Income tax - Sections 2(15) & 13(8)

Keywords - exemption benefit - industrial corporation

The Revenue Department preferred the present appeal challenging the action of ITAT in giving the benefit of Section 11 and 12 to the assessee corporation which the AO had disallowed by invoking the provision of Section 2(15) r.w.s. 13(8) of the Income tax Act.

On appeal, the HC held that,

Whether a statutory corporation constituted for the purposes of establishing commercial centers in connection with establishment & organization of industrial estates, is entitled to exemption u/s 11 of I-T Act – YES: HC

++ the counsel for assessee has pointed out that so far as this Court is concerned, the issues / questions raised in the present appeals are concluded against the Department, in view of the decision of the Division Bench of this Court in case of Commissioner of Income Tax vs. Gujarat Industrial Development Corporation - 2017-TIOL-1337-HC-AHM-IT and allied Appeals, in the case of the very assessee, but with respect to the earlier assessment years. In that view of the matter, the present appeals also stands answered in favour of assessee.

Revenue's appeal dismissed

Income tax - Section 36(1)(iii)

Keywords - business purpose - depreciation on leased asset - genuineness of transaction - loans to subsidiary

A) The assessee company had filed its returns claiming depreciation on the leased asset. During the course of assessment, the AO was however of the opinion that the transaction itself was not genuine and therefore he disallowed the assessee's claim for depreciation. When the matter went before the Tribunal, the depreciation was allowed, inter alia on the ground that the transaction was genuine and the assessee had demonstrated ownership over assets, genuineness of lease transaction, and user of leased asset for the purpose of business of earing lease rental. Therefore, the ITAT opined that when such lease rental was accepted & taxed by AO, he could not have doubted genuineness of transaction.

B) In addition, the Tribunal also reversed the order of CIT(A) and thereby deleted the addition of Rs.5,84,300/- made on account of interest u/s 36(i)(iii). This came to be challenged by the Deartment under present appeal.

On appeal, the HC held that,

Whether depreciation on leased assets should not be denied by treating it as bogus, once lease rental offered by the assessee as income in his return stands accepted by Department - YES: HC

Whether advances lent out to subsidiary companies are allowable as deduction u/s 36(1)(iii), if such advances were utilized by the subsidiaries for their businesses - YES: HC

++ as far as depreciation claim is concerned, apart from finding of the Tribunal regarding genuineness of the transaction being a finding of fact, what emerges further is that the AO had accepted lease rental as income of the assessee and taxed the same. It was on this ground that the Tribunal was of the opinion that the depreciation of leased asset cannot be denied. This question therefore also does not require consideration;

++ as far as loans to subsidiary is concerned, it is seen that while deleting the addition, the Tribunal relied on the judgment of Supreme Court in the case of S. A. Builders - 2006-TIOL-179-SC-IT. The Tribunal noted that undisputedly the loans and advances were given by the assessee to the subsidiary companies for the purpose of their business and there was no dispute that such advances were utilized by the subsidiaries for their businesses. No question of law in this regard therefore arises.

Revenue's appeal dismissed

Income tax - certificate from Excise authority - monthly returns - declaration of stock

The assessee, an individual, had filed his return declaring opening stock of Rs.6.51 crores of fabric which was claimed to have purchased from twenty four suppliers. During the course of assessment, the AO however doubted such declaration and noted that CENVAT provisions were introduced for the first time to the Textile Industries and all traders had to make declaration of stock to ascertain the CENVAT credit available in their accounts. The AO did not find such stock declaration genuine and therefore made consequential additions. On appeal, the addition made on account of bogus opening stock Rs.6,51,00,020/- stood deleted, ignoring the fact pointed out by the AO that assessee had manipulated the stock and bogus opening stock was reported in the books of account and in ROI.

On appeal, the HC held that,

Whether stocks declared by a textile dealer once stands duly certified by Central Excise Authorities, should not be doubted & added to his hands by treating it as bogus - YES: HC

++ it is seen that during the course of appellate proceedings, the assessee has produced materials including a certificate from the Superintendent of Central Excise, Surat, showing the stock position of the assessee. The CIT(A) also called for the remand report and noted that the assessee had made such a declaration before the Income Tax as well as Central Excise Authorities of his stock position. He therefore believed that such stock was actually in existence. He noted that such stock was subsequently sold by making proper declarations with the Excise Authorities. Monthly returns of claiming CENVAT credit were also filed. The assessee had shown sale of such stock after May 2003, and the sale proceeds were also received during the year under consideration. The Tribunal noted that in the declaration before the Excise Authorities, the assessee had shown the stock of the same value pertaining to different kinds of gray fabric admeasuring 17,57,165 meters. The Tribunal also noted that such stock was cleared in subsequent period, for which, monthly declarations were filed. It can thus be seen that the entire issue is based on appreciation of record, and hence, no question of law arises.

Revenue's appeal dismissed

Income tax - on money - parties to transaction - undisclosed income

During the year under consideration, a survey u/s 133A was carried out at the business premises of assessee, wherein certain loose papers were impounded. Pursuent to the same, the assessee company filed its return showing total loss of Rs.3,54,637/-. The assessment was however carried out by AO by making addition of Rs.4,72,31,590/- on account of undisclosed income. This addition was made on the ground that the assessee firm had signed in the sale deed as confirming party, which, as such, was between the partners of assessee firm in their individual capacity. However, on appeal, the CIT(A) deleted the addition of Rs.4,72,31,590/- observing that when the assessee firm as such was not the party to the transaction and the transaction was in favour of partners of the assessee firm in their individual capacity and that even there was no addition /similar addition in the hands of the partners, who, as such, were party to the transaction. This decision of CIT(A) was confirmed by the ITAT on further appeal.

On appeal, the HC held that,

Whether once protective addition already stands covered in the hands of a partnership firm, then consideration received by it in respect of transactions entered into by its partners in their individual capacity, should be brought to tax in the hands of firm as undisclosed income - YES: HC

++ the reasonings given by the ITAT, more particularly that the assessee firm was merely a confirming party and no consideration was received by the assessee firm with respect to the transaction of transfer of certain lands and that the transaction was in favour of the partners of the firm in their individual capacity and that no similar addition was made in the hands of those partners in their individual accounts and that as such, the addition was made by the AO in hands of assessee as "protective addition", it cannot be said that the Tribunal has committed any error in deleting the addition of Rs.4,72,31,590/- made by AO on account of alleged on money consideration received by assessee firm. We are in complete agreement with the view taken by the learned Tribunal.

Revenue's appeal dismissed

Gujarat VAT Act - Section 11(3)(a)(vii)

Keywords - input tax credit - manufacture of capital goods

The Commercial tax Department had preferred present appeal challenging the action of ITAT in holding that Input Tax Credit u/s 11(3)(a)(vii) of Gujarat VAT Act, 2003 was available for purchase of cement, sand, steel, grit, concrete etc. that were used for manufacture of capital goods.

On appeal, the HC held that,

Whether a dealer is eligible for Input Tax Credit u/s 11(3)(a)(vii) of VAT Act on purchase of cement, sand, steel & concrete etc. which are used for manufacture of capital goods - YES: HC

++ the counsel for Commercial tax Department has fairly stated that the questions involved in present appeal are squarely covered against the Department in view of the decision of the Division Bench of this Court in case of State of Gujarat vs. M/s. Pipavav Defense And Offshore Engineering Company Limited - 2017-TIOL-1018-HC-AHM-VAT, which has been confirmed by the Supreme Court in SLP Diary No(s).31381/2017. In view of the same, as the questions involved in the present Tax Appeal are already concluded against the Department, this Tax Appeal deserves to be dismissed.

Revenue's appeal dismissed

Cus - The assessee urges that the penalty amount of Rs. 50,000/- is excessive and could not have been imposed - The importers – Sh. Sunny Jain and Ms. Madhu Jain had approached the Settlement Commission, which disposed of their application by a graded penalty along with duty in O-I-O against assessee and Kuldeep Singh - The CIT(A) reduced the penalty imposed upon Kuldeep Singh as well as the present assessee - Kuldeep Singh’s appeal was accepted by CESTAT which held that he only filled the Bill of Entries on the part of the importer on the basis of the documents available - On the other hand, assessee’s role was of greater involvement; the CESTAT noted that he was closely associated with Sunny Jain, the mastermind of evasive operation as proprietor of M/s. Dex Logistics - In these circumstances, the exercise of jurisdiction by CESTAT in not reducing the penalty amount further in assessee’s case is neither unreasonable nor erroneous: HC

Appeal dismissed

Cus - A delinquent in a proceedings before adjudicating authority is entitled to a right of hearing - The petitioner was afforded a right of hearing - However, they wanted deferment of first date of hearing on medical conditions - Petitioner consists of more than one natural person, therefore, they cannot take benefit of so-called medical condition of one of the partners to ask for repeated adjournments - Taking a sympathetic view on the subject, it would be appropriate to quash the impugned order on the ground of the same being vitiated by breach of the principles of natural justice, as it does not deal with the request for adjournment on their second date of hearing - The adjudicating authority did not consider the second application for grant of adjournment in the impugned order at all - Impugned order is quashed to the extent of the petitioner only - The adjudicating authority is at liberty to proceed with SCN and the reply given by the petitioner, in accordance with law: HC

Writ petition disposed of

CX - Assessee is registered under category of Banking and Financial Services and renders custodial services to their client situated outside India - The assessee claims rebate of service tax paid under Exports and Service Rules, 2005 - However, the same was rejected by authorities on the ground that the custodial services are performed in India in respect of investments made in Indian Companies - It would be evident from Rule 3 of Export Service Rules that Section 105(zm) of the Act, is not specifically mentioned either as a service provided in relation to immovable property nor as the services specified as performance basis services in subclause (i) & (ii) of Rule 3 of Export of Services Rules, 2005 - Nor is it excluded from subclause (iii) which deals with providing services in relation to business or commerce to a recipient located outside India - The custodial services provided, would be clearly covered by subclause (iii) of Rule 3 of Export Services Rules, 2005 and the assessee would be entitled to its benefit - In fact, CBEC has issued a Circular No.111/2009, clarifying that in respect of services following under category/clause (c) above i.e. Rule 3(I)(iii) of the Export of Services Rules 2005, the relevant factor is the location of the Services recipient and not the place of performance - It also clarified that the phrase used 'outside India', is to mean that the benefits of the service is to accrue outside India - This Circular which is binding on the Revenue, also concludes the issue in favour of assessee: HC

Appeal dismissed

CX - Assessee is engaged in providing taxable service of 'Renting of Immovable Property' - While discharging its service tax obligation under the Act, assessee claimed deduction in terms of Notfn 24/2007 r/w Rule 6(4C) of STR, 1994 - Inspite of above, assessee had collected full amount of service tax from its clients i.e. not restricted to the amount which was paid over to the Central Government, as Service Tax - SCN was issued seeking to collect the amount being the excess of service tax recovered and retained by assessee under Section 73A (3) of the Act - The Tribunal held that the assessee had returned excess amount to its tenant - Inspite of above finding, it upheld the order of Commissioner (A) on the basis that assessee's client is likely to have taken to Cenvat Credit of service tax shown in the invoice - Appeal requires admission - However, both the parties pray that the impugned order can be set aside and restored to the Tribunal for fresh disposal, in accordance with law - Impugned order is quashed and set aside: HC

Appeal disposed of

CX - Assessee entered into an agreement with M/s JSW Steel Limited for supply of industrial gases and for that purpose established a pipeline to supply industrial gases - The purchaser having established a steel plant and having been conferred with tax benefits by State government had on agreement promised to obtain similar exemption in respect of plant to be set up within the premises of said purchaser - Due to circumstances, the said exemption could not be obtained by purchaser and consequently, the purchaser and assessee had by separate agreement agreed to compensate the tax component suffered by assessee - The department initiated proceedings by issuance of SCN calling upon the assessee to discharge interest liability on account of short payment and belated payment of such duty - In the interregnum the assessee has already paid the duty and interest demanded by department - In the light of said fact, appeal could be disposed of by reserving liberty to the assessee to approach department for appropriate relief including refund after the consideration and disposal of the issue by the larger Bench: HC

Appeal disposed of

CX - Revenue is in appeal against the order of Tribunal in 2016-TIOL-2022-CESTAT-BANG confirming the demand of central excise duty and also penalty on the assessee - The proprietor of assessee firm, Mr. Harilal M. Patel filed appeal before the Tribunal - However during the pendency of said appeal, said proprietor expired on 27.12.2011, which fact was brought to the notice of even this Court by communication of his son Mr. Ashok Patel - The fact of the death of Mr. Harilal M.Patel was also brought to the notice of Tribunal and therefore on that basis alone, the Tribunal set aside the impugned order of Commissioner - Since the legal representative – son, Mr. Ashok Patel himself moved the said application before Tribunal, he was very much available to be heard in the matter - Therefore, Tribunal has erred in allowing the said appeal simplicitor on account of the death of the proprietor of assessee in question - The demand raised under impugned order of Commissioner could be recovered from the estate of deceased Mr. Harilal M. Patel and therefore the appeal before Tribunal against that order could not be said to abate with the death of proprietor - Therefore, impugned order set aside: HC

Appeal allowed

CX - Appeal is not maintainable now due to the tax effect involved in the present case being less than the prescribed monetary limit of Rs.50,00,000/- and present case does not fall under the exception category of Notfn dated 17.08.2011 referred in paragraph No.4 of the aforesaid Instructions dated 11.7.2018 - Therefore, appeal dismissed as withdrawn/ not pressed: HC

Appeal dismissed

2018-TIOL-1503-ITAT-DEL

PEE AAR SECURITIES LTD Vs DCIT : DELHI ITAT (Dated : August 23, 2018)

Income Tax - Sections 68, 147 & 148.

Keywords – Accommodation entry - Commission - Re-assessment - Share application money - Unexplained credit.

The AO received information from Directorate of Income Tax (Investigation) that assessee was a beneficiary of accommodation entries received from established entry operators identified by investigation wing on the basis of search/survey conducted on Shfri Tarun Goyal CA. They have also been charging certain commission, for providing these entries, which usually varied from 1.5% to 3.5%. A examination of documents and records showed that assessee had received a sum of Rs 80,00,000 from Shri Tarun Goyal CA in the garb of share capital/share application money/loan which did not represent actual transaction but only accommodation entries. The AO initiated reassessment proceedings u/s 147 of Act.

In the course of the reassessment proceedings, the AO noted that the assessee had received Rs 80,00,000 as share capital subscription from two entities–namely Geefcee Finance Investments Limited and Mahanivesh India Limited. As no documentary evidence in support of verification of genuineness of transaction, identity and credit worthiness of such entities were submitted, AO asked assessee to bring on record material ingredients of genuineness of capital and share premium. The submissions made by the assessee did not satisfy the AO. He was of the view that genuineness of these two companies subscribing to the share capital was not proved and there were no satisfactory details about the source of funds in the hands of these two companies. The AO sent an inspector at the given address but he could not locate these companies or their shareholders. The AO noted that that the assessee had failed to discharge the onus of establishing genuineness of transaction, the AO treated the entire amount of Rs 80,00,000 as unexplained credit in the hands of the assessee. The AO assumed that the assessee must have paid at least 2.5% commission to organize this accommodation entry. Accordingly, he made an addition of Rs 2,00,000 in respect of unaccounted expenditure as well. Aggrieved by the additions of Rs 82,00,000 so made by the AO, assessee carried the matter in appeal before the CIT(A) but without any success. Aggrieved assessee filed appeal before Tribunal.

On appeal, Tribunal held that,

Whether at the stage of reopening of the assessment itself, existence of a prima facie belief that income has escaped assessment, is required by establishing logical link with the material facts available but without detailed analysis - YES: ITAT

++ assessee repeatedly stated that there is complete non-application of mind while recording, and while approving, the reasons for re-opening the assessment. But it was noted that as long as the AO has justification, he is legally permitted to reopen the assessment. The question, therefore, that is required to be examined whether on the basis of material available at the time of forming, or approving, the opinion that income has escaped assessment, a reasonable person would come to that conclusion. Here is a case in which certain companies subscribing to the share capital of the assessee company, based on the inputs available to the Assessing Officer at the point of time when such an opinion is formed, are entities engaged wholly in the business of providing accommodation entries, without any involvement in the bonafide business activities. These companies, as the Assessing Officer categorically notes in the reasons recorded while reopening the assessment, are "found to be only paper entities providing accommodation entries and not doing any other real business" and are controlled by one Tarun Goyal who "was found controlling more than 90 such concerns/companies (including these companies)". It has also been noted in the reasons recorded for reopening the assessment that this Tarun Goyal "has been doing the business of providing accommodation entries through these concerns by giving cheques/PO/DD in lieu of cash with/without help of some agents/mediators". There is no, and there cannot be, any dispute about bonafides of these inputs. With all these facts about the actual business alleged share subscriber companies were involved in and the facts about the assessee having received entries as alleged share capital subscription from these companies, it is only reasonable, fair and logical to hold prima facie belief that the income to the extent of alleged share subscription and commission to obtain the entries for share subscription has escaped assessment. None of the facts available to have been challenged to be incorrect, even though the assessee has shown his curiosity to find out the material based on which such facts have been available to the assessee. There is no question of non-application of mind to come to this conclusion on the facts of this case. The Assessing Officer clearly applied as much of mind as much he was required to come to this belief about income escaping the assessment, and his supervising officials also clearly applied their mind as much as it was required to come to the conclusion that there is reason to believe that income, to the above extent, has escaped assessment in this case. As a matter of fact, the facts available with the assessee and the belief held by the assessee are in perfect harmony with each other, and it is not a case that the reassessment has been initiated without any application of mind, though, given the simplicity of factual matrix, not much application of mind was needed anyway at the stage of recording reasons for holding this belief. It does not need rocket science to understand as to what is natural corollary of these entities admittedly being engaged "wholly" in the business of "providing accommodation entries" and the assessee admittedly having received alleged share subscription money from these entities. While coming to the firm conclusion about the income having escaped assessment, and brining it to tax will certainly need much more of an exercise than holding this prima facie belief, there can be little doubt that at the stage of reopening the assessment all that is needed is existence of a prima facie belief that income has escaped assessment. That condition is satisfied, and, by no stretch of logic, it can be said that the Assessing Officer had held this belief without application of mind. The AO as indeed his supervising officials, had duly applied his mind on the core question about income escaping the assessment, and, if at all, there were certain things they overlooked, though no such lapse is established even though repeatedly alleged, those aspects were not really relevant in the context of adjudicating the core issue regarding validity of reassessment;

Whether shell companies used for accommodation entries normally create fake PAN cards, board resolutions, share certificates and confirmation letters; therefore it is not correct to arrive at any conclusion based on these documents only rather bank statements should be used for analysis in depth to find out correct nature of transactions - YES : ITAT

++ assessee being private company is prohibited from offering its securities for subscription by general public. It cannot, say that it has no clue about who the subscribers to the share capital are. All that the company has to offer, to establish genuineness of transactions of subscribing to the shares, are the bank statements. The assessee is not able to produce the brains behind these companies and the documents with respect to the their financials either. These documents have to be there for issuance of share capital anyway. These shell entities, which are routinely used to launder unaccounted monies, are a fact of life, and as much a part of the underbelly of the financial world, as many other evils. Even a layman, much a Member of this specialized Tribunal, cannot be oblivious of these ground realities. It would, therefore, not really be appropriate to be swayed by the documents like PAN cards, board resolutions passed by these entities, copies of distinctive share certificates, copies of letter from these two entities confirming the fact of share subscriptions and extracts from the minutes of meeting of the directors. As for the bank statements of these companies are concerned, these statements show the lack of genuineness. The overnight balance in the bank accounts are of small amounts and the payments made from these accounts are almost at the time of making payment are transferred from other sources, for which no explanation is available. This is typical of a situation in which the bank accounts are used as a conduit to launder the ill gotten money. The assessee has no documents about their financial activities or their balance sheets. It is also a settled legal position that the onus of the assessee, of explaining nature and source of credit, does not get discharged merely by filing confirmatory letters, or demonstrating that the transactions are done through the banking channels or even by filing the income tax assessment particulars;

Whether when it is a common practice to buy accommodation entries @ 2.5% commission, in the absence of the contrary being proved, the addition of Rs 2,00,000 being 2.5% of the sum involved, should be added as unaccounted expenditure - YES: ITAT

There is thus no escape from proving genuineness of a transaction. The assessee has failed to do so. Therefore it was decided to confirm the addition in respect of alleged share subscriptions received from these two companies- namely Mahanivesh and Geefcee. As regards the addition in respect of commission, it was noted that there is a categorical finding that these entities were arranging the accommodation entries on the basis of 2.5% commission. Therefore it was decided to confirm this addition as well;

Whether since amendment in sec 68 with effect from April 1, 2012, does not change and affect its interpretation, it is not necessary to apply amended section prospectively only - YES: ITAT

the contention of the assessee is that since amendment in Section 68, with respect to addition for unverified share capital subscription, was effective from 1st April 2012, it can only be prospective and it will not apply for this assessment year. It was noted that on a conceptual note, every specific amendment to the law, particularly when it is disadvantageous to the taxpayers and is enacted ex abundanti cautela (as a measure of abundant caution) is generally, fraught with, what tax academicians and policymakers term as, the risk of its ‘kill effect'. The risk is that when a specific provision, to make the things clear and beyond any doubt, is enacted with respect to a particular point of time and a particular consequence is envisaged by the provision, interpretation of the law or treaty will invariably be inclined to draw to the inference that no such consequence was envisaged by the legislature or the treaty prior to the amendment coming into force. That is a common and fairly well accepted approach. There is, however, a rider. The rider is that even on the first principles and in a situation in which a binding judicial precedent or judicial analysis of the pre-amendment legal has already come to the same conclusions, as indicated by the specific amendment as a measure of abundant caution, such a "kill effect" is ruled out. That precisely is the situation before us. In such cases, the impact of amendment remains confined to the areas on which either (i) on the areas on which, with the help of pre- amendment provisions, the judicial conclusions are at variance with the conclusions arrived at with the help of amendment; or (ii) such areas have remained intact from the judicial precedent. Viewed thus, merely because there is a specific amendment to Section 68 with effect from 1st April 2012, it does not affect the interpretation of Section 68 on the basis of the binding judicial precedents, de horse this amendment, and the first principles. Thus their is no merits in the grievances raised by the assessee. The conclusions arrived at by the CIT(A) are correct.

Assessee's appeal dismissed