(187.8 KiB, 258 DLs)

Validity of s. 147 reopening has to be determined on the basis of law prevailing on date of issue of s. 148 notice and not on retrospectively amended law

In respect of AY 2004-05, the assessee computed its book profits u/s 115JB by claiming a deduction for provision for doubtful debts and advances and the same was allowed vide order u/s 143 (3). On 18.7.2008 (within 4 years), the AO issued a notice u/s 148 inter alia on the ground that the provision for doubtful debts had to be added back to the book profits. The assessee filed a writ petition to challenge the reopening. HELD allowing the Petition:

(i) U/s 115JB as it stood at the relevant time, the AO was authorized by cl (c) of Expl (1) to s. 115JB to add back “amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities”. In HCL Comnet Systems 305 ITR 409 the Supreme Court held that a provision for doubtful debts was a provision for diminution in the value of the assets and did not fall under the said provision. To supercede this judgement, cl (i) was inserted in the Expl to s. 115JB by the FA 2009 w.r.e.f 1.4.2001 to provide that even amounts set aside as provision for diminution in the value of an asset had to be added to the book profits.

(ii) The retrospective amendment was of no avail because it was enacted after the issue of the s. 148 notice. In Max India 295 ITR 282, the SC held in the context of s. 263 that the validity of the revision order had to be determined on the basis of the law on the date the order was passed. This principle is applicable to s. 147 as well and the validity of the reopening has to be determined on the basis of the law as it stands on the date of issue of the s. 148 notice. As the retrospective amendment to s. 115JB was not and could not have formed the basis for reopening the assessment, the same could not be relied upon to justify the reopening. The validity of the s. 148 notice must be determined with reference to the recorded reasons and the same cannot be allowed to be supplemented on a basis which was not present to the mind of the AO and could not have been so present on the date on which the power to reopen the assessment was exercised. Consequently, the reopening was without jurisdiction.

(98.2 KiB, 207 DLs)

ITAT has no power u/s 254 (2) to re-evaluate correctness on merits of earlier decision

The assessee claimed deduction u/s 80HHC which was allowed to the extent of Rs. 32.17 crs by the AO. The claim included DEPB license sale proceeds. The CIT revised the assessment u/s 263 on the ground that s. 28 (iiia) did not apply to a DEPB license and its proceeds were not eligible for deduction u/s 80HHC. The assessee filed an appeal before the Tribunal where it relied on the judgements in Pratibha Syntex Ltd vs. JCIT 81 ITD 118 and Pink Star vs. DCIT 27 ITD 137 to argue that the DEPB license would form part of the incentive and had to be considered for s. 80HHC deduction. However, the Tribunal held that these judgements were distinguishable and dismissed the appeal. The assessee thereafter filed a MA u/s 254(2) for rectification. The Tribunal allowed the application and recalled its order. The Tribunal further allowed the assessee’s appeal and set aside the CIT’s s. 263 revisional order. The Tribunal relied on Pratibha Syntex and Pink Star to hold that when the assessment order was passed, there was no dispute as to whether export incentives by way of a DEPB license were eligible for deduction u/s 80HHC. The department filed an appeal where it argued that the Tribunal’s MA order was a review of the earlier order and that it had no jurisdiction to do so u/s 254 (2). HELD allowing the appeal:

(i) S. 254(2) empowers the Tribunal to rectify a mistake apparent from the record. In Honda Siel Power Products 295 ITR 466 (SC) it was held that s. 254(2) is based on the fundamental principle that a party appearing before the Tribunal should not suffer on account of a mistake committed by the Tribunal. It was held that the Tribunal would be regarded as having committed a mistake in not considering the material which is already on record;

(ii) However, in the present case the Tribunal in the original order specifically dealt with the decisions in Pratibha Syntex and Pink Star and held them to be distinguishable. However, in the s. 254(2) order, the Tribunal virtually reconsidered the entire matter and came to the conclusion that in view of Pratibha Syntex and Pink Star a DEPB license was eligible for deduction u/s 80HHC. This amounted to a re-appreciation of the correctness of the earlier decision on merits. This was impermissible. Re-evaluating the correctness on merits of an earlier decision lies beyond the scope of the power conferred u/s 254(2).

(iii) The power u/s 254(2) is confined to a rectification of a mistake apparent on record. S. 254(2) is not a carte blanche for the Tribunal to change its own view by substituting a view which it believes should have been taken in the first instance. S. 254(2) is not a mandate to unsettle decisions taken after due reflection. It is not an avenue to revive a proceeding by recourse to a disingenuous argument nor does it contemplate a fresh look at a decision recorded on merits, however appealing an alternate view may seem. Unless a sense of restraint is observed, judicial discipline would be the casualty. That is not what Parliament envisaged.

(127.3 KiB, 322 DLs)

Speculation loss can be set off against delivery based profits

The assessee earned a profit on sale of shares held as stock-in-trade. This profit was offered as profit from a ’speculation business’ and was set off against a ’speculation loss’ brought forward from an earlier assessment year. The AO took the view that the profit from sale of shares was not from a ’speculation business’ on the ground that the assessee had settled its transaction of sale and purchase of shares through physical delivery. Consequently, the claim for set off against the speculation loss was denied. This was confirmed by the CIT (A) though reversed by the Tribunal on the ground that the profit earned from sale of shares fell within the purview of the Explanation to s. 73 and could be set off against speculation losses. On appeal by the Revenue, HELD affirming the Tribunal’s order:

(i) The Explanation to s. 73 creates a deeming fiction that where the assessee is a company and any part of its business consists of the purchase and sale of shares of other companies, the assessee is deemed to be carrying on a speculation business, to the extent to which the business consists of the purchase and sale of shares. A business postulates a systematic course of activity or dealing. Unless the business of a Company consists of the sale and purchase of shares, the deeming fiction would not apply. However, once the requirements of the Explanation are satisfied the assessee is deemed to be carrying on a “speculation business”;

(ii) The argument of the Revenue that the term “speculative transaction” in s. 43(5) must be read into the provisions of s. 73 and that a business which involves actual delivery of shares would not constitute a speculation business cannot be accepted having regard to the deeming fiction created by the Explanation to s. 73. There is no justification to exclude a business involving actual delivery of shares. Once an assessee is deemed to be carrying on a speculation business for the purpose of s. 73, any loss computed in respect of that speculation business, can be set off only against the profits and gains of another speculation business.

(207.0 KiB, 250 DLs)

S. 80-I deduction allowable without setting off loss of other units

The assessee had two units, namely, a steering unit and an axle unit, both of which were eligible u/s 80-I. While one unit was making profits, the other was incurring losses. The AO and CIT (A) took the view that deduction u/s 80-I on the profits of one unit could be allowed only after setting off the losses of the other unit. On appeal, the Tribunal allowed the claim of the assessee on the ground that the two units were independent of each other and that u/s 80-I (6), the profit making unit had to be considered to be independent of the other. Before the High Court, the department claimed that the issue was covered in their favour by Synco Industries 299 ITR 444 (SC) where it had been held that the losses had to be set off before claiming deduction u/s 80-I. HELD dismissing the appeal and deciding in favour of the assessee:

(i) The effect of s. 80-I (6) is that the deduction has to be computed as if the industrial undertaking were the only source of income of the assessee. Each industrial undertaking is to be treated separately and independently. It is only those industrial undertakings which have a profit or gain which have to be considered for computing the deduction. The loss making industrial undertaking would not come into the picture at all. The loss of one such industrial undertaking cannot be set off against the profit of another such industrial undertaking to arrive at a computation of the quantum of deduction that is to be allowed to the assessee u/s 80-I (1);

(ii) In Synco Industries 299 ITR 444 (SC), the Supreme Court did not hold that while computing the deduction u/s 80-I(6), the loss of one eligible industrial undertaking is to be set off against the profit of another eligible industrial undertaking. All that the Supreme Court said was that in computing the gross total income of the assessee, the same has to be determined after adjusting the losses and that, if the gross total income of the assessee so determined turns out to be “Nil”, then the assessee would not be entitled to deduction under Chapter VI-A. In fact, the Supreme Court clearly held that while computing the quantum of deduction u/s 80-I (6), the AO has to treat the profits derived from an industrial undertaking as the only source of income of the assessee in order to arrive at a deduction under Chapter VI-A and that the loss sustained in one of the units is not to be taken into account.

(129.3 KiB, 395 DLs)

Even if there is no assessment u/s 143 (3), reopening u/s 147 is bad if there are no proper “reasons to believe”. AO cannot go beyond the recorded reasons

The assessee was a partner in a firm. Upon retirement, he received an amount of Rs. 50 lakhs in addition to the balance lying to his credit in the books of the firm in full and final settlement of his dues. The assessee filed a return in which the said amount was not offered to tax on the ground that it was a capital receipt. No assessment order was passed. The AO issued a notice for reopening u/s 148 on the ground that as in the assessment of the firm the amount paid by it to the assessee had been allowed as a revenue deduction, the amount received by the assessee had to be assessed as income. Reliance was also placed on ss. 28 (iv) & (v). The assessee filed a Writ Petition to challenge the reopening. HELD allowing the Petition:

(i) The basic postulate which underlines s. 147 is the formation of the belief by the AO that income chargeable to tax has escaped assessment. The AO must have reason to believe that such is the case before he proceeds to issue a notice u/s 147. The reasons which are recorded by the AO for reopening an assessment are the only reasons which can be considered when the formation of the belief is impugned. The recording of reasons distinguishes an objective from a subjective exercise of power. The requirement of recording reasons is a check against arbitrary exercise of power. The validity of the reopening has to be decided on the basis of the reasons recorded and on those reasons alone. The reasons recorded while reopening the assessment cannot be allowed to grow with age and ingenuity, by devising new grounds in replies and affidavits not envisaged when the reasons for reopening an assessment were recorded;

(ii) The only reason recorded by the AO was that as the firm had been held eligible to claim a deduction of the amount paid to the assessee, the amount received by the assessee was chargeable to tax. However, this is unsustainable because the law is well settled that what the partner gets upon dissolution or retirement is the realization of a pre-existing right or interest which is not assessable to tax. Mohanbhai Pamabhai 165 ITR 166 (SC) followed. Even u/s 45 (4) (which applies only where there is a distribution of assets on dissolution or otherwise), the gains are taxable in the hands of the firm and not in the hands of the partner. The amount received by the assessee is also not chargeable u/s 28 (iv) {value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of profession} and 28 (v) {any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm}. A payment made to a partner on dissolution does not fall u/s 28 (v);

(iii) Though in Rajesh Jhaveri 291 ITR 500 (SC) the Supreme Court held that the passing of an Intimation u/s 143 (1) does not amount to an “assessment” and in the absence of an assessment, there was no question of a “change of opinion”, the Court also held that there must be “reason to believe” i.e. “cause or justification” that income had escaped assessment. There must be relevant material on which a reasonable person could have formed a requisite belief even though the material need conclusively prove the escapement;

(iv) Though Explanation (2) (b) to s. 147 creates a deeming fiction of income having escaped assessment in cases where an assessment has not been made, the act of taking notice cannot be at the arbitrary whim or caprice of the AO but must be based on a reasonable foundation. Though the sufficiency of the evidence or material is not open to scrutiny by the Court, the existence of the belief is the sine qua non for a valid exercise of power;

(v) On facts, it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. Consequently, the s. 148 notice was quashed.

(110.3 KiB, 733 DLs)

Even employees’ contribution to PF paid before due date of filing ROI is allowable u/s 43B

S. 2 (24) (x) provides that amounts received by an assessee from employees towards PF contributions etc shall be “income”. S. 36 (1) (va) provides that if such sums are contributed to the employees account in the relevant fund on or before the due date specified in the PF etc legislation, the assessee shall be entitled to a deduction. The second Proviso to s. 43B (b) provided that any sum paid by the assessee as an employer by way of contribution to any provident etc fund shall be allowed as a deduction only if paid on or before the due date specified in 36(1)(va). After the omission of the second Proviso w.e.f 1.4.2004, the deduction is allowable under the first Proviso if the payment is made on or before the due date for furnishing the return of income. The High Court had to consider whether the benefit of s. 43B can be extended to employees’ contribution as well which are paid after the due date under the PF law but before the due date for filing the return. HELD deciding in favour of the assessee:

(i) Though the revenue has argued that a distinction is to be made between “employers’ contribution” and “employees’ contribution” and that employees’ contribution being in the nature of trust money in the hands of the assessee cannot be allowed as a deduction if not paid on or before the due date specified in the PF etc law, the scheme of the Act is that employees’ contribution is treated as income u/s 2 (24) (x) on receipt by the assessee and allowed as a deduction u/s 36 (1) (va) on making deposit with the concerned authorities. S. 43B (b) stipulates that such deduction would be permissible only on actual payment;

(ii) The question as to when actual payment should be made is answered by Vinay Cements 213 CTR 268 where the deletion of the second Proviso to s. 43B w.e.f 1.4.2004 was held applicable to earlier years as well. As the deletion of the 2nd Proviso is retrospective, the case has to be governed by the first Proviso. Dharmendra Sharma 297 ITR 320 (Del) & P.M. Electronics 313 ITR 161 (Delhi) followed;

(iii) If the employees’ contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore, the Act permits the employer to make the deposit with some delays, subject to the aforesaid consequences. Insofar as the Income-tax Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed, as per the principle laid down in Vinay Cement.

(155.6 KiB, 371 DLs)

Reopening u/s 147 not valid if there is no finding regarding failure to disclose material facts

In AY 2002-2003, the assessee claimed deduction u/s 80-IB (10) of Rs. 3.85 crs which was allowed by the AO vide s. 143 (3) order. The assessment was reopened u/s 147 after the expiry of four years from the end of the assessment year on the ground that the claim for deduction u/s 80IB (10) included ineligible items of other income such ’society deposit’, ’stilt parking’ and sundry credit balances and that income had thereby escaped assessment. The assessee filed a writ petition to challenge the s. 148 notice. HELD upholding the challenge:

(i) Under the proviso to s. 147, an assessment made u/s 143 (3) can be reopened after the expiry of 4 years from the end of the assessment year only if there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment;

(ii) On facts, the assessee had furnished details of the claim u/s 80IB (10) including the break up of the other income. Even the recorded reasons showed that the inference that the income has escaped assessment was based on the disclosure made by the assessee itself. Further, there was no finding in the recorded reasons that that there was a failure to disclose necessary facts;

(iii) Accordingly, the condition precedent to a valid exercise of the power to reopen the assessment was absent. An exceptional power has been conferred upon the Revenue to reopen an assessment after a lapse of four years and the conditions prescribed by the statute for the exercise of such a power must be strictly fulfilled and in their absence, the exercise of power would not be sustainable in law.

(59.9 KiB, 263 DLs)

State Govt. PSUs do not need COD approval

The assessee is a State Govt. undertaking. Its appeal was dismissed by the Tribunal on the ground that the approval of the Committee on Disputes (“COD”) had not been obtained. In a writ petition filed by the assessee, the Additional Solicitor General appearing for the revenue stated that it was not the contention of the revenue that COD approval was required for appeals before the Tribunal in Income-tax matters. It was pointed out that though in ONGC vs. CIDCO 2007 (7) SCC 39, the Supreme Court had directed the formation of a Committee to sort out differences between the Central Government and State Government entities, and a Committee would be constituted by the UOI to look into disputes on a case to case, this was not necessary in income-tax matters. Accordingly, the order of the Tribunal was set-aside for a decision on the merits.

(245.0 KiB, 313 DLs)

Foreign Law Firms are not eligible to open liaison offices or to practice law in India. Even giving an opinion on a legal matter amounts to “practise of law”. Non-Advocates cannot practise law

White & Case, a foreign law firm, was granted permission by the RBI u/s 29 of FERA to open a liaison office in India. A PIL was filed contending that such permission was in contravention of s. 29 of FERA as well as s. 29 of the Advocates Act. HELD upholding the challenge:

(i) The liaison offices opened by the foreign law firms to act as a coordination and communications channel between the head office / branch offices and its clients in and outside India related to providing legal services to the clients. Similarly, the liaison activity of providing “office support services for lawyers of those offices working in India on India related matters” and drafting documents, reviewing and providing comments on documents, conducting negotiations and advising clients on international standards and customary practice relating to the client’s transaction etc. was nothing but practising the profession of law in non litigious matters;

(ii) U/s 29 of FERA, RBI has power to grant permission for carrying on “activities of a trading, commercial or industrial nature”. There is a fundamental distinction between professional activity and the activity of a commercial character. As the liaison activities of the foreign law firms related to the profession of law, no permission could be granted to the foreign law firms under section 29 of FERA;

(iii) S. 29 of the Advocates Act which provides that there shall “be only one class of persons entitled to practise the profession of law, namely, advocates” applies not only to persons practising as advocates before any Court / authority in litigious matters but also to persons practising in non litigious matters as well. Practising the profession of law involves a larger concept while practising before the Courts is only a part of that concept.

(iv) The argument of the UOI that if it is held the Advocates Act applies to persons practising in non-litigious matters, then no bureaucrat would be able to draft or give any opinion in non-litigious matters without being enrolled as an advocate is without merit because there is a distinction between a bureaucrat drafting or giving opinion during the course of his employment and a law firm or an advocate drafting or giving opinion to the clients on professional basis. Further, while the bureaucrat is answerable to his superiors, a law firm or an individual engaged in non litigious matters is answerable to none. To avoid such anomaly the Advocates Act has been enacted so as to cover all persons practising the profession of law be it in litigious matters or in non-litigious matters.

(v) Consequently, the RBI was not justified in granting permission to the foreign law firms to open liaison offices in India u/s 29 of FERA. Further, the foreign law firms were not entitled to practise in non litigious matters in India without following the provisions of the Advocates Act.

(71.4 KiB, 371 DLs)

Under “block of assets”, user of individual assets is not required

The assessee purchased machinery which was not put to use during the year though it formed a part of the “block of assets”. On the question whether depreciation on the said machinery was allowable, the Tribunal held that once a particular asset falls within the block, it is added to the WDV and depreciation is to be allowed on the block. The individual asset loses its identity and the question whether an individual asset is put to use in a particular year or not is irrelevant inasmuch as the requirement of law is to establish the use of the block of assets and not the use of particular equipment. On appeal by the Revenue, HELD affirming the Tribunal’s order:

(i) The rationale and purpose for which the concept of block asset was introduced, as reflected in the CBDT’s Circular dated 23.09.1988 is that once the various assets are clubbed together and become ‘block asset’ within the meaning of s. 2(11), it becomes one asset. Every time, a new asset is acquired, it is to be thrown into the common hotchpotch, i.e., block asset on meeting the requirement of depreciation being allowable at the same rate. Individual assets lose their identity and become an inseparable part of block asset insofar as calculation of depreciation is concerned;

(ii) The fusion of various assets into the block asset gets disturbed only when the eventuality contained in clause (iii) of s. 32 takes place, viz., when a particular asset is sold, discarded or destroyed in the previous year (other than the previous year in which first brought in use). Even in that event, the amount by which the moneys payable in respect of that particular building, machinery, etc. together with the amount of scrap value is to be deducted from total written down value of the ‘block asset’;

(iii) Though as per s. 32(1) the asset is to be owned and “used” for the purpose of business or profession, the expression “used for the purpose of business” when applied to block asset would mean use of block asset and not any specific items in the said block as individual assets have lost their identity after becoming inseparable part of the block asset;

(iv) The fact that under the second proviso to s. 32 assets acquired after 30th Sept shall be entitled to 50% depreciation of amount admissible does not mean requirement of user of individual asset remains intact. In the first year when the particular asset is acquired, user of the asset is required. In subsequent years, the user of individual assets is not required.