Friday, June 18, 2010

80IA : Favor of revenue and against the assessee

Income Tax – benefit u/s 80IA, 80IB – initial year is the year in which commercial production starts, not trial production; Even if there was sale of only one water cooler and one air-conditioner, it amounts to commercial production: Madras HC

ITA Nos. 1154/2009 and 1204/2009 were heard on 25th November, 2009 and judgment reserved. Within few days other three ITAs were heard on 9th December, 2009. Though the assessees are different in the two sets of appeals, questions of law are common. In fact, ITA Nos. 1154/2009 and 1204/2009 are filed by the Revenue as the Income Tax Appellate Tribunal (ITAT) has decided the matter in favour of the assessee. On the other hand, in other appeals it is the assessee who is the appellant and is aggrieved by the order of the ITAT.

Both the sets of appeals are taken up together.

Both Revenue and the Assessee are in appeal before the High Court with the same question of law, but under different sets of facts and both lost.

First Set: ITA No. 1154/2009 and ITA No. 1204/2009

The assessee M/s Nestor Pharmaceuticals Limited is in the business of manufacturing of pharmaceuticals formulations in bulk drugs and supplying the drugs to the Government hospitals, institutions besides selling the product in domestic and foreign markets. It is claiming depreciation on plant and machinery for benefit under Section 80IA/80IB of the Income Tax Act. The assessee had carried out trial production from 20th March, 1998. On that basis the Assessing Officer treated assessment year 1998-99 as the initial year for benefit under the aforesaid provision. Since this benefit is allowable for five years, according to the Assessing Officer, this benefit as admissible from assessment years 1998-99 to assessment year 2002-03. The assessee on the other hand was claiming benefit from assessment year 1999-2000 to assessment year 2003-04. The ITA No. 1204/2009 refers to assessment year 2003-04. For this reason, in respect of this assessment year, the benefit was entirely disallowed.

The Commissioner of Income Tax (Appeals) confirmed the order of the Assessing Officer but the ITAT has reversed that order holding that since Section 80IA/80IB of the Act being beneficial legislation, the benefit should be extended to the assessee. It further held that as on 20th March, 1998 only trial production started which is different from commercial production and benefit of that Section would be allowed in the year in which commercial production started i.e. in the assessment year 1999-2000 and, therefore, would be extendable up to the assessment year 2003-04.

There is no quarrel that the assessee qualifies as the industrial undertaking as specified in the said Section for the purpose of deriving benefit of the said provision. This provision allows deduction from profits and gains of an amount equal to hundred per cent of profits and gains derived from such business for the first five assessment years commencing at the time during the periods as specified in Sub-section (2) and the dispute is as to which are the first five assessment years. These five years are to commence at any time during the periods as specified in Sub-section (2).

The initial assessment year, for the purpose of Section 80IA, is the assessment year relevant to previous year in which the "industrial undertaking begins to manufacture or produce articles or things. In the present case, the trial production began on 20th March, 1998 in its Goa plant as per the details given in the audit report furnished by the assessee along with its return of income for assessment year 2003-04 and 2004-05. According to the Assessing Officer this amounted to manufacture of its products on the date which means during the previous year relevant to assessment year 1998-99 and therefore that was the initial assessment year in which the assessee company was entitled to deduction under Section 80IA and the five years period expires on 2002-03. The assessee was, therefore, not entitled to deduction @ 100% of the profits of Goa unit and restricted the same to 30% of the profits from assessment year 2003-04.

The plea of the assessee was that trial production did not amount to manufacture of its products. It is only when commercial production commences, which according to the assessee commenced only in the assessment year 1999-2000, the assessee would become entitled to deduction under Section 80IA/80IB as per Clause(c) of Sub-section 12 of Section 80IA.

There is no dispute that first sale from Goa unit was made on 23rd April, 1998 which would be the period relevant to assessment year 1999-2000. The assessee had also produced evidence in the form of no objection certificate from local authority for manufacture operation in Goa unit as well as approval for release of HT power obtained by the assessee, which were granted only in the month of April, 1998. The assessee did not even have the requisite minimum number of employees employed in the previous year relevant to assessment year 1998-99. As against this, the plea of the Revenue is that closing stock of finished goods of given unit as on 31st March, 1998 was shown by the assessee-company at Rs.1,49,405/- and there was no commercial production as claimed by the assessee, how the closing stock of finished goods could be valued at the aforesaid figure.

The High Court was of the opinion that merely because some closing stock was shown as on 31st March, 1998, would not lead to the conclusion that there was commercial production as well. Naturally, even for the purpose of trial production material would be needed and there would be production which will result in stock of finished goods. Otherwise, there is overwhelming evidence produced by the assessee, and accepted by the Tribunal as well, from which it is clear that there was only a trial production in the assessment year 1998-99 and commercial and full-fledged production commenced only in the year 1999-2000.

The controversy, thus, boils down to the limited sphere namely whether, even with the start of trial production, with no commercial production in a particular year, it will be treated as "initial year" for the purpose of Section 80IA/80IB. The CIT(A) held so and this opinion of the CIT(A) did not found favour with the ITAT.

Challenging this decision of the Tribunal, present appeal is preferred and the question of law which arises is as under:

"Whether the Ld. ITAT erred in allowing benefit of deduction u/s 801A/802B of the Act from the AY 98-99 (by treating the same as initial year of production) to AY 2003-04."

In view of consistent view taken by various High Courts, the High Court did not find any reason to take a different view and are in respectful agreement with the dicta laid down in the judgments. It is more so when even this Court, way back in the year 1984, in Commissioner of Income Tax vs. Food Specialities Ltd., followed the ratio of Hindustan Antibiotics Ltd as is clear from the following:

"As regards the year of manufacture, on the question whether there can be an experimental period, a reference was made to the case of CIT v. Hindustan Antibiotics Limited, 93 ITR 548 and Madras Machine Tools Manufacturers Ltd. v. CIT, 98 ITR 119 in both of which it was held that manufacturing for the purpose of section 15C of the 1922 Act and section 84 of the 1961 Act was the date of "commercial" manufacture and the period during which experimental work, particularly manufacture, was effected had to be disregarded."

The High Court answered the question against the Revenue and in favour of the assessee and as consequence dismissed these appeals.

The second Set: ITA No. 160/2008, ITA No. 161/2008 & ITA No. 793/2009

Question involved in all these three appeals is same discussed earlier. It also arises under Section 80IA of the Act. The Tribunal has even taken note of judgment of Bombay High Court, Allahabad High Court as well as Madras High Court, holding that there should be regular production and not the trial production. However, on facts, the Tribunal decided the case against the assessee. What weighed with the Tribunal was that the assessee had not only produced the goods for trial purposes but there was, in fact, sale of one water cooler and air-conditioner in the assessment year 1998-99 relevant to the previous year/financial year 1997-98. The explanation of the assessee that this was done to file the registration under the Excise Act as well as the Sales Tax Act. This did not find favour with the ITAT.

Thus, the distinguishing feature is that after the production, commercial sale also took place as well before on 31st March, 1998. In this factual scenario following question of law was framed in these appeals:

"Whether the ITAT was correct in law and on facts to hold that sale of one water cooler and one air-conditioner as on 31.03.1998 for the purposes of obtaining registration of excise ad sales tax was `manufacturing' within the meaning of Section 80IA?"

The High Court observed, "When we carefully examine the ratio laid down in various judgments while dealing with ITA No. 1154/2009, we arrive at irresistible conclusion that the decision rendered by the Tribunal is without blemish and does not call for any interference. The provisions of Income Tax Act use the word "manufacture". Trial production is not regarded as beginning to manufacture or to produce articles because of the reason that the assessee has to produce trial production to verify whether it can be used ultimately in the manufacture of the final article. These are, therefore, "trial runs". The article is tested to find out as to whether it can be launched as a final product in the market or not. Therefore, with mere trial production, the manufacture for the purpose of marketing the goods has not started which starts only with commercial production namely when final product to the satisfaction of the manufacturer has been brought into existence and is now fit for marketing."

In the present case, the assessee had sold one water cooler and one air-conditioner before April, 1998. Thus, the stage of trial production had been crossed over and the assessee had come out with the final saleable product which was in fact sold as well. The quantum of commercial sale would be immaterial. With sale of those articles marketable quality was established, more particularly when assessee failed to show that the dealer returned those goods on the ground that there was any defect in the water cooler or air-conditioner produced and sold by the assessee to the dealer. Things would have been different if that had happened. The Tribunal, in the circumstances, is right that the two types of conditions stipulated in Section 80IA were fulfilled with the commercial sale of the two items in that assessment year. Whether the purpose of that sale was to obtain registration of excise or sales tax would be immaterial.

This question is answered against the assessee and in favour of the Revenue and the appeals are dismissed.

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Wednesday, June 16, 2010

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

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

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

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

ITAT, MUMBAI 'H' BENCH, MUMBAI

ITO v. Heaven Distillery Pvt. Ltd.

ITA No. 742/Mum/2008

May 14, 2010

FACTS

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

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

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

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

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

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

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

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

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

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

HELD

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

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

RELEVANT EXTRACTS:

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

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

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

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

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

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

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

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

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

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

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Tuesday, June 15, 2010

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

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

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

ITAT, MUMBAI 'H' BENCH, MUMBAI

ITO

Heaven Distillery Pvt. Ltd.

ITA No. 742/Mum/2008

May 14, 2010

FACTS

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

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

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

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

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

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

HELD

RELEVANT EXTRACTS:

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

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

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

Sunday, June 13, 2010

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

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

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

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

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

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

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

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

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

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Thursday, June 10, 2010

Distribution of assets on dissolution of firm

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

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

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

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

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

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

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

HIGH COURT OF KERALA

CIT v. Manappuram General Finance & Leasing Ltd.

ITA No. 1186 of 2009

January 13, 2010

FACTS

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

HELD

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

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

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

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

RELEVANT EXTRACTS:

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

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

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

ITR

Pages

Friday, June 18, 2010

80IA : Favor of revenue and against the assessee

Wednesday, June 16, 2010

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

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

ITAT, MUMBAI 'H' BENCH, MUMBAI

FACTS

Tuesday, June 15, 2010

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

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

ITAT, MUMBAI 'H' BENCH, MUMBAI

FACTS

Sunday, June 13, 2010

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

Thursday, June 10, 2010

Distribution of assets on dissolution of firm

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

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