The Din Surrounding ‘DIN’

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The Supreme Court recently granted an interim stay on the Delhi High Court’s judgment wherein it was held that a communication issued by an income tax authority without citing the computer-generated Document Identification Number (‘DIN’) does not have any standing in law. While the one line stay order of the Supreme Court does not mention the reasons, it is worth examining how the Income Tax Department is trying to circumvent the mandate of a Circular issued by its own apex administrative body, i.e., the Central Board of Direct Taxes. 

Contents of the CBDT Circular

Before I elaborate the legal issue involved, it is apposite to summarise the CBDT’s Circular, its aim and content. The CBDT issued a Circular on 14.08.2019 stating that as part of the broader e-governance initiatives as well as Income Tax Department’s move towards computerisation of work, almost all notices and orders are being generated on the Income Tax Business Application Platform (ITBA). However, the Circular noted that some notices were being issued manually without providing an audit trail of communication. To prevent manual communication, the CBDT in exercise of its powers under Section 119, IT Act, 1961 issued the impugned Circular. Paragraph 2 of the Circular mandated that no communication by any income tax authority relating to assessment, appeals, order, exemptions, investigation, etc. shall be issued unless a computer-generated DIN has been allotted and is duly quoted in the body of such communication.    

Paragraph 3 of the Circular enlisted limited exceptions when a manual communication can be issued by an income tax authority. Paragraph 3 envisaged 5 situations: 

  • When there are technical difficulties in generating/allotting/quoting the DIN
  • When communication is required to be issued by an income tax authority who is outside the office 
  • When due to delay in PAN migration, PAN is with non-jurisdictional Assessing Officer
  • When PAN of assessee is not available and proceeding under the IT Act, 1961 is sought to be initiated 
  • When functionality to issue communication is not available in the system 

However, to issue the manual communication in any of the above 5 situations, reasons need to be recorded in writing and prior written permission of Chief Commissioner/Director General of Income Tax is required. Further, the manual communication needs to state the fact that communication is being issued manually without generating a DIN and the date of written approval. For manual communication in situations (i), (ii), and (iii), Paragraph 5 of the Circular states that the communication needs to be ‘regularised’ by uploading it on the System, generating a DIN and communicating the DIN to the assessee. Presumably, the generation of DIN and its communication to assessee would happen on an ex-post basis, but the requirement of generating the DIN needs to be fulfilled nonetheless in these situations.   

Paragraph 4, crucially, and in unambiguous terms states the consequence for not adhering to the mandate of the Circular: any ‘communication which is not in conformity with Para-2 and Para-3 above, shall be treated as invalid and shall be deemed to have never been issued.’   

The above summary of the Circular leaves no doubt that the intent of CBDT is to make manual communication by income tax authorities an exception and electronic communication containing DIN a norm. This is evident in the fact that even when manual communication is allowed under certain exigencies, it needs to be regularised on ITBA to ensure an audit trail. And the seriousness of the intent is reflected in Paragraph 4 which states that a ‘DIN-less’ communication is non-existent in law. 

The above Circular was to have effect from 01.10.2019.   

Legal Issues 

Since the issuance of the Circular, Income Tax Appellate Tribunals and High Courts have, on various instances, opined on the effect of the Circular. The general fact pattern has been that an income tax authority issued a communication after 01.10.2019 without generating the DIN, or without mentioning it in the body of the communication or communicating with the assessee manually without the Income Tax Department being able to justify that any of the 5 exceptional situations existed. The assessees have challenged the ‘DIN-less’ communications as invalid and judicial authorities have pre-dominantly favored the assessee. The three legal prongs on which the decisions stand are: 

First, Circulars issued by CBDT under Section 119 of IT Act, 1961 are binding on the Revenue, i.e., all officers and persons employed in execution of the IT Act, 1961 need to compulsorily adhere to CBDT’s Circular. 

Second, strict interpretation of Paragraphs 2 and 4 of the CBDT Circular. Former requires generation of DIN and quoting it in the body of communication. Accordingly, ex post generation of DIN and communicating it to the assessee or not mentioning the DIN in the body of communication has been held to be non-compliance of the Circular’s mandate. 

Third, the Income Tax Department cannot take recourse to Section 292B of IT Act, 1961. Section 292B, IT Act, 1961 states that any return of income, assessment, notice, etc. shall not be deemed to be invalid merely by reason of any mistake, defect or omission if the communication or proceeding are in substance and effect in conformity with the intent and purpose of IT Act, 1961. Delhi High Court observed that the defence of Section 292B is not available to the Income Tax Department since the ‘phraseology’ used in Paragraph 4 of the Circular is clear: a communication not issued in accordance with the conditions prescribed in Paragraphs 2 and 3 shall have no standing in law. The Delhi High Court’s judgment has now been stayed by the Supreme Court. 

The Income Tax Department in filing a Special Leave Petition before the Supreme Court challenging the Delhi High Court’s decision is signaling that it is not bound by CBDT’s Circular or that it would only adhere to the Circular if it is aligned with the Department’s interpretation, i.e., generating DIN and quoting it in the body of the communication is only a procedural formality and not following the said procedure should not affect the validity of the communication. The Income Department’s interpretation though is not on sound legal footing as the Circular is clear that not following the prescribed procedure would render the communication non-existent in the eyes of law. What is the middle path that the Supreme Court can invent? Even if the Supreme Court states that the Income Tax Department can claim the defence of Section 292B, it would be akin to reading down Paragraph 4 of the Circular. Perhaps the Income Tax Department can press upon the Supreme Court that if ‘DIN-less’ communications are held to be invalid, it would result in a vacuum in certain assessment proceedings, risk loss of revenue, and create legal uncertainty. This consequential approach has succeeded before Courts in various instances and can possibly have traction in the impugned case as well. But, to my mind, it will not be prudent and would directly contradict CBDT’s stance.  

Madras HC Holds Prescribed Time Period for Filing Returns as ‘Directory’: Interprets Section 62, CGST Act

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In a recent decision[1], the Madras High Court had to decide if an assessee loses the right to file tax returns after expiry of 30 days under Section 62(2), CGST Act, 2017. Section 62(2) provides an assessee 30 days to file returns after the proper officer passes a ‘best judgment’ assessment order. The High Court held that the assessee does not lose its right to file returns, but its interpretation of the provision is not founded on cogent reasoning. 

Facts 

In the impugned case, the asssessee failed to file its tax returns for the months of December 2022, January 2023 and February 2023. Thus, in exercise of the powers under Section 62(1), the proper officer passed best judgment assessment orders on 28.03.2023 for the month of December 2022 and on 30.04.2023 for the months of January 2023 and February 2023. Under Section 62(2), the assessee can file a valid return within 30 days of the service of best judgment assessment order passed by a proper officer under Section 62(1). And if the return is filed, the best judgment assessment order is deemed to have been withdrawn but the assessee’s liability for payment of fine and penalty continues. 

In the impugned case, the assessee did not file its return within 30 days of the passing of the best judgment assessment order and pleaded that the delay be condoned on account of financial difficulties. The Madras High Court framed the issue as: whether the assessee loses the right to file returns after expiry of 30 days or is right retained by providing sufficient reasons for non-filing of returns. (para 13) 

Decision 

The Madras High Court examined the relevant provision, i.e., Section 62, CGST Act, 2017 and stated that under Section 62(1) the proper officer has been granted a period of 5 years for completing the best judgment assessment. The 5 years are calculated from the due date of filing of annual return of the relevant financial year. Thus, the High Court deduced that in the impugned case, the proper officer could finalise the best judgment assessment order until 31.12.2029. And thereafter elaborated:

In such case, if the best judgement assessment order is passed by the respondent on 31.12.2029, which is permissible under Section 74 of the GST Act, the petitioner can file his returns within a period of 30 days therefrom i.e., on or before 30.01.2030. Hence, the time limit is available up to 30.01.2030 for the petitioner to file their returns. (para 14) 

The above paragraph is a peculiar reading of Section 62. Under Section 62(1), the proper officer has an outer time limit of 5 years to finalise the best judgment assessment order. This does not automatically extend the right of an assessee to file their tax returns to 5 years and 30 days. The assessee, under Section 62(2), must file a valid tax return within 30 days of passing of the best judgment assessment. Only because in the impugned case the proper officer finalized the best judgment assessment much before expiry of 5 years does not mean that the right of assessee extends to 5 years and 30 days. If the right of an assessee is interpreted to survive for 5 years and 30 days in all cases, then prompt passing of best judgment assessment orders would negate the 30 day outer limit as assessee can file valid returns anytime within 5 years and 30 days. The intent of the provision seems to be to allot the proper officer a window of 5 years to pass an order and the assessee 30 days once the order has been passed.    

The other issue, about condonation of delay was where the Madras High Court’s observations were on sounder footing. The High Court observed that if there is a sufficient reason for not filing returns within 30 days then the delay can be condoned. But, this does not lead to the High Court’s conclusion that ‘the limitation of 30 days period prescribed under Section 62(2) of the Act appears to be directory in nature’. (para 16) Here again, interpreting the 30-day time period allotted to the assessee as directory in nature is an opinion manufactured by the High Court without any cogent reasoning or a detailed analysis of the intent of the provision. 

Conclusion 

The Madras High Court’s conclusion that if there is delay on assessee’s part, i.e., beyond 30 days, then the delay can be condoned if sufficient reasons are presented is appreciable. However, the interpretation that the period of 30 days is only directory in nature and right of the assesse to file valid returns extends beyond 5 years lacks teeth. The High Court was remiss in not noticing that the period of 5 years was for the proper officer and not the assessee. The latter only has 30 days which commence from the service of the assessment order.    

[1] Comfort Shoes Components v Assistant Commissioner, Ambur, Vellore TS-694-HCMAD-2023-GST. 

Supreme Court Reduces Penalty under Section 129, CGST Act: Clarifies that Decision is Not a Precedent

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Supreme Court in a recent case[1], directed that the penalty imposed on the assessee for transporting goods without a valid e-way bill should be reduced by 50%. While the Calcutta High Court had upheld the levy of penalty, the Supreme Court to serve ‘ the ends of justice’ reduced the penalty amount by half, without articulating any convincing reason for its conclusion and stated that its order in the impugned case should not be treated as a precedent.   

Facts 

The brief facts of the case are: the assessee was in the business of horizontal drilling in underground utilities and availed the services of M/s Hariom Freight Carriers for transportation of one its machines weighing 68 tons from its previous work site in Uttar Pradesh to West Bengal. The e-way bill for transportation was generated on 30 May 2019, and it was valid until 9 June 2019. The transportation was not done within the validity period and the vehicle was intercepted on 17 June 2019 and was found carrying goods without a valid e-way bill. Accordingly, the assessee was issued a notice as to why it should not pay a tax of Rs 54,00,000 and a penalty of equivalent amount. The said amount was confirmed against which the assessee filed an appeal. The assessee deposited 10% of the tax demand and furnished a bank guarantee of the amount of demand to secure release of its machine. However, the appeal was not decided and the Calcutta High Court directed that the appeal be decided. Eventually, the High Court ordered that the tax be paid in cash, 50% of the penalty amount be paid in cash and the remaining 50% of the penalty amount be paid by furnishing a bank guarantee which should be valid for 1 year. Against the said order, the assessee approached the Supreme Court.     

Arguments and Decision 

The assessee’s arguments before the Supreme Court centred around reduction of the penalty amount. The assessee argued that the imposition of such a heavy penalty would lead to financial hardship for it. The assessee had no justifiable reason for not generating another e-way bill after expiry of the first one. The assessee could only suggest that M/s Hariom Freight Carriers did not have another vehicle available for transportation and it did not inform the assessee about it, which led to transportation of the machine accompanied by an expired e-way bill. The assessee also added that the transaction in question was not a sale/purchase but merely the transport of its capital goods from one place to another and the entire set of circumstances should be taken cognizance of to reduce its penalty.

The Revenue Department, on the other hand, defended the imposition of penalty by clearly and cogently arguing that the assessee had no valid reason for not carrying a valid e-way bill and in the absence of a valid e-way bill, it was completely justified to levy a tax and penalty on the assessee. The Revenue Department added that there was a gap of 10 days between expiry of e-way bill and interception of the transport, and the assessee should have been more vigilant. And if another vehicle was not available, then the assessee should not have agreed to transport the machine without a valid e-way bill. 

The Supreme Court referred to three distinct facts: first, an e-way bill was generated by the assessee, even if goods were transported after it had expired; second, the fact that the machine was being transported for use of the assessee itself, but in another place and there was no sale/purchase involved; third, that the penalty of a huge amount of Rs 54,00,000 was imposed on the assessee. The Court said that while it would not have ordinarily interfered, ‘the ends of justice’ would be served if the penalty amount is reduced by 50%. And concluded its order by clarifying that the order was passed under Article 142 of the Constitution and should not be treated as a precedent. 

Conclusion 

Ordinarily, one would not quibble if a Court intervenes to reduce the penalty imposed on an assessee if it in the opinion of the Court the penalty is unjust or harsh. However, in such scenarios the onerous nature of the penalty should be obvious. In the impugned case, while the penalty amount was certainly on the higher side, it is difficult to see how the assessee was not at fault. It was negligent behaviour on assessee’s part for allowing goods to be transported on an e-way bill that had expired 10 days before the vehicle was intercepted. While the fact that a penalty may impose financial hardship is an acceptable reason for reducing the quantum of penalty, the assessee’s conduct, in my opinion, did not merit the leniency shown by the Supreme Court.     

[1] Vardan Associates Pvt Ltd v Assistant Commissioner of State Tax, Central Section & Ors TS-692-SC-2023-GST. 

Pre-Deposit Under CGST Act Does not Include Penalty and Fee: Kar HC

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The Karnataka High Court in a recent decision[1] interpreted Section 107, CGST Act, 2017 and adopted a literal interpretation of Section 107(6)(b) to hold that it only mentions that the remaining amount of tax in dispute needs to be deposited before filing an appeal excluding fee, penalty and fee. Since the provision does not mention interest, fine or fee, the same cannot be read into the provision to create an onerous burden on the assessee before admitting its appeal. 

Facts and Arguments 

The facts of the case are brief: the petitioner’s appeal before the appellate authority was rejected on the ground that the condition prescribed under Section 107, CGST Act, 2017 had not been fulfilled. Section 107(1) states that any decision or order passed under CGST Act, CGST Act or UTGST Act by an adjudicating authority may be appealed by a person to such Adjudicating Authority as may be prescribed. Section 107(6) states that no appeal shall be filed under sub-section (1), unless the appellant has paid – 

  • in full, such part of the amount of tax, interest, fine, fee and penalty arising from the impugned order, as is admitted by him; and 
  • a sum equal to ten per cent of the remaining amount of tax in dispute arising from the said order, subject to a maximum of twenty-five crore rupees, in relation to which the appeal has been filed: (emphasis added)

The petitioner argued that it was disputing the entire amount confirmed in the confiscation order and under Section 107(6)(b), the tax in dispute would only include the tax component and not the interest, fee and fine. The appellant authority erred in not admitting its appeal by stating that 10% of the entire amount needs to be deposited and not 10% of the tax in dispute. The petitioner approached the Karnataka High Court via a writ seeking appropriate directions. 

The Revenue Department had a meek reply and argued that the petitioner was virtually trying to defeat the provision of appeal under Section 107. The Revenue Department argued that since the petitioner was disputing the entire amount, it was obliged to deposit 10% of the entire amount and not 10% of the tax. 

High Court Adopts Strict Interpretation 

The Karnataka High Court gave three broad reasons for agreeing to the petitioner’s arguments: 

First, the High Court cited Section 107(6) and observed that there was a statutory basis for asserting that the petitioner should only deposit 10% of the disputed tax before filing an appeal. The High Court noted that the interpretation also aligned with the legal principle that penalties are consequent to determination of tax liability. 

Second, it observed that if the statute provides that a thing has to be done in a particular manner, it should be done only in that manner. (para 8) Adopting the principle of strict interpretation of tax statutes, the High Court observed that the terms fine, fee, penalties were not used in Section 107(6)(b), but only the term ‘disputed tax’ was used, and the provision should be interpreted as per the words mentioned in it. The High Court added that the isolation of the term ‘a sum equal to ten per cent of the remaining amount of tax’ reflected legislative design and an intention to limit the pre-deposit requirement to only 10% of the disputed tax amount.  

Third, the High Court noted that the presumption is that the legislature has not made any mistake and the language employed is the determinative factor in ascertaining legislative intent. If there is any omission or defect in the provision, the Courts cannot correct it.

Conclusion The Karnataka High Court in the impugned case adopted a reasonable approach and appreciably adhered to the principle of strict interpretation of tax statutes to rule in favor of the petitioner. The High Court’s decision is clearly and unequivocally supported by the language of the provision. In fact I would argue further and recommend and in similar cases where the appellate authority takes such stance which is obviously and clearly against the written text, Courts should consider levying a penalty or costs for forcing the assessee’s hand to approach the High Court merely to get its appeal admitted.   

[1] M/S Tejas Arecanut Traders v Joint Commissioner of Commercial Taxes TS-686-HCKAR-2023-GST. 

SEZ Unit Not Entitled to Exemption from GST Compensation Cess: Andhra High Court

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In a recent decision[1], the Andhra Pradesh High Court decided two similar writ petitions and held that the SEZ unit was not eligible for exemption from GST Compensation Cess. The High Court noted that there were three specific provisions under the SEZ Act, 2005 which provided a tax exemption and interpreted the said provisions strictly to conclude that the petitioner’s claim for exemption from GST Compensation Cess did not have merit and dismissed both the writ petitions. 

Facts 

The petitioner was a company engaged in the business of ferro alloys manufacturing and was established as a SEZ unit under the SEZ Act, 2005. As per Section 26 of the SEZ Act, the petitioner was exempt from paying any duty, tax or cess under the Customs Act, 1962 and Customs Tariff Act, 1975. The petitioner sought clarification from Director (SEZ) if it was eligible for exemption from GST Compensation Cess on import of coal. The Director replied in the negative and stated that CBEC had issued a Notification No. 64/2017 under which payment of IGST was exempt on import of coal by a SEZ unit, which was otherwise leviable under Section 3 of the Customs Tariff Act, 1975. And under Section 26(1)(a), a SEZ unit is exempt only from duty of custom under the Customs Act, 1962 and Customs Tariff Act, 1975. Thus, there was no exemption from GST Compensation Cess under Section 26(1)(a) of SEZ Act, 2005. The petitioner challenged the aforesaid opinion of the Director (SEZ) as erroneous via writ petition before the Andhra Pradesh High Court.  

The Revenue Department’s arguments before the Andhra Pradesh High Court were like that of Director (SEZ). 

Decision

The Andhra Pradesh High Court spent considerable space in elaborating the nature and rationale of GST Compensation Cess, which wasn’t entirely germane to the issue in the impugned case. The High Court noted the scheme of SEZ Act and observed that tax exemption can be granted under three provisions of the SEZ Act, i.e. Sections 7, 26, and 50. 

Under Section 7 the exemption from taxes and cesses is available subject to certain conditions, but only if the relevant enactments are specified in the First Schedule of the SEZ Act, 2005. The petitioners desisted the claim that they were exempt from GST Compensation Cess under Section 7, since the relevant enactment – GST (Compensation to States) Act, 2017 – was not specified in the First Schedule of the SEZ Act. 

Second, petitioners did not press their claim under Section 50 since the said provision empowered the State Governments to grant tax exemptions, and there is presumably no State level legislation to implement SEZ Act, 2005.

The petitioners claim for exemption from GST Compensation Cess rested entirely on their interpretation of Section 26 of the SEZ Act. The petitioner’s argument for exemption was as follows: petitioner is exempted from custom duties under Section 26(1)(a) of SEZ Act including all the duties enumerated in the Customs Tariff Act, 1975. And since GST Compensation Cess is leviable on imports under Section 3(9) of the Customs Tariff Act, 1975, the petitioner is also exempt from paying it under Section 26(1)(a) of SEZ Act. The Revenue Department counter argued that what was exempt under Section 26(1)(a) was ‘duty of customs’ under Customs Act, 1962 or Customs Tariff Act, 1975. The Department elaborated and correctly so, that GST Compensation Cess owed its origin to the GST (Compensation to States) Act, 2017 and Section 3(9) of the Customs Tariff Act, 1975 only prescribes the rate applicable. Succinctly put, the petitioner cannot be allowed to interpret Section 26(1)(a) to include GST Compensation Cess when the provision only mentioned customs duty.  

The Andhra Pradesh High Court agreed with the Revenue Department, and concluded that: 

when Section 26 of SEZ Act is perused, it is discernible that the word “duty” alone is used in the said section but not the word “cess”. More prominently U/s 26(1)(a), on which much reliance is placed by the petitioners, what is exempted is only duty of customs but not any cess much-less the GST Compensation Cess. Therefore, it is difficult to accept the contention that the exemption of duty of customs under the Customs Act, 1962 or the Customs Tariff Act, 1975 or any other law on import of goods encompasses the Compensation Cess also merely because its rate of tariff is mentioned in Section 3(9) of Customs Tariff Act, 1975. In our considered view, such an argument is of no avail to the petitioners. (para 27)

In adopting a strict interpretation of Section 26(1)(a), the Andhra Pradesh High Court was clear in its conclusion that the term duty could not include within its scope GST Compensation cess. To emphasise that the scope of Section 26(1)(a) was deliberately narrow, the High Court noted that Section 7 of SEZ Act used the term ‘tax, duty or cess’, but Section 26(1)(a) did not include cess within its scope and only mentioned the term duty. And since Section 26(1)(a) only uses the term duty thereby negativing the petitioner’s argument that cess should be read into the provision. 

Conclusion  

The impugned decision is an appropriate example of the Court interpreting the provisions of a tax statute in a strict manner and rightly so. There is a well-established doctrine of interpreting the tax statutes in a strict manner and not read into the provision words and phrases that are not used in the relevant provision. The Andhra Pradesh High Court correctly adopted the said interpretive doctrine to deny petitioner’s claim of exemption from GST Compensation Cess.  

[1] Maithan Alloys Ltd v Union of India TS-677-HCAP-GST. 

Issuance of Share Capital Not Taxable: Delhi High Court cites Precedents

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The Delhi High Court recently pronounced a decision[1] wherein it adhered to the ratio of Vodafone and Nestlecases that investment by a foreign company via shares in its Indian subsidiary company is not income of the latter and not taxable under IT Act, 1961. The High Court relied on the Press Release by the Union of India indicating its approval of the former case and set aside the notices and subsequent orders issued in the impugned case under Section 148, IT Act, 1961. 

Facts 

The Delhi High Court was deciding a bunch of appeals together, and briefly elaborated on facts of one of the cases. The High Court elaborated that the petitioner was foreign company, resident in Italy, and subscribed to shares of its Indian subsidiary company. The petitioner subscribed to 15,00,000 shares at a face value of Rs 10 each and made a foreign remittance of Rs 1,50,00,000. The petitioner stated that since it did not earn any income from any source in India, it did not file any income tax returns in India. The Income Tax Department issued notices under Section 148(b) and passed orders under Section 148(d) of the IT Act, 1961 alleging that income had escaped the assessment. The petitioners challenged the said notice and orders and all the consequent actions taken therein. The petitioners assailed the allegations of money laundering and round tripping arguing that the notices did not mention the name of the company whose shares were bought and the Income Tax Department was merely trying to verify the transaction in question and was unable to substantiate any of its allegations.  

The Income Tax Department justified its actions by referring to risk management strategy. Explanation 1 of Section 148 states that the information with the Assessing Officer which suggests that income chargeable to tax has escaped assessment means any information flagged in accordance with the risk management strategy formulated by CBDT. The petitioners challenged the constitutional validity of the Explanation as well.  

Decision 

The Delhi High Court primarily relied on Vodafone and Nestle decisions to agree with the petitioners that the transactions in questions were capital account transactions that were incapable of generating any income. And in the absence of income, IT Act, 1961 cannot be invoked. To recall briefly, the Vodafone case involved issuance of shares by an Indian subsidiary company to its foreign holding company. The Assessing Officer disagreed on the valuation and opined that the shares should have been valued on the higher side. The difference between the share price arrived at by the companies and the higher price arrived by the AO was treated as ‘income foregone’ by the Indian subsidiary company. Accordingly, transfer pricing adjustment was made to tax the income foregone as a loan granted by the subsidiary company to its holding company. The Bombay High Court decided that the transaction could not be taxed under IT Act, 1961 reasoning that Chapter X of IT Act, 1961 – encompassing transfer pricing provisions – was incorporated to prevent underreporting of profits and overreporting of losses – and not to levy tax on capital receipts when there was no express provision to levy tax on such capital receipts. 

The Delhi High Court in the impugned case expressed complete concurrence with the Bombay High Court and cited the subsequent acceptance of the Bombay High Court’s decision by the Union of India. In the impugned case, the High Court accordingly set aside the notice and orders issued under Section 148, IT Act, 1961. 

Conclusion 

The Delhi High Court’s decision is, apart from the Nestle case, another instance where the Bombay High Court’s approach in the Vodafone case has received approval and rightly so. The High Court correctly cited the relevant precedents to arrive at its conclusion. Finally, though the petitioners challenged the constitutional validity of Explanation 1 to Section 148, the High Court left the question open. The issue may rear its head in another instance where the concerned Court may find it appropriate to pronounce a decision on the same.     

[1] Ms/ Angeltantoni Test Technologies SRL v Assistant Commissioner of Income Tax, Circle Intl Tax TS-804-HC-2023-DEL

Empty Liquor Bottles Are Not Scrap: Madras High Court

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The Madras High Court in a recent decision[1] held that empty liquor bottles do not constitute scrap under Section 206C, IT Act, 1961. Accordingly, it held that the petitioner, M/s Tamil Nadu State Marketing Corporation Ltd (‘TASMAC’), was not obliged to deduct tax at source when collecting licence fee from bar licencees who were authorized to sell empty bottles left behind by customers. 

Facts 

The petitioner, TASMAC, challenged the orders of the Income Tax Department wherein it was treated as an ‘assessee in default’ for failure to deduct tax at source under Section 206C, IT Act, 1961. The Income Tax Department contended that the petitioner should have deducted TCS on the amounts tendered by the successful bar licensee towards tax from sale of empty bottles by treating the sale of bottles as scrap. The petitioner has been given a statutory monopoly to sell – wholesale and retail – Indian Made Foreign Liquor (IMFL), in the State of Tamil Nadu. The petitioner invites tenders for running bars adjacent to its retail vending  liquor shops. It floats tenders to select third-party bar contractors to sell eatables and collect empty bottles from bars adjacent to its retail shops. As per the terms of bar licence, the licencee was allowed monetise empty bottles. The petitioner selected the winning tenders, used to retain 1% of the tender amount as agency commission and remit the remaining 99% to the State Government.  

The Income Tax Department contended that the petitioner fulfilled the conditions of being a seller under Explanation to Section 206C of the IT Act, 1961. The Department elaborated that the petitioner alone had the right over empty bottles as only it could award tenders for their sale and thus the awarding of tenders amounted to it selling scrap to winning bidders through the tendering process. 

The petitioners, on the other hand, contended that they only sold alcohol from distilleries and breweries to their ultimate customers via their retail outlets and they did not sell empty bottles to the customers. The petitioner clarified that the empty liquor bottles were sold by the licencees and they retained the entire consideration. Thus, the contention that the petitioner was seller of empty bottles and licencees the buyer was erroneous.  

High Court’s Interpretation of ‘Manufacture’ and ‘Scrap’ Proves Crucial    

The Madras High Court waxed eloquent and in a verbose manner about the role of petitioner in the State of Tamil Nadu. However, the issue that proved crucial to the fate of the case was the meaning of scrap. The Income Tax Department argued that empty bottles constituted scrap as per Explanation to Section 206C while the petitioner argued otherwise. Explanation (b) to Section 206C states that for the purpose of this Section – 

            Scrap means waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear and other reasons; (emphasis added)

The Income Tax Department argued that the empty bottles were scrap since they were constituted via a mechanical process. The argument was that empty bottles were only generated when the liquor bottles are opened and consumed by the consumers and that the process of opening bottled liquor bottles involved them being subjected to external force beyond their yield strength to access contents of the bottle which was nothing but a mechanical process. (para 49) The petitioner described the above interpretation of the term mechanical process as absurd and unsustainable in law. (para 34)

The Madras High Court observed that while the term ‘manufacture’ had been defined under Section 2(29BA) of IT Act, 1961 the term ‘mechanical working of materials’ in the definition of scrap has not been defined separately. In the absence of a separate definition, the High Court noted that the doctrine of nocitur a sociis should be applied. The said doctrine, in its simplest version, means that when two or more words susceptible of analogous meaning are used together they must be understood in cognate sense as if they take their colour from each other. (paras 90-91) Relying on the above doctrine, the High Court opined that that an activity that does not amount to manufacture but resembles manufacture is the only activity that can be included in the expression ‘mechanical working of material.’ And accordingly, the High Court concluded that:

Mere opening, breaking or uncorking of a liquor bottle by mere twisting the seal in a liquor bottle will not amount to generation of “scrap” from “mechanical working of material” for the purpose of explanation to Section 206C of the Act. 

That apart, the activity of opening or uncorking of the bottle is also not by the petitioner. These are independent and autonomous acts of individual consumers who decides to consume liquor purchased from the Tasmac Shops of the petitioner which have a licensed premises (Bar) adjacent to them under the provisions of the Tamil Nadu Liquor Retail Vending (in Shops and Bars) Rules, 2003. (paras 99 and 100)

The Madras High Court further underlined its observations by stating that the empty water bottles were neither the property of the petitioners or of the licencees, and that the petitioner was merely regulating the sales of empty bottles and the same cannot be equated to sale of bottles by the petitioner. 

Conclusion 

The Madras High Court adopted a prudent approach in the impugned case by relying on and correctly applying the doctrine of nocitur a sociis. The said approach was a reasonable way of rebutting the Income Tax Department’s argument that opening of the liquor bottle amounted to a mechanical process, an interpretation that certainly stretched the limits of acceptable interpretation of expressions used in a tax statute.    

[1] M/s Tamil Nadu State Marketing Corporation Ltd v The Deputy Commissioner of Income Tax TS-798-HC-2023MAD. 

Citing DIN in Communication is Necessary: ITAT, Chandigarh

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Income Tax Appellate Tribunal, Chandigarh (ITAT) in its recent decision[1] followed the decisions pronounced by the Delhi High Court and the Bombay High Court which had held that quoting DIN in the body of communication issued by the Income Tax Department is mandatory by strictly interpreting CBIC’s Circular. ITAT held that the Income Tax Department cannot take recourse to Section 293B, IT Act, 1961 and argue that the error of not quoting the DIN does not affect the validity of the communication. 

Facts 

The brief facts of case are: the assessee filed its return of income and the relevant assessment proceedings were completed. But subsequently after search proceedings in the assessee’s premises were completed, the Assessing Officer (‘AO’) stated that some of assessee’s income had escaped assessment due to assessee’s failure to fully and truly disclose certain materials. AO added additional income and passed a reassessment which was challenged by the assessee. One of the grounds of challenge before ITAT was that the AO did not follow the prescribed procedure, the assessment order was not uploaded on the e-filing portal of the assessee and was communicated via courier without mentioning the DIN. The ITAT noted that the ground relating to not mentioning the DIN was the heart of the matter and adjudicated on it on priority. And ITAT’s ruling on the said issue proved crucial to assessee’s success in the case. 

Arguments 

The arguments on the issue of DIN were simple: the assessee argued that not quoting DIN in the communication issued by the Income Tax Department was contrary to CBIC’s Circular and thus liable to be struck down. The assessee elaborated that DIN was mentioned in the demand notice, but not in the reassessment order. And both the notice and order are required to be issued under different provisions of the statute, are separate communications and thus require their own DIN. In essence, the assessee’s case was that omission to cite DIN in the body of the reassessement order was fatal and in direct contravention of the CBDT’s Circular and thus should be struck down. 

The Income Tax Department tried to justify the non-citation of DIN in the body of assessment on various grounds, two of which included: first, that the demand notice and assessment order were not two separate communications and thus the latter did not require a separate DIN; second, that the omission of DIN can be saved by Section 292B, IT Act, 1961. Section 292B states that any return of income, assessment, notice, summons or other proceedings issued or purported to have been issued under the provisions of IT Act, 1961 shall not be invalid merely by reason of any mistake, defect, or omission if such communication is in substance and effect in conformity with or according to the intent and purpose of IT Act, 1961. 

ITAT’s Decision 

ITAT cited the CBDT Circular and arrived at the prudent conclusion that the CBDT Circular was clear in its mandate that the Income Tax Department shall not issue any communication without generating a DIN and quoting it in the body of the communication. No relaxation is provided in the Circular except when manual communication may be issued with prior approval of the Principal Commissioner. The ITAT also noted that the CBDT Circular clearly provided that in the absence of adherence to the conditions prescribed, it shall be presumed that the communication is invalid and deemed to have never been issued. 

The reassessment order, the ITAT held, was issued contrary to the conditions prescribed in the CBDT Circular, i.e., it did not cite the DIN in its body nor did it adhere to the conditions prescribed for issuing manual communication. Thus, it held the impugned communication to be invalid. 

ITAT did not accept any of the Income Tax Department’s arguments. It held that while the demand notice and the subsequent assessment order were part of the same assessment proceedings and their close connection cannot be denied. However, the demand notice is passed under Section 156, IT Act, 1961 while an assessment order is passed under Section 143 read with Section 147 of the IT Act, 1961. And more importantly it noted that no exception was provided in the CBDT Circular regarding issuance of successive communications to the same assessee, on the same date and regarding the same assessment year. ITAT concluded that: 

Therefore, in the instant case, we find that assessment order and notice of demand are two separate communications qua the assessee and carry separate physical existence and identity, even though issued on the same date by the same Assessing officer pertaining to same assessment year and therefore, necessarily have to carry separate DIN on the body of the said communications. In view of the admitted position that there is no DIN on body of the assessment order (even though there is DIN on body of the notice of demand), the same will continue to be non- compliant with paragraph 2 of the CBDT Circular no. 19/2019 and carry the same consequences in terms of paragraph 4 of the CBDT Circular and will be held as invalid and never been issued. (para 21) 

The Income Department was not allowed to take recourse to Section 292B as the ITAT relied on the relevant precedents to state that the language used in the CBDT Circular did not leave room for any alternate view or leeway and the said Circular is binding on the revenue as per Section 119, IT Act, 1961. The ‘phraseology’ used in paragraph 4 of the CBDT Circular which states that a communication shall be treated as never issued was relied on to conclude that Section 292B was inapplicable to the impugned case. 

Conclusion 

The ITAT’s decisions follow what is now a growing body of jurisprudence on the issue with several High Courts and ITATs deciding that not quoting DIN in the body of communication is fatal to the communication and contrary to CBDT’s Circular. The ITAT in this decision reiterates the earlier decisions with the additional input that demand notices and assessment orders cannot be treated as a single communication and are separate orders requiring their own DIN. As I stated in my recent post on ITAT Chennai’s decision on the same issue, decisions that strictly interpret CBDT’s Circular are welcome and hold them the Income Tax Department to standards that itself has prescribed for its officers.  

[1] M/s SPS Structures Ltd v The DCIT Central Circle-1, Chandigarh TS-791-ITAT-2023. 

CSR Expenses Can be Claimed under Section 80G: ITAT Mumbai

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The ITAT Mumbai in a recent decision[1] clearly enunciated the tax treatment to CSR expenses under the IT Act, 1961. The ITAT held that while Explanation 2 to Section 37 disallows CSR expenses by way of business expenditure, but the import of the provision cannot be imported to CSR contributions which are otherwise eligible for deduction. Section 37 disallows mandatory CSR expenses referred to in Section 135, Companies Act, 2013 and not voluntary CSR expenses. The impugned case dealt with the former.  

Facts 

Principal Commissioner of Income Tax passed an order under Section 263 stating that the Assessing Officer’s assessment order was prejudicial to the interest of the revenue on the ground that assessee’s claim for deduction under Section 80G in respect of CSR expenses was allowed. The Principal Commissioner was of the view that any CSR expenditure incurred by an assessee shall not be deemed to be expenditure incurred for the purpose of business or profession and thus cannot be claimed as an expense even if part of the expense was spent on a trust/society which was otherwise eligible for deduction under Section 80G. The Principal Commissioner restored the matter to the Assessing Officer stating that the assessee’s claim under Section 80G be disallowed on CSR expenses. 

Against the said order, the assessee filed an appeal before the ITAT. 

ITAT’s Decision 

The ITAT’s decision in the impugned case is a good example of harmonious and strict interpretation of the tax statute. The Revenue’s argument was that if the sum satisfies the requirement of a CSR expense under Section 135, Companies Act, 2013 the sum gets exhausted and is no longer available for claiming the benefit under Section 80G of the IT Act, 1961. The ITAT noted that there is no provision in the IT Act, 1961 which satisfies the Revenue’s contention. The ITAT noted Section 80G barred claiming of CSR expenses if they were allocated to two funds i.e., Swach Bharat Fund and Clean Ganga Fund. While a similar restriction was not prescribed towards any other fund listed under Section 80G. This implied that if CSR expenses were allocated to any other fund listed under Section 80G, other than the two aforementioned funds there was no express prohibition of claiming deductions for donations made to other funds. ITAT noted: 

Out of so many entries under section 80G(2) of the Act, only donations in respect of two entries are restricted if such payments were towards the discharge of the CSR. The Legislature could have put a similar embargo in respect of the other entries also, but such a restriction is conspicuously absent for other entries. The irresistible conclusion that would flow from it is that it is not the legislative intention to bar the payments covered by section 80G(2) of the Act which were made pursuant to the CSR, and other than covered by section 80G(2)(iiihk) and (iiihl) of the Act. (para 6)

More pertinently, the ITAT noted that Explanation 2 to Section 37 disallowed deductions of CSR expenses only for the purpose of computing business under Chapter IV-D of IT Act, 1961 and it could not be extended or imported to CSR contributions which were otherwise eligible for deduction under Chapter VI-A of the IT Act, 1961. ITAT elaborated that the legislature intended to deny assessee the benefit under Chapter IVD pertaining to ‘Income under the head Business and Profession’. However, if the assessee is denied the benefit under Chapter VIA while computing ‘Total Taxable Income’, it would result in double disallowance to the assessee contrary to legislative intention. 

Conclusion The ITAT’s observations were founded on two pillars: first, that CSR expenses under Section 80G are only barred for two specific funds and thus donations to other funds can be claimed as expenses; second, the restriction under Explanation 2 to Section 37 was only for computing income under the head of income from business or profession and could not be used as a tool while computing total income under a separate Chapter of the IT Act, 1961. The latter observation relies on treating the two Chapters of IT Act, 1961, i.e., Chapter IVD and Chapter VI-A as independent and self-contained codes. This view is not unimpeachable, though in the impugned case the ITAT adopted a strict interpretation of the provisions and apart from the express disallowance for CSR expenses under Section 80G, it correctly held that assessee was allowed to claim expenses for other donations.    

[1] Societe Generale Securities India Pvt Ltd v PCIT TS-770-ITAT-2023. 

Adjudicating Officer Bound to Consider Assessee’s Defence: Calcutta High Court

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In a recent decision[1], a Division Bench of the Calcutta High Court has held that the adjudicating officer should consider the assessee’s explanation or defence before passing the adjudicating order that imposes penalty under Section 129, CGST Act, 2019. If an adjudicating order is passed in complete ignorance of such explanation, then it would amount to violation of principles of natural justice and the order is liable to be set aside.   

Facts 

The assessee was transporting electrical switches manufactured as per the requirements of the Government of Arunachal Pradesh. The assessee generated e-way bill for the vehicle on which the electrical switches were originally transported. However, the vehicle in question developed a mechanical failure and the goods were shifted to another vehicle. The latter vehicle was detained, and the proper officer levied a penalty on the assessee for violation of Section 129 since the e-way bill in question specified the former vehicle while the goods were found in the latter vehicle bearing a different registration number. The assessee contended before the Calcutta High Court that the breakdown of the vehicle was unanticipated and there was sufficient cause for non-compliance with the statutory provisions. The assessee further argued that the e-way bill issued with the registration number of the first vehicle was valid when the second vehicle was intercepted. And that there was no intention to evade tax.  

The Revenue Department, on the other hand, contended that under Section 129, it is not required to determine the existence of mens rea. And correctly so. The Revenue Department further argued that any of the three parties: consignor, consignee or the transporter should have re-validated the e-way bill after the first vehicle broke down. And in the absence of revalidation of e-way bill after change in vehicle, the imposition of penalty under Section 129 was justifiable.  

Calcutta High Court Decides 

The Calcutta High Court focused on one factual aspect: it noted that the assessee was issued a notice under Section 129, CGST Act, 2017 and the assessee had responded to the said notice. However, the adjudicating authority did not allude to the response of the assessee, did not apply its mind, and proceeded to mechanically levy a penalty on the assessee. The High Court observed that Section 129(3) prescribed the requirement of issuance of notice while Section 129(4) mandated that an adjudication order cannot be passed without providing the assessee an opportunity of being heard. However, the High Court stressed that complying with principles of natural justice cannot be an empty formality and that the adjudicating officer needs to evaluate the defence and its merits offered by the assessee. 

The Calcutta High Court observed that: 

However, absence of requirement to establish mens rea by the department cannot be equated with an automatic imposition of penalty under the scheme of Section 129 of the Act of 2017 in view of the provisions of Section 129 (3) and (4) thereof. A delinquent alleged to have violated a tax regime inviting imposition of penalty, nonetheless may have potential defences which would require consideration by the Adjudicating Authority. (para 37)

Accordingly, the Calcutta High Court set aside the impugned order imposing a penalty under Section 129, CGST Act, 2017 on the ground that it violated the principles of natural justice since it did not speak on the defence offered by the assessee.

Conclusion 

The Calcutta High Court’s decision in the impugned case is a welcome development since it clarifies, in no uncertain terms, the obligation on the officers is to comply with principles of natural justice in a substantive manner and not merely as a formality. The defence or explanation offered by the assessee in response to issuance of notice needs to be engaged with in a more substantive manner and the adjudicating order under Section 129 needs to reflect that the explanation was considered. The imposition of penalties under Section 129 should not be automatic. Further, it is important to bear in mind that the order can still result in imposition of penalty, the High Court has only mandated that the explanation be considered and the penalty not be levied in a mechanical or a pre-determined manner.    

[1] Asian Switchgear Private Limited v State Tax Officer, Bureau of Investigation, North Bengal TS-668-HCCAL-2023-GST. 

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