TaxTMI Updates e-Newsletter
Feb 01,2012

Reopening of assessment beyond four years - reason to believe that income has escaped assessment - retrospective amendment affecting deduction under Section 80IA - failure to disclose truly and fully all material facts - quashing of notice for reopening

Reopening of assessment beyond four years - reason to believe that income has escaped assessment - retrospective amendment affecting deduction under Section 80IA - Validity of reopening an assessment framed after scrutiny beyond four years where the sole ground is a retrospective statutory amendment affecting entitlement to deduction under Section 80IA. - HELD THAT: - The Court held that reopening an assessment beyond the four-year period requires that the Assessing Officer had reason to believe that income chargeable to tax had escaped assessment because the assessee failed to fully and truly disclose material facts. The Assessing Officer's reasons for reopening relied solely on a retrospective Explanation to Section 80IA introduced in 2009 with retrospective effect from 1.4.2000, disallowing deduction for businesses in the nature of works contracts. The court found that a retrospective amendment, even if it may disentitle an assessee to a deduction, does not by itself furnish the required foundation for reopening an assessment beyond four years in the absence of any material on record showing failure to disclose truly and fully all material facts when the original return was filed. Accordingly, the notice for reopening based exclusively on the retrospective Explanation was unsustainable. [Paras 11, 12, 14]

Notice for reopening the assessment beyond four years quashed insofar as it rests solely on the retrospective Explanation to Section 80IA; reopening held invalid for lack of reason to believe rooted in nondisclosure of material facts.

Failure to disclose truly and fully all material facts - quashing of notice for reopening - Whether the Assessing Officer could reopen the assessment on the ground that the assessee had not disclosed that it executed work as a contractor rather than as a developer, and whether the subsequent assessment order based on such reopening is sustainable. - HELD THAT: - The Court observed that the reasons recorded for reopening did not refer to any failure by the assessee to disclose the nature of the works in the original return. Moreover, when the return was filed the retrospective Explanation was not part of the statute book, and the assessee could not have been expected to make disclosures required by a subsequently introduced Explanation. In consequence, the contention that the assessee failed to disclose the contractual nature of the works was both absent from the reasons and untenable as a basis for reopening. The Court therefore quashed the reopening notice and held the assessment order passed pursuant to that reopening to be invalid. [Paras 6, 15, 16]

Reopening and the resultant assessment order are invalidated because no nondisclosure of material facts was shown and the ground relied upon was not recorded; the assessment order based on such reopening stands quashed.

Quashing of notice for reopening - Legality and propriety of delay in disposal of objections by the Assessing Officer followed by swift final assessment. - HELD THAT: - The Court noted that the assessee's objections to the reopening notice remained pending with the Assessing Officer for nearly six months and that the final assessment order was passed within two weeks after disposal of those objections. While recognising that isolated instances might be forgiven, the Court recorded concern about a recurring tendency to delay disposal of objections and then frame assessments at the fag end of time limits. Although this procedural criticism did not alone determine the legal fate of the reopening in this case, it reinforced the Court's conclusion and was admonitory in tone, directing departmental attention to the practice. [Paras 7, 17]

Court censured the practice of delaying disposal of objections and then quickly framing assessment; observed such tendency is improper and should be addressed by the Department.

Final Conclusion: The notice for reopening the assessment relating to Assessment Year 2005-06 and the subsequent assessment order are quashed: reopening beyond four years based solely on the retrospective Explanation to Section 80IA was held invalid for want of any reason to believe grounded in nondisclosure of material facts; the departmental practice of delaying objections and then promptly framing assessment was deprecated.

Fringe Benefit Tax charge under Section 115WA - deeming provisions of fringe benefits under Section 115WB(2) - provision of hospitality - sales promotion including publicity - sales discount/rebate as selling expense - interpretation of statutory deeming provisions in common parlance

Provision of hospitality - interpretation of statutory deeming provisions in common parlance - Free of cost car accessories provided to customers are not hospitality within clause (B) of Section 115WB(2) and therefore not liable to FBT as hospitality. - HELD THAT: - The court held that the ordinary meaning of 'hospitality' connotes reception and entertainment of guests or strangers in a generous manner. Giving accessories to purchasers who have paid the sale consideration is not the kind of gratuitous reception or entertainment contemplated by 'hospitality' in common parlance. Treating such accessories as 'hospitality' would unduly stretch the word beyond its natural business meaning. Consequently, the expenditure on accessories supplied to car buyers cannot be brought within clause (B) as hospitality liable to fringe benefit tax. [Paras 10, 11, 12]

Not hospitality; clause (B) of Section 115WB(2) does not apply to the free accessories in this case.

Sales promotion including publicity - sales discount/rebate as selling expense - deeming provisions of fringe benefits under Section 115WB(2) - Free of cost accessories supplied as part of the sale package are not sales promotion/publicity under clause (D) of Section 115WB(2) and thus not taxable as FBT under that clause; they are akin to selling expenses/discounts built into the sale consideration. - HELD THAT: - The court interpreted 'sales promotion' and 'publicity' in their ordinary commercial sense as activities intended to popularize or promote sales generally (e.g., publicity, distribution of samples unconnected with the actual sale). It noted that clause (vii) excludes distribution of samples and other sub-clauses exclude certain payments to third parties, showing the legislature intended to catch activities of promotion/publicity, not routine posturing of the sale price. On the facts, accessories were supplied only when the customer purchased the car and their cost was effectively embedded in the sale consideration; they were not gratuitous freebies to induce general publicity. The CBDT circular's distinction between discounts/rebates (answer to Q.60) and unrelated freebies (answer to Q.66) supports treating such accessories as selling expenses or discounted consideration rather than clause (D) sales promotion liable to FBT. The tribunal's reliance on invoice notations and the Assessing Officer's view that the measure promoted sales was rejected as inconsistent with the nature of the transaction. [Paras 17, 19, 22, 23, 24]

Not sales promotion/publicity; clause (D) of Section 115WB(2) does not apply to the accessories in this case; they are selling expenses/embedded consideration.

Final Conclusion: Both substantial questions of law are answered against Revenue and in favour of the appellant: the free accessories supplied to car purchasers are neither hospitality under clause (B) nor sales promotion/publicity under clause (D) of Section 115WB(2) for the assessment year 2006-07; appeal allowed and no order as to costs.

Service tax on construction services - tax on services versus tax on land and buildings - deeming fiction in tax law - preferential location charge as taxable service - incidence of tax distinct from taxable event - legislative competence under Entry 49 of List II - expansive explanation to statutory provision - vagueness and excessive delegation

Service tax on construction services - deeming fiction in tax law - tax on services versus tax on land and buildings - incidence of tax distinct from taxable event - legislative competence under Entry 49 of List II - Constitutional validity of the explanation inserted into Section 65(105)(zzq) and Section 65(105)(zzzh) of the Finance Act, 1994 (as amended by Finance Act, 2010). - HELD THAT: - The Court held that the explanatory provision creates a legislative deeming fiction to treat construction by a builder (intended for sale and where some payment is received before the completion certificate) as a service rendered by the builder to the buyer. The object of the levy is a tax on taxable services; the fact that the service is rendered in relation to land does not convert the charge into a tax on land or buildings as units. Reliance on settled precedents establishes that legislative competence is to be judged by the object/event of taxation and not by incidence or the machinery of collection. Parliament's legislative assessment that builders render value adding services to buyers during construction is within competence and the explanation may validly expand the scope of the taxable service. Consequently the explanation is not ultra vires on the ground that it amounts to a tax on land and buildings, and the insertion does not offend the constitutional allocation of legislative power. [Paras 23, 24, 29, 30]

Challenge to the explanation in clauses (zzq) and (zzzh) dismissed; the provisions are constitutionally valid.

Preferential location charge as taxable service - vagueness and excessive delegation - tax on services versus tax on land and buildings - Constitutional validity of clause (zzzzu) of Section 65(105) (taxation of services by builders for providing preferential location or development). - HELD THAT: - Clause (zzzzu) brings within taxable services separately charged amounts for preferential location or development provided by builders. The Court accepted the legislative rationale that such charges, when separately levied, represent value adding services rendered to buyers and thus fall within the service tax net; if no separate charge is levied, no service tax liability arises. The fact that the service relates to location does not make it a tax on land under Entry 49 of List II. The provision is not vague or an excessive delegation: the legislative prescription identifies 'preferential location' as extra advantage attracting extra payment over the basic sale price and limits the imposition to separately charged services, thereby avoiding unguided administrative discretion. [Paras 32, 33]

Challenge to clause (zzzzu) dismissed; the provision is constitutionally valid.

Deeming fiction in tax law - expansive explanation to statutory provision - consistency with valuation and incidence provisions - Whether the explanation(s) are ultra vires or inconsistent with the valuation and incidence scheme of the Finance Act (notably the principles underlying Sections 67 and 68). - HELD THAT: - The Court found the contention lacking in substance. The levy under Section 66 is on the value of taxable services defined in Section 65(105); an explanation which defines when construction is to be treated as a service for that purpose does not offend provisions relating to valuation or incidence. The legislature may, by an explanation, expand the ambit of a taxable service so long as the charge remains on the rendering of a service and the valuation machinery remains applicable; accordingly the explanation is not ultra vires Sections 67 and 68. [Paras 31]

Submission that the explanation contravenes valuation/incidence provisions rejected; explanation is not ultra vires.

Final Conclusion: The petitions challenging the Finance Act 2010 amendments (the explanations to clauses (zzq) and (zzzh) and the insertion of clause (zzzzu) in Section 65(105)) are dismissed; the Court upholds the validity of the amendments and finds no merit in the constitutional objections urged by the petitioners. There shall be no order as to costs.

Breach of contract - income tax clearance certificate - forfeiture of earnest money - Section 74 of the Indian Contract Act - measure of damages in case of stipulated compensation or penalty

Breach of contract - income tax clearance certificate - The defendant was guilty of breach of contract for failing to obtain the mandatory income tax clearance certificate and therefore liable under the agreement. - HELD THAT: - The trial court found, and this Court concurs, that the agreement to sell contemplated a sale at a declared higher consideration which required prior permission from the Income Tax Authorities (income tax clearance certificate). No party applied for or obtained that permission, rendering performance on the date fixed impossible and constituting breach by the defendant in not obtaining the clearance. The High Court accepted the trial court's findings that the defendant failed to secure the necessary statutory clearance and thereby breached the contractual obligations, entitling the plaintiff to the relief decreed for refund of the amount paid under the Agreement to Sell. [Paras 2, 4]

Defendant was in breach for not obtaining the income tax clearance certificate and liable to refund the amount received under the Agreement to Sell.

Forfeiture of earnest money - Section 74 of the Indian Contract Act - measure of damages in case of stipulated compensation or penalty - Forfeiture of the earnest money could not be upheld because the defendant did not plead or prove loss; thus the claim to forfeit was not maintainable. - HELD THAT: - The defendant neither pleaded that the monies were forfeited nor proved any loss occasioned by the plaintiff's conduct. Relying on the principle in Fateh Chand v. Balkishan Dass (as discussed in the judgment), Section 74 permits award of reasonable compensation up to the amount stipulated but does not permit forfeiture without legal injury or proof of loss that reasonably arose from the breach. In the absence of any pleading or evidence of loss, the purported forfeiture could not be sustained and the defendant was therefore not entitled to retain the amounts received under the agreement. [Paras 5, 6]

Claimed forfeiture of earnest money is not sustained for want of pleading and proof of loss; defendant liable to refund the amount received.

Final Conclusion: The appeal is dismissed. The High Court affirms that the defendant breached the agreement by failing to obtain the required income tax clearance certificate and, having neither pleaded nor proved forfeiture or loss, is liable to refund the monies received under the Agreement to Sell; parties shall bear their own costs.