Significant Rulings by Rajkot ITAT: International Tax & Business

This article delves into four critical rulings by the Rajkot ITAT, covering key tax issues. The Atlantic Shipping (P) Ltd. v. ITO case addresses the denial of tax treaty benefits under the India-Singapore DTAA due to income not being remitted to Singapore, leading to a remand for further verification. Saurashtra Cement Ltd. v. DCIT focuses on the company’s claim of guest house maintenance expenses as business expenditures, which was allowed after ITAT confirmed the company’s legal ownership of the property. In Jayshree Sarees v. Pr. CIT, the ITAT ruled that excess stock found during a tax survey should be treated as business income rather than unexplained investment, invalidating the higher tax rate under Section 115BBE. Lastly, Rajmoti Road Movers v. Pr. CIT involved the legality of reassessment proceedings and the application of Section 263. The ITAT scrutinized issues related to freight advances and partner profits, ultimately emphasizing the need for thorough investigation in reassessment cases. These judgments underscore the importance of proper documentation, judicial trust in established precedents, and the critical role of reassessment and review provisions under Indian tax law.

1) Atlantic Shipping (P) Ltd. v. ITO ITA No. 57/RJT/2014 and ITA No. 251/RJT/2019 and ITA No. 302/RJT/2019

This case discusses Atlantic Shipping (P) Ltd vs ITO in the context of international shipping activities and tax treaty benefits available under the India-Singapore Double Taxation Avoidance Agreement. The assessee claimed relief under Article 8 of the DTAA on the freight income accrued to the assessee, being a Singapore-based company, and transferred to a bank in London. Both the ITO and the CIT (Appeals) rejected the claim since the income could not be remitted to Singapore as necessitated by Article 24 (Limitation of Relief clause) of the DTAA.

Facts of the case:

i. The assessee had filed Income Tax Return for many vessels operating in Indian territorial waters on the basis of which freight income earned from such operations was reported.

ii. The freight beneficiary a company in Singapore T Shipping and Transport Pte. Ltd remitted the income to a London based bank, not a Singaporean .

iii. Notice has been issued by ITO disallowing treaty benefits on the grounds that no income has been remitted to Singapore and relies upon Article 24 of DTAA that it requires to remit to the country of residence for relief from taxes.

Submission of the Assessee:

• The assessee submitted that the said Article 8 of the DTAA permits the taxation of shipping income in the country of residence, i.e. Singapore and the said income should be exempt from Indian taxation.
• This comprises a certificate by the Inland Revenue Authority of Singapore (IRAS) showing that the income is taxable in Singapore on an accrual basis and not on remittance.
• The assessee have also argued that since the income was not remitted to Singapore, then Article 24 would not be invoked.

Observations by the Income Tax Officer:

• ITO has denied tax treaty benefits because income was remitted to London and not Singapore and therefore fails on the condition of remittance under Article 24 of DTAA.
• He contended that the income must have been remitted to Singapore, where he stayed, as Article 24 requires for Article 8 to apply on tax relief.

Observations by the CIT:

• The CIT has affirmed the order of the ITO which held that non-payment of funds to Singapore had been a breach of Article 24 of the DTAA
• The IRAS issued certificate could not be accepted as additional evidence because it was submitted after the assessment. Conditions for admitting additional evidence under Rule 46A are not satisfied.

Tribunal’s Decision:

• The Tribunal held that the certificate issued by IRAS clearly mentions that the income received is chargeable to Singapore tax on an accrual basis and not on a remittance basis.
• The Tribunal however noted inconsistencies in the certificate and questioned the factual basis for treating income as derived from business carried on in Singapore.
• The matter was sent back to ITO for further verification of the contents of the certificate and to seek clarification from the Singapore Tax Authority.

Key Takeaways:

i. Importance of Remittance: The income must have a remittance basis to Singapore for it to be eligible towards tax relief under Article 8 of the India Singapore DTAA otherwise Article 24 applies and disallows any treaty benefit.

ii. Certificate from Foreign Tax Authority: The facts of the claim are to be adequately supported with relevant statutory provisions. And as the tax authority of India could call it invalid if it lacked such a backing.

iii. Role of Article 24: Article 24 is an important provision as it avoids double non taxation as it provides that the income exempt in India shall be taxed in the State of residence.

iv. Verification Restoration: The case was returned to the ITO for further confirmation highlighting the need for detailed investigation of foreign tax documents.

2) Saurashtra Cement Ltd. v. DCIT ITA Nos. 362 and 363/RJT/2023

The Saurashtra Cement Ltd. argued against the NFAC and ITO order of the Disallowances of the Maintenance cost of the Mumbai base Guest House for A.Y 2014/2015 and 2015/2016. The company contends that the expenses incurred for maintaining the guest house occupied by relatives of the ex chairman should be allowed as business expenditure. Facing adverse decisions from the assessing officer and the NFAC the company appealed to the ITAT Rajkot Bench.

Fact of the case:

During the course of assessment year Saurashtra Cement Ltd has incurred expenditure for maintenance of guest house at Mumbai for Rs. 7,71,084/- for financial year 2014-15 and Rs. 5,03,091 for financial year 2015-16. Guest House occupied by the relatives of the ex chairman and a court case relating to its ownership was previously lost by the company. The assessing officer disallowed such expenses treating them as non business and personal in nature  as they were incurred for the benefit of relatives of the ex chairman. The NFAC had upheld this disallowance.

Submission by the Assessee:

The Assessee, represented by  Vimal Desai argued that guest house legally belonged to Saurashtra Cement Ltd, hence all expenditure incurred on maintenance should be considered business expenditure. The company contended it was the case of obligatory maintenance by the company irrespective of whosoever occupied it since it remained within the legal possession of the company.

Observations by the Income tax Officer:

The assessing officer observed that the guest house was not used for a business but was used by the relatives of ex chairman. Thus it was held by ITO that the expenditures accrued  were personal in nature and not related to the business activities of the company. Therefore the assessing officer disallowed the claim for Rs. 7,71,084 and Rs. 5,03,091 respectively in respective assessment years.

Observations by the CIT:

The CIT upheld the disallowance made by the ITO as the company has failed to explain how the expenditures were related to its business. The CIT also mentioned that the company lost an earlier legal suit pertaining to the ownership of a guest house.

Tribunal’s Decision:

The ITAT Rajkot Bench gave due consideration to the submissions and perused the paper books placed on record. It found that the guest house was lawfully owned by the company during the relevant assessment years. The Tribunal further observed that the expenditure incurred on maintenance was on the property owned by the company. Thus, the said expenses would be rightly treated as on account of the business. It also referred to The Supreme Court Judgment in Sasoon J. David and Co. (P) Ltd. v. CIT, contending that business expenditure can be incurred voluntarily and must be allowed if incurred on account of business. In such circumstance the Tribunal instructed the ITO to allow the maintenance expenses both assessment years and deleted the additions made thereon.

Key Takeaways:

i. Legal Ownership and Business Expenditures: Even if the guest house was occupied by the non Business entities namely the relatives of the former chairman legal ownership of the guest house by company justified maintenance expenses as a Business expenses.

ii. Judicial Precedents: The ITAT relied on the Supreme Court’s decision in Sasoon J. David and Co. (P) Ltd. which held that business expenses voluntarily incurred for the promotion of business should be allowed.

iii. Condoned Delays: The ITAT condoned part of the delay caused in submitting the appeals considering the reasonable cause provided by the assessee

iv. Tribunal’s Authority: ITAT may admit claims rejected by lower tax authorities if such claims are for valid business reasons and backed with legal right of ownership.

3) Jayshree Sarees v. Pr. CIT I.T.A. No. 199/Rjt/2023

The case revolves around an appeal filed before the Tribunal by Jayshree Sarees against the Principal Commissioner of Income Tax Rajkot. The core of this appeal concerns a survey conducted under section 133A of the Income tax Act 1961 at the premises of Jayshree Sarees. This stated that undisclosed stock was found during the survey and the assessee firm acknowledged additional income. Initially it was treated as business income but the Pr. CIT exercised his revision powers u/s. 263 sought to reclassify the said income as unaccounted investment under section 69 of the Act. Fell under the higher tax rate U/S. 115BBE.

The assessing officer had accepted excess stock as business income during the assessment process. The Principal Commissioner argued that this was an error and invoked section 263 declaring the assessment order erroneous and prejudicial to the interest of the revenue.

Facts of the Case:

i. A survey under section 133A was conducted on the premises of Jayshree Sarees and the excess stock revealed was of 71,50,000.

ii. The partner of the firm accepted this as additional income and declared it later under the head business income in the income tax return.

iii. The assessing authority in the assessment under section 143(3) accepted this disclosure as business income and taxed it under normal provisions

iv. The Pr. CIT invoked revision powers under section 263 contesting that undisclosed stock should have been taxed as an undisclosed investment under section 69 with a higher rate of tax under section 115BBE.

Submissions by the assessee:

i. The assessee alleged that the undisclosed stock was part and parcel of their business hence liable to be taxed as business income as disclosed during the survey and assessment.

ii. The assessee explained that the A.O made proper inquiry accepted the explanations given and determined the income accordingly on ordinary business income rates.

iii. It was further stated that in a sister concern case their surplus stock is being treated as business income therefore the same was taxed. This was upheld by the Commissioner (Appeals).

Observations by the Income Tax Officer:

During finalization of the assessment, the ITO accepted the excess stock found during the survey as business income. The officer taxed that amount of income under regular provisions of Income-tax Act by considering it part and parcel of assessee’s undeclared business profit.

Observations by the CIT :

The Pr. CIT noted the Section 115BBE provisions were not invoked by the assessing officer which would have taxed at a higher rate the undisclosed stock under Section 69. As such this income must be classified as unexplained investment since this excess source was not satisfactorily explained as business income.

Tribunal’s Decision:

The ITAT ruled in favor of the assessee. The Tribunal held that this excess stock found during the survey was not separately identifiable from the regular business stock and the explanation furnished by the assessee was satisfactory. The ITAT held that treating this excess stock as business income was a plausible view, and assessing officer’s decision was not erroneous or prejudicial to the revenue. The Tribunal has also relied upon other judgments wherein similar facts have been dealt. In the present case while dealing with the matter of Pr. CIT v. Deccan Jewellers Pvt. Ltd. wherein the High Court held that the surplus stock found during survey should be treated as business income it has supported the impugned view.

Key Takeaway:

i. Treatment of Excess Stock as Business Income: As held by the ITAT that the excess stock discovered during a survey is not separately identifiable. it would be business income and not undisclosed investment.

ii. Section 263 Revision: The Tribunal held that the Pr. CIT’s invocation of section 263 was unjustified as the assessing officer had taken a reasonable view supported by the facts of the case.

iii. Similar Judiciable Precedent Cases: The Tribunal has drawn reliance on similar judicial precedents wherein during surveys the excess stock has been treated as business income and taxed in regular provisions and not as unexplained investments.

iv. Excess Stock and Section 115BBE: The Tribunal dismissed the argument of Pr. CIT on applicability of section 115BBE holding that the assessee had explained satisfactorily the source of excess stock while continuing its regular business operations.

4) Rajmoti Road Movers v. Pr. CIT ITA No. 157/RJT/2022

This appeal by Rajmoti Road Movers is against the order of the Principal Commissioner of Income Tax for the assessment year 2012-13. The PCIT invoked Section 263 of the Income Tax Act 1961 asserting that the reassessment order was erroneous and prejudicial to revenue on account of inadequate inquiries by the Assessing Officer with regard to discrepancies like freight advances disallowance under Section 40A(3) and assessment of partners’ profits. The decisions were essentially based on these two elements of law. the legality of invoking Section 263 and the scope of reassessment proceedings under Section147.

Facts of the Case:

• Rajmoti Road Movers is a partnership firm carrying on the business of transportation. The firm filed ITR for the A.Y 2012/13.
• The original assessment u/s. 143(3) added G.P. to the income of the assessee which resulted in assessed income of Rs. 2,86,52,160.
• Later the case was opened u/s. 147 on the grounds of mismatch in advance freight charges.
• No further additions were made at the time of reassessment and income confirmed by the Assessing Officer.
• PCIT issued notice under section 263 on the ground that several discrepancies going unnoticed at the hands of the Assessing Officer.

Submissions by the assessee:

• The assessee’s contention was that all relevant documents and ledgers had been submitted before the Assessing Officer during the reassessment proceedings and were verified by him including freight advances.
• It is argued that the re opening u/s.147 was based on a specific issue and no additional discrepancy have been detected by the A.O which means further investigation is not required.
• The assessee also emphasized that Section 263 cannot be invoke to merely change the opinion of the A.O.

Observations by the Income Tax Officer:

• Under Section 147 reassessment, the ITO had verified all the requisite details including freight advances and held that there was no mismatch at all and thus no further addition in the assessed income.
• The reassessment order was passed after thoroughly considering the issue for which the case was reopened

Observations by the CIT:

• According to the PCIT exercising the power under Section 263 it noted that freight advances as well as cash payments under Section 40A(3) and profits further increased by the partners were not adequately investigated by the Assessing Officer.
• The PCIT noted that such lapses made the order of assessment erroneous and prejudicial to the interest of revenue.

Tribunal’s Decision:

The Tribunal held that the Assessing Officer has indeed closely scrutinized the matter of freight advances during the reassessment proceeding and also there was no deficit of inquiry

It held that PCIT can’t invoke section 263 to examine other issues which were not part of the reasons for reopening the assessment u/s. 147

From the above discussion it is evident that the invocation of Section 263 was not justified. The reassessment order is therefore valid.

Key Takeaways:

• Section 263 cannot be invoked to merely substitute the opinion of the Assessing Officer.
• It is always very important that reassessment proceedings under Section 147 focus on reasons for reopening and if the reasons are met then nothing more needs to be expanded in the inquiry
• This case reinforces the very principle that the powers under Section 263 must be exercised cautiously particularly when dealing with reassessment proceedings.