Direct Taxes

Tribunal

REPORTED DECISIONS

1. Deduction u/s. 80-IA – Manufacturing process consisting of various stages and chain of activities from storage of raw materials till packing of finished goods – All workers involved in these activities to be considered for counting requisite number of workers – A.Y. 1997-98

ACIT vs. Ms. Richa Chadha [2005] 96 ITD 325 (Mum); dated 5-4-2005

A manufacturing process means not only manufacturing activity but also such other activities supporting the main manufacturing process. Thus, in a chemical factory, if certain workers are employed for bringing chemicals to the site or those who are employed for their protection and safety, or those who are employed for maintaining and preserving the final product or its transportation, can also be said to be employed in the manufacturing process. Thus, those workers who are employed in subsidiary activities will also be part of manufacturing process and, hence, they need to be counted for the purpose of deciding as to whether the concern employed 10 or more workers. The act of processing starts from initial treatment till giving it a marketable form and includes sorting and repacking. If that is so, then workers employed for chain of activities involved in processing should be counted as employed for manufacturing process. Thus, it could not be held that only those, who are involved in the main manufacturing process, should be considered for the purposes of counting. If manufacturing process consists of chain of activities starting from storage, bringing to manufacturing site, manufacturing process, sorting, packing and storage, then all the workers involved in all these activities should be considered for counting the requisite number.

2. Reopening of assessment – Sec. 147 of the IT Act – Substituted provisions with effect from 1-4-1989 – Conditions relating to formation of belief about escapement of income and requirement of recording reasons remain intact – Reasons recorded had no live link between the formation of belief and escapement of income – Cannot be considered rational and reasonable – Reassessment order liable to be cancelled – A.Ys. 1996-97 to 1999-2000

Bhubhaneshwar Stock Exchange vs. ACIT [2005] 96 ITD 480 (Cuttack); dated 16-3-2005

After the total substitution of section 147 with effect from 1-4-1989, the scope of ‘income escaping assessment’ has considerably been enlarged and expanded and it is much easier to reopen the proceedings under section 147, especially when assessment u/s. 143(3) has not been done. This is so possible by virtue of the different clauses of the Explanation 2 to the newly introduced section 147. However, the conditions relating to formation of a reasonable belief about escapement of income and also the requirement of recording the said reasons remain intact even in the substituted provisions of sections 147, 148, etc.

The reasons recorded in the show-cause notice did not have any nexus with the formation of belief about escapement of income. The assessee had claimed exemption under section 11 of the Act and the reasons recorded about escapement of income was in respect of section 10(23C), which exemption was not claimed by the assessee and had further clearly stated that the requisite notification under that section had not actually been issued by the competent authority. Thus, the reasons recorded by the AO for formation of belief about escapement of income had no live link with such belief and, hence, the formation of belief about the escapement of income could not be considered to be rational and reasonable. This had got nothing to do with the sufficiency of the reasons but the absence of nexus between the reasons recorded and the belief about escapement of income made the reasons irrational and untenable. Therefore, the entire exercise of assumption of jurisdiction under section 147 was invalid and illegal. Therefore, the reopening proceedings u/s. 147 were invalid and illegal.

3. Deduction of tax at source – Section 197 r.w.r. 28AA – Certificate for deduction of tax at lower rate – Would hold good and remain in force till closure of financial year in which it is issued – No need to apply fresh certificate – Amount specified in certificate is only a tentative figure and actual amount may be more or less – A.Y. 1997-98

ITO vs. Dy. General Manager (Finance), Aditya Cement (2005) 96 ITD 398 (Jodh); dated  18-4-2005

The assessee was making payments to contractors. During the relevant financial year it filed return in Form 206 and on scrutiny, it was found that the assessee had made total payments of Rs. 4,16,41,107/- without deduction of tax at source. The assessee replied that payment was made without deduction of TDS on the basis of the certificates issued u/s. 197(1) by Commissioner dated 11-4-1997 and 6-1-1998 each authorizing payment without deduction of TDS for Rs. 2.50 crores. The AO found on perusal of the first certificate that the limit was to be exhausted on 16-10-1997 and the payments were made between 16-10-1997 and 6-1-1998 being period where no certificate was in force. Hence, assessee was deemed to be in default for non-deduction of TDS and interest u/s. 201(1A) was also charged.

The Tribunal after considering the various provisions of the IT Act as also the Rules held that the satisfaction of the AO for non-deduction or deduction of income-tax at lower rate is with reference to the total income of the recipient for the whole of the year and not for the part of the year. Thus, the certificate issued u/s. 197(1) is made valid for the assessment year in which it is issued. Further, Form No. 15AA bears column in para 3 of the form with the title – ‘Sums expected to be credited paid in pursuance of the contract during the current previous year and each of the three immediately succeeding years’. Thus, the amount specified in the certificate is only tentative figure and not the actual figure and that the amount may vary. In the instant case, the total amount authorized for payment without deduction of TDS aggregated to Rs. 5 crores, which was much more than the total amount paid of Rs. 4.16 crores and hence, the payments made after 16-10-1997 without deduction of tax at source could not empower the AO to treat the assessee as in default in terms of section 201. Consequently, the levy of interest u/s. 201(1A) was also liable to be cancelled.

4. Penalty u/s. 271(1)(c) – Assessment completed u/s. 147 – Validity of the same challenged in appeal against penalty – Notice
   u/s. 148 issued beyond statutory period prescribed – Assessment made on basis of such notice would be null and void – Very basis of imposition of penalty ceased to exist by virtue of void assessment – Penalty imposed u/s. 271(1)(c) liable to be cancelled – A.Ys. 1996-97 and 1997-98

Tide Water Marine International Inc. vs. DCIT (2005) 96 ITD 406 (Del); dated  31-5-2005

Proceedings were initiated against the non-resident assessee u/s. 147 and notice u/s. 148 was issued and the assessment was completed u/s. 143(3)/148. Penalty proceedings
u/s. 271(1)(c) was initiated and penalty was levied by AO, which was confirmed by CIT(A). In the appeal before ITAT, the assessee contended that since the notice issued u/s. 148 was beyond the statutory period prescribed, the assessment was improper and invalid.

The Tribunal held that it is open to the assessee to set up/raise the question of validity of assessment in the appeal against levy of penalty and since the question raised was purely question of law, the additional ground raised was admitted. The Tribunal held that the reassessment proceedings were vitiated as the notice u/s. 148 had been issued beyond the statutory period prescribed
u/s. 149(3) and consequently the assessment made on the basis of such notice would be null and void. Since the very basis of imposition of penalty ceased to exist by virtue of void assessment order, the penalty imposed u/s. 271(1)(c) was liable to be cancelled.

Board of Control for Cricket in India vs. DIT (Exemp) [2005] 96 ITD 263 (Mum); dated 31-1-2005

An ‘order’ open to revision u/s. 263 can be an order in ‘any’ proceedings under the Act and not necessarily an order in the assessment proceedings and not necessarily an order in the assessment proceedings alone. The term ‘order’ in the context of ‘any proceedings’ u/s. 263 gives wide meaning to the term ‘order’ and covers each and every order passed in any proceedings under the Act. Further, on plain reading of section 195(2), it is clear that it does not require an authorization to be issued. What it requires to be issued is a general or special order determining the liability towards deduction of tax at source. Any communication by the AO u/s. 195(2) that disposes an application made u/s. 195(1) and determines the liability towards tax to be deducted at source in accordance with the provisions of section 195(2), is an order for the purposes of section 263 also.