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.)

Tax treatment of sum received after termination of employment – OECD’s draft guidance

The OECD Committee on Fiscal Affairs, through a sub-group, has undertaken to clarify how variety of payments, such as non-competition payments, notice pay, severance payment, etc., that may be made following the termination of an employment should be treated for tax treaty purposes. Accordingly, it issued a draft proposal for additions and alterations to the Commentary on the OECD Model Tax Convention. A brief synopsis of suggestions given by OECD Committee on tax treatment of termination payments is provided as follows:

1. Remuneration for previous work - Any remuneration paid after the termination of employment for work done before the employment is terminated (e.g. a salary or bonus for the last period of work or commission for sales made during that period) will be considered to have been derived from the State in which the relevant employment activities were exercised.

2. Payment in lieu of notice of termination - The payment received ‘in lieu’ of notice of termination should be considered to be derived from the State where employee would have worked during the period of notice, which will be the State where the employment activities were performed at the time of the termination.

3. Severance payment - Severance payment should be considered to be remuneration derived from the State where the employment was exercised when the employment was terminated.

4. Payment of damages for unlawful dismissal - The tax treatment of such payment will depend on what the damage award seeks to compensate. It can be categorised into following:

a) Remuneration: Sum paid for serving an insufficient period of notice or because a severance payment was required by law should be treated as remuneration for these damages.

b) Capital Gains or Other income: Punitive damages awarded on grounds such as discriminatory treatment or injury to one’s reputation would typically fall under Article 21 (Other Income) or Article 13 (Capital Gains).

Differentiating between whisky and non-whisky alcoholic beverages is undesirable for comparability under TNMM

Product similarity was to be seen for applying CUP method and not for TNMM. If assessee sold non-whisky alcoholic beverages (Vodka, Gin, Brandy, Rum, etc) to non-AEs and whisky to AEs, net profit margin on sale by assessee of non-whisky alcoholic beverages couldn’t be rejected as internal TNMM for calculating ALP on assessee's sale of whisky to AEs simply based on distinction made between whisky & non-whisky as two different products

The Tribunal held as under:

1) The profitability derived from uncontrolled party engaged in similar business activity under similar circumstances was the measure of arm's length result. The focus under the TNMM was on transactions rather than on operating income of the enterprise as a whole;

2) If there was similar nature of transactions and functions between controlled transactions with the related party and uncontrolled transactions with unrelated party, then internal comparability would result into more appropriate result for computing  ALP, as it would require least amount of adjustments;

3) The product similarity was to be seen while applying CUP method and not under the TNMM because under the CUP, the focus had to be on the price of the product sold or transferred;

4) In assessee's case, both the transactions with the A.Es and unrelated parties related to alcoholic beverages, which were in similar business line. Making intra-distinction between types of alcoholic beverages like "whisky" and "other than whisky", was wholly undesirable while carrying out comparability analysis under the TNMM;

5) Under the TNMM, functional comparability of transactions was to be analyzed at net profit margin level. If such a high degree of similarity was to be seen in TNMM, then it would become impractical to apply TNMM in any case;

6) Rejection of internal TNMM simply on the basis of distinction between whisky and non–whisky as two different products was wholly undesirable and, therefore, adjustment made by TPO was to be deleted - Diageo India (P.) Ltd. v. DY.CIT [2013] 34 taxmann.com 284 (Mumbai - Trib.)

Resultant Co. can file appeal after demerger; abundant caution appeal by demerged Co. dismissed to avoid duplicity

Appeals filed by demerged company under the apprehension that the original appeals filed by the resulting company might not be held as maintainable, were not permissible. Such duplicate appeals might lead to a serious problems  if they remained un-noticed, because mistakenly two judgments could be delivered and that might lead to a serious error.

The Tribunal held as under:

1) Demerger implies transfer of all the assets and liabilities of the undertaking or division by a 'demerged company' to a 'resulting company'. In consequence of assets being taken over by a ‘resulting co’ it would be responsible and would have the rights to be a party to the litigation to protect its interest;

2) A resulting company on one hand acquired the assets and on the other hand it was responsible for the liabilities, including tax liability;

3) As per sub-section (vi) of section 2(19AA), the transfer of the undertaking was on a going concern basis, meaning thereby, that as a result of demerger the effected undertaking would loose it’s independent legal identity which merged with the resultant company. Its entity thereafter vested in the resulting company. As a natural corollary the litigation couldn’t be pursued against a non-existing legal body;

4) As a result of demerger an undertaking or a unit of demerged company was transferred to a resulting company. Therefore, after the transfer, the demerged  company was not to be held responsible for any legal action but the transferee- company was legally answerable and accountable thereafter;

5) Appeals filed by the demerged company under the apprehension that the original appeals filed by the transferee-company (resulting company) might not be held as maintainable, were nothing but the duplicate appeal, which was not permissible in the eyes of law;

6) Such duplicate appeals might lead to a serious problems if these remained un-noticed, because mistakenly two judgments could be delivered and that might lead to a serious error. Duplicity is void ab initio hence appeals were required to be dismissed - Cairn Energy Gujarat BV v. ADIT [2013] 34 taxmann.com 281 (Ahmedabad - Trib.)

ITAT rejects recall application filed by CA in ‘personal’ capacity; directs ICAI to act suitably for his misconduct

CA appearing as Authorised representative (‘AR’) for client had no locus standi to file any application before ITAT in his individual capacity without the client’s consent, after disposal of client’s appeal. CA’s conduct of filing such application after the date of Tribunal’s order disposing it off in his client’s favour was contemptuous, abuse of process of law and scandalized the system of delivery of justice

The Tribunal held as under:

1) Once the appeal was disposed off, the power conferred upon the professionals or the AR by virtue of the Power of Attorney by the assessee, came to an end. They didn’t have any locus standi to file any application before the Tribunal in his individual capacity because the Tribunal was not created to redress the grievances of the professionals;

2) Its function was to adjudicate the disputes between the assessee and the Department. The appeal was allowed in favour of the assessee and the assessee had no grievance against the order passed by the Tribunal. Instant application was filed  by the CA with an ulterior motive for the reasons best known to him, disputing the facts recorded in the order sheet;

3) After disposal of the appeal, an application could be filed on behalf of the assessee under section 254(2) of the Act for seeking rectification in the order passed under section 254(1) of the Income Tax Act. But there was no provision under the Act in which an application could be filed by any Advocate or CA or AR in his individual capacity for seeking rectification in the proceedings of the hearing, without the consent of the assessee;

4) Moreover, to dispute the proceedings of the court, without any cogent material, was also an attempt to scandalize the court and also to create hindrance in the proper judicial functioning of the court, which couldn’t be permitted under any circumstances. If it was allowed the judicial system would collapse;

5) Since the facts recorded in the order sheet had not been controverted by filing an affidavit, the judicial proceedings were correct and the contentions raised in the application were highly misconceived, wrong and contemptuous. Therefore, the instant application was moved with an intention to browbeat and scandalize the court. Since the action of CA was grossly abuse of process of law, application was dismissed with cost of Rs 5,000 to be recovered from him;

6) This tough stand was being taken only to maintain the dignity, decorum of the institution and justice delivery system so that it might not be misused by any professional to settle their personal score. If they had any grievance against any judicial forum they could approach the higher forum instead of scandalizing the concerned court or judicial body;

7) Reference made to the President of ICAI with a request to take necessary action as per law against the CA for his professional misconduct and also to take corrective measures and necessary steps to educate its members, to behave with the judicial authorities befitting to their status - Omkar Nagreeya Sahkari Bank Ltd v. DyCIT [2013] 34 taxmann.com 283 (Lucknow - Trib.)

Admissions made during survey are not conclusive unless supported by convincing evidences

Addition on the basis of seized material was unjustified if assessee was able to show that the admissions made during survey were incorrect

In the instant case, during search and seizure operation on assessee-firm, the survey party worked out the certain value of excess stock by preparing a provisional trading account. The partners of assessee-firm, not being able to explain the excess stock, surrendered the same and agreed to pay tax on the value of excess stock. The excess cash found during survey was declared by the partners as income of firm other than regular income. The return filed after survey didn’t disclose the excess stock and excess cash found during survey. Consequently, the AO made addition for excess stock under section 69 and on account of excess cash under section 69A. The CIT(A), substantially reduced the addition made by the AO. Aggrieved by the order of CIT(A), revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) It is a well-settled law that admissions are not conclusive proof of the matter. They may be shown to be untrue or having been made under mistake of fact or law. Circumstances have to be seen under which same are made;

2) Admissions could be withdrawn unless it was conclusive. The Supreme Court in the case of Pullangode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18, had held that the assessee was to be given opportunity to show that admission was incorrect or didn’t show correct state of facts. The Punjab & Haryana High Court in the case of Kishan Lal Shiv Chand Rai v. CIT [1973] 88 ITR 293, had held that it was an established principle of law that a party was entitled to show and prove that admission made by it, was, in fact, not correct and true;

3) The sole basis of making addition, i.e., provisional trading account was not found to have correct figures of purchase and sales. Whatever items had been declared by the assessee on account of excess stock were correctly considered by the CIT(A). Since the figures of the sales and purchases were based on factual figures, it was a case of factual mistake committed by the Survey party as well as by the AO, which had been rightly corrected by the CIT (A);

4) Thus, the assessee on the basis of seized material had been able to show that the admission made at the time of survey, surrendering the additional income on account of excess stock was not correct and did not show correct state of facts. The CIT(A) correctly deleted the addition as no addition could be made against the assessee on the basis of mere admission. Therefore, the departmental appeal was to be dismissed – ACIT V. MAYA TRADING CO. [2013] 34 taxmann.com 144 (Agra - Trib.)