From: CA Santosh S. Samdadiya <ca.samsans@gmail.com>
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IT : Non-payment of interest on loan taken from a co-operative bank would not attract provisions of section 43B
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[2013] 30 taxmann.com 203 (Bombay)
HIGH COURT OF BOMBAY
Commissioner of Income-tax - 2
v.
Upendra T. Kapadia*
J.P. DEVADHAR AND M.S. SANKLECHA, JJ.
IT APPEAL NO. 602 OF 2011†
OCTOBER 30, 2012
Section 43B, read with section 11, of the Income-tax Act, 1961 - Business disallowance - Certain deductions to be allowed only on actual payment - Interests payments - Assessment year 2004-05 - Whether section 43B is applicable only in respect of any amount paid as interest to a scheduled bank - Held, yes - Whether a scheduled bank as defined in Explanation 4 to section 43B would have same meaning as contained in Explanation to section 11(5)(iii) - Held, yes - Whether, therefore, where assessee took a loan from a co-operative bank which was neither mentioned in Second Schedule to Reserve Bank of India Act, 1934 nor covered by any other Banks mentioned in Explanation to section 11(5)(iii), Tribunal was correct in holding that 'S' Bank was not a scheduled bank and, therefore, non-payment of interest amount to such a co-operative bank would not attract provisions of section 43B - Held, yes [Para 8] [In favour of assessee]
FACTS
• The assessee claimed deduction of interest on loan payable to 'S' Co-operative Bank in his return.
• During assessment proceedings, the Assessing Officer noticed that the interest had not been paid up to the date of filing of return of income for the relevant assessment year. Therefore, he disallowed the interest expenditure under section 43B.
• The Commissioner (Appeals) dismissed the assessee's appeal.
• The Tribunal took a view that section 43B would not apply in case of payment of interest to a co-operative bank as said section was applicable only in respect of interest payable on a loan taken from a scheduled bank within the meaning of Explanation to section 11(5)(iii).
• The Tribunal further held that 'S' Bank was not covered within the definition of scheduled bank under section 43B. Accordingly, the disallowance made by the authorities below was deleted.
HELD
• Non-payment of interest amount to a co-operative bank would not attract disallowance under section 43B.
• Section 43B is applicable only in respect of any amount paid as interest to a scheduled bank. A scheduled bank as defined in Explanation 4 to section 43B would have the same meaning as contained in the Explanation to section 11(5)(iii). The Explanation to section 11(5)(iii) defines a scheduled bank to mean various banks referred to therein i.e. State Bank of India, its subsidiaries, Nationalized Banks and any bank included in the second schedule to Reserve Bank of India Act, 1934. The 'S' bank is not mentioned in the Second Schedule to the Reserve Bank of India Act, 1934 nor covered by any other Banks mentioned in the Explanation to section 11(5)(iii).
• Therefore, the Tribunal was correct in its conclusion that non-payment of interest amount to a co-operative bank would not attract the provisions of section 43B. This is for the reason that in terms of Explanation (4) to section 43B, scheduled bank would have a meaning given to it in the Explanation to section 11(5)(iii).
• One has to merely look at the Explanation to section 11(5)(iii) to determine whether or not 'S' Bank Ltd. is included within the meaning of a Scheduled Bank. Sub-clause (iii) of section 11(5) speaks about the deposit of any amount in a scheduled bank or co-operative society engaged in banking, but the same is of no consequence. This is for the reason that for purposes of section 43B, it would be governed by the meaning given in the Explanation to section 11(5)(iii) and not by the main part thereof.
• Therefore, no fault can be found with the order of the Tribunal. [Para 8]
• In the result, the revenue's appeal is dismissed. [Para 10]
Vimal Gupta and Ms. Padma Divakar for the Appellant. Atul K. Jasani for the Respondent.
JUDGMENT
M.S. Sanklecha, J. - This appeal by the revenue under Section 260 A of the Income Tax Act, 1961 ("the Act") is against the order dated 26/10/2009 passed by the Income Tax Appellate Tribunal ("the Tribunal") relating to the assessment year 2004-05.
2. Being aggrieved, the following questions of law have been formulated by the appellant for the consideration by this Court.
(A) Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in deleting the dis-allowance of Rs. 52,85,205/- made by the Assessing Officer u/s. 43B of the Income Tax Act being interest payable by the assessee to Shree Mahalaxmi Mercantile Co-operative Bank Limited even though there was no evidence furnished by the assessee to substantiate the claim that the assessee had made the payment of interest before the filing of his return of income?
(B) Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that Shree Mahalaxmi Mercantile Co-operative Bank Ltd. is not a scheduled bank within the meaning of Section 43B and Section-11(5) of the Income Tax Act even though the said Shree Mahalaxmi Mercantile Co-operative Bank Limited is a co-operative society which is engaged in banking and thus the provisions of section 43B(e) will not apply to the assessee?
3. The appeal is admitted on questions (a) and (b). At the request of the Advocates for the appellant and the respondent the appeal is itself taken up for final hearing.
4. The respondent-assessee is an individual engaged in the business of trading in cotton bales. For the assessment year 2004-05, the respondent-assessee filed his return of income declaring a loss of Rs. 61.38 lacs. In his return the respondent assessee had claimed a deduction/expense on account of interest of Rs. 52.85 lacs payable by him to Shree Mahalaxmi Mercantile Co-operative Bank Limited on a loan taken. During the course of the assessment proceedings the Assessing Officer noticed that the aforesaid amount of interest of Rs.52.85 lacs had not been actually paid even upto the date of filing of return of income for the assessment year 2004-05. Consequently, the Assessing Officer in his assessment order dated 30/11/2006 disallowed the deduction/expenses claimed by the assessee on account of interest of Rs. 52.85 lacs under Section 43B of the Act and added it back to the income of the assessee.
5. Being aggrieved, the respondent-assessee filed an appeal to the Commissioner of Income Tax (Appeals). By an order dated 25/9/2008, the Commissioner of Income Tax (Appeals) dismissed the respondent-assessee's appeal on the ground that it is an admitted position that the interest of Rs.52.85 lacs had not been paid to Shree Mahalaxmi Mercantile Co-operative Bank Limited upto the date of filing of the return. In the circumstances, on application of Section 43B of the Act the order of the Assessing Officer dated 30/11/2006 was upheld.
6. On second appeal, the Tribunal by its order dated 26/10/2009 held that Section 43B of the Act would not apply in case of payment of interest to a co-operative bank for the reason that the section is applicable only in respect of interest payable on a loan taken from a scheduled bank. Under terms of Explanation 4(aa) to Section 43B of the Act a scheduled bank would have a meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of Section-11 of the Act. The Tribunal held that Shree Mahalaxmi Mercantile Co-operative Bank Ltd. is not covered within the definition of scheduled bank under Section 43B of the Act. Thus, the appeal of the respondent-assessee was allowed.
7. Mr. Vimal Gupta, Senior Counsel appearing for the revenue in support of the appeal submits that there is no dispute that the amount of interest has not been actually paid by the respondent-assessee to Shree Mahalaxmi Mercantile Co-operative Bank Limited up to the date of filing of the return for the assessment year 2004-05. Further, he contends that a co-operative bank being a co-operative society would be covered within the meaning of scheduled bank under Section-43B of the Act read with Section 11(5) (iii) of the Act. In the circumstances he contends that the deduction/expenses of Rs. 52.85 lacs being the interest payable to Shree Mahalaxmi Mercantile Co-operative Bank Limited is not allowable in view of the bar under Section 43B of the Act. As against the above, Mr. Atul Jasani, Advocate for the respondent-assessee submits that though there is no dispute about the non-payment of interest till the date of filing of the return, the same is not germane to the controversy at hand. Mr. Jasani submits that Section 43B of the Act is not applicable to the payment of interest made to Shree Mahalaxmi Mercantile Co-op. Bank Ltd. In support of his submission, he relies upon an order of the Tribunal dated 26/10/2009 and states that no substantial question of law arises and the appeal be dismissed.
8. We may usefully reproduce the relevant portion of Section-43B of the Act and Section 11(5)(iii) of the Act for an appropriate adjudication of the present controversy. The relevant portion of Section 43B of the Act reads as under:
"Certain deductions to be only on actual payment.
43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-
| (a), (b), (c) & (d). or** | ** | ** |
(e) any sum payable by the assessee as interest or any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advance or
(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee,
shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.
Explanation 4 - For the purposes of this section.-(a) "public financial institution " shall have the meaning assigned to it in section 4A of the Companies Act, 1956 ( 1 of 1956);
(aa) "scheduled bank" shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of section 11;
Section 11(5)(iii) of the Act is reproduced along with the Explanation as under:
(iii) deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank).
Explanation - In this clause, "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980) or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 ( 2 of 1934);"
From the reading of the above sections, it is amply clear that Section 43B of the Act is applicable only in respect of any amount paid as interest to a scheduled bank. A scheduled bank as defined in Explanation 4 to Section 43B of the Act would have the same meaning as contained in the Explanation to Section 11(5) (iii) of the Act. The Explanation to Section 11(5)(iii) of the Act defines a scheduled bank to mean various banks referred to therein i. e. State Bank of India, its subsidiaries, Nationalized Banks and any bank included in the second schedule to Reserve Bank of India Act, 1934. The Shree Mahalaxmi Co. op. Bank Ltd. Is not mentioned in the second schedule to the Reserve Bank of India Act, 1934 nor covered by any other Banks mentioned to the Explanation to Section 11(5)(iii) of the Act. Consequently, the Tribunal was correct in its conclusion that non payment of interest amount to a co-operative bank would not attract the provisions of Section 43B of the Act. This is for the reason that in terms of Explanation (4) to Section 43B of the said Act scheduled bank would have a meaning given to it in the Explanation to Section 11(5)(iii) of the Act. Therefore, one has to merely look at the Explanation to Section 11(5)(iii) of the Act to determine whether or not Shree Mahalaxmi Mercantile Co-operative Bank limited is included within the meaning of a Scheduled Bank. Sub-Clause (iii) of sub section (5) of Section 11 speaks about the deposit of any amount in a scheduled bank or co-operative Society engaged in banking but the same is of no consequence. This is for the reason that for purposes of Section 43B of the Act we would be governed by the meaning given in the Explanation to Section 11(5) (iii) of the Act and not by the main part thereof. Therefore, no fault can be found with the order of the Tribunal dated 26/10/2009.
9. In view of the above clear position of law both the questions of law (a) and (b) are answered in the affirmative i.e. in favour of the respondent-assessee and against the appellant-revenue.
10. Appeal is dismissed. No order as to costs.Impact of Section 115BBE if I.T Act, 1961
Introduction
1. Confronted with public discourse on the issue of corruption and black money in the past two years, the Government took various proactive steps to create a legislative framework to tackle these issues. The Finance Act, 2012 envisages several such steps. One of the steps so taken by the Finance Act, 2012 is the insertion of section 115BBE in the Income-tax Act, 1961. This section applies to income referred to in sections 68 to 69D of the Act and is designed to impose greater tax burden on the assessees who fail to explain the "nature and source" of their income, investments, expenses, etc. The "White Paper on Black Money" presented in the Parliament on 16th May, 2012 was, inter alia, concerned with the laundering of unaccounted money by taking advantage of basic exemption limit. While as there cannot be two opinions on that the proliferation of black money should be checked, honest taxpayers should not be discouraged from returning their income. After a detailed examination of the scope and impact of the new provision, the author opines that there is an urgent need for framing guidelines as to determine when an assessee can be deemed to have proved the "nature and source" of his income, investments, assets and expenditures, etc.
2. Extract of Provisions of New Section 115BBE
"Tax on income referred to in section 68 or section 69 or section 69A or section 69B or section 69C or section 69D.
115BBE. (1) Where the total income of an assessee includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, the income-tax payable shall be the aggregate of—
(a) the amount of income-tax calculated on income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, at the rate of thirty per cent; and
(b) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a).
(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1)."
[Note: Hereinafter sections 68, 69, 69A, 69B, 69C and 69D are referred to as "the group of six sections"]
Objective of Section 115BBE
3. While introducing the Finance Bill, 2012 on 16th March, 2012, the Finance Minister in his speech said:
"I propose a series of measures to deter the generation and use of unaccounted money. To this end, I propose
……….Taxation of unexplained money, credits, investments, expenditures, etc., at the highest rate of 30 per cent irrespective of the slab of income."
In the Explanatory Memorandum accompanying the above Finance Bill it was stated as under:
"Under the existing provisions of the Income-tax Act, certain unexplained amounts are deemed as income under section 68, section 69, section 69A, section 69B, section 69C and section 69D of the Act and are subject to tax as per the tax rate applicable to the assessee. In case of individuals, HUF, etc., no tax is levied up to the basis exemption limit. Therefore, in these cases, no tax can be levied on these deemed incomes if the amount of such deemed income is less than the amount of basic exemption limit and even if it is higher, it is levied at the lower slab rate.
In order to curb the practice of laundering of unaccounted money by taking advantage of basic exemption limit, it is proposed to tax the unexplained credits, money, investment, expenditure, etc., which has been deemed as income under section 68, section 69, section 69A, section 69B, section 69C or section 69D, at the rate of 30% (plus surcharge and cess as applicable). It is also proposed to provide that no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provisions of the Act in computing deemed income under the said sections."
The Working of the Provisions of Section 115BBE
4. Section 115BBE forms part of Chapter XII which contains several provisions for levying special rates of tax on various kinds of incomes, considering such incomes as a separate block. Such incomes, though they form part of the "Gross total income", for the purpose of taxation, yet they are considered separately and tax is levied thereon at the rates prescribed in such sections.
Section 115BBE applies to income referred to in sections 68 to 69D. It provides as follows. :
♦ Clause (a) of sub-section (1) of section 115BBE provides for tax at the rate of 30% on such income; (surcharge and cess are also applicable).
♦ Clause (b) of sub-section (1) of section 115BBE provides that while calculating income-tax, an assessee's total income would be reduced by the income taxed under clause (a) and tax calculated on balance of income. Thereafter, the taxes payable under clauses (a) and (b) would be added.
♦ Sub-section (2) provides that notwithstanding anything contained in the Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provisions of the Act in computing his income referred to in clause (a) of sub-section (1).
In this way, in respect of the income covered by clause (a) of sub-section (1) of the above section, basic exemption, deduction under Chapter VIA and set-off of losses are also not allowable. These issues are stated in details hereunder:
4.1 No basic exemption allowed while calculating tax at special rate under section 115BBE - No basic exemption is provided for while calculating the tax liability under the provisions of section 115BBE. In the Memorandum explaining the Finance Bill, 2012 (extracts quoted hereinabove), the Legislature had made it clear that it desired to curb the practice of laundering of unaccounted money by taking advantage of the basic exemption limit. Here, one may refer to the proviso to clause (a) of sub-section (1) of section 112 of the Act whereby in case of long-term capital gain which is also taxed at a special rate, the benefit of basic exemption is granted. Section 115BBE does not contain any similar proviso. So, it is clear that no basic exemption is allowed while calculating tax at special rate under section 115BBE.
4.2 Restriction on deductions under Chapter VI-A - Sub-section (2) of section 115BBE restricts deduction in respect of any expenditure allowable to the assessee under any provision of the Act. This is not to be confused with deductions admissible in computing "Gross Total Income" under Chapter VI-A. In the case of an assessee having income referred to in section 115BBE and no other income, while determining the "Gross total income", deduction under Chapter VI-A would be admissible. This will result into a lower 'Gross Total Income/Taxable income' as compared to income determined u/s 115BBE. But while calculating tax payable, such lower taxable income would have to be ignored and tax would have to be calculated on the income determined u/s 115BBE. This is explained with the help of the following example :
| (a) Income determined by applying the provisions of section 115BBE of the Act | 150,000 |
| (b) Other income of the assessee | 0 |
| (c) Total | 150,000 |
| (d) Deduction admissible under Chapter VI-A | 100,000 |
| (e) Gross Total Income (or say Taxable Income) | 50,000 |
| (f) Tax payable on (a) above @ 30% | 45,000 |
| (g) Tax on other income (b) | 0 |
| (h) Total tax payable (excluding surcharge, cess, etc.) | 45,000 |
From the above example, it may be noted that even if an assessee is technically entitled to claim deduction under Chapter VI-A and his gross total income is below the exemption limit, his tax liability under the provisions of section 115BBE remains unaffected.
4.3 Set-off of current year's losses under other heads as per section 71 - While calculating "Gross total income", an assessee may set-off current year's losses under other heads, but as illustrated hereinabove in the case of "Deductions under Chapter VI-A", his tax liability under section 115BBE would remain unaffected.
Scope of Section 115BBE:
5. Chapter XII of the Income-tax Act, 1961 contains many provisions whereby certain special cases are taxed at specified flat rates of tax, considering those incomes as a separate taxable block of income. Section 115BBE forms part of this Chapter. It imposes tax at a flat rate of 30% (i.e., the maximum marginal rate) on such income, as is the subject-matter of this section (without making any deduction in respect of any expenditure or allowance as may be admissible to an assessee under any provision of the Act.)
Compared to various other provisions of Chapter XII, the provisions of section 115BBE are different from them in the following respects:
(a) Whereas various other provisions of Chapter XII apply to income determined at an estimated percentage of gross receipts, section 115BBE, read with section 68 applies to "sum credited". The expression "sum credited" is a wider term which includes receipts of all kinds, e.g., capital, creditors, loans and revenue receipts. Similarly, section 155BBE, read with other sections e.g., sections 69, 69A, 69B and 69C apply to the entire amount of unexplained money, bullion, jewellery or other valuable article or expenses. Section 69D applies to amounts borrowed and repaid on hundi loans otherwise than by an account-payee cheque or a bank draft.
(b) The provision contained in sub-section (2) of the above section ensures that notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing the income covered by this section.
This difference between section 115BBE on the one hand and other provisions contained in Chapter XII has been created by the Legislature deliberately so as to enact deterrent provisions in cases where nature and source of sum received, etc., are not satisfactorily explained.
Impact of section 115BBE under various circumstances:
6. The provisions of section 115BBE are likely to have an impact upon the tax liability of various taxpayers and none would remain unaffected by this provision. For a better understanding of the provision, let us consider the impact of the provision under various assumed circumstances, as follows:
6.1 Impact of section 115BBE under following circumstances
6.1-1 When assessee has incurred unexplained expenses - When an addition to a returned income made by the Assessing Officer under any of the groups of section 68, etc., consists of such income, investments, money, bullion, jewellery or other valuable articles as are not recorded in the books of account by an assessee and/or has incurred unexplained expenses or repaid hundi loans in a manner other than that prescribed.
6.1-2 When assessee's income is recorded in books but has not been offered for taxation - When an addition to a returned income made by the Assessing Officer under any of the groups of section 68, etc., consists of such income, investments, money, bullion, jewellery or other valuable articles as are recorded in the books of account as part of capital, loans, sundry creditors or such other credits which are not offered for taxation by the assessee voluntarily and the assessee fails to prove the nature and source thereof satisfactorily.
6.1-3 When assessee is found to be in possession of unexplained investments - When an assessee is not required to maintain the books of account but is found to be in possession of unexplained investments, money, bullion, jewellery or other valuable articles; and/or having incurred unexplained expenditure.
Prior to insertion of section 115BBE, an assessee was entitled to basic exemption, deductions and allowances under the provisions of the Act in respect of additions made under the above circumstances. But after the insertion of section 115BBE, no such basic exemption, deductions and allowances would be allowed for calculating tax at a flat rate of 30% on income added under any of the groups of section 68, etc. The tax liability of the assessee would be higher under the new regime.
6.1-4 When an assessee voluntarily returns income but is unable to prove source thereof - When an assessee voluntarily returns income for taxation but is unable to prove the nature and source thereof, to the satisfaction of the Assessing Officer.
6.2 Widespread belief about group of six sections - There is a wide spread belief that the group of six sections contain deeming provisions and are attracted only when Assessing Officer finds any unexplained receipt/credit, investment, money, bullion, jewellery or other valuable article and/or unexplained expenditure or borrowing or repayment of hundi loans in a manner other than that prescribed. Accordingly, it is being vehemently argued and generally believed that where any income is voluntarily offered for taxation by an assessee and its nature and source are not explained, no addition or special treatment is called for, as no prejudice is caused to the Department. No doubt, the purpose of the groups of sections 68, etc., is to bring to tax the unexplained income and once the assessee himself offers the same for taxation, the purpose of the Department is served. The Assessing Officer has no reason for taxing the same once again by applying the deeming provisions of any of the groups of six sections. However, this contention held well before the introduction of section 115BBE.
6.3 Aspects of "Income from other sources" - Generally, assessees submit returns of income declaring income from various sources under the head "Income from other sources" which consists of one or more of the income from various sources, e.g., miscellaneous receipts, gifts on ceremonial occasions, gifts from non-relatives, miscellaneous income, tuitions, household works, flying income, commission, brokerage, unspecified jobs, coaching classes, windfall income, etc. Such assessees do not maintain any books of account and return their income on an estimate basis. Naturally, they are not in a position to prove the nature and source of such returned income to the satisfaction of the Assessing Officer. If such income is not credited into any books of account, the same does not fall within the purview of section 68. At best, it can be alleged that the assessee failed in his duty to substantiate his returned income and for this reason, the Assessing Officer can make assessment to the best of his judgment wherein he may or may not make additions to the returned income.
But once such income surfaces in the form of any investments, money, bullion, jewellery or other valuable articles and/or the assessee is found to have incurred unexplained expenses, they attract either of the provisions of sections 69 to 69C. It would depend upon facts and circumstances of the case as to whether or not an assessee has sufficient explanation for having made such investments out of income so returned from other sources, or the source of such money, bullion, jewellery or other valuable articles was the income from other sources returned by him. Likewise, he is supposed to have sufficient explanation for expenses incurred.
There is another aspect of the "income from other sources". In cases, where an assessee's only source of income consists of such income, he does not maintain books of account and enjoys immunity from the application of the provisions of section 68. But if such assessee has income from business or profession also in addition to income from other sources and the later income is recorded in the books of account maintained for the purpose of income from business or profession, section 68 would become applicable to the income from other sources also, as the same is found credited in a books of account.
6.4 After enactment of section 115BE in certain circumstances the AO can apply provisions of group of sub-sections - After the enactment of section 115BBE, there is a change in the consequences of an assessee's failure to prove the nature and source of income returned. The difference in applicable rates of tax would provide a justifiable cause to the Assessing Officer to apply the provisions of the group of six sections even in the case of an income returned voluntarily for taxation. In other words, the income returned is deemed to be covered by another provision so as to levy special (higher) rate of tax thereon. The argument that there is no need to apply deeming provisions as income is voluntarily offered for taxation seems to be fallacious one. In support of this contention, it would be appropriate at this stage to point out that such attempts by an assessee to voluntarily return income from unspecified sources is considered by the Department as laundering of unaccounted money and the provisions are enacted with specific intention to tackle this menace. This is evident from the memorandum explaining the amendment stated hereinabove.
6.5 Cases in which special rates are applied and tax impact is high - It would be pertinent also to point out that due to difference in rates of tax at which a particular income is taxable, disputes arise frequently between the Department and the assessee as to whether a particular income is taxable as "short-term capital gain" or as an "income from business or profession", and so on. It is well known fact that even if there is no dispute over the quantum of income returned by the assessee, such income is taxed under a different head, if the exercise results into levy of tax higher than the same admitted by the taxpayer.
It may be noted that special rate of tax would be applied on the total income returned as "income from other sources" without granting any basic exemption limit or any deduction or allowances. The tax impact would be very high. The same has been illustrated in the following example : -
6.5.-1 Example:
| Particulars | After insertion of section 115BBE | Before insertion of section 115BBE |
| (a) Income voluntarily returned by assessee as income from other sources consisting of misc. receipts, gifts, etc. | 210,000 | 210,000 |
| (b) Income added under section 69 | 0 | 0 |
| (c) Total | 210,000 | 210,000 |
| (d) Less : Deduction under Chapter VIA- C | 0 | |
| (e) Taxable Income | 210,000 | |
| (f) Tax on above in case of an individual (male, not a senior citizen) - Excl: surcharge, cess, etc., on the basis of rates applicable in assessment year 2013-14 | 1,000 | |
| (g) Income taxable u/s 69 as the assessee fails to explain the nature and source of income but has made investments to the extent of income returned | 210,000 | |
| (h) Income taxable otherwise than section 69 | 0 | |
| (i) Deduction under Chapter VIA - C | 0 | |
| (j) Taxable income otherwise than section 69 | 0 | |
| (k) Tax on (g) @ 30% | 63,000 | |
| (l) Tax on (j) | 0 | |
| (m) Total tax due (excl: S/C, Cess, etc.) | 63,000 |
Note: For the sake of simplicity, surcharge, cess, etc., have not been considered in the above example.]
6.5-2 Some legal precedents - In the past, the instances of application of the deeming provisions on voluntarily returned income have been few as the Department had no reason to do so. Such cases are likely to increase in view of the power available under the provisions of section 115BBE. Even in the past, wherever, loss of revenue was evident, the Department rejected the returned income and applied deeming provisions. We can refer to the following legal precedents, in this connection:
6.5-2-1 CASE OF CLAIMING BOGUS INCOME FROM HORSE RACING AS EXEMPT - In the case of B.C. Paul v. CIT [1981] 6 Taxman 170 (Cal.), in return filed for the assessment year 1965-66, the assessee, being not a regular punter, disclosed receipts of Rs. 1,58,250 but claimed the same to be exempt from tax on the ground that they were casual receipts from horse racing. ITO treated impugned amount as an income from undisclosed sources holding that there were discrepancies in assessee's statement and that assessee had failed to discharge onus of proving nature and source of impugned receipt. As the assessee failed to prove the receipts from horse racing as a genuine claim, the application of section 68 by the Assessing Officer was upheld.
6.5-2-2 CASE OF CLAIMING BOGUS INCOME FROM AGRICULTURAL OPERATIONS AS EXEMPT - In the case of Avdhesh Kumar Jain v. CIT [1990] 48 Taxman 266 (All.), the assessee claimed that certain amount earned from agriculture operations was exempt. The ITO found that the assessee had failed to produce any satisfactory evidence about his being engaged in agricultural activities. The assessee was also not able to state as to whom the agricultural produce was sold. He, therefore, assessed the aforesaid amount as income from undisclosed sources in the hands of the assessee.
So, it can be concluded that a voluntary return does not stand in the way of Assessing Officer's reaching a different conclusion in the matter.
6.6 Impact of section 115BBE when an assessee credits "Cash sales" in his books of account - The provisions of section 68 are attracted when any sum is found credited in the books of an assessee. The words "any sum" are wide enough to cover the transactions of "Cash Sales" appearing in the books of an assessee and, therefore, if the assessee offers no explanation about the nature and source of "cash sales" or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, cash sales may be deemed as unexplained incomes chargeable to tax under section 68 of the Act.
To many, it may seem preposterous that cash sales credited in the books of account can be deemed as income under the provisions of section 68 and can be subjected to flat rate of tax @ 30% without making deduction for purchases. Before reaching any conclusion, it would be useful to take note of the following legal precedents which directly deal with the issue:
6.6-1 Legal precedents which directly deal with the issue
6.6-1-1 ITO v. Jethu Ram Prem Chand [2001] 114 Taxman 219 (Delhi)(Mag.) In this case, the Assessing Officer noted that the assessee had sold substantial quantities of rice but the addresses of the buyers were not mentioned in the cash memos. He also observed that the truck numbers in respect of loading of the rice were not recorded. The Assessing Officer, therefore, concluded that the cash sales amounting to Rs. 35.48 lakhs represented cash introduced by the assessee and, therefore, treated the same as unexplained income under section 68.
However, on appeal, the Commissioner (Appeals) deleted the addition observing that the assessee was maintaining day-to-day stock registers in which no defects had been pointed out by the Assessing Officer. The Tribunal held as follows:
"It was obvious that the assessee made purchases from J.R. New Delhi, on 5-1-1990 to the tune of 1970 quintals and the sales in cash of the same were made on 8-1-1990 and thereafter. As the purchase as well as sales were duly recorded in the books of account and the assessee had shown the profits on these sales made in the return of income, one failed to understand as to how the figure of total cash sales amounting to Rs. 35,48,005 could be treated as unexplained cash credit under section 68. The assessee made available to the Assessing Officer all the necessary particulars of the party from whom the assessee purchased the goods which were sold in cash and became the subject-matter of controversy at hand. The Assessing Officer in his wisdom thought it fit not to examine the supplier. It indicated that he was satisfied with the genuineness of the purchase aspect of the transaction. It was not the case of the revenue that the assessee had not shown any purchase in its books of account against which the sales had been recorded. The case law cited by the revenue as to the burden of proof on the assessee was not applicable to the facts of the present case, because the factum of purchase and sale of the goods in the assessee's books of account stood established beyond a shadow of doubt. Under these circumstances, the order of the Commissioner (Appeals) was to be upheld."
On a close reading of the above judgment, it is apparent that, though no addition was finally upheld, yet "cash sales" were doubted by the Department in the absence of proof of sales. The assessee could succeed because the nature and source were explainable with reference to purchases which were made from established sources and were duly recorded in his books. One must consider what would have been the finding if the names of the persons from whom the purchases were made were not available with the assessee and the purchases could not be proved as genuine.
This case establishes the fact that an assessee has the duty to explain the nature and source of "cash sales" when questioned by the Assessing Officer.
6.6-1-2 Harish Kumar v. Dy. CIT [2003] 85 ITD 366 (Hyd.) - The assessee submitted his return of income which, inter alia, included capital gains on sale of gold and jewellery. He availed the benefit of Voluntary Disclosure of Income Scheme, 1997 and declared gold and diamonds and necessary certificate under the said Scheme was issued by the Commissioner. Later on, the assessee sold the gold and diamonds to 'A' and 'S', respectively. The sale of gold was accepted as genuine by the Assessing Officer, while as the sale of diamonds to 'S' was not accepted as genuine and entire sale value thereof was added under section 68 by the Assessing Officer, treating the same as unexplained credit. Accordingly, assessment was completed. On appeal, the Commissioner (Appeals) confirmed the addition made by the Assessing Officer.
On second appeal, it was held as under:
"As regards the sale of diamonds to 'S', at Surat it was found that the identity of the party had been established, the transaction was genuine and the creditworthiness of jeweller had been proved beyond doubt by the assessee. The bank accounts of 'S' which were collected by the Assessing Officer showed that the amounts were received by account-payee DDs from Mumbai. The DDs were taken by 'S' and sent to the assessee which were credited in his bank account and used for business purposes of his business entities. It was not the duty of the assessee to prove the sources of the credits in the bank account of 'S'. The assessee could not establish the source of the source. The decision of the Madras High Court in S. Hastimal v. CIT [1963] 49 ITR 273, also supported this view of the assessee. [Para 30]."
On a close reading of the above judgment, one would find that in a case where the Department doubted the sales itself, the assessee succeeded because he had collected the sale proceeds of the diamonds by account payee demand drafts from customers whose identity and creditworthiness were proved. If such credit sales can be questioned by the Department, then there is no doubt that cash sales are not immune from the applicability of the provisions of section 68.
6.6-1-3 NITISHA SILK MILLS (P.) LTD. v. ITO [IT Appeal No. 896 (Ahd.) of 2011, dated 20-7-2012] - In an unreported recent case, dated 20th July, 2012, in the case of Nitisha Silk Mills (P.) Ltd. (supra) before the Ahmedabad Bench of the Income Tax Tribunal, assessee had claimed to have effected cash sales of grey cloth on three dates, i.e., 16.5.2006, 17.5.2006 and 31.3.2007 totalling to an amount of Rs. 9,95,870/-. The A.O.'s objection was that this that why cash sales were only on these three dates in the year and not on other dates. With regard to this objection of the A.O., it was submitted by the assessee before the A.O vide a written submission, dated 29-12-2009 that since the assessee decided to discontinue the business, major quantity of grey cloth lying in various process houses was called back without processing and the grey cloth so received was sold in cash. It was also submitted that some of the process houses could not trace grey cloth of the assessee and, therefore, cash equal to that value of grey cloth was given by the owners of the process houses. Considering these facts of the present case, in its entirety, we are of the considered opinion that the claim of the assessee regarding cash sales under peculiar conditions that the assessee was discontinuing its business and, therefore, some sales were made in cash could not be summarily rejected. We also find that it was observed by the Ld. CIT(A) on pages 51-52 of his order that the assessee could not provide even the names and addresses of those parties to whom cash sales were claimed to have been made. This was the main basis on which Ld. CIT(A) had confirmed the decision of the A.O. In our considered opinion, it cannot be said that in the case of cash sales, the assessee is bound to keep record of the names and addresses of the buyers.
In all the cases cited above, although the attempt of the Revenue to tax cash sales as unaccounted income failed, yet it could not be said and concluded that cash sales were outside the purview of the provisions of section 68. The cases were decided in favour of the assessees on the basis of the facts and circumstances of the cases.
In practical situations, it would be very difficult for assessees to keep fool-proof and detailed record of its transactions relating to purchases and sales. Petty traders running stalls on way-sides, hawkers, etc. do not issue cash memos/bills and obtain purchase invoices. Wholesale Departmental stores like "Big Bazaar" making numerous transactions of sales in a day cannot carry out the exercise of "KYC", i.e, "know your customer" like banks. Although in cases of cash sales, an assessee is not required to prove the "source of source", yet then it would be a Herculean task for him to prove the nature and source of "cash sales".
6.7 Impact of section 115BBE - When an assessee is covered by special provisions for computing profits or gains of a business on presumptive basis under section 44AD of the Act.
According to the provisions of sub-section (1) of section 44AD of the Act, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business, are deemed to be the profits and gains of such business. Moreover, if the assessee claims that he has earned higher than the specified percentage, the same is also deemed to be the profits and gains of such business. An assessee covered by these provisions is not required to maintain books of account.
Now a days, only annexure-less returns of Income are accepted by the Department. In the form of return of income prescribed in the case of an assessee covered by the provisions of section 44AD, there is space for submitting the particulars of total sundry debtors, sundry creditors, stock-in-trade and cash balance as at the end of the previous year only. Such an assessee is restrained from submitting his balance sheet or state of affairs or a statement of assets or liabilities or any such statement, by whatever name called. Such an assessee is not permitted to submit the particulars of his other assets and liabilities, other than the four items stated hereinabove.
For the purpose of examining the applicability of the provisions of any of the group of six sections in case of an assessee covered by the provisions of section 44AD of the Act, the issue is considered in the following two parts for better understanding:
(a) the status of four items (viz., sundry creditors, sundry debtors, stock-in-trade and cash balance) disclosed in the return of income;
(b) the status of other items not disclosed in the Return of Income.
In the case of the four items stated in (a) above, it can be argued that the assessee has explained satisfactorily the nature and source of the four items stated in (a) above, once his returned income is accepted and assessed by the Assessing Officer. If the Assessing Officer does not accept his return of income and selects his case for scrutiny, the assessee would be required to explain to his satisfaction, that the source of sundry debtors, stock-in-trade and cash balance were out his returned income. If the same are not commensurate with his income and the source is from borrowings from third parties or any other source, he would have to explain the nature and source of the same. The provisions of sections 69 to 69C would be applicable in his case. In respect of sundry creditors disclosed in his return, section 68 would not be applicable, as the creditors do not appear in any books of account which is a precondition for applicability of section 68. But this would not make any difference as corresponding to sundry creditors there would be other investments, assets, etc., which would be required to be explained under any of the remaining provisions of this group of sections.
In case of other items stated in (b) above, an assessee would have to explain the nature and source of other items, notwithstanding the fact that his return of Income has been accepted and assessed.
As per the existing law, if the Assessing Officer finds that any of the items covered by (a) and/or (b) above is unexplained, the same would be taxable under normal provisions. In other words, tax liability would be calculated according to slabs of income after allowing basic exemption, deductions, allowances, set-off of losses, etc. But after the enactment of section 115BBE, the same would be taxed at the prescribed special rate of tax as a separate block of income.
The provisions of this section specify the percentage for deeming income at 8% and permit an assessee to declare higher income, if he so likes. At present, there is no limit on such higher percentage. If excessively higher income is returned taking advantage of this provision, it may raise eyebrows that the assessee is laundering his black money through this route. For plugging this loophole, "GAAR" type provisions may be enacted in future.
However, the case of an assessee covered by the provisions of sub-section (5) of section 44AD would be different and similar to other assessees having income from business or profession.
The same provisions would apply in case of section 44AE
6.8 Impact of section 115BBE in cases of companies, LLPs and firms who are liable to pay tax at maximum marginal rate - The income of companies, LLPs, partnership firms is taxed @ 30%, which is same as prescribed under section 115BBE. These assessees do not enjoy any basic exemption limit. So, these classes of taxpayers may nurture a wrong impression that this section does not have much bearing on their case. They should take note of the fact that if the provisions of section 115BBE are attracted in their case, they would not be allowed any deduction or allowance under any provision of the Act. They would not be entitled to set-off unabsorbed depreciation and/or unabsorbed or current business loss against such an income. To this extent, their tax liability will be affected.
6.9 Impact of section 115BBE in cases of persons having income from profession - As stated earlier, the expression "sum credited" is wide enough to include receipts from a profession. So, in case of all sums credited/received as professional receipts, the assessee would be duty-bound to explain the nature and source thereof, failing which no deduction will be allowed for expenses incurred for carrying out the profession. As has been stated hereinabove, in case of "cash sales", maintenance of stock registers, evidence of purchases, etc., help the businessman in explaining the nature and source of cash sales. But a professional is at a disadvantage as he can seldom establish a link between an expense incurred and revenue generated therefrom. He will have to prove the nature and source of his receipts in some other way, probably by applying "KYC" norms, as discussed separately hereinafter.
7. When is "Nature and Source" inferred as having been established ?
7.1 In cases where section 68 is applicable?- The above-stated group of six sections was introduced into the taxing enactment step by step in order to plug loopholes and to place certain situations beyond doubt, even though there were judicial decisions covering some of the aspects.
Prior to the enactment of section 68, the Courts had held that where any amounts were found credited in the books of an assessee in a previous year and the assessee (a) either offered no explanation about the nature and source thereof, or (b) the explanation offered was, in the opinion of the Assessing Officer, not satisfactory, the sums so credited could be charged to income-tax as income of the assessee of the relevant previous year. This principle was approved by the Supreme Court in the following cases:
(a) A. Govindarajulu Mudaliar v. CIT [1958] 34 ITR 807;
(b) Lakhmichand Baijnath v. CIT [1959] 35 ITR 416;
(c) Jamnaprasad Kanhaiyalal v. CIT [1981] 130 ITR 244/6 Taxman 61;
(d) ITO v. Rattan Lal [1984] 145 ITR 183/16 Taxman 25
Section 68 enacted a deeming provision which applied in such cases. In effect, this section was only a statutory recognition of what was the state of law even prior to enactment of the 1961 Act.
The expression "nature and source" has to be understood as a requirement of identification of the source and its genuineness. The Supreme Court in Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 pointed out that the onus on the assessee has to be understood with reference to the facts of each case and proper inference has to be drawn from the facts. Where the prima facie inference on facts is that the assessee's explanation is probable, the onus will shift to the Revenue.
The question, whether or not an assessee has discharged his onus of proving the "nature and source" of an item which is the subject-matter of the section, depends upon facts and circumstances of each case. An assessee is supposed to explain the "nature and source" to the satisfaction of the Assessing Officer. The opinion of the Assessing Officer would depend upon his judgment and subjectivity and such opinion cannot be ruled out. So, the controversy on the question, whether or not an assessee has been able to prove the "nature and source" of sum credited in his books or other investments, assets, expenses, etc., is likely to increase. On the question as to when an assessee is said to have discharged his onus of proving the nature and source of an item, guidelines are available from legal precedents in case of cash credits, loans and sundry creditors appearing in his books of account. But no such guidelines are available in various other circumstances discussed hereinabove.
Prior to amendment to section 68 by the Finance Act, 2012, an assessee was required to prove the origin or source of a credit and not the "source of source". [Refer S. Hastimal v. CIT [1963] 49 ITR 273 (Mad); Tolaram Daga v. CIT [1966] 59 ITR 632 (Assam); Sarogi Credit Corpn. v. CIT [1976] 103 ITR 344 (Pat.); Nemi Chand Kothari v. CIT [2003] 264 ITR 254/[2004] 136 Taxman 213 (Gau.).]
In order to establish the receipt of cash credit as required under section 68, the assessee must satisfy three important conditions, namely, (i) identity of the creditor, (ii) genuineness of the transaction, and (iii) financial capability of the person giving the cash credit to the assessee, i.e., the creditworthiness of the creditor. In other words, the golden rule was that an assessee could not be asked to prove origin of origin and source of source.
The above golden rule was applied by the Courts in the cases of share application money, etc., received by closely held companies also in various cases stated hereinabove. Now, Section 68 has been amended by the Finance Act, 2012 requiring a closely-held company to prove the source of source of share capital, share application money, share premium and similar sum, by whatever name called. Except this, in all other cases, the above golden rule still prevails.
Apart from credits on account of borrowings, loans, sundry creditors, capital, deposits, etc., such assessees credit their income from sales (both cash and credit) and other operating activities also in their books of account. Such other credits also attract the provisions of section 68. The nature and source of these later types of credits are explained by the assessees according to the facts and circumstances of the relevant credit entry.
7.2 In cases where sections 69 to 69C are applicable - While explaining the scope of these sections hereinabove, it has been stated that these sections apply to various items (e.g., investments, money, bullion, jewellery, other valuable articles, expenditures, etc.) as are not found recorded in the books of account of an assessee. Where an assessee is required by law to maintain books of account and does not record such items in his books, these sections will apply in his case also, to the extent the same are not recorded in his books of account.
Sections 68 and 69A apply where an assessee maintains books of account. Sections 69, 69B and 69C apply to those assessees who either do not maintain books of account or even if they maintain accounts, the items covered by these sections are not recorded in such books. Section 69D applies to all assessees, i.e., those who maintain and those who do not maintain books of account.
As observed earlier, there are no legal precedents/guidelines as to when an assessee can be said to have discharged satisfactorily his onus of proving the source of such investments, money, bullion, jewellery, other valuable articles, etc., as are found in his possession, and/or the source of expenses incurred.
Normally, an assessee explains the source of such items with reference to his income (current and past) and borrowings from third parties.
If the source of unexplained investments, etc., is borrowings from third parties, the above-stated golden rule of evidence should apply even in cases where an assessee does not maintain the books of account. There is no reason for requiring such an assessee to prove the source of the source.
But where the source of unexplained investments, etc., is saving out of income of current year or previous years, the assessee may not have convincing records of his savings and it would be difficult to prove the source of unexplained items from such past savings.
Conclusion
8. It is clear that the Legislature is under an unprecedented pressure to tackle the menace of black money. While there can be no objection to the various steps taken for this purpose, the Government should not overlook the plight of its honest citizens who have been contributing taxes to the exchequer over a number of years. So, appropriate guidelines should be framed as to what would constitute a 'nature and source' in a specific situation. --
2013-TIOL-116-HC-MUM-IT
IN THE HIGH COURT OF BOMBAY
Writ Petition No.1167 of 2012
TOLANI EDUCATION SOCIETY
Vs
DEPUTY DIRECTOR OF INCOME TAX
(EXEMPTIONS)-I(2), MUMBAI & ORS
(EXEMPTIONS)-I(2), MUMBAI & ORS
D Y Chandrachud and A A Sayed, JJ
Dated: January 31, 2013
Appellants Rep by: Mr S E Dastur, Sr. Counsel, Mr Nitesh Joshi, Mr Atul K Jasani & Mr P C Tripathi
Respondent Rep by: Mr A R Malhotra
Respondent Rep by: Mr A R Malhotra
Income Tax - Writ - Sections 2(15), 10(22), 10(23)(iiiab), 10(23)(vi), 10(23C), 12A, 80(G)(5), 143(1), 143(3) - Article 226 of the Constitution of India - Whether when an educational institution receives substantial grant from the state government, it can avail the benefit of exemption u/s 10(23)(vi) - Whether an educational society can simultaneously avail benefit u/s 10(23)(vi) and 10(23)(iiib) - Whether when the surplus arises in the course of activities incidentally in case of an educational trust, the purpose of such an institution as existing for profit would defeat and the benefit of exemption u/s 10(23) would be deprived.
Petitioner is an educational society registered under the Societies' Registration Act, 1960. It was formed with the main object of promoting education in different branches of learning. The Petitioner conducts a college of commerce in Mumbai. The college was affiliated to the University of Mumbai and receives aid from the State government. A Certificate of Registration was granted to the Petitioner u/s 12A. On 10 May 2004, the Petitioner made an application for exemption u/s 10 (23C)(vi) for AY 2003-04. Regarding this, the DIT(E) informed the Petitioner that since from its accounts it appeared that the Petitioner had derived a substantial income by way of government grants for the years ending on 31 March 2001, 31 March 2002 and 31 March 2003, the file pertaining to the claim of exemption u/s 10(23C)(vi) was closed and "the cases which were wholly or substantially financed by the Government were covered by the provisions of Section 10(23C)(iiiab)." A certificate was issued to the Petitioner u/s 80(G)(5). Between 1985-86 and 2005-06, the Petitioner was allowed the benefit of the provisions of Section 11. For AY 2006-07 and 2007-08, the claim of exemption u/s 10(23C)(iiiab) was allowed. For AY 2006-07 that claim was allowed in pursuance of an order u/s 143(3) whereas, for AY 2007-08, an intimation was issued u/s 143(1) accepting the claim of exemption u/s 10(23C)(iiiab). For AY 2008-09, the benefit of Section 10(23C)(iiiab) was denied to the Petitioner though, admittedly the benefit of Section 11 was granted. The AO held that in order to be an institution substantially funded by government, the institution must receive at least 75% of its receipts from government grants. The Petitioner is in Appeal for Assessment Year 2008-09 before the C.I.T. (A). For AY 2009-10, the benefit of the exemption u/s 10(23C)(iiiab) was allowed and an intimation was furnished u/s 143(1). Assessment proceedings for AY 2010-11 were in progress. For AY 2011-12, the Petitioner submitted an application for the grant of an exemption under Clause (vi) of Section 10(23C) to the CCIT. By an order dated 29 November 2011, the CCIT had held that (i) Since the grants which were received by the Petitioner from the Government form a substantial part of the total receipts, the Petitioner does not fall within the purview of Section 10(23C)(vi); (ii) the Petitioner had not meet the requirement of an institution existing solely for educational purposes and not for the purposes of profit and that, consequently, the Application for the grant of approval u/s 10(23C)(vi) for AY 2011-12 onwards stood rejected.
It was observed that the college conducted by the Petitioner was in receipt of grants from the State Government and was an aided institution. It had shown a deficit, which was not a conclusive proof of its existence solely for educational purposes and not for the purposes of making profits. CCIT has passed an order denying the benefit of section 10(23)(vi) on the basis that the petitioner was in receipt of grant from the state govt which form a substantial part of the total receipts and consequently, the case of the Petitioner would not fall within the purview of Section 10(23C)(vi). It was observed that such an institute would fall under the purview of section 10(23)(iiiab). The CCIT had held that the fees which were collected by the Petitioner as reflected in the income and expenditure account for the year ending on 31 March 2011 would indicate that the Petitioner did not exist solely for educational purposes. It was also noted that the Petitioner had collected from the students utility fees, project work fees, industrial visit fee and a magazine fee from which it was sought to be deduced that the Petitioner does not exist solely for educational purposes. Moreover, according to the impugned order, there was an increase in the asset base with a generation of surplus which indicated that the activities of the Petitioner were not devoted solely for educational purposes.
Held that:
++ in the judgement of ACIT, Gujarat v/s. Surat Art Silk Cloth Manufacturers Association, SC while considering the expression "Activity for Profit" for the purposes of Section 2(15), held that the test that must be applied is not whether as a matter of fact an activity results in profit but whether the activity is carried on with the object of earning profit. In other words, in order to attract the exclusion, profit making must be the end to which the activity is directed or the predominant object of the activity must be the making of profit. Sub-clauses (iiiab), (iiiad) and (iv) require that the institution must exist solely for educational purposes and not for profit. Existence comprehends the purpose, goal, object and mission of the institution. Where the purpose of the institution and the defining character of its mission is education, and education alone, the test is fulfilled. The fact that incidentally, a surplus has resulted in a year will not render such an institution as existing for profit. Existence is defined by the fundamental underlying purpose of its being, though the manner in which it has consistently carried on its activities may assume relevance. Institutions exist for what they are formed to pursue and if that pursuit is solely and exclusively education, the statutory norm is fulfilled;
++ in the case of Vanita Vishram Trust v/s. CCIT, a trust was existing for over eighteen years and which had only carried on the activity of conducting educational institutions. The application submitted by the Petitioner for approval u/s 10(23C)(vi) was rejected inter-alia on the ground that the objects for which the trust existed were of a varied nature and did not fulfill the condition that it must exist solely for the purposes of education. Moreover, the trust, had a surplus which had been utilized for the purchase of assets as reflected in the balance-sheet. While setting aside the order refusing approval, this Court noted the position that since the establishment of the trust, save and except for carrying on an educational institution, no other activity had been carried on for long years. Moreover, the fact that a surplus may arise in the activity of the trust after meeting the expenditure incurred for conducting educational activities was held not to dis-entitle the trust for the benefit of the provisions of Section 10(23C);
++ the figures which are contained in the income and expenditure account contain a reference only to items of a revenue nature without taking into account capital expenditure which is incurred by the college during the concerned years. The fact that the Petitioner has a surplus of income over expenditure for the three years in question, cannot by any stretch of logical reasoning lead to the conclusion that the Petitioner does not exist solely for educational purposes or, as that CCIT held that the Petitioner exists for profit. The test to be applied is as to whether the predominant nature of the activity is educational. In the present case, the sole and dominant nature of the activity is education and the Petitioner exists solely for the purposes of imparting education. An incidental surplus which is generated, and which has resulted in additions to the fixed assets is utilized as the balance-sheet would indicate towards upgrading the facilities of the college including for the purchase of library books and the improvement of infrastructure. With the advancement of technology, no college or institution can afford to remain stagnant. The Income-tax Act 1961 does not condition the grant of an exemption u/s 10(23C) on the requirement that a college must maintain the status-quo, as it were, in regard to its knowledge based infrastructure. Nor for that matter is an educational institution prohibited from upgrading its infrastructure on educational facilities save on the pain of losing the benefit of the exemption under Section 10(23C). Imposing such a condition which is not contained in the statute would lead to a perversion of the basic purpose for which such exemptions have been granted to educational institutions. So long as the institution exists solely for educational purposes and not for profit, the test is met;
++ we have come to the conclusion that the CCIT was in error in holding that the Petitioner does not exist solely for the educational purposes or that it exists for profit. The issue pertaining to the claim of the Petitioner for the grant of an exemption under Sub-clause (iiiab) of Section 10(23C) for AY 2008-09 is now pending in Appeal before the CIT(A). It may also be noted here that the Petitioner has been consistently granted the benefit of the provisions of Section 11, which would postulate that the Petitioner does not exist for the purposes of profit. For AY 2008-09 the Petitioner has filed an Appeal before the CIT (A) against the denial of an exemption under Sub-clause (iiiab) of Section 10(23C) by the AO. We direct that the CIT(A) shall, in determining whether the Petitioner should be granted an exemption under Clause (iiiab) do so, without being influenced by any observations contained in the impugned order of the CCIT which, to the extent that it holds that the Petitioner does not exist for educational purposes and that it exists for the purposes of profit is quashed and set aside. In view of the finding which has been arrived at in the present Judgment, we hold that in the event that the Petitioner is held not to be entitled to the benefit of an exemption u/s 10(23C) (iiiab), the Petitioner would in that event be entitled to the benefit of an exemption under Clause (vi) of Section 10(23C). We clarify that since the Petitioner is in appeal before the CIT(A) for AY 2008-09, we have not dealt with the legality of the assessment order. All rights and contentions in that regard including in regard to the applicability of sub-Clause (iiiab) of Section 10(23C) are kept open. Rule is made absolute in the aforesaid terms.
Assessee's writ accepted
Cases followed:
ACIT, Gujarat v/s. Surat Art Silk Cloth Manufacturers Association, (2002-TIOL-839-SC-IT-LB)
Vanita Vishram Trust v/s. CCIT (2010-TIOL-407-HC-MUM-IT)
JUDGEMENT
Per: D Y Chandrachud:
Rule, by consent returnable forthwith. With the consent of Counsel and at their request the Petition is taken up for hearing and final disposal.
2. The Petitioner which is registered as a public trust under the Bombay Public Trusts Act, 1950 since 30 October 1980 and is a Society registered under the Societies' Registration Act, 1960 was formed with the main object of promoting education in different branches of learning. The Petitioner conducts a college of commerce in Mumbai. The college is affiliated to the University of Mumbai and receives aid from the State government. A Certificate of Registration was granted to the Petitioner on 11 December 1980 under Section 12A of the Income Tax Act, 1961. On 10 May 2004, the Petitioner made an application for exemption under Section 10 (23C)(vi) for Assessment Year 2003-04. By a communication dated 26 September 2005, the Office of the Director of Income-tax (Exemption) informed the Petitioner that since from its accounts it appeared that the Petitioner had derived a substantial income by way of government grants for the years ending on 31 March 2001, 31 March 2002 and 31 March 2003, the file pertaining to the claim of exemption under Section 10(23C)(vi) was closed. The Petitioner was informed that "the cases which are wholly or substantially financed by the Government are covered by the provisions of Section 10(23C)(iiiab)." A certificate was issued to the Petitioner under Section 80(G)(5) on 4 September 2008.
3. Between 1985-86 and 2005-06, the Petitioner was allowed the benefit of the provisions of Section 11. For Assessment Year 2006-07 and 2007-08, the claim of exemption under Section 10(23C)(iiiab) was allowed. For Assessment Year 2006-07 that claim was allowed in pursuance of an order under Section 143(3) whereas, for Assessment Year 2007-08, an intimation was issued under Section 143(i) accepting the claim of exemption under Section 10(23C)(iiiab). For Assessment Year 2008-09, the benefit of Section 10(23C)(iiiab) was denied to the Petitioner though, admittedly the benefit of Section 11 was granted. The assessing officer has held that in order to be an institution substantially funded by government, the institution must receive at least 75% of its receipts from government grants. Reliance for this inference has been placed on the provisions of the Comptroller and Auditor General (Duties, Powers and conditions of Service) Act, 1971. The Petitioner is in Appeal for Assessment Year 2008-09 before the C.I.T. (A). For Assessment Year 2009-10, the benefit of the exemption under Section 10(23C)(iiiab) was allowed and an intimation was furnished under Section 143(1). Assessment proceedings for Assessment Year 2010-11 are in progress. For Assessment Year 2011-12, the Petitioner submitted an application for the grant of an exemption under Clause (vi) of Section 10(23C) to the Chief Commissioner of Income-tax. By an order dated 29 November 2011, the Chief Commissioner of Income-tax, Mumbai has held that (i) Since the grants which are received by the Petitioner from the Government form a substantial part of the total receipts, the Petitioner does not fall within the purview of Section 10(23C)(vi); (ii) the Petitioner does not meet the requirement of an institution existing solely for educational purposes and not for the purposes of profit and that, consequently, the Application for the grant of approval under Section 10(23C)(vi) for Assessment Year 2011-12 onwards stood rejected.
4. The college conducted by the Petitioner is in receipt of grants from the State Government and is an aided institution. On the one hand the Director of Exemptions informed the Petitioner by a communication dated 26 September 2005 that being an institution wholly or substantially financed by the Government, the case of the Petitioner would not be governed by Clause (vi) of Section 10(23C), but by Section 10(23C)(iiiab). This position is reiterated in the order of the Chief Commissioner of Income-tax dated 29 November 2011 (which is impugned in these proceedings). The Petitioner is nonetheless denied the benefit of an exemption under Section 10(23C)(iiiab) by the Assessing Officer. In the affidavit-inreply that has been filed on behalf of the Revenue, it has been stated that the fact that the Petitioner is in receipt of government grants and has a deficit is not conclusive proof of its existence solely for educational purposes and not for the purposes of making profits. The affidavit-in-reply seeks to sustain the validity of both the order denying the benefit of an exemption under Section 10(23C)(iiiab) as well as of the order of the Chief Commissioner denying the benefit of the provisions of Clause (vi) of Section 10(23C). In sum and substance, the grievance of the Petitioner is that it is be entitled to the benefit of an exemption under Section 10(23C) and if the Assessing Officer comes to the conclusion as he has that the benefit of the exemption under Clause (iiiab) is to be denied, the Petitioner would in that case be entitled in law to the benefit of the exemption under Clause (vi). The grievance of the Petitioner is that the Revenue has not taken a firm position since while on the one hand the Chief Commissioner of Income-tax took the view that the benefit of Clause (vi) of Section 10(23C) could not be availed of on the ground that the Petitioner is in receipt of substantial grants from the State Government (thereby implying that the Petitioner would be governed by the provisions of Clause (iiiab)), yet an inconsistent stand is sought to be taken by the Assessing Officer. Hence it has been urged that as a result of a palpably inconsistent line of reasoning adopted by two arms of the revenue, the assessee is left without a remedy but to move these proceedings under Article 226 of the Constitution of India.
5. In order to appreciate the nature of the controversy, a reference to the statutory provisions having a bearing on the Petition would be in order. Section 10 enunciates categories of income which are not to be included in computing the total income of the previous year of any person. Clause (23C) provides for any income received by any person on behalf inter-alia of a university or other educational institution falling within the purview of subclauses (iiiab), (iiiad) and (vi). For convenience of reference it should be appropriate to extract those three clauses for clarity :
"Sub-clause (iiiab) - Any university or other educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government ;Sub-clause (iiiad) - Any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed; andSub-clause (vi) - Any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority."
6. Sub-clauses (iiiab), (iiiad) and (vi) apply to universities or other educational institutions. All the three clauses required that such institutions must exist solely for educational purposes and not for the purposes of profit. Sub-clause (iiiab) applies to those institutions which are wholly or substantially financed by the government. Sub-clause (iiiad) applies to those institutions whose annual aggregate receipts do not exceed such amount as may be prescribed. Sub-clause (vi) covers universities or educational institutions, other than those mentioned in sub-clauses (iiiab) or (iiiad) and which may be approved by the prescribed authority. For an institution which is wholly or substantially financed by government and which falls within the purview of Sub-clause (iiiab), no requirement of an approval of the prescribed authority is mandated. Similarly, under Sub-clause (iiiad) no requirement of approval is stipulated in the case of those institutions whose aggregate annual receipts are below such amount as may be prescribed. On the other hand, sub-clause (vi) of Section 10(23C) which covers institutions other than those falling under sub-clauses (iiiab) or (iiiad) requires the approval of the prescribed authority before a claim to exemption can be allowed. An application under sub-clause (vi) for approval is required by the fourteenth proviso to Section 10(23C) to be filed on or before 30 September of the relevant Assessment Year.
7. Now in this background, it will be necessary to consider the legality of the order that has been passed by the Chief Commissioner, denying the benefit of the exemption under sub- Clause (vi) of Section 10(23C). The first part of the order of the Chief Commissioner makes a reference to the fact that the Petitioner is an aided institution, being in receipt of financial aid from the State Government of Maharashtra towards salary grants. The Petitioner also receives financial assistance from the University Grants Commission (U.G.C.) for the purchase of library books, equipment and such other requirements. The Chief Commissioner noted that for Assessment Years 2008-09, 2009-10, 2010-11 and 2011-12, the percentage of grants received as a proportion of the expenditure incurred on the objects of the trust, was 56%, 63%, 52% and 58%. On this ground, the Chief Commissioner came to the conclusion that the Petitioner is in receipt of government grants which form a substantial part of the total receipts and consequently, the case of the Petitioner would not fall within the purview of Section 10(23C)(vi). On this aspect, the line of reasoning of the Chief Commissioner would indicate that since a substantial part of the total receipts of the Petitioner consists of aid received from the Government, it would not fall within the purview of sub-clause (vi) for the reason that an institution which is wholly or substantially financed by the Government falls within the ambit of sub-clause (iiiab). Sub-clause (vi) as noted earlier applies to those institutions which do not fall within the ambit of sub-clause (iiiab) or sub-clause (iiiad). The line of reasoning of the Chief Commissioner would therefore suggest that he was of the view that an institution which is in receipt of substantial grants from the Government would consequently not fall within the ambit of subclause (vi). Since a substantially or wholly grant aided institution would fall under sub-clause (iiiab), clause (vi) which is more of a residuary provision would not apply. The Chief Commissioner is correct in so far as he indicates that an institution which falls within the ambit of sub-clause (iiiab) would not fall within the purview of sub-clause (vi) since Clause (vi) applies to those institutions which do not fall within the ambit of either Sub-clauses (iiiab) or (iiiad). But having observed thus, the Chief Commissioner inquired into the further question as to whether the Petitioner fulfills the criterion for the grant of approval under sub-clause (vi) viz. of being an institution which exists solely for educational purposes and not for the purposes of profit. Though the Chief Commissioner inquired into this question for the purposes of his determination under subclause (vi) of Section 10(23C), the requirement that an institution must exist solely for educational purposes and not for the purposes of profit one which is common both to sub-clause (iiiab) as well as sub-clause (iiiad). Hence, the grievance of the Petitioner is that while on the one hand the Chief Commissioner has held that Subclause (vi) would not be applicable to an institution which is in receipt of substantial grants from the Government (such an institution being governed by Sub-clause (iiiab)), at the same time, the finding that the Petitioner does not exist solely for educational purposes and not for the purposes of profit would, in effect, not merely lead to the rejection of the exemption under Sub-clause (vi) but would also affect the claim of the Petitioner to the grant of an exemption under Sub-clause (iiiab) as well.
8. In view of the finding of the Chief Commissioner that the Petitioner does not exist solely for educational purposes and not for the purposes of profit, it becomes necessary for the Court to scrutinize the validity of that finding. The Chief Commissioner has held, in the course of his order, that the fees which were collected by the Petitioner as reflected in the income and expenditure account for the year ending on 31 March 2011 would indicate that the Petitioner did not exist solely for educational purposes. To support this finding, the Chief Commissioner has relied upon certain receipts which are part of the following table contained in the impugned order :-
| S.No. | ||
| 1 | Air Rifle shooting | Rs.29,375/- |
| 2 | Extra curricular Activities | Rs.5,12,37/- |
| 3 | Gymkhana fee | Rs.4,09,855/- |
| 4 | Misc. Income | Rs.1,67,852/- |
| 5 | Inter University sports & cultural fees | Rs.26,540/- |
| 6 | Development Fund | Rs.10,24,700/- |
| 7 | Auditorium / Class room booking | Rs.2,31,170/- |
The Chief Commissioner has also noted that the Petitioner has collected from the students utility fees, project work fees, industrial visit fee and a magazine fee from which it is sought to be deduced that the Petitioner does not exist solely for educational purposes. Moreover, according to the impugned order, there was an increase in the asset base with a generation of surplus which indicated that the activities of the Petitioner were not devoted solely for educational purposes. The Chief Commissioner has held on that basis that the Petitioner exists for the purposes of profit.
9. Now, in assessing the legality of this finding, it is necessary to emphasise at the outset that the common element in sub-clauses (iiiab), (iiiad) and (vi) is that the university or educational institution must exist "solely for educational purposes and not for the purposes of profit". The ambit of this expression can find elucidation on the basis of a Judgment of the Supreme Court in the Additional Commissioner of Income-tax, Gujarat v/s. Surat Art Silk Cloth Manufacturers Association, 121 ITR 1 = (2002-TIOL-839-SC-IT-LB). In that case, while considering the expression "Activity for Profit" for the purposes of Section 2(15) of the Income-tax, 1961, the Supreme Court held that the test that must be applied is not whether as a matter of fact an activity results in profit but whether the activity is carried on with the object of earning profit. In other words, in order to attract the exclusion, profit making must be the end to which the activity is directed or the predominant object of the activity must be the making of profit. The test which has been enunciated by the Supreme Court is in the following terms :-
" The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit."
10. Sub-clauses (iiab), (iiiad) and (iv) require that the institution must exist solely for educational purposes and not for profit. Existence comprehends the purpose, goal, object and mission of the institution. Where the purpose of the institution and the defining character of its mission is education, and education alone, the test is fulfilled. The fact that incidentally, a surplus has resulted in a year will not render such an institution as existing for profit. Existence is defined by the fundamental underlying purpose of its being, though the manner in which it has consistently carried on its activities may assume relevance. Institutions exist for what they are formed to pursue and if that pursuit is solely and exclusively education, the statutory norm is fulfilled.
11. While considering the provision of Section 10(22) of the Act, the Supreme Court in Aditanar Educational Institution v/s. Additional CIT - (1997) 224 ITR 310 held that the decisive or acid test is whether on an overall view of the matter, the object is to make a profit. The observations of the Supreme Court in Aditanar (Supra) were followed in a Judgment of a Division Bench of this Court in Vanita Vishram Trust v/s. Chief Commissioner of Income-tax and Anr. (2010) 327 ITR 121 (Bom.) = (2010-TIOL-407-HC-MUM-IT). The case before this Court was of a trust which was existing for over eighteen years and which had only carried on the activity of conducting educational institutions. The application submitted by the Petitioner for approval under Section 10(23C)(vi) was rejected inter-alia on the ground that the objects for which the trust existed were of a varied nature and did not fulfill the condition that it must exist solely for the purposes of education. Moreover, the trust, had a surplus which had been utilized for the purchase of assets as reflected in the balance-sheet. While setting aside the order refusing approval, this Court noted the position that since the establishment of the trust, save and except for carrying on an educational institution, no other activity had been carried on for long years. Moreover, the fact that a surplus may arise in the activity of the trust after meeting the expenditure incurred for conducting educational activities was held not to dis-entitle the trust for the benefit of the provisions of Section 10(23C). In addition, on the aspect of surplus, this Court adverted to the provision contained in the third proviso to Section 10(23C).
12. Now, it is in this background and particularly, having regard to the law laid down by the Supreme Court that the facts of the present case would have to be assessed. The Petitioner has averred that the main source of its income consists of grants received from the government and fees received from the students for pursuing their education and training at the college of commerce. The material which has been placed on the record by the Petitioner on affidavit consists of a tabulated statement of the details of the total receipts and the amount spent by the Petitioner towards its objects for the financial years from 1989-90 to 2010-11. The statement indicates that (i) cumulatively for all the years taken together from Assessment Years 1989-90 to 2010-11, the Petitioner has a deficit and its expenditure is in excess of its income; (ii) if the government grants as reflected in the income and expenditure account and the corpus and scholarship contribution as reflected in the balance-sheet are excluded, the Petitioner has sustained a loss for every year except financial years 1989-90, 1990-91 and 1992- 93; (iii) if government grants are included as part of the income and only corpus donation and scholarship contribution being balancesheet items are excluded, there would be a deficit save and except for financial years 1989-90, 1990-91, 1992-93, 2008-09 and 2010-11. Between 1989-90 and 2010-11, the figures placed on the record on affidavit indicate the following position :-
| (i) | Government grants | Rs.13,46,75,326/- |
| (ii) | Fees from students and other receipts | Rs.13,67,30,941/- |
| (iii) | Corpus donations and scholarship contributions | Rs.5,43,64,221/- |
| (iv) | Expenditure on running the institution | Rs.26,69,95,136/- |
| (v) | Expenditure on addition to fixed assets : | Rs.2,45,33,331/- |
The statement which has been placed on record would indicate that if Government grants are excluded, the Petitioner has consistently had a deficit of expenditure over income since 199394. Receipts by way of Government grants have been excluded because those receipts cannot lead to the conclusion that the Petitioner exists for the purposes of profit. Moreover, it has been stated on affidavit that fees by way of Extra Curricular Activities, Gymkhana Fees, Miscellaneous Income, Inter University Sports and Cultural Fees, Development Fund, Utility Fees, Project Work Fees, Industrial Visit Fees, and Magazine Fees have been charged in accordance with the circulars issued by the University of Mumbai. Fees by way of sports and cultural fees and project work fees are, it is stated required to be shared with the University of Mumbai. As regards receipts on account of rifle shooting, it has been stated that the total training fee collected in the previous year relevant to Assessment Year 201011 was Rs.31,925/- (representing 0.19% of the total income during that year). The expenditure on the activity was Rs.61,050/resulting into an excess of expenditure over income. For Assessment Year 201112 as against fees of Rs.45,780/- (representing 0.21% of the total income), an expenditure of Rs.64,400/was incurred.
13. However it has been urged on behalf of the revenue that the income and expenditure account of the Petitioner for Assessment Years 2007-08, 2008-09 and 2009-10 would reflect a surplus of Rs.7.38 lakhs, Rs.56.53 lakhs and Rs.11.48 lakhs respectively. The figures which are contained in the income and expenditure account contain a reference only to items of a revenue nature without taking into account capital expenditure which is incurred by the college during the concerned years. For instance, for the year ending on 31 March 2008, the Petitioner made additions to the fixed assets of Rs. 23.81 lakhs including among other items towards purchase of library books and electronic data processing equipment. These are essential items of expenditure for an educational institution. The fact that the Petitioner has a surplus of income over expenditure for the three years in question, cannot by any stretch of logical reasoning lead to the conclusion that the Petitioner does not exist solely for educational purposes or, as that Chief Commissioner held that the Petitioner exists for profit. The test to be applied is as to whether the predominant nature of the activity is educational. In the present case, the sole and dominant nature of the activity is education and the Petitioner exists solely for the purposes of imparting education. An incidental surplus which is generated, and which has resulted in additions to the fixed assets is utilized as the balance-sheet would indicate towards upgrading the facilities of the college including for the purchase of library books and the improvement of infrastructure. With the advancement of technology, no college or institution can afford to remain stagnant. The Income-tax Act 1961 does not condition the grant of an exemption under Section 10(23C) on the requirement that a college must maintain the status-quo, as it were, in regard to its knowledge based infrastructure. Nor for that matter is an educational institution prohibited from upgrading its infrastructure on educational facilities save on the pain of losing the benefit of the exemption under Section 10(23C). Imposing such a condition which is not contained in the statute would lead to a perversion of the basic purpose for which such exemptions have been granted to educational institutions. Knowledge in contemporary times is technology driven. Educational institutions have to modernise, upgrade and respond to the changing ethos of education. Education has to be responsive to a rapidly evolving society. The provisions of Section 10(23C) cannot be interpreted regressively to deny exemptions. So long as the institution exists solely for educational purposes and not for profit, the test is met.
14. In the circumstances, and for these reasons, we have come to the conclusion that the Chief Commissioner of Income-tax was in error in holding that the Petitioner does not exist solely for the educational purposes or that it exists for profit. The issue pertaining to the claim of the Petitioner for the grant of an exemption under Sub-clause (iiiab) of Section 10(23C) for Assessment Year 2008-09 is now pending in Appeal before the CIT(A). It may also be noted here that the Petitioner has been consistently granted the benefit of the provisions of Section 11, which would postulate that the Petitioner does not exist for the purposes of profit.
15. For Assessment Year 2008-09 the Petitioner has filed an Appeal before the CIT (A) against the denial of an exemption under Sub-clause (iiiab) of Section 10(23C) by the Assessing Officer. We direct that the CIT(A) shall, in determining whether the Petitioner should be granted an exemption under Clause (iiiab) do so, without being influenced by any observations contained in the impugned order of the Chief Commissioner of Income-tax which, to the extent that it holds that the Petitioner does not exist for educational purposes and that it exists for the purposes of profit is quashed and set aside.
16. In view of the finding which has been arrived at in the present Judgment, we hold that in the event that the Petitioner is held not to be entitled to the benefit of an exemption under Section 10(23C) (iiiab), the Petitioner would in that event be entitled to the benefit of an exemption under Clause (vi) of Section 10(23C). We clarify that since the Petitioner is in appeal before the CIT(A) for Assessment Year 2008-09, we have not dealt with the legality of the assessment order dated 21 December 2010 (Exh.A) for that year. All rights and contentions in that regard including in regard to the applicability of sub-Clause (iiiab) of Section 10(23C) are kept open.
17. Rule is made absolute in the aforesaid terms. There shall be no order as to costs.2013-TIOL-122-HC-DEL-IT
IN THE HIGH COURT OF DELHI
WP(C) No.7482/2011
ESTER INDUSTRIES LTD
Vs
UNION OF INDIA AND ORS
S Ravindra Bhat And R V Easwar, JJ
Dated : January 28, 2013
Appellant Rep. by : Mr. R. Santhanam, Adv.
Respondent Rep. by : Mr. Sanjeev Sabharwal, Sr. Standing Counsel with Mr. Puneet Gupta, Jr. Standing Counsel.
Respondent Rep. by : Mr. Sanjeev Sabharwal, Sr. Standing Counsel with Mr. Puneet Gupta, Jr. Standing Counsel.
Income Tax - Writ - Sections 115JB, 129, 143(3), 145, 147, 148, 151(1) - AS-2 - Whether it is within the legislative competence of the Parliament to give effect to certain provisions of law retrospectively - Whether reassessment can be initiated on the strength of retro amendments - Whether when the objections filed by the assessee are heard by an officer, there is any merit in the plea that the order has to be passed by the predecessor-in-office and not by his successor.
Assessee is a company engaged in the manufacture and sale of polyester chips and film. Its assessment was reopened by issue of notice u/s. 148 on the basis that provisions for obsolete inventories amounting to Rs. 33.99 lacs had not been added back although these were unascertained liabilities, and the prior period expenditure of Rs. 73,54,333/- had been debited to the Profit & Loss a/c out of which only Rs. 3,87,726/- was added back in the COI. Further, on verification of the case records, it was observed that the amount of Set off of unabsorbed business or depreciation whichever was less remained to be added in the working of book profit u/s 115JB. The notice was challenged by the assessee through a writ, which was disposed of by the HC by quashing the reassessment order and directing the Revenue to first decide the issue of jurisdiction to reopen the assessment and all other pleas. An ex-parte reassessment order was thereafter passed on 28-12-2010, against which another writ petition was filed before the HC which was disposed of. It was observed by the HC that though many a prayer had been made in the writ petition including declaring certain provisions of the Finance Act, 2008 to be unconstitutional, yet in the course of hearing, the counsels for both the Assessee and the Revenue had fairly stated that they had no objection if the assessment order was quashed and the matter was remitted to the AO to deal with the objections filed by the assessee on a specific date and thereafter proceed in accordance with law and further the assessee shall not press the issue of limitation. Thus the order of assessment was quashed and it was directed that the AO shall hear the assessee on 28th February, 2011 on the question of his objection that had been filed on 11th August, 2010 and pass an order and thereafter proceed as per law, if required. Subsequentally, the Revenue rejected all the contentions of the assessee by an order, against which the present writ had been filed before the HC along with the notice u/s. 148.
Before the HC, the assessee contended that the revenue had not obtained the sanction of the JCIT as contemplated by section 151(1) before issuing the notice u/s. 148.
Held that:
++ in the present case, we find that the notice was issued by the DCIT. No sanction was therefore required to be given by the JCIT. The objection was without any merit and was rejected. The second contention was that the disallowance of the provision of Rs. 33.99 lacs for obsolete inventories, disallowance of the unabsorbed loss of Rs.8.61 crores and the disallowance of prior period expenses of Rs. 69.67 lacs were scrutinised and discussed in detail in the assessment order passed u/s.143(3) and therefore it cannot be said that there was no scrutiny, justifying the reassessment. On these three issues, the Revenue's counsel had not seriously disputed the contention. Regarding the question of disallowance of the deferred tax liability, the assessee had contended that the amendment takes away the right of the assessee to adopt the AS-2 which had been made mandatory by a notification issued for the purposes of section 145;
++ the order of HC passed on 18-1-2011 records the concession to the assessee that though the question of vires of certain provisions of the Finance Act, 2008 was under challenge, he would have no objection if the assessment order dated 28-12-2010 is set aside and the Revenue is directed to deal with the objections of the petitioner and pass fresh orders, with the further concession that the plea of limitation would not be raised. Even on merits, the challenge to the vires has to be rejected. It is well-settled that it is within the legislative competence to give effect to certain amendments retrospectively and no grounds were made out before us to show how the retrospectivity of operation of the provision to disallow the provision for deferred tax liability – clause (h) of Explanation 1 below section 115JB – was bad. No arguments were advanced before us on the point except an assertion. In fact, beyond a certain point, the contention was not pursued – perhaps realising the futility of the attempt;
++ the original assessment was made on 30-11-2006 u/s 143(3). It is not in dispute that one of the reasons to believe as recorded by the Revenue is that in view of the retrospective amendment, the deferred tax liability, for which a provision had been made in the accounts, was to be added back to the book profit. The assessment was reopened within four years from the end of the relevant assessment year. The assessing officer has to show some "tangible material" which could form the basis for his belief that income chargeable to tax has escaped assessment. That material is the retrospective legislative amendment. Under the pre-1989 law of reassessment, information as to the true state of law could form a valid basis for reopening the assessment: Maharaj Kumar Kamal Singh v CIT. A retrospective amendment of the law can even permit action for rectification of the assessment on the ground of mistake apparent from the record: M.K. Venkatachalam vs Bombay Dyeing & Manufacturing Co. Ltd. But just because action for rectification is permissible, it does not follow that no action can be taken for reopening, for, the powers under sections 147 and 154 are not mutually exclusive; there could be some overlapping, and so long as the conditions for the applicability of the sections are satisfied, the action taken thereunder has to be validated and it is no answer to say that action should be taken under another section. Under this principle, it is held that one of the reasons for reopening in the present case being the retrospective amendment, the notice is valid;
++ the last argument of the assessee is based on section 129. It is contended that the assessee filed its objections to the notice before a particular officer, but the order rejecting those objections were passed by another officer which is opposed to the section and hence the order is invalid. The section only deals with the situation where there is a change of incumbent of the office. If there is, unless the assessee specifically demands that the earlier proceedings be reopened and he be reheard by the successor-in-office, it is open to the successor-in-office to proceed with the matter from the stage at which the matter was left by his predecessor. This plea taken in the course of the arguments before us has not been taken in the affidavit. It involves questions of fact. The respondents have had no opportunity of countering it in their counter-affidavit. As a matter of law, the section does not place a prohibition on the successor-in-office passing the order on the objections filed by the petitioner before the predecessor-in-office. All that it provides is an opportunity to the assessee to demand that the earlier proceedings be reopened and he be reheard. No attempt was made before us to show that such a demand was made by the assessee before the successor-officer. The plea is thus devoid of merit in any case. In the result, the writ petition is dismissed with costs Rs. 25,000/-.
Assessee's writ dismissed
JUDGEMENT
Per : R V Easwar, J :
In this writ petition, the petitioner challenges the notice issued under section 148 of the Income Tax Act, 1961 reopening the assessment issued on 6-3-2009 and seeks quashing of the same as also the order passed on 23-9-2011 pursuant to the notice, rejecting the petitioner's objections. 2. In respect of the assessment year 2004-05, the assessment of the petitioner, which is a company engaged in the manufacture and sale of polyester chips and film, to income-tax was first completed on 30-11-2006 under section 143(3) of the Act. It was sought to be reopened by issue of the impugned notice issued u/s. 148. The reasons for reopening, as recorded by the respondent No.2 are:
"On verification of the case records, it has been observed that the following amounts have remained to be added in the computation of income: (i) Provisions for obsolete inventories amounting to Rs. 33.99 lacs have not been added back although these are unascertained liabilities. (ii) The prior period expenditure of Rs. 73,54,333/- has been debited to the Profit & Loss a/c out of which only Rs. 3,87,726/- was added back in the computation of income. The remaining amount of Rs. 69,67,607/- has remained to be added back. Further, on verification of the case records, it has been observed that the following amounts have remained to be added in the working of book profit u/s 115JB of the IT Act. (i) Set off of unabsorbed business or depreciation which ever is less has been claimed to the extent of Rs. 8,61,89,000/- although set off is already allowed in earlier years. (ii) Profits for the year has been taken at Rs. 40,54,88,462/- instead of Rs. 44,89,09,873/-. The book profit has been taken less to the extent of Rs. 4,34,21,411/-. In the assessment completed u/s 143(3) of the IT Act, the same has not been added back/disallowed.From the facts discussed above I have reasons to believe that the income of the assessee chargeable to tax has escaped assessment because of the failure on part of the assessee to disclose its income fully and truly."
The notice was challenged by the petitioner in W.P (C). No. 13093/2009 which was disposed of by this court by quashing the reassessment order which had been passed in the meantime on 11-9-2009 and directing the respondent to first decided the issue of jurisdiction to reopen the assessment and all other pleas. An ex-parte reassessment order was thereafter passed on 28-12-2010, against which another writ petition, i.e., W.P.(C) No. 321/2011 was filed before this court which was disposed of on 18-1-2011 with a direction to the petitioner to file further objections before the respondent along with the case-law in support thereof, to be dealt with by the respondent in accordance with law. The order of this court is reproduced:
"Heard Mr. R. Santhanam, learned counsel for the assessee-petitioner and Mr. Sanjeev Sabharwal, learned counsel for the Revenue. Though many a prayer has been made in the writ petition preferred under Article 226 of the Constitution of India including declaring certain provisions of the Finance Act, 2008 to be unconstitutional, yet in course of hearing Mr. R. Santhanam, learned counsel for the assessee-petitioner and Mr. Sanjeev Sabharwal, learned counsel for the Revenue have fairly stated that they have no objection if the assessment order dated 28th December, 2010 contained in Annexure 2 is quashed and the matter is remitted to the Assessing Officer to deal with the objection filed by the assessee-petitioner on a specific date and thereafter proceed in accordance with law and further the assessee-petitioner shall not press the issue of limitation. 2. Regard being had to the aforesaid concession, the order of assessment contained in Annexure 2 is quashed and it is directed that the Assessing Officer shall hear the assessee-petitioner on 28th February, 2011 on the question of his objection that has been filed on 11th August, 2010 and pass an order and thereafter proceed as per law, if required. Be it clarified, when we have said that the issue of limitation shall not be pressed by the assessee-petitioner, it only relates to issue of framing an order of reassessment.3. The writ petition is disposed of accordingly without any order as to costs."
4. On 23-9-2011 the respondent rejected all the contentions of the petitioner by an order, which is the subject-matter of challenge before us along with the notice u/s. 148. 5. The first contention of the petitioner is that the respondent did not obtain the sanction of the Joint Commissioner of Income Tax as contemplated by section 151(1) of the Act before issuing the notice u/s. 148. A perusal of the sub-section however shows that such sanction is required only if the notice is issued by an officer who is below the rank of Assistant Commissioner or Deputy Commissioner of Income Tax. Herein, we find that the notice was issued by the Deputy Commissioner of Income Tax. No sanction is therefore required to be given by the Joint CIT. The objection is without any merit and is rejected. 6. The second contention is that the disallowance of the provision of Rs. 33.99 lacs for obsolete inventories, disallowance of the unabsorbed loss of Rs.8.61 crores and the disallowance of prior period expenses of Rs. 69.67 lacs were scrutinised and discussed in detail in the assessment order passed u/s.143(3) and therefore it cannot be said that there was no scrutiny, justifying the reassessment. On these three issues, Mr. Sabharwal, the learned standing counsel for the revenue, did not seriously dispute the contention. 7. On the question of disallowance of the deferred tax liability being brought to tax under the provisions of section 115JB as retrospectively amended with effect from 1-4-2001 by the Finance Act, 2008, the petitioner sought to attack the vires of the amendment, the contention being that the amendment takes away the right of the petitioner to adopt the Accounting Standards-2 (AS-2) which has been made mandatory by a notification issued for the purposes of section 145. The following authorities are cited in support: (i) J.K. Industries & Anr. Vs UOI & Ors. (2007) 213 CTR (SC) 301 = (2007-TIOL-207-SC-IT) and (ii) State of Tamilnadu vs Shyamsundar (AIR 2011 SC 3470). 8. We note that the order of this court passed on 18-1-2011 records the concession of the petitioner that though the question of vires of certain provisions of the Finance Act, 2008 was under challenge, he would have no objection if the assessment order dated 28-12-2010 is set aside and the respondent is directed to deal with the objections of the petitioner and pass fresh orders, with the further concession that the plea of limitation would not be raised. Even on merits, the challenge to the vires has to be rejected. It is well-settled that it is within the legislative competence to give effect to certain amendments retrospectively and no grounds were made out before us to show how the retrospectivity of operation of the provision to disallow the provision for deferred tax liability – clause (h) of Explanation 1 below section 115JB – was bad. No arguments were advanced before us on the point except an assertion. The judgment of the Supreme Court in J.K. Industries (supra) concerns the vires of AS-22 and has nothing to do with the provision now under challenge. It was not shown how the judgment in State of T.N. vs Shyamsunder (supra) was applicable to the present case. In fact, beyond a certain point, the contention was not pursued – perhaps realising the futility of the attempt. 9. The original assessment was made on 30-11-2006 under section 143(3). The Finance Act, 2008 inserted clause (h) of Explanation 1 to section 115JB retrospectively from 1-4-2001. The effect of this clause was to increase the book profit by "the amount of deferred tax and the provision therefor". It is not in dispute that one of the reasons to believe as recorded by the respondent is that in view of the retrospective amendment, the deferred tax liability, for which a provision had been made in the accounts, was to be added back to the book profit. The assessment was reopened within four years from the end of the relevant assessment year. The assessing officer has to show some "tangible material" which could form the basis for his belief that income chargeable to tax has escaped assessment. That material is the retrospective legislative amendment. Under the pre-1989 law of reassessment, information as to the true state of law could form a valid basis for reopening the assessment: Maharaj Kumar Kamal Singh v CIT (1959) 35 ITR 1 (SC). A retrospective amendment of the law can even permit action for rectification of the assessment on the ground of mistake apparent from the record: M.K. Venkatachalam vs Bombay Dyeing & Manufacturing Co. Ltd. (1958) 34 ITR 143 (SC). But just because action for rectification is permissible, it does not follow that no action can be taken for reopening, for, the powers under sections 147 and 154 are not mutually exclusive; there could be some overlapping, and so long as the conditions for the applicability of the sections are satisfied, the action taken thereunder has to be validated and it is no answer to say that action should be taken under another section. Under this principle, it is held that one of the reasons for reopening in the present case being the retrospective amendment, the notice is valid. 10. The last argument of the petitioner is based on section 129. It is contended that the petitioner filed its objections to the notice before a particular officer, but the order rejecting those objections were passed by another officer which is opposed to the section and hence the order is invalid. The section reads as under:
"129. Change of incumbent of an office Whenever in respect of any proceeding under this Act an income- tax authority ceases to exercise jurisdiction and is succeeded by another who has and exercises jurisdiction, the income- tax authority so succeeding may continue the proceeding from the stage at which the proceeding was left by his predecessor: Provided that the assessee concerned may demand that before the proceeding is so continued the previous proceeding or any part thereof be reopened or that before any order of assessment is passed against him, he be reheard."
The section only deals with the situation where there is a change of incumbent of the office. If there is, unless the assessee specifically demands that the earlier proceedings be reopened and he be reheard by the successor-in-office, it is open to the successor-in-office to proceed with the matter from the stage at which the matter was left by his predecessor. This plea taken in the course of the arguments before us has not been taken in the affidavit. It involves questions of fact. The respondents have had no opportunity of countering it in their counter-affidavit. As a matter of law, the section does not place a prohibition on the successor-in-office passing the order on the objections filed by the petitioner before the predecessor-in-office. All that it provides is an opportunity to the assessee to demand that the earlier proceedings be reopened and he be reheard. No attempt was made before us to show that such a demand was made by the petitioner before the successor-officer. The plea is thus devoid of merit in any case.
In the result, the writ petition is dismissed with costs Rs. 25,000/-. _
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