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ITAT removes the Section 271B fine levied against the commission agency by the AO

Fact and Issue of the case

Briefly, the facts of the case are that the appellant is an individual. The return of income for the assessment year 2010-11 was filed on 29.06.2010 declaring total income of Rs.1,73,260/-. During the course of assessment proceedings, the Assessing Officer found that the appellant had deposited cash in the bank account amounting to Rs.1,48,43,428/-. According to the Assessing Officer, said cash deposit represents the business receipts of the appellant which was not disclosed in the Return of Income. The Assessing Officer accordingly formed an opinion that the cash deposits amounting to Rs.1,48,43,428/- had escaped to the tax and, therefore, issued notice u/s 148 of the Income Tax Act, 1961 (‘the Act’) on 29.03.2017 after recording the reasons. Thereafter, assessment was completed by the Assessing Officer u/s 143(3) r.w.s. 147 of the Act dated 28.12.2018 at total income @ 8% of the cash deposits made by the appellant. Subsequently, the appellant was show-caused as to why a penalty u/s 271B should not be levied on 29.12.2018. In response to the show-cause notice, it was contended that the appellant is only a commission agent for one Mr. Dinanath Gupta and he was only purchasing fruits for the said Mr. Dinanath Gupta and selling them to traders as per instruction of said person for the purpose of computing the turnover, annual commission alone has to be reckoned as the gross receipts. Rejecting the above contentions, the Assessing Officer levied penalty of Rs.74,210/- u/s 271B of the Act vide order dated 28.06.2019 for failure of assessee to get accounts audited as stipulated under the provisions of section 44AB of Act.

Being aggrieved by the order of penalty, an appeal was preferred before the ld. CIT(A), who vide impugned order confirmed the levy of penalty. Being aggrieved, the appellant is in appeal before us in the present appeal.

Observation of the Court

Having heard the rival submissions and perused the material on record, tribunal is of the considered opinion that it is not fit case for levy of penalty u/s 271B merely because the appellant was unable to substantiate the submission that the appellant is only commission agent because there is no obligation on the part of the assessee to get the accounts audited as he was under the bona-fide belief that it is only commission receipt, which can be considered as turnover for the purpose of section 44AB of the Act. Accordingly, we direct the Assessing Officer to delete the penalty u/s 271B of the Act.

In the result, the appeal of the assessee in ITA No.677/PUN/2021 stands allowed. Since the facts and issues involved in the above appeal in ITA No.680/PUN/2021 for A.Y. 2012-13 are identical, therefore, our decision in ITA No.677/PUN/2021 for A.Y. 2010-11 shall apply mutatis mutandis to the appeal of the assessee in ITA No.680/PUN/2021 for A.Y. 2012-13 respectively. Accordingly, the appeal of the assessee in ITA No.680/PUN/2021 for A.Y. 2012-13 stands allowed.

Conclusion

The Tribunal ruled in favour of the assessee and ordered the AO to delete the penalty u/s 271B of the Act.

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Penalty u/s 271B shall not apply in case of delay of appointment of new Auditor

Facts and issues of the case

Briefly stated, the facts of the case are that the assessee furnished his return on 30-03-2016 declaring total income of Rs.8,56,050/-. Such return was accompanied by the tax audit report. The AO observed that the audit u/s.44AB was not carried out before the “specified date”, namely, 31-10-2015 and hence, the assessee was liable to be visited with penalty u/s.271B of the Act. On being called upon to explain the reasons for the delay, the assessee submitted that audit of the books of account for the immediately preceding year was carried out by M/s. S.M.R. For the year under consideration, the new auditor was appointed for conducting the audit on 22-08-2015. The new auditor called for objections, if any, to its appointment from the earlier auditor, who raised certain issues. Eventually, the issues were resolved and immediately thereafter the incumbent auditor undertook the audit work and completed the same, followed by the filing of the return along with the tax audit report. Not convinced, the AO imposed penalty of Rs.1,50,000/- u/s.271B of the Act. The ld. CIT(A) echoed the penalty, against which the assessee has come up in appeal before the Tribunal.

Observation by the court

After considering the rival submissions and going through the relevant material on record, it is observed that the assessee admittedly got the accounts audited beyond the due date u/s 139(1) of the Act, which was the reason for late filing of the audit report with the Department. Section 271B in such circumstances calls for imposition of the penalty. However, it is pertinent to note that section 271B is subject to section 273B, and the latter section emphasizes that if a “reasonable cause” is established for non-compliance of the requirements which led to imposition of penalty under certain sections, including 271B, then no penalty should be imposed. We are confronted with a situation in which there was a change of the auditor from the preceding year. The new auditor, as per the established procedure, sought a no objection from the earlier auditor, who raised certain objections. Those issues were resolved later on, which led to the delay in the audit of the accounts of the assessee. As and when the issues got resolved, the audit work was taken up and completed followed by the filing of tax audit report and the income-tax return. In our considered opinion, such reasons for the delay constitute a reasonable cause for the late auditing of the accounts and of furnishing the audit report belatedly. In the hue of section 273B r.w.s.271B, we hold that the ld. CIT(A) ought not to have confirmed the penalty. We, therefore, set aside the impugned order and direct to delete the penalty.

Conclusion

The court disposed off the petition and ruled in favour of the assessee

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ITAT Pune explains basic conditions for Satisfaction of reimbursement Claim

Fact and Issue of the case

This appeal by the assessee is directed against the final assessment order dated 09.12.2020 passed by the Assessing Officer (AO) u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2016-17. Succinctly, the facts of the case are that the assessee filed its return with total income of Rs.22,30,38,350/-. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the arm’s length price of certain international transactions declared by the assessee. The TPO, vide his order dated 10-06-2019 passed u/s.92CA(3), did not propose any transfer pricing adjustment. The AO observed that the assessee had included a sum of Rs.20,04, 14,231/- in its total income, being, IT service charges received through RIPL and offered it for tax at 10% in terms of the Double Taxation Avoidance Agreement between India and Switzerland (DTAA). However, another receipt of Rs.4,05,96,997/- from RIPL was not offered for taxation. On being called upon to explain the reasons, the assessee submitted that a sum of Rs. 17,02,173/- was in the nature of reimbursement of expenses received from RIPL, representing supply of clothes required for Rieter India employees, Promotional gifts for exhibitions and expenses incurred by employees towards their accommodation, laundry, transport, good etc, which was charged back without any mark-up. The AO accepted the transaction as not chargeable to tax. The remaining amount of Rs.3,88,94,824/-, which is the core of controversy in the instant appeal, was claimed as reimbursement of IT license costs incurred towards centrally purchasing software licenses and use by RIPL. The AO analyzed the Master Services Agreement (Agreement) under which the assessee provided IT services to RIPL and offered the amount relatable to such services as taxable. The AO deduced the precise nature of services rendered. He noticed that the assessee could not explain as to how the receipt of Rs.3.88 crore claimed as reimbursement, was different from the receipt of Rs.20.04 crore from the IT services rendered under the Agreement, which was offered to tax. After considering the assessee’s reply, the AO held that the amount of Rs.3.88 crore was chargeable to tax in India as Fees for Technical Services/Royalty and also under Article 12 of the DTAA. The Dispute Resolution Panel (DRP) did not provide any succor to the assessee. This is how, the assessee has come up in appeal before the Tribunal.

Observation of the court

The Court has heard both the sides and gone through the relevant material on record. The main plank of the ld. AR for claiming the amount in question as not chargeable to tax, is that the receipt was in the nature of reimbursement of IT service cost from RIPL and, in the alternative, it was a receipt of software royalty not chargeable to tax in the hue of the judgment of Hon’ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472 (SC).

The assessee has claimed the receipt to be in the nature of reimbursement of software costs from RIPL. In principle, chargeability is attracted on the income element embedded in a revenue receipt. A receipt de hors profit element, which is only a Reimbursement, is not taxable. However, to categorize a particular amount as reimbursement, it is sine-qua-non that the expenditure should be incurred for and on behalf of the other. It envisages two cumulative conditions, viz., first that undiluted benefit flowing from the incurring of the expenditure is passed on, as such, to the other and the second, that the amount incurred is recovered as it is from the other without any plus or minus to that. If the costs incurred go in a common pool which are then shared by several persons on certain allocation keys, even if the amount so allocated and recovered may be without any mark up, but it may not necessarily constitute reimbursement in the strict sense qua each participant independently.

The next contention put forth on behalf of the assessee is that the amount received from RIPL was in the nature of software royalty because it purchased certain software and transferred the same to it. In support of the contention that the receipt from RIPL is not royalty, the ld. AR relied on Engineering Analysis (supra). A proposition was bolstered that RIPL got copyrighted article from the assessee, which was different from the copyright in the software purchased.

Insofar as the ratio in the case of Engineering Analysis (supra) is concerned, there is no dispute that it has been held by the Hon’ble Summit Court that ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the “licensed” computer software product, over which the licensee has no exclusive rights, no copyright is parted with. However, the facts of the instant case are entirely different. On a specific query, the ld. AR failed to point out as to the specific number of licenses purchased by the assessee from third party vendors and those transferred to RIPL. Rather it was fairly conceded during the course of proceedings and has been established by us above that there was no direct transfer of software licenses to RIPL but it was a case of allowing user to RIPL from the centralized IT infrastructure maintained by the assessee in Switzerland. What is relevant for our purpose is the amount of receipt by the assessee for rendering services and not the costs incurred in the purchase of software facilitating the provision of services. We are not confronted with a situation in which the assessee purchased software from third party vendors and then licensed the same to RIPL for use. Rather all the software purchased by it were integrated by the assessee into its own centralized IT infrastructure for facilitating the provision of the IT services enlisted above to its group entities and RIPL is one of such beneficiary of the services. It is rather a case of the assessee only purchasing the software from third party vendors and the transactions qua such individual software coming to an end there itself. The ratio of Engineering Analysis (supra) can apply where the vendors demonstrate that what they transferred to the assessee was copyrighted article and not copyright. On the contrary, we are concerned with the second stage in which the software licenses, being in the nature of copyrighted article, were purchased by the assessee and then used in the providing various services, such as, Client Based Services (CBS), Business Applications for Sales, Marketing and Technology Users (BASMT), Business Applications for Parts and Service Users (BAPS), Business Applications for Operations Users (BAOP), Business Applications for Finance and Controlling Users (BAFC) etc.

The fact that the assessee utilized the software purchased from third party vendors for integrating them with its own software for making a common centralized integrated IT infrastructure so as to render the IT services is further fortified by the details of the alleged reimbursement submitted by the assessee. First table on page 489 of the paper book has last two columns with captions `Weights for IT infrastructure cost allocation’ and `Weighted average allocation’. On a specific query, the ld. AR submitted that the assessee company spent certain amount on IT infrastructure, independent of the software cost, which was allocated between all the 19 entities and the RIPL’s share in it was determined at 17.09%. This shows that apart from purchasing the software for the centralized IT infrastructure Centre, the assessee also incurred certain IT infrastructure costs for integrating them into its centralized system so as to render services to the worldwide entities, which was charged to RIPL at 17.09%. This plentifully proves that the amount recovered by the assessee from RIPL is not towards transfer of any software so as to constitute software royalty. The contention of the ld. AR in this respect stands repelled.

Having held that the receipt of Rs.3.84 crore is neither reimbursement nor royalty for software, the next question is to find out true nature of the receipt. It has been noticed above that the assessee rendered I.T. services to its group companies including RIPL and offered a sum of Rs.20.04 crore to tax as royalty/fees for technical services. We have further found that the nature of services provided under the Master Agreement for which Rs.20.04 crore has been offered to tax is exactly similar to that claimed to be reimbursement for which Rs.3.84 crore has been received. In fact, there is only one Master agreement with RIPL under which the composite I.T. services were rendered to the group companies including RIPL – whether with the help of own software or those purchased from third party vendors. Whereas the assessee offered revenue to tax insofar the consideration for the I.T. services rendered from its own developed software is concerned, but claimed the corresponding revenue to the extent of cost incurred in purchasing software from third party vendors and the cost incurred in setting up the matching infrastructure, as reimbursement and hence not exigible to tax. But for that, the nature of service is same. This shows that the assessee received Rs.23.92 crore (Rs.20.04 crore and Rs.3.88 crore), except the reimbursement accepted by the AO, from RIPL on account of IT services, out of which one part consisting of Rs.3.88 crore (being share allocated to RIPL towards license and IT infrastructure cost) was claimed as reimbursement and the second part consisting of Rs.20.04 crore was offered for taxation. Thus, there is no inherent difference in the composition of receipt by the assessee from RIPL, which has been bifurcated into two parts by showing Rs.20.04 crore as taxable and Rs.3.88 crore as not taxable. Since the nature of services rendered by incurring costs – on maintaining owned software and those purchased from third party vendors – is similar, the amount received by the assessee from RIPL for rendering such services cannot have two different characters viz., one part as taxable and the other as not taxable.

On a pertinent query as to whether revenue of Rs.20.04 crore received by the assessee from RIPL towards I.T. Services was offered and taxed as Royalty or Fees for technical services, as the same treatment would be given to Rs.3.84 crore as well, the ld. AR submitted the it did not make any difference as both the royalty/FTS are taxable at the rate of 10% under the DTAA. We, therefore, hold that the authorities below were fully justified in including Rs.3,88,94,824/- in the total income of the assessee and charging it to tax at 10% in parity with the assessee suo motu offering Rs.20.04 crore to tax at that rate.

Conclusion

In the result the tribunal allowed the petition and ruled in favour of the assessee

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Addition for share capital & share premium deleted by ITAT Pune

Fact and Issue of the case

Briefly stated facts are that the assessee in the present case is a private limited company and engaged in the business of Iron and steel marketing. The assessee in the year under consideration has issued 40,00,000 equity shares having face value at ₹10 and share premium at ₹90 per share aggregating to ₹40 crores only. The details of the companies which acquired the shares at premium of the assessee company stand as under:

S. No	Name of shareholder	Face value (in₹)	Premium (in₹)	Gross amount (in₹)
1	Sangam Infratech Ltd.	2,20,00,000/-	19,80,00,000/-	22,00,00,000/-
2	Dhanlaxmi Re-Rolling Mill	90,00,000/-	8,10,00,000/-	9,00,00,000/-
3	Swift Venture Pvt Ltd	90,00,000/-	8,10,00,000/-	9,00,00,000/-
4	Total	4,00,00,000/-	36,00,00,000/-	40,00,00,000/-

The assessee, besides the above, has also received share application money pending for allotment of shares amounting to ₹ 25,23,27,371/- only from the companies as detailed under:

(1)	Sangam Infratech Ltd.	Rs.13,95,00,000.00
(2)	Swift Ventures Private Limited	Rs. 2,95,00,000.00
(3)	Dhanlaxmi Re-rolling Mills.	Rs.5,21,78,717.00
(4)	Shri Ramkishan Mantri	Rs. 50,000.00
(5)	Shri Sanjay mantra	Rs.1,05,98,654.00
(6)	Shri Nilesh Chechani	Rs. 5,00,000.00
(7)	Kalyan Sangam Infratech Ltd.	Rs.2,00,00,000.00
	*Total*	*Rs.25,23,27,371.00*

Out of the above amount of ₹ 65,23,27,371/-( i.e. share capital of ₹ 4 crore, Premium of ₹ 36 crore and share application money for ₹ 25,23,27,371/-) the assessee during the year received a sum of Rs. 37,02,25,000/- through banking channel detailed as under:

1. Sangam Infratech Ltd.	Rs. 17,85,00,000/-
2. Swift Venture Pvt Ltd	Rs. 8,10,00,000/-
3. Dhanlaxmi Rolling Mills	Rs. 9,07,25,000/-
4. Kalyan Sangam Infratech Ltd	Rs. 2,00,00,000/-
Total	Rs. 37,02,25,000/-

However the AO found that the assessee company was established dated 10 August 2004 i.e. during the financial year 2004-05 corresponding to the assessment year 2005-06 and it did not carry out any business activity till the year under consideration. Conversely, it has issued shares at a premium of ₹ 90 per share aggregating to ₹ 36 crores as well as it has received share application money for the amount as discussed above. Accordingly, the AO had a doubt on the genuineness of the share capital, share premium and share application money and thus sought an explanation from the assessee by issuing notice dated 10^th September 2012 under the provision of section 142(1) of the Act.

The assessee vide letter dated 15^th March 2013 submitted that it is going to set up an integrated steel plant at Wardha which is very much viable and profitable. The assessee filed a detailed project report in support of its contention. Accordingly the management of the company decided the fair value of the shares at Rs. 100 only which were issued to the promoters and their associate concerns without calling any money from the public or any other outside person.

However, the AO disagreed with the contention of the assessee by observing that the assessee being a newly start-up company, having no experience in the line of its business, failed to prove the valuation of shares at Rs. 100/- based on cogent reason.

Accordingly, the AO to verify the genuineness of the capital cost shown by the assessee under the project with respect to certain items issued notices to the suppliers of the capital goods but none of them replied. Thus the AO was of the view that the assessee has inflated the project cost of the capital goods in order to avail higher funds from the banks. In other words the assessee claimed the high project cost so that it could take the money back from the supplier which could be reinvested in the guise of share capital/share premium in the name of the companies as discussed above. Likewise, the AO found that the companies, namely Sangam Infratech Limited (in short SIL) and Swift Venture Private Limited (in short SWPL), which invested in the assessee company were either showing the meagre income or the losses. Furthermore, these companies (SIL and SWPL) have shown sources of funds in their respective hands by way of issuing shares on premium which was not possible for the simple reason that there was no major activity carried on by them.

The AO, further to verify the share capital in the hands of SIL and SWPL issued commission under section 131(1)(d) of the Act which submitted its report. The same is placed on pages 18 to 20 of the paper book. The AO based on such commission report found that the company namely SWPL was owned by M/s Mandhani Group. Shri Yogesh Mandhani was the key person of the group who had no experience of the steel business but joined the assessee company as a director in the FY 2008-09. Thus, the AO was of the view that the assessee has introduced its unaccounted money through the collusion of SWPL. Regarding the capital introduced by SIL in the company, the AO found that the director of SIL could not justify the sources of funds available in its hands. Likewise, M/s Kalyan Sangam Infratech Ltd., a company invested share application money for Rs. 2 crores in assessee company, failed to explain the sources of funds in its hands satisfactorily.

Similarly, the capital of M/s Sanjay Mantri HUF, proprietor of M/s Dhanlaxmi Rerolling Mills as on 31^st March 2009 stands at ₹ 3,14,19,954/- and the loan increased during the year stands at ₹ 2.33 crores whereas it has invested in the shares of the company for an amount of ₹ 9,07,25,000/- only. In other words, there was not sufficient balance available with M/s Dhanlaxmi Rerolling Mills for acquiring the shares of ₹ 9,07,25,000/. Thus the source of funds in the hands of the company were not satisfactorily explained.

In view of the above the AO treated the sum of ₹ 37,02,25,000/- as unexplained cash credit under section 68 of the Act and added the same to the total income of the assessee. Aggrieved assessee preferred an appeal to the learned CIT(A).

Observation of the Tribunal

The Court has heard the rival contentions of both the parties and perused the materials available on record. The dispute in the instant case relates to the share capital received by the assessee in the year under consideration from certain parties amounting to Rs. ₹ 37,02,25,000/- which was treated as unexplained cash credit under section 68 of the Act. The initial onus is upon the assessee to establish three things necessary to obviate the mischief of Section 68 of the Act. These are:

(i) identity of the investors;

(ii) their creditworthiness/investments; and

(iii) Genuineness of the transaction.

The Revenue exercise starts only when these three ingredients are established prima facie, by the assessee and the department is required to investigate into the facts presented by the assessee. As per the statutory provision of Sec 68 and jurisprudence of the Hon’ble court, it is clear that primarily the onus is on the assessee to discharge that the credit received by it is from the sources whose identity can be proved, the genuineness of the transaction and the creditworthiness of the creditor is also established by the documentary evidences. If the assessee presents all these details during the assessment proceeding before the AO, the responsibility shifts to the AO to prove it wrong. If the AO accepts such evidences without proving it wrong, it can be said that assessee has discharged its onus. If the AO presents some contrary evidences, the responsibility again shifts upon the assessee to rebut such contrary evidences.

Admittedly, in the case on hand, the assessee has discharged its onus by furnishing the necessary details such as a confirmation of the parties, copy of ITR-V, copy of bank statement of parties along with their balance sheet, share certificate, MOA, AOA etc. in support of identity of the parties and genuineness of transaction and credit worthiness of the parties. These details of the parties are available on pages 16 to 161 of the paper book. Similarly, there is also no dispute to the fact that all the transactions were carried out through the banking channel. What is the inference that flows from a cumulative consideration of all the aforesaid contending facts is that the assessee has discharged its onus imposed under section 68 of the Act. The details filed by the assessee were cross verified by the Revenue from the respective parties and no infirmity was pointed out in the same except doubting the credit worthiness of the parties on the reasoning that these parties are earning lower income/ incurring the losses/ capital was insufficient for such investment. Accordingly the AO had a suspicion that the investors as discussed above were acting as the conduit for converting the unaccounted money of the assessee in the guise of share capital /share application money and premium on shares. Conversely the AO has not brought anything on record suggesting amount credited in the books of assessee does not belongs to respective parties but the same belongs to the assessee. Now we proceed to look into the facts of each investors which invested money in the company in the form of share capital along with share premium.

Sangam Infratech Limited (Investment of Rs. 17.85 crores)

I) On perusal of the balance sheet of SIL, placed on pages 35 of the paper book, it was noticed that its position of the fund including the unsecured loan stands at ₹ 110 crores approximately as on 31-3-2010. Out of such fund there was the opening balance as on 1 April 2009 at ₹ 56.40 crores approximately. Thus what is transpired is this that the fund in the hands of the company i.e. SIL was not generated in the year under consideration for making the investments in the company. Similarly, the company i.e. has made investment in various other companies in the year under consideration as well as in the earlier assessment years which can be verified from the details placed on page 39 of the paper book. Thus, it is not the case that the entire capital of the company i.e. SIL was invested in the shares of the assessee company.

II) Likewise, there was an assessment under section 143(3) of the Act under CASS in the case of the company i.e. SIL wherein the capital generated by SIL was accepted by the revenue. The copies of the assessment orders for the year under consideration as well as for the assessment year 2011-12 are placed on pages 56 to 62 of the paper book. Here, it is pertinent to note that though the assessment was made under CASS but the same was not converted to the normal/complete scrutiny. In other words, it can be inferred that the Revenue was aware of the financial position of the company i.e. SIL and was satisfied with the same.

III) It was noticed that the assessee received a sum of Rs. 2 crores in the earlier assessment year from SIL which was accepted by the Revenue. In other words there was no doubt raised by the Revenue of whatsoever in the earlier assessment year for the amount of Rs. 2 crores received by the assessee. Thus a question arises whether the creditworthiness can be doubted in the year under consideration towards the amount received by the assessee in the year in dispute. To our mind, the answer stands in negative. It is for the reason that once the revenue has accepted the creditworthiness of the company in the earlier year, the same cannot be disturbed in the subsequent year until and unless the corroborative evidences require otherwise. But no such evidences were brought on record.

IV) It is also pertinent to note that the commission under section 131(1)(d) of the Act was issued upon the company SIL which submitted its report but there was no negative remark about the financial position of the company i.e. SIL.

V) It is also important to note that the assessee besides the share capital of ₹17.85 crores has also received share application money for ₹13.95 crores from the company i.e. SIL, which is pending for allotment as on 31 March 2010 but there was no doubt raised by the revenue with respect to such share application money which is pending for the allotment. In other words the revenue has accepted part of the amount shown as share application money pending for allotment as correct with respect to the identity /creditworthiness of the party as well as genuineness of the transaction. To our mind, the AO erred in accepting part of the amount as genuine and at the same time doubting the genuineness for part of the amount as discussed above.

Dhanlaxmi Re-rolling Mills (DRM)

I) On perusal of the balance sheet of DRM as on 31-3-2010, placed on pages 125 of the paper book, it was noticed that its position of the fund including the loan stands at ₹ 21.7 crores approximately. Out of such fund there was the opening balance as on 1 April 2009 at ₹ 31.81 crores approximately as evident from the balance sheet an on 31-3-2009, placed on page 116 of the PB. Thus what is transpired is this that the fund in the hands of the company i.e. DRM was not generated in the year under consideration for making the investments in the company.

II) Similarly, the company i.e. DRM has shown the turnover more than of Rs. 100 crores as evident from the audited profit and loss account, placed on page 124 of the paper book. Thus, it is the case that the firm i.e. DRM is not a paper entity which was used as conduit for converting the unaccounted money of the assessee as alleged by the AO.

III) It is also important to note that the firm i.e. DRM is a proprietary concern owned by Shri Sanjay Mantri HUF and KARTA of the HUF has also made investments in the share application money in the individual capacity which has been accepted by the revenue. Thus what is transpired that the revenue has not believed on the creditworthiness of the HUF but did not doubt on the creditworthiness of the KARTA of the HUF in his individual capacity.

IV) Likewise, there was an assessment under section 143(3) of the Act in the case of the firm i.e. DRM wherein the financial position of the firm was not doubted. The copy of the assessment order for the year under consideration is placed on pages 152 to 153 of the paper book.

V) It was also noticed that the assessee received a sum of Rs. 5,14,53,717/- in the earlier assessment year from DRM which was accepted by the revenue. In other words there was no doubt raised by the revenue of whatsoever in the earlier assessment year for the amount of Rs. 5.14 crores received by the assessee. Thus a question arises whether the creditworthiness can be doubted in the year under consideration towards the amount received by the assessee in the year in dispute. To our mind, the answer stands in negative. It is for the reason that once the revenue has accepted the creditworthiness of the company in the earlier year, the same cannot be disturbed in the subsequent year until and unless the corroborative evidences require otherwise. But no such evidences were brought on record.

V) It is also important to note that the assessee besides the share capital of ₹9,00,00,000/- crores has also received share application money for ₹ 5.21 crores, which is pending for allotment as on 31 March 2010 from the firm i.e. DRM but there was no doubt raised by the revenue with respect to such share application money which is pending for the allotment. In other words the revenue has accepted part of the amount shown as share application money pending for allotment as correct with respect to the identity /creditworthiness of the party as well as genuineness of the transaction. To our mind, AO erred in accepting part of the amount as genuine and at the same time denying part of the amount as not genuine.

Based on the above it was held the by the Hon’ble Apex Court, that the Assessee-Company failed to discharge the onus required under Section 68 of the Act. Therefore, the Assessing Officer was justified in adding back the amounts to the Assessee’s income. However in the case on hand, we find that the assessee has discharged its onus cast upon it under the provisions of section 68 of the Act which has been elaborated in the preceding paragraphs.

It is also significant to note that the entire thrust of the learned DR was based on the documents/informations collected in the course of search proceedings under section 132 of the Act which was conducted on 2 May 2013. As per the learned DR the information gathered during the search proceedings should also be considered while adjudicating the issue on hand. The learned DR further submitted that the matter of the assessee for the year under consideration against the search proceedings is pending before the learned CIT (A). Accordingly the learned DR contended that the matter on hand can also be restored to the file of the learned CIT (A) for fresh adjudication along with the search proceedings. However, we are not convinced with the argument of the learned DR for the reason that both the proceedings are separate and independent to each other.It is also significant to note that the entire thrust of the learned DR was based on the documents/informations collected in the course of search proceedings under section 132 of the Act which was conducted on 2 May 2013. As per the learned DR the information gathered during the search proceedings should also be considered while adjudicating the issue on hand. The learned DR further submitted that the matter of the assessee for the year under consideration against the search proceedings is pending before the learned CIT (A). Accordingly the learned DR contended that the matter on hand can also be restored to the file of the learned CIT (A) for fresh adjudication along with the search proceedings. However, we are not convinced with the argument of the learned DR for the reason that both the proceedings are separate and independent to each other.

The assessments in the search proceedings are special assessments to be carried out under the provisions of section 153A of the Act which begins with non-obstante clause. As a result of search, the proceedings under section 153A of the Act have already begun which are based on the search materials. Furthermore, the issue before us is arising against the assessment order framed under section 143(3) of the Act and we are not adjudicating the appeal/matter arising against the assessment framed under section 153A of the Act. It might be quite possible that search material has a bearing on the income to be determined for the year under consideration but for that purpose the proceedings have already been initiated and the same will be taken care by the revenue authorities in the respective proceedings. Accordingly, we are not convinced with the argument of the learned DR.

At the time of hearing both the ld. DR and the AR have cited series of judgments but we do not want to recapitulate all of them but it is suffice to hold that the cash credit received by the assessee during the year remains no longer unexplained as provided under section 68 of the Act for the reasons as discussed above. In view of the above, we do not find any infirmity in the finding of the learned CIT (A). Accordingly, we confirm the finding of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the Revenue is dismissed.

Conclusion

The Tribunal has dismissed the appeal and ruled against the petitioner

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Non-payment of tax on voluntary contribution no ground to deny registration u/s 12AA

Fact and Issue of the case

The brief facts in this case are that the assessee has made online application in Form No.10A for approval of the Trust/ Institution u/s.12AA of the Act on 02.03.2020 under the category of Religious cum Charitable trust/institution. The assessee trust is registered under Bombay Public Trust Act, 1950 with Registration Number: A-189/PUNE dated 03.05.1952. In this case, the application for registration u/s.12AA of the Act of the assessee trust has been rejected by the Ld. CIT(Exemption) vide order dated 01.10.2020 and at Para No.3.3, 3.4 and Para No.4 of the said order, the Ld. CIT(Exemption) has enumerated the reasons for rejection of the application for granting registration u/s.12AA of the Act.

The assessee trust had collected voluntary contributions and donations. The Ld. CIT(Exemption) was of the opinion that all these voluntary contributions forms a part of the corpus funds of the trust and hence, it is an income of the assessee. Thus on the said income, the assessee trust was liable to pay tax as per law. Since the requisite taxes were not paid by the assessee, the Ld. CIT(Exemption) opined that the requirement of section 12AA of the Act i.e. satisfaction of the Commissioner about objects of the Trust and the genuineness of the activities of the trust could not be determined and hence, the said application for registration u/s.12AA of the Act of the assessee was rejected. Therefore, the ground taken by the Ld. CIT(Exemption) was that on those voluntary contributions received by the assessee, the taxes should have been paid by the assessee before they applied for registration u/s.12AA of the Act.

Observation of the Tribunal

The Tribunal has heard the submissions of rival sides and perused the materials available on record. We are of the considered view that the provisions of Section 12AA of the Act provides that the Ld. CIT(Exemption) at the time of granting registration to the assessee trust or society shall look into the objects of the trust/society and be satisfied about the genuineness of the activities carried out by such applicant trust/ society at the time of granting registration u/s.12AA of the Act. Whether any tax had accrued to be paid or whether such taxes have been paid or not are to be looked into at the stage of assessment proceedings.

The Hon‟ble Allahabad High Court in the case of Fifth Generation Education Society Vs. CIT (1990) 185 ITR 634 (All) has held that “the Commissioner is not to examine the application of income at the stage of application made by assessee for granting registration u/s.12AA of the Act. The Commissioner may examine whether the application was made in accordance with the requirements of Section 12AA r.w.r 17A and whether Form 10A has been properly filled up. He may also see whether the objects of the trust are charitable or not. At that stage, it is not proper to examine the application of income.”

Reverting to the facts of the present case, the Ld. CIT(Exemption) has not granted registration u/s.12AA of the Act since whatever donations were received by the assessee trust, the taxes were not paid and on this premise, the registration u/s.12AA cannot be denied. It is left always to the Assessing Officer to take appropriate steps at the time of assessment proceedings with regard to payment of taxes and application of income of the trust/society.

Further, the Hon‟ble Bombay High Court in the case of CIT Vs. Manekji Mota Charitable Trust (2019) 267 TAXMAN 0016 (Bombay) has held “at the time of the registration of the trust u/s.12A, the question of application of income of the trust is premature.” Thus, whether taxes are due to be paid on any income received that issue has to be looked into only at the time of assessment proceeding.

In the present case, the objects of the trust are not doubted by the Department and they have also not disputed the charitable nature of the activities conducted by the assessee trust. Meaning thereby, all the relevant records were submitted before the Ld. CIT(Exemption) and he had verified the same and was satisfied on this aspect fulfilling the requirement of Section 12AA of the Act.

Considering the aforesaid judicial pronouncements, facts and circumstances in this case, we are of the considered view that this is not a fit case for rejection of application for registration u/s.12AA of the Act on the reasons mentioned in the order of the Ld. CIT(Exemption). There is no finding on facts that the activities carried out by the assessee are not genuine. Further, the Ld. CIT(Exemption) has not mentioned in his finding that the objects of the trust were not in order or that the application made for registration was also not in accordance with law. In absence of these findings, just because, the taxes were not paid on the donations/voluntary contributions received cannot be the ground for rejection of application u/s.12AA of the Act. These things can be examined by the Department and scrutinized at the assessment stage. When all the requirements of registration u/s.12AA of the Act have been satisfied by the assessee trust, registration therein should be granted. In view thereof, we set aside the order of the Ld. CIT(Exemption) and direct the Department to grant registration u/s. 12AA of the Act to the assessee trust.

Conclusion

In the result, appeal of the assessee is allowed by the Tribunal

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Non striking of irrelevant limbs in notice u/s 274 vitiates penalty proceedings

Fact and Issue of the case

This appeal by the assessee arises out of the order dated 04-11-2016 passed by the CIT(A)-2, Pune confirming the penalty of Rs.31,42,000/- imposed by the Assessing Officer (AO) under section 271(1)(c) of the Income-tax Act, 1961 (hereinafter also called `the Act’) in relation to the assessment year 2011-12.

Briefly stated, the facts of the case are that the assessee has been the proprietor of M/s. Food Land Agro (India) engaged in the business of processing and sale of milk. The return of income was filed declaring total income of Rs.15,11,719/-. During the course of assessment proceedings, the AO observed that the assessee had entered into an agreement with M/s. Prabhat Diary Pvt. Ltd. For transferring all the assets and liabilities of its business for a total consideration of Rs.1,36,06,044/-. The AO observed that the assessee has transferred the entire proprietary concern to M/s. Prabhat Diary Pvt. Ltd. and did not disclose the capital gains arising therefrom. Thus, invoking section 50B of the Act, he made an addition of Rs.91,43,141/-. Subsequently, a penalty of Rs.31,42,000/- was imposed on this score by the AO u/s.271(1)(c) after issuing notice u/s 274 of the Act. The ld. CIT(A), after elaborately discussing the issue, upheld the penalty. Aggrieved thereby, the assessee has come up in appeal before the Tribunal.

Observation of the Tribunal

The Tribunal has heard the rival submissions through Virtual Court and scanned through the relevant material on record. A copy of the notice issued u/s 274 of the Act has been placed in the appeal folder, from which it is discernible that the AO did not strike off either of the two limbs viz., concealed the particulars of income or furnished inaccurate particulars of such income, albeit it was a case of furnishing of inaccurate particulars of income. The penalty order also came to be passed by holding in para 6.5 that: `the amount added or disallowed in computing the total income of the assessee as a result thereof shall, for the purposes of clause (c) of this sub section (1) of section 271, be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished.’ Recently, the full Bench of Hon’ble Bombay High Court in Mohd. Farhan A. Shaikh Vs. Dy.CIT (2021) 125 taxmann.com 253 (Bom) has considered this very issue.

Answering the question in affirmative, the Full Bench held that a defect in notice of not striking the relevant words vitiates the penalty even though the AO had properly recorded the satisfaction for imposition of penalty in the order u/s 143(3) of the Act. In another judgment, the Hon’ble Bombay High Court in Pr.CIT Vs. Golden Peace Hotels and Resorts (P.) Ltd. (2021) 124 taxmann.com 248 (Bom) also took similar view that where inapplicable portions were not struck off in the penalty notice, the penalty was vitiated. The SLP of the Department against this judgment has recently been dismissed by the Hon’ble Supreme Court in Pr.CIT Vs. Golden Peace Hotels and Resorts (P.) Ltd. (2021) 124 taxmann.com 249 (SC). In view of the overwhelming position, it is clear that where the charge is not properly set out in the notice u/s 274 viz., both the limbs stand therein without striking off of the inapplicable limb, but the penalty has been, in fact, levied for one of the two, such a penalty order gets vitiated.

Turning to the facts of extant case, we find from the notice u/s 274 of the Act that the AO did not strike out one of the two limbs. Not only that, the penalty was also imposed in the same way by referring to both the limbs in the penalty order. As against that, the penalty was leviable only on one limb, namely, furnishing of inaccurate particulars of income. In such a situation, the penalty order gets vitiated. Respectfully following the Full Bench judgment of the Hon’ble jurisdictional High Court, we overturn the impugned order and direct to delete the penalty.

Conclusion

The tribunal allowed the appeal and directed to delete the penalty.

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Mere non-spending of income for charitable activities cannot be reason for denial of 12AA registration

Fact and Issue of the case

The brief facts of the case are as under :-

The appellant, namely, Dr. N T Ghatte Charitable Trust is a trust formed on 02.04.2014 and is registered under the BPT Act, 1950 vide registration number E-2173/Sangli dated 13.07.2015 with the following objects :-

1) Establishment, acquisition, construction and/or maintenance or support of primary schools, high schools, colleges, vidyapeeths, study centers, medical colleges, technical colleges, and other institutions for imparting education and training of students.

2) Establishment and support of Professorship, Fellowship, Lectureships, Scholarships, Loan Scholarships, Free Ships and Prizes at any schools, colleges or other educational institutions in India.

3) Establishment maintenance and/or construction of hostels and / or boarding houses and grant of free boarding and lodging to poor, deserving students and other persons upon such terms and for such period in each case as the TRUSTEES may think fit.

4) To take over the management and administration of educational and cultural institutions of the aforesaid nature and orphanages already established with all their assets and liabilities.

5) To construct, establish, equip, maintain and/or manage laboratories, workshops and to undertake, conduct, carry on or help to carry on scientific research and other scientific works and to provide fund for such works or for payment to any person or persons engaged in research work whether in such laboratories or else where in the fields of natural or applied science including Geology, Medicine, Agriculture or Animal Husbandry, Information Technology, Computer Systems, Computer Hardware developments, Sericulture, Floriculture.

The appellant trust filed Form 10A for registration under the provisions of section 12AA of the Act on 07.12.2018. On receipt of the said application for registration of the trust u/s 12AA of the Act, ld. Commissioner of Income Tax (Exemption) had called upon the applicant through ITBA portal on 05.01.2019 to furnish certain information/clarification. In response to the same, the appellant uploaded the information on 01.02.2019. On perusal of the said information furnished by the appellant trust, the ld. Commissioner of Income Tax (Exemption) had concluded that the appellant society had not carried on any charitable activities during the last three financial years and based on this findings, the ld. Commissioner of Income Tax (Exemption) held that the genuineness of charitable nature of the activities is not established, accordingly, he denied the registration u/s 12AA of the Act vide order dated 22.06.2019.

Being aggrieved by the order of ld. Commissioner of Income Tax (Exemption), the appellant is in appeal before us in the present appeal.

Observation of the Tribunal

Tribunal has heard the rival submissions and perused the material on record. The only issue in the present appeal relates to the grant of registration u/s 12AA of the Act. From the perusal of the impugned order, it is crystal clear that the ld. Commissioner of Income Tax (Exemption) had denied the registration solely on the ground that the appellant had not undertaken any charitable activities pursuant to objects on which it was set up activities of the trust in the last three financial years. It is not the case of the ld. Commissioner of Income Tax (Exemption) that the objects of the appellant society are not charitable in nature. The reasoning of the ld. Commissioner of Income Tax (Exemption) is not tenable under the law in view of the recent judgement of the Hon’ble Supreme Court in the case of Ananda Social and Educational Trust (supra).

Further, the Hon’ble Supreme Court in the case of M/s. Ananda Social and Educational Trust vs. CIT in Civil Appeal No.1727/2020 (@SLP (C) No.25761/2015) dated 19.02.2020 held that merely because the trust has not spent any amount of its income for charitable activities and the fact that the trust has not spent any amount of income for charitable purpose does not amount to carrying on the activities contrary to its objects. In the light of legal position discussed supra, the order of the ld. Commissioner of Income Tax (Exemption) cannot be sustained in the eyes of law.

The submission of the ld. CIT-DR the matter be remanded to the ld. Commissioner of Income Tax (Exemption) for fresh examination cannot be acceded to for the reason that it amounts to ordering fresh enquiry which is not permissible under the law. In the light of the above discussion, we direct the ld. Commissioner of Income Tax (Exemption) to grant registration of the appellant trust u/s 12AA of the Act.

Conclusion

The Tribunal allowed the appeal of the assessee and direct the Commissioner of Income Tax (Exemption) to grant registration of the appellant trust u/s 12AA of the Act

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