CASE STORIES
I-T - For claiming deduction u/s 80IA(4), infrastructure development agreement executed by nodal agency of State Govt should be treated to have been entered by State itself: HC
I-T - When assessee admits cash deposits in accounts as undisclosed income which becomes NIL after AO allows set off of derivative loss, it is fit case for imposition of 100% penalty: HC
CX - Allegation of availment of credit without receipt of inputs - Incomplete investigation - Appeal allowed: CESTAT by Majority
I-T - Club and hotel membership fee paid by assessee company on behalf of Director is not capital expenditure: ITAT
I-T - Department should not reopen settled assessments, simply relying on borrowed satisfaction from auditors: HC
I-T - Adherence to procedural requirement for disposal of taxpayer's objections to reopening, is not indispensable, unless those objections are overruled: HC
ST - Optional Extended Warranty Service - Money is collected irrespective of whether vehicle is attended or not and this is how it is different than service of repair - pre-deposit waived: CESTAT by Majority
CASE LAWS
2018-TIOL-853-HC-AHM-IT
PR CIT Vs DURGA CONSTRUCTION COMPANY: GUJARAT HIGH COURT (Dated: May 1, 2018)
Income Tax - Section 32(1).
Keywords - Depreciation on dumpers - Hire of vehicle - Mining contract.
The assessee firm, engaged in the business of providing earth moving equipments on hire and undertaking mining contracts had filed return for relevant AY. During assessment, AO noted that the assessee had claimed depreciation at a higher rate on dumpers, tripper which were used by the assessee in its business. The AO called upon the assessee to justify the same. The assessee replied that the claim of the assessee would fall under sub-item 2[ii] of Item III of Appendix I to the Income-tax Rules, 1962 which provides for higher rate of depreciation on motor buses, motor lorries and motor taxis used in a business of running them on hire. The AO however, rejected the assessee’s claim for higher depreciation and granted only the normal rate of depreciation on such equipments on the ground that the assessee was not undertaking the business of running motor lorries on hire rather had been awarded the contract for mining. On appeal, CIT(A) reversed the decision of AO. The Tribunal confirmed the view of the CIT(A), taking note of the scope of work awarded to the assessee under the tender terms as also placing reliance on the CBDT Circular No. 652 dated June 14, 1993.
After hearing parties, the High Court held that,
Whether when the assessee company was contracted to give mining equipment on hire, higher depreciation cannot be denied to it - YES: HC
++ section 32(1) of the Act provides for depreciation in respect of buildings, machinery, plant or furniture, being tangible assets as well as certain intangible assets owned wholly or partly by the assessee and used for the purpose of the business or profession, at the prescribed rates. New Appendix I, which is applicable for AY 2006-2007 and onwards, in Part-A contends specific rate of depreciation for "tangible assets". Capital-III thereof pertains to "machinery and plant". Under sub-item [2] of Item [3] (iii), the rate of depreciation on "motor buses, motor lorries and motor taxis used in the business of running them on hire" is prescribed @ 30%. Revenue’s main contention appears to be that the assessee had not given the said machinery on hire since the assessee was awarded the contract for mining. However, some of the leading terms of the tender, required the assessee to provide machinery for hire for excavation of overburden, transportation of such excavated overburden minerals, transportation of minerals from mines to pit-head, stock piles or at any other place and the transportation of overburden of minerals and excavated minerals to be done by running motor vehicles such as tippers, dumpers, etc. Essentially, therefore, the assessee was awarded contract for providing such equipments on hire. It was in this context, the assessee has highlighted that the assessee has no control over the equipments so hired and it was the principal which would decide to deploy the equipments at the appropriate place. The assessee was essentially required to provide equipments and manpower on hire. Hence no error found in the view taken by the Tribunal.
Revenue's appeal dismissed
2018-TIOL-852-HC-AHM-IT
CIT Vs ARVIND PRODUCTS LTD: GUJARAT HIGH COURT (Dated: May 2, 2018)
Income tax - enduring benefit - newly improved product - revenue expenditure
The assessee company, engaged in the business of manufacturing of textiles, had filed its return declaring loss, after claiming an amount of Rs.2.70 crores incurred for project development as revenue expenditure. The AO however doubted the nature of the expenditure, and therefore called for explanations from assessee. In response, the assessee contended that the said amount was paid to Arvind Mills Limited on actual cost basis for product development, which was in the nature of improvement of different types of fabrics produced by assessee. The AO however opined that the benefit of newly developed or improved product would be available to assessee for long duration. Such expenditure therefore would be resulting into enduring benefits. He therefore disallowed such expenditure and instead treated it as capital expenditure.
On appeal, the FAA was of the opinion that the expenses incurred was with respect to development of product and it could not be denied that such expenditure would result into enduring benefit. He therefore confirmed the view of AO. On further appeal, the ITAT held that the expenditure was revenue expenditure. Whether the expenditure would result into advantage to the company may depend on various factors such as how well the products were marketed, how the market receives it and presence of similar products in the market. The Tribunal was essentially of the opinion that whether any advantage would accrue to assessee or not out of such product development being highly uncertain, the expenditure could not be treated as capital in nature.
On appeal, the HC held that,
Whether enduring benefit attached to a product as a result of development expenses incurred by the assessee, is no more sufficient criterion to regard the same as capital expenditure - YES: HC
++ in case of Commissioner of Incometax, Faridabad v. Escorts Auto Components Ltd - 2010-TIOL-325-HC-P&H-IT, Division Bench of Punjab and Haryana High Court considered the expenditure by the assessee for modification of existing products/development of new products under the same management with the same workforce and expertise. The Court held that the expenditure incurred, by no stretch of imagination, can be regarded as capital expenditure. In case of Commissioner of Incometax, Bangalore v. Tejas Networks India (P.) Ltd - 2014-TIOL-1771-HC-KAR-IT, Division Bench of Karnataka High Court considered a case where the assessee was engaged in the business of dealing and selling optical networking products, and held that lifespan of such products was very short due to severe competition, constant upgradation of original products was required and the expenditure was therefore treated as revenue expenditure. Similarly, Division Bench of Delhi High Court in case of Commissioner of Incometax v. ACL Wireless Ltd - 2013-TIOL-1073-HC-DEL-IT, observed that an expenditure which enables profit making structure to work more efficiently leaving the source of profit making structure untouched, would be revenue in nature. Therefore, the questions are answered against the Revenue.
Revenue's appeal dismissed
2018-TIOL-851-HC-AHM-IT + Case Story
CIT Vs RANJIT PROJECTS PVT LTD: GUJARAT HIGH COURT (Dated: May 2, 2018)
Income Tax - Section 80IA(4) - Gujarat Infrastructure Development Act, 1999
Keywords - Infrastructure development projects - Nodal agency constituted by State Government.
The assessee company, engaged in implementing infrastructure development projects, had filed return for relevant AY. The assessee had claimed deduction 80IA(4) of the Act. During assessment AO noted that assessee had undertaken road development project, in pursuance of an agreement with Gujarat State Road Development Corporation ('GSRDC'). The Assessee contended that the GSRDC was performing all the functions of the State Government and therefore the concession agreement executed by GSRDC should be treated to have been entered into by the State Government. The AO however did not accept such contention and rejected the assessee's claim of deduction u/s 80IA(4) of the Act. On appeal, CIT(A) granted deduction to assessee. On further appeal, Tribunal upheld the order of CIT(A).
After hearing parties, the High Court held that,
Whether infrastructure development projects undertaken by the assessee with nodal agency incorporated by the State Government is entitled for deduction 80IA(4) of the Act - YES: HC
++ GSRDC was a nodal agency constituted by the State Government for the purpose of executing road development projects through private participation and was a Government agency. The road widening project was cleared by the Government, land for such purpose was allotted by the Government. The concession agreement which GSRDC executed was approved by the Government. It was under the Government Resolution that the assessee would collect toll upon completion of such project. Upon the completion of the project period, the entire infrastructure so developed would vest in the Government. Signatory to the applicant may be GSRDC for all practical purposes and in essence, it was the agreement between the assessee and the State Government. Condition (b) of subsection (4) of section 80IA requires the assessee to have entered into agreement with the Central Government or a State Government or a local authority or any other statutory authority. However, rigid interpretation of this provision as canvassed by the Revenue would only result into the assessees involved in genuine infrastructure development projects for and on behalf of the Government or local authorities would be denied the deduction merely on the ground that the State Government had created a nodal agency for working out the finer details and nittygritty of such infrastructure development. The purpose of creating such nodal agencies as well as the legislative intent of granting deduction to the assessee engaged in developing, maintaining or operating any infrastructure projects for Central or State Government or local or statutory authorities would frustrate.
Revenue's appeal dismissed
2018-TIOL-850-HC-AHM-IT + Case Story
SWAPNIL BHARAT SHAH Vs ITO: GUJARAT HIGH COURT (Dated: April 3, 2018)
Income Tax- Section 271(1)(c).
Keywords : Concealed income - Penalty proceedings - Unexplained cash credit - Voluntary disclosure.
The Assessee, an individual, filed return for the relevant AY. The case of the assessee was selected for scrutiny. During the assessment proceedings, the AO noticed from the Annual Information Return that the assessee had made sizeable cash deposits in his ICICI bank account which was undisclosed. Therefore, the AO called the assessee to supply the details of accounts. Accordingly, the aseessee declared three bank accounts in ICICI bank, Bank of Baroda and Oriental Bank of Commerce and in all those three bank accounts, the assessee had made sizeable cash deposits and withdrawals. Thereafter, the assessee was called upon to explain the source of such deposits, for which, the assessee offered no explanation nor revealed the source thereof but argued that not the total deposits but the peak credit in the bank accounts which could be considered as unexplained cash credit. Therefore, the AO accepted the assessee's contention and also accepted the assessee's computation of such peak credit and accordingly, added such sum to the income of the assessee. During the course of assessment proceedings, the assessee also argued that he had suffered a net loss by trading in derivatives and speculative business. However, the AO disallowed the speculative loss but allowed the derivative loss as the assessee's business loss and by that reason, the assessee's assessed tax liability came to be nil as per the order of assessment. Thereafter, the AO proceeded for penalty proceedings u/s 271(1)(c) contending that the assessee had concealed the income and the particulars thereof. The assessee opposed the penalty before the CIT(A), which dismissed the appeal. On further appeal, the Tribunal also upheld the decision of the CIT(A) and dismissed the appeal filed by the assessee.
On appeal, High court held that,
Whether when the assessee admits cash deposits in accounts as undisclosed income which becomes NIL after AO allows set off of derivative loss, it is a fit case for imposition of 100% penalty - YES: HC
++ in the assessment proceedings, the assessee was confronted with undisclosed bank accounts and sizeable cash deposits in such bank accounts. The assessee did not claim that the cash deposits were through disclosed source of income. The assessee virtually admitted that cash deposits were undisclosed. The assessee only argued that not the entire tally of cash deposited in different accounts during the year but the peak credit thereof could be added under section 68 of the Act. The Assessing Officer accepted such a contention and added a sum of Rs. 19,55,500/- to the income of the assessee. It is true that during the assessment proceedings the Assessing Officer also accepted the assessee's contention of derivative loss as business loss. By offsetting such added income against the business loss, assessment did not give rise to any fresh tax demand. Nevertheless, the Assessing Officer initiated penalty proceedings because of concealment of income and particulars thereof. Even in such penalty proceedings, the assessee did not offer any explanation about the cash deposits in his different undisclosed bank accounts. In that view of the matter, the Assessing Officer was justified in imposing penalty which was levied at the minimum 100% of the tax sought to be evaded;
++ there is nothing on record to suggest that the assessee agreed to the addition of such income to cutshort the litigation in view of the fact that in any case, even after making the additions, there would be no tax liability in the hands of the assessee. Even if one were to accept the assessee's contention that such surrender was to avoid protraction of the litigation and which is often times referred to as "to buy peace" as held by the Supreme Court in case of Mak Data P. Ltd, this would not necessarily avoid initiation of penalty proceedings. In the said case, it was held and observed that voluntary disclosure does not release the assessee from the mischief of penal proceedings. The law does not provide that when an assessee makes a voluntary disclosure of his concealed income, he has to be absolved from penalty. The assessee cannot explain away his conduct by suggesting "voluntary disclosure", " to buy peace", " to avoid litigation" or "for amicable settlement".
Assessee's appeal dismissed
2018-TIOL-849-HC-AHM-IT
PR CIT Vs LALITABEN GOVINDBHAI PATEL: GUJARAT HIGH COURT (Dated: April 11, 2018)
Income Tax - Section 263 - TP Act - Sec 53A.
Keywords: Cost of acquisition - Part performance - Revisional powers - Short term capital gain.
The assessee, an individual, had returned income for the relevant AY. During the assessment proceeding, the AO noted that the assessee had declared capital gain of Rs. 5.04 lacs from sale of landed property. It was then noted that the assessee had acquired such property at a cost of Rs. 33,69,763/- after converting the land from agriculture purpose to non-agriculture purpose by paying conversion charges. The AO further observed that the assessee had entered into an agreement to sell the land to one Melody Complex Pvt. Ltd. for a sale consideration of Rs. 38,74,431/-. During the execution of such agreement, the assessee had received Rs. 1 lac from the buyer. As per the agreement, the possession was to be handed over on receiving the balance sale consideration. However, the assessee executed another sale deed through which the land in question was sold to one Gatil Properties Ltd for Rs. 4,43,52,100/-. The document also showed that the assessee had received the balance sale consideration of Rs. 37,74,431/- whereas the remaining amount of Rs. 4,04,77,669/- was received by Melody Complex Pvt. Ltd. The land possession was handed over on 25.03.2009. In the return, the assessee claimed that the cost of acquisition of the land was Rs. 33,69,763/- and was sold for Rs. 38,74,431/-. The difference of Rs. 5,04,886/- was offered to short term capital gain and the same was accepted by the AO. Accordingly, the AO completed the assessment by passing the order.
However, the Commissioner took the assessment order in revision u/s 263. The Commissioner believed that at the time of execution of the sale agreement, the possession of the land was not handed over to the purchaser. Therefore, as per Sec. 53A of the Transfer of Property Act, the principle of part performance would not apply. On appeal, the Tribunal held that the Commissioner committed an error in exercising revisional powers.
On appeal, the High Court held that,
Whether if capital gains arise from a land deal agreement made by the seller and the purchaser to a third party, the tax liability gets restricted only to the gains made by the seller-assessee - YES: HC
++ the Tribunal has primarily gone on merits of Commissioner's revisional powers u/s 263. Had this been the sole ground employed by the Tribunal, we would have examined the issue further. However, when the Tribunal had referred to an earlier judgement which has detailed consideration of all relevant facts, by reference, the Tribunal must be seen to have adopted similar principles;
++ in the sale deed, the assessee did pose as a seller and sale consideration stated to have been paid by the purchaser Gatil Properties Ltd was undoubtedly Rs. 4,43,52,100/-. However the entire amount was never received by the assessee. It was a confirming party - Melody Complex Pvt. Ltd which, under the agreement to sale, had a right to insist on purchasing the land or seek specific performance of the agreement and receive bulk of the sale consideration. Out of the total sale consideration, Rs. 4,04,77,669/- was received by such confirming party. When the assessee never received anything beyond Rs. 38,74,431/- originally agreed, question of charing capital gain from the assessee on a sum larger than the said amount of Rs. 38,74,431/- would not arise;
++ it is true that in a short span, the parties to the said transactions showed spectacular appreciation in land price. If the Revenue was of the opinion that such unusual rise in the land price indicated non-genuineness of the transaction itself, no such angle has been probed. In any case, the remaining sale consideration of Rs. 4,04,77,669/- received by Melody Pvt. Ltd can always be taxed appropriately in the hands of the said recipient. We fail to see how the Commissioner could have held the asssessee answerable for capital gain for a sum which she never received.
Revenue's appeal dismissed
2018-TIOL-848-HC-AHM-IT
ALPESHKUMAR DAHYABHAI PATEL Vs ITO: GUJARAT HIGH COURT (Dated: April 10, 2018)
Income tax - Writ - Sections 10(2A), 68, 147 & 148
Keywords - break up of receipts - presumption of AO - reasons for reopening - share of profit - unaccounted cash credit
The Assessee, is an individual and is a partner of various firms engaged in the activity of development of real estate and construction. For the A.Y 2010-11, the assessee had returned income of Rs.14,33,540/-, consequent to which his case was selected for scrutiny, which revealed that the assessee had shown profit from the firm M/s.Satyam Gokul Corporation amounting to Rs.7,65,85,994/. It was noticed that the income of the firm M/s. Satyam Gokul Corporation was Rs.32,00,25,630/- as such the share of the profit of assessee being 20% came to Rs.6,40,05,126/- against which the assessee claimed to have received Rs.7,65,85,993/- as his share of profit from the firm. Consequent to this, Rs.1,25,80,867/- was required to be added as income of assessee as unaccounted cash credit u/s.68. Further, it was also revealed that the share of profit received by assessee from M/s. Satyam Associates on the basis of survey report mentioning as to receipt of share of profit by the assessee of Rs.26,00,028/- for F.Y. 2009-10. The assessee however had shown only Rs.5,11,243/- as profit from the firm M/s. Satyam Associates for F.Y. 200910 and did not claimed exemption u/s 10(2A) as the same was not taxed in the hands of the firm and thus was required to be added as income of Rs.20,88,785/-. It was also noticed that the assessee individual had earned income by way of his share in the total income of the firm M/s. Satyam Gokul Corp amounting to Rs.7,65,85,994/- which was exempt u/s 10(2A). Thus, the AO had reason to believe that income chargeable to tax had escaped assessment, and therefore he initiated reassessment.
On Writ, the HC held that,
Whether assessee's failure to submit break-up of receipts while filing return, is any basis to draw adverse presumption u/s 68, if details regarding tax free receipts are duly explained during assessment process - NO: HC
Whether share of profit earned by a partner from his partnership firm during previous year, can be brought to tax in his hands in current year only on basis of presumption - NO: HC
++ analysis of the reasons recorded would show that the AO has pressed in service three separate reasons. In his first such reason, he points out that the assessee had shown profit from M/s.Satyam Gokul Corporation of Rs.7.65 crores. Satyam Gokul Corporation had declared profit of Rs.32.00 crores. The assessee's share being 20% thereof, the figure would come to Rs.6.40 crores. As against this, since the assessee had claimed to have received Rs.7.65 crores by way of share of his profit from the said firm, the excess of Rs.1.25 crores is required to be added as the income of the assessee u/s 68. As against this, the assessee in the objections had pointed out that the assessee had received a total of Rs.7.65 crores by way of his share in two separate partnership firms i.e. Satyam Gokul Corporation, Ahmedabad and Satyam Gokul Corporation. The AO did not accept this objection. It is noticed from the return that the assessee is shown to have received a total amount of Rs.7.65 crores by way of share of profit from firm Satyam Gokul Corporation, Ahmedabad. Thus, in this return, he had not given the breakup of the receipt from two different partnership firms. However, during the assessment proceedings, he had given the details in respect of the tax free income which was received from three separate firms;
++ the petitioner has also produced the returns of the said two firms Satyam Gokul Corporation, Ahmedabad and Satyam Gokul Corporation. The returns of both these firms show matching figures. Similarly, the return filed by Satyam Gokul Corporation, Ahmedabad, showed profit of Rs.23 crores. Profit after depreciation came to Rs.15.89 crores. The assessee having 20% share in the partnership business, received 3.17 crores out of the same. Thus, the AO's recording that assessee had received sum of Rs.7.65 crores by way of a share of profit from Satyam Gokul Corporation is not correct. In fact, his assumption that assessee should have received 6.40 crores being 20% of the profit of Rs.32 crores of Satyam Gokul Corporation itself was erroneous;
++ coming to the second reason, the AO believed that the assessee had received Rs.26 lakhs by way of his share of profit from M/s. Satva Associates. He had instead shown only a sum of Rs.5.11 lakhs for the current year. Therefore, the difference i.e. Rs.20.88 lakhs was required to be added. As against this, the assessee pointed out in the objections that the sum of Rs.26.00 lakhs was not received by him during the current year but was received in the previous year. In the current year, the assessee had only received Rs.5.11 lakhs which was shown in the return. In support of his contention, the assessee pointed out that the return of said Satva Associates was also scrutinized and after scrutiny, such distribution of the partner's profit for the assessment year 2009-10 has been accepted. From the record, it emerges that the AO has committed an error in drawing a presumption that the assessee received Rs.26 lakhs by way of share of profit from Satva Associates during the present year. This reason is also therefore not valid. In the result, the reopening notice is set aside.
Assessee's petition allowed
