(19.4 KiB, 128 DLs)

Reopening beyond 4 years on basis of Supreme Court’s judgement not justified if assessee has not failed to disclose material facts

The AO passed an order u/s 143(3) r.w.s 147 in which he allowed deduction u/s 80HHC though the assessee had suffered a loss in the export business by setting off the said loss against the export incentive. After the expiry of four years from the end of the assessment year, the assessment was reopened u/s 147 on the ground that pursuant to the judgement of the Supreme Court (probably Ipca Laboratories vs. CIT 266 ITR 521) s. 80HHC deduction could be allowed only if there were positive profits from export operations and the assessee had been wrongly allowed deduction u/s 80HHC. The Tribunal struck down the reopening. On appeal by the department, HELD dismissing the appeal:

The assessee had claimed deduction u/s 80HHC after a full disclosure of the material facts. As four years had elapsed from the end of the assessment year, the assessment could not be reopened in the absence of failure to disclose the material facts. The judgment of the Supreme Court is an expression of opinion on the interpretation of statute. Merely because a judgment has been rendered, the same cannot be a ground for reopening the assessment u/s 147 as it amounts to a change of opinion. Austin Engineering 312 ITR 70 (Guj) followed)

(59.4 KiB, 282 DLs)

Revision Of Undisclosed Income In Settlement Application Not Permissible

The assessee filed a settlement application u/s 245C (1) in which it disclosed additional income of Rs. 1.94 crores. This was revised to disclose further undisclosed income of Rs. 11.41 crores. After the s. 245D (1) order, a further disclosure of Rs. 2.76 crores was made. Despite the department’s objection that the assessee had not made a “full & true disclosure”, the Settlement Commission passed a final order u/s 245D (4) determining the total income at Rs. 42.58 crores and imposed token penalty of Rs. 50 lakhs. The department filed a Writ Petition to challenge the Settlement Commission’s order. The High Court held that as the Settlement Commission had not applied its mind to the maintainability of the application u/s 245D (1) for want of full and true disclosure of income, the matter had to be remanded to the Settlement Commission for fresh consideration. That order of the High Court was challenged by the assessee in the Supreme Court. The Supreme Court remanded the matter to the High Court on the ground that a report given by the Commissioner estimating the undisclosed income at Rs. 42.50 crores which approximately coincided with the figure arrived at by the Settlement Commission had not been considered by the High Court. In the second round, the High Court held that in view of the multiple disclosures made by the assessee, the assessee could not be said to have made a full and true disclosure of income. However, it did not set aside the application on that ground but remanded the matter to the Settlement Commission for re-determination of the undisclosed income. The result of the second remand order of the High Court was that the Settlement Commission was not required to go into the question of maintainability of the application but only the question of determination of income. The department did not challenge the High Court’s order though the assessee did. HELD dismissing the appeal:

(i) The disclosure of “full and true” particulars of undisclosed income and “the manner” in which such income has been derived are pre-requisites for a valid application u/s 245C (1) and unless the Settlement Commission records its satisfaction on this aspect, it will not have jurisdiction to pass any order on the settlement application;

(ii) The scheme of settlement does not contemplate revision of the income so disclosed in the application. If an assessee is permitted to revise his disclosure, in essence, he would be making a fresh application in relation to the same case by withdrawing the earlier application. S. 245C (3) prohibits the withdrawal of an application. An assessee cannot be permitted to resile from his stand at any stage during the proceedings. By revising the application, the applicant would be achieving something indirectly what he cannot otherwise achieve directly and in the process rendering s. 245 (3) otiose and meaningless. As there is no stipulation for revision of an application filed u/s 245C(1), the natural corollary is that determination of income by the Settlement Commission has necessarily to be with reference to the income disclosed in the application;

(iii) The High Court, having come to the conclusion that the assessee had not made a full and true disclosure of undisclosed income, was wrong in treating the application as maintainable. The High Court’s order is clearly erroneous as it has not appreciated the object and scope of the scheme of settlement. “However, for reasons best known to the Commissioner, he has chosen not to challenge this part of the impugned order“;

(iv) The argument of the assessee that the scope of judicial review being limited, the High Court should not have interfered with the order of the Settlement Commission is not acceptable. “We have no hesitation in observing that the manner in which assessee’s disclosures of additional income at different stages of proceedings were entertained by the Settlement Commission, rubbishing the objection of the Commissioner that the assessee had not made a full and true disclosure of their income in the application u/s 245C(1), leaves much to be desired“.

(245.7 KiB, 355 DLs)

S. 50C is only a measure of tax & is constitutionally valid

The assessee was the owner of land & building. It entered into a development agreement for the development & sale of the land. The consideration receivable by the assessee was Rs. 4.85 crores. For stamp duty purposes, the agreement was valued by the authorities at Rs. 15.50 crores and the duty on the same was paid by the developer. As the stamp duty valuation adversely affected the assessee for purposes of s. 50C (which provides that the value adopted by the stamp valuation authority shall be deemed to be the full value of the consideration received or accruing as a result of the transfer), the assessee filed a writ petition challenging the constitutional validity of s. 50C. HELD dismissing the Petition:

(i) There is a distinction between the subject matter of a tax and the standard by which the amount of tax is measured. The subject matter of tax is capital gains and the manner in which it should be computed is provided by s. 50C. S. 50C is only a measure of tax and not the subject matter of tax. The valuation rule of the Stamp Act is for the purpose of computation of income. It is only a standard of measure for imposing tax. (Principle laid down in A. Sanyasi Rao 219 ITR 330 (SC) followed);

(ii) S. 50C was introduced with a view to prevent evasion of tax and under-valuation of the transaction and must be read in that context. The classification made by s. 50C is in respect of an identifiable group of assessees and is not arbitrary, unreasonable or discriminatory. (K. R. Palanisamy v/s UOI 306 ITR 61 (Mad) followed)

(208.9 KiB, 437 DLs)

Exchange Fluctuation loss on pending forward contracts is an “accrued” loss

The assessee, a foreign bank carrying on business in India, entered into forward contracts with its clients to buy or sell foreign exchange at an agreed price on a future date. On the date of maturity, the contract was executed which resulted in either profits or losses to the assessee. There was no dispute that the loss was on revenue account and that loss arising on execution of the contracts in the same year were allowable as a deduction. With respect to contracts where the date of maturity fell beyond the accounting period, the assessee valued the forward contracts on the last day of the accounting period on the basis of rate of foreign exchange prevailing on that date and accounted for the loss or profit, as the case may be. The AO taxed the profits on such contracts though he disallowed the losses on the ground that they were “notional”. The Special Bench had to consider whether the loss was a “notional” or “contingent” loss or whether it was an “accrued” loss. HELD deciding in favour of the assessee:

(i) The Act allows a deduction in respect of crystallized liabilities. While as per commercial principles of policy of prudence, all anticipated liabilities have to be accounted for, as per the Act only “accrued” liabilities are allowable. While anticipated liabilities which are contingent in nature are not allowable, an anticipated liability coupled with a present obligation can be said to be a crystallized liability. A contingent liability depends purely on the happening or not happening of an event whereas if an event has already taken place, such as the entering into the contract and undertaking of an obligation to meet the liability, and only consequential effect of the same is to be determined, then, the liability is not a contingent liability (Woodward Governor 312 ITR 254 (SC) & Bharat Earth Movers 245 ITR 428 (SC) followed, Principles of law on accrual of income & loss summarized);

(ii) Accounting Standard -11 (AS-11) issued by the ICAI is mandatory and provides that if foreign exchange transactions are not settled in the same accounting period, the effect of exchange difference has to be recorded on 31st March;

(iii) On facts, the foreign currency was the assessee’s stock-in-trade and the forward foreign exchange contracts entered into by it created a continuing binding obligation on the date of contract against the assessee to fulfill the same on the date of maturity. The assessee has consistently followed the same method of accounting in regard to recognition of profit and loss. The AO, having assessed the profits, could not have disallowed the loss;

(iv) Accordingly, where a forward contract is entered into by the assessee to sell foreign currency at an agreed price at a future date falling beyond the last date of accounting period, a loss is incurred by the assessee on account of valuation of the contract on the last date of the accounting period and before the date of maturity of the forward contract.

(254.6 KiB, 315 DLs)

Voice of citizen who believes that judicial institution is not functioning well cannot be muffled by using the weapon of contempt

Shri. R. K. Jain, Editor of Excise Law Times, wrote a series of editorials making serious complaints against the working of CEGAT. The President of CEGAT wrote a letter to the Chief Justice of India complaining about the editorials pursuant to which the Supreme Court initiated criminal contempt proceedings against Shri. Jain. The proceedings were discharged after Shri. Jain tendered an apology and gave an undertaking that if there were any serious complaints regarding the functioning of CEGAT in future he would first bring those matters to the attention of the concerned authorities before taking any other action. Subsequently, Shri. R. K. Jain wrote a series of letters to the Finance Minister, Revenue Secretary, CBEC & the President, CESTAT, highlighting specific cases of irregularities, malfunctioning and corruption in the GESTAT. In particular, several irregularities by Mr. T. K. Jayaraman, Member, were also highlighted. As no cognizance was taken of the several letters, Shri. R. K. Jain wrote an editorial highlighting the perceived irregularities in the working of CESTAT. The ‘Indirect Tax Practitioners Association’ took up the cause of Shri. T. K. Jayaraman and filed a complaint with the President of CESTAT accusing Shri. R. K. Jain of “trying to scandalize the functioning of CESTAT and lower its esteem in the eyes of the public”. Though the President set up an inquiry committee, the Association chose not to appear before it out of apprehension that the proceedings may result in embarrassment to them and the Members of the CESTAT. So, the Association decided “to adopt a shortcut to silence” Shri. R. K. Jain and filed a contempt petition in the Supreme Court alleging that Shri. R. K. Jain had violated the undertaking given by him in the earlier proccedings. HELD by the Supreme Court dismissing the Petition and imposing costs of Rs. 2 lakhs:

(i) On the issue whether the undertaking was violated, Shri. R. K. Jain is not a novice and for decades, he has been fearlessly using his pen to highlight malfunctioning of CEGAT and its successor CESTAT. Based on his earlier letters, the Supreme Court had made suggestions for the working of the Tribunal. Before writing the present editorial, Shri. Jain had written several letters to the authorities pointing out serious irregularities in the functioning of the Tribunal but nothing was done by them to stem the rot. Consequently, Shri. Jain is not guilty of violating the undertaking given to the Court;

(ii) On the larger issue of whether criticism of a judicial body amount to contempt, fair criticism of the system of administration of justice or functioning of institutions or authorities entrusted with the task of deciding rights of the parties gives an opportunity to the operators of the system/institution to remedy the wrong and also bring about improvements. Such criticism cannot be castigated as an attempt to scandalize or lower the authority of the Court or other judicial institutions or as an attempt to interfere with the administration of justice except when such criticism is ill motivated or is construed as a deliberate attempt to run down the institution or an individual Judge is targeted for extraneous reasons. Ordinarily, the Court would not use the power to punish for contempt for curbing the right of freedom of speech and expression, which is guaranteed under Article 19(1)(a) of the Constitution. Only when the criticism of judicial institutions transgresses all limits of decency and fairness or there is total lack of objectivity or there is deliberate attempt to denigrate the institution then the Court would use this power;

(iii) On merits, the editorial cannot be regarded as intended to demean CESTAT as an institution and scandalize its functioning nor is there any attempt in it to lower the authority of CESTAT or ridicule it in the eyes of the public. The object of the editorial was to highlight the irregularities in the appointment, posting and transfer of the members of CESTAT and instances of the abuse of the quasi judicial powers. What was incorporated in the editorial was nothing except the facts relating to manipulative transfer and posting of some members of CESTAT and substance of the orders passed by the particular Bench of CESTAT, which were set aside by the High Courts of Karnataka and Kerala. By doing so, he had merely discharged the constitutional duty of a citizen enshrined in Article 51A(h);

(iv) S. 13 of the Contempt of Courts Act legislatively recognizes one fundamental of our value system i.e. truth. If a speech or article, editorial, etc. contains something which appears to be contemptuous and the Court initiates proceedings, truth should ordinarily be allowed as a defence unless the Court finds that it is only a camouflage to escape the consequences of deliberate or malicious attempt to scandalize the court or is an interference with the administration of justice. On facts, as it is not even suggested that what has been mentioned in the editorial is incorrect or distorted, there is no warrant for discarding Jain’s assertion that what was written is based on true facts;

(v) There is a growing acceptance of the phenomenon of whistleblower. A whistleblower is a person who raises a concern about wrongdoing occurring in an organization or body of people. Shri. Jain can appropriately be described as a whistleblower for the system who has tried to highlight the malfunctioning of an important institution established for dealing with cases involving revenue of the State and there is no reason to silence such person;

(vi) The Petition lacks bona fide and is an abuse of the process of the Court. The Petitioner, a body of professionals, are expected to be vigilant and interested in transparent functioning of CESTAT. However, instead of doing that, they have come forward to denounce the editorial. “We are sorry to observe that a professional body like the petitioner has chosen wrong side of the law”;

(vii) For filing a frivolous petition, the Petitioner is saddled with cost of Rs.2,00,000/-, of which Rs.1,00,000 to be paid to Shri. Jain.

(435.0 KiB, 1,427 DLs)

Rule 8D r.w. S. 14A (2) is not arbitrary or unreasonable but can be applied only if assessee’s method not satisfactory. Rule 8D is not retrospective and applies from AY 2008-09. For earlier years, disallowance has to be worked out on “reasonable basis” u/s 14A (1)

In AY 2002-03, the assessee claimed that no disallowance u/s 14A in respect of the tax-free dividend earned by it could be made as it had not incurred any expenditure to earn the dividend. The AO rejected the claim and made a disallowance u/s 14A. This was deleted by the CIT (A). On appeal by the department, the Tribunal followed the judgement of the Special Bench in Daga Capital 117 ITD 169 (Mum) (where it had been held that s. 14A(2) & (3) & Rule 8D are procedural in nature and have retrospective effect) and remanded the matter to the AO for re-computing the disallowance. The assessee challenged the decision of the Tribunal. HELD:

(1) The argument that dividend on shares / units is not tax-free in view of the dividend-distribution tax paid by the payer u/s 115-O is not acceptable because such tax is not paid on behalf of the shareholder but is paid in respect of the payer’s own liability;

(2) S. 14A supersedes the principle of law that in the case of a composite business expenditure incurred towards tax-free income could not be disallowed and incorporates an implicit theory of apportionment of expenditure between taxable and non-taxable income. Once a proximate cause for disallowance is established – which is the relationship of the expenditure with income which does not form part of the total income – a disallowance u/s 14A has to be effected;

(3) The argument that a literal interpretation of s. 14A leads to absurd consequences is not acceptable. S 14A is founded on a valid rationale that the basic principle of taxation is to tax net income i.e gross income minus expenditure;

(4) The argument that the method in Rule 8D r.w.s 14A (2) for determining expenditure relating to the tax-free income is arbitrary and violative of Article 14 is not acceptable because there is an adequate safeguard before Rule 8D can be invoked. The AO cannot ipso facto apply Rule 8D but can do so only where he records satisfaction on an objective basis that the assessee is unable to establish the correctness of its claim. Also a uniform method prescribed to resolve disputes between assessees and the department cannot be said to be arbitrary or oppressive. There is a rationale in Rule 8D and its method is “fair & reasonable”. It cannot be said that there is “madness” in the method of Rule 8D so as to render it unconstitutional;

(5) Rule 8D, inserted w.e.f 24.3.2008 cannot be regarded as retrospective because it enacts an artificial method of estimating expenditure relatable to tax-free income. It applies w.e.f AY 2008-09;

(6) For the AYs where Rule 8D does not apply, the AO will have to determine the quantum of disallowable expenditure by a reasonable method having regard to all facts and circumstances;

(7) On facts, though in the earlier years, the Tribunal had held that the tax-free investments had been made out of the assessee’s own funds, this did not mean that there was no expenditure incurred to earn tax-free income. Even though Rule 8D did not apply to AY 02-03, the AO had to consider whether disallowance could be made u/s 14A (1). Also, the principle of consistency would not apply as s. 14A had introduced a material change in the law.

(24.4 KiB, 535 DLs)

S. 14A applies where shares are held as investment and the only benefit derived is dividend. S. 36(1)(iii) deduction allowable if shares held as stock-in-trade

The assessee borrowed funds to acquire controlling interest shares in a company with which she claimed to have business dealings. The interest on the borrowings was claimed as a deduction u/s 36(1)(iii). The AO rejected the claim on the ground that the only benefit derived from the investment in shares was dividend and that the interest had to be disallowed u/s 14A. This was confirmed by the CIT (A). The Tribunal held that the deduction of interest was allowable u/s 36(1)(iii) in principle though a portion of the interest paid had to be regarded as attributable to the dividend and was disallowable u/s 14A. On appeal by the Revenue, HELD reversing the order of the Tribunal:

(i) The only benefit derived by the assessee from the investment in shares was the dividend income and no other benefit was derived from the company for the business carried on by it. As dividend is exempt u/s 10(33), the disallowance u/s 14A would apply. The Tribunal was not correct in estimating the s. 14A disallowance to a lesser figure than the interest paid on the borrowing when the whole of the borrowed funds were utilized by the assessee for purchase of shares;

(ii) Deduction of interest u/s 36(1)(iii) on borrowed funds utilized for the acquisition of shares is admissible only if shares are held as stock in trade and the assessee is engaged in trading in shares. So far as acquisition of shares in the form of investment is concerned and where the only benefit derived is dividend income which is not assessable under the Act, disallowance u/s 14A is squarely attracted.

(54.6 KiB, 434 DLs)

Unless mala fides are writ large, delay should be condoned. Matters should be disposed of on merits and not technicalities

The Appellant, a local authority, acquired land belonging to one of the Respondents for a development scheme in 1988. As the Appellant did not pay the compensation amount despite notice, the property was auctioned and sale confirmed in favour of the highest bidder in 1992. The bidder deposited the sale proceeds. The Appellant then “woke up from its slumber” and filed objections before the Single Judge for setting aside the auction sale. Even in these proceedings, the Appellant did not appear and the same were dismissed for non-appearance. The sale deed was executed in favour of the highest bidder. The Appellant then filed an appeal before the District Judge which was barred by limitation by a couple of months. This appeal was dismissed on the ground that there was not sufficient ground for condonation of delay. On mistaken advice, the Appellant filed a second appeal to the High Court which was thereafter treated by the Court as a revision application. This was also dismissed. The Appellant then filed a review petition which was also dismissed. Against that the Appellant filed a SLP which was also delayed. The delay in filing the SLP was condoned and the question before the Supreme Court was whether the District Judge was justified in dismissing the first appeal on the ground of delay. HELD allowing the appeal:

(i) While considering an application for condonation of delay no strait-jacket formula is prescribed to come to the conclusion if sufficient and good grounds have been made out or not. Each case has to be weighed from its facts and the circumstances in which the party acts and behaves. From the conduct, behaviour and attitude of the appellant it cannot be said that it had been absolutely callous and negligent in prosecuting the matter;

(ii) Justice can be done only when the matter is fought on merits and in accordance with law rather than to dispose it of on such technicalities and that too at the threshold;

(iii) Unless malafides are writ large on the conduct of the party, generally as a normal rule, delay should be condoned. In the legal arena, an attempt should always be made to allow the matter to be contested on merits rather than to throw it on such technicalities. Apart from the above, the appellant would not have gained in any manner whatsoever, by not filing the appeal within the period of limitation. It is also worth noticing that delay was also not that huge, which could not have been condoned, without putting the respondents to harm or prejudice. It is the duty of the Court to see to it that justice should be done between the parties;

(iv) Also observed that as the auction purchaser had been put to “inconvenience and harassment” and had not got any fruits for the sale proceeds paid in 1992, it should be paid costs of Rs. 50,000.

(234.9 KiB, 360 DLs)

S. 147 reopening for rectifying s. 154 mistakes is invalid

The AO issued a notice u/s 148 to reopen the assessment within 4 years from the end of the assessment year. There were four recorded reasons and one of them was that the AO had committed a computational error in the assessment order by deducting the wrong figure instead of the right figure. The assessee filed a Writ Petition to challenge the reopening inter alia on the ground that as the mistake could be rectified u/s 154, the reopening was bad. HELD upholding the challenge:

(i) While Explanation 2 to s. 147 deems income to have escaped assessment if excessive deduction is allowed, the reopening of an assessment u/s 147 has serious ramifications because the AO is empowered to reassess income even in respect of issues not set out in the notice. Therefore, if the power to rectify an order u/s 154(1) is adequate to meet a mistake or error in the order of assessment, the AO must take recourse to that power as opposed to the wider power to reopen the assessment. If the error can be rectified u/s 154, it would be arbitrary for the AO to reopen the entire assessment u/s 147. Further, the error in the order was not attributable to a fault or omission on the part of the assessee and the assessee cannot be penalized for a fault of the AO;

(ii) When one or more modes of assessment or remedies are available to the taxing Authority, the Authority must adopt that remedy which causes least prejudice to the assessee.

(194.5 KiB, 601 DLs)

Fee for software is NOT royalty & TDS u/s 195 not required

The assessee applied to the AO for a NOC u/s 195(2) for remittance of a fee to IXOS Software, Singapore, to acquire software. The assessee claimed that the fee was commercial profits and not taxable in the hands of the recipient under Article 7 of the India-Singapore DTAA as the recipient did not have a PE in India. The AO & CIT (A) took the view that as the software was a “copyright” / “secret process” and the assessee had merely acquired a ‘non-exclusive & non-transferable’ license to use the software and as the Singapore Company continued to be the owner of the software, the fee constituted “royalty” under s. 9(1)(vi) of the Act and Article 12 of the DTAA and that it was chargeable to tax in India. On appeal by the assessee, HELD allowing the appeal:

The effect of the judgements in Tata Consultancy Services vs. State of AP 271 ITR 401 (SC), Samsung Electronics Co 94 ITD 91 (Bang), Motorola Inc 95 ITD 269 (SB) & Dassault Systems 229 CTR 105 (AAR) is that the primary condition for coming within the definition of ‘royalty’ is that the payment must be received as consideration for the use of or right to use any copyright of a literary, artistic or scientific work etc. A ‘right to use the copyright’ is totally different from the ‘right to use the programme embedded in a CD’. In acquiring a ready made off-the-shelf computer programme, no right was granted to the assessee to utilize the copyright of the computer programme. The assessee had merely purchased a copy of the copyrighted article, namely, a computer programme which is called ‘software’. Computer software when put into a media and sold becomes goods like any other audio cassette or painting on canvas or book. Accordingly, the amount paid by the assessee towards purchase of the software cannot be treated as payment of “royalty” so as to be taxable in India under Article 12 of the DTAA and the assessee was not liable to deduct tax at source.