ITAT (MUM): Penalty proceedings : Whenever an addition/disallowance is made, initial burden is upon assessee to prove that it is not his concealed income or he has not furnished inaccurate particulars of such income

Penalty proceedings : Whenever an addition/disallowance is made, initial burden is upon assessee to prove that it is not his concealed income or he has not furnished inaccurate particulars of such income

 

• When an explanation is offered, the onus stands shifted on to the Revenue whereby it has to be shown that the explanation offered by the assessee is false or assessee has not been able to substantiate his explanation and failed to prove that such explanation is bona fide and all the facts relating to the same and material to the computation of his total income have not been disclosed

 

[2010] 5 taxmann 70 (Mum. - ITAT)

ITAT, MUMBAI 'H' BENCH, MUMBAI

ITO v. Heaven Distillery Pvt. Ltd.

ITA No. 742/Mum/2008

May 14, 2010

 

FACTS

The assessee is a Company registered under the Companies Act and it was engaged in the business of Mending and bottling of IMFL. In respect of the previous year relevant to the assessment year 2000-2001 assessee declared total income of Rs.52,380/- and the same was processed accordingly under section 143 (1) of the Act. According to the Assessing Officer provisions of section 115JA are applicable to the assessee-company. Since assessee did not compute deemed total income under section 115JA of the Act, the case was selected for scrutiny and a notice was issued under section 143 (2) of the Act, in response to which, Shri G.P. Mehta, Authorised Representative appeared from time to time and furnished relevant details. Assessment was thereafter completed by determining net taxable income at Rs.47,53,290/- and simultaneously penalty proceedings were initiated on the ground that assessee concealed the income/furnished inaccurate particulars of income which is evident from the following additions/disallowances.

1.            Disallowance of depreciation on Rs.,84,109/ -building and machinery

2.            Addition made u/s. 145A Rs. 4,41,002/-

3.            Fee's paid to Sandeep Solanki for Rs. 12,000/-Valuation of Bldg. & Machinery.

4.            Disallowance out of salary & wages     Rs. 1,57,340/-

5.            Disallowance of discount on sale         Rs. 7,98,692/-

Addition made u/s.68 on account of Rs.l 1,50,728/-unsecured loan

As regards the addition made by the Assessing Officer under section 68 of the Act, the case of the assessee was that loan confirmations were filed and creditors responded to the letters written by the Assessing Officer by confirming the credits in writing ; Summons having not been issued it cannot be said that the assessee had failed to prove the genuineness of the loan transactions. The Assessing Officer, however, observed that only some creditors have filed affidavits. Moreover, the Assessing Officer issued summons under section 131 of the Act in the month of January, 2003 but nobody attended. Since preliminary onus is upon the assessee, in the absence of proving creditworthiness, the Assessing Officer concluded that assessee had concealed income by filing inaccurate particulars.

Learned CIT (A) observed that objection of the assessee with regard to jurisdiction of the Assessing Officer to initiate penalty proceedings is factually incorrect. He noticed that the Assessing Officer had recorded his satisfaction in the assessment order by mentioning that 'proceedings under section 271 (1) (c) are initiated separately for furnishing inaccurate particulars of income'. Thus proceedings were held to be in accordance with law.

 

However, on merits, he found that it was not a fit case of levy of penalty. It may be noticed that the learned CIT(A) incorporated the written submissions in his order and accepted the plea of the assessee

 

HELD

 

In order to consider the issue in dispute, it may be necessary to appreciate the scope and ambit of the provisions of section 271 (1) (c) read with explanations therein. Section 271 (1) (c) comes into play when an assessee concealed particulars of his income or furnished inaccurate particulars of such income. Explanation 1 to Section 271 (1)(c) is a deeming provision which enlarges the scope of expression "concealment" and "furnishing of inaccurate particulars of income". It says that any amount added or disallowed in computing the total income shall be deemed to represent the income in respect of which particulars have been concealed. In other words, whenever an addition/disallowance is made, the initial burden is upon the assessee to prove that it is not his concealed income or he has not furnished inaccurate particulars of such income.

When an explanation is offered, the onus stands shifted on to the Revenue whereby it has to be shown that the explanation offered by the assessee is false or assessee has not been able to substantiate his explanation and failed to prove that such explanation is bonafide and all the facts relating to the same and material to the computation of his total income have not been disclosed. It is not for the Assessing Officer to prove beyond reasonable doubt that the assessee has furnished inaccurate particulars of income or has concealed income referable to the additions/disallowances made. In the case of Union of India vs. Dharmendra Textiles (2008) 306 ITR 277 Hon'ble Apex Court had an occasion to consider the scope and ambit of Explanations to section 271 (1) (c) of the Act and, while noticing that the Court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous and the language employed in a statute is the determinative factor of legislative intent the Hon'ble Court concluded that the explanations indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return of income. In the case of K.P. Madhusudhan vs. CIT 251 ITR 99 the Hon'ble Apex Court observed that when a notice is issued under section 271 (l) (c) of the Act, an assessee can be said to have been put to notice that explanation to section 271 (1) (c) is invoked and initial burden is upon the assessee to prove his bonafides. In other words, no express location of the explanation  is necessary. As and when addition/disallowance is made there is a deemed concealment or furnishing of inaccurate particulars of income on which penalty is imposable and the initial burden is upon the assessee to file explanation and substantiate his explanation to prove the bonafides or to show that the transactions are genuine. In a recent un-reported decision of the ITAT, Mumbai Benches (Ultramarine and Pigments Limited ITA. No. 1325/Mum/2007 dated 20^th April, 2010) the Bench had taken note of latest decision of the Apex Court in the case of Reliance Petrol Products Pvt. Ltd. 322 ITR 158 and, upon analyzing the gamut of case law on the issue, the Bench had observed that upon invoking explanation to section ¹ 1 (1) (c) of the Act there is no further onus on the Assessing Officer to establish mens rea and it is for the assessee to satisfactorily discharge the onus of proving the bonafides with regard to claim of depreciation ere, We have also gone through the case law relied upon by the learned Counsel wherein decisions were rendered by applying the above mentioned principles to the facts of those cases.

RELEVANT EXTRACTS:

20. We have carefully considered the rival submissions and perused fie record. In order to consider the issue in dispute, it may be necessary to appreciate the scope and ambit of the provisions of section 271 (1) (c) read with explanations therein. Section 271 (1) (c) comes into play when an assessee concealed particulars of his income or furnished inaccurate particulars of such income. Explanation 1 to Section 271 (1) (cj is a deeming provision which enlarges the scope of expression "concealment" and "furnishing of inaccurate particulars of income". It says that any amount added or disallowed in computing the total income shall be deemed to represent the income in respect of which particulars have been concealed. In other words, whenever an addition/disallowance is made, t]/e initial burden is upon the assessee to prove that it is not his concealed income or he has not furnished inaccurate particulars of such income. Explanation 1 to section 271 (1) (c) lays down the procedure to discharge the burden as under :

(a)               when such person offers explanation and substantiates the same; or

(b)               proves that all facts are on record and material to the computation of his total income have been disclosed and explanation is bonafide.

21. When an explanation is offered, the onus stands shifted on to the Revenue whereby it has to be shown that the explanation offered by the assessee is false or assessee has not been able to substantiate his explanation and failed to prove that such explanation is bonafide and all the facts relating to the same and material to the computation of his total income have not been disclosed. It is not for the Assessing Officer to prove beyond reasonable doubt that the assessee has furnished inaccurate particulars of income or has concealed income referable to the additions/disallowances made. In the case of Union of India vs. Dharmendra Textiles (2008) 306 ITR 277 Hon'ble Apex Court had an occasion to consider the scope and ambit of Explanations to section 271 (1) (c) of the Act and, while noticing that the Court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous and the language employed in a statute is the determinative factor of legislative intent the Hon'ble Court concluded that the explanations indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return of income. In the case of K.P. Madhusudhan vs. CIT 251 ITR 99 the Hon'ble Apex Court observed that when a notice is issued under section 271 (l) (c) of the Act, an assessee can be said to have been put to notice that explanation to section 271 (1) (c) is invoked and initial burden is upon the assessee to prove his bonafides. In other words, no express location of the explanation  is necessary. As and when addition/disallowance is made there is a deemed concealment or furnishing of inaccurate particulars of income on which penalty is imposable and the initial burden is upon the assessee to file explanation and substantiate his explanation to prove the bonafides or to show that the transactions are genuine. In a recent un-reported decision of the ITAT, Mumbai Benches (Ultramarine and Pigments Limited ITA. No. 1325/Mum/2007 dated 20^th April, 2010) the Bench had taken note of latest decision of the Apex Court in the case of Reliance Petrol Products Pvt. Ltd. 322 ITR 158 and, upon analyzing the gamut of case law on the issue, the Bench had observed that upon invoking explanation to section ¹ 1 (1) (c) of the Act there is no further onus on the Assessing Officer to establish mens rea and it is for the assessee to satisfactorily discharge the onus of proving the bonafides with regard to claim of depreciation ere, We have also gone through the case law relied upon by the learned Counsel wherein decisions were rendered by applying the above mentioned principles to the facts of those cases.

11. Now we may turn to the facts of the case on hand. As regards the claim of depreciation of building and machinery the Assessing Officer observed in pages 8 and 9 of the assessment order that (he assessee has grossly failed to produce any documentary evidence to tablish its claim that building and machineries were put to use for business purpose such as purchase of raw materials, excise records, wage register, consumption of power etc., In his opinion it is established beyond doubt that the building and machineries of erstwhile proprietary concern were not put to use for the purpose of assessee's business of production of IMFL. Despite a categorical finding, the assessee had not furnished any evidence, during the course of penalty proceedings, to establish that building and machinery was used for its business. This shows that except giving a bald explanation the assessee has not substantiated the explanation or proved the bonafides of its claim. therefore, Assessing Officer concluded that the assessee wrongly claimed depreciation on the building and machinery which was not used for business purpose and such claim had made with an intention to reduce the tax liability of the current year. Learned CIT(A) observed that the Assessing Officer ought to have examined the claim during the course of penalty proceedings. In our considered opinion the onus is upon the assessee to prove that the building and machinery was put to use. Such information would be within the personal knowledge of the assessee and the Assessing Officer cannot be called upon to prove the negative i.e. non-user of such assets. At any rate, in view of Explanation to section 271 (1) (c) of the Act the burden is upon the assessee to file proper explanation and substantiate such explanation with supporting material. In the instant case no such material was brought on record. Learned Counsel submitted that the Assessing Officer did not specify as to what documents are required to prove that the machinery was used for the purpose of packing of finished goods. He further submitted that the assessee-company had acquired the assets from M/s. R.N. Products (firm) whereas the Assessing Officer mistakenly mentioned that it was acquired from the proprietary concern which shows that there is non-application of mind. However, in our considered opinion the factum of user of building and machinery has to be proved-whether the building and machinery was taken over by the firm or from the erstwhile proprietary concern. As could be noticed from the Special Audit report, proprietary concern of Mrs. Latha Parikh was originally engaged in manufacturing of packing materials whereas by the time the assessee-company had taken over the fixed assets etc., it was a firm viz. M/s. R.N. Products. Since the assessee has not proved that it was put to use it cannot be said that the assessee substantitated its explanation. Thus we are of the opinion that it is a fit case for levy of royalty and hence the order of the learned CIT(A), on this issue is set aside.

24.    Similarly, as regards the addition made under section 1 i5A of the Act the case of the assessee is that the addition made was without, any reference to statutory records. It is noticed from the assessment order that the addition was made on estimate basis on the ground that the basis followed by the assessee is likely to result in distorted picture of true state of business for computing the chargeable income. In our opinion the bonafides of the explanation cannot be disputed. As rightly observed by the learned CIT(A) the assessee having tendered his explanation which is bonafide, during the penalty proceedings the Assessing Officer ought to have shown that it is a false explanation. In the absence of such observation we are of the view that there is no case for levy of penalty with reference to addition of Rs. 4,4 1,002/-.

25.              As regards disallowance out of salary and wages the case of Assessing Officer is that excessive provision was made by the assessee whereas the assessee vide letter dated 20-10-2003 submitted that the allegation of Special Auditor that the payment for the month of March, 2000 was made in the month of March 2000 itself was factually incorrect and details of payment were submitted in the explanation. In other words, allegation of the Special Auditor is that payment is made for 13 months whereas fact remains that payments were made only for 12 months. Under these circumstances, merely because the explanation of the assessce-company was rejected without arriving at the conclusion that it is a false claim, penalty cannot be levied. Under these circumstances, we agree with the findings of the learned CIT(A) on this issue and thus uphold the Order of the learned CIT(A).

 

26.              As regards disallowance of discount on sales the case of the

assessee is that confirmatory letters were never called for and hence they were not furnished as otherwise complete details are available with the assessee. However, it is noticed that the Assessing Officer issued a show cause notice calling upon assessee to furnish the basis of discount and details of sales made to each party and to establish the genuineness of discount. Except furnishing self-generated vouchers the assessee has not furnished the details called for. Under these circumstances the Assessing Officer doubted the genuineness of the alleged discount and accordingly disallowed the same. Even during the penalty proceedings, except merely slating that complete details were filed vide Annexure No. 43 (presumably self-generated vouchers) no other information was furnished. In other words, the assessee failed to substantiate its explanation of genuineness of the alleged discount. Though the learned CIT(A) merely reproduced the written submissions of the assessee, it is not specified as to what was contained in Annexure-43 in addition to self-generated vouchers. Even before us no material whatsoever was filed by the assessee to indicate that basic details were furnished to support its stand that discount was allowed on sales. Under these circumstances, we arc of the view that the assessee has not discharged the burden iced upon it under Explanation to section 271 (1) (c) of the Act. In other words, mere furnishing an explanation, without substantiating the same, particularly in a case where an addition was made by the Assessing Officer and confirmed by the CIT(A) on the ground that genuineness of the discount is in doubt. We therefore, set aside the Order of the learned CIT(A) on this issue and hold that penalty levied by the Assessing Officer on this count is in accordance with law.

27.     As regards unsecured loans and addition made under section 68 of the Act the case of the Assessing Officer was that the assessee failed to prove their identity, genuineness and creditworthiness he has also referred to the comments of the Special Auditor stating that most of the loan confirmations do not bear GIR/PA Nos. and most of the loan confirmations are in the name of M/s. R.R. Products, proprietary concern of Shri Lata Parikh or M/s. R.N. Products (Firm). Though confirmation letters were filed the Assessing Officer observed that summons issued to most of the loan creditors have been returned back by the postal authority and hence mere furnishing of an affidavit of so-colled lenders cannot make the loan genuine and also pointed out that one of the loan creditors i.e., Atlantic Agencies filed a letter denying any business or loan transaction with the assessee-company. He also noticed that most of the persons are small agriculturists who were not capable of lending such huge amounts. In view of the fact that initial onus is upon assessee to prove identity, genuineness and capacity of the loan editors and the assessee having failed to prove genuineness and . ditworthiness, the Assessing Officer disallowed cash credits to the tune of Rs.l 1,50,728/- under section 68 of the Act and in the absence of any further material produced even during the penalty proceedings, he concluded that it was a fit case for levy of penalty. In the assessment order it was mentioned that in the month of January, 2003 summons were issued to various loan creditors and nobody responded to the summons. Though non-attendance in response to summons was in the knowledge of the assessee, even in the penalty proceedings assessee did not choose to furnish either the correct address or ensured attendance of some of the creditors. At any rate, no information was furnished to prove the creditworthiness of the creditors. Under these circumstances, claim of the assessee that confirmatory letters is sufficient compliance to the requirements under section 68 of the Act is not in accordance with law. An explanation tendered by the assessee, in the penalty proceedings should be substantiated with documentary evidence which should prima facie show that the credits are genuine. In the instant case, Assessing Officer mentioned that most of the loan creditors are not income tax assessees and the assessee failed to establish identity and genuineness the creditors, apart from the fact that they do not have creditworthiness. Therefore, it cannot be said that explanation of the assessee is substantiated with proper material and thus Assessing Officer was justified in levying penalty under section 271 (1) (c) of the Act with reference to the addition made under section 68 of the Act. Order passed by the learned CIT(A) on this aspect is therefore set aside.

 

 

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Penalty proceedings : Whenever an addition/disallowance is made, initial burden is upon assessee to prove that it is not his concealed income or he has not furnished inaccurate particulars of such income

Penalty proceedings : Whenever an addition/disallowance is made, initial burden is upon assessee to prove that it is not his concealed income or he has not furnished inaccurate particulars of such income

 

• When an explanation is offered, the onus stands shifted on to the Revenue whereby it has to be shown that the explanation offered by the assessee is false or assessee has not been able to substantiate his explanation and failed to prove that such explanation is bona fide and all the facts relating to the same and material to the computation of his total income have not been disclosed

 

[2010] 5 taxmann.com 70 (Mum. - ITAT)

ITAT, MUMBAI 'H' BENCH, MUMBAI

ITO

v.

Heaven Distillery Pvt. Ltd.

ITA No. 742/Mum/2008

May 14, 2010

 

FACTS

The assessee is a Company registered under the Companies Act and it was engaged in the business of Mending and bottling of IMFL. In respect of the previous year relevant to the assessment year 2000-2001 assessee declared total income of Rs.52,380/- and the same was processed accordingly under section 143 (1) of the Act. According to the Assessing Officer provisions of section 115JA are applicable to the assessee-company. Since assessee did not compute deemed total income under section 115JA of the Act, the case was selected for scrutiny and a notice was issued under section 143 (2) of the Act, in response to which, Shri G.P. Mehta, Authorised Representative appeared from time to time and furnished relevant details. Assessment was thereafter completed by determining net taxable income at Rs.47,53,290/- and simultaneously penalty proceedings were initiated on the ground that assessee concealed the income/furnished inaccurate particulars of income which is evident from the following additions/disallowances.

1.            Disallowance of depreciation on Rs.,84,109/ -building and machinery

2.            Addition made u/s. 145A Rs. 4,41,002/-

3.            Fee's paid to Sandeep Solanki for Rs. 12,000/-Valuation of Bldg. & Machinery.

4.            Disallowance out of salary & wages     Rs. 1,57,340/-

5.            Disallowance of discount on sale         Rs. 7,98,692/-

Addition made u/s.68 on account of Rs.l 1,50,728/-unsecured loan

As regards the addition made by the Assessing Officer under section 68 of the Act, the case of the assessee was that loan confirmations were filed and creditors responded to the letters written by the Assessing Officer by confirming the credits in writing ; Summons having not been issued it cannot be said that the assessee had failed to prove the genuineness of the loan transactions. The Assessing Officer, however, observed that only some creditors have filed affidavits. Moreover, the Assessing Officer issued summons under section 131 of the Act in the month of January, 2003 but nobody attended. Since preliminary onus is upon the assessee, in the absence of proving creditworthiness, the Assessing Officer concluded that assessee had concealed income by filing inaccurate particulars.

Learned CIT (A) observed that objection of the assessee with regard to jurisdiction of the Assessing Officer to initiate penalty proceedings is factually incorrect. He noticed that the Assessing Officer had recorded his satisfaction in the assessment order by mentioning that 'proceedings under section 271 (1) (c) are initiated separately for furnishing inaccurate particulars of income'. Thus proceedings were held to be in accordance with law.

 

However, on merits, he found that it was not a fit case of levy of penalty. It may be noticed that the learned CIT(A) incorporated the written submissions in his order and accepted the plea of the assessee

 

HELD

 

In order to consider the issue in dispute, it may be necessary to appreciate the scope and ambit of the provisions of section 271 (1) (c) read with explanations therein. Section 271 (1) (c) comes into play when an assessee concealed particulars of his income or furnished inaccurate particulars of such income. Explanation 1 to Section 271 (1)(c) is a deeming provision which enlarges the scope of expression "concealment" and "furnishing of inaccurate particulars of income". It says that any amount added or disallowed in computing the total income shall be deemed to represent the income in respect of which particulars have been concealed. In other words, whenever an addition/disallowance is made, the initial burden is upon the assessee to prove that it is not his concealed income or he has not furnished inaccurate particulars of such income.

When an explanation is offered, the onus stands shifted on to the Revenue whereby it has to be shown that the explanation offered by the assessee is false or assessee has not been able to substantiate his explanation and failed to prove that such explanation is bonafide and all the facts relating to the same and material to the computation of his total income have not been disclosed. It is not for the Assessing Officer to prove beyond reasonable doubt that the assessee has furnished inaccurate particulars of income or has concealed income referable to the additions/disallowances made. In the case of Union of India vs. Dharmendra Textiles (2008) 306 ITR 277 Hon'ble Apex Court had an occasion to consider the scope and ambit of Explanations to section 271 (1) (c) of the Act and, while noticing that the Court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous and the language employed in a statute is the determinative factor of legislative intent the Hon'ble Court concluded that the explanations indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return of income. In the case of K.P. Madhusudhan vs. CIT 251 ITR 99 the Hon'ble Apex Court observed that when a notice is issued under section 271 (l) (c) of the Act, an assessee can be said to have been put to notice that explanation to section 271 (1) (c) is invoked and initial burden is upon the assessee to prove his bonafides. In other words, no express location of the explanation  is necessary. As and when addition/disallowance is made there is a deemed concealment or furnishing of inaccurate particulars of income on which penalty is imposable and the initial burden is upon the assessee to file explanation and substantiate his explanation to prove the bonafides or to show that the transactions are genuine. In a recent un-reported decision of the ITAT, Mumbai Benches (Ultramarine and Pigments Limited ITA. No. 1325/Mum/2007 dated 20^th April, 2010) the Bench had taken note of latest decision of the Apex Court in the case of Reliance Petrol Products Pvt. Ltd. 322 ITR 158 and, upon analyzing the gamut of case law on the issue, the Bench had observed that upon invoking explanation to section ¹ 1 (1) (c) of the Act there is no further onus on the Assessing Officer to establish mens rea and it is for the assessee to satisfactorily discharge the onus of proving the bonafides with regard to claim of depreciation ere, We have also gone through the case law relied upon by the learned Counsel wherein decisions were rendered by applying the above mentioned principles to the facts of those cases.

RELEVANT EXTRACTS:

20. We have carefully considered the rival submissions and perused fie record. In order to consider the issue in dispute, it may be necessary to appreciate the scope and ambit of the provisions of section 271 (1) (c) read with explanations therein. Section 271 (1) (c) comes into play when an assessee concealed particulars of his income or furnished inaccurate particulars of such income. Explanation 1 to Section 271 (1) (cj is a deeming provision which enlarges the scope of expression "concealment" and "furnishing of inaccurate particulars of income". It says that any amount added or disallowed in computing the total income shall be deemed to represent the income in respect of which particulars have been concealed. In other words, whenever an addition/disallowance is made, t]/e initial burden is upon the assessee to prove that it is not his concealed income or he has not furnished inaccurate particulars of such income. Explanation 1 to section 271 (1) (c) lays down the procedure to discharge the burden as under :

(a)               when such person offers explanation and substantiates the same; or

(b)               proves that all facts are on record and material to the computation of his total income have been disclosed and explanation is bonafide.

21. When an explanation is offered, the onus stands shifted on to the Revenue whereby it has to be shown that the explanation offered by the assessee is false or assessee has not been able to substantiate his explanation and failed to prove that such explanation is bonafide and all the facts relating to the same and material to the computation of his total income have not been disclosed. It is not for the Assessing Officer to prove beyond reasonable doubt that the assessee has furnished inaccurate particulars of income or has concealed income referable to the additions/disallowances made. In the case of Union of India vs. Dharmendra Textiles (2008) 306 ITR 277 Hon'ble Apex Court had an occasion to consider the scope and ambit of Explanations to section 271 (1) (c) of the Act and, while noticing that the Court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous and the language employed in a statute is the determinative factor of legislative intent the Hon'ble Court concluded that the explanations indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return of income. In the case of K.P. Madhusudhan vs. CIT 251 ITR 99 the Hon'ble Apex Court observed that when a notice is issued under section 271 (l) (c) of the Act, an assessee can be said to have been put to notice that explanation to section 271 (1) (c) is invoked and initial burden is upon the assessee to prove his bonafides. In other words, no express location of the explanation  is necessary. As and when addition/disallowance is made there is a deemed concealment or furnishing of inaccurate particulars of income on which penalty is imposable and the initial burden is upon the assessee to file explanation and substantiate his explanation to prove the bonafides or to show that the transactions are genuine. In a recent un-reported decision of the ITAT, Mumbai Benches (Ultramarine and Pigments Limited ITA. No. 1325/Mum/2007 dated 20^th April, 2010) the Bench had taken note of latest decision of the Apex Court in the case of Reliance Petrol Products Pvt. Ltd. 322 ITR 158 and, upon analyzing the gamut of case law on the issue, the Bench had observed that upon invoking explanation to section ¹ 1 (1) (c) of the Act there is no further onus on the Assessing Officer to establish mens rea and it is for the assessee to satisfactorily discharge the onus of proving the bonafides with regard to claim of depreciation ere, We have also gone through the case law relied upon by the learned Counsel wherein decisions were rendered by applying the above mentioned principles to the facts of those cases.

11. Now we may turn to the facts of the case on hand. As regards the claim of depreciation of building and machinery the Assessing Officer observed in pages 8 and 9 of the assessment order that (he assessee has grossly failed to produce any documentary evidence to tablish its claim that building and machineries were put to use for business purpose such as purchase of raw materials, excise records, wage register, consumption of power etc., In his opinion it is established beyond doubt that the building and machineries of erstwhile proprietary concern were not put to use for the purpose of assessee's business of production of IMFL. Despite a categorical finding, the assessee had not furnished any evidence, during the course of penalty proceedings, to establish that building and machinery was used for its business. This shows that except giving a bald explanation the assessee has not substantiated the explanation or proved the bonafides of its claim. therefore, Assessing Officer concluded that the assessee wrongly claimed depreciation on the building and machinery which was not used for business purpose and such claim had made with an intention to reduce the tax liability of the current year. Learned CIT(A) observed that the Assessing Officer ought to have examined the claim during the course of penalty proceedings. In our considered opinion the onus is upon the assessee to prove that the building and machinery was put to use. Such information would be within the personal knowledge of the assessee and the Assessing Officer cannot be called upon to prove the negative i.e. non-user of such assets. At any rate, in view of Explanation to section 271 (1) (c) of the Act the burden is upon the assessee to file proper explanation and substantiate such explanation with supporting material. In the instant case no such material was brought on record. Learned Counsel submitted that the Assessing Officer did not specify as to what documents are required to prove that the machinery was used for the purpose of packing of finished goods. He further submitted that the assessee-company had acquired the assets from M/s. R.N. Products (firm) whereas the Assessing Officer mistakenly mentioned that it was acquired from the proprietary concern which shows that there is non-application of mind. However, in our considered opinion the factum of user of building and machinery has to be proved-whether the building and machinery was taken over by the firm or from the erstwhile proprietary concern. As could be noticed from the Special Audit report, proprietary concern of Mrs. Latha Parikh was originally engaged in manufacturing of packing materials whereas by the time the assessee-company had taken over the fixed assets etc., it was a firm viz. M/s. R.N. Products. Since the assessee has not proved that it was put to use it cannot be said that the assessee substantitated its explanation. Thus we are of the opinion that it is a fit case for levy of royalty and hence the order of the learned CIT(A), on this issue is set aside.

24.    Similarly, as regards the addition made under section 1 i5A of the Act the case of the assessee is that the addition made was without, any reference to statutory records. It is noticed from the assessment order that the addition was made on estimate basis on the ground that the basis followed by the assessee is likely to result in distorted picture of true state of business for computing the chargeable income. In our opinion the bonafides of the explanation cannot be disputed. As rightly observed by the learned CIT(A) the assessee having tendered his explanation which is bonafide, during the penalty proceedings the Assessing Officer ought to have shown that it is a false explanation. In the absence of such observation we are of the view that there is no case for levy of penalty with reference to addition of Rs. 4,4 1,002/-.

25.              As regards disallowance out of salary and wages the case of Assessing Officer is that excessive provision was made by the assessee whereas the assessee vide letter dated 20-10-2003 submitted that the allegation of Special Auditor that the payment for the month of March, 2000 was made in the month of March 2000 itself was factually incorrect and details of payment were submitted in the explanation. In other words, allegation of the Special Auditor is that payment is made for 13 months whereas fact remains that payments were made only for 12 months. Under these circumstances, merely because the explanation of the assessce-company was rejected without arriving at the conclusion that it is a false claim, penalty cannot be levied. Under these circumstances, we agree with the findings of the learned CIT(A) on this issue and thus uphold the Order of the learned CIT(A).

 

26.              As regards disallowance of discount on sales the case of the

assessee is that confirmatory letters were never called for and hence they were not furnished as otherwise complete details are available with the assessee. However, it is noticed that the Assessing Officer issued a show cause notice calling upon assessee to furnish the basis of discount and details of sales made to each party and to establish the genuineness of discount. Except furnishing self-generated vouchers the assessee has not furnished the details called for. Under these circumstances the Assessing Officer doubted the genuineness of the alleged discount and accordingly disallowed the same. Even during the penalty proceedings, except merely slating that complete details were filed vide Annexure No. 43 (presumably self-generated vouchers) no other information was furnished. In other words, the assessee failed to substantiate its explanation of genuineness of the alleged discount. Though the learned CIT(A) merely reproduced the written submissions of the assessee, it is not specified as to what was contained in Annexure-43 in addition to self-generated vouchers. Even before us no material whatsoever was filed by the assessee to indicate that basic details were furnished to support its stand that discount was allowed on sales. Under these circumstances, we arc of the view that the assessee has not discharged the burden iced upon it under Explanation to section 271 (1) (c) of the Act. In other words, mere furnishing an explanation, without substantiating the same, particularly in a case where an addition was made by the Assessing Officer and confirmed by the CIT(A) on the ground that genuineness of the discount is in doubt. We therefore, set aside the Order of the learned CIT(A) on this issue and hold that penalty levied by the Assessing Officer on this count is in accordance with law.

27.     As regards unsecured loans and addition made under section 68 of the Act the case of the Assessing Officer was that the assessee failed to prove their identity, genuineness and creditworthiness he has also referred to the comments of the Special Auditor stating that most of the loan confirmations do not bear GIR/PA Nos. and most of the loan confirmations are in the name of M/s. R.R. Products, proprietary concern of Shri Lata Parikh or M/s. R.N. Products (Firm). Though confirmation letters were filed the Assessing Officer observed that summons issued to most of the loan creditors have been returned back by the postal authority and hence mere furnishing of an affidavit of so-colled lenders cannot make the loan genuine and also pointed out that one of the loan creditors i.e., Atlantic Agencies filed a letter denying any business or loan transaction with the assessee-company. He also noticed that most of the persons are small agriculturists who were not capable of lending such huge amounts. In view of the fact that initial onus is upon assessee to prove identity, genuineness and capacity of the loan editors and the assessee having failed to prove genuineness and . ditworthiness, the Assessing Officer disallowed cash credits to the tune of Rs.l 1,50,728/- under section 68 of the Act and in the absence of any further material produced even during the penalty proceedings, he concluded that it was a fit case for levy of penalty. In the assessment order it was mentioned that in the month of January, 2003 summons were issued to various loan creditors and nobody responded to the summons. Though non-attendance in response to summons was in the knowledge of the assessee, even in the penalty proceedings assessee did not choose to furnish either the correct address or ensured attendance of some of the creditors. At any rate, no information was furnished to prove the creditworthiness of the creditors. Under these circumstances, claim of the assessee that confirmatory letters is sufficient compliance to the requirements under section 68 of the Act is not in accordance with law. An explanation tendered by the assessee, in the penalty proceedings should be substantiated with documentary evidence which should prima facie show that the credits are genuine. In the instant case, Assessing Officer mentioned that most of the loan creditors are not income tax assessees and the assessee failed to establish identity and genuineness the creditors, apart from the fact that they do not have creditworthiness. Therefore, it cannot be said that explanation of the assessee is substantiated with proper material and thus Assessing Officer was justified in levying penalty under section 271 (1) (c) of the Act with reference to the addition made under section 68 of the Act. Order passed by the learned CIT(A) on this aspect is therefore set aside.

 

 

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Fees for Technical Services, even if rendered outside India, are Taxable

Ashapura Minichem v. ADIT (ITAT Mumbai)(ITA No. 2508/Mum/08) Fees for Technical Services, even if rendered outside India, are Taxable

 

The assessee, an Indian company, entered into an agreement with a Chinese company for bauxite testing services in its laboratories (outside India) and for preparation of test reports.

 

The assessee filed an application u/s 195(1) in which it argued that as the services were rendered outside India and the recipient did not have a permanent establishment in India, the payments were not chargeable to tax under the India-China DTAA and no tax was required to be withheld at source. The AO took the view that the payments constituted “fees for technical services” u/s 9(1)(vii) and Article 12 of the DTAA and tax was required to be withheld at 10%.

 

This was upheld by the CIT (A). The assessee appealed to the Tribunal. HELD dismissing the appeal:

 

(i)                  As regards taxability u/s 9(1)(vii), in Ishikawajima-Harima Heavy Industries 288 ITR 408 and Clifford Chance 318 ITR 237 (Bom) it was held that “fees for technical services” were not chargeable to tax in India if two conditions were not satisfied viz. that the services were (a) rendered in India and (b) were utilized in India. However, these judgments are no longer good law in view of the retrospective amendment to the Explanation to s. 9(1)(vii) by the Finance Act, 2010. The effect of the amendment is that “fees for technical services” are chargeable to tax in India even if rendered outside India. Except in a situation in which a territorial method of taxation is followed, which is usually also a lowest common factor in taxation policies of tax heavens, source rule is an integral part of the taxation system. It is thus fallacious to proceed on the basis that territorial nexus to a tax jurisdiction being sine qua non to taxability in that jurisdiction is a normal international practice in all tax systems. (The concepts of “territorial nexus” and “source rule” discussed);

(ii)                As regards taxability under the DTAA, Article 12(4) defines “fees for technical services” as “the provision of services of .. technical .. nature by a resident of a Contracting State in the other Contracting State“. Article 12(6) provides that such technical services shall be deemed to arise in a Contracting State when the payer is a resident of that State;

(iii)               The argument that in using the words “in the Contracting State“, Article 12(4) incorporates the “place of performance test” and negates the “source rule” and that services rendered offshore are not taxable is not acceptable for two reasons. Firstly, because the expression “provision for services” is wider than the term “provision for rendering of services” and covers services rendered in the one State but used in the other State. Secondly, because the interpretation will render Article 12(6) redundant. A literal interpretation to a tax treaty which renders a treaty provision unworkable should be avoided. (Principles of treaty interpretation reiterated);

(iv)              Consequently, the payment was chargeable to tax under s. 9(1)(vii) as well under Art. 12 of the DTAA and tax had to be withheld at source u/s 195.

 

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Distribution of assets on dissolution of firm

CIT v. Kumbazha Tourist Home (Dissolved) (2010) 38 DTR (Ker) 166 Distribution of assets on dissolution of firm - Applicability of s. 45(4)

 

At the time of constitution of the firm the partners brought land and respective portions of building thereon as their capital contribution, and the firm claimed depreciation in respect of the building all along. On dissolution of the firm the properties reverted back to the partners at book value in the same way it was brought by them to the firm as their capital. Retransfer of properties to the partners on dissolution of firm involves transfer of properties and, therefore, s. 45(4) is attracted.

 

Finding of the Tribunal that s. 55A has no application to the facts of the case also is not correct. Sec. 55A authorises the AO to refer any capital asset to find out its fair market value for the purpose of assessment of capital gains. AO was free to refer the assets for valuation as the transfer value shown is the book value.

 

Further, the finding of the Tribunal that the transfer of building in the course of dissolution of the firm is assessable as short-term capital gain under s. 50(1), and since the transfer was made at book value, there is no capital gain is not sustainable. Distribution of assets at book value among the partners in the course of dissolution of the firm is to be assessed under s. 45(4), and the same is not covered by s. 50(1). 

 

 

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HC Kerala: Financiers of motor vehicles are not entitled to any deprecation much less higher rate of depreciation on such vehicles

If the financiers have only financed or purchased the vehicle and the borrowers are the registered owners, then the financiers are not entitled to claim any depreciation because they are neither the owners of the vehicle nor have they used the vehicle in their profession or business entitling them for depreciation under section 32(1)

 

[2010] 5 taxmann.com 74 (Ker.)

HIGH COURT OF KERALA

CIT  v. Manappuram General Finance & Leasing Ltd.

 

ITA No. 1186 of 2009

 

January 13, 2010

 

FACTS

 

The sole question raised in all the appeals filed by the revenue is whether the Income Tax Appellate Tribunal was justified in holding that the respondents/asscssees, which are engaged in financing of vehicle purchases, are entitled to higher rate of depreciation applicable to motor vehicles used in the business of running them on hire. Rightly or wrongly, the assessing officer allowed depreciation at the rate of 20 which is the rate applicable to motor vehicles used in business or profession by the assessees. When the appeals came up for hearing in the earlier occasion, this Count expressed doubt about the correctness of the facts stated before the lower authorities including the Tribunal and therefore, the assessing officer was directed to conduct enquiry about ownership and nature of transaction between the respondents/assessees and customers purchasing vehicle on availing loan from them. The Standing Counsel pointed out that pursuant to interim order of this Court dated 30th November,2009, though notices were issued to some of the respondents, they declined to furnish details. We do not think, there is any need to call for details from them, because this Court had occasion to consider the factual position in the case of motor vehicle financiers in another batch cases decided vide judgment of this Court m Commissioner of Income Tax v Kerala State Financial Enterprises Ltd. (220 CTR 286). It is seen from the said judgment that this Court this examined the true nature of the hire purchase agreement, lease agreement etc. between the financiers and the vehicle owners and noticed that the transaction is a real loan transaction against security of the vehicle and what is done is endorsement of hypothecation in the R. C. Book in terms of Section 51 of the Kerala Motor-Vehicles Act, 1988. If the facts found in that judgment are applied to the respondents herein in these cases, then the respondents are not entitled to depreciation under Section 32 of the Income Tax Act, 1961 (for short 'the Act) because they were neither owners of the vehicle nor" ha they used the vehicle in their business or profession.

 

HELD

Keeping in mind the factual position which is not the same as projected before the lower authorities even including the assessing authority, the assesees' counsel submitted before us that "the owner" takes in not only the registered owner, but the person in whose favour hypothecation agreement is entered into. We are unable to accept this contention because the definition 'owner' as contained in Section 2 (30) of the Motor Vehicles Act, 1988 (for short 'the Act') is as follows.-

 

"2(30) "owner" means a person in whose name a motor vehicle stands registered, and where such person is a minor, the guardian of such minor, and \n relation to a motor vehicle which is the subject of a hire-purchase, agreement, or an agreement of lease or on agreement of hypothecation, the person in possession of the vehicle under that agreement."

 

What is clear from the above is that the ownership of the motor vehicle is always with the registered owner and even in respect of motor vehicle which is the subject matter of hire purchase agreement or an agreement of hypothecation, the person in possession of the vehicle under that agreement shall be the owner. Admittedly, the respondents/assessees are neither the registered owners nor are they in possession of the vehicle. On the other hand, they are only the financiers in whose favour hypothecation is endorsed in the R. C. Book in terms of Section 51(1) of the Act which requires the registering authority to make an entry in the certificate of registration regarding the existence of hire purchase, lease or hypothecation agreement. However, sub-section (4) of Section 51 states that before entering transfer of ownership in the R. C. Book of the vehicle, the consent of the person in whose favour hypothecation, hire purchase or lease agreement endorsed, is required.

 

On examining the decision of the Supreme Court above referred, the admitted position is that the leasing companies purchased the machinery and retained their ownership during the period of lease and in that context, the Supreme Court declared their eligibility for depreciation because leasing was found to be their business. So far as the decision of the Delhi High Court is concerned, there was no controversy on facts because the vehicles were stated to be given on lease which means that the lessor retained ownership and the vehicles were leased out on collection of lease rents only. In these cases, the respondents/assessees are only financiers engaged in financing of vehicles partly or fully and the amount repaid under the agreement by the registered owner is essentially repayment of loan in instalment together with agreed rate of interest. We have explained in detail the nature of transaction in the interest tax case referred above. If the respondents/assessees have only financed or purchased the vehicle and the borrowers are the registered owners, then the respondents / assessees are not entitled to claim any depreciation because they are neither the owners of the vehicle nor have they used the vehicle in their profession or business entitling them for depreciation under Section 32(1) of the Act. Similarly, the repayment made by the borrowers are essentially repayment of loan amount with agreed rate of interest. Therefore, even if the purchaser, who purchased the vehicle, with borrowed fund is running the vehicle on hire, as a business, such borrower is not entitled to deduction of entire monthly instalments paid to the respondents because such payment does not represent hire charges or lease rental of the vehicle. On the other hand, in the computation of borrower's income, he is entitled to deduction of interest paid on borrowed funds and is entitled to depreciation if the vehicle is used in the profession or business. 20% depreciation granted in the case of respondent certainly would have led to depreciation being allowed in the hands of not only the financier, but also in the hands of vehicle owners, which is a mistake. In any case, what is important is not to look at the terminology used in the agreement such as hire purchase agreement or lease agreement, but it is for the assessing officer to find the true nature and character of the agreement and the arrangement between the financier and the vehicle owners. If it is found to be a loan transaction, as found by this Court in the judgment above referred, then the respondents/assessees will not be entitled to depreciation much less higher rate claimed by them and allowed by the Tribunal.

 

RELEVANT EXTRACTS:

 

** ** ** ** ** ** ** ** ** ** ** **

 

2. Counsel for the respondents assessees have relied on a decision of the Delhi High Court in Commissioner of Income-Tax v. Bans a I Credits Ltd. (255) ITR G9) where the Delhi High Court hold that the assessees, which were engaged in the business of leasing out commercial vehicles, were entitled to depreciation at the higher rate of 40%. as provided in item IIICD(ii) i : Part A of Appendix I to the Income-tax Rules,I962. We notice that this judgment is rendered by the Delhi High Court following the decision of the Supreme Court Commissioner of Income-Tax v. Shaan Finance(P) Ltd. (231 ITR 308) wherein the Supreme Court held that when hiring out or leasing out of machinery itself is the business of the assessee, such hiring or leasing of machinery for use by the lessees would entitle the finance company to claim depreciation. The Supreme Court has clearly stated that while the lessee company, using the machinery' in the manufacture of goods, is entitled to deduction of hire charges paid as revenue expenditure, depreciation on cost of machinery is available to the company which purchases the machinery and hires out to the lessee company. We are in complete agreement with the above judgment of the Delhi High Court rendered on the facts of that case, following the decision of the Supreme Court. However, before granting depreciation the question to be considered first is whether the assessees are owners of the vehicles, who have hired out or leased out the same to other persons or use in their profession or business. The Standing Counsel appearing for the Department contended that pursuant to the interim order of this Court, none of the assessees have produced the R. C. Book or any particulars to show that they are the registered owners who have given the vehicle on hire or made lease arrangement entitling them to claim depreciation In the decision of this Court above referred we had occasion to examine the nature of transactions in vehicle financing. We have noticed that though the transaction is styled as hire purchase agreement, it is nothing, but financing of the vehicle purchase fully or partly and the vehicle1 is purchased and registered in the name of the borrower, who is entitled to depreciation at the applicable rate depending on whether the vehicle is used in profession or let on hire. Keeping in mind the factual position which is not the same as projected before the lower authorities even including the assessing authority, the assesees' counsel submitted before us that "the owner" takes in not only the registered owner, but the person in whose favour hypothecation agreement is entered into. We are unable to accept this contention because the definition 'owner' as contained in Section 2 (30) of the Motor Vehicles Act, 1988 (for short 'the Act') is as follows.-

 

"2(30) "owner" means a person in whose name a motor vehicle stands registered, and where such person is a minor, the guardian of such minor, and \n relation to a motor vehicle which is the subject of a hire-purchase, agreement, or an agreement of lease or on agreement of hypothecation, the person in possession of the vehicle under that agreement."

 

What is clear from the above is that the ownership of the motor vehicle is always with the registered owner and even in respect of motor vehicle which is the subject matter of hire purchase agreement or an agreement of hypothecation, the person in possession of the vehicle under that agreement shall be the owner. Admittedly, the respondents/assessees are neither the registered owners nor are they in possession of the vehicle. On the other hand, they are only the financiers in whose favour hypothecation is endorsed in the R. C. Book in terms of Section 51(1) of the Act which requires the registering authority to make an entry in the certificate of registration regarding the existence of hire purchase, lease or hypothecation agreement. However, sub-section (4) of Section 51 states that before entering transfer of ownership in the R. C. Book of the vehicle, the consent of the person in whose favour hypothecation, hire purchase or lease agreement endorsed, is required.

 

3. On examining the decision of the Supreme Court above referred, the admitted position is that the leasing companies purchased the machinery and retained their ownership during the period of lease and in that context, the Supreme Court declared their eligibility for depreciation because leasing was found to be their business. So far as the decision of the Delhi High Court is concerned, there was no controversy on facts because the vehicles were stated to be given on lease which means that the lessor retained ownership and the vehicles were leased out on collection of lease rents only. In these cases, the respondents/assessees are only financiers engaged in financing of vehicles partly or fully and the amount repaid under the agreement by the registered owner is essentially repayment of loan in instalment together with agreed rate of interest. We have explained in detail the nature of transaction in the interest tax case referred above. If the respondents/assessees have only financed or purchased the vehicle and the borrowers are the registered owners, then the respondents / assessees are not entitled to claim any depreciation because they are neither the owners of the vehicle nor have they used the vehicle in their profession or business entitling them for depreciation under Section 32(1) of the Act. Similarly, the repayment made by the borrowers are essentially repayment of loan amount with agreed rate of interest. Therefore, even if the purchaser, who purchased the vehicle, with borrowed fund is running the vehicle on hire, as a business, such borrower is not entitled to deduction of entire monthly instalments paid to the respondents because such payment does not represent hire charges or lease rental of the vehicle. On the other hand, in the computation of borrower's income, he is entitled to deduction of interest paid on borrowed funds and is entitled to depreciation if the vehicle is used in the profession or business. 20% depreciation granted in the case of respondent certainly would have led to depreciation being allowed in the hands of not only the financier, but also in the hands of vehicle owners, which is a mistake. In any case, what is important is not to look at the terminology used in the agreement such as hire purchase agreement or lease agreement, but it is for the assessing officer to find the true nature and character of the agreement and the arrangement between the financier and the vehicle owners. If it is found to be a loan transaction, as found by this Court in the judgment above referred, then the respondents/assessees will not be entitled to depreciation much less higher rate claimed by them and allowed by the Tribunal. On the other hand, if the vehicles are purchased by the respondents assessees and retained their ownership with registration in their name and the vehicles were either given on lease or given under hire purchase agreement giving an option to the hirer to purchase it after the pavment of leas-rentals or hire charges during the agreed period, then the respondents/assessees will be entitled to depreciation at the higher rate. The assessing officer can easily find out the factual position because if the respondents/assessees have continued as registered owners of the vehicle, they would have been involved in large number of compensation cases under the Motor Vehicles Act which case, they would have incurred large amounts towards the insurance of the vehicle and payment of compensation which would have been claimed as deduction in the income tax assessment itself. In any case, we find no justification for the Tribunal to allow higher rate of depreciation without verifying as to whether the respondents/assessees are even owners of the vehicle and are really leasing out the vehicles in hire purchase agreement as claimed. We, therefore, allow the appeals setting aside the orders of the Tribunal and that of the first appellate authority and remand the matter for verification of factual position by assessing officers and to grant depreciation, if found eligible.

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ITAT (Mum): Derivatives are speculative transactions if not for bona fide hedging.

ACIT vs. Dinesh K. Mehta HUF (ITAT Mumbai)(ITA No. 976/Mum/2009) S.43(5): Derivatives are speculative transactions if not for bona fide hedging - A.Y. 2005-06

 

In respect of AY 2005-06, the assessee, a dealer in shares, entered into transaction of purchases of Nifty Futures, which being a derivative instrument, was settled by payment of differences and not actual delivery of shares. The assessee argued that the transactions were hedging transactions meant to minimize the loss due to fluctuation of price of shares held as stock-in-trade and could not be regarded as speculative transactions u/s 43(5) so as to disallow the loss from being set off against other income.

 

The AO took the view that a derivatives transaction could be regarded as a hedging transaction u/s 43(5)(b) only to the extent of the inventory of shares held by the assessee and that the excess would be regarded as a speculative transaction. As, on the date the Nifty Futures were purchased, the inventory of shares held by the assessee was less that the value of the Futures, the loss was treated as a speculation loss.

 

The CIT (A) allowed the appeal on the ground that the s. 43(5)(d) inserted by FA 2005 w.e.f. 1.4.2006 (which provides that derivatives are not speculation transactions) was clarificatory).

 

On appeal by the Revenue, HELD reversing the CIT (A):

 

(i) In Shree Capital Services 121 ITD 498 (Kol) it has been held by the Special Bench that the amendment to s. 43(5)(d) is neither clarificatory nor retrospective in operation. Consequently, derivatives can be considered non-speculative u/s 43(5)(b) only to the extent they are for hedging purposes;

 

(ii) The argument of the assessee that to constitute a hedging transaction u/s 43(5)(b), a transaction need not be in the same shares held by the assessee as inventory or that the value of hedging transactions should be equal to or less than the value of inventory held by the assessee is not acceptable. Circular No. 23D dated 12-9-1960 makes it clear that bona fide hedging transactions shall not be regarded as speculative provided that the hedging transactions are up to the amount of his holdings and confined to shares in his holding. The value and volume of hedging transactions should be in equal proportion and the hedging transaction should be in respect of the same scripts held by the assessee;

 

(iii) If the arguments of the assessee are accepted, it will lead to a situation where all speculative transactions will be claimed as hedging transactions and the purpose behind s. 73 of not permitting set off of speculative loss against business income will become redundant. The fact that in Nifty futures and index futures there cannot be any identification of shares does not change the position in law till the insertion of s. 43(5)(d);

 

(iv) As the AO has gone by the overall value of inventory without individual script wise tally (though required to be done), the plea of the assessee that the loss in purchase of Nifty Futures should not be considered as speculative to the extent of the value of inventory held by the Assessee on a particular day is acceptable.

 

[Note: From 2006-07 such transactions would be non-speculative due to section 43(5)(d)]

 

 

 

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Compulsory Maintenance of books of account under Income Tax Act 1961

Compulsory Maintenance of books of account under Income Tax Act 1961

It is generally seen that there is confusion among taxpayers about maintenance of books of accounts under Income Tax Act like who is required compulsory to maintain the books of accounts and for how many years one has to keep his books of accounts.  Some views are expressed on this topic as follows:

Maintenance of books of accounts by Professionals: Section 44AA of Income Tax Act and rule 6F of Income Tax rules deal with the provisions regarding maintenance of books of accounts under Income tax Act. As per section 44AA(1) read with rule 6F the persons carrying on any of the profession as mentioned below are required to maintain books of accounts and other documents as may enable the assessing officer to compute his total income, if yearly gross receipts of the profession exceeded  Rs 150000
1) Legal
2)Medical
3)architectural
4)engineering
5)accountancy
6)technical consultancy
7)interior decoration
8)authorised representative
9)film artist
10)any other profession as is notified by the board

When no books of accounts are required to be maintained by professionals covered u/s 44AA(1): Proviso to Rule 6F(1) provides that if the gross receipts of a profession do not exceed Rs 150000 in any one of the three years immediately preceding the previous year or where the profession has been newly setup in the previous year, his total gross receipts in the profession for that year are not likely to exceed the said amount, then such professional need not to maintain any books of accounts as mentioned in sub rule 2 of rule 6F.

It means that if the gross receipts of a profession exceed Rs 150000 in all the three years preceding the previous year only then the books of accounts will be required to be maintained, if the gross receipt exceed the prescribed limit in the two preceding years but not in the third preceding year then there will be no need to maintain books of accounts as contemplated in sub rule 2 of rule 6F.

Maintenance of Books of accounts by other Persons covered u/s 44AA(2): In relation to any other persons engaged in any other profession or carrying on any business other than section 44AA(1), the requirement of compulsory maintenance of books of accounts applies if- either the income from business or profession exceeds Rs 120000 or the turnover or gross receipts exceed Rs 10 Lakhs in any one of the three years immediately preceding the previous year.

When no books of accounts are required to maintained by other persons covered u/s 44AA(2): If the Income or the gross receipts or gross turnover of a person carrying on business or profession other than profession as mentioned u/s 44AA(1)  do not exceed in any one of the three years preceding the previous year then no books of accounts will be required to be maintained u/s 44AA(2).
Presumptive Income scheme: The  persons who are filling their return of income under the presumptive income scheme like under section 44AD or 44AE or 44AF etc are not require to compulsory maintain books of account u/s 44AA. However where the profits and gains from the business are deemed to be profits and gains u/s 44AD or 44AE or 44AF or 44BB or 44BBB as the case may be, and the assessee has claimed his income to be lower than the profits or gains so deemed, then the books of accounts will be required to be maintained u/s 44AA.

Maintenance  of books of accounts in case of new 44AD section: A new clause IV has been added to sub section 2 of section 44AA w.e.f. 01-04-2011 which provides that where the profits and gains from a business are deemed to be profits and gains of the assessee under new section 44AD which is also applicable w.e.f 01-04-2011 and the assessee has claimed such income to be lower than the profits and gains so deemed i.e below 8% and the income of the assessee exceeds the maximum amount which is not chargeable to income tax during previous year then in such case such person shall keep and maintain such books of accounts and other documents as may enable the assessing officer to compute his total income.

Thus it means that if a person declares his income below the 8% of his total turnover or gross receipts as required u/s 44AD which is applicable w.e.f 01-04-2011 and his income is above the exempted limit then he will have to compulsory maintain his books of accounts. But if his total income is below the exempted limit and profits are also declared below 8% of gross turnover or gross reciepts then he will need not to maintain compulsory books of accounts.

What books of accounts are required to be maintained by persons covered u/s 44AA(1): As per Rule 6F(2) the following books of accounts and documents are required to be maintained:
1) cash book,
2)Journal, if the accounts are maintained as per mercantile system of accounting,
3)ledger
4)carbon copies of bills, serially numbered and carbon copies or counterfoils of receipts issued in respect of sums exceeding Rs 25,
5)original bills for expenses exceeding Rs. 50 and payment vouchers for petty expenses. However in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred, then vouchers are not necessary in respect of expenses upto Rs 50.

Persons engaged in medical profession are, in addition, required to maintain daily case register in the prescribed proforma (Form No. 3C) and inventory, as at the beginning and end of the year, of stock of drugs, medicines and other consumables accessories used for the purpose of the profession.

Books or books of accounts have also been defined u/s 2(12A) as including ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy,disc, tape or any other form of electro-magnetic data storage device.

Document has been u/s 2(22AA) as including an electronic record as defined in clause (t) of sub section (1) of section 2 of the Information Technology Act, 2000.

For how many years books of accounts are required to be preserved: Every year the record of books of accounts grows up and the cupboards filled up more and more. Every assessee wants to know for how many years he should keep the records of his books of accounts.
Rule 6F(5) provides that the books of accounts and other documents  are to be kept for at least 6 years from the end of relevant assessment year. That means from the assessment year 2009-10 one should keep books of accounts up to the assessment year 2003-04 i.e books of accounts of financial year 2002-03.
The time limit for issuing notices for assessment or reassessments have been prescribed u/s 149, after the end of such prescribed time no notice can be issued and no assessment can be framed, therefore the assessee will not need books of accounts of the concerned year. Keeping in mind the time limit as provided u/s 149 for issuing notice the following suggestions are made regarding preservation of books of accounts:

1) If the assessee has made an appeal against any assessment order of any year then the books of accounts of such year should be preserved until the final decision of such appeal
2) Where the assessment in relation to any Year has been reopened u/s 147 within time u/s 149, in such case all the books of account and documents shall continue to be kept till the assessment so reopened has been completed. 
3)Books of accounts for only 7 financial years should be preserved. Therefore the taxpayers should keep books of accounts of only financial year 2002-03 and onwards.

Where the books of accounts should be kept: The current year's books of accounts should be maintained and kept at the principal place of business or profession as per Rule 6F(3). There is no specific rule as to where the books of accounts of earlier years should be kept.

Consequences for faliure to maintain books of accounts: Failure to maintain books of accounts and other documents or to retain them as required u/s 44AA attracts penalty of Rs. 25000 u/s 271A. The penalty can be imposed by the assessing officer or CIT(Appeal).

Important decisions: The Income Tax Appellate Tribunal Delhi in its decision (1998) 97 Taxmann 273(Magzine)/60T.T.J. 278 has held that there is no rule made to the effect that which books of accounts are required to be made by the persons carrying on business covered u/s 44AA(2), therefore if the assessee has kept the details of Incomes and expenditures then no penalty shall be levied u/s 271A. 

Similar decision was made by Amritsar bench of Tribunal in case of Sujan Singh v. AO [2007] 110 TTJ (Asr.) 818 wherein it was decided that Rule 6F has not been made applicable to the persons carrying on business or Profession other than those mentioned u/s 44AA(1) and covered u/s 44AA(2). The case of the assessee falls u/s 44AA(2), as the assessee was carrying on a business of poultry farm. the board has not specified or notified the books of account to be maintained by persons covered under sub-section 2 of section 44AA.Therefore, rule 6F is not applicable to the case of the assessee- ITO v. Dinesh Paper Mart [1999] 64 TTJ (Nag.) 674 : [1999] 70 ITD 274(Nag.) relied on.

After leving penalty for non maintenance of books of accounts, no penalty can be levied for not getting the books of accounts audited: Guwahati high Court has held in its decision (1996) 222 ITR 691 that if the penalty u/s 271A has been levied on an assessee for non maintenance of books of accounts then thereafter no penalty shall be levied  u/s 271B for not getting the books of accounts audited.