No Disallowance Can Be Made In Respect Of Shares On Which Dividend Income Has Not Been Received U/s 14A r.w Rule 8D

ITAT, Kolkata holds in a landmark judgement  that in computing disallowance u/s 14A r.w Rule 8D , only investment in those shares are to be considered which has yielded exempt income in the form of dividends. In other words, disallowance cannot be made in respect of shares on which dividend income has not been received. Read the full text:

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: KOLKATA

[Before Shri K.K.Gupta, A.M. & Shri George Mathan, J.M.]

I.T.A. No. 1331/Kol/2011 : Assessment Year : 2008-09

REI Agro Ltd., Kolkata -Vs- DCIT, Central Circle-XXVII, Kol.

(PAN : AABCR 4929H)

(Appellant) (Respondent)

I.T.A. No. 1423/Kol/2011 : Assessment Year : 2008-09

DCIT, Central Circle-XXVII, Kol. –Vs- REI Agro Ltd., Kolkata

(Appellant) (Respondent)

Date of concluding the hearing : 22.05.2013

Date of pronouncing the Order : 19.06.2013

Appearances :

For the Department : Shri L.K.S. Dehiya, CIT(DR)

For the Assessees : Shri Ravi Tulsiyan, FCA

O R D E R

Per Shri George Mathan,J.M.

The ITA No.1331/Kol/2011 is an appeal filed by the Assessee and the ITA

No.1423/Kol/2011 is an appeal filed by the Revenue against the order of the CIT(A),

Central-I, Kolkata in Appeal No.03/CC-XXVII/CIT(A),C-II/10-11 dated 2nd August,

2011 for the assessment year 2008-09.

2. Shri L.K.S.Dehiya, CIT,D.R appeared on behalf of the Revenue and Shri Ravi

Tulsiyan. FCA appeared on behalf of the assessee.

3. In the assessee’s appeal, the assessee has raised the following grounds:

“1. The orders passed by the lower authorities are unwarranted, arbitrary,

without proper reasons, invalid and bad in law, in so far as they are against

the interest of the appellant company.

2. On the facts and in the circumstances of the case, the learned CIT(A)

erred in holding that proportionate management and administrative expenses are required to be deducted while computing exempt income or dealing with investment matter and in that view, in sustaining thedisallowance of Rs.26,09,386/- under Rule 8D(2)(iii) of the Income Tax Rules.

3. On the facts and in the circumstances of the case, the learned CIT(A)

erred in sustaining disallowance of Rs.26,09,386/- u/s 14A of the Incometax

Act, 1961, by applying the provisions of Rule 8D(2)(iii) of the Income

Tax Rules against meager Dividend income of Rs.1,32,638/- only.

4. The appellant craves leave to amend, alter, modify, add to, abridge

and/or rescind any or all the above grounds in future.”

3.1 In the Revenue’s appeal, the Revenue has raised the following grounds:

“01. That in the facts and circumstances of the case and in law, the Learned

CIT(A) has erred in law in deleting the disallowance of Rs.37727610/- in

respect of interest made u/s.14A of the Act read with Rule 8D of IT rules by

holding that the investment of shares was made out of own funds of the

assessee without considering that the linkage between the funds borrowed

and the investments, the income of which is exempt, was not established by

the assessee.

02. That in the facts and circumstances of the case, the Ld. CIT(A) has

erred in law in deleting the disallowance of Rs.3,77,27,610/- in respect of

interest made u/s.14A r/w Rule 8D of the Act, in view of the decision of the

Hon’ble Kolkata High Court in the case of Danukha & Sons –Vs- CIT

(Central)-I, Kolkata reported in 201 Taxman 105 (Kol) (Mag), wherein it

has been held that in the absence of any material disclosing the source of

acquisition of shares which is within the special knowledge of the assessee,

the assessing authority can make proportionate disallowance.

03. That the Department craves leave to add, modify or alter any of the

above ground(s) of appeal and/or adduce additional evidence at the time of

hearing of the case.”

4. At the time of hearing, it was submitted by the ld. D.R. that the assessee is a company which is doing the business of rice processing, power generation and Retail sale. It was a submission that during the year, the assessee had received dividend income of Rs.1,32,638/-, which was claimed as exempt. The assessee had not debited any expenses in respect of expenditure incurred for earning such exempt income. The AO has invoked the provisions of section 14A read with rule 8D of the Act and has made a disallowance of an amount of Rs.4,03,36,996/-. It was a submission that on appeal, the ld. CIT(A) had reduced the disallowance under section 14A to Rs.26,09,386/-. It was a submission that against the relief granted of Rs.4,03,36,996/-, the Revenue has filed the appeal in ITA No.1423/Kol/2011 and in respect of disallowance confirmed by the CIT(A) to the extent of Rs.26,09,386/-, the assessee has filed the appeal in ITA No.1331/Kol/2011. It was a submission that the ld. CIT(A) had considered the various case laws to come to the conclusion that no disallowance under section 14A would be made. It was a submission that the case laws relied on by the ld. CIT(A) related to the period prior to the assessment year 2008-09, being the assessment year from which the provisions of Rule 8D came into application. It was a submission that the assessee had invested Rs.103 crores in shares during the relevant assessment year. It was a further submission that there was no increase in

the share capital during the relevant assessment year. It was a submission that however, the assessee’s loan account had increased by Rs.122 crores. It was, thus, the submission by the ld. D.R. that the investment in the shares was out of interest bearing funds. It was a submission that the ld. CIT(A) had in his order in para 4.1 held that the assessee was having a common pool in respect of its own fund as also its loan fund. It was a submission that as the assessee had used interest-bearing fund for purchasing shares and the assessee had paid interest on the same, the disallowance as made by the AO by invoking the provisions of section 14A read with Rule 8D was liable to be upheld. It was a further submission that though the AO has in his assessment order specifically held that there is no disallowance liable to be made under rule 8D(i), disallowance under rule 8D(ii) had been made on the basis of the computation provided thereunder, as also under Rule 8D(iii). It was a submission that in view of the decision of the Hon’ble Jurisdictional High

Court in the case of Danukha & Sons –Vs- CIT (Central)-I, Kolkata reported in

201 Taxman 105 (Kol), it was for the assessee to show the source of acquisition of the shares by production of the materials that those were acquired from funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. The assessee having not shown such availability of funds, the disallowance was liable to be upheld.

4.1 He also relied upon the decision of the Hon’ble Kerala High Court in the

case of Leena Ramchandran reported in 339 ITR 296. It was a submission that the order of the ld. CIT(A) was liable to be reversed to the extent that he has reduced the disallowance.

5. In reply, the ld. A.R. submitted that as per the provisions of section 14A(2),

the AO was to determine the amount of expenditure incurred in relation to such income which does not form part of the total income, in accordance with such method as may be prescribed. It was a further submission that there was also supposed to be satisfaction to the correctness of the claim of the assessee. It was a submission that at the outset, the AO has not shown that the claim of the assessee that there is no amount disallowable was wrong nor is there any satisfaction recorded to such effect. On this point, the ld. D.R. submitted that the Coordinate Bench of this Tribunal has, in the case of Champion Commercial reported in 26 Taxman.com 342, held that it is only where the assessee offers a disallowance under section 14A, the AO is required to record satisfaction. When no expenditure is offered by the assessee, the AO need not record such satisfaction.

5.1    It was submitted by the ld. A.R. that as per the provisions of section 14A(3), the provisions of sub-section (2) also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to the income which does not form part of the total income under the Act. In the return filed by the assessee, there is no provision for making a claim that there is no expenditure. The fact that the assessee did not make any disallowance under section 14A, in the return filed itself was the claim that no expenditure has been incurred. The ld. A.R. further drew our attention to P&L a/c. of the assessee for the year ended on 31.03.2008 as also the balance-sheet, which were at pages 78 to 95 of the paper book. It was a submission that the shareholders’ funds in the balance-sheet showed that the share capital had increased by Rs.4 crores during the relevant assessment year and the Reserves and Surplus had gone up by Rs.112 crores. The loan fund had increased by Rs.122 crores. It was a submission that the loan funds were  used for the acquisition of assets as also towards working capital and in fact the fixed assets net block increased by Rs.116 crores, after considering a depreciation of 57 crores. It was, thus, a submission that the actual increase in the fixed assets when compared to the net block for the year ended on 31.03.2007 was 174 crores. It was a submission that the profits available to the assessee before taxation for the assessment year 2008-09 was Rs.130 crores and the profit, after taxation, was Rs.109 crores. The amount available for appropriation for the assessment year 2008-09 was Rs.128 crores. He further drew our attention to the investments during the year, which is shown at page 84, being the investment in Varrsana Ispat Limited at Rs.103 crores. It was a submission that the other investments, which were there as on the beginning of the assessment year was to an extent of Rs.58,27,282/-. It was a submission that it is out of the shares of this investment of Rs.58,27,282/-, the assessee had received the dividend income and not on the investment of Rs.103 crores. The ld. A.R. further drew our attention to page 362 of the paper book, which was the copy of the loan sanction document from the State Bank of Bikaner and Jaipur dated 22.12.2007 for letter of credit of Rs.175 crores.

It was a submission that this was on the security of the stock available with the

assessee. He further drew our attention to page 370 of the paper book, which was the letter from Allahabad Bank for reviewing and enhancing the limits for working capital from the existing Rs.250 crores to Rs.500 crores. It was a submission that this was also enhanced working capital limit, which was to be released only after the tie-up of the entire limit of Rs.1800 crores from the Consortium. This was also for the Letter of Credit purpose. He further drew our attention to pages 372, 374 and 381, which were all credit sanction advices given by the various banks, being United Bank of India, Indian Overseas Bank. It was a submission that all these were for L.C. only. It was a submission that all the loans were directly related to the business of the assessee. The ld. A.R. further drew our attention to the decision of the Coordinate Bench of this Tribunal in the case of Balarampur Chini Mills

Ltd. 140 TTJ (Kol) 73, wherein the Tribunal has held that section 14A and Rule 8D can be invoked only when the AO is not satisfied with regard to the account of the assessee that the claim of expenditure made by the assessee is not correct and the claim made by the assessee that no expenditure has been made in relation to income, which does not form part of total income under the Act. Where the assessee has explained that the share capital and reserves, that is its own funds, were utilized for the purpose of investment in shares for earning dividend income which has not been negated by lower authorities and there is no linkage or nexus between the funds borrowed by the assessee and the impugned investments, no interest expenditure can be disallowed by mechanically applying the provisions of rule 8D. It was a submission that the decision of the Hon’ble Jurisdictional High Court in the case of Danukha & Sons (supra) would not apply in so far as in that case the assessee was not able to show that the investment was made out of its own

independent non-interest bearing funds. It was a submission that no disallowance under section 14A could be made.

6. We have considered the rival submissions. A perusal of the provisions of

section 14A, more specifically sub-section (2), shows that if the AO is not satisfied with the correctness of the claim of the assessee, then the AO shall determine the amount of expenditure incurred in relation to such income, which does not form part of total income under the Act. For this the method is prescribed in rule 8D. The provision of section 14A, sub-section (3) specifies the provision of 14A(2) would also apply where the assessee makes a claim that there is no expenditure incurred. This is because if the assessee does not make a disallowance under section 14A in its computation of total income, when filing the return, then if subsection (3) was not available, the AO might not be able to make a disallowance under section 14A. Thus, where the assessee makes a claim that only a particular amount is to be disallowed under section 14A or where the assessee does not make a disallowance under section 14A, if the AO proposes to invoke the section 14A, he is to record a satisfaction on that issue. This satisfaction cannot be a plain satisfaction or a simple note. It is to be done with regard to accounts of the

assessee. In the present case, there is no satisfaction by the AO and consequently, in view of the decision of the Coordinate bench of this Tribunal in the case of Balarampur Chini Mills Ltd. referred to supra, no disallowance under section 14A can be made.

7. Now coming to the merits of the issue. A perusal of the provision of section

14A(1) clearly shows the wordings, “in relation to the income which does not form part of the total income under this Act”. In the present case, this income, which does not form part of the total income under the Act, is the dividend income of Rs.1,32,638/-. Therefore, if any disallowance is to be made in respect of expenditure incurred, it should be in relation to this dividend income of Rs.1,32,638/-. If an assessee has invested in shares, which could get dividend or there is investment which generates dividend income or exempt income as also investment which does not generate exempt income, it is only such investments in respect of which the dividend income or exempted income has been earned which can be considered when computing the disallowance under section 14A read with rule 8D. A perusal of the provisions of rule 8D also talks of satisfaction in sub-rule (1). Rule 8D(2) has three sub-parts. The first sub-part i.e. (i) deals with the amount of expenditure directly relating to the income which does not form part of the total income. That issue is not in dispute here and therefore, we do not go into it in this case. In second sub-part i.e.(ii), it is a computation provided in respect of expenditure incurred by the assessee by way of interest during the previous year which is not directly attributable to any particular income or receipt. This clearly means that if there is any interest expenditure, which is directly relatable to any particular income or receipt, such interest expenditure is not to be considered under rule 8D(2)(ii). In the assessee’s case here the interest has been paid by the assessee on the loans taken from the banks for its business purpose. There is no allegation from the banks nor the AO that the loan funds have been diverted for making the investment in shares or for non-business purposes. Further rule 8D(2)(ii) clearly is worded in the negative with the words “not directly attributable”. Thus for bringing any interest expenditure, claimed by the assessee, under the ambit of rule 8D(2)(ii) it will have to be shown by the AO that the said interest is not directly attributable to any particular income or receipt. Why we say here that it is to be shown by the AO is on account of the words in Rule 8D(1) being “where the Assessing Officer, …… is not satisfied with.

(a) ……..

(b) ……..

in relation to income……., he shall determine the amount of expenditure in

relation to such income in accordance with the provisions of sub-rule (2).

In the assessee’s case, admittedly, the assessee has substantial capital. The increase in the capital itself is to an extent of Rs.4 crores and in respect of reserves and surplus, the increase is Rs.112 crores. The loans taken during the year admittedly are for the letters of credit and the assessee is bound to provide the bank stock statement and other details to show the utilization of the loans. No bank would permit the loan given for one purpose to be used for making any investment in shares. The ld. CIT(A), it is noticed that after considering these facts that the assessee had not used any of its borrowings for purchasing the shares, has deleted the disallowance. On this ground itself, the deletion as made by the ld. CIT(A) is liable to be confirmed and we do so.

7.1 In any case, the working of the disallowance under sub-part (ii) of subclause (2) of rule 8D as made by the AO also suffers from a substantial error in so far as in the said rule in regard to the numerator B, the words used are the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance-sheet as on the first day and in the last day of the previous year. Here the AO has taken into consideration the investment of Rs.103 crores made this year, which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. This is why the question of satisfaction is provided in section 14A and rule 8D(1), that relates to the accounts of the assessee.

Thus, it is not the total investment at the beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. A question may arise as to why the term “average of the value of investment” is then used. The term average of the value of investment would be to take care of cases where there is the issue of dividend striping. In any case, as we have already held that the assessee has not incurred any expenditure by way of interest during the previous year, which is not directly attributable to any particular income, the findings of the ld. CIT(A) on the issue stand confirmed and consequently the appeal filed by the Revenue stands dismissed.

8. In respect of provisions of rule 8D(2)(iii), which is the subject-matter of the

appeal in the assessee’s hand, a perusal of the said provision shows that what is disallowable under rule 8D(2)(iii) is the amount equal to ½ percentage of the average value of investment the income from which does not or shall not form part of the total income. Thus, under sub-clause (iii), what is disallowed is ½ percentage of the numerator B in rule 8D(2)(ii). Again this is to be calculated in the same line as mentioned earlier in respect of Numerator B in rule 8D(2)(ii) of the Act.

8.1 Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into  consideration the investment which has given rise to this income which does not form part of the total income. Under the circumstances, the computation of the disallowance under section 14A read with rule 8D(2)(iii), which is issue in the assessee’s appeal, is restored to the file of the AO for recomputation in line with the direction given above. No disallowance under section 14A read with rule 8D(2)(i) and (ii) can be made in this case.

9. In the result, the appeal filed by the Revenue stands dismissed and the

appeal filed by the assessee stands partly allowed for statistical purposes.

This Order is pronounced in the Court on 19th June, 2013.

Sd/- Sd/-

(K. K. Gupta) (George Mathan)

Accountant Member Judicial Member

Dated : 19th June, 2013

Order pronounced by:

Sd/- Sd/-

A.M. J.M.

(NSS) (GM)

 

Copy of the order forwarded to:

1. REI Agro Ltd., 46C, Chowringhee Road, Kolkata - 700 071

2 DCIT, Central Circle-XXVII, Kolkata

3. The CIT(A),

4. CIT,

5. DR, Kolkata Benches, Kolkata

True Copy, By order,

Asstt. Registrar, ITAT, Kolkata

Talukdar(Sr.P.S.)

Whether A Firm Is Liable To Capital Gains Tax On Reconstitution Of Partnership?

By Subash Agarwal, Advocate

According to section 45(4)  gains arising from deemed distribution of capital assets on the dissolution of a firm or otherwise is chargeable to capital gains tax and for the purpose of section 48, FMV of assets on the date of dissolution etc. is deemed to be the full value of the consideration received.

This provision was brought on the statue book to block a devise resorted to by the assessees to transfer capital assets through the medium of firms without paying any capital gains tax, particularly, by bringing in new partner(s) and after a while, dissolving the firm and handing over high valued assets at book value to the newly inducted partners, thereby, evading capital gains tax.

Though the term “dissolution of a firm” is vividly mentioned in the provision but at the same time, there is an omnibus term used i.e., “otherwise”. The purpose of this write-up is to examine whether the “reconstitution” of partnerships are also covered under the sweep of the general term “otherwise”.

Often, revenue’s contention is that “reconstitution” of a partnership is also a specie of transfer referred to in section 45(4) and the same is covered by the term “otherwise”. As such, FMV of the assets given to the retiring partners shall be taken as deemed sale consideration for the purpose of computation of capital gains in the firm’s hands.

The mischief of sec 45(4) is applied even where there is induction of new partners on the plea that a right on existing assets is created in favour of the incoming partners, which are appearing at the book value in the accounts but their market value is considerably higher. In this regard, Kerala High Court judgement in the case of CIT vs. Kunnamkulam Mill Board 257 ITR 544 is worth taking note of.

In this case, the  Hon’ble Court held that in a case of this nature what happens is that with the admission of new partners, the right of the existing partners were reduced and that a right was created in favour of the newly inducted partners. But the ownership of the property did not change even with the change in the constitution of the firm.

Likewise, if a partner retires, he does not transfer any right in the immovable property in favour of the surviving partner because he has no specific right with respect of the properties of the firm.

 More recently, in the case of Prashant S. Joshi vs. ITO 324 ITR 154 (Bom.), same view as in the case of Kunnamkulam Mill’s case was taken.

However, a contrary view has been taken by the Bombay High Court in the case of CIT vs. A.N. Naik Associates 265 ITR 346.  In this case, there was handing over of assets of the partnership to the retiring partners. In that context, it was held that section 45(4) will apply, where there is transfer of assets to the retiring partners (see para 21 of the judgement). In this case, even Kunnamkulam Mills’ case (supra) was also considered at para 15 and the same was distinguished and it was observed that in Kunaamkulam’s case, assets were not allotted to the partners.

Another interesting case was before the Hon’ble Karnataka High Court in the case of CIT vs. Gurunath Talkies 328 ITR 59 (Karn.) where there were four partners. There was reconstitution of partnership. Two new partners were inducted. There was again reconstitution of the firm. The Old partners retired leaving the assets of the firm with newly inducted partners. The Court held that there was transfer of assets of the firm after considering the objects of the introduction of section 45(4).

Thus, the application of mischief of sec 45(4) on reconstitution of firms depends on facts and circumstances of a case. 

NO CONCEALMENT PENALTY U/S 271 (1)(c) ON ENHANCED INCOME DUE TO DVO’s REPORT

By Subash Agarwal, Advocate

In the case of Britannia Industries 238 ITR 57, Hon’ble Calcutta High Court has held that it cannot be said that there was escapement of income in a case where the DVO has enhanced the valuation of a property. DVO’s report is merely an expression of opinion.

Hon’ble Supreme Court in the case of ACIT vs. Dhariya Construction Co. 328 ITR 515 (SC) held that re-opening for escapement of income is not possible on the basis of DVO’s report.

2.         Thus, in the opinion of the courts, DVO’s report is merely an expression of opinion.

Thus, on the basis of opinion and estimation, no penalty u/s. 271(1)(c) is leviable since offence of concealment has not been proved in such a situation. When the courts have held that there is no “escapement of income” on the basis of DVO’s report, same proposition will apply where there is allegation of concealment of income.

3.         In the case of National Textiles V. CIT 249 ITR 125, the Hon’ble Gujarat High Court held that –

In order to justify the levy of penalty, two factors must co-exist, (i) there must be some material or circumstances leading to the reasonable conclusion that the amount does represent the assessee's income. It is not enough for the purpose of penalty that the amount has been assessed as income, and (ii) the circumstances must show that there was animus i.e., conscious concealment or act of furnishing of inaccurate particulars on the part of the assessee. The Explanation has no bearing on factor No. 1 but it has bearing only on factor No. 2. The Explanation does not make the assessment order conclusive evidence that the amount assessed was in fact the income of the assessee. No penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income as with the hypothesis that it does. If a assessee gives an explanation which is unproved but not disproved i.e., it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee's case is false, the Explanation cannot help the Department because there will be no material to show that the amount in question was the income of the assessee.

4.         In DILIP N. Shroff’s case 291 ITR 519 (SC) it was held as under –

“The registered valuer has arrived its opinion on certain basis. He while making the valuation report, disclosed all the particulars. He disclosed that he had chosen to the index value method. He did not rely upon any sale instance. He might have referred to the valuation of the property as mentioned in a local newspaper. But it is not in dispute that he did not furnish any inaccurate particulars. It is true that he has not enclosed the sheet showing sale instance but nothing turns out thereupon as he had not relied upon any sale instances”.

There can be a genuine difference of opinion between two experts.

In the above circumstances, penalty was deleted by the Hon’ble Supreme Court.

5.         It was further held in the following cases that penalty imposed only on the basis of valuer's estimate regarding cost of construction is not valid –

(i)         Dy. CIT vs. JMD Advisors (P) Ltd. 310 ITR 280 (Del - Trib)

(ii)        CIT vs. Apsara Talkies 155 ITR 303 (Mad)

   

TAX REFUNDABLE BUT MISSED THE DEADLINE U/S 139(4), YOU CAN STILL FILE RETURN AND CLAIM REFUND

By Subash Agarwal, Advocate

           

As per Instruction No. 225/228/93-IT (A-II) dated 12.10.93 the assessee may file claim of refund before the A.O. after expiry of time limit prescribed u/s 139(4).

As per the said instruction, following four conditions are required to be satisfied to avail the benefit-

            (i)         Refund amount does not exceed Rs. 5 lacs (Earlier, it was Rs. 1 lac )

            (ii)        There is no claim for carry forward of loss.

            (iii)       There is no claim for additional refund after completion of original assessment.

            (iv)       Income is not assessable in the hands of any other person (eg. Minor)

2.         It is mandated that the A.O. will require approval  from the following authorities while scrutinizing such belated returns-

(a)   Upto Rs. 10,000/-:                        CIT

(b)   Upto Rs. 1 lac      :                        CCIT / DGIT

(Revised to Rs. 5 lac vide circular no. 670 dated 26.10.1993)

3.         It is pertinent to note here that where the refund amount involved is upto Rs. 5 lacs, the return is required to be filed before the jurisdictional A.O. For the higher sum, return has to be sent to the CBDT, New Delhi.

4.         The CBDT has directed / clarified that –

(a)    All such cases of belated claim of refund are  to be taken up for scrutiny and

(b)   No claim is to be entertained after the expiry of 6 years from the end of the assessment year.

5.         Following precautions are required for such belated claim of refund-

(a)    Return is to be filled up in the appropriate form manually.

(b)   Reasons for delay with supporting evidences should be stated in the application for condonation of delay.

CBDT’S STONY SILENCE DESPITE DRESSING DOWN BY HIGH COURT ON WRONGFUL DENIAL OF TDS CREDIT

By Subash Agarwal, Advocate

Recently, Hon’ble Delhi High Court was seized of, inter alia, the matter under consideration  in a case where one Sri Anand Prakash, FCA addressed a letter to the Hon’ble High Court raising various issues facing the helpless assessees and claimed that because of the fault of the department, assessees are being harassed. The Hon’ble High Court took judicial notice of the letter, converted it into a PIL and made CBDT a party. The said case has now been reported as Court On Its Own Motion vs. CIT 352 ITR 273 (Del.)

On the issue of denial of justifiable TDS credit by the A.O.s due to wrong uploading of data by the deductor of TDS, the court made hard hitting observations as under-

 “An assessee as a deductee should not suffer because of fault made by deductor or inability of the Revenue to ask the deductor to rectify and correct. Once payment has been received by the Revenue, credit should be given to the assessee. The CBDT should issue suitable directions in this regard. The department’s response on the action taken against deductors for non-compliance is unfortunate and unsatisfactory and it purports to express complete helplessness on the part of the Revenue to take steps and seeks to absolve them from any responsibility. Denying benefit of TDS to a taxpayer because of the fault of the deductor causes unwarranted harassment and inconvenience. The deductee feels cheated. The Revenue cannot be a silence spectator, wash their hands and pretend helplessness. S. 234E has now been inserted by the Finance Act, 2012 to levy a fee of Rs.200 per day for default of the deductor to file TDS statement within due date. It is unfortunate that the Board did not take immediate steps after even noticing lacuna and waited till FA 2012. The stand of the Revenue that they can only write a letter to the deductor to persuade him to correct the uploaded entries or to upload the details is not acceptable. The AO must use his power and authority to ensure that the deductor complies with the law”

2.      Pursuant to the Delhi High court’s order in the above mentioned case, CBDT has issued clarification vide letter dated 21.03.2013. In the said clarification, CBDT has dealt with and directed the A.Os to follow  the procedure prescribed by section 245 to affording the opportunity to the assessees before making any adjustment of refund against the alleged arrear demands.

Unfortunately the instant issue has been left untouched.

3.      In the earlier Circular 3/2011 dated 13.05.2011, CBDT has recognized the prevalent difficulty faced by the assessees due to wrong uploading of data by tax deductors but has fallen short of implementing / suggesting proper steps to mitigate the assessee’s (deductee’s) difficulty. It has merely declared that to overcome the challenge of mismatch between Form 16A and Form No. 26AS, a common link has been created between the TDs certificates in Form No. 16A and Form No. 26AS through a facility in the Tax Information Network (TIN Website) which will enable a deductor to download TDS certificates in Form No. 16A from the TIN website based on the figures reported in e-TDS statement filed by him.

Where there is wrong feeding of data or where the tax deductor fails to file TDS returns but has deducted TDS and the TDS credit is denied to the assessee, there is a stony silence on the part of CBDT. Can the deductee be denied the rightful claim of TDS which has been deducted while making remittance to him by the deductor, who is the agent of the government?

The CBDT’s inactivity / silence in this regard is despite the dressing down handed out by the Hon’ble Delhi High Court.

4.      There is a duty on the part of the deductor to furnish TDS return with correct data and issue a certificate  to the payee u/s 203 in the form prescribed by the rules. If the deductor does not conform to the requirements of law, there is violation by the deductor to comply with section 203, so that a penalty of Rs. 100/- per day for each day till the omission is made good is leviable u/s 272A(2)(g) of the Act. The power to ensure issue of TDS certificate after filing correct TDS return by the deductor is with department and not the deductee. The deductee is helpless in the situation and has no power to enforce correction or enforce filing of TDS return. Where a defect is found, it is the assessing officer who has to take action and get it rectified by the defaulter , being the deductor, who acts as the agent of the govt.

5.      The most important provision again in this regard in section 205, which bars a direct demand on an assessee by specifically stipulating that “the assessee shall not be called upon to pay the tax himself to the extent to which the cash has been deducted from that income”. Though section 199 expects that furnishing of the prescribed certificate to be issued by the deductor, section 205 by barring a direct demand on the assessee, where deduction has been made, gives the right to credit. However, this provision is being overlooked by the department and the assessee’s refund is withheld or he  is asked to pay the tax, which is actually paid on his behalf but whose credit is denied wrongfully.

6.      CBDT could have obviated the unnecessary confusion and avoided unnecessary litigation by clarifying the issue by directing the A.Os to give the appropriate credit to the deductees in a petition u/s 154 wherever satisfactory proof of tax deduction is furnished  and directing  strict action upon the erring deductors.

7.      Fortunately, the Courts/ Tribunals in the country are conscious of the injustice meted out to the assessees by the authorities and has rightfully restored the right of the assessees in the deserving cases.

8.      In the case of ACIT vs. Omprakash Gattani 242 ITR 638 (Gau), the assessing officer refused to give credit for tax deduction at source on the ground that the date of actual payment to the government was not intimated. Assessee’s bank account was attached by initiating recovery proceedings. The assessee filed a writ petition and succeeded. The department filed a writ appeal. It was confirmed by the High Court that the assessee was entitled to credit for TDS even though the deductor might not have paid the amount to government account. The High court pointed out that where tax has been deducted, direct demand on the payee is not justified and the department should proceed against the deductor.

9.      Where the employee is unable to get TDs certificate from his employer, but there is evidence to show that tax had been deducted at source, assessee cannot be denied credit. In such a case, the authorities were directed to exercise the powers to enforce the law, while staying the collection of tax. Pl refer Joseph (Capt. J. G.) vs. JCIT 303 ITR (AT) 395 (Mum.)

10.  Even if the deductor did not deposit the tax deducted at source to the credit of the Central Government, revenue cannot recover the amount from the assessee. Pl refer Yashpal Sahni vs. Rekha Hajarnavis , ACIT 293 ITR 539 (Bom)

11.  The remedy available to the assessee in the case of denial of TDS credit not reflected in the Form No. 26AS is to file appeal before the CIT(A) where the grievance, in most likelihood, will get redressed.

It is pertinent to note that appeal can be filed even where no assessment has been done u/s 143(3) but the return has been processed u/s 143(1).

Where the time for filing appeal has expired, the assessee may file the petition u/s 154 before the A.O. and produce the TDS certificates issued by the Bank. If he rejects the application, there is remedy in the form of appeal.

.

RECENT REPORTED JUDGEMENTS IN THE FIELD OF DIRECT TAXES (Part III)

                                          Shri Subash Agarwal, Advocate

(A)       HIGH COURTS

1.  DIT (International Taxation) vs. Credit Suisse First Boston    
     (Cyprus) Ltd.   351 ITR 323 (Bom.)

Consideration received by assessee in respect of sale of securities is capital gains and exempt in terms of DTAA

Facts

The Assessing Officer further held Rs. 40.53 crores being gains in transactions of Government debt-securities to be interest within the meaning of that term in Article 11(4) of DTAA between India and Cyprus and liable, to tax in India. The assessee, however, contended that the income from sale of those securities constituted capital gains which fell within Article 14(4) and was, therefore, exempt from tax in India. The Commissioner (Appeals) deleted both the additions. The ITAT upheld the order of the Commissioner (Appeals).

On revenue's appeal:

Held

(i)         Clauses (1) and (2) of Article 11 merely provide which of the States is entitled to tax interest arising in a Contracting State and the rate at which such interest may be taxed. It is necessary first, however, to determine what constitutes interest under the DTAA.

(ii)        The principle or governing words in Article 11(4) are 'interest means income from debt-claims of every kind'. These words predicate the existence of a debtor-creditor relationship. Clause 4 relates to interest 'from' debt-claims. In other words, the income must arise out of, on account of a debt-claim. It is important to note the difference between the debt-claim itself and any accretion thereto, such as interest. Once this distinction is noted, it is easy to appreciate that the price realised upon the sale of the debt-claim itself is not interest. Interest arises from and on the terms of the debt-claim/security and would be on revenue account. The sale proceeds upon a transfer or assignment of the security arise not from but on account of and represents the debt claim/security itself.

(iii)       The words in clause 4 'whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits' appear after the opening words 'The term interest as used in this Article means income from debt-claims of every kind' and, therefore, clearly relate to income from debt-claims. Thus, if and only if the transaction is a debt-claim, it matters not whether it is secured by a mortgage and whether or not it carries a right to participate in the debtor's profits.

(iv)       The subsequent words in Article 11(4) 'in particular, income from Government securities and income from bonds or debentures' constitute merely an inclusive provision which by way of illustration refer to Government securities and income from bonds or debentures which, in turn, include the further and other accretions thereto as stated therein viz  premiums and prizes attaching to securities, bonds or debentures.

 (v)       Thus, under the Income-tax Act, 1961, as well as under the DTAA, the position remains the same at least so far as such securities are concerned viz . securities which provide for payment of interest on a particular date or at stated intervals.

(vi)       The consideration received by the assessee in respect of the sale of the said securities is, therefore, a capital gain.

(vii)      The revenue's case is that the assessee's case does not fall within Article 14(4) only because it falls within Article 11(4). Having rejected the submission that the gain from the sale of the said securities falls under Article 11(4), it follows that the same falls under Article 14(4) as 'Capital gain'.

(viii)     The assessee is, therefore, entitled to the benefit of the exemption under Article 14 of the DTAA.

2.   Pardesi Developers and Infrastructure Pvt. Ltd. Vs. CIT 351 ITR 8 (Del.) Re-assessment u/s. 147 : Where the A.O has applied his mind to the information received by him and made enquiries, the very foundation of the notice u/s. 148 i.e “reasons to belief about escapement of income is not established even ex facie. The reassessment order is liable to be quashed. Facts In the course of assessment proceedings u/s. 143(3), the A.O. issued a questionnaire to furnish the details of the share capital introduced and the share application money received but there was no response from the assessee to the questionnaire till December, 2009. On August, 2009, the Addl. CIT circulated a letter to all A.O. including the A.O. of the instant assessee. The letter was on the subject of a list of beneficiaries of accommodation entries. Thereafter, on November 9, 2009, the assessee furnished a reply to the questionnaire and gave details of the share capital raised by it and furnished confirmations from the parties. The A.O. issued notices u/s. 133(6) to the share applicants directly and all the five companies responded to those notices and reaffirmed their respective confirmations. Thereafter, assessment was completed u/s. 143(3). Then the assessment was re-opened on the alleged ground that there were bogus accommodation entries and the assessee was one of the beneficiaries of the accommodation entries to the extent of Rs.1,35,000/-. The reasons also indicated that the information that the entries were accommodation entries and were provided by bogus companies were not available with the A.O. at the time the original assessment was done.    Held, There was nothing to show that the A.O. did not receive the said information. And, there was nothing to show that the A.O. had not applied his mind to the information received by him. On the contrary, it is apparently because he was mindful of the said information that he issued notices u/s. 133(6) directly to the parties to confirm the factum if application of shares and the source of funds of such shares. Therefore, the very foundation of the notice u/s. 148 is not established even ex facie. Consequently, it cannot be said that the A.O. had the requisite belief u/s. 147 of the Act and, as a consequence, the impugned notice u/s. 148 and the reassessment order are liable to be quashed. 3.    CIT vs. UTI Bank Ltd  32 taxmann.com 282 (Gujarat) Reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the IT department FACTS The assessee had contracted with a landlord to take premises on lease for opening its branch, but no formal agreement was entered into. The landlord started the construction of the premises as per assessee's requirements. However, before completion of construction, assessee came to know of the proposed construction of an overbridge over the said property which would cause hindrance to conduct its business and services. The assessee, therefore, terminated the understanding with the landlord and paid compensation to the landlord for the work done, in lieu of withdrawing all claims against the assessee. The assessee claimed such amount paid as revenue expenditure. The Assessing Officer disallowed the amount. The Commissioner (Appeals) and the Tribunal deleted the disallowance as the compensation was paid in the course of business and for the purpose of business, to protect the assessee's interest and in lieu of the claims that could have been raised by the landlord. Held The Tribunal referred to the case of J.K. Woollen v. CIT [1969] 72 ITR 612 (SC) in which it was held that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the IT department. No question of law arises. Tax appeal is, therefore, dismissed 4.       CIT VS. Jitendra Singh Rathore 352 ITR 327 (RAJ.) Penalty u/s. 271D Facts The assessee had accepted cash loans exceeding the limit specified under section 269SS for which penalty proceedings were initiated under section 271D by the Assessing Officer. On reference to the Joint Commissioner, the competent authority to impose penalty under section 271D, he held that the assessee was liable for penalty. The Commissioner (Appeals) allowed the assessee's appeal holding that the penalty order was barred by period of limitation as mentioned under section 275(1)(c), as it was passed after the expiry of six months from end of the month in which penalty proceedings were initiated by the Assessing Officer. The Tribunal affirmed the order of the Commissioner (Appeals). Argument of the revenue The penalty proceedings was not barred by limitation as the authority competent to impose penalty was the Joint Commissioner and period of limitation should have been reckoned from the date of issue of show cause by the Joint Commissioner. Issue involved Whether the order passed by Joint Commissioner for penalty under section 271D was hit by bar of limitation? HELD The notice for issuance of the penalty proceedings under section 271D for the alleged contravention of provisions of section 269SS was issued to the assessee by the Assessing Officer on 25-3-2003. Even if the matter had otherwise been in appeal before the Commissioner (Appeals) against the original assessment order and the appeal was decided on 13-2-2004, the same was hardly of relevance so far the penalty proceedings under section 271D were concerned. As held by the High Court in CIT v. Hissaria Bros. [2007] 291 ITR 244 (Raj.), completion of appellate proceedings arising out of assessment proceedings has no relevance over sustaining such penalty proceedings. In such matter, clause (c) of section 275(1) would be applicable. In the present case, the first show cause notice for initiation of proceedings was issued by the Assessing Officer on 25-3-2003 and was served on the assessee on 27-3-2003. Obviously, the later period also expired on 30-9-2003 when six months expired from the end of the month in which the action for imposing the penalty was initiated. The order as passed by the Joint Commissioner for the penalty under section 271D on 28-5-2004 was clearly hit by the bar of limitation and has rightly been set aside in the orders impugned. Even when the authority competent to impose penalty under section 271D was the Joint Commissioner, the period of limitation for the purpose of such penalty proceedings was not to be reckoned from the issue of first show cause by the Joint Commissioner; but the period of limitation was to be reckoned from the date of issue of first show cause for initiation of such penalty proceedings. The proceedings having been initiated on 25-3-2003, the order passed by the Joint Commissioner under section 271D on 28-5-2004 was hit by the bar of limitation and the Commissioner (Appeals) and the Tribunal had, thus, not committed any error in setting aside the order of penalty. 5.Court On Its Own Motion vs. CIT 352 ITR 273 (DELHI) Strict guidelines issued to end Dept’s TDS credit & refund adjustment harassment Facts Anand Parkash, FCA, addressed a letter dated 30.4.2012 to the High Court in which he set out the numerous problems being faced by the assesses across the Country owing to the faulty processing of the Income Tax Returns and non-grant of TDS credit & refunds. He claimed that because of the department’s fault, the assessees were being harassed. The High Court took judicial notice of the letter, converted it into a public interest writ petition and directed the CBDT to answer each of the allegations made in the letter and certain other queries that the Court raised. The Court also appointed eminent senior counsel to assist it. The department accepted that tax payers are facing difficulties in receiving credit of TDS & refunds on account of adjustment towards arrears. Thereafter, as an interim measure to provide immediate relief to the assessees, the Court passed an order dated 31.08.2012 by which it gave detailed directions. Held (i) Re Uploading of wrong or fictitious demand: The CBDT has accepted that incorrect and wrong demands have been uploaded on the CPC arrears portal. In his letter dated 21.08.2012, the CIT, CPC, has expressed his concern and anguish on account of uploading of incorrect and wrong data in the CPU and the problem faced by them and by the assesses. The CBDT has issued Circular No. 4 of 2012 in which the burden is put on the assessee to approach the AOs to get their records updated and corrected by filing s. 154 applications. While this may be the easiest option available, it should not be a ground for the AO not to suo motu correct his records and upload correct data. Each assessee has a right and can demand that correct and true data relating to the past demands should be uploaded. Asking the assessee to file s. 154 applications entails substantial expenses and defeats the main purpose behind computerisation. Also, the AOs do not adhere to the time limit prescribed for disposal of the s. 154 applications. To ensure transparency (and accountability), a register must be maintained with details and particulars of each application made u/s 154, the date on which it was made, date of disposal and its fate. The s. 154 application has to be disposed of by a speaking order and communicated to the assessee. There must be full compliance of the said requirements; (ii) Re Adjustment of refund contrary to s. 245: S. 245 postulates two stage action; first a prior intimation to the assessee and then, if warranted, the subsequent adjustments of the refund towards arrears. This is not being followed by the CPC because the computer itself adjusts the refund due against the existing demand. To prevent this breach of the law, the department must follow the procedure prescribed u/s 245 and give the assessee an opportunity to file a reply which should be considered by the AO before giving the direction for adjustment. As regards the cases where such (illegal) adjustment has been made in the past, the cases must be transferred to the AOs for issue of notice to the assessee seeking adjustment of refund. The assessees will be entitled to file a reply to the notice and the AO will then pass an order u/s 245 allowing the refund. The CBDT has to fix a time limit and schedule for completing the said process. Though the process involves expenditure and paper work, the situation has arisen due to the lapses on the part of the AOs and the assessees cannot be made to suffer for the wrong uploading of arrears and wrong adjustment of refund. The question of the assessee’s entitlement to interest on the SA tax is left open though when the delay is due to the fault of the Revenue, interest should be paid u/s 244A. False uploading of past arrears and failure to follow the mandate of s. 245 is a lapse on the part of the AO; (iii) Re non-communication of adjusted s. 143(1) intimations: The non-communication of s. 143(1) intimations, where adjustments on account of rejection of TDS or tax paid has been made, is a matter of grave concern. When there is failure to dispatch the intimation within a reasonable time to the assessee, the return shall be deemed to have been accepted and the intimation will be treated as non est or invalid for want of service. The onus to show that the order was served on the assessee is on the Revenue and not upon the assessee. If a TDS or tax credit claim has been rejected on a technicality but there is no communication to the assessee of the order/intimation u/s 143(1), the AO cannot enforce the demand created by the said order/intimation; (iv) Re non-grant of credit for TDS: The problem regarding rejection of TDS credit is in two categories. The first is those where the deductors fail to upload the correct particulars of the TDS which has been deducted and paid and the second is where there is a mismatch between the details uploaded by the deductor and the details furnished by the assessee in the ROI. As regards the first, the CBDT had earlier directed that the AOs to accept the TDS claims without verification where the difference between the TDS claimed and the TDS as per AS26 did not exceed rupees one lakh. This figure has now been reduced to a mere Rs.5,000. Ex-facie, there is no justification for the reduction because credit is being given only if the three core fields match. The CBDT must re-examine this aspect and take suitable remedial steps if they feel that unnecessary burden or harassment will be caused to the assessees. As regards cases of mismatch because of different methods of accounting, or offering income in different years, the department must take remedial steps and ensure that in such cases TDS is not rejected on the ground that the amounts do not tally. The department should also fix a time limit within which they shall verify and correct all unmatched challans. An assessee as a deductee should not suffer because of fault made by deductor or inability of the Revenue to ask the deductor to rectify and correct. Once payment has been received by the Revenue, credit should be given to the assessee. The CBDT should issue suitable directions in this regard. The department’s response on the action taken against deductors for non-compliance is unfortunate and unsatisfactory and it purports to express complete helplessness on the part of the Revenue to take steps and seeks to absolve them from any responsibility. Denying benefit of TDS to a taxpayer because of the fault of the deductor causes unwarranted harassment and inconvenience. The deductee feels cheated. The Revenue cannot be a silence spectator, wash their hands and pretend helplessness. S. 234E has now been inserted by the Finance Act, 2012 to levy a fee of Rs.200 per day for default of the deductor to file TDS statement within due date. It is unfortunate that the Board did not take immediate steps after even noticing lacuna and waited till FA 2012. The stand of the Revenue that they can only write a letter to the deductor to persuade him to correct the uploaded entries or to upload the details is not acceptable. The AO must use his power and authority to ensure that the deductor complies with the law. 6.         Hardayal Charitable & Educational Trust vs. CIT 214 TAXMAN 655 (ALL.) Non commencement of charitable or educational activities- refusal of registration was not justified Facts Assessee-trust was established with object of establishment and maintenance of the schools, colleges and institutions for imparting education in different fields/subjects for helping the poor and destitute. Its application for grant of registration under section 12AA was rejected by the Commissioner on the grounds that the trust was in the process of construction of colleges for medical, engineering and management studies; that it had spent considerable amount on advertisement of the institution, which had not started its activities as yet; and that the prospectus of the assessee-trust had devoted substantially on carrying out business activities of the group concern showing logo of milk product. The Tribunal dismissed the assessee's appeal. HELD At the time of registration under section 12AA which is necessary for claiming exemption under sections 11 and 12, the Commissioner is not required to look into the activities, where such activities have not commenced or are in the process of its initiation. Where a trust, set up to achieve its objects of establishing educational institution, is in the process of establishing such institutions, and receives donations, the registration under section 12AA cannot be refused on the ground that the trust has not yet commenced the charitable or religious activity. Any enquiry of the nature would amount to putting the cart before the horse. At this stage only the genuineness of the objects has to be tested and not the activities, which have not commenced. The enquiry of the Commissioner at such preliminary stage should be restricted to genuineness of the objects and not the activities unless such activities have commenced. The trust or society cannot claim exemption, unless it is registered under section 12AA and, thus, at such initial stage the test of the genuineness of the activity cannot be a ground on which the registration may be refused. In the instant case, it is not denied that for subsequent year the assessee has been granted exemption under section 12AA and has also been approved under section 80G subject to certain conditions. If the Commissioner was satisfied with the genuineness of the objects of the trust for the subsequent assessment year, the refusal of the registration for the previous assessment year 2011-12 was not justified. The question of the exemption of the application of income received by way of donation is a separate issue which may be required to be considered, when the return is filed by the trust and is examined by the Income Tax Officer. The question as to whether the donation by the societies was the expenditure of the trust for charitable and religious purposes will be examined at the time of examining the return.  In the result the income tax appeal is allowed. 7.        CIT vs. Celetronix Power India P. Ltd. 352 ITR 70 (Bom.) Penalty u/s. 271(1)(c)  on the ground of subsequent decision of the Supreme Court is not permissible Facts In the instant case, the assessee had claimed deduction u/s. 80HHC by relying upon the judgement of CIT vs. Shirke Construction Equipments Ltd. 246 ITR 429 (Bom.). Subsequently, the case of Shirke Construction (Supra) has been reversed by the Apex Court in the case of IPCA Laboratories Ltd. Vs. Dy. CIT 266 ITR 521 and accordingly disallowance has been made and penalty u/s. 271(1)(c) was levied against the assessee on the ground of subsequent decision of the Supreme Court. Held, Tribunal had rightly deleted the penalty on the ground that the additions made on account disallowance was neither due to the failure on the part of the assessee to furnish accurate particulars nor on account of furnishing in accurate particulars. There was no infirmity in the order of the Tribunal. 8.       Azimganj Estate Pvt. Ltd. Vs. CIT 352 ITR 82 (Cal.) Rental income from unsold flats is to be treated as Income from House Property Facts The assessee, a property developer and builder, constructed a building. The A.O., for the relevant year, rejected the claim of the assessee to treat the rental income from unsold stock-in-trade under the head Income from House Property and the claim of deduction on account of repairs to the extent of 1/5th of the gross rental income on the ground that in the Wealth Tax proceedings the assessee had taken the plea that the unsold flats were stock-in-trade and not assets for the purpose of the Wealth Tax Act, 1957, which plea was accepted by the ITAT. In appeal, the CIT(A) accepted the contention of the assessee holding that the appropriate head for the income derived by way of letting out the unsold flats should be income from house property and not business income. However, the Tribunal set aside the order passed by the CIT(A) and restored that passed by the A.O. Held,                                                                             What is to be seen was being exploited commercially by the letting out or whether the asset was being let out for the purpose of enjoying the rent. The distinction between the two is a narrow one and has to depend upon certain facts peculiar to each case. Commercial assets like machinery, plants, tools, industrial sheds or godowns having high business potential stand on a different footing from assets like land and building. The subject matter of exploitation being unsold flats still owned by the assessee, the CIT(A) rightly concluded that the income therefrom should be treated as income from house property by way of letting it out. 9.      CIT vs. R. Sugantha Ravindran 352 ITR 488 (Mad.) Sec. 50C: Prior to 1.10.2009, Section 50C could not be invoked as the property was not transferred by way of registered sale deed The assessee alongwith the two co-owners transferred a property measuring 23.84 cents in pursuance of an agreement of sale of consideration of Rs.50 lakhs to a third party. The agreement was not registered one. Pursuant to the sale agreement, physical possession of the property was handed over to the buyer and the assessee received the sale consideration. The assessee worked out long term capital gains and admitted 1/3rd share therein for tax. The A.O. referred the matter to the stamp valuation authority in order to find out the value of the property for payment of stamp duty. As the guideline value given by the stamp valuation authority was found to be higher than the consideration shown in the agreement for sale, invoking the provisions of section 50C, the assessing officer computed the long-term capital gains adopting the guideline value, as the sale consideration instead of the consideration admitted by the assessee. The Commissioner (Appeals) held that section 50C can be invoked only when the property was transferred by way of registered sale deed and assessed for stamp valuation purposes. The Tribunal held that section 50C could not be invoked as the property was not transferred by way of registered sale deed. On appeal: Held, dismissing the appeal, that since the transfer in the assessee’s case was admittedly made prior to the amendment, section 50C, as amended with effect from October 1, 2009, was not applicable. State of Tamilnadu vs. India Cements Ltd. [2011] 40 VST 225 (SC) applied.  10.  CIT vs. Crescent Export Syndicate, ITAT 20 of 2013, Order dated 03.04.2013, S. 40(a)(ia) TDS: Special Bench verdict in Merilyn Shipping is not a good law            (source:itatonline.org) The assessee incurred expenditure on which TDS ought to have been deducted but was not deducted. The AO disallowed the expenditure u/s 40(a)(ia). On appeal, the Tribunal relied on Merilyn Shipping & Transports 146 TTJ 1 (Viz) (SB) and held that the disallowance u/s 40(a)(ia) could be made only for the expenditure that is “payable” as of 31st March and not for the amounts that have already been “paid” during the year. On appeal by the department to the High Court, HELD reversing the Special Bench: The key words in s. 40(a)(ia) are “on which tax is deductible at source under Chapter XVII –B” and this makes it clear that it applies to all expenses. Nothing turns on the fact that the legislature used the word ‘payable’ and not ‘paid or credited’. Unless any amount is payable, it can neither be paid nor credited. If an amount has neither been paid nor credited, there can be no occasion for claiming any deduction. The Special Bench was wrong in making a comparison between the draft Bill and the enacted law to determine the intention of the Legislature. A comparison is permissible only between the pre-amendment and post amendment law to ascertain the mischief sought to be remedied or the object sought to be achieved by the amendment. The fact that the impact of s. 40(a)(ia) is harsh is no ground to read the same in a manner which was not intended by the legislature. The law was deliberately made harsh to secure compliance of the provisions requiring deductions of tax at source. It is not the case of an inadvertent error. For the same reason, the second proviso sought to become effective from 1st April, 2013 cannot be held to have already become operative prior to the appointed date. Consequently, the majority view in Merilyn Shipping & Transports is not acceptable. Also see:      (i) CIT vs. Md. Jakir Hossain Mondal, Order dated              4.4.2013 (Cal.)    (ii) CIT vs. Sikandarkhan N Tunvar, Order dated           9.5.2013 (Guj.)                                                (source:itatonline.org)  (B)      TRIBUNALS 1.          Dy. CIT vs. Gulshan Investment Co. Ltd. 142 ITD 89 (KOL.) Rule 8D(2)(ii) and (iii) of 1962 Rules can be applied in the situations in which shares are held as investments, and that this rule will not have any application when the shares are held as stock-in-trade Facts The assessee was engaged in the business of share trading. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that while the assessee had earned dividend income but he had not made any disallowance under section 14A in respect of expenses relatable to the above exempt income. The Assessing Officer also noticed that the assessee had paid interest on borrowed amount. The Assessing Officer, thus, computed the disallowance under section 14A, read with rule 8D of 1962 Rules. The Commissioner (Appeals) opined that since the assessee held shares as stock-in-trade and no interest expenses were incurred, disallowance could not be made in terms of rule 8D of 1962 Rules. In such circumstances, the Commissioner (Appeals) estimated 10 per cent of dividend earned as expenditure which could be disallowed under section 14A. On revenue's appeal: HELD (i) Rule 8D(2)(ii) and (iii) of 1962 Rules can be applied in the situations in which shares are held as investments, and that this rule will not have any application when the shares are held as stock-in-trade. It is so for the elementary reason that the one of the variables on the basis of which disallowance under rules 8D(2)(ii) and (iii) is to be computed is the value of 'investments, income from which does not or shall not form part of total income, and, when there are no such investments, the rule cannot have any application. When no amount can be computed in the light of the formula given in rule 8D(ii) and (iii), no disallowance can be made under rule 8D (2)(ii) and (iii) either.  (ii) However, that does not exclude the application of rule 8D(2)(i) which refers to the 'amount of expenditure directly relating to income which does not form part of total income'. In other words, in a case where shares are held as stock-in-trade and not as investments, disallowance under rule 8D is restricted to the expenditure directly relatable to earning of exempt income. (iii) Consequently, while Section 14A will still apply in the cases whether shares are held as stock-in-trade or as investments, the disallowance to be made under section 14A read with rule 8D will be restricted to direct expenses incurred in the earning of dividend income.  (iv) As a corollary to the above legal position, so far as disallowance under section 14A in a situation in which the exempt income yielding asset, such as shares is held as stock-in-trade, and not as investment, the disallowance will be of related direct and indirect expenditure, whereas disallowance under rule 8D will be restricted to disallowance of only direct expenses. (v) Revenue thus, derives no advantage from invoking rule 8D in such cases; on the contrary, the scope of disallowance is only minimized in such a situation. (vi) So far as the instant case is concerned, the Commissioner (Appeals) has upheld disallowance under section 14A in respect of even indirect expenditure, but he has merely held that the provisions of rule 8D do not come into play in this case as the shares are not held as investments. (vii) The provisions of rule 8D can never be applied in a case where exempt income yielding assets are not held as investments, and that the related assets, i.e., shares, having been held as stock-in-trade all along, there is no occasion to invoke rule 8D. There is no infirmity in this approach, nor do revenue authorities stand to lose anything by this approach canvassed by the assessee. (viii) Quite to the contrary of what revenue perceives to be advantageous to the Assessing Officer, in case the application of rule 8D was to be upheld, there would have been no disallowance at all since not only that no investments were held by the assessee, admittedly there are no direct expenses are incurred on earning of the dividends and as such in all the three segments of disallowance under rule 8D(2) i.e. 8D(2)(i), (ii) and (iii), there will be zero disallowance. As against this zero disallowance under rule 8D, the Commissioner (Appeals) has upheld disallowance to the extent of Rs. 1,57,227 in respect of indirect expenses attributed to the earning of dividends. (ix) In view of the above discussion, the conclusions arrived at by the Commissioner (Appeals) is upheld. It is also clarified that the provisions of section 14A are indeed attracted whether or not the shares are held as stock-in-trade or as investments, even though the provisions of rule 8D(2)(ii) and (iii) cannot be invoked in such a case, and even though the provisions of rule 8D(2)(i) are much narrower in scope than the scope of section 14A simplicitor. (x) In the result, the revenue's appeal is dismissed. 2.   ACIT VS. Dixon Technologies (I) (P.) Ltd. 32 taxmann.com 218 (Delhi - Trib.) Assembling of air conditioner, DVD, microwave would fall within the ambit of expression 'manufacture FACTS The assessee had established two units, namely, Unit No. 1 which was set up in December, 2003, was engaged in manufacturing/production of air conditioner and microwave oven. It had established Unit No. 2 in November 2004 and this unit was engaged in manufacture/production of DVDS. The assessee claimed that both the units were independent and separately eligible for deduction under sections 80-IB/80-IC. The Assessing Officer denied the deduction to the assessee primarily for two reasons. He held that assembling of parts for the air conditioners or microwave oven did not constitute manufacturing activities and, therefore, assessee was not entitled for deduction under section 80-IB. With regard to deduction under section 80IC, he relied upon his conclusion that assembling of different components did not amount to manufacturing and further observed that one of the units was located in Khasra which had not been notified as forming part of industrial area, therefore, the unit of the assessee was not situated in an industrial area and, consequently, assessee was not entitled for deduction under section 80-IC. The Commissioner (Appeals), however, allowed the assessee's claim. On revenue's appeal: HELD The manufacture is a transformation of an article, which is commercially different from the one which is converted. It is a change of one object to another for the purpose of marketability. It brings something into existence, which is different from that, which originally existed. The new product is a different commodity physically as well as commercially. The broader test to determine whether manufacture is there or not, it is propounded that when a change or series of changes are brought out by application of processes which take the commodity to the point where, commercially, it cannot be regarded as the original commodity but is, instead recognized as a distinct and new article that has emerged as a result of the process. The First Appellate Authority has considered a flow chart wherein it was demonstrated that for manufacturing air conditioners inputs required are (a) base (b) motors (c) coil (d) gas (e) condensers etc. Apart from these, a compressor would also be required. The First Appellate Authority has observed that AC does not merely involved assembling. The assessee has to carry out various operations/activities on each of the components before the same could be utilized. Thus, the alleged assembling of air conditioner, DVD, microwave would fall within the ambit of expression 'manufacture'. As regards the objection raised by Assessing Officer in respect of geographical location of units, the copy of the site plan available in the revenue record, exhibiting the geographical location of each killa number and khasra number was also filed before the Commissioner (Appeals) along with patwari's report and there was no confusion about the location of assessee's units. They were situated within the notified area. In view of above, no error was found in the order of the Commissioner (Appeals) on the issue of granting deduction under section 80-IB/80-IC. 3.   ITO vs. Right Florists Pvt. Ltd (ITAT Kolkata)       I.T.A. No.: 1336/ Kol. / 2011; Order dated 12.04.2013 Advertisement charges paid to Google & Yahoo is not chargeable to tax in India The assessee, a florist, paid a sum of Rs. 30.44 lakhs to Google Ireland Ltd and Yahoo USA for online advertising. The AO held that the assessee ought to have deducted TDS and that as there was a failure, the expenditure was not allowable u/s 40(a)(i). This was deleted by the CIT(A) on the ground that Google and Yahoo did not have a PE in India. On appeal by the department to the Tribunal, HELD dismissing the appeal:U/s 5(2)(b) income accruing or arising in India is chargeable to tax in India. A website does not constitute a ‘permanent establishment’ unless the servers on which websites are hosted are also located in the same jurisdiction. As the servers of Google and Yahoo are not located in India, there is no PE in India. As regards the second limb of s. 5(2)(b) of “income deemed to accrue or arise in India”, one has to consider s. 9. S. 9(1)(i) does not apply as there is no “business connection” in India nor are the online advertising revenues generated in India serviced by any entity based in India. As regards s. 9(1)(vi), it is held in Yahoo 140 TTJ 195 (Mum) and Pinstorm 54 SOT 78 (Mum) that the advertising revenues are not assessable as “royalty”. As regards s. 9(1)(vii), the services are not “managerial” or “consultancy” in nature as both these words involve a human element. Applying the rule of noscitur a sociis, even the word “technical” in Explanation 2 to s. 9 (1) (vii) would have to be construed as involving a human element. If there is no human intervention in a technical service, it cannot be treated as a technical service u/s 9(1)(vii). On facts, the service rendered by Google & Yahoo is generation of certain text on the search engine result page. This is a wholly automated process. In the services rendered by the search engines, which provide these advertising opportunities, there is no human touch at all. The results are completely automated. Consequently, the whole process of actual advertising service provided by Google & Yahoo, even if it be a technical service, is not covered by the limited scope of s. 9(1)(vii). Consequently, the receipts in respect of online advertising on Google and Yahoo cannot be brought to tax in India under the provisions of the Act or the India US and India Ireland tax treaty. 4.    Shri Gurinder Singh Bawa vs. Dy. CIT, ITA No. 2075/Mum/2010, Order dated 16.11.2012 Sec. 153A: After expiry of s. 143(2) time limit, s. 143(1) assessment is final; addition u/s 153A can be made only if incriminating material is found in search For AY 2005-06, the AO passed an intimation u/s 143(1) accepting the return as filed. Subsequently, there was a search u/s 132. The AO noticed that an amount of Rs. 93 lakhs received by the assessee as a loan in earlier years had been treated as a gift and credited to the capital account. He passed an assessment order u/s 153A in which he held that the said amount was assessable as a cash credit u/s 68. The CIT(A) partly confirmed the addition. Before the Tribunal, the assessee argued that as no incriminating material was found during the search, the addition could not be made u/s 153A. HELD by the Tribunal upholding the plea: In All Cargo Global Logistics 137 ITD 287 (Mum)(SB), the Special Bench held that in a case where the assessment has abated the AO can make additions in the assessment, even if no incriminating material has been found. However, in a case where the assessment has not abated, an assessment u/s 153A can be made only on the basis of incriminating material (i.e. books of account &other documents found in the course of search but not produced in the course of original assessment and undisclosed income or property disclosed during the course of search). On facts, as the assessment was completed u/s 143(1) and the time limit for issue of s. 143(2) notice had expired on the date of search, there was no assessment pending and there was no question of abatement. Therefore, the addition could be made only on the basis of incriminating material found during search. As the addition u/s 153A was made on the information/material available in the return of income (i.e. the information regarding the gift was available in the return of income as capital account had been credited by the assessee by the amount of gift) and not on the basis of any incriminating material found during the search, the AO had no jurisdiction to make the addition u/s 153A.