The Ahmedabad ITAT recently delivered four significant rulings that clarify various aspects of tax compliance, including TCS, warranty provisions, TDS credit in amalgamation, and property transactions. The cases involved are Girishkumar Ramnarayan Shah v. ITO, Rotomag Motors & Controls (P) Ltd. v. Asstt. CIT, CIT Shiva Pharmachem Ltd. v. Dy. CIT, and Pooja Dipen Joshi v. ITO. The judgments emphasize the necessity for a thorough interpretation of tax laws and underscore that tax relief must be based on credible evidence. In Girishkumar Ramnarayan Shah v. ITO, the Tribunal allowed late submission of Form 27C for TCS, arguing there is no strict deadline as long as the forms are genuine. In Rotomag Motors, the Tribunal ruled in favor of the warranty provision claim, stating it was based on a scientifically valid method. In Shiva Pharmachem, the Tribunal highlighted that TDS credit should be granted for income from a merged entity even if procedural requirements are not fully met. These decisions reflect the ITAT’s approach of prioritizing substance over procedural technicalities and provide vital guidance for taxpayers in navigating tax compliance matters.
The present article provides details on four landmark judgments pronounced by the Ahmedabad ITAT and makes emphasis on decisions relating to TCS, warranty provisions, TDS credit connected with amalgamation, and treatment regarding property transactions.
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1. Girishkumar Ramnarayan Shah v. ITO ITA No. 340/AHD/2020
Girishkumar Ramnarayan Shah v. ITO involves applicable of Income tax Section 206C dealing with TCS. The core of the issue here lies in that the assessee had not collected TCS on the sale of scrap and subsequent presentation of Form No. 27C could be any relief. The argument of the assessee judicial precedents and the observation of the ITAT regarding the procedural requirement of filing Form 27C are discussed with considerable emphasis on the non rigid timeline of submitting such forms.
Facts of the Case:
Girishkumar Ramnarayan Shah v. ITO, a partnership firm was trading in ferrous and nonferrous metal scrap. It sold scrap of Rs. 3,07,68,942 and did not collect TCS under Income Tax Act Section 206C . The assessing officer issued a show cause notice about the failure to collect TCS @ 1% amounting to ₹3,07,689. There was no satisfactory reply given by the assessee. Thus the AO levied total tax demand u/s 206C amounting to Rs .5,53,840 with interest u/s 206C(7).
The assessee on the appellate proceedings of five parties submitted Form No. 27C before the tribunal stating that TCS collection was not required for these five parties. Moreover for 17 parties form No. 27BA was submitted to prove that buyers had filed Income Tax return.
Submissions by the assessee:
i. The assessee argued that Form No. 27C was submitted for five parties which made it exempt from collecting TCS as per the law.
ii. For the 17 other parties, Form No. 27BA was submitted indicating that the buyers had filed income tax returns and the tax on scrap sales was paid through their returns.
iii. The assessee contended that under Section 206C no time limit for submission of Form No. 27C is prescribed and the forms were submitted immediately on getting them from the buyers. Delay in submission should not rob the relief.
Observations by the Income Tax Officer:
i. The IT noted that the assessee did not collect TCS on the scrap sales and also the Form No. 27C was not submitted within time
ii. It held the assessee in default under Section 206C for failure to collect TCS and a tax demand of ₹5,53,840 was levied.
iii. The ITO rejected the late submission of Form No. 27C as the same was furnished several years after sales transactions.
Observations by CIT:
i. Since CIT accepted the Form No. 27C furnished by the assessee for five parties but rejected the same as it was filed five years after the transactions.
ii. For the 17 parties for which Form No. 27BA is furnished the CIT remitted the matter to the AO for verification of the tax paid by the buyers.
iii. CIT admitted the tax demand pertaining to five parties where Form No. 27C were filed after due date as it held that delay made forms invalid.
Tribunal’s Decision:
- Form no. 27: The ITAT noted that Section 206C Doesn’t specify strict timeline for submitting Form No. 27C and as long as the forms were genuine and submitted in the prescribe manner the delay shouldn’t affect the relief granted.
- Judicial Precedents: ITAT relied upon judicial precedent, holding in its decision in Siyaram Metal Udyog (P) Ltd. v. ACIT, Gopallal Ramprasad Kabra v. CIT, and G.K. Traders, where the Appellate Tribunal has held that Form No. 27C may be accepted, even if belatedly submitted inasmuch as the form is genuine
- Remand for Verification: The ITAT directed the AO to verify the genuineness of the Form No. 27C filed by the assessee and re examine the Form No. 27BA in respect of remaining 17 parties to satisfy himself that they had paid taxes on the sale of scrap.
- Relief Granted: ITAT restored the matter to AO with a direction to the AO that relief should be granted if verification of forms is found all right.
Key Takeaways:
I. No Fixed Time Limit for Form No. 27C Submission: The ITAT noted that Section 206C does not stipulate any time limitation for the filing of the Form No. 27C, and the delay in filing the forms can also be considered valid if the forms are genuineness.
II. Genuineness over Procedural Timeliness: The focus of the tribunal was on the genuineness of the forms rather than the procedural delays in submission, emphasizing substance over form.
III. Verification Requirement: The case underscores the importance of proper verification by the AO when considering whether relief under Section 206C can be granted
IV. Judicial Precedents: There are various judicial precedents whereby the ITAT held its decision as under. The Tribunal had sustained the validity of late submissions of Form No. 27C in similar cases.
2. Rotomag Motors & Controls (P) Ltd. v. Asstt. CIT I.T.A. No. 666/Ahd/2024
The case concerns the deductibility of a warranty provision of ₹1,14,19,990 claimed by Rotomag Motors & Controls (P) Ltd. for the assessment year 2017-18. The assessee is in the business of manufacturing engineering goods and had created the provision for a contract pertaining to solar photovoltaic (SPV) irrigation pumps supplied to the Chhattisgarh government and covered a warranty of five years. It was not permitted by the Assessing Officer also by CIT (Appeals), and held as a contingent liability rather than an allowable deduction. The matter then reached ITAT Ahmedabad Bench.
Facts of the case:
i. The assessee had claimed ₹1,14,19,990 as warranty provision expense due to a government contract.
ii. The provision was calculated as a percentage of the total project inflow, which stands at 0.74% of turnover.
iii. The Assessing Officer disallowed the provision; this was on the ground that it was contingent in nature, and according to AS-29, it does not form part of that since it could not be supported by historical data.
iv. CIT (Appeals) dismissed the AO’s order, holding that it was ad-hoc without any scientific assessment.
Submissions of the Assessee:
i. There is a statement of warranty from the basis of a reliable estimation method, following Accounting Standard 29 (AS-29) and the calculation was done using the Discounted Cash Flow (DCF) method.
ii. The assessee submitted that similar provisions were allowed in earlier years and also in subsequent assessment years.
iii. The cases such as Rotork Controls India P. Ltd. v. CIT and Bharat Earth Movers v. CIT were cited to establish that the liability as regards future provable reasonable estimates is deductible.
Observations by the Income Tax Officer :
i. The warranty provision was rejected by the AO because it claimed that it was not supported by any historical trend or scientific estimation since it was their first year of operation for the pumps.
ii. The AO treated this as a contingent liability under AS-29 as no reliable data was available to estimate future costs on account of warranties.
Observations by the CIT :
i. CIT (Appeals) affirmed the order of the AO relying on the judgment that the warranty provision failed to fulfill the conditions mentioned in AS-29
ii. CIT (Appeals) observed that it was not based on scientific or historical data and hence could not be allowed as a deduction.
Tribunal’s Decision:
- The Tribunal held that the provision made for warranty expense was based on a scientifically correct method, commensurate with AS-29.
- The Tribunal estimates that provision has been reliably estimated with inflows from the project and future liabilities.
- The Tribunal admitted that the same provisions are permitted in subsequent years also. In fact, there are consistency and legal grounds for it.
- The disallowance of Rs.1,14,19,990 was struck as the amount in respect of the warranty provision was allowable under section 37 of the Income Tax Act.
Key Takeaways:
1. Scientific basis for provision. A provision for warranty expenses would only be allowed based on scientific basis and the correct process of estimation.
2. Accounting Consistency: If the same provisions are permitted in subsequent years, it further helps to fortify the case that allows the provision in earlier years.
3. Judicial Precedents: Cases such as Rotork Controls India P. Ltd. and Bharat Earth Movers placed reliance on well-established rulings of the Tribunal to hold that provisions for future liabilities are permitted so long as they are based on reasonable estimates.
4. AS-29 Compliance: Provisions that conform to Accounting Standard 29 and represent a measurable present obligation with a reasonably ascertainable amount should be recognized for taxation purposes.
3. Shiva Pharmachem Ltd. v. Dy. CIT ITA No. 698/AHD/2023
This appeal is by Shiva Pharmachem Ltd. against the order passed by the Commissioner (Appeals) with regard to denial of TDS credit in relation to income from a merged entity, Tash Investment (P) Ltd. The core issue is on the question of TDS credit post-approved amalgamation under the decree of NCLT. This Tribunal has proceeded to answer if the credit should be granted despite procedural obstacles.
Facts of the Case:
The amalgamation scheme between Shiva Pharmachem Ltd and Tash Investment P. Ltd. was sanctioned by NCLT with effect from12.04.2019. in the relevant assessment year the assessee offered the income of the amalgamated entity for taxation and claimed the credit of the relevant TDS. The CPC Bengaluru rightly refused the credit. The appeal before the Commissioner (Appeals) was dismissed on procedural grounds.
Submissions by the Assessee:
i. Assessee submitted that income from Tash Investment (P) Ltd was offered for tax during the relevant year and therefore, TDS credit of Rs.10,09,254 should be allowed.
ii. It rested on different judicial precedents in the case of CES Ltd. and Culver Max Entertainment (P) Ltd. where it was held by the courts that it was permissible to allow credit of TDS in the hands of the amalgamated company where income was taxed in its hands.
iii. The assessee further contended that the procedural requirements under Rule 37BA are complied with and more attention should have been given by the Commissioner (Appeals) to the merits rather than procedural delay.
Observations by the Income Tax Officer :
The CPC disallowed TDS credit claiming the procedural filings were not made as required by Rule 37BA. The assessees own offered income of Tash Investment (P) Ltd was not given the credit for TDS which was due and collected.
Observations by the CIT:
The CIT upheld the order of the CPC on the ground that procedural compliance under Rule 37BA was not complete. However, though it accepted that the income was taxed in the hands of the assessee, the Commissioner did not allow the TDS credit while focusing on the lack of procedural filings.
Tribunal’s Decision:
Referring to a line of judicial precedents, including the Culver Max Entertainment (P) Ltd., it is pointed out that even if the income from the amalgamated entity has been offered for tax by the amalgamating company, the credit of TDS will be allowed so long as the certificates issued therefor were in the name of the amalgamating company. It set aside the order of CIT (Appeals) and directed the assessing officer to allow TDS credit after verifying that income had been included in the current year.
Key Takeaways:
- Amalgamation and TDS Credit: TDS credit related to income taxable in the amalgamated company’s hand must be allowed though procedural requirements are not fully completed.
- Judicial Precedents: There is a strong reliance on judicial precedents that the court has based its decision on, wherein the substance over procedure comes ahead of the amalgamation cases, granting the amalgamated company the rightful credit.
- Role of Procedural Filings: Again procedural filings are important but on such occasions the Tribunal has placed particular emphasis on the merit of the claim as such occasions when the income has already been offered for tax and the procedural points are secondary.
4. Pooja Dipen Joshi v. ITO ITA No. 856/AHD/2023 & ITA No. 696/AHD/2023
This is a case of addition made under Section 69C of Income Tax Act 1961 pertaining to the difference between Jantri value and actual purchase value of a property. The basic problem in the case, however, is that the AO has justified the addition based on the Jantri value even though pertinent facts of the case were overlooked in reopening the case.
Facts of the Case:
Assessee filed her ITR for the relevant assessment year 2012/13 with total income of Rs. 8,41,950. After conducting more investigations AO received information from Directorate of I & CI Ahmedabad that the assessee purchased property jointly with eight other persons. Transfer documents evidenced the value of the property to be Rs. 1,35,00,000. However, the Jantri value was also Rs. 4,03,07,857. The case was reopened u/s.147 of the Income Tax Act and as a result amount of Rs. 44,78,650 was added u/s. 69C on account of treating Jantri value as Total value of consideration in view of it to be an unexplained investment.
Submission by the Assessee:
The assessee said that she had never been received any show cause notice for treating investment as unexplained u/s. 69C of Income Tax Act while another point urged was regarding the share of the purchase cost already shown by the assessee in her I.T return. The assessee further added that Section 50C applies only to sellers and not to buyers and therefore said provision could not been invoked in her case. She also challenge the applicable of Section 56(2)(vii)(b) of Act since the said provision was not attracted for assessment year 2012-13 insofar as the same had come into force only from 01-04-2014.
Analysis by the Income Tax Officer :
The Sub Registrar’s information clarified the AO that the sale consideration was much below the Jantri value. Sections 50C & 56(2)(vii)(b) were relied upon by the AO in treating the difference as unexplained investment and adding the amount of ₹44,78,650 to the assessee’s income under Section 69C of the Act.
Observations by the CIT:
CIT has upheld t addition made u/s. 50C read with Section 56(2)(vii)(b) of Income Tax Act. According to the CIT this was truly treated as an unexplained investment because Jantri value was unlike from the actual purchasing value.
Tribunal’s Decision:
It held that the assessee was entitled to succeed because the addition under Section 69C working on the Jantri value was not justified. The Tribunal found that Section 50C is applicable only to sellers and not to buyers. Being a capital gains section it would arise only in the hands of the seller and as such cannot be applied. It was further held by the ITAT that Section 56(2)(vii)(b) would apply only where the property had been received either without consideration or for a consideration grossly inadequate. The above section would not attract in the facts of this case since the property was acquired with complete consideration. Tribunal also the said provision would come into operation only from relevant assessment year 2014-15 and thus could not be applied A.Y2012-13.
Addition under Section 69C can be made on actual investment in the property only and not on Jantri value as case was reopened on the basis of difference between Jantri value and actual purchase value no further addition was possible. In respect of the above case Tribunal concluded that no show cause notice had been issued to assessee about the treatment of the investment as unexplained under Section 69C. The addition was therefore quashed and the appeal allowed in favor of the assessee.
Key Takeaway:
- Section 50C Applicability: Section 50C can only be applied to sellers while calculating capital gains but cannot be raised for buyers.
- Section 56(2)(vii)(b) Application: It is only applicable to those cases where property is acquired without or for a consideration which is inadequate. This particular property had been purchased full consideration therefore it is not applicable for this case. This sub-section provision came into effect from 1-4-2014 and was thus not applicable for the assessment year of 2012-13.
- Additions u/s 69C: The basis of such additions u/s 69C can be made only on actual investment into the property and not on the Jantri value. Also reopening assessment based on one issue does not permit additional unrelated additions.
- Show Cause Notice Requirement: The AO must issue show cause notice before making additions u/s. 69C which was not done in this case making the addition untenable.
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