CASE LAWS

2018-TIOL-2453-HC-MAD-FEMA

RAJA METALS CORPORATION Vs ENFORCEMENT DIRECTORATE: MADRAS HIGH COURT (Dated: October 30, 2018)

FEMA - Sections 19, 28 & 35

Keywords - disposal on merits - financial hardship - interim stay - non prosecution - waiver of pre deposit

The present appeal had been preferred by the partnership firm as well as its partners challenging the common order passed by the Appellate Tribunal for Foreign Exchange in dismissing the application for stay & waiver of pre-deposit, by holding that no case for waiver was made out, while ignoring two factors namely prima facie case in favour of Appellant and the pleading relating to financial hardship being undue. The counsel for Appellant also pleaded that the action of ITAT in dismissing the appeals for non prosecution was illegal in absence of any power to do so either under the provisions of FERA or FEMA. The counsel also pointed out that statutory appeals in terms of Section 35 of FEMA in CMA.Nos.1948 & 1665 of 2016 were pending before this Court along with connected stay applications and no final orders had been passed in the same.

The challenge to the conditional order passed by the Tribunal was on the ground that the appellant firm as well as the partner were undergoing severe financial hardship. The lcounsel for Appellants placed reliance on the income tax returns for the last three years and submitted that directing the Appellants to make a pre-deposit of 30% of the penalty and furnish bank guarantee for the remaining amount as a onerous condition, that they would be unable to comply with the same and hence, the Appellants should be granted an opportunity to contest the appeals on merits before the Tribunal.

Having heard the parties, the HC held that,

Whether FEMA Rules contemplates rejection of an appeal for non prosecution, in the event of non appearance of the Applicant or the Presenting officer - NO: HC

Whether default of non prosecution by either of the parties to litigation, is not detrimental to disposal of appeal on merits - YES: HC

++ the appeals to the Tribunal were filed u/s 19 of FEMA. The procedure and the powers of the Tribunal are prescribed u/s 28 of the FEMA. In exercise of the powers conferred u/s 46 r/w/ss 16(1), 17(3) and 19(2) of the FEMA, the relevant Rules were framed for regulating the procedure of adjudication called the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000. Rule 11 of the said Rules deals with procedure before the Appellate Tribunal, which states that if the applicant or the presenting officer fails to appear when the appeal is called for hearing, the Appellate Tribunal may decide the appeal on the merits of the case. Thus, the said Rule does not contemplate rejection of an appeal for non prosecution in the event of non appearance of the applicant or the presenting officer. However, the conduct of the appellants in not appearing for several hearings also cannot be appreciated;

++ so far as the conditional order passed by the Tribunal is concerned, considering the financial position pleaded by the appellants and their case that they are unable to realize export production in spite of their diligent efforts, this Court is of the considered view that the appellants have made out a prima facie case. However, this observation is made only for the purpose of imposing a condition on the appellants, so that the appeals before the Tribunal can be heard and disposed of on merits. Accordingly, CMA.Nos.1665 and 1948 of 2016 are disposed of by slightly modifying the common order passed by the Tribunal by directing the appellants to deposit with the first respondent namely the Special Director, Enforcement Directorate, Government of India, 50% each of the penalty amounts imposed individually and furnish a bond for the balance 50% each and keep the bond alive till the appeals are heard and disposed of on merits by the Tribunal.

In favour of Appellant

2018-TIOL-2452-HC-MAD-IT

DECCAN AGENCY Vs DCIT : MADRAS HIGH COURT (Dated: October 26, 2018)

Income tax - Section 36(1)(vii)

Keywords - bad debts written off - commercial expidiency - irrecoverable debts - normal course of business

The assessee is a partnership firm engaged in the business of lottery agency. For the relevant assessment year, the assessee had filed its return declaring a total income of Rs.1,33,83,287/- and the same was processed u/s 143(1). Subsequently, notices u/s 143(2) and 142(1) came to be issued and the assessment was completed u/s 143(3) determining the total income at Rs.1,44,83,290/-. While doing so, the AO disallowed a sum of Rs.16,05,000/- representing bad debts written off by the assessee. It was the case of assessee that in the normal course of business, they had advanced money to a firm namely M/s. Deccan Pictures Private Limited for a Telugu movie project. According to the assessee, the project did not take off and the assessee was not in a position to realize the amount so advanced by them for the said venture. Hence, the assessee had written off the amount as normal business expenditure.

On appeal, the CIT(A) accepted the claim of assessee and held that the money had been advanced by assessee in the normal course of business and that since the amount advanced had become bad and irrecoverable, the assessee was entitled to deduct the amount in computing the income. On further appeal, the Tribunal restored the order of AO.

On appeal, the HC held that,

Whether surplus money advanced to its sister concern by a financing company as part of its business, can be written off as bad debt, upon becoming irrecoverable - YES: HC

++ it is no doubt true that in the order of assessment, the AO has stated that the assessee firm is doing business of lottery agency. However, it is found that the assessee was also engaged in the business of financing. This Court says so because in an appeal filed by the Revenue against an order passed by the CIT (A) in ITA.No.4/2008-09, which was an appeal arising out of penalty proceedings for the very same transaction, the Department had categorically taken a stand that the assessee is in the business of distribution of lottery tickets and financing. The Revenue's counsel would contend that this submission made on behalf of the Revenue cannot be taken as a candid proof to establish the line of business of the assessee. She is partly right in saying so. However, this Court does not wish to rest its finding solely based on what has been stated by the Tribunal in its order made in ITA.No.1190/Mds/2011. The assessee had filed details of interest received for the A.Ys from 1998-99 to 2001-02, the details of other debtors for the A.Ys from 1999-2000 to 2001-02, the details of loans, advances and deposits for the A.Ys 2000-01 and 2001-02 and the details of bad debts for the A.Y 2001-02. A cumulative consideration of all these documents makes it evidently clear that the assessee is in the business of not only lottery agency, but also financing as well. Therefore, the business of the assessee firm is distribution of lottery tickets and financing. If such is the situation, the case of the assessee would squarely fall within Section 36(2)(ii) as well as Section 36(1)(vii);

++ in the decision in the case of S.A.Builders Ltd., the Supreme Court pointed out that that the expression 'commercial expediency' is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. It was further pointed out that the expenditure may not have been incurred under any legal obligation, but yet, it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. It was pointed out that it is not the opinion of the Court that in every case, interest on borrowed loan had to be allowed if the assessee advances it to a sister concern and that it all depends on the facts and circumstances of the respective case. It was also pointed out that a holding company has a deep interest in the subsidiary, that if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would ordinarily be entitled to deduction of interest on its borrowed loans. In the instant case, it is seen that the assessee is not only in the business of lottery agency, but also in the business of financing as well. Records disclose that from the assessment year 1998-99, they have been advancing loans and receiving interest. Therefore, as a part of commercial expediency, the assessee, with a view to earn additional income, has advanced the surplus money available to their sister concern, which, on becoming irrecoverable, has been written off as a bad debt.

Assessee's appeal allowed

2018-TIOL-2451-HC-MAD-IT

FISHER SANMAR LTD Vs ACIT : MADRAS HIGH COURT (Dated: October 23, 2018)

Income tax - Section 80HHC

Keywords - DEPB license - deduction u/s 80HHC

The assessee company had preferred the present appeal challenging the action of ITAT in holding that the assessee was not entitled to deduction u/s 80HHC in respect of 90% of income from sale of DEPB license.

On appeal, the HC held that,

Whether entitlement to deduction u/s 80HHC in respect of income from sale of DEPB license, should not be denied by taking into consideration retrospective amendment of such provision - YES: HC

++ it is seen that the counsel for assessee as well as the Revenue agree that the substantial question of law under present appeal has been answered in the case of M.Lankalingam vs. The Commissioner of Income Tax, Chennai - T.C.A.No.1013 of 2008, wherein it was observed that: "....the assessee while challenging the assessment order before the CIT(A) in the memorandum of grounds, has specifically stated that the AO has erred in not granting proper deduction u/s 80HHC and in particular, the AO is not right in excluding exchange gain of Rs.2,58,204/- from export turnover and DEPB of Rs.36,48,697/- in computing "Profits of the Business". This computation necessarily has to be done by the AO and not by this Court. One of the present judicial member had an occasion to consider similar issue in two writ petitions filed by the assessee, one wherein, the assessee sought for declaration to declare the amendment to Section 80HHC as ultra vires and other where their challenge was to the assessment order. Following the decision in CIT v. Avani Exports, both the writ petitions were allowed. In the light of same, the matter is remanded to the AO to apply the decision in the case of CIT v. Avani Exports and proceed to grant proper deduction to the assessee u/s 80HHC....";

++ thus, by following the said decision, the Tax Case Appeal filed by the assessee, is allowed and the order passed by the Tribunal is set aside and the matter is remanded to the AO to apply the decision in the case of Avani Exports v. Commissioner of Income Tax - 2012-TIOL-745-HC-AHM-IT and to proceed to grant proper deduction to the assessee u/s 80HHC.

Case remanded

2018-TIOL-2450-HC-MAD-IT

MADRAS CRICKET CLUB Vs ITO : MADRAS HIGH COURT (Dated: October 26, 2018)

Income tax - contribution of members - interest on FDRs - principle of mutuality - surplus funds

The assessee company had preferred the present appeal challenging the action of ITAT in holding that the principle of mutuality and 'No Man could trade with himself' was not applicable to the interest income from fixed deposit earned by the assessee club from bank out of the surplus funds raised from contribution of several members of the club, even when the benefit of interest derived was utilised by several members of assessee's club.

On appeal, the HC held that,

Whether principle of mutuality will not be applicable to interest income from FRDs earned by a club from out of surplus funds kept with bank, which were raised from contribution of several members of the club - YES: HC

++ the counsel for assessee fairly submits that the substantial question has been decided against the assessee in the assessee's own case in T.C.A.Nos.928, 1067 to 1069 of 2009 - M/s. Madras Cricket Club vs. The Commissioner, Income Tax Officer, Chennai. Further in case of Madras Gymkhana Club vs. Deputy Commissioner of Income Tax - 2009-TIOL-415-HC-MAD-IT, an identical question came for consideration and the same has been decided against the assessee. The Supreme Court in Bangalore Club vs. Commissioner of Income Tax - 2013-TIOL-05-SC-IT held that if the object of assessee company claiming to be a "mutual concern" or "club", is to carry on a particular business and money is realized both from the members and from non-members, for the same consideration by giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole disclose the same profit earning motive and are alike tainted with commerciality. In the light of these decisions, the question is to be answered in favour of Revenue.

Assessee's appeal dismissed

2018-TIOL-2449-HC-MAD-IT

CIT Vs MORVI EXPORTS : MADRAS HIGH COURT (Dated: October 25, 2018)

Income tax - Section 80HHC

Keywords - duty drawback - export benefits - supporting manufacturer

The Revenue Department had preferred the present appeal challenging the action of ITAT in holding that the assessee, a supporting manufacturer, was entitled to deduction u/s 80HHC in respect of the DEPB and duty drawback disclaimed in its favour by the exporter, without taking note of the Third Proviso to Section 80HHC(3) and the difference between the provisions of Sub-Sections (3) and (3A) of Section 80HHC.

On appeal, the HC held that,

Whether export benefits in form of DEPB or duty drawback which are "cash assistance" against exports and are covered u/s 28(iiib), are liable for exclusion from business profits, if they are accrued during relevant previous year - YES: HC

++ it is seen that in assessee's own case, the questions referred to under present appeal were decided by a Division Bench of this Court in TCA.No.401 of 2009, by observing that: "....considering the finding given in the order of the AO that receipts of incentives were not part of the sale consideration, the only question that remains to be considered is as regards the value that had been transferred as part of the sale consideration. In the decision reported in case of Topman Exports Vs. Commissioner of Income Tax - 2012-TIOL-11-SC-IT-LB, the Apex Court pointed out that as far as the receipts on DEPB is concerned, the same would be part of the profits and gains of the business, it being the assistance given by the Government of India to an exporter to pay customs duty on its imports, therefore, the "cash assistance" received under the DEPB scheme would fall u/s 28(iiib) and is chargeable to income-tax under the head "Profits and gains of business or profession" even before it was transferred to the assessee by the export house. Thus, the Apex Court held that there was no justification to treat the amount which is received by an exporter on the transfer of the DEPB any differently than the profits which are made on the sale of an import licence u/s 28(iiia). Thus, 90% of DEPB which is "cash assistance" against exports and is covered u/s 28(iiib) will get excluded from the "profits of the business" of assessee, if such DEPB has accrued to the assessee during previous year...." The Revenue's counsel does not dispute this legal position and the fact that the substantial questions of law raised in these appeals are also identical.

Case disposed of

2018-TIOL-2448-HC-MAD-IT

CALIBRE FINANCIAL SERVICES LTD Vs ITO : MADRAS HIGH COURT (Dated: October 31, 2018)

Income tax - revenue loss - sale of mutual funds - stock in trade

The assessee company is engaged in financial advisory and syndication services and the MoA of the company authorises the company to deal in shares and stocks vide its main objects clause. For the year under consideration, the assessment was framed in terms of Section 143(3) at a taxable total income of Rs.8,00,928/-. The AO while completing the assessment, treated the loss arising and accruing from the transaction of sale of mutual fund units as capital loss as against the claim of such loss of Rs.8,10,378/- debited to the P&L A/c of the previous year as 'revenue loss' in the computation of taxable total income. On appeal, the CIT(A) held that it was a revenue loss, which was again reversed and the decision of AO got restored by the order of ITAT.

On appeal, the HC held that,

Whether shares held by a company engaged in share trading & mutual funds as well as rendering financial advisory & syndication services, are to be always construed as 'stock-in-trade' - YES: HC

Whether loss arising to a financial advisory & service company from trading in shares, is to be allowed as business loss, if the said company is authorised to do so as per their MoA - YES: HC

++ the short question posed for consideration is whether there was evidence available on record to indicate that the intention of assessee was to treat the holding as stock-in-trade. If such records were available and the intention was clear, then the assessee's case would be squarely covered by the decision of Supreme Court in the case of Investment Limited Vs. Commissioner of Income-Tax - 2002-TIOL-919-SC-IT-LB. However, the Tribunal came to the conclusion that there was no evidence available to indicate that the intention of assessee was to treat the holding as stock-in-trade. On a perusal of assessment records, it is clear that the assessee has stated that they are a financial service company rendering financial advisory & syndication services. Apart from that, the assessee is also trading in shares, units of mutual funds, etc. The MoA of the Company authorizes the Company to deal in shares and services vide its main objects clause. Further, it is stated that as authorized, the assessee had made mutual funds units during the financial year 2000-01 and sold the units during the same year. The trading in such units was done in the ordinary course of its business and as such revenue in nature. In the light of the said factual positions, which remain uncontroverted, the Tribunal has erred in coming to a conclusion that there was no evidence available on record to indicate that the intention of assessee was to treat the holding as stock-in-trade;

++ the AO came to the conclusion that it is a capital investment, because, the assessee was a financial services company. However, the MoA of the Company authorised to deal in shares and services. Furthermore, for all the previous assessment years and the subsequent assessment years, similar transactions have been held to be revenue in nature and for the assessment year 2006-07, the AO did not agree with the assessee. Consequently, an appeal was filed before the CIT(A), who after taking into consideration of the MoA of the Company, held that the assessee had acquired equity shares, which it held as stock-in-trade and out of which, a portion was sold incurring a loss which was accounted for as business loss. Further, it held that the method of accounting and the principle of accounting for loss or gains from investments or stock-in-trade have been consistently and regularly followed by the assessee and accordingly, the claim of assessee with regard to loss arising from trading in shares is to be allowed as a business loss as claimed by the assessee.

Assessee's appeal allowed

2018-TIOL-3532-CESTAT-MUM

MIT INSTITUTE OF DESIGN Vs CST MUMBAI CESTAT (Dated: July 11, 2018)

ST - From the wordings used in the section 35C(2) of the CEA, 1944, it is quite evident that Appellate Tribunal can rectify any mistake apparent from record by amending the order passed by it - For invoking the jurisdiction under this section, it has to be shown that what is being rectified is a mistake apparent from record - It is not the case of the applicant that the pleas raised by them in appeal or argument have not been considered by the bench while disposing of the appeal but they have filed this rectification application on the ground that tribunal has failed to consider and give a specific finding - Tribunal has also given a finding that extended period of limitation has been rightly invoked - it is a settled principle in law that whether extended period of limitation can be invoked or not is dependent on the facts of the case and cannot be dependent on the case law cited - if the finding of fact arrived at by Tribunal is not acceptable, then the same needs to be challenged by way of an appeal before appropriate authority and could not be challenged by way of an application for rectification of mistake - powers vested in Tribunal in terms of section 35C(2) of the CEA, 1944 are very limited to rectification of mistakes without re-appreciating the entire facts, evidence and law on the subject matter of appeal - no merit in applications, hence dismissed: CESTAT [para 7, 8, 13, 14]

Applications dismissed

2018-TIOL-3531-CESTAT-MUM

ARVEE ELECTRICALS AND ENGINEERS PVT LTD Vs CCE & ST : MUMBAI CESTAT (Dated: August 7, 2018)

2018-TIOL-3530-CESTAT-MUM

STAR DEN MEDIA SERVICES PVT LTd Vs CST : MUMBAI CESTAT (Dated: April 11, 2018)

2018-TIOL-3529-CESTAT-MUM

ZULASH CLEARING AND SHIPPING AGENCY Vs CC : MUMBAI CESTAT (Dated: August 31, 2018)

2018-TIOL-3528-CESTAT-MUM

I G PETROCHEMICALS Vs CCE & ST : MUMBAI CESTAT (Dated: October 22, 2018)