Section 271(1)(c) - A recent derangement?

Section 271(1)(c) -                                                      Sahil Garud

A recent derangement?                                              [B.com, A.C.A]

Is the recent Judgment in matter of Amruta Organics Pvt Ltd. Vs, DCIT, Circle 1 (ITA No. 1121/PN/2011) of the Hon’ble Pune ITAT “A” Bench, a sign of derangement of law governing section 271(1)(c) of the Income Tax Act and the purpose for which it was brought ? This particular case is largely different from the case of PWC Pvt. Ltd. Vs. CIT, Kolkata in which the Hon’ble Supreme Court allowed the appeal of the Assessee and set aside Calcutta High Court’s Decision upholding the penalty levied u/s 271(1)(c) of the Income Tax Act, on the basis of peculiar and unique circumstances existing in the evidences placed on record.

The Hon’ble Pune ITAT “A” Bench has gone a step forward to set and accomplish a new precedent on lower authorities which might prove adverse for the Income tax Department. In this instant case, the assessee was admittedly guilty of incorrect claim of Depreciation which had resulted in increase of his Loss for that year. The Hon’ble Pune ITAT allowed the Appeal of the Assessee in its 2 page order saying that “The wrong claim of depreciation in the present case cannot be said to be made with an intention to evade taxes in as much as even after the disallowance of depreciation, the resultant income of the assessee remains a loss. In fact, the assessee had pointed out before the Assessing Officer that it has been incurring losses since the year 2003 due to the market forces”.

            Firstly, there is a settled position in law on intention of tax evasion in penalty proceedings, after the Judgment of Hon’ble Supreme Court of India in the case of Dharmendra Textiles [(2007) 295 ITR 244 SC] which said that ‘for violation of rules, there is no implied requirement of mens rea or culpable mental state.’ The Hon’ble Supreme Court has again in its landmark Judgment in case of Reliance Petroproducts [322 ITR 158] explained the Dharmendra Textiles Judgment, saying that “decision is an authority only for the proposition that element of mens rea stands excluded from the scope of the provisions of section 271(1) and it is only to this extent the decision in the case of Dilip N shroff stands overruled. It is further held that conditions of that section must exist before levy of penalty. It is for revenue to establish that such conditions exist. It is only the element of mens rea which is not required to be proved by the revenue”. Thus the Justification of the Hon’ble Pune ITAT in instant case is erroneous to the extent it talks about the intention of the Assessee to evade taxes.

The term “amount of tax sought to be evaded” present in the provisions of penalty u/s 271(1)(c) cannot be ignored. The position with regard to incorrect claim of depreciation of Rs.2 lacs (approx) was an admitted position and also there were no peculiar and unique facts present which could prove that it was just a mistake on the part of the Assessee, unlike those in the case of PWC Pvt. Ltd Vs. CIT [Civil Appeal No. 6924 of 2012 SC]. The fact that ‘Assessee had been incurring losses since few years due to market forces and wrong Depreciation claim would only further add to losses’, can’t be conclusive argument to prove the mistake of the Assessee as a bonafide one. Rather it can be said that if market forces favour the Assessee in near future, he would have claimed the excess loss of Rs. 2 lacs (approx) due to depreciation had the Assessing Officer not nipped him into the bud.

The instant Judgment might result in a situation where unscrupulous Assessees might claim incorrect deduction on basis of some supporting documents, and try and take a chance that the case is not selected for Scrutiny / Regular Assessment thereby evading the eyes of Income tax Department. Even if such Assessees are subsequently caught during Regular Assessment, the instant Judgment might pose as a helping hand for them.

This truly is a Landmark Judgment! 

http://itatonline.org/archives/index.php/amruta-organics-pvt-ltd-vs-dcit-itat-pune-s-2711c-consistent-losses-show-mistake-absence-of-intention-to-evade-taxes/

Transfer Pricing .. from Economic point of view.!

The latest Transfer Pricing Adventure, a new angle ….                                                              

There has been much of a controversy lately about the tax demands raised against the Multinational Shell, Vodafone, etc. in the matter relating to under-pricing of shares issued by these companies to its Associated Enterprises sitting in foreign countries. The Income tax department has been struggling hard to uncover the impugned transactions claiming them as deceptive, under the transfer pricing regulations and provisions. There are some respected economists who are on one hand constantly jabbering and babbling about how these actions on the part of the I.T Dept. will discourage the future economic conditions FDI, etc. and on the other hand forgetting completely that such approach is completely antithetical as far as their bother about country’s economic interest is concerned.

The manipulative nature of the transaction can be scrutinized by simple logic. For e.g., Shell India which is engaged in business of exploitation / exploration of natural resources of India has availed various kinds of licenses, permissions etc. from the Indian Government for its such functioning. Now on one hand where it has all the authority to extract this valuable crude given by India, can it just be allowed to value it at such a petty price of Rs. 10/- per share being the price at which ownership in the company is invited to its own Associated Enterprise sitting in foreign Country. If yes, why not such shares unbiasedly issued to Indian investors as well, at such price? Furthermore when MNCs of this level of business like Vodafone, Nokia, etc. are using the services, resources, facilities and infrastructure provided by the Indian Government, it cannot be just freely permitted to indirectly transfer its ownership just by using a manipulative legal mask and thereby abusing legal provisions for personal benefit. This will then result in undermining of the Indian infrastructure and so its wealth and be a catastrophe for the Indian economy !

The whole ‘Transfer-Pricing’ regulations have been enacted to check on the improper transfer of benefits arising in the country, to stake owners sitting in Foreign Countries, thereby causing a loss to Indian Economy. Economists can’t take a narrow minded approach about country’s economy harping about probable discouragement for FDIs, simultaneously ignoring the current losses caused to the economy due to such manipulative practices on part of MNCs. The income tax department, by using the machinery provided to it, has been trying to apply a correct value to the stake in such companies so that the benefit arising from Indian Resources’ utilization doesn’t get transferred to the foreign stake owners at a miserably petty price. Such companies are not only sabotaging the intent for which the whole transfer pricing regulations were enacted but by such deceptive forms are also disturbing the country’s need and idea for FDI. The percentage FDI which would have been otherwise induced at a particular value consequently came to be brought about in the same proportion but for a lesser value due to such current form. The concise nature of the definition of the term ‘International transaction’ in the Transfer pricing provisions, doesn’t mention all the nature and details of the transactions entered, taking benefit of which large no. of taxpayers have omitted to report the International transactions. Therefore for clarification purpose, section 92B of the Income tax was amended by the Legislature in the last Finance Bill 2012 whereby transaction of Business re-organization and Restructuring were also made to be included. This insertion undisputedly applies to such Re-organizing and restructuring transactions irrespective of the fact that it has a bearing on Profits, income, losses or Assets of the Enterprise. This amendment being a clarification of the intended Legislative purpose was inserted by way of Explanation to the section 92B with retrospective effect from 1.4.2002.

            Some Critics have also alleged that the instant scenario, if compared to a Bonus Issue, clearly illustrates that the taxing action of the Dept. is rubbish! But hello, the same logic cannot, by any stretch of imagination apply to the current scenario !!   Comparing two totally diverse things as such is absolutely non-sensical.  Although in a bonus issue, the benefit of owning a stake in a company is passed for free, such issue is always made to all the shareholders in an unbiased manner. Also there is no issue of new capital but the existing ownership is further diluted into a larger no. of shares, and no specific Associated Enterprise of the company has right to subscribe to a bonus issue.

The reasonability of determinations of price /value of assets transferred on the part of the I.T. Officials in such transfer pricing cases depends on how they substantiate it and how satisfactory and plausible it is found by the adjudicating forums. The Judicial authorities are undoubtedly competent to decide the issue in a way that will finally meet the ends of Justice from all perspectives.

Sahil Garud
Chartered Accountant

Res Integra – section 45(2) r.w.s 54

Res Integra – section                         Sahil Garud

45(2) r.w.s 54                                       [B.com, A.C.A.]

It is true that the glitches and blotches in the literal language of the law, with various sections linked together, are noticed only when a sui generis practical scenario pops up which challenges its position in such well-constructed law. This is another such situation which needs clarifications and opinions so that the tax professionals can be impeccable in the advice they provide on tax mitigation through planning.

        When any tax payer decides to convert his investment/property, say a residential house on a plot of land being a capital asset covered u/s 2(14), into his stock in trade (SIT) with a view to deal in that property, he suffers a notional capital gain. Such gain is measured as the difference between the Fair Market value as on the date when he converts his asset & the original cost of acquisition (with indexation) of the Property. Such a charge is made under the provision of section 45(2). The Supreme Court Judgment in the case of CIT Vs. Bai Shririnbai Kooka (46 ITR 86 SC) dated 23/02/1962 following its verdict in the Bombay High Court (30 ITR 753) had an great impact on the plans of revenue authorities and it may be considered as a reason for enactment of this section 45(2) originally w.e.f 01.04.64. The Court in that case held in favour of the Assessee saying that a person cannot make profit out of himself and hence charged only that portion of Income which was arrived at as a difference between the market value on the date of conversion and the final sale value of the stock in trade (SIT).

        According to me, the legislature in its wisdom deferred the charge of the capital gain introduced by 45(2) till a date when the stock is actually sold, since such gain is a notional gain and the assessee does not receive any actual consideration on the date of its transfer. In this era of inflation of property prices, charging the Assessee with a heavy amount of tax just on conversion of his property into his stock in trade would result in undue hardship to the Assessee. Therefore such deferment of tax payment till the date of actual sale of the stock in trade and thus till an actual receipt of some consideration thereon was well justified. But according to me, the position w.r.t. timing of investment u/s 54/54F…(series) so as to claim exemption from the capital gain still needs clarification from viewers and experts. The literal reading of the section 45(2) and section 54 doesn’t give a clear picture and leave a scope for argument due to slight ambiguity.

Section 45(with subs.1 to 6) is the charging section, subsection (2) of which deals with the current scenario put forward here. This subsection (2) reads as follows: “Notwithstanding anything contained in subsection (1), the profits and gains arising from transfer by way of conversion by the owner……………………… as a result of transfer of the capital asset”. Thus by using the words “transfer by way of conversion” this section recognizes the conversion as the transfer with regard to timing of the gain.

Now, the plain reading of Section 54 says that “Subject to provisions of subsection (2),………then], instead of capital gain being charged to income tax as income of the previous year in which transfer took place, it shall be dealt with in accordance with…….” Thus it can be / might be construed by the Revenue authorities that since section 54 in the above given portion refers to the year in which transfer took place while simultaneously section 45 using the words ‘transfer’ interchangeably with ‘conversion’, the time limit for an Assessee to invest as per section 54 (2 years/3years) will start ticking from the date of conversion. But such interpretation is contrary to the very scheme of the Act and in a way fails to avoid the Assessee’s hardship.

        As said above, since the legislature has purposely deferred the charge on capital gain till he actually earns some consideration by selling the stock, in a similar way the time limit for enjoying the benefit of exemption should also be deferred. Discrimination can’t be made between subsection (2) and other subsections of section 45, all being part of the same charging section. An Assessee suffering a charge under other subsections of section 45 and the Assessee suffering it u/ss (2) must be given equal opportunity to claim exemptions as per the charging provisions, otherwise it can be argued as a violation of Article 14 of the Constitution of India in so far as it makes such discrimination. Therefore these provisions should be interpreted in such a way that time limit (2/3 years) for investment u/s 54 would incept from the day when he actually receives some consideration, in the same way as the charge is deferred till the stock is sold. Deferring the charge but not deferring the time limit for investment u/s 54 would go against the scheme of the act.

“It should be remembered that ‘language’ is at best an imperfect instrument for the expression of human intention.” 

It is a well settled position in law following the Supreme Court Judgment in case of CIT Vs. J.H Gotla (1985 AIR 1698) that, if a result which is not intended to be subserved by the object of the legislation is found from literal interpretation, and if another construction is possible apart from strict literal construction, then that construction should be preferred to the strict literal construction. In other words, where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the court can modify the language used by the Legislature. Also in the case of Bajaj Tempo (1992 AIR 1622) the Hon’ble Supreme Court of India resorted to an interpretation which was different from the literal interpretation saying that “it becomes necessary to resort to a construction which is reasonable and purposive to make the provision meaningful, and adopting literal construction in such cases would result in defeating the very purpose of the relevant sections”. The Hon’ble Bombay High Court also in the case of CIT Vs. Manjula Shah (16 Taxmann 42) while dealing with a matter w.r.t. Capital gain taxation, permitted that the meaning of one section can be imported while interpreting the other linked section so that the overall interpretation does not go contrary to the scheme of the Act and the legislative intent.

Therefore, according to me, while interpreting the provisions of section 54 which exempts the Charge of tax in the year of transfer, the meaning and intent of deferring the charge as per section 45(2) should be imported into this section so as to give proper justice to the scheme of the Act and so to the Assessee.

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Sahil Garud

Chartered Accountant.

Bom. High Court

Income from 'House Property' vis-a-vis 'Other Sources' vis-à-vis 'Business Income'.

Income from House Property                                                Sahil Garud

vis-a-vis Busniess Income                                                     Chartered Accountant

vis-a-vis Other Sources

 
Since decades there has been much controversy on Whether Charges received by an Assessee for providing services / facilities and amenities to his tenants, using the nomenclature as ‘Service Charges’, would or would not  constitute the income from house property. As per section 23 of the Income tax Act, 1961, the Annual Letting Value of the premises is the sum for which the property might reasonably be expected to be ‘let’ from year to year or where the property is let, the actual rent received or receivable by letting out of the premises. The Higher of these two values is considered as the ALV. Section 22 of the Income tax Act is the charging section for Income under the head ‘Income from House Property’. This section attempts to charge the Annual Value of such portion of the self owned property, which is not used for carrying on usual Business/profession of the said Assessee. Section 23(4) provides an option to the Assessee to opt for any one of properties as being occupied for self use, and the others will be deemed to be let out, the annual value of which will be computed as per section 23(1).

 From the plain reading of these sections it can be inferred that for computation of Annual value, only the Rental income and not the Service Charges for providing the extra facilities/services is relevant. Various Courts have held that where the facilities provided by the assessee are inseparable from the premises in question, then the receipt of such service charges are liable to be assessed as income from ‘Other sources’ and not income from house property. In a recent judgment of the Hon’ble Delhi High Court in the case of  ¹Garg Dyeing and Processing Industries vs. ACIT  it has been held that where letting of building and letting of Fixtures / Machinery / Furniture / Air-conditioning etc. were inseparable, Rental Income has to be assessed as Income from Other Sources. Similar view has been taken by the Madras High Court in case of  ²CIT Vs. Halai Memon Association  and the Hon’ble Supreme Court of India in the case of  ³CIT Vs. National Storage (P) Ltd.

The major problem arises for the Assessee who is actually engaged in the business of receiving Service charge, on properties bought which have further been let for running business centre, by incurring huge expenditure on setting-up customized infrastructure like Fixtures, Machinery, furniture, etc. and the Assessing Officer denies the claim of Depreciation on such infrastructure due to change in head of Income. The Hon’ble High Court of Calcutta in the case of  ⁴CIT Vs. Model Manufacturing Co. (P) Ltd had faced this issue of claim of depreciation but did not decide this particular issue saying that since the facts w.r.t. the depreciation claim were not before it, such issue can’t be decided. But in this instant case, the Assessee did not conduct the business of earning service charges in an organized manner and also this was not the normal business activity of the Assessee. Based on such facts, the Cal. High Court allowed all the expenses wholly and exclusively connected with earning of service charge except the depreciation claimed and therefore parked it under the head Income from Other Sources.  It however said that depreciation claim of the Assessee can be allowed u/s 57 if the conditions given in 56(2)(vii) are satisfied. But if such is not the case and the Assessee carries some ancillary activities simultaneously in connection to the premises being let, and such business is done in an organized manner with a view to earn profits, the income has to be assessed under the head ‘Income from Business’ (Karnani properties Ltd Vs. CIT) [(1971) 82 ITR 547 (SC)].

It is to be kept in mind as a Principle that the expression ‘letting out’ is used for a limited purpose. If premises remain under control of the owner and the owner receives a charge only against a license granted for a limited purpose, the income ought to be included under the head ‘Income from Business’ and not ‘Income from House Property’. In other words, if an Assessee transfers the benefits of enjoying the property as it is, wholly with a view to earn an amount and without any transfer or provision of extra facilities connected with the said premises, only then income can be assessed as ‘Income form House Property’.

            Contrary to the above scenario has been held by the ITAT (Mum) in the case of Marwar Textiles (Agency) Ltd. Vs. Income Tax Officer vide its judgment dated 24^th April 2008, but further again, this case has already been admitted in the Hon’ble High Court on the question of law raised by the Assessee vide its order of admission dated 20/09/10. Supreme Court in the case of ⁵Shambhu Investments Vs. CIT upheld the order of the Hon’ble Cal. High Court and held contrary to the above scenario on the basis of a finding that Assessee had already recovered substantial amount of the cost of the property by way of “Security fee advance” from the occupants and its intention was not to exploit the premises by way of ‘complex commercial activities’ but the sole intention was just to let out the property with a furnished accommodation. It followed the tests laid down by the apex court in ⁶Sultan Brothers Pvt Ltd. Vs. CIT for not including the Income under the head of ‘House Property’.

Thus as far as inclusion of Service charge (disputed rental income) under the head ‘Income from Business’ is considered, the position is controversial but keeping in mind the above bearings, an Assessee can safely include it under the head ‘Income from Other Sources’ if his case falls under the conditions of composite letting.

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Sahil Garud

Chartered Accountant

Bom – High Court.

1.  [(2012) 28 taxmann.com 287, Delhi]

2.  [(2000) 243 ITR 439]

3.  .[(1967) 66 ITR 596 SC]

4.  [(1986) 159 ITR 270]

5.  [(2003) 264 ITR 143 SC]

6.  [(1964) 51 ITR 353 SC]

Other Relevant Judgments:

a. CIT v. Admiralty Flats Motel [(1982) 133 ITR 895 Mad]

b. CIT v. K. L. Puri (HUF) [(1998) 233 ITR 43]

c. Mukherjee Estate (P.) Ltd. v. CIT [(2000) 244 ITR 1]

d. CIT v. Associated Building Co. Ltd. [1982] 137 ITR 359 (Bom)