Penalty on assessee having limited operations to be waived off if he had co-operated in proceedings with department

Where an assessee having limited operations had co-operated in proceedings and paid service tax alongwith interest, penalty was liable to be waived off under section 80

In the instant case assessee neither paid service tax nor filed the return in respect of Rent-a-Cab services provided by him. After show-cause notice was issued, he paid service tax alongwith interest, but sought waiver of penalties imposed on him under sections 76 & 77. He sought waiver on the ground that he was a small businessman, he had not collected service tax from service recipients and was passing through financial difficulties.

The Tribunal partly waived off penalty with following observations:-

Taking note of size of operations of assessee and fact that he had co-operated in proceedings and paid service tax alongwith interest, it was appropriate that penalties under section 76, which were almost equal to service tax liability, were required to be waived off by invoking provisions of Section 80. However, penalty imposed under section 77 was to be sustained. - Royal Travels v. Commissioner of Central Excise [2013] 35 taxmann.com 19 (Ahmedabad - CESTAT)

Karnataka HC lays down law on imposition of concealment penalty

In the instant case appeals were filed before the Karnataka HC regarding imposition of penalty. The HC interpreted section 271 and laid down law as under:

1) Penalty under section 271(1)(c) is a civil liability;

2) Mens rea isn’t an essential element for imposing penalty for breach of civil obligations or liabilities;

3) Existence of conditions stipulated in section 271(1)(c) is a sine qua non for initiation of penalty proceedings. Even if these conditions do not exist in the assessment order, at least a direction to initiate proceedings under section 271(1)(c) is a sine qua non for the AO to initiate the proceedings because of the deeming provision contained in section 271(1B);

4) Imposition of penalty even if the tax liability is admitted is not automatic. Even if the assessee has not challenged the order of assessment levying tax and interest and has paid tax and interest, that by itself would not be sufficient for the authorities either to initiate penalty proceedings or to impose penalty, unless it is discernible from the assessment order that it is on account of such unearthing or enquiry concluded by authorities it has resulted in payment of such tax;

5) Even though explanation offered, has not been substantiated by the assessee, but is found to be bonafide and all facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty can be imposed;

6) The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty, though emanate from proceedings of assessment, yet are independent and separate aspect of the proceedings. The findings recorded in the assessment proceedings, in so far as 'concealment of income' and 'furnishing of incorrect particulars' would not operate as res judicata in the penalty proceedings;

7) It is open to the assessee to contest the said proceedings on merits. However, the validity of the assessment or reassessment, in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared as invalid in the penalty proceedings;

Thus, in light of the above it was clear that merely because the assessee had agreed for certain addition and, accordingly, assessment order was passed and when the assessee had paid the tax and the interest thereon in the absence of any material on record to show the concealment of income, it couldn’t be inferred that the said addition was on account of concealment – CIT v. Manjunatha Cotton & Ginning Factory [2013] 35 taxmann.com 250 (Karnataka)

Freebies promised in election manifesto disrupts free and fair election; SC directs EC to issue guidelines

The Supreme Court held as under:

1) Promise of ‘freebies’ (TV sets, laptops, mixers, grinders etc.) in election manifestoes of political parties was not ‘corrupt practice’ under section 123 of Representation of People Act, 1951. As the said section covered corrupt practices & inducements by  candidates for winning elections (irrespective of whether the candidate’s party forms Government or not) and not promises by political party which it would implement if it forms Govt.;

2) Distribution of ‘freebies’ at State cost using tax revenues falls within the scope of ‘public purposes’ and such expenditure was not unconstitutional. Court can interfere only when expenditure incurred by Govt. is unconstitutional or contrary to a statutory provision. But it can’t interfere on the ground that such expenditure or action is not wise or that the expenditure is not good for the state;

3) Duty of CAG to scrutinize or audit Govt. expenditures arises only after the expenditure was incurred. There is no power or duty of CAG to do “pre-scrutiny” of expenditure before it is incurred;

4) Although promise of freebies in election manifesto is not corrupt practice, such promises and distribution using State funds would influence all peoples and shakes the root of free and fair elections, disturbs level playing field and vitiates the electoral process. Court has limited power to direct Legislature to legislate on particular issue;

5) However, Election Commission has power to issue directions to political parties to ensure level playing field so long as the matter is not covered by any law. Election Commission, thus, directed to issue guidelines to regulate election manifestoes as early as possible - S. Subramaniam Balaji v. Government of Tamil Nadu [2013] 35 taxmann.com 175 (SC)

CUP method deals with price of a product and not the profit margin earned thereon

Comparing margins instead of prices is incorrect application of internal CUP method

Where CIT(A) in his order upheld the internal CUP Method but dealt with profit margins instead of prices, it was an incorrect application of internal CUP Method. Application of any CUP method either internal or external involves dealing with prices of a product and not the profit margin earned thereon. Even in the case of 'internal CUP' Method, the arm's length price to be adopted is the price, subject to admissible adjustments at which the similar transactions are carried out between the assessee and an independent enterprise. Internal CUP has nothing to do with the margins earned by the same enterprise from other transactions - Sabic Innovative Plastic India (P.) Ltd. v. Dy. CIT [2013] 35 taxmann.com 177 (Ahmedabad - Trib.)

Books of account pre-requisites to tax unexplained cash credit; no additions for deposit in bank account in absence of books

Where assessee has not maintained any books of account, AO can’t invoke provisions of section 68 on the basis of deposits made in bank account of assessee

In the instant case, the assessee had not maintained any books of account. During assessment, the AO invoked the provisions of section 68 and made additions of all the deposits made by assessee in his bank account. The assessee, however, contended that the provisions of section 68 could only be invoked where any sum was found credited in his books of account. On appeal, the CIT (A) deleted the additions. Aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) The provisions of section 68 can only be invoked if any sum is found credited in the books of account maintained by assessee and the assessee offers no explanation about the nature and source thereof or the explanation offered by him isn’t, in the opinion of the Income-tax Officer, satisfactory. In this eventuality, the said sum so credited may be charged to income-tax as the income of the assessee of that previous year;

2) The passbook issued by the bank can’t be termed to be the books of account  of the assessee as per the judgment of the Bombay High Court in CIT v. Bhaichand N. Gandhi [1982] 11 Taxman 59. Therefore, the provisions of section 68 can’t be invoked on various deposits or credits found in the bank account of the assessee in the absence of any books of accounts maintained by assessee for the previous year;

3) Though provisions of section 68 couldn’t be invoked on the deposits made in the bank account of the assessee, yet the veracity of the additions made by the AO on certain deposits by invoking the provisions of section 68 examined and the assessee had furnished reasonable and plausible explanations along with confirmation with regard to different deposits. Thus, there was no infirmity in the order of CIT(A) – ITO v. Kamal Kumar Mishra [2013] 33 taxmann.com 610 (Lucknow - Trib.)

HC denies quashing settlement order; SetCom could verify true and full disclosure made by assessee till its final order

SetCom to decide whether the assessee had made full and true disclosure and  indicated the manner in which income was derived, till it passed its final order under section 245D(4)

The instant writ petition was filed by the Revenue against the orders of Commission (SetCom) declining to declare settlement applications of assessees as invalid. Revenue, aggrieved by the orders of commission, was of the view that settlement applications ought to have been held invalid as these applications failed to satisfy the prerequisites of full and true disclosure and the manner in which the undisclosed income had been derived

The High Court declined to interference with the orders of SetCom and made following observations:

1) The foundation for settlement was an application from the assessee in which he was required to make a full and true disclosure but such requirement hadn’t to be examined at the threshold stage of proceeding initiated before the Commission;

2) There might be cases where it was possible for the Commission to record a finding that the disclosure made in the application was full and true. At the same time, there could also be situations in which the Commission might not be able to record a finding with certainty at the stage of admission.  In such a situation it would be permissible for the Commission to keep the question open, to be examined at a later stage or at the stage of disposal of the application;

3) The Commission might, at any stage till it passed a final order under Section 245D(4), examine the issues and if there was sufficient material on record, determine the question of full and true disclosure and the manner in which the undisclosed income was derived and, depending on such a decision, the applications might be thrown out or they might be proceeded with further;

4) The proceedings were pending before the Settlement Commission and the final order was yet to be passed by the Commission under Section 245D(4). All the conclusions drawn by the Settlement Commission in the instant case, were only prima facie conclusions and didn’t foreclose the issues raised by the Revenue in the present proceedings.

5) Thus, the impugned issue was left open for Commission's decision till it passed its final order under section 245D(4). Writ petition were, accordingly, to be dismissed. It was for commission to decide whether the assessee have made full and true disclosure and/or indicated the manner in which income was derived  - CIT v. Income Tax Settlement Commission [2013] 35 taxmann.com 56 (Delhi)

ICAI can’t be deemed to be pursuing commercial activities by taking coaching classes or campus placements for a fee

Exemption under 10(23C)(iv) can’t be denied to ICAI on account of  fees received by it for providing coaching classes and campus placement for its students

The HC held as under:

1) The petitioner (i.e, ICAI) is the sole body empowered to conduct or approve of a course in the field of accountancy. No other person can conduct any course or award any degree or certificate which indicates a level of proficiency or competence in the field of accountancy similar to that as of a chartered accountant;

2) The activity of petitioner in conducting coaching classes was integral to its activity of conducting the courses in accountancy. The coaching classes being conducted by the petitioner couldn’t be equated with private coaching classes being conducted by organizations on commercial basis for preparing students to undertake entrance or other examinations in various professional courses;

3) The comparison of the petitioner with UPSC was also not apposite. The object of the study programme or post-qualification courses being conducted by the petitioner, was to impart knowledge and skill in the field of accountancy and related subjects to students and the same was not similar to the function as performed by UPSC;

4) It was not necessary that a person would give something for free or at a concessional rate to qualify as being established for a charitable purpose. If the object or purpose of an institution was charitable, the fact that the institution collected certain charges wouldn’t alter the character of the institution;

5) The fact that the petitioner charged a uniform fee from all students for coaching would not exclude it from the ambit of Section 2(15), unless it was found that the petitioner fell within the scope of the first proviso to Section 2(15), i.e., the petitioner carried on any trade, business or commerce or any activity of rendering any service in relation to any trade, commerce or business, for a cess or a fee;

6) The functions performed by the petitioner were in the genre of public welfare and not for any private gain or profit and, thus, it couldn’t be said that the petitioner was involved in carrying on any business, trade or commerce;

7) Accordingly, even though fees were charged by the petitioner for providing coaching classes and for holding interviews with respect to campus placements, the said activities couldn’t be stated to be rendering of service in relation to any trade, commerce or business, as such activities were being undertaken by the petitioner in furtherance of its main object which were not trade, commerce or business. Thus, Petitioner’s  writ petition was to be allowed and Department was to be directed to allow it exemption under section 10(23C)(iv) – ICAI v. Director General of Income-tax (Exemptions) [2013] 35 taxmann.com 140 (Delhi)

Tribunal had no power to modify stay order which was merged with the order of High Court

Where stay order passed by Tribunal had been challenged before High Court, such order stood merged with order of High Court; thereafter, Tribunal had no power to modify such merged stay order

In the instant case, the Tribunal vide its stay order directed the assessee to make pre-deposit of certain amount and report compliance. Against the said order, the assessee filed writ petition before the High court. The High Court only allowed credit of earlier payments to be taken by the party towards pre-deposit ordered by the Tribunal. Further, the High Court granted four weeks time to deposit any balance amount and submit proof thereof to the Registry of the Tribunal. In these circumstances the assessee again filed a miscellaneous application to the Tribunal seeking modification of the stay order.

The Tribunal rejected the application with following observations:

1) The plea made by assessee in miscellaneous application amounted to a plea for modification of original stay order which had already merged with  the order of High Court;

2) The Tribunal was incompetent to modify the stay order. The assessee had not complied with the time-bound direction of the High Court either. There was neither clear statement of any payments made by the assessee, nor there was any claim of further payments within the prescribed time towards pre-deposit ordered by the Tribunal;

3) In the above scenario, the miscellaneous application was rejected - Choice Precitech India (P.) Ltd. v. Commissioner of Central Excise [2013] 34 taxmann.com 194 (Bangalore - CESTAT)

Retention money isn’t an income of contractor if it has got no rights on it till satisfactory completion of work

If assessee was awarded a contract in terms of which certain amount was withheld by contractee towards retention money for satisfactory execution of contract, such retention money won’t represent assessee's accrued income

In the instant case the assessee had entered into contracts with the companies for onshore construction and erection activities. In terms of the contracts, amounts at the rate of 10% on the onshore activities and at the rate of 15% on the construction and erection activities were to be withheld by companies towards retention money. The AO while framing the assessment held that retention money relating to the satisfactory execution of the contract to be treated as assessee’s accrued income. The assessee, however, contended that it had no right on such retention money till completion of the work and, therefore, the same would have to be recognized only on satisfaction of the terms of the contract. On appeal, the CIT (A) and the Tribunal held in favour of assessee.

The High Court held as under:

1) For the purpose of ascertaining whether income had, in fact, accrued, one has to also see whether there is a real income. No matter by adopting any method the assessee maintains his accounts, be it the cash system or be it the mercantile system. However, in both cases unless there is real income, there cannot be any income tax;

2) In the instant case also, there was no real income as no debt had been created in favour of the assessee by virtue of the contract and the assessee did not get any right to receive the retention money during the previous year. Thus, it couldn’t be said that income in respect of the such retention money had accrued to the assessee during the previous year;

3) A similar question had arisen in case of CIT. v. Simplex Concrete Piles (India) Pvt. Ltd. 179 ITR 8, (Cal.) in which it was held that when there was a clause with regard to retention money, the assessee would get no right to claim any part of the retention money till satisfactory execution of the contract and, therefore, if there was no immediate right to receive the retention money, it couldn’t be said to have accrued to the assessee;

4) In the instant case, so far as retention money was concerned, the assessee had no right to receive the same and, therefore, it couldn’t be said that retention money had accrued to the assessee – DIT (International taxation) v. Ballast Nedam International [2013] 34 taxmann.com 270 (Gujarat)

Tiny pen drive enough to pin you down – ITAT accepts pen drive as admissible evidence in IT proceedings

Pen drive and print outs taken from it constituted admissible evidence in income-tax proceedings and formed a basis for investigation and additions

In the instant case the assessee was arrested by Punjab Police and pen drive was recovered from him containing details of his dealings, which was forwarded by police to IT Department with the printouts. The AO reopened the assessment and cited the pen drive and printouts in reasons recorded. On appeal, the CIT(A) upheld the additions made by AO. Aggrieved-assessee appealed to the ITAT and contended that that the pen drive was not an admissible evidence for reopening assessment and that various provisions of Cr. P.C., IPC, Indian evidence Act and Cyber Laws had been violated by Punjab Police during search.

The Tribunal held in favour of revenue as under:

1) Assessee’s objections had no effect on recordings of reasons by AO for forming a belief about escapement. It is trite law that technical rules of Evidence Act and Cr. P. C. were not applicable to these proceedings;

2) From the record it had emerged that many of the entries mentioned in the pen drive belonged to various business concerns of the assessee in which he was associated with in the capacity of director or partner;

3) They were explained by the assessee though on a prejudicial basis, but the fact remained that the entries had correlation with assessee’s activities. Thus, the contents of the pen drive would become admissible evidence in Income Tax proceedings and would form a basis for investigations and additions.

4) Consequently, pen drive and printouts thereof constituted admissible evidences in those proceedings. The reasons for reopening were recorded on the basis of those contents;

5) The reasons recorded for escapement of income and the material available on record with AO had a live link with each other. Thus, the reasons for reopening the assessments were properly recorded by AO - Chetan Gupta v. ACIT [2013] 34 taxmann.com 306 (Delhi - Trib.)