Thursday, October 16, 2014

Section 68 Helps Nail Jayalalitha’s Corruption Cash Credits

 

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S. 68 Helps Nail Jayalalitha's Corruption Cash Credits

The Hindu has made available a copy of the judgement of John Michael Cunha J. in the case of State vs. Selvi. J. Jayalalitha (pdf). The judgement exposes the intricate arrangements that were made to launder the huge amount of cash credits that were received by J. Jayalalitha (former Chief Minister of Tamil Nadu) from alleged corrupt means. The judgement also raises disturbing questions as to the role of the auditors of the front companies in seeking to camouflage the true nature of the transactions. A few passages from the judgement are noteworthy.

(i) As in s. 68 of the Income-tax Act, the onus is on the accused to explain the nature and source of the investment & cash credits because he has special knowledge about how a particular asset was acquired or an investment therein was made. Such proof includes proof of the identity of the person who according to the accused provided the source, capacity of such person to advance or spend the money, and lastly, the genuineness of the transaction. On facts, the accused have failed to offer any satisfactory explanation as to the enormous unexplained credits entered into their bank accounts. Whatever explanation offered by the accused by way of confirmatory letters are proved to be false and bogus. The identity of the persons who provided the source is not proved. The transactions which resulted in the cash credit is also not established (Kale Khan Mohammed Hanif (1963) 50 ITR 1 (SC) followed);

(ii) The auditors examined by the accused are found to be propped up to support the false defence set up by the accused. It is proved in evidence that the auditors examined by the accused did not handle their accounts during the check period and they were not conversant with the true facts. It is also proved in evidence that, the returns and the balance sheet and the profit and loss account were maneuvred solely with a view to offer an explanation to the huge unexplained credits entered in their respective bank accounts;

(iii) Mere declaration of property in the Income Tax returns does not amount to showing the same was acquired from the known source of income. The prosecution could show that, there was no real source of income with the assessees and the public servant is the real source. In the instant case, the prosecution has succeeded in proving beyond reasonable doubt that the only source for the acquisition of the large assets is A-1 (J. Jayalalitha) herself.


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SC Comes To Rescue Of ‘Wait-Listed’ ITAT Member Candidate Overlooked By UOI For 7 Years

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The following important judgement is available for download at itatonline.org.


Inturi Rama Rao vs. UOI (Supreme Court)

As the UOI has continued the process of appointment of Tribunal Members without amending the Rules, the Petitioner, who was wait-listed in 2007, deserves to be considered for appointment within 30 days

The Selection Committee finalized a list of 18 persons, 13 for the post of Accountant Member and 5 for the post of Judicial Member. The Petitioner, Inturi Rama Rao, was placed in a 'Waiting List' appointment as Accountant Member. The Select List was approved by the Appointment Committee of the Cabinet (ACC) and 11 vacancies of Accountant Members were filled up whereas 5 vacancies of Judicial Members were also filled up. Two vacancies of Accountant Members remained vacant as the two candidates who were selected were not cleared by the Vigilance. The Petitioner, who was in the Waiting List, perceived a right to be appointed against one of the vacant posts of Accountant Member. As appointment was not forthcoming, the Petitioner moved the Central Administrative Tribunal. Appropriate relief was granted by the CAT. The order of the CAT was affirmed by the Delhi High Court. However, the appeals filed by the UOI against the said order of the CAT and High Court were allowed by the Supreme Court on the ground that there was a difference between the main list of selected candidates and the wait-listed candidates. As appointments of the candidates in the main list (16 in number) had already been made, the Supreme Court thought it proper not to affirm the directions for appointment of the wait-listed candidates as made by the CAT and the High Court. It accepted the contentions made by the UOI that further appointments would be made only after amendment of the Rules pertained to the eligibility of the candidates. However, as the amendment to the Rules has not been effected till date and instead, the UOI initiated fresh selection process in the year 2013 on the basis of the unamended Rules and the selection process was completed and the appointments are awaited, the Petitioner filed a fresh Writ Petition. HELD by the Court allowing the Petition:

What we find is that notwithstanding the statement made on behalf of the Union of India before this Court that vacancies in the future will be made only after the amendments in the Rules are carried out, the Union of India has initiated a process to make further appointments without amending the Rules. If persons eligible under the then existing Rules which are in force even today are to be considered for appointment, surely, the petitioner, who is a wait-listed candidate, will also have to be considered for appointment by consideration of his entitlement for appointment as in the year 2007 when the appointments on the main-list were made and the two vacancies arose giving rise to the issue of operation of the waiting list. What follows from the above is that even accepting the order dated 17.11.2011 passed by this Court, in view of the subsequent facts and events that have occurred, namely, action of the Union of India in resorting to a fresh process of selection and appointment without amendment of the Rules, the right of the petitioner to be considered for appointment on the basis of his position in the Waiting List has once again come to fore which needs to be resolved by an appropriate order. We, therefore, allow this writ petition and direct consideration of the case of the petitioner for appointment on the basis of his position in the Waiting List against one of the two vacancies that had arisen on account of two of the candidates in the merit list not having been granted the vigilance clearance. This will be done by the concerned Authority within 30 days from the date of receipt of a copy of this order.


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The Solapur District Central Co-op. Bank Ltd vs. ACIT (ITAT Pune)

Interest on NPAs, even if credited to the Profit & loss account, is not chargeable to tax


No Disallowance u/s 14A & Rule 8D For Exempt Income Earned On Strategic Investments : ITAT Delhi

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The following important judgement is available for download at itatonline.org.


Interglobe Enterprises Ltd vs. DCIT (ITAT Delhi)

No disallowance u/s 14A & Rule 8D can be made towards exempt income earned on strategic investments


The assessee had made significant investments in the shares of subsidiary companies which are definitely not for the purpose of earning exempt income. Strategic investment has to be excluded for the purpose of arriving at disallowance under Rule 8D(iii). The disallowance under Rule 8D(iii) has to be computed by excluding the value of strategic investments. No disallowance under Rule 8D(i) and 8D(ii) is also warranted (REI Agro (ITAT Kol) followed)

See also Oriental Structural Engineers (Del HC), Garware Wall Ropes (ITAT Mum), JM Financial (ITAT Mum) & EIH Associated Hotels (ITAT Chennai)

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Raajratna Metal Industries Ltd vs. ACIT (Gujarat High Court)

S. 147: If AO contests the audit objection but still reopens to comply with the audit objection, it means he has not applied his mind independently and the reopening is void


No Disallowance u/s 14A & Rule 8D For Exempt Income Earned On Strategic Investments : ITAT Delhi

Dear Subscriber,

 

The following important judgement is available for download at itatonline.org.


Interglobe Enterprises Ltd vs. DCIT (ITAT Delhi)

No disallowance u/s 14A & Rule 8D can be made towards exempt income earned on strategic investments


The assessee had made significant investments in the shares of subsidiary companies which are definitely not for the purpose of earning exempt income. Strategic investment has to be excluded for the purpose of arriving at disallowance under Rule 8D(iii). The disallowance under Rule 8D(iii) has to be computed by excluding the value of strategic investments. No disallowance under Rule 8D(i) and 8D(ii) is also warranted (REI Agro (ITAT Kol) followed)

See also Oriental Structural Engineers (Del HC), Garware Wall Ropes (ITAT Mum), JM Financial (ITAT Mum) & EIH Associated Hotels (ITAT Chennai)

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Editor,

 

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Latest:

Raajratna Metal Industries Ltd vs. ACIT (Gujarat High Court)

S. 147: If AO contests the audit objection but still reopens to comply with the audit objection, it means he has not applied his mind independently and the reopening is void


Two Important Verdicts On S. 147 Reopening + Disallowance U/s 14A And Rule 8D

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The following important judgements are available for download at itatonline.org.


Raajratna Metal Industries Ltd vs. ACIT (Gujarat High Court)

S. 147: If AO contests the audit objection but still reopens to comply with the audit objection, it means he has not applied his mind independently and the reopening is void


To satisfy ourselves, whether the reassessment proceedings have been initiated at the instance of the audit party and solely on the ground of audit objections ….. On a perusal of the files, the noting made therein and the relevant documents, it appears that the assessment is sought to be reopened at the instance of the audit party, solely on the ground of audit objections. It is also found that, as such, the AO tried to sustain his original assessment order and submitted to the audit party to drop the audit objections …. … if the reassessment proceedings are initiated merely and solely at the instance of the audit party and when the Assessing Officer tried to justify the Assessment Orders and requested the audit party to drop the objections and there was no independent application of mind by the Assessing Officer with respect to subjective satisfaction for initiation of the reassessment proceedings, the impugned reassessment proceedings cannot be sustained and the same deserves to be quashed and set aside


Geojit Investment Services Ltd vs. ACIT (ITAT Cochin)

S. 14A: In applying Rule 8D(2)(ii) interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated.


(6) In our opinion, it is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt. Therefore, it is not only the interest directly attributable to tax exempt income, i.e. under rule 8D(2)(i), but also interest directly relatable to taxable income, which is to be excluded from the definition of variable 'A' in formula as per rule 8D(2)(ii), and rightly so, because it is only then that common interest expenses, which are to be allocated as indirectly relatable to taxable income and tax exempt income, can be computed.


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Editor,

 

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CBDT Order On Transfers And Postings Of ACsIT And DCsIT

Vide Order No. 182 dated 10.10.2014, the CBDT has transferred and posted several officers in the grade of Assistant / Deputy Commissioners of Income-tax with immediate effect and until further orders.


Wednesday, October 15, 2014

Two Important Verdicts + CBDT Transfer Order Of ACsIT And DCsIT

Dear Subscriber,

CIT vs. N.G.C. Network (India) P. Ltd (Bombay High Court)

Advertisement expenditure incurred by agent to popularize the business of the channel run by the foreign principal is allowable as there is a direct business between the expenditure and the assessee's business as agent. The fact that the foreign principals also benefited does not entail right to deny deduction under section 37(1)


Advertisers who advertise on these channels act through media houses and advertising agencies and they work to media plans designed in the manner so as to maximise value for the advertiser. They will evaluate expenditure with channel penetration in the market place inasmuch as only channels with high viewership would justify the higher advertising rates which is normally sold in seconds. Merely having high quality content will not ensure high viewership. This content has to be publicized. The great reach of the publicity, the higher chances of larger viewership. The larger the viewership, the better chances of obtaining higher advertisement revenue. The higher advertisement revenue, the higher will be commission earned by the assessee. Accordingly, we have no doubt that there is a direct nexus between advertising expenditure and revenue albeit the fact that there may be a lean period before revenue picks up notwithstanding high amount spent on such publicity. This justifies the higher expenditure vis-a-vis revenue noticed by the department.


DCIT vs. Owens Corning Industries (India) Pvt. Ltd (ITAT Hyderabad)

TPO cannot question commercial expediency of payment to AE. RBI approval to a transaction implies it is at arms' length price


We are of the opinion that the TPO was incorrect in going into the business expediency of payment of royalty and arriving at the conclusion of the quantum of the royalty. We find support for this proposition in the decision of Hon'ble Delhi High Court in CIT vs. EKL Appliances (345 ITR 241) (Del) wherein the Hon'ble Delhi High Court had occasion to consider the disallowance of royalty by TPO and held that if the expenditure has been incurred or laid out for the purposes of business it is no concern of the TPO to disallow the same on any extraneous reasons. In the case of Ericsson India Pvt. Ltd. vs. DCIT (ITA No. 5141/Del/2011) the Delhi High Court decision in CIT vs. EKL Appliances (supra) was followed wherein it was held that "it would be wrong to hold that the expenditure should be disallowed only on the ground that these expenses were not required to be incurred by the assessee".


CBDT Order On Transfers And Postings Of ACsIT And DCsIT

Vide Order No. 182 dated 10.10.2014, the CBDT has transferred and posted several officers in the grade of Assistant / Deputy Commissioners of Income-tax with immediate effect and until further orders.


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Editor,

 

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Tuesday, October 14, 2014

Taxability Of Interest On NPAs Credited To P And L A/c: ITAT Explains Law

Dear Subscriber,

 

The following important judgement is available for download at itatonline.org.


The Solapur District Central Co-op. Bank Ltd vs. ACIT (ITAT Pune)

Interest on NPAs, even if credited to the Profit & loss account, is not chargeable to tax

While constructing its Profit & Loss Account to arrive at its net Profit or Loss, a Co-operative Society is required to show interest accrued/accruing on amounts of Overdue Loans separately. This is precisely what has been done by the assessee in the present case. The aforesaid requirement of the manner of construction of Profit & Loss Account, prescribed under the Rules of the Maharashtra Co-operative Societies Act, 1960, has prompted the assessee to draw up its Profit & Loss Account in the manner we have noted above qua the interest on NPAs. Therefore, it cannot be accepted that the manner or presentation of account which ostensibly is in compliance with the statutory provisions governing the assessee, can be a factor to evaluate assessability or otherwise of an income. In our considered opinion, it would inappropriate to be merely guided by a presentation in the annual financial statements to infer assessee's perception that an income had accrued, without considering the entries made in the financial statements in toto. In the present case, it is quite clear that assessee has drawn up its annual financial statement in compliance with the requirements of the statutes under which it functions and/or is incorporated. Therefore, the issue with regard to non-recognition of income on NPAs is required to be adjudicated having regard to the relevant legal position and not on the basis of the presentation in the annual financial statements. At this stage, we may also refer to the judgement of the Hon'ble Supreme Court in the case of CIT vs. Shoorji Vallabhdas & Co., (1962) 46 ITR 144 (SC) for the proposition that a mere book keeping entry cannot be assessed as income unless it can be shown that income has actually resulted. In the present case, the crediting of gross interest in the Profit & Loss Account, which includes interest on NPAs cannot be taken as a proof that such income has accrued to the assessee unless the statutory guidelines applicable on the said subject are ignored. Obviously, when the banking institutions following mercantile system accounting are permitted to treat the income on NPAs as assessable on receipt basis, such a position cannot be ignored in the case of present assessee merely because of a presentation in the annual financial statements. Even otherwise, we notice that the RBI guidelines permit that interest income on NPAs be parked in a suspense account and it is not necessary that it has to be brought to the Profit & Loss Account by the assessee. However, in the present case, as seen earlier, assessee has credited the gross amount of interest on credit side of the Profit & Loss Account and simultaneously shown on the debit side of the Profit & Loss Account, the amount of interest on NPAs. In other words, instead of netting of the interest the two amounts have been shown separately one on the credit side and other on the debit side. The net effect of the said presentation is the same. Therefore, in our view, the lower authorities have misguided themselves in rejecting the claim of the assessee for non-recognition of interest income on NPAs.


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Editor,

 

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Stay of demand in high-pitched assessments should be considered as per observations in Soul v. DCIT 323 ITR 305 (Delhi)