2017-TIOL-2150-HC-ALL-IT + Story
CIT Vs UP ELECTRONICS CORPORATION LTD: ALLAHABAD HIGH COURT (Dated: February 15, 2017)
Income Tax - Sections 14A, 115JB, 142(1), 143(2) & Rule 8D(2)(iii).
Keywords: Dividend income - Electronics industry - Illegal exercise of jurisdiction & Rectified by order.
The Assessee, a registered State-owned company, was engaged in promotion of electronics industry and imparting computer training in the State of U.P. The Assessee was also registered as non-banking finance company and its activity also included trading activity, computer hardware and other peripherals. The Assessee filed its return declaring a total income as 'NIL'. However, the income for calculation of tax u/s 115JB at Rs. 47,23,798/-, therefore, the Assessee revised its original return showing book profit through CASS. The Assessee claimed a dividend income stating that no expenditure was incurred. During the process of assessment, the Assessee's return was selected for scrutiny and thereby, notices u/s 143(2) and 142(1) were issued by the AO. Moreover, the AO applied Section 14A r/s Rule 8D(2)(iii) and thereby, disallowed the dividend income as claimed and subsequently made additions. Therefore, the Assessee's total income was computed at Rs. 59,32,539/-.
On Assessee's appeal, the CIT(A) confirmed applicability of Section 14A for disallowing expenditure but reduced the additions made by the AO. Again on Assessee's appeal, the Tribunal observed that the AO had failed to record its objective satisfaction with regard to the correctness of Assessee's claim and addition was mechanical without satisfying the conditions precedent for applying Section 14A(2). Therefore, the Tribunal had partly allowed Assessee's appeal and had set aside the assessment order as confirmed by CIT(A) in relation to additions made by disallowing exemption u/s 14A(2) r/w Rule 8D.
On appeal, the High Court held that,
Whether Rule 8D(1)(b) comes into play only after AO records his non-satisfaction about the assessee's claim - YES: HC
++ it is evident from order of AO itself that Assessee produced books of accounts, bills and vouchers which were checked and tested. The manner in which Assessee disclosed its incomes from interest, etc. has been referred in order passed by AO and it is not the case of AO that there was any discrepancy;
++ it is also evident from order passed by AO that he has simply observed that Section 14A was applicable and Assessee's contention that no expenditure has been incurred is not acceptable. Nothing further has been said by AO. Can it be said that to disallow claim of Assessee and to apply Section 14A r/w Rule 8D(2)(iii), AO was justified in simply observing that contention of Assessee is not acceptable;
++ Rule 8D(1)(b) will come into the picture only when AO recorded his non-satisfaction with regard to Assessee's claim that no expenditure has been incurred or about the correctness of claim of expenditure by Assessee. Therefore, to attract Section 14A(1)(b) & (2) r/w Rule 8D, AO has to show his non-satisfaction about the claim set up by Assessee;
++ this exposition of law prior to introduction of Section 14A was when an Assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, entire expenditure in the said business was deductible and in such case, principle of apportionment of expenditure relating to non-taxable income did not apply. However, where business was divisible, principle of apportionment of expenditure was applicable and expenditure apportioned to "exempt" income or income not exigible to tax was not allowable as a deduction;
++ Section 14A after its insertion came to be considered at length in the case of Walfort Share and Stock Brokers Private Ltd., it held that insertion of Section 14A with respective effect reflects serious attempt on the part of Parliament not to allow deduction in respect of any expenditure incurred by Assessee in relation to income which does not form part of total income under Act, 1961 against taxable income;
++ in the case of Dhampur Sugar Mills, a Division Bench of this Court, presided by Dr. Justice D.Y. Chandrachud (Chief Justice), after referring to Section 14A(2) and Rule 8D of Rules, 1962 observed that to determine the amount of expenditure incurred in relation to such income which does not form part of total income under Act, 1961 by applying the method which is prescribed in Rule 8D, AO must not be satisfied with the correctness of claim of Assessee having regard to accounts of Assessee. Having said so, Court observed that for the purpose of looking into the fact whether order passed by AO has applied to the requirement or not, one has to go through the order itself since there cannot be any strait jacket formula requiring AO to use any particular language or form. If the order of AO indicate that he is not satisfied with the correctness of claim of Assessee or the claim of Assessee that no expenditure has been incurred, he has to proceed in the manner indicated in Rule 8D(2). Court then examined the order of AO passed in that case which contained various reasons and details of disclosure made by the Assessee and found that there was compliance of requirement of Section 14A(2) and order shows application of mind on the part of AO to the accounts of Assessee from the assessment order itself;
++ in our view, jurisdiction to apply Section 14A contemplates satisfaction of condition precedent therein, on the part of AO. If he has illegally exercised jurisdiction, same cannot be said to have been rectified by order passed by Appellate Authority inasmuch as order of Assessing Authority itself being illegal as statutory mandatory condition was not satisfied, such illegality could not have been cured by order passed by Appellate Authority. In the circumstances, we answer the questions against Revenue and in favour of Assessee. Appeal in question is accordingly dismissed.
Revenue's appeal dismissed
2017-TIOL-2149-HC-DEL-IT
RADICO NV DISTILLERIES MAHARASHTRA LTD Vs CIT: DELHI HIGH COURT (Dated: October 9, 2017)
Income Tax - Writ - Section 245D (2C).
Keywords: Application for settlement - Bogus/non-existent companies - ITSC - Misdescription - Restructuring - Search & Share capital.
A search was conducted at the business premises of the Assessee-company u/s 132 of the Act and proceedings were initiated u/s 153A of the Act for the AYs in question. While the proceedings were pending, the Assessee approached the ITSC under chapter XIX-A of the Act. In its applications, the Assessee made a disclosure of additional income of Rs.11,60,96,390/- and paid additional tax and interest payable thereon aggregating to Rs. 97,29,856/-. The applications also contained the confidential portion which provided the details relating to the mode and manner of earning such additional income. Apart from the Assessee's application, applications were also filed by the group companies and individuals on whom searches were carried out. In total the said applicants had declared a sum of Rs.104,10,90,845/-. A consolidated order was passed by the ITSC directing that "Since the applicants have prima-facie fulfilled the conditions prescribed u/s 245C (1) of the Act, the applications are allowed to be proceeded with."
The ITSC had simultaneously called for a report from the CIT. In that report, the CIT averred that the Assessee had received substantial amount of share capital from bogus/non-existent companies. The report further states that the Assessee had received the share capital from Enn Vee Holdings Pvt. Ltd. which in turn had received the entire share holding from bogus/non-existent/paper/briefcase companies and there was a failure by the Assessee to make a full and true disclosure of its income before the ITSC as also a failure to disclose the manner in which the income was derived and the additional amount of income tax payable on such income. Accordingly, the ITSC rejected the application of the Assessee.
In Writ, the High Court held that,
Whether an application for settlement can be rejected by the ITSC, without examining the matter comprehensively, merely on ground that it has received the substantial amount of share capital from bogus/non-existent companies - NO: HC
++ the ITSC appears to have proceeded on a wrong premise. The primary ground for rejection is that Enn Vee is a conduit and that it has received the substantial amount of share capital from bogus/non-existent companies. If this is so, it would have consequences for Enn Vee as well. The dismissal of the Assessee's applications by the ITSC would result in a failure to examine the matter comprehensively and in entirety. Even if what is contained in the report is indeed true which would become clear after the proceedings at the ITSC are concluded, appropriate orders can be passed by the ITSC in accordance with law in respect of such bogus companies, if any. The rejection of the applications of the Assessee cannot be done on this sole ground and in fact it would be appropriate if the Assessee's case is heard and decided along with case of Enn Vee;
Whether when the shareholding of any company is being changed while undergoing restructuring, there is no bar on depreciation being claimed as permissible in law - YES: HC
Whether therefore, merely a misdescription by the Assessee of the restructuring process as 'process of setup', could not be a ground for rejection of it's applications - YES: HC
++ finally, the contradiction which has been highlighted appears to misunderstand the situation. It is not in dispute that the Assessee company was undergoing restructuring. The restructuring of the shareholding is different from a company being newly setting up. The term 'process of setup' is merely a misdescription by the Assessee of the restructuring process, in its response dated 1st April 2013, to the notice of the ITSC dated 8th February 2013. The ITSC appears to have borrowed this terminology from the said document and has non-suited the Assessee on that ground. What indeed is clear from the facts is that the shareholding pattern of the Assessee company was being restructured/changed and it was not an establishment of a new company. While the shareholding of any company is being changed, there is no bar on depreciation being claimed as permissible in law. Thus, this could not be a ground for rejection of the Assessee's applications;
++ in view of the above facts and following the decision in Bindlas Duplux, the Court deems it appropriate to set aside the order of the ITSC. It is clarified that the Court has not examined the merits of the dispute which shall be examined by the ITSC in accordance with law. The applications filed by the Assessee shall be proceeded with and considered by the ITSC along with the application filed by Enn Vee.
Assessee's Writ allowed
2017-TIOL-2145-HC-MUM-IT
PR CIT Vs APEAK INFOTECH: BOMBAY HIGH COURT (Dated: June 8, 2017)
Income Tax - Section 28(iv) & 68.
Keywords: Capital Account - Capital receipt - Definition of income - Profits and gains of business & Share premium.
There were many Assessee's and the APEAK INFOTECH was one of them, filed its return. During the year relevant year the Assessee increased its Share Capital by issuing its shares at a premium. However, during the course of assessment, the AO negatived the Assessee's contention that the share premium received by it on issue of shares was a capital receipt and hence could not be taxed as income and held that the Assessee did not had any significant business at the time of issue of share capital to warrant receipt of share premium. Thus, the AO while passing the assessment order u/s 143(3) of the Act added the share premium received to its income as profits and gains of business u/s 28(iv) of the Act.
On appeal, the CIT(A) held that Section 28 (iv) of the Act had no application, as it dealt with the benefit other than cash or money arising out of business. The CIT(A) also noted that section 68 of the Act will not apply as during the course of Assessment proceedings, complete details of the investor i.e. the PAN, Balance Sheet of IT Return, copies of Bank statements, resolution of the Board authorizing the and also the parties who made the investment had confirmed the transaction in Assessment proceedings. Accordingly he allowed the appeal and set aside the order of the AO. On further appeal, the Tribunal also upheld the order of the CIT(A) relying upon the decision of the Bombay High Court in case of Vodafone India Services Pvt. Ltd. and the Apex Court in M/s G.S. Homes & Hotels P.Ltd., held that the receipt of share premium was on capital account and could not be brought to tax as income.
On appeal, the High Court held that,
Whether since statute does not provide for inclusion of share premium within the definition of income before the year starting 1st April, 2013, Revenue is not justified in adding that as profits and gains of business u/s 28(iv) of the Act - YES: HC
Whether therefore, Section 28(iv) of the Act is applicable only on the amounts received as income and not on capital Account - YES: HC
++ the definition of income as provided under Section 2(24) of the Act at the relevant time did not define as income any consideration received for issue of share in excess of its fair market value. This came into the statute only with effect from 1st April, 2013 and thus, would have, no application to the share premium received by the Assessee in the previous year relevant to the assessment year 2012 – 2013. Similarly, the amendment to Section 68 of the Act by addition of proviso was made subsequent to previous year relevant to the subject Assessment year 2012-13 and cannot be invoked. It may be pointed out that Bombay High Court in case of Gangadeep Infrastructure (P) ltd had while refusing to entertain a question with regard to Section 68 of the Act has held that the proviso to Section 68 of the Act introduced with effect from 1 April 2013 will not have retrospective effect and would be effective only from Assessment year 2013-14.
Revenue's appeal dismissed
2017-TIOL-2144-HC-AHM-IT
PR CIT Vs BABUL PRODUCTS PVT LTD: GUJARAT HIGH COURT (Dated: September 13, 2017)
Income Tax - Sections 37 & 57.
Keywords: Actual business activity - Brand name/trademark - Business expenditure - Chargeability of income - Discontinued business & Statutory charges.
The Assessee-company, had filed its return and claimed business expenditure. During the assessment proceeding, the AO noted that the Assessee was not engaged in the business activity during the relevant AY. Therefore, a disallowance of business expenses of Rs.3,26,75,383/- was made by the AO. On Assessee's appeal, the CIT(A) held that since, Assessee was not engaged in any business activity, hence, the expenditure claimed was therefore, not relatable to such business.
The matter was rolled out before the Tribunal. The Tribunal held that irrespective of the chargeability of the income under the head "profits and gains of business or profession" or "income from other sources", the expenditure so claimed had to be allowed, be it u/s 37 or u/s 57. Hence, the findings of the CIT(A) was set aside and meanwhile, directed the AO to allow the business expenditure as claimed by the Assessee.
On appeal, the High Court held that,
Whether business expenditure incurred towards the statutory charges and for employment can be allowed when the actual business activity was not carried out due to litigation for the brand name/trademark, but was not discontinued - YES: HC
++ the Tribunal has reached a factual finding that though the Assessee did not carry out any actual business activity during the year under consideration, the same was due to litigation for the brand name/trademark, however, the business was not discontinued. In the meantime, the Assessee had to incur expenditure towards the statutory charges and for employment. Such being the facts, in our opinion, no question of law arises;
++ counsel for the Revenue however, drew our attention to the observations of the Tribunal. These are merely passing observations of the Tribunal and are not meant to lay down any proposition of law. With these observations, the tax appeal is dismissed.
Revenue's appeal dismissed
2017-TIOL-2143-HC-AHM-IT
PR CIT Vs A MENARINI INDIA PVT LTD: GUJARAT HIGH COURT (Dated: July 31, 2017)
Income Tax - Capital expenditures - Enduring benefit - Royalty & Training and seminar expenses.
The Assessee-company filed its return. During the course of assessment the AO noticed that the Assessee had made payments on account of Royalty and training and seminar expenses and claimed deduction for that expenditure. However, the AO disallowed those expenditures treating the same as capital expenditure. On appeal, the CIT(A) held that the payment of royalty for use of trademark enabled the Assessee to market the product more easily and thus a profit earning apparatus and therefore, the expenditure did not result into any enduring benefit. On the matter of training and seminar expenses, the CIT(A) held that the Assessee was in the business of providing marketing to various pharma companies and the Assessee had conducted a seminar to impart training to its employees for such purpose. Accordingly, the CIT(A) allowed the appeal filed by the Assessee and set aside the decision of the AO. On further appeal, the Tribunal upheld the order of the CIT(A).
On appeal, the High Court held that,
Whether payment of Royalty for use of trademark and training and seminar expenses are for the purpose of augmenting the business of the assessee and did not result into any enduring benefit and therefore, cannot be termed as capital expenditures - YES: HC
++ the expenditures were for the purpose of augmenting the business of the Assessee and did not result into any enduring benefit such expenditures were correctly allowed as revenue expenditures. The Court is not unmindful of the decision of the Supreme Court in case of Honda Siel Cars (I) Ltd. in which on facts it was held that the royalty payment for obtaining technical knowhow for the entire period of agreement was a capital expenditure. The Supreme Court confirmed the view of the High Court that such acquisition resulted into an enduring benefit to the Assessee.
Revenue's appeal dismissed
