Showing posts with label Favor Revenue. Show all posts
Showing posts with label Favor Revenue. Show all posts

Thursday, July 25, 2013

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)
   
   
   

Monday, July 23, 2012

Fact that procedure envisaged by section 153C is somewhat cumbersome and tha

 Fact that procedure envisaged by section 153C is somewhat cumbersome and that person other than searched person is put to some inconvenience cannot be an argument to hold that entire proceedings are bad in law

• There can be some inconveniences in a case where income had already been disclosed by other person who has not been searched; however, there is no cause for any apprehension that income tax authorities will exploit situation to harass assessees where there is evidence adduced by them to show and establish that income reflected by valuable article or books of account or document seized during search has already been disclosed by them; even if they tend to act unreasonably or under misplaced enthusiasm, there are adequate safeguards which can be availed of by those persons

• If AO having jurisdiction over searched person reaches satisfaction that document belongs to a person other than searched person, it is not necessary for him to also reach a firm conclusion/ opinion that document shows undisclosed income belonging to such other person; that is a matter for enquiry, which is to be conducted in manner prescribed by section 153C

[2012] 20 taxmann.com 214 (Delhi)
HIGH COURT OF DELHI

SSP Aviation Ltd.

v.

Deputy Commissioner of Income-tax

Monday, December 19, 2011

S. 153A: Assessments pending in appeal do not abate

S. 153A: Assessments pending in appeal do not abate


For AY 2002-03, an addition of Rs. 99 lakhs was made by the AO & confirmed by the CIT (A). During the pendency of the appeal before the Tribunal, a search under s. 132 was conducted and s. 153A proceedings were initiated. The Tribunal held that in view of the s. 153A notice, the assessments of the six preceding assessment years prior to the date of search abated and that assessments pending in appeal would stand merged in the fresh assessment to be made by the AO u/s 153A pursuant of the search. The AO was directed to reconsider the additions in the s. 153A assessment. On appeal by the department, HELD reversing the Tribunal:

The second proviso to s. 153A provides that “assessments relating to any assessment year falling within the period of six assessment years pending on the date of initiation of the search u/s 132 shall abate“. The words “pending on the date of initiation of search” has to be assigned simple and plain meaning. If the assessment is finalized, there are no “pending proceedings” to be abated. The pendency of an appeal does not mean that the assessment proceedings are pending. The word ‘abatement‘ refers to something, which is pending or alive and its suspension or termination. Proceedings which are complete are not liable for abatement (Circular No.7 of 2003 dated 5.9.2003 referred)

Wednesday, December 14, 2011

Income tax - Whether adjustment made by Revenue u/s 245 can be treated as 'recovery'

 
Whether adjustment made by Revenue u/s 245 can be treated as 'recovery' - YES, rules Delhi HC

NEW DELHI, DEC 02, 2011: THE issues before the Bench are - Whether the provisions of section 220(6) are applicable when an appeal is preferred before the ITAT; Whether adjustment u/s 245 can be regarded as "recovery"; Whether pendency of appellate proceedings by itself alone cannot be a ground not to refund the amount due and payable, and is not sufficient to pass an order of the adjustment for demand on issues which have been decided against the Revenue and whether the conduct and action of the Revenue in recovering the disputed tax in respect of additions on issues which are already covered in favour of the assessee by earlier orders of ITAT and CIT(A) is justified. And the verdict goes against the Revenue.

Facts of the case

The assessee is entitled to refund of Rs.122.57 crores and Rs.107.42 crores for the AYs 2003-04 and 2005-06 respectively. For the AY 2006-07, an assessment order u/s 143(3) read with Section 144C was passed on 20th October, 2010. This created an additional demand of Rs.266.61 crores, (Rs.169 crores on account of income tax and Rs 95,49,06,432/- and Rs.1,91,31,933/- respectively on account of interest u/ss 234B and 234C). Against the said assessment order, the assessee on 19th November, 2010 filed an appeal before the ITAT. Subsequently, on 30th November, 2010, an application for stay of demand was filed. This stay application came up for hearing before the ITAT on 9th December, 2010 and an interim order was passed directing status quo in respect of recovery till 14th December, 2010.

The assessee also filed a letter before the AO informing about the status quo order with copy to the CIT. On 13th December, 2010, one day before the date of hearing, the DCIT informed the assessee that refund of Rs.122.57 crores for AY 2003-04, stands adjusted against the demand for AY 2006-07 vide order dated 7th December, 2010. This communication was made on 13th December, 2010, after the status quo order was passed on 9th December, 2010.

Similarly, the Revenue vide order dated 22nd November, 2010, had made adjustments u/s 245 of the Act for refund of Rs.69.94 crores for AY 2005-06.

The two orders u/s 245 of the Act making adjustment of refunds of Rs.69.94 crores for the AY 2005-06, dated 22nd November, 2010 and Rs.122.57 crores for AY 2003-04 vide order dated 7th December, 2010 but communicated on 13th December, 2010, were made without prior intimation as mandated and required by law.

The contention of the assessee before the ITAT was that the additions or disallowances made in the assessment order dated 20th October, 2010, for AY 2006-07, were partly covered by decisions of the ITAT and the CIT (Appeals) in favour of the assessee and thus demands should not be recovered and there should be an absolute or blanket stay from recovery of the demand in respect of at least the issues which have been decided by the appellate authorities in favour of the assessee. The ITAT instead of examining the said questions while considering the stay application on 20th January, 2011, recorded the statement made by the DR that he had received a letter dated 19th January, 2010 accepting that the earlier action u/s 245 of the Act was bad and proper proceedings u/s 245 would be initiated. Accordingly, the matter was adjourned to 4th February, 2011 "on the request of both the parties".

The assessee filed written submissions dated 27th January, 2011 before the AO, along with the chart indicating how and in what manner, as per the assessee, several issues which had resulted in the additional demand for the AY 2006-07, were covered in their favour by the orders of the appellate authorities in earlier years.

The assessee also filed an application u/s 220(6) of the Act before the AO on 8th November, 2010, that the petitioner should not be treated as an assessee in default and the demand should be kept in abeyance till disposal of the appeal before the ITAT. The ITAT while dealing with the applications was of the opinion that the AO should first dispose of the application u/s 220(6) of the Act.

The AO vide order dated 2nd February, 2011, disposed of the `stay application' and substantially dismissed the same stating inter alia, that refund of Rs.107.41 crores for the AY 2005-06 and Rs.122.57 crores for the AY 2003-04 stand adjusted and that there would be a stay of the balance amount of Rs.36.61 crores pending decision of the appeal before the ITAT, for the AY 2006-07. Another order dated 2nd February, 2011 was passed by the AO u/s 245 of the Act.

The stay application filed by the petitioner thereafter came up for hearing before the ITAT on 11th February, 2011 and the same was disposed of after recording the factual position. ITAT by its order dated 11th February, 2011, held that recovery cannot be equated with adjustment or refund u/s 245. ITAT in this regard has stated that Section 245 does not occur under the Chapter "refund" and, therefore, cannot be equated with recovery. Against this, the assessee filed a writ petition challenging the adjustment of refunds.

Having heard the matter, the High Court held that,

++ whether the stay application u/s 220(6) was maintainable - It may be noted here that the petitioner and Revenue have proceeded on the assumption that the said Section was applicable to the present case though the petitioner had filed an appeal before the ITAT and no appeal was filed before the CIT (Appeals) u/s 246A. The Revenue has rightly submitted that Section 220(6) is not applicable when an appeal is preferred before the ITAT, as it applies only when an assessee has filed an appeal u/s 246 or Section 246A of the Act;

++ an assessee is required to file an appeal before the ITAT against an assessment order u/s 143 (3) read with Section 144C. Appeal u/s 246 or 246A is not maintainable. As per Section 253(1d), against an order under sub-section 3 of Section 143 in pursuance to the direction of the DRP an appeal is maintainable before the ITAT. It may be noted that the ITAT has power to grant stay as an inherent power vested in the appellate authority as well as u/s 254 and the Rules;

++ whether adjustment u/s 245 can be regarded as recovery and the orders passed by the authorities/tribunal - It is not possible to agree with the contention of the Revenue that the word "recovery" cannot and would not include adjustment u/s 245. Recovery can be made by various modes including adjustments. Each AY is treated as separate and independent under the Act. Section 245 of the Act permits the Revenue to recover demand of one year which is pending by adjusting the refund due for another year. The term `refund' has not been defined in the Act and, therefore, it has to be understood and interpreted in the manner in which it is understood in day to day life. The term `recovery' in common parlance includes adjustments;

++ Chapter XVII of the Act deals with "collection and recovery of tax". The said chapter is divided in various parts including deduction of tax at source, payment of advance tax and Part-D is also given the same heading as Chapter XVII "collection and recovery". Chapter XIX deals with refund and Section 245 deals with adjustment/set off of refund of the tax remaining payable in other years. Placement of Section 245 in Chapter XIX relating to refund is a matter of convenience. The provisions relating to `collection and recovery" have been put in an earlier Chapter i.e. Chapter XVII, whereas "refunds" have been placed in a subsequent Chapter XIX. While dealing with the question of refund, the Legislature has provided that the refund can be adjusted or set off against a pending demand. We do not think that set off or adjustment cannot be regarded as a mode of recovery or is not a recovery mechanism. The term "recovery" is comprehensive and includes adjustment thereby reducing the demand;

++ at the same time, different parameters and requisites may apply when the appellate authority considers the request for stay against coercive measures to recover the demand and when stay of adjustment u/s 245 of the Act is prayed for. In the first case, coercive steps are taken with the idea to compel the assessee to pay up or by issue of garnishee notice to recover the amount. In the second case, money is with the Revenue and is refundable but adjusted towards the demand. Thus, while granting stay, the appellate authority or the ITAT (for that matter, even u/s 220(6)), the authority can direct stay of recovery by coercive methods but may not grant stay of adjustment of refund. However, when an order of stay of recovery in simplistic and absolute terms is passed, it would be improper and inappropriate on the part of the Revenue to recover the demand by way of adjustment. In case of doubt or ambiguity, an application for clarification or vacation/modification of stay to allow adjustment can be, and should be filed. But no attempt should be made and it should not appear that the Revenue has tried to over-reach and circumvent the stay order. Obedience and compliance with the stay order in letter and spirit is mandatory. A stay order passed by an appellate/higher authority must be respected. No deviancy or breach should be made;

++ It will be odd for the Revenue to contend that if an issue or contention is decided in favour of the assessee then for the said year refund has to be paid but the refund can be adjusted u/s 245 of the Act, on account of the demand on the same issue in a subsequent year. The broad contention is specious and illogical to be accepted. Similar or same additions can be made in a subsequent year for justifiable cause including contention of the Revenue that they have not accepted the earlier decision but it cannot be accepted as a principle that the Revenue can in ordinary course make adjustments towards a demand on an issue or contention which is already decided in favour of the assessee, though it may be a subject matter of appeal or challenge by the Revenue. Normally in such circumstances, the appellate forum should not permit the Revenue to adjust the demand, for it will be unjust, unequitable and unfair. However, while examining the issue of grant of stay including adjustment, the appellate authority for good grounds and justification made by the Revenue can refuse to grant stay of the adjustment of the refund. In such cases, adjustment can be permitted in exceptional situations pointed out by the Revenue but not as a matter of routine. It may not be possible or proper to postulate and elucidate all such situations but grounds mentioned u/s 241 of the Act are indicative;

++ pendency of appellate proceedings by itself alone cannot be a ground to not to refund the amount due and payable and is not sufficient to pass an order of the adjustment for demand on issues which have been decided against the Revenue;

++ Circular No. 1914 dated 2nd December, 1993 has been issued by CBDT with reference to Section 220(6) of the Act. These are guidelines, when and in what circumstances the demand should not be recovered. This is a reason why in clause (iv), it is mentioned that the words `stay of demand' does not occur u/s 220(6) and the AO should always use the expression `assessee in default' in consonance with the language of section 220(6). Clause (e) occurs and is a sub-clause of clause (ii) of the circular dated 2nd December, 1993. Sub-clause (e) read with (ii) will read as - "In granting stay, the AO may impose such condition as he may think fit" and "he may reserve a right to adjust refund arising, if any, against the demand." The use of word `may' and the expression `reserve a right' clearly shows that the Board itself did not postulate and regard `recovery' as excluding and not covering `adjustment' u/s 245 of the Act. As per the said circular, the AO may reserve a right to adjust, if the circumstances so warrant. In a given case, the AO may not reserve right to refund. Further, reserving a right is different from exercise of right or justification for exercise of a discretionary right/power. Moreover, the circular is not binding on the ITAT;

++ the stand of the Revenue cannot be agreed that in the present year, assessment order has been passed u/s 144C, i.e. after reference to the DRP, and therefore the orders passed by the CIT(Appeals) and ITAT in favour of the petitioner in earlier years have lost significance and do not justify stay of demand in matters covered in favour of the assessee. Decisions of the CIT (Appeals) or the ITAT in favour of the assessee should not be ignored and have not become inconsequential. This is not a valid or good ground to ignore the decisions of the appellate authorities and is also not a good ground to not to stay demand or to allow adjustment u/s 245 of the Act. Revenue has not made out a good cause or reason why adjustment should allowed to recover demand on issues that have been decided in favour of the petitioner in other years;

++ the conduct and action of the respondent-Revenue in recovering the disputed tax in respect of additions to the extent of Rs.96 crores on issues which are already covered against them by the earlier orders of the ITAT or CIT (Appeals) is unjustified and contrary to law. Accordingly, directions are issued to the respondents to refund Rs.30 crores, which will be approximately the tax due on Rs 96 crores. The said refund shall be made within one month from the date when a copy of this order is made available to the respondents;

++ with regard to the interest u/s 234B and 234C recovered on the said Rs.30 crores, no direction for refund is being issued as the respondents have not recovered the full demand. The allegation of the petitioner that several other disputed additions are also covered by the earlier orders of the ITAT/CIT (Appeals) prima facie has merit but it is not possible to quantify and calculate the exact amount. The order passed by the ITAT substantially dismissing the stay application is not correct. One option available is that the ITAT should be asked to examine the said questions and decide the stay application afresh. However, the second option is preferred i.e. to direct the ITAT to hear the appeal filed by the petitioner expeditiously and preferably within a period of four months from the date copy of this order is served in their registry.

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Friday, November 25, 2011

The Indian Hume Pipe Co Ltd vs. ACIT (Bombay High Court)


S. 147: “Full & true disclosure of material facts” means “specific” disclosure of “each” fact


The assessee entered into an agreement in July 2001 for sale of development rights for Rs.39 crores. The transfer was in December 2003. The assessee computed LTCG of Rs. 23.19 crores. The assessee invested in eligible bonds between Feb & June 2002 (after the agreement to sell but before the transfer) and claimed exemption u/s 54EC. During the assessment proceedings, the AO asked for a copy of the agreements with the purchaser and other details which the assessee furnished. A copy each of the s. 54EC bonds (which gave the dates of investments) was also furnished. The AO allowed the deduction as claimed. After the expiry of 4 years from the end of the assessment year, the AO issued a notice u/s 148 claiming that as the investments were made prior to the date of transfer (Dec 2003), s. 54EC deduction was not admissible. The assessee filed a Writ Petition to challenge the reopening on the ground that there was no failure on its part to make a full and true disclosure of material facts. HELD dismissing the Petition:

(i) “Full and true disclosure of material facts” means that the disclosure should not be garbled or hidden in the crevices of the documentary material which has been filed by the assessee with the AO. The assessee must act with candor. A full disclosure is a disclosure of all material facts which does not contain any hidden material or suppression of fact. It must be truthful in all respects;

(ii) On facts, though the AO enquired into the matter and the assessee furnished a copy of the s. 54EC bonds (from which the dates of allotment/ investment were evident), there was no (specific) reference by the assessee to the dates on which the amounts were invested in the s. 54EC bonds. Also, it was it was evident that the AO had not applied his mind to the issue of s. 54EC exemption. Accordingly, the AO was justified in reopening the assessment.

Saturday, October 8, 2011

Despite bar in Proviso to s. 14A, s. 147 reopening for earlier years valid

Honda Siel Power Products Ltd. Vs. Dy. Commissioner of Income Tax & Anr. [SLP No. 19085/2011, dtd. 29.07.2011]
Despite bar in Proviso to s. 14A, s. 147 reopening for earlier years valid


For AY 2000-01, the assessee filed a return on 30.11.2000.

As s. 14A was inserted subsequently by FA 2001 (w.r.e.f 1.4.62) and was tabled in Parliament on 28.2.2001, the assessee did not make any disallowance u/s 14A. The AO also did not make a disallowance in the s. 143 (3) order passed on 7.3.2003. After the expiry of 4 years, the AO sought to reopen the assessment to make a disallowance u/s 14A.

The assessee challenged the reopening on the ground that (i) under the Proviso to s. 14A, a reopening u/s 147 for AY 2001-02 & earlier years was not permissible, (ii) as s. 14A was not on the statute when the ROI was filed, there was no failure to disclose & (iii) as the AO had also sought to rectify u/s 154, he could not reopen u/s 147. The High Court dismissed the Writ Petition inter alia on the ground that “the Proviso to s. 14A bars reassessment but not original assessment on the basis of the retrospective amendment. Though the ROI was filed before s. 14A was enacted, the assessment order was passed subsequently. The AO ought to have applied s. 14A and his failure has resulted in escapement of income. The object and purpose of the Proviso is to ensure that the retrospective amendment is not made as a tool to reopen past cases which have attained finality. On appeal by the assessee to the Supreme Court dismissing the SLP held that the re-opening of assessment is fully justified on the facts and circumstances of the case.
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Saturday, October 1, 2011

S. 147: Despite specific & pointed queries in s. 143(3) assessment, AO cannot be said to have formed any opinion if explicit opinion not recorded

In the balance sheet enclosed with the ROI, the assessee disclosed sundry creditors of Rs. 1.66 crores. In the course of the s. 143 (3) assessment, the AO asked the assessee to submit the entire list of sundry creditors with their names and addresses etc. The assessee submitted confirmations to the extent of Rs. 1.13 crores and though it could not explain Rs. 33 lakhs, the AO assessed only Rs. 19.86 lakhs u/s 41(1) in respect of 7 creditors. The assessee filed an appeal on the issue. After the expiry of 4 years and pursuant to an audit objection, the AO issued a notice u/s 148 seeking to assess the balance of the creditors as well u/s 41(1). The assessee filed a Writ Petition challenging the reopening on the ground that (i) as the AO had consciously assessed only Rs. 19.86 lakhs though he was aware of the creditors' figure being Rs. 1.66 crores, it was a case of "change of opinion" and (ii) as 4 years from the end of the assessment year had elapsed, reopening was not permissible as there was no failure on the part of the assessee to make a full and true disclosure of the material facts. HELD dismissing the Petition:

(i) The argument that as the AO had called for the details of Rs. 1.66 crores and confined the addition only to Rs. 19.66 lakhs, the reopening is on a "change of opinion" is not acceptable. The question of change of opinion arises when the AO forms an opinion and decides not to make an addition and holds that the assessee is correct. Here, though the AO had asked specific and pointed queries with regard to the sundry creditors of Rs. 1.66 crores, he had made an addition of only Rs.19.86 lakhs and there was no discussion, ground or reason why addition of Rs. 32.97 lakhs was not made in-spite of the assessee's failure to furnish conformation and details to that extent. The argument that when the assessment order does not record any explicit opinion on the aspects now sought to be examined, it must be presumed that those aspects were present to the mind of the AO and had been held in favour of the assessee is too far-fetched a proposition to merit acceptance (Consolidated Photo vs. ACIT 281 ITR 394 (Del) followed);

(ii) The argument that there was a full and true disclosure of material facts is not acceptable because though in the regular assessment proceedings, the assessee was asked to furnish details with regard to all creditors, this was not done. The term "failure" on the part of the assessee is not restricted only to the income-tax return but extends also to the assessment proceedings. If the assessee does not disclose or furnish to the AO complete and correct information and details it is required and under an obligation to disclose, there is a failure on its part (Honda Siel Power Products vs. DCIT followed).

Wednesday, September 21, 2011

Whether when someone else deducts tax at source from payments made on beha

I-T - Whether when someone else deducts tax at source from payments made on behalf of assessee, it can be said that assessee has discharged its liability u/s 194C - NO, rules ITAT

THE issues before the Tribunal are - Whether, for attracting the provisions of Sec 194C, the presence of an express agreement vis-à-vis transportation charges, is a condition precedent; Whether liability of section 194C can be said to have been discharged if someone else deducts tax at source from payments made on behalf of the assessee and whether when assessee has diverted interest bearing funds to its sister concerns without charging any interest, disallowance of interest after allocation of interest bearing funds to tax free unit and non tax free unit is tenable, particularly for the period when the commercial production has not commenced. And the verdict goes against the assessee.

Facts of the case

Assessee company is engaged in the business of manufacturing pharmaceuticals products - filed its ROI, claiming deduction of certain expenses - it also paid interest on interest bearing funds and at the same time advanced interest free funds to its sister concerns – A.O. disallowed both these expenses on the grounds that expenses were incurred without deducting TDS and the interest bearing funds were diverted to sister concern without charging any interest. In respect of second issue it was observed by the AO that the assessee was having two units one was tax free and other was not - accordingly, the AO allocated the interest bearing funds among the units and disallowed the interest pertaining to that period during which commercial production was not commenced – CIT (A) affirmed the order of the A.O. – Before the ITAT, the AR of the assessee pleaded that the payments to the transporters were made on behalf of distributor and there was no written agreement between those transporters and the assessee.

After hearing the parties ITAT held that,

++ the distributors were acting merely as agents of the assessee and making the payment of freight charges on behalf of the assessee. Besides, the very fact that the assessee had claimed the impugned expenses as deduction shows that the assessee-company was not only liable to meet the same but had also actually met the same. It cannot therefore be accepted that the assessee was not required to pay freight charges or that it had not paid them. The mere fact that the payment was made by the distributors on behalf of the assessee will not alter the true nature, character and substance of the transaction. All the requirements of section 194C are fulfilled. Therefore it was the statutory responsibility of the assessee to deduct tax at source out of such payments and pay the same to the Government. In this view of the matter, the submission made on behalf of the assessee that the distributors were required to deduct tax at source out of impugned payments is rejected;

++ the submission made on behalf of the assessee that the distributors had deducted tax at source out of such payments and therefore the AO was not justified in making the impugned disallowance does not carry any force for several reasons. One, section 40(a)((ia) fixes the responsibility on the assessee (and none else) claiming deduction of expenses to deduct tax at source and deposit the same with the Government. The aforesaid statutory condition is not satisfied in the present case and therefore the assessee is not entitled to claim deduction of the impugned expenses. Two, as held by the CIT(A), distributors have not deducted tax at source. Three, the judgment in Transmission Corporation of AP Ltd. v. CIT (2002-TII-01-SC-INTL) referred to by the ld. authorized representative is inapplicable to the facts of the case and also for the reason that it has not been rendered in the context of section 40(a)(ia);

++ in CIT v. Abhishek Industries (2006-TIOL-314-HC-P&H-IT), the jurisdictional High Court has held that entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds, etc. do not have any different colour. Whatever are the receipts in the business; they have the colour of business receipts and have no separate identification. Sources have no concern whatsoever. Though the aforesaid judgment has been rendered in the context of section 36(1)(iii), the observations of the Hon'ble High Court as referred to above are quite apposite on the facts and in the circumstances of the case before us. Baddi unit and Dera Bassi unit are sister units of the same assessee. Dera Bassi unit has diverted part of its funds including interest-bearing funds to Baddi unit. The funds so transferred have cost. If the funds diverted are borrowed funds, then the cost is interest paid by the unit diverting its funds. If it is its own money (e.g., internal accruals, etc.), the cost is the amount of interest foregone by the unit diverting its funds. Quite obviously, not only the funds so transferred by Dera Bassi unit to Baddi unit but also interest thereon would need to be allocated to Baddi unit otherwise the profits of Baddi unit, which are exempt from tax, would stand inflated while the profits of taxable unit being Dera Bassi unit would stand artificially suppressed. In this view of the matter, the action of the AO/CIT(A) in allocating the impugned funds and interest thereon to Baddi unit and thereby capitalizing the same in terms of the proviso to u/s 36(1)(iii) is held to be in order. Ground No. 4 taken by the assessee is dismissed.

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Wednesday, September 14, 2011

Delhi High Court: Search Assessment u/s 153A Does Not Require Issue of Notice U/s 143(2)

Delhi High Court: Search Assessment u/s 153A Does Not Require Issue of Notice U/s 143(2)

Issue of notice u/s 143(2) before passing search assessment order has been controversial issue . This is for simple reason that  no clear provision regarding issue of notice has been given in the Income T Act in case of search proceeding u/s 153A . Therefore, among many grounds on which counsel for assessee challenge order by A.O u/s 153A is issuance of notice u/s 143(2).

Notice in Search Case u/s 153A

In recent past , Tribunals have given verdict that in case of search proceeding u/s 153A also , the notice u/s 143(2) is necessary . In fact , ITAT, Agra , in its order dt 30/11/2010 in case of Narendra Singh vs ITO 138 TTJ 615 held that notice u/s 143(2) is mandatory in case of search case u/s 153A.
However, Delhi High Court in a very recent judgment in case of Ashok Chadha vs CIT held that the notice u/s 143(2) is not mandatory for search assessment u/s 153A.
Search case issue before Delhi High Court
"(a) Whether the issue of notice under Section 143(2) of the Income Tax Act is mandatory for finalization of assessment under Section 153A? (b) Whether the findings of the authorities below upholding addition of Rs.10 lac of cash seized from Mr. D.S. Rawat in the hands of the Assessee was perverse and required to be set aside? "

The Court held on the issue of notice u/s 143(2) in case of search assessment u/s 153A as under

11. It is also to be noted that Section 153A provides for the procedure for assessment in case of search or requisition. Sub section (1) starts with non-obstante clause stating that it was 'notwithstanding? anything contained in sections 147, 148 and 149, etc. Clause(a) thereof provides for issuance of notice to the person searched under Section 132 or where documents etc are requisitioned under Section 132(A), to furnish a return of income. This clause nowhere prescribes for issuance of notice under Section 143(2). Learned counsel for the assessee/appellant sought to contend that the words, "so far as may be applicable" made it mandatory for issuance of notice under Section 143(2) since the return filed in response to notice under Section 153A was to be treated as one under Section 139. Learned counsel relies upon R. Dalmia v CIT (supra) wherein the question of issue of notice under Section 143(2) was examined with reference to Section 148 by the Supreme Court in the context of Section 147. The Apex Court held as under:
"As to the argument based upon Sections 144-A, 246 and 263, we do not doubt that assessments under Section 143 and assessments and reassessments under Section 147 are different, but in making assessment and re-assessments under Section 147 the procedure laid down in Sections subsequent to Section 139, including that laid down by Section 144B, has to be followed."
12. The case of R. Dalmia v CIT (supra) primarily was with regard to applicability of section 144B and Section 153 (since omitted with effect from 01.04.1989) to the assessment made under section 147 and 148 and thus cannot be said to be the decision laying down the law regarding mandatory issue of notice under Section 143(2).
13. The words "so far as may be" in clause (a) of sub section (1) of Section 153A could not be interpreted that the issue of notice under Section 143(2) was mandatory in case of assessment under Section 153A. The use of the words, "so far as may be" cannot be stretched to the extent of mandatory issue of notice under Section 143(2). As is noted, a specific notice was required to be issued under Clause (a) of sub-section (1) of Section 153A calling upon the persons searched or requisitioned to file return. That being so, no further notice under Section 143(2) could be contemplated for assessment under Section 153A.
14. No specific notice was required under section 143(2) of the Act when the notice in the present case as required under Section 153 (A) (1) (a) of the Act was already given. In addition, the two questionnaires issued to the assessee were sufficient so as to give notice to the assessee, asking him to attend the office of the AO in person or through a representative duly authorized in writing or produce or cause to be produced at the given time any documents, accounts, and any other evidence on which he may rely in support of the return filed by him.

In nutshell, the controversy regarding the issue of notice u/s 143(2) in case of search assessment u/s 153A has been set to rest by Hon'ble Delhi High Court.

Sunday, September 11, 2011

Some recent past case. (Favor Revenue)

2011-TIOL-89-SC-IT + it sc story : - ITO Vs M/s Mangat Ram Norata Ram Narwana (Dated: May 5, 2011 )

Income tax - Sections 142(1), 143(3), 148, 271(1)(a) & (c), 276C, 277, 278 - Whether, for the purpose of prosecution, it is statutorily required of the partner of the assessee-firm to sign the revised return showing higher income and leading to imposition of penalty - Whether when the partner fails to raise the issue of not signing the revised return and the assessee-firm pays up the penalty imposed, such acts impliedly amounts to admission for the purpose of prosecution.- Revenue's appeal allowed: SUPREME COURT
2011-TIOL-529-HC-AHM-IT : - Dy.CIT Vs Pradip N Desai (Dated: July 6, 2011)

Income Tax - Section 32 - Whethe the depreciation at the rate of 50% can be claimed in respect of vehicles given on lease. - Revenue's appeal allowed : GUJARAT HIGH COURT
2011-TIOL-533-HC-AHM-IT : - CIT, Ahmedabad Vs Gurukrupa Developers (Dated: July 27, 2011)

Income Tax - Section 113 - Whether the proviso to Section 113 which is in respect to the surcharge on the undisclosed income is clarificatory in nature. - Revenue's appeal allowed: GUJARAT HIGH COURT

2011-TIOL-543-HC-AHM-IT : - CIT Vs Saurashtra Kutch Stock Exchange Ltd (Dated: August 8, 2011)

Income tax – Section 12A, 13(3) – Whether once the CIT grants approval for registration of the trust u/s 12A, the AO is not required to re-examine the entire question of the object and purpose of the trust even though the approval was given with the said condition as the CIT cannot keep the very foundational issue open to be judged by the AO – Whether when there is no conclusion that any part of the funds were diverted or applied as not permitted under sub-section (3) of Section 13, the exemption cannot be denied only on the basis of some irregularities observed by SEBI in managing the funds of the trust. - Revenue's appeal dismissed : GUJARAT HIGH COURT
2011-TIOL-519-HC-DEL-IT : - CIT, Delhi Vs Industrial Finance Corporation Of India Ltd (Dated: July 11, 2011)

Income tax – Sections 36(1)(viia)(c), 36(1)(vii), 41(4A) – Whether the deduction claimed for the special reserve can be disallowed for an amount which is transferred from special reserve account to other account as per the amendment in section 36(1)(viii) which required to also maintain the amount in the reserve account though it is not retrospective – Whether the assessee is entitled to claim deduction for the amount of interest offered on NPA account which is not realized. - Revenue's appeal allowed: DELHI HIGH COURT
2011-TIOL-519-HC-DEL-IT : - CIT, Delhi Vs Industrial Finance Corporation Of India Ltd (Dated: July 11, 2011)

Income tax – Sections 36(1)(viia)(c), 36(1)(vii), 41(4A) – Whether the deduction claimed for the special reserve can be disallowed for an amount which is transferred from special reserve account to other account as per the amendment in section 36(1)(viii) which required to also maintain the amount in the reserve account though it is not retrospective – Whether the assessee is entitled to claim deduction for the amount of interest offered on NPA account which is not realized. - Revenue's appeal allowed: DELHI HIGH COURT
2011-TIOL-559-HC-KAR-IT : - CIT, Bangalore Vs Dr T K Dayalu (Dated: June 20, 2011)

Income Tax - Section 2(47)(v), 45, 143(2) – Whether, in respect of development agreement, the relevant date for attracting capital gain is the date on which possession is handed over to the developer or the date of completion of the project. - Revenue's appeal allowed : KARNATAKA HIGH COURT
2011-TIOL-564-HC-KAR-IT : - CIT, Bangalore Vs M/s Ganjam Nagappa And Sons (HUF) (Dated: May 26, 2011)

Income Tax - Sections 147, 148 - Whether the Tribunal can interfere with the concurrent findings on the question of fact when no cogent reasons are given for interfering. - Revenue's appeal allowed : KARNATAKA HIGH COURT
2011-TIOL-536-HC-MAD-IT : - CIT, Madurai Vs K A S Mathivanan (Dated: August 1, 2011)

Income Tax - Whether allowance can be made merely because future payments were made out of the funds said to be kept in the suspense account - Revenue's appeal allowed : MADRAS HIGH COURT
2011-TIOL-496-HC-P&H-IT : - CIT, Chandigarh Vs Sanjay Chhabra (Dated: March 31, 2011)

Income tax – Sections 69, 133A – Unexplained Investment – Whether when the assessee fails to rebut the unexplained investment in the purchase of fuits, and the CIT(A) and Tribunal fail to record the fact that such entries were made in the books, the addition made by the AO is sustainable. - Revenue's appeal allowed : PUNJAB AND HARYANA HIGH COURT;
2011-TIOL-567-HC-P&H-IT : - CIT Vs Mukta Metal Works (Dated: February 28, 2011)

Income Tax – Section 158BC, 158BD - Whether the office note appended to section 158BC constitutes a valid satisfaction note within the parameter of section 158BD of the Act – Whether any inference could be drawn from the entries in the seized diary during search, so as to make additions on account of undisclosed income - Whether the Tribunal is duty bound to consider the additional evidence in the form of report of forensic science laboratory in the interest of justice if the same is authentic and necessary for the decision of the issue raised before it.- Revenue's appeal allowed : PUNJAB AND HARYANA HIGH COURT

Sunday, August 21, 2011

If assessee not ask for reasons,ITAT cannot remand to AO

If assessee does not ask for s. 147 reasons & object to reopening, ITAT cannot remand to AO & give assessee another opportunity

The assessee’s assessment was reopened u/s 147. The assessee did not ask for the recorded reasons. Even before the CIT(A), though the assessee challenged the reopening as being without jurisdiction, it did not ask for the reasons. Before the Tribunal, the assessee claimed that it was not aware that it could demand the reasons and object thereto. Pursuant thereto the Tribunal remitted the case to the AO with direction that the reasons & opportunity to object be provided and denovo assessment be framed if objections were rejected. On appeal by the department, HELD allowing the appeal:

The “short-cut method” adopted by the Tribunal is totally unsustainable. While the AO is required to record reasons, Law does not mandate the AO to suo moto supply the reasons to the assessee. It is for the assessee to demand the reasons and raise objections to the reopening which the AO is required to dispose of by passing a speaking order. As the assessee did not ask for the reasons and instead participated in the reassessment proceedings, the Tribunal could not have restored the matter back to the file of the AO and give another opportunity to the assessee to raise objections to the “reasons to believe” recorded by the AO. It was the assessee‟s own creation that it did not ask for the reasons or raise objection thereto. Merely because the assessee was oblivious of such a right would not mean that the Tribunal should have granted this right to the assessee, that too, at the stage when the matter was before the Tribunal and travelled much beyond the AO‟s jurisdiction. It is trite that what cannot be done directly, it is not allowed indirectly as well. This novel and ingenuousness method adopted by the Tribunal in setting aside the reassessment orders on merits cannot be accepted.

However, also held that as the assessee had challenged the validity of reassessment before the CIT(A), it ought to have been provided with the reasons and so the matter was remitted for supply of reasons.

........
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Dear Friends : The emails are schedule to be posted in the blog (itronline.blogspot.com)and will sent to the group on various dates and time fixed. Instead of sending it on one day.
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Monday, July 25, 2011

Legal error apparent on record can be rectified.

Legal error apparent on record can be corrected by the AO in exercise of his power under s 154, as held byDelHC in Mitsubishi Corporation v CIT & AnrIn favour of: The revenue; ITA Nos 486–488 of 2008........
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Dear Friends : The emails are schedule to be posted in the blog (itronline.blogspot.com)and will sent to the group on various dates and time fixed. Instead of sending it on one day.
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Sunday, February 20, 2011

Penalty [Section 271(1)(c)] : Where ITAT, hold assessee's explaination reasonable

Income-tax - Penalty [Section 271(1)(c)] : Where Tribunal, holding assessee's explanations to be reasonable, deleted penalty under section 271(1)(c) - [2011] 9 taxmann.com 268 (Delhi)
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Wednesday, February 16, 2011

Sec 80 I , coating of wire NOT manufacturing

Income-tax : Process of coating with oxides of Noble Metals on Titanium Metal Electrode / Anode bringing about a change in its character and user for making it fit for use in production of chlorine and caustic soda in an electrolytic process is "manufacture" or "production" of "article" or "thing" within meaning of section 80-IA.

    l  The conclusion drawn by the Tribunal that by coating electrode or titanium anodes the assessee was not "manufacturing" or "producing" an "article" or "thing" within the meaning of section 80-IA(2) was erroneous, being contrary to mandatory provision of section 80-IA and contrary to and inconsistent with the evidence on record.

 

[2011] 9 taxmann.com 234 (Delhi)

HIGH COURT OF DELHI

Titanor Components Ltd.

v.

CIT

SANJAY KISHAN KAUL & RAJIV SHAKDHER, JJ.

ITA NO. 24/1999

FEBRUARY 4, 2011

 

JUDGMENT

 

Rajiv Shakdher, J

1. This is an appeal preferred under section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'IT Act') by the assessee against the judgment of the Income Tax Appellate Tribunal (hereinafter referred to as the 'Tribunal') dated 24.04.1999 passed in ITA No. 2079/D/98 pertaining to assessment year 1994-95.

1.1 The appellant is aggrieved by the impugned judgment inasmuch as it has resulted in denial of deduction claimed by the assessee under the provisions of section 80IA of the IT. Act. The captioned appeal against the impugned judgment was admitted on 18.08.2000. By this order, the following questions of law were framed :-

"(i). Whether coating with oxides of Noble Metals on Titanium Metal Electrode / Anode bringing about a change in its character and user for making it fit for use in the production of chlorine and caustic soda in an electrolytic process is "manufacture" or "production" of "article" or "thing" within the meaning of section 80-IA of the Income Tax Act, 1961?

(ii). Whether the conclusion, drawn by the Income Tax Appellate Tribunal that by coating electrode or titanium anodes the appellant was not "manufacturing" or "producing" an "article" or "thing" within the meaning of section 80IA(2) of the Income Tax Act, 1961, is erroneous being -

  (a)  Contrary to mandatory provision of section 80IA;

  (b)  Contrary to and inconsistent with the evidence on record?"

2. The brief facts which have led to the present appeal are as follows:

2.1 The assessee applied to the Government of India through Ministry of Industry, Department of Industrial Development for a licence to set up a plant to manufacture coated metal electrodes at Kundaim Industrial Area in north Goa. The assessee was issued a licence on 16.10.1990. The assessee also applied for and was issued a registration certificate by the Excise Department vide letter dated 26.06.1993. In the interregnum, i.e., on 26.02.1993 the assessee had entered into an agreement (in short 'agreement') with a company by the name of M/s UHDE India Limited (hereinafter referred to as 'UHDE') for coating titanium substrates. This contract was evidently executed between the assessee and UHDE with the knowledge of another company by the name of Indian Petro Chemicals Corporation Ltd. (hereinafter referred to as 'IPCL').

2.2 It appears that UHDE had undertaken an obligation to supply coated titanium substrates to IPCL for the use in their chlorine-caustic soda plant. By virtue of this agreement IPCL was to supply the titanium substrates through UHDE to the assessee free of cost, to enable the assessee to execute the job work, which entailed coating of, the titanium substrates, in terms of the specifications provided for in the aforementioned agreement.

2.3 Under the said agreement the assessee was required to coat the titanium substrates numbering 1212 at a total cost of Rs 6,42,84,480/-. The per square metre cost of coating titanium substrates was pegged at Rs 19,500/-. Importantly, the cost agreed to did not include excise duty which was required to be reimbursed by UHDE. Furthermore, the assessee was also obliged to dispatch the coated titanium substrates to another company, i.e., one Alpha Label India Ltd (hereinafter referred to as 'Alpha') alongwith necessary documentation, which included, the excise gate pass; so as to enable the said entity from claiming MOD VAT credit in respect of the excise duty. Evidently, Alpha was required to undertake further fabrication work to manufacture "membrane cell elements". It is not disputed that the assessee executed the contract arrived at between itself and UHDE.

3. With this background the assessee filed its return for the relevant assessment year, i.e., 1994-95. The assessee's return was a loss return which, pegged the loss at Rs 1,28,71,873/-. During the course of assessment, the assessing officer noted that the assessee had claimed a deduction under the provisions of section 80IA of the IT. Act amounting to Rs 2,62,20,996/- against a gross total income of Rs 1,33,49,093/-.

3.1 It is pertinent to note that the assessee avers in the appeal that the claim for deduction under section 80IA of the IT Act was evidently reduced to a sum of Rs 1,46,24,648/- and furthermore, the overall deduction under section 80IA of the IT. Act would be limited to the gross total income under section 80A(2) of the IT. Act.

4. The assessing officer was evidently of the view that the deduction under section 80IA of the IT. Act was not available to the assessee as the "process" whereby, the titanium substrates were coated by the assessee did not constitute "manufacture" within the meaning of the said provision. The assessee, however, on its part attempted to furnish an explanation vide letters dated 28.02.1997 and 07.03.1997.

4.1 Briefly, the assessee attempted to explain that titanium substrates were received by it through UHDE as free issue material which, the assessee was required to coat with chemicals (Noble Metal Oxide), as per the specifications contained in its agreement with the UHDE. For its efforts the assessee had received consideration, as stipulated in the aforementioned agreement against an expenditure of Rs 1,67,80,525/- incurred by it towards raw material consisting of Noble Metals, such as, ruthenium and iridium. In addition the assessee claimed it had paid excise duty to the tune of Rs 1,60,45,945/-.

4.2 The sum and substance of the explanation furnished by the assessee was that a commercially distinct product had come into existence after it was processed by the assessee.

4.3 Before the assessing officer reliance was placed on the provisions of section 80IA and, in particular, sub-section 2(iii) read with sub-section 12(b) and, the explanation to section 33B to contend that the word "manufacture" in section 80IA necessarily would include processing of goods.

5. The assessing officer, however, rejected the contention of the assessee and proceeded to hold that the processing of goods could not be equated with manufacture and production of articles. In his view, chemical coating of titanium substrates did not result in it being transformed into an entirely new commercial commodity. Thus, the assessing officer concluded that processing in the instant case, did not partake the attributes of manufacture or production of an article or thing as envisaged in section 80IA of the I.T. Act.

6. Aggrieved by the order the assessee preferred an appeal to the Commissioner of Income Tax (Appeal) [hereinafter referred to as 'CIT(A)']. The CIT(A) sustained the order of the assessing officer. In arriving at his conclusion, the CIT(A) placed reliance on the judgment of the Bombay High Court in the case of CIT v. Sterling Foods (Goa) 213 ITR 851, even though the said decision pertained to the provisions of section 80HH of the IT. Act, since it used the same expression 'manufacture' or 'production' of articles.

6.1 On facts, the CIT(A) more or less replicated the view of the assessing officer by holding that coating of titanium substrates by the assessee did not result in its conversion into an entirely new commodity. The underlying theme of CIT(A)'s order is that titanium substrates and titanium anodes are one and the same thing; therefore, all that the assessee did was to coat the said articles with noble metal oxides which, according to the CIT(A), did not result in emergence of an entirely new commodity.

7. The assessee being aggrieved preferred an appeal to the Tribunal. The Tribunal sustained the view of the authorities below.

7.1 The thrust of the Tribunal's view appears to be that the expression used by the assessee in its agreement with UHDE to describe the articles received, i.e., titanium substrates (which, as noticed above, were free issue material supplied for the purposes of coating them with noble metal oxides) was a "misnomer". For this purpose, the Tribunal relied upon the observations set out in the encyclopedia of chemical technology authored evidently by Kirk and Other (volume 15 at pages 172-183).

7.2 In other words, the Tribunal was of the view that what the assessee was receiving under its agreement with UDHE as free issue material was nothing but uncoated titanium metal anodes which on receipt were subjected to a process of coating by the assessee. In the opinion of the Tribunal the process of coating carried out by the assessee only enhanced the "longevity" and the "utility" of the original article by making it resistant to corrosion and, increasing its "conductivity" and "dimensional stability". In sum and substance the Tribunal concluded that a distinct commercial commodity did not emerge by virtue of the process employed by the assessee on the original article. According to the Tribunal, what the assessee received were titanium electrodes. These were, as per the Tribunal, nothing but titanium metal anodes; which remained unaltered in its character even after the conclusion of the process of coating. The discussion in this regard is found in paragraphs 22 and 24 of the impugned judgment of the Tribunal.

7.3 The Tribunal went on to support the aforementioned analysis by adverting to the fact that the assessee's agreement with UHDE disclosed that the coated titanium metal anodes had to be dispatched by it, for further fabrication, to one Alpha for the purposes of manufacturing membrane cell element. In the Tribunal's wisdom, this demonstrated that in order to convert a coated titanium metal anode into a "useful commercial commodity" it would require further processing. Consequently, the Tribunal repelled the contention of the assessee in regard to its claim for deduction under section 80IA of the IT. Act.

8. The instant appeal impugns this very reasoning of the Tribunal.

8.1 In support of the appeal, arguments on behalf of the assessee were addressed by Mr. Jain, while in opposition Ms Bansal appeared on behalf of the department.

8.2 Mr Jain briefly reiterated the grounds taken before the authorities below and, in particular, stressed on the opinions rendered by two experts, i.e., Dr. (Mrs.) K. Gadgil and Mr M.K. Sarkar, professors with the Indian Institute of Technology, Delhi (in short, I.I.T. Delhi) to demonstrate that the process undertaken by the assessee actually resulted in production of an anode and hence, a new article emerged contrary to what had been held by the authorities below. Mr Jain submitted that the test for ascertaining as to whether a new article was produced was: as had been settled by courts in several decisions rendered in the past; the coming into existence of a new marketable commodity. It was contended, the fact that this article had been subjected to a process which resulted in manufacture, and that the manufactured article was marketable was apparent on perusal of the material placed on record, i.e., invoices, excise gate passes and the agreement entered into by it with UHDE as also the opinion of the experts. In support of his submissions the learned counsel relied upon the following : CIT v. Oracle Software India ltd. (2010) 2 SCC 677; Vijay Ship Breaking Corpn. & Ors. v. CIT (2008) 14 DTR (SC) 74; CIT v. Tamil Nadu Heat Treatment and Fetting Services (P.) Ltd. (1999) 238 ITR 529; CIT v. Laxmi Art Studio (2001) 249 ITR 710; and CIT v. Emptee Poly-Yarn Private Limited (2010) 2 SCC 720.

9. As against this, Ms Bansal largely relied upon the judgment of the Tribunal and the authorities below. In particular, Ms Bansal stressed upon the fact that what the assessee had undertaken was job work and, in lieu thereof, the consideration received was nothing but job work charges. The learned counsel contended that the findings of fact returned by the Tribunal and the authorities below, clearly demonstrated that no new commodity had came into existence as contended by the assessee. In support of this submission she laid great stress on the observations made by the Tribunal in paragraph 25 of its judgment (which have already been noticed by us hereinabove) to the effect that the coated titanium substrates required further fabrication and, for this purpose they had to be dispatched under the agreement with UHDE by the assessee to one Alpha. The learned counsel in support of her contentions relied upon the judgment in the case of Bhagat Construction Co. Pvt Ltd. v. CIT (1998) 232 ITR 722.

10. We have heard the learned counsel for the parties and perused the judgment and orders of the authorities below, including the material placed before us.

10.1 On consideration of the material, in our view the following facts have emerged :

   (i)  the assessee had applied for a licence to set up an industry to manufacture coated titanium metal anodes. This licence was issued to the assessee on 16.10.1990;

  (ii)  On 26.02.1993 the assessee had entered into an agreement with UHDE for coating titanium substrates. It is pertinent to note at this stage (as noticed above) that while the department all along has contended that the titanium substrates are nothing but uncoated titanium metal anodes, the assessee on the other hand has taken the stand that titanium substrates are nothing but supports, which after coating are transformed into anodes;

(iii)  the assessee was issued a registration certificate by the Excise Department on 26.06.1993 in respect of the process of coating it undertook qua the article it received from UDHE. We are consciously not using, at this juncture, either the expression titanium substrate or titanium metal anode as there is contest between the parties on this very aspect;

(iv)  the assessee has in its invoices issued to UHDE sought recovery of both, the charges towards coating of the article received as well as in respect of excise duty leviable on it. Towards excise duty the assessee has paid a sum of Rs 1,60,45,945/-. There is no dispute raised before us with regard to production of invoices and the relevant gate passes before the assessing officer for scrutiny;

  (v)  In terms of the agreement arrived at between the assessee and UHDE the coated articles were sent to an entity by the name of Alpha for further fabrication to manufacture membrane cell elements;

(vi)  the assessee had placed before the authorities below, a flow chart with respect to the process employed in converting the article received from UDHE into a finished product. For the sake of convenience the same is extracted hereinbelow:


(vii)  the assessee had supported its contention made to the effect that, the process undertaken by it involved a transformation of the original material into a distinctly new marketable product, by relying upon the following material: extracts from the encyclopedia of chemical technology authored by Kirk and Othmer (volume 15 page 172-183); the opinion of professors Dr. (Mrs) K. Gadgil and Mr Sarkar of I.I.T., Delhi, who, in their opinion had placed reliance on relevant contents of the aforementioned encyclopedia of chemical technology; and lastly on invoices and excise gate passes; to which reference is already made hereinabove by us.

11. With aforesaid material on record let us examine what it briefly reveals :-

11.1 A reading of the extracts from the encyclopedia of chemical technology seems to suggest that in a chlor-alkali industry electrolytic process is inevitably used. An electrolytic process broadly involves de-composition of a liquid, which contains ions, by electrolysis. Electrolysis is nothing but de-composition of the substance by application of electric current. Therefore, what was crucial for IPCL, who happens to be manufacturer of Chlorine-Caustic Soda that they had, for their purposes in place anodes, which allowed passage of electricity without building up non-corrodible oxide coating on the surface.

11.2 As is therefore evident that an anode is really one of the terminals through which electrons pass in an electrolytic process; the other terminal is commonly referred to as a cathode.

11.3 The Tribunal upon reading the following passage came to the conclusion that what was supplied to the assessee was nothing but an uncoated anode. For the sake of convenience the passages are extracted hereinbelow:

"In response to the needs of the aerospace industry, an important technological breakthrough in the development of metal anodes took place in the 1950s when titanium became commercially available in large quantities. The excellent corrosion resistance of titanium in a variety of solutions and its self-oxidizing, valve-metal characteristic quickly were recognized to be of value for electrochemical systems. Titanium as an anode does not pass current satisfactorily because of the build up of noncorrodible oxide coatings on the surface, but with the addition of a noncorrodible metal coating, a useful anode can be produced. Extensive research work culminated in the filing of patents in 1957 in the Netherlands the U.K. (5-6) in 1958, which led to a group of patents (7-9) where oxides of noble metals are used in the coating of titanium, in particular, ruthenium oxide in combination with other metals and oxides. These precious metal oxide coatings have received worldwide acceptance in the chlor-alkali industry and have resulted in considerable power savings in the production of chlorine. By optimizing the characteristics of these anodes, new cell designs and technology for the production of chlorine have been developed."

11.4 A perusal of a further extract from the very same encyclopedia of chemical technology would show that a commercially distinct product, which is ubiquitously described as precious metal anode or noble metal coated titanium or dimensionally stable anodes etc., come into existence. The relevant extract from the said encyclopedia succeeding the extract set out hereinabove reads as follows :-

"A Second group of patents (10-12) covers platinum and mixtures of platinum-iridium deposited thermally or electrolytically on the titanium substrate. Such anodes have their main application in cathodic protection and the production of sodium chlorate.

These composite anodes, with titanium as the base metal, have been described variously as precious metal anodes (PMA), noble-metal coated titanium (NMT), dimensionally stable anodes (DSA), and platinized titanium anodes (PTA)."

11.5 The fact that there is a distinct different product produced is borne out from the following extracts under the heading "ruthenium titanium oxides".

"Scanning electron micrographs of ruthenium titanium oxide coatings show a characteristic microcracked surface (23). This cracking occurs early in the coating preparation, as solvent evaporates from the surface to form a gel of unreacted ruthenium and titanium compounds. As the coating is baked at higher temperatures, the cracks increase in size because of volume contraction of the gel. A fully baked anode coating has the appearance shown in Figure I and a surface area factor of 180-230 times the geometrical area, as measured by BET (Brunauer-Emmett-Teller) nitrogen adsorption. This large surface area contributes to the low chlorine discharge potential of these types of coatings, providing a large number of catalytic sites for gas evolution while minimizing concentration polarization…….

Chlorine-Caustic. The widest application and most rapid acceptance of metal anodes has been in the chlorine-caustic industry, where ruthenium-titanium oxide DSA coatings are used. In the mid 1960s, chlorine producers were shifting worldwide to mercury cells to take advantage of the high current densities attainable. For this reason, and because of more favourable economics, the DSA initially was first operated commercially in mercury cells. Anode structures were designed to replace graphite anodes and conversion could be completed without modification of the cells (see Alkali and chlorine products)." (emphasis is ours)

11.6 Prof. Dr. (Mrs.) K. Gadgil and Mr Sarkar of the IIT, Delhi while relying upon the said encyclopedia opined as follows:

"In manufacture of caustic soda-chlorine by electrolytic process, the positive terminal Anode should have the property that it should facilitate liberation of chlorine and suppress production of Oxygen from the aquous electrolyte (sodium chloride solution). This requires operations at a very low current density with high resistance to oxidation corrosion).

Pure titanium metal cannot be used because of quick coverage of surface by non-conducting Titanium dioxide which increases the resistance and voltage quickly to a level where high amount of oxygen is produced, besides reducing conducting surface area in a very short time. Bare Titanium is not a Anode. Consequently industrial chlorine cannot be produced. Best solution to this problem was found by coating the surface of Titanium with Noble metal oxides (which are conducting) in particular, Ruthenium oxide with or without other noble metals, such as Iridium.

Coated Titanium Metal Anodes are manufactured by coating of Titanium substrate with solution of mixed metal oxides, followed by drying and controlled baking, with strict process control. The formulae of coating solutions and process of their manufacture are closely guarded secrets of Technology suppliers.

It has been found that such coated metal titanium anodes have micro-cracked surfaces having internal surface area around 200 times that of geometrical surface, with high amount of conductivity even in presence of Titanium oxides. Through these micro-cracks high rate of chlorine release is facilitated. IN ABSENCE OF THE NOBLE METAL OXIDE COATING, THE CURRENT WILL FACE ENORMOUS RESISTANCE TO PASS THROUGH THE BASE TITANIUM SURFACE DUE TO THE FORMATION OF TITANIUM OXIDE FILM AND ELECTROLYSIS DOES NOT TAKE PLACE TO PRODUCE INDUSTRIAL CHLORINE....

TITANIUM ONLY ACTS AS A SUBSTRATE (SUPPORT) FOR SUPPORTING THE REAL ANODE WHICH IS NOBLE, METAL OXIDES

In summary, it can be stated that bare titanium metal is not an Anode and therefore, cannot be used as a Metal Anode for caustic soda — chlorine manufacture by electrolytic process. Whereas, mixed metal oxide coated titanium metal Anode provides excellent conductivity, resistance to corrosion and dimential stability necessary for manufacture of caustic soda and chlorine by electrolytic process all over the world. Technology of coating composition and methods of manufacture of anodes, however, tend to get upgraded continuously through R&D efforts of Technology suppliers." (emphasis is ours)

11.7 A reading of the aforesaid opinion alongwith the extracts from the encyclopedia quite clearly indicates that, according to the experts, titanium substrates is only used for the purpose of supporting production of a real anode, that is, a noble metal oxide. A bare titanium is not an anode.

11.8 It is important to bear in mind that the department did not produce any material by way of affidavit of any chemical analyst or an expert in chemical technology to counter the view of professor Mr. Sarkar and Dr. (Mrs.) K. Gadgil. The authorities below had donned upon themselves the role of an expert by reading an extract in a manner which perhaps suited their conclusion.

11.9 In our view such an approach is flawed; while sitting as an adjudicator, courts have to base at times, their decision; on material produced before it on an issue which requires expert input - therefore its decision not to accept material placed before it should ordinarily also be based on a similarly persuasive evidence, unless the material placed before it is completely unreliable. As noted above, the department did not adduce any evidence in support of its contention, which was contrary to that raised by the assessee.

12. What lends credence to the submissions made on behalf of the assessee which is that, coating of titanium substrates leads to emergence of a distinct product, is the fact that the process undertaken by the assessee has been subjected to excise duty by another statutory authority of the State. This crucial aspect of the matter we find has not been adverted to by any of the authorities below including the Tribunal even though the material as well as submission with regard to this aspect was squarely putforth by the assessee.

12.1 It is trite law that only that process is recognized as constituting manufacture which results in emergence of a distinct article on being subjected to either treatment, or labour or even manipulation, [see UOI v. Delhi Cloth & General Mills (1963) Supp (1) SCR 586]. The Supreme Court in the aforementioned case while, quoting from the Permanent Edition Of Words And Phrases Vol. 26 cited with approval the following passage:

"Manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use."

12.2 But for the purposes of imposition of excise duty it is not enough that manufacture takes place, it should result in production of an article which is marketable though not necessarily marketed. This aspect of the matter has been dealt with by the Supreme Court in several decisions. We do not wish to burden the judgment with all those cases; however only to highlight the contours of this principle we intend to refer to the following two judgments.

12.3 First being: South Bihar Sugar Mills Ltd. v. UOI & Ors. (1968) 3 SCR 21. In South Bihar Sugar Mills (supra) case [in which Delhi Cloth Mills (Supra) was cited with approval] the Supreme Court after analyzing the scientific evidence put forth both by the assessee and the department came to the conclusion that, in manufacture of sugar, kiln gas was produced by the assessee, which was not carbon die oxide as known to the market and hence, could not be made amenable to imposition of excise duty. The relevant observations is extracted hereinbelow:

"16. The Act charges duty on manufacture of goods. The word 'manufacture' implies a change but every change in the raw material is not manufacture. There must be such a transformation that a new and different article must emerge having a distinctive name, character or use. They duty is levied on goods. As the act does not define goods, the legislature must be taken to have used that word in its ordinary, dictionary meaning. The dictionary meaning is that to become goods it must be something which can ordinarily come to the market to be bought and sold and is known to the market. That it would be such an article which would attract the Act was brought out in Union of India v. Delhi Cloth & General Mills Ltd. [1963] Suppl. 1 SCR 586...."

12.4 The second being: A.P. State Electricity Board v. Collector of Central Excise (1994) 2 SCC 428. In this case once again the Supreme Court was called upon to adjudicate as to whether pre-stressed cement concrete poles manufactured by Andhra Pradesh State Electricity Board (APSEB) were goods within the meaning of section 3 of the Central Excise Act Sale Act, 1994. The Supreme Court after examining a number of judgments including the judgments in the case of Delhi Cloth Mills (supra) and South Bihar Sugar Mills (supra) came to the conclusion that what was necessary for imposition of excise duty was for the emergence of marketable goods. It was argued on behalf of the assessee that pre-stressed cement concrete poles manufactured by them were not goods inasmuch as they were not marketable since they were manufactured for a captive purchaser. The court after analyzing its own precedents opined that: whether or not the goods were in fact marketed was of no relevance; what was essential was that goods were marketable. Marketability being essentially a question of fact it would have to be decided as an issue of fact in each case. Even if goods were available only from one source or from a specified market it made no difference so long as they were available to the purchaser. Marketability was not dependent upon whether or not a number of purchasers available for the goods in issue; a single purchaser would suffice. Relevant observations in this regard are contained in paragraph 10 of the judgment which are extracted hereinbelow for the sake of convenience:

"10. It would be evident from the facts and ratio of the above decisions that the goods in each case were found to be not marketable. Whether it is refined oil (non-deodorised) concerned in Delhi Cloth and General Mills or kiln gas in South Bihar Sugar Mills or aluminium cans with rough uneven surface in Union Carbide or PVC films in Bhor Industries or hydrolysate in Ambalal Sarabhai the finding in each case on the basis of the material before the Court was that the articles in question were not marketable and were not known to the market as such. The 'marketability' is thus essentially a question of fact to be decided on the facts of each case. There can be no generalization. The fact that the goods are not in fact marketed is of no relevance. So long as the goods are marketable, they are goods for the purposes of section 3. IT is also not necessary that the goods in question should be generally available in the market. Even if the goods are available from only one source or from a specified market, it makes no difference so long as they are available for purchasers. Now, in the appeals before us, the fact that in Kerala these poles are manufactured by independent contractors who sell them to Kerala State Electricity Board itself shows that such poles do have a market. Even if there is only one purchaser of these articles, it must still be said that there is a market for these articles. The marketability of articles does not depend upon the number of purchasers nor is the market confined to the territorial limits of this country. The appellant's own case before the excise authorities and the CEGAT was that these poles are manufactured by independent contractors from whom it purchased them. This plea itself- though not pressed before us - is adequate to demolish the case of the appellant." (emphasis is ours)

13. As in the Central Excise and Salt Act, 1944, in the IT. Act there is no definition of the word manufacture. The expression industrial undertaking, however, has been defined inter alia in the explanation to section 33B of the IT. Act as any undertaking which is mainly engaged in the manufacture or processing of goods. The Tribunal in this case has, returned a finding to the effect that the assessee has been treated as an industrial undertaking by the relevant authorities. However, after accepting that the assessee is an industrial undertaking; (and there being no dispute that the only activity in which the assessee is engaged in is: coating titanium substrates with noble metal oxides) - the Tribunal, curiously, went on to say that what was produced was not a distinct article ignoring the evidence on record.

13.1 This apart, the Tribunal while rejecting the contention of the assessee in paragraph 26 of the impugned judgment observed that the assessee had not placed on record material to show that after coating the article in issue it became a "saleable" article and hence, a different commodity.

13.2 In our view the Tribunal lost sight of the fact that a distinct new product had come into existence after it was processed by the assessee. The fact that it had a single purchaser, (i.e., UHDE/IPCL) for its coated titanium substrates ought not to have come in the way of Tribunal allowing the deduction to the assessee. As noticed above the test is that the transformed article should be marketable. In this case there could not have been a better evidence of marketability than the assessee's agreement with UHDE.

14. The Supreme Court, as a matter of fact has, in a recent judgment entitled CIT v. Oracle Software India Limited (2010) 2 SCC 677 further refined the test as to what constitute a manufacturing process. In this case the Court was called upon to decide as to whether a process by which blank compact discs are transformed into loaded software would constitute manufacture in context of section 801 of the IT. Act. The Court employed the test of fitness. In other words, to come to the conclusion whether the process employed constitutes manufacture one would have to ascertain the efficacy of the process in rendering the commodity or an article fit for use. The relevant observations of the court in this regard are given in paragraphs 16 to 18 of the judgment. This judgment of the Supreme Court was followed in CIT v. Emptee Poly-Yarn Private Limited (2010) 2 SCC 720.

14.1 In our view the Tribunal had to employ the test of fitness in ascertaining whether the process employed by the assessee rendered the free issue material supplied to it (whether referred to as titanium substrates or a titanium metal anode), fit for use in the industry.

14.2 The Tribunal's conclusion; that the coated titanium substrates did not result in production of a distinct new article, based on provisions of the agreement arrived at by the assessee with the UHDE which, required it to dispatch the processed titanium substrates to Alpha for further fabrication to manufacture membrane cell element is, in our view, flawed. The reason for this is: the Tribunal had to address the issue as to whether the process employed by the assessee resulted in manufacture of a distinct new article. If it did, it mattered little that the said product could be further worked upon to manufacture membrane cell element. This line of inquiry and the resultant conclusion, without relevant material to support it: was, according to us, misdirected. In our opinion the Tribunal employed the wrong test. Once the Tribunal found as a fact that the process undertaken by the assessee resulted in production of a "useful commercial commodity" the enquiry had to end there, and the assessee's claim allowed.

15. The judgment cited by Ms Bansal, i.e., Bhagat Construction (supra) has no applicability. In the said case the assessee before the court impugned the order of the Tribunal before it whereby, its claim of investment allowance in respect of equipment used for quarrying and stabilizing electricity was denied. The court sustained the contention of the department on the ground that the assessee was not an industrial undertaking. The reason for coming to this conclusion was that it had been found as a matter of fact that the assessee's main business was civil engineering works and not to manufacture any intermediary products. In the course of carrying out civil engineering works it had quarried certain material which were mainly stones and the said material had been used for the said purpose. The court was of the view that, since in the course of its main activity, which was, as indicated above, civil work certain by-product had been produced, which was consumed, it would not enable the assessee to claim investment allowance on the ground that it was engaged in carrying out an industrial activity. The court held that the assessee was not a manufacturer of any article or thing but, as a matter of fact was a consumer of by-product, produced, and therefore, the machinery in issue was not amenable to investment allowance. In our view, the case is completely distinguishable on facts and hence, not applicable.

16. For the reasons given above, both questions of law are answered in favour of the assessee and against the department. Consequently, the impugned judgment is set aside. However, in the circumstances parties shall bear their own cost.



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