By Prakash Kumar Sinha, Chartered Accountant

1. Section -2(47) Transfer of capital assets -when transfer takes place – Mere advance against such transfer, when defacto transfer didn’t take place – Not taxable – Section 145A-valuation of closing stocks - Didn’t follow AS-2. Increased by the tax element without giving corresponding effect on opening stocks – Not allowed.

Where the assessee had received an advance to transfer its equity holdings in a different company, which ultimately couldn’t take place due to dispute, and, the AO levied the Capital Gain tax considering the date of receipt of advance as a transfer of share u/s. 2(47). The assessee contended that there was no de-facto or de-jure transfer of share but just on advance against such proposed transfer, which ultimately could not fructify and there was no contrary finding of revenue .The Tribunal allowing the appeal relied on the argument placed and ruling in the case of Excel Industries ( SC) ( 2014) (13 SCC 459), Shoorji Vallabhdas 46 ITR 144 and held that the tax cannot be levied on the hypothetical income. Further relying on Morvi Industries (1972) 4 SCC 451, the tribunal held that income accrues when there arises a corresponding liability of the other party from whom the income due to pay that amount.

Further as the revenue agitated through cross-appeal, against the order of CIT(A) allowing the appeal of assessee, where the addition was made by AO enhancing the valuation of closing stock to the extent of VAT and Excise duty under Section 145A and without providing corresponding adjustment in the opening stock and purchase , even though assessee had submitted that the effect of such adjustment will be NIL following the AS-2. The Tribunal relying on the ICAI guidelines and Mahavir Aluminum 297 ITR 77 held that if there is any change in the closing stock u/s. 145A, there must be corresponding adjustment in the opening stock and other accounts and accordingly didn’t interfere in the order of CIT (A), accordingly rejected the appeal of revenue and in favour of assessee.

(Supreme Industries vs. DCIT Ghaziabad & cross appeal. ITA NO -431/DEL /2016. AY 2011-12. ITAT Delhi).

Supreme Industries

2. Section 147- Reassessment – reason to believe – Reopening the assessment on the basis of AIR report in mechanical way without application of mind – Not allowed.

Invocation of section 147, where the satisfaction note prepared on the basis of the AIR report of purchase of immovable property of ₹ 35 lakh and mechanical approval of Higher Authorities of such satisfaction note, the Tribunal relying on the order of Delhi High Court in the case of N. C. Cables Limited as reported in 98 CCH 0018 dated 11/1/2017 held that where the approving authority has not applied their mind while approving, will be a mechanical approval and thereafter assuming the jurisdiction by AO will be nullity. The Tribunal has further relied on S. Goyana Lime & Chemicals and held that mechanical approval is not a proper approval and thereafter the assumption of jurisdiction u/s. 147 is without the sanction of law and hence quashed the assessment order and allowed the appeal of assessee.

(Mohd Raees vs. ITO Delhi. ITA NO 3763/DEL/2017. AY 2008-09. Delhi ITAT)

Mohd Raees

3. Section 54 -Relief from tax on reinvestment of proceeds from transfer of long term capital asset- substantial relief- Procedural sub-section(2) not complied – Relief cannot be denied.

On the issue of relief under Section 54, allowing the appeal in the favour of assessee held that sub-Section (1) is the substantial provision which provides the substantial benefit to the assessee, whereas sub-section (2) is the enabling provision, which cannot abridge or modify the substantive right to the assessee in terms of sub section (1). The assessee after transfer of residential house paid the amount to the builder /developer of the new assets within 2 years however as per the agreement, new assets were to construct within a period of four years. By doing so, she has not parked the fund in the capital gains deposit scheme in terms of sub-section 2 of 54. The AO rejected the claim of Section 54 and CIT(A) upheld the AO order and rejected the assessee appeal.

On the first point wherein the payment has been made within 2 years of transfer but new assets has to be delivered after four years, the ITAT relying on the case of Madhu Kaul (P&H High Court), Bharti Kothari (2000) 160 CTR165 (Kol HC) held that if agreement for purchase of residential flat is made and the entire amount has been paid within three years from the date of sale, the basis requirement of section 54(1) is fulfilled. On the second issue of nondepositing the fund with the deposit account as per sub section (2) of 54, the ITAT relying on K Ramachandra of the Karnataka HC held that the section 54F(4) is pari-materia to 54(2) and held that what matters is the intention of the assessee to purchase/construct the new house. The HC had held that if there is no intention to retain cash but to invest construction /purchase of new assets and if such investment is made within the period stipulated therein, section 54F(2) is not at all attracted.

(Seema Sabharwal Vs ITO Panchkula. ITA No 272 /CHD/ 2017) AY 2013-14 ITAT Chandigarh)

Seema Sabharwal

4. Section 263 – Power of CIT for revision – Explanation-2, Deemed to be erroneous Payment under Section 40(a)(v) – akin to FBT. Section 115JB Explanation-2 Income tax does not include FBT unlike section 2(43).

On the issue of section 263, allowing the appeal of the assessee, ITAT held that Explanation-2 of Section 263, which creates a deeming fiction that the order of the AO shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue, if in the opinion of the CIT, the order is passed without making any inquiries or verification which should have been made, has twin necessary conditions that have to satisfied first that the order has been passed by AO without making any inquiries or verification and second that very action of AO was prejudicial to the interest of the revenue. These twin condition has to cumulatively satisfied. On Merit it relied on the Vintage Distillers as reported in 130 TTJ 79 and held that definition of section 2(43) defining the term Income-tax cannot be read in the Explanation 2 of Section 115JB as said explanation is a specific explanation does not cover the fringe Benefit tax and consequently employee benefit cost which are akin to the FBT in terms of section 40(a)(v) and are not below the line item , cannot be add back for book profit u/s 115JB. The reliance was also placed in the case of Reliance Industries (ITA No. 5769/M /2013 dated 16/09/2015) wherein it was held that wealth tax does not form part of the Income-tax and cannot be add back to arrive the book profit in terms of 115JB. The assessee has contested the order of CIT u/s. 263 wherein the AO was directed to recompute MAT u/s. 115JB on the allegation that employee benefit expenses being the tax borne by the assessee on the deemed perquisite on the value of accommodation provided to employee and which were not admissible in terms of section 40(a) (v), was omitted to be add back while arriving the book profit u/s. 115JB. The ITAT set aside the order with a conclusion that although the AO has made no inquiry into this matter, but it was not prejudicial to the interest of the revenue because unlike Section 2(43), the Explanation-2 of Section 115 JB does not include the term FBT and further it is not below the line item.

(Rashtriya Chemicals & Fertilizers Limited vs. CIT LTU, ITA 3625/MUM/2017. AY 2012-13. ITAT Mumbai)

Rashtriya Chemicals & Fertilizers Limited.

5. Section – 147 – Change of opinion – Proper assessment u/s 143(3) and 144C (13) completed. AO invoked Section 147 on the basis of some ruling of another assessee – Not allowed.

Section 147 was invoked based on the reason to believe that the assessee has escaped the tax in the light of order in an another case ONGC vs. Foramer, France wherein it was held that in given nature of income the Section 44DA will apply and thereafter read with Section 115A the tax rate of 20% will apply, whereas the assessee has applied Section 44BB and tax @ 10% was paid. Allowing the appeal of the assessee against the order u/s. 147, held that where the assessee paid the tax u/s. 44BB and return has been processed u/s. 143(3) and 144C (13), and therefore set aside the reassessment order. The ITAT relied on the Jurisdictional High court case of B. J. Services company Middle East limited as reported in 339 ITR 169 wherein the court confronted with the similar question, held that where assessment u/s. 143(3) has been completed by applying the section 44BB after making proper inquiries could not have legally reopened on the basis of decision of ONGC Vs Foramer, France. Further it also held that such amendment in 44BB and 44DA is prospective in nature.

(IPR international vs. ADIT, International tax, Dehradun. ITA NO 4408 /DEL/2011) AY 2005-2006. ITAT Delhi

IPR international

6. TDS u/s 194J or 194C. Payment in the nature of royalty – Covered in the Royalty definition expanded by explanation-6 inserted from Finance Act 2012 with retrospective effect 1976- Impossibility of performance.

The assessee deducted the TDS on the channel placement fees u/s. 194C and paid the tax. AO contended that payment is in the nature of royalty as per explanation 6 of the section 9(1) (vi) which came through Finance act 2012 with retrospective effect 1976 and accordingly covered u/s 194J and demand was raised for differential tax. The DRP as well ITAT both rejected the revenue contention. Rejecting the revenue appeal u/s 260A, the Bombay HC held where the respondent NGC Network India had paid the Channel placement fees by deducting the TDS @2% u/s 194C and not as royalty applying 194J as contended by the department, upheld the view of both the DRP and ITAT as the matter was related to retrospective amendment. The Honorable court held that assessee cannot be called upon to perform an impossible act i.e. to comply with a provision not in force at the relevant time but introduced later by retrospective amendment. The court applied the principle of legal maxim – Lex non cogit ad impossibilia as discussed in the case of Celloplast as reported in 209 Taxman 617. The amendment of Section 9(1)(VI) by way of Explanation 6 came on 2012 with retrospective effect from 1976 and hence couldn’t have been contemplated by the respondent when he made the payment was subject to 194C only and therefore dismissed the revenue appeal.

(CIT-11 vs. NGC Network India Private limited. ITA NO 397/2015. AY 2009-2010 Bombay HC).

NGC Network India Private limited


Note: The Whole decisions can be downloaded from the CTC website under Knowledge Centre.

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