IT Act 1961

Bombay High Court Orders Refund of TDS: Opines on Illegal Tax

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In a recent judgment[1], the Bombay High Court ordered the Revenue Department to return the tax deposited by the assessee and opined that retaining tax that was not owed by the assessee in the first place would be in contravention of Article 265 of the Constitution.  

Facts 

The petitioner, an Indian company entered a Foreign Technical Collaboration with a US company. Petitioner agreed to pay US company US $ 16,231,000 net of any Indian income tax meaning that if any withholding tax was required to be deducted it would be paid by the petitioner while the US company would be paid the gross amount. The petitioner sought a no objection certificate from the Revenue Department without withholding any tax. The petitioner’s argument was that the services are rendered by the US company outside India, the income embedded in the amount accrues and arises to the US company outside India and is not taxable in India. However, the Revenue Department only issued a no objection certificate provided a 30% withholding tax was deducted. The petitioner paid the said witholding tax under protest and it was the refund of the withholding tax amount that was the subject of the impugned judgment. The petitioner’s case, succinctly put, was that the since the amount paid to US company was held to be non-taxable in India the Revenue Department was obliged to refund the withholding tax. 

The Revenue Department rejected the petitioner’s claim for refund on the ground that the tax was paid on behalf of the US company. 

Petitioner’s Argument 

Petitioner’s argument was that the Revenue Department was incorrect in taking the view that the witholding tax was deposited by it on behalf of the US company. The petitioner argued that the tax was paid by it on from its own pocket over and above the consideration agreed between it and the US company. And the US company has agreed to the same and has issued a no objection certificate that the refund be issued to the petitioner. 

The edifice of petitioner’s argument though was that once the Court had held that the income earned by the US company was not taxable in India, the tax deducted at source by it was not in accordance with the law and the amount so deducted must be paid back to it. 

The Revenue, on the other hand, made several arguments of varying persuasion but was not able to substantiate them convincingly. The Revenue, for example, suggested that the Court’s order that the income earned by US company was not taxable in India could not be used by the petitioner and the refund could be claimed only by the US company. The Revenue also suggested that the US company had claimed credit of witholding tax against tax liabilities. However, the Bombay High Court did not agree to any of the Revenue’s arguments. 

Bombay High Court Decides 

The Bombay High Court cited the order wherein it was held that the US company did not owe any tax in India on the income and concluded that: 

Technically, even though the amount deposited by Petitioner would be called as ‘tax deductible at source’, what Petitioner paid was ‘an ad hoc amount not technically a TDS amount’. Moreover, since it is also confirmed by this Court that the amount paid to DAVY was not chargeable to tax in India, Respondents’ insistence on Petitioner paying that amount was not in accordance with law and the amount so paid over must be refunded to Petitioner. (para 17) 

 The Bombay High Court relied on a few additional aspects: CBDT Circular No. 7 0f 2007 dated 23.10.2007 which stated that where no income has accrued to the non-resident or where income has accrued but no tax is due, then in such cases the amount deposited with the government cannot be said to be ‘tax’. The High Court also cited a line of relevant precedents which have established that the Revenue authorities can only collect tax per law and any tax collected illegally or not due from the taxpayer needs to be refunded else would in contravention of Article 265 of the Constitution. 

Conclusion 

The refund of tax paid out of caution and which is held to be not due from the assessee should not, ideally speaking, be a painful and long drawn process. In the impugned case, the petitioner as part of business transaction paid the tax on behalf of the US company but had to engage a lengthy process to claim refund of a tax which should have been paid much earlier. Single judgment such as in the impugned case lacks the ability to ensure course correction by the Revenue Department, but we live in hope.       

[1] Grasim Industries Ltd., v Assistant Commissioner of Income Tax, Mumbai 2023: BHC-OS:9537-DB. 

Bombay High Court Notes Grant of Licence to Developer is not Grant of Possession under IT Act, 1961

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The Bombay High Court in a recent judgment[1] quashed a notice issued to the assessee under Section 148, IT Act, 1961 on the ground that the assessee failed to disclose its income. The High Court also noted, in an allied issue, that the transfer of licence to a developer under a development agreement did not amount to transfer of a capital asset and was not subject to tax as capital gains.  

Facts 

The assessee’s return of income for the Assessment Year 2013-14 was selected for scrutiny under Section 143(2), IT Act, 1961. During the corresponding Financial Year 2012-13, the assessee, along with other co-owners, had entered into a development agreement with Ashray Developers for developing the land. In response to the query by the Assessing Officer as to why the development agreement should not be treated as ‘transfer of the said land’ and why assessee should not be assessed for capital gains, the assessee stated that the land had not been transferred. The assessee relied on Section 2(47)(v) read with Section 53A of the Transfer of Property Act, 1882 under which transfer of possession of a capital asset in part performance of the contract is treated as transfer of a capital asset exigible to capital gains. The assessee stated that the requirements of the aforestated provisions were not fulfilled in its case.  

The Assessing Officer after receiving the assessee’s reply passed an assessment order under section 143(3) of the IT Act, 1961 without making any addition to the assessee’s income on account of capital gains. However, approximately 5 years later, assessee was issued a notice under Section 148 stating that its income for the Assessment Year 2013-14 had escaped assessment. The assessee’s objection to the notice were disposed by an order which was impugned before the Bombay High Court. 

High Court Decides 

The Bombay High Court noted that the entire reason for issuance of notice for reopening of assessment seems the development agreement which the assesee signed with Ashray developers. And that the Revenue’s objection is regarding assessee’s treatment of the land in question as stock in trade as opposed to capital asset along with the underreporting of the amount paid to the assessee for transferring right of development of land to Ashray Developers. (para 8) The High Court cited a similar decision pronounced by it a few months ago and relying on the same, held that grant of licence to a developer for the purpose of development did not amount to ‘allowing the possession of the land’ as contemplated under Section 53A of the Transfer of Property Act, 1882. Thus, granting of licence for the purpose of development of flats and selling the same could not said to be granting of possession and it would not amount to transfer of a capital asset as envisaged under Section 2(47)(v) of the IT Act, 1961. (para 10)

The Bombay High Court also quashed the reassessment notice issued under Section 148 by relying on the facts of the case. The High Court noted that the assessee had replied to the Assessing Officer’s query as to why consideration received under development agreement should not be taxed under capital gains. And the assessment order was passed after receiving the reply. The High Court relied on the well-established doctrine that if an assessee has replied to a query during assessment proceedings, it follows that the query was subject of consideration by the Assessing Officer while computing the assessment.[2] And no express reference to the query is needed in the assessment order. Thus, since the reply to the specific query on capital gains was considered by the Assessing Officer, the pretext of non-disclosure of income cannot be used to issue a reassessment notice under Section 148. On this ground alone, the High Court said that the notice under Section 148 needs to be quashed and set aside. (para 10) 

Conclusion On both the issues, the Bombay High Court made pertinent observations and correctly rejected the Revenue’s stance. Neither was the issuance of reassessment notice justified nor was the argument that the transfer of development rights amounted to transfer of capital asset. This is especially when identical issues have been decided by Courts with similar results.  

[1] Darshana Anand Damle v Deputy Commissioner of Income Tax, Central Circle 3(4), Mumbai, available at https://taxguru.in/wp-content/uploads/2023/09/Darshana-Anand-Damle-Vs-DCIT-Bombay-High-Court.pdf (Accessed on 28 September 2023).  

[2] Aroni Commercials Ltd v Deputy Commissioner of Income Tax 2(1), Mumbai & Anr 2014 (44) taxmann.com 304 (Bombay). 

Supreme Court Underlines Power of Settlement Commission under IT Act, 1961

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Supreme Court in a recent judgment[1] has interpreted two provisions of IT Act, 1961 – Section 245C and section 245H – to reiterate the scope of jurisdiction and power of Settlement Commission and the necessary conditions that a taxpayer needs to satisfy to invoke its jurisdiction. The Supreme Court also underlined that the power of Settlement Commission to grant immunity to taxpayers should not be ordinarily interfered with by the High Courts. 

Facts and Relevant Issues  

The relevant facts of the case are that the appellant approached Settlement Commission under Section 245C, IT Act, 1961 for determination of its taxable income for assessment years 1994-95 to 1999-2000. The Revenue’s preliminary objection before the Settlement Commission was that the applicant did not fulfil the qualifying criteria under Section 245C since it did not make a full and true disclosure of income before the assessing officer. The Settlement Commission nonetheless assumed jurisdiction and passed an order which the Revenue challenged before the Karnataka High Court. A Single Judge of the High Court allowed the Settlement Commission to decide on all matters relating to maintainability of the application and its merits. 

The Settlement Commission thereafter found the appellant’s application maintainable and granted immunity to the appellant in exercise of its powers under Section 245H, IT Act, 1961. Aggrieved by the Settlement Commission’s order the Revenue approached the Karnataka High Court again and a Single Judge Bench upheld the jurisdiction but found fault with the Settlement Commission’s order granting immunity and remanded the matter back. Against the said order, the appellant approached the Division Bench of the High Court which approved the order of the Single Judge. The two provisions in question: Section 245C and Section 245H were interpreted by the Division Bench of the High Court in the Revenue’s favor. 

As per the Division Bench of the Karnataka High Court, Section 245C, IT Act, 1961 which governs filing of application before the Settlement Commission, the applicant’s application must contain full and true disclosure of his income. While the Settlement Commission under Section 245H, IT Act, 1961 can grant immunity from penalty if two conditions are satisfied: the applicant has co-operated with the Settlement Commission in the proceedings before it and the applicant had made a full and true disclosure of income and the way such income had been derived. The High Court reasoned that the two provisions need to be read harmoniously and not independent of each other and that Section 245C was ‘embedded’ in Section 245H. 

The Revenue supported the Division Bench’s reasoning and judgment before the Supreme Court while the appellant assailed the said judgment inter alia on the ground that the assessing officer’s opinion is not final, Section 245C does not contemplate true and full disclosure before the assessing officer but before the Settlement Commission and that non-disclosure of income before the assessing officer cannot be a ground to prevent the Settlement Commission from exercising its jurisdiction and exercising its immunity granting powers under Section 245C and Section 245H of the IT Act, 1961 respectively.              

Supreme Court Decides  

The Supreme Court engaged with another argument made by the Revenue, i.e., the disclosure made by the appellant before the Settlement Commission must be ‘something apart’ from that discovered by the assessing officer. (para 7.1) As per the Revenue, the assessing officer ‘discovered’ additional income of the appellant through documents and other materials and not on the basis of income tax returns. And that the appellant’s disclosure of income while filing an application under Section 245C must be beyond the discovery of income already made by the assessing officer. The Supreme Court correctly rejected this laboured distinction between disclosure and discovery made by the Revenue and concluded that:

To say that in every case, the material “disclosed” by the assessee before the Commission must be something apart from what was “discovered” by the Assessing Officer, in our view, seems to be an artificial requirement. In every case, there may not even be additional income to offer, apart from what has been discovered by the Assessing Officer. (para 7.2)  

In stating so, the Supreme Court also noted that the appellant’s intent for approaching the Settlement Commission is to settle the dispute and not prolong litigation. And by making a full and complete disclosure of income not disclosed in the return of income, the appellant was trying to settle the case. In other words, the Revenue’s attempt to treat the application ineligible on the basis that income beyond discovery should be disclosed was not in serving the intent to resolve the dispute.  

Conclusion 

The Supreme Court’s conclusion was also influenced by the complexity of facts wherein the appellant in question – Kotak Mahindra Bank – had to make different disclosures to the Reserve Bank of India as per its guidelines, and it cited the Settlement Commission’s order to state that the latter had applied its mind to the facts of the case and thereafter decided to grant immunity under Section 245H, IT Act, 1961. It underlined the power of the Commission under Section 245H and stated that:

The High Court ought not to have sat in appeal as to the sufficiency of the material and particulars placed before the Commission, based on which the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act. (para 9)

In stating the above, the Supreme Court reiterated that the power of Settlement Commission to grant immunity under Section 245H is determined as per facts and circumstances of each case and there is no universal formula for exercise of such power. 

[1] Kotak Mahindra Bank Ltd v Commissioner of Income Tax, Bangalore and Anr TS-556-SC-223. 

Bombay HC Allows Taxpayer to Claim Benefit of DTVVA, 2020

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In a recent judgment[1], the Bombay High Court allowed the taxpayer to claim benefit of Direct Tax Vivad Se Vishwas Act, 2020 (‘DTVVA, 2020’) and held that the interpretation adopted by the Revenue in deciding the ineligibility of the taxpayer was not in accordance with the objective and rationale of the DTVVA, 2020. The High Court relied heavily on Macrotech Developers case[2] to provide weight to its reasoning and conclusion.  

Facts 

The assessment of the taxpayer for Assessment Years 2010-11 and 2011-12 were reopened under Section 147, IT Act, 1961 and after conclusion of the reassessment proceedings the assessing officer passed an order. The assessing officer thereafter raised a demand based on the additional income determined in the reassessment proceedings. While the assessment order and consequent notice for additional demand were pending in appeal, taxpayer was served a notice as to why prosecution should not be initiated against him for intentionally evading tax. And the Revenue subsequently commenced prosecution by filing a complaint before the relevant Chief Metropolitan Magistrate. 

In the interim, DTVVA, 2020 was notified and taxpayer took advantage of it to file returns for the Assessment Years 2010-11 and 2011-12 under it. The Revenue noted that the taxpayer was not entitled to take advantage of the DTVAA, 2020 and settle the appeal since the prosecution in respect of the same had already been instituted. The taxpayer, on the other hand, claimed that under Section 9(a)(ii), DTVVA, 2020 a taxpayer was disentitled to claim the benefit only if the prosecution had been initiated ‘in respect of tax arrear’. And the amount payable by the taxpayer in the impugned case did not amount to a tax arrear.    

High Court Adjudicates

The High Court cited the ratio of Macrotech Developers case where the Bombay High Court had made a categorical observation that a bar on filing declaration is only when the prosecution initiated by the Revenue relates to tax arrears and not for any prosecution in relation to an assessment year per se. The High Court rejected the States’ weak argument that the taxpayer’s wilful evasion of tax would be covered by tax arrear. The High Court relying on the Macrotech Developers case, held that the taxpayer will be able file returns under the DTVVA, 2020. 

The Bombay High Court also examined the definition of tax arrear under Section 2(1)(o) which stated that tax arrear would mean the aggregate amount of disputed tax, interest chargeable or charged on such disputed tax and penalty levied or leviable on such disputed tax or disputed interest or disputed penalty or disputed fee as determined under the provisions of the Act. Based on the definition and ratio of Macrotech Developers case, the High Court concluded that delayed payment cannot amount to tax arrear. As per the High Court: 

the intention of the legislature was that the provisions of DTVSV Act shall not, in view of Section 9(a)(ii), apply in the case of a declarant in whose case a prosecution has been instituted in respect of tax arrear relating to an assessment year on or before the date of filing of declaration. The prosecution has to be in respect of tax arrear which naturally is relatable to an assessment year. (para 18) 

Conclusion

The Bombay High Court’s judgment in the impugned case reiterates the substance and ratio adopted in the Macrotech Developers case, and for good reason. There is little to suggest that the definition of tax arrear under DTVVA, 2020 should include delayed payment by the assessee. And the State’s contention suggesting that tax arrears should be interpreted broadly was not based on any concrete foundation and was correctly rejected by the High Court.  

[1] Pragati Pre Fab India Pvt Ltd v Principal Commissioner of Income Tax, Mumbai TS-552-HC-2023-BOM. 

[2] Macrotech Developers Ltd v Principal Commissioner of Income Tax (2021) 126 taxmann.com 1 (Bombay). 

Bombay HC Allows Petitioner to Claim Benefit of Section 54(F), IT Act, 1961

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In a lucid judgment[1], the Bombay High Court allowed petitioner to claim benefit of Section 54(F), IT Act, 1961 and held that the amendment made to the impugned provision by virtue of Finance Act, 2014 was prospective in nature. 

Facts 

The petitioner in the impugned case claimed benefit of Section 54(F), IT Act, 1961 on the ground that the capital gains from sale of residential property in India had been invested in another residential property in the United States of America. The petitioner’s claim was rejected by the Revenue Department on the ground that addition of the words ‘in India’ by way of amendment vide Finance Act, 2014 was retrospective in nature. And thus, the petitioner cannot claim benefit of Section 54(F) if the capital gains were invested in a residential property outside India. 

The petitioner argued that the only condition that was required to be fulfilled at the time of relevant assessment year was that a new residential house should be purchased de hors any condition about the location of the new house. The petitioner further stated that when a particular provision was capable of more than one meaning, the interpretation that is in favor of the assessee must be adopted. 

The State, on the other hand, argued that the amendment to Section 54(F) was clarificatory in nature and thus has retrospective effect. The State also adopted an innovative argument and stated that the requirement of ‘in India’ was in-built in the scheme of IT Act, 1961 by virtue of Section 5(2), IT Act, 1961, implying that the amendment to Section 54(F) only made express what was implied in the provision. 

Bombay High Court Favors the Petitioner 

The Bombay High Court identified the issue precisely and relied on precedents to clearly state that an amendment should be considered clarificatory only if the pre-amended provision was vague and ambiguous and it was impossible to read the provision unless the amendment was factored into it. Further as per the High Court, the clarification should not expand the scope of the provision. 

Applying the above parameters to the amendment made to Section 54(F), the High Court concluded that the pre-amended Section 54 was not ambiguous, it expressly and specifically excluded the words ‘in India’. Thus, the amendment cannot be stated to be clarificatory in nature. The High Court further noted that interplay of Section 5(2) and Section 54(F) was such that the former was ‘subject to the provisions of this Act …’ and thus the former provision would always operate subject to other provisions of the IT Act, 1961 including Section 54(F). The High Court further reasoned that amended provision did not refer to Section 5(2) or even remotely suggest that it was a clarification and concluded that the amendment to Section 54(F) wherein the words ‘in India’ were added was prospective in nature.

Conclusion 

The Bombay High Court in the impugned judgment was lucid and precise in its identification of the issue and applied the law in a straightforward and reasoned manner. The State’s argument of trying to link Section 5(2) with Section 54(F) was also suitably rebuffed, and rightly so.           

[1] Hemant Dinkar Kandlur v Commissioner of Income Tax TS-545-HC-2023 BOM. 

CA Firm Cannot Invoke MSME Act Against the Income Tax Department

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In a unique case[1], the Delhi High Court adjudicated that a Chartered Accountancy firm (‘CA firm’) cannot invoke the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSME Act’) for fees payable to it for Special Audits conducted by it under Section 142(2A), IT Act, 1961. While the High Court provided a detailed history of the rationale and objective of the MSME Act, its conclusion was based primarily on the fact that the Revenue Department was not a buyer nor was the CA firm a seller of services. As per the High Court, the Special Audit conducted by the CA firm was a statutory duty and not a commercial service thereby invocation of the MSME Act was misplaced. 

Introduction 

The impugned writ petitions resulted from four nominations made by the Income Tax Department of the concerned CA firm for conducting Special Audits of assessees under Section 142(2A), IT Act, 1961. The nomination letters so issued do not typically state the remuneration payable for the Special Audits; the amount payable is determined under the IT Act, 1961 and its relevant Rules. The dispute was not regarding the content of the reports prepared by the CA firm instead the grievance of the CA firm was about the quantum of amount payable for the work done by it in pursuance of the nomination. The Income Tax Department approved an amount that was below the amount claimed by the CA firm.  

To secure the remaining amount, the CA firm initiated two arbitration proceedings against the Income Tax Department, and both were stayed. The impugned writ petitions before the Delhi High Court were because of these arbitration proceedings. The issues before the Delhi High Court were mainly about the applicability of the MSME Act in the payment dispute between the CA firm and the Income Tax Department.  

Delhi High Court Elaborates on Rationale of MSME Act and Section 142(2A), IT Act, 1961

The Delhi High Court reproduced the Statement of Objects of the MSME Act and the provided a brief history of the legislation to emphasize that the various legal options envisaged under the MSME Act are available only to a supplier against a buyer. And a buyer under Section 2(d), MSME Act buyer is someone who buys any goods or receives any service from a supplier for consideration. Simultaneously, under Section 2(n), MSME Act defines a supplier to inter alia include micro or small enterprises and any trust or body supplying goods manufactured by a micro or small enterprise. For the impugned case, it is relevant that the CA firm was validly registered under the MSME Act, and its status under the MSME Act was not under scrutiny. The issue was if the CA firm could invoke the MSME Act against the Income Tax Department.

Under Section 142(2A), IT Act, 1961, the Income Tax Department, through the Commissioner or other high-ranking officer – if the Assessing Officer is of the opinion that the complexity of the case so requires – require an assessee to get their accounts audited from an accountant. The expenses of such audit are determined by the Principal Chief Commissioner or other such high ranking official, whose determination is final under Section 142(2D), IT Act, 1961. The approval of such remuneration may not be the exact amount stated in the invoice by the accountant, it may be lower.  

The crucial question that the High Court had to decide was if the CA firm could qualify as a supplier given the nature of its relationship and function envisaged under Section 142(2A), IT Act, 1961. And the High Court answered in the negative.    

High Court Decides Against the CA Firm 

After a detailed extract of the relevant provisions of the MSME Act and the IT Act, 1961, the Delhi High Court decided against the CA firm and held that the invocation of the MSME Act for the impugned dispute was misplaced.  As per the High Court the special audit conduct by an account under Section 142(2A) was to assist the Assessing Officer in a complex case to arrive at a proper determination of the tax liability. Also, the invoice generated by the accountant for the said work was not always accepted, as the decision of the Principal Chief Commissioner or other authorized official was final. And the said decision on appropriate remuneration was taken based on the nature and complexity of the work performed by the accountant. Based on the above, the High Court concluded that: 

The nature of the Audit and the manner in which remuneration is to be determined would require domain expertise and knowledge which the MSEFC cannot possess. Moreover, the function which is in effect delegated to the Audit firm is one which is exercised under the Income Tax Act and would be purely governed by the said statute. Payment of remuneration is also based on the factors prescribed in the Rules as discussed above. (para 96)

The High Court added that the ‘nature of assessment is not commercial but statutory’ and for assistance of the Assessing Officer and the Income Tax Department. Thus, the latter cannot be termed as a buyer nor the CA firm as a supplier and payment made to the CA firm cannot be termed as consideration since it is for performance a statutory function. (para 97) The limitation of this conclusion by the High Court is that while it is premised on the accountant performing/assisting in a statutory function, it does not clarify if the invocation of MSME Act is misplaced only due to that reason or whether the CA firm does not qualify as a supplier per se for this transaction. The High Court though add later that while the CA firm may be registered under the MSME Act and can invoke it for other purposes, it cannot invoke for assignment emanating from a statute, i.e., IT Act, 1961, and whose remuneration is determined solely by the concerned officials. Thus, for the High Court, the statutory nature of the work performed by the CA firm overpowered its status under the MSME Act.  

Conclusion 

The impugned judgment addresses a unique and novel issue and adopts a conservative approach towards the CA firm’s ability to invoke MSME Act against the Income Tax Department. The central point of the High Court’s conclusion is based on the CA firm performing a statutory function whose remuneration is determined by the statutory bodies, thereby carving the said relationship outside of the purview of a typical commercial transaction. And since as per the Delhi High Court, the MSME Act concerns itself only with commercial transactions, statutory functions cannot be subject of arbitration proceedings under the said Act. The conclusion, while seems correct in the context and facts of the case, may invite a different interpretation if another function or another statute is in question.    

[1] Principal Commissioner of Income Tax v Micro and Small Facilitation Council and Anr (2023) TAXSCAN HC 1067. 

Interplay of Section 153 and Section 144C: Bombay High Court Provides Clarity

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In a recent judgment[1], the Bombay High Court clarified that the period of limitation for passing an assessment order will be governed by Section 153, IT Act, 1961 and not by the time period envisaged under Section 144C, even if the latter was a self-contained code.  

Introduction 

The assessee was a company incorporated in Cayman Islands and headquartered in Dubai. It was engaged in the business of shallow water drilling for clients in the oil and gas industry. The assessee filed regularly filed its income returns under the IT Act, 1961 and the impugned judgment related to the Assessment Year 2004-05.  

Arguments 

The assessee argued that Section 153, IT Act, 1961 was the outermost limit for passing a final assessment order under the IT Act, 1961. The assessee stated that under Section 153(3), IT Act, 1961 read with Notification No. 10/2021, the time to pass the final assessment order in the impugned case 30 September 2021. While the draft assessment order was issued on 28 September 2021 and the final order was passed in October 2021. In view of the Revenue’s inability to pass the final assessment order before the deadline, the proceedings against the assessee should be held to be barred by limitation.   

Revenue, on the other hand, argued that time limit prescribed under Section 153(3) would be in addition to the time prescribed under Section 144C and that the time period prescribed under Section 144C does not get subsumed under Section 153(3). The Revenue made a few additional arguments to support its stance that Section 144C operated independently of Section 153(3). First, the Revenue stated that there was no time limit under Section 144C, the Dispute Resolution Panel (‘DRP’) was required to issue an order within 9 months and the Assessing Officer had one month to pass final assessment based on directions of the DRP. Second, the Revenue argued that Section 144C was a self-contained code and thus acquired primacy over Section 153(3). Third, an extension of the second, the Revenue stated that Section 144C being a special provision should override the general provision, i.e., Section 153(3). 

The Revenue also challenged correctness of the Madras High Court’s decision in Roca Bathroom case[2]where Section 153 was held to be the controlling provision for time limit of passing assessment orders. In the said case, the Madras High Court had held that the time limits prescribed under Section 144C and Section 153 are mutually and that the time limits refer not just to draft orders but also to final assessment orders. The Revenue argued that such an interpretation makes a key machinery provision unworkable and would make several orders passed after disposal of objections of DRP untenable.       

Decision 

The Bombay High Court examined the scheme of Section 144C and noted that Section 144C (13) excluded the application of Section 153. However, the exclusion was specific, i.e., the assessee need not be heard at time of passing of final assessment order and kicked only when the AO had to pass the final assessment order as per the directions of DRP. Otherwise, the High Court observed that the entire proceedings must be completed within the prescribed time provided in Section 153.

The Bombay High Court agreed with the State’s categorization of Section 144C as a self-contained code and that it constituted DRP as an expert body to investigate intricate matters concerning valuation expeditiously. The High Court agreed that while specific timelines have been drawn within the framework of Section 144C to fast-track a special kind of assessment, it ‘cannot be considered to mean that overall time limits prescribed have been given a go by in the process.’ (para 23)

The Bombay High Court further reasoned that where the legislature intended to provide exceptions, they were specifically included and provided in Section 153. It referred to various sub-sections and the Explanation to Section 153 to underline that in certain instances, the limitation period had been extended but that was not the case for Section 144C. In fact, the High Court noted, that if the argument is accepted that the AO is unfettered under Section 144C, it would run counter to the objective of Section 144C wherein time limits have been setup at every step. The High Court observed that ‘it does not stand to reason that proceedings on remand to the AO may be done at leisure sans the imposition of any time limit at all.’ (para 26)

Conclusion

The Bombay High Court rightly concluded that the time limit prescribed under Section 153 will prevail over and above the assessment time limit prescribed under Section 144C. The AO needs to follow the procedure under Section 144C, but the procedure must commence and be concluded within period of 12 months prescribed under Section 153(3). It is an important judgment by the High Court, even though it reiterates the observations made by the Calcutta High Court in the Roca Bathroom case. Especially, it is important to highlight that while the High Court agreed with the categorization of Section 144C as a self-contained code, it did not use that general categorisation to hold that it overrides Section 153 per se, and, in fact, adopted a more nuanced and cogent reading of Section 153.  

[1] Shelf Drilling Ron Tappmeyer Limited v Assistant Commissioner of Income Tax, available at https://taxguru.in/wp-content/uploads/2023/08/Shelf-Drilling-Ron-Tappmeyer-Limited-Vs-ACIT-Bombay-High-Court.pdf

[2] Commissioner of Income Tax v Roca Bathroom Products (P) Ltd (2022) 140 taxmann.com 304 (Madras). 

DTAAs are Relevant for TDS Provisions under IT Act, 1961 

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In a recent judgment[1], the Karnataka High Court reiterated the ratio of Engineering Analysis case, more specifically the applicability of Double Taxation Avoidance Agreements (‘DTAA’) vis-à-vis withholding tax obligations under the IT Act, 1961. 

Introduction 

The assessee was an International Long Distance (‘ILD’) licence holder and was responsible for providing connectivity to calls originating/terminating in India. The assessee entered into agreements with non-resident telecom operators for the aforesaid purposes and was required to pay them inter-connectivity charges. In the impugned case, the centrepiece was an agreement assessee entered into with a Belgium entity which had no permanent establishment in India. Equally, all the equipment and necessary submarine cables were situated outside India. 

Arguments 

The Revenue made several arguments, the core, for the purpose of this post was that the assessee failed to discharge its statutory obligation to withhold tax/deduct TDS before making the payments to the Belgium entity. The Revenue argued that the agreement between the assessee and the Belgium entity did not specify that the income was not taxable in India and if in the opinion of the assessee no tax was deductible it should have approached the Assessing Officer and secured a nil certificate. The Revenue further argued that the income belonged to the payee. 

The assessee, on the other hand, argued that the payments made by the assesee could neither be considered as royalty, fee for technical services or business profits since no part of the business activity was conducted in India. The assessee also resisted Revenue’s attempt to apply the expanded definition of royalty amended via insertion of Explanations to Section 9(1)(vi) and instead argued that the definition of royalty under DTAA needs to be relied on.  

Observations of the High Court 

The High Court engaged with the questions relating to the interplay of DTAAs and withholding tax provisions. It cited the GE Technology case[2] and Engineering Analysis case[3] which had held in the context of Section 195, IT Act, 1961 that DTAAs are relevant while implementing tax deduction provisions. Relying on the said observations, the Karnataka High Court in the impugned case held that the assesee can take the benefit of DTAAs. And that the ITAT – whose order was under appeal – was wrong in stating that DTAA cannot be considered in proceedings under Section 201, IT Act, 1961. 

Another crucial question that the Karnataka High Court answered by relying on Engineering Analysis case was that the amendment to Section 9(1)(vi) by insertion of Explanations did not amend the DTAAs. The amended definition of royalty was thus only applicable if IT Act, 1961 was the relevant legal instrument. The High Court further clarified that in Engineering Analysis case it was observed that Explanation 4 added to Section 9(1)(vi) vide the Finance Act, 2012 was not clarificatory. Explanation 4 expanded the definition of royalty. And Supreme Court had observed that the person under Section 195, IT Act, 1961 cannot be expected to do the impossible, i.e., apply the expanded definition of royalty for assessment years when such definition was not factually in the statute. In view of the same, the High Court answered that the assesee was not obliged to withhold tax since the Assessment Years in question were 2008-09 and 2012-13 while the Explanation 4 expanding the definition of royalty was added to the IT Act, 1961 via Finance Act, 2012. Though this point was moot since the High Court had held that the assessee was entitled the benefits under DTAA (and consequently rely on more favorable/narrow definition of royalty.). 

While the High Court’s above observations were sufficient to clarify that the assessee did not have any obligation to deduct TDS on payments made to its Belgian contractual partners. The High Court also added, in response to an argument made by the assessee, that the Revenue Department did not have the power to bring to tax income arising from an extra-territorial source. The High Court held that: 

It is also not in dispute that the facilities are situated outside India and the agreement is with a Belgium entity which does not have any presence in India. Therefore, the Tax authorities in India shall have no jurisdiction to bring to tax the income arising from extra-territorial source. (para 22)

Conclusion

The Karnataka High Court’s observations are an unqualified endorsement of the ratio in Engineering Analysiscase especially regarding the interplay of TDS provisions and the applicability of DTAAs. The High Court’s observations bring specific clarity to the benefit of DTAAs available during proceedings under Section 201, IT Act, 1961. Whether the impugned case will be the subject of appeal is unknown, but the Revenue does not have a persuasive case against the assessee based on the facts and ratio of the High Courts’ judgment.  

[1] M/s Vodafone Idea Limited v Deputy Director of Income Tax, available at https://www.livelaw.in/high-court/karnataka-high-court/vodafone-idea-deduct-tds-inter-connectivity-usage-bandwidth-charges-karnataka-high-court-233692  

[2] GE India Technology Centre Private Limited v CIT (2010) 327 ITR 456 (SC). 

[3] Engineering Analysis Centre of Excellence Private Limited v CIT (2021) 125 taxmann.com 42 (SC). 

Revenue Mistakes Buying for Selling: Bombay High Court Quashes Order

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Short Note

In a recent judgment[1], the Delhi High Court provided a remedy to the assessee that should have ordinarily not required judicial intervention. The High Court reminded the Revenue that the assessee had purchased and not sold the immovable property, eliminating the question of assessee declaring any capital gains for the transaction. 

The assessee was first issued a notice under Section 133(6), IT Act, 1961 on 25.03.2021 and thereafter under Section 148A(b) on 19.05.2022. In both notices, the assessee was required to explain why the capital gains on sale of immovable property was not disclosed. In reply to each of the notices, the assessee had furnished information that it had not sold the immovable property in question but had purchased it.    

AO passed an order on 28.07.2022 inter alia alleging that the assessee had not disclosed the acquisition of property and thorugh unexplained sources. The Bombay High Court agreed with the assessee that the order suffered from lack of application of mind by the assessee and relevant materials were not considered by the AO before passing the order. 

Adjudicating on the issue, the Bombay High Court concluded that:

Having regard to the aspects noted hereinabove, we are of the view, that if at all, the AO deems it fit to carry out a fresh exercise, it would be from the stage prior to the issuance of notice under Section 148A(b) of the Act. Clearly, the AO has missed the most crucial part of the transaction, that it was a purchase and not a sale transaction. (para 16)

The Bombay High Court set aside the order passed on 28.07.2022 in pursuance of the notice issued on 19.05.2022. Though the High Court did not set aside the notice issued on 19.05.2022, the paragraph cited above does mandate the AO to re-start the proceedings from the stage prior to issuance of such notice.    

The judgment, while not a landmark or major development under IT Act, 1961 indicates the approach of certain assessing officers (‘AO’). To begin with, the Bombay High Court remarked, it is indeed surprising that while the assessee on 22.04.2021 disclosed information to the Revenue  – in response to the first notice issued under Section 133(6) – about purchase of the immovable property, the AO issued a notice on 19.05.2022 under Section 148A(B), IT Act, 1961 alleging that the assessee had sold the property and not disclosed capital gains.  Further, once the AO realised it had mistook purchase for sale, an order was issued against the assessee alleging assessee’s failure to disclose the purchase of property, which also proved false. Instead of acknowledging the initial mistake, the order issued by the AO alleged assessee’s failure to meet various statutory obligations was an attempt to justify the initial issue of notice.  In this case, the Revenue and more specifically the AO in question did not acknowledge its initial mistake, which are unavoidable during the scrutiny process, instead it doubled down on its mistake. Consequently, we have a situation where refusal and disinclination to admit a mistake led to unnecessary litigation and required the Court to remind the Revenue to adopt a more prudent approach in such situations.     

[1] Krishna Diagnostic Private Limited v Income Tax Office Ward 143 Delhi TS-353-HC-2023 (DEL). 

No Whisper in Reasons to Believe: Bombay High Court Quashes Reassessment Notice

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The Bombay High Court in a judgment[1] delivered on 09.06.2023, quashed a reassessment notice issued to the assessee. The High Court inter alia observed that the notice had been issued without any justification and the assessing officer lacked any reason to believe that any income chargeable to tax had escaped assessment. Instead, the reassessment notice was based on the change of opinion of the assessing officer. 

Introduction 

In January 1993, the petitioner filed its return of income for the Assessment Year 1992-1993. During the assessment proceedings, the petitioner responded to queries by the assessing officer. The latter also obtained information from third parties and conducted a special audit of the petitioner to conclude the assessment in September 1995. The assessment order of the petitioner was further revised, which it appealed before the Commissioner of Income Tax in January 1998. While the appeal was pending, the Finance Act, 1998 introduced the Kar Vivad Samadhan Scheme (‘KVSS’) to declog the litigation and give assesses an opportunity to pay certain amounts and settle all their tax issues. 

The petitioner took advantage of the KVSS to settle all tax disputes and issues and paid amounts in full and final settlement of its arrears under the relevant provisions of the Finance Act, 1998. And the petitioner was accordingly issued a certificate. 

On 15.01.2000, the petitioner was issued another notice alleging that certain income for the Assessment Year 1992-93, has escaped assessment. The petitioner was accordingly asked to file a return for the said Assessment Year within a period of 30 days. The petitioner that the notice issued on 15.01.2000 should be quashed.    

Petitioner Challenges Reassessment Notice 

The petitioner assailed the validity of the reassessment notice on various grounds. The petitioner argued that the order under KVSS was passed after considering all the facts, was final for all heads of income, and also provided petitioner immunity from prosecution and imposition of penalty. The petitioner argued that the Revenue could not used the reassessment notice to ‘turn back the clock’. It is important to note that under Section 93(1), Finance Act, 1998 the designated authority was empowered to issue an order determining the tax arrears and sum payable by the taxpayer. And Section 93(3), Finance Act, 1998 stated that:

Every order passed under sub-section (1), determining the sum payable under this Scheme, shall be conclusive as to the matters stated therein and no matter covered by such order shall be reopened in any other proceeding under the direct tax enactment or indirect tax enactment or under any other law for the time being in force. 

The petitioner had a justifiable and legally sound reason to resist the issuance of reassessment order if the rationale of KVSS and its underlying statutory provisions were reasonably interpreted. To further reinforce their case, the petitioner made an alternate argument, i.e., during the assessment proceedings the assessing officer made certain queries from the petitioner which were answered by it. Therefore, it follows that the reply was subject of consideration while finalizing the assessment order and thus re-opening assessment on same subject matter cannot constitute a reason to believe that income has escaped assessment.

The Revenue defended the issuance of notice by arguing that there was misdeclaration by the petitioner. And that Section 93(1), Finance Act, 1998 permitted revival of proceedings in case the declaration by the petitioner under KVSS was found to be false. 

Bombay High Court Quashes Reassessment Notice 

The Bombay High Court rejected the Revenue’s argument and quashed the reassessment notice issued against the petitioner. The High Court cited various reasons for its conclusion. 

First, the High Court noted that it was never the State’s case that the petitioner had mis-declared income and the certificate/form issued to the petitioner under KVSS was never withdrawn. 

Second, the High Court relied on Killick Nixon case[2], where the Supreme Court adjudicated on a similar set of facts and engaged with similar arguments. The Supreme Court in Killick Nixon case had held that the determination by designated authority under Section 90, Finance Act, 1998 was conclusive in respect of tax arrears and sums payable after such determination which shall be considered as full and final settlement of tax arrears. In the said case, the Supreme Court held that the assessing officer had no jurisdiction to reopen the assessment and issue a notice under Section 148, IT Act, 1961 unless it was found that the information furnished by the assessee was false. The High Court held that only on the strength of the Supreme Court’s observations, the petitioner deserved to succeed.  

Third, the High Court also accepted the petitioner’s alternate argument and held that once the petitioner had furnished a detailed reply during the assessment proceedings and same had been considered during the assessment order; the reopening of assessment was based on a mere change of opinion by the assessing officer and not because there was any justification/reason to believe for issuance of the reassessment notice.  

Conclusion

While the impugned case was squarely covered by the Supreme Court’s decision in Killick Nixon case and was sufficient for the petitioner to succeed. The High Court, nonetheless, went a step ahead to engage with the petitioner’s alternative argument to clarify that mere change of opinion cannot constitute a reason to believe. Section 148, IT Act, 1961 empowers an assessing officer to issue a reassessment notice on if there is a reason to believe that income of the assessee has escaped assessment. Courts have in various decisions opined that mere change of opinion cannot amount to a reason to believe, but the Revenue needs frequent reminders of the threshold prescribed. Lastly, the High Court also observed that since the Revenue issued a notice under Section 148, IT Act, 1961 after expiry of four years from end of relevant assessment year:

… the onus is on the Assessing Officer to show that income chargeable to tax has escaped assessment by reason of the failure on the part of assessee to disclose fully and truly all material facts necessary for its assessment for that assessment year. There is not even a whisper in the reasons to believe that there was any such failure on the part of petitioner to disclose fully and truly all material facts necessary for its assessment.(para 17) (emphasis added) 

Accordingly, the Bombay High Court correctly quashed the reassessment notice.  

[1] Citibank N.A. v S.K. Ojha [2023] 151 taxmann.com 234. 

[2] Killick Nixon Ltd v Deputy Commissioner of Income Tax, Mumbai and Ors (2003) 1 SCC 145. 

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