Saturday, August 6, 2011

Digital Signature:Signing the digital way

Digital Signature

Signing the digital way

Introduction
The Central Board of Direct taxes announced on 1st July 2011, that all Individuals, HUFs and Partnership Firms who are liable to get their accounts audited under the Income Act 1961 will have to file their Income-Tax return online compulsorily using Digital signature for the financial year 2010-11.

Many people confuse a Digital Signature with an e-signature. An e-signature is a scanned image of your physical signature while Digital Signature is not a facsimile of a person's physical signature. A document with a Digital Signature will not contain any traditional signature but it will simply state that it has been digitally signed by (name of the person signing it). To know about Digital Signatures we will first have to understand what Digital Signature Certificates are.

What is a Digital Signature Certificate?

A Digital Signature Certificate, like hand written signature, establishes the identity of the sender filing the documents through internet which sender can not revoke or deny. Digital Signature Certificates (DSC) are the digital equivalent (that is electronic format) of physical or paper certificates. Examples of physical certificates are drivers' licenses, passports or membership cards. A digital certificate can be presented electronically to prove your identity, to access information or services on the Internet or to sign certain documents digitally. In simple words, a document can be Digitally Signed using a Digital Signature Certificate.

Why is Digital Signature Certificate (DSC) required?

Like physical documents are signed manually, electronic documents, for example e-forms are required to be signed digitally using a Digital Signature Certificate. The Information Technology Act, 2000 provides for use of Digital Signatures on the documents submitted in electronic form in order to ensure the security and authenticity of the documents filed electronically. This is the only secure and authentic way that a document can be submitted electronically. Moreover a Digital Signature is the on­ly way one can authenticate electronic or online transac­tions "legally". The potential for Digital Signatures is huge in services like e-procurement, filing of returns, filing of export-import licenses, financial transactions, digitization of land records, while using e-commerce web-sites and other transactional portals and other online trans­actions like internet banking. You can even encrypt information in your e-mail using a private key of a Digital Signature.

Types of Digital Signature Certificates:
There are basically 3 types (or classes) of Digital Signature Certificates Class-1, Class-2 & Class-3, each having different level of security.

Class 1 signatures are used for identification of username/email ID. However it cannot be used to sign any Statutory / Business Documents whereas Class 2 & Class-3 -DSCs are issued to the Individuals and can be used for either Personal or Business Purposes.

Class 2 signatures can be availed from Dealers / Re sellers of Certifying Authority, by submitting the prescribed documents. Here, the identity of a person is verified against a trusted, pre-verified database.

Class 3 signature is the highest level where the person needs to present himself or herself in front of a Registration Authority (RA) and prove his/ her identity by submitting the documents.

How does it work!!

TECHNICAL ASPECTS: Digital signatures are an application of asymmetric key cryptography. Cryptography is primarily used as a tool to protect national secrets and strategies. It is extensively used by the military, the diplomatic services and the banking sector.

CRYPTOGRAPHY: Cryptography is the science of using mathematics to encrypt and decrypt data. It enables a person to store sensitive information or transmit it across insecure networks (like the Internet) so that it cannot be read by anyone except the intended recipient.

Data that can be read and understood without any special measures is called plain text or clear text. Data which requires some special function to be performed on it before it can be read and understood, is called cipher text. The same plaintext, encrypted by using different keys, will result in different cipher text. The security of encrypted data is entirely dependent on two things: the strength of the cryptography algorithm and the secrecy of the key.

Encryption is used to ensure that information is hidden from anyone for whom it is not intended, even those who can see the encrypted data. The process of reverting cipher text to its original plain text is called decryption.

A cryptographic algorithm, or cipher, is a mathematical function (known as hash function) used in the encryption and decryption process. This hash function works in combination with a key (private key) to encrypt the plaintext (the original message).

The hash function software produces a fixed length of alphabets, numbers and symbols for any document. This is known as the hash result. However, the contents of this fixed length are never the same for two different documents. If even one letter in the document is altered, an entirely different hash result will be generated. The hash function software will always produce the same hash result for a particular message & it is practically impossible to reconstruct the original message from the hash result.

Customers are given two codes for verification —private and public keys. The public key and private key are nothing but extremely large numbers. Although the keys are mathematically related, it is almost impossible to obtain the private key by using the public key. If a particular private key was used to "sign" a message, then only the corresponding public key will be able to verify the "signature". A Digital Signature usually contains owners name, company name and address, public key, certificate serial number, expiry date of the public key, certifying company ID, and Certifying Company's Digital Signature.

Illustration

1) CHETAN wants to digitally sign emails and electronic contracts. So he would use computer software (asymmetric crypto system) to generate two keys, a public key and private key. CHETAN will give his public key to the whole world but will keep his private key to himself. Once he has done that, he can use his private key to sign contracts etc. Anyone can use CHETAN's public key to verify his signature. That's where the problem begins. How can anyone be sure which is CHETAN's public key? What if Mr. CHETAN denies that a particular public key is actually his? To solve this problem digital signature certificates are used. CHETAN would apply to a licensed CA (Certifying Authority) for a digital signature certificate.

As part of the application process he would submit identification documents as discussed earlier. He would also send his public key to the CA. The CA would then "certify" the public key as belonging to Mr. CHETAN and issue a digital signature certificate that contains Mr. CHETAN's public key along with information identifying him.

Now CHETAN wants to enter into a transaction with Pankaj. He composes an electronic document containing the words:

I, CHETAN owe Pankaj the sum of Rs. 500 only.

Using his computer CHETAN runs this document through a hash function. The computer then performs the process on the document as discussed above.

CHETAN now uses his computer to "sign" the hash result of his document. His computer software uses his private key to perform some calculations upon the hash result. This produces a signature, which consists of some digits. This set of digits is attached to the hash result.

CHETAN now sends the original message and the signed message digest (hash result) to Pankaj. Pankaj has the same hash function software on his computer. He also has his (CHETAN's) public key. When Pankaj receives CHETAN's email, he runs the original document through the hash function software and generates a hash result. The computer compares this hash result with the one that was sent to him by CHETAN. If the two hash results are the same, it means that the message is unaltered.

Pankaj also verifies whether CHETAN's private key was actually used to sign the hash result. For this Pankaj's computer uses CHETAN's public key. Only a message signed by CHETAN's private key can be verified using CHETAN's public key.

Cost and validity :- A Digital Signature certificate has to be purchased from a gov­ernment- licensed Certification Agency known as "Certifying Authority (CA)". Certifying Authority (CA) means a person who has been granted a license to issue a digital signature certificate under Section 24 of the Indian IT-Act 2000. At present, there are eight such agencies (CAs) namely, IDRBT, iCERT (Customs and Central Excise) and MTNL. Tata Consultancy Services (TCS), Safe­scrypt (from Sify), (n)Code So­lutions (from GNFC), and e­-Mudhra (from 3i Infotech).

The Digital Signature Certificates come with a validity peri­od of one-two years, implying there is a cost attached. We are not used to paying for our own signature.

While Digital Signatures are estimated to cost CAs Rs 175-225, individuals typically end up paying anyway between Rs 1,500 and Rs 3,000 —and sometimes even up to Rs 7,000 for the high-level Class-3 security certificates. The prices include a one-time payment for a crypto (USB) e-token, which contains the software. Typically, if you want to use a digital signature for sensitive transactions like e-filing of returns or internet banking & broking then the costs are between Rs. 2,200 (without token) to 3,200 (with token). Much depends on the bundling schemes & packages offered by the distributors.--
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Friday, August 5, 2011

ITR Volume 336 : Part 1 Issue dated 8-8-2011





ITR'S TRIBUNAL TAX REPORTS (ITR (TRIB))
Volume 10 : Part 6 (Issue dated : 08-08-2011)
SUBJECT INDEX TO CASES REPORTED IN THIS PART
Appeal to Appellate Tribunal --
Powers of Tribunal--Power to restore appeal--Strike by lawyers and chartered accountants--Appeals dismissed for want of prosecution--Appeals not considered on merits--Tribunal has power to restore appeals under section 254(2)--Income-tax Act, 1961, s. 254--Income-tax (Appellate Tribunal) Rules, 1963, r. 24-- Nawal Kishore and Sons Jewellers v. Asst. CIT (Lucknow) . . . 659

Cash credits --
Genuineness of gifts--Addition to income on ground that credits cannot be explained--Assessee failing to show creditworthiness and genuineness of donors and gifts--Additions justified--Income-tax Act, 1961, s. 68-- Vivek N. Jajodia v. ITO (Mumbai) . . . 581

Company --
Book profits--Computation--Power of Assessing Officer to examine--Amount claimed as deduction in first year of assessment as net prior period charges/credits--Assessee not able to substantiate claim--Amount not deductible--Provision for terminal benefits of employees calculated on basis of actuarial valuation--Deductible--Income-tax Act, 1961, s. 115JB-- Eastern Power Distribution Company of A. P. Ltd. v. Asst. CIT (Visakhapatnam) . . . 594

Income --
Diversion by overriding title--Retirement benefits payable to retiring partner for a period of five years in terms of partnership deed--Charge on profits of firm--Amounts diverted before receipt by firm--Cannot be included in total income of assessee--Income-tax Act, 1961-- RSM and Co. v. Addl. CIT (Mumbai) . . . 614

Interest on borrowed capital --
Advancing to company as interest free loan where assessee is director--No proof that given for commercial expediency of his business--Not allowable--Income-tax Act, 1961, s. 36(1)(iii)-- Vivek N. Jajodia v. ITO (Mumbai) . . . 581

Penalty --
Concealment of income--Claim for deduction of bad debt--Claim based on device to mislead Assessing Officer--Full facts regarding claim not furnished in return--Penalty leviable--Income-tax Act, 1961, s. 271(1)(c)-- Asst. CIT v. Kanchenjunga Advertising P. Ltd. (Delhi) . . . 649

Reassessment --
Notice--Notice after four years on mere change of opinion--No failure to disclose material facts necessary for assessment--Reassessment proceedings after four years invalid--Failure to record reasons--Reassessment within four years not permissible--Income-tax Act, 1961, ss. 147, 148-- GlaxoSmithKline Pharmaceuticals Ltd. v. ITO (Mumbai) . . . 631

Revision --
Powers of Commissioner--Limitation--Issues considered by Assessing Officer--No evidence of error--Commissioner cannot revise order--Issues not subject-matter of reassessment--Order of revision to be reckoned from date of original assessment order--Barred by limitation--Income-tax Act, 1961, s. 263-- D. Arunachalam v. ITO (Chennai) . . . 625


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

S. 36(1)(iii) -- Interest on borrowed capital--Advancing to company as interest free loan where assessee is director--No proof that given for commercial expediency of his business--Not allowable-- Vivek N. Jajodia v. ITO (Mumbai) . . . 581

S. 68 --
Cash credits--Genuineness of gifts--Addition to income on ground that credits cannot be explained--Assessee failing to show creditworthiness and genuineness of donors and gifts--Additions justified-- Vivek N. Jajodia v. ITO (Mumbai) . . . 581

S. 115JB --
Company--Book profits--Computation--Power of Assessing Officer to examine--Amount claimed as deduction in first year of assessment as net prior period charges/credits--Assessee not able to substantiate claim--Amount not deductible--Provision for terminal benefits of employees calculated on basis of actuarial valuation--Deductible-- Eastern Power Distribution Company of A. P. Ltd. v. Asst. CIT (Visakhapatnam) . . . 594

S. 147 --
Reassessment--Notice--Notice after four years on mere change of opinion --No failure to disclose material facts necessary for assessment--Reassessment proceedings after four years invalid--Failure to record reasons--Reassessment within four years not permissible-- GlaxoSmithKline Pharmaceuticals Ltd. v. ITO (Mumbai) . . . 631

S. 148 --
Reassessment--Notice--Notice after four years on mere change of opinion --No failure to disclose material facts necessary for assessment--Reassessment proceedings after four years invalid--Failure to record reasons--Reassessment within four years not permissible-- GlaxoSmithKline Pharmaceuticals Ltd. v. ITO (Mumbai) . . . 631

S. 254 --
Appeal to Appellate Tribunal--Powers of Tribunal--Power to restore appeal --Strike by lawyers and chartered accountants--Appeals dismissed for want of prosecution--Appeals not considered on merits--Tribunal has power to restore appeals under section 254(2)-- Nawal Kishore and Sons Jewellers v. Asst. CIT (Lucknow) . . . 659

S. 263 --
Revision--Powers of Commissioner--Limitation--Issues considered by Assessing Officer--No evidence of error--Commissioner cannot revise order--Issues not subject-matter of reassessment--Order of revision to be reckoned from date of original assessment order--Barred by limitation-- D. Arunachalam v. ITO (Chennai) . . . 625

S. 271(1)(c) --
Penalty--Concealment of income--Claim for deduction of bad debt--Claim based on device to mislead Assessing Officer--Full facts regarding claim not furnished in return--Penalty leviable-- Asst. CIT v. Kanchenjunga Advertising P. Ltd. (Delhi) . . . 649

Income-tax (Appellate Tribunal) Rules, 1963 :

R. 24 --
Appeal to Appellate Tribunal--Powers of Tribunal--Power to restore appeal --Strike by lawyers and chartered accountants--Appeals dismissed for want of prosecution--Appeals not considered on merits--Tribunal has power to restore appeals under section 254(2)-- Nawal Kishore and Sons Jewellers v. Asst. CIT (Lucknow) . . . 659

.......


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Dear Friends : The emails are schedule to be posted in the blog (itronline.blogspot.com)and will sent to the group on various dates and time fixed. Instead of sending it on one day.

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ITR (TRIB) Volume 10 : Part 6 (Issue dated : 08-08-2011)


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

Volume 10 : Part 6 (Issue dated : 08-08-2011)



SUBJECT INDEX TO CASES REPORTED IN THIS PART





























SECTIONWISE INDEX TO CASES REPORTED IN THIS PART



Income-tax Act, 1961 :



























Income-tax (Appellate Tribunal) Rules, 1963 :



Thursday, August 4, 2011

Whether assessee is entitled to interest on deposit with Revenue from end

I-T - Whether assessee is entitled to interest on deposit with Revenue from end of 120 days from date of last of authorisations for search or from date when sum is transferred into AO's account from PD Account - after 120 days: HC

NEW DELHI, JULY 12, 2011: THE two issues before the Bench are - Whether the interest u/s 234A, 234B, 234C & 220(2) is rightly levied on the demand for various years when the department is having huge deposit on account of the assessee in PD account and the assessee repeatedly requested to adjust the said amount against the demand – Whether the assessee is entitled to interest on the deposit with the department u/s 132D from the end of 120 days from the date on which the last of the authorizations for search under Section 132 or requisition under Section 132A and not from the date when sum is transferred into AO's account from PD a/c. And the verdict goes in favour of the assessee.

Facts of the case

Assessee is a proprietor of `F', started in the year 1993 to trade in gold, silver and bullion – a search and seizure action was conducted whereby cash and silver were restrained initially but subsequently seized – ACIT, investigation circle passed order u/s 132(5) that the cash found during search as unexplained was retained and not released. Subsequently, vide another order u/s 132(5), various disputed additions were made and tax and penalty @200% was levied - the entire silver seized was retained and was not released.

The department disputed the status of the concern as it was an unregistered partnership firm and intended to tax it as firm. AO made assessment u/s 143(3) in the name of `F' after making additions on protective basis. In appeal before CIT (A), partly additions were deleted and partly confirmed. Before the protective assessment orders were passed in the case of `F', assessee approached the department to allow him to sell the seized silver after deposing the amount of equal value. As no heed was paid to this request, the assessee filed Writ Petition and the Court directed the department to release seized silver after depositing rotational deposits of Rs.50 lacs or equal amount of silver to be released. Accordingly the entire silver was released against total payment of Rs.4,20,50,000/- deposited by the petitioner from time to time on the sale of released silver.

After various orders / developments, against the deposit of Rs.4,70,36,500/- lying with the Department, liability of the assessee was ascertained to Rs.17,22,608/- and thus, he was entitled to refund of the balance amount along with interest.

Assessee approached the Settlement Commission u/s 245C to determine his income. The application was admitted. According to the assessee, the amount deposited with the department was much more than the tax liability and therefore, he had been making request for refund of the same and till it was refunded, to keep the same in the fixed deposit bearing interest. That was not done. The assessee was supposed to file the income tax return for the successive years. Assessee was required to pay the advance tax due and payable in respect of these income tax returns. Since he was facing cash flow problems in his business and there was sufficient surplus money lying with the Department which belonged to the petitioner, he made request for adjusting the advance tax payable out of the aforesaid amount lying with the Department. These requests of the assessee remained unattended. However, AO while passing the assessment order imposed interest u/s 234B, 234C and 220 of the Act for making deposit of advance tax.

The Settlement Commission finally disposed of settlement application and the income of the assessee was determined. After this order was passed, the assessee again requested for release of the amount as the final tax payable was only Rs.17.22 lacs - Assessee approached various authorities in this behalf including the ITO, CBDT, Commissioner of Income Tax, etc. However, no action was taken.

Insofar as interest payable to the assessee on the deposit, the department calculated the same w.e.f the date when the amount transferred into the account of PD account. Assessee contended that he was entitled to interest u/s 132B at least till the time order is passed by the Income Tax Settlement Commission. The claim of the assessee was that u/s 132B of the Act, he was entitled to interest after six months from the date of order passed under Section 132(5) of the Act on initial seized amount minus tax due/payable and on further deposits in P.D. Account from the date of such deposit.

The issues raised by the assessee were (i) Whether interest u/s 234A, 234B, 234C and 220 (2) of the Act could be charged when according to the assessee, sufficient amount of the assessee was lying deposited with the Department wherever advance tax could be adjusted? (ii) From which date the assessee is entitled to interest on the amount which became refundable after giving effect to the orders passed by the Income Tax Settlement Commission?

Assessee contended that no interest could be charged for non-payment of advance tax as there was sufficient amount already lying with the Department. Revenue contended that it was not permissible for the assessee to seek adjustment from the amount lying with the Department, which in fact belonged to `F' which was assessed as unregistered partnership and not as the sole proprietorship of the assessee. There was a dispute about the amounts seized and/or rotational payments either belonged to `F' or the assessee in his personal capacity which was settled u/s 245D(4) by the Income Tax Settlement Commission vide its order dated 07.07.2003. Hence, no amount was available for adjustment of the demands raised in the case of assessee upto 07.07.2003.

After hearing both the parties, the High Court held that,

++ no doubt, `F' was assessed as unregistered partnership. However, the assessee was clamouring that it was his sole proprietorship concern and had submitted proofs in respect thereof. If the plea of the assessee was not accepted erroneously by the Department, it cannot take advantage of its own wrong. Ultimately, the assessee was vindicated when the Settlement Commission accepted that he was the sole proprietor of `F'. The arguments of the department that it is only on 07.07.2003 when the Settlement Commission passed the orders u/s 245D(4) of the Act that the amount became available to the petitioner, is without any substance. The request of the assessee to adjust the advance tax from the amount lying deposited with the Department in the accounts of `F' was justified, which was unnecessarily turned down by the Department. Therefore, the revenue would not be justified in levying interest, as the amount of advance tax payable by the assessee for these assessment years could be adjusted from the amount lying with the Department in the assessee's own account;

++ insofar as the assessee's entitlement to interest on the amount which became refundable after giving effect to the orders passed by the Settlement Commission, it cannot be disputed that the assessee is entitled to interest on such an amount u/s 132D(4) of the Act. This provision clearly mandates the Central Government to pay simple interest @ 1 ½ % for every month on amount by which the credit money seized under Section 132, etc. of the Act. Clause (b) sub-Section (4) of Section 132B of the Act stipulates that such interest shall run from the date immediately following the expiry of the period of 120 days from the date on which the last of the authorizations for search under Section 132 or requisition under Section 132A was executed to the date of completion of the assessment. In accordance with this provision, from the date of search and seizure of the gold, 120 days would be calculated and from the expiry of this period, the interest shall become payable. In the present case, even after giving effect to the orders of the Settlement Commission, the excess amount was not refunded to the petitioner. The assessee has demanded interest u/s 132A of the Act and would be entitled to interest u/s 244A of the Act from the date of amount transferred into the account of AO from PD account after adjusting the tax due/payable.


Tuesday, August 2, 2011

Whether when assessee, a charitable body, has already claimed ded

Whether when assessee, a charitable body, has already claimed deduction for acquisition of capital assets by application of money, a further claim of depreciation on same assets would amount to double benefits - YES, rules ITAT

THE issue before the Tribunal is - Whether when assessee, a charitable body, has already claimed deduction for acquisition of capital assets as application of money, the further claim of depreciation on the same assets would amount to double benefits. And the verdict goes against the assessee.

Facts of the case

Assessee is a charitable trust registered u/s 12A of the Act. In the return of income filed, it claimed depreciation on the assets, the cost of which were already claimed as application of money u/s 11(1). AO disallowed the depreciation claimed u/s 32 stating that the cost of asset/s having been allowed, its WDV was nil, so that there was no amount available on which depreciation could be claimed. The same would even otherwise amount to a double deduction, prohibited by law.

In appeal before ITAT, the assessee contended that the decision in the case of Escorts Ltd. & Othrs was not applicable as was held in the case of CIT vs. Marketing Committee, Pipli, 330 ITR 16 (P&H) and CIT v. Tiny Tots Education Society (2010-TIOL-550-HC-P&H-IT) which provided that there was no double deduction. Further, the law stood amended w.e.f. 1.4.1989 by co-option of clause (d) to s. 11(1) of the Act, so that there was no requirement in law for applying the said income, i.e., as covered by s. 11(1)(d), for claiming exemption in this respect. In view of the decision of the Lissie Medical Institutions, where the amount was voluntarily received with a direction that the same shall form part of the corpus, the assessee would stand to be allowed depreciation on the capital asset/s acquired out of the said funds. However, in case of no specific directions, it would not be though in both the cases, the amount was applied or utilised in the similar manner. A mere direction by the donor would alter the donee's assessable income, even as the same stood utilized by the donor in the same manner, and which was not comprehensible and, in any case, could not be the intent of law. In reply to the query raised by the Bench, that why could not the assessee take a specific direction from the donor(s) where it proposed to acquire capital asset(s) there-from, the assessee contended that it might not be practical always and secondly, the corpus was not for acquiring capital assets alone, and may well be maintained in the form of liquid assets. The two claims were different - the depreciation was a charge against the profits `an above-the-line item' and the acquisition of capital asset(s) was an application of income, determined thus, `a below-the-line item'.

Revenue relied on the decision of Lissie Medical Institutions and contended that the assessee could not point out any infirmity in the said order, so that there was no ground or occasion for the Tribunal to review or re-visit the said order.

After hearing both the parties, the ITAT held that,

++ the argument that the allowance of depreciation and deduction qua the application of income (on the assets on which the same is claimed), does not amount to or result in a double deduction is not acceptable. If the capital asset/s is a part of the asset base of the charitable trust, used for its purposes, it only forms a part of the capital structure or the apparatus of the entity, and only on the strength of which the claim qua depreciation is maintainable, i.e., as a charge against profits/income thereof. Could the same expenditure be considered as being toward `income' and, at the same time, an application of it, or, to put it in the same graphical manner, could an expenditure be considered as both above and below the line, and simultaneously at that. The two are mutually exclusive. While an expenditure is necessarily incurred for the purposes of income, i.e., as a part of the income generating process, directly or indirectly, the other is an application of the income so generated, and has nothing to do with either income generation or the maintenance of the capital structure or the income generating apparatus;

++ even where the income arises only out of voluntary contributions, recognising the need to maintain corpus, as in the case of any business activity, the law provides therefor, so that the trust/institution is not required to apply the same to claim its exemption from tax u/ss. 11 & 12. That is, the very fact that the said contribution is toward capital or corpus, is by itself sufficient to accord it exclusion, and is, thus, not liable for, or is free from the requirement of, it's application toward the object/s of the trust. Income of a charitable trust, it may be noted, is not per se exempt from tax, but only on its application toward its objects. The same, thus, is only in the nature of a deduction, i.e., required to a allowed for computing income subject to tax under the Act, which also finds support from the insertion of s. 11(1)(d). It is, as such, not a question of a mere direction, but of classifying the receipt of the trust into two distinct categories, i.e., `regular' and `toward capital'. The difference, i.e., depreciation being allowable in one case and not in the other, amount as it does to a double deduction, arises out of the very nature of the source of funding. The same rather than being prejudicial to a charitable trust, is beneficial thereto, inasmuch as the law `recognises' capital receipt as the principal source of funding of a charitable trust/institution not engaged in any business, i.e., voluntary contributions, or its need to maintain capital. In any normal case, While a capital asset acquired for and put to use for business purposes would entitle it to a claim for depreciation, i.e., whatever be the source of funding, and whether the same is acquired from `income' or from 'capital', it is only the `income' which is, where otherwise not exempt, liable to tax. Would that in any manner be considered as prejudicial or leading to a dichotomy with reference to the source of funding, as sought to be made out in respect of a charitable trust?

++ the income that is exempt is only that computed applying the normal principles of commercial accounting, i.e., net of expenses, which would thus stand to be deducted, even where the income of the trust is not from business, determined by applying the provisions of Chapter IV-D (refer s. 11 (4A)), and which expenses would include a charge toward depreciation on capital assets deployed or maintained by the trust as well. The differential treatment qua depreciation is only due to the difference in law attending the two scenarios, which rather seeks to bring the same (law) at par with that qua any other entity acquiring and using a capital asset for its purposes. No infirmity, thus, inflicts the tribunal's order qua the differential treatment of the claim for depreciation, i.e., w.r.t. the application or otherwise of the provision of s. 11(1)(d). The assessee's argument or contention for a uniform treatment (qua depreciation) seeks to eliminate the difference that the law itself specifically provides for, i.e., is contrary to the express provisions of law. The user of an asset for the intended purpose/s, a pre-requisite for a claim of depreciation in its respect, is also necessary to validate the claim (in respect of the capital expenditure) qua the application of income, as no charitable purpose would stand to be served where the capital asset acquired thus, and retained, is not used for the objects of the trust;

++ while the claim for depreciation arises following the accrual basis of accounting for determining `income', the cash method is applied for reckoning its application. Accordingly, the two claims amount to a double deduction is purely factual. The assessee/s has not been able to show, any infirmity in the said findings by the tribunal, which is affirmed;

++ without prejudice to the foregoing, both the assessee-trusts are not undertaking any business activity. As such, the claim of depreciation would be, if at all, exigible only with reference to the normative rate(s) of depreciation, i.e., as determined with reference to the useful lives of the relevant asset(s) under its given state of user. In fact, even if business activity was being undertaken, the claim for depreciation u/s. 32(1) would obtain only in respect of business asset(s). The assessee has, however, claimed depreciation in terms of the rate(s) prescribed under the Act and, as such, is not maintainable at the claimed amount/s;

++ no Legislation would have intended a double deduction in respect of the same business outgoing, and it was impossible to conceive otherwise, i.e., unless clearly so expressed. In other words, the intention of non double deduction is the given status, and is to be presumed, unless there is an express provision to the contrary in a particular case, and which was not so in the case(s) before it. The assessee's contention is, thus, not valid. Thus, the findings given in the case of Lissie Medical Institutions are endorsed.

Revenue's appeal allowed.

Some case laws

2011-TIOL-313-ITAT-MUM


Trigyn Technologies Ltd Vs DCIT, Mumbai (Dated: January 28, 2011)

Income tax – Section 36(1)(iii) – Whether when the survival of the subsidiary is vital for the assessee's business, AO can even then disallow the interest paid on borrowed funds advanced to the subsidiary on interest-free basis - Assessee's appeal allowed: MUMBAI ITAT;

2011-TIOL-312-ITAT-MUM

Mrs Nandita Khosla Vs ITO, Mumbai (Dated: May 13, 2011)

Income tax – Sections 50C, 154 – Whether where the assessee objects to stamp duty valuation, the AO is required to call for the report of DVO, and even if the valuation report is received after the assessment, the value determined may be rectified u/s 154 of the Act – Whether the value adopted by DVO is to be considered as correct as the valuation done by approved valuer is based on carpet area instead of super built up area - Assessee's appeal partly allowed: MUMBAI ITAT;

Monday, August 1, 2011

Chargeability of gifts made to HUF u/s 56 of I.T Act 1961

Chargeability of gifts made to HUF u/s 56 of I.T Act 1961

GAURAV PAHUJA
CA

In this article the author has made an attempt to distinguish between the exemption benefits granted to Individual or HUF on gift received by them, although both of them are covered by the Act under the same section i.e. 56(2)(vii), leaving other categories of assessees e.g AOP and BOI which are not covered altogether under this section.

The present section 56(2) after insertion of clause (vii) by the Finance (No. 2) Act 2009, Which is effective from October 1, 2009 and provides for the taxability of a sum of money or Property either movable or immovable, received without consideration by an "Individual or HUF" under the said section, in case it exceeds the monetary limit of Rs.50,000 during the previous year.

Thus the provisions of existing section 56(2)(vii) are attracted once the following conditions are satisfied:

(i) Sum of money or property (movable or immovable) is received on or after 1.10.2009 by an Individual or HUF either without or insufficient consideration.

(ii) Such sum of money or property is not exempted under the said section.

Now from the above mentioned, it is understood that certain exemptions are provided by the section for providing the relief where the nature and intention of the gift given is such that it satisfies the exemption criteria laid down for this purpose. Amongst the various exemptions, the very first exemption is being given in case the sum of money or property is received from any relative.

This exemption criterion made it necessary to define the meaning of the term "Relative" expressly to avoid litigation and undesired exemptions. Further even under the new clause (vii), the meaning of the term "Relative" was kept unchanged as it was understood under the existing explanation to clause (vi) of sub-section (2) of section 56 which is reproduced below:

(a) Spouse of the individual

(b) Brother or sister of the individual

(c) Brother or sister of the spouse of the individual

(d) Brother or sister of either of the parents of the individual

(e) Any lineal ascendant or descendant of the individual

(f) Any lineal ascendant or descendant of the spouse of the individual

(g) Spouse of the person referred to in clauses (ii) to (vi).

Thus the above mentioned persons are deemed to be the relatives of an Individual and hence are allowed to give any sum of money or property without consideration to the individual who is considered to be his/her relative without attracting the taxability in the hands of the recipient. These provisions cover the relatives of an individual only and not that of HUF, which is self explanatory from the way the relation is established between persons (who are considered to be relative) and an Individual.

An individual, being a natural person can reasonably be assumed to have same relatives with whom his/ her relation is established merely by birth and blood relation. But the position is not made crystal clear in the case of HUF by section 56(2), which gives the rise to the below mentioned questions:

i. Whether HUF can have relatives?

ii. Whether the relatives of an Individual (who are defined in the explanation) can be assumed to be the relatives of HUF also which is formed by such Individual (in the capacity of Karta) or not? Or if we say in other way, can the relatives of Karta be assumed to be the relatives of HUF too for the purpose of claiming exemption?

As these questions challenge the benefit of exemption granted by section 56 with respect to gifts made to HUF in the absence of necessary explanation or coverage of HUF while defining relatives of an Individual but at the same time providing for the chargeability of both "Individual" as well as "HUF'' in the same section, it calls for the interpretation of the basic intention of the section.

No doubt, The basic intention of the clause (vii) of section 56(2) is to expressly cover the "Individual" and "HUF" (and covering companies and firms in other clauses) and brought them under tax net, however while granting exemptions on gifts received from the relatives, the benefit seems to be restricted to individuals only due to the following reasons:

** ** **

(ii) The relatives of Karta cannot be assumed to be the relatives of HUF, until and unless the HUF is assumed to be as Karta's Individual ignoring the separate capacity of HUF from the Karta but which cannot be done due to the independent recognition of HUF as a person under 2(31) (ii) and thus treating HUF as an independent assessee. And when an "Assessee" is recognized independently, its relatives should also have a relation with it directly and not through the Individual or person who formed it e.g. Karta of HUF. Another example in this regard is that where a company is formed by an Individual promoter, the relatives of such Individual cannot be said to be the relatives of the company after incorporation.

** ** **

The assessee received a gift of Rs.60 lakhs from HUF of which he was a member. The AO & CIT(A) held that as HUF was not covered by the definition of "relative", the gift was chargeable to tax u/s 56(2)(v). Further the alternate submission of the assessee that gift was exempt u/s 10(2) was rejected on the basis that sec. 10(2) could be applied only to amounts received "out of income of the estate" on partial or total partition of the HUF.

The conclusion of Hon'ble Rajkot bench of ITAT in the above said case is reproduced below:

** ** **

The above judgment seeks to provide the relief to the assessee from the tax liability that would have been imposed if the case was decided on the basis of the literal meaning of the section and its explanation being reasonably interpreted keeping in view the fact of HUF being an artificial person (which is managed and controlled by its karta & other coparceners) instead of a natural one and that it is considered as a separate and independent assessee under the Income Tax Act, 1961 by recognizing it as "Person " under section 2(31) of the Act.

** ** **

Keeping in view the above, the aforementioned judgment of ITAT cannot be given regarded as conclusive and the literal meaning of the section and other facts mentioned above cannot be ignored. Thus in order to avoid undesired litigations it shall be in the interests of the assessee if one can avoid taking the gifts directly in HUF and should prefer to route it through the account of individual donor into the account of another individual i.e. donee, who shall be the relative of the former and then transfer the amount to the account of HUF, if required from the account of such individual.


Sunday, July 31, 2011

HC DEL : Sections 132(5), 143(3), 234A, 234B, 234C

Subject: Assessing Officers' Forum:- Income tax – Sections 132(5), 143(3), 234A, 234B, 234C – Whether the interest u/s 234A, 234B, 234C & 220(2) is rightly levied on the demand for various years when the department is having huge deposit on account of the assessee

2011-TIOL-410-HC-DEL-IT

IN THE HIGH COURT OF DELHI

W.P. (C) No.21428 of 2005

VISHWANATH KHANNA

Vs

UNION OF INDIA & OTHERS

A K Sikri and M L Mehta, JJ

Dated: June 03, 2011

Appellant Rep by: Mr. C S Gupta, Adv
Respondent Rep by: Mr. Sanjeev Sabharwal, Sr. Standing Counsel

Income tax – Sections 132(5), 143(3), 234A, 234B, 234C – Whether the interest u/s 234A, 234B, 234C & 220(2) is rightly levied on the demand for various years when the department is having huge deposit on account of the assessee in PD account and the assessee repeatedly requested to adjust the said amount against the demand – Whether the assessee is entitled to interest on the deposit with the department u/s 132D from the end of 120 days from the date on which the last of the authorizations for search under Section 132 or requisition under Section 132A and not from the date when the amount was transferred into the account of AO from P.D. Account.

Assessee is a proprietor of ‘F’, started in the year 1993 to trade in gold, silver and bullion – a search and seizure action was conducted whereby cash and silver were restrained initially but subsequently seized – ACIT, investigation circle passed order u/s 132(5) that the cash found during search as unexplained was retained and not released. Subsequently, vide another order u/s 132(5), various disputed additions were made and tax and penalty @200% was levied - the entire silver seized was retained and was not released.

The department disputed the status of the concern as it was an unregistered partnership firm and intended to tax it as firm. AO made assessment u/s 143(3) in the name of ‘F’ after making additions on protective basis. In appeal before CIT (A), partly additions were deleted and partly confirmed. Before the protective assessment orders were passed in the case of ‘F’, assessee approached the department to allow him to sell the seized silver after deposing the amount of equal value. As no heed was paid to this request, the assessee filed Writ Petition and the Court directed the department to release seized silver after depositing rotational deposits of Rs.50 lacs or equal amount of silver to be released. Accordingly the entire silver was released against total payment of Rs.4,20,50,000/- deposited by the petitioner from time to time on the sale of released silver.

After various orders / developments, against the deposit of Rs.4,70,36,500/- lying with the Department, liability of the assessee was ascertained to Rs.17,22,608/- and thus, he was entitled to refund of the balance amount along with interest.

Assessee approached the Settlement Commission u/s 245C to determine his income. The application was admitted. According to the assessee, the amount deposited with the department was much more than the tax liability and therefore, he had been making request for refund of the same and till it was refunded, to keep the same in the fixed deposit bearing interest. That was not done. The assessee was supposed to file the income tax return for the successive years. Assessee was required to pay the advance tax due and payable in respect of these income tax returns. Since he was facing cash flow problems in his business and there was sufficient surplus money lying with the Department which belonged to the petitioner, he made request for adjusting the advance tax payable out of the aforesaid amount lying with the Department. These requests of the assessee remained unattended. However, AO while passing the assessment order imposed interest u/s 234B, 234C and 220 of the Act for making deposit of advance tax.

The Settlement Commission finally disposed of settlement application and the income of the assessee was determined. After this order was passed, the assessee again requested for release of the amount as the final tax payable was only Rs.17.22 lacs - Assessee approached various authorities in this behalf including the ITO, CBDT, Commissioner of Income Tax, etc. However, no action was taken.

Insofar as interest payable to the assessee on the deposit, the department calculated the same w.e.f the date when the amount transferred into the account of PD account. Assessee contended that he was entitled to interest u/s 132B at least till the time order is passed by the Income Tax Settlement Commission. The claim of the assessee was that u/s 132B of the Act, he was entitled to interest after six months from the date of order passed under Section 132(5) of the Act on initial seized amount minus tax due/payable and on further deposits in P.D. Account from the date of such deposit.

The issues raised by the assessee were (i) Whether interest u/s 234A, 234B, 234C and 220 (2) of the Act could be charged when according to the assessee, sufficient amount of the assessee was lying deposited with the Department wherever advance tax could be adjusted? (ii) From which date the assessee is entitled to interest on the amount which became refundable after giving effect to the orders passed by the Income Tax Settlement Commission?

Assessee contended that no interest could be charged for non-payment of advance tax as there was sufficient amount already lying with the Department. Revenue contended that it was not permissible for the assessee to seek adjustment from the amount lying with the Department, which in fact belonged to ‘F’ which was assessed as unregistered partnership and not as the sole proprietorship of the assessee. There was a dispute about the amounts seized and/or rotational payments either belonged to ‘F’ or the assessee in his personal capacity which was settled u/s 245D(4) by the Income Tax Settlement Commission vide its order dated 07.07.2003. Hence, no amount was available for adjustment of the demands raised in the case of assessee upto 07.07.2003.

After hearing both the parties, the High Court held that,

++ no doubt, ‘F’ was assessed as unregistered partnership. However, the assessee was clamouring that it was his sole proprietorship concern and had submitted proofs in respect thereof. If the plea of the assessee was not accepted erroneously by the Department, it cannot take advantage of its own wrong. Ultimately, the assessee was vindicated when the Settlement Commission accepted that he was the sole proprietor of ‘F’. The arguments of the department that it is only on 07.07.2003 when the Settlement Commission passed the orders u/s 245D(4) of the Act that the amount became available to the petitioner, is without any substance. The request of the assessee to adjust the advance tax from the amount lying deposited with the Department in the accounts of ‘F’ was justified, which was unnecessarily turned down by the Department. Therefore, the revenue would not be justified in levying interest, as the amount of advance tax payable by the assessee for these assessment years could be adjusted from the amount lying with the Department in the assessee's own account;

++ insofar as the assessee's entitlement to interest on the amount which became refundable after giving effect to the orders passed by the Settlement Commission, it cannot be disputed that the assessee is entitled to interest on such an amount u/s 132D(4) of the Act. This provision clearly mandates the Central Government to pay simple interest @ 1 ½ % for every month on amount by which the credit money seized under Section 132, etc. of the Act. Clause (b) sub-Section (4) of Section 132B of the Act stipulates that such interest shall run from the date immediately following the expiry of the period of 120 days from the date on which the last of the authorizations for search under Section 132 or requisition under Section 132A was executed to the date of completion of the assessment. In accordance with this provision, from the date of search and seizure of the gold, 120 days would be calculated and from the expiry of this period, the interest shall become payable. In the present case, even after giving effect to the orders of the Settlement Commission, the excess amount was not refunded to the petitioner. The assessee has demanded interest u/s 132A of the Act and would be entitled to interest u/s 244A of the Act from the date of amount transferred into the account of AO from PD account after adjusting the tax due/payable.

Assessee’s appeal allowed

JUDGEMENT

Per: A K Sikri:

1. The petitioner is a proprietor of M/s Foto Traders, a firm started in the year 1993 to trade in gold, silver and bullion. Income Tax Department conducted a search and seizure operations on 04.02.1995 whereby cash and silver were restrained initially but subsequently seized as under:

Cash : Rs. 49,86,500/-

Silver : 222 bars of total weight 70003.859Kgs. Having market value estimated at Rs.4,44,66,395/- by the Income Tax Department.

2. The Assistant Commissioner of Income Tax, Investigation Circle (20)(1), New Delhi passed order under Section 132(5) of the Income Tax Act (hereinafter referred to as 'the Act') dated 02.06.1995 declaring that cash found during search as unexplained and hence, cash seized of Rs.49,86,500/- was retained and not released. Subsequently, vide another order under Section 132(5) dated 19.06.2005, various disputed additions were made and tax and penalty @200% were raised. Therefore, entire silver seized valuing Rs.4,44,66,395/- was retained and not released. We may mention at this state that the Income Tax Department disputed the status of M/s Foto Traders, as according to it, it was an unregistered partnership firm. Therefore, the Department intended to tax income in the hands of this firm. The concerned Assessing Officer (AO) passed the assessment order under Section 143(3) in the name of M/s Foto Traders after making huge additions of Rs.10,49,53,527/- on protective basis. In the appeal filed against the said order, additions of Rs.6,32,84,274/- were deleted and rest additions were confirmed. We may also mention at this stage that in the meantime and before the aforesaid protective assessment orders were passed in the case of M/s Foto Traders, the petitioner had approached the Department to allow him to sell the seized silver after deposing the amount of equal value. As no heed was paid to this request, the petitioner filed Writ Petition (Civil) No.4767/1998 in this Court. While disposing of the writ petition, this Court directed the Department to release seized silver after depositing rotational deposits of Rs.50 lacs or equal amount of silver to be released. In this manner, the Department released silver in installments against deposit of Rs.50 lacs each time. The entire silver was, thus, released against total payment of Rs.4,20,50,000/- deposited by the petitioner from time to time on the sale of released silver. Details of this deposit are as under:

“Date of Deposit

Amt. Deposited

05-02-1999

50,00,000

15-02-1999

46,00,000

01-03-1999

60,00,000

29-10-1999

25,00,000

05-11-1999

25,00,000

15-11-1999

25,00,000

22-11-1999

25,00,000

26-11-1999

44,00,000

14-12-1999

24,00,000
16,00,000

14-02-2000

50,00,000

05-04-2000

30,50,000

Total

4,20,50,000

Cash seized and retained on 04-02-1995

49,86,500

Grand Total

4,70,36,500”

3. The necessary consequence of the aforesaid developments/orders was that against deposit of Rs.4,70,36,500/- lying with the Department, liability of the petitioner was ascertained to Rs.17,22,608/- and thus, he was entitled to refund of the balance amount along with interest. To give effect of the orders of the Settlement Commission, the Deputy Commissioner of the Income Tax [Investigation Circle, 20 (1)] passed the orders dated 11.03.1999 under Section 250 of the Act. The net demand after giving effect was arrived at Rs.3,57,73,695/- including interest under Section 234A of Rs.10,63,883/-, interest under Section 234B of the Act of Rs.1,27,66,599/-, interest under Section 234C of the Act of Rs.6,142/-, interest under Section 220(2) of the Act of Rs.50,66,660/-. This amount, however was not released to the petitioner, in spite of his request to release the same and also return Original Title Deeds of the property kept as security.

4. In the meantime, the petitioner also approached the Settlement Commission by moving application under Section 245C of the Act to determine his income for the Assessment Year 1995-96.

This application was admitted on 07.03.2000 for assessment. During the pendency of this application, certain events which took place and have bearing on the dispute involved in this writ petition may now be recapitulated. As mentioned above, according to the petitioner, the amount deposited with the Department was much more than the tax liability and therefore, he had been making request for refund of the same and till it is refunded, to keep the same in the fixed deposit bearing interest. This was not done. The petitioner was supposed to file the income tax return for the successive years, i.e., Assessment Years 1999-2000, 2000-01, 2001-02, 2002-03 and 2003-04. He filed these returns. He was also required to pay the advance tax due and payable in respect of these income tax returns. According to the petitioner, since he was facing cash flow problems in his business and there was sufficient surplus money lying with the Department which belonged to the petitioner, he made request vide various letters for adjusting the advance tax payable out of the aforesaid amount lying with the Department. Separate letters and reminders were written in respect of each of the aforesaid assessment year. These requests of the petitioner also remained unattended. On the contrary, the AO while passing the assessment order imposed levied interest under Section 234B, Section 234C and Section 220 of the Act for making deposit of advance tax. A total demand raised was as under:

Assessment Year 1999-2000 : Rs.15,86,347/-

Assessment Year 2000-01 : Rs.22,75,638/-

Assessment Year 2001-02 : Rs.8,30,476/-

Total = Rs.46,92,461/-

5. Letter dated 11.02.2002 was written by the Department stating that the aforesaid amount would be adjusted in P.D. account with which deposit of the petitioner was lying. The petitioner objected to levy of these interest & demand and filed rectification application under Section 154 of the Act in respect of these assessment years.

6. While this was pending, the Income Tax Settlement Commission finally disposed of settlement application preferred by the petitioner vide order dated 07.07.2003 passed under Section 245D(4) of the Act. Vide this order, income of the petitioner for the assessment year 1995-96 was assessed at Rs.43,69,023/- on which tax was of Rs.1,78,430/-. After this order was passed, the petitioner again requested for release of the amount as the final tax payable for the assessment year 1995-96 was only Rs.17.22 lacs. The petitioner approached various authorities in this behalf including the ITO, CBDT, Commissioner of Income Tax, etc. He even faced claim from one M/s. Inter Gold (India) Limited, his supplier whom he could not make payment who filed OMP No.61 of 2004. In that OMP, this Court directed the Department to issue refund due to the petitioner by making the payment of Rs.4,20,00,000/- to the said M/s. Inter Gold (India) Limited.

7. Ultimately, order dated 27.09.2004 was passed by the AO giving effect to the orders of the Income Tax Settlement Commission. As per this order, refund payable to the petitioner was Rs.4,69,50,288/- and since the sum of Rs.4,20,00,000/- was already paid to the Inter Gold (India) Limited, balance amount of Rs.49,50,288/- was refunded to the petitioner. While computing the amount, the AO adjusted the interest charged from the petitioner in respect of non-payment of advance tax pertaining to the Assessment Years 1999-2000, 2001-02. That is the first grievance of the petitioner. The interest charged is as under:

Asst. Yr.

1995-96

1999-00

2000-01

2001-02

2002-03

Total

Interest under Section 234A

68,226

--

--

--

Interest under Section 234B

8,18,712 2,75,491

5,30,541

5,54,920

1,03,581 5,06,491

38,391

Interest under Section234C

--

55,042

90,471

38,220

Total

11,62,429

5,85,583

6,45,391

6,48,292

38,391

30,80,086

INTEREST UNDER SECTION 220(2)

TOTAL

Interest under section 220 (2)

3,33,960 4,64,886

3,70,798

5,31,927

57,220 30,105

15,310

TOTAL

7,98,846

3,70,798

5,31,927

87,325

15,310

18,04,206

8. Secondly, while calculating interest payable to the petitioner, the Department has admitted that an amount of Rs.4,39,91,00/- against the amount of Rs.4,70,36,500/-. However, the alleged draft of Rs.30.50 lacs dated 05.04.2000 to have been paid finds no mention in the Public Deposit account of M/s. Foto Traders. No original record is available in this regard with the Department. We are not concerned with this, as it is fairly stated that in this regard, litigation between the parties is pending in this Court.

9. Insofar as interest payable to the petitioner on the aforesaid deposit is concerned, the Department has calculated the same with effect from the date when the amount was transferred into the account of AO from P.D. Account. The petitioner claims that he is entitled to interest under Section 132B of the Act at least till the time order is passed by the Income Tax Settlement Commission on 07.07.2003d, whereas the Department on 27.09.2004, the Department had granted interest under Section 244A of the Act ignoring provisions of Section 132B completely. The claim of the petitioner is that under Section 132B of the Act, he is entitled to interest after six months from the date of order passed under Section 132(5) of the Act on initial seized amount of Rs.49,86,500/- minus tax due/payable and on further deposits in P.D. Account from the date of such deposit. In this backdrop, following reliefs are sought by the petitioner in this petition:

“a.(i) Issue appropriate writ, direction or order to the respondents declaring that no interest could be charged on such alleged demands raised for Assessment Years 1995-96, 1999-2000, 2000-01, 2001-02, 2002-03 and 2003-04 in view of the sufficient amount lying and deposited with the Income Tax Department since 1995.

a(ii) Issue appropriate writ, direction or order to the respondent to quash and/or set aside impugned actions of respondents in levying interest charged for Assessment years 1995-96, 1999-2000, 2000-01, 2001-02, 2002-03, 2003-04 in view of sufficient amount lying and deposited with the Income Tax Department since 1995.

a(iii) Issue appropriate writ, direction or order to the respondents that they should refund an amount of Rs.48,16,066/- as being interest illegally recovered (as per statement marked as Annexure – 43 enclosed) by deducting from amount refundable.

b.(i) Issue appropriate writ, direction or order to the respondent that petitioner is entitled for interest from the date of deposit of money in Public Deposit Account and consequentially, respondent be directed to pay the petitioner the interest amount in accordance with law and as described in statement enclosed marked as ANNEXURE – 42.

b.(ii) Issue appropriate writ, direction or order to the respondents that petitioner is entitled for interest on the amount illegally adjusted from refund. Interest has already been covered in the statement marked as ANNEXURE -42.

c. Award cost to the petitioner.

d. Pass such further order or orders as this Court may deem fit and proper in the facts and circumstances of the case.”

10. It would be clear from the above that this petition basically raises two issues, viz.,

(i) Whether interest under Sections 234A, 234B, 234C and 220 (2) of the Act could be charged when according to the petitioner, sufficient amount of the petitioner was lying deposited with the Department wherever advance tax could be adjusted?

(ii) From which date the petitioner is entitled to interest on the amount which became refundable after giving effect to the orders passed by the Income Tax Settlement Commission?

ISSUE NO.(1):

11. Submissions made by the learned counsel for the petitioner on the basis of which he has argued that no interest could be charged for non-payment of advance tax was that there was sufficient amount was already lying with the Department. The Department, however, contends that it was not permissible for the petitioner to seek adjustment from the amount lying with the Department, which in fact belonged to M/s. Foto Traders and the same was assessed as unregistered partnership and not as the sole proprietorship of the petitioner. To support this plea, the Department has relied upon the statement of the petitioner himself at the time of search/survey, which was given on oath stating that material seized belonging to M/s. Foto Traders. The Panchnama was also prepared at the address of M/s. Foto Traders at Chandni Chowk. It is the petitioner who had changed the stand later on contending that M/s. Foto Traders was not a partnership firm, but his sole proprietorship, a protective assessment order was passed in the status of firm. This order was even confirmed by the CIT (A) vide order dated 17.03.1999 and only thereafter, adjustments from P.D. Account of M/s. Foto Traders beginning from 31.03.1999 were made. Therefore, as per the Department, there was a dispute about the amounts seized and/or rotational payments either belonged to M/s. Foto Traders or Mr. Khanna in his personal capacity. That dispute was ultimately settled vide order under Section 245D(4) of the Act dated 07.07.2003 passed by the Income Tax Settlement Commission. Hence, no amount was available for adjustment of the demands raised in the case of Shri V.N. Khanna upto 07.07.2003.

12. Under Section 234B of the Act, interest is payable by the assessee if there is default in payment of advance tax. Likewise, under Section 234C of the Act, interest can be charged for deferment of advance tax. On the other hand, when the income is assessed and the tax is payable for which notice of demand under Section 156 of the Act is issued and the tax payable is not deposited within 30 days of the service, the assessee would be deemed in default.

13. Taking shelter of all these provisions, the Department has levied the interest. It is not in dispute that when the assessee filed his income tax returns for the Assessment Years 1999-2000 to 2003-04, he did not deposit advance tax due and payable in respect of these income tax returns. However, his case is that sufficient amount was tending to his credit with the Department and his request for adjustment of the advance tax, etc. was legitimate which should have been allowed by the Department. It is also not in dispute that at least Rs.4.2 Crores were lying with the Department. The only reason given by the respondent for not making adjustment from this account is that it was not permissible for the petitioner to seek adjustment from this amount, as this belonged to M/s Foto Traders which was assessed as unregistered partnership and not as the sole proprietorship of the petitioner.

14. However, to our mind, this plea taken by the respondent is totally misconceived. No doubt, M/s Foto Traders was assessed as unregistered partnership. However, the petitioner was clamouring that it was his sole proprietorship concern and had submitted proofs in respect thereof. If the plea of the petitioner was not accepted erroneously by the Department, it cannot take advantage of its own wrong. Ultimately, the petitioner was vindicated when the Settlement Commission accepted that he was the sole proprietor of M/s Foto Traders. There is an ample discussion in this behalf in the order of the Settlement Commission. The arguments of the learned counsel for the respondent that it is only on 07.07.2003 when the Settlement Commission passed the orders under Section 245D(4) of the Act that the amount became available to the petitioner, is without any substance. As stated above, the petitioner was questioning the assessment of M/s Foto Traders as unregistered partnership firm. He has been proved correct. Merely because order to this effect passed by the Settlement Commission on 07.07.2003 would not mean that it is on this date the amount became available at the hands of the petitioner. What is held by the Settlement Commission is that M/s Foto Traders is the sole proprietorship concern of the petitioner and it would follow from this finding that the request of the petitioner to adjust the advance tax from the amount lying deposited with the Department in the accounts of M/s Foto Traders was justified, which was unnecessarily turned down by the Department.

15. We are of the view that the respondent would not be justified in levying interest, as the amount of advance tax payable by the petitioner for these assessment years could be adjusted from the amount lying with the Department in the petitioner's own account.

ISSUE NO.(2):

16. Insofar as the petitioner's entitlement to interest on the amount which became refundable after giving effect to the orders passed by the Settlement Commission, it cannot be disputed that the petitioner is entitled to interest on such an amount under Section 132D (4) of the Act. This provision clearly mandates the Central Government to pay simple interest @ 1 ½ % for every month on amount by which the credit money seized under Section 132, etc. of the Act. Clause (b) sub-Section (4) of Section 132B of the Act stipulates that such interest shall run from the date immediately following the expiry of the period of 120 days from the date on which the last of the authorizations for search under Section 132 or requisition under Section 132A was executed to the date of completion of the assessment. In accordance with this provision, from the date of search and seizure of the gold, 120 days would be calculated and from the expiry of this period, the interest shall become payable.

17. This interest is upto the date of assessment. However, in the present case, even after giving effect to the orders of the Settlement Commission, the excess amount was not refunded to the petitioner. On this count, the petitioner has demanded interest under Section 132A of the Act.

18. The petitioner would, thus, be entitled to interest under Section 244A of the Act from the date of amount transferred into the account of AO from PD account after adjusting Rs.49,86,500/-, which was the tax due/payable. The amount shall be calculated accordingly.

19. Writ petition is allowed in the aforesaid terms. The petitioner shall also be entitled to cost quantified at Rs.10,000/-.