recent controversies in income tax by ca. kapil goel fca llb advocate (delhi high court) 9910272806...

Recent Controversies in Income TaxBy CA. Kapil Goel FCA LLBAdvocate (Delhi High Court)[email protected]

What is contained for discussion in next slides! Search and Seizure related controversies Reopening related developments Section 14A developments Karnataka High Court orders! Charity taxation! Section 195/ Section 40(a)(i) Sec. 9(1)(vii) Section 37; 36(1)(iii); Section 40(a)(ia); 41(1) Section 68 & Section 271D/269SS penalty Section 263 law in D.G.Housing case Section 271(1)(c) Guj HC gift addition

Search and seizure: Assessment etc

Search Assessment section 292C Presumption Gujarat High Court BABULAL JIVANLAL PATEL : Whether on the facts and in the

circumstances of the case, the Appellate Tribunal was justified in law in not taking cognizance of provisions of section 292C of the Income Tax Act, 1961, in correct perspective as the said document was seized from the premises of the assessee?:

The facts emerging from the record indicate that during the course of search a loose paper file annexure A-1 showed calculation of net profit of some trading activity. Such entries were made on the letter head of Doctor Shri Maganbhai Patel who had visited the family on 1.7.1999 when someone in the family was sick. The assessee had explained that the entries were not in his handwriting or in the handwriting of any of his family members. HELD:

However, in the facts of the present case, what is found is a loose paper on the letter head of a Doctor on which entries were made regarding some trading activity. The assessee has denied the handwriting to be his or that of any of his family members

Search Assessment section 292C Presumption . Considering the nature of the document, viz., a prescription of a

doctor, on which certain entries were made on the reverse side, along with the fact that the assessee had explained that the handwriting, was not his or that of any of his family members, the presumption that the same belonged to the assessee stood rebutted. Besides as recorded by the Commissioner (Appeals) though search had been carried out in the entire group, no evidence whatsoever had been found during the search operations which could show that the assessee did carry out any business in his individual capacity to earn such income. Moreover, the assessee was not found to be in possession of unaccounted assets etc. which could be said to have been made out of such alleged unaccounted income. Thus, in the absence of any corroborative evidence to support the case of the revenue that the assessee had actually earned such huge income, the Tribunal was justified in upholding the deletion of the addition of Rs.21,25,000/-

Search Assessment section 292C Presumption UMANG H THAKKAR - Opponent(s) GUJ. HIGH COURT

SEC. 292C/132(4A) etc.

From the office of father of assessee file containing loose paper (176 pages) was impounded and on the basis of the notings made in this file, Assessing Officer added the sum of Rs . 2.8 crores as the assessee's unaccounted investment in land. . At the outset, it is required to be noted that though there are four questions raised for consideration the issue hinges on one aspect and i.e. Whether addition made by Assessing Officer to the tune of Rs. 2.8 crores by way of unaccounted investment can be sustained or not ? 10. It can be seen from the findings of the Tribunal noted above that addition made by the Assessing Officer has been rightly deleted by the Tribunal upholding the version of CIT(A) .

Search Assessment section 292C Presumption

….Firstly on the settled law that no addition could be made on the basis of statement of the 3rd party, this deletion is made. Even if the person concerned was the father of assessee. Tribunal had noted that alleged loose papers/documents where the rough jottings were made on the papers, they were not handwriting of either assessee or any of his employees neither was there were any dates nor the figures indicative of anything (UMANG H THAKKAR )

DHIRAJLAL DURLABHBHAI PATEL - HUF :

Admittedly, except for the unsigned document, there is no other corroborating evidence to establish any transaction having been taken place, more particularly in relation to the amount stated in the said document. There is no evidence, nor any finding by any authority, that the possession of land was handed over by the assessee as contended by the learned counsel. In this factual matrix in absence of any cogent evidence to treat the amount stated in the unsigned document as the value of the transaction resulting in taxable income the Tribunal was justified in deleting the addition

Section 132: Search Validity

High Court of Bombay (Nagpur Bench) in Spacewood Furnishers (P) Ltd. & Ors. v. Director General of Income Tax (Investigation) & Ors., (2012) 246 CTR Reports 313

Section 132: Search Validity

The note of IT (Investigation) authorising the search was considered and it was held that same did not show any date, time or place, when the discreet enquiries were made and did not name the person from whom it was made. The market information did not find place in the satisfaction note and no details of the discreet enquiry were disclosed. It was held that satisfaction note must be based upon contemporaneous material, information becoming available to the competent authority. Loose satisfaction notes placed by authorities before each other cannot meet the requirement of the provisions and thus the authorisation in that case was found to be bad and unsustainable.

Orissa High Court search sec. 132 updates Maa Vaishnavi Sponge Ltd. vs Director General of

Income Tax and Ors 339 ITR 413

10. The intention of legislature is certainly not to give unbridled power to the authorized officer to seize or issue prohibitory order in respect of any asset/bank account etc. found in the course of search without application of his mind for forming of an opinion/a belief on the basis of any material available on record that the asset/deposit in bank account represents wholly or partly the undisclosed income of the assessee. …Therefore, order under s. 132(3} cannot be issued indiscriminately or it is not automatic in a search and seizure proceeding as contended by learned senior standing counsel Mr. A.K. Mohapatra.

Orissa High Court search sec. 132 updates Visa Comtrade Ltd. vs UOI and Ors. 338 ITR 343

Top most care should be taken before taking seizure action in respect of a bank account already disclosed to the Income Tax Department; The Act has not given unbridled and arbitrary power to the I.T. Authorities to invoke power under Section 132 of the Act. Needless to say that subjective satisfaction must have some objective foundation. It cannot be ipse dixit of the Authorized Officer. On those untested allegations and in absence of any findings that source of any deposit in the current bank account has not been explained or not disclosed in the regular books of account, no seizure is sustainable. As noted above, the correctness of allegation has to be assessed in assessment.

Visa Comtrade Ltd. vs UOI and Ors. 338 ITR 343 It is a settled legal proposition that if an

order is bad in its inception, it does not get sanctified at a later stage. A subsequent action/development cannot validate an action which was not lawful at its inception, for the reason that the illegality strikes at the root of the order.

M.D. Overseas Ltd. vs Director General of Income Tax and Ors 333 ITR 407 . All. High Court 70. Let's consider the question, whether the

relevancy of information leading to reasons to believe for authorising the search is to be adjudged after disclosing and hearing the aggrieved person or not. 75. A man's home is his castle, is a proverbial expression of personal privacy and security. It means, there is nothing more sacred; more strongly guarded than one's own home: a man's home is his castle where he can be in perfect safety from intrusion. 76. More than 400 hundred years ago, Sir Edward Coke, an English judge, in Semayne's Case (1604) 77 Eng. Rep. 194 gave it legal recognition by observing, '[T]he house of every one is to him as his castle and fortress, as well for his defence against injury and violence as for his repose.'

M.D. Overseas Ltd Contd

Since then it is not only part of English jurisprudence but of all democratic nations of the world; so is the case with us: the Constitution guarantees fundamental rights and protects our privacy under article 21 of the Constitution. 77. We are not only exercising writ jurisdiction, but are also sentinel on the qui view for protections of the rights; we are on alert on any encroachment on any freedom. Should we decide a point relevant to intrusion of privacy without affording reasonable opportunity to the petitioners; should we adopt a procedure that might not be fair—the ultimate aim of all jurisprudence; the yardstick on which all procedure should be tested.

M.D. Overseas Ltd Contd.

The procedure of indicating information and reason to believe (except the source) to the petitioner, then taking a decision on relevancy of the information after hearing the parties, ensures fairness. Had their disclosure barred by any enactment or were they privileged under the Evidence Act, then it would have been otherwise.

Siksha "O" Anusandhan vs CIT 336 ITR 112 HC (Orissa) (i) Whether in absence of warrant in the name of an

assessee the search conducted in its premises is a valid search as contemplated under Section 132 of the I.T. Act, 1961?

(ii) Whether initiation of a valid search as contemplated under Section 132 of the I.T. Act, 1961 in case of a person is a pre-requisite to issue notice for making assessment/reassessment under Section 153 A of the I.T. Act, 1961 in respect of such person ?

(iii) Whether on the facts and circumstances of the case, the I.T.A.T. is justified in remanding the matter to the Commissioner of Income Tax (Appeal) to adjudicate on a question of law raised before it instead of deciding the issue itself?

Siksha "O" Anusandhan

In order to assume jurisdiction to assess a person under Section 153A, there must be initiation of a valid search in respect of such person under Section 132 of the I.T. Act, 1961. The word 'person' appearing in Section 132 and in Section 153 A of the I.T. Act, 1961 is one and the same person. Thus the person, in respect of whom search under Section 132 is initiated, is the same person against whom notice under Section 153A is to be issued for making assessment/reassessment under that Section.

Siksha "O" Anusandhan In view of the above, we are not inclined to accept the

contention of Mr A. Mohapatra that even if there is any illegality in the search warrant, the same will not invalidate the search assessment proceeding initiated under Section 153A of the I.T. Act, 1961 Therefore, we are of the view that initiation of a valid search as contemplated under Section 132 of the I.T. Act, 1961 in case of a person is a prerequisite to issue notice for making assessment/reassessment under Section 153A of the I.T. Act, 1961 in respect of such person.

Law is well settled that once the materials are available on record, the appellate Court should have disposed of the case on merit taking those materials into consideration and there is no need to direct remand. (apex Court in Indian Bank vs. K.S.Govindan Nair and Ors., (2004) 13 SCC 697 )

ACIT vs Amit Pande ITAT, Indore 28 July 2011 Prima facie the Assessing Officer of the searched person should

form an opinion with regard to any document, valuables, etc., as found during the course of search, and that such document, which are declined by the searched person, actually belongs to some other person against whom proceedings u/s 153C are required to be put into operation. After recording of such satisfaction, the document so seized should be handed over to the Assessing Officer having jurisdiction over such other person, therefore, the requirement of recording of such satisfaction cannot be substituted by an appraisal note which is prepared by the search party after completion of search. Appraisal note is a secret internal document of the department for its internal use and the contents of the same are not conveyed to the assessee nor its copy supplied to the assessee even on making a written request, therefore, it cannot be treated at par with the recording of satisfaction as stipulated u/s 153C of the Act which is a mandatory requirement

CIT vs Late J. Chandrasekar (HUF) 338 ITR 61 HC (Chennai) In the light of the fact that the Revenue did not

produce any material to show that the materials were available at the hands of the Assessing Officer at the time of issuing notice, rightly the Tribunal came to the conclusion that the assumption of jurisdiction goes against the very tenor of section 153C of the Act. Consequently, the appeal had to fail. Even though the learned standing counsel for the appellant strenuously contended that the files were available in the office of the Assessing Officer, yet, there is hardly any material to show that the contention taken by the learned standing counsel before this court can be substantiated or was substantiated before the Tribunal.

Case Title Gist

Sinhgad Technical Education Society

vs ACIT 140 TTJ 233

(TO SAME effect in

Bharti Vidyapeeth orders 28th April, 2011)

AY specific incriminating document required for making addition/assuming jurisdiction u/s 153C of the Act (dumb document cannot belong any one)

Beejay Security & Finance Ltd LexReported Mumbai Bench

The satisfaction note under section 153C of the Act merely says that the documents were being sent to verify the transaction of lease. On the facts of the case it cannot be said that the AO was satisfied regarding existence of any undisclosed income which would warrant initiation of proceedings under section 153C of the Act.In our view the satisfaction required for proceedings under section 153C cannot be reduced to a mere formality of forwarding the documents found in the course of search which did not belong to the person searched and which belonged to the person against whom proceedings under section 153C are sought to be initiated.

Case Title Gist

Shri S. Kathirvel CHENNAI BENCH

‘D’ : I.T.A Nos. 1257/Mds/2009Assessment year : 2001-02

153C case: After cogitating the entire facts and evidence available before us, it is for certain that no

incriminating evidence was found during search and it was only the assessee who had disclosed this gift. By following the above decision of the ITAT Chandigarh Bench, we have to delete this addition from the hands of the assessee

153A Assessment Incriminating

aterial Must (Assess/Reassess w.r.t to escaped issue)

Hyd Bench ITAT in :M/s. Hyderabad House Pvt. Ltd., I.T.A. No. 727/Hyd/2010 : A.Y.

2002-03 29th February, 2012; M/s Sridevi Dairy Farms (P) Ltd INCOME TAX APPELLATE TRIBUNALBANGALORE BENCHES ‘B’ ITA

Nos.1093 to 1095/Bang/2010 20/1/2012

Case Title Gist

Kunjamma VarkeyCochin Bench

I.T.A. Nos. 624-629/Coch/2010 In the instant case, the AO of the

person searched, i.e., the Group cases of P.A. Kuriakose and

Paulson Varkey Group, and the assessee - the cases being

centralised – is the same, so that there would be no occasion or

necessity for being handed over the same by the AO of

the person searched, i.e., the assesse’s AO. Yet, the existence of

such materials, among those seized (and/or requisitioned),

belonging to the assessee, is a basic condition for initiating

proceedings and issue of notice u/s. 153A r/w s. 153C. As afore-

mentioned, surprisingly though, there is no mention anywhere in

any of the assessment orders for each of the seven years, i.e., 2001-

02 to 2007-08, that for A.Y. 2007-08 having been specifically called

for by the Bench. Likewise, in the appellate orders But, we may

reiterate, the absence of relevant materials belonging to the

assessee and, consequently, is a case of lack of jurisdiction.

We, accordingly, upholding th assessee’s claim, hold the

assessments as without jurisdiction and, thus, bad in law, rather,

void ab initio. The decisions cited by the assessee , i.e., P. Srinivas

Naik vs. ACIT (2008) 117 ITD 201 (Bang.) and Sinhgad Technical

Education Society vs. ACIT (in I.T.A. Nos. 114 to 117/PN/2010 dated

28.1.2011/copy on record) are relevant in this regard.

Section 153A/C: Search Asst.

Ahd bench in Dr Manshukh Shah ; Mahipat Raichand; Khemani Distilleries; Shri Babubhai H. Parikh also states similar views

Calcutta High Court Dinanath HUF; All. High Court Shaila Aggarwal 246 CTR 266 (abatement meaning u/s 153A)

Mumbai Bench ITAT in Vama Apparels 22/07/2011:It was not open to the Assessing Officer to re-agitate the issues which has already crystallized in the original assessment under section 143(3) of the Act, without there being incriminating material found as a result of search.

Section 15 3A/153C

Gujarat High Court in Gambhir Silk Mills (approving AHd Bench ITAT order)

Bang Bench ITAT in United Spirits case 13/01/2012However, in the present appellant’s case, no books of account nor any incriminate documents pertaining to the appellant were seized when a search was conducted in the residential premises of Sri Miglani and that no books of account or documents or assets seized or requisitioned were handed over to the assessing officer having jurisdiction over the appellant, but, only “(Para 3 of Asst. order) 3….A satisfaction note for initiation of action u/s 153C/148 in the case of CBDL was also received from the DCIT, CC-19, New Delhi….” Thus, the AO, in our considered view, was not within his realm for initiation of proceedings u/s 153A r.w.s 153C of the Act in the case of the present appellant

Guj High Court in case of MHASKAR GENERAL HOSPITAL 09/08/2011

A) Whether on the facts and circumstances of the case and in law, the Appellate Tribunal is right in quashing the order u/s.263 of the I.T.Act without considering the decision of this Hon'ble Court in the case of Fakir Mohmed Haji Hasan v. CIT 247 ITR 290? Refer: Deputy CIT v. Radhe Developers India Ltd., (2010) 329 ITR 1(Guj.) With respect to second question, we may notice that the assessee's stand is that its sole business was that of running a hospital. It had no other source of income and that therefore, treating such undisclosed income from other source was not justified

Reopening u/s 148 of the Act

Gujarat High Court

1) Bakulbhai Ramanlal Patel v. Income Tax Officer reported in (2011) 56 DTR(Guj.) 212, wherein Division Bench of this Court observed that the assessment cannot be reopened to verify whether any income chargeable to tax has escaped assessment and further that reopening of assessment cannot be permitted on vague and nonexistent reasons for a mere fishing inquiry.

2) Hotel Oasis(Surat) (P) LTD. v. Deputy Commissioner of Income Tax reported in (2011) 57 DTR (Guj) 378, wherein Division Bench of this Court observed that assessment cannot be reopened merely to make inquiries.

Voltas Limited WRIT PETITION NO.312 OF 2012 IN THE HIGH COURT OF JUDICATURE AT BOMBAY 15 February 2012 While a subsequent decision of a Court or a legislative

amendment enforced after the order of assessment may legitimately give rise to an inference of an escapement of income, before the Assessing Officer proceeds to reopen an assessment after the expiry of four years of the end of the relevant Assessment Year, he must nonetheless apply his mind to the fundamental question as to whether there has been a failure to disclose on the part of the assessee. In the present case, ex facie there is no such allegation (refer:DIL Limited v. Assistant Commissioner of Income Tax (Writ Petition (Lodg.) No.2786 of 2011);Commissioner of Income Tax v. M/s. K. Mohan & Co. (Exports) (Income Tax Appeal (Lodg.) 2347 of 2010 and 1263 of 2011 decided on 1 July 2011), Sesa Goa Ltd. v. Joint Commissioner of Income Tax)

NYK Line (India) Ltd.. WRIT PETITION NO.159 OF 2012 HIGH COURT OF JUDICATURE AT BOMBAY 10 FEBRUARY 2012

14 Now, undoubtedly an order of assessment which has been passed for a subsequent assessment year may furnish a foundation to reopen an assessment for an earlier assessment year. However, there must be some new facts which come to light in the course of assessment for the subsequent assessment year which emerge in the order of assessment. Otherwise, a mere change of opinion on the part of the Assessing Officer in the course of assessment for a subsequent assessment year would not by itself legitimise the reopening of an assessment for an earlier year. The point to be emphasized is, therefore, that where in the case of assessment proceedings for a subsequent year certain additional information is obtained by the Revenue which was not available to it in the course of an assessment for an earlier year, that may legitimately be utilized as a ground for reopening an assessment of the earlier year

NYK Line (India) Ltd.. WRIT PETITION NO.159 OF 2012 HIGH COURT OF JUDICATURE AT BOMBAY 10 FEBRUARY 2012

The new information which has come to the knowledge of the Revenue would, therefore, constitute tangible material. Consequently and in this background the mere fact that the Assessing Officer for Assessment Year 200708 had come to a different conclusion would not justify the reopening of the assessment for Assessment Year 200607. In order to establish that the reopening of the assessment for Assessment Year 200607 is not a mere change of opinion, the Revenue must demonstrate before the Court that during the course of the assessment proceedings for the subsequent year i.e. Assessment Year 200708 some new information or material had been brought on record which was not available when the assessment order was passed for Assessment Year 2006-07.

IN THE HIGH COURT OF JUDICATURE AT BOMBAY INCOME TAX APPEAL NO.6375 OF 2010 ICICI Bank Ltd

7. This aspect of the matter has been considered in a judgment of a Division Bench of this Court in Ashoka Buildcon Ltd. Vs. Assistant Commissioner of Income Tax [2010] 325 ITR 574 (Bombay)2. Explanation 3 enables the Assessing Officer to assess or reassess income chargeable to tax which he has reason to believe had escaped assessment and other income which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section. There is nothing on the record of the present case to indicate that there was any other income which had come to the notice of the Assessing Officer as having escaped assessment in the course of the proceedings under Section 147 and when he passed the order of reassessment.

Gujarat High Court in case of PRASAD KOCH TECHNIK TECH PVT LTD reopening not for roving enquiries and scope of sec. 40(a)(i) vis a vis Foreign supplier raw material payment The Assessing Officer supplied reasons he had recorded for reopening the

assessment, which read as under:- “The assessee company filed its return of income on 22.12.2006, declaring total income of Rs.1,00,86,370/-. The assessment u/s.143(3) was finalized on 18.06.2008 determining the taxable income of Rs.1,00,86,370/-. It is seen that the assessee company had made payment of Rs.21,60,399/- in Foreign Company for purchase of raw materials. However, neither did the company deduct TDS on this amount nor any certificate obtain from the concerned Assessing Officer for non-deduction of TDS. Thus, in view of the provisions of section 40a(i) and judgment of Karnataka High Court, entire amount was required to be disallowed and added back to the total income. As discussed above, the disallow expenditure of Rs.21,60,399/- resulted in under assessment of same income. In view of the facts discussed above, I have reason to believe that income of Rs.21,60,399/- being the amount of disallowable u/s.40a(i) chargeable to tax has escaped assessment for A.Y.2006-07 and accordingly it is the fit case for reopening the assessment u/s. 147 for the A.Y.2006-07.”

Gujarat High Court in case of PRASAD KOCH TECHNIK TECH PVT LTD reopening not for roving enquiries and scope of sec. 40(a)(i) vis a vis Foreign supplier raw material payment…22. In the reasons recorded, there is not even a

prima facie belief or disclosure that on what basis, the Assessing Officer has formed his reason to believe that such payment to the foreign supplier attracted tax in India. In absence of any live link with the reasons recorded and the belief formed, we are of the opinion that the notice was wholly invalid. 23. If, as suggested by the counsel for the Revenue, we permit the Assessing Officer to ascertain full facts and bring them on record, and then decide whether income chargeable to tax had escaped assessment or not, we would permit the Assessing Officer to reopen the assessment only for fishing enquiry.

Section 14A: Exempt Income

M/s Siva Projects Engineering IN THE INCOME TAX APPELLATE TRIBUNAL ‘A‘ BENCH, CHENNAI 17.02.2012

3. At the outset, we would like to state here that the ld. CIT(A) in the appeal of the assessee has confirmed the disallowance of expenditure of Rs. 37,87,800/- and has deleted the disallowance of interest of Rs. 27,447/-made u/s 14Aof the Act. Therefore, the grievance of the assessee which remains to be adjudicated by us is with regard to disallowance of expenditure of Rs. 37,87,800/-. 10. Before us, the ld. A.R. of the assessee submitted that no exempt income was earned during the year and no expenditure was incurred in relation to earning exempt income and therefore disallowance by invoking Rule 8D was not warranted. She also submitted that the claim of the assessee that no expenditure was incurred in relation to investment of Rs. 101,56,27,000/- was not found to be incorrect by the ld. CIT(A). Therefore, disallowance of Rs. 37,87,800/- should have been deleted by the ld. CIT(A).

Chennai bench ITAT Contd (Siva Projects )However, we find that in the instant case, the Assessing Officer

has not brought no material on record to show that the claim of the assessee that no actual expenditure was incurred in making investments in question was not correct. The Assessing Officer, without disputing the correctness of the claim of the assessee has invoked the provisions of Rule 8D. …. 14. Thus it is observed that for determining the amount disallowable as per provisions of Rule 8D(2) the condition precedent is that the Assessing Officer must come to a conclusion having regard to the accounts of the assessee that claim of the assessee that no expenditure was incurred in relation to exempt income is not correct. We find that in the instant case, no such satisfaction has been arrived at. Therefore, computation of disallowable amount as per Rule 8D(2) cannot be sustained

Gujarat High Court

SUBMERSIBLES LTD TAX APPEAL No. 868 of 2010 Section 14A : “Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by CIT (A) in deleting the disallowance of Rs. 13,82,778/= made under Section 14A of the Act ?”

Thus, from the entire gamut of facts, the Tribunal held that there was sufficient surplus funds available with the assessee to invest and there was no nexus that could be established with the expenditure incurred by the assessee for earning the dividend income. (ITAT order upheld)

Delhi bench I.T.A. No.3571(Del)/2011 M/s Mohan Exports Pvt. Ltd 2/3/2012 The ld. CIT(Appeals) has given a very specific finding that the

examination of the bank account shows that such investments are out of interest-free funds available with the assessee-company. Rule 8D(2)(ii) deals with a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt in terms of the decision in the case of Maxopp Investments Ltd. (supra). The lower authorities were expected to examine whether the interest paid in this year is or is not directly attributable to any particular income or receipt. There is a finding that the interest is not directly related to receipts by way of dividends.Therefore, In view of the finding of the ld. CIT(Appeals), no interest expenditure had been incurred for earning tax-free income. Therefore, the provision contained in Rule 8D(2)(ii) cannot be invoked.

Delhi bench

ITA No. 2061/Del/2011 Seaview Developers Ltd., Law do not permits to assume hypothetically some expenses are there (where there is none in assessee’s P&L account) and then apply estimated rate to dividend income for disallowing notional expenses relatable to tax free income.

U/s 115JB whether rule 8D can apply? Apparently No

Other developments

Ahd ITAT in case of G M M Pfaulder Ltd, B ITA No.1241/Ahd/2006 Section 14A & section 36(1)(iii) disallowance of expenses on AD-HOC basis exhaustive analysis

SC in Wallfort 326 ITR PAGE 1 Delhi High Court Maxopp (18.11.2011)

203 Taxman 364

Karnataka High Court orders!

Karnataka High Court orders : Subandam Uday Kumar case

Section 54F is a beneficial provision promoting the construction of a residential house, therefore the same should receive liberal play in light of purpose for which sec. 54F is incorporated in statute, which aims to encourage investments in acquisition of residential house and completion of construction or occupation of house is not the requirement of law. B) If after making the entire payment merely because a registered sale deed has not been executed and registered in favor of assessee before the period stipulated, he cannot be denied the benefit of section 54F deduction. C) Similarly in case assessee has invested the relevant sale consideration in construction of the house and merely because the construction was not complete in all respects and it was not in a fit condition to be occupied within the period stipulated, can be no bar for availing section 54F deduction.

P&H High COurt on Section 54/54F : LONG TERM CAPITAL ASSET PERIOD OF HOLDING HOW TO BE COUNTED

: Vinod Kumar Jain Date of Decision: 24.9.2010 held : 16. In view of the above, it is concluded that the provisions of Sections 2(14), 2(29A) and 2(42A) encompasses within its ambit those cases of capital asset which are held by an assessee. Once that is so,adverting to the facts of the present case, the assessee was allotted flat on 27.2.1982 on payment of instalments by issuance of an allotment letter and he had been making payment in terms thereof but the specific number of the flat was allocated to the assessee and possession delivered on 15.5.1986. The right of the assessee prior to 15.5.1986 was a right in the property. In such a situation, it cannot be held that prior to the said date, the assessee was not holding the flat.

P&H High COurt on Section 54/54F : LONG TERM CAPITAL ASSET PERIOD OF HOLDING HOW TO BE COUNTED

: Whether on the facts and circumstances of the present case and the provisions of Section 2(29A) and Section 2(42A) read with section 54 of the Income Tax Act, the flat allotted to the appellant vide allotment letter dated 27.2.1982 is a long term capital gain and further the investing of that amount for the purchase of another house is exempted under the provisions of Income Tax Act, 1961?”

Karnataka High Court orders K Satish Kumar Singh Section 249 Admitted tax payment: a) When

once CIT-A dismiss the appeal in limine on limited ground of non payment of admitted tax as per ROI/ITR in terms of section 249(4), in case subsequently assessee comes up with relevant tax challans, CIT-A has power/duty to recall the earlier dismissal order for fresh decision on merits of the case; b) Likewise, ITAT can look into the request of assessee where CIT-A do not entertain suggested recall application on subsequent payment of admitted tax

Karnataka High Court Rama Krishna Sewa Ashram: ITA 248/2010:

…The parliament intended to pass on the benefit of exemption of income tax to charitable and religious institutions. We are really surprised at the attitude of these authorities who are over technical in denying the benefit to deserving institutions, which are rendering laudable services to rural masses. By not granting the tax exemption benefit which they deserve the authorities have hampered said social activities of the trust and they are made to waste their precious time, energy and money in fighting this litigation….unfortunately the person who took decision to file this appeal before this court are wasting precious time of the trust which could have been used in the social service….this attitude on the part of the department cannot be countenanced. National Litigation policy 2011 to be kept in mind before filing appeals…Rs 1 lac costs imposed on department

Karnataka High Court In case of Karuna Health care society: ITA 77/2011 The order of DIT(E) gives us an impression that he

was not concerned about the charitable activity carried on by the trust as such. He had no doubt in his mind that they were carrying on charitable activity. In the absence of any finding of siphoning of funds on part of trust for non charitable activity/personal activity, no adverse view should be taken at registration stage. Both the DIT(E) and ITAT missed the object with which the parliament has enacted these provisions to offer an incentive to persons who are well placed in life to take up charitable activities. Cost Rs 25000 imposed on Department

IN THE HIGH COURT OF JUDICATURE AT MADRAS Tax Case (Appeal)No.641 of 2011 Sarvodaya Ilakkiya Pannai

(i) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the registration granted to the assessee under section 12A(a) would hold good, even though the assessee's main object in publication, purchase and sale of books which are not definitely charitable activity and the activities are purely a commercial venture with profit motive is valid ?

Sarvodaya Ilakkiya Pannai Mad. HC case contd.

6. In order to apply the above provision, there must be a specific finding by the Commissioner that the activities of the trust or institution are not genuine or not being carried out in accordance with the objects of the trust or institution as the case may be. The question is, whether the order of the Commissioner of Income Tax could fall under the powers conferred on him under section 12AA(3) of the Act. The only reason given by the Commissioner of Income Tax to cancel the registration is that the activities of the trust were not charitable and therefore, the trust is not entitled to exemption under section 11 and consequently, cancelled the registration granted under section 12AA.

Sarvodaya Ilakkiya Pannai Mad. HC case contd.

10. The Tribunal had allowed the case of the assessee with the finding that none of the conditions under section 12AA(3) were violated and therefore, the satisfaction which was arrived at by the Commissioner of Income Tax was not justified (On a challenge to the said order cancelling registration, the Appellate Tribunal has found that the order of the Commissioner was not justified as the power to cancel could be only traced out to section 12AA(3) and in the absence of any activity carried on by the trust contrary to the objects, the registration cannot be revoked )

The Chartered Accountant Study Circle Tax Case (Appeal) No.593 of 2011 13.2.2012 (Madras High Court)

2. The assessee-trust is a Society known as "The Chartered Accountants Study Circle". The aims and objects of the Society among other things are as follows:

"a. To conduct periodical meetings on professional subjects;

b. To publish books, booklets, etc. on professional subjects;

c. To organise Seminars, Conventions, Conferences, etc., as may be deemed fit from time to time;

The Chartered Accountant Study Circle Tax Case (Appeal) No.593 of 2011 13.2.2012 (Madras High Court) Madras High Court Order on aforesaid factual background 6. We have considered the above submission. The question,

therefore, is whether the publication of books of professional interest to be used as a reference material by the general public including the professionals in respect of Bank Audit, Tax Audit, etc. would be construed to be a charitable purpose.

Therefore, it cannot be held that the activities of the assessee-trust in publishing and selling books of professional interest, which are meant to be used as a reference material even by the general public as well as the professionals in respect of Bank Audit, Tax Audit, etc., cannot be construed to be one of commerce in nature. The finding of the Tribunal in this regard requires no interference.

ITA.No. 183 of 2011 ( ) 16TH DAY OF FEBRUARY 2012 ST.MARY'S MALANKARA SEMINARY, IN THE HIGH COURT OF KERALA AT ERNAKULAM

The first question raised is whether a seminary coaching and training students for priesthood is an educational institution as referred to in the above provision of the I.T. Act. Educational institution is not defined under the I.T.Act


Freedom to practice and propagate religion is a right conferred under Article 25 of the Constitution. Propagation of religion necessarily involves education and training of young generation on religious matters and unless the same is systematically done religious beliefs and practices cannot be carried to future generations. Therefore religious teaching is a right recognized under the Constitution. A person admitted to seminary takes as much as about 10 years to become a qualified priest and the long duration by itself reveals the extensive coaching and training required to become a priest who is a religious practitioner. So much so, there cannot be any controversy that religious teaching is also education within the meaning of the term contained in S.10 (23C)(iiiad) of the I.T.Act.


There is nothing to indicate that S.10(23C)(iiiad), requires the educational institutions referred to therein to impart education in any particular subject or in any manner whatsoever. So much so, the term 'education' should enjoy a wide connotation covering all kinds of coaching and training carried on in a systematic manner leading to personality development of an individual.

So much so, we hold that religious teaching in the seminary is also education and seminary is therefore an "educational institution" entitled for exemption u/s 10 (23C)(iiiad) of the I.T.Act.

Sec. 12AA & Sec. 80G Charity JITO CHENNAI CHAPTERR Tax Case Appeal Nos.337 & 338 of 2011 IN THE HIGH COURT OF JUDICATURE AT MADRAS

2. A reference to the order of the Director of Income Tax (Exemptions) shows that the application filed by the assessee under Section 12AA of the Income Tax Act for registration of the Society, has been rejected at the threshold holding that in the object clause of the deed, particularly, in clause 3(a) and 3(f), there is a provision for domestic and overseas markets and also settlement of disputes by arbitration and therefore, the Director of Income Tax(Exemptions) has come to a conclusion that the object is not charitable in accordance with Section 2(15) of the Act and is commercial in nature.

Sec. 12AA & Sec. 80G Charity JITO CHENNAI CHAPTERR Tax Case Appeal Nos.337 & 338 of 2011 IN THE HIGH COURT OF JUDICATURE AT MADRAS

6. We have gone through the object clauses, namely, 3(a) and 3(f), referred to by the Director of Income Tax(Exemptions), which are as follows: . (f) To provide for arbitration in respect of settlement of disputes arising in the course of trade, services, vacations, industry or other business matters of the community and to secure the services of experts if found necessary or desirable."

7. We have also gone through the other clauses of the deed and it is very clear that the object of the Society is to propagate Non-violence and Tenets of Truth and to encourage universal spiritual uplifment as preached by the Tirthankar Bhagwants. What is stated about the settlement of dispute is only incidental thereto and cannot be stated to be commercial in nature.

Bombay High Court in The Chembur Gymkhana INCOME TAX APPEAL NO.5568 OF 2010 February 13, 2012

There is a finding of fact that the assessee is providing sports facilities as a part of its activities consisting of badminton, table tennis, billiards, cricket and skating among others. On these facts, the primary issue which has been decided by the Tribunal must be answered by holding that the assessee for Assessment Year 199697 fulfilled the definition of the expression “charitable organization” in Section 2(15). The first question of law would, accordingly, have to be answered in the affirmative. ((1) Whether in the facts and circumstances of the case and in law, the Tribunal was right in holding that the assessee performs a charitable purpose within the meaning of Section 2(15) of the Income Tax Act, 1961)

BHC in Gymkhana case :

Supreme Court in CIT vs. Surat Art Silk Cloth Manufacturers Association,5 it is a settled principle of law that the primary or dominant purpose of the institution must be charitable. The test to be applied is whether the object which is pursued is of the main or primary object or whether it is ancillary to a dominant object

Delhi High Court orders!

Samora case (271D/269SS)

ITA No.313/2006 Judgment delivered on: 23.02.2012 Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in concluding that no penalty was leviable on the assessee under the provisions of section 271D of the Income Tax Act, 1961?


20. The Supreme Court in Asst. Director of Inspection (Investigation) v. Kum. A.B. Shanthi: 255 ITR 258 (SC); observed that (1) if there was a genuine and bona fide transaction and (2) if for any reason the taxpayer could not get a loan or deposit by account-payee cheque or demand draft for some bona fide reasons, the authority vested with the power to impose penalty has got discretionary power. The existence of a genuine or bona fide transaction is not sufficient to attract the relief under section 273B of the said Act. It must also be established that for some bona fide reasons the assessee could not get a loan or deposit by an account payee cheque or account payee bank draft.


In the present case, the Tribunal has not returned any finding as to the second aspect. Without a clear finding on both the aspects referred to in the said Supreme Court decision, the Tribunal, in law, could not have concluded that the assessee had “reasonable cause” for its failure to accept the said amounts in compliance with section 269SS of the said Act.

There is nothing on record to show that there were bona fide reasons for not accepting the said amounts through account payee cheques or account payee bank drafts. And, unless that is established, the shelter of section 273B is not available

Kamdhenu case (Section 68)

We may repeat what is often said, that a delicate balance has to be maintained while walking on the tight rope of Sections 68 and 69 of the Act. On the on hand, no doubt, such kind of dubious practices are rampant, on the other hand, merely because there is an acknowledgement of such practices would not mean that in any of such cases coming before the Court, the Court has to presume that the assessee in questions as indulged in that practice. To make the assessee responsible, there has to be proper evidence. It is equally important that an innocent person cannot be fastened with liability without cogent evidence.

Kamdhenu case (Section 68)

7) Even the Tribunal acts purely as an appellate authority. In that capacity, the Tribunal has to see whether the assessment framed by the AO, all for that matter, orders of the CIT(A) were according to law and purportedly framed on facts and whether there was sufficient material to support it. It is not for the Tribunal to start investigation. The Tribunal is only to see as to whether the additions are sustainable and there is adequate material to support the same if not the addition has to be deleted. At that stage, the tribunal would not order further inquiry. It is to be kept in mind that the AO is prosecutor as well as adjudicator and it is for the AO to collect sufficient material to make addition

Calcutta High Court in HIND CONTAINERS PVT. LTD. Versus COMMISSIONER I.TAX, W.B.-IV, KOLKATA ITA No. 315 of 2004 “i] Whether a particular expenditure could be

questioned by the Assessing Officer on the ground of justification and be disbelieved without any enquiry in order to hold the genuineness of a transaction as suspicious without holding any enquiry and giving opportunity to the assessee ?ii] If the answer to the above is in favour of assessee then whether the Tribunal was justified in law in upholding the disallowance of the payment of Rs.2,84,362/- made by the appellant to M/s. Aditya Associates towards labour charges for the purposes of the appellant’s business and its purported findings in that behalf are arbitrary, unreasonable and perverse ?”

Calcutta High Court in HIND CONTAINERS PVT. LTD. Versus COMMISSIONER I.TAX, W.B.-IV, KOLKATA ITA No. 315 of 2004 In this case no attempt has been made to dispute the

case made out by the appellant. Moreover, without examining the details with regard to the payment made in a year to the said Aditya Associates and looking at the aggregate figure, the cash transaction should not have been disbelieved or should not have been declared unacceptable under the proviso of sub-Section 3 of Section 40A. In view of the aforesaid reason, we think that all the authorities below did not render justice and this needs reconsideration

Calcutta High Court in HIND CONTAINERS PVT. LTD. Versus COMMISSIONER I.TAX, W.B.-IV, KOLKATA ITA No. 315 of 2004 We see force in the submission of Mr. Khaitan that the finding of all the authorities

below that the said Aditya Associates, the sister concern of the company, is based on no evidence. We noticed that apparently there has been a document to show separate and distinct entity of the said Aditya Associates and in order to establish the same being unreal, it is something more which is required to be done by the Revenue as it has been ruled by the Supreme Court in the case of Commissioner of Income-tax (Central) Commissioner of Income-Tax (Central), Calcutta [supra]. At the bottom of page 360 continued at page 361 of the said decision, the Supreme Court made the statement the statement of law in this regard as follows:

“The onus to prove that the apparent is not the real is on the party who claims it to be so. As it was the department which claimed that the amount of fixed deposit receipt belonged to the respondent firm even though the receipt ………………………………….., the burden lay on the department to prove that the respondent was the owner of the amount…...”

Calcutta High Court in HIND CONTAINERS PVT. LTD. Versus COMMISSIONER I.TAX, W.B.-IV, KOLKATA ITA No. 315 of 2004 Apart from the statement of law made by the Supreme Court, we quote the

provision of Section 103 of the Indian Evidence Act, which is as follows:

“103. Burden of proof as to particular fact. – The burden of proof as to any particular fact lies on that person who wishes the Court to believe in its existence, unless it is provided by any law that the proof of that fact shall lie on any particular person.”

Here, the assessee thought it best to engage outsider in order to meet the contractual obligation with various government companies for supplying drums. Their existing labour force, perhaps, would not be adequate to meet the demand of the customers. Having regard to the expediency and necessity, the company decided to engage an outsider, namely M/s. Aditya Associates. How M/s.Aditya Associates has rendered services to the company could have been examined by the authorities concerned and this could have been done only by calling the said Aditya Associates or examining the other documents regarding the payment made to the said Aditya Associates. This exercise was not undertaken by the Assessing Officer

Allahabad High Court in Case :- INCOME TAX APPEAL No. - 359 of 2011 Petitioner :- Commissioner Of Income Tax Respondent :- M/S Standard Surfactants Ltd. ITAT order section 36(1)(iii) In the present case, it is noticed that the

assessee utilixed land belonging to M/s Standard Sulphonators Ltd. as a security against loan raised from the bank, this fax is also clear from page 17 of the assessee's compilation, which is a copy of certificate issued by the State Bank of India, Civil Lines, Kanpur wherein it is certified that the property owned by M/s Standard Sulphonators Ltd. Was pledged with the bank as security against lona provided to the assessee. The value of the said property as per valuation report dated 20.9.2007 was Rs.2.25 cores.

Allahabad High Court in Case :- INCOME TAX APPEAL No. - 359 of 2011 Petitioner :- Commissioner Of Income Tax Respondent :- M/S Standard Surfactants Ltd. ITAT order section 36(1)(iii)

Since the company, M/s Standard Sulphonators Ltd. Had provided its land as security to the bank against loan taken by the assessee and in lieu of that the assessee deposited a sum of Rs.50 lakhs with the said company i.e. M/s Standard Sulphonators Lted., so it cannot be said that the said amount of Rs.50 lakhs was an interest free advance or loan. Therefore, the Assessing Officer was not justified in making the disallowance on account of notional interest on the said deposit…The Tribunal has allowed the assessee's claim regarding disallowances of interest paid on borrowed funds vis a vis advances/deposits made to M/s Standard Sulphonators Ltd. on the ground that the said company had given its property papers to the assessee for securing loan/advances from the State Bank of India. Property papers given by M/s Sulphonators Ltd. Was necessary as the bank was not willing to advance/ loan in the absence of any collateral security.

Allahabad High Court in Case :- INCOME TAX APPEAL No. - 359 of 2011 Petitioner :- Commissioner Of Income Tax Respondent :- M/S Standard Surfactants Ltd. ITAT order section 36(1)(iii)

That being the position, we are of the considered opinion that it is in the course of business transactions, and, therefore, the Tribunal was justified in deleting disallowance of the interest on assumed interest free advance S

M/s.UPS SCS (Asia) Limited IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES “L”, MUMBAI 22nd day of February, 2012. ITA No.2426/Mum/2010

4. We have heard the rival submissions and perused the relevant material on record in the light of precedents cited. The entire dispute centers around the taxability of the amount received by the assessee from Menlo India in respect of services performed outside India on the export consignments of Menlo India originating from India. There is no quarrel over the nature of services for which the above referred amount has been paid to the assessee being, freight and logistics services such as transport, procurement, customs clearance, sorting, delivery, warehousing and pick up services. Now the primary question which arises for our consideration is as to whether the payment in respect of these services can be held as `fees for technical services’ within the meaning of section 9(1)(vii).


In the absence of any specific definition of the phrase “managerial services” as used in section 9(1)(vii) defining the “fees for technical services”, it needs to be considered in a commercial sense. It cannot be interpreted in a narrow sense to mean simply executing the directions of the other for doing a specific task. For instance, if goods are to be loaded and some worker is instructed to place the goods on a carrier in a particular manner, the act of the worker in placing the goods in the prescribed manner, cannot be described as managing the goods. It is a simple direction given to the worker who has to execute it in the way prescribed. It is quite…


natural that some sort of application of mind is required in each and every aspect of the work done. As in the above example when the worker will lift the goods, he is expected to be vigilant in picking up the goods moving towards the carrier and then placing them. This act of the worker cannot be described as managing the goods because he simply followed the direction given to him. On the other hand, `managing’ encompasses not only the simple execution of a work, but also certain other aspects, such as planning for the way in which the execution is to be done coupled with the overall responsibility in a larger sense. Thus it is manifest that the word `managing’ is wider in scope than the word `executing’. Rather the later is embedded in the former and not vice versa

It is only when some consideration is given for rendering some advice or opinion etc., that the same falls within the scope of “consultancy services”. The word `consultancy’ excludes actual `execution’. The nature of services, being freight and logistics services provided by the assessee to Menlo India has not been disputed by the authorities below. There is nothing like giving any consultation worth the name.


. Where simply an equipment or a standard facility albeit developed or manufactured with the use of technology is used, such a user cannot be characterized as using `technical services’. The essence of theconsideration for the payment is rendering of services and not the use of computer. If incidentally computer is used at any stage, which is otherwise not necessary for rendering such services, the payment for freight and logistics will not partake of the character of fees of `technical services’. We, therefore, repel this contention raised on behalf of the Revenue.

Jaipur bench ITAT in Modern Insulator case 56 DTR

362; Delhi bench in HAVELL’s case 140 TTJ 283 Further, as held by Jaipur bench of ITAT in Modern

Insulator case 56 DTR 362 (also refer Delhi High Court in EON technology 203 Taxman 266) that commission related services rendered by foreign agent do not attract tax withholding u/s 195 of the Act as same are not in nature of technical /managerial services, same conclusion is available in number of Mumbai bench ITAT orders.

Further, as pointed in HAVELL’s case that certification services provided by foreign agency to Indian party in connection with export sales, is something which stands utilized for the purpose of earning the income from a source outside India (here export orders from foreign buyers) and on that count itself there is no requirement of tax withholding u/s 195 read with section 9(1)(vii) of the Act on stated certification payments.

ACIT Vs. Merchant Shipping Services (P) Ltd. and Others, 135 TTJ (Mum)

589 Where no technical services are provided as such, but the payment is made for the use of some machinery or equipment or standard facility which may have been created or brought into existence with the input of technical services along with man, machine and material, such payment would not partake of the character of fees for technical services. Take for example a person going to a cinema and purchasing ticket for watching a movie. When he purchases ticket, he pays for watching the movie and not for availing any technical service. It is a different matter that the move is exhibited on screen by way of some technical input)

(Pune bench in Glaxo case)

To be more precise, any payment for technical services in order to be covered u/s. 194J, should be a consideration for acquiring or using technical knowhow simplicitor provided or made available by human element. There should be direct and live link between payment and receipt/use of technical services/information.

Guj H.C Concealment penalty

KOKILABEN A SHAH Concealment penalty and GIFT addition u/s 68 Guj High Court Having perused the orders on record with the assistance of learned counsel for the Revenue, we see no reason to interfere. Tribunal observed that gift was received through normal banking channel. Identity of donor was disclosed and established. Assessee had furnished complete details of the gift. Tribunal noted that none of the departmental authorities made any attempt to find out whether the explanation of the assessee was false. Tribunal relied on decision of Division Bench of this Court in case of National Textiles v. Commissioner of Income Tax reported in 249 ITR 125

Guj H.C Concealment penalty

, wherein Bench observed that if the assessee gives an explanation which is unproved but not disproved, it would not lead to inference that assessee's case is false. We are also in broad agreement with the same. Relying on the decision of Nashaben H. Jariwala, wherein it was observed that merely because assessee failed to prove the gift in the manner required by the department, it is not possible to conclude that assessee concealed her income, tribunal in the present case deleted penalty.

Delhi High Court order in case of ORALCE INDIA : MARCH 30, 2011 243 CTR 103 It is well-settled that it is not open to the

Department to adopt a subjective standard of reasonableness and disallow a part of business expenditure as being unreasonably large, or decide what type of expenditure the assessee should incur and in what circumstances. Thus, the jurisdiction of the AO is only confined to deicide “Profits and gains of business or profession”, i.e., whether the expenditure claimed was actually and factually expended or not and whether it was wholly and exclusive for the purposes of business. Reasonableness of the expenditure can be considered only from this limited angle for the purpose of determining whether in fact amount was spent or not. REFER Atherton Vs. British Insulated & Helsby Cables Ltd. reported as 10 TC 155, 191 (HL) Supreme Court in the case of Commissioner of Income Tax Vs. Walchand, 65 ITR 381

CIT vs Vardhman Overseas Ltd. 204 Taxman 524 Delhi H.C. If, as contended before us by the learned

standing counsel for the revenue, the alleged benefit enjoyed by the assessee by utilizing the amounts payable to the sundry creditors in its own business for a period of four years or more is to be brought to tax under Section 28(iv), notwithstanding that the conditions of Section 41(1), which govern the factual situation, are not satisfied, then it would render the latter section otiose or a dead letter

HOTLINE ELECTRONICS LTD ITA NO.1073/2011 Delhi H.C. The Tribunal is also right in its view that unless

notices were issued to the creditors and they had stated that they have given up the claims against the assessee, no decision can be taken by the income tax authorities, merely on the ground that the debts remained unpaid in the assessee’s books for a number of years, that the liability has ceased or has been remitted. In the present case the Assessing Officer has not issued any notice to the creditors to confirm from them whether they have given up their dues from the assessee

HOTLINE ELECTRONICS LTD ITA NO.1073/2011 Delhi H.C. The assessee herein is a limited company and as per

the legal position the acknowledgment of the liability in favour of the creditors in its balance sheet extends the period of limitation for the purpose of Section 18 of the Limitation Act. It is the assessee’s claim that the debts are subsisting and it continues to be liable to pay the creditors. It is not open to the income tax authorities to draw the conclusion that the creditors have remitted the liability or that the liability has otherwise ceased without evidence or material when the assessee acknowledges a liability in the balance sheet and Explanation-1 is not applicable

Sec. 40(a)(ia)

Kol bench ITAT In Sharma Kajaria & Co. ITA 1288/Kol.2011:

7. A plain look at the above statutory provision makes it clear that this provision seeks to restrict the deductions which are otherwise permissible under section 30 to 38 of the Act. In other words, as a result of this section, a disallowance can be made only in respect of an amount which is sought to be deducted under these sections. As a corollary to this position, unless a deduction is claimed in respect of the said amount, under sections 30 to 38, the disallowance under section 40(a)(ia) cannot come into play at all. the17th day of February, 2012

Other case laws

Guj HC Bell Grantio reversal of entry and TDS liability ? Not there; Delhi High Court: KL Steel Hypertechnical contention for disallowance u/s 40(a)(ia) not tenable

Bombay High Court kotak Case 340 ITR 333 & Angel case: NCOME TAX APPEAL (L) NO. 475 OF 20112. As regards first two questions are concerned, the findings of fact recorded by the ITAT is that VSAT and Lease Line charges paid by the assessee to Stock Exchange were merely reimbursement of the charges paid/payable by the Stock Exchange to the Department of Telecommunication. Since the VSAT and Lease Line charges paid by the assessee do not have any element of income, deducting tax while making such payments do not arise.

P&h high Court in cases of Bhagwati Steels 326 ITR 108; 326 ITR 106; “if expenses incurred by a person on

account of transportation, interest, storage, etc. are added to the cost of goods, it cannot be inferred that the person who is billed had paid certain amount on account of those services separately as the same becomes part of the commodity so sold”.

P&h high Court in cases of Bhagwati Steels “The Tribunal after reading the whole contract in its entirety

reached the conclusion that the transaction between the parties was essentially governed by the distribution agreement which was transaction of goods per se and could not be segregated for the purposes of payment of expenses by way of freight. The Tribunal had rightly held that if the freight expenses incurred by T were added to the cost of the goods in the invoice raised, it could not be inferred that the assessee had paid any amount of freight separately because it was part of the cost of the product purchased. The assessee could not be said to be an assessee in default for non deduction of tax at source in terms of section 194C of the Act on the amount of freight billed separately by T. As a consequence, the provisions of section 40(a)(ia) of the Act could not be applied to disallow the amount of such freight”.

M/S.LAKSHMI HOSPITAL, 04/07/2011 Kerala High Court Cases falling under Section 69C are essentially

expenditure accounted as such by the assessee but assessee fails to prove on demand by the department. It may so happen that when unaccounted income is disclosed in search, the assessee may claim expenditure against the same and if proved, department will be bound to accept it. In this case also assessee conceded that the unaccounted receipts were collected for payment to doctors attending to patients in the hospital. We do not know, why department did not venture to confront the doctors with the explanation offered by the respondent/assessee with regard to the payments made to them Since this exercise has not been done, we do not think the assessment is tenable in the hands of the respondent/assessee which obviously cannot be expected to give receipt or voucher from the doctors to whom unaccounted payments were made

Delhi High Court Sec. 263 law explained in D.G.Housing case 1/3/2012

Hon'ble Court has observed that "In some cases possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous". The school of thought which seems to be gaining ground now is that lack of enquiry…

Delhi High Court Sec. 263 law explained in D.G.Housing case 1/3/2012

could indeed be a good reason provided two basic conditions are satisfied - first, that the AO has not made enquiries on the facts of the case which definitely require ( not that its simply desirable) further enquiries; and - second, that such an enquiry have a cause and effect relationship with order being rendered prejudicial to the legitimate interests of the revenue. One possible way of looking at the whole thing, therefore, is that no matter how desirable was it, but was it really 'required of' the AO, in the light of facts on record, to make further enquiries. It will indeed be interesting to see some erudite decision explaining the limitation of observations made in Gee Vee Enterprises to the effect that the AO "cannot remain passive in the face of a return which is apparently in order but calls for further inquiry".

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