(22.4 KiB, 2,925 DLs)

No s. 271(1)(c) penalty for a “bona fide/ inadvertent/ human error”

The assessee filed a ROI together with the Tax Audit Report. In the Tax Audit Report, it was disclosed that an amount of Rs. 23 lakhs towards provision for gratuity was not allowable u/s 40A(7). However, in the computation of income, the said amount was not disallowed. The AO also overlooked the item and omitted to make a disallowance. Subsequently, he reopened the assessment u/s 147, disallowed the expenditure and levied penalty u/s 271(1)(c). The assessee explained that the omission to make a disallowance had occurred because it had a separate accounts department and there was “some confusion” and that the return was prepared by a non-CA and was signed a director who proceeded on the basis that the return was correctly drawn up. The CIT (A), Tribunal and High Court affirmed the levy of penalty on the ground that since the assessee was a well known and reputed Chartered Accountant firm and a tax consultant, it was not expected to make such a mistake and that there had been a failure to discharge the strict liability to furnish true and correct particulars of income. On appeal by the assessee to the Supreme Court, HELD reversing all the lower authorities:

Notwithstanding the fact that the assessee is undoubtedly a reputed firm and has great expertise available with it, it is possible that even the assessee could make a “silly” mistake. The fact that the Tax Audit Report was filed along with the return and that it unequivocally stated that the provision for payment was not allowable u/s 40A(7) indicates that the assessee made a computation error in its return of income. Apart from the assessee, even the AO who framed the original assessment order made a mistake in overlooking the contents of the Tax Audit Report. The contents of the Tax Audit Report suggest that there is no question of the assessee concealing its income. There is also no question of the assessee furnishing any inaccurate particulars. All that happened in the present case is that through a bona fide and inadvertent error failed to add the provision for gratuity to its total income. This can only be described as a human error which we are all prone to make. The calibre and expertise of the assessee has little or nothing to do with the inadvertent error. That the assessee should have been careful cannot be doubted, but the absence of due care, in a case such as the present, does not mean that the assessee is guilty of either furnishing inaccurate particulars or attempting to conceal its income. Consequently, given the peculiar facts of this case, the imposition of penalty on the assessee is not justified.

(580.2 KiB, 1,539 DLs)

S. 14A & Rule 8D(2)(ii): Interest incurred on taxable income has also to be excluded to avoid incongruity & in view of Department’s stand before High Court

The Tribunal had to consider two issues on s. 14A & Rule 8D: (i) whether the AO has to record a specific satisfaction that the claim of the assessee that it has not incurred any expenditure on earning tax exempt dividend is incorrect & (ii) whether in view of the definition of variable ‘A’ embedded in the formula under Rule 8D(2)(ii), interest expenditure directly related to taxable income has also to be excluded even though it is not specifically referred to. HELD by the Tribunal:

(i) The submission that the AO has to record a specific finding that the assessee’s claim of not having incurred any expenditure to earn the tax-free income is incorrect is not acceptable. Though s. 14A(2) provides that the AO has to be “not satisfied” with the correctness of the assessee’s claim, s. 14A(3) provides that s. 14A(2) shall also apply to a case where an assessee claims that no expenditure has been incurred by him in relation to the tax-free income. The result is that when the assessee offers a disallowance u/s 14A, then s. 14A & Rule 8D cannot be invoked unless the AO is satisfied about the incorrectness of the disallowance so offered, but when assessee does not offer any disallowance u/s 14 A on his own, s. 14A(2) and Rule 8D can be invoked without any need to express satisfaction about the incorrectness of such a claim. Also, as held in Dhanuka & Sons 339 ITR 319 (Cal), when an assessee is paying interest on borrowings and is not able to show that the investment in shares is out of internal accruals or non interest bearing funds, s. 14A disallowance can be made;

(ii) Rule 8D(2)(ii) allocates “expenditure by way of interest ……….. which is not directly attributable to any particular income or receipt”. This refers to interest relatable to tax-free income as well as taxable income. However, the definition of variable ‘A’ embedded in the formula under Rule 8D(2)(ii) refers only to interest expenditure directly related to tax exempt income but not to interest expenditure directly related to taxable income. The result is that while Rule 8D(2)(ii) seeks to allocate all interest expenditure, it ends up allocating only interest expenditure relatable to tax-free income. This is clearly incongruous. In Godrej & Boyce Mfg Co Ltd 328 ITR 81 (Bom), the department took the stand, to defend the constitutional validity of Rule 8 D, that both, interest directly attributable to tax exempt income as well as interest directly relatable to taxable income would be excluded from the definition of variable ‘A’ in the Rule 8D(ii) formula. Once the Revenue has taken a particular stand about the applicability of the formula in Rule 8 D(2)(ii) based on which the constitutional validity of Rule 8D is upheld, it is not open to the Revenue to take any other stand on the issue with regard to the actual implementation of the formula in the case of any assessee. Accordingly, the correct application of the formula set out in Rule 8D(2)(ii) is, as noted in Godrej and Boyce, that interest expenses directly attributable to tax exempt income as also directly attributable to taxable income have to be excluded from the computation of common interest expenses to be allocated under Rule 8D(2)(ii).

(496.4 KiB, 2,055 DLs)

S. 147: There is no “change of opinion” if AO does not specifically apply his mind

The Full Bench was constituted to consider the meaning of the expression “change of opinion” for purposes of s. 147 and whether, in the light of Kelvinator 256 ITR 1 (Del FB), as approved in 320 ITR 521 (SC), in a case where the assessee has furnished full and true particulars at the time of original assessment with reference to the income alleged to have escaped assessment, the AO, even within 4 years from the end of the AY, could be said to have formed an opinion and to have no jurisdiction to reopen the assessment even though he had not raised any query with respect to the issue. HELD by the Full Bench:

By the Majority (Easwar J. dissenting partly):

(i) The expression “change of opinion” postulates formation of opinion and then a change thereof. The question of “change of opinion” arise only when the AO at the s. 143(3) stage forms an opinion and accepts the assessee’s stand. There is a difference between “change of opinion” and failure to “form an opinion“. However, for determining whether or not there is “change of opinion“, the fact that the assessment order is silent is not relevant because the assessee has no control over the way the order is written. There may also be cases where though the AO has not raised a query, the issue may be so apparent and obvious that to say that the AO has not formed an opinion would be contrary and opposed to normal human conduct;

(ii) The observations in Kelvinator 256 ITR 1 (FB) that when an assessment order is passed u/s 143(3), a presumption is raised u/s 114(e) of the Indian Evidence Act that the order was passed after application of mind and that otherwise there would be a premium on the authority exercising quasi-judicial function to take benefit of its own wrong does not mean that even if the AO does not examine a particular issue and had not formed any opinion, it must be presumed that he must have formed an opinion. There cannot be deemed formation of opinion even when the particular issue is not examined. The observations were made only to reject the Revenue’s contention that a non-speaking assessment order means a case of non-formation of opinion;

(iii) In affirming Kelvinator, the Supreme Court referred only to the principle of “change of opinion” and no comments were made on the presumption u/s 114(e) of the Indian Evidence Act. The assessee’s argument that the Full Bench verdict has merged in the judgement of the Supreme Court and cannot be reconsidered is not acceptable because there are no observations by the Supreme Court on the issue of whether there is deemed formation of opinion and it cannot be said that the High Court’s reasoning is the ratio of the apex Court;

Per Easwar J. (dissenting in part):

(i) There is no difference between a case where a query is raised by the AO which is replied to by the assessee with supporting material, but the opinion of the AO is not recorded in the assessment order, and a case where even without a query from the AO, the assessee voluntarily discloses full and true particulars necessary for his assessment, which are not referred to in the assessment order and the opinion of the AO is not expressly recorded. The ruling of the Full Bench in Kelvinator would apply with equal force to both types of cases.

(ii) The substratum of the ruling in Kelvinator is not a question of “deemed formation of opinion” alone but that the AO cannot take advantage of the perfunctory manner in which he completed the assessment. The ratio of the judgment is rooted to the salutary principle that the assessees shall not be subjected to harassment if they have furnished full and true particulars at the time of the original assessment. Making an assessment is a serious task. Legal consequences follow. A return of income is not a mere scrap of paper. It is to be treated with the respect it deserves. The real principle laid down by the Full Bench in Kelvinator is that if the assessee has discharged his duty of furnishing full and true particulars at the time of the assessment, it may be fairly taken that the AO has equally discharged his functions in the manner required of him. It hardly matters that in the s. 143(3) order, he has not recorded his agreement with the assessee on every issue or point; that could be reasonably inferred;

(iii) The Supreme Court affirmed Kelvinator in a “wholesome manner” in the context of a power given to the AO to disturb the finality of a s. 143(3) assessment and it was held that there should be “tangible material” with the AO. That should end the controversy. The argument that because the observations of the Full Bench on s. 114(e) of the Evidence Act were not expressly referred to and approved by the Supreme Court, that is not a part of the ratio of the Supreme Court’s verdict introduce an undesirable element of uncertainty even when finality has been accorded by the decree of Supreme Court. This way, matters can be reargued and re-agitated till the end of time and is not in conformity with the parameters of judicial discipline and comity.

(iv) The acceptance of the department’s argument that there is no “change of opinion” only because the AO did specifically look at the particulars that were on record raises a “clear and present danger” of the “dangerous consequences” of the two vices of power to review masquerading as the power to reassess and an abuse of the power to reopen the assessment coming into full play. There would be an abuse of power if the AO seeks to reopen the assessment only on the ground that he did not form an opinion despite being possessed of full and true particulars furnished by the assessee.

(62.9 KiB, 1,313 DLs)

S. 80-IB(10)(d) ceiling on commercial area inserted w.e.f. 1.4.05 does not apply to projects approved before that date

The assessee’s housing project was commenced pre 1.4.2005 when s. 80-IB(10) did not impose any ceiling on the commercial area that could be embedded in the project. S. 80-IB(10)(d) was inserted by the Finance (No.2) Act, 2004 to impose a ceiling on the extent of commercial area that could be contained in the housing project. The Tribunal held that as the assessee’s project was completed after 1.4.2005, the question of eligibility for s. 80-IB(10) deduction had to be considered as per the law then prevailing and not at the time that the project was approved. As the commercial area exceeded the ceiling stipulated in s. 80-IB(10)(d), the claim for deduction was denied. On appeal by the assessee to the High Court, HELD reversing the Tribunal:

The judgement of the Bombay High Court in Brahma Associates 333 ITR 289 (Bom) that w.e.f. 1.4.2005, deduction u/s 80-IB(10) would be governed by the restriction on commercial area imposed by clause (d) does not mean that even projects approved prior to 1.4.2005 would be governed by the said restriction. Neither the assessee nor the local authority responsible to approve the construction projects are expected to contemplate future amendment in the statute and approve and/or carry out constructions maintaining the ratio of residential housing and commercial construction as provided by the amended Act. The entire object of s. 80-IB(10) is to facilitate the construction of residential housing project and if at the stage of approving the project, there was no such restriction in the Act, the restriction subsequently imposed has to be necessarily construed on a prospective basis and as applying to projects approved after that date.