2018-TIOL-162-SC-IT + Case Story
ADDL CIT Vs BHARAT V PATEL: SUPREME COURT OF INDIA (Dated: 24 April, 2018)
Income Tax - Sections 17(2)(iii), 28(iv) & 143(3)
Keywords - Allotment of shares - Business activities - Capital Gain - Perquisite - Stock Appreciation Rights
THE assessee, an individual, is the chairperson and managing director of Proctor & Gamble India, a leading FMCG brand. In his returns filed for the relevant AY he declared his total income of about Rs 40 lakhs. However, on assessment, the AO determined the assessee's total income at about Rs 7.2 crores. Later, the CIT(A) upheld the findings of the AO. On subsequent appeal, the Tribunal partly allowed the assessee's appeal, whereupon both the assessee as well as the Revenue preferred appeals before the High Court.
Meanwhile the AO sought to recover tax on the differential amount, and held that the differential sum paid to the assessee by P&G, USA would be treated as capital gains on transfer or redemption of shares, and so the assessee was liable to pay tax on capital gains. Against such order the assessee again approached the CIT(A), who once again dismissed the assessee's appeal. The Tribunal too confirmed the order passed by the CIT(A). Against such Tribunal order, the assessee filed no appeal. Thereupon, the High Court settled the first appeal in favor of the assessee.
On hearing the matter, the Apex Court was of the view that,
Whether allotment of Stock Appreciation Rights is a perquisite not arising from business or profession - YES: SC
Whether amount received upon redemption of Stock Appreciation Rights is taxable as profits from business or profession - NO: SC
Whether allotment of Stock Appreciation Rights is different from allotment of shares & so not taxable as capital gain - YES: SC
++ it is an undisputed fact that the assessee was working as a salaried employee. The (P&G) USA was the company who had issued the Stock Appreciation Rights (SARs.) to the assessee without any consideration from 1991 to 1996. The said SARs were redeemed on 15.10.1997 and in lieu of that the assessee received an amount of Rs 6,80,40,724/from (P&G) USA. However, when the assessee filed his return, he claimed this amount as an exemption from the ambit of Income Tax. The issue involved in this appeal is in respect of Rs 6,80,40,724/made on account of amount received on redemption of Stock Appreciation Rights;
++ in order to bring the perquisite transferred by the employer to the employees within the ambit of tax, legislature brought an amendment under Section 17 of the IT Act by inserting Clause (iiia) in Section 17(2) of the IT Act through the Finance Act, 1999 (27 of 1999) with effect from 01.04.2000, which was later on omitted by the Finance Act, 2000. The intention behind the said amendment brought by the legislature was to bring the benefits transferred by the employer to the employees as in the instant case, within the ambit of the Income Tax Act, 1961. It was the first time when the legislature specified the meaning of the cost for acquiring specific securities. Only by this amendment, legislature determined what would constitute the specific securities. By this amendment, legislature clearly covered the direct or indirect transfer of specified securities from the employer to the employees during or after the employment. On a perusal of the said clause, it is evident that the case of the assessee falls under such clause. However, since the transaction in the instant case pertains to prior to 01.04.2000, hence, such transaction cannot be covered under the said clause in the absence of an express provision of retrospective effect. There is no force in the argument of the Revenue that the case of the assessee would fall under the ambit of Section 17(2) (iii) of the IT Act instead of Section 17(2) (iiia) of the IT Act. It is a fundamental principle of law that a receipt under the IT Act must be made taxable before it can be treated as income. Courts cannot construe the law in such a way that brings an individual within the ambit of Income Tax Act to pay tax who otherwise is not liable to pay. In the absence of any such specific provision, if an individual is subjected to pay tax, it would amount to the violation of his Constitutional Right;
++ considering the CBDT Circular No. 710 dated 24.07.1995, which deals with the taxability of shares issued at less than the market price, it appears that such Circular dealt with the cases where the employer issued shares to the employees at less than the market price. In the instant case, the assessee was allotted Stock Appreciation Rights (SARs.) by the (P&G) USA which is different from the allotment of shares. Hence, in the opinion of this court such Circular has no applicability on the instant case. Moreover, a Circular cannot be used to introduce a new tax provision in a Statute which was otherwise absent;
++ considering the provisions of Section 28(iv) of the Act, it is apparent that such benefit or perquisite shall have arisen from the business activities or profession whereas in the instant case there is nothing as such. The applicability of Section 28(iv) is confined only to the case where there is any business or profession related transaction involved. Hence, the instant case cannot be covered under Section 28(iv) of the IT Act for the purpose of tax liability;
++ to sum up, the assessee got the Stock Appreciation Rights (SARs) and, eventually received an amount on account of its redemption prior to 01.04.2000 on which the amendment of Finance Act, 1999 (27 of 1999) came into force. In the absence of any express statutory provision regarding the applicability of such amendment from retrospective effect, there is no force in the argument of the Revenue that such amendment came into force retrospectively. It is well established rule of interpretation that taxing provisions shall be construed strictly so that no person who is otherwise not liable to pay tax, be made liable to pay tax.
Revenue's appeal dismissed
2018-TIOL-161-SC-IT + Case Story
CIT Vs VIRTUAL SOFT SYSTEMS LTD: SUPREME COURT OF INDIA (Dated: April 24, 2018)
Income Tax – Section 145 - Companies Act, 1956 - Section 211.
Keywords - Guidance Note issued by ICAI - Lease equalization charges - Lease rental income.
The assessee company filed return for the relevant AY declaring losses and claiming deduction for lease equalization charges on the basis of Guidance Note issued by the Institute of Chartered Accountants of India (ICAI). During assessment the AO disallowed deduction for lease equalization charges from lease rental income and added the same to the income. On appeal, CIT(A) upheld the order of the AO. On further appeal, Tribunal passed order in favour of assessee, which was also confirmed by the High Court.
On appeal, the Supreme Court held that,
Whether bifurcation of lease rental income can be done as per the Guidance Note and accounting standards prescribed by the ICAI when there is no bar in the Act regarding the use of such Guidance Note and when the Act itself is silent on treatment for lease equalization charges - YES: SC
++ guidance Note reflects the best practices adopted by the accountants throughout the world. The ICAI is a recognized body vested with the authority to recommend accounting standards for ultimate prescription by the Central Government in consultation with the National Advisory Committee of Accounting Standards for the presentation of true and fair financial statements. The method of accounting followed, as derived from the ICAI's Guidance Note, is a valid method of capturing real income based on the substance of finance lease transaction;
++ bifurcation of the lease rental is, by no stretch of imagination, an artificial calculation and, therefore, lease equalization is an essential step in the accounting process to ensure that real income from the transaction in the form of revenue receipts only is captured for the purposes of income tax. Moreover, there is no express bar in the IT Act which bars the bifurcation of the lease rental. This bifurcation is analogous to the manner in which a bank would treat an EMI payment made by the debtor on a loan advanced by the bank. The repayment of principal would be a balance sheet item and not a revenue item. Only the interest earned would be a revenue receipt chargeable to income tax. Hence, no force is found in the contentions of the Revenue that whole revenue from lease shall be subjected to tax under the IT Act;
++ main contention of the Revenue is that the assessee cannot be allowed to claim deduction regarding lease equalization charges since as such there is no express provision regarding such deduction in the IT Act. However, it is apt to note here that the assessee can be charged only on real income which can be calculated only after applying the prescribed method. The IT Act is silent on such deduction. For such calculation, it is obvious that the assessee has to take course of Guidance Note prescribed by the ICAI if it is available. Only after applying such method which is prescribed in the Guidance Note, the assessee can show fair and real income which is liable to tax under the IT Act. Therefore, it is wrong to say that the assessee claimed deduction by virtue of Guidance Note rather it only applied the method of bifurcation as prescribed by the expert team of ICAI. Further, a conjoint reading of Section 145 of the IT Act read with Section 211 (un-amended) of the Companies Act make it clear that the assessee is entitled to do such bifurcation and there is no illegality in such bifurcation as it is according to the principles of law. Moreover, the rule of interpretation says that when internal aid is not available then for the proper interpretation of the Statute, the court may take the help of external aid. If a term is not defined in a Statute then its meaning can be taken as is prevalent in ordinary or commercial parlance. Hence, their is no force in the contentions of the Revenue that the accounting standards prescribed by the Guidance Note cannot be used to bifurcate the lease rental to reach the real income for the purpose of tax under the IT Act. The assessee is entitled for bifurcation of lease rental as per the accounting standards prescribed by the ICAI. Moreover, there is no express bar in the IT Act regarding the application of such accounting standards. Accordingly, the appeal is dismissed.
Revenue's Appeal dismissed
2018-TIOL-784-HC-MAD-IT + Case Story
SRINIDHI KARTI CHIDAMBARAM Vs PR CCIT: MADRAS HIGH COURT (Dated: April 12, 2018)
Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 - Sections- Writ - 10(1), 10(3), 11, 48 & 55 - Constitution of India - Article 226.
Keywords - Investment outside India - Non disclosure of information - Parallel proceedings -prosecution - Writ of prohibition - Writ of Mandamus.
The assessee is an Individual. The Revenue received information that assessee had made certain investments in acquiring assets abroad and also sold some assets outside India but had not disclosed the Foreign assets and Foreign interests fully in Schedule FA of the return of income filed by him for the relevant AY. The Revenue issued a notice to the assessee u/s 10(1) of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Act 2015). The assessee replied that, foreign remittance for purchase of the foreign asset was through normal banking channels, as per RBI guidelines. The assessee submitted relevant documents also and prayed for withdrawal of the notice u/s 10(1) of the Act, 2015. But Revenue issued summon u/s 8(1) of the Act, 2015. The assessee submitted that, there were three conditions i) Undisclosed income; ii) Undisclosed investments; and iii) Non-disclosures in the Income Tax Returns which were required to be satisfied by the Officer to invoke provisions of the Act, 2015. It was further submitted by assessee that when he had disclosed income, investments/source and also the ITRs, the order u/s 10(3) should not be passed. It was submitted that, there was no material available in the hands of the Revenue for initiating proceeding under the provisions of Act of 2015. The assessee on the other hand also submitted that in spite of the receipt of the documents, the Revenue was yet to pass orders u/s 10(3) of the Act. The 9 months had expired of furnishing relevant details to the Revenue but no order was passed u/s 10 (3) of the Act. Aggrieved assessee filed writ petition in the High Court and sought a direction upon the Revenue to pass an order forthwith u/s 10(3) of the Act, 2015. The assessee submitted that a new Officer (Deputy Director of Income Tax (Investigation), had also issued summons to the assessee u/s 8 (1) of the Act in this way two Authorities were examining the same matter. It clearly indicate that there was no intention of the Authorities to finalize the matter, but, only to harass the assesses.
The assessee apprehended that prosecution may be initiated, and since the assessee was cooperating with the assessment proceedings, a Writ of prohibition should be issued to prohibit the Revenue from initiating prosecution, in terms of Section 48 of the Act.
In Writ, the High Court held that,
Whether when section 11 of the Act, 2015 provides outer time limit to pass final order by authorities the Court can insist on forthwith passing of order in matter when pursuance of notice u/s 10 (1) information has been submitted by the assessee - NO: HC
++ the statute prescribes an outer time limit, within which, the Authority is entitled to pass final orders. Therefore, to compel the Authority to pass final orders well before the time stipulated in the statute is not feasible of consideration. When the statute prescribe an outer time limit, the Court, while exercising its power under Article 226 of the Constitution should not interfere with the said power, i.e., either by reducing the time limit prescribed under the statute or by increasing the time limit. In so far as Act, 2015 was concerned, time given for completion of assessment and reassessment was only in terms of Section 11 of the Act. Section 11 (1) of the Act states that, no order of assessment or reassessment shall be made under Section 10, after the expiry of two years from the end of the financial year, in which, the notice under sub-section (1) of Section 10 was issued by the AO. Thus, the prayer sought for by the assessee in the Writ Petitions, to direct the Revenue to forthwith pass orders under Section 10 (3) of the Act, if acceded to, it would be contrary to the statutory provisions under Section 11 (1) of the Act. Therefore, such a positive direction cannot be issued;
Whether issue of parallel proceedings of same matter by two officers is question of fact and court will not exercise its power under article 226 of decide the same - YES : HC
++ assessee had alleged that two officers were dealing with the very same subject matter. It was observed that it was a question of fact, which should be adjudicated before appropriate Authority and not in a Writ Petition, under Article 226 of the Constitution. It was for the assessee to establish the same before appropriate forum;
Whether when prosecution under the Act, 2015 is independent of other proceeding, based on apprehension of the assessee, court can not pass order restraining the Authorities from initiating prosecution - YES : HC
++ as far as issue to restraining prosecution of assessee was concerned it was noted that sub-section 1 of Section 48 states that, Chapter V dealing with offence and prosecution, shall be independent of any order under the Act, that may be, or has not been made, on any person and it shall be no defence that the order has not been made on account of time limitation or for any other reason. Thus, the language employed in the statute, includes 'offence and prosecution', as contained in Chapter V, as independent of other proceeding, which are enunciated under the Act. Section 48 commences by stating that, Chapter V is not in derogation of any other law or any other provision of Act, 2015. In such circumstances, based on the apprehension of the assessee, the Court cannot issue writ of prohibition, to prevent the Authorities from initiating prosecution. If done, it would under Section 48 of the Act be inoperative;
++ the order of sanction to prosecute passed u/s 55 of the Act is an administrative act. Therefore, the grant of sanction being an administrative act, as held by the Supreme Court in Assistant Commissioner Vs. Velliapa Textiles Limited, reported in [(2003) 132 Taxmann.com 165], the need to provide an opportunity of personal hearing to the accused before according sanction does not arise. In any event, as on date, it appears that, no such order has been passed, and thus, the Court cannot issue writ of prohibition, prohibiting the Revenue from initiating or exercising powers under the statute.
Assessee's Writ Petition dismissed
2018-TIOL-783-HC-MAD-ST
INDO SHELL MOULD LTD Vs CCE: MADRAS HIGH COURT (Dated: April 18, 2018)
ST - duty demand with interest was raised against the assessee company - The assessee sought to settle the interest liabiity in instalments - While the Department settled the case, they demanded an additional amount of duty - While the interest liability was reduced, a penalty was imposed on the assessee - Subject to payment of the additional duty, the reduced interest & the penalty, the assessee was offered immunity from prosecution - Additional efforts to seek relief were to no avail - The assessee claimed to be unable to pay the entire amounts within 30 days due to financial constraints & also claimed to have paid a major portion of the demands raised.
Held - the assessee did not contest the order raising the demands, on merits & is also willing to comply with the demands for interest - Considering that the assessee approached the Department with intent to settle their case, in furtherance of which it paid the additional duty & the penalty, the assessee deserves extension of time to pay off the interest demanded: High Court (Para 2,3,4,7)
Writ Petition Allowed
2018-TIOL-782-HC-MAD-CUS
ACCORD TRADING INDIA PVT LTD Vs DCC: MADRAS HIGH COURT (Dated: April 12, 2018)
Cus - the assessee company imported quick lime & filed bills of entry for clearance - While the assessee classified it under CTH 25221000, attracting 5% tax, the Department sought to classify it under CTH 28259090, attracting 30% tax - While the issue was resolved in favor of the assessee by the Commr.(A) in 2017, when the assessee presented the bill of entry for 2018, the goods were again classified under the heading favored by the Department.
Held - While the assessee claimed that the Department is obliged to follow the orders of a superior officer, the Department claimed that it appealed against the O-i-A before the Tribunal, and the said O-i-A had not attained finality, the Department was not compelled to follow it - Moreover, the Department also claimed that the assessee filed no representation against the re-assessment in 2018 - Hence, the assessee is directed to file reperesentations before the re-assessment authority, who would pass a speaking order - Then if aggrieved, the assessee can utilise appellate remedies - Regarding the O-i-A passed in favor of the assessee, since it has not attained finality, the Department cannot be asked to follow it: High Court (Para 1,6,7)
Writ Petition Dismissed
2018-TIOL-611-ITAT-AHM
HITACHI HOME AND LIFE SOLUTIONS INDIA LTD Vs ACIT: AHMEDABAD ITAT (Dated: April 18, 2018)
Income tax - actual cost - excessive expenditure - provision for warranty charges - past experience - scientific working
The Assessee is a manufacturer of air conditioners. During the relevant year, the assessee had incurred warranty expenses of Rs. 7,18,64,000/- which included sales commission of Rs 5,41,52,792/- as well as warranty expenses for one year of Rs 1,77,10,631/-. The warranty charges incurred by assessee for five years was Rs. 28,29,848/-. During the course of assessment proceedings, the AO however disallowed the sales commission and provision for one year warranty charges. So far disallowance of provision for one year warranty charges were concerned, the assessee argued that the same was service charges to be paid to the dealers for general clearing & maintenance service offered to every customer in the first year of sale of AC and for attending specific failure arising in functioning of AC. It was also argued that after carrying out detailed analysis of the various activities involved in providing 1 year warranty services, actual cost involved in rendering the various activities in provision of service and working out the probability of happening of events triggering to carry out services based on the past experience, had fixed the warranty amount to be given to its Sales & Service Dealer for the different models sold by the company and thus no adhoc provisions was made. The AO though accepted the method followed for working of one year warranty charges. However, he was of the opinion that assessee had not provided the failure ratio of last 5 years preceding A.Y. 2000-2001, which could justify the scientific working of one year warrant expenses and accordingly Rs.94,080/- was excessive expenditure.
On appeal, the FAA observed that one year warranty charges actually represents service charges paid to dealers carrying out General, cleaning & maintenance services of AC in first year of sale and such services were provided to each customer at free of cost. The assessee had fixed the warranty amount to be given to its Sales & Service Dealer for the different models sold by the company and considering the number of AC sold during the year, it had claimed such expenditure in Profit & loss account. The details submitted by assessee clearly suggest that no adhoc provision was made but expenditure was claimed on scientific basis. Thus, he deleted the disallowance made towards provision made for one year warranty charges. As far as five year warranty charges are concerned, the FAA observed that assessee company was providing 5 Year warranty on compressor of AC sold by it and making provision of such warranty in the year in which the AC machine was sold. The assessee had explained that it had made provisions for such expenditure on the basis of estimated failure ratio of the compressors happened in past and the percentage of compressor failure or a subject year was determined as ratio of number of compressors turned defective in a year to cumulative population of number of compressors used in immediate previous 5 years. It was further been explained that after obtaining failure ratio, same was multiplied with estimated cost of replacement of a compressor for next 5 years and the summation of such estimated cost of replacement of next 5 years each model wise was considered as the rate of 5 year warranty provision for such model for the relevant year. The FAA accepted that the assessee may have been consistently following the method of provision of warranty, but in absence of any supporting evidence for the current year, the claim could not be allowed. The scientific formula on the basis of which the provision for five year warranty had been made after taking into account the compressor failure ratio, was not given by the assessee. Thus, out of the disallowance of Rs. 7,18,64,900/- made by AO in original assessment order for sales commission and warranty expenses, the disallowance in respect of five year warranty expenses of Rs. 28,29,848/- was upheld and the remaining disallowance in respect of warranty expenses was directed to be deleted.
On appeal, the ITAT held that,
Whether provision for warranty charges based on scientific estimation after considering past experience of defective unit replacements, are allowable deduction available to a manufacturer - YES: ITAT
++ there is no dispute on the first and foremost legal principle settled by Apex Court in "Rotor Control" case, wherein it was held that such a warranty provision based on scientific estimation for quantification keeping in mind the relevant business sales vis-à-vis the product manufactured and sold; is allowable as a deduction. The Revenue's case is that although their lordships have hold such a warranty provision to be allowable in specified circumstances, the assessee has failed to place on record the relevant material supportive of its claim on facts. It is admitted that the assessee is a manufacturer of air conditioner cooling units. It appears to have provided for two kinds of warranties i.e. five years and one year. Case file suggests that the latter warranty represents service charges paid to dealers which has gone unrebutted from Revenue side. Former five year warranty provision appears to be cost of compressor replacement in the event of the same being turning out to be a defective one. The assessee's computation seems to be based on some products of model-wise number of units sold and per unit rate of five year warranty provision for the impugned assessment years. Coupled with this, it has also filed a detailed compilation chart of the impugned warranty provisions as well as sales figures of finished goods from financial year 2004-05 to 2010-11 relevant amounts involved in two types of warranties, corresponding consistent percentage and corresponding sales of finished goods, movement of the former warranty provision, its opening balance, relevant provisions created during the years, utilized sums therein, reversal sums, closing balance, breakup of the amount utilized assessment year-wise alongwith the particulars in question;
++ the DR fails to controvert the fact that the assessee has been following consistent method in creating similar warranty provision in subsequent assessment years as well. Relevant assessment order in such a case for assessment year 2011-12 indicates that there is no such disallowance made at the Revenue's behest. The assessee is assessed at the same rate throughout. Therefore, it is crystal clear that the assessee has satisfied the relevant conditions for claiming the impugned warranty provisions as deduction as envisaged in Apex Court's decision. Thus, this Tribunal accepts assessee's substantive ground seeking to claim the impugned warranty provision qua both five years and one year (supra) as computed on scientific basis as per its forgoing experience.
Assessee's appeal allowed
