ITR Volume 339 : Part 4 (Issue dated 19-12-2011)

INCOME TAX REPORTS (ITR)

Volume 339 : Part 4 (Issue dated 19-12-2011)

SUBJECT INDEX TO CASES REPORTED IN THIS PART

HIGH COURTS

Advance tax --Interest--Company--Book profits--Assessment under section 143/147 and later recomputation under section 143(3) pursuant to revision by Commissioner--Interest under section 234B chargeable on tax calculated on book profits--Income-tax Act, 1961, ss. 115J, 143, 147, 234B-- CIT v. Nahar Spinning Mills Ltd .

(P&H) . . . 557

Appeal to Appellate Tribunal --Powers of Tribunal--Commissioner (Appeals) directing Assessing Officer to decide question on merits--Consequent order of Assessing Officer reversed by Tribunal--Order of Tribunal--Valid--Income-tax Act, 1961, ss. 43(6), Expln. 2, 254-- CIT v. Arvind Products Ltd . (Guj) . . . 643

Assessment --Valuation of property--Reference to valuer--Reference to valuer only after rejection of books of account--Income-tax Act, 1961, s. 142A(1)-- CIT v. Lucknow Public Educational Society (All) . . . 588

Bad debt --Bank--Rural branch--Meaning of "place" in Explanation (ia) to section 36(1)(viia)--Branch in a rural area where population is less than 10,000--Income-tax Act, 1961, s. 36(1)(viia)-- CIT v. Lord Krishna Bank Ltd . (Ker) . . . 606

----Money-lending business--Finding that money-lending business had been carried on and interest had been assessed as business income--Amount written off--Deductible--Income-tax Act 1961, s. 36(1)(vii)-- CIT v. Southern Polymers P. Ltd.

(Mad) . . . 540

Capital gains --Exemption--Sale of residential property--Condition precedent for exemption--Profits to be used for purchase of residential property or deposited in specified account before due date for furnishing return--Date for furnishing return--Can be date under section 139(4)--Profits utilised for specified purpose before that date--Entire profits entitled to exemption--Income-tax Act, 1961, ss. 54, 139(4)-- CIT v. Ms. Jagriti Aggarwal (P&H) . . . 610

Charitable purposes --Charitable trust--Exemption--Condition precedent--Application of income for charitable purposes--Mandis established by State Government to help marketing of agricultural produce--Mandi samitis required to give part of collections and development cess to Agricultural Produce Market Board constituted under Mandi Act--Amounts given to Board constituted application of income for charitable purposes--Mandis entitled to exemption--Income-tax Act, 1961-- CIT v. Krishi Utpadan Mandi Samiti (All) . . . 488

----Charitable trust--Registration--Cancellation--Law applicable--Power to cancel registration under section 12A granted with effect from 1-6-2010--Registration under section 12A in December, 1974--Cancellation of registration under section 12AA by order dated 30-6-2009--Not valid--Income-tax Act, 1961, ss. 12A, 12AA-- Director of Income-tax (Exemptions) v. Mool Chand Khairati Ram Trust

(Delhi) . . . 622

Company --Book profits--Unabsorbed depreciation lower than loss carried forward from earlier year--Depreciation to be set off under clause (iv) of Explanation to section 115J(1A)--Income-tax Act, 1961, s. 115J-- Peico Electronics and Electricals Ltd . v. CIT (Cal) . . . 506

Deduction of tax at source --Assessee engaged in transportation of building material--Hiring dumpers--Payment made to contractors for hiring dumpers--Is not rent for machinery or equipment but payment for works contract of shifting of goods from one place to another--Section 194C applicable and not section 194-I--Income-tax Act, 1961, ss. 194C, 194-I-- CIT (TDS) v. Shree Mahalaxmi Transport Co.

(Guj) . . . 484

----Assessee entering into works contracts for transport of goods belonging to assessee to clients through their vehicles--Payment not rent for machinery or equipment but payment for works contract--Tax to be deducted under section 194C--Income-tax Act, 1961, ss. 194C, 194-I-- CIT (TDS) v. Swayam Shipping Services P. Ltd .

(Guj) . . . 647

----Payment to sub-contractors--Union of truck operators procuring contracts for its members--No sub-contracts--Tax not deductible at source--Income-tax Act, 1961, s. 194C-- CIT v. Truck Operators' Union (P&H) . . . 532

Exemption --Dividend--No expenditure in fact incurred in earning dividend income--No disallowance permissible--Income-tax Act, 1961, s. 14A-- CIT v. Reliance Industries Ltd. (Bom) . . . 632

Gift --Transfer of immovable property by assessee to her husband stated to be out of love and affection--Marriage subsisting at time of gift--No evidence that husband bought property with his funds--Gift-tax rightly imposed--Gift-tax Act, 1958, s. 16-- K. Meenakumari v. ITO (Mad) . . . 580

Gift-tax --Deemed gift--Firm--Property brought in as capital contribution by partners--Subsequent retirement of partners and withdrawal of property from firm--Difference in value not as deemed gift--Gift-tax Act, 1958, s. 4(1)(a)-- CIT v. Smt. Jayalakshmamma (Karn) . . . 546

Income --Exemption--Club--Principle of mutuality--Interest on fixed deposits, dividend, income from Government securities and profit on sale of investments--Principle of mutuality applies--Not chargeable to tax--Income-tax Act, 1961-- CIT v. Delhi Gymkhana Club Ltd. (Delhi) . . . 525

----Income or capital--Sales tax incentive--Purpose test--Capital receipt--Income-tax Act, 1961-- CIT v. Reliance Industries Ltd . (Bom) . . . 632

----Mutual concern--Co-operative society--Finding that there was complete identity between contributors and participators--Income of society not taxable--Income-tax Act, 1961-- CIT v. Talangang Co-op. Group Housing Society Ltd.

(Delhi) . . . 518

Industrial undertaking --Special deduction under section 80-IA--Manufacture of identity cards--Finding that activity involved making of a new final product from data with which it started and amount to manufacture or production of an article or thing--Assessee entitled to deduction--Income-tax Act, 1961, s. 80-IA-- CIT v. Haryana State Electronics Development Corporation Ltd. (P&H) . . . 615

----Special deduction under section 80-IB--Condition precedent--Manufacture of goods employing more than ten workers--Meaning of "worker"--Worker would include persons employed indirectly by contractor--Assessee entitled to special deduction under section 80-IB--Income-tax Act, 1961, s. 80-IB(2)(iv)-- CIT v. Jyoti Plastic Works Private Limited (Bom) . . . 491

Interest-tax --Charge of tax--Effect of sections 5 and 6--Interest on loans and advances under bills rediscounting scheme from banks to which Banking Regulation Act applies--Not chargeable to tax--Interest-tax Act, 1974, ss. 5, 6-- National Insurance Co. Ltd. v. CIT (Cal) . . . 573

Precedent --Effect of decision of Supreme court in Sargam Cinema v. CIT [2010] 328 ITR 513 (SC)-- CIT v. Lucknow Public Educational Society (All) . . . 588

Reassessment --Limitation--Effect of section 149(1)(b)--Period extended where alleged escaped income exceeds prescribed limit--Section 149 does not override provisions of section 147--Notice after four years--Failure to disclose material facts necessary for assessment must exist--Income-tax Act, 1961, ss. 147, 149-- Sayaji Hotels Ltd . v. ITO (Guj) . . . 498

----Notice--Change of opinion by succeeding Assessing Officer--Not a ground for reassessment--Income-tax Act, 1961, ss. 144, 147, 148-- H. K. Buildcon Ltd . v. ITO

(Guj) . . . 535

----Validity--Tax payable on reassessment less than tax paid under regular assessment--Reassessment proceedings--Not valid--Income-tax Act, 1961, ss. 147, 148-- PKM Advisory Services P. Ltd. v. ITO (Guj) . . . 585

----Writ--Reassessment after four years--Failure to disclose material facts necessary for assessment--Duty of assessee to disclose material facts fully and truly--Assessee claiming exemption under section 10B in respect of alleged new unit--Facts that exemption under section 10B had been granted earlier not disclosed--Whether facts had been disclosed fully and truly--Question could not be decided in writ proceedings--Income-tax Act, 1961, ss. 147, 148--Constitution of India, art. 226-- Sociedade De Formento Industrial P. Ltd. v. Asst. CIT (Bom) . . . 595

Search and seizure --Warrant of authorisation--Validity--Warrant based on material--Satisfaction note scrutinised by higher authorities--Warrant of authorisation valid--Income-tax Act, 1961, s. 132-- Dipin G. Patel v. Director General of Income-tax (Investigation) (Guj) . . . 636

Unexplained investment --Finding by Tribunal after considering material that investment had been explained--Finding of fact--Deletion of addition--Justified--Income-tax Act, 1961-- CIT v. R. Hanumaiah Associates (Karn) . . . 603

----Value of investment assessable under section 69--Income-tax Act, 1961, ss. 69, 69B-- Dhanush General Stores v. CIT (Chhattisgarh) . . . 651

Valuation of stock --Bank--Valuation of unquoted Government securities--Valuation according to RBI guidelines--Valid--Income-tax Act, 1961-- CIT v. Lord Krishna Bank Ltd . (Ker) . . . 606

Wealth-tax --Asset--Land taken on lease--Assessee in possession after expiry of lease--Litigation with regard to right of assessee--Order of court with regard to previous years that interest in land not assessable to wealth-tax as assessee does not have vested interest in land for a period exceeding six years--To be followed in present year also--Wealth-tax Act, 1957, s. 2(e)(2)(iii)-- George Oakes Ltd . v. Deputy CWT

(Mad) . . . 630

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART

Constitution of India ;

Art. 226 --Reassessment--Writ--Reassessment after four years--Failure to disclose material facts necessary for assessment--Duty of assessee to disclose material facts fully and truly--Assessee claiming exemption under section 10B in respect of alleged new unit--Facts that exemption under section 10B had been granted earlier not disclosed--Whether facts had been disclosed fully and truly--Question could not be decided in writ proceedings-- Sociedade De Formento Industrial P. Ltd. v. Assistant Commissioner of Income-tax (Bom) . . . 595

Gift-tax Act, 1958 :

S. 4(1)(a) --Gift-tax--Deemed gift--Firm--Property brought in as capital contribution by partners--Subsequent retirement of partners and withdrawal of property from firm--Difference in value not as deemed gift-- CIT v. Smt. Jayalakshmamma

(Karn) . . . 546

S. 16 --Gift--Transfer of immovable property by assessee to her husband stated to be out of love and affection--Marriage subsisting at time of gift--No evidence that husband bought property with his funds--Gift-tax rightly imposed-- K. Meenakumari v. ITO

(Mad) . . . 580

Income-tax Act, 1961 :

S. 12A --Charitable purposes--Charitable trust--Registration--Cancellation--Law applicable--Power to cancel registration under section 12A granted with effect from 1-6-2010--Registration under section 12A in December, 1974--Cancellation of registration under section 12AA by order dated 30-6-2009--Not valid-- Director of Income-tax (Exemptions) v. Mool Chand Khairati Ram Trust

(Delhi) . . . 622

S. 12AA --Charitable purposes--Charitable trust--Registration--Cancellation--Law applicable--Power to cancel registration under section 12A granted with effect from 1-6-2010--Registration under section 12A in December, 1974--Cancellation of registration under section 12AA by order dated 30-6-2009--Not valid-- Director of Income-tax (Exemptions) v. Mool Chand Khairati Ram Trust

(Delhi) . . . 622

S. 14A --Exemption--Dividend--No expenditure in fact incurred in earning dividend income--No disallowance permissible-- CIT v. Reliance Industries Ltd.

(Bom) . . . 632

S. 36(1)(vii) --Bad debt--Money-lending business--Finding that money-lending business had been carried on and interest had been assessed as business income--Amount written off--Deductible-- CIT v. Southern Polymers P. Ltd.

(Mad) . . . 540

S. 36(1)(viia) --Bad debt--Bank--Rural branch--Meaning of "place" in Explanation (ia) to section 36(1)(viia)--Branch in a rural area where population is less than 10,000-- CIT v. Lord Krishna Bank Ltd . (Ker) . . . 606

S. 43(6), Expln. 2 --Appeal to Appellate Tribunal--Powers of Tribunal--Commissioner (Appeals) directing Assessing Officer to decide question on merits--Consequent order of Assessing Officer reversed by Tribunal--Order of Tribunal--Valid-- CIT v. Arvind Products Ltd . (Guj) . . . 643

S. 54 --Capital gains--Exemption--Sale of residential property--Condition precedent for exemption--Profits to be used for purchase of residential property or deposited in specified account before due date for furnishing return--Date for furnishing return--Can be date under section 139(4)--Profits utilised for specified purpose before that date--Entire profits entitled to exemption-- CIT v. Ms. Jagriti Aggarwal

(P&H) . . . 610

S. 69 --Unexplained investment--Value of investment assessable under section 69-- Dhanush General Stores v. CIT (Chhattisgarh) . . . 651

S. 69B --Unexplained investment--Value of investment assessable under section 69-- Dhanush General Stores v. CIT (Chhattisgarh) . . . 651

S. 80-IA --Industrial undertaking--Special deduction under section 80-IA--Manufacture of identity cards--Finding that activity involved making of a new final product from data with which it started and amount to manufacture or production of an article or thing--Assessee entitled to deduction-- CIT v. Haryana State Electronics Development Corporation Ltd. (P&H) . . . 615

S. 80-IB(2)(iv) --Industrial undertaking--Special deduction under section 80-IB--Condition precedent--Manufacture of goods employing more than ten workers--Meaning of "worker"--Worker would include persons employed indirectly by contractor--Assessee entitled to special deduction under section 80-IB-- CIT v. Jyoti Plastic Works Private Limited (Bom) . . . 491

S. 115J --Advance tax--Interest--Company--Book profits--Assessment under section 143/147 and later recomputation under section 143(3) pursuant to revision by Commissioner--Interest under section 234B chargeable on tax calculated on book profits-- CIT v. Nahar Spinning Mills Ltd . (P&H) . . . 557

----Company--Book profits--Unabsorbed depreciation lower than loss carried forward from earlier year--Depreciation to be set off under clause (iv) of Explanation to section 115J(1A)-- Peico Electronics and Electricals Ltd . v. CIT

(Cal) . . . 506

S. 132 --Search and seizure--Warrant of authorisation--Validity--Warrant based on material--Satisfaction note scrutinised by higher authorities--Warrant of authorisation valid-- Dipin G. Patel v. Director General of Income-tax (Investigation)

(Guj) . . . 636

S. 139(4) --Capital gains--Exemption--Sale of residential property--Condition precedent for exemption--Profits to be used for purchase of residential property or deposited in specified account before due date for furnishing return--Date for furnishing return--Can be date under section 139(4)--Profits utilised for specified purpose before that date--Entire profits entitled to exemption-- CIT v. Ms. Jagriti Aggarwal

(P&H) . . . 610

S. 142A(1) --Assessment--Valuation of property--Reference to valuer--Reference to valuer only after rejection of books of account-- CIT v. Lucknow Public Educational Society (All) . . . 588

S. 143 --Advance tax--Interest--Company--Book profits--Assessment under section 143/147 and later recomputation under section 143(3) pursuant to revision by Commissioner--Interest under section 234B chargeable on tax calculated on book profits-- CIT v. Nahar Spinning Mills Ltd . (P&H) . . . 557

S. 144 --Reassessment--Notice--Change of opinion by succeeding Assessing Officer--Not a ground for reassessment-- H. K. Buildcon Ltd . v. ITO

(Guj) . . . 535

S. 147 --Advance tax--Interest--Company--Book profits--Assessment under section 143/147 and later recomputation under section 143(3) pursuant to revision by Commissioner--Interest under section 234B chargeable on tax calculated on book profits-- CIT v. Nahar Spinning Mills Ltd . (P&H) . . . 557

----Reassessment--Limitation--Effect of section 149(1)(b)--Period extended where alleged escaped income exceeds prescribed limit--Section 149 does not override provisions of section 147--Notice after four years--Failure to disclose material facts necessary for assessment must exist-- Sayaji Hotels Ltd . v. ITO (Guj) . . . 498

----Reassessment--Notice--Change of opinion by succeeding Assessing Officer--Not a ground for reassessment-- H. K. Buildcon Ltd . v. ITO (Guj) . . . 535

----Reassessment--Validity--Tax payable on reassessment less than tax paid under regular assessment--Reassessment proceedings--Not valid-- PKM Advisory Services P. Ltd. v. ITO (Guj) . . . 585

----Reassessment--Writ--Reassessment after four years--Failure to disclose material facts necessary for assessment--Duty of assessee to disclose material facts fully and truly--Assessee claiming exemption under section 10B in respect of alleged new unit--Facts that exemption under section 10B had been granted earlier not disclosed--Whether facts had been disclosed fully and truly--Question could not be decided in writ proceedings-- Sociedade De Formento Industrial P. Ltd. v. Asst. CIT

(Bom) . . . 595

S. 148 --Reassessment--Notice--Change of opinion by succeeding Assessing Officer--Not a ground for reassessment-- H. K. Buildcon Ltd . v. ITO (Guj) . . . 535

----Reassessment--Validity--Tax payable on reassessment less than tax paid under regular assessment--Reassessment proceedings--Not valid-- PKM Advisory Services P. Ltd. v. ITO (Guj) . . . 585

----Reassessment--Writ--Reassessment after four years--Failure to disclose material facts necessary for assessment--Duty of assessee to disclose material facts fully and truly--Assessee claiming exemption under section 10B in respect of alleged new unit--Facts that exemption under section 10B had been granted earlier not disclosed--Whether facts had been disclosed fully and truly--Question could not be decided in writ proceedings-- Sociedade De Formento Industrial P. Ltd. v. Asst. CIT

(Bom) . . . 595

S. 149 --Reassessment--Limitation--Effect of section 149(1)(b)--Period extended where alleged escaped income exceeds prescribed limit--Section 149 does not override provisions of section 147--Notice after four years--Failure to disclose material facts necessary for assessment must exist-- Sayaji Hotels Ltd . v. ITO (Guj) . . . 498

S. 194C --Deduction of tax at source--Assessee engaged in transportation of building material--Hiring dumpers--Payment made to contractors for hiring dumpers--Is not rent for machinery or equipment but payment for works contract of shifting of goods from one place to another--Section 194C applicable and not section 194-I-- CIT (TDS) v. Shree Mahalaxmi Transport Co. (Guj) . . . 484

----Deduction of tax at source--Assessee entering into works contracts for transport of goods belonging to assessee to clients through their vehicles--Payment not rent for machinery or equipment but payment for works contract--Tax to be deducted under section 194C-- CIT (TDS) v. Swayam Shipping Services P. Ltd . (Guj) . . . 647

----Deduction of tax at source--Payment to sub-contractors--Union of truck operators procuring contracts for its members--No sub-contracts--Tax not deductible at source-- CIT v. Truck Operators' Union (P&H) . . . 532

S. 194-I --Deduction of tax at source--Assessee engaged in transportation of building material--Hiring dumpers--Payment made to contractors for hiring dumpers--Is not rent for machinery or equipment but payment for works contract of shifting of goods from one place to another--Section 194C applicable and not section 194-I-- CIT (TDS) v. Shree Mahalaxmi Transport Co. (Guj) . . . 484

----Deduction of tax at source--Assessee entering into works contracts for transport of goods belonging to assessee to clients through their vehicles--Payment not rent for machinery or equipment but payment for works contract--Tax to be deducted under section 194C-- CIT (TDS) v. Swayam Shipping Services P. Ltd . (Guj) . . . 647

S. 234B --Advance tax--Interest--Company--Book profits--Assessment under section 143/147 and later recomputation under section 143(3) pursuant to revision by Commissioner--Interest under section 234B chargeable on tax calculated on book profits-- CIT v. Nahar Spinning Mills Ltd . (P&H) . . . 557

S. 254 --Appeal to Appellate Tribunal--Powers of Tribunal--Commissioner (Appeals) directing Assessing Officer to decide question on merits--Consequent order of Assessing Officer reversed by Tribunal--Order of Tribunal--Valid-- CIT v. Arvind Products Ltd .

(Guj) . . . 643

Interest-tax Act, 1974 :

Ss. 5, 6 --Interest-tax--Charge of tax--Effect of sections 5 and 6--Interest on loans and advances under bills rediscounting scheme from banks to which Banking Regulation Act applies--Not chargeable to tax-- National Insurance Co. Ltd. v. CIT

(Cal) . . . 573

Wealth-tax Act, 1957 :

S. 2(e)(2)(iii) --Wealth-tax--Asset--Land taken on lease--Assessee in possession after expiry of lease--Litigation with regard to right of assessee--Order of court with regard to previous years that interest in land not assessable to wealth-tax as assessee does not have vested interest in land for a period exceeding six years--To be followed in present year also-- George Oakes Ltd . v. Deputy CWT (Mad) . . . 630

ITR (TRIB) Volume 12 : Part 8 (Issue dated : 19-12-2011)

ITR'S TRIBUNAL TAX REPORTS (ITR (TRIB))
Volume 12 : Part 8 (Issue dated : 19-12-2011)

SUBJECT INDEX TO CASES REPORTED IN THIS PART

Assessment --Assessing Officer--Jurisdiction--Objection regarding lack of jurisdiction--Assessing Officer ought to have made reference to higher authorities for decision--Procedure irregular--Matter remanded--Income-tax Act, 1961, s. 124(2)-- ITO v. Subhash Chander Pahwa & Sons (HUF) (Delhi) . . . 777

Income-tax --General principles--Rule of consistency--When applicable-- Li & Fung (India) P. Ltd. v. Deputy CIT (Delhi) . . . 748

International transactions --Arm's length price--Transactional net margin method --Assessee's determination accepted in earlier years without considering certain factors --Orders for earlier years not to operate as res judicata--Associated enterprise receiving compensation on basis of free on board value while assessee compensated at cost plus 5 per cent. mark-up--Assessee providing critical functions with help of tangible and unique intangibles developed by it--Mark-up to be on free on board value of goods sourced through assessee--But adjustment not to exceed amount which could have been received by associated enterprise--Direction for distribution between assessee and associated enterprise in ratio of 80 : 20--Income-tax Act, 1961, ss. 92D, 144C--Income-tax Rules, 1962, r. 10B(1)(e)-- Li & Fung (India) P. Ltd. v. Deputy CIT (Delhi) . . . 748

Reassessment --Notice--Assessee-company dissolved and amalgamated with another company--Notice of reassessment issued to erstwhile director of assessee-company--Notice not valid--Income-tax Act, 1961, ss. 147, 148-- ITO v. Milestone Overseas P. Ltd. (Delhi) . . . 781

Revision --Conditions precedent--Exemption--Transfer of assets--Revocable transfer--Ingredients of--Sale of immovable property of assessee held by another organisation--Conditions for revocable transfer not satisfied--Assessment order neither erroneous nor prejudicial to interests of Revenue--Assessee entitled to exemption--Income-tax Act, 1961, ss. 11, 12, 263-- Services Association of Seventh day Adventists P. Ltd. v. ITO (Chennai) . . . 787

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART

Income-tax Act, 1961 :

S. 11 --Revision--Conditions precedent--Exemption--Transfer of assets--Revocable transfer--Ingredients of--Sale of immovable property of assessee held by another organisation--Conditions for revocable transfer not satisfied--Assessment order neither erroneous nor prejudicial to interests of Revenue--Assessee entitled to exemption-- Services Association of Seventh day Adventists P. Ltd. v. ITO (Chennai) . . . 787

S. 12 --Revision--Conditions precedent--Exemption--Transfer of assets--Revocable transfer--Ingredients of--Sale of immovable property of assessee held by another organisation--Conditions for revocable transfer not satisfied--Assessment order neither erroneous nor prejudicial to interests of Revenue--Assessee entitled to exemption-- Services Association of Seventh day Adventists P. Ltd. v. ITO (Chennai) . . . 787

S. 92D --International transactions--Arm's length price--Transactional net margin method--Assessee's determination accepted in earlier years without considering certain factors--Orders for earlier years not to operate as res judicata--Associated enterprise receiving compensation on basis of free on board value while assessee compensated at cost plus 5 per cent. mark-up--Assessee providing critical functions with help of tangible and unique intangibles developed by it--Mark-up to be on free on board value of goods sourced through assessee--But adjustment not to exceed amount which could have been received by associated enterprise--Direction for distribution between assessee and associated enterprise in ratio of 80 : 20-- Li & Fung (India) P. Ltd. v. Deputy CIT (Delhi) . . . 748

S. 124(2) --Assessment--Assessing Officer--Jurisdiction--Objection regarding lack of jurisdiction--Assessing Officer ought to have made reference to higher authorities for decision--Procedure irregular--Matter remanded-- ITO v. Subhash Chander Pahwa & Sons (HUF) (Delhi) . . . 777

S. 144C --International transactions--Arm's length price--Transactional net margin method--Assessee's determination accepted in earlier years without considering certain factors--Orders for earlier years not to operate as res judicata--Associated enterprise receiving compensation on basis of free on board value while assessee compensated at cost plus 5 per cent. mark-up--Assessee providing critical functions with help of tangible and unique intangibles developed by it--Mark-up to be on free on board value of goods sourced through assessee--But adjustment not to exceed amount which could have been received by associated enterprise--Direction for distribution between assessee and associated enterprise in ratio of 80 : 20-- Li & Fung (India) P. Ltd. v. Deputy CIT (Delhi) . . . 748

S. 147 --Reassessment--Notice--Assessee-company dissolved and amalgamated with another company--Notice of reassessment issued to erstwhile director of assessee-company--Notice not valid-- ITO v. Milestone Overseas P. Ltd. (Delhi) . . . 781

S. 148 --Reassessment--Notice--Assessee-company dissolved and amalgamated with another company--Notice of reassessment issued to erstwhile director of assessee-company--Notice not valid-- ITO v. Milestone Overseas P. Ltd. (Delhi) . . . 781

S. 263 --Revision--Conditions precedent--Exemption--Transfer of assets--Revocable transfer--Ingredients of--Sale of immovable property of assessee held by another organisation--Conditions for revocable transfer not satisfied--Assessment order neither erroneous nor prejudicial to interests of Revenue--Assessee entitled to exemption-- Services Association of Seventh day Adventists P. Ltd. v. ITO (Chennai) . . . 787

Income-tax Rules, 1962 :

R. 10B(1)(e) --International transactions--Arm's length price--Transactional net margin method--Assessee's determination accepted in earlier years without considering certain factors--Orders for earlier years not to operate as res judicata--Associated enterprise receiving compensation on basis of free on board value while assessee compensated at cost plus 5 per cent. mark-up--Assessee providing critical functions with help of tangible and unique intangibles developed by it--Mark-up to be on free on board value of goods sourced through assessee--But adjustment not to exceed amount which could have been received by associated enterprise--Direction for distribution between assessee and associated enterprise in ratio of 80 : 20-- Li & Fung (India) P. Ltd. v. Deputy CIT (Delhi) . . . 748

Compilations of case law : SALE OF LAND

INCOME – CHARGEABILITY AND COMPUTATION

SALE OF LAND

When a person acquires land with a view to selling it later, after developing it, he is carrying on activity resulting in profit and the activity can only be described as a business venture.

Raja J. Rameswar Rao Vs CIT (SC) 42 ITR 179

Joint purchase of land by 4 persons and joint sale thereof – Land fit only for house sites – Adventure in the nature of trade.

Smt. Parvathi Devi & Ors. Vs CIT (AP) 164 ITR 675

Purchase of large plot of land with a dilapidated building – sale after converting into smaller plots – No evidence that purchase of land made with intention to re-sell – Profit assessable as capital gain.

CIT Vs Mohammed Mohideen (Mad) 176 ITR 393

Sale of land after plotting – Business venture

CIT Vs R. Ramaiah & ors. (Kar) 146 ITR 39

P. Kannan Vs CIT (Kar) 154 ITR 441

Indramani Bai & Another Vs Addl. CIT (SC) 200 ITR 594

Addl. CIT Vs Chikkaveerayya Lingaiah (Kar) 164 ITR 41

Raja Rameswara Rao Bahadur Vs CIT (AP) 32 ITR 552; (SC) 42 ITR 179

G. Venkataswami Naidu & Co. Vs CIT (SC) 35 ITR 594.

Agriculturist purchasing lands in a series of transactions and selling them within a reasonably short period – adventure in the nature of trade.

Hemchand Hirachand Shah Vs CIT ( Guj ) 206 ITR 55

Land purchased had potentiality of being developed into building site – No agricultural operations were carried out on land by the assessee – Adventure in the nature of trade.

Badrilal Bholaram Vs CIT (MP) 139 ITR 207

CIT Vs B. Narasimha Reddy (Kar) 150 ITR 347

CIT Vs M. Krishna Rao (AP) 120 ITR 101

Sawandas Devram Vs CIT (MP) 150 ITR 576

Redefine Graft & Make it High Risk-Low benefit business

 

Redefine Graft & Make it High Risk-Low benefit business

SEPTEMBER 30, 2011

By Naresh Minocha

POST-Anna fast, corruption continues to hum the country. Both the grand corruption as well as the petty corruption continue to make news.

In the former category, one can easily spot the alleged payment of Rs 50-lakh bribe by Everonn Education Ltd to an income tax official for reducing tax evasion charge from Rs 116 crore to Rs 60 crore. Count how Revenue would have been lost, had CBI not acted as spoilsport for both sides involved in gratification. Imagine how tax and non-tax revenue the country is losing every year due to seamless graft that flows through the corridors of power.

In the petty bribery category, one can put a commendable community initiative in an obscure village, Budania in Jhunjhunu district of Rajasthan. Here villages have pooled their own money to install 20 close-circuit cameras with high resolution and night vision facilities to monitor the working of public service delivery entities such as community health centre. The underlying logic is that transparency prevents corruption. The village sarpanch reportedly puts online even the minutes of panchayat meeting.

These and several other recent cases of prevention and detection of corruption that offer lessons in combating corruption, which has spread like cancer in all sectors across the country. Before discussing the lessons, a recap of the dismal situation would prove handy for drawing the way forward.

The country's global rank in the Corruption Perception Index (CPI) prepared annually by Transparency International has declined to 87 th in 2010 from 46 th in 1996. This free fall in the country's reputation has occurred in spite of all the political rhetoric such as zero tolerance for corruption.

CPI and several other similar yardsticks only indicate what surveyed stakeholders perceive as the level of corruption in different countries.

The actual level of corruption in India is perhaps worse than its CPI rank of being 87 th most corrupt country among 178 countries.

The World Economic Forum's (WEF's) Global Competitiveness Report 2011-2012 (GPR) gives a frightening image about prevalence of grant in India.

It ranks 95 th among 142 nations on the issue of `irregular payments and bribes', which is one of components of institution, the first pillar among 12 pillars that constitute global competitiveness Index (GPI).

The country's ranking on other corruption-related components such as ethical behaviour of firms and favouritism in government decisions is similarly disgusting.

GPR notes corruption and burdensome regulations have fueled "discontent in the business community" in the country over the last five years.

That corruption is blunting Indian businesses' competitiveness has been driven well home by a National Manufacturing Competitiveness Council (NMCC)-commissioned study on logistics cost of manufactured exports finalized in June this year.

A 2010 Study on Enhancing Competitiveness of Unregistered Manufacturing Units conducted by Indian Institute of Foreign Trade on behalf of National Manufacturing Competitiveness Council (NMCC) observed: "Efforts to tackle corruption are likely to have a significant impact on

restoring entrepreneurs' confidence in public administration and their willingness to formalise."

The third national manufacturing survey released by NMCC in 2009 identified corruption as one of the hurdles to the firms' global competitiveness in electrical and electronics, weaving sectors.

While no one can deny the urgency for a strong Lokpal to tackle the menace of grand and syndicated corruption in the top and middle echelons of power, the country needs to do much more to stem petty corruption. After all, the latter type of bribery hurts Aam Aadmi most.

Lokpal, whatever be its variant, cannot be the solution to all forms of corruption in all situations. The country has to look afresh at the entire gamut of graft right from redefining corruption. It has to enact new laws, plug loopholes in the existing ones and speedily penalize the giver and taker of gratifications.

The anti-corruption brigade would perhaps have to put in place different strategies to deter and detect bribery in different sectors. The application of management concept of value chain analysis in the realm of corruption can provide handy in tackling graft in different situations as suggested by governance brief issued by Asian Development Bank (ADB) in December 2007.

Let us start with redefining corruption. The Government's reluctance on this issue itself confirms the lack of political will to wage a war against graft. It last year rejected the recommendation of Administrative Reforms Commission (ARC) to bring certain activities under the ambit of corruption.

In its 4 th report on `Ethics in Governance', ARC had recommended that corruption should be redefined by including four offences under the Prevention of Corruption Act 1988 (PCA).

The offences are 1) Gross perversion of the Constitution and democratic institutions amounting to willful violation of oath of office. 2) Abuse of authority unduly favouring or harming someone. 3) Obstruction of justice. 4) Squandering public money."

In its action taken report (ATR) on ARC reports, the Government has rejected this recommendation without specifying any reason for its decision. It also dismissed ARC recommendation on `collusive bribery'.

ARC suggested that an offence could be classified as `collusive bribery' if the outcome or intended outcome of the transaction leads to a loss to the state, public or public interest. In all such cases if it is established that the interest of the state or public has suffered because of an act of a public servant, then the court shall presume that the public servant and the beneficiary of the decision committed an offence of `collusive bribery'. The punishment for all such cases of collusive bribery should be double that of other cases of bribery. The law may be suitably amended in this regard."

The Government countered this recommendation as: " " It may not be feasible to attribute mens rea at the time of taking decision/action for subsequent loss to the State, public and public interest. Possibility of loss in commercial decisions in particular may not always be attributable to only the decision/action in the past due to changing commercial environment."

Yet another ARC recommendation rejected by the Government relates to speedy trial of the corrupt under PCA.

As put by ARC: "A legal provision needs to be introduced fixing a time limit for various stages of trial. This could be done by amendments to the CrPC."

The Government also steered clear of ARC recommendation to bring both the private sector and partly Government funded NGOs under PCA. The Government felt that "CGAR (Core Group on Administrative Reforms) may examine these recommendations in greater depth."

In fact, the Government should have not only accepted ARC recommendations but also moved one step ahead by bringing rampant corruption in the private sector within the ambit of PCA.

Is not a fact that marketing executives in several private companies take gratification in diverse forms from existing and potential vendors for entering into business transactions?

The entities/individuals aspiring for dealership of big companies are willing to pay underhand to executives who decide such appointments. How many cases come to light? Hardly any and when the briber complaints to police against corrupt executives for failing to do the quid pro quo, it becomes a case of fraud and cheating under different sections of Indian Penal Code (IPC).

Recall the 2003-04 case of arrest of two senior executives of Ranbaxy including a general manager for allegedly taking Rs 8-lakh bribe in two installments from one of its drugs distributors in Haryana.

Is it uncommon for promoters of Indian companies taking kickbacks in secret overseas accounts or in cash from engineering, procurement and construction contractors that set up their plants? No.

It is thus heartening to learn from the President that the Government is taking legislative steps in this direction. Inaugurating the ` ADB-OECD Anti- corruption Intiative's conference in New Delhi on 28 September, the President Pratibha Devisingh Patil said: " A process to consider changes in the Indian penal laws, has also been set in motion for criminalizing private sector bribery."

PCA is silent on corruption within the private sector. It is high time PCA is amended to adopt ADB's definition of corruption or any other such appropriate explanation.

According to ADB's Anti-corruption Policy issued in July 1998, "corruption involves behavior on the part of officials in the public and private sectors, in which they improperly and unlawfully enrich themselves and/or those close to them, or induce others to do so, by misusing the position in which they are placed."

In the illustrative list of illicit actions that constitute `corruption', ADB has included design and selection of uneconomical projects, misappropriation of confidential information for personal gains, the deliberate disclosure of false or misleading information on corporations and obstruction of justice and interference in the duties of anti-corruption agencies.

A corruption-combat guide j ointly developed by International Chamber of Commerce ( ICC) and three other international entities in 2010 lists several probable cases of bribery and extortion. Under probable scenario, "A union leader demands payment to an employee welfare fund before allowing his/her members to unload a ship."

This illustration shows that the Government ought to redefine corruption to bring under one single law all types of public and private sector bribery. The initiative should cover solicitation by NGOs and the media, both of which often enjoy the patronage of decision makers.

The ability of corruption to change its shaper like amoeba is amazing. This prompts one to raise issues that have so far been kept under the carpet. Is it not a fact that certain companies and NGOs have developed promiscuous relationship under the garb of corporate social responsibility? Are there not instances of companies incurring the wrath of NGOs for their failure to make donations? Would the Group of Ministers on paid news muster political will to do plain-speaking and recommend setting of a powerful, independent media regulator?

The Government ought to back up the enlarged definition by specifying stiff penalties. It should transform corruption to high risk, low reward business from the present high reward, low risk activity.

Apart from amending PCA, the Government has to plug loopholes and deficiencies in the anti-corruption provisions of the Indian Penal Code, Central Vigilance Commission Act and other relevant laws. More important is the need for it shed inertia over enacting a separate legislation for CBI and another for public services to empower officials to act independently against corruption.

A plenty of research and advice on these issues is available in official and non-official documents. The Government has to just muster the political will to act.

As for proceeding clinically against graft, we can revert to the ADB's governance mentioned earlier in this column. Advocating a practical approach to combating corruption, the brief says: " corruption should perhaps be addressed `in the small': chop up the elephant into tractable bits that allow micro-level reforms, however small, to occur and enable progress to be evaluated and measured more readily. This would imply that the typical broad remedial measures anchored on increasing accountability and transparency will need to be translated into concrete actions targeted to and tailor-made for specific areas. One promising approach in this direction is the value chain methodology applied at the sectoral or subsectoral level."

This methodology breaks any activity into a sequence of activities leading to provision of a service such as issue of a driving licence or a product say construction of games village for an international sports event.

"The approach forces one to focus on the output(s) of a sector, offers a useful way for identifying the vulnerabilities to corruption along different points of the chain, and consequently provides a concrete basis for devising practical measures to reduce the incidence of corruption throughout the "production process." Since it enables one to gain a better understanding of the real nature of corruption in a specific context, the approach opens up new avenues for developing actionable indicators—indicators that reflect the nature of corruption in a particular area."

This approach brings one to the need for creating a multi-tiered or multi-organization with mandatory coordinates to fight corruption at national, state and local levels with different approaches in various sectors.

The existing multiple anti-corruption agencies draw lonely furrows and reluctant to share information and tips with each other. Many of them are under-staffed or partly-equipped to take on the crooks.

This ineffective approach, coupled with lack of political will, has let corruption flourish as confirmed by all global anti-corruption yardsticks including the ones sponsored by the World Bank such as Doing Business 2011 or Paying Taxes 2010.

Singapore-based anti-corruption and governance guru, Jon S.T. Quah believes that the amalgam of weak political will and inadequate anti-corruption measures result in a hopeless strategy.

Prof. Quah has thus put India, China, Indonesia, Mongolia and Philippines in the `hopeless strategy' category.

Prof. Quah, who has authored several studies and research papers on corruption, says: "As can be seen in the cases of Singapore and Hong Kong, curbing corruption in Asian countries is not an impossible dream, but it does require the sustained commitment of political leaders and populations. Since this political will is scarce in Asian countries, it is not surprising that many leaders have adopted "hopeless" strategies that perpetuate corruption instead of stifling it."

Mr. B.R. Lall, former CBI joint director zeroed in on PM on the issue of political will in his popular book ` Who Owns CBI'. Lall has reported stated: "A strong and determined Prime Minister can make the difference….All we require is a straightforward, effective, honest, bold and a well-meaning Prime Minister for a few years at least."

Will the Prime Minister Dr. Manohan Singh bite the anti-corruption bullet and trash his image as a batsman serving as a night watchman on the dynastic pitch?

Stay of disputed income tax demands-some important points

 

Stay of disputed income tax demands-some important points

In scrutiny assessments it is sometimes seen that huge demands are created against the assessee by framing high pitched assessments due to difference in opinion on interpretation of law or interpretation of facts or due to the fact that AO is not satisfied with the explanations offered by the assessee in regard to loan creditors or cash credits or gifts etc.

After the assessment a notice u/s 156 for recovery of tax demand created in concluded assessment proceedings, is issued. If a person fails to pay such tax demand then section 220 of Income Tax Act provides for treating such assessee as assessee-in-default as a result of which not only interest @ 1% u/s 220(2) on the tax demand is charged but penalty proceedings u/s 221 may also be initiated.

The assessee may file an appeal against such huge assessment and can also consequently apply for stay of such disputed tax demand since right to request for stay of demand in question is incidental to the right of appeal.

Petition for Stay of Demand: Section 220(6) provides that Where an assessee has presented an appeal under section 246 or section 246A the Assessing Officer may, in his discretion and subject to such conditions as he may think fit to impose in the circumstances of the case, treat the assessee as not being in default in respect of the amount in dispute in the appeal, even though the time for payment has expired, as long as such appeal remains undisposed off.

Thus assessee may apply for stay of tax demand u/s 220(6) and may request that he may not be treated as assessee in default. It should be noted here that accepting the request of an assessee u/s 220(6) is within the discretionary power of the AO. But such discretionary power cannot be exercised arbitrarily but has to be exercised judicialy and reasonably as the AO while exercising such discretionary power is always treated as quasi-judicial authority.

Time limit for deposit of tax demand u/s 156: Section 220(1) provides that demand raised u/s 156 shall be paid within 30 days from the date of service of notice, however such period may also reduced to less than 30 days with the prior approval of Joint Commissioner if AO has any reason to believe that allowing full pertiod of 30 days would be detrimental to the interests of revenue.

The assessee may also apply for extension of time before the due date for the payment of demand or he may also apply for payment of demand in installments.

The assessee will be treated as assessee in default only after the end of such period as mentioned in notice u/s 156. If the installments have been allowed and installment is not paid within time fixed for payment of installment then the assessee will be treated as assessee-in-default after the end of such period fixed.

What should be done for stay of disputed demand: If the assessee has filed an appeal against any order and consequent demand, he should write to the AO for stay of such demand and request him as not to treat him as assessee in default. The petition u/s 220(6) should be formulated keeping the following points in mind:

-The petition should state the prima facie merits of the appeal. The test of merit of appeal lies mush upon the grounds of appeal, which should be strong enough.

-The hardship involved in the recovery of the disputed demand should be clearly and precisely stated. The petition should state why and how the balance of convenience is in favour of the stay, e.g. bad effect on the liquidity position of the business, jeopardy of the employment of workmen through possible closure of business and possibility dead lock in wage payment etc. as the case may be.

-Copy of grounds of appeal as well as statement of facts should accompany the petition to show the prima facie merits of the appeal.

-The petition should be submitted within 30 days of receipt of demand notice.

Stay of realization cannot be granted simply because an appeal has been preferred- Gouri Shankar Awasthi v. ITO 1970 -TMI - 7888 - CALCUTTA High Court

Discretionary power has to be exercised judicially: The discretion vested in the ITO u/s 220(6) is not merely a naked and arbitrary power but a power coupled with a responsibility and the concerned officer should take all the circumstances into account and all the considerations that could be urged or are urged by the assessee as to why he should not be treated as not being in default and then make such order as is appropriate to the facts of case. In other words, a request for the exercise of the power u/s 220(6) cannot be merely summarily rejected on the basis that the power is there with the officer but that he is not bound to exercise it- M.L.M Mahalingam Chettiar v. Third ITO 1966 -TMI - 6896 - MADRAS High Court.

AO should give reasons for dismissing an application for stay: The AO cannot simply reject the stay application without giving any reason for the same., AO must pass a speaking order while dismissing stay application.

As the exercise of discretion by AO u/s 220(6) is quasi-judicial function and he has to exercise his power fairly and reasonably and not arbitrarily or capriciously, the AO should give reasons for dismissing an application made by an assessee for involving his discretion and should also hear the assessee- Cf. Seth Gopaldas Paliwal v. WTO 1980 -TMI - 29252 - MADHYA PRADESH High Court. Teletube Electronics Ltd. V CIT 1997 -TMI - 17297 - DELHI High Court; Chesebrough Pond's Inc v A.A.C. (C.T.), [1973] 32 STC 464 (Mad.).

Assessee cannot be treated in default until stay application is disposed off: It should be noted also that until application for stay of demand is disposed off by a speaking order assessee cannot be considered as assessee in default. Moreover demand remains stayed until the disposal of the application for stay. "Where an application for stay of demand in pending for disposal u/s 220(6), the demand should be stayed until the application is considered and an order is passed"-Sat Pal v ITAT 317 (P&H); Bongaigaon Refinery and Petro Chemicals Ltd. V. CIT 2002 -TMI - 12699 - GAUHATI High Court; Debasish Moulik v. DCIT 1998 -TMI - 17178 - CALCUTTA High Court.

Stay should be granted if grounds of appeal are not frivolous: Normally, once the officer is satisfied that an appeal has been filed (and the grounds are not frivolous), he has to treat the assessee as not in default to the extent of the portion of tax disputed in the appeal. Though section 220(6) doesnot indicate in what cases denial of discretion shall be justified, the fact that the assessee is financially sound and is in a position to pay is not in itself a ground for refusing to exercise the discretion in granting the stay- R.P. David v. Ag. ITO [1972] 86 ITR 699 (Mad.).

Penalty u/s 221 cannot be imposed before disposing off of the stay petition: As noted earlier till the time stay application is disposed off by the AO, the demand remains stayed and hence assessee is not considered in default. Thus until the time stay application is being disposed off, no penalty u/s 221 can be imposed for non-payment of demand because assessee will not be considered as assessee in default till the disposing off of stay application.

In CIT v. DLF Universal Ltd. 2007 -TMI - 2980 - HIGH COURT, DELHI, the Delhi High Court held that Assessing Officer should have decided the stay applications filed by the assessee before levy of penalty u/s 221. In this case High Court held that the assessing officer should have decided the stay applications filed by the assessee before taking any steps prejudicial to the interests of the assessee.

CBDT's guidelines on stay of demand: CBDT in its instruction No. 96 dated 21-08-1969 has also stated that where the income assessed is huge in nature say twice the amount of income returned then the collection of tax should be held in abeyance till the final disposal of appeals, provided there was no lapse on the part of assessee:

For ready reference, this Instruction is reproduced below: -

"Stay in cases of harsh assessment: - One of the points that came up for consideration at the 8th meeting of the informal consultative committee was that income-tax assessments were arbitrarily pitched at high figures and that the collection of disputed demands, as a result of these, was also not stayed inspite of the specific provision in the matter in section 220(6) of the IT Act, 1961.

The then deputy Prime Minister (who was also the finance minister at the relevant time) had observed as under: -

"(w)here the income determined on assessment was substantially higher than the returned income, say twice the later amount or more, the collection of the tax in dispute should be held in abeyance till the decision on the appeals, provided there were no lapses on the part of the assessee. The board desires that the above observations may be brought to the notice of all the ITOs, working under you, and the powers of stay of recovery in such cases, upto the stage of first appeal, may be exercised by the IAC/CIT."

Subsequent Instructions

After the issue of the Instruction No 96 (supra), the CBDT has issued two more Circulars on the subject of stay of demands namely Circular No 530 dated March 6, 1989, and Circular No 589 dated. January 16, 1991. The stipulations of these circulars are: -

Circular No 530

This Circular provides that the AO may exercise his discretion u/s 220(6) and treat the assessee as not being in default in regard to demand payable in the following circumstances: -

(a) The demand in dispute has arisen because the AO has adopted an interpretation of law on which there are conflicting decisions from the High Courts or the jurisdictional High Court has adopted an interpretation, which has not been accepted by the I-T department.

(b) The demand in dispute relates to issues that have been decided in favour of the assessee in the past.
In respect of cases, which are not covered by (a) and (b), the AO has been advised to take into account all the relevant factors and communicate his decision to the assessee by a speaking order. It was said in this circular that while exercising discretion under this provision, the financial capacity of the assessee to pay the demand would not be relevant.

Circular No.589 was also issued afterwards clarifying contents of circular No 530.

Letter [F.No. 404/10/2009-ITCC], dated 1-12-2009

Many queries have been received regarding the applicability of Instruction number 95 dated 21.8.1969 vis-à-vis Instruction number 1914 dated 2.12.1993. Many assesses are taking the plea that Instruction No. 1914 does not supercede Instruction No. 95 dated 21.8.1969.

2. Instruction No. 95 dated 22.8.1969 was an assurance given by the then Deputy Prime Minister during the 8th Meeting of the Informal Consultative Committee held on 13th May, 1969. The observations made by the Deputy Prime Minister were as under:-

"Where the income determined on assessment was substantially higher than the returned income, say twice the latter amount or more, the collection of the tax in dispute should be held in abeyance till the decision on the appeal provided there were no lapses on the part of the assesses."

The above observations were circulated to the field officers by the Board as Instruction number 95 dated 21.8.1969.

2. The matter has been considered by the Board and the decision of the Board has been approved by the Finance Minister. It is hereby clarified that subsequent to Instruction No. 95 following Instructions/clarifications on the stay of demand were issued till 15th October 1980:-

(i) Clarification to Instruction number 95 was issued on 14/09/1970 stating that it relates to disputed demands only.

(ii) Instruction number 635 was issued on 12/11/1973 stating that stay should be granted only in those cases where demands are attributable to substantial points of dispute.

(iii) Clarification to Instruction number 95 dated 13/07/1976 held that the Instruction becomes operative only in cases where there are no lapses on the part of the assessee.

(iv) Instruction number 1067 dated 21/06/1977 held that the ITO can pass the necessary orders u/s 220 (6) in all cases except cases under section 144A or 144B where the approval of IAC is required.

(v) Instruction number 1158 dated 27th March 1978 held that in suitable cases the assessee may be allowed to furnish security.

(vi) Instruction number 1282 dated 4th October 1979 held that requests should be made to CIT(A) and ITAT for early disposal of appeals and constant watch should be kept on progress of appeals.

(v) Instruction number 1362 was issued on 15/10/1980 in supersession of all the earlier Instructions. It was an Instruction covering the issue in detail and in para 4 of the same there was a clear reference to the proposition laid down in Instruction number 95 which is as follows:-

In exercising this discretion, the Income-tax Officer should take into account factors such as: whether the points in dispute relate to facts; whether they arise from different interpretations of law; whether the additions have been made as a result of detailed investigation; whether the additions are based on materials gathered through enquiry/survey/search and seizure operations; whether the disputed addition to income has been assessed elsewhere by way of protective assessment and the tax thereon has been paid by such person etc. The magnitude of addition to income returned cannot be the sole determinant in this regard. Each disputed addition will need to be considered to arrive at the quantum of tax that may need to be stayed.

3. It is clear that the substance of the assurance as laid down in Instruction number 95 dated 21.8.1969 was submerged in the Instruction number 1362 dated 15/10/1980 which was issued in supersession of all earlier Instructions on the subject. Instruction No. 1914 dated 2.12.1993 was issued subsequently in super-session of all the earlier Instructions on the subject and the said Instruction also covers unreasonably high pitched assessment order and genuine hardship cases.

4. It is therefore clarified that there is no separate existence of the Instruction number 95 dated 21.8.1969. Instruction number 95 and all subsequent Instructions on the issue ceased to exist from the date Instruction No. 1362 came into operation. In turn Instruction number 1362 and all subsequent Instructions on the issue also ceased to exist the day Instruction number 1914 came into operation i.e. 2/12/1993.The Instruction number 1914 holds the field currently and a copy of Instruction number 1914 is enclosed for reference.

RECOVERY OF OUTSTANDING TAX DEMANDS

[Instruction No. 1914 F. No. 404/72/93 ITCC dated 2-12-1993 from CBDT]

The Board has felt the need for a comprehensive instruction on the subject of recovery of tax demand in order to streamline recovery procedures. This instruction is accordingly being issued in supersession of all earlier instructions on the subject and reiterates the existing Circulars on the subject.

2. The Board is of the view that, as a matter of principle, every demand should be recovered as soon as it becomes due. Demand may be kept in abeyance for valid reasons only in accordance with the guidelines given below :

A. Responsibility:

i. It shall be the responsibility of the Assessing Officer and the TRO to collect every demand that has been raised, except the following :

(a) Demand which has not fallen due;

(b) Demand which has been stayed by a Court or ITAT or Settlement Commission;

(c) Demand for which a proper proposal for write-off has been submitted;

(d) Demand stayed in accordance with paras B & C below.

ii. Where demand in respect of which a recovery certificate has been issued or a statement has been drawn, the primary responsibility for the collection of tax shall rest with the TRO.

iii. It would be the responsibility of the supervisory authorities to ensure that the Assessing Officers and the TROs take all such measures as are necessary to collect the demand. It must be understood that mere issue of a show cause notice with no follow-up is not to be regarded as adequate effort to recover taxes.

B. Stay Petitions:

i. Stay petitions filed with the Assessing Officers must be disposed of within two weeks of the filing of petition by the tax- payer. The assessee must be intimated of the decision without delay.

ii. Where stay petitions are made to the authorities higher than the Assessing Officer (DC/CIT/ CC), it is the responsibility of the higher authorities to dispose of the petitions without any delay, and in any event within two weeks of the receipt of the petition. Such a decision should be communicated to the assessee and the Assessing Officer immediately.

iii. The decision in the matter of stay of demand should normally be taken by Assessing Officer/ TRO and his immediate superior. A higher superior authority should interfere with the decision of the AO/TRO only in exceptional circumstances; e.g., where the assessment order appears to be unreasonably high-pitched or where genuine hardship is likely to be caused to the assessee. The higher authorities should discourage the assessee from filing review petitions before them as a matter of routine or in a frivolous manner to gain time for withholding payment of taxes.

C. Guidelines for staying demand:

i. A demand will be stayed only if there are valid reasons for doing so. Mere filing an appeal against the assessment order will not be a sufficient reason to stay the recovery of demand. A few illustrative situations where stay could be granted are:

It is clarified that in these situations also, stay may be granted only in respect of the amount attributable to such disputed points. Further where it is subsequently found that the assessee has not co-operated in the early disposal of appeal or where a subsequent pronouncement by a higher appellate authority or court alters the above situation, the stay order may be reviewed and modified. The above illustrations are, of course, not exhaustive.

ii. In granting stay, the Assessing Officer may impose such conditions as he may think fit. Thus he may —

a. require the assessee to offer suitable security to safeguard the interest of revenues,

b. require the assessee to pay towards the disputed taxes a reasonable amount in lump sum or in installments,

c. require an undertaking from the assessee that he will co-operate in the early disposal of appeal failing which the stay order will be cancelled.

d. reserve the right to review the order passed after expiry of a reasonable period, say up to 6 months, or if the assessee has not co-operated in the early disposal of appeal, or where a subsequent pronouncement by a higher appellate authority or court alters the above situations;

e. reserve a right to adjust refunds arising, if any, against the demand.

iii. Payment by installments may be liberally allowed so as to collect the entire demand within a reasonable period not exceeding 18 months.

iv. Since the phrase "stay of demand" does not occur in section 220(6) of the Income-tax Act, the Assessing Officer should always use in any order passed under section 220(6) [or under section 220(3) or section 220(7)], the expression that occurs in the section viz., that he agrees to treat the assessee as not being default in respect of the amount specified, subject to such conditions as he deems fit to impose.

v. While considering an application under section 220(6), the Assessing Officer should consider all relevant factors having a bearing on the demand raised and communicate his decision in the form of a speaking order.

D. Miscellaneous:

i. Even where recovery of demand has been stayed, the Assessing Officer will continue to review the situation to ensure that the conditions imposed are fulfilled by the assessee failing which the stay order would need to be withdrawn.

ii. Where the assessee seeks stay of demand from the Tribunal, it should be strongly opposed. If the assessee presses his application, the CIT should direct the departmental representative to request that the appeal be posted within a month so that Tribunal's order on the appeal can be known within two months.

iii. Appeal effects will have to be given within 2 weeks from the receipt of the appellate order. Similarly, rectification application should be decided within 2 weeks of the receipt t hereof. Instances where there is undue delay in giving effect to appellate orders, or in deciding rectification applications, should be dealt with very strictly by the CCITs/CITs.

3. The Board desires that appropriate action is taken in the matter of recovery in accordance with the above procedure. The Assessing Officer or the TRO, as the case may be, and his immediate superior officer shall be held responsible for ensuring compliance with these instructions.

4. This procedure would apply mutatis mutandis to demands created under other Direct Taxes enactments also.

Conclusion: It should be kept in mind that there is no default deemed to have occoured until disposal of stay petition therefore no penalty is imposable without disposal of stay petition. Demand remains automatically stayed during the period stay application is pending before AO.

Summary rejection of stay petition by non-speaking order is invalid.The refusal may be challenged in application u/s 264 before C.I.T. The refusal by CIT, if unreasonable and inconsiderable, is open to challenge in writ petition.

Stay petitions u/s 220(6) should not be dealt with in mechanical manner but the discretionary power to grant stay should be exercised judicialy and reasonably and a speaking order should be passed while disposing off the stay petitions.

Dated: - December 6, 2011

By: AMIT BAJAJ ADVOCATE :

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

 

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

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

Facts of the case

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

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

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

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

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

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

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

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

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

Having heard the matter, the High Court held that,

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

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

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

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

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

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

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

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

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

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

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

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