page 1 of 13 ita no.549/bang/2011 1 · assessment bad in law, void ab-initio and liable to be...

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IN THE INCOME TAX APPELLATE TRIBUNAL,

BANGALORE BENCH ‘B’

BEFORE SHRI JASON P BOAZ, ACCOUNTANT MEMBER AND

SHRI N V VASUDEVAN, JUDICIAL MEMBER

ITA No.549/Bang/2011

(Asst. year 2005-06)

M/s Synopsys International

Limited, RMZ Infinity, Tower A,

4th & 5th Floor, Municipal No.3,

Old Madras Road,Benniganahalli,

Bangalore-16.

PA No.AAJCS 6844 A

vs

The Deputy Director of

Income-tax

(International Taxation)

Circle-11(1), Bangalore.

(Appellant) (Respondent)

Date of Hearing : 7.11.2012

Date of Pronouncement : 10.12.2012

Appellant by : Shri K P Kumar, Advocate

Respondent by : Shri Farhat Hussain Quereshi, CIT-II

ORDER

PER JASON P BOAZ :

This appeal by the assessee is directed against the order of the

CIT (A)-IV, Bangalore, dated 25.02.2011 for the assessment year 2005-06.

2. The facts of the case, in brief, are as under:

2.1 The assessee is a foreign company incorporated under the laws

of Ireland, engaged in the business of sales and marketing of software

licenses in India and provision of ancillary services like consultancy, support,

training, inspection and installation. The record indicates that the assessee

http://www.itatonline.org

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filed its return of income for the assessment year 2005-06 declaring NIL

income pursuant to the issue of notice under section 148 of the I T Act,

1961 (hereinafter referred to as ‘the Act’) by the Assessing Officer on

5/4/2007. The assessment was completed by an order under section 143(3)

rws 148 of the Act on 29/12/2008 in which the assessee’s taxable income

was determined at Rs.7,47,22,046/- on account of the Assessing Officer’s

finding hat the income from software supplied by the assessee would be

chargeable to tax as Royalty.

2.2 Aggrieved by the order of assessment for the assessment year

2004-05 dated 29/12/2008, the assessee went in appeal before the

CIT(A)-IV, Bangalore. The learned CIT(A) disposed off the appeal

dismissing it except to the extent of adoption of rate of tax of 10% as

against 15% adopted by the Assessing Officer.

3.0 Aggrieved by the order of the learned CIT(A)-IV, Bangalore

dated 25/2/2011 for the assessment year 2005-06, the assessee is now

before the Tribunal, In the ground raised, the assessee has submitted as

under:-

1. Assessment bad in law and on facts

• The learned CIT(A) erred in not holding that the

order of the Deputy Director of Income-tax

(International Taxation), Circle-1(1), Bangalore

(‘DDIT’ or ‘Assessing Officer’) is bad in law and on

facts.


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• The CIT(A) erred in concluding that the

reassessment proceedings initiated upon the

appellant were valid. The CIT(A) ought to have

appreciated that the reassessment proceedings

initiated under section 148 of the Act by the

DDIT was invalid and without jurisdiction.

2. Erroneous demands

The DDIT erred in :

a) Determining the total income of the appellant at

Rs.74,722,046/-;

b) Levying income-tax of Rs.74,72,205; and

c) Levying interest under section 234B of the Act of

Rs.16,83,045/-.

3. Erroneous treatment of the receipts from Indian

customers as royalty

3.1 The DDIT/CIT(A) erred in holding that the payments

received by the appellant are ‘royalty’ under the Income-

tax Act, 1961 (‘the Act’).

3.2 The DDIT/CIT(A) erred in not holding that the payments

received by the appellant do not qualify as ‘royalty’ under

the Double Taxation Avoidance Agreement between India

and Ireland (‘the DTAA’).

3.3 The DDIT/CIT(A) erred in not holding that whether the

payments received by the appellant from Indian parties

was in the nature of royalty had most appropriately to be

judged under clause (v) of Explanation 2 to section

9(1)(vi) of the Act, which clause did not apply because

there was no right in respect of any copyright granted by

the appellant.


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3.4 The DDIT/CIT(A) erred in holding that the payments

received by the appellant from Indian parties was

towards the use of ‘process’ within the meaning of clause

(iii) of Explanation 2 to section 9(1)(vi) of the Act, and

accordingly, are ‘royalty’ as defined in section 9(1)(vi) of

the Act.

3.5 The DDIT/CIT(A) erred in not holding that, as the

appellant did not give the right to Indian customers to

reproduce and distribute to the public the copyrighted

programme, the payments received by the appellant could

not be construed as ‘royalty’.

3.6 The DDIT/CIT(A) erred in not holding that, as the

payment received by the appellant from Indian customers

was not to be measured by reference to the productivity

or use of the software, it could not be construed as

‘royalty’.

3.7 The DDIT/CIT(A) erred in holding that software is not

‘goods’.

3.8 The DDIT/CIT(A) erred in not appreciating the reliance

placed by the appellant on the decisions in the following

cases:-

• Motorola Inc. v Deputy Commissioner of Income Tax (2005) 95 ITD 269 (Delhi) (SB);

• Samsung Electronics Co. Ltd. v ITO (2005) 94 ITD 91 (Bang.);

• Sonata Information Technology Limited v ACIT (2006) 103 ITD 324 (Bang.);

• Infrasoft Limited v ADIT (2009) 28 SOT 179 (ITAT-Delhi);

• Velankani Mauritius Ltd. v DDIT (2010) 132 TTJ 124 (ITAT Bang.);

• Dassault Systems K K (2010) 188 Taxman 223 (AAR);

• DDIT v M/s TII Team Telecom International Ltd. (ITA No.309/Mum/2007) (Mum ITAT);

• DDIT v Alcatel USA International Marketing Inc (Mum) (2010-TII-123-ITAT-MUM-INTL);


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• DDIT (International Taxation) v M/s Reliance Industries Ltd. (ITA No.116/Mum/2008) (ITAT Mum);

• Hewelett-Packard (India) (P) Ltd. v ITO (2006) 5 SOT 660 (ITAT-Bangalore);

• M/s Kansai Nerolac Paints Ltd. v Addl. DIT (2010) ITA No.568/Mum//2009 (ITAT Mum.); and

• Addl. Director of Income-tax (Int. Taxation) v M/s Tata Communications Ltd. (2010) ITA No.1473/Mum/2009 (ITAT Mumbai).

3.9 The CIT(A) erred in relying upon the decision of the

Karnataka High Court in the case of Commissioner of

Income Tax and others v Samsung Electronics Co. Ltd.

And Others (2009) 227 CTR 335.

3.10 The CIT(A) ought to have followed the principles laid

down by the Supreme Court in Union of India v

Kamalakshmi Finance Corporation Limited (1991) ELT 433

(SC) and ought to have set aside the order of the DDIT.

4. Interest levied under section 234B of the Act

The DDIT/CIT(A) erred in levying interest under section

234B of the Act.

5. Interest under section 234A of the Act

The appellant prays that it be granted the consequential

relief in respect of levy of interest under section 234A

of the Act.

6. Initiation of penalty proceedings

The CIT(A) erred in not reaching a conclusion that the

initiation of penalty proceedings by the DDIT under

section 271(1)(c) was not justified in the case of the

appellant.


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7. Relief

The appellant prays that the DDIT be directed to grant

all such relief arising from the preceding grounds as also

all relief consequential thereto.

4.0 In the ground at sl.no.1, the assessee has contended that the

order of assessment is bad in law as the re-assessment proceedings initiated

under section 147 and pursuant to issue of notice under section 148 of the

Act were carried out in violation of the procedure laid down by law and the

judicial decisions on the subject and therefore, the order of assessment

required to be struck down as invalid, null and void ab-initio. The learned AR,

at the outset, submitted that, the assessee had been required to file the

return of income for the assessment year 2005-06 pursuant to the issue of

notice under section 148 of the Act on 2/4/2007, which admittedly, it did on

30/4/2007. The return of income was enclosed with a covering letter

dated 16/4/2007 (filed on 30/4/2007) addressed to the Assessing Officer

wherein the assessee had requested him to provide the reasons for initiating

the proceedings under section 148/147 of the Act (at page 10 of the paper

book filed by the learned AR on 07/11/2012). It was submitted by the

learned AR that the reasons for initiating proceedings under section

147/148 of the Act sought for by the assessee were never made available to

it by the Assessing Officer in the course of assessment proceedings which,

it is argued, was against the settled position of law on the subject. The

learned AR pointed out that the reasons recorded by the Assessing Officer

for initiation of proceedings under section 147/148 of the Act were finally

made available to the assessee only on 28/1/2010 by the learned CIT(A) in

the course of appellate proceedings, as can be seen from the narration in


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paras 3.2 and 3.3 of the learned CIT(A)’s order. The learned AR argued

vehemently that on being asked for the reasons recorded for initiation of

proceedings under section 147/148 of the Act, it was obligatory on the part

of the Assessing Officer to communicate the same to the assessee; but

which was not done. This, it was submitted, was in violation of the decisions

of the Hon’ble Apex Court in the case of GKN Driveshafts (India) Ltd. v ITO

(259 ITR 19) (SC) and of the Hon’ble Bombay High Court in the case of

Allana Cold Storage Ltd. v ITO (287 ITR 1) (Bom.) which mandated that the

Assessing Officer was bound to furnish the reasons sought within a

reasonable time, which he did not do. In support of the proposition that

failure on the part of the Assessing Officer to furnish the reasons for

initiation of proceedings under section 147/148 of the Act during the

pendency of assessment proceedings would render the resultant order of

assessment bad in law, void ab-initio and liable to be quashed, the assessee

also relied on the following decisions:-

(i) ACIT v K V Venkataswamy Reddy of the ITAT,

Bangalore in ITA Nos.797, 807, 798 &

808/Bang/2009 dated 21/5/2010 – wherein the

Tribunal, following the decision of the Hon’ble Apex

Court in the case of GKN Driveshafts (India) Ltd. v

ITO (supra) and of the Hon’ble Bombay High Court in

the case of Allana Cold Storage Ltd. v ITO (287 ITR

1) (Bom.), held that the orders of assessment have no

legal sanctity as they are not passed in conformity

with the ruling of the Courts (supra) and quashed

them.

(ii) Tata International Limited v DCIT (ITA Nos.3359 to

3361/Mum/2009 dated 29/6/2012 of ITAT, Mumbai).

(iii) CIT v Videsh Sanchar Nigam Ltd. (ITA No.4235 of

2010 dt.20/7/2011).


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4.1 Per contra, the learned DR supported the order of the

authorities below. He submitted that the request for copy of reasons

recorded for initiation of 147 proceedings vide letter dt.16/4/2007

addressed to the Assessing Officer was for filing of the return of income

for the assessment year 2005-06. No separate application was made by the

assessee to the Assessing Officer, for obtaining the reasons. It was

further submitted that as the reasons were provided to the assessee by the

learned CIT(A) that would suffice as compliance with the requirements of

law and procedure as laid down by the Courts and therefore, proceedings

initiated under section 147/148 of the Act and the resultant order of

assessment under section 143(3) rws 148 of the Act dated 29/12/2008

were valid in law. In support of this proposition, the learned DR placed

reliance on the decision of the Hon’ble Delhi High Court in the case of

Nestle India Ltd. v DCIT reported in (2004) 189 CTR (Del.) 70.

4.1.1 We have heard the rival contention, perused and carefully

considered the relevant material on record and the judicial decisions cited.

Though the arguments on merits were also made, however, at this stage, we

will confine ourselves to the issue of the validity of the initiation of

proceedings under section 147/148 of the Act and the resultant order of

the assessment for the assessment year 2005-06.

4.1.2 As per the records, we find that the then Assessing Officer

had recorded in writing the reasons for initiation of proceedings under

section 147/148 of the Act. It is also a matter of record that the

assessee’s letter dated 16/4/2007, for filing the return of income for the


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assessment year 2005-06 in response to notice under section 148

dt.2/4/2007, contained a specific request to the Assessing Officer to be

provided with the reasons for initiating the proceedings under section

147/148 of the Act (copy on page 10 of assessee’s paper book filed on

07/11/2012). The assessee’s letter dated 16/4/2007 forms a part of the

record of assessment with the Assessing Officer. It is clear from a perusal

of paras 3.2 and 3.3 of the learned CIT(A)’s order that reasons recorded by

the Assessing Officer for initiation of proceedings under section 147/148 of

the Act were never provided to the assessee by the Assessing Officer

during the pendency of assessment proceedings which culminated in the

order of assessment on 29/12/2008, almost one year and eight months after

the request for the same was made by the assessee on 16/4/2007. In para

3.2 of his order, the learned CIT(A) states that the reasons recorded for

initiation were given to the assessee on 28/1/2010 only. This establishes

the fact that the assessee was never given the reasons for initiation of

proceedings under section 147/148 of the Act by the Assessing Officer

during the pendency of assessment proceedings but only during appellate

proceedings almost 33 months after the assessee made the request for the

same by letter dated 16/4/2007.

4.1.3 As held by the Hon’ble Apex Court in the case of GKN

Driveshafts (India) Ltd. v ITO (259 ITR 19) (2003) that on being requested

by the assessee, the Assessing Officer is bound to furnish the reasons

recorded for initiation of proceedings under section 147 of the Act within a

reasonable period of time so that the assessee could file its objections

thereto and the Assessing Officer was to dispose off the same by passing a


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speaking order thereon. Even as per the rules of natural justice, the

assessee is entitled to know the reasons on the basis of which the Assessing

Officer has formed an opinion that income assessable to tax has escaped

assessment. The furnishing of reasons to the assessee is to

enable/facilitate it to present its defence and objections to the initiation of

proceedings under section 147/148 of the Act. We are of the considered

opinion that there was no justifiable reason for the Assessing Officer to

deprive the assessee of the recorded reasons by him for initiating

proceedings under section 147/148 of the Act.

4.1.4 In the decision cited by the learned AR in CIT v Videsh

Sanchar Nigam Ltd. (ITA No.4235 of 2010 dt.20/7/2011), the Bombay High

Court has held that re-assessment proceedings were invalid for the reason

that the reasons recorded for reopening of the assessment were not

furnished despite requests by the assessee till the completion of the

assessment and were furnished only after completion of the assessment.

From this decision it is clear that the reasons recorded for initiation of

proceedings under section 147/148 of the Act are required to be furnished

by the Assessing Officer to the assessee within a reasonable period in order

for the assessee to raise its objections at the preliminary stage of

proceedings. If the reasons are not furnished to the assessee during the

assessment proceedings, then the subsequent furnishing of the reasons

after completion of assessment proceedings would serve no purpose and

would amount to the assessee being denied its right to raise objections to

the validity of proceedings initiated under section 147/148 of the Act. In

the light of the findings of their Lordships in this case, it is clear that the


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completion of assessment/re-assessment without furnishing the reasons

recorded by the Assessing Officer for initiation of proceedings under

section 147/148 of the Act is not sustainable in law as it is incumbent on the

Assessing Officer to supply them within reasonable time as held by the

Hon’ble Apex Court in the case of GKN Driveshafts (India) Ltd. v ITO

(supra). The subsequent furnishing of reasons i.e. after completion of

assessment would not make good the defect/invalidity with which the

initiation of proceedings under section 147/148 of the act is tainted.

Similar view has been held by coordinate benches of the ITAT in the case of

(i) ACIT v K V Venkataswamy Reddy of the ITAT, Bangalore in ITA Nos.797,

807, 798 & 808/Bang/2009 dated 21/5/2010 and (ii) Tata International

Limited v DCIT by the ITAT, Mumbai in ITA Nos.3359 to 3361/Mum/2009

dated 29/6/2012.

4.1.5 From the discussion in paras 4.1.1 to 4.1.4 of this order (supra),

it is clear that the settled proposition of law, as laid down by the Hon’ble

Apex Court, Hon’ble High Court of Mumbai and as followed by the two

decisions of the coordinate benches of the Tribunal (all cited supra), is that

the reasons as recorded by the Assessing Officer are required to be

furnished to the assessee within reasonable time of their being recorded

and certainly prior to the completion of assessment. In the instant case, the

undisputable facts on record establish beyond doubt that the reasons

recorded for initiation of proceedings under section 147/148 of the Act

were never furnished to the assessee by the Assessing Officer before

completion of the assessment proceedings on 29/12/2008, 33 months after

the request was made by the assessee by letter dated 16/4/2007. The


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subsequent furnishing of the reasons recorded to the assessee by the

learned CIT(A) by letter dated 28/1/2010 does not achieve any purpose or

mitigate the illegality of the action of depriving the assessee its right to

raise objections against the initiation of proceedings under section 147/148

of the Act. In this view of the matter, we hold that the order of

assessment passed under section 143(3) rws 148 of the Act dated

29/12/2008 for the assessment year 2005-06 without the Assessing

Officer furnishing the recorded reasons for initiation of proceedings under

section 147/148 of the Act to the assessee within reasonable time and prior

to the completion of the assessment proceedings, renders this order of

assessment invalid and unsustainable in law.

5. Since we have quashed the order of assessment dated

29/12/2008 for the assessment year 2005-06 as being invalid and

unsustainable in law, we therefore do not propose to go into the merits of

the issues raised in this appeal.

6. In the result, the appeal filed by the assessee for the

assessment year 2005-06 is allowed.

Order pronounced in the open court on 10th day of December, 2012

Sd/- Sd/-

(N V VASUDEVAN) (JASON P BOAZ)

JUDICIAL MEMBER ACCOUNTANT MEMBER


of 13 ITA No.549/Bang/2011 13

Copy to :

1. The Revenue 2. The Assessee 3. The CIT concerned.

4. The CIT(A) concerned. 5. DR 6. GF

MSP/ By order

Senior Private Secretary, ITAT, Bangalore.


IN THE INCOME TAX APPELLATE TRIBUNAL

“A” BENCH : BANGALORE

BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER

AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER

ITA No.797, 807, 798, & 808/Bang/2009

Assessment years : 2003-04 to 2006-07

The Assistant Commissioner of

Income-tax,

Circle 10(1),

Bangalore. : APPELLANT

Vs.

Shri K.V. Venkataswamy Reddy,

No.191/2 (Old No.188),

Kudlu Village, Madiwala Post,

Hosur Road,

Bangalore – 560 058. : RESPONDENT

Appellant by : Smt. Jacinta Zimik Vashai, Addl.

CIT(DR)

Respondent by : Shri C.R. Sundaresh, Advocate

O R D E R

Per A. Mohan Alankamony, Accountant Member

These four appeals of the Revenue are directed against the

orders of the Ld. CIT (A)-V, Bangalore in ITA Nos: 101, 102 & 103/C

10(1)/CIT (A)-V/08-09 dated; 29.5.2009 for the assessment years 2003-04,

2004-05 & 2006-07 and in ITA No: 62/07/CIT(A)-V/07-08 dated; 29.5.2009

for the assessment year 2005-06 in the case of K.Y.Venkataswamy Reddy.


ITA No.797, 798,

807, 808/Bang/09

Page 2 of 18

I. ITA Nos:797, 807 & 808/09 - AYs. 03-04, 04-05 & 06-07:

For the assessment years 03-04, 04-05 and 06-07, the

Revenue has raised four identical grounds. On a perusal, ground No.1 is

general and, thus, it has become non-consequential. In the remaining

grounds, the crux of the issue raised primarily is that –

(i) The CIT(A) has erred in deleting the addition made as

undisclosed income without appreciating the facts; &

- the theory of HUF by the assessee was only an after

thought.

II. ITA No:798 - AY. 05-06:

For this assessment year, the Revenue has raised six grounds, out

of which, ground No.1 being general, it doesn’t survive for adjudication. In

the remaining grounds, the issues raised are reformulated, in a concise

manner, as under:

The CIT (A) has erred in:

(i) deleting the addition of Rs.62,29,977/- being unexplained

investments; &

(ii) deleting the addition of Rs.14,34,266/- towards vehicle

maintenance.

2. As the issues raised in these appeals were similar and rather inter-

linked, for the sake of clarity and convenience, they were clubbed, heard

together and disposed off in this common order.


ITA No.797, 798,

807, 808/Bang/09

Page 3 of 18

I. ITA Nos:797, 807 & 808/09 - AYs. 03-04, 04-05 & 06-07:

(1) Briefly stated, the assessee, an individual, was doing business in

bricks. During the course of assessment proceedings for the AY 2005-06,

the AO had noticed and reasoned to believe that certain income of the

assessee escaped assessments for the AYs 2003-04, 04-05 and 06-07

and, accordingly, to examine the veracity of the same, the assessee was

called upon to furnish his returns of income for the said AYs by issuance of

notices u/s 148 of the Act. In compliance, the assessee vide his letter

dated; 1.2.2008 requested the AO to treat the returns already furnished for

the AYs 03-04, 04.05 and 06.07 on 31.3.04, 30.10.04 and 31.10.06

respectively in response to notices u/s 148 of the Act.

(2) After giving due weightage to the assessee’s contentions, the AO

had observed that “It is verified from the assessment order dt.28.12.07 for

the AY 05-06, the loans and advances amounting to Rs.25 lakhs and cash

balance as shown in the balance sheet amounting to Rs.21,29,977/- has

already been added and brought to tax. Hence, similar disallowance is not

considered for the relevant assessment year in question.” On examining the

cash flow statements for the AYs under dispute, the AO found that the

assessee had shown agricultural income which was, according to the AO,

earned by the assessee in the HUF capacity. In the absence of any details

and also no returns of income in the capacity of HUF were furnished, the

AO had resorted to treat the agricultural incomes of Rs.11,00,419/-,

Rs.13,01,136/- and Rs.17,03,213/- for the AY 03.04, 04.05 and 06.07


ITA No.797, 798,

807, 808/Bang/09

Page 4 of 18

respectively as incomes from “Other sources” and concluded the

assessments accordingly.

(3) Disillusioned with the findings of the AO, the assessee took up the

issues with the Ld. CIT (A) for remedy. After duly considering the

contentions of the assessee, the remand report of the assessing officer

and also the counter-objections put-forth by the assessee on the remand

report, the Ld. CIT(A) had observed thus –

“(P.14) The assessing officer was not correct in rejecting the request of the

appellant for furnishing the reasons recorded on issuance of notice under

section 148 without observing the decision of the Supreme Court. Following

the above decisions relied upon by the appellant, the appeals are allowed

and the assessments made on 26.12.2008 were held as invalid as the

assessing officer has failed to observe the principles of natural justice as

held by the Hon’ble Supreme Court of India.”

With regard to the treatment of agricultural income of HUF as

unexplained investments of the assessee, the Ld. CIT (A) had made the

following observations:

“(P.16)……………….in respect of Smt.K. Radha, appellant’s wife filed her

return of income for the asst. years 2001-02 and 2002-03 on 31.7.2001 and

31.3.2003 respectively and an amount of Rs.25 lakhs was shown as advance

received from HUF in the balance sheet. The copies of the said return of

income with balance sheet were already available on record to show the

existence of HUF is not an afterthought. On perusal of the records the

copies of the said returns were available on record to strengthen the

appellant case. The assessment order passed without observing the

principle of natural justice as enunciated by the Supreme Court’s decision in

GKN Driveshafts and also the income being agricultural income earned by

the HUF cannot be taxed in the hands of the appellant. Both the grounds of

appeals succeed and relief granted to the appellant.”

(4) Disappointed with the findings of the first appellate authority, the

Revenue has come up with the present appeals. The cryptic submission of


ITA No.797, 798,

807, 808/Bang/09

Page 5 of 18

the Revenue was that the orders of the CIT(A)’s was illegal, improper and

much against the facts of the case, that the CIT(A) erred in deleting the

addition made as undisclosed income, that he failed to appreciate the facts

submitted in the form of written submission before passing the appellate

order and failed to appreciate the fact that the theory of HUF was only an

after thought. It was, therefore, prayed that the impugned order of the CIT

(A) requires to be set aside.

(5) On the other hand, the Ld. A R came up with a spirited argument

that the AO had miserably failed to provide the reasons for reopening of the

assessments before proceeding with to conclude the assessments, and,

thus, it was vehemently urged that the assessments made by the AO have

no legal sanctity as has been rightly highlighted by the Ld. CIT (A) in his

impugned order. Even on merits also, it was submitted, the AO had no

locus standi to treat the agricultural incomes as income from ‘Other

Sources’ when all the relevant details, explanation etc, were placed at his

doorstep. It was, therefore, strongly pleaded that the impugned order of

the Ld. CIT (A) doesn’t suffer from any infirmity which requires no cure at

this stage. To drive home his point, the assessee has placed reliance on

the following case laws:

(i) GKN Driveshafts (India) Ltd. v. ITO and Others 259 ITR 19 (SC);

&

(ii) Allana Cold Storage Ltd. v. ITO 287 ITR 1(Bom)


ITA No.797, 798,

807, 808/Bang/09

Page 6 of 18

(6) We have carefully considered the rival submissions, diligently

perused the relevant records and also the case laws on which the

assessee has placed strong reliance.

(7) At the outset, we would like to make it crystal clear that the when the

assessee vide his letter dated: 1.2.2008 requested the AO to treat the

returns already furnished as the returns filed in compliance to the notices

u/s 148 and simultaneously requested the AO to provide the reasons for

issuance of notices. In stead of conceding to the assessee’s legitimate

request, the AO went ahead in concluding the assessments which are

under dispute.

(8) To add insult to injury, the AO in her remand report dated: 11.5.2009

to the Ld. CIT (A)’s query, has informed that –

“With regard to the non-furnishing of reasons recorded for issue

of notice u/s 148, he has requested for reasons recorded and

submitted that the return of income filed earlier may be treated as

compliance. Hence, when the return of income was filed,

furnishing of reasons would be infructuous.”

(9) The stand of the Revenue, in our considered view, is against the

spirit of the ruling of the highest judiciary of the land in the case of GKN

Driveshafts (India) Ltd. referred supra wherein, the Hon’ble Apex Court has

observed thus –

“When a Notice under section 148 of the Income-tax Act 1961, is

issued, the proper course of action for the noticee is to file the

return and, if he so desires, to seek reasons for issuing the notices.

The AO is bound to furnish reasons within a reasonable time. On

receipt of reasons, the noticee is entitled to file objections to


ITA No.797, 798,

807, 808/Bang/09

Page 7 of 18

issuance of notice and the AO is bound to dispose of the same by

passing a speaking order.”

In the present case, the directions of the Hon’ble Court have been

given a ‘go-by’.

It may be appropriate to analyze the ruling of the Hon’ble High

Court of Bombay in the case of Allana Cold Storage Ltd. v. ITO 287 ITR

1, which is of more illustrative on a similar issue.

After deliberating the issue at length, the Hon’ble Court has observed that -

“The law as laid down by the apex court is binding on this court

as well as on the authorities functioning under the statute. This

being the position, one fails to understand as to why the first

respondent did not decide the objections separately which he is

duty bound to decide. The whole idea in laying down the law in

GKN Driveshafts (India) Ltd. v. ITO reported in [2003] 259 ITR

19 (SC) is to give an opportunity to the assessee to know as to

what is the decision on his objections, which decision has also to

be arrived at after giving an opportunity to the assessee. In the

present case, the assessee has been denied this opportunity. Not

only that but in the first three writ petitions what we find is that a

common order has been passed on the objections as well as for

the reassessment. In the fourth matter, the assessment order does

not disclose any decision on the objections at all and undoubtedly

no such decision has been given separately on the objections.

Having noted this scenario, in our view the proper course will be

to interfere with the assessment orders passed in all four matters

by the concerned officer. We are aware that when an alternative

remedy is resorted to, the writ jurisdiction is not to be exercised,

but that is a rule of self-limitation. The orders challenged in the

present matter are clearly against the law laid down by the Apex

Court and, therefore, the exercise of writ jurisdiction is called for.

That being so, we allow all these petitions and quash and set

aside the orders of assessment passed in all these four

petitions……………”


ITA No.797, 798,

807, 808/Bang/09

Page 8 of 18

(10) Respectfully following the ruling of the Hon’ble Courts referred

supra, we are of the unanimous view that the assessment orders under

dispute have no legal sanctity since they have not been concluded in

conformity with the ruling of the Hon’ble Supreme Court cited supra.

(11) Even on merits also, as submitted by the Ld. A R during the course

of hearing before this Bench, the AO had miserably failed to see the reason

before resorting to treat the agricultural income as income from ‘other

sources’.

The assessee in the capacity of HUF, owning agricultural lands, the details

of which are as under:

Sy.Nos. Name of the village Extent of land holding

192/1, 172/2, 143/2,

10/8 & 160/1

Kudlu 7 A 27 G

8/1,8/2 and 8/3

18/1

Choodasandra

Kudlu

7 A 10 G

9 7 A 24 G

According to the assessee (vide his letter dt.4.12.2008 to the

AO), after the demise of his father and on partition among his brothers, he

got his share of 14 A 20 G and subsequently he had purchased 21 A 35 ½

G up-to the F.Y 2004-05. These land holdings of the assessee have

subsequently become the HUF of the assessee. It is apparent from the

above, the assessee (HUF) has been holding vast agricultural lands -

which facts were on the records of the AO – from which the assessee


ITA No.797, 798,

807, 808/Bang/09

Page 9 of 18

(HUF) was in receipt of incomes for the AYS, the details of which are as

under:

Asst. Year Agrl. Income Extent of land holding

2003-04 Rs.11 lakhs 30 A 11 G

2004-05 Rs.13 lakhs 32 A 24 G

2005-06 Rs.15 lakhs 36 A 20 G

2006-07 Rs.17 lakhs 40 A 14 G

The assessee has been earning income from various crops, trees

grown in the said lands such as, coconut trees, mango trees, chickoo trees,

nilgiri trees, banana plantation, seasoned crop like ragi, vegetables etc.,

Out of these sale proceeds, the assessee had advanced amounts

totaling to Rs.25 lakhs as on 31.3.2003 to Smt. K. Radha, wife of the

assessee. As a matter of fact, Smt. K.Radha had furnished her returns of

income for the AYs 2001-02 and 2002.03 wherein she had disclosed the

advances taken from HUF amounting to Rs.25 lakhs. These facts were

available on record of the AO. The AO’s other allegation that the creation

of HUF was an after thought also doesn’t hold water since the assessee’s

wife in her returns of income referred supra had disclosed for the

assessment year 2001-02 itself that she had taken loan from HUF, this vital

information was also on the record of the AO.

We have duly perused the copies of Statements of Affairs as on

31.3.2001 and 31.3.2002 in the case of Mrs. K.Radha wherein it has been

explicitly mentioned that she had taken loan from HUF. This very fact has


ITA No.797, 798,

807, 808/Bang/09

Page 10 of 18

been analyzed and brought on record by the Ld. CIT (A) in his impugned

order which is under dispute.

(11) In an overall consideration of the facts and circumstances as

deliberated upon in the fore-going paragraphs, we are of the firm view that

the AO was not justified to treat the agricultural income of Rs.11

lakhs, Rs.13.01 lakhs and Rs.17.03 lakhs for the AYs 2003.04, 2004.05

and 2006.07 respectively as the income of the assessee from ‘Other

Sources’. It is ordered accordingly.

(12) In a nut-shell, the additions made for the AYs. 2003-04, 2004-

05 and 2006-07 are deleted.

II. ITA No:798 - AY. 05-06:

(1) The grievance of the Revenue relates to the deletion of

Rs.62,29,977/- as unexplained investments.

The crux of the issue, in brief, is as under:

The undisclosed income of the assessee of Rs.6279977 consists of:

Investment on purchase of lands (half share) in sy.No.28 Rs.16,00,000

Loan and advances Rs.25,00,000

Cash Balance Rs.21,29,977

Rs.62,29,977

After hearing the assessee, the AO treated the above sums as

assessee’s income for the following reasons:

(i) the HUF had not filed any returns for any of the AYs and to show

the cash in hand of Rs.21.29 lakhs and Rs.29.51 lakhs for AY 05-

06 and 04-05 respectively;

(ii) the assessee had not disclosed how the HUF came into existence;


ITA No.797, 798,

807, 808/Bang/09

Page 11 of 18

(iii) the lands in Choodasandra and Kudlu villages were purchased in

89-90 whereas the assessee got married in 1991;

(iv) no proof for agricultural income of huge proportions was

furnished;

(v) no disclosure of purchase of assets in the balance sheet of HUF in

his earlier returns;

(vi) the creation of HUF was an after thought to explain the sources

for purchase of agricultural lands; &

(vii) the bank account No.3273 was admittedly in the individual name

and not in the name of HUF.

(2) Agitated, the assessee contended before the Ld. CIT (A), the

substance of which is summarized as under:

(i) the impugned assessment order was dated: 28.12.07, whereas the

AR appeared before the AO on 27.12.07 and furnished certain

details and the case was adjourned to 28.12.07. Again the AR

appeared on 28.12.07, furnished certain details and on 29.2.07

discussed the case with the AO;

- In the letter dt. 29.12.07, details, such as, cash deposited in

the Bank, purchase of Pay orders for Rs.16 lakhs for

purchase of lands and cash balance of Rs.8.25 lakhs were

furnished;

- Details of HUF, on separation from family on an oral

partition, the assessee got agricultural lands admeasuring

7A 10 G of HUF property;

- The details of lands purchased in Choodsandra and Kudlu

village

- The lands admeasuring 7A 24G in Sy.No.9 were

purchased after the death of assessee’s father and before

the oral partition of the family of assessee’s late father and

thus there was an HUF during the life time of assessee’s

father;


ITA No.797, 798,

807, 808/Bang/09

Page 12 of 18

- On partition and after the marriage of the assessee,

agricultural lands of 14A 20G became the HUF property

and the HUF had, subsequently, purchased about 17A 38

½ G till the FY 2003-04

(ii) by ignoring the above details before the AO and on records,

the AO had passed the order on 28.12.07 itself even though the

assessee was given a hearing on 29.12.07.

(3) Armed with the above particulars, the Ld. CIT (A) vide his letter

dt.30.4.09 required the AO to explain her stand on the issue. According to

the CIT (A), the AO had repeated the contents of her earlier report along

with the assessment folder and not replied to his specific queries.

(4) In view of the above sequence of events, it is appropriate to extract

(though at the cost of repetition) the observations of the Ld. CIT (A), for

proper appreciation of facts, as under:

“7…………………On perusal of records, I find the hearing had taken

place on 29.12.07 with a noting on the Order sheet as “Sri Sivaguru

Prasad, FCA appeared, filed letter dt.29.12.07 case heard.” It is

surprised to note that the AO gave a hearing on 29.12.07 and accepted

the letter dt.29.12.07, passed the asst. order on 28.12.07 without

considering the submission made on 29.12.07. In fact the AO has

violated the principles of natural justice in the instant case. If the AO

has intended to complete the assessment on 28.12.07, then he should

not have asked the AR of the appellant to appear and file details

regarding the HUF. Once the appellant filed details before the AO,

the same cannot be ignored without assigning any reasons by the AO.

If the AO has completed the asst. order on 28.12.07, nothing prevented

him to serve the order on 29.12.07 as against discussing the case and

accepting the details. After considering the rival contentions, in

respect of grounds of appeal No.4 -7, regarding the addition of

Rs.62,29,977/- relating to a HUF, it is seen that the addition was made

by the AO on the ground that the appellant’s HUF has not filed return

of income. The appellant claimed that the only appellant’s HUF is

from agriculture and it was necessary to file return declare only

agricultural income for income-tax purposes. The land holdings of

HUF and bank account not reflected in the balance sheet of appellant

proved that these lands belonged to the HUF. The AO next observed


ITA No.797, 798,

807, 808/Bang/09

Page 13 of 18

that the lands do not stand in the name of HUF, hence, the lands are to

be considered as that of appellant. In this regard, the appellant

contention is that the Karnataka Land Reforms Act 1961 prohibits for

purchasing agricultural lands other than a person who cultivates the

lands. Further, the appellant’s AR submitted that section79B of the

said Act states that no person other than a person cultivating land

personally shall be entitled to hold lands. In these circumstances, the

appellant HUF could not have acquired agricultural land in the name

of HUF. In effect, the lands shall stand in the name of individual and

not in the name of HUF.

The AO further observed that the creation of HUF is an after thought.

The appellant claimed that the return of income in respect of

appellant’s wife Smt. K.Radha for the AYs 2001-02 and 02-03 was

filed on 31.3.01 and 31.3.03 respectively along with the balance sheet.

Wherein an amount of Rs.25 lakhs was shown as advances received

from HUF. The copies of he said returns of income were submitted to

the AO at the time of assessment proceedings. On perusal of

assessment records, copies of the said returns are available on record

to strengthen the appellant case. The claims of the appellant with

material on records and evidences cannot be brushed aside without

any cogent reason by the AO.

The AO either during the asst. proceedings or subsequently has not

disputed the existence of the land and the agricultural operations

carried on by the HUF and failed to consider the submission made by

the appellant.

In view of the above, the addition of Rs.62,29,977/- made under

unexplained investment cannot stand the test of appeal. The addition

made is without any basis and is unjustified……..’’

(5) Before us, the submission of the Revenue was rather ambiguous

which confined to that -

The CIT (A) ought to have appreciated the clear facts stated in

the written submission as also ought to have considered the

detailed reasons mentioned in the orders of assessment and that

the assessee had not filed the return of income in the status of

HUF and had come up with the theory of HUF for the first time

to explain deposits. It appears to be purely an after thought and

in the absence of any explanations and details, the action of the

assessing officer to bring the said amount to tax is perfectly

justified.


ITA No.797, 798,

807, 808/Bang/09

Page 14 of 18

(6) On the other hand, the Ld. AR was very emphatic in his urge that

since the issue has been comprehensively deliberated upon in a judicious

manner by the Ld. CIT (A) which requires no interference at this stage. It

was, therefore, pleaded that the impugned order of the first appellate

authority be sustained.

(7) We have duly considered the rival submissions and also perused

the relevant records.

At the outset, we would like to point out, as rightly highlighted by

the Ld. CIT (A), that when the relevant details were on the record, the AO,

in stead of examining the particulars so furnished, went ahead in treating

the said sum as assessee’s income and, thus, brought on the same to tax

net in an arbitrary manner. Further, the assessee’s wife, in her returns of

income for the AYs 2001-02 and 02-03 and also in the Statements of

affairs, has explicitly mentioned that “HUF advance and loan from Sri

Venkateshwara Brick Works” as liabilities. These very facts, strangely

enough, have been over-looked by the AO.

(8) In view of the above and also the issue has since been dealt with

elaborately by the Ld. CIT (A) in his impugned order, we are of the

unanimous view that the AO was not justified in treating the entire sum of

Rs.62,29,977/- as assessee’s income without any basis and also by over-

looking the facts available on record. Accordingly, the addition of

Rs.62,29,977/- is deleted.


ITA No.797, 798,

807, 808/Bang/09

Page 15 of 18

(9) The other issue raised by the Revenue is with regard to deletion

of the addition of Rs.14,34,266/-.

The assessee, being a manufacturer and supplier of bricks, had

claimed an expenditure of Rs.28,68,533/- under the head ‘vehicle

maintenance’. However, the AO was of the view that the claim was on a

higher side as in the immediately preceding year, the expense on vehicle

maintenance was only Rs.10,37,892/- on a turnover of Rs.70.5 lakhs as

against Rs.28.68 lakhs on a turnover of Rs.89.26 lakhs for the current year.

Brushing aside the assessee’s contention that the vehicles were

old and even JCB expenditure also included under this head etc., the AO in

comparing the total expenditure on raw materials and consumables etc.,

took a view that the expenses claimed were excessive and, therefore,

disallowed 50% of the total expenditure of Rs.2868533/- on vehicle

maintenance.

(10) The Ld. CIT (A), after giving due weight-age to the forceful

contentions of the assessee backed with comparative figures etc., perusing

the remand report of the AO and the rebuttal of the assessee on remand

report, has observed thus –

“(Page 20)…………….it is not fair to compare the percentage of

expenditure on vehicle maintenance on the basis of turnover alone,

various other factors such as cost of fuel, spare parts, salaries to

drivers, distance of procurement of raw material and delivery of

bricks, etc. have to be considered. The AO, apart from holding that the

expenditure on vehicle maintenance is disproportionate to increase in

turnover has not given any other valid and justifiable reasons for the

disallowance. The addition made not based on valid reasons and on

mere surmise, guess work and assumptions cannot be upheld. The


ITA No.797, 798,

807, 808/Bang/09

Page 16 of 18

addition of Rs.14,34,266/- under vehicle maintenance is deleted

accordingly.”

(11) The inexplicable reasoning of the Revenue before us was that “the

CIT (A) has seriously erred in not considering the written submission made

before passing the impugned order.”

The contentions of the assessee put-forth are summarized as

under:

(i) the assessee had six vehicles which were three to fifteen years’

old and the expenses claimed included diesel, lubricants, JCB

expenses and transportation of mud etc.

- the consumption of fuel and other lubricants depends on

the age of vehicles and also the loads they carry; that

normally the consumption of fuel by the heavy loaded

vehicles would be more than that of the LMVs;

- the AO compared the expenditure of previous year figure

which is rather illogic on the ground that –

(a) if the raw material such as clay was to be

extracted and transported from nearby tank-beds,

the consumption of fuel would be less; but, at most

of the time the assessee had to extract and

procure the qualitative clays from far off places

of tanks-beds which attributed more expenses on

fuel;

(b) the vehicles were to transport heavy loads such as

clay, bricks etc. whereby the longevity of the

vehicles would rather be shortened;

(c) the distance factor in delivery of finished goods –

bricks depends on the customers’ work spots

- these vital facts have been contributing more consumption

of fuel, maintenance of vehicles etc., which have been side-

tracked while considering the allowability of the claim by

the AO;


ITA No.797, 798,

807, 808/Bang/09

Page 17 of 18

(ii) there was a deep hike in the price of petroleum products due to

short supply as well as steep rise in the price of crude oil

imported from oil supplied countries;

(iii) the maintenance of heavy vehicles, wear and tear of its

ancillaries and also the cost on replacement of spares cannot be

equated with the expenses claimed for the same in the previous

year

(12) We have duly considered the submissions of the either party and

also taken into cognizance of the finding of the Ld. CIT (A). As a whole, we

find reasonableness in the argument of the assessee. How could one

compare the maintenance of vehicles with the consumables and raw

materials to arrive at the expenses incurred on the maintenance of

vehicles? In our considered view, the comparison attempt made by the AO

was not on the sound footing and was rather illogical. He had, perhaps,

confused with the issue itself. Another lame excuse of the AO was that

since the assessee had furnished the required data at the fag end of the

proceedings, he had to resort to disallow 50% of the claim as excessive.

The moot question before us is - how could the action of the AO be

justifiable to disallow as it would meet the end of justice, if 50% of the

expenditure claimed disallowable since the assessee took a considerable

time to furnish the required data? This exercise of the AO, to put it gently,

was a futile attempt which in no way stand the testimony of scrutiny. For

the year under dispute, the assessee had included JCB expenditure under

the head ‘vehicle maintenance’ whereas in the immediately previous year,

the JCB expenditure was added to clay excavation which was included in

raw material and consumables. This fact has not been disputed by the AO.


ITA No.797, 798,

807, 808/Bang/09

Page 18 of 18

The assessee had claimed JCB expenses (excavation of clay and

maintenance) of Rs.6.88 lakhs which was added to the vehicle

maintenance and it, perhaps, contributed the hike in the expenses claimed.

This phenomenon has not been properly appreciated by the AO.

(13) Considering the over all facts and circumstances of the issue,

we are in total agreement with the finding of the Ld. CIT (A) who was

fully justified in deleting the addition on this count.

In the result, the Revenue’s appeals for the assessment

years, 2003-04, 2004-05, 2005-06 and 2006-07 are dismissed.

Pronounced in the open court on this 21st day of May, 2010.

Sd/- Sd/-

( SMT. P. MADHAVI DEVI ) (A. MOHAN ALANKAMONY )

Judicial Member Accountant Member

Bangalore, Dated, the 21

st May, 2010.

Ds/-

Copy to:

1. Appellant 2. Respondent 3. CIT 4. CIT(A)

5. DR, ITAT, Bangalore. 6. Guard file (1+1)

By order

Assistant Registrar

ITAT, Bangalore.


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