(90.3 KiB, 1 DLs)

S. 143(3) assessment order without AO’s signature is Void

The AO passed an assessment order u/s 143(3) and issued the Income-tax Computation Form (ITNS 150), Demand Notice u/s 156 and Penalty Notice u/s 271(1)(c). While all the other documents were signed by the AO, the assessment order was not. In reply to the assessee’s contention that the assessment order was invalid, the department relied on s. 292B and Kalyankumar Ray vs. CIT 191 ITR 634 (SC) and argued that the Act does not require the service of an assessment order and the service of a valid ITNS 150 & demand notice was sufficient. HELD rejecting the department’s plea:

S.143(3) contemplates that the AO shall pass an order of assessment in writing. If the assessment order is signed then because the computation of tax is a ministerial act, ITNS-150 need not be signed by the AO. However, if the assessment order is not signed, then the fact that he has signed the tax computation form and the notice of demand is irrelevant. The omission to sign the assessment order cannot be explained by relying on s. 292B. If such a course is permitted to be followed than that would amount to delegation of powers conferred on the AO by the Act. Delegation of powers of the AO u/s 143(3) is not the intent and purpose of the Act. An unsigned assessment order is not in substance and effect in conformity with or according to the intent and purpose of the Act (Kilasho Devi Burman 219 ITR 214 (SC) followed; Kalyankumar Ray 191 ITR 634 (SC) explained)

(157.9 KiB, 14 DLs)

For Expl (baa) to s. 80HHC, netting of income from expenditure is allowed

The AO & CIT(A) computed s. 80HHC deduction by deducting 90% of the gross interest received from the profits of business. However, the Tribunal, relying on Lalsons Enterprises 89 ITD 25 (Del) (SB) & Shri Ram Honda Power Equip 289 ITR 475 (Del), held that only the net interest could be deducted (subject to nexus between the expenditure and income being proved). On appeal by the department, the High Court (CIT vs. Asian Star Co Ltd 326 ITR 56 (Bom)) reversed the Tribunal and held that the gross receipts had to be excluded. On appeal by the assessee, HELD reversing the High Court:

Under Clause (1) of Explanation (baa) to s. 80HHC, 90% of any receipts by way of brokerage, commission, etc “included in any such profits” have to be deducted from the profits & gains of business. The expression “included any such profits” means such receipts by way of brokerage, commission, etc included in the profits & gains. Therefore, if any quantum of receipts by way of brokerage, commission, etc is allowed as expenses u/s 30 to 44D and is not included in the profits of business, 90% of such quantum of receipts cannot be reduced under clause (1) of Explanation (baa) to s. 80HHC. In other words, only 90% of the net amount of any receipt of the nature mentioned in clause (1) which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining “profits of the business”. The High Court wrongly relied on CIT vs. K. Ravindranathan Nair 295 ITR 228 (SC) & circular dated 19.12.1991 explaining the clauses of the Finance Bill, 1991 (Principle in Distributors (Baroda) 155 ITR 120 (SC) followed; Shri Ram Honda Power Equip 289 ITR 475 (Del) approved)

(215.8 KiB, 25 DLs)

s. 80HHC/ 28(iiid): DEPB sale proceeds is not “profits”

The assessee sold the Duty Entitlement Pass Book (“DEPB”) which had accrued on export of its products. S. 28 (iiid) provides that “any profit on the transfer” of the DEPB shall be business profits. Under Explanation (baa) to s. 80HHC, 90% of “the sum referred to in s. 28(iiid)” has to be reduced from the business profits. Under the third Proviso to s. 80HHC (3), in the case of an assessee having an export turnover exceeding Rs. 10 crores, the profits referred to in s. 80HHC (3) can be increased by 90% of “the sum referred to in s. 28 (iiid)” only if two conditions are satisfied. If the said conditions are not satisfied, no relief on account of DEPB can be granted u/s 80HHC. In Topman Exports vs. ITO 318 ITR 87 (Mum)(SB)(AT) the Special Bench of the Tribunal held that “the sum referred to in s. 28(iiid)” meant only the “profits” on transfer of the DEPB and not the entire sale proceeds. The Tribunal held that the amount received on account of DEPB had to be bifurcated into the “face value” of the DEPB and the “profit” and that while the “face value” was assessable u/s 28(iiib), the “profit” was assessable u/s 28(iiid). The consequence was that only the “profit” suffered the rigors of the third Proviso to s. 80HHC (3) and not the “face value“. On appeal by the revenue, the High Court (CIT vs. Kalpataru Colours and Chemicals 328 ITR 421 (Bom)) reversed the Tribunal and held that the sale proceeds could not be bifurcated into “profits” and “face value” and the entire sale proceeds was “profits” for s. 80HHC r.w.s. 28(iiid). On appeal by the assessee, HELD reversing the High Court:

DEPB is “cash assistance” receivable against exports under the scheme of the Government. While the face value of the DEPB falls under clause (iiib) of s. 28, the difference between the sale value and the face value of the DEPB (the “profit”) will fall under clause (iiid) of s. 28. The High Court was not right in taking the view that the entire sale proceeds of the DEPB realized on transfer of the DEPB and not just the difference between the sale value and the face value of the DEPB represent profit on transfer of the DEPB. DEPB represents part of the cost incurred by a person for manufacture of the export product and hence even where the DEPB is not utilized by the exporter but is transferred to another person, the DEPB continues to remain as a cost to the exporter. When DEPB is transferred, the entire sum received on such transfer does not become his profits. It is only the amount that he receives in excess of the DEPB which represents his profits on transfer of the DEPB.

(61.1 KiB, 270 DLs)

S. 143(1) assessment cannot be reopening u/s 147 in absence of “new material”

The AO accepted the ROI filed by the assessee u/s 143(1). He thereafter issued a notice u/s 148 on the ground that the assessee had claimed a deduction for ERP software and that although only 20% of the said expenses was debited to the P&L A/c, the entire amount was claimed as a deduction. The assessee claimed that the reopening was not valid as there was no “new material” in the AO’s possession. HELD upholding the plea:

Though the assessment was originally u/s 143(1), it is clearly evident from the recorded reasons that there was no new material coming to the possession of the AO on the basis of which the s. 143(1) assessment was reopened. In Telco Dadaji Dhackjee Ltd, the Third Member held, after considering Rajesh Jhaveri Stock Brokers 291 ITR 500 & Kelvinator of India 320 ITR 561 (SC), that a s. 143(1) assessment could not be reopened u/s 147 without there being any new material coming to the possession of the AO. As the AO had reopened the s. 143(1) assessment on the basis of the material which was already on record, the reopening was not valid.

(292.3 KiB, 218 DLs)

In a finance lease, claim for “lease equalization charge” as per ICAI Guidelines is allowable

The assessee received lease charges and claimed a reduction towards “lease equalization charges” on the ground that reduction was in accordance with the Guidance Note dated 20.09.1995 issued by the ICAI in respect of Accounting for Leases and the Accounting Standard AS-1 notified u/s 145 which mandated that the accounting policy of the assessee should represent a true and fair view. The AO & CIT (A) rejected the claim on the ground that it was a “notional charge” and that the accounting guidelines could not override the Act. The Tribunal (38 SOT 412), however, allowed the claim. On appeal by the department, HELD dismissing the appeal:

(i) As the method for accounting for lease rentals was based on the Guidance Note “Accounting For Leases” issued by the ICAI, the AO was not entitled to disregard the same. The Guidance Note reflects the best practices adopted by accountants the world over and the fact that it was not mandatory is irrelevant. The ICAI is recognized as the body vested with the authority to recommend Accounting Standards for ultimate prescription by the Central Government u/s 211(3C) of the Companies Act. Also AS-1 pertaining to Disclosure of Accounting Policies has mandatory status for periods commencing on or after 01.04.1991. The change by the assessee in the policy of accounting for leases had the imprimatur of the ICAI and so the AO was not entitled to disregard the books of accounts or the method of accounting for leases;

(ii) The department’s contention that the “lease equalization charge” is a claim in the form of a deduction which cannot be allowed as there is no provision under the Act is based on a complete misappreciation of what constitutes a lease equalization charge. As the transaction was a finance lease, the charge had to be provided as per the ICAI Guidelines. As long as the method employed for accounting of income meets with the rudimentary principles of accountancy, one of which, includes offering only revenue income for tax, no fault can be found with the assessee debiting lease equalization charges in its profit and loss account. This represented the true and fair view of the accounts; a statutory requirement u/s 211(2) of the Companies Act, enabled determination of real income.

(122.2 KiB, 528 DLs)

Tribunal’s order is binding and failure to follow it is ‘Contempt of Court’

Though the Tribunal in the assessee’s own case held that exemption u/s 11 was available and the facts were identical, the CIT (A), for a subsequent year, declined to follow it inter alia on the ground that the DR had not advanced arguments before the Tribunal in a ‘comprehensive and effective manner’. The assessee filed an appeal demanding exemplary costs u/s 254(2B). HELD by the Tribunal after a comprehensive review of the law on the subject:

It is well settled that the Tribunal is exercising judicial functions and has all powers of a Court. The proceeding before the Tribunal are deemed to be judicial proceedings. It appears to be the impression/ misunderstanding of some tax officials that the orders of the ITAT interpreting the law cannot be binding as it is a fact finding authority. However, this is not correct because the decision of a higher authority in the judicial hierarchy is binding on all the lower authorities below the line. Hence, the AO & CIT (A) are bound by the decision rendered by the jurisdictional Tribunal. Refusal to follow the order of the ITAT would render that authority guilty of committing contempt of Tribunal for which the concerned authority is liable to be proceeded against. If the decision of the Tribunal is found to be unacceptable to the authorities below, the right course to follow is to carry the matter in appeal to the High Court and to seek suspension of the operation of the order of the Tribunal. A person occupying the chair of CIT (A) is expected to be aware of judicial discipline and the binding nature of the Tribunal’s order. To avoid harassment to the assessee and unpleasant circumstances, the CBDT should take appropriate steps to enlighten all officials to ensure that judicial discipline is maintained. Costs u/s 254(2B) can be granted only if frivolous appeals are filed and not in a case like this. However, the assessee is free to take proper steps for initiating contempt proceeding against the CIT(A) (Ajay Gandhi Vs. B.Singh 265 ITR 451 (SC), ITAT Vs. V.K.Agarwal 235 ITR 175 (SC) & Agarwal Warehousing and Leasing 257 ITR 235 (MP) followed)

(13.4 KiB, 364 DLs)

For s. 115JA/JB s. 80HHC deduction to be computed as per P&L Profits & not normal provisions

In computing “book profits” u/s 155JA & 115JB, the assessee claimed that the deduction admissible thereunder u/s 80HHC had to be computed on the basis of the “book profits” and not on the basis of the income computed under the normal provisions of the Act. This claim was upheld by the Tribunal by relying on the judgement of the Special Bench in DCIT vs. Syncome Formulations 106 ITD 193. On appeal by the Revenue, the High Court (233 CTR 443 (Bom)) reversed the Tribunal. On appeal by the assessee, HELD reversing the High Court:

In view of this Court’s Order in the case of CIT vs. Bhari Information Technology Systems upholding the judgment of the Special Bench of Tribunal in DCIT vs. Syncome Formulations (I) Ltd 106 ITD 193, the impugned judgment of the High Court is set aside and the judgments of the ITAT in these cases stand affirmed.

(144.1 KiB, 568 DLs)

S. 40(a)(ia) TDS: Even if Payee has paid tax, payer not eligible for deduction

For AY 2007-08 & 08-09, the assessee paid VSAT & transaction charges without deduction of TDS. The AO held the payment to be “fees for technical services” & disallowed the payment u/s 40(a)(ia) for want of TDS u/s 194J though the CIT (A) allowed the claim by relying on Skycell Communications 251 ITR 53 (Mad). Before the Tribunal, the assessee argued that though the merits was covered against it by CIT vs. Kotak Securities Ltd 340 ITR 333 (Bom), the deduction had to be allowed because (i) s. 40(a)(ia) was not a ‘tax-levying’ provision but was merely to ensure that tax was paid by either the payer or the payee. As the payee had already paid the taxes, the bar in s. 40(a)(i) did not apply in line with Hindustan Coca Cola Beverage 293 ITR 226 (SC) and (ii) in accordance with Kotak Securities, as the department had not objected to the non-deduction of TDS on transaction charges in the past, there was no justification for invocation of s.40(a)(ia). HELD by the Tribunal:

The argument that since the payee has already paid due tax on the income, s. 40(a)(ia) cannot be invoked is not correct. The law in Hindustan Coca Cola Beverage 293 ITR 226 (SC) that if the payee is assessed, the tax cannot be recovered from the payer was in the context of s.201 and pursuant to Circular No.275/201/95-IT dated 29-1-1997. In the absence of such circular in case of disallowance u/s 40(a)(ia), the principle laid down cannot be adopted for s. 40(a)(ia). As regards the principle that the department had accepted the position in the past, the defense is available for AY 2007-08 but not for AY 2008-09.

(124.3 KiB, 304 DLs)

s. 194H TDS: In absence of principal-agent relationship, payment, though called “commission”, not covered

The assessee obtained a bank guarantee and paid ‘bank guarantee commission’. The AO & CIT (A) took the view that since the payment was characterized as “commission” it fell within the ambit of s. 194H and the assessee ought to have deducted TDS. The assessee was held liable as assessee-in-default u/s 201. On appeal by the assessee, HELD reversing the AO & CIT (A):

S. 194H defines the expression “commission or brokerage” to include any payment received by a person acting on behalf of another person for services rendered or for any services in the course of buying or selling of goods …. Applying the principle of noscitur a sociis & ejusdem generis, the expression “commission” has to take its colour from the expression “brokerage”. As the expression “brokerage”, in common parlance and in law, means ‘fees or commission given to or charged by a broker’, the expression ‘commission’ must be confined to a payment made to agents etc for effecting sales and carrying out business transactions and cannot extend to payments which are for services rendered or products offered on a principal to principal basis. A principal-agent relationship is a sine qua non for invoking the provisions of s. 194 H. As there is no principal agent relationship between a bank issuing the bank guarantee and the assessee, the payment, though termed “commission”, is not covered by s. 194H (SRL Ranbaxy Ltd vs ACIT referred).

(140.6 KiB, 467 DLs)

Interrogation till late night amounts to “torture” & violation of “human rights”

The assessee’s premises were searched u/s 132 and alleged undisclosed income of Rs. 4.18 crores was detected. The assessee filed a complaint before the the Bihar Human Rights Commission stating that interrogation & recording of statement was conducted for more than 30 hours and till the odd hours of the night without any break or interval and this violated his human rights. The Commission upheld the plea and directed the concerned officials to show-cause why the assessee should not be compensated from their salary. The Department filed a Writ Petition to challenge the order. HELD by the Court:

(i) The interrogation continued till 3.30 a.m. on the second night of search and seizure as per the department’s record. The search and seizure manual does not prescribe any time limit for search and survey operation and the same may continue for days if required, but it has to be in keeping with the basic human rights and dignity of an individual. The purpose of the Act is to give effect to the process of execution of actions of executive and bureaucratic machinery in line of accepted standard of basic human rights which are internationally recognized. The laws, and approach to law for its execution must confirm to the charter of human values and dignity. Even a person accused of a serious offence has to be produced before the nearest Magistrate within 24 hours minus the time taken in reaching the Court. There is no possible justification to continue interrogation and keep the assessee awake till 3 a.m. on the second night of search and interrogations. No reason has been assigned as to why the interrogations could not have been deferred till the morning of the next day. The officials could have continued with the interrogation on the next day in the morning after allowing the assessee to retire at an appropriate time in the night. Sleep deprivation method of interrogation amounts to inhuman treatment and violation of Article 3 of the European Convention on Human Rights. The Convention prohibits in absolute terms torture or Inhuman or degrading treatment or punishment. No exception to Article 3 can be made even in the event of Public Emergency threatening the life of the Nation. Accordingly, the department is guilty of violating human rights even though the operations were conducted in best interest of revenue and good faith (Ireland vs. UK (1978) ECHR 1, Kalashnikov vs. Russia (2002) ECHR 596 & Salmouni vs. France (2000) 29 EHRR 403 followed; Rajendran Chingaravelu 2010(1) SCC 45 distinguished)

(ii) However, as the Commission, without issuing any notice to the officials engaged in the search (as to the violation of Human Rights), issued notice on why monetary compensation be not awarded and be recoverable from their salary, it had pre-judged the officials as being guilty of violation of human rights, without affording them an opportunity of hearing. This was contrary to s. 16 of the Protection of Human Rights Act, 1993 and had to be reversed.