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Mercantile system of accounting should be applied on real income – SC

Accrual system of Accounting is also known as the mercantile system of accounting wherein the transactions are recognized and recorded as and when they take place. Under the accrual accounting method, the revenue is recorded when it is actually earned, and the expenses are reported when they are incurred. The accrual method of accounting is used by most of the entities as it records the past transactions regarding the revenue and expense, but it also predicts the cash receipts and payments expected to arise in the future. Let us refer to the case of B.R. Sridhar (AAR Karnataka), where the issue under consideration was whether mercantile system of accounting can be applied on notional income or not.

Facts of the Case:

On 1922 the Government of Bombay granted a licence under the Indian Electricity Act, 1910 to Lady Sulochana Chinubhai & Company authorising it to generate and supply electricity to the consumers in Godhra area.
The assessee company was the successor of the said licensee.
Up to AY 1963 -64 the assessee-company was assessed on the basis of the accounts maintained according to the mercantile system.
For the subsequent assessment years, the assessee-company deducted Rs. 10,87,828 from the total earnings in respect of sale of electrical energy on the ground that the said amount was not actually recovered by it from the consumers since the consumers had filed a suit against the assessee-company and had obtained interim relief in that behalf.
The disputed amounts were shown by the assessee-company on the liability side in the balance sheet under the head “Disputed increase in rates charged to customers (consumer) carried forward pending settlement of disputes in the District court”
In AY 1968 -69 there was an adjustment of the claim amounting to Rs. 3,54,152 while making the assessment for the AY 1969-70
The income Tax officer included the said amount of Rs. 7,33,676 on the ground that the suit filed against the assessee-company by the consumers was decided in favour of the assessee-company by this court during 1968-69 and the assessee-company had the legal right to recover the said amount and on the basis of the accountancy followed by the assessee-company.
The amount will have to be taxed as the income that has accrued to the asseeeee-company on account of the decision of this court in the assessment year 1969-70.

Proceedings of the Appellate Authorities

The said addition made by the income tax officer was however deleted by the appellate assistant commissioner (appeals) on the view that no legally enforceable claim had accrued to the assessee-company during the previous year by which it could recover the arrears of motive power and electricity for lights and fans from the consumers.
The income tax appellate tribunal (ITAT) on further appeal held that the question of fixing a reasonable return was still an open issue since it was a subject matter of further litigation wherein as a result of the decision of civil judge junior division Godhra the assessee-company was restrained from recovering the charges for motive power from the customers and that the right to receive the increased rated had not crystallized accounting to the Tribunal.
The claim at the increased rates as made by the assessee-company and on the basis of which necessary entries were made in the books, represented only hypothetical income and the impugned amount as brought to tax by the income Tax officer did not represent the income which had accrued to the assessee- company during the relevant previous year.

Observations of the High Court

The HC held that the assessee-company was following the mercantile system of accounting and that even under this system in order to visit the assessee-company with the obligation to pay tax the profit must become actually due no matter when it is received and that income cannot be said to have accrued to an assessee-company if it is based on a mere claim not backed by any legal or contractual right to receive the amount at a subsequent date.
The HC held that in the mercantile system of accounting it was the real income as distinguishes from a hypothetical income which can be brought to tax.

Observations of the Supreme Court (SC)

Under the Act income charged to tax is the income that is received or is deemed to be received in India in the previous year relevant to the year for which assessment is made or on the income that accrues or arises or is deemed to accrue or arise in India during such year.
The computation of such income is to be made in accordance with the method of accounting regularly employed by the assessee.
It may be either the cash system where entries are made on the basis of actual receipts and actual outgoings or disbursements or it may be the mercantile system where entries are made on accrual basis i.e. accrual of the right to receive payment and the accrual of the liability to disburse or pay.
In commissioner of Income tax Bombay city-I v. Messrs. Shoorji Vallabhdas and co.(supra) it was laid down that income tax is a levy on income no doubt the Income Tax act takes into account two points of time all which the liability to tax is attracted viz the accrual of the income or its receipt; but the substance of the matter is the income. if income does not result at all there cannot be a tax even though in book keeping an entry is made about a hypothetical income which does not materialise.

This principle is applicable whether the accounts are maintained on case system or under the mercantile system. If the accounts are maintained under the mercantile system what has to be seen is whether income can be said to have really accrued to the assessee-company
The question whether there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity had to be considers by taking the probability or improbability of realisation in a realistic manner.
If the matter was considered in this light it was not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the income tax officer while passing the assessment orders in respect of the assessment years under consideration.

The Appellate Assistant commissioner was right in deleting the said addition made by the income tax officer and the tribunal had rightly held that the claim at the increased rates as made by the assessee-company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the income tax officer did represent the income which had really accrued to the assessee-company during the relevant previous years.
The High court in SC’s option was in error in upsetting the said view of the ITAT

In conclusion, even though assessee was following mercantile system of accounting, if no real income had accrued to the assessee, then the same could not be charged to tax.

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November, 26
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Is capital gain applicable on share of retiring partner?

Capital gain is the profit one earns on the sale of an asset like stocks, bonds or real estate. It results in capital gain when the selling price of an asset exceeds its purchase price. It is the difference between the selling price (higher) and cost price (lower) of the asset. Capital loss arises when the cost price is higher than the selling price.

The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. Section 45 of Income Tax Act, 1961 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year will be chargeable to income-tax under the head ‘Capital Gains’. Such capital gains will be deemed to be the income of the previous year in which the transfer took place.

However, is capital gain applicable on share of retiring partner? A similar issue was raised in the case of Dr. Vithal V. Kamat Vs JCIT (ITAT Mumbai). Let us refer to the case to understand the same in detail.

Facts of the Case:

The assessee filed return of income declaring total income which was processed under section 143(1).
Thereafter, the case of the assessee was selected under scrutiny and statutory notices under section 143(2) of 142(1) were issued and duly served upon the assessee.
The assessee is an individual and is engaged in the business of hotel consultancy. During the year, the assessee derived income by way of salary from M/s Kamat Hotels India Pvt Ltd in the capacity of a director, income from business and income from other sources.
During the course of assessment proceedings, the AO noticed that assessee had credited a sum of Rs.45,67,74,730 under the head “Exempt income and receipt” in the capital account and accordingly the assessee was called upon to furnish the detail of the said amount.
The assessee had retired from the partnership M/s. Sports Field Construction in terms of deed of admission and retirement.
The assessee got his accounts audited under section 44AB and in the audit report filed along with the return of income, the auditors reported that assessee received upon his retirement from M/s. Sports Field Construction a partnership firm subject to takeover of debts and liabilities under the agreement net amount of Rs.45,67,74,731 which was not taxable and was taken to the capital account as shown in the balance sheet.
The assessee retired from the partnership and relinquished his rights, title and interest in the partnership properties.
The assessee’s account with the partnership was settled on his retirement and a sum of Rs.48.15 crore was received by him by way of retirement in full and final settlement of his account with the firm.
The assessee received Rs.46.65 crore directly and Rs.1.50 crores deposited in Escrow Account.

Observations of the AO

The AO brushed aside the submissions of the assessee and came to the conclusion that the money received by the assessee from the partnership concern after reducing payment to the club members was in consideration of transfer of right, title and interest in the properties and as such held the same to be taxable under section 45(1).
According to the AO the said gain was a long-term capital gain on the ground that the said right was acquired since 1992 and cost of acquisition is taken at nil because assessee was having debit balance of Rs.1,00,04,690 in the firm which showed that the amount introduced by the assessee for acquiring such rights stood withdrawn.
Accordingly, the AO held that the amount received as reduced by the payments due to members of Rs.1,01,86,000 was to be assessed as long-term capital gain.

Observations of Commissioner of Income Tax (Appeals) [CIT(A)]

The CIT(A) after taking into consideration the facts, contentions and submissions as made by the assessee during the course of assessment proceedings and also after considering the ratio laid down by various judicial forums allowed the appeal of the assessee on this issue by holding that the compensation received by the assessee upon retirement from the partnership firm as his share in the assets of the partnership firm was not liable to tax as there was no transfer of assets involved.

Aggrieved with the order of the CIT(A), the Revenue appealed before the ITAT.

Observations of ITAT on decisions by earlier cases

In the case of Addl. CIT vs. Mohanbhai Pamabhai (supra) the Supreme Court affirmed the decision of the Gujarat High Court as reported in (1973) 91 ITR 393 (Guj.) wherein the Bombay High Court had held that any money received by the partner upon retirement from the partnership firm as his share in the assets of the partnership concern was not a consideration for transfer of his interest in the partnership to the continuing partners and there is no transfer within the meaning of section 2(47) of the Act.

Supreme Court in the case of CIT v. Tribhuvandas G. Patel (supra) held that any amount paid to the partner upon his retirement towards his share in assets was not a transfer within the meaning of section 47(ii) and not liable to capital gain.

In the case of CIT v. Lingamallu Raghu Kumar (supra) the Supreme Court held that where the assessee received on retirement from the firm a sum more than what is due towards his capital and profit amount received was not assessable to capital gain as there was no transfer of any asset as contemplated in section 2(47) of the Act.

ITAT found merit in the alternative plea taken by the assessee that if the computational provision of capital gain as provided under section 48 breaks down, then the charging provision as provided under section 45 would also fail as held by the Supreme Court in the case of CIT vs. B.C. Srinivasa Setty (128 ITR 294).

The case of the assessee was squarely covered by the decisions of the Apex Court and in view of the ratio laid down in the above decisions by the Apex Court, ITAT was inclined to dismiss the appeal of the Revenue by upholding the order of CIT(A) on this ground.

In simple words, amount received on retirement from the firm more than what is due towards his capital and profit is not assessable to capital gain as there was no transfer of any asset as per the provisions of the Income Tax Act.

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November, 19
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Can an individual sell two house properties and buy one to claim tax exemption u/s 54?

The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemption/deductions are available under sections 54, 54B, 54D, 54F etc. Section 54 gives relief from capital gains tax to a taxpayer who sells his residential house and from the sale proceeds he acquires another residential house. Following conditions should be satisfied to claim the benefit of section 54:

The benefit of section 54 is available only to an individual or HUF.
The asset transferred should be a long-term capital asset, being a residential house property.
Within 1 year before or 2 years after the date of transfer of old house, the taxpayer should acquire another residential house or should construct a residential house within 3 years from the date of transfer of the old house.
In case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).

Exemption under section 54 will be lower of following:

Amount of capital gains arising on transfer of residential house; or
Amount invested in purchase/construction of new residential house property [including the amount deposited in Capital Gains Deposit Account Scheme].

Consequences if the new house is transferred

If a taxpayer purchases/constructs a house and claims exemption under section 54 and then transfers the new house within 3 years from the date of its acquisition/completion of construction, then the benefit granted under section 54 will be withdrawn.

If the new house is sold before 3 years from the date of its purchase/completion of construction, then at the time of computation of capital gain arising on transfer of the new house, the amount of capital gain claimed as exempt under section 54 will be deducted from the cost of acquisition of the new house.

Can a person sell 2 house properties and buy one to claim exemption under Section 54?

Income Tax allows exemption on the long-term capital gain if you invest in a new residential property subject to certain conditions.
With effect from Assessment Year 2020-21, the Finance Act, 2019 was amended Section 54 to extend the benefit of exemption in respect of investment made in two residential house properties.
The exemption for investment made, by way of purchase or construction, in two residential house properties shall be available if the amount of long term capital gains does not exceed Rs. 2 crores.
If assessee exercises this option, he shall not be entitled to exercise this option again for the same or any other assessment year.

For instance, Mr A sold his residential house on 2^nd January, 2021 for Rs. 10 crores which was purchased by him 10 year ago for Rs. 8 crores. Mr. A bought a new residential house on February 01, 2020 and on March 01, 2021 worth Rs. 1 crore each.

Exemption under section 54 can be claimed in respect of capital gains arising on transfer of capital asset, being long-term residential house property. With effect from Assessment Year 2020-21, a taxpayer has an option to make investment in two residential house properties in India to claim section 54 exemption. This option can be exercised by the taxpayer only once in his lifetime provided the amount of long-term capital gain does not exceed Rs. 2 crores.

The option to claim capital gain exemption under Section 54, in respect of two houses, shall be available as the amount of capital gains does not exceed Rs. 2 crores.

As the original residential house is transferred on 2^nd January, 2021, the new house should be purchased within one year before and two years after the date of transfer. In other words, the new asset purchased between 3^rd January, 2020 and 1^st January, 2023 shall be eligible for exemption under Section 54.

As the first house is purchased on 1^st February, 2020, within 1 year before the date of transfer of original asset, and second house is purchased on March 01, 2021, within 2 years after the date of sale of original residential house, investment in both the new houses are eligible for section 54 exemption.

Amount of exemption

Exemption under section 54 will be lower of following:

Amount of capital gains arising on transfer of residential house; or
Amount invested in purchase/construction of new residential house property [including the amount deposited in Capital Gains Deposit Account Scheme].

In simple words, now one can claim exemption under Section 54 by making investments in 2 residential house properties in India.

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November, 11
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Assessee is eligible for deduction of Rs.1 crore u/s 54EC prior to amendment by Finance Act, 2014 – ITAT

Exemption under section 54EC of the Income Tax Act is available on Capital Gains on sale of any long-term capital asset being land or building or both and invested in NHAI or REC Bonds.

A taxpayer can claim exemption u/s 54EC if all the below conditions are satisfied:

Any assessee can claim exemption u/s 54EC. Therefore, an Individual, HUF, Company, LLP, Firm, etc can claim this exemption.
The asset sold is a Long-Term Capital Asset (LTCA) being Land or Building or Both. The asset is long Term if it has been held for more than 24 months.
Capital Gains are invested within 6 months from the date of transfer.
Investment can be made in the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), or Any Other Bonds notified by the Central Government.
The investment amount cannot be more than Rs. 50 lakhs during the current and succeeding financial year.

The Amount of Exemption under Section 54EC will be least of the following:

The Cost of NHAI/REC Bonds
The Capital Gains on the sale of land or building.

Withdrawal of exemption claimed under section 54EC

When bonds are sold within 5 years from the date of purchase, then the exemption u/s 54EC is withdrawn. The amount of exemption availed will be reduced from the cost of the asset. Capital Gains will be the total sales value minus the cost of the asset.

Prior to Finance Act, 2014, deduction under Section 54EC was restricted to Rs 50 lakhs. The second proviso was inserted to section 54EC(1) by the Finance (No. 2) Act, 2014, w.e.f. 1-4-2015.

According to the said second proviso, the investment made by an assessee in the long-term specified asset, from capital gains arising from transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year should not exceed Rs 50 lakh.

Let us refer to the case of Arun Kumar B M Vs ITO (ITAT Bangalore), where the issue under consideration waswhether investment Rs. 1 crore in two different financial years but within 6 months from the date of transfer of the capital assets, was an allowable deduction under Section 54EC.

Facts of the Case:

The assessee is an individual and employee of M/sTata Consultancy Services Limited.
During the relevant assessment year, the assessee sold a plot on 20.03.2013 for Rs.2,25,00,000 and declared Rs.83,102 as long-term capital gains.
The assessee had claimed the following claim of deductions:
1. deduction u/s 54F by depositing Rs.1,22,00,000 in the capital gains account scheme on 31.07.2013 towards purchase of a new residential property.
2. deduction u/s 54EC by investing Rs.1,00,00,000 in REC Bonds amounting to Rs.50 lakh each on 31.03.2013 and 31.07.2013, respectively, within six months from the date of transfer.
The assessment was completed u/s 143(3). In the said assessment order, the claim of deduction u/s 54EC was restricted to Rs.50 lakh instead of Rs.1 crore claimed by the assessee.
The AO held that the assessee was required to invest Rs.50 lakh in REC Bonds in any financial year. The AO also relied on the amendments made to section 54EC vide Finance Act, 2014 w.e.f. 01.04.2015.
Aggrieved by the order of the AO, the assessee preferred an appeal to the first appellate authority. The CIT(A) confirmed the view of the AO in restricting the claim of deduction u/s 54EC to Rs.50 lakh.
Aggrieved, with the order of the CIT(A), the assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT).

Submissions before the ITAT

The assessee submitted that Rs1 crore was invested within six months from the date of sale of the asset, which had given rise to long term capital gains.
Accordingly, it was submitted that prior to the amendment to section 54EC w.e.f. 01.04.2015, the assessee was entitled to the entire claim of deduction of Rs1 crore.
The Departmental Representative supported the orders passed by the Income Tax Authorities.

Observations of the ITAT

As per the provisions of section 54EC, it was clear that the time limit for investment was6 months from the date of transfer and even if such investment fell under two financial years, the benefit claimed by the assessee could not be denied.
The amendment in Finance (No.2) Act, 2014 related to assessment year 2015-2016 [i.e. insertion of second proviso to section 54EC(1)] and the same applied prospectively for and from assessment year 2015-2016.
A similar view as held by the following judicial pronouncements:
1. Madras High Court in CIT v. C.Jaichander (370 ITR 579)
2. Shri Vivek Jairazbhoy v. DCIT (International Taxation) (ITA No.236/Bang/2012 – order dated 14.12.2012)
3. DCIT v. Borkatte Ganapathi Hegde (ITA No.964/ Bang/2016)

Since the assessee had invested Rs. 1 crore in two different financial years and within 6 months from the date of transfer of the capital assets, the limit of Rs.50 lakh is per financial year. Hence, the assessee was eligible for deduction of Rs.1 crore u/s 54EC.

However, after the amendment,investment made by an assessee during the financial year in which the asset or assets are transferred and in the subsequent financial year does not exceed Rs 50 Lakh.

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November, 10
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Income Tax
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It is responsibility of Tax Officer to prove that black money belongs to Assessee – ITAT

Section 69 is the weapon of the revenue department to detect the tax evasion in respect of clandestine investments made by the assessee and which are not recorded in the books of accounts, if any, maintained by him. Section 69 also gives power to AO to treat the value of investments as the income of the assessee if the assessee does not offer any explanation or the explanation offered by him is not satisfactory.

According to Section 69, where the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.

As per section 69A, where in any Financial Year the assessee is found to be the owner of any money, bullion, jewellery or other valuable articles and such money, bullion, jewellery or valuable articles is not recorded in the books of accounts, if any maintained by him for any source of income and assessee offers no explanation about the nature and source of acquisition of money, bullion, jewellery and other valuable articles or the explanation offered by him is not, in the opinion of the AO, satisfactory, the money and the value of the bullion, jewellery and other valuable articles may be deemed to be the income of the assessee of such financial year.

Let us refer to the case of Mr. Kamal Galani vs ACIT, where the main issue under consideration was whether a holder of foreign currency in a foreign account can be considered as “unaccounted earnings” of a person, who at that time of time was a non-resident.

Brief Facts of the Case:

Assessee is an Indian Citizen and was resident of United Arab Emirates (UAE) from the year 1979-1991 and thereafter working at Vienna, Australia.
The assessee was a non-resident in India up to AY 1999-2000. In the year 2001, the assessee came back to India for settling in India.
Since, then the assessee was filing his return of income in India from AY 2002-03 onwards.
The assessment was reopened u/s 147 by issue of notice u/s 148, according to the information received from the French Government (Base Document) under the convention of avoidance of double taxation and the prevention of Fiscal Evasion with respect to taxes on Income and capital.
The said information received was regarding bank accounts in HSBC Private Bank (Suisse), SA, Geneva, Switzerland held by certain persons in India.
The information received from the French Government revealed that the assessee had opened a bank account in HSBC Bank, Geneva and was also a beneficiary of an account opened with HSBC Bank.
The account was opened under client name “Dipak Varandmal Galani and/or Kamal Varandmal Galani.
The account had a maximum credit balance of USD 9,40,191 in November 2015, a balance of USD 4,97,198 as on December, 2005 and USD 3,17,080 in September, 2006.
Based on said information, the AO reopened the assessment, on the ground that income chargeable to tax had escaped assessment under section 147 due to non-disclosure of existence of bank account in HSBC bank, Geneva.

Order passed by the AO

AO held that that the assessee could open the bank account with HSBC Bank only after making deposit of at least USD 3 Million.
AO held that the assessee had maintained the initial deposit of USD 3 million throughout 1998-99 to 2004-05 relevant to AY’s 1999-00 to 2005-06.
There was accretion to value of investments made in various classes of assets as revealed from the details of such investments.
The funds were deployed in various assets like loans & advances, bonds and fiduciary deposits. The return on investment in 5 months was almost 7.1%.
If the same was annualized the annual return came to 17%.
In the absence of any details forthcoming in this regard, a return was estimated @ 17% annually on investment made by the assessee on USD 3 Million. This worked out to USD Rs. 45.31 per USD.
Therefore, Rs.2,31,08,100 was added in the income of the assessee for the year under consideration being income earned on his investment of USD 3 Million with the HSBC Bank Geneva.

Appeal to CIT(A)

Being aggrieved by the assessment order, the assessee appealed before the CIT(A).
The CIT(A) after considering relevant submissions of the assessee and also taken note of remand report of the AO, rejected legal grounds taken by the assessee challenging validity of reassessment proceedings, on the ground that the AO had initiated and completed reassessment proceedings as per law.
The CIT(A) confirmed the additions of the AO.
Aggrieved with the order of CIT(A), assessee appealed before the ITAT.

Observations of the ITAT on the provisions of law

The AO made additions towards money lying in HSBC bank account, Geneva, on the basis of information from French Government by Government of India in accordance with double taxation avoidance Agreement and opined that the assessee was a beneficial owner of joint account held in the name of his brother.
The AO has also made additions towards return on investments on initial deposits claimed to have made by the assessee to open bank account @17% on the basis of some comparable cases of similar nature.
The AO analysed the facts of the case and concluded that the assessee was the owner of bank account and whatever money lying in bank account was undisclosed income of the assessee for income tax purpose.
It was contention of the assessee before the AO, as well as the CIT(A) that bank account was opened by his brother and his name was included in the bank account for convenience and as a mark of respect to his elder brother, but he was neither owner of the bank account, nor had any interest or right in money lying in bank account.
The AO has made additions towards amount lying in HSBC bank account, on the sole ground that the assessee was owner of the bank account and he was having beneficial interest in money lying in said bank account.
Although, the AO had not specifically referred provisions of section 69/69A, but he had invoked section 69/69A to bring amount lying in HSBC bank account as unexplained money of the assessee.
Therefore, in order to examine, whether money lying in HSBC bank account in the name of the assessee and his brother was unexplained money, which could be taxed u/s 69A, provisions of the said section had to be examined.
A close look at the provisions of section 69A, made it abundantly clear that in order to bring any money or other valuable articles within the ambit of said section, the AO had to prove that the money belonged to the assessee.
Of course, the initial burden was on the assessee to prove that the money or other valuable articles found in his position did not belongs to him.
But, once, the assessee filed necessary evidences to prove that said unexplained money did not belongs to him, then, onus shifted to the revenue to prove that unexplained money belonged to the assessee.
Unless, the AO proved that unexplained money belonged to the person, he could not make any addition in the hands of the assessee.

Observation of the ITAT on whether money found in HSBC bank account belonged to the assessee or his brother?

The assessee right from beginning had made it very clear that the bank account belonged to his brother and he was named only as a second holder for the purpose of nomination and for the sake of convenience.
To justify his claim, the assessee had filed a letter and affidavit from his brother stating that his brother was the owner of the bank account and he had opened a bank account in his capacity as a non-resident.
From the above, it was clear that the bank account was opened by his brother as a first account holder and the assessee was included in the bank account as a second account holder, which was very clear from the base documents relied upon by the AO, where the assessee’s name appeared as a second account holder.
Further, as stated above, the bank account was opened in the year 1998 and at the time of opening bank account, the assessee, as well as his brother both were NRI’s residing outside India.
Further, the base document clearly stated therein that assessee was account holder No.2.
The passport detail of assessee as per the base document clearly showed him to be residing at Vienna (as place of having establishment) with place of birth as Baroda.
The copy of same passport was filed on record and which clearly showed that passport was issued in Vienna and renewed through the Embassy of India since, 1993.

The legal address in base documents was taken from the birth place mentioned in the passport as permanent address, otherwise the address of the assessee in Vienna was also mentioned in passport as taken is present address.
From the above, it was very clear that the bank account belonged to his brother, but not to the assessee and this fact was further strengthened by the letter of the assessee’s brother, where he had categorically accepted the ownership of bank account and money lying in said bank account.
These facts were disregarded by the AO without providing any basis for the same.
The AO had also not disputed that the brother was the account holder and the principle holder of the bank account, but went on to make additions in the hands of the assessee on pure suspicious and surmises by invoking provisions of general clause Act, and further being a second account holder, the assessee was vested with rights and obligations connected with the account and therefore, he was a beneficial owner of the bank account.
However, at the same time, the AO failed to appreciate that the assessee’s brother by virtue of being a first account holder was also vested with some rights and therefore, the same principle / logic even applied to him.
Therefore, ITAT was of the considered view that the conclusion drawn by the AO that assessee was a beneficial owner and his brother was not the beneficial owner on the basis of above arguments was highly incorrect.

Observations of the ITAT on other contentions of the AO

Further, it was the case of the AO that account with HSBC bank, Geneva was opened by resident Indian and black money earned by such resident Indian was stashed abroad without paying taxes/disclosing income in India.
But the fact remained that in this case, the account was opened in 1998, when the assessee himself and his brother permanently resided outside India and had no intention to come to India at that time.
Further, both of them have no source of income in India, during the course of their residence abroad.
Therefore, ITAT was of the view that entire motive as presented by the AO defined all logic of opening of a secret bank account in Geneva, by NRI to stash unaccounted income taxable in India fails.
The AO mechanically disregarding all explanations furnished by the assessee as to the ownership of the account along with the corroborative materials was contrary to the settled position of law, because, once assessee had provided a reasonable explanation about ownership, then the onus was on the AO to establish that account belonged to the assessee.
ITAT was of the view that under these circumstances, the AO had erred in making additions towards amount lying in bank account as unexplained money of the assessee.

Observations of the ITAT on additions made towards return on investments @17% pa on year basis

Once, it was established that bank account did not belonged to assessee and he was not a beneficial owner, then further additions towards estimated return of income on said unexplained money was arbitrary.
The account was opened by the Appellant’s brother with the British Bank of Middle East.
Therefore, the reliance placed by the AO on the account opening information appearing on the website of HSBC Bank could not be relied upon.
Further, the account was opened by the Appellant’s brother in 1998, whereas the website information sought to be relied upon by the AO pertained to accounts sought to be opened at about the time of the assessment proceedings, i.e. around 2013.
Such reliance on website information was impermissible as the same was merely based on fanciful presumptions.
The AO had not brought any material on record to justify the use of account opening information at time of assessments to presume and arrive at the conclusion that the same would be applicable to an account alleged to have been opened by the Appellant 15 years earlier.
It was pointed out that since the assessment was made, the account opening requirements were revised to require an investment or borrowing to be made amounting to an equivalent of USD 5 million.
This indicated that the account opening requirement underwent changes from time to time.
The presumption that the account opening requirements stated at the time of the assessment would have been the same as those prevailing when the account was opened 15 years earlier, was erroneous and could not be sustained.

The AO failed to appreciate that account was opened in The British Bank of Middle East, UAE. The same was subsequently merged / acquired by HSBC Private Bank.
Hence assumption of USD 3 million was unjustified.
Further, the AO failed to appreciate that the appellant was an NRI in the year of opening the account, residing out of India for past more than 20 years.
Further, owning the bank account and the investment by Non-Resident out of sources of funds available abroad was still not taxable in India.
The AO failed to point out any evidence to prove that the funds of USD 3 million invested in opening bank account represented income from undisclosed sources earned/ accrued to appellant in 1998.
The Appellant has no sources of income in India up to 2002 and the same was already assessed on record in assessment proceedings.

In complete absence of any source of taxable income in India, the addition u/s 69 made by AO on account of investment of USD 3 million in opening the bank account with HSBC and consequent estimation of return of investment @ 17% PA as Unexplained Investment was highly unjustified. Accordingly, ITAT directed the AO to delete additions made towards amount lying in bank account. Similarly, addition made towards estimated return of investments @17% on said additions was also directed to be deleted. In conclusion, it is the responsibility of the AO to prove that the black money belongs to the assessee.

If the assessee files necessary evidence to prove that the unexplained money does not belong to him, the onus shifts to the revenue to prove that the unexplained money in fact belongs to the assessee. Unless the AO proves that unexplained money belongs to the person, he cannot make any addition in the hands of the assessee. The fact that the assessee is a joint holder of the bank account does not mean that the money belongs to him if the evidence suggests that the money belongs to the other holder.

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November, 3
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Fantastic or unacceptable explanations are not acceptable for allowance under Section 68 – Goa HC

Bogus basically means something which is counterfeit or fake, something which is not genuine.Section 68 of the Income Tax Act pertained to Cash Credits. According to Section 68, where any sum was found credited in the books of an assessee maintained for any previous year, and the assessee offered no explanation about the nature and source thereof or the explanation offered by him was not, in the opinion of the AO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

Let us refer to the case of The Commissioner of Income Tax Karnataka (Central), Bangalore Versus Sadiq Sheikh and Sadia Sheikh, where the issue under consideration was that whether the Assessing Officer (AO) can make addition u/s 68 where assessee had provided an explanation which was considered as primarily unsatisfactory.

Facts of the Case:

The assessee’s in these appeals are individuals and are spouses of one another.
The assessee’s filed their return of income and thereafter, a search was conducted under Section 132 in the residential premises of the assessee’s.
The Assessing Officer (AO) finalized the assessment by adding an amount of Rs 19,76,00,000 on account of the unaccounted cash receipts and Rs 30,00,000 on account of unexplained investments by the assessee’s.

Appeal to Commissioner of Income Tax (Appeals) [CIT(A)]

The assessee’s, aggrieved by the aforesaid additions to the declared income, appealed the assessment order to the CIT(A), who partly allowed the assessee’s appeal.
From out of the addition of Rs 19.76 crores, addition to the extent of Rs 8,49,49,888 was sustained.
However, the addition to the extent of Rs 11.76 crores was deleted.
The CIT(A), sustained the addition of Rs 30 lakhs on account of unexplained investments by the assessee’s.

Appeal to Income Tax Appellate Tribunal (ITAT)

Both the assessee’s as well as the Revenue appealed to the ITAT against the order of the CIT(A). The ITAT, by its impugned order, allowed the assessee’s appeal and dismissed the appeal instituted by the Revenue. Therefore, the Revenue appealed before the High Court.

Appeals were admitted before the High Court (HC) on the following substantial questions of law:

Whether on the facts and circumstances of the case, the ITAT was correct in law and not perverse in its findings in deleting the amount of Rs.11,26,50,112 made by the AO towards unaccounted cash receipts?
Whether on the facts and circumstances of the case, the ITAT was correct in law and not perverse in its findings deleting the amount of Rs8,49,49,888 made by the AO towards unaccounted cash receipts?

Observations of the High Court (HC) on deletion of Rs 11,26,50,112 towards unaccounted cash receipts

HC answered this against the Revenue and in favour of the assessee’s by accepting the reasoning of the CIT(A).
The CIT(A) had held that no inferences needed to be drawn about this amount simply because there was material on record that this amount was paid to M/s. Good Earth Developers and M/s. Raj Hospitality Pvt Ltd.
Therefore, the nature of such amounts could be very well assessed in the hands of said recipients and need not be assessed in the hands of the assessee’s.
Since, there was material on record, that the amount of Rs 11.26 crores was paid by the assessee’s to the 2 entities and since there was evidence on record that the two entities had admitted to the receipt of the said amount, the CIT(A), was right in taking the view that such amounts were best assessed in the hands of the two entities and not in the hands of the assessee’s.
Accordingly, the first substantial question of law needs was answered against the Revenue and in favour of the assessee’s.

What led to the appeal on the second question of law? (deletion of Rs 8,49,49,888 towards unaccounted cash receipts)

Section 68 provided that where any sum was found credited in the books of assessee maintained for any previous year and the assessee offered no explanation about nature and source thereof or explanation offered by him was not found to be satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year.
The record, in this case, indicated that hardly any explanation was offered by the assessee’s when called upon to explain the transactions leading to the transfer of the huge amount of Rs 8.49 crores into their bank accounts.
Even the source was not indicated by the assessee’s but the same was unearthed by the Revenue by probing the bank accounts and the money trail.
The assessee’s neither cooperated nor were they candid. It was only as the probe deepened, the assessee’s and their alleged sources began to offer some explanations, which, as found by the AO and the CIT(A) were far from satisfactory.
The ITAT, in its impugned order, however accepted the assessee’s explanation relying almost entirely upon the following three circumstances:
That the amount of Rs 8.49 crores was transferred into the assessee’s bank account at Development Credit Bank. The ITAT regarded this as a transfer through a “normal banking channel”.
That this amount of Rs 8.49 crores was transferred from out of the bank accounts of Siraj Sheikh (assessee’s brother/brother in law) and Vijay Kumar Rao (assessee’s close friend) held in the same bank. The ITAT had held that the identity of the source was thus established.
That the identified sources had confirmed having made these payments to the assessee’s.
Based almost entirely upon the aforesaid three circumstances and virtually ignoring all other circumstances emanating from the record, the ITAT, had concluded that the requirement u/s 68 was proved beyond any doubt by the Assessee and that no addition was required.
According to the HC, the ITAT, had erred both on facts as well as in law, in interfering with the well-reasoned analysis reflected in the orders of the AO and CIT(A).

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Reference by HC on older cases

In Oceanic Products Exporting Co. v. CIT (Ker) it was held that after the enactment of Section 68, the burden was placed on the assessee to prove a credit appearing in its books of accounts. That burden had to be discharged with positive material. When it was contended that a person had advanced money or had given a loan, it had to be established that the person was not a man of straw and had the capacity to give the money.

In CIT v. Bikram Singh, it was held that each of the three conditions i.e. identity of the creditor, capacity of the creditor, and genuineness of the transaction had to be fulfilled cumulatively. Merely because the transactions were through banking channels, it cannot be said that such transactions were genuine. When the assessee’s were not in a position to show the credit-worthiness of the creditors, there was no question of accepting the explanation of the assessee’s.

In CIT v. P Mohanakala (SC), it was held that the mere furnishing of particulars or the mere fact of payment by an account payee cheque or mere submissions of a confirmatory letter by the creditor, is, by itself was not enough to shift the onus on the Revenue.

Even in Tania Investments P. Ltd. (supra) upon which reliance was placed by the ITAT, HC had tacitly accepted the legal position that in case of cash credit entries in the books of account, the assessee had to establish identity of the party, capacity and the genuineness of the transaction.

In the said case, the assessee had established the identity and perhaps the genuineness of the transaction. On the aspect of ‘capacity’, HC agreed with the finding of the ITAT in the said case, that books of account of the said party were very much available with the AO. Such books of account itself would indicate the capacity of the party to advance loans. Therefore, without examining such books of account the AO could not have rejected the assessee’s explanation.

In the present matters, the assessee’s quite reluctantly, indicated but not established the identity of the source. In any case, the assessee’s failed to establish the capacity of the source and the genuineness of the transaction. Therefore, it was clear that Tania Investments P. Limited (supra) was quite mechanically relied by the ITAT to accept the assessee’s so-called explanation in these matters. It was possible that the ITAT merely went by the headnotes which, at times, would not accurately represent the ratio of the decision.

Similarly, even Nemi Chand Kothari (supra) rendered by the Guwahati High Court laid down the following propositions, which, supported the case of the Revenue:

Inquiry under Section 68 need not necessarily be confined by the AO to the transactions, which took place between the assessee and his creditor, but that same may be extended to the transactions, which may have taken place between the creditor and his sub-creditor
There could be no doubt that to establish the receipt of cash credit as required under Section 68, the assessee must satisfy 3 important conditions – identity of the creditor, the genuineness of the transaction, and financial capacity of the person giving the cash credit to the assessee, i.e., the creditworthiness of the creditor
Once, the assessee fulfilled the aforesaid two conditions, thereafter there is no further burden upon the assessee to establish the creditworthiness of the sub creditor or the creditor’s creditor. The onus then shifted upon the Revenue

In the present matters, the assessee’s failed to discharge the burden of establishing the creditworthiness of the creditors. The assessee’s miserably failed to establish the genuineness of the transaction between said creditors on one hand and the assessee’s on the other. In fact, there was no reference to any transaction between these apparent sources/creditors and the assessee’s. These apparent sources at one stage chose to call themselves as ‘conduits’ on behalf of M/s. Prasad Properties to the transaction projected in the agreement. If the apparent sources were mere conduits as claimed by them, then the creditor or the source was M/s. Prasad Properties. The burden, therefore, laid upon the assessee’s to establish the capacity of such source i.e. M/s. Prasad Properties and the genuineness of the transactions with M/s. Prasad Properties. The assessee’s had failed miserably on both these aspects.

In Aravali Trading Co. (supra), the firm of creditors who had advanced the amounts to the assessee’s had not only admitted to the making of such advances but further, there was material on record to establish the creditworthiness of such creditors. Such creditors were themselves taxpayers who had been assessed for income tax for the relevant years. In these factual circumstances, the court held that the capacity of creditors had been established and therefore the burden was discharged.

In contrast, in the present matters, neither was the capacity of the said creditors nor M/s. Prasad Properties was established. Also, the genuineness of the transaction, if any, was also far from established.

Observations of the High Court (HC) on deletion of Rs 8,49,49,888 towards unaccounted cash receipts

According to the HC, merely pointing out to a source and the source admitting that it had made the payments was not sufficient to discharge the burden placed on the assessee’s by Section 68.
If this were so, then, it would be sufficient for assessee’s, to simply persuade some credit- less person or entity to own up having made such huge payments and thereby evade payment of property tax on the plea that the Revenue, could always recover the tax from such credit- less source, if possible.
To discharge the burden which Section 68 casted upon assessee’s, at least some plausible explanation was required to be furnished, which had to be backed by some reliable evidence.
Therefore, the assessee’s in the present case, has not discharged the burden which was cast upon it by Section 68.
In this case the assessee’s wanted the authorities to believe that the amount of Rs 8.49 crores credited into their accounts was indeed sourced from the said creditors and M/s. Prasad Properties.
This explanation was purported to be backed by some 4 documents of absolutely dubious origins executed in the year 2006- 07 but on stamp papers of the year 2000-02 for which there is no explanation whatsoever.
M/s. Prasad Properties was allegedly founded on 03.04.2006 and stood dissolved on 29.03.2007 i.e. within a single financial year.
This firm had neither any bank account nor any PAN card. This firm never filed any ITR nor paid any income tax. Even then this firm and its partners including the said creditors claimed to have transacted the business of ‘crores of rupees’.
Above all, explanation furnished on behalf of the assessee involved transportation of cash of Rs 8.50 crores by road from Chennai to Goa (a distance of over 1046 km.).
This wasan unacceptable explanation. Yet, the ITAT, by virtually ignoring all these circumstances and further by applying incorrect legal principles, had accepted such unacceptable explanation put forth, not by the assessee’s themselves but on behalf of the assessee’s.
In these matters, even if HC were to accept that the assessee’s, by pointing out to the creditors and M/s. Prasad Properties had discharged the initial burden cast upon them by Section 68, HC found that the onus which had shifted upon the Revenue, was appreciably discharged by the Revenue.

This was not a case where the Revenue, halted its probe soon after the so-called sources were indicated by the assessee’s.
The Revenue, in these matters, probed further and unearthed quality material to establish that the so-called sources completely lacked the capacity or credit-worthiness to advance such a huge amount of Rs 8.49 crores to the assessee’s.
Further,the Revenue, in these matters, established that there was no genuineness in the transactions sought to be projected on behalf of the assessee’s. Therefore, the Revenue, in these matters, has discharged the onus, assuming that such onus had indeed shifted upon the revenue. Again, this is an aspect, which was ignored by the ITAT.
The finding recorded by the ITAT in these matters was based upon the wholly erroneous view of law and perversity on account of ignoring completely, vital and relevant circumstances emanating from the record.
Therefore, for all the aforesaid reasons, HC answered the second substantial question of law in favour of the Revenue and against theassessee’s. HC reversed the order of ITAT and restored the order made by the CIT(A) in this matter.

In conclusion, Revenue has to examine the source of the credit. Merely pointing out to a source and the source admitting that it has made the payments was not sufficient to discharge the burden placed on the assessee’s under Section 68. The explanation has to be plausible and backed by reliable evidence. If proper explanation is not provided then the unexplained credit shall be added back to the income of the assessee.

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November, 2
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Exemption u/s 54F for investment in house property outside India is available if the property was purchased before 01.04.2015

The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemption/deductions are available under sections 54, 54B, 54D, 54F etc. As per the provisions of these sections, the amount is required to be reinvested in specified investment types before the specified period. However, if the due date of filing income tax returns falls before the expiry of the specified period, the amount of capital gains is required to be invested temporarily in the Capital Gains Account Scheme which can be easily withdrawn at the time of investment in the specified instrument.

What is Section 54F of the Income Tax Act?

The income tax law provides for certain situations where such capital gains will not be subject to tax. Section 54F provides one such exemption. In the case of an assessee being an individual or a HUF, if the capital gain arises from the transfer of any long-term capital asset, not being a residential house (original asset) and the assessee has within a period of 1 year before or 2 years after the date on which the transfer took place purchased, or has within a period of 3 years after that date constructed, one residential house in India (new asset), the capital gain shall be dealt with in accordance with the following provisions of this section:

if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45
if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45

Let us refer to the case of CIT Vs. Vinay Mishra (Karnataka High Court) where the issue under consideration is whether the assessee is entitled to claim exemption u/s 54F of the Income Tax Act in respect of investment made in the house property in USA?

Facts of the Case:

Assessee was a Director of M/s Marketics Technologies (India) Pvt Ltd Bangalore.
The Assessing Officer (AO) denied the exemption with regard to investment made in residential property holding that exemption is not available for investment in property made outside India.
Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], who held that investment should be made in India for claiming the benefit of exemption under Section 54(1).
The appeal was dismissed by CIT(A).
The assessee thereupon filed an appeal before Income Tax Appellate Tribunal (ITAT).
The ITAT held that the assessee entitled to exemption under Section 54F and allowed the appeal preferred by the assessee.
Aggrieved with the order of ITAT, Revenue filed an appeal before the High Court (HC).

Submissions before the High Court (HC) by Revenue

Revenue submitted that the subject matter of the appeal was prior to amendment by Finance Act, 2014 w.e.f. 01.04.2015.
It was submitted that the assessee was not entitled to exemption as the assessee had not fulfilled the condition prescribed under Section 54, as he had not purchased the house in India.
It was also urged that if there was an ambiguity in an exemption provision, like Section 54, the benefit should go in favour of the revenue and not in favour of the assessee.
The amendment incorporated by Finance Act, 2014 w.e.f. 01.04.2015 was clarificatory in nature.

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Submissions before the High Court (HC) by Assessee

In the matter of interpretation of a charging section of a taxation statute, strict rule of interpretation was mandatory and if there were two views possible in the matter of interpretation of charging section, the one favourable to the assessee needs to be applied.
Amendment to Section 54F made by Finance Act, 2014 w.e.f. 01.04.2015 was prospective in nature and hence exemption under Section 54F should be made available to the assessee.

Observations of the High Court (HC) on amendment of Section 54F by the Finance Act, 2014

The dispute pertained to AY 2009-10 which was prior to amendment of Section 54F by the Finance Act, 2014 w.e.f. 01.04.2015.
The issue, which arose for consideration in this appeal was whether an assessee was required to purchase a residential house within India for the purposes of claiming exemption under Section 54F.
Prior to 01.04.2015, as per Section 54F(1), where the capital gain arises from the transfer of any long-term capital asset, not being a residential house, and the assessee has, within 1 year before or 2 years after the date on which the transfer took place purchased, or has within 3 years after that date constructed, a residential house, the capital gain shall be dealt with in accordance with the provisions of this section.
Post 01.04.2015, as per Section 54F(1), where the capital gain arises from the transfer of any long-term capital asset, not being a residential house and the assessee has within 1 year before or 2 years after the date on which the transfer took place purchased, or has within 3 years after that date constructed, one residential house in India, the capital gain shall be dealt within in accordance with the following provisions of this section.
Thus, it is evident, that requirement of construction of a residential house in India in order to claim exemption under Section 54F(1) was incorporated w.e.f. 01.04.2015.

Observations of the High Court (HC) on earlier cases

The Supreme Court in Govind Das vs. ITO (1976) held that unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute so as to take away or impair an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure.
The general rule as stated by Halsbury in Vol. 36 of the Laws of England (3rd Edition) and reiterated in several decisions was that all statutes other than those which were merely declaratory or which related only to matters of procedure or of evidence are prima facie prospective and retrospective operation should not be given to a statute so as to affect, alter or destroy an existing right or create a new liability or obligation unless that effect cannot be avoided without doing violence to the language of the enactment.
If the enactment was expressed in language which was fairly capable of either interpretation, it should be construed as prospective only.
The aforesaid principle was quoted with approval by the Supreme Court in ‘Vatika Township P. Ltd.’, supra.
The CBDT Circular No.1/2015 dated 21.01.2015 stated that the amendments took effect from 1st April, 2015 and will accordingly apply in relation to Assessment year 2015-16 and subsequent Assessment years.

Conclusion by the High Court (HC)

Thus, it was undeniable that residential property, for which investment was made had to be situated in India for the purpose of claiming exemption under Section 54F from Assessment year 2015-16 only and not prior to that period.
In the instant case, the investment in a residential house was made in USA prior to 01.04.2015, whereas, the requirement of making an investment in a residential house, which was incorporated by way of amendment, came into force w.e.f. 01.04.2015.
In the light of aforesaid well settled legal principles as well as the memorandum of objects of Finance Act, 2014, which clearly provided that amendments would take effect from 01.04.2015 and will apply to Assessment year 2015-16 onwards as well as the CBDT’s Circular dated 21.01.2015, it was evident that amendment incorporated in Section 54F(1) of the Act is prospective in nature.

Therefore, assessee was entitled to claim exemption u/s 54F of the Income Tax Act in respect of investment made in the house property in USA as the property was purchased before 01.04.2015. If the property was purchased outside India after 01.04.2015, then the said exemption would not be available.

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October, 22
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Corpus voluntary contributions of Trust are exempt from tax even if they were received prior to registration u/s 12AA

Section 11 and 12 of the Income tax Act provides exemptions on the income charitable and religious organisations. According to Section 11(1)(d), income in the form of voluntary contributions made with a specific direction, that they shall form part of the corpus of the trust or institution, shall be fully exempt.

The condition that at least 85% of the income should be applied during the previous year in which it is earned is not applicable in this case. It is not sufficient that the property is indirectly responsible for the income; it is necessary that the income must directly and substantially arise from the property held under trust. The property must be the effective source from which the income arises.

Registration under Section 12A is a pre-condition and mandatory requirement for claiming those exemptions. According to Section 12A, the provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless the trust or organisation is registered.

By considering the above provisions, is benefit under Section 11 and Section 12 available, merely because an organisation is registered under Section 12AA. Let us refer to the case of Income Tax Officer (Exemption) vs Hosanna Ministries (ITAT), where issue under consideration is whether voluntary contributions received by assessee-society for a specific purpose can be regarded as income under section 2(24)(iia)?

Facts of the Case:

Assessee is a registered society registered under the Societies Registration Act.
The assessee-society has received corpus donations and had shown the same in the balance sheet under the head ‘corpus fund’.
During the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee has received donations/voluntary contributions to the extent of Rs.3,33,11,930.
The AO also noticed that assessee had received contributions but not submitted 12A certificate therefore the amounts received by the assessee as income as per section 2(24)(iia) of the Act were not exempt u/sec. 11(1)(d) of the Act.
According to Section 2(24)(iia), voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes 8 or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in subclause (iv) or sub- clause (v) of clause (23C) of section 10 are taxable under income tax
The assessee has submitted before the AO that the donations/voluntary contributions not chargeable to tax and he and submitted that corpus donations being in the nature of capital receipt were not chargeable to income-tax even where trust is not registered u/sec. 12AA.
The AO however, added the amount received by the assessee to the total income of the assessee.

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Appeal to Commissioner of Income Tax (Appeals) [CIT(A)]

On appeal, CIT(A) held that assessee had received corpus donations which were outside the scope of section 2(24)(iia) and the same could not be brought to tax even though the trust was not registered u/sec. 12AA of the Act.
Therefore, CIT(A) allowed the appeal of the assessee.
Being aggrieved, the Revenue appealed before the Income Tax Appellate Tribunal (ITAT).

Observations of ITAT

ITAT found from the assessment order that, when the assessee had submitted that the donations received are voluntarily for a specific purpose, then the AO ought to have called the assessee for submission of details of donations received.
However, the AO without examining the nature of the donations, simply rejected the explanation of the assessee and added to the total income of the assessee.
In the ITAT’s opinion, the AO was not correct in adding the income.
Also, once the assessee has submitted that the donations were received voluntarily for specific purpose, it was the duty of the AO to examine who is the person who donated and for what purpose he had donated.
All the details had to be examined and thereafter AO had to decide whether the donations were in the nature of corpus donations or income of the assessee, without doing simply rejected the explanation.
On appeal CIT(A) gave a finding that the voluntary contributions received by the assessee for a specific purpose cannot be regarded as income u/sec. 2(24)(iia) of the Act.
ITAT referred to the CIT(A) order and highlighted the following observations made by the CIT(A)

Observations of CIT(A) on meaning of Corpus Donation

Corpus donation comprises two words viz, corpus and donation. Corpus is a Latin Expression, which means a body or structure. It also means a direction to constitute a body or substance. In common parlance this term is understood as capital sum. This also includes endowment.
The expression endowment means bequest, gift. It is an act of endowing which is a capital sum provided and provides for a permanent income. Endowment also means property or money bestowed as permanent fund.
In terms of charity, the corpus symbolizes funds to retain its character as a Principal amount.
It also denotes the funds earmarked for a specific purpose.
The intention of the corpus is that, the funds should not be depleted and it retains its original character of the fund i.e., principal.
Further, the expression corpus is often used from the point of the Donor symbolizing his directions to use the money in a manner as per his wishes. This in other words means that donor gives direction to the Donee for what purpose and how it is to be used.

Observations of CIT(A) on Corpus Donation under Income Tax Act

The Direct Tax Laws (Amendment) Act 1989 w.e.f. 1.4.89 had revamped corpus donation. The amendment carried out is that, the word voluntary contribution was brought under section 2(24)(iia).
The effect of amendment was that every voluntary contribution took the character of income.
Corpus donation was a Voluntary contribution and therefore, constituted income under section 2(24)(iia).
Another amendment was made in section 11(1)(d) by the same Act. The effect of the amendment is that deduction will be allowed under section 11(1)(d) in respect of Voluntary contribution with specific direction that they shall form part of the corpus of the trust or institutions.
Prior to this amendment, voluntary contribution with a specific direction, which was also known as corpus donation was never considered as an income and was totally excluded from the purview of income.

Observations of CIT(A) on whether such corpus donation is taxable as Income or not

The question arises whether such corpus donation is taxable as Income or not, even in the case in which the trust is not registered u/s.12AA because for those trusts which are registered u/s.12AA, exemption to corpus donation has been provided as per provisions of section 11(1)(d).
For a trust to which registration u/s 12AA has not been provided, its tax liability is required to be decided with reference to the scheme of the Income Tax Act as held in the case of M/s. Pentafour Software Employees Welfare Foundation and further in the case of Smt Basantidevi and Shri Chakan Lala Garg Education Trust, by Delhi High Court.
In both the cases, it was held that corpus donation being in the nature of capital receipt are not chargeable to income tax.
As far as section 2(24)(iia) is concerned, this section has to be read in the context of the introduction of the present section 12.
Section 2(24)(iia) was inserted w.e.f. 1-04-1973 simultaneously with the present section 12. Section 12 made it clear by the words appearing in parenthesis that contributions made with a specific direction that they should form a part of the corpus of the trust or institution shoul not be considered as income of the trust.

Reference to older cases by CIT(A)

In the case of RB. Shriram Religious and charitable Trust v. CIT Bombay High Court held that even ignoring the amendments to section 12, which meant that even before the words appearing to parenthesis in the present section 12, it cannot be held that voluntary contributions specifically received towards the corpus of the trust may be brought to tax.
The aforesaid decision was followed by the Bombay High Court in the case of Trustees of Kasturbai Scindia Commission Trust.
The ITAT, Chennai in Indian Society of Anaesthesiologists v. ITO held that specific funds created for fulfilling specific objectives for which these separate funds are constituted remain as capital funds as the funds can be used for fulfilling specific objectives for which these funds are constituted and hence to be treated as corpus funds and to be excluded from computation of Income.
The ITAT, Bangalore in ITO v. Vokkaligara Sangha held that voluntary contributions received for a specific purposes cannot be regarded as income u/s 2(24)(iia) of the Act since they were capital receipts being corpus fund and tied up grants for specific purposes.

Observations of CIT(A) on current case

The AO had not disputed the nature of funds received or purpose of funds utilized by the appellant society as to whether they were of Corpus and Capital Receipts or not or whether they were utilized for the specified purposes.
AO had only treated such donations/voluntary contributions received by the appellant society as liable to tax during the period prior to the Registration of the appellant society u/s.12AA of the Income-tax Act, 1961.
The appellant got registered its Society u/s.12AA of the Income-tax Act, 1961 and the Order granting Registration u/s.12AA was passed by the CIT (Exemptions) and copy of the same was filed by the appellant during the course of appellate proceedings.
Reliance was also placed on the decision of ITAT in the case of ITO (Exemptions) Vs. Serum Institute of India Research Foundation wherein it was held that corpus specific voluntary contribution being in nature of capital receipt, were outside the scope of income under section 2(24)(iia) and thus the same could not be brought to tax even in case of trust not registered u/s. 12A/12AA.
In view of the above and as the appellant got registered u/s 12AA and as the donations/voluntary contributions received of Rs. 3,33,11,930 by the appellant society were of Corpus and Capital nature, to be treated as exempt from tax liability, as the principles relating to judicial discipline assume significance and the priority.
Accordingly, following the ratios of the judicial pronouncements mentioned supra, it was treated that the donations/voluntary contributions received by the appellant society were outside the taxations, even for the period prior to its registration u/sec. 12AA.
Therefore, the AO was directed to delete the disallowance/addition made in this regard.

In view of the above, ITAT found no reason to interfere with the order passed by the CIT(A) and dismissed the appeal filed by the Revenue. Therefore, voluntary contributions received by assessee-society for a specific purpose cannot be regarded as income under section 2(24)(iia) and hence, could not be brought to tax even in case of trust not registered under section 12AA.

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October, 19
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Income Tax
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No TDS u/s 194J to be deducted on roaming charges paid – ITAT

TDS or Tax Deducted at Source is income tax reduced from the money paid at the time of making specified payments such as rent, commission, professional fees, salary, interest etc. by the persons making such payments. Any person making specified payments mentioned under the Income Tax Act are required to deduct TDS at the time of making such specified payments. The deduction of tax at source or TDS has been very helpful in the collection of taxes in the country by targeting the source of income itself.

Section 194J of the Income Tax Act, 1961 relates to the TDS deduction on fees for professional or technical services. Every person making payment of the following notified services is required to deduct TDS under section 194J of the Income Tax Act, 1961:

Fees for professional services
Fees for technical services
Royalty
Remuneration / fees / commission paid to director of the company (excluding salary)
Fees paid for not carrying out any activity in relation to any business or profession
Fees paid for not sharing any technical know-how, copyright, trade mark, patent or any other business or commercial rights of the same nature.

TDS rate under section 194J for FY 2020-21

Nature of Payment	Rate Applicable from 01/04/2020 to 13/05/2020	Rate Applicable from 14/05/2020 to 31/03/2021
Professional Fees	10%	7.5%
Technical Fees (w.e.f. 01.04.2020)	2%	1.5%
Royalty towards the sale or distribution or exhibition of cinematographic films	2%	1.5%
Director’s fees	10%	7.5%
Fees paid for not carrying out any activity in relation to any business or profession	10%	7.5%
Fees paid for not sharing any technical know-how, copyright, trade mark, patent or any other business or commercial rights of the same nature	10%	7.5%

Consequences of Failure to Deduct or Pay TDS is covered under Section 201 of the Income Tax Act. Section 201(1) of Income Tax Act expressly states that any person liable to deduct TDS on the income distributed, makes default in the deduction and/or payment of TDS, shall be treated “assessee in default” and penalty u/s 221 of Income Tax Act shall be payable by such assessee. Further according to section 201(1A), if any such person, principal officer or company does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest:

at 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted; and
at 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid,

Let us refer to the case of DCIT – TDS Vs Reliance Communications Ltd. (ITAT Mumbai), where the primary issue in the appeal was whether the roaming charges paid by the assessee to the other telecom service provider (Reliance Telecom Ltd.) were in the nature of ‘Fee for technical Services’ and hence, liable for deduction of tax at source under section 194J of the Act.

Facts of the Case:

The assessee/respondent is engaged in providing telecommunication services to its subscribers across the country.
For providing uninterrupted services to its subscribers, the assessee pays roaming charges/interconnect usage charges to other telecom operators.
In the present case the Assistant Commissioner of Income Tax (TDS) (ACIT-TDS) held that roaming/interconnect usage charges paid by the assessee to Reliance Telecom Ltd were in the nature of ‘fee for technical services’, therefore, the assessee was required to deduct tax at source under section 194J, on such payments.
Since, the assessee did not deduct tax at source on the said payments the assessee was held as ‘assessee in default’.
Consequently, the ACIT-TDS invoked the provisions of section 201(1) r.w.s. 201(1A).
The ACIT-TDS imposed tax liability of Rs.4,24,07,479 on account of withholding tax under section 194J and interest of Rs.57,05,216 under section 201(1A).
Aggrieved against the aforesaid order the assessee filed appeal before CIT(A).

Appeal before Commissioner of Income Tax (Appeals) [CIT(A)]

The CIT(A) concluded that the payment made by the assessee/respondent to other telecom company for utilization of network cannot be termed as ‘Technical Services’ as access to the network during the calls is fully automatic and does not require any human intervention.
Hence, such payments cannot be termed as ‘fee for technical services’.
Since, no Technical Services are involved the payments for such services cannot be termed as ‘Fee for Technical Services’.
Consequently, no TDS was deductible on such payments.
Against the findings of CIT(A), the Revenue appealed before the Income Tax Appellate Tribunal (ITAT).

Reference by ITAT on older cases

The primary issue in the appeal was whether the roaming charges paid by the assessee to the other telecom service provider (Reliance Telecom Ltd.) were in the nature of ‘Fee for technical Services’ and hence, liable for TDS under section 194J.
The issue was considered by the Supreme Court of India in the case of CIT vs. Bharti Cellular Ltd. (supra).
The Apex Court restored the issue to the AO for reconsideration after seeking the support of technical expert to ascertain if any human intervention is required in providing interconnect/roaming services.
Karnataka High Court in the case of CIT vs. Vodafone South Ltd held that payment made by a mobile service provider to another mobile service provider for utilization of roaming mobile date and connectivity cannot be termed as technical service and therefore, no TDS was deductible u/s194J of the Act.
The High Court upholding the order of ITAT observed that the ITAT had examined the facts and came to the conclusion that payment made for roaming connectivity cannot be termed as “technical services”.

Conclusion by ITAT in present case

Thus, in the light of the decisions discussed above, ITAT held that the roaming charges paid by the assessee were not in the nature of ‘fee for technical services’.
Since ITAT held that the roaming charges paid by the assessee to the other telecom service provider were not in the nature of ‘fee for technical services’ no TDS under section 194J was liable to be deducted.
Once there was no liability for deducting tax at source, question of charging interest under section 201(1A) did not arise.

Therefore, in conclusion, roaming charges paid are not in the nature of ‘fee for technical services’ on which TDS is liable to be deducted under Section 194J and if no TDS is liable to be deducted then tax liability and interest under section 201 and 201(1A) does not arise.

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October, 17
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Income Tax
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Assessment u/s 147 can be opened if cash is deposited in Bank but not disclosed in the ITR

Section 147 of the Income Tax Act deals with provisions of “income escaping assessment”. The grounds or reasons which led to formation of the belief that income chargeable to tax has escaped assessment must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts.

The expression “reason to believe” does not mean a purely subjective satisfaction on the part of the Income Tax Officer. The reason must be held in good faith. It cannot merely be a pretence. Any assessee could receive a notice under section 148 in case the AO believes that such individual’s income chargeable to tax might have escaped assessment. Let us refer to the case of Pillu Ram Sahal v. ITO (ITAT Jaipur) where the issue under consideration was whether the re-opening of assessement u/s 147 was justified in law or not?

Facts of the Case on opening of assessment under Section 147:

The AO on the basis of information received noted that the assessee (an individual) had deposited cash of Rs 14 lakhs in the bank account with Bank of Baroda.
The AO had initiated the proceedings u/s 147 by issuing notice u/s 148.
The AO completed the assessment u/s 143(3) read with section 147 whereby the addition of Rs. 15.50 lakhs were made on account of unexplained deposit in the bank account.
The assessee challenged the action of the AO including the validity of reopening of assessment before the CIT(A) but could not succeed.

Observations of ITAT on opening of assessment under Section 147

The AO had recorded the reasons for reopening of the assessment as under:
1. The assessee had deposited cash of Rs. 14,00,000 in Bank of Baroda during the F.Y. but no return of income was filed for the AY 2010-11.
2. Thus, this transaction was not verifiable and the assessee did not disclose fully and truly all material facts necessary for assessment.
3. Therefore, AO had reason to believe that income of Rs. 14,00,000 has escaped assessment.
Thus, the very fact of deposit of cash of Rs 14 lakhs and not filing of the return of income by the assessee itself constituted a tangible material to form the belief that income assessable to tax had escaped assessment.
ITAT further noted that JCIT after considering the reasons also recommended the reasons recorded by the AO for issuing notice u/s 148.
Based on these facts, the Pr.CIT finally granted the approval.
Therefore, it was not a case where the prudent person could have taken another view or opinion.
Accordingly, ITAT did not find any error or illegality in the impugned order of the CIT(A) upholding the validity of reopening of the assessment.

The assessee had appealed before the ITAT against the CIT(A) in confirming the actions of the AO in making an addition of Rs. 15,50,000 on account of alleged unexplained cash u/s 68.

What is Section 68?

Section 68 of the Income Tax Act pertains to cash credit. According to Section 68, where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

However, where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless:

the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited &
such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory.

What is Section 69 in Income Tax?

Section 69 is the weapon of the revenue department to detect the tax evasion in respect of clandestine investments made by the assessee & naturally which are not recorded in the books of accounts, if any, maintained by him. Section 69 also gives power to AO to treat the value of investments as the income of the assessee if the assessee does not offer any explanation or the explanation offered by him is not satisfactory.

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Facts of the Case on addition of Rs. 15.50 lakhs made u/s 68

The AO made an addition on account of unexplained cash deposited in the bank account of the assessee.
The assessee contended before the AO as well as CIT(A) that this amount was deposited out of past savings.
The assessee further explained that it was his life-long savings, required by his son for business purposes.
Therefore, due to compulsion of the wife of the assessee, the assessee had deposited this amount in the bank account which was utilized by his son for his business purposes.
The AO found that the assessee has not substantiated the explanation of source of deposit by any documentary evidence. The CIT(A) has confirmed the addition made by the AO.

Observations of ITAT

According to the ITAT, the facts were not in dispute that the assessee has deposited the cash in the bank account to the tune of Rs. 14 lakhs with Bank of Baroda.
The assessee explained before the AO that the deposits of the cash were made out of past savings of the assessee.
The assessee produced cash book prepared by the assessee to show that this was an opening balance.
However, since the assessee was not assessed to tax and there was no supporting evidence for having the opening credit balance of Rs. 15.75 lakhs, therefore, the AO after allowing the benefit of Rs. 25,000 had made the addition of remaining amount of Rs.15.50 lakhs.
Though the said addition made by the AO was based on cash book and over and above the deposit of Rs. 14 lakhs were not justified when cash book itself was rejected by the AO, however, the question remained regarding the source of deposit of Rs. 14.00 lakhs.
ITAT found that except the cash book prepared by the assessee in support of the source of deposit, no other material was produced by the assessee regarding the past savings of the assessee.
Therefore, the explanation of the assessee regarding the bank deposit in the bank was not satisfactory due to the failure on the part of the assessee to explain the source/deposits.
The addition made by the AO was based on the facts in the case of CIT vs Smt. P.K. Noorjahan (supra).
It was pertinent to note that in the said case it was found that the assessee was even not capable of earning income due to her age at that point of time.
The assessee also explained the source of investment as income from the properties which were left by her mother’s first husband.
Though the said explanation was not found to be satisfactory, however, by considering the surrounding circumstances that the assessee being a Muslim lady of 20 years was not having any source of income, therefore, she was not capable of earning any income.
The addition made by the AO was deleted. The said decision was based on peculiar facts.

In the case in hand, the assessee never explained before the AO that the said amount belongs to his son but right from beginning the assessee was claiming that this deposit is sourced by his past savings.
Once the assessee was capable of earning income then failure to explain the source of deposit in the bank would attract the provisions of Section 69.
Hence, in the facts and circumstances of the case, plea of the assessee could not be accepted that the disclosed source of income of the assessee was not sufficient for making the deposit in the bank.
If the said amount of deposit could not be assessed as income of the assessee then the very object and purpose of provisions of Section 69 of the Act was defeated.
Section 69 contemplated that if the assessee was found to have invested money without explaining the source of the same then it would be deemed as unexplained investment.
Therefore, the reasons for failure of the assessee to explain the source of deposit in the bank account as not having sufficient disclosed source of income could not be a ground for immunity from attracting the provisions of Section 69 and consequential deletion of such addition made by the AO.

In conclusion, reopening of assessment u/s 147 where the AO has reason to believe is justified and failure to explain the source of deposit of investment would attract provisions of Section 69 liable for addition.

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October, 15
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Income Tax
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Income Tax ITAT

Mercantile system of accounting should be applied on real income – SC

Facts of the Case:

Proceedings of the Appellate Authorities

Observations of the High Court

Observations of the Supreme Court (SC)

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Is capital gain applicable on share of retiring partner?

Facts of the Case:

Observations of the AO

Observations of Commissioner of Income Tax (Appeals) [CIT(A)]

Observations of ITAT on decisions by earlier cases

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Can an individual sell two house properties and buy one to claim tax exemption u/s 54?

Can a person sell 2 house properties and buy one to claim exemption under Section 54?

Amount of exemption

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Assessee is eligible for deduction of Rs.1 crore u/s 54EC prior to amendment by Finance Act, 2014 – ITAT

Facts of the Case:

Submissions before the ITAT

Observations of the ITAT

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It is responsibility of Tax Officer to prove that black money belongs to Assessee – ITAT

Brief Facts of the Case:

Order passed by the AO

Appeal to CIT(A)

Observations of the ITAT on the provisions of law

Observation of the ITAT on whether money found in HSBC bank account belonged to the assessee or his brother?

Observations of the ITAT on other contentions of the AO

Observations of the ITAT on additions made towards return on investments @17% pa on year basis

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Fantastic or unacceptable explanations are not acceptable for allowance under Section 68 – Goa HC

Facts of the Case:

Appeal to Commissioner of Income Tax (Appeals) [CIT(A)]

Appeal to Income Tax Appellate Tribunal (ITAT)

Appeals were admitted before the High Court (HC) on the following substantial questions of law:

Observations of the High Court (HC) on deletion of Rs 11,26,50,112 towards unaccounted cash receipts

What led to the appeal on the second question of law? (deletion of Rs 8,49,49,888 towards unaccounted cash receipts)

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Reference by HC on older cases

Observations of the High Court (HC) on deletion of Rs 8,49,49,888 towards unaccounted cash receipts

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Exemption u/s 54F for investment in house property outside India is available if the property was purchased before 01.04.2015

What is Section 54F of the Income Tax Act?

Facts of the Case:

Submissions before the High Court (HC) by Revenue

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Submissions before the High Court (HC) by Assessee

Observations of the High Court (HC) on amendment of Section 54F by the Finance Act, 2014

Observations of the High Court (HC) on earlier cases

Conclusion by the High Court (HC)

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Corpus voluntary contributions of Trust are exempt from tax even if they were received prior to registration u/s 12AA

Facts of the Case:

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Appeal to Commissioner of Income Tax (Appeals) [CIT(A)]

Observations of ITAT

Observations of CIT(A) on meaning of Corpus Donation

Observations of CIT(A) on Corpus Donation under Income Tax Act

Observations of CIT(A) on whether such corpus donation is taxable as Income or not

Reference to older cases by CIT(A)

Observations of CIT(A) on current case

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No TDS u/s 194J to be deducted on roaming charges paid – ITAT

TDS rate under section 194J for FY 2020-21

Facts of the Case:

Appeal before Commissioner of Income Tax (Appeals) [CIT(A)]

Reference by ITAT on older cases

Conclusion by ITAT in present case

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Assessment u/s 147 can be opened if cash is deposited in Bank but not disclosed in the ITR

Facts of the Case on opening of assessment under Section 147:

Observations of ITAT on opening of assessment under Section 147

What is Section 68?

What is Section 69 in Income Tax?

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Facts of the Case on addition of Rs. 15.50 lakhs made u/s 68

Observations of ITAT

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