direct TaXES High Court

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1 ashok Patil, Mandar Vaidya & Priti Shukla Advocates direct TaXES High Court Reported 1. Power of Commissioner appeals Sec. 112(1) Legal issue raised for first time during appeal proceedings Held that Commissioner has power to consider such legal issue a.y Smt. Raj Rani Gulati vs. CIT [2012] 346 ITR 543 (All.) The assessee had sold shares, which resulted in long-term capital gains, and had offered tax on the same at the rate of 20 per cent after taking into account indexation. The same was accepted by the AO and an assessment order was passed u/s. 143(3) of the Act. The assessee aggrieved by the order by the AO appealed to the CIT(A) where a legal ground was raised that the long term capital gain is to be assessed at 10% in view of the CBDT Circular No. 794 dated August 9, The First Appellate Authority had accepted the plea of the assessee, and directed the AO to compute the long-term capital gains at 10%. The department filed an appeal to the Tribunal on the ground that the assessee and not filed an revised return and so the assessee cannot raise and ground before the Appellate Authority and relied on the decision in the case of Goetze Ltd. vs. CIT 284 ITR 323 (SC). On appeal to the High Court the High Court while dismissing the appeal held that the assessee is entitled to raise the legal issue before the First Appellate Authority, which possesses co-terminus power similar to the Assessing Officer as per the ratio laid down by the Supreme Court in Jute Corporation of India Ltd. vs. CIT 187 ITR 688 (SC). Similar view has been held in the case of CIT vs. Pruthvi Brokers & Shareholders (P) Ltd. (2012) 252 CTR (Bom) Exemption Sec. 54F Investment in new residential house under construction House not complete in all respects within 3 years would not disentitle the assessee from claim benefit under section 54F a.y CIT vs. Sambandam Udaykumar (2012) 251 CTR (Kar) 317 The assessee had sold shares and invested a part of the same in a house property which was under construction and was not totally completed with three years as specified u/s. 54F. The AO disallowed the claim of exemption u/s 54F as the house was not :60 ML-6

2 constructed within the time specified under section 54F. The CIT(A) confirmed the order of the AO. The Tribunal decided in the favour the assessee. On appeal to the High Court, the High Court while dismissing the appeal held that the essence of the sec. 54F is that once the assessee has demonstrated that capital gains is invested in a residential house under construction, even though the transaction is not complete in all respects and as required under law, the assessee cannot be disentitled from claiming deduction u/s. 54F. 3. Computing book profits Sec 115Ja an assessee is eligible to adjust prior period expenses while computing book proits u/s. 115Ja irrespective of whether such expenses are shown separately in the books of account or not Tamil Nadu Cements Corporation Ltd. vs. JCIT (2012) 209 Taxman 58. (Mad) The assessee company in its return of income showed book profits after deducting prior period expenses. The Assessing Officer while processing the return took a view that as per the provisions of Companies Act, prior period adjustments could not be reduced for arriving at the net profit of that particular year. The Assessing Officer observed that as per the provisions of section 115 JA, the profit and loss account for the relevant previous year should be in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act and held that the computation done by the assessee was not in accordance with the section 115JA. On an appeal both CIT(A) and Tribunal confirmed the order of the Assessing Officer. On an appeal in High Court, the Hon ble High Court allowed the appeal of the assessee by reversing the view taken by the CIT(A) and Tribunal. For deciding the issue of prior period expenses the Hon ble court relied on the decisions of CIT vs. Kaiatan Chemicals and Fertilizers Ltd. 307 ITR 150 (Del.) wherein the court took a view that the prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statement of one or more prior periods and are also enumered in paragraphs 15 & 19 of Accounting Standard-5. The court further held that both prior period items and extraordinary items are to be included in the determination of the net profit or loss as per para-5 of AS-5, that prior period items should be separately disclosed in the statement of profit and loss. The Court also held that whether the prior period expenses were shown separately or not, the assessee would nevertheless be entitled to have adjustments of prior period expenses in the matter of computing the net profit of the assessee. Further on mere fact that the assessee had shown its prior period expenses in the extraordinary items separately, did not mean the net profit was arrived at de hors these items. The Court also relied on the decision of Apollo Tyres Ltd vs. CIT (2002) 255 ITR 273 (SC) and held that while computing the net profits the assessee had adjusted prior period expenses correctly and has offered the book profit for assessment.. Further the court held that Apollo Tyres Ltd. had rightly laid down propositions of law regarding jurisdiction of the Assessing Officer in respect of the matter of MAT assessment wherein the Apex Court held that once an officer accepts the book profits, he cannot travel beyond what has been disclosed in the book profit. 4. Capital Gains Sec. 54 EC Investment in bonds Extension of time available beyond six months to invest in bonds u/s. 54EC of the ac If particular bonds unavailable for subscription Commissioner of Income-tax, vs. Cello Plast. [2012] 24 taxmann.com 111 (Bombay) ML-7 619

3 In this case, the assessee sold its factory building on earning a long term capital gain of ` lakhs. The assessee tried to avail the exemption from payment of tax on long term capital gain of ` lakhs under section 54EC by purchasing bonds of the Rural Electrification Corporation Limited 'REC Bonds'. In order to avail the exemption under section 54EC, the assessee had to invest the sale proceeds in the REC bonds within six months from the date of the sale of the factory building i.e., on or before However, the assessee purchased the REC bonds only on The point of dispute was whether despite the same, the assessee was entitled to the benefit of section 54EC of the Act. The Assessing Officer disallowed the benefit of section 54EC to the assessee and subjected to tax to entire capital gain of ` lakhs. The Commissioner (Appeals) dismissed the assessee's appeal. On further appeal in Tribunal, the Tribunal allowed the appeal of the assessee and held that it was impossible for the assessee to comply with the condition of section 54EC as the REC bonds were not available and for that reason the CBDT had issued the circular dated extending the time to invest in section 54EC bonds up to Further, the Tribunal held that the fact that the assessee had deposited the amount of ` 50 lakhs with the State Bank of India with a specific direction that the bonds would be purchased out of the aforesaid amount as soon as they were available supported the stand of the assessee that the REC bonds were not available. On an appeal filed by the Revenue in High Court, the Hon ble High Court dismissed the appeal of the Revenue and allowed the 54EC exemption and held that the REC bonds could not be purchased as they were not available throughout the period of six months commencing from the date of the sale of the factory by the assessee and even thereafter till the extended date of under the CBDT circular. That the bonds were available for a limited time during this period between and makes no difference. The assessee had time till , to invest in these bonds to avail the benefit under section 54EC. Section 54EC provides a person facility to avail of the right conferred thereby at any time during the period of six months from the date of sale of the asset. The assessee cannot be deprived of this right conferred by the Act for no fault of theirs. Thus, the availability of the bonds only for a limited time during this period cannot prejudice the assessee's right to exercise the same up to the last date. The bonds were admittedly not available except during the said period. The last date for investment in the normal course would have been which was extended up to The assessee ought to be entitled to an extension of the number of days between and at the very least and, in any event, to a reasonable extension. The assessee admittedly invested in the bonds on i.e., within nine days of their being available once again from The Court also held that considering the bonds were not available for such a long period, an extension of merely nine days was extremely reasonable in the instant case. The statute itself provides that the assessee, who is subject to long term capital gain tax, can avail of exemption under section 54EC if he invests in bonds of either the National Highway Authority of India or the Rural Electrification Corporation Ltd. The choice of investing in one of the two organizations is with the assessee and the revenue cannot force the assessee to invest only in the bonds of one in preference to the other. The choice of selecting any of the bonds to purchase is entirely with the assessee and in case the bonds of assessee's choice are not available, the time to invest in the bonds get automatically extended till the bonds are available in the market and the assessee can purchase the same. :62 ML-8

4 5. Interest Sec. 234d after the introduction of Explanation 2 to section 234d by Finance act, 2012 even where refund is granted prior to the same would carry interest provided the proceedings for assessment are completed after CIT vs. Indian Oil Corporation Ltd. [2012] 25 taxmann.com 284 (Bombay) In this case the assessee-company filed its return of income for the assessment year on claiming a refund of ` 22,88,82,482. A refund cheque of ` 22,88,82,482 was issued on to assessee-company after processing of return under section 143(1). On , assessment was completed under section 143(3) arriving at a demand of ` 200,39,55,005/-. Consequently, demand of interest under section 234D for ` 2,96,63,169 on excess refund of ` 22,88,82,482 was made on assessee-company. Assessee-company disputed interest under section 234D on the grounds that refund was granted prior to and section 234D does not apply to refunds granted prior to section 234D. Assessee-company relied on Bombay HC's decision in CIT vs. Bajaj Hindustan Limited. IT Appeal No. 198 of 2009 dated On an appeal the CIT (Appeals) by an order dated , dismissed the respondent's appeal against the demand for interest under section 234D of the Act. The Commissioner of Income Tax (Appeals) held that interest is chargeable on the amount of refund granted under section 143(1) of the Act when the same is found to be paid in excess on regular assessment done under section 143(3) of the Act. Therefore, the demand for interest under section 234D of the Act was sustained. On further appeal, the Tribunal by its order dated allowed the assessee's claim. The Tribunal held that no interest under section 234D of the Act can be charged/demanded in this case as the refund of the excess tax was made prior to i.e., the date on which section 234D of the Act was introduced. The Tribunal allowed the assessee's appeal by following the decision of this Court in CIT vs. Bajaj Hindustan Limited in Income Tax Appeal No.198 of 2009 dated On further appeal in High Court, the Hon ble High Court allowed the appeal of the department and held that assessee's reliance on Bajaj Hindustan Limited was misplaced as the said decision was rendered prior to introduction of Explanation 2 to section 234D. The decision was not rendered on the basis that refund was made prior to but on the basis that section 234D came on the statute book w.e.f and section 234D had no retrospective operation. The classification in Explanation 2 to section 234D is on the basis of the date of the completion of assessment proceedings prior to on the one hand and post on the other. The classification is not on the basis of the date of grant of refund under section 143(1) of the Act. Therefore, the date of grant of refund is immaterial to determine the applicability of section 234D of the Act. The court further held that the refund which is granted under section 143(1) of the Act to an assessee is qua an assessment proceeding for a particular assessment year. The refund granted is qua an assessment year. The refund emanates from assessment proceedings for a particular assessment year. The refund granted cannot be divorced from the assessment year or the assessment proceeding. Consequently to hold that interest on such refund would only run from would be to curtail the plain meaning of Explanation 2 to section 234D. The court also held that after the introduction of Explanation 2 there can be no doubt that even where refund is granted prior to the same would carry interest provided the proceedings for assessment are completed after ML-9 639

5 The court held that the Explanation 2 which is declaratory in nature clarifies that the section would apply to an assessment year even before provided the proceedings in respect of such assessment years are not completed by the cut off date i.e Sec. 10a Even after , section 10a provides for an exemption because if it had to provide for deduction, the legislature would have transposed it from Chapter III to Chapter VIa Commissioner of Income-tax vs. TEI Technologies (P.) Ltd. [2012] 25 taxmann.com 5 (Delhi) The assessee company entered into a joint venture between a Korean and Mauritius company and claimed exemption under section 10A in respect of the profits from its Export Promotion Zone unit. The AO, however allowed set off of loss from the noneligible unit against the profit of eligible unit and assessed total income at NIL. CIT(A) opined that because deduction under section 10A is merely a deduction and not exemption, claim of deduction could not be entertained if the company did not have any positive income. On further appeal, the Tribunal, based on the decision of the Bengaluru Bench in ACIT vs. Yokogava India Limited and other similar orders held that the business loss of the non-eligible units could not be set off against the profits of an undertaking eligible for exemption under section 10A. Dismissing the appeal of Revenue, the Delhi High Court held that after the section 10A only provided for a deduction and not an exemption and it was open to the legislature to transpose the section from Chapter III to Chapter VIA. The court by relying upon the decision of Karnataka High Court in the case of CIT vs. Yokogawa India Ltd. wherein a view was taken by this court that even after its recast, the relief had been retained in Chapter III, it indicated that the intention of Parliament was to regard it as an exemption and not a deduction. The prescribed return in Form ITR-6 is also an indication that the relief under section 10A has to be given before adjustment of the current as well as the past losses, thus signifying that section 10A provides for an exemption as against mere deduction. The incomes which are enumerated in Chapter III have traditionally been considered as incomes which are exempt from tax rather than as deductions. The court further held that section 80A(4) does not militate against the view that section 10A is an exemption provision because even if section 10A is construed as exemption provision, it is still possible to invoke that sub-section and ensure that the assessee does not obtain a deduction in respect of the exempted income under any other provision of the Act. Therefore the court held that section 10A is a provision exempting a particular kind of income even in its present form, that is to say, even after being amended by the Finance Act, 2000 w. e. f Stay of demand by Tribunal cannot extend interim order of stay beyond the statutory period of 365 days CIT vs. Ecom Gill Coffee Trading (P) Ltd. (2012) 209 Taxman 190 (Kar.) In this case the Tribunal extended the interim order of stay granted in the pending appeal beyond the statutory period of 365 days. The revenue filed an appeal in High Court disputing that the orders passed by the Tribunal in view of the statutory provisions, particularly the proviso to the section introduced by way of Finance Act, 2008 with effect from The assessee disputed the tenability of these appeals by contending that with disposal of the main appeal in which the interim orders had been passed, the question became academic, as the interim :64 ML-10

6 orders had been merged with the final orders passed by the Tribunal and did not survive independently. The Hon ble High Court allowed the appeal of the Revenue and held that the appellate Tribunal has committed an error in consciously extending the interim order of stay granted in the pending appeal beyond the period of 365 days, which is the outer limit stipulated in the statutory provision. The court held that the language of the Legislature is quite clear about the outer limit stipulated for the duration of the operation of stay and if the legislature has stipulated for outer limit of 365 days within which the stay order granted by the Tribunal can operate, the Tribunal is not enabled to pass orders granting stay beyond the period of 365 days. Any other understanding or interpretation is nothing short of doing violence to the language of the statutory provision and permitting an action which is clearly in contravention of the statutory provisions. Further the court held that the Income Tax Appellate Tribunal is not an authority akin to a court but is a special Tribunal with limited jurisdiction as indicated in the statutory provisions and for a precise purpose. It is not open to the Tribunal to assume such powers and jurisdiction as are not conferred on it by the statutory provisions. The court also held that even though the interim order appealed against has not been examined independently as of now and it has got merged with the order passed in the main appeal and the court has examined this question as a matter of duty and responsibility of this court to clarify the legal position and also to ensure that the Tribunal which is functioning within the territorial limits of this court abides by the statutory provisions. 8. depreciation Sec. 32 Unabsorbed depreciation of assessment year could be allowed to be carried forward and set off after a period of eight years, in view of amended section 32(2) of the IT act Reassessment Sec. 147 Merely the assessing Officer has not given any elaborate reason for allowing any claim it will not vitiate the assessment order passed u/s. 143(3) and it will amount to change of opinion u/s. 147 of the act General Motors India (P.) Ltd. vs. Deputy Commissioner of Income-tax [2012] 25 taxmann. com 364 (Gujarat) The assessee filed its return of income declaring total income at ` 'Nil.' In its return it claimed unabsorbed losses and unabsorbed depreciation. The unabsorbed depreciation was claimed for the assessment years , , and The case of the assessee was taken up for scrutiny and notice under section 143(2) was issued. Since there were large number of transactions of import, royalty payment, management fee etc., the Assessing Officer referred the return to the TPO under section 92CA(1). The TPO in its order directed the assessee to make an addition of ` crore and on the basis a draft assessment order was passed. The assessee filed his objections with the DRP. The DRP issued directions to the Assessing Officer, and following the same, Assessing Oficer passed assessment order under section 143(3) read with section 144C, wherein additions were made under various heads and unabsorbed depreciation for assessment year of ` crores was allowed and total income of assessee was taken at ` 'Nil. Subsequently, the Assessing Officer issued a notice under section 148 proposing to reopen assessment on ground that unabsorbed depreciation pertaining to assessment year of ` crores was wrongly allowed to be set off against income of instant assessment year, , when section 32(2) ML

7 as amended by the Finance Act, 1996, allows carry forward of unabsorbed depreciation for only 8 years which ended in assessment year Accordingly, an assessment order was passed under section 143(3) read with section 147. The assessee preferred instant writ petition challenging the notice under section 148 and the consequent assessment order. The assessee's case was that he had raised various objections to notice under section 148 and Assessing Officer did not pass any order disposing of such objections, but instead rejected the objections in the assessment order. Allowing the writ Petition the court held that the writ petition under Article 226 of the Constitution of India is maintainable where no order has been passed by the Assessing Oficer deciding the objection filed by the assessee under section 148 and assessment order has been passed or the order deciding an objection under section 148 has not been communicated to the assessee and assessment order has been passed or the objection iled under section 148 has been decided along with the assessment order. There was no omission or failure on the part of the assessee to make a return under section 139. The assessee had disclosed fully and truly all material facts essential for his assessment for the year. The Assessing Oficer also had no tangible material on record, on the basis of which he could have formed his opinion or could have reason to believe that income chargeable to tax had escaped assessment. Further, in response to the queries of the Assessing Oficer, the assessee had placed entire material demanded by the Assessing Officer, and on the material on record, the Assessing Oficer applied his mind and allowed unabsorbed depreciation for the assessment year and other assessment years, to be carried forward and set off against the income of assessment year Merely because the Assessing Oficer did not give reasons for allowing the claim of unabsorbed depreciation in the original assessment order would not make the assessment order illegal. The Hon ble court further held that the Assessing Officer, in law, must be deemed to have formed an opinion. Thus, in such a situation, the original assessment order cannot be reopened as it would amount to change of opinion by the Assessing Officer and the reassessment order was liable to be set aside. Further for the purpose of issue of provisions of section 32(2), the court held that as per the amendment by Finance Act, 2001 the Assessing Oficer allowed unabsorbed depreciation allowance available in the assessment years , , and and allowed to be carried forward to the succeeding years, and held that if any unabsorbed depreciation or part thereof could not be set off till the assessment year , then it would be carried forward till the time it is set off against the profits and gains of subsequent years. The court held that, current depreciation is deductible in the irst place from the income of the business to which it relates. If such depreciation amount is in excess than the amount of profits of that business, then such excess should be adjusted against the profits and gains from any other business, if any, carried on by the assessee. If a balance is left even thereafter, that becomes deductible from out of income from any source under any of the other heads of income during that year. In case there is a still balance left over, it is to be treated as unabsorbed depreciation and it is taken to the next year. Where there is current depreciation for such succeeding year, the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If, however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year. The court also held that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y ) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and once the Circular No. 14 of 2001 clariied that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed :66 ML-12

8 depreciation from assessment year up to the assessment year got carried forward to the assessment year and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the proits and gains of subsequent years, without any limit whatsoever. Unreported 9. Business expenditure Sec. 37 No disallowance even if the expenditure benefits some other party Samsung Electronics (I) Ltd. ITA/98, 113 & 143 of Decided on 3rd September, (Delhi High Court). It has been settled by a long line of cases that expenditure incurred by the assessee in the running of his business cannot be disallowed merely on the ground that a part of the expenditure results in some benefit to a third party. This principle was applied in India by the Supreme Court in Eastern Investment Ltd. vs. CIT (1951) 20 ITR 1; CIT vs. Royal Calcutta Turf Club (1961) 41 ITR 414 and CIT vs. Chandulal Keshavlal and Co. (1960) 38 ITR Revision Sec. 263 Commissioner of Income Tax must pin point that assessment order is unsustainable in law CIT vs. DLF Ltd. ITA/236/2010 (Delhi High Court). Decided on 17th September, CIT cannot simply remand back to the AO to do the assessment de novo on the ground that the assessment order is silent on applicability of section 14A. Apart from being prejudicial to the revenue, the CIT must also pin point how the order is unsustainable in law. Unless the order is unsustainable in law, it cannot be said to be erroneous. 11. Charging of interest Section 234a and 234B For charging interest u/ss. 234A/234B The assessment order should specifically mention the section under which the interest is charged is mandatory CIT vs. Ruchira Papers Ltd. Income Tax Appeal No. 76 of 2006 dated 19th Sept (HP High Court) Where the assessment order is silent about charging of interest, no interest can be charged, even if such interest is mandatory. The interest payable under Sections 234A and 234B is compensatory in character and not penal. Where the assessment order and the demand notice does not mention about the levy of interest no interest can be charged. The tax, interest, penalty, or fine is payable in consequence of an order passed under the Act, viz. the assessment order. There has to be a specific order passed by the assessing officer charging interest and, only thereafter, a notice of demand levying interest could be issued. Even if any provision of law is mandatory and provides for charging of tax or interest, such charge should be specific and clear and should indicate that the assessing officer has applied its mind while charging interest. The judgment of the Hon ble Apex Court in CIT vs. Anjum M. H.Ghaswala was considered and distinguished. The levy of interest would be justified if the A.O. simply states that interest would be charged as per law without specifying the precise section. There is difference between a case where the A.O. says (in the assessment order) that interest would be charged as per law and a case where the assessment order is silent about charging of interest. 2 ML