TaxTMI Updates e-Newsletter
Jan 27,2012

Disallowance of foreign travelling expenses - consistency of assessment treatment with earlier assessment year - appellate tribunal's non-interference in absence of fresh grounds

Disallowance of foreign travelling expenses - consistency of assessment treatment with earlier assessment year - appellate tribunal's non-interference in absence of fresh grounds - Validity of the 10% disallowance of foreign travelling allowance claimed by the assessee for A.Y. 1989-90 - HELD THAT: - The assessing officer disallowed 10% of the foreign travelling allowance claimed. The Commissioner (Appeals) upheld that disallowance, following the order of the Income Tax Appellate Tribunal for the earlier assessment year. The Tribunal, on appeal, found no sufficient ground to interfere with the 10% disallowance and affirmed the appellate authorities' approach. Before the High Court, counsel for the assessee did not advance any persuasive basis to disturb the Tribunal's conclusion. Given the Tribunal's decision and the absence of fresh or compelling grounds to revisit the treatment, the Court declined to interfere with the disallowance.

The 10% disallowance of foreign travelling allowance for A.Y. 1989-90 is upheld and the Tribunal's order is affirmed.

Final Conclusion: The appeal is dismissed; the income-tax appellate authorities and the Tribunal were justified in upholding the 10% disallowance of foreign travelling allowance for A.Y. 1989-90, and the other contentions were not pressed before the Tribunal and do not arise for adjudication.

Rejection of books of account and estimation of income under the Income-tax Act - Use of previous year's gross profit rate for estimation of income - Recording of reasons as part of fair procedure - Estimation as a question of fact - Tribunal as final fact-finding authority

Rejection of books of account and estimation of income under the Income-tax Act - Use of previous year's gross profit rate for estimation of income - Estimation as a question of fact - Tribunal as final fact-finding authority - Validity of the assessment officer's rejection of the assessee's books and the consequent estimation of sales and gross profit rate by reference to the previous year - HELD THAT: - The Court held that where books of account are not properly maintained and vouchers (particularly for consumables) are not available for verification, the Assessing Officer was justified in invoking the provision permitting rejection of books and estimating income. Once books are rejected, estimation of sale and gross profit rate by reference to comparative figures of the assessee for the previous year is a permissible method of assessment. The Court treated the application of a gross profit rate on estimated sales as a question of fact, and noted that the Tribunal had given partial relief and acted as the final fact-finding authority. Reliance on earlier assessments for arriving at an estimation does not, in the facts of this case, amount to substantial illegality warranting interference. [Paras 12, 13, 14]

The AO's rejection of books and adoption of an estimated gross profit rate based on the previous year is sustained; the Tribunal's factual finding is final and cannot be interfered with.

Recording of reasons as part of fair procedure - Use of previous year's gross profit rate for estimation of income - Whether the Tribunal committed illegality by failing to consider grounds raised by the assessee and by relying on material from the previous assessment year without assigning reasons - HELD THAT: - The Court acknowledged the legal principle that reasons form part of fair procedure, and cited authorities emphasising the need for recording reasons. However, on the facts it found that the CIT(A) and Tribunal had considered the relevant facts and circumstances including manufacturing cost and selling price, and that the estimation adopted was lower than the previous year's gross profit. The Court concluded there was no substantive failure to apply mind such as would vitiate the order; the reliance on previous year's figures for estimation was fact-based and did not constitute a substantial question of law. [Paras 12, 14, 15]

No substantial illegality in the Tribunal's approach; absence of additional reasons or further interference does not invalidate the estimation or the Tribunal's order.

Final Conclusion: Both substantial questions of law were answered in favour of the revenue; the Tribunal's order sustaining the estimation after rejection of books is upheld and the appeal is dismissed.

Share application money not a deposit - provisions of section 269SS and penalty under section 271D - appellate interference and substantial question of law

Share application money not a deposit - provisions of section 269SS and penalty under section 271D - Whether penalty under section 271D for alleged contravention of section 269SS was rightly imposed where cash amounts received were shown as share application money. - HELD THAT: - The Assessing Officer treated cash receipts in excess of Rs.20,000 as deposits in contravention of section 269SS and imposed penalty under section 271D. The CIT(A) held, and treated the entire amount as explained being share application money. The Tribunal dismissed the Department's appeal against that finding. The Court noted that the Department had accepted the CIT(A)'s order in the related quantum proceedings and had not contested that conclusion before the Tribunal. The Court also relied on the earlier decision in ITA No. 148/1999 (16.01.1998) holding that share application money cannot be treated as a deposit within the meaning of sections 269SS/269T. Applying that principle, the Tribunal correctly upheld the deletion of the penalty since the impugned receipts were share application money and not deposits attractable under section 269SS. In view of these conclusions, no substantial question of law arises calling for interference by this Court.

Tribunal's order upholding CIT(A)'s finding that the receipts were share application money and deleting penalty under section 271D is correct; appeal dismissed.

Final Conclusion: The High Court dismissed the revenue appeal, endorsing the Tribunal's confirmation of the CIT(A)'s finding that the amounts were share application money (not deposits) and that deletion of the penalty under section 271D did not raise any substantial question of law.

Violation of Section 13(1)(c)(ii) - Explanation 3(ii) - entitlement to twenty per cent of profits / substantial interest - tied grants versus voluntary contributions - custodial obligation and requirement of separate project accounts

Violation of Section 13(1)(c)(ii) - Explanation 3(ii) - entitlement to twenty per cent of profits / substantial interest - Invocation of Section 13(1)(c)(ii) was not sustained against the respondent-society. - HELD THAT: - The tribunal's factual finding that the pledged FDRs were returned with interest to the respondent-society and that the amounts were paid back on maturity was not disputed. For Section 13(1)(c)(ii) to apply, the requirements of Section 13(3) and Explanation 3(ii) must be satisfied, i.e., it must be shown that persons in control were entitled to not less than twenty per cent of the profits of the concern. The Revenue failed to point to any finding by the Assessing Officer that such entitlement or profit interest of twenty per cent existed in favour of the persons in control of the three societies. In the absence of any recorded finding that the relevant persons had the requisite profit entitlement, the Court rejected the contention that Section 13(1)(c)(ii) was attracted. [Paras 6]

Invocation of Section 13(1)(c)(ii) rejected for want of any finding of twenty per cent profit entitlement under Explanation 3(ii).

Tied grants versus voluntary contributions - custodial obligation and requirement of separate project accounts - Unspent project grants were not treated as voluntary income of the respondent; the tribunal correctly upheld deletion of the addition. - HELD THAT: - The tribunal and CIT(A) found that the respondent received grants for specified projects subject to terms, monitoring by funding agencies, separate project audits and refund provisions for unutilized amounts. Such characteristics established that the receipts were tied grants where the respondent acted as a custodian of funds and was not free to appropriate them as voluntary contributions. The Commissioner of Income Tax (Appeals) relied on these factual findings and on precedent to delete the addition; the tribunal upheld that conclusion. In view of these findings on the nature and terms of the grants, the Court declined to entertain the Revenue's challenge on this aspect. [Paras 7, 9]

The tribunal's upholding of CIT(A)'s deletion of the addition for unspent tied grants was affirmed; the sums were not taxable as voluntary contributions.

Final Conclusion: The appeals by Revenue are dismissed: Section 13(1)(c)(ii) was not attracted for lack of any finding of requisite profit entitlement under Explanation 3(ii), and the tribunal correctly upheld that unspent tied project grants were not voluntary income of the respondent.

Revisionary jurisdiction under Section 263 - Erroneous and prejudicial to the interests of the revenue - Change of opinion doctrine - Duty of assessing officer to record reasons for conclusions - Remand for recomputation under Double Taxation Avoidance Agreement - Principles of natural justice (no prior notice required before revisional proceeding)

Revisionary jurisdiction under Section 263 - Erroneous and prejudicial to the interests of the revenue - Change of opinion doctrine - Duty of assessing officer to record reasons for conclusions - Whether the Commissioner validly exercised revisional powers under Section 263 by remanding the assessments for recomputation of DTAA credit without specifying in detail the error in the original orders - HELD THAT: - The Court held that Section 263 empowers the Commissioner to call for and examine records and to revise an order if he considers it erroneous insofar as it is prejudicial to the interests of the revenue. The power is intended to plug leakage to revenue and is not confined to situations where the Commissioner and Assessing Officer adopt identical reasoning. An assessing order that allows foreign tax credit under DTAA without disclosing the basis or computation may give rise to a clear possibility that the order is erroneous and prejudicial. The absence of explicit reasoning or a proper computation by the assessing authority in granting DTAA relief can render the order susceptible to revision. The Court rejected the Tribunal's view that the Commissioner acted merely on a change of opinion and emphasized that where an assessing officer fails to indicate the basis of entitlement (even when accepting the assessee's claim), the Commissioner is entitled to remand for explicit computation and verification. The fact that the Commissioner directed a recomputation and remand to the Assessing Officer did not amount to acting without jurisdiction. The Court further held that reasons (however brief) should support conclusions of the assessing authority, and the Commissioner may invoke Section 263 where such reasons are missing and prejudice to revenue is a real possibility. The Court relied on precedent holding that no prior formal notice is required before assuming revisional jurisdiction so long as principles of natural justice are observed before passing the revisional order. [Paras 21, 22, 28, 29]

The Commissioner's remand under Section 263 was valid; the Tribunal erred in treating the remand as beyond the Commissioner's jurisdiction and in setting aside the revisional order.

Remand for recomputation under Double Taxation Avoidance Agreement - Principles of natural justice (no prior notice required before revisional proceeding) - Disposition of appeals which challenged the Assessing Officer's recomputation carried out pursuant to the Commissioner's remand - HELD THAT: - The Court noted that following the remand the Assessing Officer had recomputed the DTAA relief resulting in reduced relief and that subsequent appellate proceedings before the Commissioner and Tribunal had been disposed of on the basis that the Commissioner's revisional order was set aside by the Tribunal. Having restored the Commissioner's remand, the Court held that the appeals against the recomputed assessments were not decided on merits by the Tribunal and therefore must be restored to the Tribunal for adjudication on merits. The Tribunal is directed to proceed with those appeals and dispose of them in accordance with law. [Paras 31, 33, 34]

Orders remitting computation stand; appeals against the reassessed orders are restored to the Tribunal for decision on merits.

Final Conclusion: Revenue appeals are allowed. The revisional directions of the Commissioner under Section 263 to remit the assessments for recomputation of DTAA credit are upheld; the Tribunal erred in setting aside those revisional orders. The consequential appeals against the recomputed assessments are restored to the Income Tax Appellate Tribunal for adjudication on merits.

Ex-gratia under voluntary retirement scheme - characterisation as salary - exemption under section 10(10C) - relief under section 89(1) - precedential effect of Division Bench decisions

Ex-gratia under voluntary retirement scheme - characterisation as salary - Ex-gratia compensation received on voluntary retirement does not require a different treatment so as to preclude the tax consequences considered by the Tribunal and the Appellate Authority. - HELD THAT: - The Court, referring to earlier Division Bench decisions of this Court, treated the matter as settled by precedent. No distinguishing features were shown to justify a different conclusion from those decisions. Consequently the Court declined to entertain a contrary view on the characterisation question and accepted the legal posture adopted by the Tribunal and the Commissioner (Appeals).

The characterisation issue stands resolved in conformity with earlier Division Bench rulings; no different view is taken.

Relief under section 89(1) - exemption under section 10(10C) - precedential effect of Division Bench decisions - Assessee who received ex-gratia/compensation on voluntary retirement is entitled to relief under section 89(1) in addition to exemption under section 10(10C). - HELD THAT: - The Court expressly followed two Division Bench decisions of this Court which held that relief under section 89(1) is admissible in cases of ex-gratia received on voluntary retirement. The learned counsel for Revenue did not point to any distinguishing feature in the present facts to displace that authoritative view. In view of those precedents, the Court found no substantial question of law warranting interference with the Tribunal's order dismissing the Revenue's appeal.

Relief under section 89(1) is available to the assessee in the circumstances of the case, and the Tribunal's dismissal of the Revenue's appeal is upheld.

Final Conclusion: Appeal dismissed; the Tribunal's order is upheld as the controversy is settled by binding Division Bench precedents and no distinguishing circumstances were shown to warrant a different conclusion.

Reopening of assessment under Section 147/148: requirement of prima facie belief based on relevant material - Assessing Officer's duty to form a prima facie opinion and not a fool proof case - Reliance on information furnished by the investigation wing (DIT (Inv.)) as a material nexus for reasons to believe - Prohibition on improving or supplementing reasons recorded for reopening after issue of notice

Reopening of assessment under Section 147/148: requirement of prima facie belief based on relevant material - Reliance on information furnished by the investigation wing (DIT (Inv.)) as a material nexus for reasons to believe - Assessing Officer's duty to form a prima facie opinion and not a fool proof case - Prohibition on improving or supplementing reasons recorded for reopening - Validity of the notice issued under Section 148 for AY 2004-05 and sufficiency of the reasons recorded for reopening the assessment. - HELD THAT: - The Court examined the written reasons recorded by the Assessing Officer on 17.2.2011 and the material supplied by the DIT (Inv.). The reasons set out the investigation wing's findings about groups operating as entry providers and specifically reproduced a tabular entry linking M/s. Shivam Softech Ltd. (described as an entry provider) to the petitioner with particulars including instrument number, date, bank, branch and account number. The Court held that at the stage of recording reasons the Assessing Officer is required only to form a prima facie belief and need not establish a conclusive case; the relevancy of material must be judged from that limited perspective. The table received from the investigation wing constituted a live nexus between the petitioner and the alleged accommodation entry and therefore furnished relevant material for forming the requisite prima facie belief. While the Court acknowledged the general rule that reasons recorded for reopening must not be supplemented or improved subsequently, it found that in the present case the material relied upon was already present and showed the necessary link; accordingly the reopening could not be struck down on the ground of impermissible supplementation. The Court rejected the contention that the material was vague or did not name the assessee, noting that the tabular information did link the entry provider with the petitioner and contained precise particulars sufficient to support a prima facie belief of escapement of income. [Paras 7, 9, 11, 12]

The notice under Section 148 for Assessment Year 2004-05 was valid; the reasons recorded furnished a prima facie belief that income chargeable to tax had escaped assessment, and the writ petition challenging the reopening was dismissed.

Final Conclusion: Writ petition dismissed; the reopening of assessment for AY 2004-05 under Section 147/148 is upheld on the basis that the reasons recorded and the investigation wing material sufficiently established a prima facie link justifying the notice; interim orders vacated and no costs awarded.

Release of seized containers upon unloading and joint sealing of goods - Duty of Customs authority to arrange safe custody of seized goods - Interim release without prejudice to enforcement of statutory liability

Release of seized containers upon unloading and joint sealing of goods - Duty of Customs authority to arrange safe custody of seized goods - Interim release without prejudice to enforcement of statutory liability - Respondents were directed to arrange safe custody of the seized goods and release the forty containers to the petitioner after unloading and joint sealing of samples within a stipulated time, without affecting any statutory liability. - HELD THAT: - The Court examined the correspondence, notably the letter dated 11.10.2010 from the office of the Additional Commissioner (Customs), which indicated that respondent no.1 desired that the seized goods (20,000 bags of MOP fertilizer grade) be kept in safe custody so that the containers could be released to the shipping line. The respondent no.2 had expressed inability to store the goods safely. Given respondent no.2's inability to keep the goods in safe custody, the responsibility to make suitable arrangements rests with respondent no.1. Considering the prolonged detention of the containers, the Court found it reasonable to direct respondent no.1 to take appropriate steps to keep the seized goods in safe custody, to unload the goods in the presence of an authorised representative of the petitioner, to have samples sealed jointly to avoid dispute in adjudication proceedings, and thereafter to release the forty containers to the petitioner within the time fixed by the Court. The Court expressly clarified that this direction for interim release does not absolve the petitioner of any liability that may be determined under the Customs Act, 1962 or any other enactment.

Respondent no.1 to arrange safe custody of the seized goods, effect unloading in the presence of the petitioner's authorised representative and jointly seal samples, and release the forty containers to the petitioner by 6th February, 2012; release to be without prejudice to any liability under relevant statutes.

Final Conclusion: Writ petition disposed with a direction that respondent no.1 shall, within the time specified, make arrangements for safe custody of the seized goods, permit unloading and joint sealing of samples in the presence of the petitioner's representative, and release the forty containers to the petitioner, the release being without prejudice to any statutory liability.

Conviction for concealment of dutiable goods and unlawful import under the Customs Act - minimum sentence requirement under the Customs Act and judicial discretion to reduce sentence for special and adequate reasons - economic offence affecting national economic planning - judicial modification of sentence to period already undergone

Conviction for concealment of dutiable goods and unlawful import under the Customs Act - Conviction recorded by the trial court and sustained on appeal was maintained by the High Court. - HELD THAT: - The petition challenged the dismissal of the appeal against conviction for offences under the Customs Act in respect of gold clandestinely concealed in the VCP. The petitioner did not dispute the conviction before this Court and accepted the conviction order. The High Court noted the facts of detection, absence of lawful import documents and that concealment was established. On that basis the conviction recorded by the courts below was left intact. [Paras 1, 3]

Conviction upheld; challenge to conviction dismissed.

Minimum sentence requirement under the Customs Act and judicial discretion to reduce sentence for special and adequate reasons - economic offence affecting national economic planning - judicial modification of sentence to period already undergone - Sentence was modified to the period already undergone and the petitioner was released, although the statutory minimum sentence exists, applying the Court's discretion for special and adequate reasons. - HELD THAT: - The Court acknowledged the statutory minimum imprisonment associated with the relevant offence but observed that the power exists to impose less than the minimum sentence for special and adequate reasons. The Court balanced the nature of the offence-recognising it as an economic offence prejudicial to national economic planning and noting historical restrictions on bringing gold into the country-with the factual circumstances that the offence occurred in 1989 and the petitioner had already suffered detention over many years and more than one month in the present incarceration. In view of the long passage of time, the third round of litigation and the period already undergone, the Court exercised its discretion to modify the sentence to the time already served and directed release; the bail bond was discharged and administrative compliance ordered. [Paras 5, 6, 7, 8, 9]

Order modified to release the petitioner on the sentence already undergone; bail bond discharged and jail superintendent directed to comply.

Final Conclusion: Criminal revision petition partially allowed: conviction maintained, but sentence modified to the period already undergone and the petitioner ordered released; bail bond discharged.

Pre-deposit for entertaining statutory appeal - deposit as condition precedent to admission of appeal - discretion to moderate pre-deposit in the interests of justice - right of appeal against a demand

Pre-deposit for entertaining statutory appeal - deposit as condition precedent to admission of appeal - discretion to moderate pre-deposit in the interests of justice - Quantum of pre-deposit required from the appellant for the appeal to be entertained by the Tribunal - HELD THAT: - The High Court had directed the appellant to deposit one-third of the service tax and penalty as a condition for entertaining its appeal. The appellant, a registered charitable society, contended it lacked resources to comply and would be deprived of its right of appeal; the Revenue sought a higher pre-deposit (50%). Having considered the submissions and material on record, the Court exercised its supervisory discretion to moderate the pre-deposit required in the interests of justice. The Court concluded that directing deposit of one-third of the demand towards service tax strikes a fair balance between the Revenue's interest in securing the demand and the appellant's ability to prosecute its appeal, and provided a time-limit for compliance to permit adjudication on merits.

Appellant directed to deposit one-third of the service tax demand on or before 15th March, 2012, failing which the conditional admission will not follow; if deposited, the appeal shall be heard on merits.

Final Conclusion: Appeal disposed by directing the appellant to make a pre-deposit of one-third of the service tax demand by 15th March, 2012; upon such deposit the appeal shall proceed to be heard on merits, with no order as to costs.

Sanction of provisional rebate under administrative circular - simplified procedure for sanction of refund/rebate of unutilised credit - preliminary scrutiny and 80% provisional sanction within 15 days - effect of pending adjudication/show cause notice on entitlement to simplified rebate procedure - disapplication of Board Circular where an offence case has been booked or recovery is pending

Effect of pending adjudication/show cause notice on entitlement to simplified rebate procedure - simplified procedure for sanction of refund/rebate of unutilised credit - Petitioner is not entitled to the benefit of the Board's Circular dated 20.4.2006 (simplified procedure and provisional sanction of 80% of rebate) while adjudication on a show cause notice is pending. - HELD THAT: - The Circular provides a simplified procedure requiring preliminary scrutiny and sanction of 80% of the rebate within 15 days, but it applies only where no offence case has been booked by the department during the preceding three years and no recovery of short levy is pending. In the present matter a show cause notice dated 21.10.2011 has been issued and adjudication proceedings are pending; therefore the petitioner is disentitled to the benefit of the simplified procedure under the Board's Circular. The Court expressly declined to examine the merits or validity of the show cause notice and observed that the impugned order did not deny the rebate itself but only the provisional relief under the Circular pending adjudication.

Writ petition dismissed; petitioner not entitled to provisional sanction under the Board's Circular while adjudication on the show cause notice is pending.

Final Conclusion: The High Court dismissed the writ petition, holding that because adjudication pursuant to the show cause notice is pending the petitioner cannot claim the benefit of the Board's simplified rebate procedure (80% provisional sanction) under the Circular dated 20.4.2006; the Court did not decide the validity of the show cause notice and noted that rebate itself was not finally denied.

Central Government Health Scheme entitlement of pensioners - Reimbursement of medical expenses by employer - Membership/registration not prerequisite for reimbursement - Pensioner entitled even if not a cardholder - Full reimbursement where hospital is in approved list

Central Government Health Scheme entitlement of pensioners - Membership/registration not prerequisite for reimbursement - Reimbursement of medical expenses by employer - Whether a retired employee who availed treatment at an approved hospital but had not completed CGHS registration or paid contributions is entitled to reimbursement under CGHS. - HELD THAT: - The High Court applied the settled position in earlier decisions of the Delhi High Court holding that a pensioner who avails medical treatment at a hospital approved under the CGHS is entitled to reimbursement of the medical expenses even if the pensioner did not possess a CGHS card, had not been registered with a dispensary, or had not paid the requisite contribution prior to treatment. The court noted precedents establishing that post-facto compliance (such as contribution after treatment) or non-processing of membership does not defeat the entitlement, that full amounts incurred are to be reimbursed subject to verification between Government and hospital, and that being a cardholder is not a condition precedent to reimbursement when the hospital is on the approved list. As the facts of the present case fall squarely within those principles, there was no infirmity in directing reimbursement to the pensioner.

The pensioner is entitled to reimbursement of medical expenses incurred at an approved hospital despite non-registration or non-payment of contribution; the writ court's direction to reimburse is sustained.

Final Conclusion: Letters Patent Appeal dismissed; the Single Judge's order directing reimbursement of medical expenses to the retired employee under CGHS is upheld.