SC: In favor of Revenue : Interest earned by co-operative credit society ... not eligible for deduction u/s. section 80P

Interest earned by co-operative credit society on surplus funds invested in short-term deposits with banks and in govt. securities not eligible for deduction u/s. section 80P

The words "the whole of the amount of profits and gains of business" in section 80P(2)(a) emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society.

CASE LAW DETAILS
Decided by:, SUPREME COURT OF INDIA, In The case of: The Totgars' Cooperative Sale Society Ltd. v. Income tax officer, Appeal No.:, CIVIL APPEAL NO. 1622 OF 2010, Decided on: FEBRUARY 8, 2010

RELEVANT PARAGRAPH

At the outset, an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction under Section 80P(2)(a)(i) of the Act is not the interest received from the members for providing credit facilities to them. What is sought to be taxed under Section 56 of the Act is the interest income arising on the surplus invested in short-term deposits and securities which surplus was not required for business purposes. Assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities.

The question, before us, is – whether interest on such deposits/securities , which strictly speaking accrues to the members' account, could be taxed as business income under Section 28 of the Act? In our view, such interest income would come in the category of "Income from other sources", hence, such interest income would be taxable under Section 56 of the Act, as rightly held by the Assessing Officer. In this connection, we may analyze Section 80P of the Act. This section comes in Chapter VI-A, which, in turn, deals with "Deductions in respect of certain Incomes". The Headnote to Section 80P indicates that the said section deals with deductions in respect of income of Cooperative Societies. Section 80P(1), inter alia, states that where the gross total income of a cooperative Society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee-Society. An income, which is attributable to any of the specified activities in Section 80P(2) of the Act, would be eligible for deduction. The word "income" has been defined under Section 2(24)(i) of the Act to include profits and gains. This sub-section is an inclusive provision. The Parliament has included specifically "business profits" into the definition of the word "income". Therefore, we are required to give a precise meaning to the words "profits and gains of business" mentioned in Section 80P(2) of the Act. In the present case, as stated above, assessee-Society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall within the meaning of the expression "profits and gains of business". Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee-Society provides credit facilities to its members, it earns interest income. As stated above, in this case, interest held as ineligible for deduction under Section 80P(2)(a)(i) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as "investment" . Further, as stated above, assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this "retained amount" which was payable to its members, from whom produce was bought, which was invested in short-term deposits/securities . Such an amount, which was retained by the assessee-Society, was a liability and it was shown in the balance-sheet on the liability-side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or in Section 80P(2)(a)(iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the Assessing Officer was right in taxing the interest income, indicated above, under Section 56 of the Act. An alternative submission was advanced by the assessee(s) stating that, if interest income in question is held to be covered by Section 56 of the Act, even then, the assessee-Society is entitled to the benefit of Section 80P(2)(a)(i) of the Act in respect of such interest income. We find no merit in this submission. Section 80P(2)(a)(i) of the Act cannot be placed at par with Explanation (baa) to Section 80HHC, Section 80HHD(3) and Section 80HHE(5) of the Act. Each of the said sections has to be interpreted in the context of its subject-matter. For example, Section 80HHC of the Act, at the relevant time, dealt with deduction in respect of profits retained for export business. The scope of Section 80HHC is, therefore, different from the scope of Section 80P of the Act, which deals with deduction in respect of income of cooperative Societies. Even Explanation (baa) to Section 80HHC was added to restrict the deduction in respect of profits retained for export business. The words used in Explanation (baa) to Section 80HHC, therefore, cannot be compared with the words used in Section 80P of the Act which grants deduction in respect of "the whole of the amount of profits and gains of business". A number of judgements were cited on behalf of the assessee(s) in support of its contention that the source was irrelevant while construing the provisions of Section 80P of the Act. We find no merit because all the judgements cited were cases relating to Cooperative Banks and assessee-Society is not carrying on Banking business. We are confining this judgement to the facts of the present case. To say that the source of income is not relevant for deciding the applicability of Section 80P of the Act would not be correct because we need to give weightage to the words "the whole of the amount of profits and gains of business" attributable to one of the activities specified in Section 80P(2)(a) of the Act. An important point needs to be mentioned. The words "the whole of the amount of profits and gains of business" emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society. In this particular case, the evidence shows that the assessee- Society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest income falls in the category of "Other Income" which has been rightly taxed by the Department under Section 56 of the Act.
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Income deemed to accrue or arise in India to non residents: Budget 2010

Commensurate with generally accepted international tax practices, the Indian tax laws provide for taxation of interest, royalties and fees for technical services of non-residents in India, provided the source of such income is situated in India.

The question / dispute has been arising that where the Non-resident has rendered services from outside India whether the source of income shall be considered to be lying in India for the purpose of Section – 9. This dispute was settled by Hon'ble Supreme Court of India in the case of Ishikawajima-Harima Heavy Industries Ltd. vs. DIT [2007] 288 ITR 408. The Hon'ble Supreme court has held that to tax the income from fees for technical services, the services must be utilized in India as well as must be rendered in India.

The Department considered this decision and came up with a retrospective amendment (w.e.f. 1/06/1976) vide Finance Act, 2007 by introducing an explanation to section – 9. As per the said explanation it was clarified that the income from Interest, Royalty and Fees for technical services shall be chargeable to tax in India irrespective of the fact that the non-resident has no residence or place of business or business connection in India.

However even after the introduction of said explanation the question of taxability when services have been rendered outside India remained unanswered. Therefore the dispute remained unresolved. The Hon'ble Karnataka High Court in the case of Jindal Thermal Company Ltd. 182 Taxmann 252 recently held that the services provided off shore or outside India cannot be taxed in India.

The department again considered the decision of High court vide Finance Bill 2010 proposes to change the explanation to section – 9 in view to bring the income from services rendered outside India under the tax net. In view of the proposed change only requirement for taxing income from such services shall be the utilization of services in India and not place of rendering the services.

The change is proposed w.r.e.f 1^st June 1976.

This amendment has far reaching impact and it can affect the taxability of several items, which hitherto were not chargeable to tax in India.

ITR'S TRIBUNAL TAX REPORTS (ITR (Trib)) HIGHLIGHTS ISSUE DATED 29-3-2010 Volume 2 : Part 4

ITR'S TRIBUNAL TAX REPORTS (ITR (Trib)) HIGHLIGHTS

ISSUE DATED 29-3-2010

Volume 2 : Part 4

Reports

Fines paid to SEBI for unfair trading practice and unbusiness like conduct cannot be disallowed : Goldcrest Capital Markets Ltd. v. ITO (Mumbai) p. 355

Amount paid as salary to employees disallowed on ground of decrease in profits not justified : Goldcrest Capital Markets Ltd. v. ITO (Mumbai) p. 355

Amount spent on acquiring non-competition rights entitled to depreciation : ITO v. Medicorp Technologies India Ltd. (Chennai) p. 367

AO estimating value as on 1-4-1981 at 10 times cost of acquisition for agricultural land fair and reasonable : Arun Sunny v. Dy. CIT (Cochin) p. 380

Assessee has no right to produce additional evidence before Tribunal unless leave granted by Tribunal for valid reasons : Arun Sunny v. Dy. CIT (Cochin) p. 380

Interest income arising out of contractual obligation taxable : Lanco Kondapalli Power P. Ltd. v. Dy. CIT (Hyd.) p. 392

Assessee following method of "cost or market price whichever is lower" consistently, deletion of addition justified : Dy. CIT v. Majestic Holdings and Finvest P. Ltd (Mumbai) p. 407

Interest on temporary surplus funds deposited in bank for business purposes assessable as business income : Voltas International Ltd. v. Asst. CIT (Mumbai) p. 410

Interest income on margin money assessable as business income : Voltas International Ltd. v. Asst. CIT (Mumbai) p. 410

Interest earned on FD in bank, income-tax refunds and inter-corporate deposits assessable as income from other sources : Voltas International Ltd. v. Asst. CIT (Mumbai) p. 410

Net interest income alone to be excluded u/s. 80HHB : Voltas International Ltd. v. Asst. CIT (Mumbai) p. 410

Interest on refund assessable in year of receipt : Dy. CIT v. Seshasayee Paper and Boards Ltd. (Chennai) p. 417

Assessment made on satisfaction of queries, not a case of lack of enquiry : Order not to be revised : Gupta International v. ITO (Delhi) p. 428

Where assessment barred by limitation, CIT cannot direct AO to pass fresh assessment order : V. Narayanan v. Dy/Asst. CIT (Chennai) p. 446

NEWS-BRIEFS

TDS to distinguish "works" against "sales" contract

In a landmark ruling recently, the Bombay High Court has said that sale contracts will not be subject to tax deducted at source (TDS), thereby giving relief to manufacturing companies, and also clarifying the issue by distinguishing between works contracts and sale contracts. In an oral judgment, delivered on March 12, the court held that while "works contract" were subject to TDS under section 194C of the Income-tax Act, "sales contract" were not. Section 194C deals with TDS on payments to contractors and sub-contractors, while section 40a(ia) disallows those expenses which are liable to TDS but on which no TDS has been deducted.

The court upheld the arguments of the pharmaceutical companies that contract manufacturing agreements entered into by them with other manufacturers amounted to a sales contract, which was not liable to TDS under section 194C. The High Court ruling will give clarity to companies whose appeals are pending at various levels like Income-tax Tribunals, courts or even with Commissioners of Income-tax (Appeals). The Bombay High Court judgment also clears doubts that had risen concerning deduction of TDS on sale contracts after a Karnataka High Court ruling that asked technology firms to deduct tax on all payments made to non-residents on software purchases.

The ruling also makes it clear that companies that outsource their manufacturing to other manufacturers, acting as contractors, will not be liable to deduct TDS on payments to the latter, and will also be allowed to treat these payments as deductible expenses, even though no TDS has been deducted.

The Revenue Department has been holding that manufacturing agreements entered into by companies with contractors make the former liable to deduct tax at source while making payments to the contractors under section 194C of the Income-tax Act and also disallowed the same as expense under section 40a(ia) as these amounted to "works contracts."

Under a "sales contract", the object of the sale is the transfer of property from one entity to the other, while a "works contract" involves the change of form and not transfer of property.

Therefore the court ruled that while a "works contract" attracts TDS and disallowance provisions, a "sales contract" does not. [Source : www.economictimes.com dated March 16, 2010]

F Employer's contribution towards overseas social security treated non-taxable

The Income-tax Appellate Tribunal, New Delhi, has recently held that the mandatory contribution by the employer towards the social security in the home county of the employee (foreign national), wherein no benefit/right gets vested in the year of contribution should not be considered as a taxable perquisite in hands of such employee.

The ruling came in the wake of a case wherein an employee, a Japanese national, was working as a general manager with an Indian company. The employee's residential status under the Income-tax Act, 1961 for the financial year 2003-04 was that of a "resident but not ordinarily resident". In the return of income filed for the said financial year, the employee did not offer to tax the employer's contribution towards social security, health insurance, etc., in his home country, i.e., Japan.

The employee contended that the issue in hand is fully covered in the favour of the employee in earlier decisions of the Tribunal wherein contribution towards social security made by the employer in the home country of the foreign national was held to be not taxable as a perquisite. Therefore, in the instant case, the amount contributed by the employer should not be treated as a taxable perquisite in the hands of the employee.

The Assessing Officer (AO) added the employer's contribution towards social security, health insurance, etc. in Japan to the taxable income of the employee in India. The Commissioner of Income-tax (Appeals), however, on the basis of Tribunal earlier decisions on the similar matter deleted the addition made by the AO.

The Tax Department contented that it should be granted time to go through the decisions relied on by the employee and for that matter the case should be adjourned.

The Delhi Tribunal held that the said contribution did not give any right/benefit to the employee in the year of contribution and such benefit was dependent upon happening of an event in the future which is beyond the control of the employee, i.e., death, permanent disability, etc. Therefore, no income can be said to be earned/accrued to the employee in the year of payment. [Source : www.economictimes.com dated March 17, 2010]

Petition RTI to know why tax refund delayed ?

Life just got better for millions who have ran from pillar to post for years to secure their tax refunds from the Income-tax (I-T) Department.

In a landmark ruling, the Central Information Commissioner has passed an order which says information on refunds is covered under the Right to Information (RTI) Act.

An assessee had filed an RTI petition with the (I-T) Department in Chennai, asking for information as to why was there a delay in the payment of his IT refunds for 2003-04, 2005-06, 2006-07 and 2008-09, amounting to Rs. 3,32,457.

The Department, however, refused to provide as the information sought is covered under section 8(1)(e) of the RTI Act, wherein the information sought is not in larger public interest and is purely personal in nature.

The Central Information Commissioner, while passing the order on another appeal to the Income-tax Department said : "To deny the appellant information sought by him under clause (e) or clause (j) of section 8(1) is nothing but misappreciation of law."

While directing the Income-tax Department to disclose information for the inordinate delay, he also ordered the issue of refunds within three months. The CIC also rapped the Department for failing to appear in a hearing arranged by the Commission where the appellant was present. [Source : www.economictimes.com dated March 15, 2010]

Top security arm to look into cyber attacks affecting I-T Department, banks

The Government's top cyber security arm has initiated a probe into complaints of Income-tax Department, banks and other financial bodies who have reported a spurt in cyber attacks and fake mails which was affecting their operations.

The Computer Emergency Response Team (CERT-In) CERT-In, a technical and cyber security department under the Ministry of Communications and Information Technology, is the nodal agency to analyse and respond to cyber attacks and intrusions into country's information and technology networks.

These agencies have asked the CERT-In to arm them with pro-active measures so that they can prevent phishing attacks as huge monetary transactions are involved and also recover any lost data.

"The CERT-In is working on incident reports sent by the I-T Department and various banks who have complained about phishing attacks on their servers and in one case even the facsimile of a banking institution was stolen and used for fraudulent purposes," a source said.

While banks have reported about "fraudulent entities" interacting with their customers to share passwords, account details and PIN numbers to the CERT-In, the Income-tax Department and its directorates have reported fake mails sent to taxpayers and have also asked for securing passwords used by income tax officials, especially handling refunds. [Source : www.economictimes.com dated March 15, 2010]

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Improve your Communication Skills

Here are 6 great tips you can use!

 1. Awareness of your own interaction with other people is the first step in improving your communication skills. Learn to identify which types of situations make you uncomfortable and then modify your behavior to achieve positive results is a critical step in improving your communication skills. You can learn to become aware of behaviors in other people that prompt you to respond in negative ways and modify your own behavior to turn the situation into a positive experience.

2. You must accept responsibility for your own behavior and do not fear apologizing for errors in judgment or insensitive actions. Asking others for honest feedback about the way you interact with others can be very helpful. Accept the negative feedback along with the positive and make changes accordingly.

3. Your non-verbal communication is equally as important as the things that you say. Positive body language is extremely important in your interactions with other people.If your words and your actions do not match, you will have a difficult time succeeding in social situations.

4. In order to learn how to improve your communication skills, you must become a great listener. You must fight the urge to respond immediately and really listen to what the other person is trying to communicate.Offering suggestions or criticism before you are certain of the other person's intent can only lead to frustration for both parties.

5. Improving your communication skills is a process and cannot be accomplished overnight. Trying to improve or change too many things at once will be counter-productive. You will become discouraged and overwhelmed if you attempt to change your entire personality all at once. Choose one or two traits at a time and work on those over a period of time. Learn to take advantage of your personal strengths and make a positive impact on others.

6. Maximize your positive personality traits and use them in your interactions with others. Good communication and great listening skills are the most important tools you can use in improving your communication skills.

You can learn how to improve your communication skills by developing excellent listening skills, learning to resolve problems and conflicts, understanding body language, and accepting responsibility for your own negative behavior.

Determination and self-awareness will make your desire to improve your communication skills a reality.
You can change your life and now is the time to start.

Exceptional communication skills can be Learned...and Mastered!!!

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Penalty- additions accepted does not necessarily attract penalty

NEMCHAND JAIN & SONS vs. DEPUTY CIT, (ITAT kolkata) 
IT(SS)A No. 21/Kol/2008;
Block period 1989-90 to 1999-2000 
Decided on 23rd October, 2009  

Gist of decision:   It is a settled principle that the power of levying penalty or not is discretionary and not mandatory. The law requires that whenever the AO is to exercise his discretion then it is the AO alone who is to exercise that discretion and the appellate authority cannot exercise that discretion on the part of the AO. The appellate authority when called upon to do so can only decide whether the discretion so exercised by the AO which has been upheld by the CIT(A) can be sustained under law or not. In order to decide whether discretion has been exercised by the AO or not this examination and finding can be given only on a perusal of the reasons set out in the penalty order. The reasons cannot be supplemented. The purpose and rationale for adhering to the reasons is to provide a safety from the excesses of arbitrariness as once the reasons are given they cannot be modified, changed, supplemented subsequently to justify the action. The reasons as such under law are required to be set out for the action at the time the action is taken. A bare perusal of the penalty order shows that the action has been levied solely on the ground that the appeal filed in the quantum proceedings is withdrawn. This fact alone has led the AO to conclude that the assessee is deemed to have accepted as undisclosed income which amounted to wilful and intentional evasion. The reasons set out in the penalty order do not inspire any confidence in coming to the conclusion that the AO has applied his mind. The imposition of penalty is mechanical and considered to be automatic by the AO which is not the position of law. From a perusal of the penalty order it is seen that the AO while exercising his discretion has been swayed by one fact alone namely that the assessee has withdrawn the appeal in the quantum proceedings thereby leading automatically to the conclusion that the assessee has evaded wilfully and intentionally. Merely to levy penalty because additions are accepted it cannot be inferred that the assessee has infringed the requirements of law. If that was so there will be no purpose in having a separate penalty proceeding. The very fact that penalty proceedings are separately taken and an opportunity granted to the assessee to show cause and produce evidence etc., shows that before levying penalty it is to be examined whether there is a deliberate violation of the provisions of law. A perusal of the reasons set out in the penalty order and the reasons for upholding the same in the impugned order clearly demonstrates that this is a case of non-application of mind by the AO. As such neither the legality of the action taken nor the legitimacy of the same can be upheld. The reasons alone are the link between the material on which certain conclusions are based and actual conclusions are drawn. They disclose how the mind is applied to the subject-matter for decision and reveal a rational nexus between the facts considered and the conclusion reached. Only in this way can opinion and decisions recorded be shown to be manifestly just, fair and reasonable which is why the requirement of setting out reasons in the justice delivery system is embedded. Fair play and justice demand that justice must not only be done but must be seen to be done. A perusal of the penalty order and the impugned order does not disclose in any manner that the mind of the authority has been applied relevantly and rationally. The reasons for coming to the conclusion which have been set out by the AO and having done so it is only those reasons which can guide as to what prevailed upon the AO to hold that penalty is to be levied. The decision-making process exhibited by the reasoning recorded in the order can be the sole guiding criteria for the appellate authority to look into the issue for deciding the legality and legitimacy of the action taken.

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ITR'S TRIBUNAL TAX REPORTS (ITR (Trib)) HIGHLIGHTS ISSUE DATED 22-3-2010 Volume 2 : Part 3

ITR'S TRIBUNAL TAX REPORTS (ITR (Trib)) HIGHLIGHTS

ISSUE DATED 22-3-2010 Volume 2 : Part 3

REPORTS	STATUTES	JOURNAL	NEWS BRIEFS

REPORTS

F In absence of vouchers AO justified in estimating 10 per cent. of total expenditure as not relatable to business : Addi Industries Ltd. v. ITO (Delhi) p. 236

F Interest on fixed deposits not business income : Addi Industries Ltd. v. ITO (Delhi) p. 236

F Deduction for export not allowable prior to adjustment of brought forward losses : Addi Industries Ltd. v. ITO (Delhi) p. 236

F Addition of 5 per cent. for sum normally said to be spent for sham transactions, proper : Dy. CIT v. Pawan Kumar Malhotra (Delhi) p. 250

F Commissioner (Appeals) restricting disallowance of expenses incurred on telephone and vehicle on estimate justified : Dy. CIT v. Pawan Kumar Malhotra (Delhi) p. 250

F Where assessee claiming deduction wrongly under bona fide belief based on advice of tax consultant, penalty to be deleted : Yogesh R. Desai v. Asst. CIT (Mumbai) p. 267

F Documents relating to undisclosed sales found during search : Expln. 1 u/s. 271(1)(c) applicable : Dy. CIT v. K.Natarajan (Bangalore) p. 273

F Where assessee provided adequate opportunity to rebut charge in search cases, penalty valid : Dy. CIT v. K.Natarajan (Bangalore) p. 273

F Penalty leviable on difference between income declared in return filed u/s. 153A and that in original return : Dy. CIT v. K.Natarajan (Bangalore) p. 273

F Assessment or reassessment relating to year falling in six year period prior to search abates : Original return filed does not abate : Dy. CIT v. K.Natarajan (Bangalore) p. 273

F Surplus earned on sale of investments is capital gains : Paresh D. Shah v. Joint CIT (Mumbai) p. 311

F Deduction u/s 80HHC cannot be granted to non-residents : Mustaq Ahmed v. Asst. DIT (Chennai) p. 315

F Deduction u/s 80HHC to domestic companies and residents not affected by non-discrimination clause of para (4)(a) under art. 26 of DTAA (Singapore) : Mustaq Ahmed v. Asst. DIT (Chennai) p. 315

F Plant kept ready for use but not actually used due to lack of raw material : Entitled to depreciation : Asst. CIT v. Chennai Petroleum Corporation (Chennai) p. 325

NEWS-BRIEFS

F Long-term capital gains remain still a hard nut to crack

The Government is likely to maintain the distinction between short-term and long-term capital gains to encourage long-term savings, as it deliberates the Draft Direct Taxes Code.

The Finance Minister said in his Budget speech that the new direct taxes law could be rolled out from April 1, 2011.

Long-term capital gains are taxed at concessional rates while short-term gains are taxed at the marginal rate of the taxpayer and could be as high as 30 per cent. for those in the highest slab.

The tax treatment of shares is different from other assets. Currently, any stock market asset held for more 12 months is considered long-term capital assets but for all other assets have to be held for more than 36 months to be considered a long-term asset. Moreover, shares held for the long-term attract only the securities transactions tax while others assets are levied a long-term capital gains tax of 10 per cent.

The Draft Direct Taxes Code has proposed to tax capital assets irrespective of the period of holding. The entire capital gains of the assessee is proposed to be added to his income and taxed at the marginal rate.

The Finance Minister has asked the CBDT to rework the Draft Code based on the feedback received from stakeholders before it is introduced in the Monsoon Session, as different factors including market conditions, requirement of funds, future expected realisations have an impact on financial decision.

However, in case of stock market transactions, concessional rate of tax has been in place for some time now and long-term gains could be completely tax free except for small amount on securities transaction tax (STT). Even industry chambers have advocated continuing the existing regime for taxation of capital gains. [Source : www.economictimes.com dated March 10, 2010]

F Government clears cloud over NGO tax breaks

The Income-tax Department has got the power to cancel any charitable organisation's registration that accords it the benefit of tax exemption, if the organisation is found to violate the norms for registration, according to Budget 2010-11. By this move, the Government has made its intent to prevail over a series of court judgments, which held that the Income-tax Department did not have the right to cancel registration of organisations with it.

However, the Budget proposal has said, "The power of cancellation of registration is inherent and flows from the authority of granting exemption".

Many organisations that are registered under the section of the income-tax law have had a tiff with the Department that sought to cancel their registration on alleged violations of the rules.

Such organisations have to maintain books of account for any commercial activity undertaken by them and if they fail to do so, the taxman enjoys the authority to question the concerned entity on the issue. The Budget proposal now gives the taxman the additional power to cancel the registration.

There were instances where the exemptions were being misused by the organisations, official sources said, adding that the object of the organisation stated in the registration was often changed without any knowledge of the Tax Department.

The Budget proposal has pointed out that judicial rulings in some cases have held that Commissioner does not have the power to cancel the registration obtained by a trust or institution as it is not specifically mentioned in section 12AA.

"It is therefore, proposed to amend section 12AA so as to provide that the Commissioner can also cancel the registration obtained under section 12AA", the Finance Bill, 2010-11 has said.

Charitable organisations would, however, be given a chance to be heard by the tax Commissioner before he decides to cancel the registration. [Source : www.financialexpress.com dated March 8, 2010]

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Bom HC decison in favour of Revenue

Netting of Interest receipt not allowed for Calculating deduction u/s. 80HHC: Bombay HC

CIT vs. Asian Star Co Ltd (Bombay High Court), ITA No. 200 OF 2009, Judgment Delivered on : 19^th March 2010

Explanation (baa) to s. 80HHC provides that 90% of interest, rent etc has to be reduced from the "Profits & gains" for purposes of s. 80HHC. In Lalsons Enterprises 89 ITD 25, the Special Bench of the Tribunal held that in computing the said interest, rent etc, the assessee was permitted to net off the interest receipt against the interest expenditure (having a nexus with the receipt) and only the balance could be reduced. This view was affirmed by the DelhiHigh Court in Shri Ram Honda Power Equipment 289 ITR 475 (Delhi).

In an oral judgement delivered today (19th March 2010) in CIT vs. Asian Star Co Ltd ITA No. 200 OF 2009 and other cases, the Bombay High Court has dissented from the judgement of the Delhi High Court and held that the language of Expl. (baa) to s. 80HHC did not permit such netting off. It held that the Special Bench had traversed the limits of interpretation and virtually legislated in giving the deduction. It held that merely because s. 80HHC was an incentive provision was no ground for giving more deduction that what the statute permitted. It held that for purposes of Expl. (baa) to s. 80HHC, 90% of gross interest has to be reduced from business profits.

Decisions in favour of Rvenue

1.Is the capital gains on distribution of assets (among the partners, on dissolution of the firm) on which depreciation had been claimed, assessable u/s 45(4) or u/s 50(1)?
2.Does the sale of an asset on which depreciation had been claimed for 21 years, but not for the latest 2 years, give rise to short term capital gains?

ITAT decisions in favour of Revenue- 2 nos.

Dear Comrade,
Attaching 2 recent decisions in favour of Revenue. Hope you find them useful.
R.Rajagopalan
Kerala

Edifice of assessment cannot be created on foundation of a time-barred notice issued u/s 143(2)

Edifice of assessment cannot be created on foundation of a time-barred notice issued u/s 143(2)

The service of notice within a period of twelve months from the end of month in which return is filed is sine qua non for proceeding with the block assessment; if an assessment, in contravention of the provisions of proviso to section 143(2), is made, the same will be a nullity and not an irregular assessment.

ITAT, MUMBAI BENCHES 'B', MUMBAI

DCIT v.  National Refinery Pvt. Ltd.

IT(SS) A. No. 347/Mum/2003

March 5, 2010

RELEVANT EXTRACTS:

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5. Section 158BC(b) provides that where any search has been conducted u/s.132 or books of account, other documents or assets are requisitioned under section 132A, in the case of any person, then the Assessing Officer shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158BB and the provisions of section 142, sub-sections (2) and (3) of section 143, section 144 and section 145 shall, so far as may be, apply. One of the important questions raised in this appeal is whether the proviso to section 143(2) applies to the block assessment also. In other words is it incumbent upon the AO to issue notice u/s 143(2) within the prescribed period of twelve months from the end of the month in which the block return is filed?

8. As against the above view in favour of the assessee that the issuance of notice within the time prescribed under proviso to section 143(2) is a mandatory requirement for framing of block assessment, a contrary view also came to be

expressed by some judicial forums. The stand of the Revenue remained that the proviso to section 143(2) did not apply to the block assessment proceedings inasmuch as clause (b) of section 158BC included the words "so far as may be" in the context of applicability of section 143(2) and hence even if no notice was issued within twelve months from the end of the month in which the return was furnished, the assessment proceedings could validly go on. Eventually this issue has been recently set to rest by the Hon'ble Apex court in the case of ACIT Vs. Hotel Bluemoon [2010-TIOL-08-SC-IT]. The facts of the case are that search action was taken against that assessee u/s.132 of the Act. Whereas the assessee argued that issuance of notice u/s.143(2) of the Act within the prescribed time for the purpose of block assessment was mandatory for the assessing authority, the department took a view that the notice u/s.143(2) was not an essential requirement in the block assessment. The Tribunal affirmed the decision of the CIT(A) that non-issuance of notice u/s.143(2) was only a procedural irregularity and the same was curable. The Hon'ble Gauhati High Court did not concur with the view expressed by the Tribunal that the issuance of notice u/s.143(2) within the prescribed time limit was not an essential requirement for the purposes of making block assessment. The Revenue took up the matter before the Hon'ble Supreme Court. Vide judgment dated 2.2.2010, the Hon'ble Apex Court has held that if an assessment is to be completed u/s.143(3) r.w.s. 158BC, notice u/s.143(2) should be issued within one year from the end of the month in which block return is filed. It has further been held that the omission on the part of the assessing authority to issue notice u/s.143(2) cannot be a procedural irregularity and the same is not curable. With the advent of this judgment from the Hon'ble Summit Court, now it becomes unambiguous that the provisions of section 143(2) are applicable to the block assessment. Since issuance of notice u/s 143(2) is an essential requirement for making block assessment, such notice has necessarily to be issued with the time prescribed under proviso to section 143(2). Thus the service of notice within a period of twelve months from the end of month in which return is filed is sine qua non for proceeding with the block assessment. If no notice is issued u/s.143(2) within the prescribed period, the Assessing Officer will have to accept the returned income and he cannot be allowed to go ahead with the assessment. If an assessment, in contravention of the provisions of proviso to section 143(2), is made, the same will be a nullity and not an irregular assessment.

9. Adverting to the facts of the instant case it is found as an undisputed fact that the assessee filed its return for the block period on 15.5.2000. Going by the mandate of proviso to section 143(2), notice u/s.143(2) could have been validly issued on or before 31.5.2001. If the Revenue's contention is accepted that notice u/s.143(2) issued on 16.5.2000 was served upon the assessee through registered post, then of course such notice will be in time and no infirmity can be found in the block assessment order on this count. If however the view point of the assessee is accepted that the notice u/s.143(2) was issued for the first time on 24.12.2001, then such a notice would be time barred. Now we need to examine if any notice u/s.143(2) dated 16.5.2000 was issued and served on the assessee. The Revenue's  view point is that notice u/s.143(2) dated 16.5.2000 was issued and served on the assessee by registered post acknowledgement due. In support of this claim the Revenue has placed on record a copy of Postal Department acknowledgement at pages 6 and 7 of the paper book. On the perusal of these two pages it is found that the name of the assessee is mentioned against Sl.no.A-715. On the right side of this

page there is stamp impression of the Department of Posts which bears the date of 22.5.2000. The learned Departmental Representative canvassed the view that since the notice u/s.143(2) dated 16.5.2000 was sent through registered post, it may be deemed to be proper service. He relied on the following cases to bolster his submission that service of notice through Registered Post A.D. which was not received back unserved, raised the presumption of the service of notice on the assessee :-

(i) CIT Vs. Vins Overseas India Ltd. [(2008) 305 ITR 320 (Del.)]

(ii) CIT Vs. Yamu Industries Ltd. [(2008) 306 ITR 309 (Del.)]

(iii) CIT Vs. Madhsy Films P.Ltd. [(2008) 301 ITR 69 (Del.)]

(iv) CIT Vs. Shanker Lal Ved Prakash [(2008) 300 ITR 243 (Del.)]

 

14. Certain salient features of this case need to be taken note of –

(i). Block return was filed on 15.5.2000. According to section 143(2) at the relevant time : `Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer shall, if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce, or cause to be produced there, any evidence on which the assessee may rely in support of the return'. Ordinarily it is only on the perusal of the return of income filed by the assessee that the Assessing Officer requires the attendance or production of some evidence in support of the assessee's claim. The filing of return on a Receipt counter on one day and the issuance of notice u/s.143(2) on the very next day would mean that all the steps from the receipt of return on the Receipt counter till the issuance of notice got completed within one day's time. Such steps would include the receipt of return on the Receipt counter of the department; the Receipt clerk, after entering the necessary particulars in the relevant register, handing over the same to the office of the concerned Assessing Officer; the office of the AO receiving it from the receipt clerk; placing of such return before the AO; the AO pursuing the return and all the accompanying documents; jotting down the points on which the explanation of the assessee is required ; finalizing such points and accordingly sending the notice. It is vital to note that it is a case of block assessment and the return was filed pursuant to the search action. It is but natural that before issuance of notice u/s.143(2) the Assessing Officer will take note of Appraisal Report of search and other relevant documents vis-à-vis the particulars disclosed in the return. It is difficult, if not impossible, to issue notice u/s.143(2) on the very next

day of the filing of the block return.

(ii). The Revenue has made out a case that the notice dated 16.5.2000 was issued u/s.143(2). The copy of said notice is available at page 4 of the paper book. No doubt such notice is shown as dated 16.5.2000, but against Column No.1 giving the date on which the return for the block period was filed, it has been mentioned as 15.11.2000. It is axiomatic that notice u/s.143(2) can be issued only when the return has already been filed. It is an admitted position that the assessee filed the block return on 15.5.2000. As against that the said notice dated 16.5.2000 mentions the date of return as 15.11.2000. Moreover the notice containing reference to return filed on 15.11.2000 can be issued only after such date and not prior to that. Hence it is impossible for the said notice dated 16.5.2000 to have reference to the return filed on 15.11.2000, which is a later date.

(iii). Even if we go ahead with the presumption that the notice, as contended by the Revenue, was actually issued on 16.5.2000 then it would have contained some requirements of the Assessing Officer supposed to be furnished in support of certain claims made by the assessee. Along with the said notice u/s.143(2) dated  16.5.2000, copy of which is available in the Departmental Paper Book, there is no reference for the production of any accounts / document or any particular information. Except for mentioning the date on which the attendance is required on 6.6.2000, it is silent on the documents or evidence required from the assessee in support of the claims made in the block return. On the contrary we find that the

notices dated 20.12.2001 issued on 24.12.2001, copy placed at pages 1 to 3 of the paper book, has a questionnaire requiring the assessee to tender explanation on various documents found at the time of search. This questionnaire is running into two pages.

(iv). According to the department it issued second notice u/s.143(2) on 24.12.2001 whereas according to the assessee that was only the first and the only notice. It is not understandable as to how the swiftness shown by the Assessing Officer in issuing notice u/s.143(2) on the very next day from the filing of the return on 16.5.2000 came to halt all of a sudden and it was only after a time gap of more than one and half years that the so called second notice was issued on 24.12.2001, against which the assessment was completed on 31.1.2002. If the Assessing Officer had been genuinely so fast in examining the return of the assessee and issuing notice u/s.143(2) on the next day, then he would have taken some action against the assessee for non-compliance and not kept quiet for such a long period in issuing the second notice requiring compliance by the assessee just a week ahead of the limitation period for the completion of block assessment.

(v). There is no reference, in the assessment order, to the said alleged notice dated 16.5.2000 issued u/s.143(2). Further when the assessee was called upon to be present on 6.6.2000, there should have been some reference, at least to the non- attendance of the assessee, in the assessment order.  (vi). Order sheet is a record of proceedings, which is placed in the beginning of the file recording various dates on which the proceedings for assessment continued along with the requirements called for by the Assessing Officer from

time to time during the course of assessment. It is obligatory on the part of the Assessing Officer to mention the gist of proceedings in the Order sheet starting with the date of filing of the return up to the finalization of the assessment. Wherever some details are called for or case is adjourned to next date, the signature of the assessee or its representative is taken. This Order sheet also contains reference of all the notices issued from time to time by the A.O. In order to conclusively resolve the controversy about the issuance of the said notice u/s 143(2) on 16.5.2000, the Bench directed the learned Departmental Representative to produce the assessment record. Such record was produced before the Bench. Albeit the order sheet is there but the learned Departmental Representative could not point out any entry in the Order sheet of the A.O. for the issuance of the alleged notice on 16.5.2000. 15. The above discussed points in the foregoing para do go to show that no notice u/s.143(2) , as claimed by the Revenue authorities, was issued on 16.5.2000. Only the notice dated 20.12.2001 was served on the assessee on 24.12.2001. As the block return was filed on 15.5.2000 and according to the Hon'ble Supreme Court in Hotel Bluemoon (supra) the provisions of section 143(2) are attracted in the block assessment, it was mandatory for the AO to serve notice on the assessee on or before 31.05.2001. Since the only notice dated 20.12.2001 issued by the A.O. u/s.143(2) was served upon the assessee on 24.12.2001, the same became time barred. It is simple and plain that the edifice of the assessment cannot be created on the foundation of a time barred notice issued u/s.143(2). The resultant proceedings flowing out of such invalid notice cannot have legal legs to stand on. We, therefore, hold that the consequential block assessment order passed in this case deserves to be and is hereby quashed. In view of our decision on this legal ground raised by the assessee in its Cross objection, there is no need to dispose off the departmental appeal on merits.

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