Delhi High Court
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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.

Bonus Share
Op EdsOP. ED.

   

Introduction

A company accumulates its equity capital via investments from various investors. Generally, these investors are concerned less with the company’s affairs and more with their return on investment. The company issues cash dividends and/or bonus shares to reward these investors’ interest.

Cash dividends involve actual cash outflow from the company’s coffers and attract dividend tax which the investor bears.1 However, on the other hand, bonus shares are free shares (as its cost of acquisition is taken as nil) issued to the investors in proportion to their already existing shareholding in the company. These are issued out of accumulated profits/reserves of the company, and no additional cash inflow or outflow is involved.2 Hence, a question on the taxability of allotment of bonus share arises.

In IRC v. John Blott, a case from 1921, the House of Lords addressed this moot question by observing that since the allotment of bonus shares does not change the company’s coffers and nothing enters the allottee’s pockets, the issuance of bonus shares could not be taxed on similar lines as taxation of cash dividends.3 Various Indian courts have made similar observations.4

However, recently, there have been cases wherein the assessing officers (AO) have extended the literal interpretation of Section 56(2)(vii)5 of the Income Tax Act, 1961 (IT Act) to conclude that issuance of bonus share is a transfer of property, other than immovable property, without consideration and hence, is income from other sources (IOS) in the hands of the assessee. Therefore, tax is leviable on those bonus shares aggregate fair market value. Although, the Indian courts have struck down this extension of literal interpretation on various occasions.

This article aims to understand the basis and extent of the feasibility of such interpretation and elaborate on why the decision of various courts to reject such interpretation is correct. The paper first lays Section 56(2)(vii) of the IT Act to understand how the issuance of bonus shares could not be taxed as IOS and then elaborates on some recent judicial decisions supporting the same.

Section 56 of the Income Tax Act, 1961

Section 56(2)(vii) of the IT Act deals with levying tax on deemed income arising on transfer of gifts, etc. which has the value of more than a certain amount under the head “income from other sources”. It stipulates that “where an individual or Hindu Undivided Family (HUF) receives, from any person, any property other than an immovable property without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property shall be taxable as IOS”.6 This provision applies mutatis mutandis to a company or a firm.7

By imprinting dictionary meaning on the term “receive” in the above provision, it would mean receiving or actual receipt of something, including money, letter, or a gift, by way of a transfer. Likewise, the term “property” in Section 56 means to include “shares and securities” under the head of an assessee’s capital asset. This implies that Section 56(2)(vii) applies when the nature of the property being transferred is a capital receipt and not a revenue receipt.

Following the above logic, allotment of bonus share constitutes a property transfer without consideration for Section 56 and shall be subjected to tax. However, a holistic understanding of the purpose of enacting Section 56 and interpreting the term “consideration” would prove that the same is not warranted.

Purposive approach to Section 56

On reading Section 56(2)(vii), we could see that any sum of money or any property-in-kind received without consideration or for inadequate consideration by an individual or HUF is chargeable to income tax as IOS. The provision addresses deemed income received due to the transfer of property without consideration, like in the case of gift transfer. Such deemed income was taxed under the Gift-Tax Act, 19588. However, it was repealed, and to have a preventive measure against tax evasion in the guise of gifts transfer and prevention of money laundering, Section 56(2)(vii) in the form of an anti-abuse provision, was enacted.9

Further, recognising this anti-abuse nature of Sections 56(2)(vii)/(vii)(a) and broadening the scope of donee-based taxation of gifts or IOS, the Finance Bill, 201710 introduced Section 56(2)(x) to include any other assessee (other than an individual, HUF, a firm, or a company in certain cases) who receives a sum of money or property without consideration or for inadequate consideration.11

Furthermore, the Karnataka High Court, in the case of CIT v. Ranjan Pai when faced with a similar challenge, ruled in favour of the assessee, basing their verdict on the premise that there was no material evidence pertaining to the assessee’s intention of evading tax liability, which the Court considered as one of the primary objectives of enacting and levying tax under Section 56(2)(vii).12

When bonus shares are issued, the primary purpose is to incentivise the investor for their contribution. Even though these shares are allotted without any cash inflow or outflow, bonus shares are taxed at a later stage when the allottee transfer or sells these shares under the head “capital gains”.13 In this scenario, since there is no cost of acquisition, it is taken as nil14, and the full selling price is considered gains to compute capital gains tax.15 Hence, in a nutshell, tax is not evaded. It is only deferred to a later stage. Therefore, subjecting allotment of bonus share under Section 56(2)(vii) does not fit the purpose of enacting the said provision and thus, should not be taxed as such.

Meaning of “consideration”

Similarly, the term “consideration” as used in Sections 56(2)(vii)/(vii)(a) is neither defined nor explained anywhere in the IT Act16. In the conventional sense, “consideration” refers to something done in place of or in return for something else,17 including any inconvenience or harm endured.18 The term “consideration” as used in Sections 56(2)(vii)/(vii)(a) might thus be interpreted to encompass the decrease in the fair market value of the shares previously held by such shareholders (as a detriment).19 Hence, it can be contended that the issuance of bonus shares is actually not bereft of any consideration and should be considered for tax purposes under Section 56.

Therefore, it can be construed that Section 56(2)(vii) does not warrant levying of tax on the allotment of bonus share. Various courts in India have made similar observations.

Judicial development

In 2014, the ITAT, Mumbai in Sudhir Menon v. CIT20, dealt with this issue of taxability of bonus share under Section 56. In this case, the taxpayer was offered proportional bonus shares with a face value of INR 100 each. Half of the shares were subscribed by the taxpayer, with the remaining shares being distributed to the other shareholders. The assessing officer used the shares’ year-end market value and treated the difference as insufficient compensation under Section 56 of the Income Tax Act because of the higher value.

The Tribunal determined that the issuance of bonus shares is a capitalisation of the company’s profit that does not result in an increase or decrease in a shareholder’s wealth or shareholding percentage. A bonus issue merely increases the market liquidity of shares, whereas a proportionate allotment does not affect shareholders. As a result, it is exempt from taxation under Section 56 of the Income Tax Act.

However, the Tribunal did rule that in the event of a disproportionate issue of bonus shares, where the value of the property being passed is greater than the value of his existing property, he may be subject to tax under Section 56.21

The ITAT, Delhi, in 2019, relied on this decision in CIT v. Mamta Bhandari, holding that Section 56 of the ITA did not apply to the allotment of bonus shares when the shareholder’s shareholding did not increase or decrease. The shareholder does not receive property in a proportional allotment of bonus shares because what they receive is the split shares from their own holding. Due to the issuance of bonus shares, the shareholder gets his own value of the existing shares at a lower overall value. As a result, Section 56 of the ITA is not applicable.22

Following the above Tax Tribunal decisions, a similar case was appealed to the Karnataka High Court from the Bangalore ITAT.23 According to the ITAT, when a shareholder receives the bonus issue, there is a decrease in the overall value of the shares he owns, which is offset by the bonus issue shares. As a result, such an issue should not be taxed as “income from other sources”. The Income Tax Department then appealed the matter. The High Court upheld the ITAT ruling and reiterated that the allotment of bonus shares made on a pro rata basis could not attract tax liability under Section 56.

The Court determined that a company’s issuance of bonus shares is merely a reallocation of funds from its reserves to its capital. It does not result in an inflow or outflow of funds for the company. Furthermore, shareholders who receive such a pro rata allotment do not gain any benefit that can be taxed under Section 56.24 Hence, it is clear that the issuance of bonus shares shall not attract tax liability under Section 56.

Conclusion

When a company allot bonus shares, it does not change its capital structure.25 In other words, the issuance of bonus shares increases the number of shares accessible on the market but does not affect the total value of the company’s stock. Simply capitalising the reserves and transferring the numbers from the “reserves/surplus” column to the “share capital” column without actual cash inflow or outflow does not influence the company’s total net worth.

Neither does it increase or decrease the wealth of the shareholder. His shareholding remains unchanged. It is only that his existing shareholding further splits on a pro rata basis. There is no actual transfer of the property. Issuance of bonus shares only reduces the value of the shares of the existing shareholders proportionately.26 On the contrary, while selling these bonus shares, since the acquisition cost is taken nil, the entire selling price is considered as gains and is taxable at that stage.

In other words, allotment of bonus share does not attract tax liability under Section 56(2)(vii) as it does not match the purpose of enacting the said provision and following the interpretation of the term “consideration”, it further does not fulfil the criteria of levying tax under the said provision.

As a result, the author believes that the definition of “shares and securities” in Section 56(2)(vii) should be limited to those shares and securities that would otherwise command a price and whose absence is due to nefarious tax evasion motives, rather than bonus shares, which are supposed to be without any outflow by their very nature. Hence, the issuance of bonus shares does not attract tax liability under Section 56(2)(vii) of the Income Tax Act.


† Fifth year student, BA LLB (Hons.), West Bengal National University of Juridical Sciences, Kolkata. Author can be reached at <kartik218023@nujs.edu>.

1. Tax Guru, “Income Tax on Dividend Received from Company”, 4-6-2022, <https://taxguru.in/income-tax/income-tax-dividend-received-company.html> (last visited 8-6-2022).

2. Tax Guru, “Taxability of Bonus Shares under the Income Tax Act”, 1961, 8-10-2018, <https://taxguru.in/income-tax/taxability-bonus-shares-income-tax-act-1961.html> (last visited 8-6-2022).

3. IRC v. John Blott, (1921) 8 TC 101.

4. See CIT v. Madan Gopal Radhey Lal, AIR 1969 SC 840; CIT v. Dalmia Investment Co. Ltd., AIR 1964 SC 1464; CIT v. Mercantile Bank of India Ltd., 1936 SCC OnLine PC 33.

5. Income Tax Act, 1961, S. 56(2)(vii).

6. Income Tax Act, 1961, S. 56(2)(vii).

7. Income Tax Act, 1961, S. 56(2)(vii)(a).

8. Gift Tax Act, 1958.

9. Sumeet Khurana and Rajat Juneja, “Taxing ‘Bonus Shares' — The Question is of Timing!”, <https://database.taxsutra.com/articles/f71b0d371e2d106d969d4598adc9f7/expert_article#_ftn17> (last visited 8-6-2022).

10. Finance Bill, 2017.

11. Memorandum Explaining the Provisions of the Finance Bill, 2017, at 22, <https://www.taxmann.com/bookstore/bookshop/bookfiles/samplechapterGTA.pdf> (last visited 8-6-2022).

12. CIT v. Ranjan Pai, 2020 SCC OnLine Kar 4981.

13. Income Tax Act, 1961, S. 45.

14. Income Tax Act, 1961, S. 55(2)(aa)(iii-a).

15. Tax Guru, “Taxability of Bonus Shares under the Income Tax Act, 1961”, 8-10-2018, available at <https://taxguru.in/income-tax/taxability-bonus-shares-income-tax-act-1961.html> (last visited 8-6-2022).

16. Income Tax Act, 1961.

17. CIT v. Jaykrishna Harivallabhdas, 1997 SCC OnLine Guj 255.

18. Oregon Home Builders v. Crowley, 170 P 718, 87 Or 517, 171 P. 214.

19. CIT v. Dalmia Investment Co. Ltd., AIR 1964 SC 1464.

20. 2014 SCC OnLine ITAT 118.

21. Sudhir Menon v. CIT, 2014 SCC OnLine ITAT 118.

22. 2019 SCC OnLine ITAT 16913.

23. CIT v. Ranjan Pai, 2020 SCC OnLine Kar 4981.

24. CIT v. Ranjan Pai, 2020 SCC OnLine Kar 4981.

25. Sudhir Menon v. CIT, 2014 SCC OnLine ITAT 118.

26. CIT v. Mamta Bhandari, 2019 SCC OnLine ITAT 16913.

Case BriefsSupreme Court

Supreme Court: The bench of MR Shah* and BV Nagarathna, JJ has held that the right available to the judgment debtor under Rule 60 of the Second Schedule of the Income Tax Act, 1961 is a valuable right and the last resort/opportunity to the judgment debtor to save his property and should not be affected on the technical ground and/or for the mistake and/or the bona fide mistake for which he was not at all responsible.

“It is a right available to the judgment debtor after his property is sold in a court auction. Therefore, such a valuable right available to the judgment debtor to save his property should not be affected on the technical ground and/or for the mistake and/or the bona fide mistake for which he was not at all responsible.”

Background

In the case at hand, Recovery Certificate bearing RP No.153/2006 was issued in favour of the IndusInd Bank for recovery of an amount of Rs.71,88,819.87/- recoverable from the original borrowers – respondent Nos. 3 to 5 with further interest payable at the rate of 12% p.a. from 27.12.1999 till realization and the costs, charges and expenses of the proceedings for recovery thereof.

A proclamation of sale of the properties was issued by the Recovery Officer, DRT on 28.11.2006 fixing the public auction on 08.01.2007. The amount due and payable was Rs.1,27,30,527/- including interests as on 30.06.2006. In the auction held on 08.01.2007, the bid of respondent Nos. 1 and 2 herein (original writ petitioners) being the highest offer being Rs.1.35 crores came to be accepted by the Recovery Officer. The successful bidders – respondent Nos. 1 and 2 deposited the bid amount on 22.01.2007.

The original borrowers thereafter filed an application under Rule 60 of the Second Schedule of the Income Tax Act, 1961 read with Sections 25 to 29 of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 for setting aside the auction vide application dated 25.01.2007 and submitted a Demand Draft for an amount of Rs.1,27,30,527/- as specified in the sale proclamation.

The Recovery Officer adjourned the matter to 06.02.2007 directing the respondents to serve a copy of the order and the application on the Bank and the auction purchaser. The Bank filed its reply on 06.02.2007 before the Recovery Officer in response to the application of the respondent No.5 (on the 29th day from the date of auction). In its reply, the Bank claimed that there was some shortfall in the amount deposited by the borrower but no calculation sheet was attached to the reply.

The Recovery Officer thereafter passed an order dated 15.02.2007 allowing the application submitted by the borrower by holding that the borrower had deposited the requisite amount for setting aside the sale under Rule 60 of the Second Schedule of the Income Tax Act. Accordingly, the sale of the properties in question came to be set aside. The Recovery Officer also directed the Bank to hand over all the original documents pertaining to the immovable properties in question to the borrower immediately.

The Gujarat High Court, however, set aside the order passed by the DRAT and confirmed the sale in favour of auction purchasers by dismissing the application submitted by the judgment debtor under Rule 60 of the Second Schedule of the Income Tax Act, 1961 by observing that as there was a shortfall in the deposit of the amount while exercising the right under Rule 60 and hence, there was non-compliance of the provisions of Rule 60.

Analysis

The Supreme Court, however, disagreed with the opinion of the High Court and held that as such it was the duty cast upon the Recovery Officer to mention the exact amount in the sale certificate. The Recovery Officer mentioned the amount in the Sale Certificate of Rs.1,27,30,527/- including the interest as on 30.06.2006, however, did not specify any further amount towards the interest for the period between 30.06.2006 till the date of the sale proclamation, i.e., 08.01.2007, which the Recovery Officer ought to have mentioned specifically. The aforesaid mistake and/or inaccuracy on the part of the Recovery Officer led to the shortfall in the deposit of the amount, which was towards the interest for the period between 30.06.2006 to 08.01.2007, otherwise, the judgment debtor had substantially complied with Rule 60.

“The shortfall was Rs.3,57,647/-. When the judgment debtor deposited the substantial amount of Rs. 1,27,30,527/- and other amounts due and payable under Rule 60 including the penalty and the interest, there was no reason for the judgment debtor not to deposit Rs. 3,57,647/- which is a very small amount as against the amount deposited.”

Though the Bank filed its reply before the Recovery Officer in response to the application made by the judgment debtor – borrower made under Rule 60 and in which it was stated that there was some shortfall in the amount deposited, but according to the judgment debtor, no calculation sheet was attached to the reply and/or supplied to the judgment debtor. Hence,

“If the Recovery Officer would have been accurate in submitting the exact amount in the sale proclamation due and payable on the date of sale proclamation then the eventuality which has arisen in the present case would not have arisen. There was an absurd misconduct on the part of the Recovery Officer for which the judgment debtor should not be made to suffer.”

The Court observed that if the Bank would have submitted the calculation sheet earlier alongwith the reply on 06.02.2007, which was 29th day from the date of auction, the judgment debtor would have deposited the balance shortfall amount. Therefore, there was a substantial compliance/ compliance of Rule 60. If the Recovery Officer would have been accurate in submitting the exact amount in the sale proclamation due and payable on the date of sale proclamation then the eventuality which has arisen in the present case would not have arisen. There was an absurd misconduct on the part of the Recovery Officer for which the judgment debtor should not be made to suffer.

The Court explained that the legislative intent of Rule 60 is to give the defaulter as much latitude as possible till the end and he can, under Rule 60, without assigning any cause but after depositing the sum therein mentioned as mentioned in the sale proclamation within the stipulated time, avoid the auction and protect his property. Thus, the right which is available to the judgment debtor under Rule 60 is a most valuable right available and the same shall not be permitted to be affected on the technical ground and/or bona fide mistake for which he cannot be said to be at fault.

[RS Infra-Transmission Ltd v. Saurinindubhai Patel, 2022 SCC OnLine SC 854, decided on 11.07.2022]


*Judgment by: Justice MR Shah

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The Division Bench of Hemant Gupta and V. Ramasubramanian, JJ., held that non-supply of satisfaction note to the assessee will not make the whole act of search and seizure contrary to Section 132(1) of the Income Tax Act,1961.  

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Supreme Court puts an end to about a century-old land dispute under U.P. Consolidation of Holdings Act

The Court held that since all the three brothers were alive when the Civil Court passed the partition decree, the Consolidation authorities were well within their powers—considering the subsequent death of two brothers—to hold that the shares of the brother who died issueless should be equally distributed among heirs of his two brothers.

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Bail applications of co-accused arising from the self-same FIR shall be listed before the same court to avoid disparity

 With a view to bringing reform in practices relating to disposal of bail applications arising from the same case, the Division Bench of Ajay Rastogi and Vikram Nath, JJ., held that where more than one bail application has been filed by co-accused of offences arising from self-same FIR, all such applications shall be listed before the same court to avoid disparity.  

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Illegal Coal Mining| Supreme Court stays Meghalaya HC’s order directing dismantling of existing coke plants

In a case concerning illegal coal mining in the State of Meghalaya, the Vacation Bench comprising Surya Kant and J.B. Pardiwala, JJ., stayed directions of the Meghalaya High Court directing the dismantling of existing coke plant(s).

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Indian Dhows sinking & hijacking by Somali Pirates| Delay in repudiating insurance claim cannot be the only factor to presume deficiency in service

“The delay in processing the claim and delay in repudiation could be one of the several factors for holding an insurer guilty of deficiency in service. But it cannot be the only factor.”

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Civil Court versus Writ Court: Breaking down the scope of jurisdiction in execution/registration of documents matters

The bench of Hemant Gupta and V. Ramasubramanian, JJ has lucidly explained the law on the jurisdiction in case of disputes relating to execution and registration of deeds and documents under the Registration Act, 1908.

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Cases Reported in SCC


2022 SCC Vol. 6 Part 1

2022 SCC Vol. 6 Part 2

2022 SCC Vol. 6 Part 3

2022 SCC Vol. 6 Part 4

2022 SCC Vol. 6 Part 5


Know Thy Judges


Explorer of the Legal Multiverse – Justice A.M. Khanwilkar retires

Justice Krishna Murari

Justice M.M. Sundresh

Monthly RoundUp
Legal RoundUpLegislation Roundup

Around 50 Legislation Updates | Relating to Controlled Delivery (Customs) Regulations, 2022, Bullion exchange units, Legal Metrology, Work from Home for the Unit, Project Screening Committee, Biodegradable plastic, Zero coupon zero principal, Note Authentication and Fitness Sorting Parameters and International Trade Settlement in Indian Rupees

MINISTRY OF CORPORATE AFFAIRS

Obligations on the part of ‘Insolvency Professionals’ regulated vide Insolvency and Bankruptcy Board of India (Insolvency Professionals) (Amendment) Regulations, 2022

On 4-7-2022, Insolvency and Bankruptcy Board of India (IBBI), notified Insolvency and Bankruptcy Board of India (Insolvency Professionals) (Amendment) Regulations, 2022. With immediate effect it amends Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016. Through this regulation, the professionals that conduct the resolution of insolvency of any third person are obliged to make it impartial, paying the costs incurred, managing their information with the Board.

Read More HERE

MINISTRY OF FINANCE

Insertion of Form No. 26QF to the Income tax Rules, 1962 vide Income-tax (20th Amendment) Rules, 2022

The Central Board of Direct Taxes has notified Income-tax (20th Amendment) Rules, 2022 to amend the Income-tax Rules, 1962. The amendment modifies Rule 31 A dealing with Statement of deduction of tax under section 200 (3) and insertion of Form No. 26QF to the Income tax Rules, 1962.

Read More HERE

CBDT specifies non fungible token as virtual digital asset

The Central Government has specified a token which qualifies to be a virtual digital asset as non-fungible token within the meaning of sub-clause (a) of clause (47A) of section 2 of the Income-tax Act, 1961.

Read More HERE

SIDBI modifies 10% contribution to a fixed percentage which will be decided by the Bank vide SIDBI (Defined Contributory New Pension) [Amendment] Regulations, 2022

On 21-06-2022, the Small Industries Development Bank of India notified Small Industries Development Bank of India (Defined Contributory New Pension) [Amendment] Regulations, 2022 in order to amend Small Industries Development Bank of India (Defined Contributory New Pension) Regulations, 2012. These Amendments will have a retrospective effect and comes into force with effect from January 01, 2020.

Read More HERE

Regulation of provisions on re-import of jewellery exported on E-commerce platforms vide Courier Imports and Exports (Electronic Declaration and Processing) Amendment Regulations, 2022

On 30-6-2022, Ministry of Finance notified Courier Imports and Exports (Electronic Declaration and Processing) Amendment Regulations, 2022. By this amendment, Central Board of Indirect Taxes and Customs (CBIC) elaborates the provisions of import/export of jewellery sold on e-commerce exchanged through courier, which will come into force with immediate effect.

Read More HERE

Manner of obtaining certificate of registration by ‘Finance Company’ under IFSCA revised vide IFSCA (Finance Company) (Amendment) Regulations, 2022

On 1-7-2022, International Financial Services Centres Authority (IFSCA) notifies International Financial Services Centres Authority (Finance Company) (Amendment) Regulations, 2022. This Amendment seeks to amend International Financial Services Centres Authority (Finance Company) Regulations, 2021, with the aim of defining the certification process and updating activities permitted to be carried out by the Finance Company under IFSCA. These regulations will come into force with immediate effect.

Read More HERE

Deposit and refund scheme for taxes in Electronic Ledgers revised vide Central Goods and Services Tax (Amendment) Rules, 2022

On 5-7-2022, Central Government notified Central Goods and Services Tax (Amendment) Rules, 2022 that amends Central Goods and Services Tax Rules, 2017. Any registration of tax persons which has to be suspended under Rule 21A, if it hasn’t already been cancelled by Rule 22, then it will stand revoked on payments of the due returns on them.

Read More HERE

CBIC extends waiver of late fee for delay in filing Form GSTR-4 for FY 2021-22

On 05-07-2022, the Central Board of Indirect Taxes and Customs has waived the late fee for delay in furnishing Form GSTR-4 for the period for the FY 2021-22 till 28-07-2022.

Read More HERE

Application u/s 158AB to defer filing of appeal before Tribunal or jurisdictional High Court introduced vide Income-tax (Twenty Second Amendment) Rules, 2022

The Central Board of Direct Taxes notifies Income-tax (Twenty Second Amendment) Rules, 2022 to amend the Income-tax Rules, 1962. The amendment introduces a provision dealing with Application u/s 158AB to defer filing of appeal before Tribunal or jurisdictional High Court.

Read More HERE

CBIC notifies Controlled Delivery (Customs) Regulations, 2022

The Central Board of Indirect Taxes and Customs (CBIC) has notified Controlled Delivery (Customs) Regulations, 2022 in order to track shipments of gold, silver etc.

Read More HERE

Ministry of Finance notifies 7.1% rate of interest under the special deposit scheme

Special Deposit Scheme

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MINISTRY OF HOME AFFAIRS

Transaction limit of foreign contribution received from relatives has been increased from one lakh to ten lakhs vide Foreign Contribution (Regulation) Amendment Rules, 2022

On 01-07-2022, the Ministry of Home Affairs has notified the Foreign Contribution (Regulation) Amendment Rules, 2022 to further amend the Foreign Contribution (Regulation) Rules, 2011. The amendment extends the time period to notify the Government regarding the overseas transaction from 30 days to three months and transaction limit from relatives has been increased from one lakhs to 10 lakhs.

Read More HERE

MINISTRY OF CONSUMER AFFAIRS, FOOD AND PUBLIC DISTRIBUTION

CCPA issues Guidelines to prohibit automatic levy of service charge in hotels and restaurants

On 04-07-2022, the Central Consumer Protection Authority (‘CCPA’) has issued Guidelines to prevent unfair trade practices and to protect the consumer interest with regard to levy of service charge in hotels and restaurants.

Read More HERE

Legal Metrology (Packaged Commodities) (Second Amendment) Rules, 2022

The Department of Consumer Affairs has issued the Legal Metrology (Packaged Commodities) (Second Amendment) Rules, 2022 in order to allow the electronic products to declare certain mandatory declarations through the QR Code for a period of one year, if not declared in the package itself.

Read More HERE

MINISTRY OF COMMERCE AND INDUSTRY

Bullion exchange units will now be deemed IFSCs vide Special Economic Zones (Second Amendment) Rules, 2022

On 6th July, 2022, Central Government passed Special Economic Zones (Second Amendment) Rules, 2022. It will be coming into force with immediate effect. The authority unit stores bullion as an asset for the purpose of issuance of ‘bullion’ spot delivery/depository receipts as per Rule 19. These units will now be deemed as International Financial Services Centre.

Read More HERE

Provision for Work from Home for the Unit introduced vide SEZ (Third Amendment) Rules, 2022

On 13-07-2022, the Ministry of Commerce and Industry has issued the Special Economic Zones (Third Amendment) Rules, 2022 to further amend the Special Economic Zones Rules, 2006. A new Rule 43A has been introduced which provides that a Unit may permit its employees, including contractual employees, to work from home or from any place outside the Special Economic Zone.

Read More HERE

MINISTRY OF HEALTH AND FAMILY WELFARE

FSSAI issues Guidelines for submission of applications for endorsement of vegan logo

On 25-07-2022, FSSAI has issued Guidelines for submission of applications for endorsement of vegan logo in exercise of power conferred by sub-regulation 5 of FSS (Vegan Foods) Regulations, 2022.

Read More HERE

MINISTRY OF LAW AND JUSTICE

Remunerations of Executive Officers in Arbitration Council decide vide Arbitration Council of India (Terms and conditions and salary and allowances payable to Chairperson and Members) Rules, 2022

On 9-7-2022, Central Government notified Arbitration Council of India (Terms and conditions and salary and allowances payable to Chairperson and Members) Rules, 2022 to defines rules of appointment, qualifications and conditions of service of officers of Arbitration Council and applicable with immediate effect.

Read More HERE

Relaxation for renewal of notary practice certificate beyond six months from expiry vide Notaries (Second Amendment) Rules, 2022

The Central Government has notified Notaries (Second Amendment) Rules, 2022 in order to amend Notaries Rules, 1956. The amendment inserts a proviso in Rule 8B relating to Renewal of Certificate of Practice in order to relax the application for renewal.

Read More HERE

MINISTRY OF ELECTRONICS AND INFORMATION TECHNOLOGY

Meity issues Draft Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021

On 6-7-2022, Ministry of Electronics & Information Technology published draft amendment rules to amend the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021. These amendments aim to direct the intermediaries of social media to further limit and instruct the users to abide by the rules and regulations, privacy policy and user agreement for accessor usage of its computer resource by any person and on failure the account of users can be removed and suspended. These issues can be resolved by appealing to the Grievance Appellate Committee.

Read More HERE

MINISTRY OF ENVIRONMENT, FOREST AND CLIMATE CHANGE

Formation of Project Screening Committee to screen project proposals for use of forest land vide Forest (Conservation) Rules, 2022

On 28-06-2022, Central Government notified new rules namely, “Forest (Conservation) Rules, 2022” to further carry out the protection and preservation of forests in India under Forest Conservation Act, 1980 (Act). These rules supersede the Forest Conservations Rules, 2003 and come into immediate effect.

Read More HERE

Use of biodegradable plastic, introduced vide Plastic Waste Management (Second Amendment) Rules, 2022

On 6-07-2022 the Ministry of Environment, Forest and Climate Change further amended the Plastics Waste Management Rules, 2016 by adding a second amendment named Plastic Waste Management (Second Amendment) Rules, 2022. The Rules have added some new definitions, such as, biodegradable plastics, end of life disposal, plastic packaging, Plastic Waste Processors, pre-consumer plastic packaging waste, post-consumer plastic packaging waste, recyclers, waste to energy etc.

Read More HERE

STATE LEGISLATIONS

Andhra Pradesh Consumer Protection (Direct Selling) Rules, 2021

On 15-07-2022, the Ministry of Consumer Affairs has notified Andhra Pradesh Consumer Protection (Direct Selling) Rules, 2021 to define direct selling entity, cooling off period, money circulation scheme, etc.

Read More HERE

Manner of determining input tax credit introduced vide Rajasthan Goods and Services Tax (Amendment) Rules, 2022

On 16-7-2022 the Finance Department of Rajasthan has notified the Rajasthan Goods and Services Tax (Amendment) Rules, 2022 to further amend the Rajasthan Goods and Services Tax Rules, 2017. The Amendment Rules has come into effect from 05-07-2022.

Read More HERE

SECURITIES AND EXCHANGE BOARD OF INDIA

SEBI issues circular on disclosure of specified securities and holding of specified securities in dematerialized form to bring transparency to investors

On 30-06-2022, Securities and Exchange Board of India (‘SEBI’) issued a circular providing the investors in the securities market more clarity and transparency in disclosure of shareholding pattern and manner of maintaining shareholding in dematerialized format.

Read More HERE

SEBI issues circular on investor grievance mechanism to expedite redressal and disposal of complaints

On 04-07-2022, Securities and Exchange Board of India (‘SEBI’) issued a circular on Investor Grievance Mechanism also amending its circular dated 23-02-2017 to protect the interests of investors in securities market and to promote the development and regulate the securities market.

Read More HERE

SEBI issues circular on framework for Cyber Security and Cyber Resilience for all Qualified Registrars to an Issue and Share Transfer Agents

On 06-07-2022, Securities and Exchange Board of India (‘SEBI’) issued a circular on framework for Cyber Security and Cyber Resilience for all Qualified Registrars to an Issue and Share Transfer Agents (‘QRTAs’) to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Read More HERE

SEBI declares Zero coupon, zero principal bond as securities

The Central Government has declared “zero coupon zero principal instruments” as securities for the purposes of the Securities Contracts (Regulation) Act, 1956.

Read More HERE

Levy of GST on the fees payable to SEBI

On 18-07-2022, SEBI has issued a circular for all the Market Infrastructure Institutions, Companies who have listed / are intending list their securities, other intermediaries and persons who are dealing in the securities market, that the fees and other charges payable to SEBI shall be subject to GST at the rate of 18%.

Read More HERE

SEBI issues circular permitting 155 entities to use e-KYC Aadhaar Authentication services as sub-KYC User Agency

On 20-02-2022, Securities and Exchange Board of India (‘SEBI’) has issued guidelines on entities allowed to use e-KYC Aadhaar Authentication services of Unique Identification Authority of India (‘UIDAI’) in Securities Market as sub- KYC User Agency (‘KUA’) to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Read More HERE

SEBI introduces Chapter on Social Stock Exchange vide SEBI (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2022

On 25-07-2022, the Securities and Exchange Board of India has issued SEBI (Issue of Capital and Disclosure Requirements) Third Amendment) Regulations, 2022 to amend the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. The amendment inserts a Chapter X-A dealing with Social Stock Exchange (‘SSE’).

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SEBI introduces Chapter on Obligations of Social Enterprises vide SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2022

On 25-07-2022, the Securities and Exchange Board of India has issued SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2022 to amend the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. The amendment inserts Chapter IX-A dealing with Obligations of Social Enterprises.

Read More HERE

SEBI inserts definition of Social Impact Fund vide SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2022

On 25-07-2022, the Securities Exchange Board of India(‘SEBI’) has issued SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2022 to amend the SEBI (Alternative Investment Fund) Regulations, 2012.

Read More HERE

SEBI issues circular extending the timeline for Nomination/ Opting out for Mutual Fund Unit Holders

On 29-07-2022, the Securities and Exchange Board of India (‘SEBI’) has extended the timeline for Nomination for Mutual Fund (‘MF’) Unit Holders till October 01, 2022 in order to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Read More HERE

SEBI issues Operational Circular for listing obligations and disclosure requirements or Non- convertible Securities, Securitized Debt Instruments, and Commercial Paper

On 29-07-2022, the Securities and Exchange Board of India(‘SEBI’) issued an operational circular for listing obligations and disclosure requirements or Non- convertible Securities, Securitized Debt Instruments, and/or Commercial Paper for effective regulation of the corporate bond market and to enable the issuers and other market stakeholders to get access to all the applicable circulars at one place. The provisions of this circular shall come into force with effect from 01-08-2022.

RESERVE BANK OF INDIA

RBI notified provisioning requirement for Investment in Security Receipts in order to provide glide path for the Regional Rural Banks

On 28-08-2022, Reserve Bank of India (‘RBI’) notified that for smooth functioning of the Regional Rural Banks (‘RRBs’) and to ensure smooth implementation of Clause 77 of the Master Direction- Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (‘MD-TLE’) notified on 24-09-2021, the difference between the carrying value of Security Receipts (‘SR’) should be calculated over a 5-year period starting with the financial year ending 31-03-2022.

Read More HERE

RBI issued Guidelines on Note Authentication and Fitness Sorting Parameters

On 01-07-2022, Reserve Bank of India (‘RBI’) issued guidelines on authentication of note and fitness sorting parameters for the Note Sorting Machines (‘Machine’) installed in banks. To get recycled, a note must pass all the fitness parameters: genuine notes, authenticity check.

Read More HERE

RBI issues circular on takeover/ acquisition of control of non- bank payment system operators and sale and transfer of payment system activity

On 04-07-2022, the Reserve Bank of India (‘RBI’) has issued a circular determining the requirements for obtaining prior approval in case of any takeover or/and acquisition of control of non-bank Payment System Operators (‘PSOs’) and sale or transfer of payment system activity of the same.

Read More HERE

RBI imposes Rs.1.5 crore penalty on Kotak Mahindra Bank Ltd for deficiency in regulatory compliance

The Reserve Bank of India (‘RBI’) has imposed a penalty of Rs. 1.5 crore on Kotak Mahindra Bank Ltd.(‘Kotak’) for contravening the provisions of the Banking Regulation Act, 1949, the Depositor Education and Awareness Fund Scheme, 2014, and RBI directions.

Read More HERE

RBI issues guidelines on International Trade Settlement in Indian Rupees

On 11-07-2022, Reserve Bank of India has issued guidelines on International Trade Settlement in Indian Rupees to promote growth of global trade, emphasizing exports, and to support the increasing interest of global trading community in INR.

Read More HERE

RBI imposes penalty of more than Rs. 1 crore on Ola Financial Services Private Ltd. for non-compliance with Master Direction on Prepaid Payment Instruments, 2021 and Know Your Customer, 2016

On 12-07-2022, the Reserve Bank of India (‘RBI’) imposed a penalty of Rs 1 crore and 67.80 lakh on Ola Financial Services Private Ltd (‘Ola’) for not complying with certain provisions of Master Direction on Prepaid Payment Instruments (‘PPI’) dated 27-08-2021 and Master Direction Know Your Customer (‘KYC’) Direction dated 25-02-2016.

Read More HERE

RBI issues revised regulatory framework for Urban Co-operative Banks (UCBs)

On 15-02-2021, the Reserve Bank of India had constituted the Expert Committee on Urban Co-operative Banks (‘the Committee’) to examine the issues in urban co-operative banking sector, provide a medium term road map, suggest measures for faster resolution of UCBs and recommend suitable regulatory/ supervisory changes for strengthening the sector by leveraging the recent amendments to Banking Regulation Act, 1949.

Read More HERE

Case BriefsSupreme Court

Supreme Court: The bench of MR Shah* and BV Nagarathna, JJ has rejected the view taken by the Karnataka High Court and ITAT, Bangalore that the requirement of furnishing a declaration under Section 10B (8) of the Income Tax Act, 1961 (IT Act) is mandatory, but the time limit within which the declaration is to be filed is not mandatory but is directory. The Court held that the assessee shall not be entitled to the benefit under Section 10B (8) of the IT Act on noncompliance of the twin conditions as provided under Section 10B (8) of the IT Act.

In the case at hand, when the assessee submitted its original return of income under Section 139(1) of the IT Act on the due date i.e. 31.10.2001, it specifically stated that it is a company and is a 100% export-oriented unit, entitled to claim exemption under Section 10B of the IT Act and therefore no loss is being carried forward. However, thereafter the assessee filed the revised return of income under Section 139(5) of the IT Act on 23.12.2002 and filed a declaration under Section 10B (8) which admittedly was after the due date of filing of the original return under Section 139(1), i.e., 31.10.2001.

The ITAT as well as the High Court held that for claiming the so-called exemption relief under Section 10B (8) of the IT Act, furnishing the declaration to the assessing officer is mandatory but furnishing the same before the due date of filing the original return of income is directory. Aggrieved by the decision, the Revenue approached the Supreme Court.

The Supreme Court observed that the High Court and ITAT is erroneous and contrary to the unambiguous language contained in Section 10B (8) of the IT Act which provides that  “where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of Section 10B may not be made applicable to him, the provisions of Section 10B shall not apply to him for any of the relevant assessment years”.

Hence, for claiming the benefit under Section 10B (8), the twin conditions of furnishing the declaration to the assessing officer in writing and that the same must be furnished before the due date of filing the return of income under sub-section (1) of Section 139 of the IT Act are required to be fulfilled and/or satisfied. Both the conditions to be satisfied are mandatory.

It cannot be said that one of the conditions would be mandatory and the other would be directory, where the words used for furnishing the declaration to the assessing officer and to be furnished before the due date of filing the original return of income under subsection (1) of section 139 are same/similar.”

The Court also considered the facts that in the case at hand the assessee filed its original return under Section 139(1) and not under Section 139(3). The revenue submitted that the revised return filed by the assessee under Section 139(5) can only substitute its original return under Section 139(1) and cannot transform it into a return under Section 139(3), in order to avail the benefit of carrying forward or set-off of any loss under Section 80 of the IT Act.

Agreeing with the Revenue’s submission, the Court explained,

“The assessee can file a revised return in a case where there is an omission or a wrong statement. But a revised return of income, under Section 139(5) cannot be filed, to withdraw the claim and subsequently claiming the carried forward or setoff of any loss. Filing a revised return under Section 139(5) of the IT Act and taking a contrary stand and/or claiming the exemption, which was specifically not claimed earlier while filing the original return of income is not permissible. By filing the revised return of income, the assessee cannot be permitted to substitute the original return of income filed under Section 139(1) of the IT Act.”

Therefore, it was held that claiming benefit under Section 10B (8) and furnishing the declaration as required under Section 10B (8) in the revised return of income which was much after the due date of filing the original return of income under Section 139(1) of the IT Act, cannot mean that the assessee has complied with the condition of furnishing the declaration before the due date of filing the original return of income under Section 139(1) of the Act.

Ruling in favour of the Revenue, the Court held that for claiming the benefit under Section 10B (8) of the IT Act, the twin conditions of furnishing a declaration before the assessing officer and that too before the due date of filing the original return of income under Section 139(1) are to be satisfied and both are mandatorily to be complied with.

Setting aside the judgment of High Court and ITAT, the Court held that the assessee shall not be entitled to the benefit under Section 10B (8) of the IT Act on noncompliance of the twin conditions as provided under Section 10B (8) of the IT Act.

[CIT v. Wipro Ltd., 2022 SCC OnLine SC 831, decided on 11.07.2022]


*Judgment by: Justice MR Shah


Counsels

For Revenue: ASG Balbir Singh

For Assessee: Senior Advocate S. Ganesh

Case BriefsSupreme Court

Supreme Court: The Division Bench of Hemant Gupta* and V. Ramasubramanian, JJ., held that non-supply of satisfaction note to the assessee will not make the whole act of search and seizure contrary to Section 132(1) of the Income Tax Act,1961.  

Reversing the impugned decision of the Gujarat High Court, the Court held that formation of reasons to believe being an administrative act, the courts have only limited power to determine whether such reasons are whimsical or malafide, the sufficiency of the grounds which induced the competent authority to act is not a justiciable issue to be determined by courts. 

Factual Backdrop  

The appellant-assessee had transferred a sum of Rs. 10 crores to M/s Goan Recreation Clubs Private Ltd. during the financial year 2016-17. He had secured the loan by way of a mortgage of the property situated in North Goa. Thereafter, the assessee became the Director of the Company from 18-05-2016 to 23-06-2016. Later on, Rs. 10 crores were repaid and the mortgage was released on 10-07-2017. In the income-tax return filed by the assessee for that financial year, he had shown an interest income of Rs.42,51,946 which had been taxed as well. 

In the above backdrop, the Revenue had started a search and seizure operation against the assessee, suspecting that unaccounted black money was involved in the transaction since the Company stepped into the business of gaming and entertainment and launched a casino in Goa without having any adequate capital. Further, the company had made cash deposits of a total Rs.13,79,10,500 soon after demonetization.  

Grievances of the Assessee  

The assessee challenged the act of authorization for search and seizure before the Gujarat High Court on the ground that it was a fishing enquiry and the conditions precedent as specified in Section 132 of the Act were not satisfied. The assessee contended that he was not supplied with the satisfaction note as required to be disclosed in terms of Explanation to Section 132(1) of the Income Tax Act,1961  inserted by the Finance Act, 2017 with retrospective effect i.e., on 01-04-1962.  

Findings of the High Court 

The High Court found that none of the reasons to believe to issue authorization met the requirement of Section 132(1)(a), (b) and (c), hence the warrant of authorization dated 07-08-2018 issued under Section 132 of the Act was quashed. Consequently, all actions taken pursuant to such a warrant of authorization were rendered invalid.  

Whether the Revenue has Reasons to Believe 

The Revenue submitted that it was not expected to disclose to any of the members directly or indirectly involved in the cob-web of financial transactions with the core groups, viz. Sarju Sharma and associated group of companies as any inkling of action were likely to compromise the confidentiality and secrecy of the case.   

The Court noted that the detailed satisfaction note showed multiple entries in the account books of Sarju Sharma and others. Further, manner of Sarju Sharma who was either in Siliguri (West Bengal) or in Goa contacting the assessee in Ahmedabad for a loan of Rs.10 crores did not appear to be a normal transaction. Subsequent repayment of mortgage and the interest income reflected in the relevant assessment year appeared to be the steps taken by the assessee to give a colour of genuineness. Therefore, the Court opined that the Revenue had a reason to suspect that such entry was an accommodation entry and the cobweb of entries required to be unravelled including the trail of the money paid by the assessee. The Court observed, 

“The intention of the Revenue was to un-layer the layering of money which is suspected to be done by the assessee since the accommodation entry is a common modus operandi to bring the unaccounted black money to books for a brief period.”

Noting that the Revenue suspected that the investment of Rs.10 crores for a short period was not for earning interest income as the same was repaid in the same assessment year and intended to investigate the fund trail of the money paid by the assessee, the Court opined that such belief was not out of hat or whimsical.  

“The test to consider the justiciability of belief is whether such reasons are totally irrelevant or whimsical. the Court has to examine whether the reason to believe is in good faith; it cannot merely be pretence.”

Considering the reasons recorded in the satisfaction note including the investment made by the assessee for a brief period and that investment was alleged to be an accommodation entry, the Court said that it cannot be said to be such which does not satisfy the prerequisite conditions of Section 132(1) of the Act. 

With regard to non-supply of satisfaction notice to the assessee, the Court opined that such a notice would have been sufficient notice of the material against the Company and its group, to defeat the entire attempt to unearth the cobweb of the accounts by the Company and its associates. The Court opined that the Revenue may fail or succeed but that would not be a reason to interfere with the search and seizure operations at the threshold, denying an opportunity to the Revenue to unravel the mystery surrounding the investment made by the assessee.  

Hence, the Court held that the view of the High Court that the authorization to search the premises of the assessee was invalid, could not be sustained.  

Findings and Conclusion  

With a view to restate and elaborate the principles in exercising the writ jurisdiction in the matter of search and seizure under Section 132 of the Act the Court made the following observations:  

  1. The formation of opinion and the reasons to believe recorded is not a judicial or quasi-judicial function but administrative in character;  
  2. The information must be in possession of the authorised official on the basis of the material and the opinion must be honest and bona fide. It cannot be merely pretence 
  3. The authority must have a reasonable belief that the person concerned has omitted or failed to produce books of accounts or other documents; or such person is in possession of any money, bullion, jewellery or other valuable article indicating non-disclosed income;  
  4. The Courts can examine whether the reasons recorded are actuated by mala fides or on a mere pretence and that no extraneous or irrelevant material has been considered;  
  5. The question as to whether such reasons are adequate or not is not a matter for the Court to review in a writ petition. The sufficiency of the grounds which induced the competent authority to act is not a justiciable issue;  
  6. The relevance of the reasons for the formation of the belief is to be tested by the judicial restraint as in administrative action as the Court does not sit as a Court of appeal but merely reviews the manner. The Court shall not examine the sufficiency or adequacy thereof;  
  7. In terms of the explanation inserted by the Finance Act, 2017 with retrospective effect from 01-04-1962, such reasons to believe as recorded by income tax authorities are not required to be disclosed to any person or any authority or the Appellate Tribunal.  

In view of the above, the Court concluded that the High Court was not justified in setting aside the authorization of search. Consequently, the appeal was allowed and the impugned order was set aside. The Revenue was held to be at liberty to proceed against the assessee in accordance with the law.  

[Director of Income Tax (Investigation) v. Laljibhai Kanjibhai Mandalia, 2022 SCC OnLine SC 872, decided on 13-07-2022] 


*Judgment by: Justice Hemant Gupta 


Appearance by:  

For the Appellant: Balbir Singh, Additional Solicitor General  

For the Respondent: Datar, Senior Advocate  


Kamini Sharma, Editorial Assistant has put this report together 

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.

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.

Advance RulingsCase Briefs

Rajasthan Appellate Authority for Advance Ruling: The Bench of Pramod Kumar Singh, Member (Central Tax) and Ravi Jain, Member (State Tax) while addressing a matter held that hostel seat should be considered as a unit of accommodation.

Factual Background

Appellant had filed an appeal against the ruling issued by Authority for Advance Ruling Rajasthan.

Appellant was registered as a Public Charitable Trust under Section 12AA of the Income Tax Act, 1961. It was stated that the appellant was also the sponsoring body of Mody University of Science and Technology (MUST).

Further, it was added that the appellant was considering a proposal to allow the students of MUST to use the ‘Hostel Accommodation’ in its surplus infrastructure which includes Hostel Seat for the students along with serving meals including breakfast, lunch and dinner.

The ‘Boarding and Lodging Charges’ will directly be charged from the students and shall be based on the type of the ‘HOSTEL SEAT’ opted by the students.

The application was filed before the Rajasthan Authority for Advance Ruling to seek an Advance Ruling on the following:

Whether Hostel facility which includes Lodging and Boarding service provided by appellant to the students of MUST having value service upto Rs 1000 per day would be eligible for exemption under entry 14 of the notification 12/2017 CTR Dt. 28-06-2017?

Rajasthan Authority for Advance Ruling held that the applicant would not be eligible for exemption under entry no 14 of the Notification No. 12/2017 Central Tax (Rate), dated 28-6-2017.

Aggrieved with the above, the present appeal was filed.

Analysis and Decision

Rajasthan Appellate Authority for Advance Ruling expressed that, the Hostel Accommodation Service is at par with the “Service by a hotel, Inn, guest house, club or campsite, by whatever name called, for residential or lodging purpose” which falls under Service Accounting Code – 9963.

The Bench noted that as per Section 2(74) of the CGST Act the term “mixed supply” means two or more individual supplies of goods or services, or any combination made in conjunction with each other day by a taxable person for a single price where such supply does not constitute a composite supply.

In the present matter, the Authority observed that the appellant was supplying services of food along with Hostel Accommodation service.

“The supply of food with Hostel Accommodation service is not naturally bundled in normal course of business.”

Authority added that, a person can live in the hostel without availing other services like food but to make ones stay more comfortable, the said ancillary services are availed him.

Bench found that other services being provided by the appellant were not naturally bundled or ancillary to Hostel service as the inhabitants of Hostel seats can avail the said services from any other source. In fact, the inhabitants have been restricted from sourcing these other services from any other person and have to avail the same from the appellant.

“…supply of hostel accommodation along with food is not a composite supply but it is a mixed supply.”

As per Section 8 (b) of the CGST Act, 2017 in case of the mixed supply of accommodation and food, the highest rate of both will be applicable.

In view of the above, the appeal was disposed of. [Mody Education Foundation, In Re., RAJ/AAAR/01/2021-22, decided on 27-10-2021]

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

Case BriefsHigh Courts

Delhi High Court: The Division Bench of Manmohan and Dinesh Kumar Sharma, JJ., addressed a matter wherein the decision of Income Tax Appellate Tribunal for the Assessment Year 2011-12 was challenged.

Appellant’s Counsel stated that the respondent-assessee had appeared and cooperated in the assessment proceedings and had not raised any objection about non-service of notice under Section 143(2) of the Income Tax Act, 1961 during the entire assessment proceedings and therefore, the assessee was precluded from taking any objection that the notice was not issued in time in accordance with Section 292BB of the Act.

Further, the appellant stated that the Tribunal had erred in ignoring Section 124(3) of the Act which mandated that issue regarding jurisdiction of Assessing Officer cannot be challenged after one month from the issuance of notice under Section 143(2) of the Act or after completion of assessment proceedings, whichever is earlier.

Supreme Court’s decision in Commr. Of Income Tax v. Laxman Das Khandelwal, [2019] 417 ITR 325 (SC) interpreted Section 292BB of the Income Tax Act.

High Court stated that it was in agreement with the Tribunal that Section 292BB does not give the power to condone the failure or delay in issuing the statutory notice required to be issued under Section 143(2) of the Act. Section 292BB deals with the failure of service of notice and not with regard to the failure to issue notice.

In the above-cited Supreme Court decision, it was clearly stated that the scope of Section 292BB is to make service of notice having certain infirmities to be proper and valid. However, the Section does not save the complete absence of notice. For Section 292BB to apply, the notice must have emanated from the Department. It is only the infirmities in the manner of service of notice that the Section seeks to cure.

Therefore, since the notice under Section 143(2) of the Act was not issued within the period of six months prescribed for the purpose, jurisdiction assumed by the Assessing Officer under Section 143(3) of the Act was assumed erroneously.

Settled Law

The issue of jurisdiction goes to the roots of the cause and such an issue can be raised at any belated stage of the proceedings including appeal.

In Court’s opinion, no substantial question of law arose for consideration in the present appeal, hence it was dismissed. [PR. Commissioner of Income Tax v. Consortium Nussli Comfort Net, 2022 SCC OnLine Del 895, decided on 25-3-2022]


Advocates before the Court:

For the Appellant:

Mr Sanjay Kumar, Advocate with Ms Easha Kadian, Advocate

For the Respondent:

Dr. Rakesh Gupta, Advocate with Mr Somil Agarwal and Mr Anshul Mittal, Advocates.

National Consumer Disputes Redressal Commission
Case BriefsTribunals/Commissions/Regulatory Bodies

National Consumer Disputes Redressal Commission (NCDRC): The Coram of Dinesh Singh (Presiding Member) and Justice Karuna Nand Bajpayee (Member) expressed that in the ‘service’ of ‘housing construction’, if, in a particular case, “compensation” is computed “by way of interest” on the deposited amount it shall not be differently treated than the other cases in which the term “interest” may not at all be used in computing the compensation.

Background

This Commission had by an earlier order directed that OP shall refund the entire principal amount of Rs 2,74,79, 831,48 to the complainant alongwith compensation in form of simple interest at the rate of 11% and OP shall also pay a sum of Rs 25,000 as the cost of litigation.

Both sides admitted that the entire amount paid by the decree holder to the judgment debtors has been refunded along with the cost of litigation.

Issue for Consideration

Whether or not compensation which was computed by way of interest on the deposited amount, attracts TDS?

Analysis, Law and Decision

Coram stated that the only issue was in respect of deduction of tax at source on the “compensation” awarded, which in the present case was computed “in the form of simple interest” on the deposited amount.

Certainly, tax is not deducted at source if the compensation is awarded in the form of a lumpsum amount, or when the formula or yardstick, if and as any adopted for the purposes of computation, does not involve or refer to the term “interest”. It will therefore be erroneous to deduct tax at source just because in a particular case the formula or yardstick adopted for computation alludes to the term “interest”.

Commission clarified that it is neither adding to nor subtracting from the Income Tax Act. If a person is responsible to pay income tax on any revenue or capital receipt under the aid Act, he will be so liable.

Adding to the above, Coram stated that compensation awarded under the Consumer Protection Act is for the loss or injury suffered and is universally applicable to both goods and services inclusive of the service relating to housing construction.

The context and meaning of the term “interest” if used in the mode of calculation or a formula or yardstick adopted for computing compensation under section 2(1)(d) of the Consumer Protection Act is identifiably different from the context and meaning as used in Section 194A of the Income Tax Act.

Hence, there was no justification for deducting tax at source in the instant case.

Concluding the matter, the Commission observed that the tax deducted at source on compensation appeared to be a mistake with no malafide and even though the tax ought not to have been deducted it is also seen that the same has not been retained by the judgment debtors and deposited in the account of the decree-holder in the Income Tax Department.

In view of the above discussion, the matter was closed. [Rita Bakshi v. M3M India Ltd., 2022 SCC OnLine NCDRC 40, decided on 2-3-2022]


Advocates before the Commission:

For the Appellant: Mr. Deepak Narayana, Advocate

For the Respondent: Mr. A. K. Takkar, Advocate with Ms. Syashee Pesswani, Advocate

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.

Op EdsOP. ED.

Introduction

When determining the constitutional validity of taxation laws, the Court generally analyses whether the challenged provision makes a reasonable classification or not. The general tendency of courts in cases where taxation statutes are challenged on the ground of Article 14[1] of the Indian Constitution (Article 14) can be summed up in the words of the Supreme Court in N. Venugopala Ravi Varma Rajah v. Union of India,[2] which noted as follows– “A taxing statute is not, therefore, exposed to attack on the ground of discrimination merely because different rates of taxation are prescribed for different categories of persons, transactions, occupations or objects.” In this article the recent decision of the Supreme Court in CIT v. Pepsi Foods Ltd.[3] (Pepsi Foods decision), has been analysed in view of the above principle of law.

Relevant jurisprudence

A. Relationship between Article 14 and taxation laws

It is accepted that, “the State is allowed to pick and choose objects for taxation if it does do reasonably.” While the above extract is from the laws of the United States of America, the principle has been reiterated by the Indian courts in many decisions.[4] The Supreme Court in Amalgamated Tea Estates Co. Ltd. v. State of Kerala,[5]  held that, “as revenue is the first necessity of the State and as taxes are raised for various purposes and by an adjustment of diverse elements, the Court grants to the State greater choice of classification in the field of taxation than in other spheres.” They went ahead and in view of the above reasoning declared that, “On a challenge to a statute on the ground of Article 14, the Court would generally raise a presumption in favour of its constitutionality.”

For our analysis, it is pertinent to know that any classification made qua taxation legislature, must be based on “rational” grounds and should not be “arbitrary”. Thereby, what one requires to determine is whether the distinction created by the challenged provision is based on “intelligible differentia”. In such cases, the test of permissible classification dictates that a statute may create a distinction so long as it fulfils the two conditions. These are, first, that the classification must be based upon intelligible differentia and must distinguish persons who are grouped together from the rest and second, that the same must have a rational relationship with the objective sought to be achieved by the statute in question.[6]

The Indian courts have dealt with this proposition of law many times, in some cases even declaring taxation laws as unconstitutional. Some instances as highlighted by the Supreme Court in the Pepsi Foods decision[7] are as follows:

(a) Suraj Mall Mohta v. A.V. Visvanatha Sastri[8]– Section 5(4), the Taxation on Income (Investigation Commission) Act, 1947 was held unconstitutional qua Article 14 on the basis that the procedure was substantially more prejudicial and drastic to the assessee than the one contained under the Income Tax Act. The Court noted that, “Classification means segregation in classes which have a systematic relation, usually found in common properties and characteristics.”

(b) Kunnathat Thatehunni Moopil Nair v. State of Kerala[9]Land revenue/tax called “basic tax” challenged on grounds to have treated unequals equally. Classification made under the Land Tax Act, 1955 held to be creating an improper classification and provision held unconstitutional qua Article 14.  In this case, the Court on the ground that the imposition of the above law was ex facie hard on certain classes of people than the other owing to the productivity of their lands, set aside Section 4 of the Act.

(c) Union of India v. A. Sanyasi Rao[10]Section 44[11], the Income Tax Act held unconstitutional for singling out only certain trade whereby relief under Sections 28[12] and 43-C[13] denied to them. Accordingly, the Court held, that the above was “unfair and arbitrary as denying equal treatment under law”.

B. Law of interpretation of statutes

The “golden” rule of interpretation is relevant to the analysis of the Pepsi Foods decision[14]. The first rule of interpretation is ita scriptum est, which states that the Court must not add/modify the law and should carry out a simple literal or grammatical interpretation. However, Lord Wensleydale, in Grey v. Pearson, noted that in many circumstances grammatical or literal interpretation of statute leads to absurdity, repugnance or inconsistency in regard to the object of the statute.[15] Thus, the Court in such cases where the rule of literal interpretation fails may modify the law only with view to remove the said absurdity.

Background to the case

Section 254(2-A)[16], was introduced via amendment to the Finance Act, 1999[17]. It grants the Income Tax Appellate Tribunal (ITAT) power to pass orders in respect to appeals before it and declares that the same will decide the appeal within 4 years from end of financial year it was filed in. The controversy lies in the third proviso to the same which states, that if the appeal is not disposed within the above, order of stay shall stand vacated even if “delay not attributable to taxpayer.”

The genesis of this proviso may be traced to the decision of the Court in ITO v. M.K. Mohammed Kunhi,[18] where it was held that power granted to the Tribunal under Section 254(2-A), implicates that all incidental and necessary powers as well can be exercised such as the power to grant a stay. Power of stay may be exercised, by the Tribunal, however, not as routine and only when strong reasons support the grant of such a stay. The Tribunal must be convinced that the entire purpose of appeal will be frustrated if stay is not granted and recovery proceedings are allowed to continue.

The facts relevant to the present case are; the respondent (assessee) was initially a US based company which merged with PepsiCo India Holdings Pvt. Ltd. w.e.f. 1-4-2010, in view of a scheme of arrangement duly approved by Punjab & Haryana High Court. In the Assessment Year 2008-2009, a return was filed declaring the total income. A final assessment award was made against the assessee on 19-10-2012. The assessee filed an appeal before the Income Tax Appellate Tribunal on 29-4-2013. On 31-5-2013 a stay of the operation of the order of the assessing officer was granted for six months by the Tribunal. The stay extended for 6 months, and was subsequently extended till 28-5-2014. Since, the statutory period for extension of stay was to expire as under Section 254(2-A) was to end of 30-5-2014, the assessee filed a writ petition in the Delhi High Court. The Delhi HC struck down third proviso to Section 254(2-A) which did not permit extension of stay beyond 365 days even if assessee was not responsible for delay in hearing of appeal. The bunch of appeals before the Supreme Court which yielded in the Pepsi Foods decision[19], which is analysed in this article, aimed to seek whether Section 254(2-A), the Income Tax Act, 1961 was constitutional vis-à-vis Article 14 and challenged the orders of various High Courts[20] which also declared the provision unconstitutional.

Synopsis of arguments

The table below will illustrate the main arguments led by the counsels.

S. No. In regard to Petitioner Respondent
1. Whether there is a right to “stay”? No right to stay the judgment of appellate proceedings and the same dependent upon discretion of the appellate court, which once exercised the same does result in an automatic extension in cases of expiry of reasonable period. Once discretionary relief granted it would be arbitrary and discriminatory that such stay be vacated automatically without reference to whether or not the assessee responsible for such delay in appellate proceedings.
2. Whether remedy of stay available? Discretionary remedy of stay part and parcel with right to appeal, which is statutory and may be taken away. Once vested right to appeal there is a vested right to seek stay.

 

3. Whether Article 14 may be used to challenge constitutionality of tax legislations? Article 14 cannot be applied mechanically to tax laws. Discriminatory taxation may be struck down under Article 14 qua the test of Manifest Arbitrariness (Shayara Bano v. Union of India[21]).

 

Ratio of the decision[22]

The Court held that the third proviso to Section 254(2-A) is both arbitrary and discriminatory and thereby, offends Article 14 of the Constitution. This is for twofold reason, firstly, it treats unequals as equals. This is for reason that the same treats assessee who is responsible for delay in proceedings with those who are not. The astonishing feature pointed by the Court under Proviso 3 which in itself spells out the said distinction. Secondly, the third proviso was inserted with view to stay achieve speedy disposal of cases wherein stay has been granted in favour of the assessee. The Court noted that such an objective cannot be discriminatory or arbitrary. Therefore, the above distinction does not fulfil the twin test[23] laid down in Nagpur Improvement Trust v. Vithal Rao[24]. Accordingly, the third proviso which stated “automatic vacation of stay on completion of 365 days, whether or not assessee responsible for the same or not”, was held to be prima facie discriminatory and thus, violative of Article 14. Further, the provision was termed to be “capricious, irrational and disproportionate” towards the assessee.

The Court lay their reasoning in bedrock of various decisions outlining necessary facets of the present matter. The Court took reference from the decision in Essar Steel (India) Ltd. v. Satish Kumar Gupta[25], where the term “mandatorily” as used under Section 12(3) of the Insolvency and Bankruptcy Code, 2016[26] was struck down. The aforementioned decision noted that time taken in a proceeding should not operate to harm the litigant for no fault of their own. The Court went ahead and instead of categorising the entire provision as arbitrary only struck down the term “mandatorily” for being manifestly arbitrary and unreasonably excessive. Further, the Court also noted that where the “tax was imposed deliberately with the object of differentiating between persons similarly circumstanced” the same should be struck down.

Conclusion

In view of the above, the Court held that in the present matter, unequals have deliberately been treated as equals qua equating assesses who are responsible for the delay in appellate proceedings with those who are not. Such a distinction was categorised by the Court as arbitrary and discriminatory and accordingly liable to be struck down. The Court thus, upheld the decision of the Delhi High Court and held that the Section 254(2-A) third proviso must be read without the word, “even” and “is not” after the words, “delay in disposing of appeal”. Thereby, the Court following the golden rule of interpretation simply modified the part of the challenged law which created the absurdity. The unreasonable and arbitrary distinction so created on the grounds of being contrary to Article 14 of the Indian Constitution has been transformed instead of being struck down in its entirety. This has been done both to fit the scheme and fulfil objective of the Income Tax Act.


 Associate, Jusip, e-mail: ananyasharma.ail@gmail.com.

[1] <http://www.scconline.com/DocumentLink/h7G5KbD4>.

[2] (1969) 1 SCC 681 : (1969) 74 ITR 49.

[3] 2021 SCC Online SC 283.

[4] Jagannath Baksh Singh v. State of U.P., AIR 1962 SC 1563.

[5] (1974) 4 SCC 415  

[6] Grey v. Pearson (1857) 6 HL Cas 61, 106: 26 LJ Ch 473, 481.

[7] 2021 SCC Online SC 283.

[8] AIR 1954 SC 545 : (1955) 1 SCR 448.

[9] AIR 1961 SC 552 : (1961) 3 SCR 77.

[10] (1996) 3 SCC 465.

[11]  Income Tax Act, 1961, S. 44.

[12]  Income Tax Act, 1961, S. 28.

[13]  Income Tax Act, 1961, S. 43-C.

[14]  2021 SCC Online SC 283.

[15] (1857) 6 HL Cas 61, 106: 26 LJ Ch 473, 481.

[16]  Income Tax Act, 1961, S. 254(2-A).

[17]  Finance Act, 1999.

[18] AIR 1969 SC 430 : (1969) 71 ITR 815.

[19]  2021 SCC Online SC 283.

[20] CIT v. Ronuk Industries Ltd., 2010 SCC OnLine Bom 2064 : (2011) 333 ITR 99; Narang Overseas (P) Ltd. v. Income Tax Appellate Tribunal, 2007 SCC OnLine Bom 671 : (2007) 295 ITR 22; Pepsi Foods (P) Ltd. v. CIT, 2015 SCC OnLine Del 9543.

[21] (2017) 9 SCC 1.

[22] Paras 22 & 23, Pepsi Foods decision, 2021 SCC Online SC 283.

[23] Twin Test – (i) must be founded on intelligible deferential; and (ii) the differentia must have rational relation with the objective sought to be achieved by the legislation.

[24] (1973) 1 SCC 500.

[25] (2020) 8 SCC 531.

[26]  Insolvency and Bankruptcy Code, 2016, S. 12(3).

Case BriefsSupreme Court

Supreme Court: Interpreting Section 263(2) of the Income Tax Act, 1961, the bench of MR Shah* and AS Bopanna, JJ has held that receipt of the order passed under Section 263 by the assessee has no relevance for the purpose of counting the period of limitation provided under Section 263 of the Income Tax Act.

Section 263 (2) of the Income Tax Act, reads as under:-

“(2) No order shall be made under sub¬section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.”

On a fair reading of sub-section (2) of Section 263, the Court noticed that as mandated by sub¬section (2) of Section 263 no order under Section 263 of the Act shall be “made” after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.

“Therefore, the word used is “made” and not the order “received” by the assessee. Even the word “dispatch” is not mentioned in Section 263(2).”

Hence, once it is established that the order under Section 263 was made/passed within the period of two years from the end of the financial year in which the order sought to be revised was passed, such an order cannot be said to be beyond the period of limitation prescribed under Section 263 (2) of the Act.

Holding that the word used is “made” and not the “receipt of the order”, the Court noticed that,

“As per the cardinal principle of law the provision of the statue/act is to be read as it is and nothing is to be added or taken away from the provision of the statue.”

[Commissioner of Income Tax v. Mohammed Meeran Shahul Hameed, 2021 SCC OnLine SC 901, decided on 07.10.2021]


Counsels:

For Revenue: ASG Vikramjit Banerjee

For Respondents: Senior Advocate R. Sivaraman


*Judgment by: Justice MR Shah

Know Thy Judge | Justice M. R. Shah

Case BriefsSupreme Court

Supreme Court of India: Noting the donations being made to the Trust to be ‘bogus donations’ Bench of Uday Umesh Lalit and Ajay Rastogi, JJ., cancelled the registration of the Trust under Section 12AA and 80G of the Income Tax Act, 1963.

What transpired the present matter?

Present appeal challenged the decision of Calcutta High Court setting aside the order passed by Commissioner of Income Tax (Exemption) cancelling the registration of respondent Trust under Section 12AA of the Income Tax Act, 1961 and another order passed by the Income Tax Appellate Tribunal dismissing appeals therefrom.

Background

Trust was registered under Section 12AA of the Act and was also accorded approval under Section 80G (vi) of the Act.

It was stated that in a survey conducted on an entity named School of Human Genetics and Population Health, Kolkata under Section 133A of the Act, it was prima facie observed that the Trust was not carrying out its activities in accordance with the objects of the Trust. Hence a show-cause notice was issued by the CIT.

Hence CIT invoked the provisions of Section 12AA(3) of the Income Tax Act and cancelled the registration under Section 12AA of the Act. This resulted in cancellation of the approval granted to the Trust under Section 80G of the Act.

When the matter reached High Court, Trust submitted that it had received donations from various donors and the Trust was under no obligation to verify the source of the funds of the donor or whether those funds were acquired by performance of any unlawful activity.

Further, it was also added that the funds were applied for the purposes of trust and that there was no evidence to suggest that those funds were applied for any illegal or immoral purposes or that the Trust was a namesake.

High Court had allowed the appeal and set aside the order of cancellation of the registration of the Trust while directing for the restoration of its registration.

Analysis, Law and Decision

Bench noted that as per the answers to the questionnaire put forward to the Managing Trustee, it depicted the extent of misuse of the status enjoyed by the Trust by virtue of registration under Section 12AA of the Act.

The answers also showed that the donations were received by way of cheques out of which substantial money was ploughed back or returned to the donors in cash. As per the facts, the said donations were ‘bogus’ donations and that the registration conferred upon the Trust under Section 12AA and 80G of the Act was completely being misused by the Trust.

Hence, the authorities were right in cancelling the registration under Section 12AA and 80G of the Act.

Opinion on High Court’s decision

Supreme Court held that High Court erred in entertaining the appeal and it did not even attempt to deal with the answers to the questions and whether the conclusions drawn by the CIT and the Tribunal were in any way incorrect or invalid.

Conclusion

While setting aside the decision under challenge, Court allowed the present appeal and restored the order passed by the CIT and the Tribunal. [Commissioner of Income Tax (Exemptions) v. Batanagar Education and Research Trust, 2021 SCC OnLine SC 529, decided on 2-08-2021]


Advocates before the Court:

Pet. Advocate(s)   ANIL KATIYAR
Resp. Advocate(s)   ABHIJIT SENGUPTA[caveat]
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

CBDT
Legislation UpdatesNotifications

The Central Board of Direct Taxes has passed Income Tax (25th Amendment) Rules, 2021 on August 31, 2021. The Income Tax (25th Amendment) Rules, 2021 shall come into force on April 1, 2022. The Amendment inserts Rule 9D prescribing calculation of taxable interest relating to contribution in a provident fund, exceeding specified limit. For the calculation of taxable interest relating to provident fund, following points to be taken into consideration under Rule 9D:

 

  • The Non-taxable contribution account shall be the aggregate of the following:
  • closing balance in the account as on March 31, 2021
  • any contribution made by the person in the account during the previous year 2021-2022 and subsequent previous years, which is not included in the taxable contribution account; and
  • interest accrued as reduced by withdrawal
  • The Taxable contribution account shall be the aggregate of the following:
  • contribution made by the person in a previous year in the account during the previous year 2021-2022 and subsequent previous years, which is in excess of the threshold limit; and
  • interest accrued as reduced by the withdrawal, if any, from such account; and

 

The threshold limit shall mean:

  • five lakh rupees, if the second proviso to clause (11) or clause (12) of section 10 is applicable; and
  • two lakh and fifty thousand rupees in other cases.

 


*Tanvi Singh, Editorial Assistant has reported this brief.