Unreported Decisions – February 2020

By Ajay R. Singh, Advocate

1. S. 50C: Capital Gains – Full value of consideration – stamp valuation – Landlocked property – DVO given 50% discount on account of encumbrances – the entire basis of valuation adopted by the DVO is devoid of any legally sustainable foundation – there is nothing sacrosanct about discounting @ 50% for arriving at fair market value.

The assessee is an individual who had sold a piece of land at ₹ 50 lakh. The deed of conveyance was registered on 20-08-2010 and the stamp duty valuation of the said deed of conveyance was ₹ 2,31,70,000/-. As the assessee challenged this stamp duty valuation being adopted for the purpose of computation of capital gains, the matter was referred to DVO, who valued the fair markets value of the said land as on 20-08-2010 at ₹ 1,11,30,000/-. Accordingly long term capital gains were computed at ₹ 92,76,967/-. The ld CIT(A) did not accept the Assessee contention and upheld the addition of the AO.

The assessee carried the matter in appeal before the ITAT. The Tribunal summoned the valuation officer. The Tribunal observed that in the sale deed, not only the property in question was in possession of a third party, it also did not have any direct access from the public road and the access thereto was only through a property which the end buyer had already purchased. The Tribunal questioned that with these serious restrictions on the right of the seller, which are also fully recognized in the DVO’s report, can the stamp duty valuation report be adopted as a fair market price in this case. More so when DVO himself has given a discount of 50% on account of these encumbrances.

Whether in these circumstances, there are any good reasons to reject the valuation of ₹ 50 lakh on which the sale deed as entered into and adopt 50% of the fair market value as deemed sale consideration?

The ITAT held that there is no basis whatsoever for adoption of 50% of the fair market value as deemed sales consideration, and this deemed sale consideration is purely based on the estimation. In a situation in which the assessee has no choice but to sell the land to a particular person and take on board a consenting party which is in possession and control of the said property, the assessee has no choice but to accept whatever is being offered to him in consideration of parting with assessee’s legal title over the said property. The entire basis of valuation adopted by the DVO is devoid of any legally sustainable foundation in as much as there is nothing sacrosanct about discounting at the rate of 50% for arriving at fair market value. In view of entirety of the case the Assessing Officer was directed to adopt the sale consideration at ₹ 50 lakh as referred in deed of conveyance and compute long term capital gains on that basis. Accordingly assessee’s ground was allowed.

Wenceslaus Joseph D’souza v. Income Tax Officer (1)(2), ITA No. 4732/Mum/2016, A.Y: 2011-12, Bench. “C”, DOH: 26/12/2019 (Mum)(Trib)

Wenceslaus Joseph D’souza

2. S. 14A : Disallowance of expenditure – Exempt income – absence of recording non-satisfaction about the correctness of assessee’s suo motu disallowances under section 14A – the further disallowance calculated by invoking the provisions of Rule 8D is not justified. [R. 8D].

The assessee is an individual, engaged in the business of dealing in high-tech printing machinery, computer software and other annual maintenance contract. The assessee filed his return of income for AY 2013-14 declaring total income at ₹ 2.48 crore. In the computation of income, the assessee has shown following exempt income

Dividends from companies ₹ 54,74,290/-
Interest from tax free PSU bonds ₹ 1,50,24,289/-
Share in profit from a partnership firm ₹ 1,32,123/-
Total 2,60,30,702/-

The AO invoked the provisions of Rule 8D and made disallowance under – (i) ₹ 2,022 being demat charges; (ii) disallowance u/r. 8D(2)(ii) and (iii) ₹ 13,16,100 being 0.5% of average value of investment.

The Ld. AR for the assessee submits that he has not incurred any direct or indirect expenditure of any nature for the purpose of earning tax free income. Considering the status of the assessee, the assessee is getting free “Home Delivery” services from the mutual funds/ agents/ brokers and fund managers. The assessee doesn’t have any dedicated staff for handling portfolio. The portfolio analysis is made by the fund manager in order to get more business from the assessee. Demat charges of ₹ 2,022/- are debited to capital account and not claimed as deductible expenses. Therefore no disallowance made by invoking the provisions of Rule 8D is not justified.

To support the disallowance made by AO and confirmed by ld CIT(A), the revenue strongly relied on the decision of Tribunal for AY 2012-13 dated 30-01-2019. On the contrary the ld AR for The assessee vehemently submitted that the facts for A.Y. 2012- 13 are at variance as no suo motu disallowance under section 14A was offered by the assessee in that year.

The Tribunal held that the AO on verification of the return of assessee noted that the assessee has made suo motu disallowance of ₹ 4,12,614/-. The AO recorded that basis of working suo motu disallowance under section 14A, is not furnished by assessee. On show cause the assessee explained that provisions of section 14A is not applicable to the assessee for the reason that assessee has made suo motu disallowance of 2% of tax free income as per CIT(A)’s order for AY 2009-10. The assessee also explained that he has not deployed any borrowed funds for earning tax free income and that disallowance as per Rule 8D was not made as the formula was giving absurd results. It was explained that the assessee was availing services of Fund Manager, who are getting hefty commission from mutual funds because of huge investments made by assessee. As per assessee the suo moto disallowance was quite enough. The AO without expressly recording his dis-satisfaction about the correctness of the suo moto disallowance invoked the provisions of Rule 8D and in addition to direct expenses of ₹ 2,022/- under Rule 8D(2)(i) also disallowed ₹ 13,16,100/- under Rule 8D(2)(iii) being average value of investment.

Shri Jayant R. Pardiwala vs. ACIT-24(1), ITA NO.: 270/M/2018, A.Y. 2013-14, Bench. “F”, date 11-12-2019 (Mum)(Trib).

Shri Jayant R. Pardiwala

3. S.139 r.w.s. 80 : Return of income – original return filed within the due date prescribed u/s. 139(1) – revised return filed, subsequently within the due date prescribed u/s. 139(5) – the nature of original return filed u/s. 139(1) and consequently, the conditions prescribed u/s. 139(3) of the Act, is fulfilled – loss claimed shall be allowed to be carried forward:

The assessee had filed its return of income for AY 2012-13 on 29/11/2012, declaring total income of ₹ Nil, being income from business of ₹ 8,18,81,234/-, less set off of brought forward loss of earlier years. The assesee has considered brought forward losses for AY 2009-10 at ₹ 5,75,97,803/- as per revised return filed for that year. The Ld. AO, however restricted the brought forward loss for AY 2009-10 to ₹ 1,33,52,450/-, as per original return of income filed for that year by invoking the provisions of section 80 of the Act, and accordingly, disallowed excess loss claimed by the assessee, as per the revised return of income.

The ld. CIT(A), allowed brought forward loss claimed by the assessee, on the basis of revised return filed for that year, on the ground that provisions of section 80 cannot be invoked, when the assessee has filed revised return of income within the due date allowed under the Act, because, the revised return would take place of the original return for that year.

The Tribunal held that the assessee has claimed set off for brought forward business loss, as per revised return of income filed for that year. The ld. AO has allowed loss, as per original return of income filed for that year. According to the ld. AO, losses of earlier years can be allowed to be set off, as per the provisions of section 80, which states that any loss return filed, as per the provisions of section 139(3) only can be allowed to be set off, but not loss as per revised return of income filed u/s 139(5) of the Act . As per the provisions of section 80 of the Act, loss determined in pursuance of return filed in accordance with the provisions of Sec. 139(3) of the Act, shall be allowed to be carried forward under the relevant provisions of the Act. Sec. 139(3) of the Act, specifies that loss sustain made under the head Income from Business shall be allowed to be carried forward under the relevant provisions of the Act, provided the return is filed within the due date as prescribed under the provisions of section 139(1) of the Act. Similarly, as per section 139(5) of the Act, an error or omission in the return filed u/s. 139(1) can be rectified by filing a revised return on or before the expiry of one year from the end of relevant assessment year or before the completion of assessment whichever is earlier.

In the present case, the original return was filed on 24-09-2009, which is before the due date of filing return u/s. 139(1) of the Act. Similarly, the assessee has filed revised return on 26-03-2011, which is before the due date of filing revised return i.e 31/03/2011. From the plain reading of section 139(3) r.w.s. 80 of the Act, it is clear that if assessee incurred a loss, which it claims to be carried forward, then it has to file its return of income within the time stipulated in section 139(1) of the Act, otherwise, the loss will not be carried forward. Since, the assessee has filed original return within the due date prescribed u/s. 139(1), then any revised return filed, subsequently within the due date prescribed u/s. 139(5) partakes, the nature of original return filed u/s. 139(1) and consequently, the conditions prescribed u/s. 139(3) of the Act, is fulfilled and accordingly, loss claimed shall be allowed to be carried forward under the relevant provision of the Act. Therefore, the ld. AO was incorrect in invoking the provisions of section 80 of the Act.

ACIT – 4(2)(2) vs. Marks & Spencer Reliance India Pvt. Ltd, ITA No.6703/Mum/2018, AY: 2012-13, Bench. “D”, DOH: 22/01/2020 (Mum)(Trib).

Marks & Spencer Reliance India Pvt. Ltd.