Sec 158BC - Whether when no incriminating document is found during search,

Sec 158BC - Whether when no incriminating document is found during search, even then addition can be made on ground that some transactions shown in books are found to be fictitious - NO, rules HC

KOLKATA, JULY 08, 2011: THE issues before the Bench were - Whether when no incriminating document is found during the search, no addition can be made in respect of the transactions reflected in the regular books in the block assessment even if they are found to be fictitious and can only be considered under regular assessment and whether surcharge is applicable to the Income tax payable even though the search and seizure took place before insertion of the proviso to Section 113. And the verdict partially goes in favour the assessee.

Facts of the case

During the previous year ended March 31, 1993 relevant to the AY 1993-94, the assessee purchased for the purpose of resale HTS wire from `DKH' Stores - payment for purchases was made by account payee cheques partly during the impugned previous year and partly during the subsequent year - the entire quantity of wire was sold during the previous year ended March 31, 1993 to `SCL' giving rise to a profit of Rs.2.89 lacs – the entire sale proceeds were received by the assessee during the impugned previous year by account payee cheque deposited into the bank on 31st March, 1993. The transactions were duly accounted in the regular books of account – income tax return was filed declaring an income of Rs.3.42 lacs which was processed u/s 143(1). Search took place in Dec, 95 and the copy of audited accounts for impugned previous year was seized and the AO asked the assessee to produce the statement of `DKH' which was reflecting as creditor to whom the amount was due to payment. Assessee furnished the copies of bills, challans and details of payment made. AO made direct enquiry through the inspector who could not find the said person at the address mentioned in the documents – assessee explained the sales by submitting the copies of sales bills, sale price received by cheque and transactions were duly recorded in the books. AO held that the assessee did not require HTS wire for the fabrication work and it had inflated its expenses by claiming bogus purchases and treated it as undisclosed income.

Another issue arose was as regards to two payments of Rs.10 lakh each shown in the regular books of account allegedly made to `FC' and `SCC' in August 95 - the search took place as indicated earlier on December 21, 1995 before the close of the Financial Year 1995-96 and the assessee's return for the Assessment Year 1996-97 relevant to the Financial Year 1995-96 was due to be filed much later.

AO asked the assessee as to why the payments should not be treated as fictitious as the payments were shown as against old dues but the two parties were not shown as Sundry Creditors as on March 31, 1995. Assessee explained that the cheques issued in the names of the said parties were "Account Payee" but the endorsement in this behalf was cancelled and cash was drawn against the cheques by the assessee's cashier which was thereafter sent to Budge Budge site for payment of wages to the contractors and labourers where its receipts and subsequently disbursements were duly recorded which was duly verified by the Assessing Officer. AO, however, held that the payments were fictitious and bogus and included the same as undisclosed income for the Financial Year 1995-96. ITAT confirmed the additions made by the AO.

Assessee contended that the transactions being reflected in the return of the assessee and being also supported by the entries made in the books of account produced by the assessee cannot be added even if considered as fictitious, in block assessment. If those were disbelieved and treated to be fictitious, the AO could pass necessary order in the regular assessment, but there was no scope of passing such order in block assessment as the findings recorded by the AO were not based on any material recovered at the time of search and seizure – no incriminating papers were recovered from the office of the assessee in respect of these transactions.

Revenue contended that pursuant to a notice issued for block assessment, the AO had every right to pass the order impugned in block assessment.

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

++ so far the finding of the AO that the assessee did not require HTS wire for the fabrication work and consequently, the assessee had inflated its expenses by claiming bogus purchases, it is found that such finding of the AO is not based on any material obtained during search and seizure but is founded on the documents reflected in the return of the assessee;

++ as regards the finding of the AO in respect of the two payments of Rs. 10 lakh, each shown in the regular books of account, in course of search and seizure, a certificate of license showing that Shri Umesh Narayan Jha as proprietor of `SCC' who was found to be an employee of the propriety concern of D. K. Goyal was recovered. The Photostat certified copy of the cheque which was encashed after deleting the account payee mark in favour of `SCC' and making it a self drawn one has been placed showing that the same was not seized at the time of search and seizure. The payment by the said cheque was not made to `SCC' and it was a self paid bearer cheque encashed by the drawer himself. Thus, merely because a license in the name of `SCC' was recovered from the office of the Assessee, such fact has nothing to do with the said encashment in favour of the drawer. Thus, the addition of Rs. 20 lakh which is shown in the regular books of account as payment made to `FC' and `SCC' as cash payment of Rs. 10 lakh each as fictitious entry in block assessment was patently illegal as it had no connection with the search and seizure;

++ the finding as regards addition is not based on any materials unearthed on search and seizure and thus, not liable to be assessed on block assessment under Chapter XIV B of the Act but should be subject to regular assessment;

++ the proviso to Section 113 of the Act is curative in nature as is held by the Supreme Court, in the case of CIT vs. Suresh N. Gupta (2008-TIOL-02-SC-IT). Therefore, it is held that surcharge is applicable to the Income tax fixed under Section 113 of the Act even though the search and seizure took place before insertion of the proviso to Section 113 of the Act.

ITR (Trib) HIGHLIGHTS ISSUE DATED 15-08-2011 Volume 10 Part 7

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

ISSUE DATED 15-08-2011

Volume 10 Part 7

APPELLATE TRIBUNAL ORDERS

F Where no evidence of service of notice assessment of undisclosed income, notice not valid : Dr. Y. D. Singh v. Dy. CIT (All) p. 698

F AO declining to entertain on doctrine of mutuality that he has no power to entertain proper : Jay Bharat Co-op. Housing Society Ltd. v. ITO (Mumbai) p. 717

F Where no bona fide reason for receipt of loan, imposition of penalty proper : Mahak Singh v. ITO (Delhi) p. 727

F Assessee failing to show purchase details of shares, income from undisclosed justified : Smt. Kusum Lata v. Asst. CIT (Delhi) p. 737

F Production of pilferage proof caps from printed aluminium sheets is manufacture : Asst. CIT v. Pixie Enterprises (Chennai) p. 744

F Advance received for setting up facility before starting of business not chargeable to tax on its forfeiture :Velocient Technologies Ltd. v. ITO (Delhi) p. 750

F Appellate Tribunal : Tribunal cannot interfere through parallel proceedings : G.Venkateswaran v. Asst. CIT (Chennai) p. 770

F Where assessee providing bona fide explanation and furnishing all details, deletion of penalty justified : Deputy CIT v. Nokia India P. Ltd. (Delhi) p. 790

NEWS-BRIEF

F Income-tax waived on wrongly paid amount

Tax cannot be levied on an amount wrongly paid to a person because of a mistake made by the payer, according to a recent order by a division bench of the Income-tax Appellate Tribunal (ITAT).

In this case, the taxpayer company, Tata Investment Corporation, moved the ITAT after it was levied tax on dividend it received on the shares it had already transferred to other entities. The taxpayer is a non-banking finance company. Since the transfer of shares was not entered in the records of the company whose shares were sold by taxpayer company, the dividend for a particular year was wrongly issued to the taxpayer company.

In its order on July 15, the ITAT pointed out that section 72 of the Indian Contract Act, 1872 stipulates that a person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it and therefore amounts received by the mistake of the paying party cannot be construed as income of the receiver and therefore not liable to be taxed.

All income cannot be taxed, but only those incomes on which the taxpayer has a legitimate and enforceable right is liable to tax, the ITAT held. The ITAT held that income can be considered "accrued" only when the taxpayer has a right to receive the income. Without a legally enforceable right, there cannot be an accrual of income. [Source :www.economictimes.com dated August 5, 2011]

F Government promote convenience of tax offices in foreign countries: Under pressure to bring back unaccounted money stashed abroad, the Government said it will set up tax overseas units in eight countries, including the US, France and Germany, this financial year.

"The proposal is being processed and (eight) Income-tax Overseas Units (ITOUs) are likely to be set up within the present financial year 2011-12," the Minister of State for Finance told the Lok Sabha in a written reply.

Cyprus, Japan, UK, the Netherlands and United Arab Emirates are the other countries where the Government wants to establish ITOUs.

The Government, the Minister said, had earlier set up ITOUs at Mauritius and Singapore.

He said the Government has framed a five-pronged strategy to fight the menace of tax evasion that include joining hands with international bodies like G-20 and United Nations, besides forming appropriate legislations, setting up domestic institutions, and manpower training.

The Government has also approved the cadre restructuring of the Directorate of Enforcement for increasing its effectiveness in implementing the provisions of the Prevention of Money Laundering Act and the Foreign Exchange Management Act.

"The approval includes increase in staff strength from 745 to 2,064 and the number of offices from 22 to 39. This is likely to involve an expenditure of about Rs. 60 crore annually. The restructuring process of the Directorate of Enforcement is likely to be completed in 2-3 years," the Minister said.

The Minister also informed Lok Sabha that Government has commissioned a study to estimate the quantum of unaccounted wealth, both inside and outside the country, and its ramifications on the national security based on recommendations of the Standing Committee on Finance. [Source : www.economictimes.com dated August 5, 2011]

(ITR) HIGHLIGHTS ISSUE DATED 15-8-2011 Volume 336 Part 2

INCOME TAX REPORTS (ITR) HIGHLIGHTS

ISSUE DATED 15-8-2011

Volume 336 Part 2

F Delivery of goods to a foreign buyer in India not export and not entitled to exemption u/s. 10B : Swayam Consultancy P. Ltd. v. ITO (AP) p. 189

F Notice based on subsequent decision of High Court reversed by Supreme Court : Notice not valid : Commercial Co-operative Bank Ltd. v. ITO (Guj) p. 196

F Sales tax and excise duty not to form part of total turnover : CIT v. Falcon Tyres Ltd. (Karn) p. 200

F AO to consider membership fee payable to club whether revenue expenditure : CIT v. Falcon Tyres Ltd. (Karn) p. 200

F Part of tax deposited before request for time to pay taxes and entire amount paid subsequently : Prosecution not valid : Sushil Kumar Saboo v. State of Bihar (Patna) p. 202

F Presumptive taxation : No discussion in Tribunal's order regarding correctness of CIT (A) order : Matter remanded : Kesar Singh v. CIT (P&H) p. 205

F Tribunal finding price paid for raw materials not unreasonable : Part of price could not be disallowed : CIT v. V. S. Dempo and Co. P. Ltd. (Bom) p. 209

F Notice based on subsequent two-judge decision of Supreme Court which was overruled by a larger Bench : Notice not valid : Surat People Co-op. Bank Ltd. v. ITO (Guj) p. 218

F Legal position clarified in 1985 : Rectification based on SC decision in 1994 valid : Shahbad Co-operative Sugar Mills Ltd. v. Deputy CIT (P&H) p. 222

F Source of purchase of jewellery satisfactorily explained : Not undisclosed income of assessee : Sonia Magu v. CIT (Delhi) p. 227

F Duty drawback scheme : No accrual of income till claim of assessee quantified and verified by competent authority : CIT v. Sriyansh Knitters P. Ltd. (P&H) p. 235

F IPRS incentive received in next accounting year : Amount did not accrue and not assessable in AY 1993-94 :CIT v. Manav Tools (India) P. Ltd. ( P&H) p. 237

F Precise details about persons to be searched mentioned in warrant of authorisation : Search legal : Jose Cyriac v. CIT (Ker) p. 241

F Tribunal finding transfer of goods between units of same undertaking at market value : Section 80-I(8) not applicable : CIT v. Punjab Concast Steels Ltd. ( P&H) p. 248

F Cancellation of registration by order passed in March 2009 by Commissioner not valid : CIT v. Manav Vikas Avam Sewa Sansthan (All) p. 250

F Satisfaction regarding undisclosed income of such person recorded before completion of assessment of person searched : Assessment proceedings of third person valid : CIT v. Girdhari Lal Bassi (P&H) p. 255

F Tribunal finding there was no material from which concealment of income could be inferred : Penalty could not be imposed : CIT v. Careers Education and Infotech P. Ltd. (P&H) p. 257

F Bona fide claim for deduction not concealment or furnishing of inaccurate particulars : CIT v. Raj Overseas (P&H) p. 261

F Global distribution of services to airlines by NRI : Tribunal finding 15 per cent. of revenue accruing in respect of bookings made in India : Finding of fact : Director of I. T. v. Galileo International Inc. (Delhi) p. 264

F Small scale undertaking in rural area : AO denying relief on ground unit situate within fifteen kilometres from municipal limits not proper : CIT v. Friends Salt and Allied Industries (Guj) p. 272

F Part performance under agreement prior to amendment : No transfer giving rise to capital gains : CIT v. Rakesh Gupta (All) p. 277

F Trading in shares or investment : Two separate portfolios permissible : CIT v. Gopal Purohit (Bom) p. 287

F No satisfactory explanation of investment : Addition justified : Hazari Lal v. CIT (P&H) p. 290

F Gift discovered to be bogus : Penalty leviable : CIT v. Deep Chand ( P&H) p. 292

F Details furnished by assessee supported by material documents : Assessee entitled to relief u/ss. 32A and 80-IA : CIT v. Aicam Engineering P. Ltd. (Mad) p. 294

F Undertaking by managing director to get additional income surrendered by assessee but not declared in return by assessee : Levy of penalty justified : Shveta Nanda v. CIT (P&H) p. 298

F Procedural requirement complied with : Assessee to be assessed in capacity of a firm : CIT v. Nand Lal Labhu Ram ( P&H) p. 303

F Amount of gifts almost equal to difference in gross profit declared : Gifts received undisclosed income of assessee : CIT v. Deepak Iron and Steel Rolling Mills ( P&H) p. 307

F Provision that income-tax payable by MLA on salary and allowance will be paid by State : Law within competence of State Legislature : Manmohan Singh v. State of Punjab (P&H) p. 312

F Book profits : Losses brought forward deductible : CIT v. Sumi Motherson Innovative Engineering Ltd. (Delhi) p. 321

F No discussion on material justifying enhancement : Matter remanded : Aggarwal Engineering Co. v. Asst. CIT ( P&H) p. 332

STATUTES AND NOTIFICATIONS

F C. B. D. T. Circulars : Circular No. 4 of 2011, dated 19th July, 2011-Prior permission under section 281 of the Income-tax Act, 1961 to create a charge on the assets of business-Issuance of guidelines p. 1

F Notifications : Income-tax Act, 1961 : Notifications under section 120(1) and (2) : Jurisdiction of Income-tax authorities : Amendments p. 10

JOURNAL

F Is interest on an interest-free deposit obtained in addition to the stipulated rent, "rent receivable" under section 23(1)(b) ? (M. S. Prasad, IRS (Retd.), Director (A&PAC), CBDT) p. 10

NEWS-BRIEF

F Income-tax waived on wrongly paid amount

Tax cannot be levied on an amount wrongly paid to a person because of a mistake made by the payer, according to a recent order by a division bench of the Income-tax Appellate Tribunal (ITAT).

In this case, the taxpayer company, Tata Investment Corporation, moved the ITAT after it was levied tax on dividend it received on the shares it had already transferred to other entities. The taxpayer is a non-banking finance company. Since the transfer of shares was not entered in the records of the company whose shares were sold by taxpayer company, the dividend for a particular year was wrongly issued to the taxpayer company.

In its order on July 15, ITAT pointed out that section 72 of the Indian Contract Act, 1872 stipulates that a person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it and therefore amounts received by the mistake of the paying party cannot be construed as income of the receiver and therefore not liable to be taxed.

All income cannot be taxed, but only those incomes on which the taxpayer has a legitimate and enforceable right is liable to tax, the ITAT held. The ITAT held that income can be considered "accrued" only when the taxpayer has a right to receive the income. Without a legally enforceable right, there cannot be an accrual of income. [Source :www.economictimes.com dated August 5, 2011]

F Government promote convenience of tax offices in foreign countries

Under pressure to bring back unaccounted money stashed abroad, the Government said it will set up tax overseas units in eight countries, including the US, France and Germany, this financial year.

"The proposal is being processed and (eight) Income-tax Overseas Units (ITOUs) are likely to be set up within the present financial year 2011-12," the Minister of State for Finance told the Lok Sabha in a written reply.

Cyprus, Japan, UK, the Netherlands and United Arab Emirates are the other countries where the Government wants to establish ITOUs.

The Government, the Minister said, had earlier set up ITOUs at Mauritius and Singapore.

He said the Government has framed a five-pronged strategy to fight the menace of tax evasion that include joining hands with international bodies like G-20 and United Nations, besides forming appropriate legislations, setting up domestic institutions, and manpower training.

The Government has also approved the cadre restructuring of the Directorate of Enforcement for increasing its effectiveness in implementing the provisions of the Prevention of Money Laundering Act and the Foreign Exchange Management Act.

"The approval includes increase in staff strength from 745 to 2,064 and the number of offices from 22 to 39. This is likely to involve an expenditure of about Rs. 60 crore annually. The restructuring process of the Directorate of Enforcement is likely to be completed in 2-3 years," the Minister said.

The Minister also informed Lok Sabha that Government has commissioned a study to estimate the quantum of unaccounted wealth, both inside and outside the country, and its ramifications on the national security based on recommendations of the Standing Committee on Finance. [Source : www.economictimes.com dated August 5, 2011]

F Government reviewing DTAA with Mauritius for wider tax awareness

The Government is working to review the Double Taxation Avoidance Convention (DTAC) with Mauritius to further strengthen its provisions and have better exchange of information on tax matters with the island nation, which accounts for almost 36 per cent. of FDI inflow to India.

In a written reply to the Lok Sabha, the Minister of State for Finance said the Government has proposed to review the India-Mauritius DTAC to incorporate appropriate changes in the agreement for prevention of treaty shopping and to strengthen the mechanism of exchange of information of tax matters between the two countries.

"There was unwillingness on the part of Mauritius to cooperate in addressing this problem. However, recently it was agreed to convene the next meeting of the joint working group on the DTAC. We have now proposed next round of discussion to which Mauritius is yet to respond," the Minister said.

Mauritius contributed to 35.96 per cent. of the total Foreign Direct Investment (FDI) that came to India in 2010-11. It was 40.16 per cent. in 2009-10 and 41.01 per cent. in 2008-09.

"Accurate estimate of the volume of alleged 'revenue loss' is difficult as the tax on capital gains depends on the difference between the sale and purchase prices, factor of cost inflation index, cost of transfer, the set off of loss suffered in one transaction against the gains in the other and the carried forward losses of earlier years," he said.

He was replying to a question of whether the Government had found some loopholes and revenue leakages in the DTAA with Mauritius.

"Since the tax on capital gains from Mauritius-based entities was exempt, a large number of them did not file the returns unless they had other streams of income as well. The exact amount of revenue loss due to non-taxation of capital gains cannot be quantified," the Minister said.

The India-Mauritius DTAA provides for taxation of income from capital gains arising from sale of shares only in the country of residence of the investor.

Therefore, an investor routing his investments through Mauritius into India does not pay tax on capital gains here.[Source : www.economictimes.com dated August 5, 2011]

Whether, for levy of FBT, meaning of word 'construction' in Sec 115WC is re

Whether, for levy of FBT, meaning of word 'construction' in Sec 115WC is restrictive and includes only civil construction within its realm - NO, rules ITAT

THE issue before the Bench is - Whether, for the levy of FBT, the connotation of the word 'construction' in Sec 115WC is restrictive and includes only civil construction works within its realm. And the final ruling goes in favour of the assessee.

Facts of the case

Assessee Company is engaged in the business of manufacturing of specialized equipment of solid and waste and a liquid waste treatment for industries and communities and these equipments were known as Twin Wire Belt Filter Press for Sludge Management - Major portion of the assessee's activities included construction of civil structures - AO while framing the assessment rejected the submission of the assessee for levyng FBT @ 5% and levied 20% rate. CIT(A) affirmed the order of the AO.

On appeal, the Tribunal held that,

++ as per provisions of sec. 115WC(2)(b) in the case of an employer who is engaged in the business of construction, the value of fringe benefit shall be taken @ 5%. The question before us is that whether or not assessee engaged in the business of construction. The word "construction" has not been defined in the Act. Therefore, its ordinary meaning in common parlance has to be taken. The definitions as given in aforementioned two dictionaries have already been reproduced. If those definitions are kept in mind, the word "construct" cannot be restricted only to civil construction. It includes in its ambit pile or put together, build, make, to form by putting together parts; frame; devise; to draw, as a figure, so as to fulfill given conditions, the result of intellectual perception and consideration of things and ideas receive through the senses. It also includes construction of a housing estate/construct a bridge build, erect, put up, set up, raise, elevate, establish, assemble, manufacture, fabricate, make, construct a plan/theory form, formulate, put together, create, devise, design, invent, compose etc;

++ the word "construction" though mainly connected to the building but it includes within its ambit a bridge under construction building, erection, elevation, establishment, assembly, manufacture, fabrication. It also includes an impressive construction structure, building, edifice, assembly, framework. Therefore, its ambit has not been restricted to only to construction of building. It includes impressive construction structure, building, edifice, assembly, framework etc. The nature of plants made by the assessee-included fixation of certain equipments on land for managing waste and it included also certain degree of civil construction. A structure is created through which the waste is managed by those equipments. It also requires land to establish such erections and to put plant thereon. Therefore, it cannot be said that assessee's activity does not involve business of construction.

Income accruing or arising in India to a non-resident (US company) on t

IT/ILT : Income accruing or arising in India to a non-resident (US company) on transfer of a capital asset situate in India to an Indian company would be income deemed to accrue or arise in India to said non-resident and can be assessed in hands of the non-resident or in hands of Indian company as agent of that non-resident under section 163 [Section 9 of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India]

l Transfer of Indian company's share constitutes transfer of a capital asset situate in India and income from such transfer of capital asset even if accrues or is received in India within the meaning of section 5 such income being specifically enumerated under section 9 would be income deemed to accrue or arise in India

l The capital gains accruing or arising to a non-resident on transfer of a capital asset situate in India apart from being taxed in hands of non-resident, can be taxed in hands of agent of non-resident under section 163 read with section 9 because the income accruing to the non-resident falls within the category of deemed income specified in section 9

l The CBDT circulars No. 682 & 789 explaining the DTAA between India & Mauritius would not apply where the investments are made in India by entities other than the entities incorporated in Mauritius - [2011] 12 taxmann.com 141 (Bom.)