Practical Aspects of Assessments      

Date 30th Dec, 2015 Presentation by: CA RAJIV K. DOSHI

rajiv@rkdoshi.com

Provisions Amended by Finance Act, 2008• From 01-04-2008 all returns have to be processed wherein

arithmetical mistakes and incorrect claims apparent from the information in the return will be added back and intimation will be issued demanding the additional demand or refunding the excess taxes paid. Such intimation can be issued only within one year from the end of the financial year in which such return was filed.

• Incorrect claims is defined as- Inconsistency in figures in the entries in return Where evidence is required to be filed as per various

provisions of the act, but not filed Where deduction exceeds the limits prescribed under

various provisions of the act

Amendment of Intimation

• Amendment of intimation / deemed intimation can be made u/s 154 of the Act.

 • Opportunity has to be given to assessee, if amendment has

the effect of reducing the refund or increasing the liability of assessee.

ISSUES

• If no intimation and time lapse and refund due 

• When TDS credit / Advance tax not allowed / short allowed

• When different tax rate charged i.e. general rate in place of special rate

• Notice u/s 143(2) issued and processing not done Alternative : Rectification / Appeal

•  Instruction No. 18/3013 dt. 17/12/13. Where a valid return is filed with refund claim, but remained pending beyond the prescribed date, the AO to process it & issue refund not withstanding the time limit prescribed u/s. 143 (1).

Purpose of Scrutiny

• The purpose of the scrutiny assessment is to verify correctness of the income declared.

 • Assessing officer may make the addition in respect of actual

income understated by assessee by suppressing receipt and/or inflating expenses. The assessing officer can also make addition under deeming provisions of the Act like Sec. 68, 69, 69A, 69B, 69C even though there is no evidence of earning of actual income by assessee.

 • Quality Assessment – Majority additions related to 19 issues

– ‘A step ahead’ –book issued by CCIT Ahmedabad in 2013.

6

ScrutinyManual selection – Compulsory 

selection( Every year criteria 

is published)

Discretionary Manual

Discontinued from 2013

CASS

Limited

In all other cases

Complete

Where 

potential 

escapement of 

income is > 10 lacs

Continued in next slide

Discussed separately in following slide 

7

CASS

Annual Information Return

•Purchase of Immovable Property valued at Rs. 30,00,000/- or more TDS-92B•Investment of Rs. 2,00,000 or more in Mutual Fund•Cash deposits aggregating to Rs. 10,00,000/- or more in a year in savings account

Central Information Branch

•Transfer of immovable property•Purchase of Bank Draft of more than Rs. 50,000/- in cash•Cash deposit aggregating of Rs 200000 on a day•Payment made against Credit Card more than Rs 2,00,000/-

TDS return

•Interest other than interest on security•Salary to employees

8

Manual Selection• Addition in early A.Y. exceeds Rs. 10 lakhs.• Addition in early A.Y. on the issue of T.P. in excess of Rs. 10 Cr.• All assessments pertaining to section 133A excluding cases 

where books of accounts were not impounded and retuned income is less than preceding A.Y. However if assessee has retract the disclosure, such case will not be covered.

• Search & seizure cases• Returns filed in response to notice under sec 148 of the Act• Registration u/s 12AA• Approval already granted u/s 10(23C)/35(1)(iii)/10(46) of the act 

has been withdrawn• Specific and verifiable information pointing out tax-evasion is 

given by Government Departments. The A.O. shall record and take prior approval from jurisdiction.

9

Precautions in Assessment• Punctuality.• Promptness and knowledge of the case.• Nothing of order sheet.• Cryptic and relative reply.• Humble-ness.• Raise alternative arguments.• Know your rights.• Acknowledgement of replies.• Keep windows/vistas open.• Paging and sequential order.• Submit written replies.• Refer past assessments, incase required.• Factum of production of Books of Accounts.

• Past instructions

It is interesting to note the spirit behind a number of instructions issued by the CBDT in the past which are by and large observed more in breach than in compliance. For example, - Circular No. 3 dated 16-1-1942 states that the assessments should not be influenced by the Budget estimates. But the present high-handed assessments are exactly to the contrary.

Circular No. 230 dated 27-10-1977 states that ITO should give each assessee a different timing for hearing. We also need to discipline ourselves in adhering to schedule time of hearing.

10

• CBDT Letter No. 241 / 23 / 70 dated 23-10-1970 states that the orders should be passed (even in complicated cases) within 14 working days after the date of last hearing.

• Instruction No.1395 dated 15-5-1981 - If ITO cannot adhere to the schedule of hearing, the assessee should be informed by letter or telephone, wherever possible.

• Again, Circular No. 3 dated 16-1-1942 states that unless ITO feels it advisable, books of account and vouchers etc. should not be called for in case of companies where accounts have been audited. In practice, what is the value attached to the tax-audit reports?

11

Notice u/s 143(2) [Page 1/3]

•  Whether Notice?Served upon assesseServed in timeServed in proper manner

If Invalid notice-Objection (Section 292BB) Where the assessee affirms by way of an affidavit that notice u/s143(2) was not received by him within the prescribed time, the onus lies with the department to conclusively prove that the notice was served upon the assessee within the prescribed time. Failure to do so shall lead to set aside of the Assessment as it was held in CIT v Lunar Diamonds Ltd.[2006] 281 ITR 1(Del.).

•  Section 292BB: 

A section 292BB has been added w.e.f. 01-04-2008 which provides that if the assessee has cooperated in the Assessment or re-assessment proceedings then it will be treated that the notice u/s 143(2) has been duly served upon the assessee and the assessee will not be able to object to the late or irregular service of notice.

 The proviso to section 292BB makes it further clear that if the assessee has before the Assessment or re-assessment proceedings objected to the no service or late or irregular service of notice u/s 143(2) then section 292BB shall be not applicable.

Notice u/s 143(2) [Page 2/3]

Therefore if an assessee does not receive the notice or

receives the notice u/s 143(2) after the 30th September and he

cooperates in the Assessment proceedings and doesn’t object

to the non receiving or late or irregular receiving of the notice

then the Assessment proceedings and the assessment order

shall be considered as valid and will not be quashed in the

appeal.

Notice u/s 143(2) [Page 3/3]

15

Scrutiny Notice-143[2]• 148 notice pending 143[2] time limit. CIT v. TCP Ltd.

[2010] 323 ITR 346 (Mad). All DHC in KLM Royal Dutch.

• 143[2] only after ITR is filed, 143[2] served before return is filed, assessment bad in law, DHC in IT v. Society for worldwide Inter Bank Financial, Telecommunications 323 ITR 249.

• Presumption as to valid service of 143[2] notice.-- Notice sent by registered post well before expiry of time limit and not received unserved. DHC in CIT v. Yamu Industries Limited 306 ITR 309.-- Record not disclosing envelope undelivered or received back-Presumption that notice served not rebutted by assessee. DHC in CIT v. Madhsy Films P. Ltd. 301 ITR 069.

Notice u/s 142(1) Notice u/s 143(2)

Notice to call for RoI/ books of account/other information.

Notice for making assessment u/s 143(3)

By issuing notice u/s 142(ii) alone, assessment is not possible.

Assessment u/s 143(3) is possible only if the notice u/s 143(2) has been issued.

Notice can be issued even if the assessee has not filed the RoI.

Notice can be issued only if the assessee has filed the RoI.

No time limit prescribed in law for issue of this notice.

Time limit of 12 months prescribed for service of notice.

Books of accounts can be asked for a limited period. (3 years)

No Such restriction.

17

Inquiry in Scrutiny Assessment

•  Notice u/s. 143(2) - Production of evidence in support of return of income.

•  Notice u/s. 142(1) - Production of accounts or documents or furnish specified information. Assessee cannot be called upon to produce accounts relating to period more than 3 years prior to previous year.

•  Summons u/s 131 - Discovery / Inspection, Enforcing attendance, compelling production of accounts /documents and issuing commission.

•  Power to impound books of accounts u/s 131(3) / Notice u/s.133(6) - Collecting accounts / information.

18

Reference to Valuation

•  Section 142A was retrospectively inserted to empower AO to refer VO to make estimate of any movable or immovable assets for the purpose of making addition under deeming provision of section 69, 69A, 69B and section 56(2).

•  It has been held in case of Rallies India Limited v. Dy. CIT 284 ITR 159 (Bom) that reference to valuation cannot be made after completion of assessment.

•  When the expenditure of construction is supported by bills / vouchers and no defect or omission is found out, the addition on account of understatement of construction cost cannot be made.

19

Special Audit - Sec. 142(2A) [Page 1/2]

•  A.O. may with the previous approval of Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by accountant.

•  Nature & complexity of account.

•  Opportunity must be provided to assessee before directing him to get the accounts audited.

•  Max. time limit for special audit - 180 days.

20

•  Expenses pertaining to special audit shall be paid by Central Government where directions are issued on or after 01/06/2007

  •  A.O cannot direct the special auditor to prepare books of

accounts. Ref: Bajrang Textiles V. CIT - 3 SOT 115 (Jodh.)

 •  Special audit report is not binding on assessing officer.

Special Audit - Sec. 142(2A) [Page 2/2]

21

Best Judgment Asst. - Sect. 144 [Page 1/2]

•  Best judgment assessment can be made in following cases, if:-  

I. No return of income is filed, or II.Assessee fails to comply with all the terms of notice

issued u/s 142(1) or 142(2A) or section 143(2)  

•  A.O should give opportunity before passing order u/s 144.

•  Opportunity not necessary where notice u/s 142(1) is issued.

22

•  Over assessments to be avoided – The assessment have to be made in a reasonable and fair manner after considering all the relevant circumstances of the case. Even where an assessment has to be made ex parte, the information available should be reasonably weighed and a proper estimate made in the exercise of best judgment in the circumstances. There should be no tendency to frame assessments even in such cases mechanically on past basis, if there is evidence to the contrary, e.g., the business of the concern has become defunct or is in clearly adverse circumstances. If unjustified over-assessments are avoided, this will, inter alia, curtail the feature of exaggerated demands which unnecessarily inflate arrears figures.—Instruction : No. 574, dated 27-7-1973; Source : 193rd Report of Public Accounts Committee (1983-84) (Seventh Lok Sabha), (pp. 26-27).

Best Judgment Asst. - Sect. 144 [Page 2/2]

23

Issue of directions - Sec. 144A

•  JCIT is empowered to issue directions to A.O to complete the assessment. Directions can be issued, either on his -

(i) own motion or (ii) on a reference being made by A.O or (iii) on application

of assessee.  •  Directions which are prejudicial to assessee shall not be issued

without giving opportunity of hearing to assessee.

24

Reassessment-Sec. 147

•  Notice u/s 148 cannot be issued after expiry of 4 years from the end of relevant A.Y, if:-

(i) Assessment is completed u/s 143(3)/147 &

(ii) Income chargeable to tax has escaped assessment not on account of failure on part of assessee to disclose fully & truly all material facts.

25

Core Principles of Reassessment with Important Case Laws

1. Recording of reasons •  Recording of reasons is a condition precedent to invoke

jurisdiction under section 147/148. •  CIT vs. Rajindra Rosin & Turpentine Industries. (2008)

305 ITR 161 (Punj. & Har.) •  Language of section 148(2) does not permit recording of

reasons between date of issuance of notice and service of notice, words used by provisions in no uncertain terms require recording of reasons before issuing any notice.

•  Rajoo Engineers vs. Dy. CIT (2008) 218 CTR (Guj.) 53

26

2. Notice - Return under protest

When a notice under section 148 of the Income-tax Act, 1961, is issued, the proper course of action for the notice is to file the return and, if he so desires, to seek reasons for issuing the notices. The assessing officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the notice is entitled to file objections to issuance of notice and the assessing officer is bound to dispose of the same by passing a speaking order.

 GKN Driveshafts (India) Ltd. vs. ITO & Ors. (2003) 259 ITR 19 (SC).

27

3. Reasons - Recorded to be supplied•  Reasons for notice must be given and objections of assessee

must be considered. 

•  Allana Cold Storage vs. ITO (2006) 287 ITR 1 (Bom.)

•  Assessee is entitled to be supplied with the reasons. Assessee is not estopped from challenging the impugned notice after having submitted to the jurisdiction of the officer by filing returns.

28

Sahkari Khand Udhyog Mandal (Guj. HC)

1. Supply the reasons recorded within 30 days of filing the return without waiting for the assesse to demand any reason. While supplying the reason, A.O to mention 60 days timeline for raising the objection.

2. Assesse to raise the objection with 60 days.

3. A.O to dispose of the objection within 4 months.

Videsh Sachar Nigam 340 ITR 6C(BOM.)

29

Tata International Mumbai ITAT- ITA - 3309 to 3361/M/2009 dt. 29-6-2012.

Reason for reassessment was not furnished to the assesse before the completion of assessment, held reassessment not valid.

Berger Paints India Ltd vs. ACIT & Ors (2004) 266 ITR 462 (Cal)

If assessing officer rejects objections filed to notice under section 148 he shall not proceed further in matter for a period of four weeks from date of receipt of service of said order on objections, on assessee.

Asian Paints Ltd. vs. Dy. CIT (2008) 296 ITR 90 (Bom.)

Reassessment framed by the assessing officer without disposing of the primary objection raised by the assessee to the issue of reassessment notice issued by him was liable to be quashed.

30

MCM Exports vs. Dy CIT (2009) 23 DTR 356 (Guj).

Notices issued under sections 142(1) and 143 (3) without disposing of the objections raised in response to the reasons recorded held to be invalid.

Premier Ltd vs. Dy CIT WPN o 2340 dt.22-10-2008 (Bom)

31

4. Issue of notice by successor  

Assessing officer recording reasons for assessment and assessing officer issuing notice under section 148 must be the same person. Successor assessing officer cannot issue notice under section 148 on the basis of reasons recorded by predecessor assessing officer. Notice issued invalid and deserves to be quashed.

Hyoup Food and Oil Industries Ltd. vs. ACIT (2008) 307 ITR 115 (Guj.)

32

5. Service of notice

The notice prescribed by section 148 cannot be regarded as a mere procedural requirement. It is only if the said notice is served on the assessee that the ITO would be justified in taking proceedings against the assessee. If no notice is issued or if the notice issued is shown to be invalid, then the proceedings taken by the ITO would be illegal and void.

Y. Narayan Chetty vs. ITO (1959) 35 ITR 388 (SC), CIT vs. Thayaballi Mulla Jeevaji Kapasi (1967) 66 ITR 147 (SC), CIT vs. Kurban Hussain Ibrahimji Mithiborwal (1971) 82 ITR 821 (SC)

33

•  Where notice was not sent by registered post nor served upon assessee in any other manner whatsoever, proceedings for assessment were void.

 

CIT vs. Harish J. Punjabi (2008) 297 ITR 424 (Del.)

•  Time limit for issue of notice- s. 143(2)

When period for issue of under section 143(2) not expired, reassessment held to be invalid.

CIT vs. Qatalys Software Technologies Ltd (2009) 308 ITR 249 (Mad).

•  Notice Signed on 31.03.2010 but sent by speed post on 07.04.2010

Kanubhai M. Patel HUF 43 DTR 329.

34

6. Disclosure of Primary Facts

•  Statement of unconnected person

In the absence of any material before the AO a statement by an unconnected person did not constitute reason to believe that assessee income had escaped assessment especially when the assessee had produced all the material and relevant facts and therefore the reassessment proceedings could not be sustained.

Praful Chunilal Patel vs. M.J. Makwana, ACIT (1999) 236 ITR 832 (Guj) JCIT & Ors vs. George Williamson (Aassam) Ltd. (2002) 258 ITR 126 (Guj)

35

7. Audit objection

AO having granted benefit of S. 72A to the assessee in respect of unabsorbed depreciation of the amalgamating company after the assessee had furnished the relevant particulars and the AO was satisfied about the eligibility of the assessee for the benefit of S. 72A are not applicable to the facts of the case amounted to a case of change of opinion and, therefore, reassessment proceedings cannot be sustained.

Stock Exchange Ahmedabad vs. ACIT (1997) 227 ITR 906 (Guj)

Apollo Hospital Enterprises Ltd. vs. ACIT (2006) 287 ITR 25 (Mad.)

36

•  AO having reopened the assessment at the benefit of the Audit department while disagreeing with the later objection and without entertaining his own belief that the income of the assessee had escaped assessment on the ground that assessee had claimed loss on the basis of erroneous computation as indicated by the audit party reopening is not sustainable, notice u/s. 148 quashed.

Rajesh Jhaveri Stock Brokers (P) Ltd. vs. ACIT (2006) 284 ITR 593 (Guj)

37

•  AO having communicated to the auditor that a certain decision of a HC did not apply to the facts of the petitioners case but later rejected the objections raised by the petitioner to the notice u/s. 148 taking a contrary view without giving any reason as to why he has departed from the earlier view that the decision was not applicable, there was total non-application of mind on the part of AO; matter remanded back to AO for de novo consideration.

Asian Cerc Information Services (P) Ltd vs. ITO (2007) 293 ITR 271 (Bom)

38

•  Reassessment was not valid as the AO held no belief on his own at any point of time that income of assessee had escaped assessment on account of erroneous computation of benefit u/s 80HHC and was constrained to issue notice only on the basis of audit object.

Adani Exports vs. DCIT (1999) 240 ITR 224 (Guj)

•  Audit Objection cannot be the basis for reopening of assessment to income tax by the revenue.

Indian & Eastern Newspaper Society vs. CIT (1979) 119 ITR 996 (SC).

39

•  AO having allowed assessee's claim for depreciation in the regular assessment and reopened the assessment pursuant to audit objection, it cannot be said that he had formed his own opinion that the income had escaped assessment, and the reopening being based on mere change of opinion, same was not valid.

IL & FS Investment Managers Ltd. vs. ITO & Ors (2008) 298 ITR 32 (Bom)

Vijaykumar M. Hirakhanwala (HUF) vs. ITO & Ors (2006) 287 ITR 443 (Bom)

8. Reasons to believe - Survey subsequent

•  Detection of excess stock or unaccounted expenditure as renovation of business premises at the time of survey u/s. 133A in a subsequent year, could not constitute reason to believe that such discrepancies existed in earlier years also and, therefore, reopening of assessments for those years on the basis of aforesaid reason to believe was not valid.

CIT vs. Gupta Abhushan (P) Ltd. (2008) 16 DTR (Del) 76

40

9. Reassessment - Interpretation of High Court decision

•  Reopening of assessment on the basis of wrong interpretation of High Court decision was invalid.

Assam Co. Ltd vs. UOI & Ors (2005) 275 ITR 609 (Gau)

41

10. Supreme Court decision cannot be the basis

•  The ITO cannot seek to reopen an assessment under section 147 on the basis of the Supreme Court decision in a case where assessee had disclosed all material facts.

Indra Co. Ltd. v. ITO (1971) 80 ITR 559 (Cal.)

42

11. Ignorance of board circular is not sufficient

•  The mere fact that the ITO was not aware of the circular of the board is not sufficient to reopen the assessment.

Dr. H. Habicht v. Makhija (1985) 154 ITR 552 (Bom.)

43

12. Scope of Powers :

• Statements by the third party cannot form the basis

A mere confessional statement by the third party (who is the lender of the assessee) that he was the mere name lender and that all his transactions of loans were bogus, without naming the assessee as one who had obtained bogus loans, would not be sufficient to hold that the assessee's income had escaped assessment .

S.P. Agarwalla Alias Sukhdeo Prasad Agarwalla vs. ITO (1983) 140 ITR 1010 (Cal)

44

• Once Assessment is open – any other increase can be considered Best Wood 331ITR 63.

• But if AO doesn’t assess income for which reasons recorded. u/s 147, he cannot assess other income u/s 147.

Jet Airways 331ITR 236.

45

46

Sanctity of Inquiry

The Supreme Court in the case of Dhirajlal Girdherilal v. CIT (26 ITR 736), Dhkershwari Cotton Mills Ltd. V. CIT (26 ITR 755), Omar Salay Mohammed v. CIT (37 ITR 151), Lalchand Bhagatlal Ambica Ram v. CIT (37 ITR 288) and CIT v. Daulatram Rawatmal v. CIT (26 ITR 736) held that the assessment is liable to be cancelled if it is based on conjectures, surmises and presumptions and not on hard rock of facts and relevant material.

47

Sanctity of Inquiry

In C. Vasantlal & Co. v. CIT (45 ITR 206) (SC), the Supreme Court held that it was open to an income-tax officer to collect materials to facilitate assessment even by private enquiry. But if he desires to use materials so collected, the assessee must be informed of the materials (Dhakeshwari Cotton Mills Ltd. v. CIT (26 ITR 775)(SC). The Supreme Court in case of Kishinchand Chellaram v. CIT(125 ITR 713) held that materials collected cannot be kept back from assessee by revenue authorities.

48

Sanctity of Inquiry

• The details of comparable case should be given by assessing officer and if it is not given, assessee should ask for the same.

• Assessee should demand cross examination of witnesses who furnished adverse information /statement to assessing officer.

• If cross examination is not demanded, the assessee cannot plead at later stage that as cross examination is not allowed, the addition is wrong.

• Value of Affidavit – Mehta Parikh & Co. 30 ITR 181• Audit Report when books are destroyed (Jay Eng. Delhi HC)

49

Fall In Gross Profit

• Assessee should explain fall in gross profit by showing that margin of profit was low during relevant year compared to past years.

• In absence of omission or defects in books of accounts and records, addition cannot be made.

Case laws:

CIT v. Vikarm Plastic (239 ITR 161) (Guj) CIT v. Dr. Rajnikant Dave (281 ITR 6) (Del)

50

Estimate of Production

• A.O cannot reject book results merely on the basis of disparity in consumption of electricity vis a vis production without any supporting evidence.

Case Law:

St. Teresa's Oil Mills v. State of Kerala (76 ITR 365) (Ker)

51

New Loans

• Assessee should prove identity, capacity of lenders as well as genuineness of transaction.

• Where lender is assessed to tax, assessee can avoid addition by filing confirmation with particulars of PAN.

Case Law:

Addl. CIT Vs. Hanuman Agrawal (151 ITR 150) (Pat) CIT Vs. Orissa Corporation (P) Ltd. (159 ITR 78) (SC) CIT Vs. Gopal & Co. (204 ITR 285) (Gau.) Jalan Timbers Vs. CIT (223 ITR 11) (Gau.) CIT Vs. Rohini Builders (256 ITR 360) (Guj.)

52

New Share Capital

• In case of new share capital, assessee is required to prove only identity of shareholders.

Case Laws:  

CIT Vs. Steller Inv. Ltd (192 ITR 287) (Del) CIT Vs. Kwick Travels (199 ITR 85) (St.) (Del) CIT Vs. Sophia Fin. Ltd. (205 ITR 98) (Del) (FB) CIT Vs. Steller Inv. Ltd. (251 ITR 263) (SC) CIT Vs. Lovely Exports 216 CTR 195 (SC)Superline Construction Pvt. Ltd. ITA No. 3645/Mum/2014

53

Receipts by way of Gift

• In case of gift, the heavy burden is cast on assessee to prove the genuineness of gifts. The burden to produce donor is on assessee.

• If donor is assessed to tax and confirmed donation of money to assessee by personally appearing before AO, the addition can be avoided.

Case Law:-

• Murlidhar Lahorimal Vs. CIT(280 ITR 512) (Guj) • Padamsingh Chauhan. 315 ITR 433 (Raj) • Ran Dev Kumar 315 ITR 435 (Raj.)

54

Source of Source

• Assessee is not required to prove source of the source of credit.

Case Laws:

Hastimal V. CIT (49 ITR 273)(Mad.) Tolaram Daga V. CIT (59 ITR 632)(Assam) Nemichand Kothari v. CIT (264 ITR 254) (Gau) Murlidhar Lahorimal Vs. CIT(280 ITR 512) (Guj)

55

Remission/Cessation of Liability

• Section 41(1) cannot be applied for current year when liability was incurred.

• There must be some benefit in the form of remission or cessation.

• The burden is on revenue that assessee claimed deduction in past years.(Ref: CIT v. Pranlal Doshi-201 ITR 756).

• In CIT v. Sugauli Sugar Works P.Ltd (236 ITR 518 (SC) and Ambica Mills Ltd v. CIT(54 ITR 167) (Guj), it was held that the fact that the period of limitation prescribed by the Limitation Act had expired, does not mean that the debt was extinguished merely because remedy by way of suit was barred.

56

Section 41(1) & Section 68 [Page 1/2]

Perfect Paradise Emporium ITAT No. 159/Del/201/Dt. 22/04/15

1) Even if the liability seems under serious doubts.- AO tried to verify creditors. Many of them were not found at given address. Many said that they do not even know the assessee, many said that they had no transactions with the assessee. Held. There was no cessation of liability and amount could not be added as income u/s. 41(1) of the Act.

Bhogilal Ramjibhai Atara. Tax appeal No. 558 of 2013 dt. 04/02/2013 (Guj.)

57

2) Unilateral action can not bring about a cessation of liability because a remission can be granted only by the creditor. Cessation can only occur by reason of operation of Law or debtor unequivocally declaring his intention, not to honour his liability when the payment is demanded by the creditor, or by a contract between the parties.

Vardhman Overseas 343 ITK 408 Del.

3) Applying above two ratio, it was held that addition u/s. 41 (1) can not be made in the year under appeal. At the same time, no addition can be made u/s. 68 as bogus purchase in the year under appeal, because addition u/s. 68 can be made only in the year in which credit was made to the account of creditor.

Damodar Hansraj 71 ITR 427 (SC)

Section 41(1) & Section 68 [Page 2/2]

58

Payments to Associates

• In CIT v. Voltamp Transformers P. Ltd. v. CIT (129 ITR 105) (Guj), it was held that payments are not to be judged from the viewpoint of a revenue officer but from the viewpoint of a businessman.

• In CBDT's circular dated 6/7/68, it has been observed that "The income-tax officer is expected to exercise his judgement in a reasonable and fair manner and provision is not be applied in a manner which will cause hardship in bona fide cases."

59

Claim of Expenditure

• In CIT v. Dhanrajgiri Raja Narasingiriji (91 ITR 544), it was held by Supreme Court that 'It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure.‘Every businessman knows his interest best.'

60

Investment in stock

• In the case of difference between stock as reported to revenue and bank, no addition can be made if there is difference in value and not quantity. (Ashokkumar v. ITO) (201 CTR 178) (J & K).

• In case of difference in stock in quantities, the addition can be avoided on basis of following case laws.

CIT v. General Metal Works (172 ITR 173) (All) CIT v. Sind. Rice & Gen. Mills (281 ITR 428) (PH) CIT v. Padmavati Cotton (236 ITR 340) (Mad)

61

Business Income v. Capital GainVarious Parameters:

• The intention at the time of purchase • The length of period of holding • The frequency of transactions • Owned fund v. Borrowed fund • Time devoted • The infrastructure and set up employed • The volume of transaction • Alternative occupation • The ratio of purchase and sales/holding • Circumstances responsible for sale • Post utilization of proceeds • Treatment in books of account • MOA/AOA • No. of scripts

62

Circulars and Case Laws• Instruction No. 1827 dated 31/8/89 • Draft Circular dated 16/5/2007• Cir. No. 4/2007 dated 16/6/2007• Deepaben A. Shah 99 ITD 218 (Ahd)• Fidelity Northstar Star 288 ITR 641 (AAR)• Revashankar Kothari 283 ITR 338 (Guj) • Smt. Neerja Birla v. Asst CIT 66 ITD 148 (Mum)• Janak S. Rangwalla v. Asst CIT (11 SOT 627)• General Ele.Pension Trust (280 ITR 425) (AAR)• Ramanarain Sons Ltd v. CIT(41 ITR 534) (SC)

63

Bogus/Non-genuine Purchases [Page 1/2]

• Assessee should place evidence in form of bills, challan, entry in stock register, payment by crossed cheques etc.

Case Laws: Dy. CIT v Adinath Ind-252 ITR 476 (GUJ) ITO v Sunsteel-92 TTJ 1126 (AHD) Sri Rama Multitec v ACIT-92 TTJ 568 (AHD) CIT V S. M. Omer- 201 ITR 608 (CAL) CIT V. M.K. Brothers-163 ITR 249(GUJ) Balaji Tex. Ind.P.L. V ITO-49 ITD 177(BOM) J. R. Sol. Ind. P.L V ACIT-68 ITD 165 (CHD.) Milkfood Ltd. V. DCIT - 65 TTJ 848 (DEL) CIT V. Kashiram Textile Mills P. Ltd. 284 ITR 61 (GUJ)

64

• Estimation of inflation in expense through bogus purchase bills. Simit P. Sheth 356 ITR 451 (Guj.)Satyanarayan P. Rathi 351 ITR 150 (Guj.)

• Hawala Dealer declared by VAT authority. - Cash withdrawal, Bank statement of supplier not verified. Transportation of goods established .Relied on Babulal Borana – 282 ITR 251 – addition deletedRajeev G. Kalathi ITR No. 6727/Mum/2012 dt. 20.08.2014

Bogus/Non-genuine Purchases [Page 2/2]

65

Assessment after revision

• It has been held that the issue which is not touched upon on revision cannot be basis for making addition in assessment taken in pursuance of order u/s 263-Ref: CIT v. D. N. Doshani & Co. (280 ITR 275) (Guj)

66

Inclusion of taxes/duties-Sec-145A

• Our Institute suggested exclusive method but section 145A talks about inclusive method. Both methods are revenue neutral.

• So auditor gives reconciliation in the tax audit report & demonstrates that even when adjustments are made as per provisions of section 145A, there is no impact on the figure of net profit / loss.

• However, AO makes adjustment only to the figure of closing stock so as to make addition.

Case Laws: CIT v. Indo Nippon Chemicals Ltd (261 ITR 275) (SC) Dy. CIT v. Gandhar Oil Ltd. (104 TTJ 630) (Mum)

67

Whether stock can be valued at Market Price?

• The stock cannot be valued at market price, if it is higher than cost price.

Case Law: Sanjeev Woolen Mills v. CIT (279 ITR 434) (SC)

• If the value of closing stock is disturbed in any year, the corresponding adjustment in value of opening stock of next year should be given.

Case Laws: CIT v. Chandrika Towers (275 ITR 173) (MP)

68

Destruction of books of accounts• I.T authorities can accept the audit report where books of

accounts are destroyed & they can also draw inference from the same regarding supporting materials for deductions claimed.

Case Law: CIT. V. Jay Engg. Works Ltd. -113 ITR 389(Del)

69

Protective Assessment• Protective assessment has been recognized by judicial

decisions although there is no specific provision in the Act.

• If substantive assessment is not made, protective assessment becomes substantive assessment.

• There cannot be recovery in case of protective assessment.

• Although protective assessment is permissible, protective penalty order is not permissible.

70

New Claim During Assessment• It has been held by Supreme Court in Goetze (India) Ltd. Vs.

CIT (284 ITR 323) that new claim for deduction cannot be entertained by assessing authority other than by way of filing revised return of income.

• What will happen if some ommission comes to the assesses notice during assessment proceedings by which time limit for filing revised return may have elapsed.

71

• CBDT Circular No 14 of 11 April 1955, which comes to rescue of taxpayers and states that: Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessees on whom it is imposed by law, officers should :

72

(a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;

(b) 1freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs;

(c) Public Relation Officers have been appointed at important centres, but by the very nature of their duties, their field of activity is bound to be limited."

73

• Certain Precedents on the subject - HC and ITAT - Post Goetze

DHC in the case of Bharat Aluminium (decided on 24 May 2007) 163 Taxman 430, has inter-alia ruled that assessee can file revised computation in the course of ongoing assessment proceedings under the Act, without making recourse to revised return, despite the fact that time limit for revising return under section 139(5) had expired. DHC while inferring above has placed reliance on All. HC ruling in the case of Dhampur Sugar Mills 90 ITR 236. Interestingly, SC ruling in the case of Goetze do not find mention in DHC ruling.

74

Mumbai ITAT in the case of Chicago Pneumatic India Limited 15 SOT 252 in context of allowability of new claims during the assessment proceedings without having recourse to revised return, placing reliance on principle embedded in Article 265 of Indian constitution (No tax can be collected except by the authority of law) and old CBDT Circular No. 14 dated 11 April 1955 and distinguishing Goetze ruling of SC reported in 284 ITR 323 has categorically held that assessee has the right to make new claims during assessment proceedings without recourse to revised return (Refer Para 45 to Para 49 of the ruling).

75

• Delhi ITAT in Moser Baer Further 295 ITR 148 (AT) has distinguished Goetze (supra) in context of fresh claim (viz. opting out) under section 10B of the Act. In this connection, while distinguishing Goetze (supra) ITAT has held that Goetze (supra) operates in different context and has no applicability to section 10B, which is a code in itself.

• Kolkata ruling in the case of Van Oord Altanata B.V 112 TTJ 229 has interalia held that "there is no estoppel against that statute" and AO is duty bound to bring correct legal position to assessee's notice and give effect to the same while passing assessment order, irrespective of assessee's mistake.

76

R. K. Doshi & Co. Chartered Accountants

Thanks