LEGAL MAXIMS

Latin maxims articulate the principled foundations on which the law is built. Each is a time-tested, ancient treasure of Roman law which not only embellish as much the common law as the civil law, but rightfully shape, mold and intellectually structure and ground lawyers, from their first day of law school to the last law journal they read in retirement..

1. ignorantia  facti  excusat

 Meaning of the above expression according to Black’s Law dictionary (9^th edition) is : “Ignorance of fact is an excuse”

According to the said dictionary, whatever is done under a mistaken impression of a material fact is excused or provides grounds for relief- this maxim refers to the principle that acts done and contracts made under mistake or ignorance of a material fact are voidable. 

2. ignorantia juris non excusat

2.1 Meaning of the above expression according to Black’s Law dictionary (9^th edition) is : “Lack of Knowledge about a legal requirement or prohibition is never a excuse to a criminal charge”

2.2   However, in a civil proceeding our Supreme Court in in the case of Motilal Padampat Sugar Mills Co. Ltd vs State of Uttar Pradesh & Ors reported in (1979) 118 ITR 326 (SC) held that :-

         

          “….there is no presumption that every person knows the law. It is often said that every one is presumed to know the law, but that is not a correct statement ; there is no such maxim known to the law”

2.3     In Wealth-tax officer v.S.P. Jayakumar [1983] 3 ITD 221 (Mad.),  the issue before the ITAT, Chennai Bench was that the assessee,  did not file wealth-tax returns for six years on the ground that he was not aware of the provisions of the Wealth-tax Act. When Government publicised the Voluntary Disclosure Scheme in 1975 then he consulted a tax practitioner and  filed the returns voluntarily. The WTO levied penalty under section 18(1)(a) ( for non filing of returns). Before the authorities the assessee pleaded that ignorance of law was a reasonable cause.

The ITAT held in favour of the assessee as under-

“The maxim that ignorance of law is no excuse is, no doubt, a well known time honoured principle, but it appears to us that it has lost much of its relevance in the context of the present day legal system replete with complex legislation touching upon every aspect of life.

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4. It may be remembered that this legal maxim originated at a time when the function of the State in most part was merely to govern the country, by maintaining law and order within the country, and protect it from external aggression and, as stated in Salmond’s Jurisprudence, the law in most instances was derived from and in harmony with the rules of natural justice, but in the modern days, as we have already stated, the law of a State govern almost every aspect of life of its citizens and it is well-nigh impossible for anyone to know all the statutory laws and every provision thereof. As a matter of fact, efficacy and justification of this principle that every one is presumed to know the law is doubted very much in the observations at page 396 of Salmond’s Jurisprudence where it is stated that it must be admitted, however, that while each of the reasons on which the principle is based is valid and weighty, they do not constitute altogether sufficient basis for so stringent and severe a rule and the theory that the law is knowable throughout by all to whom it con cerns is an ideal rather than a fact in any system as indefinite and mut- able, that in a complex legal system a man requires other guidance than that of common sense and a good conscience and the fact seems to be that the rule in question, while in general sound, does not in its full extent and uncompromising rigidity admit of any sufficient justification. It is further observed that certain exceptions to it are being developed, particularly in respect of the defence of ‘claim of right’ in criminal law.

5. In P.V. Devassy v. CIT [1972] 84 ITR 502 (Ker.) this principle was also considered. We can do no better than reproduce an extract from the judgment

". . . Public policy requires that ignorance of law should be no excuse. But, there is no presumption that everybody knows the law, though it is often so stated.

‘Sometimes it is said that every man is presumed to know the law, but this is only a slovenly way of stating the truth that ignorance of the law is not in general an excuse.’ (See A First Book of Jurisprudence by Pollock, at page 163)

In Martindale v. Falkner [l846] 135 ER 1124,1130, Maule J. said:

"There is no presumption in this country that every person knows the law ; it would be contrary to common sense and reason if it were so.’

In Criminal Law by Glanville Williams, at page 385, it is stated :

‘The view that every one is presumed to know the law is now generally rejected ; it is not a true proposition of law, and even if it were, it would only be a legal fiction, not a moral justification. Lord Mansfield Drily observed that it would be very hard upon the profession, if the law was so certain, that everybody knew it ; and Maule J. is credited with the observation that everybody is presumed to know the law except His Majesty’s judges, who have a Court of Appeal set over them to put them right. The idea that the law can be known by every one is to-day, in the planned and welfare State, more ludicrous than ever’ ". (p. 507)

6. That the tax laws of this country are complex and complicated and often require for compliance, therewith the assistance of tax practitioners specialising in this field, is a well known fact. It is equally well known fact that the legislation in this field undergoes so frequent changes and amendments that it is not possible for even a person specialising in this field, including the tax administrator, to claim that he knows what exactly the law is on a particular given day or period without making references to the history of the enactments. In such circumstances, it would be a travesty of truth and justice to hold that the assessee knew or ought to have known the correct law and comply therewith, even though, in fact, he was not aware of the provisions.”

FROM MY ARCHIVES-ITAT, KOLKATA UNREPORTED DECISIONS   ( Part 6)

1.     ACIT Circle -3, Asansol vs. Sri Govind Prasad Khedwal

         ITA No. 180/K/2012, ‘A’ Bench; A.Y. 2008-09

        Order dated : 08.04.2013

 Whether unsubstantiated sundry creditors can be added back u/s     68 ?

a) The brief facts of this case are that the assessee is proprietor of M/s. Dinesh Electricals, which is involved in the trading of General Electrical items. That the case AO completed the assessment  u/s 143(3) by making various additions, inter alia, on the ground of unsubstantiated sundry creditors by invoking the provision of sec 68

 b)                  Aggrieved the assessee went in appeal before the First Appellate Authority, who deleted the addition.

 c)                   Honb’le Tribunal dismissed the appeal of the Revenue and held that the onus rests on the AO to disprove the fact that the purchases were bogus. Having accepted the purchases and payments to them A.O cannot add back, merely on non response from the trade creditors, by invoking the provision of Sec. 68 of the Act.

2          ITO Ward 35(3), Kolkata vs. Shri Kamal Kumar Bansal

             ITA No. 2299/K/2010; ‘B’ Bench; A.Y. : 2005-06

             Order dated : 30.06.2011

Whether the A.O has to record a finding that the amount in question was allowed as deduction in any earlier year or that some benefit was derived by way of remission or cessation of liability before invoking the provision of sec 41(1) ?

a)               The brief facts of this issue are that the AO while doing the scrutiny assessment added an amount of Rs.9,00,000/- and Rs.5,00,000/- as outstanding liabilities payable to M/s. Element Dealers Pvt. Ltd. and M/s. Exquisite Apartment Pvt. Ltd. respectively by applying the provisions of section 41(1) of the Act. In regard to one party, he  relied upon  the Inspectors report which stated  that M/s. Elements Dealers (P) Ltd. had already received back the advance and the name of the assessee does not appear in the balance sheet of the said party. He further pointed out that the payment was not made by the assessee but by Shri R.D.Bansal.

b)              On appeal the ld. CIT(A) has deleted the addition  by observing that there is no finding of the AO that the amount was allowed as deduction in any earlier year and that some benefit was derived by way of remission or cessation of liability.

c)               Aggrieved that the Department is in appeal before the Tribunal. Hon’ble Tribunal dismissed the appeal of the Department holding that –"We are of the considered view that in this case neither the provision of section 68 of the Act is applicable as it is an admitted fact that the assessee has brought forward these loans/advances from the earlier years. As regarding the applicability of section 41(1) of the Act the ld. CIT(A) has clearly mentioned that there is no finding by the AO that above amounts were allowed as deduction in the earlier years. Therefore, we find no infirmity in the order of the ld. CIT(A). We confirm the same and dismiss the appeal of the Revenue”.

Manisha Prakash Amin vs. JCIT Range-48, Kolkata

ITA No. 1839/K/2010; ‘A’ Bench; A.Y.:2006-07

Order dated : 24.05.2011

Where loans are received by the assessee in cash from relatives, whether transaction between relatives is not in the character of loans or deposit attracting the provisions of sec. 269SS of the Act and penalty u/s 271D is not attracted ?

a)               Brief facts leading to the above issue are that the Assessing Officer during the course of assessment proceedings noticed that the assessee has received a sum of Rs.1,90,000/- from Smt. Gita Ben D Amin and a sum of Rs.80,000/- from Sri Narayan Bhai J Amin respectively in cash. Accordingly, he initiated penalty proceedings u/s. 271D of the Act for violation of provisions of section 269SS for accepting cash. The only issue in this appeal of the assessee is against the order of CIT(A) confirming the levy of penalty by JCIT, Range-48, Kolkata u/s. 271D of the Act exceeding Rs.20,000/-. The main issue involved is that levy of the penalty for violation of provisions of section 269SS for receiving loan in cash in excess of Rs.20,000/-. Accordingly, he levied penalty for a sum of Rs.2,70 lacs.

b)              Aggrieved, assessee preferred appeal before CIT(A), who in appeal, confirmed the action of the Assessing Officer. Being further aggrieved, the assessee is now in appeal before the Tribunal.

c)               Hon’ble Tribunal observed that the loans received by the assessee in cash from relatives in cash and transaction between relatives is not in the character of loans or deposit attracting the provisions of sec. 269SS of the Act and  allowed the appeal of the assessee holding that the loans from relatives are in the nature of financial support within the family and this is a reasonable cause falling u/s. 273B of the Act. Accordingly, deleted the penalty levied by JCIT and reversed the orders of lower authorities.

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