TaxTMI Updates e-Newsletter
Jan 21,2012

Reopening of assessment under section 147 for escaped income - deduction under section 80IB(10) and disqualification by subsequent amendment - failure to disclose fully and truly all material facts - retrospective effect of statutory amendment

Reopening of assessment under section 147 for escaped income - failure to disclose fully and truly all material facts - deduction under section 80IB(10) and disqualification by subsequent amendment - retrospective effect of statutory amendment - Validity of the notice dated 18.3.2011 seeking reopening of the assessment for A.Y.2004-05 - HELD THAT: - The Court held that the only reason recorded for reopening the assessment beyond four years was that the housing project allegedly contained commercial construction in excess of the later-inserted clause (d) of section 80IB(10), which disqualifies a deduction where commercial area exceeds prescribed limits. The amendment containing clause (d) was introduced with effect from assessment year 2005-06 and was not retrospective; consequently it could not form a foundation for reopening an assessment already finally framed for A.Y.2004-05. The reasons recorded did not allege any failure by the assessee to disclose fully and truly all material facts necessary for assessment nor did they indicate concealment of material particulars; the Assessing Officer did not found the belief of escaped income on any such omission. An alternative contention by Revenue that the assessee was ineligible even without clause (d) was neither the ground recorded for reopening nor supported by any allegation of non-disclosure in the reasons; the Court therefore rejected that contention as not a valid basis to sustain reopening. For these reasons the notice to reopen was held wholly invalid. [Paras 6, 7]

The impugned notice for reopening the assessment for A.Y.2004-05 is quashed.

Final Conclusion: The petition succeeds; the High Court quashed the notice to reopen the assessment for A.Y.2004-05 as being based on a subsequently enacted non retrospective disqualification and lacking any suggestion of failure to disclose material facts.

Penalty under Section 271(1)(c) - Two views rule - Applicability of Section 167(B)(2) to an A.O.P. - Binding effect of CBDT circulars vis-a -vis Supreme Court decisions - Reference to Special Bench as indicium of bona fide doubt

Penalty under Section 271(1)(c) - Two views rule - Reference to Special Bench as indicium of bona fide doubt - Validity of the penalty imposed under Section 271(1)(c) when the correctness of assessment placement (in the A.O.P. or in the hands of individual members) involved conflicting views. - HELD THAT: - The Tribunal deleted the penalty on the ground that two reasonable views existed on whether income should be assessed in the A.O.P. or in the hands of individual members, a doubt demonstrated by the Tribunal's own referral to a Special Bench. The Court accepted that the referral order (showing that the question raised a point of general public importance and that conflicting authorities/circulars existed) evidenced a bona fide doubt. The fact that the referral was made after the return was filed did not preclude the assessee from having had such a doubt when filing. Applying the settled principle that a penalty under Section 271(1)(c) cannot be sustained where two views are possible, the Court found no reason to interfere with the Tribunal's deletion of the penalty and held that no substantial question of law arose for consideration. [Paras 9, 10, 11]

Penalty under Section 271(1)(c) deleted as two reasonable views existed; appeal dismissed.

Final Conclusion: The High Court upheld the Tribunal's order deleting the penalty under Section 271(1)(c) for assessment years 2003-04 and 2004-05, concluding that a bona fide doubt (demonstrated by referral to a Special Bench) meant two views were possible and penalty could not be sustained.

Determination of annual capacity of production - Application of Rule 5 of the Hot Re-rolling Steels Mills Annual Capacity Determination Rules, 1997 - Redetermination under Rule 4(2) - Effect of alteration in production parameters on annual capacity - Non obstante nature of Section 3A - Second proviso to Section 3A(2) - re-determination on alteration of factor

Application of Rule 5 of the Hot Re-rolling Steels Mills Annual Capacity Determination Rules, 1997 - Redetermination under Rule 4(2) - Effect of alteration in production parameters on annual capacity - Rule 5 of the 1997 Rules applies even where a manufacturer has altered a parameter after obtaining permission under Rule 4(2), and the annual capacity so determined shall be deemed equal to actual production in financial year 1996-97 when the conditions of Rule 5 are met. - HELD THAT: - The Court held that Section 3A is a non obstante charging provision enabling determination of annual capacity by rules and that Rule 3(3) contains the exclusive formula for such determination. An intimation under Rule 4(2) requiring redetermination must be effected pursuant to the formula in Rule 3(3). Given the clear and unambiguous language of Rule 5, where the annual capacity determined (or redetermined pursuant to Rule 3(3)) is less than actual production in financial year 1996-97, Rule 5 operates to deem the annual capacity equal to that actual production. The Court followed the decision of the Supreme Court in Commissioner of Central Excise Chandigarh v. Doaba Steel Rolling Mills, which reversed the contrary view and held that Rule 5 cannot be ignored on account of a permitted change in parameters that reduces capacity; accordingly Rule 5 'springs into action' and must be given full effect. [Paras 5, 8, 10]

Rule 5 applies on redetermination under Rule 4(2) and the annual capacity shall be deemed equal to actual production in financial year 1996-97 where Rule 5 conditions are met.

Final Conclusion: Appeal allowed; the CESTAT order dated 16.06.2010 is set aside and Rule 5 of the 1997 Rules is held to apply to the period concerned (financial year 1996-97). Parties to bear their own costs.

Sale in the course of import - integral connection / inextricable link between sale and import - single sale occasioning the import - privity of contract - transfer of documents of title before goods cross customs frontiers

Sale in the course of import - integral connection / inextricable link between sale and import - single sale occasioning the import - Whether the import by the appellant and subsequent sale to Canara Bank, Bangalore is a sale in the course of import within the meaning of Section 5(2) of the Central Sales Tax Act and hence exempt from sales tax. - HELD THAT: - The Court applied the settled tests derived from Supreme Court precedents that a sale is 'in the course of import' only where the sale occasions the import and there is an integral, inextricable link between the sale and the import such that the connection cannot be severed without breaching statutory or contractual obligations. The decision examined the factual matrix: the appellant was the importer named in the bill of entry; customs clearances and import formalities were effected by the appellant; the purchase order from Canara Bank was placed on the appellant (not on the foreign manufacturer); and there was no privity of contract between Canara Bank and the German supplier. The Court contrasted these facts with authorities where exemption was allowed because legal or contractual obligations vested ownership or exclusive rights in the buyer on dispatch (making diversion impossible) or where export/import was canalised so that a single sale occasioned the import. Here, the appellant had independent contracts on a principal-to-principal basis with the bank and with the foreign supplier, and no contractual or statutory bar prevented the appellant from selling or diverting the imported goods to a third party. Back-to-back contracts and the appellant's intention to supply the bank were insufficient to establish the requisite inextricable link or that a single sale occasioned the import. Consequently, the conditions for applicability of Section 5(2) were not satisfied.

The sale was not a sale in the course of import under Section 5(2) of the CST Act; benefit claimed by the appellant is refused.

Final Conclusion: The substantial question of law was answered against the appellant: the import by the appellant and the subsequent sale to Canara Bank did not qualify as a sale in the course of import under Section 5(2) of the Central Sales Tax Act; the appeal is dismissed in favour of the Revenue.