Income Tax Notice

A notice from the Income Tax Department is every taxpayer's worst nightmare come true. However it need not be so. You should not panic if you get a tax notice. A majority of the notices is sent in the normal course of processing returns.
To start with, check whether the notice is really meant for you. The tax department issues notices according to PAN, not the name of the taxpayer. Also confirm its validity.
A notice under Section 143(3) for scrutiny assessment has to be served within six months of the end of the financial year in which the return was filed. If served later than this period, it will be considered invalid. If the notice comes by snail mail, preserve the envelope. It is proof of the dates on which it was posted and received.
However, the deadline can be longer in case of notices served under Section 148. Under this, the assessing officer can reopen a case up to six years from the end of the relevant assessment year if he has reasons to suspect income evasion. If the amount in question is less than 1 lakh, only returns that are up to four years old can be reopened.
Should you seek help from an expert when you get a notice? Even if the notice is simply about a factual matter, such as an arithmetical error, TDS mismatch or deduction amount or even if when it is a serious issue, such as a notice for scrutiny or reassessment under
Section 148, one should get a professional to respond.
Engaging a specialist would push up the compliance cost, but it would ensure that the matter is skillfully handled. A chartered accountant will be better equipped to deal with the situation and provide apt response.
A scrutiny notice may ask for several documents, including bank statements, pay-slips, rent receipts and brokerage statements. While it may not be possible to put all this together in the short time. it is important to convey your intent to the tax department.
Make sure you respond within the deadline. Send whatever documents you can get and request for more time. This will establish that your intention is to comply with the notice.

Defects in panchnamas don’t affect validity of search, yet remedial steps are needed to avoid this practice: High Court

MDLR Resorts (P.) Ltd. v. Commissioner of Income-tax (2013) 40 taxmann.com 365 (Delhi)

Facts:

The present writ petitions were filed by petitioners contending that no panchnamas were drawn against them, their names were subsequently interpolated and mentioned in warrants of search and, thus, proceedings initiated under section 153A were void and bad for want of jurisdiction.

The High Court dismissed these petitions by holding as under:

• The expression ‘panchnama’ has not been defined in the Act. As per the manual prepared by the Revenue relating to search and seizure operations, at the end of search or when it is temporarily concluded, a panchnama is required to be prepared or drawn. It is evidently clear that this document has considerable evidentiary value and should be prepared with care and caution; 
• The panchnama should be exhaustive, should record all events in the same sequence in which they have occurred and should specify details like name of person against whom warrant was issued, time of temporary conclusion of search, etc. Panchnama should be prepared even in cases where nothing is found or seized in the search; 
• There was certainly lapse and failure to comply with the requirements of search and seizure manual, as the panchnama did not contain names of petitioners and did not record any suspension of search; 
• Even the obstruction and presence of third persons were not mentioned in the panchnamas. But this would not affect the validity of the search. However, the respondents had to take remedial steps and ensure that such lapses did not occur in future, otherwise similar allegations would be repeated, entailing litigation; 
• This would curtail any allegation of interpolation, addition of names, etc. However, in the facts of the present case, we do not think that the lapse or failure in the panchnamas would affect the validity of the search or would nullify notice under section 153A of the Act. Thus, the instant writ petition was to be dismissed as contention of the petitioners had no merits and the same was to be rejected.

Where interest earned by assessee on KFW grants received from Germany was not shown in profit and loss account following AS-1 but disclosed in audit report, penalty under section 271(1)(c) would not be justified

Commissioner of Income-tax - IV v. Housing and Urban Development Corporation Ltd* [2014] 41 taxmann.com 30 (Delhi)

Section 271(1)(c), read with section 28(i), of the Income-tax Act, 1961 - Penalty - For concealment of income [Dis-allowance of claim, effect of] - Assessment year 1997-98 - Assessee earned interest on KFW grants received from Germany - Contention of assessee was that interest should not be included and shown in profit and loss account as this was contrary to Accounting Standard No. 1 issued by ICAI - In paragraph 3 of Schedule 'U', commercial audit report, specific statement to said effect was made - Tribunal had gone into explanation given by assessee and found nature and type of accounting change in accord with and as per Accounting Standard 1 - Further it was found that full and true disclosure of facts were made by assessee - Whether since assessee proceeded in bonafidely manner, deletion of penalty would be justified - Held, yes [Para 3] [In favour of assessee]

 JUDGEMENT

• At the outset, we record that Annexure-2 to the appeal does not relate to the penalty proceedings but is an order passed by the Commissioner of Income Tax (Appeals) relating to the assessment proceedings. However, having gone through the facts recorded by the tribunal, we do not find any ground or reason to interfere with the impugned order deleting penalty for concealment under Section 271(1)(c) of Income Tax Act, 1961 (Act) in respect of assessment year 1997-98. Learned counsel for the appellant does dispute full and true disclosure by the respondent in view of the specific statement made in the 'Notes on Accounts' on change in method of accounting and why and for what reason Rs.8.67 crores was not included in the taxable income. The respondent- assessee had earned interest on KFW grants received from Germany. The contention of the assessee was that this interest should not be included and shown in the profit and loss account as this was contrary to Accounting Standard No.1 issued by the Institute of Chartered Accountants of India. The tribunal has specifically referred to and reproduced the commercial audit report and paragraph 3 of Schedule 'U' in which the specific statement to the said effect was made. 
• Learned counsel for the Revenue however submits that in the last year i.e., the assessment year 1996-97 the assessee on their own had added back Rs.29.62 crores and included the same for the purpose of computation of income-tax. This was on the basis of legal advice given by the auditor. 
• The tribunal in the impugned order has gone into the explanation given by the assessee and also the nature and type of accounting change in accord and as per Accounting Standard No.1. To this extent, there is no dispute and the Revenue cannot and does challenge the findings recorded by the tribunal. As far as the assessee himself adding back Rs.29.62 crores in the last year is concerned, it was on the basis of legal or professional advice but this did not bar or prohibit the assessee to make a claim in the next years. Full and true disclosure of facts was made by the assessee and it was not the case of the Revenue that the explanation offered and the stand of the assessee was not legally plausible. The assessee, therefore, as recorded by the tribunal, had proceeded bonafidely. Last year the assessee may have taken a conservative view but in the current year upon reconsideration they had made the claim, after full details were mentioned and stated. On legal issues there can be difference of opinion. A claim which requires consideration on merits but facts and figures are correct and transparently stated, does not justify imposition of penalty. Such cases are covered by Explanation 1. The tribunal?s finding that the explanation was bona fide cannot and should not be interfered with. The said finding is a finding of fact. 
• The appeal has no merit and is accordingly dismissed.

Procedure for Incorporation of Limited Liability Partnership (LLP)

1	The minimum number of partners to incorporate a LLP is two, they may be individuals or body corporate who may be acting through their representatives
2	There is no upper limit on the maximum number of partners of LLP. Out of the partners two shall be designated partners one whom shall be resident in India.
3	All the designated partners shall obtain Designated Partner Identification Number (DPIN), DPIN is an eight digit numeric number allotted by the Central Government in order to identify a particular partner.
4	The application for allotment of DPIN shall be made online in (E-Form 7)
5	As all the documents in relation to LLP whether they may relate to incorporation, filing etc are filed online and are required to be digitally signed atleast one Designated Partner to obtain the digital signature certificates from government recognized DSA’s
6	The name with which LLP is to be incorporated is to be decided.
7	The registrar will approve the name applied for provided the name is not either undesirable in the opinion of the Central Government or that is identical with or that which too nearly resembles to the name of any existing partnership firm or a LLP or a body corporate or a trade mark registered or pending registration under the Trade Marks Act, 1999.
8	Application shall be made in (E-Form 1) for the availability of the proposed name with the Registrar
9	Applicable fees has to be paid by of credit card.
10	The name approved shall be available for adoption for a period of 3 months.
11	Thereafter Limited Liability Partnership Agreement governing the mutual rights and duties among the partners and among the LLP and its partners is to be prepared which contains : Name of the LLP Name of Partners & Designated Partners Manner of contribution Profit/Loss Sharing ratio between partners Rights & Duties and obligations of Partners Proposed Business of LLP Rules for governing the conduct of operations of LLP In case no agreement is entered into, the rights & duties as prescribed under Schedule I to the LLP Act shall be applicable.
12	LLP agreement contains a subscription sheet which must be subscribed by the partners who shall sign the same along with their name. The subscription sheet must be witnessed by any chartered Accountant/Company Secretary/Advocate in practice.
13	Incorporation documents must be filed with the Registrar in (E-Form 2) with the following attachments. Copy of authorization where the partner is a limited liability partnership, or company, or a limited liability partnership incorporated outside India or a company incorporated outside India.  Proof of address of registered office of limited liability partnership.  Details in respect of names of partners/witnesses and their signatures.  Attachments in respect of details of individuals/bodies corporate where the number exceeds five.  Optional attachments as may be required.
14	E-Forms contains details such as name of designated partners, SRN no. of E-Form 1, name of LLP, address of LLP, particulars of the state in which LLP is being incorporated.
15	After the Registrar is satisfied that all the formalities with respect to the incorporation has been complied , he will issue a Certificate of Incorporation as to formation of the LLP within maximum of 14 days from date of filing of documents . The Certificate of Incorporation issued shall be the conclusive evidence of formation of the LLP.
16	On incorporation Every LLP so registered shall be assigned a LLP identification number (LLPIN) in one consecutive series
17	LLP agreement must be filed in (E-Form 3) with the Registrar. This form must be filed within 30 days of incorporation.
18	The LLP Agreement must be stamped in accordance with the stamp Act applicable in the relevant state where LLP is being incorporated.
19	The consent of the partner to act as partner of LLP must be filed in (E-Form no. 4) along with the following attachments : Address proof. Identity proof.This form must be filed within 30 days of incorporation
20	All the E-Forms will be digitally signed by any Designated partner and shall be certified by an advocate/company secretary/chartered accountant/cost accountant in practice engaged in the formation of LLP.
NOTE  In the office of Registrar there shall be maintained a Register of LLPs in which the names of LLPs shall be entered in the order in which they are registered. In case of foreign nationals residing outside India in countries signatory to the Hague Apostile Convention, 1961 and seeking to register a LLP in India, their signatures and address on the incorporation documents and proof of identity, where required, shall be notarized before the notary of the country of their origin and be duly apostillised in accordance with the said Hague Convention.

Order of amalgamation doesn't transfer tenancy rights from transferor-company to transferee-company

AMBALAL SARABHAI ENTERPRISES LTD. V. RAJEEV DAGA (2013) 40 taxmann.com 99 (Calcutta)

The High Court held as under:

1) Where order of amalgamation wasn't served on landlord by the transferee-company and landlord continued to issue rent receipts in the name of (dissolved) transferor-company, though he accepted rent from transferee-company, yet no right of tenancy was created or transferred in favour of transferee-company;

2) Tenancy is a non-transferable object that can extend to others either by an explicit contract or by statute;

3) In the instant case, there was neither any statute to support transfer of tenancy on amalgamation nor any agreement executed between tenant (transferor-company) and landlord to deal with such an eventuality.

Assessee got depreciation on a mall even if when part of it wasn't commercially exploited

E-CITY ENTERTAINMENT (INDIA) (P.) LTD. V. ACIT (2013) 39 taxmann.com 120 (Mumbai - Trib.)

Depreciation cannot be disallowed on ground that some areas in mall remained unutilized

• The Assessing Officer (‘AO’) disallowed the depreciation claim on commercial complex, by holding that its certain areas couldn’t be used by assessee for business purposes;
• The AO disallowed proportionate depreciation which related to unused portion of the commercial complex;
• On appeal before the CIT (A), the assessee contended that the entire commercial space was put to use but only a part of it was leased out and it would not mean that the unutilised area was used for non-business purposes or personal purposes;
• It further contends that it was owner of the entire building so the depreciation couldn’t be disallowed. The CIT (A) allowed the claim of the assessee. Aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

• After the amendment made by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, w.e.f. April 1, 1988, the individual assets had lost their identity and for the purpose of allowing of depreciation, only the block of assets had to be considered;
• It had to be seen whether the particular block of assets was owned by the assessee and used for the purpose of business;
• If block of assets was owned by the assessee and used for the purpose of business, depreciation had to be allowed. The test of user had to be applied upon the block as a whole instead of upon an individual asset;
• The observation of the AO, that the depreciation on complex would be allowed to the extent of the area which was used for business purpose, was devoid of any merit;
• Once it was proved that block of asset was used for the purposes of assessee’s business and there was no finding as to whether the block of assets was used for other business purposes, proportionate disallowances of depreciation was not warranted. Thus, the addition made by AO was to be deleted.

No depreciations to owner on assets given on lease if loan transaction was disguised as sale and lease back transaction

HATHWAY INVESTMENTS (P.) LTD. V. ACIT (2013) 38 taxmann.com 389 (Mumbai - Trib.)

Assessee was not entitled to claim depreciation on asset which was purchased from Gujarat State Electricity Board and same was immediately leased back to it, since the transaction was a sham transaction

Facts:

• The assessee had purchased energy meters of different makes for a consideration of Rs. 4.99 crores from Gujarat State Electricity Board (GEB) and these meters (assets) were then immediately leased back to GEB vide a lease agreement; 
• It accordingly claimed depreciation on the said meters under proviso to section 32(1). The Assessing Officer (‘AO’) disallowed the depreciation claim of assessee by holding that the alleged lease transaction was in reality a transaction of finance. On appeal, the CIT (A) upheld the order of AO.

The Tribunal held in favour of revenue as under:

• The assessee’s contention that transaction was with a State Government and it would be highly improper to impute any collusiveness or colourable nature of the transaction without any concrete evidence was misconceived; 
• The facts on the file itself spoke that the transaction in question was a colourable device with the twin purposes of financing the GEB and at the same time making such an arrangement to enable the financer to claim depreciation on the assets and in lieu thereof to pay reduced rate of interest to the financer in proportion to the value of benefit availed by the financer, for which it otherwise was not entitled to; 
• A perusal of section 23 of the Indian Contract Act, 1872 reveals beyond doubt that even if the consideration or object of an agreement may not be expressly forbidden by law, but if it is of such a nature that, if permitted, it would defeat the provisions of law, the same will not be lawful; 
• It is always the goods or the assets itself which are the primary subject of a valid transfer, not the incidental benefits, which automatically pass on to the transferee with the transferred asset; 
• In the case in hand, only the incidental tax benefits were intended to be transferred without any intention to transfer the asset itself. Thus, whole of the effort had been made to transfer the right to claim depreciation on the assets to the assessee for the purpose of the Income-tax Act, but not the assets itself. Therefore, the Assessing Officer had rightly disallowed depreciation on electric meters.