In this article we reviews recent four important cases decided by the Mumbai Income Tax Appellate Tribunal (ITAT), each addressing distinct tax disputes. In Deloitte Haskins & Sells LLP v. National E-Assessment Centre, the focus was on discrepancies between turnover reported in ITRs and GST returns. Valuable Technologies (P) Ltd. v. CIT(A) involved the classification of long-term capital loss versus business loss for set-off purposes. In Vipul Vasant Patil v. Asstt. DIT, the issue revolved around claiming Foreign Tax Credit (FTC) despite delayed filing of Form 67. Lastly, Sonal Samit Vartak v. ITO discussed whether hardship compensation received during a flat redevelopment was taxable as income or should be treated as a capital receipt. These cases underscore critical tax principles, including turnover reconciliation, capital receipts, and procedural compliance for FTC claims.
I. Deloitte Haskins & Sells LLP v. National E-Assessment Centre (ITA No. 4312/MUM/2023)
This is a case of Deloitte Haskins and Sells LLP challenging the order pronounced by the National E-Assessment Centre under section 143(3) read with section 144B of the Income Tax Act, 1961. The core issues relating to the appeal are as follows reconciliation of turnover differences between ITR and Service Tax/GST returns treatment of payments made to retired partners short credit of TDS.
Facts of the Case:
DHS LLP firm which is provide professional service in assurance, taxation and consulting services. In the income tax return assessee declared total income Rs.274.41 crore for the year 2018/19. On this assessment the Assessing Officer noted that there were discrepancies in turnover or receipts as per ITR versus Service Tax or GST returns that showed a huge difference of ₹ 2294.40 crore. The AO observed that the firm had made cash payments of ₹11.49 crore to retired partners and restricted the TDS credit claimed by the assessee on account of which the disputes arise on various fronts.
Submissions by the Assessee:
1. Assessee explained that it is due to the Cash system of Accounting which has been followed for preparation of ITR as against the invoice system for service/ GST tax returns.
2. A comprehensive reconciliation statement was submitted showing the requirements for adjustment of out-of-pocket expenses, unreceived invoices, and intra-firm transactions which were accounted for differently in the ITR and GST returns.
3. DHS LLP submitted that the payments to the retired partners were according to the partnership deed and therefore were deducted from the firm’s income under overriding title.
4. The firm contended that TDS credit was wrongfully restricted and requested full credit was claimed in the ITR.
Observations by the Income tax Officer:
1. On scrutiny of the reconciliation filed by the assesse it was found to be satisfactory but still proceeded to add Rs.147.22 crores difference between the turnover of the ITR and the GST return.
2. Payments to Retired Partner the AO disallowed the claim stating that since it was the income of the firm this would be deemed to be an application of income rather than a diversion by overriding title.
3. The AO also restricted the TDS credit at Rs. 64.22 crore so that the short credit becomes Rs.18.62 crore.
Observations by the CIT :
CIT upheld all the decisions taken by the AO he confirms the turnover addition disallows the payments made to retired partners and directs the AO to verify the TDS credit claims allow the correct amount.
Tribunal’s Decision:
1. Mismatch in Turnover: The ITAT believed that the AO had accepted the reconciliation provided by the assessee which had reconciled the variance between ITR cash based accounting and invoice based accounting for GST. Holding so the Tribunal deleted the addition of ₹22 crore.
2. Payments to Retired Partners: Deeming the payments to retired partners as diverted by overriding title the Tribunal relied on judicial precedent and held that such payments could not be considered as part of the income of the assessee. The disallowance was deleted.
3. TDS Credit: The tribunal established that the AO should check the records and, after proper checking, should provide only the accurate TDS credits.
Key Takeaways:
1. Turnover Reconciliation: The ITR and the GST Returns might differ with some Accounting system differences but there has to be satisfactory reconciliation accepted by the tax authorities.
2. Payments to Retired Partners: Payments made to retired partners under specific provisions in a partnership deed qualify as an expense if the income is diverted by overriding title.
3. TDS Credit: The Tribunal held that the TDS credits need to be verified stringently by the AO and correct figures must be granted based on Form 26AS and other records.
II. Valuable Technologies (P) Ltd. Vs. CIT(A) (ITA No. 645/MUM/2024)
This case concern an appeal filed by Valuable Technologies (P) Ltd. against the I.T Department wherein a decision had been passed over the treatment of a long-term capital loss and its set off against to long-term capital gains. This appeal was heard before the Mumbai Bench of the ITAT. Primary issue of this appeal was set on whether the loss of Rs. 15,72,530 was a capital loss or a business loss as it had an impact its eligibility for set-off under the Income Tax Act.
Facts of the case:
Valuable Technologies (P) Ltd. involved in the software services business, filed its income tax return for the year under consideration on 12-1-2021 claiming a refund of Rs. 1,08,17,078. The CPC processed the return and made adjustments set off current year loss and brought forward loss against capital gains and income from other sources. As the AO partly reversed certain adjustments under section 154 but the set-off of losses was rejected the CIT sustained the aforesaid rejection and instead categorized the brought forward loss as business loss in place of capital loss
Submissions by the Assessee:
Assessee claimed that the loss of Rs.15,72,530 was long term capital loss, not business loss as concluded by CIT. Thus, it submitted that the loss should be set off against the long term capital gains of Rs.2,67,73,895 as envisaged by section 74 of the Income Tax Act which permits setting off capital losses against capital gains
Observations by the Income Tax Officer:
The AO categorized the brought forward loss of ₹ 15,72,530 as a business loss. According to section 72 such a loss is available only for set-off against business income alone. Thus the AO did not permit the assessee to effect set-off against the capital gains of the year under consideration.
Observations by the CIT :
The CIT held in favor of the AO since it considered that brought forwarded loss was wholly business loss and did not qualify to be set-off against capital gains. In the circumstances, the CIT dismissed the assessee’s claim and refused to allow the adjustment of the loss account with regard to long term capital gains hence increasing the tax liability of the assessee.
Tribunal’s Decision:
The ITAT observed that the single question of fact available for decision is about the characterization of the loss of ₹15,72,530. On reading the submissions, the Tribunal held that the nature of loss needs to be verified by the AO. When such a loss is a capital loss, it may be allowed to be set off against the capital gains under section 74 of the Income Tax Act. On this, the Tribunal restored the matter to the AO for verification and allowed the appeal of the assessee for statistical purposes.
Key Takeaways:
1. Nature of Loss: It clearly states that the loss must be characterized as capital or business loss. When it is characterize as capital loss in such cases the loss can be set off against capital gains and when characterizes as business loss then the loss can be set off against business income.
2. Section 74 vs. Section 72: while section 74 allows sett off capital losses against capital gains section 72 allows the sett off business losses against business incomes only.
3. Verification by AO: The Tribunal directed AO to verify the nature of brought forward loss and if it is in reality capital loss to allow the set off against capital gains.
III. Vipul Vasant Patil v. Asstt. DIT (ITA No. 3974/MUM/2023)
The subject of this case is Vipul Vasant Patil, an individual taxpayer, raising a dispute regarding the disallowance of Foreign Tax Credit (FTC) claimed in a revised return for income earned in Singapore. Main controversy here is that could FTC be claimed or not since the taxpayer did not submit Form 67 within the due date referred to in section 139(1) of Income Tax Act 1961? The appeal is ahead of the ITAT Mumbai Bench for the A.Y 2018/19.
Facts of the Case:
The assessee is Vipul Vasant Patil. He is a resident individual with income from salary house property and other sources. The assessee earned salary during the financial year in Singapore1/12/2017 to 31/3/2018. Tax was deducted in Singapore on this salary. The taxpayer originally filed his ITR for the above mentioned A.Y on 16/7/2018 but at that time he had not claimed any FTC. Later he filed a revised return on 28-3-2019 claiming FTC of Rs. 3,33,695 for taxes paid in Singapore. He also filed Form 67 along with the revised return. The CPC rejected the FTC claiming that Form 67 was not filed within due date for the original return under section 139(1). CIT upheld the denial of the CPC.
Submission by the Assessee:
Assessee argued that he has filed Form 67 along with the revised return and as decided by various judicial precedents FTC can be claimed even though he has filed Form 67 before the completion of the assessment even though it was not filed with the original return. He further relied on relevant case laws on this issue in particular Duraiswamy Kumaraswamy v. Pr. CIT (Madras High Court) decision. In this case the court allowed the FTC even though Form 67 was belatedly filed since the said form had been filed before assessment was finalized.
Observation by Income tax Officer:
The AO dismissed the FTC on the ground that while the assessee failed to furnish Form 67 by due date under section 139(1). AO interpreted Rule 128 of the Income Tax to require a strict adherence deadlines for submission of Form 67 where only FTC benefit is claimed.
Observations by the CIT :
The CIT confirmed the order of the AO but further added that for filing Form 67 section 139(1) demands the same to be filed strictly within the given time limit. Since the assessee did not file the said Form 67 within the aforesaid time limit the claim for FTC was rejected
Tribunal’s Decision
Citing judgments in several judicial precedents of the Madras High Court in Duraiswamy Kumaraswamy v. Pr. CIT it further held that filling of Form 67 was only directory and not mandatory so long as the same was filled and presented before assessment is completed. Since the assessee filed Form 67 along with the revised return and before the processing of the return by the CPC the Tribunal directed the AO to allow the FTC after verifying that the income earned in Singapore was included in the return and that no refund was claimed in Singapore. The appeal was allowed and AO was directed to verify and allow the FTC claim accordingly.
Key Takeaways:
1. Foreign Tax Credit: it can be claimed even if Form 67 is not filed by due date u/s. 139(1) as long as it is submitted before the completion of the assessment.
2. Form 67 filing requirement: The requirement of form 67 submission is held to be directory and not mandatory. However the Tribunal noted that the decisive aspect would lie in whether the form was submitted prior to the processing of the return.
3. AO’s Verification: ITAT directed the AO to verify that Singapore income was reported in the Indian return and that the taxpayer didn’t claim any refund from Singapore before granting the FTC.
IV. Sonal Samit Vartak v. ITO (ITA No. 1139/Mum/2024)
In Sonal Samit Vartak v. ITO the income has been reassessed for the A.Y 2011/12 and the taxability of hardship compensation accruing to the assessee for vacating her flat for redevelopment is the core issue. The assessee treated it as capital receipt whereas ITO treated it as income from other sources. It was based on the interpretation of the nature of such compensation with reference to the relevant judicial precedents on the point such as in Sarfaraz S. Furniturewalla v. CIT.
Facts of the Case:
Sonal Samit Vartak was a member of MIG Co operative Housing Society and received hardship compensation worth Rs. 25,21,508 from D.B. MIG Realtors and Builders during the redevelopment of the housing society.
ITR for the relevant assessment year 2011/2012 did not file by the assessee. The ITO received information regarding the amount paid. He therefore issued a notice u/s.148 of the Income Tax Act for reassessment.
The major controversy surrounds the character of the hardship compensation whether it is capital receipt or taxable income.
Submissions by the Assessee:
- Assessee argued that the amounts received were on account of capital receipt and thus could not be taxed under the Income Tax Act.
- Assessee also relied upon few judicial precedents too like decision of Bombay High Court in the case of Sarfaraz S. Furniturewalla v. CIT whereby hardship compensation had been treated like a capital receipt exempted from tax.
Observations by the income Tax officer:
- Classified the hardship compensation as income from other sources and added to the taxable income of the assessee.
- Reassessed order determined the total taxable income of the assessee at Rs.25,16,780 for A.Y 2011/12.
Observations by the CIT:
The CIT upheld the ITO’s order and ruled that compensation is taxable as income from other sources therefore it dismissed the appeal filled by the assessee.
Tribunal’s Decision:
The Court has read carefully the submissions of both parties and judicial precedents while reviewing the case.
It especially referred to the judgment of the court in the case of Sarfaraz S. Furniturewalla vs CIT where the court held down the rule that hardship compensation paid by the developer from redevelopment is not taxable as a revenue receipt
The Tribunal reversed the order of AO by ordering deletion of the addition of Rs. 25,21,508 made to the taxable income of the assessee while treating the hardship compensation as a capital receipt.
Key takeaways:
1. Hardship Compensation : The Tribunal reiterated that the compensation paid toward inconvenience suffered on account of redevelopment comprising hardship allowances etc should be treated as capital receipts and cannot be levied with tax as income under the head income from other sources.
2. Judicial Precedents: The decision was highly predicated on the case of Sarfaraz S. Furniturewalla vs CIT which set a clear example on the non taxability of hardship compensation.
3. Section 148: The reassessment process u/s.148 must be based on clear evidence but nature of receipts plays crucial role in determining their taxability.
4. Tribunal’s Role: The Tribunal make sure that judicial precedents are followed protecting taxpayers from being wrongly taxed on capital receipts.
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