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2016 (1) TMI 935 - ITAT VISAKHAPATNAM

2016 (1) TMI 935 - ITAT VISAKHAPATNAM - TMI - Reopening of assessment - Held that:-The A.O. at the time of issuing notice u/s 148 of the Act, is not necessarily to establish the fact that there is escapement of income. But, what is necessary is that there must be some material evidence, on which the formation of opinion is arrived at by the A.O. In the instant case, the A.O. issued notice u/s 148, based on the information that the assessee has received arbitration amount which was not offered to .....

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on receipt basis for the year under consideration? - Held that:- The interim amount received towards arbitration award after furnishing security and also on personal guarantee of the Directors of the company, cannot be treated as income of the assessee on receipt basis in the year of receipt. On going through the facts of the present case, we noticed that issue is not yet final. The Hon'ble A.P. High court, finally dismissed the review petition filed by the DGNP on 18.6.2014 and upheld the arbi .....

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or the Appellant : Shri G V N Hari, AR For the Respondent : Shri G Guruswamy, DR ORDER Per G. Manjunatha, Accountant Member These appeals filed by the assessee are directed against the common order of CIT(A), Visakhapatnam dated 28.3.2012 for the assessment years 2005-06 & 2008-09. Since, the issue involved in these appeals is common, they are clubbed, heard together and disposed of by way of this common order for the sake of convenience. 2. The brief facts of the case are that the assessee .....

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of DGNP, the assesse contractors referred the matter to the Arbitrator as per the Arbitration clause in the contract agreement. The arbitrator passed arbitration award on 31.3.2000 and the matter was decided in favour of the assesse contractor by awarding an amount of ₹ 7.99 crores along with an interest of ₹ 9.75 crores. Aggrieved by the arbitration award, the DGNP challenged the arbitration award before the District court, Visakhapatnam. The Hon'ble District Court, Visakhapatna .....

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um of ₹ 4,77,81,305/- with the principal district judge, Visakhapatnam, pending disposal of the case. The Hon'ble Andhra Pradesh High Court passed another interim order directing the DGNP to deposit a further amount of ₹ 2,29,95,752/-. Thereafter, the Hon'ble A.P. High Court, pending final disposal of the case, allowed the assessee company to withdraw an amount of ₹ 3 crores on 16.11.2004 after furnishing equal amount of security in the form of title deeds of any proper .....

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39;ble A.P. High Court, filed a special leave petition before the Hon'ble Supreme Court. The Hon'ble Supreme Court allowed the DGNP to withdrawn the SLP with a liberty to file review petition before the Hon'ble Andhra Pradesh High court, seeking clarification on the issue raised before the Supreme Court. The DGNP filed a review petition and requested the Hon'ble A.P. High Court to review its order dated 1.4.2009 along with a stay petition praying for stay of all further proceedin .....

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or the above two assessment years offering the said receipts for taxation. Therefore, the A.O. issued notice u/s 148 of the Act dated 20.1.2010 for the assessment year 2005-06 which was duly served on 21.1.2010. Similarly, notice u/s 148 of the Act was also issued for the assessment year 2008-09 on 20.8.2009 which was duly served on the assessee. In response to the notice u/s 148 of the Act, the assessee has filed return for the assessment year 2005-06 on 17.3.2010 declaring nil income and also .....

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ponse to show cause notice, the assessee submitted that it had withdrawn the amounts as per the directions of the Hon'ble High Court of Andhra Pradesh by furnishing equal amount of security. Therefore, the same is treated as liability in the books of accounts of the assessee company as the arbitration proceedings was not final at the time of receipt of amount. Further, it is submitted that till date the issue has not reached finality and the entire amount is disputed, because the DGNP have f .....

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arantee of the Directors of the company and hence, it does not have absolute right to receive the amount, as the matter is still in dispute. Under these circumstances, making additions towards interim amount received is incorrect. To support its arguments, the assessee has relied upon the Hon'ble Supreme Court judgement in the case of Hindustan Housing and Land Developers Trust Vs. CIT 161 ITR 524 and also placed its reliance on Hon'ble A.P. High court in the case of CIT Vs. Devta Chandr .....

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5 ITR 1 and also AP High Court judgement in the case of CIT Vs. M. Sarojini Devi 250 ITR 759. 5. Aggrieved by the assessment order, the assesse, preferred an appeal before the CIT(A). Before CIT(A), the assessee reiterated the submissions made before the assessing officer. The assessee further contended that the AO's action of reopening the assessment is invalid, as the AO did not have material evidence before him to come to the conclusion that income had escaped assessment. However, the CIT .....

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s made by the assessing officer and dismissed the assessee's appeal. Aggrieved by the CIT(A) order, the assessee is in appeal before us and raised the following grounds: 1. Appellant submits that the Commissioner of Income Tax (Appeals) is not justified in holding that the proceedings initiated under section 148 are valid and attracted in the case of the appellant. 2.a. Appellant submits that the Commissioner of Income Tax (Appeals) is not justified in holding that the Interim amount receive .....

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e receipt. 2.c. Without prejudice to the above Grounds urged under 2.a. and 2.b. above, appellant submits that the Commissioner of Income Tax (Appeals) is not justified in rejecting the contention of the appellant that interim award comprising of interest element should be subjected to levy f income tax on accrual basis only but not on receipt basis. 3. Appellant submits that the Commissioner of Income Tax (Appeals) is not justified in upholding the action of assessing officer in considering as .....

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tion award before the Hon'ble Andhra Pradesh High court. The A.R. further submitted that the Hon'ble High Court of Andhra Pradesh allowed the assessee to withdraw the interim amount by furnishing adequate security and also taking personal guarantee of the Directors of the company, therefore in the event of the Hon'ble High Court reverse the order of arbitration, then, the assessee have to refund the entire amount to the principals. Hence, until the arbitration award reaches finality, .....

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to 12% per annum. The A.R. further submitted that the DGNP filed further appeal against the order of the High Court before the Hon'ble Supreme court and challenged the very basic applicability of arbitration Act. Though, the Hon'ble Supreme Court did not give any findings on the appeal, it allows the DGNP to withdraw the appeal with a right to file a review petition before the Hon'ble High Court of Andhra Pradesh, seeking clarifications on the subject matter. Therefore, if a situatio .....

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mp; Land Development Trust Vs. CIT (1986) 161 ITR 524. 3. CIT Vs. Devata Chandraiah & Sons (1985) 154 ITR 893 (AP) 4. CIT Vs. Abdul Mannan Shah Mohammed (2001) 248 ITR 614 (Bombay) 5. CIT Vs. Janata Cooperative Sugar Mills Ltd. (1998) 233 ITR 635 6. DSL Enterprises Pvt. Ltd. Vs. NC Chandratre Vs. ITO & others (2013) 84 DTR (Bom) 451 7. Commissioner of Wealth Tax Vs. Nand Lal Mohan Lal etc. (2010) 232 CTR 185 8. CIT Vs. Sarvatra Road Runners Pvt. Ltd. (2008) 301 ITRnm 443. 7. On the other .....

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tration order shall become final, therefore, the assessee has obsolete right over the said amount. Hence, interim amount received by the assessee of ₹ 3 crores each in assessment year 2005-06 & 2008-09 is taxable on receipt basis. Therefore, he urged to uphold the order of the CIT(A). 8. We have heard both the parties and perused the materials available on record. We also gone through the case laws relied upon by the parties. The first issue came up for our consideration is, whether th .....

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otice u/s 148 of the Act. From the facts, it is clear that the A.O. has issued notices u/s 148 of the Act, for both the assessment years, which are within the time prescribed under the provisions of the Act. Further, it is also clear that the A.O. has material evidence before him to form a belief that the income chargeable to tax has escaped assessment. Under the provisions of section 147 of the Act, the assessing officer is authorized to assess or reassess income chargeable to tax, if he has a .....

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In the instant case, the A.O. issued notice u/s 148, based on the information that the assessee has received arbitration amount which was not offered to tax, which constitute the valid reason for reopening the assessment. Therefore, we are of the view that the A.O. has rightly reopened the assessment. The CIT(A), after elaborate discussions rejected the assessee arguments and upheld the validity of reopening. Therefore, we upheld the reopening of the assessment and reject the grounds raised by .....

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. The arbitrator vide his order dated 31.3.2010 decided the issue in favour of the assessee and awarded an amount of ₹ 7.99 crores along with interest of ₹ 9.75 crores. The DGNP has challenged the arbitration order before the district court. The district court vide its order dated 22.10.2002 confirmed the arbitration award and dismissed the appeal filed by the DGNP. The DGNP filed further appeal against the order of the district court, before the Hon'ble A.P. High court. Mean tim .....

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e company. The assessee company, on furnishing the requisite security got an amount of ₹ 3 crores each in the assessment year 2005-06 & 2008-09. The assessing officer brought to tax the above said amounts in the assessment year 2005-06 & 2008-09. The assessee's contention was that the matter is still pending before the Hon'ble A.P. High Court, therefore, until the matter reaches finality, the interim amount received by it cannot be taxed in the year under consideration. 10. .....

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ion award before the district court. The district court vide its order dated 22.10.2002 have dismissed the appeal filed by the principals. The DGNP further preferred an appeal before the Hon'ble A.P. High Court and the matter is still pending at the time of assessee received these impugned amounts. On perusal of the facts, we noticed that the principals have challenged the applicability of the provisions of arbitration Act and contended that the present arbitration award passed under the ame .....

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on'ble A.P. High Court. The Hon'ble A.P. High Court neither stayed the operation of the arbitration award nor granted any stay for further proceedings. Therefore, until the arbitration amount is finally ascertained or determined, the amount received by the assessee cannot be considered as income in the year of receipt. Therefore, in our view, it would be taxable as a business income in the previous year in which the said amount is finally determined. It is a trite law that income can be .....

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nly a liability and not a income. Accordingly, the withdrawal of the amount by the assessee is contingent in nature, because there is always a possibility of the said amount being refunded by the assessee in the event of the review petition filed by DGNP is accepted by the Hon'ble A.P. High Court. The assessee being a Public Limited Company necessarily followed the mercantile system of accounting and presented its accounts on accrual system. On perusal of the financial statement filed by the .....

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of the assessee on receipt basis for the year under consideration, because of the reason that the principals have challenged the very basic applicability of arbitration act before the Supreme Court. Though the Supreme Court did not give any finding on the issue raised by the DGNP, it allowed the DGNP to withdraw its appeal, with a right to seek clarification from the Hon'ble A.P. High Court on the applicability of the provisions of arbitration act. In the event, the Hon'ble A.P. High cou .....

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e A.P. High court delivered its final verdict on 2009, wherein it has upheld the arbitration award amount but, modified the interest payable from 17.5% to 12%. Therefore, from these facts it is very clear that unless the issue reaches finality in the court of law, the said amount cannot be treated as income of the assessee. On going through the facts of the present case, we noticed that the Hon'ble A.P. High Court passed its final order on 18.6.2014 and dismissed the review petition filed by .....

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year under consideration, because the impugned amounts were not accrued in both the assessment years. If at all it is taxable, it should be taxed in the year 2010-11, when the arbitration award was passed. We find force in the arguments of the Ld. A.R. that, the A.O. himself admitted that the assesse is following mercantile system of accounting, therefore, these receipts cannot be taxed on receipt basis. The correct date is to be reckoned for recognizing the said receipt is, when the arbitration .....

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ment in the case of CIT Vs. Ghanshyam (HUF) (2009) 315 ITR 1 and distinguished the Hon'ble Supreme Court judgement referred by the assessee in Hindustan Housing and Land Development Trust Ltd. Vs. CIT 161 ITR 524. On perusal of the facts of both the cases, we are of the view that the judgement referred by the A.O. in the case of CIT Vs. Ghansham (HUF)(supra) is delivered under different context, i.e. keeping in view of the provisions of section 45(5) of the Act, wherein the statute itself pr .....

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t a fixed point of time namely on the date of transfer. According to the Hon'ble Supreme court section 45 defines capital gains, it makes them chargeable to tax and it allots an appropriate year for such charge and section 45 lays down the mode of computation after capital gain and deductions therein. Therefore, in our considered opinion the case law relied upon by the revenue is not at all applicable to the facts of the present case. The assessee has relied on the Hon'ble Supreme Court .....

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, therefore, it cannot be compared with compensation or enhanced compensation received on account of compulsory acquisition of land under the land acquisition act. 15. Now coming to the case laws, relied by the assessee counsel. The assessee counsel, at the time of hearing relied upon plethora of case laws in support of his contentions. The A.R. relied upon the judgment of Hon'ble Supreme Court in the case of Hindustan Housing and Land Development Trust Vs. CIT 161 ITR 524, wherein the Hon&# .....

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efunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at that stage. If the appeal were allowed in its entirety, the right to payment of enhanced compensation would have fallen altogether. The extra amount of compensation of ₹ 7,24,914/- was not income arising or accruing to the respondent during the previous year relevant to the assessment year 1956-57. BY THE COURT: "There is a clear distinction between cases such as the pres .....

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as under: Held The facts would indicate that the challenge to the arbitral award is pending appeal and (he award is yet to attain finality. There can be no manner of dispute even as a matter of first principle, about the fact that the amount of ₹ 65 crores which was permitted to be withdrawn against a bank guarantee for an equivalent amount does not represent income which has accrued to the assessee. So long as the challenge to the arbitral award is alive and is pending, and the legality .....

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o the assessee. (Para 10) The scope of the appeal before the Division Bench Is the validity of the order of the Single Judge dismissing the objection to the arbitral award and it is not only the quantum of compensation which is in dispute In the appeal that has been filed against the order of the Single Judge. Moreover, it would be fallacious to postulate that the assessee has absolute ownership of the funds to the extent of ₹ 65 crores. Even the impugned order of the ITO proceeded on the .....

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ring the financial year in question. The assessee would have an indefeasible entitlement in respect of the principal amount of ₹ 65 crores as well as the interest earned only if the proceedings which are pending in regard to the challenge to the arbitral award conclude in its favour. Unless those proceedings attain finality, the assessee would be subject to a possible order of restitution not merely in respect of the principal amount of ₹ 65 crores, but also the interest which has be .....

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nd its fairly conceded by counsel for the assessee that if the challenge to the arbitral award ends in favour of the assess-e, the Revenue would be entitled to bring to tax the amount accrued in the corresponding year. The ITO was not justified in denying a certificate under s. 197 despite the fact that such a certificate has been issued earlier for three preceding financial years 2009-10, 2010-11 and 2011-12. First respondent is directed to issue a certificate under s.197 for financial year 201 .....

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peal filed by it, the assessee was obliged to return the amount by way of restitution under s. 144 of the CPC. In view of the above, we are of the opinion that both the CIT(A) as well as the Tribunal were correct in law in deleting the addition of ₹ 3,28,65,728 made by the Assessing Officer. No substantial question of law arises for consideration. The appeal is dismissed." 18.The Hon'ble Delhi High Court, in the case of Paragon Constructions (I) Pvt. Ltd. Vs. CIT & ANR (2005) .....

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ar that the Income-tax will have to be assessed as it can be said that the amount accrued on that date only." 19. The Hon'ble A.P. High Court in the case of CIT Vs. Devatha Chandraiah & Sons (1985) 154 ITR 893, under similar circumstances held as under: "Held, that the money representing the sales tax had been received by the assessee in a fiduciary capacity. The money received towards sales tax by the assessee from the purchasers was received on behalf of the agriculturist pri .....

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#39;ble Supreme Court in the above case held as under: "Under s. 45(1), profits or gains arising from the transfer of a capital asset effected in the previous year is taken to be the income of the previous year in which the transfer took place and such profits are chargeable to tax under the head "Capital gains". However, it was noticed that in cases where capital gains accrued or arose by way of compulsory acquisition, the additional compensation stood awarded in several stages b .....

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effecting the recovery of additional demand. It was also noticed that repeated rectifications of assessment on account of enhancement of compensation by different Courts often resulted in mistakes in computation of tax. Therefore, with a view to remove these difficulties, the Finance Act, 1987 inserted s. 45(5) to provide for taxation of additional compensation in the year of receipt instead of in the year of transfer of the capital asset. (Para 16 & 18) Interest under s. 28 of Land Acquisit .....

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was inserted w.e.f. 1st April, 1988 as an overriding provision. As stated above, compensation under the L.A. Act, 1894, arises and is payable in multiple stages which does not happen in cases of transfers by sale etc. Hence, the legislature had to step in and say that as and when the assessee-claimant is in receipt of enhanced compensation it shall be treated as "deemed income" and taxed on receipt basis. This is supported by insertion of cl. (c) in s. 45(5) w.e.f. 1st April, 2004 and .....

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tages, the receipt of such enhanced compensation/consideration is to be taxed in the year of receipt subject to adjustment, if any, under s. 155(16), later on. Hence, the year in which enhanced compensation is received is the year of tax ability. Consequently , even in cases where pending appeal , the Court/Tribunal/authority before which appeal is pending, permits the claimant to withdraw against security or otherwise the enhanced compensation (which is in dispute), the same is liable to be tax .....

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. Vs. CIT (2008) 217 CTR (P&H ) 113 and CIT vs. Dehradun Tea Co.(judgment of the Uttaranchal High Court dt. 23rd March, 2007 in IT Appeal No. 117 of 2003) set aside; CIT vs. Hindustan Housing & Land Development Trust Ltd. (1986) 58 CTR (SC) 179 : (1986) 161 ITR 524 (SC) distinguished. 21. The Hon'ble M.P. High Court in the case of CIT Vs. Central India Electric Supply Company Ltd. (1993) 114 CTR (MP)160, held as under: "The main point for consideration is whether the market pric .....

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ut the price, quantification of the price is done only through the award of the arbitrator. In the particular facts and circumstances of this case, on acquisition of the plant and the machinery of the assessee, its price under s. 7A of the Electricity Act had become payable on the date of the acquisition and it was quantified when the umpire resolved the dispute between the parties and made the award, but it became due only when the decree in terms of the award was passed by the Civil Court unde .....

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that passing of the award itself makes the amount awarded due. The fact that the judgment and the decree of the Civil Court passed on the award was pending consideration in appeal before the High Court is also not a good ground to contend that the price was not due till the litigation with regard to the award was not over. There is no doubt that in law the money payable under a decree becomes due for payment on the date of passing of the decree and nonetheless it is so even if the decree is appe .....

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actual receipt thereof. Pendency of litigation in respect of an amount or price due has no relevancy so far as the taxability of such accrued income is concerned. The likelihood of the income being reduced in the subsequent assessment year as a result of the litigation may give rise to resort to other remedies available in the Act for rectification and refund of the tax, but on that ground it cannot be held that no income had accrued to the assessee for the relevant assessment year. The liabili .....

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