By Subash Agarwal, Advocate
A. High
Court
1. CIT
vs. Kuruvilla Abraham 356 ITR 519 (Mad.)
Paintings excluded from personal effects –
amendment was not made with any retrospective effect
In order to
attract the capital gains tax it should first fall within the definition of
capital asset as defined in section 2(14) of the Act. Paintings were excluded
from the purview of personal effects and, consequently, included as one of the
capital assets u/s. 2(14) only pursuant to the amendment made under the Finance
Act, 2007, w.e.f. April 1, 2008. The amendment was not made with any
retrospective effect. The Memorandum Explaining the Provisions of the Finance
Bill, 2007, made it clear that the amendment was intended to take effect from
April 1, 2008, and apply in relation the A.Y. 2008-09 and for subsequent years.
2. Maruti
Suzaki India Ltd. vs. Dy.CIT 356 ITR 209 (Del.)
Reassessment on the basis of change of
opinion
Where a claim or
deduction has been examined by the A.O., it would amount to formation of an
opinion despite the fact that no addition had been made or reason therefore had
been given in the original assessment order. Thus, when after an examination in
the first round, the matter is sought to be re-opened by the issuance of notice
u/s. 148 of the Act, it would clearly be a case of change of opinion and the
re-assessment proceedings would be invalid.
3. CIT
vs. Samara India P. Ltd. 356 ITR 12 (Del.)
Bad Debt
In the instant
case, the Hon’ble Delhi High Court dismissed the revenue’s appeal by holding
that amount written off as bad debt was deductible. The Hon’ble High Court relied
upon the judgement of Supreme Court in
the case of T.R.F. Ltd. vs. CIT 323 ITR 397, where it has been held that after
the amendment of section 36(1)(vii) of the I.T. Act, 1961 was effect from
01.04.1989, in order to obtain a deduction in relation to bad debts, it is not
necessary for the assessee to establish that the debt has become irrecoverable.
It is enough if the bad debts are written off as irrecoverable in the accounts
of the assessee.
4. CIT
vs. Peoples General Hospital Ltd. 356 ITR 65 (MP)
Share Application Money – Identity of the
share applicant to be proved
In the instant
case, the A.O. made addition on the ground that a non-resident Indian company
had made share subscription to the capital of the assessee. The A.O. doubted
the creditworthiness of the share applicant – company and directed addition of
the amount of share subscription provided by the company to the assessee.
Held
If the assessee
had received subscription to the public or rights issue through banking
channels and furnished complete details of the shareholders, no addition could
be made under section 68 of the Act, in the absence of any positive material or
evidence to indicate that the shareholders were benamidars or fictitious
persons or that any part of the share capital represented the company’s own
income from undisclosed sources. It was nobody’s case that the non-resident
Indian company was a bogus or non-existent company or that the amount
subscribed by the company by way of share subscription was in fact the money of
the assessee. The assessee had established the identity of the investor who had
provided the share subscription and that the transaction was genuine. Though in
this case, the assessee’s contention was that the creditworthiness of the
creditor was also established, but according to the Hon’ble High Court, in the
light of the judgement of Lovely Exports P LTd. 319 ITR (St.) 5 (SC), held that
– “we
have to see only in respect of the establishment of the identity of the
investor.”
5. CIT
vs. Shivali Construction Pvt. Ltd. 355 ITR 218 (Del.)
Remission or cessation of liability
In the instant
case, the A.O. treated the unclaimed unsecured loan as income of the assessee
on the grounds that the assessee had not been carrying out any business
activity for the last many years and since the loans were long outstanding and
there did not appear to be any obligation on the assessee to repay these loans,
it clearly implied that there was cessation of liability to pay those loans.
The Hon’ble
Delhi High Court dismissed the appeal of the revenue holding that the very
first condition for invoking sec. 41(1) is that an allowance or deduction ought
to have been made in the assessment for any year in respect of any loss,
expenditure or trading liability incurred by the assessee. In the instant case,
no allowance or deduction had been made in the assessment of the assessee in
any earlier year. Consequently, there was no question of invoking sec. 41(1).
6. CIT
VS. Bholanath Poly Fab Pvt. Ltd. 355 ITR 290 (Guj.)
Bogus Purchase
The assessee
engaged in the business of trading in finished fabrics. The A.O. held that
purchases were unexplained and disallowed the same by treating as bogus
purchases. The Tribunal was of the opinion that though the purchases might have
made from bogus parties, the purchase themselves were not bogus. The Tribunal
was of the opinion that not the entire amount, but the profit margin embedded
in such purchase amount would be subjected to tax. The Hon’ble High Court
supported the view of the Tribunal.
See
also: CIT vs. Simit P. Sheth 356 ITR 451 (Guj.)
7. CIT
vs. Raman Boards Ltd. 355 ITR 305 (Karn.)
Payment made to subsidiary company – no
question of applicability of Sec. 40A(2)(b)
Held, in order
to attract the provisions of sec. 40A(2), the assessee has to incur an
expenditure by making payment to the person referred to in clause (b). In the
instant case, the assessee was a company. The person, to whom it had to make
the payment in order to attract the provision, was any director of the company
or any relative or director. Admittedly, the payment was made to the subsidiary
company and not to any director or any relative of the director. Therefore the
requirement to section 40A(2) was not fulfilled.
8. Jagat
Jayantilal Parikh vs. Dy. CIT 355 ITR 400 (Guj.)
Reassessment on the basis of audit
objection not valid
Original
assessment was completed on scrutiny. In the post-assessment period, the audit
party raised objections and the A.O. had in internal communication, strongly
objected to them. No material emerged to indicate any independent application
of mind by the A.O. The facts on the contrary clearly established the absence
of subjective satisfaction of the A.O. Thus, such notice for reopening on the
basis of audit objection was not valid.
9. Dy.
CIT vs. Smt. Sneha Joshi 355 ITR 102 (Bom.)
Reassessment – Reason should be proper
In the instant
case, the reasons which had been disclosed by the A.O. to the assessee for
reopening the assessment for the relevant assessment years did not indicate
that there was any failure on the part of the assessee to disclose fully and
truly all materials facts necessary for the assessment. If the basis for reopening an assessment beyond four years was founded
on the material produced by the assessee, the clear inference was that there
was no suppression of facts materials to the assessment by the assessee. The
attention of the A.O. was drawn to this aspect when the assessee submitted its
objections to the reopening of the assessment but he disregarded them. Such objections in respect of validity of reopening
of the assessment are not an idle formality. Treating the exercise as a
meaningless formality would be a serious breach of the law. The A.O. while
disposing of the objections, observed that notice u/s.148/ITNS-34 did not
contain any provisions to disclose that the assessee has failed to disclose
fully and truly all material facts necessary for assessment. Again, the A.O.,
while dealing with the submission that the reasons did not even state that
there was a failure of the assessee to disclose fully and truly all material
facts, contended that in the reasons recorded for the reopening the assessment
through typographical error the conclusion remained to be incorporated.
It was held that
the fact that the form prescribed by the CBDT did not require that the reasons
should state that there was a failure of the assessee to disclose fully and
truly all material facts was no answer to the jurisdictional requirement
contained in sec. 147. The provisions of the statute enacted by Parliament bind
all authorities, including the A.O. A form, which is at the highest an
administrative instruction, cannot override a statutory provision. Again, the
A.O. sought to explain away her failure to record a satisfaction of the
requirement of the proviso to sec. 147 stating that this was a typographical error.
The omission to state a jurisdictional
fact could not be regarded as a typographical error. Therefore, the A.O.
had in purporting to reopen the assessment acted in clear breach of the mandate
of the law and of the jurisdictional condition prescribed by the proviso to
section 147.
10. CIT
vs. Manjula J. Shah 355 ITR 474 (Bom.)
Cost of Acquisition
The assessee
derived income from business, house property, capital gains and other sources.
The assessee’s daughter, the previous owner, originally acquired the capital
asset (flat) on January 29, 1993, and the assessee acquired the flat under a
gift deed dated January 2, 2003, without incurring any cost. The assessee sold
the capital asset on June 30, 2003, for Rs.1.10 crores. According to the A.O.,
the cost inflation index for 2002-03 would be applicable in determining the
indexed cost of acquisition for the assessment year 2004-2005. The CIT(A) held
the long term capital gains had to be determined by computing the indexed cost
of acquisition with reference to the cost inflation index for 1993-94 instead
of the cost inflation index for the A.Y. 2002-03 as held by the A.O. The same
view was supported by the Tribunal. Dismissing the revenue’s appeal, the
Hon’ble high court held that –
(i)
When the Legislature by introducing the deeming
fiction seeks to tax the gains arising on transfer of a capital asset acquired
under a gift or will the capital gains under sec.48 have to be computed
applying the deemed fiction. Therefore, the fiction contained in Explanation 1(i)(b)
to sec.2(42A) has to be applied in determining the indexed cost of acquisition
u/s. 48.
(ii)
By applying the deeming provision contained in
Explanation 1(i)(b) to sec. 2(42A) the assessee was deemed to have held the
asset from January 29, 1993 to June 30, 2003, by including the period for which
the asset was held by the previous owner and accordingly, held liable for long
term capital gains tax. While computing the capital gains, the indexed cost of
acquisition had to be computed with reference to the year in which the previous
owner first held the asset and not the year in which the assessee became the
owner of the asset.
11. CIT
vs. Dey’s Medical Stores Manufacturing P. Ltd. 355 ITR 126 (All.)
Business Expenditure – Allowability of sales
promotion expenses
The assessee was
engaged in manufacturing of drugs and medicines. It debited an expenditure of
Rs.23,60,574/- towards sales promotion expenses. This amount was paid to
another company. The assessee contended that the expenses were deductible because
although the assessee did not maintain any office for the purpose of advertisement
and sales promotion, such an office was maintained by the Calcutta Company,
whose expenses were reimbursed by the assessee. The A.O. did not accept the
contention and made disallowance. However, the CIT(A) and Tribunal accepted the
contention of the assessee. The Hon’ble High Court held that –
The payment of
8% of the sales realization, to the Calcutta company, to reimburse it for
expenditure incurred by it on behalf of the assessee in maintaining the sales
promotion office and other infrastructure for advertising its product was
allowable expenditure u/s. 37(3B)(iv).
12. Rural
Electrification Corporation Ltd. vs. CIT 355 ITR 345 (Del.)
Applicability of sec. 150
The assessee
advanced loans to a co-operative society which created a special corpus fund.
The society earned interest on the special fund but did not disclose it in its
returns of income on the ground that the money actually belonged to the
assessee and that any income earned thereon was on behalf of the assessee. The
Tribunal agreed with the submissions of the society and held that the interest
was not taxable in the hands of the society but ought to be taxed in the hands
of the assessee. On that basis, the Ld. A.O. issued notice u/s. 148 to the
assessee seeking to reopen its assessment. On writ petition contending that the
notice u/s. 148 was issued beyond the period of six years stipulated in sec.
149 and the bar of limitation prescribed in sec. 149 would be applicable unless
the revenue was able to establish that the case fell within sec. 150 r.w.
Explanation 3 to sec. 153.
Held, when the Tribunal held in favour
of the society concluding that the interest was not taxable in its hands and
that the interest ought to have been taxed in the hands of the assessee, an
opportunity of hearing ought to have been given to the assessee. No opportunity
of hearing was given to the assessee prior to the passing of the order of the
Tribunal. As such, one essential ingredient of Explanation 3 was missing and
therefore, the deeming clause would not get triggered. Thus, sec.150 would not
apply and, therefore, the bar of limitation prescribed by sec. 149 was not
lifted. In such a situation, the normal provisions of limitation prescribed
u/s. 149 would apply. Therefore, the notice issued u/s. 148 having all been
issued beyond the period of six years were time barred.
B. Tribunals
1. Shrinivas R Desai vs. ACIT
[2013] 35 taxmann.com 170 (Ahmedabad - Trib.)
Eligibility
for getting deduction u/s. 54
Held
(i)
The use of words 'purchased
or constructed' in section 54 does not mean that the property can either be
purchased or constructed and not a combination of both the actions.
(ii)
A property may have been
purchased as a readymade unit but that does not restrict the buyer from
incurring any bonafide construction expenditure on improvisation or
supplementary work.
(iii)
Accordingly, as long as the
assessee has incurred the bona fide construction expenditure, even after
purchasing the unit, the additional expenses so incurred would be eligible for
qualifying investment under section 54.
(iv)
The cost of purchase under
section 54 does include any capital expenditure incurred by the assessee on such
property to make it liveable.
(v)
As long as the costs are of
such a nature as would be includible in the cost of construction in the normal
course, even if the assessee has bought a readymade unit and incurred those
costs after so purchasing the readymade unit – as per his taste and
requirements, the costs so incurred will form integral part of the qualifying
amount of investment in the house property.
2. ACIT vs. Farida Shoes (P.) Ltd. 143 ITD 400
(Chennai)
Payments made to non-residents on account of service
rendered outside India - provisions of section 195 are not applicable
Facts
The assessee made payment to overseas agent
as commission for procurement of export orders and claimed it as business
expenditure. The A.O. disallowed the claim on ground that assessee had not
deducted tax at source on payment made to non-residents. On first appeal, the
assessee contended that the commission was paid for procurement of export
orders which were completely rendered outside India by overseas agent, and
therefore, such payment was not liable to tax in India. The Commissioner
(Appeals) thus, deleted the addition. On appeal by revenue, before the Tribunal,
the Hon’ble Tribunal held that –
(i)
The
only issue for consideration is as to whether the assessee is under obligation
to deduct the TDS under section 195 or not. The Commissioner (Appeals), by
considering the entire facts and circumstances of the case passed a detailed
order by observing that section 195 have no application to assessee's case. In
the case of Prakash Impex v. Asstt. CIT [IT Appeal No. 8 (Mds.)
of 2012, dated 30-3-2012], the coordinate Bench of Tribunal, Chennai had
considered the very same issue and observed that the commission paid to
non-resident agent for the services rendered outside India and such payments
are not chargeable to tax in India and therefore, the provisions of section 195
are not applicable in view of the decision of the Supreme Court in the case of G.E. India Technology Centre (P.) Ltd. v.
CIT [2010] 327 ITR 456.
(ii)
In
the case of Armayesh Global v. Asstt. CIT [2012] 51 SOT 564, the Mumbai Bench of Tribunal has observed that the commission payment was
made to the overseas agent for procuring export orders. The agents have not
been provided by managerial/technical services. The relationship between the
assessee and the non-resident (agent) was only for rendering non-technical
services. Moreover, there was no permanent establishment of the said
non-resident in India. Therefore, the commission paid to the non-resident agent
did not accrue or arise in India and, thus, there was no need for deducting TDS
under section 195.
(iii)
In
the present case, the assessee paid certain amounts to overseas agents for
procurement of export orders. The agents have not provided any
managerial/technical services. The payments received by the non-resident Indian
are not taxable in India. Taking into consideration of entire facts and
circumstances and by following decision in Armayesh Global's case (supra),
it is opined that the issue involved in this appeal is covered in favour of the
assessee and section 195 have no application to assessee's case. Accordingly,
the appeal of the revenue is dismissed.
3. Pravat vs.
CIT 142
ITD 654 (Kol.)
Registration under section
12AA
Facts
The assessee, a society said to be working
for public good in rural area, moved an application under section 12AA but
instead of any adjudication on the said application, a communication was issued
by the Income-tax Officer (Technical) in the office of the Commissioner
informing the assessee that the assessee was declined registration under section
12AA and initial exemption under section 80G.
Issue Involved
Whether the communication sent by Income-tax
Officer could be treated as disposal of assessee's application for registration
under section 12AA?
HELD
(i)
An
application made to a statutory authority, for his exercise of powers vested in
him by the statute, can only be disposed of by him and not by any other person
to whom he may like to delegate such an authority. A statutory power vested in
an authority cannot be delegated by the authority to any other authority,
unless there is a specific enabling provision to that effect in the statute
itself. It is, therefore, beyond much controversy and debate that it was for
the Commissioner to dispose of the application for registration, and the order
thereon could not have been passed by any other authority to which such powers
may have been delegated. The communication by the Income-tax Officer
(Technical), therefore, does not have any authority of law. The assessee has
not received any order rejecting the application under section 12A till date.
It is, thus, also not in dispute that there is no other service of any other
communication addressed to the assessee by the Commissioner. In these
circumstances, the application under section 12AA cannot be treated to have
been disposed of by the Commissioner.
(ii)
No reasons whatsoever have been given in the
ITO's letter but he mentions that the application was considered
'sympathetically' and rejected. This kind of authoritarian approach and
unwillingness to give legal reasons does not anyway befit conduct of any public
authority in a democratic set up like ours, wherein rule of law is of paramount
importance. It is not the sympathy, but the legal rights of the assessee, which
should be subject-matter of consideration, and there is not even a whisper of
those relevant considerations. The Income-tax Officer had, thus, even in
sending this communication, which has no value in law sofaras disposal of
application under section 12AA is concerned, shown complete lack of conduct
befitting someone holding a public office to implement the provisions of a
legal statute, i.e., Income-tax Act, 1961.
(iii)
Further,
it is not open to the Commissioner to keep an application for registration
under section 12A pending indefinitely, and when the application is not
disposed of within a period of six months from the date of filing the
application, the approval is deemed to have been granted. Clearly, in the
instant case, the period of six months from the date of application has passed
and no order has been passed by the Commissioner. Therefore, for this short
reason alone, the registration under section 12A should be deemed to have been
granted.
4. ACIT vs. Arun Thomas 143 ITD 237 (Coch)
Interest on capital borrowed for purpose of
business would be guided by provisions of section 36(1)(iii) and not by section
37(1)
FACTS
The assessee engaged in money
lending business, received deposit outside books of account and paid interest
thereon and claimed deduction. The A.O. found that the deposit shall be
accepted only as per the provisions of RBI Act at the rate fixed by RBI for
non-banking financial institution and private money lenders are prohibited from
accepting deposits from public and, thus, the assessee had accepted the deposit
in violation of the provisions of RBI Act and paid interest in violation of Explanation to section 37(1). He
disallowed the claim of the assessee. However, the Commissioner (Appeals)
allowed the said claim.
HELD
(i)
A
bare reading of section 37(1) clearly shows that any expenditure which is not
in the nature described under sections 30 to 36 and not being capital
expenditure or personal expenditure laid out wholly and exclusively for the
purpose of business has to be allowed in computing the total income. Therefore,
it is obvious that the expenditure which falls under sections 30 to 36 and
capital expenditure and personal expenditure are excluded from section 37 of
the Act. For removal of doubts, Explanation 1 to section 37(1)
introduced by the Finance (No. 2) Act of 1998 with the retrospective effect
from 1-4-1962 clarifies that any expenditure incurred for any purpose, which is
an offence or which is prohibited by law shall not be treated as incurred for
business and no deduction shall be allowed in respect of such expenditure.
While clarifying Explanation to
section 37(1) the CBDT clarified in circular No. 772.
(ii)
From
the above Explanation, the
Legislature intended to disallow the payment like protection money, extortion,
hafta, bribe, etc. when it was claimed as business expenditure. The contention
of the taxpayer is that the payment of interest by the taxpayer comes within
the ambit of sections 30 to 36. No doubt, section 37(1) is not applicable in
respect of expenditure which falls within sections 30 to 36 of the Act. In this
case, the taxpayer admittedly borrowed funds for enhancing the working capital
for the purpose of money lending business. Interest on capital borrowed for the
purpose of business falls within the provisions of section 36(1)(iii),
any interest paid thereon has to be allowed as deduction under section 36(1)(iii).
In view of the above, provisions of section 37(1) may not be applicable in
respect of interest on the capital borrowed for business purpose. Apart from
this, the taxpayer claims that the funds were borrowed in the personal capacity
and not in the name of business concern. The payment of interest on the
borrowed capital falls within section 36(1)(iii) and hence the
provisions of section 37(1) may not be applicable. Therefore, it may be
immaterial whether the money was borrowed in personal capacity or not.
5. Dy. CIT vs. Jammu & Kashmir Bank Ltd. 142 ITD 553 (Amritsar)
Where
interest free funds available with assessee were more than investment made in
tax free securities, no disallowance under section 14A could be made
Facts
The
A.O. having found that the assessee-bank had made investment in tax free
securities, invoked provisions of section 14A and made disallowance on account
of proportionate interest and management expenses attributable to earning
exempt income. The CIT(A) considering fact that the assessee had enough funds
of its own and a portion of same would have easily been invested in exempted
income, deleted disallowance made under section 14A.
On second
appeal, the Hon’ble Tribunal held that –
(i)
The assessee has submitted details before the
A.O. that the assessee is having interest free funds for making investment in
tax-free securities and infrastructural advances. The A.O. in fact has not
accepted these details and the explanation of the assessee in right spirit and
has rejected the same that the assessee was required to give entry-wise details
to prove that the assessee is having interest free funds and the same were
invested in the exempt securities. This approach of the A.O. cannot be accepted
especially for the reasons that the assessee has submitted that the assessee is
having interest free funds of Rs. 2265.25 crores at the beginning of the year
and Rs. 2,736.65 crores at the end of the year, which indicates an increase of
interest free funds to the extent of Rs. 471.40 crores. Besides this, a clear
explanation was given before the A.O. that the profits of the year after
declaring dividend and dividend tax amounting to Rs. 237.52 crores were also
pumped in such accounts. Thus, interest free funds to the extent of Rs. 708.92
crores were available to assessee-bank for making investment which far exceeded
investment in tax free securities can be said to be established only when it is
shown that interest free funds are not available with the assessee-bank whereas
reverse is true in this case, the borrowed funds are not available for
investment in tax free securities and infrastructural advances. The A.O. has
not brought on record that interest free funds are not available with the
assessee-bank. The assessee is having borrowed funds to the extent of Rs.
11,058.54 crores whereas investment and advances are to the tune of Rs.
11,926.42 crores. The A.O. has not controverted the fact that the
assessee-company is not having enough funds to make investment in tax free
securities.
(ii)
As a matter of fact, section 14A requires to
determine the amount of expenditure incurred in relation to such exempt income
which does not form part of total income under the Act. Therefore, the onus
lies on the A.O. to establish that in fact there was some expenditure actually
incurred by the assessee. The A.O. in the present case has not brought on
record any such expenditure which has actually been incurred by the assessee on
account of interest expenditure or even the management or administrative
expenditure for earning the exempt income. The Commissioner (Appeals) has
rightly held that statute has not left such decision on the wishes and ideas of
the A.O. to determine what expenditure has been incurred without establishing
and identifying the same.
(iii)
Since there is nothing on record brought out
by the A.O. that the assessee has actually incurred any cost or expenditure in
relation to the exempt income, no disallowance on account of interest,
management or administrative case can be made by the A.O.. Therefore, the
addition being the proportionate disallowance on account of interest expenses
was to be deleted.
6. ACIT vs. Meenakshi Khanna 34
taxmann.com 297 (Delhi - Trib.)
Applicability of provisions of section
56(2)(vi) in case of receipt of alimony
Facts
During the previous year relevant to the
assessment year 2008-09, the assessee received lump sum payments from her
ex-husband 'P', a national of Germany. She did not admit any tax liability on
the said amount. She stated that (i) there was an agreement between her
and 'P' for custody, separation and divorce on 1-12-1989 and divorce finally
took place on 20-4-1990, (ii) pursuant to this agreement 'P' had agreed
to pay the said amount in instalments over a period of time which he did not
honour, (iii) thereupon she threatened for execution of divorce
agreement, (iv) 'P', therefore, parted with the said amount as full and
final settlement in lieu of past monthly non-payments and in lieu of future
payments, (v) said amount was received in August 2007 as alimony from
'P' as per divorce agreement, (vi) amount received contained
consideration for extinguishing her right of living with her husband, and (vii)
in any case the said amount was a capital receipt. The A.O. held that the
assessee was not covered under the definition of relative as provided in
exceptions to section 56(2)(vi). He, therefore, treated the amount
received by the assessee as income from other sources taxable under the
provisions of section 56(2)(vi) and added the same to the income of the assessee.
On appeal, the Commissioner (Appeals) held that the provisions of section
56(2)(vi) would not be applicable to the instant case. He, therefore,
deleted the impugned addition made by the A.O. On second appeal, the Hon’ble
Tribunal held that –
(i)
The
divorce agreement was entered in the year 1990 and monthly payments were
promised to be paid to the assessee by the husband, who did not pay the same.
Therefore, the assessee threatened to take legal action against husband, who,
therefore, paid a lump sum amount for settlement of all her claims against the
husband.
(ii)
The
Commissioner (Appeals) has held that amount was paid by way of alimony only
because they were husband and wife and the assessee was spouse of the person
who has paid the amount and, therefore, payment received from spouse did fall
within the definition of relative. The Commissioner (Appeals) has also held
that the amount was received against consideration of relinquishing her
personal right of claiming monthly payments as provided under the divorce
agreement. The Bombay High Court in the case of Princes Maheshwari Devi of
Pratapgarh v. CIT [1984] 147 ITR 258 had held monthly payments of alimony as taxable and lump sum amount of
alimony as tax free being capital receipt.
(iii)
In
the instant case, though the assessee was to receive monthly alimony which was
to be taxable in the each year from conclusion of divorce agreement, but the
monthly payments were not received and, therefore, were not offered to tax. The
receipt by the assessee represents accumulated monthly instalments of alimony,
which has been received by the assessee as a consideration for relinquishing
all her past and future claims. Therefore, there was sufficient consideration
in getting this amount. Therefore, section 56(2)(vi) is not applicable.
Moreover if the revenue's arguments are to be accepted of it being monthly payments
liable for tax as per decision of the Bombay High Court in the case of Princes
Maheshwari Devi of Pratapgarh (supra), then also the amount
represented by past monthly payments cannot be taxed in the year under
consideration. Therefore, the amount in question was a capital receipt not
liable to tax. In view of the above facts and circumstances, the appeal filed
by the revenue was liable to be dismissed.
7. S. Ranjith Reddy vs. Dy. CIT 35
taxmann.com 415 (Hyderabad - Trib.)
A. Only execution of development agreement of
land, without commencement of construction, cannot be held as transfer so as to
attract capital gains tax
Facts
The assessee had received land
measuring 6 acres and 4.8 guntas from his late father. He, along with his
family members and some third parties, entered into a joint development
agreement (joint venture) on 28-2-2006 with 'L' Constructions, which itself
held land in the same area. By virtue of the agreement, assessee was to receive
plots along with constructed houses. The A.O. held that there was transfer of
land on the basis of the development agreement and, therefore, computed capital
gain in the hands of assessee. On appeal, the Commissioner (Appeals) confirmed
the order of the A.O.
Held
(i)
The
first condition for transfer under section 2(47) is as to whether there was a
sale, exchange or relinquishment of the asset. The assessee entered into a
joint development agreement with 'L' Constructions in the previous year
relevant to the assessment year under appeal, for promoting a joint venture
with 'L' to construct houses.
(ii)
The
joint venture project, as far as the impugned previous year is concerned, was
only in its nascent stage. As per the agreement, 'L' was to construct the
building at its own cost. All the above features make out a case of a JV for
developing and reconstructing houses by adjusting rights in the immovable
properties by providing the vacant land and in return getting a share in the
undivided right over the land as well as in the built-up area.
(iii)
As
far as the previous year relevant to the impugned assessment year is concerned,
nothing happened other than the execution of the agreements. The transfer of an
immovable property always contemplates transfer of an existing property, i.e.,
a property in praesenti. The question in the present case is whether
there was a property existing to be transferred by the assessee-company. As far
as the land of 6 acres and 4.8 guntas is concerned, there was only an
agreement. The proposed project was still to be born as the offshoot of the
assessee. The assessee and 'L' were not forming any new company. The assessee
was not transferring any right or any property to 'L'. The assessee-company
assigned its landed property in favour of 'L' by the joint venture agreed into
between the assessee and 'L'. There cannot be a sale to oneself. Nothing was
exchanged in the previous year relevant to the assessment year under appeal. No
right was relinquished by the assessee in the impugned previous year. It only
proposed to redefine the rights. There is no extinguishment of any rights
therein.
(iv)
The
consideration for the contribution made by the assessee-company is not by way
of sale consideration. As the assessee is providing its land for development,
the assessee is getting rights in the developed property. The extinguishment of
its right over the land is compensated by its right in the built-up area. Even
if it is considered as a proposed exchange, nothing has been culminated in the
impugned previous year. All those things are to happen in the future. The joint
venture has not started the construction in the impugned previous year. The
housing project was a proposed project. As already stated, a transfer is
contemplated only in the case of an existing property. In the present case the
property was only in the nature of mutual rights. The project and development
are yet to happen. Strictly, speaking, the projects and plans may happen or may
not happen. That is why the parties call the arrangement as agreements. The
assessee has not transferred any property as such, either in favour of 'L' or
in favour of the JV. In these circumstances, there cannot be a case that the
assessee had sold or extinguished or relinquished any of its assets/rights. The
rights of the assessee-company and 'L' are with reference to the property to be
built in future. Therefore, there cannot be a case of extinguishment of any
right in the property held by the assessee.
(v)
All
these matters bring home an important point that the expectations and
contemplations incorporated in the agreements are the business propositions
made by the concerned parties, which have been deduced into enforceable
agreements. Even though the agreements are enforceable, they themselves do not
take the character of immovable properties.
(vi)
The
execution of the development agreement does not bring into existence any
tangible asset that could be transferred between the parties. The agreements
speak about the intentions of the parties. Their future action plans are based
on the agreements. Once the project is completed and all the stipulations are
satisfied, the parties may come to declare the final satisfaction of the
agreements. Only at that point of time, the question really arises as to
whether there was any transfer within the meaning of section 2(47). That too
again, the question will be further enlarged to know that if at all there is a
transfer, whether it is between the assessee and 'L'.
(vii)
Next
it is necessary to consider whether this arrangement can be treated as a
transfer within the meaning of section 53A of the Transfer of Property Act. In
the present case, 'L' is not a transferee; it has not taken possession of the
property. No money consideration it has been discharged. In fact there cannot
be a question of handing over possession of the property to anybody. The
assessee itself contemplated a joint venture for the development of housing
project. The joint venture is not a new legal entity. It is an extension of the
assessee itself. In such circumstances, there cannot be a case of transfer at all
and it is only to enable its contractual obligations in planning, implementing
and executing the project as construed in the Joint development agreement. It
is for 'L' to undertake the construction activities and do each and everything
to transform the concept into reality.
(viii)
It
is important to bear in mind that section 2(47)(v) refers to possession to be
taken or retained in part performance of the contract of the nature referred to
in section 53A of the Transfer of Property Act. When the assessee enters into a
contract which is a development agreement, in the garb of agreement of sale, it
is the date of this development agreement which is material date to decide the
date of transfer. However, by no stretch of logic, this legal precedent can
support the proposition that all development agreements, in all situations,
satisfy the conditions of Section 53A which is a sine qua non for
invoking section 2(47)(v).
(ix)
A
plain reading of the section 53A of the Transfer of Property Act shows that in
order that a contract can be termed to be of the nature referred to in section
53A of the Transfer of Property Act, it is one of the necessary preconditions
that transferee should have or is willing to perform his part of the contract.
(x)
It
is clear that willingness to perform for the purposes of section 53A is
something more than a statement of intent; it is the unqualified and
unconditional willingness on the part of the vendee to perform its obligations.
Unless the party has performed or is willing to perform its obligations under
the contract, and in the same sequence in which these are to be performed, it
cannot be said that the provisions of section 53A of the Transfer of Property
Act will come into play on the facts of that case. It is only elementary that,
unless provisions of section 53A of the Transfer of Property Act are satisfied
on the facts of a case, the transaction in question cannot fall within the
scope of deemed transfer under section 2(47)(v).
(xi)
As
per the development agreement, landowner gets his share of plots on
construction, and consideration is quantified in terms of money. Also the
handling over of possession in the development agreement is missing. Both the
developer and the assessee were having the landed property. They pooled
together the landed property along with some other parties who were owners of
some other landed property and all parties together gave licence to the builder
to enter the premises and construct houses. No sale was effected on the date of
agreement. No consideration has passed between the parties on signing the
agreement. Further from the date of signing of development agreement dated
28-2-2006 to 31-3-2006, no progress has taken place in the said landed property
which is subject-matter of the development agreement. Further, there was no
consideration in the form of money that passed between the parties. There was
no construction, whatsoever, that took place during the period. Even otherwise,
there was a General Power of Attorney given by the assessee to the developer.
In such a situation, it is only the actual performance of transferee's
obligation which can give rise to the situation envisaged in section 53A of the
TP Act. On these facts, it is not possible to hold that the developer performed
its obligation during the period in which the capital is sought to be taxed by
the Revenue authorities. Thus, the condition laid down under section 53A of TP
Act was not satisfied during the period. Once it is concluded that the
developer did not perform the stipulation as required by the development
agreement during the period under consideration and within the meaning assigned
to the expression in section 53A of TP Act it cannot be said that there was a
transfer under section 2(47)(v) so as to levy capital gain tax.
B. Even while reopening a case where only
intimation under section 143(1) was issued, it is essential that A.O. should
have tangible material before him justifying his reason to believe that income
had escaped assessment
Facts
The assessee's return of income
for assessment year 2006-07 was processed under section 143(1). Later, the A.O.
reopened assessment on ground that assessee had entered into a development
agreement, whereby assessee handed over his land to builder in lieu of
developed plots. The A.O. held that value of developed plots received were taxable
in the year of executions of the development agreement as there was a transfer
under section 2(47)(v). On appeal, the assessee contended that reopening of
assessment was not permissible as there was no tangible material, the
Commissioner (Appeals) rejected assessee's contentions.
On assessee's appeal, the Hon’ble Tribunal
held that –
(i)
One
needs to give a schematic interpretation to the words 'reason to believe'
failing which, section 147 would give arbitrary power to A.O. to reopen
assessments on the basis of mere change of opinion, which cannot be per se
reason to reopen. The A.O. has no power to review; he has the power to
reassess. But reassessment has to be taxed on fulfilment of certain pre
conditions and if the concept of 'change of opinion' is removed, then, in the
garb of reopening the assessment, review would take place. One must treat the
concept of change of opinion as an inbuilt test to check abuse of power by the
A.O. Hence, the A.O. has power to reopen, provided there is 'tangible material'
to come to the conclusion that there is escapement of income from assessment.
Reasons must have a live link with the formation of the belief.
(ii)
Undoubtedly
an order of the assessment which has been passed in 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
the assessment. Otherwise, a mere change of opinion on the part of the A.O. in
the course of assessment for a subsequent assessment year would not by itself
legitimize reopening of assessment for an earlier year.
(iii)
The
contention of the Department is that there was no assessment under section
143(3) for the assessment year 2006-07 and only return was processed under
section 143(1) and the A.O. was within the jurisdiction of reopening the
assessment and there was no change of opinion. For the Department to say that
there was no change of opinion, it should be incumbent upon the Department to
demonstrate that during the course of assessment proceedings for Assessment
year 2007-08 some new information had been brought on record, which was not
available when the return of income was processed for Assessment year 2006-07
or before the expiry of time limit to complete the assessment for Assessment
year 2006-07 in regular course. That indeed is not the case of the Revenue. All
the material which was relevant to determine the income were available with the
A.O. when the regular assessment was to be completed for Assessment year
2006-07. Consequently, mere formation of another view in the course of
assessment proceedings for Assessment year 2007-08 would not justify the
revenue for reopening the assessment for Assessment year 2006-07 though the
reopening of assessment has taken place within the period of 4 years. In the
present case, there is no tangible material, no new information and no fresh
material which came before the Revenue in the course of assessment for Assessment
year 2007-08 to justify reopening of assessment for A.Y. 2006-07.
(iv)
The
contention of the Department was that where no view had been taken as to the
correctness of the return in the first instance, the A.O. could not be said to
exercise a power of review when he reopened the assessment which had been
earlier passed under section 143(1). This argument is similar to the argument
that if no opinion can be said to have been formed by the A.O. when the return
was merely processed under section 143(1), by issuing notice under section 148,
he cannot be said to have changed his opinion. But it needs to be remembered
that section 147 applies both to section 143(1) as well as section 143(3) and,
therefore, except to the extent that the reassessment notice issued under
section 148 in a case where the original assessment was made under section
143(1) cannot be challenged on the ground of a mere change of opinion, still it
is open to an assessee to challenge the notice on the ground that there is no
reason to believe that income chargeable to tax has escaped assessment. There
is no exclusion in section 147 to the effect that where the return was earlier
processed under section 143(1) it is not necessary for the A.O. to hold or
entertain a belief that income chargeable to tax had escaped assessment for the
reasons recorded by him. Therefore, the condition that the A.O. must have
reason to believe and the further condition that those reasons must have a live
link with the formation of the belief is applicable equally to cases where the
return was processed under section 143(1) as also to cases where the return was
examined and an assessment was made by a speaking order under section 143(3).
(v)
All
that has been excluded is that the assessee, in whose case the return was first
processed under section 143(1), cannot challenge the notice of reopening on the
ground that it is prompted by a mere change of opinion. Only to this limited
extent there is a disability on the part of the assessee to challenge the
notice of reopening in a case, where his return was earlier processed under
section 143(1).
(vi)
Thus,
while resorting to section 147 even in a case where only an intimation had been
issued under section 143(1)(a), it is essential that the A.O. should have
before him tangible material justifying his reason to believe that income had
escaped assessment.
(vii)
The
assessee contended that there was no such tangible material before the A.O.
from which he could entertain the belief that there was transfer under section
2(47)(v) resulting in escapement of income chargeable to tax. Though it is not
possible to challenge the action of the A.O. on the ground of a change of
opinion because in the present case the return was earlier processed under
section 143(1), his action can be challenged, on the ground that there was no
tangible material before the A.O. to enable him to entertain a prima facie
belief that income chargeable to tax has escaped assessment. The Department has
not produced any tangible material on the basis of which the reasons were recorded
to demonstrate that there was a live link or nexus between them and the
requisite belief. Being so, the reopening cannot be held as valid.
(viii)
The
facts suggest that the information that was considered by the A.O. to reopen
the assessment was already on record and if the A.O. failed to consider the
same for framing the assessment by issuing notice under section 143(2), he was
precluded from considering the same material for reopening of the assessment
under section 147, read with section 148. Accordingly, the assessment is
quashed.
