TaxTMI Updates e-Newsletter
Aug 21,2012

Validity of best judgment assessment under Section 144 despite contemporaneous reference to other provisions - Transfer of seized materials under Section 153C to the Assessing Officer of the regular assessee - Requirement of recorded satisfaction by the searching Assessing Officer for transfer under Section 153C - Jurisdiction of the regular Assessing Officer to examine evidentiary value of materials transferred

Validity of best judgment assessment under Section 144 despite contemporaneous reference to other provisions - Best judgment assessment under Section 144 - Validity of the best judgment assessment completed for the assessment year 2009-10 even though the assessment order also quoted Sections 153C and 153A. - HELD THAT: - The Court held that where no return has been filed and no advance tax paid for the relevant year, the Assessing Officer was bound to make a best judgment assessment under Section 144. The fact that the assessment order for 2009-10 also quoted Sections 153C and 153A (which were the legal basis for separate assessments for preceding years) does not vitiate the validity of an assessment actually made under Section 144. The department's clarification that the 2009-10 order was a Section 144 best judgment assessment was accepted. Any challenge to the 2009-10 assessment on merits must be pursued before the appellate authority (CIT (Appeals)). [Paras 4]

The best judgment assessment for 2009-10 is validly made under Section 144 and is not invalidated by the incidental quotation of Sections 153C and 153A in the same order; appellate remedy remains available.

Transfer of seized materials under Section 153C to the Assessing Officer of the regular assessee - Requirement of recorded satisfaction by the searching Assessing Officer for transfer under Section 153C - Jurisdiction of the regular Assessing Officer to examine evidentiary value of materials transferred - Validity of assessments for the six assessment years (2003-04 to 2008-09) taken up under Section 153C read with Section 153A where the searching Assessing Officer did not record a separate satisfaction before transferring materials. - HELD THAT: - The Court distinguished the earlier regime and held that Section 153C requires that the seized money, bullion, jewellery, articles, books of account or documents recovered in a search belong to or relate to a person other than the searched assessee; it does not require the searching officer to record a satisfaction that those materials establish undisclosed income of that other person. Transfer of materials under Section 153C is an internal departmental step to enable the regular Assessing Officer (who is familiar with the assessee's affairs) to consider the materials. The regular Assessing Officer receiving the materials retains full jurisdiction to test their evidentiary value, hear the assessee and make assessment. Accordingly, absence of a recorded satisfaction by the searching officer does not invalidate the transfer or the consequent assessments under Section 153C read with Section 153A. [Paras 5]

Assessments for 2003-04 to 2008-09 under Section 153C read with Section 153A are valid despite the searching officer not recording a separate satisfaction prior to transfer; the regular Assessing Officer may adjudicate on the materials received.

Final Conclusion: Writ Appeals dismissed as devoid of merit; statutory appeals before the appellate authority remain available and the appellant is granted one month to file appeals which will be treated as filed in time; interim orders or payments, if sought or made, are to be accounted for by the authorities.

Undisclosed income - burden of proof - genuineness of gifts - concurrent findings of fact - search under Section 132 of the Income Tax Act

Undisclosed income - burden of proof - concurrent findings of fact - Whether the difference between Rs.80.00 lacs shown in a seized note and the documented purchase consideration of Rs.71.35 lacs for the Candy House property could be treated as undisclosed income of the assessee. - HELD THAT: - The seized paper recording Rs.80.00 lacs was in the handwriting of the assessee's father and was explained before assessment as the resale value noted for division of family property. The assessee informed the department of this explanation prior to assessment and the revenue did not produce independent evidence showing that any cash over and above Rs.71.35 lacs had been paid. Both the Commissioner (Appeals) and the Tribunal accepted these factual findings that no excess cash consideration was paid. Those concurrent findings of fact were not shown to be perverse, and therefore the tribunal was correct in deleting the addition made by the Assessing Officer. [Paras 4]

Addition of Rs.8.65 lacs deleted; no substantial question of law arises.

Genuineness of gifts - burden of proof - concurrent findings of fact - Whether gifts aggregating to Rs.22.75 lacs received from cousins were genuine or required to be treated as undisclosed income. - HELD THAT: - The assessee produced evidence during assessment and appeals showing the source of the gifted amounts-account payee cheques, passbooks, income tax details and PAN of the donors, and that the sums represented refunds received by the donors. The Commissioner (Appeals) and the Tribunal examined that evidence and concurrently found the gifts to be genuine. The question of genuineness is one of fact; the revenue did not demonstrate that those concurrent factual findings were perverse. Consequently the additions on account of the alleged sham gifts could not be sustained. [Paras 9]

Addition of Rs.22.75 lacs deleted; no substantial question of law arises.

Final Conclusion: Both additions sustained by the Assessing Officer were set aside by the appellate authorities on concurrent findings of fact; the High Court dismisses the revenue's appeal and affirms deletion of the additions.

Validity of reassessment proceedings under Section 147 of the Income-tax Act - Assessment order void ab initio - Quashing of reassessment

Validity of reassessment proceedings under Section 147 of the Income-tax Act - Assessment order void ab initio - Proceedings initiated by the Assessing Officer under Section 147 and the consequent reassessment order are illegal and void ab initio. - HELD THAT: - The Division Bench referred the matter to a Third Member pursuant to a difference of opinion between its Members on the fundamental question concerning the validity of the reassessment. The Third Member, after hearing parties and considering the facts and circumstances, concurred with the proposed order of the Judicial Member. By majority view the Tribunal held that the assessment order passed by the Assessing Officer was illegal and void ab initio and therefore liable to be set aside. The consequence of this conclusion is that the reassessment order was quashed and the appeal of the assessee allowed. [Paras 3, 4, 5, 6]

Assessment order passed in pursuance of reassessment proceedings is quashed as being illegal and void ab initio; appeal allowed.

Final Conclusion: The reassessment for Assessment Year 1998-99 was declared illegal and void ab initio and the assessment order is quashed; the assessee's appeal is allowed.

Exemption under section 10(23FB) of the Income Tax Act - investible funds as defined in Rule 2(hh) of SEBI (Venture Capital Fund) Regulations - requirement to invest 66.67% of investible funds in venture capital undertakings under Regulation 12(d)(i) - exemption available to any income of a Venture Capital Fund upon fulfillment of SEBI conditions

Investible funds as defined in Rule 2(hh) of SEBI (Venture Capital Fund) Regulations - requirement to invest 66.67% of investible funds in venture capital undertakings under Regulation 12(d)(i) - Computation of 'investible funds' and applicability of the 66.67% investment requirement - HELD THAT: - The Tribunal accepted that 'investible funds' must be computed by deducting administration and management expenses from the corpus as defined under Rule 2(hh) of the SEBI Regulations. The matter previously remitted for verification was considered on the adjusted corpus figures furnished by the assessee. Applying the definition of investible funds, the Tribunal (following findings of the CIT(A) in related assessment years) found that the assessee achieved the prescribed 66.67% investment in venture capital undertakings within the life cycle of the fund (as demonstrated by the years identified in the working), and that the SEBI Regulation requirement is to be met by the end of the fund's life cycle. [Paras 7, 8]

Investible funds are corpus net of administration and management expenses; on that basis the prescribed 66.67% threshold under Regulation 12(d)(i) was satisfied within the fund's life cycle.

Exemption under section 10(23FB) of the Income Tax Act - exemption available to any income of a Venture Capital Fund upon fulfillment of SEBI conditions - Entitlement to exemption under section 10(23FB) in respect of interest income for A.Y. 2004-05 - HELD THAT: - The Tribunal noted that, having satisfied the SEBI investment condition as computed on investible funds, the assessee met the statutory conditions for exemption under section 10(23FB). The Tribunal also accepted the view (reflected in the CIT(A)'s orders for adjacent assessment years and earlier ITAT orders) that once the conditions are fulfilled the exemption applies to any income of the Venture Capital Fund, including interest and dividend. Consequently, the CIT(A)'s direction to allow the exemption in respect of the interest income was held to be justified and not open to interference. [Paras 8, 9]

Assessee entitled to exemption under section 10(23FB) in respect of the interest income for A.Y. 2004-05, and the revenue's appeal is dismissed.

Final Conclusion: The appeal filed by the revenue is dismissed; on computation of investible funds (corpus less management and administration expenses) the prescribed SEBI investment threshold was met within the fund's life cycle and the assessee is entitled to exemption under section 10(23FB) in respect of the interest income for A.Y. 2004 05.

Capital receipt versus revenue receipt - sales tax incentive treatment - deduction as business expenditure under section 37(1) - lump sum payment on termination of BOOT agreement - revenue or capital character - capitalisation in books not decisive of tax character - valuation of closing stock under section 145A and adjustment for unutilised CENVAT/MODVAT - depreciation on acquisition of license/commercial right as intangible asset - computation of deduction under section 80HHC on adjusted book profits under section 115JA/115JB - disallowance of provisions for bad and doubtful debts under Explanation to section 115JB(2)

Capital receipt versus revenue receipt - sales tax incentive treatment - Sales tax incentive received by the assessee is to be treated as capital receipt. - HELD THAT: - The Tribunal considered the nature of the sales tax exemption granted to the assessee for establishing industry in a backward area and the authorities and decisions relied upon. Following earlier Tribunal decisions in the assessee's own case and allied precedents (including ITAT Special Bench and Ahmedabad Bench rulings relied upon by the assessee), the Bench held that the sales tax incentive, although paid/realised by way of exemption on sales, is determinable by reference to capital investment in fixed assets and therefore constitutes a capital receipt. The Tribunal set aside the orders of the AO and CIT(A) and allowed the assessee's grounds for both assessment years accordingly. [Paras 8, 76]

Allow the assessee's grounds and treat the sales tax incentive as capital receipt.

Deduction as business expenditure under section 37(1) - Expenditure by way of donations/contributions to community welfare organisations is allowable as revenue deduction under section 37(1) subject to verification of payment. - HELD THAT: - Relying upon prior Tribunal decisions in the assessee's own case and relevant High Court and Tribunal precedents, the Bench held that the contributions were in the nature of revenue expenditure incurred as part of corporate social responsibility/for securing goodwill and commercial advantage and therefore deductible under section 37(1). The Tribunal directed verification of proof of payment by the AO before giving effect to the claim. [Paras 15, 79]

Reverse the disallowance and allow the donations/contributions as revenue deductions subject to verification.

Lump sum payment on termination of BOOT agreement - revenue or capital character - capitalisation in books not decisive of tax character - The lump sum payment made to terminate the BOOT agreement is a revenue expenditure and not capital in nature. - HELD THAT: - Examining commercial reality and applying the tests laid down by the Supreme Court (including reliance on Madras Auto Service and Assam Bengal Cement principles), the Tribunal found that the lump sum was paid to rid the assessee of recurring BOOT charges and did not bring any capital asset into existence in the assessee's hands (ownership remained with the lessor). The payment conferred an operational advantage (control of operations) but not a capital asset; consequently it ought to be treated as substitution for recurring revenue payments. The Bench also held that the fact the assessee capitalised the amount in its books does not determine tax character and cited authorities to that effect. The AO's depreciation allowance previously granted was to be withdrawn on giving effect to this decision. [Paras 26, 32]

Allow the claim as revenue expenditure and reverse the capitalisation/assessment treatment subject to withdrawal of previously allowed depreciation.

Apportionment of registration/stamp duty over lease period - Registration fee and stamp duty paid in connection with lease transactions are revenue expenditure and allowable in the year incurred. - HELD THAT: - After considering precedent authorities (including decisions of the Bombay and Madhya Pradesh High Courts), the Tribunal held that registration and stamp duty paid on execution of lease did not create an asset of enduring nature for the assessee and therefore could not be disallowed as capital. The earlier approach of apportioning over the lease period was not accepted on the facts before the Tribunal and the expenditure was allowed as revenue in the assessment year. [Paras 38]

Reverse the apportionment and allow the registration and stamp duty as revenue expenditure in the year claimed.

Deduction as business expenditure under section 37(1) - Expenditure incurred for designing and relocating an existing reactor is revenue expenditure and allowable. - HELD THAT: - The Tribunal noted that the reactor was an existing asset purchased earlier and was relocated within factory premises because it was not functioning at its original location; the work did not create a new asset. Applying the principle that expenditure to make existing plant serviceable and to derive optimum use is revenue in nature (with reference to Abbott Laboratories decision), the Tribunal allowed the claim and reversed the AO/CIT(A) findings, subject to withdrawal of depreciation allowed by the AO when giving effect. [Paras 45]

Allow the expenditure as revenue deduction.

Computation of deduction under section 80HHC on adjusted book profits under section 115JA/115JB - Deduction under section 80HHC for the purpose of computing book profits under section 115JB is to be worked out on adjusted book profits as held by higher authority. - HELD THAT: - Following the Special Bench decision in Syncom Formulations and the Supreme Court's affirmation in Bhari Information Tech. Sys. P. Ltd., the Tribunal held that deductions under Chapter VI (including section 80HHC) must be computed with reference to adjusted book profits under the provisions analogous to section 115JA, and hence the assessee's claim had to be allowed. The Revenue did not dispute applicability of the higher authority. [Paras 51, 99]

Allow the claim and direct computation of deduction under section 80HHC on adjusted book profits.

Lease rental - character of repayments - Lease rental paid for boilers taken on lease is allowable and prior disallowance is to be set aside. - HELD THAT: - On review of earlier Tribunal and High Court decisions in the assessee's case and the identical factual matrix in preceding years where lease rentals were allowed, the Tribunal followed precedent and confirmed the CIT(A)'s order in favour of the assessee, dismissing the Revenue's ground. [Paras 58]

Dismiss Revenue's ground and uphold allowance of lease rental.

Section 40A(9) - employer contributions to employee funds - Contributions made by the assessee to clubs and employee-related organisations were allowable; disallowance under section 40A(9) deleted. - HELD THAT: - On facts identical to earlier assessment years where the Tribunal had allowed such contributions, and absent any distinguishing feature, the Bench followed its earlier orders and the CIT(A)'s deletion of the AO's disallowance under section 40A(9). The Revenue's challenges for both assessment years were therefore rejected. [Paras 64, 103]

Uphold deletion of disallowance and dismiss Revenue's grounds.

Prior period expenditure - crystallisation of liability - Prior period storage charges whose liability crystallised in the year under consideration are allowable as revenue expenditure. - HELD THAT: - The Tribunal noted that verification completed in the current year established that the liability to pay storage charges crystallised in the assessment year and that identical claims had been allowed in prior years. On that basis the AO's disallowance was reversed and the CIT(A)'s order upheld. [Paras 69]

Allow the prior period expenditure and dismiss the AO's disallowance.

Depreciation on intangible commercial right - licence/franchise - Cost of constructing jetty (whereby the assessee acquired preferential user/license rights) is part of an intangible asset block and is eligible for depreciation. - HELD THAT: - Comparing the agreement terms with earlier Tribunal authority in Reliance Ports & Terminals, the Bench found that the assessee acquired a business/commercial right (priority user and set-off of port charges) though legal ownership of the jetty remained with the maritime board; that right constitutes an intangible asset within the meaning of section 32(1). On identical facts to the cited Tribunal decision, depreciation on the cost incurred for construction of jetty was allowed. [Paras 88]

Allow depreciation by treating the expenditure as part of the block of intangible asset.

Valuation of closing stock under section 145A and adjustment for unutilised CENVAT/MODVAT - Unavailed CENVAT credit need not be added to taxable income where purchases and closing stock have been consistently accounted net of duty; if closing stock is increased for unutilised CENVAT then corresponding purchases/opening stock adjustments must be made. - HELD THAT: - Applying section 145A and authority of the Bombay and Delhi High Courts, the Tribunal held that inclusion of unutilised CENVAT in closing stock requires corresponding adjustment to purchases/opening stock; inconsistent methods (gross at one end and net at the other) cannot be adopted. On the facts, where purchases were recorded net of excise duty, the AO's addition for unutilised CENVAT was deleted and direction given for proper treatment under section 43B if duty is paid. [Paras 96]

Delete the addition for unutilised CENVAT and direct proper accounting consistent with section 145A/AS 2 principles.

Disallowance of provisions for bad and doubtful debts under Explanation to section 115JB(2) - Provisions for bad and doubtful debts are disallowable for computation of book profit under section 115JB by virtue of retrospective amendment. - HELD THAT: - The assessee conceded, and the Tribunal accepted, that the Finance (No.2) Act, 2009 inserted a clause into the Explanation to section 115JB(2) with retrospective effect from 1 April 2001 disallowing such provisions. On that basis the AO's disallowance was confirmed and the CIT(A)'s deletion reversed in both assessment years. [Paras 72, 106]

Confirm disallowance of provisions for bad and doubtful debts for computation under section 115JB.

Final Conclusion: For assessment years 2003-04 and 2004-05 the Tribunal allowed the assessee's appeals on multiple fronts (sales tax incentive characterised as capital receipt; various expenditures - donations, BOOT termination lump sum, registration/stamp duty, reactor relocation, jetty construction depreciation, section 80HHC deduction, prior period charges, CENVAT treatment - allowed as appropriate), while partly allowing Revenue's appeals by confirming disallowance of provisions for bad and doubtful debts under the retrospective amendment to the Explanation to section 115JB(2); the result is that the assessee's appeals are allowed and the Revenue's appeals are allowed in part.

Crystallisation of liability - scientifically ascertained liability / actuarial valuation - contingent liability versus incurred liability - merchantile/mercantile system of accounting - provisions and subsequent reversal - capital expenditure versus revenue expenditure (production of films) - depreciation in a block of assets - use of asset - deductibility of foreign travel expenses - business purpose - provisions for settlement - prior disallowance and write-back - entertainment expenses and Sec. 37(2) exclusions - computation of turnover for deduction under Sec. 80HHC - exclusion of sales tax, trade discount and excise duty - deduction under Sec. 80HH - effect of brought forward losses on unit-wise deduction

Crystallisation of liability - scientifically ascertained liability / actuarial valuation - contingent liability versus incurred liability - Deductibility of accrued VRS liability claimed by the assessee for the year and whether the liability was crystallised and admissible at assessment stage - HELD THAT: - The Tribunal found that the claim arose from a Voluntary Retirement Scheme announced in December 1992 and that the assessee produced an actuary's valuation and sample agreements between the company and employees which were not examined by the Assessing Officer. Given those materials, the Tribunal considered that the question whether the liability was scientifically calculated and crystallised could not be finally decided on the record before the AO. In the interest of justice the Tribunal directed restoration to the AO for examination and verification of the actuary certificate and the individual agreements, and permitted allowance of the claimed liability if the AO is satisfied that it was calculated on a scientific basis and crystallised in the relevant year. [Paras 8]

Matter restored to the file of the AO for verification of actuary valuation and agreements; ground allowed for statistical purposes.

Mercantile/mercantile system of accounting - provisions and subsequent reversal - Allowability of year end provisions for expenses where actual payments in subsequent year differ from provisions - HELD THAT: - The assessee followed mercantile accounting and made provisions at year end which are adjusted in subsequent years; the CIT(A) directed the AO to ensure that amounts are not doubly taxed by reducing subsequent year expenses to the extent of provisions. The Tribunal found no infirmity in that approach and upheld the CIT(A)'s direction and confirmation of the addition in part, noting the accounting practice and earlier Tribunal findings in the assessee's own case. [Paras 11, 14]

Addition confirmed and the CIT(A)'s direction to adjust subsequent-year expense heads upheld; ground dismissed.

Capital expenditure versus revenue expenditure (production of films) - Whether expenditure on production of films is capital or revenue in nature - HELD THAT: - Following the Tribunal's earlier decision in the assessee's own case and the Bombay High Court authority relied upon therein, the Tribunal held that the expenditure on production of films is revenue in nature. The CIT(A)'s classification of the expenditure as capital was therefore reversed and the AO directed to treat the specified expenditure as revenue expenditure. [Paras 19]

Expenditure on production of films to be treated as revenue expenditure; ground allowed.

Depreciation in a block of assets - use of asset - Allowability of depreciation on plant forming part of a block of assets when the unit's use during the year is disputed - HELD THAT: - The CIT(A) held the unit was not functioning and disallowed depreciation; before the Tribunal the assessee disputed the factual finding and the Department did not controvert restoration. The Tribunal directed restoration to the AO to verify whether the Kandla plant was actually in use during the year, and if so to allow depreciation. [Paras 25]

Matter restored to the AO for verification; ground allowed for statistical purposes.

Deductibility of foreign travel expenses - business purpose - Disallowance of foreign travel expenses as capital/personal or not for assessee's business - HELD THAT: - On identical facts the Tribunal in the assessee's earlier years had allowed similar claims. Considering those earlier Tribunal findings and the details placed on record, the Tribunal deleted the disallowance sustained by the CIT(A) and held the foreign travel expenses were allowable as incurred for business purposes. [Paras 31]

Disallowance deleted; appeal allowed on this ground.

Provisions for settlement - prior disallowance and write-back - contingent liability versus incurred liability - Deductibility of provision for impending union settlement where earlier provision had been disallowed in a prior year and settlement executed in a later year - HELD THAT: - The AO and CIT(A) followed findings in respect of earlier assessment years and held that the deduction did not arise in the year under appeal because the settlement was signed on a date relevant to a subsequent assessment year; the Tribunal found those conclusions consistent with the earlier Tribunal orders and the timing of the executed settlement and refused to interfere. [Paras 36]

Addition confirmed; ground dismissed.

Deductibility of expenses incurred for foreign visitors - business purpose - Allowability of hotel and air fare expenses incurred for foreign visitors coming to India - HELD THAT: - Although the AO treated the expenditure as incurred for the parent company and non business for the assessee, the Tribunal, guided by its own earlier decision in the assessee's case for the preceding year and on perusal of the foreign travel particulars in the paper book, concluded the expenses were for the assessee's business and directed the AO to allow them. [Paras 43]

Expenditure allowed; ground allowed.

Allowance of guest house food and beverages - verification and detailed breakup - Disallowance under Sec. 37(4) of amounts claimed for transit houses (guest/ transit house expenses) - HELD THAT: - The Tribunal noted an earlier Tribunal finding in a prior year allowing food and beverages and directed the AO to consider the detailed break up furnished by the assessee and to allow expenses incurred on food and beverages. As the matter required verification, the issue was restored to the AO with directions. [Paras 46]

Matter restored to AO for verification and directed to allow food and beverages component; ground allowed for statistical purposes.

Entertainment expenses and Sec. 37(2) exclusions - Characterisation of lunch, canteen, business meeting and AGM expenses for purposes of Sec. 37(2) - HELD THAT: - The Tribunal directed the AO to allow business meeting expenses and AGM expenses as they are not entertainment in nature; as to canteen expenses, the Tribunal directed an addition of only a specified sum in line with earlier Tribunal findings in the assessee's case, thereby partly allowing the appeal on this point. [Paras 50]

Partly allowed - business meeting and AGM expenses to be allowed; limited addition from canteen expenses to be made.

Computation of turnover for deduction under Sec. 80HHC - exclusion of sales tax, trade discount and excise duty - Inclusion of sales tax and trade discount in total turnover for computing deduction under Sec. 80HHC and exclusion of excise duty element - HELD THAT: - Following the Tribunal's earlier decision in the assessee's own case and the Supreme Court and High Court authorities applied therein, the Tribunal held that sales tax and trade discount should be excluded from turnover for Sec. 80HHC. The Tribunal also allowed the assessee's additional plea to exclude the excise duty element relying on the Jurisdictional High Court precedent. [Paras 55, 56]

Relief allowed - sales tax, trade discount and excise duty excluded from turnover for computing deduction under Sec. 80HHC.

Prior period/provision shortfall - treatment as prior period expense - Deductibility of excess of subsequent payment over provisions made in prior year (prior period expense) - HELD THAT: - The Tribunal accepted the CIT(A)'s conclusion that the shortfall represented a prior period expense where provision in the earlier year fell short of subsequent payment; on the facts, the Tribunal found no reason to interfere with the CIT(A)'s confirmation of the disallowance. [Paras 61]

Addition upheld; ground dismissed.

Deduction under Sec. 80HH - effect of brought forward losses on unit-wise deduction - Allowability of deduction under Sec. 80HH for a unit where brought forward losses of that unit may be available - HELD THAT: - The Tribunal found that the factual claim of the assessee-that there were no brought forward losses available for set off-required verification. The Tribunal therefore restored the matter to the AO to verify whether any brought forward losses of the unit remained to be set off; if none exist, the AO was directed to allow the Sec. 80HH deduction. [Paras 68]

Matter restored to the AO for verification; ground allowed for statistical purposes if no brought forward losses are found.

Final Conclusion: The assessee's appeal for assessment year 1993-94 is partly allowed: several disallowances were deleted or recharacterised (including film production expenditure, foreign travel, certain guest house and foreign visitor expenses, and turnover adjustments for Sec. 80HHC), while other claims were dismissed; multiple issues requiring factual verification (notably the VRS liability, Kandla plant depreciation, and Sec. 80HH brought forward losses) were restored to the Assessing Officer for examination and determination in accordance with the Tribunal's directions.

Reopening of assessment under section 148 - reason to believe - tangible material - change of opinion - admissibility of advertisement expenditure under section 37(1)

Admissibility of advertisement expenditure under section 37(1) - change of opinion - Validity of the partial disallowance of advertisement expenses sustained by the Assessing Officer and set aside by the CIT(A), as challenged by the department - HELD THAT: - The Tribunal noted that the question of part disallowance of advertisement expenses had been finally adjudicated in favour of the assessee by co-ordinate Benches in the assessee's own appeals for A.Y. 2005-06 (Third Member decision and subsequent bench decisions). In view of those binding coordinate decisions on identical facts, the Tribunal declined to disturb the CIT(A)'s order allowing the expenditure and held that the department's appeal must be dismissed. The Tribunal expressly followed the prior decisions in the assessee's own cases rather than re-examining the admissibility of the expenditure on the merits. [Paras 3]

Department's appeal against allowance of advertisement expenditure dismissed; Tribunal follows coordinate-bench decisions in assessee's own cases and upholds CIT(A)'s deletion of disallowance.

Reopening of assessment under section 148 - reason to believe - tangible material - change of opinion - Validity of reassessment proceedings initiated under section 148 for A.Y. 2004-05 - HELD THAT: - The Tribunal examined the Assessing Officer's reasons and the record of the scrutiny assessment for A.Y. 2004-05 and found that the AO had relied on findings from the assessment order for A.Y. 2005-06 to form a reason to believe. Applying the principle in Kelvinator (that reopening requires tangible material with a live link to the formation of belief) and having regard to the Third Member findings for A.Y. 2005-06 which showed materially different facts (including the commencement of advertising sales representation agreements w.e.f. 1 July 2004), the Tribunal held there was no live link between the reasons recorded and the formation of belief for A.Y. 2004-05. The reassessment, therefore, amounted to a mere change of opinion and was invalid. The Tribunal followed the detailed reasoning of the co-ordinate Bench in the assessee's own case and upheld the CIT(A)'s order quashing the reopening. [Paras 8, 10, 11]

Cross-objection allowed; reassessment proceedings under section 148 for A.Y. 2004-05 held invalid and quashed.

Final Conclusion: The department's appeal is dismissed and the assessee's cross-objection is allowed: the disallowance of advertisement expenses is not sustained in view of coordinate-bench decisions, and the reassessment proceedings under section 148 for A.Y. 2004-05 are quashed as invalid.

Penalty under section 271(1)(c) - furnishing inaccurate particulars or concealment of income - when two views are possible no penalty - reassessment consequent to later judicial decision - application of Supreme Court precedents in mitigating penalty

Penalty under section 271(1)(c) - furnishing inaccurate particulars or concealment of income - when two views are possible no penalty - Whether penalty under section 271(1)(c) can be levied where the deduction claimed was debatable, had been allowed in the original assessment, and the return contained working and explanations - HELD THAT: - The Tribunal held that imposition of penalty under section 271(1)(c) requires that the return contain incorrect particulars or that there was concealment of material facts; mere disallowance of a deduction which is debatable or rests on an arguable legal view does not attract penalty. Where two reasonable views are possible, or where the assessee has furnished the basis of its claim (including computation and auditors' report) and the matter involves question of law or is highly debatable, penalty is not exigible. The CIT(A) had rightly cancelled the penalty after noting that the deduction was allowed in the regular assessment, detailed explanations and working were furnished with the return, and the disallowance in reassessment arose from subsequent judicial developments rather than from any concealment or false particulars by the assessee. [Paras 6, 9]

Penalty cancelled because the case involved a debatable legal question and there was no concealment or furnishing of inaccurate particulars in the return.

Reassessment consequent to later judicial decision - application of Supreme Court precedents in mitigating penalty - Whether reassessment and consequent disallowance based on a later Supreme Court decision can sustain levy of penalty when the deduction was earlier allowed - HELD THAT: - The Tribunal agreed with the CIT(A) that disallowance made in a reopened assessment as a consequence of a later decision of the Apex Court does not by itself convert the matter into one of concealment or inaccurate particulars capable of attracting penalty. The facts showed the deduction was allowed in the original assessment and the claim was made in good faith relying on existing judicial decisions; the subsequent adverse Supreme Court decision could not be the basis for penalising the assessee where there was no falsity or concealment. The Tribunal relied on recent Supreme Court authorities cited by the Bench to support that penalty is not exigible in such circumstances and therefore upheld the cancellation of penalty. [Paras 10]

Penalty cannot be sustained where disallowance arises from a later judicial decision and the deduction had earlier been allowed; CIT(A)'s cancellation of penalty upheld.

Final Conclusion: The appeal filed by the department is dismissed; the CIT(A)'s order cancelling the penalty under section 271(1)(c) is upheld.

Disallowance under section 40(a)(ia) - reimbursement of expenses versus taxable payment for tax deduction at source - single consolidated bill versus separate bills for TDS applicability - scope of tax deduction at source under Chapter XVII-B - remand to Assessing Officer for verification of facts and quantification - applicability of section 40(a)(ia) only to amounts payable as on 31st March

Disallowance under section 40(a)(ia) - reimbursement of expenses versus taxable payment for tax deduction at source - single consolidated bill versus separate bills for TDS applicability - remand to Assessing Officer for verification of facts and quantification - applicability of section 40(a)(ia) only to amounts payable as on 31st March - Whether the disallowance of clearing and forwarding charges under section 40(a)(ia) should be sustained or requires fresh verification by the Assessing Officer. - HELD THAT: - The Tribunal declined to decide the matter on merits and restored the issue to the Assessing Officer for detailed examination. The Tribunal noted the assessee's plea that a portion of the clearing and forwarding charges represented reimbursements and that tax was not deductible on such reimbursements, and that part of the remaining amount had been suo moto disallowed in the return. The Tribunal observed that the Board Circular quoted by the CIT(A) indicates that a single consolidated bill may attract TDS but that multiple periodic bills do not ipso facto become a single bill; however, the Tribunal refrained from a final finding on that factual/legal point and placed the matter within the AO's jurisdiction for verification. The AO was directed to examine (i) which amounts are covered by TDS, (ii) amounts the assessee has itself disallowed in his computation, and (iii) the extent of reimbursements which are not chargeable to TDS, and to apply the law including the principle that section 40(a)(ia) is directed to amounts payable as on 31st March and should not be invoked to disallow expenditures actually paid during the previous year without TDS, as indicated by the Special Bench decision cited by the Tribunal. The Tribunal modified the CIT(A)'s directions to include these specific points of verification and restored the issue for adjudication by the AO. [Paras 5, 7, 8]

The issue is restored to the Assessing Officer for verification and fresh adjudication in accordance with the directions given; appeal allowed for statistical purposes.

Final Conclusion: The Tribunal has remanded the question of disallowance under section 40(a)(ia) in respect of clearing and forwarding charges to the Assessing Officer for detailed verification of the nature and quantification of reimbursements, amounts on which TDS is chargeable, and amounts already disallowed by the assessee, and directed application of the relevant legal principles; appeal disposed as allowed for statistical purposes.

Attribution of interest to Capital Work in Progress (CWIP) - Mixed funds and onus of proof for tracing borrowings - Rate of depreciation on UPS as integral part of computer hardware - Classification of interest income as business income versus income from other sources - Reliance on and distinguishability of precedent

Attribution of interest to Capital Work in Progress (CWIP) - Mixed funds and onus of proof for tracing borrowings - Whether part of interest expenditure should be disallowed by attributing interest to closing Capital Work in Progress. - HELD THAT: - The assessee had both own funds and interest-bearing borrowings and the revenue had attributed interest to CWIP using an average rate applied to closing WIP. The Tribunal accepted that there was an opening WIP for which no disallowance was made in the earlier year and treated that as already accepted to have been financed from own funds. The Tribunal examined the additions to CWIP during the year (which were modest), the substantial increase in capital and reserves, the relatively small increase in borrowings and the large profit for the year, and concluded that the additions to CWIP could be explained from internal funds. In these circumstances, and given that the revenue did not controvert the assessee's factual demonstration that borrowed funds were not used for the capital additions, the Tribunal found no justification for attributing interest to CWIP and disallowing the claim. [Paras 2]

Disallowance of interest of Rs. 23,67,420 attributed to CWIP set aside; assessee's interest claim allowed.

Rate of depreciation on UPS as integral part of computer hardware - Reliance on and distinguishability of precedent - Whether depreciation on UPS should be allowed at the higher rate applicable to computer hardware (60%) or at normal rate for electrical equipment (15%). - HELD THAT: - The assessee treated the UPS as an integral part of computer equipment and claimed depreciation at 60%. The AO and CIT(A) treated UPS as electrical backup equipment and allowed depreciation at 15%. The Tribunal reviewed the Special Bench decision on routers and switches and found it distinguishable on facts. However, the Tribunal noted that the Hon'ble Delhi High Court had held that UPS may attract the higher rate where appropriate (citing Orient Ceramics & Industries Ltd.), and no contrary jurisdictional precedent was shown. Following the Delhi High Court authority, the Tribunal accepted that depreciation at 60% is allowable for UPS used with computers and allowed the claim. [Paras 3]

Order of CIT(A) confirmed to be set aside; depreciation on UPS allowed at the higher rate (60%).

Classification of interest income as business income versus income from other sources - Reliance on and distinguishability of precedent - Whether interest income from fixed deposits kept as margin money for LCs/Bank Guarantees and deposits with MSEB is taxable as business income or as income from other sources. - HELD THAT: - The revenue treated the interest as income from other sources relying on Pandian Chemicals (Supreme Court). The Tribunal found that Pandian Chemicals is distinguishable because that case addressed whether income was derived from a particular activity, whereas the present question is whether the interest can be regarded as business income. The assessee's uncontroverted case was that the FDRs and deposits were maintained as margin/security in direct connection with the business. On that basis, and supported by the Bombay High Court decision in Indo Swiss Jewell, the Tribunal concluded that such interest is incidental to and arises from the business and therefore should be treated as business income. [Paras 4]

Interest income treated as business income; CIT(A)'s order set aside and assessee's claim allowed.

Final Conclusion: The Tribunal allowed the appeal in full for AY 2008-09: the interest disallowance attributed to CWIP was set aside, depreciation on UPS was allowed at the higher rate applicable to computer hardware, and the interest income on deposits held as margin/security was held to be business income.

Computation of profits for export-oriented unit under section 10A - Allocation of common/head office expenses to units - Attribution of indirect/head office expenses on turnover basis - Disallowance under section 14A and Rule 8D applicability - Prospective application of Rule 8D

Computation of profits for export-oriented unit under section 10A - Allocation of common/head office expenses to units - Attribution of indirect/head office expenses on turnover basis - Whether the AO and CIT(A) were justified in attributing head office common/indirect expenses to the 10A unit on the basis of turnover and disallowing the deduction under section 10A. - HELD THAT: - The tribunal reviewed the assessment facts and the authorities' approach to computation of the 10A unit's profit. The assessee had not apportioned common head quarter expenses aggregating to the specified amount to the 10A unit; the AO apportioned those expenses to the unit in the ratio of the unit's turnover to total turnover, resulting in a loss and denial of the section 10A benefit. The tribunal accepted the view that head office expenses cater to all units and therefore must be attributed to the units when computing the unit's profit. It found attribution on the basis of turnover to be an appropriate and acceptable method for allocating indirect/head office expenses and concluded there was no infirmity in the AO's and CIT(A)'s approach. [Paras 2]

Allocation of head office common/indirect expenses to the 10A unit on the basis of turnover was held appropriate; the disallowance of the section 10A deduction was upheld.

Disallowance under section 14A and Rule 8D applicability - Prospective application of Rule 8D - Whether the AO was justified in applying Rule 8D retrospectively to compute expenses attributable to exempt income for AY 2007 08, or whether Rule 8D is prospective and prior years require computation on a reasonable basis. - HELD THAT: - The tribunal examined the rival contentions and the jurisdictional High Court decision cited by the CIT(A). In view of the Bombay High Court ruling in Godrej and Boyce Mfg. Co. vs. DCIT, Rule 8D applies only from assessment year 2008 09 onwards. For assessment years prior to 2008 09, including the year under appeal, expenses relating to exempt income (both direct and indirect) must be determined on a reasonable basis after giving the assessee an opportunity of hearing. The CIT(A)'s direction to the AO to recompute the disallowance in light of that decision and after affording hearing was therefore in accordance with law and was upheld. [Paras 3]

Rule 8D held prospective from AY 2008 09; for AY 2007 08 the AO must compute disallowance relating to exempt income on a reasonable basis after affording the assessee an opportunity of hearing; the CIT(A)'s direction was upheld.

Final Conclusion: Both impugned orders of the authorities below were upheld and the assessee's appeal was dismissed.

Addition as deemed income under section 68 of the Income-tax Act - accommodation entries / hawala transactions - onus of proof on the assessee to explain source of deposits - peak deposit method for taxing unexplained bank credits - estimation of income from hawala operations

Addition as deemed income under section 68 of the Income-tax Act - onus of proof on the assessee to explain source of deposits - Whether the entire cash deposits in the assessee's bank accounts could be added as unexplained income under section 68 - HELD THAT: - The Tribunal recorded that cash deposits as alleged were in fact made in the assessee's bank accounts and that the assessee accepted providing accommodation entries. The lower authorities had added the entire deposits as unexplained income because the assessee failed to produce the alleged provider (Mr. Jatin Shah) or corroborative evidence and did not discharge the initial onus to explain the source. Noting these facts, the Tribunal held that while the assessee had not discharged the onus to fully explain the deposits, addition of the entire cash deposits as deemed income was not appropriate without further verification. The Tribunal therefore did not sustain the wholesale addition made by the Assessing Officer but directed a limited further exercise of fact-finding by the AO to determine the correct quantum to be assessed. [Paras 11]

Issue remitted to the Assessing Officer to verify peak deposits in all bank accounts together and make additions only to the extent of such peak deposits after affording the assessee a hearing.

Peak deposit method for taxing unexplained bank credits - estimation of income from hawala operations - Whether the income assessable on account of accommodation/hawala transactions should be estimated by reference to peak deposits and by application of a profit rate - HELD THAT: - Accepting the assessee's alternative concession that profit could be estimated, and having regard to an earlier acceptance in the assessee's own case for an earlier year, the Tribunal directed that the AO should determine the aggregate peak deposit across all relevant accounts and restrict additions to that peak. Independently, as a measure of fairness and to provide guidance to the AO for computing taxable profit from the hawala business, the Tribunal directed computation of profit at the rate of 0.5% on the total cash deposited during the year, while leaving the AO to assess the correct income after verification and providing opportunity of hearing to the assessee. [Paras 11, 12]

Assessee to file peak deposit statement; AO to verify peak deposits and make additions accordingly; AO directed to compute profit at 0.5% of the entire cash deposited for assessment purposes.

Final Conclusion: The appeal is partly allowed inasmuch as the Tribunal set aside the addition of the entire cash deposits and remitted the matter to the Assessing Officer to verify and assess additions limited to the peak deposits of the accounts after hearing the assessee; additionally the AO was directed to compute profit from the hawala/accommodation operations at 0.5% of the total cash deposited. The appeal is disposed of as party allowed for statistical purposes.

Inflated purchase consideration - colourable device / sham transaction - disallowance under section 40A(2) of the Income Tax Act - sister concern transaction assessed to tax - tax planning versus tax evasion

Inflated purchase consideration - colourable device / sham transaction - sister concern transaction assessed to tax - disallowance under section 40A(2) of the Income Tax Act - Whether the claimed purchase of TDR from Kasturi Housing Pvt. Ltd. was a colourable device attracting disallowance of the inflated purchase consideration - HELD THAT: - The Tribunal examined the sequence of transactions: M/s. Shatmurti Realty Pvt. Ltd. was the original vendor, KHPL (Kasturi Housing Pvt. Ltd.) paid Rs. 96,25,000/- to the original vendor and subsequently sold the TDR to the assessee for Rs. 1,75,00,000/-, the assessee sold the TDR for Rs. 1,81,50,100/- and offered the small resultant profit to tax. KHPL paid tax on its profit from the interposed sale at 30%, a fact not disputed by Revenue. Relying on the principle that where a sister concern with whom a transaction is entered is itself assessed to tax (thereby demonstrating no loss to revenue and absence of tax evasion), a disallowance under the provision invoked cannot be sustained, the Tribunal held that the Assessing Officer's conclusion that the arrangement was a colourable device was not tenable. The Tribunal noted the respondent authorities' reliance on the decision in CIT Vs. Indo Saudi Services (Travel) Pvt. Ltd. to the effect that payments to relatives/sister concerns do not attract disallowance if the counterparty has been assessed and tax has been paid, and treated the undisputed fact of KHPL having paid tax on the profit as determinative. On these findings the Tribunal concluded that no disallowance was warranted in the hands of the assessee. [Paras 6]

Addition of the inflated amount disallowing purchase consideration is deleted and the appeal is allowed.

Final Conclusion: The Tribunal allowed the appeal, holding that no disallowance was justified as the interposed seller (Kasturi Housing Pvt. Ltd.) had suffered tax on its profit, and therefore the transaction could not be treated as a colourable device to evade tax.

Deemed dividend under section 2(22)(e) - advance or loan by a closely held company to a shareholder holding substantial interest - to the extent of accumulated profits - not in the ordinary course of business / money lending not a substantial part of business - business expediency / commercial consideration - personal guarantee and collateral security as consideration for company benefit

Deemed dividend under section 2(22)(e) - business expediency / commercial consideration - personal guarantee and collateral security as consideration for company benefit - Whether the amount of Rs. 17,65,517 withdrawn by the assessee from a closely held company constituted a deemed dividend under section 2(22)(e) for Assessment Year 2006-07. - HELD THAT: - The Tribunal upheld the CIT(A)'s finding that the payments did not partake the character of deemed dividend. Although s.2(22)(e) treats advances or loans by a closely held company to a substantial shareholder as deemed dividend to the extent of accumulated profits, the factual matrix must be examined. In the present case the assessee, a managing director and substantial shareholder, had provided personal guarantee and collateral security to enable the company to obtain bank finance; her liquidity was thereby reduced and withdrawals from the company were permitted as a commercial accommodation against that background. The Tribunal found the transactions were made as a matter of commercial expediency to protect the business interest of the company rather than as gratuitous advances to a shareholder. Reliance placed on precedents favourable to the assessee, notably the Division Bench decision in Pradip Kumar Malhotra (following Creative Dyeing & Printing P. Ltd.), was held to be apposite; conversely, decisions relied on by Revenue (Sarada P., Tarulata Shyam, P.K. Abubucker) were held inapplicable on the facts. Applying these principles, the Tribunal concluded that the amounts advanced did not constitute loans/advances in the sense contemplated by s.2(22)(e) and therefore were not taxable as deemed dividend. [Paras 7, 8, 10]

The addition of Rs. 17,65,517 as deemed dividend under section 2(22)(e) was deleted and the Revenue's appeal dismissed.

Final Conclusion: On the facts, withdrawals made by the assessee against the background of personal guarantees and collateral security furnished for the company's bank finance amounted to commercial accommodation and did not attract the deeming fiction of section 2(22)(e); the CIT(A)'s deletion of the addition is sustained and the Revenue's appeal is dismissed.

Speculative transaction - derivative transactions - trading in derivatives excluded from speculative transactions by amendment - set off of losses against short term capital gains - recognized stock exchange - intention test and principle of consistency

Speculative transaction - derivative transactions - trading in derivatives excluded from speculative transactions by amendment - recognized stock exchange - set off of losses against short term capital gains - intention test and principle of consistency - Whether losses from futures and options transactions entered into on recognized stock exchanges are speculative and thus disallowable, or non speculative (investment/business) losses eligible for set off against short term capital gains for AYs 2006 07 and 2007 08. - HELD THAT: - Finance Act, 2005 amended the definition of speculative transaction so that an eligible transaction in respect of trading in derivatives carried out in a recognized stock exchange shall not be deemed speculative with effect from AY 2006 07. The assessee's F&O transactions were carried out through registered stock brokers on recognized exchanges and therefore fall within the exclusion introduced by the amendment. The CIT(A) applied the intention test and principle of consistency, considering frequency, volume, period of holding and overall facts, and held the transactions to be investment (non speculative) transactions; the Tribunal accepted that conclusion and also relied on appellate precedents treating futures & options as sub categories of derivatives and on the purposive construction of the amendment. The Revenue's reliance on earlier authority treating non delivery contracts as speculative was held inapplicable in view of the statutory amendment and the facts that the transactions were on recognized exchanges. For these reasons the Tribunal found no infirmity in the CIT(A)'s conclusion that the losses were not speculative and were eligible to be set off against short term capital gains.

Losses on futures & options entered into on recognized stock exchanges are not speculative for AYs 2006 07 and 2007 08 and may be set off against short term capital gains; the CIT(A)'s orders are upheld.

Final Conclusion: Both appeals by the Revenue are dismissed; the Tribunal upholds the CIT(A)'s finding that the assessee's futures and options transactions carried out on recognized stock exchanges are non speculative and that the resulting losses are eligible for set off against short term capital gains for the assessment years 2006 07 and 2007 08.

Penalty under Section 112(a) for aiding/abetting illicit import - connivance in import of second hand vehicles by use of back dated bills of lading - confiscation sustained where primary parties did not challenge adjudication - appellate reduction of penalty in the exercise of discretion

Penalty under Section 112(a) for aiding/abetting illicit import - connivance in import of second hand vehicles by use of back dated bills of lading - Penalty imposed on the appellant under Section 112(a) for abetting illicit import was justified. - HELD THAT: - The Tribunal found on record (admitted by the appellant) that the Dubai supplier contacted the appellant, informing him of back dating bills of lading to satisfy the one year possession requirement and requesting assistance in clearance. The appellant arranged the CHA, handed over the documents and did not retract statements given to Customs. These uncontested facts establish the appellant's knowledge and connivance in importing second hand cars without complying with import conditions, thereby attracting liability under the penal provision. The Tribunal therefore upheld the imposition of penalty on merits. [Paras 6]

Penalty under Section 112(a) is upheld.

Appellate reduction of penalty in the exercise of discretion - Quantum of penalty reduced on appellate consideration. - HELD THAT: - While the penalty was sustained on merits, the Tribunal in exercise of its discretionary powers considered the appellant's plea for leniency and reduced the monetary penalty from the sum imposed by the adjudicating authority to a lower amount in each case. [Paras 6]

Penalty reduced to Rs. 25,000 in each case.

Confiscation sustained where primary parties did not challenge adjudication - Appellant cannot challenge confiscation of the vehicles where the importers and other penalised parties did not appeal. - HELD THAT: - The Tribunal noted that neither the importers nor the other persons against whom penal proceedings were initiated filed appeals against the adjudication order. In the absence of any challenge by those primary parties, it is presumed they had no grievance with confiscation and fines, and consequently the appellant cannot maintain a grievance against the confiscation order. [Paras 6]

Complaints as to confiscation are not entertained; confiscation stands.

Final Conclusion: Appeals dismissed except that the penalty imposed on the appellant is reduced; penalty under Section 112(a) sustained on merits but quantums lowered to Rs. 25,000 in each case; orders of lower authorities otherwise upheld and stay applications disposed of.

Bona fide dispute - winding up petition - guarantee clause - right to return and opportunity to replace goods - breach of contract by purchaser withholding payment - security by bank guarantee to preserve creditor's claim

Bona fide dispute - winding up petition - Whether the dispute raised by the company was a bona fide dispute sufficient to bar presentation of the winding up petition - HELD THAT: - The court held that a bona fide dispute will defeat a winding up petition only where the dispute, in substance, relates to the transaction between the parties and there exists privity such that the dispute can legitimately be asserted by the company against the petitioning creditor. Here the rejection by the ultimate purchaser (ISMT) and the purchaser's separate dealings could not, without more, be equated to a dispute between the company and the petitioning-creditor. The trial judge erred in treating the third party's rejection as creating a bona fide dispute between the parties when the contract terms required return of rejected goods and an opportunity to replace them. The company did not return the goods nor give the petitioner a reasonable opportunity to perform the replacement obligation under the guarantee clause; instead it purchased elsewhere and withheld payment. Consequently, the court concluded that, on the presented facts, the contention amounted not to a bona fide dispute capable of defeating the winding up petition but to an alleged breach by the company. [Paras 16, 17, 18, 19, 21]

The dispute was not a bona fide dispute sufficient to bar the winding up remedy, insofar as the company failed to comply with the contractually mandated procedure for return and replacement of rejected goods.

Guarantee clause - right to return and opportunity to replace goods - breach of contract by purchaser withholding payment - Whether the company breached the contract by not returning the rejected goods and by withholding/adjusting the balance payment instead of allowing replacement - HELD THAT: - The court examined the contract terms which provided that goods found to be faulty must be returned and the seller given a reasonable time to rectify or replace; only upon failure to do so could the buyer purchase elsewhere and claim reimbursement. The record showed no demand for return nor an opportunity afforded to the petitioning-creditor to replace the goods; instead the company retained the goods at the site and procured replacements from third parties, and adjusted/withheld payment. The court characterised this conduct as a breach of the guarantee clause and held that the company could not take advantage of its own breach to withhold the balance payment. [Paras 16, 17, 18, 19, 21]

The company breached the contractual guarantee clause by failing to return the rejected goods and by withholding/adjusting the balance payment instead of allowing the petitioner the opportunity to replace the goods.

Security by bank guarantee to preserve creditor's claim - What interim measure should be directed pending appropriate proceedings between the parties - HELD THAT: - Exercising powers under the Companies Act, the court modified the trial court's order by directing the company to furnish security to preserve the petitioning-creditor's claim. The security was to be in the form of a bank guarantee or other acceptable security to the Registrar, original side, for a limited period, with provision that if the petitioner instituted appropriate proceedings within the stipulated time the security would be retained until further order; if no proceedings were instituted the security would be returned and the trial court's original order would revive. The measure balanced protection of the creditor's monetary claim against the company's defence and the need to avoid unjust enrichment arising from the company's alleged breach. [Paras 22, 23]

The company was directed to furnish security by bank guarantee or other acceptable form to the Registrar for the specified sum and period, with conditional retention or return depending on whether the petitioner pursues appropriate proceedings.

Final Conclusion: The High Court found that the company could not rely on the third party's rejection to establish a bona fide dispute as against the petitioning-creditor where the contract required return of rejected goods and an opportunity to replace them; the company's failure to return the goods and its withholding/adjustment of payment amounted to breach. The impugned order was modified: the company was directed to furnish a bank guarantee (or other security) to preserve the creditor's claim for a limited period, subject to the contingencies specified by the court.

Reverse charge mechanism - taxation of services provided from outside India and received in India - commercial coaching and training services - extended period of limitation - show cause notice versus confirmed demand - traversing beyond SCN

Extended period of limitation - Applicability of the extended period of limitation for demands when returns had been filed and the Department was aware of the assessee's activities. - HELD THAT: - The first appellate authority found that the assessee had filed returns for the relevant period and the Department was aware of the activities; reliance was placed on precedents holding that the extended period is not available where facts are known to the Department. The Tribunal agreed with this reasoning and held that the extended period of limitation could not be invoked, so that only the demand period within one year prior to the issue of the show cause notice would survive.

Extended period of limitation not available; demand restricted to one year prior to show cause notice.

Commercial coaching and training services - taxation of services provided from outside India and received in India - reverse charge mechanism - Whether the respondents were liable to pay service tax under the reverse charge mechanism for training services allegedly provided by the foreign parent company. - HELD THAT: - The adjudicating authority's demand rested on an assertion that training fees were paid to the foreign parent. The assessee produced certificates from the foreign provider and invoices showing that the expenditures were for travel, accommodation and related expenses, and the Revenue did not controvert this with supporting evidence. The lower authority had failed to prove that a taxable consideration for training was paid or that the service was partly rendered in India. Further, services rendered wholly outside India are governed by the Rules for services provided from outside India and received in India and, where services are rendered wholly outside India and no consideration for the service (training fee) is paid, service tax under reverse charge does not arise. Applying these principles, the Tribunal accepted the appellate finding that no training fee was charged and that the amounts were reimbursements/expenses; consequently no liability under reverse charge arose.

Respondents not liable to pay service tax under reverse charge for the training claimed; no service tax demand sustainable on the material before the authorities.

Show cause notice versus confirmed demand - traversing beyond SCN - Validity of the adjudicating authority confirming demand under provisions different from those invoked in the show cause notice. - HELD THAT: - The first appellate authority observed that the show cause notice charged the assessee under one set of provisions while the adjudicating authority confirmed demand under a different provision applicable to services partly rendered in India. The adjudicating authority thereby traversed beyond the scope of the show cause notice. The Tribunal endorsed this finding, noting that the lower authority had applied a provision for partly rendered services without proving that the service was partly rendered in India, rendering the impugned order unsustainable on that ground.

Confirmation of demand under provisions not pleaded in the SCN was not maintainable; impugned adjudication flawed for having traversed beyond the SCN.

Final Conclusion: The Tribunal upheld the orders of the first appellate authority: the extended period of limitation could not be invoked, the Revenue failed to prove payment of training consideration attracting reverse charge, and the adjudicating authority had traversed beyond the SCN; accordingly the Revenue's appeals were dismissed and the impugned orders set aside.

Refund of service tax - nexus between services and authorized operations - approval committee certification - application of Notification No. 09/2009-ST and its amendment - refund under Section 11B of the Central Excise Act - SEZ Act supremacy and deemed export treatment for services

Nexus between services and authorized operations - approval committee certification - Whether the adjudicating and appellate authorities could re-examine and reject refund claims by disputing the nexus between the services and the appellant's authorized SEZ operations despite an Approval Committee certificate - HELD THAT: - The Tribunal held that the Approval Committee had examined and granted specific certification identifying the services received and justifying their use in relation to authorized operations; the jurisdictional Commissioner is a member of that Committee. Once the Approval Committee has given nexus and justification, it was unwarranted for the adjudicating authority or the Commissioner (Appeals) to independently re-open and reject the same question. Accordingly the rejection of the refund claims on the ground of absence of direct nexus was held to be legally unsustainable. [Paras 6]

Rejection of refund claims for lack of direct nexus set aside; claims allowed on this ground.

Application of Notification No. 09/2009-ST and its amendment - refund under Section 11B of the Central Excise Act - SEZ Act supremacy and deemed export treatment for services - Whether services wholly consumed within the SEZ, on which service tax was paid, are excluded from refund by the amendment to Notification No. 09/2009-ST, or whether refund is available under Section 11B/read with SEZ law despite such payment - HELD THAT: - The Tribunal observed that Notification No. 09/2009-ST exempts specified taxable services provided in relation to authorized SEZ operations and that the notification's refund procedure is designed to operationalise exemption where tax is discharged ab initio on services procured from outside. For services wholly consumed within the SEZ there is no necessity to discharge service tax initially; however, where service tax has been paid, entitlement to refund cannot be denied if the appellant otherwise qualifies under Section 11B of the Central Excise Act. Further, services provided to a SEZ are treated as deemed export under the SEZ Act and SEZ Rules, and Section 51 of the SEZ Act gives those provisions overriding effect. In view of the Government's policy that exports should not bear tax, a broad view must be taken in favour of refund. Therefore, even if the Notification's procedural carve-out were argued to apply, the appellants remain eligible for refund under Section 11B and cannot be denied relief merely because the claim was advanced under the Notification. [Paras 6]

Refund claims relating to services wholly consumed within the SEZ cannot be denied on the stated notification ground and are maintainable under Section 11B/read with SEZ law; rejection set aside.

Final Conclusion: Impugned orders rejecting parts of the refund claims are set aside; appeals allowed and appellants entitled to consequential relief, the lower orders being unsustainable in law.

Provisional assessment - service tax collection and remittance - adjustment of excess payments - department of Government of India - liability for service tax, interest and penalties - interest on delayed payment of tax by a government department - penalty waiver under section 80 of the Finance Act, 1994

Service tax collection and remittance - adjustment of excess payments - Whether any service tax remained finally payable by the respondent for the disputed initial period - HELD THAT: - The Tribunal found that the disputed amounts related to an initial period of service tax levy when procedures were evolving and several assessments were provisional. Revenue did not finalise provisional assessments and was silent regarding the respondent's pleaded excess payments for subsequent periods. The tax collected from customers (inclusive of service tax) remained within Government accounts and required only accounting adjustment between Government accounts. In view of these facts, the small short payment asserted by Revenue and the admitted provisional nature of later assessments, the Tribunal concluded that no tax was finally due from the respondent for the impugned period. [Paras 6]

No service tax is held to be finally payable by the respondent in the impugned matter.

Provisional assessment - adjustment of excess payments - Whether assessments for the periods in question were provisional and whether excess payments affected the demand - HELD THAT: - The Tribunal accepted the respondent's position that assessments during the relevant span were provisional and noted that the respondent had made excess payments for the impugned and subsequent provisional periods. Given Revenue's failure to finalise those provisional assessments or to contest the excess payments, the Tribunal treated the strict procedural requirements for provisional assessment/refund as mitigated by the nascent state of the service tax regime and the practical difficulties faced in collection and accounting. [Paras 6]

Assessments for the relevant periods were provisional and the existence of excess payments militates against sustaining the Revenue demand.

Department of Government of India - liability for service tax, interest and penalties - interest on delayed payment of tax by a government department - penalty waiver under section 80 of the Finance Act, 1994 - Whether interest and penalties could be imposed on the respondent (a Government of India department) for delayed remittance - HELD THAT: - The Tribunal observed that the respondent, being a Government of India department during the relevant period, collected service tax which remained in Government accounts and required intra-government transfers for adjustment. The Tribunal relied on precedent holding that interest need not be collected for delay in deposit by a government department and, applying the discretionary provision in section 80 of the Finance Act, 1994, found the facts fit for waiver of penalties given the nascent stage of service tax implementation and instructions governing Government accounting. [Paras 6, 7]

Interest demand not sustained and penalties waived under section 80 of the Finance Act, 1994.

Service tax collection and remittance - Whether the stay petitions and the Revenue appeals should be granted - HELD THAT: - Having concluded that no tax was finally due, that provisional assessments were not finalised, and that interest and penalties were not maintainable in the circumstances, the Tribunal found no basis to grant stay or to uphold the Revenue's appeals. [Paras 8]

Stay petitions and Revenue appeals are rejected.

Final Conclusion: The Tribunal held that, on the facts and because provisional assessments were not finalised and excess payments were not contested by Revenue, no service tax was finally due for the disputed period; interest was not collectible and penalties were waived under section 80 of the Finance Act, 1994, and accordingly the Revenue's stay applications and appeals were dismissed.

Revisionary jurisdiction of Commissioner of Central Excise - Appellability of revisionary orders to Appellate Tribunal - Vested right of appeal upon commencement of lis - Effect of substitution and Explanation as saving clause - Application of Section 6 of the General Clauses Act, 1897 - Maintainability of appeals against orders passed in pursuance of pending proceedings

Revisionary jurisdiction of Commissioner of Central Excise - Vested right of appeal upon commencement of lis - Effect of substitution and Explanation as saving clause - Application of Section 6 of the General Clauses Act, 1897 - Appellability of revisionary orders to Appellate Tribunal - Whether appeals before the CESTAT are maintainable against orders passed by Commissioners in revision under the erstwhile Section 84 of the Finance Act, 1994 where revisionary proceedings were instituted before 19.8.2009 but the Commissioner passed the revisionary order after 19.8.2009. - HELD THAT: - The Tribunal held that a lis between the Department and an assessee commenced on the date of issuance of the revisionary show-cause notice under the erstwhile Section 84 and that the right of appeal is a vested substantive right which accrues as from the commencement of the lis. Applying the principles in Garikapati Veeraya, the law governing the right of appeal is the law in force on the date the revisionary proceedings commenced. Explanation to the substituted Section 84 manifests a legislative intent to allow Commissioners to continue and complete revisionary proceedings begun before 19.8.2009 as if the old Section 84 remained in force; had the legislature intended to deprive parties of the pre-existing appellate remedy it would have used express words to that effect. In the absence of any contrary legislative intention, Section 6 of the General Clauses Act operates to preserve rights and remedies accrued under the pre-amendment law: omission of "or section 84" from Section 86 by the 2009 amendment did not extinguish the right of appeal vested on the date of institution of the revisionary proceedings, nor did it bar continuation or enforcement of legal proceedings in respect of that right. The Tribunal rejected the department's argument that the sole remedy was by writ, observing that writ jurisdiction is extraordinary and not an adequate substitute for a statutory appellate remedy. Consequently, orders passed by Commissioners in revision pursuant to proceedings instituted before 19.8.2009 are appealable to the CESTAT as if the omission had not occurred. [Paras 15, 18, 22]

Appeals to the CESTAT against revisionary orders passed after 19.8.2009 are maintainable where the revisionary proceedings were instituted before 19.8.2009; the vested right of appeal is preserved by the Explanation to Section 84 and by Section 6 of the General Clauses Act.

Final Conclusion: The Tribunal held that all appeals (and stay applications) filed against revisionary orders passed by Commissioners after 19.8.2009 are maintainable before the CESTAT where the revisionary proceedings (show-cause notices) were issued prior to 19.8.2009; the matters may be listed for disposal on merits.

Suppression of facts and mens rea to evade duty - failure to file declaration under Rule 173C and sufficiency of RT 12 returns - invocation of extended period of limitation under the proviso to section 11A(1) - appreciation of documentary evidence and concurrent findings of fact

Failure to file declaration under Rule 173C and sufficiency of RT 12 returns - appreciation of documentary evidence and disclosure in duty paying documents - Filing of RT 12 returns together with duty paying challans/invoices was sufficient disclosure despite non filing of a separate declaration under Rule 173C. - HELD THAT: - The Tribunal examined the duty paying documents (challans/invoices) filed by the assessee and found that they specifically recorded the address, that the pipes were fabricated from supplier's free issue material and that the goods were cleared on job work basis. The Tribunal noted that RT 12 returns during the relevant period were to be filed along with duty paying documents for revenue scrutiny and that the material facts were therefore disclosed to the authorities. On that basis the Tribunal concluded there was no suppression of material facts or intention to evade duty. The High Court held that these findings were matters of appreciation of the documentary record and that no perversity was shown in the concurrent conclusion that the documents amounted to disclosure notwithstanding absence of a separate Rule 173C declaration. [Paras 5]

There was no suppression by the assessee and filing of RT 12 with the duty paying documents was sufficient disclosure despite non filing of a separate Rule 173C declaration.

Invocation of extended period of limitation under the proviso to section 11A(1) - time bar and applicability where no suppression is found - Extended period of limitation under the proviso to section 11A(1) could not be invoked because there was no suppression or intent to evade duty. - HELD THAT: - The Tribunal concluded, on the basis of the documentary record and the disclosed scope of job work (space, power, hydro testing provided by the supplier and the captive consumption of fabricated pipes by the supplier), that the revenue had knowledge of the relevant facts and no suppression was established. Therefore the show cause notice invoking the extended period was held to be time barred. The High Court found these conclusions to be based on relevant materials and to be an appreciation of facts not vitiated by perversity, so that the extension of limitation could not be sustained. [Paras 5, 6]

Invocation of the extended period under the proviso to section 11A(1) was not justified as there was no suppression; the show cause notice was time barred.

Appreciation of documentary evidence and concurrent findings of fact - scope for interference by higher forum - The Tribunal's factual findings and concurrent appreciation of records were not liable to be interfered with by the High Court in absence of perversity. - HELD THAT: - The High Court observed that the Tribunal's conclusions flowed from relevant documents on record showing the nature of the work order, the free issue material, and the captive consumption of fabricated pipes. These are findings in the realm of appreciation of evidence. The court found no demonstration of perversity in the Tribunal's conclusions and therefore held that no substantial question of law arose warranting interference. [Paras 6]

Concurrent factual findings by the Tribunal were upheld and the High Court declined to interfere for want of perversity.

Final Conclusion: The appeal is dismissed; the Tribunal's allowance of the assessee's appeal is upheld because there was no suppression warranting invocation of the extended period and the documentary disclosures (RT 12 with duty paying documents) rendered the show cause notice time barred.

Time-bar/limitation of demand - bona fide belief based on binding precedent - admissibility of Cenvat credit on Education Cess and Secondary and Higher Education Cess for inputs received from 100% EOU - application of amended Rule 3(7)(a) of the Cenvat Credit Rules

Time-bar/limitation of demand - bona fide belief based on binding precedent - Impugned demand set aside on the ground of limitation. - HELD THAT: - The show-cause notice was issued on 30.3.2010 seeking recovery of Cenvat credit for the period May, 2007 to October, 2008, i.e., beyond the one-year period. Prior decisions of the Tribunal on the admissibility of Cenvat credit of Education Cess and Secondary and Higher Education Cess on inputs from 100% EOUs were rendered before issuance of the show-cause notice. The appellants demonstrated a bona fide belief, founded on those decisions, that such credit was admissible for the period prior to the amendment. Given those precedents and the fact that the demand related to a period outside the one-year limitation, the Tribunal found the appellants' limitation plea to have considerable force and, without addressing the merits, set aside the order-in-appeal and allowed the appeal. [Paras 5]

Order-in-Appeal set aside and appeal allowed on limitation ground; merits not adjudicated.

Final Conclusion: Appeal allowed by setting aside the Commissioner(Appeals) order on the ground that the demand was time-barred in view of prior Tribunal decisions giving the appellants a bona fide belief; merits were not decided.

Interest on delayed refund/rebate payment - maintainability of appeal to Tribunal against denial/delay of interest on rebate - interest payable after three months from filing of refund claim - consequential relief on allowance of interest

Maintainability of appeal to Tribunal against denial/delay of interest on rebate - interest on delayed refund/rebate payment - The appeal is maintainable before the Tribunal in respect of a claim for interest on delayed sanction of a rebate/refund. - HELD THAT: - The Department contended that appeals relating to rebate claims are not maintainable before the Tribunal and therefore the present appeals must be rejected. The Tribunal noted its earlier orders in the appellant's own matters (Orders Nos. 375 to 392/2012 dated 20.4.2012) holding that appeals concerning interest on rebate claims are maintainable before the Tribunal. Having followed that precedent, the Tribunal overruled the objection to maintainability and proceeded to decide the entitlement to interest.

Objection to maintainability is rejected and the appeals are held maintainable before the Tribunal.

Interest on delayed refund/rebate payment - interest payable after three months from filing of refund claim - The appellants are entitled to interest on delayed sanction of the rebate/refund claim. - HELD THAT: - Relying on the settled position affirmed by the Supreme Court in Ranbaxy Laboratories Ltd. v. Union of India, the Tribunal held that interest is payable on delayed sanction of a refund claim from three months after the date of filing of the refund claim. Applying that principle, the Tribunal concluded that the appellants are entitled to interest for delayed sanction of their rebate claim and allowed the appeals with consequential relief.

The appeals are allowed; appellants are entitled to interest on the delayed sanction of the rebate/refund claim and consequential relief is granted.

Final Conclusion: Appeals allowed: the Tribunal rejects the objection to maintainability and, applying the Supreme Court's ruling that interest is payable after three months from filing of the refund claim, grants interest on the delayed sanction of the rebate claim with consequential relief.

Payment of duty with interest post-detection and non-imposability of penalty under Section 11AC of the Central Excise Act, 1944 - penalty under Rule 27 of the Central Excise Rules, 2002 - late filing of returns and delayed payment of excise duty - adjustment of amounts already paid against newly imposed penalty

Payment of duty with interest post-detection and non-imposability of penalty under Section 11AC of the Central Excise Act, 1944 - Whether penalty under Section 11AC of the Central Excise Act, 1944 is imposable where the assessee filed belated returns and paid the duty along with interest thereafter. - HELD THAT: - The Tribunal applied its earlier view in Condor Power Products Pvt. Ltd. and found that although the assessee failed to file returns and pay duty in time, the full duty was paid subsequently along with interest when pointed out by the Department. In such circumstances the Tribunal held that imposition of penalty under Section 11AC was not warranted. The determinative reasoning is that the subsequent payment of duty with interest extinguished the basis for the statutory penalty under Section 11AC, particularly where there was no finding of fraud, collusion, suppression of facts or willful evasion. [Paras 6]

Penalty under Section 11AC of the Central Excise Act, 1944 is not imposable and is dropped.

Penalty under Rule 27 of the Central Excise Rules, 2002 - adjustment of amounts already paid against newly imposed penalty - What penalty, if any, is appropriate for the contravention of delayed filing and delayed payment, and whether amounts already paid are to be adjusted. - HELD THAT: - The Tribunal found that the assessee's conduct amounted to a contravention of the statutory provisions, though not attracting Section 11AC. Consequently, a lesser penalty under Rule 27 of the Central Excise Rules, 2002 is appropriate. The Tribunal imposed a penalty under Rule 27 and directed that amounts already paid by the assessee (including a previously paid penalty and excess interest) be adjusted against the penalty imposed under Rule 27. [Paras 6]

Imposition of a penalty under Rule 27 of the Central Excise Rules, 2002 and adjustment of amounts already paid against that penalty.

Final Conclusion: Appeal is partly allowed: penalty under Section 11AC set aside, penalty under Rule 27 imposed, with consequential adjustment of amounts already paid; matter disposed accordingly.