No s. 14A disallowance of interest on borrowed funds if AO does not show nexus between borrowed funds & tax-free investment

CIT V RAJEHA CORPORATION

In AY 2000-01 the assessee had investments in shares & mutual funds of Rs. 20 crores on which it earned tax-free dividend of Rs. 13.35 lakhs. The assessee also had borrowed funds on which it claimed deduction of interest of Rs. 8.70 crores. The AO disallowed interest of Rs.2.79 crores on the ground that it was relatable to earning tax-free dividend. The Tribunal deleted the disallowance on the ground that the investments had been made out of the assessee’s own funds and not out of the borrowed funds. The department filed an appeal before the High Court. HELD dismissing the appeal:

Counsel for the Revenue could not point as to how interest on borrowed funds to the extent of Rs.2.79 crores was attributable to earning dividend income which are exempt u/s 10(33) of the Act. Therefore, in the absence of any material or basis to hold that the interest expenditure directly or indirectly was attributable for earning the dividend income, the decision of the Tribunal in deleting the disallowance of interest made u/s 14A cannot be faulted.

Submitting inaccurate claim would not amount to giving inaccurate particulars, Penalty can not be imposed U/s. 271(1)(c)

CIT Vs Brahmaputra Consortium Ltd (Delhi HC) - When the assessee accepts the excess depreciation claimed inadvertently and the same being disallowed by the AO, penalty u/s 271(1)(c) is not warranted in such a case.

Commissioner of Income Tax versus Brahmaputra Consortium Ltd.

Decided by – Delhi High Court

ITA 1582 OF 2010

Judgment reserve on: 12.7.2011

Judgment delivered on: 03.8.2011

A.K. SIKRI, J.
1. The penalty imposed by the Assessing Officer under Section 271 (1) (c) of the Income-Tax Act (hereinafter referred to as ‘the Act’) and confirmed by the CIT (A) has been deleted by the Tribunal vide impugned orders dated 13th August, 2009. Aggrieved by this order of the Tribunal, the present appeal is preferred by the Revenue.
2. We may first give the narration of the facts which have led to the imposition of penalty on the assessee. The case pertains to the assessment year 2001-02 for which year the respondent/assessee had filed its return declaring loss at Rs. 93,74,724/-. During the assessment proceedings, the Assessing Officer noticed that the assessee had claimed the following deduction/expenditure:-
(i) the fee of Rs.  1.59 lacs paid to the Registrar of Companies (ROC) for increasing authorized capital as revenue expenditure, treating the same as revenue expenditure, the Assessing Officer disallowed the same following the judgment of Supreme Court in 225 ITR 792.
(ii) The assessee had shown addition of Rs.  28,53,130/- in building. However, supporting vouchers/evidence could not be produced. Accordingly the Assessing Officer estimated addition at Rs. 20,00,000/- and allowed depreciation at 5% on this amount. In the process, claim of Rs. 42,656/- was disallowed as excessive.
(iii) The assessee had claimed depreciation @ 40% on earth moving equipment which consisted of excavators and tippers. As per the rules, only tippers were eligible for higher rate of depreciation at 40% and not excavators. When the assessee was confronted with this, it revised its claim, claiming 25% of depreciation instead of 40%. This resulted in disallowance of excess depreciation in the sum of Rs.  65,89,097/-.
3. All the aforesaid disallowances were accepted by the assessee. At the same time, while passing the assessment order, the Assessing Officer, also initiated penalty proceedings. Show cause notice was given in this behalf which was replied to by the assessee. Finding the reply as unsatisfactory, the Assessing Officer imposed penalty of Rs.  26,29,147/- under section 271 (1)(c) of the Act holding that the assessee had made wrong claim of excess depreciation on plant and machinery as well as on building and also on the wrong claim of deduction of fee paid to ROC for increase of authorized share capital as revenue expenditure. While doing so, the Assessing Officer rejected the contention of the assessee that the assessee had, by mistake claimed depreciation of 40% on tippers and excavators and since it had itself revised the computation, it was a bona fide error. The Assessing Officer took the view that the assessee revised its computation only when the wrong claim of depreciation was discovered by the AO, that too, when it could be discovered after proper enquiry and scrutiny of the details. The Assessing Officer further recorded in his order that only when the assessee was confronted with the facts and specifics queries were raised vide orders dated 31st March, 2004 that the assessee accepted the position and revised the claim and, therefore it was clearly a case of furnishing of inaccurate particulars for the claim of excessive depreciation.
4. The Assessing Officer also held the view that in so far as addition to the building is concerned, claim was made without supporting evidence and, therefore, the Assessing Officer had to allow the depreciation on estimated cost only. The excessive depreciation on that account also was thus treated as a false claim.
5. Insofar as claim for deduction of fee paid to ROC is concerned, as per the Assessing Officer this fee was paid for increase of authorized share capital which could not be treated as revenue expenditure in view of the categorical judgment of the Apex Court in PSIDC Ltd. Vs. Commissioner of Income Tax, 225 ITR 792 and, therefore, the claim was palpably false.
6. The CIT (A) concurred with the aforesaid approach of the Assessing Officer holding that in view of Explanation-I to Section 271 (1) (c) of the Act disallowances of above claims deem to be the income in respect of which particulars had been concealed by the assessee within the meaning of Section 271(1)(c) of the Act and consequently the assessee was liable for penalty. According to the CIT (A) it also amounted to furnishing of inaccurate particulars of income.
7. The aforesaid approach of the Assessing Officer and CIT (A) has not found favour with the Tribunal. According to it, insofar as disallowance of part depreciation on building is concerned, it was merely on account of estimated cost of building which did not call for any penalty. In respect of penalty on the wrong claim qua payment of fee to the ROC, the penalty has been deleted on the ground that explanation given by the assessee could not be called mala fide and no particulars were concealed in this behalf. The Tribunal accepted the explanation of the assessee that it was claimed as revenue expenditure by placing reliance on several judicial pronouncements, and therefore, the claim was not mala fide.
8. Likewise, regarding the claim for depreciation, according to the Tribunal, it was a case of bona fide mistake as the assessee had claimed depreciation treating the earth moving equipment to be one block assets consisting of tippers and excavators and claiming depreciation @ 40% on the entire block of earth moving equipment. When the assessee found, during the course of assessment proceedings, that it was infact entitled to depreciation @ 25% on excavators, the assessee accepted the said mistake immediately and revised the claim of depreciation by reducing it. The explanation was accepted as genuine and bona fide resulting into deleting of penalty on this count as well.
9. We may state at the outset that entire thrust of argument of the counsel for the appellant was to justify the penalty imposed on wrong claim of depreciation at higher rate on excavators. It was argued that the Schedule clearly provides that on excavators the depreciation allowable is at 25% and it is tippers on which depreciation is to be allowed is 40% by mixing the acquisition cost of tippers with excavators, the assessee had claimed depreciation at 40% on both excavators and tippers which was contrary to the specific provisions and thus Explanation-I to Section 271 (1)(c) clearly attracted as it would amount to giving inaccurate and false particulars and concealing material particulars for higher claim.
10. There cannot be dispute about the aforesaid provisions allowing depreciation @ 25% on excavators. However, the circumstances under which the claim was made at 40%, shows that it was a genuine and bona fide which was directed by the assessee. In this year, the assessee had acquired new excavators and tippers for a total sum of Rs. 1,78,75,260/- and Rs. 6,36,88,865/- respectively. All block of assets were termed as ‘earth moving equipment’s and taken in the profit and loss account under the aforesaid head. The cost on tippers was much higher on which depreciation was rightly claimed at 40%. However, since the entire block consisting of excavators and tippers was taken under the head ‘earth moving equipment’, the explanation given by the assessee was that inadvertently, in respect of excavators are the depreciation was claimed at 40% instead of 25%. This explanation has been accepted as genuine and bona fide by the Tribunal which is the final fact finding authority. In CIT Vs. Escorts Finance Ltd. (2010) 328 ITR 44 this Court has held that deletion of penalty on the ground of inadvertent error is a finding of fact. Infact, the Assessing Officer did not even contradict the plea of the assessee that excess claim of depreciation was not an inadvertent error.
11. That apart, other element present in this case gives a strong indication that the error was genuine and bona fide. Return for the assessment year in question was filed declaring loss of Rs.  93,74,724. Assessment was also completed at loss of Rs.  23,33,321/-. Therefore, excess claim of depreciation was not advantageous to the assessee. Had depreciation been claimed @ 25%, it would have resulted in higher depreciation in the succeeding years which would, have consequently reduced the total income of succeeding years. It indicates that excess claim of depreciation was not a device, rather it was an inadvertent error.
12. Thus by making claim of depreciation at higher rate in this year, where the income tax return was at loss, the assessee did not gain any mileage. On the contrary, it was better for him to claim depreciation @ 25% in this year resulting into higher written down value in the next year for claim of depreciation of a higher amount on higher written down value thereby reducing the tax liability.
13. The Assessing Officer was not correct in holding that submitting inaccurate claim would amount to giving inaccurate particulars. Such a contention of the Department is specifically rejected by the Supreme Court in a recent judgment in the case of CIT Vs. Reliance Petroproducts Pvt. Ltd. (2010) 322 ITR 158.
14. We are, thus, of the opinion that no substantial question of law arises in this appeal which is accordingly dismissed. (A.K. SIKRI)
JUDGE
(M.L. MEHTA)
JUDGE
AUGUST 3,2011

Section 253 Of The Income-Tax Act, 1961 – Appellate Tribunal – Appeals To – Instructions Regarding Standard Operating Procedure On Filing Of Appeals To ITAT Under Section 253 And Related Matters

INSTRUCTION NO. 08/2011 [F NO. 279/MISC./M- 43/2011-ITJ], DATED 11-8-2011

With a view to streamline the process of filing appeals to ITAT and in suppression of the existing Instructions on the subject in general, and Instruction No. 1274 dated 10-8-1979, Instruction No. 1353 dated 9-9-1980, Instruction No. 1387 dated 3-3-1981, Instruction No. 1493 dated 18-11-1982, Instruction No. 1570 dated 4-7-1984, Instruction No. 1894 dated 16-6-1992, and Instruction No. 1921 dated 23-1-1995, in particular, the following Instructions are issued herewith for compliance by all concerned:

Responsibility for Filing of Appeals to ITAT

2. Subject to the Instructions issued by the CBDT for the time being in force on monetary limits for filing appeals under section 268A, the jurisdictional CIT shall be the authority to decide whether to contest an order of the CIT(A), in the light of the facts and circumstances of a particular case and the statutory provisions. While taking decision in the matter, he shall, inter alia, take into consideration reports of the authorities below. Once the CIT communicates his decision to contest a particular order of CIT(A), it shall be the responsibility of the Range Head to ensure timely and proper filing of appeal in the ITAT and consequential follow up actions. The actual filing of appeal is to be ensured by the Assessing Officer (AO).

Time Lines for Filing of Appeals in ITAT under section 253 of the Act

3. Time lines, indicating clearly the responsibilities of each level involved in the process, for filing appeals to ITAT have been laid down in Annexure-I to this instruction for strict adherence by all concerned.

4. Appeal Effect and Scrutiny Report

   i.  On receipt of the order of the CIT(A), the AO shall give appeal effect promptly and properly. The Range Head shall monitor correctness and timely appeal effect in respect of orders of CIT(A).

  ii.  Any pendency in regard to the appeal effect beyond one month shall be reported by the Range Head to the CIT in the DO reporting monthly activities of the Range, along with reasons for the delay.

 iii.  With a view to provide relevant inputs to the decision making authority for filing appeals to ITAT, a format for scrutiny report is prescribed herewith at Annexure-II.

 iv.  In respect of appeals decided in favour of revenue, the AO shall submit only Part-I of the proforma in Annexure-II to the Range Head and there will be no need to fill in other parts of the proforma in such cases.

5. Quality of Appeals

   i.  The CsIT shall ensure that appeals to ITAT are filed only where there is proper justification. Orders of CIT(A) on factual issues should be accepted unless the findings are perverse.

  ii.  While giving comments / recommendations or taking decision to contest CIT(A)’s order, the officers concerned shall, inter alia, ensure that the following issues have been taken into consideration:

 (a)  Facts of the case and basis of addition / disallowance are clearly brought out.

 (b)  Reasons for granting relief by the CIT(A) on the relevant issues are clearly spelt out.

 (c)  The reasons as to why the CIT(A) was not justified in recording the findings of fact or law on each issue are clearly brought out. Evasive stand or ambiguous language is to be avoided.

 (d)  If any factual finding by CIT (A) is inconsistent with or contrary to the material on record, the relevant material should be clearly identified to show perversity.

 (e)  Cogent reasons for the decision to file appeal on relevant issues are properly and clearly recorded by the CIT, as this will constitute the basis for further litigation in appropriate cases.

 (f)  The grounds of appeal arising out of the order of CIT(A) are carefully drafted to clearly spell out the grievance of the department and the relief sought.

 (g)  In case of mixed question of facts and law, the grounds of appeal should clearly bring out specific legal and factual issues to be contested.

 (h)  The grounds are precise and not argumentative.

  iii.  Along with authorization memo under section 253(2) and grounds of appeal, the CIT shall send a copy of comments of Range Head and reasons for his own decision authorizing appeal to the AO for his record and guidance.

  iv.  In case appeal has not been authorized against adverse order of the CIT(A), the decision should be conveyed to the AO along with copy of scrutiny report containing reasons for acceptance.

6. Proper Judicial Record Management System

6.1 The CIT shall, inter alia, ensure that once appeal to ITAT is authorized against the order of CIT (A), a separate judicial folder for the assessee for a particular year is maintained in his office. Among other things, the folder should have a copy of relevant assessment order (along with copies of key documents used as evidence in support of additions made), a copy of the remand report, if any, and the scrutiny report submitted by the authorities below.

6.2 Such judicial folder should be easily retrievable for scrutiny of ITAT order or Judgment of the High Court, as the case may be, at the time of considering further appeal in the case, if any. A similar judicial folder in respect of assessee’s appeal under section 253 filed in ITAT, containing a copy of appeal memo filed by the assessee and other relevant documents should also be maintained for the aforesaid purpose.

7. Transfer of Jurisdiction outside CIT’s Charge During Pendency of Appeal

7.1 In case of transfer of jurisdiction over a case from one CIT to another CIT charge during pendency of appeal, the transferor AO shall, while transferring the case records along with the judicial folders in CIT’s office to the transferee AO, duly inform the change of jurisdiction to the Registrar ITAT with a copy to his CIT’s office. This fact of intimation to the Registrar ITAT shall also be mentioned by him in the transfer memo. This procedure shall apply to the appeals filed by the department as well as by the assessee.

7.2 In such cases, if the ITAT order is received by the transferor CIT, he shall immediately return the same to the Registrar ITAT referring to the earlier intimation of transfer of jurisdiction and informing that in view of the transfer of jurisdiction it is the transferee CIT who holds jurisdiction over the case and as such the service of the order should be made on him. A copy of the communication to the Registrar should be endorsed to the transferee CIT along with the copy of Tribunal’s order for taking further necessary action.

7.3 In case of transfer of jurisdiction over a case involving two different Benches of ITAT during the pendency of appeal, necessary steps shall be taken by the transferor CIT to request the ITAT Bench where the case is pending to transfer the same to the Bench of ITAT having jurisdiction over the cases of transferee AO. The matter may also be coordinated with the transferee CIT.

8. Preparation of Memorandum of Appeals / Papers etc.

The Range Head shall ensure that:

   i.  Once the grounds and authorization under section 253(2) for filing appeal are received from CIT, Form No. 36 i.e. Memo of appeal is duly filled-in and filed by AO, with all necessary annexures, in the registry of ITAT before expiry of limitation.

  ii.  The ITA No. of the appeal filed is obtained by AO and recorded on other sets (including office copy) of the appeal papers. The Range Head should communicate the same to the CIT within the prescribed time limit as in Annexure-I.

 iii.  There is proper vetting of Memorandum of Appeals as regards relevant facts therein before the appeal is actually filed.

 iv.  Necessary particulars including the correct PAN, tax effect involved are mentioned.

  v.  All annexures including copies of orders of authorities below are properly typed as per ITAT Rules to avoid defects/office objections.

 vi.  In case, any document such as agreement, seized papers, depositions etc. are crucial to the issues involved and considered by lower authorities, a copy of the same must be referred to at relevant place in appeal memo and its copy annexed thereto.

9. Filing of Appeal and Subsequent Monitoring

The CIT shall put in place proper mechanism with defined responsibility of different levels of officials in his charge to ensure that:

   i.  The appeal is filed in the ITAT within prescribed time limit as in Annexure-I.

  ii.  ITA/WTA Number allotted by the registry is obtained and recorded in judicial folder in CIT’s office as mentioned in check list / proforma for scrutiny report on CIT(A) order at Annexure-II.

 iii.  In case, the registry of the ITAT notifies any defect, immediate steps are taken by the AO concerned to remove the same with the assistance of the office of CIT (DR) or Senior DR as the case may be.

 iv.  One set of appeal memo is kept with the AO for linking the same with the relevant assessment record.

  v.  One set of appeal memo is kept in the office of CIT for placing the same in judicial folder.

 vi.  The appeals are followed up and the Department is effectively represented at every hearing stage.

vii.  Proper coordination with the Departmental Representative is maintained at every stage by Range Head.

viii. The details and information called for by the ITAT/DR should be furnished (in quadruplicate) at the earliest and, in any case at least three days before the date fixed for hearing before the ITAT.

10. Appeals/ Cross Objections Filed by the Assessee

10.1 In cases where appeal to ITAT against the order of CIT(A) is filed by the assessee (whether department has filed appeal or not), the CIT shall ensure to put in place proper mechanism to examine the desirability of filing cross-objections (CO) in suitable cases. As soon as the memo of appeal filed by the assessee is received, a file should be opened in the office of CIT and assigned a proper identification number incorporating the ITA No. allotted by the ITAT and further necessary action taken.

10.2 Officers have to be alert particularly in those cases where CIT(A)’s order was not acceptable but appeal was not filed as tax effect was below the prescribed limit. If the assessee has filed appeal in ITAT in such cases, the CIT shall direct the AO to file cross-objections against that part of the CIT(A)’s order to which he objects, within statutory time limit.

Compliance of ITAT Directions

11. The CIT shall put in place proper mechanism to ensure timely and due compliance to the directions of the ITAT. Close co-ordination between field officers, CIT (DR) and Departmental Representative in the ITAT has to be ensured so that directions are communicated in time and proper compliance is made to the satisfaction of the Tribunal.

Orders of ITAT containing strictures etc.

12. Orders of the ITAT containing strictures or those which are contrary to Board’s orders, notifications, instructions, circulars etc. shall be brought to the notice of the Board (concerned division) immediately by the CIT through CCIT/DGIT under intimation to ITJ section of the Board.

Assistance to Departmental Representatives

13. The Range Head shall ensure that the AO sends a copy of the scrutiny report, comments of Range Head and decision of CIT, to the DR office along with the DR’s copy of appeal papers immediately after filing of appeal and obtaining ITA No. Whenever, DR requires any records, clarification or other material, including paper book to be submitted to ITAT, the CIT and Range Head shall ensure that the requirements are complied with promptly.

14. Monitoring Mechanism

   i.  The CIT shall ensure that appeals to ITAT are filed within prescribed time and pursued properly.

  ii.  The CIT shall intimate to the CCIT in his monthly DO, the instances of delayed appeals to ITAT along with the reasons and corrective actions taken. The CCIT shall review due adherence to this instruction on a quarterly basis and take appropriate measures in case of deviations.

 iii.  The cases of material deviations from this instruction, if any, shall be brought to the notice of ITJ section of the Board by the CCIT.

15. This Instruction shall apply to appeals to be filed in ITAT with effect from 22nd August, 2011.

16. Hindi version of instruction to follow.

Note: Reference to the CCIT/CIT in this Instruction includes DGIT/DIT as the case may be.

Annexure-I

TIMELINES FOR FILING APPEAL TO ITAT

Sl. No.	Stages	No. of days	Total Time
1.	Receipt of CIT(A)’s order in the office of CIT	0 day	0 day
2.	Sending the order to AO for necessary action along with a copy to Range Head	5 days	5 days
3.	Entry in the relevant register and submission of scrutiny report in prescribed proforma by AO to Range Head after giving appeal effect	25 days	30 days
4.	Submission of recommendation by Range Head on scrutiny report to CIT along with draft grounds of appeal	10 days	40 days
5.	Decision making by the CIT including finalisation of grounds of appeal and sending the same to AO	7 days	47 days
6.	Actual filing of appeal in ITAT by AO	6 days	53 days
7.	Intimation of Diary/lodging to the office of CIT	2 days	55 days

Annexure- II

Proforma for ‘Scrutiny Report’ on CIT(A)’s order

Limitation to file appeal under section 253 expires on: ………………….

(Parts 1 to 4 are to be filled-in by the AO and 5 to 6 by Range Head)

u TO BE FILLED IN ALL THE CASES OF ORDERS OF CIT(A)

1. Particulars from the order under scrutiny

S. No.	Points	Particulars
i.	Name and address of the assessee
ii.	PAN
iii.	Assessment Year
iv.	Appeal No. and date of the order
v.	Date of receipt of the order in the office of CIT
vi.	Date of giving appeal effect
vii.	Overall Tax effect of the order

u TO BE FILLED ONLY WHERE ORDERS OF CIT(A) ARE ADVERSE TO REVENUE

2. Analysis of the order under scrutiny

i.	Whether it is combined order for more than one assessment years	Yes / No
ii.	If yes, specify assessment years involved and identify specific issues related to different assessment years for filing separate appeals. Use Annexure, if required.
iii.	Whether it is combined order for more than one assessee/group case?	Yes/No
iv.	If yes, whether jurisdiction of all assessees falls in the same Range?	Yes / No
v.	If reply to (iv) above is no, identify the AO/Range / CIT having jurisdiction over other assessees for communication of stand taken on common issues?
vi.	If the proceeding of order under scrutiny was dependent on some other proceedings (say order under section 263 / set aside order /Registration under section 12A / Approval etc.), specify the present appellate status of the other proceedings along with ITA No. /W.P. No. etc.
vii.	Whether any additional ground was admitted by the CIT(A)?	Yes/No
viii.	If yes, whether the AO was intimated of the new grounds?	Yes / No
ix.	Whether any additional evidence was admitted by CIT(A)?	Yes/No
x.	If yes, whether opportunity to AO was granted under Rule 46A to give comments / counter the same?	Yes/No/NA

3. Scrutiny report on appellate order

A. If the tax effect in l(vii) above is below prescribed monetary limit and case does not fall in any exception of Instruction on monetary limits for filing appeals for the time being in force, detailed scrutiny may not be taken up and only general recommendation as to whether decision of CIT(A) is prima facie acceptable on merits or not, may be given.

B. In cases other than at ‘A’ above, the AO in his scrutiny report shall cover following points, as may be applicable, on each issue where relief is allowed by CIT(A), in a separate Annexure.

i.	Relief allowed by the CIT(A) :-
	u   Description of issue involved in brief,
	u   Basis of addition/ disallowance made in assessment order,
	u   Reasons for grant of relief by CIT(A),
	(Relevant page /para No. of assessment order and CIT(A)’s order for each issue may also be specified)
ii.	Tax effect in respect of each issue on which relief is allowed by CIT(A) is to be worked out separately.
iii.	Whether any remand report was called for by the CIT(A)?
iv.	If yes, AO’s comments in brief on relevant issues above should be given. Specify whether relief by CIT(A) is in conformity with AO’s views in the remand report?
	(Attach copy of CIT(A)’s letter/order calling for the report and also the remand report submitted by the AO along with assessment order).
v.	Whether any factual finding given by CIT(A) is contrary to the material on record? If yes, specify in detail indicating specific para of order under scrutiny & material on record contradicting such a finding.
vi.	If the decision of CIT(A) is not acceptable, specify reasons (also taking into account the remand report, if any, on the issue)
vii.*	Whether similar issue was involved in the case of assessee in earlier years? If yes, status of appeal etc. may be indicated.
viii.	If the same issue is involved in subsequent year in the case of assessee, the stand /action taken by AO/status of appeal, if any, may be indicated.
ix.	Has CIT(A) relied upon any judicial decision? If yes, has a copy been annexed or citation given in case of reported decisions? (Note: Whether the relied upon decision has been challenged in further appeal? If so, the present status may be given.)
x.	Whether the issue arises out of audit objection?
xi.	If yes, whether audit objection is included in Draft Para? Also state whether Audit objection has been accepted by the department or not.

* Item vii is extremely important, if applicable, (the involvement of issue in earlier year may already be indicated in assessment order or CIT(A)’s order)

4. General

i.	Aggregate of tax effects in 3B(ii) above
ii.	Whether the tax effect above is below the limit prescribed for filing of appeal in CBDT Instruction on monetary limits?	Yes/No/NA
iii.	Whether the case falls in any of the exceptions laid down in the said Instruction? If so, specify clause No.?
iv.	Due date for submission of report to Range head (30 days from the date of receipt of CIT(A)’s order in the office of CIT)

Submitted to the Addl./Jt. CIT, Range- …………………. for kind consideration & further action. The assessment records in ………………….. volumes are also sent herewith.

Date:	Signature
Place:	Name & Designation of the AO

5. Recommendation of Range head on scrutiny report by AO

i.	For each issue on which relief is allowed by the CIT(A) specify the issue involved with proper referencing:- (issues involved to be mentioned in brief, for illustration – disallowance of interest for interest free loan given; repair expenses treated as capital; accrual of interest income  on Bonds; deduction under section 80-IB etc.)
ii.	Whether any additional evidence was admitted without granting opportunity to AO? If yes, give details.
iii.	Whether any finding of fact given by CIT(A) is inconsistent with material on record, making his order perverse? (see Note below)
iv.	If so, give details and explain which parameters of perversity are satisfied and how? (Refer to Note below)
v.	Whether there are any mistakes apparent form record which require filing of rectification application before CIT(A)?
vi.	Whether the decision of CIT(A) is acceptable on merits? If not, give reasons for each issue.
vii.	Draft specific ground to be taken before ITAT.

6. Final Summary of report

Appeal is recommended on issues Nos.	…., …… & ……
Aggregate tax effect on issues on which appeal is recommended
Due date for submission of report in CIT office (40 days from the date of receipt of CIT(A) order in CIT office)

Submitted to the CIT- ……………………………. for kind consideration & further action.

Date:	Signature of the Range head
Place:	Name & Designation

7. Decision by the CIT on the scrutiny report

A. Issue wise decision of the CIT, as to whether appeal is to be filed or not, may be recorded with reasons, keeping in view the line of argument the DR is expected to take before ITAT at the time of hearing:

Issue No 1.

Issue No. 2 ………………… and so on

Aggregate tax effect on issues proposed to be contested in the ITAT

B. Grounds of appeal to be raised before the ITAT may be framed in respect of the issues not accepted by the CIT.

C. In case of a combined order or order in a group case, involving more than one assessee falling under jurisdiction of different CsIT, the CIT shall communicate the stand taken on common issues to the CIT having jurisdiction over other case(s).

8. Categorization of final decision by CIT

A. The appeal is not to be filed

    i.  As the order is acceptable on merits, or

   ii.  Even though the order is not acceptable, appeal is not being filed only on the consideration that the tax effect is less than the limit prescribed in CBDT’s Instruction on monetary limits.

B. Appeal is to be filed on the ‘grounds of appeal’ framed above

    i.  As the order is not acceptable on merits, or

   ii.  Though tax effect is below the prescribed limit, the case falls under the exceptions (to be specified) of the Instruction of CBDT on monetary limits.

  iii.  Authorisation under section 253(2) of the I.T. Act is issued separately. Appeal to be filed accordingly.

Date:	Name & Signature
Place:	Commissioner of Income-tax

9. Filing of appeal

   i.  After decision of the CIT, the DCIT/ACIT/ITO(J) shall send authorization letter and grounds of appeal along with the scrutiny report to the AO and ensure that appeal to ITAT is filed within time limit.

  ii.  A copy of scrutiny report is to be sent to the DR along with his copy of appeal papers. (NOT TO BE ENCLOSED WITH OTHER SETS TO BE FILED IN ITAT)

        The ITA No. and date of filing should be obtained from AO and recorded.

ITA No. : …………………… dated  ………………. :

Note on perversity:

An order or finding is perverse on facts, if it falls under any of the following categories:

 (a)  The finding is without any evidence. Briefly indicate how it is so.

 (b)  The finding is contrary to the evidence. Briefly state how it is so with particular reference to documents on record.

 (c)  There is no direct nexus between the conclusion of fact and primary fact upon which that conclusion is based? If it is so, briefly state how it is so.

 (d)  When an authority draws a conclusion which cannot be drawn by any reasonable person or authority on the material and facts placed before it. (Sudarshan Silk & Sarees v. CIT 300 ITR 205 SC)

Service Tax Case Law – Update – August, 2011

1. Services:

1.1  CCE, Ranchi vs. Modi Construction Co.2011 (23) STR 6 (Jhar.)

In the present case, the assessee was engaged in handling and shifting of unfinished and finished goods in factory premises of customer. The High Court observed that Cargo handling service means loading, unloading, packing or unpacking of cargo and Cargo according to dictionary means cargo loaded or unloaded on truck, aircraft and ship. It is held that definition of Cargo handling service does not cover handling of goods within factory premises.

1.2  Kaveri Coal Suppliers vs. CCE, Kanpur 2011 (23) STR 35 (Tri.-Del.)

The appellant in this case was engaged in activity of making payment of price of coal for various persons and arranging transportation by paying freight and arranging insurance, R/R etc and received commission from clients to whom finance was provided. The Tribunal after relying on CBEC Order 37B No. 2/1/2002-ST dated 20/04/2002 held that financing of coal is not included as service of C&F Agent.

1.3  CCE, Jaipur vs. K. K. Polymers 2011 (23) STR 129 (Tri.-Del.)

In this case assessee was engaged in procuring purchase orders from prospective buyers for their principals and dispatches the goods to the prospective buyers. They also own the responsibility and guarantee of payment towards sale of such goods. The Tribunal held that activity undertaken by assessee is not covered under the category of Clearing and Forwarding Agency service.

1.4  CST, Bangalore vs. Indian Institute of Management 2011 (23) STR 132 (Tri.-Bang.)

The Tribunal in this case held that assessee an educational institution solely engaged in imparting education and at time facilitates recruitment on their campus through interviews which is incidental or ancillary to their main objective cannot be called as commercial concern, as they are not engaged in trade or commerce. It is further held that prior 01/05/2006 Manpower Recruitment or Supply Agency service rendered by the assessee which is not a commercial concern would not fall under the service tax net.

1.5  ITW India Limited vs. CCE, Vapi 2011 (23) STR 159 (Tri.-Ahmd.)

The Tribunal in this case held that service tax in case of financial leasing services is leviable only on lease management fee/processing fees and documentation charges and not on principal amount. Since the service tax is confirmed on entire principal amount, the impugned order set aside and matter remanded to original authority for re-quantification of demand.

1.6  Orient Packaging Ltd. vs. CCE, Meerut-I 2011 (23) STR 167 (Tri.-Del)

The Tribunal in this case held that process of cutting paper into sheets is not manufacture but production of goods. Processing of goods is integral part of production and intention of legislation while inserting word “production” in the definition of Business Auxiliary service was to levy tax on activity of production/processing. Further, penalty is waived as the issue involved is interpretation of statute.

2. Interest/Penalties/Others:

2.1 CST, New Delhi vs. Independent News Services P. Ltd. 2011 (23) STR 23 (Tri.-Del.)

In this case, the assessee collected service tax but not remitted to the Government. However, on being pointed out deposited entire service tax with interest before issue of SCN. The Revenue challenged dropping of SCN for penalty under section 76 and 77 of FA, 1994 and contended that penalty equal to 25% of tax not paid hence assessee is not entitled to any immunity from payment of penalty. The Tribunal held that Section 73(3) does not envisage payment of penalty once tax paid in full with interest. It is further held that after making provision in law, the Revenue should respect the provision made rather than feel aggrieved that the provision is too lenient.

2.2 CCE, Raipur vs. Shyam Enterprises 2011 (23) STR 29 (Tri.-Del.)

In this case department issued SCN on the basis that assessee rendered Manpower Recruitment and Supply service. Assessee contended that they have rendered erection and commissioning of tower parts done through engagement of employees/workers of company and not covered under Manpower Recruitment and Supply service. The Tribunal held that SCN is not providing foundation for levy in respect of activity carried out and therefore revenues appeal is to be dismissed.

3. CENVAT Credit:

3.1 Utopia India Pvt. Ltd. vs. CST, Bangalore 2011 (23) STR 25 (Tri.-Bang.)

The Tribunal in this case allowed cenvat credit on the following input services;

• Chartered Accountants services for accounting and auditing of transactions.
• Manpower recruitment and supply service availed for supply of qualified personnel to provide output service.
• Outdoor catering service for staff to the extent incurred by the appellant.
• Insurance for assets such as computers, equipments, building etc.
• Security staff employed to guard premises from where output service provided.
• Technical inspection service to assess its credential to qualify for grading ISO 9001 2000.

3.2 CCE, Chennai vs. Areva T &D India Ltd. 2011 (23) STR 33 (Tri.-Chennai)

The assessee in this case a manufacturer and also provided taxable services. The Tribunal held that no separate account is required to be maintained for credit of duty taken on inputs and input service as cenvat credit is common kitty. Credit taken on excise duty could be used for payment of service tax on services provided by assessee.

3.3 CCE, Coimbatore vs. Sri Varahiamman Steels (P) Ltd. 2011 (23) STR 91 (Tri.-Chennai)

In this case, there was change in the name of assessee without change in its constitution. The department rejected credit on the ground that the order allowing credit was in previous name. The Tribunal held that credit allowed under its previous name can be transferred to assessee in its new name.

3.4 CCE & ST. LTU, Bangalore vs. ABB Limited. 2011 (23) STR 97 (Kar.)

The High Court in this case held that till 01/04/2008, transportation charges incurred by manufacturer for clearance of final product from place of removal included in main part of the definition of Input service. Further, it is held that finding of Tribunal to the effect that transportation charges are also covered under “activities relating to business” is entirely unnecessary and unsustainable.