TaxTMI Updates e-Newsletter
Feb 17,2012

Registration under section 12A - cancellation of registration under section 12AA(3) - genuineness of activities - activities carried out in accordance with the objects of the trust - entitlement to exemption under section 11

Cancellation of registration under section 12AA(3) - genuineness of activities - activities carried out in accordance with the objects of the trust - Validity of the Commissioner's revocation of the Society's registration under section 12AA(3) on the ground that its publication and sale activities were not charitable - HELD THAT: - Section 12AA(3) permits cancellation of registration only where the Commissioner is subsequently satisfied that the activities of the trust are not genuine or are not being carried out in accordance with the objects of the trust. The Commissioner had earlier considered and been satisfied with the Society's stated objects relating to publication, sale and propagation of Sarvodaya and Gandhian literature when granting registration. The revocation was founded on the conclusion that those activities were not charitable rather than on a specific finding that the activities were not genuine or were not in accordance with the objects. Where registration was granted after inquiry into objects and genuineness, the Commissioner cannot cancel registration under section 12AA(3) merely because he considers the activities not charitable; the provision requires satisfaction about non-genuineness or non-conformity with objects. Whether income from such transactions is assessable or exempt under section 11 is a matter for the assessing officer and does not by itself constitute a ground under section 12AA(3) for cancellation.

The Commissioner's cancellation did not fall within the limited grounds of section 12AA(3) and was not justified; the Tribunal's reversal of cancellation is upheld.

Entitlement to exemption under section 11 - registration under section 12A - Whether the Tribunal was wrong in not treating aggregate receipts for the stated assessment years as disabling operation of the first proviso (thereby affecting entitlement to registration/exemption) - HELD THAT: - The Tribunal found that none of the conditions under section 12AA(3) were violated and allowed the Society's appeal against cancellation. The High Court, applying the Tribunal's conclusion that cancellation was unjustified for lack of satisfaction under section 12AA(3), found no reason to interfere with the Tribunal's order. The determination of whether particular receipts are assessable or exempt under section 11 and whether provisos apply in assessment proceedings is distinct from the limited grounds for cancellation under section 12AA(3). The Court therefore did not disturb the Tribunal's treatment and did not re-open the factual/appraisal findings concerning receipts across the assessment years.

The Tribunal's approach in not sustaining cancellation on the grounds advanced is upheld and the challenge based on aggregate receipts requires no interference.

Final Conclusion: The High Court dismissed the tax case appeal, upholding the Tribunal's finding that the Commissioner's cancellation of registration was not justified under section 12AA(3); the Tribunal's order restoring registration is maintained.

Registration under Section 12AA - charitable and religious purpose - admixture of religious and charitable objects - entitlement to exemption under Section 11 - enquiry under Section 12AA(1)(b)(ii) - appellate fact finding by the Tribunal

Registration under Section 12AA - admixture of religious and charitable objects - entitlement to exemption under Section 11 - The Tribunal was right in law to hold that the assessee trust is entitled to registration under Section 12AA despite having objects that are religious and charitable in nature. - HELD THAT: - The Court noted that income from property held under trust wholly for charitable or religious purposes is exempt under Section 11, and that Section 12AA does not distinguish between trusts created for charitable purposes and those created for religious purposes. The Tribunal had relied on precedent and concluded that the presence of both religious and charitable objects does not disqualify the trust from registration. The High Court found that this conclusion was based on valid material and constituted a factual finding by the Tribunal which was not perverse, and therefore required no interference. [Paras 6]

Tribunal's holding that the trust is entitled to registration under Section 12AA is confirmed; question answered against the Revenue.

Enquiry under Section 12AA(1)(b)(ii) - appellate fact finding by the Tribunal - genuineness and charitable activities - The Tribunal was justified in directing the Commissioner to grant registration under Section 12AA despite the Revenue's contention that the assessee had not established genuineness and carrying out of charitable activities as required. - HELD THAT: - The Court observed that the Commissioner had conducted an enquiry under the statutory provision, but the Tribunal, on appraisal of material and by reference to authoritative decisions, concluded that registration should be granted. The High Court treated the Tribunal's conclusion as a question of fact founded on material evidence and not liable to be upset in exercise of judicial review. Consequently the Tribunal's direction to grant registration was upheld. [Paras 6]

Tribunal's direction to the Commissioner to grant registration is upheld; the Revenue's contentions on insufficiency of proof are rejected.

Final Conclusion: The appeal is dismissed; the order of the Income Tax Appellate Tribunal allowing registration of the trust under Section 12AA is confirmed and both substantial questions of law are answered against the Revenue.

Reopening of assessment beyond four years - proviso to Section 147 requiring failure to disclose fully and truly all material facts - failure to disclose fully and truly all material facts - reliance on subsequent assessment order as basis for reopening

Reopening of assessment beyond four years - proviso to Section 147 requiring failure to disclose fully and truly all material facts - reliance on subsequent assessment order as basis for reopening - Validity of the notice dated 20 June 2011 reopening assessment for Assessment Year 200506 beyond four years - HELD THAT: - The Court examined whether the jurisdictional condition for reopening an assessment beyond four years - namely, a failure by the assessee to disclose fully and truly all material facts necessary for assessment - was satisfied. The impugned notice relied solely on findings recorded in the assessment order for Assessment Year 200708. The reasons issued with the notice do not specify what material facts were allegedly not fully and truly disclosed for Assessment Year 200506, nor do they set out even a prima facie basis for inferring such failure. The assessment order for Assessment Year 200506 itself records that the Assessing Officer examined the contention of the assessee and found that the business activity was manufacturing jewellery in a Special Economic Zone. In the absence of any particularised or intelligible reasons showing non-disclosure of material facts for the year in question, the primary jurisdictional requirement in the proviso to Section 147 for reopening beyond four years is not fulfilled. Consequently the reopening notice is invalid. [Paras 6]

The notice dated 20 June 2011 reopening assessment for Assessment Year 200506 is invalid and is quashed.

Final Conclusion: The petition is allowed; the impugned notice dated 20 June 2011 reopening assessment for Assessment Year 200506 is quashed and set aside; no order as to costs.

Reopening of assessment beyond four years - failure to disclose fully and truly all material facts - validity of certificate issued under Section 195 - chargeability of payment to tax under Section 195 - credit versus payment for purpose of withholding tax

Reopening of assessment beyond four years - failure to disclose fully and truly all material facts - Validity of reopening assessment for Assessment Year 200405 beyond four years where no failure to disclose material facts is alleged or established - HELD THAT: - The Court examined the reasons recorded for reopening and the record of disclosures made by the petitioner. The petitioner had disclosed in the original return, the profit and loss account, the tax audit report and in subsequent replies during assessment proceedings (including the agreement, methodology of allocation, and the Section 195(2) order) the payment to the foreign principal and the basis that it was a reimbursement of costs. The reasons recorded for reopening do not allege any failure to disclose fully and truly all material facts necessary for assessment, and the Assessing Officer accepted the revised return in the assessment order. In these circumstances, and because the reopening was attempted beyond the four-year period, the jurisdictional condition for reopening was not satisfied and the reassessment notice could not be sustained. [Paras 10, 12]

Reopening beyond four years quashed for lack of jurisdictional foundation; no failure to disclose established.

Validity of certificate issued under Section 195 - credit versus payment for purpose of withholding tax - Whether the Assessing Officer was justified in treating the certificate as one under Section 197 and relying on Circular 774/99 to impugn the certificate's applicability - HELD THAT: - The Court found that the Assessing Officer proceeded on the erroneous premise that the certificate was issued under Section 197, whereas the record showed the application and order were under Section 195(2). The reasons for reopening premised on Circular 774/99 and the timing of credit did not correctly characterise the certificate. The order under Section 195(2) remained on record and had not been shown to be revoked. The Assessing Officer's reliance on the alleged invalidity of a Section 197 certificate, rather than addressing the actual Section 195 certificate and the substance of the payment, was therefore legally unsound. [Paras 11]

Assessing Officer erred in treating the certificate as under Section 197; that basis cannot sustain reopening.

Chargeability of payment to tax under Section 195 - reopening of assessment beyond four years - Whether the reasons for reopening show that the payment made to the foreign principal was income chargeable to tax such that Section 195 obligations arose - HELD THAT: - Section 195 obligations attach where a sum payable to a non-resident is chargeable to tax under the Act. The reasons recorded for reopening make no reference to any conclusion that the payments constituted income chargeable under the Act. The petitioner consistently maintained, and placed on record, that the payments were reimbursements made at actuals without markup and supported this with the allocation agreement, methodology and the Section 195(2) order. Because the Assessing Officer's reasons do not identify or record a view that the payments were chargeable income, there is no stated basis to infer that income had escaped assessment warranting reopening beyond four years. [Paras 11, 12]

Reopening cannot be sustained where reasons do not show the payment to be income chargeable to tax and no such allegation is made.

Final Conclusion: The writ petition is allowed: the notice dated 22 March 2011 under Section 148 is quashed and set aside, the reassessment cannot be sustained for Assessment Year 200405, and there shall be no order as to costs.

Time-limit for completion of assessment under Section 153B - exclusion of period during which assessment proceedings are stayed - special audit under Section 142(2A) and exclusion of special audit period - proviso to the Explanation to Section 153B(1) granting minimum 60 days where remaining period is less than 60 days - limitation-barred assessment

Time-limit for completion of assessment under Section 153B - exclusion of period during which assessment proceedings are stayed - special audit under Section 142(2A) and exclusion of special audit period - proviso to the Explanation to Section 153B(1) granting minimum 60 days where remaining period is less than 60 days - Validity of assessment order dated 29th June, 2007 under Section 153A read with Section 153B - whether it was barred by limitation - HELD THAT: - The Court held that the limitation period under Section 153B(1)(a) ordinarily expired on 31st March, 2006. The interim stay of assessment proceedings pursuant to W.P. (C) No. 4954/2006 required exclusion of the period during which the proceedings were stayed in terms of the Explanation to Section 153B(1). Following vacation of the stay by the High Court's order dated 18th December, 2006, the Assessing Officer was directed to issue a show cause and, if warranted, pass a fresh order under Section 142(2A). When the Assessing Officer passed an order under Section 142(2A) on 19th January, 2007 directing a special audit to be completed within 105 days, the period of the special audit fell within the categories excluded by the Explanation. After excluding the stayed period and the special audit period, the remaining period available to the Assessing Officer for completing the assessment was less than sixty days, thereby invoking the proviso to the Explanation which extends the remaining period to a minimum of sixty days. The assessment order dated 29th June, 2007 was passed within sixty days counted from the date on which the special auditor was required to furnish the report, and therefore was within the extended period permitted by the proviso. The tribunal's conclusion that the assessment was time-barred was rejected; the Supreme Court decision relied upon by the tribunal (Hope Textiles) was held inapplicable to the facts and statutory scheme under consideration. [Paras 11, 12, 14, 18, 20]

The assessment order dated 29th June, 2007 was not barred by limitation; the proviso to the Explanation to Section 153B(1) applied and extended the period to sixty days, and the appeal is answered in favour of the Revenue.

Final Conclusion: The substantial question is answered for the Revenue: the assessment dated 29th June, 2007 is not time barred under Section 153B(1) after excluding the stayed period and the special audit period and applying the proviso; the Tribunal is directed to proceed to hear the appeals on merits.

Gross profit rate - rejection of books of account - best judgment assessment - verifiability of purchases and consumption - disallowance under section 43B

Gross profit rate - best judgment assessment - Application of GP rate of the immediately preceding assessment year (2000-2001) for computing income for AY 2001-2002 instead of averaging last two years - HELD THAT: - The CIT(A) applied the GP rate of the immediately preceding year (9.28%) to the assessee's turnover for AY 2001-2002 after the AO had rejected books and estimated income using an average of the two preceding years. The Tribunal observed that estimates in best judgment assessments must be honest and fair and not arbitrary. The assessee's turnover for the year was substantial and there was no material demonstrating that the GP rate adopted by the CIT(A) lacked reasonable basis. In the absence of such material, the CIT(A)'s application of the immediately preceding year's GP rate was held to be reasonable and sustainable.

The CIT(A)'s adoption of the preceding year's GP rate is upheld and the Revenue's ground is dismissed.

Rejection of books of account - verifiability of purchases and consumption - Gross profit rate - Whether, after rejection of books and application of an earlier year's GP rate, separate additions for unverifiable purchases and unverifiable consumption of colours and chemicals are maintainable for AY 2003-2004 - HELD THAT: - The CIT(A) sustained the rejection of the assessee's books by the AO and applied the GP rate of the immediately preceding year (10.65%) to compute trading income, resulting in an addition. The Tribunal held that once books are rejected and a trading addition is made by applying an appropriate GP rate, making further additions based on the same defects in the rejected books (such as unverifiable purchases and unverifiable consumption) is not justified. The GP rate applied by the CIT(A) was not shown to be unreasonable. Consequently, the separate 3% disallowances levied by the AO on account of unverifiable purchases and unverifiable consumption were correctly deleted by the CIT(A).

The CIT(A)'s deletion of the 3% disallowances and direction to adopt the earlier year's GP rate are upheld; the Revenue's grounds are dismissed.

Rejection of books of account - verifiability of purchases and consumption - Gross profit rate - disallowance under section 43B - Identical grounds for AY 2004-2005 (deletion of 3% disallowances after application of earlier GP rate) and deletion of disallowance under section 43B for late payment of PF/ESI - HELD THAT: - The parties agreed that the factual and legal issues for AY 2004-2005 mirror those decided for AY 2003-2004. Applying the same reasoning, the Tribunal dismissed the Revenue's challenges to the deletion of the 3% disallowances where the books had been rejected and a preceding year's GP rate applied. Separately, the CIT(A) had deleted a disallowance under section 43B in respect of late PF/ESI payment where payment was made before the due date of filing the return; the Tribunal followed the applicable bench precedent cited by the CIT(A) and rejected the Revenue's ground on this point as well.

Grounds contesting the deletion of the 3% disallowances are dismissed as identical to AY 2003-2004; the deletion of the section 43B disallowance is also upheld and the Revenue's grounds are rejected.

Final Conclusion: All three appeals filed by the Revenue for AY 2001-2002, 2003-2004 and 2004-2005 are dismissed: the Tribunal upheld the CIT(A)'s adoption of preceding years' GP rates where reasonable; confirmed that no further additions for unverifiable purchases/consumption should follow a trading addition made after rejection of books; and sustained deletion of the section 43B disallowance for late PF/ESI payment where payment preceded the return filing due date.

Addition for low gross profit rate - estimate-based additions - unaccounted sales and initial working capital addition - deletion of additions made on presumption or guesswork - search and post-search accounting adjustments

Addition for low gross profit rate - estimate-based additions - search and post-search accounting adjustments - Validity of additions made on account of alleged low gross profit (GP) rate - HELD THAT: - The Tribunal affirmed the CIT(A)'s deletion of the GP-rate additions. The assessee had itself offered additional income which, when taken into account, produced a GP of 17.5% (books GP 13.5%), whereas the AO had estimated GP at 18%. The Tribunal observed that when books are rejected and a uniform GP is applied some estimation is inevitable and, on the material on record, there was no basis to hold that the GP offered by the assessee was not bona fide. The difference between the AO's estimate and the assessee's adjusted GP was marginal (0.5%), and the AO produced no material to show the assessee conducted business outside books in a manner that would vitiate the offered GP. For A.Y.2004-05 and A.Y.2005-06 the same reasoning was applied and the additions were held unsustainable. [Paras 5, 15]

Additions on account of low GP rate deleted; Revenue's grounds dismissed.

Unaccounted sales and initial working capital addition - deletion of additions made on presumption or guesswork - search and post-search accounting adjustments - Sustainability of additions for alleged unexplained investment/initial working capital and sales outside books discovered during search - HELD THAT: - The Tribunal confirmed the CIT(A)'s deletion of additions made as alleged initial investment for unaccounted sales and for sales produced out of shortage of raw material. In A.Y.2004-05 the AO's addition treating closing stock and debtors ratios as indicative of unaccounted working capital was held to be based on conjecture; no evidence was produced to show unaccounted investment or unrecorded invoices, and the assessee had offered certain additional income. The Tribunal also relied on favourable precedent cited for the assessee. In A.Y.2005-06 the Tribunal applied identical reasoning and group-bench findings that post-search audited accounts recorded the sales and that the AO had not pointed to any unaccounted sales; consequently the additions were treated as premised on presumption and deleted. [Paras 9, 19]

Additions for unexplained investment/ sales outside books deleted; Revenue's grounds dismissed.

Final Conclusion: Both Revenue appeals for A.Y.2004-05 and A.Y.2005-06 are dismissed and the assessee's cross-objections for A.Y.2004-05 are dismissed.

Interest on refund of sale proceeds of confiscated goods - No statutory provision for payment of interest to successful claimants - Authorities created by statute are governed by the statute - Remand for adjudication of interest on refund of pre-deposit

Interest on refund of sale proceeds of confiscated goods - No statutory provision for payment of interest to successful claimants - Authorities created by statute are governed by the statute - Refund claim for interest on sale proceeds of confiscated goods was not maintainable in absence of statutory provision. - HELD THAT: - The Tribunal applied its earlier decision in Overseas Trading Corporation and the Supreme Court's principle in Miles India Ltd. that statutory authorities are governed by the provisions of the statute under which they act. Inasmuch as there is no provision permitting payment of interest on the sale proceeds of confiscated goods, the authority cannot order such interest. On that basis the appellants' claim for interest on the sale proceeds was rejected. [Paras 7, 8]

Claim for interest on refund of sale proceeds of confiscated goods rejected for lack of statutory mandate.

Remand for adjudication of interest on refund of pre-deposit - Interest on refund of the pre-deposit was not finally adjudicated by the Commissioner(Appeals) and is remanded for fresh decision. - HELD THAT: - The Tribunal observed that although the SDR stated the refund application and refund dates, the Commissioner(Appeals) did not record any finding on entitlement to interest on the refunded pre-deposit and disposed of the appeal solely on the sale proceeds point. Consequently the matter was remitted to the Appellate Authority to decide the claim for interest on the pre deposit after considering the judgments relied upon by the appellants. [Paras 9]

Matter remanded to the Appellate Authority for appropriate decision on interest on refund of pre-deposit.

Final Conclusion: Appeal dismissed insofar as interest on sale proceeds of confiscated goods is claimed (no statutory basis); appeal remanded for fresh adjudication by the Appellate Authority on interest claimed on the refunded pre deposit.

Maintainability of writ petition during pendency of alternative remedy - jurisdictional restraint where a substantial appeal is pending before a higher court

Maintainability of writ petition during pendency of alternative remedy - interference by High Court when a substantive appeal lies before the Supreme Court - Whether the writ petition under Article 226 is maintainable when a substantial appeal against the same orders is pending before the Supreme Court. - HELD THAT: - The Court noted that the petitioner had preferred a substantial appeal to the Supreme Court against the CESTAT orders and that the Supreme Court had directed issuance of notice. In view of the pending appeal and the fact that the Supreme Court was seized of the controversy, it was not appropriate for this Court to entertain the writ petition or to grant the restraint sought against the respondents. Consequently, the writ petition was held not maintainable and was dismissed. [Paras 2, 5, 6]

Writ petition dismissed as not maintainable; no costs.

Final Conclusion: The High Court declined to exercise its discretionary jurisdiction under Article 226 because the matter was the subject of a pending appeal before the Supreme Court; the writ petition was dismissed as not maintainable.

Use of brand name belonging to director - benefit of Small Scale Industry exemption - identity of brand owner and entitlement to exemption - finality of earlier tribunal order confirmed by the Supreme Court

Use of brand name belonging to director - benefit of Small Scale Industry exemption - identity of brand owner and entitlement to exemption - finality of earlier tribunal order confirmed by the Supreme Court - Use of a brand name belonging to a director of the respondent company does not constitute use of the brand name of another person so as to disentitle the respondent to the Small Scale Industry exemption. - HELD THAT: - The Commissioner (Appeals) applied the Tribunal's earlier Final Order No.953-954/04-NB dated 02.12.04, which held that use of a brand name belonging to the director cannot be treated as use of another person's brand so as to deny SSI exemption; the Revenue's challenge to that Tribunal decision was dismissed by the Supreme Court by order dated 01.04.10, thereby rendering the Tribunal's view final. In view of the binding and final earlier decision on the same factual and legal question, the Department's plea lacked merit and the Commissioner (Appeals) was correct in following the Tribunal's conclusion and allowing the respondents' appeal.

Revenue's appeal is rejected and the respondents retain the benefit of the SSI exemption.

Final Conclusion: The appeal by Revenue is dismissed as devoid of merit: the Tribunal's earlier finding that the use of the director's brand does not amount to use of another person's brand for denying SSI exemption has been confirmed by the Supreme Court and is final; the Commissioner (Appeals) correctly applied that precedent.

Duty liability on samples drawn for testing and not cleared from factory - proviso to Section 4A regarding assessable value enhancement - pre-deposit condition for grant of stay - followed precedents of High Courts on samples for testing

Duty liability on samples drawn for testing and not cleared from factory - proviso to Section 4A regarding assessable value enhancement - Whether duty is exigible on samples taken for testing within factory premises and not cleared from the factory, and whether the demand premised on adopting a pro rata assessable value could be sustained - HELD THAT: - The Tribunal, on a prima facie appraisal, accepted the appellants' defence that the goods in question were samples drawn for testing within the factory premises and were not cleared from the factory. The Tribunal observed that, in light of the decisions of the Bombay High Court in CCE Belapur v. RPG Life Sciences Ltd and the Himachal Pradesh High Court in CCE Chandigarh v. Dabur India Ltd, samples drawn for testing and not cleared from the factory do not attract duty liability. Applying those precedents, the Tribunal found that the Revenue's attempt to enhance assessable value by applying a pro rata cost basis under the proviso to Section 4A could not, at this stage, be allowed to operate so as to require payment pending disposal of the appeal. Accordingly, the condition of pre-deposit of the disputed duty and penalty was dispensed with and the stay petition was allowed unconditionally. [Paras 6]

Pre-deposit of the disputed duty and penalty dispensed with; stay petition allowed unconditionally following High Court precedents that samples drawn for testing and not cleared from the factory are not liable to duty.

Pre-deposit condition for grant of stay - followed precedents of High Courts on samples for testing - Whether the condition of pre-deposit of the specified amount should be waived for grant of stay of demand - HELD THAT: - Having concluded on the prima facie applicability of the cited High Court decisions that samples taken for internal testing are not dutiable, the Tribunal exercised its discretionary power to waive the pre-deposit condition. The Tribunal relied on the mentioned precedents as dispositive of the appellants' entitlement to protection from coercive recovery pending adjudication, and therefore granted unconditional stay. [Paras 6]

Condition of pre-deposit of Rs. 2,65,086/- waived and stay granted unconditionally.

Final Conclusion: The Tribunal, relying on relevant High Court decisions, held prima facie that samples taken for internal testing and not cleared from the factory are not liable to duty; accordingly the pre-deposit condition was dispensed with and the stay of demand was granted unconditionally.