TaxTMI Updates e-Newsletter
Nov 18,2020

Supply in terms of Section 7(1)(a) of the CGST Act, 2017 - Business including provision by a club, association or society of facilities or benefits to its members (Section 2(17)(e)) - Consideration in terms of Section 2(31) of the CGST Act, 2017 - Principle of Mutuality - Advance Ruling jurisdiction under Section 97(2) Clause (e) - Definition of person to include association of persons

Business including provision by a club, association or society of facilities or benefits to its members (Section 2(17)(e)) - Supply in terms of Section 7(1)(a) of the CGST Act, 2017 - Whether the activities undertaken by the Appellant constitute 'business' under Section 2(17)(e) and thereby amount to 'supply' under Section 7(1)(a) attracting GST - HELD THAT: - The Appellate Authority examined the society's bye law objects (management, maintenance, administration, social/cultural activities and raising funds) and held these activities are directed to providing facilities, benefits or convenience to members. Clause (e) of Section 2(17) expressly brings provision of facilities or benefits by a club/association/society to its members (for subscription or other consideration) within the meaning of 'business'. The definition of 'service' and the wide scope of 'supply' under Section 7(1) were applied to conclude that the society performs services for its members for consideration named as 'society charges'. The Authority distinguished earlier decisions under erstwhile sales tax/service tax regimes (including the Calcutta Club line of cases) on the ground that CGST's definitions of 'person', 'business' and 'supply' are wider and deliberately include supplies by incorporated and unincorporated clubs to their members, thereby displacing the common law principle of mutuality in the GST context. Consequently, the activities were held to be 'business' and to amount to 'supply' liable to GST, subject to applicable exemption thresholds. [Paras 10, 14, 18, 26]

Activities of the Appellant amount to 'business' under Section 2(17)(e) and constitute 'supply' under Section 7(1)(a), and are liable to GST (subject to the notification limits)

Consideration in terms of Section 2(31) of the CGST Act, 2017 - Supply in terms of Section 7(1)(a) of the CGST Act, 2017 - Whether the contribution / society charges collected from members constitute 'consideration' under Section 2(31) - HELD THAT: - The Authority found that the amounts collected as 'society charges' are paid for services and benefits rendered by the society (maintenance, payment of statutory dues for common areas, organisation of activities etc.), and therefore qualify as 'consideration' within the meaning of Section 2(31). The mandatory or obligatory nature of the contributions did not alter their character as consideration. On this basis, the charges were held to support a finding of taxable supply. [Paras 13, 14, 20, 26]

Society charges constitute 'consideration' under Section 2(31) and support the conclusion that a taxable supply is made

Advance Ruling jurisdiction under Section 97(2) Clause (e) - Whether the Appellant's second question on correctness/quantification of GST liability in illustrative invoices is answerable by an Advance Ruling under Section 97(2) - HELD THAT: - The Authority agreed with the MAAR that Clause (e) of Section 97(2) permits determination of the liability to pay tax (i.e., whether a supply is taxable) but does not extend to quantification, computation or methodology of tax liability on particular invoices. Therefore, the specific query about correctness of GST discharged on illustrative invoices fell outside the scope of matters that may be answered in an advance ruling. [Paras 24, 26]

The question on correctness/quantification of GST liability on illustrative invoices is outside the scope of Advance Ruling under Section 97(2) and cannot be answered

Final Conclusion: The Appellate Authority affirms the MAAR ruling: the society's activities constitute 'business' under Section 2(17)(e), the charges collected are 'consideration' under Section 2(31), and such activities amount to 'supply' under Section 7(1)(a) and are liable to GST, subject to the Notification exemption (monthly contribution up to Rs. 7,500 per member and aggregate turnover threshold). The request to rule on the correctness/quantification of GST on illustrative invoices is not answerable in an advance ruling.

Compulsory audit under Section 142(2A) - opportunity of hearing under Section 142(2A) - nature and complexity of accounts - volume and multiplicity of transactions - interest of revenue - scope of hearing under Section 142(2A) - special audit

Compulsory audit under Section 142(2A) - opportunity of hearing under Section 142(2A) - scope of hearing under Section 142(2A) - nature and complexity of accounts - Validity of the direction to refer the petitioner for compulsory audit under Section 142(2A) on the ground that no effective opportunity of hearing was afforded to the petitioner. - HELD THAT: - The record shows that scrutiny proceedings under Section 143 were pending and notices under Section 143(2) and Section 142(1) had been issued with specific queries regarding discrepancies in receipts, investments, sale consideration, expenses and refunds. A questionnaire under Section 142(1) was replied to but the Assessing Officer found the books not maintained accurately and the accounts complex and bulky. Before directing a special audit, the Assessing Officer issued a specific notice dated 27.12.2019 (fixing compliance on 30.12.2019) calling for explanation and expressly stating that this was an opportunity of hearing and inviting reasons why the case should not be referred for special audit under Section 142(2A). The Court relied on the principle in Rajesh Kumar v. Dy. CIT that the hearing required under Section 142(2A) need not be elaborate and that brief reasons and notice suffices so long as the principles of natural justice are complied with. In the present case the Assessing Officer recorded reasons linked to the nature, volume and complexity of accounts and the interest of revenue, and afforded the petitioner a hearing opportunity before issuing the direction for special audit. On these facts, the exercise of power under Section 142(2A) was not shown to be vitiated for want of an effective hearing. [Paras 4, 5, 6, 7, 8]

Direction for compulsory special audit under Section 142(2A) sustained; challenge for lack of effective hearing rejected.

Final Conclusion: Writ petition dismissed; no interference with the Assessing Officer's direction for special audit under Section 142(2A) for AY 2017-18.

Perversity of factual findings - reconciliation of seized cash with audited balance sheet - proof of ownership of seized cash - double taxation - appellate interference under Section 260A of the Income Tax Act

Perversity of factual findings - proof of ownership of seized cash - Tribunal's treatment of the plea that the books were open on the date of search and that the cash was reconciled later. - HELD THAT: - The court found that the tribunal had examined the question and recorded that the assessee failed to produce material to show that the cash seized belonged to M/s S.S.Tours and Travels. The tribunal had put the assessee to proof and noted absence of any substantive explanation before it. The High Court held that the finding is a pure finding of fact and, in the absence of any demonstration of perversity, no interference under Section 260A was warranted. The court therefore answered the substantial question against the assessee. [Paras 8, 9]

Finding that the books being 'open' and later reconciliation did not establish ownership of the seized cash is a factual conclusion which is not perverse; no interference.

Reconciliation of seized cash with audited balance sheet - proof of ownership of seized cash - Whether the tribunal was correct in ignoring that the balance sheet was audited which had reconciled the cash seized during search. - HELD THAT: - The tribunal enquired whether the income had been offered to tax earlier and noted that the assessee did not produce documentary material to substantiate that the seized cash was reconciled in the audited accounts of M/s S.S.Tours and Travels. The High Court observed that absence of such material before the tribunal justified its approach. Since the matter involves evaluation of evidence and there was no shown perversity in the tribunal's conclusion, the court declined to disturb the factual finding. [Paras 8, 9]

Tribunal was entitled to treat the audited balance-sheet reconciliation as unproven in absence of supporting material; the finding is not perverse.

Double taxation - appellate interference under Section 260A of the Income Tax Act - Whether sustaining the addition was incorrect when the appellant had contended that the cash found had been reconciled and taxed elsewhere (double taxation). - HELD THAT: - The tribunal specifically asked whether the income had been offered to tax in the hands of the other entity and whether tax had been paid; the assessee failed to establish that the amount had earlier been assessed and taxed so as to give rise to a double taxation bar. The High Court held that, absent evidence of prior assessment and taxation, the Assessing Officer's addition stood justified on facts. As this is a factual conclusion not shown to be perverse, the court refused to interfere. [Paras 8, 9]

No double taxation established on record; sustaining of the addition on the factual matrix is upheld.

Final Conclusion: The substantial questions of law framed at admission are answered against the assessee; the tribunal's factual findings that the assessee failed to prove ownership or prior taxation of the seized cash are not perverse, and the appeal is dismissed.

Minimum Alternate Tax - deduction under Section 36(1)(viii) of the Act - deduction for prudential bad debt provision under Section 36(1)(vii) - depreciation claimed on Held to Maturity investments - disallowance under Section 14A of the Act - meaning of "financial corporation" and "public company" for eligibility

Minimum Alternate Tax - Liability of banking companies to tax under the Minimum Alternate Tax regime - HELD THAT: - The Court recorded that the first substantial question of law - whether banking companies are liable to Minimum Alternate Tax under the provisions cited - had already been answered against the revenue by a Bench of this Court in ITA No.18/2014 by order dated 16.01.2020. The proposition was therefore treated as concluded in favour of the assessee and against the revenue, and no fresh determination was made in the present appeal.

Answered against the revenue and in favour of the assessee.

Deduction for prudential bad debt provision under Section 36(1)(vii) - Permissibility of claiming deduction for provision for bad debts (prudential write-off) where no contemporaneous write-off was debited to the profit and loss account - HELD THAT: - The Court noted that the second substantial question had already been decided against the revenue by a Bench of this Court in ITA No.1066/2008 by order dated 21.10.2014. Relying on that precedent, the Court treated the question as concluded in favour of the assessee and did not re-open the matter.

Answered against the revenue and in favour of the assessee.

Depreciation claimed on Held to Maturity investments - Entitlement to claim depreciation on investments classified as 'Held to Maturity' despite being notional and contrary to RBI valuation guidelines - HELD THAT: - The Court observed that the third substantial question had been decided against the revenue by reference to the decision in KARNATAKA BANK LTD. v. ASSISTANT COMMISSIONER OF INCOME-TAX, and the revenue did not dispute that precedent. On that basis the Court treated the issue as concluded in favour of the assessee.

Answered against the revenue and in favour of the assessee.

Deduction under Section 36(1)(viii) of the Act - meaning of "financial corporation" and "public company" for eligibility - Whether the assessee (a banking company) was eligible for deduction under Section 36(1)(viii) of the Act for the Assessment Year 2007-08 - HELD THAT: - The Court examined the text of Section 36(1)(viii) as it stood for the relevant period and noted that the clause allowed deduction in respect of a special reserve created and maintained by a "financial corporation" engaged in providing long-term finance, with the Explanation stating that "financial corporation" shall include a public company and a Government company, and that "public company" and "Government company" have the meanings assigned in Sections 3 and 617 of the Companies Act, 1956 respectively. The Court found that the assessee, Vijaya Bank, was not a private company, fulfilled the requirements of Section 3 to be a public company, and, given that 51% of its shares were held by the Government of India, also fell within the definition of a Government company under Section 617. Accordingly, the assessee fell within the definition of "financial corporation" for the purposes of clause (viii) and was therefore entitled to the deduction under Section 36(1)(viii) for the Assessment Year in question.

Assessee entitled to the deduction under Section 36(1)(viii); question answered against the revenue and in favour of the assessee.

Disallowance under Section 14A of the Act - Validity of deletion of disallowance made under Section 14A - HELD THAT: - The Court recorded that the fifth substantial question had been decided against the revenue by a Bench of this Court in ITA No.97/2010 and connected matters by judgment dated 17.01.2020. On that basis the Court treated the Tribunal's deletion of the Section 14A disallowance as upheld in favour of the assessee.

Answered against the revenue and in favour of the assessee.

Final Conclusion: All substantial questions of law raised in the appeal were answered against the revenue and in favour of the assessee; consequently the revenue's appeal fails and is dismissed for Assessment Year 2007-08.

Direct Tax Vivad Se Vishwas Act, 2020 - declaration under Section 4 - disposal of proceedings as infructuous - processing of declaration and determination of amount payable - liberty to restore appeals without condonation of delay - substantial question of law left open

Declaration under Section 4 - disposal of proceedings as infructuous - Tax appeals disposed of on the ground that the assessee had filed a declaration under the Direct Tax Vivad Se Vishwas Act, 2020. - HELD THAT: - The Court noted that the assessee filed declarations under Section 4 of the Direct Tax Vivad Se Vishwas Act, 2020. In view of the statutory scheme which permits a declarant to end tax disputes by filing such declaration and having the amount determined under Section 3, the Court held that no useful purpose would be served by keeping these appeals pending and accordingly disposed of the tax case appeals on that ground. The Court expressly left the substantial questions of law open in light of this procedural voluntary resolution under the statute. [Paras 6, 7, 8]

Appeals disposed as the assessee had filed declarations under the Act; substantial questions left open.

Processing of declaration and determination of amount payable - Direct Tax Vivad Se Vishwas Act, 2020 - Direction to the Department to process the declaration and communicate its decision in accordance with the Act. - HELD THAT: - Relying on the provisions of the Direct Tax Vivad Se Vishwas Act, 2020 (including the mechanism in Section 3 for determination of amount payable and the procedure under Section 4 and Section 5), the Court directed the Revenue to process the declarations filed by the assessee at the earliest and to communicate the decision to the assessee promptly. The order emphasises implementation of the statutory procedure rather than adjudication on the substantial questions framed in the appeals. [Paras 3, 4, 5, 7]

Department directed to process the declaration and communicate its decision in accordance with the Act.

Liberty to restore - liberty to restore appeals without condonation of delay - Assessee granted liberty to restore the appeals if the decision on the declarations is adverse, without requirement to seek condonation of delay. - HELD THAT: - The Court safeguarded the assessee's interests by permitting restoration of the appeals in the event the ultimate decision on the declarations is not in the assessee's favour. The Registry was directed to entertain a Miscellaneous Petition for restoration and to place it before the Division Bench without insisting upon any separate application for condonation of delay. This preserves the parties' appellate rights pending final outcome under the settlement statute. [Paras 7]

Liberty granted to restore the appeals if the declaration's outcome is adverse; restoration to be entertained without condonation proceedings.

Final Conclusion: The High Court disposed of the tax appeals as the assessee had filed declarations under the Direct Tax Vivad Se Vishwas Act, 2020, directed the Department to process and communicate its decision under the Act, left the substantial questions of law open, and granted the assessee liberty to restore the appeals without condonation of delay if the declarations are finally adjudicated against it.

Vivad Se Vishwas Scheme - declaration under Section 4 of the Direct Tax Vivad Se Vishwas Act, 2020 - determination of amount payable under Section 3 - immunity from initiation of proceedings and imposition of penalty - liberty to restore appeal - condonation of delay not required for restoration

Vivad Se Vishwas Scheme - declaration under Section 4 of the Direct Tax Vivad Se Vishwas Act, 2020 - determination of amount payable under Section 3 - Direction to permit the assessee to file a declaration under the Act and for the competent authority to process it expeditiously. - HELD THAT: - The Court noted that the assessee intends to avail the scheme and observed that the Direct Tax Vivad Se Vishwas Act, 2020 provides a mechanism for determining the amount payable on filing a declaration, along with related provisions for payment, immunity and exclusions. In light of these subsequent statutory developments, the Court directed the appellant to file Form No. I by the specified date and required the designated authority to process the declaration in accordance with the Act. The Court framed no adjudication on the merits of the Substantial Questions of Law, instead providing a statutory route for resolution under the Act and ordering expeditious consideration of the declaration. [Paras 3, 4, 5, 8]

Assessee directed to file Form No. I on or before the specified date and the competent authority directed to process the declaration in accordance with the Act as expeditiously as possible, preferably within six weeks of filing.

Liberty to restore appeal - condonation of delay not required for restoration - Grant of liberty to restore the appeal if the outcome of the declaration is not in the assessee's favour, without insisting on condonation of delay. - HELD THAT: - The Court provided that, should the declaration under the Act result unfavourably to the assessee, the assessee may seek restoration of the present appeal. The Registry was directed to entertain such a Miscellaneous Petition for Restoration and place it before the Division Bench without insisting upon an application for condonation of delay. The Court expressly left the Substantial Questions of Law open, refraining from any adjudication on those questions. [Paras 7, 9]

Liberty granted to the assessee to restore the appeal if the declaration's result is unfavourable; restoration to be considered without insistence on condonation of delay and the substantial questions of law left open.

Final Conclusion: The tax appeal is disposed of by permitting the assessee to file a declaration under the Direct Tax Vivad Se Vishwas Act, 2020 to seek settlement; the competent authority is directed to process it expeditiously and the assessee is granted liberty to restore the appeal without requirement of condonation of delay if the declaration's outcome is adverse; the substantial questions of law remain undecided.

Proviso to Section 2(15) - commercial activity versus charitable purpose - charitable purpose - general public utility - no profit-no loss basis - state-controlled statutory body - entitlement to exemption under Section 11 - question of fact as to nature, scope and frequency of activity

Proviso to Section 2(15) - commercial activity versus charitable purpose - state-controlled statutory body - charitable purpose - entitlement to exemption under Section 11 - no profit-no loss basis - Whether the Proviso to Section 2(15) of the Income-tax Act applies to the assessee, a statutory board constituted under the KIAD Act, or whether its activities amount to charitable purpose enabling exemption under Section 11. - HELD THAT: - The Court upheld the Tribunal's finding that the Board is a State-established and State-controlled statutory body constituted to promote orderly establishment and development of industries under the KIAD Act, functioning under pervasive Government control. The Tribunal's factual conclusion - that the Board's primary and dominant object is not profit-making, that it operates on a 'no profit-no loss' basis, and that its activities advance an object of general public utility - was reached after evaluating statutory provisions (including powers and obligations under the KIAD Act), the composition of income (significant interest income and expenditure components), and the manner of operations (land acquired by Government and handed to the Board for development). Those findings were neither shown to be perverse nor displaced by the Revenue. The Court also noted consistency of this view with decisions of several High Courts. On that factual and legal matrix, the Proviso to Section 2(15) was held not applicable and the assessee entitled to claim exemption under Section 11, subject to fulfillment of other statutory conditions not disputed by the Assessing Officer. [Paras 7, 8, 9]

The Proviso to Section 2(15) does not apply to the assessee; the Board's activities are charitable in nature and it is entitled to the benefits of Section 11.

Final Conclusion: The substantial question of law is answered against the Revenue. The Tribunal's conclusion that the Proviso to Section 2(15) is not attracted to the assessee is upheld; the appeal is dismissed.

Applicability of amended Section 153C prospective effect - Jurisdiction under Section 153C - "belongs" versus "pertains/relates to" - Assessment under Section 153A to be founded on incriminating material seized from the searched person's premises - Limitation for block/search assessments - execution/conclusion of last authorisation and effect of prohibitory orders under Section 132(3) - Reopening under Section 147 - requirement of independent "reason to believe" and prohibition of borrowed satisfaction - Scope of reassessment under Section 147 - 'such income' and 'any other income' must be read conjunctively - Notional interest on advances to partners - optionality under partnership deed and year-of-taxation principle - CBDT Circular No.17 of 2019 - dismissal of Revenue appeals below revised monetary threshold

Applicability of amended Section 153C prospective effect - Jurisdiction under Section 153C - "belongs" versus "pertains/relates to" - Validity of proceedings initiated under Section 153C in respect of searches conducted before 1.6.2015 where the Assessing Officer's satisfaction recorded that seized documents "relate/pertain" to the assessee but did not record that the documents "belong" to the assessee. - HELD THAT: - The Tribunal applied the Gujarat High Court's decision in Anil Kumar Gopikishna Agrawal v. ACIT and concluded that the amendment to section 153C (w.e.f. 01.06.2015) which substituted 'pertain/relate' for 'belong' is prospective and cannot be applied to searches conducted prior to 01.06.2015. For searches before that date jurisdiction under section 153C required that seized money/valuables or books/documents 'belong' to a person other than the searched person; mere entries or information in documents found at the searched premises that 'relate to' the third person are insufficient to invoke pre-amendment section 153C. The Assessing Officer's satisfaction notes in the lead matters recorded only that documents contained information which "relates to" the third parties and not that they belonged to them; accordingly assessments made under section 153C on that basis were quashed. The Tribunal allowed the preliminary ground and set aside assessment orders in the identified appeals (serial nos.1-43). [Paras 15, 16, 19, 23]

Proceedings/assessments under Section 153C founded only on a satisfaction that documents 'relate/pertain to' an assessee are invalid where the search occurred before 01.06.2015; affected assessment orders (serial nos.1-43) quashed.

Assessment under Section 153A to be founded on incriminating material seized from the searched person's premises - Whether additions in assessments completed under Section 153A may be based on material seized from premises of other persons (third parties) or on post-search information from unrelated searches/investigations. - HELD THAT: - Relying on binding and jurisdictional precedents (including the Gujarat and Delhi High Court line of authorities), the Tribunal held that assessment under section 153A must be connected with incriminating material seized during the search of the particular assessee's premises; material recovered from searches of other persons or information from unrelated third party investigations cannot be used to make additions under section 153A. The Tribunal examined the assessment orders and the AO's basis of additions for Rajesh Sunderdas Vaswani, Deepak Budharmal Vaswani and Sanjeet Motors Finance P. Ltd., and found that, except for a jewellery recovery from the assessee's own premises in Deepak's A.Y. 2015-16, the additions were not based on incriminating material seized from the respective assessees' premises. Accordingly those additions (as identified in the chart and discussed in the order) were disallowed or the appeals were partly allowed; the solitary jewellery addition for Deepak in A.Y.2015-16 was sustained. [Paras 24, 29, 31, 39]

Assessments under Section 153A must be based on incriminating material seized at the searched assessee's premises; additions predicated on material from other premises or unrelated investigations are not sustainable (assessees' appeals partly allowed; Deepak's A.Y.2015 16 jewellery addition confirmed).

Limitation for block/search assessments - execution/conclusion of last authorisation and effect of prohibitory orders under Section 132(3) - Whether the time limit for completing assessments under the search provisions (Section 153B) is extended by prohibitory orders under Section 132(3) and when the 'last authorisation' is deemed executed for computing limitation. - HELD THAT: - The Tribunal reviewed Section 153B(1)-(2), the Explanation to earlier provisions, and a line of authorities (including Karnataka, Delhi, Kerala and Bombay High Courts, and Supreme Court precedents). It held that the period of limitation for search/block assessments begins on the conclusion of the search as evidenced by the last panchnama drawn for the executed authorisation. Prohibitory orders under Section 132(3) cannot be used to prolong the search so as to extend the starting point for limitation unless the statutory conditions for such orders are satisfied and properly recorded; where the exercise of Section 132(3) was not justified or no materials were recovered on revocation, the prohibitory order is invalid and cannot extend limitation. On the facts, several prohibitory orders in these matters were held invalid (no practicable reason shown or no recovery on revocation), the search was concluded in March 2015, and assessments framed after the expiry of the statutory period (two years from end of FY 2014 15) were time barred; those assessments were quashed as indicated in the order. [Paras 52, 53, 62, 65, 66]

Limitation for assessments under Section 153B runs from the conclusion of the search as recorded in the last panchnama; invalid use of Section 132(3) orders does not extend limitation - affected assessments beyond the statutory period are quashed.

Reopening under Section 147 - requirement of independent "reason to believe" and prohibition of borrowed satisfaction - Scope of reassessment under Section 147 - 'such income' and 'any other income' must be read conjunctively - Validity of reopening assessments under Section 147/148 in A.Y. 2008 09 where the Assessing Officer's 'reasons to believe' relied on investigation/search reports without independent application of mind; and whether additions made in reassessment survive where the original basis for reopening is not sustained. - HELD THAT: - The Tribunal analysed the requirements for recording 'reason to believe' and reiterated that information from investigation/search teams does not, by itself, constitute a 'reason to believe' unless processed and independently considered by the AO; borrowed satisfaction is impermissible. On the facts of the lead matter (ITA No.456/Ahd/2019 - A.Y.2008 09) the AO's reasons reproduced investigation material without demonstrating how that material established escapement of income or non disclosure by the assessee; the AO had therefore not applied independent mind and issued notice on borrowed satisfaction. Further, the Tribunal examined the link between the reasons recorded and the actual additions made: where the additions in the final assessment did not correspond to the 'such income' forming the basis of the notice, the reassessment could not be sustained. Applying these principles the Tribunal quashed the reassessment(s) under Section 147/148 for the relevant matters and treated related revenue appeals as infructuous. [Paras 88, 94, 98, 101, 103]

Reopenings based on unprocessed third party/investigation material (borrowed satisfaction) are invalid; where the AO did not independently form reason to believe or where the final additions do not match the basis recorded, reassessment under Section 147/148 is quashed (lead A.Y.2008 09 reassessment set aside).

Notional interest on advances to partners - optionality under partnership deed and year-of-taxation principle - Validity of addition of notional interest (treated as income) in A.Y.2015 16 in M/s Venus Infrabuild for interest not charged to partners on earlier years' debit balances. - HELD THAT: - The Tribunal examined the partnership deed clause and found that charging interest on partners' debit balances was by mutual understanding and not mandatory. The Assessing Officer's notional addition in A.Y.2015 16 (78.18% of interest which the AO asserted should have been charged in prior years) was not sustainable; if any adjustment was appropriate it belonged to the respective earlier years (A.Y.2012 13 and A.Y.2013 14). Following applicable precedent and the partnership deed terms, the Tribunal disallowed the notional interest addition and directed deletion of the addition confirmed by the lower authority. [Paras 121, 126, 127, 128]

Notional interest on partner advances cannot be levied in A.Y.2015 16 where charging interest was optional under the partnership deed; the addition is deleted (appeal partly allowed).

CBDT Circular No.17 of 2019 - dismissal of Revenue appeals with low tax effect - Maintainability of Revenue appeals in light of CBDT Circular No.17 of 2019 revising the monetary threshold for pursuing appeals. - HELD THAT: - The Tribunal applied CBDT Circular No.17/2019 and, where the disputed tax effect did not exceed the revised threshold (stated in the order), dismissed the Revenue's appeals as not maintainable, while leaving open restoration where the Revenue could show inapplicability of the Circular. [Paras 109, 110]

Revenue appeals with tax effect below the revised threshold under CBDT Circular No.17/2019 dismissed as not maintainable; restoration may be sought by Revenue on appropriate showing.

Final Conclusion: The Tribunal (ITAT Ahmedabad) disposed of the consolidated appeals by: quashing assessments issued under Section 153C that relied on the post amendment 'pertains/relates to' test for searches conducted before 01.06.2015; holding that assessments under Section 153A must be founded on incriminating material seized from the searched assessee's premises (disallowing additions based on material from other premises except a confirmed jewellery recovery); declaring that invalid use of Section132(3) prohibitory orders cannot extend limitation for block assessments (time barred orders were quashed where applicable); quashing reassessments under Section 147/148 founded on borrowed satisfaction and where additions did not correspond to the reasons recorded; deleting the notional interest addition in respect of partner advances where charging interest was optional under the partnership deed; and dismissing certain Revenue appeals under CBDT Circular No.17/2019 for low tax effect. Appeals were disposed as detailed in the body of the order.

Income from business or profession versus Income from House Property - Revisionary powers under Section 263 of the Income tax Act - Rule of consistency in assessment treatment - Relevance of Memorandum of Association and ancillary object clause - Allowability of business expenses and depreciation during a temporary lull in trading

Income from business or profession versus Income from House Property - Revisionary powers under Section 263 of the Income tax Act - Rule of consistency in assessment treatment - Relevance of Memorandum of Association and ancillary object clause - Whether the assessment order treating rental receipts as business income was an erroneous order prejudicial to the interest of the Revenue so as to justify exercise of powers under Section 263 - HELD THAT: - The Tribunal examined whether the Assessing Officer's view - that the rental receipts were assessable as business income - was a possible view sustainable in law and supported by material on record. The AO had issued questionnaires, considered replies and documents, and had consistently treated the receipts as business income in earlier years. The Memorandum of Association, including ancillary Clause 19 authorising leasing, supported characterization of letting as an authorised business activity. Supreme Court precedents (Chennai Properties; Rayala Corporation) and the rule of consistency were applied to hold that the AO's view was tenable. Section 263 can be invoked only where the AO's order is erroneous and prejudicial; where two views are possible and the AO adopts one view permissible in law, the order is not erroneous merely because the Commissioner prefers another view. Applying these principles, the Tribunal held that the AO's conclusion was a possible view and not unsustainable in law, and therefore the Pr. CIT's revision under Section 263 was not justified. [Paras 8]

The order under Section 263 setting aside the assessment on the ground that rental receipts should be treated as income from house property is quashed; the AO's treatment as business income was a possible view and not erroneous or prejudicial to Revenue.

Allowability of business expenses and depreciation during a temporary lull in trading - Distinction between lull/temporary non realisation of stock in trade and discontinuation of business - Whether the disallowance of depreciation and business expenses by treating the assessee as not being in business during the year was justified - HELD THAT: - The Tribunal considered the assessee's explanation that stock in trade remained unsold due to market lull and that business was not discontinued. Reliance was placed on authorities recognising the difference between a temporary lull and cessation of business; expenses and depreciation incurred for business purposes remain allowable if business has not been closed. The Pr. CIT's reliance on calculations that disallowed depreciation and vehicle expenses (thereby asserting a profit if assessed under house property) was found to be based on incorrect treatment. Given the continuous treatment in earlier years and the absence of closure of business, the expenses and depreciation claimed were allowable in principle and the Pr. CIT was not justified in disallowing them to conclude that the AO's order was prejudicial to Revenue. [Paras 4, 8]

Disallowance of depreciation and business expenses on the ground of alleged absence of business was not justified; the AO's allowance was not rendered erroneous so as to warrant revision under Section 263.

Final Conclusion: The Tribunal allowed the appeal, quashed the Pr. CIT's order under Section 263 for AY 2014-2015, and upheld the Assessing Officer's treatment of the rental receipts as business income and the allowance of business expenses and depreciation, the AO's view being a tenable view in law.

Disallowance under section 40A(3) for cash payments - exceptions under Rule 6DD - business expediency and genuineness of transactions - identification of payee and proof of source of payment - onus under section 68 in relation to unsecured loans - effect of non-response to summons issued under section 133(6)

Disallowance under section 40A(3) for cash payments - exceptions under Rule 6DD - business expediency and genuineness of transactions - identification of payee and proof of source of payment - Deletion of addition made under section 40A(3) in respect of cash payments for purchase of immovable property - HELD THAT: - The Tribunal found that identity of the sellers was established by registered sale deeds and that the source of cash payments was demonstrated from withdrawals from the assessee's bank accounts and entries in regular books of account; the Assessing Officer did not allege use of unaccounted money. In respect of the first transaction the seller resided in a village without banking facilities (supported by a Sarpanch certificate and affidavit) and the registry date fell on a Sunday (bank holiday), and in the second transaction a small cash advance was made at seller's insistence to secure the deal while remainder was paid by cheque. Applying the legal principle that section 40A(3) must be read with Rule 6DD and that considerations of business expediency and genuineness can exempt a transaction from disallowance, the Tribunal held that the facts satisfied the test of business expediency and genuineness and that invoking the rigours of section 40A(3) was not justified. [Paras 5, 6, 7]

Addition of Rs. 30,60,000 made under section 40A(3) deleted.

Onus under section 68 in relation to unsecured loans - effect of non-response to summons issued under section 133(6) - identification of payee and proof of source of payment - Deletion of addition made under section 68 in respect of certain unsecured loans treated as unexplained - HELD THAT: - The assessee furnished confirmations containing names, addresses and PANs, evidence of receipt through banking channels, ledger entries, details of interest and TDS and the summons under section 133(6) were duly served; most creditors replied and only four creditors (aggregate Rs. 9,00,000) did not respond. The AO accepted similar documentation in respect of other lenders and did not record any adverse material to discredit the confirmations. In these circumstances the Tribunal applied the principle that once the assessee discharges the initial onus under section 68, the AO must produce material to discredit it and that mere non receipt of replies to summons (where notices were served and addresses not shown to be false) does not warrant an adverse inference. [Paras 13, 14]

Addition of Rs. 9,00,000 treated as unexplained loans set aside.

Final Conclusion: The appeal is allowed: the addition of Rs. 30,60,000 under section 40A(3) is deleted and the addition of Rs. 9,00,000 in respect of unsecured loans is set aside for AY 2013-14.

Disallowance under Section 40(a)(i) - Obligation to deduct tax at source under Section 195 - Principle: Section 195 applies only to sums chargeable to tax - Commission for procuring export orders vs. fees for technical services - Permanent establishment and situs of rendering of services - Disallowance under Section 14A read with Rule 8D(2)

Disallowance under Section 40(a)(i) - Obligation to deduct tax at source under Section 195 - Principle: Section 195 applies only to sums chargeable to tax - Commission for procuring export orders vs. fees for technical services - Permanent establishment and situs of rendering of services - Deletion of disallowance under Section 40(a)(i) in respect of export commissions paid to non-resident overseas agents was justified. - HELD THAT: - The Tribunal upheld the CIT(A)'s finding that the overseas agents rendered services outside India, did not have a permanent establishment or fixed place of business in India, and the commission payments related to procuring export orders or facilitating imports. Applying the principle in GE India Technology Centre (supra) and decisions of various High Courts, the obligation to deduct tax under Section 195 arises only if the payment is a 'sum chargeable under the Act.' Where no part of the commission is chargeable to tax in India (services performed and paid for abroad, no PE, and covered by applicable DTAA positions), Section 195(2) and a certificate for nil/ lower deduction are not triggered and non-deduction does not attract disallowance under Section 40(a)(i). The Tribunal examined the agency agreements and factual matrix and concluded the payments were order-specific commission (not fees for technical services) and thus not taxable in India; accordingly the disallowance was correctly deleted. [Paras 3, 4, 5, 6, 7]

Appeal dismissed; deletion of disallowance under Section 40(a)(i) upheld.

Disallowance under Section 14A read with Rule 8D(2) - Exemption from taxability of investment income - Deletion of disallowance under Section 14A r.w. Rule 8D(2) was justified because no exempt income was earned during the year. - HELD THAT: - The Tribunal agreed with the CIT(A) that where no exempt income has been earned in the relevant year, the statutory disallowance under Section 14A (and the computation mechanism under Rule 8D(2)) does not arise. On the facts, the assessee had not earned any exempt income from investments in the year under consideration and therefore no disallowance was warranted. The Tribunal found no infirmity in the appellate authority's order granting relief. [Paras 8, 9]

Appeal dismissed; deletion of disallowance under Section 14A r.w. Rule 8D(2) upheld.

Final Conclusion: Both appeals filed by the Revenue for AY 2013-14 and AY 2014-15 were dismissed: the Tribunal affirmed deletion of the disallowance under Section 40(a)(i) (read with Section 195) in respect of export commission paid to non-resident overseas agents, and affirmed deletion of the disallowance under Section 14A r.w. Rule 8D(2) as no exempt income was earned.

Taxability of fees for certification by foreign entity - application of DTAA and definition of "fees for technical services" - disallowance under section 40(a)(i) for failure to deduct tax at source - deductibility of provision for sales incentive made on a scientific basis - requirement of notice for enhancement of addition under the appellate procedure - computation of deduction under section 80-IC and treatment of earlier years' losses - effect of deeming fiction treating eligible unit as separate source for deduction - characterisation of foreign exchange gain on repatriation as capital or revenue - application of section 45 to transfers in foreign currency and Rule 115 conversion - allowability of education cess as deduction despite non filing of revised return - remand for factual verification of claimed adjustment on written back bad debt

Taxability of fees for certification by foreign entity - application of DTAA and definition of "fees for technical services" - disallowance under section 40(a)(i) for failure to deduct tax at source - Disallowance of certification/testing fees of Rs. 5,68,856 under section 40(a)(i) for failure to deduct tax at source - HELD THAT: - The Tribunal found the facts identical to its earlier orders in the assessee's own case for AYs 2006-07 and 2007-08 where payments to the same foreign certifying entity were held not to be taxable as "Fees for Technical Services" under the India-Netherlands DTAA. The assessee made the payments for mandatory export certification and bona fide believed tax was not deductible at source. On identical facts, the Tribunal held the payment cannot be brought to tax in India under the relevant treaty and therefore the disallowance under section 40(a)(i) was not sustainable. [Paras 5]

Disallowance under section 40(a)(i) deleted; grounds 1, 1.1 and 1.2 allowed.

Deductibility of provision for sales incentive made on a scientific basis - requirement of notice for enhancement of addition under the appellate procedure - Disallowance and subsequent enhancement of provision for Shahenshah Sales Incentive Scheme - HELD THAT: - The Tribunal found the facts in the year under appeal identical to earlier assessment years in which it had held the provision was made on a scientific basis and therefore allowable. The CIT(A) had not only confirmed the assessing officer's disallowance but had enhanced the addition without issuing the statutory show cause notice under section 251. In view of the Tribunal's precedent in the assessee's own case and the procedural lapse in enhancement, the disallowance and the enhancement were held unsustainable. [Paras 8]

Disallowance and enhancement set aside; Grounds 2, 2.1, 2.2, 2.3, 2.4 and 2.5 allowed.

Computation of deduction under section 80-IC and treatment of earlier years' losses - effect of deeming fiction treating eligible unit as separate source for deduction - Notional adjustment of earlier years' losses of eligible units while computing deduction under section 80 IC - HELD THAT: - The Tribunal held that where losses of earlier years pertaining to eligible units had already been set off against profits of other (non eligible) units in those earlier years, there is no legal basis to notionally bring those absorbed losses forward again for the purpose of computing deduction under section 80 IC. The deeming fiction that treats an eligible unit as a separate source is limited to computing the quantum of deduction and does not override the general scheme for set off and carry forward of losses in Chapters governing taxable income. Precedents applying the same principle were held applicable, and the assessing officer's notional set off was therefore held to be incorrect. [Paras 11]

Notional adjustment deleted; Grounds 3 and 3.1 allowed.

Characterisation of foreign exchange gain on repatriation as capital or revenue - application of section 45 to transfers in foreign currency and Rule 115 conversion - Taxation of foreign exchange gain on remittance on redemption of shares in foreign subsidiary - HELD THAT: - The Tribunal accepted that the shares were redeemed at par in the same foreign currency in which they were acquired, so that there was no capital gain in the foreign currency. Capital gain must be computed in the foreign currency and then converted to INR under Rule 115; since the capital gain in foreign currency was nil, the rupee equivalent is nil. The exchange gain arose on repatriation (a separate event) and, on the facts, was a capital accretion not chargeable as income under section 45. Applying authorities on characterisation of exchange gains, the Tribunal held that the assessing officer erred in treating the repatriation related exchange gain as taxable income. [Paras 14]

Addition on account of foreign exchange gain deleted; Grounds 4 and 4.1 allowed.

Allowability of education cess as deduction despite non filing of revised return - Claim for deduction of education cess and secondary higher education cess though not claimed in the original return - HELD THAT: - The Tribunal distinguished the Supreme Court decision relied upon by the revenue and accepted that education cess is a distinct statutory levy and that the claim, though not made by filing a revised return, could be entertained on appeal. The Tribunal followed the view that the claim for deduction of education cess is allowable for computation of taxable income and that Goetze (India) Ltd. does not preclude the appellate authority from entertaining the claim in the circumstances of the case. [Paras 17]

Claim for deduction of education cess allowed; Grounds 5 and 5.1 allowed.

Remand for factual verification of claimed adjustment on written back bad debt - Claim for adjustment of excess provision of bad debts written back (alleged double taxation) - HELD THAT: - The Tribunal noted that the assessing officer did not verify the assessee's contention that a portion of the amount written back had been wrongly offered to tax, resulting in double taxation. As the factual position was unexamined, the Tribunal did not decide the claim on merits but remanded the issue to the assessing officer for fresh adjudication and verification, directing that the assessee be given an opportunity of hearing. [Paras 20]

Issue remanded to Assessing Officer for verification; Grounds 6 and 6.1 partly allowed for statistical purpose.

Final Conclusion: The appeal is partly allowed: the Tribunal deleted the disallowance under section 40(a)(i) for foreign certification fees, set aside the disallowance and enhancement of provisions for the Shahenshah sales incentive scheme, held the assessing officer's notional set off of earlier absorbed losses for computation of section 80 IC deduction to be incorrect, deleted the addition for foreign exchange gain on redemption of shares, allowed the claim for deduction of education cess, and remanded the claim relating to excess bad debt provision written back to the assessing officer for verification; the appeal is therefore partly allowed (statistical purpose).

Bogus purchases - accommodation entries - reliance on third party investigation - estimation of income from alleged bogus purchases - gross profit estimation method - onus of proof

Bogus purchases - reliance on third party investigation - estimation of income from alleged bogus purchases - gross profit estimation method - onus of proof - Whether the addition made by the Assessing Officer by treating entire purchases as bogus should be sustained or whether income should be estimated by applying a percentage gross profit on the alleged bogus purchases - HELD THAT: - The Tribunal found that neither side proved the case conclusively: the assessee produced basic evidence but did not furnish further supporting material to satisfy the Assessing Officer, while the AO relied on information from the investigation wing and Maharashtra Sales Tax Department without conducting independent enquiries to a logical conclusion. In the absence of conclusive proof that all purchases were fictitious and having regard to precedents where only the profit element embedded in purchases from suspicious/hawala dealers was taxed, the Tribunal held that taxing the entire purchase value was not justified. The CIT(A) had adopted 12.5% gross profit following judicial guidance, but the Tribunal observed that the rate of gross profit must be fact dependent; considering the assessee's trading business in ferrous and non ferrous metals (where margins are typically low) and the absence of evidence supporting the higher rate, the Tribunal found 12.5% to be excessive. Applying its discretion consistent with coordinate bench practice, the Tribunal directed the AO to estimate the income from the alleged bogus purchases at 6% gross profit on total purchases from the concerned parties. [Paras 7, 8]

The addition is reduced and the AO is directed to estimate income from the alleged bogus purchases at 6% gross profit on the total purchases for Asst.Year 2011-12; appeals are partly allowed.

Final Conclusion: Both parties failed to establish their contentions conclusively; therefore the Tribunal sustained the approach of estimating income on the profit element alone and, considering the nature of the assessee's trading business, reduced the estimated gross profit to 6% on total alleged bogus purchases for Asst.Year 2011-12, partly allowing both appeals.

Transactional net margin method (TNMM) at entity level - transaction-by-transaction benchmarking - Comparable Uncontrolled Price (CUP) method and comparability adjustments - availability, coverage and reliability of data for selection of most appropriate method - treatment of closely linked transactions - treatment of standard and non-standard input costs in royalty base - effect of regulatory (RBI/SIA) approval on arm's length nature of royalty - appropriate base for computing profit level indicator for indenting/marketing services

Transactional net margin method (TNMM) at entity level - transaction-by-transaction benchmarking - treatment of closely linked transactions - availability, coverage and reliability of data for selection of most appropriate method - Acceptance of entity-level TNMM (aggregate benchmarking) for the impugned international transactions instead of transaction-by-transaction approach. - HELD THAT: - The Tribunal found that the assessee could not reasonably adopt a transaction-by-transaction approach because comparable uncontrolled transactions separately for the disputed transactions were not available, and that certain transactions (notably purchase of raw materials and payment of royalty) emanated from a common source and were closely linked. The selection of TNMM at the entity level was held to be in accordance with the requirement that the availability, coverage and reliability of data be taken into account when selecting the most appropriate method. On the facts, the aggregate TNMM at entity level produced a profit level indicator of the assessee within the range of comparables and therefore the entity-level TNMM was accepted and the revenue's ground was dismissed. [Paras 5]

Entity-level TNMM accepted for the impugned international transactions; revenue's challenge to the aggregate benchmarking approach dismissed.

Comparable Uncontrolled Price (CUP) method and comparability adjustments - conditions prevailing in the market as comparability factor - geographical and volume differences in CUP application - Rejection of CUP method for benchmarking purchase of raw materials/components and acceptance of entity-level TNMM for that transaction. - HELD THAT: - The Tribunal agreed with the CIT(A) that the TPO applied the CUP method without adequately considering essential comparability factors, in particular market conditions including geographical location and volume differences. The TPO's external/internal CUP comparisons involved transactions across different countries and materially different volumes, and ignored that purchases from AEs constituted an insignificant proportion of total purchases (with large unrelated purchases affecting market prices). Citing relevant authorities on the need to account for quality, location and volume differences, the Tribunal held CUP inapplicable on the facts and upheld the CIT(A)'s deletion of the CUP-based adjustment, accepting the entity-level TNMM instead. [Paras 8]

CUP method held inapplicable on the facts; ALP adjustment based on CUP deleted and entity-level TNMM accepted for the purchase transaction.

Treatment of standard and non-standard input costs in royalty base - effect of regulatory (RBI/SIA) approval on arm's length nature of royalty - no separate benchmarking of royalty where included in TNMM operating cost - Validity of royalty computation excluding non-standard material costs and whether the royalty paid is at arm's length (including effect of RBI/SIA approval and inclusion of royalty in entity-level TNMM). - HELD THAT: - The Tribunal accepted the assessee's classification of inputs into standard and non-standard items and noted that the royalty agreement (and its computation formula) had been approved by SIA and RBI and its workings were regularly furnished to RBI without objection. The TPO's approach of deducting both standard and non-standard costs to compute a higher royalty base was rejected; the CIT(A)'s calculation (deducting only standard items) was upheld. Further, since the royalty formed part of the assessee's operating cost in the entity-level TNMM, and having regard to judicial precedents and regulatory approvals, separate benchmarking of the royalty was unnecessary and the royalty payment was held to be at arm's length. [Paras 9, 11, 12, 13]

CIT(A)'s treatment of royalty computation and conclusion that the royalty is at arm's length (and need not be separately benchmarked) is upheld; ALP adjustment deleted.

Appropriate base for computing profit level indicator for indenting/marketing services - transactional net margin method by reference to relevant base - Proper computation of the financial indicator for the indenting commission transaction - whether the denominator should be sales of the associated enterprise or the commission income (i.e., commission-based basis). - HELD THAT: - The Tribunal held that the TPO erred in using the sales revenue of the associated enterprise (which do not pass through the assessee's books) as the denominator to compute the indenting segment's profit level indicator. The assessee's indenting activity yields commission income that is reflected in its books; the correct base for the segmental indicator is commission income (the relevant revenue of the assessee), and the resulting segmental indicator (profit/commission) was higher than the comparable domestic marketing segment indicator. Therefore the transaction was at arm's length and the TPO's CUP-style adjustment (which used AE sales as denominator) was incorrect. [Paras 14, 16]

CIT(A)'s approach reinstated: financial indicator computed on commission (not AE sales) and the indenting commission transaction held to be at arm's length; ALP adjustment deleted.

Final Conclusion: All the impugned transfer-pricing adjustments directed by the TPO for Assessment Year 2005-06 were disallowed: the Tribunal upheld the CIT(A)'s deletion of the adjustments, accepting the entity-level TNMM for the disputed transactions, rejecting CUP for the purchase transaction, holding the royalty computation and regulatory approvals to establish arm's length treatment (with no separate benchmarking required), and confirming the commission-based benchmark for the indenting activity. The revenue's appeals are dismissed.