TIOL Update - 2016-TIOL-INSTANT-ALL-356

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CASE LAWS

2016-TIOL-2373-HC-MUM-IT

SOMAIYA ORGANOCHEMICALS LTD Vs CIT: BOMBAY HIGH COURT (Dated: September 30, 2016)

Income Tax - Sections 37(3A), 40A(8), 52, & 256(1).

Keywords: business income - admissible deduction - loss of stock in trade - previous year - setting up - newly set up business -

Whether if as per the provisions of Section 37 (3A), expenses incurred by the assessee on advertisement, publicity and sales promotion exceeding Rs 40,000 are to be allowed for any previous year, it is irrelevant that the previous year consisted of only one month or more than 12 months - YES: HC

The assessee is a limited company. For AY 1980-81, it applied to ITO for change of its previous year. ITO allowed the application with the result that the previous year of the Assessee got changed from 1st June, 1978 to 31st May, 1979 (12 months) to 1st June, 1978 to 31st October, 1979 (17 months). The Assessee inter alia claimed before the ITO in the course of the assessment proceedings that the limit for the purpose of disallowance u/s 37(3A) should be increased proportionately from Rs.40,000/to Rs.56,660/, taking into account the fact that the previous year was increased from 12 months to 17 months; and that after increasing the limit thus and applying the provisions of Subsection 3A on the basis of such limit, no portion of the advertisement and publicity expenses should be disallowed u/s 37(3A). AO did not accepted the contention of asessee and applied the limit of Rs.40,000/to the previous year consisting of 17 months and disallowed 10% of the expenditure in excess over the limit of Rs.40,000/, resulting in disallowance of Rs.4,522/. On appeal, CIT(A) held that there was no provision in the Act for proportionate increase of allowances, when the previous year was increased to more than 12 months. On that basis, the Assessee's appeal was rejected by CIT(A). On further appeal, Tribunal rejected the appeal, holding that Section 37 (3A), as it then stood, spoke of the expenses on advertisement, publicity and sales promotion exceeding Rs.40,000/for any previous year; that it was irrelevant whether the previous year consisted of only one month or more than 12 months.

Held that,

++ the definition of "previous year" makes it clear that ordinarily a previous year implies a period of 12 months preceding AY. The only exceptions are to be found in cases of newly set up businesses or professions and alterations made in the previous year with the permission of ITO or according to the directions of the Board. In the case of a newly set up business or profession, the previous year may comprise of the period beginning with the setting up of the business or profession and ending with the financial year preceding the assessment year (or ending with the date within such financial year upto which the accounts of the assessee have been made up) which may be different from 12 months. So also, in the case of a determination by the Board under clause (c) of Subsection (1) of Section 3 or permission by the ITO under Subsection (4) of Section 3, the period of "previous year" could be different from 12 months. It may be more than 12 months or less than 12 months. Barring these exceptions in all cases, the "previous year" would be a period of 12 months. The limit of Rs.40,000/provided in Subsection (3A) can be said to be fixed keeping this ordinary period of 12 months in mind. In the exceptional cases referred to above, if the previous year is altered, either reduced or extended from the period of 12 months, the limit of Rs.40,000/will have to be proportionately reduced or extended, just as the aggregate expenditure would get reduced or extended, depending on the period over which it is to be applied. That would be in keeping with the object and purpose of the provision and any other interpretation would lead to unreasonable and absurd consequences as pointed out below;

++ the object and purpose of the limit provided in Subsection (3A) are to restrict wasteful expenditure on advertisement, publicity and sales promotion at the cost of the Exchequer. The previous year, as we have seen above, may mean 12 months (which is ordinarily the case) or anything between one day to less than two years. Can it possibly be suggested that the measure of the limit, namely, Rs.40,000/, should be the same whether the previous year includes one month or twenty three months. The answer is obviously in the negative. Absurd consequences would follow, if it were in the positive, which cannot be said to be intended by the legislature, for in that case Rs.40,000/spent over one month would not be termed as extravagant or wasteful, whereas Rs.40,000/spent over twenty three months would be treated as extravagant and wasteful. The reasonable interpretation to be applied, on the principle of law stated in the cases of K. P. Varghese and others would be to hold that the limit is to be applied to a period of 12 months, and increased or reduced proportionately to the length of the previous year, if such year is other than 12 months. This interpretation also accords with the rest of the Subsections introduced in Section 37 by the subject amendment. For example, Explanation I to Subsection (3B) (which gives relief in respect of advertisement in small newspapers) requires the average circulation of the newspaper to be calculated for the year in which the advertisements have been published. The Explanation provides that an advertisement shall be taken to be an advertisement in a small newspaper if the average circulation of the newspaper does not exceed 15,000 copies. The number of copies mentioned as 15,000 will have to be reckoned clearly in relation to one year which would include 12 months. If it is less than one year, the number of copies will have to be proportionately reduced to consider the relevant average circulation. So also, exemption from any disallowance under Subsection (3A) provided in Subsection (3D) of the Act must be applied to the whole length of the previous years referred to therein in respect of new industrial undertakings. If any previous year exceeds 12 months, whatever increased expenditure made over such extended period would be entitled to such exemption and not expenditure relatable only to 12 months;

++ the amounts and limits which were enacted for the ordinary length of the previous year, i.e. of twelve months, were to be proportionately increased (i.e. in proportion to the increase in the year). Explanatory Notes to these provisions of the Direct Tax Law (Amendment) Act, 1987, contained in Circular No.549 dated 31st October, 1989 of C.B.D.T., explained that these amendments were made to remove hardships and anamolies which would result in respect of assessees whose transitional previous year would exceed twelve months. The amendment introduced by the Finance Act in terms of the tenth schedule indicates two things. Firstly, any increase in the previous year (over twelve months) would result into a hardship or anamoly if the amounts or limits specified in the provisions of the Act were not proportionately increased. Secondly, proportionate increase in the amounts was a legitimate relief in such cases. There is no reason why we should not adopt the same approach in dealing with the hardship or anamoly we are faced with in a case like the present. The hardships or anamolies which we have referred to above in relation to the interpretation of Section 37 (3A), would require us to depart from a literal construction and adopt a reasonable and purposive construction requiring alteration of the limit of Rs.40,000/provided in Subsection (3A) in proportion to the increase in the previous year. Such interpretation accords with the object and purpose of the provision and does away with the anamoly or hardship without really doing any violence to the words of the provision. SC in the case of State of Bihar vs. S.K. Roy AIR 1966 SC 1995 has held that it is a well recognized principle that a subsequent legislation may be looked at whilst interpreting an earlier statute, where the earlier statute is capable of more than one interpretation. Following that judgment, a Division Bench of our Court (to which one of us, M.S. Sanklecha J, was a party) in CIT vs. Knight Frank (India) Pvt.Ltd. 2016-TIOL-2064-HC-MUM-IT made use of subsequent amendment introduced in the Act to interpret a previously existing provision concerning service tax. In the present case, the interpretation adopted by us is in keeping with the amendment made by the Direct Tax Law (Amendment) Act, 1987. In the light of the foregoing discussion, we hold that there is a clear warrant for proportionately increasing the limit laid down in Section 37 (3A) as a result of increase in the previous year of the assessee from 12 months to 17 months. Question (a) is, accordingly, answered in the negative, i.e. in favour of the assessee and against the Revenue.

Assessee's appeal allowed

2016-TIOL-2372-HC-MAD-IT

H GOUTHAMCHAND JAIN Vs ITO: MADRAS HIGH COURT (Dated: September 21, 2016)

Income tax - inflated cash expenditure - reporting of additional income & survey operations

Whether where the assessee has not maintained any record for incurring the expenditure in cash for the period during which the survey operations were carried out, such expenditure are liable to be treated as inflated expenditure - YES: HC

Whether the sudden booking of huge expenditure in a month's time, after survey operations were carried out, would lead to an inference that the same was deliberately booked to neutralise the obligation to report additional income over and above the normal income - YES: HC

The assessee, a dealer of pharmaceuticals, had filed its return declaring total income of Rs.12,24,423/-. Subsequently, survey operations were carried out at the business premises of assessee u/s 133A, wherein the assessee offered to return additional income for Rs.15 lakhs over and above the regular income. However, he booked certain expenditure in the immediate aftermath of the survey operations and claimed that because of the expenditure thus incurred, the net income came down, though he did include Rs.15 lakhs increase in the total income. The AO discredited this attempt of the assessee and observed that the expenditure was incurred towards commission by way of cash payments, but however, no receipts/ vouchers, etc. have been produced in support of the said claim. On appeal, the CIT(A) reversed the order of AO insofar as the additions made by AO by disallowing the inflated expenditure was concerned.

Having heard the parties, the High Court held that,

++ there is no gain-saying that during the survey operations, the assessee has given his statement in the form of questions and answers. From the statement of assessee, it becomes clear that he has not maintained any record for incurring the expenditure in cash for the concerned period, the date on which the survey operations were carried out. What has been offered by the assessee voluntarily is in respect of filing Return with regard to Rs.15 lakhs over and above the regular income. This is the reason why, to ascertain the quantum of regular income, normally that can be expected in respect of the Return filed by an assessee for the relevant A.Y, the AO will look into the Returns of the immediately preceding four years period. From that, it has emerged that the gross turnover for the four preceding years, was shown to the tune of Rs.3,44,27,963/-, Rs.4,24,67,070/-, Rs.5,79,89,402/- and Rs.8,12,36,798/-. As against this, for the A.Y 2008-2009, the assessee has reported the gross turnover of Rs.9,71,88,656/-. It is no doubt true that there was consistently considerable quantum of increase in the gross turnover and consequently, the gross profit and net profit had been reflected by the assessee by incremental increase each year. Hence, in those circumstances, the AO has reversed some of the expenditure said to have been incurred in cash, for the relevant A.Y, and added it to the taxable income. The order passed by the AO has contained adequate reasons as to why he has discredited the expenditure incurred in cash. The CIT(A) has not looked into those factors while reversing the order of assessment passed by the AO;

++ in the instant case, the statement of the assessee during the survey operations, no doubt, could have been made due to duress or stress of the very operations, but however, the circumstance which could be taken note therefrom is that there are no registers or records maintained by the assessee insofar as the expenditure incurred by him up to that point. Only sales and purchase details are maintained in the computer. Therefore, the sudden booking of huge expenditure in a month's time, that too, after survey operations were carried out, would lead any reasonable and prudent man to an inference that the same was deliberately booked to neutralise the obligation to report additional income of Rs.15 lakhs over and above the normal income. When expenditure in cash is incurred, receipts/vouchers have got to be maintained accurately and the same will have to be produced for acceptance of the assessing officer. No explanation is forthcoming as to why an expenditure to the tune of Rs.6 lakhs, has been shown to have been incurred for the first time during the relevant assessment year towards the payment of commission, while similar expenditure was not reflected at all in the preceding four years, particularly, when there was no change in the line of business activity of the assessee, all these years. Therefore, the inference drawn by the AO cannot be construed to be perverse, and on the other hand, it is a reasonable deducible inference and that is exactly what the Tribunal has subscribed to.

Assessee's appeal dismissed

2016-TIOL-2371-HC-MAD-IT

CIT Vs KN PANNIRSELVAM: MADRAS HIGH COURT (Dated: September 01, 2016)

Income tax - Sections 2(1A), 10(1), 143(3) & 148

Keywords - agricultural land - business income - income from agricultural operations & reopening

Whether where the factum of 'carrying of agricultural operations' by an assessee on the agricultural land owned by him, is established by the ITAT being a fact finding authority, the same cannot be quoted by the AO as reasons for initiating reopening of the assessment of such assessee on his agricultural income - YES: HC

The assessee was carrying on agricultural operation in the agricultural land owned by him at Velichai Village near Kelambakkam and had derived income from sale of replanted trees, flowers and creepers, saplings and seeds, rent for agricultural land, share of profit and interest on capital from a firm engaged in agricultural operations. He filed the return for the A.Y 2007-2008 declaring his taxable income as Rs.3,47,238, from plantscape business and agricultural income of Rs.51,89,480/- from agricultural operation. The assessment was thereafter completed u/s.143(3) on the assessed income of Rs.10,47,616/- and agricultural income of Rs.51,89,4380/-. The case was subsequently reopened by issuance of notice u/s.148 and assessment was completed u/s 143(3) r/w/s 147 computing net taxable income at Rs.62,37,096/-. The AO accordingly raised a demand of Rs.26,23,900/- by treating the agricultural income as business income. On appeal, the CIT(A) held that the income derived from agricultural land was exempt u/s.10(1), by giving a categorically factual finding that the assessee had grown plants, in nursery on the agricultural land owned by him, at Velichai Village near Kelambakkam and at Chengalpattu, and derived income from sale of such plants and held that Explanation 3 to Section 2(1A), which includes nursery as agricultural activity, was clarificatory in nature. On further appeal, the ITAT upheld the order of CIT(A).

Having heard the parties, the High Court held that,

++ the Case of the assessee is that he owns an agricultural land to an extent of 23.03 Acres at Velichai Village near Kelambakkam and 16.93 Acres in Chengalpattu and derived income from sale of replanted trees, flowers and creepers, saplings and seeds, rent for agricultural land, share of profit and interest on capital from a firm engaged in agricultural operation. As per section 2(1A) of Income Tax Act, agricultural income should be derived from the land and the said land should have been used for agricultural operation. Then, there should be something done on the land by human and technical agency to produce out of land any crop, tree plantation and other agricultural produce in order to determine whether a certain income is agricultural income, the immediate and effective source of income must be land. If it is not land, the income cannot be considered as agricultural income. With regard to the issue of disallowance of agricultural income of Rs.51,89,480/-, the claim of the assessee was allowed by the CIT(A) by holding that the income from nursery is an agriculture income. In reaching his conclusion, the CIT(A) relied on the decision of CIT v. Green Gold Tree Farmers P Ltd., wherein it has been held that sale proceeds of plants raised in nursery on land belonging to the assessee constitute agriculture income. The CIT(A) has also referred to the decision of a Division Bench of this Court in CIT vs. Soundarya Nurser, and held that even the plants grown in pots is an agricultural activity as they involve all the activities of agriculture farming like seeding, weeding, watering, manuring etc. In the light of the aforesaid decisions, subsequently, the Ministry of Finance has amended Section 2(1A) of Income Tax Act and thereby, Explanation 3 to Section 2(1A) was inserted by the by Finance Act,2008, to treat the income from nursery as agricultural income;

++ in the explanation offered to the Asst CIT, Nungambakkam, Chennai, the assessee submitted that he has been doing Landscaping Architect from 1981 and running two business concerns viz., plantscape and Flower and Petals. He is growing plants in his lands and for that purpose, he has incurred expenses for tilling of land, sowing of seeds, and purchase of clay sand and fertilizers. As such, agricultural operations are carried on the land. From the materials on record, it could be seen that, it is not the case of the AO at the first instance that the assessee has not produced any details of the expenditure incurred in raising flowers and petals in pots. As rightly pointed out by the assessee's counsel, had the issue of expenditure been pointed out at the time of assessment, the assessee was bound to explain. Assessment order does not disclose that because of the fact that the assessee did not prove expenditure, income from flowers and petals was added. He has only said without performing basic operations, income generated cannot be termed as agricultural income. Even during the appeal, the revenue has not raised such issue. Such contentions are made for the first time, before this Court. The assessment order has to fall or succeed on the contents of the order. A fact which was never raised in the assessment proceedings cannot be introduced for the first time, in an appeal u/s 260A, for an answer.

Revenue's appeal dismissed

2016-TIOL-2370-HC-AP-ST

ABC ENGINEERING WORKS Vs CCE: ANDHRA PRADESH HIGH COURT (Dated: JUNE 16, 2016)

Service Tax - Waiver of pre-deposit - Undue hardship - Mere assertion per se not suffice - Financial difficulty to make pre-deposit must be proved - CESTAT's reliance on appellant's loans and advances, sundry debtors and other fixed assets found to have been more than sufficient to comply with pre-deposit demand, cannot be faulted - No inherent defect or legal infirmity in CESTAT order declining to waive pre-deposit warranting interference.

If both the words 'undue and hardship' are read conjointly, it is nothing but more than necessary suffering or exorbitant or difficulty. This Court, while dealing with the similar issue in batch of Appeals (B.Hima Bindu v. Commissioner of Customs) held that while considering the application, seeking waiver of pre-deposit, these twin requirements should be kept in view. Use of the word "undue" would mean something more than just hardship. It means an excessive hardship or a hardship greater than the circumstances warrant. Undue means something which is not merited by the conduct of the claimant, or is disproportionate to it. For a hardship to be undue it must be shown that the burden to observe or to perform is out of proportion to the nature of the requirement, and the benefit which the applicant would derive from its compliance. Undue hardship is a matter within the special knowledge of the applicant, and must be established by him. A mere assertion of undue hardship would not suffice. The expression "undue hardship" is, ordinarily, related to economic hardship. The Tribunal is required to consider the question whether or not a direction to deposit the amount would cause undue hardship. Without considering the said question, it cannot go into the merits of the appeal itself. Thus, it is clear that it is for the assessee to prove his financial condition as on the date of demand since it is within his exclusive knowledge and at the same time the Tribunal has to protect the interest of the revenue, while waiving the pre-deposit in view of the proviso to Section 35-F of the Central Excise Act.

The main grievance of the assessee is that the assessee is running in loss for the last many years prior to the demand and on the date of demand for payment of duty or service tax.

The reasoning recorded by the Tribunal to decline the waiver of pre-deposit is based on accounting procedure of the assessee, even otherwise the loan and advances of the assessee is Rs.11.35 crores besides Sundry Debtors to a tune of Rs.08.58 crores. The assessee can realise the amount from the Sundry Debtors and loans and advances, and make pre-deposit as required under Section 35-F of the Central Excise Act. Therefore, the reasoning recorded by the Tribunal to decline waiver of pre-deposit is in accordance with law for the reason that the assessee himself disclosed the claim for depreciation to a tune of Rs.6.80 crores.

In addition, a prima facie case means an arguable case or a case to go for trial. In the present case on hand, the assessee though disputed the demand on the ground of limitation, but unable to satisfy this Court prima facie that the demand is barred by limitation at this stage. However, it is open to the assessee to raise the question of limitation in an appeal. Therefore, this court finds no prima facie case or a case to go for trial or arguable case in favour of the assessee. Since the assessee failed to establish prima facie case in its favour, the other two requirements i.e. balance of convenience and irreparable loss need no further consideration in this matter. (Para 17-23, 27-32)

Appeal dismissed

2016-TIOL-2369-HC-AP-CX

SATACKLINE SUSTEMS PVT LTD Vs CC & CE: ANDHRA PRADESH HIGH COURT (Dated: August 18, 2016)

Central Excise - Non-compliance with pre-deposit - One last opportunity - Statutory Right of Appeal of assessee - Cannot technically become redundant on mere dismissal of delay condonation application - However while recognizing the right of assessee to exercise statutory remedies available Revenue interest has to be protected - Appellate Commissioner in his order recognized that there was hardship caused to the assessee that prevented assessee not to comply with the demand but to file a further appeal before CESTAT after huge delay which got dismissed - Since appellant is willing to comply with pre-deposit conditions set by Commissioner (A), in the interest of both the parties, one last opportunity allowed by setting aside CESTAT order. (Para 6-9)

Appeal allowed

2016-TIOL-2368-HC-MAD-CUS

MUTUMA Vs PR CC: MADRAS HIGH COURT (Dated: September 12, 2016)

Customs - Gold - The petitioner, a Singapore citizen of Indian origin arrived at Chennai Airport from Singapore, bringing 1000 gms of gold bars and failed to declare the same to the Customs - A show cause notice was issued, proposing confiscation of the gold, with imposition of penalty, which ultimately resulted in an order of confiscation with option of redemption, subject to conditions - the petitioner as well as the Revenue preferred appeals to the first respondent and the Commissioner of Customs (Appeals), who partly allowed the appeal filed by the petitioner and reduced the RF and penalty, and rejected the appeal preferred by the Revenue - Petitioner seeks implementation of the order and release of gold, in the instant WP.

Held: As on date there is no order of stay granted by the Revisional Authority; hence the second respondent is bound to implement the order passed by the first respondent - the second respondent/Customs Department is granted 45 days time from the date of receipt of a copy of this order to move a stay application before the Revisional Authority and if they fail to secure any stay or appropriate interim orders, on the expiry of the 45th day, the respondents shall release the gold subject to the petitioner paying the modified RF and penalty - such release shall be only for re-export and not for clearance; and the petitioner shall also file a bond securing the interest of Revenue, in the event they succeed before the Revisional Authority [Para 7, 8]

WP Allowed

2016-TIOL-2367-HC-MAD-CUS

MONSOON IMPORTS AND EXPORTS Vs ADDITIONAL DIRECTOR GENERAL: MADRAS HIGH COURT (Dated: September 15, 2016)

Customs - Country of origin - Petitioner filed BE for import of PVC Flex Banners, declaring country of origin as Malaysia - SCN was issued, proposing treatment of country of origin as China; enhancement of value for assessment to customs duty; confiscation of the goods and imposition of penalty under Sections 28 and 124 of the Customs Act 1962 - the instant WP is filed, praying for quashing the notice.

Held: All the issues raised by the petitioner are not exclusively legal issues, but mixed questions of fact and law - ignoring the certificate issued by the Malay Chamber of Commerce, whether the Operational Certification Procedure had to be adhered to, and whether the first respondent could have issued the show cause notice for all the seven containers, when even as per the averment made in the notice states that only three containers have originated from China, are all factual issues - the genuineness of the certificate and the validity and its efficacy, should be considered first, because, it has an effect on the entire adjudication - All the issues, raised by the petitioner, can very well be agitated by way of reply to the show cause notice - prayer to quash the impugned show cause notice is declined, granting liberty to the petitioner to file reply to the impugned show cause notice within a period of 30 days from the date of receipt of a copy of this order, in which, the petitioner can raise preliminary objections, i.e., with regard to the validity, and efficacy of the certificate issued by the Malay Chamber of Commerce and the effect of the Operational Certification Procedures etc., along with other factual contentions, and the second respondent, while adjudicating the issues raised by the petitioner, shall decide the issue relating to the validity and efficacy of the certificate issued by Malay Chamber of Commerce, as first among other issues to be decided. [Para 6, 7, 8]

WP disposed of