(53.8 KiB, 857 DLs)

Unaccounted expenditure to be set-off against unaccounted income despite Expl. to s. 37(1) & proviso to s. 69C. Govt. criticized for apathy towards black money

Pursuant to a search u/s 132, an assessments u/s 158BC was made and various additions were made. One of the issues was whether if the AO makes an addition of unaccounted income on the basis of seized records, he is required to give a deduction for the unexplained expenditure shown in the same records. HELD by the Court:

(i) The assessee was engaged in unaccounted business and the seized accounts showed unaccounted receipts and unaccounted expenditure. There is no justification for doubting the entries found in the seized records pertaining to expenditure while accepting the income found recorded therein. When the Department relies on the seized records for estimating undisclosed income, there is no reason why the expenditure stated therein should be disbelieved merely because there is no written agreement and that payments were not made through cheques or demand drafts. This would be unrealistic and not justified. The statute authorizes assessment of “undisclosed income” which has to be arrived at after allowing expenditure incurred by the assessee whether it be accounted in the regular books or not. The Explanation to s. 37(1) does not apply because the unaccounted business is not an “illegal business” and the proviso inserted to s. 69C by the Finance (No.2) Act, 1998 w.e.f. 1.04.1999 does not cover excess expenditure over accounted expenditure in business is covered by s. 69C itself.

(ii) We are constrained to observe about the effort made by us to persuade the Central Government to take steps to prevent generation and circulation of black money. Through a detailed interim order we appraised the Government that unless prohibition is introduced against cash dealings particularly in property sales in film industry and the like against at least for payments over a certain limit in cash, black money generation and circulation cannot be controlled because the disincentives on cash dealings contained under the various provisions of the Income Tax Act have failed to achieve the objective. Further, by prohibiting use of cash in major transactions terror and mafia funding and corruption could be arrested to a large extent. Above all, the worst enemy of our economy that is, circulation of high denomination counterfeit currencies (presently estimated at 7000 crores) could be prevented to a large extent. Unfortunately, the response of the Central Finance Ministry is not at all encouraging in as much as Government wants status quo to continue to the detriment of the economic interest of the country and the people as a whole. Our limitations while exercising appellate jurisdiction u/s 260A inhibit us from initiating any proceedings or issuing direction against the Central Government. However, we express our anguish on the attitude of the Central Government to have created this vicious situation and allow the same to continue.

(202.4 KiB, 1,871 DLs)

To “make available” technical knowledge, mere provision of service is not enough; the payer must be enabled to perform the service himself

The assessee, a UK based reinsurance broker, received commission from several Indian insurance companies for arranging reinsurance contracts. The AO & CIT (A) held that the commission was assessable to tax in India as “fees for technical services” u/s 9(1)(vii) & Article 13(4)(c) of the DTAA. However, the Tribunal (included in file), relying extensively on Raymond vs. DCIT 86 ITD 791 (Mum) & other judgements, held that “In order to fit the terminology “make available” in Article 13(4)(c), mere provision of technical services is not enough but the technical knowledge must remain with the payer, and he must be equipped to independently perform the technical function himself without the help of the service provider“. It was held that as the nature of services rendered by the assessee was not “technical or consultancy services which made available technical knowledge” etc to the payer, the commission was not assessable to tax. On appeal by the department, HELD dismissing the appeal:

The Tribunal held that the “make available” condition was not satisfied inasmuch as no technical knowledge etc, was made available by the assessee to the Indian insurance companies operating in India. The Tribunal conclusions are based on an assessment of the factual matrix of the case at hand and are factual in nature. As there is no perversity in the findings, it does not give rise to a substantial question of law.

(167.6 KiB, 1,369 DLs)

Difference between “Finance Lease” & “Operational Lease”

The assessee bought 1614 items of computer systems for Rs.40 lacs from HCL Hewlett Packard Ltd and leased back to the same company. The assessee claimed 100% depreciation on the ground that the cost of each itemswas less than Rs.5,000. The AO & CIT (A) held that the lease was not a bona fide transaction and that the transaction was a finance transaction. It was held that the assessee had advanced Rs.40 lacs to HCL Hewlett Packard Ltd and agreed to receive back this amount along with the interest over six years. However, the Tribunal upheld the claim on the ground that the conditions of a valid lease were satisfied. On appeal by the department to the High Court, HELD:

The question whether an agreement is a finance agreement or an operating lease cannot be decided by merely looking at the title of the agreement or the nomenclature given to the said agreement. The terms and conditions mentioned in the agreement may be relevant but the surrounding circumstances & type and nature of the asset have also to be considered. There is a difference between a finance agreement and an operational lease. A finance lease is one where the lessee uses the asset for substantially the whole of its useful life and the lease payments are calculated to cover the full cost together with interest charges. It is thus a disguised way of purchasing the asset with the help of a loan. An operating lease is any other type of lease where the asset is not wholly amortised during the non-cancellable period, if any, of the lease and where the lessor does not rely for his profit on the rentals in the non-cancellable period. This distinction has been explained in Asea Brown Boveri Ltd vs. IFCI (2004) 12 SCC 570, Association of Leasing and Financial Service Companies vs. UOI (2011) 2 SCC 352 & Sundaram Finance Ltd vs. Kerala AIR 1966 SC 1178. As the Tribunal has not considered the issue from the right perspective, matter remanded.

(57.2 KiB, 1,054 DLs)

S. 10A/ 10B deduction allowable without set off of losses of non-eligible units

The question arose whether the brought forward unabsorbed depreciation and losses of a unit which was not eligible for s. 10A deduction could be set-off against the current profit of a unit eligible for s. 10A deduction. The Tribunal, relying on Scientific Atlanta Vs. ACIT 129 TTJ 273 (Che)(SB) held that the a. 10A deduction had to be allowed before set-off of the losses of the non-eligible unit. On appeal by the department to the High Court, HELD dismissing the appeal:

S. 10A is a deduction provision and not an exemption provision. S. 10A has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of s. 72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. S. 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in s. 80C to 80U. S. 80B(5) defines for the purposes of Chapter VI-A “gross total income” to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the context of the deduction which is allowable u/s 10A, which would not be permissible unless a specific statutory provision to that effect were to be made. In the absence thereof, such an approach cannot be accepted. Accordingly, the decision of the Tribunal is affirmed since it is plain and evident that the deduction u/s 10A has to be given at the stage when the profits and gains of business are computed in the first instance (Hindustan Unilever Ltd vs. DCIT 325 ITR 102 (Bom) followed)

(39.8 KiB, 796 DLs)

Q whether the s. 127(2) transfer order is invalid for want of reasons referred to Full Bench

The CIT, Valsad, passed an order u/s 127(2) centralizing the assessee’s case from Vapi to Surat “to facilitate coordinated and effective investigation”. The assessee challenged the order on the ground that as no reasons were given in the s. 127(2) order (though given in the affidavit-in-reply), the s. 127(2) order had to be struck down as per Ajanta Industries vs. CBDT 102 ITR 281 (SC). The department relied on Arti Ship Breaking vs. DIT 244 ITR 333 (Guj) where it was held that Ajanta Industries was no longer good law and reasons were not required to be stated in the order. HELD by the Court:

In Ajantha Industries vs. CBDT 102 ITR 281 (SC), it was held that the requirement of recording reasons u/s 127(1) is mandatory and non-communication thereof is not saved by showing that the reasons exist in the file. However, in Arti Ship Breaking 244 ITR 333 (Guj) this law was not followed on the basis that in two subsequent decisions it was held non-communication of reasons recorded by the authority would not vitiate the proceedings. This view of the division bench does not appear to be correct because the said later two decisions related to irregularities in course of disciplinary proceedings which had nothing to do with s. 127 conferring power of transfer. Accordingly, it cannot be said that Ajantha Industries has lost its force in view of those two subsequent decisions. Accordingly, the matter has to be referred to a larger bench to consider the following question:

 

“Whether the decision of the three-judge-bench of the Supreme Court in the case of Ajantha Industries reported in [1976] 102 ITR 281 so far as it lays down the law that the requirement of recording reasons under section 127(1) of the Income tax Act is a mandatory direction under the law and non-communication thereof is not saved by showing that the reasons exist in the file although not communicated to the assessee is still a good law in view of the subsequent decisions of the Supreme Court in the cases of Managing Director, ECIL v. B. Karunakar, AIR 1994 SC 1074, and State Bank of Patiala v. S. K. Sharma, AIR 1996 SC 1669 as held by a Division Bench of this court in the case of Arti Ship Breaking vs. Director of Income Tax (Investigation) and others reported in (2000) 244 ITR 333.”

(103.3 KiB, 1,629 DLs)

S. 40(a)(ia): Special Bench verdict cannot be followed in view of High Court verdict

In AY 2005-06, the assessee made payments to contractors & for professionals & technical services. Though TDS was deducted, it was paid after the end of the FY but before filing the ROI. The assessee pleaded that s. 40(a)(ia), as amended by the FA 2010 w.e.f. 1.4.2010 to provide that no disallowance should be made if the TDS was paid before the due date of filing the ROI should be held to be retrospective. However, the AO & CIT (A), rejected the claim by relying on Bharati Shipyard Ltd 132 ITD 53 (Mum) (SB). On appeal to the Tribunal, HELD allowing the appeal:

The issue involved has now been decided by the Calcutta High Court in CIT vs. Virgin Creators against the Revenue. However, it is noteworthy that the Special Bench of ITAT Mumbai in the case of Bharati Shipyard Ltd 132 ITD 53 (Mum) has taken a view that the amendment is prospective in nature and would apply accordingly. Respectfully following the decision of the Calcutta High Court in the case of Virgin Creators the order of the CIT(A) is not sustainable and the assessee’s appeal is allowed.

(497.5 KiB, 1,108 DLs)

S. 147: Q whether there is “change of opinion” if AO does not specifically apply his mind referred to Full Bench

In the Notes to accounts, the assessee had disclosed that it had received Rs.173 lakhs for transfer of exclusive distribution rights of AC and water coolers and that it was credited to capital reserve and not treated as income. The AO passed a s. 143(3) assessment order in which he did not deal with the issue. Subsequently, as the revenue audit raised an objection, the AO, within 4 years from the end of the AY, reopened the assessment on the ground that the said amount was chargeable as “Capital gains”. The Tribunal, following Kelvinator 256 ITR 1 (FB) (affirmed in 320 ITR 561 (SC)), struck down the reopening on the ground that it was based on the notes on accounts that was already on record, there was no “fresh material” and so it was a case of “lapse of the AO” and a “change of opinion“. On appeal by the department, HELD:

A case where the AO specifically examines an issue and applies his mind poses no difficulty because even if the order is silent, it is a case of “change of opinion”. However, in a case where the AO does not notice or examine a particular aspect in the assessment order and does not raise any written question or query, can it be said that the doctrine of “mere change of opinion” is applicable. There can be different aspects in which this question may arise including cases where the claim may be a repetition and allowed in earlier years. To what extent the presumption u/s 114 (e) of the Evidence Act applicable is the issue. The question is whether the presumption is rebuttable and when the presumption is rebutted. Further, whether the said presumption only applies to procedural aspects or even to substantive assertions relevant to the assessment. Though in Kelvinator 256 ITR 1, the Full Bench held that s. 114 (e) of the Evidence Act would apply and the AO would be deemed to have applied his mind, s. 114 was not specifically referred to by the Supreme Court nor did it specifically approve or disapprove the observations of the Full Bench. Accordingly, the matter should be examined by a larger Bench and the issues requiring consideration are:

 

(i) What is meant by the term “change of opinion?

 

(ii) Whether assessment proceedings can be validly reopened u/s 147, even within four year, if an assessee has furnished full and true particulars at the time of original assessment with reference to income alleged to have escaped assessment and whether and when in such cases reopening is valid or invalid on the ground of change of opinion?

 

(iii) Whether the bar or prohibition under the principle “change of opinion” will apply even when the AO has not asked any question or query with respect to an entry/note, but there is evidence and material to show that the AO had raised queries and questions on other aspects?

 

(iv) Whether and in what circumstances s. 114 (e) of the Evidence Act can be applied and it can be held that it is a case of change of opinion?”

(84.4 KiB, 805 DLs)

Tribunal’s order not dealing with finding of “sham” transaction is “perverse”

The AO disallowed payments made by the assessee to M/s Blue Chip & Co towards “C&F handling charges” on the ground that the transactions were a “sham” and intended to provide interest-free funds to Vijay Mallya & his wife Samira Mallya. This was confirmed by the CIT (A) though the Tribunal allowed the claim on the ground that a similar issue had been allowed in the earlier years. On appeal by the department, HELD reversing the Tribunal:

It is not in public interest to accept such a claim when there is no evidence of rendering any service by Blue Chip & Co to the assessee. The sole object of diverting funds to Blue Chip & Co was to facilitate passing of funds as interest free loan to Vijay Mallya and Samira Mallya. The agreement between the assesee and Blue Chip was found to be a “sham transaction” by the AO & CIT (A). The Tribunal committed grave error by recording the order as if it is a consent order though the DR had categorically defended the AO & CIT (A)’s order. Also, the earlier orders of the Tribunal had been challenged before the High Court. Therefore the findings of the Tribunal are wholly erroneous, cryptic, perverse, laconic and perfunctory.

(218.3 KiB, 485 DLs)

Tribunal Member’s Corruption Charges Info Can Be Disclosed Under RTI

Certain complaints qua corruption were made against Ms. Jyoti Balasundaram, Member/CESTAT. After examining this complaint, the President of CESTAT made certain adverse entries in the ACR of the said Member. On the basis of the said ACR, the Department of Revenue, Ministry of Finance, opened a file with the subject “follow up action on the integrity in the ACR for the year 2000-01 in respect of Ms. Jyoti Balasundaram, Member (Tech), CESTAT.” Ultimately, this file was closed without taking any proper action. The appellant filed a RTI application seeking inspection of the file & copies of the Note Sheets and correspondence. This was rejected by the CIC on the ground that the issue relating to integrity was a part of the ACR & ACR grades could not be disclosed to third-parties except under exceptional circumstances. The Single Judge held that the information sought was “third party information” and so the authorities had to consider whether the third party’s “privacy” defence could be overruled in the public interest or not. On second appeal, HELD:

U/s 8(1)(j) of the RTI Act, information which relates to personal information the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual cannot be disclosed unless the authority is satisfied that the larger public interest justifies the disclosure of such information. U/s 11 (1), where the CPIO etc intends to disclose the information which relates to or has been supplied by a third party and has been treated as confidential by that third party, the CPIO is required to give written notice to the third party and invite him to make submissions why the information should not be disclosed. This mandatory procedure has to be followed and the Single Judge rightly directed the CIC to determine whether disclosure of the Tribunal Member’s ACR was in the larger public interest (Arvind Kejriwal vs. CPIO AIR 2010 Delhi 216 followed; Centre for Earth Sciences Studies Vs. Anson Sebastian, 2010 (2) KLT 233 not followed)

(448.1 KiB, 1,017 DLs)

Transfer Pricing: TPO cannot examine the necessity of, or rewrite, the transaction

The assessee entered into an agreement pursuant to which it paid brand fee/ royalty to an associated enterprise. The TPO disallowed the payment on the ground that as the assessee was regularly incurring huge losses, the know-how/ brand had not benefited the assessee and so the payment was not justified. This was reversed by the CIT (A) & Tribunal on the ground that as the payment was genuine, the TPO could not question commercial expediency. On appeal by the department, HELD dismissing the appeal:

The “transfer pricing guidelines” laid down by the OECD make it clear that barring exceptional cases, the tax administration cannot disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. The guidelines discourage re-structuring of legitimate business transactions except where (i) the economic substance of a transaction differs from its form and (ii) the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The OECD guidelines should be taken as a valid input in judging the action of the TPO because, in a different form, they have been recognized in India’s tax jurisprudence. It is well settled that the revenue cannot dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur (Eastern Investment Ltd 20 ITR 1 (SC), Walchand & Co 65 ITR 381 (SC) followed). Even Rule 10B(1)(a) does not authorise disallowance of expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same.