(401.5 KiB, 1,139 DLs)

U/s 254(2) Tribunal entitled to recall order in entirety to rectify apparent mistake

The Tribunal passed an order u/s 254 (2) by which it took the view that as there was a mistake apparent from the record, the order deserved to be recalled and the appeal heard afresh. The assessee challenged the order by a Writ Petition and argued that while the Tribunal had the jurisdiction to rectify a mistake it could not recall the order in the entirety. As a doubt was expressed as to the correctness of the earlier decisions of the High Court (in K.L. Bhatia 182 ITR 361 (Del), J.N. Sahni 257 ITR 16 (Del) etc) on the matter owing to the later judgement of the Supreme Court in Honda Siel Power Products vs. CIT 295 ITR 466 (SC), the issue was referred to a Full Bench of the Delhi High Court. Held by the Full Bench.

(i) In the earlier judgements of the Delhi High Court, it was held that as the Tribunal has no inherent power of review it could not recall its order passed on merits. It was held that recalling the entire order would mean passing of a fresh order which is not permissible as s. 254(2) has no existence de hors the order u/s 254(1) inasmuch as when an order is passed u/s 254(2) either allowing amendment or refusing to amend, the same gets merged with the original order passed and becomes an order u/s 254(1) which is not the legislative intent;

(ii) This view is now not tenable in view of the judgements of the Supreme Court in Honda Siel Power Products 295 ITR 466 and Saurashtra Kutch Stock Exchange 262 ITR 146 where it was held that the power of rectification has been conferred on the tribunal to see that no prejudice is caused to either of the parties appearing before it by its decision based on a mistake apparent from the record. It was held that atonement to the wronged party by the court or the tribunal for the wrong committed by it has nothing to do with the concept of inherent power to review. The Supreme Court clearly stated that it was the fundamental principle is that no party appearing before the tribunal should suffer on account of any mistake committed by the Tribunal and no prejudice should be caused to either of the parties before the Tribunal which is attributable to the Tribunal’s mistake, omission or commission and if the error is a manifest error, then the Tribunal would be justified to recall.

(iii) Consequently, the Tribunal does have the jurisdiction u/s 254(2) to recall its own order in entirety and there is no absolute prohibition. The earlier judgements of the High Court on the issue do not lay down the correct statement of law.

(41.0 KiB, 1,035 DLs)

Form of transaction can be ignored & Corporate Veil lifted if attempt is to “evade” taxes

The assessee, a partnership firm comprising of father & son, sold its business as a going concern to a limited company. The partners of the firm were the directors of the company. The company paid the assessee Rs. 1.25 crores towards “technical know-how”, Rs. 36 lakhs as “non-compete compensation for pending orders” and Rs. 33 lakhs as “non-compete compensation for future orders”. The entire amount of Rs. 1.94 crores was claimed to be a non-taxable capital receipt. However, the AO held the entire sum to be assessable as consideration for transfer of “goodwill” u/s 55. On appeal, the CIT (A) upheld the assessee’s stand with regard to the technical know-how & “non-compete compensation for pending orders” and rejected the balance. On cross appeals, the Tribunal upheld the stand of the AO on the ground that the arrangement to pay technical know-how etc was a “colourable device to evade tax” and the entire amount was assessable as “goodwill”. On appeal by the assessee, HELD dismissing the appeal:

(i) Given that the assessee was taken over as a going concern, it could not have been taken over without the so-called technical know-how. The assessee could not have sold the other tangible assets keeping with it the so-called technical know-how. Accordingly, the receipts for technical know-how and the compensation for non-competing fees are nothing but a part of composite receipt to diminish the value of the assets of the assessee. The assessee has termed the said amount as technical know-how in order to escape from the clutches of s. 55(2) under which goodwill is taxable. The assessee has clearly attempted to evade tax by claiming the amount received as goodwill into one of technical know-how in order to evade tax;

(ii) The question of non-compete fee does not arise given that the assessee was taken over as a going concern in its entirety by the new company. The partners of the assessee are the directors of the company and the consideration was paid to the assessee and not to the partners. There was no competition between the assessee and the new company;

(iii) Both the Tribunal and the AO have held that what was done by the assessee is clearly an attempt to evade tax in order to get over s. 55(2). It is a well settled principle of law that what is permissible is avoidance but not evasion. When an attempt is made by a company to evade tax it is the bounden duty of the authorities to lift the corporate veil and find out the real intention behind the same. It is the duty of the Court in every case, where ingenuity is expended to avoid taxing and welfare legislation, to get behind the smoke screen and discover the true state of affairs. The Court is not to be satisfied with form and leave well alone the substance of a transaction.

(17.9 KiB, 875 DLs)

DRP must give “cogent and germane reasons” in support of s. 144C directions

The assessee filed a Writ Petition to challenge the order of the Dispute Resolution Panel (DRP) on the ground, inter alia, that the DRP had not given any reasons in support of its directions to the AO. Before the High Court, the DRP conceded that its order “deserved to be quashed”. HELD quashing the DRP’s order:

When a quasi judicial authority (like the DRP) deals with a lis, it is obligatory on its part to ascribe cogent and germane reasons as the same is the heart and soul of the matter. And further, the same also facilitates appreciation when the order is called in question before the superior forum.

(69.0 KiB, 939 DLs)

DRP must not pass “laconic” orders but must deal with assessee’s objections

The Disputes Resolution Panel (DRP) issued direction u/s 144C against which the assessee filed an appeal before the Tribunal. The principal ground was that the DRP had not considered the assessee’s submissions and issued a very “laconic and non-speaking direction”. HELD upholding the assessee’s plea and remanding the matter to the DRP:

S. 144C empowers the DRP to issue directions for the guidance of the AO to enable him to complete the assessment. It can confirm, reduce or enhance the variations proposed in the draft order. However, as against the provisions of s. 144C, the DRP has passed a very laconic order. Though voluminous submissions were made before the DRP against the draft assessment order, the DRP brushed aside everything without even a whisper of the assessee’s objections and submissions. The directions of the DRP are too laconic to be left uncommented. The directions given by the DRP almost tantamounts to supervising the AO’s draft order and in that sense it can be equated that appellate jurisdiction being exercised. It was held in Sahara India (Farms) vs. CIT 300 ITR 403 (SC) that even “an administrative order has to be consistent with the rules of natural justice”.

(45.7 KiB, 771 DLs)

Assessee’s request for permission to file appeal to CIT(A) cannot be treated by DRP as “no objection” to draft assessment order

The AO passed a draft assessment order u/s 144C on 29.12.2009 in which he stated that the assessee could either accept the variations suggested in the order or file objections before the Dispute Resolution Panel (DRP). The assessee exercised the latter choice and filed objections on 29.01.2010. On 20.01.2010, the CBDT issued a Circular clarifying that the assessee had a choice to either go before the DRP or the CIT (A). At the first hearing before the DRP, the assessee addressed a letter dated 22.04.2010 requesting permission to file an appeal before the CIT (A). However, the DRP passed an order dated 08.07.2010 stating that the choice whether to approach the DRP or the CIT (A) had to be taken before filing the objections and not thereafter. It held that as the assessee had already filed the objections, directions u/s 144C (5) had to be issued. However, instead of dealing with the objections, it observed that the assessee had chosen to “withdraw the objections” filed before the DRP and confirmed the draft assessment order as correct. The assessee filed a Writ Petition to challenge the DRP’s order. HELD upholding the challenge:

The DRP’s order suffers from the vice of being contrary to the record as well as non-application of mind and causes immense prejudice to the assessee. The assessee had never sought withdrawal of the objections filed by it but had requested the DRP for consent to approach the AO to issue the final order so as to file an appeal before the CIT (A). If the DRP was of the view that it did not have the jurisdiction to give such consent or that the objections could not be withdrawn, it could have rejected the application but ought to have dealt with the objections on merits. The result of the DRP’s stand was that all doors for the assessee were closed because its objections had not been considered by the DRP, an appeal against the assessment order could not be filed before the CIT (A) and even an appeal against the DRP’s order would be an exercise in futility. This is not sustainable. Accordingly the objections are restored to the DRP with direction to consider on merits within 3 months.

(18.8 KiB, 1,045 DLs)

No coercive recovery if first appeal ready for hearing

The assessee filed appeals before the Commissioner (Appeals) against the assessment orders for AYs 2004-05 to 2008-09. Though the appeals were ripe for hearing and the appellate authority had already posted the appeals for hearing on different dates, the AO without considering the pendency of the appeals issued demand notices and took steps for attachment of the assessee’s bank account. The assessee filed a Writ Petition to challenge the recovery action which was opposed by the department on the ground that the assessee had repeatedly sought adjournment of the hearing of the appeals. HELD allowing the Petition:

(i) The appellate authority is directed to dispose of the appeals at the earliest possible, after affording an opportunity of hearing to the assessee, at any rate within a period of one month from the date of receipt of a copy of the Court’s judgment;

(ii) Till such time orders are passed by the appellate authority, recovery steps shall be kept in abeyance;

(iii) If there is any non-cooperation from the part of the assessee, the appellate authority is at liberty to finalize the appeals without providing any further opportunity of hearing.

(235.4 KiB, 1,699 DLs)

Ability to pay demand is no bar for grant of stay on recovery

The assessee filed a stay application before the Tribunal. The Department opposed by relying on the observations of the Supreme Court in CCE vs. Dunlop India 154 ITR 172 (SC) and contended that as paucity of funds had not been sufficiently demonstrated, for this reason alone stay should not be granted. HELD rejecting the Department’s contention and granting stay while following B. N. Nobis & Co vs. JCIT 71 TTJ 153 (Kol):

(i) While the Supreme Court has decried ‘the practice of granting interim orders merely because assessee is able to show a good prima facie case’, the observations have to be understood in the context of the case which was one of indirect taxation where the burden had already been passed on to the consumer. Also it was a case of a Writ Petition under Article 226 & not that of an appellate jurisdiction. The observations of the Supreme Court in the context of grant of stay in writ proceedings does not have binding force on, or even direct relevance to, the principles governing grant of stay during appellate proceedings though it does provide guidance on principles governing the decision to grant stay;

(ii) The Court has made it clear that though there are no hard and fast rules regarding grant of stay, prudence, discretion and circumspection are called for and stay should not be granted as a matter of course. Considerations about balance of convenience, question of irreparable injury and implications to public interest have to be borne in mind;

(iii) The Supreme Court’s observations in Dunlop cannot be interpreted to mean that the Tribunal is denuded of the powers to grant stay until case for financial stringency is successfully made out by the applicant. There is no conflict in holding this view as also adhering to the settled principles governing grant of stay which lay down that financial constraints of the applicant are important, even if not sole of qualifying, consideration in entertaining a stay application, besides considerations like existence of strong prima facie case, balance of convenience and possibilities of Revenue’s rights of recovery being prejudiced by waiting till the outcome of appeals.

(123.5 KiB, 1,742 DLs)

S. 50C applies to transfer of development rights in property

The assessee was co-owner of inherited property. He entered into an agreement with the developer for development of the property for a consideration of Rs. 63 lakhs and offered his share of the consideration to capital gains. The Stamp Valuing Authority valued the property at Rs.4.73 crores though the DVO valued it at Rs. 1.81 crores. The AO invoked s. 50C and adopted the DVO’s valuation as the consideration. This was confirmed by the CIT (A). Before the Tribunal, the assessee argued that there was a distinction between “rights in land & building” and the “land and building” and that s. 50C did not apply to “rights” in land & building such as development rights. It was pointed out that the fact that only development rights were transferred was borne out by the fact that the assessee was shown as owner of the property in the municipal records. It was also pointed out that the stamp duty law made a distinction between transfer of development rights and transfer of the property by imposing different rates of duty. HELD dismissing the appeal:

The argument that transfer of development rights does not amount to transfer of land or building and therefore s. 50C is not applicable is not acceptable because u/s 2(47)(v) the giving of possession in part performance of a contract as per s. 53A of the Transfer of property Act is deemed to be a “transfer”. When the assessee received the sale consideration and handed over possession of the property vide the development agreement, the condition prescribed in s. 53A of the Transfer of Property Act was satisfied and u/s 2 (47) (v) the transaction of transfer was completed. The fact that the assessee’s name stands in the municipal records does not change the nature of the transaction.

(111.6 KiB, 2,620 DLs)

For s. 10B foreign expenditure for self purposes and turnover retained abroad cannot be reduced from “export turnover”

The assessee was engaged in the business of development of software by way of on-site and off-shore development and had a branch in USA for which separate accounts were maintained. The assessee claimed deduction u/s 10B in respect of the exports of software made. In computing the export turnover, the AO held that an amount of Rs. 3.33 crores incurred by the USA branch constituted “expenses incurred in foreign exchange in providing technical services outside India” and had to be deducted from the export turnover as provided in s. 10B. He also held that the turnover of the USA branch to the extent of Rs. 15.14 crores had to be reduced from the export profits as it had not been received in convertible foreign exchange in India within the period specified in s. 10B (3). On appeal, the CIT (A) upheld the claim of the assessee with regard to Rs. 15.14 crores while he rejected the claim with regard to Rs. 3.33 crores. The cross appeals of the parties were referred to the Special Bench. HELD by the Special Bench deciding both issues in favour of the assessee:

(i) As regards the expenditure of Rs. 3.33 crores incurred abroad, though the definition of “export turnover” in s. 10B excludes “expenses incurred in foreign exchange in providing technical services outside India”, expenses incurred in a foreign country towards pay roll etc in connection with staff in the foreign branch is not covered because there is no provision of technical services to any outside agency but it is towards fulfillment of the object to develop software. A person cannot provide services to self. Even as per Circular Nos. 621 dated 19.12.91 and 694 dated 23.11.94, expenditure incurred on site abroad is eligible for deduction u/s 10B;

(ii) As regards the turnover of Rs. 15.14 crores retained abroad, one limb of the Government cannot be allowed to defeat the operation of the other limb. While s. 10B requires the foreign exchange to be brought to India within the prescribed period, the RBI permits the assessee to retain the said foreign exchange abroad for specific purposes. RBI is the competent authority for s. 10B as well. The result is that the reinvestment of export earning is deemed to have been received in India and thereafter to have been repatriated abroad (principle in J.B. Boda & Co 223 ITR 271 followed).

(118.1 KiB, 2,168 DLs)

Transaction in the nature of “Gift” not within ss. 391 – 394 of Cos Act. Scheme designed to avoid taxes cannot be sanctioned

Vodafone Essar Gujarat Ltd (“transferor”) filed a Petition u/s 391 to 394 of the Companies Act, 1956 to transfer its ‘Passive Infrastructure Assets’ to Vodafone Essar Infrastructure Ltd (“transferee”) free of liabilities and encumbrances. The corresponding liabilities were not to be transferred. No consideration was payable by the transferee nor were any shares to be allotted to the members of the transferor. Post de-merger, the transferee was to be made a substantially owned company of a new company to be formed by all or some of the shareholders of the transferee. Thereafter, the transferee was to be amalgamated/ merged into Indus Towers Ltd. The application was opposed by the income-tax department on the ground that since no consideration was involved, the transaction was ultra vires. It was also claimed that the transaction did not fall within the anbit of ss. 391 to 394 but was a simple transfer between two separate entities to evade legitimate taxes which would be payable if the transaction was effected as a simplicitor transfer. It was also claimed that the Scheme was solely for purposes of avoiding tax. HELD upholding the challenge and dismissing the Petition:

(i) S. 391 does not contemplate all kinds of schemes but only schemes that are either a compromise or an arrangement with creditors or members or any class of them. The transaction being in the nature of a “gift” is not an “arrangement”. The expression ‘arrangement’ contemplates give and take between the parties as against something in nature of gift which has to be without consideration. The transaction is also not a “reconstruction” because the important criterion for “restructuring” is that the same persons carry on the same business. In the present case, the transferee is not to carry on the business of the transferor;

(ii) A “Gift” which is a transfer of property made voluntarily is not contemplated by s. 391 because the main purpose of s. 391 is to foist the decision of the statutory majority upon the dissenting minority. S. 391 contemplates a forced agreement on the dissenting minority which is contrary to the basic requirement of the gift being a voluntary action;

(iii) The scheme being an agreement without consideration may be void u/s 25 of Contract Act. The court cannot exercise jurisdiction to sanction an agreement which may otherwise to be held as void in law and non-enforceable between parties;

(iv) The transferee shall be claiming benefit u/s 80IA once again on same block of assets on which the transferor had already claimed the benefit u/s 80IA in future once it becomes “eligible undertaking”, which is likely to happen in light of the recommendations in the working committee report;

(v) The scheme appears to be a camouflage to circumvent the mandatory provisions of the Income-tax Act and may be held to be void u/s 281 and if it is so, the court will not exercise jurisdiction to sanction a transaction which is pointed out to be void under law;

(vi) Since no liabilities are transferred including the employees relating to the Passive Infrastructure assets, the expenses will continue to be borne by the transferor which would artificially deplete the taxable profit and will not give a true and fair view of the accounts, thus affecting adversely the taxable profits;

(vii) The transaction is a “conduit” to avoid capital gains because had it been entered into directly with Indus Towers, exemption u/s 2(19AA) & 47(iii) would not be available and tax of about Rs. 3500 crores would be payable;

(viii) The transaction seeks to avoid stamp duty to the tune to Rs. 600 cr because if it had been entered into as a sale to Indus stamp duty @ 6% is payable while in the guise of a demerger, stamp duty @ 1% is payable;

(ix) No VAT shall be payable on the movable assets transferred under the scheme if the same is sanctioned u/s 391 which otherwise would have been payable;

(x) Considering all these aspects, it is foregone conclusion that the avoidance of tax is taking place only if the present scheme is sanctioned by the Court, otherwise not. The transferee is nothing but a paper company being only intermediate for transferring Passive Infrastructure assets from transferor companies to Indus for the purpose of tax evasion. This is clear from the fact that it has only paid up capital of Rs. 5 lacs especially when it is to hold assets worth Rs. 15,000 cr post sanction of the scheme. (Wood Polymer Ltd 47 Comp Cases 597 (Guj) and McDowell & Co 154 ITR 148 (SC) followed).