TaxTMI Updates e-Newsletter
Jan 03,2019

Adjustment of tax refund against alleged tax dues - Effect of appellate order on assessment demand - Delay in refund disbursement and administrative apathy - Judicial admonition regarding administrative delay

Adjustment of tax refund against alleged tax dues - Effect of appellate order on assessment demand - Adjustment of the bank's refund for AY 2010-11 against alleged tax dues for AY 2008-09 and AY 2012-13 was reviewed and corrected by the Revenue authorities. - HELD THAT: - The petition recorded that the Competent Authority initially adjusted part of the refund for AY 2010-11 against alleged dues for AY 2008-09 and AY 2012-13. Following the High Court stay in respect of AY 2008-09 and subsequent action by the Authority, the adjustment in respect of AY 2008-09 was dropped. With respect to AY 2012-13, after the Commissioner (Appeals) granted substantial relief and the Assessing Officer gave effect to that appellate order, the demand for AY 2012-13 was also wiped out. In consequence the principal grievance underpinning the petition ceased to subsist. [Paras 1]

The adjustments were set aside/corrected and the petitioner's main grievance no longer survives.

Delay in refund disbursement and administrative apathy - Judicial admonition regarding administrative delay - The Court noted delay by Revenue in rectifying the position and accepted the departmental apology, but declined to pass further orders. - HELD THAT: - The Court acknowledged pressures on Revenue authorities and the need for internal checks when large refunds are involved, while emphasising that officers should not act insensitively or unduly delay refunds. The Deputy Commissioner filed an affidavit explaining reasons for delay and tendered an apology to the Court and the petitioner. Having received that explanation and apology, the Court closed the issue without further order or observation. [Paras 2, 3]

Delay was noted, apology accepted, and no further orders were made.

Final Conclusion: The petition is disposed of as the contested adjustments to the refund were rectified; the Court accepted the departmental apology for delay and made no further order.

Business expenditure - deduction under section 37 - management training expenses - judicial consistency - book profit computation under section 115JB - reduction of agricultural income

Business expenditure - deduction under section 37 - management training expenses - judicial consistency - Allowability of foreign travel and related education expenses incurred for the director's son as business expenditure deductible under section 37 - HELD THAT: - The Tribunal found the claim not to be res integra, noting a co-ordinate bench decision in the assessee's own earlier appeal for AY 2011-12 which accepted substantially similar expenditures as business expenditure where the beneficiary subsequently served the company. The departmental representative could not distinguish the facts or law between the two assessment years. Applying judicial consistency, the Tribunal accepted the assessee's contention that the foreign travel/education expenses were incurred wholly and exclusively for business (as management training) and directed deletion of the disallowance. [Paras 2, 3]

The disallowance of the foreign travelling/education expenditure is deleted and the claimed amount is allowed as business expenditure.

Book profit computation under section 115JB - reduction of agricultural income - Claim for reducing agricultural income for computation of book profits under section 115JB - HELD THAT: - The assessee, through its counsel, expressly declined to press the substantive ground concerning the manner of reducing agricultural income for book profit computation. The Tribunal recorded that the assessee no longer pressed this grievance and therefore declined to adjudicate the substantive contention. [Paras 4]

The substantive ground regarding reduction of agricultural income for computation of book profits under section 115JB is not pressed and is therefore not adjudicated.

Final Conclusion: The appeal is partly allowed: the foreign travel/education expenditure claimed on behalf of the director's son is allowed as a business deduction; the claim regarding reduction of agricultural income for book profit computation is not pressed and remains unadjudicated.

Allowability of expenses and depreciation during temporary cessation of business - depreciation when assets are kept in a state of readiness - maintenance of company as a going concern and statutory obligations - add-back to book profits under section 115JB

Allowability of expenses and depreciation during temporary cessation of business - maintenance of company as a going concern and statutory obligations - Whether expenses and depreciation claimed by the assessee are allowable despite absence of active business during the year. - HELD THAT: - The Tribunal upheld the CIT(A)'s conclusion that the assessee's lack of active operations in the year under consideration did not disentitle it to routine expenditures and depreciation. Relying on precedents recognized by the CIT(A), the Tribunal accepted that corporate entities incur outlays to keep the company viable and discharge statutory obligations while not formally wound up, and that such expenditure is allowable. The facts showed only a temporary lull and no formal winding up; the assessee had kept assets ready for use and incurred expenditure incidental to maintaining the company. On these grounds the additions disallowing expenses and depreciation were held to be unsustainable and the claim was allowed. [Paras 5]

Claims for expenses and depreciation were allowed in favour of the assessee.

Add-back to book profits under section 115JB - depreciation when assets are kept in a state of readiness - Whether the AO was justified in adding back depreciation to book profits for computation under the book profit tax provision. - HELD THAT: - The Tribunal agreed with the CIT(A) that the AO's addition of depreciation to book profits under the book profit computation was without statutory basis. The provision for computing book profits prescribes specific add-backs and depreciation is not among the items required to be added back. Having allowed depreciation for tax purposes, the Tribunal found no legal foundation for the AO's step of adding back depreciation to book profits and reversed that action. [Paras 5]

AO's addition of depreciation to book profits under the book profit computation was reversed.

Final Conclusion: The revenue's appeal was dismissed; the CIT(A)'s allowance of the assessee's expenses and depreciation and reversal of the AO's add-back to book profits was upheld.

Reopening of assessment - formation of belief for reopening - verification of information prior to issuance of notice under section 148 - natural justice - right to cross examination of third party witnesses/documents - de novo assessment on remand

Reopening of assessment - formation of belief for reopening - verification of information prior to issuance of notice under section 148 - Validity of reopening the assessment by issuing notice under section 148 in the light of information received from third parties. - HELD THAT: - The Tribunal rejected the contention that the Assessing Officer was required to verify the veracity of information before forming belief and issuing notice under section 148. The A.O.'s duty is to form a belief that income has escaped assessment; verification of the correctness of information is not a precondition to issuing the notice but is to be done subsequently in the course of reassessment. Consequently the challenge to reopening on the ground that no independent pre notice enquiry was made was held devoid of merit and dismissed. [Paras 6]

Contention that reopening was invalid for lack of pre verification is rejected; reopening per se sustained.

Natural justice - right to cross examination of third party witnesses/documents - de novo assessment on remand - Whether reliance on third party documents without granting opportunity of cross examination to the assessee vitiated the assessment and required remand. - HELD THAT: - The Tribunal found merit in the assessee's submission that the Revenue based its finding on documents and entries originating from a third party and that the assessee was not afforded opportunity to cross examine the third party persons whose statements or records were relied upon. This omission was held to infringe principles of natural justice and caused prejudice to the assessee. In view of this defect the Tribunal set aside the assessment order and directed a de novo assessment, expressly refraining from expressing any view on the merits; the A.O. was directed to afford the assessee the opportunity of cross examination and decide afresh on the basis of the record and any cross examination conducted. [Paras 6]

Assessment set aside and remanded for de novo assessment after granting opportunity for cross examination of relevant third party persons; merits left open.

Final Conclusion: The appeal is allowed for statistical purposes: the reopening is not invalid for want of pre notice verification, but the assessment is set aside and remanded for de novo adjudication because the assessee was not permitted to cross examine third party witnesses; the A.O. to decide the matter afresh after permitting cross examination, with no observation on merits.

Alternate claim of deduction under section 10A - deduction under section 10B - remand to Assessing Officer for verification and computation - computation of deduction before adjustment of brought forward losses and unabsorbed depreciation

Alternate claim of deduction under section 10A - deduction under section 10B - remand to Assessing Officer for verification and computation - Assessee entitled to pursue alternate claim for deduction under section 10A notwithstanding original return claimed deduction under section 10B; matter remitted to Assessing Officer for verification and computation of deduction under section 10A. - HELD THAT: - The Tribunal held that where the assessee in the return claimed deduction under section 10B but during assessment proceedings made an alternate claim for deduction under section 10A, the alternate claim is maintainable. The CIT(A)'s allowance of the alternate claim was upheld following a series of Tribunal decisions in the assessee's own case and in related precedents (including Clarion Technologies and Approva Systems), which directed remand to the Assessing Officer to verify eligibility and compute the deduction under section 10A. The Tribunal found no merit in the Assessing Officer's denial merely because the original return had claimed section 10B; the assessee may press the alternate plea before the AO or CIT(A) and the AO must afford reasonable opportunity of hearing and decide the claim in accordance with law. Accordingly the matter was set aside to the file of the AO for limited purpose of verification and computation of deduction under section 10A.

Alternate claim under section 10A allowed; remitted to Assessing Officer for verification and computation in accordance with law.

Computation of deduction before adjustment of brought forward losses and unabsorbed depreciation - Deduction under section 10A is to be computed before setting off brought forward business losses and unabsorbed depreciation. - HELD THAT: - The Tribunal rejected Revenue's contention that brought forward losses and unabsorbed depreciation must be adjusted prior to allowing deduction under section 10A. Relying on the ratio of the Hon'ble Bombay High Court in CIT v. Black & Veatch Consulting Pvt. Ltd., the Tribunal held that post-amendment treatment makes section 10A a deduction to be computed prior to adjustment of earlier losses/depreciation. The Tribunal noted the decision of the Supreme Court in Himatasingike Seide Ltd. concerned pre-amendment provisions and is not applicable to the amended statutory scheme; accordingly Grounds relating to adjustment of brought forward losses/unabsorbed depreciation were dismissed.

Deduction under section 10A to be computed before adjusting brought forward losses and unabsorbed depreciation; Revenue's grounds on this point dismissed.

Final Conclusion: Both appeals by Revenue dismissed; assessee entitled to alternate claim under section 10A and the matters remitted to the Assessing Officer for verification and computation of the deduction under section 10A, which is to be computed before adjustment of brought forward losses and unabsorbed depreciation.

Estimation of gross profit - Assessment reopened under Section 263 - Admissibility of statements recorded during survey - Reliance on audit under section 44AB - Burden to point out defects in books of accounts - Deletion of addition by Commissioner (Appeals)

Estimation of gross profit - Burden to point out defects in books of accounts - Deletion of addition by Commissioner (Appeals) - Admissibility of statements recorded during survey - Reliance on audit under section 44AB - Whether the Assessing Officer was justified in enhancing gross profit by estimation and making addition when no defect in books of accounts was pointed out, and whether the Commissioner (Appeals) was justified in deleting that addition. - HELD THAT: - The Tribunal held that the Assessing Officer proceeded to enhance the gross profit despite not finding any defect in the assessee's books or supporting records in either the original assessment under section 143(3) or the reassessment pursuant to the order under section 263. An addition based solely on a lower gross profit ratio was not warranted where books had been maintained, audited under section 44AB, and no specific deficiencies were demonstrated. The assessee had furnished a reasonable explanation for the reduction in gross profit (commencement of operations in a new building, recruitment and increased staff costs, competition and volatile gold prices, higher interest and selling/advertising expenses), which the Assessing Officer did not successfully rebut. The Tribunal also noted the limited evidentiary value of statements recorded during survey (as treated by the Commissioner (Appeals) in light of jurisdictional precedent and departmental instructions), and that audit under section 44AB does not dispense with the requirement that the department identify defects in accounts before making additions. For these reasons the Tribunal found no infirmity in the Commissioner (Appeals)'s deletion of the estimated gross profit addition. [Paras 7, 8]

Deletion of the addition made by estimating gross profit sustained; Assessing Officer's enhancement not upheld.

Final Conclusion: Revenue's appeal dismissed; the addition made by estimating gross profit was correctly deleted by the Commissioner (Appeals) as the Assessing Officer did not demonstrate defects in the books and the assessee furnished plausible explanations for the lower gross profit.

CENVAT credit on GTA services - place of removal - Free on Road (FOR) sale - binding effect of Supreme Court decision over Board circular - extended period of limitation-suppression of facts - penalty for erroneous CENVAT credit

CENVAT credit on GTA services - place of removal - Free on Road (FOR) sale - binding effect of Supreme Court decision over Board circular - Admissibility of CENVAT credit on GTA (outward freight) where goods are sold on FOR basis and invoice included freight and insurance - HELD THAT: - The Tribunal found that although the contracts and purchase orders showed delivery on FOR basis with ownership passing at buyer's premises and the invoice value included freight and insurance, CENVAT credit of GTA services is permissible only up to the place of removal. The question is governed by the amended definition of 'input service' and the legal position laid down by the Supreme Court in Ultratech Cement Ltd., which held that CENVAT credit on GTA services for transport from place of removal to the buyer's premises is not admissible. A subsequent Board circular cannot override the Supreme Court's decision. Applying that ratio, the appellant was held not entitled to CENVAT credit on GTA services for transport beyond the place of removal.

CENVAT credit on GTA services for transport from place of removal to buyer's premises is not admissible; the appellant's claim is rejected.

Extended period of limitation-suppression of facts - penalty for erroneous CENVAT credit - Validity of invoking extended period of limitation and imposition of penalties for the disputed CENVAT credit - HELD THAT: - The Tribunal accepted that the appellants had been regularly filing returns showing the CENVAT credit availed and that, during the impugned period, there existed judicial decisions favourable to the assessee supporting admissibility of credit. There was no finding of suppression of facts, fraud, collusion or intent to evade duty. In these circumstances the demand beyond the normal period of limitation was set aside and the penalties imposed were held unsustainable. The demand insofar as it related to the normal period was upheld.

Extended period demand and penalties set aside for lack of suppression or intent; demand sustained only for the normal period.

Final Conclusion: Following the Supreme Court's decision in Ultratech Cement Ltd., the appellant is not entitled to CENVAT credit on GTA services for transport up to the buyer's premises; however, demands raised beyond the normal period and penalties are quashed for want of suppression or intent, and only the demand for the normal period is sustained.

Option under Rule 6(3) of CENVAT Credit Rules - CENVAT credit on inputs used exclusively for exempted goods - Maintenance of separate accounts under Rule 6 - Voluntary reversal of credit and payment of interest - Penalty for wrongful availment of credit

Option under Rule 6(3) of CENVAT Credit Rules - Maintenance of separate accounts under Rule 6 - CENVAT credit on inputs used exclusively for exempted goods - Applicability of Rule 6(3) option and whether Revenue can compel maintenance of separate accounts when the assessee opts to pay the prescribed percentage instead. - HELD THAT: - The Tribunal found that Rule 6(3) provides an alternative option to manufacturers who cannot, or elect not to, maintain separate accounts for inputs used in dutiable and exempted goods: instead of segregating inputs, the manufacturer may pay the prescribed percentage of the price of exempted final products. When an assessee exercises the option under Rule 6(3) and pays the prescribed amount (here, 6%), the Department cannot mandate adoption of the separate-account route contrary to that option. The factual matrix showed the appellants had availed credit on all inputs and paid the amount under Rule 6(3)(i); consequently, Revenue's insistence on reversal of the entire credit because separate accounts were not maintained was held to be contrary to the scheme of Rule 6(3). [Paras 6]

Revenue cannot insist on maintenance of separate accounts where the assessee has validly exercised the option under Rule 6(3) and paid the prescribed percentage; the option complies with the CENVAT Credit Rules.

Voluntary reversal of credit and payment of interest - Penalty for wrongful availment of credit - Whether penalty is leviable where the assessee voluntarily reversed the excess credit and paid interest to 'buy peace'. - HELD THAT: - The Tribunal noted that the appellants had taken total credit and subsequently reversed the remaining credit and paid interest though, on the Tribunal's view of Rule 6(3), such reversal was not required. Given that the appellants had reversed the credit and paid interest, and considering the principle that Revenue could not compel the separate-account route after the assessee availed the statutory option, imposition of penalty in these circumstances was found to be unjustified. Reliance on earlier decisions of the Tribunal was noted to support the view that exercise of the option under Rule 6(3) and compliance therewith precludes penalty for the same act. [Paras 6]

Penalty imposed on the appellants is set aside.

Final Conclusion: The appeal is allowed to the extent that the penalty relating to the disputed reversal of credit is set aside: the assessee's exercise of the option under Rule 6(3) precluded Revenue from insisting on separate accounts or treating the credit as wrongly availed, and imposition of penalty was not justified; the appellants had in any event voluntarily reversed the remaining credit and paid interest.

Cenvat credit admissibility - Investigation by DGCEI and its infirmities - Failure to implead or examine suppliers and transporters - Benefit of doubt - Penalty for wrongful availment of credit

Cenvat credit admissibility - Investigation by DGCEI and its infirmities - Failure to implead or examine suppliers and transporters - Benefit of doubt - Cenvat credit claimed on invoices issued by M/s Unnati Alloys Pvt Ltd (directly or via intermediary invoices) cannot be denied where the investigation is infirm and no contrary evidence proves non-receipt of inputs. - HELD THAT: - The Tribunal found that the DGCEI-based investigation relied primarily on the statement of an investigator-target (Sh. Amit Gupta) without conducting independent inquiries at the ends of the alleged suppliers, transporters or the directors of M/s Unnati Alloys Pvt Ltd. The appellants' employees gave statements asserting receipt and use of the inputs, and M/s Prime Metalloys Pvt Ltd stated that it supplied the goods to the appellant. Revenue did not produce contrary evidence to show that inputs were not received or to identify replacement of inputs. In view of these investigative gaps and the absence of corroborative evidence disproving receipt, the investigation was held to be improper and the benefit of doubt was accorded to the appellants, resulting in the conclusion that Cenvat credit could not be denied. [Paras 7, 9]

Cenvat credit upheld in favour of the appellants; impugned denial set aside.

Penalty for wrongful availment of credit - Investigation by DGCEI and its infirmities - Penalty levied on the appellants cannot be sustained where denial of Cenvat credit is not justified due to infirmities in the investigation. - HELD THAT: - Since the Tribunal concluded that Cenvat credit could not be denied on the facts and that the investigation suffered from defects (including failure to implead or examine material parties), there remained no basis for imposing penalties on the appellants. The causal premise for penalty - wrongful availment of credit demonstrably established by proper investigation - was absent. [Paras 8, 9]

Penalties imposed on the appellants are set aside.

Final Conclusion: Appeals allowed; impugned order denying Cenvat credit and imposing penalties set aside for the period November 2011 to November 2012 due to investigative infirmities and absence of contrary evidence, with benefit of doubt accorded to the appellants.

Levy of Value Added Tax on differential turnover - Consideration of documents filed with objections - Right to effective personal hearing - Remand for fresh assessment on procedural infirmity

Consideration of documents filed with objections - Levy of Value Added Tax on differential turnover - Assessment set aside and remitted for reconsideration because the Assessing Officer's finding that no supportive documents were filed is factually incorrect. - HELD THAT: - The Court recorded that the petitioner filed objections along with supporting documents which were acknowledged on 14.05.2018. The Assessing Officer, however, concluded that no such documents were filed. The High Court held that this finding is factually incorrect and that whether those documents substantively support the petitioner's case is a matter to be decided only after those documents are considered on merit. For the two contested issues concerning the levy of tax on the differential turnover, the Court therefore set aside the impugned assessment orders and remitted the matter to the Assessing Officer to re-do the assessment after examining the documents already filed by the petitioner. [Paras 7, 9]

Impugned assessment orders set aside in respect of the two issues and remitted to the Assessing Officer for fresh consideration of the documents filed.

Right to effective personal hearing - Remand for fresh assessment on procedural infirmity - Assessment set aside and remitted because a general invitation in the notice of proposal was not an effective grant of personal hearing after the petitioner filed its reply. - HELD THAT: - The Court held that an indication in the notice of proposal that the petitioner may appear on any working day within 15 days cannot substitute for an effective personal hearing. An effective personal hearing should be fixed after receipt of the petitioner's reply so that both parties can meaningfully discuss the proposal and the reply. In the present case no specific date for personal hearing was fixed after the petitioner filed its reply, which constituted a procedural infirmity warranting remand. [Paras 8, 9]

Impugned assessment orders set aside insofar as they proceeded without affording an effective personal hearing; matter remitted to allow a specific personal hearing.

Final Conclusion: Writ petitions allowed. Assessment orders are quashed only insofar as they relate to the levy of Tamil Nadu VAT on the differential turnover between the balance sheet and Form WW for the assessment years 2012-2013 to 2015-2016; the matters are remitted to the Assessing Officer to re-do the assessment after considering the documents already filed and after providing an effective personal hearing to the petitioner within six weeks. In respect of other issues the assessment orders remain undisturbed. No costs.