TaxTMI Updates e-Newsletter
May 12,2020

Completion of criminal investigation within specified time - Interim bail in case of delayed investigation - Right to apply for bail and trial court's discretionary consideration - Custody duration and relevance to grant of interim relief

Completion of criminal investigation within specified time - The State is directed to endeavour to complete the ongoing investigation into the alleged creation of fake firms within three months from the date of the order. - HELD THAT: - Having regard to the pendency of investigation and the representations made by learned counsel, the Court set a fixed short timeline for completion of the investigation. The direction is prospective and obliges the investigative agencies to use best endeavours to finalise their inquiries within the stipulated three-month period. The order recognises the public interest in expeditious investigation while balancing the procedural duties of the State.

Investigation to be completed within three months from the date of the order.

Interim bail in case of delayed investigation - Custody duration and relevance to grant of interim relief - If the investigation is not completed within three months, the petitioner shall be released on bail by the trial court on imposition of appropriate terms and conditions. - HELD THAT: - The Court, after noting the nature of allegations and the period of incarceration already undergone by the petitioner, provided a safeguard against prolonged detention resulting from investigative delay. Instead of directing immediate bail, the Court conditioned bail upon non-completion of investigation within the prescribed period and left the modalities (terms and conditions) of bail to the trial court, thereby preserving judicial discretion while preventing indefinite custody due to delay.

Failure to complete investigation within three months will entitle the petitioner to be released on bail by the trial court subject to appropriate conditions.

Right to apply for bail and trial court's discretionary consideration - If investigation is completed and the report is filed within three months, the petitioner may move the trial court for bail, and any such application shall be considered on its own merits by the trial court. - HELD THAT: - The Court clarified that completion of investigation and filing of the report within the stipulated period does not preclude the petitioner from seeking bail; rather it preserves the ordinary right to apply for bail. The trial court is directed to adjudicate any bail application filed after such filing solely on its merits, thereby maintaining the established jurisprudential standard that bail determinations remain within the trial court's discretion based on case-specific considerations.

If investigation is completed and the charge/report is filed within three months, petitioner may apply for bail and the trial court will consider the application on merits.

Final Conclusion: The special leave petition is disposed of by directing the State to endeavour to complete the investigation within three months; failure to do so will entitle the petitioner to be released on bail by the trial court on appropriate conditions, while completion and filing of the report within that period leaves the question of bail to be decided by the trial court on its merits.

Completed Contract Method versus Percentage Completion Method - Applicability of revised AS-7 to real estate developers - Recognition of income under different accounting methods - Section 145 and notified accounting standards - Characterisation of rental income from commercial property as income from business - Characterisation of fit-out rentals as income from other sources

Completed Contract Method versus Percentage Completion Method - Applicability of revised AS-7 to real estate developers - Section 145 and notified accounting standards - Whether the assessee was entitled to adopt the Completed Contract Method of accounting instead of the Percentage Completion Method prescribed by AS-7 for the assessment year in question. - HELD THAT: - The Court accepted the Tribunal's finding that, on the facts, the assessee carried on development activity and undertook construction in relation to sale of super built-up area and that the assessee had historically followed the Completed Contract (project completion) method which the revenue had earlier accepted for prior years. The Court observed that AS-7 prescribes accounting treatment for construction contracts and that where AS-7 is applied its consequences (including valuation of opening inventories) must follow; however, having regard to the nature of the assessee's transactions and the earlier acceptance and practice, the Tribunal was right to uphold the Completed Contract Method for the year under consideration. The Court relied on the principle that recognition of income under the Act can be attained by different accounting methods and specifically referred to the view in the earlier decision of the Apex Court that both completed contract and percentage completion are permissible methods, noting that the assessee had changed to Percentage Completion in subsequent years resulting in revenue neutrality for the assessment year in issue. The substantial question of law was therefore answered in favour of the assessee and against the revenue. [Paras 8, 9, 10, 11, 12]

Completed Contract Method upheld for assessment year 2005-06; substantial question No.1 answered in favour of the assessee.

Characterisation of rental income from commercial property as income from business - Characterisation of fit-out rentals as income from other sources - Whether rental income from Forum Mall fell to be taxed under the head 'income from business' (and not 'income from house property') and whether rentals from fit-outs were assessable as 'income from other sources' rather than 'income from house property'. - HELD THAT: - The Court held that the questions were no longer res integra in view of this Court's earlier decision in COMMISSIONER OF INCOME TAX-III VS. VELANKANI INFORMATION SYSTEMS (P) LTD. , which establishes that where an assessee is in the business of acquiring land, constructing commercial buildings and letting them out as a business, the receipts do not fall under income from house property even if separate rental deeds exist or the building is let with furniture and other facilities. Applying that principle, the Tribunal's classification of Forum Mall rentals as income from business and fit-out rentals as income from other sources was affirmed and answers to substantial questions Nos.2 and 3 were given against the revenue and in favour of the assessee. [Paras 13]

Rental income from Forum Mall to be treated as income from business; fit-out rentals to be treated as income from other sources; substantial questions Nos.2 and 3 answered in favour of the assessee.

Final Conclusion: The appeal is dismissed; the order of the Income Tax Appellate Tribunal, Bangalore Bench 'B' in ITA No.218/Bang/09 for assessment year 2005-06 is affirmed and costs are made easy.

Deduction under Section 10B - deemed exports - third-party exports - inter-unit transfers - value addition principle in computation of income - report under Rule 16E / Form No.56G

Deduction under Section 10B - deemed exports - third-party exports - inter-unit transfers - value addition principle in computation of income - report under Rule 16E / Form No.56G - Entitlement to deduction under Section 10B in respect of exports effected through third parties and by inter unit transfers - HELD THAT: - The Court held that the legislative purpose of Section 10A/10B is to encourage export oriented undertakings to earn convertible foreign exchange and that the benefit cannot be confined to a pedantically narrow notion of direct export. Relying upon earlier decisions of this Court and the Supreme Court endorsing that deemed exports effected through third parties who remit foreign exchange still constitute exports in the hands of the manufacturing undertaking, the Court held that exports effected through third parties and inter unit transfers qualify for deduction under Section 10B. The Court observed that the assessee had furnished the accountant's report in Form No.56G as required under Rule 16E and that the Assessing Officer had itself examined major parties; the mere possibility of duplication was rejected because each person can claim only on his value addition and the presumption of duplication is contrary to the statutory mode of computing income. In these circumstances the Court found no necessity to remit the matter for fresh factual enquiry and concluded that the tribunal and lower authorities erred in disallowing the claim insofar as transactions through third parties and inter unit transfers were concerned. [Paras 11, 12]

The orders of the Tribunal and the Commissioner (Appeals) insofar as they disallowed deduction under Section 10B for transactions through third parties and inter unit transfers are quashed and the assessee is held entitled to the deduction.

Final Conclusion: Appeals allowed. The assessee is entitled to deduction under Section 10B in respect of exports through third parties and inter unit transfers for the assessment years before the Court; the impugned parts of the orders disallowing such claims are quashed.

Nexus between expenditure and business purpose - reasonableness of expenditure - verifiability of claims under Section 37(1) - burden of proof on the assessee - arm-chair of the businessman doctrine - disallowance on ad-hoc comparison with earlier year

Nexus between expenditure and business purpose - verifiability of claims under Section 37(1) - burden of proof on the assessee - disallowance on ad-hoc comparison with earlier year - arm-chair of the businessman doctrine - Whether the disallowance of the claim for discounts and rebates was justified where the books of accounts were not disputed and the expenditures were incurred for business purposes. - HELD THAT: - The Court held that the Assessing Officer, the Commissioner (Appeals) and the Tribunal erred in disallowing the discounts and rebates claimed by the assessee. The authorities below did not dispute the books of account or the material produced by the assessee, yet proceeded to make ad-hoc disallowances by comparing rates of discount with an earlier year. Reliance was placed on the principle that once a nexus between the expenditure and the purpose of business is established, the Revenue cannot substitute its view for commercial judgment or assume the role of the board of directors to determine how much expenditure is reasonable. While the burden to substantiate a claim under Section 37(1) lies on the assessee, in the present case there was no positive material to justify disallowance; variations in discount percentages between years, by themselves, did not warrant rejecting the claim where profitability had increased and the accounts were accepted. Applying these principles, the Court concluded that the impugned disallowances were arbitrary and not sustainable.

The disallowance of the claim for discounts and rebates was quashed and the orders of the Assessing Officer, Commissioner (Appeals) and the Tribunal insofar as they disallowed those claims were set aside.

Final Conclusion: The substantial question of law framed is answered in favour of the assessee; the impugned orders to the extent they disallowed the claim for discounts and rebates are quashed and the appeal is disposed of.

Capital gain versus business income - intention at the time of purchase and period of holding - adventure in the nature of trade - conversion of agricultural land into non agricultural land not determinative - exemption under section 54F - allowability of improvement/construction expenditure - limited scrutiny selection and enhancement of scope (CBDT instructions)

Capital gain versus business income - intention at the time of purchase and period of holding - adventure in the nature of trade - conversion of agricultural land into non agricultural land not determinative - Gains arising from sale of the specified immovable properties are to be treated as capital gains and not as business income - HELD THAT: - The Tribunal found that the properties were purchased long before the year of sale (some in 1995 and others in 2010-11), shown as capital investment in the balance sheet, and were continuously held and used for agricultural purposes until sale. The authorities below relied on factors such as conversion of agricultural land into non agricultural land and certain construction activity, but the Tribunal held that mere conversion or piecemeal sale does not ipso facto convert a capital asset into stock in trade. The AO and CIT(A) failed to give due weight to the assessee's long holding period, original intention at purchase, and continuous agricultural use; relevant case law shows that determination depends on totality of circumstances and regularity of transactions. On these facts the sales amounted to realization of long term capital assets and not an "adventure in the nature of trade." [Paras 11, 12, 13, 16]

Property sales treated as transfer of capital assets and taxed as capital gains

Exemption under section 54F - capital gain versus business income - Assessee entitled to exemption claimed under section 54F in respect of the long term capital gains - HELD THAT: - Because the Tribunal concluded that the transactions gave rise to long term capital gains, it directed that the exemption claimed under section 54F be allowed. The Tribunal noted that the assessee utilised the sale proceeds to acquire residential property for personal use (Bengaluru) and that the statutory relief under section 54F applies to such long term capital gains on the facts of this case. [Paras 16]

Allow exemption under section 54F in respect of the capital gains

Allowability of improvement/construction expenditure - Deduction for expenditure claimed towards construction/improvement is to be allowed in full - HELD THAT: - The AO had disallowed 50% of the claimed development/construction expenditure citing lack of supporting bills; the CIT(A) reduced the disallowance to 40% on an ad hoc basis. The Tribunal accepted the assessee's contention that supporting documents and detailed bank/payment charts were produced and test checked, and found no justification for sustaining any part of the disallowance. Accordingly, the Tribunal directed that the full expenditure claimed be allowed in computing capital gains. [Paras 18, 19]

Allow the entire claimed expenditure while computing capital gains

Limited scrutiny selection and enhancement of scope (CBDT instructions) - Enhancement of limited scrutiny scope without required approval was asserted but not decisive on facts; Tribunal followed prior identical decision for dismissal of addition - HELD THAT: - The assessee contended that the case was selected for limited scrutiny and that the AO exceeded the scope without prior approval under CBDT instructions. The Tribunal, noting identical facts and reasoning in the brother's case and on the material on record, did not sustain the addition. Although the instructions on limited scrutiny were cited, the Tribunal's decision rested on the factual conclusion that the transactions were capital in nature and on following the Tribunal's earlier order in the closely similar case. [Paras 3, 4, 6, 7]

Objection to expanded scope did not survive as addition was deleted on merits following analogous Tribunal decision

Final Conclusion: The appeal is allowed: the sales of the properties are held to be transfers of long term capital assets (not business income), exemption under section 54F is directed to be granted, and the entire claimed construction/improvement expenditure is allowed for computing capital gains; the Tribunal follows its earlier decision in the closely similar case.

Transfer Pricing - Arm's Length Price - Transactional Net Margin Method (TNMM) - Functional comparability (FAR analysis) - On-site revenue filter - Selection and exclusion of comparable companies - Working capital adjustment in transfer pricing - Slump sale - Net worth computation under section 50B for slump sale - Withholding-tax-based disallowance under withholding tax provisions - Computation of interest on assessed v. returned income

On-site revenue filter - Selection and exclusion of comparable companies - Functional comparability (FAR analysis) - Transactional Net Margin Method (TNMM) - Validity of DRP's exclusion/inclusion of certain comparables by applying an on-site revenue filter and functional comparability analysis in determining ALP under TNMM - HELD THAT: - The Tribunal examined whether the DRP could exclude comparables by applying an on-site revenue filter and by reference to functional dissimilarities. It followed the approach adopted in a coordinate-bench decision (Hewlett Packard India Software Operations v. DCIT) where identical issues arose for captive software service providers for the same year. The Tribunal held that where the DRP's findings on functional dissimilarity are supported by the companies' segmental and annual report materials before the Tribunal, the exclusions are sustainable. Applying that approach here, Acropetal Technologies Ltd. and L&T Infotech Ltd. were held not to be functionally comparable to the assessee (a captive, cost-plus contract service provider) and therefore excluded. RS Software (India) Ltd., which both parties accepted for inclusion, was directed to be included in the comparable set. The Tribunal similarly examined E-Infochips Ltd. and, following consistent coordinate-bench precedent and the DRP finding that its service-income threshold was not met, confirmed its exclusion. For other contested comparables, the Tribunal remitted specific items for verification where segmental or factual inconsistencies required further examination by the TPO/AO after affording the assessee opportunity to be heard.

DRP's exclusion of Acropetal and L&T Infotech upheld; RS Software to be included; E-Infochips exclusion upheld; certain comparables remitted to AO/TPO for verification of functional comparability and segmental margins.

Selection and exclusion of comparable companies - Functional comparability (FAR analysis) - Assessee's objections to inclusion/exclusion of specific comparables (Persistent Systems & Solutions Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., Concept Communications Ltd., Cyber Media India Online Ltd., Asian Business Exhibition & Conferences Ltd.) - HELD THAT: - The Tribunal considered the factual record in each instance and directed outcomes accordingly. Persistent Systems & Solutions Ltd. and Persistent Systems Ltd. were directed to be excluded because the available annual report/segmental information did not establish functional similarity with the assessee's captive software development services. Sasken Communication Technologies Ltd. was set aside to the AO/TPO for fresh verification of functional comparability and recomputation of segmental margins (with opportunity to the assessee), because segmental information exists but the AO/TPO had used consolidated figures rather than segmental results. Concept Communications Ltd. and Cyber Media India Online Ltd. were remitted to the AO/TPO for FAR verification on the basis that authorities below had not examined FAR in sufficient detail. Asian Business Exhibition & Conferences Ltd. was directed to be excluded from the marketing-support comparable set because its event-management/intangible-driven revenues rendered it functionally dissimilar to the assessee's marketing-support services.

Persistent entities excluded; Sasken, Concept Communications and Cyber Media remitted to AO/TPO for FAR verification; Asian Business Exhibition & Conferences excluded.

Working capital adjustment in transfer pricing - Selection and exclusion of comparable companies - Whether working capital adjustment should be restricted to an upper limit of 1.63% as applied by the TPO/DRP - HELD THAT: - The Tribunal held that restricting the working capital adjustment to a 1.63% cap (average cost of capital of comparables) is contrary to transfer-pricing principles and prior coordinate-bench decisions. The Tribunal directed the AO/TPO to recompute the working capital adjustment on actual differences in working capital, observing that the assessee should provide necessary details for comparables remaining in the final list, and that revenue has powers under section 133(6) to obtain information from comparables if required. The Tribunal indicated that denial of adjustment merely because information is not available from comparables is not permissible without the revenue exercising its statutory powers to obtain such data.

Working capital adjustment remanded to AO/TPO to compute actual adjustment in accordance with law; directive to recompute without the 1.63% cap.

Slump sale - Net worth computation under section 50B for slump sale - Whether transfer of the wireless division constituted a slump sale and the consequent treatment of capital gains - HELD THAT: - The Tribunal analysed the statutory tests for slump sale and 'undertaking' and examined the business-transfer agreement and the assessee's accounting treatment. Finding that the assessee had transferred the wireless division as a going concern for a lump-sum consideration and had accounted for the transaction as transfer of the division (not as itemised asset sales), the Tribunal concluded that the transaction is a slump sale in substance. It directed the AO to compute capital gains accordingly, determine the net worth of the undertaking per the methodology in section 50B (and related explanations), allow indexation, determine depreciation on the relevant block of assets, and compute capital gains under sections 45-50 and section 55 as applicable. The Tribunal rejected the AO's reliance on the buyer's valuation for computing the asset values in the assessee's hands and the AO's contention that absence of separate cash ledgers or certain excluded items prevented slump-sale characterisation.

Slump-sale characterisation accepted; matter remitted to AO for computation of capital gains and net worth in accordance with section 50B and related provisions.

Withholding-tax-based disallowance under withholding tax provisions - Validity of disallowance of certain software-related payments under the withholding-tax provisions (disallowance under withholding-tax regime) - HELD THAT: - The Tribunal considered the contention that purchases of software/equipment with embedded software do not attract withholding obligations and noted the Karnataka High Court precedent (CIT v. Samsung Electronics Ltd.) relied upon by the Department that purchase of software may fall within the ambit of royalty for withholding purposes. Applying that precedent, the Tribunal found no infirmity in the AO's disallowance and dismissed the assessee's challenge to the disallowance.

Disallowance under withholding-tax-related provisions upheld; assessee's ground dismissed.

Computation of interest on assessed v. returned income - Correct basis for computation of interest under the provisions relating to interest on defaults (re computation of interest under section 234C) - HELD THAT: - Both parties agreed that interest under the relevant provision should be computed on returned income rather than assessed income. The Tribunal directed the assessing officer to recompute interest under the relevant interest provision in accordance with law and on the returned income, noting that the issue is consequential.

Interest to be recomputed by AO in accordance with law on the returned income; ground allowed for consequential/statistical purposes.

Final Conclusion: The appeals were partly allowed. The Tribunal upheld several DRP exclusions based on functional dissimilarity, directed inclusion of RS Software, confirmed exclusion of E Infochips, excluded certain persistent entities, remitted specified comparables for further FAR verification, directed recomputation of working capital adjustment on actuals, held the wireless-division transfer to be a slump sale and remitted computation of net worth and capital gains under section 50B and related provisions to the AO, upheld the withholding tax based disallowance, and directed recomputation of interest in accordance with law.

Remand for fresh adjudication - Protective assessment versus substantive assessment - De novo consideration by appellate authority - Divergent appellate views requiring reconsideration

Remand for fresh adjudication - Protective assessment versus substantive assessment - De novo consideration by appellate authority - Whether the orders of the Commissioner (Appeals) should be set aside and the appeals remitted for fresh consideration in view of divergent treatment between appeals relating to substantive proceedings and those relating to protective assessments - HELD THAT: - The Tribunal accepted the Revenue's contention that the CIT(A) had adopted divergent views: in protective-assessment appeals the CIT(A) held that additions should be made in the substantive proceedings, whereas in the appeals arising from the substantive proceedings the CIT(A) had not given effect to that view. The assessees did not controvert this inconsistency or produce contrary material. In the interest of justice and fair play the Tribunal concluded that the impugned CIT(A) orders ought to be set aside and the matters remitted for fresh adjudication. The Tribunal directed that the CIT(A) decide the appeals arising from the substantive proceedings first and thereafter decide the appeals relating to protective assessments, and to decide all appeals afresh as per law. [Paras 5, 6]

Impugned orders of the CIT(A) set aside and appeals remitted to the CIT(A) for de novo disposal, with directions to decide substantive proceedings first and then protective assessments; appeals allowed for statistical purposes.

Final Conclusion: The Tribunal set aside the CIT(A)'s impugned orders and remitted the appeals to the CIT(A) for de novo consideration, directing that substantive proceedings be decided first and protective-assessment appeals thereafter; appeals are allowed for statistical purposes.

Remand for fresh adjudication - protective assessment versus substantive assessment - decision set aside - de novo hearing by appellate authority - interest of justice and fair play

Remand for fresh adjudication - protective assessment versus substantive assessment - de novo hearing by appellate authority - Whether the impugned appellate orders should be set aside and the appeals remitted to the Commissioner of Income Tax (Appeals) for fresh decision, with a direction to decide substantive proceedings first and then protective assessments. - HELD THAT: - The Tribunal accepted the submission of the Revenue that divergent views had been taken by the appellate authorities below and noted that this contention was not controverted by the assessees. In the interest of justice and fair play the Tribunal held that the impugned orders required reconsideration. Accordingly the Tribunal set aside the impugned orders and remitted the appeals to the file of the Commissioner of Income Tax (Appeals) for fresh adjudication. The Tribunal directed that the Commissioner of Income Tax (Appeals) should decide the appeals relating to the substantive proceedings first and thereafter decide the appeals relating to protective assessments. The Tribunal's direction was based on the need for appellate consistency and because the point raised by the Revenue concerning the interplay between protective and substantive assessments had not been addressed in the substantive appeals before the Commissioner of Income Tax (Appeals). [Paras 5]

Impugned orders set aside and matters remitted to the Commissioner of Income Tax (Appeals) for de novo decision, with a direction to decide substantive proceedings first and then protective assessments.

Final Conclusion: Appeals allowed for statistical purposes; impugned orders are set aside and the matters are remitted to the Commissioner of Income Tax (Appeals) for fresh decision as directed by the Tribunal.

Excess sugarcane price - distribution of profit versus deductible expenditure - remand to Assessing Officer for determination of profit component in additional purchase price - application of Section 40A(2) to payments made to non members - harvesting and transportation expenses allowable as business expenditure - reliance on CBDT Circular No. 6/2007

Excess sugarcane price - distribution of profit versus deductible expenditure - remand to Assessing Officer for determination of profit component in additional purchase price - application of Section 40A(2) to payments made to non members - Restoration of assessment issue regarding excess sugarcane price paid to cane growers to the Assessing Officer for fresh determination in light of the Supreme Court's decision in CIT v. Tasgaon Taluka S.S.K. Ltd. - HELD THAT: - Following the binding exposition of law in CIT v. Tasgaon Taluka S.S.K. Ltd., the Tribunal remitted the question whether the excess paid under Clause 5A (additional purchase price/SAP) contains a component which is an appropriation/distribution of profit and therefore not deductible, to the file of the Assessing Officer. The Assessing Officer is directed to allow deduction for the Statutory Minimum Price (SMP) paid under Clause 3, and to examine the accounts, balance sheet and material supplied to the State Government for fixation of the final price under Clause 5A to segregate the profit (distribution) component from the deductible expenditure component. Payments to members which constitute sharing of profit are to be treated as appropriation (non deductible), whereas payments to non members are to be examined under the test in Section 40A(2) to determine whether they are excessive or unreasonable. The assessee must be afforded a reasonable opportunity of hearing before the Assessing Officer, and may raise contentions regarding the SMP versus FRP regime where relevant. [Paras 7, 8]

Issue remitted to the Assessing Officer for fresh determination in accordance with the Supreme Court's directions, with liberty to the assessee to raise all contentions and for the AO to apply Section 40A(2) to non members.

Harvesting and transportation expenses allowable as business expenditure - reliance on CBDT Circular No. 6/2007 - Allowability of harvesting and transportation (H&T) expenses incurred by the co operative sugar mill as deductible business expenditure under the Act. - HELD THAT: - The Tribunal applied the Board's administrative guidance in CBDT Circular No. 6/2007, which recognises that harvesting and transportation expenses incurred by co operative sugar mills to secure an adequate and sustained supply of freshly cut sugarcane are incurred wholly and exclusively for the purpose of business and are allowable in computing the income of such mills. On this basis the disallowance of H&T expenditure was reversed. [Paras 8, 9]

Disallowance of harvesting and transportation charges is reversed and the expenditure is allowed as deductible for the assessment year under consideration.

Final Conclusion: For Assessment Year 2013 14, the Tribunal allowed the appeals for statistical purposes by (i) restoring the question of excess sugarcane price to the Assessing Officer for determination of the profit/distribution component in accordance with the Supreme Court's judgment (with application of Section 40A(2) to payments to non members and opportunity of hearing to the assessee), and (ii) allowing harvesting and transportation expenses as deductible in view of CBDT Circular No. 6/2007.

Suppressed sales - stock reconciliation - evidentiary proof by bank statements and ledgers - ad-hoc disallowance without rejecting books of account - opportunity to produce vouchers and bills - remand for fresh adjudication - principles of natural justice

Suppressed sales - stock reconciliation - evidentiary proof by bank statements and ledgers - Deletion of addition of Rs. 1,75,00,000 treated as suppressed sales - HELD THAT: - The Assessing Officer had added the difference between figures in the month-wise statement and the profit & loss account as suppressed sales on the basis that the assessee failed to produce supporting documents. The assessee explained that the difference arose from an advance receipt of Rs. 1,75,00,000 which was inadvertently entered in the outward column of the stock register due to wrong computer settings and was returned subsequently; bank statement, ledger of the party and stock registers were produced. The Tribunal accepted the stock reconciliation submitted by the assessee, noted the Assessing Officer had misread a stock statement as a sales register and observed that had the entry been a sale there would have been an outward quantity entry. The Revenue's representative conceded to the reconciliation. On these facts the Tribunal found no suppressed sales and deleted the addition. [Paras 8]

Addition of Rs. 1,75,00,000 treated as suppressed sales deleted.

Disallowance of operating expenses - remand for fresh adjudication - principles of natural justice - Remand of disallowance of operating expenses for fresh examination by the Assessing Officer - HELD THAT: - The Assessing Officer computed a large difference in purchases/closing stock which resulted in a disallowance. The assessee filed a reconciliation and explanation showing that differences arose from inclusion of direct costs to purchases and submitted that no opportunity was afforded to explain the reconciliation and that the AO did not examine the supporting material. The Tribunal observed that the reconciliation had not been examined by the AO or the CIT(A) and that a further opportunity should be afforded to the assessee to explain and to the AO to examine the reconciliation. The Revenue raised no objection to remand. Accordingly the Tribunal set aside the assessment-directional finding on this issue and remitted the matter to the Assessing Officer for fresh adjudication in accordance with law. [Paras 10]

Issue remitted to the Assessing Officer for de novo examination of the reconciliation and adjudication.

Ad-hoc disallowance without rejecting books of account - opportunity to produce vouchers and bills - remand for fresh adjudication - Remand of ad-hoc disallowance of travelling expenses to the Assessing Officer for de novo adjudication - HELD THAT: - The Assessing Officer made an ad-hoc disallowance of travelling expenses on the ground that bills and vouchers were not submitted. The assessee submitted that it is now prepared to produce the vouchers and bills and sought an opportunity to do so. Relying on the principle that ad-hoc disallowance is inappropriate where books are not rejected and in view of the assessee's willingness to furnish supporting documents, the Tribunal found it fit to remit the matter to the Assessing Officer to permit the assessee to file vouchers and for fresh adjudication. The revenue did not object to remand. [Paras 12]

Ad-hoc disallowance of travelling expenses set aside and remitted to the Assessing Officer for de novo adjudication; ground allowed for statistical purposes.

Opportunity to produce vouchers and bills - remand for fresh adjudication - Remand of disallowance of subscription and donation for de novo adjudication - HELD THAT: - The Assessing Officer disallowed subscription and donation for want of bills and vouchers. The assessee, now ready to produce the requisite vouchers, sought an opportunity to do so. The Tribunal held that the assessee should be permitted to tender the supporting documents and remitted the matter to the Assessing Officer for fresh examination. The Revenue did not object to remand. [Paras 14]

Addition under subscription and donation set aside and remitted to the Assessing Officer for de novo adjudication; ground allowed for statistical purposes.

Final Conclusion: Appeal partly allowed: deletion of the addition treated as suppressed sales; other disputed additions (operating expenses, travelling expenses, subscription and donation) remitted to the Assessing Officer for fresh adjudication after affording the assessee opportunity to produce supporting documents.

Assessee in default under section 201(1) for failure to deduct tax under section 195 - business connection / dependent agent test under Explanation 2 to section 9(1)(i) - principle of principal-to-principal transactions and burden of proof on revenue - interest liability under section 201(1A) for non-deduction of tax

Assessee in default under section 201(1) for failure to deduct tax under section 195 - business connection / dependent agent test under Explanation 2 to section 9(1)(i) - principle of principal-to-principal transactions and burden of proof on revenue - Whether the assessee was an assessee in default for not deducting tax under section 195 on payments to non-resident sellers because their Indian agents constituted dependent agents creating a business connection under Explanation 2 to section 9(1)(i). - HELD THAT: - The Tribunal examined the material concerning the role and status of the Indian agents (Ashapura Commodities and A.G. Goel & Sons) and the confirmations furnished by the non-resident sellers that they had no business connection in India. The authorities below had treated the agents as working mainly or wholly for the non-resident on the basis that a large proportion of the agent's revenue was from those principals and on selective references in correspondence and invoices. The Tribunal held that such factors, including a statement that a principal is a "main client" or that over 50% of an agent's revenue derives from a principal, do not ipso facto establish that the agent works mainly or wholly for the non-resident within the meaning of Explanation 2. The proper test is whether the agent, in reality, habitually secures orders mainly or wholly for the non-resident or exercises authority to conclude contracts on behalf of the non-resident, or maintains stock for regular delivery on the non-resident's behalf, and whether there is a real and intimate economic dependence or control. Applying the legal test and the Circular 23/1969 guidance relied upon by the assessee, and having regard to the agents' independent commission-agent status and absence of evidence of control or exclusive agency, the Tribunal concluded that revenue failed to discharge its burden to prove a dependent agent relationship or business connection. Accordingly, the assessee was not required to deduct tax under section 195 and could not be treated as an assessee in default under section 201(1). [Paras 8]

Order declaring the assessee an assessee in default was set aside and the additions made by the A.O. were directed to be deleted; ground No.1 of the appeal allowed.

Interest liability under section 201(1A) for non-deduction of tax - assessee in default under section 201(1) for failure to deduct tax under section 195 - Whether interest under section 201(1A) was rightly levied on the assessee in respect of the same payments for which deduction under section 195 was disputed. - HELD THAT: - The Tribunal observed that the interest liability under section 201(1A) is consequential upon a finding that a person is an assessee in default under section 201(1). Having held that the assessee was not required to deduct tax because the non-resident sellers did not have a business connection in India and the agents were independent, the basis for imposing interest under section 201(1A) fell away. For the same reasoning as on the primary issue of default, the Tribunal allowed the appeal against the levy of interest. [Paras 9]

Levy of interest under section 201(1A) set aside; ground No.2 allowed.

Final Conclusion: The Tribunal partly allowed the appeal for A.Y. 2015-16 by setting aside the finding of assessee-in-default and deleting the related additions, and by quashing the interest levied under section 201(1A); other general grounds did not require separate adjudication.

Cash credits in bank account and burden of proof to prove genuineness - treatment of interest on matured FDRs attributable to earlier years - requirement of corroborative evidence before imputing private practice receipts - unexplained investments in shares and mutual funds and initial burden of explanation

Cash credits in bank account and burden of proof to prove genuineness - rotational fund and share-trading related bank entries - Deletion of addition made on account of unexplained credits in bank account - HELD THAT: - The Tribunal found that the assessee had explained the nature of the various credit entries in the bank account (rotational fund from employment, credit on cancellation of DD used for share trading, clearing of a cheque, and earlier investments in IDBI Infrastructure Bonds). The CIT(A) had allowed part relief only on account of past savings but failed to consider these specific explanations. In absence of any contrary material produced by Revenue, the explanation discharged the initial burden and warranted deletion of the addition made by the Assessing Officer. [Paras 5]

Addition on account of cash credits in bank account deleted.

Treatment of interest on matured FDRs attributable to earlier years - year of receipt versus year of accrual - Deletion (or restriction) of addition made for interest on FDRs which pertained to earlier years - HELD THAT: - The Assessing Officer himself noted that the FDRs related to earlier years and the Tribunal accepted the assessee's submission that a major part of the interest earned on maturity pertains to previous years and therefore should not be taxed in the year under consideration. The Tribunal directed the Assessing Officer to delete interest attributable to earlier years and to restrict any addition to interest pertaining to the year under consideration if not included in the return. [Paras 8]

Addition in respect of interest earned on previous years deleted; any addition confined to interest for the year if not disclosed in return.

Requirement of corroborative evidence before imputing private practice receipts - no presumption without supporting evidence - Deletion of addition made on account of presumed private practice income - HELD THAT: - Although the CIT(A) sustained the addition on the basis that the assessee was a surgeon and might receive private practice fees, the Tribunal observed that no corroborative evidence was placed on record by Revenue to substantiate such receipts. The CIT(A)'s sustainment was therefore based on presumption and not on evidence, which rendered the addition unjustified. [Paras 11]

Addition on account of private practice deleted for lack of corroborative evidence.

Unexplained investments in shares and mutual funds and initial burden of explanation - allocation of investments disclosed in spouse's return - Deletion of addition relating to alleged unexplained investments in shares and mutual funds - HELD THAT: - The Assessing Officer treated investments (including mutual funds and tax-free bonds) as belonging to the assessee despite those amounts being shown in the return of the assessee's wife. The CIT(A) had accepted that profit on share trading pertained to the wife and deleted that income but nonetheless sustained the investment addition on the basis that the assessee had not discharged the initial burden. The Tribunal held that once the CIT(A) accepted that the trading profit pertained to the wife, the initial burden as to ownership of the investments had been discharged and therefore the addition relating to investments ought to be deleted. [Paras 14]

Addition in respect of alleged unexplained investment in shares and mutual funds deleted.

Final Conclusion: The appeal is partly allowed: the Tribunal directs deletion of the additions made for bank credits, the alleged private practice receipt, and the alleged unexplained investments in shares and mutual funds; the addition for interest on matured FDRs is deleted insofar as it pertains to earlier years and restricted to interest attributable to the year under consideration if not offered in the return.

Reopening of assessment on the basis of reason to suspect - Addition based solely on loose papers/Tax Evasion Petition (TEP) without corroborative evidence - Requirement of corroborative evidence for attribution of undisclosed income - Speculation by quantification on the basis of business locality is impermissible

Addition based solely on loose papers/Tax Evasion Petition (TEP) without corroborative evidence - Requirement of corroborative evidence for attribution of undisclosed income - Speculation by quantification on the basis of business locality is impermissible - Validity of addition of the alleged receipt (noted as 1.87) in assessee's hands where the assessment was reopened on the basis of a TEP/loose paper entry. - HELD THAT: - The Tribunal found that the reassessment and consequential addition rested solely on a loose paper/TEP noting which mentioned the assessee's name against the figure '1.87' but did not specify the currency unit or amount (thousands, lakhs or crores) and did not bear the assessee's signature. The Assessing Officer's conclusion that the entry represented Crores was based on conjecture drawn from the business locality and therefore rested on surmise and guesswork. The Department did not produce any corroborative material or evidence to substantiate that any amount was actually paid to the assessee. Reliance was placed on precedents holding that entries in third party loose papers, without supporting evidence, are insufficient to make additions against a person. Given absence of signature, absence of clear quantification, and absence of corroboration, the Tribunal held the addition unsustainable and directed deletion. [Paras 8, 9]

The addition based on the loose paper/TEP entry is deleted for lack of corroborative evidence; Grounds Nos. 3 to 5 are allowed.

Final Conclusion: Appeal partly allowed; the addition made in reassessment on the basis of the loose paper/TEP entry is set aside and the Assessing Officer is directed to delete the addition.

Applicability of quality control order to imports - Date of import reckoned with reference to shipment date - BIS marking requirement on imported goods

Applicability of quality control order to imports - Date of import reckoned with reference to shipment date - BIS marking requirement on imported goods - The requirement of affixing BIS mark under the Stainless Steel Products (Quality Control) Order, 2016 could not be applied to goods shipped before that Order came into force. - HELD THAT: - The Tribunal held that there was no dispute on facts that the goods had been shipped in January 2017, whereas the Stainless Steel Products (Quality Control) Order, 2016 came into force only on 07.02.2017. Applying Para 2.17 of the Foreign Trade Policy, 2015-2020, the relevant date for reckoning import was the date of shipment or dispatch from the supplying country, as evidenced by the Bill of Lading, and not the later date of arrival. Since the Order was not in force on the shipment date, the appellants were under no legal obligation to affix the BIS mark on the imported goods. The view that prior knowledge of the forthcoming Order required compliance even before its enforcement was rejected as having no legal basis. [Paras 6, 7]

Confiscation and consequential redemption fine founded on non-affixation of BIS mark were held unsustainable, and the impugned orders were set aside.

Final Conclusion: The appeals were allowed on the ground that the BIS marking requirement under the Stainless Steel Products (Quality Control) Order, 2016 was not enforceable against consignments shipped before the Order came into force. The impugned confiscation and related redemption fine were therefore set aside.

Managerial remuneration in excess of prescribed limits - approval of Central Government under Section 197 - refund of excess remuneration - admission of pre CIRP claims in CIRP - role of the committee of creditors and resolution professional in verification of claims - related party managerial remuneration

Managerial remuneration in excess of prescribed limits - approval of Central Government under Section 197 - refund of excess remuneration - admission of pre CIRP claims in CIRP - role of the committee of creditors and resolution professional in verification of claims - Whether the appellant's claim for managerial remuneration paid in excess of amounts permissible under the Companies Act, 2013, and sought to be admitted as a pre CIRP claim, was rightly rejected. - HELD THAT: - The Appellate Tribunal upheld the Adjudicating Authority's conclusion that excess managerial remuneration payable beyond the limits prescribed required prior approval of the Central Government under Section 197 and that, in the absence of such approval or a 'No Objection Certificate' from the lenders, such excess payments could not be released. The record showed the appellant had been drawing excess remuneration with the expectation of subsequent approval and on two occasions had repaid excess amounts; the committee of creditors (COC) did not approve the excess payments in its meetings. The Resolution Professional informed the appellant by e mail that the claim was rejected for these reasons. The Tribunal found no obligation on the Resolution Professional or COC to obtain Central Government approval on the appellant's behalf or to validate an unsupported Form D claim; where excess payments lack statutory approval they are properly shown as recoverable in the books and are not admittable as valid pre CIRP dues. Given the appellant's awareness of the excess payments and the COC's refusal to approve, there was no ground to interfere with the impugned order rejecting the excess remuneration claim. [Paras 5, 6, 7]

The Adjudicating Authority's rejection of the appellant's claim for excess managerial remuneration was affirmed and the appeal dismissed.

Final Conclusion: The appeal is dismissed. The claim for managerial remuneration paid in excess of limits prescribed by the Companies Act, 2013, was correctly rejected in the absence of Central Government approval or lender consent; the Resolution Professional and the COC were not obliged to obtain such approvals on the appellant's behalf.

Refund of CENVAT credit - Rule 5 of CENVAT Credit Rules, 2004 - Applicability of limitation under Section 11B of the Central Excise Act, 1944 - Relevant date for computation of limitation (end of quarter in which FIRC/FIRC-equivalent is received) - Notifications prescribing conditions and limitation for refund (Notification No.5/2006, Notification No.27/2012 and Notification No.14/2016)

Refund of CENVAT credit - Rule 5 of CENVAT Credit Rules, 2004 - Applicability of limitation under Section 11B of the Central Excise Act, 1944 - Notifications prescribing conditions and limitation for refund (Notification No.5/2006, Notification No.27/2012) - Whether refund claims under Rule 5 of the CENVAT Credit Rules, 2004 are subject to the time limit prescribed in Section 11B of the Central Excise Act, 1944. - HELD THAT: - The Court held that Rule 5 expressly permits refund subject to "such safeguards, conditions and limitations, as may be specified by the Central Government by notification." Notifications issued under Rule 5 (notably Notification No.5/2006 and Notification No.27/2012) unambiguously require filing "before the expiry of the period specified in Section 11B of the Central Excise Act, 1944." Applying established precedent (including the principles in UNION OF INDIA v. UTTAM STEEL and Mafatlal Industries), the Court concluded that limitation under Section 11B applies to refund claims under Rule 5 and that subordinate legislation cannot override the statutory limitation. Consequently refund applications under the CENVAT Rules cannot be entertained without reference to the time prescribed in Section 11B. [Paras 11, 12, 14]

Refund claims under Rule 5 are subject to the one-year limitation in Section 11B and claims filed beyond that period are time-barred.

Relevant date for computation of limitation - Refund of CENVAT credit - Notification No.27/2012 - CE (NT) - Whether the "relevant date" for computing the one year limitation for refund of unutilized CENVAT credit is the end of the quarter in which the FIRC (or equivalent document) is received. - HELD THAT: - The Court examined the scheme of Rule 5 as read with Notification No.27/2012 and its amendment by Notification No.14/2016 and agreed with the tribunal that, for the purposes of computing the time limit under Section 11B as applied by the notifications, the relevant date is the last date of the last month of the quarter in which the FIRCs (or the prescribed documentary receipt) are received. Applying that construction, several of the appellant's refund claims (specifically those filed on 03.01.2014 relating to earlier quarters) were found to have been filed beyond one year from the relevant quarter-end and thus time barred. Four claims were remanded to the original authority for consideration, against which no further appeal was pursued by the revenue. [Paras 13, 14]

The relevant date for computing the one year limitation is the end of the quarter in which the FIRC (or prescribed receipt) is received; claims filed after one year from that quarter end are barred.

Notification No.14/2016 - CE (NT) - Retrospective effect of procedural amendments to limitation - Refund of CENVAT credit - Whether the limitation prescribed by Notification No.14/2016 (or any later notification) operates so as to permit claims for refund that were already time barred before its commencement. - HELD THAT: - Relying on settled principles that procedural changes to limitation cannot revive a remedy that was already barred when the amendment came into force, the Court rejected the appellants' contention that refunds could be claimed without reference to limitation or that limitation would apply only from the date of Notification No.14/2016. The Court held that where a claim was already barred under the law in force before an amending notification, the later notification cannot revive the dead claim; thus the one year limitation applies according to its operative date and principles of retrospectivity governing procedural statutes. [Paras 11, 12, 14]

Amendments by later notifications do not revive claims already barred; limitation applies in accordance with established principles and the notifications cannot be read to permit otherwise time barred claims.

Final Conclusion: The High Court affirmed the tribunal: refund claims made under Rule 5 of the CENVAT Credit Rules, 2004 are subject to the one year limitation under Section 11B of the Central Excise Act, 1944; the relevant date for computing limitation (as per the notifications) is the end of the quarter in which the FIRC is received; claims filed beyond one year from that date are time barred, and later notifications do not revive already barred claims. Appeals dismissed and tribunal orders affirmed.

Principle of mutuality - club or association service - service tax liability of services provided by a club to its members - constituted under any law - tax net exclusion for incorporated clubs prior to 1.7.2012

Principle of mutuality - service tax liability of services provided by a club to its members - Principle of mutuality applies to services provided by the club to its members and such services do not amount to taxable service for levy of service tax in the circumstances of the case. - HELD THAT: - The Court accepted the view of the Apex Court in State of West Bengal v. Calcutta Club Limited that where a club or association is incorporated or constituted under a statute it falls outside the service tax definition prior to 1.7.2012. Applying that authority, the Court held that the activities in issue-services provided by the club to its members-are governed by the principle of mutuality and therefore do not constitute a taxable rendition of service between distinct persons for the relevant periods. The Tribunal's reliance on precedents holding the matter not res integra was upheld. [Paras 7]

Answered in favour of the respondent: principle of mutuality applies and the services are not taxable for the periods in question.

Club or association service - constituted under any law - tax net exclusion for incorporated clubs prior to 1.7.2012 - Whether the CESTAT was correct in holding that the principle of mutuality overrides the statutory provisions relied upon by the revenue and therefore the services are not taxable under the categories relied upon. - HELD THAT: - Relying on the Apex Court's construction that entities which are 'constituted' under a statute (including companies and cooperative societies registered under respective Acts) fall outside the service tax net as clubs or associations prior to 1.7.2012, the High Court held that the CESTAT correctly applied that principle. The Court observed that incorporated clubs/associations are 'constituted' under law and thus were not included within the taxable definition before the specified date; consequently the Tribunal's conclusion rejecting the revenue's invocation of the statutory entries was affirmed. [Paras 7]

Answered in favour of the respondent: CESTAT was right to hold that the services were not taxable as club or association service for the relevant periods.

Service tax liability of services provided by a club to its members - club or association service - Whether the activities of the club amount to a service provided to members and are liable to service tax. - HELD THAT: - The Court examined the statutory definition and the authoritative pronouncement of the Apex Court which clarified that incorporated clubs or associations constituted under law were excluded from the service tax net prior to 1.7.2012. On that basis, the Court found that the activities of the respondent's club, as rendered to its members during the specified periods, did not attract service tax and upheld the Tribunal's orders allowing the respondent's appeals against the adjudicating authority's demands. [Paras 7]

Answered in favour of the respondent: the club's activities do not amount to taxable services for the periods adjudicated.

Final Conclusion: Appeals dismissed; substantial questions of law answered in favour of the respondent-assessee and against the revenue, and the CESTAT orders dated 6.1.2015 and 11.2.2015 are affirmed; no order as to costs.

Refund of excess duty - compounded levy scheme - sealing of machinery and period-specific duty liability - compliance with appellate direction - entitlement to refund with interest

Refund of excess duty - sealing of machinery and period-specific duty liability - entitlement to refund with interest - compliance with appellate direction - Adjudicating Authority directed to entertain and decide the appellant's refund claim for excess duty paid for the period 16.04.2012 to 30.04.2012 in respect of Machine No. 2 and, if entitled, refund the amount with interest. - HELD THAT: - The Tribunal recorded that the appellant paid duty in advance for April 2012 for Machine No. 2, which was sealed from 16.04.2012 to 30.04.2012, and that a refund claim for the excess duty paid for that sealed period had been filed. This Tribunal had earlier directed the Adjudicating Authority to compute working and non-working periods and determine the refund, but the Authority failed to deal with the April 2012 claim despite that direction. Noting the omission and describing it as negligence, the Tribunal has directed the Adjudicating Authority to entertain the specific refund claim within seven days of receipt of the order and to pass a decision in accordance with law; where the appellant is held entitled, the refund shall be paid along with interest. [Paras 3, 4]

Adjudicating Authority to entertain and decide the refund claim for April, 2012 within seven days and, if refund is due, to pay it with interest.

Final Conclusion: The appeal is disposed of by directing the Adjudicating Authority to deal with the appellant's refund claim for April, 2012 within seven days and to grant the refund with interest if entitlement is established.