REPORTED DECISIONS

1. Assessment – Section 143 – Decisions given in assessment order for an earlier year are not binding either on assessee or on department in a subsequent year – A.Y. 1996-97

Tamilnadu Chlorates vs. JCIT (2006) 98 ITD 1 (Chennai); Order dated 6-9-2005

The assessee was engaged in the business of generation or distribution of power. It claimed deduction under section 80HH which was disallowed by the authorities below.

The Tribunal held that there was no merit in the contention of the assessee that deduction was allowed in the initial year of assessment and, therefore, it could not be withdrawn in later year. The claim was not maintainable under the law. As a general rule, the principle of res judicata is not applicable to the decisions of income-tax authorities. An assessment for a particular year is final and conclusive between the parties only in relation to that year. Decisions given in an assessment order for an earlier year are not binding either on the assessee or on the department in a subsequent year.

2. Block assessment in search cases – Section 158B, r.w.s. 158BB – Undisclosed income – Block period 1-4-1990 to 20-7-2000 – Income, which is not based on material or evidence found as a result of search and which has been duly disclosed in assessee's books maintained in regular course of business, cannot be treated as undisclosed income under section 158B

DCIT vs. M. L. Dalmiya & Co. Ltd. [2006] 98 ITD 93 (Kol.); Order dated 7-10-2005

The assessee-company was subjected to a search and seizure operation under section 132. Pursuant to notice issued under section 158BC, the assessee filed its return showing nil undisclosed income. During assessment proceedings, the Assessing Officer observed that the assessee had shown certain amount received from nineteen companies part of which was treated as amalgamation reserve on account of six transferor companies and remaining amount was said to have been received from thirteen companies on account of direct share application money. The AO came to the conclusion that all the said nineteen companies were benami of assessee and the sole purpose for the formation of those companies was to introduce black money in its business without paying any tax. Consequently, he treated the same as assessee's undisclosed income for the block period. On appeal, the Commissioner (Appeals) while observing that the amalgamation reserve and share application money were disclosed by the assessee to the department before the date of search vide filing its regular return and same were also recorded in books of account, deleted the entire addition thereby allowing the assessee's appeal.

The Tribunal held that it was a block assessment case and any addition was supposed to be made in the hands of the assessee on the basis of evidence/material found as a result of search. The action of the Assessing Officer in treating the amalgamation reserve and share application money, which were shown in the regular return of income, as undisclosed income of the assessee, was not justified. Section 158B(b) is a charging provision and that provision of Chapter XIV-B applies only to those income which can be brought within the definition of undisclosed income. The method as to how undisclosed income is to be computed has been given under section 158BB. The computation has to be on the basis of books of account or documents or material found as a result of search. It is settled law that the computation provisions cannot supersede the charging provisions. If some income cannot become undisclosed income within the definition under section 158B(b), it cannot be brought to tax by way of computation under section 158BB. The computation provisions are to be applied subsequent to the charging provisions. Chapter XIV-B is an independent Code. Object of the said Chapter is to bring to tax undisclosed income which the assessee has earned during a block year. As to how this income is to be computed, the method has been given under section 158BB. Thus, every income which can be regarded to be undisclosed income within the definition given under section 158BB can be brought to tax under that Chapter by computing such undisclosed income on the basis of evidence, material or record found at the time of search. Thus, the income which is not based on the evidence or material found at the time of search; i.e., based merely on hypothesis, surmises, conjectures or estimate, cannot be brought to tax under that Chapter. The income, which is not undisclosed; i.e., income has been duly disclosed in the assessee's books maintained in the regular course of business, can also not be brought to tax under that Chapter. Even an asset or transaction, which is duly entered in the books maintained by the assessee regularly and disclosed to the department, can also not be regarded to be undisclosed income. The assessment under that Chapter shall be in addition to regular assessment and income assessed will not be included in regular assessment. Thus, the income, which has not been found on the basis of material or evidence found as a result of search, cannot be treated as undisclosed income under the said section.

3. Business expenditure – Interest on borrowed capital – Section 36(1)(iii) – Debit balance in capital account of partners – No borrowings during the year – Debit balance in capital account also reduced by fresh contributions – Disallowance of interest not justified - A.Y. 2002-03

ITO vs. J.M.P. Enterprises [2006] 99 TTJ 305, 308 (Asr); Order dated 16-12-2005

For the relevant assessment year, the debit balance in the capital account of the partners reduced considerably as compared to the earlier years. It was also a fact that in the earlier years, the department did not disallow any part of interest expenditure. No material was brought on record to show that there was increase in the borrowings during the year and it had link with withdrawals of the partners. The withdrawals made by the partners during the year were also less than the profits earned and fresh contributions made.

The Tribunal held on the aforesaid facts that no disallowance of interest on borrowings could be made on the ground that the assessee had diverted borrowed funds to the partners, as there was a reduction in the debit balances in the capital accounts of the partners as compared to the earlier year and that there was no increase in the borrowed funds in the relevant year which
could be linked to the withdrawals by the partners.

4. Disallowance made u/s. 40(b) – Salary to partner – Remuneration for section 40(b) is as per the book profits reflected in profit and loss account – Interest income on Fixed Deposit shown credited in profit and loss account – Remuneration to partners to be paid u/s. 40(b) without excluding the interest income which formed part of the book profit – A.Y. 1998-99

ACIT vs. Sheth Brothers [2006] 99 TTJ 189 (Rajkot); Order dated 30-8-2005

Sec. 40(b) contains provisions with regard to restricting the allowance of deduction on account of remuneration to partners. The section adopts the profit as shown in the P&L a/c of the firm as the basis for allowing such deduction. In order to ensure that the figure of ‘net profit’ is not artificially reduced by claiming deduction far in excess of limits permissible under ss. 30 to 43D, s. 40(b) requires that ‘net profit’ is worked out in accordance with Chapter IV-D. The words ‘book profit’ have been defined for this purpose in Expln. 3 as ‘net profit’ as shown in the P & L a/c for the relevant previous year. This brings not only the income computed under the head ‘Business’ but the ‘net profit’ as shown in the P&L a/c to the centrestage of s. 40(b). This definition is, no doubt, further qualified by the words "computed in the manner laid down in Chapter IV-D". These qualifying words have been advisedly used in order to ensure that inadmissible or excessive claims relating to income to be computed under the head ‘Business’ which are embedded in the book profit are excluded from the base for limiting remuneration to partners. Prima facie, under s. 40(b) the legislature did not authorize exclusion of non-business receipts and expenditure recorded in the P & L a/c. The legislature knew that in the scheme of the IT Act, the whole income of the firm under different heads is liable to be assessed in the hands of the firm and that remuneration to partners debited to P&L a/c cannot be broken down into different components, to be allocated to the income computed under different heads. Such exercise for breaking down remuneration to partner with respect to different income earned by the partnership firm has not been spelt out anywhere in the statute. There is also no dispute to the legal position that whatever income is received by the partner from the firm in the name of interest, salary, bonus, commission or remuneration by whatever name called is chargeable to income-tax under the head ‘Profits and gains of business or profession’ under s. 28(v). Such remuneration received by partner is neither exempt nor entitled to any kind of deduction while computing total income of the partner in his individual hands. Such remuneration is allowed to the partner for actively participating in the conduct of firm’s business and thereby putting the capital and other funds of firm for commercial exploitation. The profit earned by firm through such commercial exploitation of its resources is credited to the P & L a/c and partner is made entitled to remuneration as per the clear stipulations in the partnership deed. Whole income embedded in the net profit as appearing in the P & L a/c of the assessee-firm is to be taken into consideration for allowing deduction of remuneration paid to partners under s. 40(b) without excluding the interest income which formed part of the book profit.

5. Firm – Disallowance under s. 40(b) – Salary to partners – Allowability against undisclosed income – Assessee declaring that excess stock discovered during survey was out of current year’s undisclosed income, taking the same to its P & L a/c and claiming partners’ remuneration against the same under s. 40(b) – AO treating the undisclosed income under s. 69 and disallowing the claim under s. 40(b) – Not justified – A.Y. 1994-95

ITO vs. Jamnadas Muljibhai [2006] 99 TTJ 197 (Rajkot); Order dated 27-1-2005

The survey took place at the assessee’s premises on 14th Dec., 1993; i.e., after 9 months from the first day of the financial year relevant to the assessment year under consideration. In the statement recorded and its reply to question No. 13, the partner of the assessee-firm stated that the excess stock of gold and silver found during the course of survey was out of income of the current year which was not recorded up to the date of survey. There is also no dispute to the fact that assessee had made proper entry in the books of account showing the alleged income as income from business and the book profit was increased accordingly. Thus, the partner of the assessee-firm not only explained the source of investment in the excess stock, but also credited the source of such investment being income from current year’s business in its P & L a/c. The AO has not disbelieved the assessee’s claim that investment was out of business income. If the Department was of the view that explanation furnished by the assessee regarding source of investment, which was out of current year’s business income, was found to be not acceptable, the AO should have given reason to dispute the assessee’s version as to the source being business income. No material has been brought on record by the Department to disprove the assessee’s contention regarding source of business income which was out of business of gold and silver ornaments. It is also not the case of the Department that assessee was doing some other activities in which such income was earned and alleged to be invested in the gold and silver ornaments in which the assessee was dealing. As per provisions of s. 40(b), Expln. 3, for the purpose of this clause ‘book profit’ means the net profit, as shown in the P & L a/c for the relevant previous year, computed in the manner laid down in Chapter IV-D, as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm, if such amount has been deducted while computing the net profit. In the instant case, there is no dispute to the fact that net profit of the assessee-firm was inclusive of the profit earned in the course of business, found to be invested in the stock. Therefore, source of stock was out of business income and which was not controverted by the Department by bringing material on record, on which the assessee was eligible to claim deduction remuneration under s. 40(b).

6. Penalty under Ss. 271D and 271E – Contravention of Ss. 269SS and 269T – Reasonable cause – Assessee was ignorant of the relevant provisions and was not advised by his counsel – Assessee’s advocate placed an affidavit to this effect before the AO – Thus, there was reasonable cause for acceptance as also for repayment of the loans in cash – CIT(A) justified in deleting penalty under Ss. 271D and 271E – A.Y. 1991-92

ITO vs. Prabhulal Sahu [2006] 99 TTJ 177 (Jd); Order dated 9-11-2005

The provisions of s. 271D are subject to the provisions of s. 273B which stipulate for the non-imposition of penalty if the assessee proves that there was reasonable cause for violation or to comply with the relevant provisions. The assessee was ignorant of relevant provisions on which the assessee was not advised by his counsel. Affidavit of the advocate of the assessee to this effect was placed before the AO. It shows that the assessee was not aware or was not enlightened upon this fact more specifically in the background of the situation that he was only a matriculate, as is borne out from the impugned order. In view of the totality of the facts and circumstances of the case, the CIT(A) was justified in deleting the penalty imposed under s. 271D. As the repayment of loans have been made in respect of two persons out of total nine from whom the loans were accepted in cash in violation of provisions of s. 269SS, the reasonable cause shown for acceptance of loans in cash, would hold good here also in repayment of such loans.

7. Penalty under s. 271D – Validity – Limitation – Assessee having not filed any return for the relevant assessment year nor any assessment having been made, penalty under s. 271D was invalid as it was not initiated during the course of any proceedings under the IT Act – It was also invalid as penalty proceedings were initiated after a lapse of seven years and was barred by limitation – Further, Revenue authorities having accepted the transaction as genuine, penalty was not leviable – The transaction in question was neither loan nor deposit because the amount having been received from the trustee, was receipt to oneself, and there was no reason for levy of penalty under s. 271D as the default, if any, was of technical and venial nature – A.Y. 1996-97

Sharda Educational Trust vs. ACIT [2006] 99 TTJ 212 (Agra); Order dated 20-1-2005

It is an admitted fact that neither the assessee had furnished any return for the asst. yr. 1996-97, nor any assessment was made nor any proceedings under the IT Act relating to the assessee was pending before the IT authorities on 12th June, 2003, or later on, till the date of levy of penalty under s. 271D; i.e., on 12th June, 2003, when the proceedings were initiated or on 11th Dec., 2003, when the penalty order was passed and, therefore, the penalty proceedings having not been initiated during the course of any proceedings, the same were illegal and bad in law. It is also an admitted fact that the penalty proceedings in question were initiated after a lapse of a period of more than seven years. Consequently, it is not possible to uphold the levy of penalty. The assessee’s plea that in view of the intention of the legislature while enacting the provisions of Ss. 269SS and 269T as well as 271D and 271E, which, as explained in Circular No. 387, dt. 6th July, 1984, was to curb the transaction of black money, is also liable to be accepted because in the present case, the Revenue has accepted the transaction as genuine and has not found the deposit being out of unaccounted cash or the deposit having been made with an effort to explain or introduce cash in the garb of loan/deposit. The transaction in question was neither loan nor deposit because the amount having been received from the trustee, was receipt to oneself, and there was no reason for levy of penalty under s. 271D and the default, if any, was of technical and venial nature.