S. 14A disallowance under Rule 8D cannot exceed original disallowance

Where the AO made a disallowance u/s 14A by estimating 10% of the expenses as being attributable to the tax free receipts and in the appeal before the Tribunal the department argued that in view of the judgement of the Special Bench of the ITAT in Daga Capital 26 SOT 603 the matter had to be remanded to the AO for applicability of Rule 8D and the judgement in Assam Travels 199 ITR 1 (SC) was relied on to contend that the remand could result in a larger disallowance than had been calculated by the AO, HELD that:

(i) While the matter had to be remitted to the AO to recalculate the disallowance under Rule 8D as held by the Special Bench, the assessee could not be worse off than it would have been if it had not filed an appeal against the assessment order. Accordingly, the AO was directed to restrict the disallowance to the original figure.

(ii) The ratio of Assam Travels was not applicable to the facts of the case.

To levy penalty, AO has not to prove wilful attempt by assessee but onus is on assessee to prove bona fides

Where the assessee, being the amalgamated company, claimed that the period of 8 years available u/s 72A for set off of the unabsorbed investment allowance of the amalgamating company had to be counted from the date of amalgamation but the Tribunal rejected that stand and held that the period of 8 years had to be counted from the year of incurring the loss and in the penalty proceedings u/s 271(1)(c) the CIT (A) held that notwithstanding the view on merits, penalty could not be imposed because the claim was bona fide and there was nothing to suggest gross or wilful negligence or fraud by the assessee, HELD, reversing the order of the CIT (A) that:

(i) The claim of the assessee was patently wrong and such claim could not avoid penalty;

(ii) The judgement of the Supreme Court in UOI vs. Dharmendra Textile Processors 174 TM 571 fortifies the interpretation that where the assessee offers an explanation, the onus is on the assessee to substantiate the explanation or prove the bona fides and show that there is full disclosure of all the facts relating to the explanation. The AO is not obliged to prove that there was a wilful attempt by the assessee or that the explanation of the assessee is not bona fide;

(iii) 271(1)(c) has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability.

See Also: Supreme court decision in Dharmendra Textile Processors – Does it change the law on section 271 (1) (c). By J.P.Shah, Advocate Ahmedabad. (2008) 40 BCAJ. January 2009 .p 505

The Proviso to s. 113 is retrospective

The Provio to s. 113 (which imposes surcharge on block assessments), though inserted only with effect from 1.6.2002, is applicable to searches conducted prior to that date as it is ‘clarificatory’ and ‘curative’ in nature.

CIT vs. Suresh N. Gupta 297 ITR 322 (SC) followed.

Note: It appears the attention of the Bench was not drawn to the fact that in CIT vs. Vatika Township (P) Ltd. (2009) 17 DTR 353 (SC) / (2009) 221 CTR 409 (SC) the issue has been referred to a larger Bench.

See Also: The bane of retrospective amendments by N. M. Ranka, Advocate and Interpretation of Statutes by Sorabh Soparkar, Advocate.

“Sham” lease transactions cannot be given relief as “financial arrangements”.

(1) Where the AO disallowed part depreciation on bottles leased out by the assessee on the ground of “non-user” but the Tribunal & High Court confirmed the same on the ground that as the lease was not renewed and the bottles were not returned on expiry, the transaction was only a financial arrangement and not a Lease, HELD, reversing the lower authorities that as u/s 254 (1), the Tribunal had no power to enhance the Assessment and the benefit granted to the assessee by the AO could not be taken away.

(2) Where depreciation on other leased assets was disallowed on the ground that the lease arrangement was a “sham” and the same was upheld and the assessee claimed in the alternative that if the said transaction was a financial arrangement, as held by the Department, even then the assessee could be taxed only on Interest embedded in the amount of lease rentals received from the lessee and the matter should be remitted for recalculation, HELD rejecting the claim that as the transaction was a “sham”, the plea that it should be regarded as a financial arrangement could not be accepted.

Reopening notice even if served after limitation period is valid.

Where the AO issued a notice under section 147 of the Act and also tried to serve it on the assessee within the limitation period of six years but the assessee claimed that same was served only after the expiry of the limitation period and the question arose whether the notice was valid, HELD:

(i) S. 149, which imposes the limitation period, requires the notice to be “issued” but not “served” within the limitation period. Once a notice is issued within the period of limitation, jurisdiction becomes vested in the AO to proceed to reassess. Service is not a condition precedent to conferment of jurisdiction but it is a condition precedent to the making of the order of assessment;

(ii) S. 27 of the General Clauses Act, 1897 creates a rebuttable presumption of due service or proper service if the document sought to be served is sent by properly addressing, prepaying and posting by registered post to the addressee and such presumption is raised irrespective of whether any acknowledgment due is received from the addressee or not. This means that the addressee to whom the communication is sent must be taken to have known the contents of the document sought to be served upon him without anything more. Similar presumption is raised under illustration (f) to S. 114 of the Indian Evidence Act whereunder it is stated that the Court may presume that the common course of business has been followed in a particular case, that is to say, when a letter is sent by post by pre-paying and properly addressing it the same has been received by the addressee. These presumptions are rebuttable but in the absence of proof to the contrary the presumption of proper service or effective service on the addressee would arise;

(iii) On facts, the assessee had refused to accept the notice at three addresses belonging to her. Accordingly, the statutory presumption that she had been validly served had to be drawn.

Advances to sister concerns must be presumed to have come out of own funds and not borrowed funds.

Where the assessee had its own funds as well as borrowed funds and it advanced funds to its sister concerns for allegedly non-business purposes and the question arose whether the AO was justified in disallowing the interest on the borrowed funds on the ground that they had been used for non-business purposes, HELD:

Where an assessee has his own funds as well as borrowed funds, a presumption can be made that the advances for non-business purposes have been made out of the own funds and that the borrowed funds have not been used for this purpose. Accordingly, the disallowance of the interest on the borrowed funds is not justified.

S. 115JA assessment is not liable for advance tax interest u/ss 234B and 234C.

(i) Where an assessment is made u/s 115JA of the Act, an assessee is not liable to pay interest for non-payment/shortfall of advance tax u/ss 234B and 234C of the Act. CIT v. Kwality Biscuits Ltd 284 ITR 434 (SC) followed;

(ii) There is a difference between dismissal of a Special Leave Petition and dismissal of an Appeal. While the dismissal of a SLP does not result in merger of the judgment of the High Court with that of the Supreme Court and there is no affirmation, the dismissal of an Appeal results in an affirmation and merger of the order of the High Court into that of the Supreme Court.

Note: In CIT v. Kwality Biscuits Ltd 284 ITR 434 (SC) the Court was concerned with s. 115J of the Act.

Effect of retraction of statement of confession.

Where during FERA search proceedings the accused-appellant allegedly confessed to violations of the law and later filed an affidavit retracting his confession and the Tribunal and the High Court rejected the retraction on the basis that the onus was on the accused to show that the confession was obtained from him by threat, coercion or force, HELD reversing the lower authorities that:

(i) It is trite law that evidences brought on record by way of confession which stood retracted must be substantially corroborated by other independent and cogent evidences, which would lend adequate assurance to the court that it may seek to rely thereupon;

(ii) The initial burden to prove that the confession was voluntary in nature would be on the Department. The special or peculiar knowledge of the person proceeded against would not relieve the prosecution or the Department altogether of the burden of producing some evidence in respect of that fact in issue. It may only alleviate that burden to discharge and very slight evidence may suffice;

(iii) A person accused of commission of an offence is not expected to prove to the hilt that confession had been obtained from him by any inducement, threat or promise by a person in authority. The burden is on the prosecution to show that the confession is voluntary in nature and not obtained as an outcome of threat, etc. if the same is to be relied upon solely for the purpose of securing a conviction.

(iv) With a view to arrive at a finding as regards the voluntary nature of statement or otherwise of a confession which has since been retracted, the Court must bear in mind the attending circumstances which would include the time of retraction, the nature thereof, the manner in which such retraction has been made and other relevant factors. Law does not say that the accused has to prove that retraction of confession made by him was because of threat, coercion, etc. but the requirement is that it may appear to the court as such.

No Permanent Establishment if only personnel supplied.

(1) Where a Malaysian company supplied technical personnel to the assessee (a Dutch company) on terms that the personnel would remain under the control of the assessee and that the Malaysian company would have no role to play in the execution of the Project and the question arose whether the recipient had a “supervisory activities” PE under Article 5 (4) (a) and the sums received was assessable as business profits (there being no provision for FTS in the India-Malaysia DTAA), HELD that as the Malaysian company’s role ended with the supply of personnel, it could not be considered to be carrying on supervisory activities in India and there was no PE. Consequently, the business profits were not chargeable, s. 195 did not apply and disallowance u/s 40(a)(i) in the hands of the payer was not permissible;

(2) Where the employees of the assessee’s foreign head office worked partly for the Indian Project and the question arose whether such part of the expenses as were allocable to the Indian project was hit by s. 44C of the Act, HELD s. 44C did not apply to all expenses incurred by the HO but was confined to “executive and general administration” expenses. Salary paid to technical personnel did not constitute either “general administrative” expenses nor “executive” expenses. The latter term applies only to managerial personnel;

(3) Where the assessee paid a UK company for deployment of their personnel for the supervision of the Indian project and recipient fell within the ambit of Articles 5 (2)(j) (supervisory activities exceeding 6 months in connection with a building site etc) and 5 (2) (k) (furnishing of services through personnel for more than 90 days) and the question arose as to which of the two would prevail to determine whether there was a PE, HELD that the provision that was more beneficial to the assessee (Art. 5(2)(j)) would apply.

Judgements not cited by parties during the hearing should not be referred to in deciding the appeal.

Where the ITAT decided the appeal against the assessee by relying on judgements that had not been cited by the Departmental Respresentative and without giving the assessee an opportunity to explain why those judgements had no application to the assessee’s case, the High Court set aside the order of the Tribunal for a fresh hearing.

Note: The order of the Tribunal is reported as Naresh Pahuja v DCIT (2008)12 DTR 436 (2008), 17 SOT 636, 118 TTJ 319.

Also See: Vindhya Telelink Ltd v JCIT (2008) 15 DTR 238 (Jab) (TM) and Lakhmini Merwal Das v ITO 84 ITR 649 (Cal) (659) and Hon’ble President’s Guidelines to Hon’ble Members for drafting orders.