2018-TIOL-2440-HC-MAD-IT + Case Story
INDIAN ADDITIVES LTD Vs ACIT: MADRAS HIGH COURT (Dated: November 02, 2018)
Income Tax - Sections 80IB, 115JA & 148.
Keywords - Unascertained liability - Reopening of assessment - Loss on account of foreign exchange fluctuation - Loan advanced to employees.
A) The assessee is a Joint Venture between an American company and an Indian company. For the AY 1998-1999, the assessee filed return of income. A scrutiny order was passed and assessment was completed. Thereafter, a notice u/s 148 was issued for the reason that the loss arising on account of foreign exchange fluctuation amounting to Rs. 59,70,000/- was not allowable in the computation of income u/s 115JA of the Act, in so far as the same was an 'unascertained liability' for the purposes of computation of book profit u/s 115JA. Accordingly, the amount was treated as an unascertained liability and added back to the book profits in the computation of income under Section 115JA. On appeal, CIT(A) passed order in favour of assessee. On further appeal, Tribunal passed order in favour of Revenue.
B) In the return of income filed for the AY 1998-1999, the assessee claimed deduction u/s 80IB in respect of its business income. During assessment the AO held that interest from housing and vehicle loan advanced to its employees, interest on advances made to suppliers and Discounts from suppliers and service providers would be ineligible for deduction as had no nexus to the business of the assessee and hence, immediate and effective source was not the business of the undertaking of assessee. Accordingly, the AO excluded these receipts from the profit of the assessee in computing the deduction u/s 80IB. The assessee filed an appeal before the CIT(A), which was partly allowed. The assessee filed appeal before the Tribunal, which was dismissed. Aggrieved assessee filed appeal before the High Court.
the High Court held that,
Whether the loss arising from foreign exchange fluctuation is an unascertained liability required to be added back to the book profit as per clause (c) of explanation to Section 115JA of the Act - NO : HC
++ assessee's contention is that such loss arising from the foreign exchange fluctuation was determined with reference to rate of foreign exchange as on the last date of the financial year and was, therefore, an ascertained liability for the purpose of Clause (c) of Explanation to Section 115JA of the Act. The assessee further contended that for the import, the assessee had to effect payments on or before 31st March of the relevant year and the amount having not been paid, the rate of the foreign exchange as on 31st March was taken into account and accordingly, the same was calculated and therefore, it cannot be treated as an unascertained liability;
++ though the Revenue contended that the assessee has made only a provision, it was found that nowhere in the assessment proceedings such a statement was made. Even while passing the assessment order, the AO has shown the same as loss on account of exchange fluctuation and not as a provision. Therefore, the substantial question of law framed for consideration in the case on hand, requires to be answered in favour of the assessee;
Whether if income accrued is merely incidental and not the prime purpose of doing the act in question, then the same if has nexus with business of assessee is eligible for deduction u/s 80IB of Act - YES : HC
++ with regard to interest received from Housing and Vehicle Loans and interest received from Advances paid to suppliers, counsel for the Assessee relied upon the decision of Court in the case of Arul Mariammal Textiles Limited V. ACIT, wherein, the Assessee was required to furnish a fixed deposit, which was a pre-condition to enable the Assessee to open a foreign Letter of Credit for the purpose of import of critical components for manufacture of wind mill and this incidentally had earned some interest and it was held that such income is not liable to be assessed and is eligible to be claimed as deduction. In Arul Mariammal Textiles Limited, issue was decided in favour of the assessee holding that the interest income earned by the assessee is merely incidental and not the prime purpose of doing the act in question. It was noted that the substantial questions of law framed for consideration have to be answered in favour of the assessee. Accordingly, the same are answered;
++ admittedly, the assessee does not carry on the business of financing for housing loan and or for vehicles. The benefit/concession is extended to the employees of the assessee as a part of a labour welfare package. It is not disputed by the Revenue that the assessee borrows amounts from the bank at a higher rate of interest and extends housing and vehicle loans to its employees at subsidised rates. Thus, these loans and advances being incentives to the employees, has to be held to be directly relatable to the interest of industrial undertaking.With regard to the advances paid to the suppliers, the CIT(A) was of the view that the assessee would get a discount on account of payment of such advances. On the other hand, the assessee has been able to establish that on account of payment of advances, the supplies are done promptly, which is directly relatable to the business of the industrial undertaking. Furthermore, it is also a commercially prudent decision to enable the industrial undertaking to efficiently function to generate better returns.
Assessee's appeal allowed
2018-TIOL-2439-HC-DEL-IT
PR CIT Vs McDONALD'S INDIA PVT LTD: DELHI HIGH COURT (Dated: October 22, 2018)
Income Tax - Sections 14A & 260A
Keywords - Exempt income
On assessment for the relevant AY, the AO made disallowance of about Rs 1.64 crores u/s 14A during the relevant AY, on grounds that no exempt income had been earned during the relevant AY. On subsequent appeal, the Tribunal deleted such disallowance, by following the decisions in Cheminvest Ltd vs. CIT and CIT vs. Holcim India P. Ltd. Hence the Revenue's appeal.
On appeal, the High Court held that,
Whether disallowance made u/s 14A is sustainable if no exempt income or dividend is earned in the relevant AY - NO: HC
++ the decision in the case of Maxopp Investment Ltd. Vs. Commissioner of Income tax is significant and does answer the question in issue. This decision does not support the Revenue as the Assessing Officer in the case of Maxopp Investment Ltd. Vs. Commissioner of Income tax had himself restricted the disallowance to the extent of exempt income. The decision of the Delhi High Court in CIT vs. Holcim India P. Ltd. had referred to the issue whether disallowance of expenditure under Section 14A of the Act would be made even when no exempt income in the form of dividend was earned in the year. Such decision was followed & elaborated in Cheminvest Ltd vs. CIT. Considering the relevant findings in all three cases, no substantial question of law arises.
Revenue's appeal dismissed
2018-TIOL-2435-HC-MAD-ST
SHIYAM FOUNDATIONS Vs CST : MADRAS HIGH COURT (Dated: October 29, 2018)
ST - Tribunal dismissed the appeal filed by the assessee on 15.02.2017 on the ground of non-compliance with the order of pre-deposit passed on 21.09.2016 – appeal to High Court – Appellant is represented by the legal heir (wife) as the Proprietor passed away on 29.08.2016 and submits that she did not have knowledge of the proceedings and consequently, the demise of the Proprietor of the appellant was not placed before the Tribunal; that the record also shows that none appeared for the appellant when the Tribunal passed the interim order on 21.09.2016 – moreover, when the appeal was dismissed for non-compliance of the conditional order, there was no appearance on behalf of the appellant.
Held: In the peculiar facts and circumstances of this case, High Court is convinced that the order passed by the Tribunal needs to be interfered with – High Court, therefore, directs that the appeal be taken up and decided on merits by the Tribunal without insisting upon any pre-deposit; substantial questions of law kep open; also clarified that that the order has been passed taking note of the peculiar facts and circumstances of the case and is not to be treated as a precedent – matter remanded: High Court [para 7, 8]
Matter remanded
2018-TIOL-2434-HC-MAD-IT
TRACTORS AND FARM EQUIPMENT LTD Vs ACIT : MADRAS HIGH COURT (Dated: October 31, 2018)
Income tax - Sections 80HHC, 143(3), 147 & 148
Keywords - contribution to approved fund - disclosure by assessee - reassessment
The assessee company is engaged in the business of manufacturing farm equipments. For the assessment year under consideration, they had filed return admitting a total income of Rs.81,72,97,700/-. The return was processed u/s 143(1)(a) accepting the income returned resulting in a demand of Rs.2,74,746/-. Subsequently, the case was selected for scrutiny and a notice u/s 143(2) was issued and thereafter, assessment u/s 143(3) was completed determining the total income of Rs.83,10,51,940/-. While computing the assessment, the AO restricted the claim of deduction u/s 80HHC. However, later on, a notice u/s 148 was issued beyond the period of three years for the reason that the AO proposes to disallow the contribution to welfare fund of Rs.3,51,682/- as it was not an approved fund. In response to the notice, the assessee filed a return and the assessment was completed u/s 143(3) r/w/s 147 determining the total income at Rs.82,22,49,660/-. Though the AO proposed to disallow the contribution to the welfare fund of Rs.3,51,682/- on the ground that it was not an approved fund, the contention raised by the assessee was accepted and the assessment was not reopened on the said ground. However, while completing the assessment, the AO restricted the claim of deduction u/s 80HHC by excluding 90% of interest received from dealers for the bleated payment from the profits of the business under Clause (baa) to Explanation 4 of Section 80 HHC.
On appeal, the HC held that,
Whether it is the duty of the AO and not the assessee as to what legal inferences can be drawn from the material facts disclosed by the asseessee in his original return - YES: HC
Whether a legal inference arrived at by the AO on basis of facts trully & fully disclosed by the taxpayer in his original return, being a technical ground, is no basis to reopen concluded assessments - YES: HC
++ before considering as to whether Explanation 3 to Section 147 would be attracted, it is to be seen as to whether Section 147 was rightly invoked by the AO. A perusal of reasons recorded for reopening makes it clear that the proposal to disallow the contribution to welfare fund was on the ground that it is not an approved fund. There is no allegation of the assessee's failure to disclose fully and truly all material facts necessary for assessment. Thus, the proposal to disallow the contribution to the welfare fund was on a technical ground that it is not an approved fund. This is the manner in which the AO has interpreted the materials, which were disclosed by the assessee at the time of filing the original return. Thus, if the material facts are in the possession of the AO as disclosed by the assessee, it is for the AO to draw a proper legal inference and ascertain the correct interpretation of the statutory provision for levying the proper tax. It is not for the assessee to say as to how the AO should arrive at a conclusion based on the facts disclosed before him by the assessee. In other words, what legal inferences can be drawn from the material facts disclosed by the asseessee is not the duty of the assessee but that of the AO and in the instant case, the facts have been disclosed and the AO proposed to disallow the said contribution to the welfare fund on a technical ground that it is not an approved fund. Therefore, it is clear that it is a legal inference, which was arrived at by the AO based on the facts, which have been disclosed. Therefore, there was no failure on the part of assessee to disclose fully and truly all the material facts. Hence, reopening of the assessment u/s 147 is bad in law;
++ further, the question as to whether the Revenue can fall back to Explanation (3) to Section 147 and proceed to make roving enquiry into some other matter, in the instant case, with regard to computing eligible profits for the purpose of Section 80HHC, is no longer res-integra and considered by the Division Bench of the Bombay High Court in the case of Commissioner of Income Tax Vs. Jet Airways (I) Ltd - 2010-TIOL-907-HC-MUM-IT. The decision in the case of Jet Airways was referred to by Delhi High Court in case of Ranbaxy Laboratories Limited Vs. Commissioner of Income Tax - 2011-TIOL-356-HC-DEL-IT, wherein it was held that the legislature could not be presumed to have intended to give blanket powers to the AO that on assuming jurisdiction u/s 147 regarding assessment or reassessment of escaped income, he would keep on making roving inquiry and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction. Having thus come to a conclusion that reopening of the assessment itself was bad in law, this Court is not required to decide other issue as to whether the finding of the AO with regard to computation of eligible profits for the purpose of 80HHC was correct or not.
Assessee's appeal allowed
2018-TIOL-2433-HC-MAD-IT
CHOLAMANDALAM MS GENERAL INSURANCE COMPANY LTD Vs INCOME TAX APPELLATE TRIBUNAL : MADRAS HIGH COURT (Dated: November 13, 2018)
Income tax - Writ - Sections 260A
Keywords - interim stay - maintainability of petition - process of filing appeals - recovery proceedings
The assessees, insurance companies, had preferred the present petition challenging the order, whereby the Tribunal had transgressed its jurisdiction and had given certain findings, which have virtually made the IRDA Regulations, 2000 as nugatory. Furthermore, it was pleaded that before rendering such a finding, the Tribunal ought to have heard the Government of India, the Insurance Regulatory and Development Authority of India, the Central Board of Direct Taxes and the General Insurance Council, which were proper and necessary parties to be heard in the matters. The assessees had therefore sought stay from recovery proceedings.
On Writ, the HC held that,
Whether where recovery proceedings are initiated before the expiry of appeal time, it would virtually render the appeal as infructuous - YES: HC
Whether assessees should be protected against the recovery proceedings, where an interim stay order is in force - YES: HC
++ the Revenue objects to the maintainability of the writ petitions on the ground that an appeal lies to the Division Bench of this Court u/s 260A and that no writ is maintainable. However, the issue regarding maintainability of the writ petitions has become academic, as the present assessee i.e., Cholamandalam MS General Insurance Company Limited has already filed tax case appeals against the orders passed by the Tribunal and those appeals are in the process of being numbered. So far as the other insurance companies are concerned, it is stated that they are in the process of filing appeals. They would further state that the period of limitation is 120 days and that the period is yet to be over;
++ it is settled legal principle that before the expiry of appeal time, if recovery proceedings are initiated, it would virtually render the appeal as infructuous. Therefore, considering the fact that the said writ petitions were directed to be numbered subject to maintainability and that there has been an interim order in force since Aug 30, 2018, this Court is of the considered view that the assessees should be protected against the recovery proceedings. Hence, the respective AOs of the assessees – insurance companies are restrained not to initiate any recovery proceedings pursuant to the orders passed by the Tribunal, against which, the insurance companies have filed appeals/are in the process of filing appeals u/s 260A.
Case disposed of
2018-TIOL-2431-HC-MAD-IT
EVERWIN EXPORT CORPORATION Vs ITO: MADRAS HIGH COURT (Dated: October 25, 2018)
Income tax - direct nexus to business - income from other sources - netting off interest income
THE Assessee company had preferred present appeals challenging the action of ITAT in holding that the interest paid could not be netted off against the interest income earned so far as the income arises from the business of assessee. The Assessee also challenged the action of ITAT in holding that the interest income be assessed under the head 'income from other sources' when in fact per se, it had a direct nexus to the business of assessee.
On appeal, the HC held that,
Whether when interest income accrued is merely incidental and not the prime purpose of doing the act in question, then such income is not liable to be assesseed and can be netted off against interest payment - YES: HC
Whether interest income can be assessed under the head 'income from other sources' when in fact per se, it had a direct nexus to the business of assessee - NO: HC
++ the counsel for assessee submitted that so far as netting off interest income is concerned, it is squarely covered in favour of assesse, in the light of the decision of this Court in case of Arul Mariammal Textiles Ltd., Vs. Assistant Commissioner of Income Tax, Coimbatore - 2018-TIOL-1774-HC-MAD-IT. It is also submitted that, insofar as the direct nexus to business is concerned, the same is covered by the decision of Supreme Court in ACG Associated Capsules Pvt. Ltd Vs. The Commissioner of Income Tax, Central-IV, Mumbai - 2012-TIOL-13-SC-IT-LB. The counsel for Revenue does not dispute that the Substantial Questions of Law, which have been raised in these appeals, are covered by the mentioned decisions. Hence, the matter is decided accordingly.
Assessee's appeal allowed
2018-TIOL-2430-HC-MAD-IT
INDO JAPAN APPARELS PVT LTD Vs ACIT: MADRAS HIGH COURT (Dated: October 29, 2018)
Income tax - Sections 10A & 80HHC
Keywords - aggreived party - job work charges - relief u/s 10A - remand order - total turnover
THE assessee company had preferred present appeals challenging the action of ITAT in holding that job work charges should be included in the total turnover for the purpose of computation of deduction u/s 10A. The assessee also challenged the action of ITAT in not dealing with the relief granted by the CIT(A) u/s 10A under the amendment provision to that Section.
On appeal, the HC held that,
Whether remand order passed by ITAT to the CIT(A) only to adjudicate an alternate submission of assessee, will have any effect over other portions of the order passed by CIT(A) in favour of assessee - NO: HC
++ the Tribunal came to a conclusion that since, the CIT(A) has summarily dismissed the relief sought for by the assessee u/s 80HHC, though it granted relief to the assessee u/s 10A. Thus, the Tribunal was of the opinion that the matter requires to be re-examined. This Court does not fully concur with the view expressed by the Tribunal, since the CIT(A) did not reject the relief sought for by the assessee u/s 80HHC, but observed that the alternate submission made by assessee for granting relief u/s 80HHC is academic and does not arise. Therefore, technically it is not a decision on merits, but a decision wherein, the CIT(A) opined that the alternate submission need not be considered. The assessee is on appeal, apprehending that the remand order passed by the Tribunal, remanding the case to the CIT(A) would be an open remand whereby, whatever relief granted to the assessee would also be re-adjudicated;
++ the assessee however need not have any apprehension in this regard, as the order passed by the Tribunal is very clear, since this appeal is filed by the assessee and not by the Revenue. Therefore, in the assessee's appeal they cannot be worse of than they were before CIT(A). Therefore, in the facts and circumstances, it would suffice to clarify that the Remand to the CIT(A) is only to adjudicate the submission of assessee with regard to their entitlement for relief u/s 80HHC alone. The other portions of the order passed by the CIT(A) which were decided in favour of assessee shall remain intact.
Case disposed of
2018-TIOL-2429-HC-MAD-IT
ROYAL SUNDARAM GENERAL INSURANCE CO LTD Vs DCIT: MADRAS HIGH COURT (Dated: November 12, 2018)
Income tax - Writ - Section 37(1)
Keywords - disposal of main appeal - escapement from condition - interim stay - prima facie case
THE assessee company is engaged in the business of rendering insurance services. It had preferred the present petition challenging the dismissal of stay petitions holding that there were no convincing reasons to establish a prima facie case in favour of the assessee with respect to the issues raised in the present appeal.
On Writ, the HC held that,
Whether as long as the interim stay order continues to remain intact, the assessee is bound by it and has to comply with the order in its letter & spirit till the disposal of main appeal - YES: HC
Whether assessee can seek escapement from compliance of conditional stay order passed by the Tribunal, by simply pleading that the Tribunal has commenced hearing of appeals - NO: HC
++ from perusal of the materials placed on record, it is found that absolutely there is no error in the order passed by the Tribunal in rejecting the stay petitions. Firstly, as noticed, the assessee had filed stay petitions Nos. 1 to 4 and 5 to 8/Mds/2018, which were partly allowed, by observing that: "....Without going into the merits of the appeals filed by assessee and considering the fact that the demand is for all the seven years put together nearly Rs.200.00 Crs. against which the assessee had paid only Rs.15.00 Crs, the assessee is granted an installment scheme of Rs.7.00 Crs. per month representing an installment of Rs.1.00 Cr. for each of the assessment years in respect of the appeals which the Stay Petitions have been filed...." In terms of this order, the first instalment was payable on or before Jan 16, 2018 and subsequent installments to be paid on or before 15th of every succeeding month;
++ it is not disputed by the assessee that they had complied with the condition but only upto May 2018. It is not clear as to why the assessee abruptly failed to comply with the conditional order passed by the Tribunal. The explanation offered by the assessee is that the Tribunal commenced hearing of the appeals. This cannot be an answer since as long as the interim order continues to remain intact, the assessee is bound by it and has to comply with the order in its letter and spirit till the disposal of the main appeal by the Tribunal. Therefore, this Court does not appreciate the conduct of assessee in abruptly failing to comply with the conditional stay order and filing fresh set of stay petitions, which are not maintainable and therefore that is one more reason to reject the stay petitions apart from the reasons assigned by the Tribunal.
Assessee's petition dismissed
2018-TIOL-2428-HC-KERALA-IT
CIT Vs GANGA COMPLEX: KERALA HIGH COURT (Dated: November 1, 2018)
Income Tax - Section 132(4).
Keywords - Block assessment - Excess sale consideration - Sales turnover & Undisclosed income.
THE company assessee's Managing director's residence was searched and survey proceedings were conducted in the assessee's own business premises. The statements procured from the survey and search proceedings, disclosed excess sale consideration than the statements found in the business premises. Thus, there was definitely a suppression which was treated as undisclosed income by the Department, but for search was not a disclosure of the actual sales turnover. On approaching the Sales Tax Department the AO found two revised returns having been filed under the Sales Tax enactment for both the assessment years relevant to the assessment years which are the subject matter. Further, the sales tax assessment was requisitioned and the difference as admitted by the assessee before the Sales Tax authorities was taken as the undisclosed income. The Tribunal stated that the period for filing the return was not over would not absolve the assessee from a block assessment if the transactions disclosed on search were not entered in the books of accounts. Thus, Revenue has appealed before the High Court against the Tribunal's order.
On appeal the High Court held that,
Whether a block assessment can lead to re-assessment based on search proceedings, in which no incriminating material was disclosed - NO: HC
++ the Tribunal had rightly noticed that an intelligent assumption has been made that the returns would not have disclosed an excess sale consideration but for the search it remains in the realm of an assumption. There were no books of accounts recovered from the assessee's business premises which showed a lesser sale consideration. The statements recovered from the residence of the Managing Director showed a larger consideration. Thus, the Tribunal held that, it cannot be assumed that the returns filed would have shown only the figures in the statements recovered from the business premises. Further, the case of Binoy Mathai is not applicable, since in that the time for filing return for the AY had been extended by the CBDT, in which context the declaration was made. Further, the Tribunal observed that the returns for both the AY's was filed by the assessee showing the higher sale consideration for a reassessment if there was no correct disclosure and not a block assessment. Thus, the order of the Tribunal requires no interference.
Revenue's appeal dismissed
2018-TIOL-3490-CESTAT-MAD
CCE & ST Vs RITES LTD: CHENNAI CESTAT (Dated: February 12, 2018)
CX - The assessee company, entered into a contract with the Sudan Railways Corporation for rehabilitation of 4 Hitachi Diesel Electric Locomotives - For this work, the assessee used imported material as well as indigenously sourced material - After rehabilitation the four Hitachi locos were re-exported to Sudan - Since all-industry rate was not available for re-exported locomotives, the assessee filed drawback shipping bills under Brand rate of drawback category - The original authority held that Brand rate could not be made available since applications were filed beyond the prescribed period - On appeal, the Commr.(A) opined that the applications were filed within 90 days & noting the provisions of Board's Circular No. 13/2010 dated 24.06.2010 which extended the limitation period for filing claims for brand rate drawback, opined that such beneficial Circular would apply retrospectively - Held - The assessee filed the claims within the prescribed 90-day period as well as the 30-day condonable period - The Commr.(A) also noted that the requisite supporting documents have been submitted - The original authority held otherwise merely because original Excise invoices were not produced for verification - Such hypertechnicality cannot be sustained, considering that the assessee is an arm of the Indian Railways and it is undisputed that the assessee exported the goods - Presenting of commercial invoices only cannot be sole reason to conclude that relevant documents were not produced - Hence the O-i-A needs no intervention: CESTAT (Para 2,5)
Revenue's appeal dismissed
2018-TIOL-3489-CESTAT-HYD
CCCE AND ST Vs SANDOR MEDICAIDS PVT LTD: HYDERABAD CESTAT (Dated: October 04, 2018)
Cus - The assessee imported 'Synvisc Hylan G-F 20 medical devide in sterile solution form for treatment of Osteoarthritis' & classified it under Customs Tariff heading 90214090 and also claimed exemption under Notfn No 21/2002-Cus by clearing the goods at nil rate of duty - The Department alleged that the goods were Sodium Hyalauronate solution 1% which is classifiable under CTH 3004 9099 and is taxable at rates specified in Notfn No 21/2002-Cus - The Department further alleged that the assessee availed benefit for which it was ineligible & raised duty demand with interest for recovery - Penalty u/s 114A was also imposed - Held - The issue at hand is whether Synvisc Hylan G-F 20 is classifiable under CTH 9021 or CTH 3006 & if any differential duty liability arises - Also whether extended limitation could have been invoked on allegations that assessee suppressed the true nature of the product - From expert opinion, it is seen that the imported product is an absorbable implant in the knee joint for pain relief and improvement of joint mobility of the knee joints - Besides, the drugs include medical devices and have been licensed by the Drug Controller of India - The Department piut forth nothing to suggest why the product is not classifiable as medical devices - The literature submitted by the assessee & expert opinion clearly shows the product to be implantable medical device - Hence it cannot classify under CTH 3006 which covers Gel preparations designed for humans as lubricant for parts of the body for surgical operations - Thus the assessee correctly classified it under CTH 9021 - Consequently, the duty demand, interest & penalty are unsustainable - Moreover, mis-declaration cannot be alleged since the Department could have obtained more literature or information on the product to determine its classification: CESTAT (Para 1,7,8,9)
Revenue's appeal dismissed
