Direct Tax Vista Your weekly Direct Tax recap Edn. 15 – 19th July 2022 By Vivek Jalan, Partner, Tax Connect Advisory Services LLP

 

 

1. Principles for challenging “Search & Seizure” operations laid down by Apex Court

Many a times, assessees challenge the act of authorization for search and seizure on the ground that it is a fishing enquiry and the conditions precedent as specified in Section 132 of the Act are not satisfied. It is to be determined by the courts whether the “sufficiency or inadequacy of the reasons to believe recorded” can be gone into while considering the validity of an act of authorization to conduct search and seizure. The principles in exercising the writ jurisdiction in the matter of search and seizure under Section 132 of the Act has been laid down by The Hon’ble Apex Court in the decision in the case of Principal Director of Income Tax (Investigation) & Ors. Vs Laljibhai Kanjibhai Mandalia [2022-VIL-15-SC-DT]. They are as follows -

 

i) The authority must have information in its possession on the basis of which a reasonable belief can be founded that the person concerned has omitted or failed to produce books of accounts or other documents for production of which summons or notice had been issued, or such person will not produce such books of accounts or other documents even if summons or notice is issued to him; or

 

ii) Such person is in possession of any money, bullion, jewellery or other valuable article which represents either wholly or partly income or property which has not been or would not be disclosed;

 

iii) Such reasons may have to be placed before the High Court in the event of a challenge to formation of the belief of the competent authority in which event the Court would be entitled to examine the reasons for the formation of the belief,

 

iv) The sufficiency or adequacy thereof of the reasons need not be brought before the court;

 

v) The question as to whether such reasons are adequate or not is not a matter for the Court to review in a writ petition. The sufficiency of the grounds which induced the competent authority to act is not a justiciable issue;

 

vi) The relevance of the reasons for the formation of the belief is to be tested by the judicial restraint as in administrative action as the Court does not sit as a Court of appeal but merely reviews the manner in which the decision was made. The Court shall not examine the sufficiency or adequacy thereof;

 

vii) In terms of the explanation inserted by the Finance Act, 2017 with retrospective effect from 1.4.1962, such reasons to believe as recorded by income tax authorities are not required to be disclosed to any person or any authority or the Appellate Tribunal

 

It is thus suggested that an action of the department should be measured against these principles by the tax practitioners going forward before they challenge search and seizure actions.

 

2. Investing in CSR may become easier with Zero coupon, zero principal bond declared as securities

The Finance Ministry has declared zero coupon zero principal instruments (ZCZP) as securities. This may help many organisations including corporates to utilise their fund marked for social responsibility and also help non-profit organisations to get funds in a more transparent manner. Neither any interest is paid nor principal is repaid under ZCZP. For example, take the case of a corporate which is mandated to use part of profit under Corporate Social Responsibility (CSR), it will get an instrument to invest but not for return. Zero Coupon-Zero Principal instrument means an instrument issued by a not-for-profit organisation which shall be registered with the social stock exchange (SSE) segment of a recognised stock exchange in accordance with the regulations made by the Securities and Exchange Board of India (SEBI)

 

The notification also declared the inclusion of ZCZP in the list of securities under Securities Contracts (Regulation) Act, 1956. As on date, this list included shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities, derivative, units or any other instrument issued by any collective investment scheme, security receipt, mutual fund units (excluding ULIPs), units issued by any pooled investment vehicle and government securities. These securities can be traded on a recognised stock exchange and such trading can be regulated by SEBI.

 

The new notification is a follow up to Finance Minister Nirmala Sitharaman’s announcement in the FY20 Budget - It is time to take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion. I propose to initiate steps towards creating an electronic fund raising platform — a social stock exchange — under the regulatory ambit of SEBI for listing social enterprises and voluntary organisations working for the realisation of a social welfare objective so that they can raise capital as equity, debt or as units like a mutual fund.

 

To implement this, SEBI formed a working group which recommended that ZCZP bonds be listed on the SSE. They will carry a tenure equal to the duration of the project that is being funded, and at tenure, they will be written off the investee’s books. Such bond is particularly well suited to investors who are looking to create social impact but do not wish to have their funds returned to them. However, such bonds are not without risk, as there is no guarantee that the social impact that an NPO (Non-Profit Organisation) is promising will in fact be created. Accordingly, investors will be keen to channel funds only to credible and legitimate NPOs, which the SSE will ensure by requiring beneficiary NPOs to report on social impact in a standardised format. Furthermore, the group recommended investors in ZCZP bonds may also be awarded a tax benefit to incentivise their participation in this instrument. Accordingly, last September, the SEBI board approved a framework for SSE through which ZCZP can be issued. It has been proposed that the minimum issue size of ZCZP will be Rs.1 crore while the minimum application size shall be Rs.2 lakh.

 

3. Money Laundering allegations are very Serious, cannot be used when assessee explained transactions

The Calcutta High Court, commented that the allegations of money laundering are very serious allegations and the effect of a case of money laundering under the relevant Act is markedly different. The said allegations cannot be used when the assessee discharges his obligations and explained the transaction.

 

The Assessing Officer during the proceedings against the assessee, M/s Sreeleathers, noticed that during the year under consideration the assessee had received unsecured loans from various companies and the names of 13 such companies were furnished and it was alleged that those companies were the “paper companies” having no worth. The assessee informed the Assessing Officer that all transactions with one of such company namely, were made through banking channels. To establish the identity of the lender the assessee enclosed their KYC details and proof to show that the notice under Section 133(6) of the Act was duly served on the lender. The Court held that where the assessee furnishes full details regarding the creditors, it is up to the department to pursue the matter further to locate those creditors and examine their creditworthiness. The Court held that the assessee has discharged his initial burden and the burden shifts on the assessing officer to enquire further into the matter which he failed to do.

 

The usage of the expression “money laundering” was uncalled for as the allegation of money laundering is a very serious allegation and the effect of a case of money laundering under the relevant Act is markedly different.

 

It was held that the assessing officer ignored the settled legal principle and in spite of the assessee having offered the explanation with regard to the loan transaction, no finding has been recorded as regards the satisfaction on the explanation offered by the assessee.”

 

 

4. Interest on Deposits during Construction period cannot be taxed as IFOS

During construction period, incase borrowings are made by the assessee for purchasing fixed assets and some of such amount is  kept in FDs for the time being; the interest income earned therein will not be assessed under Income from Other Sources. The interest, being intrinsically connected with construction activity, would go to reduce the cost of construction. The Hon’ble Supreme Court in CIT VS. BOKARO STEEL PLANT has held that interest and hire charges realized from contractor could not be taxed as ‘Income from other sources’. Similarly In CIT VS. KARNAL COOPERATIVE SUGAR MILLS LTD., the Hon’ble Supreme Court specifically considered the amount of interest earned during construction period on the amount of fixed deposits for opening letter of credit, as not chargeable to tax as ‘Income from other sources’. On similar grounds, relief was provided in the case of DANA INDIA TECHNICAL CENTRE PRIVATE LTD. Vs DCIT [2022-VIL-876-ITAT-PNE]

 

5. Development of Sports is a “Charitable Activity” and exempt from Tax - Reaffirmed

Once again the application for registration u/s 12A of a Sports Organization was rejected by The CIT(E) alleging that the activities of the assessee fell under the provisio to Sec 2(15) in as far is it is not an advancement of any other object of general public utility. This was even after the decision of Hon'ble Bombay High Court in the case of Chembur Gymkhana where reverse was held. Also in Assistant CIT (Exemptions) v. Surat District Cricket Association it was held that where predominant object of assessee-society was to promote cricket and other sports at State as well as at National level and receipts shown under income from other sources were from activities undertaken in furtherance of various sports, profit earning was not predominant purpose of assessee and thus, proviso to section 2(15) could not be invoked to decline benefit of section 11 of The Act. This was reiterated in the case of GYMNASTICS SEVABHAVI SANSTHA Vs CIT EXEMPTION [2022-VIL-875-ITAT-MUM]

 

6. Would ‘Provision for expenses’ added back due to delay in receipt of bills

It is a general accounting practise that provisioning is made for expenses like retainership fees of consultants, rent, etc which are paid periodically. However sometimes bills are received after sometime. For example on 31st March a provision for rent is made, but the bill is received for the period on 1st April. This is allowed year after year, but suddenly field officers start imagining out of the box. A question was raised by disallowance of claim of Provision for expenses, being carried away by the fact that the liability to pay shall arise upon the assessee only after the receipt of the relevant bills and not considering its accrual.

 

It was held in the case of L’OREAL INDIA PRIVATE LIMITED [2022-VIL-864-ITAT-MUM], that the fact that there was an obligation upon the assessee to pay for the liability as a result of past event cannot be denied. By belated receipt of bills, the payment only gets postponed, but not the liability that has already accrued to the assessee. It is also fact that the assessee has been providing for known expenses and losses year after year and the said provision has been verified by the statutory auditors of the assessee company. Hence such expenses were hitherto allowed.

 

7. Matching of Income and expenses every year

In another out of box case, an AO disallowed expenses as was no substantial income in one year, even though there was income reported in the next year. It was considered that these expenditures were not incurred wholly and exclusively for the purpose of business.

 

Such cases sometimes come up when the concerned authorities either do not reflect sufficiently on accounting and business principles or ARs do not represent appropriately. It is an easy understanding that the AO has to give findings and appreciate the accounts filed by the assessee before disallowing the expenses against the business income shown by the assessee. So long as the expenses are incurred for the purpose of business, it should be allowable as deduction and it is not necessary that the expenditure may result in income or there must be substantial income. The same was correctly held by in the case of ACIT Vs M/s EMCIPI ELECTRONICS PVT. LTD. [2022-VIL-857-ITAT-DEL]

 

8. CBDT notifies Form 8A to defer filing of appeal on identical issues

The Finance Act, 2022 has inserted a new Section 158AB which provides that in a case of an assessee wherein the question of law arising from an order of Commissioner (Appeals) or the ITAT for a particular assessment year is identical to a question of law that is pending before jurisdictional High Court or the Supreme Court in assessee’s own case for any other assessment year or any other assessee’s case for any assessment year, then to avoid duplicity of appeal before judicial forums, based on the communication from Principal Commissioner or Commissioner, the assessing officer shall not file an appeal before the jurisdictional High Court or the ITAT. The Assessing Officer (AO) shall instead file an application to the jurisdictional High Court or the ITAT that the appeal on the question of law in the assessee’s case may be filed when the decision on such question of law, in the other case, becomes final.

 

To notify form for making such application by the AO, the CBDT has made the amendments to the Income-tax Rules 1962 vide Income-tax (22nd Amendment) Rules, 2022. The CBDT has renumbered the existing Rule 16 as Rule 15A and inserted a new Rule 16. The new Rule 16 provides that the application, referred to in section 158AB required to be made before the ITAT/High Court, shall be made in Form No. 8A by the AO. Form 8A seeks the following details from the Assessing Officer:

 

(a) Appellant’s Personal Information;

(b) Respondent’s Personal Information;

(c) Case Details, such as Assessment Year, total income declared, details of order against which appeal is deferred, etc.;

(d) Questions of Law for which appeal is deferred;

(e) Details of other cases on the basis of which appeal is deferred; and

(f) Due date for filing of application as per section 158AB(2).

 

9. Certain Forms Mandatorily to be filed in e-Mode

The Central Board of Direct Taxes (CBDT) has mandated the electronic filing of certain forms, returns, statements, reports, and orders under the Income-tax Act. Form 3CEF, Form 10F, Form 10IA, Form 3BB, etc. are certain forms that shall be furnished electronically and shall be verified in the manner prescribed under Rule 131(1).

 

Important to note regarding online filing of Form 68 u/s 270AA(2) to grant immunity from imposition of penalty or prosecution by paying the demand amount and submitting for not appealing; and Form u/s 206C(1A) regarding non-deduction of TCS on scrap, etc where the item is used for manufacturing purposes.

 

(The author is a CA, LL.M & LL.B and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Lead - Indirect Tax Core Group of CII- ER and The Chairman of The Fiscal Affairs Committee of The Bengal Chamber of Commerce. He has Authored more than 15 books on varied aspects of Direct and Indirect Taxation. E-mail - vivek.jalan@taxconnect.co.in)