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)

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.

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)

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.

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).

Gains on housing society redevelopment is non-taxable capital receipt

The assessee was the member of a housing society. The housing society and it’s members entered into an agreement with a developer pursuant to which the developer demolished the building owned by the housing society and reconstructed a new multistoried building by using the FSI arising out of the property and the outside TDR available under Development Control Regulations. The assessee, as a member of the housing society, received a larger flat in the new building, displacement compensation of Rs. 6 lakhs (at Rs.34,000 p.m. for the period of construction of the new building) and additional compensation of Rs.11.75 lakhs. The AO & CIT (A) held that the said “additional compensation” was assessable as income in the assessee’s hands. On appeal by the assessee, HELD allowing the appeal:

In principle, though the scope of “income” in s. 2(24) is very wide, a capital receipt is not chargeable to tax as income unless there is a specific provision to that effect. As the residential flat owned by the assessee in the society’s building was a capital asset in his hands, the compensation was a capital receipt. The department’s argument that the cash compensation was a “share in profits earned by the developer” is not acceptable because it proceeds on the fallacy that the nature of payment in the hands of the payer determines the nature in the hands of the recipient. However, as the said receipt reduced the cost of acquisition of the new flat, it had to be taken into when computing the gains from a transfer thereof in the future

TPO can rely on “contemporaneous” data even if not available at specified date

In a transfer pricing appeal, the Tribunal had to consider two issues: (a) what is the data to be considered by the TPO at the time of determining ALP? & (b) whether the assessee should be given an opportunity to refute the material sought to be utilized by the TPO? HELD by the Tribunal:

(i) Under Rule 10D (4) the information and documents should as far as possible be contemporaneous and should exists latest by the ‘specified date’ specified in s. 92F (4) i.e. the due date for filing the ROI. There is no cut-off date upto which only the information available in public domain can be taken into consideration by the TPO while making the transfer pricing adjustments and arriving at the ALP. The assessee’s argument that s.92D and Rule 10D is defeated if the TPO takes the data which is available in the public domain after the specified date is not acceptable.

(ii) While the TPO is empowered by s. 131(1) & 133(6) to call for information without informing the assessee about the process, he cannot use such information against the assessee without giving the assessee a reasonable opportunity of hearing. If the assessee seeks an opportunity to cross-examine third parties, it has to be given the opportunity (Genisys Integrating Systems followed)

S. 271(1)(c): CA’s opinion does not necessarily make claim “bona fide”

The assessee obtained the opinion of a Chartered Accountant on whether expenditure on fees to the Registrar of Companies for increasing authorized capital can be claimed as revenue expenditure. The CA relied on judicial precedents and opined that the issue was debatable and a claim could be made on the basis that if two views were possible, the view in favour of the assessee should be taken. The assessee claimed deduction and even the tax auditor did not qualify the same. The AO relying on Punjab State Industrial Development Corp 225 ITR 792 (SC) & Brooke Bond 225 ITR 798 (SC) disallowed the claim and levied s. 271(1)(c) penalty which was upheld by the CIT (A). Before the Tribunal, the assessee pleaded that as it had relied on the opinion of an expert in making the claim, its action was bona fide & penalty could not be levied. HELD dismissing the appeal:

In view of the two decisions of the Supreme Court which held the field when the return was filed, the claim was patently disallowable. The claim was also not discernible on the face of the record and the details of expenses had to be gone into in order to decipher the claim. The argument that the assessee does not have expertise in taxation matters and so it relied on expert opinion is not acceptable because the opinion was furnished for accounting purposes. An accountant’s view is not really material for deciding the deductibility or otherwise of an expenditure. The assessee knew about the problem at the time of filing of return, but still made the claim. Not only this, the claim was pursued even up to the level of the CIT (A) in gross disregard for the decision of the Supreme Court, which the assessee came to know at least after receiving the assessment order. Therefore, the claim was not only wrong but also false and it was persisted with for some time. The fact that the assessee did not even seek explanation from the tax auditor or the CA gave the impression that the whole thing was a sham.

S. 271(1)(c): Despite Surrender After Detection, Penalty Can be Waived

Pursuant to a search & s. 153A assessment on the basis of seized papers, statements etc; the assessee offered additional income of Rs. 2.68 crores on the basis that he was unable to explain the old records. Some of the other additions made by the AO were partly deleted by the CIT (A) & Tribunal. The AO & CIT (A) levied s. 271(1)(c) penalty on the ground that the assessee’s offer of additional income was not voluntary or bona fide. On appeal by the assessee to the Tribunal, HELD allowing the appeal:

Though the assessee owned the unaccounted transactions only after search action, when an assessee admits his mistake and that he has committed a wrong and offers the additional income to tax, it cannot be said that his statement is false or not bona fide. Neither the CIT (A) nor the Tribunal were completely clear about the exact amount of concealment and there was no conclusive evidence as some additions had been deleted. S. 271(1)(c) gives discretion to the AO to exonerate the assessee from levy of penalty even in case where the assessee has concealed the income or furnished incorrect particulars of income. Penalty should not be imposed merely because it is lawful to do so. The AO has to exercise his discretion judiciously. If an assessee files a revised return though at a later stage or discloses true income, penalty need not be levied. No doubt, merely offering additional income will not automatically protect the assessee from levy of penalty but in a given case where the assessee came forward with additional income though after detection because he was not in a position to explain the seized material properly and expresses remorse in his conduct un-hesitantly, the AO has to exercise the discretion in favour of such assessee as otherwise the expression ‘may’ in s. 271(1)(c) becomes redundant. In a case of admitted income, concealment penalty is not automatic. The discretion vested in the AO should be used not to levy penalty. On facts, the case was most befitting to exercise such discretion because there was divergent opinion while deleting or sustaining the addition and there was no conclusive proof that the assessee concealed income or furnished inaccurate particulars of income. The assessee’s offer was to avoid litigation. If the AO had clinching evidence of concealment, he should not have accepted the assessee’s offer and should have proceeded on the basis of material on record (VIP Industries 112 TTJ 289, Siddharth Enterprises 184 TM 460 (P&H) & Reliance Petro Products 322 ITR 158 (SC) followed).

Transfer Pricing: TPO is duty bound to eliminate differences in comparables’ data

In a Transfer Pricing matter, the Tribunal had to consider whether for purposes of making adjustment under Rule 10B (1)(e)(iii) ‘working capital’ constituted a ‘difference between the international transactions and the comparable uncontrolled transactions of between the enterprises entering into such transactions’ and if so whether the said difference ‘could materially affect’ the amount of net profit margin of relevant transactions in the open market. HELD by the Tribunal:

Rule 10B(e)(iii) provides that “the profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market“. While the “differences” are not specified, it covers “any differences” which could materially affect the amount of net profit margin. The litmus test to be applied is if the ‘difference, if any, is capable of affecting the NPM in open market? If yes, then the TPO is under statutory obligation to eliminate such differences. The revenue cannot say that difference is likely to exist in all accounts and so the demands of the assessee should be ignored. The revenue’s stand that the assessee is ineligible for any adjustments if he provides the set of comparable is not correct because under Rule 10(3) it is the duty of the AO/TPO/DRP to minimize/eliminate the difference which is likely to materially affect the price. It is the settled proposition that ‘working capital’ adjustment is an adjustment that is required to be made in TNMM. The revenue’s contention that the ‘differences’ specified should refer to only (i) the factor of demand and supply; (ii) existence of marketable intangibles i.e. brand name etc; (iii) geographical location and the like is not acceptable. Further, as the difference in the Arm’s length Operating Margin of the Comparables before and after making the adjustment for working capital was up to 3.77%, it was “material” and had to be eliminated (Mentor Graphics 109 ITD 101 (Del), E-gain Communication 118 ITD 243 (Pune) Sony India 114 ITD 448 (Del) & TNT India followed)