Tax Updates at a Glance

Thursday, February 28, 2013

S. 78 -Where mens rea stands accepted in relation to the demand of duty, it has to be accepted by the assessee vis-a-vis the proposal for imposition of penalty under section 11AC

Alloytech vs CCE

Whether penalty u/s 11AC of the Central Excise Act imposed on the assessee is sustainable or not ?

Held, The assessee has tacitly admitted their liability to have reversed the CENVAT credit at the time of removal of the capital goods. They also voluntarily paid interest under section 11AB. These payments cannot be accepted as payments under sub-section 2B of section 11A of the Act inasmuch as these were made under compulsion. Hence, the question of invoking Explanation 3 ibid does not arise. It is not in dispute that the show-cause notice invoked the extended period of limitation on the ground of suppression of facts with intent to avail undue CENVAT credit. The assessee did not choose to contest the demand on the ground of limitation, thereby virtually accepting the allegation of suppression. Their only grievance is against the penalty. The grounds for invoking the extended period of limitation are Indisputably identical to the grounds for invoking the section 11 AC. If that be so, where the demand has not been contested on the ground of limitation, it is not open to the assessee to oppose the section 11 AC penalty. In other words, where mens rea stands accepted in relation to the demand of duty, it has to be accepted by the assessee vis-a-vis the proposal for imposition of penalty under section 11AC. In the result, the penalty is unquestionable in this case.

Breaking News: HC - S. 54/54F: Several independent units can constitute “a residential house”

The assessee entered into a development agreement pursuant to which the developer demolished the property and constructed a new building comprising of three floors. In consideration of granting the development rights, the assessee received Rs. 4 crores and two floors of the new building. The AO held that in computing capital gains, the cost of construction of Rs. 3.43 crores incurred by the developer on the development of the property had to be added to the sum of Rs. 4 crores received by the assessee. The assessee claimed that as the said capital gains was invested in the said two floors, she was eligible for exemption u/s 54. The AO rejected the claim on the basis that the units on the said floors were independent & self-contained and not “a residential house” and granted exemption for only one unit. The CIT(A) and Tribunal upheld the assessee’s claim by relying on B. Ananda Basappa 309 ITR 329 (Kar) and K.G. Rukminiamma 331 ITR 211 (Kar). On appeal by the department to the High Court HELD dismissing the appeal:

As held in B. Ananda Bassappa (SLP dismissed) & K G Rukminiamma, the Revenue’s contention that the phrase “a” residential house would mean “one” residential house is not correct. The expression “a” residential house should be understood in a sense that building should be of residential in nature and “a” should not be understood to indicate a singular number. Also, s. 54/54F uses the expression “a residential house” and not “a residential unit”. S. 54/54F requires the assessee to acquire a “residential house” and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the Section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems to us that the income tax authorities cannot insist upon that requirement. A person may construct a house according to his plans, requirements and compulsions. A person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. The physical structuring of the new residential house, whether it is lateral or vertical, cannot come in the way of considering the building as a residential house. The fact that the residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of the deduction u/s 54/54F. It is neither expressly nor by necessary implication prohibited.

Contrast with ITO vs. Sushila Jhaveri 292 ITR (AT) 1 (Mum)(SB). On the question whether a non-jurisdictional High Court will prevail over the Special Bench see the line of cases where Virgin Creations (Cal HC) was followed in preference to Bharati Shipyard 132 ITD 53 (Mum)(SB).

S. 40(a)(ia) - Deduction of tax cannot be postponed till the last date of the accounting period by debiting the running account of the payee.

Hon`ble high court judgment reported in (2012) 6 TaxCorp (DT) 50407 (CALCUTTA) does not apply to a case where the assessee has failed to deduct the tax itself at source out of payments made to payee in accordance with the provisions of Chapter-XVII-B.

ITO vs Bhoomi Construction

Dated: 8^th Feb 2013

The assessee is a partnership firm engaged in the business of civil construction. It filed its return of income for the assessment year under appeal on 22-12-2006 returning total income at Rs.1,37,383/- as against which the total income of the assessee was assessed by the Assessing Officer at Rs. 59,10,645/- after disallowing a sum of Rs. 57,48,265/- u/s. 40(a)(ia) of the Income-tax Act.

The assessee claimed before the AO that tax amounting to Rs. 75,410/- was deducted by the assessee on 31.3.2006 by debiting the running account of M/s J.B. Construction and the same was deposited with the Government before the due date specified in sub-section (1) of section 139 and therefore the impugned payments were not hit by section 40(a)(ia). The AO did not accept the submissions and disallowed disallowing a sum of Rs. 57,48,265/- u/s. 40(a)(ia).

On appeal, before CIT(A) allowed the claim of the assessee following the judgment reported in (2012) 6 TaxCorp (DT) 50407 (CALCUTTA).

Whether Ld. CIT(A) has erred in deleting the addition under section 40(a)(ia) made by the Assessing Officer on account of tax not been deposited or paid during the previous year.

Revenue on appeal before ITAT, submitted that assessee have paid sum of Rs.9,54,887/-; Rs.21,52,185/- + Rs.17,52,906/-; and Rs.8,88,287/- on 12-05-2005, 20-06-2005, and on 08-11-2005 respectively. The ld. D.R. submitted that a sum of Rs.75, 410/- has been shown in the chart as deducted on 31-03-2006 towards tax by debiting the account of M/s J.B. Construction. He contended that section 194C required the assessee to deduct tax at source out of amounts paid/credited in favour of M/s. J.B. Construction Co, and not to deduct the tax by debiting the running account of the payee in its books. He further submitted that the amount deducted on 31-03-2006 was not deducted at source in as much as it was not deducted out of the amount paid by the assessee on 12-05-2005, 20-06-2005 and 08-11-2005 and hence the aforesaid sum shown as deduction on 31-03-2006 did not constitute deduction of tax at source out of amounts paid/credited to M/s. J.B. Construction Co. in terms of section 194C of the Income-tax Act. According to him, there was thus failure on the part of the assessee in complying with the provisions of section 194C and therefore its case was not covered by the judgment reported in (2012) 6 TaxCorp (DT) 50407 (CALCUTTA).

ITAT observed that payments were made by the assessee on the aforesaid dates to M/s J.B. Construction without deduction of tax at source. The case of the assessee however is that it has running account with M/s J.B. Construction and therefore it debited the said account by a sum of Rs.75,410/- on 31.3.2006 as representing deduction of tax and deposited the same with the Government before the due date specified in section 139(1) and therefore the AO was not justified in making the impugned disallowance under section 40(a)(ia).

The crucial question that arises for consideration is as to what constitutes deduction of tax at source u/s 194C read with section 40(a)(ia). Is it required to be deducted at source out of the amounts paid to a contractor/sub-contractor? Or, it is sufficient compliance with law if the running account of payee is debited by the deductor on the last date of the previous year without deducting the same from actual payments made by the assessee during the course of its accounting year.

Further ITAT observed that Section 40(a)(ia) applies only when “… tax is deductible at source under Chapter XVII-B and such tax has not been deducted ….”. The relevant question therefore is as to what is the import firstly of the phrase “deduction” of tax and secondly of such deduction being “at source”. “Deduct” means to take away or to subtract from the whole. “At source” means occurrence of an event that initiates a process. Therefore payment of any amount, on which tax is deductible at source, itself is the “source” at which tax should be deducted and it is after such deduction that the remaining amount should be paid to the payee. This position becomes quite clear on perusal of Chapter XVII-B of the Income-tax Act dealing with “Collection and Recovery of Tax – Deduction at Source”. “Deduction at source” means subtraction of the amount of tax from the whole amount payable by the assessee to the payee out of which tax is deductible. If tax is not so deducted out of the amount payable, it cannot be said to have been “deducted at source”. In other words, if tax is deducted at any other point of time than at the time when the amount exigible to deduction of tax at source is paid or is deducted out of any other sum than the sum out of which it is mandated to be deducted, such deduction of tax per se cannot be said to be at source. Source of deduction of tax statutorily emanates from payment. Deduction of tax at source, i.e., out of the amount payable in terms of section 194C read with section 40(a)(ia), is one thing and debiting the running account of the payee on the last date of the accounting period is altogether a different thing. Deduction of tax at source and its payment to the Government is a continuous source of revenue mobilisation throughout the year. The law mandates deduction of tax to be made at source, i.e., as and when amount is payable, and therefore deduction of tax cannot be postponed till the last date of the accounting period by debiting the running account of the payee. By no stretch of imagination, debiting the running account of a payee can be said to be deduction of tax at source as contemplated by section 194C read with section 40(a)(ia).

Service Tax - The gross amount has to be adopted to quantify the tax liability treating it as value of taxable serv

Whether the amount which has been paid by the service recipient to the appellant is inclusive or exclusive of service tax liability?

As per this system of taxation, tax borne by the consumer of goods/services is collected by the assessee (manufacturer/service provider) and remitted to the Government. When the amount is collected for the provision of services, the total compensation received should be treated as inclusive of service tax due to be paid by the ultimate customer of the services unless service tax is also paid by the customer separately. So considered, when no tax is collected separately, the gross amount has to be adopted to quantify the tax liability treating it as value of taxable service plus service tax payable.

TDS not deducible on Chit Dividend/Discount: SLP dismissed by SC

On 18^th Feb 2013 Supreme Court dismissed the SLP filed by revenue again Hon`ble Delhi high court judgment reported in (2009) 3 TaxCorp (DT) 43917 (DELHI). Hon`ble Delhi high court held that dividend/discount disbursed to the members from their contribution cannot be mistaken for interest income in the hands of the subscribers. TDS U/S 194A NOT DEDUCIBLE

S U P R E M E C O U R T O F I N D I A

RECORD OF PROCEEDINGS

Petition(s) for Special Leave to Appeal (Civil) CC 7714/2010

(From the judgement and order dated 24/07/2009 in ITA No.44/2008, of

The HIGH COURT OF DELHI AT N. DELHI)

C.I.T,DELHI Petitioner(s)

VERSUS

SAHIB CHITS(DELHI) P.LTD. Respondent(s)

(With appln(s) for c/delay in filing SLP)

Date: 18/02/2013

This Petition was called on for hearing today.

CORAM :

HON'BLE MR. JUSTICE R.M. LODHA

HON'BLE MR. JUSTICE J. CHELAMESWAR

HON'BLE MR. JUSTICE MADAN B. LOKUR

For Petitioner(s)

Mr. Arijit Prasad, Adv.

Ms. Anil Katiyar, Adv.

Mr. B.V. Balaram Das, Adv.

For Respondent(s) Mr. K. Parasaran, Sr. Adv. Mr. A. Raghunath,Adv.

UPON hearing counsel the Court made the following

O R D E R

Delay condoned.

The special leave petition is dismissed.

The appellant had not furnished the return within time allotted to him under sub sections (1) and (2) and therefore, his case clearly falls within the provision of section 139(4). Section 139(5) merely stipulates that it is applicable to any person who has furnished the return under sub sections (1) or (2).

Menezes Fernandes Enterprises Vs ITO (HC OF BOMBAY AT GOA)

Dated: 21^st Jan 2013

In favor of Revenue

The assessee is a registered partnership firm constituted by the partnership deed. The due date for filing of the return was 31/8/1993. The assessee filed its return of income on 30/9/1993 and the said return declared an unabsorbed depreciation to the tune of Rs.2,42,996 for the AY 1993-94. Intimation u/s 143(1)(a) was issued on 21.9.1994 and served on the assessee on 24.11.1994. The assessee claimed to have filed a revised return for the purpose of correcting the mistake in its claim by declaring the amount of unabsorbed depreciation as Rs.4,14,345. The assessee challenged this intimation before the DCIT(A), who directed the assessing authority to consider the revised return in the light of the judgment of Madhya Pradesh High Court and Calcutta High Court. The Revenue challenged this order and filed a Second Appeal before the Tribunal. Initially the Tribunal passed the order dated 12.12.2002 and set aside the order of the DCIT(A) and remanded the matter back to the CIT(A). A review application was filed by the assessee u/s 254 seeking rectification of the order, which was dismissed by the Tribunal.

“Whether the Tribunal was justified in holding that the revised return was invalid in law when the said return was filed before the due date for filing the return u/s. 139(4) of the Act and it could be deemed as a rectified return u/s. 139(4) of the Act and not a revised return u/s 139(5) of the Act?

Learned counsel appearing on behalf of the appellant submitted that the Tribunal had erred in coming to the conclusion that the return filed was a revised return. He submitted that it ought to have held that the said return was a valid return since it was a rectified return and it was sought before the intimation u/s 143(1)(a) was served on the assessee. It was then contended that the Tribunal had erred in relying on the judgment of the Apex Court in the case reportd in AIR 1996 S.C 1895. He submitted that the Supreme Court had not decided the issue as to the distinction between a revised return and a rectified return. He, therefore, submitted that the ratio of the said judgment could not have been made applicable to the appellant of the present case.

Further ld. counsel invited our attention to the Circular No.549 which was issued on 31/10/1989 and which raises a presumption in favour of the revenue. He submitted that even if the said circular was taken into consideration, the benefits of the said circular ought to have been given to the appellant, since admittedly, the order passed under section 143 (1) (a) was not served on the assessee when he filed the rectified return. It was submitted that there was a bonafide mistake on the part of the accountant and the said mistake was sought to be rectified by filing a rectified return.

On the other hand, the Departmental Representative submitted that after the period of filing the return was over and, as such, in view of the provision of Section 139 sub clause (5), the assessee was not entitled to file the revised return. It was submitted that in case of delay in filing the return, the provision of sub clause (5) was not applicable to such cases, which were covered u/s 139(4), in view of the fact that section 139(5) merely was restricted to the return which was filed under section 139(1) and (2).

Hon`ble high court observed that the benefits of sub clause 5 of Section 139 would not apply to the applications which are filed under section 139(4) of the said Act. Learned counsel appearing on behalf of the appellant had laid much emphasis on the provisions of sub clause 5 and, more particularly, on the last portion which reads as under: “ he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before completion of the assessment, whichever is earlier”. It was contended that in the present case admittedly, the order of assessment was not served on the appellant and, therefore, the provisions of sub clause 5 were clearly attracted in favour of the appellant. We are unable to accept the said submission when sub clause 5 has to be read in context with the other provisions of the said section. In the present case, it is an admitted position where the appellant had not furnished the return within time allotted to him under sub sections (1) and (2) and therefore, his case clearly falls within the provision of section 139(4). Section 139(5) merely stipulates that it is applicable to any person who has furnished the return under sub sections (1) or (2). In the present case, therefore, if the appellant had filed the return in time, and thereafter had filed a rectified return, he could be permitted to do so under the said provision. Therefore, from the aforesaid provisions it can be seen that the Legislature in its wisdom had intended to give the benefits of filing a revised return only to those persons who fall within the four corners of section 139 sub sections (1) and (2) of the said Act. If the legislature had intended to also give the same benefits to an assessee who had not furnished the return within time, it would have said so in sub clause (5). The very fact that sub clause 4 is not referred to in sub clause (5) clearly indicates the intention of the legislature.

Held, No revised return can be filed under sub-section (5) of Section 139 in a case where the return is filed under Section 139(4). Once this is so the revised returns filed by the assessee for both the said assessment years were not valid in law and could not have been treated and acted upon as revised returns contemplated by sub-section (5) of Section 139 - which means that Section 153(1)(c) was not attracted in this case.

Further Hon`ble high court also didn`t accept the appellant argument that the Apex Court in the case reported in AIR 1996 S.C 1895 had not given any decision on the point of distinction between a revised return and a rectified return. The Apex Court after taking into consideration the view taken by the High Court thereafter had observed that the High Court had drawn a distinction between a revised return and a rectified return and in that context had observed that there may be distinction. The Apex Court, however, clearly has maintained in its conclusion that the rectified return was in fact a new return. It is not possible for us to interpret the judgment of the Supreme Court and come to a conclusion that this point has not been decided by the Apex Court. It is not open for the High Court to interpret the judgment of the Supreme Court. The Apex Court in several cases has deprecated this practice of the High Court in dissecting the judgment of the Apex Court in this manner.