TIOL Update - 2018-TIOL-INSTANT-ALL-538

Tapan Kumar Dutta Vs CIT: : SUPREME COURT OF INDIA (Dated: April 24, 2018)

Keywords - Benami transaction - Block assessment - Search proceedings - Undiscosed income

The assessee is a partner in a partnership firm. The Revenue conducted a search of the firm's premises and seized several documents besides a sum of Rs. 34 lakhs. On assessment, the AO noted undisclosed cash receipts. Hence notice u/s 158BC was served on the assessee, directing it to file true and correct returns including undisclosed income for a block period. The assessee replied to such notice, declaring aggregate undisclosed income at Rs 14 lakhs. Meanwhile, the assessee approached the CIT(A), who passed an order directing initiation of proceedings u/s 158BD for undisclosed income. Pursuantly fresh notice u/s 158BC r.w. Sec 158BD was issued to the assessee. While the assessee claimed to have already filed returns for block period, the AO rejected such contentions and made additions of Rs 3,48,56,430/-.

The assessee again approached the CIT(A), who held that the undisclosed income of the block period in the instant case should be taken in the aggregate sum of Rs. 66,55,911/- as against Rs. 3,48,56,430/- as assessed by the AO. Subsequently, both the Tribunal as well as the High Court dismissed the appeals filed by the assessee.

Whether the AO can initiate block assessment on being satisfied that there exists prima facie documents or assets, recovered through search proceedings, proving that certain undisclosed income belongs to the assessee - YES: SC

Whether it is necessary to record satisfaction that the undisclosed income belongs to the person being searched, before issuing notice u/s 158BC - NO: SC

Whether notice issued u/s 158BD is justified where the AO is absolutely certain that the undisclosed income does not belong to the person being searched - YES: SC

++ in the present case, it is not in dispute that the AO, who is assessing the Firm as well as the assessee, is the same person. In other words, the same AO having jurisdiction over the searched person can proceed against the present assessee. Therefore, the present AO had jurisdiction to proceed against the present assessee to make a block assessment under Chapter XIV-B of the IT Act, in case the AO is prima facie satisfied that any undisclosed income belongs to the present assessee;

++ it is well settled that there must be prima facie satisfaction on the part of the AO on the basis of searched books of accounts or other documents or assets that any undisclosed income belongs to any person other than the searched person. In support of the contention that there was prima facie satisfaction of the AO, his order was based upon the material on record that undisclosed income belonged to the present assessee, when he issued the notice under Section 158BC on 09.09.1999;

++ on a conjoint reading of Sections 158BC and 158BD, it is clear that no satisfaction to the effect that undisclosed income belongs to the searched person is necessary before issuing the notice under Section 158BC against the searched person as Section 158BC speaks of a condition that where any search had been conducted under Section 132 or books of accounts or other documents or assets or requisition under Section 132A in case of any person, then, the AO shall serve notice to such person requiring him to furnish within specified time a return in the prescribed form. Therefore, at the time when notice under Section 158BC was issued by the Assessing Officer to M/s Nitya Kali Rice Mill, it was not necessary for the AO to arrive at a satisfaction that any undisclosed income belongs to M/s Nitya Kali Rice Mill. A search was conducted against M/s Nitya Kali Rice Mill under Section 132 of the IT Act. Since the notice under Section 158BC issued to M/s Nitya Kali Rice Mill and the notice under Section 158BC issued to the Appellant were on the same day i.e., on 09.09.1999, the question of coming to a satisfaction that any undisclosed income based on seized books of accounts or documents or assets belonged to the present Appellant did or could not arise inasmuch as no reasonable or prudent man can come to such satisfaction unless the seized books of accounts or documents or assets are perused, examined and verified. Therefore, the AO was right in arriving at a decision that the notice under Section 158BC issued to the present Appellant on 09.09.1999 did not satisfy the requirement of Section 158BD of the IT Act. He therefore rightly proceeded to issue fresh notice (Second Notice) under Section 158BD on 20.11.2000 after recording a satisfaction that any undisclosed income based on seized books of account or document or assets or other materials may belong to the Appellant. In fact, in the present case, the AO has himself come to a conclusion that the notice issued under Section 158BC on 09.09.1999 to the assessee was not in conformity with the requirement of Section 158BD of the IT Act.

++ a perusal of Section 158BD of the IT Act makes it clear that the Assessing Officer needs to satisfy himself that the undisclosed income belongs to any person other than the person with respect to whom the search was made under Section 132 or whose books of accounts or other documents or assets were requisitioned under Section 132A. The very object of the Section 158BD is to give jurisdiction to the Assessing Officer to proceed against any person other than the person against whom a search warrant is issued. Although Section 158BD does not speak of ‘recording of reasons' as postulated in Section 148, but since proceedings under Section 158BD may have monetary implications, such satisfaction must reveal mental and dispassionate thought process of the Assessing Officer in arriving at a conclusion and must contain reasons which should be the basis of initiating the proceedings under Section 158BD.

++ hence the order dated 14.08.2000, passed by the Additional Commissioner of Income Tax (Appeals), u/s 144A of the IT Act directed the Assessing Officer to take the undisclosed income of the assessee including from the benami business in the name of two other persons at an aggregate sum of Rs 17 lakhs as against Rs 14 lakhs declared by the assessee in his block return was passed in contravention of law and is not sustainable in the eyes of law.

CIT Vs Shree Rama Multi Tech Ltd : SUPREME COURT OF INDIA (Dated: April 24, 2018)

Keywords - Bank Deposits - Interest Income - Public issue expenses - Share application money - Set off of interest income.

The assessee is engaged in manufacture of multilayer tubes and plastic products. The assessee made initial public issue during the relevant year and the amount of share application money was deposited with the banks on which interest was earned which was shown in the return filed as income from other sources. The assessment for relevant year was completed. The assessee had raised an additional ground before the Tribunal to allow the set off of interest against the public issue expenses. The Tribunal set aside the issue for fresh adjudication by the AO. Keeping in view the specific guidelines of the Tribunal in this regard and in the absence of specific working of interest for pre-allotment and post-allotment, the claim of the assessee was not allowed and added to the total income under the head income from the other sources.

On appeal, CIT(A) directed the AO to grant relief to assessee by recomputing the income and modifying the tax calculation without applying the proviso to Section 240 of the Act. In the meanwhile, reassessment proceedings were initiated on the ground that income of assessee had escaped assessment. In reassessment order, AO did not allow set off of the interest income against the public issue expenses. On appeal, CIT(A) partly gave relief to assessee but affirmed the findings of the AO in not allowing set off of interest income from share application money. Both the Assessee and the Revenue filed crossappeals before the Tribunal. The Tribunal, passed order in favour of assessee and allowed the deduction on account of interest income. The Revenue's appeal before the High Court was dismissed.

Whether interest income earned from deposit of share application money statutorily required to be kept in separate account is incidental in nature and the assessee is entitled to set it off against expenses relating to public issue - YES: SC

Whether if the assessee deposits its surplus money lying idle in some other account in the bank account in which public issue money is kept, any income earned is to be treated as 'income from other sources' - YES: SC

++ assessee was statutorily required to keep share application money in the separate account till the allotment of shares was completed. Interest earned on such separately kept amount was to be adjusted towards expenditure for raising share capital. Interest earned was inextricably linked with requirement of company to raise share capital and was thus adjustable towards the expenditures involved for the share issue. Interest earned from share application money statutorily required to be kept in separate account was being adjusted towards the cost of raising share capital. Hence the High Court was right in allowing such deduction;

++ if there is any surplus money which is lying idle and it has been deposited in the bank for the purpose of earning interest then it is liable to be taxed as income from other sources but if the income accrued is merely incidental and not the prime purpose of doing the act in question which resulted into accrual of some additional income then the income is not liable to be assessed and is eligible to be claimed as deduction. So if the share application money that is received is deposited in the bank in light of the statutory mandatory requirement then the accrued interest is not liable to be taxed and is eligible for deduction against the public issue expenses. The issue of share relates to capital structure of the company and hence expenses incurred in connection with the issue of shares are to be capitalized because the purpose of such deposit is not to make some additional income but to comply with the statutory requirement, and interest accrued on such deposit is merely incidental. The appeals are accordingly dismissed.

Income Tax - Sections 80-O & 143(2)

Keywords : Convertible foreign exchange - Managing Agent - Service Charge - Technical & Technical assistance -

The assessee, an individual, claimed deductions u/s 80-O in its return. The assessee had claimed that it had exported industrial and commercial knowledge and information about the market conditions. The AO scrutinized the case, and determined the sum payable by the assessee. On appeal, the CIT(A) allowed the benefit to the assessee. However, the Tribunal upheld the Revenue's appeal and the High Court concurred with it.

Whether when the provisions of Sec 80-O mandate production of documents relating to which relief is sought, deduction can be claimed even without furnishing such documents - NO: SC

Whether supply of blue prints of commercial documents qualifies as technical assistance - NO: SC

Whether when it is a case of principal-agent relationship, even then benefit of Sec 80-0 can be claimed - NO: SC

++ it is evident from record that the major information sent by the Appellant to the Sumitomo Corporation was in the form of blue prints for the manufacture of dies for stamping of doors. Several letters were exchanged between the parties but there is nothing on record as to how this blue print was obtained and dispatched to the company. It is also evident on record that the Appellant has not furnished the copy of the blue print which was sent to the Sumitomo Corporation neither before the Assessing Officer nor before the Appellate authority nor before the Tribunal. The provisions of Section 80-O mandate the production of document in respect of which relief has been sought. We, therefore, have to examine whether the services rendered in the form of blue prints and information provided by the Appellant fall within the ambit of Section 80-O or any of the conditions stipulated therein in order to entitle the assessee to claim deduction;

++ the blue prints made available by the Appellant to the Corporation can be considered as technical assistance provided by the Appellant to the Corporation in the circumstances if the description of the blue prints is available on record. The said blue prints were not even produced before the lower authorities. In such scenario, when the claim of the Appellant is solely relying upon the technical assistance rendered to the Corporation in the form of blue prints, its unavailability creates a doubt and burden of proof is on the Appellant to prove that on the basis of those blue prints, the Corporation was able to start up their business in India and he was paid the amount as service charge;

++ with regard to the remuneration to be paid to the Assessee for the services rendered, in terms of the letter dated 25.01.1995, it has been specifically referred that the remuneration would be payable for the commercial and industrial information supplied only if the business plans prepared by the Appellant results positively. Sumitomo Corporation will pay to PASCO International service charges equivalent to 5% (per cent) of the contractual amount between Sumitomo and its customers in India on sales of its products so developed. From a perusal of the above, it is clear that the Appellant was entitled to service charges at the rate of 5% (per cent) of the contractual amount between Sumitomo Corporation and its customers in India on sales of its products so developed but there is nothing on record to prove that any product was so developed by the Sumitomo Corporation on the basis of the blue prints supplied by the Appellant as also that the Sumitomo Corporation was able to sell any product developed by it by using the information supplied by the assessee. Meaning thereby, there is no material on record to prove the sales effected by Sumitomo Corporation to its customers in India in respect of any product developed with the assistance of Appellant's information and also on as to how the service charges payable to Appellant were computed;

++ in the present facts and circumstances of the case, the services of managing agent, i.e., the assessee, rendered to a foreign company, are not technical services within the meaning of Section 80-O of the IT Act. The Assessee failed to prove that he rendered technical services to the Sumitomo Corporation and also the relevant documents to prove the basis for alleged payment by the Corporation to him. The letters exchanged between the parties cannot be claimed for getting deduction under Section 80-O of the IT Act;

++ it is settled law that the expressions used in a taxing statute would ordinarily be understood in the sense in which it is harmonious with the object of the Statute to effectuate the legislative animation. The Assessee was a managing agent and the High Court was right in holding the principal-agent relationship between the parties and there is no basis for grant of deduction to the Assessee under Section 80-O of the IT Act.

ITO Vs Techspan India Pvt Ltd: SUPREME COURT OF INDIA (Dated: April 24, 2018)

The assessee company, engaged in developing and exporting computer softwares, had returned loss. During the assessment proceeding, the ITO noted that the assessee had declared its income from software development and HR development divisions but also claimed expenses commonly for both without recording any basis and issued SCN in this regard. The proceedings finally ended with a rectification of the assessment order u/s 154. The ITO arrived at an income of Rs. 31,63,570/- which was fully set-off against the loss brought forward and the income was assessed as 'Nil'.

Again, on 10.02.2005, a re-opening notice u/s 148 was served on the ground that the deduction u/s 10A was allowed in excess and the income had escaped assessment. To which, the assessee had objected while filing a detailed reply. However, the objections were rejected and reassessment was done by the Revenue. In Writ, the High Court set aside the SCN as well as the re-assessment order.

Whether the intention of the Legislature while making invocation of Sec 147 conditional is to allow the Revenue to adopt liberal interpretation of the expression 'reason to believe' - NO: SC

Whether the power of re-assessment under Section 147 also includes the power to Review assessment - NO: SC

++ the language of Sec. 147 makes it clear that the ITO certainly has the power to re-assess any income which escaped assessment for any AY subject to the provisions of Ss 148 to 153. However, the use of this power is conditional upon the fact that the ITO has some 'reason to believe' that the income has escaped assessment. The use of the words 'reason to believe' in Sec. 147 has to be interpreted schematically as the liberal interpretation of the word would have the consequence of conferring arbitrary powers on the ITO who may even initiate such re-assessment proceedings merely on his 'change of opinion' on the basis of same facts and circumstances which has already been considered by him during the original assessment proceedings. Such could not be the intention of the legislature. The said provision was incorporated in the scheme of the Act so as to empower the Assessing Authorities to re-assess any income on the ground which was not brought on record during the original proceedings and escaped his knowledge; and the said fact would have material bearing on the outcome of the relevant assessment order;

++ sec. 147 does not allow the re-assessment of an income merely because of the fact that the ITO has a change of opinion with regard to the interpretation of law differently on the facts that were well within his knowledge even at the time of assessment. Doing so would have the effect of giving the ITO the power of review and Sec. 147 confers the power to re-assess and not the power to review. The word 'change of opinion' implies formulation of opinion and then a change thereof. In terms of assessment proceedings, it means formulation of belief by an ITO resulting from what he thinks on a particular question. It is a result of understanding, experience and reflection;

++ before interfering with the proposed re-opening of the assessment on the ground that the same is based only on a change in opinion. If the assessment order is non-speaking, cryptic or perfunctory in nature, it may be difficult to attribute to the ITO any opinion on the questions that are raised in the proposed re-assessment proceedings. Every attempt to bring to tax, income that has escaped assessment, cannot be absorbed by judicial intervention on an assumed change of opinion even in cases where the order of assessment does not address itself to a given aspect sought to be examined in the re-assessment proceedings;

++ the question as to how and to what extent deduction should be allowed u/s 10A. Hence, initiation of the re-assessment proceedings u/s 147 by issuing a notice u/s 148 merely because of the fact that now the ITO is of the view that the deduction u/s 10A was allowed in excess, was based on nothing but a 'change of opinion' on the same facts and circumstances which were already in his knowledge even during the original assessment proceedings. Therefore, we are of the view that disputed judgment and order of the High Court dated 24.02.2006 does not call for any interference.

Income Tax - Sections 37(1) & 143(3)

Keywords - Capital expenditure - Revenue expenditure - Trademark

THE assessee company is a leading importer & supplier of automobile accessories and rubber products. It entered into a Trade Mark licence agreement for a period of ten years, which was later substituted with a licence agreement, with one M/s Hilton Rubbers Ltd. (HRL). Under the agreement, the assessee could use the trademark of HRL on two of its products. Ownership of the trademark remained with HRL and it also received royalty on domestic sales made by the assessee. Also such agreement could be terminated if the assessee misused the trademark. Subsequently, a second licence agreement was also entered into, for which the assessee paid Rs one crore to HRL. On such expenditure, the assessee claimed deduction u/s 37(1), on the ground that it was a revenue expenditure.

On assessment for the relevant AY, the AO noted that the payment of Rs 1 crore was absent in the earlier agreement & had been made for use of the brand. Hence the AO held the expenditure of Rs 1 Crore as not being related to the assessee's business. It was further held that such expenditure was of capital nature and was of an enduring nature. On appeal, the CIT(A) relied on a decision of the Apex Court and held such payment to be revenue expenditure on which assessee could claim deduction. It was also held that the expenditure incurred in connection with right to use the trademark was important in the business operations of the assessee & also for its efficiency and profitability. Subsequently, the Tribunal overturned the findings of the CIT(A) and held that while one agreement was for use of trademark, and the other was for sale of shareholding, the payment of Rs 1 crore was not made for a pure trademark licence. The Tribunal further held that since the right to use the trademark was for an unlimited period, and there was no clause for renewal or any further consideration, the trademark though termed as a licence, was in effect, final sale of the mark. Thus, the Tribunal held the payment of Rs 1 Crore to be an enduring benefit & hence capital in nature.

On hearing the matter, the High Court held that,

Whether payment made to acquire a trade mark, for facilitating entry into a particular market & boosting business, is to be treated as revenue expenditure - YES: HC

Whether payment made to acquire a trademark is revenue expenditure, where its ownership remains with the assignor and only a right to use was given - YES: HC

Whether to determine whether an expenditure is capital or revenue in nature, both the terms and conditions of the agreement as well as the facts and circumstances of the agreement must be considered - YES: HC

Whether the retention of any rights by the licensor or assignor is the test to determine whether a mark was was licensed or assigned - YES: HC

++ the Apex Court in Empire Jute Company Ltd. v. CIT, held that the test of enduring benefit is not an absolute or a conclusive test and depends on the facts and circumstances of each case. Further, in its decision in Alembic Chemical Works Co. Ltd. v. CIT, the Apex Court held that even a `once for all' or lumpsum payment was held to be inconclusive in deciding whether the expenditure was capital or revenue in nature;

++ in order to determine whether a particular expenditure is capital or revenue in nature, some of the factors that are relevant are - i) the nature of the right being given - exclusive, non-exclusive, permanent or term based; ii) the benefit being derived - whether enduring, long term, short term; and iii) the nature of payment being made - periodic, lump sum, revenue linked payments. These factors are singularly not determinative of the nature of the expenditure. It depends on the facts of each case. In a given case, a lump sum payment may still be revenue expenditure. A long term licence, without ownership vesting in the licensee could also be revenue expenditure. An exclusive right to use, to the exclusion of the owner, though termed as a licence, could be a transfer of title in the mark, and could constitute capital expenditure. Thus, the Court has to see not merely the terms of the agreement but also the facts and circumstances surrounding the agreement in order to determine the nature of the expenditure;

++ the fundamental test to determine as to whether a particular mark has been licensed or assigned is to see if the licensor or assignor has retained any rights in the mark. If rights are retained with the owner, usually it is a license and if no rights are retained by the owner, then it would usually be an assignment. A license is, therefore, nothing but a permissive use of the mark, which permission, is revocable. A `right to use' is usually a license and not an assignment, except in certain circumstances;

++ the first agreement contains an acknowledgment that HRL was the owner of the mark. The agreement grants an exclusive right to use “HILTON” owned by HRL to the assessee. The assessee could not, without HRL's permission apply for registration of the mark on its own or dispute the ownership of HRL. If any infringement came to the knowledge of the assessee, it had to seek the prior written consent of HRL, which had the right to decide as to what action it would take whether with or without the assessee, in respect of such infringer. An application could have been filed to register the assessee as a registered user and such application could have been made jointly only. The termination clause was clear. Though the initial period was 10 years, the agreement could have been terminated with 12 months‟ written notice by either party. The termination was automatic under some circumstances as detailed in the agreement. One of the reasons for termination could be the termination of the joint venture agreement. Upon termination of the license agreement, the appellant would not have any rights to use or seek registration of the mark “HILTON”. This agreement was in the nature of a license agreement and had all the trappings of a license. The rights of HRL were completely preserved and only a right to use was being given to the assessee. No long term benefit accrued to the assessee;

++ the settled position in law is that use by a licensee would also inure to the benefit of a licensor, for it would continue to remain the owner, unless there was also part transfer of title. In this case, title and ownership of the mark was not transferred. The assessee only had permission and approval to use the mark. Thus, the benefit of the use of the mark “HILTON” during the period when it stood licensed to the assessee inures to HRL. The use of the mark “HILTON” thus, merely facilitated the assessee's business in India i.e. it facilitated the assessee's entry into India under the brand name and the trade name which was familiar to the industry and market. The advantage of having used the mark “HILTON” between 1992 and 2005 could endure and benefit the appellant as a permitted and authorized user, but it cannot be called an acquisition and benefit of capital nature so as to constitute capital expenditure. The assessee did not purchase and acquire title in the trademark. It did not retain any rights in the mark. Thus, the payment of Rs.1 crore was for the purpose of obtaining an advantage in carrying on its business and is therefore in the revenue field;

++ subsequent facts would only confirm this court's opinion and ratio that the right conferred on the assessee under the second license agreement entered into 9th November, 1995 had only authorized the assessee to use the mark for ten years. The assessee had not acquired any permanent ownership or title in the said mark. The said payment though in lump sum was made to use the said mark and could well have been made with reference to the total sales as was the position in the first agreement dated 27th January, 1993. Certain terms and conditions for using the mark “HILTON” were changed and altered vide agreement dated 9th November, 1995, but in substance with reference to the rights acquired there was no difference between this agreement and earlier license agreement dated 27th January, 1993. All the above facts point to the clear conclusion that the payment of Rs.1 crore ought to be treated as revenue expenditure.

Assessee's Appeal Allowed