CBDT wakes up: Issues Circular 4/2012 allowing AO's to rectify Incorrect Arrears of Demand!!!!!!!

CBDT has issued circular 4/2012 on 20/06/2012 allowing Assessing Officers to rectify incorrect demands protested by Assessee's to be rectified even if period of Limitation for Rectification of 4 years as per S.154 of the Income tax Act,1961 has expired. 


Further the Assessing Officers are directed to give effect of such rectification on Financial Accounting System (FAS) portal of CPC, Bengaluru and refund wrongly adjusted,if any please be allowed to Assessee's.


To read the notification, clink on the following link:


http://www.itatonline.org/info/index.php/adjustment-of-refunds-against-arrears-cbdt-circular/

MVAT Audit due date preponed to 30th November [Vat-1512/CR-61/Taxation-1 dated 01/06/2012]

Yes, you read it right!!!!!!!!!!

Rule 66 of MVAT Rules which provides due date of submitting Audit report under S.61 of MVAT Act has been amended vide Notification -1512/CR-61/Taxation-1/dated 01/06/2012.

Rule 66 provides following:

The report of the audit under section 61 shall be submitted within ten months of the end of the year to which the report relates.

However the said rule has been amended to substitute "ten months" to "eight months"

Further the period of retention of books of accounts has been increased from six years to eight years to the year to which they relates.

Note: Only few of several amendments are reflected above:

For full notification click the following link:

Notification- 1512/CR-61/Taxation-1 dated 01/06/2012

No penalty u/s 271(1)(c) for additions to normal income where Income is assessed under MAT provisions - Revenue's SLP against Delhi HC order dismmised by SC [CIT V/s Nalwa Sons Investment Ltd.]

Petition(s) for Special Leave to Appeal (Civil) No(s).18564/2011

(From the judgement and order dated 26/08/2010 in ITA No.1420/2009 of The HIGH COURT OF DELHI AT N. DELHI)

Facts of the case:

•  Ld. AO levied penalty u/s 271(1)(c) for filling inaccurate particulars of Income due to additions made to total income under normal provisions on account of :

1. Claiming Depreciation on asset acquired on last day where the same could not be substantiated by appellant of having been used on that day. 
2. Disallowance for late payment of PF
3. Disallowance of deduction u/s 80HHC for not including loss on manufactured and traded goods exported out of India against incentives and had claimed deduction under Section 80HHC of the Act on 90% of the incentives.

• CIT (A) and ITAT set aside the penalty order on merits of the case.
•  Department filed appeal u/s 260A against the orders of the court and argued the case on merits.

Rests as followed:

12. Mr. Vohra, the learned counsel appearing for the assessee, however, gave a totally a different twist to the matter by predicating his submission on Section 115JB of the Act. His contention was that as per Explanation 4 of Section 271 (1) (c) of the Act, the penalty is levied with respect to the amount of tax sought to be evaded. According to him since the amount of tax had been paid by the assessee under Section 115JB of the Act, no penalty could be levied in respect of the additions/disallowances made by the A.O. 

13. Before we proceed to take note of further argument on this point, we reproduce the relevant provision of Section 271 (1) (c) of the Act:-

“271. Failure to furnish returns, comply with notices, concealment of income, etc.

(1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-

              xxx             xxx                 xxx
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income, or

              xxx            xxx                 xxx

He may direct that such person shall pay by way of penalty,-
              xxx           xxx                  xxx

       

(iii) in the cases referred to in clause (c) or clause (d), in addition to tax, if any, payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or fringe benefits or the furnishing of inaccurate particulars of such income or fringe benefits.

              xxx            xxx                 xxx


Explanation4- For the purposes of clause (iii) of this sub-section , the expression “the amount of tax sought to be evaded”-

(a) In any case where the amount of income in respect of particulars have been concealed or
inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income, means the tax that would have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished had such income been the total income;

(b) In any case to which Explanation 3 applies, means the tax on the total income assessed as reduced by the amount of advance tax, tax deducted at source, tax collected at source and self-assessment tax paid before the issue of notice under Section 148;

(c) In any other case, means the difference between the tax on the total income assessed
and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished

            xxx            xxx                 xxx”

14. Mr. Vohra argued that even if the penalty was to be imposed on the alleged concealment of income by the assessee or in respect of income in which inaccurate particulars have been furnished, the quantum of penalty is quantified with reference to the amount of tax sought to be evaded. His explanation was that the tax sought to be evaded would be the difference between the tax due on the income assessed and the tax that would have been chargeable had such total income been reduced by the amount of concealed income. Thus, the penalty is levied on the basis of tax on the difference between the income assessed and the income returned.

15. On this principle, the penalty could not be imposed in the present case as the assessee had paid the tax at deemed income under Section 115 JB of the Act, which income was more than the income assessed as per normal procedure. The Scheme of the Act is that if the tax payable under normal procedure is higher, such amount is taxable income of the appellant; otherwise book profits are deemed as the total income of the assessee in terms of Section 115 JB of the Act. He thus submitted that once „book profits‟ are, by a legal fiction, deemed to be total income of the assessee, such deeming fiction must be taken to its logical conclusion. As a necessary corollary, in such a case where income of an assessee company is finally assessed at „book profits‟ by deeming the same to be total income of the assessee, penalty
imposable under Section 271(1) (c) of the Act could only be levied in respect of any adjustment/addition/disallowance made while computing such „book profits‟. In such a situation, the revenue cannot be allowed to impose penalty with reference to the additions/ disallowances made while computing normal income since such income pales into insignificance, both for the purpose of imposition of tax and all logical consequences
following thereon.

16. In nut shell, his submission was that when the tax was imposed and calculated under the Act on the deemed income under Section 115JB of the Act, for the purposes of the imposition of penalty the department could not revert back to the normal income as it would lead to an absurd situation of two different incomes of the same person for the same assessment year. Further more, when the income tax is paid on the „book profits‟ by a legal fiction, such legal fiction has to be taken to its logical conclusion. He referred to the following decisions in support of his submissions:-

(i) A.S. Glittre Vs. CIT, 225 ITR 739 @ 744
(ii) M. Venugoal Vs. Divisional Manager, LIC of India, AIR 1994 SC 1343, 1347-48
(iii) UOI Vs. Jalyan Udyog, AIR 1994 SC 88, 96-97
(iv) Builders Association of India Vs. UOI, 73 STC 370 at 400 (SC)

17. Ms. Bansal countered the aforesaid arguments of Mr. Vohra by submitting that the Supreme Court had now made it clear in CIT Vs. Gold Coin Health Care Limited that even where the assessed income and returned income both are at loss, penalty can be levied under Section 271 (1) (c) of the Act. Her submission was that no restricted meaning can be given to the term “amount of tax sought to be evaded”. Where the loss has been determined by the AO at a figure less than the returned income then it would amount to concealment of income and the tax on the said amount would be treated as the amount of tax sought to be evaded.

18. Ms. Bansal justified the penalty by arguing that as per the provisions of Section 115 JB of the Act where the book profit is determined at a figure higher than the returned figure, then the penalty could be levied, because as per the provisions of Section 115 JB (5) save as otherwise provided in this Section, all other provisions of the Act shall apply to the assessee and therefore, penalty is leviable with respect to book profits. CIT (A) has observed in para 2.6 of his order that as regards disallowance of depreciation of Rs. 32,51,906/- and disallowance of Rs. 3,030/- under Section 2 (24) (x), there is no need of adjudication because the same have not been considered while computing the income u/s 115 JB of the Act, it had been considered while computing loss under regular provisions of the Act and thereafter, (CIT (A) had considered merits of the case. Thus CIT (A) has not given any finding as to whether penalty could be levied on the income/loss as per the normal provisions of the Act when positive book profit is determined u/s 115JB of the Act.

19. However, it is to be stated that as per the scheme under Section 115JB, AO could not have made addition with respect to depreciation and disallowance under Section 2 (24) (x) because as per the judgment of Supreme Court I the case of Apollo Tyres Limited( 255 ITR 273) Balance Sheet prepared by the assessee as per Schedule VI of the Companies Act is sacrosanct, and the AO cannot tamper with the net profit declared in such Profit & Loss A/c. Therefore, AO could not have tampered with the figure of depreciation as claimed by the assessee as per the Companies Act, may be WDV method or straight line method or any other method.

20. We have considered the rival submissions. Judgment of the Supreme Court in Gold Coin’s (supra) clarifies that even if there are losses in a particular year, penalty can be imposed as even in that situation there can be a tax evasion. As per Section 271 (1) (c), the penalty can be imposed when any person has concealed the particulars of his income or furnished incorrect particulars of the income. Once this condition is satisfied, quantum of penalty is to be levied as per clause (3) of Section 271 (1) ( c) which stipulates that the penalty shall not exceed three times “ the amount of tax sought to be evaded”. The expression “the amount of tax sought to be evaded” is clarified and explained in Explanation 4 thereto, as per which it has to have the effect of reducing the loss declared in the return or converting that loss into income. It is in this context that in Gold Coins (supra) the Supreme Court explained the legal position as under:-

“Reference to the Department Circular No. 204 dated 24.7.1976 reported in 1977 (110) ITR 21(St.) has also substantial relevance. Same reads as follows:-

New Explanation 4 defined „the amount of tax sought to be evaded‟. According to the definition, this expression will ordinarily mean the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed. In a case, however, where on setting off the concealed income, against any loss incurred by the assessee under other head of income or brought forward from earlier years, the‟ total income is reduced to a figure lower than the concealed income or even to a minus figure, „the tax sought to be evaded‟ will mean the tax chargeable on the concealed income as if it were the total income. Another exception to the general definition of the expression „tax sought to be evaded‟ given earlier is a case to which Explanation 3 applies. Here, the tax sought to be evaded will be the tax chargeable on the entire total income assessed.

A combined reading of the Committee‟s recommendations and the Circular makes the position clear that Explanation 4 (a) to Section 271 (1) (c) intended to levy the penalty not only in a case where after addition of concealed income, aloss returned, after assessment becomes positive income but also in a case where addition of concealed income reduces the returned loss and finally the assessed income is also a loss or a minus figure. Therefore, even during the period between 1.4.1976 to 1.4.2003 the position was that the penalty was leviable even in a case where addition of concealed income reduces the returned loss. When the word “income” is read to include losses as held in Harprasad‟s case (supra) it becomes crystal clear that even in a case where on account of addition of concealed income the returned loss stands reduced and even if the final assessed income is a loss, still penalty was leviable thereon even during the period 1.4.1976 to 1.4.2003. Even in the Circular dated 24.7.1976, referred to above, the position was clarified by Central Bureau of Direct Taxes (in short „CBDT‟). It is stated that in a case where on setting off the concealed income against any loss incurred by the assessee under any other head of income or brought forward from earlier years, the total income is reduced to a figure lower than the concealed income or even to a minus figure the penalty would be imposable because in such a case “the tax sought to be evaded‟ will be tax chargeable on concealed income as if it is “total income”.

21. The question, however, in the present case, would be, as to whether furnishing of such wrong particulars had any the effect on the amount of tax sought to be evaded. Under the scheme of the Act, the total income of the assessee is first computed under the normal provisions of the Act and tax payable on such total income is compared with the prescribed percentage of the „book profits‟ computed under section 115JB of the Act. The higher of the two amounts is regarded as total income and tax is payable with reference to such total income. If the tax payable under the normal provisions is higher, such amount is the total income of the assessee, otherwise, „book profits‟ are deemed as the total income of the appellant in terms of Section 115JB of the Act.

22. In the present case, the income computed as per the normal procedure was less than the income determined by legal fiction namely „book profits‟ under Section 115 JB of the Act. On the basis of normal provision, the income was assessed in the negative i.e. at a loss of Rs. 369521018. On the other hand, assessment under Section 115 JB of the Act resulted in calculation of profits at Rs. 40163180. 

23. In view thereof, in conclusion, the assessment order records as follows:-

                               “Assessed at Rs. 40163180 u/s 115 JB, being higher
                                of two. Interest u/s 234B and 234C has been charged
                                as per the provisions of Income Tax Act, 1961.
                                Penalty proceedings u/s 271 (1) © of the Income Tax
                                 Act, 1961 have been initiated. Issue necessary forms.”

24. The income of the assessee was thus assessed under Section 115 JB and not under the normal provisions. It is in this context that we have to see and examine the application of Explanation 4. 

25. Judgment in the case of Gold Coins (supra), obviously, does not deal with such a situation. What is held by the Supreme Court in that case is that even if in the income tax return filed by the assessee losses are shown, penalty can still be imposed in a case where on setting off the concealed income against any loss incurred by the assessee under other head of income or brought forward from earlier years, the total income is reduced to a figure lower than the concealed income or even a minus figure. The court was of the opinion that „the tax sought to be evaded‟ will mean the tax chargeable not as if it were the total income. Once, we apply this rationale to Explanation 4 given by the Supreme Court, in the present case, it will be difficult to sustain the penalty proceedings. Reason is simple. No doubt, there was concealment but that had its repercussions only when the assessment was done under the normal procedure. The assessment as per the normal procedure was, however, not acted upon. On the contrary, it is the deemed income assessed under Section 115 JB of the Act which has become the basis of assessment as it was higher of the two. Tax is thus paid on the income assessed under Section 115 JB of the Act. Hence, when the computation was made under Section 115 JB of the Act, the aforesaid concealment had no role to play and was totally irrelevant. Therefore, the concealment did not lead to tax evasion at all.

26. The upshot of the aforesaid discussion would be to sustain the order of the Tribunal, though on different grounds. Therefore, while we do not agree with the reasoning and approach of the Tribunal, for our reasons disclosed above, we are of the opinion that penalty could not have been imposed even in respect of claim of depreciation made by the assessee. This appeal is accordingly dismissed.

A cut from Union Budget 2012-13

• India’s GDP growth in 2012-13 expected to be 7.6 per cent +/- 0.25 per cent
• GDP is estimated to grow by 6.9 per cent in 2011-12, after having grown at 8.4 per cent in preceding two years
• Current account deficit at 3.6 per cent of GDP for 2011-12 and reduced net capital inflow in the 2nd and 3rd quarters put pressure on exchange rate
• Growth moderated and fiscal balance deteriorated due to tight monetary policy and expanded outlays.
• Deterioration in fiscal balance in 2011-12 due to slippages in direct tax revenue and increased subsidies
•  Endeavour to keep central subsidies under 2 per cent of GDP in 2012-13. Over next 3 year, to be further brought down to 1.75 per cent of GDP 
• Twelfth Five Year Plan to be launched with the aim of “faster, sustainable and more inclusive growth”. Five objectives identified to be addressed effectively in ensuing fiscal year.
• DTC Bill to be enacted at the earliest after expeditious examination of the report of the Parliamentary Standing Committee
• Drafting of model legislation for the Centre and State GST in concert with States is under progress & GST network to be set up as a National Information Utility and to become operational by August 2012
• For 2012-13, Rs. 30,000 crore to be raised through disinvestment. At least 51 per cent ownership and management control to remain with Government 
• Foreign Direct Investment- Efforts to arrive at a broad based consensus in consultation with the State Governments in respect of decision to allow FDI in multi-brand retail upto 51 per cent.
• External Commercial Borrowings (ECB) to be allowed to part finance Rupee debt of existing power projects 
• Proposal to allow foreign airlines to participate upto 49 per cent in the equity of an air transport undertaking under active consideration of the government 
• ECB to be permitted for working capital requirement of airline industry for a period of one year, subject to a total ceiling of US $ 1 billion
• Tax free bonds of Rs. 60,000 crore to be allowed for financing infrastructure projects in 2012-13
• National Manufacturing Policy announced with the objective of raising, within a decade, the share of manufacturing in GDP to 25 per cent and creating of 10 crore jobs
• Various proposals to address the shortage of housing for low income groups in major cities and towns including allowing ECB for low cost housing projects and setting up of a credit guarantee trust fund etc
• Government has announced a financial package of Rs.3,884 crore for waiver of loans of handloom weavers and their cooperative societies
• Rs.5,000 crore India Opportunities Venture Fund to be set up with SIDBI
• Target for agricultural credit raised by Rs.1,00,000 crore to Rs.5,75,000 crore in 2012-13
• Enrolment of 20 crore persons completed under UID mission. Adequate funds to be allocated to complete enrolment of another 40 crore persons
• Proposal to lay a White Paper on Black Money in current session of Parliament 

BUDGET ESTIMATES 2012-13

• Gross Tax Receipts estimated at Rs.10,77,612 crore
• Net Tax to Centre estimated at Rs.7,71,071 crore
• Non-tax Revenue Receipts estimated at Rs.1,64,614 crore.
• Non-debt Capital Receipts estimated at Rs.41,650 crore
• Total expenditure for 2012-13 budgeted at Rs.14,90,925 crore.
•  Plan expenditure for 2012-13 at Rs.5,21,025 crore is 18 per cent higher than Budeget Estimates of 2011-12. 
•  99 per cent of the total plan outlay met in the Eleventh Plan.
•  Non-plan expenditure estimated at Rs.9,69,900 crore.
•  Rs.3,65,216 crore estimated to be transferred to States including direct transfers to States and district level implementing agencies.
• Entire amount of subsidy is given in cash and not as bonds in lieu of subsidies. 
• Fiscal deficit at 5.9 per cent of GDP in RE 2011-12.
• Fiscal deficit at 5.1 per cent of GDP in BE 2012-13.
• Net market borrowing required to finance the deficit to be Rs.4.79 lakh crore in 2012-13.
• Central Government debt at 45.5 per cent of GDP in 2012-13 as compared to Thirteenth Finance Commission target of 50.5 per cent.
• Effective Revenue Deficit to be 1.8 per cent of GDP in 2012-13.

TAX REFORMS

[A] Direct Tax 

• Exemption limit for the general category of individual taxpayers proposed to be enhanced from Rs.1,80,000 to Rs.2,00,000 giving tax relief of Rs.2,000.
• Upper limit of 20 per cent tax slab proposed to be raised from Rs.8 lakh to Rs.10 lakh.
• Proposal to allow individual tax payers, a deduction of upto Rs.10,000 for interest from savings bank accounts.
• Proposal to allow deduction of upto Rs.5,000 for preventive health check up.
• Senior citizens not having income from business proposed to be exempted from payment of advance tax.
• To provide low cost funds to stressed infrastructure sectors, rate of withholding tax on interest payment on ECBs proposed to be reduced from 20 per cent to 5 per cent for 3 years for certain sectors.
• Restriction on Venture Capital Funds to invest only in 9 specified sectors proposed to be removed.
• Proposal to continue to allow repatriation of dividends from foreign subsidiaries of Indian companies at a lower tax rate of 15 per cent upto 31.3.2013.
• Investment link deduction of capital expenditure for certain businesses proposed to be provided at the enhanced rate of 150 per cent.
• New sectors to be added for the purposes of investment linked deduction.
• Proposal to extend weighted deduction of 200 per cent for R&D expenditure in an  inhouse facility for a further period of 5 years beyond March 31, 2012.
• Proposal to provide weighted deduction of 150 per cent on expenditure incurred for agri-extension services.
• Proposal to extend the sunset date for setting up power sector undertakings by one year for claiming 100 per cent deduction of profits for 10 years.
• Turnover limit for compulsory tax audit of account and presumptive taxation of SMEs to be raised from Rs. 60 lakhs to Rs. 1 crore.
• Exemption from Capital Gains tax on sale of residential property, if sale consideration is used for subscription in equity of a manufacturing SME for purchase of new plant and machinery.
• Rajiv Gandhi Equity Saving Scheme to allow for income tax deduction of 50 per cent to new retail investors, who invest upto Rs.50,000 directly in equities and whose annual income is below Rs. 10 lakh to be introduced. 
• Proposal to provide weighted deduction at 150 per cent of expenditure incurred on skill development in manufacturing sector.
• Reduction in securities transaction tax by 20 per cent on cash delivery transactions.
• Proposal to extend the levy of Alternate Minimum Tax to all persons, other than  companies, claiming profit linked deductions.
• Proposal to introduce General Anti Avoidance Rule to counter aggressive tax avoidance scheme.
• Measures proposed to deter the generation and use of unaccounted money.
• A net revenue loss of Rs.4,500 crore estimated as a result of Direct Tax proposals

[A] Indirect Tax

[i] Service Tax

• All services barring 17 negative list services, now under Service Tax net Increase in Service Tax rate from 10% to 12%
• Exemption from service tax is proposed for some sectors. 
• Service tax law to be shorter by nearly 40 per cent.
• New scheme announced for simplification of refunds.
• Rules pertaining to point of taxation are being rationalised.
• Number of alignment made to harmonise Central Excise and Service Tax. A common simplified registration form and a common return comprising of one page are steps in this direction.
• Revision Application Authority and Settlement Commission being introduced in Service Tax for dispute resolution.
• Utilization of input tax credit permitted in number of services to reduce cascading of taxes
• Place of Supply Rules for determining the location of service to be put in public domain for stakeholders’ comments.
• Study team to examine the possibility of common tax code for Central Excise and Service Tax.
• Proposals from service tax expected to yield additional revenue of Rs.18,660 crore.

[ii] Other Indirect Taxes

• Standard rate of excise duty to be raised from 10 per cent to 12 per cent, merit rate from 5 per cent to 6 per cent and the lower merit rate from 1 per cent to 2 per cent with few exemptions.
• Excise duty on large cars also proposed to be enhanced.
• Proposal to increase basic customs duty on imports of gold and other precious metals
• No change proposed in the peak rate of customs duty of 10 per cent on nonagricultural goods.
• To stimulate investment relief proposals for specific sectors - especially those under stress.
• Proposals to increase excise duty on ‘demerit’ goods such as certain cigarettes, hand-rolled bidis, pan masala, gutkha, chewing tobacco, unmanufactured tobacco and zarda scented tobacco.
• Levy of excise duty of 1 per cent on branded precious metal jewellery to be extended to include unbranded jewellery. Operations simplified and measures taken to minimise impact on small artisans and goldsmiths.
• Branded Silver jewellery exempted from excise duty.
• Duty-free allowances increased for eligible passengers and for children of upto10 years.
• Proposals relating to Customs and Central excise to result in net revenue gain of Rs.27,280 crore.
• Indirect taxes estimated to result in net revenue gain of Rs.45,940 crore.

 Net gain of Rs.41,440 crore in the Budget due to various taxation proposals.

Small Taxpyers and Senior Citizens free from IT Scrutiny: CBDT

Small Tax payers (Individuals and HUF's having Gross Total Income less than Rs.10 lakh) and Senior citizens, filing ITR-1 and ITR-2 shall not be scrutinzed by IT department for A.Y 2012-13 , unless the IT department is in posession of credible informatio


No.402/92/2006-MC (07 of 2011)
Government of India / Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
***
New Delhi dated the 14th March 2011
PRESS RELEASE
Streamlining procedure for scrutiny of income-tax returns
Scrutiny of income tax returns is an important mechanism for ensuring taxpayer
compliance and to counter tax-evasion. However, it has evoked some concern from small
taxpayers and senior citizens about prolonged enquiries. Concerns have also been raised about
selection of the same cases in scrutiny year after year.
Appreciating the concern of these taxpayers and with a view to mitigate their hardships,
Central Board of Direct Taxes has reviewed its scrutiny selection procedure. In order to redress
the grievance, it has been decided that during the financial year 2011-12, cases of senior citizens
and small taxpayers, filing income-tax returns in ITR-1 and ITR-2 will be subjected to scrutiny
only where the Income Tax department is in possession of credible information.
Senior citizens for this purpose would be individual taxpayers who are 60 years of age or
more. Small taxpayers would be individual and HUF taxpayers whose gross total income, before
availing deductions under Chapter VIA, does not exceed Rupees ten lakh.
***

Subsidiary Co. is not related to Holding Co. u/s 40(A)(2)(b) - CIT V/s VS Dempo & Co.(P) Ltd (2011) 244 CTR (Bom) 102

Facts of the case:


Assessee co: V.S. DEMPO & CO. (P) LTD [hereinafter referred to as "H"] 
Subsidirary Co: M/s Dempo Mining Corporation (P) Ltd  [hereinafter referred to as "S"]
Transaction : Purchase of  iron ore of particular quality for Rs. 8,66,75,390 by "H" from "S"
Transaction rate: Rs. 80/DLT of Lump oil and Rs. 85/ DLT for high grade lump iron ore.

Ld AO's  finding: One "M/s Orient Goa (P) Ltd" had purchased high grade iron ore at Rs. 62.30 and high grade lumpy ore at Rs. 59.64 per DLT

Ld AO's conclusion: The assessee had purchased the ore from its subsidiary were higher than the market rate and, therefore, the provisions of s. 40A(2) of the Act were attracted. Hence, the AO disallowed the expenditure to the extent of Rs. 49,30,488, under s.40A(2) of the Act. 

Assessee filed appeal with CIT(A) who allowed the appeal 

Revenue challenged CIT (A) order with ITAT, who also confirmed CIT (A) order 

Revenue further challenged ITAT order with Bombay High Court which held as under:



4. Clause (a) of sub-s. (2) of s. 40A of the income-tax provides that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in cl. (b) of the sub-section and the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. Clause (b) of sub-s. (2) of s. 40A of the income-tax mentions the class of persons in respect of whom cl. (a) is attracted. Learned counsel for the respondent submits that M/s Dempo Mining Corporation (P) Ltd., (hereinafter referred to as "the subsidiary company") from which the assessee purchased the iron ore is not one of the persons mentioned in cl. (b) of sub-s. (2) of s. 40A and, therefore, sub-s. 2(a) was not attracted. In the alternative he submitted that the finding recorded by the CIT(A) as well as the Tribunal that the assessee had paid a little higher than the usual rate taking into consideration the fact that the assessee was assured a huge quantity of supply, as well as the quality of supply that it cannot be said that the rate was unjustified, was a finding of fact. In the absence of any perversity, the finding of fact recorded by the CIT(A) and confirmed by the Tribunal cannot be interfered with in an appeal under s. 260A of the Act. He further submitted that both the assessee, as well as the subsidiary were registered companies under the Companies Act, 1956 liable to pay the income-tax at the same rate. Therefore, there was no question of diversion of any funds. He invited our attention to the CBDT Circular No. 6-P dt. 6th July, 1968, which states that no disallowance is to be made under s. 40A(2) in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax. He submitted that the CIT(A) as well as the Tribunal have also recorded a finding of fact that there was no attempt of evasion of tax and, therefore, in view of the CBDT circular dt. 6th July, 1968, s. 40A(2) was not attracted and should not have been applied by the AO. The circular is binding on the Department and on this ground also the appeal should be dismissed.
    The CIT(A), on appreciation of the material available before him, has come to the conclusion that the assessee, as an exporter, was exporting huge quantity of iron ore. It was assured of supply of huge quantity of iron ore as well as quality of iron ore by a reason of the fact that it had entered into a contract with its subsidiary. He has also held that both the assessee and its subsidiary were companies paying tax at the same rate and, therefore, there was no question of tax evasion. These findings are not open for challenge in this appeal.
     In our view, in a business of export consistency of supply as well as quality of supply is important. In order to assure a consistent supply of material of the same quality the purchaser of a commodity may pay to a seller bound under a contract a little higher than the current rate. Furthermore, in case of yearly contracts by agreeing to buy goods at a specified rate the exporter is insulated from vagaries of any seasonal rise in the market rate. Therefore,
unless the rate agreed is so very much excessive or unreasonable as to doubt the objective behind the agreement, it cannot be said that the rate, a little higher than the seasonal market rate is unjustified or amounts to diversion of profit. In this connection, the fact that the assessee as well as its subsidiary which is the seller are in the same tax bracket and pay same rate of tax is a fact which assumes importance. Admittedly, it is not a case of tax evasion in as much as if the rate would have been less, the assessee’s profit would have been more, but the profits of the seller would have been less and both being taxable at the same rate, there would be no difference in the aggregate tax payable by the assessee and its subsidiary.
        A decision of a Division Bench of this Court in CIT vs. Indo Saudi Services (Travel) (P) Ltd. (2008) 219 CTR (Bom) 562 : (2008) 12 DTR (Bom) 304 is a case in point. Therein the
assessee was a general sales agent of Saudi Arabian Airlines. The assessee earned commission at 12 per cent from Saudi Arabian Airlines. The assessee had appointed several agents, including its sister concern as sub-agents and was paying commission to each such sub-agent. While the assessee was paying a commission of 9 per cent to all its agents, it was paying additional 1/2 per cent to its sister concern which was also acting as a sub-agent. The AO disallowed the 1/2 per cent commission paid to the assessee’s sister concern under s. 40A(2) of the IT Act. The order was confirmed by the CIT(A) as well as by the Tribunal. On an appeal at the instance of the assessee, this Court noted that the sister concern to which the assessee was paying extra 1/2 per cent commission was also assessed to tax and was paying tax. Relying upon the Circular No. 6-P, dt. 6th July, 1968 of the CBDT, it is held
that no disallowance should be made under s. 40A(2) of the IT Act in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax. This Court while allowing the appeal, set aside the addition made under s. 40A(2) of the Act.
         In our view, in the facts and circumstances of the case, the ratio of decision of this Court in Indo Saudi Services (Travel) (P) Ltd.’s case (supra) squarely applies to the facts
of the case at hand.



8. Ms. Dessai, learned counsel appearing for the Revenue, invited our attention to another decision of a Division Bench of this Court in CIT vs. Shatrunjay Diamonds (2003) 183 CTR (Bom) 86 : (2003) 261 ITR 258 (Bom), and to the observations made in paras 10 and 11 of the decision. She submitted that once it was held that the payment was made to a related person mentioned in cl. (b) of s. 40A(2) of the Act, the burden shifted on the assessee and it was the duty of the assessee to discharge the burden by leading proper evidence that the provisions of s. 40A(2) were not attracted to the assessee’s case. The basic requirement for the applicability of s. 40A(2) of the Act is that the payment must be made to a related person i.e., to a person referred to in cl. (b), of sub-s. (2) of s. 40A of the Act. In the facts and circumstances of the case, we are of the view that the payment in the case at hand was not
made to a person mentioned in cl. (b) of s. 40A(2) of the Act for the reasons indicated below.
9. Clause (a) of sub-s. (2) of s. 40A of the Act provides that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in cl. (b) of the sub-section and the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the
assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable, shall not be allowed as a deduction. The object of s. 40A(2) is to prevent diversion of income. An assessee who has large income and is liable to pay tax at the highest rate prescribed under the Act often seeks to transfer a part of his income to a related person who is not liable to pay tax at all or liable to pay tax at a rate lower than the rate at which the assessee pays the tax. In order to curb such tendency of diversion of income and thereby reducing the tax liability by illegitimate means, s. 40A was added to the Act by an amendment made by the Finance Act, 1968. Clause (b) of s. 40A(2) gives the list of related persons.


       It is only where the payment is made by the assessee to the related persons mentioned in cl. (b) of s. 40A (2) of the Act that the AO gets jurisdiction to disallow the expenditure or a part of the expenditure which he considers excessive or unreasonable. Clause (b) of s. 40A(2) reads as under : "40A(2)(b)
The persons referred to in cl. (a) are the following, namely :
(i) where the assessee is an individual - any relative of the assessee; 
(ii) where the assessee is a company -any director of the company, partner of the firm firm, association of persons or Hindu or member of the association or family, or any undivided family relative of such director, partner or member;
(iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;
(iv) a company, firm, AOP or HUF having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member;
(v) a company, firm, AOP or HUF of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member;
(vi) any person who carries on a business or profession,—
       (A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or
       (B) where the assessee being a company, firm, AOP or HUF, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner, or member, has a substantial interest in the business or profession of that
person.
Explanation.—For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,—
(a) in a case where the business or profession is carried on by a company, such
person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profit) carrying not less than twenty per cent of the voting power; and
(b) in any other case, such person is, at any time during the previous year, beneficially
entitled to not less than twenty per cent of the profits of such business or profession."



10. Learned counsel for the appellant submitted that the present case falls under sub-cl. (ii) or sub-cl. (iv) of cl. (b) of s. 40A(2). Sub-cl. (ii) provides that where the assessee is a company, firm, AOP or HUF, any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member would be a related person.


In the present case, the assessee is a company and the seller is its subsidiary
company. The seller i.e., the subsidiary company does not fall in any of the capacities mentioned under sub-cl. (ii) of cl. (b). Only a director of the company, partner of the firm, or member of the association or family or any relative of such director, partner or member is a related person, under sub-cl. (ii) of cl. (b) of subs. (2). Another company, even if it is a subsidiary of the assessee is not a related person within the meaning of sub-cl. (ii) of cl.(b) of s. 40A(2). Sub-cl. (iv) of cl. (b) of s. 40A(2) provides that in case of a company, firm, AOP or HUF having a ‘substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member is a related person.

Again a subsidiary company does not fall in any of the class of persons mentioned in sub-cl. (iv) of cl. (b) of s.40A(2). In law, a holding company is a member of subsidiary company and holds more than 50 per cent equity share capital of the subsidiary company (except in cases where it controls the composition of the board of directors without holding majority of the shares). While the holding company is a member of its subsidiary company, the subsidiary company is not a member of the holding company. As, the subsidiary company was not a member of the assessee, sub-cl. (iv) of cl. (b) of s. 40A(2) of the Act is also not attracted in the present case.

In Shatrunjay Diamonds (supra), the Division Bench of this Court held that the burden of proving that the case does not fall under s. 40A(2)(b) would shift on the assessee if the supplier of the goods is a related person as mentioned under cl. (b).


In the present case, as we have held that the subsidiary company is not a related person of the assessee within the meaning of cl. (b) of s. 40A(2) of the Act, the decision has no application to the facts of the present case.



For these reasons, there is no merit in the appeal which is hereby dismissed.

New service launced by IT Dept to request missed Intimation,Rectification orders and Refunds

The process of request for re-sending of CPC-Intimation u/s 143(1)/154 and refund is now available in 'Services' option on Income Tax E-filling portal.

The said service allows taxpayers to request resending by Department of Intimation u/s 143(1), Rectification order issued u/s 154 and Tax Refunds processed by CPC. This service is available for intimations/rectification orders and refunds for A.Y.2008-09 onwards and the same can be requested to be sent in Paper mode at PAN Address, ITR Address  or New Address or through Electronic mode via E-Mail. ECS of Tax refund can be requested to be made in Bank Account mentioned in Return filed.