S. 271(1)(c)/ 271(1B): If, in the assessment order, AO directs initiation of penalty on specific issues but not on others, he is not entitled to levy penalty on the other issues

S. 271(1)(c) empowers the AO, where he is satisfied in the course of any proceedings under the Act that the assessee had concealed the particulars of his income or furnished inaccurate particulars of such income, to direct the payment of penalty. Sub-section (1B) was inserted with retrospective effect from 01.04.1989 to provide that where any amount is added or disallowed in computing the total income or loss of an assessee and the assessment order contains a direction for initiation of penalty proceedings, such an order of assessment shall be deemed to constitute satisfaction of the AO for initiation of penalty proceedings under s. 271(1)(c). In order that the deeming fiction in sub-section (1B) must apply, two requirements must be fulfilled. The first requirement is that an amount must have been added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment. The second is that the order of assessment must contain a direction for the initiation of penalty proceedings under clause (c) of sub-section (1) of s. 271. Where both the conditions as aforesaid are fulfilled, the order of assessment must be deemed to constitute satisfaction of the AO for initiating penalty proceedings. In the present case, it is abundantly clear that in respect of those heads where the AO considered it appropriate to initiate penalty proceedings u/s 271(1)(c), he made a specific direction to that effect. In respect of the claim of interest on the SDF loan, there is no direction by the AO. The absence of a reference to the initiation of proceedings u/s 271(1)(c) is not an inadvertent omission since it is clear that in respect of several other heads, where the AO did consider it appropriate to initiate penalty proceedings, he made an observation to that effect. In fact, even in the concluding part of his order, the AO issued a direction for initiating penalty notice u/s 271(1)(c) “as discussed above”. The expression “as discussed above” is material because it refers to those heads in respect of which a specific direction was issued by him for initiating steps u/s 271(1)(c). Undoubtedly, as held in Mak Data 358 ITR 593 (SC), the AO has to satisfy himself whether penalty proceedings should be initiated or not during the course of assessment proceedings and he is not required to record his satisfaction in a particular manner or reduce it into writing. However, in the present case there is no direction whatsoever by the AO in respect of the specific head of interest on the SDF loan, on which the penalty was deleted by the Tribunal. This omission in the case of the SDF loan stands in sharp contrast to those items where the AO has specifically directed the initiation of penalty proceedings u/s 271(1)(c). Consequently, the Tribunal was justified in deleting the penalty u/s 271(1)(c) in respect of the SDF loan

S. 254: If a legal issue is raised (even for the first time) ITAT has the duty to deal with it and cannot remand it to lower authorities

The Tribunal should have answered the legal issue itself. The Tribunal was not prevented in any manner and in law from considering a purely legal issue for the first time, more so, if this legal issue goes to the root of the matter. The issue was an impact and legal effect of a order of amalgamation and winding up of the assessee thereto on the penalty proceedings have been initiated and were continuing. If they were initiated prior to the order of the winding up passed or the scheme of amalgamation being sanctioned, then, whether the subsequent act of a order sanctioning the scheme would permit continuation of the proceedings against an entity or company which is wound up and in terms of the provisions contained in the Act was, thus, a clear legal issue. It should have been answered by the Tribunal, particularly when it had admitted the question or ground and also the additional evidence filed by the assessee. The only two documents which required to be looked into were the scheme of amalgamation and the order passed in pursuance thereof by this Court. If that was the admitted factual position and based on which the legal issue was raised, then, the Tribunal was obliged to answer the legal question. Its omission to answer it, therefore, is vitiated in law. The Tribunal is a last fact finding Court and equally if it could have been approached by the assessee both on law and fact, then, in the given circumstances, the Tribunal should have answered this issue and its failure to do so can safely be termed as not performing its duty in law. The direction to remit and to remand it to the AO is not justified and in the peculiar facts and circumstances noted above

Assessee cannot be denied credit for TDS on the ground of Form 26AS mismatch because he is not at fault. Non-grant of TDS credit causes harassment, inconvenience & makes the assessee feel cheated. Dept to pay interest + costs of Rs. 25,000

(ii) On facts, no effort has been made by the AO to verify whether the deductor had made the payment of the TDS in the government account. On the other hand, the Income-tax department has shown helplessness in not refunding the amount on the sole ground that the details of the TDS did not match with the details shown in Form 26AS. There is a presumption that the deductor has deposited TDS amount in the government account especially when the deductor is a government department. By denying the benefit of TDS to the Petitioner because of the fault of the deductor causes not only harassment and inconvenience, but also makes the assessee feel cheated. There is no fault on the part of the Petitioner. The fault, if any, lay with the deductor. The mismatching is not attributable to the assessee. The department must refund the amount within 3 weeks with interest. The department must also pay costs of Rs. 25,000 to the Petitioner

Important guidelines laid down regarding procedure for promotion of ITAT Members to avoid arbitrariness. Suggestion made that there should be a mechanism to oversee the quality of orders passed by ITAT Members

(v) Members of tribunals such as the ITAT perform crucial judicial functions, which can have an adverse bearing on individuals, and at times, vast commercial and fiscal ramifications. In these circumstances, the Central Government should seriously consider continuous oversight through the concerned High Courts, given that High Courts exercise appellate (and supervisory writ) jurisdiction over the orders and proceedings of ITAT and its benches. Some reporting mechanism, preferably centralized, to oversee the quality of the orders of ITAT is essential because the President of ITAT’s powers over members of ITAT and Vice President are not appellate, they are administrative. Creation of this mechanism would result in adding a new and possibly crucial dimension to ensure greater scrutiny of ITAT and its orders and also provide a link in the decision making process of selection to senior judicial positions within ITAT.

No disallowance u/s 14A & Rule 8D can be made if the assessee does not have tax-free income & no claim for exemption is made

Sub-section (1) of s. 14A provides that for the purpose of computing total income under chapter IV of the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the present case, the Tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the Tribunal held that disallowance u/s 14A of the Act could not be made. The Tribunal relied on the decision of the P&H High Court in case of CIT vs. Winsome Textile Industries Ltd 319 ITR 204 (P&H) where it was held that s. 14A could have no application to a case where the assessee did not make any claim for exemption. We do not find any question of law arising, Tax Appeal is therefore dismissed.

S. 147: Reopening, even within 4 years, solely on the basis of a clarificatory retrospective amendment is not permissible

In Katira Construction 352 ITR 513 (Guj) it was held that the Explanation to s. 80IA(4) was purely explanatory in nature and did not mend the existing statutory provisions. If an Explanation is added to a statute for the removal of doubts, the implication is that the law was same from the beginning and the same is further explained by way of addition of the Explanation. Therefore, it is not a case of introduction of new provision of law by retrospective operation, but when all the materials regarding activities of the assessee are available on record and the benefit of the provision is already made available to such assessee, reassessment proceedings cannot be initiated only on account of addition of such Explanation. On facts, as the AO had conducted a detailed scrutiny before allowing the s. 80-IA(4) deduction, the reopening based only on the retrospective insertion of the Explanation is on mere “change of opinion” (Parikshit Industries 352 ITR 349 (Guj) & Agrawal J.V. 83 DTR 101 (Guj) followed)

S. 147: Strict guidelines laid down to streamline procedure for reopening of assessments

(ii) It can thus be seen that there are four important stages once the AO issues notice for reopening of the assessment. Such stages are: (i) the assessee if he so wishes, may demand the reasons recorded by the AO after filing return in response to notice u/s 148 of the Act, (ii) the AO supplying such reasons to the assessee, (iii) the assessee raising objections to the notice for reopening and (iv) the AO disposing of the objections raised by the assessee. With a view to streamlining this procedure, and to ensure, as far as possible, the AO is not faced with the unenviable task of completing the assessment proceedings in a few days left before the same became time barred, we would like to give certain directions of general implication which, we would expect, are followed by all concerned. While doing so, we are conscious that these stages are provided by the Supreme Court in GKN Driveshafts (India) Ltd 259 ITR 19 and we would be giving directions only to the extent the said judgment already does not provide for. We have noticed that considerably long time is consumed sometimes by the assessee demanding the reasons recorded by the Assessing Officer and sometimes the AO complying with such a request of the assessee. It is an accepted proposition that the reasons recorded by the AO are not confidential and the assessee whose assessment is being reopened has a right to know such reasons. We therefore thought that these two stages can be substantially eliminated by giving suitable directions. The further stage is of the assessee raising objections which often times is done after much delay and the last stage comes where the AO deals with such objections. This is yet another problem area where unduly long time is consumed by the AO. Under the circumstances, following directions are issued:

No s. 14A & Rule 8D disallowance if there is no tax-free income

S. 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what s. 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A) & Tribunal does not give rise to any substantial question of law.

S. 50B applies only to a “sale” for a “monetary consideration” and not to a case of “exchange” of the undertaking for shares under a s. 391/394 scheme of arrangement

The definition of the term “slump sale” in s. 2(42C) means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sale. In Motors & General Stores (P) Ltd 66 ITR 692 (SC) it was held that a “sale” meant a transfer for a monetary consideration and that an “exchange” would not amount to a “sale”. On facts, scheme of arrangement shows that the transfer of the undertaking took place in exchange for issue of preference shares and bonds. Merely because there was quantification when bonds/preference shares were issued, does not mean that monetary consideration was determined and its discharge was only by way of issue of bonds/preference shares. In other words, this is not a case where the consideration was determined and decided by parties in terms of money but its disbursement was to be in terms of allotment or issue of bonds/preference shares. All the clauses read together and the entire Scheme of Arrangement envisages transfer of the Lift Division not for any monetary consideration. The Scheme does not refer to any monetary consideration for the transfer. The parties were agreed that the assessee was to transfer the undertaking and take bonds/preference shares as consideration. Thus, it was a case of exchange and not a sale. Therefore, s. 2(42C) of the Act was inapplicable. If that was not applicable and was not attracted, then, s. 50B was also inapplicable. The judgement of the Delhi High Court in SRIE Infrastructure Finance Ltd 207 Taxman 74 (Del) is distinguishable on facts. There is no necessity to analyze the circumstances in which s. 50B was inserted in the statute book.

Gains arising from PMS transactions are capital gains & not business profits

The assessee offered LTCG & STCG on sale of shares which had arisen through a Portfolio Management Scheme of Kotak and Reliance. The investments were shown under the head “investments” in the accounts and were made out of surplus funds. Delivery of the shares was taken. The AO, CIT (A) & Tribunal held that as the transactions by the PMS manager were frequent and the holding period was short, the LTCG & STCG were assessable as business profits. On appeal by the assessee, HELD allowing the appeal