Tuesday, July 30, 2013

S.220(6): Demand be stayed if strong prima facie case made out.

HDFC Bank Limited vs. ACIT (Bombay High Court)
S. 220(6): Demand should be stayed if strong prima facie case made out. Demand on covered issues cannot be recovered by adjustment of refunds

The AO passed an assessment order u/s 143(3) and raised a demand of Rs. 1719 crores. In response to the assessee's stay application, the AO accepted that demand of Rs. 1370 crores had to be kept in abeyance as they were covered in favour of the assessee by appellate orders for earlier years. However, he still held that the said demand had to be adjusted against refunds of Rs. 560 crores determined for earlier years. He demanded that the balance demand of Rs. 377 crores on the other issues be paid by the assessee. The assessee filed a Writ Petition to challenge the adjustment of refunds against the demand on covered issues and the non-grant of stay on the other issues. HELD by the High Court:

The manner in which and the ground on which an adjustment of the refund was made is arbitrary and contrary to law. The stay order states that the assessee would not be treated as an assessee in default in respect of covered issues. Yet the department has proceeded to adjust the refund due and payable to the assessee merely on the ground that the department's appeal is pending. The adjustment of a refund is a mode of effecting recovery. Once an issue has been covered in favour of the assessee in respect of another assessment year on the same point, it was wholly arbitrary on the part of the department to proceed to make an adjustment of the refund. If the adjustment was not made, there can be no manner of doubt that the assessee would have been entitled to a stay on the recovery of the demand. The demand cannot be adjusted by the department in this manner merely because it is in possession of the funds belonging to the assessee to which the assessee is legitimately entitled to and has been granted a refund. The making of an adjustment in these facts is totally arbitrary and contrary to law. As regards the other issues, the assessee has made out a strong prima facie case for a stay of the recovery of the demand. As the action of the department in adjusting the refunds due to the assessee was contrary to law, the interests of justice would be served if the department is permitted to make an adjustment to an extent of Rs.60 crores and refund the balance with interest.

Sham transaction of buy-back of shares is dividend, attracts section 115-O

 

Sham transaction of buy-back of shares is dividend, attracts section 115-O

Only a genuine buyback is excluded from the definition of 'dividend' under section 2(22)(iv) and exempt from DDT under section 115-O. Where proposed transaction of buy-back of shares is a colourable transaction, the consideration received from such buy-back will satisfy the definition of dividend under the Act and consequently attract tax in India under section 115-O - A MAURITIUS, IN RE [2012] 20 taxmann.com 52 (AAR)

Monday, July 29, 2013

SOME CASE LAWS

 

2012-TIOL-236-HC-DEL-IT

CIT, New Delhi Vs Kamdhenu Steel & Alloys Ltd (Dated : December 23, 2011)

Income tax – Sections 68, 69, 148 – Whether when by providing adequate material prima facie the assessee discharged the burden of proving the identity of shareholders, genuineness of the transaction and creditworthiness of the shareholders, Revenue is supposed to make thorough probe of nature of the transaction before it could nail the assessee and fasten it with a liability u/s 68 and 69 of the Act – Whether when the AO issues notice u/s 148 mechanically on the information supplied by the DIT (Inv.) without applying his own mind and even did not care for the apparent mistake in the details on the basis of which notice is issued, the notice is rightly quashed. - Revenue's appeal dismissed:DELHI HIGH COURT

2012-TIOL-174-ITAT-LKW

M/s Blue Star Limited Vs DCIT, Lucknow (Dated : February 8, 2012)

Income Tax - Sections 194C, 194J, 201(1), 201(1A) - Whether when the scope of work executed by the sub-contractors has not been examined, an order passed to treat the payment made u/s 194J and not 194C as applied by the assessee can still be sustained. - Case remanded : LUCKNOW ITAT




SERVICE TAX SECTION

2012-TIOL-393-CESTAT-DEL

M/s APK Identification Vs CCE, Noida (Dated : February 2, 2012)

Service Tax - Refund - Service Tax paid by Service Provider - Delay in refund claim - Power to condone - Applicability of notification - Notification No. 09/09 dt. 03-03-09 provides that the Deputy Commissioner has power to condone the delay. The delay involved is only 17 days and when a public authority is given any power, he is expected to exercise it unless there is a reason for not exercising such power. No reason has been recorded in the impugned order. Further, the time limit under Notification No.17/11-ST dated 1.3.11 is applicable to the claims filed before that date and pending on that date. The adjudicating authority should consider the claim as per the proviso of Notification 17/2011-ST dated 1.3.11 which was in force on the date when the order is issued. The claims are not time barred and the matter is remanded to the adjudicating authority to decide the case afresh, on the merits of the claim. (Para 4) - Matter remanded: DELHI CESTAT

CENTRAL EXCISE SECTION

2012-TIOL-394-CESTAT-BANG

CCE, Belgaum Vs M/s Hindustan Engineers (Dated : September 16, 2011)

Central Excise – Eligibility of CENVAT Credit on MS flats and MS angles used for manufacturing material handling equipments such as moulding tracks and bucket elevators – Essential facts pleaded before the adjudicating authority at variance with pleadings made in the reply to SCN – Respondent-assessee filed a declaration as to how flats and angles were used along with photographs in support of such declaration – Respondent-assessee not opposed to Proper Officer of Central Excise visiting their factory and inspecting material handling equipments to have been fabricated/manufactured out of MS Flats and MS Angles in question – Matter remanded to original authority to consider these materials in de novo proceedings – Based on alternative plea of respondent, if respondent found eligible for CENVAT Credit on MS flats and MS angles as inputs, they should be given that benefit in as much as department not opposed to such observations made by adjudicating authority in favour of respondent – Original dispute as to whether flats and angles could be considered as parts/components of capital goods for availing CENVAT credit still open for fresh adjudication – In case they are found to be ineligible as capital goods, alternative claim for availing credit on the same items as inputs to be considered – Impugned order set aside and matter remanded for de novo adjudication – Rule 2(a) read with Rule 2(k) of CENVAT Credit Rules, 2004 - Appeal allowed by way of remand : BANGALORE CESTAT

Some case laws of 2012

 

CIRCULAR

it12cir01

Issuance of TDS Certificates in Form No.16A downloaded from TIN website - Circular under section 119 of the Income- tax Act 1961.

CASE LAWS

2012-TIOL-245-HC-MUM-IT

CIT, Pune Vs Mr Purshottam B Khutale (Dated : March 16, 2012)

Income Tax - Section 45(5) - Whether when assessee is awarded enhanced compensation on compulsory acquisition of agricultural land, the same is to be taxed as capital gains of the previous year when the compensation was received even if the final appeal is pending before the High Court. - Revenue's appeal allowed: BOMBAY HIGH COURT

2012-TIOL-244-HC-MUM-IT

CIT, Pune Vs Finolex Cables Ltd (Dated : March 1, 2012)

Income Tax - Sections 80I, 80IB - Whether where substantial investment has been made and the new plant and machinery is installed in the newly constructed building it can be said that assessee has set-up a new industrial undertaking and it is not the expansion of earlier unit and hence the depreciation of such unit is not to be set-off with the income of that unit which enjoys deduction u/s 80I. - Revenue's appeal dismissed: BOMBAY HIGH COURT

2012-TIOL-243-HC-MUM-IT

CIT, Mumbai Vs Divine Holdings Pvt Ltd (Dated : March 7, 2012)

Income Tax - Sections 119(2)(a), 143(3), 234A, 234B & 234C - Whether a notified person under the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992 is not liable to pay interest u/s. 234A, 234B, & 234C of the IT Act, 1961. - Case remanded: BOMBAY HIGH COURT

2012-TIOL-242-HC-MUM-IT

CIT, Bombay Vs M/s Airlines Hotel Pvt Ltd (Dated : March 30, 2012)

Income Tax - Section 37 - Whether settlement charges paid for re-acquiring a part of running hotel business and legal expenses incurred in relation to the same are business expenditure as per Sec 37 of the Act.- Revenue's appeal dismissed: BOMBAY HIGH COURT

2012-TIOL-177-ITAT-MUM + Tara story

Tara Jewels Exports Pvt Ltd Vs JCIT, Mumbai (Dated : March 16, 2012)

Income Tax - Sections 10A, 80HHC - Whether when SEZ-based exporter outsources manufacturing to jobworkers outside the SEZ, which accounts for large proportion of total exporters, the Sec 10A benefits are to be reduced in the same proportion - Whether for the purpose of Sec 10A benefits it is necessary for the SEZ Unit to undetake some manufacturing within the SEZ. - Case remanded: MUMBAI ITAT




SERVICE TAX SECTION

CIRCULAR

sercir156

Service tax paid on taxable services used for export of goods at the post-manufacture stage - electronic refund through the Indian Customs EDI System -- Notification 52/2011-ST – review.

CASE LAWS

2012-TIOL-410-CESTAT-MAD

M/s Logos Constructions Private Limited Vs CST, Chennai (Dated : October 13, 2011)

Service Tax - Construction Service – Commercial or Industrial Construction Services – Works Contract - Demand – Stay / Dispensation of pre-deposit – The service provider is engaged in activities relating to construction of assembly shop, press shop, office buildings, utility building, canteen building, guest houses etc. Demand of service tax is made under the category of "Construction Services", "Commercial or Industrial Construction Services", and "Works Contract". The service provider challenges the demand on the ground that for the same activity service tax has been demanded under different heads for different periods. HELD - The case involves construction activities for constructing different types of buildings and structures. On the facts of the case and the findings of the Commissioner the service provider, prima facie , has not made out a case for unconditional waiver. The service provider has admitted that their activities are liable to service tax under Works Contract from 01.06.2007 but they have not taken registration for the said services till 01.04.2008. Pre-deposit ordered. (Para 6) - Pre-deposit ordered: CHENNAI CESTAT

2012-TIOL-407-CESTAT-AHM + Adani story

Adani Gas Ltd Vs CST, Ahmedabad (Dated : March 6, 2012)

Service Tax - Stay - Pre-deposit - Charges for pipes, measuring equipment etc, at the time of providing new gas connection - Prima facie liable to tax - Pre-deposit ordered: In the present case, the customer never has a right of possession since it would never become his own property at all. At any given point of time, the appellant can take re-possession and at no time, the customer would become the owner or can claim right of possession. In the case where an item is rented, the customer has right of possession so long as he keeps paying the rent. In the absence of any payment of rent for the meter and the equipment, there is no consideration in this case for right of possession by the customer and therefore the customer cannot even claim the right of possession also. Prima facie, the conclusion is that the appellants have provided the service and are liable to Service Tax, which has been demanded. No doubt that there is a need for going into the issues and elements of service in depth in terms of statutes, meaning of various statutes and the agreement between the customer and the appellant, which can be done only at the time of final hearing. Since the appellants have not been able to make prima facie case in their favour and no financial difficulty has been pleaded, it is appropriate that the appellant should deposit 25% of the Service Tax demanded in the impugned order within 8 (eight) weeks. - Pre-deposit ordered: AHMEDABAD CESTAT

2012-TIOL-406-CESTAT-MAD

M/s City Union Bank Vs CCE, Trichy (Dated : Decemder 20, 2011)

Service Tax – Penalty – Waiver under Section 80 – The jurisdictional Commissioner in his review order has given no satisfactory reason or any finding regarding any suppression, fraud etc to reverse the finding of the original authority in regard to extending the benefit under Section 80 to the appellants. Waiver of penalty upheld. (Para 2) - Appeal allowed: CHENNAI CESTAT

CENTRAL EXCISE SECTION

2012-TIOL-409-CESTAT-MAD

M/s Jino Systems India Pvt Ltd Vs CCE, Chennai (Dated : December 16, 2011)

Central Excise – Trading – Duty received from buyer – Section 11D - Penalty – In respect of some invoices the assessee has not recovered any excess excise duty and in respect of the one invoice they have already paid the duty amount along with interest. There is no specific provision either in the Act or in the Rules for imposition of penalty for a case under Section 11D of the Act. Penalty set aside. (Para 3 & 4) - Appeals allowed : CHENNAI CESTAT

2012-TIOL-405-CESTAT-MAD

Kwality Fun Foods & Restaurant P Ltd Vs CCE, Coimbatore (Dated : January 31, 2012)

Central Excise – Valuation – Related person – HLL entering into agreement with Kwality Fun Foods & Restaurant Pvt. Ltd for manufacture of Ice Creams under the Brand name acquired by HLL - HLL was concerned with KFRL in commercial terms and KFRL having facility of manufacture, such facility was availed by HLL to get its branded goods manufactured by the former - That does not make them related persons - If the manufacturer or buyer are one and the same person behind curtain in that circumstance, holding them "related person" applying section 4 of Central Excise Act, 1944 may be possible - Merely because ice cream was manufactured using brand name acquired by HLL and entire product was sold to BILIL/HLL, that did not make them "related person" - SCNs did not lift the corporate veil to find out any mysterious arrangement between the parties to cause subterfuge to Revenue - "Related person" does not mean mere holding of shares by a company - Obligations of parties were well defined by sourcing agreement and that also separated both entities with their defined individual objects. No evidence came to record to prove that Revenue was prejudiced and there were no cogent reasons or evidence depressing the assessable value – Impugned order set aside. - Appeals allowed: CHENNAI CESTAT

2012-TIOL-404-CESTAT-BANG

CCE, Belgaum Vs M/s India Sugar & Refineries Ltd (Dated : October 28, 2011)

Central Excise – Eligibility of CENVAT Credit on MS angles, plates, sheets, rods used for fabrication and maintenance of structures/capital goods – Original authority denied credit by holding that the impugned goods are not capital goods – Appellate authority held the same as inputs and allowed credit, resulting in Revenue appeal – Original authority did not have occasion to examine whether impugned goods qualified to be capital goods or alternatively as inputs – Impugned order set aside and matter remanded – Rules 2(a) and 2(k) of CENVAT Credit Rules, 2004 - Appeal allowed by remand: BANGALORE CESTAT

Sunday, July 28, 2013

[GlobalIndianCAs] A One Rupee Karmic Lesson

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A One Rupee Karmic Lesson

By Dr G Sreekumar Menon, Commissioner (A), Goa

THIS incident happened about two and a half decades back, but, even the long passage of time, has not diminished its value.

A friend of mine had advised me to visit the temple of Srinivasamangapuram, while returning from Tirupathi. He promised me that it was pure bliss to visit that temple which nestled in a sleepy village, under the foothills of the Tirumala Mountains. So, one evening I went to Srinivasamangapuram, in search of bliss.

During those days, it was an enchanting place, a simple, remote village, very very quiet, and a small temple engulfed in silence. The luxurious silence was occasionally interrupted by a scampering monkey or a lone devotee ringing the temple bell. I simply soaked myself in the divine silence and aloneness of that evening hours. Sitting alone, on the footsteps of the temple, the radiant glow of the evening sunset, bathing the quiet village, it was a soothing and healing experience. (Today, the environment has totally changed. Serpentine queue of pilgrims everywhere, countless shops and vendors, paddy fields that have become car parks, serenity has fled to somewhere else.)

The last bus was scheduled to leave at 7 P.M., in the twilight darkness I made my way slowly to the deserted bus stop. While I was patiently waiting in the darkness for the bus to arrive, a young man accompanied by a very old lady approached me. The lady was shrivelled with age and should have been more than 75 years of age. The young man wanted to know if I was going to Tirupathi town, and if so, whether I could take this lady and drop her in Tirupathi bus stand? While I answered in the affirmative, the thought of this lady for company was mentally not liked by me. A disagreeable thought rushed through my mind, then. (Even now, when I recollect this incident, I am ashamed of that thought of irritation, that raced through my mind, then. Had it been a damsel, I would have gladly welcomed her, but, this old lady for company… oh no…), All my blissful moments at the temple were quickly forgotten. Perhaps, the young man wanted me to pay her bus fare, I thought.

The bus arrived and a few passengers got inside. The old lady boarded through the front entrance, while I opted for the rear entrance. As the bus proceeded, the Conductor came to collect the fare. I asked for two tickets, pointed to the old lady, in the front seat, as the other passenger. The fare, during those days, was one rupee, per passenger. I paid two rupees, and happily settled down, trying to enjoy the cool breeze that rushed into the moving bus. A few moments later, a commotion in the front, alerted all the passengers. The old lady was standing and having a loud argument with the conductor, who was pointing a finger at me. The conductor came to me gesticulating, that, the old lady was scolding him, for, accepting her bus fare, from me! I was shocked; it was as though somebody had slapped me. My egoistic vanity, had made me to conclude, that, the young man, wanted me to pay, the old lady's bus fare, but here she was, standing and demanding that she be allowed to pay her own bus fare! At that moment, I felt so small and petty.

The old lady was pleading to the conductor to return the one rupee back to me, and accept her money instead. I requested her not to be bothered about it; after all, it was just one rupee only. Her reply really upset me more. She entreated to me "son. It is not a matter of one rupee, I will have to take rebirth to repay this one rupee back to you. Why do you want me to take another birth to repay this debt of one rupee?" I was simply jolted and shocked by her plea. Oh God! What lesson is she teaching me? I just could not answer her. It was the other co-passengers, who shouted at her and asked her to keep quiet. But, she was constantly turning and pleading to me "why do you want me to be reborn for this one rupee". My false ego and shame prevented me from taking that one rupee.

It was a relief, when the bus stopped at the final stop. We parted ways in the darkness.

That night, in the hotel room, the mind was engrossed in an endless searching debate. Is Karma, the operating system of this world? Is there a gigantic Karmic Stock Exchange, monitoring our actions, deeds and thoughts? Are successive rebirths generated for settlement of Karmic debts? Are we observing fasts, vrats and performing Homas to secure a good Karmic loan to tide over difficulties created by bad Karma? Are those worthless individuals in enviable positions because of their +AAA Karmic credit rating? Will this old lady, really be reborn and come to me, in some future birth, to repay a debt of one rupee? How, when and where will our future lives intersect, to settle this one rupee debt?

Oh God! What a great Karmic lesson, she taught me, in those twilight hours, beneath the Tirumalahills? Can even a one-rupee coin trigger a chain of Karmic reactions? If so, how can we, who receive piles of unsolicited gifts on every festival day, repay such Karmic debts? Are those who suffer in an aggravated manner from incurable diseases and crisis in some kind of a Karmic recession? Will the Gods favour us with good Karmic loans or bonds to overcome problems?

Who knows the ways of the Gods? But, my eyes are always searching for her, when will she come to me, with a one-rupee coin in her hands?

(The views expressed are personal)



Sub: Law of Karma

If you had paid the bus fare without expecting anything in return, it can be termed as selfless service. You also ensured the safe arrival of the old lady at Tirupathi. It is the deed and not the money spent is important under the law of karma. Selfless service is service to God. Either it is good karma or bad karma, the dividends are always in multiples. P.A.PARAMESWARAN



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Recent Activity:
This group is moderated by SHRI. BHUPENDRA SHAH, FCA, DISA(ICA)of Mumbai and DIPAK AGARWAL, FCA, DISA(ICA)of Guwahati. The opinion expressed here by any memebrs are of their own, and the user need to verify it from their own sources. No responsibility of any sort can be cast upon any members or the modertaor for any opinion expressed or the information posted on this group.



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Friday, July 26, 2013

ITR (TRIB) Volume 17 : Part 5 (Issue dated : 06-08-2012)

ITR'S TRIBUNAL TAX REPORTS (ITR (TRIB))
Volume 17 : Part 5 (Issue dated : 06-08-2012)

SUBJECT INDEX TO CASES REPORTED IN THIS PART

Advance tax --Interest--Default and deferment of advance tax --Liability due to amendment of section 90--Interest chargeable only from date of amendment--Income-tax Act, 1961, ss. 90, 234B-- Siam Commercial Bank PCL v. Deputy Director of Income-tax (International Taxation) (Mumbai) . . . 599

Bad debt --Change of law--After 1-4-1989 sufficient if assessee writes off debt in books--Sums shown as income of year and then written off--Claim allowable--Income-tax Act, 1961, s. 36(1)(vii), (2) (as amended w. e. f. 1-4-1989)-- KPMG India P. Ltd. v. Dy. CIT (Mumbai) . . . 569

----Provision for bad debt at beginning of year-- Deductible--Income-tax Act, 1961, s. 36(1)(vii)-- Siam Commercial Bank PCL v. Deputy Director of Income-tax (International Taxation) (Mumbai) . . . 599

Business --Loss--Foreign currency received as deposit--Sale of foreign currency and forward contract for purchase of foreign currency--Loss in transaction--Not deductible--Income-tax Act, 1961-- Siam Commercial Bank PCL v. Deputy Director of Income-tax (International Taxation) (Mumbai) . . . 599

Business expenditure --Disallowance--Excessive or unreasonable payments--Burden of proof--Is on assessee in first instance--No enquiry by Assessing Officer--Ad hoc disallowance of ten per cent.--Not sustainable--Matter remanded--Income-tax Act, 1961, s. 40A(2)(b)-- KPMG India P. Ltd. v. Dy. CIT (Mumbai) . . . 569

----Disallowance--Payments subject to deduction of tax at source--Payments to non-resident for purely professional services and reimbursement of expenses--Not payment of royalty--Non-resident not having permanent establishment--No tax deductible at source and payment allowable as deduction--Income-tax Act, 1961, s. 40(a)(ia)--Double Taxation Avoidance Agreement between India and the U. S. A., art. 12-- KPMG India P. Ltd. v. Dy. CIT (Mumbai) . . . 569

----Disallowance--Shipping company--Assessment under tonnage tax scheme--Disallowance of expenditure under section 14A cannot be made--Income-tax Act, 1961, ss. 14A, 115VP-- Varun Shipping Co. Ltd. v. Addl. CIT (Mumbai) . . . 587

----Unit exempted under section 10A rendering services to unit not so exempted--Service charges allocated on basis of turnover--Service charges allowable--Expenses under heads â€Å“deputation expenses†and â€Å“other expenses†--Finding that incurred wholly and exclusively for business--Allowable--Purchase of software--Payment not royalty--Allowable--Income-tax Act, 1961, ss. 9(1)(vi), 10A, 40(a)(ia)-- Asst. CIT v. Sonata Information Tech. Ltd. (Mumbai) . . . 533

Capital gains --Exemption--Time of transfer of capital asset--Agreement for sale of land in June 1996--Changes in agreement and final agreement in November 1999--Possession handed over and 98 per cent. of sale consideration received--No-objection certificate from appropriate authority received in February 2000--Transfer took place in November 1999--Investment of sale proceeds in December 1998--Assessee entitled to benefit under section 54/54F--Income-tax Act, 1961, ss. 54, 54F-- Asst. CIT v. PR. Chockalingam (Chennai) . . . 617

Deduction only on actual payment --Amendments brought in 2003--Curative--Applicable for earlier years--Employer̢۪s contribution to employees provident fund paid before due date for filing return--Allowable--Income-tax Act, 1961, s. 43B-- KPMG India P. Ltd. v. Dy. CIT (Mumbai) . . . 569

Income --Accrual of income--Time of accrual--Discounting of bills--Future discounts--Amounts had not accrued and were not assessable--Income-tax Act, 1961-- Siam Commercial Bank PCL v. Deputy Director of Income-tax (International Taxation) (Mumbai) . . . 599

Shipping company --Computation of book profits--Assessment under tonnage tax scheme--Deduction related to shipping--Admissible--Income-

tax Act, 1961, ss. 115JB, 115VI, 115V-O-- Varun Shipping Co. Ltd. v. Addl. CIT (Mumbai) . . . 587

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART

Double Taxation Avoidance Agreement between India and the U. S. A. :

Art. 12 --Business expenditure--Disallowance--Payments subject to deduction of tax at source--Payments to non-resident for purely professional services and reimbursement of expenses--Not payment of royalty--Non-resident not having permanent establishment--No tax deductible at source and payment allowable as deduction-- KPMG India P. Ltd. v. Dy. CIT (Mumbai) . . . 569

Income-tax Act, 1961 :

S. 9(1)(vi) --Business expenditure--Unit exempted under section 10A rendering services to unit not so exempted--Service charges allocated on basis of turnover--Service charges allowable--Expenses under heads â€Å“deputation expenses†and â€Å“other expenses†--Finding that incurred wholly and exclusively for business--Allowable--Purchase of software--Payment not royalty--Allowable-- Asst. CIT v. Sonata Information Tech. Ltd. (Mumbai) . . . 533

S. 10A --Business expenditure--Unit exempted under section 10A rendering services to unit not so exempted--Service charges allocated on basis of turnover--Service charges allowable--Expenses under heads â€Å“deputation expenses†and â€Å“other expenses†--Finding that incurred wholly and exclusively for business--Allowable--Purchase of software--Payment not royalty--Allowable-- Asst. CIT v. Sonata Information Tech. Ltd. (Mumbai) . . . 533

S. 14A --Business expenditure--Disallowance--Shipping company--Assessment under tonnage tax scheme--Disallowance of expenditure under section 14A cannot be made-- Varun Shipping Co. Ltd. v. Addl. CIT (Mumbai) . . . 587

S. 36(1)(vii), (2) (as amended w. e. f. 1-4-1989) --Bad debt--Change of law--After 1-4-1989 sufficient if assessee writes off debt in books--Sums shown as income of year and then written off--Claim allowable-- KPMG India P. Ltd. v. Dy. CIT (Mumbai) . . . 569

S. 36(1)(vii) --Bad debt--Provision for bad debt at beginning of year--Deductible-- Siam Commercial Bank PCL v. Deputy Director of Income-tax (International Taxation) (Mumbai) . . . 599

S. 40(a)(ia) --Business expenditure--Disallowance--Payments subject to deduction of tax at source--Payments to non-resident for purely professional services and reimbursement of expenses--Not payment of royalty--Non-resident not having permanent establishment--No tax deductible at source and payment allowable as deduction-- KPMG India P. Ltd. v. Dy. CIT (Mumbai) . . . 569

----Business expenditure--Unit exempted under section 10A rendering services to unit not so exempted--Service charges allocated on basis of turnover--Service charges allowable--Expenses under heads â€Å“deputation expenses†and â€Å“other expenses†--Finding that incurred wholly and exclusively for business--Allowable--Purchase of software--Payment not royalty--Allowable-- Asst. CIT v. Sonata Information Tech. Ltd. (Mumbai) . . . 533

S. 40A(2)(b) --Business expenditure--Disallowance--Excessive or unreasonable payments--Burden of proof--Is on assessee in first instance--No enquiry by Assessing Officer--Ad hoc disallowance of ten per cent.--Not sustainable--Matter remanded-- KPMG India P. Ltd. v. Dy. CIT (Mumbai) . . . 569

S. 43B --Deduction only on actual payment--Amendments brought in 2003--Curative--Applicable for earlier years--Employer̢۪s contribution to employees provident fund paid before due date for filing return--Allowable-- KPMG India P. Ltd. v. Dy. CIT (Mumbai) . . . 569

S. 54 --Capital gains--Exemption--Time of transfer of capital asset--Agreement for sale of land in June 1996--Changes in agreement and final agreement in November 1999--Possession handed over and 98 per cent. of sale consideration received--No-objection certificate from appropriate authority received in February 2000--Transfer took place in November 1999--Investment of sale proceeds in December 1998--Assessee entitled to benefit under section 54/54F-- Asst. CIT v. PR. Chockalingam (Chennai) . . . 617

S. 54F --Capital gains--Exemption--Time of transfer of capital asset--Agreement for sale of land in June 1996--Changes in agreement and final agreement in November 1999--Possession handed over and 98 per cent. of sale consideration received--No-objection certificate from appropriate authority received in February 2000--Transfer took place in November 1999--Investment of sale proceeds in December 1998--Assessee entitled to benefit under section 54/54F-- Asst. CIT v. PR. Chockalingam (Chennai) . . . 617

S. 90 --Advance tax--Interest--Default and deferment of advance tax --Liability due to amendment of section 90--Interest chargeable only from date of amendment-- Siam Commercial Bank PCL v. Deputy Director of Income-tax (International Taxation) (Mumbai) . . . 599

S. 115JB --Shipping company--Computation of book profits--Assessment under tonnage tax scheme--Deduction related to shipping--Admissible-- Varun Shipping Co. Ltd. v. Addl. CIT (Mumbai) . . . 587

S. 115VI --Shipping company--Computation of book profits--Assessment under tonnage tax scheme--Deduction related to shipping--Admissible-- Varun Shipping Co. Ltd. v. Addl. CIT (Mumbai) . . . 587

S. 115V-O --Shipping company--Computation of book profits--Assessment under tonnage tax scheme--Deduction related to shipping--Admissible-- Varun Shipping Co. Ltd. v. Addl. CIT (Mumbai) . . . 587

S. 115VP --Business expenditure--Disallowance--Shipping company--Assessment under tonnage tax scheme--Disallowance of expenditure under section 14A cannot be made-- Varun Shipping Co. Ltd. v. Addl. CIT (Mumbai) . . . 587

S. 234B --Advance tax--Interest--Default and deferment of advance tax --Liability due to amendment of section 90--Interest chargeable only from date of amendment-- Siam Commercial Bank PCL v. Deputy Director of Income-tax (International Taxation) (Mumbai) . . . 599

Special audit can be directed without providing an opportunity of personal hearing to assessee

Proviso to section 142(2A) does not envisage any personal hearing to assessee before an passing of an order for special audit.

In the instant case the assessee-company was opposed to the proposal of special audit on the ground that there were no complexities in the accounts and contented that proviso to section 142(2A) provides an opportunity of personal hearing to assessee.

The HC held as under:

1) The requirement of personal hearing is normally not seen as necessary concomitant to a reasonable opportunity of being heard. The same depends on the statutory provisions from which such right flows, the nature of the proceedings and the consequences likely to follow from such proceedings;

2) The proviso to section 142(2A) does not envisage any personal hearing before an order under sub-section (2A) can be passed. The said proviso only requires giving a reasonable opportunity of being heard to the assessee. Such reasonable opportunity ordinarily would not include right of personal hearing;

3) It was strongly argued by assessee that the very fact that the AO believed that the accounts were complex, it meant that the issues were complex and the personal hearing was required. This contention was misconceived. Complexity of accounts and complexity of the question whether accounts were complex or not were two totally different things;

4) Thus, a clear distinction had to be drawn between the two. Whether the accounts were complex so as to call for special audit was one aspect. Another aspect was whether the question to ascertain if the accounts were complex was itself a complex question. This would have a bearing on whether personal hearing was necessary. Thus, assessee’s contention of personal hearing was rejected;

5) Coming to the question of validity of the order on the premise of complexity and the requirement of interest of revenue, it was noticed that the assessee had been given previous notice under section 142(1) with respect to its accounts. For a long time the assessee did not comply with such notices;

6) The authorities had highlighted several aspects of the matter to indicate that the accounts were complex and that interest of revenue would be served if the special audit report was obtained. The various points on which the AO desired that the auditor should make a report itself would demonstrate that the accounts were complex;

7) The AO had sufficient material at his command to form an opinion that the accounts were complex and that it was in the interest of the revenue to get them audited by the special auditor. Thus, there was no merit in instant petition and the same was to be dismissed. - NEESA LEISURE LTD. V. DY. CIT [2013] 35 taxmann.com 216 (Gujarat)

Whether when dividend income is incidental to business of sale of shares, which

 

Whether when dividend income is incidental to business of sale of shares, which remained unsold, it cannot be said that expenditure incurred in acquiring shares is to be apportioned to extent of dividend income and should be disallowed - NO: Karnataka HC

BANGALORE, APRIL 11, 2012: THE issues before the Bench are - Whether when dividend income is incidental to the business of sale of shares, which remained unsold with the assessee, it cannot be said that expenditure incurred in acquiring shares is to be apportioned to the extent of dividend income and should be disallowed and Whether when the assessee takes loan and purchases shares and earns dividend income on unsold shares, any notional interest expenditure is to be disallowed. And the answer goes in favour of the assessee.

Facts of the case

Assessee is a distributor of state lotteries and a dealer in shares and securities. The assessee earned dividend income of Rs.46,67,190/- from shares of certain companies and 93% of shares of M/s Kurlon Ltd., and further the assessee has purchased 24,000 fully paid shares from M/s.Kurlon Ltd., and converted its stock of partly paid shares into fully paid shares by paying the outstanding amount of Rs.8/- per share, which worked out to Rs.5,27,97,016/-. To pay for the conversion cost, the assessee had entered into agreement with M/s.Kitchen Appliances Pvt. Ltd., to avail interest free loan of Rs.14/-crores and had paid Rs.28/- lakhs to one Sri.A.S.Krishna Iyer for brokering this loan. The Assessing Officer held that this expenditure was directly attributable to the earning of the dividend income and disallowed the same. He further considered the business expenditure claimed by the assessee and estimated the expenditure incurred by the assessee on earning of the dividend income at Rs.27,24,330/- under Rule 8D of the Income Tax Rules and disallowed the same as relatable to earning of the exempt income.

The Commissioner of Income (Appeals) confirmed the said order. In appeal, the Tribunal was of the view that the assessee had taken interest free loan from M/s.Kitchen Appliances Pvt. Ltd,, and what was disallowed, was the expenditure relatable to the broking of this loan as the expenditure for earning of dividend income from these shares. It was not only the direct expenditure, which was disallowable under Section 14A in relation to exempt income, but even indirect expenditure was to be disallowed proportionately. The expenditure, which was relatable to earning of dividend income though incidental to the trading of shares, was also to be disallowed under Section 14A of the Income Tax Act. However, the Tribunal found that the Assessing Officer attributed the entire broking commission as relatable to earning of dividend income only, which was not correct. The loan had been utilized for the purchase of shares and the profit earned by sale of these shares was offered as business income. Hence, the broking expenditure had to be considered as business expenditure, as well and allowed the appeal accordingly. The Assessing Officer was directed to bifurcate all the expenditure proportionally and allow the expenditure in accordance with law.

On appeal to the HC, the Counsel for the assessee contended that the assessee had incurred expenditure for purchasing shares. 63% of the shares so purchased were sold and the income derived therefrom was offered to tax as business income. The remaining 37% of the shares remained unsold. Those shares yielded dividend. The assessee had not incurred any expenditure to. earn the said dividend income. Therefore, no expenditure could be attributed to the said dividend income and the said expenditure cannot be disallowed and the assessee was entitled to the benefit of deduction of the entire expenditure incurred in respect of purchase of shares.

Per contra, the Counsel for the Revenue pointed out that admittedly when shares retained by the assessee had yielded dividend, when the dividend income was exempted from payment of income tax proportionately, the expenditure incurred in acquiring that dividend also should be excluded from expenditure. In that view of the matter, the orders passed by the authorities are legal and valid.

Held that,

++ when no expenditure is incurred by the assessee, in earning the dividend income no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63% of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37% of the shares are retained. It has remained unsold with the assessee. It is those unsold shares which have yielded dividend, for which, the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions;

++ in that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside.

Thursday, July 25, 2013

Case law oo1

text of case law 001

Though Expl. 10 to s. 43(1) does not apply to loan waiver, treatment in books of

 
Steel Authority of India Ltd vs. CIT (Delhi High Court)

Though Expl. 10 to s. 43(1) does not apply to loan waiver, treatment in books of reducing amount waived from asset cost means that WDV has to be reduced

The assessee received a loan of Rs. 5,277 crores from the Steel Development Fund in earlier years. In AY 2000-01, a substantial part of the loan was waived. In its books of account, the assessee reduced the cost of the assets by the amount of loan waived and claimed depreciation on the reduced figure. However, the assessee claimed that for income-tax purposes, the waiver did not impact the WDV of the assets and that depreciation had to be allowed on the original figure. The AO, CIT (A) & Tribunal (included in file) decided the issue against the assessee by relying on Explanation 10 to s. 43(1) inserted by the F (No. 2) Act 1998 w.e.f. 1.4.1999. On further appeal to the Tribunal, HELD reframing the question:

Explanation 10 to s. 43(1) does not cover the case of waiver of the loan. It covers only the grant of a subsidy or reimbursement by whatever name called. Though the assessee's case may not fall under Explanation 10, the waiver of the loan amounted to the meeting of a portion of the cost of the assets under the main provision of s. 43(1) because of the treatment given by the assessee in its books of account in reducing the cost/WDV of the assets by the amount of the loans waived. The real nature of a transaction can be understood by reference to the contemporaneous act of the parties, which throws considerable light on their true intention and their understanding of the transaction. The assessee understood the receipt of the loans as having been given towards meeting a part of the cost of the assets and the waiver cannot have a different effect on such intention. PJ Chemicals Ltd 210 ITR 830 (SC), which holds, (pre Explanation 10) that a subsidy given as an incentive for industrial growth cannot be reduced from the cost of the assets under s. 43(1), does not apply to the facts.

Note: In CIT vs. Tata Iron & Steel 231 ITR 285 (SC) it was held that even if a loan was taken for acquisition of an asset, its non-payment will not affect the cost of the asset

Related Judgements
Logitronics Pvt Ltd vs. CIT (Delhi High Court) The answer to the question whether the waiver of a loan is taxable as income or not depends on the purpose for which the loan was taken. If the loan was taken for acquiring a capital asset, the waiver thereof would not amount to any income exigible to tax…
Steel Authority vs. STO (Supreme Court) Where the Appellate Commissioner disposed of the appeal by a non-reasoned order, held that a statutory appeal could not be disposed of in that manner. Reason is the heartbeat of every conclusion. It introduces clarity in an order and without the same it becomes lifeless. Failure to give reasons….

Airport Authority of India vs. CIT (Delhi High Court – Full Bench) The question that has to be considered is whether the expenditure is incurred for initiating the business or for removing an obstruction to facilitate an existing business. Expenditure incurred for running the business or working it, with a view to produce profits is in the nature of revenue expenditure….

HC presumes existence of culpable mind in not filing return within time; confirms prosecution

HC presumes existence of culpable mind in not filing return within time; confirms prosecution    

Where assessee had not filed return of income timely, it could be prosecuted under section 276CC on presumption that there existed a culpable mental state as onus to prove that delay was not willful was on assessee and not on department

In the instant case, the assessee had filed the return of income on 1-5-1995 for assessment year 1994-95. The revenue's case was that inspite of several notices issued to assessee, she had filed the return of income beyond the statutory period. Therefore, delay in filing return was willful and deliberate and, thus, she was liable to be prosecuted and punished under section 276CC. However, the trial Court and the Sessions Court discharged the assessee. The revenue then filed the petition seeking reversal of orders of both the Courts.

The High Court held as under:

1) It was not in dispute that the assessee had not filed the return for the assessment year 1994-95 within prescribed period and not even within the period within which the revenue had required her to do so. The assessee had not even responded to the communications sent by the revenue requiring her to file return of income or to show the proof of filing. So, the offence under Section 276CC stood committed by that time and for that offence, the department could file a criminal complaint against her after obtaining requisite sanction from the competent authority which it did obtain and complaint was filed in Court;

2) It was for the respondent to establish during the trial that her failure to file return was not willful. The Courts went wrong in going into the question as to whether the explanation offered by the assessee before the filing of the complaint in Court was rightly rejected or not;

3) Once the complaint stood filed, the trial Court was only required to examine whether cognizance was to be taken or not and if it was decided to take cognizance, thereafter, trail Court was required to examine whether in the pre-charge evidence the complainant had been able to show that the assessee had not filed her return for the relevant assessment year within the prescribed period, which fact in the present case was not even disputed by the assessee;

4) So, after raising the presumption under section 278E, the trial Court should have framed the charge against the assessee leaving it to her to show thereafter that there was no willful default on her part. Just because the assessee had applied for the compounding of the offence before the filing of the complaint against her in Court, and the same had not been decided before the filing of the complaint, it could not be said that the complaint was not maintainable;

5) The trial Court was not required to examine at the stage of charge as to why the department was not compounding the offence in the case of the respondent herein. If she was aggrieved by any action or inaction on the part of the authority for compounding, she would have had recourse to legal remedies instead of waiting for the prosecution to be launched by the department;

6) The revisional Court also did not go into the aforesaid aspects and simply affixed its seal of approval to the order of the trail Court and, therefore, its order also couldn’t be sustained. This petition, accordingly, was allowed. The impugned orders of the trial Court and the revisional Court were set aside – ACIT V. NILOFAR CURRIMBHOY [2013] 35 taxmann.com 99 (Delhi)
   
   
   

Wednesday, July 24, 2013

Loan Transaction : Sunil Kumar Jha Addl. Commissioner of Income Tax, Central Range, Baroda

When we refer to an entry of loan transaction as `fake loan' received from a `paper company', it invariably means that such entry represents unaccounted money of the person in whose books of account the money has been credited as loan and the lender company is only a conduit for routing the money back to the books of account of that person. However, despite having knowledge of this fact and knowing the techniques and methods used by the assessees for this purpose, it remains a huge challenge for the tax authorities to bring all material facts and evidences on record so as to prove which in his opinion is a fact beyond doubt.

2. In an economy where unaccounted income is a big menace, there are always efforts made by the tax evaders to bring their unaccounted income back to their books of account without paying any tax on the same. Numerous methods and techniques are used for this purpose and there are lots of techniques that authorities know about and probably countless others that have yet to be uncovered. Routing the unaccounted income back to the books of account disguised as loan or share capital is one of such methods widely used by the tax evaders in our country. The method is most prevalent and perhaps also one of the most organized one to bring the unaccounted money back to the books of account and even the established business houses resort to this method to bring their unaccounted money back to their business without paying any tax on the same.

The process to bring the money back in this manner is commonly known in business parlance as Jamakharchi entries or accommodation entries. This is a well organized racket controlled and conducted by persons known as entry providers. Kolkata is undoubtedly the Mecca of such operations liberally providing entries to business concerns all over the country but other business hubs such as Mumbai and Delhi are also not far behind in having organized rackets for providing accommodation entries to the willing tax evaders. Although, there is no uniformity of methodology or approach, or certainty of estimation of unaccounted income being brought back in the books of accounts in this manner, the magnitude of the same, without any doubt, is significant and huge.

2.1 The method of providing accommodation entry entails breaking up large amounts of money into smaller, less-suspicious amounts. In India, this smaller amount has to be below Rs. 50,000/- as deposit of cash below this amount does not require providing PAN of the depositors. The money is then deposited into one or more bank accounts either by multiple people or by a single person over an extended period of time. Also, even larger amounts are deposited in the banks with PAN numbers of individuals who are mostly illiterate and work for these entry operators for small salary or commission. The money is then routed through paper companies controlled by these operators. These companies are incorporated by taking care of all formalities such as registering with ROC but having only postal addresses with no real office or employees. The directors of such companies are again individuals who are mostly illiterate or semiliterate and work for the entry operators for small salaries or commission. At first sight, most of these companies would pass of as finance, investment or technology companies. But as the entry operators would secretly admit, these are only paper companies used to route the unaccounted income and, at the same time, clean hoards of unaccounted income for their clients. These companies used for routing the unaccounted money are basically fake companies that exist for no other reason than to `layer' the entries or pass it on to the beneficiary as loan or share capital. They take in unaccounted money as "loan or share capital" and pass it on to either another such paper company for `layering' of the transaction or directly to the beneficiary as loan or share capital. They simply create the appearance of legitimate transactions through fake entries of loans or share capital in their books of account. As has been exposed from time to time through search and seizure operations by the department, such entry operators controls hundreds of bank accounts for depositing cash and hundreds of companies for routing the entries. Limited resource and infrastructure of the Registrar of Companies (ROC) perhaps makes it easier for them to incorporate large number of such paper companies without any difficulty. The process, prima facie, may appear very simple but it is extremely difficult to expose the whole chain of money deposited and `layers' through which it is routed back to the beneficiary. The biggest problem is that there is no effective deterrence to curb the activities of these entry operators. Even conducting search and seizure operations against them have not really worked as a deterrence and such operations often ended up in disclosure of `unaccounted commission income' of these entry operators which definitely could not be the purpose of conducting search and seizure operations against these operators.

2.2 In USA, in 1996, Harvard-educated economist Franklin Jurado went to prison for cleaning $36 million for Colombian drug lord Jose Santacruz-Londono. Even in India, people with a whole lot of unaccounted income typically hire such `financial experts' to handle the process to bring the money back to books of account without paying tax on the same. It's complex by necessity. The whole idea is to make it impossible for Income-tax authorities to trace the unaccounted money and it's source during the process of bringing it back to the books of account of the assessee. However, we do not have such provisions in Income-tax Act 1961 to put such operators behind bars. Hence, the solution at the moment is to handle the individual cases of such entries routed back through paper companies at the time of assessment in the purview of available provisions of Income- tax Act and judicial pronouncements in respect of the same.

3. Recourse under Section 68 of the Income-tax Act 1961:
The recourse available for the assessing officers to tackle the individual cases of such fake loans brought back in the books of account as cash credit is within the meaning of Section 68 of the Income-tax Act 1961. The provision relating to cash credit, as in Section 68, was provided for the first time in the Income Tax Act 1961 (Act No.43 of 1961) as there was no corresponding provision in the Income Tax Act, 1922. It would be pertinent to note that Section 68 is a new section in comparisons with the provision of the Income Tax Act, 1922 and it is a culmination of a series of judicial pronouncements under the provisions of the Income Tax Act, 1922.

3.1 For the purpose of better comprehension, the Section 68 may be divided as below:
(1) Where any sum is found credited in the books of an assessee;
(2) Maintained for any previous year; and
(3) Assessee offers no explanation about the nature and source thereof; or
(4) The explanation offered by him, is not, in the opinion of the Assessing Officer, satisfactory;
(5) The sum so credited may be charged to Income tax;
(6) As the income of the assessee, of that previous year.

The initial catchphrase of the section is " Where any sum is found credited in the books of account of the assessee" meaning thereby that Section 68 is attracted where an entry relating to a sum is found to have been credited in the books of the assessee, which thus implies, existence of books and recording of a sum which the Assessing Officer considers as doubtful. Perusal of Section 68 would show that in relation to the expression `books', the emphasis is on the word `assessee'. In other words, such books have to be the books of the assessee himself and not of any other person and books of account of even a firm in which the assessee is a partner cannot be considered as the books of the assessee as held in the case of Smt. Shanta Devi v. CIT [1988] 171 ITR 532 (Punj. & Har.).
On this issue, it would also be pertinent to refer to another recent decision by Hon. Indore Bench of ITAT in case of Agrawal Coal Corpn. (P.) Ltd. v. Asstt. CIT 63 DTR 201. In this case it was held by the Tribunal that merely because the companies were registered with ROC, were filling return of income, having PANs/bank accounts, share application forms were submitted but the same did not establish their identity as these companies might have been existing on papers or in real sense at the time of registration but were specifically found to be non-existent. Further, assessee even failed to produce the director or employees of these share applicants and, thus, addition under Section 68 made in the hands of assessee was sustainable.
In CIT vs. Frostair (P.) Ltd. [2012] 26 taxmann. com 11 (Delhi), it was held that the assessee was under a burden to explain nature and source of share application money received in a given case and he had to establish shareholder's identity; genuineness of transaction; and creditworthiness of shareholders. On being informed that assessee had accepted share capital from some companies which were engaged in providing bogus entries, in form of loan and share application money, Assessing Officer asked for details under Section 142 of the Act. Assessee submitted a list of 18 shareholders from which Assessing Officer discerned that PAN/GIR No. of shareholders was not correct, they were not available at addresses given and they were not filing their ITRs with concerned officers. It was held by the Hon. High Court that since Assessing Officer had examined all facts in exhaustive manner, addition under Section 68 and, consequently initiation of penalty proceedings were justified.
Another recent decision by Hon. Allahabad High Court dated July 30, 2012 in the case of CIT vs.Hindon Forge (P.) Ltd. [2012] 25 taxmann. com 239 (All.), may also be referred to on this issue. In this case the Assessee-company had taken unsecured loans from eight different trusts. One `R' was common managing trustee of all these trusts. He was also managing director of assessee-company and other directors were his close relatives. `R' did not produce trust deeds, its objects, and beneficiaries of trusts to establish that there were beneficiaries other than him and his associates. Trusts were receiving cash donations, which were transferred on same day to assessee by way of cheques. Assessee did not prove that trusts had any other sources of fund or that they had given credits to any other person or company. In the given facts it was held that the method and manner adopted by assessee clearly established that he was playing a fraud with revenue and, since genuineness of transactions were not established at all, there was no question of shifting burden under Section 68 on revenue and, therefore, addition of unsecured loans to income of assessee was justified. It is important to note that the decision of Hon. Gujarat High Court in the case of Dy. CIT v. Rohini Builders (supra) was also referred to in this decision.
There is another recent and significant decision dated 15th February 2012 in the case of Commissioner of Income-tax vs. Nova Promoters & Finlease (P) Ltd. [2012] 18 taxmann.com 217 (Delhi) which is of immense relevance, as in this case important observations have been made by the Hon. Delhi High Court as to the burden of proof and shifting of onus in the cases of cash credit under Section 68 of the Act. In this case, the assessee filed its return declaring loss for relevant assessment year which is Assessment Year 2000-01. Subsequently, Assessing Officer received information from the Investigation Wing that assessee had obtained accommodation entries in garb of share application monies. In order to examine genuineness and creditworthiness of companies which gave entries to the assessee, Assessing Officer issued summons to two persons namely, `M' and `R' who did not appear before him. Subsequently, assessee filed a letter with Assessing Officer along with affidavits of `M' and `R' in which both of them had stated that transactions with assessee were genuine and earlier statements recorded from them by the Investigation Wing were given under pressure. The Assessing Officer, however, did not accept those affidavits and made certain additions to the income of the assessee under Section 68. But, Hon.Tribunal, taking a view that there was no dispute about identity of shareholders namely `M' and `R', deleted addition made by the Assessing Officer. On revenue's appeal, it was noted by the Hon. High Court that both `M' and `R' had admitted before Additional Director (Investigation) that they were acting as accommodation entry providers. They had also given a list of 22 companies in which they were operating accounts. It was also apparent that out of 22 companies whose names figured in information given by them to the Investigation Wing, 15 companies had provided so-called `share subscription monies' to the assessee. It was held by the Hon. High Court that on facts, there was specific involvement of assessee-company in modus operandi followed by `M' and `R' and, therefore, impugned order passed by Tribunal deleting addition was to be set aside. It was held by the Hon. High Court that "the ratio of a decision is to be understood and appreciated in the background of the facts of that case. So understood, it will be seen that where the complete particulars of the share applicants such as their names and addresses, income tax file numbers, their creditworthiness, share application forms and share holders' register, share transfer register etc. are furnished to the Assessing Officer and the Assessing Officer has not conducted any enquiry into the same or has no material in his possession to show that those particulars are false and cannot be acted upon, then no addition can be made in the hands of the company under Section 68 and the remedy open to the revenue is to go after the share applicants in accordance with law. We are afraid that we cannot apply the ratio to a case, such as the present one, where the Assessing Officer is in possession of material that discredits and impeaches the particulars furnished by the assessee and also establishes the link between self-confessed "accommodation entry providers", whose business it is to help assessees bring into their books of account their unaccounted monies through the medium of share subscription, and the assessee. The ratio is inapplicable to a case, again such as the present one, where the involvement of the assessee in such modus operandi is clearly indicated by valid material made available to the Assessing Officer as a result of investigations carried out by the revenue authorities into the activities of such "entry providers". The existence with the Assessing Officer of material showing that the share subscriptions were collected as part of a pre-meditated plan – a smokescreen – conceived and executed with the connivance or involvement of the assessee excludes the applicability of the ratio. In our understanding, the ratio is attracted to a case where it is a simple question of whether the assessee has discharged the burden placed upon him under Section 68 to prove and establish the identity and creditworthiness of the share applicant and the genuineness of the transaction. In such a case, the Assessing Officer cannot sit back with folded hands till the assessee exhausts all the evidence or material in his possession and then come forward to merely reject the same, without carrying out any verification or enquiry into the material placed before him. The case before us does not fall under this category and it would be a travesty of truth and justice to express a view to the contrary.
Reference was also made on behalf of the assessee to the recent judgment of a Division Bench of this court in CIT v. Oasis Hospitalities Private Limited, (2011) 333 ITR 119. We have given utmost consideration to the judgment. It disposes of several appeals in the case of different assessees. These quoted observations clearly distinguish the present case from CIT v Oasis Hospitalities P Ltd. (supra). Except for discussing the modus operandi of the entry operators generally, the Assessing Officer in that case had not shown whether any link between them and the assessee existed. No enquiry had been made in this regard. Further, the assessee had not been confronted with the material collected by the investigation wing or was given an opportunity to cross examine the persons whose statements were recorded by the investigation wing.
In the case before us, not only did the material before the Assessing Officer show the link between the entry providers and the assessee-company, but the Assessing Officer had also provided the statements of Mukesh Gupta and Rajan Jassal to the assessee in compliance with the rules of natural justice. Out of the 22 companies whose names figured in the information given by them to the investigation wing, 15 companies had provided the so-called "share subscription monies" to the assessee.
In the light of the above discussion, we are unable to uphold the order of the Tribunal confirming the deletion of the addition of Rs.1,18,50,000 made under Section 68 of the Act as well as the consequential addition of Rs.2,96,250."
Another decision of Hon. Delhi High Court, which is most recent dated 21st December 2012 in the case of CIT vs. N R Portfolios Pvt. Ltd. in ITA Nos. 134/2012 could be of utmost help for the assessing officers dealing with the challenges of exposing accommodation entries and bringing it to tax under Section 68 of the Act. In this case, the assessee, a company, received Rs. 35 lakhs towards share allotment. As the shareholders did not respond to summons, the AO assessed the said sum as an unexplained credit under Section 68. On appeal, the CIT(A) and Tribunal relied on Lovely Exports 216 CTR 195 (Del) & Divine Leasing 299 ITR 268 (SC), held that as the assessee had furnished the PAN, bank details and other particulars of the share applicants, it had discharged the onus of proving the identity and credit-worthiness of the investors and that the transactions were not bogus. It was also held that the AO ought to have made enquiries to establish that the investors had given accommodation entries to the assessee and that the money received from them was the assessee's own undisclosed income. On appeal by the department the Hon. High Court, held reversing the decision of Ld.CIT(A) & Hon. Tribunal that:

Though in previous decisions (Lovely Exports) it was held that the assessee cannot be faulted if the share applicants do not respond to summons and that the Revenue authorities have the wherewithal to compel anyone to attend legal proceedings, this is merely one aspect. An assessee's duty to establish the source of the funds does not cease by merely furnishing the names, addresses and PAN particulars, or relying on entries in the Registrar of Companies webs ite. The company is usually a private one and the share applicants are known to it since the shares are issued on private placement basis. If the assessee has access to the share applicant's PAN or bank account statement, the relationship is closer than arm's length. Its request to such concerns to participate in income tax proceedings, would, from a pragmatic perspective, be quite strong. Also, the concept of "shifting onus" does not mean that once certain facts are provided, the assessee's duties are over. If on verification, the AO cannot contact the share applicants, or the information becomes unverifiable, the onus shifts back to the assessee. At that stage, if it falters, the consequence may well be an addition underSection 68 (A. Govindarajulu Mudaliar 34 ITR 807 followed).

Another decision of utmost relevance is of Hon. ITAT Indore Bench in the case of Vaibhav Cotton (P.) Ltd. vs. Income-tax Officer, 4(4) Indore, [2012] 26 taxmann.com 352 (Indore.) In this case the assessee company had shown in its balance sheet certain amount representing share capital received from a Kolkata based company and some other individual investors. Face value of shares was Rs. 10 and those shares were issued at a premium of Rs. 90 per share. Next year, promoters/directors of assessee-company purchased those shares back at a discount of 90 per cent. In order to ascertain genuineness of share transactions, Assessing Officer issued notices to Kolkata based company and other alleged shareholders which were returned by postal authorities with a remark `left'. He also visited respective banks through which money was routed by these investors and found that cash was deposited immediately prior to issue of cheque to assessee and accounts of those companies were closed immediately after transfer of funds. Assessing Officer thus taking a view that share transactions were not genuine, added amount in question to assessee's taxable which was upheld by the Hon. Tribunal.

4. It is not necessary to establish that the money came back to the books of the assessee as `entry' actually emanated from his coffers :

While dealing with doubtful cash credits, is it necessary for the assessing officer to establish that the money came back to the books of the assessee as `entry' actually emanated from the coffers of the assessee? This issue has been decided by the Hon'ble Delhi High Court in a recent decision dated 20.07.2012 in the case of Commissioner of Income-tax vs Independent Media (P.) Ltd.210 TAXMANN 14(Delhi)(2012), which is significant as the observation made by the Hon. Court in this decision would be a great help in establishing the cases where `entries' have been taken from paper companies. In this case it was alleged by the Investigation wing that the assessee-company received share capital from those persons who had given statements before Investigation wing that they were entry providers giving accommodation entries after receiving cash and after charging their commission. Assessee furnished PAN of subscriber-companies, share application forms, board resolutions, copy of bank statement, pay orders, confirmation from subscribers, their income-tax returns, copies of their balance sheets, etc. However it was held by the Hon. Court that if explanation adduced by assessee with regard to identity and creditworthiness of subscriber-companies and genuineness of transactions was not acceptable for valid reasons, Assessing Officer could make addition under Section 68 and for that purpose he would not be under any duty to further show or establish that monies emanated from coffers of assessee-company. The Hon. Court further observed that "We are unable to uphold the view of the Tribunal that it is incumbent upon the Assessing Officer, on the facts and circumstances of the case, to establish with the help of material on record that the share monies had come or emanated from the assessee's coffers. Section 68 of the Act casts no such burden upon the Assessing Officer. This aspect has been considered more than 50 years back by the Supreme Court in the case of A Govindarajulu Mudaliar v.CIT [1958] 34 ITR 807 where precisely the same argument was advanced before the Supreme Court on behalf of assessee. The argument was rejected by the Court."

4.1 The Hon'ble Court further referred that in the above case, Shri Venkatarama Iyer, J. speaking for the Court observed as under: -

"Now the contention of the appellant is that assuming that he had failed to establish the case put forward by him, it does not follow as a matter of law that the amounts in question were income received or accrued during the previous year, that it was the duty of the Department to adduce evidence to show from what source the income was derived and why it should be treated as concealed income. In the absence of such evidence, it is argued, the finding is erroneous. We are unable to agree. Whether a receipt is to be treated as income or not, must depend very largely on the facts and circumstances of each case. In the present case the receipts are shown in the account books of a firm of which the appellant and Govindaswamy Mudaliar were partners. When he was called upon to give explanation he put forward two explanations, one being a gift of Rs. 80,000/- and the other being receipt of Rs. 42,000/- from business of which he claimed to be the real owner. When both these explanations were rejected, as they have been it was clearly upon to the Income-tax Officer to hold that the income must be concealed income. There is ample authority for the position that where an assessee fails to prove satisfactorily the source and nature of certain amount of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipt are of an assessable nature. The conclusion to which the Appellate Tribunal came appears to us to be amply warranted by the facts of the case. There is no ground for interfering with that finding, and these appeals are accordingly dismissed with costs."
5. Responsibility towards source of source :

In ordinary circumstances, assessee's burden is confined to prove creditworthiness of creditor with reference to transaction between assessee and creditor. It was so held in Nemi Chand Kothari v. CIT [2004] 136 Taxman 213 (Gau.),that a harmonious construction of Section 106 of the Evidence Act and Section 68 of the Income-tax Act will be that though apart from establishing the identity of the creditor, the assessee must establish the genuineness of the transaction as well as the creditworthiness of his creditor, the burden of the assessee to prove the genuineness of the transactions as well as the creditworthiness of the creditor must remain confined to the transactions, which have taken place between the assessee and the creditor. What follows, as a corollary, is that it is not the burden of the assessee to prove the genuineness of the transactions between his creditor and sub-creditors nor is it the burden of the assessee to prove that the sub-creditor had the creditworthiness to advance the cash credit to the creditor from whom the cash credit has been, eventually, received by the assessee. It is not the business of the assessee to find out the source of money of his creditor or of the genuineness of the transaction, which took place between the creditor and sub-creditor and/or creditworthiness of the sub-creditors, since, these aspects may not be within the special knowledge of the assessee.

5.1 However, on this issue, it is important to keep in mind that it may not be the responsibility of the assessee to prove source of source but nothing precludes the assessing officer to make enquiry in respect of the source of the source as well to establish that both the source and it's source are part of a larger chain of `paper companies' engaged in the business of providing accommodation entries to the willing tax evaders. Once a valid presumption is raised by way of an enquiry about the genuineness of transaction between the source and it's source the same could be used as an evidence to doubt the integrity of the source of the assessee and to raise a valid presumption about the transaction between the assessee and it's source being not genuine.

6. Test of human probability :
As has been discussed earlier, the issue of shifting of onus in the cases of cash credit is a complex one and each case has to be examined in it's own facts and circumstances. Hence, in the cases of `fake loan' from `paper companies' the theory of preponderance of human probability as pronounced by the Hon. Apex Court in the cases of CIT v. Durga Prasad More [1971] 82 ITR 540 and Sumati Dayal v. CIT [1995] 80 Taxman 89/214 ITR 801 (SC) is of utmost importance. In the cases where it has been established that the source company is a mere `paper company' solely engaged in the activity of providing accommodation entries, the presumption on the basis of human probability may be referred to by the assessing officers to fortify their findings.

6.1 Hon. Supreme Court in CIT v. Durga Prasad More [1971] 82 ITR 540 , at pages 545-547 made a reference to the test of human probabilities in the following fact situation : –
"… Now we shall proceed to examine the validity of those grounds that appealed to the learned judges. It is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will be very easy to make self-serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide-open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents.
Now, coming to the question of onus, the law does not prescribe any quantitative test to find out whether the onus in a particular case has been discharged or not. It all depends on the facts and circumstances of each case. In some cases, the onus may be heavy whereas, in others, it may be nominal. There is nothing rigid about it. Herein the assessee was receiving some income. He says that it is not his income but his wife's income. His wife is supposed to have had two lakhs of rupees neither deposited in banks nor advanced to others but safely kept in her father's safe. Assessee is unable to say from what source she built-up that amount. Two lakhs before the year 1940 was undoubtedly a big sum. It was said that the said amount was just left in the hands of the father-in-law of the assessee. The Tribunal disbelieved the story, which is, prima facie, a fantastic story. It is a story that does not accord with human probabilities. It is strange that the High Court found fault with the Tribunal for not swallowing that story. If that story is found to be unbelievable as the Tribunal has found, and in our opinion rightly, then the position remains that the consideration for the sale proceeded from the assessee and, therefore, it must be assumed to be his money.

It is surprising that the High Court has found fault with the Income-tax Officer for not examining the wife and the father-in-law of the assessee for proving the department's case. All that we can say is that the High Court has ignored the facts of life. It is unfortunate that the High Court has taken a superficial view of the onus that lay on the department.
`…Science has not yet invented any instrument to test the reliability of the evidence placed before a Court or Tribunal. Therefore, the Courts and Tribunals have to judge the evidence before them by applying the test of human probabilities. Human minds may differ as to the reliability of a piece of evidence. But, in that sphere, the decision of the final fact-finding authority is made conclusive by law." (p. 545)
6.2 The test of human probabilities has been emphasized in yet another decision of the Hon. Supreme Court in the case of Sumati Dayal v. CIT [1995] 80 Taxman 89/214 ITR 801 (SC). It was held in this case that in view of Section 68, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income-tax as the income of the assessee of the previous year if the explanation offered by the assessee about the nature and source thereof, is, in the opinion of the Assessing Officer, not satisfactory. In such case there is prima facie evidence against the assessee, viz., the receipt of money, and if he fails to rebut the same, the said evidence being unrebutted can be used against him by holding that it is a receipt of an income nature. While considering the explanation of the assessee, the department cannot, however, act unreasonable.

6.3 Why this decision is so important while dealing with cases of `fake loan' from `paper companies', because it acknowledges that what is apparent may not be real and test of human probabilities has to be applied to understand if the apparent is real and if the transaction fails to withstand the test of human probabilities it has to be taken as an in-genuine transaction even if documentary evidences suggest otherwise. In this case, the assessee, a dealer in art pieces, had shown income from horse-race winnings in two consecutive accounting years. The assessing officer did not accept this and made addition under Section 68 which was confirmed by the Appellate Assistant Commissioner. Thereafter the assessee approached the Settlement Commission. The Settlement Commission also took the view that the claim of winnings in races was false and what were passed off as such winnings really represented the appellants taxable income from some undisclosed sources. Hon. Supreme Court also agreed with the Settlement Commission saying that after considering the surrounding circumstances and applying the test of human probabilities the Commission had rightly concluded that the assessee's claim about the amount being her winnings from races was not genuine.

6.4 The test of human probability often comes to the help of the revenue to track unaccounted income. This could be a great help in exposing the `fake loans' from `paper companies' as well. In one of its special kinds, the test of human probability made an assessee pay huge amount of tax in Som Nath Maini v. CIT [2008] 306 ITR 414 (Punj. & Har.). In this case, the assessee in his return declared loss from sale of gold jewellery and also declared a short-term capital gain from sale of shares so that the two almost match each other. This simple tax planning became ineffective after the Assessing Officer disbelieved the astronomical share price increase applying the test of human probability. The Assessing Officer observed that short-term capital gains were not genuine in as much as the assessee had purchased 45000 shares of Ankur International Ltd. at varying rates from Rs. 2.06 to Rs. 3.1 per share and sold them within a short span of six-seven months at the rate varying from Rs. 47.75 paisa to Rs. 55. Even though the two respective transactions for purchase and sale of shares were routed through two different brokers, yet the Assessing Officer did not believe the astronomical rise in share price of a company from Rs. 3 to Rs. 55 in a short-term.The assessee lost its case before the Tribunal. Confirming the order of the Tribunal, the Punjab and Haryana High Court held that the burden of proving that income is subject to tax is on the revenue but, on the facts, to show that the transaction is genuine, burden is primarily on the assessee. As per the Court, the Assessing Officer is to apply the test of human probabilities for deciding genuineness or otherwise of a particular transaction. Mere leading of the evidence that the transaction was genuine, cannot be conclusive. Any such evidence is required to be assessed by the Assessing Officer in a reasonable way. Genuineness of the transaction can be rejected in case the assessee leads evidence which is not trustworthy, and the department does not lead any evidence on such an issue.

7. Responsibility of the Assessing Officer :
There is no denying to the fact that in the case of cash credit the primary onus is on the assessee and where the assessee fails to discharge such onus the Assessing Officer is well within his jurisdiction to treat the cash credit as income of the assessee within the meaning of Section 68 of the Act. However, the balance of burden in the case of cash credits is delicate and complex and unless and until the Assessing Officer shows his intention to make enquiry to examine the truth, the additions made under Section 68 in the cases of `fake loan' from `paper companies' would not get affirmation of the appellate authorities. In the cases of loans from `paper companies', additions are often made by the Assessing Officers by highlighting the defects in the submission of the assessee without making further enquiries which does not help the case of revenue as merely highlighting defects in the submission of the assessee without making any further enquiry would in most cases be not accepted as sufficient to reach a conclusion that entry of such loan represents income of the assessee.
Some example of the same is given below for illustration:
1. The assessee has provided name, address and PAN of the creditor but did not provide confirmations from him.
2. Confirmatory letters from the creditors were filed but the creditors were not produced for examination.
3. Summons issued under Section 131 to the creditors but they did not respond to the summons.
4. The letters sent to the creditors at the given address returned unserved with comment "not found" or "inadequate address".
5. The confirmation of the creditor was filed but his bank statement was not produced or his credit worthiness have not been established.

7.1 It must be kept in mind that such instances could be the circumstances to have a valid doubt as to the genuineness of the loan but these alone would not be sufficient to have a valid presumption as to the fact that the cash credit represents income of the assessee. Under Section 68 of the Act, the Assessing Officer has jurisdiction to make enquiries with regard to the nature and source of the sums credited in the books of account of the assessee and it is immaterial as to whether the amount so credited is given the colour of a loan or share application money or sale proceeds. The use of the words "any sum credited in the books" in Section 68 indicates that the section is very widely worded and the Assessing Officer is not precluded from making an enquiry as to the true nature and source of the sum credited in the accounts even if it is credited as loan from another company. The Assessing Officer would be entitled, and it would indeed be his duty to enquire whether the alleged creditors do in fact exist or not and whether the loan shown in the garb of a credit from a company is nothing but an accommodation entry routed through a paper company solely existing for the purpose of providing such accommodation entries. Although, given in the context of share application money, the decision of Hon. Delhi High Court in the case of CIT vs. Sofia Finance Ltd. 205 ITR 98 (full bench) is extremely significant where explaining and rather over ruling some observations of the division bench in Steller Investment case which has been confirmed by the Hon. Supreme Court in 164 CTR 287 in a one line decision stating that no question of law arose in such a case. The full bench observed as under :
"what is clear, however, is that Section 68 clearly permits an ITO to make enquires with regard to the nature and source of any of all the sums credited in the books of account of the company irrespective of the name and cloture or the source indicated by the assessee. In other words, the truthfulness of the assertion of the assessee regarding the nature and the source of the credit in his books of account can be gone into by the ITO. In the case of Steller Investments Ltd., the ITO had accepted the entries subscribed share capital. Section 68 of the Act was not referred to and the observations in the said judgement cannot mean that the ITO cannot or should not go into the position as to whether the alleged share holder actually existed or not. If share holders are identified and it is established that they have invested money in the purchase of shares then the amount received by the company would be regard as capital receipts and to that extent the observations in the case of Steller Investment Ltd. are correct, but if, on the other hand, the assessee offers new explanation at all or explanation offered is not satisfactory then, the provision of Section 68 may be invoked."
7.2 It is, therefore, imperative on the part of the Assessing Officer to make enquires as to the nature and source of cash credits and bring evidence on record to expose the fact that the loan is a fake one representing an accommodation entry from a paper company. Although, the nature and extent of enquiry has to be case- specific so as to raise a valid presumption to treat the loan as income of the assessee. However, in the case of accommodation entries received through paper companies the Assessing Officer can easily bring certain facts on record to highlight that the loan received actually represents an accommodation entry. It could be proved that the company providing loan exists only on paper, it has no employees, the address given is only a postal address and the company does not have any physical set up at the given address, the same address is used as postal address for multiple companies indulging in to the same activity of providing accommodation entries. It could also possibly be proved that the directors of the companies are non- existent or even if they exist, they are illiterate or semi illiterate individuals who do not have competence or credibility to operate any investment company. Examining the directors on oath under Section 131 could also be a way to carry the enquiry further so as to prove that they may be acting on behalf of some other person for petty amounts received as salary or commission. It could also be proved that the company is receiving huge amount as loan and giving the same to other concerns without any apparent motive of conducting any actual business and the directors of the company are not even aware of such huge transactions made by the company for, considering the doctrine of business purposes, the company should have a reason, other than avoidance of taxes, for undertaking such transactions. Necessary enquiries may also be made from the bank to examine the bank account of the creditor and also to examine the person who has introduced such bank accounts. In some of the cases, It may have been held that the assessee do not have responsibilities to prove the source of the source, but nothing precludes the Assessing Officer to examine even the source of the source as a process of enquiry to bring the truth on record that these companies work in a chain as conduit to provide accommodation entries which does not represent any genuine transactions.

7.3 As discussed earlier, in number of decisions the efforts of the Assessing Officers have been acknowledged and applauded by the appellate authorities where enquires have been made and additional information and evidences have been brought on record to raise a valid presumption as to the cash credit being income of the assessee. It is, therefore, required that the Assessing Officers properly analyse the individual cases before them and, instead of solely depending on the submissions of the assessee and highlighting the deficiency of the same, conduct independent enquiry and bring additional facts and evidences on record to raise a valid presumption, in favour of accommodation entry representing income of the assessee, which could sustain the test of appeal.
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Author
Sunil Kumar Jha
Addl. Commissioner of Income Tax, Central Range, Baroda