Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal, Delhi (ITAT): Addressing the issue, of whether mere rejection of the claim by an Assessing Officer would ipso facto make assessee liable for the penalty, the Bench of G.S. Pannu (President) and Kul Bharat (Judicial Member) held that it won’t make the assessee liable to a penalty.

Factual Matrix


An assessee had filed its return of income and the assessment under Section 143(3) of the Income Tax Act, 1961 was framed. Thereby, the income was assessed at Rs 2,13,61,910 after making additions in respect of the wrong claim of deduction under Section 24(a) of the Income Tax Act; disallowance of excess depreciation on vehicles and disallowance of interest under Section 36(1)(iii) of the Act.

A further appeal was carried out wherein the disallowance of interest under Section 36(1)(iii) of the Act was deleted.

Subsequently, the Assessing Officer issued a notice under Section 271(1)(c) of the Act to show cause why the penalty should not be levied, for which the assessee stated that deduction under Section 24(a) of the Act was claimed by the assessee through a bonafide and inadvertent error.

AO did not accept the contention of assesse that he had disclosed and furnished correct particulars of his income, hence penalty was levied.

Aggrieved with the above, the assessee preferred an appeal before the CIT (A) who sustained the penalty, therefore the assessee has appealed before this Tribunal.

Analysis and Decision


“There is no straight jacket formula to say that particular act was a bonafide error or another a deliberate act.” 

The Bench noted that the assessee in the present matter had successfully demonstrated that the claim of deduction under Section 24(a) of the Income Tax Act, was made as the rent was offered for tax under the income from house property.

Hence, in view of the Supreme Court decision in Price Waterhouse Coopers (P) Ltd. v. CIT, (2012) 11 SCC 316 the penalty imposed by the AO on the stated issue could not be sustained, therefore, AO was directed to delete the penalty.

Tribunal found merit in the contention of the assessee that,

“…merely because of a claim is rejected by the Assessing Officer, would not ipso facto make the assessee liable for penalty.”

In the Supreme Court’s decision of CIT v. Reliance Petroproducts (P) Ltd., [2010] 322 ITR 588, the levy of penalty was not justified.

Therefore, the Tribunal directed the Assessing Officer to delete the penalty.

Further, it was added that since the notice did not specify the specific charge, hence in light of the Supreme Court decision in PCIT v. Sahara India Life Insurance Company Ltd., ITA No.475/2019, the initiation of penalty proceedings was not in accordance with law.

In view of the above, the appeal of the assessee was allowed. [Agarwal Packers & Movers Ltd., ITA No. 6565/Del/2018, decided on 29-4-2022]


Advocates before the Tribunal:

For the appellant: Ruchesh Sinha, Advocate

For the respondent: Kirti Sankratyayan, Sr. Dr

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal, Kolkata: The Bench of Sonjoy Sarma (Judicial member) and Rajesh Kumar (Accountant Member) held that the expenditure incurred by the assessee as such on replacement of wooden body of trucks has to be allowed fully against the income of the assessee in the current year.

The present appeal was preferred by the assessee against the order of the Commissioner of Income Tax for the assessment year 2013-14.

Bench noted that there was delay of 32 days in filing the present appeal and after going through the application for condonation of delay and after hearing both the sides, Tribunal opined that the cause for delay was reasonable, so Bench condoned the delay and proceeded to hear the appeal.

Issue

The only issue in the present matter was against the order of CIT(A) confirming the order of AO wherein the expenses of Rs 47,40,701 were treated as capital expenditure as against the assessee’s contention that the same were of revenue nature as being incurred on repairs and maintenance of the trucks etc.

Analysis and Decision

Tribunal noted that the assessee was an operator of trucks and lorries on hire. During the year, the assessee had incurred expenditure on replacements of old truck bodies which was treated as revenue expenditure however wrongly shown under the head depreciation by claiming 100% of the said expenditure as allowable during the year instead of charging the expenditure directly to the profit and loss account as the revenue item.

Bench held that the expenditure incurred by the assessee as such on replacement of wooden body of trucks has to be allowed fully against the income of the assessee in the current year.

Consequently, Tribunal set aside the order of CIT (A) and directed the AO to treat the expenditure as revenue in nature.

Hence, the appeal of the assessee was allowed. [Ashim Krishna Bhatta v. ACIT, ITA No. 40/Kol/2020, decided on 21-4-2022]


Advocates before the Tribunal:

For the Appellant: P Jhunjhunwala, A.R

For the Respondent: Manash Mondal, Addl. CIT

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal, Chandigarh (ITAT): The Coram of Sanjay Garg (Judicial Member) and Annapurna Gupta (Accountant Member) examined the issue as to the taxability of the amount of gift received by the assessee from his ‘HUF’.

An appeal was preferred by the assessee against the Principal Commissioner of Income Tax against revision order passed under Section 263 of the Act, whereby the PCIT had set aside the assessment order passed by the Assessing Officer with a direction to make the assessment afresh under Section 143(3) read with Section 147 of the Income Tax Act.

Factual Background

The assessee had filed his return of income declaring an income of Rs 14,32,982 and the assessment was completed by the Assessing Officer under Section 143(3) of the Act accepting the returned income.

Subsequently, the assessing officer reopened the assessment under Section 147 read with Section 148 on the ground that the assessee during the year under consideration had received a gift of Rs 5,90,000 from the Hindu Undivided Family.

In the opinion of the Assessing Officer, since the amount of said gift was more than Rs 50,000, hence the same was exigible to tax as ‘income from other sources’ under Section 56(2)(vii) of Income Tax Act.

PCIT while invoking his jurisdiction under Section 263 of the Act, set aside the order passed by the Assessing Officer, held that HUF does not fall in the definition of relative in the case of an ‘individual’ as provided in the explanation to clause (vii) to Section 56(2).

Though, the definition of a relative in the case of a ‘HUF’ has been extended to include any member of the ‘HUF’, yet, in the said extended definition, the converse case is not included that is to say in the case of an individual, the ‘HUF’ has not been mentioned in the list of relatives.

Thus, PCIT formed a view that though a gift from a member to the ‘HUF’ was not exigible to taxation as per the provisions of Section 56(2)(vii) of the Act, however, a gift by the HUF to a member exceeding a sum of Rs 50,000 was taxable.

To claim an exemption under Section 10(2) of the Act, the member ‘HUF’ must receive any amount for consideration out of the income of the ‘HUF’. That since the assessee had received the aforesaid amount of Rs 5,90,000/- without consideration, hence, the same was not tax-exempt.

Further, the PCIT set aside the order of the Assessing Officer and directed the AO to make the assessment afresh.

On being aggrieved with the order of the PCIT, the assessee filed the appeal.

Analysis, Law and Decision

Coram expressed that the order of the Assessing Officer cannot be said to be erroneous and therefore, the PCIT wrongly exercised jurisdiction under Section 263 of the Act and the same cannot be held to be justified.

Assessee had taken a plea that the gifts had been received by the assessee out of the income of the ‘HUF’ and that the same was exempt under Section 10(2) of the I.T. Act. It was noted that there was no rebuttal or denial either in the order of the Assessing Officer or in the order of the PCIT in respect of the contention of the assessee that the amount in question was received out of the income of the HUF. In view of the said, the assessee was entitled to exemption under Section 10(2) of the Act.

In case an individual member throws his elf-acquired property into a common pool of ‘HUF’, the ‘HUF’ or other members of the ‘HUF’ do not have any pre-existing right in the self-acquired property of a member. If such an individual member throws his own/self-earned or self-acquired property in common pool, it will be an income of the ‘HUF’, however the same will be exempt from taxation as the individual members of the ‘HUF’ have been included in the meaning of ‘relative’.

In view of the above, the HUF had not been included in the definition of relative in explanation to Section 56(2) (vii) as it was not so required whereas in case of HUF, members of the HUF find mention in the definition of ‘relative’.

Hence, the amount received by the assessee from the ‘HUF’ , being its members, was a capital receipt in his hands and was not exigible to income tax.[Pankil Garg v. Pr. CIT, Karnal; 2019 SCC OnLine ITAT 13321, decided on 17-7-2019]

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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: Explaining the scope of jurisdiction of ITAT, the bench of MR Shah* and BV Nagarathna, JJ has held that the powers under Section 254(2) of the Income Tax Act are only to correct and/or rectify the mistake apparent from the record and not beyond that.

In the present case, a detailed order was passed by the ITAT when it passed an order on 06.09.2013, by which the ITAT held in favour of the Revenue. The said order was then recalled on 18.11.2016. It is pertinent to note that the order was recalled while exercising the power under Section 254(2) of the Act as the Assessee had filed miscellaneous application for rectification under Section 254(2) of the Act. While allowing the application under Section 254(2) of the Act and recalling its earlier order dated 06.09.2013, the ITAT had re-heard the entire appeal on merits as if the ITAT was deciding the appeal against the order passed by the C.I.T.

It was argued before the Court that the Revenue itself had in detail gone into merits of the case before the ITAT and the parties filed detailed submissions based on which the ITAT passed its order recalling its earlier order. The Court, however, rejected the said contention and held that,

“Merely because the Revenue might have in detail gone into the merits of the case before the ITAT and merely because the parties might have filed detailed submissions, it does not confer jurisdiction upon the ITAT to pass the order de hors Section 254(2) of the Act.”

In exercise of powers under Section 254(2) of the Act, the Appellate Tribunal may amend any order passed by it under sub-section (1) of Section 254 of the Act with a view to rectifying any mistake apparent from the record only. Therefore, the powers under Section 254(2) of the Act are akin to Order XLVII Rule 1 CPC. While considering the application under Section 254(2) of the Act, the Appellate Tribunal is not required to re-visit its earlier order and to go into detail on merits.

Further, if the Assessee was of the opinion that the order passed by the ITAT was erroneous, either on facts or in law, in that case, the only remedy available to the Assessee was to prefer the appeal before the High Court.

Therefore, it was held that the order passed by the ITAT recalling its earlier order dated 06.09.2013 which has been passed in exercise of powers under Section 254(2) of the Act is beyond the scope and ambit of the powers of the Appellate Tribunal conferred under Section 254 (2) of the Act.

[Commissioner of Income Tax v. Reliance Telecom Ltd., 2021 SCC OnLine SC 1170, decided on 03.12.2021]


Counsels

For Revenue: Additional Solicitor General Balbir Singh

For Respondent: Advocate Anuj Berry


*Judgment by: Justice MR Shah

Know Thy Judge | Justice M. R. Shah

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal (ITAT), Mumbai: A two-Member Bench of Pramod Kumar (Vice President) and Ravish Sood (Judicial Member) allowed the Board of Control for Cricket in India (“BCCI”) to continue with its registration under Section 12-A of the Income Tax Act, 1961 making it eligible for income tax exemption benefits. The main controversy arose regarding the commercial nature of the Indian Premier League (“IPL”) organised by BCCI, however, there is significant discussion on substantive law in the decision of the Appellate Tribunal.

Factual Matrix

BBCI challenged correctness of the order passed by the Principal Commissioner of Income Tax, Mumbai (“CIT”), rejecting its application for registration under Section 12-A(1)(ab) read with Section 12-AA of the Income Tax Act, 1961.

Notably, BCCI was duly granted registration under Section 12-A in 1996, which is yet to be cancelled or withdrawn. However, BCCI applied for fresh registration in wake of the amendment in its ‘memorandum of association, and rules and regulations’, to implement the recommendations of Justice R.M. Lodha Committee.

While rejecting BCCI’s application, the CIT took note of the amended Memorandum of Association (“MoA”) and inter alia noted that a specific clause was inserted for conducting Indian Premier League (“IPL”) matches, and concluded that “it can be easily concluded that activities of the applicant specially in relation to the IPL are in the nature of trade, commerce or business, and therefore, the applicant is squarely covered by proviso to Section 2(15) and hence applicant’s claim of being covered by the last limb, i.e. advancement of any other object of general public utility cannot be held to be charitable purpose”.

BCCI on the other hand contented that its activities are wholly charitable and genuine, and the element of profit in organising the IPL event does not vitiate its predominant character.  It was submitted that BCCI was in fact under no obligation to approach the CIT for fresh registration as the amendments did not even remotely affect its basic objects for which the registration was earlier granted; nevertheless it approached the CIT in deference  to the observations made by another Bench of the Appellate Tribunal to the effect that “the assessee society should approach the registering authority with the changes and amendments so that the authorities could examine as to whether the amendments in question meet the requirement of law”.

Law, Analysis and Decision

Application of S. 12-A(1)(ab)

Referring first to Section 12-A(1)(ab), the Appellate Tribunal noted that the true trigger for an application under that section has to be the modification of objects “which do not conform to the conditions of the registration”. Therefore, unless such modifications are demonstrated, there is no occasion for CIT to assume jurisdiction. The registration granted to BCCI in 1996 was on the basis of MoA, 1940. Unless, therefore, there were significant amendments in that Memorandum of Association, the provisions of Section 12-A(1)(ab) will not come into play inasmuch these provisions come into play only when the assessee “has adopted or undertaken modifications of the objects which do not conform to the conditions of registration”.

The Appellate Tribunal then compared MoA, 1940 and the amended MoA, 2018, and found that the amended MoA does not show any change which is contrary to the corresponding clause in the earlier MoA. It was noted that there was nothing in the impugned order to even indicate that the modifications in the objects of the amended deed do not conform to the objects in the memorandum of association based on which the registration was granted. The Appellate Tribunal observed:

“It is also important to bear in mind the fact that Section 12-A(1)(ab) specifically refers to ‘objects’ of the assessee trust or institution, and, it cannot, therefore, be open to the Principal Commissioner to go beyond the ‘objects’ so far as jurisdiction under this Section 12-A(1)(ab) is concerned. It is only when there is such a modification in the object clause that it does not conform to the conditions of registration, i.e. objects clause in the documents based on which registration was granted – only the memorandum of association in this case, that Section 12-A(1)(ab) can come into play.”

It was also noted that any changes to bring out reforms in the functioning of BCCI and specifically approved by the Supreme Court to be for that purpose (by its order dated 9-8-2018), cannot be termed to be the changes that dilute the fundamental objective of promoting the game of cricket, or said to be “not in conformity” with the objects of promoting the game of cricket all along espoused by BCCI and as set out in the pre-amendment MoA. In this view of the matter also, the condition precedent for invoking Section 12-A(1)(ab), was not fulfilled.

Referring to the view of another Bench that the assessee society should approach the registering authority with the changes and amendments so that the authorities could examine as to whether the amendments in question meet the requirement of law, the Appellate Tribunal observed:

“[T]his requirement, in our humble understanding, does not necessarily extend to the filing of the fresh application of registration under Section 12-A(1)(ab) unless the amendments are such as not in conformity with the documents based on which registration was originally granted. There is a difference in these two situations, i.e. between keeping the registration authority [informed] about the changes in the memorandum of association etc., and between making an application for fresh registration which comes into play only when the amendments in question do not conform to the objectives in respect of which registration was granted or obtained. Unless that condition is satisfied, Section 12-A(1)(ab) [does not] come into play.”

It was observed that there is a vital distinction between “object” and “power”. It could not even be in dispute that the object of BCCI is the promotion of cricket game, and, at best, it has powers to hold IPL for achieving this object. Whether this power of conducting IPL is exercised with predominantly pecuniary gains in mind or not is a different aspect, but then this is a “power” not an “object”. The Appellate Tribunal was of the opinion that:

“So far as the provisions of Section 12-A(1)(ab) are concerned, the Principal Commissioner was only required to examine the objects of the institution and not to extend her considerations to the powers vested in the institution. Unless the bridge of finding variations in objects of pre-amendment or post-amendment objects is crossed, there is no occasion to examine anything else. “

Application of proviso to S. 2(15)

Next, it was noted that the entire basis of declining registration by CIT was invoking the proviso to Section 2(15) on the ground that IPL activities are in the nature of commercial activities and cross the threshold limit specified in exceptions to the proviso to Section 2(15). On this point, the Appellate Tribunal observed:

“It is, however, well-settled in law that so far as registration under section 12-AA is concerned, Section 2(15) has no application in the matter.”

Relying on its earlier decision in Kapurthala Improvement Trust v. CIT, 2015 SCC OnLine ITAT 8111, the Appellate Tribunal concluded that the remedy to the proviso to Section 2(15) coming into play is not denial of registration under section 12-A or 12-AA but denial of benefits of exemption under Section 11, under Section 13(8). That is the reason that along with the insertion of proviso to Section 2(15), effective from the same date, sub-section 13(8) was also inserted and these two provisions are thus clearly complementary in nature.

Indian Premier League

Interestingly, as to the question whether IPL can indeed be said to be commercial in nature in the sense that the entire orientation of these matches is aimed at making money in the garb of promotion of cricket, the Appellate Tribunal was of the view that it was not necessary to go into that aspect in the instant case. It however added:

“[O]n the face of it merely because a sports tournament is structured in such a manner so as to make it more popular, resulting in more paying sponsorships and greater mobilisation of resources, the basic character of the activity of popularising cricket is not lost. It is indeed possible that the predominant object remains the promotion of cricket but that activity is done in a more effective and financially optimal manner, and that there is no conflict in the cricket becoming more popular and the cricket becoming more entertaining. It results in providing significant economic opportunities to those associated with the holding of the IPL tournament and, in the process, enriching the resources of the assessee trust. As long as the object of promoting cricket remains intact, and that continues to be the predominant object, the assessee cannot be said to be not following the object of promoting cricket, just because the operational model of a cricket tournament, whether IPL or any other tournament, is more entertaining, more economically viable, provides greater economic opportunities to all those associated with that tournament, and mobilises greater financial resources for popularising cricket. The purpose for which all the funds at the disposal of the assessee trust, including the additional funds generated by holding the IPL tournament, are employed is certainly for promoting cricket, and that is what really matters. Improvising the rules of the game, adding entertainment value to it and making it economically attractive, may be a purist’s nightmare but the same factors can also be viewed as radical and innovative ideas to popularise a game –  the very raison d’être of an institution like this assessee, and that is how we view it.”

In such view of the matter, the Appellate Tribunal held that BCCI was entitled to continuance of its registration under Section 12-A dated 12-2-1996. Accordingly, the impugned order passed by the CIT was quashed. [BCCI v. CIT, ITA No. 3301/Mum/2019, dated 2-11-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal (ITAT): The Bench of Inturi Rama Rao (Accountant Member) and Partha Sarathi Chaudhary (Judicial Member), decided whether registration under Section 12 AA can be denied for non-payment of taxes on donations received.

Instant appeal emanated from the Order of the CIT (Exemption), Pune passed under Section 12AA (1)(b)(ii) of the Income Tax Act, 1961 on the following grounds:

  • CIT (E) erred in rejecting the registration under Section 12 AA of the Income Tax Act.
  • Further, CIT (E) erred in law and on facts that voluntary contributions received by the charitable trust are not income as defined vide Section 2(24) (iia) of the Act.
  • CIT (E) erred in not giving a reasonable opportunity of being heard while rejecting the application made under Section 12AA (1)(b)(ii) of the Act.
  • Assessee craves right to add, alter or modify any grounds of appeal before or at the time of hearing of the appeal.

Factual Matrix

Assessee made online application form for approval of the Trust/Institution under Section 12 AA of the Act under the category of Religious cum Charitable trust/Institution. The said application was rejected by CIT (E).

CIT (E) opined that the voluntary contributions collected by the assessee trust formed a part of the corpus funds of the trust and hence, it is an income of the assessee. Thus, on the said income, the assessee trust was liable to pay tax as per law. Since the requisite taxes were not paid by the assessee, the CIT (E) opined that the requirement of Section 12 AA of the Act i.e. satisfaction of the Commissioner about objects of the Trust and the genuineness of the activities of the trust could not be determined and hence, the said application for registration under Section 12 AA of the Act of the assessee was rejected.

Analysis, Law and Decision

In Tribunal’s opinion, the provisions of Section 12AA of the Act provides that CIT(E) at the time of granting registration to assessee trust or society shall look into the objects of the trust/society and be satisfied with the genuineness of the activities carried out by such applicant trust/society at the time of granting registration under Section 12AA of the Act.

 Whether any tax had accrued to be paid or whether such taxes have been paid or not are to be looked into at the stage of assessment proceedings.

Allahabad High Court in Fifth Generation Education Society v. CIT, (1990) 185 ITR 634 (All) held that,

“the Commissioner is not to examine the application of income at the stage of application made by assessee for granting registration u/s.12AA of the Act. The Commissioner may examine whether the application was made in accordance with the requirements of Section 12AA r.w.r 17A and whether Form 10A has been properly filled up. He may also see whether the objects of the trust are charitable or not. At that stage, it is not proper to examine the application of income.”

In the case of Kai Shri Mahadebrao Naykude Dnyanvikas Prabhodhini Trust v. Commissioner of Income Tax (Exemption) (2020) 208 TTJ (Pune) 296, it was observed that,

when the objects of the trust were not disputed by the Department, nor they have disputed genuineness of activities of the assessee trust, then non filing of return u/s. 139(4A) of the Act cannot be the ground to deny registration u/s.12AA of the Act to the assessee. It is only at the assessment proceedings, the Assessing Officer can take appropriate steps as per law regarding the non-filing of return. However, at the time of granting registration, the object of the assessee trust has to be looked into and genuineness of the activities of the assessee trust should be considered.

In the present matter, registration was not granted under Section 12AA of the Act since taxes were not paid on the donations received by the assessee trust. It is always left to the Assessing Officer to take appropriate steps at the time of assessment proceedings with regard to payment of taxes and application of income of the trust/society.

Bombay High Court in the case of CIT v. Manekji Mota Charitable Trust (2019) 267 TAXMAN 0016 (Bombay) has held “at the time of the registration of the trust u/s.12A, the question of application of income of the trust is premature.” Thus, whether taxes are due to be paid on any income received that issue has to be looked into only at the time of assessment proceeding. 

In the instant case, the objects of the trust were not doubted by the Department, and they have also not disputed the charitable nature of the activities conducted by the assessee trust.

Therefore, Tribunal held that the present matter was not a fit case for rejection of application for registration under Section 12 AA of the Act and no findings were laid down stating the activities carried out by the assessee were not genuine.

“…just because, the taxes were not paid on the donations/voluntary contributions received cannot be the ground for rejection of application u/s.12AA of the Act. These things can be examined by the Department and scrutinized at the assessment stage. When all the requirements of registration u/s.12AA of the Act have been satisfied by the assessee trust, registration therein should be granted.”

Hence, the order of CIT (E) was set aside, and the Department was directed to grant registration under Section 12 AA of the Act to asseessee trust. [Shree Lakadipool Vitthal Mandir v. CIT (E), ITA No. 568/PUN/2020, decided on 25-5-2021]


Assessee by: Shri Abhay Shastri

Revenue by: Shri Deepak Garg

Appointments & TransfersNews

Appointments Committee of the Cabinet has approved the proposal for appointment of the following persons as Judicial Member and Accountant Member in the Income Tax Appellate Tribunal (ITAT) for a period of 4 years with effect from the date of assumption of the charge of the post, or until attaining the age of 67 years, or until further order, whichever is the earliest:

Judicial Member


Un-Reserved Category


  • Shri Sonjoy Sarma, Advocate
  • Ms S. Seethalakshmi, Advocate
  • Shri Shatin Goyal, Additional District & Sessions Judge
  • Shri Anubhav Sharma, Additional District & Sessions Judge

OBC Category


Shri T.R. Senthil Kumar, Advocate


SC Category


Shri Manmohan Das, Law Officer in SBI


Accountant Member


Un-Reserved Category


  • Bhagirath Mal Biyani, Chartered Accountant
  • Balakrishnan S. Chartered Accountant
  • Jamiappa Dattatraya Battull, Chartered Accountant
  • Padmavathy S, Chartered Accountant
  • Arun Khodpia, Chartered Accountant

OBC Category


Rathod Kamlesh Jayantbhai, Chartered Accountant


SC Category


Ripote Dipak Pandurang, Commissioner of Income Tax

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal, Delhi: Dealing with the validity of the order passed under section 143(3), which was passed by an officer who did not have the Jurisdiction on the case of the Assessee and whether, the second Statutory notice issued under section 143(2) by the jurisdiction Assessing Officer, is also barred by limitation. The tribunal has reiterated that the notice under section 143(2) can be issued within a period of six months from the end of the financial year in which the return was filed. Further, on the point of jurisdiction relating to the issuance of notice also makes the notice under Section 143(2) void-ab-initio

The return of income for Assessment Year 2015-16 was e-filed by the Assessee on 2/9/2015 declaring a total income of Rs. 8,76,900/-. The case was selected for complete scrutiny under CASS. The Assessing Officer after considering the submissions and the relevant documents passed the final assessment order u/s 143 (3) of the Income Tax Act on 1st May, 2017, and accepted the declared income by the Assessee.

The Principal Commissioner of Income Tax (CIT) issued a notice under Section 263(1) on 16/08/2017. The Principal CIT vide order dated 7/11/2017 set aside the original assessment order and directed the Assessing Officer to pass the assessment order afresh.

Being aggrieved by the order u/s 263 of the Income Tax Act, 1961 passed by the Principal CIT, the Assessee preferred an Appeal before the Income Tax Appellate Tribunal (hereinafter referred as to “Tribunal”).

Whereby, the tribunal was pleased to held that the notice under section 143(2) can be issued within a period of six months from the end of the financial year in which the return was filed. Further, on the point of jurisdiction relating to the issuance of notice also makes the notice under Section 143(2) void-ab-initio.

“The tribunal was pleased to held that the notice under Section 143(2) can be issued after an income tax return has been filed but within a period of six months from the end of the financial year in which the return was filed. Thus, the first notice under Section 143(2) was issued on 01.08.2016 which by the non-jurisdictional Assessing Officer and jurisdictional Assessing Officer issued the notice on 10.03.2017 which is beyond the limitation period as per the statutory provisions of the Act. Thus, the notice is time-barred and hence, the assessment itself becomes void-ab-initio.

the proper jurisdiction of the Assessing Officer in the present case is that of DCIT, Circle 25(2) as the assessment for A.Y. 2014-15 has proceeded before the said Assessing Officer in Assessee’s case. There was no change of jurisdiction sought by the Revenue as per Section 124 read with Section 120 of the Income Tax Act, 1961. Thus, on the point of jurisdiction relating to the issuance of notice also makes the notice under Section 143(2) void-ab-initio.”

[Nirmal Gupta v. Pr. CIT-9,  2021 SCC OnLine ITAT 345, decided on 22.06.2021]


† Advocate, Supreme Court of India and Delhi High Court  

Case BriefsTribunals/Commissions/Regulatory Bodies

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

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

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

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

Material Facts and Assessee’s Contention

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

Preliminary Objections by Income Tax Department

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

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

Reference to Larger Bench

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

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

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

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

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

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

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

Case BriefsTribunals/Commissions/Regulatory Bodies

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

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

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

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

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

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

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

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

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

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


† Advocate, Supreme Court of India and Delhi High Court 

Case BriefsTribunals/Commissions/Regulatory Bodies

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

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

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

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

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

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

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


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

Case BriefsTaxationTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal (ITAT), Jaipur: The Bench of Vijay Pal Rao, JM and Vikram Singh Yadav, AM, held that, the benefit of CBDT Instruction No1916 dated 11-05-1994 will not take away the benefit of the explained jewellery acquired by the assessee.

The instant appeal was directed against the Order of CIT(A)-4, Jaipur.

The assessee is an individual and derives income from salary and other sources. When Search and Seizure under Section 132 of the Income Tax Act were carried out, gold and silver jewellery valued at Rs 32, 71, 895 were found from the residential premises of the assessee.

In the course of assessment proceeding, the assessee claimed benefit of CBDT Instruction No. 1916 dated 11-05-1994 to the extent of 850 gms. of jewellery in the hands of his wife, daughter and himself.

The AO accepted the above claim and allowed the said benefit, further the assessee added that the jewellery of 343.328 gms was purchased from time to time recorded in the books of account and all the jewellery is supported by purchase bill found during the course of search.

However, the above claim of the assessee was denied in giving the benefit of purchases made on the ground that this quantity of 343.328 gms. of gold jewellery is already the part of 850 gms. jewellery allowed as per CBDT Instruction No. 1916 dated 11-05-1994.

The above-stated action of denying the benefit by the AO was challenged by the assessee.

On being aggrieved by the order of CIT (A), the assessee filed the present appeal.

Decision 

Bench observed that there is no dispute regarding the fact that jewellery to the extent 343.328 gms. represents the purchases made by the assessee from time to time which is duly supported by the purchase bills found during the search and seizure action.

Tribunal stated that:

Once the AO has not disputed the purchases made by the assessee of the said quantity of jewellery then the same cannot be treated as unexplained jewellery of the assessee.

Why did AO deny the benefit? 

The AO denied the benefit of the said quantity of jewellery on the ground that since the benefit of reasonable jewellery to the extent of 850 gms. as per CBDT Instruction No. 1916 dated 11-05-1994 is already granted, therefore, to that extent, no further benefit can be granted.

Tribunal observed that it is pertinent to note that CBDT Instruction No. 1916 dated 11-05-1994 has explained in case of gold jewellery found in the possession of the assessee during the course of search and seizure activity and the assessee is not able to explain the same then the quantity prescribed under the said CBDT Instruction No. 1916 in respect of the married female member, unmarried female member and male member of the assessee would be treated as a reasonable holding of jewellery on account of the acquisition of that much jewellery on various occasions of marriages, other social & customary occasions as prevailing in the society. 

Bench held that the quantity of jewellery which is otherwise explained by the assessee by producing the purchase bills as well as recorded in the books of account of the assessee and the AO had not disputed the said explanation then the quantity which is explained otherwise by producing the purchase bills and books of account would not be treated as part of the quantity of reasonable possession as prescribed under the said CBDT Instruction No. 1916 dated 11-05-1994.

Therefore, the benefit of CBDT Instruction No. 1916 dated 11-05-1994 will not take away the benefit of the explained jewellery acquired by the assessee.

In view of the above discussion, the quantity of jewellery to the extent of 343.328 gms has to be allowed separately as explained jewellery and no addition can be made to that extent.

No error was found in the Order of CIT (A) in regard to 50% of silver items and the addition sustained by CIT on account of unexplained jewellery was deleted.[Ram Prakash Mahawar v. DCIT Central Circle, Alwar; 2020 SCC OnLine ITAT 498, decided on 20-02-2020]


What is the CBDT Instruction No. 1916?

The Central Board of Direct Taxes has issued Guidelines/ Instruction No. 1916 dated 11th May, 1994 in the matter of seizure of jewellery, which reads:

Instances of seizure of jewellery of small quantity in the course of operation under section 132 have come to the notice of the Board. The question of a common approach to situation where search parties come across items of jewellery has been examined by the Board and following guidelines are issued for strict compliance.

(i) In the case of a wealth-tax assessee, gold jewellery and ornaments found in excess of the gross weight declared in the wealth-tax return only need to be seized.

(ii) In the case of a person not assessed to wealth-tax gold jewellery and ornaments to the extent of 500 gms. per married lady 250 gms per unmarried lady and 100 gms. per male member of the family, need not be seized.

(iii) The authorized officer may having regard to the status of the family and the customs and practices of the community to which the family belongs and other circumstances of the case, decide to exclude a larger quantity of jewellery and ornaments from seizure. This should be reported to the Director of Income-tax/Commissioner authorizing the search all the time of furnishing the search report.

(iv) In all cases, a detailed inventory of the jewellery and ornaments found must be prepared to be used for assessment purposes.

Case BriefsTribunals/Commissions/Regulatory Bodies

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

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

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

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

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

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

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

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

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


Advocate, Supreme Court of India and Delhi High Court 

Case BriefsHigh Courts

Karnataka High Court: A Division Bench of Alok Aradhe and H.T. Narendra Prasad, JJ. set aside the decision of the Income Tax Appellate Tribunal in favour of the assessee.

The present appeal was filed under Section 260-A of the Income Tax Act, 1961 (IT Act) wherein an order passed by the Income Tax Appellate Tribunal (ITAT) was challenged.

The substantial question under deliberation was:

If the ITAT was correct coming to the decision that deductions which fall under Section 10-B of IT Act the can be computed without setting off of brought forward business losses and unabsorbed depreciation?

The Court relied on the decision in CIT v. Yokogawa (India) Ltd., 2016 SCC OnLine SC 1491 and held that the decision of the Tribunal in the said matter was incorrect. Therefore, the above-mentioned question was answered in favour of the assessee.[Commissioner of Income Tax v.  Mind Tree Consulting Ltd., I.T.A No. 50 of 2013, decided on 17-08-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

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

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

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

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

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

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

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

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

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

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

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

Case BriefsTribunals/Commissions/Regulatory Bodies

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

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

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

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

Background

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

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

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

Issue

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

Finding

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

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

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

Case BriefsHigh Courts

Bombay High Court: A Division Bench of Ujjal Bhuyan and Milind N. Jadhav, JJ., dismissed an appeal filed against the order of the Income-tax Appellate Tribunal, Pune, whereby it had set aside the decision of the Assessing Officer proposing to conduct special audit of the respondent-assessee under Section 142(2-A) of the Income Tax Act, 1961.

The assessing officer had submitted a proposal for a special audit under Section 142(2-A) to the administrative Commissioner. Pursuant thereto, the administrative Commissioner granted approval. The ITAT set aside the said decision holding that a show-cause notice was required to be given to the assessee by the Assessing Officer before making the order proposing conduct of special audit under Section 142(2-A). Aggrieved thereby, the Commissioner of Income Tax filed the instant appeal.

The High Court relied on the Supreme Court decisions in Rajesh Kumar v. CIT, (2007) 2 SCC 181 and Sahara India v. CIT, (2008) 14 SCC 151 and observed that before forming an opinion as to the need for a special audit, having regard to the requirement of Section 142(2-A), a pre-decisional hearing has to be given by the Assessing Officer to the assessee. Even thereafter when the question of approval is before the approving authority. The latter is also required to comply with the principles of natural justice. Therefore, in both the stages contemplated under Section 142(2-A), principles of natural justice are required to be followed.

Moreover, vide the Finance Act, 2007 (w.e.f. 1-6-2007), a proviso was added to Section 142(2-A), and following the said amendment, it is now a statutory requirement that the Assessing Officer has to provide reasonable opportunity of hearing to the assessee before directing the assessee to get the accounts audited under the said provision.

In such view of the matter, the High Court held that in the absence of pre-decisional hearing, the decision to have special audit was invalid and consequentially, all the proceedings conducted thereafter stood vitiated. The Court found no infirmity in the order of the ITAT and the appeal was held devoid of merits. [CIT v. Vilson Particle Board Industries Ltd., 2020 SCC OnLine Bom 183, decided on 27-1-2020]

Case BriefsHigh Courts

Bombay High Court: A Division Bench comprising of S.C. Dharmadhikari and B.P. Colabawalla, JJ. dismissed an appeal filed under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal wherein it was held that Section 194-LA was not applicable in case at hand.

The facts of the case were that the assessee Development Authority had acquired land from hutment dwellers and paid compensation for rehabilitation. The Assessing Officer passed an order under Sections 201(1) and 201(1-A). He was of firm opinion that there had been acquisition of immovable property and the assessee, while compensating the hutment dwellers, was liable to deduct tax at source (TDS) as per the provisions of Sections 194-L and 194-LA. The assessees carried the matter in appeal before the Commissioner of Income Tax (Appeals) who held that the said sections were not applicable in the instant case. The decision was affirmed by ITAT. Aggrieved thus, the Revenue had filed the instant appeal.

The High Court perused the record and found that the order impugned did not require any interfere. The Court was of the view that the subject land always vested in the State. The hutment dwellers were encroaching squatters who had built illegal hutments on State land, they were trespassers. This being the case, there was no question of land being acquired by the assessee. It was an encroachment which was removed by the assessee and the encroachers were rehabilitated. This being the case, the Court was of the view that Sections 194-L or 194-LA had no application to the facts and circumstances of the case. The appeal was accordingly dismissed. [CIT v. Mumbai Metropolitan Regional Development Authority,2018 SCC OnLine Bom 2374, dated 06-09-2018]