Case law oo1

text of case law 001

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.

—————
Author
Sunil Kumar Jha
Addl. Commissioner of Income Tax, Central Range, Baroda

Analysis

 

Slump Sale – Whether breaking up of price permissible:-

1.1 The decision of the Calcutta High Court in the case of Kwality Ice Creams {I} Ltd [2011] 336 ITR 100 {Cal} may provide fodder for interesting appraisal by the readers. In this case, the assessee, an ice cream manufacturer, transferred its marketing undertaking for a price of Rs. 3 crores. There is nothing in the decision to suggest that the price of Rs. 3 crores was a composite price for transfer of individual assets of the marketing undertaking sold. On the contrary, from the facts of the case, it appears that the price was paid for a slump sale of the marketing undertaking as a whole. The decision related to Assessment Year 1996-97 i.e. before the slump sale provisions of section 50B were brought on the statute book.


In short, the decision of the Supreme Court in the Artex case never carried an authority that if the sale is factually a slump sale, it is permissible for the tax authority to break down the price – even on any scientific basis – and allocate the price over the assets. The finding of the Calcutta High Court that the Apex Court in Artex case permitted such breaking up of the slump price does not appear manifest from a reading of the Artex decision

The issues for consideration of the High Court was whether the price of Rs. 3 crores could be severed and allocated individually to the various assets of the marketing undertaking transferred – so that the capital gains relating to depreciable assets could be taxed separately u\s 50. The High Court here has held in affirmative. In coming to this conclusion, it was drawn support from the decision of the Supreme Court in the case of CIT vs. Artex Manufacturing Co [1997] 227 ITR 260 {SC}. According to the High Court, the Supreme Court has specifically held that if item wise allocation of the price is possible towards the assets of the business transferred, then capital gains should be determined vis-à-vis the individual assets.

1.2 According to me, the Supreme Court has not held in this manner in the Artex decision. In the Artex case, though it was stated in the transfer agreement that the business was transferred for a lump sum price, the Assessing Officer had found that the assessee had obtained a valuation report of the individual assets for the purpose of fixing the sale price of the business. This meant that the lump sum price in the agreement was, in reality, not a slump sale price for the business as a whole, but an aggregated price of the individual assets of the business sold. It was a composite price for the sale of a bunch of assets and not a single price for the business as a whole. The findings of the Apex Court are understandable because the real underlying agreement between the parties was to transfer itemized assets at a bunched price and this was not a case of slump sale simpliciter as made out in the written agreement.

In fact, in another decision of the same date of the Supreme Court in the case of CIT vs. Elecon Control Gear Mfg. Co. [1997] 227 ITR 278 {SC}, the Apex Court distinguishing its earlier decision in the Artex case, has held that the agreement of the assessee was for a slump sale of the business as a whole as there was nothing in the transfer agreement to suggest that there was itemized sale of the assets.

1.3 Whether a transfer agreement is of a slump sale of a business undertaking or a sale of a bunch of assets of the business undertaking for a composite price, should be discerned from the terms and conditions of the agreement. If the transfer agreement shows that the real intention of the parties was to effect a transfer of the business as a whole for a slump price, then it would not be permissible for the Court to read the agreement otherwise. The sale must then be assessed to tax as on slump sale basis only. The decision of the Supreme Court in Elecon Control Gear is a clear authority for this proposition.

On the other hand, if the real intention of the parties, as apparent from their conduct, was sell individual assets only, the fact that transfer agreement cites a slump sale should hardly matter. Here, it should definitely be permissible for the Court to come to the conclusion that the price mentioned in the agreement was merely a composite price for itemized sale of various assets and the Court should sever the sale consideration over the transferred assets as done by the Supreme Court in the Artex Case. After all, if the substance of an agreement is manifestly at variance from the form in which it is projected, nothing should preclude the Court from ignoring the form and assessing the transaction on the basis of this substance.

In short, the decision of the Supreme Court in the Artex case never carried an authority that if the sale is factually a slump sale, it is permissible for the tax authority to break down the price – even on any scientific basis – `and allocate the price over the assets. The finding of the Calcutta High Court that the Apex Court in Artex case permitted such breaking up of the slump price does not appear manifest from a reading of the Artex decision.

There is tangible difference between slump sale of a business for a unit price and composite sale of assets of the business at an aggregated price. Whereas in the former, it is not permissible for the tax authority to split the price over the assets transferred even on scientific basis, in the latter case it is permissible. This distinction, according to me, has been well maintained in a balanced manner by the Supreme Court in its Artex and Elecon Control decisions. Readers are invited to form their opinions on this issue.

Capital Gains on retirement of partner on assignment of his share.

The sum and substance of these decisions is that whenever an obligation to pay any income is created by way of a charge on the income, a superior title is created over the income in favour of the charge holder to the extent of the charge. Qua this income, the charge holder has a paramount or superior title over that of the assessee. The income, to the extent of the charge, is diverted in favour of the assessee before it reaches the assessee

2.1 The decision of the Mumbai Tribunal in the case of Sudhakar M. Shetty decision – [2011] 130 ITD 197 {Mum} makes a distinction between the tax incidents visiting a partner who merely realises his share due to him on retirement and a retiring partner who assigns his share to a continuing partner for lump sum consideration. Whereas the former mode has been held not to invite capital gains tax, the latter was held to be not so fortunate.

The Tribunal has observed that a partner' share' in the partnership is a `property' and its assignment would constitute a transfer of a capital asset giving rise to capital gains. The difference between consideration received on assignment and his capital account balance was held taxable as capital gains

According to the Tribunal, the assessee, Sudhakar Shetty's retirement was under the second mode – i.e. by assignment of share and hence, his retirement gave rise to taxable capital gains

2.2. It is pertinent that the issue in the decision concerns the normal capital gains' provisions of section 45 [1] i.e. between partners inter se in their individual capacities and has nothing to do with the provisions of section 45 [4], where the transfer contemplated is between the firm and a partner.

2.3 For analysing this decision, let us first understands as to what constitutes a partner's `share' in partnership?

As per the classical English partnership law cited by Lindsay and adopted by Indian Courts in Narayanappa vs. Bhaskara Krishnappa {AIR 1966 SC 1300}and Dewas Cine Corporation – 68 ITR 240 {SC}, a partner's monetary rights are two folds . Firstly, during his tenure as partner, whereas he has no specific right in any individual asset of the partnership, his right is only to receive his share of profit Secondly, on dissolution or retirement, he has a right to a share in the net estate of the firm {i.e. assets minus liabilities and winding up expenses- valued on the basis of a notional sale} as on date of the retirement or dissolution. This bundle of rights constitutes the `share `of the partner.

So, when a partner retires, the accounts of the firm are made up –valuing the assets on basis of a notional sale, the liabilities and notional winding up expenses are deducted – and the amount due to the retiring partner towards his share, as worked out by this arithmetic, is determined as payable to him.

It is pertinent that a partner's right to this share is not created on retirement. This right existed the moment he joined the partnership. It was a right in presenti , whose value was merely determinable at time of retirement and this right, the partner carried with him all along as `his property' from the time of his joining till he retires.

On retirement, the retiring partner takes away his own money due to him and the shares of the continuing partners remain intact without an enlargement. So, there is no `transfer" of any property from such retiring partner to the continuing partners. This logic can be found in the decision of the Gujarat High Court decision in the case of Mohanbhai Pamabhai as reported 91 ITR 393 {Guj} as approved by the Supreme Court in 165 ITR 166 {SC}

Even if the continuing partners bring in further capital to settle the retiring partner, the enlargement of the continuing partner's shares is due to their own `self –acts" of bringing in more funds and not due to anything done by the retiring partner. Hence, there is no act of `transfer' from the retiring partner to continuing partner.

The Gujarat High Court decision in the case of Mohanbhai Pamabhai – 91 ITR 393 {Guj} referred above was distinguished by the Bombay High Court in Tribhuvandas Patel case – 115 ITR 95 {Bom} . The Bombay High Court distinguished between two modes of retirement as under ;-

[a] Where a partner merely retires by taking away the money due on his share as per accounts – no transfer and capital gains – agreeing with Mohanbhai Pamabhai – 91 ITR 393 {Guj}.

[b] But, where the partner assign his share to a continuing partner for a lump sum consideration, the `share' is property in hands of the retirement partner and hence a capital asset. Its assignment is a transfer. On such assignment, there is a transfer of capital asset from retiring partner to continuing partner and hence, capital gains result.

In the case before the Bombay HC, there was dispute between the partners and under a court settlement agreement, it was cited that the retiring partner was `assigning' his share to the continuing partner for an amount of say – Rs. 4.71 lacs. It was held that there was transfer on such assignment resulting in capital gains. This Bombay High Court decision has also been followed by the same High Court in other decisions.

The Bombay High Court decision in Tribhuvandas Patel [115 ITR 95] came up for consideration before the Supreme Court in 236 ITR 515 {SC}. Here, it appears that a short question was put to the Supreme Court as to whether the amount of Rs. 4.71 lacs received on retirement attracted capital gains. The Supreme Court, probably appraising the issue as a case involving a retiring partner merely realising the money due towards his share on retirement, held that this amount was not taxable as capital gains following its earlier decision in Mohanbhai Pamabhai 165 ITR 166 {SC}.

The Mumbai Tribunal in Sudhakar Shetty's case has apparently taken the view that the issue about capital gains implications on assignment of share by partner had not been addressed as a question before the Apex Court in Tribhuvandas Patel case in 236 ITR 515 {SC} and therefore, the decision of the Bombay HC in Tribhuvandas Patel's case in 115 ITR 95 {Bom} remains not overruled and binding on it as a decision of jurisdictional High Court.

It is in this scenario that readers are invited to appraise the decision of the Mumbai Tribunal in Sudhakar Shetty`s case.

In order to do, let us firstly understand what is the general partnership law relating to assignment of share by partner?

Section 29 of the Indian Partnership Act cites the rights of an assignee of share by partner as under:-

Firstly, when a partner assigns his `share', the assignor continues to be the partner and the assignee can neither take part in the conduct of the partnership business nor has right to ask or inspect the accounts. He has only a right to receive the share of profit due to the assignor-partner, which accounts he must accept without demur. In short, it is not open to the assignee to challenge the correctness of the accounts and has to accept it as correct.

Secondly, when the assignor-partner ceases to be a partner, the assignee gets the right to demand the assignor-partner's share in the assets of the firm as due to him on such cessation and also a right to the accounts from the date of cessation onwards till he is fully settled.

So, on the issue of assignment of a partner's share, the following points emerge-

[a] It is not specified in the section 29 as to who can be an assignee. So, the assignee can be a rank outsider to the partnership or even a continuing partner.

[b] An assignee does not automatically become a partner in place of the assignor-partner. He remains only an assignee. This is even so if the other partners have consented to the assignment. This is because the consent operates only in respect of the `assignment'. They cannot be presumed to have agreed to his introduction as partner.

[c] The assignee cannot take part in the business of the partnership.

[d] The assignor-partner continues to remain the partner and is not relieved from his mutual obligations to the other partners under the partnership deed.

[e] The assignment does not take place under the auspices of the partnership deed, but is private deal between the assignor-partner and the assignee. This is in marked contrast to retirement, which takes places under the terms and conditions of the partnership deed.

Therefore, a possible view is that even if the assignment of the partner's share is done to a continuing partner, the continuing partner remains an `assignee' qua the share assigned and not a `partner'. No doubt, in his capacity as an existing partner, he can take part in the business of the partnership and access the accounts directly. But, it may be noted that this right is due to his natural right as an existing partner and has nothing to do with his acquiring the subsequent partnership share on assignment

The disability of the assignee-partner, in operating as a fully fledged partner qua the share assigned can be best understood by this example. Assume A, B & C are partners. As per the partnership deed, A is designated as Managing Partner and B is supposed to remain as dormant partner. An assignment by A of his share to B cannot make B the Managing Partner. This is because as per section 29 [1] of Partnership Act, a partner cannot assign his right to take part in the business to an assignee. So, the disability of the assignee remains.

In contrast to a retirement by a partner, an assignment by a partner of his `share' to a continuing partner results in enlargement of his property holdings. The assignee partner now has two properties – [a] his original share as partner and [b] his new share as assignee. The assignment also results in diluting of the assignor-partner's rights in the sense that he can no longer take home his share in profits or his share in the net asset on retirement or dissolution, since these rights he has given to the assignee.

If seen from the above angle, a transfer of property rights from the assignor partner to the assignee partner would be evident and the assignment transaction gets exposed to capital gains' tax. In contrast, a `transfer' is not existent when a partner merely realises his share on retirement as he is merely getting the money due to him from the firm.

2.12. More ever, when a partner retires, it become necessary to prepare the accounts in order to determine the share payable to the retiring partner. But, in an assignment, the question of preparing the accounts of the firm for the purpose of settling the assignee partner does not arise. The price is fixed between the assignor and assignor without reference to the accounts and that is why, I think, it was referred as `lump sum bases by the Bombay High Court decision in Tribhuvandas Patel's case.

It may be noted that the expression `lump sum' – does mean that amount due to a retiring partner cannot be determined at an agreed `rounded – up' figure by the continuing partners. After all, the rounded up figure is also agreed after a fair assessment of the accounts.

It is in this legal background that the decision of the Mumbai Tribunal in Sudhakar Shetty's case may be appraised by the readers now.

In Sudhakar Shetty's case, both the assessee and his wife were partners with a few others. His wife retired in the prior financial year and for settling her account, a revaluation [assumedly at market value on basis of a notional sale] was done of the assets and the surplus on revaluation was credited to all partners.

In the next financial year, within few months of his wife's retirement, the assessee also retired. No fresh revaluation was apparently done as a revaluation was done only a few months ago. On retirement, he received the amount due on his capital, which includes his share on revaluation surplus. A possible view is that this was a case of a normal retirement by a partner and did not involve any assignment. The assessee had apparently taken only the money due to him on retirement.

A citation in the retirement deed that the assessee would not have any right in the assets of the firm after retirement should not constitute an assignment. The cessation of the rights in the net assets of the partnership was a natural incidence of his retirement.

It may be noted that there is a significant difference between [a] an assignment of share by partner followed by retirement and [b] only retirement simpliciter. In the former case, the transfer event takes place because of a prior assignment and the subsequent retirement is only a consequential incident. On the other hand, when a partner retires, the nature of his right in his hands undergoes a transformation. His original contractual rights qua the other partners are not the same as he had when he was a partner. For example, he ceases to have the right to profits, right to take part in the business thereafter etc. What remains in his hands is only to seek the money worth of the net assets due to his share. In short, on retirement, he ceases to have the original rights of a partner and there can be obviously no assignment of rights which he longer has. Readers may thus note that whereas there can be an assignment before retirement. there cannot be an assignment of a partner's share after retirement . A citation in the retirement deed that the retiring partner would no longer have any right in the assets of the partnership cannot therefore amount to an assignment of a partnership share by the retiring partner to the continuing partner.

It is therefore a possible view that there was no assignment of share by the retiring partner to the continuing partner in the Sudhakar Shetty's case. Readers may therefore examine this decision carefully.

Income – Diversion vs. Application

3.1 The decision of the Mumbai Tribunal in the case of RSM and Co vs. Addl. CIT [2011] 10 ITR {Trib} 614 {Mumbai} is a thought provoking decision. In this case, partnership deed of the assessee chartered accountant firm, provided in its terms and conditions for payment to a retiring partner, who had completed fifty years of age, an amount [calculated at 25 % of the average earnings of the partner from the firm of three completed years prior to his retirement] payable in four quarterly instalments for a period of five years. The issue, before the Tribunal, was whether the payments made by the assessee to the retiring partners was a case of diversion of income at source by an overriding title or application of income after it accrued to the assessee.

3.2 The Tribunal firstly considered the decision of The Supreme Court in the case of CIT vs. Sitladas Tirathdas [1961] 41 ITR 367 {SC}. Here, the Apex Court had laid down the ground rules as to when a payment made under an obligation would constitute a diversion of income by overriding title and per contra, when such payment would otherwise be a mere application of income after it accrued to the assessee. The Apex Court had observed as under:-

"Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable"

3.3 The Tribunal then dealt with various decision of the Bombay High Court where the issue of diversion of income by overriding charge was involved. These decisions were rendered after considering the decision of the Supreme Court in the case of Sitaldas Tirathdas cited above.

The decisions are:-

CIT vs. Patuck {C.N.}[1969] 71 ITR 713 {Bom}

CIT vs. Crawford Bayley and Co [1977] 106 ITR 884 {Bom}

CIT vs. Nariman B. Bharucha & Sons [1981] 130 ITR 863 {Bom}

The sum and substance of these decisions is that whenever an obligation to pay any income is created by way of a charge on the income, a superior title is created over the income in favour of the charge holder to the extent of the charge. Qua this income, the charge holder has a paramount or superior title over that of the assessee. The income, to the extent of the charge, is diverted in favour of the assessee before it reaches the assessee. Even if the income charged lands in the hands of the assessee, he is only its collector of the sum on behalf of the charge holder. The position of the assessee, as such collector, is that of a `cestui que' trustee, who holds the income in trust for the charge holder. The income belongs to the charge holder only and cannot be assessed in the hands of the assessee.

It is pertinent that the decisions in the cases of CIT vs. Crawford Bayley and Co [1977] 106 ITR 884 {Bom}and CIT vs. Nariman B. Bharucha & Sons [1981] 130 ITR 863 {Bom}directly involved cases where the payments, made by partnership firms to erstwhile partners or their heirs under obligations agreed in the partnership deeds, were held to be diversions of incomes not taxable in hands of the firms.

3.4. After considering the above precedents laid down by the Supreme Court and the Bombay High Court, the Mumbai Tribunal in the case of RSM and Co held that covenant in the partnership deed to make payment to the retired partner created an overriding charge on the income of the assessee in favour of the retired partner. By virtue of this charge, the income to the extent of the charge was diverted to the retiring partner before it reached the hands of the assessee. The Tribunal thus held that this income cannot be assessed in the hands of the assessee.

3.5. According to me, whereas the decision of the Mumbai Tribunal has been correctly laid, it is also possible support the decision from another angle. Some Courts have made a fine distinction between an obligation which attaches to the source of income and an obligation which attaches to the income itself According to these decisions, the diversion of income is only in the former case and in the later cases, it application of income. Without dwelling at length on these decisions, I would invite the attention of the readers to the decision of the Supreme Court in the case of CIT vs. Travancore Sugars and Chemicals Ltd [1973] 88 ITR 1 {SC}, which comes to my mind. Here, it appears that the Apex Court has made an observation to the effect that where the obligation is attached to the profit earning apparatus, the income can be said to be diverted at the source. On the other hand, if the obligation is attached to the profit earning process, the payment may have to be considered as to whether the same is allowable as expenditure from business profits.

From the facts of the case cited in the Mumbai Tribunal decision in the case of RSM & Co, it can be seen that there was a covenant in the partnership deed obliging the partnership firm to pay an assured amount to a retiring partner. When the partners sign such a deed, the covenant binds both the continuing partners and the retiring partners at the time of future retirement. The effect of this covenant is that the continuing partner would be entitled to continue the business of the partnership only under a pre-condition that the retiring partner would be paid this assured amount. In short, the profit earning apparatus of the partnership firm is released by retiring partner in to the hands of the continuing partners subject only to their commitment to this obligation. This is veritably a case, where the obligation to pay an income is attached to the very source of income i.e. the profit earning apparatus.

Therefore, even viewing from this angle, it is possible to also support the decision of that the Mumbai Tribunal in RSM & Co's case.

CA Anant PAi

READING [Art of reading]

 

READING

INTRODUCTION:

Reading is inevitable for knowledge gaining. The main purpose behind our reading is to make connections between what we have already known and what we need to know. Knowledge is wide. Gaining knowledge or updating in particular subject is highly required for the present business world. There may be many reasons for reading-

Practical application;

To get an overview;
To locate specific information;
To identify the central idea of theme;
For pleasure and enjoyment.
FAST AND SLOW READING:

How to read. The style of reading may be of two types – fast reading and slow reading. Fast reading may be used for the following:

To gain an overview of the material;
To separate relevant from irrelevant material;
To locate specific information;
To identify the central theme or idea;
There are three effective fast reading styles which are scanning, key words spotting and skimming. The speed reading aims to improve reading skills by-

Increasing the number of words read in each block;
Reducing the length of time spent reading each block; and
Reducing the number of times your eyes skip back to a previous sentence.
Slow reading helps to gain a detailed understanding of the material and maintain your connection. A slow reading is useful to-

Evaluate what you have read;
Remember exactly what you have read;
Follow instructions or directions;
Understand difficult terms or ideas.
TECHNIQUES:

The following are the techniques of reading-

Reading for enjoyment – like reading a novel or magazine – it is involves light reading;
Exploratory reading – skimming through the book to get the gist of the topic. Skimming involves finding out what something is all about. In order to skim one is to formulate questions before begin to read. E.g., What is this all about. Does this article deal with the subject one is researching. Etc.,
Revision reading – skimming through a book which is familiar in order to confirm knowledge;
Search reading – scanning for a specific piece of information or to answer a specific question;
Proof reading – carefully focusing on spelling, punctuation and sentence structure and checking accuracy;
Reading for mastery – to get detailed information or understanding the topic; For this careful, slow and repeated reading is adopted;
Critical reading – reading for stimulus, for challenge, to assess values and ideas an in reading a book for review or critically analyzing a novel. The most important skill in critical reading is asking questions. Skim through the passage first read the passage more slowly keeping in mind certain questions like why does the author make this statement; how do you feel about this information; what opinions, feelings and attitudes are being expressed; are they facts or opinions; is the information logical; examine the choice of words used – what connotations are suggested; then re read silently and aloud for a number of times and finally form the opinion as derived from critical reading.
READING PURPOSE:

Reading is essential for success. It also means taking some risks. One cannot read everything. One cannot read everything in the same way. One has to decide why he is reading and he what he wants to get out of it and this means of selecting what to read and how much attention to give certain parts of his reading. Deciding the purpose of reading one is to decide the approach and the depth of reading-

For a set text or wider reading.
For a lecture
For a tutorial/seminar.
For an assignment
For an exam.
Before reading one has to look-

at the title, details about the author and work out how the work fits in with other texts in the subject;
scan the contents page and the index to gain an overview of the are covered by the work;
skim through the work, picking up key paragraphs and sentences, particularly the opening and closing sections of chapters or articles
and then read the whole carefully, nothing major points and ideas in one's one words as well as sections to which one may wish to return later.

For assignment or for research one may try the following steps:

start with a book from the reading list which gives an overview of the topic;
as you read, keep asking yourself exactly what you are looking for and write down those questions as a guide to reading;
keep doing the look, scan and skim procedure to make sure the material is both relevant to your needs, and that you are not duplicating information you have already found;
record the details of author, title, place of publication, publisher and date as you select each work so that you don't have the frustration of trying to find it again and preparing your reference list/bibliography. Record page numbers with any notes you take;
take notes from your reading as you would if you were reading for research purposes.
DIFFICULT READING:

When you find reading is difficult there are several strategies that you can try-

Be an active reader by asking yourself questions about what you are reading and how it relates to your research;
Prepare for reading by consulting your lecture, notes beforehand for guidance and an overview;
Turn section headings in the book or article into questions and answer them in your own words after you have read the section;
Break the reading into smaller sections and note one section at a time;
If the language or style used make the work too difficult to grasp, seek help from your tutor or lecture, who may be able to suggest a more straightforward introduction to the topic.
STRATEGIC READER:

Strategic readers actively construct meaning as they read, interacting with the text. They set purposes for reading, select method of accomplishing these purposes, monitor and repair their comprehension as they read and evaluate the completed task. A strategic reader constructs, examines and extends meaning before, during and after reading for a variety of texts. There are a number of differences between strategic readers and poor readers during all phases of the reading process.

By: Mr. M. GOVINDARAJAN

WHAT is Res Judicata

 

By Vinayak Y Thakur

WHAT is Res Judicata

A matter adjudged, a thing judicially acted upon or decided, a thing or matter settled by judgment, a thing definitely settled by judicial decision, the thing adjudged – Law Lexicon

As per Black's law Dictionary – 7th Edition, there are three elements in the above principle.

They are -

(1) an earlier decision on the issue,

(2) a final judgment on the merits, and

(3) the involvement of the same parties, or parties in privity with the original parties.

The above principle operates as a bar to try the same issue once over. The Apex Court in the case of Sulochana Amma vs. Narayanan Nair - (2002-TIOL-292-SC-MISC) held that this principle aims to prevent multiplicity of proceedings and accords finality to an issue, which directly and substantially had arisen in the former suit between the same parties or their privies, decided and became final, so that parties are not vexed twice over; vexatious litigation would be put to an end and the valuable time of the Court is saved. It is based on public policy as well as private justice. The principle would apply, therefore, to all judicial proceedings of the tribunals other than the civil courts.

Basis and Scope of

The principles of Res Judicata are of universal application as it is based on two age old principles, namely , interest reipublicae ut sit fins litium which means that it is in the interest ofthe State that there should be an end to litigation and the other principle is nemo debet his veari, si constet curiae quod sit pro un aet eademn cause meaning thereby that no one oughtto be vexed twice in a litigation if it appears to the Court that it is for one and the same cause. This doctrine is common to all civilized system of jurisprudence to the extent that a judgment after a proper trial by a Court of competent jurisdiction should be regarded as final and conclusive determination of the questions litigated and should forever set the controversy at rest.

That principle of finality of litigation is based on high principle of public policy . In the absence of such a principle great oppression might result under the colour and pretence of law in as much as there will be no end of litigation and a rich and malicious litigant will succeed in infinitely vexing his opponent by repetitive suits and actions. This may compel the weaker party to relinquish his right. The doctrine of Res Judicata has been evolved to prevent such an anarchy.

Recently, Hon. Supreme Court in the case of M. Nagabhushana vs. State of Karnataka 2011 (271) ELT 481 dealt with this doctrine. It held that the application of this doctrine should not be hampered by any technical rules of interpretation. Plea of res judicata is not mere technicality, but a fundamental principle sustaining rule of law, ensuring finality in litigation.

Constructive res judicata

`Constructive' means `implied', "that which has not the character assigned to it in its own essential nature, but acquires such character in consequence of the way in which it is regarded by a rule or policy of law (Black)

Whether doctrine is applicable in taxation matters

The principle of res judicata or estoppel is not applicable to tax matters , thus the view taken by the assesse or appellate, revisional authority or even the High Court in respect of any one assessment period will not be final and conclusive for subsequent assessment period but such earlier decisions should be a cogent factor in the determination of the same point in subsequent assessment period.

In the case of Bramec Surie (P) Ltd . 1986 (25) ELT 79, the Tribunal had held that issues already concluded in earlier proceedings could be reopened in subsequent proceedings for another period of time if emerging fresh materials give a new dimension to the matter.

While dealing with the issue whether Appellate Tribunal is bound by its earlier decision, the Hon. Supreme Court in the case of Swaraj Mazda Ltd 1995 (77) ELT 505 held that the Tribunal is not precluded from deciding the question on merits because of earlier decision of the Tribunal regarding an earlier period.

The non-application of the doctrine of res judicata in tax matters is based on the fact that assessment for each year is distinct and separate since the Finance Act which alone supports the assessment is sanctioned only for a particular year by the legislature. When happening of some subsequent event was not existent at the time of passing the first order, one cannot plead res judicata.

Case laws relied on for the above discussion

++ J.K. Synthetics Ltd. 1981 (8) ELT 328 Tribunal

++ Birla Jute Mfg. Co. Ltd. 1985 (21) ELT 930 Tribunal

++ Jain Exports - (2003-TIOL-164-HC-DEL-EXIM-LB)

++ Peico Electronics & Electricals Ltd. 1994(71) ELT 1053 (Tribunal) upheld in 2000 (116) ELT A72 SC.

++ Swaraj Mazda Ltd. 1995 (77) ELT 505 SC

++ Sulochana Amma vs. Narayanan Nair - (2002-TIOL-292-SC-MISC)

++ UOI vs. R.C.Fabrics (P) Ltd. - (2002-TIOL-533-SC-CUS-LB)

++ M. Nagabhushana 2011 (271) ELT 481 SC.

Income Tax Arrear Letter from CPC Bangalore just a communication of demand not a

 

Income Tax Arrear Letter from CPC Bangalore just a communication of demand not a demand notice, No need to respond to tax notices for below Rs 100

It has been reported in some sections of the press that the Central Processing Centre , Bangalore is sending notices for payment of taxes which are as small as Rs. 1/- , 4/- , 6/-, causing unnecessary hardship to assesses .

It has been stated that when the refunds for amounts less than Rs. 100/- are not issued by the Income Tax Department, then the demand for less than Rs. 100/- should also not be collected .

Clarification in this regard is as follows:

Arrear Demand Communication

The Income Tax Department has created a central repository of all demands for better demand management as required by Standing Committee of Parliament and C&AG. To achieve this, all officers were asked to collate demand lying at various places viz. IRLA, TMS and manual registers and upload onto CPC portal. This was also part of the annual action plan. Consequently AOs have uploaded the same. During a meeting with Bangalore Chartered Accountants association, it was suggested that taxpayers should also be informed about the same so as to enable them to take necessary action if the outstanding demands were incorrect. This measure was aimed at providing greater transparency. Therefore, a communication has been sent to taxpayers informing them about existing arrears. It may be clarified that this communication is not a demand notice. This measure is, in fact, an assessee -friendly exercise. The Department has also written to all chief commissioners to amend such entries, if found incorrect, when approached by taxpayers. This would correct the database if a taxpayer has proof of payment etc. As per extant procedure, demand of less than Rs. 100 is not enforced but is liable for adjustment against future refunds.

How to Draft Appeal and Procedure in Appeals before CIT (Appeals) a

 

How to Draft Appeal and Procedure in Income Tax Appeals before CIT (Appeals) and ITAT
How to Draft Appeal and Procedure in Income Tax Appeals before CIT (Appeals) and ITAT

Drafting Appeal and Procedure in Income Tax Appeals before CIT (Appeals) and ITAT

Drafting of Appeal

1. Drafting of Statement of Facts and Grounds of appeal before Commissioner of Income-tax (Appeals) and Income-tax Appellate Tribunal.

The Income-tax Rules, 1962 ( the Rules) only provides that an appeal to the Commissioner (Appeals) shall be made in Form No. 35 and that the form of verification shall be signed and verified by the person who is authorised to sign the return of income under section 140 of the Income-tax Act, 1961 (the Act) (Rule 45) . However, Income-tax (Appellate Tribunal ) Rules, 1963 ( the Tribunal Rules) specifies as to the contents of the memorandum of appeal. Rule 8 mandates that every memorandum of appeal shall be written in English and shall set forth, concisely and under distinct heads the grounds of appeal without any argument or narrative and such grounds shall be numbered consecutively. Rule 47 of the Rules prescribes Form No. 36 for an appeal to the Income-tax Appellate Tribunal (the Tribunal) and Form No. 36A for filing memorandum of cross-objections. Both the memorandum of appeal and memorandum of cross-objections are to be verified by the person specified in Rule 45 as narrated above. Form No. 35 requires to set out a statement of facts along with the ground of appeal. No statement of fact is required to be filed with the memorandum of appeal to be filed with the Tribunal. This is for the reason that the annexures to the memorandum of appeal to be filed before the Tribunal includes Form No. 35 in which statement of facts are narrated. Therefore, it is necessary to present the statement of facts in such a manner so as to clearly bring out the issues in the assessment/penalty proceedings leading to the order under challenge. Rule 22 of the Tribunal Rules provides that memorandum of cross-objection shall be numbered as an appeal and all the rules so far as may be, shall apply to such appeal.

A specimen draft of grounds of appeal is as under:

"On the facts and in the circumstances of the case and in law the Assessing Officer (or ` the Commissioner of Income–tax (Appeals)' where an appeal is filed before the Tribunal against the order of Commissioner (Appeals)) erred in …….without appreciating …………".

A prayer should be made for deletion or addition/disallowance after taking relevant ground as under :

"The Appellant prays that the addition/ disallowance of Rs. _________ made in respect of/out of ……………. be deleted."

And at the end the Appellant should crave leave for variation or withdrawal of grounds of appeal as under:

"The Appellant craves leave to add, amend , alter vary and / or withdraw any or all the above grounds of Appeal."

If the statement of facts /grounds of appeal are separately annexed then the same should be signed by the Appellant.

Procedure in appeal
1. As stated hereinabove, an appeal to the Commissioner (Appeals) is to be filed in Form No. 35 and to the Tribunal in Form No. 36. Cross-objections are to be filed in Form No. 36A.

As per notes to the Form No. 35 the memorandum of appeal, statement of facts and the grounds of appeal must be in duplicate and should be accompanied by a copy of the order appealed against and the notice of demand in original, if any. However, it is advisable that an assessee prepares three identical sets of appeal papers which would include the order for the sake of convenience so that he can file two sets with the Commissioner (Appeals) and take the acknowledgment on the third. The memorandum of appeal should be accompanied by the prescribed fee. The schedule of fee is given hereinafter. Further, where the appeal is filed against an order imposing penalty under section 271(1)(c) of the Act , a copy of assessment order must also be attached.

Rule 9 of the Tribunal Rules provides that every memorandum of appeal to be filed before the Tribunal shall be in triplicate and shall be accompanied by two copies (at least one of which is a certified copy) of the order appealed against, two copies of the order of the assessing officer, two copies of the grounds of appeal, before the first Appellate authority and two copies of statement of facts, if any, filed before the said Appellate Authority. In a case of appeal against the order of penalty, the memorandum of appeal shall also be accompanied by two copies of the assessment order. Where an assessment order is passed under section 143(3) rws 144B or under section 143(3) rws 144A or under section 143(3) rws 147, the memorandum of appeal shall also be accompanied by the two copies of the draft assessment order under section 144B or directions under section 144A or the original assessment order as the case may be. The memorandum of appeal before the Tribunal shall also be accompanied by the prescribed fees. However, it is advisable that four identical sets consisting of memorandum of appeal in Form No. 36, order of Commissioner (Appeals), Form No. 35 with annexures and the assessment/penalty order from which the appeal arises are prepared for the sake of convenience so that three sets could be filed before the Tribunal and an acknowledgment can be taken on the fourth. It may be noted that, explanation to Rule 9 clarifies that "certified copy " will include the copy which was originally supplied to the assessee as well as photostat copy thereof duly authenticated by the assessee or his authorised representative as a true copy.

The Supreme Court in CIT vs. Calcutta Discount Co. Ltd., (1973) 91 ITR 8 (SC) observed that in considering an appeal the Appellate Authority should deal with the substance of the matter at issue and not be unduly influenced by mere procedural technicalities, for example, whether the memo of appeal was or was not in proper form etc.

2. Appeal fees
A fees payable for filing the appeal are given hereunder as Annexure to the chart regarding filing of appeals under the Income-tax Act. However, it may be noted that the Hyderabad Bench of the Tribunal in Andhra Pradesh State Electricity Board vs. ITO (1994) 49 ITD 552 (Hyd) have held that even where total income is computed at a loss and such loss exceeds Rs.1 lakh, the fees payable would be as per the slab prescribed for the income more than Rs. 1 lakh and therefore fees are to be determined on the basis as if loss determined is income. The Mumbai Bench of the Tribunal in Chiranjilal S. Goenka vs. WTO (2000) 66 TTJ (Mum) 728 have held that the stay application for more than one year or for more than one order for the same assessment year can be made on payment of fees of Rs. 500/- only. Further, the Mumbai Bench of Tribunal in Amruta Enterprises vs. Dy. CIT (2003) 84 ITD 172 (Mum) have held that the quantum of penalty under section 271(1)(c) cannot be linked with the assessed income and therefore the fees payable is as per the provisions of section 253 (6)(d). Also, in Narendra Valji Shah vs. ACIT (ITA/3545/M/99 dated 24-5-2000).

The Tribunal (Mumbai Bench C) held that the levy of penalty u/s. 271B is not in any way related to the total income and hence fees would be Rs. 500/- as contemplated in section 253(6)(d). A similar view was taken in Chromatte India Ltd. vs. ITO (ITA/3486-87/M/02 dated 12-2-2002) where the Tribunal held that in an appeal against an order u/s 263 the fees are to be paid as per section 253(6)(d). Also, in Mrs. Nimu R. Thodani vs. Jt. CIT (ITA/5437/M/97 dated 1-2-2000) the Tribunal held that in cases filed with respect to interest under sections 234A, 234B, 234C or any other interest appeal fee would be Rs. 500/- as per section 253(6)(d) because interest is in no way related to the assessed income but is linked with tax payable. The ratio of the said decisions will also apply to the appeals to be filed before Commissioner (Appeals).

3. Who can sign the appeal memo
As stated hereinabove, the form of appeal is to be signed and verified by the person who is authorised to sign the return of income under section 140 of the Act. As such the appeal to be filed by an individual must be signed and verified (i) by the individual himself, (ii) where he is absent from India, by the individual himself or by some person duly authorised by him in this behalf (a valid Power of Attorney should be attached with the appeal) (iii) where he is mentally incapacitated from attending to his affairs, by his guardian or any other person competent to act on his behalf., and where, for any other reason, it is not possible for the individual to sign the appeal, by any person duly authorised by him in this behalf (a valid Power of Attorney should be attached with the appeal). Therefore, unless any of such exceptional circumstances be present, an appeal in order to be valid, has to be signed by the individual himself. In case of the Hindu undivided family, the appeal is to be signed by the Karta and where the Karta is absent from India or he is mentally incapacitiated from attending to his affairs, the appeal is to be signed and verified by any other adult member of such family. If the Hindu undivided family has no major member as Karta, appeal may be validly signed by any male adult member of the family who is in receipt of the income. [pl. see Shridhar Uday Narayan vs. CIT (1962) 45 ITR 577(All)]. "Adult "is a person who has attained the age of discretion which in India is 16 years. A person attains majority at the age of 18 years. In a case of a company an appeal is to be signed and verified by the Managing Director thereof or where for any unavoidable reason, such Managing Director is not able to sign, by any Directors thereof or where there is no Managing Director by any Director thereof. The Calcutta High Court in National Insurance Co. Ltd vs. CIT (1995) 213 ITR 862 (Cal) held that the return signed by a Director and not by the Managing Director was invalid in absence of any explanation. A company which is being wound up or for whose assets any person has been appointed as a receiver, the appeal is to be signed and verified by the liquidator referred to in section 178(1). In case of a firm the appeal is to be signed by the Managing Partner thereof or where for any unavoidable reason, such Managing Partner is not able to sign, by any partner thereof not being a minor or where there is no Managing Partner as such, by any partner thereof not being a minor. In other cases, it is the principal officer who has to sign the appeal. The Bombay Bench of the Tribunal in Mrs. Leezo Salidan vs. CIT 16 TTJ 243 (Bom) , Pyrkashim Stores vs. CIT 9 ITD 93(Bom) and Hariledge vs. ITO 29 Taxman 122 (Bom) as also the Gujarat High Court in Rajendrakumar Maneklal Sheth( HUF) vs. CIT (1995) 213 ITR 715 (Guj) have held that the appeal signed by an advocate / Chartered Accountant is valid. The correctness of this decisions is however not free from doubt. However, there are divergent views on the issue as to whether the defect in signature would render the appeal a nullity. The Allahabad High Court in Court of Wards, Naraindas Narsinghdas vs. CIT in (1950)18 ITR 204 (All) has held the appeal to be invalid whereas a Calcutta High Court in Sheonath Singh vs. CIT (1958) 33 ITR 591 (Cal) has held it to be an irregularity which can be rectified. Please also refer to Gouri vs. CIT (1959) 37 ITR 220 (Pat), Gianchand Virbhan vs. CIT (1960) 39 ITR 414 (Pat), and V.K. Padmalochan Sahu (1974) 95 ITR 113 (Ori) whose views are those in line with that of Calcutta High Court. The Madras High Court in Arunachalam Chettiar vs. CIT (1962) 45 ITR 407 (Mad) and Andhra Pradesh High Court in Chelamala Setti Adeyya vs. CGT (1964) 54 ITR 339 (AP) held that failure to attach notice of demand to memorandum of appeal is mere irregularity which can be subsequently rectified. [Also see Gyan Manjari Kuari vs. CIT (1944) 12 ITR 59 (Pat); Ag IT v. Keshab Chandra Madanlal (1950) 18 ITR 569, 573(SC)]. The Bombay High Court in Malani Trading Co. vs. CIT (2001) 252 ITR 670 (Bom) have held that merely because there is defect in the memo of appeal, dismissal of appeal without giving opportunity to cure said defect will be improper. Where revenue filed appeal without including therein grounds of appeal and statement of facts as required and Tribunal did not issue defect memo, the Gauhati Bench of the Tribunal in Asst. CIT vs. Rayang Timber Products (P) Ltd. (2002) 82 ITD 73 (Gau)(TM) held that appeal was to be deemed to have been accepted and it had to be further presumed that Tribunal had already exercised its discretion under sub-rule (3) of rule 9 of ITAT rules in favour of appellant.

4. Presentation of appeal
A memorandum of appeal to the Commissioner (Appeals) must be presented to the office of the Commissioner in person or by an agent or sent by Registered Post addressed to the Office of the Commissioner (Appeals). A memorandum of appeal to the Tribunal must be presented by the Appellant in person or by an agent to the Registrar at the Head Quarters of the Tribunal at Bombay or to an Officer authorised in this behalf by the Registrar or sent by Registered Post addressed to the Registrar or to such officer. Vide order No. 1 of 1973 dated 1.10.1973, the Registrar of the Tribunal has authorised Asst. Registrars of the Appellate Tribunal situated at different places to be the authorised Officer to receive the appeals or applications as per Rule 7 of the Tribunal Rules. In the case the applicant apprehends that it is last day of the limitation for presentation of his appeal and application, he may present it to the Assistant Registrar at his residence or any other place wherever he may be or to Member of the Tribunal at his residence or wherever he may be. If an appeal is send by post it shall be deemed to have been presented on that day on which it is received by the office of the Commissioner (Appeals) or the Tribunal (pl.see Rule 6(2) of the Tribunal Rules and F.N.Roy vs. Collector of Customs AIR 1957 (SC) 648 – postal authorities are not considered as a agents of the addressee but are the agents of the sender).

5. Time for filing an appeal
An appeal to the Commissioner (Appeals) should be filed within a period of 30 days of the service of the order against which the appeal is preferred. The Calcutta High Court in Charki Mica Mining Co. Ltd. vs. CIT (1978) 111 ITR 193 (Cal) has held that the period of limitation for filing an appeal to the Commissioner (Appeals) is to be computed from the date of the receipt of demand by the assessee and not from the date of receipt of assessment order by the assessee. An appeal to the Tribunal should be filed within a period of 60 days from the date on which the order sought to be appealed against is communicated.

Where the assessment order was served on the person who was not an authorised agent of the assessee, and later on, the assessee applied for and obtained a copy of the assessment order for purpose of filing an appeal, it was held that the time limit for filing the appeal should be reckoned from the date on which the assessee obtained the copy of the assessment order and notice of demand and not from the earlier date of service of the assessment order – CIT vs. Prem Kumar Rastogi (1980) 124 ITR 381 (All). Also see, Jayalakshmi Cloth Stores vs ITO (1981) 132 ITR 764 (AP), Rasipuram vs. CIT (1956) 30 ITR 687 (Mad) and Malayalam Plantations Ltd vs. CIT (1959) 36 ITR 205 (Ker). Where postal acknowledgment in file of Assessing Officer did not bear signature of any person and so also it did not bear any date of service, it was reasonable to believe that the assessee was not served with the order of assessment and the demand notice and in such case appeal filed by the assessee on 10-8-1980 against the order of assessment for the assessment year 1981-82 could not be said to be barred by limitation. (Badri Singh Thakur vs. ITO (1995) 78 Taxman 206(Jab).

6. Delay in filing an appeal
Section 249 (3) gives a power to the Commissioner (Appeals) to condone the delay in filing the appeal to the Commissioner (Appeals). Similarly, section 253(5) empowers the Tribunal to admit an appeal or permit the filing of memorandum of cross-objection after the expiry of the relevant period if it is satisfied that there was sufficient cause for not presenting it within that period. When an application for condonation of delay in filing an appeal is preferred, it is statutory obligation of the appellate authority to consider whether sufficient cause for not presenting the appeal in time was shown by the appellant – Shrimant Govindrao Narayanrao Ghorpade vs. CIT (1963) 48 ITR 54(Bom). An assessee has a statutory right to present an appeal within prescribed period without any order being required from the Appellate Authority for admission of the appeal. But after the expiry of the prescribed period, an appeal can be entertained only if it is admitted by the appellate authority after condoning the delay [CIT vs. Mysore Iron & Steel Ltd. (1949) 17 ITR 478, 480 (Bom)]. But the power to condone the delay is discretionary and the discretion must be judicially exercised. (J & K Small Scale Industries Development Corpn Ltd., v. Dy. CIT (1949) 71 ITD 367 (Asr). The Supreme Court in Collector of Land Acquisition vs. Mrs. Katiji & Others (1987)167 ITR 471(SC), held that Court should have pragmatic and liberal approach. [Also see Raja Jagadambika Pratap Narain Singh vs. CBDT 100 ITR 698 (SC)] The Supreme Court in N. Balkrishnan vs. M. Krishnamurthy (1998) 7 SCC 123 had condoned a delay of 833 days. It was observed that condonation of delay is a matter of discretion of the Court and the only criterion is the acceptability of explanation irrespective of the length of delay. A subsequent decision of the Supreme Court/High Court was considered as sufficient cause for condoning delay in filing the appeal. State of Andhra Pradesh vs. Venkataramana Chudava & Muramura Merchant (1986) 159 ITR 59 (AP). The Courts have also held that the mistake of an Advocate or Chartered Accountant is a reasonable cause for delay in filing an appeal. (pl. see Rafiq C. Munshilal AIR 1981 SC 1400 (1401), Mahavir Prasad Jain vs. CIT (1988) 172 ITR 331 (MP), Concord of India Insurance Co. Ltd. vs. Smt. Nirmaladevi & Sons (1979) 118 ITR 507 (SC). Punam Singh vs. ITO (2002) 257 ITR 38 (Chennai) ( Trib). Shakti Clearing Agency P. Ltd. vs. ITO (127 Taxman 49 (Mag) (Raj.). For other reasons, please see Vijayeshwari Textiles Ltd. vs. CIT (2002) 256 ITR 560 (Mad), Meenakshy Lucky Centre vs. Jt. CIT (2002) 122 Taxman 266 (Coch) (Mag). Revenues petition for condonation of delay was dismissed in Asst. CIT vs. Taggas Industries Development Ltd. (2002) 80 ITD 21 (Cal); Asst. CIT vs. Punna Textiles Industries P. Ltd., (2002) 122 Taxman 264 (Cal) (Mag), Asst. CIT vs. Mahadeo Agarwalla (2002) 125 Taxman 229 (Cal) (Mad).

7. Payment of admitted tax
As far as appeal before the Commissioner (Appeals) is concerned, section 249 (4) provides that no appeal shall be entertained under chapter XX unless at the time of filing the appeal the assessee has paid (a) the taxes due on the returned income or (b) where no return is filed, an amount equal to the amount of advance tax which was payable by him. The Commissioner (Appeals) is empowered, for any good and sufficient reason, to exempt the assessee from operation of this provision in case of (b). Prior to amendment from 1-4-1989 the Commissioner (Appeals) had power to exercise his power to exempt in case (a) also. Order refusing to exercise such discretion is an appealable order – CIT vs. Smt. Nanhibai Jaiswal (1988) 171 ITR 646 (M.P.). Filing of appeal before Tribunal also falls under chapter XX , hence provisions of section 249(4) are applicable to an appeal filed before the Tribunal. (V. Baskaran vs. Asst. CIT (1998) 62 TTJ (Chennai) 698). But the Indore Bench of the Tribunal in Pawan Kumar Lodha vs. ACIT (2003) 78 TTJ (Ind) 983 held that prepayment of tax does not apply to appeal filed before the Tribunal. However, it does not apply to appeals filed to the Tribunal from assessment framed under Chapter XIV B. [V.S.N. Sudhakaran vs. Asst. CIT (2002) 83 ITD 159 (Chennai); Anil Sanghi vs. ACIT (85 ITD 73 (Del) (SB)]. The Madras High Court in CIT vs. Smt. G.A. Somanth Kamani (2002) 125 Taxman 424 (Mad) held that section 249 (4) cannot be read down so as to restrict it to appeal against assessment only it will be applicable in case of appeal against penalty also.

8. Appeal is not maintainable where tax is not deducted at source from payment made to non-resident and is not paid to the Govt. prior to filing of appeal (ITO vs. Tata Iron & Steel Co. Ltd. (2001) 71 TTJ (Cal) 323. Crucial date for deciding the applicability of amended provisions to section 249(4) was the date of issue of notice under section 143(2) and not date of filing return. (Satyendra Pal Chaudhary vs. Asst. CIT (2002) 74 TTJ (Mum) 741) . Where despite adjustment of seized amount full amount of tax due from assessee was not paid before filing appeal, assessee's appeal was not maintainable (Bharatkumar Sekhsaria vs. Dy. CIT (2002) 82 ITD 512 (Mum) . Also see CIT vs. Smt. G.A. Samonthakamani (2002) 125 Taxman 424 (Mad).

In Shri Parasram G. Purohit vs. ACIT, ITA No. 2689/Bom/93 Bench `B' Assessment year 1989-90, the Hon'ble Bombay Tribunal, held that once the tax required to be paid u/s. 249(4) has been paid before the final date of hearing, it is incumbent to consider the appeal having been filed on the date of payment. (Decision of Supreme Court in CIT vs. Filmistan 42 ITR 163 referred to). Where appellant was `notified entity under the Special Court (Trial of offences relating to Transactions in Securities) Act, 1992 and all properties had been attached, in view of this fact that the Appellant had requested the Assessing Officer to approach special Court to release amount of self assessment tax payable and such request had been made by Assessing Officer, assessee could be said to have made implied compliance with the provisions of section 249(4). (Divine Holdings (P) Ltd vs. Dy. CIT (2001) 119 Taxman 27 (Mum) (Mag) (Also see, Ashwin S. Mehta (HUF) vs. Asst CIT (2002) 75 TTJ (Mum) 960). Where assessee filed appeal on 2.4.1976 and 4.11.1997 was last date on which AAC heard appeal by which time assessee had paid entire tax due, the Delhi High Court in CIT vs. Rama Body Builders (2001) 250 ITR 825 (Del), AAC was not justified in refusing to entertain appeal on the ground that tax due had not been paid by 2.4.1976, the date on which the appeal was filed, [also see S. Venkatesh vs. Asst. CIT (2000) 112 Taxman 31 (Chennai) (Mag)].

9. Death of an assessee
Where an assessee to an appeal dies or is adjudicated insolvent or in the case of the company wound up, the appeal will not abate and will continue against the executor, administrator or other legal representatives of the assessee or by or against the assignee, receiver or liquidator as the case may be. In case of a death of assessee, the legal heirs of the assessee must file copy of death certificate and an affidavit of they being the legal heirs. A fresh memorandum of appeal signed by the legal heirs must be filed before the Commissioner (Appeals) or the Tribunal as the case may be where the assessee is the appellant so that the legal heirs are brought on record.

CHART REGARDING FILING OF APPEALS UNDER THE INCOME-TAX ACT, 1961

Particulars CIT I.T.A.T
Relevant provisions Sections 246A to 251 Sections 252 to 255
Appealable Orders Specified in section 246A 253
Time limit 30 days 60 days
Prescribed Form Form No. 35 (Rule 45) Form No. 36 (Rule 47(1)
Cross objection — Form No. 36A
(Rule 47(1) Time Limit 30 days)
Fees payable As prescribed – As per Annexure
Documents accompanying the Memo of Appeal Statement of Facts, Ground of Appeal. Notice of Demand and copy of order against which appeal is preferred (In case of appeal against penalty order assessment order also to be annexed). Grounds of Appeal order of CIT (A) and Form No. 35 with entire set filed along with it
No. of copies to be filed Duplicate Triplicate
Filed with CIT(A) mentioned in Notice of Demand The Asst. Registrar, Income-tax Appellate Tribunal
SCHEDULE OF FEES FOR FILING APPEALS TO THE COMMISSIONER OF
INCOME-TAX (APPEALS) AND INCOME-TAX APPELLATE TRIBUNAL

Particulars Fees for filing appeal before CIT (A) Fees for filing appeal before I.T.A.T
Under Income-tax Act, 1961
Assessed total income Rs. 1 lakh or less Rs. 250 Rs. 500
Assessed total income more than Rs. 1 lakh but not more than Rs. 2 lakhs Rs. 500 Rs. 1,500
Assessed total income more than Rs. 2 lakhs Rs. 1000 1% of assessed income subject to a maximum of Rs. 10,000
Where subject matter is not covered under any of above Rs. 250 Rs. 500
Under other Direct taxes (Wealth Tax Act/Gift Tax Act etc) In an appeal under Wealth Tax Act, in the case an appeal is not relatable to net wealth as computed by A.O — Rs. 500
Miscellaneous application u/s. 254(2) — Rs. 50
Stay Petition — Rs. 500