TaxTMI Updates e-Newsletter
Jan 20,2012

Overriding effect of rehabilitation scheme under SICA - Non-obstante clause in section 43B of the Income Tax Act - Applicability of BIFR circulars to income-tax deductions - Construction of scheme in aid of rehabilitation of sick industrial companies

Applicability of BIFR circulars to income-tax deductions - Overriding effect of rehabilitation scheme under SICA - Reliance on BIFR Circulars No.523 (05.10.1988) and No.576 (31.08.1990) did not justify treating those circulars as mandating allowance of deduction under section 43B in the present case. - HELD THAT: - The Court examined Circular No.523 and Circular No.576 and found that Circular No.523 dealt with remission or cessation of interest liability under section 41(1) and clarified that section 32(1) of SICA refers to provisions of the Act and rules or schemes made thereunder and not to orders under section 17(2). Circular No.576 later clarified that a sanctioned Scheme under section 18 would have overriding effect only in matters covered by Circular No.523. Since Circular No.523 related to section 41(1) and not to section 43B, the Tribunal's reliance on these circulars to permit deduction under section 43B was unsustained on the facts of this case. [Paras 6, 7]

BIFR Circulars No.523 and No.576 do not mandate allowance of deduction under section 43B for the facts before the Court.

Overriding effect of rehabilitation scheme under SICA - Non-obstante clause in section 43B of the Income Tax Act - Construction of scheme in aid of rehabilitation of sick industrial companies - A scheme sanctioned under SICA has overriding effect over inconsistent provisions of the Income Tax Act, and the sanctioned Scheme's provision that income-tax authorities may consider allowing deduction under section 43B must be construed in light of the rehabilitation purpose, affording the assessee the benefit. - HELD THAT: - The Court construed section 32(1) of SICA as stating that provisions of SICA and rules or schemes made thereunder shall have effect notwithstanding anything inconsistent in any other law. Consequently, a Scheme framed under section 18 will override inconsistent provisions of the Income Tax Act, including section 43B. The Court further held that the Scheme's observation that income-tax authorities may consider allowing deduction under section 43B must be read purposively in the context of rehabilitation; when an assessee takes over a sick company pursuant to a sanctioned Scheme, the assessee is entitled to the benefits necessary for rehabilitation and the Scheme should be construed accordingly. The Court noted consistent authority to similar effect. [Paras 10, 11, 12]

The sanctioned Scheme under SICA overrides inconsistent provisions of the Income Tax Act and the assessee is entitled to the benefit of allowance under section 43B as contemplated by the Scheme.

Final Conclusion: Both tax appeals by the Revenue were dismissed: the Tribunal's reliance on the BIFR circulars did not by itself support allowance under section 43B, but the sanctioned Scheme under SICA has overriding effect vis-a -vis the Income Tax Act and, read purposively for rehabilitation, entitles the assessee to the claimed benefit; appeals dismissed.

Registration under Section 10(23C)(iv) - application of income wholly and exclusively to the objects for which the institution is established - relevance of maintenance of proper accounts and external vouchers - duty to give hearing and consider explanations before rejecting an approval application - power to remit for fresh consideration

Registration under Section 10(23C)(iv) - duty to give hearing and consider explanations before rejecting an approval application - Validity of the order dismissing the petitioner's application for registration and whether the application was rejected without adequate consideration of explanations and documents - HELD THAT: - The Court found that the respondent dismissed the Form No.56D application for registration largely on the basis of observed fluctuations in expenses and alleged defects in vouchers, but did not examine or deal with the detailed explanations and supporting material furnished by the petitioner in its letter dated 28.4.2009 before passing the impugned order dated 30.4.2009. The Court observed that year-to-year variation in expenditure alone does not necessarily demonstrate absence of bona fide application of income to objects, and that specific departures in accounting (such as cash payments or missing voucher particulars) require consideration of explanations and verification rather than being treated as ipso facto proof of siphoning off income. Having regard to the statutory scheme governing approval under Section 10(23C) and the monitoring/conditioning power of the prescribed authority as explained in American Hotel and Lodging Association Educational Institute , the Court held that the respondent ought to have given the petitioner an opportunity of hearing and considered the petitioner's explanations before reaching the adverse conclusion.

Impugned order set aside and matter remitted for fresh decision; respondent to decide the registration application afresh after hearing the petitioner and considering the explanations and materials.

Relevance of maintenance of proper accounts and external vouchers - application of income wholly and exclusively to the objects for which the institution is established - power to remit for fresh consideration - Scope of reconsideration on remand and the factors to be kept in view by the prescribed authority - HELD THAT: - The Court directed that on remand the respondent must examine the genuineness of activities and the application of income to objects as envisaged by the provisos to Section 10(23C), keeping in mind the observations in American Hotel and Lodging Association Educational Institute . The respondent may, consistent with the statutory scheme, verify accounts, call for documents, and, where appropriate, impose conditions or monitoring stipulations while granting approval; however, such steps must follow consideration of the petitioner's explanations and an opportunity of hearing. The remand is for fresh adjudication on merits and not merely for mechanistic rejection based on apparent voucher defects or year-to-year fluctuations.

Direction to respondent to decide afresh on merits and after hearing, with liberty to require verification/conditions in accordance with law.

Final Conclusion: Impugned order dated 30.4.2009 is set aside and the application for registration under Section 10(23C)(iv) is remitted to the Director General of Income Tax (Exemptions) for fresh decision after giving the petitioner an opportunity of hearing and considering its explanations and supporting material; petitioner/representative to appear as directed and the respondent may decide the matter in accordance with statutory principles and the observations in the cited authority.

Refund consequent upon finalisation of provisional assessment - provisional assessment and suo moto refund under Section 18 - claim for refund and limitation under Section 27 - doctrine of unjust enrichment in refund claims - non retrospective effect of amendments to Section 18 (subs. 3,4,5) - Explanation II to Section 27 - application where additional refund is claimed after adjustment

Provisional assessment and suo moto refund under Section 18 - refund consequent upon finalisation of provisional assessment - Whether refund arising on finalisation of provisional assessment (prior to the 13.7.2006 amendments to Section 18) is payable without any application under Section 27. - HELD THAT: - The Court accepted the line of authority that where provisional duty paid is finally assessed at a lower amount, the excess is payable to the importer by virtue of Section 18 and, insofar as assessments finalised before the insertion of sub sections (3) to (5) w.e.f. 13.7.2006 are concerned, no separate claim under Section 27 is required. The Court followed the decisions of the Constitution Bench and subsequent Supreme Court three Judge Bench authorities distinguishing refunds that arise directly upon finalisation of provisional assessment from refunds arising for other reasons; in the former category the bar of unjust enrichment and the procedural requirements of Section 27(2) do not apply and the Revenue is bound to make refund suo moto. The Gujarat High Court decision in Hindalco (and supporting Supreme Court precedent) was held to correctly state the law for pre amendment provisional assessments, and the undisputed factual finding that the final orders were not communicated meant limitation under Section 27 did not pose a bar in any event. [Paras 6, 11, 20, 21]

Refund due on finalisation of provisional assessment had to be paid under Section 18 and no application under Section 27 was necessary in the facts of these pre amendment assessments.

Doctrine of unjust enrichment in refund claims - non retrospective effect of amendments to Section 18 (subs. 3,4,5) - Whether the doctrine of unjust enrichment (and the conditions introduced by subs. (3)-(5) of Section 18 w.e.f. 13.7.2006) applied to the respondent's claim. - HELD THAT: - The Court observed that sub sections (3), (4) and (5) to Section 18 were inserted w.e.f. 13.7.2006 and that Revenue did not contend for retrospective operation. The newly inserted provisions (including express reference to conditions akin to unjust enrichment) are substantive and therefore do not govern assessments finalised prior to their commencement. Reliance on Explanation II and Section 27(2) to invoke unjust enrichment for amounts refundable on finalisation of provisional assessment prior to 13.7.2006 was rejected, following the reasoning in Allied Photographics, TVS Suzuki and Mafatlal (as interpreted by the three Judge Bench). Consequently, the principle of unjust enrichment did not operate to deny refund in this case. [Paras 7, 11, 20]

The amendments to Section 18 (subs. 3-5) are not retrospective; unjust enrichment did not bar the respondent's refund in respect of these pre amendment provisional assessments.

Explanation II to Section 27 - application where additional refund is claimed after adjustment - claim for refund and limitation under Section 27 - Scope of Explanation II to Section 27 and distinction between (a) refunds admittedly due on final adjustment of provisional assessment and (b) additional refund claims arising after adjustment (requiring an application under Section 27). - HELD THAT: - The Court adopted the explanatory distinction: where provisional duty is finally reduced and an excess is admittedly due on adjustment, Section 18 (or Rule 9B analogue) governs and no application under Section 27 is necessary; by contrast, where after adjustment an assessee seeks further amounts (for example due to appellate orders, rectification or fresh grounds), Explanation II to Section 27 applies and such claims must be made within the limitation prescribed and comply with Section 27(2). The Gujarat High Court illustrations (and authorities) were accepted to delineate the two situations and to confine Explanation II to cases where a further claim is pressed beyond the admitted adjustment. [Paras 10, 19, 20]

Explanation II to Section 27 applies to additional refund claims after adjustment; it does not convert refunds admittedly due on finalisation of provisional assessment into claims requiring compliance with Section 27.

Final Conclusion: The substantial question is answered in favour of the respondent. For the provisional assessments finally determined in 1999, the excess duty found on finalisation was refundable under Section 18 without any separate claim under Section 27, and the later amendments to Section 18 (subs. 3-5 w.e.f. 13.7.2006) and the doctrine of unjust enrichment do not apply retrospectively; the appeal is disposed of against Revenue.

Exigibility of service tax on services provided by non-residents prior to insertion of Section 66A - prospective operation of a taxing provision

Exigibility of service tax on services provided by non-residents prior to insertion of Section 66A - Services supplied by a non-resident to the assessee before 18.4.2006 are not exigible to service tax by virtue of insertion of Section 66A of the Finance Act, 1994. - HELD THAT: - The Court considered the effect of the insertion and implementation of Section 66A of the Finance Act, 1994 (inserted w.e.f. 18.4.2006) and followed earlier judicial pronouncements, including the Bombay High Court decision in Indian National Shipowners Association and this Court's Division Bench view in Commissioner of Central Excise v. Bhandari Hosiery Exports Ltd. The Tribunal's reliance on the Bombay High Court decision was affirmed. Having examined a like challenge in Commissioner of Central Excise v. M/s Kansal Hosiery Exports (STA No.16 of 2011, decided 2.1.2012), the Court concluded that services provided by non-residents prior to the statutory insertion were not subject to service tax, and found no distinction in the present appeals that would warrant a different result.

Appeals dismissed; transactions prior to 18.4.2006 not exigible to service tax where services were supplied by non-residents.

Final Conclusion: The Revenue's appeals are dismissed; the Tribunal's orders holding that services supplied by non-residents before the insertion of Section 66A (18.4.2006) are not exigible to service tax are affirmed, following earlier decisions including the Division Bench judgment referred to and the Bombay High Court decision.

Proviso to Section 11AC of the Central Excise Act, 1944 - penalty equivalent to duty reduced to 25% if deposited within 30 days - tribunal's power to rectify order and grant statutory benefit - absence of legal infirmity warranting interference - substantial question of law under Section 35G of the Act

Proviso to Section 11AC of the Central Excise Act, 1944 - penalty equivalent to duty reduced to 25% if deposited within 30 days - tribunal's power to rectify order and grant statutory benefit - Validity of the Tribunal's direction permitting payment of penalty at 25% within 30 days under the proviso to Section 11AC where earlier orders did not disclose the benefit. - HELD THAT: - The Tribunal, noting that the earlier orders imposing penalty did not indicate the availment of the proviso to Section 11AC, granted the assessee the statutory opportunity to deposit the penalty at 25% if paid within 30 days. The High Court held that where an earlier order was not passed in accordance with Section 11AC, the Tribunal was justified in affording the assessee the benefit prescribed by the proviso and in rectifying the earlier order by directing deposit of 25% within 30 days, failing which the full penalty equivalent to duty would remain payable. The Court found no legal infirmity in the Tribunal's order and that the Tribunal acted within its powers in granting the statutory benefit.

Tribunal's direction upholding grant of 30-day 25% deposit benefit under the proviso to Section 11AC is valid and not liable to interference.

Substantial question of law under Section 35G of the Act - absence of legal infirmity warranting interference - Whether the appeal raised a substantial question of law under Section 35G warranting interference with the Tribunal's order. - HELD THAT: - The Court examined the grounds of appeal and concluded that the challenge was misconceived. Since the Tribunal merely granted the assessee the statutory benefit under Section 11AC's proviso and there was no legal infirmity in that exercise, the appeal did not raise any substantial question of law within the meaning of Section 35G. Consequently, interference with the Tribunal's order was unwarranted.

Appeal does not raise a substantial question of law under Section 35G and is liable to be dismissed.

Final Conclusion: The appeal is dismissed; the Tribunal's order permitting the assessee to deposit the penalty at 25% within 30 days under the proviso to Section 11AC is upheld and there is no substantial question of law under Section 35G to warrant interference.