Advance tax payable is liable to be adjusted against an amount illegally retained with the department, upon specific request: Delhi High Court

Matter: Vishwanath Khanna v. Union of India, decided on 03 June, 2011

Assessment Years: 1995-96, 1999-2000, 2000-01, 2001-02, 2002-03, 2003-04

Relevant Facts:

1. A search and seizure operation was carried on at M/s Foto Traders in which cash and bullion worth approx Rs 5, 00,000 were seized.

2. Under an order u/s 132(5), the AO assessed the income of M/s Foto Traders as an unregistered partnership and passed the assessment. This was opposed by the petitioner.

3. The petitioner approached the Settlement Commission and the Commission ordered that the concern M/s Foto Traders is a sole proprietorship and assessed it accordingly.

4. The assessee was to file Income tax returns for the AY’s in question save 1995-96, but did not pay the advance tax due to the fact that a huge amount was lying with the department.

5. The department sought to levy interest u/s 234 A, B, C and 220(2) upon the assessee for non-payment of advance tax.

Questions of law:

1. Whether interest under Sections 234A, 234B, 234C and 220 (2) of the Act could be charged when according to the petitioner, sufficient amount of the petitioner was lying deposited with the Department wherever advance tax could be adjusted?

2. From which date the petitioner is entitled to interest on the amount which became refundable after giving effect to the orders passed by the Income Tax Settlement Commission?

Upholding the appeal of the Assessee, the Hon’ble Court held that:

1. The respondent would not be justified in levying interest, as the amount of advance tax payable by the petitioner for these assessment years could be adjusted from the amount lying with the Department in the petitioners own account. (para 15)

2. Interest is payable to the assessee u/s 132B(4) and 244A as well alongwith costs of Rs. 10,000.

The decision is available here.

Interest leviable u/s 27(1) of the DST Act if full amount of tax due has not been paid by the assessee as per a correct and complete return: Delhi HC

Matter: Mohan Hotel Pvt. Ltd v. Commissioner of Sales Tax, S.T. Ref. No.2/2002, decided on 03.06.2011

Assessment Year: 1984-85 to 1989-90

Relevant Facts:

1. The assessee supplies food to airlines which are not for consumption/consumed in India. The assessee thus claims exemption from local sales tax as the food being in the course of export/

2. The assessee contented that the sale came within the purview of section 5(1) of the Central Sales Tax Act, 1956. http://www.vakilno1.com/bareacts/centralsalestaxact/s5.htm. Furthermore, as there was a correct and complete disclosure in the returns of the assessee, no interest would be liable to be paid.

3. The AO rejected the claim of the assessee. The Dy. Commissioner (A) also rejected the claim of the assessee. The tribunal reasoned against the assessee that the document was not a document of title. A review before the Tribunal was also dismissed.

Question of law made under a reference:

(i). Whether on the facts and under the circumstances of the case, the Tribunal was correct in holding that the delivery order issued by the dealer is not a document of title and therefore, the case of the appellant does not fall under the second limb of section 5(1) of the Central Sales Tax Act, 1956?

(ii). Whether on the facts and under the circumstances of the case, the Tribunal was correct to hold that the second limb of the aforesaid section 5(1) pre-supposes foreign destination of the goods?

(iii). If the answer to both the aforesaid questions is in the negative, whether on the facts and under the circumstances of the case the Tribunal was correct in upholding levy of interest under Section 27(1) of the Delhi Sales Tax Act, 1957 read with Section 9(2A) of the Central Sales Tax Act, 1956?

Dismissing the appeal of the petitioner, the Hon’ble Court held that:

1. Only question (iii) came to be adjudicated before the court.

2. Each question is to be decided on the facts of the case. It is clear that there was no correct and complete disclosure of sales in the returns.

3. Interest will be leviable under section 27(1) of the DST Act read with section 21(3) if full amount of tax due has not been paid by the dealer/assessee as per return which is both correct and complete. The correctness and completeness of the return and the bonafide of the assessee/dealer would have to be ascertained in the facts and circumstances of each case.

The decision is available here.

Section 27: If any dealer fails to pay the tax due as required by sub- section (3) of section 21, he shall, in addition to the tax (including any penalty) due, be liable to pay simple interest on the amount so due at one per cent per month from the date immediately following the last date for the submission of the return under sub-section (2) of the said section for a period of one month, and at one and a half per cent per month thereafter for so long as he continues to make default in such payment or till the date of completion of assessment under section 23, whichever is earlier.

Section 21(3): Every registered dealer required to furnish returns under sub-section (2) shall pay into a Government Treasury, or the Reserve Bank of India or in such other manner as may be prescribed, the full amount of tax due from him under this Act according to such return, and shall where such payment is made into a Government Treasury or the Reserve Bank of India furnish along with the return a receipt from such Treasury or bank showing the payment of such amount.

Mumbai ITAT: No advance tax be deducted and no interest u/s 234B payable when TDS equals amount of tax payable

ADIT (International Taxation) v. Universal International Music BV, on 31^st January, 2011

ITA No.6063/M/2004; ITA No.9034/M/2004; ITA No.2304/M/2006; ITA No.5064/M/2006

Assessment Year: 2000-01, 2001-02, 2002-03, 2003-04

Question/s before the Hon’ble Tribunal: Whether the benefit of Article 12 of the Indo-Netherlands DTAA is applicable to the assessee?

Whether interest u/s 234B is liable to be charged as no advance tax was paid by the assessee?

Relevant facts: The assessee who was the tax resident of Netherlands within the meaning of Article 4 of Double Taxation Avoidance Agreement (DTAA) signed between India and Netherlands was engaged in Manufacturing of audio and visual recordings, the development, manufacture and exploitation of audio and visual carriers or combinations thereof and earning royalty on exploitation of music rights. The assessee sought benefit of article 12 of the India-Netherlands DTAA and offered to tax the royalty income @10%, while the AO sought to tax the income at 30% being that the assessee was not the beneficial owner of the intellectual property.

Dismissing the appeal of the department, the Hon’ble Tribunal held that:

Para 10.3: “In view of the foregoing decision we see no infirmity in the order of CIT(A) in coming to the conclusion that the assessee was the beneficial owner of the royalty and the same has to be taxed @ 10% for all the years.

Para 11.1: “The dispute is regarding levy of interest under section 234B. There is no dispute that entire income of the assessee was tax deductible at source under the provisions of section 195 and therefore in view of the provisions of section 209(1)(d), the advance tax payable by the assessee will be nil. This view is supported by several judgments including the judgment of Hon’ble jurisdictional High Court (313 ITR 187). We therefore see no infirmity in the order of CIT(A) deleting the interest and the same is therefore upheld.”

The decision is available here.

ITAT, Mumbai: A continuing debit balance is not, per se, an international transaction on which Arms Length Pricing of interest can be done

Nimbus Communications v. ACIT, decided on 5^th January, 2011

Question before the Hon’ble Tribunal: Whether the Commissioner (Appeals) was justified in sustaining an arm’s length price (ALP) adjustment in respect of interest not charged by the assessee on debit balances, overdue beyond thirty days, of assessee’s associated enterprises.

Relevant facts: During the relevant previous year, the assessee had international transactions with one of its associated enterprises, i.e. World Sports Nimbus Pte Ltd Singapore, and the said associated enterprises had some overdue payments, to be made to the assessee. The assessee did not charge any interest on these overdue payments.

The TPO made an arm’s length adjustment of Rs 12,51,175. The quantification of notional interest was done by adopting interest at 2.19 % LIBOR on overdue amount beyond 30 days.

Allowing the appeal of the assessee, the Hon’ble Court held that:

(Para 5): “A continuing debit balance, in our humble understanding, is not an international transaction per se, but is a result of the international transaction. In plain words, a continuing debit balance only reflects that the payment, even though due, has not been made by the debtor… What can be examined on the touchstone of arm’s length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into.”

The Hon’ble Tribunal concluded that: “In view of these discussions, in our considered view, a continuing debit balance per se, in the account of the associated enterprises, does not amount to an international transaction under section 92B in respect of which ALP adjustments can be made.”

The judgment is available here.

Supreme Court: Advance Tax payable on MAT and in default, interest u/s 234B, 234C applicable

Jt.C.I.T.,Mumbai v. M/S.Rolta India Ltd. on 7 January, 2011

Question before the Hon’ble Court: “Whether interest under Section 234B can be charged on the tax calculated on book profits under Section 115JA? In other words, whether advance tax was at all payable on book profits under Section 115JA?”

Relevant Facts: Assessee furnished a return of income on 28.11.1997 declaring total income of Rs. Nil. On 28.3.2000, an order under Section 143(3) was passed determining the total income at nil after set off of unabsorbed business loss and depreciation. The tax was levied on the book profit worked out at Rs. 1,52,61,834/- determined as per the provisions of Section 115JA. The interest under Section 234B of Rs. 39,73,167/- was charged on the tax on the book profit as worked out in the order of assessment.

Upholding the appeal of the Department, the Hon’ble Court held, inter alia that:

Para 8: “The pre-requisite condition for applicability of Section 234B is that assessee is liable to pay tax under Section 208 and the expression "assessed tax" is defined to mean the tax on the total income determined under Section 143(1) or under Section 143(3) as reduced by the amount of tax deducted or collected at source. Thus, there is no exclusion of Section 115J/115JA in the levy of interest under Section 234B. The expression "assessed tax" is defined to mean the tax assessed on regular assessment which means the tax determined on the application of Section 115J/115JA in the regular assessment.”

Para 9: “…held that Section 115JB, with which we are concerned, is a self-contained code pertaining to MAT, which imposed liability for payment of advance tax on MAT companies and, therefore, where such companies defaulted in payment of advance tax in respect of tax payable under Section 115JB, it was liable to pay interest under Sections 234B and 234C of the Act.”

The decision is available here.

3. Brij Lal & Ors. v. CIT, Jalandhar on 21st October, 2010

Questions of Law and the determination by the Hon’ble Court thereon:

“(I) Whether section 234B applies to proceedings of the Settlement Commission under Chapter XIX-A of the said Act?

(para) 11. Our detailed analysis shows that though Chapter XIX- A is a self-contained Code, the procedure to be followed by the Settlement Commission under sections 245C and 245D in the matter of computation of undisclosed income; in the matter of computation of additional income tax payable on such income with interest thereon; the filing of settlement application indicating the amount of income returned in the return of income and the additional income tax payable on the undisclosed income to be aggregated as total income shows that Chapter XIX-A indicates aggregation of incomes so as to constitute total income which indicates that the special procedure under Chapter XIX-A has inbuilt mechanism of computing total income which is nothing but assessment (computation of total income). To elaborate, under section 245C(1B), if the applicant has furnished a return in respect of his total income, tax shall be calculated on the aggregate of total income returned and the income disclosed in the settlement application as if such aggregate were total income. Under the Act, tax is payable on the total income as computed in accordance with the provisions of the Act. Thus, section 143(3) provision is sought to be incorporated in section 245C. When Parliament uses the words "as if such aggregate would constitute total income", it presupposes that under the special procedure the aggregation of the returned income plus income disclosed would result in computation of total income which is the basis for the levy of tax on the undisclosed income which is nothing but "assessment". Similarly, section 245C(1C) provides for deductions from the total income computed in terms of section 245C(1B). Thus, the special procedure under sections 245C and 245D in Chapter XIX-A shows that a special type of computation of total income is engrafted in the said provisions which is nothing but assessment which takes place at section 245D(1) stage. However, in that computation, one finds that provisions dealing with a regular assessment, self-assessment and levy and computation of interest for default in payment of advance tax, etc. are engrafted. [See sections 245C(1B), 245C(1C), 245D(6), 245F(3) in addition to sections 215(3), 234A(4) and 234B(4)].”

Thus, the Hon’ble Court held that section 234A, 234B and 234C are applicable as the provisions of Chapter XIX-A are akin to a return of income.

“(II) If answer to the above question is in the affirmative, what is the terminal point for levy of such interest - Whether such interest should be computed up to the date of the Order under section 245D(1) or up to the date of the Order of the Commission under section 245D(4)?
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(Para 12) Under sections 245C(1B) and (1C) the additional amount of income tax payable on the undisclosed income shall be on the total income as calculated under section 245C(1B). On computation of total income under sections 245C(1B) and (1C), interest follows such computation. It is important to note that interest follows computation of total income. Once such computation takes place under section 245C(1B) then section 234B(2) applies. The said sub-section deals with the situation where before determination of total income under section 143(1) or 143(3) tax is paid under section 140A or otherwise interest shall be calculated in accordance with section 234B(1) up to the date on which tax is so paid. In that sense an application under section 245C(1) is a return. Section 245C(1) deals with computation of total income.

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Thus, as stated above, sections 234A, B and C are applicable up to the stage of section 245D(1) order passed by the Settlement Commission.”

“(III) Whether the Settlement Commission could reopen its concluded proceedings by invoking section 154 of the said Act so as to levy interest under section 234B, though it was not so done in the original proceedings?

The point to be noted is that in computation of additional income tax payable by the assessee, there is no mention of section 154. On the contrary, under section 245I the order of the settlement Commission is made final and conclusive on matters mentioned in the application for settlement except in the two cases of fraud and misrepresentation in which case the matter could be re- opened by way of review or recall. Like ITAT, the Settlement Commission is a quasi-judicial body. Under section 254(2), the ITAT is given the power to rectify but no such power is given to the Settlement Commission. Thus, we hold that Settlement Commission cannot reopen its concluded proceedings by invoking section 154 of the Act. Lastly, one must keep in mind the difference between review/ recall of the order and rectification under section 154. The Schedule of Chapter XIX-A does not contemplate invocation of section 154 otherwise there would be no finality to the assessment by settlement which is different from assessment under Chapter XIV where there is an appeal, revision, etc. Settlement of liability and not determination of liability is the object of Chapter XIX-A.”

Thus, in conclusion the Hon’ble Court held at para 16 that:

“16. (1) Sections 234A, 234B and 234C are applicable to the proceedings of the Settlement Commission under Chapter XIX-A of the Act to the extent indicated hereinabove.

(2) Consequent upon conclusion (1), the terminal point for the levy of interest under section 234B would be up to the date of the order under section 245D(1) and not up to the date of the Order of Settlement under section 245D(4).

(3) The Settlement Commission cannot re-open its concluded proceedings by invoking section 154 of the Act so as to levy interest under section 234B, particularly, in view of section 245I.”

The decision can be accessed here.