Income tax - Writ - Section 179

Keywords - recovery from ex-Director - mis appropriation of funds - outstanding dues of company

The assessee is an ex-director of one Brajvashi Caterers Private Limited. For the A.Y 2010-11, the AO passed an order of assessment in case of said company imposing demand of unpaid tax of Rs. 17.06 lacs. However, since the company did not pay the same, the AO desired to invoke section 179 and issued notice to the assessee requiring him to show cause as to why he should not be recovered for outstanding dues of the company in his capacity of Director. In response, the assessee opposed the notice contending that she had already resigned as Director from the company w.e.f. Dec 29, 2009. Since her resignation, she had no association with the company and the affairs of the company were managed by one Narendrasinh Chauhan along with his brother Kalpeshkumar Chauhan and another. The assessee explained that these directors had defrauded the company and the Revenue. Thus, it was pleaded that there was no negligence, misfeasance or breach of duty on her part as a director which led to revenue defalcation. The AO however, ignored such pleas and passed an order asking her to pay up dues of the company, observing that no provision was made by the company or any of its Directors to ensure payment of government dues which were bound to arise on account of deliberate and known acts of gross neglect, misfeasance and breach of duty by all directors of the company.

On Writ, the HC held that,

Whether Section 179 permits lifting of corporate veil for recovery of unpaid tax dues of a private company from its directors, without establishing that non-recovery was on account of misfeasance or breach of duty on part of such directors in relation to affairs of company - NO: HC

++ it is noticed that section 179 would enable the Revenue to recover unpaid tax dues of a private company from its director, unless he proves that the non-recovery cannot be attributed to any gross negligent, misfeasance or breach of duty on his part in relation to the affairs of the company. Of course this requirement is cast in the negative and the burden is on the person who was a director of the company at the relevant time to establish the relevant facts. Nevertheless, it would be the onus of AO to draw the primary facts to the notice of assessee on the basis of which, he proposes to invoke powers u/s 179 of the Act. Essentially, this statutory provision provides for lifting of corporate veil and enable the Revenue to recover the unpaid tax dues of a private company from its directors, provided the requirements referred to in sub-section (1) of section 179 are satisfied;

++ it is found that in the showcause notice, the AO has not laid down sufficient foundation for invoking section 179, leave alone broadly pointing out he has not even alleged that non-recovery was on account of gross negligent, misfeasance or breach of duty on part of assessee in relation to the affairs of the company. His final conclusions in the order are therefore based on the material at his command which was never shared with the assessee. In the result, the order passed by AO is set aside only on this ground making it clear that nothing stated in the order would prevent the AO from initiating fresh exercise for the same purpose, if so advised and, if the material at his command is sufficient to permit him to do so.

Assessee's petition allowed

2018-TIOL-1777-HC-MAD-CX

BHEL Vs ASSISTANT COMMISSIONER CGST & CE: MADRAS HIGH COURT (Dated: August 27, 2018)

CX - The assessee company is a PSU, engaged in manufacture of boilers, steam generators, parts of water tube boilers, valves, parts of valves, pressure vessels and heat exchangers, parts of pressure vessels and heat exchangers - It availed credit of EC & SHEC and Krishi Kalyan Cess (KKC) on input goods - Such credit was utilized during clearance of final products - As the assessee was unable to carry forward such amounts paid, it claimed refund of the same - The Department issued SCN directing the assessee to produce requisite documents and appear for hearing - However, the assessee received the notices on the date of the hearing itself - Hence it sought a fortnight's period of time to appear with relevant records - However, the Revenue proceeded to reject the refund claim without permitting personal hearing - Hence the present writ alleging violation of principles of natural justice.

Held - The assessee's contention of delayed receipt of SCN is not contested by the Revenue - Its request seeking extention of time for producing relevant documents was not considered - The Revenue could not have passed the order rejecting the refund claim without giving the assessee an opportunity to make its case - An order so passed is in contravention of the principles of natural justice - Hence the orders are set aside and the matter is remanded for fresh consideration - Assessee directed to appear for personal hearing and produce requisite documents: HC (Para 2,4,5)

Writ petition allowed

Income tax - abandoned project - pre operative expenses - revenue expenditure

The assessee company is engaged in the business of manufacture of PVC and caustic soda and also in the business of shipping. For the relevant A.Y 2000-01, they filed their return admitting 'NIL' income under normal computation and Rs.9,67,19,274/- under the provisions of Section 115JA, and paid tax to the tune of Rs.3,72,36,920/- u/s 115JA. The said return was also processed u/s 143(1). of the Act. Subsequently, it came to the notice of AO that the assessee had intended to start a textile business in the A.Y 2000-01 and since the project did not materialize, the assessee decided to abandon the project and in view of the same, they incurred an expenditure of Rs.2,38,25,383/- and treating the expenditure as revenue expenditure, it was returned in the books. The AO therefore, while considering the preoperative expenses of taxable project, held that the act of assessee in debiting the capital expenditure to its P&L A/c was not in accordance with the provisions of law and accordingly, disallowed the same.

On appeal, the FAA relied upon the decision of Division Bench of this Court in the case of EID Parry (India) Ltd. Vs. CIT - 2003-TIOL-292-HC-MAD-IT and held that since the expenditure was incurred for the purpose of setting up a new project, which was subsequently abandoned, the nature of expenditure would not change from capital to revenue. On further appeal, the Tribunal concurred with the findings of the FAA and held that the textile project was totally a new project for the assessee, therefore, the expenditure incurred in attempt to commence production of new article could only be construed as capital expenditure.

On appeal, the HC held that,

Whether the proper test to be applied for deciding allowability of expenses incurred on a new project, is the unity of control, management & common fund, but not the nature of new business - YES: HC

++ the assessee's case is that the decisive factors for allowance of expenditure are unity of control, management inter connection, inter lacing, inter dependent, common fund, etc. In other words, if these factors are fulfilled, then the expenditure should be allowed even if the project is a new one. In this regard, it is noticed the Division Bench of Delhi High Court in the case of Jay Engineering Works Ltd., which took into consideration all the relevant decisions on the point, some of which are identical to the facts of the present case in the sense that the assessee ran a particular line of business and wanted to start a different line of business, for which, expenditure was incurred and subsequently, the business was abandoned and the question was as to how the expenditure had to be treated. The Delhi High Court in the said case of Jay Engineering Ltd, observed that: "....the nature of the new business is not a decisive test for determining whether or not there is an expansion of an existing business. What is of importance is that the control of both the ventures, the existing venture as well as the new venture, must be in the hands of one establishment or management or administration. The place of business of the existing business and the new business may not be in close proximity. However, the funds utilised for management of both the concerns must be common as reflected in the balance sheet of the company...." Thus, it is clear that if unity of control, management and common fund are with the assessee, then it is no matter as to whether a totally different line of business is started by the assessee. Thus, unity of control is the decisive test and not the nature of two lines of business;

++ a perusal of the order of CIT(A) shows that, it has been observed that all the heads, under which, expenditure relating to textile project was incurred, are generally revenue expenditure. It is not known as to what made the Authority to take a different decision after having accepted that they are revenue expenditure and however, ultimately, the CIT(A) concluded that on account of new line of business, the expenditure was a capital expenditure, which has been held as not a decisive test. As admitted by the CIT(A), the preoperative expenses are all generally revenue expenditure and by applying a wrong test, which is not the decisive test, the Authorities had concurrently committed an error in treating the expenditure as capital expenditure. For all these reasons, the order passed by the Tribunal calls for interference.

Assessee's appeal allowed

Income tax - Sections 80I, 80IA, 147 & 148

Keywords - eligible industrial undertakings - foreign letter of credit - interest income - margin money

The assessee company had filed return for the A.Y 1996-1997 claiming that in respect of two units, one situated at Pondicherry and another outside, a total interest income on the monies kept with the bank by way of margin money for taking foreign Letter of Credit by the Assessee to the tune of Rs.74,34,478/-, was eligible to be claimed as deduction u/s 80IA. The assessment was however completed u/s 143(3) r/w/s 147 disallowing the interest income.

On appeal, the CIT(A) reversed the order of AO. Challenging the same, the Revenue preferred appeal before the ITAT, whereby it was allowed, holding that the income derived from eligible business of an undertaking alone was eligible for deduction and the interest income derived from an industrial undertaking was not eligible for deduction u/s 80IA. This was challenged by the assessee by way of a Miscellaneous Petition for recall of its order. Though the Tribunal allowed Miscellaneous Petition and restored the matter for deciding afresh, the assessee did not co-operate for the disposal of appeal and sought for adjournment, which, in the opinion of the Tribunal was a delaying tactic. Therefore, the Tribunal held that the wordings of Section 80I and 80IA were identical and both the Sections use the expression "any profits and gains derived from industrial undertaking".

On appeal, the HC held that,

Whether accrual of interest on FDs kept by an industrial undertaking with banks as a pre-condition, so as to enable them to import critical component for purpose of manufacturing, is no basis to deny deduction u/s 80IA - YES: HC

++ it is seen that the Tribunal reiterated its earlier order, wherein, the Revenue's appeal was allowed and even at that stage, the Assessee did not appear before the Tribunal. The Tribunal followed the decision in Pandian Chemical's case and held that Assessee is not entitled for deduction u/s 80IA. The application filed by the Assessee to recall the said order was allowed and the Tribunal afforded one more opportunity to the Assessee. Nevertheless, the Assessee appeared before the Tribunal and sought for adjournment, which in the opinion of the Tribunal was a delaying tactics and accordingly, it reiterated its order and held that the interest earned from bank deposit for the purpose of margin money do not qualify for deduction. Thus, this Court is first required to examine as to whether the decision in Pandian Chemical's case would apply to the facts and circumstances of the case. Referring to the factual position in assessee's case, it is seen that the margin money by way of fixed deposit was available with the Assessee's bankers so as to enable the Bank to open a Foreign Letter of Credit, which was essential for the purpose of import of critical components for the purpose of manufacture of the wind mill for generation of electricity. As far as the case of Pandian Chemical's is concerned, it arose out of a claim u/s 80HH, and the Supreme Court referring to the decision of Privy Council in case of CIT V. Raja Bahadu Kamakhaya Narayan Singh - 2002-TIOL-677-SC-IT-CB, held that although electricity may be required for purposes of an industrial undertaking, the deposit required for its supply is a step removed from the business of industrial undertaking and the derivation of profits on deposits made with the Electricity Board cannot be said to flow directly from the industrial undertaking itself;

++ it is noted that Section 80I, 80IA and 80IB have a common scheme and from a reading of those Sections, it is clear that said sections provide for incentive in the form of deductions, which are linked to the profits and not to investment, whereas, in the other provisions, namely, Sections 80H, 80HH, 80HHA, 80HHB, 80HHBA and 80HHC, the scheme is different. In fact, this distinction was noticed by a Division Bench of the Kerala High Court in K.Ravindranathan Nair V. DCIT - 2003-TIOL-72-HC-KERALA-IT, wherein, the Court, while considering the decision of Apex Court in Karnal Co-operative Sugar Mills Limited, pointed out that the said decision was not rendered in the context of all the provisions of Section 80HHC, as the decision in Karnal Co-operative Sugar Mills Limited followed the decision in the case of CIT V. Bokaro Steels Limited - 2002-TIOL-161-SC-IT. In Karnal Cooperative Sugar Mills Limited, the deposit of money was directly linked with the purchase of plant & machinery and therefore, it was held that any income earned on such deposit was incidental to the acquisition of assets for the setting up of plant and machinery. Therefore, the Tribunal committed an error in allowing the Revenue's appeal by merely placing reliance on the decision in the case of Pandian Chemical's, which arose out of a case u/s 80HH and this error committed by the Tribunal goes to the root of the matter affecting the very correctness of the order passed by the Tribunal. In the case of CIT V. M/s.T.T.G. Industries Limited - 2012-TIOL-739-HC-MAD-IT, the Court pointed out that Section 80IA/80IB has a common scheme and a reading of Section 80IA makes it clear that the only requirement for the applicability is deriving of income by an undertaking or an enterprise from any business referred to in sub section (4) and thus, any profits and gains derived from an industrial undertaking from any business would qualify for deduction u/s 80IA;

++ similarly, in the case of CIT V. Shree Rama Multi Tech Limited - 2018-TIOL-153-SC-IT, the Apex Court analysed the purpose of deposit and held that it was not for some additional income, but to comply with the statutory requirements and the interest accrued on such deposit is merely incidental. Thus, this will be the right test to be applied to the present case. Further, in the case of CIT V. Jaypee DSC Ventures Ltd - 2011-TIOL-172-HC-DEL-IT, the High Court held that the deposit made by the Assessee was not the surplus money lying idle with it to earn interest, but it was the amount of interest earned from fixed deposit, which was kept in the bank for the purpose of furnishing the Bank Guarantee. In the present case, the requirement of the Assessee to furnish the fixed deposit was a pre-condition to enable the assessee to open a foreign Letter of Credit for the purpose of import of critical components for the manufacture of wind mill. This incidentally had earned some interest. As pointed out by the Supreme Court in Shree Rama MultiTech Limited, it is not the assessee's surplus money, which was deposited by way of fixed deposit, which had earned interest; on the contrary, it was a pre-condition for the purchaser/Assessee to enable him to import the critical component for the purpose of manufacturing. Furthermore, it is not the case of the Revenue that the amount was deposited in fixed deposit solely for the purpose of earning interest nor it is the case of the Revenue that the amount, which was deposited in fixed deposit was a surplus money, which was lying idle in the hands of assessee. Therefore, whatever income accrued is merely incidental and not the prime purpose of doing the act in question, which resulted into accural of some additional income and therefore, the said income is not liable to be assesseed and is eligible to be claimed as deduction.

Assessee's appeal allowed

Income tax - Writ - Sections 143(1), 147 & 148

Keywords - cash payments - reasons for reopening - undisclosed investment

The assessee, a real estate developer, had filed its return declaring "Nil" income and the same was accepted without scrutiny u/s 143(1). Subsequently, an information was received from ACIT, Ahemdabad showing seizure of various incriminating materials from the premises Venus Group, on the basis of search proceedings conducted u/s 132. As per the seized material, it was found that the present assessee was one of the parties to the transaction of several land properties with the Venus Group in various years. The total amount of cash transaction included in the sale of land at Tarapur/Sargasan carried out by the group was Rs.33,24,89,500/- and the total area was 84,732 Sq. metres, whereas the share of assessee on the land at Sargasan was 53,813 sq. Meters, which worked out to 63.51%. Therefore, assessee's share in the unaccounted portion of cash transaction was Rs. 21,11,62,931/-. Thus, the source of cash investment of Rs. 2,95,62,810/- for purchase of land during the previous year was unaccounted income of assessee, which remained unexplained. In view of the same, the AO had reasons to believe that unaccounted cash expenditure had escaped assessment within the meaning of section 147, and accordingly, he issued reopening notice u/s 148. Upon being supplied reasons for such reopening, the assessee raised objections, but in vain.

On Writ, the HC held that,

Whether sufficient material available on record to form a belief that cash payments were made during relevant year for purpose of undisclosed investment, necessitates reassessment - YES: HC

++ in in the present case, the assessment of both the assesses were made u/s 143[3] without any scrutiny. As per the AO, there is prima facie material to suggest cash payments for purchase of land in different proportion by the assessees. It is seen that larger issues were examined by this Court in the judgment dated April 02, 2018 which cover number of assesses of the same group and concerned respective notices for reopening of their assessments for earlier A.Y 2010-2011. All contentions for and against were examined and petitions were dismissed. Broadly, the very same issues arose in the present petitions except an additional element that no taxing event took place during the present year. Such contention cannot be accepted. Prima facie, the AO has material at his command to form a belief that payments in cash were made not for purchase of land property and these payments were made during the period relevant to the year under consideration. If these facts are ultimately established, the question of taxing the assessees for such undisclosed investment would immediately arise. Reopening of the assessments therefore cannot be quashed.

Assessee's petition dismissed

CX - Whether the petitioner who has manufactured and supplied goods (after payment of excise duty via the cenvat credit route) to a 100% Export Oriented Unit (EOU) is entitled to claim refund of Terminal Excise Duty (TED).

Held: The Policy Relaxation Committee's [PRC] decision is neither consistent nor even handed - though the petitioner obtained refund of TED for the quarter April, 2011 to June, 2011 and July, 2011 to September, 2011 despite PRC's earlier decision of 04.12.2012, the third application for the quarter October, 2011 to December, 2011 was rejected despite the facts and circumstances of the case being pari materia with other two quarters - PRC and the respondent no.3 should have acceded to the petitioner's request for grant of TED for the quarter October, 2011 to December, 2011 as it was a period which fell prior to the issuance of the amendment notification No.4 dated 18.04.2013 - Circular No.16, dated 15.03.2013 cannot impact the application(s) for refund pertaining to the period prior to 18.04.2013 - FTP 2009-2014 conferred a right on the petitioner, who, admittedly, was a DTA supplier, at the relevant point in time, to seek refund of TED, as the supplies had been made to 100% EOUs, albeit, under a non-ICB route - the argument that since excise duty was not paid via cash but was paid by utilizing the cenvat credit route and hence, the petitioner would not be entitled to claim refund is unsustainable as there is no bar in law in paying duty by utilizing cenvat credit - writ petition allowed - the impugned communication dated 21.04.2016, issued by respondent no.3, whereby the petitioner's claim for refund was declined is set aside - the respondents are directed to refund TED to the petitioner, albeit, to the tune of Rs.83.64 lakhs for the period spanning between October, 2011 and December, 2011 after due verification : HIGH COURT [para 9, 14, 15, 15.1, 19]

Writ Petition allowed

Cus - The Single Judge, vide impugned order - 2018-TIOL-733-HC-MAD-CUS., rejected the prayer of the appellant for desealing the godown or the return of the consignments and directed the respondents/Department to issue fresh summons to the appellant - appellant in writ appeal before High Court.

Held : Customs Authorities can seal the godown, alongwith the goods inside as a preventive measure to restrain the godown owner from using the godown for keeping illegally removed goods, atleast till such time, the proceedings of confiscation, regarding the goods, being adjudicated upon - the owners of these goods have not claimed for release of these goods - this leads to the very strong suspicion that these goods had been removed from CFS without proper documentation or on forged papers - investigation regarding these goods is going on - the respondent, by order dated 24.4.2018, has extended the period to issue SCN and this order has not been challenged - the authorities are directed to complete the investigation forthwith and pass orders - desealing cannot be permitted till the finality of the proceedings initiated under section 124 of the Customs Act - hence, the writ appeal is dismissed : HIGH COURT [para 11, 17, 18, 19]

Writ Appeal dismissed

Cus - Grievance of the petitioner is with regard to the Final Findings dated 28.11.2017 recorded by the Designated Authority [DA], Directorate General, Anti-Dumping and Allied Duties, terminating the investigation undertaken by him under the Rules of 1995 - a direction is sought to set aside the said findings and to direct the said DA to recommend to the Central Government to levy anti-dumping duty on imports of normal Butanol or N-butyl Alcohol, originating in and exported into India from Saudi Arabia.

Held: Refusal by the DA to look into any possible threat of injury or material retardation to the establishment of any industry in India falls short of the statutory mandate - the findings recorded by the DA clearly demonstrated sufficient evidence of dumping within the short span of three months by the exporters/producers from Saudi Arabia and also the injury caused to the domestic industry thereby - therefore, the DA could not have taken recourse to Rule 14(b) of the Rules of 1995 for justifying the termination of investigation - in fact, none of the clauses in Rule 14, which deals with termination of investigation, had application whereby the designated authority could have taken such a step - when the DA found that several other countries who were exporting the very same product to India had been subjected to anti-dumping measures, allowing exporters/producers from Saudi Arabia to do so without subjecting them to the same anti-dumping measures, even though their activities within a short span of three months clearly indicated their invasive capturing of the domestic market and the consequential injury to domestic industry, was clearly not warranted - the DA, having recorded findings in support of the injury sustained by the domestic industry by dumping of like products by exporters/producers from Saudi Arabia, failed to carry through on the same note and strangely did a volte-face, when it came to the final recommendation - this was on the strength of his misconceived notion that a three month span of dumping was insufficient for recording a finding - there is no such mandate in the Rules of 1995 - the Final Findings dated 28.11.2017 are set aside and the matter is remitted to the DA for consideration afresh - the writ petition is, accordingly, allowed to the extent indicated: HIGH COURT [para 23, 24, 25, 27, 28]

Writ Petition allowed