CASE LAWS

2016-TIOL-1746-ITAT-MUM + Story

RATNAKAR M PUJARI Vs ITO : MUMBAI ITAT ( Dated: August 3, 2016)

Income tax - Sections 143(3), 147 & 148

Keywords - bogus transaction - escaped assessment - penny stock company - pre dated contract notes - reasons for reopening & unexplained cash credits

Whether where the material information has live nexus with the formation of belief that the income of the assessee has escaped assessment, the reopening under said circumstances cannot be said to be bad in law - YES: ITAT

Whether a transaction of 'off market purchase of share' for which payments were made in cash and the brokers had issued pre dated contract notes, is liable to be treated as bogus transaction, and hence such cash receipts are liable to be treated as 'unexplained cash receipts' - YES: ITAT

The assessee is engaged in the business of running a fast food and juice centre in Iraniwadi in Kandivali (W) under the name and style of Bhagvwati Juice Centre. During the subject year, specific information was received from Addl. CIT Mumbai that the assessee was indulging in nongenuine and bogus capital gains from the transactions of purchase and sale of shares of M/s Shiv Om Investment & Consultancy Ltd., a Kolkatta based company. It was also mentioned in the information received by the Revenue that M/s Shiv Om Investment & Consultancy Ltd. quoted at the Kolkatta Stock Exchange was only a penny stock company and for the purpose of showing the holding period of more than 12 months, M/s Badri Prasad & Sons and other Kolkatta based brokers have issued pre-dated contract notes on the dates prior to July, 2004 for the sale of shares of this company at the rate of Rs. 4/- to Rs.4.50 per share to the various persons. Thus, the Revenue had reason to believe that income chargeable to tax has escaped assessment in the case of the assessee and the assessment was re-opened by issue of notice u/s 148. The AO noticed that assessment in the case of the assessee for the A.Y 2005-06 in which the alleged shares were claimed to be purchased by the assessee was completed u/s 143(3) r.w.s. 147, wherein it was clearly proved that the assessee's claim of purchase of alleged 4000 shares of M/s Shiv Om Investments and Consultancy Limited on 11th May, 2004 for a consideration of Rs. 4,080/- was bogus and was only a paper transaction. The AO observed that the payments for shares purchased were made through cash and not through banking channel. Thus, he came to the conclusion that the assessee's claim of receipt of Rs. 4,92,750/- on alleged sale of shares purchased from M/s Shiv Om Investment and Consultancy Limited was not genuine and a fabricated transaction through which the unaccounted money has been converted into accounted money and the same had been treated as unexplained cash credits and brought to tax. On appeal, the CIT(A) upheld the order of AO.

Having heard the parties, the Tribunal held that,

++ it is observed that no scrutiny assessment has been framed for the impugned assessment year by the Revenue u/s 143(3) originally, while based on information received from Addl.CIT(Inv.), Unit-V, Mumbai that the assessee is indulging in non-genuine and bogus capital gains from transaction of sale and purchase of shares of M/s Shiv Om Investment and Consultancy Limited which was penny stock company and pre-dated contract notes were issued by the Brokers to manipulate and introduce long term capital gains in favour of the assessee which are exempt from tax u/s 10(38) of the Act leading to escapement of income from taxation, which led to issue of notice u/s 148 which is within four years from the end of the relevant A.Y, the receipt of afore-stated information from Addl. CIT(Inv) is fresh and tangible material which has live link and nexus with the formation of belief that the income of the assessee has escaped assessment, and keeping in view that the original assessment was not framed u/s 143(3) and no opinion was ever formed by the AO and hence there is no change of opinion, we uphold the re-opening of the assessment u/s 147/148. We have observed that the assessee has made purchases of 4000 shares of M/s Shiv Om Investment and Consultancy Limited for Rs.4,080/-. The said shares were purchased in off market transactions for which payments were made in cash. The said purchases have been treated as bogus and sham transactions by the Revenue as it is alleged that certain brokers have manipulated and issued pre-dated contract notes which even did not have details such as time of contract, trade number, transaction details etc and payments were also made in cash by the assessee against such sham and bogus purchase with the objective of introducing by manipulating tax free exempt long term capital gains u/s 10(38) leading to escapement of income from taxation, and the said findings of the AO with respect to bogus and sham purchases have become conclusive and final as the assessee has not challenged the findings of the AO made in the assessment order passed by the AO u/s 143(3) r/w/s 147 in the first appeal filed with CIT(A) and hence the finding of the AO has attained finality. Since the said findings of the AO with respect to purchases of 4000 shares of M/s Shiv Om Investment and Consultancy Limited in assessment year 2005-06 have become conclusive having attained finality, the sales in consequence thereof the sham and bogus purchases cannot be accepted as genuine.

Assessee's appeal dismissed

2016-TIOL-2352-HC-RAJ-IT

CIT Vs KAMALJEET SINGH AHLUWALIA: RAJSTHAN HIGH COURT (Dated: September 8, 2016)

Income Tax-Section 80HHC

Whether merely because claim is allowable as per computation of income, can be a reason to allow deduction u/s 80HHC in absence of an audit report in support of claimed deduction?

The assessee derives income from share of profit from firm and export business. The assessee claimed exemption u/s 80HHC at Rs.1,07,33,971/-. It transpired during the course of processing u/s 143(1)(a) that the required certificate of a C.A claiming deduction u/s 80HHC was not enclosed along with the return of income and accordingly the claim was rejected. The assessee moved an application for rectification u/s 154 claiming that the requisite certificate u/s 80HHC was duly attached along with the return of income and thus the claim was rightly made, however, the AO passed order u/s 154 rejecting the contention of the assessee by observing that no such certificate was enclosed with the return of income .The CIT(A) observed that though the assessee claimed deduction u/s 80HHC for an amount of Rs.1,07,33,971/- on the other hand the certificate worked out allowable deduction u/s 80HHC at Rs.6,00,410/- only. The CIT(A) also noticed contradictions in the claim of the assessee and also expressed that even otherwise assessee could not have moved an application u/s 154 since the issue was highly debatable and accordingly the application u/s 154 was not maintainable and thus dismissed the appeal. The Tribunal, observed that since the assessee is an exporter and as per the computation of income, had claimed deduction u/s 80-HHC to the tune of Rs.1,07,33,971/- and such claim being allowable, thus held the claim to be allowable and accordingly allowed the same.

On Appeal before the HC the Revenue Counsel submitted that the audit report was not annexed with the return of income and even as per the certificate of the C.A, the allowable deduction was only Rs.6,00,410/- and in none of the three orders namely, order of the AO, CIT(A) or Tribunal there is an averment by the assessee that two audit reports . It was further submitted that to claim deduction u/s 80HHC it is mandatory and the requirement is not only to have an audit report but also to enclose with the return of income. Merely claiming that the assessee is an exporter, is no sufficient compliance of the Act and CA has to certify correctness of claim u/s 80HHC. The AR submitted that an audit report was annexed with the return of income and in case it was noticed that said audit report was not part of the return of income, the AO was under legal obligation to have issued a notice u/s 139(9), to make good the deficiency and in the instant case no such notice was served, therefore, the disallowance of deduction u/s 80HHC is in violation of principles of natural justice. He further contended that the assessee is an exporter and was entitled to deduction u/s 80HHC on such exports having been made and the claim of deduction u/s 80HHC was claimed in accordance with the provisions of the Act.

Having heard the parties, the HC held that,

++ no tangible evidence was enclosed either with the return of income or at the later stage claiming deduction of Rs.1,07,33,971/-.The Tribunal, has also conveniently ignored the factum of making a mention of any audit report having been placed before it claiming deduction u/s 80HHC at Rs.1,07,33,971/-. The Tribunal simply observes that an audit report specifies the amount of rebate allowable at Rs.6,00,410/-. We disapprove the manner in which the claim has been allowed by the Tribunal on the basis of computation of total income alone and in not even uttering a word about the audit report to claim deduction for an amount of Rs.1,07,33,971/-. Merely because claim is allowable as per computation of income, is no reason to allow when sub-clause (4) of Section 80HHC mandates filing of an audit report in support for claiming deduction. The Tribunal erred in allowing deduction u/s 80HHC of Rs.1,07,33,971/- . The finding of Tribunal is perverse .

Revenue’s Appeal Allowed.

2016-TIOL-2351-HC-AHM -IT

NABROS PHARMA PVT LTD Vs DCIT: GUJARAT HIGH COURT (Dated: September 21, 2016)

Income Tax Act - Sections 10B, 147, 148

Keywords: newly established hundred percent export oriented undertaking, reopening of assessment, escapement of income, failure to disclose full and true
Whether issue of notice u/s 148 for reopening of assessment after four years of end of relevant assessment year is sustainable where the assessing officer would have to correlate different documents only upon which he would learn that the two directors had advanced huge loans to the company - Yes: HC

The Assessee is a company engaged in business of manufacturing of pharmaceutical drugs and formulations. The company had set up two units for such purpose. For the assessment year 2007-08, the Assessee filed the return declaring income. Assessee had claimed exemption under Section 10B. The return was taken in scrutiny by the Assessing Officer. He passed the order of assessment under Section 143(3) accepting assessee’s income except disallowance of a sum under Section 14A. To reopen such assessment, the Assessing Officer issued the impugned notice on the ground that the directors had advanced huge amounts of interest free funds to the assessee company since beginning of the production in the eligible unit. By not charging interests, the eligible unit's profit has been artificially jacked up. During the course of proceedings u/s143(3) for AY 2011-12, it was ascertained that the total interest foregone by the two directors of the company for AY 2007-08 was Rs.46,65,937/- by calling for year-wise details of such interest. By not paying interest on borrowed funds, the profits of the eligible unit u/s10B was artificially inflated to almost this extent. Furthermore, it was noticed that the assessee had claimed income of Rs.1,24,000/- in relation to FDR interest as exempt u/s10B. Such income was not eligible for exemption u/s10B and was wrongly claimed by the assessee. Assessing officer was of the view that during the course of original assessment proceedings u/s143(3) for AY 2007-08, there was failure on the part of the assessee to furnish unit-wise accounts and all the details mentioned above to complete the assessment accordingly. Thus, he had reason to believe that income of the assessee had escaped assessment. Assessee’s objections were rejected by the Assessing Officer.

Having heard the parties, the Court held that,

++ Section 10B of the Act pertains to special provisions in respect of newly established 100% export oriented undertakings and briefly put grants exemption to new industrial undertakings established for 100% exports. For consecutive years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture, its income from exports of articles would be 100% exempt from tax. Sub-section (7) of Section 10B provides that the provisions of Sub-section (8) and sub-section (10) of Section 80IA shall so far as may be applied in relation to the undertaking referred to in the present section as they apply for the purpose of undertaking referred to in Section 80IA. Thus, by reference, the provisions of sub-section (8) and sub-section (10) of Section 80IA are made applicable to Section 10B of the Act also;(para 7)

++ the fact that the Assessee company borrowed sizeable amount from the said two directors is not in dispute. During the year under consideration, Mrs. C had advanced sum of Rs.50.65 lacs to the assessee and the maximum loan balance during the said period was Rs.1.51 crores. Likewise, Mr. N the other director of the company had advanced a sum of Rs.2.71 crores during the same period with a maximum loan balance of Rs.5.12 crores. Since the directors were closely connected with the Assessee-company, sub-section (10) of Section 80IA would certainly apply allowing the Assessing Officer to modulate the profit of the company for the purpose of exemption under Section 10B of the Act appropriately; (para 10)

++ there is thus, a thin line between the disclosure which disguises a material fact and therefore would be in terms of the proviso read with explanation 1 would amount to failure of disclosure and one where it would be the duty of the Assessing Officer on the basis of primary facts disclosed by the assessee to draw further inferences on facts and or in law. Significantly, explanation 1 refers to discovery by the Assessing Officer while exercising due diligence;(para 18)

++ what formed part of the record was that the assessee company had borrowed huge loans from said two persons. What did not form part of the record was whether on such loans any interest was paid or not, a fact which could not have been evident or visible to the Assessing Officer unless he had made further inquiries. Undoubtedly, the Assessing Officer could have made further inquiries and ascertained for his satisfaction whether on such borrowings any interest was paid or not and had he done so, as is referred to in explanation 1 to Section 147, he would have discovered a material fact viz. of the company not paying interest on sizeable borrowings. In fact, the fact that the said two lenders were the Directors of the Company is not appearing in the annexures 'D' and 'E to the audit report where the figures of loans are mentioned. Thus, the assessing officer would have to correlate different documents only upon which, if at all, he would learn that the two directors had advanced huge loans to the company. Thus, this case clearly fell within the scope of explanation to Section 147 of the Act. This would not therefore prevent the assessing officer from reopening the assessment beyond a period of four years from the reign of assessment year.(para 19)

Assessee’s Petition dismissed

2016-TIOL-2350-HC-P&H -IT

VMT SPINNING COMPANY LTD Vs CIT: PUNJAB AND HARYANA HIGH COURT (Dated: September 16, 2016)

Income Tax-Section 254-Whether the usage of the words u/s 254 , "pass such orders thereon as it thinks fit" gives very wide powers to the Tribunal and the Tribunal while exercising its appellate jurisdiction would have the discretion to allow to be raised before it new or additional questions of law arising out of the record before it even if it has been not taken in the memorandum of appeal nor by its leave?

The assessee was assessed to tax, which order was challenged by the assessee before the CIT(A) which was partly allowed. This led to filing of cross-appeals before the Tribunal-one by the Revenue and the other by the assessee. In the Memorandum of Appeal filed before the Tribunal, the assessee raised an additional ground with regard to calculation of Minimum Alternate Tax to be carried forward to the subsequent year. According to the assessee, in the Assessment Order, the same had not been correctly calculated. As this ground was to challenge the above computation made in the assessment proceedings and had not been raised before the Commissioner, the Tribunal refused to adjudicate upon the same. The Tribunal held that in the absence of any request in writing for admission of an additional ground in the appeal, the Revenue would be put to serious prejudice as it would have no opportunity to counter the request of the assessee in this regard.

On Appeal before the HC the Assessee counsel submitted that the assessee would not rely upon any additional evidence and would proceed only on the basis of the facts admitted by the department.

Having heard the parties, the HC held that,

++ the usage of the words "pass such orders thereon as it thinks fit" gives very wide powers to the Tribunal and according to us such powers are not limited to adjudicate upon only the issues arising from the order appealed from. Any interpretation to the contrary would go against the basic purpose for which the appellate powers are given to the Tribunal u/s 254 which is to determine the correct tax liability of the assessee.

++ a harmonious reading of Section 254 (1) and Rules 11 and 29 of the Rules coupled with basic purpose underlying the appellate powers of the Tribunal which is to ascertain the correct tax liability of the assessee leaves no manner of doubt that the Tribunal while exercising its appellate jurisdiction would have the discretion to allow to be raised before it new or additional questions of law arising out of the record before it. What cannot be done is examination of new sources of income for which separate remedies are provided to the revenue under the Act.

++ where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings, it is necessary to consider that a question in order to correctly assess the tax liability of an assessee. The reason is obvious. Where disputed questions of facts are involved, it would unnecessarily delay the assessment proceedings and may in certain circumstances place an unfair burden upon the Revenue such as when the proceedings have been pending for a long period of time and it is difficult to ascertain the facts. Such cases would deprive the Revenue an opportunity of meeting the case on facts effectively.

++ Rule 11 infact confers wide powers on the Tribunal, although it requires a party to seek the leave of the Tribunal. It does not require the same to be in writing. The Tribunal can decide the appeal on a ground neither taken in the memorandum of appeal nor by its leave. The only requirement is that the Tribunal cannot rest its decision on any other ground unless the party who may be affected has had sufficient opportunity of being heard on that ground. In the present case the Tribunal ought to have exercised its discretion especially in view of the fact that the assessee intends raising only a legal argument without reference to any disputed questions of fact. The matter remanded to the Tribunal for adjudicating upon the additional ground on merits. The Tribunal would be at liberty to remand the matter further, if it so deems fit.

Assessee’s Appeal Allowed

2016-TIOL-2332-HC-KOL-CX

CCE Vs ASSAM TUBES LTD: CALCUTTA HIGH COURT (Dated: September 22, 2016)

CX - CCE has filed a petition against an order passed by the Settlement Commission in terms of s.32F of the CEA, 1944. Held: Petitioner has canvassed the point of alleged failure of the Settlement Commission to appreciate facts - A writ court is not a First Appellate Court where the facts are to be re-apprised to find out whether another view can be taken on the facts established - The Settlement Commission has considered the relevant facts and has arrived at a finding as recorded in the impugned order - Such finding has not been demonstrated to be perverse - Jurisdiction of the Settlement Commission to pass the impugned order has also not been questioned - High Court is not inclined to interfere under Article 226 of the Constitution of India - Petition dismissed: High Court [para 6, 7]

Petition dismissed

2016-TIOL-2331-HC-KOL-CUS

JAI BALAJI INDUSTRIES LTD Vs DCC: CALCUTTA HIGH COURT (Dated: September 22, 2016)

Cus - Petitioner did not prefer an appeal against the order assessing the liability within the time prescribed under the Customs Act, 1962 and, therefore, the appeal filed belatedly was dismissed by the appellate authorities – Petitioner before the High Court alleging that no SCN u/s 28 of the Customs Act, 1962 was issued to them.

Held: It is not the case of the petitioner that the order of assessment was not made known to the petitioner - The alleged non-issuance of such notice u/s 28 itself does not vitiate the entire proceedings - It cannot be said that the assessing officer is acting without jurisdiction by not issuing an appropriate notice u/s 28 of the Act in determining the liability of an assessee - Petitioner had ample opportunity to have such alleged irregularity corrected in a statutory appeal but they did not file the same within the time prescribed - A litigant who has allowed his alternative statutory remedy to go bye without affording any reasonable explanation for the same, should not be allowed to file a writ petition to assail such action - Petitioner had a right of appeal before the Division Bench under Section 130 of the Customs Act, 1962 but that too was not preferred – Petition dismissed: High Court [para 6, 7, 8, 10]

Petition dismissed

2016-TIOL-2330-HC-KOL-CUS

NAVEEN GOEL Vs CC: CALCUTTA HIGH COURT (Dated: September 22, 2016)

Cus – Petitioner claims that Custom Authorities did not issue any show cause notice to the petitioner and, therefore, he was unaware of the proceedings and could not appear before the Custom Authorities; that he is a non-resident India and residing in Malaysia; that principles of natural justice has been violated.

Held: Petitioner had made a voluntary statement u/s 108 of the Customs Act before the Custom Authorities and it also appears from such narration that the show cause notice to the petitioner was issued to the local address of the petitioner as known to the Custom Authorities - Petitioner claims to derive knowledge of the impugned order from a conversation with his father at such local address - Apparently the father of the petitioner has received the impugned order - the irresistible conclusion is that, the petitioner was served with the show cause notice at the local address given by the petitioner to the Custom Authorities and was aware of the proceeding being undertaken by the Custom Authorities in view of the fact that, the petitioner and his brother had made voluntary statements – petitioner, although being well aware of the proceedings had chosen not to participate therein, therefore, the plea of breach of principles of natural justice is not available – Petition dismissed: High Court [para 8, 9]

Petition dismissed