Income Tax Appellate Tribunal - Bangalore
Joint Commissioner Of Income Tax,, ... vs M/S Abb India Ltd, Bangalore on 21 August, 2024
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH : BANGALORE
BEFORE SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER
AND
Ms. MADHUMITA ROY., JUDICIAL MEMBER
ITA No.1314/Bang/2014
Assessment year : 2009-10
ABB India Ltd., Vs. The Joint Commissioner of
(formerly ABB Ltd.), Income Tax (LTU),
21st Floor, World Trade Centre, Bangalore.
Dr. Rajkumar Road,
Malleshwaram West,
Bangalore - 560 055.
PAN : AAACA 3834B
APPELLANT RESPONDENT
ITA No.1368/Bang/2014
Assessment year : 2009-10
The Joint Commissioner of Vs. ABB India Ltd.,
Income Tax (LTU), (formerly ABB Ltd.),
Bangalore. Bangalore - 560 055.
PAN : AAACA 3834B
APPELLANT RESPONDENT
Appellant by : Shri Harshvardhan
Respondent by : Ms. Neera Malhotra, CIT(DR)(ITAT), Bengaluru.
Date of hearing : 27.05.2024
Date of Pronouncement : 21.08.2024
ITA Nos.1314 & 1368/Bang/2014
Page 2 of 154
ORDER
Per Laxmi Prasad Sahu, Accountant Member
This appeals are filed by the assessee and revenue against the order dated 31.7.2014 of the CIT(Appeals), LTU, Bangalore for the AY 2013-14.
2. Grounds of Appeal by Assessee "1. Order is invalid, null and void 1.1. On the facts & in the circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals), LTU, Bangalore ['Ld. CIT(A)'] under section 250 of the Act, on certain grounds of appeal, is invalid, void, contrary to provisions of law and also contrary to facts, material evidence existing on records.
2. Taxation of tax-free interest earned by the Company 2.1. On the facts & in the circumstances of the case, the Ld. CIT(A) grossly erred in law and facts in confirming the addition made by the Assessing Officer ('AO') with respect to the tax-free interest earned on NPCL bonds XXIII series being redeemable non-convertible `infrastructure bonds, amounting to Rs. 10,241,096.
2.2. On the facts & in the circumstances of the case, the Ld. CIT(A) erred in law and facts in holding that no provisions of the Act enable the Appellant to claim the interest earned on NPCL bonds as exempt from tax.
3. Disallowance of deduction for reversal of provision for royalty and technical fees 3.1. On the facts & in the circumstances of the case, the Ld CIT(A) erred in law and facts in confirming the disallowance made by the AO with respect to deduction claimed by the Appellant in the return of income for reversal of provisions for ITA Nos.1314 & 1368/Bang/2014 Page 3 of 154 royalty and technical fees amounting to Rs. 23,449,362, without appreciating the fact and records that the Appellant had disallowed such amounts in the year of creation of provision.
4. Disallowance of deduction for reversal of provision for contracts, professional fees and rent 4.1. On the facts & in the circumstances of the case, the Ld CIT(A) erred in law and facts in confirming the disallowance made by the AO with respect to deduction claimed by the Appellant in the return of income for reversal of provisions for contracts, professional fees and rent amounting to Rs. 26,154,850, without appreciating the fact and records that the Appellant had disallowed such amounts in the year of creation of provision
5. Disallowance of rent, professional charges and contract amounts 5.1. On the facts & in the circumstances of the case, the Ld CIT(A) erred in law and facts in not deleting the disallowance made by the AO with respect to rent, professional charges and contract expenses amounting to Rs. 38,628,000.
5.2. The Ld CIT(A) erred in law and facts in not considering the sample/ documents supporting the claim submitted by the Appellant and e remanding the matter back to AO for verification.
6. Repairs and renovation expenses on leasehold premises claimed as revenue expenses 6.1. On the facts & in the circumstances of the case, the Ld CIT(A) erred 1` in law and facts in confirming the disallowance made by the AO treating the repairs & renovation expenses of Rs 65,128,000 on leasehold premises to be capital in nature, without appreciating the fact that such expenses are in the nature of repairs to leasehold premises as envisaged under section 30(a)(i) of the Income tax Act, 1961 (`the Act').
ITA Nos.1314 & 1368/Bang/2014 Page 4 of 154 6.2. The Appellant relies on the ruling of the Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 99 Taxman 575 (SC).
7. Capital gains on sale of Integra Shares 7.1 On the facts & in the circumstances of the case, the Ld CIT(A) erred in law and facts in confirming the long term capital gain ('LTCG') computed by the AO on sale of shares of Integra Hindustan Controls Ltd amounting to Rs. 97,101,240 as against the LTCG actually earned by the Appellant of Rs. 22,701,964.
7.2. The Ld CIT(A) failed to appreciate the fact that capital gains cannot be computed based on notional consideration which is not actually received by the Appellant and has to be only on real income.
7.3. The Appellant relies on the Supreme Court decision in the case of K P Varghese vs. ITO (1981) 7 Taxman 13 (SC).
8. Deduction of lease rentals on assets acquired through financial lease 8.1. On the facts & in the circumstances of the case, the Ld CIT(A) erred in law and facts in confirming the disallowance made by the AO with respect to lease rentals paid on assets acquired through finance lease of Rs. 3,192,000 on the basis that the same is capital in nature.
8.2. The Ld CIT(A) failed to understand the fact that the said lease rentals were capitalized in the book of accounts in order to comply with the accounting standards. However, the same is revenue in nature and deduction of the same can be claimed for the computation of income-tax.
8.3. Without prejudice to the above, the Ld CIT(A) erred in not directing the AO to grant depreciation as per law if the lease rentals are treated as capital in nature.
ITA Nos.1314 & 1368/Bang/2014 Page 5 of 154
9. Disallowance of commission expenditure 9.1. On the facts & in the circumstances of the case, the Ld CIT(A) erred in law and facts in confirming the disallowance made by the AO with respect to commission paid to foreign agents amounting to Rs. 67,855,000, under section 37 and 40(a) of the Act.
10. Disallowance of repairs and maintenance expenditure On the facts & in the circumstances of the case, the Ld CIT(A) erred in law and facts in confirming the disallowance made by the AO with respect to expenditure on repairs and maintenance of Rs 1,068,628 under section 40(a)(ia) of the Act, on the basis that taxes were not deducted on the same.
11. Disallowance of freight and forwarding expenses 11.1. On the facts & in the circumstances of the case, the Ld CIT(A) erred in law and facts in confirming the disallowance made by the AO, under section 40(a)(ia) of the Act, with respect to expenditure on freight and forwarding amounting to Rs 3,225,000 on the basis that taxes were not deducted on the same.
12. Disallowance of miscellaneous expenses 12.1 On the facts & in the circumstances of the case, the Ld CIT(A) erred in law and facts in confirming the disallowance made by the AO under section 40(a)(ia) of the Act, with respect to amounts paid towards contract services amounting to Rs 754,058 and director's fee of Rs.2.,4§1,a(10on the basis that taxes were not deducted on the same.
13. Disallowance of fines paid for transport expenses 13.1. On the facts & in the circumstances of the case, the Ld CIT(A) erred in law and facts in confirming the disallowance made by the AO, with respect to reimbursement made by the Appellant for fines paid by the transporters to the Regional Transport Offices, under section 37 of the Act amounting to Rs 568,130.
ITA Nos.1314 & 1368/Bang/2014 Page 6 of 154
14. Disallowance of difference between assessable value as per excise returns and sales as per financial statements 14.1. On the facts & in the circumstances of the case, the Ld CIT(A) erred in law and facts in confirming the disallowance made by the AO with respect to certain items of differences between the assessable value as per excise returns and sales as per the financial statements.
14.2. The Ld CIT(A) failed to appreciate the fact that the Appellant has submitted substantial amount of evidence which is approximately 80% of the total disallowance value and there was no reason to disallow the difference.
15. Levy of interest under section 234B of the Act 15.1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the levy of consequential interest under section 234B of the Act.
16. Levy of interest under section 234C of the Act 16.1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the levy of consequential interest under section 234C of the Act.
17. Levy of interest under section 234D of the Act 17.1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the levy of consequential interest under section 234D of the Act.
18. Initiation of penalty proceedings under section 271(1)(c) of the Act 18.1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in not directing the AO to drop the initiation of penalty proceedings when there is no concealment of income or filing of inaccurate particulars.
The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal."
ITA Nos.1314 & 1368/Bang/2014 Page 7 of 154 Grounds of Appeal by Department "1. The order of the Ld. CIT(A) is opposed to law and fact of the case.
2. The CIT (A) has erred in directing the AO to delete the additions made towards Disallowance of deduction of Rs 16,51,69,000/- on Custom duty on closing stock. Deduction u/s. 43B is not allowable and the duty paid should be included for valuing the closing stock as per Sec.145A. The act of the assessee in claiming deduction u/s 43B is incorrect because the components of cost of goods lying in stock as at the end of the year includes import duty paid and' I. such purchase cost was already debited to P/L account. During the course of assessment proceedings the assessee could not submit any of the evidences/invoices in support of its claim. Hence the same was disallowed for want of evidence /proof while concluding the assessment u/s.143 r.w.s. 144C.
3. The CIT(A) has erred in directing the AO to give relief on Sale proceeds from land transfer treated as income from other sources as it is not in accordance with the order of the Hon'ble Supreme Court in 202 Taxman 607.
4. The CIT (A) has erred in directing the AO to give relief on Disallowance of provision for late deliveries as the expenses are in the nature of contingent expenditure.
The Appellant submits that the above grounds are independent and without prejudice to one another."
3. Briefly stated the facts of the case are that the appellant company filed its return of income for AY 2009-10 on 20.09.2009 declaring a total income of Rs. 756,99,11,140. The case was selected for scrutiny and statutory notices were issued to the assessee for compliances. The assessee filed details as called for time to time as possible, after considering the entire submissions and facts of the case the assessing officer (AO) assessed income at Rs.12,57,54,67,925.
ITA Nos.1314 & 1368/Bang/2014 Page 8 of 154 Aggrieved from the above order the assessee filed appeal before the CIT(A) LTU and he partly allowed the appeal. Aggrieved from the order of the CIT(A) both the parties filled appeal before the Income Tax Appellate Tribunal. We are adjudicating first to the appeal of the assessee.
4. Ground no.1 raised in this appeal is general in nature and does not require separate adjudication. The other grounds are discussed issue-wise below:
Disallowance of tax free interest earned (ground no.2)
5. The appellant had invested Rs. 20 crore on Infrastructure Bonds
- XXII series of Nuclear Power Corporation India Ltd. (NPCIL) which was claimed exempt u/s 10(23G), although this section was not cited by the assessee in the return while making the claim of exempt income of Rs. 1,02,41,096 from the said bonds. From the application the AO noted that the assessee is eligible for claim of exemption u/s 10(23G) of the IT Act. The AO noticed that the provisions of section 10(23G) had been omitted by the Finance Act 2006 w.e.f. 01.04.2007 and NPCIL also confirmed through its letter dt. 14.08.2012 that the interest on these bonds did not qualify for exemption under any other provision of the IT Act after omission of section 10(23G) w.e.f. AY 07-08. Based on these facts the AO disallowed the claim of tax free interest. The assessee also relied upon an alternate claim that its interest income was exempt u/s 10(15)(iv)(h). The AO did not accept the alternate plea of the assessee too. Before the CIT(A) the appellant submitted that it was not registered for the NPCIL bonds in terms of ITA Nos.1314 & 1368/Bang/2014 Page 9 of 154 the requirement of the above provisions. The assessee also placed reliance upon Circular no.14(XL-35) dt. 11.04.1955 issued by the CBDT stating that the AO should not take advantage of the ignorance of the assessees regarding their rights and draw their attention to any relief to which they are entitled, and guide the assessee in making the correct claim. The ld. CIT(A) noted that, since the appellant's facts, admittedly, do not fit within either section 10(23G) or section 10(15)(iv)(h) of the IT Act, and there is no other provision which makes the imputed income as tax free, the application of this Circular cannot be accepted in the appellant's matter. The CIT(A) confirmed the findings of the AO.
6. The ld. AR reiterated the submissions made before the lower authorities and has filled written synopsis in addition to the arguments which is as under:-
"The Assessee had subscribed for 200 bonds at a face value of Rs. 10 Lac each of the Nuclear Power Corporation of India Limited in Year 2003-04 relevant to AY2004-05. A copy of the said application form is to be found at page 148 of the Paper Book. The interest income thereon was eligible for an exemption in terms of section 10(23G). The bonds had a minimum lock-in period of five years and on the expiry of the said period the Assessee had exercised its option in FY2008-09 for redemption and, accordingly, the bonds were redeemed on completion of five-year period. These bonds carried a coupon of 5.25% per annum as compared to the prevailing market rate of interest of 6.00 to 8.50% (range). During the previous year relevant to the assessment year 2009-10 the Assessee earned Rs.1,02,41,096/- by way of interest on the bonds. The Assessee had claimed an exemption under section 10(23G) for the assessment years 2005- 06 onwards and, accordingly, it did so even for the current assessment year inspite of the fact that the said section stood ITA Nos.1314 & 1368/Bang/2014 Page 10 of 154 omitted with effect from 1.4.2007 as according to it the subsequent omission was not determinative of the issue.
The Assessing Officer denied the exemption for the reasons given in para 1 of its order and his action was confirmed by the Learned Commissioner of Income-tax (Appeals) who held that the Assessee was not entitled to the exemption under section 10(23G) as the section stood omitted with effect from the assessment year 2007-08.
As regards the Assessee' s alternative contention that an exemption should be granted in terms of section 10(15)(iv)(h) was also rejected as there was no Notification issued by the Central Government in terms of the said section to exempt interest that accrued on the aforesaid bonds.
It is submitted that as noted earlier the Assessee had made the application to subscribe for the bonds on it being held out that the interest thereon was eligible for an exemption under section 10(23G). It was on this basis that the Appellant's subscribed for the bonds which carried a coupon of 5.25% as opposed to the market rate then prevailing. It is submitted that the Appellant acquired a vested right to claim that the interest earned on these bonds was not exigible to tax. Although the provisions of section 10(23G) were omitted with effect from 1st April 2007 the only implication thereof was that any instrument subscribed after 1st April 2006 would not be eligible for the benefit of the exemption and it is not as if an instrument which was subscribed for prior to such date would lose the benefit of the exemption because the provision got deleted. This argument has its foundation in section 6 of the General Clauses Act. In this regard, reliance is placed on a judgment of the Supreme Court in CIT vs. Shah Sadiq& Sons 161 ITR 102 where the Assessee, a partnership firm, which had incurred a loss in the previous years relevant to the assessment years 1960-61 and 1961-62 had claimed a set-off of such loss against its income for the assessment year 1962-63. The Assessing Officer rejected the claim by holding that in accordance with the law in force for the assessment year 1962-63 the unabsorbed loss could be carried forward only by the partners of a registered firm and not by the firm itself. The Tribunal took the view that the repeal of the earlier enactment could not supersede any right already accrued under the repealed enactment ITA Nos.1314 & 1368/Bang/2014 Page 11 of 154 unless there was something in the repealing act to indicate to the contrary. Upholding the view taken by the Tribunal the Supreme Court (at page 108 of the report) held that the right given to the Assessee for the assessment year 1961-62 under section 24(2) of the Indian Income-tax Act, 1922 was an accrued and vested right and it could have been taken away expressly or by necessary implication. As that had not been done in terms of section 297(2) of the Act it was clear that the presumption under section 6(3) of the General Clauses Act indicated that such right should be preserved. The Court held that whatever rights are expressly saved by the savings provisions undoubtedly stand saved. But, that does not mean that rights which are not so saved are extinguished or stand ipso facto terminated by the mere fact that a new statute repealing the old statute is enacted. According to the Court rights which have accrued are saved unless they are taken away expressly and, therefore, the set-off was rightly claimed by the Assessee therein.
The fact that in the present case section 10(23G) was only omitted does not make any difference to the principle laid down (see Fibre Boards Pvt. Ltd. Vs. CIT (2015) 10 SCC 333) On a parity of reasoning when the Assessee subscribed to the bonds it was on the footing that the deduction under section 10(23G) was available to it and, therefore, the vested right could not be taken away and, hence, both the lower authorities were not justified in rejecting the claim."
7. The ld. DR supported the order the lower authorities and made extensive arguments. She has also filed a written synopsis which is as under:
1. "The Section 10(23G) of the I.T Act stood omitted by Finance Act, 2006 w.e.f 01-04-2007. Accordingly, the interest earned by the appellant on the NPCIL Bonds Issue - series XXIII, which was earlier exempt under Section 10(23G) of the I.T Act was no longer available to the appellant.
ITA Nos.1314 & 1368/Bang/2014 Page 12 of 154
2. In the submissions filed before AO & CIT(A) the appellant failed to specify under which section of the Act the exemption was claimed for the interest earned from bonds.
3. It is a trite law that when the section itself is omitted from the statute, exemption cannot be claimed.
4. On a clarification sought by the AO, the Director, NPCIL categorically stated in his letter to AO that w.e.f 01.04.2007 the appellant cannot claim the benefit under any other provision of IT Act.
5. Accordingly, the addition of Rs.1,02,41,096/- sustained by the Ld.CIT(A) may please be upheld and GOA No.2 may kindly be DISMISSED."
8. Considering the rival submissions the assessee has invested Rs.20 crores in Infrastructure Bonds Series-XXII of Nuclear Power Corporation of India Ltd. (NPCIL) in AY 2004-05 of 5.25% Tax Free Bonds on which the interest of Rs.1,02,41,096 was received. As per the details submitted, the instrument was redeemable, non-convertible infrastructure bonds with tax benefit u/s. 10(23G) of the Act. Accordingly the assessee claimed it as exempt income. This tax benefit u/s. 10(23G) was omitted by Finance Act, 2006, w.e.f. 1.4.2007. Since the provision itself was omitted from the statute, therefore the AO did not allow the interest as exempt income. The alternate plea raised by the assessee that the provision of section 10(15)(iv)(h) may be applied to the assessee, but it was also not considered. On confirmation made by the AO with MD, NPCIL, had categorically stated in his return reply that no benefit was available to assessee company after 01.04.2007 and they cannot claim benefit ITA Nos.1314 & 1368/Bang/2014 Page 13 of 154 under any other provisions of the Act. The ld. AR of the assessee has lengthily argued on this issue and written synopsis filed is incorporated above and relied on various judgments during the course of hearing. The ld. DR has also filed written synopsis. We noted that section 10(23G) was initially inserted in the statute by the Finance Act (No.2) of 1996 w.e.f. 1.4.1997 and various amendments were made and it was omitted by Finance Act, 2006 w.e.f. 01.04.2007. Since this provision was omitted from the statute book w.e.f. 01.04.2007 and there is no any saving clause. On similar issue, the Hon'ble Jurisdictional High Court in the case of Pr. Cit- 7 vs Texport Overseas (P.) Ltd. reported in [2020] 114 taxmann.com 568 ( Karnataka) has been held as under:-
"5. Having heard learned Advocates appearing for parties and on perusal of records in general and order passed by tribunal in particular it is clearly noticeable that Clause (i) of section 92BA of the Act came to be omitted w.e.f. 01.04.2019 by Finance Act, 2014. As to whether omission would save the acts is an issue which is no more res intigra in the light of authoritative pronouncement of Hon'ble Apex Court in the matter of Kolhapur Canesugar Works Ltd. v. Union of India AIR 2000 SC 811 whereunder Apex Court has examined the effect of repeal of a statute vis-a-vis deletion/addition of a provision in an enactment and its effect thereof. The import of section 6 of General Clauses Act has also been examined and it came to be held:
"37. The position is well known that at common law, the normal effect of repealing a statute or deleting a provision is to obliterate it from the statute-book as completely as if it had never been passed, and the statute must be considered as a law that never existed. To this rule, an exception is engrafted by the provisions of section 6(1). If a provision of a statute is unconditionally omitted without a saving clause in favour of pending proceedings, all actions must stop where the omission finds them, and if final relief has not been granted before the omission goes into effect, it cannot be granted afterwards. Savings of the nature ITA Nos.1314 & 1368/Bang/2014 Page 14 of 154 contained in section 6 or in special Acts may modify the position. Thus the operation of repeal or deletion as to the future and the past largely depends on the savings applicable. In a case where a particular provision in a statute is omitted and in its place another provision dealing with the same contingency is introduced without a saving clause in favour of pending proceedings then it can be reasonably inferred that the intention of the legislature is that the pending proceedings shall not continue but fresh proceedings for the same purpose may be initiated under the new provision."
6. In fact, Co-ordinate Bench under similar circumstances had examined the effect of omission of sub-section (9) to Section 10B of the Act w.e.f. 01.04.2004 by Finance Act, 2003 and held that there was no saving clause or provision introduced by way of amendment by omitting sub-section (9) of section 10B. In the matter of General Finance Co. v. ACIT, which judgment has also been taken note of by the tribunal while repelling the contention raised by revenue with regard to retrospectivity of section 92BA(i) of the Act. Thus, when clause (i) of Section 92BA having been omitted by the Finance Act, 2017, with effect from 01.07.2017 from the Statute the resultant effect is that it had never been passed and to be considered as a law never been existed. Hence, decision taken by the Assessing Officer under the effect of section 92BI and reference made to the order of Transfer Pricing Officer-TPO under section 92CA could be invalid and bad in law.
7. It is for this precise reason, tribunal has rightly held that order passed by the TPO and DRP is unsustainable in the eyes of law. The said finding is based on the authoritative principles enunciated by the Hon'ble Supreme Court in Kolhapur Canesugar Works Ltd. referred to herein supra which has been followed by Co-ordinate Bench of this Court in the matter of M/s. GE Thermometrias India Private Ltd., stated supra. As such we are of the considered view that first substantial question of law raised in the appeal by the revenue in respective appeal memorandum could not arise for consideration particularly when the said issue being no more res integra."
ITA Nos.1314 & 1368/Bang/2014 Page 15 of 154
9. Respectfully following the above judgment we reject the entire arguments of the ld. AR of the assessee. The case law relied by the ld. AR of the assessee is also not applicable in the present facts of the case since section 10(23G) has been omitted by the Finance Act, 2006 w.e.f. 01.04.2007 without any saving clause.
10. In the result, this ground is dismissed.
Disallowance of deduction for reversal of provision for royalty and technical fee (ground no. 3)
11. During the FY 2008-09, the appellant had reversed the provisions for royalty and technical fees amounting to Rs 2,34,49,362 in the Profit and Loss account. These provisions were created from AY 2002-03 to AY 2008-09. Further, the same was disallowed u/s. 40(a) in the respective years of creation due to non-deduction of taxes. In the computation of income for AY 2009-10, the appellant reduced Rs 2,34,49,362 towards reversal of the aforesaid provisions on the ground that the same were disallowed in the earlier years when the provisions were created. The AO in the assessment order held that when expenditure is disallowed under section 40(a) of the Act in an earlier year then the same would be allowed in subsequent years only on payment of taxes along with interest. He also noted that in the tax audit report of the appellant for earlier assessment years, the disallowances was reported under clause 17(f) - "amounts inadmissible under section 40(a)", and not against 17(k) - "particulars of any liability of a contingent nature", which deals with provisions/contingent liability. He believed that the provisions made in the earlier assessments years were ITA Nos.1314 & 1368/Bang/2014 Page 16 of 154 not genuine since no person would forego his claim after rendering services. In any case, he held that the reversal should be credited to the Profit and Loss account and offered to tax under section 41 of the Act. It was also held that since tax had not been deducted in the earlier year as well as the current year, the claim made by the assessee would lead to claim of double deduction i.e., in the earlier assessment year as well as in the current year. The AO had asked for party wise breakup of the original provisional amount, details of technical services rendered by those persons to the company and invoice; raised by them as well as agreement copies entered into with the parties concerned The appellant before the AO, as well as during appeal, has expressed its inability to submit these particulars since its claim is that the provision itself was an estimated amount without linkage to identified parties. For reasons of this uncertainty and fluidity, and the fact that no invoice was received later in relation to the provisioned amount, the necessity for reversal had been felt by the company in FY 2008-09. In its appeal submission the appellant contended that as per the language of section 28 and section 41(1) of the IT Act, the reversal of provision disallowed in earlier years could not be brought to tax in the manner done by the AO. On appeal the ld. CIT (A) noted that these are identical to the submissions made on identical facts for AY 2008-09 in ITA No. 45/JCIT LTU/CIT(A)LTU/2013-14 where the issue has been dealt with in detail and decided against the assessee following the same reasoning.
ITA Nos.1314 & 1368/Bang/2014 Page 17 of 154
12. The ld. AR reiterated the submissions made before the lower authorities and submitted that :
"The Assessee had, in the previous years relevant to the assessment years 2002-03 to 2008-09, made certain provision for payment of royalty and fee for technical services. As the Assessee had not deducted tax at source the said provisions were not claimed or allowed as a deduction. During the previous year relevant to the assessment year 2009-10 the Assessee wrote back these provisions on the ground that the liability for payment of this amount stood extinguished. As no deduction for the provisions so made was allowed in the earlier years the Assessee claimed that the section 41(1) would not stand attracted and, hence, the write back was not assessable. The Assessing Officer states that the claim made by the Assessee was incorrect for two reasons. The first was that there is no credit to the profit and loss account on account of such reversal. The second is that the basis for the disallowance in the earlier years was that no tax was deducted at source and the Assessee would claim the amount as and when it deducted tax at source. As admittedly the Assessee had not deducted tax at source during the current assessment year the same was not allowable as a deduction. The Commissioner of Income-tax (Appeals) has followed her order for assessment year 2008-09 and upheld the disallowance that was made.
The Assessee's computation of income (see page 2 of Paper Book) discloses that the Assessee had separately claimed a deduction of the sum of Rs. 2,34,49,000/-. The Assessee, by its letter dated 25thJune 2012, (see page 101 of Paper Book) clearly brought out the years in which the disallowance was made. It also furnished along with the letter copy of the journal entries evidencing the reversals which journal entries are to be found from page 107 onwards of the Paper Book. The Assessee reiterated this position by its letter dated November 15, 2012 a copy whereof is to be found at page 352 of the Paper Book.
It is submitted that the law is settled, by a series of the judgments of the Supreme Court, that a remission of a liability cannot give rise to income that is chargeable to tax (see CIT vs. Hukamchand Mohanlal 82 ITR 624) where at page 656 the Supreme Court observed that "as pointed out by the High Court ITA Nos.1314 & 1368/Bang/2014 Page 18 of 154 under the general law if a trading liability has been allowed as a business expenditure and this liability is remitted in any subsequent year, the amount remitted cannot be taxed as income of the year of remission nor can account for the year in which the liability was allowed be reopened or adjusted, section 41(1) was enacted to supersede this principle ......". The Supreme Court reiterated this position in Commissioner of Agricultural Income-tax vs. Kerala Estate Mooriad Chalapuram 161 ITR 155 where the Court noted that there was no provision analogous to section 10A of the 1992 of the Act in the Agricultural Income- tax Act which permitted such amount of remission being brought to tax. The Court also noted the principal laid down by the High Court at Bombay in Penkar Vs. CIT 16 ITR 183 to the effect that it is impossible to see how a mere remission which leads to the discharge of the liability of the debtor can ever become income for the purpose of the taxation. The Assessee submits that the said amount of Rs. 2,34,49,000/- is liable to tax only if section 41(1) is applicable. It is also equally well settled that the burden to establish that the conditions of section 41(1) are complied with is on the revenue. In this regard, reference may be made to the judgment of the Delhi High Court in Steel and General Mills Company Limited vs. CIT 96 ITR 438, CIT vs. Nathuabhai Desaibhai 130 ITR 238 as well as of the Karnataka High Court in Liquidator Mysore Agencies Private Limited vs. CIT 114 ITR 853. It is clear that the Assessing Officer has not established the condition that the amount that was written back during the year was allowed as a deduction in the earlier years. In fact it is already pointed out that such was not the position. Therefore, section 41(1) can have no application whatsoever. As regards the second reasoning given by the Assessing Officer, viz., that the amount does not appear to the credit of the Profit and Loss Account based on a misunderstanding of the entry that was passed. It is apparent from the snapshot of the journal entries that appear at page 107 onwards that in the year in which the provision was made the expense account was debited and a provision account was credited. This entry was reversed in the previous year relevant to assessment year 2009-10 and, accordingly, there was no credit to the Profit and Loss Account for the year ended 31st March 2009 but in fact what was happened was that the expenditure on account of royalty and fee ITA Nos.1314 & 1368/Bang/2014 Page 19 of 154 for technical services stood reduced by the aforesaid sum of Rs. Rs. 2,34,49,000/-.
In so far as the reason of the Commissioner is concerned, it is submitted that for the assessment year 2007-08 the matter had come up before the Tribunal and the Tribunal sent back the matter to the file of the Assessing Officer for the limited purpose of verifying the fact that the amount written back was out of the provisions disallowed in the year of creation of the provision and if the Assessing Officer is satisfied the same should be allowed as a deduction. In the present year there is no need to restore the issue to the AO as the necessary evidence was already furnished in the course of the assessment proceedings and the correctness thereof has not been doubted."
13. On the other hand, the ld. DR reiterated the order of the lower authorities and submitted that the Hon'ble ITAT, in appellant's own case, for the earlier assessment year i.e. A.Y. 2008-09 in MP No. 44/Bang/2017 (In ITA No. 1124/Bang/2014) dated 07-06-2017 has remitted the matter back to the file of AO to carry out verification. Accordingly, following the direction of Hon'ble ITAT, in appellant's own case, this issue may please be remitted the matter back to the file of AO to carry out verification, on similar lines.
14. Considering the rival submissions and facts of the case, the assessee has reduced provision for royalty and technical fees from the income. For the year. A similar issue has been decided by ITAT, in appellant's own case, for the earlier assessment year i.e. A.Y. 2008-09 in MP No. 44/Bang/2017 (In ITA No. 1124/Bang/2014) dated 07-06- 2017 has remitted the matter back to the file of AO to carry out verification. Since the issue in hand is similar as for AY 2008-09, accordingly we also remit this issue to the file of AO for necessary ITA Nos.1314 & 1368/Bang/2014 Page 20 of 154 verification in the light of the judgment for the AY. 2008-09 cited supra and decide the issue as per law. Accordingly, this ground is allowed for statistical purpose.
Disallowance of reversal of provision for contracts, professional fees and rent (ground no. 4).
15. The facts in this matter are similar to the nature of transaction and treatment discussed supra for ground no. 3. During the FY 2008- 09, the appellant had reversed the provisions towards contracts, professional fees and rent amounting to Rs. 2,61,54,850 in the Profit and Loss account, the provisions having been created in earlier years when the same was disallowed u/s. 40(a) (in the respective years of creation) due to non-deduction of taxes. In the computation of income for the current year, the appellant reduced Rs. 2,61,54,850 towards reversal of the aforesaid provisions as the same were disallowed in the earlier previous year when the provision was created. On appeal the ld. CIT (A) noted that these are identical to the submissions made on identical facts for AY 2008-09 in ITA No. 45/JCIT LTU/CIT(A)LTU/ 2013-14 where the issue has been dealt with in detail and decided against the assessee following the same reasoning.
16. The ld. AR reiterated the submissions made before the lower authorities and further submitted that this ground is similar to Ground No.3 except it deals with the reversal for provision hitherto disallowed on account of the applicability of section 40(a)(ia). The relevant evidence in the form of journal entries are to be found at pages 114 onwards of the Paper Book.
ITA Nos.1314 & 1368/Bang/2014 Page 21 of 154
17. The ld. DR submitted that a similar issue has been decided by the coordinate bench of the tribunal in assessee's own case, for the earlier assessment year i.e. A.Y. 2008-09 in ITA No. 1124/Bang/2014 dated 26-08-2016, in Para 7 of its order has upheld the addition and copy of judgement was produced. She further submitted that as the facts of the present case are similar to A.Y. 2008-09, reference in this regard is invited to Para 3 (3.1 TO 3.4 ) at Pages 17 to 22 of the AO's order and Para 4, on Page 4, of the order of Ld.CIT(A), the addition made may please be upheld.
18. Considering rival submissions and facts of the case, the assessee has reduced provision for contract professional fee and rent from the income. A similar issue has been decided by ITAT, in appellant's own case, for the earlier assessment year i.e. A.Y. 2008-09 in MP No. 44/Bang/2017 (In ITA No. 1124/Bang/2014) dated 07-06-2017 has remitted the matter back to the file of AO to carry out verification. Since the issue in hand is similar as for AY 2008-09, accordingly we also remit this issue to the file of AO for necessary verification in the light of the judgment for the AY. 2008-09 cited supra and decide the issue as per law. Accordingly, this ground is allowed for statistical purpose.
Disallowance of rent, professional charges & contract amounts (Ground no. 5).
19. The assessee had quantified Rs.6,25,85,000 for disallowance u/s. 40(a) in respect of payments made under the captioned heads without TDS and the same had also been identified in column 17(f) of the Tax ITA Nos.1314 & 1368/Bang/2014 Page 22 of 154 Audit Report. Out of this, Rs.3,86,28,000 was stated to be covered under TDS payments made after the tax audit report date and the balance Rs 2,39,57,000 was suo moto disallowed u/s 40(a). The AO called for party wise details in respect of the entire amount considered in the tax audit report for disallowance i.e. Rs 6,25,85,000 and when such details were unavailable he brought the balance of Rs 3,86,28,000 also to tax through disallowance u/s 37, holding that prima facie genuineness of the expenses was not established prior to examination of the allowability u/s 40(a). Before me, only two sample invoices dt 29.06.09 of ABB technology Ltd for license fee were furnished. In remand proceedings the AO had been asked to verify the assessee's claim of TDS coverage to the extent of Rs 3,86,28,000 but the said verification had not been concluded at the AO's end. Accordingly the CIT(A) directed to examine the TDS payments and to give benefit to the assessee if the related expenses are found to be incurred for business purposes with correct TI)S compliance.
20. The ld. AR reiterated the submissions made before the lower authorities and further submitted that the Assessee had, in its computation of income, disallowed a sum of Rs. 6,25,85,000/- (see page 1 of Paper Book) which was a provision made on account of expenditure on rent, professional services and payments to various contractors. This amount was reported as disallowable in the tax audit report having regard to the provisions of section 40(a)(ia) as the Assessee had not deducted tax at source on the aforesaid amount. However, out of the said sum an amount of Rs. 3,86,28,000/- was paid ITA Nos.1314 & 1368/Bang/2014 Page 23 of 154 after the audit report was signed and, therefore, the actual disallowance made in section 40(a)(1) was in the sum of Rs. 2,39,57,000/-. The Assessing Officer took the view that the entire amount of Rs. 6,25,85,000/- was to be disallowed as the Assessee had not submitted party wise ledger of the various expenditure debited to the profit and loss account, copies of invoices raised and evidence for payment of the actual expenditure. When the matter travelled to the Commissioner of Income-tax (Appeals) she took the view that the Appellant had furnished only sample evidence for the incurrence of the expenditure. She also took the view that in the course of the remand proceedings the Assessing Officer has not made the requisite verification and, therefore, she restored the matter to the Assessing Officer to examine the details of the payment of TDS and to give benefit of the deduction if the expenditure was found to be incurred for business purpose and the appropriate TDS compliance was made. The Assessee submits that there was no valid legal basis for the Assessing Officer to make the disallowance of Rs. 6,25,85,000/-.The Assessing Officer had not disputed that the Assessee had actually made the payments after the date of the audit report but before the due date for filing the return. In fact in the remand proceedings details of the same were produced before the Assessing Officer but, nevertheless, he did not deal with the same. In these circumstances, the Commissioner of Income-tax (Appeals) ought to have deleted the aforesaid disallowance. In so far as the balance of Rs. 2,39,57,000/- is concerned, the same was actually disallowed by the Assessee albeit for the reasons different from that ITA Nos.1314 & 1368/Bang/2014 Page 24 of 154 adopted by the Assessing Officer. In fact when tax was deducted in the subsequent year the Assessee had made a claim for the deduction and the deduction stands allowed. In these circumstances, there was no necessity for the Commissioner of Income-tax (Appeals) to have remanded the issue to the Assessing Officer.
21. The ld. DR submitted that the GOA No. 5 - disallowance of rent, professional charges and contract amounts, no details filed till date, grounds of appeal is liable to be dismissed on the reasons that prior to examination of allowability u/s 40(a) of the Act, the appellant was required to establish the genuineness of expenses which it failed to do as no details were filed before AO for the claim of Rs.3,86,28,000/-. Reference in this regard is invited to Para 4 (4.1 TO 4.2) at Pages 22 to 25 of the AO's order. Before Ld.CIT(A) only 2 sample invoices dated 29.06.2009 of abb technology for licence fee were furnished. Reference in this regard is invited to Para 5 at Page 5 of the order of Ld.CIT(A). Therefore, as the appellant has FAILED to produce any details before AO, Ld.CIT(A) and before Hon'ble ITAT till date, the addition of Rs.3,86,28,000/-made may please be upheld.
22. Considering the rival submissions, the assessee has debited towards rent of Rs.4,21,95,040, professional services of Rs.24,47,370 and amount paid to contractor of Rs.179,42,312 totalling to Rs.6,25,84,472 in rounding off Rs.6,25,85,000. In this connection, the assessee was asked to provide party wise ledger of all the amounts and if any tax was deducted for the purpose of section 40(a). The case was ITA Nos.1314 & 1368/Bang/2014 Page 25 of 154 posted for hearing on different dates for producing the evidences in support of the claim of the assessee and in this regard for want of non- compliance, notice u/s. 272A(1)(c) in spite of the assessee was unable to produce any evidences. It was submitted by the assessee that after the tax audit report a tax was deducted on sum of Rs.3,86,28,000 and TDS was paid to the income tax department and balance amount of Rs.2,39,57,000 was suo motu disallowed and added back. The AO noted that assessee was unable to submit any reply on this issue i.e., non-submission of party wise ledger and sub-ledger of various expenditure debited into the profit & loss account, copies of invoices raised by the respective parties, evidences for payment made to those parties. The AO further noted that prima facie the genuineness of expenditure needs to be examined before restoring to section 40(a) or 40(a)(ia). Accordingly the entire sum of Rs.6,25,85,000 was disallowed. Since, the assessee suo motu disallowed a sum of Rs.2,39,57,000. Accordingly a balance of Rs.3,86,28,000 were disallowed u/s. 37 of the Act. We noted from the written synopsis that the sample evidences were submitted in the remand proceedings, however the revenue authorities have not appreciated the same. The ld. DR had also submitted that assessee is unable to substantiate its case with credible evidences at any stage of the proceedings. We noted from the order of the AO that the disallowance has been made u/s. 37 of the Act, however the CIT(A) has given direction to the AO that if the assessee has compliance to TDS provisions and the AO has to allow to that extent is also not correct. Once the expenditure is ITA Nos.1314 & 1368/Bang/2014 Page 26 of 154 disallowed u/s. 37 for not fulfilling certain conditions, the compliance of other provisions will not apply. Considering the arguments noted above, we remit this issue back to the AO for afresh consideration with documents submitted during the remand proceedings. If the assessee is unable to substantiate its case in terms of section 37, to the extent of non-submissions of the evidences, then the balance amount shall be disallowed. Further if the assessee fulfils the conditions for allowing the expenditures in terms of u/s 37 them the AO has to examine the applicability of section 40(a) or 40(a)(ia) of the Act. We further make it clear that subsequently complying the provisions of section 40(a) and 40(a)(ia) will not affect the disallowance made u/s. 37. Accordingly this ground is allowed for statistical purpose. Disallowance of repair and renovation expenses on lease hold premises claimed as revenue expense (ground no. 6)
23. The appellant had claimed a sum of Rs.6,51,28,000 as deduction towards 'repair and renovation expenses' on lease hold premises. The details of the expenses had not been made available to the AO who provided around 11 opportunities to the assessee. In spite of, the assessee could not produce the evidence. Accordingly the disallowance was made u/s. 37 of the I.T. Act where there was no evidences were produced by the assessee in support of its claim. The AO further noted that in the previous AY 2008-09 the similar expenditure was claimed as revenue expenditure and it was disallowed, It was treated as capital in nature by the CIT(A) and depreciation was allowed on the same. The appellant submitted that the expenses were not incurred for creating any new asset but for making the leased ITA Nos.1314 & 1368/Bang/2014 Page 27 of 154 premises usable for the purpose of its business. It was, therefore, claimed to be in the nature of expenditure for routine repairs and renovation in terms of Sec.30(a)(i). In the impugned AY the CIT(A) has directed to the AO for grant of depreciation on repair and renovation expenses on lease hold premises treating it as capital expenditure. He also relied on the appeal for AY 2008-09 in ITA No.189/Addl.CIT LTU/CIT(A)LTU/2011-12 in order dt. 30.09.2013.
24. The ld. AR reiterated the submissions made before the lower authorities and further submitted that this ground deals with the allowance of certain expenditure incurred on repairs and maintenance as revenue expenditure. The Assessing Officer albeit stated in the assessment order that in the past expenditure had been treated as capital but depreciation was allowed. The Assessing Officer not only disallowed the expenditure but did not allow any deduction for depreciation also. In further appeal the CIT (A) following her order for the assessment year 2008-09 has upheld the disallowance of expenditure but allowed a deduction for depreciation. It is submitted that as the issue raised only pertains to the year in which the deduction is to be allowed and having regard to the fact that over a period of time the entire claim made by the Assessee would stand allowed as admittedly the Assessee is entitled to depreciation on the expenditure that is treated as being in the capital field, the Assessee is not pressing the same as long as the department is directed to give depreciation even for future years as consistent with its stand that the expenditure ITA Nos.1314 & 1368/Bang/2014 Page 28 of 154 was in the revenue field the Assessee had not claimed depreciation. This direction to the Assessing Officer is purely consequential.
25. The ld. DR submitted in respect of repairs and renovation expenses on leasehold premises claimed as revenue expenses, depreciation claim already allowed by ld.CIT(A), this ground is infructuous. In the Synopsis filed vide letter dated 31-01-2024 the appellant is agreeing for grant of depreciation, which the Ld.CIT(A) has already agreed and directed the AO to allow depreciation after cause due verification, as per law. Reference in this regard is invited Para 7, on Page 6-7, of the order of Ld.CIT(A). As the claim of depreciation is already allowed by Ld.CIT(A), the GOA No.6 is infructuous.
26. Considering the rival submissions, we noted from the order of assessment that the AO has disallowed u/s. 37 for want of evidences in spite of giving various opportunities to the assessee. However the CIT(A) has treated the expenditure as capital in nature following the previous AY, but the revenue is not in appeal on this point. We noted from the grounds of appeal of the assessee that it has challenged the expenditure not to be treated as capital in nature. We observe from the written synopsis filed by both the sides that ld. AR of assessee agreed for allowing depreciation on the expenditure incurred. However, the ld. DR also agreed for depreciation after due verification. Since in the impugned case during the course of assessment proceedings the assessee could not file any evidences, therefore it cannot be said that ITA Nos.1314 & 1368/Bang/2014 Page 29 of 154 particular expenditure is a capital or revenue in nature, Therefore, considering the written synopsis of both the parties, we remit this issue back to the file of AO for due verification and classification between capital and revenue in nature. If the AO is satisfied with credible evidences, he is directed to give necessary effect either u/s 32 or u/s 37 as per applicability of the provisions as per law. The AO is further directed to give effect of section 32 on the subsequent years if the assessee is eligible as per law. Accordingly this ground is allowed for statistical purpose.
Capital Gains on sale of Integra Shares (ground no. 7)
27. Briefly stated the facts of the case are that the appellant had sold shares of Integra Hindustan Controls Ltd., where it was one of the promoters, to Integra Holdings Switzerland being a non-resident company. The 2,80,500 shares which were purchased in 1990-91 were sold for Rs. 3,16,71,799. In support of the share transfer the appellant had furnished a copy of the form FC-TRS issued by ICICI bank, being the appellant's AD bank appointed by the RBI, valuation certificate of shares given by Manian & Rao (Chartered Accountants) and copy of extracts of the Board's meeting dt. 19.02.2008 covering this transaction. The AO was led to investigate the matter when he found that the price of the shares quoted in the Stock exchange as on 01.04.2008 was Rs. 183 which, if adopted would have led to a sale consideration of Rs. 5,31,31,500 as against which a much lower sale consideration had been disclosed. During the course of assessment ITA Nos.1314 & 1368/Bang/2014 Page 30 of 154 proceedings the AO conducted enquiry from RBI, SEBI and ICICI Bank. The reply submitted by the RBI is as under:-
"as regards your query on the valuation of shares, we advise under the then prevalent regulations, in terms of A.P. (DIR Series) Circular No. dated October 4, 2004, the price of shares transferred by way of sale by resident to a non-resident shall not be less that the ruling market price, in case the shares are listed on stock exchange.
Further, as regards the query as to whether CA can value the listed securities below the value, it is advised that since the company is a listed one, the price shall not be less than the ruling market price."
28. A reply was also submitted by the ICICI Bank vide letter dated 17.8.2012 as under:-
"1. The price at which the shares are transacted had been arrived at based on valuation in accordance with SEBI (Substantial Acquisition of Shars and Takeovers) regulations, 1997. The nature of the transaction is interse transfer of shares among promoters which had been handled based on explanatory statements and guidelines contain in regulation ()(e)(iii)(b) of SEBI (SAST) regulations. The transaction is in compliance with SEBI guidelines, Extant RBI guidelines on issue price of the shares vide RBI master circular on foreign Direct Investment in India dated July 2, 2007 (Page 13) (copy enclosed) was as under:
"QUOTE:
Price of shares issued to persons resident outside India under the FDI Scheme, shall be worked out on the basis of SEBI guidelines in case of listed companies. In case of unlisted companies, valuation of shares has to be done by a Chartered Accountant in accordance with the guidelines issued by the erstwhile Controller of Capital Issues.
2. The said acquisition of shares for interse transfer of shares amongst promoters was eligible for exemption under regulation 3(1) (e)(iii)(b) of SEBI (SAST) guidelines. Accordingly, the price ITA Nos.1314 & 1368/Bang/2014 Page 31 of 154 for the shares had been arrived at based on valuation method prescribed in explanatory statement to regulation 3(1) (e)(iii)(b) of SEBI (SAST) regulations, 1997.
3. The fair valuation report given by Chartered Accountant to the AD Bank is enclosed herewith.
4. The copy of the Bank's statement in support of the remittance of consideration is enclosed herewith".
29. The AO further noted that share purchase agreement (SPA) and MOU were never given by the assessee or by ICICI Bank at the initial stage of investigation. When the enquiries were persistently carried out, suddenly the copies of MOU and SPA emerged into the picture where ICICI Bank had replied that the offer price was mutually agreed between the parties as per the MOU and SPA. Ther AO further noted from the emails/reply that the SPA and MOU appears to be afterthought to support the sale transaction. Had there been any such MOU or SPA on the date mentioned it should have been submitted either to RBI or to ICICI bank in the year 2008 before completing the transaction. The ICICI Bank has given reply on 29.8.2012 that the final price was based on mutual consent of both the seller and the buyer. In the present case the alleged SPA and MOU and its copies were given to ICICI Bank by way of an email only on 31.8.2012., after the final show cause notice dated 21.8.2012. When the ICICI Bank was questioned about the transaction, they had called for clarification from assessee for the first time in the month of August, 2012 (probably after the letter issued by AO dated 21.8.2012).
"8.4 Enquiries from SEBI:
ITA Nos.1314 & 1368/Bang/2014 Page 32 of 154 As the entire transaction is governed by SEBI guidelines a separate letter was addressed to SEBI by seeking the clarification vide letter dated 9-11-2012. The point wise clarification was given by SEBI in their letter dated 10-12-2012 is reproduced below:
Reply to point no.1: Explanation (1) to Regulation 3(1) (e) of Sal Regulation 1997 stipulates , inter alia, that exemption for making an open offer under sub clause (iii)and (iv) shall not be available if inter se transfer of shares is at a price exceeding 25% of the price as determined in terms of Regulation 20(4) and 20(5) of the takeover regulations. The price for frequently and infrequently traded shares is computed in terms of regulation 20(4) and regulation 20(5) of the takeover Regulations respectively. In the instant case, as the shares of the target company came under the category of frequently traded, as defined under the takeover regulations, the price computed in terms of Regulation 20(4) was considered to be as Rs.378.15 per share. Accordingly, the price in the instant case, for claiming aforesaid exemption would have to be less than Rs.473 i.e. Rs.378.15 X 125%.
Reply to Q.No.2 as stated above the inter-c transfer could have been at any price which is less than Rs.473".
The AO after considering the entire document provided by the assessee, ICICI Bank, RBI and SEBI, made analysis and issued show cause notice for quantification of full value of consideration of shares sold which is as under:-
"Share transfer issue: The company has sold shares of Integra Hindustan Controls Ltd to Integra Holdings and capital gain was calculated on the sale consideration of Rs.3,16,71,255/-. During the course of assessment proceedings several enquiries were conducted from RBI, SEBI and ICICI Bank in order to ascertain the market value to determine the valuation. The enquiries conducted from RBI has revealed a fact that the listed securities cannot be transferred/ sold to NRI less than the market value [copy of the RBI letter is enclosed as Annexure-1.]. It is also replied by RBI that the listed shares shall not be valued less than the ruling market price and CA cannot,/ value the shares less than the market price. However, you have contended that as per clause ITA Nos.1314 & 1368/Bang/2014 Page 33 of 154 3(1)(e)(iii) of take over regulations 1997 the shares can be sold at any price between Rs. I and Rs.473 which is 125% premium over the market price of Rs.378, 15. In this connection, a share purchase agreement and MOU was submitted before ICICI bank only on 31,8.2012 [copy of the letter given by ICICI bank as annexure-21 and contended that the offer price was mutually negotiated between both the parties. From the SPA and MOU the name of the authorized signatory of the buyer who has signed on behalf of Integra was not available. Please identify the signatory of the SPA and MOU.
The enquiries conducted from SEBI has also revealed a fact that as per the terms of regulation 20(4) the price of the share of the target company came under the category of frequently traded, the price was considered to be Rs.378.15 per share. The exemption for making an open offer under sub-clause 3(iii)(iv) shall not available if the inter se transfer is at a price exceeding 25% of the price determined in terms of regulation 20(4) and 20(5) of the takeover regulations. Accordingly, in your case for claiming the aforesaid exemption the price would have to be less than Rs.437 (Rs.378.5 x 125%) it is cannot be between Rs.1 and Re.473 as claimed in your submissions. Such contention is against the SEBI regulation and accordingly the ruling market price rate is proposed to be adopted as against Rs.112.91 per share claimed by the company. The SEBI has also confirmed in their written reply dated 12.12.2012 that no such SPA and 11,4011 was given by your company to SEBI at any point of time (Annexure-3).
Under these circumstances kindly explain why the ruling market price shall not be adopted as rate per share as against your claim. Furnish your objections if any".
30. In response to show cause notice the assessee furnished reply on 17.01.2013 by reiterating that the transaction price could be anything between Rs. 1 & 473 and SPA & MOU were signed by Chairman. After verifying the submission, another notice was issued to assessee on 18.1.2013. Meanwhile another letter was issued to RBI by ITA Nos.1314 & 1368/Bang/2014 Page 34 of 154 enclosing the reply given by SEBI and they were requested to furnish the clarification on the sate consideration. The RBI was also asked to comment upon the SPA and MOU. On receipt of the letter RBI has furnished the following reply vide letter dated 21-1-2013 and it is scanned and presented below:-
"Dear Sir, Time barring assessment in the case of M/S. ABB Ltd. - calling information under Section 133(6) of the Income Tax Act Please refer to your letter No.JCIT(LTU)/ABB/Scrutiny/2012-13 dated January 7, 2013 addressed to DGM, RBI, Bangalore on the captioned subject. Our response to your query is tabulated below:
Query Our clarification
1.Whether the claim of the company that the In terms of AP (DIR Series) Circular No.16
value of the share can be anything between dated October 4, 2004 the price of shares
Rs.1 and Rs.473 as claimed in the earlier involving transfer between resident to non- N.
submissions? resident, shall not be less than the ruling
market price, in case the shares are listed on
stock exchange.
2.Whether the reply given by ICICI Bank that Even if the price is mutually agreed as per
the price was mutually agreed between the SPA, the same should be in compliance
parties as per SPA and MOU was correct? It is with FEMA Regulations.
pertinent to mention here that only after this
office enquiry such SPA and MOU was obtained
from assessee company and forwarded to the
undersigned by ICICI Bank. Prima facie
no such SPA or MOU and the same have been
confirmed by SEBI.
3. As it involves foreign exchange transaction As given in 1 above
what could be rate of sale per share?
31. The reply given by the RBI was given to the assessee and their explanation was called which was submitted by the assessee. Finally the AO after considering the entire facts of the case concluded as under:-
"After considering the above correspondence made with RBI, SEBI & ICICI bank and reply from the assessee the AO ITA Nos.1314 & 1368/Bang/2014 Page 35 of 154 computed the capital gain at the rate of Rs.378.15 per share of 2,80,500 observed as under:
The detailed discussion made above has revealed a fact that the assessee company has concealed various particulars in connection with the sale/transfer of shares of Integra Hindustan Controls Ltd., to Integra Holdings AG. As it is listed security it cannot be sold less than the fair market value as per the reply given by RBI in both their letter dated 3-8-2012 and 21-1-2013. It is to be mentioned here that the entire transaction was governed by FEMA, RBI and SEBI guidelines. In the present case the assessee company has created some documents in support of the sham transaction and submitted the same to ICICI bank and I misrepresented the case claiming that the shares can be sold anything between Rs.1 and Rs.473. In the entire process the ICICI bank has also abetted the assessee company in furnishing false information before the AO.
It was categorically replied by RBI in the last letter dated 21.1.2013 that even though the offer price is mutually agreed it should be in line with FEMA guidelines. Hence it is prime fade a violation of FEMA and concealment of income as per IT Act. In order to ascertain the veracity of the two documents namely, SPA and MOU the notice dated 18.1.2013 was issued to the company by calling the where about of Mr. Adrian Oehler on the date of MOU and SPA. However, the assessee company has furnished the above said reply by abstaining themselves from the issue on hand. The entire issue is summarized and concluded as under:
The shares sold by the company to the NRI was a listed security and the price shalt not be less than the ruling market price.
ii. The SPA and MOU were created during the course of assessment proceeding the copies are given to ICICI bank to mislead the revenue.
iii. Even if the price was mutually agreed as per the SPA the same should be in compliance with FEMA Regulations.
Accordingly, for the purpose of computing the capital gain Rs.378.15 [market value} is adopted as against the claim of the assessee of Rs.112.91 per share. It is once again reiterated that ITA Nos.1314 & 1368/Bang/2014 Page 36 of 154 the offer price in this case cannot be negotiated as it was a listed security and the shares were transferred to NRI."
Accordingly the AO computed capital gain of Rs. 9,71,01,240/-.
32. Aggrieved from the above order of the AO, the assessee filed appeal before the ld. CIT(A). The ld. CIT(A) after considering the appellant's submissions and perused the judicial decisions relied upon she observed as under:-
9.9. The first aspect in this matter relates to compliance with the regulation of SEBI & RBI in the matter of transfer of shares by promoters of the group companies involved. Under the SEBI regulation normally the transfer of such shares of quantum involved (15% or more) with takeover of management was to be governed by section 10, 11 & 12 of the SERI (Substantial Acquisition of Shares and Takeovers regulations 1997) (i.e. -
SAST regulation) governed by norms for appropriate public announcement of the share availability for sale, computation of correct offer price, obligations of the acquirer etc. The appellant had applied for exemption from these norms through the panel route but SEBI considered that exemption was to be considered in terms of clause 3(1)(e)(iii)(b) of the Regulations subject to correct determination of the offer price. As informed to the company, and later to the AO u/s 133(6), SEBI had computed the offer price under Regulation 20(4) at Rs. 378.15/share, and had mentioned that for claiming the exemption the price "would have to be less than Rs. 473." The appellant interpreted this to mean that the offer price could be anywhere between Re.1 to Rs. 473. The RBI guideline, however, in terms in its circular of 2004 (supra) had prescribed that the transfer could not be below the ruling market price. The AO read the SEBI Regulation and the RBI guideline harmoniously to hold Rs. 37815_ to be the sale consideration that accrued to the assessee.
9.10. Before the ld. CIT(A) Sri B. Gururaj the Senior Vice president (Legal & Integrity) and Company Secretary appeared on 18.07.2014 to explain the regulatory compliance in respect of ITA Nos.1314 & 1368/Bang/2014 Page 37 of 154 the share transfer to Integra. He submitted that only the SEBI guidelines were applicable for the impugned transaction and that FEMA guidelines monitored by RBI were not applicable to it at all since the deal was between promoters. This interpretation was not taken before the AO and is not even evident from the RBI's response u/s 133(6) to the AO when queried with the specific facts of the appellant's case. The RBI has clearly held that even if the share transfer was done as per mutually agreed upon terms by the promoters "the same should be in compliance with FEMA Regulations" (reply dt. 21.01.2013). Even the RBI Master Circular dt. 02.07.2007 confirms this fact when it says that share transfers by way of sale in "transactions which attract the provision of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997" require RBI approval. The harmonious reading of the appellant's matter in terms of both SEBI and FEMA regulations, therefore, is the correct course of action to be followed. The assessee, instead, had relied upon its Shares Purchase Agreement to justify the rate of Rs. 112.91/share.
9.11. Going merely by the regulatory guideline applicable to the impugned transaction the AO's conclusion derived from the price cap specified in the RBI circular is considered to have been validly drawn. The copy of the SPA filed without production of the original and without submission of the evidence required by the AO regarding the presence in India on the relevant date of the Chairmen of Integra, therefore, necessarily brought the quality of the evidence itself into doubt and dispute. This was especially in view of the ambiguous statement of the witness Sri E. A Karthikeyan who claimed to be a witness only for the "seller side:
Mr. B Gururaj. Buyer side: I am not aware" (answer 36). He could not identify the signature of the buyer (answer 37), nor could recollect when the exact event of signing of the agreement took place (answer 38, 40, 41, 46, 47). He was also unable to state whether the signature of the buyer was already existing on the document when he witnessed the seller placing his signature (answer 48). These ambiguities have naturally raised doubts about the genuineness of the SPA relied upon, especially when it was a plain paper agreement carrying signatures without mentioning even the names of the person who have signed on behalf of the buyer and seller. The short signature scribbled at the ITA Nos.1314 & 1368/Bang/2014 Page 38 of 154 bottom of each page are not clear as to which party they belong to. The extract of the first page and the last portion of the agreement scanned and shown below clearly reflects the lack of fundamental details which are critical to establish the legal validity and genuineness of written contracts.
9.12 Before me the appellant furnished copies of e-mail dt. 12.03.2008 sent by B Gururaj to one Mr. Adrian Oehler of Integra containing two sets of share purchase agreement (scanned) duly signed by Gururaj as PDF document attachments.
Mr. Adrian. was requested in these mails to sign both the sets and return one set for the appellant's record. This is contemporaneous evidence carrying the same date as the share purchase agreement i.e 12.03.2008. The document submitted before the AO caries the signature of both seller and buyer as on back date i.e. on 12.3.2008 whereas in reality on 12th March only Sri Gururaj has appended his signature as the seller. Another e-mail dt. 20.03.2008 from Binal Trivedi, the Company Secretary of Integra Hindustan Controls Ltd., the target company has also been filed wherein he has informed Sri Gururaj that he has received the share purchase agreement in two copies in original from Integra Holding. Considering the signing of the agreement by the buyer on a date subsequent to the date when the agreement is said to have been executed, along with the ambiguities expressed by the witness to the agreement, in my view a question mark continues to exist on the legal validity of the document and its contents. For these reason, I am in agreement with the AO's conclusion that the SPA does not constitute satisfactory evidence of the appellant's claim for the sale transfer price.
9.13 Coming to the legal issue raised by the appellant that consideration u/s 48 cannot be understood as "notional consideration", I find that the judicial decision relied upon are different from the appellant on facts. In the case of K.P Varghese the Hon'ble Supreme Court was adjudicating on a matter u/s 52(2) dealing with understatement of consideration in transfer of a property. This section has been omitted by the Finance Act 1987 w.e.f 1988 and, hence, the principles enunciated in that order cannot hold good for the appellant's facts. In the case of Zeppelin Mobile the Hon'ble ITAT, New Delhi in para 8 and 9 highlighted by the appellant has held that it was not for the IT ITA Nos.1314 & 1368/Bang/2014 Page 39 of 154 Authorities to sit in judgment over violations of the FEMA guidelines, especially when no objection is raised by the RBI in that case to the rate per share adopted by the assessee for which the RBI had accorded approval. In the present matter no approval of RBI is available for the share transfer rate adopted as per the SPA and, infact, the RBI as well as the AD bank which enforced the FEMA Regulations on behalf of RBI, was not even provided a copy of the SPA at the time when the share transfer took place. In any case, I am in respectful disagreement with this stand of the Hon'ble ITAT that violation of FEMA guidelines should not be taken into account by the AO while deciding an issue related to the correct consideration/price for the share transfer. Instead, financial transactions have to be understood by the AO through harmonious reading of the applicable guidelines in so far as they have any bearing on the determination of income.
9.14 In the present matter the appellant holds that capital gains are to be computed on the actual gains and "not on gains that ought to have arisen out of the transaction." This in itself is an indirect admission by the appellant that what ought to have taken place, i.e what was expected under the FEMA guidelines did not take place. The notion of 'consideration accrued' is, therefore, to be understood in this background. The consideration claimed to have been actually received in this case was Rs. 3,16,71,799. But the consideration which accrued according to the AO was Rs. 10,60,71,075, this being is a direct result of the application of the RBI's circular and the FEMA guidelines, similar to the consideration that accrues to a land owner when his land is acquired for public purposes in terms of any government notification which also specifies the value at which the acquisition will be made. Since the contractual arrangement between the appellant and Integra was subject to the final regulatory enforcement of RBI's circular, it could not have agreed for a price lower than the RBI mandated market price. The consideration taken into account by the AO can, therefore, be considered as having accrued to the appellant in terms of section
48. Regarding the appellant's request to apply the proviso to section 112 the relevant provision are reproduced below.
ITA Nos.1314 & 1368/Bang/2014 Page 40 of 154 "Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities [or unit] for zero coupon bond], exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee."
9.15 Although the appellant itself had adopted indexation while computing the capital gains on the Integra share sale its request now to compute the said Long Term Capital Gains without indexation, and with the rate of 10% as per the above proviso, is a legitimate request which is beneficial for the assessee and is allowed under the IT Act. The AO is directed to compute the LTCG in terms of the proviso to Section 112.
9.16 The appellant has also pointed out that the carried forward loss of Rs. 1,55,44,000 determined in the order of CIT(A) in its own case for AY 2005-06 has not been allowed to be set off. The claim appears to be factually correct and the AO is directed to verify the same from records and allow the set off.
In view of the discussion as above the grounds raised in this matter partly succeed."
33. The ld. AR reiterated the submissions made before the lower authorities and has also filed written synopsis which is as under :-
"In this regard, the Assessee had initially entered into a memorandum of understanding on January 25,2008 (see page 341 of Paper Book) and, thereafter, entered into a Share Purchase Agreement with Integra Holdings AG dated 12th March 2008 where by the Assessee sold its entire holding of 2,80,500/- shares at a lump sum of 8,00,000CHF (Swiss Francs). A copy of this agreement is to be found at page 245 to 247 of the Paper Book. In accordance with the FEMA Regulation the Assessee had enclosed Form FC-TRS to its authorized dealer a copy whereof is to be found at page 138 of Paper Book. The Board of Directors of the Assessee had, at a meeting held on 19th February 2008, ITA Nos.1314 & 1368/Bang/2014 Page 41 of 154 authorized the sale of the shares after obtaining of the requisite approvals at a price which would not be less than Rs. 103 per share (see page 195 of Paper Book). As the shares of Integra were listed on the Stock Exchange, Integra Holdings had applied to SEBI for its approval under the SEBI (Substantial Acquisition of Shares and Takeover Regulations) by its letter dated 17th March 2008 a copy whereof is to be found at page 701 of Paper Book. The consideration at which the transfer was to take place was clearly mentioned in the said application. The purchaser obtained an exemption from the applicability of SEBI (Substantial Acquisition of Shares and Takeover Regulations) in terms of the communication dated 25th March 2008 received from SEBI a copy whereof is to be found at page 196 of the Paper Book. The exemption was granted on the basis that the price agreed between the parties at which the shares would be sold would not be less than the price calculated in accordance with regulation 20(5). The Assessee was under a bonafide belief that the price at which it had agreed to sell the shares was not in breach of any regulation as the Assessee had transferred the same at a price in accordance with the price mentioned in the SEBI (Substantial Acquisition of Shares and Takeover Regulations). However, it was subsequently advised that it may be regarded as being in breach of the master circular issued by the Reserve Bank of India on 2nd July 2007 in respect of Foreign Investments in India. Annexure 3 thereof set out the pricing guidelines and in terms thereof a transfer of shares by way of sale under a private arrangement by a person resident in India to a person resident outside India had to be made at the ruling market price in case the shares were listed on the stock exchange. In view thereof, the Assessee made an application to the Reserve Bank of India by its letter dated 6th November 2014 seeking to regularize the transaction and the Reserve Bank of India by its letter dated 22nd December 2014 has accepted the application and given its post facto approval to the transfer of the shares at the price agreed upon. The application to the RBI and their approval thereto are to be found at our application for additional evidence filed under cover of a letter dated 31st March 2023.
The question that arises for consideration is whether the Assessing Officer was justified in substituting the price agreed upon between the parties by the sum of Rs. 378.15 per share ITA Nos.1314 & 1368/Bang/2014 Page 42 of 154 (which was the market value computed in accordance with the SEBI Regulations) and compute the capital gains accordingly. A perusal of para 8 of the assessment order would reveal that the Assessing Officer has sought to cast several doubts about the validity of the transactions but ultimately he has held that as the share that was transferred was listed on the stock exchange it could not to be sold at a price less than the fair market value that is the price at which the share was quoted on the date of the sale albeit that is not the basis of the computation of the gain. The Commissioner of Income-tax (Appeals) has, for the reasons given in para 9 of her order upheld the stand of the Assessing Officer. She has held that the clarification issued by the Reserve Bank of India clearly discloses that even if the share transferred was done as per mutually agreed upon terms by the promoters in accordance with the SEBI Regulations, nevertheless, the same should be in compliance with the FEMA master circular. She has also cast some doubts on the validity of the Share Purchase Agreement in view of some alleged discrepancies between the date of the agreement and the signing thereof.
It is submitted that the scope of total income is delineated in section 5 of the Act and in terms thereof it is only income that accrues or arises in India or that which by a fiction contained in section 9 is deemed to accrue or by the fiction contained in section 7 is deemed to be received in India is chargeable to tax. The charge of capital gains in terms of section 45 has to be in accordance with the computation provision enacted in section 48. Section 48 speaks of the capital gains being computed by reducing from the full value of the consideration that accrues to or is received by the transferor, the expenditure incurred in connection with the transfer, the indexed cost of acquisition and the indexed cost of improvement. The term "full value of the consideration" is not defined in the Act but it is now well settled by a series of judgments of the Supreme Court and other High Courts that the full value of the consideration in the case of a transfer by way of sale (as is the present case) is the price at which the parties have contractually agreed to transfer the asset. It is this price that accrues to and is received by the Assessee. The Legislature has made a few exceptions to this principle by statutorily providing that the agreed consideration can be substituted by the fair market value of the asset that is transferred.
ITA Nos.1314 & 1368/Bang/2014 Page 43 of 154 Section 50B, after its amendment by the Finance Act 2021, provides that the fair value of the capital asset as on the date of the transfer calculated in the prescribed manner shall be deemed to be the full value of the consideration received or accrued as a result of the transfer of the capital asset. Section 50C permits the value adopted or assessed by the authority of State Government for the purpose of payment of stamp duty to be treated as the full value of the consideration in the event the consideration contractually agreed is less than such value. Section 50CA, which was inserted by the Finance Act 2017, enables the Assessing Officer to substitute the contractually agreed consideration by the fair market value of a share which is not listed on the stock exchange (such fair market value being calculated in the manner prescribed) in the event the latter is more than the former. Likewise section 50D permits the fair value of the asset on the date of its transfer to be treated as the full value of the consideration in the event the consideration received or accruing as a result of the transfer of the capital asset is not ascertainable. Section 45(4) also deems the fair market value of the asset on the date of such transfer to be the full value of the consideration received or accruing on the date of the transfer on a distribution of a capital asset by a partnership firm to one of its partners. The other set of provisions which permits substitution of the agreed consideration are to be found in Chapter X of the Act which deals with what is commonly known as transfer pricing provisions where the income arising in an international transaction has to be computed having regard to the arm's length price. It is submitted that none of the aforesaid statutory provisions can have any application in the present case and in fact such is not the case made out by either of the authorities below. Therefore, it was not open to the Assessing Officer to substitute the price agreed upon between two independent parties acting at arm's length by an amount determined in accordance with a price of Rs. 378.15 per share. Assuming for a moment the Assessee had contravened the FEMA Master Circular the consequence would be that it would be open to the Reserve Bank of India to take appropriate steps against the Assessee, but it was not open to the Assessing Officer to substitute the contracted consideration. It is now well settled that assuming there is a default in complying with any regulations it is the regulator enforcing the regulation that is contravened who has to take steps against the defaulter and it is not open to ITA Nos.1314 & 1368/Bang/2014 Page 44 of 154 the tax authorities to do so. In this regard reliance may be placed upon certain decisions of the Tribunal where the revenue urged that the Assessee had failed to comply with the relevant Regulation and, therefore, would lose the benefit of the exemption/deduction that is available to them. This contention has consistently been rejected by the authorities referred to hereinafter.
In any event once the RBI has granted it ex post facto approval it must follow that the price at which the Assessee has transferred the shares is in accordance with the FEMA guidelines and, hence, for this reason too the action of the Assessing Officer of bringing to tax an income which neither accrued nor was received which was sustained by the CIT(A) must be reversed.
It is submitted that the judgment of the Supreme Court and several High Courts support the case of the Appellant. In George Henderson & Co. vs. CIT 66 ITR 622 the Court held that the Assessing Officer was not justified in taking the market value of the assets transferred to be the full value of the consideration. According to the Court the expression "full consideration" in the main part of section 12B(2) of the Indian Income-tax Act, 1922 (which is in para materia with section 48 of the Act) cannot be construed as having a reference to the market value of the asset that is transferred as the expression only means the full value of the thing received by the transferor in exchange for the capital asset transferred by hi. In case of a sale (as is so in the present case) the full value of the consideration is the full sale price actually paid. If that be so, then, it is only the contractually agreed consideration which admittedly was received by the Assessee and, therefore, on this ground also the Assessee is entitled to succeed. The Court further held that the Legislature itself has made a distinction between the two expressions "full value of the consideration" and "fair market value of the assets transferred" and it is provided that if certain conditions are satisfied as mentioned in the first proviso to section 12B(2) the market value of the asset transferred is deemed to be the full value of the consideration. In the present case also under the 1961 Act the Legislature has provided for circumstances in which the fair market value of the assets transferred can be deemed to be ITA Nos.1314 & 1368/Bang/2014 Page 45 of 154 the consideration for the transfer but admittedly none of these circumstances apply.
Thereafter, the Supreme Court in CIT vs. Gillanders Arbuthnot & Co.Ltd. 87 ITR 407 reiterated this position. The Court on the facts of the case came to the conclusion that the transaction was one of sale and not one of exchange as urged by the revenue. Consequently, the Court held that in the case of a sale all that is to be seen is what is the consideration agreed for and it is that consideration alone which could be subject of charge.
In K.P.Varghese vs. ITO 131 ITR 597 the Court had to consider the scope of section 52(2) of the Act. The Court held that even for section 52(2) to apply the revenue has to establish that the consideration actually received by the Assessee is more than what is declared by him and it is only, thereafter, would the provision of section 52(2) apply. The Court further held that if sub-section (2) is construed as being applicable to even to cases where the full value of the consideration in respect of the transfer is correctly declared or disclosed by the Assessee and there is no underestimated consideration which would result in an amount being taxed which has neither accrued to the Assessee nor has been received by him. The Court thus emphasized that an Assessee can be taxed only on what accrues to or is received by him and not on a fictional basis unless the law specifically mandates.
The principle laid down in the aforesaid judgment of the Supreme Court was applied by the Delhi High Court in Arjun Malhotra vs. CIT 403 ITR 354.The Court emphasized that for the year they were concerned with viz., 1999-2000 section 52 stood deleted. The Court held that even if the section was applicable having regard to the judgment of the Supreme Court in the case of K.P. Varghese there could be no addition basis the market value of the asset transferred. The Court further held it was obvious that when section 52 of the Act itself was not applicable the Assessing Officer could not have substituted the actual sale consideration received by the Assessee with another figure stating that this was the market value.
ITA Nos.1314 & 1368/Bang/2014 Page 46 of 154 In Zeppelin Mobiles Systems Gmbh vs. ADIT 154 TTJ 684 the Delhi Bench of the Tribunal had to consider a case where the Assessee had sold shares at the price of Rs.390 per share whereas as per the RBI guidelines the shares could have been sold only at Rs.400/- per share. The Tribunal held that if the Assessee, in view of the Income-tax authorities, had committed any violence of these guidelines, the appropriate course to open to them was to bring it to the notice of the bank. It was the FEMA authorities who are competent to take appropriate action against the Assessee for breach of the guidelines. In the present case, as noted earlier, there has been no breach of the guidelines having regard to the ex post facto approval to the transfer granted by the RBI and, accordingly, the entire basis for the addition that was made by the Assessing Officer and confirmed by the CIT(A) has disappeared."
34. On the other hand the ld. DR was relied on the order of the lower authorities and she further submitted written synopsis which is as under:
"VIOLATION OF SECTION 45(5)(a) OF THE ACT - The issue of sale of shares of Integra Hindustan Controls Ltd., where the appellant was one of the promoters, to an NRI i.e. Intergra Holdings, Switzerland was to be carried out as per RBI regulations as per Section 45(5)(a) of the Income Tax Act. The Ld.CIT(A) has clearly brought out the violation of RBI regulation by the appellant in the following Para :
PARA 9.1 (i) AT PAGE 9 OF ORDER OF Ld.CIT(A) dated 31.07.2014 " (i) RBI regulation in terms of AP(DIR series) circular no.16 dt.14.10.2004 - the price of shares transferred by way of sale by resident to non-resident shall not be less than the ruling market price, in case the shares are listed on stock exchange (the shares of Integra were so listed)."
PARA 9.10 AT PAGE 13-14 OF ORDER OF Ld.CIT(A) dated 31.07.2014 - REFER PAGE 712 OF THE PAPER BOOK FILED BY APPELLANT ITA Nos.1314 & 1368/Bang/2014 Page 47 of 154 " ...........................................................
The RBI has clearly held that even if the share transfer was done as per mutually agreed upon terms by the promoters "the same should be in compliance with FEMA Regulations" (reply dt.21.01.2013). Even the RBI Master Circular dt. 02.07.2007 confirms this fact when it says that share transfers by way of sale in "transactions which attract the provision of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997" require RBI approval. The harmonious reading of the appellant's matter in terms of both SEBI and FEMA regulations, therefore, is the correct course of action to be followed. The assessee, instead, had relied upon its Share Purchase Agreement to justify the rate of Rs.112.91/share."
SHARES SOLD WERE LISTED IN BSE - PRICE OF SALE CANNOT BE LESS THAN LISTED PRICE - RBI vide letter dated 03-08-2012 (Refer Para 8.2 on Pages 37 of order of AO dated 18.02.2013) informed the AO that transfer of shares by a resident to a non-resident cannot be less than the ruling market price.
"ORIGINAL" SHARE PURCHASE AGREEMENT(SPA) DTD.12.03.2008 AND MOU DTD.25.01.2008 NEVER SUBMITTED TO AO & Ld.CIT(A) - AMBIGUITIES IN THE DOCUMENT - FUNDAMENTAL DETAILS UNVERIFIABLE The "ORIGINAL" SPA and MOU were "NEVER PRODUCED" before the AO and Ld.CIT(A).
The very existence of SPA and MOU are under cloud. In this regard the various inconsistencies and inaccuracies are pointed out both by the AO and Ld.CIT(A). Reference is invited to Para 9.11 TO 9.12 on Pages 14-16 of order of CIT(A) dated 31.07.2014 where the Ld.CIT(A) has, after considering all evidences brought on record by AO, stated that ".........................I am in agreement with the AO's conclusion that the SPA does not constitute satisfactory evidence of the appellant's claim for the sale transfer price."
SHARE PURCHASE AGREEMENT DTD.12.03.2008 AND MOU DTD.25.01.2008 NEVER SUBMITTED TO RBI & SEBI ITA Nos.1314 & 1368/Bang/2014 Page 48 of 154 The appellant's claim that price of Rs.112.91 per share was determined as per the Share Purchase Agreement (SPA) dated 12.03.2008 and MOU dated 25.01.2008 was dismissed by both the AO and Ld.CIT(A). Both the RBI and SEBI confirmed that the Share Purchase Agreement (SPA) dated 12.03.2008 and MOU dated 25.01.2008 were never submitted before them.(Refer Para 9.4 TO 9.6 on Pages 11-12 of order of CIT(A) dated 31.07.2014) DELIBERATE AND MISLEADING INTERPRETATION OF CALCULATION OF "OFFER PRICE" AT Rs.378.15/SHARE BY SEBI-DISMISSED BY Ld.CIT(A) - The appellant had tried to mislead and misinterpret the "Offer Price" calculated by SEBI at Rs.378.15, both before AO and Ld. CIT(A). However, the Ld.CIT(A) has placed the facts and the SEBI and RBI regulation in the proper perspective. Reference is invited to Para 9.9 on Pages 13 of order of CIT(A) dated 31.07.2014 where the Ld.CIT(A) has, after considering all evidences brought on record by AO, stated that " ................ As informed to the company, and later to the AO u/s 133(6), SEBI had computed the offer price under Regulation 20(4) atRs.378.15/share, and had mentioned that for claiming the exemption the price "would have to be less than Rs.473." The appellant interpreted this to mean that the offer price could be anywhere between Re.1 to Rs.473. The RBI guideline, however, in terms in its circular of 2004 (supra) had prescribed that the transfer could not be below the ruling market price. The AO read the SEBI Regulation and RBI guideline harmoniously to hold Rs.378.15 to be the sale consideration that accrued to the assessee."
NO EX-POST FACTO APPROVAL BY RBI - "ONLY COMPOUNDING OF CONTRAVENTION UNDER,FEMA,1999" - WRONG CLAIM BY APPELLANT -
TO BE DISMISSED During the course of hearing the appellant vide letter date 31.03.2023 filed 9 additional evidences.
The document at page no. 9 is order of RBI dated 27.05.2015 with subject "COMPOUNDING OF CONTRAVENTION UNDER FEMA, 1999" whereby appellant was levied a penalty ITA Nos.1314 & 1368/Bang/2014 Page 49 of 154 of Rs. 2,85,500/- by RBI. Accordingly, the claim of the appellant, in its synopsis dated 31.01.2024, at page 24, that the RBI had granted ex-post facto approval is incorrect and misleading. RBI had not accorded any ex-post facto approval. RBI had levied penalty upon the appellant for contravention under FEMA, 1999.
CASE LAWS RELIED UPON - NOT RELEVANT TO THE CASE OF APPELLANT - TO BE DISMISSED During the course of hearing before the Hon'ble ITAT, the appellant relied upon the following decisions, in support of its arguments, and the same are to be dismissed as the facts in these decisions are different from the case of the appellant and the same are discussed below:
George Henderson & Co Vs CIT 66ITR 622 - This case law is "NOT" applicable to the case of the appellant for the following reasons :
It is with reference to 1922 Act.
It is "NOT" a transaction covered under Section 45(5)(a) of the I.T.Act,1961.
It is "NOT" a case of sale of shares by resident to non-resident.
The transaction in this case is "NOT" governed by regulations of RBI,FEMA and SEBI.
No contravention of FEMA AND RBI guidelines was established in this case, as in the case of the appellant.
CIT Vs GILLANDERS ARBUTHNOT & Co.Ltd. 87 ITR 407 - This case law is "NOT" applicable to the case of the appellant for the following reasons :
It is with reference to 1922 Act.
It is "NOT" a transaction covered under Section 45(5)(a) of the I.T.Act,1961.
It is "NOT" a case of sale of shares by a resident to non-resident.
ITA Nos.1314 & 1368/Bang/2014 Page 50 of 154 The transaction in this case is "NOT" governed by regulations of RBI,FEMA and SEBI.
No contravention of FEMA AND RBI guidelines was established in this case, as in the case of the appellant.
K.P VARGHESE Vs ITO 131 ITR 597 - This case law is "NOT" applicable to the case of the appellant for the following reasons :
This decision is with reference to Section 52(2) of the Act which is "OMITTTED" by Finance Act 1987 w.e.f 1988.
It is "NOT" a transaction covered under Section 45(5)(a) of the I.T.Act,1961.
It is "NOT" a case of sale of shares by a resident to non-resident.
The transaction in this case is "NOT" governed by regulations of RBI,FEMA and SEBI.
No contravention of FEMA AND RBI guidelines was established in this case, as in the case of the appellant.
ARJUN MALHOTRA Vs CIT 403 ITR 354 - This case law is "NOT" applicable to the case of the appellant for the following reasons :
This decision was decided in favour of appellant as this case relates to A.Y.1999-200 and the AO had wrongly invoked Section 52(2) of the Act which was "OMITTTED" by Finance Act 1987 w.e.f 1988(Para 25). Section 52(2) is not invoked in the case of appellant and, therefore, this decision is "NOT" applicable.
It is "NOT" a transaction covered under Section 45(5)(a) of the I.T.Act,1961.
It is "NOT" a case of sale of shares by a resident to non-resident.
The transaction in this case is "NOT" governed by regulations of RBI,FEMA and SEBI.
ITA Nos.1314 & 1368/Bang/2014 Page 51 of 154 No contravention of FEMA AND RBI guidelines was established in this case, as in the case of the appellant.
ZEPPELIN MOBILES SYSTEMS GMBH Vs ADIT 154 TTJ 684 - This case law is "NOT" applicable to the case of the appellant for the following reasons :
In this case the Hon'ble ITAT had held that it was not for IT authorities to sit in judgement over violations of FEMA guidelines, especially when no objection is raised by the RBI in that case to the rate per share adopted by the assessee for which RBI had accorded approval.
This case is "NOT" relevant to the facts of the case of the appellant "AS NO RBI APPROVAL WAS SOUGHT BY THE APPELLANT". Further, the RBI vide its order dated 27.05.2015 with subject "COMPOUNDING OF CONTRAVENTION UNDER FEMA, 1999" had only levied a penalty of Rs. 2,85,500/- on the appellant. This order proves that no ex-post facto approval was given by RBI.
Accordingly, the order of AO & Ld.CIT(A) may kindly be upheld for adopting rate of Rs.378.15 per share and GOA No.7 may kindly be DISMISSED."
35. Considering the rival submissions mainly the issue involved is that the determination of the sales consideration on the transfer of shares by the assessee company to Integra Holdings, Switzerland being a non-resident company @ Rs.112.91 per share as per the agreed price.
We further noted from Form FC-TRS issued by ICICI Bank which is placed at PB Page 697 to 699 at sl.no.9, the price quoted on the stock exchange is showing Rs.183 as on 01.04.2008, however the price as per valuation guideline it is blank. However, the AO considering the nature of transaction and correspondence with RBI, SEBI & ICICI Bank he applied sales consideration per share @ Rs.378.15 for 2.80,500 shares transferred. The shares were also listed on the BSE ITA Nos.1314 & 1368/Bang/2014 Page 52 of 154 (Bombay stock exchange) In this regard, the assessee submitted form FC-TRA issued by ICICI Bank, a valuation certificate of share given by Manian & Rao, CA and copy of extracts of the minutes of meeting of Board of Directors of the company held on 9.2.008. As per enquiry made by the AO the price of transferred shares by a resident to non- resident, in terms of AP(DIR Series) Circular No.16 dated October 4, 2004 the price of shares involving transfer between resident to non- resident shall not be less than the ruling market price, in case the shares are listed on stock exchange and even if the price is mutually agreed as per SPA, the same should be in compliance with FEMA regulations. He also noted if the foreign exchange transaction is involved, The above price shall be applicable. We noted from the MOU executed on 25.1.2008. We are reproducing some relevant clauses of the MOU which are as under:-
"5. This transaction is subject to approvals/permissions/consent of the Board of Directors, regulatory and/or such other authorities like SEBI, RBI, if any. Seller however shall co- operate and provide assistance to the Buyer in obtaining permission/approval, if any from the regulatory authorities and SEBI/RBI for the transaction.
7. The parties presume that this sale and purchase transaction between the Promoters inter se is exempted from the provisions of SEBI Regulations for the mandatory Open Offer to the public, as the conditions prescribed in the Regulation for the said exemption are satisfied. The Buyer shall however obtain a declaration/confirmation as to the fulfillment of conditions prescribed under the SEBI (Substantial Acquisition & TakeOver) Regulation to ITA Nos.1314 & 1368/Bang/2014 Page 53 of 154 the effect that the Open Offer provision is not triggered.
8. The Buyer shall comply with the required procedural formalities prescribed under SEBI/RB1 regulations.
12. This MOU shall be valid for a period of_60days from the date of signing of this MOU (unless extended thereafter by the Parties with mutual consent) within which the Parties shall conclude the transaction of Sale & Purchase of Shares, in its entirety."
36. We are also reproducing some clauses of the SPA executed on 12.3.2008:-
3. "Upon receipt of the approvals / confirmations from the Securities and Exchange Board of India exempting the transaction under Takeover Regulations as provided in Clause 2 above, the Seller shall execute the Deed of Transfer in favor of the Buyer and handover the executed Transfer Deed together the physical share certificate/s for the entire holding of280,500 equity shares to the Buyer or his duly appointed representative/s for the purpose, immediately on credit of amount to sellers account.
Any Charge levied by the respective bankers for the remittance shall be borne by the respective parties accordingly.
5. The Buyer shall obtain on or before 30th May, 2008 approval from the Securities & Exchange Board of India (SEBI) under Regulation 4 of the SEBI (Substantial Acquisition & Transfer of Shares) Regulation for the purpose of getting exemption to the Buyer from the obligation of making an Open Offer to the other Shareholders of the Target Company, by filing appropriate application in the prescribed format along with the requisite filing fee.
6. The Buyer shall also comply with the required procedural formalities prescribed under SEBI/RBI ITA Nos.1314 & 1368/Bang/2014 Page 54 of 154 regulations in regard to announcement to the stock exchanges, submission of information to RBI at the time of remittance of consideration, etc.
11. The Parties agree that the transaction in its entirety shall be completed on or before 30" May 2008.
Nevertheless, in case of any delay in completion of this transaction due to delay in regulatory approvals and/or in dealing with any issue raised by any regulatory authority, the parties shall co-ordinate with each other and ensure that the transaction is completed smoothly by extending the validity of this Agreement for such further period as may be mutually agreed in writing.
However, neither party shall claim any damage or liability of any nature on the other either by way of penalty or otherwise.
12. This Agreement shall be valid up to 30' May 2008 unless extended for a further period as provided in Clause-12 above. Except for the reasons stated in clause-12 above, this Agreement cannot be renewed for any other purpose."
37. We further noted from the additional evidences filed by the assessee dated 3.4.2023 in terms of Rule 29, we are hereby admit the additional evidence containing page no. 1 to 49. The assessee during the course of proceedings approached to the RBI on 16.4.2013 and subsequent dates also for filing regarding regularization of the transaction and decision regarding the compounding application for contravention under FEMA. We are reproducing some correspondence/order made between the assessee and RBI which are as under:
ITA Nos.1314 & 1368/Bang/2014 Page 55 of 154 ITA Nos.1314 & 1368/Bang/2014 Page 56 of 154
38. The assessee has also enclosed a letter issued by RBI dated 7.4.2015 which is as under:-
39. Further the RBI has passed order for compounding of contravention under FEMA, 1099 dated 27.5.2015 is as under:--
ITA Nos.1314 & 1368/Bang/2014 Page 57 of 154 ITA Nos.1314 & 1368/Bang/2014 Page 58 of 154 ITA Nos.1314 & 1368/Bang/2014 Page 59 of 154 ITA Nos.1314 & 1368/Bang/2014 Page 60 of 154 ITA Nos.1314 & 1368/Bang/2014 Page 61 of 154 ITA Nos.1314 & 1368/Bang/2014 Page 62 of 154
40. It is clear from the above letters issued by RBI from time to time and passed order relating to the compounding of contravention under FEMA 1999 - C.A. No.MPO 3605. We noted from letter dated 22.12.2014 issued by RBI at para No.2 it is clearly mentioned that "we convey our post facto approval from FEMA angle for the transfer of 2,80,500 shares of M/s. Integra Hindustan Controls Ltd. held by M/s.
ABB India Ltd. to non-resident at Rs.112.91 per share in April, 2008, subject to ABB India Ltd. approaching us for compounding for deviation from FEMA pricing guidelines prescribed in terms of regulation 10(A)(b)(iii) of Notification No. FEMA 20/2000-RB dated 3.5.2000 as applicable at the time of the transfer transaction read with para 2.2 (a) of A.P. (DIR Series) Circular No.16 dated 4.10.2004 but not the transaction price. Further it is also clear from the order that the assessee filed an application for compounding for contravention of FEMA regulation and had submitted that the contravention was unintentional and requested that a lenient view may be taken to which the RBI has accepted noted supra in the order.
41. We noted from the letter issued by RBI dated 22.12.2014 which was received by the assessee on 08.01.2015 placed at PB page 25. As per this letter at para no.5, it has been mentioned as under:-
"5. This communication is issued from the foreign exchange angle under the provisions of FEMA and should not be construed to convey the approval by any other statutory authority or Government under any other laws/regulations. If further approval or permission is required from any other regulatory ITA Nos.1314 & 1368/Bang/2014 Page 63 of 154 authority or Government under the relevant laws/regulations, the applicant should take the approval of the concerned agency before effecting the transaction. Further, it should not be construed as regularizing or validating any irregularities, contravention or other lapses, if any, under the provisions of any other laws / regulations."
42. From the above para it is clear that post facto approval was granted to the assessee from FEMA angle only and as per para no. 5 the approval should not be construed as regularizing or validating any irregularities, contravention or other lapses, if any, under the provisions of any other laws / regulations or any regulatory authority or Government. We also noted from Form (See Rule 4 of 5) placed at page No.30 & 31 of PB the assessee has clearly mentioned that applicant is filed for compounding the offence as per RBI Memorandum bearing ED.CO.FID.No.10128/10.21.336/2014-15 dated 22.12.2014. We also note from letter of RBI dated 7.4.2015 at para no.2 that opportunity was granted to assessee for compounding of contravention under FEMA 1999 for personal hearing with the compounding authority for making submission. The RBI has passed order on 7.5.2015 under compounding of contravention under FEMA 1999. As per para No.3 the concerned parties were required to adhere to pricing guidelines, documentation and reporting requirements for such transfers as may be prescribed by Reserve Bank from time to time." Further, in terms of Paragraph 2.2(a) of AP(DIR Series)Circular No.16 dated October 04, 2004, "price of shares transferred by way of sale by resident to a non-resident shall not be less than the ruling market price, in the case the shares are listed on stock exchange."
ITA Nos.1314 & 1368/Bang/2014 Page 64 of 154
43. From the above it is clear that the market price of the listed shares shall not be less than the ruling market price if transfer of share is done by resident to non-resident. The shares were listed on the date of transfer by the assessee(resident) to the transferee(non-resident) company . On going through the entire judgment the RBI has passed order for compounding of contravention under FEMA provision issued in terms of regulation 10(A)(b)(iii) of Notification No.FEMA 20/2000- RB Circular No.16 dated 4.10.2004 for the money brought into India to the tune of Rs.3,16,72,080. From the entire judgment we nowhere find that the fair value of the shares should be considered as Rs.112.91 per share for income tax purpose of .2,80,500 shares. The RBI has clearly stated in case of listed shares the price should not be less than the ruling market price in case of shares are transferred by the resident to non-resident.. The AO has also received reply from RBI vide letter dated 3.8.2012 noted above.
44. Further, we noted from the enquiry made by the AO from SEBI and the SEBI has replied that "The price for frequently and infrequently traded shares is computed in terms of regulation 20(4) and regulation 20(5) of the takeover Regulations respectively. In the instant case, as the shares of the target company came under the category of frequently traded, as defined under the takeover regulations, the price computed in terms of Regulation 20(4) was considered to be as Rs.378.15 per share".
ITA Nos.1314 & 1368/Bang/2014 Page 65 of 154
45. During course of hearing the ld. DR has referred to section 45(a) of the I.T. Act, 1961 for the sake of ready reference, we are reproducing the same as hereunder:
"(5) Notwithstanding anything contained in sub-section (1), where the capital gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law, or a transfer the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, and the compensation or the consideration for such transfer is enhanced or further enhanced by any court, Tribunal or other authority, the capital gain shall be dealt with in the following manner, namely :--
(a) the capital gain computed with reference to the compensation awarded in the first instance60 or, as the case may be, the consideration determined or approved in the first instance by the Central Government or the Reserve Bank of India shall be chargeable as 61[income under the head "Capital gains" of the previous year in which such compensation or part thereof, or such consideration or part thereof, was first received]; and* "
46. From the above section the assessee was required to obtain approval from RBI or from SEBI (Central Government) in the first instance for determination of the consideration , but the assessee has not done on the date of transaction which were mandatory as per provision of Income Tax Act. The arguments of the ld. AR of the assessee is not accepted that the RBI has granted post facto approval for transfer of share at Rs.112.15 per share. It is very much clear from the RBI letter dated 22.12.2014 as per para no.5 noted supra.
ITA Nos.1314 & 1368/Bang/2014 Page 66 of 154
47. Since the purchase and sale of securities are regulated by SEBI, accordingly we confirm the price for sale of 2,80.500 shares is to be considered at Rs.378.15 per share by the assessee company to the non- resident company. Definitely the tax on the income can only be assessed after it comes to the hands of the assessee as per the real income theory propounded by the Honourable Supreme Court in United Commercial Bank v. CIT [1999] 106 Taxman 601/240 ITR 355. Since in the cash on hand the assessee had to obtain approval at the first instance of the specific transactions in terms of section 45, and the purchase and sales price are also governed as per the correspondence with SEBI & RBI on the ruling market price, therefore, the price should be considered as per the ruling market price. therefore, this real income theory will not apply in this case. The ld. AR of the assessee has relied on various judgments in his written synopsis as well as during the course of hearing. In the case laws relied by the ld. AR in the case of George Henderson & Co. Ltd. []TS- 3-SC-1967] it related u/s. 12B of 1922 Act for considering the full value of the consideration. But here in the case on hand is governed by Income Tax Act, 1961, section 45 noted above and the approval is required as mentioned in section 45(5)(a) from the Reserve Bank of India or Central Government (SEBI) but the assessee at the time of transaction did not obtain approval at the first instance of the transaction. As per section 2(22B)(i) has been defined fair market value in relation to capital asset means "the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date".
ITA Nos.1314 & 1368/Bang/2014 Page 67 of 154 In the case of assessee the shares were available for sale in the open market, therefore, the mutual price fixed by the assessee is not accepted for the income tax purpose i.e. dual price of the listed shares of a company without obtaining approval from the regulatory body. The judgment relied by the ld. AR of the assessee in the case of Zeppelin Mobile System GmbH in ITA No.5179/Del/2010 dated 12.4.2013 is also not applicable in the present facts of the case. The ld. CIT(A) as well as the ld. CIT(DR) rightly distinguished this judgment. The other judgments relied by the ld. AR of the assessee has been rightly distinguished by the ld. DR. Here the case on hand is with regard to determination of capital gain of the listed shares transferred to the non-resident by the Indian Resident in the line with section 45 of the I.T. Act. 1961. We do not find any infirmity in the order of the lower authorities. In the result, this ground is dismissed.
Disallowance of deduction of lease rentals as capital expenditure (ground no. 8)
48. Briefly stated the facts of the case are that the assessee had claimed Rs. 31,92,000 as deduction in its computation of income on account of lease rentals on assets acquired through financial lease arrangement, although the same lease rentals had been capitalized in its books of account following the requirement of AS-19. The Assessing Officer took the view that the lease rentals so paid would be capital expenditure as it is the lessee who is the owner of the asset who is entitled for depreciation on the assets put to use in its business. In ITA Nos.1314 & 1368/Bang/2014 Page 68 of 154 coming to his conclusion he relied upon the judgment of the Supreme Court in ABB vs. Industrial Finance Corporation of India Limited 154 Taxman 512 as well as a decision of the Bangalore Bench of the Tribunal in HP India Sales Limited vs. DCIP and of the Delhi Bench of the Tribunal in Rio Tinto vs. ACIT. The Commissioner of Income-tax (Appeals) has upheld the view taken by the Assessing Officer by following the judgment of the Supreme Court. Expressing grievance against the AO's stand as above, the appellant cited the following judicial decisions before the CIT (A) in support of its argument that it was not the owner of the assets in case of finance lease in terms of section 32 for claiming depreciation.
• Banashankari Medical & Oncology Research Centre Ltd. vs JCIT [2009] 316 ITR 407 (Kar.) • CIT vs. Rajasthan State Electricity Board (2007) 160 Taxman 19 (Raj) • CIT vs. Gujarat Gas Company Limited (2009) 3081TR 243 (Guj) • I.C.D.S. Ltd vs. CIT (2013) 29 Taxmann.com 129 (SC)
49. The CIT (A) noted that, according to the appellant the decision of ABB cited by the AO was given u/s 3 of Special Courts Act and was, therefore, not applicable to a matter under the IT Act. After considering the entire submissions the CIT (A) dismissed the ground by observing as under:-
"I have considered the appellant's submissions as above but I am not convinced by the same. The judicial decision of the Rajasthan and. Gujarat High Court cited were on a different set of facts involving sale cum lease back agreements with adjudication on whether they were sham or colorable devices for tax evasion. The decision of the Hon'ble Supreme Court in the appellant's own case u/s 3(1) of Special Court (Trial of Offences Relating to Transactions in Securities) Act may have been rendered under a different law but the understanding of finance lease as discussed in the order, especially in the context of the appellant, is particularly relevant in the ITA Nos.1314 & 1368/Bang/2014 Page 69 of 154 present matter. The Hon'ble Court has referred to various publications to explain the meaning of a lease finance arrangement. The following extract from the judgment is instructional -
"A Finance Lease is one where the Lessee uses the asset for substantially the whole of its useful life and the lease payments are calculated to cover the full cost together with interest charges. It is, thus, a disguised way of purchasing the asset with the help of a loan. SSAP 23 required that assets held under a finance lease he treated on the balance sheet in the same way, as if they had been purchased and a loan had been taken out to enable this....... A finance lease, also called a capital lease, is nothing but a loan in disguise. It is only an exchange of money and does not result into creation of economic services other than that of intermediation ........... The purchase of assets or equipments or machinery is by the borrower. For all practical purposes, the borrower becomes the owner of the property, bears the wear and tear, maintains and operates the machinery/equipment, undertakes indemnity and agrees to bear the risk of loss or damage, if any. He is the one who gets the property insured. lie remains liable for payment of taxes and other charges and indemnity. He cannot recover from the lessor, any of the abovementioned expenses. The period of lease extends over and covers the entire life of the property for which it may remain useful divided either into one term or divided into two terms with clause for renewal. In either case, the lease is non-cancellable."
All the above said features are available in the transaction entered into by the appellant. In addition, we find that the registration of the 56 cars stood in the name of the appellant from the very beginning and on payment of full amount including termination fee, as agreed upon, nothing more was needed to be done to vest the appellant with ownership and only loan documents were needed to be discharged and cancelled.
There are certain tax benefits which by styling the transaction like a financial lease become available to the lessor (financier) and the lessee (borrower) both. Accounting standards have been devised consistently with which the entries are made in the accounts so as to satisfy the requirements of tax laws and to avail the best benefits by way of tax planning to both the parties."
ITA Nos.1314 & 1368/Bang/2014 Page 70 of 154 The above description of the terms under which the vehicles were acquired under finance lease arrangement by the appellant by paying lease rentals in FY 2008-09 is identical to the above arrangement. It is, therefore, held that ownership of the asset was with the appellant under the arrangement and, hence, the payment towards lease rentals had been correctly capitalized in the books of account. To deviate from this practice in the statement of income by claiming lease rental as revenue expenses is clearly not justified. The facts in the case of Banashankari Medical and Oncology Research of the jurisdictional High Court are different since the Hon'ble Court has held there that, "the equipments are not owned by the assessee." (para 5). The same therefore, is considered inapplicable in the present matter where the Hon'ble Supreme Court's decision has been given on an identical finance lease arrangement in case of the appellant itself. This ground, therefore, fails."
50. The ld. AR of the assessee reiterated the submissions made before the lower authorities and further submitted that the appellant has entered into lease agreements primarily with Kotak Mahindra Primus Limited and Ford Credit of India Limited the details of the lease rentals payable are to be found at page 422 of the Paper Book. In terms of the Lease Agreement the Assessee is not the owner of the asset but merely has a right to use the asset during the tenure of the lease. However, having regard to the requirements of the Accounting Standard the Assessee has to capitalize these lease assets in its books. Nevertheless, as in law the Assessee is not the owner of the assets it has not claimed depreciation in respect thereof whilst computing its income chargeable to tax but instead has claimed a deduction for the lease rentals that it is contractually bound to pay. This treatment given by the Assessee is supported by the judgment of the Supreme Court in ICDS vs. CIT 350 ITR 527 where the Supreme Court held that the as ITA Nos.1314 & 1368/Bang/2014 Page 71 of 154 the lessor was the owner of the asset it was entitled to depreciation on the assets so leased during the period of the lease. The Court also rejected the contention of the revenue that under the Motor Vehicles Act it was the lessee who was registered as the owner and, therefore, for tax purposes too it must be regarded as the owner. This view has been applied by several High Courts as well as the Tribunal in a series of judgments thereafter. In fact in Hewlett Packard India Sales Private Limited vs. CIT 430 ITR 460 the Karnataka High Court has reversed the order of the Tribunal dated 9th January, 2012 denying the claim for depreciation. The judgment of the Supreme Court in Asea Brown Boveri vs. Industrial Finance Corporation of India Limited arose from an appeal under section 10 of the Special Courts (Trial of Offences Relating to Transactions in Securities) Act 1992 and was delivered on the following facts. The Appellant therein had entered into a Lease Finance Agreement in terms whereof it had taken certain cars under lease finance. The Fairgrowth Financial Services Limited became a notified party under section 3(2) of the Special Courts Act due to certain illegal transactions. The Central Government appointed the Respondent in the appeal to be the custodian of the Fairgrowth Financial Services Limited and the Appellant continued to pay the lease rentals to the Respondent in lieu of Fairgrowth Financial Services Limited in terms of the agreement. It was conceded before the Supreme Court that so far as the transactions between the Fairgrowth and the Appellant as evidenced by the agreement dated 4th December 1990 is concerned, it is a transaction of lease finance. In view of this ITA Nos.1314 & 1368/Bang/2014 Page 72 of 154 concession, the Court held that the purchase of assets is by the borrower and for all practical purposes the borrower becomes the owner of the property. The Court also noted that the registration of the cars stood in the name of the Appellant from the very beginning and on payment of the full amount including the depreciation if agreed upon nothing more was needed to be done to vest the Appellant with the ownership of the assets. However, the Court also noted that there are certain tax benefits which by styling the transaction like a financial lease become available to the lessor and the lessee both. However, the Court held that in so far as the Special Courts Act is concerned it is the provision of that act which would apply. Keeping in view the real nature of the transactions and ascertaining the real intention of the contracting parties. In these circumstances, the Court held that at the highest the Appellant could be called upon to pay the balance amount of the lease rentals but could not have been directed to deliver the cars to the Custodian. It is submitted that this judgment of the Supreme Court is to be confined to the provision of the Special Courts Act and cannot be applied to the provisions of the Income-tax Act as the Learned Judges themselves have observed. In fact the Supreme Court in a subsequent decision of the ICDS has itself held that the lessor is the owner of the asset and is entitled to depreciation thereon. A fortiorari the lessee cannot be the owner and, thus, must be allowed a deduction for the lease rental paid by it. The judgment of the Supreme Court in the case of Asea Brown Boveri Limited has also been considered by the Tribunal in HP India Sales Ltd vs DCIT ITA No ITA Nos.1314 & 1368/Bang/2014 Page 73 of 154 683/Bang/2010 dated 09.11.2012. The decision of the Tribunal relied upon in the case of HP Sales Private Limited by the Assessing Officer is contrary to the view taken by the High Court in that very Assessee itself. In fact there are series of decisions of the Bangalore Bench of the Tribunal thereafter where also the claim for deduction of the lease rentals by the lessee and depreciation by the lessor stands allowed. In these circumstances, it is submitted that the orders of both the authorities below should be reversed and the claim be allowed.
51. The ld. DR submitted that the deduction on lease rentals on assets acquired through financial lease is against the judgement of Hon'ble Apex Court of the appellant in its own case. Therefore the ground taken by the assessee is liable to be dismissed and referred the Para 13 TO 13.3 on Pages 22-25 of order of CIT(A) dated 31.07.2014). She further submitted that the ld. CIT(A) in para 13.2 on Page 23 of the order has reproduced the findings of the Hon'ble Supreme Court in appellant's own case i.e. ABB Ltd. Vs Industrial Finance Corporation of India 154 Taxmann 512 by stating that "The decision of the Hon'ble Supreme Court in the appellant's own case u/s 3(1) of Special Court (Trial of Offences Relating to Transactions in Securities) Act may have been rendered under a different law but the understanding of finance lease as discussed in the order, especially in the context of the appellant, is particularly relevant in the present matter ................................................"
ITA Nos.1314 & 1368/Bang/2014 Page 74 of 154
52. Based on the decision of the Hon'ble Supreme Court the Ld.CIT(A) upheld the disallowance of claim of deduction of Rs.31,92,187 made in the Computation of Income as lease rentals on finance leased assets. Accordingly, the addition of Rs. 31,92,187 sustained by the Ld.CIT(A) may please be upheld.
53. Considering the rival submissions the assessee has claimed in its computation of Rs.31,92,000 acquired as finance lease arrangements and for complying the Accounting Standard the assessee has capitalized and no depreciation has been claimed on such assets. we noted from the submissions made the Assessee is not the owner of the leased assets but merely it has right to use the assets during the tenure of the lease and the assessee is contractually bound to pay lease rental charges. The ld. AR of the assessee relied on the judgment of Hon'ble Jurisdictional High Court in the case of Hewlett- Packard India Sales (P.) Ltd vs CIT reported in [2021] taxmann.com 238 ( Karnataka). During the course of hearing, the ld. AR of assessee has relied on the judgment of I.C.D.S. Ltd. v. CIT [2013] 29 taxmann.com 129 (SC), which is latest judgment dated January, 2013 in which it has been held that twin conditions must be satisfied for claiming of depreciation i.e., (i) ownership and (ii) usage for business. Here the assessee is not the owner accordingly the twin conditions have not been satisfied. There is no doubt that the assets have been used for the purpose of business. Accordingly the assessee is eligible for claim of revenue expenditure on lease rent payments. We are extracting the relevant parts of the judgment hereunder:-
ITA Nos.1314 & 1368/Bang/2014 Page 75 of 154 "19. We may now advert to the first requirement i.e. the issue of ownership. No depreciation allowance is granted in respect of any capital expenditure which the assessee may be obliged to incur on the property of others. Therefore, the entire case hinges on the question of ownership; if the assessee is the owner of the vehicles, then he will be entitled to the claim on depreciation, otherwise, not.
20. In Mysore Minerals Ltd. v. CIT [1999] 106 Taxman 166 (SC), this Court said thus:
"...authorities shows that the very concept the depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset is utilizing the capital asset and thereby losing gradually investment caused by wear and tear, and would need to replace the same by having lost its value fully over a period of time."
21. Black's Law Dictionary (6th Edn.) defines 'owner' as under:
"Owner. The person in whom is vested the ownership, dominion, or title of property; proprietor. He who has dominion of a thing, real or personal, corporeal or incorporeal, which he has a right of enjoy and do with as he pleases, even to spoil or destroy it, as far as the law permits, unless he be prevented by some agreement or covenant which restrains his right.
The term is, however, a nomen generalissimum, and its meaning is to be gathered from the connection in which it is used, and from the subject-matter to which it is applied. The primary meaning of the word as applied to land is one who owns the fee and who has the right to dispose of the property, but the terms also included one having a possessory right to land or the person occupying or cultivating it.
The term "owner" is used to indicate a person in whom one or more interests are vested his own benefit. The person in whom the interests are vested has 'title' to the interests whether he holds them for his own benefit or the benefit of another. Thus the term "title" unlike "owner".."
It defines the term 'ownership' as -
ITA Nos.1314 & 1368/Bang/2014 Page 76 of 154 "Collection of right to use and enjoy property, including right to transmit it to others.... The right of one or more persons to possess or use a thing to the exclusion of others. The right by which a thing belongs to some one in particular, to the exclusion of all other persons. The exclusive right of possession, enjoyment or disposal; involving as an essential attribute the right to control, handle, and dispose."
The same dictionary defines the term "own" as 'To have a good legal title'.
These definitions essentially make ownership a function of legal right or title against the rest of the world. However, as seen above, it is "nomen generalissimum, and its meaning is to be gathered from the connection in which it is used, and from the subject-matter to which it is applied."
22. A scrutiny of the material facts at hand raises a presumption of ownership in favour of the assessee. The vehicle, along with its keys, was delivered to the assessee upon which, the lease agreement was entered into by the assessee with the customer. Moreover, the relevant clauses of the agreement between the assessee and the customer specifically provided that:
(i) The assessee was the exclusive owner of the vehicle at all points of time;
(ii) If the lessee committed a default, the assessee was empowered to re-possess the vehicle (and not merely recover money from the customer);
(iii) At the conclusion of the lease period, the lessee was obliged to return the vehicle to the assessee;
(iv) The assessee had the right of inspection of the vehicle at all times.
For the sake of ready reference, the relevant clauses of the lease agreement are extracted hereunder:-
"2. Lease Rent The lessee shall, during the period of lease punctually pay to the lessor free of any deduction whatsoever as rent for the assets the ITA Nos.1314 & 1368/Bang/2014 Page 77 of 154 sum of moneys specified in the Schedule 'B' hereto. All rents shall be paid at the address of the Lessor shown above or as otherwise directed by the Lessor in writing. The rent shown in Schedule 'B' shall be paid month on 1st day of each month and the first rent shall be paid on execution thereof.
4. Ownership The assets shall at all times remain the sole and exclusive property of the lessor and the lessee shall have no right, title or interest to mortgage, hypothecate or sell the same as bailee
9. Inspection The Lessor shall have the right at all reasonable time to enter upon any premises where the assets is believed to be kept and inspect and/or test the equipment and/or observe its use.
18. Default If the lessee shall make default in payment of moneys or rent payable under the provisions of this agreement, the Lessee shall pay to the Lessor on the sum or sums in arrears compensation at the rate of 3% per month until payment thereof, such compensation to run from the day to day without prejudice to the lessor's rights under any terms, conditions and agreements herein expressed or implied. All costs incurred by the Lessor in obtaining payment of such arrears or in endeavoring to trace the whereabouts of the equipments or in obtaining or endeavouring to obtain possession thereof whether by action, suit or otherwise, shall be recoverable from the lessee in addition to and without prejudice to the lessors right for breach of this lease.
19. Expiration of Lease:
Upon the expiration of this Lease, the Lessee shall deliver to the Lessor the assets at such place as the Lessor may specify in good repair, condition and working order. As soon as the return of the asset the Lessor shall refund the amount of security deposit. If the lessee fails to deliver the equipment to the Lessor in accordance with any direction given by the Lessor, the Lessee shall be deemed to be the tenant of the assets at the same rental and upon ITA Nos.1314 & 1368/Bang/2014 Page 78 of 154 the same terms herein expressed and such tenancy may be terminated by the Lessor immediately upon default by the lessee hereunder or upon 7 days notice previously given.."
23. The Revenue's objection to the claim of the assessee is founded on the lease agreement. It argued that at the end of the lease period, the ownership of the vehicle is transferred to the lessee at a nominal value not exceeding 1% of the original cost of the vehicle, making the assessee in effect a financer. However we are not persuaded to agree with the Revenue. As long as the assessee has a right to retain the legal title of the vehicle against the rest of the world, it would be the owner of the vehicle in the eyes of law. A scrutiny of the sale agreement cannot be the basis of raising question against the ownership of the vehicle. The clues qua ownership lie in the lease agreement itself, which clearly point in favour of the assessee. We agree with the following observations of the Tribunal in this regard:
"20. It is evident from the above that after the lessee takes possession of the vehicle under a lease deed from the appellant- company it (sic.) shall be paying lease rent as prescribed in the schedule. The ownership of the vehicles would vest with the appellant-company viz., ICDS as per clause (4) of the agreement of lease. As per clause (9) of the Lease agreement, M/s. ICDS is having right of inspection at any time it wants. As per clause (18) of the Lease agreement, in case of default of lease rent, in addition to expenses, interest etc. the appellant company is entitled to take possession of the vehicle that was leased out. Finally, as per clause (19), on the expiry of the lease tenure, the lessee should return the vehicle to the appellant company in working order.
21. It is true that a lease of goods or rental or hiring agreement is a contract under which one party for reward allows another the use of goods. A lease may be for a specified period or in perpetuity. A lease differs from a hire purchase agreement in that lessee or hirer, is not given an option to purchase the goods. A hiring agreement or lease unlike a hire purchase agreement is a contract of bailment, plain and simple with no element of sale inherent. A bailment has been defined in S.148 of the Indian Contract Act, as "the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the ITA Nos.1314 & 1368/Bang/2014 Page 79 of 154 purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them.
22. From the above discussion, it is clear that the transactions occurring in the business of the assessee-appellant are leases under agreement, but not hire purchase transactions. In fact, they are transactions of 'hire'. Even viewed from the angle of the author of 'Lease Financing and Hire Purchase', the views of whom were discussed in pages 16 and 17 of this order, the transactions involved in the appellant business are nothing but lease transactions.
23. As far as the factual portion is concerned now we could come to a conclusion that leasing of vehicles is nothing but hiring of vehicles. These two aspects are one and the same. However, we shall discuss the case law cited by both the parties on the point."
24. The only hindrance to the claim of the assessee, which is also the lynchpin of the case of the Revenue, is Section 2(30) of the MV Act, which defines ownership as follows: -
""owner" means a person in whose name a motor vehicle stands registered, and where such person is a minor, the guardian of such minor, and in relation to a motor vehicle which is the subject of a hire-purchase agreement, or an agreement of lease or an agreement of a hypothecation, the person in possession of the vehicle under that agreement."
25. The general opening words of the Section say that the owner of a motor vehicle is the one in whose name it is registered, which, in the present case, is the lessee. The subsequent specific statement on leasing agreements states that in respect of a vehicle given on lease, the lessee who is in possession shall be the owner. The Revenue thus, argued that in case of ownership of vehicles, the test of ownership is the registration and certification. Since the certificates were in the name of the lessee, they would be the legal owners of the vehicles and the ones entitled to claim depreciation. Therefore, the general and specific statements on ownership construe ownership in favour of the lessee, and hence, are in favour of the Revenue.
ITA Nos.1314 & 1368/Bang/2014 Page 80 of 154
26. We do not find merit in the Revenue's argument for more than one reason: (i) Section 2(30) is a deeming provision that creates a legal fiction of ownership in favour of lessee only for the purpose of the MV Act. It defines ownership for the subsequent provisions of the MV Act, not for the purpose of law in general. It serves more as a guide to what terms in the MV Act mean. Therefore, if the MV Act at any point uses the term owner in any Section, it means the one in whose name the vehicle is registered and in the case of a lease agreement, the lessee. That is all. It is not a statement of law on ownership in general. Perhaps, the repository of a general statement of law on ownership may be the Sale of Goods Act; (ii) Section 2(30) of the MV Act must be read in consonance with sub-sections (4) and (5) of Section 51 of the MV Act, which were referred to by Mr. S. Ganesh, learned senior counsel for the assessee. The provisions read as follows: -
"(4) No entry regarding the transfer of ownership of any motor vehicle which is held under the said agreement shall be made in the certificate of registration except with the written consent of the person whose name has been specified in the certificate of registration as the person with whom the registered owner has entered into the said agreement.
(5) Where the person whose name has been specified in the certificate of registration as the person with whom the registered owner has entered into the said agreement, satisfies the registering authority that he has taken possession of the vehicle from the registered owner owing to the default of the registered owner under the provisions of the said agreement and that the registered owner refuses to deliver the certificate of registration or has absconded, such authority may, after giving the registered owner an opportunity to make such representation as he may wish to make (by sending to him a notice by registered post acknowledgment due at his address entered in the certificate of registration) and notwithstanding that the certificate of registration is not produced before it, cancel the certificate and issue a fresh certificate of registration in the name of the person with whom the registered owner has entered into the said agreement:
ITA Nos.1314 & 1368/Bang/2014 Page 81 of 154 Provided that a fresh certificate of registration shall not be issued in respect of a motor vehicle, unless such person pays the prescribed fee:
Provided further that a fresh certificate of registration issued in respect of a motor vehicle, other than a transport vehicle, shall be valid only for the remaining period for which the certificate cancelled under this sub-section would have been in force."
Therefore, the MV Act mandates that during the period of lease, the vehicle be registered, in the certificate of registration, in the name of the lessee and, on conclusion of the lease period, the vehicle be registered in the name of lessor as owner. The Section leaves no choice to the lessor but to allow the vehicle to be registered in the name of the lessee Thus, no inference can be drawn from the registration certificate as to ownership of the legal title of the vehicle; and (iii) if the lessee was in fact the owner, he would have claimed depreciation on the vehicles, which, as specifically recorded in the order of the Appellate Tribunal, was not done. It would be a strange situation to have no claim of depreciation in case of a particular depreciable asset due to a vacuum of ownership. As afore-noted, the entire lease rent received by the assessee is assessed as business income in its hands and the entire lease rent paid by the lessee has been treated as deductible revenue expenditure in the hands of the lessee. This reaffirms the position that the assessee is in fact the owner of the vehicle, in so far as Section 32 of the Act is concerned.
27. Finally, learned senior counsel appearing on behalf of the assessee also pointed out a large number of cases, accepted and unchallenged by the Revenue, wherein the lessor has been held as the owner of an asset in a lease agreement. CIT v. A.M. Constructions [1999] 238 ITR 775 (AP); CIT v. Bansal Credits Ltd. [2003] 259 ITR 69/126 Taxman 149 (Delhi); CIT v. M.G.F. (India) Ltd. [2006] 285 ITR 142/[2007] 159 Taxman 335 (Delhi); CIT v. Annamalai Finance Ltd. [2005] 275 ITR 451/146 Taxman 627 (Mad.). In each of these cases, the leasing company was held to be the owner of the asset, and accordingly held entitled to claim depreciation and also at the higher rate applicable on the asset hired out. We are in complete agreement with these decisions on the said point.
ITA Nos.1314 & 1368/Bang/2014 Page 82 of 154
28. There was some controversy regarding the invoices issued by the manufacturer - whether they were issued in the name of the lessee or the lessor. For the view we have taken above, we deem it unnecessary to go into the said question as it is of no consequence to our final opinion on the main issue. From a perusal of the lease agreement and other related factors, as discussed above, we are satisfied of the assessee's ownership of the trucks in question.
29. Therefore, in the facts of the present case, we hold that the lessor i.e. the assessee is the owner of the vehicles. As the owner, it used the assets in the course of its business, satisfying both requirements of Section 32 of the Act and hence, is entitled to claim depreciation in respect of additions made to the trucks, which were leased out.
30. With regard to the claim of the assessee for a higher rate of depreciation, the import of the same term "purposes of business", used in the second proviso to Section 32(1) of the Act gains significance. We are of the view that the interpretation of these words would not be any different from that which we ascribed to them earlier, under Section 32 (1) of the Act. Therefore, the assessee fulfills even the requirements for a claim of a higher rate of depreciation, and hence is entitled to the same."
54. Respectfully following the above judgments of Hon'ble Jurisdictional High Court & Apex Court , we hold that the assessee is eligible to claim the lease rent as revenue expenditure. The case law relied by the revenue is not applicable in the present facts of the case. Accordingly this ground is allowed.
Disallowance of commission expenditure u/s 40(a) (Ground no. 9)
55. Briefly stated the facts of the case in respect of commission and discount expenditure debited by the assessee to the Profit & Loss account at Rs.5,62,02,000 and Rs.3,21,35,000 respectively, totalling to Rs. 8,83,37,000, it was claimed that that the amount was incurred ITA Nos.1314 & 1368/Bang/2014 Page 83 of 154 towards commission paid to domestic agents and foreign agents; It was also stated that the Company had deducted taxes on the commission payments of Rs. 2,04,82,000 made to domestic agents but no taxes had been deducted on an amount of Rs. 6,78,55,000 representing commission on payments made to foreign agents. The appellant submitted that the non resident agent operates outside the country and no part of its income arises in India and, hence, no taxes were deducted in its case. Reliance was placed on Circular 786 dated 7th February 2000 issued by the CBDT. The AO had recorded that in spite of notices dt. 04.06.2012, 25.07.2012, 22.08.2012, 02.11.2012 & 18.01.2013 the appellant had been unable to furnish evidence regarding the foreign agent who had earned export commission from the assessee. He, therefore, held that the burden of proof of expenditure claimed u/s 37(1) had not been satisfied by the assessee and since tax had also not been deducted u/s 195, he disallowed Rs. 6,78,55,000 u/s 37(1) and 40(a). During the course of appeal haring the appellant was required to furnish evidence in the form of agreement with the foreign agent showing the nature of services performed by them, the location of services performed, along with the copy of their ledger account and sample invoices from the books of the appellant. The appellant filed ledger extract in respect M/s ABB International Marketing Ltd., copy of sample general vouchers and invoices with respect to the commission paid.
56. The Assessee had incurred an expenditure by way of commission payable both to residents and non-residents as well as on ITA Nos.1314 & 1368/Bang/2014 Page 84 of 154 Discount. The aggregate expenditure incurred was in a sum of Rs.8,83,37,000/-. The Assessee had deducted tax at source on a commission sum of Rs. 2,04,82,000/- and no tax was deducted on the balance amount of Rs. 6,78,55,000/-. The amounts on which tax was not deducted at source represented payments made to foreign commission agents who were situated outside India and were rendering services only outside India in connection with procurement of export orders. The Assessee had not deducted tax at source on these payments on the basis that the amounts so paid was not chargeable to tax in India as the services were rendered only outside India. The Assessing Officer took the view that as the Assessee had failed to identify the parties/agents and had not adduced any evidence to establish the services rendered, the expenditure incurred was disallowed by him both under section 37(1) of the Act as well as by invoking the provisions of section 40(a)(i).
57. The ld. AR submitted that the ld. Commissioner of Income (Appeals) noted that the agreements entered into with the parties were not filed before her and in the absence thereof as it was not possible to verify the Assessee's claim and the same had to be disallowed. First of all it is submitted that both the authorities have failed to appreciate that the expenditure a commission was only a sum of Rs.5,62,02,000/- as is apparent from the Schedule to the Profit and Loss account (see page 26 of Paper Book) and the Discount Expenditure was 3,21,35,000/- ( see page 26 of Paper Book). The combined total amount is Rs.8,83,37,000/-(5,62,02,000+3,21,35,000). Therefore, the disallow-
ITA Nos.1314 & 1368/Bang/2014 Page 85 of 154 ance, if any, could only have been in a sum of Rs. 3,57,20,000/- (Total commission 5,62,02,000 - 2,04,82,000 [commission on which TDS deducted] ).It is submitted that the Assessee had filed copies of the commission ledger account to whom the payment had to be made. The Assessee was regularly paying commission to this party and, in the past, no such disallowance was made. The expenditure was thus allowable under section 37(1) and having regard to the fact that amount was not chargeable to tax in India the question of disallowing the same by invoking the provision of section 40(a)(i) would also not arise.
58. The ld. DR submitted in respect of the assessee was given ample opportunities for filing details which is clear from Para 14 on Pages 25-26 of order of CIT(A) In spite of it could not file any evidences before the lower authorities for substantiating its payment made towards commission. She further submitted that before Hon'ble ITAT the appellant filed Additional Evidence vide letter dated 10.03.2023. The additional evidence contains agreement copy which comes into force on 05/07/2010 and the Board's resolution is effective from 24/08/2010. Both these documents relate to A.Y.2011-12 and are not relevant to the current assessment year i.e. A.Y.2009-10 and, therefore, it is requested that the additional evidence may kindly be dismissed. She further submitted that on 14.12.2012 the appellant had filed broad TDS reconciliation before AO which contained total commission [Rs.5,62,02,000] and discount [Rs.3,21,35,000] totalling to Rs.8,83,37,000 . Out of this appellant claimed before the AO that on domestic commission of Rs.2,04,82,000 TDS was deducted. On the ITA Nos.1314 & 1368/Bang/2014 Page 86 of 154 balance amount of Rs.6,78,55,000 no TDS was deducted. Beyond this the appellant FAILED to produce any details regarding identity of parties, agreement copies invoices raised, percentage at which payments were made , duration of service etc. before the AO, Ld.CIT(A) and even before Hon'ble ITAT till date. The contention of the appellant that disallowance could only have been of Rs.3,57,20,000 [Rs.5,62,02,000- Rs.2,04,82,000] is baseless as both the AO and Ld.CIT(A) sought for details for the entire amount of Rs.8,83,37,000, and appellant could only furnish details on domestic commission of Rs.2,04,82,000, on which TDS was deducted. On the balance amount of Rs.6,78,55,000 no details are produced till date even before Hon'ble ITAT. Accordingly she requested that the order of the lower authorities should be restored.
59. Considering the rival submissions the assessee has debited the expenditure like commission, interest, rent, legal and professional expenses, etc. into the Profit & Loss account. The assessee was asked to substantiate with evidences towards expenditure and TDS deducted and reconciliation statement. The assessee submitted reconciliation statement towards domestic commission paid of Rs.2,04,82,000 where the balance amount of Rs.6,78,85,000 no TDS was made. The assessee was given various opportunities But it could not substantiate with credible evidences.. The assessee submitted before the AO that as per CBDT Circular No.786 dated 7.2.2000 in which it has been clarified that the assessee was not required to deduct TDS u/s. 195 on payment made to non-resident for export commission. In the present ITA Nos.1314 & 1368/Bang/2014 Page 87 of 154 case during the course of assessment proceedings the assessee failed to produce any evidence regarding the foreign agent who had earned export commission from assessee. The assessee was also unable to produce any agreement made with the recipients (foreign agents /non- residents) and any evidences towards services rendered by the non- resident. Accordingly it was disallowed u/s. 37(1). The AO also noted that assessee has not deducted TDS, therefore section 40(a) will also apply in this case. During the course of appellate proceedings the appellant filed ledger extract in respect of M/s. ABB International Marketing Ltd., copy of sample general voucher and invoices with respect to commission paid were filed. From the ledger extracts it was noted by the CIT(A) that payments were towards base fee and success fee. After considering the entire submissions the CIT(A) has observed as under:-
"14.3 The ledger account shows payments towards "base fee" and "success fee". The appellant explained that 'base fee' was charged when the holding company gave leads to the appellant in respect of prospective customer/projects for further pursuit. In case any of the leads were converted into a actual contract a higher rate was charged as "success fee". It was stated to be paid as per agreed upon rates but the AR also candidly admitted that copy of such agreements were not available for submission. He also could not specify what was the percentage of contracts on which base/success fee was not paid to the holding company. In other words, it is not possible to verify the appellant's claim on facts that it has paid commission for certain services performed by the holding company in terms of information about prospective sales/business opportunity. The duration of services, their terms and actual benefit gained therefrom, therefore, remain unverifiable claims.
ITA Nos.1314 & 1368/Bang/2014 Page 88 of 154 14.4 From the ledger account it is also seen that sometimes the success fee has also been refunded (eg. USD 28,560 on 24.10.2008) thereby indicating that the facts in respect of conversion of each base fee charged "lead" into a successful "contract" are not always a unidirectional certainty. The success fee appears to be charged separately for "India market" and "SAARC". The relevance of the fee for the India market is not immediately understood since the appellant being based out of the country, is expected to have more immediate local knowledge content about prospective sales opportunities compared to a holding company located in Europe. The business relevance of the payment, therefore, is also in doubt and has not been established with proper evidence by the appellant. I see no reason, therefore, to interfere with the finding of the AO in this matter. The ground raised is, accordingly, dismissed."
60. We noted that the assessee has filed additional evidence under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963 and has enclosed the agreement among ABB Marketing Representative, ABB Ltd. and ABB Global Marketing FZ-LLC. We found from the agreement Annexure 1, there is no any time/date/period mentioned and we noted in Annexure-2 it was signed by the parties w.e.f. 24.08.2010 which are not relevant for the impugned assessment year. It is interestingly note that sufficient opportunities were provided by both the authorities for substantiating its case with credible documents/evidences and it was the duty of the assessee to produce the same before them. Before the CIT(A) the assessee has candidly admitted that " It was stated to be paid as per agreed upon rates but the AR also candidly admitted that copy of such agreements were not available for submission" Suddenly the assessee produced before us copy of agreement on 13.03.2023 is also not relevant for the adjudication for the impugned assessment year. Therefore the ITA Nos.1314 & 1368/Bang/2014 Page 89 of 154 additional evidence filed in respect of agreement made towards payment of commission is not accepted .
61. We noted from the above order of the CIT(A) that the assessee has candidly admitted that the copy of such agreement were not available for Commission expenses paid. Therefore it is clear that what kind of services were rendered outside India by the non-residents to the assessee company are not known. The assessee is also unable to prove that what was the duration of services, their terms. We also noted from the submission made by the ld. DR that the assessee has filed additional evidences which are not relevant for the impugned assessment year. Therefore the additional evidences cannot be considered. Accordingly we reject the entire arguments of the ld. AR of the assessee noted supra and we do not find any infirmity in the order of the ld. CIT(A) noted supra. Accordingly we dismiss the ground No.9 raised by the assessee.
Disallowance of repairs and maintenance expenditure u/s 40(a)(ia) (ground no. 10)
62. During the FY 2009-10, the appellant had incurred an amount of Rs 10,68,628 towards civil repair work carried out in the appellant's premise situated at Halol plant. The amount had been paid to M/s. Canort Engineers for which the appellant had not deducted any taxes on the payment. The AO held that in the absence of any evidence on taxes being deducted at source, the said payment was to be disallowed u/s. 40(a)(ia) of the Act. The appellant submitted that it follows mercantile system of accounting and that the impugned expenses were ITA Nos.1314 & 1368/Bang/2014 Page 90 of 154 incurred during the year under consideration for the purpose of its business. it was argued that the books of accounts of the Appellant are audited by a renowned firm of Chartered Accountants and there is no disclosure being made in the tax audit report regarding such payments on which taxes are not deducted. The appellant had claimed the said expenses in the computation of income for the year under consideration. The CIT(A) noted from the appellant's submissions that the requirement of tax deduction at source for claiming deduction u/s 40(a)(ia) is not linked to the system of accounts maintained by an assessee. The satisfaction of the TDS condition is given primacy over the general fact of the expenditure being incurred for the purpose of business. The ld. CIT (A) cconsidering this statutory position and the appellant's candid admission on 20.08.2013 that no further details or evidences are available on this matter, the AO's actions were justified.
63. The ld. AR reiterated the submissions made before the lower authorities and further submitted that , the Assessing Officer disallowed certain expenditure that the assessee had claimed under the head repair and maintenance. The Assessing Officer took the view that out of the expenditure a sum of Rs.10,68,628/- was paid to M/s. Conart Engineers Limited in respect of certain civil repair works carried out at the Assessee's premises at Halol. As the Assessee had not deducted tax at source in respect of such payment the same was disallowed under section 40(a)(ia). The Commissioner of Income-tax (Appeals) also upheld the disallowance that in the absence of any evidence that tax was deducted at source. It is submitted that the Assessing Officer has ITA Nos.1314 & 1368/Bang/2014 Page 91 of 154 not pointed out as to under which section the Assessee was obliged to deduct tax at source and has failed to do so. Further, the Chartered Accountant who had issued the Tax Audit Report has not pointed out any failure to deduct tax at source. In the circumstances, the disallowance made ought not to be sustained.
64. The ld. DR relied on the order of lower authorities and submitted that before Hon'ble ITAT the appellant filed Additional Evidence vide letter dated 10.03.2023. It is requested that this issue may please be remanded to AO for verification of these documents.
65. Considering the rival submissions we noted that the assessee made payment to M/s. Canort Engineers for which the appellant had not deducted any taxes on the payment. The AO held that in the absence of any evidence on taxes being deducted at source, the said payment was to be disallowed u/s. 40(a)(ia) of the Act. The appellant has claimed the said expenditure in computation of income for the year under consideration and before the CIT (A) candidly admitted that no further details or evidences were available , considering the additional evidences filed vide letter dated 10.03.2023 and as requested by the ld. DR for remitting the issue for verification , we are remitting back to the file of the AO for afresh consideration and decide the issue as per law.
Disallowance of freight and forwarding expenses u/s 40a)(ia) (ground no. 11)
66. During the FY 2009-10, the appellant had incurred an expenditure of Rs 32,25,000 towards freight & forwarding expenses in ITA Nos.1314 & 1368/Bang/2014 Page 92 of 154 respect of transport contractors. The appellant had paid the amount to M/s. J.H. Parabia Transport Pvt Lid but had not deducted any taxes on the payments. The AO held that in the absence of any evidence on taxes being deducted at source, the said payment was to be disallowed under section 40(a)(ia) of the Act. The CIT (A) held that the submissions and admissions in this matter are identical to those raised for grounds of repairs and maintenance expenditure , for the same reason this ground is also dismissed.
67. The ld. AR submitted that this ground is similar to Ground No.10 and deals with the disallowance out of freight and forward expenses of Rs. 32,25,000/- by invoking the provisions of section 40(a)(ia). The submissions made whilst dealing with the earlier ground are reiterated here also.
68. The ld. DR relied on the order of lower authorities and submitted that before Hon'ble ITAT the appellant filed Additional Evidence vide letter dated 10.03.2023. It is requested that this issue may please be remanded to AO for verification of these documents.
69. Considering the rival submissions we noted that the assessee made payment to M/s. J.H. Parabia Transport Pvt Lid for which the appellant had not deducted any taxes on the payment. The AO held that in the absence of any evidence on taxes being deducted at source, the said payment was to be disallowed u/s. 40(a)(ia) of the Act. The appellant has claimed the said expenditure in computation of income for the year under consideration and before the CIT (A) candidly ITA Nos.1314 & 1368/Bang/2014 Page 93 of 154 admitted that no further details or evidences were available , considering the additional evidences filed vide letter dated 10.03.2023 and as requested by the ld. DR for remitting the issue for verification , we are remitting back to the file of the AO for afresh consideration and decide the issue as per law.
Disallowance of miscellaneous expenses u/s 40(a)(ia) (ground no. 12)
70. During the course of examination of miscellaneous expenses break-up in the financial statement, the amount of contract services paid/credited was Rs 26,61,93,058. However, as per the reconciliation statement submitted before the AO the amount was Rs 26,54,39,000 was allowed. Hence, the AO disallowed the balance amount of Rs 7,54,058 towards contract services as, according to him, no evidence of TDS evidence was submitted. The AO also found that the company had not deducted TDS on the director's fee of Rs 14,65,000. He, therefore, held that the director being a manager and also a technical person, the assessee ought to have deducted such taxes at source. Accordingly, the AO disallowed the claim of Rs 22,19,058 (Rs 14,65,000 + Rs 7,54,058) of the appellant and added back the amount of deduction claimed. Before the CIT(A) it was claimed that Director's fees are not in the nature of salary and no taxes are to be deducted in the absence of any specific provision on the same. A specific provision was inserted vide Finance Act, 2012 under section 194J covering this payment. Therefore, as per the appellant, the payments made prior to this amendments in the Act ought not to be covered by the provisions of section 194J. As far as the director's fee is ITA Nos.1314 & 1368/Bang/2014 Page 94 of 154 concerned, the nature of payment is akin to salary since it relates to a benefit derived from a company under agreed upon service/performance delivery conditions. The appellant also admitted that no further details or evidences are available with it in this matter. The CIT (A) held that the conclusion of the AO is also supported by the judicial decision in the case of CIT vs M.S.P Rajes 202 ITR 646 (K.ar) and CIT vs Tara Singh 233 ITR 669 (Del). After considering the submissions of the assessee and relying on the judgments noted above in his order, he dismissed the ground raised by the assessee on this issue.
71. The ld. AR submitted that the directors are not whole time directors and, hence, the fees that are paid to them would not be liable to tax under the head "Salaries" and, accordingly, there would be no obligation to deduct tax at source under section 192. In fact it is for this reason that section 194J was amended by the insertion of clause (baa) in sub-section (1) by the Finance Act, 2012 to impose an obligation to deduct tax at source on such payments. The Poona Bench of the Tribunal in Dy.CIT vs. Kirloskar Oil Engines158 ITD 309 and Bharat Forge Limited vs. CIT 159 TTJ 649 has held that there is no obligation to deduct tax at source on payments made to the directors and, accordingly, the disallowance made by the Assessing Officer and confirmed by the Commissioner of Income-tax (Appeals) under section 40(a)(ia) should be deleted.
ITA Nos.1314 & 1368/Bang/2014 Page 95 of 154
72. The ld. DR relied on the order of the lower authorities and she referred to the Para 17 TO 17.2 of order of CIT(A) She further submitted the appellant states that Rs.14,65,000 is paid for director's fee on which no TDS is deductible u/s 194J of the Act. Apart from making this statement the appellant failed to produce any details regarding benefit derived from the services agreed upon/performance deliver conditions for paying this fee to director before AO, Ld.CIT(A) and before Hon'ble ITAT till date. For the balance amount of Rs.7,54,058, the appellant has only made vague statement in its synopsis dated 31.01.2024 and has failed to FAILED to produce any details before AO, Ld.CIT(A) and before Hon'ble ITAT till date. Accordingly, the addition of Rs.7,54,058 sustained by the Ld.CIT(A) may please be upheld
73. Considering the rival submissions, both the lower authorities have disallowed miscellaneous expenses of Rs.7,54,058 for want of evidences regarding not furnishing of TDS deduction details. During the year, it was also noted that the assessee has not deducted TDS on the Director fee paid of Rs.14,65,000. In this regard, the assessee submitted that there is no such provision in the Income Tax Act before amendment in the TDS provisions by the Finance Act, 2012. Therefore, the TDS provision is not applicable on the Director's fee. From the arguments noted above of the ld. AR of the assessee, there is no proper explanation advanced by the ld. AR on the TDS deduction for Rs.7,54,058. It seems that the assessee did not have evidences and the findings noted by the AO could not be controverted by the ld. AR ITA Nos.1314 & 1368/Bang/2014 Page 96 of 154 of the assessee. Accordingly, we uphold the addition of Rs.7,54,058. Further we noted that the assessee has paid Directors fee of a sum of Rs.14,65,000 on which no TDS has been deducted. Considering the arguments of the ld. AR of the assessee that the provision for TDS deduction was inserted by the Finance Act, 2012 will not support the case of the assessee since similar issue has been decided by the Hon'ble Karnataka High Court in the case of CIT v. M.S.P. Rajes [1993) 69 Taxman 461 (Kar) (before the amendment made) in which it has been held that the remuneration received by the director is assessable as salary rather than income from other sources. In the case on hand, the ld. CIT(A) has noted that the benefit derived from a company under agreed upon services/performance delivery conditions and the company also admitted that no further details or evidences are available with the assessee in this matter and the findings of the lower authorities could not be controverted by the ld. AR of the assessee. The judgement relied by the ld. AR of the assessee is judgment of coordinate Bench of ITAT Pune. Since the judgment of upper court is available, we are bound to follow the same. Respectfully following the judgment of the Hon'ble jurisdictional High Court we uphold the order of the CIT(A) on this issue.
Disallowance of fines paid for transport expenses u/s 37 (ground no.
13)
74. During the FY 2008-09, the appellant had reimbursed Rs 5,68,130 towards fines paid by transporters to their Regional Transport Offices (RTO). The same was debited in the Profit and Loss account as a part of freight charges paid to transporters and claimed as deduction ITA Nos.1314 & 1368/Bang/2014 Page 97 of 154 while filing return of income. The tax audit report did not disclose the payments towards these fines. The AO held that expenses incurred towards fines / penalty is not an allowable expenditure as per Explanation to section 37(1) of the Act. He, accordingly, disallowed the claim. Before the CIT (A) In its written submission the appellant contended that since the fines and penalty referred to in Explanation 1 to section 37 were expected to be paid by the assessee for it to be disallowed, in the present case where the amount was only reimbursement of the fines paid by transporters the application of this provision by the AO was erroneous. Reliance was placed on the following judicial decisions by the assessee which are as under..
• Sri Venkata Sathyanarayana Rice Mill Contractors Company vs. CIT (1997) 223 ITR 101 (SC) • Western Coalfields Limited v. ACIT (2009) 124 TTJ 659 (Nag) • Briham Maharashtra Sugar Syndicate Limited v. DCIT (2009) 182 Taxman 236 (Bom)
75. The ld. CIT (A) observed that the appellant's interpretation of the statutory provision as above cannot be accepted since Explanation to Sec. 37(1) speaks of "any expenditure incurred by an assessee"
which is broad enough to include expenses directly paid for by assessee or .those reimbursed by it. In the latter case it is an expenditure/financial change as far as the business of the assessee is concerned. Hence, in this case, fines and penalty paid for the assessee's own default or reimbursement for the defaults of others but ultimately incurred due to operational necessity of business, come within the scope of the provisions. The ultimate purpose of the expenditure in both cases is towards an. offence prohibited by law and, hence, the ITA Nos.1314 & 1368/Bang/2014 Page 98 of 154 outflow would squarely be brought within the scope of Explanation to section 37(1). The test of commercial expediency has been specifically overridden by the prohibition of payment towards legal offences and, hence, the decision cited by the appellant can be clearly distinguished on facts. In case of the Supreme Court judgment the issue involved donation/contribution by the assessee to a District Welfare Fund set up by the District Collector as a condition for getting permit to export. The AO held it to be against public policy but the Hon'ble Court held that the donation was incurred for the purpose of trade. In any case, the nature of the payment as being legal was never in dispute and, hence, the case cannot be cited in the context of fines or penalty for an admitted illegality or rule breakage which is the nature of reimbursement involved in the present matter. After considering the entire submissions of the assessee, the CIT(A) upheld the action of the AO.
76. The ld. AR of the assessee filed written submissions which is as under:-
"The Assessee engages the services of certain transport operators for the purposes of transporting its goods. These transporters are independent service providers and are not agents of the Assessee. The transport operators are paid a certain amount as well as certain expenses are reimbursed to them. One such expense that was reimbursed represented fines paid by the transporters to the Regional Transport Office. This amount was disallowed on the footing that the same represents a payment made for infraction of law and, hence, having regard to Explanation 1 to section 37(1) of the Act the said amount cannot be allowed as a deduction. It is submitted that the Appellant has not violated any law for which either it or its employees have been fined. In the circumstances ITA Nos.1314 & 1368/Bang/2014 Page 99 of 154 the disallowance, if any, has to be made in the hands of the transport operator. In so far as the Appellant is concerned, it is an expenditure incurred by it towards freight. Assuming the transport operator had just grossed up the expenses that were incurred by it which it claims separately as a reimbursement and raised the bill for a lumpsum amount, then, there could have been no doubt that such lumpsum would be allowed to be deducted in its entirety. In the circumstances merely because the transport operator has split up its bills would not justify a disallowance be made."
77. The ld. DR relied on the order of lower authorities and referred to para 18 TO 18.4 of order of CIT(A) She further submitted that the Tax Audit Report "DID NOT" disclose the payments towards these fines. The Expenses incurred towards fines/penalty are not an allowable expenditure as per Explanation to section 37(1) of the Act. The appellant failed to produce any details or evidence both before the AO & Ld.CIT(A). Accordingly, the addition of Rs. 5,68,130/- sustained by the Ld.CIT(A) may please be upheld.
78. Considering the rival submissions, we noted that the AO has disallowed the fine/penalty paid by the transporter of the assessee to the RTO which were reimbursed by the assessee to the transporter and debited under the aforesaid head. The Tax Audit Report is also silent on this issue. Accordingly the AO invoked explanation 1 to section 37(1). The CIT(A) also noted that it is in the nature of fine and penalty paid by the assessee for an offence or which is prohibited by law accordingly upheld the action of the AO. From the submissions made by the ld. AR noted above, we are not in agreement that it is a part and parcel of the freight expenditure. We noted that the ITA Nos.1314 & 1368/Bang/2014 Page 100 of 154 reimbursement of the fine which were separately billed by the transporter to the assessee clearly says that it is in the nature of fines/penalties and the transporter has done works for the assessee for which they have been remunerated in the form of freight expenses and penalty paid separately. It is impliedly that it was the consent of the assessee for violating the transportation rules, otherwise the assessee could have shifted the burden upon the transporter for violating the rules and the assessee would not have paid. During the course of proceedings before the AO as well as CIT(A) the assessee was not able to substantiate that it is not in the nature of fines/penalties in terms of section 37(1) explanation 1. Considering the totality of facts we decide this issue against the assessee.
Disallowance of difference between assessable value of manufactured goods as per excise returns and sales as per financial statement. (Ground no. 14)
79. Briefly stated the facts are during the course of assessment proceedings, AO found a difference between the assessable value of goods manufactured and sold as per the excise returns filed by the different units of the appellant (Rs.4490,39,92,777 and the sale of manufactured goods shown in the segmental Profit & Loss account submitted (Rs.3436,37,92,412). After examining the reconciliation submitted by the appellant, he considered an amount of Rs.378,97,42,798 out of the difference as being unevidenced and treated it as undisclosed sales of manufactured goods. During the course of appeal proceedings, the appellant furnished a fresh ITA Nos.1314 & 1368/Bang/2014 Page 101 of 154 reconciliation of the differences which was remanded to the AO for his comments. The additional evidences filed to explain the reason for the difference noted by the AO. The AO partly accepted during the remand proceedings. In its rejoinder to the above, the appellant submitted that the difference of considered as unevidenced after remand proceedings by the AO constituted a very small percentage (0.38%) of the total disputed value. It related to smaller transactions and even out of these the appellant was able to furnish evidence to the extent of Rs.4,50,26,975 to demonstrate the stock transfer. The CIT(A) after considering the remand report and submissions/ evidences produced, major additions were deleted and sustain the additions of Rs, 11,79,61,974 by observing as under three heads :-
Job work - A sum of Rs.29,29,85,474/- was considered as the goods sent for assembly and job work and it was duly received back. As per the company when the goods are sent for job work the excise invoices are invariably raised. However, it cannot be considered for ultimate sale. The invoice wise listing and sample invoices were submitted by the company in support of their claim before the AO who, on examination found a sum of Rs. 2,75,07,711/- was posted as various parties. But the company did not explain to whom those goods were sent and from whom received back.
In respect of all the three items as above the appellant made a common argument in its rejoinder which was pivoted on the difficulty in submitting 100% evidence and the sufficiency of a very large sample of evidence of about 88% to establish the claims made. The principle of `de-minimum' doctrine was reiterated whereby law allows overlooking the trivialities or things which are insignificant. It was argued that this was a tested principle of law when the substance part is proved to be factually correct and bonafidely true, the presumption if any for the balance has to be in favour of the assessee, especially, when the ITA Nos.1314 & 1368/Bang/2014 Page 102 of 154 Revenue has not brought any material on record even to remotely suggest or presume suppression of income. It was submitted that the veracity of the transaction not under doubt, the evidence on big ticket transactions under the same head proved, the nature of the balance transaction could not be under any cloud of suspicion. The AR argued that it would be ideal to have ready to present data to the extent of 100% but admitted that it is equally impossible in a huge and massive corporate set up - "If the substantial transaction is found to be in order and in the absence of any negative proof or evidence, the presumption, if any, has to be made only in favour of the appellant in the case of the balance transaction and should not be deemed or assumed to be suppression of income, specially, when there is no statutory deeming fiction in the Act."
After considering the remand report and evidences filed by the assessee, the ld. CIT(A) noted that the above plea and am largely in agreement with it, in principle. However, he cannot accept its application to the item of 'job work' since the primary entry in the ledger account itself is non-specific and ambiguous. The requirement of supporting primary evidence for these vaguely designated "various parties", therefore, cannot be equated with other ledger entries which are specific in details but wanting in supporting evidence such as excise invoice etc. The addition of Rs. 2,75,07,711 under job work was, therefore, confirmed while the explanation for 'testing' and 'exhibition' are accepted and the disallowance thereof directed to be deleted.
Stock Transfer :- Under stock transfer for movement of goods from one unit to another was shown at Rs. 289,23,91,711 in the original reconciliation filed before the AO but without substantiating evidence. During remand proceedings the figure was pegged at Rs.131,30,19,344 in support of which CENVAT registers, excise invoices from receiving factory and annexure of stock transfer containing 232 pages were examined. The AO noted that evidence was absent for the following (total Rs. 4,95,84,463).
Captive Consumption : Out of captive consumption of Rs.2,69,33,751 assessee was able to give invoice copies for a sum of Rs.79,19,900 and for the balance amount of Rs. 1,90,13,851 (30%) no evidences were submitted.
ITA Nos.1314 & 1368/Bang/2014 Page 103 of 154 Location not identified : It was noticed from the reconciliation ledger that the receiving location of goods are not identified in several cases, totaling Rs. 40,18,887. Hence, this amount is also not allowable as stock transfer for want of evidence.
Part II not identified : Whenever goods are moved from one location to another location the excise invoices of the originating and receiving locations are to be mentioned. The receiving location is treated as Part II of CENVAT register. In several cases, the corresponding Part II was not mentioned in the ledger. Such amount was totaled as Rs.2,65,51,725/-.
Considering the turnover of the trading locations I consider that the evidences made available Rs.4,50,26,975 to demonstrate the stock transfer. Considering the turnover of the organization being more than Rs.6300 crores with 13 manufacturing locations and 5 trading locations I consider that the evidences made available on this disputed matter are sufficient enough as a very large sample to establish the appellant's claim. No suspicious or malafide circumstances or transactions have been pointed out by the AO. The non-furnishing of the miniscule data, therefore, cannot lead to a presumption of suppression of income. The appellant's explanation is accepted and the difference pointed out by the AO as above is to be ignored.
Sale Invoice on project customers - The company contended that a sum of Rs. 12,20,28,994/- was shown in the ledger code of 710117 as CTC method sales 3rd party. It was claimed that this amount was not shown in manufactured sales third party under the ledger code 710102. However, out of Rs. 12,20,28,994/- they were able to give invoice copies to the AO for a sum of Rs.10,38,40,000 and for the balance amount of Rs.1,81,88,994/- no evidence was submitted.
Difference in MRP based assessable value - On examination of the appellant's additional evidences admitted during appeal, the AO reported that the difference of Rs.33,99,84,343 was said to have arisen out of the excise duty paid on the value of excise return/excise invoice when actually the goods had been sold at a lesser price. The AO noted that the amount included excise invoice of earlier year i.e. AY 2008-09 pertaining mainly to the ITA Nos.1314 & 1368/Bang/2014 Page 104 of 154 Peenya and Faridabad units. The excise invoices in many cases were not tagged to the sales invoice.
The appellant has conceded the above mistakes and facts but has stated before me that the issue, as in the case of sale invoice on project customers, was essentially one relating to non-furnishing of 100% evidence and details even though evidence had been filed for about 80% of the claim. The appellant reiterated the principle of de-minimus doctrine urging that the trivialities should be over looked in favour of significant or substantive data. I am unable to accept this argument since the appellant's own ledger account clearly shows that the claim of earlier year invoices had also been included in FY 2008-09 which is not allowable for computation of business profits relatable to a financial year. The sum of Rs.7,22,65,269 pointed out by the AO is, therefore, confirmed. Similarly, the de-minimus doctrine cannot be applied in a case where the very year of assessability is in question as in case of goods dispatched in one year to a project but where the latter would raise the manufacturing sale invoice in a later financial year. The AO's insistence on complete verification of claim which involves both amount as well as period in these cases, therefore, cannot be faulted with. The addition to the extent of Rs.1,81,88,994, therefore, is confirmed."
80. After considering the above the CIT(A) confirm the addition of Rs. 11,79,61,974 as above, accordingly partly allowed this ground
81. The ld. AR reiterated the submissions made before the lower authorities and submitted that addition made by the Assessing Officer on account of a difference between the turn over declared by the Appellant in its excise return as well as the turn over declared in the financial statements. The Assessing Officer was of the view that the difference between the two figures to the extent it was not reconciled by the Assessee aggregating Rs.378,97,42,798/- had to be added to the Appellant's income having regard to the reasons given by him in para ITA Nos.1314 & 1368/Bang/2014 Page 105 of 154 18 of his order. The assessable value of the goods manufactured and sold as per the excise return filed by different units of the Appellant aggregated Rs.4490,39,92,777/- and the sale of the manufactured goods shown in the segmented profit and loss account aggregated Rs.3436,37,92,412/-. After examining the reconciliation statement, the Assessing Officer made an addition of a sum of Rs.378,97,42,798/-. During the course of the appellate proceedings the Appellant had filed a detailed reconciliation which the Commissioner of Income-tax (Appeals) was pleased to consider and required the Assessing Officer to submit the Remand Report thereon. The first item in respect of which there was a differential was on account of free supplies made. As excise duty is payable on free supplies made the same was reflected in the excise records but the same was not reflected in the segmental profit and loss account since the same were not supplied for a consideration of free supplies were made under six broad categories viz.,
i) Dispatch for testing goods;
ii) Dispatch for display of goods at exhibitions;
(iii) Dispatch for assembly for job workers;
(iv) Dispatch as samples;
(v) Dispatch for material used for carrying out repairs; and
(vi) Dispatch towards warranty and obligations
82. The Assessing Officer in the course of the remand proceedings accepted the explanation qua items at serial Nos. (iv), (v) and (vi). In so far as the dispatch for testing goods the Assessing Officer accepted the explanation to the extent of Rs. 13,31,80,000/- and confirmed a disallowance of Rs. 2,88,08,805/-. As regards the goods sent for exhibition the Assessing Officer accepted the explanation to the extent ITA Nos.1314 & 1368/Bang/2014 Page 106 of 154 of Rs.2,88,24,568/- but in the absence of any invoice for the balance amount of Rs.51,29,641/- sought a confirmation of the disallowance to that extent. In so far as the dispatch for assembly by job workers is concerned, the Assessing Officer has held that a sum of Rs.2,75,07,711/- was concerned, the individual names of the parties was not specified. Before the Commissioner of Income-tax (Appeals) pursuant to the remand report filed by the Assessing Officer it was submitted that a substantial part of the items of reconciliation were duly supported with the relevant documentation. The Assessing Officer has not brought an iota of evidence on record to establish that there is a sale which has taken place outside the books of accounts. In these circumstances absent any evidence a positive addition to the Appellant's income could not be made. The Commissioner of Income- tax (Appeals) accepted the Appellant's contentions in so far as the dispatch for testing goods and for display at exhibition was concerned but rejected it in so far as the job work is concerned as the entry was ambiguous.
83. The ld. AR further submitted that the mere difference of the turnover figures in the excise return and as per the financial by itself cannot be the basis for an addition to the Appellant's income. The law is well settled that if a positive addition to an Assessee' s income is proposed to be made, then the burden would be on the revenue to establish that there has been a sale effected outside the books of accounts. A discrepancy in the two figures may be a cause for enquiry but in any circumstances cannot be the sole basis for an addition. The ITA Nos.1314 & 1368/Bang/2014 Page 107 of 154 total alleged difference was in the sum of Rs.29,29,85,474/- out of the aforesaid the Assessee had filed documentary evidence to the extent of Rs. 27 crores. It is only to an extent of Rs. 2.75 crores which is less than 10% of the total figure under this category that the full details could not be filed. The Appellant submits that once the Commissioner of Income-tax (Appeals) accepted the Appellant's submission qua the other categories and deleted the addition which deletion is not even challenged by the revenue in its appeal but it would be clear that there is no basis in the addition that is proposed. In these circumstances, it is submitted that the addition of Rs. 2.75 ought to be deleted.
84. The ld. AR further submitted that as noted earlier, the total addition made by the Assessing Officer in the original assessment proceedings was in a sum of Rs.378,97,42,798/-. The CIT (A) had called for a remand report from the Assessing Officer inter alia in respect of the addition so made. The Assessing Officer has accepted that the Appellant has been able to satisfy him with regard to the alleged discrepancy to the sum of Rs. 342,69,33,892/-. The Commissioner of Income-tax (Appeals) out of the balance addition of Rs. 36,28,08,906/- has further accepted the Appellant's explanation to the extent of Rs. 24,48,46,931/- and an addition has been sustained to the extent of Rs.11,79,61,974/- which represents a summation of three amounts of Rs. 2,75,07,711/-, Rs.7,22,65,269/- and Rs.181,88,984/- which are specifically dealt with in paragraphs 20.4 to 20.5, and para 20.12 of her order. The revenue has accepted the order of the Commissioner of Income-tax (Appeals) inasmuch as it has granted ITA Nos.1314 & 1368/Bang/2014 Page 108 of 154 relief to the Assessee and, therefore, the present submissions are confined to the aforesaid three additions only. In so far as the first item of Rs. 2,75,07,717/- is concerned, the difference between the turn over declared in the excise return and the turn over declared in the financial statement is on account of the fact that when certain goods are sent to outside processors on a job work basis excise duty is payable by the Assessee on their clearance from the factory but the same is not regarded as a sale for the purpose of the financial statements. The total value that is declared for goods sent on job work that was declared to the excise authorities was in a sum of Rs.29,29,85,474/-. The full details of the aforesaid figure giving an invoice wise listing as well as sample invoice were furnished to the Assessing Officer. There was one residuary entry of various parties aggregating Rs. 2,75,07,711/-. The Commissioner has accepted that it is not necessary to file 100% proof of the aforesaid amounts in paras 20.4 and 20.5 of her order. However, when it comes to the said sum of Rs. 2,75,07,711/- she confirms the addition since according to her the primary entry in the ledger account itself is non specific and ambiguous. It is reiterated that absent any positive evidence being led by the Assessing Officer to establish that any sale outside the books has taken place from a mere rejection of the Assessee's explanation does not justify a positive addition to the Assessee's income. The Assessee submits that the Assessing Officer has not invoked the power vested in him in section 145 to reject the Assessee'[s accounts and make an assessment to the best of his judgment as contemplated by section 144. Absent thereof it would not ITA Nos.1314 & 1368/Bang/2014 Page 109 of 154 be open to him to make the addition in the manner in which it has been done. The judgment of the Jammu and Kashmir in International Forest Company vs. CIT 101 ITR 721 would support this contention where the Court held that a mere low yield of sawn timber in the accounting year or the manifestation of a meagre gross profit would not be taken as indicative of suppression of sales on the part of the Assessee. In coming to this conclusion the High Court has relied upon the judgment of the Bombay High Court in R.B. Bansilar Abirchand Spinning and Weaving Mills vs. CIT 75 ITR 260 as well as of the Kerala High Court in B.F. Verghese vs. State of Kerala 72 ITR 726. The Court also reiterated the well settled principle that if the profits shown by the Assessee in its return are not accepted it is for the taxing authorities to prove that the Assessee made more profits.
85. It is further submitted that the Assessing Officer not having found any defect in the details furnished qua the balance amount of close to 27 crores there was no justification in rejecting the explanation of the Assessee qua the aforesaid figure of Rs. 2.75 crores. It is submitted that this amount represents less than 10% of the total amount spent on job work and less than 1% of the total amount of the discrepancy which was originally added by the Assessing Officer. The Commissioner has proceeded on a factually incorrect premises that the entry in the Ledger is itself ambiguous. She has failed to appreciate that in the ledger account full details of each entry is specified but in the listing that was prepared several small entries were aggregated and disclosed as one lumpsum figure. In these circumstances, especially, ITA Nos.1314 & 1368/Bang/2014 Page 110 of 154 having regard to the fact that the Commissioner of Income-tax (Appeals) has herself accepted the application of the de-minimis principle ought to have deleted the aforesaid addition.
86. The next item pertains to the addition of Rs.1,81,88,994/- being the cost of the transfer of goods to project customers. The Assessee, in the course of its business, enters into large contracts for executing project with its customers. These contracts entail a provision of various components from the Assessee's factories along with installation activities and supply of goods manufactured by third parties. When the goods leave the factory an excise invoice is prepared because the levy of excise is on the removal of goods from the factory and the same is reflected in the excise turn over declared with the excise authorities. However, in so far as the financial invoices are concerned they are raised based on the milestone especially set out in the project contracts which would differ from the invoicing for excise purpose. One of the items in the reconciliation submitted to the Assessing Officer was with regard to his differential in timing of raising of the invoices. The aggregate amount on this account came to Rs. 12,20,28,994/-. The Assessee furnished copies of the invoices aggregating Rs. 10,38,40,000/- in the course of the remand proceedings and neither the Commissioner of Income-tax (Appeals) and nor the Assessing Officer have found any flaw with the aforesaid details. It is only with regard to the balance sum of Rs. 1,81,88,994/- that the addition was sustained by the Commissioner of Income-tax (Appeals) on the ground that no ITA Nos.1314 & 1368/Bang/2014 Page 111 of 154 evidence was submitted. The submissions made earlier would be equally applicable in this case too and the same are reiterated.
87. The last issue in respect of which addition was sustained is with regard to the sum of Rs. 7,22,65,269/- on the footing that this sum represents invoices which pertain to the earlier year. As noted earlier, the difference in the reporting for excise purpose and the reporting for financial statements. The Commissioner accepts that invoices which were pertained to the earlier year have been offered for tax in this year. Once that is so, there is no question of rejecting the explanation. The Assessee therefore submits that the aforesaid addition made by the revenue ought to be deleted.
88. The ld. DR relied on the order of lower authorities and has submitted written synopsis which is as under.
"1. The contention of the appellant that the addition of Rs. 11,79,61,974 sustained by the Ld.CIT(A) is merely on the basis of difference between excise returns and financial statements is misleading and inaccurate.
2.. NON-FURNISHING OF DETAILS BEFORE AO - The AO gave numerous opportunities to the appellant to furnish reconciliation between service income reported in the service tax returns and service income reported in the segmental P&L account furnished by appellant before the AO. The appellant furnished details for Rental and Other taxable income of Rs.2,95,64,151 and the same was accepted by AO. However, the appellant failed to furnish details of advances received from customers of Rs.1,36,56,690 and other receipts chargeable etc. of Rs. 24,09,35,247 which resulted in addition of Rs.25,25,88,937. The AO, in Para 18.1.1 and 18.1.2, in the order u/s 143(3) dated 18.02.2013 has clearly brought out the fact that the ITA Nos.1314 & 1368/Bang/2014 Page 112 of 154 appellant failed to furnish details on these 2 items. Therefore, the AO made an addition of Rs.25,25,88,937.
3. FRESH RECONCILIATION STATEMENT & PARTIAL EVIDENCE FILED BEFORE CIT(A) - REMAND REPORT OF AO - BALANCE DISALLOWANCE OF Rs.11,79,61,974 UPHELD BY CIT(A) - Before the Ld.CIT(A) the appellant furnished a fresh reconciliation statement ( Refer Para 20.1 of order of CIT(A) dated 31.07.2014) and furnished partial evidence on which remand report was called from AO. On examination of evidence furnished. The Ld.CIT(A) divided the differences into 3 categories :
a. FREE SUPPLIES - "JOB WORK" (PARA 20.2 TO 20.5 OF ORDER OF Ld.CIT(A)) - After due consideration of the remand report of the AO and analysis of evidence furnished by appellant, the Ld.CIT(A) sustained the addition under the head "JOB WORK" (Para 20.5) of Rs.2,75,07,711/- for the following reasons :
Primary entry on ledger non-specific and ambiguous, Non-furnishing of "supporting primary evidence" for vaguely designated "various parties" in the ledger.
For these reasons the Ld. CIT(A) held that the principle of 'de- minimum' doctrine cannot be applied for this disallowance Rs.2,75,07,711/-.
b) NO REQUIREMENT UNDER TO INVOKE SETION 145 OF I.T. ACT,1961 FOR "NON-SPECIFIC", "AMBIGUOUS", "VAGUE" AND "UNEVIDENCED" ENTRIES IN THE BOOKS OF ACCOUNTS OF Rs.2,75,07,711/-
The contention of appellant that the AO did not invoke provisions of Section 145 of the Act and, therefore, the AO has no power to make addition is legally incorrect. This contention of the appellant is legally not tenable. The appellant has made non- specific, ambiguous and vague entries in the books of accounts. There is no Accounting Standard or sections and provisions in the I.T.Act, 1961 that supports the contention raised by the appellant that 10% of non-specific, ambiguous and vague entries in the ITA Nos.1314 & 1368/Bang/2014 Page 113 of 154 books of accounts, which have no supporting evidence, are to be allowed. In fact, as per Accounting Standards each and every entry in Books of account is required to be specific and evidenced with bills, vouchers and other supporting documents. The onus is on the appellant to establish and explain the entries made in the books of accounts and produce evidence in support of it, when called for. The appellant failed to discharge this onus, both before the AO and Ld.CIT(A), and accordingly, the Ld.CIT(A) upheld the addition of Rs.2,75,07,711.
c) REVENUE NOT IN APPEAL - ARGUMENT FLAWED & BASELESS The Ld.AR contended that Revenue has not filed appeal against relief given by Ld.CIT(A) to the assessee and, therefore, there is no basis for addition made. This argument of appellant is flawed and baseless as upon receiving the partial evidences filed by the appellant, Ld.CIT(A) called for Remand Report from AO, analysed all evidences and upheld the addition of Rs.2,75,07,711/- as the appellant failed to establish and explain the entries made in the books of accounts and produce evidence in support of it.
d) COST OF TRANFER OF GOODS TO PROJECT CUSTOMERS-DISALLOWANCE OF Rs.1,81,88,994/-
UPHELD - "UNEVIDENCED" ENTRIES IN THE BOOKS OF ACCOUNTS - YEAR OF ASSESSIBILITY NOT ESTABLISHED(PARA 20.11 (B) & 20.12 OF ORDER OF Ld.CIT(A) The Ld.CIT(A) rejected the principle of de-minimus doctrine advanced by the appellant as the Ld.CIT(A) held in Para 20.12 at Page 39 of the order stating that "Similarly, the de-minimus doctrine cannot be applied a in case where the very year of assessibility is in question as in case of goods dispatched in one year to a project but where the latter would raise the manufacturing sale invoice in a latter financial year. The AO's insistence on complete verification of claim which involves both amount as well as period in these cases, therefore, cannot be faulted with. The addition to the extent of Rs.1,81,88,994/-, therefore is confirmed".
ITA Nos.1314 & 1368/Bang/2014 Page 114 of 154
e) DIFFERENCE IN MRP BASED ASSESSABLE VALUE -
DISALLOWANCE OF Rs.7,22,65,269/- UPHELD - GOODS ACTUALLY SOLD AT LESSER PRICE THAN EXCISE INVOICE - INVOICES PERTAIN TO EARLIER YEAR i.e. F.Y.2008-09(PARA 20.11 (B) & 20.12 OF ORDER OF Ld.CIT(A)) The Ld.CIT(A) rejected the principle of de-minimus doctrine advanced by the appellant as the Ld.CIT(A) held in Para 20.12 at Page 38 of the order stating that " I am unable to accept this argument since the appellant's own ledger account clearly shows that the claim of earlier year invoice had also been included in FY 2008-09 which is not allowable for computation of business profits relatable to a financial year. The sum of Rs.7,22,65,269/- pointed out by the AO is, therefore, confirmed."
4. Accordingly, the addition of Rs. 11,79,61,974 sustained by the Ld.CIT(A) may please be upheld and GOA No.14 may kindly be DISMISSED."
89. Considering the submissions from both the sides we noted that here the dispute before us is only for goods sent for job work of Rs.2,75,07,711, sales invoice on project customers of Rs.1,81,88,994 and for Rs.7,22,65,269 for difference arisen out of the excise duty paid on the value of excise return / excise invoice where actually the goods had been sold at a lesser price. The CIT(A) has done good reasoned order after considering the remand report, rejoinder and evidences filed by the assessee during the first appellate proceedings. We do not find any infirmity in the order of the CIT(A) as noted above. From the above findings of the CIT(A), we noted the he has pointed out that the assessee has Primary entry on ledger non-specific and ambiguous, Non-furnishing of "supporting primary evidence" for vaguely designated "various parties" in the ledger . The assessee was granted ITA Nos.1314 & 1368/Bang/2014 Page 115 of 154 various opportunities to reconcile the difference but it was unable to reconcile the figures. During the course of hearing before us on 16.01.2024 the ld. AR. of the assessee has also filed a reconciliation statements in which he has fairly accepted that for a sum of Rs. 2,75,07,,711/- "vendor details not submitted". The primary onus is on the appellant to establish and explain the entries made in the books of accounts and produce evidence in support of it, when called for. The appellant failed to discharge this onus, both before the AO and Ld.CIT(A). Further the contention of appellant that the AO did not invoke provisions of Section 145 of the Act and, therefore, the AO has no power to make addition is legally incorrect, this contention of the ld. AR is legally not tenable since in this case the entry made in the books of account are required to be explained by the assessee, but here the assessee could not explain the same as noted by both the authorities. The appellant has made non-specific, ambiguous and vague entries in the books of accounts. It is the primary duty of the assessee to explain the entries made in the books of accounts with the supporting evidences. Further the assessee has relied on the de- minimum doctrine will not support the arguments of the ld. AR of the assessee. The assessee is stating that 88% of the large sample evidences were established. The de minimum doctrine has decided in a landmark judgment of the Indian Banks Association v. Devlkala Consulting Services, 137 Taxman 69 (SC) in which it has been held as under:-
DE MINIMIS ITA Nos.1314 & 1368/Bang/2014 Page 116 of 154 The principle of de minimis, as contended by appellants had no application in the instant case.
It is not a matter which would not receive the attention of anybody. Not only a public interest litigation was filed but also the association of borrowers of State had also filed a special leave petition. The amount collected from the borrowers may be negligible for the appellant banks but the amount they have realised from five crores of borrowers was not a small one. By reason of a self-created confusion, misconception as regard application of a statute and misapplication and misconstruction thereof by the appellants had resulted in an illegal action; as a result whereof the borrowers have been deprived of a huge amount. Consequently the Union of India and the appellants have unjustly enriched themselves. When such an unjust enrichment takes place, the doctrine of de minimis, should not be applied in equity or otherwise. [Para 23]
90. In the case at hand the ld. CIT(A) has noted that entry in the primary ledger account itself is non-specific and ambiguous. The entry made in concerned ledger book should be specific in detail, but there was no evidences found for the disputed amount. The ld. AR of the assessee accepted in the reconciliation statement produced before us that vendor details not submitted. In these circumstances if we accept the de minimum theory, the assessee will get unjust enrichment benefit which is not permissible in the income tax proceedings, the entries made in the books for income or expenditure should be specific and supported with the evidences. Therefore relying on the above judgment of Hon'ble Apex Court supra, we reject this argument of the ld. AR of the assessee. Accordingly, we uphold the findings of the ld.
CIT(A) noted above. In the result this ground of appeal is dismissed. Sale invoice on project customers (Rs.1,81,88,994) ITA Nos.1314 & 1368/Bang/2014 Page 117 of 154
91. During the AY under the projects head the AO disallowed Rs.12,06,53,044 out of which documents submitted during the remand proceedings of Rs.10,22,64,050, Accordingly the CIT(A) disallowed to the extent of Rs.1,81,88,994 by observing that the assessee could not be able to submit any evidences at any stage of point, Therefore the decision taken under job work noted supra principle will apply here also. We do not find any infirmity in the order of the CIT(A). This ground is also dismissed.
Despatch for testing of goods Rs.7,22,65,269
92. During the impugned AY, the goods sent to Peenya and Faridabad Industries to the tune of Rs.33,99,84,344 were dispatched through Excise Invoices but not considered in the financial statement which were not accepted in the assessment proceedings. Later on, in the remand proceedings the revenue authorities accepted to the tune of Rs.26,77,19,074. And the balance of Rs.7,22,65,269 could not be verified. The assessee submitted that excise duty were paid on the MRP (Maximum Retail Price), whereas actually the goods were sold at lesser price. However in the remand proceedings the AO noted that the amount included in excise invoice of earlier year, it means that 2008-09 pertaining mainly to the Peenya and Faridabad Unit. But the excise invoices in many cases were not tagged to the sales invoice. Since here the assessee could not prove with credible evidence at any stage of point and how the assessee has recorded in the books of account with credible evidences or remained unexplained. The argument made by the ld. AR incorporated in the above written ITA Nos.1314 & 1368/Bang/2014 Page 118 of 154 synopsis will not support to the assessee's case and we found substance in the argument advanced by the ld. DR. Therefore the decision taken under job work noted supra principle will apply here also. We do not find any infirmity in the order of the CIT(A). and we reject the argument of the assessee. In the result, ground No.14 is dismissed.
93. Ground No.15, 16, 17 & 18 are consequential in nature hence it does not require for adjudication.
ITA No. 1368/BANG/2014 REVENUE APPEAL94. The ground No. 01 is general in nature, hence it does not require adjudication.
Disallowance of custom duty on closing stock (ground no.2)
95. The appellant had paid customs duty of Rs.16,51,69,465 for purchase/ import of raw material which was included in the cost of purchase debited to the Profit & Loss Account as well as in the value of closing stock as on 31.03.2009. Applying the provisions of Sec.43B and relying on various judicial decisions including the decision of the Hon'ble ITAT in its own case, a deduction of the customs duty paid was claimed in the computation of income. The AO disallowed this amount contending that the custom duty paid, being a component of closing stock, cannot be excluded while valuing the closing stock when the corresponding purchase was already debited to the Profit & Loss account and that this would lead to suppression of profit. He further held that adding back the amount in the next year would lead to inflation of the value of the opening stock and thereby the applicant ITA Nos.1314 & 1368/Bang/2014 Page 119 of 154 would be claiming double deduction of the same amount. The appellant contended that in its financial statements the company had included the value of the customs duty paid in the value of the closing stock of the current year and the opening stock of the subsequent year. Therefore, there was no suppression of the profits in any way. It was only for the purpose of computing income under the provisions of the I.T. Act that such amount of custom duty was claimed as a deduction in accordance with the provisions of section 43B read with various judicial precedents.
96. On first appeal, the CIT(A) noted that similar issue has already been adjudicated on identical facts in case of the appellant for AY 2008-09 in ITA No. 189/Addl.CIT-LTU/CIT(A)/ 2011-12 in the order dt. 30.09.2013 and, thereafter, while adjudicating the appeal against the order u/s. 147 in ITA No.45/JCIT(LTU)/CIT(A)/LTU/13-14 for the same AY 2008-09 and decided the issue in favour of the assessee.
97. The ld. Dr submitted that in Para 6 of the order of Ld.CIT(A) there is no analysis of facts and evidences brought out by the Assessing Officer in the order u/s 143(3). In Para 5 in the order u/s 143(3), the AO has clearly established the following patent defects in the claim of deduction of customs duty of Rs. 16.51,59,461 u/s 43B. In Para 5.2 of the order u/s 143(3) the AO has established that the appellant has violated Accounting Standard 2 according to which the closing stock shall be valued at cost or market price whichever is lower as per accounting standard (AS-2)..Further in column (ii) Column ITA Nos.1314 & 1368/Bang/2014 Page 120 of 154 No.21 of Tax Audit Report submitted by the appellant clearly states the " Basic custom duty is included in the value of respective raw material goods or fixed assets................................"
98. The ld. AR relied on the order of the CIT(A) and further submitted that this ground deals with the disallowance of a claim for deduction of Rs. 16,51,69,000/- being the customs duty paid during the year on goods imported during the year but held in stock at the end of the year. When the goods are cleared from the customs, customs duty is paid and the same is also included whilst valuing the closing stock of the goods. Therefore, this treatment is revenue neutral as both the debit side of the Profit and Loss Account as well as credit side have the same figure. Hence, the deduction which is allowable under section 43-B in the year of payment is effectively not allowed. Accordingly, the Assessee has consistently been claiming a separate deduction of the customs duty paid by it during the previous year on the goods lying in closing stock. This is apparent from pages 1 and 2 of the Paper Book where at page 1 the custom duty paid on imported goods lying in the opening stock in a sum of Rs. 14,51,28,000/- was added back to the computation of income and a deduction of Rs. 16,51,69,000/- was claimed separately at page 2 of the compilation. This claim was made basis the judgment of the Gujarat High Court in Lakhanpal National Limited vs. ITO 162 ITR 240 for the first time in the assessment year 1997-98.The Tribunal has consistently been allowing this claim in favour of the Assessee and a copy of the order for assessment year 1997-98 (Ref No ITA No 2555, 6235/Mum2003) was handed over ITA Nos.1314 & 1368/Bang/2014 Page 121 of 154 separately during the course of hearing where this claim has been dealt with in para 133 to 136 of the order. Reliance is also placed on para 10 of the order for the assessment year 2008-09 (Ref No ITA No1837/Bang/2013) which too was handed over separately. A perusal of this order would reveal that the claim is also supported by the judgment of the Supreme Court in CIT vs. Berger Paints 266 ITR 99 as well as that of the Special Bench of the Tribunal in Indian Communication Network vs. ACIT 49 ITD 56. Therefore, it is submitted that the addition was rightly deleted by the Commissioner of Income-tax (Appeals).
99. In the rejoinder the ld. Dr submitted that the argument of the appellant that earlier years are decided in its favour is of no relevance as issue of valuation of closing stock is an independent fact which is to be examined every year with reference to facts brought on record by the AO. The AO held in Para 5.4 of order u/s 143(3) that when the duty component was forming part of purchase invoice and the entire purchase cost was debited into the P&L account as cost of material consumed, the assessee company cannot claim the same as deduction while valuing the closing stock. The appellant "FAILED" to furnish evidence in support of alleged import duty of Rs. 16,51,69,465 and claimed as deduction u/s 43B. (Refer Para 5.2,5.3 and 5.4 at Pages 26 to 29 of the order u/s 143(3) dated 18.02.2013). The order of the Ld. CIT(A) is bad in law and facts as it fails to render any decision on the factual and legal aspects brought out by the AO and, therefore, it is ITA Nos.1314 & 1368/Bang/2014 Page 122 of 154 requested that the same being prejudicial to the interest of the revenue may kindly be reversed and order of AO be upheld.
100. Considering the rival submissions, we noted that the AO has not allowed the customs duty paid on the imported material which are lying in the closing stock observing that it will be double deduction as well as assessee could not produce proof of payment and res judicata is not applicable in the income tax proceedings. The AO has also relied on the judgment of Hon'ble Apex Court in the case of CIT v. Maruti Udyog Ltd. (2010) 186 Taxman 407 in which it has been held that the custom duty paid and allowed as deduction u/s. 43B has to be added to value of the closing stock. In the present case on hand, the assessee has also added the customs duty paid in the closing stock. While computing taxable income of the assessee for the relevant AY, the custom duty paid and included in the opening stock has been added and custom duty paid which are including in the closing stock has been reduced. So there is net impact on the difference of custom duty included in the opening stock and closing stock. Since this issue is consistently decided in favour of assessee in assessee's own case for the AY 2008-09 in ITA No. 1837/Bang/2013 dated 28.03.2022 and decisions relied by the ld. AR of the assessee supports to the case of the assessee. For the sake of convenience we are reproducing the judgment of Hon'ble Apex Court on the similar issue in the case of Berger Paints India Ltd. v. CIT noted supra in which it has been held as under:-
ITA Nos.1314 & 1368/Bang/2014 Page 123 of 154
8. There is no doubt that the judgment of the Gujarat High Court in Lakhanpal National Ltd.'s case (supra) is completely in favour of the assessee as it accepts the contention of the assessee in toto.
It is not in dispute that the decision in Lakhanpal National Ltd.'s case (supra) was not challenged by the department before this Court and thus has been accepted by the department. The interpretation placed on section 43B in Lakhanpal National Ltd.'s case (supra) was directly followed by the judgment of the Bombay High Court in CIT v. Bharat Petroleum Corpn. Ltd. [2001] 252 ITR 43 and by the Madras High Court in Chemicals & Plastics India Ltd. v. CIT [2003] 260 ITR 193. These two judgments also appear to have been accepted by the Revenue and have not been challenged before this court at all. This fact asserted before us by the petitioner- assessee has not been disputed in the counter affidavit of the Department.
9. In addition to these three High Court judgments, it appears that, noticing the conflicting views taken by the Tribunals, a Special Bench of the Income-tax Appellate Tribunal was constituted to resolve the issue. In Indian Communication Network (P.) Ltd. v. IAC [1994] 206 ITR 96 (SB - AT), the Special Bench of the Tribunal considered all the conflicting judgments and the judgment in Lakhanpal National Ltd.'s case (supra) as also its own order in the case of the appellant-assessee reported in Berger Paints India Ltd. v. CIT [1993] 44 ITD 573 (Cal.). After noticing all the conflicting views, and the attempt made by the Tribunal in Hindustan Computers Ltd. v. ITO [1987] 21 ITD 524 (Delhi), to distinguish the observations made in Lakhanpal National Ltd.'s case (supra), the Special Bench of the Tribunal made the following observations at Indian Communication Network (P.) Ltd.'s case (supra) :
"We would like to make it absolutely clear that the removal of the amount in question from the figure of closing stock is not tantamount to a 'tinkering' of the closing stock but allowing to the assessee the effective deduction to which it is entitled under section 43B. We would also like to emphasise that in the subsequent assessment year, the assessee's opening stock would ITA Nos.1314 & 1368/Bang/2014 Page 124 of 154 stand reduced by a corresponding figure since it cannot avail of a 'double deduction'." (p. 114) It was further observed by the Special Bench that :--
"Before we part with this ground, we cannot help feeling that the litigation between the parties could have been avoided since it was quite immaterial, whether full deduction was allowed in one year or partly in one year and partly in the next, since the assessee is a company and rate of tax is uniform. The gain to one and the loss to the other is illusory since what is deferred in one year, would have to be discharged in the next. In that sense, nobody has won and nobody has lost." (p. 114)
10. It is specifically asserted in the written submissions of the appellant-assessee that this decision of the Special Bench of the Income-tax Appellate Tribunal in Indian Communication Network (P.) Ltd.'s case (supra) has also not been challenged. This fact is also not disputed by the Revenue.
11. In view of judgments of this Court in Union of India v Kaumudini Narayan Dalal [2001] 249 ITR 219, CIT v. Narendra Doshi [2002] 254 ITR 606 and CIT v. Shivsagar Estate [2002] 257 ITR 59, the principle established is that if the revenue has not challenged the correctness of the law laid down by the High Court and has accepted it in the case of one assessee, then it is not open to the revenue to challenge its correctness in the case of other assessees, without just cause.
12. The judgment of the Gujarat High Court in Lakhanpal National Ltd.'s case (supra) was relied upon and followed by the Bombay High Court in Bharat Petroleum Corpn. Ltd.'s case (supra) as well as by the Madras High Court in Chemicals & Plastics India Ltd.'s case (supra). The Special Bench of the Tribunal also relied upon the judgment of the Gujarat High Court in Lakhanpal National Ltd.'s case (supra). The Revenue has attempted to distinguish the judgment of the Gujarat High Court on the facile ground that the judgment of the Gujarat High Court was one rendered in connection with a provisional assessment under section 141A and not in a regular assessment. In our view, this distinction is hardly acceptable. In any event, a reading of the Gujarat High Court's judgment shows that the judgment is not ITA Nos.1314 & 1368/Bang/2014 Page 125 of 154 based merely on the adjustments permissible under section 141A, as is contended by the revenue, but that the judgment proceeds on an analysis of section 43B and makes a finding that the entire amount of excise duty/customs duty paid by the assessee in a particular accounting year was an allowable deduction in respect of that year irrespective of the amount of excise duty/customs duty which was included in the valuation of the assessee's closing stock at the end of the accounting year. After coming to this conclusion, the Gujarat High Court then proceeded to consider the impact of section 141A and granted appropriate relief thereunder. It is not possible for us to accept the contention of the revenue that the judgment of the Gujarat High Court in Lakhanpal National Ltd.'s case (supra) is distinguishable on the ground put forward.
13. The decision of Lakhanpal National Ltd.'s case (supra) which clearly laid down the interpretation of section 43B was followed by the judgments of the Madras High Court and Bombay High Court and was again followed by the decision of Special Bench of the Income-tax Appellate Tribunal, none of which have been challenged. In these circumstances, the principle laid down in Kaumudini Narayan Dalal's case (supra), Narendra Doshi's case (supra) and Shivsagar Estate's case (supra) clearly applied. We see no 'just cause' as would justify departure from the principle. Hence, in our view, the revenue could not have been allowed to challenge the principle laid down in Lakhanpal National Ltd.'s case (supra), which was followed by the Inspecting Assistant Commissioner in the case of the assessee in the three assessment years in question. We are, therefore, of the view that the Commissioner, the Income-tax Appellate Tribunal and the Calcutta High Court erred in permitting the revenue to raise a contention contrary to what was laid down by the Gujarat High Court in Lakhanpal National Ltd.'s case (supra). This decision has been subsequently followed by the decisions of the Bombay High Court in Bharat Petroleum Corpn. Ltd.'s case (supra) and the Madras High Court in Chemicals & Plastics India Ltd.'s case (supra) as well as the decision of the Special Bench in Indian Communication Network (P.) Ltd.'s case (supra) , which have all remained unchallenged.
ITA Nos.1314 & 1368/Bang/2014 Page 126 of 154
101. Respectfully following the above judgment, the assessee is eligible for deduction us/. 43B (a) on the custom duty paid for the purchase of raw materials and debited into the profit & loss account either separately or included with the raw materials which are lying in the closing stock. The AO has not doubted the purchases. We further noted that during the course of assessment proceedings, the assessee was unable to produce payment for proof of custom duty with credible evidences as observed by the AO. Accordingly for limited purpose of verification, the issue is remitted back to AO for the verification of the customs duty paid which are lying in the value of closing stock. The assessee is directed to produce necessary evidences. Accordingly this issue is allowed for statistical purpose.
Sale proceeds from land transfer treated as income from other sources (ground no. 3)
102. The appellant had declared Long Term Capital Gain of Rs. 5,42,84,000 (LTCG) which included LTCG of Rs. 4,61,51,056 from claimed sale of land to ABB Global Services Ltd. The land measured 9 acres 27 guntas and was situated in Survey no. 88/3 and 88/4 Basavanahalli Village, Kasaba Hobli, Nelamangala Taluk. The land was purchased by assessee on 09,10.1997. The appellant had only produced an agreement for sale dt. 21.06.2007 in support of the transaction of transfer of capital asset. The AO enquired with the Sub- Registrar, Nelamangala and obtained the encumbrance certificate which showed that the land had not been transferred and sold to anybody in FY 2008-09 and was held by the company till 28.07.2012. The AO, therefore, relied upon section 54 of the Transfer of Property ITA Nos.1314 & 1368/Bang/2014 Page 127 of 154 Act and the decision of the Hon'ble Supreme Court in the case of Suraj Lamp Industries Pvt. Ltd. vs State of Haryana (2011) 202 Taxman 607 and held that immovable properties can be legally transferred only by a registered deed on conveyance and not by an agreement of sale. The appellant, on being confronted with the above facts by the AO had filed evidence of receipt of consideration amount of Rs. 5,99,50,000 from the purchaser in its bank account and had informed that possession of the land had been transferred to the purchaser in completion of the sale transaction. The AO was not moved by this argument and treated the entire sale consideration as income from other sources. He also mentioned that the entire property had been attached u/s 281B of the IT Act through order dt. 06.11.2012 and had there been any sale of the property the purchaser ought to have objected to such attachment, which it did not. During the appellate proceedings before the CIT(A), the appellant informed that it had furnished an agreement to sale" and an "unregistered sale deed" before the AO and the purchaser had not only taken possession of the land but also started utilizing it for its business by constructing a factory building on it. It was asserted that the law does not mandate that for a transaction to be considered as a 'transfer' the underlying asset should have been registered in the name of the purchaser. It was stated that possession of asset and right to use it are enough to justify legal ownership. Reliance was placed on the following judicial decisions in this regard -
• CIT vs. Hormasji Mancharji Vaid [2001]118 Taxman 276 (Guj.) (FB) • CIT vs. C.F.Raju [2007] 158 Taxman 310 (Ker.) ITA Nos.1314 & 1368/Bang/2014 Page 128 of 154 • ACIT vs. Mrs. Geetadevi Pasari (2006) 104 TTJ (Mumbai) 375 • Dnyaneshwar N Mulik vs. ACIT [2005] 98 TTJ 179 (Pune ITAT) • Radhe developers & Ors. vs. ITO Ors [2008] 113 I 1.1 300 (Ahmedabad ITAT) • Vemanna Reddy (HUF) vs. ITO [20081 114 TTJ 246 (Bangalore ITAT) • ITO vs. Rina B. Parwani [2009] 31 SOT 36 (Pune)
103. The ld. CIT(A) after considering the entire issue relied on the case laws cited, allowed the appeal by observing that the transaction falls within the definition of "part performance" u/s. 53A of the Transfer of Property Act 1882 which is recognized u/s 2(47)(v) as constituting "transfer" in relation to a capital asset.
104. The ld. DR relied on the order of AO and submitted that the ld. CIT(A) is not justified by observing that the said land is transferred in terms of section 2(47) of the Income Tax Act and has violated the judgment of Hon'ble Apex Court as relied by the AO. She further submitted that in Para 8 of the order of Ld.CIT(A) there is no analysis of facts and evidences brought on record by the Assessing Officer in the order u/s 143(3) dated 18.02.2013. The AO in the Para 7 of the order u/s 143(3) clearly established the appellant failed to produced registered sale deed in support of the claim of sale proceeds of a land held by it. Further, AO obtained EC certificate from SRO, Nelamangla which showed the appellant to be legal owner of the land as on 28.07.2012. So, when the appellant continued to be the owner of the property until 28.07.2012,as per records of SRO, Nelamangla, how did the appellant claim to have sold the property in the previous year relevant to A.Y.2009-10? Department having such surmounting ITA Nos.1314 & 1368/Bang/2014 Page 129 of 154 evidences against the appellant, the CIT(A) by merely relying on some clauses in the Act gave relief to the appellant. The order of Ld. CIT(A) is in gross violation of the law laid down by the Hon'ble Supreme Court in the case of Suraj Lamps & Industries (P) Ltd. Vs State of Haryana & Anr. [2012] 340 ITR 1 [2011] 202 TAMMAN 607 . para 11, 12 & 16 are the important findings in this decision which are being relied upon.(annex-iii). The order of the ld. CIT(A) is bad in law and facts as it fails to render any decision on the factual and legal aspects brought out by the AO and, therefore, it is requested that the same being prejudicial to the interest of the revenue may kindly be reversed and order of AO be upheld.
105. The ld. AR submitted that the Assessee has entered into an Agreement to Sell dated 21st June 2007 to transfer a certain plot of land belonging to it to a company called ABB Global Services Limited. A copy of this agreement is to be found at page 144 of Paper Book. This agreement record that the consideration for the transfer was Rs. 5,99,50,000/- and that the conveyance shall be executed on the fulfillment of certain conditions. Thereafter, on 31st December, 2008 which is during the previous year relevant to assessment year 2009-10 an Indenture of Sale ( Page 197 of Paper Book) was executed which also records that the possession of the property was given to the transferee on the execution of the Indenture. As this event took place in the previous year relevant to assessment year 2009-10 the Assessee offered the capital gains arising on the transfer the Assessing Officer does not dispute that the sum of Rs. 5,99,50,000/- was received as ITA Nos.1314 & 1368/Bang/2014 Page 130 of 154 consideration for the transfer but says that as the actual mutation entry was done only in 2012, the said sum of Rs. 5,99,50,000/- is to be assessed as income chargeable under the residuary head. It is submitted that having regard to the definition of the word transfer in section 2(47) it is absolutely clear that the Assessee has correctly offered to tax the capital gains arising on the transfer of the said land in the assessment year 2009-10 as not only was there a duly executed deal but also possession of the land was handed over. If, for any reason, the Assessing Officer is of the view that the transfer is to take place only when the mutation entry is passed then it must follow that the amount of Rs. 5,99,50,000/- should be assessed as capital gains in that year and in the present case it must be treated as advance receipt for the transfer of the property. Under no circumstances whatsoever could the amount received which characterized as income chargeable under the residuary head as has been done by the Assessing Officer. The argument of the revenue that the amount is received it must bear the character of the income is contrary to the well settled principle enunciated by the Supreme Court in Parimisetti Seetharamamma vs. CIT 57 ITR 532. Therefore, the Commissioner of Income-tax (Appeals) has rightly rejected the contention of the Assessing Officer and upheld the stand of the Assessee.
106. In the rejoinder the ld. DR submitted that the case law relied by the ld. AR of the assessee are not applicable in the present facts of the case. The Hon'ble Apex court has settled this issue that the for treating ITA Nos.1314 & 1368/Bang/2014 Page 131 of 154 transfer within the meaning of section 2(47) of the I.T. Act. 1961 the registration of the property is mandatory.
107. Considering the rival submissions, there is no dispute in the facts that the assessee made sale agreement in the impugned AY and the entire payments were received. However, there was no sale deed executed till the end of the financial year and even upto date 27.07.2012 as observed by the AO the letter received from the EC is scanned in the assessment order and still the ownership is lying with the assessee. We also noted that the assessee has made another agreement dated 31.12.2008 referring to the agreement to sale dated 21.10.2007 but this agreement to sell was not produced before us. The assessee has placed agreement to sale dated 21.06.2007 at P.B. page No. 144 to 147. As per section 54 of the Transfer of Property Act, sale/property of an immovable property would be effected only through registration of the property duly stamped and registered as required by law and agreement of sale does not create any interest or charge on its subject matter. The AO had relied on the judgment of Hon'ble Apex Court in the case of Suraj Lamp Industries P. Ltd. v. State of Haryana (2011), 202 Taxman 607 in which it has been held as under:-
6. In this background, we will examine the validity and legality of SA/GPA/WILL transactions. We have heard learned Mr. Gopal Subramanian, Amicus Curiae and noted the views of the Government of NCT of Delhi, Government of Haryana, Government of Punjab and Government of Uttar Pradesh who have filed their submissions in the form of affidavits.
Relevant Legal Provisions ITA Nos.1314 & 1368/Bang/2014 Page 132 of 154
7. Section 5 of the Transfer of Property Act, 1882 ('TP Act' for short) defines 'transfer of property' as under:
"5. Transfer of Property defined : In the following sections "transfer of property" means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself [or to himself] and one or more other living persons; and "to transfer property" is to perform such act."
Section 54 of the TP Act defines 'sales' thus:
"Sale" is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised.
Sale how made. Such transfer, in the case of tangible immoveable property of the value of one hundred rupees and upwards, or in the case of a reversion or other intangible thing, can be made only by a registered instrument.
In the case of tangible immoveable property of a value less than one hundred rupees, such transfer may be made either by a registered instrument or by delivery of the property.
Delivery of tangible immoveable property takes place when the seller places the buyer, or such person as he directs, in possession of the property.
Contract for sale.-A contract for the sale of immovable property is a contract that a sale of such property shall take place on terms settled between the parties.
It does not, of itself, create any interest in or charge on such property."
Section 53A of the TP Act defines 'part performance' thus :
"Part Performance. - Where any person contracts to transfer for consideration any immoveable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, ITA Nos.1314 & 1368/Bang/2014 Page 133 of 154 being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract :
Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof."
8. We may next refer to the relevant provisions of the Indian Stamp Act, 1999 (Note : Stamp Laws may vary from state to state, though generally the provisions may be similar). Section 27 of the Indian Stamp Act, 1899 casts upon the party, liable to pay stamp duty, an obligation to set forth in the instrument all facts and circumstances which affect the chargeability of duty on that instrument. Article 23 prescribes stamp duty on 'Conveyance'. In many States appropriate amendments have been made whereby agreements of sale acknowledging delivery of possession or power of Attorney authorizes the attorney to 'sell any immovable property are charged with the same duty as leviable on conveyance.
9. Section 17 of the Registration Act, 1908 which makes a deed of conveyance compulsorily registrable. We extract below the relevant portions of section 17.
"Section 17 - Documents of which registration is compulsory.--
(1) The following documents shall be registered, namely:--
** ** *
(b) other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or ITA Nos.1314 & 1368/Bang/2014 Page 134 of 154 contingent, of the value of one hundred rupees and upwards, to or in immovable property.
** ** ** (1A) The documents containing contracts to transfer for consideration, any immovable property for the purpose of section 53A of the Transfer of Property Act, 1882 (4 of 1882) shall be registered if they have been executed on or after the commencement of the Registration and Other Related laws (Amendment) Act, 2001 and if such documents are not registered on or after such commencement, then, they shall have no effect for the purposes of the said section 53A".
Advantages of Registration
10. In the earlier order dated 15.5.2009, the objects and benefits of registration were explained and we extract them for ready reference :
"The Registration Act, 1908, was enacted with the intention of providing orderliness, discipline and public notice in regard to transactions relating to immovable property and protection from fraud and forgery of documents of transfer. This is achieved by requiring compulsory registration of certain types of documents and providing for consequences of non-registration.
Section 17 of the Registration Act clearly provides that any document (other than testamentary instruments) which purports or operates to create, declare, assign, limit or extinguish whether in present or in future "any right, title or interest" whether vested or contingent of the value of Rs. 100 and upwards to or in immovable property.
Section 49 of the said Act provides that no document required by Section 17 to be registered shall, affect any immovable property comprised therein or received as evidence of any transaction affected such property, unless it has been registered. Registration of a document gives notice to the world that such a document has been executed.
ITA Nos.1314 & 1368/Bang/2014 Page 135 of 154 Registration provides safety and security to transactions relating to immovable property, even if the document is lost or destroyed. It gives publicity and public exposure to documents thereby preventing forgeries and frauds in regard to transactions and execution of documents. Registration provides information to people who may deal with a property, as to the nature and extent of the rights which persons may have, affecting that property. In other words, it enables people to find out whether any particular property with which they are concerned, has been subjected to any legal obligation or liability and who is or are the person/s presently having right, title, and interest in the property. It gives solemnity of form and perpetuate documents which are of legal importance or relevance by recording them, where people may see the record and enquire and ascertain what the particulars are and as far as land is concerned what obligations exist with regard to them. It ensures that every person dealing with immovable property can rely with confidence upon the statements contained in the registers (maintained under the said Act) as a full and complete account of all transactions by which the title to the property may be affected and secure extracts/copies duly certified."
Registration of documents makes the process of verification and certification of title easier and simpler. It reduces disputes and litigations to a large extent.
Scope of an Agreement of sale
11. Section 54 of TP Act makes it clear that a contract of sale, that is, an agreement of sale does not, of itself, create any interest in or charge on such property. This Court in Narandas Karsondas v. S.A. Kamtam [1977] 3 SCC 247, observed:
"A contract of sale does not of itself create any interest in, or charge on, the property. This is expressly declared in Section 54 of the Transfer of Property Act. See Rambaran Prosad v. Ram Mohit Hazra [1967] 1 SCR 293. The fiduciary character of the personal obligation created by a contract for sale is recognised in Section 3 of the Specific Relief Act, 1963, and in Section 91 of the Trusts Act. The personal obligation created by a contract of sale is described in Section 40 of the Transfer of Property Act as an obligation arising out of contract and annexed to the ITA Nos.1314 & 1368/Bang/2014 Page 136 of 154 ownership of property, but not amounting to an interest or easement therein."
In India, the word 'transfer' is defined with reference to the word 'convey'. The word 'conveys' in section 5 of Transfer of Property Act is used in the wider sense of conveying ownership … …that only on execution of conveyance ownership passes from one party to another."
In Rambhau Namdeo Gajre v. Narayan Bapuji Dhotra [2004 (8) SCC 614] this Court held:
"Protection provided under Section 53A of the Act to the proposed transferee is a shield only against the transferor. It disentitles the transferor from disturbing the possession of the proposed transferee who is put in possession in pursuance to such an agreement. It has nothing to do with the ownership of the proposed transferor who remains full owner of the property till it is legally conveyed by executing a registered sale deed in favour of the transferee. Such a right to protect possession against the proposed vendor cannot be pressed in service against a third party."
It is thus clear that a transfer of immoveable property by way of sale can only be by a deed of conveyance (sale deed). In the absence of a deed of conveyance (duly stamped and registered as required by law), no right, title or interest in an immoveable property can be transferred.
12. Any contract of sale (agreement to sell) which is not a registered deed of conveyance (deed of sale) would fall short of the requirements of sections 54 and 55 of TP Act and will not confer any title nor transfer any interest in an immovable property (except to the limited right granted under section 53A of TP Act). According to TP Act, an agreement of sale, whether with possession or without possession, is not a conveyance. Section 54 of TP Act enacts that sale of immoveable property can be made only by a registered instrument and an agreement of sale does not create any interest or charge on its subject matter.
Scope of Power of Attorney ITA Nos.1314 & 1368/Bang/2014 Page 137 of 154
13. ...............
Scope of Will
14. ............
Conclusion
15. Therefore, a SA/GPA/WILL transaction does not convey any title nor create any interest in an immovable property. The observations by the Delhi High Court, in Asha M. Jain v. Canara Bank - 94 [2001] DLT 841, that the "concept of power of attorney sales have been recognized as a mode of transaction"
when dealing with transactions by way of SA/GPA/WILL are unwarranted and not justified, unintendedly misleading the general public into thinking that SA/GPA/WILL transactions are some kind of a recognized or accepted mode of transfer and that it can be a valid substitute for a sale deed. Such decisions to the extent they recognize or accept SA/GPA/WILL transactions as concluded transfers, as contrasted from an agreement to transfer, are not good law.
16. We therefore reiterate that immovable property can be legally and lawfully transferred/conveyed only by a registered deed of conveyance. Transactions of the nature of 'GPA sales' or 'SA/GPA/WILL transfers' do not convey title and do not amount to transfer, nor can they be recognized or valid mode of transfer of immoveable property. The courts will not treat such transactions as completed or concluded transfers or as conveyances as they neither convey title nor create any interest in an immovable property. They cannot be recognized as deeds of title, except to the limited extent of section 53A of the TP Act. Such transactions cannot be relied upon or made the basis for mutations in Municipal or Revenue Records. What is stated above will apply not only to deeds of conveyance in regard to freehold property but also to transfer of leasehold property. A lease can be validly transferred only under a registered Assignment of Lease. It is time that an end is put to the pernicious practice of SA/GPA/WILL transactions known as GPA sales.
ITA Nos.1314 & 1368/Bang/2014 Page 138 of 154
17. It has been submitted that making declaration that GPA sales and SA/GPA/WILL transfers are not legally valid modes of transfer is likely to create hardship to a large number of persons who have entered into such transactions and they should be given sufficient time to regularize the transactions by obtaining deeds of conveyance. It is also submitted that this decision should be made applicable prospectively to avoid hardship.
18. We have merely drawn attention to and reiterated the well- settled legal position that SA/GPA/WILL transactions are not 'transfers' or 'sales' and that such transactions cannot be treated as completed transfers or conveyances. They can continue to be treated as existing agreement of sale. Nothing prevents affected parties from getting registered Deeds of Conveyance to complete their title. The said 'SA/GPA/WILL transactions' may also be used to obtain specific performance or to defend possession under section 53A of TP Act. If they are entered before this day, they may be relied upon to apply for regularization of allotments/leases by Development Authorities. We make it clear that if the documents relating to 'SA/GPA/WILL transactions' has been accepted acted upon by DDA or other developmental authorities or by the Municipal or revenue authorities to effect mutation, they need not be disturbed, merely on account of this decision.
19. We make it clear that our observations are not intended to in any way affect the validity of sale agreements and powers of attorney executed in genuine transactions. For example, a person may give a power of attorney to his spouse, son, daughter, brother, sister or a relative to manage his affairs or to execute a deed of conveyance. A person may enter into a development agreement with a land developer or builder for developing the land either by forming plots or by constructing apartment buildings and in that behalf execute an agreement of sale and grant a Power of Attorney empowering the developer to execute agreements of sale or conveyances in regard to individual plots of land or undivided shares in the land relating to apartments in favour of prospective purchasers. In several States, the execution of such development agreements and powers of attorney are already regulated by law and subjected to specific stamp duty.
ITA Nos.1314 & 1368/Bang/2014 Page 139 of 154 Our observations regarding 'SA/GPA/WILL transactions' are not intended to apply to such bona fide/genuine transactions."
107. Further in the case of CIT v. Balbir Singh Maini reported in (2017) 86 taxmann.com 94 (SC), the Hon'ble Apex Court has held as under:-
17. The relevant sections that are necessary for us to decide the present matter are as under:
Transfer of Property Act "53A. Part performance. - Where any person contracts to transfer for consideration any immoveable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefore by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract:
Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof.] ITA Nos.1314 & 1368/Bang/2014 Page 140 of 154 Income Tax Act Section 2 - Definitions In this Act, unless the context otherwise requires, -
(47) "transfer", in relation to a capital asset, includes, --
(i) to (iv)** ** **
(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or
(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.
45. Capital gains - (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place.
48. Mode of computation - The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:
expenditure incurred wholly and exclusively in connection with such transfer;
the cost of acquisition of the asset and the cost of any improvement thereto:"
ITA Nos.1314 & 1368/Bang/2014 Page 141 of 154
18. Section 53A, as is well known, was inserted by the Transfer of Property Amendment Act, 1929 to import into India the equitable doctrine of part performance. This Court has in Shrimant Shamrao Suryavanshi v. Pralhad Bhairoba Suryavanshi [2002] 3 SCC 676 stated as follows:
"16. But there are certain conditions which are required to be fulfilled if a transferee wants to defend or protect his possession under Section 53-A of the Act. The necessary conditions are:
there must be a contract to transfer for consideration of any immovable property;
the contract must be in writing, signed by the transferor, or by someone on his behalf;
the writing must be in such words from which the terms necessary to construe the transfer can be ascertained;
the transferee must in part-performance of the contract take possession of the property, or of any part thereof;
the transferee must have done some act in furtherance of the contract; and the transferee must have performed or be willing to perform his part of the contract."
19. It is also well-settled by this Court that the protection provided under Section 53A is only a shield, and can only be resorted to as a right of defence. Rambhau Namdeo Gajre v. Narayan Bapuji Dhgotra [2004] 8 SCC 614 , para 10. An agreement of sale which fulfilled the ingredients of Section 53A was not required to be executed through a registered instrument. This position was changed by the Registration and Other Related Laws (Amendment) Act, 2001. Amendments were made simultaneously in Section 53A of the Transfer of Property Act and Sections 17 and 49 of the Indian Registration Act. By the aforesaid amendment, the words "the contract, though required to ITA Nos.1314 & 1368/Bang/2014 Page 142 of 154 be registered, has not been registered, or" in Section 53A of the 1882 Act have been omitted. Simultaneously, Sections 17 and 49 of the 1908 Act have been amended, clarifying that unless the document containing the contract to transfer for consideration any immovable property (for the purpose of Section 53A of 1882 Act) is registered, it shall not have any effect in law, other than being received as evidence of a contract in a suit for specific performance or as evidence of any collateral transaction not required to be effected by a registered instrument. Section 17(1A) and Section 49 of the Registration Act, 1908 Act, as amended, read thus:
"17(1A). The documents containing contracts to transfer for consideration, any immovable property for the purpose of Section 53A of the Transfer of Property Act, 1882 (4 of 1882) shall be registered if they have been executed on or after the commencement of the Registration and Other Related Laws (Amendment) Act, 2001 and if such documents are not registered on or after such commencement, then they shall have no effect for the purposes of the said Section 53A."
"49. Effect of non-registration of documents required to be registered. No document required by Section 17 or by any provision of the Transfer of Property Act, 1882 (4 of 1882), to be registered shall--
affect any immovable property comprised therein, or confer any power to adopt, or be received as evidence of any transaction affecting such property or conferring such power, unless it has been registered:
Provided that an unregistered document affecting immovable property and required by this Act or the Transfer of Property Act, 1882 (4 of 1882), to be registered may be received as evidence of a contract in a suit for specific performance under Chapter II of the Specific Relief Act, 1887 (1 of 1877) or as evidence of any collateral transaction not required to be effected by registered instrument."
ITA Nos.1314 & 1368/Bang/2014 Page 143 of 154
20. The effect of the aforesaid amendment is that, on and after the commencement of the Amendment Act of 2001, if an agreement, like the JDA in the present case, is not registered, then it shall have no effect in law for the purposes of Section 53A. In short, there is no agreement in the eyes of law which can be enforced under Section 53A of the Transfer of Property Act. This being the case, we are of the view that the High Court was right in stating that in order to qualify as a "transfer" of a capital asset under Section 2(47)(v) of the Act, there must be a "contract" which can be enforced in law under Section 53A of the Transfer of Property Act. A reading of Section 17(1A) and Section 49 of the Registration Act shows that in the eyes of law, there is no contract which can be taken cognizance of, for the purpose specified in Section 53A. The ITAT was not correct in referring to the expression "of the nature referred to in Section 53A" in Section 2(47)(v) in order to arrive at the opposite conclusion. This expression was used by the legislature ever since sub-section
(v) was inserted by the Finance Act of 1987 w.e.f. 01.04.1988. All that is meant by this expression is to refer to the ingredients of applicability of Section 53A to the contracts mentioned therein. It is only where the contract contains all the six features mentioned in Shrimant Shamrao Suryavanshi (supra), that the Section applies, and this is what is meant by the expression "of the nature referred to in Section 53A". This expression cannot be stretched to refer to an amendment that was made years later in 2001, so as to then say that though registration of a contract is required by the Amendment Act of 2001, yet the aforesaid expression "of the nature referred to in Section 53A" would somehow refer only to the nature of contract mentioned in Section 53A, which would then in turn not require registration. As has been stated above, there is no contract in the eye of law in force under Section 53A after 2001 unless the said contract is registered. This being the case, and it being clear that the said JDA was never registered, since the JDA has no efficacy in the eye of law, obviously no "transfer" can be said to have taken place under the aforesaid document. Since we are deciding this case on this legal ground, it is unnecessary for us to go into the other questions decided by the High Court, namely, whether under the JDA possession was or was not taken; whether only a licence was granted to develop the property; and whether the developers were or were not ready and willing to carry out their ITA Nos.1314 & 1368/Bang/2014 Page 144 of 154 part of the bargain. Since we are of the view that sub-clause (v) of Section 2(47) of the Act is not attracted on the facts of this case, we need not go into any other factual question.
21. However, the High Court has held that Section 2(47)(vi) will not apply for the reason that there was no change in membership of the society, as contemplated. We are afraid that we cannot agree with the High Court on this score. Under Section 2(47)(vi), any transaction which has the effect of transferring or enabling the enjoyment of any immovable property would come within its purview. The High Court has not adverted to the expression "or in any other manner whatsoever" in sub-clause (vi), which would show that it is not necessary that the transaction refers to the membership of a cooperative society. We have, therefore, to see whether the impugned transaction can fall within this provision.
22. The object of Section 2(47)(vi) appears to be to bring within the tax net a de facto transfer of any immovable property. The expression "enabling the enjoyment of" takes color from the earlier expression "transferring", so that it is clear that any transaction which enables the enjoyment of immovable property must be enjoyment as a purported owner thereof1 The idea is to bring within the tax net, transactions, where, though title may not be transferred in law, there is, in substance, a transfer of title in fact."
108. Further the Hon'ble Bombay High Court has also held that unless the registration of the property is done it cannot be construed in terms of "transfer" in the case of Prithvi Consultants Pvt. Ltd vs DCIT reported in [2024] 470 ITR 37 (Bom) dated 05.09.2023.
109. Respectfully following the judgment of the Hon'ble Apex Court we hold that the documents containing contracts to transfer for consideration, any immovable property for the purpose of section 53A of the Transfer of Property Act, 1882 (4 of 1882) shall be registered if they have been executed on or after the commencement of the ITA Nos.1314 & 1368/Bang/2014 Page 145 of 154 Registration and Other Related laws (Amendment) Act, 2001 and if such documents are not registered on or after such commencement, then, they shall have no effect for the purposes of the said section 53A". Accordingly it cannot be said that the impugned property got transferred within the meaning of section 2(47) of the Income Tax Act. Accordingly only on the basis of sale agreement in the impugned assessment year there was no capital gain arising on the transfer of the said property. We also seen from the sale agreement dated 21.06.2007 that there are conditional agreement made as per clause 6 which says that at Sr. No. 06 " This agreement is subject to clearance/ approvals from the concerned authorities land conversion, construction plans, pollution consents etc.". Considering the totality of the facts, there is no capital gain arised on the transfer of the capital asset in terms of section 2(47) of the I.T.Act. Therefore the capital gain shown by the assessee is not correct. The ld. AR has relied on the judgment of Hon'ble Supreme Court in Parimisetti Seetharamamma vs. CIT 57 ITR 532 is related for the AY 1946-47, 1947-48, 1950-51 and 1951-52 but after the amendment made in the registration act 2001 the registration of the property is required if the sale price is more the specified limits, therefore, this judgment relied by the ld. AR will not support to the case of the assesse. We do not find fault in the arguments of the ld. DR. Accordingly the AO is directed to compute capital gain in the year in which the transfer takes place in the light of the judgments relied by us noted supra after giving reasonable opportunity to the assessee and decide the issue as per law. We noted ITA Nos.1314 & 1368/Bang/2014 Page 146 of 154 from the written synopsis submitted by the ld. AR of the assessee that, "If, for any reason, the Assessing Officer is of the view that the transfer is to take place only when the mutation entry is passed then it must follow that the amount of Rs. 5,99,50,000/- should be assessed as capital gains in that year and in the present case it must be treated as advance receipt for the transfer of the property." The ld. AR of the assessee was also unable to produce sale deed/ mutation entry before us till the date of hearing. It appears that the registration of the said property has not been completed. The assessee has deleted the said land from the balance sheet and has considered income under the head capital gain and in the balance sheet, the assessee has also not shown the amount received of RS.5,99,50,000 as a liability. The balance sheet of the company has been adopted in the Annual General Meeting of the company which cannot be changed/altered. Therefore, we cannot direct to the AO to treat it as advance. Therefore the alternate argument of the assessee is rejected. Accordingly this ground is allowed for statistical purpose.
Disallowance of provision for late deliveries (ground no, 4)
110. Briefly stated the facts are the Appellant during the course of business enters into contracts with the customers for supply of products or rendering of services. In most of the cases, the timing of delivery/work completion is a critical issue and the contracts carry clauses relating to levy of liquidated damages if the delivery of the goods/completion of the works is delayed for reasons not attributable to the customer. The appellant had made delays in supplies/deliveries ITA Nos.1314 & 1368/Bang/2014 Page 147 of 154 of work to be made to customers during the subject financial year and accordingly, a provision for liquidated damages had been made with respect to such delays. Later, when an invoice is raised by the appellant the customer always exercises its right towards levy of liquidated damages and deducts/retains the agreed portion of the contract value while remitting consideration to the appellant. The AO held that the above expenses incurred are purely contingent in nature and do not constitute expenditure and they cannot therefore, be the subject matter of deduction under the mercantile system of accounting. The AO, therefore, disallowed Rs. 18,04,06,823 under section 37 of the Act. The AO relied upon the assessee's company submission that "during the course of the execution of the contract, a delay may occur due to a combination of reasons" (emphasis provided). The AO noted that since the delay was not a foregone conclusion in case of every contract execution, the provisioning was uncertain and contingent in nature.
111. Aggrieved from the order of the AO the assessee before the CIT (A) was argued that the AO has not appreciated the actual manner of conduct of the assessee's business. It is only after the contractual project execution period has been exceeded does the appellant make the provision towards late deliveries. The revenues recognized through the bill raised; however, are offered in full. On exceeding of the project timeline the appellant files applications for time extension with the contractee and engages in negotiations to finalize the responsibility attribution for the delay. Therefore, even though the liability for the liquidated damages had crystallized on exceeding of the project ITA Nos.1314 & 1368/Bang/2014 Page 148 of 154 timeline, the actual quantification of the penalty is the result of such negotiation. The following judicial decisions were cited in this regard.
Bharat Earth Movers vs. CIT (2000) 112 Taxman 61 (SC) Metal Box Co. of India Ltd vs. Their Workmen (1969) 73 ITR 53 (SC) Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (Cal) Arnrish & Co. vs. CIT l(2002) 121 Taxman 604 (Guj) Taparia Tools Ltd vs. Jt CIT (2003) 260 1TR 102 (Bombay) Asia Aviation Ltd. vs. ACIT (2010) 126 ITD 406 (ITAT Delhi)
112. The CIT (A) after considering the submissions of the assessee allowed this ground by observing that "I am inclined to agree with the appellant's arguments that the damages/liability towards delay was identifiable and estimated with reasonable certainty in the provision made. The copies of some of the contract filed before me as evidence contain a clear penalty clause stating that "in case of any delay in supplies for reasons not attributable to the purchaser, supplier shall be liable to the purchaser, penalties of an amount calculated at the rate of 0.5% of the contract price for each week of delay or part thereof." (order no. 11261 dt. 08.08.2006 with FFE Minerals India Pvt. Ltd.) For installation related work orders there is a penalty "in case of any delay in commissioning for reasons not attributable to the purchaser of 0.5 % of the contract price for each week of delay or part of thereof." (order no. 11265 dt. 08.08.2006 with FFE Minerals India Pvt. Ltd). Considering these evidences, the manner of the conduct of the appellant's business and the facts of the case, I am convinced that the provisions do not constitute contingent expenditure and are allowable u/s.. This ground, therefore, succeeds."
ITA Nos.1314 & 1368/Bang/2014 Page 149 of 154
113. Aggrieved from the above decision of the CIT(A) the revenue has raised this issue that the provision is a contingent in nature and not allowable u/s 37 of the Income Tax Act. 1961.
114. The Ld. DR relied on the order of AO and submitted that provision for late deliveries being in nature of contingent liabilities. there is no finding by ld.CIT(A) - no data called for actual expenditure incurred during the year. In Para 21 of the order of Ld.CIT(A) there is no analysis of facts and evidences brought out by the Assessing Officer in the order u/s 143(3). The AO in the Para 19 of the order established that expenditure of Rs. 18.04.06,823 being provisional in nature cannot be claimed u/s 37 of the I.T. Act. The "CONCEPT OF PROVISION" and "TREATMENT TO BE GIVEN"
while allowing deduction u/s 37 of the I.T.Act is now laid down by Hon'ble Supreme Court in the case of M/s Rotork Control India (P) ltd. Vs CIT 314 ITR 62 (SC) (ANNEX-IV) . The relevant PARA 10, 11 & 17 from the decision are reproduced below :
"10. What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.
11. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
ITA Nos.1314 & 1368/Bang/2014 Page 150 of 154
17..................................................................................................... ...........................The principle which emerges from these decisions is that if the historical trend indicates that large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under Section 37 of the 1961 Act. It would all depend on the data systematically maintained by the assessee ....................... ......................................................................."
(Emphasis supplied)
115. The order of the Ld. CIT(A) is bad in law and facts as it fails to render any decision on the factual and legal aspects brought out by the AO except for examining some clauses and not calling for the historical data to understand the method of accounting followed in the earlier years and the actual expenses incurred during the current year and, therefore, it is requested that the decision rendered by Ld.CIT(A) being prejudicial to the interest of the revenue may kindly be reversed and order of AO be upheld.
116. The ld. AR relied on the order of CIT(A) and submitted that this ground challenges the deletion of the addition made by the Assessing Officer on account of the provision for liquidated damages on the footing that the same is contingent in nature. In terms of the contracts entered into by the aassessee with its customer the aassessee was to fulfill its obligation within a particular period of time. In the event there was any default in fulfillment of the obligation by the date mentioned in the contracts, then, the aassessee was liable to pay damages in a sum which is specified in the contract. As and when a ITA Nos.1314 & 1368/Bang/2014 Page 151 of 154 default actually takes place, the aassessee provides for its obligation to pay its liquidated damages and claims the same as a deduction. The Assessing Officer treated the provision so made as a contingent one. The Commissioner of Income-tax (Appeals) in para 21.3 of her order has found that the liability for payment of damages on account of the delay was ascertainable and estimated with reasonable certainty having regard to the terms of the contracts. Once that is so the principle laid down by the Supreme Court in Bharat Earth Movers vs. CIT 245 ITR 428 is clearly applicable and the finding of the Commissioner of Income-tax (Appeals) ought to be upheld.
117. Considering the rival submissions the AO has disallowed the provision for late delivery into the Profit & Loss account to the extent of Rs.18,04,06,823 u/s. 37 noted that it is merely provision and it is contingent in nature which are not allowable. The CIT(A) noted that the damages/liability towards delay was identifiable and estimated with reasonable certainty in the provisions made. The specimen copy of the contracts were filed and it was noted that there is a penalty clause which are to be calculated @ 0.5% of the contract price for each week of delay or part thereof and since in the order No.11261 & 11265 dated 8.8.2006 with FFE Minerals India P. Ltd. and held that considering the conduct of the business of the assessee the provisions are not contingent expenditure and allowed. The ld. DR vehemently argued on this point and submitted written synopsis quoted supra. On the other hand, the ld. AR of the assessee has relied on the order of CIT(A) and filed written synopsis quoted supra and submitted that it is ITA Nos.1314 & 1368/Bang/2014 Page 152 of 154 on the reasonable estimate basis and it is not contingent in nature,. looking to the conduct of business of assessee the provisions made are not contingent in nature. In the contract agreement, there are some penalty clauses if the projects are not completed within the specified time line. Therefore it is required to make provisions for the delayed projects. We noted that the assessee has not furnished any calculation for making provision on any scientific basis as per law laid down by the Hon'ble Apex Court in the case of Rotork Control (I) P. Ltd. as relied by the dl. DR. If the project duration falls in more than one financial year and unless project allowed period is not expired or in other words projects are not completed within the time allowed, the penalty is to be charged. But the assessee is unable to demonstrate the basis of provisions made, how it has been arrived, the project details, has not been filed by the ld. AR of the assessee. . The assessee has also not satisfied the requirement of section 37 for allowability of the provision for late delivery expenditure. There is no doubt that the penalty clause may be imposed by the contractee for late deliveries or completion of the project and assessee has to pay some obligations as per the terms and conditions of the contract, but here the assessee has not brought any such material or any reasonable estimate/calculation for making such provision. As per the auditor's report "Note to accounts revenue from long term contracts are recognized on the percentage of completion method, in proportion that the contract costs incurred for work performed up to the reporting date bear to the estimated total contract costs". This reporting says the assessee is ITA Nos.1314 & 1368/Bang/2014 Page 153 of 154 following for calculating revenue percentage of completion method Once the assessee is following percentage of completion method and no revenue has been recognized for the balance works which are yet to be done by the assessee and the penalty is to be levied for the delayed projects and the period of completion is also not known to the assessee. There is no revenue recognized by the assessee by following the Percentage of Completion method on such balance works. Then in such circumstances it cannot be said that the provision made by the assessee are in the line of the judgment of the Hon'ble Apex Court as relied by the ld. AR of the assessee. The CIT(A) has accepted only the submission of the assessee. The case laws relied by the ld. AR of the assessee in the case of Bharat Earth Movers vs. CIT 245 ITR 428 is not applicable in the present facts of the case. In the judgment cited by the ld. AR it relates to the provision for leave encashment of its employees and the provision was made by assessee-company for meeting liability towards leave encashment proportionate to entitlement earned by employees of company subject to ceiling on accumulation as applicable on relevant date, But in the case the assessee has made provision without any scientific or reasonable estimate. Therefore the provision made towards late delivery by the assessee of Rs.18,04,06,823 is not allowable. We further make it clear that the expenditure shall be allowed u/s. 37 on the basis of actual expenditure incurred by the assessee during the impugned AY towards penalty for late deliveries with credible evidences, Therefore the assessee is directed to produce before the AO the actual expenditure ITA Nos.1314 & 1368/Bang/2014 Page 154 of 154 incurred by the assessee under this head during the period under consideration and AO is directed to verify and decide the issue as per law. Accordingly we partly allow the grounds raised by the revenue on this issue.
118. In the result, both the appeals are allowed for statistical purpose.
Pronounced in the open court on this 21st day of July, 2024.
Sd/- Sd/-
( MADHUMITA ROY ) (LAXMI PRASAD SAHU )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Bangalore,
Dated, the 21st July, 2024.
/Desai S Murthy /
Copy to:
1. Appellant 2. Respondent 3. Pr.CIT 4. CIT(A)
5. DR, ITAT, Bangalore.
By order
Assistant Registrar
ITAT, Bangalore.