(62.9 KiB, 1,573 DLs)

Non-issue of s. 143(2) notice renders s. 147 assessment order invalid

The AO passed an assessment order u/s 143(3) r.w.s. 147 without issuing a notice u/s 143(2). The assessee challenged the reassessment order on the ground that the non-issue of the s. 143(2) notice rendered the order void. HELD upholding the challenge:

The law relating to validity of the assessment proceedings in absence of issuance of notice u/s 143(2), in a case where the AO proceeded to frame the assessment in pursuance of a return is well established. If the assessment is framed u/s 143 (3), either read with s. 158 BC or s. 147, it is mandatory for the AO to issue notice u/s 143 (2). The issuance and service of notice u/s 143 (2) is mandatory and not procedural. If the notice is not served within the prescribed period, the assessment order is invalid (Pawan Gupta 318 ITR 322 (Del), Hotel Blue Moon 321 ITR 362 (SC) & C. Palaniappan 284 ITR 257 (Mad) followed).

(239.8 KiB, 914 DLs)

S. 147 Reopening For AY 2000-01 valid despite Proviso to s. 14A. Material facts must be disclosed during assessment proceedings

For AY 2000-01, the assessee filed a return on 30.11.2000. As s. 14A was inserted subsequently by FA 2001 (w.r.e.f 1.4.62) and was tabled in Parliament on 28.2.2001, the assessee did not make any disallowance u/s 14A. The AO also did not make a disallowance in the s. 143 (3) order passed on 7.3.2003. After the expiry of 4 years, the AO sought to reopen the assessment to make a disallowance u/s 14A. The assessee challenged the reopening on the ground that (i) under the Proviso to s. 14A, a reopening u/s 147 for AY 2001-02 & earlier years was not permissible, (ii) as s. 14A was not on the statute when the ROI was filed, there was no failure to disclose & (iii) as the AO had also sought to rectify u/s 154, he could not reopen u/s 147. HELD dismissing the Writ Petition:

(i) The Proviso to s. 14A bars reassessment but not original assessment on the basis of the retrospective amendment. Though the ROI was filed before s. 14A was enacted, the assessment order was passed subsequently. The AO ought to have applied s. 14A and his failure has resulted in escapement of income. The object and purpose of the Proviso is to ensure that the retrospective amendment is not made as a tool to reopen past cases which have attained finality;

(ii) The assessee has “accepted and admitted” that it has not given details with regard to proportionate expenses relatable to tax free income and argued that it was not required to disclose the same as s. 14A was not in the statute book when the ROI was filed. However, the details ought to have been given at the stage of the assessment proceedings & the failure to do so is a “failure to disclose material facts”. It is the duty of the assessee to bring to the notice of the AO particular items in the books of account or portions of documents which are relevant. Material facts are those facts which if taken into accounts they would have an adverse affect on assessee by the higher assessment of income than the one actually made. The assessee is a multinational company and it is difficult to perceive and accept that its tax or the legal department was not aware and did not have knowledge about s. 14A (Consolidated Photo 281 ITR 394 (Del) followed);

(iii) Though the AO also invoked s. 154, the assessee (rightly) claimed that there was no apparent mistake & s. 154 was not applicable. Accordingly, the fact that there were s. 154 proceedings is not a bar to the s. 147 proceedings. Further, the scope of s. 154 & 147/148 are different and it cannot be said as a general principle that if notice u/s 154 is issued, then notice u/s 147/148 is barred or prohibited (Hindustan Unilever Ltd 325 ITR 102 (Bom) distinguished).

(200.6 KiB, 1,399 DLs)

Pre AY 05-06, a project approved as “housing project” by local authority eligible for deduction u/s 80-IB(10) irrespective of extent of commercial user

In AY 2003-04 the assessee undertook the construction of a project at Pune which was approved as a “residential plus commercial” project. The commercial area of the plot was 20.83% of the total area. The assessee claimed deduction u/s 80-IB(10) which was denied by the AO & CIT (A) on the ground that the expression “Housing Project” in s. 80IB(10) applied only to projects consisting of residential units and not to projects having commercial units. On appeal, the Special Bench (119 ITD 255) held that pre the amendment in AY 2005-06, if the project was approved by the local authority as a “housing project” or if the project was approved as “residential plus commercial” and the commercial user did not exceed 10% of the BUA, deduction was allowable in entirety. However, if the commercial user exceeded 10%, deduction was allowable only on the residential units. On appeal by the department to the High Court, HELD:

(i) S. 80-IB(10) (pre amendment w.e.f. AY 2005-06) does not define the expression ‘housing project’ but refers to housing projects which are approved by the local authorities. Under the local laws, the authorities are empowered to approve projects as “housing projects” with commercial user to the extent permitted under the DC Rules framed by the respective local authority. Accordingly, if the legislature intended to restrict the benefit of deduction only to the projects approved exclusively for residential purposes, then it would have stated so. However, as the legislature has provided that the deduction is available to all housing projects approved by a local authority, the result is that even projects with commercial user approved as a “housing project” are eligible for deduction;

(ii) While the Special Bench was right in holding that a project with residential and commercial user to the extent permitted under DC Rules would be a “housing project” and eligible for deduction, it was not justified in confining the deduction only to projects having commercial area upto 10% of the BUA because once the basic argument of the revenue that the housing projects with commercial user are not entitled to Section 80IB(10) deduction is rejected, no restriction could be imposed. If the project is approved as a “housing project” deduction u/s 80-IB(10) is allowable irrespective of the commercial area;

(iii) The insertion of clause (d) to s. 80-IB(10) w.e.f. 1.4.2005 to deny s. 80-IB (10) deduction to projects having commercial user beyond the prescribed limits is not retrospective.

(249.3 KiB, 791 DLs)

CIT’s Sanction u/s 148/151 if mechanical and without reasons is invalid. Assessee cannot be expected to disclose what he does not know

The assessee’s property was compulsorily acquired in AY 1965-66 and the resultant compensation was offered to tax. The assessee initiated proceedings for enhanced compensation and this was duly disclosed. The enhanced compensation was finally determined in AY 1979-80 and the assessee invested the same & claimed exemption u/s 54E. The AO reopened the assessment u/s 147 beyond 8 years (now 4 years) on the ground that the enhanced compensation ought to have been assessed in AY 1965-66. The proposal for sanction was granted by the CBDT (now CIT) in the proforma with the rubber stamp “Yes. The Board is satisfied“. The reassessment was upheld by the CIT (A) & the Tribunal. On appeal to the High Court, HELD allowing the appeal:

(i) U/s 151, a notice u/s 148 cannot be issued after the expiry of 8 years (now 4 years) from the end of the assessment year “unless the Board is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice“. In the present case, approval had been accorded by affixing a mere rubber stamp. Rubber stamping of underlying material is hardly a process which can get the imprimatur of the Court as it suggests that the decision has been taken in a mechanical manner. Even if the reasoning set out by the ITO was to be agreed upon, the least, which is expected, is that an appropriate endorsement is made in this behalf setting out brief reasons. Reasons are the link between the material placed on record and the conclusion reached by an authority in respect of an issue, since they help in discerning the manner in which conclusion is reached by the concerned authority. There is no proper application of mind by the Board (Chuggamal Rajpal 79 ITR 603 (SC) followed);

(ii) The assessee is required to disclose material facts which existed at the material time between the filing of the return and the assessment order. A material fact which is not in existence right up to the time of assessment cannot possibly be disclosed. Therefore, a fact which comes into existence subsequent to the making of the assessment cannot be a material fact within the purview of s. 147. The duty to disclose material facts necessarily postulates existence of a thing or material. If a material is not in existence or if a material is such of which the assessee had no knowledge there would be no duty to disclose such material (Tirath Ram Ahuja (HUF) 306 ITR 173 (Del) followed);

(iii) The duty of the assessee does not extend beyond making a true and full disclosure of primary facts. Once he has done that, his duty ends and it is for the ITO to draw correct inference from the primary facts. It is not the responsibility of the assessee to advise ITO with regard to the inference, which should be drawn from the primary facts and if an ITO draws an inference, which appears subsequently to be erroneous, mere change of opinion with regard to that inference does not justify initiation of action for re-opening of assessment (Lakhmani Mewal Das 103 ITR 437 (SC) followed);

(iv) On facts, as the assessee had disclosed the fact that there was an application for enhancement but could not possibly have disclosed what would be the extent of enhancement there was no failure to disclose material facts.

(38.2 KiB, 986 DLs)

B/fd Business Loss can be set-off against dividends assessed as “income from other sources” if shares held for business

The assessee, engaged in the business of purchase and sale of shares, earned dividend income of Rs. 43.48 lakhs which it offered to tax as “income from other sources”. The assessee set-off the dividend income against its brought forward business loss. The AO & CIT (A) rejected the set-off on the ground that u/s 72 business losses can only be set-off against business income and not “income from other sources”. On appeal by the assessee, HELD allowing the appeal:

U/s 72(1)(i), the brought forward business loss can be set-off against “the profits and gains of any business or profession carried on” by the assessee. S. 72 (1)(i) does not use the word “assessable under the ‘head‘ profits & gains of business”. So, the question is whether the securities formed part of the trading assets of the business and the income there from was income from the business. The answer to this question has to be decided on commercial principles and not on the basis of the classification of ‘heads of income’ in s. 14. Though for the purpose of computation of the income, dividends are assessable under the head “Other Sources”, it does not cease to be part of the income from business if the securities are part of the trading assets. Accordingly, the assessee is eligible for set-off as claimed (Cocanada Radhaswmi Bank 57 ITR 306 (SC) & New India Investment 130 ITR 778 (Cal) followed).

(182.1 KiB, 1,730 DLs)

S. 148 notice, even if unserved, is valid & second s. 148 notice issued to meet assessee’s claim of non-service, is invalid & renders assessment void

For AY 2001-02 (and other years), the AO recorded reasons for reopening of assessment on 22.9.05 and issued s. 148 notice on 23.9.05. The notice was sent through speed post and was not returned undelivered. Though the assessee appeared before the AO on several occasions and wrote letters, he claimed vide Affidavit that the s. 148 notice was not received by him. Pursuant to the assessee’s claim, the AO issued another notice dated 25.9.06 u/s 148 and an assessment order u/s 143(3)/147 was passed on 24.12.2007. The assessee challenged the reassessment on the ground that (i) with respect to the s. 148 notice dated 23.9.05, the assessment order passed on 24.12.07 was time-barred and (ii) with respect to the s. 148 notice dated 25.9.06 that it could not have been issued during the pendency of the first notice. The department argued that as the assessee had claimed that he had not received the first notice dated 23.9.05, only the second notice could be considered and if so, the assessment was valid. HELD allowing the appeal:

(i) Though the assessee claimed by affidavit that he had not received the first s. 148 notice (and that formed the basis of the second 148 notice), as the first notice was sent by speed post as permitted by s. 282, it is presumed to have been duly served upon the assessee and was valid;

(ii) There is a difference between “issue” and “service”. To obtain jurisdiction to assess/reassess the escaped income, the s. 148 notice has to be “issued” but need not be “served”. Service is not a condition precedent to conferment of jurisdiction on the AO but a condition precedent only to the making of the order of assessment. The word “issue” means that the notice must leave the custody of the AO and as the Post Office is not the department’s agent, sending it by post completes “issue”. Accordingly, though the first notice was not (according to the assessee & department) served on the assessee, the AO was vested with power to assess/reassess the escaped income (R. K. Upadhyaya 166 ITR 163 (SC) & Sheo Kumari Debi 157 ITR 13 (Pat) (FB) followed);

(iii) With regard to the second notice, as the first s. 148 notice was valid and reassessment proceedings were pending, the second s. 148 notice is a ‘nullity’. Unless the reassessment proceedings initiated u/s 147 are concluded & brought to a logical end, the AO cannot issue fresh notice u/s 148. This is not an “irregularity” but a “nullity” (Ranchhoddas Karsandas 26 ITR 105 (SC) & Jai Dev Jain 227 ITR 301 (Raj) followed);

(iv) The result is that the limitation period has to be reckoned with reference to the first notice dated 23.09.05 as per which the assessment order dated 24.11.07 is beyond time.

(159.0 KiB, 1,038 DLs)

Transfer Pricing: CUP method is preferable to TNMM

The assessee sold automobile wipers to its associated enterprise and claimed that as per the “Comparable Uncontrolled Price” (CUP) method, the transactions were at arms’ length basis. The TPO rejected the CUP method on the basis that the comparability of controlled and uncontrolled transactions was not established with certain degree of reasonableness and accuracy and that the conditions prevailing in the market were not established to be identical. The TPO adopted the TNMM and directed that an adjustment be made by adopting the mean profit of comparables. This was confirmed by the DRP. On appeal, HELD:

(i) U/s 92C read with Rule 10B, the most appropriate method has to be applied for determination of arm’s length price. In principle, the CUP method (the traditional transaction method) is preferable to the other methods because all other things being equal, the CUP and traditional transactional methods lead to more reliable results vis-a-vis the results obtained by applying transaction profit method (UCB India 121 ITD 131 and Serdia Pharmaceuticals followed);

(ii) For the CUP method, the focus is on the market in which the products are sold by the assessee and any unique feature of the market in which assessee is situated is of no importance in relative terms. As the goods were sold by the assessee as well as the competitive Chinese manufacturers in the USA market, the market conditions in the territory of sale were the same. The buyer in the USA market will be more concerned with quality and price rather than economic conditions prevailing in China and India (SNF (Australia) Pty. Ltd. Vs. COT (2010) FCA 635 referred to);

(iii) As regards the comparability of the products the assessee has to provide the sale data of the AE in terms of sale price of Chinese and assessee’s goods in the USA market and quantitative data of purchase of Chinese and Indian wipers by the AE and the terms of payment and the AO shall compute the arm’s length price using this data on CUP method.

(21.4 KiB, 1,521 DLs)

Supreme Court recalls law requiring PSUs to obtain COD approval

In ONGC vs. CCE 104 CTR (SC) 31, the Supreme Court directed the Central Government to set up a ‘Committee on Disputes’ to monitor disputes between the Government and Public Sector Enterprises and give clearance for litigation. It was held the no litigation could be proceeded with in the absence of COD approval. This was followed in ONGC vs. CIDCO (2007) 7 SCC 39 and it was held that even disputes between PSUs and State Governments would require COD approval.

In CCE vs. Bharat Petroleum Corporation, a 2 Judge Bench of the Supreme Court held that the working of the COD had failed and that the time has come to revisit the law. The matter was referred to a Larger Bench for reconsideration.

HELD by the Larger Bench recalling its orders in ONGC vs. CCE 104 CTR (SC) 31, (2004) 6 SCC 437 and ONGC vs. CIDCO (2007) 7 SCC 39:

The idea behind setting up of the … “Committee on Disputes” (CoD) was to ensure that resources of the State are not frittered away in inter se litigations between entities of the State, which could be best resolved, by an empowered CoD … Whilst the principle and the object behind the aforestated Orders is unexceptionable and laudatory, experience has shown that despite best efforts of the CoD, the mechanism has not achieved the results for which it was constituted and has in fact led to delays in litigation …. on same set of facts, clearance is given in one case and refused in the other.

 

This has led a PSU to institute a SLP in this Court on the ground of discrimination. We need not multiply such illustrations. The mechanism was set up with a laudatory object. However, the mechanism has led to delay in filing of civil appeals causing loss of revenue. For example, in many cases of exemptions, the Industry Department gives exemption, while the same is denied by the Revenue Department. Similarly, with the enactment of regulatory laws in several cases there could be overlapping of jurisdictions between, let us say, SEBI and insurance regulators. Civil appeals lie to this Court. Stakes in such cases are huge. One cannot possibly expect timely clearance by CoD. In such cases, grant of clearance to one and not to the other may result in generation of more and more litigation. The mechanism has outlived its utility. In the changed scenario indicated above, we are of the view that time has come under the above circumstances to recall the directions of this Court

(159.4 KiB, 1,747 DLs)

Activity of giving micro-finance & earning interest is “charitable purpose”

The assessee, a micro-finance company, applied for registration u/s 12A for exemption u/s 11. The CIT rejected the application on the ground that (a) the objects showed a profit motive, (b) the assessee was charging an interest rate which was higher than that charged by banks & (c) the activity of giving loans was a business activity and not a “charitable purpose” u/s 2(15). On appeal by the assessee, HELD allowing the appeal:

(i) On the issue whether the assessee has a “profit motive” in pursuing its objects, the fact that the assessee is registered u/s 25 of the Companies Act prima facie shows that the assessee is set up to promote “charity or any other useful object” and intends to apply its profits in promoting those objects. The assessee is prohibited from making payment of any dividend to its members. The Objects provide that the assessee has to promote micro finance services to poor persons and to help them rise out of poverty without the motive of profit;

(ii) On the issue whether the activity of promoting micro finance services is a “charitable purpose” u/s 2(15), as per CBDT Circular No.11 of 2008 dated 19.12.2008, a wide range of objects for the welfare of economically and socially disadvantaged people are covered and entities which pursue these objects will be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated in s. 11(4A) or the seventh proviso to s.10(23C) (Bharatha Swamukhi Samsthe 28 DTR (Bang)(Trib) 113 followed);

(iii) The fact that there is a surplus from the activity of micro financing cannot by itself be a ground to say that the assessee does not exist for charitable purpose particularly when the MOA & AOA provide that the profit shall not be distributed amongst the members but shall be utilized towards the objects (Thanthi Trust 247 ITR 785 (SC) & Agricultural Produce and Market Committee 291 ITR 419 (Bom) followed)

(358.7 KiB, 876 DLs)

S. 10(23C)(vi) exemption cannot be rejected merely because there is a surplus

The assessee, a society running a school, applied for exemption u/s 10(23C)(vi) on the ground that it was existing “solely for the purpose of education and not for the purpose of profit”. The CCIT followed CIT vs. Queens’ Educational Society 319 ITR 160 (Utt) and rejected the application on the ground that as the assessee had made a surplus from its activities, it did not exist “solely” for educational purposes. On a Writ Petition to challenge the rejection, HELD allowing the Petition:

(i) To decide whether the institution exists solely for education and not to earn profit the test of predominant object of the activity has to be seen to decide. The purpose does not lose its character merely because some profit arises from the activity. It is not possible to carry on educational activity in such a way that the expenditure exactly balances the income and there is no resultant profit, for, to achieve this, would not only be difficult of practical realization but would reflect unsound principles of management. In order to ascertain whether the institute is carried on with the object of making profit or not it is duty of the prescribed authority to ascertain whether the balance of income is applied wholly and exclusively to the objects for which the applicant is established (Aditanars Educational Institution 224 ITR 310 (SC) & American Hotel and Lodging Association 301 ITR 86 (SC) followed);

(ii) Accordingly, the opinion expressed by the CCIT that the educational institution seeking exemption should not generate any quantitative surplus is legally untenable and incorrect. The assumption that for exemption there should not be any surplus and if it is otherwise the institution society exists for profit and not charity is not justified (Vanita Vishram Trust 327 ITR 121(Bom), Maa Saraswati Trust 194 TM 84 (HP) and Pinegrove International Charitable Trust 327 ITR 73 (P&H) followed).