TaxTMI Updates e-Newsletter
Sep 14,2021

Input tax credit - blocked credit under Section 17(5)(h) - goods destroyed - reversal of input tax credit - non-obstante clause - expiry of perishable goods - Government Circular No. 72/46/2018-GST dated 26.10.2018

Input tax credit - blocked credit under Section 17(5)(h) - goods destroyed - reversal of input tax credit - expiry of perishable goods - Government Circular No. 72/46/2018-GST dated 26.10.2018 - ITC on inputs used in manufacture of cakes and pastries that expired while kept on display and were thrown away must be reversed as blocked credit under section 17(5)(h) of the CGST Act. - HELD THAT: - The applicant conceded that the bakery items were perishable, kept on display and, upon expiry, were discarded. The Authority treated the act of throwing away expired cakes and pastries as destruction of goods. Section 17(5)(h) operates as a non-obstante provision blocking input tax credit in respect of goods that are lost, stolen, destroyed, written off or disposed of as gift or free samples; goods destroyed therefore fall within the prohibition. The Authority further relied on Government Circular No. 72/46/2018-GST dated 26.10.2018 which directs reversal of ITC where time-expired goods returned by retailers/wholesalers are destroyed by the manufacturer, and held that the present facts present a similar scenario. Statutory and penal provisions prohibiting sale of expired foodstuffs were noted to support the conclusion that such items cannot be sold and are to be treated as destroyed. Applying these legal propositions, ITC attributable to inputs consumed in the expired and destroyed goods is not admissible and must be reversed. [Paras 9, 10, 11, 12]

ITC on inputs used in manufacturing expired cakes and pastries that were destroyed must be reversed under section 17(5)(h) of the CGST Act.

Final Conclusion: The Authority ruled that input tax credit relating to inputs used in manufacture of perished cakes and pastries which were discarded is blocked under section 17(5)(h) and must be reversed; the Government Circular dated 26.10.2018 was applied as analogous guidance.

Classification under HSN - Classification of parts - Toothed wheels, chain sprockets and other transmission elements presented separately; parts - General Rules for Interpretation of the Harmonized System - Rule 1 of GIR - Rule 3(a) of GIR - Rule 3(c) of GIR - Specificity principle in tariff classification

Classification under HSN - Toothed wheels, chain sprockets and other transmission elements presented separately; parts - Rule 1 of GIR - Rule 3(a) of GIR - Rule 3(c) of GIR - Classification of the subject sprocket for GST purposes - HELD THAT: - The Authority examined the specific tariff description covering "toothed wheels, chain sprockets and other transmission elements presented separately; parts" under HSN 8483 (subheading 8483 90 00 / 848390) and found that this entry aptly describes the subject goods. Applying Rule 1 of the General Rules of Interpretation (classification to be based on the Heading), the Authority concluded there was no need to proceed further through the GIR sequence. The Authority further observed that even if subsequent GIR rules were applied, Rule 3(a) (most specific description) favours classification under 848390, and Rule 3(c) (where headings are equally specific, the later numerical heading may be considered) supports the same result over the heading for chains relied on by the applicant. The Authority also noted consistency with earlier tribunal authority which classified sprockets under the corresponding heading in the Central Excise Tariff, reinforcing that the CETA/CTH description aligns with HSN 8483. On these grounds the sprocket was held classifiable under HSN 848390. [Paras 3, 4, 5, 6]

Sprocket is classifiable under HSN 8483 90 00 (848390).

Final Conclusion: Advance Ruling issued: the subject sprocket is classified under HSN 848390 (toothed wheels, chain sprockets and other transmission elements presented separately; parts).

Reverse charge mechanism under Section 9(3) and Section 9(4) of the CGST Act - liability of recipient to pay GST on reverse charge for used goods, waste and scrap supplied by Central/State/UT or local authorities - no reverse charge liability for purchase of scrap and used vehicles from unregistered suppliers - exemption threshold for supplies received from unregistered suppliers (not applicable where RCM itself does not arise)

Reverse charge mechanism under Section 9(3) of the CGST Act - liability of recipient to pay GST on reverse charge for used goods, waste and scrap supplied by Central/State/UT or local authorities - Whether a composition dealer is liable to pay GST under reverse charge when purchasing scrap/used vehicles from Central Government, State Government, Union territory or a local authority. - HELD THAT: - The Authority examined the scope of Section 9(3) and the notifications issued thereunder, including insertion of Sr. No. 6 in Notification No.4/2017-Central Tax(Rate) (as amended by Notification No.36/2017) which specifically notifies "used vehicles, seized and confiscated goods, old and used goods, waste and scrap" supplied by Central Government, State Government, Union territory or a local authority, where the recipient (any registered person) is liable to pay central tax on reverse charge basis. Applying these notifications to the facts, the Authority held that where the supplier of the subject goods is one of the specified governmental authorities, the recipient (including a composition dealer who is a registered person) is liable to discharge tax under the reverse charge mechanism. [Paras 4, 5]

Composition dealer purchasing scrap/used vehicles from Central/State/UT or local authority is liable to pay GST under RCM.

Reverse charge mechanism under Section 9(4) of the CGST Act - no reverse charge liability for purchase of scrap and used vehicles from unregistered suppliers - exemption for supplies from unregistered suppliers and its non-applicability where RCM is not notified - Whether a composition dealer is liable to pay GST under reverse charge when purchasing scrap/used vehicles from unregistered dealers, and whether any exemption limit applies. - HELD THAT: - The Authority considered Section 9(4) and the notifications framed thereunder. Notification No.08/2017 initially provided an exemption up to a daily threshold for supplies received from unregistered suppliers but was subsequently amended and subject to further specification by Notification No.7/2019 which lists specific registered recipients and categories where RCM from unregistered suppliers is applicable. The subject goods (scrap and used vehicles) are not notified under Notification No.7/2019 for RCM from unregistered suppliers. Consequently, purchases of the subject goods from unregistered dealers do not attract reverse charge liability and therefore the question of an exemption limit for such purchases does not arise. [Paras 4, 5]

There is no RCM liability for purchase of scrap and used vehicles from unregistered dealers; hence no exemption limit is applicable.

Final Conclusion: The Authority ruled that a composition dealer must pay GST on reverse charge when purchasing scrap/used vehicles from Central/State/UT or local authorities, whereas no reverse charge liability arises for purchases of such goods from unregistered dealers, and accordingly no exemption limit is attracted in respect of purchases from unregistered suppliers.

Composite supply of works contract - predominantly meant for use other than for commerce, industry or any other business or profession - public authority - Markets and Fairs (Eleventh Schedule, Article 243G) - eligibility for concessional rate under Notification No.11/2017 - entry 3(vi)(a)

Composite supply of works contract - The subject contract for construction of the Fish Market is a composite supply of works contract. - HELD THAT: - The Authority found that the contract involves construction of immovable property wherein transfer of property in goods is involved in execution of the contract and accordingly satisfies the definition of a works contract. The contract was therefore held to be a composite supply of works contract for GST classification purposes. [Paras 8]

Subject supply is a composite supply of works contract service.

Public authority - eligibility for concessional rate under Notification No.11/2017 - entry 3(vi)(a) - The supply is to a local authority/public authority and thus meets the recipient condition of entry 3(vi) of the Notification. - HELD THAT: - The Authority accepted that the service recipient, Panchayat Vibhag-Road and Building, Valsad District Panchayat, is a Panchayat and therefore a local authority. Reliance was placed on the statutory definition of public authority and the fact that the recipient is a governmental local body. This satisfies the requirement that the recipient be the Central Government, a State Government, a local authority, a governmental authority or a Government Entity as envisaged in the Notification. [Paras 8, 10]

Recipient qualifies as a local authority/public authority for the purpose of entry 3(vi).

Markets and Fairs (Eleventh Schedule, Article 243G) - predominantly meant for use other than for commerce, industry or any other business or profession - The Fish Market is predominantly meant for use other than for commerce, industry or any other business or profession because it falls under the Panchayat function of 'Markets and Fairs' and the activity is undertaken by the Panchayat as a public authority. - HELD THAT: - The Authority examined the Eleventh Schedule to the Constitution and noted that 'Markets and Fairs' (entry 22) is within the functions of Panchayats. It held that a 'Fish Market' is a market and thus falls under entry 22 rather than being subsumed under 'Fisheries' (entry 5). Having regard to the Explanation to Serial No.3(vi) (which excludes activities undertaken by governments or local authorities as public authorities from the definition of 'business'), the Authority concluded that construction of the Fish Market by the Panchayat is predominantly for use other than commerce, industry or any other business or profession. [Paras 11, 12, 13, 14]

Construction of the Fish Market is predominantly for non-business use as it is a 'Market' undertaken by the Panchayat in its capacity as a public authority.

Eligibility for concessional rate under Notification No.11/2017 - entry 3(vi)(a) - The subject supply qualifies for taxation at the concessional rate under Serial Number 3(vi)(a) of Notification No.11/2017 (as amended). - HELD THAT: - Applying the determinations that the supply is a composite works contract, that the recipient is a local authority/public authority, and that the structure is predominantly meant for non-business use, the Authority concluded that all criteria of Serial No.3(vi)(a) of the Notification are satisfied. Consequently, the work falls squarely within the notified entry which prescribes the concessional rate for such supplies to government/local authorities for civil structures predominantly meant for non-business use. [Paras 7, 8, 14, 15]

The subject supply is eligible for the concessional GST rate prescribed at Serial Number 3(vi)(a) of Notification No.11/2017.

Final Conclusion: The Advance Ruling holds that the construction contract for the Fish Market is a composite works contract supplied to a Panchayat (a local/public authority), that the Fish Market is a market falling under the Panchayat function of 'Markets and Fairs' and is predominantly for non-business use, and accordingly the supply is eligible for taxation at the concessional rate specified in Serial Number 3(vi)(a) of Notification No.11/2017 - i.e., 12% GST (6% CGST + 6% SGST).

Classification under HSN 2106 (Food preparations not elsewhere specified or included) - HSN sub heading 21069099 - Rejection of classification under HSN 1905 (unleavened breads ready for consumption) - 'Ready to eat' versus products requiring further processing for human consumption - General Rules for the Interpretation of the Harmonized System - Rule 3(c) - Inapplicability of concessional Entry No.99A of Schedule I (khakhra, plain chapatti or roti) - Application of Schedule III entries (Entry No.453 and Entry No.23) and levy at 18% GST

Classification under HSN 2106 (Food preparations not elsewhere specified or included) - HSN sub heading 21069099 - Rejection of classification under HSN 1905 (unleavened breads ready for consumption) - 'Ready to eat' versus products requiring further processing for human consumption - Paratha produced by the applicant is classifiable under HSN 21069099 and not under HSN 1905. - HELD THAT: - The Authority examined composition, packaging and cooking instructions and found the applicant's parathas require heating on a pan/griddle for 3-4 minutes as per packing instructions and are therefore not ready to eat products. Heading 1905 and its explanatory notes cover already prepared or cooked products that do not require further processing for consumption; khakhra/plain chapatti/roti are ready to eat and differ in composition and processing needs from the applicant's parathas. In view of these factual distinctions and the need for further processing, the products do not fall within heading 1905. Considering the nomenclature and General Rules, no specific heading describes 'paratha'; having found that the goods are food preparations requiring processing, the Authority held they fall under the residual heading 2106 and specifically under the tariff item 21069099. [Paras 15, 18]

Paratha merits classification at HSN 21069099 (heading 2106) and not under heading 1905.

General Rules for the Interpretation of the Harmonized System - Rule 3(c) - Classification by reference to headings which occur last in numerical order - Where no specific heading applies and the goods equally merit consideration under competing headings, Rule 3(c) supports classification under the heading occurring last in numerical order. - HELD THAT: - The Authority analysed Rules 1-3 of the General Rules for Interpretation. There was no specific tariff description for 'paratha' (Rule 1 and 2 inapplicable) and no applicable Rule 3(a) or 3(b) basis. Consequently, Rule 3(c) was applied, which directs classification under the heading that occurs last in numerical order among those equally meriting consideration; HSN 2106 thus prevailed over 1905 in the present factual matrix. [Paras 17, 18]

Rule 3(c) was applied to prefer HSN 2106 over HSN 1905 for the applicant's products.

Inapplicability of concessional Entry No.99A of Schedule I (khakhra, plain chapatti or roti) - 'Ready to eat' versus products requiring further processing for human consumption - Entry No.99A of Schedule I (concessional 5% GST for khakhra, plain chapatti or roti) does not apply to the applicant's parathas. - HELD THAT: - Entry No.99A grants a concessional rate only to goods classified at HSN 1905 or 2106 described as 'khakhra, plain chapatti or roti'. Although parathas are classifiable under 2106, the description 'khakhra, plain chapatti or roti' was not satisfied because those items are ready to eat products that do not require further processing, whereas the applicant's parathas require heating before consumption and differ in composition. Consequently, the concessional entry is not attracted. [Paras 20]

Entry No.99A of Schedule I is not applicable to the applicant's parathas.

Application of Schedule III entries (Entry No.453 and Entry No.23) and levy at 18% GST - Residual classification and applicable GST rate where no concessional entry applies - For the relevant periods, the applicant's parathas are covered under Schedule III entries and liable to GST at 18% (9% CGST + 9% SGST). - HELD THAT: - Because parathas are classifiable under heading 2106 and are not covered by the concessional description in Schedule I, they fall into the residual categories of Schedule III. For the period 1 7 17 to 14 11 17, the product is covered by Entry No.453 of Schedule III (goods not specified in Schedules I, II, IV, V or VI). With effect from 15 11 17, the amended Notification places the product under Entry No.23 of Schedule III (heading 2106: food preparations not elsewhere specified or included, subject to specified exclusions). In both periods the applicable rate is 18% (9% CGST + 9% SGST). [Paras 21, 22, 23]

Parathas are covered under Entry No.453 of Schedule III for 1 7 17 to 14 11 17 and under Entry No.23 of Schedule III with effect from 15 11 17, and are liable to GST at 18% (9% CGST + 9% SGST).

Final Conclusion: The Authority ruled that the applicant's parathas are not ready to eat unleavened breads under HSN 1905 but are food preparations classifiable at HSN 21069099. The concessional Entry No.99A (5%) for 'khakhra, plain chapatti or roti' does not apply. Consequently, the products fall under Schedule III entries and are taxable at 18% GST: under Entry No.453 for 1 7 17 to 14 11 17 and under Entry No.23 of Schedule III from 15 11 17 onwards.

Provisional attachment under section 83 of the CGST Act - requirement of pending adjudication proceedings for provisional attachment - provisional attachment made in absence of proceedings is ultra vires - defreezing of bank account upon setting aside of attachment - remedy under Rule 159(5) for revocation of attachment - precedential application of Radha Krishan Industries and divisional bench precedents

Provisional attachment under section 83 of the CGST Act - requirement of pending adjudication proceedings for provisional attachment - provisional attachment made in absence of proceedings is ultra vires - Validity of the order of provisional attachment dated 09/11/2020 when no proceedings under sections 62, 63, 64, 67, 73 or 74 of the Act were pending. - HELD THAT: - The Court found that no proceedings under sections 62, 63, 64, 67, 73 or 74 had been initiated against the petitioner. Reliance was placed on the Division Bench decision in M/s. S.S. Offshore Pvt. Ltd. and the Supreme Court decision in Radha Krishan Industries to hold that an order of provisional attachment under section 83 cannot be sustained in the absence of the jurisdictional fact of pending adjudication proceedings. Consequently, the provisional attachment was held to be in contravention of the legal principle established by those authorities and therefore ultra vires. [Paras 4, 5]

The order of provisional attachment dated 09/11/2020 is set aside and the attachment is quashed.

Remedy under Rule 159(5) for revocation of attachment - precedential application of divisional bench decisions - Whether the petitioner should be relegated to the statutory remedy under sub rule (5) of Rule 159 instead of obtaining relief in the writ petition. - HELD THAT: - The respondents' contention that the petitioner ought to proceed under Rule 159(5) was considered. The Court observed that the decision in M/s. Jaychem Enterprise Pvt. Ltd. was distinguishable because there the validity of an attachment made in the absence of pending proceedings was not in issue. Given the admitted absence of any initiated proceedings under the specified sections and the precedent relied upon, the Court did not regard relegation to Rule 159(5) as an adequate response to an attachment found to be ultra vires, and accordingly granted writ relief. [Paras 3, 4, 5]

Petitioners were not relegated to Rule 159(5); writ relief was granted and the attachment ordered to be revoked immediately.

Final Conclusion: Writ petition allowed; the provisional attachment dated 09/11/2020 quashed and the Assistant Commissioner directed to defreeze the petitioner's bank account immediately; respondents remain free to act in accordance with law.

Sanction for prosecution under Section 132(6) of the Central Goods and Services Tax Act, 2017 - Competence of Additional Director General to exercise powers of the Commissioner - Simultaneous initiation of adjudication and criminal prosecution under fiscal statutes - Requirement of prior determination of tax liability before initiation of prosecution - Cognizability and non-bailability of offences under Section 132

Sanction for prosecution under Section 132(6) of the Central Goods and Services Tax Act, 2017 - Competence of Additional Director General to exercise powers of the Commissioner - Validity of the sanction issued by the Additional Director General for prosecution under Section 132. - HELD THAT: - The Court examined whether the sanction for prosecution granted by the Additional Director General was by an authority competent to grant previous sanction required under Section 132(6). The record shows that the Government of India, Ministry of Finance, Department of Revenue, by notification, declared the Additional Director General, GST Intelligence (and related posts) to be equivalent to the Commissioner and authorised to exercise the powers of the Commissioner. Having regard to that notification and the material on record, the Court concluded that the sanction impugned was not a nullity for want of competence of the sanctioning authority. The objection that the sanction was unauthorised therefore did not warrant quashing of the complaint or summons. [Paras 13, 19]

Sanction by the Additional Director General was valid and the competence objection failed.

Simultaneous initiation of adjudication and criminal prosecution under fiscal statutes - Requirement of prior determination of tax liability before initiation of prosecution - Whether prosecution under Section 132 could be initiated without completion of adjudication/determination of tax liability and whether the complaint ought to be quashed on that ground. - HELD THAT: - The Court considered competing authorities addressing whether adjudication and prosecution must await each other. On the authorities relied upon by the parties and the statutory scheme, the Court accepted the position that under the GST scheme adjudication and criminal prosecution may be commenced simultaneously and that initiation of prosecution does not necessarily require completion of the adjudication process. Further, the Court noted that the complaint filed by the department already records assessment-related material (including claimed input tax credit reflected in GSTR-2A) and that summons had been issued and answered; consequently the submission that no assessment existed and therefore prosecution was premature was not established. Applying the legal principles articulated in the cited decisions, the Court found no ground to quash the complaint or summons merely because adjudication and prosecution were contemporaneous. [Paras 18, 19]

Prosecution could be validly initiated without prior completion of adjudication and the plea for quashing on that ground failed.

Final Conclusion: The application under Section 482 seeking quashing of the complaint and the order of cognizance/summons was dismissed; the sanction and the initiation of prosecution were held to be legally sustainable and did not warrant interference.

Validity of arrest following enquiry under Section 70 of the CGST Act, 2017 - Compliance with procedural requirements for arrest and enquiry under the CGST Act - Authorization for arrest and enforcement action - Admissibility and evidentiary weight of statements recorded during statutory enquiry - Grant of bail in presence of prima facie material

Validity of arrest following enquiry under Section 70 of the CGST Act, 2017 - Compliance with procedural requirements for arrest and enquiry under the CGST Act - Authorization for arrest and enforcement action - Lawfulness of the summons, enquiry and subsequent arrest of the petitioner under the CGST Act, 2017. - HELD THAT: - The Court found that summons were issued to the petitioner under Section 70 on 12.02.2021, an enquiry was conducted the same day and statements were recorded; following the enquiry an arrest memo was issued and the petitioner was remanded on 13.02.2021. The Special Public Prosecutor produced a copy of the authorization for the enquiry/arrest and the respondent maintained that mandatory procedures under the CGST Act were followed. The Court accepted that an opportunity had been afforded during the enquiry, that incriminating material emerged during that enquiry and that the arrest memo was issued by an authorised officer. The admissibility or ultimate validity of the recorded statement and involvement of the petitioner in the alleged offence were held to be matters for investigation and trial rather than for determination at the bail stage. [Paras 8, 9]

The procedures for summons, enquiry and arrest were not found to be violative of law and the contention of procedural illegality and lack of authorization was rejected.

Admissibility and evidentiary weight of statements recorded during statutory enquiry - Grant of bail in presence of prima facie material - Whether the petitioner was entitled to bail at this stage. - HELD THAT: - The learned counsel for the petitioner conceded that the case was registered based on a confession statement recorded during the enquiry. The Court reiterated that questions regarding admissibility and the truth of the statement, and whether the petitioner was involved in the alleged offences, are to be decided after investigation and in trial. At the bail stage the Court must examine whether there is prima facie material against the accused. Having found that the enquiry produced incriminating material and that the investigation is pending, the Court was not persuaded to exercise discretion in favour of bail. [Paras 9, 10]

Bail was refused and the petition dismissed.

Final Conclusion: Summons under Section 70 were held to have been followed by an enquiry and an authorised arrest; the Court found no procedural illegality in the steps taken and, since incriminating material emerged and investigation is pending, declined to grant bail.

Anticipatory bail - power to summon under Section 70 of the Central Goods and Services Tax Act, 2017 - custodial interrogation and arrest powers under the CGST scheme (including Section 69 and Section 132) - bogus invoicing and procurement of input tax credit - prima facie satisfaction for arrest to prevent tampering with evidence - requirement of assessment and proceedings under Sections 73/74 in relation to tax determination

Anticipatory bail - bogus invoicing and procurement of input tax credit - Anticipatory bail application of the applicant - HELD THAT: - The Court considered the material placed on record by the respondent that prima facie the applicant and his family members acted in connivance to procure invoices from two alleged dummy suppliers for the purpose of availing inadmissible input tax credit and export benefits. The Court noted that proprietors of the supplier firms denied conducting business or supplying goods, and statements recorded during investigation indicated creation and use of dummy units and bank accounts to facilitate the transactions. The applicant admitted partnership in four of the entities and the departmental record (including e-way bills and statements) showed substantial assessable value and unpaid amounts in respect of invoices alleged to be bogus. The Court found these circumstances sufficient to negativate the claim that all transactions were bona fide and to show complicity on the part of the applicant. On the basis of the foregoing, and on consideration of authorities cited by both parties, the Court concluded that custodial interrogation was necessary and that the case did not warrant grant of anticipatory bail. [Paras 11]

Anticipatory bail rejected.

Power to summon under Section 70 of the Central Goods and Services Tax Act, 2017 - custodial interrogation and arrest powers under the CGST scheme (including Section 69 and Section 132) - prima facie satisfaction for arrest to prevent tampering with evidence - requirement of assessment and proceedings under Sections 73/74 in relation to tax determination - Validity of summons issued under Section 70 CGST Act and the necessity of custodial interrogation/arrest powers under the CGST scheme - HELD THAT: - The Court upheld the lawfulness of the summons issued under Section 70 for production of documents and attendance, observing no infirmity in its issuance. The respondents contended, and the Court accepted as a factual conclusion, that the documents and statements on record gave rise to a reasonable belief that offences under Section 132 were committed and that custody might be required to prevent disappearance or tampering of evidence. The Court reviewed competing submissions that assessment under Sections 73/74 must precede action, but treated those submissions as arguments which do not negate the statutory arrest and investigative powers under the CGST Act. The Court referred to relevant High Court and Supreme Court precedents addressing the scope of arrest powers under the CGST scheme and the limited scope for protective relief via anticipatory bail where prima facie material supports custodial interrogation. [Paras 1, 6, 11]

Summons held lawful; custodial interrogation/arrest powers under the CGST scheme not displaced and may be exercised where prima facie material exists.

Final Conclusion: The application for anticipatory bail is rejected; the summons under Section 70 CGST Act is lawful and, on the material before the Court, custodial interrogation/arrest powers under the CGST scheme may be exercised, so no interim protection from arrest is granted.

Disallowance u/s 14A - Exempted Income - proportionate disallowance of interest paid by the banks for investments made in tax free bonds/ securities which yield tax free dividend and interest to assessee Banks - whether assessee had sufficient interest free own funds which were more than the investments made? - whether Section 14A, enables the Department to make disallowance on expenditure incurred for earning tax free income in cases where assessee like the present appellant, do not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income? -

HELD THAT:- Revenue does not contend that the Assessee Banks had held the securities for maintaining the Statutory Liquidity Ratio (SLR), as mentioned in the circular - when there is no finding that the investments of the Assessee are of the related category, tax implication would not arise against the appellants, from the said circular.

The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessees.

The above conclusion is reached because nexus has not been established between expenditure disallowed and earning of exempt income. The respondents as earlier noted, have failed to substantiate their argument that assessee was required to maintain separate accounts. Their reliance on Honda Siel [2011 (7) TMI 275 - SC ORDER] to project such an obligation on the assessee, is already negated. The learned counsel for the revenue has failed to refer to any statutory provision which obligate the assessee to maintain separate accounts which might justify proportionate disallowance - Decided in favour of the assessee.

Transfer of a capital asset to a firm by way of capital contribution - distinction between stock-in-trade and capital asset for capital gains - reason to believe for reopening assessment under Section 147 - notice under Section 148 to reopen assessment processed under Section 143(1) - borrowed satisfaction and requirement of independent application of mind - penetration of sham or device transactions to ascertain true nature of transfer

Reason to believe for reopening assessment under Section 147 - notice under Section 148 to reopen assessment processed under Section 143(1) - Validity of the notice issued under Section 148 read with Section 147 to reopen assessment for A.Y. 2015-16. - HELD THAT: - The Court examined whether the Assessing Officer had 'reason to believe' that income had escaped assessment, and whether the prerequisites of Section 147 were satisfied where the returns were processed under Section 143(1). The Court recalled the statutory test that AO must have cause or justification to suppose income has escaped assessment and that such reason need not amount to a final adjudication. Having reviewed the reasons recorded and the material available (including the partnership assessment order, absence of opening stock entries, ledger entries, VAT returns, and other documentary indicia), the Court concluded there was cogent material justifying initiation of proceedings under Section 147. Reliance on authorities holding that 'reason to believe' requires only cause or justification was applied. The Court also held that the fact that the firm's assessment was pending on appeal did not render the reasons invalid, and that the AO had applied his mind rather than merely borrowing satisfaction. Consequently the notice under Section 148 was held to be valid. [Paras 12, 14, 26, 28, 29]

Notice under Section 148 read with Section 147 to reopen assessment for A.Y. 2015-16 is valid and the reopening is justified.

Distinction between stock-in-trade and capital asset for capital gains - transfer of a capital asset to a firm by way of capital contribution - penetration of sham or device transactions to ascertain true nature of transfer - Whether the gifted gold brought into the partnership by the writ applicants constituted stock-in-trade (not chargeable under Section 45(3)) or a capital asset attracting Section 45(3). - HELD THAT: - The Court considered the writ applicants' contention that the gifted gold was stock-in-trade and therefore not a capital asset subject to Section 45(3). It noted the legal position from the cited Supreme Court authority that transfer of a personal capital asset to a firm may amount to a transfer under Section 45, but that tax authorities may probe whether the transfer is a genuine capital contribution or a device to evade tax. The Court examined the contemporaneous material: absence of opening stock entries, ledger and balance-sheet anomalies, late production of stock registers, VAT returns inconsistent with claimed trading turnover, family nature of gifts, and prior years' accounts not reflecting trading activity. On that factual matrix, the Court held that the question of whether the items were stock-in-trade or capital assets was open to scrutiny and that the AO was entitled to investigate under reassessment proceedings; the materials furnished furnished prima facie justification to treat the transactions as attracting Section 45(3) for purposes of reassessment. [Paras 22, 23, 24, 25, 27]

The factual and documentary indicia justified inquiry into whether the gifted gold was a capital asset attracting Section 45(3); the matter is open to scrutiny and not a basis to quash the reopening.

Borrowed satisfaction and requirement of independent application of mind - Whether the Assessing Officer's reasons for reopening were a mere 'borrowed satisfaction' from the firm's assessment order or reflected an independent application of mind. - HELD THAT: - The Court evaluated the contention that the AO had merely adopted findings from the firm's assessment and thus lacked independent satisfaction. It noted that while the AO referred to the firm's scrutiny order, he also considered independent material relating to the writ applicants (absence of opening stock entries in their books, lack of balance-sheet entries for the gift, inconsistencies in VAT returns, late disclosure of stock registers, and the family nature of the transfers). The Court concluded these considerations demonstrated application of mind beyond merely borrowing the firm's findings and amounted to tangible material justifying belief that income had escaped assessment. [Paras 3, 13, 23, 25, 26]

The AO did not act on mere borrowed satisfaction; there was independent application of mind supporting the reopening.

Final Conclusion: Writ applications challenging the notice dated 28.03.2018 under Section 148 read with Section 147 for A.Y. 2015-16 are dismissed; the reopening is held to be legally valid and the interim relief is vacated.

Transfer of income tax file - show-cause notice - opportunity to be heard - communication of order - production of record

Production of record - communication of order - Respondents must produce records showing the receipt and disposal of the petitioner's letters dated 18th September, 2019 and 3rd October, 2019 and whether any decision regarding transfer was communicated to the petitioner before effecting transfer. - HELD THAT: - The Court noted that a show-cause notice dated 5th September, 2019 was followed by the petitioner's letters of 18th September, 2019 and 3rd October, 2019 seeking time and requesting materials relied upon for transfer. The respondent's counsel was unable to state the fate of those representations. In view of the absence of clarity about whether the representations were considered or communicated to the petitioner prior to the transfer appearing on the portal, the Court directed the respondents to produce the relevant record demonstrating (a) receipt of the said letters, and (b) the decision, if any, on those letters and whether such decision or the formal order of transfer was communicated to the petitioner before the transfer was recorded on the portal. The Court confined itself to directing production of record for further consideration and did not adjudicate the merits of the transfer at this stage.

Respondents directed to produce the record showing receipt and disposal/communication relating to the petitioner's letters dated 18th September, 2019 and 3rd October, 2019 for further consideration.

Production of record - proof of service - Petitioner required to produce evidence of service of his letter dated 18th September, 2019. - HELD THAT: - Having regard to the respondent's contention that the petitioner's first reply may have been filed beyond the 14-day period specified in the show-cause notice and the respondent's inability to confirm receipt, the Court directed the petitioner to place on record sufficient documents to show how the letter dated 18th September, 2019 was sent or served on the respondents. This direction is for verification of service and to assist the respondents in producing the relevant disposal records; the Court did not determine the effect of any delay or the legal consequences of service/non-service at this stage.

Petitioner directed to produce sufficient proof of service of his letter dated 18th September, 2019.

Final Conclusion: The writ petition was taken up for preliminary inquiry: respondents directed to produce the relevant records concerning receipt, consideration and communication of the petitioner's representations and any formal order of transfer; petitioner directed to produce proof of service of his representation; matter listed for further consideration on 20th September, 2021.

Interim stay of criminal proceedings - Abuse of process - Timely filing under Section 139(4) of the Income Tax Act, 1961 - Prosecution under Section 276CC of the Income Tax Act, 1961 - Requirement of willful failure to file return for prosecution - Absence of penalty under Section 271(1)(a) as relevant to initiation of prosecution

Timely filing under Section 139(4) of the Income Tax Act, 1961 - Prosecution under Section 276CC of the Income Tax Act, 1961 - Absence of penalty under Section 271(1)(a) as relevant to initiation of prosecution - Abuse of process - Whether the complaint under Section 276CC could be allowed to proceed where the assessee filed the return within the extended time under Section 139(4) and no penalty under Section 271(1)(a) was imposed. - HELD THAT: - The court examined the record and found that the assessee filed the income-tax return for Assessment Year 2016-17 on 31.01.2018, within the time permitted by Section 139(4). The return was processed and accepted by the Income Tax Department. No penalty under Section 271(1)(a) was imposed. In light of these facts, and having regard to the statutory requirement that prosecution under Section 276CC is not to be allowed where there is no requisite willful failure to file the return and where the statutory conditions for prosecution are not satisfied, the complaint prima facie appears to be an abuse of the process of law. On these findings the applicant made out a case for interim relief pending fuller consideration on merits.

Interim stay granted of further proceedings in Criminal Case No.50 of 2019 insofar as they relate to the present applicant.

Interim stay of criminal proceedings - Requirement of willful failure to file return for prosecution - Whether the matter should be kept for further consideration on law and facts and the procedure to be followed in that regard. - HELD THAT: - The court recorded that the matter involves questions of law and fact which require fuller consideration. It directed that the opposite party may file a counter-affidavit within three weeks and the applicant may file a rejoinder within one week thereafter. The order stays further proceedings only in respect of the present applicant until the next date of listing, thereby preserving the interim position while remanding the substantive contest for adjudication on merits.

Matter listed for further hearing; counter and rejoinder to be filed in the specified time-frame and proceedings stayed in respect of the applicant until the next date of listing.

Final Conclusion: On the prima facie finding that the return was filed within the time permitted by Section 139(4), was accepted and no penalty under Section 271(1)(a) was imposed, the Court granted interim stay of the criminal proceedings under Section 276CC against the applicant and directed further pleadings and listing for fuller adjudication; the stay operates only in respect of the present applicant until the next date of hearing.

Interest on excess refund - Regular assessment (definition under Section 2(40)) - Reassessment under Section 147 - Explanation (1) and Explanation (2) to Section 234D - Retrospective application of tax provisions

Regular assessment (definition under Section 2(40)) - Reassessment under Section 147 - Interest on excess refund - Whether an assessment completed under Section 143(3) read with Section 147, when it is not an assessment made for the first time under Section 147, can be regarded as a 'regular assessment' for the purposes of Section 234D. - HELD THAT: - The Court examined the statutory definition of 'regular assessment' in Section 2(40) and the scheme of Section 234D. Explanations to Section 234D extend the meaning of 'regular assessment' to an assessment made for the first time under Section 147 or Section 153A, but do not convert a subsequent reassessment (i.e., one following an earlier assessment under Section 143(3)) into a 'regular assessment'. The assessment dated 26.12.2008 in this case was not a first-time assessment under Section 147 because an assessment under Section 143(3) had already been completed on 31.03.2004. Applying the settled authorities and the statutory scheme, the Court held that such reassessment cannot be treated as a 'regular assessment' for attracting Section 234D, and consequently interest under Section 234D cannot be levied in these circumstances. [Paras 8, 9, 22]

An assessment under Section 143(3) read with Section 147 which is not the first assessment under Section 147 cannot be regarded as a 'regular assessment' for the purposes of Section 234D; therefore Section 234D does not apply and interest cannot be levied.

Explanation (2) to Section 234D - Retrospective application of tax provisions - Interest on excess refund - Whether Explanation (2) to Section 234D, inserted with retrospective effect from 01.06.2003, renders Section 234D applicable to assessment years commencing before 01.06.2003 where proceedings are completed after that date, and the effect of that clarification on the present reassessment. - HELD THAT: - The Court noted that Explanation (2) was inserted to clarify legislative intent that Section 234D applies to any proceeding completed on or after 01.06.2003 irrespective of the assessment year. The Court observed that Explanation (2) cannot be read in isolation from the charging provision in sub-section (1) and from the remainder of Section 234D. While Explanation (2) extends temporal applicability, the substantive requirement that the refund become collectible on a 'regular assessment' remains. Here, although Explanation (2) and the retrospective amendment generally make Section 234D applicable to proceedings completed after 01.06.2003, the particular reassessment in this case does not satisfy the statutory condition of being a 'regular assessment' because an earlier regular assessment under Section 143(3) existed prior to 01.06.2003. Therefore, the retrospective insertion does not assist the Revenue to levy interest under Section 234D in these facts. [Paras 8, 19, 22]

Explanation (2) makes Section 234D temporally applicable to proceedings completed on or after 01.06.2003, but it does not override the requirement that the refund be rendered collectible on a 'regular assessment'; consequently, the retrospective amendment does not permit charging Section 234D interest in the present reassessment.

Final Conclusion: The Revenue's appeal is dismissed. The reassessment under Section 143(3) read with Section 147 dated 26.12.2008, not being an assessment made for the first time under Section 147, cannot be treated as a 'regular assessment' for the purposes of Section 234D; accordingly no interest under Section 234D is leviable for assessment year 2001-02.

Taxability of interest on securities on specified/due dates - application of third proviso to s.145(1) regarding taxation of interest on securities - treatment and allowability of loss on revaluation of securities as deductible loss/depreciation - reliance on precedential rulings applying uniform rule to banks regarding interest and revaluation losses

Taxability of interest on securities on specified/due dates - application of third proviso to s.145(1) regarding taxation of interest on securities - Addition on interest on securities for the assessment year 1990-91 is not liable to tax. - HELD THAT: - The Court followed earlier Division Bench authority which held that banks are taxable for interest on securities only on specified dates when such interest becomes due for payment. That reasoning, applying the third proviso to s.145(1) as it stood for the relevant years, was treated as determinative. The Tribunal's deletion of the addition was sustained on the basis that the interest was not taxable on a day-to-day accrual basis for the purposes of the Income-tax Act when the proviso prescribes taxation on specified dates. Having regard to the identical question decided in the assessee's own and other bank cases, no error was found in the Tribunal's conclusion. [Paras 5]

Tribunal's deletion of the addition on interest on securities for AY 1990-91 upheld; appeal dismissed on this point.

Treatment and allowability of loss on revaluation of securities as deductible loss/depreciation - reliance on precedential rulings applying uniform rule to banks regarding interest and revaluation losses - Loss on revaluation of securities for the assessment year 1991-92 was correctly treated as allowable (as trading loss/depreciation) and therefore deductible. - HELD THAT: - The Court accepted the Tribunal's view, consistent with prior Division Bench decisions, that where investments are made and the market value at the end of the year differs from the value shown in the opening balance, the notional diminution can be allowed as depreciation (or an allowable loss) for tax purposes. The ratio in the cited precedents was applied to the facts, and no infirmity was found in allowing the deduction for the revaluation loss. The Court therefore affirmed the Tribunal's allowance of the deduction. [Paras 5]

Tribunal's allowance of the loss on revaluation of securities for AY 1991-92 upheld; appeal dismissed on this point.

Final Conclusion: Following binding Division Bench precedents on identical questions, the appeals are dismissed and the substantial questions of law are answered against the Revenue; no costs.

Deductibility under Section 37 as business expenditure - interaction between deduction under Section 36(1)(iv) and prohibition in Section 40A(9) - recognised or approved provident/superannuation fund requirement - application of precedent in Kattabomman Transport Corporation to absorption of government employees - absence of tax-avoidance motive and intention in allowing deduction

Deductibility under Section 37 as business expenditure - interaction between deduction under Section 36(1)(iv) and prohibition in Section 40A(9) - recognised or approved provident/superannuation fund requirement - application of precedent in Kattabomman Transport Corporation to absorption of government employees - absence of tax-avoidance motive and intention in allowing deduction - Contribution made towards a superannuation/welfare fund created for absorbed former Port Department employees is allowable as business expenditure under Section 37 and the Tribunal's order allowing the deduction is to be confirmed. - HELD THAT: - The Court affirmed the Tribunal's decision following earlier decisions in the assessee's own cases and applying the principle in Kattabomman Transport Corporation. The facts show that a diminishing class of employees, formerly of the Port Department, were absorbed by the Board on an option that preserved their original service conditions including gratuity/pension; remittances were made into a separate fund created for their welfare. The assessee did not claim the fund to be an approved or recognised fund under the statutory definition applicable to Section 36(1)(iv). While it is settled that where deduction is barred under Section 36(1)(iv) read with Section 40A(9) a claimant cannot take refuge under the general provision of Section 37, that legal proposition does not decide the present case on identical facts. The Court relied on the absence of any allegation of device for tax-avoidance, the statutory intention as explained in Textool, and the factual background that remittances were made pursuant to governmental direction and the terms of absorption. On these facts the remittances formed part of business expenditure deductible under Section 37 and the Tribunal correctly allowed the claim; the revenue's attempts to distinguish precedent were rejected as the present facts were at least as favourable to the assessee as in Kattabomman Transport Corporation. Consequently the substantial questions of law were answered against the revenue and in favour of the assessee. [Paras 9, 11, 13, 14, 15]

Tribunal's allowance of the contribution as deductible business expenditure under Section 37 is upheld and the revenue's appeal is dismissed.

Final Conclusion: The High Court dismissed the revenue's appeal, upholding the Tribunal's order and confirming that the contribution to the employees' welfare/superannuation fund was allowable as business expenditure under Section 37 on the facts of the case.

Explanation under section 68 - Onus of assessee to prove identity, genuineness and creditworthiness - Limits of Assessing Officer's inquiry under section 68 vis-a -vis section 106 of the Evidence Act - Adverse inference from non-appearance of creditors - Assessing Officer's duty to investigate and, if necessary, assess the creditors - Prospective application of amendment to section 68

Onus of assessee to prove identity, genuineness and creditworthiness - Limits of Assessing Officer's inquiry under section 68 vis-a -vis section 106 of the Evidence Act - Explanation under section 68 - Whether the assessee discharged the onus under section 68 in respect of share capital/share premium received and whether the addition under section 68 was sustainable. - HELD THAT: - The Tribunal examined the materials placed on record by the assessee (share application forms, ROC filings, PAN copies, audited financials and bank statements of the subscribers, ITRs, evidence of allotment and payment by account payee cheques) and applied the settled principle that an assessee must prima facie establish the identity of creditors and the genuineness and creditworthiness of the transactions vis a vis the assessee. The Bench noted that section 68 permits the AO to treat unexplained credits as income only if the explanation is unsatisfactory and that the burden placed on the assessee is confined by section 106 of the Evidence Act so that the assessee is not obliged to prove matters solely within the special knowledge of third party creditors or their sub creditors. Relying on precedents, the Tribunal held that once identity and receipt by account payee cheques are established and the creditors are incomes tax assessee(s) with returns and balance sheet entries for the investments, the onus shifts to the AO to disprove the credibility of those documents or to proceed against the creditors themselves. In the instant case the Tribunal found that the assessee had produced cogent documentary evidence of identity, source and genuineness of the funds and that the AO failed to undertake independent investigation or proceedings against the creditors to displace those records. Consequently the addition could not be sustained on mere inferences drawn from circumstances or non appearance of directors before the AO. [Paras 13, 14, 15, 16, 17]

Assessee discharged the onus under section 68; addition under section 68 deleted.

Adverse inference from non-appearance of creditors - Assessing Officer's duty to investigate and, if necessary, assess the creditors - Whether the Assessing Officer was justified in making addition on the basis that notices could not be served and directors of subscribing companies did not appear, and whether amounts relating to an earlier year were correctly included. - HELD THAT: - The Tribunal reiterated that mere non compliance with summons or non appearance of creditors before the AO is not, without more, a ground to treat the credits as non genuine where the assessee has established identity and payment by account payee cheques. The proper course for the Department, where it doubts the source or creditworthiness of creditors, is to pursue enquiries or proceedings in the hands of those creditors. Separately, on the factual matrix the Tribunal examined the year wise bifurcation of share application money and observed that a substantial portion of the amounts related to AY 2011 12 and were not within the subject matter of assessment for AY 2012 13; accordingly the AO erred in including amounts pertaining to AY 2011 12 in the AY 2012 13 assessment under section 68. [Paras 10, 13, 15, 17]

AO was not justified in drawing adverse inference solely from non appearance; the proper course was to investigate creditors; addition to the extent relating to AY 2011 12 was erroneous and the addition was deleted.

Final Conclusion: On the facts and in law the Tribunal held that the assessee had satisfactorily established identity, genuineness and creditworthiness of the share subscribers for the sums in issue, that the AO failed to discharge the obligation to investigate or proceed against the creditors, and that amounts relating to AY 2011 12 were wrongly included in AY 2012 13; accordingly the addition under section 68 is deleted and the appeal is allowed.

Admissibility of additional evidence under Rule 46A of the Income Tax Rules, 1962 - power of the Appellate Authority to admit additional evidence and direct further inquiry in the interest of justice - power of the Tribunal to admit additional evidence under Section 254 read with Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 - substantial justice as a ground for admission of additional evidence - remand for fresh consideration versus appellate admission of evidence

Admissibility of additional evidence under Rule 46A of the Income Tax Rules, 1962 - substantial justice as a ground for admission of additional evidence - remand for fresh consideration versus appellate admission of evidence - Admissibility and consideration of the additional documents/evidence filed by the assessee before the Commissioner (Appeals). - HELD THAT: - The Tribunal examined the scope of Rule 46A and the Tribunal's power under Section 254 read with Rule 29 of the ITAT Rules to deal with additional evidence. While noting the general principle that evidence available at the assessment stage should ordinarily be produced then, the Tribunal found that the documents now placed on record were necessary for adjudication, that allowing them would not prejudice the Revenue whereas refusal would prejudice the assessee, and that principles of substantial justice favoured admission. The Tribunal therefore directed that the Commissioner (Appeals) admit the additional evidence, afford the assessee a reasonable opportunity of hearing and decide the appeal afresh. The Tribunal treated remand/consideration by the CIT(A) as appropriate in the circumstances rather than permitting final disposal without examination of the material. This conclusion was reached after balancing the nature of the material, the remand report from the AO indicating verifiability of facts, and the absence of prejudice to the Revenue. [Paras 6, 7]

Grounds Nos. 1 and 2 allowed; ld. CIT(A) directed to admit the additional evidence, provide reasonable opportunity of hearing and decide the appeal afresh.

Final Conclusion: The Tribunal allowed the appeal for statistical purposes by permitting the admission of additional evidence under Rule 46A and directing the Commissioner (Appeals) to admit and consider that evidence and decide the appeal afresh after affording the assessee a reasonable opportunity of hearing; other grounds were left open for fresh adjudication.

Protective assessment - assessment in the hands of HUF versus individual assessee - computation of full value of consideration on transfer under a joint development agreement - deduction under section 54F

Protective assessment - assessment in the hands of HUF versus individual assessee - Whether protective assessment of long term capital gain in the hands of the assessee was justified in the absence of a substantive assessment in the hands of the HUF - HELD THAT: - The Tribunal held that a protective assessment in the assessee's hands cannot be finally sustained without a prior or concurrent substantive adjudication in the hands of the HUF. The AO had recorded a protective assessment while reserving the right to tax the HUF substantively, but no substantive assessment order for the HUF preceded or accompanied the protective action. Given that the characterisation of the property (individual share vis-a -vis HUF property) and the primary liability may be determinative of whether the assessee or the HUF is chargeable, a protective order alone would have no operative effect. Accordingly, the Tribunal concluded that the matter of levy in the assessee's hands must be reconsidered after the outcome of the substantive proceedings, and remanded the question to the AO for fresh examination in the light of any assessment action concerning the HUF. [Paras 13]

Remanded to the AO for de novo consideration of the question of assessment (protective versus substantive) having regard to any substantive assessment in the hands of the HUF.

Computation of full value of consideration on transfer under a joint development agreement - deduction under section 54F - Computation of capital gains (including determination of full value of consideration) and claim for deduction under section 54F - HELD THAT: - The Tribunal directed that all issues relating to computation of capital gain - including the proper measure of full value of consideration in the context of a joint development agreement and the entitlement to deduction under section 54F - shall be re-examined afresh by the AO. This re-examination is to be undertaken de novo and will depend on the outcome of the proceedings in the case of the HUF; consequently the AO must reconsider valuation of constructed area or other heads of consideration and the application of section 54F (including the effect of acquisition of more than one flat) in light of the determinations made regarding whether the capital gain arises in the hands of the assessee or the HUF. [Paras 13]

Remanded to the AO to recompute capital gain and decide the claim under section 54F de novo, dependent on the outcome of the HUF proceedings.

Final Conclusion: The Tribunal set aside the assessment order and remitted the matters to the AO for fresh adjudication: (i) the question whether the capital gain is assessable in the HUF or in the individual assessee's hands; and (ii) all consequential computations including determination of full value of consideration and the claim under section 54F, to be considered de novo in the light of any substantive assessment in the HUF; appeal treated as allowed for statistical purposes.

Income from house property versus profits and gains of business or profession - Commercial exploitation of property / mall operation as an integrated business - Service charges and common area maintenance as elements of business revenue - Consistency of treatment across assessment years and precedential value of Tribunal orders - Deductibility of business expenditure and depreciation where income is business income

Income from house property versus profits and gains of business or profession - Commercial exploitation of property / mall operation as an integrated business - Service charges and common area maintenance as elements of business revenue - Consistency of treatment across assessment years and precedential value of Tribunal orders - Consideration received from letting out commercial space in the mall is to be treated as profits and gains from business or profession and not as income from house property. - HELD THAT: - The Tribunal found that the assessee's activities of operating the mall constitute a complex, integrated business in which leasing, mall operating revenue, common area maintenance charges and ancillary services (security, electrification, cleanliness, parking, etc.) form part of a single business model for commercial exploitation of the property. The Tribunal relied on its consistent prior decisions in the assessee's own cases for earlier assessment years, and observed no material change in facts for the year under appeal. In that context the thread of integrated services and the commercial objective of operating the mall determine the character of receipts as business income rather than mere rent; the fact that tenants may treat charges as rent or deduct tax under section 194-I does not alone decide taxability in the hands of the recipient. Having regard to these findings and the absence of distinguishing facts urged by the Revenue, the Tribunal directed the Assessing Officer to treat the impugned receipts as business income. [Paras 5, 9]

Income from the mall operations to be assessed under profits and gains of business or profession.

Deductibility of business expenditure and depreciation - Consequential relief upon reclassification of income - Deduction of business expenditure and depreciation is allowable against the income after it is treated as income from business or profession. - HELD THAT: - Having reclassified the receipts as business income, the Tribunal held that expenditure relating to business operations and depreciation on fixed assets must be considered in that light. The issue was decided as a consequence of the primary finding on characterisation of income, and the Tribunal directed that such deductions be allowed by the Assessing Officer. [Paras 6]

Business expenditure and depreciation to be allowed in computation of business income.

Final Conclusion: The appeal is partly allowed: the receipts from letting and mall operations for Asstt.Year 2014-15 are to be treated as profits and gains of business or profession and, accordingly, related business expenditure and depreciation are to be allowed. The Assessing Officer is directed to give effect to this view.

Allowability of business expenditure as wholly and exclusively incurred for the purpose of business - proviso to Section 37(1) - expenditure prohibited by law - CBDT Circular No.5/2012 - scope and retrospective application - treatment of disallowance in computing Chapter VI A deduction (deduction under Section 80IC) - disallowance under Section 14A read with Rule 8D - computation of disallowance - direct expenses directly relatable to exempt income (Rule 8D(2)(i)) - disallowance of interest under Rule 8D(2)(ii) - availability of interest free (own) funds - other expenses disallowance under Rule 8D(2)(iii) - average value of investments limited to investments yielding exempt income

Allowability of business expenditure as wholly and exclusively incurred for the purpose of business - proviso to Section 37(1) - expenditure prohibited by law - CBDT Circular No.5/2012 - scope and retrospective application - treatment of disallowance in computing Chapter VI A deduction (deduction under Section 80IC) - Whether sales promotion, advertisement and publicity expenses incurred by the assessee are allowable under the Act and whether disallowance based on CBDT Circular No.5/2012 and consequent recomputation of deduction under Section 80IC was justified. - HELD THAT: - The Tribunal held that sales promotion, advertisement and publicity expenses, incurred by the assessee in the course of its manufacture and sale of pharmaceutical products and not impugned as not genuine, are expenditures incurred wholly and exclusively for the purpose of business and therefore allowable. The proviso to Section 37(1) applies only where the law or regulation prohibiting the expenditure is applicable to the assessee; the Indian Medical Council Regulations apply to medical practitioners and not to pharmaceutical manufacturers, and the CBDT Circular No.5/2012 cannot be used to enlarge the scope of a different regulation so as to impose a retrospective burden on the assessee. Further, the Circular is prospective in effect from 01.08.2012 and is not applicable to the relevant assessment year. The Tribunal also followed precedent and CBDT clarification that disallowances which enhance profits should be considered in computing Chapter VI A deductions; accordingly the Assessing Officer erred in reducing the Section 80IC deduction by the same sales promotion amount, which would result in double disallowance.

Addition disallowing sales promotion, advertisement and publicity expenses deleted; deduction under Section 80IC to be allowed without reducing it by the disallowed sales promotion expenses.

Disallowance under Section 14A read with Rule 8D - computation of disallowance - direct expenses directly relatable to exempt income (Rule 8D(2)(i)) - Whether the Assessing Officer was justified in disallowing direct expenses attributable to earning exempt income under Rule 8D(2)(i). - HELD THAT: - The Tribunal accepted the finding of the Assessing Officer that certain expenditures were directly relatable to the earning of exempt dividend income and thus fall squarely within Rule 8D(2)(i). Where the authorities have recorded a categorical finding of direct nexus between the expenditure and exempt income, such expenditure must be disallowed under Rule 8D(2)(i). The principle distinguishing cases where the assessee has not made a suo motu disallowance was applied; Rule 8D procedure is available to the AO in that situation.

Disallowance of direct expenses relatable to exempt income under Rule 8D(2)(i) upheld.

Disallowance of interest under Rule 8D(2)(ii) - availability of interest free (own) funds - Whether interest expense should be disallowed under Rule 8D(2)(ii) where the assessee claims availability of interest free own funds in excess of investments yielding exempt income. - HELD THAT: - The Tribunal noted settled jurisprudence that where a taxpayer has mixed funds, a presumption may favour treatment of investments as financed from interest free own funds; consequently availability of interest free funds is a relevant factor in computing disallowance under Rule 8D(2)(ii). The Commissioner (Appeals) had directed verification of the assessee's claim of interest free funds and remitted the matter to the Assessing Officer to determine disallowance on that basis. The Tribunal found this approach proper and remitted the question of disallowance of interest to the file of the AO for determination after examining the availability of interest free funds.

Issue of disallowance of interest under Rule 8D(2)(ii) remitted to the Assessing Officer for verification of availability of interest free (own) funds and recomputation accordingly.

Other expenses disallowance under Rule 8D(2)(iii) - average value of investments limited to investments yielding exempt income - Whether other expenses should be disallowed under Rule 8D(2)(iii) and whether investments not yielding exempt income must be excluded in computing the average value of investments. - HELD THAT: - Because the assessee had not made any suo motu disallowance, the AO was required to apply the formula in Rule 8D(2)(iii) to compute 'other expenses' disallowable at the prescribed rate. The Tribunal applied binding authority that only investments which yielded exempt income in the relevant assessment year are to be included in computing the average value of investments for the purpose of Rule 8D(2)(iii). The AO was directed to compute other expenses disallowable at the prescribed percentage on the average value computed after excluding investments that did not yield exempt income in the year under consideration.

Disallowance under Rule 8D(2)(iii) sustained, but AO directed to compute the average value of investments including only those investments that yielded exempt income for the relevant assessment year.

Final Conclusion: The assessee's appeal is partly allowed and the Revenue's appeal is dismissed. Sales promotion and publicity expenditures were held allowable and Section 80IC deduction is to be recomputed without reducing for those expenditures; disallowances under Rule 8D(2)(i) and (iii) are sustained subject to the limited directions given, while disallowance of interest under Rule 8D(2)(ii) is remitted to the Assessing Officer for determination after verifying availability of interest free funds.

Condonation of delay - Exemption under section 10(38) - Unexplained cash credit under section 68 - Burden of proof to link a taxpayer to an organised racket - Adverse inference from designation of a scrip as a penny stock - Doctrine of res inter alios acta

Condonation of delay - Petition for condonation of delay in filing appeal for assessment year 2012-13 - HELD THAT: - The assessee filed a petition to condone an 18 day delay in filing the appeal, explaining that the delay arose from an incorrect date recorded in Form 36 relating to receipt of the CIT(A)'s order. The Tribunal examined the explanation and the submissions of both parties. It held that the reasons furnished by the assessee constituted a reasonable cause within the meaning of the Act and were sufficient in the interests of substantial justice to excuse the short delay. The Tribunal therefore exercised its discretion to admit the appeal for adjudication.

Delay of 18 days in filing appeal for assessment year 2012-13 is condoned and the appeal is admitted.

Exemption under section 10(38) - Unexplained cash credit under section 68 - Burden of proof to link a taxpayer to an organised racket - Adverse inference from designation of a scrip as a penny stock - Doctrine of res inter alios acta - Whether long term capital gains claimed as exempt under section 10(38) could be treated as unexplained cash credit under section 68 by linking the assessee to a racket in penny stocks (assessment years 2012-13 and 2013-14) - HELD THAT: - The Tribunal accepted as undisputed that the assessee purchased and sold the shares on recognized stock exchanges and that consideration was paid and received through banking channels, with contract notes and bank statements on record. The AO and CIT(A) relied on the company's weak financials, dramatic rise in scrip price and departmental investigations which labelled the scrip a penny stock, and on the broker's adverse regulatory history, to treat the receipts as unexplained cash credit under section 68. The Tribunal held that adverse features relating to the scrip or the broker alone do not suffice to displace the genuineness of the assessee's transaction. To classify exempted long term capital gain as unexplained cash credit, the revenue must demonstrate a nexus between the assessee's transactions and an organised scheme to generate bogus gains; mere suspicion, surmise or analysis of the issuer's financials is inadequate. The Tribunal also observed that there was no corroborative evidence that the assessee participated in rigging or was part of the alleged racket, and that the assessee's broader trading activity in other scripts (Demat account) rebutted the finding of an isolated, suspicious deal. On these findings the Tribunal disagreed with the AO/CIT(A)'s conclusion and directed deletion of the additions made under section 68.

Additions treating the sale proceeds as unexplained cash credit under section 68 are deleted; the claims of exemption under section 10(38) are to be accepted for the assessment years in issue.

Final Conclusion: The Tribunal condoned the short delay in filing the appeal for assessment year 2012-13 and, on merits for both assessment years 2012-13 and 2013-14, reversed the authorities below by holding that departmental findings about the scrip and broker did not, without corroborative evidence linking the assessee to an organised racket, justify treating claimed exempt long term capital gains as unexplained cash credit under section 68; appeals are allowed.

Deemed dividend under section 2(22)(e) - commercial/trade advances outside ambit of section 2(22)(e) - allowability of belated employees' contribution to PF & ESI as deduction under section 36(1)(va) read with section 43B(b) - precedential value of High Court and Tribunal decisions and CBDT clarification on trade advances

Deemed dividend under section 2(22)(e) - commercial/trade advances outside ambit of section 2(22)(e) - Whether amounts paid by the assessee on behalf of a related concern and debited to that concern's account are exigible as deemed dividend in the hands of the assessee under section 2(22)(e) of the Act. - HELD THAT: - The Tribunal found that section 2(22)(e) applies where a company makes loans or advances to its shareholders (or persons in whom shareholders have beneficial interest) and such loans constitute deemed dividend in the hands of those shareholders to the extent of accumulated profits. The payments in issue were made by the assessee pursuant to a contract-manufacturing/commercial understanding with the related concern, were debited to that concern's account and subsequently adjusted against receivables. If the transactions were loans or advances, the deeming fiction would apply in the hands of the related concern/shareholder and not in the hands of the payer-company. The transactions were held to be normal commercial/trade advances for job work and therefore outside the scope of deemed dividend under section 2(22)(e)

Additions under section 2(22)(e) in the hands of the assessee were not sustainable and were correctly deleted by the CIT(A).

Allowability of belated employees' contribution to PF & ESI as deduction under section 36(1)(va) read with section 43B(b) - precedential value of High Court and Tribunal decisions and CBDT clarification on trade advances - Whether belated payment of employees' contribution to PF and ESI, made after the due date under the respective Acts but before the due date of filing the return under the Income Tax Act, is allowable as a deduction. - HELD THAT: - The Tribunal observed that multiple High Courts, including the Madras High Court in CIT v. Industrial Security & Intelligence India Pvt. Ltd., and the Supreme Court (by dismissal of SLP in the Rajasthan State Beverages Corporation matter) have held that employees' contributions deposited after the statutory due date but on or before the due date of filing the income-tax return are allowable. The CBDT circular relied upon by Revenue addresses employer's contribution and therefore does not negatethe allowability of employees' contributions. Applying this settled precedent and reasoning, the Tribunal held that the Assessing Officer erred in disallowing the belated employees' contributions to PF & ESI and that the CIT(A) correctly deleted that addition. [Paras 12]

Belated payment of employees' contribution to PF & ESI made before filing the return is allowable; the disallowance was rightly deleted by the CIT(A).

Final Conclusion: Both impugned additions - (i) deemed dividend under section 2(22)(e) in the hands of the assessee and (ii) disallowance of belated employees' contribution to PF & ESI - were correctly deleted by the CIT(A); the Revenue's appeal is dismissed.

Deduction/exemption under section 54F - Registered sale deed value versus actual consideration - Proof of payment by bank instruments and seller's confirmation under section 133(6) - Cost of improvement-acceptance of explained source of funds

Deduction/exemption under section 54F - Registered sale deed value versus actual consideration - Proof of payment by bank instruments and seller's confirmation under section 133(6) - Whether the assessee is entitled to claim exemption under section 54F for the full consideration of Rs. 58,00,000 paid for purchase of new residential house despite the registered sale deed recording a lower consideration. - HELD THAT: - The Tribunal found on the material on record that the assessee had entered into an agreement and sale deed dated 06.02.2012 recording an agreed consideration of Rs. 58 lakhs, paid the entire consideration by cheque/demand draft, and that the seller responded to notice under section 133(6) confirming the sale at Rs. 58 lakhs. Bank statements of the seller corroborated receipt by cheque. Under these facts the Tribunal held that the genuineness of the transaction could not be doubted merely because the registered deed recorded a lesser amount; consequently the AO and CIT(A) erred in restricting the exemption to the value shown in the registered sale deed and disallowing Rs. 30 lakhs of the claim. The Tribunal directed deletion of the addition made by the AO in respect of disallowance under section 54F. [Paras 6]

Addition of Rs. 30 lakhs disallowing exemption under section 54F is deleted and the exemption is allowed for the full consideration of Rs. 58 lakhs.

Cost of improvement-acceptance of explained source of funds - Whether the assessee's claimed cost of improvement of Rs. 3,50,000 (comprising Rs. 3,00,000 bank loan and Rs. 50,000 own savings) should be allowed in full. - HELD THAT: - The assessee explained that Rs. 3 lakhs was financed by Canara Bank and the balance Rs. 50,000 was met from her salary savings. The AO accepted the genuineness of the expenditure but restricted the cost to the bank finance of Rs. 3 lakhs for want of proof of source for the remaining Rs. 50,000. The Tribunal observed that the AO gave no valid reason to reject the explanation of past savings, noted the normal banking practice and the assessee's employment with the bank, and held that the source for the balance amount was satisfactorily explained. The CIT(A)'s confirmation of the AO's restriction was therefore reversed and the full cost of improvement was directed to be allowed. [Paras 9]

Cost of improvement of Rs. 3,50,000 is allowed in full as claimed by the assessee.

Final Conclusion: The Tribunal allowed the appeal: deletion of the addition disallowing exemption under section 54F for Rs. 30 lakhs and direction to allow the claimed cost of improvement of Rs. 3,50,000; appeal allowed.