Month: February

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the order of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

Before the Division Bench, the assessee relied upon the decision of the Bangalore Bench of the Tribunal in the case of Steelcon Industries (P) Ltd. v. ITO, ITA No. 571 (Bang.) 1989, A.Y. 1985-86, order dated 27-12- 2004) wherein the issue was decided in favour of the assessee by following the decisions of the SC in the cases of CIT v. Cocanada Radhaswami Bank, (55 ITR 17) (SC) and CIT v. Chugandas & Co., (55 ITR 17) (SC). The Division Bench noticed that there is another judgment of the SC in the case of CIT v. Express Newspapers Ltd., (53 ITR 250) wherein the SC held that capital gains are connected with the capital assets of the business and therefore, it cannot make them the profit of the business and cannot be set off against the brought forward business loss. This decision of the SC was not considered by the Tribunal in the case of Steelcon Industries (P) Ltd (supra) and therefore, the Division Bench felt that the decision in the case of Steelcon Industries (P) Ltd. (supra) requires reconsideration by a Special Bench. The President constituted a Special Bench for disposal of the following two grounds of the appeal filed by the assessee —

“(1) That the learned CIT(A) erred in law and on facts that the appellant is not entitled to set off carry forward business loss of Rs.39,99,652 against the long-term capital gain arising on sale of land used for the purpose of business.

(2) That the authorities below ought to have appreciated that there is no cessation of business and the appellant is entitled to set off the carry forward business loss.”

Held:
Section 72 permits carry forward of business loss to subsequent assessment years and allows it to be set off against profits & gains, if any, of any business or profession carried on by the assessee and assessable for the relevant assessment year. The term ‘profits and gains of business or profession’ means income earned out of business carried on by the assessee and not any income which is in some way connected to the business carried on by the assessee.

SB did not agree with the contention of the assessee that the assets sold by the assessee were business assets. It held that these were un-disputedly capital assets and capital receipts are not taxable, nor are the capital payments deductible from the income of the assessee. The capital is to be used for the purpose of carrying on the business of the assessee and it shall remain in the business of the assessee till it is either converted into stock-in-trade or is disposed of. The income earned by the assessee by carrying on the business by use of stock-in-trade only is the business income of the assessee.

SB held that the decision of the SC in Express Newspapers Ltd. (supra) is squarely applicable to the facts of the present case and that the Coordinate Bench of the Tribunal in the case of Steelcon Industries Pvt. Ltd. (supra) has wrongly placed reliance upon the decision of the Apex Court in the cases of United Commercial Bank Ltd. and M/s. Cocanada Radhaswami Bank Ltd. It held that the gains arising on sale of land and building were not eligible for set-off against the brought forward business loss u/s.72.

These grounds of appeal filed by the assessee were decided against the assessee.

Facts:
The assessee-company had provided corporate guarantee to ICICI Bank UK on behalf of its subsidiary. The TPO held that guarantee is an obligation and if the principal debtor falls to honour the obligation, the guarantor is liable for the same and, hence, the TPO determined a commission @ 3.75% as the ALP under the CUP method on the basis of the commission charged by the ICICI Bank as benchmark.

Held:
The Tribunal held that no TP adjustment is required in respect of corporate guarantee transaction done by the assessee-company. The Tribunal noted as under:

(1) The TP legislation provides for computation of income from international transaction as per section 92B.

(2) The corporate guarantee provided by the assessee-company does not fall within the definition of international transaction.

(3) The TP legislation does not stipulate any guidelines in respect of guarantee transactions.

(4) In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. The corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the bank or financial institution.

Facts:
The assessee was given refund while processing the return u/s.143(1) and further refund was given after assessment u/s.143(3). In reassessment proceedings u/s.147, the refund amount got reduced and, therefore, the excess refund given earlier became collectible from the assessee. The Assessing Officer levied interest u/s.234D on such excess refund amount. The learned CIT(A) held that the interest u/s.234D is not chargeable in the hands of the company in reassessment proceedings.

Held:
The Tribunal upheld the CIT(A)’s order. The Tribunal noted as under:

(1) On a plain reading of section 234D, it is noticed that the interest u/s.234D is leviable only if the refund granted to the assessee u/s.143(1) of the Act becomes collectible in the order passed under regular assessment.

(2) As per section 2(40) read with Explanation to section 234D, ‘regular assessment’ is defined to mean assessment order passed u/s.143(3) or u/s.144 or where the assessment has been made for the first time u/s.147 or u/s.153A. Thus, reassessment proceedings u/s.147 after completion of the assessment u/s.143(3) is excluded from the purview of ‘regular assessment’.

(3) Such exhaustive definition of ‘regular assessment’ when considered in the light of the fact that in the appellant-company’s case the assessment u/s.147 has been made not for the first time, but after the completion of an assessment u/s.143(3), the same cannot be termed as regular assessment and, consequently, the provisions of section 234D cannot apply in the appellantcompany’s case.

(b) Section 92C of the Income-tax Act, 1961 read with Rules 10B(1)(a), 10B(1)(c) and 10B(1)(e) of the Income-tax Rules, 1962 — Transfer pricing — Most appropriate method for computing arm’s-length price — Rates charged to the third parties in the domestic market cannot be compared with the rates charged to AE in the export market — There are various factors which affect the pricing of the product in the domestic market vis-à-vis the export market — Hence the CPM method is not appropriate method for determining the ALP — CUP or TNMM was the most appropriate method for determining ALP.

Facts:
(a) Depreciation u/s.32(1)(iii)

The assessee acquired the unit of G on slump-sales basis consisting of all its assets which included intellectual property rights such as designs, drawings, manufacturing processes and technical know-how for a consideration of Rs.17.01 crore. The registered valuer valued the knowhow acquired at Rs.2.41 crore and royalty payable for use of brand name, trademark, logo, etc. at Rs.2.67 crore. The Assessing Officer disallowed depreciation on the same on the basis that as per agreement, the assessee has not purchased any know-how from G and the assessee is entitled to use trademark, logo and brand name of G free of cost for a period of three years.

Held:
The Tribunal, relying on the decisions in the following cases, allowed the assessee’s claim:

(a) Amway India Enterprises v. Dy. CIT, (2008) 114 TTJ 476 (Del.) (SB)/(2008) 4 DTR (Del.) (SB) (Trib.) 1/(2008) 111 ITD 112 (Del.) (SB)

(b) Hindustan Coca Cola Beverages (P.) Ltd. v. Dy. CIT, (2010) 43 DTR (Del.) 416

The Tribunal noted as under:

(1) It is an undisputed fact that the assessee has paid the agreed consideration of Rs. 17.01 crore as a lump-sum amount to purchase the unit in its entirety i.e., the unit consisting of items like trademark, logo and brand name, designs, drawings, manufacturing processes and technical know-how.

(2) Simply because, in the agreement to purchase, it is mentioned that the use of all items like trademark, logo and brand name is allowed to the assessee for three years by G free of cost, it does not mean that there is no value for these items. The agreement between the seller and the purchaser does not put restriction on the right of the purchaser to record the asset at its fair value in its books.

(3) The apportionment of the lump-sum amount amongst the various assets and rights has to be made and which has been done in the present case as per the valuer’s report. The approved valuer has valued the know-how acquired at Rs.2.41 crore and royalty payable for use of brand name, trademark and logo at Rs.2.67 crore.

(4) The Special Bench of the Tribunal in the case of Amway India (supra) has held that if the software is useable/used for more than two years, it is a capital expenditure and if it is for less than two years, it is revenue expenditure. Thus, following the ratio laid down therein, since the assessee had purchased the use of brand name, trademark, logo for three years and similarly, the intellectual property right such as design, drawings, manufacturing processes and technical know-how in respect of the products manufactured by the unit was acquired, the expenditure incurred in this regard as valued by the approved valuer is capital expenditure on which the claim of depreciation was allowable.

Facts:
(b) Computation of ALP

During the year, the assessee-company sold goods to its associate enterprises (AEs). Initially, while filing the return of income, the assessee had adopted the comparable uncontrolled price method (CUP) for determining the arm’s-length price (ALP) in respect of exports transactions undertaken with the AE. Thereafter, in the proceedings before the learned TPO, the assessee contended that even as per transactional net margin method (TNMM), the transactions of export of goods are at ALP. The revised Form No. 3CEB was filed and details of the company selected as comparable were furnished. The learned TPO did not agree with the submissions of the assessee and held that the CUP method and TNMM are not applicable for determining the ALP. The learned TPO has considered the gross margin earned by the assessee in the export segment visà- vis gross margin earned in the domestic segment. Accordingly, he has held that the gross margin in the domestic segment is much higher than the margin earned in the export segment and, hence, he made an addition of Rs.58.54 lakh.

Held:
The Tribunal held that the TPO was not justified in adopting CPM and in comparing the gross margin in export segment vis-à-vis gross margin in domestic segment of the assessee without appreciating that the CUP or TNMM was the most proper method for determining the ALP. The TPO was directed to accept the claim of the assessee regarding the ALP based on TNMM which method has been accepted in the succeeding year.

The Tribunal noted as under:

(1) Rates charged to the third parties in the domestic market cannot be compared with the rates charged to AE in the export market. There are various factors which affect the pricing of the product in the domestic market vis-à-vis the export market and, therefore, the price cannot be compared. The assessee has to bear substantial marketing cost in the domestic segment, there is no bad debt risk in respect of the sales made to the AE and no product liability risk. Besides, it is also a material aspect that the assessee has to bear product liability risks like retention money, bank guarantee, warranty, etc. in the domestic segment, but such risks are not to be borne in the export segment. Due to these factors, the assessee has to charge higher rates in the domestic segment and, therefore, comparison of the rates of the products in the domestic segment and the export segment is not justified.

(2) For the A.Y. 2007-08, the assessee has adopted TNMM for determining the ALP and the TPO has accepted the same. There is substance in the alternative submissions of the authorised representative that TNMM can also be accepted during the year for determining the ALP.

Facts:

The assessee had filed original return of income u/s.139(1) declaring total income of Rs.94.09 lakhs. Subsequently, the assessee filed a revised return claiming long-term capital loss of Rs.1.82 crore and the said loss was claimed to be carried forward u/s.74. The AO denied carry forward of such loss on the ground that as per section 80, loss not determined in return u/s.139(3) cannot be allowed to be carried forward and set off u/s.74. The learned CIT also confirmed the order of the AO observing that carry forward of loss returned for the first time in revised return of income is not eligible for carry forward to the next assessment year as per provisions of section 80.

Held:

In the present case, the assessee filed the original return u/s.139(1) in which the positive income is determined and subsequently even revised return filed declared positive income as the assessee could not set off the long-term capital loss on the sale of shares. He claimed the same to be carried forward.

As per the provisions of section 139(5) in both the situations where the assessee has filed the return of positive income as well as return of loss at the first instance as per the time-limit prescribed and subsequently, files the revised return then the revised return is treated as valid return. Hence once the assessee declares positive income in original return filed u/s.139(1), but subsequently finds some mistake or wrong statement and files revised return declaring loss, then he cannot be deprived of the benefit of carry forward of such loss.

Facts:
In the original assessment u/s.143(3), the AO disallowed interest of Rs.58.86 lakh. The assessee-company did not agitate the disallowance of interest before the Appellate Authority. While filing return in response to notice u/s.153A, the assessee voluntarily disallowed the interest disallowance made in the original assessment, subject to reservation of right for contesting the allowability of entire interest during the course of assessment proceedings. When the matter came before the CIT(A), the assessee put forth details to support the deduction of interest. The learned CIT(A) forwarded the same to the AO and as per the remand report, the learned CIT(A) directed the AO to disallow interest of Rs.10.81 lakhs and ordered deletion of the remaining disallowance.

The viewpoint of the Department was that the assessee was not entitled to seek relief on any matters which had attained finality in the original assessment, as section 153A does not permit assessment at income lower than the one finally assessed in the original assessment.

Held:
U/s.153A the AO is required to make assessment afresh and compute ‘total income’ in respect of each of relevant six assessment years. As there is no specific restriction on jurisdiction of the AO in not including any new income to such fresh total income pursuant to search which was not added during the original assessment, in the like manner, there is no restriction on the assessee to claim any deduction which was not allowed in the original assessment. As it is a fresh exercise of framing assessment or reassessment, the assessee can argue about merits of the case qua addition made in the original assessment.

The judgment of the Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd., (198 ITR 297) was distinguished since in that case the Apex Court was considering provisions of section 147. Conditions for taking action u/s.147 vis-à-vis u/s.153A are different.

Also provisions of search assessment u/s.153A, etc. have been inserted by the Finance Act 2003 w.e.f. 1st June 2003. These provisions are successor of special procedure for assessment of search cases under Chapter XIV-B starting with section 158B. Whereas Chapter XIV-B required assessment of ‘undisclosed income’ as a result of search, which has been defined in section 158(b), section 153A dealing with assessment in case of search w.e.f. 1st June 2003 requires the AO to determine ‘total income’ and not ‘undisclosed income’.

Regarding the view that the income in assessment u/s.153A should not be reduced than original assessment, it needs to be noted that total income is not reduced simply on basis of making claim. The AO is fully empowered to consider the question of deductibility. Hence, assessment u/s.153A needs to be done afresh without any reference to the original assessment.

Facts:
Assessee-company, a Foreign Institutional Investor, was engaged in business of share trading.

The assessee received shares in ratio of 1 : 16 shares held by it in a company. This resulted in long term capital loss. AO disallowed the assessee’s claim of long term capital loss, on swap transaction. When the matter was referred to DRP, it was held that no sound reason was furnished by the assessee to explain as to why it entered in an exchange transaction that resulted in huge loss, that no prudent businessman would enter in to such a transaction, that swap ratio of shares transacted was not done by the competent authority i.e. a merchant banker.

Held:
Swapping of shares was approved by an agency of Govt. of India i.e. FIPB and it had approved the ratio of shares to be swapped. In these circumstances to challenge the prudence of the transaction was not proper. Even if the transaction was not approved by the Sovereign and it was carried out by the assessee in normal course of its business, the Ld AO/DRP could not question the prudence of the transaction. Genuiuness of a transaction can be definitely a subject of scrutiny by revenue authorities, but to decide the prudence of a transaction is prerogative of the assessee. A decision as to whether to do / not to do business or to carry out/not to carry out a certain transaction is to be taken by a businessman. If it is proved that a transaction had taken place, then resultant profit or loss has to be assessed as per the tax statutes. Therefore by casting doubt about the prudence of the transaction, members of the DRP had stepped in to an exclusive discretionary zone of a businessman and it is not permissible.

ii. Set off of short term capital loss subject to STT allowed against short term capital gain not subjected to STT

Facts:
Assessee has claimed set off of short-term capital loss subjected to Securities Transaction Tax(STT) against the short-term capital gains that was not subjected to STT. The AO held that as both the transactions were subject to different rates of tax, the set off of loss is not correct. He held that in order to set off the short term capital loss, there should be short term capital loss and short term capital gain on computation made u/s. 48 to 55. The assessee was entitled to have the amount of such short term capital loss set off against the short term capital gain, if any, as arrived under a similar computation made for the assessment year under consideration.

Held:
The phrase “under similar computation made” refers to computation of income, the provisions for which are contained u/ss. 45 to 55A of the Act. The matter of computation of income was a subject which came anterior to the application of rate of tax which are contained in section 110 to 115BBC. Therefore, merely because the two sets of transactions are liable for different rate of tax, it cannot be said that income from these transactions does not arise from similar computation made as computation in both the cases has to be made in similar manner under the same provisions. The Tribunal therefore, held that short term capital loss arising from STT paid transactions can be set off against short term capital gain arising from non SIT transactions.

Note: Readers may also read following decisions of Mumbai Tribunal:

• DWS India Equity Fund [IT Appeal No. 5055 (Mum.) of 2010]

• First State Investments (Hong Kong) Ltd. vs. ADIT [2009] 33 SOT 26 (Mum)