CASE LAWS
2017-TIOL-1972-HC-AHM-IT
PRASHANTI MEDICAL SERVICES AND RESERCH FOUNDATION Vs UoI : GUJARAT HIGH COURT (Dated: September 14, 2017)
Income Tax – Sections 35AC(4),(5),(6) & (7)
Keywords – Charitable trust - Exemption
The assessee is a public charitable trust constituted with the object of establishing an institution for rendering medical services to the poor and needy persons, and for undertaking medical research. The assessee claimed to be surviving entirely on donations, and was operating hospitals in three cities. For setting up a fourth hospital, the assessee sought approval of the National Committee for Promotion of Social and Economic Welfare, Department of Revenue, to the effect that the donors to the project would be eligible to claim exemption u/s 35AC. Such approval was granted. The assessee claims that with existing & anticipated donations, the construction project was underway, and for which 50% of the capital expenditure was already undertaken. Meanwhile, a sub-section (7) was inserted to Section 35, to the effect that no deduction under the said section would be allowed in respect of the AY commencing on or after 01.04.2018. The assessee claimed that such provision would hinder the donations to the project, thereby putting it in jeopardy. The assessee claimed that although the deduction had been withdrawn, existing projects could not be endangered, and therefore claimed that the provision be construed to mean that existing projects approved u/s 35AC (1) be unaffected.
On hearing the appeal, the High Court held that,
Whether when the Parliament decides in its wisdom to withdraw a particular beneficial provision from a particular date, such withdrawal would also apply to existing projects - YES: HC
++ the fact that the Parliament had the competence to enact the said provision has nowhere been disputed. It is not even the stand of the assessee that the Parliament which granted the deduction could not have withdrawn it. Thereby, a deduction is in the nature of waiver to a limited extent from payment of tax. In absence of such a deduction, the assessee incurring such expenditure would have to account for the full amount to tax. In order to encourage donations for or direct expenditure in certain approved projects or schemes meant for promoting social and economic welfare or the uplift of the public, the said provision was introduced by the legislature. If at a later point of time, the Union legislature in its wisdom was of the opinion that such benefit should no longer be granted, it is always open for the parliament to withdraw the deduction by framing necessary legislation. This provision in the strict sense of the term is to have prospective effect. It may affect pending projects. Nonetheless, the withdrawal of the deduction is from a prospective date. Thereby, it is possible that some of the institutions, projects or schemes may be adversely affected and the legislation may act somewhat harshly. However, this cannot be a ground for annulling the statutory provision;
++ considering the decisions of the Apex Court in Kasinka Trading and Another vs. Union of India and Another and Kothari Industrial Corporation Limited vs. Tamil Nadu Electricity Board and Another, in plain terms, Section 35AC(7) provided for a terminal point for granting benefit u/s 35AC. When after 01.04.2017 the legislature desired to withdraw such deduction, any expenditure after such date would no longer be an eligible deduction. The Union legislature was competent to introduce such amendment.
Assessee's appeal dismissed
2017-TIOL-1971-HC-J&K-IT + Story
SOMA TRG JOINT VENTURE Vs CIT : JAMMU AND KASHMIR HIGH COURT (Dated: September 15, 2017)
Income Tax - Sections 2(24), 40(a)(ia), 143(3), 194C & 194J.
Keywords: Accrued income - Diversion of income - JV members & Retrospective effect.
The Assessee, a joint venture(JV) of M/s TRG Industries (P) Ltd and M/s Soma Enterprises Ltd, entered into two separate JV agreements with an objective of submission of two tenders for construction of two tunnels of Northern Railway on the Katra-Reasi Section of Udhampur-Srinagar-Baramullah rail link project. However, it was only M/s Soma Enterprises Ltd. which had the necessary experience under the Notice Inviting Tender floated by Northern Railways. The Assessee had filed its return with two TDS certificates showing that northern railways had deducted tax at source in respect of aggregate payments made.
The AO computed the income at Rs.12,09,55,137 as against the income which was declared to be NIL. It was also observed by the AO that the tax was deducted at source on the payments made by the railway authorities treating the Assessee as contractor, hence, the Assessee had sub-contracted the execution of the work in the ratio of 97:3 and thus provisions of Section 40(a)(ia) are attracted. Thereby, the AO disallowed an amount paid by the Assessee to the joint venturers as per the provisions of Section 40(a)(ia). It was further held that contention of the Assessee that it did not carry out any business during the relevant AY was factually incorrect.
Aggrieved Assessee filed an appeal before the CIT(A), where the same was dismissed by confirming the assessment order. Later, again another appeal was preferred by the Assessee before the Tribunal, wherein, it was held that income had accrued to the Assessee and it was not a case of diversion of income by overriding title because all payments were received and duly credited in the books. It was further held that the Assessee was liable for deduction of tax at source in respect of payments made to M/s TRG Industries (P) Ltd and M/s Soma Enterprises Ltd u/s 194 C and 194 J. It was also held that the payments made by the Assessee to M/s TRG Industries (P) Ltd and M/s Soma Enterprises Ltd were not eligible for deduction in view of Section 40(a)(ia). Thereupon, a miscellaneous application was filed u/s 254(2) by the Assessee and prayed for correction of the mistakes which had crept in the records, however, the same was not decided.
On appeal, the High Court held that,
Whether no tax liability arises if there is diversion of income at source itself by overriding title - YES: HC
++ from the relevant clauses of the agreement, it is evident that the Assessee was formed only for the purposes of submission of tender and it was agreed between the two companies namely M/S TRG Industries (P) Ltd and M/s Soma Enterprises Ltd that in case the JV is awarded the work by the employer, a more detailed joint venture based on the agreement shall be signed. Admittedly, M/s Soma Enterprises Ltd was the lead party of the JV and was supposed to execute the agreement. The Assessee has admittedly not executed the agreement. For the purpose of execution of the agreement, thereafter admittedly, the side agreements were executed;
++ it is pertinent to note that neither the existence nor the genuineness of side agreements have been disputed or even doubted by the Revenue. There is no finding by the AO that the members of the JV had authority to interfere with or comment on the work executed by the other member or that both the members have jointly executed the work. It is pertinent to note that neither amount would have been received by the Assessee from the northern railways for no work performed by it nor it could be stated that the Assessee has performed any activity but still the income has accrued. We are aware that the definition of income as provided u/s 2(24) is inclusive and wide, yet the fact remains that the income diverted at source before it accures to the Assessee cannot be regarded as an income;
++ admittedly, the Assessee had not incurred any expenditure and the work admittedly was executed by M/s Soma Enterprises Ltd. It was also held by the Apex Court that true test of diversion of income by overriding title is whether the amount sought to be deducted, in truth, never reached the Assessee as his income. To apply the doctrine of diversion of income by overriding title, the first and foremost condition to be satisfied is the nature of Assessee's obligation, whether by the obligation, the income is diverted before it reaches the Assessee, or whether the income is required to be applied to discharge an obligation after such income reaches the Assessee. In the instant case, there is diversion of income at the source itself. Therefore, the instant case is diversion of income by overriding title. The receipt of amount of Rs.12,09,55,137/- could not be treated as income of the Assessee and it was the case of diversion of income by overriding title. Accordingly, the first substantial question of law is answered in favour of the Assessee.
Whether when the taxes have have been paid by the JV, it still attracts proviso to Sec 40(a)(ia) inserted vide Finance Act 2012 - NO: HC
++ a clarification was issued by the Ministry of Finance, in which it was clarified that where the consortium arrangement is made for executing the EPC/Turnkey contracts in which each member is independently responsible for executing its part of work through its own resources and also bears the risk of its scope of work i.e. there is clear demarcation in the work and costs between the consortium members and each member incurs expenditure only in its specified area of work, such a consortium may not be treated as association of person;
++ thus with insertion of section proviso by Finance Act, 2012 to section 40(a)(ia) as otherwise also since the taxes have been paid by the JV, the Assessee could be held to be an Assessee in default so as to disallow the amount attributed by the JV to the JV in the ratio of 97:3 so as to invoke Section 40(a)(ia). The aforesaid amendment is retrospective and is clarificatory in nature. For yet another reason, Section 40(a)(ia) is inapplicable to the fact situation of the case as no amount was payable by the Assessee at the close of the year and if two views are possible, the one which favours the Assessee has to be adopted as referred in the case Red Brick Realtors's case. Accordingly, the substantial question of law is also answered in the affirmative and in favour of the Assessee. Accordingly, the orders passed by the AO as well as CIT(A) and Tribunal are hereby quashed. In the result, the appeals are allowed.
Assessee's appeal allowed
2017-TIOL-1970-HC-AHM-IT
LADHABHAI DAMJIBHAI PANARA Vs PR.CIT : GUJARAT HIGH COURT (Dated: September 12, 2017)
Income Tax - Writ - Section 143(3).
Keywords : Financial hardship - Principles of natural justice - Reduction of predeposit & Tax demand.
The Assessee is an individual government contractor carrying out construction activities. For the AY in question , the Assessee had filed the return of income declaring total income of Rs.48,20,010/. The AO undertook the scrutiny assessment and passed the order under section 143(3) of the Act determining total income of the Assessee at Rs.3,38,00,260/. In such order the AO made sizable additions. Resultantly, the tax demand of Rs.1,34,09,720/arose. The Assessee paid 15% thereof and requested for suspension of the rest of the disputed demand pending appeal which the Assessee filed. The AO however conveyed to the Assessee that he must, as approved by the Pr. CIT, deposit 50% of the total demand pending such appeal.
On appeal, Pr. CIT rejected such a request on the ground that in terms of para 4(B)(a) of the CBDT circular, it was open for the authorities to increase the demand pending appeal above 15%. He was of the opinion that the examples cited in the said subpara are not exhaustive. He contended that the Assessee had not submitted any documentary evidence showing financial hardships and also the Assessee was granted several opportunities of personal hearing, despite which, no one remained present for him.
In Writ , the High Court held that,
Whether when the assessee makes written submission for reduction in pre-deposit percentage of demand raised, mere non-appearance of the assessee and lack of financial hardship plea warrant rejection - NO: HC
++ there are two fundamental flows due to which the same may be set aside. First is that the Principal Commissioner cited the non-appearance of the Assessee during personal hearings as the main ground for rejecting the request for reduction of predeposit. Though he did refer to the Assessee's written submissions, the grounds raised in the written submissions were not met with. The main reason for rejecting the request of the Assessee was that he could not demonstrate any financial hardship. Financial hardship need not be the sole ground on which increase in predeposit of 15% can be opposed. Further, if the Assessee was not interested in personal hearing, his written submissions could and should have been taken into consideration before deciding his request;
Whether when the percentage of pre-deposit is hiked beyond 15% on the basis of Board Circular, it is necessary for the AO to give reasons for doing so - YES: HC
++ there is yet another defect in the said order. As noted, the Assessing Officer in the present case proposed collection of amount pending appeal at the rate of 50% of the disputed demand. He also obtained approval of the Commissioner in terms of the said circular which must have been by citing his reasons. The Principal Commissioner or any other authority without disclosing such reasons which had weighed with the Assessing Officer and which had persuaded the Commissioner to authorize the Assessing Officer to increase the demand from the Assessee, confirmed the demand rejecting the Assessee's objections. This was in breach of principles of natural justice. When the Assessee had no idea on what grounds the authorities prima facie thought that the standard formula of granting stay on depositing 15% of the disputed tax demand would not be appropriate, it was incumbent upon the Revenue to put such reasons to the Assessee enabling the Assessee to meet with such grounds and oppose higher collection by raising suitable defense;
++ in the result, order is set aside. The Principal Commissioner shall pass a fresh order after first providing the reasons which had weighed with the Assessing Officer in proposing and the Principal Commissioner in approving collection of 50% of the demand pending appeal to the Assessee, giving him reasonable time to respond. The Assessee clarified that the Assessee is not interested in personal hearing, instead would make written representation and submissions. The Principal Commissioner shall decide the issue bearing in mind the observations made above and on the basis of such further representation and objections of the Assessee. Till then, there shall be no further recovery.
Assessee's Writ Allowed
2017-TIOL-1969-HC-KAR-MISC + Story
M J S ENTERPRISES Vs CONTROLLER OF STORES AND PURCHASE
: KARNATAKA HIGH COURT (Dated: September 13, 2017)
GST - Sale of Old & Scrap buses - whether leviable to 28% GST as normal buses or 18% GST under Schedule-III Heading No.7204 "Ferrous waste and scrap; remelting scrap ingots of iron or steel" or under Residuary Entry No.453 of the same Schedule-III, in which, "Goods which are not specified in Schedule I, II, IV, V or VI" of the KGST Act as contended by petitioners - GST rates as indicated in the E-Tender Notice does not give the fixed rate of GST at 28% as submitted by the petitioners; it only stipulates the rate of GST "As applicable /28.0" - the bar/stroke between "As applicable & 28.0" makes them mutually exclusive parts of the said clause - It is for the petitioners to participate in the said Tender process as per the terms indicated therein or not to so participate - E-Tender Notice cannot be quashed by this Court, as this Court does not find illegality in the same - it is not certain even with the Respondents-KSRTC, as to what rate of GST, they are going to charge when such auctions are finalized upon the bidding process undertaken in pursuance of the E-Tender Notice issued - Petitioners are at liberty to either approach the Respondent-KSRTC itself for clarification or the competent authority, namely, Authority for Advance Ruling under the provisions of Section 96 of the CGST/KGST Act, 2017 and there is no justification for this Court to interfere at this stage - If the said Authority is presently not manned and constituted, it does not render it a fit case to invoke writ jurisdiction at this stage - it would be premature for the Court to decide such academic questions at this stage, when the very foundation of such a dispute itself is not even available for this Court to decide - Petitions dismissed as premature: HC [para 6 to 10]
Petitions dismissed
2017-TIOL-1968-HC-AHM-IT
PR CIT Vs MAZDA LTD: GUJARAT HIGH COURT (Dated: September 12, 2017)
Income Tax - Section 37(1).
Keywords - Business expenditure, Business loan & liquidated damages
Whether when unintended delay and consquential liquidated damages are inbuilt character of the nature of the assessee's business, no disallowance is called for u/s 37(1) - YES: HC
The assessee-company, engaged in the business of manufacturing and trading of machinery, filed its return for the relevant assessment year. During the scrutiny assessment, the Assessing Officer noticed that the assessee had claimed business expenditure by way of liquidated damages in the profit and loss account under the head 'administrative and selling expenses'. The Assessing Officer called for the details of such expenditure in response to which, the assessee stated that damages suffered were in the nature of penalty imposed by the various parties for delay in delivering or late completion of the contract and it was normal incident of assessee's business to enter into contracts, then cancel contract which led to the cancellation charges so should be allowed as business expenditure. However AO was of the opinion that though the assessee had incurred the loss, the same cannot be considered as business expenditure and allowed under section 37 of the Act.
On appeal, CIT (A) allowed the assessee's appeal relying on the decision of the Tribunal in case of the assessee in earlier assessment years. On further appeal, the Tribunal held in favour of the assessee.
On appeal, the HC held that,
++ the assessee provides customized product or a machinery. The purchase order would specify the date of delivery of the machinery or execution of the contract. The purchase order itself would specify that in cases of delay, the assessee would be charged at a certain percentage of the value of the order. The delay would occur due to multiple reasons such as delay in approval of the drawings, delay in inspection and performance test of the equipments by the customer or the authorized inspection or such like. It can thus be seen that in the nature of the business that the assessee was doing, such unintended delay and resultant liability of the assessee to pay damages was inbuilt feature and inherent part of the business and cannot be dissected or disassociated from the assesse's normal business activities;
++ full Bench of Punjab and Haryana High Court in case of Jamna Auto Industries vs. Commissioner of Income Tax highlighted the difference between the penalty for infraction of law and damages for breach of contract in the context of deduction under section 37(1) of the Act. The Court held that whenever damages are to be paid by an assessee for a breach of contract, such damages are treated to be normal expenses of business. It was further held that where an assessee has to pay damages to other party to fulfill the contract entered into by him in the ordinary course of his business, the amount of damages to be paid is allowable deduction if it is in the ordinary course of business and is not opposed to public policy;
++ in the result, both the questions are answered in favour of the assessee and against the Revenue.
Revenue's appeal dismissed
2017-TIOL-1967-HC-AHM-IT + Story
VIKAS SHIPPING CORPORATION Vs UoI: GUJARAT HIGH COURT (Dated: September 7, 2017)
Income Tax - Writ - Sections 245D & 245HA.
Keywords: Additional tax & interest - Amendments - Declaration of abatement - Pending proceedings & Settlement proceeding.
The Assessee-partnership firm filed an application u/s 245D(4) to the Commission for settlement of its block period assessments. The final order was reserved. During the pendency of the said proceeding, certain amendments were made in Chapter XIXA pertaining to settlement of cases. As per the amendments, the Assessee was required to pay additional tax and interest on the income disclosed before the Commission. However, the statute did not provide any final time limit for such payment, but, later it provided for abatement of the such settlement proceedings. Since, the settlement application was not disposed of before the amendments were made for abatement of pending proceedings, the Commission wrote a letter to the Assessee giving an opportunity to be heard. In reply, the Assessee requested the Commission to forward the orders passed in the settlement application u/s 245D(4).
The Settlement Commission passed an order by which it declared that the proceedings had abated due to non-compliance by the Assessee with the provisions of section 245D(2D) and directed the AO to dispose of the case in accordance with the provisions of sub-sections 2, 3 and 4 of section 245HA.
In Writ, the High Court held that,
Whether the amendment in Sec 245HA(3) makes any distinction between a pre-hearing stage case or a case with final hearing being over - NO: HC
++ as per newly inserted section 245HA(3), the material produced by the Assessee before the Commission and that collected by the Settlement Commission through inquiries pending, the settlement proceedings and the evidence brought on record could be utilised by the AO or the I-T authority in proceeding further with the pending cases, once the proceedings before the Settlement Commission abates;
++ there was no time limit within which once the proceedings were finally heard and reserved for order, the Settlement commission had to dispose of the same by a final order. No malafides are attributed to the members of the Settlement Commission to suggest that there was deliberate delay on their part. If therefore, when the settlement proceeding was still pending, amendments were made in the statute which applied to such pending proceeding, same had to be applied with full force. The statute does not make any distinction whether the proceedings were pending before the Settlement Commission at pre-hearing stage or at the stage where the hearing was over and the case was pending for disposal by the Settlement Commission;
Whether when the amended provisons mandate access to the Revenue to all the materials furnished before the SETCOM, the HC can still prevent the Revenue from doing so - NO: HC
++ the defence that the Assessee was not aware about the pendency of such proceeding ignores the documents on record. On 13.7.2007, the Settlement Commission had conveyed to the Assessee that there would be a further hearing on 7.8.2007. The footnote though was scored out in the copy forwarded to the Assessee obviously, because this did not concern the Assessee, did contain a reference to the CIT to state on the next date of hearing whether the requirement of payment of tax and interest as contained in section 245D(2D) has been fulfilled by the Assessee. As is evident from the Assessee's letter dated 31.7.2007 written to the Settlement Commission in response to the said communication, the Assessee received the same on 13.7.2017 itself;
++ well before the final date of 31.7.2017 for payment of additional tax and interest, the Assessee at any rate was aware that the proceedings before the Settlement Commission was not yet disposed of. The Assessee therefore had the responsibility to pay the tax and interest as provided in 245D(2D). The Assessee failed to comply with such requirement. In terms of section 245HA(1) therefore, the settlement proceeding would abate. This was automatic. The Settlement Commission by its judgment merely made a declaration of abatement which had even otherwise come about by virtue of operation of law. The Settlement Commission had no other alternative;
++ the alternative request of preventing the I-T authority from using the material on record before Settlement Commission cannot be accepted in terms of plain language used in section 245HA(3). As noted, the Assessee has not challenged the vires of this provision. In any case in an independent judgment we have upheld the same relevant provision, portion of which is noted in this judgment. In the result, petition is dismissed.
Assessee's Writ dismissed
2017-TIOL-1966-HC-ALL-IT + Story
CIT Vs SAHU INVESTMENT MUTUAL BENEFIT COMPANY LTD: ALLAHABAD HIGH COURT (Dated: March 3, 2017)
Income Tax - Sections - 36(1)(iii) & 43(ii), Companies Act - 620A.
Keywords - Agent Commission - compounding interest - colourable device - Lifting of corporate veil - Mutual Benefit Company - Nidhi - piercing of corporate veil & unsecured loan.
The assessee is a Mutual Benefit Company. As per MoA, main objectives of Assessee were, (i) to receive deposits from shareholders and (ii) to lend money to shareholders. A Mutual Benefit Company takes deposits/ give advances only to its members or shareholders. During the A.Y. 1993-94, Rs. 1,12,14,665.30 was paid as interest on deposits. Interest on deposit scheme was calculated on product basis. Further interest was calculated on quarterly compounding basis in F.D.R. Schemes and half yearly basis in other schemes. Further a sum of Rs. 38,13,119.10 was debited in profit and loss account towards commission to agents, for procuring these deposits. Against this, total receipt from interest was Rs. 1,27,50,047.20 and Rs. 7,87,014.36 from Banks. Assessing Officer calculated commission on interest paid/payable on deposits as 34%. Administrative and establishment expenses were claimed as Rs. 27,84,389/-. Besides, Assessee Company also paid Interest Tax as Rs. 3,08,544/-. By this system, Assessee had received funds from public in the form of various types of deposits, by paying a high rate of interest, and commission to agents, and advanced these funds in the form of unsecured loans mainly to sister concerns at a very low rate of interest. In cases of loans, other than to sister concerns, Assessee has charged interest upto 28% p.a. also.
The assessee had been accumulating losses in several past years. As on 01.04.1992 losses were reflected at Rs. 44,53,045/-. Borrowed funds were utilized in advancing loans. Interest rates earlier being 20% in A.Y. 1992-93 was reduced to 16% in A.Y. 1993-94. Assessing Officer found that Assessee has paid compound interest including commission charges on various deposit schemes at higher rate. Interest had been charged on unsecured loans to its Directors at simple interest at 16% per annum, thus resulting in interest received/ receivable of Rs. 1,24,41,611.51 as against Rs. 1,51,91,943.03 paid by Assessee as interest and commission to obtain these deposits under various schemes. There was thus a difference of loss, which varied from Rs. 27 lacs and odd.
The AO took the view that expenditure in regard to payment of interest on borrowings had not been incurred wholly and exclusively for business purposes by resorting to colourable device for siphoning the profit to its sister concerns and a few selected share holders amongst total share holders numbering 30,000. A.O. thus held that Assessee has not used funds for its own business but had merely advanced in the form of unsecured loans, at a low rate of interest of 16% per annum, in majority of cases to sister concerns. In this way it has incurred loss, year after year, and has shown a loss of Rs. 41,76,919/-. during the year itself as per profit and loss account. A.O., therefore, disallowed interest charged less from sister concerns and said that it could not be allowed as "deduction". It held that instead of 16% interest, amount chargeable should have been 24.50%. In the result, it disallowed interest and commission of Rs. 29,20,123/-.
On appeal, the CIT(A) examined statutory character of a "Mutual Benefit Company" and found that in terms of Government of India's notification dated 31.07.1987, issued by Ministry of Industry (Department of Company Affairs), New Delhi, under G.S.R. 597, Assessee had been declared 'Nidhi' under Section 620A of Companies Act, 1956. The nature of "Mutual Benefit Company" was explained by observing that their objects were to enable members to save money or invest their savings and secure loans at favourable rates. They inculcated idea of thrift and compulsory savings in the minds of poor and middle class people. It was pointed out that A.O. wrongly held that "Mutual Benefit Company" could not admit, as member, any body corporate or trust, since this amendment came into force by notification dated 04.12.1995 and not applicable in A.Y. 1993-94, in question in this appeal. With regard to advancement of loan to certain individuals, CIT(A) held that A.O. forgot that Assessee was a Company which was authorized to advance loans and accept deposits. The CIT(A) held that Assessee was a "Nidhi Company" and transaction of raising funds and lending were confined amongst its members only. There were no borrowings as such from banks or any other Institutions, therefore, question of diversion of such borrowings did not arise. The huge sum of Rs. 29,20,123/- as had been added, neither accrued from income nor became legally due or payable. The CIT(A) found that there was virtually no difference in interest charged and paid. The CIT(A) further observed that there was a difference of only Rs. 2,40,000/. whereas cost of general administration and infrastructure, as was required to maintain corporate status, would be much more. Hence on this fact also there was no under recovery of interest. The Tribunal rejected the Revenue's appeal.
Having heard the parties, the HC held that,
++ The counsel for Revenue argued before us that loans were advanced mainly to Directors, promoters, family members of promoters at a much lower rate, causing persistent loss hence, there was no wise business dealing/ transaction, hence A.O. rightly lifted veil and found a less charged amount of interest and added lesser interest by calculating same at 24.50%. The arguments are totally misconceived and inapplicable for the reason that bereft of facts, regarding nature of business of Company and other relevant aspects, a decision rendered in respect of a different nature of Company involving different activities and business, having different factors, cannot be applied universally in all cases. A minor deviation in a fact may have a wider impact on the ultimate inference and conclusion. In the present case A.O., at least, has found no fallacy or incorrectness in the statement or fictitious nature of transaction;
Whether AO is within his rights to apply fanciful notions of so-called prudent business transactions to make disallowances - NO: HC
++ in regard to functioning of Assessee, yardstick has to be applied from businessman point of view and not according to A.O. There cannot be any doubt, if there is a case of evasion of tax, Court can take appropriate view so as not to allow any person to evade tax but simultaneously, for fanciful notions of so called prudent business transactions, assumed by an Income Tax authority, something which is notional or non-est, cannot be converted into income for the purpose of attracting tax liability;
++ deduction under Section 36(1)(iii) of Act, 1961 is applicable in respect of interest of loan raised for business purpose. Section 36 is a residual Section in respect of certain deductions which are to be made from income of Assessee while arriving at taxable income and that is why it is nomenclatured as "other deductions". Any amount on account of interest paid becomes an admissible deduction under Section 36, if interest was paid on capital borrowed by Assessee and this borrowing was for the purpose of business or profession. This is very clear from Section 36(1)(iii) of Act, 1961;
Whether mere fact that the assessee paid higher interest rates on amount received and realised lesser rates on loans and advances, it warrants interference with the deduction on any notional basis - NO: HC
++ in the present case, deposits were received from members and loans and advances were given on interest to members which is the business of Assessee Company. Thus all transactions were for the purpose of business. In such a scenario, when interest was actually paid by Assessee or accrued, who followed mercantile system of accounting, on application of this statutory provision, on incurring of such interest, Assessee would be entitled to deduction of full amount in assessment year in which it is paid;
++ whether amount of interest was actually realized or realizable both are treated as paid in view of Section 43(ii) of Act, 1961 which says that paid means actually paid or incurred according to method of accounting upon the basis of which profits or gains are computed under the head "profits and gains of business of profession";
++ we are satisfied that once genuineness of transactions of deposits or advances are not doubted and not shown fictitious, colourable etc., mere fact that Assessee paid higher rates on amount received/ deposits or realized lesser rates on advances/ loans, would not entitle interference with the claim of deduction, on any notional basis as that is impermissible in law;
Whether when basic objective of the Mutual Benefit Company is to take deposit and lend loans to its members, mere fact that some members were also holding certain position in the Company and loans were given to sister company, it calls for invoking doctrine of ‘piercing of veil’ - NO: HC
++ whenever doctrine of "lifting of veil" has been applied, there have been compelling reasons therefor and many a times even statutory provision permits. In the present case it is not disputed that basic objective of Company was to take deposit and lend loans to its members and further that loans were actually advanced to members. The mere fact that some members were also holding certain position or status in Company, would make no difference. So long as there is no material evidence or otherwise findings recorded by A.O. that advancement of loan to members of particular category was for reasons other than bona fide, we do not find anything therein to justify application of doctrine of "piercing of veil";
++ some Authorities cited by the counsel for Revenue basically deals with cases of Companies of different nature and not Mutual Benefit Companies which is a different category, recognized in that category by Government of India under Section 620A of Act, 1956;
++ therefore, submission that here is a case where this Court must pierce veil and find out sophisticated device of tax evasion on the part of Assessee, in our view, is a misconceived proposition inasmuch as without appreciating nature of Assessee Company, and its business etc., actual transactions cannot be doubted. Only a part of rate of interest was questioned, hence this broad proposition of invoking doctrine of lifting of veil is not justified to be raised in this case and we have no hesitation in rejecting the same;
++ appeal answered in favour of Assessee and against Revenue.
Revenue's appeal dismissed
2017-TIOL-1965-HC-DEL-CUS + Story
RITES LTD Vs ADDL DGFT: DELHI HIGH COURT (Dated: September 15, 2017)
DGFT - RITES is Government of India Enterprise and not a hapless individual, who can be taken advantage of; it cannot be heard to canvas that it had made payments under duress - having failed to exercise the alternate remedy within the time prescribed, RITES cannot be permitted to circumvent the statutory procedure by filing petitions under Article 226 of the Constitution of India - no plausible justification of the delay in assailing the impugned orders - present petitions are grossly delayed and have been filed to overcome the failure of not availing of the alternate remedies within the time specified – Petition dismissed: High Court [para 10, 13-17]
Petition dismissed
2017-TIOL-1959-HC-KOL-ST
MAGMA SHARCHI FINANCE LTD Vs CST: CALCUTTA HIGH COURT (Dated: July 13, 2017)
ST - (i) Whether the Tribunal, while remanding the matter, addressed any of the issues or questions which were not included in the show-cause notice?(ii) Whether the remand order of the Tribunal is otherwise bad in law?
HELD - By the impugned order, there was remand of the issues for reconsideration on the directions which amount to taking of additional evidence - the Code of Civil Procedure, 1908 [Code] separately provides for remand and production of additional evidence in Appellate Court which is not so under section 35C of the Central Excise Act, 1944 [CEA] -the Tribunal, in exercising appellate power, gave directions for remand without setting aside the order-in-original, either on a preliminary point or otherwise on merits -in directing taking of additional evidence, it did not consider any material disclosed before it being necessary to be produced as additional evidence before the adjudicating authority -the Tribunal simply directed the adjudicating authority to take additional evidence on remand - the CEA, in providing for the powers of the Appellate Tribunal, did not make applicable the provisions of the Code as far as may be to appeals to it but those provisions have been made applicable as far as may be to appeals to the High Court -that being the situation, this Court finds no reason to not expect adherence to some procedure by the Tribunal in exercising appellate powers of making directions for remand and taking additional evidence -the Tribunal found lack of assistance from the order of the Commissioner, since according to it, the Commissioner had not examined all the agreements -however, the Tribunal did not come to a finding that though the sample agreements said something but the true nature of transactions in relation thereto was something else -the Revenue has urged an interpretation of, as according to it, the true nature of transactions emanating from the appellant's documents as constituting transactions of taxable services on which service tax had not been paid -the Commissioner gave his interpretation while the Tribunal did not but remand the matter with direction for taking additional evidence -the Revenue was unable to show that there was any material before the Tribunal that could persuade this Court to consider an interpretation possible otherwise than that given by the Commissioner, for the purpose of upholding the impugned order -there is no record in the impugned order that the appellant refused, failed or neglected to produce any document or evidence before the Tribunal -where investigation and inquiry were unable to bring to light material which could be the basis for directions to take additional evidence, this Court finds that such directions in the impugned order have been made without reason -the adjudicating authority cannot be directed to fish out evidence -the Central Excise Intelligence and Investigation Manual require the SCN to be issued only after proper inquiry/investigation i.e., when the facts used are ascertained and allegations justified -the adjudicating authority is to adjudicate on the demand in the SCN based on the allegations made therein -there is no finding in the impugned order setting aside as erroneous a finding of the adjudicating authority, on the basis of materials that were there either before the adjudicating authority or before the Tribunal - where the appellant was on notice regarding peril of imposition of penalties and no submission had been made before the adjudicating authority with regard to the invocation of extended period of limitation on the ground of suppression attracting penal provisions, the portion in the said order relating to applicability of extended period in terms of proviso to section 73(1) of the Finance Act, 1994 [Finance Act] and liability for penalty under section 78 of the Finance Act is sufficient adjudication in the facts and circumstances -there are specific findings of the adjudicating authority regarding omission, failure and suppression by the appellant on the allegations made in the SCN -on a reading of sections 73, 78 and 83A of the Finance Act, this Court is unable to hold that upon determination of a demand, where the extended period of limitation has been invoked, the adjudication of penalty that stand attracted is to be made by initiating a separate proceeding -the penalty adjudged and direction made in regard thereto by the adjudicating authority is clearly under the provisions of section 78 of the Finance Act as it stood before substitution -this Court, therefore, answers the questions in the affirmative and in favour of the appellant, except on the issues of recovery of Rs.93 lakhs, suppression and imposition of penalties which are in favour of the Revenue -on the issue of Rs.93 lakhs, this Court found concurrent findings rejecting the clarification sought to be tendered by the appellant -the impugned order is set aside and order-in-original dated 31.3.2009, restored - the appeals stand disposed of: HIGH COURT [para 24, 26, 29, 30, 31, 32, 33, 35, 36]
Appeals disposed of
2017-TIOL-1958-HC-DEL-PMLA
RASHMI CEMENT LTD Vs ENFORCEMENT DIRECTORATE: DELHI HIGH COURT (Dated: August 30, 2017)
Prevention of Money Laundering Act, 2002 – The petitioner, a private limited company, has challenged the issuance of the show cause notice dated 21.6.2017 by the Adjudicating Authority under section 8(1) of the Prevention of Money Laundering Act, 2002 [Act] as being unnecessary and a prayer has been made to stay the proceedings before the Adjudicating Authority on the ground that the very initiation of the proceedings under the Act is unwarranted and per-se illegal.
HELD – From a conspectus of the various decisions on the issue of jurisdiction, what can be simply and pithily stated is that technically speaking, with the issuance of notice to the petitioner by the Adjudicating Authority which is located in Delhi, jurisdiction is conferred on the Delhi High Court to entertain the writ petition - in the present case, what is not in dispute is that the petitioner is a company which is situated in Kolkata, West Bengal - the address of the petitioner in the FIR, charge sheet and in all other documents is of Kolkata - the FIR (predicate offence) was lodged by CBI at Kolkata - the ECIR has been registered at Kolkata - pursuant to the ECIR, properties falling under the jurisdiction of Kolkata High Court have been attached provisionally - it is only after the filing of the original complaint as contemplated under section 5(5) of the Act before the Adjudicating Authority which is located in Delhi that the impugned notice by the Adjudicating Authority has been issued from Delhi - though a small fraction of a cause of action has definitely arisen in Delhi but before exercising the discretion of entertaining the present writ petition, this Court would per force be required to look to other factors as well including "forum convenience" - but for the lodging of the original complaint, nothing has happened in Delhi - that apart, no final order has been passed by the Adjudicating Authority and only notice to show cause as to how and with what available resource, the property which has been provisionally attached was purchased by the petitioner - the impugned notice, in the present case, no doubt, has serious fiscal/penal consequences in case the explanation offered by the petitioner is not accepted by the Adjudicating Authority - but entertaining a writ petition seeking quashment of the aforesaid notice would amount to exercising discretion in the matter of arrogating jurisdiction only by virtue of the location of the Adjudicating Authority which is in Delhi - the petitioner, otherwise also has various stages and forums available to him for challenging any decision/action of the respondent or the Adjudicating Authority, viz. the Appellate Tribunal and the High Court - section 42 of the Act clearly indicates that in case the matter travels upto the Appellate Tribunal under section 26 of the Act, any person aggrieved against the order of the Appellate Tribunal could approach the High Court within the jurisdiction of which the aggrieved party ordinarily resides or carries on business or personally works for gain - in case the Central Government is the aggrieved party, the High Court within the jurisdiction of which the respondent, or in a case where there are more than one respondent, any of the respondents ordinarily resides or carries on business or personally works for gain, shall have the jurisdiction - in that view of the matter, the respondent would be forced to, if it is aggrieved finally by an order of the Appellate Tribunal to challenge such order before the High Court of Kolkata only whereas if the contention of the petitioner is accepted and if this Court assumes the jurisdiction of exercising its discretion, two options would be available to the petitioner namely of Kolkata High Court and Delhi High Court - this would definitely militate against the principle of forum convenience - this Court, therefore, is of the view that this Court ought not to entertain the present writ petition - in case the petitioner is so advised, an appropriate petition could be preferred before the High Court of Kolkata for the needful : HIGH COURT [59, 60, 61, 62, 63]
Writ Petition disposed of
2017-TIOL-3413-CESTAT-DEL
SCROPION INTERNATIONAL Vs CC: DELHI CESTAT (Dated: September 5, 2017)
Cus - Import - Dispute arose regarding classification of readymade garments declared as "girls tight" - importer declared classification under CTH 61152100 as "articles of apparel-knitted or crocheted" whereas department was of the view that goods were classifiable under CTH 62046990 as "girls trousers-knitted or crocheted" - as per the test report, since the major component was of other than synthetic fibre, the goods were held classifiable under CTH 62046990 - vide impugned order, the Commissioner (Appeals) approved the classification under chapter 62 - appeal to CESTAT.
HELD: Appellant, vide letter dated 31.1.2014, has agreed that the goods are made of woven fabric containing different synthetic fibre and viscose - chapter 61 covers only "articles of apparel and clothing, accessories knitted or crocheted" and same is clearly specified under chapter note 1 to chapter 61 - on the other hand, chapter 62 covers the same items when not knitted or crocheted - it stands admitted that the disputed goods are made of woven fabric - consequently, the classification under chapter 61, as claimed by the appellant is ruled out and the classification under chapter 62046990 is upheld - no reason found to interfere with the impugned order, which is upheld and appeal rejected : CESTAT [para 5, 6, 7]
Appeal rejected
