Case BriefsSupreme Court

Supreme Court: The 3-judge bench of RF Nariman*, Hemant Gupta and BR Gavai, JJ has held that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India.

Background

The Court was hearing an appeal arising from the judgment of the High Court of Karnataka dated 15.10.2011 reported as CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494, wherein it was held that the amounts paid by the concerned persons resident in India to non-resident, foreign software suppliers, amounted to royalty and as this was so, the same constituted taxable income deemed to accrue in India under section 9(1)(vi) of the Income Tax Act, 1961, thereby making it incumbent upon all such persons to deduct tax at source and pay such tax deductible at source [TDS] under section 195 of the Income Tax Act.

The Court grouped the appeals before it into four categories:

i) The first category dealt with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer

ii) The second category of cases dealt with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users.

iii) The third category dealt with cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users.

iv) The fourth category dealt with cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users

Scheme of Income Tax Act vis-à-vis applicability of Double Taxation Avoidance Agreements (DTAA)

The scheme of the Income Tax Act, in relation to the questions before the Court, is that for income to be taxed under the Income Tax Act, residence in India, as defined by section 6, is necessary in most cases.

Under section 5(2) of the Income Tax Act, the total income of a person who is a non-resident, includes all income from whatever source derived, which accrues or arises or is deemed to accrue or arise to such person in India during such year. This, however, is subject to the provisions of the Income Tax Act. Certain income is deemed to arise or accrue in India, under section 9 of the Income Tax Act, notwithstanding the fact that such income may accrue or arise to a non-resident outside India. One such income is income by way of royalty, which, under section 9(1)(vi) of the Income Tax Act, means the transfer of all or any rights, including the granting of a licence, in respect of any copyright in a literary work.

That such transaction may be governed by a DTAA is then recognized by section 5(2) read with section 90 of the Income Tax Act, making it clear that the Central Government may enter into any such agreement with the government of another country so as to grant relief in respect of income tax chargeable under the Income Tax Act or under any corresponding law in force in that foreign country, or for the avoidance of double taxation of income under the Income Tax Act and under the corresponding law in force in that country.

“What is of importance is that once a DTAA applies, the provisions of the Income Tax Act can only apply to the extent that they are more beneficial to the assessee and not otherwise.”

Further, by explanation 4 to section 90 of the Income Tax Act, it has been clarified by the Parliament that where any term is defined in a DTAA, the definition contained in the DTAA is to be looked at. It is only where there is no such definition that the definition in the Income Tax Act can then be applied.

The machinery provision contained in section 195 of the Income Tax Act is inextricably linked with the charging provision contained in section 9 read with section 4 of the Income Tax Act, as a result of which, a person resident in India, responsible for paying a sum of money, “chargeable under the provisions of [the] Act”, to a non-resident, shall at the time of credit of such amount to the account of the payee in any mode, deduct tax at source at the rate in force which, under section 2(37A)(iii) of the Income Tax Act, is the rate in force prescribed by the DTAA. Importantly, such deduction is only to be made if the non-resident is liable to pay tax under the charging provision contained in section 9 read with section 4 of the Income Tax Act, read with the DTAA.

When is making of copies or adaptation of a computer programme not copyright infringement?

The making of copies or adaptation of a computer programme in order to utilise the said computer programme for the purpose for which it was supplied, or to make up back-up copies as a temporary protection against loss, destruction or damage so as to be able to utilise the computer programme for the purpose for which it was supplied, does not constitute an act of infringement of copyright 54 under section 52(1)(aa) of the Copyright Act. What is referred to in section 52(1)(aa) of the Copyright Act would not amount to reproduction so as to amount to an infringement of copyright.

Section 52(1)(ad) is independent of section 52(1)(aa) of the Copyright Act, and states that the making of copies of a computer programme from a personally legally obtained copy for non-commercial personal use would not amount to an infringement of copyright. However, it is not possible to deduce from this that if personally legally obtained copies of a computer programme are to be exploited for commercial use, it would necessarily amount to an infringement of copyright.

“Section 52(1)(ad) of the Copyright Act cannot be read to negate the effect of section 52(1)(aa), since it deals with a subject matter that is separate and distinct from that contained in section 52(1)(aa) of the Copyright Act.”

Definition of Royalty in the DTAAs vis-à-vis the Income Tax Act

Under Article 12 of the India-Singapore DTAA, the term “royalties” uses the expression “means”, thereby making it exhaustive and it refers to payments of any kind that are received as a consideration for the use of or the right to use any copyright in a literary work.

As opposed to this, the definition contained in explanation 2 to section 9(1)(vi) of the Income Tax Act, is wider in at least three respects:

i. It speaks of “consideration”, but also includes a lump-sum consideration which would not amount to income of the recipient chargeable under the head “capital gains”;

ii. When it speaks of the transfer of “all or any rights”, it expressly includes the granting of a licence in respect thereof; and

iii. It states that such transfer must be “in respect of” any copyright of any literary work.

However, even where such transfer is “in respect of” copyright, the transfer of all or any rights in relation to copyright is a sine qua non under explanation 2 to section 9(1)(vi) of the Income Tax Act. In short, there must be transfer by way of licence or otherwise, of all or any of the rights mentioned in section 14(b) read with section 14(a) of the Copyright Act.

The transfer of “all or any rights (including the granting of a licence) in respect of any copyright”, in the context of computer software, is referable to sections 14(a), 14(b) and 30 of the Copyright Act. The expression “in respect of” is equivalent to “in” or “attributable to”.

“Thus, explanation 2(v) to section 9(1)(vi) of the Income Tax Act, when it speaks of “all of any rights…in respect of copyright” is certainly more expansive than the DTAA provision, which speaks of the “use of, or the right to use” any copyright.”

However, when it comes to the expression “use of, or the right to use”, the same position would obtain under explanation 2(v) of section 9(1)(vi) of the Income Tax Act, inasmuch as, there must, under the licence granted or sale made, be a transfer of any of the rights contained in sections 14(a) or 14(b) of the Copyright Act, for explanation 2(v) to apply. To this extent, there will be no difference in the position between the definition of “royalties” in the DTAAs and the definition of “royalty” in explanation 2(v) of section 9(1)(vi) of the Income Tax Act.

Conclusion

The Court held that the “person” mentioned in section 195 of the Income Tax Act cannot be expected to do the impossible, namely, to apply the expanded definition of “royalty” inserted by explanation 4 to section 9(1)(vi) of the Income Tax Act, for the assessment years in question, at a time when such explanation was not actually and factually in the statute.

“… persons are not obligated to do the impossible, i.e., to apply a provision of a statute when it was not actually and factually on the statute book.”

Hence, the distribution of copyrighted computer software, would not constitute the grant of an interest in copyright under section 14(b)(ii) of the Copyright Act, thus necessitating the deduction of tax at source under section 195 of the Income Tax Act.

The Court highlighted that the effect of section 90(2) of the Income Tax Act, read with explanation 4 thereof, is to treat the DTAA provisions as the law that must be followed by Indian courts, notwithstanding what may be contained in the Income Tax Act to the contrary, unless more beneficial to the assessee. Hence, it was held that,

“Given the definition of royalties contained in Article 12 of the DTAAs, there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases.”

[Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax, 2021 SCC OnLine SC 159, decided on 02.03.2021]


*Judgment by: Justice RF Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by:

For appellants: Senior Advocates Arvind Datar, Percy Pardiwala, S. Ganesh, Ajay Vohra, Preetesh Kapur and Advocates Sachit Jolly, Kunal Verma

For Revenue: Additional Solicitor General Balbir Singh

Experts CornerTarun Jain (Tax Practitioner)

  1. Introduction

Tax minimisation pursuits are as old as tax itself. While there is no fundamental right to be immune from taxation,[1] there is nonetheless judicial recognition that “every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be”.[2] The Indian judiciary has witnessed tumultuous swings on the scope of taxpayers’ abilities to adjust their affairs. On the one hand are the sui generis observations of Justice Chinnappa Reddy in McDowell[3] inter alia highlighting that “no one can now get away with a tax avoidance project with a mere statement that there is nothing illegal about it” versus the other decisions of the Supreme Court, such as Azadi Bachao Andolan,[4] Walfort Share,[5] Vodafone International,[6] etc., which continue to vindicate tax planning.

In the year 2012 and in the context of income tax law, the Parliament intervened by inserting statutory provisions to address tax avoidance disputes and thereby adding legislative certainty as regards their respective rights of the taxpayers vis-à-vis the tax officer’s ability to revisit transactions. It is not for the first time that anti-avoidance rules have been inserted in the tax law. In fact tax laws are replete with provisions which repel specific class of prohibited transactions.[7] The difference between these provisions vis-à-vis the 2012 change, which introduced General Anti-Avoidance Rules (or GAAR), is that GAAR are potentially limitless in their scope and extend to all transactions.

  1. Legislative history

The introduction of GAAR in the law was originally proposed in the Direct Taxes Code Bill, 2009, which was followed by Direct Taxes Code Bill, 2010, but did not fructify. Thereafter the GAAR provisions were enacted in the Income Tax Act, 1961 (Act) in terms of the amendments carried out by Finance Act, 2012. Seeking to accommodate the representations from various quarters, the Government of India appointed an Expert Committee under the chairmanship of Dr Parthasarathi Shome which made extensive recommendations on GAAR.[8] Taking note of these recommendations, the relevant provisions of the Act were amended and also supplemented by detailed rules and administrative clarifications. The application of the GAAR law was also revised and amended law came into force from 1-4-2017.[9]

  1. Scope of GAAR – Impermissible avoidance arrangement

For the GAAR law to apply, it is necessary that an “impermissible avoidance arrangement” (IAA) exists.[10] The expression IAA has been defined in the Act[11] and the relevant provision states as under:

  1. Impermissible avoidance arrangement.— (1) An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it—

 (a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;

 (b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;

 (c) lacks commercial substance or is deemed to lack commercial substance under Section 97, in whole or in part; or

 (d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.

As can be seen from the above, IAA is defined very widely to cover not just the transactions which are not at arm’s length but even those which are considered as resulting in misuse of the Act (either directly or indirectly), lacking commercial substance or lacking bona fide purpose. The same provision further provides that even where the “main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit”, it shall be presumed that the entire arrangement has the main purpose of obtaining a tax benefit; the burden is upon the taxpayer concerned to rebut such presumption.[12]

As if such detailed scope of IAA was not enough, there are other provisions in the Act which supplement (rather enlarge) the scope of IAA. The Act defines the scope of arrangements which are deemed to lack commercial substance,[13] meaning and scope of “round tripping” (which is one of the situations which is deemed to lack commercial substance),[14] besides delineating when does a person become an “accommodating party” for the purpose of IAA,[15] factors considered irrelevant to determine commercial substance in a transaction,[16] etc. In addition, another provision contains a near-exhaustive set of definitions specific to the GAAR chapter under the Act.[17]

  1. Consequences of application of GAAR

Once a transaction is covered within the scope of IAA, then wide-ranging consequences can follow.[18] It is stipulated that where an IAA exists, “then the consequences, in relation to tax, of the arrangement, including denial of tax benefit or a benefit under a tax treaty, shall be determined, in such manner as is deemed appropriate, in the circumstances of the case”. The Act itself stipulates the likely consequences in such scenarios, which include disregarding, combining or recharacterizing any step or the whole IAA; disregarding any accommodating party or treating any accommodating party and any other party as one and the same person; reallocating amongst the parties to the arrangement accruals, receipts, expenditures, etc., repositioning the place of residence of any party to the arrangement or the situs of an asset or transaction; lifting of corporate veil, etc. The Act further provides that, to this end, “(i) any equity may be treated as debt or vice versa; (ii) any accrual, or receipt, of a capital nature may be treated as of revenue nature or vice versa; or (iii) any expenditure, deduction, relief or rebate may be recharacterized.”[19] The Act, in addition, provides consequences in respect of the connected persons and accommodating parties.[20] In short, once a transaction is declared as an IAA, the underlying tax benefit would be brought to tax irrespective of the legal form of the transaction or the position of the parties.

  1. Procedural dynamics

The aforesaid survey of statutory provisions relating to GAAR unfailingly manifests its wide scope and consequences. In order to ensure against its indiscriminate application and arrest potential of abuse, the Act provides for framing of “guidelines” and stipulation of “conditions” which may be prescribed and the GAAR provisions “shall be applied in accordance” with such guidelines and conditions.[21] These guidelines are prescribed in Part DA of the Income Tax Rules, 1962 (Rules).

The very first provision in the Rules stipulates carve-outs i.e. situations where GAAR provisions shall not apply.[22] There are four different situations identified in this provision. First is a monetary threshold in terms of which GAAR would not apply to an IAA where the tax benefit does not exceed INR 3 crores. This is presumably to give relief to small transactions. Second is a class exclusion whereby GAAR does not apply to foreign institutional investors (i.e. FIIs) who do not claim tax treaty benefits and satisfy other stipulated conditions. Third is also a class exclusion whereby non-resident investors of a FII are excluded. The rationale for these exclusions was discussed in detail in the Expert Committee Report, which is evidently to protect foreign investors and grant legal certainty to them. Fourth is a provision colloquially referred as grandfathering provision whereby income arising out of investment transfer made prior to 1-4-2017 (i.e. before application of GAAR) is excluded from the scope of GAAR. This is to ensure against the retrospective application of GAAR law. The other provisions in the Rules provide for the show-cause notice mechanism to be issued by the assessing officer (AO) to the taxpayer concerned before application of GAAR,[23] time-limits for various actions to be undertaken under the GAAR provisions, etc. In addition, certain administrative clarifications[24] have been issued by the Income Tax Department which explain its perspective on the interpretation and application of GAAR provisions.

This takes us back to the Act which prescribes a detailed procedure for applying GAAR.[25] It is stipulated that in a situation where the AO considers that the transaction may be an IAA, he is required to a make a reference to the Principal Commissioner of Income Tax, who, if he agrees, shall issue a notice to the taxpayer concerned and issue necessary directions after hearing the response. In the event the explanation of the taxpayer is not found satisfactory, then a reference has to be made to an approval panel which would, after hearing both the taxpayer and the tax officer, pass directions determining whether a case for IAA is made out. The approval panel would comprise of three members; the chairperson being a serving or former High Court Judge, one senior Indian Revenue Service member and one member who “shall be an academic or scholar having special knowledge of matters, such as direct taxes, business accounts and international trade practices”. The completion of proceedings relating to IAA shall be in terms of the directions of the approval panel, which must be issued within six months of reference being made to it.

  1. Conclusion

A review of the procedural dynamics reveals that multiple stages of hearing and application of mind by different classes of authorities, including those representing the judiciary and external experts, are envisaged in the GAAR application process. This is possibly directed towards driving away subjectivity before the GAAR consequences are applied, in line with the recommendations of the Expert Committee and also emulating international best practices. On a larger level, however, the introduction of GAAR in the tax law reveals the legislative non-tolerance towards tax avoidance manoeuvers. Looked from another perspective, the constant tussle between the taxpayer and the tax officer is sought to be injuncted by the legislature with GAAR, by prescribing the substantive parameters on which the conduct of the taxpayer shall be assessed and the procedure which shall preserve the sanctity of adjudication and instil fairness in this exercise. It is noteworthy that despite the extensive litigation generally observed in tax laws, not a single case has been reported where GAAR law has been applied even though the law already being in force for a few years now. This indicates that the introduction of GAAR in the income tax law has brought about both a perceptual and implementation change insofar tax avoidance is concerned.

†Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics.

[1]State of W.B. v. Subodh Gopal Bose, AIR 1954 SC 92, para 20, vide Patanjali Sastri C.J.

[2]IRC v. Duke of Westminster, 1936 AC 1.

[3]McDowell and Co. Ltd. v. CTO, (1985) 3 SCC 230 : (1985) 154 ITR 148.

[4]Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1 : (2003) 263 ITR 706.

[5]CIT v. Walfort Share and Stock Brokers (P) Ltd., (2010) 8 SCC 137 : (2010) 326 ITR 1.

[6]Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 : (2012) 341 ITR 1.

[7]For illustration, see Ch. X, Income Tax Act, 1961.

[8] Expert Committee Report available HERE .

[9]S. 95(2) of the Income Tax Act, 1961 states “[t]his Chapter shall apply in respect of any assessment year beginning on or after the 1st day of April, 2018”.

[10]S. 95(1), Income Tax Act, 1961.

[11] S. 96(1), Income Tax Act, 1961.

[12] S. 96(2), Income Tax Act, 1961.

[13] S. 97(1), Income Tax Act, 1961.

[14] S. 97(2), Income Tax Act, 1961.

[15] S. 97(3), Income Tax Act, 1961.

[16] S. 97(4), Income Tax Act, 1961. It is noteworthy that “the fact of payment of taxes, directly or indirectly, under the arrangement”, “period or time for which the arrangement exists”, etc. are specifically provided as immaterial for the purpose of the commercial substance analysis.

[17] S. 102, Income Tax Act, 1961. For illustration, this provision defines expressions such as arrangement, asset, benefit, connected person, fund, party, relative, tax benefit, etc.

[18] S. 98, Income Tax Act, 1961, titled “consequences of impermissible avoidance arrangement”.

[19] S. 98(2), Income Tax Act, 1961.

[20] S. 99, Income Tax Act, 1961.

[21] S. 101, Income Tax Act, 1961.

[22] R. 10-U, Income Tax Rules, 1962.

[23] R. 10-UB, Income Tax Rules, 1962.

[24]For illustration, see Circular No. 7 of 2017 dated 27-1-2017, available HERE .

[25] S. 144-BA, Income Tax Act, 1961.

Case BriefsTribunals/Commissions/Regulatory Bodies

Income-tax Appellate Tribunal, New Delhi: Dealing with the issue of enhancement by CIT(A) which was never therein the reasons recorded for reopening the assessment. The ITAT was pleased to hold that the CIT(A) exceeded his jurisdiction in making the enhancement on an issue which was never there in the reasons recorded for reopening the assessment.

The Assessee is a resident of Meerut and has been filing his return from the same address before the ITO, Ghaziabad. On the basis of an AIR information ITO, Ghaziabad initiated reassessment proceedings. The information suggested that Assessee has purchased property. All the notices and intimations were issued to the address which was mentioned in the transfer deed of the property. Since all the notices were served at this address, where the Assessee was not residing he could not respond to the notices and the assessment was framed ex parte u/s 144/147 of the Act.

Being aggrieved by the order passed by the Assessing Officer, the Assessee preferred an appeal before the CIT(A). CIT(A) was pleased to delete the addition made by the AO as no such property was purchased by the Assessee. However, the CIT (A) was of the opinion that the Assessee has in fact sold some property in the year under consideration and, accordingly, issued a notice of enhancement.

Being Aggrieved by the enhancement the Assessee preferred an Appeal before the ITAT on a limited issue that CIT(A) had no power to enhance the assessment on an altogether different issue which was never there in the reasons recorded for reopening the assessment.

The ITAT was pleased to hold that the CIT(A) exceeded his jurisdiction in making the enhancement on an issue which was never there in the reasons recorded for reopening the assessment.

“However, the CIT(A) exceeded his jurisdiction in making the enhancement on an issue which was never there in the reasons recorded for reopening the assessment.

We are of the considered view that the enhancement done by the CIT(A) is bad in law and the reassessment notice issued by the AO, Ghaziabad is also bad in law. We, accordingly, set aside the assessment and quash the same. Since the foundation has been removed the order of the first appellate authority becomes non est”

Hence, the appeal was allowed. [Harendra Singh v. ITO, I.T.A No.1318/Del/2018, decided on 27-11-2020]


Akshat Malpani, Advocate, Supreme Court of India and Delhi High Court

Hot Off The PressNews

Taking another step towards e-governance and encouraging participation of citizen as stakeholders in curbing tax evasion, the Central Board of Direct Taxes has launched an automated dedicated e-portal on the e-filing website of the Department to receive and process complaints of tax evasion, foreign undisclosed assets as well as complaints regarding Benami properties.

The public can now file a Tax Evasion Petition through a link on the e-filing website of the Department https://www.incometaxindiaefiling.gov.in/ under the head “File complaint of tax evasion/undisclosed foreign asset/ Benami property”. The facility allows for filing of complaints by persons who are existing PAN/Aadhaar holders as well as for persons having no PAN /Aadhaar. After an OTP based validation process (mobile and/or email), the complainant can file complaints in respect of violations of the Income-tax Act, 1961, Black Money (Undisclosed Foreign Assets and Income) Imposition of Tax Act, 1961 and Prevention of Benami Transactions Act (as amended) in three separate forms designed for the purpose.

Upon the successful filing of the complaint, the Department will allot a unique number to each complaint and the complainant would be able to view the status of the complaint on the Department’s website. This e-portal is yet another initiative of the Income Tax Department to bring about enhanced ease of interaction with the Department, while strengthening its resolve towards e-governance.


Ministry of Finance

[Press Release dt. 12-01-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal, Mumbai (ITAT): Dealing with the issue on nature, scope, and explanation Section 263 (2)(a) to the effect that an order is deemed to be erroneous and prejudicial to the interests of the revenue or not. Further, what a prudent, judicious and responsible Assessing is to do in the court of Assessment Proceeding, whether an income is exempt under section 10(34) or not. The tribunal was pleased to conclude that, the true test for finding out whether Explanation 2(a) has been rightly invoked or not is, not simply existence of the view, but an objective finding that the Assessing Officer has not conducted, inquiries and verifications expected, in the ordinary course of performance of duties, of a prudent, judicious and a responsible public servant that the Assessing Officer is expected to be. Further, the investments in questions were held as the corpus, and, as such, the provisions of Section 13 (1)(d) were not attracted

The Assessee before us is a public charitable trust, set up in the year 1932, registered under the Bombay Trusts Act, 1950. The Assessee trust is also registered as a charitable institution under Section 12A of the Income Tax Act, 1961. The Assessee trust had filed its return of income, and its assessment, under section 143(3) of the Act, was completed determining ‘Nil’ taxable income. Subsequently, however, learned Commissioner of Income Tax (Exemptions) [hereinafter referred to as ‘the Commissioner’] issued a show-cause notice requiring the Assessee to show cause as to why this order not be subjected to revision under Section 263 of the Act. A subsequent show cause notice was also issued whereby the commissioner framed the issues on lack of inquiry by the Assessing Officer, the inadequacy of inquiry of the Assessing Officer, or taking up the pertinent line of inquiry but not following it to its logical conclusion by the Assessing Officer. Whereby the Commissioner was pleased to conclude that: –

  1. The investments in shares are covered by an exception provided in proviso (i) & (ia) to section 13(1)(d) and unless it is covered by exceptions, it results into denial of exemptions. Therefore, the AO has failed to make basic but necessary verification on this issue.
  2. It is the failure of Assessing Officer to make due verification on the basis of which jurisdiction under Section 263 can be invoked.
  3. Despite the material being available on records, which could lead to prima facie opinion that the trustees are having control over the affairs of Tata Sons Ltd., the Assessing Officer has failed to take the issue to any logical conclusion. Hence, the show-cause notice issued under Section 263 of I.T Act was reasonable and justified.
  4. In reference to Section 10, the Assessing Officer ought to have asked the assessee to demonstrate that the entire income of the Trust was applied or being applied for the purpose of the Trust. Not conducting due verification amounts to the order being erroneous and prejudicial to the interest of revenue. Similarly, adopting the pertinent line of inquiry but not taking it to the logical end also renders the order erroneous and prejudicial to the interest of revenue.
  5. Therefore order u/s 143(3) dated 30.12.2016 for the assessment year 2014-15 is erroneous in so far as it is prejudicial to the interests of the revenue. The Assessing Officer shall make a denovo assessment after proper examination of various issues.

Being Aggrieved by the stand of the Commissioner the Assessee preferred an Appeal before the Income Tax Appellate Tribunal, Mumbai whereby the tribunal was pleased to conclude that

  1. The true test for finding out whether Explanation 2(a) has been rightly invoked or not is, not simply existence of the view, but an objective finding that the Assessing Officer has not conducted, inquiries and verifications expected, in the ordinary course of performance of duties, of a prudent, judicious and responsible public servant that the Assessing Officer is expected to be.
  2. Whether an income is exempt under Sections 10(34) or under 11, it does not prejudice the interests of the revenue in any way. Accordingly, even if the order can be said to be ‘erroneous’ for any reason, it cannot be said to be ‘prejudicial to the interests of the revenue’, and, therefore, section 263 could not have been invoked on this point either. Further, the investments in questions were held as the corpus, and, as such, the provisions of Section 13 (1)(d) were not attracted.
  3. What essentially follows is that it’s not the declaration of an investment being a corpus investment but the fact of its being treated as capital and rather than using the investment for the purposes of the trust, using the income from investment for the purposes of the trust, which is determinative of its being in the nature of corpus investment. How the trust is treating the investment, i.e., in the capital field or not, is thus truly determinative of the investment being part of the corpus. Viewed thus, the mere fact of these investments being held as capital for at least more than four decades as conclusively established by the material before the Assessing Officer, and only income from these investments being applied for the purposes of the trust clearly establishes the fact of these investments being part of the corpus of the trust.
  4. A prima facie view of the Assessing Officer cannot be reason enough to decline the assessee certain tax treatment which has been given to the assessee all along for decades, but it can surely be reason enough to leave a window for appropriate action being taken against the assessee, if so warranted- and that is exactly what the Assessing Officer has done. The stand of the Assessing Officer is, in our humble understanding, quite apt and bonafide. It cannot be faulted.

The ITAT was pleased to set aside the order and judgment passed by the Commissioner “Learned Commissioner was clearly in error in invoking powers under section 263 on the ground that the Assessing Officer failed to examine the investments of the trust complying with the provisions of Section 11(5) and Section 13(1)(d) of the Act. We disapprove his action.” Further, the learned Commissioner was not justified in subjecting the assessment order to revision proceedings on the ground that the Assessing Officer did not examine the matter regarding assessee’s control over Tata Sons Ltd, and whether, by virtue of such alleged control, any of the specified persons under section 13(3) received any benefits, and whether the investments made by the assessee trust were in violation of Section 13(2)(h). Subsequently, ITAT held that  “we are unable to see any reasons for holding the suspicion that some of the interest income may be from sources that are not qualified for exemption under section 11, and, for that reason, the verification about sources of interest income is required to be done extensively. Once all these details were on record, and there is not even a suggestion that any part of interest income is not qualified for exemption under section 11, we are unable to uphold the stand of the learned Commissioner that the subject assessment order was erroneous and prejudicial to the interest of the revenue for want of verifications of interest income sources.”

[Sir Ratan Tata Trust v. Deputy Commr. of Income Tax, ITA No. 3737/Mum/2019, decided on 28-12-2020]


Akshat Malpani, Advocate, Supreme Court of India and Delhi High Court

Hot Off The PressNewsTaxation

In view of the challenges faced by taxpayers in meeting the statutory and regulatory compliances due to the outbreak of COVID-19, the Government brought the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 (‘the Ordinance’) on 31st March, 2020 which, inter alia, extended various time limits. The Ordinance has since been replaced by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act.

The Government issued a Notification on 24th June, 2020 under the Ordinance which, inter alia, extended the due date for all Income Tax Returns for the FY 2019-20 (AY 2020-21) to 30th November, 2020. Hence, the returns of income which were required to be filed by 31st July, 2020 and 31st October, 2020 were required to be filed by 30th November, 2020. Consequently, the date for furnishing various audit reports including tax audit report under the Income-tax Act, 1961 (the Act) was also extended to 31st October, 2020.

In order to provide more time to taxpayers for furnishing of Income Tax Returns, the due date was further extended vide notification No 88/2020/F. No. 370142/35/2020-TPL dated 29th October, 2020:

(A) The due date for furnishing of Income Tax Returns for the taxpayers (including their partners) who are required to get their accounts audited [for whom the due date (i.e. before the said extension) as per the Act was 31st October, 2020] was extended to 31st January, 2021.

(B) The due date for furnishing of Income Tax Returns for the taxpayers who are required to furnish report in respect of international/specified domestic transactions [for whom the due date (i.e. before the said extension) as per the Act was 30th November, 2020] was extended to 31st January, 2021.

(C) The due date for furnishing of Income Tax Returns for the other taxpayers [for whom the due date (i.e. before the said extension) as per the Act was 31st July, 2020] was extended to 31st December, 2020.

(D) Consequently, the date for furnishing of various audit reports under the Act including tax audit report and report in respect of international/specified domestic transaction was also extended to 31st December, 2020.

Considering the problems being faced by the taxpayers, it has been decided to provide further time to the taxpayers for furnishing of Income Tax Returns, tax audit reports and declaration under Vivad Se Vishwas Scheme. Further, in order to provide more time to taxpayers to comply under various ongoing proceedings, the dates of completion of proceedings under various Direct Taxes &Benami Acts have also been extended. These extensions are as under:

a.            The due date for furnishing of Income Tax Returns for the Assessment Year 2020-21 for the taxpayers (including their partners) who are required to get their accounts audited and companies [for whom the due date, as per the provisions of section 139(1) of the Income-tax Act,1961, was 31st October, 2020 and which was extended to 30th November, 2020 and then to 31st January, 2021] has been further extended to 15th February, 2021.

b.            The due date for furnishing of Income Tax Returns for the Assessment Year 2020-21 for the taxpayers who are required to furnish report in respect of international/specified domestic transactions [for whom the due date, as per the provisions of section 139(1) of the Income-tax Act,1961, was 30th November, 2020 and which was extended to 31st January, 2021] has been further extended to 15th February, 2021.

c.             The due date for furnishing of Income Tax Returns for the Assessment Year 2020-21 for the other taxpayers [for whom the due date, as per the provisions of section 139(1) of the Income-tax Act, 1961, was 31st July, 2020 and which was extended to 30th November, 2020 and then to 31st December, 2020] has been further extended to 10th January, 2021.

d.            The date for furnishing of various audit reports under the Act including tax audit report and report in respect of international/specified domestic transaction for the Assessment Year 2020-21 has been further extended to 15th January, 2021.

e.            The last date for making a declaration under Vivad Se Vishwas Scheme has been extended to 31st January, 2021 from 31st December, 2020.

f.             The date for passing of orders under Vivad Se Vishwas Scheme, which are required to be passed by 30th January, 2021 has been extended to 31st January, 2021.

g.            The date for passing of order or issuance of notice by the authorities under the Direct Taxes & Benami Acts which are required to be passed/ issued/ made by 30th March, 2021 has also been extended to 31st March, 2021.

Further, in order to provide relief for the third time to small and middle class taxpayers in the matter of payment of self-assessment tax, the due date for payment of self-assessment tax date is hereby again being extended. Accordingly, the due date for payment of self-assessment tax for taxpayers whose self-assessment tax liability is up to Rs. 1 lakh has been extended to 15th February, 2021 for the taxpayers mentioned in para 4(a) and para 4(b) and to 10th January, 2021 for the taxpayers mentioned in para 4(c).

The Government has also extended the due date of furnishing of annual return under section 44 of the Central Goods and Services Tax Act, 2017 for the financial year 2019-20 from 31st December, 2020 to 28th February, 2021.

The necessary notifications in this regard shall be issued in due course.


Ministry of Finance

[Press Release dt. 30-12-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal (ITAT), Mumbai: The Bench of Pramod Kumar (Vice President) and Pavan Kumar Gadale (Judicial Member) allows Foreign Tax Credit to Amarchand & Mangaldas under Indo-Japanese Tax Treaty.

The issue in the instant matter was:

“Whether or not the authorities below were justified in declining tax credit under Article 23(2) of India Japan Double Taxation Avoidance Agreement [‘Indo Japanese tax treaty’, in short; (1990) 182 ITR (Stat) 380– as amended from time to time], in respect of taxes of Rs 80,55,856 withheld by its clients fiscally domiciled in Japan, on the facts and in the circumstances of this case.

Alternatively, assessee pleaded that in the event of the assessee being declined the tax credit in respect of the taxes so withheld in Japan, the assessee should at least be allowed a deduction, for the said amount, in the computation of its professional income.

In the instant case, the assessee is one of India’s well-known firms and is assessed to tax in the status of a partnership firm.

Further, it was stated that the return filed by the assessee was subjected to scrutiny assessment proceedings. The assessee had claimed a foreign tax credit of Rs 80,55,856 in respect of taxes withheld by its clients in Japan.

Adding to the above, it was stated that the taxes so withheld were at the rate of 10% on gross billing amounts, by treating the professional fees earned by the assessee in Japan as taxable in Japan. 

Assessing Officer opined that the taxes were wrongly withheld in Japan and therefore the assessee was not entitled to a foreign tax credit in respect of the same.

Commissioner (Appeals) noted that the taxes withheld by the Japanese clients were contrary to the scheme of the Indo Japanese tax treaty, and, therefore, the assessee was not entitled to any foreign tax credit for the same.

Being aggrieved with the above, assessee appealed before the Tribunal.

Analysis and Decision

Tribunal observed that there was no dispute about the fundamental legal position in terms of Article 23(2)(a) of Indo Japanese tax treaty,

“where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in Japan, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Japanese tax paid in Japan, whether directly or by deduction.”

Further, the bench stated that

What essentially follows is that when in accordance with the provisions of Indo Japanese tax treaty, any income of Indian resident is taxed in Japan, the Indian resident will get the deduction, in the computation of his tax liability, taxes paid by the assessee in Japan- whether paid directly by the assessee or whether taxes were withheld in Japan.”

Issue to adjudicate:

Whether the assessee could reasonably be said to be taxable in Japan under Article 12, in respect of the professional income earned in Japan, of the Indo Japanese tax treaty?

Tribunal made another observation that there are overlapping areas in the definition of fees for technical services under Article 12(4), which covers’ technical, management and consultancy services’ vis-à-vis the definition of professional services income from which can be taxed under Article 14 as ‘income from independent personnel services’.

While continuing with the above observations, tribunal added that when a particular type of income is specifically covered by a treaty provision, the taxability of that type of income is governed by the specific provisions so contained in the treaty.

“When we are interpreting a treaty provision, we cannot be guided by any one rule of interpretation alone even when the results achieved on that basis come in conflict with the results reached at by way of applying the other applicable principles.”

Tribunal concluded that unless the provisions of Article 14 are held to be applicable only for individuals, the exclusion clause under Article 12(4) being confined to the individuals earning income taxable under Article 14 does not make sense.

“principles of interpretation of treaties, as indeed any statutory provision or legal document, are to be applied in a holistic manner, and no one principle of interpretation, howsoever well established, can have priority over another principle of interpretation which is legally binding.”

Bench in view of the above discussion found that under the scheme of this treaty, what is taxable under Article 14 is only the professional income of an individual and not of entities other than individuals.

“…in the scheme of the Indo Japanese tax treaty, Article 14 for independent personal services holds the field for the individuals only- particularly in the light of the exclusion clause under Article 12(4) being restricted to payment of fees for professional services to individuals alone.”

Hence, Tribunal found that the assessee was wrongly declined tax credit of Rs 80,55,856.

While parting with the decision, Tribunal expressed that in a situation in which a transaction by a resident of one of the contracting states is to be examined in both the treaty partner jurisdictions, from the point of view of taxability of income arising therefrom, different treatments being given by the treaty partner jurisdictions will result in incongruity and undue hardship to the assessee.

“…on the peculiarities of Indo Japanese tax treaty provisions, the legal fees paid to a partnership firm of lawyers can indeed be subjected to levy of tax under Article 12 as the exclusion clause under Article 12(4) does not get triggered for payments to persons other than individuals, and the provisions of Article 14 are required to be read in harmony with the provisions of Article 12(4).”

[Amarchand & Mangaldas & Suresh A Shroff & Co. v. Asst. Commr. of Income Tax, 2020 SCC OnLine ITAT 500, decided on 18-12-2020]


Appearances by:

Dr S M Lala, Dishesh Shrivastava, and Harsh Bafna, for the appellant.

S S Iyengar for the respondent.

Case BriefsTribunals/Commissions/Regulatory Bodies

Central Information Commission (CIC): Neeraj Kumar Gupta (Information Commissioner) decided whether disclosure of income tax returns of the husband to wife under RTI Act is permissible or not.

Appellant had filed an application before the CPIO, Income Tax, Jodhpur seeking information with regard to the income tax returns filed by Mohammed Rafique for the period of 2017 to 2018.

Being dissatisfied from non-provision of the requested information, the appellant approached the Commission by filing a second appeal under Section 19(3) of the Right to Information Act.

Decision

Commission on perusal of the records observed that the information sought by the appellant regarding the copies of income tax return of her husband, etc. is personal information of the third party which cannot be disclosed under Section 8(1)(j) of the RTI Act.

Further, the Commission referred to the judgment of the Supreme Court in Girish Ramchandra Deshpande v. Central Information Commission, SLP (C) No. 27734 of 2012, decided on 03-10-2012wherein it was held that:

14. “The details disclosed by a person in his income tax returns are “personal information” which stand exempted from disclosure under clause (j) of Section 8(1) of the RTI Act, unless involves a larger public interest and the Central Public Information Officer or the State Public Information Officer or the Appellate Authority is satisfied that the larger public interest justifies the disclosure of such information.”

However, the Division Bench of the Madhya Pradesh High Court in Sunita Jain v. Pawan Kumar Jain, 2018 SCC OnLine MP 373 and Sunita Jain v. BSNL, WA No. 170 of 2015, decided on 15-05-2018, had in a matter where the information seeker had sought the salary details of her husband from the employer held as under:

“While dealing with the Section 8(1)(j) of the Act, we cannot lose sight of the fact that the appellant and the respondent No. 1 are husband and wife and as a wife she is entitled to know what remuneration the respondent No. 1 is getting. Present case is distinguishable from the case of Girish Ramchandra Deshpande (supra) and therefore the law laid down by their Lordships in the case of Girish Ramchandra Deshpande (supra) are not applicable in the present case. In view of the foregoing discussion, we allow the appeal and set aside the order passed by the Writ Court in W.P. No.341/2008. Similarly, the W.A. No.170/2015 is also allowed and the impugned order passed in W.P. No.1647/2008 is set aside.”

Bombay High Court’s decision in Rajesh Ramachandra Kidile v. Maharashtra SIC, WP No. 1766 of 2016, dated on 22-10-2018.

In view of the above-stated analysis and the judgments of the Higher Courts, the Commission directed the respondent to inform the appellant about the generic details of the net taxable income/gross income of her husband held and available with Public Authority for the period of 2017-18, within a period of 15 working days from the date of receipt of this order.

In view of the above observations, the appeal was disposed of. [Rahmat Bano v. CPIO, 2020 SCC OnLine CIC 1119, decided on 06-11-2020]

Case BriefsHigh Courts

Kerala High Court: Vinod Chandran J., while answering the law points in favour of the Revenue department, restrained from any recovery of the amounts refunded, “(…)since as of now the levy of service tax on the payment in lieu of foreign agency commission will not be leviable as ‘Business Auxiliary service’ prior to 18-04-2006”

 Background

The appellant is a processor and exporter of seafood. The controversy herein is with respect to the refund of service tax paid by the appellant for services rendered prior to 18-04-2006 when service tax on foreign agency commission was not leviable. The appellant had paid tax without any reluctance or objection. Later, the High Court of Bombay in Indian National Ship Owners Association v. Union of India, 2009 (13) STR 235 (Bom) held that service recipient in India is liable to service tax for payments in lieu of service received from abroad only from 18-04-2006 after Section 66A was incorporated in the Finance Act, 1994. The Supreme Court upheld the judgment of the High Court of Bombay on 14-12-2009, within eight months of which application for refund was filed by the appellant before the original authority. The original authority allowed the claim against which a review was filed, which was rejected. Later, in the first appeal, the refund order was set aside against which the aggrieved party approached CESTAT, which finally ended concurring with the decision of setting aside the order of directing refund.

 Issues

(a) Whether the Appellate Tribunal was right in setting aside the order passed by the Deputy Commissioner in refunding the amount collected illegally by the department?

(b) When service tax on foreign agency commission came into force only on 18-04-2006 by the introduction of Section 66A in the Finance Act, 1994, whether the Tribunal erred in setting aside the order of refund on the ground of limitation in submitting the application for refund?

(c) When the amount collected by the department does not have the colour of legality, whether Section 11B of the Central Excise Act, 1944 is attracted so as to refuse the claim of refund made by the assessee?

(d) Whether the impugned order is against the mandate of Article 265 of the Constitution of India?

 Contentions

Counsel for the Appellant, placed reliance on the decision of the present Court in CE Appeal no. 14 of 2018, decided on 03-09-2018, VP Khader v. The Commissioner for Central Excise, Service Tax and Customs, so to submit that the payments were made by mistake in law and hence the same has to be refunded even if the application is not filed within the time provided.

Standing Counsel, Sri Ramavarma Reghunathan Thamburan for Central Board of Excise and customs relied on the decision of Supreme Court in Mafatlal Industries Ltd. v. Union of India, (1997) 5 SCC 536 and a decision of this Court reported in Southern Surface Finishers v. Assistant Commissioner of Central Excise, 2019 KHC 47.

Observations

The present Court considered the Supreme Court decision in Southern Surface Finishers, wherein it was found that, “(…) the mistake if committed by the assessee, whether it be on law or facts; the remedy would be only under the statute.” The Court elaborating upon the same view, said, “If that be so, the questions of law have to be answered in favour of the Revenue and against the assessee. But, however, we notice that the amounts have been refunded to the assessee as per the order of the original authority. In such circumstances, the Revenue would have to recover the amounts from the assessee, in which event we would be directing recovery of an amount which cannot be treated as tax due under Article 265 of the Constitution of India.”

Further, the Court took notice of the decision in CIT, Madras v. P Firm Muar, AIR 1965 SC 1216, wherein it was held, “If a particular income is not taxable under the Income Tax Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is out of place in tax law; a particular income is either exigible to tax under the taxing statute or it is not. If it is not, the Income-tax Officer has no power to impose tax on the said income”.

 Decision

Disposing of the present appeal, the Court said, “In such circumstances, though we answer the question of law in favour of the Revenue, we find the Revenue to be incapable of recovery of the amounts refunded as tax due.” [Uniroyal Marine Exports v. CCE,  2020 SCC OnLine Ker 5175, decided on 17-11-2020]


Sakshi Shukla, Editorial Assistant has put this story together

Case BriefsHigh Courts

Delhi High Court: Suresh Kumar Kait, J., while addressing the present matter, observed that,

Providing information regarding an ongoing investigation to its informer is not only inappropriate but also injurious to the ongoing investigation.

The instant petition was filed under Section 482 of Criminal Procedure Code, 1973 seeking setting aside of the orders passed in Rajiv Yaduvanshi v. Principal Director, Income Tax (Investigation-I), Crl. 102 of 2020.

Background

Investigation unit of the Income Tax Department received a Tax Evasion Petition by respondent 1 against Vandana Sodhi and Sandeep Sumbly (respondents 2 and 3, respectively).

The Tax Evasion Petition after going through the due procedure was marked to the Dy. Director of Income Tax, Investigation Unit 8(4) under the administrative control of Principal Director of Income Tax (Investigation-2). Department further commenced the proceedings as per the Standard Operating Procedure. 

On 23-09-2020, an “Application for Calling Status Report” was filed by respondent 1. In the said application, an ex-parte order was passed.

On 05-10-2020, the said application was again listed before ACMM and it was directed that a status report be filed. Thereafter the said application was again listed before the ACMM and time was sought on behalf of the petitioner as the concerned PDIT had been transferred. Again on 28-10-2020, the said application was again listed before the ACMM, wherein a Notice was issued.

Contention

Respondent 1 accepted the notice and counsel for respondent 1 submitted that the filed application before the Court to know the status of the investigation and the petitioner department is duty-bound to comply with the directions passed by ACMM.

Petitioners Counsel submitted that impugned order passed by ACMM calling for a status report were passed without jurisdiction as no provision of the CrPC gives such power to the ACMM.

Further, the counsel added that, it is a settled principle of law that neither the ACMM nor any Court below, however, only this Court has inherent powers under CrPC.

It was noted in the instant case that, respondent 1 had filed an application without any procedure mentioned in CrPC or Income Tax Act. Moreover, the Judge passed directions after directions without realizing even that he does not have inherent powers under CrPC.

Decision

Court observed that the said application was filed under Section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Rules Act, 2015 and ACMM did not consider Section 55 of the said Act.

In view of the above, ACMM usurped the inherent jurisdiction of this Court which is impermissible under the law.

Moreover, in the cases pertaining to Tax Evasion Petitions, this Court also exercises its powers sparingly and it is a well-settled principle that only the broad outcome of Tax evasion petition may be communicated to the complainant, that too upon culmination of the investigation.

Income Tax Department has a specific framework of investigations dealing with the TEPs and information in respect of the investigation carried out by the office of Directorate General of Income Tax (Investigation) is not required to be intimated to the complainant as the said office is even outside the purview of the RTI Act, 2005.

Reliance on the decision of the Central Information Commission was placed:

S.K. Agarwalla v. Directorate General of Central Excise Intelligence, CIC/AT/A/2007/01455, in this decision the appellant vide an RTI application requested information relating to the progress of the case under investigation, wherein it was held as under:

“..although speedy investigations in matters of revenue- evasion is salutary goal, it would be inappropriate and even injurious, to ongoing investigations if informers are allowed to intrude into the investigative progress all in the name of enforcing a Right to Information. Intrusive supervision of investigation work of public authorities especially by interested parties has the effect of impeding that process, in the sense it exposes the officers to external pressures and constricts the freedom with which such investigations are to be conducted. Commission also felt that there is no reason why officers of public authorities should space their investigations to benefit informants. Intrusive interference in investigation work is not conductive to such investigations and, in that sense, impedes it.”

Court held that since the application filed by respondent 1 before the ACMM was without the provisions of either CrPC or Income Tax Act which is bad in law.

Hence, the orders passed by Judge are declared as illegal, perverse and without jurisdiction and therefore the same are set aside. [Principal Director, Income Tax (Investigation-2) v. Rajiv Yaduvanshi, Crl. MC No. 2140 of 2020, decided on 06-11-2020]

Op EdsOP. ED.

Death and taxes in life are certain, knowing how to pay only your fair share is third.

                                                                                                                                       Yvette D.

Income Tax Return (‘ITR’), an annual record of income, enables a taxpayer to declare his income, expenses, tax liability, deductions, savings, investments, etc. during the applicable Fiscal Year [i.e. Financial Year (‘FY’) – a period from April 1 to March 31]. This annual record is to be mandatorily submitted to the Indian revenue authorities in a prescribed format, known as the ITR form. In India, tax on income for individuals, is levied at slab rates i.e. lower income is taxed at a lower rate and higher income at a higher rate. This is also known as vertical equity i.e. people with higher income are placed higher up the ladder and therefore are required to shell out more taxes compared to those with lower income who are placed at the lower end of the ladder. The Income Tax Act, 1961[1] (‘the Act’) and the related rules cast a legal obligation on every individual to file ITR, wherein the total income for the year exceeds the basic exemption limit of INR 2.5 lakhs, which is not chargeable to income tax as per the applicable provisions. However, in case of companies, there is no such basic exemption limit and it becomes mandatory to file the ITR annually.

An assessee, in simpler terms, means a person by whom any tax or any other sum of money is payable under the Act. The total income of an assessee for the FY/Previous Year (‘PY’) is taxable in the relevant Assessment Year (‘AY’). For example, the total income for PY 2019-20 (i.e. from
April 1, 2019, to March 31, 2020) is taxable in  AY 2020-21.

Why taxes are levied? Can the Government collect the taxes arbitrarily?

One of the primary reasons for levy of taxes in India, is that it constitutes the basic source of revenue for the Government, which is further utilised to meet the expenses for development purposes like
health care, infrastructure, provision of education, defence, etc. and public welfare.

  • Article 265 of the Constitution of India, lays down that “No tax shall be levied or collected except by authority of law”.
  • Parliament and State Legislatures are empowered to makes laws on the matters enumerated in the 7th Schedule by virtue of Article 246 of the Constitution of India.
  • The 7th Schedule to Article 246 contains 3 lists which enumerate the matters under which Parliament and the State Legislatures have the authority to make laws for the purpose of levy of taxes.
  • One of the 3 lists is the ‘Union List’, on the matters of which, only Parliament has the exclusive power to make laws.
  • Entry 82 of the ‘Union List’ has given the power to Parliament to make laws on taxes on income other than agricultural income.

Article 265 –> Article 246 –> 7th Schedule –> Union List –> Entry 82 –>Income Tax

Therefore, the Government derives its powers to frame laws on taxes directly from the Constitution of India.

IMPORTANCE OF ITR FILING

The ITR serves as an income proof and is very critical for the following reasons:

  1. Claiming refunds or deductions: Deductions are one of the ways to reduce the overall tax liability and save unnecessary tax leakage. By filing ITRs, a person can get refund of Tax Deducted at Source (‘TDS’) subject to certain conditions.
  2. Carry forward of losses: In situations wherein losses have been incurred for a particular year, even then the ITR should be filed so that the assessee can carry forward the losses to set off against the gains of the subsequent years, subject to certain conditions. This is one of the efficient ways to reduce the burden of tax in the forthcoming years.
  1. Visa Processing: Foreign consulates often ask for ITRs of past few years, at the time of visa process. Thus, it becomes an important document while travelling overseas.
  1. Government Tender: Individuals that plan to start their own business and are required to fill government tenders, have to furnish ITR of preceding years. It serves as a proof of financial status and acts as a check on timely payment of obligations.
  1. Fee/Prosecution for non-filing or late filing of ITR: Under the Act, non-filing or late filing of ITR can attract a fee of INR 1,000 if the total income does not exceed INR 5 lakhs. In other circumstances, a penalty of INR 5,000 or INR 10,000 is levied (as the case may be), leading to legal implications for the taxpayers who are mandatorily required to file as per the provisions. Further, a willful failure to furnish ITR in due time may lead to rigorous imprisonment of 3 months to 7 years and fine.

MODES OF TAX COLLECTION

Some of the important modes of collecting taxes from taxpayers are in the form of TDSAdvance Tax and Self-Assessment Tax. The taxes are deductible from the total tax due from the assessee. Additionally, every person whose estimated tax liability for the year is INR 10,000 or more shall pay tax in advance i.e. advance tax subject to few exceptions. Advance tax also known as ‘pay-as-you-earn’ refers to paying a part of the taxes before the end of the FY rather than paying the complete amount at the end of the FY. This helps the Government to get a constant flow of income throughout the year and is beneficial for the assessee to avoid any interest on taxes for late payment.

The assessee, while filing ITR, needs to pay Self-Assessment Tax under Section 140-A of the Act, if tax is due on the total income as per his ITR after adjusting, inter alia, TDS, relief of tax, tax credit, advance tax, etc. However, it is to be noted that a senior citizen of age 60 years or above who does not have any income chargeable under the head “Profits and Gains of Business or Profession” is not liable to pay advance tax and can discharge their tax liability (other than TDS) by payment of Self-Assessment Tax.

EXEMPTIONS VIS-À-VIS DEDUCTIONS: A CONUNDRUM

One of the common conundrum that exists among the taxpayers is the difference between deductions and exemptions. Not all that one earns is taxed in India. Yes! The Government provides exemptions which are applicable on certain types of income, such as agriculture income is exempt from income tax in India. The various items of income that are mentioned in Section 10 of the Act are excluded from the total income of an assessee and hence are known as exempted incomes.

Now, what if the income earned by the individual is not exempted? Is there still a ray of hope? Yes, of course. There are certain other incomes which are included in the Gross Total Income but are wholly or partly allowed as deductions while computing the total income.

Rent paid – claim exemption or deduction

One of the most common exemption/deduction claimed by an assessee is for the rent paid while filing ITR. This can be availed by using House Rent Allowance (‘HRA’) under Section 10(13-A) of the Act or deduction of rent paid under Section 80GG of the Act. HRA is an allowance granted by an employer to its employee towards payment of rent for residence of the employee. Tax exemption on HRA can be claimed on satisfaction of certain conditions. Whereas, Section 80GG of the Act provides relief to those individuals who do not receive HRA.

ITR FORMS AND THEIR APPLICABILITY

Certain sections of society consider the ITR process to be cumbersome. However, it is of significant importance to consider that people with different income levels/sources are required to file different ITR forms. Every individual is not required to provide detailed information and calculations. For example, a salaried employee who earns a modest salary and has no other source of income except salary, the government has provided a plain-vanilla ITR form which actually becomes a child’s play. The assessee has to judiciously ascertain the ITR form applicable as follows:

TABLE: ITR FORMS[2]

ITR 1

(Sahaj)

  • For individuals having income from salaries, one house property, other sources (interest etc.) and;
  • Having total income up to INR 50 lakhs;
  • It is not applicable to directors of a company or shareholders in an unlisted company.
ITR 2
  • For individuals and HUFs

[3] not carrying out business or profession under any proprietorship.

ITR 3
  • For individuals and HUFs having income from a proprietary business or profession.
ITR 4 (Sugam)
  • For presumptive income from Business and Profession;
  • Not for an individual who is either Director in a company or has invested in unlisted equity shares.
ITR 5
  • For persons other than:

(i) Individual,
(ii) HUF,
(iii) Company, and
(iv) Person filing Form ITR-7.

ITR 6
  • For companies other than those claiming exemptions under Section 11 of the Act.
ITR 7
  • For persons including companies required to furnish return under Sections 139(4-A) or 139(4-B) or 139(4-C) or 139(4-D) or 139(4-E) or 139(4-F) of the Act.

ITR can be filed either online or offline. The introduction of online or electronic filing (‘E-filing’) portal has made the ITR filing comparatively swifter and easier compared to earlier days making it a child’s play.

FORM 26 AS: A CONSOLIDATED FORM

Form 26AS is a consolidated annual tax statement that reflects details of TDS, Tax Collected at Source, Advance Tax, Self-Assessment Tax, against the taxpayer’s Permanent Account Number (PAN). Basically, it is the record of all the transactions (certain to some conditions) made or done against one’s individual PAN. The Budget for 2020-21 further revised Form 26AS with an aim to provide a more comprehensive profile of the taxpayer which would include all high value transactions like the details provided by banks and financial institutions too.[4] This is to enhance the flow of information between the taxpayers and the tax authorities. As a result, all the information is available and collected in a consolidated form that is Form 26AS. This in turn facilitates correct ITR filing as the assessee can cross-check the details of income and taxes, thereby making Form 26AS a very important document while filing ITR. For instance, if the employer quotes an incorrect PAN of any employee, TDS deducted will not be reflected in the employee’s Form 26AS. Further, certain high value transactions are also reported in Form 26AS now thus, bringing everything under the Government scanner now.

 CONCLUSION

 Filing ITR is a legal, moral and social duty of every citizen of the country. It provides a platform to the assessee to claim refund of taxes already paid, apart from other reliefs and act as a basis for the Government to determine the revenue generated in the country and accordingly form public welfare policies. The number of registered users on the Income Tax India E-filing Portal as of August 31, 2020 was 9.47 crores[5] out of approximately 138 crores of population. Now, any individual can easily file ITR by visiting www.incometaxindiaefiling.gov.in and creating own income-tax account simply using their PAN. Considering the Covid-19 pandemic and with a view to providing immediate relief to the business entities and individuals, in a press release dated July 17, 2020, the Ministry of Finance stated that the Income Tax Department refunded INR 71,229 crore to more than 21.24 lakh taxpayers. The last date to file ITR for AY 2019-20 was September 30, 2020 which has been extended to November 30, 2020[6] and for AY 2020-21 it was November 30, 2020, which has been extended till December 31, 2020[7]. It is observed that the citizens consider the whole procedure of ITR filing, to be tedious, however, it is undeniable that India is moving towards creating an easier, simpler and efficient tax system with the introduction of e-filing and newly introduced tax reforms.


*Author is an Economics graduate and also holds a Master’s degree in Economics. Currently, in her final year of LLB (Symbiosis Law School, Pune) wherein she secured merit scholarship for holding first rank in her batch. Author has undergone numerous internships with certain renowned law firms like Khaitan & Co. and L&L Partners, New Delhi. The views expressed in this article are solely of the author and does not relate to the views of any other person or firm.

[1] Income Tax Act, 1961

[2] incometaxindia.gov.in

[3]HUF stands for Hindu Undivided Family

[4] Union Budget 2020-21, Ministry of Finance, Government of India

[5] https://www.incometaxindiaefiling.gov.in/moreStatistics

[6] F.No. 225.150/2020-ITA-II, dated 30-9-2020

[7] CBDT issues Press Release for extension of due dates for filing Income tax Returns and Tax Audit Reports under the Income Tax Act, 1961 for AY 2020-21, dated 25-10-2020.

Hot Off The PressNews

The Income Tax Department has carried out a search and seizure action on 14-10-2020 in the case of a leading advocate practicing in the field of commercial arbitration and alternate dispute resolution. He was suspected to be receiving substantial amounts in cash from his clients, to settle their disputes. During the search 38 premises spread over Delhi, NCR and Haryana have been covered.

            During the search, cash of Rs 5.5 crore has been seized, while 10 lockers have been placed under restraint. Incriminating documents of unaccounted cash transactions and investments made by the assessee over several years have been found. Substantial digital data reflecting unaccounted transactions of the assessee and his associates, who are financers and builders, has also been recovered.

            In one case, the assessee had received Rs 117 crore from a client in cash, whereas he had shown only Rs 21 crore in his records, which was received through cheque. In another case, he received more than Rs 100 crore in cash from an infrastructure and engineering company for its arbitration proceedings with a public sector company.

            The unaccounted cash received, has been invested by the assessee in the purchase of residential and commercial properties and in taking over of trusts engaged in running of schools. Evidences recovered indicate an investment of more than Rs 100 crore in cash in several properties in posh areas in the last two years. The assessee and his associates have also purchased several schools and properties, for which also more than Rs 100 crore was paid in cash. He has also taken accommodation entries worth several crores.

            Further investigations are in progress.


Ministry of Finance

[Press Release dt. 15-10-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal, Mumbai: Dealing with the issue on disallowance under Section 14A of the Income Tax Act, 1961, the Tribunal has reiterated that no deduction is allowed in respect of expenditure incurred by the Assessee in relation to income which does not form part of the total income under this Act.

The Assessee, in the present case was engaged in the business of banking including foreign exchange transaction. It has branches in India and head office is based out in Muscat. Assessment proceedings were initiated against the Assessee, involving following issues: –

  1. Assessee credited an amount of ₹ 14,35,542/– as interest received from the head office in its profit and loss account but in the computation of income filed along with the return of income, it has reduced the above said interest income from the taxable income stating that the same is not taxable as it is received from head office. The Assessing Officer brought the above interest received from head office as taxable income of the Assessee.
  2. Assessee claimed for deduction of specifically incurred expenses by Head Office on behalf of Indian branches of ₹ 45,164/– which were justified by the Assessee as travel expenses and certification fees. The Assessing Officer rejected the contention of the Assessee and made the disallowance of ₹ 45,164/–
  3. Assessee debited an amount of ₹ 1,64,68,864/– on account of interest paid to the Head Office. In the computation of income, the Assessee added back to the total income stating that the same is not claimed as a deduction in view of the fact it is a payment to self and hence no expenses incurred on amount of payment to self. The Assessing Officer treated the interest received from head office as taxable income and interest paid to head office not treated as taxable since the Assessee has added back this amount to the total income.

Aggrieved by the order passed by the Assessing Officer, Assessee preferred an Appeal before the CIT(A) whereby CIT (A): –

  1. deleted the interest income received from head office of ₹ 14,35,542/– being income to self and holding the principle of mutuality as provided under the Act is applicable in respect of interest income earned from Head Office.
  2. deleted the disallowance of ₹ 45,164/- under Section 37 of the Act.
  3. confirmed that when the income of the assessee is not taxable, the provision of section 14A is applicable for expenditure incurred on income not part of taxable income.

Being aggrieved by the said order, both the parties preferred an Appeal before the ITAT, whereby the issue no. 1 and 2 decided by CIT where upheld. In reference to issue no. 3 the ITAT held that the interest income earned by Assessee dealing with Head Office held that the transaction between the head office and its branch office shall be treated like mutual concerns and all the transaction between them shall be eliminated.

“Therefore, we do not agree with the assessee that only exempt income which is not part of total income alone should be considered to disallowance u/s 14A. As per the provision of section14A at that point of time, it clearly says that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. Nowhere it says it is confine to exempt income which is not form part of total income.”

The matter was, hence, remitted back to the AO to quantify the disallowance u/s 14A by eliminating the expenditure relevant for earning the above said income, it may not the interest expenditure alone, it will include the administrative and other expenditure.

[DCIT (IT) Versus Oman International Bank S. A. O. G. (now known as HSBC International Bank S.A.O.G.) I.T.A. No. 4174/Mum/2014. Decided on 15.09.2020]


Advocate, Supreme Court of India and Delhi High Court 

Case BriefsHigh Courts

Patna High Court: In a petition alleging Section 234E of the Income Tax Act, 1961 to be unconstitutional, ultra vires and in contravention of the Constitution of India, Division Bench of Sanjay Karol, CJ., and S. Kumar, J., disposed of the petition refuting all the said allegations and upholding Section 234E as constitutionally valid.

Two fold submissions have been made by the petitioner in the present petition which are (1) constitutional validity of Section 234E of the Income Tax Act, 1961 is challenged; (2) Initiation of proceedings under Section 200A of the Income Tax Act, 1961 is bad in law.

The factual matrix in the present matter is such that a fee for default in furnishing statement under heading Levy of fee in certain cases in chapter XVII-Collection and Recovery-Interest Chargeable has been levied on the petitioner and the same has been challenged.

While dealing with the first issue whereby the constitutional validity of Section 234E of the Income Tax Act, 1961 has been challenged, the Court found no substance in the said contention raised by the petitioner. It is held that under no circumstances can it be implied that the aforementioned statute has was passed by an incompetent legislature or that it has infringed the rights guaranteed under Part III of the Constitution of India. Section 234E is reproduced below for reference-

“234E. Fee for default in furnishing statements.

—(1) Without prejudice to the provisions of the Act, where a person fails to deliver or cause to be delivered a statement within the time prescribed in sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C, he shall be liable to pay, by way of fee, a sum of two hundred rupees for every day during which the failure continues.

(2) The amount of fee referred to in sub-section (1) shall not exceed the amount of tax deductible or collectible, as the case may be.

(3) The amount of fee referred to in sub-section (1) shall be paid before delivering or causing to be delivered a statement in accordance with sub-section

(3) of section 200 or the proviso to sub-section (3) of section 206C.

(4) The provisions of this section shall apply to a statement referred to in sub-section (3) of section 200 or the proviso to sub-section (3) of Section 206C which is to be delivered or caused to be delivered for tax deducted at source or tax collected at source, as the case may be, on or after the 1st day of July, 2012.”

Further, relying on the position adopted by other Indian Courts of law while settling a similar issue in a string of case laws, the Court dismissed this contention raised by the petitioner basis the judgments delivered in the cases of Rashmikant Kundailia v. Union of India, (2015) 373 ITR 0268 (Bom), Dr Amrit Lal Mangal v. Union of India, (2015) 235 Taxman 0410 (P &H) and Biswajit Das v. Union of India, (2019) 413 ITR 0092 (Delhi).

Now with respect to the second contention of the petitioner that the proceedings under Section 200A of the Income Tax Act, 1961 is bad in law, the counsel for the petitioner, D.V. Pathy has submitted that the petitioner will be taking recourse under the statutory remedy that is available to him. He pleads for the issue of limitation to be relaxed.

Counsel of the respondents, Archana Sinha has submitted that the issue of limitation shall not be raised during the proceedings given that the petitioner takes recourse under the statute within a period of thirty days from the date of passing of this order.

In view of the facts, circumstances, authorities cited and the arguments advances, the Court disposed of the petition with the direction that the subject of limitation shall not come into the picture if statutory proceedings are initiated within a period of thirty days from the date of this order.[L.N. Sales Pvt. Ltd. v. Union of India, 2020 SCC OnLine Pat 1232, decided on 20-08-2020]

Legislation UpdatesNotifications

Central Board of Direct taxes notifies a clarification that the imposition of a charge on the prescribed electronic modes under Section 269 SU of the Income Tax Act.

Based on Section 10 A of the Payment and Settlement Systems Act, 2000, any charge including the Merchant Discount Rate shall not be applicable on or after 01-01-2020 on payment made through prescribed electronic modes.

However, representations have been received that some banks are imposing and collecting charges on transactions carried out through UPI. A certain number of transactions are allowed free of charge beyond which every transaction bears a charge.

The above-stated act on part of banks is a breach of Section 10 A of the PSS Act as well as Section 269SU of the IT Act. Such breach attracts penal provisions under Section 271 DB of the IT Act as well as Section 26 of the PSS Act.

Therefore, bank are advised to immediately refund the charges collected, if any, on or after 1st January, 2020 on transactions carried out using the electronic modes prescribed under Section 269 SU of the IT Act and not to impose charges on any future transactions carried through the said prescribed modes.

Following were prescribed electronic modes under Section 269 SU of the Income Tax Act:

  • Debit Card powered by RuPay
  • Unified Payments interface (UPI)(BHIM-UPI)
  • Unified Payments Interface Quick Response Code (UPI QR Code) (BHIM-UPI QR Code)

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal, Hyderabad: Dealing with the issue on accommodation entries and bogus purchases, the Tribunal has said that the entire purchase cannot be treated as a bogus purchase when there is evidence to establish that the payment was carried out through banking channels.

The Assessee, in the present case, is an individual who is engaged in the business of trading gold and gold ornaments in the name and style of M/s Vijay Jewelers. Search and seizure under Section 132 of the Income Tax Act on three individuals, revealed that these individuals were providing accommodation entries for the purchase of gold and gold Jewelry to various entities including the proprietary concern of the Assessee. It was further revealed that the Assessee had obtained accommodation entries for the purchase of gold from them and various other individuals.

The Assessee failed to prove the credit-worthiness of the individuals from whom the gold and ornaments were purchased. Though the Assessee was able to furnish the bank statements and vouchers to substantiate a claim that the payment was done via cheque.

The Assessing Officer placed its reliance on the decision passed by the  Supreme Court in the case of Kachwala Gems v. CIT, (2007) 12 SCC 761 and held that the purchase made by the Assessee from those individuals is a bogus transaction.  Therefore, the Assessing Officer estimated 10% of the bogus purchase as the undisclosed income of the Assessee.

On Appeal, the Commissioner of Income Tax (Appeal) opined that the entire bogus purchase has to be added to the income of the Assessee and accordingly enhanced the addition.

Being aggrieved by the addition done by the CIT(A) the Assessee preferred an Appeal before the Income Tax Appellate Tribunal which was called upon to decide whether the CIT(A) was justified in enhancing the addition by treating the entire bogus purchase of the Assessee as his income?

The Tribunal set aside the order passed by the CIT(A) and held that the CIT(A) was not justified to enhance the addition by treating the entire bogus purchases as the income of the Assessee. It placed reliance on the payment of the purchases which were done via banks and were the accounted money of the Assessee. Further, the gold and ornaments were either sold by the Assessee or were treated as his business stock. Confirming the  estimated 10% of the bogus purchase as the undisclosed income of the Assessee by the AO, the Tribunal said,

“Though the payment made by the assessee towards the purchases are through banking channels, it is also revealed that the suppliers were issuing bogus bills and vouchers to various parties. In this situation, producing the bills and vouchers and evidencing the payment made through cheque alone will not establish that the transactions are genuine.”

Hence, setting aside the order of CIT(A), the Tribunal held,

“… the order of the Ld. CIT (A) to enhance the addition by treating the entire bogus purchases as the income of the Assessee is not appropriate because it is evident that the Assessee had made purchases apparently from his accounted money as the payments have made through banking channels.”

[Bhagatram Hyderabad v. Asst. Commissioner of Income Tax, 2020 SCC OnLine ITAT 345, decided on 28-07-2020 ]

Case BriefsSupreme Court

Supreme Court: Dealing with the question as to whether disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 is confined/limited to the amount “payable” and not to the amount “already paid”, the bench of AM Khanwilkar and Dinesh Maheshwari, JJ held that the expression “payable” is descriptive of the payments which attract the liability for deducting tax at source and it has not been used in the provision in question to specify any particular class of default on the basis as to whether payment has been made or not. Stating that the term “payable” has been used in Section 40(a)(ia) of the Act only to indicate the type or nature of the payments by the assessees to the payees referred therein, the Court said that the argument that the expression “payable” be read in contradistinction to the expression “paid”, sans merit and could only be rejected.

Section 40(a)(ia) provides for the consequences of default in the case where tax is deductible at source on any interest, commission, brokerage or fees but had not been so deducted, or had not been paid after deduction (during the previous year or in the subsequent year before expiry of the prescribed time) in the manner that the amount of such interest, commission, brokerage or fees shall not be deducted in computing the income chargeable under “profits and gains of business or profession”.

The Court, further, said that

“Section 40(a)(ia) is not a stand-alone provision but provides one of those additional consequences as indicated in Section 201 of the Act for default by a person in compliance of the requirements of the provisions contained in Part B of Chapter XVII of the Act.”

Explaining the scheme of the Act, the Court said that Section 194C is placed in Chapter XVII of the Act on the subject “Collection and Recovery of Tax”; and specific provisions are made in the Act to ensure that the requirements of Section 194C are met and complied with, while also providing for the consequences of default. Section 200 specifically provides for the duties of the person deducting tax to deposit and submit the statement to that effect. The consequences of failure to deduct or pay the tax are then provided in Section 201 of the Act which puts such defaulting person in the category of “the assessee in default in respect of the tax” apart from other consequences which he or it may incur. Section 40 of the Act, and particularly the provision contained in sub-clause (ia) of clause (a) thereof, indeed provides for one of such consequences.

Hence, holding that when the obligation of Section 194C of the Act is the foundation of the consequence provided by Section 40(a)(ia) of the Act, reference to the former is inevitable in interpretation of the latter, the Court said that the scheme of these provisions makes it clear that the default in compliance of the requirements of the provisions contained in Part B of Chapter XVII of the Act (that carries Sections 194C, 200 and 201) leads, inter alia, to the consequence of Section 40(a)(ia) of the Act. Hence, the contours of Section 40(a)(ia) of the Act could be aptly defined only with reference to the requirements of the provisions contained in Part B of Chapter XVII of the Act, including Sections 194C, 200 and 201.

On the question whether sub-clause (ia) of Section 40(a) of the Act, as inserted by the Finance (No. 2) Act, 2004 with effect from 01.04.2005, is applicable only from the financial year 2005-2006 and not retrospectively, the Court said that

“It needs hardly any detailed discussion that in income tax matters, the law to be applied is that in force in the assessment year in question, unless stated otherwise by express intendment or by necessary implication.”

As per Section 4 of the Act of 1961, the charge of income tax is with reference to any assessment year, at such rate or rates as provided in any central enactment for the purpose, in respect of the total income of the previous year of any person. The expression “previous year” is defined in Section 3 of the Act to mean ‘the financial year immediately preceding the assessment year’; and the expression “assessment year” is defined in clause (9) of Section 2 of the Act to mean ‘the period of twelve months commencing on the 1st day of April every year’. The legislature consciously made the said sub-clause (ia) of Section 40(a) of the Act effective from 01.04.2005, meaning thereby that the same was to be applicable from and for the assessment year 2005-2006; and neither there had been express intendment nor any implication that it would apply only from the financial year 2005-2006.

The Court, hence, said

“We need not multiply on the case law on the subject as the principles aforesaid remain settled and unquestionable.”

 

[Shree Choudhary Transport Company v. Income Tax Officer, 2020 SCC OnLine SC 610 , decided on 29.07.2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal (ITAT), Mumbai: Explaining the law on disallowance u/s.40(a)(ia), the Tribunal has said that if the payees have included the subject mentioned transaction in their income tax returns, then the assessee payer should not be treated as assessee in default and disallowance u/s.40(a)(ia) of the Act should be deleted in its hands. It further stated,

“IF the subject mentioned transaction is not reflected in the income tax returns of the payees, then disallowance made in the hands of the assessee u/s 40(a)(ia) of the Act would remain in force.”

The Tribunal was dealing with a case pertaining to Tax Deduction at Sources and held that the advertisement charges paid to an agency which is a franchisee of a newspaper would attract TDS under Section 194 of the Income Tax Act, 1961.

The Tribunal held that any amount paid as a consideration for carrying out any work is liable for deduction of Tax at Source.

Background

The Assessee was in the business of import eye testing equipment mainly from M/s. Topcon Asia Pvt. Ltd., Singapore and selling them to eye doctors, eye hospitals, medical colleges etc., all over India. The Assessee also procured maintenance contracts, brake-down jobs, and other services to the customer through its engineers.

The Assessee made a one-time payment to the franchisee of “The Hindu” newspaper for advertising for hiring staff . It was argued that it was a one-time payment and no contract exist with the newspaper and accordingly, the provisions of Section 194C of the Act would not be applicable.

On Scrutiny, the Assession Officer disallowed the payment made u/s. 40(a)(ia) by the Assessee on account of advertisement expenses incurred without deduction of tax at source. The Order passed by the AO was upheld the CIT(A). Being aggrieved by the decision of the CIT(A) the Assessee preferred an Appeal before the ITAT.

Issue

Whether the CIT(A) was justified in confirming the disallowance made u/s 40(a)(ia) of the Act for an amount of Rs. 56,997/- on account of advertisement expenses without deduction of tax at source?

Finding

The ITAT was pleased to hold that the any Assessee who is responsible for paying any sum to any resident for carrying out any work in pursuance of a contract shall deduct tax at source thereon.

Further, in the present case the Assessee was responsible for paying the sum to the franchise as consideration for publishing the advertisement and therefore It was held that all the ingredients of Section 194C were fulfilled. Hence, it was held that the Assessee is liable for deduction of Tax at Source.

[Mehra Eyetech Pvt. Ltd. v. Add. Commissioner of Income Tax,  ITA No. 1760/Mum/2019,decided On 13.07.2020]

Case BriefsSupreme Court

Supreme Court: The 2-judge bench of AM Khanwilkar and Dinesh Maheshwari, JJ has held that for bringing any particular foreign exchange receipt within the ambit of Section 80-O of Income Tax Act for deduction, it must be a consideration attributable to information and service contemplated by Section 80-O; and in case of a contract involving multiple or manifold activities and obligations, every consideration received therein in foreign exchange will not ipso facto fall within the ambit of Section 80-O.

Factual Background

The appellants, who had been engaged in providing services to certain foreign buyers of frozen seafood and/or marine products and had received service charges from such foreign buyers/enterprises in foreign exchange, claimed deduction under Section 80-O of the Act of 1961, as applicable for the relevant assessment year/s. In both these cases, the respective Assessing Officer/s denied such claim for deduction essentially with the finding that the services rendered by respective assessees were the ‘services rendered in India’ and not the ‘services rendered from India’ and, therefore, the service charges received by the assessees from the foreign enterprises did not qualify for deduction in view of clause (iii) of the Explanation to Section 80-O of the Act of 1961.

ITAT Decision: As per the agreements with the referred foreign enterprises, the assessee had passed on the necessary information which were utilised by the foreign enterprises concerned to make a decision either to purchase or not to purchase; and hence, it were a service rendered from India

Kerala High Court Decision: Assessees were merely marine product procuring agents for the foreign enterprises, without any claim for expertise capable of being used abroad rather than in India and hence, the services rendered by them do not qualify as the ‘services rendered from India’, for the purpose of Section 80-O of the Act of 1961.

Supreme Court Ruling

Explaining the law on the issue the Court said that any foreign exchange receipt has to be attributable to the information or service contemplated by the provision and only that part of foreign exchange receipt, which is so attributable to the activity contemplated by Section 80-O, would qualify for claiming deduction. Such enquiry is required to be made by the Assessing Officer; and for the purpose of this imperative enquiry, requisite material ought to be placed by the assessee to co-relate the foreign exchange receipt with information/service referable to Section 80-O. Evidently, such an enquiry by the Assessing Officer could be made only if concrete material is placed on record to show the requisite correlation.

On the argument that Section 80-O of the Act is essentially an incentive provision and, therefore, needs to be interpreted and applied liberally, the Court said that that deductions, exemptions, rebates et cetera are the different species of incentives extended by the IT Act.

“Section 80-O is only one of the provisions in the Act of 1961 dealing with incentive; and even as regards the incentive for earning or saving foreign exchange, there are other provisions in the Act …”

Without expanding unnecessarily on variegated provisions dealing with different incentives, the Court said that it would be suffice to notice that the proposition that incentive provisions must receive “liberal interpretation” or to say, leaning in favour of grant of relief to the assessee is not an approach countenanced by this Court.

“at and until the stage of finding out eligibility to claim deduction, the ambit and scope of the provision for the purpose of its applicability cannot be expanded or widened and remains subject to strict interpretation but, once eligibility is decided in favour of the person claiming such deduction, it could be construed liberally in regard to other requirements, which may be formal or directory in nature.”

Applying the aforementioned principles, the Court noticed that, in the case at hand, all the clauses of the agreements read together make it absolutely clear that the appellant was merely a procuring agent and it was his responsibility to ensure that proper goods are supplied in proper packing to the satisfaction of the principal.

“Even if certain information was sent by the assessee to the principals, the information did not fall in the category of such professional services or information which could justify its claim for deduction under Section 80-O of the Act.”

The Court, hence, upheld the verdict of the High Court.

[Ramnath and Co. v. Commissioner of Income Tax, 2020 SCC OnLine SC 484 , decided on 05.06.2020]

Case BriefsSupreme Court

Supreme Court: In some relief to the financially stressed telecom giant Vodafone Idea, the bench of UU Lalit and Vineet Saran, JJ has directed a tax refund of Rs.733 Crores to the company within 4 weeks. The Court also directed the Income Tax department to conclude the proceedings initiated pursuant to notice under sub-section (2) of Section 143 of the Act in respect of AY 2016-17 and 2017-18 as early as possible.

Background of the case

Vodafone Idea had, however, sought Rs 4,759.07 crore in tax refund from for Assessment Years 2014-15, 2015-16, 2016-17 and 2017-18. The IT Department had, however, withheld the returns on account of multiple issues like Transfer Pricing Adjustment, Capitalization of Licence Fees, 3G Spectrum Fees, Asset Restoration Cost Obligation including the effect of amalgamation of group entities which required thorough scrutiny and determination. It had argued that processing any refunds, in light of pending special audit, scrutiny and tax demands of more than Rs 4,700 crore, will be prejudicial to the interest of the revenue department.

Vodafone Idea, on the hand, argued that after the lapse of the one-year period, by reason of second proviso to Section 143 (1), the right to claim refund is vested in any assessee. This is independent of the Revenue’s power to issue a scrutiny notice under Section 143 (2), for which the period of limitation is longer. However, if the Assessing Officer does not issue any notice, or intimation, if the assessee can claim refund, that right is a statutorily vested one if, within the said period of one year, a reasoned order is not made under Section 143 (1D) within the said one year period.

On relevance of non-obstante clause under Section 143 (1D)

The Court explained that the power under sub-section (1) of Section 143 of the Act is summary in nature designed to cause adjustments which are apparent from the return while that under sub-sections (2) and (3) is to scrutinize the return and cause deeper probe to arrive at the correct determination of the liability of the assessee. It further said that if the power under sub-section (2) of Section 143 of the Act is initiated in a manner known to law, there cannot be any insistence that the processing under sub-section (1) of Section 143 be completed and refund be made before the scrutiny pursuant to notice under sub-section (2) of Section 143 is over.

It, however, going into the legislative intent behind introduction of the non-obstate clause under Section 143 (1D), said that the intent to have the general principle emanating from subsection (1) of Section 143 overridden, in case where the proceedings are initiated pursuant to notice under sub-section (2) of the Act, gets more pronounced and emphasized by use of non-obstante clause in sub-section (1D).

It explained,

“irrespective of some change in the text of said provision which was sought to be introduced by Finance Act 2016 and not accepted by Finance Act, 2017, the legislative intent is clear from the expression, “… the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2)” and by use of non-obstante clause.”

The bench, further, said that though the period for which it would not be necessary to process the return was sought to be specified by Finance Act, 2016, mere absence of such period in the provision as it stands today, makes no difference.

“As against the general principle which mandates an action in a particular manner, when an exception is to be carved out, the relevant provisions stipulate “it shall not be necessary” to adhere to and follow the manner mandated by such general principle; and if the contingency contemplated by such exception arises, the general principle is to stand overridden.”

On whether separate intimation to the assessee is mandatory or not

On the issue whether any intimation is required to be given to the assessee that because of initiation of proceedings pursuant to notice under sub-section (2) of Section 143 of the Act processing of return in terms of sub-section (1) of Section 143 of the Act, would stand deferred, he bench held that a separate intimation was neither contemplated by the statute nor would it achieve any purpose. It said,

“the issuance of notice under sub-section (2) of Section 143 is enough to trigger the required consequence.”

The Court explained that the  processing of return in terms of subsection (1A) of Section 143 of the Act is to be done through centralized processing and the scope of processing under subsection (1) of Section 143 of the Act is purely summary in character. Once deeper scrutiny is undertaken and the matter is being considered from the perspective whether there is any avoidance of tax in any manner, issuance of notice under sub-section (2) itself is sufficient indication.

“Sub-section (1D) of Section 143 of the Act does not contemplate either issuance of any such intimation or further application of mind that the processing must be kept in abeyance. It would not, therefore, be proper to read into said provision the requirement to send a separate intimation.”

[Vodafone Idea Ltd. v. Assistant Commissioner, Income Tax Circle 26 (2), 2020 SCC OnLine SC 418 , decided on 29.04.2020]