Key Tax Rulings from Kolkata ITAT: Part 1 Analysis

This article provides an analysis of notable tax rulings from the Kolkata Income Tax Appellate Tribunal (ITAT) covering key issues such as disallowance of short-term capital losses under Section 50C, deemed dividends under Section 2(22)(e), and the filing of Form 10IC under Section 115BAA. It highlights four key cases: Nalanda Builders (P) Ltd. v. DCIT, where the Tribunal ruled in favor of the taxpayer regarding the disallowance of capital losses and Section 50C; Apeejay Surrendra Management Services (P) Ltd. v. DCIT, which clarified that deemed dividends apply only to shareholders; Narayani Laxmi Viniyog (P) Ltd. v. ITO, where the Tribunal upheld the applicability of a lower tax rate under Section 115BAA without requiring a fresh Form 10IC; and Little Star Commodities (P) Ltd. v. ITO, where the penalty for underreported income was contested based on the lack of objective basis for the assessment. These cases reflect the Tribunal’s emphasis on adherence to natural justice and proper compliance with tax provisions, serving as essential references for tax professionals.

These judgments discuss important tax law considerations like natural justice, tax liability, and penalties and thus become rich sources for tax professionals and business entities engaged in tax assessment and litigations.

1. Nalanda Builders (P) Ltd. v. DCIT I.T.A. No. 763/Kol/2022

Appeal filed by Nalanda Builders (P) Ltd is against the order passed by the Commissioner of Income Tax concerning the addition made by the Assessing Officer on two important issues.

1. This is the difference between the value adopted by the assessee and the fair market value u/s. 50C of Income Tax Act.

2. Disallowance of the of short term capital loss on the selling of equity shares.

Facts :  –

• Assessee sold two flats for sum consideration of Rs.3,00,00,000.
• The AO made addition Rs. 3, 26, 37,314 and concluded discrepancy between the FMV and the sale price.
• The second issue pertains to the claim of the assessee regarding a loss of ₹3,19,65,849 incurred on the sale of shares of two companies  M/s. Tuni Textiles Ltd and M/s. Blue Circle Services Ltd. The AO rejected this loss in his assessment order holding that the transactions were bogus and apparently arranged with the motive of booking losses from prearranged share trades.

Submission by the Assessee:

• All supporting documents to prove that the share transactions were authentic were furnished by assessee including contract notes bills and statements.
• The said transactions occurred on recognized stock exchanges the payments also went through proper banking channels
• The assessee argued that there was no evidence showing them to have participated in any manipulation or stock price rigging.

Observations by the income Tax Officer:

• The AO mainly relied on the SEBI reports and the investigation wing which had pointed out certain stocks to be manipulated.
• Some of these corporations to whom notices were issued for the share transactions were financially weak, and hence the AO concluded that the transactions were bogus.
• The AO disallowed the assessee’s claim of short-term capital loss.

Observation by CIT:

• CIT upheld the order of AO on the basis of findings of SEBI and investigation report.
• The CIT noted that transactions were part of larger scheme involving manipulated penny stocks and were therefore bogus.

Tribunal’s Decision:

• The Tribunal considered the rival contentions and documents provided by assessee which comprise of contract notes bank statements and bills.
• It was noted that AO had not conducted  independent investigation into the documents provided by the assessee but instead relied closely on  investigation reports.
• Addition u/s. 50C was not attracted as FMV and Sale consideration was within the permitted range of 10%.
• The Tribunal ruled in favor of assessee about both  addition under Section 50C and  disallowance of the short term capital loss.

Key Takeaways:

1. Onus of Proof: The assessee had discharged its preliminary onus of providing all the documents necessary to prove the share transactions.

2. Lapse of Enquiry: The AO had not made an independent inquiry into the documents submitted but proceeded on the basis of reports of investigation from external agencies.

3. Natural Justice: Natural justice is violated as AO has not provided chance to assessees of cross examination of witness whose statements have been relied upon.

4. Decision on Section 50C: Tribunal found that Section 50C were not applicable as the difference between FMV and sale price was within 10%

5. Short term Capital Loss: Tribunal accepted realness of assessee’s share transactions and ruled in favor of assessee.

2. Apeejay Surrendra Management Services (P) Ltd. v. DCIT ITA Nos. 987 & 988/Kol/2023

Facts: –

The case is about an issue regarding the matter where the AO has added a sum toward deemed dividend under Section 2(22)(e) of the Income Tax Act. The main issue here is whether the loans received from a group company, Apeejay Private Ltd.  by ASMSPL should be considered as chargeable to tax as a deemed dividend because of common shareholding.

• ASMSPL also saw a total loss of 2,16,59,610 for A.Y 2013/14.
• During the year ASMSPL accepted loans/advances of 5,50,11,501 from Apeejay Private Ltd.
• AO contended that there was common shareholder Kathua Steel Works Pvt. Ltd. holding majority shares in both APL (99.96%) and ASMSPL (57.86%).
• AO held the loan had been assessed as deemed dividend under Section 2(22)(e) of Income Tax Act as KSWPL had substantial interest in both the entities.

Submission by the Assessee:

• ASMSPL submitted that it was not a shareholder in APL and therefore Section 2(22)(e) does not apply.
• It was contended that loan was taken and same was used to meet working capital requirements & certain amount was repaid in same Financial year.
• It was relied on judicial decision A case in point is ACIT v. Bhaumick Colour Pvt. Ltd. where it was held that deemed dividend could be assessed only in hands of shareholder & not in hands of any other person.

Observation by the Income Tax Officer:

• AO found out that since KSWPL has substantial interest both in ASMSPL as well as in APL loan so received by ASMSPL would be held to be a deemed dividend u/s 2(22)(e).
• AO has claimed that Section 2(22)(e) should be applied inasmuch as the common shareholder was also a beneficiary of the loan advanced by APL to ASMSPL.

Observation by the CIT :

• CIT has confirmed that AO’s order agreeing that loan advanced by assessee to APL should be treated as deemed dividend even though assessee was persisting or arguing that the assessee was not a shareholder to the company APL.
• CIT has placed reliance on principle that payments made by company to the concern in which shareholder has substantial interests fall in scope of deemed dividend provisions.

Tribunal’s Decision:

• The Tribunal reviewed the facts of case and noted that the AO and CIT had not measured the full scope of judicial precedents on deemed dividend
• It was held that the assessee ASMSPL could not be taxed u/s. 2(22)(e) because the deemed dividend provisions should only apply to the shareholder.
• The Tribunal ruled that the shareholder KSWPL was the entity that could be taxed under Section 2(22)(e), not ASMSPL. The addition of Rs. 5,50,11,501 as deemed dividend in ASMSPL’s hands was deleted.

Key Takeaways:

1. Applicability of Section 2(22)(e): The provisions of deemed dividend would apply only to the shareholders and not the assesse in this case.

2. Judicial Precedents: The Tribunal relied on the case of Bhaumick Colour Pvt. Ltd. which repeated that being deemed dividend it can only be taxed in the hands of the shareholder and cannot be taxed in the hands of a non shareholder.

3. Nature of Loans: The Tribunal found that the loans provided by APL to ASMSPL were intended to meet up working capital requirements and the shareholder KSWPL was the only entity that could potentially benefit from the arrangement

4. Taxability in Shareholders’ Hands: The Tribunal clarified that income actually accrues to the shareholder with beneficial interest and not the company receiving the loan.

3. Narayani Laxmi Viniyog (P) Ltd. v. ITO T.A. No. 973/KOL/2024

This appealed filed by Narayani Laxmi Viniyog (P) Ltd. Against the I.T Commissioner regarding the tax rate apply in the A.Y 2023/24. What is to be decided is whether or not the assessee could however get lower tax rate of 20% under applicable provisions of Section 115BAA of Income Tax Act. Despite not submitting Form 10IC for the relevant year.

Facts: –

• As Private Limited Company, assessee has filed Income Tax return for A.Y 2023 – 24 by calculating its tax liability u/s. 115BAA @ 22%.
• Return was processed by CPC with higher rate of 40% on the ground that assessee had not filed Form 10IC for the relevant assessment year.
• Assessee had filed his first Form 10IC on 7/02/2021 for A.Y 2020-21 and a lower rate of tax has been granted by the revenue.
• The CIT held that as the assessee has not filed Form 10IC for relevant year he is not entitled to 22%.

Submission by the Assessee:

The assessee contended that  once it had opted validly for Section 115BAA by filing Form 10IC for the Assessment Year 2020/21 no subsequent filing of the form was necessary for any subsequent years.

It is submitted that subject to provisions of Section 115BAA(5) the option once exercised in respect of all future assessment years unless it stands invalidated on account of breach of some of the conditions none of which were violated by the assessee.

Observations by the Income Tax Officer:

• The AO applied the rate of 40% tax instead of what was claimed by the assessee which was 22%. AO did so on the grounds of the fact that Form 10IC is not submitted for the relevant year.

Observations by the CIT:

CIT has upheld decision of AO reasoning that since assessee did not submit Form 10IC for A Y 2023-24 it was not permitted to the benefit of the lower tax rate.

Tribunal’s Decision:

• The Tribunal found it is clear that the relevant section (115BAA(5)) itself states that after exercising the option of lower rate of tax it continues to be applied for subsequent years without requiring Form 10IC to be submitted except in case the option is rendered invalid by certain violations.
• Since the assessee had exercised valid option in the assessment year 2020-21 without any infirmity, the Tribunal held that the assessee was eligible for the rate of 22% in the assessment year 2023-24.
• The Tribunal set aside the order of CIT(A) and directed AO to compute tax liability at 22%.

Key Takeaways:

• Section 115BAA Application: Once an assessee opts to pay the lower tax rate under Section 115BAA this choice subsequent years is automatically applicable no fresh Form 10IC is required, unless the conditions are breached.
• Significance of Compliance: While the CPC and CIT have applied strict interpretation the Tribunal has underlined clarity in law which has treated the requirement of filing Form 10IC as a one-time requirement unless disqualified.
• Judicial Interpretation: The Tribunal relied heavily on Section 115BAA(5) which helps the assessee’s argument that once availed then the lower tax rate benefit persists unless such disqualifications take place.

4. Little Star Commodities (P) Ltd. v. ITO I.T.A. No. 455/KOL/2024

Little Star Commodities (P) Ltd. v. ITO is a penalty case under Section 271(1)(c) of the Income Tax Act. A penalty has been levied on the assessee for allegedly under reporting the full amount of commission income by showing  lower rate of commission earned from providing accommodation entries. The appeal was heard in the ITAT  Kolkata Bench.

Facts :-

• Little Star Commodities (P) Ltd. assessee filed the income tax return of  for assessment year 2012/13, which disclosed an income of commission 1,34,000.
• The assessing officer alleged that the assessee was involved in providing to accommodation entries and that he had earned commission at the rate of half per cent on transactions aggregating to 78.9 crore.
• The AO considered that the commission had been underreported and estimated the right amount of commission to be 1%, hence recomputing the commission income to 7,80,955.
• Added ₹6,46,955 to the commission income and penalty proceeding under Section 271(1)(c) imposing penalty of Rs1,99,911 equivalent to 100% of the tax attempted to be evaded.

Submission by the Assessee:

The assessee alleged that penalty was unjust since the addition was based on an estimation of the commission rate for the AO’s estimation was purely a difference of opinion and had no scientific basis.

Observation by the Income Tax officer:

• The AO accepted the commission income accrued from accommodation entry activities but disagreed with the rate at which the commission was reported settling on 1% against the originally declared 0.05%.
• The AO concluded that it was a clear case of income being intentionally under reported so as to avoid the tax liability and therefore addition justified.

Observation by the CIT :

CIT held that penalty levied by the AO was justified on grounds that revision in commission rates was justified for invoking Section 271(1)(c).

Tribunal’s Decision:

• The Tribunal held that there was revision in the commission income only based on an estimate made by the AO. There was no scientific or factual justification for making an increase in the rate of commission from 0.05% to 1%.
• The Tribunal declared that the total penalty was based on a point of difference of opinion as to the rate of commission and not on any evidence that there was clear concealment of income.
• The Tribunal observed that since the revised income was on an estimate, Section 271(1)(c) penalty was unsustainable. Thus the penalty amount of Rs. 1,99,911 was deleted and the assessee’s appeal was allowed.

Key Takeaways:

1. Estimate Based Assessments: penalties under Section 271(1)(c) cannot be accepted on estimated addition to income only. There must be clear and strong incrimination of concealment or misrepresentation of income.

2. Difference of Opinion: A difference in opinion about the rate of income cannot serve as the base for imposing a penalty especially when no scientific or accurate method is used to conclude the revised rate.

3. Relief to Assessee; In case income is reassessed on assumptions or estimates penalties cannot be imposed unless there is adequate evidence of the assessee having under reported his income.