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.

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. 220(6): In high-pitched assessments, AO must ordinarily grant stay of demand

The assessee offered Rs. 3.48 lakhs. The AO made a “high-pitched” assessment of Rs. 1.44 crores. The AO rejected the assessee’s stay application and issued s. 226(3) garnishee notices. The assessee filed a Writ Petition to challenge the rejection of the stay application. HELD by the High Court allowing the Petition:

(i) U/s 226 (6) the AO has the discretion not to treat the assessee as being in default during the pendency of the appeal. The AO has to normally use this discretion in favour of assessee particularly when high pitched assessments are made and the demand of tax is several times the declared tax liability in the spirit of Instruction No.95 dated 21.08.1969 and grant stay. The mandate of Parliament in s. 220 (6) is that the AO should normally wait for the fate of the appeal filed by the assessee. Therefore, the discretion conferred by s. 220(6) of not treating the assessee in default should ordinarily be exercised in favour of assessee unless there are overriding and overwhelming reasons to reject the assessee’s stay application. The application cannot normally be rejected by merely describing it to be against the interest of Revenue if recovery is not made, if tax demanded is twice or more of the declared tax liability. The very purpose of filing of appeal, which provides an effective remedy to the assessee, is likely to be frustrated, if such a discretion was always to be exercised in favour of revenue rather than assessee.

(ii) The tendency of making high pitched assessments by the AO is not unknown and it may result in serious prejudice to the assessee and miscarriage of justice & sometimes may even result into insolvency or closure of the business if such power was to be exercised only in a pro-revenue manner. It may be like execution of death sentence, whereas the accused may get even acquittal from higher appellate forums or courts. Therefore, the powers u/s 220 (6) has to be exercised in accordance with the letter and spirit of Instruction No. 95 dated 21.08.1969 which holds the field and is biding on the AO.

(iii) CBDT urged to issue appropriate guidelines for grant of stay in the spirit of Instruction No.95 dated 21.08.1969 to all the subordinate authorities & to clarify that CIT (A) has the power to grant stay of demand.

(iv) On facts, as the assessed income was 47 times the returned income, the applicability of Instruction No.95 dated 21.08.1969 was beyond the pale of doubt and the assessee was entitled to a stay of demand till the disposal of the appeal by the CIT (A).

(v) The CIT (A) has inherent powers to grant stay against recovery of disputed demand of tax if an appeal u/s 246A is filed. The relevant factors to be considered are prima-facie case, balance of convenience, irreparable injury, nature of demand and hardship likely to be caused to the assessee, liquidity available to the assessee etc.

S. 147/292BB: Delay in issue of s. 143 (2) notice renders assessment invalid

The AO issued a notice u/s 148 to reopen the assessment. Though the assessee filed a ROI, the AO did not issue the s. 143(2) notice within the prescribed period but passed a draft assessment order u/s 144C. The Court had to consider (a) what is the effect of the failure to issue notice u/s 143(2) within the period stipulated in the proviso to clause (ii) and (b) the effect of s. 292BB of the Act. HELD by the Court quashing the assessment proceedings:

(i) The service of notice u/s 143(2) within the statutory time limit is mandatory and is not an inconsequential procedural requirement. Omission to issue notice u/s 143(2) is not curable and the requirement cannot be dispensed with. S. 143(2) is applicable to proceedings u/s 147 & 148. While the Proviso to s. 148 protects and grants liberty to the Revenue to serve notice u/s 143(2) before passing of the assessment order for returns furnished on or before 1.10.2005, in respect of returns filed pursuant to notice u/s 148 after 1.10.2005, it is mandatory to serve notice u/s 143(2) within the stipulated time limit (Hotel Blue Moon 321 ITR 362 (SC) referred).

(ii) S. 292BB incorporates the principle of estoppel and stipulates that an assessee who has appeared in any proceeding and co-operated in any enquiry relating to assessment or reassessment shall be deemed to be served with any notice which was required to be served and would be precluded from objecting that the notice was not served upon him or was served upon him in an improper manner or was not served upon him in time. However, the principle of estoppel does not apply if the assessee has raised objection in reply to the notice before completion of assessment or reassessment. As the AO had passed a draft assessment order and the assessee had raised an objection before completion of assessment, the estoppel in s. 292BB did not apply and the s. 147 proceedings could not continue.

As interim measure, Ex-ITAT Members permitted to practice before Benches where they were not posted

Rule 13E of the Income Tax Appellate Tribunal Members (Recruitment and Conditions of Service) Rules, 1963 notified on June 3, 2009 imposes a ban on the practice by retired members before the Income Tax Appellate Tribunal. The Petitioner, a retired member of the Tribunal, filed a writ petition to challenge the said Rule as being ultra vires the provisions of s. 288 of the Act and s. 30 of Advocates Act 1961. HELD by the High Court granting interin relief:

Though, prima facie, the Rule appears to be a correct notification supposedly issued in public interest in line with the rules and practice clamping ban on the legal practice by the retired judges of High Court in the courts where they remain posted as permanent judge and the Tribunals and Courts subordinate to High Court, however, it appears to be offensive in two respects; namely, that the retired members have been completely barred from practice before the Tribunal, and secondly, that the aforesaid rule 13E has been interpreted to apply retrospectively in the judgment rendered in the case of Concept Creations vs. ACIT 120 ITD 19 (Delhi) (Special Bench) by the Income Tax Appellate Tribunal, Delhi, beyond its pale of competence as it has the jurisdiction to decide only the matters relating to tax appeals as contained in the Income Tax Act vide Sections 253 and 254 thereof.

 

Hence, issue notice to opposite party no.3 to show cause as to under what jurisdiction and authority, the Tribunal has interpreted Rule 13E as aforesaid in the judgment passed in the case of Concept Creations(supra) to the disadvantage of the retired members by imposing a complete ban on the practice before the Tribunal.

 

The petitioner may serve this notice dasti as well.

 

Till the next date of hearing, operation of the impugned rule 13E as well as the judgment in the case of Concept Creations shall remain stayed in so far as they impose a complete ban on the practice by retired members before the Tribunal.

 

Thus, it would be open for the retired members to practise before the Benches of Tribunal where they had not remained posted and held courts temporarily or on regular basis.

S. 147: Retrospective amendment no basis beyond 4 years. AO not to delay passing objection order

For AY 2005-06, the AO passed a s. 143(3) order in which he allowed s. 80-IA deduction. Thereafter, after the expiry of 4 years, he reopened the assessment u/s 147 on the ground that in view of the retrospective amendment to the Explanation to s. 80-IA by the F (No. 2) Act 2009 w.r.e.f. 1.4.2000, the assessee, being a works contractor, was not eligible for s. 80-IA deduction. The AO took 6 months to deal with the objections and passed the assessment order within 2 weeks. On a Writ Petition filed by the assessee to challenge the assessment order, HELD allowing the Petition:

(i) The fact that by virtue of the Explanation to s. 80IA added with retrospective effect from 1.4.2000, income derived from the works contract would not qualify for deduction u/s 80IA does not mean that an assessment can be reopened beyond 4 years without there being any failure to disclose truly and fully all material facts (Sadbhav Engineering 333 ITR 483(Guj) followed);

(ii) The argument that the assessee failed to disclose the nature of works executed and that the same was executed only as works contractor and not as a developer, cannot be accepted for two reasons. Firstly, the reasons recorded do not refer to such a ground. Secondly, when the assessee filed the return of income, the Explanation in question was not in picture. The assessee cannot be expected to comply with the requirements of such Explanation by making disclosures in this regard which Explanation did not form part of the statute book when he filed his return;

(iii) The AOs have a tendency to delay disposing of the objections and, thereafter at the fag end of final time limit, to frame the assessment. This tendency is not approved. This was not the intention of the Apex Court when GKN Driveshafts (India) Ltd. vs. ITO 259 ITR 19 (SC) was rendered. This should be brought to the notice of the AOs by the Department so that such instances do not recur in future.

Transfer of shares of foreign company by non-resident to non-resident does not attract Indian tax even if object is to acquire Indian assets held by the foreign company

A Cayman Island company called CGP Investments held 52% of the share capital of Hutchison Essar Ltd, an Indian company engaged in the mobile telecom business in India. The shares of CGP Investments were in turn held by another Cayman Island company called Hutchison Telecommunications. The assessee, a Dutch company, acquired from the second Cayman Islands company, the shares in CGP Investments for a total consideration of US $ 11.08 billion. The AO issued a show-cause notice u/s 201 in which he took the view that as the ultimate asset acquired by the assessee were shares in an Indian company, the assessee ought to have deducted tax at source u/s 195 while making payment to the vendor. This notice was challenged by a Writ Petition but was dismissed by the Bombay High Court. In appeal, the Supreme Court remanded the matter to the AO to first pass a preliminary order of jurisdiction which the AO did. This order was challenged by the assessee by a Writ Petition which was dismissed by the High Court (329 ITR 126 (Bom). On appeal by the assessee, HELD allowing the appeal:

(By the Court)

(i) The department’s argument that there is a conflict between Azadi Bachao Andolan 263 ITR 706 (SC) & McDowell 154 ITR 148 (SC) and that Azadi Bachao is not good law is not acceptable. While tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges is not permissible, it cannot be said that all tax planning is impermissible;

(ii) In the taxation of a Holding Structure the burden at the threshold is on the Revenue to establish abuse in the sense of tax avoidance in the creation and/or use of such structure(s). The Revenue may invoke the “substance over form” principle or “piercing the corporate veil” test only after it is able to establish that the transaction is a sham or tax avoidant (e.g. structures used for circular trading or round tripping or to pay bribes) or if the Holding Structure entity has no commercial or business substance and has been interposed only to avoid tax. A strategic foreign direct investment coming to India should be seen in a holistic manner and keeping in mind certain factors like the period of business operations in India etc. On facts, the Hutchison structure was in place since 1994 and could not be said to be created as a sham or tax avoidant. The holding companies were not a “fly by night” operator or short time investor;

(iii) The Revenue’s argument that u/s 9(1)(i) it can “look through” the transfer of shares of a foreign company holding shares in an Indian company and treat the transfer of shares of the foreign company as equivalent to the transfer of the shares of the Indian company on the premise that s. 9(1)(i) covers direct and indirect transfers of capital assets is not acceptable. S. 9(1)(i) (unlike the DTC Bill, 2010) does not use the word “indirect transfer”;

(iv) The argument that CGP, the intervened entity, had no business or commercial purpose and that its situs was not in the Cayman Islands but in India (where the assets were) is also not acceptable. The situs of the shares of a company is where the registered office is;

(v) The High Court’s finding that, applying the “nature and character of the transaction” test, the transfer of the CGP share was not adequate in itself to achieve the object of consummating the transaction between HTIL and VIH and that there was a transfer of other “rights and entitlements” which were “capital assets” is not correct because the transaction was one of “share sale” and not an “asset sale”. It had to be viewed from a commercial and realistic perspective. As it was not a case of sale of assets on itemized basis, the entire structure, as it existed, ought to have been looked at holistically. A transfer of shares lock, stock and barrel cannot be broken up into separate individual components, assets or rights such as right to vote, right to participate in company meetings, management rights, controlling rights, control premium, brand licences and so on as shares constitute a bundle of rights. The sum of US$ 11.08 bn was paid for the “entire package” and it was not permissible to split the payment and consider a part of it towards individual items (Mugneeram Bangur 57 ITR 299 (SC) followed);

Per Radhakrishnan, J (concurring):

(i) On the conflict between McDowell & Azadi, It is a cornerstone of law that a tax payer is enabled to arrange his affairs so as to reduce the liability of tax and the fact that the motive for a transaction is to avoid tax does not invalidate it unless a particular enactment so provides. However, for the arrangement to be effective, it is essential that the transaction has some economic or commercial substance;

(ii) On facts, CGP’s interposition in the corporate structure and its disposition, by way of transfer, for exit, was for a commercial or business purpose and not with the ulterior motive for evading tax. It cannot be considered to be an artificially interposed device and the principle of “fiscal nullity” will not apply. For the principle of “fiscal nullity” to apply, there should be a pre-ordained series of transactions and there should be steps inserted that have no commercial purpose. In that case, the inserted steps can be disregarded for fiscal purpose and one can look at the end result. However, the sale of the CGP shares was a genuine business transaction, not a fraudulent or dubious method to avoid capital gains tax. The situs of the shares was in the Cayman Islands;

(iii) The argument that s. 9(1) should be given a purposive interpretation so as to cover even indirect transfers is not acceptable. On the transfer of shares of a foreign company to a non-resident off-shore, there is no transfer of shares of the Indian company, though held by the foreign company and it cannot be contended that the transfer of shares of the foreign holding company, results in an extinguishment of the foreign company control of the Indian company and it also does not constitute an extinguishment and transfer of an asset situate in India. Transfer of the foreign holding company’s share off-shore, cannot result in an extinguishment of the holding company right of control of the Indian company nor can it be stated that the same constitutes extinguishment and transfer of an asset/ management and control of property situated in India;

(iv) S. 195 applies only if payments are made from a resident to another non-resident and not between two non-residents situated outside India. The transaction was between two non-resident entities through a contract executed outside India, consideration passed outside India and the transaction had no nexus with the underlying assets in India. In order to establish a nexus, the legal nature of the transaction has to be examined and not the indirect transfer of rights and entitlements in India.

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).