Delhi High Court
Case BriefsHigh Courts

Delhi High Court: On a question of law before the Court that whether the Income Tax Appellate Tribunal (‘ITAT’) erred in law in holding that the difference between the price at which stock options were offered to employees of the appellant company under ESOP and ESPS and the prevailing market price of the stock on the date of grant of such options was not allowable revenue expenditure under Section 37(1) of Income Tax Act, 1961, (‘IT Act’), a Division Bench of Manmohan and Manmeet Pritam Singh Arora, JJ., sets aside the impugned order and held that an assessee is entitled to claim deduction under Section 37 IT Act, 1961, if the expenditure has been incurred, thus, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued, and the market value of the shares would also be expenditure incurred for the purposes of Section 37(1) of IT Act.

Reliance was placed on Commissioner of Income Tax v. Biocon Ltd. I.T.A. NO. 653 OF 2013 (Karnataka), wherein it was held

“2. The shares of the company were transferred to the trust at the face value and the employees of the assessee were allowed to exercise the option to buy the shares within the time prescribed under the scheme subject to the terms and conditions mentioned therein. The assessee claimed the difference of market price and allotment price as a discount and claimed the same as an expenditure under Section 37 of the Act. The Assessing Officer rejected the claim on the ground that the assessee has not incurred any expenditure and the expenditure is contingent in nature and therefore, the assessee is not entitled to claim the difference between the market price and the allotment price as an expenditure under Section 37 of the Act. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 13.11.2009 dismissed the appeal preferred by the assessee.

10. From perusal of Section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression ‘expenditure’ will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of Section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital.

Thus, the Court held that the Income Tax Appellate Tribunal erred in law in holding that the difference between the price at which stock options were offered to employees of the appellant company under ESOP and ESPS and the prevailing market price of the stock on the date of grant of such options was not allowable revenue expenditure under Section 37(1) of the Income Tax Act, 1961.

[PVR ltd. V. Commissioner of Income Tax, ITA 564 of 2012, decided on 23-08-2022]


Advocates who appeared in this case :

Mr. Salil Kapoor and Mr. Sumit Lalchandani, Advocates, for the Appellant;

Mr. Sanjay Kumar and Ms. Easha Kadian, Advocates, for the Respondent.


*Arunima Bose, Editorial Assistant has put this report together.

Income Tax Appellate Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

   

Income Tax Appellate Tribunal (ITAT), New Delhi: While deciding the instant appeal pertaining to the Assessment Year 2015-16 where the Revenue challenged the decision of CIT(A) for deleting the addition of Rs 4,33,18,870 made on account of unsecured loan under Section 68 of the Income Tax Act, 1961, the Bench of Shamim Yahya (Accountant Member) and Yogesh Kumar US (Judicial Member) held that the non-existence of the parties who have given loan to the assessee, clearly indicates their nature being prima facie bogus. Furthermore, non-discussion of the financials further cast doubt on the lender's creditworthiness.

Facts and Legal Trajectory of the case: The Assessing Officer (hereinafter AO) noted that the assessee had received unsecured loan during the Financial Year 2014-15 from approximately 26 people. The assessee was also asked to submit ITR of the relevant years for all the parties to prove their creditworthiness. The AO issued summons under Section 131(1A) to several parties at the address provided by the assessee, requesting their personal deposition and information. During the analysis of the bank statement of the parties concerned, the AO noted that the amount forwarded to the assessee was received by the lenders from some other accounts just before it was forwarded. However, neither anyone attended on the date given nor was any information requested by the summons filed.

Several reminders were issued, no one gave their personal attendance, but details and alibis were submitted through their authorized representative. In view of this conduct the AO raised doubt regarding their identity. The AO rejected the submissions of some of the parties that it was their saving from which they have given loan. Hence, the AO found the source to be unexplained and found 10 people to be of dubious credit. The AO also raised questions upon the genuineness of the transactions was not successfully explained by the assessee.

The assessee challenged the findings via an appeal to the CIT(A) who noted that the assessee had stated that all the details were given to the Assessing Officer. Furthermore, the CIT(A) observed that the assessee had precisely given the details and documents filed during the assessment proceedings for each party. Therefore CIT(A) rejected the AO's assessment and held that the assessee had proved the identity and genuineness of the transaction and creditworthiness thereby discharging the onus.

Contentions: Aggrieved with the afore-stated decision by the CIT(A), the Revenue appealed before the ITAT contenting that the CIT(A) erred in deciding the issue by ignoring the fact that the income of some of the parties/lender was not proportionate to the loan amount provided to the assessee.

It was further argued that that merely because identity of creditor is disclosed, the burden of assessee to explain money in his hands would not be discharged if the donor's creditworthiness is not proved to the satisfaction of the AO. It was submitted that the instant matter is a classic case of routing of unaccounted money in circuitatious manner.

Observations

  • Perusing the facts and the contentions, the Tribunal noted that the people who gave the loans were not present at their address, which clearly shows the lack of genuineness of the transactions.

  • It was also pointed out that only part figures for the financial were available and the entire financials of the loan given were not on record and the CIT(A) decided the genuineness of the transactions and the creditworthiness of the lenders relying upon the documents and data picked from here and there. The Bench was perplexed as to- “Without examining the entire financials of the parties, how their creditworthiness has been accepted by the CIT(A) itself is a mystery”.

  • The Tribunal expressed its confusion over the findings by the CIT(A) stating that “The powers of the CIT(A) is co-terminus with that of the Assessing Officer. In the appeal, if the CIT(A) was of the opinion that further enquiry was required, the same should have been done by the CIT(A) himself”.

Decision: With the afore-stated observations, the Tribunal remitted the issue to the AO and directed the assessee to cooperate and produce cogent evidence in support of identity, creditworthiness and genuineness of the transaction.

[ACIT v. Hare Krishna Orchid, ITA No.662/DEL/2020, decided on 12-08-2022]


Advocates who appeared in this case :

Revenue – Gayasuddin Ansari, Sr. DR;

Assessee – R.S. Singhvi, CA, Rajat Garg, CA and Satyajeet Goel, CA.


*Sucheta Sarkar, Editorial Assistant has prepared this brief.

Meghalaya High Court
Case BriefsHigh Courts

Meghalaya High Court: The Division Bench of Sanjib Banerjee, CJ. and W. Diengdoh, J. disposed of a petition holding that the assessee should be given a minimum of 7 days’ time to respond to the reassessment notice.

A notice under Section 148 of the Income-Tax Act, 1961 had been issued without following the mandatory procedure under Section 148-A thereof. An incidental issue as to jurisdiction had also been raised.

According to the assessee, the relevant notice that ought to have afforded the assessee seven days’ time to respond thereto was issued to an email id that was used for filing the return for the assessment year 2017-18. The assessee submits that the notice pertains to the assessment year 2018-19 and, by then, the email id of the assessee had been changed. The assessee further informed that the notice was physically delivered at the address of the assessee on 30-03-2022 and, even before the reply could be issued, the notice under Section 148 of the Act was issued by recording that the assessee had not responded to the previous notice.

The Court opined that since the scheme of the relevant provisions required a previous notice and seven days’ time to be afforded to the assessee to respond thereto and it appeared that such procedure may not have been followed in this case, the subsequent notice under Section 148 of the Act and the order pertaining thereto should be set aside and the matter be restored to the initial stage.

The Court held that the assessee will have seven days to respond to the initial notice and the response will be considered by the appropriate authority before passing any order or taking any further steps. The question of jurisdiction was left open for the assessee to urge before the Department.

[Highgrowth Commodities Trade (P) Ltd. v. Principal Commr. of Income Tax, 2022 SCC OnLine Megh 253, decided on 14-06-2022]


Advocates who appeared in this case :

Mr Abhratosh Mazumdar, Sr.Adv with Mr Kaushik Goswami, Sr.Adv Mr Avra Mazumdar, Ms Shruti Swaika, Ms Anakshi Neog, Ms M. Kakoty, Advocates, for the Petitioner;

Dr N. Mozika, ASG with Ms K. Gurung, Advocates, for the Respondents.


*Suchita Shukla, Editorial Assistant has reported this brief.

Calcutta High Court
Case BriefsHigh Courts

Calcutta High Court: The Division Bench of Debangsu Basak and Bibhas Ranjan De, JJ. disposed of a appeal which was directed against the order dated 09-02-2022 by which Judge was pleased to hold that, despite the assessee receiving further evidences with regard to the quantum of tax liability subsequent to the conclusion of the order of refund, there was no material irregularity in the order of refund warranting interference under Article 226 of the Constitution of India. 

 

Advocate appearing for the appellant/writ petitioner submitted that order of refund was passed on 03-05-2021 after which the assessee received Certificate of Export on 25-08-2021 and if such Certificate is placed before the revisional authority, the petitioner will be entitled to refund of the tax liability of the petitioner. The Certificate is a material evidence which the revisional authority needs to consider in order to assess the tax liability of the petitioner. It was further submitted that the tax authorities cannot derive undue benefit of circumstances which are beyond the control of the appellant/writ petitioner.  

 

Advocate appearing for the State submits that the adjudication of tax liability stood completed on the passing of the order of the revisional authority.  

 

The Court was of the opinion that the appellant/writ petitioner was not at all fault in not receiving the document dated 25-08-2021 that the appellant/writ petitioner seeks to place before the revisional authority. It is not a case that the appellant/writ petitioner was in possession of certain documents which the appellant/writ petitioner did not place before the revisional authority. Rather, it is a case where the appellant/writ petitioner received a document subsequent to the order of the revisional authority. Reasonable opportunity should be afforded to such assessee to bring such evidences to the notice of the tax authorities.

 

The Court thus held that another opportunity should be granted to the appellant/writ petitioner to place the document before the revisional authority. Revisional authority was requested to reconsider its order passed on refund taking into account the document dated 25-08- 2021 in accordance with law. 

 

[Nipika Agarwal v. Asst. Commr. of State Tax,  2022 SCC OnLine Cal 1490, decided on 09-06-2022] 


Mr  Sandip Choradia, Ms Esha Acharya : for the Appellant 

Mr Hirak Barman, Mr Bikramaditya Ghosh : for the State 


*Suchita Shukla, Editorial Assistant has reported this brief.

Case BriefsHigh Courts

Delhi High Court: The Division Bench of Manmohan and Manmeet Pritam Singh Arora, JJ., expressed that, merely because there was a delay of one day in asking for an adjournment, the assessee living outside India cannot be denied his Right to file an objection to Show Cause notice.

The present petition had been filed challenging the order passed under Section 148 A (d) of the Income Tax Act, 1961 and the notice was passed under Section 148 of the Act.

Petitioner’s counsel submitted that the impugned order had been passed without considering the petitioner’s request for adjournment dated 9-4-2022 as well as 12-4-2022 and a detailed reply dated 13-4-2022 to the show cause notice.

Respondents- revenue stated that the adjournment request had not been filed within the stipulated time and therefore, the Assessing Officer was well within its right to pass the order under Section 148A(d) of the Act.

Analysis, Law and Decision


The High Court stated that the petitioner-assessee has a right to get adequate time in accordance with the Act to submit its reply.

“Section 148 A (b) permits the Assessing Officer to suo moto provide up to thirty days period to an assessee to respond to the Show Cause Notice issued under Section 148A(b), which period may in fact be further extended upon an application made by the Assessee in this behalf, and such period given to the assessee is excluded in computing the period of limitation for issuance of notice under Section 148 of the Act in terms of the third proviso to Section 149 of the Act.” 

High Court remarked that since the petitioner-assessee was a resident of the United States of America, the Court was of the view that the delay of one day in asking for an adjournment should not have led to the closure of the right to file a reply to the Show Cause Notice.

The Bench quashed the impugned orders and directed respondent 1 to pass a fresh reasoned order under Section 148 A(d) after considering the reply filed by the petitioner. [Ernst and Young U.S. LLP v. ACIT, 2022 SCC OnLine Del 1529, decided on 20-5-2022]


Advocates before the Court:

For the Petitioner:

Mr S. Ganesh, Sr. Advocate with Ms Soumya Singh and Ms Ananya Kapoor, Advocates.

For the Respondents:

Mr Puneet Rai with Ms Adeeba Mujahid and Mr Karan Pandey, Advocates.

Case BriefsHigh Courts

Orissa High Court: A Division Bench of S. Muralidhar CJ and R. K. Pattanaik J. dismissed the appeal filed by the assessee and upheld AO’s decision to disallow part of the payment towards commission.

The background facts are that the Appellant during the AY in question was engaged in the business of manufacturing and sale of P.P. woven sacks meant for packing of fertilizer and cement etc. It filed its return of income and while examining the claims, the AO raised a query regarding payment of commission and asked the Appellant to justify it. It was claimed that the commission was entirely paid through banking channels after deducting Tax at Source (TDS). Each of the commission agents had disclosed the said commission amount in their respective returns and paid tax thereon. In the assessment order dated 8-03-2013, the AO partly allowed the commission expenses to the tune of Rs.23,41,245/- and disallowed Rs.30,08,545/- which was then added to the returned income of the Appellant. The Appellant filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] which was dismissed as the persons to whom the commission was paid were Directors of the appellant or the relatives of such Directors. Thereafter, the Appellant went before ITAT. The Appellant failed to bring on record their expertise to render services and also what services had in fact been rendered to enhance the business of the Appellant. Merely because TDS had been deducted, would not justify allowing the entire amount as claimed towards commission. Accordingly, the appeal was dismissed, and the instant appeal was filed.

Counsel for the appellants Mr. RP Kar submitted that the commission paid could not be termed as excessive or unreasonable and had been duly accounted for. He insisted that with the TDS having been deducted at the time of paying such commission, and with the recipients of commission having disclosed it in their respective tax returns and having paid tax thereon, again subjecting such payment at the hands of the Appellant would amount to double taxation, which is impermissible in law.

Counsel for respondents Mr. RS Chimanka and A Kedia submitted that the concurrent orders of the AO, the CIT (A) and the ITAT and submits that they call for no interference.

The Court observed that in the given case claiming that each of the seven persons to whom commission was paid actually had the expertise to help the Appellant procuring the IOF from different sources appears to be stretching things a bit too far, and hence the AO appears to be justified in disallowing the commission insofar as it was paid to the said seven persons.

The Court relied on J.K. Woollen Manufacturing v. Commissioner of Income Tax (1969) 72 ITR 612 (SC) and observed that there was the test of commercial expediency. In other words, whether the payment made to the General Manager of the company as commission was an expenditure wholly and exclusively for the purpose of the business? It was concluded that the reasonableness of the expenditure had to be adjudged from the point of view of the businessman and not the Income Tax Department. In the circumstances, the entire amount paid to the General Manager as commission was allowed as expenditure.

The Court observed that all the persons to whom commission was paid were either Directors of the Company or their relatives. None of them is shown to have any expertise in procuring IOF from the Indian markets for enabling the Appellant to meet the purchase order placed on it for IOF. The amounts paid as commission were also not insubstantial. Even from the point of view of a businessman, it does appear to this Court that the commission amount which was disallowed by the AO cannot be said to be for the purpose of business of the Appellant.

The Court held “Thus, it cannot be said that the AO’s decision to disallow part of the payment towards commission was unreasonably arrived at.” [Oripol Industries Ltd. v. Joint Commissioner of IT, ITA No.41 of 2017, decided on 12-05-2022]


Arunima Bose, Editorial Assistant ahs reported this brief.

Case BriefsSupreme Court

Supreme Court: The bench of UU Lalit and S. Ravindra Bhat*, JJ has held that whether corporate death of an entity upon amalgamation per se invalidates a tax assessment order ordinarily cannot be determined on a bare application of Section 481 of the Companies Act, 1956 (and its equivalent in the 2013 Act), but would depend on the terms of the amalgamation and the facts of each case.

Facts Background

The Court was deciding an appeal against the order of the Delhi High Court rejecting the appeal, by the revenue and affirming the order of the Income Tax Appellate Tribunal (ITAT) which quashed the assessment order against the assessee Mahagun Realtors Private Limited (MRPL).

MRPL, a real estate company, amalgamated with Mahagun India Private Limited (MIPL) on 01.04.2006. The Assessing Officer (AO), issued an assessment order on 11.08.2011, assessing the income of ₹ 8,62,85,332/- after making several additions of ₹ 6,47,00,972/- under various heads. The assessment order showed the assessee as “Mahagun Relators Private Ltd, represented by Mahagun India Private Ltd”.

It was argued before the Court that the assessment framed in the name of amalgamating company which was ceased to exist in law, was invalid and untenable in terms of Section 170(2) of the Income Tax Act, 1961.

Analysis

Section 170 of Income Tax Act, inter alia, provides that where a person carries on any business or profession and is succeeded (to such business) by some other person (i.e., the successor), the predecessor shall be assessed to the extent of income accruing in the previous year in which the succession took place, and the successor shall be assessed in respect of income of the previous year in respect of the income of the previous year after the date of succession.

Further, there are not less than 100 instances under the Income Tax Act, wherein the event of amalgamation, the method of treatment of a particular subject matter is expressly indicated in the provisions of the Act. In some instances, amalgamation results in withdrawal of a special benefit (such as an area exemption under Section 80IA) – because it is entity or unit specific. In the case of carry forward of losses and profits, a nuanced approach has been indicated. All these provisions support the idea that the enterprise or the undertaking, and the business of the amalgamated company continues. The beneficial treatment, in the form of set-off, deductions (in proportion to the period the transferee was in existence, vis-à-vis the transfer to the transferee company); carry forward of loss, depreciation, all bear out that under the Act, (a) the business-including the rights, assets and liabilities of the transferor company do not cease, but continue as that of the transferor company; (b) by deeming fiction through several provisions of the Act, the treatment of various issues, is such that the transferee is deemed to carry on the enterprise as that of the transferor.

The amalgamation of two or more entities with an existing company or with a company created anew was provided for, statutorily, under the old Companies Act, 1956, under Section 394 (1) (a). Section 394 empowered the court to approve schemes proposing amalgamation, and oversee the various steps and procedures that had to be undertaken for that purpose, including the apportionment of and devolution of assets and liabilities, etc.

Reading Section 394 (2) of the Companies Act, 1956, Section 2 (1A) and various other provisions of the Income Tax Act together, the Court reached to the conclusion that despite amalgamation, the business, enterprise and undertaking of the transferee or amalgamated company- which ceases to exist, after amalgamation, is treated as a continuing one, and any benefits, by way of carry forward of losses (of the transferor company), depreciation, etc., are allowed to the transferee. Therefore, unlike a winding up, there is no end to the enterprise, with the entity. The enterprise in the case of amalgamation, continues.

The Court observed,

“Amalgamation, thus, is unlike the winding up of a corporate entity. In the case of amalgamation, the outer shell of the corporate entity is undoubtedly destroyed; it ceases to exist. Yet, in every other sense of the term, the corporate venture continues – enfolded within the new or the existing transferee entity. In other words, the business and the adventure lives on but within a new corporate residence, i.e., the transferee company. It is, therefore, essential to look beyond the mere concept of destruction of corporate entity which brings to an end or terminates any assessment proceedings. There are analogies in civil law and procedure where upon amalgamation, the cause of action or the complaint does not per se cease – depending of course, upon the structure and objective of enactment. Broadly, the quest of legal systems and courts has been to locate if a successor or representative exists in relation to the particular cause or action, upon whom the assets might have devolved or upon whom the liability in the event it is adjudicated, would fall.”

Ruling on facts

The Court specifically noticed that, in the present case,

  • The amalgamation was known to the assessee, even at the stage when the search and seizure operations took place, as well as statements were recorded by the revenue of the directors and managing director of the group.
  • A return was filed, pursuant to notice, which suppressed the fact of amalgamation; on the contrary, the return was of MRPL. Though that entity ceased to be in existence, in law, yet, appeals were filed on its behalf before the CIT, and a cross appeal was filed before ITAT.
  • Even the affidavit before the Supreme Court was on behalf of the director of MRPL.
  • The assessment order painstakingly attributed specific amounts surrendered by MRPL, and after considering the special auditor’s report, brought specific amounts to tax, in the search assessment order.

The Court was, hence, of the opinion that all the aforementioned points clearly indicated that the order adopted a particular method of expressing the tax liability. The AO, on the other hand, had the option of making a common order, with MIPL as the assessee, but containing separate parts, relating to the different transferor companies (Mahagun Developers Ltd., Mahagun Realtors Pvt. Ltd., Universal Advertising Pvt. Ltd., ADR Home Décor Pvt. Ltd.).

“The mere choice of the AO in issuing a separate order in respect of MRPL, in these circumstances, cannot nullify it.”

Right from the time it was issued, and at all stages of various proceedings, the parties concerned (i.e., MIPL) treated it to be in respect of the transferee company (MIPL) by virtue of the amalgamation order – and Section 394 (2). Furthermore, it would be anybody’s guess, if any refund were due, as to whether MIPL would then say that it is not entitled to it, because the refund order would be issued in favour of a non-existing company (MRPL).

Having regard to all these reasons, the Court held that the conduct of the assessee, commencing from the date the search took place, and before all forums, reflects that it consistently held itself out as the assessee.

[Principal Commissioner of Income Tax v. Mahagun Realtors (P) Ltd, 2022 SCC OnLine SC 407, decided on 05.04.2022]


*Judgment by: Justice S. Ravindra Bhat


Counsels

For Petitioner: Advocate Raj Bahadur Yadav

For respondents: Advocate Kavita Jha

Case BriefsSupreme Court

Supreme Court: The bench of UU Lalit and S. Ravindra Bhat*, JJ has held that the declaration under the Income Declaration Scheme (IDS) cannot lead to immunity from taxation in the hands of a non-declarant.

The Court explained that the objective of Income Declaration Scheme (IDS), introduced by Chapter IX of the Finance Act, 2016, was to enable an assessee to declare her (or his) suppressed undisclosed income or properties acquired through such income. It is based on voluntary disclosure of untaxed income and the assessee’s acknowledging income tax liability. This disclosure is through a declaration (Section 183 of the Income Tax Act) to the Principal Commissioner of Income Tax within a time period, and deposit the prescribed amount towards income tax and other stipulated amounts, including penalty.

Facially, Section 192 of the Income Tax Act affords immunity to the declarant: “…nothing contained in any declaration made under section 183 shall be admissible in evidence against the declarant for the purpose of any proceeding relating to imposition of penalty…” Therefore, the protection given, is to the declarant, and for a limited purpose.

The assessee, in the case at hand, is a private limited company and had filed return of income for the AY 2010-11 on 25.9.2010. The return was accepted under section 143(1) of the Act without scrutiny.

The assessment was re-opened after search proceedings conducted in the case of one Shirish Chandrakant Shah, an accommodation entry provider in Mumbai, it was observed that huge amounts of unaccounted moneys of promoters/directors were introduced in closely held companies of the assessee’s group.

Further, the reasons to believe also stated that the chairman of M.R. Shah Group, during the statement- recorded under Section 132(4), disclosed that Garg Logistics Pvt. Ltd. had declared ₹ 6.36 crores as undisclosed cash utilized for investment in the share capital of the assessee, M.R. Shah Logistics Pvt. Ltd. through various companies. The assessee company’s chairman voluntarily  disclosed the statements made by Garg Logistics under Section 132 of the Act, about the declaration by Garg Logistics P Ltd, under the Income Declaration Scheme (IDS).

It can be seen that in the present case, the declarant was Garg Logistic Pvt Ltd and not the assessee. The Court, hence, held that the assessee could not claim immunity in the present case.

[Deputy Commissioner of Income Tax v. M. R. Shah Logistics Pvt. Ltd., 2022 SCC OnLine SC 365, decided on 28.03.2022]


*Judgment by: Justice S. Ravindra Bhat


For Assessee: Advocate Guru Krishnakumar

Income Tax Appellate Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal (ITAT), New Delhi: The Coram of Amit Shukla (Judicial Member) and Pradip Kumar Kedia (Accountant Member) allowed an appeal against a revisional order passed under Section 263 of the Income Tax Act, 1961.

The appeal had been filed led at the instance of the legal heir and wife of the deceased-assessee (Vas Dev) against the revisional order of the Principal Commissioner of Income Tax, Faridabad whereby the assessment order passed by the Assessing Officer under Section 143(3) read with Sect ion 147 of the Act was sought to be set aside for reframing the assessment in terms of supervisory jurisdiction.

The assessee has challenged the assumption of jurisdiction by the PCIT under Section 263 of the Act on the ground that ;

(i) the initiation of revisional proceedings and consequential order under Sect ion 263 of the Act is in the name of a deceased person is a nonest and unsustainable in the eyes of law

(ii ) the assessment order under revision is neither erroneous nor prejudicial to the interest of the Revenue and thus revisional commissioner was not competent to exercise revisional powers.

A revision order was eventually passed by which the PCIT set aside the assessment so completed and remanded the matter back to the file of the Assessing Officer for fresh adjudication thereof on issues alleged in the show cause notice. Thus the instant appeal was filed.

Firstly, it was contended that the assessee, namely, Vas Dev expired on 04-12-2020 whereas the show cause dated 20-03-2021 had been issued and addressed to the deceased-assessee, namely, Vas Dev instead of legal heir. Secondly, show cause notice was issued initially on 20-03-2021 asking the assessee to appear on 05-04-2021, i .e., after the expiry of the limitation on 31-03-2021. However , the aforesaid show cause notice was later modified and the fresh notice dated 25-03-2021 was issued through e-mail and the matter was fixed for hearing on the immediate next date on 26-03-2021 in grave violation of principle of natural justice.

The Tribunal held that the issue of validity of a notice and proceedings held subsequent thereto against a dead person was no longer res integra as the Delhi High Court in Dharamraj v. ITO, WP (C) 9227 of 2021 dated 17-10-2022 examined the issue in length and held that the notice issued against a death person is null and void and all consequent proceedings/orders being equally tainted are liable to be set aside.

The Tribunal while reiterating the relevant parts of the above judgment found considerable merit in the plea on behalf of the legal heir for the assessee that the entire proceedings beginning from issue of show cause notice and culminating in revisional order under Sect ion 263 of the Act was a nonest exercise and cannot be given effect in law regardless of the fact whether the revenue was privy to death or otherwise. The Tribunal further held that fixing the date of hearing beyond the limitation period was bad in law and was not a curable defect.

The Tribunal also noted that no other opportunity was given to the assessee while concluding the proceedings under Section 263 of the Act.

“We are constraint to observe that such a casual approach of a very senior functionary of the Department does not augur well in the eyes of public and cannot be countenanced on the touchstone of sacrosanct principle of natural justice explicit in 263 itself . “

Hence, in the absence of any opportunity to the assessee, for which the fault was attributable squarely to the PCIT was fatal and such defect being incurable, the revisionary order passed under Section 263 of the Act was also quashed independently on this ground.

The appeal was allowed and revisional order was set aside.

[Sheela Devi v. Principal Commr. of Income Tax, 2022 SCC OnLine ITAT 75, decided on 03-03-2022]


Appellant by: Ms Swati Talwar

Respondent by: Shri Ajay Kumar


Suchita Shukla, Editorial Assistant has put this report together 

Case BriefsHigh Courts

Delhi High Court: The Division Bench of Manmohan and Navin Chawla, JJ., while focusing on the principles of natural justice and right to personal hearing observed that,

Faceless Assessment Scheme does not mean no personal hearing.

An assessee has a vested right to personal hearing and the same has to be given, if an assessee asks for it.

Instant petition challenged respondent 3’s action in passing the impugned final assessment order under Section 143(3) of the Income Tax Act, 1961 and the impugned notice under Section 156 of the Act for Assessment Year 2018-19.

High Court’s Reasoning

This is unable to comprehend as to how despite ‘nil’ or ‘null’ variation proposed in the show cause notice, the impugned final assessment order and notice makes a demand of Rs 1,69,77,44,240.

High Court expressed that this Court is unable to comprehend as to how despite ‘Nil’ or ‘Null’ variation proposed in the show cause notice, additions had been made to the assessed income in the draft assessment order and the final assessment order. It was noted that while the show cause notice assessed a total loss of Rs 1,76,94,91,428, the impugned final assessment order and notice made a demand of Rs 1,69,77,44,240 as if the petitioner made a super profit!

Further, as mandatorily required by Section 144B(1)(xvi) of the Income Tax Act, no show cause notice was served upon the petitioner.

Petitioner’s response was not considered, and the draft assessment order was issued and the reason for not considering the same response was a technical glitch in the online facility.

Faceless Assessment Scheme does not mean no personal hearing. Not understood as to how grant of personal hearing would either frustrate the concept or defeat the very purpose of Faceless Assessment Scheme.

Bench found that no opportunity of personal hearing was given to the petitioner even after a specific request was made.

High Court opined that a faceless assessment scheme does not mean no personal hearing.

Supreme Court’s decision in Piramal Enterprises Ltd. v. Additional/Joint/Deputy Asst. Commr. Of Income Tax, 2021 SCC OnLine Bom 1534 was referred to wherein Section 144B of the Income Tax Act was interpreted.

It is settled law that where exercise of a power results in civil consequences to citizens unless the statute specifically rules out the application of natural justice, the rules of natural justice would apply.

 High Court elaborated that where an action entails civil consequences, observance of natural justice would be warranted and unless the law specifically excludes the application of natural justice, it should be taken as implanted into the scheme.

The opportunity to provide a hearing before making any decision is considered to be a basic requirement in Court proceedings.

In the Supreme Court decision of C.B. Gautam v. Union of India, (1993) 1 SCC 78, Court invoked the same principle and held that even though it was not statutorily required, yet the authority was liable to give notice to the affected parties while purchasing their properties under Section 269-UD of the Act, namely, the compulsory purchase of the property. It was observed that though the time frame within which an order for compulsory purchase has to be made is fairly tight, yet urgency is not such that it would preclude a reasonable opportunity of being heard

Subsequently, in Sahara India (Firm) v. Commissioner of Income-tax, Central-I, [2008] 169 Taxman 328 (SC), the Supreme Court highlighted the necessity and importance of the opportunity of a pre-decisional hearing to an assesee and that too in the absence of any express provision. Infact, the requirement of following principles of natural justice was read into Section 142(2A) of the Income Tax Act following the earlier decisions of the Supreme Court in Swadeshi Cotton Mills v. Union of India, (1981) 1 SCC 664 and C.B. Gautam v. Union of India, (1993) 1 SCC 78.

Use of the expression “may” in Section 144B (7)(VIII) is not decisive where a discretion is conferred upon a quasi-judicial authority whose decision has civil consequences. The word “may” which denotes discretion should be construed to mean a command. Consequently, this Court is of the view that requirement of giving an assessee a reasonable opportunity of personal hearing is mandatory.

Stating that the non-obstante clause and the use of the expression ‘shall be made’ in Section 144B (1) creates a mandatory obligation upon the respondent/Revenue to follow the prescribed procedure, Court expressed that, the use of the expression “may” in Section 144B (7)(viii) is not decisive.

The word “may” is capable of meaning “must” or “shall” in the light of the context.

Court added that, a quasi-judicial body must normally grant a personal hearing as no assessee or litigant should get a feeling that he never got an opportunity or was deprived of an opportunity to clarify the doubts of the assessing officer/decision-maker.

The Bench suggested that, The identity of the assessing officer can be hidden/protected while granting personal hearing by either creating a blank screen or by decreasing the pixel/density/resolution.

Hence, the word “may” in Section 144B(viii) should be read as “must” or “shall” and the requirement of giving an assessee a reasonable opportunity of personal hearing is mandatory.

Conclusion

The impugned final assessment order and impugned notice issued by respondent 3 have been set aside and the matter remanded back to the Assessing Officer [Bharat Aluminium Company Ltd. v. Union of India, 2022 SCC OnLine Del 105, decided on 14-1-2022]


Advocates before the Court:

For the Petitioner: Mr Arvind Datar, Senior Advocate with Mr Gopal Mundhra, Advocate.

For the Respondents: Mr Gigi C. George, Advocate for UOI.

Mr Sanjay Kumar, Advocate for Revenue.

Income Tax Appellate Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal (ITAT): Coram of Anil Chaturvedi (Accountant Member) and Suchitra Kamble (Judicial Member) allowed the appeal filed by the assessee challenging the assessment order made by the Income Tax authorities.

The assessee society was duly registered, and the renewal was granted for the period of 5 years. Society was granted registration under Section 12AA of the Income-tax Act, 1961. The society was granted an exemption under Section 10(23C) (vi) of the Income Tax Act. The return of income filed was filed declaring NIL income.

Assessing Officer made addition of Rs 93,88,000 towards net surplus from hostel activity and also disallowed Rs 3,26,11,455 regarding the claim of depreciation made by the assessee.

Being aggrieved by the assessment order the appeal of the assessee was partly allowed.

Analysis, Law and Decision

Tribunal stated that it was undisputed that the assessee was carrying educational activity.

Income from these activities declared by the assessee was NIL and the assessee earned gross receipt of Rs 16,26,69,407 on account of educational activity whereas the assessee was also running hostels for the students as per the UGC Guidelines which is an ancillary activity.

Tribunal further expressed that, in the absence of any evidence to show that the hostel facilities were provided to anybody other than students and staff of the trust, the hostel facilities provided by the educational institution shall be construed to be the intrinsic part of the ‘educational activities’ of the assessee and they cannot be considered different than activities of the society of ‘education’.

Hence, the addition amounting to Rs 93,00,088 made by the AO and sustained by the CIT(A) was not correct.

CIT(A) and the Assessing Officer failed to consider that the hostel facility is incidental to achieve the object of providing education as per object of the society and hence comes under the charitable purpose which is exempt under Section 11 of the Income Tax Act, 1961. 

In light of the decision of Supreme Court in CIT v. Rajsthani & Gujarati Charitable Foundation Poona, wherein it was held that the depreciation in respect of cost of the assets allowed to the assessee as expenditure is allowable, the issue regarding the depreciation in respect of hostel facilities was squarely covered in favour of the assessee.

In view of the above discussion, the appeal of the assessee was allowed. [Ideal Institute of Technology Society v. JCIT, 2021 SCC OnLine ITAT 662, decided on 3-11-2021]


Advocates before the Tribunal:

Appellant by: Sh. C. S. Aggarwal, Sr. Adv, Sh. Ravi Pratap Mall, Adv

Respondent by: Ms Sunita Singh, CIT DR

Case BriefsTribunals/Commissions/Regulatory Bodies

Customs, Excise and Services Tax Appellate Tribunal (CESTAT): P. Dinesha (Judicial Member) allowed an appeal which was filed with the point of consideration of eligibility of the appellant for refund of 4% of Special Additional Duty (SAD). The appellant made the above claim for refund and after due adjudication, the Assistant Commissioner rejected 4% SAD being time barred in terms of the above Notification. The Commissioner of Customs (Appeals), Cochin upheld the rejection against which, the present appeal had been filed before this forum.

Counsel for the appellant contended that neither the statute nor the original notification prescribed any limitation for claiming the refund of SAD and hence, imposition of time restriction by an Amending notification is clearly bad in law.

The Tribunal after hearing the contentions was of the view that appellant was correct in claiming refund of 4% SAD which was in terms with the settled position.

The Tribunal explained that the doctrine of precedence only mandates that it is the ratio in the decision of higher courts to be followed, and not conclusions. The Tribunal was of the view that it will be wholly inappropriate to choose views of one of the High Courts based on perceptions about reasonableness of the respective viewpoints, as such an exercise will de facto amount to sitting in judgment over the views of the Hon’ble High Courts- something diametrically opposed to the very basic principles of hierarchical judicial system. When there is a reasonable interpretation of a legal and factual situation, which is favourable to the assessee, such an interpretation is to be adopted.

The Tribunal further held that High Court’s judgment in favour of the assessee, in the light of this legal principle laid down by Supreme Court, is to be preferred over the Hon’ble non-jurisdictional High Court not favourable to the assessee finding guidance from the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192.

The appeal was allowed holding the denial of refund is bad in law.[John’s Cashew Co. v. Commr. Of Customs, 2021 SCC OnLine CESTAT 2598, decided on 18-10-2021]


Suchita Shukla, Editorial Assistant has reported this brief.


 

CBDT
Legislation UpdatesRules & Regulations

The Central Board of Direct Taxes has notified the Income-tax (30th Amendment) Rules, 2021 vide notification dated 24th September, 2021.

  • The amendment has amended Rule 10D of the Income Tax Act and further extended the applicability of provisions under Rule 10D for assessment years 2020-21 and 2021-22. They shall be deemed to have come into force from the April 1, 2021.
  • Rule 10D of Income tax Rules states that where an eligible assessee has entered into an eligible international transaction and the option exercised by the said assessee is valid, the transfer price declared by the assessee in respect of such transaction shall be accepted by the income tax authorities, if it is in accordance with the circumstances provided in the rule.

 


*Tanvi Singh, Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

Customs, Excise and Services Tax Appellate Tribunal (CESTAT): The Coram of Dilip Gupta (President) and C.J. Mathew (Technical Member) allowed an appeal which was filed against the order passed by Principal Commissioner of Central Excise, New Delhi, by which the demand of service tax had been confirmed with interest and penalty.

Appellant had been engaged in rendering air travel agent and other tour related services and during the period of dispute the appellant was rendering air travel agent services to the Embassy of the United States of America. The appellant claimed that it was the sole and exclusive service provider for the US Embassy and operated from a desk set up within the premises of the US Embassy. On such services, the appellant was availing exemption from payment of service tax in terms of Notification dated 23-05-2007 till 30-06-2012 and, thereafter, under Notification dated 20-06-2012. These Notifications exempted services rendered to diplomatic mission or consular posts in India from payment of service tax. In 2014, an investigation was initiated and audit of the records of the appellant was conducted in terms of rule 5A of the Service Tax Rules, 19944. During the audit, it was observed that the appellant was incorrectly availing exemption on services rendered to the US Embassy. The audit resulted into issuance of a show cause notice dated 16.04.2014 proposing to deny the exemption as a result of which a demand of service tax amounting to Rs. 81,11,575 was made. Principal Commissioner had passed the impugned order dated 30-09-2015 denying the exemption to the appellant and confirming the demand of service tax with penalty.

The four issues framed by the Principal Commissioner were:

(a) Whether the exemption contained in the Notification dated 23.05.2007 upto 30.06.2012 and Notification dated 20.06.2012 w.e.f. 01.07.2012 is available to the appellant for the services provided by it to the US Embassy despite the non-fulfillment of the conditions laid down in the said Notifications and whether, the service tax can be recovered and demanded from the appellant in the event it is not entitled to the exemption?

(b) Whether the appellant fulfilled its duty for amending the changed address in the Registration Certificate as per the provisions of Act and if not so, whether penalty is leviable?

(c) Whether the extended time period can be invoked?

(d) If yes, whether the appellant is liable for payment of interest & penalty under the provisions of Act/Rules, as alleged in the show cause notice?”

Bare perusal of the Notification in issue dated 23-05-2007 indicated that the following conditions have to be satisfied:

  1. Services must have been rendered to a diplomatic mission or consular post in India;
  2. The Protocol Division of the Ministry of External Affairs11 must issue a certificate to the specified diplomatic mission or consular post in India stating that it is entitled to claim exemption from payment of service tax;

iii. The diplomatic mission or consular office must provide the taxable service provider an authenticated copy of such certificate along with an original undertaking (signed and serially numbered) stating that the services have been received for official purpose; and

  1. The invoice raised by the service provider must carry the date and serial number of the undertaking.

In the present case the first condition was fulfilled second condition states that the Protocol Division must issue a certificate to the diplomatic/consular post in India. In this regard, the US Embassy was issued certificates from the Protocol Division and this has not been disputed by the Department and third condition relates to providing certificates and original undertakings by the diplomatic mission/ consular post in India to the service provider. Fourth condition to the Exemption Notification mentions that the invoices issued by the service provider must carry the serial number and date of the undertaking. The purpose of this condition is to ensure proper correlation between the services rendered and the exemption claimed by the service provider. The show cause notice has alleged that the invoices did not carry the serial number of the undertakings. The exemption was sought to be denied on this ground and the impugned order has also confirmed such denial.

Counsel for the appellant submitted that from the entire chain of the aforesaid documents there was no room to doubt that the services were rendered by the appellant to the US Embassy and such services were exempted by virtue of the undertaking and certificate provided by the US Embassy to the appellant.

The Tribunal explained that Notifications was issued by the Central Government of India in the public interest to exempt taxable services provided to a foreign diplomatic mission or consular post in India. As is evident from clause (i) of both the Notifications, the underlying purpose is to uphold the principle of reciprocity amongst the nations. It is only to ensure that there is no evasion of tax and that services have been rendered specifically to those diplomatic missions/ consular officers to whom a certificate has been issued by the Protocol Officer that the Notifications require a correlation to be established between the invoices and the undertakings. Once these two documents can be correlated, though not in a manner provided for, the substantive conditions to the Exemption Notifications stand fulfilled and the exemption cannot be denied and considered the judgments in Lakshmiratan Engineering Works Ltd. v. Assistant Commr. (Judicial) l Sales Tax, 1967 (9) TMI 116, J.K. Manufacturers Ltd. v. Sales Tax Officer, 1969 (5) TMI 54 and Chunni Lal Parshadi Lal v. Commr. of Sales Tax, 1986 (3) TMI 297.

The Tribunal further made it clear that even when an assessee has suppressed facts, the extended period of limitation can be invoked only when “suppression‟ or “collusion” is wilful with an intent to evade payment of duty. The invocation of the extended period of limitation, therefore, cannot be sustained.

The appeal was allowed by the Tribunal.[SOTC Travels Services (P) Ltd. v. Principal Commr. Of CE, 2021 SCC OnLine CESTAT 2574, decided on 20-09-2021]


Suchita Shukla, Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: In an important ruling on taxation law, the bench of Sanjay Kishan Kaul and Hrishikesh Roy*, JJ has held that the proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments.

Issue

Whether Section 14A of the Income Tax Act, 1961, enables the Department to make disallowance on expenditure incurred for earning tax free income in cases where assessees like the present appellant, do not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income?

What does Section 14A state?

In Section 14, the various incomes are classified under Salaries, Income from house property, Profit & Gains of business or profession, Capital Gains & Income from other sources.

The Section 14A relates to expenditure incurred in relation to income which are not includable in Total Income and which are exempted from tax. No taxes are therefore levied on such exempted income. The Section 14A had been incorporated in the Income Tax Act to ensure that expenditure incurred in generating such tax exempted income is not allowed as a deduction while calculating total income for the concerned assessee.

Legislative history

Section 14A was introduced to the Income Tax Act by the Finance Act, 2001 with retrospective effect from 01.04.1962, in aftermath of judgment in the case of Rajasthan State Warehousing Corporation Vs. CIT, (2000) 3 SCC 126. The said Section provided for disallowance of expenditure incurred by the assessee in relation to income, which does not form part of their total income.

“As such if the assessee incurs any expenditure for earning tax free income such as interest paid for funds borrowed, for investment in any business which earns tax free income, the assessee is disentitled to deduction of such interest or other expenditure.”

Although the provision was introduced retrospectively from 01.04.1962, the retrospective effect was neutralized by a proviso later introduced by the Finance Act, 2002 with effect from 11.05.2001 whereunder, re-assessment, rectification of assessment was prohibited for any assessment year, up-to the assessment year 2000-2001, when the proviso was introduced, without making any disallowance under Section 14A. The earlier assessments were therefore permitted to attain finality. As such the disallowance under Section 14A was intended to cover pending assessments and for the assessment years commencing from 2001-2002.

Facts

  • In the case at hand, the Court was concerned with disallowances made under Section 14A for assessment years commencing from 2001-2002 onwards or for pending assessments.
  • The assessees are scheduled banks and in course of their banking business, they also engage in the business of investments in bonds, securities and shares which earn the assessees, interests from such securities and bonds as also dividend income on investments in shares of companies and from units of UTI etc. which are tax free.
  • None of the assessee banks amongst the appellants, maintained separate accounts for the investments made in bonds, securities and shares wherefrom the tax-free income is earned so that disallowances could be limited to the actual expenditure incurred by the assessee.
  • In absence of separate accounts for investment which earned tax free income, the Assessing Officer made proportionate disallowance of interest attributable to the funds invested to earn tax free income by referring to the average cost of deposit for the relevant year.
  • The CIT (A) had concurred with the view taken by the Assessing Officer.
  • The ITAT in Assessee’s appeal against CIT(A) considered the absence of separate identifiable funds utilized by assessee for making investments in tax free bonds and shares but found that assessee bank is having indivisible business and considering their nature of business, the investments made in tax free bonds and in shares would therefore be in nature of stock in trade. The ITAT then noticed that assessee bank is having surplus funds and reserves from which investments can be made. Accordingly, it accepted the assessee’s case that investments were not made out of interest or cost bearing funds alone and held that disallowance under Section 14A is not warranted, in absence of clear identity of funds.
  • The decision of the ITAT was reversed by the High Court.

Analysis

The Supreme Court took note of the fact that the CIT(A) and the High Court had based their decision on the fact that the assessee had not kept their interest free funds in separate account and as such had purchased the bonds/shares from mixed account. This is how a proportionate amount of the interest paid on the borrowings/deposits, was considered to have been incurred to earn the tax-free income on bonds/shares and such proportionate amount was disallowed applying Section 14A of the Act.

It, however, explained that

“In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure.”

The Court, hence, held that if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax- free securities then in such cases, disallowance under Section 14A cannot be made.

[South Indian Bank v. CIT,  2021 SCC OnLine SC 692, decided on 09.09.2021]


*Judgment by: Justice Hrishikesh Roy

Know Thy Judge | Justice Hrishikesh Roy

Appearances before the Court by:

For Appellants: Senior Advocates S. Ganesh, S.K. Bagaria, Jehangir Mistri and Joseph Markose,

For Respondent/Revenue: ASG Vikramjit Banerjee and Senior Advocate Arijit Prasad

Income Tax Appellate Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal (ITAT): A two-Member Bench of Pramod Kumar, Vice President and Amarjit Singh, Judicial Member, referred a seminal question to be decided by a larger Bench of three or more Members of the Income Tax Appellate Tribunal (“ITAT”). The two-Member Bench dubbed it as:

“[A] macro issue that touches upon the tax liability of virtually every company which has residents of a tax treaty partner jurisdiction as shareholders, and has substantial revenue implications.”

The present appeal (filed by the Income Tax Department) and cross-objection (filed by the assessee) called into question the correctness of the order passed by the Commissioner of Income Tax (Appeals) in the matter of assessment under Section 143(3) of the Income Tax Act, 1961, for the assessment year 2016-17.  One of the issues raised in the present matter (by way of one of the grounds taken by the assessee in cross-objection) was that:

“The Assessing Officer be directed to compute the tax payable by the assessee under Section 115-O of the Income Tax Act, 1961 at the rate prescribed in the Double Taxation Avoidance Agreement between India and France in respect of dividend paid by the assessee to the non-resident shareholders i.e., Total Marketing Services and Total Holdings Asie, a tax resident of France.”

Material Facts and Assessee’s Contention

The assessee company has some non-resident tax holders fiscally domiciled in France. The assessee has paid dividend distribution tax under Section 115-O of the Income Tax Act. The short case of the assessee is that since the shareholders of the assessee company are entitled to the benefits of the India France Double Taxation Avoidance Agreement (“Indo French Tax Treaty”), the dividend distribution tax paid by the assessee, which is nothing but a tax on dividend income of the shareholders, cannot exceed the rate at which, under the Indo French Tax Treaty, such dividends can be taxed in the hands of the non-resident shareholders in question

Preliminary Objections by Income Tax Department

The appellant−Income Tax Department raised various preliminary objections to the cross-objection filed by the respondent−assessee, which were rejected by the ITAT. The first objection was that the cross-objection filed by the assessee was time-barred. Perusing the material on record, the ITAT was satisfied that the memorandum of cross-objection was filed within the time limit.

Another objection was about the assessee’s claim of treaty protection. It was contended that the claim so far as the rate of dividend distribution tax is concerned, was never raised before any of the authorities below, and no fresh issue can be raised by way of a cross-objection filed under Section 253(4) of the Income Tax Act. Negating this, the ITAT opined that there is a legal parity in the appeal and the cross-objection inasmuch as the issues which can be raised in an appeal can also be raised in a cross-objection. There cannot be any justification in restricting the scope of issues which can be raised in a cross-objection. Whatever issues, therefore, can be raised by way of an appeal are the issues that can be raised by way of a cross-objection.

Reference to Larger Bench

On the main issue (as noted above), the assessee contended that the matter is covered by the decisions of other Coordinate Benches. The assessee submitted that following the principles of consistency, the issue does not require a reference to Special Bench. The ITAT was urged to follow the Coordinate Benches and remit the matter to the file of the Assessing Officer for reconsideration in the light of the same.

For rejecting this submission, the ITAT found force in the Supreme Court decision in Union of India v. Paras Laminates (P) Ltd., (1990) 4 SCC 453. It was observed by ITAT that the assessee’s submission that the ITAT President cannot constitute a Special Bench in the absence of conflict of opinions by the Division Benches is incorrect and untenable in law. Of course, it is for the President to take a considered call on whether or not it is a fit case for constitution of a Special Bench, but, in the event of his holding the view that it is indeed a fit case to constitute a Special Bench, he is not denuded of the powers to do so on account of lack of conflict in the views of the Division Benches.

Thereafter, the ITAT set out its reasons for doubting the correctness of the decisions of the Coordinate Benches, on the dividend distribution tax rate being restricted by the treaty provision dealing with taxation of dividends in the hands of the shareholders (i.e. Article 11 of the Indo French Tax Treaty, as in the present case):

  • The payment of dividend distribution tax under Section 115-O does not discharge the tax liability of the shareholders. It is a liability of the company and discharged by the company. Whatever be the conceptual foundation of such a tax, it is not a tax paid by, or on behalf of, the shareholder. Therefore, dividend distribution tax cannot be treated as a tax on behalf of the recipient of dividends, i.e. the shareholders.
  • Under the scheme of the tax treaties, no tax credits are envisaged in the hands of the shareholders in respect of dividend distribution tax paid by the company in which shares are held. The dividend distribution tax thus cannot be equated with a tax paid by, or on behalf of, a shareholder in receipt of such a dividend. In fact, the payment of dividend distribution tax does not, in any manner, prejudice the foreign shareholder, and any reduction in the dividend distribution tax does not, in any manner, act to the benefit of the foreign shareholder resident in the treaty partner jurisdiction. This taxability is wholly tax-neutral vis-à-vis foreign resident shareholder and the treaty protection, when given in respect of dividend distribution tax, can only benefit the domestic company concerned. The treaty protection thus sought goes well beyond the purpose of the tax treaties.
  • It is to stretch things a bit too far to say that even when tax burden is shifted from a resident of the tax treaty partner jurisdiction to resident of another jurisdiction, the tax burden on another person, who is not eligible for tax treaty benefits anyway, will nevertheless be subjected to the same level of tax treaty protection. . Such a proposition does not even find mention in any tax treaty literature, and therefore the present decision, extending the tax treaty protection to the company paying dividends, in respect of dividend tax distribution tax, appears to be a solitary decision of its kind.
  • Wherever the Contracting States to a tax treaty intended to extend the treaty protection to the dividend distribution tax, it has been so specifically provided in the tax treaty itself. In the absence of such a provision, it cannot be inferred as such.
  • A tax treaty protects taxation of income in the hands of residents of the treaty partner jurisdictions in the other treaty partner jurisdiction. Therefore, in order to seek treaty protection of an income in India under the Indo French Tax Treaty, the person seeking such treaty protection has to be a resident of France. The expression ‘resident’ is defined, under Article 4(1) of the Indo French Tax Treaty, as “any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature”. Obviously, the company incorporated in India, i.e. the assessee in the present case, cannot seek treaty protection in India ─ except for the purpose of, in deserving cases, where the cases are covered by the nationality non-discrimination under Article 26(1), deductibility non-discrimination under Article 26(4), and ownership non-discrimination under Article 24(5). as, for example, Article 26(5) specifically extends the scope of tax treaty protection to the “enterprises of one of the Contracting States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State”. The same is the position with respect of the other non-discrimination provisions. No such extension of the scope of treaty protection is envisaged, or demonstrated, in the present case. When the taxes are paid by the resident of India, in respect of its own liability in India, such taxation in India, cannot be protected or influenced by a tax treaty provision, unless a specific provision exists in the related tax treaty enabling extension of the treaty protection.
  • Taxation is a sovereign power of the State ─ collection and imposition of taxes are sovereign functions. Double Taxation Avoidance Agreement is in the nature of self-imposed limitations of a State’s inherent right to tax, and these DTAAs divide tax sources, taxable objects amongst themselves. Inherent in the self-imposed restrictions imposed by the DTAA is the fact that outside of the limitations imposed by the DTAA, the State is free to levy taxes as per its own policy choices. The dividend distribution tax, not being a tax paid by or on behalf of a resident of treaty partner jurisdiction, cannot thus be curtailed by a tax treaty provision.

For all these reasons independently, as also taken together, the ITAT was of the considered view that it is a fit case for the constitution of a Special Bench, consisting of three or more Members, so that all the aspects relating to this issue can be considered in a holistic and comprehensive manner. The question which may be referred for the consideration of Special Bench consisting of three or more Members, subject to the approval of, and modifications by, the ITAT President, is as follows:

“Whether the protection granted by the tax treaties, under Section 90 of the Income Tax Act, 1961, in respect of taxation of dividend in the source jurisdiction, can be extended, even in the absence of a specific treaty provision to that effect, to the dividend distribution tax under Section 115-O in the hands of a domestic company?”

The Registry was directed to place the matter before the ITAT President for appropriate orders. [CIT v. Total Oil (India) (P) Ltd.,  2021 SCC OnLine ITAT 367, dated 23-6-2021]

Case BriefsSupreme Court

Supreme Court: Interpreting the true scope of Section 80-IA(5) of the Income Tax Act, 1961, the bench of L. Nageswara Rao* and Vineet Saran, JJ has held that the scope of sub-section (5) of Section 80- IA of the Act is limited to determination of quantum of deduction under sub-section (1) of Section 80-IA of the Act by treating ‘eligible business’ as the ‘only source of income’.

Provision in question

Sub-section (1) and sub-section (5) of Section 80-IA which are relevant for these Appeals are as under:

“80-IA. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.— (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent. of the profits and gains derived from such business for ten consecutive assessment years.

* * * *

(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of subsection (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.”

The essential ingredients of Section 80-IA (1) of the Act are:

  1. a) the ‘gross total income’ of an assessee should include profits and gains;
  2. b) those profits and gains are derived by an undertaking or an enterprise from a business referred to in subsection (4);
  3. c) the assessee is entitled for deduction of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive assessment years; and
  4. d) in computing the ‘total income’ of the Assessee, such deduction shall be allowed.

The import of Section 80-IA is that the ‘total income’ of an assessee is computed by taking into account the allowable deduction of the profits and gains derived from the ‘eligible business’.

Background

In the case at hand, the ‘gross total income’ of the Assessee for the assessment year 2002-03 was less than the quantum of deduction determined under Section 80-IA of the Act. The Assessee contended that income from all other heads including ‘income from other sources’, in addition to ‘business income’, have to be taken into account for the purpose of allowing the deductions available to the Assessee, subject to the ceiling of ‘gross total income’. The Appellate Authority was of the view that there is no limitation on deduction admissible under Section 80-IA of the Act to income under the head ‘business’ only.

The Court was hearing a case where the Revenue had argued that sub-section (5) of Section 80-IA refers to computation of quantum of deduction being limited from ‘eligible business’ by taking it as the only source of income.

“… the language of sub-section (5) makes it clear that deduction contemplated in sub-section (1) is only with respect to the income from ‘eligible business’ which indicates that there is a cap in sub-section (1) that the deduction cannot exceed the ‘business income’.”

On the other hand, the Assessee had argued that sub-section (5) pertains only to determination of the quantum of deduction under sub-section (1) by treating the ‘eligible business’ as the only source of income.

The claim of the Assessee was that in computing its ‘total income’, deductions available to it have to be set-off against the ‘gross total income’, while the Revenue contends that it is only the ‘business income’ which has to be taken into account for the purpose of setting-off the deductions under Sections 80-IA and 80-IB of the Act

Analysis and conclusion

In Synco Industries Ltd. v. Assessing Officer, Income Tax, Mumbai, (2008) 4 SCC 22, the Supreme Court was concerned with Section 80-I of the Act. Section 80-I(6), which is in pari materia to Section 80-IA(5), is as follows:

“ 80-I(6) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under subsection (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the hotel or the business of repairs to ocean-going vessels or other powered craft were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.”

It was held in Synco Industries that

  • for the purpose of calculating the deduction under Section 80-I, loss sustained in other divisions or units cannot be taken into account as sub-section (6) contemplates that only profits from the industrial undertaking shall be taken into account as it was the only source of income.
  • Section 80-I(6) of the Act dealt with actual computation of deduction whereas Section 80-I(1) of the Act dealt with the treatment to be given to such deductions in order to arrive at the total income of the assessee.

In CIT (Central), Madras v. Canara Workshops (P) Ltd., Kodialball, Mangalore, (1986) 3 SCC 538, the question that arose for consideration before this Court related to computation of the profits for the purpose of deduction under Section 80-E, as it then existed, after setting off the loss incurred by the assessee in the manufacture of alloy steels. Section 80-E of the Act, as it then existed, permitted deductions in respect of profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule. It was argued on behalf of the Revenue that the profits from the automobile ancillaries industry of the assessee must be reduced by the loss suffered by the assessee in the manufacture of alloy steels.

The Court was, however, not in agreement with the submissions made by the Revenue. It was, hence, held that the profits and gains by an industry entitled to benefit under Section 80-E cannot be reduced by the loss suffered by any other industry or industries owned by the assessee.

Referring to the aforesaid authorities, the Court held that

“… Sub-section (5) cannot be pressed into service for reading a limitation of the deduction under sub-section (1) only to ‘business income’.”

[CIT v. Reliance Energy Ltd., 2021 SCC OnLine SC 349, decided on 28.04.2021]


Judgment by: Justice L. Nageswara Rao 

Know Thy Judge| Justice L. Nageswara Rao

For Revenue: Senior Advocate Arijit Prasad

For Assessee: Senior Advocate Ajay Vohra

Case BriefsSupreme Court

Supreme Court: Dealing with an important question as to the constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act, 1961, the 3-judge bench of RF Nariman*, BR Gavai and Hrishikesh Roy, JJ has held that any order of stay shall stand vacated after the expiry of the period or periods mentioned in the Section only if the delay in disposing of the appeal is attributable to the assessee.

Section 254 (2A) of the Income Tax Act states that “In every appeal, the Appellate Tribunal, where it is possible, may hear and decide such appeal within a period of four years from the end of the financial year in which such appeal is filed under sub-section (1) or sub-section (2) of section 253”

However, the third proviso provides that “if such appeal is not so disposed of within the period allowed under the first proviso or the period or periods extended or allowed under the second proviso, which shall not, in any case, exceed three hundred and sixty-five days, the order of stay shall stand vacated after the expiry of such period or periods, even if the delay in disposing of the appeal is not attributable to the assessee.”

By a judgment dated 19.05.2015, the Delhi High Court struck down that part of the third proviso to Section 254(2A) of the Income Tax Act which did not permit the extension of a stay order beyond 365 days even if the assessee was not responsible for delay in hearing the appeal. The Revenue, hence, challenged the said judgment and several other judgments from various High Courts holding the same.

The Delhi High Court, in it’s judgment, held that

“Unequals have been treated equally so far as assessees who are responsible for delaying appellate proceedings and those who are not so responsible, resulting in a violation of Article 14 of the Constitution of India.”

Agreeing to the said reasoning, the Supreme Court added,

“This is a little peculiar in that the legislature itself has made the aforesaid differentiation in the second proviso to Section 254(2A) of the Income Tax Act, making it clear that a stay order may be extended upto a period of 365 days upon satisfaction that the delay in disposing of the appeal is not attributable to the assessee.”

It was further explained that ordinarily, the Appellate Tribunal, where possible, is to hear and decide appeals within a period of four years from the end of the financial year in which such appeal is filed. It is only when a stay of the impugned order before the Appellate Tribunal is granted, that the appeal is required to be disposed of within 365 days. So far as the disposal of an appeal by the Appellate Tribunal is concerned, this is a directory provision. However, so far as vacation of stay on expiry of the said period is concerned, this condition becomes mandatory so far as the assessee is concerned.

“The object sought to be achieved by the third proviso to Section 254(2A) of the Income Tax Act is without doubt the speedy disposal of appeals before the Appellate Tribunal in cases in which a stay has been granted in favour of the assessee. But such object cannot itself be discriminatory or arbitrary…”

The Court, hence, concluded:

  • Since the object of the third proviso to Section 254(2A) of the Income Tax Act is the automatic vacation of a stay that has been granted on the completion of 365 days, whether or not the assessee is responsible for the delay caused in hearing the appeal, such object being itself discriminatory, was held liable to be struck down as violating Article 14 of the Constitution of India.
  • Also, the said proviso would result in the automatic vacation of a stay upon the expiry of 365 days even if the Appellate Tribunal could not take up the appeal in time for no fault of the assessee.
  • Further, vacation of stay in favour of the revenue would ensue even if the revenue is itself responsible for the delay in hearing the appeal. In this sense, the said proviso is also manifestly arbitrary being a provision which is capricious, irrational and disproportionate so far as the assessee is concerned.

Hence, partially upholding the validity of the third proviso to Section 254(2A) of the Income Tax Act, the Court held that the same will now be read without the word “even” and the words “is not” after the words “delay in disposing of the appeal”. Therefore, any order of stay shall stand vacated after the expiry of the period or periods mentioned in the Section only if the delay in disposing of the appeal is attributable to the assessee.

[Deputy Commissioner of Income Tax v. Pepsi Foods Ltd., 2021 SCC OnLine SC 283, decided on  06.04.2021]


*Judgment by Justice RF Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by:

For Revenue: ASG Bikarma Banerjee

For Assessees: Senior Advocate Ajay Vohra and Advocates Himanshu S. Sinha, Deepak Chopra and  Sachit Jolly

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Income Tax Appellate Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal, Bangalore: Dealing with the issue of whether the CIT(A) was justified in confirming the addition of amount representing 15% of the sale proceeds deducted by the Monitory committee from e-auction sale of mineral stock belonging to the Assessee and which was contributed to SPV, as per the direction given by the Supreme Court,  the ITAT held that the amount deducted @ 15% from the sale proceeds constitute trading receipts in the hands of the Assessee, but at the same time it is allowable as deduction u/s 37(1) of the Income Tax Act, 1961.

Over rampant mining in the state Karnataka the Supreme Court in the case of Samaj Parivartana Samudaya v. State of Karnataka, (2019) 17 SCC 753 imposed a complete ban on mining in the district of Bellary. Further, after application and request the mining work was resumed after categorizing the mines in three segments ‘A’, ‘B’ and ‘C’, depending on various types of violations by Lessee and financial obligation were created on account of damages and loss caused to the forest and environment by contravention of laws

The Assessee was a partnership firm and is engaged in the business of extraction of iron ore by taking lease of lands from Government. The mines owned by the Assessee herein have been categorised as “B” category mines. Hence 15% of sale, proceeds have been deducted by Monitoring Committee during the years under consideration.

The Assessee had reduced the above-said amounts from the gross sale proceeds and accordingly declared only net sale proceeds as its income in both the years. Assessment proceedings were initiated whereby the AO held that: –

  1. Entire sale proceeds as per E-auction bit sheets/invoices has to be assessed to tax as trading receipts. Hence it constitutes income in the hands of the Assessee.
  2. The amount retained by CEC/MC, as per directions of the Supreme Court on behalf of the Assessee, which is given to the Special Purpose Vehicle (SPV) is on account of damages and loss caused to the forest and environment by contravention of laws. The said amount cannot be allowed as deduction out of sale proceeds even after the accrual of such liability which is being compensation and penal in nature for contravention of laws. The amount so retained for adjusting penalty and other liabilities is nothing but the appropriation of the profit of the Assesse
  3. SPV established for Social-economic development of the mining area is nothing but relating to Corporate Social responsibility only. Hence it is not allowable u/s 37(1), as it was not incurred by the Assessee wholly and exclusively for the purpose of business. It was retained to meet the penal and other liabilities for contravention of law and therefore, the said amount cannot be allowed as deduction in view of the specific Explanation to section 37(1) of the Act.

The CIT(A) confirmed the view taken by the AO. Being aggrieved by the said order, the Assessee preferred an Appeal before the ITAT, whereby ITAT held that:

“It cannot be said that these amounts are penal in nature. The Assessee could not have resumed the mining operations. Therefore, these expenses are incidental to carrying on the business and hence allowable u/s 37(1) of the Act.”

“In view of the foregoing discussions and also following the decision rendered by the co-ordinate benches, we hold that the amount deducted @ 15% from the sale proceeds constitute trading receipts in the hands of the Assessee, but at the same time it is allowable as deduction u/s 37(1) of the Act. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue in both the years under consideration and direct the AO to delete the impugned addition in both the years.”

Thus the Appeal preferred by the Assessee was allowed and the ITAT was pleased to hold the amount deducted @ 15% from the sale proceeds constitute trading receipts in the hands of the Assessee, but at the same time it is allowable as deduction u/s 37(1) of the Act.

 [M/s. M. Hanumantha Rao Vs. A.C.I.T I.T.A. No. 3298 % 3299/Bang/2018. Decided on 25.02.2021].


† Advocate, Supreme Court of India and Delhi High Court