Key Income Tax Rulings of 2023 | A Review of Top 20 Case Laws from Taxmann

The year 2023 was loaded with several significant Income-tax rulings a taxpayer and revenue will need to remember. This article reviews the top 20 income-tax case laws of the year reported on taxmann.com.

All these reported case laws contain a three-line digest and headnotes, which are drafted and reviewed by a team of professionals. We focus on bringing the issue involved and ratio decidendi to the fore and integrating it with all connected records so that you can have a holistic view of a judgment.

1. Notification is needed to apply the MFN clause; No benefit if the country joins OECD post-signing of the first treaty: SC

[Assessing Officer v. Nestle SA [2023] 155 taxmann.com 384 (SC)]

A significant development has unfolded as the Supreme Court ruled in favour of the revenue regarding the applicability of the Most Favoured Nation (MFN) clause contained in various Indian treaties. The Supreme Court’s decision effectively overruled the judgment of the Delhi High Court in the case of Steria India and Concentrix Services Netherlands BV.

The central issues at hand pertain to the invocation of the MFN clause in cases where the third country, with which India has entered into a Double Tax Avoidance Agreement (DTAA), was not a member of the OECD at the time of entering into the DTAA but subsequently became an OECD member. Additionally, the question arises whether the MFN clause can be triggered automatically or is contingent on issuing a notification.

The Supreme Court held that the word ‘is’ appearing in Clause IV(2) of the India-Netherlands DTAA need to be interpreted correctly. The clause is quoted below:

“If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD, India should…………….”

The expression “is” has a present signification and derives meaning from the context. The conclusion is that when a third-party country enters into DTAA with India, it should be a member of the OECD for the earlier treaty beneficiary to claim parity.

The treaty practices of Switzerland, Netherlands, and France are influenced by their unique constitutional and legal systems. In India, when a third state joins the OECD after signing a DTAA, India must communicate and accept the beneficial effect through a notification under Section 90. Therefore, the essential requirement of a notification under Section 90 cannot be undermined.

If a DTAA or Protocol provision with one nation mandates equal treatment for a specific matter, even after another nation (part of OECD) receives preferential treatment. In that case, it does not automatically apply the same benefit to the DTAA of the first nation that has an agreement with India. In this case, the terms of the earlier DTAA need a separate amendment through a notification under Section 90.

Accordingly, for a court, authority, or tribunal to enforce a DTAA or any protocol that alters existing legal provisions, a notification under Section 90(1) is essential and obligatory.

2. Mutuality does not exempt interest income of clubs even if banks are corporate members: SC

[Secundrabad Club etc. v. CIT [2023] 153 taxmann.com 441 (SC)]

Assessee-club was a mutual association of persons existing solely for the benefit of its members. The main object of the club was to promote social activities, including sports and recreation, amongst its members and various services can be availed of by its members. The surplus income generated by the club from members was deposited as fixed deposits, post office deposits, national savings certificates, etc.

The issue before the Supreme Court was:

“Whether the deposit of surplus funds by Clubs by way of bank deposits in various banks wouldn’t be subject to tax in the hands of the Clubs considering the principle of mutuality?”

The Supreme Court held that the principle of mutuality is rooted in common sense. This implies that a person cannot earn profit from an association that he shares a common identity with. The essence of the principle lies in the commonality of the contributors and the participants who are also beneficiaries. There has to be a complete identity between the contributors and the participants. Therefore, it follows that any surplus in the common fund shall not constitute income but will only be an increase in the common fund meant to meet sudden eventualities.

The principle of mutuality would not apply to interest income earned on fixed deposits made by the Clubs in the banks, irrespective of whether the banks are corporate members of the club or not.

If there is an entry of a third party or non-member to utilise the funds of the club and return the same with interest, then the parties’ relationship is not based on privity of mutuality. The essential condition of mutuality, i.e., identity between the contributors and participators, would end. The relationship would then be like any other commercial relationship, such as between a customer and a bank where the customer makes a fixed deposit to earn an interest income.

In the principle of mutuality, where many people contribute to a fund, they are ultimately paid the surplus from the fund. In that case, it is a mere repayment of the contributors’ own money. However, if the very same surplus fund is not applied for the common purpose of the club or towards the benefit of the members of the club directly but is invested with a third party who has the right to utilise the said funds, subject to payment of interest on it and repayment of the principal when desired by the club, then, in such an event, the club loses its control over the said funds.

When surplus funds of a club are invested as fixed deposits in a bank, and the bank has a right to utilise the said fixed deposit amounts for its banking business subject to repayment of the principal along with interest, the identity is lost.

Thus, the interest income earned on fixed deposits made in the banks by the Clubs has to be treated like any other income from other sources.

3. Non-banking Co-op Society offering credit facilities to members eligible for Section 80P relief: Supreme Court

[Kerala State Co-Operative Agricultural & Rural Development Bank Ltd. v. AO [2023] 154 taxmann.com 305 (SC)]

The assessee was a state-level agricultural and rural development bank governed as a co-operative society under the Kerala Co-operative Societies Act, 1969. It was engaged in providing credit facilities to its members.

In the relevant assessment year, the assessee filed its return and claimed a deduction under Section 80P(2)(a)(i). The Assessing Officer (AO) disallowed the deduction on the grounds that the assessee was a co-operative bank and, thus, was hit by Section 80P(4) and would not be eligible for deduction under Section 80P(2).

The matter reached the Supreme Court.

The Supreme Court held that banking is defined in Section 5(b) of the Banking Regulation Act, 1949 to mean accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. Therefore, a banking company must transact banking business vis-à-vis the public.

If a co-operative society would not transact the business of banking as defined in Section 5(b), it would not be a co-operative bank within the meaning of Section 56 of Banking Regulation Act and would be entitled to the benefit of deduction under Section 80P.

Since the assessee society was an apex co-operative society within the meaning of Kerala State Co-Operative Agricultural Development Banks Act, 1984 (State Act, 1984) whose primary object was to provide financial accommodation to its members who were all other co-operative societies and not members of the public, it was not a co-operative bank within the meaning of Section 5(b) read with Section 56 of Banking Regulation Act.

Accordingly, the deduction under Section 80P could not be denied by invoking Section 80P(4).

4. Annual licence fee paid by Airtel to DoT is a capital expenditure amortizable under Section 35ABB: SC

[CIT v. Bharti Hexacom Ltd. [2023] 155 taxmann.com 322 (SC)]

The assessee company was engaged in the business of telecommunication services and value-added related services. It initially procured a licence from the Government for telecommunication services under the 1994 agreement, which New Telecom Policy, 1999 subsequently governed. In terms of the licence agreement, the assessee had to pay an entry fee payable up to 31-7-1999, and, thereupon, the licence fee was payable as a percentage of gross revenue under the licence effective from 01-08-1999.

The Delhi High Court apportioned the licence fee as partly revenue and partly capital by dividing the licence fee into two periods, i.e. before and after 31-7-1999. Accordingly, it was held that the licence fee paid or payable for the period up to 31-7-1999, i.e., the date set out in the Policy of 1999, should be treated as a capital expense, and the balance amount payable on or after the said date should be treated as a revenue expense.

On appeal, the Supreme Court held that as per the Policy of 1999, there was a multi-licence regime since any number of licences could be issued in a given service area. Further, the licence was for a period of twenty years instead of ten years as per the earlier regime. The migration to the Policy of 1999 was on the condition that the entire policy must be accepted as a package, and consequently, all legal proceedings and disputes relating to the period up to 31-7-1999 were to be closed. If the migration to the Policy of 1999 was accepted by the assessees herein or the other service providers, then all licence fee paid up to 31-7-1999 was declared as a one-time licence fee as stated in the communication dated 22-7-1999 which was treated to be a capital expenditure.

The licence granted under the Policy of 1999 was non-transferable and non-assignable. More importantly, if there was a default in the licence fee payment, the entire licence could be revoked after sixty days’ notice.

The view of the Delhi High Court was not right in apportioning the expenditure incurred towards establishing, operating and maintaining telecom services as partly revenue and partly capital by dividing the licence fee into two periods, that is, before and after 31-7-1999 and holding that the licence fee paid for the period upto 31-7-1999 should be treated as capital and the balance amount payable on or after the said date should be treated as revenue.

The nature of payment being for the same purpose cannot have a different characterisation merely because of the change in the manner or measure of payment or, for that matter, the payment being made annually. Therefore, the nomenclature and the manner of payment are irrelevant.

The payment post 31-7-1999 was a continuation of the payment made before 31-7-1999, albeit in an altered format, which does not take away the essence of the payment. It was a mandatory payment traceable to the foundational document, i.e., the license agreement as modified post-migration to the 1999 policy. The consequence of non-payment would result in the ouster of the licensee from the trade. Thus, this is a payment which is intrinsic to the existence of the licence as well as trade itself.

Accordingly, variable annual licence fees paid by the assessees to the DoT under the Policy of 1999 are capital in nature and may be amortised in accordance with Section 35ABB.

5. Supreme Court eliminates discrimination in Section 10(26AAA); Sikkimese women marrying non-Sikkimese and old Indian settlers are eligible for exemption

[Association of Old Settlers of Sikkim v. UOI [2023] 146 taxmann.com 271 (SC)]

The Supreme Court ends discrimination against a Sikkimese woman marrying a non-Sikkimese in the matter of Income-tax exemption under Section 10(26AAA). It also directed the Govt. to amend the Explanation to Section 10(26AAA) to suitably include a clause to extend the tax exemption to all Indian citizens domiciled in Sikkim on or before 26th April 1975.

The Association of Old Settlers of Sikkim and others have filed a writ petition under Article 32 of the Constitution of India, asking for a court order striking down Section 10(26AAA) of the Income-tax Act.

The petitioners have prayed to strike down Section 10(26AAA) to the extent it excludes Indians who have settled in Sikkim before the merger of Sikkim with India on 26-04-1975, but their names are not recorded as “Sikkim Subjects”.

Further, a request was also made to remove the Proviso to Section 10(26AAA), which excludes “Sikkimese women” who marry non-Sikkimese after 01st April 2008, from the exempt category.

The Supreme Court of India held the purpose of Section 10(26AAA) is to grant exemption to the residents of Sikkim. Therefore, all such Indian citizens who settled in Sikkim before the merger of Sikkim with India on 26-04-1975 are to be treated at par as they form the same group/class.

Just because the Indian citizens settled in Sikkim did not relinquish their Indian citizenship, or their ancestors were not registered under the Sikkim Subjects Regulations, 1961, at the time of its enactment, it cannot be concluded that they are no longer considered “Sikkimese”.

There is no nexus sought to be achieved in excluding the Indians, who had settled in Sikkim before the merger of Sikkim with India on 26-04-1975, but their names are not recorded as “Sikkim Subjects”. The Union of India has failed to satisfy any reasonable classification and/or nexus to exclude such a class of Indians who have settled in Sikkim before 26-04-1975.

Therefore, excluding long-time Indian settlers who settled in Sikkim before its merger with India on 26th April 1975 from the definition of “Sikkimese” in Section 10(26AAA) is unjust, unfair, and in violation of Article 14 of the Indian Constitution.

The Union of India shall amend the Explanation to Section 10(26AAA) to suitably include a clause to extend the exemption from payment of income tax to all Indian citizens domiciled in Sikkim on or before 26th April 1975.

Till such amendment is made by the Parliament, any individual whose name does not appear in the Register of Sikkim Subjects, but it is established that such individual was domiciled in Sikkim on or before 26th April 1975 shall be entitled to the benefit of exemption. This direction is being issued in the exercise of powers under Article 142 of the Constitution.

About the objection to the Proviso in Section 10(26AAA) that excludes “a Sikkimese woman who marries a non-Sikkimese after 01st April 2008” from the exemption category, no valid reason has been provided by the Union of India for this exclusion.

It should be noted that there is no disqualification for a Sikkim man who marries a non-Sikkimese after 01-04-2008. Thus, there is clear discrimination based on gender, which is wholly violative of Articles 14, 15, and 21 of the Constitution of India.

A woman is not a chattel and has an identity of her own, and the mere factum of being married ought not to take away that identity. Therefore, the Proviso to Section 10 (26AAA) is also struck down as being ultra vires Articles 14, 15, and 21 of the Constitution of India.

Editor’s Note:

To settle the issue and incorporate the ruling of the Apex Court, the Finance Act 2023 has substituted clause (26AAA) of Section 10 with retrospective effect from 01-04-1990.

6. Section 271C penalty cannot be imposed for belated or non-payment of TDS: Supreme Court

[US Technologies International (P.) Ltd. v. CIT [2023] 149 taxmann.com 144 (SC)]

The assessee, a private limited company, was engaged in a software development business. It deducted tax at source (TDS) in respect of salaries, contract payments, etc., for the relevant assessment year. The assessee deposited the amount of TDS in instalments with a delay ranging from 5 days to 10 months.

During the survey conducted by the AO, the delay in depositing the amount of TDS was noticed, and interest under Section 201(1A) was charged. Further, the Additional Commissioner (ACIT) levied a penalty equivalent to the amount of TDS under Section 271C on the assessee. The High Court confirmed the penalty order imposed by ACIT. Aggrieved by the order, the assessee preferred an appeal to the Supreme Court.

The Supreme Court held that Section 271C(1)(a) applies in case of a failure on the part of the assessee to “deduct” the whole or any part of the tax as required under the provisions of the Act. The words used in Section 271C(1)(a) are very clear, and the relevant words used are “fails to deduct.” It does not speak about the belated remittance of the TDS.

Only a limited text involving Section 115-O(2) or the second proviso to Section 194B alone would constitute an instance where a penalty can be imposed in terms of Section 271C(1)(b) for the non-payment of tax. The legislature has provided the consequences of non-payment or belated remittance/payment of the TDS as in Section 201(1A) and Section 276B of the Act.

As per the settled position of law, the penal provisions are required to be construed strictly and literally. The cardinal principle of interpretation of the statute and, more particularly, the penal provision are needed to be read as they are. Nothing is to be added, or nothing is to be taken out of the penal provision.

The words “fails to deduct” occurring in Section 271C(1)(a) cannot be read into “failure to deposit/pay the tax deducted”. Therefore, on the plain reading of Section 271C, no penalty under Section 271C(1)(a) can be levied on belated remittance of the TDS after the same is deducted by the assessee.

7. ALP determined by ITAT can be subject to scrutiny; no absolute proposition of law that its decision is final: SC

[Sap Labs India (P.) Ltd. v. ITO [2023] 149 taxmann.com 327 (SC)]

The issue before the Supreme Court was:

“Whether the High Court was correct in holding that the determination of arm’s length price by the Tribunal shall be final against which the High Court cannot entertain an appeal?”

The Supreme Court held that the tribunal must follow the guidelines stipulated under Chapter X of the Income-tax Act, namely, Sections 92, 92A to 92CA, 92D, 92E and 92F and Rules 10A to 10E while determining the arm’s length price (ALP). Any determination of ALP under Chapter X dehors the relevant provisions of the Income-tax Act is considered perverse and may be considered a substantial question of law as perversity itself can be said to be a substantial question of law.

There cannot be any absolute proposition of law that in all cases where the tribunal determined ALP, the same is final and cannot be scrutinised by the High Court in an appeal under Section 260A of the Income-tax Act.

When the determination of ALP is challenged before the High Court, it is always open for the High Court to consider and examine whether the ALP was determined considering the relevant guidelines under the Act and the Rules.

Even the High Court can examine the comparability of two companies or the selection of filters and whether the same is done judiciously and based on the relevant material/evidence on record. The High Court can also examine whether the comparable transactions have been taken into consideration properly, i.e., to the extent non-comparable transactions are considered comparable or not.

Therefore, the view that in the matter of transfer pricing, the determination of ALP by the tribunal shall be final and cannot be a subject matter of scrutiny is not acceptable. The High Court is not precluded from examining the correctness of the determination of ALP.

Consequently, the matter was remitted back to the respective High Court for fresh consideration after examining the arm’s length price in accordance with the relevant provisions.

8. Loss due to confiscation of smuggled stock-in-trade not allowable under Section 37: Apex Court

[CIT v. Prakash Chand Lunia (D) [2023] 149 taxmann.com 416 (SC)]

The assessee was in the business of making jewellery. A search was conducted by the Directorate of Revenue Intelligence (DRI) officers at the premises taken on rent by the assessee and recovered slabs of silver.

Since the assessee failed to explain the source of the acquisition of silver, additions were made under Section 69A and an assessment order was passed. Later, the assessee claimed that the loss due to confiscation by the DRI official of the Customs Department was a business loss.

The matter reached the High Court, wherein loss was duly allowed, relying upon the Supreme Court Ruling in the case of Piara Singh [1980] 3 Taxman 67 (SC). The revenue filed the instant appeal before the Supreme Court.

The Supreme Court held that the judgement in the case of Piara Singh wrongly relied upon as the same pertained to an assessee who was engaged in the business of smuggling currency notes and for whom confiscation of the currency notes was a loss occasioned in pursuing his business.

In the instant case, the main business of the assessee was dealing in silver, and his business cannot be said to be the smuggling of silver bars, as was the case in the case of Piara Singh (supra).

In the assessee’s case, he was carrying on an otherwise legitimate silver business. To make larger profits, he indulged in the smuggling of silver, which was an infraction of the law.

The word ‘any expenditure’ mentioned in Section 37 takes in its sweep loss occasioned in the course of business, being incidental to it. As a consequence, any loss incurred by way of expenditure by an assessee for any purpose that is an offence or prohibited by law is not deductible in terms of Explanation 1 to Section 37.

Such an expenditure/loss incurred for any purpose which is an offence shall not be deemed to have been incurred for the purpose of business or profession or incidental to it, and hence, no deduction can be made.

A penalty or a confiscation is a proceeding in rem. Therefore, a loss in pursuance to the same is not available for deduction regardless of the nature of the business, as a penalty or confiscation cannot be said to be incidental to any business. Therefore, an appeal of revenue was allowed, and an order passed by the High Court was set aside.

9. ‘Bitumen’ is not a ‘valuable article’; No Section 69A addition if transporter does not deliver it to Govt.: SC

[D. N. Singh v. CIT, [2023] 150 taxmann.com 301 (SC)]

The assessee carried on business as a carriage contractor for bitumen. It was involved in a scam of misappropriating the bitumen and not delivering the quantity lifted to the various divisions of the Road Construction Department of the Government of Bihar. Finding out that the actual quantity was not delivered, the AO invoked Section 69A and made additions due to the short supply of bitumen.

The matter reached the Supreme Court of India.

The Supreme Court held that the assessee at any point did not claim ownership over the bitumen not delivered to the authorities. It was also not a case where the assessee exercised rights available in law, entitling it to possess goods as of right or pass on the title to another under law as permitted. At best, the assessee’s possession was a shade better than that of a thief as the possession had its origin under a contract of bailment.

It would be straining the law beyond justification if the Court recognised a thief as the property owner within the meaning of Section 69A. Recognising a thief as the property owner would also mean that the owner would cease to be recognised as the owner, which would indeed be the most startling result.

When the facts are clear that the assessee is not the owner and somebody else is the owner, then treating the assessee as the owner may produce the most illegal results apart from being unjust.

The intention behind introducing Section 69A was to get at income not reflected in the books of account but found to belong to the assessee. Not only must it belong to the assessee, but it must be other valuable articles.

Applying the Principle of Ejusdem Generis, bitumen would stand out as a strange bedfellow in the company of its immediate predecessor words, viz., money, bullion, and jewellery. Bitumen is a clear misfit and could not have been the legislative intention to treat it as another valuable article.

Bitumen is a residual product in petroleum refineries and is usually used in road construction. It may be found in small quantities or large quantities. If the ‘article’ is to be found ‘valuable’, then in small quantity, it must not just have some value, but it must be ‘worth a good price’ or ‘worth a great deal of money’. If this is so, Section 69A would then stand attracted.

But if treating it as a ‘valuable article’ requires ownership in large quantity and multiplying the value in large quantity, a ‘good price’ or a ‘great deal of money’ is arrived at, then it would not be valuable.

Thus, the AO acted illegally in holding that the assessee was the ‘owner’ and made the addition under Section 69A on the said basis.

10. AO rightly imposed a penalty under the Black Money Act for non-disclosure of foreign assets in Schedule FA of ITR: ITAT

[Ms. Shobha Harish Thawani v. Jt. CIT [2023] 154 taxmann.com 564 (Mumbai – Trib.)]

The Mumbai Tribunal has confirmed the imposition of a penalty on the taxpayer for failing to disclose foreign assets in the Schedule FA of ITR. The tribunal stated that reporting interest income in the ITR from said foreign asset does not exempt the taxpayer from the obligation to disclose the assets in Schedule FA.

The assessee and her husband jointly invested in Global Dynamic Opportunity Fund Ltd. The assessee’s share in the said investment was 40%. The assessee invested out of funds transferred from India to HSBC Bank in Jersey.

The assessee declared interest income from the foreign investment in AY 2016-17. Said asset was sold, and capital gain was offered to tax in AY 2019-20. However, the assessee did not disclose foreign assets while filing the return of income (ITR) for AY 2016-17 to AY 2018-19 under Schedule FA.

The AO levied a penalty towards the non-disclosure under Section 43 of the Black Money Act 2015 (BMA) for each of the assessment years. On appeal, the CIT(A) upheld the levy of penalty. The aggrieved assessee filed the instant appeal before the tribunal.

The Mumbai Tribunal held that Section 43 of the BMA contains provisions for the levy of penalty for failure to furnish information or furnish inaccurate particulars about an asset (including financial interest in any entity) located outside India in ITR.

As per said section, a resident and ordinarily resident person is liable for a penalty if he fails to furnish or files inaccurate particulars of investment outside India while filing the return of income under Section 139. Foreign investments/assets are to be disclosed in ITR Schedule FA.

It is apparent from the language of Section 43 that the disclosure requirement is not only for the undisclosed asset but any asset held by the assessee as a beneficial owner or otherwise. Undisputedly, the assessee had not disclosed the foreign asset in the Schedule FA of ITR. Thus, the penalty was rightly levied upon the assessee.

The assessee contended that the penalty is not mandatory but is at the discretion of the AO since the word used in the section is that the AO “may” levy a penalty.

It was held that even if it is assumed that in the light of the expression “may” used in Section 43 of BMA, the AO has the discretion to levy a penalty. The assessee failed to substantiate that the AO has exercised his discretion extravagantly.

After examining the facts of the case, AO formed his opinion on levying a penalty. He exercised his discretion judiciously. No material was brought to show that AO levied penalty arbitrarily and unjustifiedly.

Further, the provisions of Section 43 do not provide any room not to levy a penalty even if the foreign asset is disclosed in books since the penalty is levied only towards non-disclosure of foreign assets in Schedule FA.

11. Portuguese law does not allow the wife to hold 50% voting rights in the husband’s shares;deemed dividend applicable: HC

[Dattaprasad Kamat v. Asst. CIT [2023] 153 taxmann.com 702 (Bombay)]

The assessee-individual held 33% shares in a private limited company. He was married to his spouse as per the provisions of the Portuguese Civil Code, as applicable to the State of Goa.

As per Section 5A of the Income-tax Act, if the Portuguese Civil Code governs the husband and wife, the income of the husband and wife under any head of the income, except income derived from “salaries”, shall be apportioned equally between them.

A search was conducted in the company’s office and director’s residences. After the search, the Assessing Officer (AO) held that various payments made by the assessee through the company were deemed dividends under Section 2(22)(e).

Applying the Portuguese Civil Code, the assessee contended that his wife was the beneficial owner of half of the 33% shares (16.5% shares) in the said company. Since the qualifying limit of 20% referred to in Section 2(22)(e) is not satisfied, the deemed dividend provisions are not applicable.

The Bombay High Court held that if the wife does not make any statement under Section 187C(2) of the Companies Act, 1956, asserting her ownership of a 50% beneficial interest in the shares held by her husband, then the husband would be considered sole owner of entire 33% share portion. This ownership would come with complete voting rights and authority linked to these shares.

A shareholder would be one whom the company recognises as the person to whom dividends declared are legally payable. The Memorandum of Articles essentially binds the company’s shareholders through the various covenants contained therein, which regulate and restrict the liabilities of the shareholders in relation to the company, which is a separate juristic entity.

In the present case, the wife did not claim to have had a name entered into the Register or Members of the Company. She did not participate in passing resolutions or exercising any voting rights, as she did not hold any shares in the company.

The provisions of the Civil Code could not create any right for a spouse who is not a registered shareholder of the company. The Company Act provisions exclusively regulate the relationship between the company and a shareholder. The wife would have no voting powers under the scheme of the Companies Act attached to any of the shares, which have been exclusively registered in the husband’s name.

Consequently, the submission that the wife of the assessee, married under the provisions of the Portuguese Civil Code, would be entitled to the beneficial ownership of the husband’s shares was to be rejected. Thus, the provisions of section 2(22)(e) would fully apply to the husband.

12. Cognizant liable to pay DDT on its Rs. 19,000 crores buyback: ITAT

[Cognizant Technology Solutions India (P.) Ltd. v. Asst. CIT [2023] 154 taxmann.com 309 (Chennai – Trib.)]

The assessee (Cognizant Technology) had purchased its own shares from non-resident shareholders in a ‘Scheme of Arrangement & Compromise’ sanctioned by the High Court of Madras in terms of provisions of Section 391-393 of the Companies Act, 1956.

In accordance with the scheme, the assessee purchased 94,00,534 equity shares from its shareholder at the price of Rs. 20,297 per share and paid a total consideration of Rs. 19,080.26 crores.

The share capital of the assessee company was held by four non-resident shareholders, out of which three shareholders are residents of the USA, and one shareholder is a tax resident of Mauritius. The net effect of the scheme was that post-sanction of the scheme, the only shareholder left was Cognizant Mauritius Ltd.

The AO held that consideration paid by the assessee to its shareholders for the purchase of its own shares was liable to tax as deemed dividend under Section 2(22)(d). Consequently, the assessee was liable to pay Dividend Distribution Tax (DDT) under Section 115-O.

On the other hand, the assessee submits that the ‘Scheme of Arrangement & Compromise’ was sanctioned by the High Court of Madras in terms of Sections 391 to 393 of the Companies Act, 1956. It cannot be considered as a buyback of shares in terms of provisions of Section 77A or a reduction of capital in terms of Sections 100-104/402 of the Companies Act, 1956.

On appeal, the CIT(A) upheld the findings of AO. The matter reached before the tribunal.

The tribunal held as follows:

Two essential prerequisites must be satisfied to come within the ambit of Section 2(22)(d). First, there must be a distribution to the shareholders on the reduction of the capital, and second, it must be to the extent that the company possess accumulated profits. In the present case, it was evident from the audited financial statement that the share capital has been reduced by around Rs. 9.4 crores, which is equivalent to 54.70% of the total paid-up share capital. The Supreme Court, in CIT v. G. Narasihan 236 ITR 327, has clarified that Section 2(22)(d) is automatically attracted once these parameters are satisfied. Further, Clause 7 of the scheme clarifies that the distribution of money will be out of the general reserves and accumulated credit balance in the profit and loss account. Thus, both conditions are satisfied to treat the transaction within Section 2(22)(d).

The assessee also argued that the scheme of purchase of own shares was made through offer and acceptance. This involves an element of quid pro quo, and thus, there was no ‘distribution of the purpose of section 2(22)(d). The tribunal held that the definition of ‘distribution’ does not contain any aspect of quid pro quo or lack thereof. The prerequisites for distribution are that there must be payment, and the disbursal must be made to more than one person. Section 2(22)(d) does not distinguish whether the reduction of share capital is the intended result of the resultant consequence of the scheme.

The assessee’s transaction would either fall under Section 391-393 r.w. Section 77 and Section 100 of the Companies Act, 1956 or Sections 391-393 r.w Section 77A of the Companies Act, 1956. The scheme clearly states that it is not a buyback under Section 77A. Therefore, once the assessee states it is not buyback under section 77A, it should automatically fall back to Section 77 r.w Sections 100-104 of the Companies Act, 1956. If said sections are applied, then said transaction was nothing but the reduction of capital and distribution of accumulated profits.

The assessee also contended that Section 115QA was amended in 2016, and the present transaction would only be taxable per the amended provisions. The assessee’s arguments were not accepted for two reasons. Firstly, there is a distinction between the purchase of own shares upon reduction of share capital and buyback. Buyback is a term used only with respect to transactions covered under Section 77A. If all conditions of Section 115-O r.w Section 2(22) are satisfied, the same cannot be impliedly excluded based on the amendment to Section 115QA.

13. CA firm can’t invoke MSMED Act to recover the balance amount of remuneration for a special Audit: HC

[Pr. CIT v. Micro & Small Enterprise Facilitation Council [2023] 152 taxmann.com 177 (Delhi)]

A CA firm, registered as a `Micro Enterprise’ under the provisions of the MSMED Act, was on the IT Department panel as a Special Auditor. After completing a Special Audit assignment and submitting the final audit reports, the CA Firm raised four invoices in respect of the said audits.

Even after raising the invoices, the full payment was not received. Accordingly, the CA firm invoked the provisions of the MSMED Act and approached the Micro & Small Enterprise Facilitation Council (MSEFC) for arbitration. Aggrieved by this, the Principal CIT filed a writ petition challenging the directions for reference to arbitration by the CA Firm.

The High Court held that a combined reading of Section 142(2A) to 142(2D) of the Income-tax Act and Rule 14B of the Income-tax Rules would show that the IT Department maintains a panel of accountants. The empanelled accountants are fully aware of the nature of the assignment when the nomination is made. Such accountants are also aware of the finality attached to the determination of the remuneration under Section 142(2D). The accountant is under no obligation to accept the nomination. The purpose of a Special Audit is to help and assist the AO. It is also to facilitate the assessment and properly determine the tax liability after arriving at a correct taxable income. After completing the Special Audit, the Chief Commissioner or the Commissioner plays a crucial role in determining remuneration.

Rule 14B(5) stipulates that the number of hours claimed by the accountant for billing purposes has to be commensurate with the size and quality of the report submitted by the accountant. This provision clearly shows that the invoice the accountant may raise is not to be straightaway accepted.

The Chief Commissioner or the Commissioner is required to assess various factors, including:

• The nature of the work assigned to the accountant;
• The quantum of work;
• The duration of the work;
• The quality of the report;
• Whether the hours claimed are exaggerated or commensurate with the work.

The nature of the audit and how remuneration is to be determined would require domain expertise and knowledge that the MSEFC cannot possess.

The IT Department cannot be termed as a ‘buyer’ when it is nominating the accountant for conducting a Special Audit; neither can the CA Firm be termed as a ‘supplier’. The remuneration payable to the accountant cannot also be termed as ‘consideration’ as the Special Audit is a statutory duty being performed by the accountant for and on behalf of the AO.

The MSMED Act has no applicability to the nature of the assignment given to the CA Firm. The CA Firm may be registered as a Micro or Small enterprise and may be entitled to the invocation of the jurisdiction of the MSMED Act for other purposes.

Insofar as the assignment emanates from a statute, i.e., under Section 142(2A), the determination of the remuneration is solely the prerogative of the Commissioner or the Chief Commissioner. The same would not be liable to be called into question either in a civil court or a commercial or civil suit for recovery of money. The Special Auditor nomination for a Special Audit is governed by the Income Tax Act and Rules provisions.

Thus, the invocation of the provisions of the MSMED Act under such circumstances, with respect to Special Audit remuneration under Section 142(2D), would not be tenable.

14. 50% of the rent is taxable in the wife’s hand if the sale deed does not specify her share in joint property: ITAT

[Smt. Shivani Madan v. ACIT [2023] 147 taxmann.com 423 (Delhi – Trib.)]

A search was conducted on the premises of the assessee. The search revealed that the assessee was a joint owner of a property along with her husband. However, the assessee did not disclose income from such house property while filing a return of income.

Since the registered sale deed of the property had not defined ownership share between the co-owners, the Assessing Officer (AO) considered 50-50 ownership of the property between the assessee and her husband. Accordingly, he assessed 50% of rental income in the hands of the assessee.

The assessee contended that she made a minor contribution to acquire such house property. Thus, taxing 50% of house property income in the hands of the assessee was not justified.

The tribunal held that the ownership is considered as per the mutation records. The sale deed only mentioned that the assessee is a co-owner of the property, but the share of each co-owner was not definite and ascertainable. The contention of the assessee that her share is limited to the amount paid by her (approximately 5.4%) is baseless as the facts and circumstances do not affirm such a fact.

The Allahabad High Court in Saiyad Abdulla v. Ahmad AIR 1929 All 817 has held that in the absence of specification of the shares purchased by two persons in the sale deed, it must be held that both purchased equal shares.

Following such a decision, it must be held that the husband and wife purchased equal shares. Therefore, AO was justified in taxing 50% of the income from house property in the hands of the assessee.

15. Company is entitled to depreciation and maintenance expenses of sports car purchased for commuting key managerial personnel: ITAT

[Silver Spark Apparel Ltd. v. DCIT [2023] 147 taxmann.com 500 (Mumbai – Trib.)]

The assessee, a private limited company, filed its return of income for the relevant assessment year. For the year, the assessee’s case was selected for scrutiny. During proceedings, the AO noticed that the assessee purchased a sports car and claimed a deduction for depreciation and maintenance expenses for the same.

The AO contended that the sports car was used primarily for car racing activities. The requirement of such a car in the case of the assessee, being a unit engaged in manufacturing suits and trousers, cannot be considered wholly and exclusively necessary for the purpose of the business. He disallowed the deduction for depreciation and maintenance expenses.

Aggrieved by the order, the assessee preferred an appeal to CIT(A). CIT(A) upheld the additions, and the matter reached the Mumbai Tribunal.

The tribunal held that the assessee was a private limited company and was to be considered a separate person and distinct assessable entity as per Section 2(31) of the Act. A company is inanimate, and there cannot be anything personal about such an entity. By virtue of its very nature, the company cannot have any “personal use”.

It cannot be stated the vehicle is used personally by the company, even though the vehicle is used by the directors for personal purposes. In addition, once the expenditure was in terms, as provided in Sections 309 and 198 of the Companies Act, 1956, there could not be any ‘non-business’ purpose.

Therefore, the action of AO in disallowing depreciation and maintenance charges on the sports car owned and used by the assessee for the purpose of business was not justified.

16. Searches conducted before 01-06-2015 would be covered under amendment by FA 2015 in Section 153C: SC

[ITO v. Vikram Sujitkumar Bhatia [2023] 149 taxmann.com 123 (SC)]

In a significant ruling on search cases, the Supreme Court has given retrospective effect to the amendment to Section 153C by the Finance Act, 2015. The object and purpose of Section 153C was to address persons other than the searched person. The Apex Court held that the amendment to Section 153C shall apply to searches conducted before 1-6-2015.

A search was conducted in 2013 on the premises of a business group. During the search proceedings, the AO received no original document belonging to the assessee. Only a hard disk containing references to the assessee’s name was seized.

The assessee-individual filed its return of income for the relevant assessment year by declaring business income from a partnership firm and other incomes. After the search proceedings, the AO initiated the proceedings against the assessee under Section 153C based on seized material. A Panchnama was prepared before 01-06-2015. However, notice was issued under Section 153C after 01-06-2015.

Section 153C pertains to the assessment of the income of any other person. Under the unamended Section 153C, the proceeding against other persons (other than the searched person) was based on the books of account or documents seized or requisitioned that “belongs or belong to” a person other than the searched person. The Finance Act 2015, w.e.f., 01-06-2015, amended Section 153C by replacing the words “belongs or belong to” with the words “pertains or pertain to”.

On receiving notice, the assessee claimed that there were only references to the assessee’s name, and thus, the AO could not have initiated proceedings under the amended provisions of Section 153C. The matter reached the Apex Court.

The Supreme Court held that the Delhi High Court, in the case of Pepsico India Holdings Private Limited [2014] 50 taxmann.com 299 (Delhi), interpreted the expression “belong to”. The High Court observed and held that there is a difference and distinction between “belong to” and “pertain to”. The HC gave a very narrow and restrictive meaning to the expression/word “belongs to” and held that the ingredients of Section 153C have not been satisfied.

The observation made by the Delhi High Court led to a situation where, though incriminating material pertaining to a third party/person was found during search proceedings under Section 132, the revenue could not proceed against such a third party.

This necessitated the legislature to clarify by substituting the words “belongs or belong to” for the words “pertains or pertain to” and to remedy the mischief that was noted pursuant to the judgment of the Delhi High Court.

If the assessee’s submission is accepted, i.e., although the incriminating materials were found from the premises of the searched person, they may still not be subjected to the proceedings under Section 153C solely on the ground that the search was conducted before the amendment. In this case, the very object and purpose of the amendment to Section 153C, which is to substitute the words “belongs or belong to” for the words “pertains or pertain to” shall be frustrated.

Any interpretation which may frustrate the very object and purpose of the Act/Statute shall be avoided by the Court. If the interpretation as canvassed by the assessee was accepted, the object and purpose of the section shall be frustrated.

Section 153C is a machinery provision that has been inserted to assess persons other than the searched person under Section 132. As per the settled position of law, the Courts, while interpreting machinery provisions of a taxing statute, must give effect to its manifest purpose by construing it in such a manner as to effectuate the object and purpose of the statute.

Therefore, the amendment brought to Section 153C vide the Finance Act 2015 shall apply to searches conducted under Section 132 before 01-06-2015, i.e., the date of the amendment.

17. Sum paid to contract teachers cannot be treated as a ‘fee for professional services’; No Section 194J TDS

[Dist. Intermediate Educational Office v. ITO (TDS) [2023] 150 taxmann.com 439 (Hyderabad – Trib.)]

The assessee was an authority appointed by and working under the directions of the State Government. Its primary function was to disburse the Honorarium/Remuneration to the teachers with whom the colleges agreed to perform the teaching work entrusted by the college committee following the curriculum of the intermediate syllabus.

During the assessment proceedings, the AO held that the payments to teachers fall within the ambit of ‘fee for professional services’ as per Section 194J. Accordingly, the AO made additions and treated the assessee as ‘assessee-in-default’ for non-deduction of tax on payment to contracted teachers under Section 194J.

The matter reached the Hyderabad Tribunal.

The tribunal held that for Section 194J, “professional services” shall mean services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as notified by the Board.

Notification No. 88/2008 dated 28-01-2008 issued by CBDT notified the services rendered by the following persons in relation to the sports activities as “Professional Services”:

• Sports Persons,
• Umpires and Referees,
• Coaches and Trainers,
• Team Physicians and Physiotherapists,
• Event Managers,
• Commentators,
• Anchors and
• Sports Columnists.

The words’ fee for professional services means’ left no scope for interpretation, and the categories mentioned therein as on the date are exhaustive by the explanation itself or by the notification of CBDT. Such an exhaustive definition excludes the payments to contract teachers in intermediate colleges.

Either in the Explanation to Section 194J or in the notification issued, the contract teachers referred to as teaching professionals by AO are not covered. Thus, payments made to contract teachers did not answer the ‘fee for professional services’ description to levy TDS under Section 194J.

18. Extended time limit provided by TOLA is not applicable for sanction of notice under Section 151: HC

[Siemens Financial Services (P.) Ltd. v. Dy. CIT [2023] 154 taxmann.com 159 (Bombay)]

The assessee was a Non-Banking Finance Company (NBFC) and classified as an Asset Finance Company. In June 2021, it received a Section 148 notice stating that there was reason to believe that income chargeable to tax for AY 2016-2017 had escaped.

Later, the AO referred to the order of the Supreme Court in the case of Union of India v. Ashish Agarwal (2022) 138 taxmann.com 64 (SC) and treated Section 148 notice as show cause notice in terms of Section 148A(b). Later, an order was passed under Section 148A(d).

The assessee contended that the Finance Act 2021 amended Section 151, which provides for sanction for the issue of notice. AY 2016-2017, three years elapsed on 31st March 2020; hence, the provisions of amended Section 151(i) and 151(ii) would have to be fulfilled, which have not been complied with. The matter reached before the Bombay High Court.

The Bombay High Court held that the Taxation and Other Laws (Relaxation and Amendment of certain provisions) Act, 2020 [TOLA] provided for a relaxation of certain provisions of the Income-tax Act, 1961. Where any time limit for completion or compliance of an action, such as completion of any proceedings or passing of any order or issuance of any notice, fell between the period 20th March 2020, to 31st December 2020, the time limit for completion of such action stood extended to 31^st March 2021.

Thus, TOLA only seeks to extend the limitation period and does not affect the scope of Section 151. AO cannot rely on the provisions of TOLA and the notifications issued thereunder as Finance Act, 2021, amended Section 151, and the provisions of the amended section would have to be complied with by AO, w.e.f., 01^st April 2021.

Hence, the AO cannot take the shelter of TOLA as subordinate legislation cannot override any statute enacted by the Parliament. Further, the notification extending the dates from 31^st March 2021 to 30^th June 2021 cannot apply once the Finance Act 2021 is in existence.

The sanction of the specified authority has to be obtained in accordance with the law existing when the sanction is obtained. Therefore, the sanction must be obtained by applying the amended Section 151(ii). Since the sanction was obtained in Section 151(i), the impugned order and notice were bad in law and should be quashed and set aside.

19. Explanations 6 & 7to Sec. 9(1)(i) are to be given retro effect as they have to be read along with Expl. 5: HC

[CIT (International Taxation) v. Augustus Capital PTE. Ltd. [2023] 157 taxmann.com 88 (Delhi)]

The issue before the Delhi High Court was:

“Whether Explanations 6 and 7 appended to Section 9(1)(i), which was inserted by the Finance Act 2015 with effect from 01.04.2016, can operate retrospectively?”

The Delhi High Court held that Section 9(1)(i) inter-alia seeks to impose tax albeit via a deeming fiction qua all income accruing or arising, whether directly or indirectly, through or from any property in India or through or from any asset or through transfer of asset situated in India, or the transfer of a capital asset situated in India.

The judgment of the Supreme Court rendered in the case of Vodafone International Holdings BV v. Union of India excluded from the scope and ambit of Section 9(1)(i)  gain or income arising from the transfer of shares of a company located outside India. However, the value of the shares was dependent on assets situated in India. To cure this gap in the legislation, Explanations 4 and 5 were introduced by the Finance Act 2012, which was effected from 1-4-1962.

Explanations 4 and 5 presented difficulties in that the expressions’ share and interest’ and ‘substantially’ found in the explanations were vague, resulting in undue hardship for transferors where the percentage of share or interest transferred was insignificant. Explanations 6 and 7 alone would have no meaning if they were not read along with Explanation 5. Therefore, if Explanations 6 and 7 have to be read along with Explanation 5, which concededly operates from 1-4-1962, they would have to be construed as clarificatory and curative.

Accordingly, it was concluded that although Explanations 6 and 7 were indicated in the Finance Act 2015 to take effect from 1-4-2016, they could be treated as retrospective having regard to the legislative history that led to the insertion of Explanations 6 and 7.

Accordingly, the appeal was dismissed.

20. Cost of acquisition of shares converted from FCCBs to be computed as per FCCB Scheme 1993 and not as per Section 49(2A): SC

[CIT (International Taxation) v. Kingfisher Capital Clo Ltd [2023] 153 taxmann.com 163 (SC)]

The assessee, a Cayman Island entity, purchased Foreign Currency Convertible Bonds (FCCBs) from a non-resident as per the scheme notified by the Central Government in 1993. During the year under consideration, the assessee converted such bonds into equity shares and sold a part of such shares on the stock exchange. To compute the quantum of capital gains, the assessee relied on clause 7(4) of the FCCB scheme and adopted the closing price of equity shares on the date of conversion of FCCBs into shares as its cost of acquisition. Accordingly, the computed gains were offered to tax as short-term capital gains.

In the assessment proceedings, the AO held that the cost of acquisition must be computed in accordance with Section 49(2A), which provides that the the cost of converted shares or debentures is taken at the price paid for the acquisition of original bonds, debentures or debenture certificate. The assessee filed a writ before the Bombay High Court.

The High Court held that Clause 7 of the scheme specified the cost of acquisition for conversion of FCCBs would be conversion price determined based on the price of the shares at the Bombay Stock Exchange or the National Stock Exchange on the date of the conversion of FCCBs into shares.

The Supreme Court held that AO’s contention was with respect to the interpretation of Section 47(xa), which was introduced through an amendment from the Finance Act, 2008, with effect from 01-10-2008. It was urged that a combined reading of that provision with Section 115AC ought to have led to a correct conclusion that the date of acquisition of the bonds by the assessee was the determinative time for its valuation.

The Apex Court upheld the findings of the High Court wherein it was held that the assessee was right in his contention that the AO fell in clear error in taking assistance from the amendments made by the Finance Act, 2008. The authority was not right in holding that the cost of acquisition of the shares as per clause 7(4) of the FCCB Scheme is not tenable.

AO attempted to read the provisions of the Income-tax Act introduced with effect from 1-4-2008 in relation to Foreign Currency Exchangeable Bond Scheme, 2008 and apply it to the FCCB Scheme of 1993. This is not correct.

It was evident that any scheme prior thereto, particularly the FCCB Scheme notified by the Central Government in 1993 and applicable with effect from 01st April 1992 and enabling the computation of cost of acquisition, in terms thereof, was held to be unaffected.

The bonds issued in the instant case did not answer the description of the Foreign Currency Exchangeable Bond Scheme, 2008. They confirmed with the earlier scheme relating to the Foreign Exchange Convertible Bonds Scheme 1993. The distinction between the two schemes is that one relates to the issuance of Exchange Convertible Bonds, whereas the other relates to Foreign Currency Exchangeable Bonds.

Thus, there was no infirmity with the Bombay High Court’s reasoning; accordingly, the revenue’s appeal was dismissed.