M/s Nandi Hills Hotels & Resorts Ltd., Bangalore V. Asst.C.I.T., Bangalore

ITSSA 2/BANG/2016

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 8071 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax (Search & Seizure) Appeal
• Pronouncement Date: 21-11-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: misc
• Appeal Filed On: 17-04-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Double taxation relief; Opportunity of being heard; Block assessment; TDS; Set aside
• Section: 132; 195; 158BC; 113; 13; 158BD

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B. R. BASKARAN, ACCOUNTANT MEMBER IT(SS)A Nos.2 and 3/Bang/2016 Block Periods : AY 1991-92 to 2001-02 FY 1990-91 to 2000-01, M/s. Nandi Hills Hotels and Resorts Ltd., #14, Dispensary Road, Kalasipalayam, Bengaluru – 560 001. PAN : AAACN 5900 H Vs. ACIT, Circle – 12(1), Bengaluru. APPELLANT RESPONDENT Appellant by:Shri.G. Bhaskar, Advocate Respondent by :Shri. Sumer Singh Meena, CIT(DR)(OSD)(ITAT), Bengaluru Date of hearing:17.11.2021 Date of Pronouncement:22.11.2021 O R D E R Per N.V. Vasudevan, Vice President These are appeals by M/s.Nandi Hills Hotels & Resorts Ltd., (hereinafter referred to as NHH & RL or Nandi Hills or Appellant) against two orders both dated 19.01.2016 of CIT(A)-5, relating to Block Periods 1991-92 to 2001-02 and 1990-91 to 2000-01, respectively. 2. NHH & RL is a company. It wanted to promote star category hotel and resort together with 27 hole golf course near Devanahalli Village, Bangalore. It entered into an arrangement with M/s East India Hotels Ltd. seeking their advice and consultancy. M/s.East India Hotels Ltd. in turn for the purpose of establishing 27 hole Golf Course as a part of the resort and on IT(SS)A Nos.2 and 3/Bang/2016 Page 2 of 14 their recommendations, NHH & RL engaged the services of seven non- residents who had expertise and experience in laying of golf links and the issues connected therewith. NHH & RL entered into separate arrangement, with the 7 persons to carry out the assigned functions in the course of establishing and laying a golf course in the newly proposed resort at Devanahalli. 3. The amount payable to the 7 non-residents, were as follows: Sl. No. Name of the Foreign Concern M/s. Amount 1 Golfplan-Ronald Fream Design Group Ltd US$309126 2 Douglas Barker Architects US$358446 3 Mackenzie*Mackey –PartnersUS$136850 4Babey Moultn.Inc. US$202000 5 Architectural Lightirjg US$30000 6 Davis Langdon and Seah Singapore (P) Ltd. U5$46000 7 Haarwath Asia Specific Singaport Pte Ltd.Singapore $6500 4. NHH & RL approached its AO to issue a No Objection Certificate (NOC) u/s.195 of the Income Tax Act, 1961 (Act) to remit payment to the non-residents and was issued NOC by the AO as per the details given below: Sl.No.Date Name of the Non-resident Payee Amount 1 17.2.1995 Payment to Ronald Fream Design Group Ltd. US$18,376.49 2. 22.9.1995 -do- US$60,000.00 3. 4.11.1996 -do- US$18,000.00 4. 12.12.1995-do- US$30,000.00 5. 28.6.1996 -do- US$71,000.00 6. -do- Mackenzie & Mackey US$26,000.00 7. -do- Babey Moulton Inc. US$40,000.00 8. 17.2.1995 Douglas Barker Architects US$89,946.50 IT(SS)A Nos.2 and 3/Bang/2016 Page 3 of 14 9. 21.8.1995 -do- US$33,500.00 10. 22.9.1995 -do- US$75,000.00 11. 25.1.1996 -do- US$60,000.00 12. 6.5.1996 -do- US$50,000.00 13. 28.3.1996 Mackenzie & Mackay & Partners US$26,000.00 14. 28.6.1996 -do- US$26,000.00 15. 25.7.1996 -do- US$20,000.00 16. 23.9.1996 -do- US$20,000.00 17. 13.2.1997 -do- US$18,000.00 18. 28.6.1996 Babey Moulton Inc. US$40,000.00 19. 8.7.1996 -do- US$72,000.00 20. 5.8.1997 -do- US$35,000.00 21. 12.12.1996M/s.Architectural Lighting Design US$15,000.00 22. 23. 5.8.1997 1.9.1997 -do- M/S.David Longdon & Seah US$15,000.00 US$60,000.00 5. The actual payment was made by the Assessee to the non-residents as per the details given below: Assessment Year Amount in Rs. Remarks 1995-96 (year ended 31.3.1995) 34,61,120Paid to Non-residents in Foreign Exchange 1996-97 (year ended 31.3.1996) 2,04,69,169-do- 1997-98(year ended 31.3.1997) 1,32,70,889-do- 1998-99(Year ended 31.3.1998) 24,64,994-do- Total 3,96,66,172 IT(SS)A Nos.2 and 3/Bang/2016 Page 4 of 14 6. The above payments are reflected in the profit and loss account of NHH & RL in the respective financial years. 7. NHH & RL is part of the Jhonson group. There was a search in the case of Jhonson group on 24.1.2001 and NHH & RL was also subjected to search on the very same day. Notice u/s.158BC of the Act was issued to NHH & RL dated 29.6.2001. An order of assessment u/s.158BC read with Sec.143(3) of the Act undated, assessing the income of the NHH & RL at nil for the Block period FYs 1990-91 to 2000-01 was passed. 8. The then Assessing Officer, DCIT, Central Circle 1(1), Bangalore issued a show cause notice dated 14.01.03 to NHH & RL u/s.163 of the Act to show cause as to why NHH& RL should not be treated as an agent of the 7 non-residents to whom payments mentioned above were made and passed an order holding NHH & RL as an agent u/s.163 vide order No.NandiHills/DC/CC-I/2002-03 dt. 18.01.03 as per the provisions of Sec.163 of the I.T.Act. In the order passed on 28.01.2003 u/s.163, the then Assessing Officer held as under: "As per the Double Taxation Agreement with USA and as per Section 9 of the ITAct, 1961, the fees for technical services which are in the nature of Royalty are incomes deemed to have accrued and arisen in India. Hence, I am treating the company as an agent of the Non resident in respect of the above payments," Followed by the aforesaid order, the DCIT, Central Circle 1(1), Bangalore issued a notice u/s.158BD r.w.s.163 of the Act for the block period 1991- 92 to 2001-02 dt. 31.01.03 calling upon NHH & RL to file return of income for the block period as representative Assessee of the 7 non- IT(SS)A Nos.2 and 3/Bang/2016 Page 5 of 14 residents. Section 163 of the Act provides that for the purposes of the Act, "agent", in relation to a non-resident, includes any person in India— (a) who is employed by or on behalf of the non-resident; or (b) who has any business connection with the non-resident; or (c) from or through whom the non-resident is in receipt of any income, whether directly or indirectly; or (d) who is the trustee of the non-resident; Since the 7 non-residents received payment from NHH & RL, the Revenue treated NHH & RL as a representative Assessee. In terms of Sec.161 of the Act, representative Assessee is liable for taxes payable by the non-resident as regards the income in respect of which he is a representative assessee and shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income. Sec.163(2) of the Act provides that no person shall be treated as the agent of a non-resident unless he has had an opportunity of being heard by the Assessing Officer as to his liability to be treated as such. 9. In response to the notice dated 31.3.2003, NHH & RL filed a return of income disclosing Nil income on 16.04.03. 10. NHH & RL however challenged the order u/s.163 dated 18.01.03 passed by the Assessing Officer, by filing Writ Petition before the Hon'ble High Court of Karnataka at Bangalore in W.P.Nos.19567-69 and 20274 -281/2003. In disposing off those Writ Petition vide order dated 26.02.08, the Hon'ble High Court while partly allowing the assessee's Writ Appeal remitted the issue back to the Assessing Officer for reconsideration afresh and to pass an appropriate IT(SS)A Nos.2 and 3/Bang/2016 Page 6 of 14 order u/s.163 in compliance with the mandatory provisions of the Act, after affording reasonable opportunity to the Petitioner. 11. In the proceedings before the AO after the order of the Hon’ble Karnataka High Court, NHH & RL contended that it had obtained 'No objection certificate' from the then Assessing Officer before remitting the payments made to the foreign consultants. Hence, the provisions of Sec.163 cannot be invoked as there was no failure on its part. This contention was rejected by the AO and he held that the NOC was only for permitting remittance to the non-resident and had no effect on ultimate tax liability. He also held that the NOCs which were issued at that time are really not order u/s195(2) / 195 but were simply TCCs for remittances abroad. He also held that prima-facie,NHH & RL was liable to deduct TDS from these remittances since services rendered by the Non Residents clearly falls within the ambit of "included services/technical services" both in terms of Sec.9(1)(vii) of the Act and Article 13 of the US - India DTAA. The AO ultimately held that NHH & RL was an 'Agent' u/s.163 of the Act of the foreign and Non-resident concerns to whom payments mentioned above were made which will be duly taken care while completing the pending assessment u/s.158BD r.w.s.163 of the Act. The order under section 163 of the Act passed by the AO was dated 20.06.2008. 12. The AO, after treating the assessee as an agent of the 7 parties to whom the payments were made by the appellant, proceeded to frame an order of assessment under section 158BD of the Act, dated 30.10.2009. In the block assessment order, the AO treated the payments to the non-resident 7 parties as fees for technical services. IT(SS)A Nos.2 and 3/Bang/2016 Page 7 of 14 13. On appeal by the appellant, the CIT(A) by the impugned orders confirmed both the orders of the AO passed u/s.163 of the Act and the order passed u/s.158BD of the Act. 14. Before the Tribunal, the submission made by the learned Counsel for the appellant was that for initiating proceedings under section 158BD of the Act, there should be evidence found in the course of search of some other person and the AO of the other person has to be satisfied with the documents found in the course of search relates to the assessee and disclosed existence of undisclosed income. He brought to our notice that the proceedings under section 158BD of the Act have been initiated on the basis of the search in the case of Jhonson’s Group. He also brought to our notice that the appellant was also searched and an order of assessment under section 158BC of the Act has been passed assessing the assessee on a undisclosed income of Nil for the period 1990-91 to 2000-01. The search in the case of the appellant and Jhonson’s Group was conducted on 20.01.2001. It was the plea of the learned Counsel for the assessee that for proceeding against the appellant under section 158BD of the Act as representative Assessee no material whatsoever was found which was incriminating in nature to initiate proceedings under section 158BD of the Act. It was submitted by him that without material being found in the course of search, proceedings under section 158BD and additions made therein cannot be sustained. In this regard, he brought to our notice that in respect of payments made to 7 non- residents, the appellant has approached the Department for a no objection certification and was given no objection certificate by the Department in respect of all the 7 non-residents and the no objection certificates are placed at pages 193 to 217 of the assessee’s Paper Book. All these no objection certificates have been obtained prior to the date of search in the case of the IT(SS)A Nos.2 and 3/Bang/2016 Page 8 of 14 appellant and Jhonson’s Group. It was submitted by him that the factum of payment was well within the knowledge of the Department prior to the search and therefore even assumed that the payments to the non-residents can be treated as fees for technical services, it cannot be said that the same constitutes undisclosed income. He submitted that for initiating proceedings under section 158BC of the Act, it was necessary for the AO to record a satisfaction that the material found in the course of search of some other person disclosed undisclosed income in the hands of the person against whom proceedings are initiated under section 158BD of the Act. It was submitted by him that no such satisfaction is emanating from the records of the AO. In this regard, he brought to our notice the following order sheet entries recorded by the AO before issuing notice under section 158BD of the Act dated 31.1.2003: “31.1.2003: I have carefully considered the reply given by the a vide letter dated 21.1.2003 and same is rejected and order u/s.163 was passed. As per the douible taxation Avoidance Agreement with USA and as per Sec.9 of the IT Act, the fee for technical services and consultancy are incomes deemed to have accrued and arisen in India. a should have deducted tax at source before paying the amount to non residents. As the a has not deducted the tax on these amounts and these factors were unearthed because of search proceedings, these incomes should be brought to tax for the block period by initiating proceedings u/s.163 of the IT act, by treating M/s. NHH & RL as an agent of the person to whom the payments made. Issue notice u/s.158BD rw 163.” 15. It was submitted by him that the expression "undisclosed income" is defined in section 158B (b) of the Act as under: "158B(b) "undisclosed income" includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in IT(SS)A Nos.2 and 3/Bang/2016 Page 9 of 14 the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act, or any expense, deduction or allowance claimed under this Act which is found to be false." It was submitted that a block assessment is to be carried out on the basis of the material found during the course of search and not as a result of other documents or material, which come to the possession of the AO subsequent to the conclusion of the search operation unless and until such material has a relationship or connection with certain material or evidence found during the course of search. It was highlighted in CIT v. Ravi Kant Jain [2001] 117 Taxman 28/250 ITR 141/117 Taxman 28 (Delhi) how the procedure of Chapter -XIV-B is intended to provide a mode of assessment of undisclosed income, which has been detected as a result of search. The scope and ambit of a block assessment is limited to materials unearthed during search and the assessment for the block period can only be done on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the AO. The Bombay High Court in the case of CIT v. Vinod Danchand Ghodawat [2001] 114 Taxman 90/247 ITR 448 also held, similarly that where the assessee had made disclosure in their wealth tax return, which was accepted by the Department, additions made by the Department on the ground of undisclosed income was erroneous. 16. It was next submitted that the Hon’ble Supreme Court in the case of Manish Maheshwari vs. ACIT - 289 ITR 341 has clearly laid down the various prerequisite conditions which are needed to be satisfied for validly taking action u/s 158BD. The relevant portion of which is as under: " Section 158BD, however, provides for taking recourse to a block assessment in terms of section 158BC in respect of any other person, the conditions precedent where for are: (i) satisfaction must be IT(SS)A Nos.2 and 3/Bang/2016 Page 10 of 14 recorded by the Assessing Officer that any undisclosed income belongs to any person, other than the person with respect to whom search was made under section 132 of the Act; (ii) the books of account or other documents or assets seized or requisitioned had been handed over to the Assessing Officer having jurisdiction over such other person; and(iii) the Assessing Officer has proceeded under section 158BC against such other person. " 17. Reference was also made to the decision of the Hon’ble Supreme Court wherein it was held that satisfaction in the case of AO of the searched person is a pre-requisite for issue of notice u/s.158BD, in the case of CIT Vs M/s Calcutta Knitwears (2014) 362 ITR 673 (SC). It was submitted that neither from the order sheet entry referred to above or any credible evidence is forth coming as to what satisfaction had been reached at by the AO as no copy of the satisfaction note has been provided and which leads to the presumption that no satisfaction note was recorded and thus the proceedings so initiated become void ab-initio in view of the above quoted decision of the Honble Supreme Court. It was submitted that a specific plea that in the absence of a "satisfaction note" the block assessment is invalid was raised before the CIT(A) as Ground No. 2.5. Though the submissions in this regard have been recorded by the CIT(A) in para 4.1 (Page 12 of CIT(A) order), the ground has not been specifically adjudicated at all by the CIT(A). It was pointed out that the CBDT itself has accepted the requirement of recording satisfaction in circular No. 24/2015 dated 31.12.2015, which is as follows: 4. The guidelines of the Hon'ble Supreme Court as referred to in para 2 above. with regard to recording of satisfaction note, may be brought to the notice of ah for strict compliance. It is further clarified that even if the AO of the searched person and the "other person" is one and the same, then also he is required to record his satisfaction as has been held by the Courts. 5. In view of the above, filing of appeals on the issue of recording of satisfaction note should also be decided in the IT(SS)A Nos.2 and 3/Bang/2016 Page 11 of 14 light of the above judgment. Accordingly, the Board hereby directs that pending litigation with regard to recording of satisfaction note under section 158BD/153C should be withdrawn/not pressed if it does not meet the guidelines laid down by the Apex Court. It was submitted that in the absence of a specific satisfaction note which was neither supplied to the assessee nor to the CIT(A), the entire proceedings is liable to be quashed. 18. The Learned DR relied on the order of the Revenue authorities. 19. We have considered the rival contentions and carefully gone through the orders of authorities below. The Assessing Officer initiated proceedings under section 158BD in respect of the appellant as agent of 7 non-residents and completed the assessment by determining undisclosed income. One of the contention before ld Commissioner of Income tax (Appeals) was that no satisfaction was recorded which is sine qua non for initiation of proceedings u/s.158BD. Ld Commissioner of Income tax (Appeals) has not given any decision on the above issue. The order sheet entry which we have extracted in the earlier part of this order does not spell out any satisfaction to the effect that some undisclosed income is required to be brought to tax in the hands of person other than person searched as a result of material found in the course of search which belong to relate to the person other than the person searched u/s.132 of the Act. This is a essential requirement before initiating proceedings u/s.158BD. Even as per requirement of provisions of section 158B(b) “Undisclosed Income” is to be computed on the basis of unrecorded transactions and assets which come to the light as a result of search action. Such undisclosed income is to be computed on the basis of seized record or consequential fact which comes to the notice of the department subsequently, Hon’ble Supreme Court in the case of Manish Maheswari IT(SS)A Nos.2 and 3/Bang/2016 Page 12 of 14 (supra) have clearly laid down the requirement for initiation of proceedings under section 158BD, one of which is recording of satisfaction note to the effect of pointing out some undisclosed income to be worked out on the basis of material gathered as a result of search action and the same is required to be taxed in the hands of the person other than person searched. Recording of such satisfaction is a foundation for assumption of jurisdiction to proceed against person other than person searched. In the case of Manoj Agrawal Manoj Agarwal, 113 ITD 377 (Del) the five Members Special Bench of the Tribunal has held in para 113 of the report that the satisfaction to initiate block assessment proceedings in the case of other person is to be recorded in writing and has to be objective/judicious satisfaction and has to be recorded by the AO of the person searched during the course of I58BC proceedings. The relevant portion from para 113 is reproduced herein below: "113. Section 158BD commences with the words "where the Assessing Officer is satisfied that any undisclosed income belongs to any person, other than the person with respect to whom search was made 1 and thus it is clear that the satisfaction of the Assessing Officer assessing the person searched is the first and foremost requirement. The Assessing Officer can arrive at this satisfaction only after ascertaining whether there is any undisclosed income at all and this finding can be arrived at by him only in the course of the section 158BC assessment proceedings. Thereafter, he has to arrive at a finding as to the person to whom such income belongs. This finding also can be arrived at only in the course of the section 158BC proceeding in the case of the person searched." 20. The Hon’ble Supreme Court in the case of Manish Maheshwari (supra) has specified laid down conditions precedent for taking action tinder section 158BD of the Act, which we have set out in the earlier part of this order. The Hon’ble Supreme Court in the said decision, ultimately concluded by holding that since the Assessing Officer has not recorded his satisfaction, which is mandatory; nor has he transferred the case to the Assessing Officer having jurisdiction over the matter, we are of the opinion IT(SS)A Nos.2 and 3/Bang/2016 Page 13 of 14 that the impugned judgments of the High Court cannot be sustained, which are set aside accordingly. 21. Applying the proposition of law laid down by Hon’ble Supreme Court in the case of Manish Maheswari (supra) and also decisions of co- ordinate benches (supra) as discussed above to the facts of the instant case, we are of the view that initiation of proceedings under section 158BD was ab-initio null and void. As we have already noticed there was no material found in the course of search regarding payment by the appellant to the non- residents and the facts with regard to payment by the appellant to the non- resident was well within the knowledge of the department and it cannot be said there was anything which remained undisclosed or was discovered only as a result of search. 22. In view of the above conclusion, we have not gone into several other issues raised by the appellant regarding, limitation u/s.158BE of the Act, non issue and service of notice u/s.143(2) of the Act etc. We are not going into those aspects as the assessment u/s.158BD of the Act is annulled as null and void and those issues are left open. We are also therefore not deciding the question whether the Appellant was rightly held to be a representative Assessee of the non-residents in terms of Sec.163 of the Act. The relevant appeal being IT(SS)A.No.2/Bang/2016 is dismissed as infructuous while the appeal being IT(SS) A.No.3/Bang/2016 in which the Appellant has challenged the determination of undisclosed income is allowed. IT(SS)A Nos.2 and 3/Bang/2016 Page 14 of 14 23. In the result, appeal being IT(SS)A.No.2/Bang/2016 is dismissed as infructuous while the appeal being IT(SS) A.No.3/Bang/2016 is allowed. Pronounced in the open court on the date mentioned on the caption page. Sd/- (B. R. BASKARAN) Sd/- (N. V. VASUDEVAN) ACCOUNTANT MEMBER VICE PRESIDENT Bangalore, Dated : 22.11.2021. /NS/* Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.