CASE LAWS
2018-TIOL-173-SC-IT + Case Story
COMMISSIONER Vs MAHINDRA AND MAHINDRA LTD: SUPREME COURT OF INDIA (Dated: April 24, 2018)
Income Tax - Sections 28(iv), 36(1)(iii) & 41(1).
Keywords: Amortisation benefit - 'Benefit or perquisite' - Cash receipt - Cessation of liability - CIF - loan waiver - Right of waiver - Trading liability vs Other liability - Promissory note - Waiver of loan.
The Assessee-company is a leading automobile company. The assessee decided to expand its jeep product line by including FC-150 and FC-170 models and for that purpose, it entered into an agreement with Kaiser Jeep Corporation (KJC) based in America. As per the agreement, the KJC agreed to sell the die, welding equipments and die moulds to the assessee. The final price of the tooling and other equipments was agreed at $6,50,000/- including cost, insurance and freight (CIF). Accordingly, the assessee took all the requisite approvals and the equipments were supplied by the KJC. For the procurement of the said toolings and other equipments, the KJC also agreed to provide loan to the assessee at the rate of 6% interest repayable after 10 years in installments and for that purpose, the assessee got the requisite approval from the RBI.
In the meantime, one American Motor Corporation (AMC) had taken over the KJC and also agreed to waive the principal amount of loan advanced by the KJC to the assessee and to cancel the promissory notes as and when they got matured. Thereafter, the assessee filed its return and disclosed around Rs. 57 lakhs as cessation of its liability towards the AMC. However, after perusal of the return, the AO concluded that with the waiver of the loan amount, the credit represented income and not a liability. Accordingly, the AO held that such sum was taxable u/s 28. Being dissatisfied, the assessee preferred an appeal before the CIT(A), which dismissed the appeal and upheld the decision of the AO. On further appeal by the assessee, the Tribunal decided the matter in favour of the assessee. Thereafter, on Revenue's appeal, the High Court also confirmed the decision of the Tribunal.
On hearing the matter, the Apex Court held that,
Whether loan waiver granted by overseas supplier of capital assets is waiver of trading liability and it falls within the purview of Sec 41(1) - NO: SC
Whether the benefit in the form of cash receipt, arising on account of loan waiver by the creditor, is to be taxed u/s 28 (iv), even though such provisions bring under sweep only the benefits other than in the form of money - NO: SC
++ it is a well-settled principle that creditor or his successor may exercise their "Right of Waiver" unilaterally to absolve the debtor from his liability to repay. After such exercise, the debtor is deemed to be absolved from the liability of repayment of loan subject to the conditions of waiver. The waiver may be a part waiver i.e., waiver of part of the principal or interest repayable, or a complete waiver of both the loan as well as interest amounts. Hence, waiver of loan by the creditor results in the debtor having extra cash in his hand. It is receipt in the hands of the debtor/assessee. The short but cogent issue in the instant case arises whether waiver of loan by the creditor is taxable as a perquisite under Section 28 (iv) of the IT Act or taxable as a remission of liability under Section 41 (1) of the IT Act;
++ for the applicability of the provision of section 28 (iv), the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money. In the present case, it is a matter of record that the amount of Rs. 57,74,064/- is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of Section 28 (iv) of the IT Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case. Hence, in no circumstances, it can be said that the amount of Rs 57,74,064/- can be taxed under the provisions of Section 28 (iv) of the IT Act;
++ it is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under Section 41 of the IT Act. The objective behind this Section is simple. It is made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability. It is undisputed fact that the assessee had been paying interest at 6 % per annum to the KJC as per the contract but the assessee never claimed deduction for payment of interest under Section 36 (1) (iii) of the IT Act. In the case at hand, CIT (A) relied upon Section 41 (1) of the IT Act and held that the assessee had received amortization benefit. Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time, hence, it is nothing else than depreciation. Depreciation is a reduction in the value of an asset over time, in particular, to wear and tear. Therefore, the deduction claimed by the assessee in previous assessment years was due to the deprecation of the machine and not on the interest paid by it;
++ the purchase effected from the Kaiser Jeep Corporation is in respect of plant, machinery and tooling equipments which are capital assets of the assessee. It is important to note that the said purchase amount had not been debited to the trading account or to the profit or loss account in any of the assessment years. There is difference between 'trading liability' and 'other liability'. Section 41 (1) of the IT Act particularly deals with the remission of trading liability. Whereas in the instant case, waiver of loan amounts to cessation of liability other than trading liability. Hence, there is no force in the argument of the Revenue that the case of the assessee would fall under Section 41 (1) of the IT Act.
Revenue's appeal dismissed
2018-TIOL-172-SC-IT + Case Story
CIT Vs CALCUTTA EXPORT COMPANY: SUPREME COURT OF INDIA (Dated: April 24, 2018)
Income Tax - Sections 40(a)(ia) & 139(1).
Keywords: Export commission charges - Finance Acts, 2008 & 2010 - Genuine hardship - Retrospective effect - TDS.
The assessee firm, involved in manufacturing and exporting casting materials, had returned income for the relevant AY. During the scrutiny assessment, the AO noted that the assessee had paid export commission charges to M/s. Steel Crackers Pvt. Ltd. It was also noted that the assessee had deposited TDS on the said commission charges on 01.08.2005. However, the AO stated that in order to avail the benefit provided u/s 40(a)(ia), the assessee was required to deposit the TDS on such commission on 07.07.2004, 07.09.2004 and 07.10.2004 before the end of the previous year i.e. 31.03.2005. Accordingly, the AO held that the assessee could not claim the deduction of the commission amount from its total income and hence, disallowed the said export commission charges. Further, the AO revised the assessee's total income and directed to pay the additional tax amount. On assessee's appeal, the FAA held that the said commission charges were eligible for deduction under the said AY.
On further proceedings, both Tribunal as well as the High Court dismissed the Revenue's appeal.
On appeal, the Apex Court held that,
Whether the legislative intent behind the provisions of Sec 40(a)(ia) is to ensure tax compliance and not to punish taxpayer - YES: SC
Whether amendment made to Sec 40(a)(ia) vide Finance Act, 2010 is curative in nature and thus provides relief to taxpayers depositing TDS deducted before filing of return - YES: SC
++ the amended provision of Sec. 40(a)(ia) came with a purpose to ensure tax compliance. The fact that the intention of the legislature was not to punish the assessee is further reflected from a bare reading of the provisions of Sec. 40(a)(ia). It only results in shifting of the year in which the expenditure can be claimed as deduction. In a case where the TDS was duly deposited with the government within the prescribed time, the said amount can be claimed as a deduction from the income in the previous year in which the TDS was deducted. However, when the amount deducted in the form of TDS was deposited with the government after the expiry of period allowed for such deposit then the deductions can be claimed for such deposited TDS amount only in the previous year in which such payment was made to the government;
++ however, it has caused some genuine and apparent hardship to the assesses especially in respect of tax deducted at source in the last month of the previous year, the due date for payment of which as per the time specified in Sec. 200(1) was only on 7th of April in the next year. The assessee in such case, thus, had a period of only seven days to pay the TDS from the expenditure incurred in the month of March so as to avoid disallowance of the said expenditure u/s 40(a)(ia). With a view to mitigate this hardship, Sec. 40(a)(ia) was amended by the Finance Act, 2008 which provided that no disallowance u/s 40(a)(ia) shall be made in respect of the expenditure incurred in the month of March if the TDS on such expenditure has been paid before the due date of filing of the return. It is important to mention here that the amendment was given retrospective operation from the date of 01.04.2005 i.e., from the very date of substitution of the provision;
++ the amendment though has addressed the concerns of the assesses who have deducted TDS during the last month of the previous year but with regard to the taxpayers who have deducted TDS in the remaining eleven months of the previous year, was still resulting into unintended consequences and causing grave and genuine hardships to the assessees who had substantially complied with the relevant TDS provisions by deducting the TDS and by paying the same to the credit of the Government before the due date of filing of their returns u/s 139(1). The disability to claim deductions on account of such lately credited sum of TDS in assessment of the previous year in which it was deducted, was detrimental to the small traders who may not be in a position to bear the burden of such disallowance in the present AY;
++ in order to remedy this position and to remove hardships which were being caused to the assessees who have deducted TDS in the remaining eleven months of the previous year, amendments have been made in the provisions of Sec. 40(a)(ia) by the Finance Act, 2010. The amendment provide that all TDS made during the previous year can be deposited with the Government by the due date of filing the return of income. The idea was to allow additional time to the deductors to deposit the TDS so made;
++ TDS results in collection of tax and the deductor discharges dual responsibility of collection of tax and its deposition to the government. Strict compliance of Sec. 40(a)(ia) may be justified keeping in view the legislative object and purpose behind the provision but a provision of such nature, the purpose of which is to ensure tax compliance and not to punish the tax payer, should not be allowed to be converted into an iron rod provision which metes out stern punishment and results in malevolent results, disproportionate to the offending act and aim of the legislation;
++ legislature can and do experiment and intervene from time to time when they feel and notice that the existing provision is causing and creating unintended and excessive hardships to citizens and subject or have resulted in great inconvenience and uncomfortable results. Obedience to law is mandatory and has to be enforced but the magnitude of punishment must not be disproportionate by what is required and necessary. The consequences and the injury caused, if disproportionate do and can result in amendments which have the effect of streamlining and correcting anomalies;
++ a proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the Section, is required to be read into the Section to give the Section a reasonable interpretation and requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the Section as a whole. The purpose of the amendment made by the Finance Act, 2010 is to solve the anomalies that the insertion of Sec. 40(a)(ia) was causing to the bona fide tax payer. The amendment, even if not given operation retrospectively, may not materially be of consequence to the Revenue when the tax rates are stable and uniform or in cases of big assessees having substantial turnover and equally huge expenses and necessary cushion to absorb the effect;
++ however, marginal and medium taxpayers, who work at low gross product rate and when expenditure which becomes subject matter of an order u/s 40(a)(ia) is substantial, can suffer severe adverse consequences if the amendment made in 2010 is not given retrospective operation i.e., from the date of substitution of the provision. Transferring or shifting expenses to a subsequent year, in such cases, will not wipe off the adverse effect and the financial stress. Such could not be the intention of the legislature. Hence, the amendment made by the Finance Act, 2010 being curative in nature required to be given retrospective operation i.e., from the date of insertion of the said provision;
++ in the case of Allied Motors (P) Limited, this Court has held that the new proviso to Sec. 43B should be given retrospective effect from the inception on the ground that the proviso was added to remedy unintended consequences and supply an obvious omission. The proviso ensured reasonable interpretation and retrospective effect would serve the object behind the enactment. The said view has consistently been followed by this Court in the various cases. Hence, we are of the view that the amended provision of Sec. 40(a)(ia) should be interpreted liberally and equitable and applies retrospectively from the date when Sec. 40(a)(ia) was inserted i.e., w.e.f. AY 2005-2006 so that an assessee should not suffer unintended and deleterious consequences beyond what the object and purpose of the provision mandates;
++ as the developments with regard to the Section recorded shows that the amendment was curative in nature, it should be given retrospective operation as if the amended provision existed even at the time of its insertion. Since the assessee has filed its returns on 01.08.2005 i.e., in accordance with the due date under the provisions of Section 139 hence, is allowed to claim the benefit of the amendment made by Finance Act, 2010 to the provisions of Sec. 40(a)(ia). We are of the view that judgment of the High Court does not call for any interference and, hence, the appeals are accordingly dismissed. Parties to bear cost on their own.
Revenue's appeal dismissed
2018-TIOL-171-SC-IT + Case Story
CIT Vs S AJIT KUMAR: SUPREME COURT OF INDIA (Dated: May 2, 2018)
Income tax - Sections 132A, 133A, 153A, 158BB, 158BC & 158BH.
Keywords: Block assessment - Survey - undisclosed income
Whether materials collected during Survey u/s 133A, conducted at the assessee's premises simultaneously with Search Operation, can be utilised for block assessment u/s 158BB r/w Sec 158BH - YES: SC
The Revenue conducted a Search in the premises of the assessee on 17.07.2002 which was concluded on 21.08.2002. On the same date, there was a survey in the premises of Elegant Constructions and Interiors Ltd. ( ‘M/s. ECIL’) - the builder and interior decorator who constructed and decorated the house of the assessee at Valmiki Nagar. The Survey revealed that the assessee had engaged the contractor for construction of the house. At the same time, the survey also led to unearthing of the fact of the assessee had paid Rs 95,16,000/- to M/s ECIL in cash and the same was not accounted for.
The Assessing Officer completed the block assessment and held that the said amount was liable to tax as undisclosed income of the block period. The CIT(A) upheld the AO's order. The Tribunal set aside the CIT(A) order. The HC also rejected the appeal of the Revenue.
On appeal, the Apex Court held that,
++ it is a cardinal principle of law that in order to add any income in the block assessment, evidence must be found in the course of the search u/s 132 of the IT Act or in any proceedings simultaneously conducted in the premises of the assessee, relatives and/or persons who are connected with the assessee and are having transaction/dealings with such assessee. In the present case, the moot question is whether the fact of cash payment of Rs 95.16 lakhs can be added under the head of the undisclosed income of the assessee in block assessment;
++ in the instant case, the office and residential premises of the assessee searched on 17.07.2002 and finally concluded on 21.08.2002. During the course of search, certain evidence were found which showed that the assessee had indulged in understatement of his real income relating to the block period from 01.04.1996 to 17.07.2002. Consequently, a notice dated 25.02.2003, under Section 158BC of the IT Act, was issued to the assessee and he was asked to file return for the block period. In reply to such notice, the assessee filed return on 11.08.2003, admitting the undisclosed income as "NIL";
++ the cost of investment was disclosed to the Revenue in the course of return filed by the assessee. The assessee also disclosed the detail of transaction between the assessee and M/s ECIL in the assessment year 2001-2002. However, he had not disclosed the payment of Rs. 95,16,000/- in cash made to M/s. ECIL.
++ the method of calculating the undisclosed income of the block period is provided under Section 158BB of the IT Act. On a perusal of the relevant provision, it is evident that for the purpose of calculating the undisclosed income of the block period, it can be calculated only on the basis of evidence found as a result of search or requisition of books of accounts or other documents and such other materials or information as are available with the Assessing Officer and relatable to such evidence. Section 158BB has prescribed the boundary which has to be followed. No departure from this provision is allowed otherwise it may cause prejudice to the assessee. Needless to say that it is the cannon of tax law that it should be interpreted strictly;
++ however, Section 158BH of the IT Act has made all other provisions of the IT Act applicable to assessments made under Chapter XIVB except otherwise provided under this Chapter;
++ the power of survey has been provided under Section 133A of the IT Act. Therefore, any material or evidence found/collected in a Survey which has been simultaneously made at the premises of a connected person can be utilized while making the Block Assessment in respect of an assessee under Section 158BB read with Section 158 BH of the IT Act. The same would fall under the words "and such other materials or information as are available with the Assessing Officer and relatable to such evidence" occurring in Section158 BB of the Act. In the present case, the Assessing Officer was justified in taking the adverse material collected or found during the survey or any other method while making the Block Assessment;
++ we are of the considered opinion that the decisions relied upon by senior counsel for the assessee do not lay down the correct law;
++ the orders passed by the Assessing Officer making the Block Assessment are restored. However, the parties shall bear their own cost.
Revenue's appeal allowed
