2014-TIOL-286-ITAT-AHM
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'C' AHMEDABAD
BENCH 'C' AHMEDABAD
ITA No.946/Ahd/2011
Assessment Year: 2007-08
Assessment Year: 2007-08
DEPUTY COMMISSIONER OF INCOME TAX
GANDHINAGAR
GANDHINAGAR
Vs
GUJARAT STATE DISASTER MANAGEMENT AUTHORITY
BLOCK NO-11, UDHYOG BHAVAN, SECTOR NO11, GANDHINAGAR
PAN NO:AAALG0094J
BLOCK NO-11, UDHYOG BHAVAN, SECTOR NO11, GANDHINAGAR
PAN NO:AAALG0094J
Mukul Kr Shrawat, JM And N S Saini, AM
Date of Hearing: May 8, 2014
Date of Decision: May 16, 2014
Date of Decision: May 16, 2014
Appellant Rep by: Shri Alok Johri, CIT-DR
Respondent Rep by: Shri S N Soparkar, AR
Respondent Rep by: Shri S N Soparkar, AR
Income Tax - Sections 11(1)(a), 11(2)& 12 - Whether the CIT(A) was justified in deleting the addition being the interest earned on grants received by the Government - Whether the additions made on refund of grant to the District Rural Development Agency (DRDA) was justified.
The assessee is a trust (AOP) and engaged in the activity of implementation of program for construction and rehabilitation. As per the return a deficit/loss of Rs.1,40,32,47,731/- was declared. The assessee had earned interest income of Rs.9,79,70,032/- from the funds provided by the Government of Gujarat. The AO held that certain interest income had already been shown by the assessee as income; therefore, the impugned amount in the like manner should also be taxed as income in the hands of the assessee. The CIT(A) deleted the addition of Rs.9,79,70,032/- being the interest earned on grants received and shown as payable to the Government of Gujarat.
The assessee has refunded an amount of Rs.2,36,17,000/- granted by District Rural Development Agency. The AO held that the refund of unspent grant of earlier years on which the assessee had already claimed exemption u/s.11(1)(a) in respective years should not be treated as an application of income for the year under consideration so as to be eligible for the exemption. The CIT(A) deleted the addition.
Having heard the parties, the Tribunal held that,
++ on the issue of the CIT(A) deleting the addition of Rs.9,79,70,032/- being the interest earned on grants received by the Government, the CIT(A) has rightly followed the order of the Tribunal wherein the Tribunal held that the interest cannot be assessed as the assessee's income and thereupon decided the issue in favour of the assessee. No interference is required;
++ on the issue of the CIT(A) deleting the addition of Rs.2,36,17,000/- made on account of refund of grant to DRDA, the Tribunal in Assessee own case held that the amount which was earlier assessed as income, refunded to DRDA during the year under appeal, constitutes a deduction while ascertaining the application of the income for the purpose of section 11(1)(a).
The assessee is a trust (AOP) and engaged in the activity of implementation of program for construction and rehabilitation. As per the return a deficit/loss of Rs.1,40,32,47,731/- was declared. The assessee had earned interest income of Rs.9,79,70,032/- from the funds provided by the Government of Gujarat. The AO held that certain interest income had already been shown by the assessee as income; therefore, the impugned amount in the like manner should also be taxed as income in the hands of the assessee. The CIT(A) deleted the addition of Rs.9,79,70,032/- being the interest earned on grants received and shown as payable to the Government of Gujarat.
The assessee has refunded an amount of Rs.2,36,17,000/- granted by District Rural Development Agency. The AO held that the refund of unspent grant of earlier years on which the assessee had already claimed exemption u/s.11(1)(a) in respective years should not be treated as an application of income for the year under consideration so as to be eligible for the exemption. The CIT(A) deleted the addition.
Having heard the parties, the Tribunal held that,
++ on the issue of the CIT(A) deleting the addition of Rs.9,79,70,032/- being the interest earned on grants received by the Government, the CIT(A) has rightly followed the order of the Tribunal wherein the Tribunal held that the interest cannot be assessed as the assessee's income and thereupon decided the issue in favour of the assessee. No interference is required;
++ on the issue of the CIT(A) deleting the addition of Rs.2,36,17,000/- made on account of refund of grant to DRDA, the Tribunal in Assessee own case held that the amount which was earlier assessed as income, refunded to DRDA during the year under appeal, constitutes a deduction while ascertaining the application of the income for the purpose of section 11(1)(a).
Revenue's appeal dismissed
Cases Followed:
Gujarat State Disaster Management Authority Vs. ACIT, ITA No.949/Ahd/2009
CIT Vs. Gujarat State Disaster Management Authority, Tax Appeal No.80 of 2010.
CIT Vs. Gujarat State Disaster Management Authority, Tax Appeal No.80 of 2010.
ORDER
Per: Mukul Kr Shrawat:
This is an appeal filed by the Revenue arising from the order of learned CIT(A), Gandhingar, dated 20.12.2010. The grounds raised by the Revenue are hereby decided as follows:
"The learned CIT(Appeals) has erred in law and on facts in deleting the addition of Rs.9,79,70,032/- being the interest earned on grants received and shown as payable to the Government of Gujarat."
2. Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) dated 07.12.2009 were that the assessee is a trust (AOP) and engaged in the activity of implementation of program for construction and rehabilitation. As per the return a deficit/loss of Rs.1,40,32,47,731/- was declared. It was noted by the AO that the assessee had earned interest income of Rs.9,79,70,032/- from the funds provided by the Government of Gujarat. The said amount was disclosed under the head "current liabilities" claimed to be payable to the Government of Gujarat. The objection of the AO was that the assessee had prepared and applied the income for the purpose other than its objects. The assessee's explanation was that the funds received by the assessee were alleged by the Government of Gujarat for the purpose of "Gujarat Emergency Earthquake Rehabilitation Reconstruction". The funds provided as also the interest on the surplus fund till their utilization are not in the nature of income in the hands of the assessee but in the nature of a liability. The AO was not convinced and held that certain interest income had already been shown by the assessee as income; therefore, the impugned amount in the like manner should also be taxed as income in the hands of the assessee.
3. When the matter was carried before the First Appellate Authority, learned CIT(A) has followed a decision of Respected ITAT pronounced in A.Y. 2006-07 and held as under:
"The assessee has mainly relied on the decision of the hon'ble ITAT on similar issue in previous assessment year 2006-07 in the case of the assessee. In the assessee's case in para, 10, page-10, it has been held by the Hon'ble ITAT that interest cannot be assessed as assessee's income following the Hon'ble jurisdictional High Court's decision in the case of Gujarat Municipal Finance Board vs DCIT-222 ITR 317, basically accepting the contention of the assessee that the interest was diverted at source by an overriding title in favour of the State Government etc. The Hon'ble ITAT regarding this issue has decided that since the conditions that the interest should be refunded by the assessee found part of the grant itself and there was bar on the assessee's right to enjoy the interest income; right from the inception, such interest does not belong to the assessee. Alternatively, the Hon'ble ITAT has also held that the amount of interest credited to the account of the State Government should be treated as application of the income for the purpose of section 11(1)(a) of the Act, on commercial consideration. Therefore, the interest in question is held to be not income of the assessee and therefore not taxable in its hands. The question of, its application becomes redundant."
4. Heard both the sides. Before us an order of ITAT Ahmedabad 'C' Bench for A.Y.2006-07 titled as "Gujarat State Disaster Management Authority Vs. ACIT, Gandhinagar Circle, Gandhinagar bearing ITA No.949/Ahd/2009, dated 5th June, 2009 is cited wherein an order of Hon'ble Gujarat High pronounced in the case of Gujarat Municipal Finance Board, 221 ITR 317is cited and thereafter held as under:
"The aforesaid judgment of the Hon'ble jurisdictional high court supports the assessee also in its contention that the interest was diverted at source by an overriding title in favour of the State Government. Because of the directive from the State Government, in the cited case the interest was held not to amount as income of the Gujarat Municipal Finance Board and it was held that the interest was diverted to the State Government by an overriding title. The State Government could treat the interest also as part of the grant only because it had full control and dominion over the interest by reason of the overriding title created in its favour by its directive to the Gujarat Municipal Finance Board. Similarly in the present case, as we have already seen, there was a letter 31-12-2004 written by the finance Department of the State Government to the assessee directing the assessee to deposit the interest to the credit of the consolidated fund of the State. This directive was reiterated in the certificate issued by the Principal Secretary. These directives created an overriding title in favour of the State Government so far as the interest element was concerned. Thus, on this point also, namely, the creation of overriding title, the judgment is in favour of the assessee.10. Respectfully following the judgment of the Hon'ble Gujarat High Court (supra) we decide this issue in favour of the assessee and hold that the interest of Rs.9,82,70,573/- cannot be assessed as the assessee's income. In the view we have taken it is not necessary to examine the alternative contention to the effect that the amount of interest credited to the account of the State Government should be treated as application of the income for the purpose of section 11(1)(a) of the Act, on commercial consideration. Thus ground no.1 is allowed."
5. In view of the above, we hereby hold that learned CIT(A) has rightly followed the order of the Tribunal and thereupon decided the issue in favour of the assessee. No interference is required. Ground of the Revenue is therefore dismissed.
6. Ground No.2 is reproduced below:
"The learned CIT(Appeals) has erred in law and on facts in deleting the addition of Rs.2,36,17,000/- made on account of refund of grant to DRDA."
7. It was noted by the AO that the assessee has refunded an amount of Rs.2,36,17,000/- granted by District Rural Development Agency. Since, the amount was refunded; therefore, the assessee was required to explain as to how the said payment is not treated as non application of income for the purpose of trust. The assessee has furnished the details of the amount received time to time and also informed the AO that the unspent balance amount was refunded to DRDA. However, the AO was not convinced and according to him refund of unspent grant of earlier years on which the assessee had already claimed exemption u/s.11(1)(a) in respective years should not be treated as an application of income for the year under consideration so as to be eligible for the exemption; hence, impugned amount was taxed in the hands of the assessee.
8. When the matter was carried before the First Appellate Authority, learned CIT(A) followed the order of the Tribunal pronounced in assessee's own case for A.Y. 2006-07. After considering the explanation of the assessee as well as following the order of the Tribunal learned CIT(A) has decided this issue in assessee's favour as follows:
"5.1 It was pointed put to the assessee vide order sheet entry dated 9/12/2010 by the undersigned that they should show cause as why return of original grant be treated as application of money. Once the original grant has been declared as income by the assessee, refund should be reduced from income and 85% of application of income as required should be from the net amount. The assessee has replied to this issue vide letter dated 16/12/2010, as under:"During the discussions, it was observed that whether the refund of unspent grants to DRDA amounting to Rs.2,36,17,000 can be considered as reduction of income or whether it can be considered as application of income. In this context, we would like to point out that in the return of income, refund of grants have been considered as reduction or reversal of income. As per the return, income before deductions is shown as Rs.192,33,34,778 which is the income as per audited Income and Expenditure account. While arriving at this income, as per Schedule F of the audited accounts, refund of Rs.2,36,17,000/- has been deducted from grants received. Considering this fact and also considering the decision of the Tribunal in our case for Asst Year 2006-07 that refund of grants, which has been considered as income during earlier years cannot be added back to income, we request you to delete this addition made by the Assessing Officer."5.2 Considering the above reply and the decision of the Hon'ble ITAT it is held that refund of grant in question would be reduced from income of the assessee. In any case, net amount of grant received has to be considered as income for the purpose of section 11(1)(a). The refund is not an application of income, in any manner.
9. Heard both the sides and perused the order of the Tribunal for A.Y.2006-07 (supra), relevant paragraph 13 is reproduced below:
"13. On a careful consideration of the rival contentions and the facts of the case, we are of the view that the assesee is entitled to succeed for the reason that the amount of Rs.13 crores was assessed as income of the assessee, rightly or wrongly, in the assessment years 2002-2003 and 2003-2004. Once the amount is assessed as income, the same cannot be added back to the assessee's income over again in the year under appeal. If we apply the principle that the grants cannot be assessed as income as they were made for specific or assigned projects, as we have held in respect of the first ground, then the position would be a fortiori. In the case of CIT Vs. Ganga Charity Trust Fund, (1986) 162 ITR 612, it was held by the Hon'ble Gujarat High Court that for the purpose of applying the income of the trust for charitable purposes, income derived from the trust property must be determined on commercial principles and in doing so, all outgoings including income-tax must be deducted and it is only from the surplus income in the hands of the trustees that the question of application of income can arise. In CIT Vs. Sheth Manilal Ranchhoddas Visram Bhavan Trust, (1992), 198 ITR 598 it was held that depreciation on the assets of the trust was deductible while arriving at the income available for application to charitable and religious purposes. Respectfully applying the principles laid down in these judgments to the present case, it seems to us that the amount of Rs.13 crores which was earlier assessed as income, refunded to DRDA during the year under appeal, constitutes a deduction while ascertaining the application of the income for the purpose of section 11(1)(a) of the Act. Accordingly, we uphold the assessee's contention and allow grounds no.3 and 4.14. Ground No.5 is to the effect the C1T(A) erred in law in not allowing the deduction under Section 11(1)(a) without considering the amounts of Rs.9,82,70,573/- and Rs.13 crores. This ground is consequential to earlier grounds and therefore no separate decision is required.
10. Before we conclude, it is worth to mention that in Tax Appeal No.80 of 2010 order dated 13th June, 2011 the Hon'ble Gujarat High Court in the case of CIT Vs. Gujarat State Disaster Management Authority in assessee's own case has upheld the view of the Tribunal in the following manner:
"6. The first issue pertains to whether the grant from the Government of Gujarat constitute the income of the assessee as per provisions of Section 11(2). The Tribunal has sought to rely upon the judgment of this Court given in case of Gujarat Municipal Finance Board Vs. DCIT (Assessment) reported in (1996) 221 ITR 317……….7. Resultantly, Tribunal concluded that the grants are sanctioned the assessee only for the project under Rehabilitation Programme and same cannot be treated as assessee's income. It also referred to the order of the Tribunal in case of Gujarat Safai Kamdar Vikas Nigam (ITA No.3232/Ahd/2008 (Assessment Year 2005-06)] wherein it was held that the grant given by the State Government to another entity which was to spend grants only for the stated purpose cannot be considered as voluntary contribution nor can the same be assessed under Section 12 of the Act as income of recipient……..9. As far as Issue No.2 is concerned, the Tribunal has largely depended on judgment of Gujarat High Court in case of Gujarat Municipal Finance Board (supra). As in the case of grant, it has held that the interest derives by investing the grant temporarily for interest is also not taxable. It did not confirm with the view of CIT (Appeals) that the assessee treated the grants given by the State Government as its income and therefore the interest earned by temporary investment of the grants cannot be exempted by holding that ratio in the said judgment is that any grant-in-aid cannot be considered as income and merely because the grant is treated as income by the assessee in its books, the interest does not become taxable……10. As far as Issue No.3 is concerned the same relates to the additions made by the assessing officer on refund of grant to the District Rural Development Agency (DRDA). The assessee accordingly to the Tribunal was asked to explain how the refund can be treated an application of the income of the trust. It claimed that the refund amounted to application of income of the trust which was rejected by the Assessing Officer and CIT(Appeals) endorsed the view taken by the Assessing Officer by holding that the amount refunded did not form part of the funds made available to the assessee for being applied to the Trust……There does not to be any infirmity or mistake in the reasonings given by the Tribunal. Resultantly, there does not arise any question of interference as far as also this issue also is concerned."
10. In view of the above judgment of the Hon'ble Jurisdictional High Court, we find no force in both the grounds of the Revenue; hence hereby dismiss.
12. In the Result, Revenue's Appeal is dismissed.
2014-TIOL-278-ITAT-JAIPUR
IN THE INCOME TAX APPELALTE TRIBUNAL
JAIPUR BENCH, JAIPUR
JAIPUR BENCH, JAIPUR
ITA No.182/JP/2013
Assessment Year: 2009-10
Assessment Year: 2009-10
RAM PRAKASH MIYAN BAZAZ
S-225, MAHAVEER NAGAR
TONK ROAD, JAIPUR
PAN NO:ABHPP9332J
S-225, MAHAVEER NAGAR
TONK ROAD, JAIPUR
PAN NO:ABHPP9332J
Vs
DEPUTY COMMISSIONER OF INCOME TAX
CIRCLE-6, JAIPUR
CIRCLE-6, JAIPUR
Hari Om Maratha, JM And N K Saini, AM
Date of Hearing: January 29, 2014
Date of Decision: May 5, 2014
Date of Decision: May 5, 2014
Appellant Rep by: Shri R K Jain
Respondent Rep by: Shri D C Sharma - DR
Respondent Rep by: Shri D C Sharma - DR
Income Tax - Section 54F.
Keywords: capital gains, long term capital gain, capital asset, income from house property, investment in residential house.
Whether in the absence of completion and possession by way of registration and transfer of its title of flats booked by the assessee on the date of transfer of original capital asset, the income from House Property could be assessed - Whether any payment made towards acquisition of a new residential house by way of making payment in advance even by booking or by paying installments within the prescribed has to be treated as investment towards purchase/construction of a new house.
The assessee, as an individual, derives his income from long term capital gain and from other sources. For A.Y. 2009-10, he filed his return of income (RIICO) declaring income. The assessee had derived income from other sources, from long term capital and from of interest. During the relevant period, the Rajasthan State Industrial Development and Investment Corporation Ltd. (in short, 'RIC') acquired land owned by the assessee jointly with other members of his family. The assessee claimed exemption under section 54F. The Assessing Officer called for the complete details regarding this claim. In his reply, assessee stated that he had utilized an amount in terms of section 54F of the Act. He had deposited certain amount under capital gain account scheme opened with the Bank of Baroda and an amount was utilized in purchasing residential flat. The assessee also claimed further expenditure given to the Interior Designer towards supervision and interior decoration. After receipt of this reply, the Assessing Officer sought clarification from the assessee as to how section 54F of the Act applied to this case and why he should allow this exemption. The Assessing Officer wanted proof of the entire claim made by him. The assessee replied. After considering the reply and making various observations, the Assessing Officer finally concluded that the assessee was not eligible for exemption under section 54F because at the time of acquisition of land, the assessee owned more than one residential house. Therefore, as per Assessing Officer assessee did not fulfill even the primary condition for claiming exemption under section 54F of the Act. Further, advance payment made for the purchase of residential flat was not treated as investment/utilization of the capital gain in the purchase of a residential house. Assessing Officer did not treat the deposit in the capital gain account scheme. The claim of payment to the Civil Engineer on account of supervision was also declined.
In appeal, CIT(A) dismissed the appeal of the assessee.
Having heard the parties, the tribunal held that,
++ bookings for the flats namely ATS-Noida and ATS-Chandigarh existed on 05/06/2008, wherein the assessee did not have ownership, control, possession, title etc. by virtue of these bookings and the only valuable right/asset, assessee had, was the 'Right to acquire Flat' which could be either converted into a 'Flat' or the right itself could be transferred for a consideration.";
++ this provision aims at encouraging either construction or purchase of a residential house out of a capital gain arising from the sale of certain capital assets. The title above the main section is very clear in this direction. We would like to repeat this title to emphasize our point of view:-
"54F. Capital gain on the transfer of certain capital assets not to be charged in case of investment in residential house"
++ this section describes vendors of the capital gain, as an individual or a HUF. All other entities like a firm, a company etc. have been excluded from its ambit. This fact also clears the intention of the legislations because the individuals and/or the HUF which is composed of individuals, are only capable of residing in a house. This section binds the individual/HUF to get a new-asset (= a residential house) either by way of purchase or construction within the stipulated period after the sale of the 'original asset'. We are not concerned about this limitation in this case. This section also helps the individual to claim benefit by depositing the 'capital gain' in a particular manner. We are not concerned about this aspect now. Apart from defining the terms like - the net-consideration etc. this section imposes other conditions via a provision appended thereto. And we are concerned only with the provision 54F(b)(a)(i) as extracted above and we are required to answer the dispute between the parties by using this provision alone. This provision proscribes that the individual/HUF must not own more than one residential house on the date of transfer of the original asset. They have excluded new-asset i.e. new residential house from being counted at the time of such transfer because the section provides a leeway of one year for purchasing/constructing the residential house before this transfer. The date of transfer of the original asset in this case is 05/06/2008. Let use examine if the assessee had more than one residential house on that date or not. The chart extracted at pages 9 & 10 of this order makes it amply clear that on 05/06/2008, this assessee did not own more than one residential house. However, he had booked two flats (residential houses) - one each at ATS-Noida and ATS-Chandigarh. Regarding these 'bookings' and the investments made the contention of the assessee is that "the booking of flats" does not tantamount to 'ownership' of the flats unless these are completed and their ownership is transferred in his names. But at the same it is contended that after 05/06/2008, in the year of 2009 i.e. within the period of leeway provided in this section, the assessee has booked one flat in the Emaar-MGF, Gurgaon and has treated the booking amount paid as an 'investment made' in the purchase of a new-asset i.e. a residential house in consonance with the provisions of section 54F which does not suffer with the prohibitions of section 54F(4) or the proviso 54F(1)(b)(a)(i). This submission seems to be contradictory at the first sight. But, when this issue is examined it is not noticed that there is neither contradiction in assessee's claim nor there is inherent contradiction in the Act. The Act is very clear. It speaks about 'investment' in the new-asset (refer the title of this section). The term 'purchased' or 'constructed' used in section 54F(1) may not necessarily mean that the new-asset must have been transferred in the name of the assessee and the investment made by way of booking a flat and if such investment is proved it must be treated as an ample compliance of this proviso when it is examined in the light of the aim and object with which the legislators have enacted this beneficial provision. On the other hand the "transfer of ownership" in other flats is material because the section uses the term 'owns' in the proviso. Thus investment & ownership are two distinct terms which have their meanings and connotations in different ways. The investment of capital gains is a beneficial provision and 'ownership' at the time of transfer of the original asset is to be interpreted strictly as per law. In our considered opinion both these stages cannot be dealt with in the same manner. Our this view is further fortified by the same provision as the proviso 54F(1)(b)(b) to this section postulates that such residential house, other than the residential house owned on the date of transfer of the original asset is chargeable under the head "income from house property". The proviso 54F(1)(b)(a)(i) is further clarified by this proviso. If the assessee owns more than one residential house the income from that house is chargeable under the head "income from house property". In this case no such income is chargeable from the flats booked at Noida and Chadigarh. Thus, in the totality of the facts and the law the flats booked at ATS-Noida and ATS Chandigarh 'owned' by the assessee as on 05/06/2008;
++ On 05/06/2008, the assessee had one residential house at S-225, Mahaveer Nagar, Jaipur which was self occupied, one business office at Heritage City, Gurgaon which is business property, in which the assessee had 50% share. The assessee had booked two flats one each at Noida & Chandigarh and had made advance bookings on the date of transfer i.e. on 05/06/2008. But neither possession had been taken nor ownership had transferred of those flats in the name of the assessee till that date. The assessee has booked one new residential house at Emaar-MGF, Gurgaon in the year 2009 i.e. after the date of 05/06/2008. The assessee has treated this new residential house at MGF, Jaipur as a new asset and the house at Mahaveer Nagar, Jaipur, as his sole residential house. Regarding two flats booked, one each at Noida and Chandigarh, the case of the assessee is that assessee has not become owner of those houses until 05/06/2008 as neither possession of the same had been given to him. According to him, on 05/06/2008 he owned only one residential house and therefore, he is entitled for exemption under section 54F of the Act in respect of new asset booked at Emaar-MGF, Gurgaon. It is stated that in those two flats, assessee has only 'Right to Acquire Flat';
++ the assessee became owner of the Noida flat only on 10/07/2010 and has not acquired ownership of the Chandigarh flat till date. Thus, picture becomes clear in respect of proviso (a)(i) to section 54F of the Act that the residential house mentioned therein has a different connotation because 'house' means building in its normal residential conditions which is found fit for living by human-beings and not a house under construction' and this house should be completely owned by the assessee at the relevant time. The Legislators in their wisdom have used two different terms to refer to the original residential house sold as 'old asset' and by referring to the new residential house to be purchased or constructed as the case may be, as 'new asset'. The collective reading of this section makes it clear that two conditions should be satisfied and both are co-exist at the relevant time of transfer of original asset 1) the assessee must owned the residential house on the date of transfer and 2) income from such residential house should be chargeable under the head 'income from other house property'. If the above two conditions co-exist, the assessee becomes disentitled to the exemption section 54F of the Act, particularly when, the assessee owns such a house other than the original asset and its income is chargeable as a income from house property as per the provisions of section 22 of the Act. The assessee needs to be owner rather legal owner of that house. Supreme Court in the case of CIT Vs. Podar Cement (P) Ltd. etc. 2002-TIOL-445-SC-IT-LB has clearly explained this position by holding that 'owner' is a person who is entitled to receive income from the property in his own right. In the absence of completion and possession by way of registration and transfer of its title etc., of these two flats booked by the assessee on the date of transfer original capital asset i.e. 05/06/2008, the question of assessing 'Income from House Property' under section 22 of the Act will not arise. The CIT(A) has misdirected himself has treating even 'right to acquire a flat' as owned by the assessee. In our considered opinion, the conclusion of CIT(A) is not correct. Thus with regard to Noida & Chandigarh flats it can be safely concluded that these were not owned by the assessee on 05/06/2008 in terms of section 54F of the Act. The CIT(A) has observed (at page 14 of her order) that "the argument that the flats at Noida and Chandigarh are just booked and not possessed does not hold water, because if the same logic is applied, no exemption would be available to the appellant because the flat at the Gurgaon with respect to which exemption is being sought from capital gain is also just booked and possession has not been given to the appellant in the assessment year under consideration";
++ the above observation seems to be plausible at the first reading. Why - the booking at Noida/Chandigarh is to be treated differently from the booking of Gurgaon flat. But, when this aspect is examined in depth with ratiocination the above observation becomes wrong and contrary to the intention of the Act. The meaning of term 'owns' used in section 54F (conditions) - 'owns more than one residential house on the date of transfer of the capital asset' - has a different meaning. That house needs to be. This owner means a legal owner who is entitled to receive income from the property in his own right. This house should be real and not symbolic. In the absence of possession, registration, title etc., question of assessing 'income from house property' under section 22 of the Act does not arise. Thus, CIT(A) has failed to differentiate between the nature of asset owned by the assessee when a flat is booked he has a 'right to acquire' and this 'right to acquire', is not equivalent to 'own' a house. On the other hand the parameters which apply to investment of 'capital gain' in the construction - purchase of a house within two years of sale of the original asset. That is why the CBDT has issued circular Nos. 471 dated 15/10/1986 and circular No. 672 dated 06/12/1993 which clarify that the amount paid towards booking as to be treated towards 'construction' for the purpose of section 54/54F. This assessee made payment to the builder Emaar - MGF Gurgaon before 30/09/2009 for buying a II residential house. Builder has promised to give possession of the house before 05/06/2010 i.e. within 2 years of the sale of the original asset but could not give possession by that time. Section 54F is a beneficial provision for promoting the construction of residential houses and requires an assessee to construct houses and for achieving that purpose to intent of the Legislature is to encourage investments in the acquisition of a residential house and completion of construction or occupation is not the requirement of the law. In view of the above discussion the assessee cannot be treated owner of Noida/Chandigarh flats on 05/06/2010. At the same time, he to be allowed benefit of section 54F because he has invested the capital gain as per the requirement of the Act;
++ the CBDT issued a circular No. 471 dated 15/10/1986 clarifying that payment made to a builder/developer is a sufficient compliance for exemption under section 54F of the Act. CIT(A) has gone by sheer technicalities to hold that the flat at Emaar-MGF, Gurgaon is not covered under section 54F of the Act. To meet such recurrence of situations in the modern days where properties are booked and thereafter purchased, the CBDT in their wisdom further clarifies vide circular No. 672 dated 16/12/1993 that if any amount out of net sale consideration of the original asset is paid to any builder or developer, this amount should be considered towards the terms 'purchase/construct' for the purpose of sections 54/54F of the Act. It is not disputed by the Revenue that the assessee has not made payment for purchase of residential house in Gurgaon in view of the above clarifications of CBDT, this is enough compliance of the provision of section 54F of the Act and the assessee became entitled to this exemption;
++ section 54F of the Act is a beneficial provision aimed at promoting existence of new residential houses to further the needs of the society. Thus, the intention of the Legislator is to encourage investment in the acquisition of residential houses and section 54F of the Act prescribes and proscribes the conditions for availing its benefit. The terms/words used in this section have been very selectively & prudentially used by the legislature. This benefit is against the capital gain arising out of transfer of any long term capital asset not being a residential house and which has been referred to as an 'original asset' subject to a condition that if the 'net-sale-consideration' is invested either in purchasing/constructing a residential house or in constructing the same within the period prescribed in this section. However, if the assessee owned more than one residential house other than the new asset on the date of transfer of the original asset, this benefit is not available to him. In the given case, undisputedly, the assessee had sold a capital asset in the form of land on 03/10/2008 and earned long term capital gain of Rs. 2,03,76,237/- (this LTCG has been calculated by the Assessing Officer at Rs. 2,04,37,654/-) as there was some error in the computation filed by the assessee with the return because in the indexing of the cost of land in F.Y. 1991-92, the assessee's half share was not considered. The assessee has claimed exemption under section 54F (1)(b) of the Act to the extent of Rs. 1,26,52,789/- as against total investment of Rs. 1,29,66,275/-. Thus, by now we have come to the conclusion that the assessee did not own more than one residential house on the date of transfer of the original asset. Therefore, one condition of this provision stands satisfied;
++ owning of a residential house at the time of transfer of the original asset has different meaning and connotation and acquisition of new asset 'which is equivalent to purchase of new residential house' has entirely different meaning and connotation. This provision encourages people to purchase or construct new residential houses. If the capital gain is invested in the manner prescribed in this section to that extent the capital gain is spent or invested 'has to be allowed as deduction'. So, with regard to purchase of new residential house, the provisions does not laid down a condition that a new house should either be complete or it should be purchased as a complete livable house. The aim is to direct the minds of the society in purchasing new residential house so that the menace of shortage of houses is tackled to some extent. Therefore, keeping in view the aim and object of the legislator and in view of that clarifications of the CBDT, in our considered opinion, CIT(A) has misdirected himself in giving the same meaning to the residential house owned at the time of transfer of the original asset and the investment made out of the capital gain in the purchase or construction of new house, which has been defined as 'new asset' in the Act. Therefore, any payment made towards acquisition of a new residential house by way of making payment in advance even by booking or by paying installments within the prescribed has to be is treated as investment towards purchase/construction of a new house. Accordingly, we hold that the assessee is entitled for exemption under section 54F of the Act of LTCG of Rs. 2,04,37,654/-;
++ we allow grounds raised in this appeal, which are in fact in relation to only one issue i.e. availability of deduction of section 54F(1)(a)(i) of the Act or to say under section 54F of the Act. Accordingly, this appeal of the assessee stands allowed and the entire addition stands deleted.
Keywords: capital gains, long term capital gain, capital asset, income from house property, investment in residential house.
Whether in the absence of completion and possession by way of registration and transfer of its title of flats booked by the assessee on the date of transfer of original capital asset, the income from House Property could be assessed - Whether any payment made towards acquisition of a new residential house by way of making payment in advance even by booking or by paying installments within the prescribed has to be treated as investment towards purchase/construction of a new house.
The assessee, as an individual, derives his income from long term capital gain and from other sources. For A.Y. 2009-10, he filed his return of income (RIICO) declaring income. The assessee had derived income from other sources, from long term capital and from of interest. During the relevant period, the Rajasthan State Industrial Development and Investment Corporation Ltd. (in short, 'RIC') acquired land owned by the assessee jointly with other members of his family. The assessee claimed exemption under section 54F. The Assessing Officer called for the complete details regarding this claim. In his reply, assessee stated that he had utilized an amount in terms of section 54F of the Act. He had deposited certain amount under capital gain account scheme opened with the Bank of Baroda and an amount was utilized in purchasing residential flat. The assessee also claimed further expenditure given to the Interior Designer towards supervision and interior decoration. After receipt of this reply, the Assessing Officer sought clarification from the assessee as to how section 54F of the Act applied to this case and why he should allow this exemption. The Assessing Officer wanted proof of the entire claim made by him. The assessee replied. After considering the reply and making various observations, the Assessing Officer finally concluded that the assessee was not eligible for exemption under section 54F because at the time of acquisition of land, the assessee owned more than one residential house. Therefore, as per Assessing Officer assessee did not fulfill even the primary condition for claiming exemption under section 54F of the Act. Further, advance payment made for the purchase of residential flat was not treated as investment/utilization of the capital gain in the purchase of a residential house. Assessing Officer did not treat the deposit in the capital gain account scheme. The claim of payment to the Civil Engineer on account of supervision was also declined.
In appeal, CIT(A) dismissed the appeal of the assessee.
Having heard the parties, the tribunal held that,
++ bookings for the flats namely ATS-Noida and ATS-Chandigarh existed on 05/06/2008, wherein the assessee did not have ownership, control, possession, title etc. by virtue of these bookings and the only valuable right/asset, assessee had, was the 'Right to acquire Flat' which could be either converted into a 'Flat' or the right itself could be transferred for a consideration.";
++ this provision aims at encouraging either construction or purchase of a residential house out of a capital gain arising from the sale of certain capital assets. The title above the main section is very clear in this direction. We would like to repeat this title to emphasize our point of view:-
"54F. Capital gain on the transfer of certain capital assets not to be charged in case of investment in residential house"
++ this section describes vendors of the capital gain, as an individual or a HUF. All other entities like a firm, a company etc. have been excluded from its ambit. This fact also clears the intention of the legislations because the individuals and/or the HUF which is composed of individuals, are only capable of residing in a house. This section binds the individual/HUF to get a new-asset (= a residential house) either by way of purchase or construction within the stipulated period after the sale of the 'original asset'. We are not concerned about this limitation in this case. This section also helps the individual to claim benefit by depositing the 'capital gain' in a particular manner. We are not concerned about this aspect now. Apart from defining the terms like - the net-consideration etc. this section imposes other conditions via a provision appended thereto. And we are concerned only with the provision 54F(b)(a)(i) as extracted above and we are required to answer the dispute between the parties by using this provision alone. This provision proscribes that the individual/HUF must not own more than one residential house on the date of transfer of the original asset. They have excluded new-asset i.e. new residential house from being counted at the time of such transfer because the section provides a leeway of one year for purchasing/constructing the residential house before this transfer. The date of transfer of the original asset in this case is 05/06/2008. Let use examine if the assessee had more than one residential house on that date or not. The chart extracted at pages 9 & 10 of this order makes it amply clear that on 05/06/2008, this assessee did not own more than one residential house. However, he had booked two flats (residential houses) - one each at ATS-Noida and ATS-Chandigarh. Regarding these 'bookings' and the investments made the contention of the assessee is that "the booking of flats" does not tantamount to 'ownership' of the flats unless these are completed and their ownership is transferred in his names. But at the same it is contended that after 05/06/2008, in the year of 2009 i.e. within the period of leeway provided in this section, the assessee has booked one flat in the Emaar-MGF, Gurgaon and has treated the booking amount paid as an 'investment made' in the purchase of a new-asset i.e. a residential house in consonance with the provisions of section 54F which does not suffer with the prohibitions of section 54F(4) or the proviso 54F(1)(b)(a)(i). This submission seems to be contradictory at the first sight. But, when this issue is examined it is not noticed that there is neither contradiction in assessee's claim nor there is inherent contradiction in the Act. The Act is very clear. It speaks about 'investment' in the new-asset (refer the title of this section). The term 'purchased' or 'constructed' used in section 54F(1) may not necessarily mean that the new-asset must have been transferred in the name of the assessee and the investment made by way of booking a flat and if such investment is proved it must be treated as an ample compliance of this proviso when it is examined in the light of the aim and object with which the legislators have enacted this beneficial provision. On the other hand the "transfer of ownership" in other flats is material because the section uses the term 'owns' in the proviso. Thus investment & ownership are two distinct terms which have their meanings and connotations in different ways. The investment of capital gains is a beneficial provision and 'ownership' at the time of transfer of the original asset is to be interpreted strictly as per law. In our considered opinion both these stages cannot be dealt with in the same manner. Our this view is further fortified by the same provision as the proviso 54F(1)(b)(b) to this section postulates that such residential house, other than the residential house owned on the date of transfer of the original asset is chargeable under the head "income from house property". The proviso 54F(1)(b)(a)(i) is further clarified by this proviso. If the assessee owns more than one residential house the income from that house is chargeable under the head "income from house property". In this case no such income is chargeable from the flats booked at Noida and Chadigarh. Thus, in the totality of the facts and the law the flats booked at ATS-Noida and ATS Chandigarh 'owned' by the assessee as on 05/06/2008;
++ On 05/06/2008, the assessee had one residential house at S-225, Mahaveer Nagar, Jaipur which was self occupied, one business office at Heritage City, Gurgaon which is business property, in which the assessee had 50% share. The assessee had booked two flats one each at Noida & Chandigarh and had made advance bookings on the date of transfer i.e. on 05/06/2008. But neither possession had been taken nor ownership had transferred of those flats in the name of the assessee till that date. The assessee has booked one new residential house at Emaar-MGF, Gurgaon in the year 2009 i.e. after the date of 05/06/2008. The assessee has treated this new residential house at MGF, Jaipur as a new asset and the house at Mahaveer Nagar, Jaipur, as his sole residential house. Regarding two flats booked, one each at Noida and Chandigarh, the case of the assessee is that assessee has not become owner of those houses until 05/06/2008 as neither possession of the same had been given to him. According to him, on 05/06/2008 he owned only one residential house and therefore, he is entitled for exemption under section 54F of the Act in respect of new asset booked at Emaar-MGF, Gurgaon. It is stated that in those two flats, assessee has only 'Right to Acquire Flat';
++ the assessee became owner of the Noida flat only on 10/07/2010 and has not acquired ownership of the Chandigarh flat till date. Thus, picture becomes clear in respect of proviso (a)(i) to section 54F of the Act that the residential house mentioned therein has a different connotation because 'house' means building in its normal residential conditions which is found fit for living by human-beings and not a house under construction' and this house should be completely owned by the assessee at the relevant time. The Legislators in their wisdom have used two different terms to refer to the original residential house sold as 'old asset' and by referring to the new residential house to be purchased or constructed as the case may be, as 'new asset'. The collective reading of this section makes it clear that two conditions should be satisfied and both are co-exist at the relevant time of transfer of original asset 1) the assessee must owned the residential house on the date of transfer and 2) income from such residential house should be chargeable under the head 'income from other house property'. If the above two conditions co-exist, the assessee becomes disentitled to the exemption section 54F of the Act, particularly when, the assessee owns such a house other than the original asset and its income is chargeable as a income from house property as per the provisions of section 22 of the Act. The assessee needs to be owner rather legal owner of that house. Supreme Court in the case of CIT Vs. Podar Cement (P) Ltd. etc. 2002-TIOL-445-SC-IT-LB has clearly explained this position by holding that 'owner' is a person who is entitled to receive income from the property in his own right. In the absence of completion and possession by way of registration and transfer of its title etc., of these two flats booked by the assessee on the date of transfer original capital asset i.e. 05/06/2008, the question of assessing 'Income from House Property' under section 22 of the Act will not arise. The CIT(A) has misdirected himself has treating even 'right to acquire a flat' as owned by the assessee. In our considered opinion, the conclusion of CIT(A) is not correct. Thus with regard to Noida & Chandigarh flats it can be safely concluded that these were not owned by the assessee on 05/06/2008 in terms of section 54F of the Act. The CIT(A) has observed (at page 14 of her order) that "the argument that the flats at Noida and Chandigarh are just booked and not possessed does not hold water, because if the same logic is applied, no exemption would be available to the appellant because the flat at the Gurgaon with respect to which exemption is being sought from capital gain is also just booked and possession has not been given to the appellant in the assessment year under consideration";
++ the above observation seems to be plausible at the first reading. Why - the booking at Noida/Chandigarh is to be treated differently from the booking of Gurgaon flat. But, when this aspect is examined in depth with ratiocination the above observation becomes wrong and contrary to the intention of the Act. The meaning of term 'owns' used in section 54F (conditions) - 'owns more than one residential house on the date of transfer of the capital asset' - has a different meaning. That house needs to be. This owner means a legal owner who is entitled to receive income from the property in his own right. This house should be real and not symbolic. In the absence of possession, registration, title etc., question of assessing 'income from house property' under section 22 of the Act does not arise. Thus, CIT(A) has failed to differentiate between the nature of asset owned by the assessee when a flat is booked he has a 'right to acquire' and this 'right to acquire', is not equivalent to 'own' a house. On the other hand the parameters which apply to investment of 'capital gain' in the construction - purchase of a house within two years of sale of the original asset. That is why the CBDT has issued circular Nos. 471 dated 15/10/1986 and circular No. 672 dated 06/12/1993 which clarify that the amount paid towards booking as to be treated towards 'construction' for the purpose of section 54/54F. This assessee made payment to the builder Emaar - MGF Gurgaon before 30/09/2009 for buying a II residential house. Builder has promised to give possession of the house before 05/06/2010 i.e. within 2 years of the sale of the original asset but could not give possession by that time. Section 54F is a beneficial provision for promoting the construction of residential houses and requires an assessee to construct houses and for achieving that purpose to intent of the Legislature is to encourage investments in the acquisition of a residential house and completion of construction or occupation is not the requirement of the law. In view of the above discussion the assessee cannot be treated owner of Noida/Chandigarh flats on 05/06/2010. At the same time, he to be allowed benefit of section 54F because he has invested the capital gain as per the requirement of the Act;
++ the CBDT issued a circular No. 471 dated 15/10/1986 clarifying that payment made to a builder/developer is a sufficient compliance for exemption under section 54F of the Act. CIT(A) has gone by sheer technicalities to hold that the flat at Emaar-MGF, Gurgaon is not covered under section 54F of the Act. To meet such recurrence of situations in the modern days where properties are booked and thereafter purchased, the CBDT in their wisdom further clarifies vide circular No. 672 dated 16/12/1993 that if any amount out of net sale consideration of the original asset is paid to any builder or developer, this amount should be considered towards the terms 'purchase/construct' for the purpose of sections 54/54F of the Act. It is not disputed by the Revenue that the assessee has not made payment for purchase of residential house in Gurgaon in view of the above clarifications of CBDT, this is enough compliance of the provision of section 54F of the Act and the assessee became entitled to this exemption;
++ section 54F of the Act is a beneficial provision aimed at promoting existence of new residential houses to further the needs of the society. Thus, the intention of the Legislator is to encourage investment in the acquisition of residential houses and section 54F of the Act prescribes and proscribes the conditions for availing its benefit. The terms/words used in this section have been very selectively & prudentially used by the legislature. This benefit is against the capital gain arising out of transfer of any long term capital asset not being a residential house and which has been referred to as an 'original asset' subject to a condition that if the 'net-sale-consideration' is invested either in purchasing/constructing a residential house or in constructing the same within the period prescribed in this section. However, if the assessee owned more than one residential house other than the new asset on the date of transfer of the original asset, this benefit is not available to him. In the given case, undisputedly, the assessee had sold a capital asset in the form of land on 03/10/2008 and earned long term capital gain of Rs. 2,03,76,237/- (this LTCG has been calculated by the Assessing Officer at Rs. 2,04,37,654/-) as there was some error in the computation filed by the assessee with the return because in the indexing of the cost of land in F.Y. 1991-92, the assessee's half share was not considered. The assessee has claimed exemption under section 54F (1)(b) of the Act to the extent of Rs. 1,26,52,789/- as against total investment of Rs. 1,29,66,275/-. Thus, by now we have come to the conclusion that the assessee did not own more than one residential house on the date of transfer of the original asset. Therefore, one condition of this provision stands satisfied;
++ owning of a residential house at the time of transfer of the original asset has different meaning and connotation and acquisition of new asset 'which is equivalent to purchase of new residential house' has entirely different meaning and connotation. This provision encourages people to purchase or construct new residential houses. If the capital gain is invested in the manner prescribed in this section to that extent the capital gain is spent or invested 'has to be allowed as deduction'. So, with regard to purchase of new residential house, the provisions does not laid down a condition that a new house should either be complete or it should be purchased as a complete livable house. The aim is to direct the minds of the society in purchasing new residential house so that the menace of shortage of houses is tackled to some extent. Therefore, keeping in view the aim and object of the legislator and in view of that clarifications of the CBDT, in our considered opinion, CIT(A) has misdirected himself in giving the same meaning to the residential house owned at the time of transfer of the original asset and the investment made out of the capital gain in the purchase or construction of new house, which has been defined as 'new asset' in the Act. Therefore, any payment made towards acquisition of a new residential house by way of making payment in advance even by booking or by paying installments within the prescribed has to be is treated as investment towards purchase/construction of a new house. Accordingly, we hold that the assessee is entitled for exemption under section 54F of the Act of LTCG of Rs. 2,04,37,654/-;
++ we allow grounds raised in this appeal, which are in fact in relation to only one issue i.e. availability of deduction of section 54F(1)(a)(i) of the Act or to say under section 54F of the Act. Accordingly, this appeal of the assessee stands allowed and the entire addition stands deleted.
Assessee's appeal allowed
Case followed:
CIT Vs. Podar Cement (P) Ltd. 2002-TIOL-445-SC-IT-LB
Sardarmal Kothari [2008] 302 ITR 286 (Mad)
CIT Vs. Sambandam Udaykumar 2012-TIOL-217-HC-KAR-IT
Smt. Ranjeet Sandhu Vs. DCIT [2011] 16 taxmann.com 201 (Chandigarh)
Smt. Usha Vaid Vs. ITO, Dasuaya [2012] 53 SOT 385 (Amritsar)
CIT Vs. Podar Cement (P) Ltd. 2002-TIOL-445-SC-IT-LB
Sardarmal Kothari [2008] 302 ITR 286 (Mad)
CIT Vs. Sambandam Udaykumar 2012-TIOL-217-HC-KAR-IT
Smt. Ranjeet Sandhu Vs. DCIT [2011] 16 taxmann.com 201 (Chandigarh)
Smt. Usha Vaid Vs. ITO, Dasuaya [2012] 53 SOT 385 (Amritsar)
ORDER
Per: Hari Om Maratha:
This appeal of the assessee for A.Y. 2009-10 is directed against the order of Ld. CIT(A)-II, Jaipur dated 28/01/2013.
2. Briefly stated, the facts of the case are that the assessee, as an individual, derives his income from long term capital gain and from other sources. For A.Y. 2009-10, he filed his return of income (RIICO) on 30/09/2009 declaring total income of Rs. 2,06,86,650/-. The assessee has derived income from other sources of Rs. 77,23,448/- from long term capital and of Rs. 1,34,63,204/- form of interest. During the relevant period, the Rajasthan State Industrial Development and Investment Corporation Ltd. (in short, 'RIC') acquired land owned by the assessee jointly with other members of his family located at Vimalpura, Jaipur for a total consideration of Rs. 5,81,19,891/-. Particulars of the entire land acquired are as under:-
Khasara No. | Area | Date of purchase | Amount | Share of the assessee |
| 731 | 0.43 feet | 25.01.1991 | 42000 | ½ share/Rs. 21000 |
| 28 | 0.63 feet | 31.05.1994 | 151200 | ½ share/Rs. 75600 |
| 27.29 | 1.51 feet | 01.06.1994 | 362400 | ¼ share of Rs. 90600 |
2.1 Income under the head 'long term capital gain' of Rs. 77,23,448/- has been computed by the assessee as under:-
1. Indexed cost of acquisition F.Y. 1991-92 42000/199 x 582 = 122834 | |
2. Vimalpura Land F.Y. 1991-92 170000/259x582 = 382008 | Rs. 504842 |
| Long term capital gain | Rs. 20376237 |
| Deduction u/s 54F | Rs. 12652789 |
| (Investment in house property u/s 54F Of Rs. 12966275) taxable LTCG | Rs. 7723448 |
3. The assessee has claimed exemption under section 54F of the I.T. Act, 1961 (hereinafter referred to as 'the Act' in short). The Assessing Officer has called for the complete details regarding this claim. The assessee filed reply dated 18/07/2011 stating that he had utilized Rs. 1,29,66,275/- in terms of section 54F of the Act. He had deposited Rs. 40 Lac under capital gain account scheme opened with the Bank of Baroda on 29/09/2009 and Rs. 79,66,275/- was utilized in purchasing residential flat in the village Maidawas (Gurgaon). To prove purchase of flat, the assessee produced a photocopy of the application form issued by the Emaar MGF Land Ltd., on a stamp paper of Rs. 50/- dated 10/12/2009. Annexure-3 of the application-cum-agreement form bears the name of the assessee for unit area 1975 sq.ft. dated 23/09/2009 and its price has been calculated as under:-
| Basic price | Rs. 7108025/- |
| Basic price | Rs. 533250/- |
| Car Park | Rs. 250000/- |
| And club membership | Rs. 75000/- |
| And club membership | Rs. 7966275/- |
3.1 The assessee has also claimed further expenditure of Rs. 10 Lac as given to the Interior Designer-Shri Mukesh Aren, a Civil Engineer, towards supervision and interior decoration. After receipt of this reply, the Assessing Officer sought clarification from the assessee as to how section 54F of the Act applies to this case and why he should allow this exemption. The Assessing Officer wanted proof of the entire claim made by him. The assessee replied vide letter dated 12/08/2011 as under:-
"1. The assessee has booked resident flat at Gurgaon with EMAAR MGF Land Ltd. by giving cheque No. 531797 of Rs. 5,00,000/- on 24/09/2009, the cheque was cleared on bank on 29/09/2009. The date of booking 23/09/2009 is mentioned in Schedule of payment of said agreement. Bank statement has also been submitted. The assessee has given full amount of cheques amounting to Rs. 79,66,275/- which was subsequently cleared time to time.The stamp paper date is not so important as it is evident from record that assessee has given & booked flat within due time. The registration of documents etc. is subsequent process.10 SOT 139 Mumbai Angela J Kazi Vs. ITO 75 Taxman 145 (Bomb.)Placed letter of booking of new flat record, copy cheque to builder and ultimate sale agreements.Hence assessee's intention was clear for purchasing new flat with in period of furnishing of return. So claim of assessee is well justified and within ambit of income-tax law.2. The assessee is having only one residential house at S-225, Mahaveer Nagar, Jaipur, as appearing in balance sheet of Rs. 43,50,534/-. The above mentioned flat is only another residential flat within condition of section 54F as prior to it assessee is having only Mahaveer Nagar residential house.The other alleged flats are not residential flats as appearing in balance sheet as assessee has never occupied them for residential purposes, as these are for investment purposes, according also shown under investments is balance sheet. The assessee has invested in ATS Paradise, Greater Noida (U.P.) amounting to Rs. 51,23,000/- and possession of it has been taken on 10/07/2010, copy enclosed.The another investment was in ATS prelude - Golf Meadow Chandigarh amounting to Rs. 29,90,000/- its possession is pending. The heritage city flat was jointly owned by brother Om Prakash possession taken on 08/03/1999 it was also for investment purposes letter enclosed.3. It has already been explained that assessee has utilized amount of capital gain for purchase of new residential house i.e. amounting to Rs. 79,66,275/- given to builder and further Rs. 10 lac against supervision and interior work. Thus total amounting to Rs. 89,66,275/- and balance Rs. 40 lac has been deposited in capital gain account, evident of same has been filed. Thus total investment u/s 54F is of Rs. 1,29,66,275/- as claimed in computation of income and on balance amount assessee has paid capital gain tax. The following judgments are in this context.Smt. Shashi Verma VS. CIT 224 ITR 106 (M.P.)i) The circulate N. 672 dated 16/12/1993 and 471 dated 15/10/1986 (That amount was allowed to be paid in installments does not effect the legal position in such schemes. These cases shall be treated as cases of construction for the purposes of capital gains.ii) If substantial investment is made in the construction of house than it should be deemed that sufficient steps have been taken and this satisfies the requirements of section 54.Mrs. Seetha Subramanian VS. ACIT 59 ITD 94 Mad.The allotment itself is a sufficient compliance for getting benefit u/s 54F even though the assessee has not paid all the installments due under said scheme. The intention of legislature was to invest in the acquisition of a residential house and completion of construction of occupation is not required.4. The assessee has given explanation for the interior & supervision work in letter dated 05/08/2011, the copy of the claim of receipt of amount of Rs. 10 lac given to Mr. Mukesh Aren Engineer for making house habitable is enclosed."
4. After considering the above reply and making various observations, the Assessing Officer has finally concluded that the assessee is not eligible for exemption under section 54F of the Act because at the time of acquisition of land, the assessee owned more than one residential house. Therefore, as per Assessing Officer assessee does not fulfill even the primary condition for claiming exemption under section 54F of the Act. Further, advance payment made for the purchase of residential flat has not been treated as investment/utilization of the capital gain in the purchase of a residential house. That is why on both these counts, the Assessing Officer has rejected this claim of the assessee. He has not treated the deposit of Rs. 40 Lakhs in the capital gain account scheme. He has distinguished the decisions/case law on which the assessee placed reliance in support of his claim. The claim of payment of Rs. 10 Lac to the Civil Engineer on account of supervision was also declined on the reasoning that on the receipt issued by Shri Mukesh Aren, he has not mentioned his degree and amount was paid in cash. The Assessing Officer has computed the income of the assessee as under:-
| A Income from Long Term Capital Gain | 2,04,37,654/- |
| B Income from other sources | 1,34,63,204/- |
| Gross Total Income | 3,39,00,858/- |
Deduction under Chapter VIA
| (i) u/s 80C | 1,00,000/- | |
| (ii) u/s 80 G (Eligible for 50% of contribution Rs.. 8,00,000/-) | 4,00,000/- | 5,00,000/- |
| Total income | 3,44,00,858/- | |
| Rounded of | 3,34,00,860/- |
4.1 Aggrieved, assessee preferred appeal before Ld. CIT(A) against the order of Assessing Officer. After making lengthy discussions, Ld. CIT(A) has also dismissed the appeal of the assessee. The assessee is further aggrieved. He has filed this second appeal by raising the following grounds:-
"1. The Ld. CIT(A) had denied the claim of assessee u/s 54F of I.T. Act and had erred in holding that assessee owned to 'Residential Houses' (ATS-Noida Flat and ATS-Chandigarh Flat) on the date of transfer of original asset, under proviso (a)(i) to section 54F(1) by overlooking the apparent fact that the assessee neither had possession nor ownership of these so called flats on the date of transfer of original asset (i.e. 05/06/2008).2. That Ld. CIT(A) had ignored the fact that income from so called two 'Residential Houses' (ATS-Noida Flat and ATS-Chandigarh Flat), said to be owned by assessee, had to be chargeable under 'Income from House Property' as per proviso (business) to section 54F(1), so as to deny the exemption u/s 54F. The assessee did not have any access, control, possession, ownership etc. on the date of transfer of original asset (i.e. 05/06/2008) and therefore, no income was chargeable under the 'Income from House Property' on that date.3. The Ld. CIT(A) had failed to differentiate between nature of asset owned by the assessee i.e. 'Right to acquire the Flat' and 'the Flat itself'. Assessee had 'Right to Acquire the Flats' and not the 'Flat/residential houses itself' on the date of transfer of original asset (i.e. 05/06/2008) in terms of Section. 54F.Ld. CIT(A) also ignored the fact that ATS-Noida became the 'Residential House' on 10/07/2010 after getting control/possession on this date, the 'Right to Acquire Flat' was converted into the 'Ownership of Flat/Residential Houses'. ATS Chandigarh's possession has still not been received till the date of this appeal and therefore it remains a 'Right to Acquire Flat' only.4. Without prejudice to the above grounds, the Ld. CIT(A) had erred in holding that no exemption would be available to the assessee for the new asset acquired for residence u/s 54F where the assessee has made the payment of the booking only and not obtained the possession of the new house before due date of filing the return. While holding so, the Ld. CIT(A) has ignored the CBDT Circular No. 471 dated 15/10/1986 which lays down that payment to builder is sufficient compliance for claiming exemption u/s 54F.5. That the appellant craves leave to reserve to itself the right to additional, alter, amend, substitute, withdraw and/or any ground(s) of appeal at or before the time of hearing."
5. We have heard rival submissions and have carefully perused the entire record. Both the parties have reiterated their arguments taken before Ld. CIT(A). After considering rival submissions in the light of the evidence available on record including the paper book filed by the assessee, we have found that the following facts are not disputed by the parties:-
(1) that the assessee got his share in the compensation of Rs. 208.81 Lac from jointly owned land consequent upon acquisition thereof by the Rajasthan State Industrial Development and Investment Corporation Ltd. (RIICO) on 05/06/2008 and has earned the long term capital gain (LTCG) of Rs. 203.76 Lac in this process. (2) that the assessee invested his share of compensation of Rs. 208.81 Lac before 30/09/2009 (i.e. due date of filing of ROI for A.Y. 2009-10). The details of entire investment are as under:-
| 1. Investment under section 54F | Rupees |
| a) Payment for residential flat of Emaar – MGF (a builder) at Gurgaon | 89.66 Lac |
| b) Deposit in Capital Gain account with BOB | 40.00 Lac |
| 2. Offered for Tax as LTCG | 77.23 Lac |
Assessee had following houses & bookings as on 05/06/2008:-
| S.No. | Properties and their address | Year of acquisition | Share of the assessee | Whether assessed under section 22 |
| 1 | Residential House S-225, Mahaveer Nagar, Jaipur | Around 15 years back | 100% | YES, as self occupied house |
| 2 | Business office Flat No. 101, Block NO. 43, Heritage City, Gurgaon | Since June 1998 | 50% | Property used for business & exempted u/s 22 |
| 3 | Bookings of Flat ATS-Noida and ATS-Chandigarh | Advance bookings on the date of transfer i.e. 05/06/2008 | 100% | In absence of ownership, possession etc. the question does not arise. |
| 4 | New Residential House booking at Emaar-MGF, Gurgaon | 2009 | 100% | Exemption u/s 54F claimed for acquiring second house |
Bookings for the flats namely ATS-Noida and ATS-Chandigarh existed on 05/06/2008, wherein the assessee did not have ownership, control, possession, title etc. by virtue of these bookings and the only valuable right/asset, assessee had, was the 'Right to acquire Flat' which could be either converted into a 'Flat' or the right itself could be transferred for a consideration."
6. To understand the nature of claim made under section 54F of the Act, we have to incorporate this section in its entirety herein as under:-
54F. Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house. - (1) Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:Provided that nothing contained in this sub-section shall apply where-(a) the assessee,-(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or(ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and(b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head "Income from house property".Explanation.-For the purposes of this section,-"net consideration", in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.(2) Where the assessee purchases, within the period of two years after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head "Income from house property", other than the new asset, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a), or, as the case may be, clause (b), of sub-section (1), shall be deemed to be income chargeable under the head "Capital gains" relating to long-term capital assets of the previous year in which such residential house is purchased or constructed.(3) Where the new asset is transferred within a period of three years from the date of its purchase or, as the case may be, its construction, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1) shall be deemed to be income chargeable under the head "Capital gains" relating to long-term capital assets of the previous year in which such new asset is transferred.(4) The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139 in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset:Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,-(i) the amount by which-(a) the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), exceeds(b) the amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset, shall be charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and(ii) the assessee shall be entitled to withdraw the unutilised amount in accordance with the scheme aforesaid.
From the plain and normal reading of the above sections one can easily construe that this provision aims at encouraging either construction or purchase of a residential house out of a capital gain arising from the sale of certain capital assets. The title above the main section is very clear in this direction. We would like to repeat this title to emphasize our point of view:-
"54F. Capital gain on the transfer of certain capital assets not to be charged in case of investment in residential house"
This section describes vendors of the capital gain, as an individual or a HUF. All other entities like a firm, a company etc. have been excluded from its ambit. This fact also clears the intention of the legislations because the individuals and/or the HUF which is composed of individuals, are only capable of residing in a house. This section binds the individual/HUF to get a new-asset (= a residential house) either by way of purchase or construction within the stipulated period after the sale of the 'original asset'. We are not concerned about this limitation in this case. This section also helps the individual to claim benefit by depositing the 'capital gain' in a particular manner. We are not concerned about this aspect now. Apart from defining the terms like - the net-consideration etc. this section imposes other conditions via a provision appended thereto. And we are concerned only with the provision 54F(b)(a)(i) as extracted above and we are required to answer the dispute between the parties by using this provision alone. This provision proscribes that the individual/HUF must not own more than one residential house on the date of transfer of the original asset. They have excluded new-asset i.e. new residential house from being counted at the time of such transfer because the section provides a leeway of one year for purchasing/constructing the residential house before this transfer. The date of transfer of the original asset in this case is 05/06/2008. Let use examine if the assessee had more than one residential house on that date or not. The chart extracted at pages 9 & 10 of this order makes it amply clear that on 05/06/2008, this assessee did not own more than one residential house. However, he had booked two flats (residential houses) - one each at ATS-Noida and ATS-Chandigarh. Regarding these 'bookings' and the investments made the contention of the assessee is that "the booking of flats" does not tantamount to 'ownership' of the flats unless these are completed and their ownership is transferred in his names. But at the same it is contended that after 05/06/2008, in the year of 2009 i.e. within the period of leeway provided in this section, the assessee has booked one flat in the Emaar-MGF, Gurgaon and has treated the booking amount paid as an 'investment made' in the purchase of a new-asset i.e. a residential house in consonance with the provisions of section 54F which does not suffer with the prohibitions of section 54F(4) or the proviso 54F(1)(b)(a)(i). This submission seems to be contradictory at the first sight. But, when this issue is examined it is not noticed that there is neither contradiction in assessee's claim nor there is inherent contradiction in the Act. The Act is very clear. It speaks about 'investment' in the new-asset (refer the title of this section). The term 'purchased' or 'constructed' used in section 54F(1) may not necessarily mean that the new-asset must have been transferred in the name of the assessee and the investment made by way of booking a flat and if such investment is proved it must be treated as an ample compliance of this proviso when it is examined in the light of the aim and object with which the legislators have enacted this beneficial provision. On the other hand the "transfer of ownership" in other flats is material because the section uses the term 'owns' in the proviso. Thus investment & ownership are two distinct terms which have their meanings and connotations in different ways. The investment of capital gains is a beneficial provision and 'ownership' at the time of transfer of the original asset is to be interpreted strictly as per law. In our considered opinion both these stages cannot be dealt with in the same manner. Our this view is further fortified by the same provision as the proviso 54F(1)(b)(b) to this section postulates that such residential house, other than the residential house owned on the date of transfer of the original asset is chargeable under the head "income from house property". The proviso 54F(1)(b)(a)(i) is further clarified by this proviso. If the assessee owns more than one residential house the income from that house is chargeable under the head "income from house property". In this case no such income is chargeable from the flats booked at Noida and Chadigarh. Thus, in the totality of the facts and the law the flats booked at ATS-Noida and ATS Chandigarh 'owned' by the assessee as on 05/06/2008.
7. Now, we have to see as to whether appellant has fulfilled all the requisite conditions of this section or not? As per Ld. CIT(A), the assessee owned two residential houses, situated at ATS-Noida flat and ATS Chandigarh flat, on the date of transfer of the original asset, which is a proscribed condition and, therefore, this benefit is not available to the assessee. As against this, the case of the assessee, throughout has been that he neither possessed nor owned these houses which are flats, on the date of transfer of original asset which fall on 05/06/2008. In fact, under proviso a(i) to section 54F (1) of the Act, the assessee is not entitled to this benefit, in case, he owns more than one residential house other than the new asset on the date of transfer of the original asset.
8. Now we have to see as to whether on the date of transfer of the original asset, which is of 05/06/2008, the assessee owned more than one residential house other than the new asset or not? As per the above chart, the facts which remained undisputed. On 05/06/2008, the assessee had one residential house at S-225, Mahaveer Nagar, Jaipur which was self occupied, one business office at Heritage City, Gurgaon which is business property, in which the assessee had 50% share. The assessee had booked two flats one each at Noida & Chandigarh and had made advance bookings on the date of transfer i.e. on 05/06/2008. But neither possession had been taken nor ownership had transferred of those flats in the name of the assessee till that date. The assessee has booked one new residential house at Emaar-MGF, Gurgaon in the year 2009 i.e. after the date of 05/06/2008. The assessee has treated this new residential house at MGF, Jaipur as a new asset and the house at Mahaveer Nagar, Jaipur, as his sole residential house. Regarding two flats booked, one each at Noida and Chandigarh, the case of the assessee is that assessee has not become owner of those houses until 05/06/2008 as neither possession of the same had been given to him. According to him, on 05/06/2008 he owned only one residential house and therefore, he is entitled for exemption under section 54F of the Act in respect of new asset booked at Emaar-MGF, Gurgaon. It is stated that in those two flats, assessee has only 'Right to Acquire Flat'.
9. On the other hand, the case of Ld. Sr. D.R. who has relied on the orders of the authorities below, is that these two flats one each at Noida and Chandigarh would be included in the term 'owns' on 05/06/2008 as both these flats had been booked by that date. Still further, the case of the assessee is that even the booking of a flat in a buildings under construction tantamount to utilization of capital gain in the purchase of a residential house and the amount paid in advance till the flat (house) is ready and is transferred to the assessee or as per law its ownership is transferred to the assessee. The ITAT, Cochin Bench rendered in the case ofGeroge Dominic Vs. ACIT reported in (2013) 35 taxmann.com 547. With reference to para 12 of this judgment it was argued that only on completion of construction of the building, it acquires the status of 'residential house'. The Bench has further observed that proviso appended to section 54 says that the income from residential house is chargeable under the head 'income from house property'. Meaning thereby that house should be fit for residing at the relevant time, so that, it should be treated as a house property and its income can be charged under the law. Therefore, the ratio of this judgment is that on the date of transfer of the original asset owned by the assessee if should be a 'house' ready for living therein. Further Delhi Bench in the case of Smt. Bina Kedia Vs. ITO, Ward 23(2), New Delhi (discussed at pages 4 & 5 in written submissions) has taken a similar view. The relevant portion of this judgment reads as under:-
"The Ld. CIT(A) has mentioned that as on the date of transfer (i.e. 04/10/1999), the assessee was owner of another house (DDA Flat Booking) and hence benefit of sec. 54F was not available. We find that the flat in Dwarka was allotted on 28/06/2001 (possession taken on 21/07/2001). Thus the assessee was not owner of any house on the date of transfer (i.e. 04/10/1999) of capital assets. Ld. CIT(A) has also held that benefit of sec. 54F cannot be granted as the assessee had purchased residential house other than the new asset within the period of one year after the date of transfer of capital asset as DDA flat was acquired by her within one year. In this case the assessee sold 125 shares of Castrol on 21/08/1999 for a sum of Rs. 53,108.75 and 66200 shares of Rajdhani Securities on 04/10/1999 for a sum of Rs. 11,55,190 through Shree Balaji Share Trading Company. Therefore, the DDA flat was not acquired within one year from the date of transfer of capital asset. Hence proviso to section 54F is not applicable in the case of assessee."
10. Undisputedly, the assessee became owner of the Noida flat only on 10/07/2010 and has not acquired ownership of the Chandigarh flat till date. Thus, picture becomes clear in respect of proviso (a)(i) to section 54F of the Act that the residential house mentioned therein has a different connotation because 'house' means building in its normal residential conditions which is found fit for living by human-beings and not a house under construction' and this house should be completely owned by the assessee at the relevant time. The Legislators in their wisdom have used two different terms to refer to the original residential house sold as 'old asset' and by referring to the new residential house to be purchased or constructed as the case may be, as 'new asset'. The collective reading of this section makes it clear that two conditions should be satisfied and both are co-exist at the relevant time of transfer of original asset 1) the assessee must owned the residential house on the date of transfer and 2) income from such residential house should be chargeable under the head 'income from other house property'. If the above two conditions co-exist, the assessee becomes disentitled to the exemption section 54F of the Act, particularly when, the assessee owns such a house other than the original asset and its income is chargeable as a income from house property as per the provisions of section 22 of the Act. The assessee needs to be owner rather legal owner of that house. Hon'ble Supreme Court in the case of CIT Vs. Podar Cement (P) Ltd. etc. reported in 226 ITR 625 (SC) = 2002-TIOL-445-SC-IT-LB has clearly explained this position by holding that 'owner' is a person who is entitled to receive income from the property in his own right. In the absence of completion and possession by way of registration and transfer of its title etc., of these two flats booked by the assessee on the date of transfer original capital asset i.e. 05/06/2008, the question of assessing 'Income from House Property' under section 22 of the Act will not arise. The Ld. CIT(A) has misdirected himself has treating even 'right to acquire a flat' as owned by the assessee. In our considered opinion, the conclusion of Ld. CIT(A) is not correct. Thus with regard to Noida & Chandigarh flats it can be safely concluded that these were not owned by the assessee on 05/06/2008 in terms of section 54F of the Act. The Ld. CIT(A) has observed (at page 14 of her order) that "the argument that the flats at Noida and Chandigarh are just booked and not possessed does not hold water, because if the same logic is applied, no exemption would be available to the appellant because the flat at the Gurgaon with respect to which exemption is being sought from capital gain is also just booked and possession has not been given to the appellant in the assessment year under consideration".
The above observation seems to be plausible at the first reading. Why - the booking at Noida/Chandigarh is to be treated differently from the booking of Gurgaon flat. But, when this aspect is examined in depth with ratiocination the above observation becomes wrong and contrary to the intention of the Act. The meaning of term 'owns' used in section 54F (conditions) - 'owns more than one residential house on the date of transfer of the capital asset' - has a different meaning. That house needs to be. This owner means a legal owner who is entitled to receive income from the property in his own right. This house should be real and not symbolic. In the absence of possession, registration, title etc., question of assessing 'income from house property' under section 22 of the Act does not arise. Thus, Ld. CIT(A) has failed to differentiate between the nature of asset owned by the assessee when a flat is booked he has a 'right to acquire' and this 'right to acquire', is not equivalent to 'own' a house. On the other hand the parameters which apply to investment of 'capital gain' in the construction - purchase of a house within two years of sale of the original asset. That is why the CBDT has issued circular Nos. 471 dated 15/10/1986 and circular No. 672 dated 06/12/1993 which clarify that the amount paid towards booking as to be treated towards 'construction' for the purpose of section 54/54F. This assessee made payment to the builder Emaar - MGF Gurgaon before 30/09/2009 for buying a II residential house. Builder has promised to give possession of the house before 05/06/2010 i.e. within 2 years of the sale of the original asset but could not give possession by that time. Section 54F is a beneficial provision for promoting the construction of residential houses and requires an assessee to construct houses and for achieving that purpose to intent of the Legislature is to encourage investments in the acquisition of a residential house and completion of construction or occupation is not the requirement of the law. In view of the above discussion the assessee cannot be treated owner of Noida/Chandigarh flats on 05/06/2010. At the same time, he to be allowed benefit of section 54F because he has invested the capital gain as per the requirement of the Act.
11. Now coming to a concomitant situation that if booking of flats does not tantamount to ownership of the house then how come the assessee claim that by booking a flat it has acquired 'new house' and becomes entitle for this exemption. Similar situations repeatedly arose and to settled them, the CBDT issued a circular No. 471 dated 15/10/1986 clarifying that payment made to a builder/developer is a sufficient compliance for exemption under section 54F of the Act. Ld. CIT(A) has gone by sheer technicalities to hold that the flat at Emaar-MGF, Gurgaon is not covered under section 54F of the Act. To meet such recurrence of situations in the modern days where properties are booked and thereafter purchased, the CBDT in their wisdom further clarifies vide circular No. 672 dated 16/12/1993 that if any amount out of net sale consideration of the original asset is paid to any builder or developer, this amount should be considered towards the terms 'purchase/construct' for the purpose of sections 54/54F of the Act. It is not disputed by the Revenue that the assessee has not made payment for purchase of residential house in Gurgaon in view of the above clarifications of CBDT, this is enough compliance of the provision of section 54F of the Act and the assessee became entitled to this exemption.
12. We have found that section 54F of the Act is a beneficial provision aimed at promoting existence of new residential houses to further the needs of the society. Thus, the intention of the Legislator is to encourage investment in the acquisition of residential houses and section 54F of the Act prescribes and proscribes the conditions for availing its benefit. The terms/words used in this section have been very selectively & prudentially used by the legislature. This benefit is against the capital gain arising out of transfer of any long term capital asset not being a residential house and which has been referred to as an 'original asset' subject to a condition that if the 'net-sale-consideration' is invested either in purchasing/constructing a residential house or in constructing the same within the period prescribed in this section. However, if the assessee owned more than one residential house other than the new asset on the date of transfer of the original asset, this benefit is not available to him. In the given case, undisputedly, the assessee had sold a capital asset in the form of land on 03/10/2008 and earned long term capital gain of Rs. 2,03,76,237/- (this LTCG has been calculated by the Assessing Officer at Rs. 2,04,37,654/-) as there was some error in the computation filed by the assessee with the return because in the indexing of the cost of land in F.Y. 1991-92, the assessee's half share was not considered. The assessee has claimed exemption under section 54F (1)(b) of the Act to the extent of Rs. 1,26,52,789/- as against total investment of Rs. 1,29,66,275/-. Thus, by now we have come to the conclusion that the assessee did not own more than one residential house on the date of transfer of the original asset. Therefore, one condition of this provision stands satisfied.
13. As we have already held that owning of a residential house at the time of transfer of the original asset has different meaning and connotation and acquisition of new asset 'which is equivalent to purchase of new residential house' has entirely different meaning and connotation. This provision encourages people to purchase or construct new residential houses. If the capital gain is invested in the manner prescribed in this section to that extent the capital gain is spent or invested 'has to be allowed as deduction'. So, with regard to purchase of new residential house, the provisions does not laid down a condition that a new house should either be complete or it should be purchased as a complete livable house. The aim is to direct the minds of the society in purchasing new residential house so that the menace of shortage of houses is tackled to some extent. Therefore, keeping in view the aim and object of the legislator and in view of that clarifications of the CBDT, in our considered opinion, Ld. CIT(A) has misdirected himself in giving the same meaning to the residential house owned at the time of transfer of the original asset and the investment made out of the capital gain in the purchase or construction of new house, which has been defined as 'new asset' in the Act. Therefore, any payment made towards acquisition of a new residential house by way of making payment in advance even by booking or by paying installments within the prescribed has to be is treated as investment towards purchase/construction of a new house. Accordingly, we hold that the assessee is entitled for exemption under section 54F of the Act of LTCG of Rs. 2,04,37,654/-. We further derive support for our above finding from the following decisions:-
1. Sardarmal Kothari [2008] 302 ITR 286 (Mad)2. CIT Vs. Sambandam Udaykumar (2012) 345 ITR 389 = 2012-TIOL-217-HC-KAR-IT.3. Smt. Ranjeet Sandhu Vs. DCIT [2011] 16 taxmann.com 201 (Chandigarh)4. Smt. Usha Vaid Vs. ITO, Dasuaya [2010] 25 taxmann.com 188 (Amritsar)/[2012] 53 SOT 385 (Amritsar)5. Smt. V.A. Tharabai Vs. DCIT, Circle -I, Vellore [2012] 19 taxmann.Com 276 (Chennai).
14. In view of our foregoing discussion, we allow grounds raised in this appeal, which are in fact in relation to only one issue i.e. availability of deduction of section 54F(1)(a)(i) of the Act or to say under section 54F of the Act. Accordingly, this appeal of the assessee stands allowed and the entire addition stands deleted.
15. In the result, the appeal of the assessee stands allowed.
(Order Pronounced in the Court on 5.5.2014)
IT/ILT : In terms of section 32(1)(iia), there is no restriction on assessee to carry forward additional depreciation and, thus, where only 50 per cent of additional depreciation is allowed in year of purchase of machinery as it was put to use for lass than 180 days during said year, balance 50 per cent of additional depreciation can be claimed in subsequent assessment year
IT/ILT : Where assessee gave loan to its subsidiary company located abroad to acquire another foreign company, in view of fact that at time of conversion of loan into cumulative redeemable preferential shares, there was fall in value of loan due to difference in foreign exchange conversion rate, said loss being in course of acquiring a capital asset, it was to be treated as capital loss not eligible for deduction
IT/ILT: Where assessee advanced loan to its AE located abroad, in view of order passed in case of Siva Industries & Holdings Ltd. v. Asstt. CIT [2011] 46 SOT 112 (URO)/11 taxmann.com 404 (Chennai), Assessing Officer was to be directed to adopt LIBOR method of rate of interest for purpose of determining ALP of loan transaction in question
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[2014] 45 taxmann.com 337 (Cochin - Trib.)
IN THE ITAT COCHIN BENCH
Apollo Tyres Ltd.
v.
Assistant Commissioner of Income-tax, Circle -1, Range - 1, Kochi*
N.R.S. GANESAN, JUDICIAL MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
IT APPEAL NO. 616 (COCH.) OF 2011
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
DECEMBER 20, 2013
I. Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price [Comparables and adjustments] - Assessment year 2007-08 - During relevant year, assessee advanced loan to its AE located in Mauritius carrying interest at rate of 7.5 per cent per annum - In transfer pricing study, assessee benchmarked international transaction using LIBOR - Six months average US $ LIBOR rate for period April, 2006 to March, 2007 came to 5.39 per annum - Since, assessee actually charged 7.5 per cent which was higher than comparable uncontrolled price of six months US $ LIBOR, transaction of advancement of loan was claimed to be at arm's length price - TPO by adopting interest rate taken earlier for advancing similar loans to associate enterprises, made certain adjustment - DRP confirmed said adjustment - Whether in view of order passed by Chandigarh Bench of this Tribunal in Siva Industries & Holdings Ltd. v. Asstt. CIT [2011] 46 SOT 112 (URO)/11 taxmann.com 404 (Chennai) and Mumbai Bench in Tata Autocomp Systems Ltd. v. Asstt. CIT [2012] 52 SOT 48/21 taxmann.com 6 (Mum.), impugned order of lower authorities was to be set aside and Assessing Officer was to be directed to consider LIBOR method of rate of interest for purpose of determining arm's length price of transaction in question - Held, yes [Para 45] [In favour of assessee]
II. Section 32 of the Income-tax Act, 1961 - Depreciation - Additional depreciation (Carry forward of additional depreciation) - Assessment year 2007-08 - Whether in terms of section 32(1)(iia), there is no restriction on assessee to carry forward additional depreciation and, thus, where only 50 per cent of additional depreciation is allowed in year of purchase of machinery as it was put to use for less than 180 days during said year, balance 50 per cent of additional depreciation can be claimed in subsequent assessment year - Held, yes [Para 12] [In favour of assessee]
III. Section 28(i) of the Income-tax Act, 1961 - Business loss/deductions - Allowable as (Foreign exchange fluctuation loss) - Assessment year 2007-08 - Assessee-company advanced foreign currency loan in Indian rupees to its wholly subsidiary company, 'A', Mauritius, for acquiring entire share capital of a South Africa based company - Subsequently, 'A', Mauritius converted loan advanced by assessee into preference shares - However, at time of conversion of loan into cumulative redeemable preferential shares, due to decline in value of Rands, loan amount declined - Assessee claimed that loss was incurred due to difference in foreign exchange conversion rate, and, thus, it was to be allowed as business loss - Revenue authorities rejected assessee's claim - Whether since loss in question was suffered in course of acquiring a capital asset for expansion of profit earning apparatus, it was to be treated as capital loss which could not be allowed as deduction– Held, yes [Para 32] [In favour of revenue]
FACTS-II
| ■ | The assessee claimed additional depreciation in respect of new machinery and plant acquired after 30-9-2005. | |
| ■ | The Assessing Officer allowed 10 per cent of the additional depreciation for the assessment year 2006-07. The assessee claimed the remaining 10 per cent of the depreciation during the year under consideration. | |
| ■ | The Assessing Officer rejected the claim of the assessee on the ground that there was no provision for carry forward of any additional depreciation. | |
| ■ | The DRP confirmed order of Assessing Officer. | |
| ■ | On appeal: |
HELD-II
| ■ | A bare reading of section 32(1)(iia) clearly says that in case a new machinery or plant was acquired and installed after 31-3-2005 by an assessee, who is engaged in the business of manufacture or production of article or thing, then, a sum equal to 20 per cent of the actual cost of the machinery and plant shall be allowed as a deduction. | |
| ■ | It is not in dispute that the assessee has acquired and installed the machinery after 31-3-2005. It is also not in dispute that the assessee is engaged in the manufacture of article or thing. Therefore, the assessee is eligible for additional depreciation which is equivalent to 20 per cent of the actual cost of such machinery. The dispute is the year in which the depreciation has to be allowed. | |
| ■ | The assessee has already claimed 10 per cent of the depreciation in the earlier assessment year since the machinery was used for less than 180 days and the balance 10 per cent was claimed in the year under consideration. | |
| ■ | Section 32(1)(iia) does not say about the year in which the additional depreciation has to be allowed. It simply says that the assessee is eligible for additional depreciation equal to 20 per cent of the cost of the machinery provided the machinery or plant is acquired and installed after 31-3-2005. | |
| ■ | Proviso to section 32(1)(iia) says that if the machinery was acquired by the assessee during the previous year and has put to use for the purpose of business less than 180 days, the deduction shall be restricted to 50 per cent of the amount calculated at the prescribed rate. | |
| ■ | Therefore, if the machinery is put to use in any particular year, the assessee is entitled for 50 per cent of the prescribed rate of additional depreciation. The Act is silent about the allowance of the balance 10 per cent additional depreciation in the subsequent year. | |
| ■ | Taking advantage of this position, the assessee now claims that the year in which the machinery was put to use, the assessee is entitled for 50 per cent additional depreciation since the machinery was put to use for less than 180 days and the balance 50 per cent shall be allowed in the next year since the eligibility of the assessee for claiming 20 per cent of the additional depreciation cannot be denied by invoking second proviso to section 32(1)(ii). [Para 11] | |
| ■ | This issue was considered by the Delhi Bench of this Tribunal in the case of Dy. CIT v. Cosmo Films Ltd. [2012] 139 ITD 628/24 taxmann.com 189. The revenue has taken a similar ground as taken before this Tribunal that the assessee cannot carry forward the additional depreciation to be allowed in the subsequent assessment year. | |
| ■ | The Delhi Bench of this Tribunal after considering the provisions of section 32(1)(iia) and proviso to section 32(1)(ii) found that when there is no restriction in the Act to deny the benefit of balance 50 per cent, the assessee is entitled for the balance, additional depreciation in the subsequent assessment year. [Para 12] | |
| ■ | A similar view was taken by Mumbai Bench of this Tribunal in MITC Rolling Mills (P.) Ltd. v. Asstt. CIT [IT Appeal No. 2789 (Mum.) of 2012, dated 13-5-2013]. In view of the above decisions of the co-ordinate benches of this Tribunal on identical set of facts, it is opined that the balance 50 per cent of the depreciation has to be allowed in the subsequent year, therefore, the orders of the lower authorities on this issue are set aside and the Assessing Officer is directed to allow the claim of balance 50 per cent additional depreciation in the year under consideration. [Para 14] |
FACTS-III
| ■ | The assessee-company advanced foreign currency loan in Indian rupees to its wholly subsidiary company, 'A', Mauritius, carrying interest at the rate of 7.5 per cent. | |
| ■ | The loan was advanced for acquiring 100 per cent controlling interest in DTIPL, South Africa. The Mauritius subsidiary advanced the said loan to 'AP', South Africa, which ultimately acquired the entire share capital of DTIPL, South Africa. | |
| ■ | It was undisputed that 'A' Mauritius had converted the above said loan advanced by the assessee into non-cumulative redeemable preferential shares after getting the consent of the assessee. | |
| ■ | However, at the time of conversion of the loan into cumulative redeemable preferential shares, due to decline in the value of the Rands, the loan amount declined. | |
| ■ | The assessee claimed that since said loss was incurred mainly due to difference in the foreign exchange conversion rate, it was to be allowed as business loss. | |
| ■ | The assessee's claim was rejected on the ground that it was the acquisition of the capital asset which resulted in loss, therefore, it was a capital loss which could not be allowed as deduction. | |
| ■ | On appeal: |
HELD-III
| ■ | Admittedly, the assessee is not in the business of money lending. The assessee is in the business of manufacturing tyres. For the purpose of expanding its capital base and the profit making apparatus, the assessee advanced loan to Mauritius based subsidiary company for the purpose of acquiring a controlling interest in the South African company. | |
| ■ | It is an admitted fact that the assessee acquired enduring benefit due to expansion of its business in South Africa. The assessee utilized the marketing network of the South African company. Due to centralized purchase, the cost of raw material has considerably lowered down and the assessee was able to market its product on competitive rate. The assessee was able to reduce the manufacturing cost due to transfer of technical skill acquired from South African company. | |
| ■ | Therefore, the assessee obtained enduring benefit in the capital field. The assessee also acquired 100 per cent controlling interest in the South African company. Therefore, it is obvious that the loan was advanced by the assessee for acquiring the South African company, which is undoubtedly a capital asset. In other words, the loan advanced by the assessee was converted into an investment. [Para 28] | |
| ■ | Thus, the assessee advanced the so-called loan for the purpose of acquiring controlling interest in the South African Company through its Mauritius subsidiary company which is a capital investment. Therefore, the loss, if any, suffered has to be treated as capital loss and it cannot be allowed as revenue loss. [Para 31] | |
| ■ | It is well settled principles of law that if the money was advanced for the purpose of acquiring a capital interest which is enduring in nature, then the loss or profit suffered in that process has to be treated in the capital field. The loss/profit was not earned/received in the process of earning profit. The loss is suffered in the course of acquiring a capital asset for expansion of the profit earning apparatus. | |
| ■ | Therefore, the Assessing Officer has rightly found that there is no loss suffered by the assessee in conversion of loan into preferential shares of the Mauritius subsidiary company and the loss shown is only a book loss. | |
| ■ | Even assuming for the arguments' sake, it has to be treated as a loss, then, the loss is in the capital field, and therefore, it cannot be allowed as loss while computing total income. Therefore, there is no reason to interfere with the orders of lower authorities. Accordingly, the same is confirmed. [Para 32] |
CASES REFERRED TO
Dy. CIT v. Cosmo Films Ltd. [2012] 139 ITD 628/24 taxmann.com 189 (Delhi) (para 7), Asstt. CIT v.SIL Investment Ltd. [2012] 54 SOT 54/26 taxmann.com 78 (Delhi) (para 7), MITC Rolling Mills (P.) Ltd. v. Asstt. CIT [IT Appeal No. 2789 (Mum.) of 2012, dated 13-5-2013] (para 7), Divis Laboratories Ltd. v. Dy. CIT [IT Appeal No.11/Hyd/2012, dated 12-7-2013] (para 7), S.A. Builders Ltd. v.CIT(Appeals) [2007] 288 ITR 1/158 Taxman 74 (SC) (para 25), CIT v. Anand Technology Resource Park (P.) Ltd. [2011] 202 Taxman 654/15 taxmann.com 4 (Kar.) (para 25), CIT v. Woodward Governor India (P.) Ltd. [2007] 294 ITR 451/162 Taxman 60 (Delhi) (para 26), CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326 (SC) (para 26), Siva Industries & Holdings Ltd. v. Asstt. CIT [2011] 46 SOT 112 (URO)/11 taxmann.com 404 (Chennai) (para 39), Tata Autocomp Systems Ltd.v. Asstt. CIT [2012] 52 SOT 48/21 taxmann.com 6 (Mum.) (para 39), Four Soft Ltd. v. Dy. CIT [2011] 142 TTJ 358 (Hyd.) (para 39), Dy. CIT v. Tech Mahindra Ltd. [2011] 46 SOT 141 (URO)/12 taxmann.com 132 (Mum.) (para 39), Perot Systems TSI (India)(P.) Ltd. v. Dy. CIT [2010] 37 SOT 358 (Delhi) (para 39) and Cotton Naturals (I) (P.) Ltd. v. Dy. CIT [2013] 32 taxmann.com 219 (Delhi) (para 39).
Ajay Vohra for the Appellant. M. Anil Kumar and Smt. S. Vijayaprabha for the Respondent.
ORDER
N.R.S. Ganesan, Judicial Member - This appeal of the assessee is directed against the order of the assessing officer dated 21-10-2011 for the assessment year 2007-08.
2. The first ground of appeal is with regard to additional depreciation u/s 32(1)(iia) of the Act.
3. Shri Ajay Vohra, the ld. senior counsel for the assessee submitted that the assessee claimed Rs. 5,01,83,094 as additional depreciation in respect of new machinery and plant acquired after 30-09-2005. It is not in dispute that the assessing officer has allowed 10% of the additional depreciation for the assessment year 2006-07. The assessee claimed the remaining 10% of the depreciation for the year under consideration. However, the assessing officer disallowed the claim of the assessee. Referring to the report filed by the DRP (DRP), the ld. senior counsel pointed out that DRP misconstrued the provisions of section 32(1)(iia) of the Act and rejected the claim of the assessee on the ground that there is no provision for carry forward of any additional depreciation. According to the ld. senior counsel, this is not a carry forward of additional depreciation; but a claim made by the assessee during the year under consideration. Referring to provisions of section 32(1)(iia) of the Act, the ld. senior counsel submitted that in case of any machinery or plant acquired and installed after 31-03-2005 the assessee is entitled for a further sum equal to 20% of the actual cost of the plant & machinery installed as additional depreciation. This section 32(1)(iia) does not say the year in which the additional depreciation has to be allowed. It simply says that the assessee, who is engaged in the business of manufacture or production of articles or thing has acquired and installed machinery and plant after 31-03-2005 is eligible for additional depreciation of a further sum equal to 20% of the actual cost. The further sum of 20% of the actual cost may be allowed either in the year in which the plant or machinery was acquired and installed or in the subsequent years. So long as there is no restriction in respect of the year in which the additional depreciation is to be allowed, the assessing officer cannot reject the claim of the assessee for the year under consideration.
4. The ld. senior counsel further pointed out that second proviso to section 32(1)(ii) of the Act restricts the depreciation to 50% in case the machinery and plant was put to use for the purpose of business or profession for a period less than 180 days. Therefore, according to the ld. representative, when the plant or machinery is used for less than 180 days, the assessee is entitled for 50% of the additional depreciation and the remaining 50% can be claimed in the subsequent year since there is no restriction to claim the additional depreciation in the subsequent assessment year. The ld. senior counsel further submitted that it is not a case of carry forward of additional depreciation for want of sufficient profit. According to the ld. senior counsel, the assessee has sufficient profit to absorb the entire depreciation for the first year in which the depreciation was claimed. However, in view of second proviso to section 32(1)(ii), the assessing officer has allowed only 10% of the depreciation being 50% of the total claim. In the absence of any provision to prohibit the assessee from claiming remaining depreciation in the next assessment year, the claim of depreciation cannot be disallowed by the assessing officer.
5. Referring to the objection filed before the DRP, the ld. senior counsel for the assessee submitted that section 32(1)(iia) is an incentive provision and enacted by the legislature with an intention to boost investment in industry so as to increase the productivity. A provision in taxing statute granting incentive for promoting growth and development should be construed liberally. According to the ld. senior counsel, hyper technical and legalistic approach would frustrate and defeat the very intention of the legislation. Therefore, such hyper technical approach should be avoided.
6. The ld. senior counsel submitted that a bare reading of section 32(1)(iia) clearly shows that the assessee is eligible for additional depreciation in case the new machinery and plant was acquired and installed after 31-03-2005. There is no restrictive condition in the clause for the eligibility of the assessee to claim additional depreciation. When the assessee is eligible for depreciation @20%, in the absence of any specific provision, the assessing officer cannot cut down the scope of deduction by referring to proviso to section 32(1)(ii) of the Act. According to the ld. senior counsel, even if there is any contradiction between sections 32(1)(iia) and proviso to section 32(1)(ii), it has to be reconciled so as to give harmonious effect to the legislative intent. The benefits conferred on the assessee by way of incentive provision cannot be taken away by adopting an implied meaning to second proviso to section 32(1)(ii) of the Act. Since the second proviso to section 32(1)(ii) does not expressly prohibit the allowance of the balance 50% depreciation in the subsequent year, proviso to section 32(1)(ii) shall not be interpreted to mean that it impliedly restrict the additional depreciation to be allowed in the subsequent assessment year. According to the ld. senior counsel, when the main provision which allows depreciation @20% and does not prescribe any particular year in which it has to be allowed, the intention of the legislature is to allow entire additional depreciation @20%. The second proviso to section 32(1)(ii) is to mean that 10% should be allowed in the year in which the machinery is acquired and installed and the balance 10% has to be impliedly allowed in the subsequent year.
7. The ld. senior counsel placed his reliance on the decision of the Delhi Bench of this Tribunal in the case ofDy. CIT v Cosmo Films Ltd [2012] 139 ITD 628/24 taxmann.com 189 and in the case of Asstt. CIT v.SIL Investment Ltd. [2012] 54 SOT 54/26 taxmann.com 78 (Delhi). Further reliance was placed on the decision of the Mumbai Bench of this Tribunal in MITC Rolling Mills (P.) Ltd. v. Asstt. CIT IT Appeal No.,2789/Mum/2012, dated 13-5-2013 copy of which is available at pages 26 to 28 of the paper book. The ld. senior counsel has also relied upon the unreported decision of the Hyderabad Bench of this Tribunal in the case of Divis Laboratories Ltd v. Dy. CIT IT Appeal No.11/Hyd/2012, dated 12-7-2013 copy of which is available at pages 29 to 41 of the paper book.
8. On the contrary, Shri M Anil Kumar, the ld. DR submitted that the assessee is entitled for additional depreciation u/s 32(1)(iia) of the Act in respect of new machinery and plant . The depreciation has to be granted in the year in which the machinery was put to use. If the machinery was put to use for less than 180 days, then, the assessee is entitled only for 50% of the additional depreciation i.e. 10%. In fact, 10% of the depreciation was allowed in the year in which the machinery was put to use. It is not the case of the assessee that the assessee had no sufficient profit in the year in which the machinery was put to use, therefore, the additional depreciation could not be carried forward. According to the ld. DR, there is no provision in the Income-tax Act to carry forward the allowable depreciation when the assessee has sufficient profit. During the year under consideration, the assessee put to use the machinery for less than 180 days. Therefore, in view of proviso to section 32(1)(ii), the assessee is entitled only for 50% of the depreciation and not the entire rate of depreciation @20%. In view of the proviso, according to the ld. DR, the assessee is not entitled for additional depreciation during the year under consideration.
9. We have considered the rival submissions on either side and also perused the material available on record. Section 32(1)(iia) reads as follows:
"32(1)(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii):
Provided that no deduction shall be allowed in respect of –
| (A) | Any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or | |
| (B) | Any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or | |
| (C) | Any office appliances or road transport vehicles; or | |
| (D) | Any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year." |
10. We have also carefully gone through the Second Proviso to section 32(1)(ii) of the Act, which reads as follows:
"Provided further that where an asset referred to clause (i) or clause (ii) or clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purpose of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia) as the case may be."
11. A bare reading of this section 32(1)(iia) clearly says that in case a new machinery or plant was acquired and installed after 31-03-2005 by an assessee, who is engaged in the business of manufacture or produce of article or thing, then, a sum equal to 20% of the actual cost of the machinery and plant shall be allowed as a deduction. It is not in dispute that the assessee has acquired and installed the machinery after 31-03- 2005. It is also not in dispute that the assessee is engaged in the manufacture of article or thing. Therefore, the assessee is eligible for additional depreciation which is equivalent to 20% of the actual cost of such machinery. The dispute is the year in which the depreciation has to be allowed. The assessee has already claimed 10% of the depreciation in the earlier assessment year since the machinery was used for less than 180 days and claiming the balance 10% in the year under consideration. Section 32(1)(iia) does not say that the year in which the additional depreciation has to be allowed. It simply says that the assessee is eligible for additional depreciation equal to 20% of the cost of the machinery provided the machinery or plant is acquired and installed after 31-03-2005. Proviso to section 32(1)(iia) says that if the machinery was acquired by the assessing during the previous year and has put to use for the purpose of business less than 180 days, the deduction shall be restricted to 50% of the amount calculated at the prescribed rate. Therefore, if the machinery is put to use in any particular year, the assessee is entitled for 50% of the prescribed rate of additional depreciation. The Income-tax Act is silent about the allowance of the balance 10% additional depreciation in the subsequent year. Taking advantage of this position, the assessee now claims that the year in which the machinery was put to use the assessee is entitled for 50% additional depreciation since the machinery was put to use for less than 180 days and the balance 50% shall be allowed in the next year since the eligibility of the assessee for claiming 20% of the additional depreciation cannot be denied by invoking Second Proviso to section 32(1)(ii) of the Act.
12. This issue was considered by the Delhi Bench of this Tribunal in the case of Cosmo Films Ltd (supra). The revenue has taken a similar ground as taken before this Tribunal that the assessee cannot carry forward the additional depreciation to be allowed in the subsequent assessment year. The Delhi Bench of this Tribunal after considering the provisions of section 32(1)(iia) and proviso to section 321)(ii) of the Act found that when there is no restriction in the Act to deny the benefit of balance 50%, the assessee is entitled for the balance additional depreciation in the subsequent assessment year. In fact, the Delhi Bench of this Tribunal has observed as follows at pages 641 and 642 of the ITD:
"……Thus, the intention was not to deny the benefit to the assessees who have acquired or installed new machinery or plant. The second proviso to section 32(1)(ii) restricts the allowances only to 50% where the assets have been acquired and put to use for a period less than 180 days in the year of acquisition. This restriction is only on the basis of period of use. There I no restriction that balance of one time incentive in the form of additional sum of depreciation shall not be available in the subsequent year. Section 32(2) provides for a carry forward set up of unabsorbed depreciation. This additional benefit in the form of additional allowance u/s 32(1)(iia) is one time benefit to encourage the industrialization and in view of the decision of Hon'ble Supreme Court in the case of Bajaj Tempo Ltd.v. CIT [1992] 196 ITR 188, the provisions related to it have to be construed reasonably, liberally and purposive to make the provision meaningful while granting the additional allowance. This additional benefit is to give impetus to industrialization and the basic intention and purpose of these provisions can be reasonably and liberally held that the assessee deserves to get the benefit in full when there is no restriction in the statute to deny the benefit of balance of 50% when the new machinery and plant were acquired and used for less than 180 days. One time benefit extended to assessee has been earned in the year of acquisition of new machinery and plant . It has been calculated @15% but restricted to 50% only on account of usage of these plant & machinery in the year of acquisition. In section 32(1)(iia), the expression used I "shall be allowed". Thus, the assessee had earned the benefit as soon as he had purchased the new machinery and plant in full but it is restricted to 50% in that particular year on account of period usages. Such restrictions cannot divest the statutory right. Law does not prohibit that balance 50% will not be allowed in succeeding year. The extra depreciation allowable u/s 32(1)(iia) in an extra incentive which has been earned and calculated in the year of acquisition but restricted for that year to 50% on account of usage. The so earned incentive must be made available in the subsequent year. The overall deduction of depreciation u/s 32 shall definitely not exceed the total cost of machinery and plant . In view of this matter, we set aside the orders of the authorities below and direct to extend the benefit. We allow ground no.2 of the assessee's appeal. Since we have decided ground no.2 in favour of assessee, there is no need to decide the alternate claim raised in ground no.3. The same is dismissed."
13. This issue was also considered by another bench of this Tribunal at Delhi in SIL Investment Ltd(supra). At page 233 of the TTJ, the Tribunal has observed as follows:
"40. There is nothing on record to show that the directions given by the learned CIT(A) are not proper. The eligibility for deduction of additional depreciation stands admitted, since 50 per cent thereof had already been allowed by the AO in the asst.yr.2005-06, i.e. the immediately preceding assessment year. Therefore, obviously, the balance 50 per cent of the deduction is to be allowed in the current year, i.e. asst. yr. 2006-07. The learned CIT(A) has merely directed the verification of the contentions of the assessee and to allow the balance additional depreciation after such factual verification. Accordingly, finding no merit therein, ground No.3 raised by the Department is rejected."
14. A similar view was taken by Mumbai Bench of this Tribunal in MITC Rolling Mills (P.) Ltd. (supra). In view of the above decisions of the co-ordinate benches of this Tribunal on identical set of facts this Tribunal is of the considered opinion that the balance 50% of the depreciation has to be allowed in the subsequent year, therefore, the orders of the lower authorities on this issue are set side and the assessing officer is directed to allow the claim of balance 50% additional depreciation in the year under consideration.
15. The next ground of appeal is with regard to share issue expenditure incurred in respect of equity shares and the fee paid to Registrar of Companies for increasing the authorised share capital of the company.
16. Shri Ajay Vohra, the ld. senior counsel submitted that the assessee has incurred expenditure to the extent of Rs.6,36,07,257 on issues of shares to Qualified Institutional Buyers and further expenditure of Rs.12,50,000 on fees paid to Registrar of Companies for increasing the authorized share capital. According to the ld. senior counsel, the assessee claimed deduction of Rs.1,29,71,451 by way of amortization of aggregate expenditure of Rs.6,48,71,451 u/s 35D of the Act. However, the assessing officer / DRP (DRP, hereinafter) disallowed the claim of the assessee on the ground that benefit under that section is available only in respect of setting up of a new industrial unit and not for meeting expenditure for expansion of the business. Referring to section 35D(1), the ld. senior counsel for the assessee submitted that section 35D(1) allows deduction in connection with the expenditure specified in sub section (2) of that section incurred before commencement of business or at the time of expansion of such business or setting up of new unit. According to the ld. senior counsel, the assessee engaged in the business of manufacture and sale of automotive tyres. With a view to expand its global foot print and reach, the assessee acquired the shares of Dunlop Tyres International Pty. Limited (DTIPL hereinafter) engaged in the same line of business as that of the assessee through its wholly owned subsidiary of Apollo Mauritius Holdings Limited (AMHPL) and Apollo South Africa Holdings (Proprietory) Ltd. The shares were issued to Qualified Institutional Buyers for repayment of bridge loan raised for acquisition of Dunlop Tyres International Ltd, South Africa through advancing loans to AMHPL. The ld. senior counsel further submitted that in the context of globalization and liberalization the acquisition of shares of DTIPL engaged in the same line of business as that of the assessee should be regarded as expansion of the assessee's undertaking. Therefore, the expenditure incurred for acquiring the shares of DTIPL has to be amortised u/s 35D of the Act.
17. On the contrary, Shri M. Anil Kumar, the ld. DR submitted that the assessee claimed expenditure of Rs.1,29,71,451 u/s 35D of the Act. According to the ld. DR, section 35D is available only in respect of initial setting up or in connection with setting up of a new industrial undertaking and not for meeting the expenditure incurred for expansion of business. According to the ld. DR, the assessee claimed before the assessing officer and DRP that the expenditure was incurred during the course of business for the purpose of working capital of the company. Since the assessee claimed before the lower authorities that the expenditure was incurred in the course of business and funds were raised for meeting the working capital of the company, according to the ld. DR, section 35D has no application at all.
18. We have considered the rival submissions on either side and also perused the material available on record. The assessee now claims that expenditure was incurred for issue of shares to Qualified Institutional Buyers and fees paid to Registrar of Companies. Therefore, it has to be amortised for five years and 1/5th of the amount shall be allowed during the year under consideration. A bare reading of the draft assessment order, the objection filed by the assessee before the assessing officer and the decision of the DRP clearly shows that the assessee claimed that additional capital was raised for augumentation of the working capital; therefore, it was in the revenue field. It was also not claimed before the lower authority that the expenditure was incurred in respect of issue of shares and fees paid to Registrar of Companies. Therefore, the lower authorities had no occasion to examine whether the expenditure was in fact incurred for issue of shares and fees paid to the Registrar of Companies. Since now the assessee claims that the expenditure was incurred for issue of shares to the Qualified Institutional Buyers and on fees paid to Registrar of Companies, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the assessing officer. The assessing officer shall re-examine the issue and find out whether, funds raised by the assessee and utilization thereof was for the purpose of acquiring a capital asset by way of its expansion or it is for the working capital of the existing business. Since the assessing officer and the DRP had no occasion to examine the issue, this Tribunal is of the considered opinion that the matter needs to be reconsidered. Accordingly, the orders of the lower authorities are set aside and the disallowance of Rs.1,29,71,451 is remitted back to the file of the assessing officer. The assessing officer shall reconsider the issue afresh after considering the contentions of the assessee that the expenditure was incurred to expand its business globally by acquiring a company which is doing a similar business as that of the assessee. We make it clear that we are not expressing any opinion on merit. It is for the assessing officer to examine the issue independently on merit and take a decision in accordance with law after giving a reasonable opportunity to the assessee.
19. The next issue arises for consideration is disallowance of investment written off in the shares of Gujarat Perstop Electroniks Ltd.
20. Shri Sanjay Vohra, the ld. senior counsel for the assessee submitted that the assessee invested a sum of Rs.5.18 crores by acquiring 51.8 lakhs shares of Gujarat Perstop Electroniks Ltd, a company jointly promoted by the assessee and Gujarat Industrial & Investment Corporation. According to the ld. representative, Gujarat Perstop Electroniks Ltd was declared as a sick company by the BIFR. Therefore, a sum of Rs.4.66 crores being 90% of the total investment in the equity shares of Gujarat Perstop Electroniks Ltd was written off by the assessee during the year 2002-03. Referring to page 399 of the paper book, the ld. senior counsel submitted that in the Board of Directors meeting held on 26-06-2002 it was decided to write down 90% of the existing equity due to accumulated losses. The balance 10% of the investment being 51.8 lakhs was written off during the year under consideration. According to the ld. representative 90% of the investment was held to be allowable as loss incidental to business by this Tribunal for the assessment year 2002-03 in ITA No.429/Coch/2006 order dated 08-02-2003. According to the ld. senior counsel for the assessment year 2002-03, this bench of the Tribunal found that the investment in Gujarat Perstop Electroniks Ltd, though not engaged in the same line of business as that of the assessee company was for the purpose of business and write off of 90% of the investment was in the nature of loss incidental to business, and therefore, allowable deduction in terms of section 28 r.w.s. 37(1) of the Act. Referring to the order of this Tribunal for the assessment year 2002-03, copy of which is available on page 247 of the paper book, the ld. representative submitted that in respect of 90% of the amount written off, the Tribunal allowed the claim of the assessee. Therefore, the remaining 10% now written off during the year under consideration has to be allowed. According to the ld. representative, this issue is covered by the order of this Tribunal in favour of the assessee.
21. On the contrary, Shri M Anil Kumar, the ld. DR submitted that the assessee admittedly invested Rs.5.18 crores for acquiring the shares of Gujarat Perstop Electroniks Ltd, a company jointly promoted by the assessee and Gujarat Industrial & Investment Corporation. Gujarat Industrial & Investment Corporation is not in the business of manufacture and sale of automotive tyres. The expenditure was not incurred in the course of earning of profit. According to the ld. DR, the shares were acquired with a view to acquire capital asset for a new business venture. Therefore, the expenditure incurred by the assessee by way of investment in acquiring 51.8 lakhs shares of Gujarat Perstop Electroniks Ltd is in the course of acquisition of capital asset. Referring to the order of this Tribunal in assessee's own case for the assessment year 2002-03, the ld. DR submitted that no doubt, this Tribunal examined the issue in 2002-03 and found that 90% of the investment made by the assessee which was written off during that period has to be allowed as business loss u/s 28 r.w.s. 37(1) of the Act. The DRP and the assessing officer apparently not followed the order of this Tribunal since the department has already filed an appeal before the High Court against the order of this Tribunal and to keep the issue alive, the disallowance was made as it was made for the assessment year 2002-03.
22. We have considered the rival submissions on either side and also perused the material available on record. We have also carefully gone through the order of this Tribunal in assessee's own case for the assessment year 2002-03. The admitted facts of the case is that the assessee invested a sum of Rs.5.18 crores for acquiring the shares of Gujarat Perstop Electroniks Ltd which was jointly promoted by the assessee and Gujarat Industrial & Investment Corporation. It is not in dispute that Gujarat Perstop Electroniks Ltd is not in the business of manufacture and sale of automotive tyres. Therefore, the investment made by the assessee to the extent of Rs.5.18 crores for acquiring the shares of Gujarat Perstop Electroniks Ltd cannot be in the course of earning of profit or running the existing business effectively and efficiently. This investment of 5.18 crores was made by the assessee to acquire a new platform / profit earning apparatus for expanding the scope of its business. Therefore, under normal circumstances, this should have been treated as capital expenditure. Any loss incurred in the investment for a capital asset has to be treated as capital loss. Therefore, we have our own reservation about the correctness of the decision of the earlier bench of this Tribunal for the assessment year 2002-03. We are conscious that the decision of the co-ordinate bench of this Tribunal is binding on the subsequent benches. Even though we have reservation about the correctness of the decision taken by the earlier bench, to maintain the judicial discipline, this Tribunal has to follow the decision taken by the earlier bench of this Tribunal. In view of the settled principles of law about the binding nature of the decision of the earlier bench of this Tribunal and the matter is already pending before the High Court in appeal by the department, we do not find any reason to take a different view than that of the earlier decision taken by the earlier bench till the high court pronounces its judgment in the departmental appeal for the assessment year 2002-03. Since the departmental appeal is already pending before the High Court against the order of this Tribunal for assessment year 2002-03, reference to larger bench also may not serve any purpose. Accordingly, by following the order of this Tribunal for the assessment year 2002-03, the order of assessing officer is set aside and the assessing officer is directed to allow 10% of the remaining investment written off as business loss as held by the earlier bench.
23. The next ground of appeal is with regard to disallowance of loss to the extent of Rs.45,58,79,524 on the loan advanced to subsidiary company which was converted into preference shares.
24. Shri Ajay Vohra, the ld. senior counsel for the assessee submitted that the assessee company advanced foreign currency loan of 314 million Rands equivalent to 232.92 crores in Indian rupees to its wholly subsidiary company, Apollo Mauritius Holdings Co Ltd carrying interest at the rate of 7.5%. The loan was advanced for acquiring 100% controlling interest in DTIPL, South Africa. The Mauritius subsidiary advanced the said loan to Apollo, South Africa, which ultimately acquired the entire share capital of DTIPL, South Africa on 21-04-2006. According to the ld. senior counsel, the object and purpose of advancing loan to Apollo Mauritius Holdings Co Ltd was to facilitate the subsidiary company to acquire a similarly placed tyre manufacturing company in South Africa which offers a comprehensive range of radial products under the world renowned brand. The ld. senior counsel further submitted that the object of advancing the loan was also intended to enhance the efficiency of the assessee's business and give it a sharper competitive edge by creating synergy with tyre business in South Africa. Referring to the annual report of the assessee company for the year under consideration, the ld. senior counsel submitted that the assessee advanced a foreign currency loan to Mauritius subsidiary on commercial expediency. According to the ld. senior counsel, after acquiring the South African company through its Mauritius subsidiary, the assessee was able to acquire raw materials at low cost due to centralized purchasing. The engineering and technical support supplemented by skills the transfer through on the job training, outsourcing the product to capitalize on lower manufacturing cost. The assessee increased its ability to secure off-shore funding at more competitive rates. Apart from that the assessee anticipated benefits in centralized international marketing, global brand positioning, product range rationalization, etc. The ld. senior counsel further submitted that on 29-03-2007, the Apollo Mauritius converted the above said loan advanced by the assessee into non cumulative redeemable preferential shares after getting the consent of the assessee. However, at the time of conversion of the loan into cumulative redeemable preferential shares, due to decline in the value of the Rands, the loan of 314 million Rands which was equivalent to 232.92 crores had declined by an amount of Rs.45.54 crores. After conversion of loan into redeemable preferential shares, the value of the same stood at 187.33 crores.
According to the ld. senior counsel, in the process of conversion of the loan into redeemable preferential shares and due to decline in value of the Rands, the assessee suffered a loss of Rs.45.58 crores. The ld. senior counsel submitted that this loss was incurred mainly due to difference in the foreign exchange conversion rate. Referring to the note said to be filed along with the revised return, the ld. senior counsel pointed out that though in the books of account, preferential share was recognized at 232.92 crores which was the amount originally advanced, the foreign exchange loss was debited to foreign exchange currency transaction reserve account. According to the ld. senior counsel, since there was a constructive repayment of loan advanced by the assessee company the same was converted into redeemable preferential shares which resulted in actual foreign exchange loss of Rs.45.58 crores. According to the ld. senior counsel, the loss suffered by the assessee was not claimed in the original return; however, the same was claimed in the revised return. The DRP disallowed the claim of the assessee on the ground that it was a book loss and not in the nature of business loss. The assessing officer made the disallowance on the ground that the acquisition of the capital asset resulted in loss, therefore, it is a capital loss, hence, it cannot be allowed.
25. According to the ld. senior counsel, the intention of the assessee at the time of advancing the loan was to acquire control over DTIPL, South Africa with the intention to expand its global reach and to access know how, skills owned by DTIPL. Therefore, the acquisition of DTIPL was in the larger interest of the business of the assessee company. As a consequence of devaluation of the Indian rupee, the assessee has suffered loss. The ld. senior counsel pointed out that the assessee borrowed the loan for the purpose of business and the same was advanced to Mauritius subsidiary company and the interest on the loan was claimed as a deduction and allowed by the assessing officer u/s 36(1)(iii) of the Act. The ld. senior counsel placed his reliance on the judgment of the Apex Court in the case of S.A. Builders v. CIT(Appeals)[2007] 288 ITR 1/158 Taxman 74 (SC). The ld. senior counsel has also placed reliance on the judgment of the Karnataka High Court in CIT v. Anand Technology Resource Park (P) Ltd. [2011] 202 Taxman 654/15 taxmann.com 4 (Kar). The ld. senior counsel for the assessee has also placed reliance on various judgments of the various High Courts wherein similar interest was allowed on the borrowed funds. Applying the principles laid down by the Supreme Court and various High Courts on the interest paid on the loan which was advanced to sister concern, the ld. senior counsel for the assessee submitted that the loan advanced to Mauritius company for the purpose of acquiring controlling interest in DTIPL was for business purpose and was due to commercial expediency, therefore, the loss suffered by the assessee due to foreign exchange fluctuation has to be allowed as business loss.
26. Referring to the judgment of the Delhi High Court in CIT v. Woodward Governor India (P) Ltd.[2007] 294 ITR 451/162 Taxman 60 which has been approved by the Supreme Court in CIT v.Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326, the ld. senior counsel submitted that the increase in liability due to increase in the rate of foreign exchange was held to be on the revenue account, hence, it is allowable as revenue expenditure. Therefore, the loss suffered by the assessee has to be allowed as revenue expenditure.
27. On the contrary, Shri M Anil Kumar, the ld. DR submitted that the assessee has not claimed loss in the original return, however, the same was claimed in the revised return. According to the ld. DR, the money was advanced in foreign currency as a loan to subsidiary company for the purpose of acquiring controlling interest in DTIPL in South Africa. Therefore, the loan was advanced for the purpose of acquiring a capital asset in South Africa. After acquisition of a capital asset, the profit earning apparatus of the assessee is expanded due to the loan advanced by the assessee. Indirectly the assessee is acquiring a capital asset through the subsidiary company. According to the ld. DR, the loan was already advanced and by a book entry, the assessee is showing loss. In fact, according to the ld. DR, no material loss has accrued to the assessee. The ld. DR further submitted that advancing money is not the business of the assessee. The business of the assessee, admittedly, is manufacturing of tyre. The ld. DR further pointed out that the loan advanced by the assessee was claimed to have been converted into preferential share and while valuing the preferential share, a book loss was shown. According to the ld. DR, the loan taken by the assessee for the purpose of acquiring capital asset is in the capital field, therefore, the consequential loss, if any, said to be suffered by the assessee is in the capital field. The ld. DR further pointed out that conversion of loan into preferential shares amounts to liquidation of loan and it cannot be construed as loss suffered in the course of business activity. Therefore, according to the ld. DR, the loss suffered by the assessee has to be treated as capital loss, hence, it cannot be allowed.
28. We have considered the rival submissions on either side and also perused the material available on record. Admittedly, the assessee borrowed loan and advanced the same as loan to Mauritius subsidiary in foreign currency. Subsequently, the loan advanced was converted into preferential shares. The valuation of the preferential share in Indian rupee was recorded in the books of account and the difference between the value of preference share in Indian rupee and South African Rand was shown as business loss. Admittedly, the assessee is not in the business of money lending. The assessee is in the business of manufacturing tyres. For the purpose of expanding its capital base and the profit making apparatus, the assesee advanced loan to Mauritius subsidiary company for the purpose of acquiring a controlling interest in the South African company. It is an admitted fact that the assessee acquired enduring benefit due to expansion of its business in South Africa. The assessee utilized the marketing net work of the South African company. Due to centralized purchase, the cost of raw material has considerably lowered down and the assessee was able to market its product on competitive rate. The assessee was able to reduce the manufacturing cost due to transfer of technical skill acquired from South African company. Therefore, the assessee obtained enduring benefit in the capital field. The assessee also acquired 100% controlling interest in the South African company. Therefore, it is obvious that the loan was advanced by the assessee for acquiring the South African company, which is undoubtedly a capital asset. In other words, the loan advanced by the assessee was converted into an investment.
29. Now the question arises for consideration is when the value of the shares of Mauritius subsidiary company was diminished due to reduction in Indian rupee, whether such a diminution could be allowed as revenue loss? When the assessee advanced the money for the purpose of acquiring / expanding the capital asset, the consequential loss, if any, has to be treated as capital loss. It is not a simple loss due to reduction in Indian rupee. The assessee admittedly advanced money for the purpose of acquiring 100% controlling interest in the South African company through its Mauritius subsidiary company. Therefore, in fact, it is an investment. The so-called loan was advanced in foreign currency. This Tribunal had an occasion to consider the identical issue in respect of the same loan in the assessee's own case for the assessment year 2006-07. This Tribunal found that the so-called loan was advanced for acquiring a capital asset. In fact, at paragraphs 18 & 19 of the order for assessment year 2006-07 this Tribunal has observed as follows:
"18. We have considered the rival submissions on either side and also perused the material available on record. Admittedly, the assessee is in the business of manufacture and sale of tyre. In order to expand its business in South Africa, the assessee intended to purchase Dunlop Tyres International (proprietory) Ltd. For that purpose, as an intermediary arrangement, a subsidiary company was flouted in Mauritius by name 'Apollo (Mauritius) Holding Pvt Ltd. Apollo (Mauritius) Holding Pvt Ltd, in turn, flouted another company in South Africa called Apollo (South Africa) Holding Pvt Ltd. The assessee company gave a loan of 314 million Rands to Mauritious subsidiary company, which in turn, gave loan to South African subsidiary company for the purpose of acquiring Dunlop Tyres International (proprietory) Ltd. Therefore, the purpose of granting loan is to acquire a company in South Africa. It is an admitted fact that South Africa has two manufacturing units of Dunlop Tyres International (proprietory) Ltd and has wide range of distributorship networking for sales. In order to safeguard itself from foreign exchange rate fluctuation, the assessee entered into a forward contract with Citi Bank. However, before the due date, i.e. 14-03-2006, the assessee had to settle the forward contract and on that account has suffered a loss of Rs.5,09,01,000. The question arises for consideration is - whether loss suffered by the assessee in settling the forward contract before the due date is a capital loss or a revenue loss? It is well settled principle of law that the expenditure incurred by the assessee in the process of earning of profit is a revenue expenditure. However, if any expenditure was incurred in the process of establishing a capital asset either by expanding the existing unit or by expanding the profit making apparatus it has to be treated as capital expenditure.
19. Now, in the above background, we have to see whether acquisition of tyre manufacturing company along with the distribution network at South Africa would expand the business and profit making apparatus of the assessee or not? The assessee, instead of acquiring the company directly, established a company in Mauritius as 100% subsidiary company and the said subsidiary company has established another company in South Africa. The motive and intention behind the establishment and creation of two intermediary companies is for the purpose of acquiring Dunlop Tyres International (proprietory) Ltd. The loan in foreign exchange was granted to achieve the above object of acquiring the company in South Africa. This Tribunal is of the considered opinion that by acquisition of a company in South Africa, the manufacturing base and distribution network, in other words, the capital base of the company, expands considerably and the profit making apparatus also expanded. Though the company was acquired through a subsidiary company this Tribunal of the considered opinion that it is only an arrangement made by the assessee to acquire Dunlop Tyres International (proprietory) Ltd. In effect, the assessee is holding and controlling the subsidiary company as well as Dunlop Tyres International (proprietory) Ltd. This Tribunal is of the considered opinion that the entire arrangements made by the assessee by establishing two intermidiary subsidy companies would come to light once the corporate veil is lifted. Therefore, the loss suffered was in the process of acquisition of Dunlop Tyres International (proprietory) Ltd in South Africa. In other words, the loss was suffered in the process of acquisition of a capital asset which expands the manufacturing facility as well as the profit making apparatus of the company. Therefore, this Tribunal is of the considered opinion that the loss suffered by the assessee by settling the forward contract in the process of acquisition of Dunlop Tyres International (proprietory) Ltd is a capital loss which cannot be allowed as a revenue loss or as an item of expenditure. This is not an expenditure incurred in the course of earning of profit. Therefore, this Tribunal do not find any infirmity in the order of the lower authority. Accordingly the order of CIT(A) on this issue is confirmed."
30. Furthermore, the assessee himself claiming the share issue expenses as capital expenditure and amortization u/s 35D of the Act. The Special Bench of this Tribunal at Delhi in the assessee's own case reported at 264 ITR (AT) 1 (Del)(SB) has found similar transaction as capital in nature.
31. We have carefully gone through the judgment of the Apex Court in the case of S.A. Builders Ltd.(supra) and other judgments of various High Courts. No doubt, the assessing officer allowed the interest on the borrowed funds as business expenditure u/s 37(1) of the Act. By taking a clue from this, the ld. senior counsel for the assessee claims that the loss has also to be allowed as revenue loss. We are unable to accept the contention of the ld. senior counsel for the assessee. When the assessee borrowed loan either for capital investment or for working capital, the borrowal is for the purpose of business, therefore, the interest paid on such loan has to be allowed as revenue expenditure. The Apex Court in the case of S.A. Builders (supra) found that advancing the amount borrowed to the sister concern is also a business purpose and there is a commercial expediency in advancing the amount. So long as the funds advanced to the sister concern are used for business purpose of the sister concern and the amounts by the directors of the sister concern for their personal purpose, the interest on such loan has not to be allowed as business expenditure. We are unable to understand how this principle laid down by the Apex Court is applicable to the facts of the case. Here, the assessee advanced the so-called loan for the purpose of acquiring controlling interest in the South African Company through its Mauritius subsidiary company which is a capital investment. Therefore, the advance of loan is for acquiring a capital asset or for expansion of its capital base. Therefore, the loss, if any, suffered has to be treated as capital loss and it cannot be allowed as revenue loss.
32. It is well settled principles of law that if the money was advanced for the purpose of acquiring a capital interest which is enduring in nature, then the loss or profit suffered in that process has to be treated in the capital field. The loss / profit was not earned / received in the process of earning profit. The loss is suffered in the course of acquiring a capital asset for expansion of the profit earning apparatus. Therefore, this Tribunal is of the considered opinion that the assessing officer had rightly found that there is no loss suffered by the assessee in conversion of loan into preferential shares of the Mauritius subsidiary company and the loss shown is only a book loss. Even assuming for the arguments' sake, it has to be treated as a loss, then, this Tribunal is of the considered opinion that the loss is in the capital field, and therefore, it cannot be allowed as loss while computing total income. Therefore, this Tribunal do not find any reason to interfere with the orders of lower authorities. Accordingly, the same is confirmed.
33. The next issue arises for consideration is with regard to disallowance of depreciation u/s 38(2) of the Act in respect of let out portion of the corporate office building at Gurgaon.
34. We heard Shri Ajay Vohra, the ld.senior counsel for the assessee and Shri M Anil Kumar, the ld.DR. It is brought to the notice of this bench for the assessment year 2006-07 that an identical issue came up before this Tribunal in ITA Nos 31 & 74/Coch/2010. The copy of the order is placed at page 386 of the paper book. This Tribunal found that the assessee is not entitled for depreciation on the Gurgaon office premises.
35. Having heard the ld. senior counsel for the assessee and the ld. DR we find that this Tribunal had an occasion to consider this issue for the assessment year 2006-07. By following its earlier order for the assessment years 2001-02, 2002-03, 2004-05 and 2004-05 this Tribunal found that the CIT(A) was not justified in allowing the claim of the assessee with regard to depreciation. In view of the above decision of the Tribunal in the assessee's own case for the very same property disallowing the depreciation we do not see any reason to interfere with the order of the lower authority. Accordingly, the same is confirmed.
36. The next ground of appeal is in respect of addition made by the assessing officer on account of interest received on the amount advanced to associated enterprise in Mauritius, viz. Apollo Mauritius Holdings Ltd and on account of reimbursement of expenses received from Dunlop Tyres International Pty Ltd (now known as Apollo Tyres Soputh Africa (Proprietory) Limited) (DTIPL).
37. Shri Ajay Vohra, the ld. senior counsel for the assessee submitted that the assessing officer and the Transfer Pricing Officer made an addition of Rs.7,24,53,335 on account of interest received on the amount advanced to associate enterprise in Mauritius and on account of reimbursement of expenses received from DTIPL. According to the ld. senior counsel, the assessee advanced a loan of Rs. 314 million Rands equivalent to 232.92 crores to Apollo Mauritius Holdings Ltd. As per the agreement with Apollo Mauritius Holding Ltd the loan carried interest @7.5% per annum. Accordingly, the assessee received interest of Rs.7,07,13,227. In the transfer pricing study, according to the ld. senior counsel, the assessee benchmarked the international transaction using LIBOR. The six months average USD LIBOR rate for the period April, 2006 to March, 2007 comes to 5.39% per annum. However, the assessee actually charged 7.5% which is higher than the comparable uncontrolled price of six month USD LIBOR. Therefore, according to the ld.senior counsel, the transaction of advancement of loan to Mauritius associate concern is at arm's length price.
38. The ld. senior counsel for the assessee further submitted that during the year under consideration the assessee availed and utilized foreign currency loan from international finance corporation carrying interest @7.25% to 7.46% per annum. The assessee company had also taken foreign currency loan from ICICI Bank carrying interest @ 7.24% and 7.05%. According to the ld. senior counsel, the interest charged by the assessee is higher than the rate of interest on the foreign currency loan. Therefore, the transaction between the assessee and Apollo Mauritius Holdings Ltd is at arm's length price.
39. Even otherwise, according to the ld. senior counsel, loan advanced to Apollo Mauritius Holdings Ltd was financed by way of bridge loan from various banks in India. The average rate of interest charged by banks in India on the bridge loan comes to 7.14% per annum which was lower than the interest rate of 7.5% charged by the assessee on the loan advanced to Apollo Mauritius Holdings Ltd. According to the ld. senior counsel, the TPO, applying the rate of 11.35% on the loan taken from GE Capital Services India made transfer pricing adjustment of Rs.7,07,13,227. The ld. senior counsel for the assessee submitted that the loan advanced to Mauritian entity was in foreign currency, therefore, the same has to be benchmarked applying LIBOR. For this proposition, the ld. senior counsel placed his reliance on the following decisions:
Siva Industries & Holdings Ltd. v. Asstt. CIT [2011] 46 SOT 112 (URO)/11 taxmann.com 404 (Chennai)
Tata Autocomp Systems Ltd. v. Asstt. CIT [2012] 52 SOT 48/21 taxmann.com 6 (Mum.)
Four Soft Ltd. v. Dy. CIT [2011] 142 TTJ 358 (Hyd.)
Dy. CIT v. Tech Mahindra Ltd. [2011] 46 SOT 141 (URO)/12 taxmann.com 132 (Mum.)
Perot Systems TSI (India)(P.) Ltd v. Dy. CIT [2010] 37 SOT 358 (Delhi)
Cotton Naturals (I) (P.) Ltd v. Dy. CIT [2013] 32 taxmann.com 219 (Delhi)
40. The ld. senior counsel for the assessee further pointed out that the average cost of the funds available with the assessee is at 7.25%. Therefore, charging of interest at 7.5% on the loan advanced to Mauritian subsidiary was at arm's length price.
41. On the contrary, Shri M Anil Kumar, the ld.DR submitted that in respect of interest received from Mauritian subsidiary, the TPO adopted internal CUP method and accordingly made the adjustment. According to the ld. DR, LIBOR rate has not taken into consideration the risk factor involved in advancing the loan. Therefore, the average six months USD LIBOR rate for the period April, 2006 to March, 2007 may not be the appropriate method. In respect of reimbursement of expenses received from Dunlop Tyres International Pvt Ltd, the assessing officer found that the assessee has received the money without any interest and the interest cost has been ignored by the assessee. According to the ld. DR, the TPO, by adopting the interest rate taken earlier for advancing similar loans to associate enterprises made adjustment. According to the ld. DR, the DRP, after taking into consideration the substantial gap between the time of expenditure and the time of reimbursement confirmed the assessment made by the TPO.
42. We have considered the rival submissions on either side and also perused the material available on record. Admittedly, the assessee advanced loan to associate enterprise in Mauritius and received interest. The assessee has also received reimbursement of expenditure from DTIPL. The question arises for consideration is - whether the assessee has charged interest at arm's length price in respect of loan advanced to associate enterprise.
43. We have carefully gone through all the decisions referred by the ld. senior counsel for the assessee. In the case before the Chandigarh Bench of this Tribunal in Siva Industries & Holdings Ltd (supra) the assessee advanced a loan of Rs.50 crores to its subsidiary in Mauritius for making invest and charged interest @6% per annum. The TPO found that USD denominated LIBOR could not be considered as a loan was given from India and the prime lending rate in India has to be taken into consideration. The department contended before the Tribunal that LIBOR would be applicable if the assessee advanced loan in foreign currency. However, in the case before the Chandigarh Bench of this Tribunal, the loan was advanced in Indian rupee and, therefore, the department contended that prime lending rate in the domestic market would be applied and not LIBOR rate. The Tribunal after considering the materials available on record found that the assessee raised funds by issuing zero per cent optional convertible preferential issue for advancement of loan to Mauritius subsidiary company. The loan was given in USD. The assessee was also receiving interest from the associate enterprise. Since the transaction was an international transaction, the Tribunal found that commercial principle with regard to international transaction has to be applied. Accordingly, the Tribunal found that the prime lending rate in domestic market has no application and international market rate fixed by LIBOR would come into play. Accordingly, the Tribunal found that LIBOR should be applied.
44. We have also carefully gone through the decision in Tata Autocomp Systems Ltd (supra). The Mumbai Bench of this Tribunal found that loan extended to associate concern come within the ambit of international transaction. The question of rate of interest on the borrowings of loan is an integral part of the arm's length price determination. The Tribunal, after considering the instructions issued by RBI in respect of export credit to exporters on internationally competitive rate under the scheme of pre-shipment credit in foreign exchange and re-discounting of export bills abroad has permitted the banks to fix the rate of interest with reference to ruling LIBOR or LIBOR EURIBOR. Accordingly, the Tribunal found that there is justification on the part of the assessee to adopt EURIBOR rate in determining the arms' length price on the loan advanced to associate enterprise. In the case on hand also, the loan was advanced in foreign currency to Mauritius associate concern. The assessee availed loan in foreign currency to advance loan to the associate concern in Mauritius. The assessee, in fact, charged interest at 7.5%. The LIBOR rate of interest during that period is 5.39% per annum. Therefore, the rate of interest charged by the assessee on the loan advanced to associate enterprise on the international transaction is more than the LIBOR average rate for the six months' period during the relevant time.
45. Since the co-ordinate benches of this Tribunal at Chandigarh and Mumbai found that in respect of international transaction, LIBOR would be more appropriate, this Tribunal is of the considered opinion that the assessing officer has to adopt LIBOR than the domestic market rate. In the case before us, the domestic market rate comes nearly to 7.14% to 7.5%. Therefore, this Tribunal is of the considered opinion that the assessing officer is not justified in rejecting the LIBOR rate of interest by determining the arm's length price in respect of loan advanced to associate enterprise. Accordingly, the orders of the lower authorities are set aside and the assessing officer is directed to consider LIBOR rate of interest for the purpose of determining the arm's length price.
46. The next issue arises for consideration is deduction u/s 80IA of the Act in respect of diesel generating sets I and 2 and in respect of gas turbine power generation unit.
47. Shri Ajay Vohra, the ld. senior counsel for the assessee submitted that the assessing officer by following his own order for the assessment year 2005-06 rejected the claim of the assessee on the ground that the power generating unit is not an undertaking by itself. Referring to the order of this Tribunal for the assessment year 2005-06 in ITA No.429/Coch/2006, the ld. senior counsel submitted that this Tribunal found that DG & DT power generating unit for captive consumption is eligible for deduction u/s 80IA of the Act. Though the order of this Tribunal was brought to the notice of the assessing officer and DRP, they simply rejected the claim of the assessee on the ground that the issue has not reached finality. According to the ld. senior counsel, the order of this Tribunal for the assessment year 2005-06 is binding on the lower authority including the DRP, therefore, they cannot take a different view. We heard Shri M Anil Kumar, the ld. DR also.
48. Admittedly, the very same issue came before this Tribunal for the assessment year 2005-06 in the assessee's own case in ITA No.729/Coch/2008. This Tribunal, by following its earlier order for the assessment year 2002-03 found that diesel power generation unit for captive consumption is also eligible for deduction u/s 80IA of the Act. In view of the order of this Tribunal, the lower authorities are not justified in rejecting the claim of the assessee. Accordingly, the order of the assessing officer is set aside and the assessing officer is directed to allow deduction u/s 80IA of the Act in respect of captive power generation by using diesel power generation unit. However, in respect of gas turbine power generation unit, the issue was remanded back to the file of the assessing officer since the same was raised before this Tribunal as an additional ground. Therefore, for the year under consideration also, we remand back the matter to the file of the assessing officer for reconsideration on merit.
49. The next ground arising for consideration is additional deduction of 50% expenditure on in-house research and development u/s 35(2AB) of the Act.
50. The ld. senior counsel for the assessee submitted that the very same issue came up before this Tribunal for the assessment year 2006-07 in ITA Nos 31 & 74/Coch/2010. This Tribunal found that the assessee failed to make any claim before the assessing officer, therefore, the matter was restored to the file of the assessing officer for consideration on merit in respect of deduction u/s 35(2AB). We heard Shri M Anil Kumar, the ld. DR also.
51. As rightly submitted by the ld. senior counsel for the assessee, deduction u/s 35(2AB) of the Act the issue was remanded back to the file of the assessing officer as the assessee failed to claim the same before the assessing officer. For the sake of consistency, the orders of the lower authorities are set aside and the issue u/s 35(2AB) of the Act is remanded back to the file of the assessing officer for reconsideration. The assessing officer shall reconsider the issue and decide the same afresh in accordance with law after giving reasonable opportunity of hearing to the assessee.
52. In the result, the appeal filed by the assessee is partly allowed.
■■*Partly in favour of assessee.
IT: Where dominant object underlying constitution of trust was for benefit of only Agrawal community, application for registration under section 12AA should be dismissed
■■■
[2014] 45 taxmann.com 273 (Allahabad)
HIGH COURT OF ALLAHABAD
Agrawal Sabha
v.
Commissioner of Income-tax -I*
DR. DHANANJAYA YESHWANT CHANDRACHUD, CJ.
AND DILIP GUPTA, J.
AND DILIP GUPTA, J.
IT APPEAL NO. 64 OF 2014
MARCH 24, 2014
Section 2(15), read with section 12AA, of the Income-tax Act, 1961 - Charitable/religious purpose (Registration application) - Assessment year 2010-11 - Assessee had filed an application for registration under section 12AA - Dominant object underlying constitution of trust was for benefit of only Agrawal community - No documentary evidence had been produced to support that trust had carried out any activity of general public utility such as establishment of hospitals, dharamshalas, libraries and schools - Whether, its application under section 12AA should be dismissed - Held, yes [Para 9] [In favour of revenue]
FACTS
| ■ | The assessee had filed an application for registration under section 12AA. | |
| ■ | The Commissioner rejected the said application on the ground that the dominant object underlying the constitution of the trust was for the benefit of only the Agrawal community. The Commissioner also found that no documentary evidence had been produced to support that the trust had carried out any activity of general public utility such as the establishment of hospitals, dharamshalas, libraries and schools. | |
| ■ | The Tribunal held that the activity undertaken by the trust during the financial year in question related only to the Agrawal community and absolutely no documentary evidence was furnished to the effect that the dharamshala had been put to use for members other than those belonging to that particular community. However, in all fairness, the Tribunal had granted liberty to the assessee to move a fresh application for registration. | |
| ■ | On further appeal: |
HELD
| ■ | Section 12AA(1) lays down a procedure which has to be followed for the registration of a trust under clause (a) or clause (aa) of sub-section (1) of section 12AA by the Commissioner. Section 12AA mandates that the Commissioner has to satisfy himself, after calling for documents or information from the trust, about the genuineness of the activities of the trust or institution and the objects of the trust. [Para 6] | |
| ■ | In the present case, the Commissioner has held that the dominant nature underlying the setting up of a trust was to benefit only the Agrawal community. The Commissioner relied upon such material as was produced by the assessee. If according to the assessee, the trust exists not merely for the benefit of the Agrawal community or for a particular religious group but for the benefit of the general public for a charitable or religious purpose, it would be necessary for the assessee to satisfy the Commissioner about the activities of the trust or the genuineness of its objects. Such a requirement is expressly incorporated in clauses (a) and (b) of sub-section (1) of section 12AA. [Para 9] | |
| ■ | The assessee having failed to discharge the burden, the Tribunal was justified in confirming the decision of the Commissioner. At the same time, it has been left open to the assessee to move a fresh application for registration before the Commissioner. If this is done, it shall be duly considered in accordance with law on the basis of the materials that will be produced by the assessee. [Para 10] | |
| ■ | In the circumstances, on the basis of the material which was produced by the assessee on the record of the Commissioner and before the Tribunal, the Court was of the view that no substantial question of law arise in this appeal so as to warrant the interference of this Court. [Para 12] |
CASE REVIEW
Ahmedabad Rana Caste Association v. CIT [1971] 82 ITR 704 (SC) (para 11) distinguished.
CASES REFERRED TO
CIT v. Dawoodi Bohara Jamat [2014] 43 taxmann.com 243 (SC) (para 7) and Ahmedabad Rana Caste Association v. CIT [1971] 82 ITR 704 (SC) (para 11).
S.K. Garg and Ashish Bansal for the Appellant.
ORDER
1. The appeal by the assessee under Section 260A of the Income Tax Act, 1961, arises from a judgment of the Income Tax Appellate Tribunal, Agra, dated 31 October 2013. The assessee had filed an application for registration under Section 12AA of the Income Tax Act. The Commissioner of Income Tax-I, Agra, in an order dated 15 July 2013 rejected the application on the ground that (i) the dominant object underlying the constitution of the trust was for the benefit of only the Agrawal community; and (ii) during the financial year 2011-12, the assessee earned income of Rs.17.96 lacs and incurred an expenditure of Rs. 20.74 lacs in organizing 'Shri Maharaja Agrasen Jayanti' which indicates that the activity was specifically for the Agrawal community.
2. The other expenses of the trust were found to be as follows :
| "Donation | 18,200/- | |
| Web Site Exp. | 1,500/- | |
| Stationery | 1,650/- | |
| Ugai (Bad Debts) | 25,900/- | |
| Bank Charges | 556/- | |
| Misc. Exp. | 39,801/- | |
| Salary A/c | 6,000/- | |
| Scooter Exp. | 42,129/- |
The Commissioner also found that no documentary evidence had been produced before him to support that the trust had carried out any activity of general public utility such as the establishment of hospitals, dharamshalas, libraries and schools. Since all the activities related to a particular community, namely the Agrawal community, the application was dismissed. The assessee carried the matter in appeal before the Income Tax Appellate Tribunal. The Tribunal has, during the course of its judgment dated 31 October 2013, specifically recorded the admission of the learned counsel appearing on behalf of the assessee made in the course of the submissions.
For convenience of reference, it would be necessary to extract the specific admission recorded in the order of the Tribunal in that regard: "(i) During the course of arguments, the ld. counsel for the assessee admitted that the assessee did not file any evidence or material before the ld. CIT to contradict the report submitted by the AO against interest of assessee at the enquiry stage of registration application; (ii) The ld. counsel for the assessee, however, admitted that no list of occupants in any Dharamashala was furnished before the ld. CIT and no such details have been furnished in the paper book."
3. Besides this, the Tribunal has noticed that the learned counsel appearing on behalf of the assessee did not contradict the finding of fact recorded by the CIT in his order that during the financial year 2011-12, as against an income of Rs.17.96 lacs, the trust had incurred an expenditure of Rs.20.74 lacs in organizing 'Shri Maharaja Agrasen Jayanti' which was meant only for the Agrawal community. The Tribunal also recorded the admission that no documentary evidence was furnished either before the CIT or before the Tribunal in respect of any activity of a general public utility.
4. But, it has been urged on behalf of the assessee by the learned counsel that during the course of the hearing before the Tribunal a paper book was filed. A copy of the index has been extracted in paragraph 9 of the writ petition. The balance sheet of the assessee as at 31 March 2012, to which the attention of the Court has been drawn by the learned counsel, would indicate as the assets of the trust, a building valued at Rs. 2.53 crores. The income and expenditure account indicates that an amount of Rs. 80,900/- was realised towards booking of rooms. Even if this aspect is duly taken into account, it is evident that both the Tribunal and in the first instance the CIT held that the activity undertaken by the trust during the financial year in question related only to the Agrawal community and absolutely no documentary evidence was furnished to the effect that the dharamshala had been put to use of members other than those belonging to that particular community.
5. However, in all fairness, the Tribunal has granted liberty to the assessee to move a fresh application for registration before the CIT so as to establish that the objects of the society were charitable or religious in nature and that its activities were genuine.
6. Section 12AA(1) of the Income Tax Act, 1961, lays down a procedure which has to be followed for the registration of a trust under clause (a) or clause (aa) of sub-section (1) of Section 12A by the Commissioner. Section 12AA mandates that the Commissioner has to satisfy himself, after calling for documents or information from the trust, about the genuineness of the activities of the trust or institution and the objects of the trust.
7. In a recent judgment of the Supreme Court in CIT v. Dawoodi Bohara Jamat [2014] 43 taxmann.com 243, it has been held that Sections 11 and 12 are substantive provisions which provide for exemptions to religious or charitable trusts. Sections 12A and 12AA lay down the procedural requirements. Section 13 sets out the circumstances in which the exemption would not be available to a religious or charitable trust. One restriction is where the trust or institution is created or established for the benefit of any particular religious community or caste [Section 13(1)(b)]. In this context, while interpreting the scheme of these provisions, the Supreme Court has held that Section 13 has to be read in conjunction with the provisions of Sections 11 and 12 for determining the eligibility of a trust to claim exemption under the aforesaid provisions:
"16. Therefore, under the scheme of the Act, Sections 11 and 12 are substantive provisions which provide for exemptions available to a religious or charitable trust. Income derived from property held by such public trust as well as voluntary contributions received by the said trust are the subject-matter of exemptions from the taxation under the Act. Sections 12A and 12AA detail the procedural requirements for making an application to claim exemption under Sections 11 or 12 by the assessee and the grant or rejection of such application by the Commissioner. A conjoint reading of Sections 11, 12, 12A and 12AA makes it clear that registration under Sections 12A and 12AA is a condition precedent for availing benefit under Sections 11 and 12. Unless an institution is registered under the aforesaid provisions, it cannot claim the benefit of Sections 11 and 12. Section 13 enlists the circumstances wherein the exemption would not be available to a religious or charitable trust otherwise falling under Section 11 or 12 and therefore, requires to be read in conjunction with the provisions of Sections 11 and 12 towards determination of eligibility of a trust to claim exemption under the aforesaid provisions."
8. In the case before the Supreme Court, it has further been held as follows:
"45.... What is intended to be excluded from being eligible for exemption under Section 11 is a trust for charitable purpose which is established for the benefit of any particular religious community or caste."
9. In the present case, the CIT has held that the dominant nature underlying the setting up of a trust was to benefit only the Agrawal community. The CIT relied upon such material as was produced by the assessee. If according to the assessee, the trust exists not merely for the benefit of the Agrawal community or for a particular religious group but for the benefit of the general public for a charitable or religious purpose, it would be necessary for the assessee to satisfy the Commissioner about the activities of the trust or the genuineness of its objects. Such a requirement is expressly incorporated in clauses (a) and (b) of sub section (1) of Section 12AA.
10. The assessee having failed to discharge the burden, the Tribunal in our view was justified in confirming the decision of the Commissioner. At the same time, it has been left open to the assessee to move a fresh application for registration before the Commissioner. We need only to clarify that if this is done, it shall be duly considered in accordance with law on the basis of the materials that will be produced by the assessee.
11. Learned counsel appearing on behalf of the assessee relied upon an earlier judgment of the Supreme Court in Ahmedabad Rana Caste Association v. CIT [1971] 82 ITR 704. The judgment of the Supreme Court may not be of much assistance to the appellant since the position under the 1922 Act was materially different from the Act of 1961, as would be apparent from the following extract of the judgment:
"4...
Under the Act 1922 a trust for the benefit of any particular religious community or caste was entitled to exemption but under the Act of 1961, a charitable trust which is created for such benefit on or after the first day of April, 1962, would be disentitled to the exemption. In the present case the trust was created prior to 1st April, 1962, and, therefore, no question arises of its not being entitled to the exemption if other conditions were satisfied even though it was created for the benefit of the Rana caste of Ahmedabad."
12. In the circumstances, on the basis of the material which was produced by the assessee on the record of the Commissioner and before the Tribunal, we are of the view that no substantial question of law would arise in this appeal so as to warrant the interference of this Court. However, while dismissing the appeal, we clarify that this would not affect the liberty which has been granted to the society to file a fresh application for registration.
13. The appeal is, accordingly, dismissed. There shall be no order as to costs.
Regards,
Pawan Singla , LLB
M. No. 9825829075
Then JCIT from Patiala (Punjab) convicted in corruption case
THEN JOINT COMMISSIONER OF INCOME TAX SENTENCED THREE YEARS RIGOROUS IMPRISONMENT WITH FINE OF RS. 20,000/- IN A CORRUPTION CASE
CBI Press Release- New Delhi, 10.06.2014
The Special Judge, CBI Cases, Patiala (Punjab) has convicted Shri R.L. Channalia, the then Joint Commissioner, Income Tax, Amritsar (Punjab) and sentenced him to undergo three Years Rigorous Imprisonment with fine of Rs.20,000/- in a Corruption Case.
CBI had registered the case on 28.06.2010 U/s 420, 467, 468, 471 IPC and 13(1) (d) r/w 13(2) of PC Act, 1988 against Shri R.L. Channalia, the then Joint Commissioner Income Tax (ITAT), Amritsar on a complaint from CBDT. It was alleged that Shri R.L. Channalia has promoted himself as Addl. Commissioner of Income Tax by tampering with the CBDT's Notification No.7 dated 20.03.2007 & putting his name in place of another person at Sl.No.1 of the said Notification. One notification from CBDT's website contained the name of another person at Sl.No.1 and the other notification from the service book of Shri R.L. Channalia contained the name of Shri R..L. Channalia at Sl.No.1.
Investigation revealed that Shri Roshan Lal Channalia joined the Indian Revenue Service on 20.08.1990 as Asstt. Commissioner of Income Tax and further promoted as Dy. Commissioner during 1998 and Joint Commissioner of Income Tax during 2001. In July/August, 2007, Shri Channalia claimed in his office that he had been promoted as Addl. Commissioner of Income Tax w.e.f. 01.01.2003 as per copy of the CBDT Notification obtained by him from his own sources. He started using the new designation in his official communication and directed, the then Office Superintendent to get prepared 4 rubber stamps in English in the name of R.L. Channalia, IRS, Addl. Commissioner of Income Tax, Range-6, Pathankot and 2 rubber stamps in Hindi, in the same designation. Subsequently, he directed the Establishment Section of his office to calculate the arrears of his pay w.e.f. 01.01.2003 by giving the said copy of CBDT Notification No.7 dated 20.03.2007. Investigation further revealed that 3 Member Committee Meeting was held on 17.01.2007 to consider officers in the grades of JCIT, for their placement in the non-functional selection grade. In view of pending disciplinary proceedings against Sh.R.L.Channalia, his case along with 5 other officers was kept in sealed cover and was excluded from the approved list. The original notification dated 20.3.2007 issued under the signature of then Under Secretary contained the name of another person at Sr.No.1 and not of Shri R.L.Channalia.
After thorough investigation, CBI filed a chargesheet U/s 420, 471 IPC and 13(1) (d) r/w 13(2) of PC Act, 1988 on 20.01.2012 in the court of Special Judge, CBI Cases, Patiala (Punjab).
The Trial Court found the accused guilty and convicted him.
imited Liability Partnership (LLP) – All you want to know
Posted In Partnership | 4 Comments »
CA Nitesh Kumar More
What is LLP?
LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership.
The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.
The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.
Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner's wrongful business decisions or misconduct.
Rights & Duties of Partners
Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity.
LLP shall be a body corporate and a legal entity separate from its partners.
LLP in Other Countries
The LLP structure is available in countries like United Kingdom, United States of America, various Gulf countries, Australia and Singapore.
Difference between Traditional Partnership Vs. LLP
| Traditional Partnership | LLP |
| Not a Legal Entity | Legal Entity |
| Minimum 2 Partners | Minimum 2 Partners |
| Maximum 20 Partners | No Limit |
| Partners are jointly liable | To the extent of Their contribution |
| Registration is not compulsory | Compulsory |
| BS etc. need not be filled | Filling is compulsory |
| Audit is not Compulsory | Compulsory if Turnover is Rs.40 Lakhs or contribution is Rs. 25 Lakhs |
| Name mat be any | Must be approved by Registrar and must have LLP as suffix |
| Minor can become Partner | Minor can not become Partner |
Company VS LLP
A basic difference between an LLP and a joint stock company lies in that the internal governance structure of a company is regulated by statute (i.e. Companies Act, 1956 now Companies Act, 2013) whereas for an LLP it would be by a contractual agreement between partners.
The management-ownership divide inherent in a company is not there in a limited liability partnership.
LLP will have more flexibility as compared to a company.
LLP will have lesser compliance requirements as compared to a company.
The essential requirement for setting LLP is 'carrying on a lawful business with a view to profit' so Charitable Institution or organization which we are used to Register as Sec. 25 company earlier can not be registered as LLP.
Formation of LLP
A minimum of two partners will be required for formation of an LLP. There will not be any limit to the maximum number of partners whereas in partnership it is 20.
A body corporate may be a partner of an LLP.
Any individual or body corporate may be a partner in a LLP. However an individual shall not be capable of becoming a partner of a LLP, if—
(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;
(b) he is an un discharged insolvent; or
(c) he has applied to be adjudicated as an insolvent and his application is pending.
Appointment of at least two "Designated Partners" shall be mandatory for all LLPs. "Designated Partners" shall also be accountable for regulatory and legal compliances, besides their liability as 'partners, per-se".
Every LLP shall be required to have atleast two Designated Partners who shall be individuals and at least one of the Designated Partner shall be a resident of India. In case of a LLP in which all the partners are bodies corporate or inwhich one or more partners are individuals and bodies corporate, at least two individuals who are partners of such LLP or nominees of such bodies corporate shall act as designated partners.
Every Designated Partner would be required to obtain a "Designated Partner's Identification Number" (DPIN)
The mutual rights and duties of partners inter se and those of the LLP and its partners shall be governed by the agreement between partners or between the LLP and the partners. This Agreement would be known as "LLP Agreement".
As per provisions of the LLP Act, in the absence of agreement as to any matter, the mutual rights and liabilities shall be as provided for under Schedule I to the Act. Therefore, in case any LLP proposes to exclude provisions/requirements of Schedule I to the Act, it would have to enter into an LLP Agreement, specifically excluding applicability of any or all paragraphs of Schedule I.
LLPs shall be registered with the Registrar of Companies (ROC) (appointed under the Companies Act, 1956) after following the provisions specified in theLLP Act. Every LLP shall have aregistered office. An Incorporation Document subscribed by at least two partners shall have to be filed with the Registrar in a prescribed form. Contents of LLP Agreement, as may be prescribed, shall alsobe required to be filed with Registrar, online.
Contents of LLP Agreement or any changes made therein, if any, may be filed inForm 3 and details of partners/designated partners may be filed in Form 4
Name of LLP
Every limited liability partnership shall have either the words "limited liability partnership" or the acronym "LLP" as the last words of its name. LLPs would not be given names, which, in the opinion of the Central Government, are undesirable. Registrar would be under obligation to follow such rules, which would be framed by the Central Government in connection with allotting names would be framed by the Central Government in connection with allotting names to LLPs. There are also provisions in respect of 'rectification of name' in case two LLPs have been registered with the same name, inadvertently.
The name can be reserved by ROC on approval of Form1, for a period of 3months from the date of intimation by the Registrar. However, Foreign LLP/Companies have an option to reserve their existing names, under which they are operating outside India, for a period of 3 years in India, which can be further renewed on application to Registrar in Form 25.
It has been provided in the Act that a document may be served on a LLP or a partner or designated partner by sending it by post or by any other mode (to be prescribed under Rules) at the registered office and any other address specifically declared by the LLP for the purpose in such form and manner as may be prescribed (in the rules). Thus, an LLP shall have option to declare one more address (other than the registered office) for getting statutory notices/letters etc. from Registrar.
Persons, who subscribed to the "Incorporation Document" at the time of incorporation of LLP, shall be partners of LLP. Subsequent to incorporation, new partners can be admitted in the LLP as per conditions and requirements of LLP.
A person may cease to be a partner in accordance with the agreement or in the absence of agreement, by giving 30 days notice to the other partners. A person shall also cease to be a partner of a limited liability partnership-
(a) on his death or dissolution of the limited liability partnership; or
(b) if he is declared to be of unsound mind by a competent court; or
(c) if he has applied to be adjudged as an insolvent or declared as an insolvent.
Notice is required to be given to ROC when a person becomes or ceases to be partner or for any change in partners.
Every partner shall inform the LLP of any change in his name or address within a period of fifteen days of such change. The LLP, in turn, would be under obligation to file such details with the Registrar within thirty days of such change in Form 4.
Partner's contribution may consist of both tangible and/or intangible property and any other benefit to the LLP.
Every partner of an LLP would be, for the purpose of the business of the LLP, an agent of the LLP but not of the other partners. Liability oof partners shall be limited except in case of unauthorized acts, fraud and negligence. But a partner shall not be personally liable /span>ffor the wrongful acts or omission of any other partner. An obligation of the limited liability partnership whether arising in contract or otherwise, is solely the obligation of the limited liability partnership.
The liabilities of LLP shall be met out of the property of the LLP.
The Act provides for the minimum of two partners to carry on LLP. If at any time the number of partners of a limited liability partnership is reduced below two and the limited liability partnership carries on business for more than six months while the number is so reduced, the person, who is the only partner of the limited liability partnership during the time that it so carries on business after those six months and has the knowledge of the fact that it is carrying on business with him alone, shall be liable personally for the obligations of the limited liability partnership incurred during that period.
The provisions have also been made in the Act to provide that where after a partner's death the business is continued in the same LLP name, the continued use of that name or of the deceased partner's name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the LLP done after his death.
For statutory compliances provisions of at least one resident designated partner(DP) in every LLP is would ensure that at least one partner is available in Indiafor at least six months for regulatory compliance requirements. The LLPs would have freedom to appoint more than one resident as DP. LLP as an entity wouldalways remain liable for regulatory or other compliances. Civil liability on such apartner would be adjudicated by the courts under civil law which recognizes 'foreign awards'. Criminal liability would require adjudication/ enforcement by thecourts including using the extradition process. Position would be similar to thecases of directors of companies who are foreign nationals.
Accounts & Audit
An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. A "Statement of Accounts and Solvency" in prescribed form shall be filed by every LLP with the Registrar every year.
The accounts of every LLP shall be audited in accordance with Rule 24 of LLP, Rules 2009.
Such rules, inter-alia, provides that any LLP, whose turnover does not exceed, in any financial year, forty lakh rupees, or whose contribution does not exceed twenty five lakh rupees, is not required to get its accounts audited. However, if the partners of such limited liability partnership decide to get the accounts of such LLP audited, the accounts shall be audited only in accordance with such rule.
Every LLP would be required to file annual return in Form 11 with ROC within 60days of closer of financial year. The annual return will be available for public inspection on payment of prescribed fees to Registrar.
Power of Registrar to Call for information& Inspection
Registrar would have power to obtain such information which he may consider necessary for the purposes of carrying out the provisions of the Act, from any designated partner, partner or employee of the LLP. He would also have power to summon any designated partner, partner or employee of any LLP before him for any such purpose, in case the information has not been furnished to him or in case the Registrar is not satisfied with the information furnished to him.
Central Govt may appoint inspectors to investigate the affairs of an LLP. The manner and procedure for conduct of investigation has been specified in the Act.
The following documents/information will be available for inspection by any person:-
Incorporation document,
Names of partners and changes, if any, made therein,
Statement of Account and Solvency
Annual Return
TThe fees for such inspection of an LLP is Rs 50/- and fees for certified copy or extract of any document u/s 36 shall Rs. 5/- per page.
Filling of Documents
The provisions of the Act require LLPs to file the documents like Statement of Account and Solvency (SAS) and Annual Return (AR) and notices in respect of Account and Solvency (SAS) and Annual Return (AR) and notices in respect of changes among partners etc. within the time specifically indicated in relevant provisions. The Act contains provisions for allowing LLPs to file such documents after their due dates on payment of additional fees. It has been provided that incase LLPs file relevant documents after their due dates with additional fees upto300 days, no action for prosecution will be taken against them. In case there is delay of 300 days or more, the LLPs will be required to pay normal filing fees, additional fee and shall also be liable to be prosecuted.
The Act also contains provisions for compounding of offences which are punishable with fine only.
Taxation of LLP
Since the taxation related matters in India are provided under Tax Laws, the taxation of LLPs has not been provided in the LLP Act. The Finance Bill, 2009 has made provisions in this regard, pursuant to which the taxation scheme of LLPs has been proposed to be introduced in the Income Tax Act. The Finance Bill,2009 has proposed following regarding taxation of LLPs:-
(a) LLPs to be taxed on the lines similar to general partnerships under Indian Partnership Act, 1932, i.e. taxation in the hands of the entity and exemption from tax in the hands of its partners.
(b) Consequent changes to be made in the Income-tax Act, 1961 like (i) the word 'partner' to include within its meaning a partner of a limited liability partnership, (ii) the word 'firm' to include within its meaning a limited liability partnership and (iii) the word 'partnership' to include within its meaning a limited liability partnership.
(c) The designated partner shall sign the income tax return of an LLP, or, where, for any unavoidable reason such designated partner is not able to sign the return or where there is no designated partner as such, any partner shall sign the return.
(dspan>)) In case of liquidation of an LLP, every partner will be jointly and severally liable for payment of tax unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part.
(e) As an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Income-tax Act, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion.
(f) If there is a violation of these conditions, the provisions of section 45 of Income-tax Act shall apply.
Remuneration To Partners –
Remuneration paid to partners is deductible at the hands of LLP within limits prescribed under Income Tax act subject to agreement and other terms & conditions.
Interest To Partners –
Interest paid to partners is deductible at the hands of LLP within limits prescribed under section 40(b) of Income Tax Act if requirements of section 184 are satisfied. As per section 185 of Income Tax Act, if the requirements of section 184 are not satisfied, firm will be assessed as firm but shall not be eligible for deduction of remuneration or interest to partner. Interest paid/credited to partner will be allowable as deduction to LLP and it will be taxed at the hands of partner of LLP.
The conditions for allowing deduction of interest are as follows –
Payment of interest should be authorised by the partnership deed and should be in accordance with terms of partnership deed.
Interest should not pertain to period prior to partnership agreement and (c) Interest should not exceed 12%.
Disallowance of interest and interest u/s 40A(2) –
As per section 40A(2) of Income Tax Act, any expenditure incurred by an assessee in respect of which payment has been made to specified persons (relative, director of company, partner of firm, person having substantial interest in business of assessee etc.), is liable to be disallowed in computing business profit to the extent such expenditure is considered to be excessive or unreasonable, having regard to the fair market value of goods or services or facilities etc.
Thus, even if payment of remuneration or interest is allowable as per section 40(b) of Income Tax Act, it can be disallowed under section 40A (2) of Income Tax Act.
Signing Of Income Tax Return –
Income Tax return shall be signed by designated partner of LLP. If for unavoidable reasons, the designated partner is unable to sign and verify the return, or where there is no designated partner, any partner of LLP can sign and verify income tax return [section 140(cd) of Income Tax Act].
No Presumptive Taxation Scheme –
LLP cannot avail presumptive taxation scheme under sections 44AC or 44AD of Income Tax Act.
Liability of Partner Towards Liability Of Income Tax Of LLP –
All partners of LLP are jointly and severally liable for income tax liability, but a partner can escape the liability if he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of any duty on his part [section 167C of Income Tax Act].
Conversion
Only private / unlisted public company can be converted into LLP.
Financial Year
In case LLP has been incorporated on or after 1st October of financial year, then LLP can close its first financial year either on the coming or next 31st March i.e. LLP files its first financial year details for 18 months.
In case total number of designated partners (DP) and partners as on 31st March of the financial year for which return is being filed exceeds two hundred, details are required to be updated through the screen. These details are required to be provided in the screen before filling eForm 11. Once the details are updated on the LLP portal, a service request number (SRN) shall be generated by the system and the same is to be mentioned at the time of filing of form 11. Also note that filing of form 11 shall not be allowed in case there is any other eForm 11 pending for payment of fee or any other eForm 11 is under processing or already approved in respect of the SRN.
TThe charge details i.e. creation, modification or satisfaction of charge, can be filed through Appendix to eForm 8(Interim). However, it is not mandatory to file the charge details with the office of Registrar but the stakeholders can voluntarily file the same.
Dissolution of LLP
As per the terms of LLP agreement, LLP can be dissolved by executing dissolution deed. The net assets of the LLP can be distributed amongst the partners in a manner specified under LLP agreement.
If LLP distributes any other amount over & above the original capital and share of profit for the year till dissolution then the tax issues may arise depending upon the nature of the distribution and the character of amount being received by each partner.
Winding up of LLP
LLP can be wound up when a resolution is passed at the General Meeting of the partners and 3/4th majority of the partners approve the winding up of LLP.
The competent Court has power to pass the necessary orders based on the application made by LLP for winding up.
The consent of the lenders and creditors will be necessary before the Court passes an order for winding up of the LLP.
The creditors also have power to make an application for winding up of LLP if 2/3rd in value of the creditors establish that LLP is not in a position to pay the debts to the creditors.
Various Forms for LLP
| Application for reservation or change of name | Form 1 | Form 1 |
| Incorporation document and subscriber's statement | Form 2 | Form 2 |
| Details in respect of designated partners and partners of Limited Liability Partnership | Form 2A | Form 2A |
| Information with regard to limited liability partnership agreement and changes, if any, made therein | Form 3 | Form 3 |
| Notice of appointment, cessation, change in name/ address/designation of a designated partner or partner. and consentto become a partner/designated partner | Form 4 | Form 4 |
| Notice of appointment, cessation, change in particulars of a partners | Form 4A | Form 4A |
| Notice for change of name | Form 5 | Form 5 |
| Statement of Account & Solvency | Form 8 | Form 8 |
| Annual Return of Limited Liability Partnership (LLP) | Form 11 | Form 11 |
| Form for intimating other address for service of documents | Form 12 | Form 12 |
| Notice for change of place of registered office | Form 15 | Form 15 |
| Application and statement for conversion of a firm into Limited Liability Partnership (LLP) | Form 17 | Form 17 |
| Application and Statement for conversion of a private company/ unlisted public company into limited liability partnership (LLP) | Form 18 | Form 18 |
| Notice of intimation of Order of Court/ Tribunal/CLB/ Central Government to the Registrar | Form 22 | Form 22 |
| Application for direction to Limited Liability Partnership (LLP) to change its name to the Registrar | Form 23 | Form 23 |
| Application to the Registrar for striking off name | Form 24 | Form 24 |
| Application for reservation/ renewal of name by a Foreign Limited Liability Partnership (FLLP) or Foreign Company | Form 25 | Form 25 |
| Form for registration of particulars by Foreign Limited Liability Partnership (FLLP) | Form 27 | Form 27 |
| Return of alteration in the incorporation document or other instrument constituting or defining the constitution; or the registered or principal office; or the partner or designated partner of limited liability partnership incorporated or registered outside India. | Form 28 | Form 28 |
| Notice of (A) alteration in the certificate of incorporation or registration; (B) alteration in names and addresses of any of the persons authorised to accept service on behalf of a foreign limited liability partnership (FLLP) (C) alteration in the principal place of business in India of FLLP (D) cessation to have a place of business in India | Form 29 | Form 29 |
| Application for compounding of an offence under the Act | Form 31 | Form 31 |
| Form for filing addendum for rectification of defects or incompleteness | Form 32/ | Form 32 |
DIN Forms
| Description | e-Form with Instruction kit | e-Form |
| Application for allotment of Director Identification Number | Form DIR-3 | Form DIR-3 |
| Intimation of change in particulars of Director to be given to the Central Government | Form DIR-6 | Form DIR-6 |
Disallowance of input tax credit on the ground that seller is bogus or cancelled dealer
The system of VAT was introduced in the sales tax law to bring more transparency, efficiency, to remove tax cascading etc. The difficulties which may arise in any system comes to picture only when the system is practically implemented.
One of the major difficulties being faced by the dealers is the disallowance of input tax credit by the revenue on the ground that the dealer from whom the goods have been purchased is a bogus dealer or whose certificate has been cancelled, as a result of which, it is claimed by the revenue that since no tax has been paid by such cancelled or bogus dealer, therefore no corresponding tax credit is available to the purchaser.
Section 13(12) of the Punjab VAT Act, 2005 has been amended w.e.f. 15.11.2013 to the effect that Input tax credit in no case shall exceed the amount of tax on the purchase of goods, actually paid in the Government treasury. This amendment is prospective and its effect has not been made retrospective. So this amendment would not have any effect on the cases before 15.11.2013.
Now there are certain points in relation to the disallowance of input tax credit on the ground of purchaser being a cancelled and bogus dealers, which need some light so as to keep the principle of fairness alive in the assessment proceedings, while disallowing any input tax credit.
Disallowance in case of bogus dealers: I have seen many cases where assessing officers pass an assessment order stating that the dealer from whom the goods have been purchased are bogus dealers. Now the bogus dealer has not been defined in the Punjab VAT Act. In general terms one would understand that a bogus dealer would be a person who is dealing in the bogus/ fraudulent transaction of sale and purchase or who fraudulently has collected the tax on his sales, but not paid the same with the Government.
No mechanism to know whether a person is genuine dealer or not: Now while dealing with any person, how one can come to know whether the person from whom he is purchasing the goods, is a genuine dealer or a not, is a question which remains unanswered, as there is no mechanism provided by the Department so as to get to know that the person from whom he is purchasing the goods has deposited the tax collected from him in the Government treasury.
The Department also has not provided/published any list of such bogus dealers, from where an assessee may come. The assessee comes to know only at the time of assessment proceedings that the person from whom he has purchased the goods is a bogus dealer declared by the Department.
In the absence of such a mechanism, every person has a right to believe that a person to whom the registration has been granted by the Department itself, is a genuine dealer, as the registration is granted after due verification by the Department officials.
Principle of fairness must be adopted: Now, in such a scenario, during the assessment proceedings, before disallowing input tax credit to the purchaser on the ground that the person from whom he has purchased the goods is a bogus dealer, the principle of fairness and justice demands that such person must be confronted with the evidence that how such person is a bogus dealer.
When an officer records a finding in his assessment order that a seller of goods is a bogus dealer, this is purely a finding of fact. Now, it must be remembered that finding of fact has to be a legal finding of fact, and what is a legal finding of fact has been very well explained by Punjab & Haryana high Court in the judgement Pehr Chand & Sons vs State of Punjab 30 STC 211 as follows:
"A finding of fact in order to be binding has to be a legal finding of fact. For instance, a finding of fact which is based on no evidence is no finding of fact. Similarly, a finding of fact based on irrelevant evidence and a finding of fact based on evidence partly relevant and partly irrelevant, would be no answer to the contention of the assessee that such a finding is vitiated and is no finding in the eyes of law"(para 32 of the judgement).
Thus the officer concerned must produce an evidence to establish a fact that a dealer concerned is a bogus dealer. However, having said that, it should also be noted that the onus is on the assessee in first place to prove that he has made genuine purchases and therefore he must also produce the evidences to prove the genuineness of his purchases from the so called bogus dealers, i.e. he must produce VAT invoices, proof of payment, and proof of movement of goods or other circumstancial evidences which may prove his purchase as genuine.
However it should be noted that once the evidences as to genuineness of purchases are produced, the onus must shift on the officer concerned to rebut the same.What happens most of the time is the AOs without rebutting the evidences produced by the assessee, makes disallownace of input tax credit, as if they are bent upon doing so, ignoring the fact that they are also acting as quasi judicial authorities and have to abide by the principles of judiciousness.
At this juncture, the Judgement of our jurisdictional Punjab & Haryana High Court in the well known case Gheru Lal Bal Chand vs State of Haryana clearly which has laid down the principle that seller is an agent of Government and input tax credit cannot be disallowed to the genuine purchaser on the ground that seller has not deposited the tax with the Government treasury, unless some fraudulent, collusion or connivance is proved between the seller or its predecessors and the purchaser, will come to rescue the assessee from any unfair disallowance of input tax credit.
However, all in all in my view if only the principle of fairness and justice is adopted by the quasi judicial authorities during the assessment proceedings, most of the problems and litigations would disappear and it would also increase the tax collection of revenue.
to be continued…….
In the next Article disallowance of input tax credit in case of cancelled dealers would be discussed.
(Author – Amit Bajaj Advocate, Bajaj & Bajaj Advocates, 128, Sangam complex, Milap chowk, Jalandhar Cty (Punjab), Email: amit@amitbajajadvocate.com, M +919815243335)
Who is required to file ITR-2 for AY 2014-15 and mode of filing?
Who can use this ITR-2 Return Form for Assessment Year 2014-15?
This Return Form is to be used by an individual or a Hindu Undivided Family whose total income for the assessment year 201 4-15 includes:-
(a) Income from Salary / Pension; or
(b) Income from House Property; or
(c) Income from Capital Gains; or
(d) Income from Other Sources (including Winning from Lottery and Income from Race Horses). Further, in a case where the income of another person like spouse, minor child, etc. is to be clubbed with the income of the assessee, this Return Form can be used where such income falls in any of the above categories.
Who cannot use this Return Form?
This Return Form should not be used by an individual whose total income for the assessment year 2014-15 includes Income from Business or Profession.
Annexure-less Return Form
No document (including TDS certificate) should be attached to this Return Form. All such documents enclosed with this Return Form will be detached and returned to the person filing the return.
Manner of filing ITR-2 Return Form for Assessment Year 2014-15?
This Return Form can be filed with the Income-tax Department in any of the following ways, -
(i) by furnishing the return in a paper form;
(ii) by furnishing the return electronically under digital signature;
(iii) by transmitting the data in the return electronically and thereafter submitting the verification of the return in Return Form ITR-V;
(iv) by furnishing a Bar-coded return.
A resident assessee having any assets (including financial interest in any entity) located outside India or signing authority in any account located outside India, shall fill out schedule FA and furnish the return in the manner provided at either 5(ii) or 5(iii).
From the assessment year 2013-14 onwards all the assessees having total income more than 5 lakh rupees are required to furnish the return in the manner provided at 5(ii) or 5(iii). Also in case of an assessee claiming relief under section 90, 90A or 91 to whom Schedule FSI and Schedule TR apply, he has to furnish the return in the manner provided at either (ii) or (iii).
Where the Return Form is furnished in the manner mentioned at (iii), the assessee should print out two copies of Form ITR-V. One copy of ITR-V, duly signed by the assessee, has to be sent by ordinary post to Post Bag No. 1, Electronic City Office, Bengal uru–5601 00 (Karnataka). The other copy may be retained by the assessee for his record.
Filling out the acknowledgement
Only one copy of this Return Form is required to be filed. Where the Return Form is furnished in the manner mentioned at 5(i) or at 5(iv), the acknowledgement should be duly filled in ITR-V.
Obligation to file return
Every individual whose total income before allowing deductions under Chapter VI-A of the Income-tax Act, exceeds the maximum amount which is not chargeable to income tax is obligated to furnish his return of income. The maximum amount not chargeable to income tax in case of different categories of individuals is as follows:-
| Sl.No. | Category | Amount (in Rs.) |
| | In case of individuals below the age of 60 years | 2,00,000 |
| | In case of individuals, resident in India, who are of the age of 60 years or more but less than eighty years at any time during the financial year 2013-14 | 2,50,000 |
| In case of individuals, resident in India, who are of the age of 80 years or more at any time during the financial year 2013-14. | 5,00,000 |
RBI advises Information System(IS) Audit for Urban Cooperative Banks
RBI/2013-14/638
UBD.BPD.Cir.No. 71/12.09.000/2013-14
UBD.BPD.Cir.No. 71/12.09.000/2013-14
June 11, 2014
The Chief Executive Officer
All Primary (Urban) Co-operative Banks
All Primary (Urban) Co-operative Banks
Introduction of Information System(IS) Audit for Urban Cooperative Banks
Please refer to our circular UBD No.POT.PCB.30/09.96.00/2001-02 dated February 12, 2002 advising UCBs to introduce EDP audit system on perpetual basis. It is observed that since then some of the UCBs have adopted technology and have been offering electronic banking, tele banking, electronic clearing/funds transfer, electronic money, smart cards etc to its customers. With a view to integrating the range of services offered by bank branches, providing better customer services, generating MIS reports and various reports for regulators and Government of India, Reserve Bank of India has vide Circular UBD CO BPD PCB Cir No 14/09.18.300/2013-14 dated September 11, 2013 prescribed a calibrated timeline for implementation of CBS for UCBs based on their deposit size.
In view of the above and having regard to risks emanating from adoption of technology, there is a need to introduce IS Audit in UCBs. It is, therefore, advised that
- UCBs may adopt an IS audit policy, if not already done, appropriate to its level of operations, complexity of business and level of computerization and review the same at regular intervals in tune with guidelines issued by RBI from time to time.
- UCBs may also adopt appropriate systems and practices for conducting IS audit on annual basis covering all the critically important branches (in terms of nature and volume of business).
- Such audits should be undertaken preferably prior to the statutory audit so that IS audit reports are available to the statutory auditors well in time for examination and for incorporating comments, if any, in the audit reports.
- IS audit reports should be placed before the board and compliance should be ensured within the time frame as outlined in the audit policy.
- The above instructions may be implemented during the current accounting year i.e April 1, 2014 to March 31, 2015.
Yours faithfully,
(Scenta Joy)
General Manager
General Manager
Custom Superintendent from Chennai jailed in disproportionate assets case
TWO YEARS RIGOROUS IMPRISONMENT WITH FINE OF RS. 20,000/- TO THEN SUPERINTENDENT OF CUSTOMS FOR ACQUIRING DISPROPORTIONATE ASSETS
The Special Judge for CBI Cases, Chennai has convicted Shri B. Pugazhenthi, then Superintendent of Customs, Chennai and sentenced him to undergo two years Rigorous Imprisonment with fine of Rs. 20,000/- in a disproportionate assets case.
CBI had registered a case on the allegation that Shri B. Pugazhenthi, Superintendent of Customs, Chennai had abused his official position and acquired assets disproportionate to his known source of income. The investigation revealed that during the check period from 01.01.2004 to 30.11.2009, Shri B. Pugazhenthi has acquired disproportionate assets, both movable & immovable to the tune of Rs.89,72,956/- in his name & in the names of his family members and incurred an expenditure of Rs.45,80,974/- as against his total income of Rs.70,91,059/-.
CBI filed charge sheet against Shri B. Pugazhenthi U/s 13(2) r/w 13(1)(e) of Prevention of Corruption Act, 1988.
The Designated Court found the accused guilty and convicted him.
Corrigendum: "the Companies (Removal of Difficulties) Second Order, 2014" read as "the Companies (Removal of Difficulties) Order, 2014"
Corrigendum: "the Companies (Removal of Difficulties) Second Order, 2014" read as "the Companies (Removal of Difficulties) Order, 2014".
MINISTRY OF CORPORATE AFFAIRS
CORRIGENDUM
New Delhi, the 27th May , 2014
S.O. 1406 (E).—In the notification of the Government of India in the Ministry of Corporate Affairs S.O. 1177(E), dated the 29th April, 2014 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (ii) dated 30th April, 2014, in line six, for "(1) This order may be called the Companies (Removal of Difficulties) Second Order, 2014" read "(1) This order may be called the Companies (Removal of Difficulties) Order, 2014".
[F. No. 2/6/2014-CL-V] AMARDEEP SINGH BHATIA, Jt. Secy.
On Wednesday, 11 June 2014 3:48 PM, IFAC <communications@ifac.org> wrote:
The Latest Global Knowledge, Resources and News from the Gateway
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