Income tax - Section 40(a)(ii) & CBDT Circular No. 91/58/66 ITJ (19), dated May 18, 1967

Keywords: Allowable expenditure - Education cess - Sale of mining rights

A) The assessee company is one of the largest private sector fertilizer producers in India. Consequent to filing of its return for the relevant A.Y, the ITO had disallowed the 'cess' paid by assessee on the ground that it was not an allowable expenditure u/s 40(a)(ii). The assessee however contended that cess was paid on income tax and hence, it could not be treated as part of income. When the matter was taken up before the ITAT, the order of AO was upheld by holding that education cess was a disallowable expenditure u/s 40(a)(ii). Accordingly, the assessee challenged the decision of ITAT by pointing that the Parliamentary Committee had decided to omit the word 'cess' from the clause (ii) of Section 40(a) and the resultant effect of the omission was that only taxes paid were to be disallowed in the assessments for the year 1962-63 and onwards.

B) The assessee during the year under consideration, received a sum of around Rs.5.26 Cr from sale of mining rights. The assessee also incurred an expenditure of around 87.45 lakhs, which were paid to one M/s ANS construction for dismantling of existing structure, fencing of boundary, construction of temp site office and security in plant area and claimed the same as capital expenses against the sale of mining rights. However, the AO disallowed the deduction claimed by assessee. He was of the view that the connection of such expenditure to mining was not proved, and hence disallowed such expenses. On appeal, the Tribunal confirmed the disallowance. Challenging the same, the assessee pointed out that once the details were given and payment was reflected in the books of accounts, the expenses should not be disallowed.

On appeal, the HC held that,

Whether in view of CBDT circular and the decision of the Apex Court, the word 'Cess' is not akin to 'Tax' and therefore, cannot be disallowed u/s 40(a)(ii) - YES: HC

++ as far as cess payment is concerned, in view of the circular of CBDT where word "Cess" is deleted, this Court is of the considered opinion that the Tribunal has committed an error in not accepting the contention of the assessee. Apart from the Supreme Court decision referred that assessment year is independent and word Cess has been rightly interpreted by the Supreme Court that the Cess is not tax, and in that view of the matter, the view taken by the Tribunal is required to be reversed;

Whether deduction claimed on account of capital expenses against the sale of mining rights, need not be disallowed, once the details are evidenced and payment is reflected in books of accounts - YES: HC

++ as far as sale of mining rights is concerned, it was stated that the same is not revenue expenses. Then for the relevant year, the CIT(A) has rightly accepted the details that payment has been made through cheque and the same has been reflected by the assessee in the balance sheet. Therefore, the expenses cannot be disallowed, since for earlier year it was accepted as capital expenses and capital gains in earlier years.

Assessee's appeal partly allowed

Income Tax - Business income - Long Term Capital Gain - Short Term Capital Gain

The assessee, a home-maker, filed returns for the relevant AY, reflecting short term capital gains on sale & purchase of shares, as well as speculation income from share trading. On assessment, the AO noted that the assessee had integrated both activities and so noted that the activity was being done with business motive. Hence, treating such activity as being trading activity, the AO treated the STCG as business income. On appeal, the CIT(A) upheld such findings. The Tribunal too upheld the same.

On appeal, the High Court held that,

Whether profit arising from sale of shares within one week from date of their purchase, so as to earn profits, is to be classified as business income - YES: HC

Whether such types of sale & purchase can be treated as investment where income arising from such transactions had been classified as business income in the immediately preceeding AY - NO: HC

++ the details of the sales and purchase in shares during the year resulted in the conclusion of the Tribunal that total 73 transactions were disclosed. Only one transaction is shown in long term capital gain category. The other transactions are sales and purchase of shares during the year itself. Out of 72 transactions showing the short term capital gain, only in the case of ten transactions, the holding period is more than one month. In the majority of the transactions the period of holding is even less than one week. That is ranging from one day to seven days. Hence the argument was rejected that merely because ten transactions disclose holding period of more than one month that is not reflective of the transactions undertaken during the year under assessment. In fact, the trend is that the majority transactions have a feature in the holding of shares from one day to seven days. The assessee sold the shares within a period of one week from the date of purchase in more than eighty per cent of the cases. It is this trend which resulted in the concurrent finding against the assessee. The intention of the assessee in indulging in these transactions is to earn profit at the earliest possible occasion and when there is a rise in the price. The assessee is moving as per the stock market trend. At the first available opportunity, the assessee is selling the shares. This type of activity of sale and purchase is rightly termed, not as an investment, but actuated by motive of sale and purchase so as to earn profit at the earliest occasion. In the year 2006-07, which is immediately preceding the assessment year, the assessee herself offered the profit from sale and purchase of shares as business income. Hence, the shifting stands as also the peculiar nature of the transactions resulted in the Tribunal upholding concurrent findings against the assessee. Hence the Tribunal's findings warrant no interference.

Assessee's appeal dismissed

Income Tax - Sections 69B & 69C

Keywords - Unexplained expenditure - Valuation report - Work in progress

The assessee company, engaged in civil construction, was subject to search & seizure operations during the relevant AY. Certain valuation reports pertaining to works in progress were seized. It was noticed the figures indicated in the valuation report of the site engineers were higher than the work-in-progress recorded in the assessee's books. Such difference was found to be of about Rs 9.30 crores. However, the assessee agreed to making additions of about Rs 10 crores. However on assessment for the relevant AY, the assessee did not offer such amount for taxation. Hence the AO made additions of such amount on account of unexplained sources of income, u/s 69C of the Act. On appeal, the CIT(A) deleted such addition on grounds that the AO had not produced any evidence showing that the assessee did not record sales, purchase & other expenses properly in its books of accounts. Such findings were upheld by the Tribunal on grounds that there was no material being brought to show that the valuation done earlier is incorrect & that provisions of Section 69C were inapplicable because there was no evidence of any unaccounted expenditure.

On appeal, the High Court held that,

Whether it is incumbent upon the Revenue to prove existence of some unexplained expenditure before invoking provisions of Section 69C - YES: HC

++ both the CIT (A) & the Tribunal have rendered a finding that Work in Progress as indicated in its return of income for the year ending 31.3.2009 correctly reflects the closing Work in Progress determined on physical verification. On facts both the CIT(A) & the Tribunal have rendered a finding that the value of Work in Progress as done by its site engineers in November, 2008 was only on provisional basis. No verification was ever done by the search party. The return filed on 31.3.2009 showing its closing Work in Progress has been accepted by the AO. Thereby, unless it is first established by the Revenue that there is unexplained expenditure, no occasion to apply Section 69C of the Act can arise. The Revenue has not challenged the concurrent findings of the CIT(A) as well as of the Tribunal that the Work in Progress as disclosed during the time of search was on provisional basis and it was taken into consideration while determining the Work in Progress as on 31.3.2009;

++ thus in the facts of this case, the question as proposed is academic, unless the Revenue first challenges finding of fact arrived at by the Tribunal. The finding of fact is that, there is no excess work in progress than that declared by the assessee as on 31.3.2009 and the valuation done of the work-in-progress as on 31.11.2008 was only on provisional basis. No substantial question of law arises.

Revenue's appeal dismissed

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

Keywords - Audit report - AS-11 - Scrutiny - Tangible material.

The assessee's case was picked up for scrutiny on noticing that it had some forex gains. Later the AO initiated re-assessment on the ground that the forex gain was to be treated as revenue in nature and had escaped assessment. The AO also shared the reasons for the notice u/s 148.

On Writ, the High Court held that,

Whether audit report is mere information and does not constitute tangible material to initiate re-assessment - YES: HC

++ the Carlton case concludes the issue in the present case; the audit objection merely is an information. As reiterated in Kelvinator by the Supreme Court, change of information is impermissible. Revenue clearly barred by provisions of Section 147/148 of the Act;

++ the impugned re-assessment notice dated 30.03.2017, cannot be sustained. It is hereby quashed; all consequential proceedings issued and conducted pursuant to the said re-assessment notice are also hereby quashed.

Assessee's writ petition disposed of

Income tax - Writ - Sections 68, 142 & 143

Keywords - Pre-deposit - Stay on demand

The assessee, a cooperative bank, was assessed for the relevant AY, whereupon the AO made additions to the assessee's income u/s 68 of the Act. On appeal, the CIT(A) granted stay on recovery of such demand conditional upon pre-deposit of 50% of the duty demanded. In writ, the Single Judge reduced the quantum of pre-deposit to 20%. Hence the present writ appeal, claiming recovery of such huge amounts would adversely affect its financial conditions and lead to its closure.

In writ, the High Court held that,

Whether stay on recovery of duty demand can be granted to a cooperative bank whose members come from marginalized sections of society - YES: HC

Whether therefore a blanket stay on such demand can be granted considering that the assessee did not submit relevant details before the AO or the CIT(A) - NO: HC

++ noticing the fact that the assessee is an Institution in the Co-operative sector and taking note of its members who are from the general public as also from the marginalised sections, this court is of the opinion that an opportunity could be afforded to the assessee to produce the details of deposits;

++ to avoid any recalcitrant attitude by the assessee, the assessee's counsel was directed to file an affidavit of undertaking, which has been done by the Secretary of the appellant-Bank, in this appeal before us. The affidavit categorically undertakes to produce the details of the deposits before the First Appellate Authority. The assessee would also produce any further details required by the First Appellate Authority or the Assessing Officer on a report being called for by the First Appellate Authority. The same shall be done within the time stipulated by the First Appellate Authority or the Assessing Officer on directions of the First Appellate Authority. In any event, we do not think that a blanket stay can be granted;

++ considering the entire circumstances as also the failure of the assessee to produce the details at the first stage, we are of the opinion that the assessee will have to make a deposit of 1% of the tax addition made u/s 68 within a period of one month from the date of receipt of a certified copy of this judgment. The Writ appeal is disposed of with no observation on merits. The consideration of the First Appellate Authority shall be untrammeled by any observation of the Single Judge. Writ Petition is allowed leaving the parties to suffer their respective costs.

Assessee's writ appeal partly allowed

CX - Revenue has challenged the order passed by Tribunal in 2017-TIOL-4598-CESTAT-CHD - Undisputedly, the amount involved in present appeal is Rs. 11,76,679/- - As the amount involved is less than the limit prescribed in the Circular issued by the Central Board of Indirect Taxes & Customs, the present appeal is dismissed as not maintainable - Consequently, the application for condonation of delay in refiling of the appeal is also dismissed: HC

Appeal dismissed

CX - Issue relates to classification as the turn over was sought to be taxed either under the Head of Management Consultancy Services or Franchise Services or Intellectual Property Services - Appeal raising issue of classification of goods is not maintainable before this Court in terms of Section 35 G(1) read with Section 35(L)(ii) of CEA, 1944: HC

Appeal dismissed

NDPS - a parcel was reported as suspicious by a courier company - Search of parcel revealed it to be containing some quantity of heroin concealed within auto parts - Inquiry revealed that the parcel had been booked by the first petitioner herein, using the ID details of some other person - The petitioner was apprehended and upon questioning, claimed to have received the parcel from another person - Search of the other person's house revealed similar auto parts and packing material, besides other incriminating material - Thereafter, the petitioner was arrested and convicted u/s 21 & 29 of the NDPS Act - It was also alleged that the petitioner had been convicted earlier as well - The petitioner filed the present bail application claiming to have had no wilful possession of such contraband.

Held - Considering relevant portions of the Apex Court's decision in Mohan Lal Vs. State of Rajasthan, it was held that there had to be animus and mental intent showing or establishing possession of contraband - In the present case, the first petitioner booked the parcel containing the contraband, whilst under the impression that the articles belonged to the other person - However, the petitioner did know that a fake ID would be needed to send the courier - Hence it cannot be inferred that the petitioner had no conscious possession of the contraband - Besides, considering that the first petitioner had already been convicted & deported for an earlier offence, no satisfaction can be recorded to the effect that he would not indulge in such behaviour again - Hence the first petitioner does not deserve to be granted bail - Regarding the bail application of the second petitioner, who is the proprietor of the courier company, it is seen that he did not realise the existence of the contraband until the parcel was not cut open and examined - Further his conduct while handling the parcel did not reveal him to be in conscious possession of contraband or in the knowledge that the parcel contained contraband - Hence the second petitioner can be released on bail upon furnishing a sum and two surety bonds: HC (Para 2,4,5,6,9,11,12)

Bail Applications partly allowed

Cus - Assessee was working for one M/s Alliance Strategies Limited as a Liaison Manager - The said concern was issued notice for clearing goods on the basis of false documents - The assessee urges that penalties imposed are ex-facie arbitrary and unreasonable - In absence of differentiating the role of three employees i.e. the assessee, Mr. Amit Mahajan and Ms. Anuradha Diwan, he could not be singled out and imposed with a higher penalty of Rs.40 lacs - The Revenue urges that there was a difference, inasmuch as, the assessee was responsible for forgery of a larger number of documents and that the findings indicate that assessee was involved in forgery and other two employees were coordinating him - Imposition of different amounts as penalties upon assessee on the one hand and the other two employees on the other, does not appear to be justified - Although the Revenue sought to justify this difference by emphasising upon the nature of the role, what appears from the record is that the lower authorities were carried away by the fact that the assessee was a Manager whereas, the other two were lesser ranked employees - The penalty imposed upon assessee under Section 112 and 114AA of Customs Act, 1962 is reduced to Rs.6 lacs under each provision: HC

Appeal partly allowed

Cus - Petitioner imported bicycle parts and bicycle pumps - During search, incriminating documents were recovered and resumed - On enquiry, it was found that the petitioner had some stock of imported bicycles parts and the same were detained and handed over to one Rajeev Kumar Kalia, proprietor of petitioner on superdari - A SCN was served upon the petitioner - The petitioner submitted an application under Section 127B of the Act, before Settlement Commission by accepting duty liability of Rs. 31,38,526/- and accordingly deposited the same along with interest - The Settlement Commission settled the application of petitioner at Rs. 38,53,718/- and called upon him to deposit the remaining customs duty of Rs. 7,15,192/- - The aforementioned order has been challenged on the ground whether the Settlement Commission was justified in settling at Rs. 38,53,718/- - The order of Settlement Commission does not call for any interference as it does not fall in any of the conditions enabling this Court under Article 226 of the Constitution of India to bring the order under the expression "judicial review", for, the order of Settlement Commission is not based only on documentary evidence but the statements of the witnesses including that of the petitioner - The amount settled by Settlement Commission cannot be said to be erroneous or inequitable - No ground for interference is made out: HC

Writ Petition dismissed

Cus - The petitioner applied for advance authorisation with duty free facility to import raw materials under the obligation to re-export finished goods - Such advance authorisation was granted to the petitioner which contained a condition, by which petitioner was obligated to export finished products within a specified time - Petitioner failed to comply with the said condition - Thus, made a request for extension of time to fulfil the obligation of re-export - While passing the impugned order, second respondent has exercised his power and granted extension of time and further made a direction unworkable by stating that the direction will operate from 22.02.2014 - Thus, the benefit granted in favour of petitioner has ended in futility and the impugned order is a paper order, probably with a view to comply with the direction issued by this Court - Revenue contend that if court is of the view that the extension should have been prospective, then the matter should be remanded to second respondent to consider the eligibility of petitioner for extension of such prospective extension - The second respondent cannot be given an opportunity to revise his own order and he having not been vested with any such power to revise his own order under the relevant regulations, the question of remanding the matter does not arise - With regard to the period for which the extension has to be granted, the respondent should have taken a realistic approach, because, admittedly, the petitioner is yet to fulfil the export obligation - Therefore, to grant extension up to August 2014 is an unworkable order and probably would serve statistical purposes only - Therefore to that extent the impugned orders call for interference - Second respondent is directed to grant the petitioner extension of time by 6 months prospectively from the date of issuance of the order to be passed by the second respondent and to remove the name of petitioner's company from the denied entity list: HC

Writ petition allowed

Tamil Nadu Value Added Tax - Writ - e-filing of returns - Manual filing of returns - Revised returns

The assessee company filed revised returns for a particular month in the relevant AY. It also sought refund of input tax credit by considering manual returns filed by it in Form W. Hence the present writ, seeking directions to such effect.

In writ, the High Court held that,

Whether an assessee can be permitted to file revised return under the TNVAT Act where filed manually & not electronically as mandated in the Act - YES: HC

++ the counsel for the Revenue contended that under the scheme of the Tamil Nadu Value Added Tax Act, 2006 electronic returns alone are accepted. An identical plea was raised in a batch of cases arising under the Income Tax Act, 1961 as to whether an assessee can be permitted to file a return without Aadhar number. Interim orders have been granted by the Division Bench of this Court as well as the Division Bench of the Delhi High Court permitting the assessees to file manual returns. Though, under the Income Tax Act, 1961 the procedure of e-filing alone is contemplated except for two cases viz., assessees who have income less than Rs 5 lakhs and assessees who have income of Rs 80 lakhs and above. Though the order passed by the Division is an interim order, the endeavour of the Revenue in the instant case should be to collect appropriate rate of tax by making a proper assessment. Therefore, in my considered view, no prejudice would be caused to the interest of Revenue, if the prayer sought for by the assessee is accepted. Hence the Revenue is directed to take on file the revised return filed by the assessee on 21.12.2017 as well as the manual return in Form W, afford an opportunity of personal hearing to the petitioner and redo the assessment in accordance with law.

Writ petition disposed of