Ten tax issues on which CBDT concedes that their officers are wrong! ( Part I)

Ten tax issues on which CBDT concedes that their officers are wrong!

( Part I)

1.               Issue no 1

CBDT has clarified about non- taxability of compensation on compulsory acquisition of Agriculture & Non Agriculture land

1.1 CBDT circular: CBDT Issued a Circular No.36/2016 [F.NO.225/88/2016-ITA.II], dated 25-10-2016 to clarify about non-taxability of compensation and enhanced compensation received by Land Owners for agriculture and non agriculture land acquired under Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 ( for short  RFCTLARR Act)

1.2 No provision under the Income  tax Act granting such exemption : 

According to the provisions of the Income-tax Act, 1961, capital gains arising from the following two types of agricultural land are exempt from tax-

a)               Agricultural land not situated in specified urban area [ as provided in clause(a) and (b) of sec 2(14)(iii)] is not regarded as a capital asset. Therefore, Capital Gain arising from transfer or compulsory acquisition of such agricultural land is not taxable.

b)              Capital Gain arising from transfer of agricultural land subject to the fulfillment of certain conditions like such land is situated in the specified urban area as mentioned above, such land during the period of two years immediately preceding the date of transfer was being used for agricultural purposes, such income has arisen from the compensation received by such assessee on or after the 1st day of April, 2004 [ sec. 10(37) ]

However, as per Section 96 of the RFCTLARR Act, income-tax shall not be levied on any award or agreement made (except those made under section 46) without making any distinction between compensation received for compulsory acquisition of agricultural land and non-agricultural land. Therefore, CBDT has issued the circular to clarify the uncertainty caused by the RFCTLAAR Act by filling up the lacuna caused by the absence of specific provision in the Act.

CBDT has categorically stated in the circular as under-

“The matter has been examined by the Board and it is hereby clarified that compensation received in respect of award or agreement which has been exempted from levy of income-tax vide section 96 of the RFCTLARR Act shall also not be taxable under the provisions of Income-tax Act, 1961 even if there is no specific provision of exemption for such compensation in the Income-tax Act, 1961.”

1.3           What was the need for the circular ?

When a Central Act, subsequently enacted, specifically grants relief from the income –tax and other duties, where is the scope for confusion ?

CBDT seems to be conscious of the fact that the officers of the department tend to adopt err-on –the- side- of- the- revenue line leading to needless litigation. Hence the circular. The circular seems to have paid off with not much litigation visible in the public domain on this front.

1.4           Some case-laws on the issue.

However, two decisions may be referred to demonstrate the ‘itch’ of the officers to add back/ fasten the unnecessary liability on the assessees. In the case of ANNAPURNA MISHRA vs Income TAX OFFICER 177 ITD 496 (CUTTACK), the property of the assessee was compulsorily acquisitioned by National High Way authority, Keonjhar through Notification made by Collector Keonjhar in the financial year 2014-15 and the assessee was paid a compensation of Rs. 12,93,070/- on 31.3.2015. The A.O in ignorance of the circular brought the said amount to tax and it was only at the stage of the tribunal that the circular was brought to the notice of the bench. The bench then passed the order restoring the matter back to the file of the A.O directing him to pass the order afresh considering the circular.

Another decision is in  N. Nanda Kumar’s case by the Andhra Pradesh High Court (396 ITR 21) wherein the High court held that there is no TDS liability u/s 194LA on Government compensation received under compulsory acquisition . HC allowed assessee’s writ petition. HC referred to Sec. 96 of the RFCTLAAR Act and held that Circular No.36/2016 dated 25-10-2016 issued subsequently clarified that compensation received under 2013 Act is not liable to income tax is clearly in assessee’s favour though in the final analysis court held that the circular is of no help to the assessee in the instant case since it is silent on the issue of TDS. Court remarked that Commissioner of Income Tax (TDS), Hyderabad, was over-jealous in issuing a letter dated 05-11-2015 ( directing the authorities to deduct TDS) as though Section 194LA of the Income Tax Act would prevail over Section 96 of the 2013 Act, thereby, the court highlighted the tendency of the tax authorities to show over-jeal in tax collection ignoring the simple interpretational issues. In the final analysis the court delved into the very objective of the 2013 Act which is to benefit the poor land owners and their families would be hampered if tax is deducted u/s 194LA. High Court clarified that section 96 of the 2013 Act makes section 194LA inapplicable and lammented that “If there can be no tax on a particular income by virtue of some special provisions contained in an enactment other than the Income Tax Act, 1961, it is not known how any provision contained in Chapter-XVII          ( containing TDS provisions)  of the Income Tax Act could be invoked.”

2.               Issue no 2- A zero sum game

CBDT’s clarification regarding automatic allowance of the claim for a higher profit-linked deduction under Chapter VI-A pursuant to additions made pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc. of the Act.

2.1   CBDT circular: CBDT ISSUED a CIRCULAR NO. 37/2016 [F.NO.279/MISC./140/2015/ITJ], DATED 2-11-2016 clarifying that there shall be automatic enhancement of profit-linked deduction claimed under Chapter VI-A on the additions being made by the A.Os under the provisions of sections 32, 40(a)(ia), 40A(3), 43B etc. of the Act.

2.2      Scope of the circular :   Though the head note has referred to sec 80- IA only for the purpose of granting of benefit, the body of the circular has used the wider expression “profit-linked deduction under Chapter VI-A”. Therefore, it follows that the benefit of the circular is available to all the provisions pertaining to profit-linked deduction available under Chapter VI-A like secs. 80IA, 80IAB, 80IAC, 80 IB, 80IBA, 80IC, 80IE.

2.3        Contents of the circular :

According to the CBDT, Chapter VI-A of the Income-tax Act, 1961 provides for deductions while computing the profits and gains from specified business activity. While making assessment of entities claiming such deductions, the Assessing Officer may make certain disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc., of the Act. At times, disallowance out of specific expenditure claimed may also be made. The effect of such disallowances is an increase in the profits. Doubts have been raised as to whether such higher profits would also result in claim for a higher profit-linked deduction under Chapter VI-A.

At para 2 of the circular, the issue of the claim of higher deduction on the enhanced profits has been considered and CBDT admits that the issue is a contentious one ( meaning thereby that many a times A.Os are not accepting the claim of the consequential higher deduction). However, CBDT refers to the three  decisions favourable to the assessee of three High Courts - High Courts of Bombay, Gujarat and Allahabad and stated that their views have been  accepted by the Department.

The three decisions referred to and their ratio decidendi are given below-

(i)		If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduction of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) of the Act would qualify for deduction under section 80-IB of the Act. This view was taken by the courts in the following cases:
		Income-tax Officer -Ward 5(1) v. Keval Construction [2013] 33 taxmann.com 277 (Guj.)
		Commissioner of Income-tax-IV, Nagpur v. Sunil Vishwambharnath Tiwari [2016] 63 taxmann.com 241 (Bom.)
(ii)		If deduction under section 40A(3) of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act. This view was taken by the court in the following case:
			Principal CIT, Kanpur v. Surya Merchants Ltd. [2016] 72 taxmann.com 16 (All.).

 Accordingly, by way of the circular, CBDT has directed its officers that appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon.

2.4   It is pertinent to note that though the routine additions definitely qualified for the enhanced benefit of deduction, the provisions referred to in the circular are in the nature of deeming fictions and were meant to act as deterrence for violation of certain mandatory provisions prescribed. Therefore, many A.Os were not convinced with the logic of granting the enhanced equivalent benefit of deductions. CBDT has tried to give quietus to the litigation by accepting the decisions of the three High Courts.

Post the issue of the circular, many pending litigation on the issue has been settled by the courts/ITAT simply on the basis of the circular without delving into the merit of the addition. Courts/ITAT has also been considerate enough to adopt the spirit of the circular rather than going by the form of/ nomenclature used in the circular.

2.4     Case-laws on the issue

A.  In a case before the ITAT, Mumbai Bench in ITO, 2(1)(4), Mumbai vs Anthelio Business Technologies, I.T.A. No. 976/Mum/2015, Decision dtd. 21 December, 2016, the main issue before ITAT in the Revenue's appeal and the C.O. filed by the assessee was with respect to the disallowance made u/s 40(a)(i) of the Act. The assessee was registered as a 100% export oriented unit under the Software Technology Park of India Scheme and the assessee was engaged in the business of provision of information technology enabled services and other back office support services. It was an undisputed and admitted position between the parties that the assessee was entitled to deduction u/s 10B of the Act and the profits of the assessee were wholly exempt from payment of taxes u/s 10B of the Act.

The twin issues before the ITAT were whether the assessee was entitled to the  enhancement of benefit u/s 10B due to disallowance u/s 40(a)(i) though both the sections are not explicitly mentioned in the circular.

The Tribunal returned its finding as under-

“We find that the Revenue's appeal and the assessee's cross objection are duly covered by the CBDT circular although Section 10B of the Act is not placed under Chapter VI-A of the Act rather the same is placed under Chapter-III of the Act but the deductions u/s 10B of the Act are profit linked deductions and hence there is no reason why the same should not be allowed keeping in view the spirit of afore-stated CBDT circular as the deduction u/s 10 B of the Act is also profit linked deduction . Similarly, it is stated in the circular about disallowance u/s 40(a)(i) of the Act which is succeeded by the word 'etc' wherein the circular has stated as under:

"In computing the profits and gains of a business activity, the Assessing Officer may make certain disallowances, such as disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc., of the Act."

The use of the word 'etc.' clearly denotes that it will apply to similarly placed disallowances and disallowance u/s 40(a)(i) of the Act is also disallowance due to non-deduction of withholding tax as is contemplated by Section 40(a)(ia) of the Act. Hence the CBDT circular will be applicable to deductions u/s 10B of the Act as well to disallowance u/s 40(a)(ia) of the Act as well. Hence the appeal of the Revenue is not sustainable/maintainable in view of afore-stated CBDT circular dated 02-11-2016 and we dismiss the appeal filed by the Revenue , while the C.O. filed by the assessee is allowed as the additions of Rs.1,35,556/- made by the AO are w.r.t. disallowance u/s 40(1)(ia) of the Act.”

B. In DCIT, Circle-1, Ahmedabad vs Ascendum Solutions (India) Pvt.,                      ITA  N o. 429/ Ahd/14, decision dtd 25 September, 2017, at the time of  hearing of the appeal filed by the department, the counsel for the assessee raised a preliminary objection that even if the plea of the Assessing Officer is to be accepted, since entire business income of the assessee is eligible for exemption under section 10A, it will be revenue neutral inasmuch as even if disallowance under section 40(a)(i) is upheld, the corresponding enhanced income eligible for section 10 A benefit will also go up. The plea of the assessee was accepted at the threshold on the basis of the circular and the revenue’s appeal was dismissed.

                                                              

C.    In PCIT vs.  M/S SUN PHARMECEUTICAL INDUSTRIES, TAX APPEAL No. 854 of 2016, decision dtd 30 th March, 2017, the revenue, in the appeal filed u/s 260A, proposed, inter alia, the following Substantial Question of Law before the Gujarat High Court-

“[E] Whether the Tribunal was justified in deleting (sic) the deduction u/s., 80IB of the Act on account of disallowance of remuneration under Section 40 (b) of the Act and disallownace under Section 43B of the Act ?"

The proposed Question [E] in the Tax Appeal was dismissed in light of the CBDT Circular.

D.    In a very recent decision M/S. Eka Software Solutions vs Deputy Commissioner Of Income, ITA No.2114/Bang/2019, Decision dtd 17 January, 2020, the Banglore Bench of ITAT referred to its own decision in the assessee's own case for preceding year wherein the Tribunal had held that disallowance of business service-marketing charges will go to increase the profits of the business which is eligible for deduction u/s. 10AA of the Act and that deduction u/s. 10AA of the Act should be allowed on such enhanced profit consequent to disallowance u/s. 40(a)(i) of the Act. Further, the ITAT referred to the  two High Courts viz., Hon'ble Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. (2010) 194 Taxman 192 (Bom) and Hon'ble Gujarat High Court in the case of ITO v. Kewal Construction, 354 ITR 13 (Guj) which had taken the view that when disallowance u/s. 40(a)(ia) of the Act goes to enhance the profits that are eligible for deduction under Chapter VIA of the Act, the deduction under Chapter VIA should be allowed on such increased profit. Finally, reference was made to the circular to grant relief to the assessee.

      ……. To be continued