Gujarat High Court Judgments — 2020

The High Court held that the payment made by the respondent to HUB International Limited for providing supervising drilling operations in oil fields, while potentially 'Fees for Technical Services', was primarily for the exploration and development of Oil and Gas in India. Therefore, the dominant purpose of the payment aligns with the provisions of Section 44BB. The Court found no infirmity in the ITAT's order holding Section 44D inapplicable and that the respondent was liable to deduct TDS at 4.2% under Section 44BB. Consequently, Question (A) was answered in favour of the assessee (Niko Resources) and against the Revenue. Questions (B), (C), and (D) were not answered in view of the decision on Question (A). The appeal was dismissed. The ratio is that payments for services directly associated with or inextricably connected with prospecting, extraction, or production of mineral oil are assessable under Section 44BB, irrespective of whether they are technically 'fees for technical services', provided the dominant purpose is mineral oil exploration and production. The CBDT circular dated 22.10.1990, accepting this test, was also noted.

The High Court decided to dispose of the tax appeal. The primary reason for this decision was the Revenue's decision not to press the appeal due to a low tax effect, as guided by Circular No. 17/2019. This circular establishes monetary limits for appeals before various judicial forums, including the High Court. The Court noted the monetary limit for appeals before the High Court as Rs. 1,00,00,000. Consequently, the appeal was disposed of in accordance with this policy. The Court also reserved liberty for the Revenue to revive the tax appeal in case of any difficulty. No specific findings on the merits of the original tax dispute were made as the appeal was not pressed.

The High Court held that the substantial question of law was no longer res integra, citing decisions of the Apex Court and its own court. The Court found that the trust deed's clauses (specifically Clause 20 regarding trustee composition and Clause 22 regarding the primary benefit to the Sindhi Community with residual benefit to non-Sindhis) did not exclusively create the trust for the benefit of a particular religious community. The Court noted that the CIT's finding that the objects were solely for the benefit of the Sindhi community was not correct. The Court reiterated that at the time of registration under Section 12AA, the CIT is required to consider only the 'nature of its object' and 'genuineness of the activities' of the trust. The determination of whether Section 13(1)(b) is attracted would be the task of the Assessing Officer during assessment. Therefore, the respondent-trust was considered charitable and religious, not exclusively benefiting a specific community, and thus entitled to registration under Section 12A. The question of law was answered in favour of the assessee.

The High Court of Gujarat decided to dispose of the Tax Appeal. The primary reason for this decision was the Revenue's statement that the appeal was not pressed due to a low tax effect, as per Circular No. 17/2019. The Court acknowledged the circular's provisions, which establish monetary limits for appeals. Specifically, appeals before the High Court have a monetary limit of Rs. 1,00,00,000. The Court found that the tax effect in this particular appeal was below this threshold. Therefore, the appeal was disposed of accordingly. The Court also reserved the liberty for the Revenue to revive the tax appeal in case of any difficulty. No specific issue regarding the merits of the original assessment or the prior appellate orders was decided.

The High Court held that while the Income Tax Act provides a complete machinery for redressal, the statutory remedy must be effective and not a mere formality. The Court found that the impugned order passed by the Assessing Officer was not sustainable in law. The Court agreed with the ITAT's view that Section 44AD of the Act was not applicable because the return was accompanied by an audit report under Section 44AB. The ITAT's direction to the AO to reconsider the issue of the claim for a lower rate of profit in accordance with the assessee's books of accounts was considered appropriate. The High Court quashed and set aside the AO's order and remitted the matter back to the AO for fresh consideration as specifically directed by the ITAT, clarifying that the AO must reconsider the issue regarding the claim for a lower rate of profit, not at the rate of 8%.

The High Court held that the Settlement Commission was justified in accepting the settlement application. The Court noted that the Settlement Commission had thoroughly examined the Rule 9 report submitted by the petitioner (Revenue) and provided proper opportunities for hearing to both parties. The Court found that the additional income of Rs. 12 Crore offered by the assessee during the Section 245D(4) proceedings was considered by the Commission in the spirit of settlement, and that the Commission's determination was just and proper. The Court rejected the Revenue's argument that the High Court should not have interfered with the Settlement Commission's order, especially since the Revenue had conceded the maintainability of the writ petition before the High Court. The Court found no good ground for interference with the Settlement Commission's order and dismissed the petitions.

The High Court held that the Appellate Tribunal committed an error in dismissing the assessee's appeal. The Court agreed with the reasoning of the Tribunal in the case of Mumbai Mazdoor Sabha vs. Assistant Commissioner of Income Tax, (2016) 75 taxmann.com 134, which held that contributions received from employers as a result of settlement agreements, where the predominant object is the welfare of workers and not earning profit, are incidental to the activities of the union and are exempt under Section 10(24) of the Income Tax Act. The Court found that the Appellate Tribunal's reason for not following the Mumbai Mazdoor Sabha decision – that the amount was not shown in the audited books of account – was not a valid ground to deny exemption. The Court concluded that the amount received by the assessee-Union was exempt under Section 10(24) of the Act. The impugned order of the Appellate Tribunal was quashed and set aside, and the substantial question of law was answered in favour of the assessee.

The High Court held that for compounding an offence under Section 276C(1) of the Income Tax Act, 1961, the permissible payment is 100% of the tax sought to be evaded, not 100% of the amount of income sought to be evaded. The Court referred to its own decision in Supernova System Pvt. Ltd. Vs. CCIT-2, which interpreted the CBDT's guidelines of December 23, 2014. Paragraph 12.2 of these guidelines prescribes 100% of the amount sought to be evaded for Section 276C(1) offences. The Court reasoned that Section 276C(1) itself links the severity of punishment to the amount sought to be evaded, which refers to tax, penalty, or interest. Therefore, the 'amount sought to be evaded' in the context of compounding fees under the circular must be understood as the tax evaded. The Court set aside the impugned communication demanding fees based on concealed income and directed a fresh computation based on tax evaded. It noted that the petitioner had already paid the disputed amount under protest and ordered a refund of any excess amount.

The High Court held that there was no substantial question of law involved in the appeal. The Tribunal's finding that once the re-assessment proceedings were quashed and accepted by the department, there was no scope for the Commissioner to exercise power under Section 263 was upheld. The Tribunal reasoned that for Section 263 powers to be invoked, there must be an existing order that is erroneous and prejudicial to the revenue. Since the re-assessment order was already quashed and extinguished, it could not be considered erroneous. Additionally, the Tribunal noted that the time limit for revision under Section 263(2) had expired concerning the original assessment order passed on October 15, 2011, as the action under Section 263 was contemplated in March 2017, long after the expiry of the two-year period ending March 31, 2014. The Court found no infirmity in the Tribunal's order.

The High Court dismissed the appeal, finding no substantial question of law. It relied on its own prior decision in Tax Appeal No. 141 of 2017 concerning the same assessee for AY 2009-10. In that prior decision, the Court had considered the issue of whether carbon receipts were taxable in the year of receipt or utilization, referencing the Supreme Court's judgment in CIT vs. Excel Industries Limited. The Supreme Court held that income tax cannot be levied on hypothetical income and that accrual must be real, considering the probability or improbability of realization. Applying this principle, the High Court in the prior case concluded that since the carbon receipts were neither sold nor transferred in the year under consideration, they could not be included as income for that year. The High Court found no reason to interfere with the ITAT's order and dismissed the present appeal.

The High Court held that the question of law raised by the Revenue was no longer res integra in view of its own prior decision in Commissioner of Income-tax, Rajkot-II Vs. Rajkot District Co-op. Bank Ltd. ([2014] 222 taxmann 240 (Gujarat)). The Court noted that the instructions clearly provide for the amortization of premium paid on the acquisition of securities when they are acquired at a rate higher than the face value. Such amortization must be for the remaining period to maturity. This aligns with the ITAT's direction in the impugned order. The Court found no contrary CBDT instructions brought to its notice. As the instruction in question was issued under Section 119(2) of the Income-tax Act, 1961, it would bind the Revenue. Therefore, no question of law arose, and the appeal was dismissed. The operative direction was the dismissal of the appeal.

The High Court dismissed the appeal on the first substantial question of law concerning carbon receipts, as it had been decided in a related appeal. Regarding the second question of law concerning additional depreciation, the Court held that the assessee was entitled to claim the remaining 50% of the additional depreciation in Assessment Year 2011-12. The Court reasoned that Section 32(1)(iia) of the Act, read with its provisos, allows for the balance 50% of additional depreciation to be claimed in the immediately succeeding previous year if the asset was put to use for less than 182 days in the year of acquisition. The Court noted that the legislature had also clarified this position by inserting a third proviso to Section 32(1) with effect from April 1, 2016. Therefore, both the CIT(A) and the ITAT had rightly allowed the claim, and no substantial question of law arose.