TaxTMI Updates e-Newsletter
Jul 03,2023

Speaking order - appealable order under the WBGST Act - availability of alternative remedy by way of appeal - principles of natural justice - lack of jurisdiction

Speaking order - Whether the impugned order dated 16th December, 2022 is a speaking order and whether the sufficiency of reasons can sustain a writ petition in view of an available appeal. - HELD THAT: - The Court examined the impugned order and found that it contains reasons and is a detailed order. The petitioner's challenge is to the sufficiency of those reasons; however, the Court held that dissatisfaction with the adequacy of reasons in an order which is otherwise reasoned does not permit bypassing the statutory remedy of appeal. The determinative consideration was that the impugned order is appealable under the WBGST framework and the grievance as to sufficiency of reasons is appropriately ventilated on appeal rather than by extraordinary writ.

Impugned order is a speaking and reasoned order; sufficiency of reasons does not justify entertaining the writ petition when an appeal is available.

Availability of alternative remedy by way of appeal - principles of natural justice - lack of jurisdiction - Whether the writ petition is maintainable in view of the existence of an alternative statutory remedy and whether any violation of natural justice or lack of jurisdiction justified writ relief. - HELD THAT: - The Court assessed whether the impugned order suffered from jurisdictional infirmity or breach of natural justice that would oust the applicability of the alternative remedy. It concluded that there was no showing of violation of principles of natural justice, no inherent lack of jurisdiction in the authority that passed the order, and no statutory bar to adjudication of the grievance by the Appellate Authority. Given these findings, the availability of an effective alternative remedy by appeal renders the writ petition unsuitable for interference. The Court also clarified that its refusal to entertain the writ does not preclude the petitioner from seeking release of the vehicle on compliance with legal formalities, nor does it affect the merits of any future appeal.

Writ petition dismissed for want of alternative remedy; no jurisdictional defect or breach of natural justice found that would justify bypassing appeal.

Final Conclusion: Writ petition dismissed on the ground of availability of an alternative remedy by way of appeal; the impugned order was held to be a reasoned, appealable order and no jurisdictional or natural justice defect was found to warrant writ relief. Any appellate challenge remains open and the order on non-entertainment does not affect substantive rights on appeal or applications for release of the vehicle in accordance with law.

Reopening of assessment under Section 148 read with Section 147 of the Income tax Act - reason to believe - failure to disclose fully and truly the material facts - jurisdictional condition for reopening beyond four years - touchstone of reasons recorded - separate legal entity and obligation to produce documents - search and seizure under Section 132

Reopening of assessment under Section 148 read with Section 147 of the Income tax Act - failure to disclose fully and truly the material facts - jurisdictional condition for reopening beyond four years - touchstone of reasons recorded - separate legal entity and obligation to produce documents - Validity of the notice under Section 148 seeking reopening of assessment for AY 2009-10 on the ground of alleged failure to disclose material facts and escaped income. - HELD THAT: - The Court reviewed the settled law that reopening after four years requires satisfaction of the additional jurisdictional condition that the assessee failed to disclose fully and truly material facts. The reasons recorded must themselves disclose the material on which the assessing officer formed his belief; they cannot be supplemented later. In the present case the assessing officer relied on bank transactions reflected in the account of a separate legal entity, Avash Logistic Park Pvt. Ltd., and treated non-production of that entity's bank statements as a failure on the part of the petitioner. The assessing officer for both the petitioner and Avash Logistic was the same, and the scrutiny assessments for the two entities were completed on consecutive days with the Avash Logistic bank account having been available during scrutiny of that entity. The reasons recorded did not show specific tangible material connecting the four entries relied upon to the petitioner or demonstrating that payments to the broker resulted in generation of cash that reached the petitioner. Given that the bank statements related to a distinct entity assessed separately, and that the statements had been considered in the scrutiny of that entity, the recorded reasons do not establish the requisite failure by the petitioner to disclose material facts nor do they furnish a valid basis for forming the belief that income had escaped assessment. Accordingly the jurisdictional requirements for reopening beyond four years were not satisfied. [Paras 9, 10, 11, 12, 13]

The notice under Section 148 and the order rejecting objections were invalid; the reopening was set aside.

Final Conclusion: The petition is allowed; the notice dated 1 July 2014 under Section 148 and the order dated 24/25 November 2015 rejecting objections are set aside for failure to satisfy the jurisdictional conditions for reopening the assessment for AY 2009-10.

Mechanical application of administrative circular - discretion under section 220(6) of the Income Tax Act, 1961 - quashing of order for non-application of mind - obligation to consider stay application filed before the Assessing Officer

Obligation to consider stay application filed before the Assessing Officer - discretion under section 220(6) of the Income Tax Act, 1961 - mechanical application of administrative circular - quashing of order for non-application of mind - Whether the impugned letter directing payment of 20% of demand could stand where the Assessing Officer did not consider the stay application filed before him and appeared to act mechanically. - HELD THAT: - The High Court found that the impugned letter demonstrated uncertainty on the part of the ITO as to whether a stay application had been filed before any appellate authority and therefore did not reflect an exercise of the discretion vested in the AO under sub-section (6) of section 220. The letter's request for a copy of any order granting stay indicated that the stay application addressed to the AO had not been considered on merits. Where an administrative circular prescribing a standard percentage for grant of stay is relied upon mechanically without application of mind to the pending stay application, the resultant direction is without reasons and unsustainable. In the present case the court did not express any opinion on the Delhi High Court or Supreme Court decisions cited by the petitioner, but concluded that the procedure adopted in the impugned communication was defective because the AO failed to consider the stay application and exercise the statutory discretion. [Paras 4, 5]

Impugned letter set aside and quashed; the AO directed to consider the stay application dated 28th April, 2022 and to pass an order under sub-section (6) of section 220; consequential action taken pursuant to the impugned letter also quashed.

Final Conclusion: Writ petition allowed: communication directing payment was quashed for non-application of mind and the matter remitted to the Assessing Officer to decide the stay application under section 220(6).

Adjustment of refund against assessment demand - intimation under section 245 - stay under section 220(6) - extension of stay till disposal of appeal - prior intimation mandatory for set off - interest under section 244A

Stay under section 220(6) - extension of stay till disposal of appeal - Effect of a stay granted under section 220(6) on the Respondent's power to treat the assessee as an assessee in default and to undertake adjustment of refunds. - HELD THAT: - The Court held that a stay granted under section 220(6) does not operate only for a limited six month period but continues until disposal of the appeal by the Appellate Authority. Reliance is placed on the Court's earlier decision that where such a stay is granted the time to make payment is extended until the appeal is disposed of. The Respondent's contention that the stay lapsed after six months was rejected and, consequently, the Respondent could not lawfully treat the assessee as in default or proceed to effect adjustments while the stay subsisted. [Paras 5]

Stay under section 220(6) continues till disposal of the appeal; the Respondent's reliance on expiry after six months was rejected.

Adjustment of refund against assessment demand - intimation under section 245 - prior intimation mandatory for set off - interest under section 244A - Validity of adjusting admitted refunds against outstanding demands without issuing prior written intimation under section 245. - HELD THAT: - The Court held that prior intimation in writing under section 245 before setting off a refundable amount against an outstanding demand is a mandatory requirement. Non compliance with the requirement of prior intimation renders the adjustment illegal. The Court noted admissions by the Respondent of procedural lapse in failing to give the required intimation and followed settled precedent that such failure vitiates the adjustment. Accordingly the adjustments of the refunds were quashed and the petitioner directed to be paid the refund with interest under section 244A. [Paras 5]

Adjustment of refunds without prior intimation under section 245 is illegal; such adjustments are quashed and refunds directed to be paid with interest under section 244A.

Final Conclusion: The adjustments of refunds for the specified assessment years are quashed and set aside; the aggregate refund (as determined) is to be paid to the petitioner within two weeks with interest under section 244A. Rule made absolute in these terms; no costs.

Addition on account of mismatch between Form 26AS and books of account - verification of bank statements and running account bills - onus of proof and third party confirmation for TDS claims - appellate interference limited where factual findings and verification sustain order

Addition on account of mismatch between Form 26AS and books of account - verification of bank statements and running account bills - Whether the Tribunal was justified in deleting the addition made by the Assessing Officer based on alleged difference between receipts as per Form 26AS and the assessee's books. - HELD THAT: - The Tribunal examined the material and recorded that the Assessing Officer had not verified the assessee's claims. The Tribunal noted the contract value and that the assessee had raised running account (RA) bills; it found that receipts shown in books and supported by bank statements corresponded to amounts received in the relevant year. The CIT(A) had carried out verification of bank accounts and the contract and deleted the addition. On this factual foundation the Tribunal dismissed the revenue's appeal. The High Court, on appellate review, accepted the Tribunal's factual findings and verification-based conclusion, holding there is no substantial question of law warranting interference with the concurrent factual conclusion that the addition was not justified. [Paras 10, 11]

Tribunal rightly deleted the addition after verification; Assessing Officer's addition based on Form 26AS mismatch was not sustained.

Onus of proof and third party confirmation for TDS claims - appellate interference limited where factual findings and verification sustain order - Whether any substantial question of law arises from the revenue's contention that the assessee failed to discharge the onus to produce third party confirmations regarding TDS leading to deletion of the addition. - HELD THAT: - Revenue challenged the appellate and Tribunal findings on grounds including alleged failure by the assessee to produce third party confirmations for TDS and claimed factual discrepancies in contract value. The Tribunal and CIT(A) addressed these contentions by verifying bank statements, contract amount and running bills, and concluded that the assessee's position was substantiated. The High Court found these were factual determinations supported by the record and therefore no substantial question of law arose as framed by the revenue. Where concurrent factual findings and verification by lower authorities sustain the order, appellate interference on pure factual disputes is not warranted. [Paras 10, 11]

No substantial question of law arises from the asserted failure to furnish third party confirmations; the Tribunal's dismissal of the revenue's appeal stands.

Final Conclusion: The High Court dismissed the revenue's appeal against the Tribunal's order for AY 2013-14, holding that the Tribunal and CIT(A) had properly verified the assessee's bank records, running bills and contract particulars and that no substantial question of law arose to warrant interference with the concurrent factual findings; the appeal is dismissed.

Merger and succession of tax credits - migration of tax credit/challan - rectification application and grant of refund - mandamus for payment of refund with applicable interest

Migration of tax credit/challan - rectification application and grant of refund - mandamus for payment of refund with applicable interest - Direction to respondents to remit the refund arising from migration of advance tax and TDS credits following merger, together with applicable interest, within a specified time-frame. - HELD THAT: - The petitioner sought transfer of pre-paid taxes of the merged entity Polaris to Virtusa and consequent refund by way of rectification. The respondents informed the Court that the challan migration from Polaris to Virtusa had been successfully uploaded manually on 07.06.2023 and credit for advance tax and TDS was allowed, resulting in a refund in favour of the petitioner. As the primary grievance has been addressed by migration and allowance of credit, the Court directed that the consequential refund, with applicable interest in accordance with law, be remitted to the petitioner without delay and within a fixed period. The direction is limited to ensuring timely payment of the refund with interest; the Court did not re-open the merits of the tax-credit entitlement after migration. [Paras 7, 9, 10]

Respondents directed to remit the refund along with applicable interest to the petitioner within eight weeks from receipt of a copy of the order.

Final Conclusion: The writ petition is disposed of as the migration and allowance of tax credits have been effected; respondents are directed to remit the consequential refund with applicable interest within eight weeks. No order as to costs.

Principles of natural justice - assessment under Section 153C read with Section 144 of the Income Tax Act, 1961 - notice under Section 142(1) of the Income Tax Act, 1961 - demand notice under Section 156 of the Income Tax Act, 1961 - remand for fresh consideration and personal hearing

Principles of natural justice - assessment under Section 153C read with Section 144 of the Income Tax Act, 1961 - notice under Section 142(1) of the Income Tax Act, 1961 - demand notice under Section 156 of the Income Tax Act, 1961 - Validity of the assessment orders dated 28.03.2023 insofar as they were passed without affording adequate opportunity to the petitioner and consequent validity of the demand notices issued on the same date. - HELD THAT: - The petitioner was issued notices under Section 153C granting 30 days to file returns but was thereafter served notices under Section 142(1) requiring documents within two days. The Assessing Officer then proceeded to pass six assessment orders of even date without granting the extended time requested by the petitioner. The Court held that expecting the petitioner to collate information for six assessment years within two days, having earlier granted 30 days under Section 153C, amounted to placing the petitioner on an excessively tight timeframe and breached the principles of natural justice. For these reasons the impugned assessment orders were set aside. Consequent demand notices issued under Section 156 also collapse as a result of the setting aside of those assessment orders. [Paras 8, 10, 11, 12, 13]

Impugned assessment orders dated 28.03.2023 set aside for breach of natural justice; consequential demand notices of even date to collapse.

Remand for fresh consideration and personal hearing - production of material - Extent and manner in which the Assessing Officer may proceed afresh after setting aside the assessment orders. - HELD THAT: - The Court did not set aside the notice dated 20.03.2023 under Section 142(1); instead liberty was granted to the Assessing Officer to continue the proceedings from the stage at which the matter stood when that notice was issued. The petitioner/assessee was directed to respond and furnish relevant information within four weeks. The Assessing Officer was directed to provide to the petitioner any information or material in his possession that had not been furnished earlier, and to grant a personal hearing to the petitioner's authorized representative with notice indicating date and time. These directions preserve the opportunity for the petitioner to be heard and for the AO to rely on material already on record before proceeding further. [Paras 14, 15, 16]

Proceedings remitted to the Assessing Officer from the stage of issuance of the Section 142(1) notice dated 20.03.2023; petitioner to comply within four weeks; AO to furnish withheld material and grant personal hearing.

Final Conclusion: The writ petitions are allowed: the six assessment orders dated 28.03.2023 are set aside for breach of natural justice and the consequential demand notices collapse; the matter is remitted to the Assessing Officer to proceed from the stage of the Section 142(1) notice dated 20.03.2023, subject to the directions to supply material to the petitioner and to grant a personal hearing, and the petitioner is directed to respond within four weeks.

Taxability of unexplained cash credits under section 68 - onus of proof on assessee to explain cash credits - verification of source of capital and documentary corroboration - admissibility of partners' audited accounts and assessment of partners as corroborative evidence - standard of appellate interference with concurrent findings of fact

Taxability of unexplained cash credits under section 68 - onus of proof on assessee to explain cash credits - verification of source of capital and documentary corroboration - standard of appellate interference with concurrent findings of fact - Whether the deletion of the addition made under section 68 in respect of partners' cash/ capital introduction and the consequent disallowance of interest was justified and sustainable. - HELD THAT: - The Assessing Officer had treated partners' capital introduction as unexplained cash credit and made additions, largely because the capital was said to be introduced in cash and could, in his view, have been by cheque. The Commissioner (Appeals) found that only a small portion of the total capital introduced was in cash and that the assessee had satisfactorily explained the source of the major part of the capital by showing that partners had taken loans from Bajaj Finserv Ltd., out of which funds were introduced into the firm. The Tribunal recorded that the Assessing Officer failed to properly verify the evidence produced-relied instead on a judicial decision-whereas the partners were assessed to tax and their accounts audited, particulars which were not doubted. On these concurrent findings the Tribunal upheld the deletion of the addition. The High Court held those concurrent findings to be reasonable findings of fact and declined to interfere, noting that no substantial question of law arose. The Court thereby applied the established principle that concurrent factual findings, supported by evidence and not vitiated by error of law, are not to be disturbed on appeal. [Paras 5, 6, 7]

Concurrent factual findings of the CIT(A) and the Tribunal upholding deletion of the addition under section 68 (and related disallowance of interest) are affirmed; Revenue's appeal dismissed.

Final Conclusion: The High Court dismisses the Revenue's appeal against the Tribunal's order for Assessment Year 2014-2015, upholding the deletion of the addition under section 68 on concurrent findings of fact that the assessee had adequately explained the partners' sources of capital and that the Assessing Officer had not properly verified the evidence; no substantial question of law is made out.

Foreign assignment allowance - accrual of salary income for services rendered outside India - place/situs of employment - point of receipt versus point of payment to bank - income of a non-resident not taxable in India for services performed abroad - double non-taxation is immaterial to situs of income - Travel Currency Card (TCC) top up - reliance on binding precedents of coordinate Benches and High Courts

Foreign assignment allowance - accrual of salary income for services rendered outside India - place/situs of employment - point of receipt versus point of payment to bank - Travel Currency Card (TCC) top up - double non-taxation is immaterial to situs of income - reliance on binding precedents of coordinate Benches and High Courts - Whether foreign assignment allowance received abroad for services rendered outside India is taxable in India. - HELD THAT: - The Tribunal held that the foreign assignment allowance which was received by the assessees outside India by way of top up to a Travel Currency Card (TCC), albeit transferred by the Indian employer through its bank accounts, does not accrue or arise in India and therefore is not taxable in India. The Tribunal rejected the Revenue's contention that payment into or through an Indian bank account, or continued presence on the Indian employer's payroll, establishes the situs of employment in India; payment to the banker for overseas disbursement does not convert the point of accrual to India. The Tribunal further held that the fact that the amount may not have been taxed in the host country (alleged double non taxation) is irrelevant to the question whether the income accrued in India. Reliance was placed on earlier decisions of coordinate Benches and High Courts which determine that income of a non resident for services performed outside India accrues outside India and is not taxable here, and those precedents were followed as the issue was no longer res integra. [Paras 11, 13, 14]

Foreign assignment allowance received abroad for services rendered outside India is not taxable in India; the assessees' grounds are allowed.

Final Conclusion: Following coordinate Benches and authoritative precedents, the appeals are allowed and the foreign assignment allowance received abroad for services rendered outside India is held not taxable in India.

Long-term capital gain - holding period reckoning - rectification deed and relation back to original allotment - partial allowance of capital gains relief - computation/remand for quantification

Long-term capital gain - holding period reckoning - rectification deed and relation back to original allotment - entitlement to long-term capital gain in respect of the portion of land measuring 235.94 sq.mtr. - HELD THAT: - The Tribunal accepted the assessee's contention that the rectification deed dated 31.07.2015, which records the entire area as 302.86 sq.mtr., relates back to the original allotment and conveyance in her favour and thus establishes the assessee's title in respect of the open land of 235.94 sq.mtr. since the original allotment. On this basis the Tribunal held that the holding period for the 235.94 sq.mtr. portion must be treated as commencing from the original allotment, thereby qualifying the gain on sale as long-term capital gain for the purposes of AY 2016-17. The Tribunal therefore allowed the claim in respect of that portion and directed the assessing officer to compute capital gains accordingly. [Paras 10]

Allow long-term capital gain claim in respect of the 235.94 sq.mtr. area and direct AO to calculate the capital gain for that portion.

Holding period reckoning - Long-term capital gain - treatment of the portion of property (66.92 sq.mtr.) previously conveyed to the daughter - HELD THAT: - The Tribunal recorded that the original deed of conveyance dated 05.08.1986 recorded only 66.92 sq.mtr. as transferred and that the vendor had executed a sale to her daughter on 16.03.2006 in respect of that constructed area. That sale stood until its subsequent cancellation, and the authorities below had therefore correctly treated the holding period in relation to that 66.92 sq.mtr. as interrupted by the conveyance to the daughter so as to preclude treating the entire property as held for over 36 months. The Tribunal accepted that the benefit of long-term capital gain cannot be allowed for the area which had been conveyed away and was not continuously held by the assessee throughout the requisite period. [Paras 10]

Do not allow long-term capital gain benefit for the 66.92 sq.mtr. portion which had been conveyed to the daughter and interrupted the requisite holding period.

Computation/remand for quantification - direction to the assessing officer for computation of capital gains for the allowed portion - HELD THAT: - Having allowed the claim in respect of the 235.94 sq.mtr. portion, the Tribunal did not itself compute the capital gain but directed the assessing officer to calculate the capital gain in respect of that area and to grant relief to the assessee accordingly. This constitutes a remand for quantification and implementation of the Tribunal's finding on entitlement. [Paras 10]

Remand to the assessing officer for computation of capital gains in respect of the allowed 235.94 sq.mtr. area.

Final Conclusion: The appeal is partly allowed: long-term capital gain relief is granted for the 235.94 sq.mtr. area (directing the AO to compute the capital gain), while relief is refused for the 66.92 sq.mtr. portion that had been conveyed to the daughter.

Assessment of assets found during search - Separate legal entity for taxation - Telescoping of sale proceeds against unexplained investment - Burden of proof in search cases - Wealth tax returns as evidentiary record

Assessment of assets found during search - Separate legal entity for taxation - Wealth tax returns as evidentiary record - Whether jewellery found in the bedroom/locker of the assessee's son and wife could be assessed in the hands of the assessee. - HELD THAT: - The Tribunal accepted that each adult family member who is a taxpayer is a separate legal entity for tax purposes and that assets belonging to such persons must ordinarily be assessed in their own hands even if found in common premises. The order notes that jewellery belonging to Shri Ajeeth Challani was found in his bedroom and jewellery belonging to Smt. Shobha Challani was found in her locker, and that both son and wife are independent assessee(s) who had filed wealth tax returns before the search. On these facts the Tribunal held that the Assessing Officer erred in attributing those items to the appellant. The Tribunal therefore directed deletion of additions made in respect of the jewellery and silver articles found in the possession of the son and wife, relying on the principle that assets of adult family members with known sources of income and returns cannot be taxed in another person's hands merely because they were located in a common residential premises. [Paras 8]

Additions in respect of jewellery and silver articles found in the possession of the appellant's son and wife deleted; those items shall not be assessed in the hands of the appellant.

Telescoping of sale proceeds against unexplained investment - Burden of proof in search cases - Wealth tax returns as evidentiary record - Whether the assessee was entitled to telescopic credit for purchase of gold and diamond jewellery out of sale proceeds of silver utensils, thereby reducing unexplained jewellery found during search. - HELD THAT: - The Tribunal recorded that there was an admitted shortage of silver articles when comparing physical stock with wealth tax returns, and that the Assessing Officer had taxed long term capital gains on sale of silver. The assessee's case was that the sale proceeds were used to purchase new gold and diamond jewellery, which would remove the alleged excess. The Tribunal held that where the Assessing Officer has itself taxed the sale proceeds as capital gains, the source thus recognized must be given effect to by allowing telescoping (credit) against the acquisition of jewellery explained to have been funded from that sale, provided the explanation is plausible on the record. Applying that principle to the facts, and after excluding jewellery of wife and son, the Tribunal accepted that the remaining excess jewellery of the appellant was explained by purchase from sale proceeds of silver and observed that the Assessing Officer erred in refusing telescoping merely because detailed vouchers were not produced; accordingly the Tribunal directed deletion of additions in respect of the remaining excess gold and diamond jewellery. [Paras 9]

Telescopic benefit allowed in respect of jewellery explained to have been purchased from sale proceeds of silver; additions in respect of the remaining alleged excess gold and diamond jewellery in the appellant's hands deleted.

Final Conclusion: Appeal allowed: additions attributable to jewellery and silver articles found in the possession of the appellant's son and wife are deleted, and additions in respect of excess gold and diamond jewellery in the appellant's hands are deleted by allowing telescopic credit from sale proceeds of silver.

Reopening of assessment beyond four years under section 148 - conditions precedent - change of opinion - no suppression of material facts - reasons recorded must disclose new material

Reopening of assessment beyond four years under section 148 - conditions precedent - change of opinion - reasons recorded must disclose new material - Validity of reopening the assessment initiated under section 147/148 in respect of issues already examined in the original assessment - HELD THAT: - The Tribunal held that the reassessment was initiated on the same materials which had been placed before and considered by the Assessing Officer in the original assessment proceedings. The reasons recorded do not disclose any new material or allegation of suppression of facts; they merely reflect an audit objection and a change of opinion. Reliance was placed on the decisions upholding that where no new facts come to the notice of the AO and the issues were examined in the original assessment, reopening beyond four years is impermissible. Given that the AO had considered the claims of depreciation and interest on late payment of TCS in the original assessment, the reopening was held to be without the necessary conditions precedent and therefore bad in law. The Bench also noted that the CIT(A) had not decided the legality of reopening but the Tribunal, after examining the record and applicable precedents, quashed the reopening. [Paras 12, 14]

Reopening of assessment was quashed as a mere change of opinion lacking new material; the reassessment proceedings are invalid.

Final Conclusion: The cross objection of the assessee is allowed and the Revenue's appeal is dismissed; the reassessment initiated by reopening is quashed for being a mere change of opinion without new material.

Weighted deduction under section 35(2AB) - legal sanctity of Form 3CL prior to amendment of Rule 6(7A) - allowability of clinical trial expenditure as part of "expenditure on scientific research" - MAT credit inclusive of surcharge and education cess - refund of dividend distribution tax where dividend ceases to be dividend by virtue of amalgamation effective from appointed date - non-levy of interest under section 234A where return filed before due date - interest under section 234C leviable only for shortfall in advance tax on returned income - verification and grant of TDS credit claimed in return

Weighted deduction under section 35(2AB) - legal sanctity of Form 3CL prior to amendment of Rule 6(7A) - Allowability of weighted deduction under section 35(2AB) and whether the quantum can be restricted to the amount certified in Form 3CL for the assessment years under consideration. - HELD THAT: - The Tribunal held that for the assessment years before the amendment to Rule 6(7A) effective 01.07.2016 there was no statutory requirement to restrict the weighted deduction to the quantum stated in DSIR Form 3CL. The statutory scheme requires approval of the in house R&D facility by the prescribed authority (DSIR) and compliance with the audit and documentation requirements; however, prior to the 2016 amendment Form 3CL did not have the legal sanctity to cap the deduction claimed by an assessee. The Tribunal followed coordinate-bench decisions which examined the scheme of section 35(2AB), the related Rules and DSIR guidelines and concluded that where the facility is approved and the AO has not disputed correctness of the expenditure, weighted deduction at the claimed rate must be allowed on the basis of the expenditure recorded in the books. Applying that principle, the Tribunal directed deletion of the disallowance made by the AO and allowed the assessee's claim for weighted deduction for AY 2012-13 and, mutatis mutandis, for AYs 2013-14 to 2015-16. [Paras 11, 12]

Assessee's claim for weighted deduction under section 35(2AB) is allowed as claimed; disallowance restricted to Form 3CL is deleted for AY 2012-13 to 2015-16.

Allowability of clinical trial expenditure as part of "expenditure on scientific research" - Weighted deduction under section 35(2AB) - Allowability as weighted deduction of clinical trial expenditure certified by DSIR but not claimed in the return for AY 2012-13. - HELD THAT: - The Tribunal noted the Explanation to section 35(2AB) expressly includes clinical drug trial expenditure within 'expenditure on scientific research'. The assessee's annual report and the DSIR Form 3CL recorded the clinical trial expenditure. Although the amount had not been claimed in the return as weighted deduction, the assessee clarified that 100% of the expenditure had already been taken in the computation and the claim before the Tribunal sought the additional 100% (i.e., the weighted component). Having held that DSIR approval of the facility is the determinative factor for allowing weighted deduction for the years in question, the Tribunal directed the AO to allow the additional 100% weighted deduction in respect of the certified clinical trial expenditure. [Paras 14, 16]

Clinical trial expenditure certified by DSIR is eligible for the additional 100% weighted deduction under section 35(2AB); AO directed to allow the claim.

MAT credit inclusive of surcharge and education cess - Whether MAT credit available for set off under the MAT provisions should include surcharge and education cess. - HELD THAT: - Relying on coordinate-bench and High Court decisions, the Tribunal held that MAT credit brought forward under the relevant provisions must be computed and set off against the tax liability inclusive of surcharge and education cess. The Tribunal reasoned that post amendment to formats and having regard to judicial precedents, surcharge and cess form part of 'tax' for purposes of computing MAT liability and available credit. Applying these conclusions to the facts of the assessee's case, the Tribunal directed the AO to include surcharge and education cess when computing and allowing MAT credit under section 115JAA. [Paras 19, 20]

AO directed to compute and allow MAT credit inclusive of surcharge and education cess.

Verification and grant of TDS credit claimed in return - Grant of credit for tax deducted at source claimed by the assessee for AY 2013-14 and AY 2015-16. - HELD THAT: - The Tribunal noted the assessee's claim that the AO had not granted TDS credit claimed in the return. The Tribunal directed the Assessing Officer to verify the claim and allow the TDS credit in accordance with law after verification, thereby remitting the factual determination to the AO for compliance with the direction. [Paras 21]

AO directed to verify and allow the assessee's TDS credit claim in accordance with law.

Non-levy of interest under section 234A where return filed before due date - Levy of interest under section 234A for AY 2014-15 where return was filed before the due date. - HELD THAT: - The Tribunal accepted the assessee's submission that interest under section 234A is leviable only for delay in furnishing the return of income. The AO's record showed the return for AY 2014-15 was filed on 29.11.2014 which was before the due date. On that basis the Tribunal held the levy of interest under section 234A was not warranted and directed the AO to verify and delete the interest after giving the assessee a reasonable opportunity of being heard. [Paras 22, 23]

Interest under section 234A deleted; AO to verify and delete after affording opportunity to the assessee.

Refund of dividend distribution tax where dividend ceases to be dividend by virtue of amalgamation effective from appointed date - Entitlement to refund of DDT paid on dividends declared to companies which, by court-sanctioned amalgamation with appointed date prior to dividend declaration, ceased to be distinct entities. - HELD THAT: - The Tribunal examined facts showing the amalgamation's appointed date preceded the dividend declaration. Relying on High Court authority, the Tribunal observed that where amalgamation takes effect from an appointed date anterior to declaration, payment that purported to be dividend to the transferor companies cannot retain the character of dividend and thus tax paid thereon is refundable. The Tribunal directed the AO to examine the assessee's claim in light of the cited High Court decision and process the refund of DDT with statutory interest after affording the assessee a reasonable opportunity of hearing. [Paras 24, 28]

AO directed to examine claim and process refund of DDT with statutory interest in accordance with law after giving the assessee opportunity of being heard.

Interest under section 234C leviable only for shortfall in advance tax on returned income - Correctness of interest under section 234C where assessee contends no shortfall in advance tax based on returned income. - HELD THAT: - The Tribunal accepted the assessee's submission that interest under section 234C is charged for shortfall in advance tax based on the income returned and not on income as assessed. It therefore directed the AO to verify the correctness of section 234C interest computed and, if erroneously charged, to delete it after giving the assessee a reasonable opportunity of being heard. [Paras 29]

AO directed to verify and delete any erroneously charged interest under section 234C after affording opportunity to the assessee.

Final Conclusion: Appeals partly allowed: weighted deduction under section 35(2AB) granted as claimed for AYs 2012-13 to 2015-16 (Form 3CL not a cap prior to 01.07.2016); clinical trial expenditure allowed as additional weighted deduction; MAT credit to include surcharge and education cess; AO directed to verify and allow TDS claims, delete incorrect interest under sections 234A and 234C where applicable, and to examine and process refund of DDT in respect of dividends affected by amalgamation, all after affording the assessee reasonable opportunity of being heard.

Comparability under the transactional net margin method (TNMM) - functional analysis (FAR) for selection of comparables - related party transactions (RPT) filter - aggregate computation - cash PLI (adjustment for depreciation) under Rule 10B - risk adjustment - requirement of quantification - treatment of provision for doubtful debts in operating margin - treatment of fixed assets written off for operating margins - notional interest on trade receivables as an international transaction - benchmarking of interest - use of LIBOR / SBI rate and 6 months LIBOR + basis points - allowability of depreciation on goodwill arising on amalgamation and interplay with amalgamation provisions - statutory interplay: special amalgamation provisions vis-a -vis general depreciation allowance

Comparability under the transactional net margin method (TNMM) - functional analysis (FAR) for selection of comparables - Inclusion or exclusion of specific comparable companies and direction for fresh consideration where FAR/segmental data was not examined or was unreliable - HELD THAT: - The Tribunal examined multiple contested comparables in the software-development and marketing-support segments. Where the record showed functional dissimilarity, absence of segmental data, unreliable reporting or prior co ordinate-bench precedent excluding the entity, the Tribunal directed exclusion of specific comparables (for example, Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., Infosys Ltd., Nihilent Ltd., Infobeans Technologies Ltd., Thirdware Solutions Ltd., Aspire Systems (India) Pvt. Ltd., Inteq Software Pvt. Ltd., Cybage Software Pvt. Ltd.). Where the lower authorities had not performed or had inadequately considered FAR or where the financial/segmental disclosures were inconsistent or unreliable (for example, Akshay Software Technologies Ltd., Evoke Technologies Pvt. Ltd., Sagarsoft India Ltd., Sasken Communication Technologies Ltd., certain MSS comparables such as Spectrum, ICRA Management and Hindustan Fields Services), the Tribunal remitted those comparability questions to the AO/TPO for fresh consideration after affording the assessee opportunity to produce supporting documents and for FAR analysis. The Tribunal also directed that where earlier coordinate-bench decisions applied, the AO/TPO should follow them.

Several comparables were directed to be excluded from the final list; other comparables were remitted for fresh FAR-based consideration by AO/TPO with directions to afford opportunity to the assessee and to apply consistent tests.

Related party transactions (RPT) filter - aggregate computation - Method and rate for applying the RPT filter in selecting comparables - HELD THAT: - The Tribunal held that RPT ratio must be calculated on an aggregate basis as ratio of related party income plus related party expenses to sales, following the coordinate-bench authority. The Tribunal directed the AO to apply the RPT filter consistently on an aggregate basis for all comparables and to adopt the RPT threshold as guided by the Karnataka High Court decision in PCIT v. Yodlee Infotech P. Ltd., instructing the AO/TPO to follow that authority in selecting the RPT threshold (the Tribunal directed adoption of the precedent rather than prescribing a new numerical threshold itself).

AO/TPO directed to compute RPT ratio on aggregate basis and to apply RPT filter rate in accordance with the cited High Court authority.

Cash PLI (adjustment for depreciation) under Rule 10B - Whether Cash PLI (i.e., exclusion/adjustment of depreciation) should be adopted in computing operating margin - HELD THAT: - Following the jurisdictional High Court and earlier Tribunal precedents, the Tribunal directed adoption of Cash PLI (i.e., exclude depreciation impact or otherwise adjust for differing depreciation policies) because differences in depreciation policies materially affect net margins and Rule 10B requires adjustments for such material differences. The Tribunal allowed the assessee's grounds on this point and directed AO/TPO to adopt Cash PLI for PLI computation.

Adoption of Cash PLI directed; AO/TPO to recompute margins accordingly.

Risk adjustment - requirement of quantification - Claim for risk adjustment on account of the assessee being a low risk contract/captive service provider - HELD THAT: - The Tribunal noted that Rule 10B(3) permits adjustments for differences that materially affect margins, including risk differences, but also followed co ordinate authority holding that a risk adjustment requires a proper and reliable quantification. The Tribunal therefore remitted the matter to the AO/TPO for fresh examination and directed the assessee to furnish a quantified method of computing the risk adjustment so that the AO/TPO can decide the claim in accordance with law.

Issue remitted to AO/TPO for fresh consideration; assessee to provide quantified risk adjustment details.

Treatment of provision for doubtful debts in operating margin - Whether provision for doubtful debts is to be treated as operating expense when computing operating margins of comparables - HELD THAT: - The Tribunal observed that the correct treatment depends on whether the provision relates to the current assessment year or to earlier years. Where the provision pertains to current-year sales, it is part of operating expenditure and should be treated as operating; where it relates to earlier years (i.e., writing back or adjusting provisions of prior years), it may not be treated as operating for the year under consideration. Because the assessee could not clarify applicability during hearing, the Tribunal remitted the issue to the AO/TPO for verification and decision after giving the assessee an opportunity of being heard.

Issue remitted to AO/TPO for verification; treatment to be decided based on year-to-which provision relates.

Treatment of fixed assets written off for operating margins - Whether fixed assets written off should be treated as non operating when computing operating margins - HELD THAT: - The DRP had directed that fixed assets written off are non operating items and should be excluded from operating profit computations because they are balance sheet items and not expenses incurred in earning operating revenue. The Tribunal directed the AO/TPO to follow the DRP directions on this issue and remitted the matter to AO/TPO to apply that treatment.

AO/TPO directed to follow DRP direction and treat fixed assets written off as non operating for PLI computation.

Notional interest on trade receivables as an international transaction - benchmarking of interest - use of LIBOR / SBI rate and 6 months LIBOR + basis points - Whether adjustment for notional interest on extended receivables is an international transaction and the appropriate benchmark rate to be applied - HELD THAT: - The Tribunal held that notional interest on receivables is an international transaction and rejected the assessee's submission that it is subsumed within the segmental TNMM. The Tribunal recorded that the TPO had applied 6 months LIBOR + 300 basis points but the DRP had directed use of SBI short term deposit rate; after hearing, the Tribunal directed that, for computation beyond the credit period, the TPO shall consider 6 months LIBOR + 300 basis points for giving effect. The Tribunal also noted the DRP's instruction to restrict interest computation to the financial year end where directed and recognised that credit period arguments (e.g., FEMA nine month provision) may be considered but ultimately directed application of 6 months LIBOR + specified basis points beyond the credit period for computation.

Notional interest recognised as international transaction; AO/TPO to compute interest using 6 months LIBOR + 300 bps beyond the credit period, with effects to be given as directed by DRP.

Allowability of depreciation on goodwill arising on amalgamation and interplay with amalgamation provisions - statutory interplay: special amalgamation provisions vis-a -vis general depreciation allowance - Allowability of depreciation on goodwill arising on amalgamation - HELD THAT: - The Tribunal considered extensive submissions and conflicting authorities. It observed that goodwill in the assessee's books arose on amalgamation and that various intangibles were represented collectively as goodwill. Given factual uncertainties (whether separate intangible components were valued, whether the amalgamating company had claimed any benefit, and whether any double benefit would arise) and divergent precedent, the Tribunal remitted the issue to the AO for verification of facts, valuation details and to ensure no double benefit, instructing the AO to decide afresh after affording opportunity to the assessee. The Tribunal noted that this is the second year of the claim for AY 2017 18 and directed reconsideration consistent with its AY 2016 17 directions.

Issue remitted to AO for fresh decision after verification of valuation, components of goodwill and to ensure compliance with amalgamation specific provisions; AO to give assessee opportunity of being heard.

Application of coordinate-bench and High Court precedents in transfer-pricing selection and filters - Direction to apply relevant coordinate bench and High Court precedents (including on RPT filter and comparables) where applicable - HELD THAT: - Where co ordinate bench or High Court authorities were on point (for example, calculation of RPT on aggregate basis; adoption of Cash PLI; exclusion or inclusion of certain comparables in earlier years), the Tribunal directed AO/TPO to follow those decisions in conducting the fresh comparability / margin computations and filters.

AO/TPO directed to apply the cited coordinate bench and High Court jurisprudence in fresh proceedings.

Advance tax credit and consequential interest - Credit for advance tax paid by the transferor company after amalgamation and levy of interest under section 234B - HELD THAT: - The Tribunal remitted to the Assessing Officer the assessee's claim for credit of advance tax paid by the transferor company merged into the assessee so that AO may verify entitlement and give decision in accordance with law. The Tribunal recorded that interest under section 234B was consequential in nature and related to adjustments remitted or to be decided.

Advance tax credit claim remitted to AO for verification; interest under section 234B treated as consequential.

Final Conclusion: The appeals are partly allowed in large part to direct fresh consideration by the AO/TPO in accordance with law: several comparables were excluded as not functionally comparable; multiple disputed comparability and computation issues (including certain proposed inclusions, RPT calculation method, Cash PLI adoption, risk adjustment quantification, treatment of doubtful debts, fixed asset write offs and goodwill depreciation, and advance tax credit) were remitted to the AO/TPO for re examination after affording opportunity to the assessee, while the Tribunal held that notional interest on trade receivables is an international transaction and directed computation using 6 months LIBOR + 300 bps beyond the credit period and ordered AO/TPO to follow the cited coordinate bench and High Court precedents in the fresh adjudication.

Validity of notice under Section 148A(b) of the Income Tax Act - Reassessment under Section 147 of the Income Tax Act - Duty to afford opportunity to rebut new material or reasons - Quashing of tax notice for being arbitrary and founded on erroneous basis - Treatment of order as an additional show cause notice

Validity of notice under Section 148A(b) of the Income Tax Act - Duty to afford opportunity to rebut new material or reasons - Treatment of order as an additional show cause notice - Impugned order dated 25.03.2023 issued under Section 148A(b) quashed for being founded on an erroneous basis and for supplying new reasons without giving the petitioner opportunity to explain; order to be treated as an additional show cause notice with directions for fresh consideration after personal hearing. - HELD THAT: - The assessment notice was founded on the respondent's computation that aggregated two entries of Rs. 90,00,000/-, namely the sale consideration and an identical amount reflected in the TDS statement, to reach an alleged escaped income of Rs. 1,80,00,000/-. The Court found this basis flawed because there was no contention that two separate properties were acquired for Rs. 90,00,000/- each; the respondent's own papers treated Rs. 90,00,000/- as the sale consideration and separately recorded the same amount in TDS, which the respondent impermissibly aggregated. Further, the impugned order introduced additional lines of inquiry - relating to the loan account, employment details and salary certificate - which were not put to the petitioner earlier. The petitioner was therefore not afforded an opportunity to meet these new contentions. In these circumstances the order could not stand: a taxpayer must be given a chance to answer the specific material relied upon and any fresh reasons adduced must be communicated so that they can be contested. Accordingly the Court set aside the impugned order but directed that it be treated as an additional show cause notice, granting the petitioner a short period to file explanation and requiring the respondent to afford a personal hearing and decide the matter within a specified timeframe.

Impugned order dated 25.03.2023 set aside; it shall be treated as an additional show cause notice, petitioner to file explanation within two weeks of receipt, and respondent to afford personal hearing and pass orders within eight weeks thereafter.

Final Conclusion: Writ petition allowed; the notice under Section 148A(b) dated 25.03.2023 is quashed for being based on an erroneous computation and for introducing new reasons without opportunity to the petitioner; directions issued for fresh consideration after the petitioner files explanation and is given a personal hearing; no order as to costs.

Carry forward and set off of unabsorbed depreciation without limitation - interpretation of section 32(2) as amended by Finance Act, 2001 - effect of CBDT Circular No.14 of 2001 - prospective application of Finance Act amendments - binding effect of Division Bench precedent

Carry forward and set off of unabsorbed depreciation without limitation - interpretation of section 32(2) as amended by Finance Act, 2001 - effect of CBDT Circular No.14 of 2001 - binding effect of Division Bench precedent - Whether the assessee was entitled to carry forward and set off unabsorbed depreciation pertaining to earlier assessment years after the expiry of eight years, in light of the amendment to section 32(2) and CBDT Circular No.14 of 2001, and whether any substantial question of law survives for admission? - HELD THAT: - The Court observed that the question is no longer res integra in view of the Division Bench decision in General Motors India (P) Ltd. [2012 (8) TMI 714 - GUJARAT HIGH COURT] which interpreted the Finance Act amendments and CBDT Circular No.14 of 2001 as dispensing with the eight-year restriction for carry forward and set off of unabsorbed depreciation and held that unabsorbed depreciation pertaining to years up to A.Y.2001-02 became part of A.Y.2002-03 and thereafter governed by section 32(2) as amended by Finance Act, 2001. The Tribunal had followed that ratio and dismissed the revenue's appeal. The High Court recorded that the Division Bench's purposive and harmonious interpretation of the statutory amendment and the clarificatory circular leads to the conclusion that unabsorbed depreciation available on 1 April 2002 is available for carry forward and set off without temporal limitation. Consequently, no substantial question of law arose warranting admission of the tax appeal against the Tribunal's order allowing the carry forward and set off as applied to the assessment proceedings for A.Y.2007-2008. [Paras 4, 5, 6, 7]

The Court declined to admit the tax appeal, holding that the issue is settled by binding Division Bench precedent and that no substantial question of law arises; the appeal is rejected at the admission stage.

Final Conclusion: The tax appeal is not admitted and is rejected at the admission stage: the carry forward and set off of the unabsorbed depreciation (pertaining to the earlier years and carried into A.Y.2002-03) is governed by section 32(2) as amended and CBDT Circular No.14 of 2001, permitting carry forward without the eight-year limitation, and the Tribunal's order in favour of the assessee stands.

Interference with appellate tribunal order - review of tribunal order - dismissal of civil appeals

Interference with appellate tribunal order - review of tribunal order - Whether the Supreme Court should interfere with the Securities Appellate Tribunal's judgment dated 24 March 2022 in Appeal No 550 of 2021 and its order dated 10 October 2022 in Review Application No 20 of 2022. - HELD THAT: - The Supreme Court examined the impugned judgment and the subsequent review order of the Securities Appellate Tribunal and found no reason to interfere with either order. Having considered the matters presented in the civil appeals challenging those orders, the Court concluded that the Tribunal's decisions did not warrant judicial intervention by this Court.

The impugned judgment dated 24 March 2022 and the review order dated 10 October 2022 are not interfered with; the civil appeals are dismissed.

Final Conclusion: The Supreme Court dismissed the civil appeals and declined to interfere with the Securities Appellate Tribunal's judgment and review order; pending applications, if any, were disposed of.

Judicial interference with appellate tribunal orders - finality of Securities Appellate Tribunal orders - dismissal of civil appeal

Judicial interference with appellate tribunal orders - finality of Securities Appellate Tribunal orders - No ground to interfere with the impugned order passed by the Securities Appellate Tribunal; the civil appeal was dismissed. - HELD THAT: - The Supreme Court examined the challenge to the order of the Securities Appellate Tribunal and found no substance warranting interference. The Court recorded its conclusion without disturbing the Tribunal's decision and dismissed the civil appeal. No separate reasons or detailed legal exposition were set out in this order.

Appeal dismissed; impugned order of the Securities Appellate Tribunal upheld.

Final Conclusion: The civil appeal was dismissed and the impugned order of the Securities Appellate Tribunal was affirmed; pending interlocutory applications, if any, were disposed of.

Manufacture as defined in Section 2(f) of the Central Excise Act, 1944 - cutting/slitting of jumbo paper rolls - trading activity versus manufacture - exclusion of value of traded goods from assessable value - eligibility for exemption under Notification 8/2003 dated 01.03.2003

Manufacture as defined in Section 2(f) of the Central Excise Act, 1944 - cutting/slitting of jumbo paper rolls - trading activity versus manufacture - Whether cutting/slitting of jumbo paper rolls into writing and printing paper sheets amounts to 'manufacture' under Section 2(f) of the Central Excise Act, 1944, or is a trading activity. - HELD THAT: - The Tribunal examined whether the conversion of jumbo paper rolls into sheets by cutting, ruling and organizing into sets effects a change in the nature, name, character or use of the paper such that it would constitute 'manufacture' under Section 2(f) read with the Section and Chapter Notes of the First Schedule to the Central Excise Tariff Act, 1985. The goods purchased were jumbo rolls (sub-heading 4802.6190) and the finished sheets fell under sub-heading 4802.6990. The activity of cutting/slitting and incidental operations did not produce a new commodity with distinct identity; the paper remained writing/printing paper. The Tribunal followed the decision of the Hon'ble Supreme Court in S.R. Tissues (2005) holding that cutting/slitting of jumbo rolls into smaller sizes does not amount to manufacture. Applying that ratio, the Tribunal held the appellant's operations to be trading and not manufacture. [Paras 12, 13, 14, 15, 16]

Cutting/slitting of jumbo paper rolls into sheets does not amount to manufacture; the activity is trading.

Exclusion of value of traded goods from assessable value - eligibility for exemption under Notification 8/2003 dated 01.03.2003 - Whether the value of the converted paper sheets (being trading clearances) is includable in the assessable value for computing entitlement to the exemption under Notification 8/2003 dated 01.03.2003, and whether demands confirmed by the department are sustainable. - HELD THAT: - Having held that the appellant's conversion amounted to trading and not manufacture, the Tribunal applied the legal consequence that the value of traded goods is not includable in the assessable value of manufactured clearances for determining eligibility under the exemption notification. After excluding the value of traded goods, the appellant's clearances for the respective financial years fell within the limits prescribed by Notification 8/2003. Consequently, the departmental demands based on including that value were unsustainable. [Paras 16]

Value of traded goods excluded from assessable value; appellant eligible for exemption under Notification 8/2003 and departmental demands set aside.

Final Conclusion: The Tribunal allowed all three appeals, holding that cutting/slitting of jumbo paper rolls into writing and printing paper sheets is trading and not manufacture; accordingly the value of such traded goods is not includable in assessable value for Notification 8/2003, and the confirmed demands were set aside.