147 on the basis of AUDIT OBJECTION.

2009-TIOL-461-HC-DEL-IT

IN THE HIGH COURT OF DELHI

W.P(C) No. 9180/2007 & CM No. 17282/2007

CARLTON OVERSEAS PVT. LTD

Vs

INCOME TAX OFFICER

A K Sikri And Valmiki J Mehta, JJ

Dated: August 18, 2009

Appellant Rep. by: Mr. Ajay Vohra and Ms. Kavita Jha, Advocates.
Respondents Rep. by: Ms. P.L.Bansal, Advocate.

Income tax - Sec 147 - Assessee is a manufacturer and exporter of footwear - claims deductions under Sections 80HHC and 80IB - AO raises queries - Assessee files detailed reply - AO passes assessment order u/s 143(3) - Notice u/s 148 - assessee asks for reasons for reopening assessment - AO furnishes reasons - held, reopening of assessment merely on the observation of audit party amounts to change in opinion which cannot be allowed under Sec 147 - Assessee's appeal allowed

JUDGEMENT

Per: Valmiki J Mehta J.:

1. The petitioner by way of this writ petition has sought the quashing of the notice dated 29.1.2007 issued under Section 148 of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), and by which notice, the Assessing Officer (AO) has sought to re-open the assessment with respect to the assessment year 2002-2003.

2. The petitioner is a Private Limited Company engaged in a business of manufacturing and export of footwear. For the assessment year 2002-2003 the assessee company filed the return of income on 30.1.2002 declaring an income of Rs. 3,02,91,449/-. In this return of income the petitioner had claimed deduction under Section 80-G, 80-HHC and 80-IB of the Act. The return of income was filed along with the following documents:

"(i) Audited Accounts

(ii) Tax Audit Report

(iii) Audit Report in Form No. 10-CCAC for claim of deduction under Section 80-HHC of the Act

(iv) Detailed computation of income along with the detailed working of deduction claimed under Section 80-HHC and 80-IB of the Act

(v) Audit Report on Form 3-CEB relating to international transactions."

3. During the course of the assessment, the Assessing Officer vide questionnaire dated 28.2.2005 asked the following question with respect to the allowability of deduction under Section 80-HHC of the Act:

"Mr. S.C. Goyal, C.A. appeared. Ask to justify deduction under Section 80-HHC in view of the provisions of sub-section (9) of Section 80-IA and why deduction allowed under Section 80-IB should not be deducted while working out deduction under Section 80-HHC. Produce books of accounts. Produce details of interest income also. Case adjourned to 4th March, 2005."

4. The petitioner filed a detailed note on deduction under Section 80-HHC and Section 80-IB which has been filed as Annexure 'A' to the writ petition. The said note justified the entitlement of the petitioner/assessee company for claiming the reliefs under Section 80-HHC and 80-IB. In the last para of the note, it was specifically stated that where there are two reliefs, each relief under a different section, then, the relief should be calculated independently subject only to the condition that aggregate of both the reliefs should not exceed the income of the undertaking. Other portion in the note shows the claim of the assessee to get a double deduction under both the heads and that calculation of relief has to be done independently.

5. An assessment order was thereafter passed under Section 143(3) of the Act on 29.3.2005. The assessee thereafter received the impugned notice dated 29.1.2007 under Section 148 of the Act. On receipt of the notice under Section 148, the assessee company applied for the reasons for re-opening the assessment which were furnished to the assessee as under:

"Reasons for reopening the assessment in the case of M/s Carlton Overseas Ltd. for the A.Y. 2002-03.

Return of income for A.Y. 2002-03 was filed on 31.10.02 declaring the income of Rs. 23,70,590/- and the case was assessed u/s 143(3) at an income of Rs. 27,44,850/-. On perusal of the return, it was noticed that the assessee was allowed deduction of Rs. 70.70 lakhs under Section 80IA and the same was not deducted from the profit of the business for the purpose of calculating deduction u/s 80HHC. As per the sub section 9 of 80IA, the profits considered for the deduction u/s 80IA should be reduced for computing the deduction under any other section mentioned in the chapter VIA. This has resulted in the incorrect allowance of deduction of Rs. 49.08 lakhs involving short, levy of tax of Rs. 24.57 lakhs including interest.

Therefore, I have reason to believe that taxable income of Rs. 24.57 lakhs chargeable to tax has escaped assessment and I am satisfied that it is a fit case for issue of notice u/s 148 of the Income-tax Act.

Sd/-
(V. VIZAY BABU)
Deputy Commissioner of Income Tax
Circle-3(1), New Delhi"

6. Mr. Ajay Vohra, learned counsel for the petitioner has contended that the reasons for re-opening of the assessment clearly do not provide the basis for issuing of the notice under Section 148 inasmuch as no new material has been disclosed for issuing of the notice and the reasons given for re-opening of the assessment merely reflect a change of opinion, and a mere change of opinion is not sufficient for issuing the notice under Section 148. The counsel has further referred to the counter affidavit filed by the Revenue in this Court in which it has been clearly stated that objection was raised by the Revenue Audit Party with regard to allowing of the deduction under Section 80-IA and 80-HHC i.e. after the assessee was allowed deduction of Rs. 70.70 lakhs under Section 80-IA but the said amount was not deducted from the profits of the business while computing deduction under Section 80-HHC, and therefore the mistake has resulted in the incorrect allowance of deduction of Rs. 49.08 lakhs involving a short levy of tax of Rs. 24.57 lakhs including interest. Mr. Vohra contends that it is quite clear in view of the stand taken in the counter affidavit that no new facts have come on record and the impugned notice is merely based on a change of opinion bring on the basis of the same material which was already available with the Assessing Officer at the time of making initial assessment under Section 143(3) of the Act.

7. Mr. Vohra, in support of his contention, has specifically relied upon Transworld International Inc. Vs. Joint Commissioner of Income-Tax, 273 ITR 242 in support of his contention and which holds that when sufficient material was placed on record and the Assessing Officer had arrived at conclusion that the assessee was entitled to a particular relief (depreciation in that case) then on the same material a different view could not be taken as the same amounted to a change of opinion and consequently the notice and the subsequent proceedings are not valid and liable to be quashed.

8. Ms. Prem Lata Bansal, learned counsel appearing for the Revenue has contended that Audit Party can on factual basis ask for re-assessment and which has, therefore, been done in the present case. It is, however, admitted by her that a mere change of opinion does not permit action under Section 147/148 of the Act.

9. We find that the arguments on behalf of the petitioner are well founded and it must succeed. The Audit Report merely gives an opinion with regard to the non-availability of the deduction both under Section 80-IA and under Section 80-HHC and that the deduction under Section 80-IA was not deducted from the profits of the business while computing deduction under Section 80-HHC. Clearly, therefore, there was no new or fresh material before the Assessing Officer except the opinion of the Revenue Audit Party.

10. Since it is settled law that mere change of opinion cannot form the basis for issuing of a notice under Section 147/148 of the Act, therefore, we do not propose to burden our judgment with the said judgments. In fact, as stated above, the counsel for the Revenue does not dispute this principle of law.

11. In view of the above, the present writ petition is allowed and the impugned notice dated 29.1.2007 issued by the respondent No.2 is quashed. A writ in the nature of prohibition is issued commanding the respondents, more particularly the respondent No. 2, to forbear in giving any effect to or taking any steps whatsoever pursuant to and in furtherance of the notice under Section 148 of the Act for the proceedings initiated with respect to the assessment year 2002-03.

12. The writ petition is disposed off accordingly.

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ITAT : AMENDMENT TO SEC 73 CLARRIFACTORY

Month-Year :                      Jul - 2010

Author/s :                          ITA No. 1009/Mum./2010 [BCAJ]

Title :                                   Virendra Kumar Jain v. ACIT

 

Details :

Per R. V. Easwar :

Facts :

In A.Y. 2001-02 the assessee suffered a speculation loss of Rs.4,55,30,494 which loss was allowed to be carried forward to subsequent years u/s.73(2) of the Act. In the return filed for A.Y. 2006-07 the assessee claimed that speculation loss brought forward from A.Y. 2001-02 should be set off against speculation profits for the A.Y. 2006-07. The Assessing Officer (AO) denied the claim of the assessee on the ground that u/s.73(4) no loss shall be carried forward for more than four assessment years immediately succeeding the assessment year for which it was first computed. He held that speculation loss for A.Y. 2001-02 cannot be carried forward beyond A.Y. 2005-06.

Aggrieved the assessee preferred an appeal to CIT(A) who upheld the action of the AO.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

It is a settled rule of interpretation that a vested right can be taken away only by express language or by necessary implication. This is settled by the decision of the Privy Council in Delhi Cloth & General Mills Company Ltd. v. CIT, AIR 1927 (PC) 242 and the same has been cited with approval by the Supreme Court in the case of Jose Dacosta v. Bascora Sadashiv Sinai Narcomin, AIR (1975) SC 1843. The assessee had a vested right to carry forward the speculation loss for a period of eight assessment years as per S. 73(4) as it stood before the amendment made by the Finance Act, 2005. That such a right is a vested right cannot be doubted after the judgment of the Supreme Court in the case of CIT v. Shah Sadiq & Sons, 166 ITR 102 (SC). In S. 73(4) or in any other provision there is no express language or any implication to the effect that the right of the assessee to carry forward the speculation loss for a period of eight subsequent assessment years has been taken away.

Any speculation loss computed for the A.Y. 2006-07 and later assessment years alone would be hit by the amendment and such loss can be carried forward only for four subsequent assessment years. The vested right of the assessee has not been taken away.

The amendment made by The Finance Act, 2005 w.e.f. 1-4-2006 is merely to substitute the words 'four assessment years' for the words 'eight assessment years' in Ss.(4) of S. 73. Ss.(4) of S. 73 refers only to the loss to be carried forward to the subsequent years. It does not say anything about the set-off of the speculation loss brought forward from the earlier years. There is a distinction between a loss brought forward from the earlier years and a loss to be carried forward to the subsequent years. The sub-section deals only with the speculation loss to be carried forward to the subsequent years andin the very nature of the things, it cannot apply to speculation loss quantified in any assessment year before the A.Y. 2006-07.

The Tribunal made a reference to the Income-tax Rules prescribing form of return of income and noted that the form in ITR 4 makes a distinction between loss brought forward and loss to be carried forward. It held that since in the present case it was concerned with the assessee's right to set off the brought forward speculation losses against speculation profits for A.Y. 2006-07, Ss.(4) of S. 73 has no application.

The Tribunal allowed the appeal filed by the assessee.

 

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263 quashed by Gujarat high court.

2010-TIOL-552-HC-AHM-IT

IN THE HIGH COURT OF GUJARAT

AT AHMEDABAD

TAX APPEAL No. 689 of 2009

COMMISSIONER OF INCOME TAX-I

Vs

NUTAN ORGANISERS

D A Mehta And H N Devani, JJ

Dated : July 13, 2010

Appellant Rep. by : Mr B B Naik, Sr Adv with Mrs Mauna M Bhatt
Respondent Rep. by : None

Income Tax - Sections 80IB, 263 - Whether the powers u/s 263 can be invoked even by satisfying any one of the two conditions prescribed in the law.

The assessee a registered partnership firm, is engaged in the business of developing housing projects. The assessee entered into an agreement for developing and constructing houses, flats and shops in terms of the agreement. The assessee filed return of income for A.Y 2003-04 declaring the total income at Nil after claiming deduction u/s 80IB(10). The AO after making necessary verification of the construction activities, accepted the claim of the assessee for deduction u/s 80IB [10] and framed assessment u/s 143(3) taking the income at Nil. CIT initiated proceedings u/s 263 on the ground that deduction u/s 80IB(10) was available to an 'undertaking, developing and building housing projects'. Since the assessee was not the undertaking which had promoted and developed the said housing project, the AO had erred in accepting the assessee's claim for deduction u/s 80IB(10) and cancelled the assessment order and directed the AO to frame a fresh assessment .The Tribunal allowed the  assessee appeal.

Issue taken to the High Court where the counsel of the Revenues submitted that the AO had finalised assessment without any evidence with regard to ownership of land on which the project was constructed by the assessee. The assessee was merely a contractor and was, therefore, not eligible for any deduction u/s 80IB(10). It was also submitted that the order passed by the AO being erroneous and prejudicial to the interest of the revenue.

Having heard the parties the High Court has held that,

++ a perusal of the notice u/s 263 as reproduced in the impugned order indicates that the same has been issued on the ground that the order of assessment is prejudicial to the interests of revenue. The said notice does not indicate that the order sought to be revised is erroneous.

++ the notice satisfies only one of the twin conditions which are required to be satisfied for the purpose of invoking the power u/s 263, namely that the order is prejudicial to the interests of revenue. However, the other condition, namely, that the order is erroneous is evidently not satisfied.

++ the invocation of the power u/s 263 by the Commissioner, not being in consonance with the provisions of the said section, it cannot be stated that the Tribunal has committed any legal infirmity so as to warrant interference.

Revenue's Appeal dismissed.

Cases Followed.

Malabar Industrial Co. Ltd. Vs. CIT (2002-TIOL-491-SC-IT)

 

JUDGEMENT

Per : H N Devani, J :

1. In this appeal under section 260A of the Income Tax Act, 1961 (the Act), appellant revenue has proposed the following four questions :

"[i] Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in coming to the conclusion that deduction under section 80IB(10) of the Act has committed an error in exercise of jurisdiction under section 263 of the Income Tax Act?

[ii] Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in coming to the conclusion that the Commissioner of Income Tax-I, Surat, has committed an error in exercise of jurisdiction under section 263 of the Income Tax Act ?

[iii] Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in coming to the conclusion that the Commissioner of Income Tax-I, Surat, has initiated proceeding under section 263 of the Income Tax Act only on the ground that the assessment order dated 31.3.2006 passed by the Assessing Officer is prejudicial to the Revenue and is not erroneous?

[iv] Whether, on the facts and in the circumstances of the case, the impugned order passed by the Income Tax Appellate Tribunal is contrary to the evidence and material on the record of the case and is suffering from non-application of mind and, hence, perverse or not ?"

2. The respondent assessee is a registered partnership firm engaged in the business of developing housing projects. During the previous year relevant to assessment year 2003-2004, the assessee entered into an agreement with M/s. Anand Row Houses and Apartments Pvt. Ltd. for developing and constructing houses, flats and shops in terms of the agreement. The assessee filed return of income for assessment year 2003-04 declaring the total income at Nil after claiming deduction under section 80IB(10) of the Act to the tune of Rs.62,64,157/-. The Assessing Officer after making necessary verification of the construction activities, accepted the claim of the assessee for deduction under section 80IB[10] and framed assessment under section 143(3) taking the income at Nil. Later on the Commissioner of Income Tax, Surat after examining the assessment record for the year under consideration initiated proceedings under section 263 of the Act on the ground that deduction under section 80IB(10) was available to an 'undertaking, developing and building housing projects'. Since the assessee was not the undertaking which had promoted and developed the said housing project, the Assessing Officer had erred in accepting the assessee's claim for deduction under section 80IB(10). Vide order dated 24.3.2008 made under section 263 of the Act, the Commissioner cancelled the assessment order made under section 143(3) of the Act and directed the Assessing officer to frame a fresh assessment after examining all relevant facts of the case and all aspects involved in the claim of deduction under section 80IB of the Act. The assessee carried the matter in appeal before the Tribunal and succeeded.

3. Assailing the impugned order of the Tribunal, the learned Counsel for the appellant submitted that the Assessing Officer had finalised assessment without any evidence with regard to ownership of land on which the project of Anand Row Houses and Apartments was constructed by the assessee. The assessee was merely a contractor and had not organised the project of Anand Row Houses and Apartments and was, therefore, not eligible for any deduction under section 80IB(10) of the Act. It was submitted that the order passed by the Assessing Officer being erroneous and prejudicial to the interest of the revenue, the Tribunal had committed an error in setting aside the order made by the Commissioner in exercise of powers under section 263 of the Act.

4. As can be seen from the impugned order of the Tribunal, before the Tribunal it had been contended on behalf of the assessee that proceedings under section 263 of the Act can be initiated only after having come to a prima facie conclusion that the order proposed to be revised is erroneous so as to be prejudicial to the interest of the revenue. If any of the two requirements are not satisfied, initiation of proceedings under section 263 of the Act would itself be bad in law. It was also contended that the proceedings under section 263 had been initiated for want of ownership of the land, which was not the requirement of the provisions for grant of deduction under section 80IB(10) of the Act. The Tribunal after considering the provisions of section 80IB (10), held that from the said provision, it was quite clear that requirement of ownership of the land is not clearly spelt out, and therefore, the provision at the most can be said to be liable to two interpretations. If the Assessing Officer had adopted one interpretation, his order cannot be said to be erroneous and prejudicial to the interest of the revenue.

5. As regards the validity of initiation of proceedings under section 263, the Tribunal was of the view that the same was bad in law inasmuch as the notice issued by the Commissioner itself was vague. The Tribunal further found that the order under section 263 was bad on the ground that the Commissioner had proceeded to pass the order only on the basis of the conclusion that the assessment order in question was prejudicial to the interest of the revenue. According to the Tribunal the settled legal position is that the assessment order to be revised must be erroneous as well as prejudicial to the interest of revenue. Unless and until both these conditions are satisfied, the Commissioner is precluded from exercising powers under section 263 of the Act.

6. Insofar as invocation of the power under section 263 of the Act is concerned, the apex court in Malabar Industrial Co. Ltd. Vs. CIT, (2000) 243 ITR 83 = (2002-TIOL-491-SC-IT) has held that a bare reading of section 263 of the Act makes it clear that the pre-requisite for the exercise of jurisdiction by the Commissioner suo motu under it, is that order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous, and (ii) it is prejudicial to the interests of the revenue. If one of them is absent, that order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue, recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer. It is only when an order is erroneous that the section will be attracted.

7. Examining the facts of the present case in the light of the aforesaid decision, a perusal of the notice under section 263 as reproduced in the impugned order indicates that the same has been issued on the ground that the order of assessment is prejudicial to the interests of revenue. The said notice does not indicate that the order sought to be revised is erroneous. In the circumstances the notice satisfies only one of the twin conditions which are required to be satisfied for the purpose of invoking the power under section 263, namely that the order is prejudicial to the interests of revenue. However, the other condition, namely, that the order is erroneous is evidently not satisfied. In the circumstances, the invocation of the power under section 263 by the Commissioner, not being in consonance with the provisions of the said section, it cannot be stated that the Tribunal has committed any legal infirmity so as to warrant interference.

8. For the foregoing reasons, no question of law much less any substantial question of law can be stated to arise out of the impugned order of the Tribunal.

The appeal is accordingly dismissed.

 

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ITR'S TRIBUNAL TAX REPORTS (ITR (TRIB)) Vol 5 Part 3 dt 13 09 2010

ITR'S TRIBUNAL TAX REPORTS (ITR (TRIB))

Volume 5 : Part 3 (Issue dated : 13-9-2010)

SUBJECT INDEX TO CASES REPORTED IN THIS PART

Accounting --Income--Accrual of income--Method of accounting--Bank--Forward contract entered into by assessee to sell foreign currency at agreed price at future date falling beyond last date of accounting period--Binding obligation on assessee on that date--Foreign exchange currency is assessee's stock-in-trade--Loss on account of evaluation of contract occurs on last date of accounting period, not on date of maturity of contract--Income-tax Act, 1961, s. 145(3)-- Deputy CIT v. Bank of Bahrain and Kuwait [SB] (Mumbai) . . . 301

Appeal to Appellate Tribunal --Rectification of mistake--Subsequent decision of court--Order of Tribunal contrary--Liable to be rectified--Income-tax Act, 1961, s. 254(2)-- V. R. Chittanandam v. Asst. CIT (Chennai) . . . 258

Appeal to Commissioner (Appeals) --Order must be self explanatory--Non-speaking order not disposing of all grounds--Set aside and matter remitted--Income-tax Act, 1961, s. 250(6)-- ITO v. Charanbir Singh Oberoi (Delhi) . . . 251

Assessment --Exemption--Sportsman--Award money and cricketing income --Assessee entitled to exemption in respect of award money--Claim for cricketing income raised for first time before Tribunal--Matter remanded for verification--Income-tax Act, 1961, s. 147--Circular No. 447, dated January 22, 1986-- Asst. CIT v. Ajay Jadeja (Delhi) . . . 233

Bad debts --Department insisting upon proof of debts becoming bad--Not justified--Deduction allowable--Income-tax Act, 1961, s. 36(1)(vii)-- Deputy CIT v. Spic Gel Engineering Construction Co. Ltd. (Chennai) . . . 293

Banking company --Interest on Government securities--Mercantile system of accounting--Interest accrues on coupon dates and not on day-to-day basis--Income-tax Act, 1961-- Deputy CIT v. Bank of Bahrain and Kuwait [SB] (Mumbai) . . . 301

Business expenditure --Assessee distributing electricity under licence from State Government--Expenditure incurred to help State Government in drought relief in Gujarat State--Expenditure for purposes of commercial expediency--Deductible--Income-tax Act, 1961, ss. 37, 80G-- Surat Electricity Co. Ltd. v. Asst. CIT (Ahmedabad) . . . 280

----Securities purchased during year and lying in closing stock--Finding that securities held as stock-in-trade--Mere classification as investment in balance-sheet not relevant--Broken period interest paid on securities purchased during year--Allowable--Income-tax Act, 1961-- Deputy CIT v. Bank of Bahrain and Kuwait [SB] (Mumbai) . . . 301

Deduction --Income not includible in total income--Dividend--Expenditure in earning, whether to be disallowed--Matter remanded--Income-tax Act, 1961, s. 14A-- Deputy CIT v. Bank of Bahrain and Kuwait [SB] (Mumbai) . . . 301

Depreciation --Assessee claiming deduction on account of depreciation on camera given on rent--Explanation that professional charges declared inclusive of camera hire charges--Assessing Officer disallowing claim for non-production of agreement with company--Substantial amount of professional receipts disclosed by assessee--Direction to allow claim--Income-tax Act, 1961, s. 32-- Asst. CIT v. Ajay Jadeja (Delhi) . . . 233

Dividend --Deemed dividend--Amount received by shareholder from company disclosed as loan in balance-sheet--Amount liable to be treated as deemed dividend--Addition to be restricted to extent of accumulated profits of company at beginning of year--Income-tax Act, 1961, s. 2(22)(e)-- Asst. CIT v. Ajay Jadeja (Delhi) . . . 233

Exemption --Salary--Relief when paid in advance or arrears--Amount received on voluntary retirement--Amounts received by retiring employees of RBI--Subsequent decision binding on Tribunal--Assessee entitled to exemption--Income-tax Act, 1961, s. 10(10C)-- V. R. Chittanandam v. Asst. CIT (Chennai) . . . 258

Foreign projects --Special deduction--Supply of manpower for refinery shut down not qualifying as foreign project--Assessing Officer to verify details of other works undertaken by assessee--Income-tax Act, 1961, s. 80HHB(2)(b)(ii)-- Deputy CIT v. Spic Gel Engineering Construction Co. Ltd. (Chennai) . . . 293

Income --Accrual of income--Guarantee commission--When taxable--If commission refundable on revocation of guarantee, guarantee commission to be spread over period for which guarantee given--If not, to be taxed in year guarantee given irrespective of period-- Deputy CIT v. Bank of Bahrain and Kuwait [SB] (Mumbai) . . . 301

Interpretation of taxing statutes --Word "satisfaction" used in different sections--Has different meanings-- Asst. CIT v. M. N. Rajaraman (Chennai) . . . 261

Penalty --Concealment of income--Loss on trading in shares treated as speculation loss--All material facts disclosed--No inaccurate particulars furnished--No material evidencing concealment or explanation of assessee not substantiated--Mere addition to income not sufficient to levy penalty--Penalty to be deleted--Income-tax Act, 1961, s. 271(1)(c), Expln. 1-- Asst. CIT v. Varun Finstock Pvt. Ltd. (Ahmedabad) . . . 271

Reassessment --Reassessment after four years--Condition precedent--No finding of failure by assessee to disclose material facts--Reopening of assessment based on outcome of case for another year--Change of opinion--Reassessment invalid--Income-tax Act, 1961, s. 147, proviso-- Asst. CIT v. Ajay Jadeja (Delhi) . . . 233

----Summary assessment accepting claims for exemption--No expression of opinion--Reopening to disallow exemption--Not a case of change of opinion--Permissible--Income-tax Act, 1961, ss. 143(1)(a), 147-- Asst. CIT v. Ajay Jadeja

(Delhi) . . . 233

Royalties received from foreign enterprises --Special deduction--Consideration in convertible foreign exchange for supply of drawings to foreign company for specific project--Assessee entitled to special deduction--Income-tax Act, 1961, s. 80-O-- Deputy CIT v. Spic Gel Engineering Construction Co. Ltd. (Chennai) . . . 293

Royalty --Special deduction--Technical fees received from foreign enterprises --Assessee receiving remuneration for rendering technical service by deputing personnel--Agreement for providing technical service approved by CBDT/Commissioner--Even promise to render services at future date entitles assessee for deduction under section 80-O--Assessee entitled to deduction--Income-tax Act, 1961, ss. 9(1)(vii), Expln. 2, 80-O-- Voltas International Ltd. v. Asst. CIT (Mumbai) . . . 255

Search and seizure --Requisition--Assessment--Assessment of income of any other person--Deposits made in other concerns cannot be equated with bullion, jewellery etc. seized--No mention in order sheet that seized items belonged to assessee--Revised returns disclosing deposits as income and taxes paid thereon prior to date of recording order sheet entry--Satisfaction of Assessing Officer not recorded in notice--Assessment quashed--Assessee entitled to refund of excess tax paid--Income-tax Act, 1961, ss. 153A, 153C, 158BD-- Asst. CIT v. M. N. Rajaraman (Chennai) . . . 261

Words and phrases --"Inaccurate particulars"-- Asst. CIT v. Varun Finstock Pvt. Ltd. (Ahmedabad) . . . 271

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART
Income-tax Act, 1961 :

S. 2(22)(e) --Dividend--Deemed dividend--Amount received by shareholder from company disclosed as loan in balance-sheet--Amount liable to be treated as deemed dividend--Addition to be restricted to extent of accumulated profits of company at beginning of year-- Asst. CIT v. Ajay Jadeja (Delhi) . . . 233

S. 9(1)(vii), Expln. 2 --Royalty--Special deduction--Technical fees received from foreign enterprises --Assessee receiving remuneration for rendering technical service by deputing personnel--Agreement for providing technical service approved by CBDT/Commissioner--Even promise to render services at future date entitles assessee for deduction under section 80-O--Assessee entitled to deduction-- Voltas International Ltd. v. Asst. CIT (Mumbai) . . . 255

S. 10(10C) --Exemption--Salary--Relief when paid in advance or arrears--Amount received on voluntary retirement--Amounts received by retiring employees of RBI--Subsequent decision binding on Tribunal--Assessee entitled to exemption-- V. R. Chittanandam v. Asst. CIT (Chennai) . . . 258

S. 14A --Deduction--Income not includible in total income--Dividend--Expenditure in earning, whether to be disallowed--Matter remanded-- Deputy CIT v. Bank of Bahrain and Kuwait [SB] (Mumbai) . . . 301

S. 32 --Depreciation--Assessee claiming deduction on account of depreciation on camera given on rent--Explanation that professional charges declared inclusive of camera hire charges--Assessing Officer disallowing claim for non-production of agreement with company--Substantial amount of professional receipts disclosed by assessee--Direction to allow claim-- Asst. CIT v. Ajay Jadeja (Delhi) . . . 233

S. 36(1)(vii) --Bad debts--Department insisting upon proof of debts becoming bad--Not justified--Deduction allowable-- Deputy CIT v. Spic Gel Engineering Construction Co. Ltd. (Chennai) . . . 293

S. 37 --Business expenditure--Assessee distributing electricity under licence from State Government--Expenditure incurred to help State Government in drought relief in Gujarat State--Expenditure for purposes of commercial expediency--Deductible-- Surat Electricity Co. Ltd. v. Asst. CIT (Ahmedabad) . . . 280

S. 80G --Business expenditure--Assessee distributing electricity under licence from State Government--Expenditure incurred to help State Government in drought relief in Gujarat State--Expenditure for purposes of commercial expediency--Deductible-- Surat Electricity Co. Ltd. v. Asst. CIT (Ahmedabad) . . . 280

S. 80HHB(2)(b)(ii) --Foreign projects--Special deduction--Supply of manpower for refinery shut down not qualifying as foreign project--Assessing Officer to verify details of other works undertaken by assessee-- Deputy CIT v. Spic Gel Engineering Construction Co. Ltd. (Chennai) . . . 293

S. 80-O --Royalty--Special deduction--Technical fees received from foreign enterprises --Assessee receiving remuneration for rendering technical service by deputing personnel--Agreement for providing technical service approved by CBDT/Commissioner--Even promise to render services at future date entitles assessee for deduction under section 80-O--Assessee entitled to deduction-- Voltas International Ltd. v. Asst. CIT (Mumbai) . . . 255

----Royalties received from foreign enterprises--Special deduction--Consideration in convertible foreign exchange for supply of drawings to foreign company for specific project--Assessee entitled to special deduction-- Deputy CIT v. Spic Gel Engineering Construction Co. Ltd. (Chennai) . . . 293

S. 143(1)(a) --Reassessment--Summary assessment accepting claims for exemption--No expression of opinion--Reopening to disallow exemption--Not a case of change of opinion--Permissible-- Asst. CIT v. Ajay Jadeja (Delhi) . . . 233

S. 145(3) --Accounting--Income--Accrual of income--Method of accounting --Bank--Forward contract entered into by assessee to sell foreign currency at agreed price at future date falling beyond last date of accounting period--Binding obligation on assessee on that date--Foreign exchange currency is assessee's stock-in-trade--Loss on account of evaluation of contract occurs on last date of accounting period, not on date of maturity of contract-- Deputy CIT v. Bank of Bahrain and Kuwait [SB] (Mumbai) . . . 301

S. 147 --Assessment--Exemption--Sportsman--Award money and cricketing income --Assessee entitled to exemption in respect of award money--Claim for cricketing income raised for first time before Tribunal--Matter remanded for verification--Circular No. 447, dated January 22, 1986-- Asst. CIT v. Ajay Jadeja (Delhi) . . . 233

----Reassessment--Summary assessment accepting claims for exemption--No expression of opinion--Reopening to disallow exemption--Not a case of change of opinion--Permissible-- Asst. CIT v. Ajay Jadeja (Delhi) . . . 233

S. 147, proviso --Reassessment--Reassessment after four years--Condition precedent--No finding of failure by assessee to disclose material facts--Reopening of assessment based on outcome of case for another year--Change of opinion--Reassessment invalid-- Asst. CIT v. Ajay Jadeja (Delhi) . . . 233

S. 153A --Search and seizure--Requisition--Assessment--Assessment of income of any other person--Deposits made in other concerns cannot be equated with bullion, jewellery etc. seized--No mention in order sheet that seized items belonged to assessee--Revised returns disclosing deposits as income and taxes paid thereon prior to date of recording order sheet entry--Satisfaction of Assessing Officer not recorded in notice--Assessment quashed--Assessee entitled to refund of excess tax paid-- Asst. CIT v. M. N. Rajaraman (Chennai) . . . 261

S. 153C --Search and seizure--Requisition--Assessment--Assessment of income of any other person--Deposits made in other concerns cannot be equated with bullion, jewellery etc. seized--No mention in order sheet that seized items belonged to assessee--Revised returns disclosing deposits as income and taxes paid thereon prior to date of recording order sheet entry--Satisfaction of Assessing Officer not recorded in notice--Assessment quashed--Assessee entitled to refund of excess tax paid-- Asst. CIT v. M. N. Rajaraman (Chennai) . . . 261

S. 158BD --Search and seizure--Requisition--Assessment--Assessment of income of any other person--Deposits made in other concerns cannot be equated with bullion, jewellery etc. seized--No mention in order sheet that seized items belonged to assessee--Revised returns disclosing deposits as income and taxes paid thereon prior to date of recording order sheet entry--Satisfaction of Assessing Officer not recorded in notice--Assessment quashed--Assessee entitled to refund of excess tax paid-- Asst. CIT v. M. N. Rajaraman (Chennai) . . . 261

S. 250(6) --Appeal to Commissioner (Appeals)--Order must be self explanatory--Non-speaking order not disposing of all grounds--Set aside and matter remitted-- ITO v. Charanbir Singh Oberoi (Delhi) . . . 251

S. 254(2) --Appeal to Appellate Tribunal--Rectification of mistake--Subsequent decision of court--Order of Tribunal contrary--Liable to be rectified-- V. R. Chittanandam v. Asst. CIT (Chennai) . . . 258

S. 271(1)(c), Expln. 1 --Penalty--Concealment of income--Loss on trading in shares treated as speculation loss--All material facts disclosed--No inaccurate particulars furnished--No material evidencing concealment or explanation of assessee not substantiated--Mere addition to income not sufficient to levy penalty--Penalty to be deleted-- Asst. CIT v. Varun Finstock Pvt. Ltd. (Ahmedabad) . . . 271


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Manipulative Tax Avoidance is not tax planning

Manipulative Tax Avoidance is not tax planning

T.N. Pandey, Ex-chairman, CBDT

The author, in this article, with the instance of an advertisement appearing in an Economic Daily has amply demonstrated how the income-tax benefits intended for broader public goodwill can be used by the advertiser for individual benefits under calibrated tax avoidance techniques. According to him, such benefits need to be denied to persons who resort to such tactics even if the same could be said to be within the framework of law!

In the Economic Times, dated June 25, 2010, at page 3, an advertisement has appeared prominently which reads as under:

HOTEL COMPANIES IMMEDIATE TAKEOVER

Wanted hotel companies with assessed carried forward losses/unabsorbed depreciation of Rs. 5 crores and above for immediate takeover. Please email full details to hotelcorporation@gmail.com

Advertisement made for mere tax avoidance!

1. Prima facie, the solicitation of offers is motivated by a desire to deprive the exchequer of its rightful income tax dues by someone having generated substantial profits to wipe off the same by purchasing undertakings with losses and unabsorbed depreciation who are having no future prospects so that the profits could be set off against the losses of bought out companies not making bona fide use of the income-tax provisions permitting set off and carry forward provisions in cases of mergers/amalgamations under the Income-tax Act, 1961(Act). No other purpose could be there behind such an unusual advertisement for taking over losing undertakings!

Word `takeover' loosely used!

2. Apparently, the words `immediate takeover' have been used in a loose sense (for merger/amalgamation) as no advertisement is needed for takeover activities. In common parlance, takeover is generally understood to imply the acquisition of shares carrying voting rights in a company in a direct or indirect manner with a view to gaining control over the management of the company. Takeovers (also referred to as acquisitions) are generally affected by purchase of assets of a target company or by means of schemes of arrangement following the procedure laid down under the Companies Act, 1956 – Sections 391 to 396A. These are of two types, namely, (a) friendly or negotiated takeovers and (b) hostile takeovers. First category of takeovers are generally in the forms of mergers or amalgamations.

It is apparently in the first sense that the word `takeover' has been used in the advertisement as there cannot be an immediate takeover in the 2nd category as in this type of takeovers, no offers are made for acquisition of a company or companies, but the acquirer unilaterally, generally secretively pursues efforts to get controlling interest in the other company or companies against the wishes of the target company. Such acts of acquirer are referred to as `raids' or `takeover raids' in the corporate world. These raids, when organized in systematic ways, are called `takeover bids'. A takeover is hostile where it is in the form of `raid'. Obviously, such attempts may or may not require merger or amalgamation.

Although, the term `takeover' has not been defined under the SEBI Takeover Regulations, the term basically envisages the concept of an acquirer (as defined under regulation 2(b) of the Regulations) taking over the control (as defined under regulation 2(c) of the Regulations) or management of the target company (as defined under regulation 2(o) of the Regulations). When an acquirer acquires substantial quantity of shares or voting rights of the target company, it results in the substantial acquisition of shares. Thus, takeover can be by reorganization or reconstruction of the existing company also and this does not require any advertisement of the nature published in the Economic Times reproduced earlier. The SEBI Takeover Regulations, 1997 contain provision for making public announcement mandatory bid, in cases of takeovers vide regulations 10 and 12 in the manner prescribed. A bid besides being mandatory could also be partial or competitive. Though no advertisement of the nature as reproduced earlier is necessary in the case of takeovers, a public announcement is to be given in the newspapers (see Regulation 21(1) of the SEBI Takeover Regulations) by the acquirer, primarily to disclose his intention to acquire the voting capital of the target company from the existing shareholders by means of an open offer.

Elaborate compliance is required to various regulations in cases of such takeovers. No special tax benefits in regard to loss or depreciation (unabsorbed) have been mentioned for takeover cases as, by and large the company/companies takeover remain the same.

From the foregoing account, it is apparent that though in the advertisement the word `takeover' has been used, the intention seems to have merger/amalgamation of the companies having substantial unabsorbed losses/depreciation with the advertiser undertaking(s) to benefit under the Income-tax Act from carried forward unabsorbed losses/depreciation. Hence, the impact of the effort for takeover as mentioned in the advertisement is being examined to see whether tax benefits should be permissible in cases of such takeovers.

Income-tax benefits

3. Though under the Income-tax law certain benefits have been provided for in cases of losses related to amalgamating companies, in the case of amalgamated companies, the revenue foregone is with some objectives – not to offer a route for private gains to save tax without any benefits to the economy/society or the country. In other words, the benefits are permissible from broad perspectives and not to give a tax escape route.

Business Restructuring

4. Mergers/amalgamations/takeovers/reconstruction/reorganization of undertakings are the ways for business restructuring. These have become imperative because of globalization of trade, commerce/business activities. Business restructuring is done with a view to fully utilize potentialities of the existing businesses, redirection or changes in them to achieve better results, managing more finances, deployment of funds usefully in expanded areas of work consequent to reorganization, contribute to growth of the blended organization(s), utilizing interdependence in a better way to increase business and profits, development of core-competencies, risk reduction, better management and many other such benefits. In short corporate restructuring is intended to improve the competitiveness of individual businesses maximizing best utilization of resources, sustained growth and exploiting each others strengths to the maximum benefit of the reorganized/restructured unit and ultimately for the benefit of the country. Obviously, these objectives cannot be achieved in a short run by amalgamation or merger of already loss making units or who have the enormous burden of carried forward losses without any scheme for improving their functioning and merely with an idea of using their losses!

The basic objective of exercises of the nature proposed to be carried out through the medium of the advertisement reproduced earlier is to give set back to the revenue in its efforts to maximize collections. The issue proposed to be examined in later paragraphs is whether the same would come in the category of legitimate/legally permissible tax planning or the schemes are merely in the nature of subterfuges to save tax.

Observation of Chinappa Reddy J. in McDowell & Co. Ltd.'s case

5. On reading such an advertisement, one is reminded of the observations made by learned J. Chinappa Reddy in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11 (SC) where he has remarked regarding tax avoidance as under:

(a) Substantial loss of much needed public revenue, particularly in a welfare State like India.

(b) Serious disturbance caused to the economy of the country by piling up of mountains of black money directly causing inflation.

(c) Large hidden loss to the community by some of the best brains in the country being involved in the perpetual war waged between tax avoider and his expert team of advisers, lawyers and accountants on one side, and the Tax Officer and his perhaps not so skilful advisers on the other side.

(d) Sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it.

(e) Ethics (or lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of artful dodgers.

As to the ethics of taxations, the learned Judge observed:

"We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognize that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no loss moral plane than honest payment of taxation."

The learned Judge further said that the proper way to construe a taxing statute while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is such that the judicial process may accord its due approval to it.

However, there have not been many takers of the views expressed by Reddy J. Even in McDowell & Co. Ltd.'s case (supra) itself Rangnath Mishra J. made the following observations regarding the situation when tax avoidance devices could be said to be permissible. He said –

"Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay taxes honestly without resorting to subterfuges."

Whether taking advantage of setting off losses/depreciation by purchasing these from others could be considered legitimate tax planning?

6. Before examining this proposition, it would be appropriate to consider the Income-tax provisions permitting set off of carried forward losses.

6.1 Carry forward and set off of depreciation/accumulated depreciation – Present position. Section 32 of the Act contains provisions relating to depreciation on plant, machinery, building, etc. Appendix 1 to rule 5 in the Income-tax Rules, 1962 provides for rates of depreciation.

6.1.1 Unabsorbed depreciation - If the whole amount of current depreciation allowance is not deductible on account of the insufficiency of income (under various heads of income), the remaining unabsorbed amount is called `Unabsorbed Depreciation'.

6.1.2 Set off and Carry forward of Depreciation (i.e. unabsorbed deprecia-tion)

(1) If on account of the insufficiency of profits full amount of allowable depreciation cannot be deducted from the profits of the business in that year, the balance of unabsorbed depreciation shall first be set off against the profits of any other business or profession carried on by the assessee.

(2) If still some part of unabsorbed depreciation is left unabsorbed, the amount left unabsorbed can be set off against income under any other head for that assessment year.

(3) If unabsorbed depreciation cannot be wholly set off, the amount of depreciation not set off shall be carried forward to the following assessment year.

(4) The unabsorbed depreciation shall be added to the depreciation allowance for the following P.Y. or for the succeeding previous years till such time, it is fully deducted. In other words, the unabsorbed depreciation shall be treated as part of the current year's depreciation.

Carry forward and set off of losses

7. If for any assessment year the net result under the head `Profit and gains of business or profession' is a loss to the assessee (not being a loss of speculation business), and such loss cannot be wholly set-off against his income under any other head, so much of the loss as has not been so set off shall be carried forward to the following assessment year and it shall be set off against the income under the head `Profit and gains of business or profession'. If the loss cannot be wholly set off in the following year, it shall be carried forward for a maximum period of eight assessment years immediately succeeding the assessment year for which the loss was first computed.

Preference in setting off of unabsorbed losses and unabsorbed depreciation

8. If there is brought forward business loss along with unabsorbed depreciation, the order of set off shall be as under:

Rs.

(i)
Business profits before depreciation for current year
……..

(ii)
Less: Current year's depreciation
……..


Balance
……..

(iii)
Less: B/fd business loss
……..


Balance
……..

(iv)
Less: B/fd unabsorbed depreciation
……..


Balance
……..


Still if there is any unabsorbed depreciation left, it can be set off against income under any other head.

Treatment of unabsorbed losses/depreciation in situations of mergers/amalgamations/takeover

9. The term `amalgamation/merger' generally convey the same meaning. Amalgamation has been defined in section 2(1B) of the Act to mean either merger of one or more companies with another company or the merger of two or more companies to form one company.

For merger to qualify as amalgamation for the purposes of the Income-tax Act, the following conditions have to be satisfied:

(i) All the properties of the amalgamating company immediately before the amalgamation should become the properties of the amalgamated company by virtue of the amalgamation.

(ii) All liabilities of the amalgamating company immediately before the amalgamation should become the liabilities of the amalgamated company by virtue of the amalgamation.

(iii) Shareholders holding not less than three-fourths (in value) of the shares in the amalgamating company (other than shares already held by the amalgamated company or by its nominee) should become shareholders of the amalgamated company by virtue of the amalgamation.

Tax benefits in regard to carried forward losses/depreciation of amalgamating company/companies in the hands of the amalgamated company/companies – Section 72A of the Income-tax Act

10. If the following conditions are satisfied, then the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be loss/depreciation of the amalgamated company for the previous year in which the amalgamation is effected—

(i) There is an amalgamation of a company owning industrial undertaking, ship or a hotel with another company; or a banking company with a SBI or any subsidiary of SBI. From the assessment year 2008-09, section 72A is also applicable in the case of an amalgamation of a public sector airlines with another public sector airlines.

(ii) The amalgamating company has been engaged in the business in which the accumulated loss occurred or depreciation remains unabsorbed, for 3 or more years.

(iii) The amalgamating company has held continuously as on the date of the amalgamation at least three-fourths of the book value of fixed assets held by it two years prior to the date of amalgamation.

(iv) The amalgamated company continues to hold at least three-fourths in the book value of fixed assets of the amalgamating company which is acquired as a result of amalgamation for five years from the effective date of amalgamation.

(v) The amalgamated company continues the business of the amalgamating company for a minimum period of 5 years from the date of amalgamation.

(vi) The amalgamated company, which has acquired an industrial undertaking of the amalgamating company by way of amalgamation, shall achieve the level of production of at least 50 per cent of the installed capacity of the said undertaking before the end of 4 years from the date of amalgamation and continue to maintain the said minimum level of production till the end of 5 years from the date of amalgamation. However, the Central Government, on an application made by the amalgamated company may relax this condition.

(vii) The amalgamated company shall furnish to the Assessing Officer a certificate in Form No. 62, duly verified by an accountant, with reference to the books of account and other documents showing particulars of production, along with the return of income for the assessment year relevant to the previous year during which the prescribed level of production is achieved and for subsequent assessment years relevant to the previous years falling within 5 years from the date of amalgamation.

Consequences when the above conditions are satisfied - If the above conditions are satisfied, then accumulated business loss and unabsorbed depreciation of the amalgamating company shall be deemed to be loss and depreciation of the amalgamated company for the previous year in which amalgamation is effected.

Consequences when the above conditions are not satisfied after adjusting loss/depreciation - In case the above specified conditions are not fulfilled, then that part of brought forward of loss and unabsorbed depreciation which has been set off by the amalgamated company shall be treated as the income of the amalgamated company for the year in which the failure to fulfil the conditions occurs.

Whether the type of arrangement proposed by the advertiser could be considered as a `subterfuge'?

11. Prima facie, the objective of the advertiser seems to be to acquire the loss making hotels at cheap prices, retain these for reaping the benefit of accumulated loss/depreciation and then dispose of the same thus not adding in any way to the growth of the industry but deriving benefit for self of the losses/depreciation of taken over undertakings.

Transactions of the nature which prima facie seem to be unnatural, but are geared mainly at tax avoidance as in the case of advertiser proposing to purchase companies with unabsorbed loss/depreciation, cannot be considered as coming in the category of legal tax avoidance or legitimate tax planning of the nature mentioned by Mishra J. in McDowell & Co. Ltd.'s case (supra). The Karnataka High Court in the case of ICDS Ltd. v. CIT [2007] 291 ITR 18/161 Taxman 293 has not approved manipulative tax planning. In this case the assessee was acquiring assets in its name and leasing the same to various educational institutions. The lessees made interest bearing deposits with the assessee equal to cost of leased assets. The lease rental was equal to interest on deposits which was adjusted by both the parties. Lessor and lessees were having common management. As owner of the assets, the assessee claimed depreciation. All the lower authorities denied the claim of assessee holding transaction blatantly geared to evade tax liability. It was held that transactions entered into by the assessee were a mechanism devised to enable a non-tax paying entity to acquire an asset and also to claim depreciation as the lessees being educational entity are exempt from tax. The finding that the assessee was not entitled to claim depreciation on the assets was not on the basis of the underlying motive but the direct result of the manner in which these transactions were engineered. In the case of the advertiser, the basic objective is not in any way for overall benefit of loss making units but is for self-interest to save income-tax. Where the sole aim behind carrying out the series of transactions in a particular scheme is outright tax avoidance, the court is competent to take judicial notice of it and reject the scheme altogether.

Concluding comments

12. In the case of an advertisement appearing in an Economic daily the author has opined that the true nature of transaction has to be seen – not merely its being coming within the framework of law. The only immediate gain to the advertiser could be to get the income-tax liability reduced in a manner which does not confer any public benefit nor, prima facie, benefits to the undertakings to be taken over, except to the advertiser! That can never be the objective of a tax give away even in terms of the yardstick prescribed by Mishra J. in the McDowell & Co. Ltd.'s case (supra). Hence, the advertiser cannot be said to be eligible for the income-tax benefits available in the cases of mergers/amalgamations.

__._,_.___

HC (MUM):- 10 A

(2010) 35 (I) ITCL 109 (Bom-HC)

Zycus Infotech (P) Ltd. v. CIT

JUDGMENT

This appeal was admitted on 21-7-2008 to consider following substantial questions of law :

(a) Whether on the facts and in the circumstances of the case, the Tribunal was right in applying the provisions of Explanation 1 to section 10A(9) in the present case?

(b) Whether on the facts and in the circumstances of the case, Explanation 1 to section 10A(9) of the Income Tax Act, 1961 was at all applicable to the facts of the present case as the Explanation 1 to section 10A(9) has been inserted with effect from 1-4-2001 and will apply only to those entities which for the first time got entitled to exemption under section 10A of the Act with effect from 1-4-2001 and it will not apply to those entities which have become entitled to Explanation under section 10A of the Act on the date prior to 1-4-2001, as in the present case, the exemption has been available to the appellant from the assessment year 1998-99. In other words, whether the Explanation I has retrospective operation as held by the Appellate Tribunal or whether it has prospective operation as contended by the appellant?

The Facts

2. The appellant is a private limited company which has been treated as a newly established undertaking in Free Trade Zone in accounting period relevant to assessment year 1997-98 and is enjoying deduction of its profits and gains as are derived by the undertaking as provided under section 10A of the Income Tax Act, 1961 (hereinafter referred to as `the Act). There was a change in the shareholding pattern of the company which has been reproduced by the assessing officer. In the Assessment order reading as under:—

Shareholding pattern as on 31-3-1998

Name of the Shareholder
No. of shares of Rs. 10 face value
Share
holding (%)
Voting power (%)

Aatish Dedhia
100
50
50

Nanji Dedhia
100
50
50

Total number of shares issued by the company
200
100
100


Shareholding pattern as on 31-3-2001

Name of the Shareholder
No. of shares of Rs. 10 face value
Share
holding (%)
Voting power (%)

Aatish Dedhia
73,78,800
42.30
51.02

Nanji Dedhia
57,200
0.33
0.39

NRIs& Others
1,00,28,544
57.37
48.58

Total shares
1,74,64,544
100.00
100.00


3. Before the issue of new shares, Shri Aatish N. Dedhia and Shri Nanji N. Dedhia were having 100 per cent of voting power in respect of the shares held by them. After the issue of shares to NRIs, after obtaining the approval of the Reserve bank of India, the voting powers in respect of shares held by Shri Aatish Dedhia and Shri Nanji Dedhia were reduced to 51.42 per cent. The assessing officer held that the percentage of shares of the company held by shareholders in the year in which the undertaking was set up, were reduced to less than 51 per cent, i.e., 42.63 per cent (in the year under consideration) of the shares as against 100 per cent held previously by the Dedhia Group. He, as such, held that it is clearly established that the beneficial interest in the undertaking is transferred. He applied the provisions of Explanation 1 to section 10A of the Act.

4. Being aggrieved by the aforesaid order of the assessing officer, an appeal was preferred before the Commissioner (Appeals)wherein the Commissioner (Appeals) confirmed the order of the assessing officer. Consequently, an appeal came to be filed before the Income-tax Appellate Tribunal against the order of the Commissioner (Appeals) whereby, the Tribunal has concurred with the findings of the Commissioner (Appeals) and disallowed the exemption by invoking the provisions of section 10A(9) of the Income Tax Act. Aggrieved thereby, the appellate jurisdiction of this court is invoked by the appellant under section 260A of the Act for consideration of substantial question of law framed in the opening part of this judgment.

Submissions

5. Learned counsel for the appellant submits that the provisions of section 10A(9) read with Explanation 1 are not applicable to the facts of the case because shares having more than 51 per cent of voting power still continue to be held by the Dedhia Group after the issue of new shares to the NRI entities, even though the number of shares held by the Promoters are less than 51 per cent of the total shares issued by the Appellant-Company. According to learned counsel for the appellant, the Tribunal has committed a serious error in coming to the conclusion that the focus of the explanation is on the holding of the shares carrying not less than 51 per cent of the voting power and not on the holding of 51 per cent of the voting power.

6. The learned counsel for the appellant further submits that the Explanation 1 to section 10A(9) of the Act requires the original holders of shares of the appellant-company to keep control and management of the appellant-company by holding 51 per cent of the voting power irrespective of the number of shares held by them. It is thus submitted that the promoters of the appellant-Company viz. Shri Aatish Dedhia and Shri Nanji Dedhia are continuing to have 51.42 per cent of the voting power even though the number of shares held by them are 42.63 per cent of the total shares issued by the appellant-company.

7. Learned counsel for the appellant further submitted that during the previous year relevant to the assessment year 2001-02 the ownership of the beneficial interest in the appellant-company is not transferred by any means and, therefore, the appellant-company is entitled to deduction under section 10A(1) of the Act.

8. So far as question (&) referred to hereinabove is concerned, learned counsel for the appellant submits that sub-section (9) of section 10A which was inserted with effect from assessment year 2001-02 but omitted from assessment year 2004-05 would apply prospectively, i.e., the undertaking to which section 10A applies with effect from 1-4-2000. It is submitted that in sections 10A and 10B, there is a block concept for 10 years, the transfer that may forfeit relief has to be considered with reference to the last day of the previous year, when the claim for relief is made and "the last day of the year in which undertaking was set up". Learned counsel for the appellant thus submits that, it is the block concept, which holds the key to the reference to "the year of setting up", therefore, the provision will apply only for those whose block of 10 years starts with effect from 1 -4-2000 and it cannot apply to those undertakings which had commenced production before 1-4-2000. It is also submitted that section 10A has been substituted by a new section of 10A by the Finance Act, 2000 whereby sub-section (9) has been inserted for the first time with effect from 1-4-2000 and, therefore, the new section cannot impair the right already acquired prior to the introduction of section 10A(9) unless specifically stipulated.

9. In reply, the learned counsel for the revenue tried to support the impugned order and reiterated the observations made therein and prayed for dismissal of appeal with costs.

Consideration

10. Having heard rival parties, before considering the rival submissions, it is necessary to turn to Explanation 1 of section 10A(9), which provides that the promoters of the appellant company should continue to hold shares of the company carrying not less than 51 per cent of the voting power. The said Explanation reads as under:—

"Explanation 1: For the purposes of this section, in the case of a company, where on the last day of any previous year, the shares of the company carrying not less than 51 per cent of the voting power are not beneficially held by persons who held the shares of the company carrying not less than 51 per cent of the voting power on the last day of the year in which the undertaking was set up, the company shall be presumed to have transferred its ownership or the beneficial interest in the undertaking."

11.At this juncture, it would also be useful to turn to paragraph No. 15.9 of the Circular of the CBDT bearing No. 794, dated 9-8-2000, which explains the insertion of sub-section (9) and Explanation 1 thereto by the Finance Act, 2000 which reads as under :—

"15.9 Sub-section (9) provides that in case there is a transfer of ownership or the beneficial interest in the undertaking by any means, the deduction under sub-section (1) shall not be allowed to the assessee for the assessment year relevant to such previous year in which the transfer takes place and in the subsequent years. Explanation 1 further provides that in the case of a company where on the last date of any previous year the shares of the company carrying not less than 51 per cent of the voting power are not beneficially held by persons who held the shares of the company carrying not less than 51 per cent of the voting power on the last day of the year in which the undertaking was set up, the company shall be deemed to have transferred its ownership or the beneficial interest in the undertaking."

12. Having examined the aforesaid provisions of the Income Tax Act and the sweep of circular issued by the CBDT, it is necessary to take stock of the provisions of the Companies Act, 1956.

13. Section 86 of the Companies Act has been substituted by the Companies (Amendment) Act, 2000 with effect from 13-12-2000 whereby a company incorporated under the Companies Act, 1956 has been allowed to issue two kinds of shares viz., `equity shares' and `preference shares' and the equity shares can be with voting rights or with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed. Accordingly, Company (Issue of Shares Capital with Differential Voting Rights) Rules, 2001 have been framed, which permits the issuance of equity shares with differential voting rights. Accordingly, the appellant company has issued shares without voting rights. In the result, the original promoters, ie., Shri Aatish Dedhia and Shri Nanji Dedhia continue to hold shares of the appellant-company carrying not less than 51 per cent of the voting power. It is thus clear that during the previous year relevant to assessment year 2001-02 the ownership of the appellant company was not transferred by any means and, therefore, the appellant company is right in claiming entitlement to deduction under section 10A(7) of the Act.

14. So far as second question is concerned, one has to keep in mind the settled principle of interpretation that retrospectivity cannot be lightly inferred unless it is clearly provided for in the statute. The first proviso to section 10A implies continuity. If the intention was to deprive the existing industries or to impose a condition, which is not capable of being fulfilled in the context of transfer having already occurred prior to the statute, it would have been specifically made clear. Under these circumstances, keeping in mind the general principle that vested right cannot be divested, one cannot assume retrospectivity to a greater extent than what the section intends.

15. At this juncture, it is needless to mention that, where the words used are "has made, has ceased, has failed and has become", they were found to be words which can be understood as happening both prior and after coming into force of the statute, as it was understood from the words "if a person has been convicted" to include anterior conviction. In the Explanation 1, present tense is used with an injunction that the shares "are not beneficially held by the persons who hold the shares in company". The present tense cannot be assumed to describe the status of the shareholder as the owner, but the status of the shares which are beneficially held. On this interpretation the language of the section can only be understood to describe "the date on which the undertaking was set up" as applicable only for those who are setting up the undertaking after the new provision, so that in case of others, the date has to be understood at best, as on 1-4-2000, the date on which the law was brought in the statute.

16. In the aforesaid view of the matter and the findings recorded, both the questions stand answered in negative, le., in favour of the assessee and against die revenue. Appeal is allowed with no order as to costs.

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ITAT (HYD) :- 40(i)(a), not applicale on labor payments..

Dear All,

 

The query relevant in the context of sec. 40(a)(ia).

 

Hyd. Bench of ITAT held that payment of direct expenses like labour charges are not covered by sec. 30 to 38 but falls under sec. 28(i), which deals with chargeability of income under the head "Business". Sec. 40 starts with the nonobstant clause "Notwithstanding anything to the contrary in ss. 30 to 38". Therefore, mischief of sec. 40(a)(ia) does not apply to claim of direct expenses like labour charges. This was held in the case of K. Srinivas Naidu V. ACIT 131 TTJ 17(Hyd. Bench)

ITAT (DEL):- Non-compete fees taxable,

Non-compete fees are capital expenditure and therefore liable to tax, according to a recent ruling by the Income-tax Appellate Tribunal, Delhi.

The special bench of ITAT, Delhi gave this ruling on July 30, 2010, on an appeal filed by Tecumseh India, the Indian arm of the US-based Tecumseh. The transaction in question was the acquisition of Whirlpool assets at Faridabad and Ballabgarh and the non-compete fees it paid to Whirlpool. The assets were purchased on July 2, 1997 but the agreement for non-compete fees of Rs 2.65 crore was signed on July 10, 1997.

Since the non-compete fee was claimed by Tecumaseh as revenue expenditure, it accordingly deducted the amount from computation of taxable income. The I-T department did not agree with the taxpayer's contention and held that the payment of non-compete fee was capital expenditure and therefore tax has to be paid. The assessing officer, therefore added the expenditure back into the income computed for purpose of levying tax.

The company had cited the Delhi High Court decision in the case of Eicher to support its case. In the case of Eicher, the Delhi High Court had held that the non-compete fees are mainly for protecting the profitability and business interest of the company.

Further, since no profit-making apparatus was created through the payment of non-compete fees, such expenditures could be classified as revenue expenditure, and therefore tax was not payable on this count. The tax payer company had also argued that the acquisition of Whirlpool assets and the agreement for the non-compete fee were made on different dates and therefore the latter could not be construed as part of the acquisition.

The I-T department contented that though MoU and the agreement for paying non-compete fees, are signed on separate dates, they are part of the same transaction that could be classified as capital expenditure.

The I-T department cited section 6 of the Indian Evidence Act which stipulates that courts should take note of facts which formed part of the same transaction though they may have occurred at different places and time. It said the non-compete clause was part of the same transaction.