(246.2 KiB, 1,160 DLs)

Strictures against dept for disposing stay applications without proper reasons

Pursuant to orders u/s 201(1) & 201(1A), the assessee was liable to make payment of Rs. 59.06 crores for three years. The AO rejected the stay application and directed that 50% of the demand be paid. A part of the demand was paid by the assessee. The assessee filed a stay application before the CIT. Of the three years, the CIT granted stay for two years and directed the AO to realize the demand for AY 2010-11 amounting to Rs. 7.69 crores. No reasons were given for the decision. Despite the stay granted by the CIT, the AO issued garnishee notices u/s 226 (3) for the entire amount of Rs. 59.06 crores. The assessee filed a writ petition to challenge the same. HELD allowing the Petition:

(i) The action of the AO in issuing garnishee notices for the entire demand despite the partial stay by the CIT shows defiance and non-application of mind;

(ii) There is no reasoning in the CIT’s order for refusing to stay the demand for AY 2010-11 despite KEC International v. B.R. Balakrishnan 251 ITR 158 where parameters have been laid down to govern the manner in which applications for stay should be dealt with. Either the CIT is ignorant of the law laid down by the Court or has acted in breach of the principles enunciated in the judgment. In either view of the matter, the entire approach of the CIT (TDS) is thoroughly misconceived. In KEC International it was noted that in a large number of matters orders are passed perfunctorily by the department only with an idea of effecting recovery before March 31, though such orders could have been passed earlier in detail and after recording proper reasons. The law laid down by the Division Bench has not led the authorities to act in compliance. This is an unfortunate state of affairs;

(iii) Accordingly, the garnishee notices were stayed and the CIT was directed to pass a fresh order in line with KEC International.

(332.8 KiB, 3,029 DLs)

S. 10(23C)(v) benefit cannot be denied merely because there are profits. In computing the profits, capital expenditure has to be deducted

S. 10(23C)(vi) provides that the income of any university or other educational institution existing solely for educational purposes and not for purposes of profit shall be exempt. The assessee was running a school solely for educational purposes and claimed exemption u/s 10 (23C) (vi). The exemption was denied /withdrawn on the ground that as the assessee had earned substantial profits year after year and had not made efforts to lower its fees, the profits were not incidental and the assessee existed for profits. On a writ petition filed by the assessee, HELD allowing the challenge:

(i) To decide whether an institution exists solely for education and not to earn profit the predominant object of the activity has to be seen. The mere fact that an educational institution generates surplus after meeting the expenditure over a period of time does not mean that it ceases to exist ‘solely’ for educational. The test to be applied is whether the predominant object of the activity is to sub-serve the educational purpose or to earn profit. It should be seen whether profit-making is the predominant object of the activity or whether profit is incidental to the carrying of the activity. There is no requirement that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realization but would also reflect unsound principle of management. (Surat Art Silk Cloth Manufacturers Association 121 ITR 1 (SC) and Aditanar Educational Institution 224 ITR 310 (SC) applied);

(ii) In computing the total income, capital expenditure incurred for the attainment of the objects of the society has to be deducted under the third proviso to s. 10(23C). There is no bar to doing so unlike the provisions of ss. 37 and 36 (1)(xii). This is also supported by clause 11 of Form 56D which has to be filed as per Rule 2CA and the case law on s. 11 which provide that capital expenditure constitutes “application of income”;

(iii) In Children’s Book Trust AIR 1992 SC 1456, the Supreme Court had observed in the context of the Delhi Municipal Corporation Act, 1957 that where a society was making systematic profits it could not claim exemption even if the profit was utilized only for charitable purposes. The observations were made in the context of an Act which is not pari materia to s. 10 (23C). Also the judgement cannot be applied because the scheme of s. 10(23C)(vi) permits the retention of 15% of the profits and the application of 85% thereof. Queens Educational Society 319 ITR 160 (Utt) dissented from;

(iv) The action of the CIT in withdrawing exemption u/s 10 (23C) (vi) will discourage and frustrate the object of the Govt to promote education by allowing private parties to set up educational institutions. If the stand of the Revenue is accepted no educational institution can be said to be existing solely for educational purposes as in every case there is bound to be a profit. S. 10(23C)(vi) would then be rendered otiose;

(v) The contention of the Revenue that exemption u/s 10 (23C) (vi) could only be given to a university or educational institution and not to a society registered under the 1860 Act is not acceptable because such a society constitutes ‘other educational institutions’. Aditanar Educational Institution 224 ITR 310 followed.

(vi) On facts, as the society’s application of income (after considering the capital expenditure) was more than 100%, it could by no stretch of imagination be held to be an educational institution existing for the purposes of making profit so as to be not entitled to exemption in view of the provisions of s. 10(23C) (vi).

(33.6 KiB, 983 DLs)

One Bench cannot differ from the view of another co-ordinate Bench but must refer to a larger Bench

One Bench of the Tribunal decided an appeal in favour of the assessee. However, another Bench refused to follow that decision even though the facts were the same on the ground that the earlier decision did not address the grievance of the Revenue and did not consider all the facts and did not lay down a clear ratio. The assessee filed a writ petition complaining of breach of propriety on the part of the Tribunal by not referring the issue to a larger Bench. HELD upholding the challenge:

(i) We are not happy to observe but constrained to say that one must remember that pursuit of the law, however glamorous it is, has its own limitation on the Bench. In a multi-judge court, the Judges are bound by precedents and procedure. They could use their discretion only when there is no declared principle to be found, no rule and no authority. The judicial decorum and legal propriety demand that where a learned single Judge or a Division Bench does not agree with the decision of a Bench of co-ordinate jurisdiction, the matter should be referred to a larger Bench. It is a subversion of judicial process not to follow this procedure. In our system of judicial review which is a part of our Constitutional scheme, we hold it to be the duty of the judges of the courts and members of the tribunals to make the law more predictable. The question of law directly arising in the case should not be dealt with apologetic approaches. The law must be made more effective as a guide to behavior. It must be determined with reasons which carry convictions within the Courts, profession and public. Otherwise, the lawyers would be in a predicament and would not know how to advise their clients. Subordinate courts would find themselves in an embarrassing position to choose between the conflicting opinions. The general public would be in dilemma to obey or not to obey such law and it, ultimately, falls into disrepute.

(ii) The view taken by the Tribunal is not the correct approach. If the Tribunal wanted to differ to the earlier view taken by the Tribunal in the identical set of facts, judicial discipline required reference to the larger bench. One co-ordinate bench finding fault with another co-ordinate bench is not a healthy way of dealing with the matters.

(289.0 KiB, 2,498 DLs)

The obligation to deduct the tax at source u/s 195 (1) arises only when the payment is chargeable to tax. Samsung Electronics not followed

The assessee, an Indian company remitted mobilization & demobilization charges of Rs. 8.65 crs by way of reimbursement to its parent company, a company based in Netherlands. The assessee applied to the AO u/s 195 (2) for a Nil withholding rate though the AO held that tax had to be deducted at 11%. The assessee deducted tax on sums aggregating Rs. 6.98 crs. In the assessment order the AO took the view that as the assessee had failed to deduct tax at source u/s 195, the expenditure had to be disallowed u/s 40(a)(i). This was upheld by the CIT (A) and the Tribunal (effectively on the balance amount). The Tribunal followed the judgement of the Supreme Court in Transmission Corporation of AP 239 ITR 387 and held that the assessee was duty bound to deduct tax u/s 195 (1) and could not escape liability without obtaining a certificate u/s 195 (2). The Tribunal held that the assessee was not entitled to “step into the shoes of the AO” and examine “whether the receipt was income in the hands of the recipient or not”. On appeal by the assessee, HELD reversing the judgement of the Tribunal:

(i) The observations of the Supreme Court in Transmission Corporation of AP 239 ITR 387 have to be read in the context of the question before the Court i.e. whether tax was deductible on the gross trading receipts or only on the “pure income profits”. The Court was not concerned with a case where the receipt was not chargeable to tax in the hands of the recipient at all. On the other hand the observations of the Court make it clear that the liability to deduct tax at source arises only when the sum payable to the non-resident is chargeable to tax;

(ii) Even the plain language of s. 195 shows that the tax at source is to be deducted on the “sum chargeable under the provisions of the Act”. One can, therefore, reasonably say that the obligation to deduct tax at source is attracted only when the payment is chargeable to tax in India;

(iii) The determination by the AO under s.195(2) of the Act is tentative in nature. In case it is ultimately found in the assessment proceedings relating to the recipient that he was not liable to pay any tax on the sums received, the assessee cannot be treated in “default” inasmuch as s. 195(1) of the Act casts an obligation to deduct the tax at source on the sum ‘chargeable under the provisions of this Act’;

(iii) As regards Samsung Electronics 185 Taxman 313 (Kar), the context was different. The assessees wanted to show in their own assessment proceedings that the amount paid by them was not assessable to tax at the hands of recipient. No doubt, they would be precluded to do so. However, when in the assessment proceedings relating to recipient itself, it is opined by the income tax authorities that the tax is not payable at all on the amounts so received, provision of s. 195 would not be attracted. “Even otherwise, because of the analysis of what Transmission Corporation of AP decides, we, with due respect, are not in agreement with some of the observations made in the aforesaid judgment of the Karnataka High Court”.

(33.1 KiB, 5,537 DLs)

S. 271 (1) (c) penalty cannot be imposed even for making unsustainable claims

The assessee claimed deduction u/s 36 (1) (iii) for interest paid on loan taken for purchase of shares. The AO disallowed the interest u/s 14A and levied penalty u/s 271 (1) (c) on the ground that the claim was unsustainable. The penalty was deleted by the appellate authorities. On appeal by the department to the Supreme Court, HELD dismissing the appeal:

(i) S. 271 (1) (c) applies where the assessee “has concealed the particulars of his income or furnished inaccurate particulars of such income”. The present was not a case of concealment of the income. As regards the furnishing of inaccurate particulars, no information given in the Return was found to be incorrect or inaccurate. The words “inaccurate particulars” mean that the details supplied in the Return are not accurate, not exact or correct, not according to truth or erroneous. In the absence of a finding by the AO that any details supplied by the assessee in its Return were found to be incorrect or erroneous or false, there would be no question of inviting penalty u/s 271(1)(c).

(ii) The argument of the revenue that “submitting an incorrect claim for expenditure would amount to giving inaccurate particulars of such income” is not correct. By no stretch of imagination can the making of an incorrect claim in law tantamount to furnishing inaccurate particulars. A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. If the contention of the Revenue is accepted then in case of every Return where the claim made is not accepted by the AO for any reason, the assessee will invite penalty u/s 271(1)(c). That is clearly not the intendment of the Legislature.

(iii) The law laid down in Dilip Shroff 291 ITR 519 (SC) as to the meanings of the words “conceal” and “inaccurate” continues to be good law because what was overruled in Dharmendra Textile Processors 306 ITR 277 (SC) was only that part in Dilip Shroff where it was held that mens rea was an essential requirement for penalty u/s 271 (1)(c).

(108.8 KiB, 1,558 DLs)

India-Mauritius treaty benefits cannot be denied on the ground that assessee is a subsidiary of a USA Corp

The applicant, a resident of Mauritius, was a subsidiary of a USA company. It received capital contribution and loans from the USA parent which were used to purchase shares in ILFS, an Indian company. On sale of the shares, the applicant earned capital gains which were chargeable to tax under the Act. However, under Article 13 (4) of the India-Mauritius tax treaty, such gains were not chargeable to tax in India. The applicant filed an application for advance ruling on the question whether in view of the said Article 13 (4), the gains were chargeable to tax in India. The department resisted the application on the ground that though the legal ownership ostensibly vested with the applicant, the real and beneficial owner of the capital gains was the US Company which controlled the applicant and the applicant was merely a façade made use of by the US holding Company to avoid capital gains tax in India. HELD rejecting the stand of the department:

(i) The effect of Azadi Bachao Andolan 263 ITR 706 (SC) is that there is no “legal taboo” against ‘treaty shopping’. Treaty shopping and the underlying objective of tax avoidance/mitigation are not equated to a colourable device. If a resident of a third country, in order to take advantage of a tax treaty sets up a conduit entity, the legal transactions entered into by that conduit entity cannot be declared invalid. The motive behind setting up such conduit companies is not material to judge the legality or validity of the transactions. The principle that “every man is entitled to order his affairs so that the tax is less than it otherwise would be” is applicable though a colourable device adopted through dishonest methods can be looked into in judging a legal transaction from the tax angle. Tax avoidance is not objectionable if it is within the framework of law and not prohibited by law. However, a transaction which is ‘sham’ in the sense that “the documents are not bona fide in order to intend to be acted upon but are only used as a cloak to conceal a different transaction” stands on a different footing. For an act to be a ‘sham’, the parties thereto must have a common intention not to create the legal rights and obligations which they give the appearance of creating;

(ii) On facts, as all legal formalities for purchase of the shares and their subsequent transfer had been gone through and the consideration had been received by the applicant, it was difficult to assume that the capital gain has not arisen in the hands of the applicant but had arisen in the hands of the USA parent;

(iii) The fact that the USA parent provided the funds and played a role in negotiating the transaction of sale does not lead to the legal inference that the shares were in reality owned by the USA parent. To take such a view would be contrary to the ground realities of mutual business and economic relations between a holding and subsidiary company and the inter-se legal structure. The fact that the subsidiary has its own corporate personality and is a separate legal entity cannot be overlooked. The fact that the holding company exercises acts of control over its subsidiary does not in the absence of compelling reasons dilute the separate legal identity of the subsidiary. It is unrealistic to expect that a subsidiary should keep off the clutches of the holding company and conduct its business independent of any control and assistance by the parent company;

(iv) Consequently, the gains made by the Applicant were not chargeable to tax in India.

Obiter: It looks odd that the Indian tax authorities are not in a position to levy capital gains tax on the transfer of shares in an Indian company. Whether the policy considerations underlying Article 13 (4) of the treaty and the spirit of the CBDT Circular would still be relevant in the present day fiscal scenario is a debatable point.

(187.8 KiB, 1,172 DLs)

Validity of s. 147 reopening has to be determined on the basis of law prevailing on date of issue of s. 148 notice and not on retrospectively amended law

In respect of AY 2004-05, the assessee computed its book profits u/s 115JB by claiming a deduction for provision for doubtful debts and advances and the same was allowed vide order u/s 143 (3). On 18.7.2008 (within 4 years), the AO issued a notice u/s 148 inter alia on the ground that the provision for doubtful debts had to be added back to the book profits. The assessee filed a writ petition to challenge the reopening. HELD allowing the Petition:

(i) U/s 115JB as it stood at the relevant time, the AO was authorized by cl (c) of Expl (1) to s. 115JB to add back “amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities”. In HCL Comnet Systems 305 ITR 409 the Supreme Court held that a provision for doubtful debts was a provision for diminution in the value of the assets and did not fall under the said provision. To supercede this judgement, cl (i) was inserted in the Expl to s. 115JB by the FA 2009 w.r.e.f 1.4.2001 to provide that even amounts set aside as provision for diminution in the value of an asset had to be added to the book profits.

(ii) The retrospective amendment was of no avail because it was enacted after the issue of the s. 148 notice. In Max India 295 ITR 282, the SC held in the context of s. 263 that the validity of the revision order had to be determined on the basis of the law on the date the order was passed. This principle is applicable to s. 147 as well and the validity of the reopening has to be determined on the basis of the law as it stands on the date of issue of the s. 148 notice. As the retrospective amendment to s. 115JB was not and could not have formed the basis for reopening the assessment, the same could not be relied upon to justify the reopening. The validity of the s. 148 notice must be determined with reference to the recorded reasons and the same cannot be allowed to be supplemented on a basis which was not present to the mind of the AO and could not have been so present on the date on which the power to reopen the assessment was exercised. Consequently, the reopening was without jurisdiction.

(68.2 KiB, 3,208 DLs)

Delayed payment of employees’ PF contribution allowable u/s 43B

The assessee paid the employees’ contribution to PF and ESIC after the grace period but before the due date for filing the return. The AO disallowed the payment u/s 36(1) (va) and held that s. 43B had no application. This was confirmed by the CIT (A). On appeal, HELD deciding in favour of the assessee:

In Alom Extrusion Ltd 319 ITR 306 the Supreme Court held that the omission of the second proviso to s. 43B by the Finance Act 2003 operated retrospectively w.e.f. 1.4.1988. The Court held that the contribution payable by the employer to the P.F/Superannuation Fund or any other Fund of welfare of the employees was allowable if paid before the due date of filing the return. Consequently, the issue is covered in favour of the assessee and the deduction is allowable u/s 43B.

(98.2 KiB, 761 DLs)

ITAT has no power u/s 254 (2) to re-evaluate correctness on merits of earlier decision

The assessee claimed deduction u/s 80HHC which was allowed to the extent of Rs. 32.17 crs by the AO. The claim included DEPB license sale proceeds. The CIT revised the assessment u/s 263 on the ground that s. 28 (iiia) did not apply to a DEPB license and its proceeds were not eligible for deduction u/s 80HHC. The assessee filed an appeal before the Tribunal where it relied on the judgements in Pratibha Syntex Ltd vs. JCIT 81 ITD 118 and Pink Star vs. DCIT 27 ITD 137 to argue that the DEPB license would form part of the incentive and had to be considered for s. 80HHC deduction. However, the Tribunal held that these judgements were distinguishable and dismissed the appeal. The assessee thereafter filed a MA u/s 254(2) for rectification. The Tribunal allowed the application and recalled its order. The Tribunal further allowed the assessee’s appeal and set aside the CIT’s s. 263 revisional order. The Tribunal relied on Pratibha Syntex and Pink Star to hold that when the assessment order was passed, there was no dispute as to whether export incentives by way of a DEPB license were eligible for deduction u/s 80HHC. The department filed an appeal where it argued that the Tribunal’s MA order was a review of the earlier order and that it had no jurisdiction to do so u/s 254 (2). HELD allowing the appeal:

(i) S. 254(2) empowers the Tribunal to rectify a mistake apparent from the record. In Honda Siel Power Products 295 ITR 466 (SC) it was held that s. 254(2) is based on the fundamental principle that a party appearing before the Tribunal should not suffer on account of a mistake committed by the Tribunal. It was held that the Tribunal would be regarded as having committed a mistake in not considering the material which is already on record;

(ii) However, in the present case the Tribunal in the original order specifically dealt with the decisions in Pratibha Syntex and Pink Star and held them to be distinguishable. However, in the s. 254(2) order, the Tribunal virtually reconsidered the entire matter and came to the conclusion that in view of Pratibha Syntex and Pink Star a DEPB license was eligible for deduction u/s 80HHC. This amounted to a re-appreciation of the correctness of the earlier decision on merits. This was impermissible. Re-evaluating the correctness on merits of an earlier decision lies beyond the scope of the power conferred u/s 254(2).

(iii) The power u/s 254(2) is confined to a rectification of a mistake apparent on record. S. 254(2) is not a carte blanche for the Tribunal to change its own view by substituting a view which it believes should have been taken in the first instance. S. 254(2) is not a mandate to unsettle decisions taken after due reflection. It is not an avenue to revive a proceeding by recourse to a disingenuous argument nor does it contemplate a fresh look at a decision recorded on merits, however appealing an alternate view may seem. Unless a sense of restraint is observed, judicial discipline would be the casualty. That is not what Parliament envisaged.

(127.3 KiB, 1,191 DLs)

Speculation loss can be set off against delivery based profits

The assessee earned a profit on sale of shares held as stock-in-trade. This profit was offered as profit from a ‘speculation business’ and was set off against a ‘speculation loss’ brought forward from an earlier assessment year. The AO took the view that the profit from sale of shares was not from a ‘speculation business’ on the ground that the assessee had settled its transaction of sale and purchase of shares through physical delivery. Consequently, the claim for set off against the speculation loss was denied. This was confirmed by the CIT (A) though reversed by the Tribunal on the ground that the profit earned from sale of shares fell within the purview of the Explanation to s. 73 and could be set off against speculation losses. On appeal by the Revenue, HELD affirming the Tribunal’s order:

(i) The Explanation to s. 73 creates a deeming fiction that where the assessee is a company and any part of its business consists of the purchase and sale of shares of other companies, the assessee is deemed to be carrying on a speculation business, to the extent to which the business consists of the purchase and sale of shares. A business postulates a systematic course of activity or dealing. Unless the business of a Company consists of the sale and purchase of shares, the deeming fiction would not apply. However, once the requirements of the Explanation are satisfied the assessee is deemed to be carrying on a “speculation business”;

(ii) The argument of the Revenue that the term “speculative transaction” in s. 43(5) must be read into the provisions of s. 73 and that a business which involves actual delivery of shares would not constitute a speculation business cannot be accepted having regard to the deeming fiction created by the Explanation to s. 73. There is no justification to exclude a business involving actual delivery of shares. Once an assessee is deemed to be carrying on a speculation business for the purpose of s. 73, any loss computed in respect of that speculation business, can be set off only against the profits and gains of another speculation business.