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

 

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

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

Drafting of Appeal

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

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

A specimen draft of grounds of appeal is as under:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

GENERAL AMNESTY FOR RETROSPECTIVE RESTORATION OF NAMES

 

ANNOUNCEMENT
GENERAL AMNESTY FOR RETROSPECTIVE RESTORATION OF NAMES
FROM REGISTER OF MEMBERS AND CERTIFICATE OF PRACTICE
DATE: 03.01.2012
With a view to mitigating the hardships being faced by such members whose names stand removed
as on date due to non-payment of membership fee, the Council has decided to give them an
opportunity by way of General Amnesty for restoration of their names retrospectively.
Continuation of membership entitles to designate as `CA' and benefits alike monthly Journal of the
Institute , newsletters of Regional Councils & Branches of the Institute, participation in the
conferences, seminars and other programmes organized by the Institute, Regional Councils and/or
Branches at concessional rates; regular update of programs being organized and initiatives taken for
the benefit of the profession and members; emerging professional opportunities, practice area
development, publications of the Institute.
This is an excellent opportunity to get your name restored with retrospective effect by submitting
your application in Form 9 on or before 31
st
March, 2012 alongwith the outstanding fee for the
intervening period of nam e removal and restoration fee submitted. Details of General Amnesty
Scheme are given below:-
(i) Retrospective restoration of membership under General Amnesty Scheme:
Category I: The names of the members whose name is removed prior to 31
st
March 2011 on account
of non payment of fees and not restored as on date may apply for retrospective restoration of their
names under General Amnesty Scheme by filling Form 9 along with the membership fees for the year
during which the name was removed and for the current year together with the fee(s) for the
intervening years and the additional fee of Rs.1200/- towards restoration. To avail benefits of General
Amnesty Scheme, members should submit the requisite fees and Form upto 31
st
March 2012.
The scale of membership fee as applicable from time to time is as given below:
Effective from Associate Fellow
1
st
April, 2011 *Rs.800 *Rs.2200
1
st
April, 2008 *Rs.600 **Rs.1,800
1
st
April, 2000 Rs.300 Rs.900
1
st
April, 1996 Rs.225 Rs.700
1
st
April, 1991 Rs.150 Rs.400
1
st
April, 1986 Rs.100 Rs.275
1
st
April, 1982 Rs.80 Rs.200
1
st
April, 1976 Rs.60 Rs.125
1
st
April, 1975 Rs.45 Rs.110
1
st
April, 1964 Rs.28 Rs.83
1
st
April 1949 Rs.25 Rs.25
*Rs.450/- and Rs.*Rs.600/- where an Associate
member has attained the age of 65 years as on
1
st
April,

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Co-accused's statement not enough for conviction: HC

 

Co-accused's statement not enough for conviction: HC

January, 04th 2012
The Nagpur bench of Bombay high court has ruled that an accused can't be convicted just on the basis of a co-accused's statement. "The statement of co-accused can always be used if the accused is being tried primarily on other evidence. But his statement cannot be foundation to convict the accused when that is only the sole material," the court said.

A single judge bench of justice Ambadas Joshi then acquitted an accused for offences of theft, cheating and forgery. "Allowing the trial to proceed would mean nothing but waste of time of the court, the prosecution, and would burden the state exchequer. Apart from that it tends to disrepute the criminal law administrative system," a justice Joshi observed before disposing of the plea.

"Permitting trial on such unsustainable material would be vexing the accused and burdening the courts with prosecution which cannot be reasonably expected to fructify or at least could be worthy of trial," the court said before absolving accused Pravin Kalmegh who filed the petition through his counsel Akash Moon and PS Mohgaonkar of all charges.

Kalmegh (co-accused) along with Vijay Kene, the prime accused, were charged under sections 420, 34 and 379 of the Indian Penal Code (IPC). On First Information Report (FIR) of July 16, 2009, the Imambada police station arrested the duo and subsequently filed a chargesheet on September 20 in same year.

The petitioner filed four separate petitions contending he was prosecuted in four crimes only on the basis of Kene's version and there is no other evidence available against him. He further argued that Kene named him just to satisfy his personal grudge and enmity and falsely implicated him in the crime.

The HC found there indeed was no other proof on record against petitioner. The court citing many Supreme Court and HC judgments quashed and set aside the criminal proceedings in all four cases.

Whether profit from sale of shares intended as investment in books & treated as STCG

 

I-T - Whether profit from sale of shares intended as investment in books and treated as short-term capital gains, can be construed as business income on basis of frequency and magnitude of transactions - ruled in favour of Revenue by ITAT

MUMBAI, DEC 15, 2011: THE issues before the Tribunal are - Whether profit from sale of shares intended as an investment in the books of the assessee and supported by the resolution of its board of directors, and treated as short term capital gains, can be treated as business income on the basis of frequency and magnitude of the transactions and whether assessee's intention at the time of making the share purchase and the treatment given by the assessee to these transactions in its books of account, would overrule the facts of frequency and volume of the transaction to determine the nature of the transaction as investment or trade. And the answer partly goes in favour of Revenue.

Facts of the case

The assessee is a Private Limited Company engaged in the business of dealing in shares and securities. The Assessee was doing trading, speculation, investment and also had transactions from the derivative market. The assessee had switched from trading to the investment based business following a resolution passed by its Board of Directors in March 2005, stating that all transactions related to delivery based shares were to be carried out only on investment account. Accordingly, during the year, the assessee had not made any fresh purchases of shares in respect of trading. Through a software used by the assessee, all the trading transactions were automatically bifurcated on a day to day basis, as an investment or a speculative activity depending on when the contract for share purchase was squared up, whether on the same day without taking delivery or in a few days after taking delivery. Thus the assessee had a scrip wise analysis for every listed company share on a day to day basis.

During the year, the assessee had made an application for the initial public offers by M/s Shoppers Stop and YES Bank for which it had utilized the financial facilities from L&T Ltd and Kotak Mahindra Investment Ltd and paid interest on such borrowings. The shares acquired through these IPOs were sold as short term investment and the interest paid was reduced from the working of such gain. The assessee also maintained a running ledger with the share broker through whom such investments were arranged, which reflected the loans from and advances made to various associates and group concerns. This ledger showed huge loans taken and repaid for the activity of investment without any interest having been paid. The accounts were generally squared up at the end of the year and thus showed nil balance.

In its return of income, the assessee had shown its sale and purchase transactions and reported a net profit. After reducing miscellaneous expenses and the interest paid on two IPOs, the assessee had shown short term capital gains which were adjusted against the brought forward unabsorbed depreciation loss short term capital loss for earlier assessment years which resulted in short term capital gain on which the assessee had applied the tax rate of 10 per cent. The assessee had also shown long term capital gain which was claimed as exempt under section 10(38).

According to the assessee, the assessee was an investor. This was because the intention at the time of making an investment had to be seen, to determine whether the assessee was an investor or a trader. There was no trading transaction during the year and the trading profit had arisen only out of sale made from the opening stock of earlier year. Also, at the end of the year, the assessee company had sufficient funds and investment in shares had been made out of own funds.

While the AO accepted the long term capital gains and the short term capital losses posted by the assessee, he rejected the assessee's explanation of being an investor and objected to the short term capital gains on which the assessee had applied the lower tax rate of 10 per cent.

The AO noted that only in a few cases the assessee had squared up the contract of purchase and sale after more than one month. The AO thus held that the frequency and the amount of borrowing showed that the assessee's intention was business in the trading of shares and securities on a day to day basis. The scrip wise list showing stock in trade during the year, had shares of various listed companies which were also there in the huge list shown as investment. Even the purchases in the same scrip on the same day were divided into speculation and investment. Thus, the assessee had smartly but intentionally switched over its trading business to the investment business to have undue advantage of lower tax rate provided for short term capital gain. The assessee had utilised borrowed money for these huge investments made during the year. The assessee's IPO application for a huge amount had incurred a huge interest cost, which could not be treated as a short term investment by any prudent businessman and clearly showed the assessee's intention of doing business was a camouflage of showing the same as investment activity. Its accounts were also squared up at the end of the year to avoid the reflection in the balance sheet as borrowed loans. This view was also supported by the fact that the assessee was also trading in the derivative market with a huge volume on almost day to day basis. Thus the AO treated the short term capital gain as business income on which the higher tax rate of 30 per cent was applicable.

In appeal, the CIT(A) treated the short term capital gain on shares allotted in the IPO as business income but otherwise reversed the AO's order. The CIT(A) held that, there were no outstanding loans against the assessee; the net worth of the assessee company was substantial enough to cover the entire investment in shares, which proved that the assessee had made the entire investment out of its own funds without any borrowing. Also, considering the resolution passed by the assessee company's board of directors, the intention of the assessee at the time of purchase was accepted as that of investment. The CIT(A) held that it was immaterial whether the assessee held the shares for 90 days or 380 days and it could not alter the nature of transaction. Thus, the CIT(A) held that the short term capital gain earned on shares could not be taxed as business income. The CIT(A) then directed the AO to tax the income from short term capital gains at the lower rate of 10 per cent under section 111A.

In appeal before the Tribunal, the Revenue side submitted that the activity of frequent buying and selling of shares over a short span of period had to be treated as business being adventure in nature of trade. This was the first year where the volume and frequency were more and the holding period was less. Also, the frequency and amount of borrowings for investment in shares and the magnitude of the transaction justified the income as "business income" as against "short term capital gain" treated by the assessee. Thus, the profit from purchase and sale of shares had to be considered as business income and not capital gain as claimed by the assessee. The assessee's intention was to pay less tax that is at the rate of 10 per cent as against 30 per cent.

The assessee did not appeal against treating the short term capital gain on IPO shares as business income. The assessee submitted that in the earlier assessment years, the AO had accepted the short term capital gain and the long term capital gain without making any disallowance. Also, no borrowed funds had been utilized as its own funds and free reserves were higher than the value of investments. Also, as per CBDT circular, the assessee could have two portfolios of securities, one for investments and the other for stock in trade and the valuation of shares in the books of account had an important bearing in the matter.

Having heard the parties, the Tribunal held that,

++ the Board had accepted that an assessee could have two portfolios simultaneously – one, an investment portfolio comprising of securities which were to be treated as capital asset and two, a trading portfolio comprising of stock in trade which were to be treated as trading asset and the assessee could have income under both heads that is, capital gains and business income;

++ the AAR had culled out various principles from the decision of the Apex Court, following which the CBDT had issued guidelines for AOs to determine whether the shares held by the assessee were investment or stock-in-trade. Accordingly, it was possible for an assessee to be both an investor as well as dealer in shares. Following various legal precedents, whether a transaction of sale and purchase of shares was a trading or investment transaction was a mixed question of law and fact. Purchase with intention to resell could constitute capital gain or business profit depending on circumstances like quantity of purchase and nature of activity. A company that purchased and sold shares had to show that they were held as stock-in-trade and the existence of its power to purchase and sell shares in the memorandum of association was not decisive of the nature of transaction. The Board had also advised that no single principle was decisive and the total effect of all the principles had to be considered;

++ in this case, the shares were held for a few days or in few cases for a few weeks or months. Purchase of shares during the year and selling them frequently in a short period indicated that the assessee had purchased the shares with a motive to earn profit in a short period. Therefore, the frequency and volume of the transactions gave an impression that the assessee did not intend to acquire the shares with an investment motive. In the case of investment, the earning of dividend and the appreciation of the shares was the primary consideration. Only a trader looked for short term gains from purchase and sale of shares. Therefore, the treatment given by the assessee to these transactions in the books of account, could not be the only determinative factor about the nature of the transactions. The fact that the shares were disclosed as investment in the balance sheet had to be reckoned with but when other factors or circumstances threw some doubt on the motive of the assessee in acquiring the shares, as in this case, then the entries in the books of account or balance sheet would not override them and be taken as decisive of the intention of the assessee.

++ although in the preceding two years, the short term capital gain had been accepted by the Revenue in scrutiny/summary assessment, the assessee's argument that the same had to be followed this year too was without force as it was the settled proposition of law that principles of res judicata did not apply to income tax proceedings and every assessment was independent and separate;

++ in the preceding assessment year, the assessee traded in shares and the resolution to treat delivery based shares as investment was passed only towards the end of the financial year. The entire exercise was done by the assessee with a motive to reduce the tax liability which was 10 per cent for short term capital gains and 30 per cent for business income. Therefore notwithstanding the fact that the shares were shown as investment in the balance sheet of March 2005, which were earlier a part of stock in trade, sale of the same, could not be considered as sale of investment and consequently the profit had to be treated as business income. Also, it was the computer which decided whether the share was delivery based or non-delivery based and whether it was for trading or investment. Therefore the Board's resolution had lost its significance;

++ the assessee's argument that no borrowed funds had been utilized for making the investment was also without force as the AO had given a categorical finding that the assessee had used borrowed money from group concerns and associates and only towards the end of the year, the same was squared up so as to give an impression that no borrowed funds had been utilized for the purpose of investment in shares;

++ the assessee could have two portfolios; one for investment and one for trading. Mere volume of transaction did not mean that the assessee was a trader and the intention with which the purchase was made had to be seen. However, in this case, the intention of the assessee appeared to be whimsical. Purchases in the same scrip on the same day had been divided into speculation and investment whereby the intention of the assessee was just to reduce the tax liability by treating a part of the profit as short term capital gain. Therefore, the profit on account of purchase and sale of shares by the assessee had to be treated as income from business. The order of the CIT(A) was therefore set aside and the AO's order was restored. The grounds raised by the Revenue were accordingly allowed.

AUDIT OVERSIGHT KEY TO AUDIT INDEPENDENCE

 

AUDIT OVERSIGHT KEY TO AUDIT INDEPENDENCE

One of the important rights that shareholders enjoy is the right to receive financial information periodically. It is widely perceived that managers have a temptation to `cook' account books and provide favourable financial information to the investing public. Therefore, there is a need to have an independent third party, with adequate competency, to review those financial statements to assess whether they provide a `true and fair view'. The statutory auditor plays that important role. The auditor provides a reasonable assurance that the financial disclosures are fair and complete, and thus, enhances the investors' confidence, which is essential to the promote liquidity and efficiency of the capital market. A developed capital market ensures flow of capital to the corporate sector and efficient allocation of capital. Thus, the auditing profession plays a critical role in the economic development of a country. It is a well-established view that the statutory auditor is the watchdog of the public interest. Yet, the auditee (the company) pays the fees. Neither the government nor the public pays the audit fees. Although shareholders enjoy the right to appoint the auditor, in practice, the management appoints the auditor. Consequently, a fundamental tension exists for the auditor whereby the party to whom he technically owes primary allegiance is not the party who pays for his services. Thus, auditor's independence is potentially compromised simply by accepting the audit engagement. Audit firms, like any other professional firms, strive for growth and intend to retain the client. Therefore, while engaged in the audit of financial statements of a particular year, it expects to get appointment for the next year. Moreover, like any other professional firm, bottom line is important for audit firms. Therefore, they have a temptation to cut cost. As was revealed in the case of Enron, the audit techniques and procedures follo wed by the auditor (Arthur and Anderson, one of the then big Five audit firms) remained unchanged even when the audit risk enhanced significantly. This inherent tension and temptation to compromise on audit quality cannot be glossed over. Therefore, search for mechanisms to enhance auditor's independence and audit quality continues. It is imperative that effective oversight of the accounting profession and of independent audits is critical to the reliability and integrity of the financial reporting process. Various mechanisms exist for auditor oversight. About three decades back, auditor oversight through `self regulation' was prevalent in most countries. In this regard, auditing profession was no different from many other professions (e.g., medical and legal). `Peer review' and `disciplinary mechanism' were some of the systems being used by the accounting and auditing profession to ensure independence and quality. With large-scale audit failures, the credibility of `self-regulatory measures' is being questioned. Audit oversight mechanisms, which are not predominantly based on self-regulation, are being introduced as a part of the audit reform. One such system is the review of statuary audit by the audit committee of the board of directors. In USA, the Sarbanes-Oxley Act (2002) created the Public Company Accounting and Oversight Board (PCAOB). One of the PCAOB's responsibilities is to conduct independent inspections of public company audit firms. In India, in 2007, the government has constituted a `Quality Review Board'. It is generally believed that rotation of auditors or lead audit partner periodically will be mandatory on the promulgation of the new Companies Act. There is no consensus that this system will strengthen the auditor's independence and audit quality. There is a concern that, in absence of adequate number of large audit firms, Big Four will enter into a tacit arrangement to rotate audit among them. Luckily, in India, share of the BIG Four is around 50 per cent. Therefore, most companies should be able to appoint auditor of their choice. However, they might also prefer to restrict the rotation among two or three firms of their choice. International Organization of Securities Commissions (IOSCO) has recommended establishment of an independent regulator to oversee the auditing profession. India should not jump to accept the recommendation of the IOSCO. Some research findings observe that PCAOB's inspections have not yielded better results than those from the peer review system. It is not a great idea to introduce all the systems at a time without evaluating the experience of other countries. Rather, the accounting profession and the government should work together to strengthen the existing `audit oversight' systems. - www.business-standard.com

Reference under section 142A made for estimation of sale consideration-Possibility

 

Reference under section 142A made for estimation of sale consideration-Possibility
No reference can be made under section 142A to the Valuation Officer for estimating the full value of consideration in respect of property for the purpose of computation of capital gains under section 48.

Vide Sumit Khurana v. ACIT (2011) 42(II) ITCL 252 (Del-Trib)

S. 2(22)(e): “Trade Advances” are not “loans & advances”

 

CIT vs. Arvind Kumar Jain (Delhi High Court)

S. 2(22)(e): "Trade Advances" are not "loans & advances"

The assessee held 50% of the shares of a closely held company. The assessee's books showed that he had taken an "unsecured loan" of Rs. 47 lakhs from the company. The AO assessed the said amount as "deemed dividend" u/s 2(22)(e) though the CIT (A) & Tribunal deleted it on the ground that there was a running business relationship between the assessee and the company and the said amount was not a loan but was the result of those business transactions. The department filed an appeal before the High Court. HELD dismissing the appeal:

(i) S. 2(22)(e) provides that any "loan or advance" by a closely held company to a substantial shareholder shall be assessed as "deemed dividend". The purpose is to tax accumulated profits distributed in the form of loans. Bearing this purpose in mind, the word "advance" has to be read in conjunction with the word "loan". The attributes of a loan are that it involves a positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries interest and there is an obligation of re-payment. The term "advance" may or may not include lending. The word "advance" if not found in conjunction with the word "loan" may or may not include the obligation of repayment. If it does then it would be a loan. Applying the doctrine of noscitur a sociis, the word "advance" means such advance which carries with it an obligation of repayment. Trade advance which are in the nature of money transacted to give effect to a commercial transactions do not fall within the ambit of s. 2(22)(e) (CIT Vs. Raj Kumar 318 ITR 462 followed);

(ii) The fact that the assessee has himself shown the amount in his books of accounts as "unsecured loan", is not determinative of the true nature of transaction. (India Discount Co Ltd 75 ITR 191 (SC) followed).

Related Judgements
CIT vs. Parle Plastics Ltd (Bombay High Court) S. 2(22)(ii) excludes loans and advances where (a) the loan or advance was made by the lending-company in the ordinary course of its business and (ii) lending of money is a "substantial part" of the business of the lending-company. The first condition was satisfied as the business of the…
CIT vs. Ankitech Pvt Ltd (Delhi High Court) U/s 2(22)(e), any payment by a closely-held company by way of advance or loan to a concern in which a substantial shareholder is a member holding a substantial interest is deemed to be "dividend" on the presumption that the loans or advances would ultimately be made available to the…
CIT vs. M/s Khemchand Motilal Jain (Madhya Pradesh High Court) While kidnapping is an offense, paying ransom is not; Bar in Explanation 1 to s. 37(1) not attracted The assessee, engaged in manufacture and sale of bidis, sent its whole-time director to a forest area for purchase of tendu leaves. There, the director was kidnapped by dacoits and…

I-T - Whether AO can brush aside actual rent received and reopen assessment on g

 

I-T - Whether AO can brush aside actual rent received and reopen assessment on ground that sister concern earned higher rent from property located in vicinity of assessee's property - NO, rules ITAT

MUMBAI, NOV 01, 2011: THE issues before the Bench are - Whether AO can brush aside actual rent received and reopen assessment on the ground that the sister concern per se earned higher rent from the property located in the vicinity of the assessee's property and whether reasons alone are to be seen while scrutinizing the jurisdiction of AO under section 147. And the ruling goes in favour of the assessee.

Facts of the case

Assessee Company let out its property on rent and reflected the actual rent as income from house property - the AO while assessing the sister concern, observed that the sister concern had let out its premises, situated in the same building, at a higher rent - Accordingly, the AO formed a view that the property of the assessee should also be assessed at the same value, and hence he reopened the assessment and assessed the case - CIT(A) affirmed the order of the AO - Before ITAT, assessee interalia challenged the jurisdiction of the AO under section 147 on the ground that there was no material with the AO on the basis of which it can be opined that income has escaped assessment.

After hearing the parties the ITAT held that,

++ as noted by the Assessing Officer in reasons recorded for reopening the assessments, the actual rent received by the assessee is to be substituted for the rent received for a similar property by an associate concern. We are unable to see any legal support for this approach of the Assessing Officer. Just because a similar property is let out for a higher rent, the Assessing Officer cannot determine annual value on the basis of such higher rent, and disregard the actual rent received. No doubt a higher rent being received by a sister concern for a similar property may prima facie indicate that "the sum for which the property might reasonably be expected to let out from year to year" could be higher than actual rent received, but that does not per se justify such a higher rent being adopted as the annual value of Rs.2,62,25,960 which is what Assessing Officer has done in the reasons recorded by the Assessing Officer;

++ it is also important to bear in mind that, as held by Bombay High Court in the case of Hindustan Lever Ltd. vs. R. B. Wadkar (2004-TIOL-72-HC-MUM-IT ), ... It is needless to mention that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to these reasons". Similarly, in the case of Prashant S. Joshi Vs. ITO (2010-TIOL-146-HC-MUM-IT), Hon'ble Bombay High Court has observed that "the reasons which are recorded by the AO are the only reasons which can be considered when formation of belief is impugned." Viewed in this perspective, when we examine reasons recorded for reopening the assessment, we find that these reasons proceed on the fallacious assumptions that when a higher rent is received for same property by a person other than the assessee, the rent so received can be substituted for the rent actually received by the assessee. We are unable to see any legal support for this assumption;

++ it was not even the case of the Assessing Officer that the sum for which subject property might reasonable be expected to let out is to be ascertained by making further enquiries. That apart, Hon'ble Bombay High Court, in the case of Smt. Smitaben N Ambani V CWT (2009-TIOL-86-HC-MUM-WT) and while dealing with the scope of expression "the sum for which the property might be reasonably expected to let from year to year", has observed that rateable value, as determined by the Municipal Corporation, shall be the yardstick. In view of these discussions, in our considered view, the reasons for reopening the assessment cannot be sustained in law, and are contrary to the plain provisions of statute and law as laid down by Hon'ble Jurisdictional High Court

Section 271 (1) (c) of the Income-tax Act, 1961

Section 271 (1) (c) of the Income-tax Act, 1961

SECTION 271 (1) (c)

PENALTIES

Penalty under clause c of Sub-Section 1 of Section 271 of the Income-tax Act, 1961, if the Assessing Officer or the Commissioner of Income Tax (Appeals) during the course of the Assessment Proceedings under the Act is satisfied that any person has ‘concealed’ or ‘furnished inaccurate particulars of income’. The words ‘concealed’ or ‘furnished inaccurate particulars of income’ has been defined either in this Section nor any where else of the Act. One thing is certain that these two circumstances are not identical in details although they may lead to the same effect, namely, keeping a certain portion of the income. The word ‘conceal’ is derived from the Latin word ‘concelare’ which implies to ‘hide’. It signifies a deliberate act of omission on the part of the assessee. A mere omission or negligence would not constitute a deliberate act suppressio veri or suggestio falsi – T. Ashok Pai Vs. CIT (2007) 161 Taxman 340, 292 ITR 11 (SC).

The words ‘furnishing inaccurate particulars of income’ refer to the particulars which have been furnished by an assessee of his income and the requirements of concealment of income is that income has not been declared at all or is not even recorded in the books of accounts or in a particular case the concealment of the particulars of income may be from the books of accounts as well as from the furnished – CIT vs. Raj Trading Co. (1996) 217 ITR 208, 86 Taxman 282 (Raj).

Above provisions of the Section clarifies that:

a) The penalty could only be levied by the Assessing Officer and/or the Commissioner of Income Tax (Appeals) and not higher authorities to that such as Income Tax Appellant Tribunal, High Court, and Supreme Court.

b)   It would only be levied during the Assessment Proceedings under the Income-tax Act, 1961.

c)   The penalty is in addition to the tax, if any payable by the assessee.

d)  Penalty could not be levied where the Total Income of the Assessee is in negative i.e. loss after the completion of the Assessment Proceedings under the Income-tax Act, 1961. Commissioner of Income Tax vs. Rajasthan Vanaspati Product Limited, (2008) 8 DTR (Raj) 282, were it has been held that, Penalty under section 271(1)(c)—Concealment—Assessment at loss—Penalty under s. 271(1)(c), prior to amendment of Explanation 4 thereof by the Finance Act, 2002, w.e.f. 1st, April, 2003, could not be imposed in cases where, even after adding the concealed income, the assessed income remained a loss. And concluded that, Penalty under s. 271(1)(c), prior to amendment of Explanation 4 thereof by the Finance Act, 2002, w.e.f. 1st April, 2003, could not be imposed in cases where, even after adding the concealed income, the assessed income remained a loss.

HISTORY OF THE SECTION

It all started way back in 01.04.1965 when the word ‘deliberately’ was omitted by the Finance Act 1964. It is obvious that the onus to prove the ‘deliberately’ was on the department. But, the same had been causing difficulties to the assessee as the departments are used to levy penalty almost under all the circumstances of disallowance or additions as the case may be.

The principal object of enacting this section was to provide prevention against recurrence of default on the part of the assessee. The basic sense of this section was to stop the practice of what the legislature considers to be against the public interest. The department was unable to prove one’s deliberateness towards certain act, thus the whole onus was on the laps of the department wholly and solely.

To overcome this difficulties in discharging this ‘onus’ the legislature came with an amendment under the Finance Act, 1964 w.e.f. 01/04/1965 by deleting the word ‘deliberately’ from the section. With this the burden once again fell on the assessee. Thus, the assessee was the one who had to prove that the particular act has not been done deliberately. An explanation was also added at the end of the section in order to cast upon the assessee the ‘onus’ to prove that the omission of income did not arise from any fraud or gross or wilful neglect in case where the difference between the returned income and assessed income was at a certain specified percentage.

DETAILED VIEW ON CASE LAWS

1.   VOLUNTARY SURRENDER OF UNDISCLOSED INCOME

A close study of the recent cases reveals the liberal judicial approach in applying the specific and strict provisions of section 271(1)(c). Voluntary surrender of the alleged undisclosed income just to buy peace of mind has emerged as an exception protecting the assessee against penalty even in an obvious case.

Thus, the Madras High Court in the case of CIT vs. Jayaraj Talkies (1999) 239 ITR 914 (Mad) held that mere agreement to addition of income or surrender of income did not imply concealment of income where the assessee surrendered certain amount to assessment because it was unable to substantiate its claims with necessary vouchers.

Similarly, the Kerala High Court in the case of CIT vs. M. George & Brothers (1987) 59 CTR (Ker) 298 : (1986) 160 ITR 511 (Ker) held that where the assessee for one reason or the other agrees or surrenders certain amounts for assessment, the imposition of penalty solely on the basis of the assessee's surrender will not be well founded.

In CIT vs. Suraj Bhan (2006) 203 CTR (P&H) 230 : (2007) 294 ITR 481 (P&H), the Punjab & Haryana High Court held that penalty cannot be imposed merely on account of higher income having been subsequently declared.

In this case, the assessee filed revised return showing higher income and gave the explanation that the higher income was offered to buy peace of mind, and to avoid litigation.

The Punjab & Haryana High Court, again, seems to have gone a step further in defying the specific provision of Explanation 1. In this case, transportation charges to the tune of Rs. 12,12,880 debited in the profit and loss account, when detected and investigated by the Assessing Officer during the assessment proceedings, the assessee could not satisfactorily explain the same. The assessee, without filing a revised return, surrendered the said uncorroborated amount of expenses merely to buy peace of mind and to avoid further litigation.

Although it was a clear-cut case of concealment penalty but the Punjab & Haryana High Court rather unconvincingly found that since the impugned payments were directly made by the suppliers, therefore, there was neither concealment of income nor furnishing of inaccurate particulars of income within the meaning of section 271(1)(c). "The Department has to prove mens rea before levying penalty under section 271(1)(c) and it cannot be made out that the assessee has concealed income or furnished inaccurate particulars merely because he has surrendered certain amount to avoid litigation and to buy peace of mind."

It appears that in all the aforediscussed cases, the respective Madras, Kerala, Punjab & Haryana High Courts relied on the two rulings of the Supreme Court, viz., Sir Shadi Lal Sugar & General Mills Ltd. vs. CIT (1987) 64 CTR (SC) 199 : (1987) 168 ITR 705 (SC) and CIT vs. Suresh Chandra Mittal (2001) 170 CTR (SC) 182 : (2001) 251 ITR 9 (SC).

In Sir Shadi Lal Sugar & General Mills Ltd. (supra) it was categorically ruled that if the assessee had agreed to the assessment of undisclosed income, it did not absolve the Revenue from proving mens rea in a quasi criminal offence.

In Suresh Chandra Mittal's case (supra) the Court came out with an epoch-making ruling, viz., if an assessee files a revised return showing higher income and gives explanation that he has offered higher income to buy peace of mind and to avoid litigation, penalty cannot be imposed merely on account of higher income having been subsequently declared.

2.   IF EXPLANATION IS NOT PRESSED INTO SERVICE BURDEN IS ON THE DEPARTMENT

It would indeed be a misconception of law to assume that merely by bringing the case under section 271(1)(c), its Explanation 1 would automatically be made applicable. Instead, Explanation 1 has to be specifically referred in the relevant notice; otherwise the case has to be adjudicated in the light of the main provision of section 271(1)(c) which has to be construed in the light of the ruling of Anwar Ali (supra). Consequently, the initial burden which has been cast upon the assessee by reason of Explanation 1 would automatically be on the Department by virtue of the rule of Anwar Ali. This, as a matter of fact and law, is the stand repeatedly taken by the Bombay High Court in the two cases of CIT vs. P.M. Shah (1993) 203 ITR 792 (Bom) : TC 50R.800 and CIT vs. Dharamchand L. Shah (1993) 113 CTR (Bom) 214 : (1993) 204 ITR 462 (Bom).

In both the cases, penalty proceedings were initiated without mentioning in the notice that Explanation 1 to section 271(1)(c) was being resorted to. The assessee objected the application of Explanation 1 at a subsequent stage. When the controversy came up before the Bombay High Court by way of a reference, the Court, concurring with the Tribunal, held that in the absence of any intimation of penalty proceedings under the Explanation 1 to section 271(1)(c), levy of penalty under the Explanation was not sustainable.

To clarify its finding, the Court, stressed that the Explanation cannot in any manner be said to be merely an elucidation of what was already contained in section 271(1)(c); instead, the Explanation makes a considerable difference to what was contained in section 271(1)(c).

3.   UNSATISFACTORY EXPLANATION WOULD NOT ATTRACT PENALTY

In the case of Roshan Lal Madan (supra), the Chandigarh Bench of the Appellate Tribunal came out with a very peculiar construction of clause (A) to Explanation 1, which, in effect, renders the whole statutory exercise in this respect as quite futile.

It was virtually pointed out that "The words used in clause (A) of the Explanation 1 "found to be false" expressly imports the element of deceitful intent. The word "false" in its juristic sense implies something more than a mere untruth. Untruth is simply a statement which is not true and may have been uttered without intention to deceive and through ignorance. However, falsehood necessarily denotes the violation of truth for the purposes of deceit. Merely because the explanation furnished by the assessee is considered not satisfactory or unreasonable would not ipso facto justify the invocation of clause (A) to levy penalty under section 271(1)(c)".

The Tribunal, accordingly, came to the conclusion that an unsatisfactorily explained investment would result into the addition of the impugned amount as income from undisclosed sources under section 69 but would not justify the levy of penalty under section 271(1)(c), Explanation 1(A).

4.   SPECIFIC INVOCATION OF EXPLANATION NOT REQUIRED

As has already been stated in the beginning, in the recent case of K.P. Madhusudhanan (supra) a three Judges Bench of the Supreme Court has categorically laid down that no express invocation of the Explanation to section 271 in the notice under section 271 is necessary for applying the provisions of said Explanation and after the introduction of Explanation, there is no question of proof of mens rea.

Affirming the decision of the Kerala High Court in CIT vs. K.P. Madhusudhanan (2001) 165 CTR (Ker) 353 : (2000) 246 ITR 218 (Ker) and overruling the aforediscussed (contrary) decision of the Bombay High Court, the apex Court in K.P. Madhusudhanan’s case (supra) clarified that "The Explanation to section 271(1)(c) is a part of section 271". Therefore, when the designated tax-authority issues to an assessee a notice under Section 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. The notice under section 271 puts the assessee to notice that he has to rebut the presumption drawn against him by virtue of the Explanation; otherwise he has to bear the penalty, emphatically concluded the Court.

5.   ASSESSEE’S CONSENT FOR ADDITION SHALL NOT ABSOLVE THE ASSESSEE FROM BURDEN OF PROOF

In an earlier case of Sir Shadilal Sugar & General Mills Ltd. vs. CIT (1987) 64 CTR (SC) 199: (1987) 168 ITR 705 (SC) : TC 50R.300, a two Judges Bench of the Supreme Court, in the context of the assessment year 1958-59, firmly stated that if an assessee admitted that there were incomes, it could not amount to an admission that there was deliberate concealment. "From agreeing to additions, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission, i.e., when the assessee realises the true position, it does not dispute certain disallowances but that does not absolve the Revenue from proving the mens rea of a quasi criminal offence".

The three Judges Bench of the Supreme Court in the recent case of K.P. Madhusudhanan (supra) expressly stated that the aforequoted observation was made prior to the insertion of Explanation. Therefore, it is no longer good after the insertion of Explanation. No burden lies on the Revenue to prove mens rea even if the assessee has agreed the additions to his income as by virtue of the Explanation the assessee is not absolved from the initial burden laid on him by the Explanation, Emphatically stated the Court.

6.   PRINCIPLES EMERGING FROM DILIP N. SHROFF'S CASE

A careful reading of the judgment of the Supreme Court reveals the following legal positions regarding the provisions of section 271(1)(c) read with Explanation 1 thereto :

(a)     The Explanations to section 271(1)(c) are applicable to both the concealment of income and the furnishing of inaccurate particulars. Clause (c) of sub-section (1) of section 271 categorically states that the penalty would be leviable if the assessee conceals the particulars of his income or furnishes inaccurate particulars thereof. By reason of such concealment or furnishing of inaccurate particulars alone, the assessee does not ipso facto become liable for penalty. Imposition of penalty is not automatic. Levy of penalty not only is discretionary in nature but such discretion is required to be exercised on the part of the Assessing Officer keeping the relevant factors in mind. Penalty proceedings are not to be initiated, only to harass the assessee. The approach of the Assessing Officer in this behalf must be fair and objective.

(b)     Only in the event the factors enumerated in clauses (A) and (B) of Explanation 1 are satisfied and a finding in this behalf is arrived at by the Assessing Officer, the legal fiction created thereunder would be attracted.

(c)      Both the expressions, viz., concealment and the furnishing of inaccurate particulars signify a deliberate act or omission on the part of the assessee. Such deliberate act must be either for the purpose of concealment of income or furnishing of inaccurate particulars.

(d)     In view of clause (A) of Explanation 1, the Assessing Officer is required to arrive at a finding that the explanation offered, if any, by the assessee is false. In view of clause (B), findings have to be given by the Assessing Officer (i) that the assessee has failed to prove that explanation given by him is bona fide and (ii) that all the facts relating to the same and material to the computation of income have not been disclosed by him. Thus, apart from his explanation being not bona fide, it should have been found as of fact that he has not disclosed all the facts which are material to the computation of his income.

(e)     Primary burden of proof, therefore, is on the Revenue. The statute requires satisfaction on the part of the Assessing Officer. He is required to arrive at a satisfaction so as to show that there is primary evidence to establish that the assessee has concealed the amount or furnished inaccurate particulars and this onus is to be discharged by the Department.

(f)       While considering as to whether the assessee has been able to discharge his burden, the Assessing Officer should not begin with the presumption that he is guilty.

(g)     Once the primary burden of proof is discharged, the secondary burden of proof would shift on to the assessee because the proceeding under section 271(1)(c) is of penal nature in the sense that its consequences are intended to be an effective deterrent  which will put a stop to practices which the Parliament considers to be against the public interest and, therefore, it is for the Department to establish that the assessee is guilty of concealment of income or of furnishing inaccurate particulars thereof.

(h)     The order imposing penalty is quasi-criminal in nature and, thus, burden lies on the Department to establish that the assessee has concealed his income. Since burden of proof in penalty proceedings varies from that in the assessment proceedings, a finding in an assessment proceeding that a particular receipt is income cannot automatically be adopted, though a finding in the assessment proceeding constitutes good evidence in the penalty proceeding. In the penalty proceedings, thus, the authorities must consider the matter afresh as the question hasto be considered from a different angle.

(i)       Thus, before a penalty can be imposed, the entirety of the circumstances must reasonably point to the conclusion that the disputed amount represents income and that the assessee has consciously concealed the particulars of his income or has furnished inaccurate particulars thereof.

(j)       Penalty provisions have to be strictly construed. Even when the burden is required to be discharged by an assessee, it would not be as heavy as in the case of prosecution.

(k)     It may be true that the legislature has attempted to shift the burden from Revenue to the assessee. It may further be correct that different views have been expressed as regards construction of statutes in the light of the changing legislative scenario, but the tenor of a penal proceeding remains the same.

(l)       The omission of the word "deliberately" from section 271(1)(c), thus, may or may not be of much significance but what is material is its application.

(m)   "Concealment of income" and "furnishing of inaccurate particulars" are different. Both concealment and furnishing of inaccurate particulars refer to deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of suppression veri or suggestio falsi. Although it may not be very accurate or apt but suppressio veri would amount to concealment, suggestio falsi would amount to furnishing of inaccurate particulars.

(n)     The Assessing Officer is required to arrive at a satisfaction that there is "falsity" in furnishing of explanation by the assessee. Explanation 1, therefore, categorically states that such Explanation must either be false or not otherwise substantiated.

(o)     Concealment and furnishing of inaccurate particulars would not overlap each other as they represent different concepts. Had they not been so, the Parliament would not have used the different terminologies. Where the show-cause notice issued by the Assessing Officer does not clearly say whether it is issued for concealment of income or for furnishing inaccurate particulars of income, it will mean non-application of mind on the part of the Assessing Officer.

(p)     The Assessing Officer is bound to comply with the principles of natural justice while passing the order levying penalty for concealment.

I-T - Whether merely incurring expenditure and paying by account payee cheques a

 

I-T - Whether merely incurring expenditure and paying by account payee cheques apart from deducting tax at source on such payments are not enough to claim an expenditure as revenue expenditure - Yes, rules ITAT

AHMEDABAD, OCT 18, 2011: THE questions before the Tribunal are - Whether merely incurring business expenditure and paying by cheque apart from deducting tax at source on such payments are not enough to claim business expenses; Whether assessee is required to establish that such expenses were incurred wholly and exclusively for the purpose of business; Whether interest paid on capital can be disallowed notionally ignoring that no disallowance was made in earlier year in which such advances were made and the assessee had sufficient interest free funds and whether failure to attend proceedings before AO attracts penalty for non-appearance. And the verdict partly goes against the assessee.

Facts of the case

Assesses is engaged in the manufacturing of yarn. It filed its ROI claiming deduction of certain payments made by it on account of services obtained, AO asked the details, assessee filed details in parts however could not file any document establishing that the services obtained were wholly and exclusively for the purpose of business- CIT(A) affirmed the order of the AO rejecting the contention that the payments are allowable since made by account payee cheques and TDS was also deducted from the same.

Assessee gave certain advances to its near and dears and hence the AO disallowed notional interest attributable to these advances from the payments of interest made by assessee- CIT (A) affirmed the same- Before ITAT AR of the assessee points out that the advances were made in preceding assessment year and no disallowance was made beside this the assessee was having ample funds at the time of advancing of the funds- In respect of third issue the AO levied penalty of 271(1)(b) on account of non-appearance of the assessee-CIT(A) affirmed the same.

After hearing the parties the ITAT held that,

++ the assessee failed to submit any test report either before the authorities below or before the Tribunal. In the absence of any evidence of testing of yearn by this Consultancy Services, the assessee failed to prove that they had rendered any services for the purpose of business of the assessee. The AO also specifically asked the assessee to produce the person to whom consultancy service charges have been paid and to establish their identity. The assessee however, did not produce any such persons before the AO and even the identity is not established. The AO also noted in the assessment order that as per information available during the course of assessment proceedings, the assessee was purchasing some cotton bales from other parties for supply to Mafatlal Industries Ltd. Considering the facts of the case noted above and failure of the assessee to prove that expenses were incurred wholly and exclusively for the purpose of its business, the authorities below were justified in rejecting the claim of the assessee;

++ copy of the intimation u/s 143(1) of the IT Act for preceding assessment year 2006-07 is also filed at PB-26 in which no disallowance out of interest have been made. Since the interest has not been disallowed in the earlier year on the same facts, therefore, on mere opening balances in the assessment year under appeal, no disallowance could have been made. We rely upon the decision of the Hon'ble Karnataka High Court in the case of Sridev Enterprises;

++ the assesses filed copy of the balance sheet for the assessment year under appeal to show that interest-free funds from M/s. Travel World was available to the assessee in a sum of Rs.30,00,000/- and sufficient capital was available in the capital account of the partners. The profit of the assessee as per profit & loss account was also shown at Rs.28,95,852/-. Thus, sufficient interest free funds were available with the assessee to give interest-free loans and advances to these 3 parties. The AO has also not made out any case if any borrowed funds have been diverted for non-business purposes;

++ the AO noted in the penalty order that despite show cause notice for levy of penalty was served upon the assesses but the assessee did not give any reasons why penalty should not be imposed. Thus, according to the AO no explanation is filed for failure to comply with statutory notice. The learned Counsel for the assessee however, referred to the show cause notice dated 17-07-2009 and the reply filed by the assessee on 23-07-2009 (PB-19) which according to her also is referred to in the assessment order. We find that though this reply dated 23-07-2009 was filed before the AO but no reasons have been given for failure to comply with the statutory notices. The assessee from Para 1 to 8 submitted the details on merit and in the bottom merely stated that the assessee has no intention to not to comply with the statutory notices and that the notice u/s 143(2) of the IT Act could not be complied with because it was not possible to collect various information. Thus, the assessee has not given any specific or reasonable cause to show why there was failure to comply with the statutory notices.