The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the Income Tax Act does not contemplate estimation of income in anticipation of a business which has not yet been set up. Such an interpretation would render the proviso to section 3 and the exception carved out in section 234C(1) ineffective.
The ITAT reiterated the settled legal principle that interest under section 234C of the Income Tax Act cannot be levied on income which was not in existence or could not have been reasonably foreseen on the relevant due dates. This principle is not confined merely to cases of windfall income such as gifts, but extends to all situations where the income arises subsequently and could not have been anticipated earlier.
In the present case, the ITAT found that it is not merely a case of unexpected income, but a case where the business of Capgemini IT Solutions (appellant) itself had not come into existence prior to October 2019. In the absence of any business activity or source of income, the question of estimating income for the earlier instalments does not arise at all. Accordingly, the levy of interest under section 234C in respect of the instalments falling due prior to Oct 17, 2019 is not sustainable in law.
The Division Bench comprising Kavitha Rajagopal (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) observed that the proviso to section 3 clearly stipulates that in the case of a business newly set up, the previous year shall commence from the date of setting up of such business and end with the financial year. Thus, the statutory scheme itself recognises that prior to the date of setting up of business, there is no previous year qua such business and consequently no income under the head “Profits and gains of business or profession” can be said to have arisen.
The Bench noted that the appellant commenced its operations from the Special Economic Zone only upon receipt of approval from the Office of the Development Commissioner on Oct 17, 2019. Thus, there was no occasion for the appellant to estimate such income or discharge advance tax liability for the instalments due on 15th June and 15th September.
Accordingly, the Bench held that the case of the appellant squarely falls within the exception carved out in clause (c) of the proviso to section 234C(1), inasmuch as the income under the head “Profits and gains of business or profession” has arisen for the first time during the year upon commencement of operations in October 2019. Once the statute itself recognizes that no interest shall be leviable in such circumstances, the levy of interest for the earlier instalments cannot be sustained.
Briefly, the assessee/ appellant company engaged in rendering Information Technology and Information Technology Enabled Services, filed its return declaring NIL income. The case was however selected for scrutiny on the issues of “Introduction/ Addition of high value intangible asset during the year” and “High liabilities as compared to low income/receipts”.
The appellant submitted that it had claimed deduction under section 10AA amounting to Rs. 18.65 lakhs in respect of export of software services from its eligible SEZ units and had filed the return declaring total income at Rs. Nil after such deduction. The Assessing Officer also recorded that “on verification of the details submitted by the assessee, the income as declared by the assessee in the return of income is accepted.”
However, as per the computation sheet forming part of the assessment order, the total income was determined at Rs. 18.65 lakhs under normal provisions, and the tax liability was computed under section 115JB at Rs. 23.42 lakhs. On appeal, the CIT(A) directed the Assessing Officer to verify the claim and grant deduction under section 10AA as claimed in the original return.
Appearances:
AR Vyomesh Pathak, for the Appellant/ Assessee
DRs R.A. Dhyani and V.S. Mahajan, for the Respondent/ Revenue
