CASE LAWS
2018-TIOL-843-HC-AHM-IT + Case Story
KIRAN RAVJIBHAI VASANI Vs ACIT: GUJARAT HIGH COURT (Dated: April 2, 2018)
Income Tax - Writ - Sections 143(1) & 147.
Keywords: Cash voucher - Escaped assessment - Finally established fact - Reasonable belief - Sale of land & Unaccounted cash transaction.
The assessee an individual, had returned income for the relevant AY which was accepted without scrutiny u/s 143(1). However, a search operation u/s 132 was conducted in the premises of Venus Group of Ahmedabad on 10.03.2015 and accordingly, various incriminating documents were seized. On analysis of such seized documents, it was found that unaccounted cash transactions were first recorded on cash vouchers and based on them the entries were recorded on the day cash book. The documents also indicated that entries were made to record all unaccounted cash transactions of Venus Group and Vaswani family member. On the basis of the seized material, it was found that the assessee was one of the parties to the transactions in several land properties with Venus Group during the FY 2009-10 relevant to AY 2010-11. Further, it was also found that the transactions of land at various survey in which the assessee was a co-purchaser with 10% share involved unaccounted cash and assessee's proportionate share in this unaccounted cash was above the document price. Therefore, the AO believed that the invested amount was not recorded in the assessee's regular books and was out of his undisclosed income which was not brought to tax. Subsequently, to reopen such assessment, the AO issued SCN. Nevetheless, the assessee raised objections to the reopening notice however, the same were rejected by the AO.
Having heard the parties, the High Court held that,
Whether failure to take steps u/s 143(3) will render the AO powerless to initiate reassessment proceedings even when intimation u/s 143(1) has already been issued - NO: HC
Whether the expression “reasonable belief” can be read with the AO having finally ascertained the fact by any legal evidence - NO: HC
++ at the outset, we may record the settled principles of law which would have some bearing in the present set of cases. Firstly, in a case where the return filed by the assessee is accepted u/s 143(1) without scrutiny, since the AO had not formed any opinion, principle of change of opinion would not apply. This has been made sufficiently clear in the case of Rajesh Jhaveri Stock Brokers Private Limited. These principles were reiterated by the Supreme Court in the latter judgment in case of Zuari Estate Development & Investment Company Limited. Despite this position, even in a case where the return of the assessee is accepted without scrutiny u/s 143(1), in order to reopen the assessment, the AO must have reason to believe that income chargeable to tax has escaped assessment. This issue has been discussed at considerable length by this Court in the case of Inductotherm (India) Private Limited;
++ the requirement, thus for reopening of assessment, is “reasonable belief”. This expression is not synonymous with the AO having finally ascertained the fact by any legal evidence or conclusion. In this context, the Supreme Court in the case of Rajesh Jhaveri Stock Brokers Private Limited had observed that "... Sec. 147 authorizes and permits the AO to assess or reassess income chargeable to tax if he has reason to believe that income for any AY has escaped assessment. The word reason in the phrase reason to believe would mean cause or justification ... The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The function of the AO is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers ..." ;
++ in the case of Raymond Woollen Mills Limited v. ITO & Ors., the Apex Court has held that "... We have only to see whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage ..." Lastly, it is well settled that the validity of the notice of reopening would be judged on the basis of reasons recorded by the AO for issuance of such notice. It would not be permissible for the AO to improve upon such reasons or to rely upon some extraneous material to support his action. Reference in this respect can be made to the decision of this Court in the case of Aayojan Developers;
++ from the reasons recorded by the AO, we gather that various premises of Venus Group were subjected to search operations conducted on 10th March 2015. During such search operations, various incriminating documents were seized. One of the premises searched was terrace of one Crystal Archade, a building situated on C.G Road, Ahmedabad. Number of documents relating to unaccounted cash transactions were seized from such premises. These seized documents were analyzed and co-related. It was found that unaccounted cash transactions were first recorded in the cash vouchers. On the basis of such cash vouchers, entries were recorded in the day cash-book. Further, photocopies of documents and loose papers recovered during search operations were forwarded to the AO which contained Summary-Sheet; Daily Cash-book entries. According to the AO, analyzing all these documents and by co-relating them, it was found that unaccounted cash transactions were first recorded in the cash vouchers. On the basis of recording made in these cash vouchers, entries were recorded in the day cash-book;
++ continuity of recording of unaccounted cash transactions indicated that the entries were made to record all unaccounted cash transactions of Venus Group and Vaswani family members (who were part of the group). The cash book was written in coded form for names, amount, dates. It was found that there were huge cash transactions in the land sales made by the said Venus Group. To avoid detection, the dates were ante-dated by ten years and figures in cash were recorded 1/100th of the actual sum. The reasons further recorded that the assessees were the purchasers of four parcels of land of village-Sargasan sold by the Venus Group, bearing Survey No. 428/16; 430/3; 430/B and 430/J. The total sale consideration, as per the registered documents for these four land transactions, comes to Rs. 75.77 lacs (rounded off);
++ as per the cash-book and the summary sheet, a total of Rs. 33.24 Crores (rounded off) was received towards sale of Tarapur and Sargasan lands by the said Venus Group for sale of a total area of 84,732 sq meters of land. The assessees had purchased 21,651 sq meters out of the said land area which represented approx. 25.55% of the total land sold by Venus Group during the said period. The AO for computation, therefore, apportioned proportionate amount of cash dealings;
++ the summary sheet which was found during the search operation shows a total amount of Rs. 33,24,89,500/- (other than EC) and an amount of Rs. 8,21,105/- (by EC). The total of these two figures is also mentioned in the summary sheet as Rs. 41,46,000/-. The reasons recorded point out that the cash transactions are recorded in the name of different entities in the seized cash vouchers. Amount which is legally paid and which has been paid through banking channels, only such amount is mentioned in the sale deeds. This amount paid through bank channels and which is reflected in the total sale consideration in the sale deeds is also entered with a noting “against EC” in the seized papers. The Revenue would thus point out that the summary-sheet when indicated a figure of Rs. 8,21,105/- against EC, it reflected the total sale consideration, of course multiplied by 100, since all the figures are supposedly recorded 1/100th of the actual sum, which is received through banking channels towards the sale of lands and which is duly reflected in the sale deeds. According to the Revenue, thus, the total sale transactions reflected for sale of all these parcels of land would comes to Rs. 8,21,10,500/- (approx.) which matches with the total sale consideration under different sale deeds. In this context, Revenue would point out that the remaining figure of Rs. 33,24,895/- (other than EC) found in the summary-sheet reflects sale consideration of Rs. 33,34,89,500/- received by Venus Group for sale of different lands at Sargasan and Tarapur during the same period and which was not accounted;
++ the AO had analyzed the voluminous material collected by the Revenue during the search operations in connection with Venus Group. This material prima facie suggested huge cash transactions in connection with sale of lands against the total declared sale consideration of Rs. 8.21 Crores (rounded off). The material prima facie suggests that the total cash transactions of Rs. 33.24 Crores had taken place. The Revenue argues that the entires in Summary-sheet and Vouchers carried dates which were deliberately put 10 years backward to disguise and the figures were recorded by deleting two zeroes from the actual to avoid detection and co-relation;
++ at this stage, when we are concerned with re-opening of the assessment that too in a case where the original return filed by the assessee was accepted without scrutiny, the material at the command of the AO is sufficient to permit the process of reopening. As held by the Supreme Court in the case of Rajesh Jhaveri Stock Brokers Private Limited and Raymond Woolen Mills Limited, reason to believe cannot be equated with finally established fact that the income chargeable to tax having escaped assessment additions will invariably be made and further, sufficiency of reasons enabling the AO to form such a belief would not be gone into.
Assessee's petition dismissed
2018-TIOL-844-HC-AHM-IT
PR CIT Vs SUN PHARMACEUTICAL INDUSTRIES LTD: GUJARAT HIGH COURT (Dated: April 23, 2018)
Income tax - Sections 14A, 37 & Rule 8D
Keywords - contribution to partnership firm - forward contracts - forex rate gain - hedging contract - investment fluctuation - revenue receipts
A) The Assessee company, during the relevant year, incurred expenditure for and on behalf of a partnership firm namely M/s. Sun Pharmaceutical Industries, of which it was a partner. The assessee contended that such expenditure was in the nature of business expenditure and therefore, allowable u/s 37. The AO however rejected such a contention. On appeal, the FAA did not approve the AO's rejection of the applicability of section 37, but held that there should be disallowance in terms of section 14A and not Rule 8D as the issue pertained to A.Y 2007-08 when Rule 8D was not yet active. On further appeal, the Tribunal did not accept the assessee's contention regarding non-applicability of disallownace u/s 14A but perhaps on a concession, directed the AO to compute such disallowance in terms of Rule 8D which was by then inacted. The rejected the Revenue's contention also that section 37 itself was not applicable and the entire expenditure should have been disallowed.
B) The assessee company during the relevant year, entered into forward contracts to safeguard the value of investments fluctuation, and had treated such foreign exchange rate gain as capital receipt. The AO however, was of the opinion that the same should be treated as Revenue receipts and taxed accordingly. On appeal, the FAA accepted the contention of assessee that the gain accrued was not in the course of any trading activity but on account of hedging in the foreign exchange and therefore, the same should be treated as capital receipt. On further appeal, the ITAT held that the forward contract in respect of investments were on capital account and not profit received by assessee on cancellation of such contract, hence would be treated as capital receipt.
On appeal, the ITAT held that,
Whether an issue raised separately before writ jurisdiction, merits no adjudication by clubbing it with other matters - YES: HC
++ as far as contribution to partnership firm is concerned, the view of the Tribunal in rejecting the Revenue's contention regarding non applicability of Section 37, has been challenged by the Revenue in corresponding appeal being Tax Appeal No. 312 of 2018. However, in the present appeal, the question is confined to the disallowance u/s 14A which arises out of the Tribunal's decision in assessee's appeal and which was not allowed by the Tribunal. Therefore, this question is not entertained in the present Tax Appeal making it clear that the corresponding question of applicability or otherwise of section 37 raised by the Revenue in Tax Appeal No. 312 of 2018 would be debated independently;
Whether monetary payback yeilded upon dissolution of forward foreign contract, will have to be construed as capital receipt only - YES: HC
++ as far as forex gain is concerned, it is seen that as pointed out by the counsel for assessee in case of Deputy Commissioner of Income Tax (Assessment) vs. Garden Silk Mills Ltd. (320 ITR 720), the Court was concerned with facts where the assessee had received a gain of Rs. 68.66 lacs on cancellation of forward foreign exchange contract and had treated such surplus as not allowable to tax. The Tribunal had added that it was a capital receipt not allowable to capital gains tax as cancellation of such a contract did not involve any transfer or assignment of any asset within the meaning of section 2(47). The question of law framed at the instance of the Revenue was "Is profit on cancellation of forward exchange contract, a capital receipt or a revenue receipt", which was answered against the Revenue by observing that the principle that is to be applied for determining the character of a receipt, whether results in any profit or loss on account of appreciation or depreciation in the value of foreign currency held by the assessee, upon conversion into another currency, would depend on whether the transaction is relatable to a trading transaction or is in relation to a capital asset or in relation to fixed capital. Thus, the surplus received upon cancellation of forward foreign exchange contract will partake character of a capital receipt only.
Case disposed of
2018-TIOL-842-HC-AHM-IT + Case Story
CIT Vs LOK PRAKASHAN LTD: GUJARAT HIGH COURT (Dated: April 24 & 25, 2018)
Income Tax - Sections 80-I, 143(3) & 147.
Keywords: Allocation of income - Area of circulation - Eligible units - News paper - Weighted revenue allocation.
The Assessee-company, a publishing house, set up two printing units, one at Khanpur and another at Nilgiri. The Nilgiri unit was eligible for deduction u/s 80-I, but the Khanpur unit did not enjoy such benefits. For the relevant AY, the assessee filed the return of income which came-up for scrutiny assessment u/s 143(3) r/w/s 147. During such scrutiny assessment, the AO noticed that the assessee had claimed deduction u/s 80-I for the Nilgiri Unit by claiming equal revenue allocation though the proportion of copies of newspapers printed at both places was unequal. However, the AO was not convinced about such allocation and therefore, called upon the assessee to clarify in that regard. The assessee contended that Ahmedabad edition of the newspapers represented 66.9% of the total number of copies of the news papers sold. It also represented 67.8% of the total sale amount generated through such sale. It further pointed out that the Ahmedabad edition received 89.97% of the advertisement income. The assessee also pointed out that between Ahemdabad edition, proportion of Khanpur Unit and Nilgiri Unit was 60.35% and 39.65% respectively.
However, the AO did not approve the higher allocation of advertisement income in the hands of the eligible unit. He was also not convinced about the Ahmedabad edition receiving 89.97% of the advertisement revenue. He was of the opinion that such figure included advertisement income of other editions also. He noted that in the assessment year 1994-95, he had made adjustment in that head and computed the advertisement income of Ahmedabad edition at 71%. However, in such year, since the circulation of Ahmedabad edition was 45% of the total circulation of the news paper, he decided to allocate advertisement income to Ahmedabad unit at 80% considering that in current year, Ahmedabad edition circulation was 67% of the total circulation.
The AO therefore, attributed 80% of total advertisement income to Ahmedabad unit. Having done that he discarded the assessee’s contention that such advertisement income was largely generated only out of city sale of news papers and therefore, the profit margins in case of Khanpur and Nilgiri units should be equally devised since majority of such copies sold in the city were printed at Nilgiri unit. He instead, applied the ratio of the total number of copies printed and sold by these two units inter se.
On assessee's appeal, the CIT(A) substantially accepted the assessee’s contention but not the formula as such. He was of the opinion that a fair formula should be worked out which would give higher profitability to the city edition at the same time, not adopting a simple formula of the allocation of advertisement revenue purely on the basis of proportion of the number of copies printed and sold by the two units. Therefore, he devised the formula, which was based on weighted revenue allocation. On further appeal by the Revenue, the Tribunal approved the CIT(A)'s weighted revenue allocation formula and rejected the appeal filed by the Revenue.
On appeal, the High Court held that,
Whether when the assessee-newspaper fails to maintain separate books for its two units, one of them being eligible for Sec 80-I benefits, it would be fair to divide the income between the two units in proportion of their circulations - YES: HC
Whether higher amount of income from advertisement in one edition of the newspaper can be shifted to the eligible unit, for calculating deduction u/s 80-I, merely on the basis of area of circulation of newspapers printed in such unit - NO: HC
++ in the order of assessment, the Assessing Officer merely referred to advertisement income of some other editions being merged with these figures provided by the assessee without any further elaboration. Without establishing that such merging was at large scale, he relied on the exercise undertaken by him for earlier year and purportedly projected the figures for the present year. Firstly, we do not approve of this tinkering by the Assessing Officer on a passing observation of the advertisement income including income from certain other editions without citing instances and without even attempt to estimate the level of such intermixing. Equally importantly his projection of the previous years' figures was also erroneous. He noted that in the previous year, the assessee had shown the proportion of Ahmedabad edition at 45% of the total publication by the news paper as compared to 67% of the current year. Since in the previous year he had worked out the advertisement revenue generation for Ahmedabad edition at 71%, he adopted a figure of 80% for the current year. Going simply by proportion of 45:71, the 67% publication of Ahmedabad edition would justify advertisement income allocation of over 100%. Under the circumstances, we would not permit the Assessing Officer to tamper with the assessee's projection of advertisement revenue of Ahmedabad edition at 89.87% of the total advertisement revenue. With varying figures, same scenario would prevail in all assessment years;
++ the Revenue has raised strong objection to the very foundation adopted by the CIT(A) viz. to hold that 81% of the publication in the city of Ahmedabad was printed in Niligir unit. The Revenue contends that, no evidence was led to establish this fact. We find considerable force in this contention. The assessee's representation before the CIT(A) was that for its business considerations out of the total number of copies of the news papers sold in the city, 81 came from the printing house at Nilgiri. In other words, the assessee contended that the Nilgiri unit provided 81% of the news papers sold in Ahmedabad. The rest were supplied by Khanpur unit. This factual assertion of the assessee was not examined by the CIT(A) before acceptance. We do not find sufficient material produced by the assessee to establish this basic fact. CIT(A) therefore, proceeded on unverified facts;
++ CIT(A) seems to have given considerable importance to the assessee's assertion that bulk of the Ahmedabad circulation came from Nilgiri unit whereas the bulk of the news paper printed at Khanpur were circulated outside Ahmedabad. Quite apart from such data not being established on record we wonder whether this could be the rational basis for making disproportionate income allocation between the two units. A noted earlier, the formula devised by the CIT (A) does not even properly project this primary element. Even otherwise, we do not find that this is the rational basis for disproportionate allocation of income between the two units. The news papers remained the same. The news, the articles, the advertisements, the quality of paper and the printing quality were the same. The cost of the news paper also remained the same. Merely because greater number of news papers printed at Nilgiri unit were diverted for circulation in Ahmedabad would not make any material difference insofar as income allocation is concerned;
++ the assessee had not maintained separate accounts for its two units of Ahmedabad one being eligible for deduction under section 80-I, the other not so eligible. Both printing units printed and published newspapers which were marked as Ahmedabad edition. Such newspapers were circulated in and around the city of Ahmedabad including North Gujarat. The newspapers, in all respects, were identical. The quality of paper used, the printing material and the cost of each such news paper sold in Ahmedabad as well as outside Ahmedabad were the same. Under the circumstances, the most fair and equitable means of dividing the income between the two units would be in the proportion of their internal publication and circulation of Ahmedabad edition. That is what the Assessing Officer has done.
Revenue's appeal allowed
2018-TIOL-12-AAR-GST
GIRIRAJ RENEWABLES PVT LTD
CGST Act, 2017 - Supply of turnkey Engineering, Procurement and Construction (EPC) contract for construction of Solar Power plant wherein both goods and services are supplied is to be construed as Works Contract and not as Composite Supply – Since transaction is treated as ‘Works Contract' and not as ‘Composite Supply', there would be no relevance of ‘principal supply' – as to whether benefit of concessional rate of 5% of ‘Solar Power generation system and parts thereof' would be available to sub-contractors, since no documents have been produced, Authority is unable to deal with this question: AAR [para 5] .
Application disposed
2018-TIOL-11-AAR-GST
ACRYMOLD: AAR (Dated: March 23, 2018)
CGST Act, 2017 – Classification - Trophy - Heading 8306 2920 – Even though the word 'Trophy' is specifically mentioned in the referred heading, all trophies made of any material cannot be classified under this HSN and are to be classified as per the applicable provisions of the Customs Tariff Headings – since a general question is raised as to whether if there is a combination of different materials and about 75% (value terms) is getting used of any one raw material, under which HSN bill should be made, therefore, no decision can be given: AAR [para 6]
Application disposed
