(237.6 KiB, 358 DLs)

Removal of ITAT President appointed on “officiating” basis is proper & legal

Shri. G. E. Veerabhadrappa, the senior-most Vice President of the Tribunal, was vide order dated 13.10.2011 appointed President of the Tribunal in an “officiating capacity till the post was filled up on regular basis“. Vide notification dated 5.5.2012 the said order was modified to read “in an officiating capacity up to 31.8.2012 or further orders“. On 31.8.2012, Shri. H. L. Karwa was appointed the President in place of Shri. G. E. Veerabhadrappa. Shri. Veerabhadrappa was thereafter transferred on 7.11.2012 to Calcutta. Shri. Veerabhadrappa filed a Petition claiming that (i) the curtailment of the period of appointment till 31.8.2012 was unjustified, (ii) his removal from the post of President was actuated by “malice and personal vendetta” of the Law Secretary owing to his refusal to cancel the transfers of Shri. Hari Om Maratha and Smt. Diva Singh and (ii) the appointment of Shri. H. L. Karwa (the junior-most Vice President) as President was irregular as found by the Appointments Committee of the Cabinet. The Law Ministry opposed the Petition on the ground that there were complaints regarding integrity and that the decision was taken at the highest level after “due consideration”. HELD by the CAT dismissing the Petition:

(i) The order appointing the Applicant as President made it clear that the appointment was “in an officiating capacity and until further orders“. The appointment order did not confer any invincible right on the Applicant to continue in office. Also, the order dated 5.5.2012 restricting the Applicant’s tenure as President till 31.8.2012 was challenged by him several months later. Even though there may not be delay and laches, it can be said that the conduct was one of acquiescence and did not entitle him to relief;

(ii) As regards the allegation that the removal was motivated by “malice and personal vendetta“, the exchange of correspondence between the President and the Law Ministry regarding the transfers of the Members took place after the passing of the order dated 5.5.2012 curtailing the tenure of the Applicant till 31.8.2012. There is some merit in the contention of the Respondents that the Applicant is trying to create a “smoke screen” by unnecessarily dragging the names of the Law Secretaries and making personal allegations;

(iii) The allegation that the appointment of Shri. H. L. Karwa as Officiating President was improper as a selection process was not resorted to is also not correct. The Government is entitled to appoint the President in an officiating capacity so as to ensure that no vacuum is left in the Institution. The opinion expressed by the Appointments Committee of the Cabinet is totally misconceived. It is immaterial whether the person appointed as officiating President is junior or not and there is no question of supersession. It is, however, desirable that the appointment to the post of President be made at the earliest on a regular basis rather than on an ad-hoc/ officiating basis.

(162.1 KiB, 674 DLs)

Taxability of a revocable transfer as deemed gift u/s 4(1)(c) of the Gift-tax Act

The assessee owned 6000 shares of Hero Cycles. On 20.02.1982, he executed a deed of revocable transfer in favour of M/s Yogesh Chandra. The deed permitted the assessee to, after completion of 74 months from the date of transfer but before the expiry of 82 months from the said date, exercise the power of revoking the gift. In other words, there was a window of 8 months within which the gift could be revoked. The deed of revocable transfer specifically stated that the gift shall not include any bonus shares or right shares received and/or accruing or coming to the transferee from Hero Cycles by virtue of ownership of the said shares. Effectively, therefore, only a gift of 6000 equity shares was made by the assessee to the transferee. On 29.09.1982 & 31.5.1986, the company issued 4000 and 10,000 bonus shares to the transferee. On 15.6.1988, the assessee revoked the gift with the result that the 6000 shares gifted to the transferee came back to the assessee. However, the 14,000 bonus shares allotted to the transferee while it was the holder of the equity shares of the company continued with the transferee. In AY 1982-83, the GTO relied on McDowell 154 ITR 148 (SC) and held that the revocable transfer was only for the purpose of reducing the wealth tax liability and was void. He, however, made a protective gift-tax assessment. The Tribunal and the High Court (CGT vs. Satya Nand Munjal 256 ITR 516 (P&H)) reversed the AO and held that a revocable transfer was valid even if its object was to avoid wealth-tax. The assessee was held liable to pay gift-tax u/r 11 of the Gift-tax Act. In AY 1989-90 the AO & CIT(A) held that the 14,000 shares belonged to the assessee and as the revocation was only with respect to the 6,000 shares and the 14,000 bonus shares continued with the transferee, there was a chargeable gift to that extent. The Tribunal reversed the AO & CIT(A). On appeal by the department, the High Court reversed the Tribunal and held that the assessee was liable to gift tax on the value of the bonus shares gifted by him to the transferee applying the principles of Escorts Farms (Ramgarh) 222 ITR 509 (SC). On appeal by the assessee to the Supreme Court, HELD:

The fundamental question is whether there was in fact a gift of 14,000 bonus shares made by the assessee to the transferee. The answer to this question lies in s. 4(1)(c) of the Gift-tax Act which provides that “where there is a release, discharge, surrender, forfeiture or abandonment of any debt, contract or other actionable claim or of any interest in property by any person, the value of the release, discharge, surrender, forfeiture or abandonment to the extent to which it has not been found to the satisfaction of the AO to have been bona fide, shall be deemed to be a gift made by the person responsible for the release, discharge, surrender, forfeiture or abandonment“. On facts, the assessee had made a valid revocable gift of 6000 equity shares in the company on 20.2.1982 to the transferee. The only event that took place in AY 1989-90 was the revocation of the gift by the assessee on 15.6.1988. The question whether the revocation of the gift of the original shares in AY 1989-90 constitutes a gift of the bonus shares that were allotted to the transferee on 29.09.1982 and 31.05.1986 requires to be answered in the light of s.4(1)(c). The question of applicability of Escorts Farms has to be decided after a finding is reached on the applicability of the first part of s. 4(1)(c) (matter remanded).

(258.7 KiB, 1,672 DLs)

S. 32: A “Financier” satisfies the “ownership” & “user” test for depreciation

The assessee, a NBFC, bought vehicles and leased it out to its customers. The vehicles were registered in the names of the customers. The AO held that as the vehicles were registered in the names of the customers and were used by them, the assessee was not eligible for depreciation u/s 32 as it was not the “owner” of the vehicles nor had it “used” the vehicles for purposes of business. The CIT(A) & Tribunal allowed the assessee’s claim. However, the High Court reversed the Tribunal on the ground that the assessee was only a “financier” and not the “owner” of the vehicles and so was not eligible to claim depreciation. On appeal by the assessee to the Supreme Court, HELD reversing the High Court:

(i) S. 32 requires that the asset must be “owned, wholly or partly, by the assessee and used for the purposes of the business”. The Department’s argument that the assessee is not the “owner” of the vehicles is not acceptable because the lease agreement specifically provided that the assessee was the exclusive owner of the vehicle at all points of time and that it was empowered to repossess the vehicle (and not merely recover money) if the lessee committed a default. At the conclusion of the lease period, the lessee was obliged to return the vehicle to the assessee. Also, the assessee had the right of inspection of the vehicle at all times. As the assessee has a right to retain the legal title of the vehicle against the rest of the world, it would be the owner of the vehicle in the eyes of law. The fact that at the end of the lease period, the ownership of the vehicle is transferred to the lessee at a nominal value not exceeding 1% of the original cost of the vehicle does not make a difference. Also the fact that the Motor Vehicles Act deems the lessee to be the “owner” has no relevance;

(ii) The Department’s argument that the assessee had not “used” the vehicles is also not acceptable because the vehicle was “used” by the assessee in its’ business of leasing. Once it is held that leasing out of the vehicles is one mode of doing business by the assessee and the income derived from leasing out is treated as business income it would be contradictory, in terms, to say that the vehicles are not used wholly for the purpose of the assessee’s business. The physical user of the vehicles is not necessary (Shaan Finance 231 ITR 308 (SC) followed)

(292.7 KiB, 987 DLs)

Interest earned by a mutual association from deposits placed with member banks is not exempt on the ground of “mutuality”

The assessee, a mutual association, claimed that the interest earned by it on fixed deposits kept with the bank (which was a corporate member) was not taxable on the basis of mutuality. The AO rejected the claim though the CIT(A) and Tribunal upheld the claim. The High Court reversed the Tribunal and upheld the stand of the AO. On appeal by the assessee to the Supreme Court, HELD dismissing the appeal:

For a receipt to be exempt on the principles of Mutuality, three conditions have to be satisfied. The first is that there must be a complete identity between the contributors and participators. The second is that the actions of the participators and contributors must be in furtherance of the mandate of the association. The third is that there must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves. On facts, though the interest was earned from banks which were corporate members of the club, it was not exempt on the ground of mutuality because (i) the arrangement lacks a complete identity between the contributors and participators. With the funds of the club, member banks engaged in commercial operations with third parties outside of the mutuality, rupturing the ‘privity of mutuality’, and consequently, violating the one to one identity between the contributors and participators, (ii) the surplus funds were not used in furtherance of the object of the club but were taken out of mutuality when the member banks placed the same at the disposal of third parties, thus, initiating an independent contract between the bank and the clients of the bank, a third party, not privy to the mutuality & (iii) The Banks generated revenue by paying a lower rate of interest to the assessee-club and loaning the funds to third parties. The interest accrued on the surplus deposited by the club like in the case of any other deposit made by an account holder with the bank. A façade of a club cannot be constructed over commercial transactions to avoid liability to tax. Such setups cannot be permitted to claim double benefit of mutuality.

(307.8 KiB, 645 DLs)

S. 158B: Despite TDS & Advance-tax, income is “undisclosed” if ROI not filed by due date

A search u/s 132 was conducted on 23.2.1996 when it was detected that though the assessee had taxable income for AY 1995-96 it had not filed a ROI and the due date (31.10.1995) had lapsed. The AO issued a s. 158BD notice directing the assessee to file a return for the block period. The assessee claimed that as it had paid advance tax on the income for AY 1995-96, the income could not be said to be “undisclosed“. The AO rejected the claim though the Tribunal and High Court accepted the assessee’s claim on the basis that payment of Advance Tax itself necessarily implies disclosure of the income on which the advance is paid. On appeal by the department to the Supreme Court, HELD reversing the Tribunal and High Court:

S. 158B(b) defines the expression “undisclosed income” to mean that income “which has not been or would not have been disclosed for the purposes of this Act”. The only way of disclosing income on the part of an assessee is through filing of a return and therefore an “undisclosed income” signifies income not stated in the return filed. It cannot be said that payment of Advance Tax by an assessee per se is tantamount to disclosure of total income. There can be no generic rule as to the significance of payment of Advance Tax in construing intention of disclosure of income. This depends on the time at which the search is conducted in relation to the due date for filing return. If the search is conducted after the expiry of the due date for filing return, payment of Advance Tax is irrelevant in construing the intention of the assessee to disclose income because it is a case where income has clearly not been disclosed. The possibility of the intention to disclose does not arise since the opportunity of disclosure has lapsed. If search is conducted prior to the due date for filing return, the opportunity to disclose income by filing a return still persists. In such a case, payment of Advance Tax may be a material fact for construing whether an assessee intended to disclose. An assessee is entitled to make the legitimate claim that even though the search or the documents recovered show income earned by him, he has paid Advance Tax for the relevant assessment year and has an opportunity to declare the total income, in the return of income, which he would file by the due date. Hence, the fulcrum of such a decision is the due date for filing of return of income vis-à-vis date of search. Also, because Advance Tax is based on estimated income, it cannot result in the disclosure of the total income assessable and chargeable to tax. The proposition that payment of Advance Tax is tantamount to disclosure of income would be contrary to the very purpose of filing of return. On facts, as the assessee had not filed the ROI by the date of search and the due date had lapsed, the income found was “undisclosed” even though advance-tax thereon had been paid. Similarly, as TDS is also computed on the estimated income of an assessee for the relevant FY, it does not amount to disclosure of income, nor does it indicate the intention to disclose income if the ROI is not filed.

(206.2 KiB, 610 DLs)

Payment by post-dated cheque relates back to date of handing over of cheque

In the year ended 31.3.2002, the assessee, a charitable trust eligible for exemption u/s 11, received a post-dated cheque dated 22.4.2002 from Apollo Tyres Ltd for which it issued a receipt. The AO held that the post-dated cheque had been accepted by the assessee to do undue favour to Apollo Tyres, whose directors were trustees of the assessee and that there was a violation of s. 13(2)(d)(h), and that s. 11 exemption had to be denied. This was reversed by the Tribunal and the High Court on the ground that as the post dated cheque was given before 31.3.2002 and was duly honoured in April, 2002 when it was presented before the bank, the date of payment of the cheque should be treated as the date on which the cheque was received by the assessee. On appeal by the department to the Supreme Court, HELD dismissing the appeal:

Though the assessee trust issued a receipt in March 2002 when it received the cheque dated 22.4.2002, it was clearly stated in its record that the amount of donation was receivable in future and it was shown as donation receivable in the balance sheet as on 31.3.2002. Also Apollo Tyres Ltd did not avail any advantage of the said donation during the FY 2001-2002. When a post-dated cheque is issued, it will have to be presumed that the amount was paid on the date on which the cheque was given to the assessee and, therefore, it cannot be said that any undue favour was done by the assessee to Apollo Tyres Ltd. A cheque, unless dishonoured, is payment (Ogale Glass Works 25 ITR 529 (SC) followed)

(23.5 KiB, 2,572 DLs)

Income-tax details can be disclosed under RTI only if in “larger public interest”

The Petitioner sought details of the Respondent’s movable and immovable properties and also the details of investments, lending and borrowing from Banks and other financial institutions. He has also sought for the details of gifts stated to have accepted by the Respondent, his family members and friends and relatives at the marriage of his son. The information sought for finds a place in the income tax returns of the Respondent. The Supreme Court had to consider whether the information sought for qualifies to be “personal information” as defined in clause (j) of S. 8(1) of the RTI Act. HELD by the Supreme Court:

The details disclosed by a person in his income tax returns are “personal information” which stands exempted from disclosure under clause (j) of Section 8(1) of the RTI Act, unless it involves a larger public interest and the Central Public Information Officer or the State Public Information Officer or the Appellate Authority is satisfied that the larger public interest justifies the disclosure of such information. On facts, as the Petitioner has not made a bona fide public interest in seeking information, the disclosure of such information would cause unwarranted invasion of privacy of the individual u/s 8(1)(j) of the RTI Act.

(22.4 KiB, 2,923 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.

(496.4 KiB, 2,054 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.