CASE LAWS

2018-TIOL-795-HC-MAD-IT

ALFA INVESTMENTS Vs ITO : MADRAS HIGH COURT (Dated: April 10, 2018)

Income Tax - Writ - Sections 68, 143(3), 147 & 148

Keywords - Introduction of capital - Re-opening of assessment

THE assessee, a partnership firm engaged in commercial and trading activities including investing, acquiring and holding shares, stocks, assets and other securities, filed returns for the relevant AY, declaring nil income. The assessment for the relevant AY was completed, wherein the AO made addition of Rs 108,35,05,000/- to the assessee's income on account of unexplained cash credit, and determined the assessee's income. On appeal, the CIT(A) gave relief to the assessee, on grounds that such amount was introduced as capital over the course of two earlier FYs & so the AO could take cognizance of the matter only after initiating proper proceedings.

Thereafter, the assessments for the two AYs in question, were reopened and reasons were furnished. Considering the assessee's submission, speaking orders for both AYs were passed. Both orders were challenged in two writ petitions. Before the single Judge, the assessee claimed that the CIT(A) had not given directions to re-open the assessment, and that such re-opening of assessment was unsanctioned. The single Judge dismissed the writs & left it open to the AO to complete the assessment.

On hearing the writ, the High Court held that,

Whether re-opening of assessment based on sufficient reasons, is justified even though not explicitly directed by the CIT(A) - YES: HC

++ the assessee succeeded in the appeal by contending that there was no fresh capital introduced during the AY 2012-2013. It was the contention of the assessee before the CIT(A) that the entire amount of capital of Rs.108.35 crores was actually introduced into the books of the firm during the earlier two FYs 2009- 2010 and 2010-2011. The assessee, by demonstrating that the entire amount of capital referred to was introduced during the two earlier FYs, succeeded in the appeal; the assessee has no case that a return of income was filed for the AYs 2010-11 and 2011-12 explaining the capital of Rs.108,35,05,000/-; the assessee is now resisting the proceedings for re-opening the assessments on the ground that proper reasons were not given. It is true that specific direction was not given by the CIT(A) for reopening the assessment for the AYs 2010-11 and 2011-12. However, the reasons given by the Income Tax Officer would be sufficient for re-opening the assessment;

++ the Income Tax Officer in the order dealing with the objections indicating the reasons, justified the proceedings for reopening the assessment. The Income Tax Officer made it clear that assessee did not file its returns of income for the AYs 2010-2011 and 2011-2012. Therefore, there was no opportunity to verify the transactions claimed to have been made in those years. It was further indicated in the said order that the assessee was not maintaining any bank account and it failed to furnish any other proof to establish the link between the capital introduced and its withdrawals for the purpose of investments. The Income Tax Officer would be in a position to consider the introduction of capital for the relevant year only in case returns were filed by the appellant. The assessee having failed to file its return of income for the AYs 2010-11 and 2011-12 cannot be heard to say that the Income Tax Officer was not correct in re-opening the assessment when it was made known at a later point of time that capital was introduced in the course of the earlier two financial years. The reasons given by the Income Tax Officer would satisfy the statutory requirements for re-opening the assessment. Hence the assessee has not made a case to interfere in the proceedings initiated by the Income Tax Officer for re- opening the assessment for the AYs 2010-11 and 2011- 12.

Assessee's writ petition dismissed

2018-TIOL-794-HC-DEL-IT

ORIENTAL BANK OF COMMERCE Vs Addl.CIT : DELHI HIGH COURT (Dated: April 17, 2018)

Income Tax - Acquisition of property - Copyright license - Depreciation rate - Enduring advantage - Permanent right & Software business.

The assessee bank, had returned income for the relevant AY. In the course of the assessment proceeding, the AO noted that the assessee had incurred expenditure towards acquiring various categories of software. Accordingly, the AO concluded that since the said expenses fell in the capital stream, hence, they could not be allowed. Therefore, for each AY, separate amounts were disallowed. On appeal, the CIT(A) upheld the AO's determination. On further appeal, the Tribunal held that the said software expenses were in the nature of capital expenditure.

On appeal, the High Court held that,

Whether an expenditure incurred by a bank on account of application software specific to its existing activities can be treated as capital in nature - NO: HC

++ this Court is cognizant at the very outset of the fact that the nature of the articles acquired are licenses. They do not confer any enduring right – much less a permanent right as in the nature of acquisition of property. These copyright licenses are used for the duration, spelt out by the licensor/intellectual property owner. Furthermore and importantly, the bank's objective is not to carry on software business, rather it uses the computer software as a tool to maximise its performance and streamline its efficiency. In Asahi India Safety Glass Ltd., the Division Bench of this Court after considering the previous judgments including Alembic Chemicals Works enunciated the correct test and principles;

++ the mere circumstance that the depreciation rate is spelt out in the Schedule to the Act in our opinion is not conclusive as to the nature of the expenditure and whether it resulted an enduring advantage to a particular assessee. It is nobody's case that assessee is dealing with computer softwares or is in the business of any related services. Rather it uses specific customized software, which is specific to its banking activities. But for the use of such software, the nature of expenditure otherwise incurred for streamlining its functions i.e. towards fee payable to the consultants for systems and employment of special professionals to carry on the tasks that the software in fact performs, would have fallen undoubtedly in the revenue stream. Taking these into account and the further circumstance that the software itself would have run its course or life span as it were, given that the earlier AY in question is 2008-09, we are of the opinion that the question of law framed is to be answered in favour of the assessee.

2018-TIOL-793-HC-MUM-IT + Case Story

Pr.CIT Vs GRASIM INDUSTRIES LTD : BOMBAY HIGH COURT (Dated: April 18, 2018)

Income Tax - Reconsideration of issue - Sale tax exemption benefit - Technical know how expenditure -Wrong information with Counsel.

The assessee Company filed its return for relevant AY. During assessment AO held that technical knowhow being an intangible asset, the fee for obtaining the same was a capital expenditure. The assessee claimed sale tax exemption benefit, which was disallowed. The matter on appeal reached before the Tribunal. The Tribunal treated the technical assistance fees as revenue expenditure and restored the issue of taxability of the sale tax exemption benefit to the file of the AO for deciding afresh. On appeal, the High Court inquired the Revenue regarding the status of the matter remanded back for reconsideration. The counsel for the Revenue, on instructions from the AO informed that no effect had been given to the impugned order of the Tribunal and the matter was still pending with the AO.

The assessee disputed this stand of Revenue and submitted a copy of the order passed by the AO giving effect to the impugned order of Tribunal on the issue remanded. The Court enquired from the counsel of the Revenue as to why he shared wrong information about the status of issues remanded. He replied that AO had specifically informed him that no order had been passed consequent to the impugned order. The court directed the AO to file an affidavit pointing out the circumstances which led to giving incorrect fact to the Counsel leading to unnecessary waste of time and effort. The Joint CIT submitted affidavit and pointed out that there was a misunderstanding on the part of its Counsel on instructions received from the AO. It was further submitted that the Revenue would be more careful in respect of statements made in the Court. ASG requested that this matter should be treated as closed.

After hearing parties, the High Court held that,

Whether if the counsel for the Revenue continues to argue on certain issues without taking proper Instructions from Revenue which has already closed the case, amounts to harassment of taxpayer - YES: HC

Whether CBDT is required to prescribe SOP for AOs assisting counsels and also training programmes for counsels for ensure fair play - YES: HC

++ some Counsel for the Revenue, time and again argue matters only for the sake of arguing even when the issue stands concluded or without taking proper instructions in respect of facts as existing i.e. post the passing of the impugned order of the Tribunal. If this conduct is permitted at the bar, then it would become a practice for an Advocate to make a statement, on instructions and thereafter, when the events do not turn out as desired by litigants, the Advocate will turn around and state that he had misunderstood his client. This cannot be a norm. Therefore, the message now needs to be sent, loud and clear that the Advocate must be more careful whilst making statement on instructions, as the same are accepted by the Court, without question;

++ in present case, the Counsel is appearing for the State. The responsibility of an Advocate appearing for the State is much greater to ensure that justice is done and common people/ citizens are not harassed. This conduct on the part of the Revenue's Counsel of not taking proper instructions and arguing matters as they perceive a debatable point involved, does lead to undue harassment of the tax payers;

++ many of an Advocates are fresh entrants to the bar and in due course, learn the standard expected of an Advocate. However, many of them are refusing to learn. Therefore, the CBDT could consider holding of a training programme, where leading Advocates could address the domain expert on the ethics, obligation and standard expected of Advocates before they start representing the State. This is only a suggestion and it is entirely for the CBDT to take appropriate steps to ensure that the Revenue is properly represented to serve the greater cause of justice and fair play;

++ the CBDT should lay down a standard procedure in respect of manner in which the Departmental Officer/ AO assist the Counsel for the Revenue while promoting/ protecting Revenue's cause. It has been found in most cases, atleast during the final hearing, Revenue's Counsel were left to fend for themselves and that even papers at times were borrowed from the other side or taken from the Court Records. If the mindset of the Revenue Officer changes and they attend to the case diligently till it is disposed of, only then would it be ensured that the State is properly represented. ASG and the Registry was directed to forward a copy of order to the Chairman, CBDT. It was expected that the ASG to interact and advice the CBDT in respect of the issues referred to enable proper representation by the Advocates on behalf of the Revenue.

Revenue's Appeal dismissed

2018-TIOL-1355-CESTAT-MAD

SIX SIGMA SOFT SOLUTIONS PVT LTD Vs CST : CHENNAI CESTAT (Dated : March 06 , 2018)

ST - Appellants were providing technically qualified employees / manpower to IT companies for development of software projects -department took the view that this activity would come within the fold of "Manpower Recruitment and Supply Agency Services" – SCNs issued – demands confirmed, penalties imposed – appeal to CESTAT.

HELD: From the various agreements, it is abundantly clear that appellant was involved only in supply of manpower to TCS, Infosys etc. – the facts are very much pari materia with the facts of Future Focus Infotech India (P) Ltd. - 2010-TIOL-835-CESTAT-MAD wherein the Tribunal has clearly laid down that appellants therein had undertaken only supply of skilled manpower – no new facts or evidence found requiring a deviation from the ratio laid down by the Tribunal in the above decision -accordingly, there is no infirmity in the impugned order concluding that the activity of the appellant would fall within the fold of "Manpower Recruitment or Supply Agency Service" – there is merit in the appellent's contention that the adjudicating authority has not considered submissions on non-taxability of such services when provided by them to clients outside India and to SEZ units – once it is confirmed that recipient unit is a SEZ unit and other procedural requirements and conditions of the notification no.4/2004-ST have been fulfilled, notification benefit to taxable value involved in such services should not be denied for flimsy reasons - the facts came to light only when the department conducted scrutiny of the annual reports, possibly during audit -in such circumstances, the department is fully justified in invoking the extended period of limitation of five years – merit found in the appellant's submission that while the demand has been made from 16.6.2005 - for the period 1.4.2005 to 15.6.2005, the demand is erroneous since the impugned Manpower Recruitment of Supply Agency Services was made taxable only w.e.f. 16.6.2005 – merit also found in the plea for grant of cum tax benefit as there is no allegation that appellants have collected tax from their clients – on the issue of penalty, benefit of doubt can be given to the appellant that they were under bonafide belief that no tax is required to be deposited by them on the services provided: CESTAT [para 6.1, 6.2, 6.3, 6.4, 6.6, 6.7, 6.8]

In sum, it is held and ordered as under :

(a) The services provided by the appellant fall within the category of Manpower Recruitment or Supply Agency Service - the order of the adjudicating authority on this score is upheld.

(b) The penalties imposed under sections 76 & 78 of the Finance Act, 1994 are set aside.

(c) The matter is remanded to the adjudicating authority for the following purposes:

(i) to recalculate the tax liability from 16.6.2005 since the tax liability on Manpower Recruitment or Supply Agency Services came into effect only from that date;

(ii) to reconsider the appellant's submissions in respect of the services provided outside India and accord benefit under the provisions of Export of Service Rules as admissible;

(iii) to reconsider their claim that they have provided services to SEZ and extend benefit under notification no.4/2004-ST as admissible;

(iv) the final tax liability shall be recalculated by the adjudicating authority as directed at sl.no.(i) to (iii) above and after extending cum-tax-benefit in such recalculation.

Appeal is partly allowed on above terms[para 7]

Appeal partly allowed

2018-TIOL-1356-CESTAT-MAD

CS NATARAJAN Vs CST : CHENNAI CESTAT (Dated : March 16 , 2018)

ST - Appellants are engaged in running a Spoken English Language Coaching Center along with personality development in the name of "ZEAL" - department was of the view that the said activity would fall under 'Commercial Coaching or Training Service' and the fees collected from the students / trainees are subject to levy of ST - SCNs issued – demands confirmed, penalties imposed – appeal to CESTAT.

HELD: Personality development course conducted by the appellantsisintended to develop overall skills of the students in order to facilitate them to obtain employment -as per the definition of "Vocational Training Course", if it intends to help the candidates / trainee to obtain self-employment directly or under the employer, would qualify as 'vocational training' – the Tribunal, in the case of Mariya Computer Systems (P) Ltd. - 2017-TIOL-864-CESTAT-DEL, as well as in the case of Col's Calibre - 2018-TIOL-1211-CESTAT-MAD, has analyzed the issue and held that such course would fall under the category of 'vocational training' and would be eligible for exemption - following the decision in the case of Mariya Computer Systems, the appellantsare eligible for exemption and the demands made against the appellants cannot be sustained -impugned orders set aside and appeals allowed : CESTAT [para 6, 7]

Appeals allowed