ITAT MUMBAI BENCH ‘E’
Syntholab Chemicals & Research
v.
Assistant Commissioner of Income-tax-14(3)
K.C. Singhal, Judicial Member
and Abraham P. George, Accountant Member
IT Appeal No. 5081 (Mum.) of 2006
[Assessment year 2003-04]
April 21, 2008
Section 40A(2), read with section 40(b), of the Income-tax Act, 1961 - Business disallowance - Excessive or unreasonable payments - Whether provisions of section 40A would not have an overriding effect over provisions of section 40(b), rather provisions of section 40(b), being special provisions relating to payment to partners, would prevail over general provisions of section 40A - Held, yes
Section 40(b), read with section 36(1)(iii), of the Income-tax Act, 1961 - Business disallowance – Interest, salary, etc., paid by firm to partner - Assessment year 2003-04 - Whether if condition provided in section 36(1)(iii), i.e., money has been borrowed from partners for purpose of business, is satisfied, interest paid on such money cannot be disallowed except as provided under provisions of section 40(b) - Held, yes - Whether where capital of partners was utilized for purpose of business and, thus, requirement of section 36(1)(iii) stood satisfied and interest paid to partners was in accordance with provisions of section 40(b)(iv), no disallowance could be made of said interest - Held, yes
Facts
During the relevant assessment year, the assessee-firm had paid interest to partners and their family members and claimed deduction of the same. The Assessing Officer noticed that the assessee had paid interest to partners at the rate of 12/18 per cent per annum while interest received on FDR kept by the assessee with the bank was at an average rate of 9 per cent per annum. He, therefore, held that the interest paid to partners was excessive and unreasonable as per the provisions of section 40A(2). He, therefore, worked out interest paid in excess of interest received from fixed deposits and by invoking the provisions of section 40A(2) disallowed the same. On appeal, the Commissioner (Appeals) held that the provisions of section 40 have an overriding effect over the provisions of sections 30 to 38, while the provisions of section 40A had an overriding effect over the entire provisions of the Act, and, thus, the provisions of section 40A would have an overriding effect over section 40 also. He also held that section 40 only restricts the allowance of interest to partners to the limit of interest provided in the section, but section 40A disallows the payment if it is in excess of the market value and since in the instant case the partners of the firm were covered by the provisions of section 40A(2), excessive or unreasonable payment of interest would be disallowable. He, therefore, upheld the order of the Assessing Officer.
On second appeal :
Held
There cannot be any dispute to the legal provision that interest on borrowed fund can be allowed as a deduction only where condition specified in section 36(1)(iii) is satisfied. This legal position would also be applicable to amounts borrowed from the partners by way of capital or otherwise even after amendment to section 40(b) effective from 1-4-1993. The only condition provided in section 36(1)(iii) is that money must be borrowed for the purpose of business. If this condition is satisfied, then no disallowance can be made except as provided under the provisions of section 40(b) which has an overriding effect. Section 40(b) only restricts the allowance up to the limit prescribed in the section. The finding of the Commissioner (Appeals) that section 40A has an overriding effect even over the provisions of section 40(b) and, consequently, the disallowance can be made even when it is found that payment to partners is excessive or unreasonable having regard to the fair market value of goods, services or facilities, could not be accepted inasmuch as both the provisions cover different fields and even otherwise the provisions of section 40(b), being special provisions relating to payment to partners, would prevail over the general provisions of section 40A.
In the instant case, the entire income including the interest on FDR had been assessed as business income by the Assessing Officer. Therefore, it was clear that capital of partners was utilized for the purpose of the business and, consequently, the requirement of section 36(1)(iii) stood satisfied. Further, interest paid to partners was in accordance with the provisions of section 40(b)(iv) and, therefore, no disallowance could have been made.
In the instant case, the disallowance had been made under section 40A(2), which had no application to the instant case. Therefore, the impugned disallowance made by the Assessing Officer and confirmed by the Commissioner (Appeals) was not justified and was liable to be deleted.
posted at www.taxmannindia.blogspot.com
Monday, August 31, 2009
ITAT, DELHI BENCH ‘B’ WHETHER SUB-LICENSEES CAN BE TREATED TO BE THE OWNERS OF THE PROPERTIES AND CAN BE SUBJECTED TO HOUSE PROPERTY INCOME?
WHETHER SUB-LICENSEES CAN BE TREATED TO BE THE OWNERS OF THE PROPERTIES AND CAN BE SUBJECTED TO HOUSE PROPERTY INCOME?
RATIO DECIDENDI
Sub-licensees are to be treated as deemed owner in view of the definition of ownership and transfer as given in section 27(iii) read with section 269UA(f)(ii) of the IT Act
IN THE ITAT, DELHI BENCH ‘B’, NEW DELHI
C. J. International Hotels Ltd.
v.
ACIT
ITA No. 1519/Del.05
July 24, 2008
RELEVANT EXTRACTS
** ** ** ** ** ** ** ** ** ** ** **
21.3. First of all we would like to examine the claim of the assessee with reference to the material on record. The main arguments advanced by the assessee to support its claim are as under:
(i) That the assessee is not owner of the premises. It is only licensee in view of the license-deed executed by the NDMC. This argument of the assessee is found to be substantiated from the terms and conditions of the license-deed. On going through the license-deed dated 14 7-1982,-it is found that originally through license deed dated 16th April 1981, NDMC as licenser entered into an agreement with M/s Pure Drinks, New Delhi Ltd. for granting license to use the plot of land measuring 4.5 acres at Windsor Place, New Delhi, for construction and commission of Five Star hotel building. Later on, as per the conditions of the licenser, a company under the name of M/s CJ. International Hotels Ltd., was formed and registered under the Companies Act, 1956 and it was agreed between the parties that license agreement be executed with this company in terms of supplemental agreement dated 13th January 1982. Thus, the agreement dated 14-7-1982 came to be executed with the assessee company.
(ii) The license was granted to the licensee for construction of a hotel and in lieu of the premises given under license, license fee per annum was also determined. The relevant portion of the license-deed in this regarded is as under:
“... Whereas the Licensor has offered and the Licencees have agreed to accept the license to use the plot of land measuring 4.29 acres at the crossing at Raisina Road and Janpath at Windsor Place, New Delhi (as shown in Annexure ‘A’) for construction and commission of a 5 star Hotel latest by 31st December 1984 in fall and in all respects for the purpose of housing a hotel of decent standard and other business appurtenant to the furtherance of Tourism in India to be run by the Licensees on license basis on terms and conditions mentioned hereinafter at an annual license fee of Rs. 2.68 crores (Rupees two crores sixty eight lacs only) or 21% (Twenty one per cent) of the annual gross turnover of the hotel business, whichever is mere from the date of handing over the said plot of land to the licensees including former licensees.”
(iii) In the license deed various restrictions were also imposed. As per clause 3, license fee was to be paid by the licensees to the licenser in every financial year. As per clause 5, the licensee was to fornish to the licensor its accounts. Clause 8 empowers the licensor to inspect the books of account and other relevant records. Clause 9 entitled the licenser to revoke or cancel the license. This clause is as under:
“9. In the event of the Licensees failing to make the payment of license fee, interest due thereupon or any other payment due against the licensees for any reason whatsoever of the amount demanded by the licensor in foil or in part, the licensor shall have absolute discretion without further reference to the Licensees to revoke' cancel the license with immediate effect for running the said hotel in terms of this license, to take possession of the licensed premises by recourse to law as provided in the Public Premises (Eviction of Unauthorized occupants) Act. 1971 or any other such law in force, at that time, after revocation of the license and the Licensees shall have do claim on the premises but only seek arbitration under clause 55 of this agreement."
(iv) As per clause 10, the premises were to continue on lease with the licensee. Clause 11 even enabled the licenser to terminate the license; This clause is as under:-
“11. The license will be liable for termination if at any time the licensees commits any breach of the terms, conditions and covenants on their part to be observed and performed under this license deed. But before any action is taken in this behalf the licensor shall communicate in writing to the licensees the breach, if any, of the terms and conditions on their part to the observed and performed under this license deed and it will be open to the licensees to satisfy the licenser that there had in fact been no such alleged breach to the satisfaction of the licensor."
(v) Clause 16 prohibited the licensee from subletting the premises to any other person without the permission of the licensor. This clause is as under:
“16. The Licensees shall not be at liberty in any way to underlet, sublet, encumber, assign or transfer their rights and interest or part with possession of the land and the building thereon or any part thereof or share therein to any person, directly or indirectly without the previous written consent of the Licensor. But the Licensees shall have the right to sub-license the licensed property, as stipulated in clause 34 of this license agreement."
(vi) Under other clauses of the license, several restrictions and conditions were imposed upon the licensee i.e. the assessee. Clause 29 provided that the accommodation or building to be constructed on the licensed space shall at all times vest in the licensor. This clause is as under:
“29. The accommodation/ building to be constructed on the licensed space shall at all times vest in the licensor together with all fittings, fixtures and other installations of the immovable types or of the types removal of is likely to cause damage to the accommodation/ building. A list of such fittings, fixtures and installations shall be drawn up jointly by the representatives of the licensor and the licensees on completion of die said accommodation building and the same shall form part of the license deed.”
(vii) Clause 34 permitted the licensees to sub let the premises. This clause is as under:
“34. The Licensees shall run the 5-star hotel themselves. However, the licensees may allow sub-licensees within the period of license for running car parking, cycle-scooter stand for parking and shopping arcades, bank, offices (within the shopping arcade) etc. The Licensees shall be further responsible for the conduct of various sub-licensees and observance of rules and regulations etc. The licensees shall be further responsible to answer that the sub-licensees shall not get any right over and above the rights and privilege of the licensees.”
(vii) By virtue of clause 50,it is provided that license shall stand ip so facto determined and possession/occupation transferred to the licensor. This clause is as under”
“The license shall stand ip-so- facto determined and possession/ occupation transferred to the licensor without any right to compensation whatsoever to the Licensees in any of the following events:...
(viii) From the clauses of the license-deed referred to above, it is clear that title in the property or ownership of the property in West Tower, was not transferred to the assessee. By virtue of the license deed, the assessee only become a license and not the owner of the premises. The license was granted for a specific purpose to the assessee by the NDMC i.e. for running a 5-star hotel and for that purpose several conditions were imposed, in violation of which the license-deed was liable to be terminated. These conditions set out in the license deed did not transfer the ownership of the premises to the assessee and NDMC remained the owner of the premises by virtue of various clauses of the license deed referred to above.
VII. In view of clauses 4 & 5 of the model sub-license deed, certain services, like, air-conditioning, cleaning & maintenance of common passages, lobbies and entrances, electricity and water supply, sanitary, plumbing etc. were to be provided to the sub-licensees by the assessee, in lieu of which the sub-licensees or occupants, were to pay the service charges. As per clause 7, the sub-licensee was authorized to sub let fee premises although any transfer of the space by the sub-licensee to other persons was subject to the discretion of the company and prior written approval from the company. As per clauses 9 to 22, various other conditions have been imposed. As per clause 31, the allotment was to be for a initial period of 9 years 11 months. It was to be renewed subsequently.
VIII. In view of the above conditions, it is clear that license was granted to the sub-licensees for using die space and enjoying fruits of income therefrom. It is undisputed that the sub-licensees were receiving rent from the occupants and were deducting TDS at the time of such receipts. They were also offering this income to income-tax under the head “Income from house property”.
IX. In view of the above facts and other aspects, it is established that sub-licensees were enjoying the premises by having exclusive control over possession and domain over the property. The interest in the property was acquired by them by virtue of the sub-license deed. They were enjoying the income from the property and the department was assessing such income under the head “Income from house property". Thus, for all intents and purposes and particularly in view of the provisions contained u/s 27(iii) read with section 269 UA, these sub-licenses were to be treated as owners and not the assessee. The departmental authorities have not properly appreciated these facts.
X. The learned sr. DR has supported the order of the departmental authorities in holding that the assessee be treated as owner of the property. We have already reproduced the argument of the learned DR in the earlier paras of this order. The contention of the learned DR was that section 22, relating to income from house property, is fully applicable in the case of the assessee. The learned counsel for the assessee on the other hand made reference to the provisions of sec. 27(iii) and submitted that interpretation of the provision u/s 27(iii) as done by the departmental authorities is not correct. According to him this provision provides only for deemed ownership when a person acquires any right as against ‘all rights', "in or with respect to any building or part thereof. According to him, "any right in or with respect to a building", as specified in section 27(iiib) is different from "All the rights" which one must possess to become owner under the Transfer of Property Act He further submitted that for proper understanding of the provision, one needs to see its legislative background and the object behind the provision. It was pointed out by him that Chapter XX-C was brought into the I.T. Act w.e.f 1-10-1986 and conferred a pre-emptive right in Central Government to purchase the property. According to him the provisions of Section XX-A, which preceded Chapter XX-C, were made to deal with the under valuation of immovable properties in sale-deeds and agreement to sell and to check tax evasion. According to him, the power extended not only to the case of sale or exchange but also included in its purview, a lese for a term exceeding 12 years. He further argued that were used and the enjoyment of property stood transferred, it was deemed to be a transfer and thus where any rights in or with respect to any building included the enjoyment of the property, whether by becoming a member or acquiring shares in a cooperative society, company or other association of persons or by way of any agreement or arrangement, or what-ever nature, it was treated as transfer. Thus, it was pointed out by the learned counsel that the provisions of Sec. XXA & XXC later on extended to the provisions governing income from house property as well as income under the head "capital gains".
XI. The issue to be decided, is whether the sub-license has the effect of transferring or enabling the enjoyment of the impugned property. The contention of the learned DR
was that because of restriction imposed, premises were not transferred to the sub-licensees, whereas the contention of the assessee is that full rights in relation to
such property for its use and enjoyment stood transferred to sub-license.
XII. On considering the relevant provisions of I.T. Act, it is found that the concept of "real ownership" and not "the legal ownership", has to be taken into account In the
case of Poddar Cement 226 ITR 625, the Hon'ble Supreme Court was concerned with the interpretation of the word "owner" within the meaning of section 22 of
the LT. act in its practical sense. The relevant observation of the Hon'ble Supreme Court at page 642 of the report are as under
"the juristic principle from the view point of each one is to determine the true connotation of the term 'owner' within the meaning of section 22 of the Act in its practical sense, leaving the husk of the legal title beyond the domain of ownership for eh purpose of this statutory provision-The reason is obvious. After all, who is to be taxed or assessed to be taxed more accurately - a person in receipt of money having actual control over the property with no person having better right to defeat his claim of possession or a person in legal parlance who may remain a reminder man, say, at the end or extinction of the period of occupation. One cannot reasonably and logically visualize as to when a person in actual physical control of the property realizing the entire income and usufructs of the property for this own use and not for the use of any other person, having the absolute power of disposal of the income so received, should be held not liable to tax merely because a vestige of legal ownership or a husk of title in the long run may yet clothe another person with the power of a residual ownership when such contingency arises which is not a case even here."
On page 653 the Hon'ble Supreme Court has farther observed as under:
“We are conscious' of the settled position that under the common law, "owner" means a person who has got valid title legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act, Registration Act, etc. But, in the context of section 22 of the Income-tax Act, having regard to the ground realities and further having regard to the object of the income-tax Act, namely, "to tax the income", we re of the view, ''owner*' is a person who is entitled to receive income from the property in his own right". Similarly, though the provision of Chapter XXC have not been made applicable to the provisions of section 32, the Hon'ble Supreme Court in the case of Mysore Minerals 239 ITR 775 (SQ adopted the same logic and held "anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded therefore and having the right to use and occupy the property and/ or to enjoy its usufruct in his own right would be the owner of ht buildings though a formal deed of title may not have been executed and registered as contemplated by the Transfer of Property Act, the Registration Act, etc "Building owned by the assessee" the expression as occurring in section 32(1) of the Income-tax Act means the person who having acquired possession over the building in his own right uses the same for the purposes of the business or; profession though a legal title has not been conveyed to him consistently with the requirement s of laws such as the Transfer of Property Act and the Registration Act, etc., but nevertheless is entitled to hold the property to the exclusion of all others."
In view of the above, it is seen that the restrictions contained in sub-licenses to which reference has been made by the learned DR did not really impinge on the enjoyment of the premises by the sub-licensees. Sub-licensees can part with the possession of the property in lieu of the consideration. Even the AO has taken into account the rent collected by the sub-licensees from the occupants for working out the ALV and for applying the average rental method, which shows that it was clear to the AO also that sub-licensees were earning rental income by enjoying the property allotted to them by the occupants.
XIII. The learned counsel for the assessee also compared the restrictions imposed in the license deed executed in favour of the assessee by the NDMC and the restrictions imposed by the assessee while executing sub-license deeds in favour of sub-license. According to him, similar restrictions as imposed by the NDMC upon the assessee were imposed by the assessee upon the sub-licensees. In this regard he made reference to various clauses of the two deeds and restrictions contained there under. XIV. According to him, if despite the restrictions imposed upon the assessee under the lease deed, the ownership stood transferred to the assessee, then in view of similar conditions contained under the license deed, the assessee had transferred ownership to the sub-licensees.
21.4. On going through the relevant material, referred to above we find force in this submission of the learned counsel for the assessee. In our considered opinion, the sub-licensees are deemed owners and were enjoying the income from the property allotted to them. They were earning income by farther letting out the property conversely speaking, if by virtue of the restrictions imposed, the sub-licensees cannot be treated to be deemed owners, then on the same logic the assessee also cannot be treated to be the owner because of the restrictions imposed in the license deed.
21.6. The last contention of the learned counsel for the assessee was that since the sub-licensees are to be treated as owners, the assessee cannot be treated to be owner or deemed owner because there cannot be two owners of one property at the same time. In this regard he made reference to the decision of Hon'ble Supreme Court in the case of Mysore Minerals Ltd. 239ITR 775.
21.7. We have considered the argument of the assessee. In the case of
Mysore Minerals Ltd. (supra), after relying upon the earlier judgments in
the cases of Podddar Cement 226 ITR 625 (SC) (supra); and Jodhamal
Kuthiala'case the Hon'ble Supreme Court has observed as under:
“It is well settled that there cannot be two owners of die property simultaneously and in the same sense of the term. The intention of the legislature in enacting section 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. Assigning any different meaning would not subserve the legislative intent. To take the case at hand it is the appellant-assessee who having paid part of the price, has been placed in possession of the houses as an owner and is using the buildings for the purpose of its business in its own right. Still the assessee has been denied the benefit of section 32. On the other hand, the Housing Board would be denied the benefit of section 32 because in spite of its being the legal owner it was not using the building for its business or profession."
21.8. From the above observations also it is clear that there could not be
two owners of the property. In the present case, the sub-licensees were
having possession over the property. This possession was not for one year
or two but for a large period of 9 years and 11 months which was subject to
further renewal. The user, control and enjoyment of the property was with
them. They were also paying income-tax on the rental income earned by them and therefore they are to be treated as owners of the space sub-licensed to them.
21.9. In view of the above, we are unable to concur with the findings recorded by the learned CIT(Appeals) and setting aside the same we hold that the assessee cannot be subjected to house-property income u/s 22 and 23 of the LT Act as owner of the premises licensed to it. In our view, sub-licensees are to be treated as deemed owner in view of the definition of ownership and transfer as given in sec. 27(iii) read with section 269UA(f)(ii).
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posted at www.taxmannindia.blogspot.com
RATIO DECIDENDI
Sub-licensees are to be treated as deemed owner in view of the definition of ownership and transfer as given in section 27(iii) read with section 269UA(f)(ii) of the IT Act
IN THE ITAT, DELHI BENCH ‘B’, NEW DELHI
C. J. International Hotels Ltd.
v.
ACIT
ITA No. 1519/Del.05
July 24, 2008
RELEVANT EXTRACTS
** ** ** ** ** ** ** ** ** ** ** **
21.3. First of all we would like to examine the claim of the assessee with reference to the material on record. The main arguments advanced by the assessee to support its claim are as under:
(i) That the assessee is not owner of the premises. It is only licensee in view of the license-deed executed by the NDMC. This argument of the assessee is found to be substantiated from the terms and conditions of the license-deed. On going through the license-deed dated 14 7-1982,-it is found that originally through license deed dated 16th April 1981, NDMC as licenser entered into an agreement with M/s Pure Drinks, New Delhi Ltd. for granting license to use the plot of land measuring 4.5 acres at Windsor Place, New Delhi, for construction and commission of Five Star hotel building. Later on, as per the conditions of the licenser, a company under the name of M/s CJ. International Hotels Ltd., was formed and registered under the Companies Act, 1956 and it was agreed between the parties that license agreement be executed with this company in terms of supplemental agreement dated 13th January 1982. Thus, the agreement dated 14-7-1982 came to be executed with the assessee company.
(ii) The license was granted to the licensee for construction of a hotel and in lieu of the premises given under license, license fee per annum was also determined. The relevant portion of the license-deed in this regarded is as under:
“... Whereas the Licensor has offered and the Licencees have agreed to accept the license to use the plot of land measuring 4.29 acres at the crossing at Raisina Road and Janpath at Windsor Place, New Delhi (as shown in Annexure ‘A’) for construction and commission of a 5 star Hotel latest by 31st December 1984 in fall and in all respects for the purpose of housing a hotel of decent standard and other business appurtenant to the furtherance of Tourism in India to be run by the Licensees on license basis on terms and conditions mentioned hereinafter at an annual license fee of Rs. 2.68 crores (Rupees two crores sixty eight lacs only) or 21% (Twenty one per cent) of the annual gross turnover of the hotel business, whichever is mere from the date of handing over the said plot of land to the licensees including former licensees.”
(iii) In the license deed various restrictions were also imposed. As per clause 3, license fee was to be paid by the licensees to the licenser in every financial year. As per clause 5, the licensee was to fornish to the licensor its accounts. Clause 8 empowers the licensor to inspect the books of account and other relevant records. Clause 9 entitled the licenser to revoke or cancel the license. This clause is as under:
“9. In the event of the Licensees failing to make the payment of license fee, interest due thereupon or any other payment due against the licensees for any reason whatsoever of the amount demanded by the licensor in foil or in part, the licensor shall have absolute discretion without further reference to the Licensees to revoke' cancel the license with immediate effect for running the said hotel in terms of this license, to take possession of the licensed premises by recourse to law as provided in the Public Premises (Eviction of Unauthorized occupants) Act. 1971 or any other such law in force, at that time, after revocation of the license and the Licensees shall have do claim on the premises but only seek arbitration under clause 55 of this agreement."
(iv) As per clause 10, the premises were to continue on lease with the licensee. Clause 11 even enabled the licenser to terminate the license; This clause is as under:-
“11. The license will be liable for termination if at any time the licensees commits any breach of the terms, conditions and covenants on their part to be observed and performed under this license deed. But before any action is taken in this behalf the licensor shall communicate in writing to the licensees the breach, if any, of the terms and conditions on their part to the observed and performed under this license deed and it will be open to the licensees to satisfy the licenser that there had in fact been no such alleged breach to the satisfaction of the licensor."
(v) Clause 16 prohibited the licensee from subletting the premises to any other person without the permission of the licensor. This clause is as under:
“16. The Licensees shall not be at liberty in any way to underlet, sublet, encumber, assign or transfer their rights and interest or part with possession of the land and the building thereon or any part thereof or share therein to any person, directly or indirectly without the previous written consent of the Licensor. But the Licensees shall have the right to sub-license the licensed property, as stipulated in clause 34 of this license agreement."
(vi) Under other clauses of the license, several restrictions and conditions were imposed upon the licensee i.e. the assessee. Clause 29 provided that the accommodation or building to be constructed on the licensed space shall at all times vest in the licensor. This clause is as under:
“29. The accommodation/ building to be constructed on the licensed space shall at all times vest in the licensor together with all fittings, fixtures and other installations of the immovable types or of the types removal of is likely to cause damage to the accommodation/ building. A list of such fittings, fixtures and installations shall be drawn up jointly by the representatives of the licensor and the licensees on completion of die said accommodation building and the same shall form part of the license deed.”
(vii) Clause 34 permitted the licensees to sub let the premises. This clause is as under:
“34. The Licensees shall run the 5-star hotel themselves. However, the licensees may allow sub-licensees within the period of license for running car parking, cycle-scooter stand for parking and shopping arcades, bank, offices (within the shopping arcade) etc. The Licensees shall be further responsible for the conduct of various sub-licensees and observance of rules and regulations etc. The licensees shall be further responsible to answer that the sub-licensees shall not get any right over and above the rights and privilege of the licensees.”
(vii) By virtue of clause 50,it is provided that license shall stand ip so facto determined and possession/occupation transferred to the licensor. This clause is as under”
“The license shall stand ip-so- facto determined and possession/ occupation transferred to the licensor without any right to compensation whatsoever to the Licensees in any of the following events:...
(viii) From the clauses of the license-deed referred to above, it is clear that title in the property or ownership of the property in West Tower, was not transferred to the assessee. By virtue of the license deed, the assessee only become a license and not the owner of the premises. The license was granted for a specific purpose to the assessee by the NDMC i.e. for running a 5-star hotel and for that purpose several conditions were imposed, in violation of which the license-deed was liable to be terminated. These conditions set out in the license deed did not transfer the ownership of the premises to the assessee and NDMC remained the owner of the premises by virtue of various clauses of the license deed referred to above.
VII. In view of clauses 4 & 5 of the model sub-license deed, certain services, like, air-conditioning, cleaning & maintenance of common passages, lobbies and entrances, electricity and water supply, sanitary, plumbing etc. were to be provided to the sub-licensees by the assessee, in lieu of which the sub-licensees or occupants, were to pay the service charges. As per clause 7, the sub-licensee was authorized to sub let fee premises although any transfer of the space by the sub-licensee to other persons was subject to the discretion of the company and prior written approval from the company. As per clauses 9 to 22, various other conditions have been imposed. As per clause 31, the allotment was to be for a initial period of 9 years 11 months. It was to be renewed subsequently.
VIII. In view of the above conditions, it is clear that license was granted to the sub-licensees for using die space and enjoying fruits of income therefrom. It is undisputed that the sub-licensees were receiving rent from the occupants and were deducting TDS at the time of such receipts. They were also offering this income to income-tax under the head “Income from house property”.
IX. In view of the above facts and other aspects, it is established that sub-licensees were enjoying the premises by having exclusive control over possession and domain over the property. The interest in the property was acquired by them by virtue of the sub-license deed. They were enjoying the income from the property and the department was assessing such income under the head “Income from house property". Thus, for all intents and purposes and particularly in view of the provisions contained u/s 27(iii) read with section 269 UA, these sub-licenses were to be treated as owners and not the assessee. The departmental authorities have not properly appreciated these facts.
X. The learned sr. DR has supported the order of the departmental authorities in holding that the assessee be treated as owner of the property. We have already reproduced the argument of the learned DR in the earlier paras of this order. The contention of the learned DR was that section 22, relating to income from house property, is fully applicable in the case of the assessee. The learned counsel for the assessee on the other hand made reference to the provisions of sec. 27(iii) and submitted that interpretation of the provision u/s 27(iii) as done by the departmental authorities is not correct. According to him this provision provides only for deemed ownership when a person acquires any right as against ‘all rights', "in or with respect to any building or part thereof. According to him, "any right in or with respect to a building", as specified in section 27(iiib) is different from "All the rights" which one must possess to become owner under the Transfer of Property Act He further submitted that for proper understanding of the provision, one needs to see its legislative background and the object behind the provision. It was pointed out by him that Chapter XX-C was brought into the I.T. Act w.e.f 1-10-1986 and conferred a pre-emptive right in Central Government to purchase the property. According to him the provisions of Section XX-A, which preceded Chapter XX-C, were made to deal with the under valuation of immovable properties in sale-deeds and agreement to sell and to check tax evasion. According to him, the power extended not only to the case of sale or exchange but also included in its purview, a lese for a term exceeding 12 years. He further argued that were used and the enjoyment of property stood transferred, it was deemed to be a transfer and thus where any rights in or with respect to any building included the enjoyment of the property, whether by becoming a member or acquiring shares in a cooperative society, company or other association of persons or by way of any agreement or arrangement, or what-ever nature, it was treated as transfer. Thus, it was pointed out by the learned counsel that the provisions of Sec. XXA & XXC later on extended to the provisions governing income from house property as well as income under the head "capital gains".
XI. The issue to be decided, is whether the sub-license has the effect of transferring or enabling the enjoyment of the impugned property. The contention of the learned DR
was that because of restriction imposed, premises were not transferred to the sub-licensees, whereas the contention of the assessee is that full rights in relation to
such property for its use and enjoyment stood transferred to sub-license.
XII. On considering the relevant provisions of I.T. Act, it is found that the concept of "real ownership" and not "the legal ownership", has to be taken into account In the
case of Poddar Cement 226 ITR 625, the Hon'ble Supreme Court was concerned with the interpretation of the word "owner" within the meaning of section 22 of
the LT. act in its practical sense. The relevant observation of the Hon'ble Supreme Court at page 642 of the report are as under
"the juristic principle from the view point of each one is to determine the true connotation of the term 'owner' within the meaning of section 22 of the Act in its practical sense, leaving the husk of the legal title beyond the domain of ownership for eh purpose of this statutory provision-The reason is obvious. After all, who is to be taxed or assessed to be taxed more accurately - a person in receipt of money having actual control over the property with no person having better right to defeat his claim of possession or a person in legal parlance who may remain a reminder man, say, at the end or extinction of the period of occupation. One cannot reasonably and logically visualize as to when a person in actual physical control of the property realizing the entire income and usufructs of the property for this own use and not for the use of any other person, having the absolute power of disposal of the income so received, should be held not liable to tax merely because a vestige of legal ownership or a husk of title in the long run may yet clothe another person with the power of a residual ownership when such contingency arises which is not a case even here."
On page 653 the Hon'ble Supreme Court has farther observed as under:
“We are conscious' of the settled position that under the common law, "owner" means a person who has got valid title legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act, Registration Act, etc. But, in the context of section 22 of the Income-tax Act, having regard to the ground realities and further having regard to the object of the income-tax Act, namely, "to tax the income", we re of the view, ''owner*' is a person who is entitled to receive income from the property in his own right". Similarly, though the provision of Chapter XXC have not been made applicable to the provisions of section 32, the Hon'ble Supreme Court in the case of Mysore Minerals 239 ITR 775 (SQ adopted the same logic and held "anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded therefore and having the right to use and occupy the property and/ or to enjoy its usufruct in his own right would be the owner of ht buildings though a formal deed of title may not have been executed and registered as contemplated by the Transfer of Property Act, the Registration Act, etc "Building owned by the assessee" the expression as occurring in section 32(1) of the Income-tax Act means the person who having acquired possession over the building in his own right uses the same for the purposes of the business or; profession though a legal title has not been conveyed to him consistently with the requirement s of laws such as the Transfer of Property Act and the Registration Act, etc., but nevertheless is entitled to hold the property to the exclusion of all others."
In view of the above, it is seen that the restrictions contained in sub-licenses to which reference has been made by the learned DR did not really impinge on the enjoyment of the premises by the sub-licensees. Sub-licensees can part with the possession of the property in lieu of the consideration. Even the AO has taken into account the rent collected by the sub-licensees from the occupants for working out the ALV and for applying the average rental method, which shows that it was clear to the AO also that sub-licensees were earning rental income by enjoying the property allotted to them by the occupants.
XIII. The learned counsel for the assessee also compared the restrictions imposed in the license deed executed in favour of the assessee by the NDMC and the restrictions imposed by the assessee while executing sub-license deeds in favour of sub-license. According to him, similar restrictions as imposed by the NDMC upon the assessee were imposed by the assessee upon the sub-licensees. In this regard he made reference to various clauses of the two deeds and restrictions contained there under. XIV. According to him, if despite the restrictions imposed upon the assessee under the lease deed, the ownership stood transferred to the assessee, then in view of similar conditions contained under the license deed, the assessee had transferred ownership to the sub-licensees.
21.4. On going through the relevant material, referred to above we find force in this submission of the learned counsel for the assessee. In our considered opinion, the sub-licensees are deemed owners and were enjoying the income from the property allotted to them. They were earning income by farther letting out the property conversely speaking, if by virtue of the restrictions imposed, the sub-licensees cannot be treated to be deemed owners, then on the same logic the assessee also cannot be treated to be the owner because of the restrictions imposed in the license deed.
21.6. The last contention of the learned counsel for the assessee was that since the sub-licensees are to be treated as owners, the assessee cannot be treated to be owner or deemed owner because there cannot be two owners of one property at the same time. In this regard he made reference to the decision of Hon'ble Supreme Court in the case of Mysore Minerals Ltd. 239ITR 775.
21.7. We have considered the argument of the assessee. In the case of
Mysore Minerals Ltd. (supra), after relying upon the earlier judgments in
the cases of Podddar Cement 226 ITR 625 (SC) (supra); and Jodhamal
Kuthiala'case the Hon'ble Supreme Court has observed as under:
“It is well settled that there cannot be two owners of die property simultaneously and in the same sense of the term. The intention of the legislature in enacting section 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. Assigning any different meaning would not subserve the legislative intent. To take the case at hand it is the appellant-assessee who having paid part of the price, has been placed in possession of the houses as an owner and is using the buildings for the purpose of its business in its own right. Still the assessee has been denied the benefit of section 32. On the other hand, the Housing Board would be denied the benefit of section 32 because in spite of its being the legal owner it was not using the building for its business or profession."
21.8. From the above observations also it is clear that there could not be
two owners of the property. In the present case, the sub-licensees were
having possession over the property. This possession was not for one year
or two but for a large period of 9 years and 11 months which was subject to
further renewal. The user, control and enjoyment of the property was with
them. They were also paying income-tax on the rental income earned by them and therefore they are to be treated as owners of the space sub-licensed to them.
21.9. In view of the above, we are unable to concur with the findings recorded by the learned CIT(Appeals) and setting aside the same we hold that the assessee cannot be subjected to house-property income u/s 22 and 23 of the LT Act as owner of the premises licensed to it. In our view, sub-licensees are to be treated as deemed owner in view of the definition of ownership and transfer as given in sec. 27(iii) read with section 269UA(f)(ii).
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Sunday, August 30, 2009
WHEN NOTICE OF REASSESSMENT CAN BE ISSUED WITHOUT ANY TIME LIMIT
WHEN NOTICE OF REASSESSMENT CAN BE ISSUED WITHOUT ANY TIME LIMIT
RATIO DECIDENDI
Where the Assessing Officer includes an item of income for the assessment year 1999-2000 which on appeal is held to relate to the assessment year 1998-99, that finding on appeal can be utilized to reopen the assessment for the assessment year 1998-99 without any time limit by virtue of the provisions of section 150(1)
IN THE ITAT, DELHI BENCH ‘D’, NEW DELHI
ACIT
v.
Rajendra Kumar
ITA No. 1396/Del/2004
March 14, 2008
RELEVANT EXTRACTS :
** ** ** ** ** **
5. Section 148 makes it mandatory for the Assessing Officer to issue and serve a notice on the assessee calling upon him to furnish a return of income within a specified period. Service upon the assessee of a valid notice under section 148 constitutes the foundation of the jurisdiction of the Assessing Officer to make re-assessment and this position was recognized and laid down by the Supreme Court for the first time in Y. Narayana Chetty and Anr. vs. ITO, Nellore & Ors. (1959) 35 ITR 388. In this case, it was observed as follows:
“…..The notice prescribed by section 34 cannot be regarded as a mere procedural requirement; it is only if the said notice is served on the assessee as required that the Income-tax Officer would be justified in taking proceedings against him. If no notice is issued or if the notice issued is shown to be invalid then the validity of the proceedings taken by the Income-tax Officer without a notice or in pursuance of an invalid notice would be illegal and void.”
The position is the same under the 1961 Act also. This is well settled position and does not require the citing of any authority. Before issue of notice, it is mandatory for the Assessing Officer to record his reasons for doing so. Section 149 prescribes the time limit for issue of the notice under section 148. This section has received amendments by the Finance Act, 2001, with effect from 1-6-2001 prescribing different time limits than those prescribed prior to the said date. Briefly stated, different time limits have been prescribed depending upon the amount of income chargeable to tax that has escaped assessment. Section 150 makes provision for cases where an assessment is made in pursuance of an order on appeal, reference or revision or an order of a court in any proceedings under any other law. Sub-section (1) says that the time limits prescribed in section 149 will not apply, which means that a notice under section 148 may be issued at any time for the purpose of making an assessment or re-assessment or recomputation in consequence of or to give effect to any finding or direction contained in an order passed under the Income-tax Act by way of appeal, reference or revision or by a court in any proceeding under any other law. Having thus removed the time limits for issuing notice under section 148 in such cases, sub-section (2) hastens to add that where any assessment, re-assessment or recomputation pursuant to an order of appeal, reference or revision or an order of a court in any proceeding under any other law is sought to be made in respect of an assessment year such an order of assessment, reassessment or recomputation could not have been made at the time the order, which was the subject matter of the appeal, reference or revision, as the case may be, was made by reason of any other provision limiting the time within which any action for assessment, re-assessment or recomputation may be taken. The rationale behind this provision is not to confer upon the Assessing Officer the jurisdiction to reopen an assessment which the Assessing Officer did not otherwise possess. It says that where the reassessment proceedings would have been barred by time even at the point of time when the order, which became the subject matter of the appeal, revision, etc., was passed, resort cannot be made to sub-section (1) of section 150. An example may make the position clear. Supposing for the assessment year 1999-2000 the Assessing Officer includes an item of income which on appeal is held to relate to the assessment year 1998-99 (the earlier year). This finding on appeal can be utilized to reopen the assessment for the assessment year 1998-99 without any time limit by virtue of the provisions of section 150 (1), the reason being that had the Assessing Officer been aware even when he completed the assessment for the assessment year 1999-2000 that the income was assessable in the assessment year 1998-99, he would and could have included the income in that assessment year itself. This in turn postulates that an assessment or re-assessment for the assessment year 1998-99 would have been permissible at the point of time when the assessment order for the assessment year 1999-2000 was passed. That is the reason why sub-section (2) of section 150 provides that the enlargement of time provided in sub-section (1) will not be available where, even on the date when the assessment was completed, an assessment or reassessment of the income for the assessment year 1998-99 (in our example) would have been barred by time.
6. Keeping in view the above statutory provisions, let us examine the facts of the present case. The assessment order for the assessment year 1978-79 was passed on 22-3-1990 under section 144 of the Act. It was in this assessment order that the capital gains were first brought to assessment. There was an appeal against the aforesaid assessment order and the CIT (Appeals) upheld the assessment to capital gains by order dated 15-5-1991 in ITA No. 328/1991/MRT. It was this order of the Commissioner (Appeals) that was carried in further appeal to the Tribunal which passed the order on 14-6-2000 holding that the capital gains were assessable in the assessment year 1980-81. The question for consideration is whether on 22-3-1990, the date on which the assessment for the assessment year 1978-79 was framed, the Assessing Officer could have taken action by issue of notice under section 148 to reopen the assessment for the assessment year 1980-81. According to section 149(1)(b)(iii) as it stood with effect from 1-4-1989 but before being amended by the Finance Act, 2001, with effect from 1-6-2001, if seven years have elapsed from the end of the assessment year 1980-81, but not more than ten years have elapsed, the notice under section 148 can be issued for the assessment year 1980-81 provided the escaped income was likely to be Rs. 50,000 or more. Seven years from the end of the assessment year 1980-81 would have elapsed on 31-3-1988. Ten years would have elapsed on 31-3-1991. On 22-3-1990, seven years had elapsed but not ten years; further the income chargeable to tax was more than Rs.3 lacs. Thus, on 22-3-1990 the Assessing Officer could havew validly issued notice under section 148 in respect of the assessment year 1980-81. Therefore, the Assessing Officer could have validly issued notice under section 148 on 28-3-2003 taking advantage of the direction issued by the Tribunal in the appeal for the assessment year 1978-79. Such a notice is saved by sub-section (1) of section 150 and the provisions of sub-section (2) of section 150 are not applicable. The contention of the learned counsel for the assessee was that the law as on 28-3-2003 will govern the issue of notice under section 149(1)(b), according to which, the maximum period of six years would have elapsed from the assessment year 1980-81 on 31-3-1987 and, therefore, the Assessing Officer could not have issued the notice under section 148 on 22-3-1990. We are unable to accept the contention because under section 150(2), the time limit within which notice under section 148 could be issued by the Assessing Officer has to be reckoned, in the very nature of things, under the provisions of section 149 as they stood as on 22-3-1990 as is clear from the words “assessment year in respect of which an assessment, reassessment or recomputation could not have been made at the time the order which was the subject matter of the appeal, reference or revision, as the case may be, was made by reason of any other provision limiting the time within which any action for assessment, re-assessment or recomputation may be taken”. In the very nature of things, such other provision limiting the time for issue of notice under section 149 has to be reckoned with only on the date on which the assessment order for the assessment year 1978-79 was passed, which was on 22-3-1990. On this date, the Assessing Officer could have issued notice under section 148 within the time limit provided by section 149(1)(b)(iii) of the Act as it stood on that date. The contention of the learned counsel for the assessee to the contrary is rejected.
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RATIO DECIDENDI
Where the Assessing Officer includes an item of income for the assessment year 1999-2000 which on appeal is held to relate to the assessment year 1998-99, that finding on appeal can be utilized to reopen the assessment for the assessment year 1998-99 without any time limit by virtue of the provisions of section 150(1)
IN THE ITAT, DELHI BENCH ‘D’, NEW DELHI
ACIT
v.
Rajendra Kumar
ITA No. 1396/Del/2004
March 14, 2008
RELEVANT EXTRACTS :
** ** ** ** ** **
5. Section 148 makes it mandatory for the Assessing Officer to issue and serve a notice on the assessee calling upon him to furnish a return of income within a specified period. Service upon the assessee of a valid notice under section 148 constitutes the foundation of the jurisdiction of the Assessing Officer to make re-assessment and this position was recognized and laid down by the Supreme Court for the first time in Y. Narayana Chetty and Anr. vs. ITO, Nellore & Ors. (1959) 35 ITR 388. In this case, it was observed as follows:
“…..The notice prescribed by section 34 cannot be regarded as a mere procedural requirement; it is only if the said notice is served on the assessee as required that the Income-tax Officer would be justified in taking proceedings against him. If no notice is issued or if the notice issued is shown to be invalid then the validity of the proceedings taken by the Income-tax Officer without a notice or in pursuance of an invalid notice would be illegal and void.”
The position is the same under the 1961 Act also. This is well settled position and does not require the citing of any authority. Before issue of notice, it is mandatory for the Assessing Officer to record his reasons for doing so. Section 149 prescribes the time limit for issue of the notice under section 148. This section has received amendments by the Finance Act, 2001, with effect from 1-6-2001 prescribing different time limits than those prescribed prior to the said date. Briefly stated, different time limits have been prescribed depending upon the amount of income chargeable to tax that has escaped assessment. Section 150 makes provision for cases where an assessment is made in pursuance of an order on appeal, reference or revision or an order of a court in any proceedings under any other law. Sub-section (1) says that the time limits prescribed in section 149 will not apply, which means that a notice under section 148 may be issued at any time for the purpose of making an assessment or re-assessment or recomputation in consequence of or to give effect to any finding or direction contained in an order passed under the Income-tax Act by way of appeal, reference or revision or by a court in any proceeding under any other law. Having thus removed the time limits for issuing notice under section 148 in such cases, sub-section (2) hastens to add that where any assessment, re-assessment or recomputation pursuant to an order of appeal, reference or revision or an order of a court in any proceeding under any other law is sought to be made in respect of an assessment year such an order of assessment, reassessment or recomputation could not have been made at the time the order, which was the subject matter of the appeal, reference or revision, as the case may be, was made by reason of any other provision limiting the time within which any action for assessment, re-assessment or recomputation may be taken. The rationale behind this provision is not to confer upon the Assessing Officer the jurisdiction to reopen an assessment which the Assessing Officer did not otherwise possess. It says that where the reassessment proceedings would have been barred by time even at the point of time when the order, which became the subject matter of the appeal, revision, etc., was passed, resort cannot be made to sub-section (1) of section 150. An example may make the position clear. Supposing for the assessment year 1999-2000 the Assessing Officer includes an item of income which on appeal is held to relate to the assessment year 1998-99 (the earlier year). This finding on appeal can be utilized to reopen the assessment for the assessment year 1998-99 without any time limit by virtue of the provisions of section 150 (1), the reason being that had the Assessing Officer been aware even when he completed the assessment for the assessment year 1999-2000 that the income was assessable in the assessment year 1998-99, he would and could have included the income in that assessment year itself. This in turn postulates that an assessment or re-assessment for the assessment year 1998-99 would have been permissible at the point of time when the assessment order for the assessment year 1999-2000 was passed. That is the reason why sub-section (2) of section 150 provides that the enlargement of time provided in sub-section (1) will not be available where, even on the date when the assessment was completed, an assessment or reassessment of the income for the assessment year 1998-99 (in our example) would have been barred by time.
6. Keeping in view the above statutory provisions, let us examine the facts of the present case. The assessment order for the assessment year 1978-79 was passed on 22-3-1990 under section 144 of the Act. It was in this assessment order that the capital gains were first brought to assessment. There was an appeal against the aforesaid assessment order and the CIT (Appeals) upheld the assessment to capital gains by order dated 15-5-1991 in ITA No. 328/1991/MRT. It was this order of the Commissioner (Appeals) that was carried in further appeal to the Tribunal which passed the order on 14-6-2000 holding that the capital gains were assessable in the assessment year 1980-81. The question for consideration is whether on 22-3-1990, the date on which the assessment for the assessment year 1978-79 was framed, the Assessing Officer could have taken action by issue of notice under section 148 to reopen the assessment for the assessment year 1980-81. According to section 149(1)(b)(iii) as it stood with effect from 1-4-1989 but before being amended by the Finance Act, 2001, with effect from 1-6-2001, if seven years have elapsed from the end of the assessment year 1980-81, but not more than ten years have elapsed, the notice under section 148 can be issued for the assessment year 1980-81 provided the escaped income was likely to be Rs. 50,000 or more. Seven years from the end of the assessment year 1980-81 would have elapsed on 31-3-1988. Ten years would have elapsed on 31-3-1991. On 22-3-1990, seven years had elapsed but not ten years; further the income chargeable to tax was more than Rs.3 lacs. Thus, on 22-3-1990 the Assessing Officer could havew validly issued notice under section 148 in respect of the assessment year 1980-81. Therefore, the Assessing Officer could have validly issued notice under section 148 on 28-3-2003 taking advantage of the direction issued by the Tribunal in the appeal for the assessment year 1978-79. Such a notice is saved by sub-section (1) of section 150 and the provisions of sub-section (2) of section 150 are not applicable. The contention of the learned counsel for the assessee was that the law as on 28-3-2003 will govern the issue of notice under section 149(1)(b), according to which, the maximum period of six years would have elapsed from the assessment year 1980-81 on 31-3-1987 and, therefore, the Assessing Officer could not have issued the notice under section 148 on 22-3-1990. We are unable to accept the contention because under section 150(2), the time limit within which notice under section 148 could be issued by the Assessing Officer has to be reckoned, in the very nature of things, under the provisions of section 149 as they stood as on 22-3-1990 as is clear from the words “assessment year in respect of which an assessment, reassessment or recomputation could not have been made at the time the order which was the subject matter of the appeal, reference or revision, as the case may be, was made by reason of any other provision limiting the time within which any action for assessment, re-assessment or recomputation may be taken”. In the very nature of things, such other provision limiting the time for issue of notice under section 149 has to be reckoned with only on the date on which the assessment order for the assessment year 1978-79 was passed, which was on 22-3-1990. On this date, the Assessing Officer could have issued notice under section 148 within the time limit provided by section 149(1)(b)(iii) of the Act as it stood on that date. The contention of the learned counsel for the assessee to the contrary is rejected.
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ALLOWABILITY OF CLAIM UNDER SECTION 54F OF THE INCOME-TAX ACT, 1961 ITAT, ‘B’ BENCH, MUMBAI
ALLOWABILITY OF CLAIM UNDER SECTION 54F OF THE INCOME-TAX ACT, 1961
RATIO DECIDENDI
The assessee is not expected to proceed to buy a defective residential house (new asset), which is prone to demolition by the Municipal Authorities in order to qualify for exemption under the provisions of Income Tax Act; exemption under section 54F is available to the assessee, if the intention of the assessee from the very beginning is to invest the long term capital gains in the new asset, though certain conditions are not met for genuine facts and circumstances.
IN THE ITAT, ‘B’ BENCH, MUMBAI
Mukesh G. Desai, HUF
v.
ITO
ITA NO. 2077/MUM OF 2007
June 24, 2008
RELEVANT EXTRACTS :
** ** ** ** ** **
8. We have heard the rival submissions and perused the orders of the lower authorities. The facts of the case, the grounds of the assessee and orders of the authorities given birth to number of issues in connection with the claim of exemption under section 54F. These issues include (i) whether the Assessing Officer is right in treating the unsuccessful investment of long term capital gains in the row house no 30 as purchase of new asset as per subsection (1) of section 54F and in treating the cancellation of said purchase of row house in June 1997 as transfer of new asset in violation of conditions in subsection (3) of section 54F, which provides for lock in period of 3 years for transfer of a new asset from the date of its purchase, (ii) whether such cancelled purchase of new asset provides necessary immunity from attracting the provisions of subsection (4) of section 54F relating to depositing the capital gains in the bank, (iii) whether Assessing Officer and Commissioner (Appeals) were justified in rejecting the assessee’s claim that the construction of flat n 5 in the under construction building named Abhijit, is the new asset and not the cancelled purchase transaction of row house no 30, (iv) whether the depositing money in Capital Gains Scheme in the bank as per the provisions of section 54F(4) is still a relevant condition even though the capital gains are invested in row house under bonafide belief by the assessee, (v) whether the purchase of ‘block of shares’ of the M/s Sonzol Finance and Investment P. Ltd. as a part of the scheme to become entitled to the allotment of flat no 5 in the Abhijit, should be treated as the investment of long term capital gains in the construction of the new asset, (vi) whether the assessee’s successful reinvestment in the construction of the flat no. 5 in Abhijit building, subsequent to cancellation of the row house, should be treated as investment in purchase of new asset under section54F, and finally (vii) whether the assessee investment in flat no. 5 in Abhijit is the case of purchase or the case of construction and whether applicable limitation of time period is two or three years.
11. Sub-section (1) of 54F mentions to the eligible long term capital assets i.e. any long term capital asset not being the residential house, eligible new asset and modes of investment of such capital gains in the new asset and time limitations when the new asset is purchased or constructed apart from others. We find that there is no dispute on the eligibility of the long-term capital gains and there is dispute on the eligible new asset, mode of investment of such gains and applicable time limitations for such investment of the same. The assessee holds that the investment of gains on 28-3-1998 in the construction of flat no. 5 in under construction building called Abhijit is the investment in eligible new asset for the purpose of subsection (1) and therefore, the assessee’s case is the case of construction and in turn, the applicable time limitation is the period of three for investing the long term capital gains. Whereas, the revenue contends that the assessee investment of capital gains in the Row House no 30 is the eligible new asset and not in the construction of the flat no 5 in Abhijit Building. In other words, what is purchased in connection with the Flat No. 5 is a ‘block of shares’ of M/s Sonzol Finance and Investment P. Ltd. only and such purchase has only made the assessee entitled to a Flat No. 5 in Abhijit Building.
12. We have analysed the above dispute and analyzed the factual matrix relating to the both Row House No. 30 and the Flat 5 in Abhijit Building. The sequence of events from the accrual of long term capital gains of Rs.27,01,204 entering into an agreement with Harshad Rai Poonamchand Doshi, the builder of Row houses in Shanti Park vide the Articles of Agreement dated 26-8-1996 and payment of Rs. 30.50 lakhs for purchase of Row House No. 30 consisting of Ground plus First Floor, Shanti Vidya Nagari, Meera Road, Dist. Thane, termination of the agreement dated 26-8-1996 cancelling the purchase of the said row house vide the Articles of Agreement for cancellation and refund of Rs. 30.5 lakhs by Sri Doshi, revealed that the assessee’s intention to invest the capital gains in the residential house to avail the exemption under section 54 is beyond any doubt. The Assessing Officer has not brought anyting on record to derive any mala fide intention in assessee’s decision to pay the capital gains to Sri Doshi as per the agreement and receiving the refund of the same owing to the possible threat to the proposed row house. Assessing Officer has not established that any of the Articles of Agreement dated 26-8-1996 and Articles of Agreement for cancellation are bogus. Therefore, the cancellation of agreement by the assessee falls within the ambit of the doctrine of caveat emptor (ie buyers beware) and surrender of row house no 30 is legally justified. The assessee is not expected to proceed to buy a defective residential house (new asset), which is prone to demolition by the Municipal Authorities in order to qualify for exemption under the provisions of Income tax Act. Therefore, we are of the considered opinion that the decision of the lower authorities in treating the row house as the new asset is misplaced. We find the relevance of the apex court judgment in the case of T N Aravinda Reddy (120 ITR 46) for the proposition that in the context of relief under section 54, investment has to be understood in a liberal sense without limiting the meaning of ‘lexical legalese’ and word ‘purchase’ should be understood as in the sense of ‘plainspoken people’. Further the decision of Jodhpur Bench of the ITAT in the case of Jagan Nath Singh Lodha (supra) is relevant for the proposition that exemption under section 54F is available to the assessee, if the intention of the assessee from the very beginning is to invest in the new asset, though certain conditions are not met for genuine facts and circumstances. Therefore, we have no confusion in our minds in favour of ignoring the whole issue of investment of capital gains in the purchase of row house no. 30 and in not ignoring the assessee’s investment of said capital gains in the Flat no. 5 in Abhijit Building.
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RATIO DECIDENDI
The assessee is not expected to proceed to buy a defective residential house (new asset), which is prone to demolition by the Municipal Authorities in order to qualify for exemption under the provisions of Income Tax Act; exemption under section 54F is available to the assessee, if the intention of the assessee from the very beginning is to invest the long term capital gains in the new asset, though certain conditions are not met for genuine facts and circumstances.
IN THE ITAT, ‘B’ BENCH, MUMBAI
Mukesh G. Desai, HUF
v.
ITO
ITA NO. 2077/MUM OF 2007
June 24, 2008
RELEVANT EXTRACTS :
** ** ** ** ** **
8. We have heard the rival submissions and perused the orders of the lower authorities. The facts of the case, the grounds of the assessee and orders of the authorities given birth to number of issues in connection with the claim of exemption under section 54F. These issues include (i) whether the Assessing Officer is right in treating the unsuccessful investment of long term capital gains in the row house no 30 as purchase of new asset as per subsection (1) of section 54F and in treating the cancellation of said purchase of row house in June 1997 as transfer of new asset in violation of conditions in subsection (3) of section 54F, which provides for lock in period of 3 years for transfer of a new asset from the date of its purchase, (ii) whether such cancelled purchase of new asset provides necessary immunity from attracting the provisions of subsection (4) of section 54F relating to depositing the capital gains in the bank, (iii) whether Assessing Officer and Commissioner (Appeals) were justified in rejecting the assessee’s claim that the construction of flat n 5 in the under construction building named Abhijit, is the new asset and not the cancelled purchase transaction of row house no 30, (iv) whether the depositing money in Capital Gains Scheme in the bank as per the provisions of section 54F(4) is still a relevant condition even though the capital gains are invested in row house under bonafide belief by the assessee, (v) whether the purchase of ‘block of shares’ of the M/s Sonzol Finance and Investment P. Ltd. as a part of the scheme to become entitled to the allotment of flat no 5 in the Abhijit, should be treated as the investment of long term capital gains in the construction of the new asset, (vi) whether the assessee’s successful reinvestment in the construction of the flat no. 5 in Abhijit building, subsequent to cancellation of the row house, should be treated as investment in purchase of new asset under section54F, and finally (vii) whether the assessee investment in flat no. 5 in Abhijit is the case of purchase or the case of construction and whether applicable limitation of time period is two or three years.
11. Sub-section (1) of 54F mentions to the eligible long term capital assets i.e. any long term capital asset not being the residential house, eligible new asset and modes of investment of such capital gains in the new asset and time limitations when the new asset is purchased or constructed apart from others. We find that there is no dispute on the eligibility of the long-term capital gains and there is dispute on the eligible new asset, mode of investment of such gains and applicable time limitations for such investment of the same. The assessee holds that the investment of gains on 28-3-1998 in the construction of flat no. 5 in under construction building called Abhijit is the investment in eligible new asset for the purpose of subsection (1) and therefore, the assessee’s case is the case of construction and in turn, the applicable time limitation is the period of three for investing the long term capital gains. Whereas, the revenue contends that the assessee investment of capital gains in the Row House no 30 is the eligible new asset and not in the construction of the flat no 5 in Abhijit Building. In other words, what is purchased in connection with the Flat No. 5 is a ‘block of shares’ of M/s Sonzol Finance and Investment P. Ltd. only and such purchase has only made the assessee entitled to a Flat No. 5 in Abhijit Building.
12. We have analysed the above dispute and analyzed the factual matrix relating to the both Row House No. 30 and the Flat 5 in Abhijit Building. The sequence of events from the accrual of long term capital gains of Rs.27,01,204 entering into an agreement with Harshad Rai Poonamchand Doshi, the builder of Row houses in Shanti Park vide the Articles of Agreement dated 26-8-1996 and payment of Rs. 30.50 lakhs for purchase of Row House No. 30 consisting of Ground plus First Floor, Shanti Vidya Nagari, Meera Road, Dist. Thane, termination of the agreement dated 26-8-1996 cancelling the purchase of the said row house vide the Articles of Agreement for cancellation and refund of Rs. 30.5 lakhs by Sri Doshi, revealed that the assessee’s intention to invest the capital gains in the residential house to avail the exemption under section 54 is beyond any doubt. The Assessing Officer has not brought anyting on record to derive any mala fide intention in assessee’s decision to pay the capital gains to Sri Doshi as per the agreement and receiving the refund of the same owing to the possible threat to the proposed row house. Assessing Officer has not established that any of the Articles of Agreement dated 26-8-1996 and Articles of Agreement for cancellation are bogus. Therefore, the cancellation of agreement by the assessee falls within the ambit of the doctrine of caveat emptor (ie buyers beware) and surrender of row house no 30 is legally justified. The assessee is not expected to proceed to buy a defective residential house (new asset), which is prone to demolition by the Municipal Authorities in order to qualify for exemption under the provisions of Income tax Act. Therefore, we are of the considered opinion that the decision of the lower authorities in treating the row house as the new asset is misplaced. We find the relevance of the apex court judgment in the case of T N Aravinda Reddy (120 ITR 46) for the proposition that in the context of relief under section 54, investment has to be understood in a liberal sense without limiting the meaning of ‘lexical legalese’ and word ‘purchase’ should be understood as in the sense of ‘plainspoken people’. Further the decision of Jodhpur Bench of the ITAT in the case of Jagan Nath Singh Lodha (supra) is relevant for the proposition that exemption under section 54F is available to the assessee, if the intention of the assessee from the very beginning is to invest in the new asset, though certain conditions are not met for genuine facts and circumstances. Therefore, we have no confusion in our minds in favour of ignoring the whole issue of investment of capital gains in the purchase of row house no. 30 and in not ignoring the assessee’s investment of said capital gains in the Flat no. 5 in Abhijit Building.
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ELIGIBILITY OF CLAIM OF DEPRECIATION ON ASSETS PURCHASED/LEASED OUT UNDER A SALE & LEASE BACK TRANSACTION IN THE ITAT, BENCH ‘B’ CHENNAI
ELIGIBILITY OF CLAIM OF DEPRECIATION ON ASSETS PURCHASED/LEASED OUT UNDER A SALE & LEASE BACK TRANSACTION
RATIO DECIDENDI
Once the assessee - leasing company is to be considered as the owner of the assets, it is eligible for depreciation according to the depreciation schedule to the Income-tax Rules since the theory of sale and lease back had not been invented by the assessee, in fact, it has been accepted by the Legislature
IN THE ITAT, BENCH ‘B’ CHENNAI
Premier Housing & Industrial Enterprises Ltd.
v.
ACIT
ITA NO. 1163/Mds./04
March 5, 2008
RELEVANT EXTRACTS :
** ** ** **
5. We have heard both the parties and perused the material on record. We have carefully gone through the entire facts of the case and also material on record. In respect of this transaction, the purchase of the asset is supported by the invoice No.047047 dated 04.03.1996. The valuation of the asset is also supported by the valuation report issued by Shri V.Subramanian, Chartered Engineer who has valued the asset at Rs.20,00,000/- per unit and also certified by Chartered Accountant, Shri M.-Srinivasan. The lease transaction also supported by lease deed dated 23.03.1996. According to this lease agreement, the asset was leased to M/s.Gremach CNC Ltd. There was one clause in the lease agreement which reads as follows.
"The Lessor will request the manufacturer/suppliers to effect delivery on or before the date of commencement of the rentals, but if, for whatever reason, delivery is not effected by the manufacturers/ suppliers by that date, lessor shall not be liable for any loss suffered by lessee thereby"
According to this clause, the assessee/lessor was to request M/s.Gremach CNC Ltd. to give delivery to the lessee. From this clause, the Assessing Officer meant that asset was not in the possession of M/s.Gremach CNC Ltd. and the lessee could not have sold the asset to the assessee and there was no actual sale and lease back transaction and accordingly there was no use of the asset by M/s.Gremach CNC Ltd. Accordingly, the Assessing Officer concluded that the assessee is not entitled for depreciation. In the case of CIT vs. Shana Finance Pvt. Ltd. reported in 231 ITR 308(5.C), it was heid that the assessee is entitled for depreciation in respect of asset which was leased out in the course of its ordinary business. After examining the invoice, lease deed, valuation report certified by the chartered accountant, in our opinion, this was a genuine transaction and the Assessing Officer doubted only because of certain general clauses appeared in the lease agreement. The Assessing Officer has not at all verified with the concerned party viz lessee regarding the existence of the leased equipment. He came to the conclusion only on the basis of this particular general clause appeared in lease agreement. The main contention of the lower authorities for disallowing the depreciation was the asset was not at all used by the lessee. The usage of the asset by the lessee is irrelevant consideration to grant the depreciation.
6. In our opinion, the real intention of the parties is to be ascertained before concluding whether the transaction was loan transaction or lease back transaction. The genuineness of the transaction could be gathered from the intention of the parties. On the basis of surrounding circumstances, in our opinion, the document produced before the lower authorities show that the manufacturer/ lessee intend to sell the impugned asset to the assessee and the lease agreement show, agreement for specified rate of lease rent. The asset was valued by the independent valuer and certified by the Chartered Accountant and after completion of the lease period, the asset is to be re-delivered to the lessor. In this factual position, we are of the opinion that the transaction is real lease transaction.
11. The facts and circumstances of the present assessee's case are similar to those considered by the earlier Bench of the Tribunal (supra). Respectfully following the decision of Apex Court in First Leasing Co. of India Ltd. (supra),, wherein their lordships held that the leasing company is to be considered as the owner of the assets and once the assessee is the owner of the assets, it is eligible for depreciation. Applying the said judgment to the facts of the present assessee's case we do not find any illegality in this claim of the assessee, because once the assessee is to be considered as the owner of the assets, the assessee is eligible for the allowances under the Income-Tax Act, namely depreciation according to the depreciation schedule to the income tax rules.
12. The theory of sale and lease back had not been invented by the assessee. In fact by virtue of the amendment brought in Sec.43 (1), Explanation (4A) by which sale and lease back has been accepted by the legislature.
13. In the case of McDowell & Co Ltd. v. Commercial Tax Officer (154 ITR 148) (SC) the ratio laid down is to the effect that each and every transaction can be regarded as colourable device if the transaction results in more reduction of tax liability. After the ratio laid down in the case of Union of India v. Azadi Bachao Andolan 263 ITR 206 (S.C.) principle of McDowell's case is diluted. After dilution of McDowell's case we can allow the claim of the assessee and as long as it is a genuine transaction and resulted in reduction of tax liability arising there from, it cannot automatically attract the label of the colourable device" as held by the Orissa High Court in Industrial Development Corporation of Orissa Ltd. v. CIT (268 ITR 130) and Bombay High Court decision in the case of Padamjee Pulp & paper Mills Ltd. v. CIT 210 ITR 97 and also the judgment of Hon'ble Madhya Pradesh high Court in the case of CIT vs. Dhayalal Meghji and Co. (149 CTR 126) and the order of this Tribunal in the case of Newdeal Finance & Investment Ltd. v. DCIT (74 ITD 469). The power of the authorities to go behind the apparent to find out the real and if the transaction is non-genuine or a facade or a make believe affair got up to evade the tax liability or if it appears that the series of steps taken to achieve the desired result is sham and collusive and in those circumstances, the authorities can ignore the transaction and apply the ratio laid down by the Hon'ble Supreme Court in McDowell's case (supra).
14. In other words the tax planning can be tolerated whereas tax evasion by dubious means cannot be countenanced. On seeing this it appears that each transaction can be scanned under the above scanner and it is easily segregated. But it is not so easy as it appears each and every transaction are to be viewed with caution so as to identify the intention of tax planning and tax evasion. The transaction which appears to be a tax evasion can on scrutiny of series 'of transactions, the transacting parties, the nature of transaction, the nature of trade, the nature of machinery, etc. will decide the ultimate litmus test. As already stated, that when a transaction, the genuineness of which is not doubted and there is a reduction of tax liability it automatically does not attract the ratio laid down Mcdowell's case. This juncture attracts the benefit of the decision of the Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andoian 263 ITR 206 and it cannot be viewed as a collurable devise. The Honjble Bombay High Court and M.P. High Court dealt this issue after the ratio laid down by Hon'ble Apex Court in the case of Bachao Andoian cited supra and held that each transaction shall be viewed with reference to the facts of each case.
17. (t is purely a business decision of the assessee to earn income by way of 'ease rentals. The decision to purchase and lease it back to the seller is therefore business decision of the assessee on which the department cannot sit in and decide the way the business could be done. It is the assessee's arm chair exclusively.
18. By these SLB assessee deriveo benefit and it is not automatic to apply rigour of rule of McDowell's. The Assessing Officer should have evaluated the same with reference to whole SLB transaction in one weighing pan and the other one dispensing SLB transaction. The scale which weightec high, the Assessing Officer can easily deduce and find out. This was not done by the Assessing Officer. This exercise was never attempted to by the Assessing Officer. However, be that as it may there was nothing illegitimate about the transaction to treat it as colorable device and hence the second allegation of collusiveness holds no water.
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RATIO DECIDENDI
Once the assessee - leasing company is to be considered as the owner of the assets, it is eligible for depreciation according to the depreciation schedule to the Income-tax Rules since the theory of sale and lease back had not been invented by the assessee, in fact, it has been accepted by the Legislature
IN THE ITAT, BENCH ‘B’ CHENNAI
Premier Housing & Industrial Enterprises Ltd.
v.
ACIT
ITA NO. 1163/Mds./04
March 5, 2008
RELEVANT EXTRACTS :
** ** ** **
5. We have heard both the parties and perused the material on record. We have carefully gone through the entire facts of the case and also material on record. In respect of this transaction, the purchase of the asset is supported by the invoice No.047047 dated 04.03.1996. The valuation of the asset is also supported by the valuation report issued by Shri V.Subramanian, Chartered Engineer who has valued the asset at Rs.20,00,000/- per unit and also certified by Chartered Accountant, Shri M.-Srinivasan. The lease transaction also supported by lease deed dated 23.03.1996. According to this lease agreement, the asset was leased to M/s.Gremach CNC Ltd. There was one clause in the lease agreement which reads as follows.
"The Lessor will request the manufacturer/suppliers to effect delivery on or before the date of commencement of the rentals, but if, for whatever reason, delivery is not effected by the manufacturers/ suppliers by that date, lessor shall not be liable for any loss suffered by lessee thereby"
According to this clause, the assessee/lessor was to request M/s.Gremach CNC Ltd. to give delivery to the lessee. From this clause, the Assessing Officer meant that asset was not in the possession of M/s.Gremach CNC Ltd. and the lessee could not have sold the asset to the assessee and there was no actual sale and lease back transaction and accordingly there was no use of the asset by M/s.Gremach CNC Ltd. Accordingly, the Assessing Officer concluded that the assessee is not entitled for depreciation. In the case of CIT vs. Shana Finance Pvt. Ltd. reported in 231 ITR 308(5.C), it was heid that the assessee is entitled for depreciation in respect of asset which was leased out in the course of its ordinary business. After examining the invoice, lease deed, valuation report certified by the chartered accountant, in our opinion, this was a genuine transaction and the Assessing Officer doubted only because of certain general clauses appeared in the lease agreement. The Assessing Officer has not at all verified with the concerned party viz lessee regarding the existence of the leased equipment. He came to the conclusion only on the basis of this particular general clause appeared in lease agreement. The main contention of the lower authorities for disallowing the depreciation was the asset was not at all used by the lessee. The usage of the asset by the lessee is irrelevant consideration to grant the depreciation.
6. In our opinion, the real intention of the parties is to be ascertained before concluding whether the transaction was loan transaction or lease back transaction. The genuineness of the transaction could be gathered from the intention of the parties. On the basis of surrounding circumstances, in our opinion, the document produced before the lower authorities show that the manufacturer/ lessee intend to sell the impugned asset to the assessee and the lease agreement show, agreement for specified rate of lease rent. The asset was valued by the independent valuer and certified by the Chartered Accountant and after completion of the lease period, the asset is to be re-delivered to the lessor. In this factual position, we are of the opinion that the transaction is real lease transaction.
11. The facts and circumstances of the present assessee's case are similar to those considered by the earlier Bench of the Tribunal (supra). Respectfully following the decision of Apex Court in First Leasing Co. of India Ltd. (supra),, wherein their lordships held that the leasing company is to be considered as the owner of the assets and once the assessee is the owner of the assets, it is eligible for depreciation. Applying the said judgment to the facts of the present assessee's case we do not find any illegality in this claim of the assessee, because once the assessee is to be considered as the owner of the assets, the assessee is eligible for the allowances under the Income-Tax Act, namely depreciation according to the depreciation schedule to the income tax rules.
12. The theory of sale and lease back had not been invented by the assessee. In fact by virtue of the amendment brought in Sec.43 (1), Explanation (4A) by which sale and lease back has been accepted by the legislature.
13. In the case of McDowell & Co Ltd. v. Commercial Tax Officer (154 ITR 148) (SC) the ratio laid down is to the effect that each and every transaction can be regarded as colourable device if the transaction results in more reduction of tax liability. After the ratio laid down in the case of Union of India v. Azadi Bachao Andolan 263 ITR 206 (S.C.) principle of McDowell's case is diluted. After dilution of McDowell's case we can allow the claim of the assessee and as long as it is a genuine transaction and resulted in reduction of tax liability arising there from, it cannot automatically attract the label of the colourable device" as held by the Orissa High Court in Industrial Development Corporation of Orissa Ltd. v. CIT (268 ITR 130) and Bombay High Court decision in the case of Padamjee Pulp & paper Mills Ltd. v. CIT 210 ITR 97 and also the judgment of Hon'ble Madhya Pradesh high Court in the case of CIT vs. Dhayalal Meghji and Co. (149 CTR 126) and the order of this Tribunal in the case of Newdeal Finance & Investment Ltd. v. DCIT (74 ITD 469). The power of the authorities to go behind the apparent to find out the real and if the transaction is non-genuine or a facade or a make believe affair got up to evade the tax liability or if it appears that the series of steps taken to achieve the desired result is sham and collusive and in those circumstances, the authorities can ignore the transaction and apply the ratio laid down by the Hon'ble Supreme Court in McDowell's case (supra).
14. In other words the tax planning can be tolerated whereas tax evasion by dubious means cannot be countenanced. On seeing this it appears that each transaction can be scanned under the above scanner and it is easily segregated. But it is not so easy as it appears each and every transaction are to be viewed with caution so as to identify the intention of tax planning and tax evasion. The transaction which appears to be a tax evasion can on scrutiny of series 'of transactions, the transacting parties, the nature of transaction, the nature of trade, the nature of machinery, etc. will decide the ultimate litmus test. As already stated, that when a transaction, the genuineness of which is not doubted and there is a reduction of tax liability it automatically does not attract the ratio laid down Mcdowell's case. This juncture attracts the benefit of the decision of the Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andoian 263 ITR 206 and it cannot be viewed as a collurable devise. The Honjble Bombay High Court and M.P. High Court dealt this issue after the ratio laid down by Hon'ble Apex Court in the case of Bachao Andoian cited supra and held that each transaction shall be viewed with reference to the facts of each case.
17. (t is purely a business decision of the assessee to earn income by way of 'ease rentals. The decision to purchase and lease it back to the seller is therefore business decision of the assessee on which the department cannot sit in and decide the way the business could be done. It is the assessee's arm chair exclusively.
18. By these SLB assessee deriveo benefit and it is not automatic to apply rigour of rule of McDowell's. The Assessing Officer should have evaluated the same with reference to whole SLB transaction in one weighing pan and the other one dispensing SLB transaction. The scale which weightec high, the Assessing Officer can easily deduce and find out. This was not done by the Assessing Officer. This exercise was never attempted to by the Assessing Officer. However, be that as it may there was nothing illegitimate about the transaction to treat it as colorable device and hence the second allegation of collusiveness holds no water.
** ** ** **
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PERIOD OF PRESERVATION OF ACCOUNTS
I owe this information to Bomabay Chartered Accountant Society(BCAS) .
PERIOD OF PRESERVATION OF ACCOUNTS
Period of Preservation of Accounts/Records under Different laws
Companies Act, 1956
A company is required to maintain its books of account and vouchers for a period of 8 years immediately preceding the current year.
A s. 25 company is required to maintain its books of account and vouchers for a period of not less than 4 years.
The books and papers of the Amalgamated/ Transferor Company must be not be disposed of without the prior permission of the Central Government
The books and papers of a company which has been wound-up and of its liquidator shall not be destroyed for a period of 5 years from the date of its dissolution. They may be destroyed earlier with prior Central Government permission.
Every Company (not being an NBFC) accepting public deposits must maintain a Register of deposits for 8 calendar years from the financial year in which the latest entry is made in the Register
The Register and Index of Members must be maintained Permanently.
The Register and Index of debenture-holders must be maintained for 15 years after the redemption of debentures
The copies of all Annual Returns and Certificates annexed thereto must be maintained for 8 years from date of filing with the ROC
NBFC Directions
Every NBFC accepting public deposits must maintain a Register of deposits for each branch and a consolidated Register for 8 calendar years following the financial year in which the latest repayment /renewal entry is made in the Register
Income-tax Act, 1961
Assessees are required to preserve the specified books of account for a period of 6 years from the end of the relevant assessment year, i.e., for a total period of 8 previous years. Thus, accounts must be maintained for PY 1997-98 and onwards and accounts up to 31st March, 1997 (PY 1996-97) need not be maintained for income-tax purposes.
Transfer Pricing documents and information specified under Rule 10D must be maintained for a period of 8 years from the end of the relevant assessment year, i.e., for a total period of 10 previous years.
Central Excise
Daily Stock Account of goods produced must be maintained for 5 years immediately after the financial year to which such records pertain
Service Tax
Records maintained under various other laws in force from time to time would be acceptable
Maharashtra Value Added Tax Rules
Every Registered Dealer must preserve all books of account, registers and other documents relating to stocks, purchases, dispatches and deliveries of goods, payment made and receipts towards sale or purchase of goods for at least 5 years from the expiry of the year to which they relate
SEBI Regulations
Under the SEBI Regulations for Stock Brokers, Merchant Bankers, Portfolio Managers, Underwriters, Debenture Trustees, FIIs, Custodian of Securities and Depository Participants the Records prescribed by SEBI under relevant Regulations must be maintained for a minimum period of 5 years
Under the SEBI Regulations for Venture Capital Funds and Mutual Funds the records prescribed by SEBI under relevant Regulations must be maintained for a minimum period of 8 years
SEBI Regulations for Registrar & Transfer Agents and Bankers to an Issue the records prescribed by SEBI under relevant Regulations must be maintained for a minimum period of 3 years
ICAI – Council’s decision of 1957
CAs should preserve records relating to audit and other work done by them, routine correspondence and other papers for a minimum period of 7* years
Compiled by: Pravin Sarswat
Extracts from BCA's
PERIOD OF PRESERVATION OF ACCOUNTS
Period of Preservation of Accounts/Records under Different laws
Companies Act, 1956
A company is required to maintain its books of account and vouchers for a period of 8 years immediately preceding the current year.
A s. 25 company is required to maintain its books of account and vouchers for a period of not less than 4 years.
The books and papers of the Amalgamated/ Transferor Company must be not be disposed of without the prior permission of the Central Government
The books and papers of a company which has been wound-up and of its liquidator shall not be destroyed for a period of 5 years from the date of its dissolution. They may be destroyed earlier with prior Central Government permission.
Every Company (not being an NBFC) accepting public deposits must maintain a Register of deposits for 8 calendar years from the financial year in which the latest entry is made in the Register
The Register and Index of Members must be maintained Permanently.
The Register and Index of debenture-holders must be maintained for 15 years after the redemption of debentures
The copies of all Annual Returns and Certificates annexed thereto must be maintained for 8 years from date of filing with the ROC
NBFC Directions
Every NBFC accepting public deposits must maintain a Register of deposits for each branch and a consolidated Register for 8 calendar years following the financial year in which the latest repayment /renewal entry is made in the Register
Income-tax Act, 1961
Assessees are required to preserve the specified books of account for a period of 6 years from the end of the relevant assessment year, i.e., for a total period of 8 previous years. Thus, accounts must be maintained for PY 1997-98 and onwards and accounts up to 31st March, 1997 (PY 1996-97) need not be maintained for income-tax purposes.
Transfer Pricing documents and information specified under Rule 10D must be maintained for a period of 8 years from the end of the relevant assessment year, i.e., for a total period of 10 previous years.
Central Excise
Daily Stock Account of goods produced must be maintained for 5 years immediately after the financial year to which such records pertain
Service Tax
Records maintained under various other laws in force from time to time would be acceptable
Maharashtra Value Added Tax Rules
Every Registered Dealer must preserve all books of account, registers and other documents relating to stocks, purchases, dispatches and deliveries of goods, payment made and receipts towards sale or purchase of goods for at least 5 years from the expiry of the year to which they relate
SEBI Regulations
Under the SEBI Regulations for Stock Brokers, Merchant Bankers, Portfolio Managers, Underwriters, Debenture Trustees, FIIs, Custodian of Securities and Depository Participants the Records prescribed by SEBI under relevant Regulations must be maintained for a minimum period of 5 years
Under the SEBI Regulations for Venture Capital Funds and Mutual Funds the records prescribed by SEBI under relevant Regulations must be maintained for a minimum period of 8 years
SEBI Regulations for Registrar & Transfer Agents and Bankers to an Issue the records prescribed by SEBI under relevant Regulations must be maintained for a minimum period of 3 years
ICAI – Council’s decision of 1957
CAs should preserve records relating to audit and other work done by them, routine correspondence and other papers for a minimum period of 7* years
Compiled by: Pravin Sarswat
Extracts from BCA's
Saturday, August 29, 2009
Claim for exemption allowable under section 10(10C) of IT Act, 1961 HIGH COURT OF CHHATISGARH
Claim for exemption allowable under section 10(10C) of IT Act, 1961
Benefit in lieu of salary payable to an employee opting for voluntary retirement is exempted from being charged to tax to the extent of Rs. 5 lakhs by reason of section 10(10C); even if the payment is stretched over a period of years, the same would not become chargeable to tax in any subsequent assessment year
HIGH COURT OF CHHATISGARH
ITO
v.
Dhan Sai Srivas
Tax Case No. 15 of 2007
JUNE 16, 2009
RELEVANT EXTRACTS :
** ** ** ** ** **
11. Section 10 (10C) of the Act was inserted in order to make voluntary retirement attractive so as to reduce human complements for securing economic viability of certain companies. It was intended to make voluntary retirement more attractive and beneficial to the employees opting for voluntary retirement. Therefore, this has to be interpreted in a manner beneficial to the optee for voluntary retirement, if there is any ambiguity.
12. Section 15 (a) of the Act provides for chargeability of salary to tax as soon it becomes due, though not paid. As soon the salary becomes due, the incurring of the liability is complete. As soon the liability is incurred, it becomes a deemed payment in view of definition of 'pay' defined under Section 43(2) of the Act. In the present case, though the amount of monthly benefit payable under the voluntary retirement scheme consists of salary or benefit in lieu of salary, as defined in Section 17(1) or (3) read with Section 43(2) of the Act. Prior to amendment in the Act, 2003, any amount "received" by an employee on his voluntary retirement in accordance with any scheme of voluntary retirement, was not to be included in computing his total income for the previous year. Exemption is available to the extent of Rs.5,00,000/-. Under the scheme liability to pay was incurred and the amount became payable at the time when the employee was released having opted for the voluntary retirement under the scheme. Therefore, this is an amount, which is receivable by the employee at the time of voluntary retirement according to the scheme and become chargeable to tax under clause (a) of Section 15 of the Act, even though not paid.
13. Section 10 (10C) of the Act specifies that in computing total income received by any category of employee described in the section at the time of his voluntary retirement or termination of his service, along with a scheme or schemes of voluntary retirement, is not to be included to the extent of such amount does not exceed Rs.5 Lac. The second proviso to the section further lays that where exemption has been allowed to an employee under that clause for any assessment year, no exemption thereunder shall be allowed to him in relation to another assessment year. Section 15 of the Act is couched in the widest possible terms to include within its ambit every kind of remuneration of every kind of servant, however highly or lowly placed he may be. It brings to charge (1) any salary due, in the previous years, whether paid or not; (2) advance salary; and (3) arrears of salary. Thus, the amount payable under the voluntary retirement scheme is salary within the meaning of Section 17 (1) or (3) read with Section 43(2) of the Act.
17. The core question for our consideration in these appeals is the interpretation of expression "amount received" in Section 10 (10C) of the Act prior to Amendment, 2003.
18. Expression used in the statute is not always to be interpreted literally or grammatically. Sometimes it has to be interpreted having regard to context in which expression is used and having regard to the object and purpose for which the same is enacted. Tax laws have to be interpreted reasonably and in consonance with justice adopting pervasive approach. Contextual meaning has to be ascertained and given effect to. A provision for deduction, exemption or relief should be construed reasonably and in favour of the assessee.
19. It is well recognized principle that subsequent legislation may be looked at in order to see what is the proper interpretation to be put upon the earlier Act where the earlier Act is obscure or ambiguous or readily capable of more than one interpretation. (State of Bihar Vs. S.K. Roy, AIR 1966 SC 1995). While interpreting the words "refunded" as used in clause (b) of Section 15 of the Central Sales Tax Act, 1956 the Hon'ble Apex Court in the matter of Thiru Manickam and Co, Versus The State of Tamil Nadu reported in (1977) 1 SCC 199 held that ambiguity in the language of clause (b) of Section 15, as it existed at the relevant time, the matter is made clear by the amendment made in the Central Act by the Central Sales Tax (Amendment) Act, 1972. It has been held that the fact that the amendment of clause (b) Section 15 was not like some other provisions given retrospective effect, would not materially affect the position. As already mentioned above, the legislature as a result of the amendment, clarified what was implicit in the provisions as they existed earlier. An amendment which is by way of clarification of an earlier ambiguous provision can be useful aid in construing the earlier provision, even though such amendment is not given retrospective effect.
20. It could not be the intention of the legislature to extend benefit under Section 10 (10C) of the Act to the employees, who retired before 1.4.2004, to restrict the sum to the extent the amount actually received by them at the time of voluntary retirement for that particular assessment year and to other employees of the some organization who opted for voluntary retirement after 1.4.2004 to extend that benefit for the amount received by them as well as the amount receivable by them in the subsequent financial years. Therefore, we are of the considered opinion that amendment was clarificatory and curative in nature.
21. Therefore, to the extent of Rs.5 Lac, the said amount is exempted from being charged to tax by reason of Section 10 (10C) of the Act. Even if the payment is stretched over a period of years, the same would not become chargeable to tax in any subsequent assessment year. An amount becomes chargeable once it is earned whether it is received or not. Since the employee was not in service, therefore, the deferred payment will not continue and it would not be a salary from service, neither a deferred payment of salary nor arrear payment of salary, since the scheme postulates an one time payment in consideration of voluntary retirement though the payment is deferred in five installments. Therefore, it would not be a payment of salary outside the scope of Section 10 (10C) of the Act. The characteristic cannot be changed because of stretching over of the period of payment of dues under the scheme.
22. On the basis of aforesaid discussions, we hold that salary or benefit in lieu of salary payable to an employee opting for voluntary retirement is chargeable to tax under Section 15 (a) as soon as it became due, though not paid. The amount so received is exempted from being charged to tax to the extent of Rs.5,00,000/- by the reason of Section 10 (10C) of the Act. Even if the payment is stretched over a period of years, the same would not become chargeable to tax in any subsequent assessment year.
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Benefit in lieu of salary payable to an employee opting for voluntary retirement is exempted from being charged to tax to the extent of Rs. 5 lakhs by reason of section 10(10C); even if the payment is stretched over a period of years, the same would not become chargeable to tax in any subsequent assessment year
HIGH COURT OF CHHATISGARH
ITO
v.
Dhan Sai Srivas
Tax Case No. 15 of 2007
JUNE 16, 2009
RELEVANT EXTRACTS :
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11. Section 10 (10C) of the Act was inserted in order to make voluntary retirement attractive so as to reduce human complements for securing economic viability of certain companies. It was intended to make voluntary retirement more attractive and beneficial to the employees opting for voluntary retirement. Therefore, this has to be interpreted in a manner beneficial to the optee for voluntary retirement, if there is any ambiguity.
12. Section 15 (a) of the Act provides for chargeability of salary to tax as soon it becomes due, though not paid. As soon the salary becomes due, the incurring of the liability is complete. As soon the liability is incurred, it becomes a deemed payment in view of definition of 'pay' defined under Section 43(2) of the Act. In the present case, though the amount of monthly benefit payable under the voluntary retirement scheme consists of salary or benefit in lieu of salary, as defined in Section 17(1) or (3) read with Section 43(2) of the Act. Prior to amendment in the Act, 2003, any amount "received" by an employee on his voluntary retirement in accordance with any scheme of voluntary retirement, was not to be included in computing his total income for the previous year. Exemption is available to the extent of Rs.5,00,000/-. Under the scheme liability to pay was incurred and the amount became payable at the time when the employee was released having opted for the voluntary retirement under the scheme. Therefore, this is an amount, which is receivable by the employee at the time of voluntary retirement according to the scheme and become chargeable to tax under clause (a) of Section 15 of the Act, even though not paid.
13. Section 10 (10C) of the Act specifies that in computing total income received by any category of employee described in the section at the time of his voluntary retirement or termination of his service, along with a scheme or schemes of voluntary retirement, is not to be included to the extent of such amount does not exceed Rs.5 Lac. The second proviso to the section further lays that where exemption has been allowed to an employee under that clause for any assessment year, no exemption thereunder shall be allowed to him in relation to another assessment year. Section 15 of the Act is couched in the widest possible terms to include within its ambit every kind of remuneration of every kind of servant, however highly or lowly placed he may be. It brings to charge (1) any salary due, in the previous years, whether paid or not; (2) advance salary; and (3) arrears of salary. Thus, the amount payable under the voluntary retirement scheme is salary within the meaning of Section 17 (1) or (3) read with Section 43(2) of the Act.
17. The core question for our consideration in these appeals is the interpretation of expression "amount received" in Section 10 (10C) of the Act prior to Amendment, 2003.
18. Expression used in the statute is not always to be interpreted literally or grammatically. Sometimes it has to be interpreted having regard to context in which expression is used and having regard to the object and purpose for which the same is enacted. Tax laws have to be interpreted reasonably and in consonance with justice adopting pervasive approach. Contextual meaning has to be ascertained and given effect to. A provision for deduction, exemption or relief should be construed reasonably and in favour of the assessee.
19. It is well recognized principle that subsequent legislation may be looked at in order to see what is the proper interpretation to be put upon the earlier Act where the earlier Act is obscure or ambiguous or readily capable of more than one interpretation. (State of Bihar Vs. S.K. Roy, AIR 1966 SC 1995). While interpreting the words "refunded" as used in clause (b) of Section 15 of the Central Sales Tax Act, 1956 the Hon'ble Apex Court in the matter of Thiru Manickam and Co, Versus The State of Tamil Nadu reported in (1977) 1 SCC 199 held that ambiguity in the language of clause (b) of Section 15, as it existed at the relevant time, the matter is made clear by the amendment made in the Central Act by the Central Sales Tax (Amendment) Act, 1972. It has been held that the fact that the amendment of clause (b) Section 15 was not like some other provisions given retrospective effect, would not materially affect the position. As already mentioned above, the legislature as a result of the amendment, clarified what was implicit in the provisions as they existed earlier. An amendment which is by way of clarification of an earlier ambiguous provision can be useful aid in construing the earlier provision, even though such amendment is not given retrospective effect.
20. It could not be the intention of the legislature to extend benefit under Section 10 (10C) of the Act to the employees, who retired before 1.4.2004, to restrict the sum to the extent the amount actually received by them at the time of voluntary retirement for that particular assessment year and to other employees of the some organization who opted for voluntary retirement after 1.4.2004 to extend that benefit for the amount received by them as well as the amount receivable by them in the subsequent financial years. Therefore, we are of the considered opinion that amendment was clarificatory and curative in nature.
21. Therefore, to the extent of Rs.5 Lac, the said amount is exempted from being charged to tax by reason of Section 10 (10C) of the Act. Even if the payment is stretched over a period of years, the same would not become chargeable to tax in any subsequent assessment year. An amount becomes chargeable once it is earned whether it is received or not. Since the employee was not in service, therefore, the deferred payment will not continue and it would not be a salary from service, neither a deferred payment of salary nor arrear payment of salary, since the scheme postulates an one time payment in consideration of voluntary retirement though the payment is deferred in five installments. Therefore, it would not be a payment of salary outside the scope of Section 10 (10C) of the Act. The characteristic cannot be changed because of stretching over of the period of payment of dues under the scheme.
22. On the basis of aforesaid discussions, we hold that salary or benefit in lieu of salary payable to an employee opting for voluntary retirement is chargeable to tax under Section 15 (a) as soon as it became due, though not paid. The amount so received is exempted from being charged to tax to the extent of Rs.5,00,000/- by the reason of Section 10 (10C) of the Act. Even if the payment is stretched over a period of years, the same would not become chargeable to tax in any subsequent assessment year.
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Allowability of exemption under section 54F of IT Act, 1961 ITAT, BENCH ‘C’. CHENNAI (THIRD MEMBER)
Allowability of exemption under section 54F of IT Act, 1961
Section 54F exemption cannot be availed if there is a house in existence on the date of transfer
ITAT, BENCH ‘C’. CHENNAI (THIRD MEMBER)
ACIT
v.
T. N. Gopal
ITA No. 231(Mds.)/2008
May 25, 2009
------------ORDER-------------
Per M.K.Chaturvedi (Vice-President): This appeal came before me as a Third Member to express my opinion on the following question:-
"Whether, in view of facts and circumstances, exemption under section 54F of Income Tax Act, 1961 could be allowed to assessee or not?"
2. I have heard the rival submissions in the light of material placed before me and the precedents relied upon. The assessee got share in the house property, as per the WILL of his father He became the joint owner of the property along with his brother. After becoming the joint owner of the said property the assessee sold shares for the purpose of construction of an additional floor in the house for him and the cost to the construction was claimed as exempted under sec 54F.
3 Section 54F exempts tax on long term capital gains arising from transfer of any long term capital asset (not being a residential house) invested in a residential house This exemption cannot be availed if there is a house in existence on the date of transfer In the facts of the present case. I find that the assessee was the joint owner of the house property along with his brother on the date of transfer and he utilized the long term capital gam for construction of additional floor in the same house. The Hon'ble Jurisdictional High Court in the case of CIT v V. Pradeep Kumar And Another, 290 ITR 90 (Mad.) has held that a mere extension of the existing building will not give benefit to the assessee under sec.54F of the Act. The case of the assessee clearly comes within the ken of the ratio of the aforesaid decision. The decision in the case of CIT v P.V Narasimhan, 181 ITR 101 (Mad), as relied by the Id counsel was considered in the case of Pradeep Kumar (supra). In view of the decision of the Jurisdictional High Court which is of binding nature, I agree with the view taken by the learned Judicial Member. 4. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.
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Section 54F exemption cannot be availed if there is a house in existence on the date of transfer
ITAT, BENCH ‘C’. CHENNAI (THIRD MEMBER)
ACIT
v.
T. N. Gopal
ITA No. 231(Mds.)/2008
May 25, 2009
------------ORDER-------------
Per M.K.Chaturvedi (Vice-President): This appeal came before me as a Third Member to express my opinion on the following question:-
"Whether, in view of facts and circumstances, exemption under section 54F of Income Tax Act, 1961 could be allowed to assessee or not?"
2. I have heard the rival submissions in the light of material placed before me and the precedents relied upon. The assessee got share in the house property, as per the WILL of his father He became the joint owner of the property along with his brother. After becoming the joint owner of the said property the assessee sold shares for the purpose of construction of an additional floor in the house for him and the cost to the construction was claimed as exempted under sec 54F.
3 Section 54F exempts tax on long term capital gains arising from transfer of any long term capital asset (not being a residential house) invested in a residential house This exemption cannot be availed if there is a house in existence on the date of transfer In the facts of the present case. I find that the assessee was the joint owner of the house property along with his brother on the date of transfer and he utilized the long term capital gam for construction of additional floor in the same house. The Hon'ble Jurisdictional High Court in the case of CIT v V. Pradeep Kumar And Another, 290 ITR 90 (Mad.) has held that a mere extension of the existing building will not give benefit to the assessee under sec.54F of the Act. The case of the assessee clearly comes within the ken of the ratio of the aforesaid decision. The decision in the case of CIT v P.V Narasimhan, 181 ITR 101 (Mad), as relied by the Id counsel was considered in the case of Pradeep Kumar (supra). In view of the decision of the Jurisdictional High Court which is of binding nature, I agree with the view taken by the learned Judicial Member. 4. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.
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Invalid versus defective return ITAT, MUMBAI BENCHES ‘L’ MUMBAI
Invalid versus defective return
The signing of return by an unauthorized person cannot invalidate the return, but would make the return defective; when a defective return is filed, the Assessing Officer is obliged to give chance to the assessee to rectify the defect within the specified period; it is only on the failure to remove the defect within the said specified or extended period that the defective return is converted into invalid return; section 292B helps the assessee only to the extent to saving the return from being declared as ‘Invalid’; it does not render the defective or irregular return as valid; if a return is successfully brought within the sweep of section 292B, then it will not be declared as invalid, but will become defective and the case will come back to be governed by section 139(9); in such a situation the Assessing Officer will allow an opportunity to the assessee to rectify the defect as per the prescription of this sub-section and the assessee will be under obligation to remove the defect, if the defect is cured as per section 139(9), then such return becomes valid; if the assessee fails to remove such defect, then the defective return is converted into invalid return
ITAT, MUMBAI BENCHES ‘L’ MUMBAI
Morgan Stanley Asset Management Inc.
v.
DCIT
ITA No. 1833/Mum/2004
August 11, 2009
RELEVANT EXTRACTS:
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13. The entire focus in the present appeal is to decide whether the returns filed by the assessee were valid or invalid or defective. Whereas the AO, on observing that the return was not properly verified in as much as it was not signed by the right person, declared it to be invalid and non-est. He further intimated the assessee vide para 5 of his communication dated 11.1.2000 that the act of wrong verification is not a rectifiable defect u/s 139(9) which provides that removal of any defect of a valid return of income. Since your Return of Income is not valid, it cannot be rectified u/s 139(9). It may be pointed out that the explanation to section 139(9) which enumerates various rectifiable defects does not include invalid rectification.’ On the contrary the stand of the assessee ab initio was that primarily the return was valid and if it was to be considered as not valid, then section 292B will come to its rescue, which will assist in making good the deficiency in the verification part of the return. It is further noted that in all the three returns filed by the assessee, original as well as revised, the signatures are done by some partner of M/s S.B. Billimoria & Co. not in his own name but as `s.b.billimoria’ in his handwriting. Further the assessee has contended before the AO that Rule 12 should not be considered but the substantive provision contained in section 140(c) will be applicable, which permits the verification of the return of income by a valid power of attorney. The A.O. held the return as invalid because it was not properly verified. The ld. CIT(A) followed the suit and upheld the action of the AO but on the ground that POA was not properly notarized and further its original was required to be filed as against the copy of POA filed by the assessee.
14. There is no dispute on the fact that the assessee executed a power of attorney in favour of the M/s S.B. Billimoria & Co. Chartered Accountants, a copy of which is available in the paper book. It authorized the said CA firm to file the return on its behalf through its partner. It is further noted that assessee did file its returns through M/s S.B. Billimoria & Co. Chartered Accountants signed by Sh. N.B. Bugwadia, its partner. But the said partner, instead of signing his own name, put initials as `s.b.billimoria’.
15. Section 140 has marginal note : “Return by whom to be signed”. Clause (a) is applicable in the case of an individual. It states that the return shall be signed by the individual himself, but where he is absent from India, by the individual himself or by some person duly authorized by him in this behalf. Sub-clause (iii) deals with a particular situation where such individual is mentally incapacitated. Sub-clause (iv) states that where, for any other reason, it is not possible for the individual to sign the return, then it shall be signed by any person duly authorized by him in this behalf. There is a proviso attached to this clause which states that in a case referred to in sub-clause (ii) or sub-clause (iv), if the person signing the return holds a valid power of attorney from the individual to do so, then it shall be attached to the return. Thus it is noted that if due to one reason or the other individual cannot personally sign the return, then an option has been given to get it signed by a valid power of attorney holder and further such POA should be attached to the return. Clause (b) of section 140 deals with the signing of the return of HUF. According to this clause the return shall be signed by the karta, and where the karta is absent from India or is mentally incapacitated from attending to his affairs , then by any other adult member of such family. The option given as per clause (a) for getting the return signed by a valid power of attorney holder is not available to HUF. The return has to be signed either by the karta himself or alternatively by any adult member in case the karta is not in position to sign under the specified circumstances. Thus it can be seen that the karta of HUF is not empowered to execute a power of attorney in favour of any one empowering such person to file the return on his behalf. Then comes clause (c) of section 140, on which the assessee has relied before the AO as applicable on it. It provides that in the case of a company, the return u/s.139 shall be signed and verified by the managing director thereof, or where for any unavoidable reason such managing director is not able to sign and verify the return, or where there is no managing director, then by any director thereof. The first proviso to clause (c) states that : “where a company is not resident in India, the return may be signed and verified by a person who holds a valid power of attorney from such company to do so, which shall be attached to the return”. Clause (cc) of section 140 applying to a firm provides that the return shall be signed by the managing partner thereof, or where for any unavoidable reasons such managing partner is not able to sign and verify the return, or where there is no managing partner as such, by any partner thereof, not being a minor. Under this clause also there is no provision for the signing of the return by the holder of a valid power of attorney. Clause (e) states that incase of any other association, the return shall be signed and verified, by any member of the association or the principal officer thereof.
16. On going through various clauses of section 140, it is seen that whereas clause (a) and (c) contain the provision for the signing of the return by a valid power of attorney holder, other clauses do not have such provision. Thus there is a clear line of demarcation between the classes of assessees, who , in certain circumstances, can get their returns signed and verified by a the holder of valid POA, in which case such POA is required to be attached to the return and on the other hand the classes of assessees who do not enjoy such privilege. It is not permissible to a non-privileged assesse to issue POA and get his return filed through the holder of a POA. It is true that in common parlance if a person can do some work personally, he can get it done through his Power of attorney holder also. But we are dealing with section 140, in which separate categories of assesses have been made and the said general rule has been made applicable only to some of them and not all. It is obvious that the intention of the legislature is not to extend this general rule to all the classes of the assesses. If that had been the situation, then there was no need of inserting proviso to clauses (a) and (c) only but a general provision would have been attached as extending to all the classes of assessees. From the language of section 140, it can be easily noticed that only the returns of individuals and companies can be signed by a valid power of attorney holders in the specified circumstances and the other categories of the assessee are not entitled to this privilege.
17. Adverting to the facts of the instant case it is found that the assessee has claimed before the AO that section 140(c) was applicable in its case and that is the reason for which the return was got signed from a valid power of attorney holder. On the perusal of the original return of income filed by the assessee, copy of which is available in the paper book, it transpires that Return Form No. 3 has been used and against the Column No. 5 `Status’ code 07 has been mentioned. Form No. 3, at the relevant time, was applicable `For Non-corporate assessees not claiming exemption u/s 11 and not having income from business or profession’. Further Code No. 07 stands for `Association of persons (AOP). The revised return filed by the assessee on 17.11.1998 is again in Form No. 3 mentioning its Status Code as 07. The third return is also on the same lines. When this position was confronted to the ld. AR and sought explanation as to how it is being claimed that section 140(c) ,which is applicable only to corporate assessees, be applied here as against the assessee being an AOP, he stated that the correct status of the assessee is company but inadvertently the return was filed wrongly in Form No.3 and further by mistake Code No.7 was mentioned against the column status.
30. In view of these judicial precedents it becomes obvious that Explanation to section 139(9) enumerating defects in the return cannot be considered as exhaustive in the sense that if a particular defect is not covered in it, that will make the return as invalid. Even if there are some other defects or irregularities, apart from those mentioned in the Explanation, which are merely in the nature of non-compliance of certain formalities or some irregularities, those will still be considered as impliedly included in section 139(9) and the return not fulfilling such requirements will become defective and not invalid.
32. A bare perusal of this section reveals that no return of income etc. shall become `invalid’ or deemed to be invalid merely by reason of any mistake, defect or omission in such return if it is in substance and effect in conformity with the intent and purpose of the Act. The intent and purpose of the Act is to make assessment at correct figure. If there is some technical defect in the return which does not affect the overall taxability of the income, section 292B comes into play to take care of such technical defect by considering it as not invalid return of income provided such return is in substance and effect in conformity with the Act.
35. The Hon’ble Delhi High Court in Bharat Nidhi Ltd. v. CIT (2008) 306 ITR 230 (Del) considered the case of company in which the return was signed by its Secretary as against section140(c) requiring the signing of return by the managing director of the company. It has been held in this case that the signing of the return by an unauthorized person is a curable defect as per section 292B and would not make the return as invalid. It was further observed that since the assessee filed a correct return before the completion of assessment, the requirement of the proper signing stood complied with and hence the defect in the return removed. Similar view has been expressed in the case of Hind Samachar Ltd. v. Union of India & Ors. (2008) 217 CTR 637 (P&H) by holding that a return which is signed and verified by a person other than the one authorized under the Act, has to be treated as defective and is amenable to provisions of section 292B and 139(9). On going through the above judicial pronouncements it is vivid that the signing of return by an unauthorized person cannot invalidate the return, but would make the return defective.
39. Adverting to the facts of the instant case we find that the whole controversy rotates around the fact that, a partner of M/s. S.B.Billimoria & Co. signed the return but instead of his signature he put up `S.B.Billimoria’ in his own handwriting. The ld. AR claimed that it is a regular practice and such a signing cannot be termed as defect and the return be declared as valid. We are not convinced with this submission. The purpose of the verification of the return is that it should be obvious from the return that who has signed it. The return has to be signed by a natural person in his own name. Apart from that it is necessary to indicate the father’s name of the person signing and verifying the return so that the person signing may be easily identified. The return should itself speak for these particulars without needing to discover them from some external source. The assessee has relied on some bank certificate to indicate that Shri N.B.Bugwadia has signed the return as `s.b.billimoria. If the return is signed by natural person but as some artificial person, then the particulars required for verification of the natural person will not come up, which obviously goes against the intent and purpose of verification part of the return.
40. There is no dispute on the fact that when a valid Power of Attorney is executed in favour of someone, the return can be filed, if permitted by law, on the basis of such Attorney by the person who has been so authorized and such Power of Attorney should be attached along with the return of income. There is no quarrel on the fact that a Power of Attorney was executed on 23.6.1994, copy of which is available at page 57 of the paper book in which M/s. S.B. Billimoria & Co. Chartered Accountants have been empowered inter alia to sign and submit the return “acting through their partners”. It is further noted that the original return as well as two revised returns were filed indicating appropriately that it was signed by Power of Attorney holder - M/s. S.B. Billimoria & Co., Chartered Accountants, a copy of which was attached along with the return. However, the mistake occurred when a partner of M/s.S.B.Billimoria & Co., instead of putting his own signature signed the name of S.B.Billimoria at the space required for verification. Naturally the non-signing of the return by the partner in own name did not make the return as valid. But the question is as to whether this defect is of such an enormity as to make the return as invalid and non-est.
41. In our considered opinion this defect, in the given circumstances, can be held as technical only covered within the meaning of section 292B for the reason that but for such defect the return is in substance and effect in conformity with the intent and purpose of this Act. The view point of the Assessing Officer is that the verification can be done by a natural person and not an artificial person is not correct in entirety. It is simple and plain that an artificial person cannot sign in a natural way. When any of its representatives sign the document, it is considered as duly signed by the artificial person. Like in the instant case whereas M/s. S.B. Billimoria & Co., Chartered Accountants was appointed as Power of Attorney for filing the return etc., it was only some partner of M/s. S.B. Billimoria & Co. who could have signed the return for and on behalf of this firm. Even though there is irregularity in the signature but still it cannot be said that such verification is not done by a natural person. The learned A.R. has placed on record a copy of the recent judgment passed by the Hon’ble Bombay High Court dated 27.4.2009 in Prime Securities Limited Vs. ACIT in which the return was held to be valid after considering section 292B. In this case some observations of the Hon’ble Supreme Court on page 13 have been recorded to the effect that if a statute requires personal signature of a person, which includes a mark, the signature or the mark must be that of the man himself. In this judgment, the Hon’ble Bombay High Court, taking assistance from section 292B, decided the issue in assessee’s favour on the ground that the defect in the original return was cured while filing a fresh return which would relate back to the date of original return filed.
42. Now we will examine another irregularity in the return to see if the return has been invalidated by such mistake or it is only defective. On being pointed out about the filing of the return in Form No.3 by the assessee with the Status Code as 07, the ld.AR came out with the explanation that the correct status is that of the corporate assessee and also submitted that the defect about the filing of return in wrong form was brought to the notice of the A.O. in relation to the return for assessment year 2000-2001 and the Assessing Officer while passing order u/s.154 in respect of wrong charging of interest u/s.234A, recorded the status as non-resident company. It was further claimed by the ld. AR that the filing of return in the wrong form did not make the return as defective or invalid. In his opinion so long as the correct particulars of income are forthcoming from the return, it shall be valid, notwithstanding the fact that it is filed in wrong form. We are unable to agree with the ld. AR on this point. Firstly the correct status of the assessee in the year in question is still in dispute. The mere fact that the Assessing Officer in passing order u/s.154 has mentioned the status of the assessee as a non-resident company and that too in relation to the assessment year 2000-2001 cannot be considered as the admission of this status even in relation to the year in question.
43. The next contention raised is that a return filed in wrong Form be considered as valid. We are unable to accept this view point. The Income-tax Rules, 1962 prescribe different types of return forms in which returns are to be filed by the specified class of assessees. For example Form No. 1 is a return form for companies other than those claiming exemption u/s 11. Then Form No. 2 is return form for assessees other than companies whose income include income under the head `Profits and gains of business or profession.’ Form No. 2B is return of income for block assessment. Form No. 3 is return of income for assessees other than companies whose total income does not include `Profits and gains of business or profession’. These return forms are created by keeping into consideration the distinct requirements of a particular classes of assesses and further the mode and manner of information which the Department wants in respect thereof. It is not permissible to file return in the wrong form. If the contention of the ld. AR is accepted that anyone can file return in any Form, then the different form prescribed for filing the return of individual, HUF, firm, companies, etc. will become meaningless. An individual will file his return in Form applicable to the company and vice versa and claim that its return be declared as valid. We are not agreeable with this contention as such a practice would result in chaos and the very purpose of prescribing different forms of returns in respect of different classes of assessees would be defeated. At the same time it is equally true that if a return is not filed in the prescribed form the said return cannot be declared as invalid and non-est. But it will become defective and require modification at the instance of the Assessing Officer when such defect is pointed out.
44. When a defective return is filed, the AO is obliged to give chance to the assessee to rectify the defect within the specified period. It is only on the failure to remove the defect within the said specified or extended period that the defective return is converted into invalid return. Section 292B helps the assessee only to the extent of saving the return from being declared as `Invalid’. It does not render the defective or irregular return as valid. If a return is successfully brought within the sweep of section 292B, then it will not be declared as invalid, but will become defective and the case will come back to be governed by section 139(9). In such a situation the AO will allow an opportunity to the assessee to rectify the defect as per the prescription of this sub-section and the assessee will be under obligation to remove the defect. If the defect is cured as per section 139(9), then such return becomes valid. If the assessee fails to remove such defect, then the defective return is converted into invalid return. Hence it is clear that section 292B saves the return from being declared invalid, but it does not per se cures the defect. The defect has to be removed by the assessee on being brought to his notice by the A.O. In the case of Nicholas Applegate (supra) , relied on behalf of the assessee, the defect was removed and a correct return was filed before the completion of assessment, that is why it was held to be valid. However in the instant case the AO has opined that only the defects enumerated in Explanation to section 139(9) are liable to be considered for treating the return as defective and not any other defect, such as wrong verification. It is further seen that the AO held the return to be invalid on the sole ground that the return was not properly signed and verified. He did not proceed further to examine whether it was a case of an AOP or a company. The assessee also filed one return after the other in Form No. 3 in the same wrong manner by getting it signed from one of the partners of M/S S.B. Billimoria & Co. not in his own name individually but as `s.b.billimoria’. So the instant case is still roaming in the domain of section 292B and has not been brought within the purview of section 139(9) by the AO, enabling to reach a positive conclusion as to whether the return is valid or invalid, which, in turn, is dependent on the assessee succeeding or failing to remove the defect.
45. The ld. CIT(A) has dealt with a significant aspect of the case. He opined that the return was invalid because the assessee had filed only a photocopy of the Power of Attorney and not its original. The ld. AR has contended before us that there is no requirement of furnishing the original POA and the filing of its copy along with the return was the compliance of the statutory requirement. In order to decide this controversy we need to go back to the proviso to section 140(c) as per which where the return is signed and verified by a person who holds valid Power of Attorney from a company to do so, such Power of Attorney shall be attached to the return. From here it can be seen that there is statutory requirement of filing original Power of Attorney along with the return of income and copy of that does not substitute the requirement of filing such Power of Attorney in original. The legislature is not oblivious of the distinction between the copy and the original of the documents. Where ever it considered that there is a substantive compliance of the provision on filing a copy of the document, it made a specific mention of that. Fulfillment of requirement on filing copies of original documents can be found in various sections of the Act, such as section 184(2) which requires the filing of a certified copy of the instrument of partnership ; section 80U(2) which requires every individual claiming a deduction to furnish a copy of the certificate issued by the medical authority ; Explanation 1 to section 54E(1A) etc. As against that, the requirement of filing copy of the POA is conspicuously absent in section 140(c). This clause of section 140 warrants the attachment of the power of attorney to the return. So it is patent that the non-qualification of the words `power of attorney’ with the words `a copy of’ clear the intention that only the filing of the original POA is the fulfillment of the requirement of section and not its copy.
46. The learned A.R. has produced before us the Power of Attorney in original. Since the learned CIT(A) has not given any opportunity to the assessee to file the original and declared the return as invalid on that count, in our considered opinion, the return without the original Power of Attorney cannot be treated as invalid and non-est, without providing opportunity to the assessee to file such Power of Attorney in original, moreso when the original power is in existence. We, therefore, hold that the filing of the copy instead of the original Power of attorney, in the given circumstances, is only an irregularity and cannot invalidate the return.
47. Now we are back to square one that the assessee filed its three returns in Form which is not applicable to the corporate assessee and claimed the status as an AOP. Before the AO the submission was made that the provisions of section 140(c) are applicable, which are relevant for corporate assessee. If however we go by the status of the assessee as mentioned in the returns of income, that is found to be that of an AOP and in that case clause (e) of section 140 shall apply for the signing and verification of the return. In the given circumstances it is not clear as to what is the correct status of the assessee. In our considered opinion, it is of paramount importance to first determine the correct status of the assessee only then the application of the correct clause of section 140, requiring signing and verification of the return by the assessee, can be considered.
48. There is another important dimension of the case. The assessee filed the return at a positive income at more than Rs. 20.00 crores and simultaneously claimed carry forward for the loss suffered by it under the head `Capital gains’. Section 80 states that `Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed in accordance with the provisions of sub-section (3) of section 139, shall be carried forward and set off ….’ Further section 139(3) provides that if any person has sustained a loss in any previous year under the head `Profits and gains of business or profession’ or under the head `Capital gains’ and claims that the loss or any part thereof should be carried forward then he may furnish the return within the time allowed u/s 139(1) and all the provisions of this sub-section shall apply as if it were a return under sub-section (1). A conjoint reading of sections 80 and 139(9) brings to fore that in order to carry forward loss under the heads `Profits and gains of business or profession’ or `Capital gain’ it is sine qua non that the return claiming carry forward of loss must be filed within the time prescribed u/s 139(1). If the return is filed beyond the due date as specified under sub-section (1), then such loss cannot be allowed to be carried forward.
49. The sole reason behind the AO treating the return as invalid is that such a return will be deemed as if never filed and the right to carry forward the loss under the head `capital gains’ shall come to naught. Now when we are restoring the matter to the AO, we want to make it clear that he will issue defect memo to the assessee calling upon it to remove the defects in the return and if the assessee succeeds in removing the defects, the correct return now filed shall date back to the original return as has been held in the case of Prime Securities Limited Vs. ACIT (supra) and Nicholas Applegate (supra) provided the defect is removed within the time period allowed by the AO. It will be treated as if it is original return for all purposes.
50. Under these circumstances we deem it proper to set aside the impugned order and restore the matter to the file of the Assessing Officer with the direction to first verify the correct status of the assessee. If the assessee turns out to be AOP as mentioned in returns filed by it then a defect memo should be issued enabling the assessee to rectify the defect by getting it signed and verified by the member or principal officer thereof as per section 140(e). If however the correct status is found to be company then again we hold that the signing by the partner as `S.B.Billimoria’ in the verification part of the return and non-filing of original power of attorney will constitute defects in the return. In that case also he will issue a defect memo and afford an opportunity to the assessee to get the return signed by the partner in his own name under a valid Power of Attorney to be annexed in original along with the return. While finalizing the assessment he will also examine the aspect of the notarization of the power of attorney in the given case. If the assessee fails to remove these defects within the prescribed time limit u/s.139(9), then the A.O. will be right in treating the return as invalid in which case there will be no question of allowing any carry forward of the loss under the head `Capital gain’. If, however, the assessee succeeds in rectifying the defects within the prescribed time or as further time granted by him under sub-section (9), then the Assessing Officer shall examine the claim of capital loss on merits. If such a claim is found to be correct then he will allow the carry forward of such loss for the reason that removal of defects shall validate the original and revised return filed by the assessee in time.
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The signing of return by an unauthorized person cannot invalidate the return, but would make the return defective; when a defective return is filed, the Assessing Officer is obliged to give chance to the assessee to rectify the defect within the specified period; it is only on the failure to remove the defect within the said specified or extended period that the defective return is converted into invalid return; section 292B helps the assessee only to the extent to saving the return from being declared as ‘Invalid’; it does not render the defective or irregular return as valid; if a return is successfully brought within the sweep of section 292B, then it will not be declared as invalid, but will become defective and the case will come back to be governed by section 139(9); in such a situation the Assessing Officer will allow an opportunity to the assessee to rectify the defect as per the prescription of this sub-section and the assessee will be under obligation to remove the defect, if the defect is cured as per section 139(9), then such return becomes valid; if the assessee fails to remove such defect, then the defective return is converted into invalid return
ITAT, MUMBAI BENCHES ‘L’ MUMBAI
Morgan Stanley Asset Management Inc.
v.
DCIT
ITA No. 1833/Mum/2004
August 11, 2009
RELEVANT EXTRACTS:
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13. The entire focus in the present appeal is to decide whether the returns filed by the assessee were valid or invalid or defective. Whereas the AO, on observing that the return was not properly verified in as much as it was not signed by the right person, declared it to be invalid and non-est. He further intimated the assessee vide para 5 of his communication dated 11.1.2000 that the act of wrong verification is not a rectifiable defect u/s 139(9) which provides that removal of any defect of a valid return of income. Since your Return of Income is not valid, it cannot be rectified u/s 139(9). It may be pointed out that the explanation to section 139(9) which enumerates various rectifiable defects does not include invalid rectification.’ On the contrary the stand of the assessee ab initio was that primarily the return was valid and if it was to be considered as not valid, then section 292B will come to its rescue, which will assist in making good the deficiency in the verification part of the return. It is further noted that in all the three returns filed by the assessee, original as well as revised, the signatures are done by some partner of M/s S.B. Billimoria & Co. not in his own name but as `s.b.billimoria’ in his handwriting. Further the assessee has contended before the AO that Rule 12 should not be considered but the substantive provision contained in section 140(c) will be applicable, which permits the verification of the return of income by a valid power of attorney. The A.O. held the return as invalid because it was not properly verified. The ld. CIT(A) followed the suit and upheld the action of the AO but on the ground that POA was not properly notarized and further its original was required to be filed as against the copy of POA filed by the assessee.
14. There is no dispute on the fact that the assessee executed a power of attorney in favour of the M/s S.B. Billimoria & Co. Chartered Accountants, a copy of which is available in the paper book. It authorized the said CA firm to file the return on its behalf through its partner. It is further noted that assessee did file its returns through M/s S.B. Billimoria & Co. Chartered Accountants signed by Sh. N.B. Bugwadia, its partner. But the said partner, instead of signing his own name, put initials as `s.b.billimoria’.
15. Section 140 has marginal note : “Return by whom to be signed”. Clause (a) is applicable in the case of an individual. It states that the return shall be signed by the individual himself, but where he is absent from India, by the individual himself or by some person duly authorized by him in this behalf. Sub-clause (iii) deals with a particular situation where such individual is mentally incapacitated. Sub-clause (iv) states that where, for any other reason, it is not possible for the individual to sign the return, then it shall be signed by any person duly authorized by him in this behalf. There is a proviso attached to this clause which states that in a case referred to in sub-clause (ii) or sub-clause (iv), if the person signing the return holds a valid power of attorney from the individual to do so, then it shall be attached to the return. Thus it is noted that if due to one reason or the other individual cannot personally sign the return, then an option has been given to get it signed by a valid power of attorney holder and further such POA should be attached to the return. Clause (b) of section 140 deals with the signing of the return of HUF. According to this clause the return shall be signed by the karta, and where the karta is absent from India or is mentally incapacitated from attending to his affairs , then by any other adult member of such family. The option given as per clause (a) for getting the return signed by a valid power of attorney holder is not available to HUF. The return has to be signed either by the karta himself or alternatively by any adult member in case the karta is not in position to sign under the specified circumstances. Thus it can be seen that the karta of HUF is not empowered to execute a power of attorney in favour of any one empowering such person to file the return on his behalf. Then comes clause (c) of section 140, on which the assessee has relied before the AO as applicable on it. It provides that in the case of a company, the return u/s.139 shall be signed and verified by the managing director thereof, or where for any unavoidable reason such managing director is not able to sign and verify the return, or where there is no managing director, then by any director thereof. The first proviso to clause (c) states that : “where a company is not resident in India, the return may be signed and verified by a person who holds a valid power of attorney from such company to do so, which shall be attached to the return”. Clause (cc) of section 140 applying to a firm provides that the return shall be signed by the managing partner thereof, or where for any unavoidable reasons such managing partner is not able to sign and verify the return, or where there is no managing partner as such, by any partner thereof, not being a minor. Under this clause also there is no provision for the signing of the return by the holder of a valid power of attorney. Clause (e) states that incase of any other association, the return shall be signed and verified, by any member of the association or the principal officer thereof.
16. On going through various clauses of section 140, it is seen that whereas clause (a) and (c) contain the provision for the signing of the return by a valid power of attorney holder, other clauses do not have such provision. Thus there is a clear line of demarcation between the classes of assessees, who , in certain circumstances, can get their returns signed and verified by a the holder of valid POA, in which case such POA is required to be attached to the return and on the other hand the classes of assessees who do not enjoy such privilege. It is not permissible to a non-privileged assesse to issue POA and get his return filed through the holder of a POA. It is true that in common parlance if a person can do some work personally, he can get it done through his Power of attorney holder also. But we are dealing with section 140, in which separate categories of assesses have been made and the said general rule has been made applicable only to some of them and not all. It is obvious that the intention of the legislature is not to extend this general rule to all the classes of the assesses. If that had been the situation, then there was no need of inserting proviso to clauses (a) and (c) only but a general provision would have been attached as extending to all the classes of assessees. From the language of section 140, it can be easily noticed that only the returns of individuals and companies can be signed by a valid power of attorney holders in the specified circumstances and the other categories of the assessee are not entitled to this privilege.
17. Adverting to the facts of the instant case it is found that the assessee has claimed before the AO that section 140(c) was applicable in its case and that is the reason for which the return was got signed from a valid power of attorney holder. On the perusal of the original return of income filed by the assessee, copy of which is available in the paper book, it transpires that Return Form No. 3 has been used and against the Column No. 5 `Status’ code 07 has been mentioned. Form No. 3, at the relevant time, was applicable `For Non-corporate assessees not claiming exemption u/s 11 and not having income from business or profession’. Further Code No. 07 stands for `Association of persons (AOP). The revised return filed by the assessee on 17.11.1998 is again in Form No. 3 mentioning its Status Code as 07. The third return is also on the same lines. When this position was confronted to the ld. AR and sought explanation as to how it is being claimed that section 140(c) ,which is applicable only to corporate assessees, be applied here as against the assessee being an AOP, he stated that the correct status of the assessee is company but inadvertently the return was filed wrongly in Form No.3 and further by mistake Code No.7 was mentioned against the column status.
30. In view of these judicial precedents it becomes obvious that Explanation to section 139(9) enumerating defects in the return cannot be considered as exhaustive in the sense that if a particular defect is not covered in it, that will make the return as invalid. Even if there are some other defects or irregularities, apart from those mentioned in the Explanation, which are merely in the nature of non-compliance of certain formalities or some irregularities, those will still be considered as impliedly included in section 139(9) and the return not fulfilling such requirements will become defective and not invalid.
32. A bare perusal of this section reveals that no return of income etc. shall become `invalid’ or deemed to be invalid merely by reason of any mistake, defect or omission in such return if it is in substance and effect in conformity with the intent and purpose of the Act. The intent and purpose of the Act is to make assessment at correct figure. If there is some technical defect in the return which does not affect the overall taxability of the income, section 292B comes into play to take care of such technical defect by considering it as not invalid return of income provided such return is in substance and effect in conformity with the Act.
35. The Hon’ble Delhi High Court in Bharat Nidhi Ltd. v. CIT (2008) 306 ITR 230 (Del) considered the case of company in which the return was signed by its Secretary as against section140(c) requiring the signing of return by the managing director of the company. It has been held in this case that the signing of the return by an unauthorized person is a curable defect as per section 292B and would not make the return as invalid. It was further observed that since the assessee filed a correct return before the completion of assessment, the requirement of the proper signing stood complied with and hence the defect in the return removed. Similar view has been expressed in the case of Hind Samachar Ltd. v. Union of India & Ors. (2008) 217 CTR 637 (P&H) by holding that a return which is signed and verified by a person other than the one authorized under the Act, has to be treated as defective and is amenable to provisions of section 292B and 139(9). On going through the above judicial pronouncements it is vivid that the signing of return by an unauthorized person cannot invalidate the return, but would make the return defective.
39. Adverting to the facts of the instant case we find that the whole controversy rotates around the fact that, a partner of M/s. S.B.Billimoria & Co. signed the return but instead of his signature he put up `S.B.Billimoria’ in his own handwriting. The ld. AR claimed that it is a regular practice and such a signing cannot be termed as defect and the return be declared as valid. We are not convinced with this submission. The purpose of the verification of the return is that it should be obvious from the return that who has signed it. The return has to be signed by a natural person in his own name. Apart from that it is necessary to indicate the father’s name of the person signing and verifying the return so that the person signing may be easily identified. The return should itself speak for these particulars without needing to discover them from some external source. The assessee has relied on some bank certificate to indicate that Shri N.B.Bugwadia has signed the return as `s.b.billimoria. If the return is signed by natural person but as some artificial person, then the particulars required for verification of the natural person will not come up, which obviously goes against the intent and purpose of verification part of the return.
40. There is no dispute on the fact that when a valid Power of Attorney is executed in favour of someone, the return can be filed, if permitted by law, on the basis of such Attorney by the person who has been so authorized and such Power of Attorney should be attached along with the return of income. There is no quarrel on the fact that a Power of Attorney was executed on 23.6.1994, copy of which is available at page 57 of the paper book in which M/s. S.B. Billimoria & Co. Chartered Accountants have been empowered inter alia to sign and submit the return “acting through their partners”. It is further noted that the original return as well as two revised returns were filed indicating appropriately that it was signed by Power of Attorney holder - M/s. S.B. Billimoria & Co., Chartered Accountants, a copy of which was attached along with the return. However, the mistake occurred when a partner of M/s.S.B.Billimoria & Co., instead of putting his own signature signed the name of S.B.Billimoria at the space required for verification. Naturally the non-signing of the return by the partner in own name did not make the return as valid. But the question is as to whether this defect is of such an enormity as to make the return as invalid and non-est.
41. In our considered opinion this defect, in the given circumstances, can be held as technical only covered within the meaning of section 292B for the reason that but for such defect the return is in substance and effect in conformity with the intent and purpose of this Act. The view point of the Assessing Officer is that the verification can be done by a natural person and not an artificial person is not correct in entirety. It is simple and plain that an artificial person cannot sign in a natural way. When any of its representatives sign the document, it is considered as duly signed by the artificial person. Like in the instant case whereas M/s. S.B. Billimoria & Co., Chartered Accountants was appointed as Power of Attorney for filing the return etc., it was only some partner of M/s. S.B. Billimoria & Co. who could have signed the return for and on behalf of this firm. Even though there is irregularity in the signature but still it cannot be said that such verification is not done by a natural person. The learned A.R. has placed on record a copy of the recent judgment passed by the Hon’ble Bombay High Court dated 27.4.2009 in Prime Securities Limited Vs. ACIT in which the return was held to be valid after considering section 292B. In this case some observations of the Hon’ble Supreme Court on page 13 have been recorded to the effect that if a statute requires personal signature of a person, which includes a mark, the signature or the mark must be that of the man himself. In this judgment, the Hon’ble Bombay High Court, taking assistance from section 292B, decided the issue in assessee’s favour on the ground that the defect in the original return was cured while filing a fresh return which would relate back to the date of original return filed.
42. Now we will examine another irregularity in the return to see if the return has been invalidated by such mistake or it is only defective. On being pointed out about the filing of the return in Form No.3 by the assessee with the Status Code as 07, the ld.AR came out with the explanation that the correct status is that of the corporate assessee and also submitted that the defect about the filing of return in wrong form was brought to the notice of the A.O. in relation to the return for assessment year 2000-2001 and the Assessing Officer while passing order u/s.154 in respect of wrong charging of interest u/s.234A, recorded the status as non-resident company. It was further claimed by the ld. AR that the filing of return in the wrong form did not make the return as defective or invalid. In his opinion so long as the correct particulars of income are forthcoming from the return, it shall be valid, notwithstanding the fact that it is filed in wrong form. We are unable to agree with the ld. AR on this point. Firstly the correct status of the assessee in the year in question is still in dispute. The mere fact that the Assessing Officer in passing order u/s.154 has mentioned the status of the assessee as a non-resident company and that too in relation to the assessment year 2000-2001 cannot be considered as the admission of this status even in relation to the year in question.
43. The next contention raised is that a return filed in wrong Form be considered as valid. We are unable to accept this view point. The Income-tax Rules, 1962 prescribe different types of return forms in which returns are to be filed by the specified class of assessees. For example Form No. 1 is a return form for companies other than those claiming exemption u/s 11. Then Form No. 2 is return form for assessees other than companies whose income include income under the head `Profits and gains of business or profession.’ Form No. 2B is return of income for block assessment. Form No. 3 is return of income for assessees other than companies whose total income does not include `Profits and gains of business or profession’. These return forms are created by keeping into consideration the distinct requirements of a particular classes of assesses and further the mode and manner of information which the Department wants in respect thereof. It is not permissible to file return in the wrong form. If the contention of the ld. AR is accepted that anyone can file return in any Form, then the different form prescribed for filing the return of individual, HUF, firm, companies, etc. will become meaningless. An individual will file his return in Form applicable to the company and vice versa and claim that its return be declared as valid. We are not agreeable with this contention as such a practice would result in chaos and the very purpose of prescribing different forms of returns in respect of different classes of assessees would be defeated. At the same time it is equally true that if a return is not filed in the prescribed form the said return cannot be declared as invalid and non-est. But it will become defective and require modification at the instance of the Assessing Officer when such defect is pointed out.
44. When a defective return is filed, the AO is obliged to give chance to the assessee to rectify the defect within the specified period. It is only on the failure to remove the defect within the said specified or extended period that the defective return is converted into invalid return. Section 292B helps the assessee only to the extent of saving the return from being declared as `Invalid’. It does not render the defective or irregular return as valid. If a return is successfully brought within the sweep of section 292B, then it will not be declared as invalid, but will become defective and the case will come back to be governed by section 139(9). In such a situation the AO will allow an opportunity to the assessee to rectify the defect as per the prescription of this sub-section and the assessee will be under obligation to remove the defect. If the defect is cured as per section 139(9), then such return becomes valid. If the assessee fails to remove such defect, then the defective return is converted into invalid return. Hence it is clear that section 292B saves the return from being declared invalid, but it does not per se cures the defect. The defect has to be removed by the assessee on being brought to his notice by the A.O. In the case of Nicholas Applegate (supra) , relied on behalf of the assessee, the defect was removed and a correct return was filed before the completion of assessment, that is why it was held to be valid. However in the instant case the AO has opined that only the defects enumerated in Explanation to section 139(9) are liable to be considered for treating the return as defective and not any other defect, such as wrong verification. It is further seen that the AO held the return to be invalid on the sole ground that the return was not properly signed and verified. He did not proceed further to examine whether it was a case of an AOP or a company. The assessee also filed one return after the other in Form No. 3 in the same wrong manner by getting it signed from one of the partners of M/S S.B. Billimoria & Co. not in his own name individually but as `s.b.billimoria’. So the instant case is still roaming in the domain of section 292B and has not been brought within the purview of section 139(9) by the AO, enabling to reach a positive conclusion as to whether the return is valid or invalid, which, in turn, is dependent on the assessee succeeding or failing to remove the defect.
45. The ld. CIT(A) has dealt with a significant aspect of the case. He opined that the return was invalid because the assessee had filed only a photocopy of the Power of Attorney and not its original. The ld. AR has contended before us that there is no requirement of furnishing the original POA and the filing of its copy along with the return was the compliance of the statutory requirement. In order to decide this controversy we need to go back to the proviso to section 140(c) as per which where the return is signed and verified by a person who holds valid Power of Attorney from a company to do so, such Power of Attorney shall be attached to the return. From here it can be seen that there is statutory requirement of filing original Power of Attorney along with the return of income and copy of that does not substitute the requirement of filing such Power of Attorney in original. The legislature is not oblivious of the distinction between the copy and the original of the documents. Where ever it considered that there is a substantive compliance of the provision on filing a copy of the document, it made a specific mention of that. Fulfillment of requirement on filing copies of original documents can be found in various sections of the Act, such as section 184(2) which requires the filing of a certified copy of the instrument of partnership ; section 80U(2) which requires every individual claiming a deduction to furnish a copy of the certificate issued by the medical authority ; Explanation 1 to section 54E(1A) etc. As against that, the requirement of filing copy of the POA is conspicuously absent in section 140(c). This clause of section 140 warrants the attachment of the power of attorney to the return. So it is patent that the non-qualification of the words `power of attorney’ with the words `a copy of’ clear the intention that only the filing of the original POA is the fulfillment of the requirement of section and not its copy.
46. The learned A.R. has produced before us the Power of Attorney in original. Since the learned CIT(A) has not given any opportunity to the assessee to file the original and declared the return as invalid on that count, in our considered opinion, the return without the original Power of Attorney cannot be treated as invalid and non-est, without providing opportunity to the assessee to file such Power of Attorney in original, moreso when the original power is in existence. We, therefore, hold that the filing of the copy instead of the original Power of attorney, in the given circumstances, is only an irregularity and cannot invalidate the return.
47. Now we are back to square one that the assessee filed its three returns in Form which is not applicable to the corporate assessee and claimed the status as an AOP. Before the AO the submission was made that the provisions of section 140(c) are applicable, which are relevant for corporate assessee. If however we go by the status of the assessee as mentioned in the returns of income, that is found to be that of an AOP and in that case clause (e) of section 140 shall apply for the signing and verification of the return. In the given circumstances it is not clear as to what is the correct status of the assessee. In our considered opinion, it is of paramount importance to first determine the correct status of the assessee only then the application of the correct clause of section 140, requiring signing and verification of the return by the assessee, can be considered.
48. There is another important dimension of the case. The assessee filed the return at a positive income at more than Rs. 20.00 crores and simultaneously claimed carry forward for the loss suffered by it under the head `Capital gains’. Section 80 states that `Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed in accordance with the provisions of sub-section (3) of section 139, shall be carried forward and set off ….’ Further section 139(3) provides that if any person has sustained a loss in any previous year under the head `Profits and gains of business or profession’ or under the head `Capital gains’ and claims that the loss or any part thereof should be carried forward then he may furnish the return within the time allowed u/s 139(1) and all the provisions of this sub-section shall apply as if it were a return under sub-section (1). A conjoint reading of sections 80 and 139(9) brings to fore that in order to carry forward loss under the heads `Profits and gains of business or profession’ or `Capital gain’ it is sine qua non that the return claiming carry forward of loss must be filed within the time prescribed u/s 139(1). If the return is filed beyond the due date as specified under sub-section (1), then such loss cannot be allowed to be carried forward.
49. The sole reason behind the AO treating the return as invalid is that such a return will be deemed as if never filed and the right to carry forward the loss under the head `capital gains’ shall come to naught. Now when we are restoring the matter to the AO, we want to make it clear that he will issue defect memo to the assessee calling upon it to remove the defects in the return and if the assessee succeeds in removing the defects, the correct return now filed shall date back to the original return as has been held in the case of Prime Securities Limited Vs. ACIT (supra) and Nicholas Applegate (supra) provided the defect is removed within the time period allowed by the AO. It will be treated as if it is original return for all purposes.
50. Under these circumstances we deem it proper to set aside the impugned order and restore the matter to the file of the Assessing Officer with the direction to first verify the correct status of the assessee. If the assessee turns out to be AOP as mentioned in returns filed by it then a defect memo should be issued enabling the assessee to rectify the defect by getting it signed and verified by the member or principal officer thereof as per section 140(e). If however the correct status is found to be company then again we hold that the signing by the partner as `S.B.Billimoria’ in the verification part of the return and non-filing of original power of attorney will constitute defects in the return. In that case also he will issue a defect memo and afford an opportunity to the assessee to get the return signed by the partner in his own name under a valid Power of Attorney to be annexed in original along with the return. While finalizing the assessment he will also examine the aspect of the notarization of the power of attorney in the given case. If the assessee fails to remove these defects within the prescribed time limit u/s.139(9), then the A.O. will be right in treating the return as invalid in which case there will be no question of allowing any carry forward of the loss under the head `Capital gain’. If, however, the assessee succeeds in rectifying the defects within the prescribed time or as further time granted by him under sub-section (9), then the Assessing Officer shall examine the claim of capital loss on merits. If such a claim is found to be correct then he will allow the carry forward of such loss for the reason that removal of defects shall validate the original and revised return filed by the assessee in time.
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posted at www.taxmannindia.blogspot.com
Supreme Court on deletion of penalty imposed under section 271(1)(c) of IT Act, 1961 SUPREME COURT OF INDIA
Supreme Court on deletion of penalty imposed under section 271(1)(c) of IT Act, 1961
The penalty spoken of in section 271(1)(c) is neither criminal nor quasi criminal but a civil liability; albeit a strict liability; such liability being civil in nature, mens rea is not essential.
SUPREME COURT OF INDIA
CIT
v.
Atul Mohan Bindal
Civil Appeal No. 5769 of 2009
August 24, 2009
RELEVANT EXTRACTS:
** ** ** ** ** ** ** ** ** ** ** **
4. Atul Mohan Bindal - assessee filed return of his income for Assessment Year 2002-03 on August 8, 2002 declaring his total income Rs.1,98,50,021/-. In the assessment proceedings u/s 143, a notice alongwith questionnaire was issued to him by the Assessing Officer on November 29, 2002. Pursuant thereto, assessee attended the assessment proceedings and furnished the requisite details. During the assessment proceedings, it transpired that assessee worked with M/s DHL International(S) PTE Ltd.,Singapore during the previous year and was paid salary in Singapore amounting to US$ 36,680.79 equivalent to Rs.17,81,952/-. The assessee explained that an amount of US $ 8199.87 (Rs.3,98,350/-) was deducted as tax from the aforesaid salary income and having paid tax on salary income earned in Singapore, he was of the view that the said income was not liable to be included in the total income in India. He however, offered salary income of Rs. 17,81,952/- to be included in his total income. The assessee was also found to have received an amount of Rs. 5,00,000/- from his erstwhile employer M/s Honeywell International (India) Pvt. Ltd. in the previous year. His explanation was that the said amount was exempted under Section 10(10 B) of the Act being retrenchment compensation. According to the Assessing Officer, that amount could not be exempted u/s 10 (10B) as the assessee was not a workman. The assessee also earned interest income of Rs. 22,812/- from Bank of India which was not included by him in the total income but he offered for tax the said amount. The Assessing Officer, accordingly, added Rs.17,81,952/-, Rs.5,00,000/- and Rs.22,812/- to the income declared by the assessee in the return and assessed the total income of assessee at Rs.2,21,54,785/-.Penalty proceedings under Section 271(1)(c) were initiated separately and penalty of Rs.7,75,211/- was imposed under Section 271(1)(c) by the Assessing Officer vide Order dated March 16, 2003.
5. The assessee accepted the order of assessment but challenged the order of penalty in appeal before the CIT (Appeals) XXV, New Delhi.
6. After hearing the assessee and the departmental representative, the CIT (Appeals) XXV, New Delhi allowed the appeal and set aside the order of penalty vide his order dated August 22, 2005. The CIT (appeals) held that the assessee has neither concealed the particulars of his income nor he furnished any inaccurate particulars thereof. This is what the CIT (Appeals) held:
"I believe that this is a case of unintentional and inadvertent omission and therefore, it is not a fit case for levy of penalty u/s. 271(1)(c) of the Act as the assessee has not concealed the particulars of his income; nor has he furnished any inaccurate particulars thereof. As can be seen from a perusal of the impugned order, the penalty has been levied with reference to firstly, the addition disallowing the claim of Retrenchment compensation of Rs.5,00,000/- made u/s 10(10B) of the Act, secondly, the salary received in Singapore for services rendered outside India from December to March 2002 amounting to Rs.17,81,952/- offered by the appellant in the course of assessment proceedings and thirdly the interest income of Rs. 22,812/- also offered for tax in therevised return filed during the course of assessment proceedings. As regards the former, the AO appears to be completely satisfied as regard the genuineness of the reasons that necessitated the revision. As regard the second, the issue involved difference of opinion even between two different benches of the Apex Court, and thirdly, the A.O again seems to be satisfied about the appellant's reply in this connection. In any case, the additions were made on the basis of the particulars furnished by the appellant and not discovered independently by the A.O.
5.1 That the appellant had a bona fide belief of the non-taxability of the salary income earned in Singapore where tax- withholding had taken place and India had DTAA with Singapore, so he did not include this receipt in his salary income cannot be rejected out of hand. During assessment proceedings however, assessee offered this salary receipt for taxation as per IT Act, 1961. Therefore, an amount of Rs. 17,81,952/- was included in the total income of the assessee. In such setting of facts, I am afraid, the impugned addition may not lead to concealment of income or furnishing of inaccurate particulars thereof."
9. The revenuel filed appeal u/s 260A before the High Court of Delhi. The High Court considered the question whether the Assessing Officer had recorded a valid satisfaction for initiating penalty proceedings under Section 271(1)(c) of the Act. Inter alia, relying upon a decision of that Court in Commissioner of Income Tax vs. Ram Commercial Enterprises Ltd. and noticing that Ram Commercial Enterprises has been approved by this Court in Dilip N. Shroff vs. Joint Commissioner of Income Tax (2007) 291 ITR 519 (SC), and T. Ashok Pai vs. Commissioner of Income Tax2, held that from the reading of the assessment order, it was not discernible as to why the Assessing Officer chose to initiate proceedings against the assessee and under which part of Section 271(1)(c). The High Court, therefore, accepted the view of the Tribunal and CIT (Appeals) and dismissed the appeal of the Revenue with cost of Rs. 5,000/-.
10. Section 271(1)(c) as was operative during the relevant year reads thus:
"271. (1) If the Assessing Officer or the (***) (Commissioner (Appeals) in the course of any proceedings under this Act , is satisfied that any person.
(a)
(b)
(c) has concealed the particulars of his income or (***) furnished inaccurate articulars of such income, he may direct that such person shall pay by way of penalty,
(i) .............
(ii)............
(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed (three times), the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income.
(***)
(Explanation 1. Where in respect of any facts material to the computation of the total income of any person under this Act.
(A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the (**) (Commissioner (Appeals) to be false, or
(B) such person offers an explanation which he is not able to substantiate ( and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him), then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub- section, be deemed to represent the income in respect of which particulars have been concealed.
11. A close look at Section 271(1) (c) and Explanation (1) appended thereto would show that in the course of any proceedings under the Act, inter alia, if the Assessing Officer is satisfied that a person has concealed the particulars of his income for furnished inaccurate particulars of such income, such person may be directed to pay penalty. The quantum of penalty is prescribed in Clause (iii). Explanation 1, appended to section 271(1) provides that if that person fails to offer an explanation or the explanation offered by such person is found to be false or the explanation offered by him is not substantiated and he fails to prove that such explanation is bona fide and that all the facts relating the same and material to the computation of his total income has been disclosed by him, for the purposes of Section 271(1)(c), the amount added or disallowed in computing the total income is deemed to represent the concealed income. The penalty spoken of in Section 271(1)(c) is neither criminal nor quasi criminal but a civil liability; albeit a strict liability. Such liability being civil in nature, mens rea is not essential.
12. In the case of Union of India and Ors. vs. Dharamendra Textile Processors and Ors (2008) 306 ITR 277 , a three judge Bench of this Court held that Dilip N. Shroff did not lay down correct law as the difference between Section 271(1)(c) and Section 276(c) of the Act was lost sight of. The Court held that the explanation appended to Section 271(1)(c) indicates element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The Court held thus:
"The Explanations appended to Section 271(1)(c) of the Income Tax Act, 1961, indicate the elements of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The judgment in Dilip N. Shroff case (supra) has not considered the effect and relevance of Section 276(c) of the I.T. Act. The object behind the enactment of Section 271(1)(c) read with Explanations indicates that the Section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under Section 276 (c)."
15. Insofar as the present case is concerned, as noticed above, the High Court relied upon its earlier decision in Ram Commercial Enterprises which is said to have been approved by this Court in Dililp N. Shroff. However, Dillip N. Shroff has been held to be not laying down good law in Dharamendra Textiles. Dharamendra Textiles is explained by this Court in Rajasthan Spining and Weaving Mills. Having thoughtfully considered the matter, in our judgment, the matter needs to be reconsidered by the High Court in the light of the decisions of this Court in Dharamendra Textiles and Rajasthan Spinning and Weaving Mills.
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posted at www.taxmannindia.blogspot.com
The penalty spoken of in section 271(1)(c) is neither criminal nor quasi criminal but a civil liability; albeit a strict liability; such liability being civil in nature, mens rea is not essential.
SUPREME COURT OF INDIA
CIT
v.
Atul Mohan Bindal
Civil Appeal No. 5769 of 2009
August 24, 2009
RELEVANT EXTRACTS:
** ** ** ** ** ** ** ** ** ** ** **
4. Atul Mohan Bindal - assessee filed return of his income for Assessment Year 2002-03 on August 8, 2002 declaring his total income Rs.1,98,50,021/-. In the assessment proceedings u/s 143, a notice alongwith questionnaire was issued to him by the Assessing Officer on November 29, 2002. Pursuant thereto, assessee attended the assessment proceedings and furnished the requisite details. During the assessment proceedings, it transpired that assessee worked with M/s DHL International(S) PTE Ltd.,Singapore during the previous year and was paid salary in Singapore amounting to US$ 36,680.79 equivalent to Rs.17,81,952/-. The assessee explained that an amount of US $ 8199.87 (Rs.3,98,350/-) was deducted as tax from the aforesaid salary income and having paid tax on salary income earned in Singapore, he was of the view that the said income was not liable to be included in the total income in India. He however, offered salary income of Rs. 17,81,952/- to be included in his total income. The assessee was also found to have received an amount of Rs. 5,00,000/- from his erstwhile employer M/s Honeywell International (India) Pvt. Ltd. in the previous year. His explanation was that the said amount was exempted under Section 10(10 B) of the Act being retrenchment compensation. According to the Assessing Officer, that amount could not be exempted u/s 10 (10B) as the assessee was not a workman. The assessee also earned interest income of Rs. 22,812/- from Bank of India which was not included by him in the total income but he offered for tax the said amount. The Assessing Officer, accordingly, added Rs.17,81,952/-, Rs.5,00,000/- and Rs.22,812/- to the income declared by the assessee in the return and assessed the total income of assessee at Rs.2,21,54,785/-.Penalty proceedings under Section 271(1)(c) were initiated separately and penalty of Rs.7,75,211/- was imposed under Section 271(1)(c) by the Assessing Officer vide Order dated March 16, 2003.
5. The assessee accepted the order of assessment but challenged the order of penalty in appeal before the CIT (Appeals) XXV, New Delhi.
6. After hearing the assessee and the departmental representative, the CIT (Appeals) XXV, New Delhi allowed the appeal and set aside the order of penalty vide his order dated August 22, 2005. The CIT (appeals) held that the assessee has neither concealed the particulars of his income nor he furnished any inaccurate particulars thereof. This is what the CIT (Appeals) held:
"I believe that this is a case of unintentional and inadvertent omission and therefore, it is not a fit case for levy of penalty u/s. 271(1)(c) of the Act as the assessee has not concealed the particulars of his income; nor has he furnished any inaccurate particulars thereof. As can be seen from a perusal of the impugned order, the penalty has been levied with reference to firstly, the addition disallowing the claim of Retrenchment compensation of Rs.5,00,000/- made u/s 10(10B) of the Act, secondly, the salary received in Singapore for services rendered outside India from December to March 2002 amounting to Rs.17,81,952/- offered by the appellant in the course of assessment proceedings and thirdly the interest income of Rs. 22,812/- also offered for tax in therevised return filed during the course of assessment proceedings. As regards the former, the AO appears to be completely satisfied as regard the genuineness of the reasons that necessitated the revision. As regard the second, the issue involved difference of opinion even between two different benches of the Apex Court, and thirdly, the A.O again seems to be satisfied about the appellant's reply in this connection. In any case, the additions were made on the basis of the particulars furnished by the appellant and not discovered independently by the A.O.
5.1 That the appellant had a bona fide belief of the non-taxability of the salary income earned in Singapore where tax- withholding had taken place and India had DTAA with Singapore, so he did not include this receipt in his salary income cannot be rejected out of hand. During assessment proceedings however, assessee offered this salary receipt for taxation as per IT Act, 1961. Therefore, an amount of Rs. 17,81,952/- was included in the total income of the assessee. In such setting of facts, I am afraid, the impugned addition may not lead to concealment of income or furnishing of inaccurate particulars thereof."
9. The revenuel filed appeal u/s 260A before the High Court of Delhi. The High Court considered the question whether the Assessing Officer had recorded a valid satisfaction for initiating penalty proceedings under Section 271(1)(c) of the Act. Inter alia, relying upon a decision of that Court in Commissioner of Income Tax vs. Ram Commercial Enterprises Ltd. and noticing that Ram Commercial Enterprises has been approved by this Court in Dilip N. Shroff vs. Joint Commissioner of Income Tax (2007) 291 ITR 519 (SC), and T. Ashok Pai vs. Commissioner of Income Tax2, held that from the reading of the assessment order, it was not discernible as to why the Assessing Officer chose to initiate proceedings against the assessee and under which part of Section 271(1)(c). The High Court, therefore, accepted the view of the Tribunal and CIT (Appeals) and dismissed the appeal of the Revenue with cost of Rs. 5,000/-.
10. Section 271(1)(c) as was operative during the relevant year reads thus:
"271. (1) If the Assessing Officer or the (***) (Commissioner (Appeals) in the course of any proceedings under this Act , is satisfied that any person.
(a)
(b)
(c) has concealed the particulars of his income or (***) furnished inaccurate articulars of such income, he may direct that such person shall pay by way of penalty,
(i) .............
(ii)............
(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed (three times), the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income.
(***)
(Explanation 1. Where in respect of any facts material to the computation of the total income of any person under this Act.
(A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the (**) (Commissioner (Appeals) to be false, or
(B) such person offers an explanation which he is not able to substantiate ( and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him), then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub- section, be deemed to represent the income in respect of which particulars have been concealed.
11. A close look at Section 271(1) (c) and Explanation (1) appended thereto would show that in the course of any proceedings under the Act, inter alia, if the Assessing Officer is satisfied that a person has concealed the particulars of his income for furnished inaccurate particulars of such income, such person may be directed to pay penalty. The quantum of penalty is prescribed in Clause (iii). Explanation 1, appended to section 271(1) provides that if that person fails to offer an explanation or the explanation offered by such person is found to be false or the explanation offered by him is not substantiated and he fails to prove that such explanation is bona fide and that all the facts relating the same and material to the computation of his total income has been disclosed by him, for the purposes of Section 271(1)(c), the amount added or disallowed in computing the total income is deemed to represent the concealed income. The penalty spoken of in Section 271(1)(c) is neither criminal nor quasi criminal but a civil liability; albeit a strict liability. Such liability being civil in nature, mens rea is not essential.
12. In the case of Union of India and Ors. vs. Dharamendra Textile Processors and Ors (2008) 306 ITR 277 , a three judge Bench of this Court held that Dilip N. Shroff did not lay down correct law as the difference between Section 271(1)(c) and Section 276(c) of the Act was lost sight of. The Court held that the explanation appended to Section 271(1)(c) indicates element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The Court held thus:
"The Explanations appended to Section 271(1)(c) of the Income Tax Act, 1961, indicate the elements of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The judgment in Dilip N. Shroff case (supra) has not considered the effect and relevance of Section 276(c) of the I.T. Act. The object behind the enactment of Section 271(1)(c) read with Explanations indicates that the Section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under Section 276 (c)."
15. Insofar as the present case is concerned, as noticed above, the High Court relied upon its earlier decision in Ram Commercial Enterprises which is said to have been approved by this Court in Dililp N. Shroff. However, Dillip N. Shroff has been held to be not laying down good law in Dharamendra Textiles. Dharamendra Textiles is explained by this Court in Rajasthan Spining and Weaving Mills. Having thoughtfully considered the matter, in our judgment, the matter needs to be reconsidered by the High Court in the light of the decisions of this Court in Dharamendra Textiles and Rajasthan Spinning and Weaving Mills.
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posted at www.taxmannindia.blogspot.com
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