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CASE STORIES
I -T - Commissioner is not allowed to re-examine assessee's claim by invoking powers u/s 263 when such claim was already discussed by both AO and Appellate Commissioner: HC
I-T - When merchant banker did nothing to test veracity of financial data furnished by assessee, no fault is to be found with AO if DCF method adopted to compute FMV was rejected: ITAT
I-T - When limited company transfers shares to group company as Gift but fails to prove that it was a part of family settlement, then it cannot escape from claws of capital gains: ITAT
I- T - When assesee is not an owner of power generating plant & merely takes care of maintenance work on behalf of owner for certain consideration, it is not eligible for Sec 80IA benefits: HC
CASE LAWS
2018-TIOL-1037-HC-KAR-IT + Case Story
Pr.CIT Vs H NAGARAJA : KARNATAKA
HIGH COURT (Dated:
May 29, 2018)
Income Tax - Sections 263 & 271(1)(c).
Keywords: Development expenses - Doctrine of merger - Non-agricultural use - Revisional jurisdiction - Unexplained income.
The assessee is a partner in a firm, which is engaged in the business of purchasing agricultural lands and converting them for non-agricultural purpose. The assessee's spouse and his father were also associated as partners in the firm. Pursuant to a search operation at the assessee's premises, notice u/s 153A was issued for the relevant AYs. Accordingly, the assessee filed returns for the relevant AYs. On assessment, the AO noted that the assessee claimed expenses for developing the layout at an agricultural property under three different heads viz., development expenses, labour charges and work in progress. The said agricultural property was then sold. Accordingly, the assessee was asked to furnish requisite details of such expenses. In reply, the assessee had produced the list of names and addresses of parties to whom the amount was paid along with the PAN numbers, bills and vouchers. However, the AO treated such sum as assessee's undisclosed income and proceeded to make additions in respect of AYs 2008-09 and 2009-10 respectively.
When the matter reached before the Appellate Commissioner, the additions to the extent of only Rs.12,50,000/- was confirmed for the AY 2008-09 and in respect with the AY 2009-10, addition of Rs.2 Crores was confirmed and rest was ordered to be deleted. Nevertheless, by exercising revisionary powers u/s 263, the Revisional Commissioner proceeded held that the properties purchased by the assessee at Kaggalipura and the subsequent sale did not tally in respect of both the assessment orders, and hence, directed to reconsider the entire materials. It was further found that the development expenses consisting of labour charges, work in progress, had to be added for the AY 2008-09. Similarly, the Revisional Commissioner ordered to make addition for both the AYs on the ground that the cheque payments and TDS made for claiming expenditure had to be verified. When the matter was placed before the Tribunal, the order passed by the Revisional Commissioner was set aside.
On appeal, the High Court held that,
Whether it is open to the Commissioner to re-examine the assessee's claim by invoking its revisonary jurisdiction u/s 263 even if, such a claim was already discussed and concluded by both the AO and the Appellate Commissioner - NO: HC
++ the Revisional Authority holds that labour charges, work in progress should be disallowed. In our view, when the development expenses as considered by the AO were the subject matter of appeal and the CIT(A) on the judicial side has found that for both the AYs, the expenses incurred had to be accepted by disallowing the claim of Rs.50 lakhs for the AY 2008-09 and Rs.2 Crores for the AY 2009-10, question of Commissioner of Income Tax (Administration) exercising revisional jurisdiction u/s 263 to once again examine the very same issue so as to disallow the labour charges and work in progress does not arise, as the order of assessment made by the AO got merged with the order of the Appellate Commissioner. The Revisional Authority cannot, by acting u/s 263 interfere and upset the order passed by the Appellate Commissioner. If the Revenue was aggrieved by the order of the Appellate Commissioner, the only remedy was to file an appeal to the Tribunal or to re-open the assessments;
++ the Counsel for the assessee is right and justified in placing reliance on the judgment of this Court in the cases of VARMA INDUSTRIAL LTD. and SRI SALIL PUNOOSE. The law laid down in the said two judgments applies to the facts of the present case because the Appellate Commissioner has considered the matter while concurring with the order passed by the AO, and therefore, the order of the AO stood merged with the order of the Appellate Commissioner. In such circumstances, the same question cannot be re-opened by the Revisional Authority exercising power u/s 263;
++ it is the case of the assessee that during the AYs 2005-06 to 2009-10, he had purchased 63 acres 20 guntas of land at Kaggalipura village. The said properties were transferred to M/s. Brigade Enterprises under registered sale deeds; consideration for purchase of these properties was invested to an extent of 50% by the assessee and the balance 50% was invested by M/s. Canara Housing Development Corporation. The AO has accepted the payments made for purchase of lands from agriculturists and the sale of lands to M/s. Brigade Enterprises as having been duly accounted for during the various AYs. When the AO scrutinized the returns for the AYs 2008-09 and 2009-10, he considered the purchase of lands from villagers and thereafter sale of the same to M/s. Brigade Enterprises. He has dealt with the same in the assessment order and has proceeded to arrive at a conclusion that for AY 2008-09, there was unexplained income of Rs.1,25,66,700/- and for the AY 2009-1-0, there was unexplained income in a sum of Rs.1,92,72,383/-. He has thus proceeded to treat these to items as undisclosed profit for the respective AYs;
++ the assessee has challenged this order by filing appeal before the Appellate Commissioner. After examining the legality and correctness of the order passed by the AO, the Appellate Commissioner has held that the addition made by the AO regarding unexplained income was not justified in view of the evidence furnished by the assessee. Hence, the Appellate Commissioner ordered for deletion of the additions made by the AO, as a result the conclusions regarding purchase price paid for acquiring the lands and the sale proceeds received by selling the lands stood concluded as per the order of the Appellate Commissioner. The order passed by the AO got merged with that of the Appellate Commissioner for both the AYs. Therefore, there was no scope for the Revisional Commissioner to exercise jurisdiction u/s 263 to proceed to re-examine the purchase made by the assessee in respect of the lands in question. The Revisional Commissioner had no justification to add cost price in a sum of Rs.2,71,13,658/- stating that it pertained to sales made for the subsequent year. He also erred in directing the AO to re-examine the purchase price of the lands. As rightly contended by the Counsel for the assessee, the conclusion reached by the Commissioner while exercising revisional jurisdiction tantamounts to directly interfering with the conclusions reached by the Appellate Commissioner. Such power of the revisional authority cannot be conceded to enable him to interfere with the orders passed by the Appellate Commissioner in view of the doctrine of merger. Hence, it has to be held that the Revisional Commissioner acted without jurisdiction in passing the said order;
Whether CIT is justified in exercising his revisional powers u/s 263 where AO was satisfied, consequent to making an enquiry and examining the evidence produced by the assessee establishing the genuineness of the commission and development expenses - NO: HC
++ the Appellate Tribunal has rightly held that the Commissioner was in error in proceeding to take the view that actual service rendered by each of the individuals had to be established for accepting commission in the sale and purchase of land. A careful perusal of the findings recorded in the order passed by the Tribunal makes it clear that as regards commission expenses, the AO after examining the assessee, had questioned him to state details regarding evidence he had supporting the claim of commission and development expenses and also as to whether TDS had been deducted and remitted by him of the said payments. In response to the same, the assessee had stated that evidence would be placed before the AO. As a sequel of the same, the assessee submitted full details regarding payment of commission. After considering the material, the AO chose not to make any addition on the item pertaining to commission. Therefore, the Tribunal has rightly found that the items of expenses on which the Revisional Commissioner proposed to revise the assessment having been thoroughly supported by the AO, it was not open for the revisional authority to interfere with the same only because another view was possible. The Tribunal has supported its conclusion by referring to the judgment of the Bombay High Court in this regard in the case of NIRAV MODI;
++ as we do not find any error in the approach adopted by the Tribunal, we find that there is no scope for interference in the matter. Therefore, the substantial question of law raised by the Revenue is answered in the negative. We, therefore, hold that in the facts and circumstances of the case, the Tribunal was right in holding that the CIT was not justified in exercising the revisional powers u/s 263 of the Act to upset the order passed by the AO which had stood merged with the order passed by the CIT(A).
Revenue's appeal dismissed
2018-TIOL-1036-HC-MAD-IT + Case Story
COVANTA SAMALPATTI OPERATING PVT LTD Vs ACIT : MADRAS
HIGH COURT (Dated:
April 4, 2018)
Income Tax - Section 80IA - Electricity Act, 2003 - Section 2(28).
Keywords : Service contract - Power plant maintenance.
The assesee company, engaged in the business of power plant installation, had claimed deduction u/s 80IA. During the assessment proceedings AO noticed that assessee's undertaking had not been set up for generation and distribution of power as the assessee was a mere contractor and was paid for the services rendered. The AO disallowed the same. On appeal, the CIT concurred with the finding of the AO. Aggrieved by the same the assessee filed appeal before the Tribunal which upheld the finding of the CIT.
On appeal, the High Court held that,
Whether when the assesee is not the owner of the power generating plant and it merely takes care of the maintenance work on behalf of the owner for certain consideration, it is not eligible for Sec 80IA benefits - YES: HC
Whether if the assessee, as a contractor of the power plant, provides certain technical knowhow in generation of electricity, it becomes entitled to Sec 80IA benefits - NO: HC
++ the term 'generating company' can only refer to the SPCL and not the assessee, since the AO, the FAA and the Tribunal, after considering the scope of the agreement entered into between the assessee and the SPCL, clearly held that the assessee is not the owner of the power plant and that it does only maintenance work, for which, it is given a fee. Even assuming that the assessee contributed technical knowhow for the purpose of generating electricity, it does so on behalf of the owner of the plant namely the SPCL. We find that the interpretation of agreement between the assessee and the SPCL, as given by the AO, the FAA and the Tribunal, is perfectly legal and valid and that there is no perversity in the finding rendered by all the three Authorities. In such circumstances, the factual position to arrive at a different conclusion cannot be re-appreciated.
Assessee's appeal dismissed
2018-TIOL-1028-HC-KERALA-ST
NEYYATTINKARA MUNICIPALITY Vs DEPUTY COMMISSIONER OF CENTRAL EXCISE & SERVICE TAX : KERALA HIGH COURT (Dated: May 22, 2018)
ST - the assessee herein is a self-governed institution under the Kerala Municipality Act - It claimed ignorance of any service tax liability arising from its activities - Later, it sought to avail benefit of the VCES Scheme - It declared its duty liability & pursuantly deposited 50% of the same, with the other half to be deposited before a specified date - Subsequently, the assessee realized that its actual duty liability was lesser than what was originally declared - Hence the assessee remitted a reduced amount towards the pending amount payable - Thereupon, the Revenue rejected the assessee's application under VCES on grounds that the payments were not made in accordance with the scheme - The Revenue also claimed that the assessee ought to have sought rectification of mistake in its declaration & that it ought to have filed a rectified declaration - Since it did not do so, its application had been dismissed - Hence the present writ.
Held - Considered the provisions of Section 107 of the Finance Act, 2013, which provides the procedure for making declaration for settlement of liability under VCES - The Act does not provide for amending declarations made under VCES - It was a subsequent Circular which enabled such amendments & without changing date of payment - In such circumstances, the denial of benefits to the assessee under VCES, on grounds of non-furnishing of amended declaration within stipulated time, is unjust & unreasonable - Hence the Department is directed to examine the application on merits: HC (Para 1,3)
Writ Petition Allowed
2018-TIOL-1027-HC-KERALA-CUS
PRAYAG DOMESTIC APPLIANCES Vs CC : KERALA HIGH COURT (Dated: April 6, 2018)
Cus - the assessee company imported Digital Multifunction Printers - However, the goods were confiscated - Later the Tribunal directed the release of the goods upon payment of redemption fine, duty demanded & penalty - The assessee claimed that the Revenue was yet to execute the Tribunal's directions.
Held - The Revenue claims that its appeal, filed in another matter with identical issue, is pending disposal before the Apex Court - In such case, the present High Court settled the matter in favor of the assessee therein - Thereby, should the Revenue fail to obtain a favorable verdict from the Apex Court before May 20, 2018, it would have to enforce this Court's findings provided in the related matter: HC
Writ Petition Disposed off
2018-TIOL-1026-HC-KERALA-CUS
QUALITY TRADERS Vs CC : KERALA HIGH COURT (Dated: May 24, 2018)
Cus - the assessee company imported PVC roll mats and PVC Carpets - The Department refused to accept the value of the goods as declared by the assessee - It insisted that the assessee accept loaded value - Request for provisional release of the goods was denied - When importing a subsequent consignment, the assessee experienced the same encumbrance - When it decided to pay duty as per loaded value, the Department did not pass an appealable order against such goods, as contemplated u/s 17(5) of the Customs Act - Thus the assessee was unable to challenge such demand before the appellate authority.
Held - The goods be released conditional upon execution of bank guarantee for payment of balance duty - The Department is directed to examine whether duty paid as per loaded value was paid under protest - Thereupon, an order be passed within one month: HC (Para 2,3,4)
Writ Petition Allowed
2018-TIOL-1025-HC-KERALA-CUS
ATUL AUTOMATION PVT LTD Vs CC : KERALA HIGH COURT (Dated: April 6, 2018)
Cus - the assessee company imported Digital Multifunction Printers - However, the goods were confiscated - Later the Tribunal directed the release of the goods upon payment of redemption fine, duty demanded & penalty - The assessee claimed that the Revenue was yet to execute the Tribunal's directions.
Held - The Revenue claims that its appeal, filed in another matter with identical issue, is pending disposal before the Apex Court - In such case, the present High Court settled the matter in favor of the assessee therein - Thereby, should the Revenue fail to obtain a favorable verdict from the Apex Court before May 20, 2018, it would have to enforce this Court's findings laid down in the related matter: HC
Writ Petition Disposed off
2018-TIOL-777-ITAT-DEL + Case Story
AGRO PORTFOLIO PVT LTD Vs ITO : DELHI ITAT (Dated: May 16, 2018)
Income Tax - Sections 56(2)(viib), 142(1), 144 & Rule 11UA.
Keywords - Best judgement assessment - DCF method - Fair market value - NAV method - Projections in cash flow - Valuation report.
The assessee company deals with all kinds of investment instruments. During the PY, the assessee allotted equity shares u/s 56(2)(viib) r.w. Rule 11UA, of face value of Rs.10/- each at a premium of Rs.40/- per share consisting total amount of Rs. 1,26,00,000/-. However, the fair market value(FMV) of the share of Rs. 50/- was calculated on Discounted Cash Flow (DCF) method by the merchant banker appointed by the assessee. Pursuantly, the assessee returned losses of Rs. 53,083/- for the relevant AY. During the assessment proceedings, the AO issued Sec.142(1) notice calling for clarifications. The assessee failed to satisfy the queries of the AO, hence another notice u/s 142(1) was issued whereunder the AO computed the FMV of shares by following the NAV method. However, the assessee did not respond to this notice also. Therefore, under best judgement method, the AO made additions of Rs. 1,27,26,000/- u/s 56(2)(viib) by determining the FMV of shares by Net Asset Value (NAV) method thereby rejecting the valuation report of the merchant banker. Even on appeal before the CIT(A), the assessee did not produce any evidence to verify the correctness of the data supplied by the assessee to the merchant banker. Hence, the CIT(A) upheld the findings of the AO.
Having heard the parties, the Tribunal held that,
Whether when the merchant banker did nothing to test the veracity of the financial data furnished by the assessee, no fault is to be found with the AO if the DCF method adopted to compute the FMV was rejected - YES: ITAT
++ the Tribunal is unable to accept the contentions of the assessee that in view of the provisions u/s 56(2)(viib) r.w. Rule 11UA(2) the AO had no jurisdiction to adopt a different method than the one adopted by the assessee, and if for any reason the AO has any doubt recording such valuation report and does not agree with the same is bound to make a reference to the Income tax Department Valuation Officer to determine the FMV of such capital asset. This is so because unless and until the assessee produces the evidences to substantiate the basis of projections in cash flow and provides reasonable connectivity between those projections in cash flow with the reality evidences by the material, it is not possible even for the Departmental Valuation Officer to conduct any exercise of verification of the acceptability of the value determine by the merchant banker. This is more particularly in view of the long disclaimer appended by the merchant banker at page no. 16 & 17 of the paper book which clearly establishes that no independent enquiry is caused by merchant banker to verify the truth or otherwise the figures furnished by the assessee at least on test basis. The merchant bankers solely relied upon an assumption without independent verification, the truthfulness, accuracy and completeness of the information and the financial data provided by the company. A perusal of this long disclaimer clearly shows that the merchant banker did not do anything reflecting their expertise, except mere applying the formula to the data provided. Therefore, this Tribunal is unable to brush aside the contention of the Revenue that the possibility of tailoring the data by applying the reverse engineering to the pre-determined conclusions;
++ there has not been any possibility of verifying the correctness or otherwise of the data supplied by the assessee to the merchant banker, in the absence of which the correctness of the result of DCF method cannot be verified. This left no option to the AO but to reject the DCF method and to go by NAV method to determine the FMV of the shares. Without such evidence, it serves no purpose even if the matter is referred to the Department's Valuation Officer. Therefore, no illegality or irregularity in the approach of conclusions is found by the authorities below. While confirming the same, this Tribunal dismissed the appeal as devoid of merits. In the result, the appeal of the assessee is dismissed.
Assessee's appeal dismissed
2018-TIOL-776-ITAT-DEL + Case Story
GAGAN INFRAENERGY LTD Vs DCIT : DELHI ITAT (Dated: May 15, 2018)
Income Tax - Sections 2(47), 45, 47(iii) & 55.
Keywords - Artificial entities - Gift of shares - Transfer of shares - Taxation of capital gains on transfer.
The assessee company had filed its return for relevant AY. The case was selected for scrutiny and statutory notices were issued. During assessment, AO noted that the assessee company held certain equity shares of Jindal steel & Power Ltd (JSPL). The assessee company gave certain shares of JSPL as gift without consideration to Giebe Trading Pvt.Ltd (GTPL), which was another company of the same Group. The assessee had claimed this transaction not covered by section 56(2)(viia) but was exempt from tax u/s 47(iii) of the Act. The AO observed that gift by a corporation to another corporation was a strange transaction as there could not be a gift between artificial entities. The AO noted that by transferring its investment to its sister concern by way of gift, the assessee reduced its income to the extent that would have accrued if the company would have sold the shares in the open market. The AO held that provisions of Sec 47(iii) did not apply to facts of the present case. According to the AO the transfer of shares to GTPL was a transfer within the meaning of section 2(47) of the Act and taxed it u/s 45. He computed the value of shares transferred to GTPL by taking market value of each share transferred. On appeal, CIT(A) upheld the order of AO.
On further appeal, Tribunal held that,
Whether when a limited company transfers its shares to a group company as Gift but fails to prove that it was a part of the family settlement, even then it can escape from the claws of capital gains - NO: ITAT
++ the scheme of capital gains, as set out in Section 45 to 55 of the Act, excludes certain categories of transaction from its ambit. These are, distribution of capital assets on the partition of a Hindu family or on the dissolution of a firm; transfer of a capital asset by a company to its subsidiary or under a scheme of amalgamation; transfer of a capital assets under a gift or a will or an irrevocable trust. It was noted that huge volume of shares in a public limited company is transferred by assessee to another company without any consideration, without any proper documentation being executed as per law and giving it a nomenclature of gift;
++ AO had rightly raised question regarding the reality and genuineness of transaction, in addition to its validity. It has been vehemently contested by authorities below as well as CIT that transaction has been effectuated for avoiding payment of tax and to get out of the ambit of section 56 (2) (viia) of the Act. It is apparent from record that assessee has not demonstrated by way of documentary evidence or in any of the manner to prove the genuineness and validity of transaction. The counsel of the assessee has been harping that the shares held by the assessee in a Public Limited Company was transferred in lieu of a family realignment, but failed to establish the relation of the alleged transferee company with that of assessee or any of the group/subsidiary companies. Further there is no agreement/document that has been executed between group companies forming part of family realignment. To postulate that a company can give away its assets free to another even orally, can only be aiding dubious attempts at avoidance of tax payable under the Act unless it is supported by documentary evidence. The AO is in a better position to make proper enquiry into the question of reality, genuineness and validity of alleged transaction, entered into by the assessee;
++ the assessee is directed to provide all necessary and relevant information/details to assist AO, in determining correct nature of alleged transaction as per law. It is also directed that in the event assessee fails to provide any document as called for, in order to establish the genuineness and validity of alleged transaction, as has been submitted to be for a family realignment, AO may compute income in the hands of assessee as per law. On the contrary if assessee is able to prove to the satisfaction of AO regarding genuineness and validity of the transaction, no addition shall be called for. Hence it was decided to set aside the issue raised by assessee back to AO who shall decide the issue as per facts and law, after giving due opportunity of being heard to the assessee. In the result appeal filed by assessee stands allowed for statistical purposes.
Case Remanded
