2017-TIOL-361-SC-IT
CIT Vs CHET RAM (HUF): SUPREME COURT OF INDIA (Dated: September 12, 2017)
Income Tax - Sections 45(5)(c) & 155(16).
Keywords - taxability of compensation amount
The assessee is an Hindu Undivided Family (HUF). Pusuant to an interim order of the High Court in appeals pertaining to acquisition of land, the assessee received some amount of enhanced compensation along with interest. This prompted the Revenue to take a view that such compensation amount with interest was taxable in the year in which such amount had been received. However, the Tribunal and subsequently, the High Court rejected the Revenue's appeals in this regard.
Held that,
Whether an enhanced amount of compensation received with interest, granted by an interim order of the court, is taxable in the year in which it was received - YES : HC
++ the Revenue cited the decision of the Apex Court in Commissioner of Income Tax, Faridabad v. Ghanshyam (HUF) wherein the provisions of Section 45(5) were considered, and it was held that in light of the amendment to the Act, the person who had received enhanced compensation and interest thereon, even vide an interim order of the Court, would be assessed to tax for that enhanced compensation. Following such precedence, the Revenue appeals are allowed and the orders of the Tribunal and the High Court set aside. Thereby, the assessee would be liable to pay tax on the enhanced amount of compensation and interest received by them during the year in question.
Revenue's SLP allowed
2017-TIOL-360-SC-VAT + Story
STATE OF GUJARAT Vs RELIANCE INDUSTRIES LTD: SUPREME COURT OF INDIA (Dated: September 22, 2017)
Gujarat VAT Act - Section 11(3)(b).
Keywords: Branch transfer - Disjunctive - Double reduction - Fuels - Input tax credit - Raw material - Packing of goods & Separate categories.
The Assessee was engaged in the business of manufacturing and selling polymers and chemicals in its factory situated in the State of Gujarat. After the manufacture of those goods, same were transferred by the Assessee to its various branches located in different parts of the country from where those goods were sold. Obviously, in respect of goods transferred to places outside the State, the VAT was paid at the time of sale of those goods in those States, as per the local laws of the said States. The goods were sold in the State as well and in respect of those goods VAT is paid as per the Gujarat VAT Act. For the purpose of manufacturing the aforesaid goods, namely, polymers and chemicals, the Assessee purchases furnace oil, natural gas and light diesel oil from its registered dealers. Those fuels were used for the aforesaid manufacturing activities. On purchase of the raw material, VAT was paid at varying rates. On furnace oil, 4% VAT was payable as per the VAT Act, whereas on natural gas and light diesel oil rate of VAT prescribed and payable was 12.5%. Since those inputs were used for manufacturing of the final products, there was a provision in the VAT Act for giving credit on the VAT which was paid at the time of purchase of those inputs under Section 11 of the VAT Act.
As per the provisions the tax credit which is admissible to the purchasing dealer is subject to provisions of sub-section (2) of Section 12. Sub-section (3)(b), provides that if the goods are falling in the categories mentioned in sub-clauses (i), (ii) and (iii), the tax credit is to be reduced by the amount of tax calculated at the rate of 4% on the taxable turnover of purchases within the State. As noted above, the raw material/ inputs used in the instant goods were fuels. Sub-clause (ii) includes such goods in case the taxable goods are dispatched outside the State in the course of branch transfer. After the final product was produced, the Assessee transfers those goods to its various branch offices, many of which were located outside the State and, therefore, those goods which were so transferred would be covered by this sub-clause and in respect of such goods which were transferred outside the State and were taxable under the VAT Act, the tax credit was to be reduced by 4%. Since the raw material in the instant goods was in the nature of fuels used for the manufacture of goods, it gets covered by sub-clause (iii) as well.
The AO had held that in respect of such goods tax credit was required to be reduced at the rate of 4% under sub-clause (ii) and again at the rate of 4% under sub-clause (iii).On appeal, the JCCT the decision of the AO. On further appeal, the Tribunal held that the deduction can be at 4% only and there cannot be double reduction in tax credit admissible to the Assessee. On Revenue's appeal, the High Court had upheld the view of the Tribunal.
After hearing the parties, the Apex Court held that,
Whether fuels and raw materials used for manufacture or packing of goods which are dispatched outside the State in the course of branch transfer, are totally separate categories and therefore, attracts double reduction of input tax credit u/s 11(3)(b) of Gujarat VAT Act - YES: SC
++ it is clear that the material used even in the packing of goods is treated as raw material and, therefore, this definition is to be treated as term of art. This definition also clarifies that fuels used in the manufacture of goods would be treated as raw material with the only exception of those fuels which are used for the purpose of generation of electricity. Section 11(3) (b) is a non-obstante clause as it starts with the word 'notwithstanding'. Another aspect which is to be necessarily kept in mind is that it is the 'amount of tax credit' which a dealer would be entitled to claim under clause (a) that is to be reduced at the rate of 4% and this reduction is to be effected in three eventualities provided under sub-clauses (i), (ii) and (iii). Insofar as sub-clause (i) is concerned, it pertains to trading activity and there is no question of any overlap between sub-clause (i) on the one hand and sub-clauses (ii) and (iii) on the other. Further, insofar as sub-clauses (i) and (ii) are concerned, same are disjunctive as the word 'or' is inserted between these two clauses. However, when one come to clauses (ii) and (iii), where there is a possibility of overlap (as it has happened in the instant case as well), there is no word 'or' used between clauses (ii) and (iii). Sub-clause (ii) finishes with the punctuation mark full stop and then sub-clause (iii) starts. This depicts the intention of the Legislature, namely, reduction is not confined to one of the aforesaid two sub-clauses and it can occur under both these provisions. It is rightly pointed out by the appellant State that these are event based sub-clauses and two events are totally different. Sub-clause (ii) is attracted in those cases where taxable goods are used as raw material (which may not necessarily be fuel but all raw materials are included) and also the other condition which is to be fulfilled is that these goods are dispatched outside the State in the course of branch transfer etc. Therefore, even if the taxable goods are used as raw material in the manufacture or in the packing of goods but they are consumed or sold within the State, sub-clause (ii) would not apply. On the other hand, sub-clause (iii) is referable to only fuels which are used for manufacture of goods. It is, thus, a totally separate category and the moment fuel is used in the manufacture of goods, this sub-clause gets attracted and it would be immaterial whether the goods are sold within the State or outside the Sate;
++ the material in question, namely, furnace oil, natural gas and light diesel oil are admittedly subject to VAT under the VAT Act. The Legislature, however, has incorporated the provision, in the form of Section 11, to give tax credit in respect of such goods which are used as inputs/ raw material for manufacturing other goods. Rationale behind the same is simple. When the finished product, after manufacture, is sold, VAT would be again payable thereon. This VAT is payable on the price at which such goods are sold, costing whereof is done keeping in view the expenses involved in the manufacture of such goods plus the profits which the manufacturer intends to earn. Insofar as costing is concerned, element of expenses incurred on raw material would be included. In this manner, when the final product is sold and the VAT paid, component of raw material would be included again. Keeping in view this objective, the Legislature has intended to give tax credit to some extent. However, how much tax credit is to be given and under what circumstances, is the domain of the Legislature and the courts are not to tinker with the same;
++ the reduction of 4% would be applied whenever a case gets covered by sub-clause (ii) and again when sub-clause (iii) is attracted. This, however, would be subject to one limitation. In those cases where VAT paid on such raw material is 4%, as in the case of furnace oil, reduction cannot be more than that. After all, Section 11 deals with giving credit in respect of tax that is paid. Therefore, if some reduction is to be made from the said credit, it cannot be more than the credit given. Thus, so far as furnace oil is concerned, tax credit shall be reduced by 4%. On the other hand, tax credit given in case of natural gas and light diesel oil (other fuels), it shall be reduced by 4% under sub-clause (ii) and 4% under sub-clause (iii) of clause (b) of sub-section (3) of Section 11.
Revenue's appeal allowed
2017-TIOL-359-SC-VAT
STATE OF KARNATAKA Vs MK AGRO TECH PVT LTD: SUPREME COURT OF INDIA (Dated: September 22, 2017)
KVAT Act - Section 11(a)(1) & 17 - KVAT Rules - Rule 131.
Keywords: By-product - Definition of "goods" - Exempted goods - Input tax credit - Literal construction - Manufacturing process - Output tax - Partial deduction & Purposive construction.
The Assessee-company is manufacturer of sunflower oil, which is extracted from sunflower cake by employing solvent extraction process. Sunflower oil cake, is, thus, used as input/raw material. On purchase of sunflower oil cake (input) VAT is payable under the KVAT Act. After the extraction of sunflower oil, on its sale again VAT is payable under the said Act. For this reason, provisions of KVAT Act provides for tax credit paid on the input. However, when the sunflower oil is extracted, by-product in the form of de-oiled sunflower oil cake also becomes available. This by-product is sold by the Assessee but on the sale of this by-product, no VAT is payable as it is exempted item under the KVAT Act. Since, no output tax is payable on the sale of exempted goods, the input tax credit in such cases is partially admissible. The manner in which partial exemption is given is provided in Rule 131 of KVAT Rules, 2005.
The Assessee filed return for the year under consideration. The Revenue, after scrutinizing the returns filed by the Assessee and after hearing contentions of the Assessee contented that the Assessee was eligible only for partial input tax rebate as per Section 17(1) of the KVAT Act r/w Rule 131(3) of the KVAT Rules. On appeal, the FAA dismissed the same confirming the order passed by the Revenue. On further appeal, the Tribunal confirmed the order passed by the FAA. On revision petitions, the High Court by applying the principle of purposive construction, allowed the revision petitions filed by the Assessee holding that the Assessee was entitled to the benefit of full input tax deduction.
After hearing the parties, the Apex Court held that,
Whether the issue of a product being by-product or manufactured product is immaterial and irrelevant since the product is a saleable commodity and it is the sale of goods which triggers the provisions of Section 17 of KVAT Act - YES: SC
++ the first mistake which is committed by the High Court is to ignore the plain language of sub-section (1) of Section 17. This provision which allows partial rebate makes the said provision applicable on the 'sales' of taxable goods and goods exempt under Section 5. Thus, this sub-section refers to 'sale' of the 'goods', taxable as well as exempt, and is not relatable to the 'manufacture' of the goods. The High Court has been swayed by the fact that while extracting oil from sunflower, cake emerges only as a by-product. Relevant event is not the manufacture of an item from which the said by-product is emerging. On the contrary, it is the sale of goods which triggers the provisions of Section 17 of KVAT Act. Whether it is by-product or manufactured product is immaterial and irrelevant. Fact remains that de-oiled cake is a saleable commodity which is actually sold by the Assessee. Therefore, de-oiled cake fits into the definition of "goods" and this commodity is exempt from payment of any VAT under Section 5 of the KVAT Act. Thus, provisions of Section 17 clearly get attracted when 'sale' of these goods takes place.
++ the High Court has not considered the import and effect of sub-rule (3) of Rule 131 of the KVAT Rules. After perusing Rule 131 in its entirety, it becomes clear that sub-rule (1) pertains to input tax directly relatable to sales of exempt goods which is non-deductible. Likewise, sub-rule (2) mandates that input tax directly relating to sale of goods shall be deductible. On the other hand, sub-rule (3) covers those cases where input tax is not directly relatable to exempt goods and taxable goods. It is therefore, applied in those cases where input tax relating to both sale and taxable goods and exempt goods is known. In that situation, formula is given under this sub-rule to work out the partial deduction. The High Court has neither take note of nor discussed sub-rule (3).
Whether since by-product is not only marketable as "goods" but also fetches significant sale price and able to generate 45% revenue, there was no reason for departing from the principle of literal construction in a taxing statute - YES: SC
++ the High Court was conscious of the fact that when literal interpretation to Section 17 is given, the case of the Assessee would get covered thereby. It is for this reason the High Court has chosen to depart from the rule of literal construction, on the ground that the literal construction would lead to absurdity and would defeat the object of the Act. Therefore, according to the High Court, the purposive construction is to be resorted to achieve the object for which the provision is enacted. Literal construction in the present case does not lead to any absurd results. On the contrary, the object behind Section 17 allowing partial rebate in such cases gets achieved when the said provision is applied giving literal construction in the instant case. Here is a case where the Assessee has paid input tax while purchasing the raw material, namely, sunflower oil cake. This has been used for extraction of sunflower oil. Even after extracting the sunflower oil what remains is de-oiled cake which, no doubt, is a by-product. However, it is not to be discarded as waste. Rather, it is not only marketable as "goods" but fetches significant sale price. The ratio of sale of sunflower oil and de-oiled cake is 55:45. The respondent Assessee is, thus, able to generate 45% revenue from the sale of de-oiled cake. However, no output tax is paid on the sale of this item since this item is exempted from payment of VAT under Section 5 of the KVAT Act. Section 17 is meant to take care of these situations, which is the purpose behind that provision. Approach of the High Court, in fact, defeats the said purpose. Therefore, there was no reason for departing from the principle of literal construction in a taxing statute.
++ the entire scheme of the KVAT Act is to be kept in mind and Section 17 is to be applied in that context. Sunflower oil cake is subject to input tax. The Legislature, however, has incorporated the provision, in the form of Section 10, to give tax credit in respect of such goods which are used as inputs/ raw material for manufacturing other goods. Rationale behind the same is simple. When the finished product, after manufacture, is sold, VAT would be again payable thereon. This VAT is payable on the price at which such goods are sold, costing whereof is done keeping in view the expenses involved in the manufacture of such goods plus the profits which the manufacturer intends to earn. Insofar as costing is concerned, element of expenses incurred on raw material would be included. In this manner, when the final product is sold and the VAT paid, component of raw material would be included again. Keeping in view this objective, the Legislature has intended to give tax credit to some extent. However, how much tax credit is to be given and under what circumstances, is the domain of the Legislature and the courts are not to tinker with the same.
Whether since major outcome of solvent extraction plant is de-oiled cake (by-product) and the same is marketable good having market value, provisions of section 17 gets attracted - YES:SC
++ on literal interpretation of Section 17 it can be gathered that it does not distinguish between by-product, ancillary product, intermediary product or final product. The expressions used are 'goods' and 'sale' of such goods is covered under Section 17. Both these ingredients stand satisfied as de-oiled cakes are goods and the respondent Assessee had sold those goods for valuable consideration.The Revenue recorded a clear finding, which was accepted by the Tribunal as well, that records and statement of accounts of the Assessee clearly stipulates that after solvent extraction is completed, 88% of de-oiled cake remains and only 12% remains is the oil which is further refined in the refinery. This clearly shows that major outcome (88%) of the solvent extraction plant is de-oiled cake which in itself is a marketable good having market value. The aforesaid reasons given are sufficient to hold that Section 17 gets attracted in the instant case and the view taken by the High Court is erroneous.
Revenue's appeal allowed
2017-TIOL-2015-HC-MUM-IT
CIT Vs GOA MINERALS PVT LTD: BOMBAY HIGH COURT (Dated: April 11, 2017)
Income Tax - Sections 40A(2)(a) & (b)(iv), 260A
Keywords - disallowance of charter-hire expenses
The assessee hired barges for the transportation of iron-ore and so, incurred some expenses towards the charges for the charter-hire of the barges. On assessment, the AO disallowed the expenses u/s 40A(ii)(a), as being excessive and made an addition of such amount to the assessee's income. However, the Tribunal subsequently deleted such addition.
On appeal, the High Court held that,
Whether findings of facts based upon documentary evidence, could be re-appreciated by the HC, to arrive at contrary findings, without submitting any evidence or material showing that said findings were incorrect - NO: HC
Whether charter-hire expenses incurred could be disallowed for allegedly being excessive, where it was factually proven that there was no excessive payment or any enrichment of the assessee - NO: HC
++ considering the provisions of Section 40A(ii)(a), it is clear that where the first part of the section was satisfied, the question of refusing such charges when such amounts are not excessive would not at all arise. In the present case, the authorities below have concurrently found that the charges claimed by the assessee were not excessive as they were based on the charges fixed by the Barge Owners Association. As the findings of fact have been arrived at based on the documentary evidence on record whose authenticity has not been disputed by the revenue, we find that such findings cannot be said to be perverse. The revenue was unable to point out that the findings rendered by the authorities below was on the basis of misreading of the evidence or that any relevant document had been over-looked while arriving at such findings of fact. As already pointed out herein above, the findings of fact are based on the documentary evidence and consequently, this Court in the present appeals under Section 260 cannot reappreciate the evidence to come to any contrary findings. As the revenue have failed to produce any evidence or material to show that the amount of charges were excessive, we are of the opinion that there is no infirmity committed by the Tribunal while coming to the conclusion that the amount charged are not excessive and as such do not come within the four corners of Section 40A(2)(a).
++ considering the decision of the Bombay High Court in CIT vs. V. S. Dempo and Co. (P) Ltd., we find that in the present case, the Tribunal has found in the impugned order for the AYs 2003-2004 that there is no evidence brought on record to show that the payment itself was excessive and it had enriched the individual Directors. It is also noted that the records reveal that there is no undue advantage by the Directors by the arrangement and there is no loss to the Revenue as the subject amount has already been taxed in the hands of the HUF. It is further noted that the case of the HUFs has not been reopened and there is no reopening of the assessment of the individual Directors. It is also pointed out that the records reveal that the barges were taken on payment of time charter charges of income earned from the transportation of iron ore on the basis of per tonne rate as prescribed by the Goa Barge Owners Association. Considering the said factual position, the Tribunal observed that in the absence of any comparative case that the payments were excessive and unreasonable, the orders of the Revenue Authorities are liable to be set aside. The Tribunal also took note of the Circular dated 06.07.1968, and observed that there is nothing on record to show that either of the parties enriched by getting a fixed sum of money as charter hire charges and the tax due by the assessee has been reduced by this arrangement. The Tribunal also found that as far as the other appeal being I.T.A. No. 48/PANJ/2006, the issues involved are identical and consequently, the appeal filed by the assessee came to be allowed.
++ presently, the factual findings are that there is no excessive payment or that the arrangement has in any way enriched the assessee which cannot be faulted as they are based on the appreciation of evidence by the Tribunal, and no perversity has been shown to such findings by the revenue.
Revenue's appeal dismissed
2017-TIOL-2014-HC-MAD-VAT
INDUSTRIAL MINERALS REFRACTORIES Vs ACCT: MADRAS HIGH COURT (Dated: September 12, 2017)
Tamil Nadu Value Added Tax Act, 2006 - Writ - Sections 18 & (3) & 19(11)
Keywords - refund of input tax credit
The assessee is a dealer registered under the Tamil Nadu Value Added Tax Act 2006 and also under the Central Sales Tax Act 1956. Revision SCNs were issued to the assessee for the AYs 2011-12 to 2015-16, wherein certain defects were pointed out, and which were classified under two heads, namely that the assessee was entitled for adjustment of the input tax credit as done in the impugned assessment orders. The second issue was w.r.t. the assessee's claim for refund of input tax credit, which had been reversed, relying upon the decision of the Madras High Court in Everest Industries Limited Vs. State of Tamil Nadu. Thus, the assessee challenged such assessment orders vide the present writ.
On hearing the petition, the High Court held that,
Whether the AO could reject refund of input tax credit reversed by the assessee, without assigning any reasons for the same, and without considering either the assessee's reply to SCN or the applicable judicial precedents relied on by the assessee - NO : HC
++ from a perusal of the impugned orders, it is eventually clear that the AO did not give any reasons as to why the case as projected by the assessee in their reply to the revision notices dated 20.2.2017 is not acceptable. In fact, the AO rejected the objections of the assessee in a single line stating that the reply given by the assessee cannot be considered as per Section 18(3) of the State Act. As noticed above, the impugned orders being devoid of reasons, it is sufficient to set aside the same.
++ the assessee had relied on R.K.Knits Vs. AC (CT), Adyar II Assessment Circle and Xomox Sanmar Limited Vs. AC (CT), Mylapore Assessment Circle, Chennai wherein issues similar to the present case were raised in both cases. However, the AO made no endeavour to go through the judgments and understand the legal position, which has been laid down in those decisions. It is clear that the AO abdicated his statutory powers and the assessments have been completed in a most cryptic manner. For all the above reasons, the finding rendered by the AO w.r.t. adjustment of input tax credit is set aside.
++ as to the next issue is concerned, regarding the assessee's claim for the refund of input tax credit, which has been reversed by them for the relevant AYs, the assessee did not specifically raise a plea that the refund should be granted to them in the light of the decisions of this Court in Everest Industries Limited. In any event, this Court is inclined to set aside the impugned proceedings w.r.t. the adjustment of input tax credit and for the reasons stated above, this Court is also inclined to give liberty to the assessee to make a claim for refund w.r.t. reversal, which they effected by placing reliance upon the decision of this Court in the case of Everest Industries Limited.
++ the writ petitions are partly allowed and the impugned assessment orders are set aside in so far as the rejection of the assessee's objections w.r.t. adjustment of input tax credit and the matter is remitted back to the Asst. Commr. (CT) to redo the assessment under the said head by taking note of the decision in the cases of R.K.Knits and Xomox Sanmar Limited. The assessee is given liberty to seek for refund of the input tax credit reversed by them in the light of the decision in the case of Everest Industries Limited. In this regard, the assessee shall give specific reasons in writing to the AO, who while redoing the assessment w.r.t. adjustment of input tax credit, shall also consider the assessee's representation in the light of the decision in Everest Industries Limited and pass appropriate orders on merits and in accordance with law.
Assessee's writ petition allowed
