By Devendra Jain, Chartered Accountant

1. Sections 48 & 49: Value of tenancy rights needs to be considered for the purpose of determining the cost of acquisition

In the given case, the assessee had sold a property in AY 2007-08, which was acquired by it in lieu of surrender of tenancy rights. While calculating Capital Gains on transfer of the said property, assessee took the market value of the said property as on the date of surrender of tenancy rights as ‘cost of acquisition’. The market value of the said property was calculated on the basis of cost incurred for purchase of other flats of the same building during the same time. Assessing Officer contended that the assessee acquired the property free of cost and hence the cost of acquisition shall be taken as NIL.

On appeal before CIT(A), CIT(A) relied upon Hon’ble Mumbai ITAT decision in case of Mrs. Tauqeer Fatema Rizvi in ITA No. 8862/Mum/2011, wherein it was held that for the purpose of Sections 48 and 49, the value of tenancy rights is to be taken into consideration. The builder has given alternate flat to assessee only by virtue of surrender of tenancy rights. Had there been no tenancy rights, the builder would not have offered any flat to the assessee, on ownership basis. Thus, it is valuable right on which cost of acquisition has to be determined.

On appeal before Hon’ble ITAT by revenue, Hon’ble ITAT affirmed the decision of CIT(A). Further, Hon’ble ITAT also relied upon the decision of Hon’ble Bombay High Court in case of Abar Alvi 117 Taxmann 95.

[ACIT vs. Shree Krishna Pharmacy ITA No. 3947/Mum/2016]

Shree Krishna Pharmacy ITA

2. Section 271(1)(c): No penalty can be imposed when the addition to income has been made on the basis of estimation

In the given case, assessee was engaged in liquor business. During the course of assessment assessing officer had discovered that assessee had deposited huge amount in cash in two bank accounts held by him with UCO Bank and Eluru Bank aggregating to ₹ 1,40,20,390/-. The assessee explained that he had another bank account in GG Bank and the withdrawals made from that account were used for depositing into these two bank accounts. Assessing Officer did not accept the contention of assessee and had given credit for sales made by assessee of ₹ 77,43,204/- and treated the balance amount of ₹ 62,77,186/- (₹ 1,40,20,390 – ₹ 77,43,204) as unexplained cash credit.

On, appeal the CIT(A) had made a finding that credit for the deposits made within 3 days from the date of withdrawals from GG Bank should be given and accordingly deleted the amount of ₹ 54,45,920/- and sustained the addition of ₹ 8,31,266/-.

On an appeal before Hon’ble ITAT by assessee, it was held that there is no scientific basis for fixing the date span of 3 days by CIT(A). If in case the date span was extended to 7 days then assessee would get further credit of ₹ 6.09 lakhs. On the contrary, the possibility of assessee being engaged in any other business activity cannot be ruled out. Hon’ble ITAT instead of giving outright credit for withdrawals, estimated the income at ₹ 5,00,000/- being 8%
of ₹ 62,77,186/-, which was adopted by Assessing Officer as unexplained cash credit..

In course of penalty proceeding, assessing officer did not accept the contention of assessee that in case where income is determined on estimation, no penalty should be imposed. Assessing officer imposed penalty u/s. 271(1)(c) for furnishing inaccurate particulars of assessee’s turnover.

On an appeal before Hon’ble ITAT, it was held that ultimately the additions sustained were only on the basis of estimation. Therefore, Assessing Officer is not able to establish in this case that assessee has concealed income by furnishing inaccurate particulars and hence no penalty u/s. 271(1)(c) can be imposed. Accordingly, penalty was deleted.

[Tuta Lakshmana Rao vs. ITO ITA No.: 393/Viz/2016]

Tuta Lakshmana Rao

3. Section 56(2)(viia) r.w. Rule 11UA: For the purpose of valuation, book value of immovable property needs to be taken and not its FMV

In this case, assessee, a private limited company, acquired 1,01,77,800 shares of M/s. Tuff Engineering Pvt. Ltd. (TEPL). The valuation of shares of the said company was fixed at ₹ 5/- per share, the method of valuation was based on formula provided by Rule 11UA of the Income-tax Rules, 1962. The said value was based on valuation report of a Chartered Accountant who valued the shares at ₹ 4.96/- per share.

For the purpose of valuation, the value of land of TEPL was taken on the basis of book value of the said land amounting to ₹ 6,32,75,332/-. Whereas, the assessing officer contended that the value of land should be taken on market value of land which was arrived at ₹ 16,78,65,600/-. Considering the Market value, the valuation of share came to ₹ 45.72 per share. Assessing officer added the difference in the valuation aggregating to ₹ 11,84,46,336/- to the total Income. CIT(A) also confirmed the view of assessing officer.

On appeal before Hon’ble ITAT, Honourable members following the view taken by Bombay High Court in case of Shahrukh Khan vs. DCIT 90 taxman. com 284, held that the Explanation to Section 56(2)(viib) needs to be duly considered. Accordingly, while valuing the shares the book value of the assets and liabilities declared by TEPL should be taken into consideration. There is no whisper under the provision of Rule 11UA to refer to the fair market value of the land. Therefore, the assessing officer was directed to consider the book value of land and not the fair market value for the purpose of valuation.

[M/s. Minda S. M. Technocast Pvt. Ltd. vs. Addl. CIT ITA No: 6964/Del/2017]

M/s. Minda S. M. Technocast Pvt. Ltd.

4. Sec. 148: Reopening held to be bad in law due to non-application of mind by assessing officer

Information was received from investigation wing that certain people have resorted to money laundering by way of bogus share application money. Assessing officer reopened the assessment stating that he has reasons to believe that income of ₹ 15 lakh plus commission @ 2% thereon has escaped assessment. However, final assessment order was passed making addition of ₹ 2.15 crore on increased share application money. Assessee challenged the reopening before CIT(A), however the same was dismissed.

In the reasons recorded, assessing officer specifies the volume of accommodation entry to be approx. ₹ 15 lakhs whereas in assessment order an amount of ₹ 2.15 crore was added. Hon’ble ITAT following the decision of PCIT vs. RMG Polyvinyl (I) Ld. 386 ITR 5 (Bom.) stated that such an error (i.e huge difference) indicates non-application of mind by assessing officer.

Further, following the decision of Hon’ble Bombay High Court in case of Bharat J. Patel vs. UOI (2015) 378 ITR 596 (Bom.), ITAT held that assessing officer should have allowed at least 4 week’s time to assessee to seek legal remedies after rejection of the objections of the assessee w.r.t. reopening.

In the reasons recorded by assessing officer it was mentioned that “… bogus accommodation entries were provided/taken”. Hon’ble ITAT held that reasons recorded did not specify the other party who either provided or received accommodation entries, moreover it did not establish the involvement of assessee in such alleged money laundering.

Further, investigation wing had not analysed the alleged transaction prior to AY 2005-06, whereas the present case pertains to AY 2004-05. Even the order of assessing officer did not reveal that he had taken any exercise before recording the reasons. Thus following the decision of MRY Auto Components Ltd. vs. ITO (2017) ITA No. 2418/Del/2014, Hon’ble ITAT held that satisfaction of assessing officer was not based on any sound reasoning and hence reopening was bad in law.

[Meta Plast Engineering P. Ltd vs. ITO ITA No: 5780/Del/2014]

Meta Plast Engineering P. Ltd

5. No addition for alleged bogus purchases where transaction confirmed by suppliers in response to notice u/s. 133(6)

Assessee was in the business of manufacturing of Jewellery. Assessee had no Local sales, all the sales effected were in the form of export. Assessing officer relied upon statement of a person, who was associated with suppliers, that they were involved in providing accommodation entries. Assessing officer issued notice u/s. 133(6) to alleged parties and the parties had duly replied along with various relevant documentary evidences. However, the same was rejected and entire addition of alleged bogus purchase of ₹ 14.99 crore was made. Before CIT(A) assessee also produced the affidavit of suppliers. CIT(A) however reduced the addition to 12.5% of alleged bogus purchase.

Hon’ble ITAT noted that, the statement on which assessing officer had relied, nowhere specified that accommodation bills were issued to assessee. There is subtle but very important difference in issuing bogus bills and issuing bogus bills to a particular party. Further, assessing officer had not doubted the sales, suppliers had appeared before assessing officer and had confirmed the sales made to assessee along with affidavit, the suppliers had also duly filed the VAT returns, assessee had submitted the chart showing the procurement and corresponding sales of alleged bogus purchases. Hon’ble ITAT held that the above stated evidences were sufficient enough to prove the genuineness of purchases and accordingly the entire addition was deleted by Hon’ble ITAT. In affirming the above view, Hon’ble ITAT relied upon the decision of M/s. Imperial Imp. & Exp. (ITA No. 5427/Mum/2015).

[Shantivijay Jewels Ltd. vs. DCIT ITA No.: 1045/Mum/2016]

Shantivijay Jewels Ltd.

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

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