TaxTMI Updates e-Newsletter
Feb 10,2012

Disallowance under section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules - Assessing Officer's duty to determine expenditure attributable to exempt income - Requirement of adopting a reasonable basis or method and furnishing reasonable opportunity to the assessee - Application of binding precedent of the Jurisdictional High Court - Remand for fresh consideration in accordance with higher court directions

Disallowance under section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules - Assessing Officer's duty to determine expenditure attributable to exempt income - Requirement of adopting a reasonable basis or method and furnishing reasonable opportunity to the assessee - Remand for fresh consideration in accordance with higher court directions - Sustenance of the disallowance of expenses attributable to exempt dividend income made under section 14A read with Rule 8D and the consequent addition of Rs.1,26,440/- - HELD THAT: - The Tribunal held that the controversy is covered by the decision of the Hon'ble Jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. v. DCIT (2010) 328 ITR 81 (Bom.), which upheld the constitutionality of subsections (2) and (3) of section 14A and directed that, even prior to AY 2008-09 when Rule 8D was not applicable, the Assessing Officer is obliged to determine expenditure incurred in relation to income not includible in total income under section 14A(1). The Assessing Officer must adopt a reasonable basis or method consistent with all relevant facts and circumstances and must furnish a reasonable opportunity to the assessee to place material on record. Applying that precedent, the Tribunal set aside the orders of the revenue authorities and remitted the matter to the file of the Assessing Officer for fresh adjudication in the light of the High Court's directions, after giving the assessee a reasonable opportunity of being heard. [Paras 6, 7]

Disallowance confirmed by lower authorities set aside and matter remitted to the Assessing Officer for fresh decision in accordance with the directions of the Hon'ble Jurisdictional High Court, after affording the assessee a reasonable opportunity to be heard.

Final Conclusion: The appeal is partly allowed for statistical purposes: the Tribunal set aside the disallowance under section 14A read with Rule 8D and remitted the matter to the Assessing Officer to decide afresh in conformity with the Jurisdictional High Court's judgment, providing the assessee a reasonable opportunity of hearing.

Condonation of delay - reasonable and sufficient cause for delay due to negligence/misrepresentation by authorised representative - ex-parte assessment and ex-parte appellate order - remand for fresh adjudication after affording opportunity of being heard

Condonation of delay - reasonable and sufficient cause for delay due to negligence/misrepresentation by authorised representative - Whether the delay in filing the appeals before the Tribunal should be condoned in view of the assessee's representative's failure to prosecute the appeals and whether the matters should be remitted for fresh adjudication. - HELD THAT: - The Tribunal found that the appeals were substantially delayed because the assessee's authorised representative/chartered accountant failed to attend proceedings before the AO and CIT(A), caused ex-parte disposal, and thereafter did not file the appeals before the Tribunal despite being entrusted with signed papers and power of attorney. The assessee promptly engaged another lawyer upon discovering non-prosecution and filed the appeals with affidavits explaining the circumstances. Relying on precedents where delay caused by the advocate's misrepresentation or non-vigilance of the authorised agent was held to constitute sufficient cause, the Tribunal held those principles applicable. Given that the assessments and the first appeals were disposed of ex-parte and that the assessee had a prima facie case on merits (sale of agricultural land beyond municipal limits and contention of non-taxability or capital gains treatment not examined due to ex-parte orders), the Tribunal concluded that denying relief on mere technicality of limitation would cause injustice. Applying the principle that delay must be condoned where there is reasonable and sufficient cause attributable to the authorised representative and the assessee acted with due vigilance once aware, the Tribunal exercised its discretion to condone the delay and direct further proceedings. [Paras 6, 7]

Delay in filing the appeals is condoned and both matters are remitted to the file of the AO for fresh adjudication after affording the assessee a reasonable opportunity of being heard.

Final Conclusion: Both appeals are allowed for statistical purposes by condoning the delay in filing and directing remand to the AO to decide the matters afresh after affording the assessees opportunity of being heard.

Reopening of assessment beyond four years - Proviso to Section 147 - failure to fully and truly disclose all material facts - Reason to believe versus formation of opinion - Retrospective amendment cannot supply or substitute for failure to disclose - Explanation (1)(i) to Section 115JB - provisions for diminution in value of investment

Proviso to Section 147 - failure to fully and truly disclose all material facts - Reason to believe versus formation of opinion - Validity of reopening an assessment beyond four years where the reasons for reopening do not record any failure by the assessee to fully and truly disclose material facts. - HELD THAT: - The reopening notice dated 8 March 2011 seeks to reopen the assessment for Assessment Year 200405 beyond the four-year period. The reasons communicated to the assessee show only that the Assessing Officer had a "reason to believe" that income had escaped assessment; they do not record any finding or statement that the assessee had failed to fully and truly disclose all material facts necessary for assessment. Where reopening is sought after four years, the proviso to Section 147 requires evidence of such failure to disclose. A mere statement of a reason to believe, without reference to a non-disclosure or concealment of material facts, does not satisfy the proviso. Accordingly the foundational requirement for reopening beyond four years is missing in the present case. [Paras 5]

The reopening is invalid insofar as it is beyond four years because the reasons do not satisfy the proviso to Section 147 by showing failure to fully and truly disclose material facts.

Retrospective amendment cannot supply or substitute for failure to disclose - Explanation (1)(i) to Section 115JB - provisions for diminution in value of investment - Whether the retrospective insertion of Explanation (1)(i) to Section 115JB (including provisions for diminution in value of investment) justifies reopening an assessment beyond four years by permitting an inference of failure to disclose. - HELD THAT: - Explanation (1)(i) to Section 115JB was inserted retrospectively with effect from 1 April 2001 to include amounts set aside as provision for diminution in value of investment. While the retrospective amendment may give the Assessing Officer reason to believe that income chargeable to tax has escaped assessment, a retrospective change in law does not itself permit an inference that the assessee previously failed to fully and truly disclose material facts. Indeed, a retrospective parliamentary amendment negates the inference of non-disclosure relied upon for reopening beyond four years. Further, on the specific items relied on (diminution in investment, gratuity and superannuation, and business development expenditure), the assessment record shows either allowance or prior disallowance; there is no ex facie non-disclosure warranting reopening under the proviso. [Paras 5]

The retrospective amendment in Explanation (1)(i) to Section 115JB does not constitute a ground to reopen the assessment beyond four years in the absence of a finding of failure to disclose material facts; the reopening on that basis is unsustainable.

Final Conclusion: The petition is allowed; the notice dated 8 March 2011 under Section 148 for Assessment Year 200405 is quashed and set aside for failure to satisfy the proviso to Section 147. No order as to costs.

Deemed dividend under Section 2(22)(e) - registered shareholder versus beneficial owner - strict interpretation of fiscal fiction - judicial construction of repeated statutory language

Deemed dividend under Section 2(22)(e) - registered shareholder versus beneficial owner - strict interpretation of fiscal fiction - Whether the provisions of Section 2(22)(e) apply where the registered shareholder is not the beneficial owner of the shares - HELD THAT: - The Court upheld the view that the first limb of Section 2(22)(e) applies only where the payment is made to a person who is a registered holder of shares and who is also the beneficial owner as prescribed by the provision. Reliance was placed on the Special Bench decision in ACIT v. Bhaumik Colour Pvt. Ltd., which in turn followed the Supreme Court decisions in C.P. Sarathy Mudaliar and Rameshwarlal Sanwarmal that construed 'shareholder' to mean the registered shareholder. The Court observed that the expression following 'shareholder' in Section 2(22)(e) - 'being a person who is the beneficial owner of shares' - qualifies the noun 'shareholder' and constitutes an additional requirement; it does not replace the requirement of being a registered shareholder with mere beneficial ownership. The Delhi High Court in Indian Technocraft and subsequent decisions (including National Travel Services) have approved this ratio, and the present appeal is therefore concluded by reference to those precedents. [Paras 2, 5, 6, 9]

Section 2(22)(e) does not apply where the assessee is not the registered shareholder and only the beneficial owner; the Tribunal's conclusion in favour of the assessee is upheld.

Final Conclusion: The appeal is dismissed; no substantial question of law arises in view of binding precedents construing Section 2(22)(e), and the Tribunal's order for Assessment Year 2006-07 is affirmed (no order as to costs).

Exemption under section 54F - requirement of construction within three years for claiming section 54F relief - deposit in capital gains account as condition for claiming exemption under section 54F(4) - revisional jurisdiction under section 263 - conditions for invoking section 263: order must be erroneous and prejudicial to the interest of revenue

Exemption under section 54F - requirement of construction within three years for claiming section 54F relief - deposit in capital gains account as condition for claiming exemption under section 54F(4) - Availability of exemption under section 54F where the assessee had not constructed the new residential house within three years and had neither taken possession nor registered the plot in his name - HELD THAT: - The Tribunal held that the statutory scheme of section 54F makes exemption contingent on investment in a new residential house within the periods specified, including construction within three years. Sub section (4) mandates appropriation or deposit of the unutilised net consideration in a specified capital gains account before furnishing the return. On the facts, the assessee had not commenced construction even by the time of the revisional order; possession and registration of the plot in the assessee's name had not been effected and the three year period had expired. The Tribunal observed that the benefit of section 54F is directed to a real construction/investment and cannot be enlarged beyond the legislative time limit; reliance placed by the assessee on deposit of part consideration without transfer or possession did not satisfy the statutory conditions for exemption. Having regard to these findings and the settled approach in earlier High Court decisions on similar facts, the exemption was not available to the assessee. [Paras 5]

Exemption under section 54F denied as conditions - including construction within three years and appropriate deposit/appropriation - were not satisfied.

Revisional jurisdiction under section 263 - conditions for invoking section 263: order must be erroneous and prejudicial to the interest of revenue - Validity of the Commissioner invoking revisional jurisdiction under section 263 to revise the assessment on account of improperly allowed exemption - HELD THAT: - The Tribunal reiterated that both limbs of section 263 must be satisfied - the assessment order must be erroneous and prejudicial to the interest of the Revenue. Allowance of an unproved deduction or exemption satisfies both limbs because it renders the assessment erroneous and causes prejudice to revenue. Applying this test to the present facts, where the section 54F exemption was allowed notwithstanding non compliance with statutory conditions, the Tribunal found the revisional jurisdiction rightly invoked. Consequently, the Commissioner was justified in directing reassessment/rewriting of the total income. [Paras 6]

Invocation of section 263 upheld as the assessment was erroneous and prejudicial to the Revenue for allowing an unentitled exemption.

Final Conclusion: The impugned order of the Commissioner under section 263 was affirmed: the assessee was not entitled to exemption under section 54F because statutory conditions (including construction/possession/registration within the prescribed period and appropriate deposit) were not satisfied, and consequently the revisional action to have the Assessing Officer rework the total income was justified.

Revenue expenditure versus capital expenditure - commercial advantage test - allowability under Section 30(a)(1) - deeming fiction under Explanation I to Section 32

Revenue expenditure versus capital expenditure - commercial advantage test - allowability under Section 30(a)(1) - Whether the payment made by the tenant towards repair/reconstruction of the tenanted premises was revenue in nature and deductible under Section 30(a)(1) or capital in nature - HELD THAT: - The Court applied the commercial advantage test as articulated in the Supreme Court's decision in Madras Auto, holding that where expenditure brings into existence an asset belonging to another but yields an enduring business advantage to the payer (such as continued occupation on concessional terms), the expenditure may still be revenue in nature. The Tribunal and the CIT(A) had found, concurrently, that the assessee remained a tenant on the same rent and did not acquire title to any part of the newly constructed building; the payment of Rs.1.50 Crores secured an enduring commercial advantage (continuation of tenancy of equivalent area at the same rent) but did not result in acquisition of a capital asset by the assessee. Consequently the expenditure was not of capital character. The Court further observed that Explanation I to Section 32 creates a deeming fiction only where capital expenditure is in fact incurred by the assessee; since here the expenditure was held not to be capital in nature, the Explanation did not apply. Having accepted the view in Madras Auto and the concurrent findings below, the Court concluded that the expenditure was allowable as revenue expenditure under Section 30(a)(1). [Paras 8, 10, 11]

The cost of repair/reconstruction paid by the tenant was revenue in nature and deductible; the Tribunal's deletion of the disallowance is upheld.

Final Conclusion: The substantial question of law is answered in favour of the assessee: the payment made for repair/reconstruction of the tenanted premises was revenue expenditure and deductible under Section 30(a)(1); the concurrent findings of the CIT(A) and Tribunal that no capital asset was acquired are sustained and the appeal is dismissed.

Cessation or remission of liability under Section 41(1) - unilateral writing off in books as remission of liability - Explanation 1 to Section 41(1) - non retrospective effect - writing back of provisions and assessability as income - non allowability of provisions under Section 43B and its effect on assessability

Explanation 1 to Section 41(1) - non retrospective effect - unilateral writing off in books as remission of liability - Whether unilateral writing back of previously claimed and allowed liabilities (salaries, wages and bonus) in the assessee's books for assessment years prior to 1997-98 attracts tax under Section 41(1). - HELD THAT: - The Court held that Explanation 1 to Section 41(1), which treats the unilateral writing off in books as remission/cessation of liability, was inserted with effect from 1 April 1997 and applies to assessment year 1997-98 and subsequent years. Explanation 1 has no retrospective effect and therefore cannot be invoked for assessment year 1995-96 (or other years prior to 1997-98). Absent the Explanation, mere unilateral write back by the assessee does not necessarily amount to cessation or remission of liability for the purposes of Section 41(1). Applying this principle to the salaries, wages and bonus written back in the year under appeal, the addition under Section 41(1) was held not to be in accordance with law. [Paras 14]

Addition resulting from write back of salaries, wages and bonus for years prior to AY 1997-98 deleted.

Cessation or remission of liability under Section 41(1) - writing back of provisions and assessability as income - Whether unclaimed suppliers' and customers' credit balances written back in books for assessment years prior to 1997-98 are assessable under Section 41(1). - HELD THAT: - The Court applied the same reasoning as to salaries and wages: Explanation 1 (treating unilateral write offs as cessation) does not apply to years before AY 1997-98. Consequently, unilateral write back of unclaimed credit balances of suppliers and customers in those years cannot, by that fact alone, be treated as cessation of liability attracting Section 41(1). The Tribunal's deletion of these additions was upheld for the assessment years under consideration. [Paras 15, 21]

Additions relating to unclaimed suppliers' and customers' credit balances for the specified years deleted.

Cessation or remission of liability under Section 41(1) - Whether amounts representing uncashed cheques, written back in the year under appeal, are assessable under Section 41(1). - HELD THAT: - The Tribunal found, and the Court accepted, that the uncashed cheques had not been claimed as a deduction in any earlier assessment year and represented cheques on hand at the end of the accounting period. Because Section 41(1) applies where a liability or expenditure previously claimed/allowed has subsequently ceased or been remitted, it is inapplicable where no earlier deduction or claim existed. The Assessing Officer and CIT(A) had not shown why the assessee's stand was unacceptable, and the addition could not be sustained. [Paras 16]

Addition on account of uncashed cheques deleted.

Writing back of provisions and assessability as income - non allowability of provisions under Section 43B and its effect on assessability - Whether write back of provisions (including excess provisions for excise, sales tax, tax on immovable property and doubtful debts) are assessable under Section 41(1) where such provisions were not allowed as deductions in earlier years by reason of Section 43B or otherwise. - HELD THAT: - The Court accepted the CIT(A)'s finding (not challenged) that the provision for doubtful debts had not been allowed as a deduction earlier; accordingly Section 41(1) did not apply and the write back could not be taxed. Similarly, where provisions for tax, excise or sales tax were not claimed as deductions earlier because of the operation of Section 43B, their write back in the year under appeal could not be treated as income under Section 41(1). The one instance of unclaimed bonus, which had been claimed earlier, was treated differently by the CIT(A), but the Court dealt with each item on its facts. [Paras 8, 10, 18]

Write backs of provisions not previously allowed as deductions (including doubtful debts and provisions affected by Section 43B) are not assessable under Section 41(1); relevant additions deleted where those facts obtain.

Cessation or remission of liability under Section 41(1) - Whether excess dividend written back in the year under appeal is assessable under Section 41(1). - HELD THAT: - Dividend is an appropriation of profits and is not an allowable deduction under the Income tax Act. Consequently, an excess dividend written back cannot be assessed as income under Section 41(1) which is concerned with cessation of liabilities or allowances previously made. The Court therefore held that excess dividend written back could not be taxed under Section 41(1). [Paras 17]

Excess dividend written back not assessable under Section 41(1).

Final Conclusion: The substantial question of law-whether unclaimed credit balances and similar write backs made in the assessee's books for assessment years prior to 1997-98 can be taxed under Section 41(1)-is answered in the affirmative against the revenue and in favour of the assessee to the extent explained: Explanation 1 to Section 41(1) (treating unilateral write offs as cessation) does not apply retrospectively, and write backs are taxable under Section 41(1) only where there was a prior allowance/claim and a genuine cessation; accordingly the contested additions (unclaimed salaries, suppliers' and customers' credit balances, uncashed cheques, and specified provisions) for the listed assessment years are deleted as set out above.

Tax deduction at source - commission within the meaning of Section 194H - principal-agent distinction - passage of property/ownership on delivery - treatment under Section 201(1)/(1A) - distinguishing precedent

Commission within the meaning of Section 194H - principal-agent distinction - passage of property/ownership on delivery - treatment under Section 201(1)/(1A) - Whether amounts retained by concessionaires (difference between MRP and price paid to the Dairy) amounted to commission attractin g liability to deduct tax under Section 194H and consequent treatment under Section 201(1)/(1A). - HELD THAT: - On a fair reading of the agreements and attendant factual matrix the Tribunal's conclusion that the relationship between the Dairy and the concessionaires was of principal to principal was upheld. The determinative test is when property in the goods passed; here ownership of milk and other products vested in the concessionaires at the time of delivery. The agreement required payment on delivery, prohibited return of unsold milk, placed loss on account of spoilage or wastage on the concessionaire, and recorded sale transactions by invoicing-indicating an actual sale and transfer of property. Clauses reserving booth ownership to the Dairy or permitting inspection and regulation of vending/maintenance were held to be safeguards of the Dairy's property and public safety and not indicative of an agency relationship. Consequently the difference between the MRP and the price paid by concessionaires represented their business income and could not be characterised as commission within the meaning of Section 194H; therefore there was no obligation on the Dairy to deduct tax and the Assessing Officer's invocation of Section 201(1)/(1A) was not sustained.

The Tribunal's finding of principal-to-principal sale was upheld and the amounts were not liable to be treated as commission; thus no default under Section 201(1)/(1A) arose.

Distinguishing precedent - commission within the meaning of Section 194H - Whether the Court's earlier decision in Delhi Milk Scheme v. CIT applied to these cases. - HELD THAT: - The Court examined the factual basis of Delhi Milk Scheme and found it materially different: in DMS the agreements showed that ownership did not pass to concessionaires, unsold milk was taken back by DMS, daily collections were handed over to DMS and the agreements were redrafted after survey-facts that supported an agency character and attracted Section 194H. In the present cases there was no redrafting; the agreements and facts established transfer of ownership on delivery and absence of features indicative of agency. On this factual distinction the DMS precedent was held inapplicable.

Delhi Milk Scheme (supra) is distinguishable on facts and does not apply to these appeals.

Final Conclusion: The Revenue's appeals are dismissed: the Tribunal correctly held that the concessionaires purchased milk and products on delivery vesting ownership in them, the sums retained by them were their business income and not commission within Section 194H, and no default under Section 201(1)/(1A) was made out; the DMS precedent is distinguishable on facts.

Release of detained goods on furnishing security/paying part of differential duty - personal bond for balance duty - assessment to be completed expeditiously - transaction value and bona fides of contract

Release of detained goods on furnishing security/paying part of differential duty - personal bond for balance duty - Direction for release of the imported goods on specified conditions - HELD THAT: - On the materials on record and the parties' submissions the High Court ordered release of the goods subject to the petitioner paying 30% of the differential duty and executing a personal bond for the balance. The Court noted prior orders in which similar conditional releases were made and referred to the appellate decision upholding the bonafides of the petitioner's import contract, which supported permitting release on conditions. The Court also required the petitioner to cooperate fully with any assessment proceedings initiated by the respondents. The order embodies a conditional provisional release pending completion of assessment. [Paras 2, 4, 6]

Goods to be released forthwith on payment of 30% of the differential duty and on furnishing a personal bond for the balance, subject to cooperation in assessment proceedings.

Assessment to be completed expeditiously - transaction value and bona fides of contract - Direction to the assessing authority to proceed with and conclude the customs assessment - HELD THAT: - The Court directed the assessing authority to consider the petitioner's claims and to proceed with assessment and pass an appropriate order within eight weeks from receipt of a copy of the order. The direction was given in light of the appellate finding upholding the contractual arrangements and the need for finalisation of assessment promptly; the Court mandated expedition without expressing an adjudication on the merits of the ultimate assessment. [Paras 3, 7]

Assessing authority to consider claims and complete the assessment and pass an appropriate order within eight weeks.

Final Conclusion: The writ petition is allowed by directing immediate release of the goods on payment of 30% of the differential duty and execution of a personal bond for the balance; the petitioner must cooperate in assessment proceedings and the assessing authority is directed to conclude assessment within eight weeks. No costs.

Interest on delayed refund under Section 11BB - deeming fiction in the explanation to Section 11BB - date from which interest under Section 11BB accrues - applicant's entitlement to interest where appellate or judicial order directs refund

Interest on delayed refund under Section 11BB - date from which interest under Section 11BB accrues - applicant's entitlement to interest where appellate or judicial order directs refund - Whether the Respondent was entitled to interest on sanctioned rebate claims and the date from which such interest accrues under Section 11BB as interpreted by the Supreme Court in Ranbaxy Laboratories Ltd. - HELD THAT: - The Court applied the law laid down by the Supreme Court in Ranbaxy Laboratories Ltd., holding that Section 11BB provides that where duty paid is found refundable and refund is not made within three months from receipt of the application under Section 11B(1), the applicant is entitled to interest at the rate fixed by the Central Government. The explanation to Section 11BB operates as a deeming fiction to treat an appellate or judicial order directing refund as an order under Section 11B(2) for certain purposes, but it does not postpone the date from which interest begins to run. Interest therefore accrues from the expiry of three months from the date of receipt of the refund application, and not from the date on which an appellate authority or court actually passes an order for refund. The Revenue's contention that interest should be computed only from the date on which the Commissioner dropped the show cause notice or from the date of sanction was held to be contrary to the settled position in Ranbaxy. In consequence, the order of the Commissioner (Appeals) allowing interest and the confirmation in revision were not interfered with.

The entitlement to interest was upheld and the grant of interest by the Commissioner (Appeals), as confirmed in revision, was sustained; interest accrues from the expiry of three months from receipt of the refund application.

Final Conclusion: The petition under Article 226 is dismissed; the appellate order allowing interest and the revisional confirmation stand, since interest under Section 11BB begins to run from three months after receipt of the refund application as settled by the Supreme Court in Ranbaxy.