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Month: January

Belgian Constitutional Court held that retroactive effect of 2009 Protocol is not unconstitutional – DTAA between Belgium and France

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On 30th October 2012, the Belgian Constitutional Court (Grondwettelijk Hof/Court Constitutionelle) gave its decision in Xavier Deceunick and Stéphanie Coquard v. Belgian State (Case No. 5054) on the constitutionality of the retroactive effect of the 2008 protocol to the Belgium-France DTAA (“the Protocol”), with respect to the municipal surcharge. A preliminary ruling was requested by the Court of First Instance Bergen on 23th January 2012. Details of the case are summarised below:

(a) Facts:

The taxpayers were both residents in Belgium in 2008. One of the Taxpayers was a frontier worker who received employment income from France. Based on the Protocol, which became effective on 1st January 2010, the French employment income was included in the taxable base for the calculation of the municipal surcharge. Because several provisions of the Protocol for frontier-workers applied retroactively from 1st January 2009, the tax administration imposed municipal surcharges on the employment income derived in 2008, because it was taxed in the assessment year 2009. The Taxpayer reasoned that the retroactive effect was incompatible with the non-discrimination principle of articles 10 and 11 and 172 of the Belgian Constitution.

(b) Article 1 of the Protocol provides that employment income derived by frontier-workers is taxable in the source state. Articles 2 and 3 of the Protocol provide that:

• employment income derived by a Belgian resident in France, may be included in the taxable base for the municipal surcharge, which is in Mayur Nayak Tarunkumar G. Singhal, Anil D. Doshi Chartered Accountants International taxation line with article 466 of the Belgian Income Tax Act; and

• the Protocol will have retroactive effect from 1st January 2009.

(c) Decision: The Court observed that the retroactive effect creates legal uncertainty and therefore, only can be accepted if it can be justified by overriding reasons in the general interest. The Belgian government stipulated that it was necessary to include foreign employment income derived by frontier workers in the tax base for the municipal surcharge to decrease the financial problems of Belgian municipalities located in the frontier zone.

In the Explanatory Memorandum to the Protocol, it was indicated that it would be applied to income derived in the tax year 2008 (assessment year 2009). The Court held that the retroactive imposition does not disproportionately infringe the Taxpayer’s rights. The Court based its view on the fact that:

• taxpayers were sufficiently informed about the Protocol when it was signed; and

• taxpayers in France are taxed at a lower rate than in Belgium.

Consequently, the Court held that the retroactive effect of the Protocol was not unconstitutional.

Note: The decision deviates from a decision of the Court of First Instance (Gerecht van Eerste Aanleg) Leuven of 6th April 2012, in which it was decided that municipal surtax was due on income derived in the year that the 2008 protocol became effective. Article 167(2) of the Belgian Constitution regulates that Belgian tax treaties and protocols can only take effect after ratification. The decision of the Court of First Instance Leuven ignores the fact that contracting states often agree that a treaty or protocol should have retroactive effect. Nevertheless, it can be argued that the decision of the Court could be correct because article 3 of the Protocol provides that it will only take effect from 1st January 2009. Therefore, it can be reasoned that it was not the intention of the contracting states that the protocol applies to foreign employment income derived in 2008.

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Notification No VAT 1512/CR-139/Taxation-1 Dated 21.11.2012

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The Government of Maharashtra has issued Notification dated 21.11.2012 amending the Maharashtra Value Added Tax Rules, 2005 thereby extending the period for submission of MVAT Audit report u/s. 61 of the MVAT Act, 2002 from Eight Months to Nine months and fifteen days from the end of the year to which report relates.
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(2011) 24 STR 410 (Tri.-Delhi) — Punjab Venture Capital Ltd. v. Commissioner of Central Excise, Chandigarh.

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Consultancy of fund management including the identification of the projects not covered in Management Consultancy service — Primary objects were to find investment proposal and fund allocation — Confusion between Banking and Financial Services and Management Consultants — Sections 65(12) and 65(65) of Finance Act, 1994.

Facts
The issue arose as regards the interpretation of the term ‘Management Consultant’ with the term ‘Banking & Financial services’.

Held
The Tribunal observed that the excerpts of Fund Management agreement clearly show that the activity was to explore possibility of investment by various modalities. Also, it is clear that the appellants carried out the activity of providing service of consultancy of Fund Management including the identification of the projects. Allowing the appeal, the Tribunal held that the Department’s case was not coming out clearly as regards nature of services provided by the appellants. The Tribunal held that the appellants were providing the service of banking and financial services as their primary objective was to find investment proposal which involved fund allocation.

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(2011) 24 STR 408 (Tri.-Delhi) — Rakesh Porwal & Associates v. Commissioner of Central Excise, Jaipur-II.

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Whether verification of address of client for the bank by Chartered Accountant (CA) is covered under the Business Auxiliary Services (BAS) as u/s.65(19) of Finance Act, 1994.

Facts
The appellant was a CA and was paying service tax on the fees received by him as Chartered Accountant. The dispute arose as regards the services rendered by the CA to M/s. HDFC for contact-point verification of residence and offices of the clients of the banks.

The Revenue held that the aforementioned services were covered under the Business Auxiliary service and accordingly confirmed the service tax demand of Rs.1,78,479 along with interest and penalty. The appellant referred to the agreement entered into by the appellant with M/s. HDFC for providing services of contact-point verification of residence and offices and any other services as per the set guidelines and formats set by the bank from time to time. The appellant also drew attention to the definition of BAS u/s.65(19) of the Finance Act which relates to the services in relation to promotion of marketing of services provided by the client.

Held
The Tribunal observed that the verification of the addresses given by the client cannot be considered to be a service similar to promoting or marketing the services of the bank or evaluating their prospective customers. Accordingly, it was held that the services provided by the appellant were not considered Business Auxiliary Service.

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(2011) 24 STR 310 (Tri.-Del.) — Batra Sons v. Commissioner of Central Excise, Jalandhar.

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Penalty — Non-registration — Section 75A of the Finance Act, 1994 (the Act) — Section 75A no more in statutory book from 10-9-2005, but at relevant time, such mandatory requirement of registration could not be dispensed with — Penalty imposable.

Penalty — Non-payment of tax — Penalty u/s.76 and u/s.78 of the Act — Revisionary authority imposing penalty in revision — No element indicating deliberate attempt to escape liability — Penalties cannot be imposed mechanically — Section 80 of the Act.

Penalty — Failure to file returns — Tax paid and revised returns filed after getting revised figures- Mala fide not imputed — Penalty u/s.77 of the Act set aside.

Facts
The appellants appealed against a revisional order passed u/s.84 of the Act levying penalty u/s.75A, 76, 77 and 78 of the Act and contended that the revisional order intended to impose penalty without justifiable reason and that all cases required consideration u/s.80 of the Act. The Revenue on the other hand submitted that there was no need to intervene with the orders passed as in the absence of imposition by the adjudication order, revisionary power was bound to be exercised.

Held
The Tribunal observed that while imposing the penalty, the authority failed to apply the law properly. As regards penalties levied under various sections, it was held that:

Revisionary authority in respect of penalty levied to the extent u/s.75A was justified even though the provision was no longer in force, but at the relevant point of time when the law was in force to regulate taxable activities, such a mandatory requirement could not be dispensed with. In the absence of any reason to establish mala fide intention on part of the assessee, the penalty imposed u/s.76 and u/s.78 of the Act was unwarranted and the same invited consideration u/s.80 of the Act which provides for non-imposition of penalty in case of reasonable cause on part of the assessee. As far as penalty u/s.77 was concerned, there was a failure in filing the return. However, the assessee paid the taxes and revised returns were filed. Also, the authority did not cite any reasonable ground for levying penalty under this section and thus penalty u/s.77 of the Act is set aside.

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(2011) 24 STR 307 (Tri.-Del.) — Power Grid Corporation of India Ltd. v. Commissioner of Sales Tax, New Delhi.

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Leasing telecommunication network to another telegraph authority — Not a taxable service — Since telegraph authority not a subscriber — The definition of leased circuit — As per interpretation of statutes — Includes part — Should satisfy the conditions/requirements of means port — Hence the plea of Revenue rejected.

Facts
The appellant, a holder of infrastructure provider category II licence under first proviso to section 4 of the Indian Telegraph Act, 1885 it also provides its services to M/s. Bharti Infotech Ltd. and M/s. Data Access India Ltd., who are also registered under the said provisions. The Revenue contended that the service of leasing of telecommunication network provided by the appellant was taxable in terms of clause (zd) of s.s 105 of section 65 of the Finance Act, 1994 which defined the taxable service as: “service provided to a subscriber by telegraph authority in relation to leased circuit”.

According to the appellant, M/s. Bharti Infotech Ltd. and M/s. Data Access India Ltd., (registered under the above provisions) could not be considered as subscriber as they were telegraph author- ity. Since the service was not provided to the subscriber, the appellant was not liable to pay the service tax. The appellant relied on the decision in the case of Fascel Ltd v. Commissioner, (2007) 7 STR 595 (Tribunal). Also, a Circular issued by the CBEC 91/2/2001-ST, dated 12-3-2007 was cited. The appellant further submitted that the facility of telecommunication network provided by them to different users on a band-width-sharing basis did not come within the meaning of ‘leased circuit’.

Held
Relying on the decision in the case of Reliance Telecom Ltd. v. CST, Ahmedabad (2007) TIOL 414- CESTAT AHM, the Tribunal held that telegraph authority receiving interconnecting service cannot be considered as a ‘subscriber’. As such, the demand failed except for about Rs.7 lakh in respect of service provided to M/s. Converges and M/s. Dakshe Services, as the same were not registered as telegraph authority.

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(2011) 24 STR 290 (Tri.-LB) — Sri Bhagavathy Traders v. Commissioner of Central Excise, Cochin.

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Valuation — Whether amount incurred as reimbursements to be included in the assessable value — Conflicting views of the Tribunal — C.B.E.C & C. Circular cannot be relied upon to support the claim of splitting part of amount as reimbursable expenses and rest as service charges — Costs for input services and inputs used in rendering services cannot be treated as reimbursable costs — Section 67 of the Finance Act, 1994 (the Act).

Facts
The appellant provided C&F agency services to several persons including M/s. Indian Oil Corporation Ltd. (hereinafter referred to as ‘IOCL’). A show-cause notice (SCN) was issued against the appellant, a registered assessee, for short payment of service tax of Rs.53,90,080 from April 2003 to March 2006 along with interest and penalty. The Tribunal (Referral Bench) while hearing the appeal noted the decision in the case of Sangamitra Services Agency v. CCE, Chennai (2007) TIOL 1335- CESTAT and a plethora of cases wherein it was held that “reimbursement charges should not form part of the gross value for the discharge of service liability”. The Tribunal (Referral Bench) also noted a contrary decision in the case of M/s. Naresh Kumar & Co. Pvt. Ltd. v. CST, Kolkata (2008) 11 STR 578 (Tribunal) wherein it was held that “the cost incurred on reimbursement of expenses if any, needs to be included in the gross value of the taxable services rendered.” In view of contrary decisions on the issue, the matter was referred to the Larger Bench. The appellants referring to the agreement with IOCL submitted that they were required to submit bills separately for both fixed operating expenses and service charges as a C & F agent. Also, according to the agreement, expenses incurred towards electricity and water charges, communication expenses, etc. were reimbursed on actual basis. Similar agreements were entered into with other parties. The appellant referred to the definition of value of taxable service which is defined as ‘gross amount charged for the services rendered’. In this behalf, the appellant submitted that expenses incurred on activities on behalf of the principal and recovered as reimbursements cannot be treated as part of value of C & F services. Referring to the various circulars, the appellant submitted that various services like Custom House Agent service and Steamer Agent service did not include several expenses incurred on account of exporter/importer. Also the value of Consulting Engineering service and manpower recruiting service did not include amount incurred on behalf of the clients which are reimbursed on actual basis.

The provisions of section 67 of the Act underwent changes w.e.f. 19-4-2006 only and the concept of consideration was introduced which included reimbursement also. The Revenue on the other hand submitted that during the relevant period the gross amount paid by the service recipient on which the service tax was charged included all the expenses incurred towards provision of service as service tax was a destination-based consumption tax. Also, during the relevant period Rule 6(8) of the Service Tax Rules, 1994 provided that “the value of taxable service in relation to services provided by a C&F agent to clients for rendering services of C&F operations in any manner shall be deemed to be gross amount of remuneration or commission (by whatever name called) paid to such agent by the client engaging such agent” and relied on the decisions of Nilesh Kumar & Co. Pvt. Ltd. [(2008) 11 STR 578 (Tri.)] and Harveen & Co. [(2011) TIOL 848 CESTAT-Del.]

Held
The Tribunal (Larger Bench) observed that on basis of various cases relied by the assessee and the Department, it was important to consider the scope of the term ‘reimbursements’. In case of service provider and service recipient, the question of reimbursements shall arise when the service recipient was legally bound to pay certain amount to any third party and the amount is paid by the service provider on behalf of the service recipient. The various circulars of the Board relied upon by the appellant clearly referred to amounts payable on behalf of the service recipient. However, the same could not be held to be in support of the claim of the assessee that the amount can be split as reimbursable expenses and the rest as towards service charges. The costs for input services and inputs used in rendering services cannot be treated as reimbursable expenses. No decision of the Division Bench of the Tribunal was shown by the assessee in their favour. Accordingly, it was held that the there was no conflict in the decisions rendered by the Co-ordinate Benches and the matter was returned to the Referral Bench for decision on merits.

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(2011) 24 STR 387 (Mad.) — Strategic Engineering P. Ltd. v. Additional Commissioner, Central Excise, Madurai.

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Writ jurisdiction — Writ petition not to be rejected for existence of alternative statutory remedy — After the admission of writ petition, the Court should normally hear the case on merits — Article 226 of the Constitution of India.

Whether erection and laying of pipes is liable to service tax under erection, commissioning and installation services or scientific or technical consultancy services.

Facts
The company, a manufacturer of FRP pipes, falling under Chapter No. 7014.00 of the Central Excise Tariff was also in the business of laying GRP pipes for its customers for consideration of labour charges. Order confirming the demand of service tax for the show-cause notice demanding service tax was served on the petitioner under the category of ‘Erection, Commissioning and Installation’ and ‘Scientific or Technical Consultancy services’ for services rendered by the petitioner to its non-resident clients. The writ was admitted without notice to the respondent. However, the Court directed the Revenue to file a counter on merits claimed by the petitioner. The respondent challenged maintainability on the ground of availability of alternate remedy. However, the Court found that subsequent to admission of the writ and filing of counter by the respondent, it was not appropriate to relegate the petitioner to alternate remedy. Further, the question involved in the writ was found purely legal and the Court decided to hear the merits of the case.

Held
The question pertained to whether or not commissioning and installation of pipes was covered by the service tax provisions of section 65(28) of the Finance Act, 1994 at relevant time. It was found that the service of commissioning and installation was redefined by substituting section 65(28) by section 65(39a) with effect from 10-9-2004 and wherein drain laying or other installation for transportation of fluid, etc. were inserted only with effect from 16-6-2005. It was further found that the respondent demanded service tax treating the business as execution of works contract. Since this service came into effect only from 1-6-2007, the demand raised for the period in question was found unsustainable and allowing the petition, the SCN and order were held to be the outcome of misreading of legal provision.

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(2011) 24 STR 272 (Kar.) — Commissionerr of Central Excise and Service Tax, LTU, Bangalore v. Micro Labs Ltd.

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Premium paid for employees’ health/medical insurance — CENVAT credit of service tax allowed — Input service should be utilised directly or indirectly in relation to the final product — Irrespective of the fact whether mentioned or not in the definition of input service in Rule 3 of the CENVAT Credit Rules, 2003 it amounted to input service.

Facts
The employer paid health insurance premium of the employees and claimed credit for the same. The adjudicating authority denied the credit. It was confirmed by the first Appellate Authority, however allowed by the Tribunal. The question for consideration was eligibility of the assessee to avail CENVAT credit towards payment of service tax on the Group Insurance Health Policy. The decision in the case of Commissioner v. Stanzen Toyotetsu India (P) Ltd., (2011) 23 STR 444 (Kar.) was referred to in which it was inter alia held that “the Group Insurance Health Policy taken by the assessee is a service which would constitute an activity relating to business which is specifically included in the input service definition”.

Held
It was held that services such as transport facility provided to the employees and vehicle insurance pertaining to the same, workmen’s compensation and expenses relating to the same, even though not expressly mentioned in the definition of input service tantamount to input services and the Tribunal’s decision was held legal and valid.

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(2011) 24 STR 283 (Ker.) — Precot Mills Ltd. v. Union of India.

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Demand — Transport service recipient — Retrospective amendment of statute — Demand in terms of amended statute sustainable only if matter was kept alive at time when original provision was in force — Otherwise demand unsustainable.

Facts
The petitioner, a manufacturer of cotton yarn engaged the services of transporter to transport the manufactured cotton yarn. With the introduction of levy of service tax on services rendered by goods transport operators, a question arose as to liability of the customers engaging the services of transporters to pay service tax.

The Supreme Court in the case of Laghu Udyog Bharati v. UOI, 1999 (33) RLT 911 held that “the person who is availing the services of a transporter could not be made liable for filing returns and paying service tax and that service tax being on the value of services, is payable only by the person who provides the services who only can be regarded as an assessee for the purpose of service tax”.

In the aftermath of the judgment, the Parliament enacted Chapter V and sections 116 and 117 of the Finance Act, 2000 whereby the persons engaging the services of the goods services operators were made liable to pay service tax during the period of 16-7-1997 and 15-10-1998.

The petitioner vide their original petition challenged the constitutional validity of sections 116 and 117. The petitioner also contended that even if sections 116 and 117 were considered to be valid, only in respect of demand notices issued while the provisions struck down by the Supreme Court were in force and the matter was alive can be continued by virtue of new sections.

Held
The High Court observed that the Supreme Court in J. K. Cotton Spinning and Weaving Mills Ltd. and Another v. Union of India and Others, (1987) 32 ELT 234 held that “even if a provision is amended with retrospective effect, the Department can proceed with the demand only if the matter was kept alive at the time when the original provision was in force.” Accordingly, allowing the original petition, the High Court held that the petitioner was not liable to pay service tax as demanded.

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Software Development Charges — whether liable to VAT or Service Tax?

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Introduction
When there are two different authorities to levy tax of a similar nature, there is bound to be a controversy. And one such controversy going around is whether development charges for software are liable to VAT or service tax? The issue is debatable as both the authorities consider the same under their jurisdiction.

There are certain judgments, mainly about aspect theory, under which the respective authorities under VAT and service tax consider some aspect of the transaction as liable to tax under their respective law and try to levy tax. This results in overlapping and also leads to double taxation of the same transaction. However, without making any attempt to analyse the theory of double taxation, etc., let’s try to understand the correct position of taxation of software development charges.

Software, whether goods?
The first issue in relation to taxation of software is whether softwares are goods. This issue has already been settled by the Supreme Court. Reference can be made to the judgment of the Supreme Court in the case of Tata Consultancy Service v. State of Andhra Pradesh, (137 STC 620) (SC).

In para 17 the Supreme Court has observed as under:

“17. Thus this Court has held that the term ‘goods’, for the purposes of sales tax, cannot be given a narrow meaning. It has been held that properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed, etc. are ‘goods’ for the purposes of sales tax. The submission of Mr. Sorabjee that this authority is not of any assistance as ‘software’ is different from electricity and that software is intellectual incorporeal property, whereas electricity is not, cannot be accepted. In India the test, to determine whether a property is ‘goods’, for purposes of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whether the concerned item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed, etc. Admittedly in the case of software, both canned and uncanned, all of these are possible.”

Thus, in relation to ready software whether canned or uncanned, the Supreme Court has observed that they are goods and hence can be subjected to sales tax including VAT, as presently levied.

However, the issue still remains whether all uncanned softwares are liable to VAT. There may be two situations under the above category of uncanned software:

One is that uncanned software may be developed for a particular customer as per his specifications. The software developer reserves all IPR including copyright in the said software unto himself. He will transfer the same to the customer after the software is ready against consideration. The transaction satisfies the test laid by the Supreme Court.

The other situation is that the customer while putting the order for development of software may reserve his copyright and IPR in the said software to be developed unto himself right from original stage of development of the software. Under the above circumstances it can be said the developer is not developing any software as his property which he can transfer to the customer. In this case the software coming into existence belongs to the customer as copyright lies with him as and when the software is being developed. Therefore the software developer can be said to be rendering services for development and not selling any software. In such a case there is no justification for levy of VAT. If at all, applicable service tax may be leviable, but not VAT.

This issue has been decided now by the Karnataka High Court in the case of Sasken Communication Technologies Ltd. v. The Deputy Commissioner of Sales Tax, DVO-5 (W.A. Nos. 90-101/2011 dated 15-4- 2011). In this case also similar issue was involved. The dealer M/s. Sasken Communication Technologies Ltd. developed software for its customers. However, as per agreement the copyrights and IPR in the said software belonged to the customer right from original stage of development. The Karnataka High Court held that since the copyright belonged to the customer right from the beginning, the software coming into existence after development belonged to the said customer and therefore there is nothing in the hands of the developer to transfer the same to the customer. In other words there was no sale of goods against consideration so as to attract VAT. This was nothing but rendering of development services for software.

The High Court has observed as under about the nature of transaction:

“39. From the aforesaid Clauses it is abundantly clear that the parties have entered into an agreement whereby the assessee renders service to the client for development of software, i.e., for software development and other services. Pursuant to the agreement and the work orders, the service shall be performed by the assessee. Services must be requested by issue of a valid work order together with a statement of work. As compensation for the service rendered to the customer, the fees specified in the relevant work order or in the statement of work is payable and billing is done on a time and material basis or on a fixed price or on a monthly basis. Pricing for time and material projects shall be fixed at a rate set forth in Annexure-A to the agreement.

40. The assessee agrees that all patentable and unpatentable, inventions, discoveries and ideas which are made or conceived as a direct or indirect result of the programming or other services performed under the agreement shall be considered as works made for hire and shall remain exclusive property of the client and the assessee shall have no ownership interest therein. Promptly, upon conception of such an invention, discovery, or idea, the assessee agrees to disclose the same to the client and the client shall have full power and authority to file and prosecute patent applications thereon and maintain patents thereon. At the request of the client the assessee agrees to execute the documents including but not limited to copyright assignment documents, take all rightful oaths and to perform such acts as may be deemed necessary or advisable to confirm on the client all right, title and interest in and to such inventions, discoveries or ideas, and all patent applications, patents, and copyrights thereon. Both the source code of developed software and hardware projects of worldwide intellectual property in and each shall be owned by the client. The assessee acknowledges that all deliverables shall be considered as works made for hire and the client will have all right, title including worldwide ownership of intellectual property rights in and each deliverable and all copies made from it. If acceptable to the client, the client may reuse all or any of the components developed by the assessee outside the scope of those contracts for the execution of the projects under this agreement.

41. Therefore, even before rendering service, the assessee has given up his rights to the software to be developed by the assessee. The considerations under the agreement is not for the cost of the project, the consideration is for the service rendered, based on time or man-hours. Once the project is developed, all rights in respect of the said project including the intellectual property rights vest with the customer and he is at liberty to deal with it in any manner he likes. The assessee has agreed to execute all such documents which are required for the exercise of such absolute rights over the software developed by the assessee.

 42.   The ‘deliverables’ has been defined under the agreement to mean all materials in whatever form generated, treated or resulting from the development, including but not related to the software modules or any part thereof, the source code and or object code, enhancement applications as well as any other materials media and documentation which shall be prepared, written and or developed by the developer for the client under this agreement and/or project order. If the customer agrees to provide any hardware, software and other deliverables that may be required to carry out the development and provide the deliverables he may do so. Otherwise the assessee has to make or provide all those hardware and software to develop the deliverable and the final product. No doubt at the end of the day, this software which is developed is embedded on the material object and only then the customer can make use of the same. The software so developed even before it is embedded on the material object or after it is embedded on a material object exclusively belongs to the customer. In the entire contract there is nothing to indicate that the assessee after developing the software has to embed the same on a material object and then deliver the same to the customer so as to have title to the project which is developed. The title to the project/software to be developed lies with the customer even before the assessee starts rendering service.”

The above observations of the High Court entirely cover the debatable issue. The parties can now very well decide whether the transaction of development of software will be covered by VAT or service tax based on ownership in the copyright and IPR. We hope that the controversy will rest here and the future transactions will be free from any dispute.

A market is never saturated with a good product, but it is very quickly saturated with a bad one.
— Henry Ford

REFUND OF CENVAT CREDIT: OTHER THAN ON EXPORTS

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Statutory provisions [Rule 5 of CENVAT Credit Rules, 2004 (‘CCR’)]

“Where any input or input service is used in the manufacture of final product which is cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate product cleared for export, or used in providing output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilised by the manufacturer or provider of output service towards payment of,

  • duty of excise on any final product cleared for home consumption or for export on payment of duty; or
  • service tax on output service,

and where for any reason such adjustment is not possible, the manufacturer or the provider of output service shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by Notification.

Provided that no refund of credit shall be allowed if the manufacturer or provider of output service avails of drawback allowed under the Customs and Central Excise Duties Drawback Rules, 1995, or claims rebate of duty under the Central Excise Rules, 2002, in respect of such duty; or claims rebate of service tax under the Export of Services Rules, 2005 in respect of such tax:

Provided further that no credit of the additional duty leviable u/ss.(5) of section 3 of the Customs Tariff Act shall be utilised for payment of service tax on any output service.

 Explanation — For the purposes of this rule, the words ‘output service which is exported, means the output service exported in accordance with the Export of Services Rules, 2005.”

Refunds in situations other than export — A contentious issue

Rule 5 under CCR is the only provision which permits refund of CENVAT credit, essentially in case of exports. Refunds of unutilised CENVAT credit are often claimed in situations, other than export. For example, discontinuance of business, payments in case of disputes made in cash due to insistence by the Department instead of debit to CENVAT credit, Pre Deposits pending appeal made in cash instead of debit to CENVAT credit, etc.

Interpretation of the words ‘where for any reason such adjustment is not possible . . . .’ in Rule 5 has resulted in extensive litigations between the tax Department and the taxpayers.

Entitlement to refund in situations other than exports has been a very contentious issue and divergent judicial views have been expressed. There are very limited cases directly relating to service tax. However, there are extensive judicial precedents under Central Excise, principles in regard to which are relevant for service tax and which serve as a useful guide while dealing with issues of refunds relating to service providers.

The same are analysed hereafter along with the latest Larger Bench Ruling.

Mumbai Tribunal ruling holding that refund is inadmissible in situations other than exports

In the case of National Leather Cloth Mfg. Co. v. CCE, (2006) 198 ELT 400 (Tri-Mumbai) followed the ratio of the judgment in case of CCE, v. Rajashree Cements, (2001) 132 ELT 724 (Tri-Chennai) and denied the refund of MODVAT credit observing as under:

“The decision in the cases of Bombay Burmah, Arcoy Industries and Omkar Textile have been rendered contrary to the earlier decision of the Tribunal in the case of Rajashree Cements, which was delivered at an earlier point of time on 9-9- 2001. Moreover, Rajashree Cements also correctly notices the provisions of law which allow cash refund only in the case of unutilised credit in respect of export of final products. Hence, the decision in the said case is binding and the same requires to be followed until reversed by either Larger Bench or by any superior court”.

In the case of Rajashree Cements referred above, the Tribunal had held as under:

Para 5

“Accordingly, we hold that payment of duty through RG23A Part II account is a payment of duty and the refund of the same has to be given, if otherwise admissible and principle of unjust enrichment does not apply. However, the refund amount is to be given in RG23A Part II accounts if the same is in operation.”

In the case of National Leather, though it was an admitted fact that the appellants were not in a position to utilise the credit as they have closed down, legitimate refund was denied.

The three decisions of the Tribunal cited by the appellants and not followed in the above case of National Leather (supra) as the same were considered contrary to the decision in the case of Rajashree Cements are given below.

  • Assessee’s factory closing before allowance of Modvat credit by the Tribunal and utilisation of credit was prevented due to initiation of proceedings by the Department. It was held that the assessee was entitled to cash refund. [CCE v. Omkar Textile, (2002) 148 ELT 461 (Tri-Mum.)]
  • Amount originally paid by the assessee by debiting RG23A. Part II. The assessee moved out of Modvat credit scheme when dispute finally settled — It was held that the assessee is not able to utilise credit, the very basis of refund is defeated, in which case amount is to be given in cash. [CCE v. Arcoy Industries, (2004) 170 ELT 507 (Tri-Mum.)]
  • Section 11B contains no bar against payment of refund by cheque/cash in cases where original payment of duty was from Modvat/Cenvat account. Moreover, the assessee ceased to exist as a manufacturing unit and has no Cenvat account into which refund can be credited. [CCE v. Bombay Burmah Trading Corpn., (2005) 190 ELT 40 (Tri-Del.)]

Larger Bench Ruling in Gauri Plasticulture (P) Ltd. v. CCE, (2006) 202 ELT 199 (Tri-Mumbai) (LB)

In this case duty debit was made in CENVAT (MODVAT) account. However, the appellants could not utilise the credit due to departmental objections and insistence of payment from PLA Account. Thereafter the appellants surrendered their licence due to discontinuance on business and applied for refund of unutilised CENVAT credit.

The Larger Bench, under the peculiar facts of the case held that credit can be given in MODVAT Account, but if an assessee is not able to utilise, cash refund can be granted. The important observations made by the Larger Bench are as under:

Para 8

“Detailed reading of the above judgments, leads into the fact that wherever the assessee was unable to utilise the credit on account of objection raised by the Department or actions taken by them by way of initiation of proceedings or paid duty out of Modvat account at the Department’s insistence, and for that reason, he had to pay duty in cash or out of the PLA, they would be entitled to refund of that credit in cash, on the dispute being ultimately settled in their favour. In the decisions holding that such refund in cash is not possible, it has been observed that there is no provision allowing refund of such credit in cash. However, we are not in agreement with the above proposition for the simple reason that there is also express no bar in the Modvat Rules to that extent. We have to keep in mind that it is not the refund of unutilised credit, but the credit which has been used for payment of duty at the insistence of the Revenue or has been reversed because the Department was of the view that the same is not available for utilisation. This is a simple and basic principle of equity, justice and goods conscience. Had the Department not prevented the assessee from utilising the credit otherwise available to him, they would have been in a position to use the same towards payment of duty on their final product, which obligation they had to discharge from their PLA account. As such, on the success of their claim subsequently, if the assessee is maintaining Modvat credit and is in a position to use the same for future clearances, it should normally be credited back in the same account from where it was debited i.e., RG23A Part account. However, if an assessee is not able to use the credit on account of any reasons, whatsoever (which may be closure of his factory or final products being exempted, etc.) the refund becomes admissible in cash or by way of credit entry in PLA to the extent duty paid in cash or out of PLA during the relevant period.

Para 9

On the same basic principles of equity, justice and good conscience, if such refund in cash makes the assessee enrich because during the period when the dispute was pending, they had not paid any duty in cash and as such, the debit entry in Mod-vat account would have made no difference, as the credit would have been lying unutilised only in the account, such credit, cannot be refunded in cash.”

Karnataka High Court ruling in UOI v. Slovak India Trading Co. Pvt. Ltd., (2006) 201 ELT 559 (Kar.) [Confirmed by the Supreme Court (2008) 223 ELT A 170

In this case, the assessee was engaged in manufacture of shoes for M/s. Bata India Ltd. and was registered under the Central Excise. They surrendered their registration and a refund application was made on 14-5-2003 claiming a refund of Rs.4,15,057. During the Internal Audit, it was noticed that the assessee had availed CENVAT credit of the materials received by them during the past and had availed the credit to the tune of Rs.3,09,390. On scrutiny, it was noticed that there was neither production, nor clearance of finished goods. CENVAT credit availed by the assessee was irregular. A show-cause notice was issued in the matter with regard to irregular availment and also with regard to rejection of refund claim. Thereafter, an order was passed ordering allowance of CENVAT credit of Rs.3,72,405 availed. Refund claim was rejected in terms of section 11B of the Act. It was stated that there is no provision in Rule 5 of the CENVAT Credit Rules, 2002 with regard to refund. An unsuccessful appeal was filed by the assessee. Thereafter, the Tribunal was moved and the Tribunal allowed the appeal in terms of the impugned order.

The High Court held that Rule 5 of the CENVAT Credit Rules, 2002 does not expressly prohibit refund of unutilised credit where there was no manufacture in light of the closure of factory. Further, since the assessee has come out of the MODVAT Scheme, refund of unutilised credit has to be granted.

The Department’s appeal against the afore-said Court ruling was rejected by the Supreme Court.

Recent Larger Bench Ruling in the case of Steel Strips v. CCE, (2011) 269 ELT 257 (Tri.-LB)

The following question was referred to the Larger Bench regarding refund of unutilised amount of MODVAT credit in cash for the period from December, 1997 to September, 1999:

“Whether in cases where either on account of coercion by the Department or otherwise, the assessee pays the duty through PLA account, in spite of having sufficient balance in the MODVAT/CENVAT credit, on the factory or unit becoming inoperative and there being no likelihood of restarting the production, can such assessee be entitled for refund of the credit amount under the provisions of law in force?

Though, the Larger Bench ruling is with reference to section 11B of Central Excise Act, 1944, the observations are very relevant in the context of Rule 5 of CCR.

The Larger Bench distinguished the rulings of Larger Bench in Gauri Plasticulture (P) Ltd., Karnataka High Court in Slovak India as well as other rulings and held that refund of unutilised credit is only permissible in case of exports and for no other reason whatsoever that may be.

The Larger Bench made the following important observations while passing the order:

Para 5.7

“A distinction between provisions of the statute which are of substantive character and are built in with certain specific objectives of policy on the one hand, and those which are merely procedural and technical in their nature on the other hand, must be kept clearly distinguished. An eligibility criteria to get refund calls for a strict construction, although construction of a condition thereof may be given a liberal meaning if the same is directory in nature. The doctrine of substantial compliance is a judicial invention, equitable in nature, designed to avoid hardship in cases where a party does all that can be reasonably expected of it, but fails in or faults in some minor or inconsequent aspects which cannot be described as the ‘essence’ or the ‘substance’ of the requirement. Like the concept of ‘reasonableness’, the acceptance or otherwise of a plea of ‘substantial compliance’ depends upon the facts and circumstances of each case and the purpose and object to be achieved and the context of the prerequisites which are essential to achieve the object and purpose of the rule or the regulation. Such a defence cannot be pleaded if a clear statutory prerequisite which effectuates the object and the purpose of the statute has not been met. Certainly, it means that the Court should determine whether the statute has been followed sufficiently, so as to carry out the intent for which the statute was enacted and not a mirror image type of strict compliance. Substantial compliance means ‘actual compliance in respect to the substance essential to every reasonable objective of the statute’ and the Court should determine whether the statute has been followed sufficiently so as to carry out the intent of the statute and to accomplish the reasonable objectives for which it was passed.

Para 5.8

Fiscal statute generally seeks to preserve the need to comply strictly with regulatory requirements that are important, especially when a party seeks the benefits of an exemption clause, substantial compliance of an enactment is insisted upon, where mandatory and directory requirements are lumped together, for in such a case if mandatory requirements are complied with, it will be proper to say that the enactment has been substantially complied with notwithstanding the non-compliance of directory requirements. In cases where substantial compliance has been found, there has been actual compliance with the statute, albeit procedurally faulty. The doctrine of substantial compliance seeks to preserve the need to comply strictly with the conditions or requirements that are important to invoke a tax or duty exemption and to forgive non-compliance for either unimportant and tangential requirements or requirements that are so confusingly or incorrectly written that an earnest effort at compliance should be accepted.

Para 5.9

The test for determining the applicability of the substantial compliance doctrine has been the subject of a myriad of cases. Quite often, the critical question to be examined is whether the requirements relate to the ‘substance’ or ‘essence’ of the statute; if so, strict adherence to those requirements is a precondition to give effect to that doctrine. On the other hand, if the requirements are procedural or directory, in that they are not of the essence of the thing to be done, but are given with a view for the orderly conduct of business, they may be fulfilled by substantial, if not strict compliance. In other words, a mere attempt at compliance may not be sufficient, but actual compliance of those factors which are considered as essential. In the cases of refund substantial compliance with the law granting refund is sine qua non.

Para 5.11

No person has a vested right in any course of procedure. He has only the right of prosecution or defence in the manner laid down by law. He has no right other than to proceed according to the mandate of the statute governing the subject. Claim of refund is not a matter of right unless vested by law. That would depend upon the object of the statute and eligibility. The purpose for which law has been made and its nature, the intention of the Legislature in making the provision, the relation of the particular provision to other provisions dealing with the subject including the language of the provision are considerable factors in arriving at the conclusion whether a particular claim is in accordance with law. No injustice or hardship plea can be raised to claim refund in the absence of statutory mandate in that behalf and no equity or good conscience can influence fiscal courts without the same being embedded in the statutory provisions.

Para 5.13

It is well-settled principles of law that what cannot be done directly should not be allowed to be done indirectly. On surrendering of their licence, the appellants were not allowed to claim the refund of the unutilised credit in the Modvat account, and the same would have lapsed. As such, utilisation of the same towards payment of disputed demand of duty, after surrendering of their registration, had not led to a situation where the assessee was compelled not to use the

credit for regular clearances and had to make payment through PLA accounts. As such, in the instant refund in cash was not to be allowed.

Para 5.16

Modvat law has codified the procedure for adjustment of the duty liability against the Modvat account. That is required to be carried out in accordance with law and unadjusted amount is not expressly permitted to be refunded. In the absence of express provision to grant refund, that is difficult to entertain except in the case of export. There cannot be presumption that in the absence of debarment to make refund in other cases that is permissible. Refund results in outflow from treasury, which needs sanction of law and an order of refund for such purpose is sine qua non. Law has only recognised the event of export of goods for refund of the Modvat credit as has been rightly pleaded by the Revenue and instant reference was neither the case of ‘otherwise due’ of the refund, nor the case of exported goods. Similarly, absence of express grant in statute does not imply ipso facto entitlement to refund. So also absence of express grant is an implied bar for refund. When right to refund does not accrue under law, claim thereof is inconceivable. Refund of unutilised credit is only permissible in case of export of goods and for no other reason, whatsoever that may be. Thus, where the assessee pays duty through the PLA account, in spite of having sufficient balance in the Modvat/Cenvat credit account on the factory or unit becoming inoperative and there being no likelihood of re-starting the production, such an assessee cannot be entitled to refund of the credit amount under the provisions of law in force.”

Conclusion

The Department authorities are following the aforesaid Larger Bench ruling and denying refunds, though in many cases, the reasons could be genuine.

With due respects to the Larger Bench, it would appear that refund provisions being in the nature of beneficial provisions ought to be construed liberally rather than strictly in accordance with the settled principles laid down by the Supreme Court from time to time.

It is suggested that appropriate amendment need to be made in Rule 5 of CCR, whereby powers may be granted to CBEC to prescribe circumstances under which refunds may be permitted subject to appropriate revenue safeguards.

Insertion of Rule 40BA and Form No. 29C — Notification No. 60/2011 [F. No. 133/70/2011- SO(TPL), dated 1-12-2011.

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CBDT has made following amendments vide Incometax (Ninth Amendment)

Rules, 2011 with effect from 1st December, 2011 Rule 40BA inserted to provide for special provisions for payment of tax by Limited Liability Partnership (LLP)

LLP shall furnish the report of an accountant as required by section 115JC for the purpose of computation of adjusted total income and minimum alternate tax in Form No. 29C.

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Narad Investments & Trading Pvt. Ltd. v. Dy. CIT ITAT ‘H’ Bench, Mumbai Before B. R. Mittal (JM) and Rajendra Singh (AM) ITA Nos. 3360/Mum./2010 A.Y.: 1996-97. Decided on: 19-10-2011 Counsel for assessee/revenue: Jayesh Dadia/ V. V. Shastri

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Section 220(2) — Interest payable by assessee — Manner of computing default period — Original assessment set aside and fresh assessment made by the AO — Whether period of levy of interest is to be reckoned from the date of default as per the original assessment order or as per the fresh assessment order — Held that interest payable is to be computed from the date of fresh assessment order.

Issue: When original assessment has been set aside by the Tribunal and fresh assessment has been made by the AO, the period of levy of interest u/s.220(2) should be reckoned from the date of default as per the original assessment order or as per the fresh assessment order.

In the case of the assessee the original assessment was confirmed by the CIT(A) but on further appeal, the Tribunal set aside the order of the CIT(A) and the issue was restored back to the AO. In the fresh assessment, the AO repeated the addition raising the same demand but interest u/s.220(2) was levied from the date of demand notice issued as per the original assessment order. The assessee disputed the AO’s action relying on the Board Circular No. 334, dated 3-4-1982, and contended that as the original assessment had been set aside by the Tribunal, the interest u/s.220(2) could be charged only from the date when the demand become due as per the fresh assessment order and not from the date of original assessment order.

Held:
In terms of the Board Circular (supra), in case the assessment is set aside by the CIT(A) and setting aside become final, interest u/s.220(2) has to be charged only after expiry of 35 days from the date of service of demand notice pursuant to the fresh assessment order. In the case of the assessee, since the original order of assessment was confirmed by the CIT(A) but on further appeal, the Tribunal set aside the order of the CIT(A) and the issue restored to the AO, it was held that in terms of the Circular, the interest u/s.220(2) had to be charged only from the date of the fresh assessment order.

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Haware Constructions Pvt. Ltd. v. ITO ITAT ‘H’ Bench, Mumbai Before N. V. Vasudevan (JM) and R. K. Panda (AM) ITA Nos. 5601/Mum./2009, 6861/Mum./2010 & 1547/Mum./2011 A.Ys.: 2005-06, 2006-07 & 2007-08 Decided on: 5-8-2011 Counsel for assessee/revenue: J. P. Bairagra/ Goli Sriniwas Rao

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Section 80IB(10) — Deduction in case of housing project — (1) Whether an assessee builder can follow project completion method of accounting — Held, Yes; (2) Whether the AO justified in refusing to grant deduction on the ground that the commercial area exceeded the permissible limit and/or the area of the flat exceeded the permissible limit after considering balcony and terrace — Held that the limit as applicable as on the date when the project was approved should be applied and not as on the date of completion of the project and based thereon, the assessee had not exceeded the permissible limit as laid down in the Act;

Section 2(22)(e) — Deemed dividend — Loans and advances to related concern — Held that taxable in the hands of the shareholder and not in the hands of the assessee borrower.

Facts:
(1) A.Y. 2005-06:

The assessee was engaged in the business of construction and builder. On account of revision in AS-9, it changed its method of accounting in respect of projects which commenced after 1st April, 2003 from percentage completion method and started recognising revenue from the projects on completion of the projects, when the risk of ownership was transferred to the customer. However, the AO termed the change to project completion method as invalid. On appeal, the CIT(A) agreed with the AO and rejected the project completion method of accounting applied by the assessee to the new projects.

(2) A.Y. 2006-07:

The assessee was denied the benefit of deduction u/s.80IB(10) for the following reasons:

(a) The commercial area in the housing project exceeded 5% of the total project area;

(b) Some of the purchasers of flats had also purchased adjacent flats, the sum total of these two flats exceeded 1000 sq.ft.;

(c) Majority of the flats sold exceeded the area of 1000 sq.ft. after including balcony and terrace.

(3) A.Y. 2007-08:

The assessee had taken unsecured loan of Rs.8.02 crore during the year from HEB Pvt. Ltd., which had got free reserves of Rs.50.96 crore. According to the AO the provisions of section 2(22)(e) were attracted since one of the shareholders of the assesseecompany was holding more than 20% equity capital in HEB Pvt. Ltd. and the assessee-company.

Held:
(1) A.Y. 2005-06:
Relying on the various decisions (listed below), the Tribunal held that the project completion method was an accepted and recognised method of accounting. It also noted that the same was also accepted by the AO in the preceding as well as in the subsequent assessment year. According to it, an assessee can follow any recognised method of accounting and the condition was that the same method should be followed consistently. Since the assessee in the instant case was regularly following the project completion method and has offered the income in the year of completion of project, the Tribunal did not find any reason to reject the same. Accordingly, the assessee’s appeal was allowed.

(2) A.Y. 2006-07:

(a) Relying on the decision of the Special Bench of the Tribunal in the case of Brahma Associates reported in 122 TTJ 443 and the Co-ordinate Bench of the Tribunal in the case of Shri Girdharilal K. Lulla vide ITA No. 4207/Mum./2009 order dated 30-5-2011, the Tribunal found merit in the submissions of the assessee that when the approval was obtained prior to 31-3-2005, the condition of shopping area not exceeding 5% of built-up area or 2000 sq.ft. whichever is less, as introduced by the subsequent amendment are not applicable in respect of projects approved and commenced before 1-4-2005. Accordingly, the appeal filed by the assessee was allowed on this ground.

(b) As regards the second objection of the revenue that the assessee had sold two or more than two flats to one party, the combined area of which was more than 1000 sq.ft., the Tribunal accepted the submission of the assessee that the area of two flats should not be combined even though the two flats were sold to one person because:

  • the built-up area of each flat as approved by CIDCO was less than 1000 sq.ft.;
  • the assessee has sold each flat under separate agreement;
  • the assessee has not sold two flats by combining them together as one flat to one party;
  • there is no evidence with the Department that the assessee had sold the flat after combining the two flats together;
  • It is also not the case of the Revenue that each flat in the housing project undertaken by the assessee could not have been used as an independent or as a self-contained residential unit not exceeding 1000 sq.ft. of built-up area and that there would be a complete habitable residential unit only if two or more flats were joined with each other which would ultimately exceed 1,000 sq.ft. of built up area;
  • the condition that not more than one residential unit in the housing project was allotted to any person not being an individual, has been inserted by the Finance (No. 2) Act, 2009 w.e.f. 1-4-2010.

(c) The Tribunal agreed with the assessee that the definition of ‘built-up area’ as given in s.s 14(a) of section 80IB, whereby the balcony/terrace area was also considered as part of built-up area, was inserted by the Finance Act, 2004 w.e.f. 1-4-2005 and, therefore, the same was applicable only in respect of the projects approved after 1-4-2005. In the given case of the assessee, as the project was approved prior to 1-4-2005, the appeal filed by the assessee was allowed on this ground.

(3) A.Y. 2007-08:

The Tribunal noted that the assessee was not a registered shareholder in HEB Pvt. Ltd. Therefore, relying on the decision of the Special Bench of the Tribunal in the case of ACIT v. Bhaumik Colour P. Ltd., [313 ITR (AT) 146] where it was held that deemed dividend can be assessed only in the hands of the person who is a shareholder of the lender company and not in the hands of a person other than a shareholder and not in the hands of the borrowing concern in which such shareholder is member or partner having substantial interest, the appeal filed by the assessee was allowed and directed the AO to delet the addition.

Cases relied on (A.Y. 2005-06):
1. Awadesh Builders v. ITO, 37 SOT 122 (Mumbai);
2. Prestige Estate Projects (P) Ltd. v. DCIT, 129 TTJ (Bang) 680;
3. CIT v. Bilahari Investment (P) Ltd., 299 ITR 1 (SC);
4. H. M. Constructions v. CIT, 90 TTJ (Bang.) 510.

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ITO v. Damodar Bhuvan CHS Ltd. ITAT ‘D’ Bench, Mumbai Before N. V. Vasudevan (JM) and T. R. Sood (AM) ITA No. 1610/Mum./2010 A.Y.: 2005-06. Decided on: 16-9-2011 Counsel for revenue/assessee : M. R. Kubal/ B. V. Jhaveri

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Section 2(24) — Income — Taxability of receipt of transfer fees and non-occupancy charges from its members by the housing society — Amount received in excess of the limits prescribed under the law — Held that the sum received is exempt from tax on the principle of mutuality.

Facts:
The assessee was a co-operative housing society. During the year under appeal, its claim to treat the receipt of the sum of Rs.15 lac towards transfer charges (described as contribution to heavy repair fund) and Rs.1.31 lac towards non-occupancy charges as exempt was negatived by the AO. On appeal, the CIT(A) held that these receipts are exempt under the principle of mutuality.

Held:
As regards the receipt of Rs.15 lacs towards transfer charges, relying on the Bombay High Court decision in the case of the Sind Co-operative Housing Society v. Income-tax Officer, (317 ITR 47), which was also followed in the cases of Suprabhat Co-operative Housing Society Ltd. v. ITO, (ITA No. 1972 of 2009 dated 1-10-2009) as well as Shyam Co-operative Housing Society Ltd. v. CIT, (ITA Nos. 92, 93 and 206 of 2008, dated 17-7-2009), the Tribunal held that the principle of mutuality applies to the receipt of transfer fees. Similarly, in respect of the receipt of Rs.1.31 lac towards non-occupancy charges, the Tribunal relied on the decision of the Bombay High Court in the case of Mittal Court Premises Co-op Society v. ITO, (320 ITR 414) and held that the principle of mutuality equally applies to such receipt. It further held that the restriction on the quantum of receipt by an association from its members prescribed by any other law regulating the relationship between members and its association will not be relevant while taxing the receipts under the Act. Thus, according to it, the principle of mutuality will not cease to exist in respect of receipts from members by an association beyond the quantum restricted by any law regulating the relationship between members and its association.

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Yahya E. Dhariwala v. DCIT ITAT ‘G’ Bench, Mumbai Before J. Sudhakar Reddy (AM) and V. Durga Rao (JM) ITA No. 5501/Mum./2009 A.Y.: 2005-06. Decided on: 25-11-2011 Counsel for assessee/revenue: K. Gopal/ A. K. Nayak

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Section 54EC — Six months period, referred to in section 54EC, should be reckoned from the end of the month in which the transfer takes place.

Facts:
During the previous year relevant to the assessment year under consideration the assessee sold shares of two private limited companies. The assessee chose to invest the entire sale consideration in the bonds specified u/s.54EC of the Act. Of Rs.1,97,50,000 invested by the assessee in REC bonds, a sum of Rs.45,00,000 was invested on 30th August, 2005. The AO in an order passed u/s.147 r.w.s. 143(3) of the Act denied the claim for deduction of Rs.45,00,000 on the ground that the shares have been transferred on 24th February, 2005, whereas the investment was made on 30th August, 2005 which is beyond the period of six months from the date of sale. The assessee submitted that the sale of shares took place on 28th February, 2005, based on documents filed with the Registrar of Companies.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to ITAT.

Held:
The Tribunal noted that the subject-matter of transfer is shares of a private limited company. In case of shares of private limited company, the process of transfer of shares can be said to be completed only when the board of directors approves the transfer. The Annual Return filed before the ROC disclosed that the date of registration of transfer was 28th February, 2005. Board resolution approving the transfer of shares was passed on 25th February, 2005. Just because the stamping was done on 24th February, 2005 of blank forms, it cannot be concluded that there is transfer on 24th February, 2005. The Tribunal concluded that the date of transfer is 28th February, 2005. Hence, the investment made on 30th August, 2005 was within a period of six months as contemplated under the Act.

The Tribunal then held that even if the date of transfer is to be taken as 24th February, 2005, the wording used in the section is ‘at any time within a period of six months after the date of such transfer’. The Tribunal noted that the Madras High Court in the case of Kadri Mills Ltd. and the Calcutta High Court in the case of Brijlal Lohia and Mahabir Prasad Khema have held that since the term ‘month’ is not defined in the Income-tax Act, 1961, the expression used under the General Clauses Act, 1897 should be applied. Having noted the definition of the term ‘month’ as defined under The General Clauses Act, 1897 and also that the Act in certain sections has stated the period in number of days the Tribunal held that from the language in section 54EC the period of six months should be reckoned from the end of the month in which the transfer takes place. As the investment was made on 30th August, 2005, the Tribunal held that the assessee has invested a part of the capital gain within a period of six months after the date of transfer of the long-term capital asset in question in specified assets.

The Tribunal allowed the appeal filed by the assessee.

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(2011) 24 STR 411 (Tri.-Chennai) — Commissioner of Central Excise (ST), Pondicherry v. Fairline Worldwide Express.

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Rectification of mistake by Tribunal in service tax appeal — Section 74 of the Finance Act, 1994 providing a period of two years for rectification of mistake by any Central Excise Officer not applicable to appeals to Tribunal.

Facts
The application for rectification arose out of Tribunals final order No. 213/2010, dated 19-12-2010.

The Revenue contended that as section 74 of the Finance Act, 1994 provided for a two-year period of limitation for rectification of error by a Central Excise Officer, the same period of limitation should be applied in the case of orders passed by the Tribunal also.

Held
The Tribunal noted that there was no statutory provision for filing application for rectification in case of service tax appeals before the Tribunal. In the absence of an express provision for filing application for rectification in orders in service tax appeals disposed of by the Tribunal, the application was held one without merits.

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Notification no- 52/2012 [S.O.2805(E)] dated 29th November 2012, Income tax (Fifteenth Amendment) Rules, 2012 – Amendment in Rules 11U and 11UA

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Rule 11UA is amended to interalia provide that the Discounted free cash flow method is recognised as one of the methods for valuation for the purpose of issue of shares The Capital Gains Account (First Amendment) Scheme, 2012 – Notification no. 44/2012 dated 25-10-2012
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Income – In determining whether a receipt is liable to be taxed, the taxing authorities cannot ignore the legal character of the transaction which is the source of the receipt – Amounts collected from customers towards disputed Sales Tax liability were not kept in a separate bank account and hence formed part of business turnover and thus constituted income.

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Sundaram Finance Ltd. v. ACIT [2012] 349 ITR 356 (SC)

The assessee, a non-banking financial company, was engaged in the business of the hire purchase financing, equipment leasing and allied activities.

The assessee had filed its return of income for the assessment year 1998-99 for a total income of Rs.50,38,16,950.

The assessee had been collecting certain sums as “contingent deposit” from the leasing/hire purchase customers with a view to protect themselves from sales tax liability. These amounts were collected on ad hoc basis.The assessee did not offer such sums to tax as income on the ground that such sums were collected as contingent deposits.

The case of the assessee before the Supreme Court was that the said collection was in anticipation of sales tax liability, which was disputed. According to the assessee, in order to safeguard itself against, inter alia, the said sales tax liabilities, the assessee received Rs.36,47,585 as contingent deposits from its customers which were “refundable”, if the assessee was to succeed in its challenge to the levy of the said sales tax. According to the assessee, the sum of Rs.36,47,585 was, therefore, an imprest with a liability to refund, that the said sum had the character of “deposits” and hence, were not taxable in the year of receipt, but would be taxable only in the year in which the liability to refund the sales tax ceased [in case the assessee failed in the pending sales tax appeals).

The Supreme Court observed that it is well settled that in determining whether a receipt is liable to be taxed, the taxing authorities cannot ignore the legal character of the transaction which is the source of the receipt. The taxing authorities are bound to determine the true legal character of the transaction. In the present case, the assessee had received Rs.36,47,585 in the assessment year 1998-99. As per the statement made by learned counsel for the assessee in court, the said sum of Rs.36,47,585 was not kept in a separate interest bearing bank account but it formed part of the business turnover. In view of the said statement, the Supreme Court was of the view that there was no reason to interfere with the impugned judgment of the High Court. Applying the substance over form test, the Supreme Court was satisfied that in the present case the said sum of Rs.36,47,585 constituted income. The said amount was collected from the customers. The said amount was collected towards sales tax liability. The said amount formed part of the turnover.

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Section 9 (i) (vii), Article 12 of India UK DTAA – Person exercising control and supervision real and economic employer of seconded employees – on facts payments by ICO to UK Co pure reimbursement – mere secondment does not result in rendering of services and hence not FTS – services did not make available any technical knowledge

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16. Abbey Business Services  (P) Ltd v DCIT
[2012] 53 SOT 401 (Bang)
Asst Years: 2005-06 & 2006-07. Dated: 18/07/2012

Section 9 (i) (vii), Article 12 of India UK DTAA – Person exercising control and supervision real and economic employer of seconded employees – on facts payments by ICO to UK Co pure reimbursement – mere secondment does not result in rendering of services and hence not FTS –  services did not make available any technical knowledge


Facts:

The taxpayer was an Indian subsidiary company of a foreign company (“FCo”). FCo was a group company of a British company (“UKCo”). UKCo entered into an agreement with an Indian company (“ICo”) to outsource the provision of certain process and call centres to ICo. ICo was to provide financial and insurance services to customers of UKCo in the UK.

In order to ensure that high quality services were provided by ICo, UKCo entered into a consultancy agreement with the taxpayer for which the taxpayer was to be compensated at cost plus 12 %. Further, to facilitate the outsourcing agreement between UKCo and ICo, UKCo entered into an agreement for secondment of employees (“Secondment Agreement”) from UKCo to the taxpayer.

In terms of the Secondment Agreement, secondees were under the direct management, supervision and control of the taxpayer during the period of secondment. UKCo was not responsible for any loss or damage occasioned by the works done by the secondees. Secondees performed the tasks at such place, as instructed by taxpayer. At the same time, the secondees remained employees of. UKCo during secondment. Accordingly, UKCo (and not the taxpayer) was responsible to pay remuneration and any other employment benefits to secondees. In terms of section 192 of I T Act, UKCo withheld tax at source on salaries paid to secondees.

The taxpayer reimbursed to UKCo all payments and expenses incurred by UKCo in respect of seconded employees. However, the taxpayer did not withheld taxes on the amount reimbursed to UKCo. The AO was of the view that the reimbursements made to UKCo were in the nature of FTS and hence, the taxpayer ought to have withheld taxes on the same.

In appeal, the CIT(A) held that while reimbursement of salary cost was not subject to withholding, only reimbursement of other administrative expenses was liable for withholding. The issues before the Tribunal were as follows.

1. Whether the taxpayer can be regarded as the real and economic employer of the seconded employees?

2. Whether the payments made by the taxpayer to UKCo were pure reimbursement of expenses and if so, whether they constituted income of UKCo?

3. Whether the payments made by the taxpayer to UKCo constituted FTS u/s. 9(1)(vii) of I T Act?

4. Whether the payments made by the taxpayer to UKCo constituted FTS under Article 13(4) of India-UK DTAA?

Held:

The Tribunal observed and held as follows.

(i) Whether the taxpayer can be regarded as the real and economic employer of the seconded employees. The Tribunal reviewed the Secondment Agreement to determine who was vested with control and supervision of the seconded employees. It found that the taxpayer had control of the seconded employees and if the taxpayer so required, UKCo was obligated to withdraw any seconded employee. Also, UKCo was not liable or responsible for any loss or damage caused due to work of secondees. Thus, direct control and supervision of the seconded employees vested in the taxpayer. The clause stating that UKCo was to remain the employer was for ensuring social security and other benefit to the seconded employees. Hence, UKCo was mere ‘legal employer’ while the taxpayer was ‘real and economic employer’.

(ii) Whether the payments made by the taxpayer to UKCo were pure reimbursement of expenses and if so, whether they constituted income of UKCo

The Tribunal referred to the clause of the Secondment Agreement stating that in consideration for secondment of staff by UKCo, the taxpayer shall make payments equivalent to costs and expenses incurred by UKCo in respect of seconded employees. It further referred to the relevant account in the ledger of the taxpayer as also the Notes to Accounts which stated that the taxpayer reimburse all expenses incurred by UKCo in respect of seconded employees. Hence, following IDS Software Solutions (India) (P) Ltd v ITO [2009] 32 SOT 25 (Bang) (URO), the Tribunal held that the payments were mere reimbursements of salary and other costs.

As regards the second limb of the issue (i.e., whether these payments would be regarded as income chargeable in the hands of UKCo), the Tribunal reiterated the principle laid down in the case of TISCO v Union of India [2001] 2 SCC 41 that reimbursement of salary cost and other expenses cannot be regarded as income in the hands of the recipient since there was no profit or gain element in it.

(iii) Whether the payments made by the taxpayer to UKCo constituted FTS u/s. 9(1)(vii) of I T Act To constitute FTS u/s. 9(1)(vii) of I T Act, the consideration paid should have been for rendition of managerial, technical or consultancy services. Under the Secondment Agreement, the taxpayer had paid consideration only for secondment of staff and not for rendition of any services.
Therefore, the payments made by the taxpayer did not constitute FTS.

(iv) Whether the payments made by the taxpayer to UKCo constituted FTS under Article 13(4) of India-UK DTAA. As held earlier, the reimbursement cannot be regarded as income of UKCo. Also, it does not constitute FTS u/s. 9(1(vii) of I T Act. Since a DTAA cannot impose tax which is not contemplated or levied under I T Act, question of such payments constituting FTS under India-UK DTAA does not survive. In terms of Article 13(4) of India-UK DTAA, to constitute FTS, following two conditions should be satisfied.

(a) The consideration is paid for rendering of technical or consultancy services; and

(b) Such services ‘make available’ technical knowledge, experience, skill, know-how or process or consist of the development and transfer of a technical plant or design.

UKCo has not rendered any service to the taxpayer. Hence, condition (a) would not be satisfied. Further, even if secondment were to be considered as ‘service’, it could only be ‘managerial service’ (mentioned in section 9(1(vii)). However, Article 13(4) (c) includes only technical or consultancy services. Hence, the payment fails the test in (a) above. Additionally, condition (b) requires that services ‘make available’ technical knowledge, etc. As no technical knowledge, etc. was ‘made available’ by UKCo, it also fails the test in (b) above.

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Industrial Undertaking – Deduction u/s. 80 HH and 80-I – Neither section 80HH nor section 80-I (as it stood in assessment year 1992-93) statutorily obliged an assessee to maintain its accounts unit-wise and it was open to maintain accounts in a consolidated form from which unit-wise profits could be worked out for computing deduction u/s. 80HH/80I.

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[2012] 349 ITR 352 (SC) CIT v. Bongaigaon Refinery and Petrochemical Ltd.

Bongaigaon Refinery and Petrochemical Ltd. (for short “BRPL”) (before it merged in IOC) was a public sector undertaking engaged in refinery, petrochemical and polyester staple fibre business. Three different and separate units were set up by BRPL in the financial year 1979-80, 1985-86 and 1988-89 respectively. The three units were engaged in the production of separate and distinct types of products. They were three different industrial undertakings. BRPL was entitled to claim deduction u/s. 80HH and 80-I of the Income-tax Act, 1961, during the relevant assessment year 1992-93. BRPL could not claim such deduction till the assessment year 1992-93, as its net taxable income for earlier assessment years was nil. It was only in the assessment year 1992-93 when the gross total became positive that BRPL claimed relief for its petrochemical unit u/s. 80HH and u/s. 80-I of the Income-tax Act 1961. However, BRPL could not claim such deduction for its refinery unit, as the period for which such relief could be claimed had expired. Further, it could not claim such deduction for its polyester staple fibre unit as it had negative income during the accounting year ending 31st March, 1992, corresponding to the assessment year 1992-93.

The Assessing Officer while framing assessment had allowed the claim of deduction u/s. 80HH and 80I. Subsequently, the Commissioner of Income Tax revised the assessment u/s. 263 on the grounds that the assessee had not maintained its accounts unit-wise for claiming deduction u/s. 80HH and 80-I. On an appeal, the Tribunal held that there was no s tatutory requirement u/s. 80HH(5)/80-I(7) to maintain unit-wise accounts, but to put an end to the litigation directed the assessee to submit unit-wise accounts. The assessee went in an appeal before the High Court which set aside the direction of the Tribunal. On an appeal to the Supreme Court by the Department, the Supreme Court held that though neither section 80HH nor section 80-I (as it stood) statutorily obliged assessee to maintain its accounts unit-wise and that it was open to assessee to maintain the accounts in a consolidated form, however in order to put an end to the litigation between the Tax Department and PSU, it remitted the case to the Assessing Officer, to ascertain whether the assessee had correctly calculated its net profits for the assessment year in respect of its petrochemical units for the purposes of claiming deduction u/s. 80HH and 80-I. The Supreme Court observed that in the present case, the assessee had prepared its financial statements on consolidated basis from which it had worked out unit-wise net profits. If not done, it could be done by the Auditors even today from the Consolidated Books of Accounts. Once such working is certified by the Auditors, the net profit computation (unit-wise) could be placed before the Assessing Officer, who can find out whether such profits are properly worked out and on that basis compute deduction u/s. 80HH/80-I.

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Commission to Non-resident Agents – Whether Accruing or Arising in India

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Issue for Consideration Many exporters, located in India, use the services of commission agents located abroad, for procuring orders from abroad. These agents locate customers in foreign countries, and procure orders from them on behalf of the Indian exporters . The goods are then shipped from India to such customers by the Indian exporters, and payment is received directly from such customers by the Indian exporters. The commission agents are generally paid a commission by the Indian exporters as a percentage of the orders procured by the agents, such commission generally being remitted directly from India to the overseas bank accounts of the agents.

The taxability of such commission in India had been an issue that had arisen long back, and the CBDT as far back as 1969, had issued a circular no. 23 dated 23.7.1969, clarifying that such commission was not taxable in India. Further, vide circular no. 786 dated 7.2.2000, the CBDT had again reiterated that such commission was not taxable in India u/s. 5(2) and 9, and that therefore no tax was deductible at source u/s. 195 from such commission. However, vide circular no. 7 of 2009 dated 22.10. 2009, the CBDT has withdrawn both the above referred circulars, no. 23 as well as no. 786, besides the circular no. 163 dated 29.5.1975 which dealt with an agent engaged in the activity of purchase of goods for export. The ostensible reason behind withdrawal of the said circulars was that the interpretation put on the said circulars by some of the taxpayers to claim relief in the opinion of the Board was not in accordance with the provisions of section 9, or the intention behind the issue of the circulars.

In the light of the withdrawal of the above circulars, the question has arisen as to whether such commission to foreign agents is subject to tax in India, and whether tax is accordingly deductible u/s. 195 from such commission. In case of agents who are tax residents of countries with which India has Double Taxation Avoidance Agreements, such income may not be taxable in India on account of the applicability of Article 7 of the DTAA dealing with Business Profits, as business profits are not taxable in India in the absence of a permanent establishment in India. The issue would however assume significance in the case of agents who are tax residents of countries with which India does not have DTAAs, and who would be governed by the provisions of the Income Tax Act.

While the Authority for Advance Rulings has recently taken a view that such commission is chargeable to tax in India under the provisions of the Income Tax Act, the Hyderabad bench of the tribunal has taken a contrary view of the matter.

SKF Boilers & Driers’

Case The issue came up before the Authority for Advance Rulings (AAR) in the case of SKF Boilers and Driers Pvt Ltd, in re, 343 ITR 385.

In this case, the applicant was an Indian company engaged in the manufacture and supply of rice par boiling and dryer plants as per customer requirements. It had received an order from a Pakistani company through two Pakistani agents. The plant was shipped to the Pakistani customer, and on completion of the export order, the commission became payable to the agents as per the agreed terms. A ruling was sought from the AAR as to whether such commission income of the nonresident agents could be deemed to accrue or arise in India and whether tax was required to be deducted at source u/s. 195.

On behalf of the revenue, it was pointed out that there was no DTAA with Pakistan which covered such payment, nor was there any other tax exemption available. It was also stated that circular no. arising to the agents on account of export commission fell u/s. 5(2)(b), as the income had accrued in India when the right to receive the income became vested.

On behalf of the applicant, it was argued that the agents had rendered services abroad and would be entitled to receive commission abroad for the services rendered to foreign clients of the applicant. As services were rendered outside India, and the payment was receivable by the agents abroad, no income would arise u/s. 5(2)(b) read with section 9(1).

The AAR considered the provisions of sections 5 and 9, and observed that they proceeded on the assumption that income had a situs, and the situs had to be determined according to the general principles of law. According to the AAR, the words ‘accrue’ or ‘arise’ occurring in section 5 had more or less a synonymous sense, and income was set to accrue or arise when the right to receive it came into existence. The AAR expressed the view that no doubt the agents had rendered services abroad and had solicited orders abroad, but the right to receive the commission arose in India when the order was executed by the applicant in India. According to the AAR, the fact that the agents had rendered services abroad in the form of soliciting the orders and that the commission was to be remitted to them abroad were wholly irrelevant for the purpose of determining the situs of their income.

The AAR therefore held that the income arising on account of commission payable to the two agents was deemed to accrue and arise in India and was taxable in India in view of the specific provisions of section 5(2)(b) read with section 9(1)(i), and that the provisions of section 195 would therefore apply.

Avon Organics’ case

The issue again came up recently before the Hyderabad bench of the tribunal in the case of ACIT v Avan Organics Ltd., 28 taxmann.com 170.

In this case, the assessee was engaged in the activity of manufacture and sale of chemicals and bulk drugs. It paid commission to foreign agents for services rendered by them in connection with effectuating export sales, and such payments were made by telegraphic transfer directly to the overseas bank accounts of the agents. Such payments were made without deducting tax at source. It was claimed by the assessee that the foreign agents operated in their respective countries and no part of the income arose in India, and hence no tax was required to be deducted at source on the payments made to the foreign agents.

The assessing officer rejected the assessee’s contention by observing that the non-residents were paid by way of telegraphic transfer obtained from banks in India, that the banks acted as agents of the non-residents, and therefore, the non-residents had received the payment in India. He accordingly disallowed the payment of the commission u/s. 40(a)(i). The Commissioner (Appeals) reversed the order of the assessing officer.

Before the tribunal, it was argued on behalf of the revenue that the commission payment being for services rendered by the foreign agents in connection with business activities arising in India, was taxable in the hands of the foreign agents, and therefore the assessee was required to deduct tax at source.

On behalf of the assessee, it was argued that the foreign agents did not render any part of the services in India, did not have an establishment in India and therefore, commission was not deemed to have arisen in India as per section 5(2)(a). It was further argued that the mere fact of transmission of the commission to foreign agents through telegraphic transfer did not make the banks as agents of the foreign commission agents, amounting to receipt of payment on their behalf in India.

The tribunal examined the material on record and noted that besides the fact of telegraphic transfer of the remittances being made from a bank in India, the assessing officer had no other material on record to show that the foreign agents either rendered any services in India or had any permanent establishment in India. According to the tribunal, only the fact that the remittances towards commission were telegraphically transferred to the foreign agents from banks in Hyderabad would not lead to the inference that the income to the foreign agents accrued or arose in India in terms of section 5(2)(a).

The tribunal therefore held that the assessee was justified in not deducting tax at source from the commission paid to the foreign agents.

A similar view had been taken earlier by the AAR in the case of SPAHI Projects (P) Ltd, in re 183 Taxman 92 and by the Tribunal earlier in the case of DCIT v Divi’s Laboratories Ltd 131 ITD 271 (Hyd). In the latter case, the Tribunal has expressly taken the view that the withdrawal of earlier circulars by the CBDT did not assist the Department in disallowance of such expenditure.

Observations

The controversy to an extent revolves around the question whether the withdrawal of the said circulars changed the legal position, as it was understood that the said circulars only confirmed the legal position that such commission was not taxable in India. Circular nos. 23 and 786, clarified the legal position and confirmed that even the interpretation of the CBDT was that, where the non-resident agent operated outside the country, no part of his income arose in India, and since the payment was usually remitted directly abroad, it could not be held to have been received by or on behalf of the agent in India. The CBDT confirmed that this was its interpretation of sections 5(2) and 9, and this view prevailed within the CBDT right till 22.10. 2009, when circular no. 7 of 2009 was issued for withdrawing the above circulars.

The position stated by the earlier circulars is the correct legal position, and the circulars merely clarified this position, a fact that has been confirmed by the number of tribunal and High Court decisions which, in the past, have upheld the validity of the reasoning and conclusion given in the said circular nos. 23 and 786. Therefore, the mere withdrawal of a circular which clarified the correct legal position would not change the legal position in this regard and if that is so , the stand now taken by the CBDT under the said circular 7 of 2009 has to be taken as the one that is contrary to the true legal position under the Act for taxation of such commission.

The AAR in SKF Boilers & Driers case perhaps erred holding that the place of accrual of an income is to be determined w.r.t the time of its accrual. While it is true that the point of time when commission arises is the time when the export of goods takes place, the AAR, in SKF Boilers & Driers case, erred in taking the view that even the situs of accrual of the income was the place from where the goods were exported. Under tax laws in India, it has been generally accepted that the place where the work is actually done is normally the situs of accrual of the income. For instance, in the case of salary income, the place of rendering of services is regarded as the place of accrual of income. The commission agent did not carry on any activity in India, and just the fact that the moment of accrual of income was linked to the moment of export of goods from India, did not mean that the commission income also accrued in India. The income from the export of goods was not the same as the income by way of commission. The linkage between the quantum or time of accrual between two events does not necessarily imply a linkage between the place of accrual of the two events. For instance, the value of a derivative is derived from its underlying fact, but the place of its accrual would be the place where the contract is entered into, and not the

place where the delivery of the underlying goods takes place. The AAR seems to have mistaken the linkage between the two events vis-a -vis the moment of accrual, to also imply a linkage in the place of accrual.

The AAR in the SKF Boilers & Driers case seems to have overlooked clause (a) of explanation 1 to section 9(1)(i). This clause provides that in the case of a business of which all the operations are not carried out in India, the income of the business that is deemed under this clause to have accrued or arisen in India is only such part of the income as is reasonably attributable to the operations carried out in India. This clause supports the view that the Income Tax Act treats the place where the activity is carried out as a place of accrual of income. This effectively means that if a business is only partly carried out in India, only that part of the income attributable to the business activity carried out in India would be taxable in India. This position is further reiterated by explanation 3 to section 9(1)(i) of the Act. That being the case, if no part of the business activity is carried out in India, as in the case of a foreign commission agent, then no part of the income can be taxed in India.

Further, the Supreme Court, in the case of CIT v Toshoku Ltd 125 ITR 525, considered a situation where an Indian exporter had appointed a non-resident sales agent for exports. The commission was credited in the books of the Indian exporter, and was subsequently paid. While holding that such credit did not constitute receipt of the commission in India, the Supreme Court also considered whether the commission accrued or arose in India. The Supreme Court observed as under:

“The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non-resident assessees during the relevant year. This takes us to section 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of cl. (a) of the Explanation to cl. (i) of s/s (1) of section 9 of the Act, which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India, shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the tax-able territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India.

In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad, does not amount to an operation carried out by the assessees in India as contemplated by cl. (a) of the Explanation to section 9(1)(i) of the Act. The commission amounts which were earned by the non -resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India.”

From the above decision of the Supreme Court, it is clear that in the absence of any activity being carried out in India by a non-resident commission agent, the commission does not accrue or arise in India, and is not taxable in India.

A view similar to the view taken in the case of Avon Organics in favour of the assessee has been taken by the Hyderabad tribunal in the case of Priyadarshini Spinning Millls (P) Ltd. , 25 taxmann. com 574. The tribunal in this case took a view that no tax was deductible at source u/s. 195 on payment of such commission and that expenditure on commission could not be disallowed u/s. 40(a) (i) of the Act.

In view of the discussion here, it is appropriate to hold that the said Circular No. 7 of 2009 is without the authority of the law and shall have no application in determining the taxability of income by way of commission in the hands of a foreign commission agent rendering services outside India.

Nirupama K. Shah v. ITO ITAT ‘B’ Bench, Mumbai Before D. Manmohan (VP) and Rajendra Singh (AM) ITA No. 348/Mum./2010 A.Y.: 2006-07. Decided on: 18-11-2011 Counsel for assessee/revenue: Dr. K. Shivaram/O. A. Mao

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Section 54F — Amounts paid for completion of flat purchased in semi-finished condition, pursuant to a tripartite agreement entered into by the assessee with the contractors and the builder form part of cost of new house even though such agreement was entered prior to agreement for purchase of house.

Facts:
The assessee who was 50% co-owner of a flat at Walkeshwar sold the same for a sum of Rs.2.30 crores as per transfer deed dated 15-1-2006. The assessee invested sale proceeds in purchase of a house property vide agreement dated 26-5-2006 for Rs.45.60 lacs. The assessee had before completion of the building incurred expenditure of Rs.43 lakhs as per three supplementary agreements dated 22-4-2006. The assessee, therefore, treated the cost of the new house at Rs.88.60 lakhs for the purpose of claiming deduction u/s.54F.

The assessee explained to the AO that the flat purchased was in a semi-finished condition without flooring, plumbing, wiring, etc. Therefore, for providing internal basic amenities as mentioned in the main agreement, the assessee entered into a supplementary agreements which were also signed by the builder. The AO observed that the supplementary agreements were entered prior to the main agreement. The main agreement did not have reference of the supplementary agreements. The main agreement clearly provided that the builder was providing the flat with all basic amenities required for making the premises habitable. He did not allow the exemption with reference to this sum of Rs.43 lakhs and held the expenditure of Rs.43 lakhs incurred by the assessee to be cost of improvement of the flat, which could not be considered for deduction u/s.54F.

Aggrieved the assessee preferred an appeal to the CIT(A) where he submitted that since the assessee was in urgent need of the flat and the flat being purchased was in skeletal condition, the seller suggested that the assessee engage other contractors for finishing the work. It was because of this reason that the supplementary agreement was entered into before the main agreement. The assessee substantiated his contentions by referring to letter dated 29-3-2006 written by the builder. The CIT(A) confirmed the order passed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the assessee took possession of the flat on 15-5-2006 and thereafter the registered deed was executed on 26-5-2006. The Tribunal held that the claim of the assessee cannot be rejected only on the ground that the agreement had been entered into prior to taking over possession of the flat. The claim of the assessee to engage other contractors to expedite work as suggested by the builder cannot be held unjustified on the facts of the case. It held that all expenditure incurred for acquisition of the new flat prior to taking over possession has to be considered as part of the cost. However, in order to verify that the assessee has not claimed any bogus expenditure to inflate the cost so as to claim higher deduction or show double expenditure in respect of the same type of work, the Tribunal set aside the order passed by the CIT(A) and restored the matter to the file of the AO for passing a fresh order after necessary examination.

The Tribunal allowed the appeal filed by the assessee.

Note: It appears that the reference to section 54F should be a reference to section 54, since the assessee had sold a residential house.

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2011-TIOL-748-ITAT-Mum. ITO v. Taj Services Pvt. Ltd. A.Y.: 2003-04. Dated: 16-9-2011

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Section 48(i) — Compensation paid by the assessee to lessee to terminate the leasehold rights and surrender possession of the aircraft to the purchaser of the aircraft from the assessee is eligible for deduction while computing capital gain.

Facts:
The assessee-company, engaged in the business of travel-related services, gave an offer to Mafatlal Finance Co. Ltd. (MFL) for purchase from MFL an aircraft which MFL owned and was leased by MFL to Megapode Airlines Ltd. (MAL), for a period of 7 years commencing on 30-12-1994 and ending on 29-12-2001, under a lease agreement dated 30-12-1994, with an option to renew the lease for an indefinite period of time. The terms of sale of air-craft by MFL to the assessee were that the assessee would pay MFL a consideration of Rs.43,75,000 and sale would be subject to the rights of the lessee (MAL) under the lease agreement dated 30-12-1994 and in particular the right of MAL to extension of the tenure of the lease. In addition to the consideration, the assessee was also to pay to MAL a sum of Rs.3.18 crores spent by MAL to refurbish the aircraft to make it air-worthy. On 15-1-2002, MFL raised an invoice on the assessee for sale of aircraft. On 1-3-2002, the Directorate General of Civil Aviation issued a certificate of registration, registering the assessee as the owner of the aircraft. This certificate also recognised MAL as the operator of the aircraft. According to the assessee, it acquired the aircraft on 28-12-2001.

The assessee informed MAL that since it proposed to sell the aircraft without any encumbrances, the assessee proposed to foreclose the lease and requested MAL to handover the aircraft. The assessee gave 3 months’ notice of termination and informed MAL that the termination would be effective 6-5-2002.

Consequent to various negotiations which took place between the assessee and MAL, it was agreed by the assessee with MAL that the assessee would give Rs.4.70 crore to MAL as compensation for premature closure of the lease agreement and MAL agreed to deliver the aircraft in good working condition on or before 6-5-2002. Also, by lease agreement dated 25-2-2002 between the assessee as owner and lessor of the aircraft and MAL as the lessee, the lease period of the aircraft to MAL was extended by 5 years effective from 30-12-2011.

The assessee sold the aircraft without any encumbrances for a consideration of Rs.8,92,87,147. While computing short-term capital gains arising on transfer of aircraft, the assessee inter alia claimed a deduction of Rs.4,70,00,000, being amount of compensation paid for premature termination of the lease agreement, u/s.48(i) of the Act, as being expenditure incurred wholly and exclusively in connection with transfer of capital asset.

The AO while assessing the total income of the assessee did not allow this amount as a deduction on the ground that also that MFL having earned Rs.17.51 crore as lease rentals from MAL till date of sale could have sold the aircraft to MFL or MAL for a consideration of Rs.43.75 lakh and the amount which would have been taxable in that case would have been greater; the assessee and MAL were part of the same group and that MAL was suffering losses and therefore payment for foreclosure of lease agreement was to avoid tax liability. Also, the transaction was not a genuine transaction since the termination of lease by the assessee was on 6-2-2002, whereas the renewal agreement with MAL was entered only on 25-2-2002 and even this lease agreement did not contain clauses for termination of the lease and the monetary compensation quantified and agreed between the parties.

Aggrieved, the assessee preferred an appeal to the CIT(A) who distinguished the decisions relied upon by the AO and allowed the appeal filed by the assessee on the ground that once it is established that the assessee was under a contractual obligation to provide the aircraft free of any encumbrances for which it had paid compensation to MAL, such compensation is inextricably incidental to transfer and, hence, allowable as deduction u/s.48(i) of the Act.

Aggrieved the Revenue preferred an appeal to the Tribunal.

Held:
The Tribunal held that the compensation paid to MAL for surrendering its pre-existing rights as the lessee is inextricably connected to the transfer of the aircraft as one of the condition for sale of the aircraft by the assessee was surrender of possession to the purchaser free from all encumbrances. It noted that the renewal agreement had to be signed between the assessee and MAL on 25-2-2002 so that possession of the aircraft by MAL till delivery to the purchaser is made remains lawful. It also held that there can be no complaint regarding compensation paid to MAL being excessive. It is for the parties to the agreement to decide on the rightful compensation. There is no material available on record to show that there was any ulterior motive in paying the sum of Rs.4.70 crore as compensation by the assessee to MAL for surrendering leasehold rights and delivering possession of the aircraft. It also observed that the alternative computation filed by the assessee clearly demolishes the case of the AO that there was any motive to avoid tax.

This ground of appeal filed by the Revenue was dismissed.

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2011-TIOL-735-ITAT-PUNE Glaxosmithkline Pharmaceuticals Ltd. v. ITO (TDS) A.Ys.: 2006-07 to 2008-09. Dated: 7-10-2011

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Sections 9(1), 194C, 194J — Security services are not technical or professional services. Hence, payment made in lieu of such services is not covered u/s.194J but u/s.194C.

Facts:
The assessee, engaged in manufacturing of medicines was subjected to survey action u/s.1333A of the Act on 21-11-2007 by the ITO (TDS) (AO). The AO noticed that in respect of payments made by the assessee towards security charges, the assessee was deducting tax at source @ 2.26% u/s.194C. The AO was of the view that the payments for security charges are covered u/s.194J. He passed an order u/s.201 and 201(1A) r.w.s. 194J and demanded payment of TDS and interest on TDS for the 4 assessment years 2005-06 to 2008-09.

Aggrieved the assessee preferred an appeal to the CIT(A) who held that security personnel were rendering skilled services to the assessee and can be categorised as professional or technical services as per the Explanation to section 194J of the Act. He upheld the order passed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal having considered the answer of the CBDT to Q No. 28 of Circular No. 715, dated 8-8-1995 held that an electrician is also a skilled person and if the services of an electrician provided by a contractor are treated by the CBDT under the provisions of section 194C vis-àvis section 194J, then it gives strength to the argument that security services provided by a contractor will also come under the provisions of section 194C, because the security guards are also skilled persons as an electrician. The services provided by security personnel under a contract with the agency cannot be categorised as technical service unless the provisions of clause (vi) to Explanation 2 to section 9(1) are fulfilled. In order to rope in any service provider within the net of section 194J, it is of paramount importance to check the true nature of service provided on the touchstone of the mandate of this provision alone. Clause (vii) to Explanation 2 to section 9(1) defines fees for technical services, as consideration for rendering of any ‘managerial, technical or consultancy services’, the word ‘technical’ is preceded by the word ‘managerial’ and is succeeded by the word ‘consultancy’. Following the view of the decision of the Mumbai Bench in the case of ACIT v. Merchant Shipping Service (P) Ltd. and Others, (135 TTJ 589) (Mum.) it held that as both managerial and consultancy services are possible with human endeavour, the word ‘technical’ should also be seen in the same light. To be more precise, any payment for technical services in order to be covered u/s.194J, should be a consideration for acquiring or using technical know-how simplicitor provided or made available by human element. There should be direct and live link between payment and receipt/use of technical services/information. If the conditions of section 194J r.w.s. 9(1), Explanation 2 clause (vii) are not fulfilled, the liability under this section is ruled out. The payments made by the assessee for security services are covered u/s.194C.

The Tribunal allowed the appeal filed by the assessee.
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(2011) 131 ITD 84 (Hyd.) Sri Venkateswara Bhakti Channel v. ACIT, Circle-1(1) Dated: 26-11-2010

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Section 12A — Can a section 25 company be registered u/s.12A of Income-tax Act — Held, Yes.

Facts:

The assessee-company was registered u/s.25 of the Companies Act, 1956 and was engaged in producing religious feature films, serials for a temple. It applied for registration u/s.12A with the Commissioner. The application was rejected on the grounds that the assessee was a private limited company.

Held:
The provisions of section 11 deal with the exemption of the total income of a ‘person’ who derives income from property held under trust for charitable or religious purposes. The plain reading of the definition of person also includes a company. The word institution is also not defined anywhere in section 12AA, but the meaning as given in Oxford Dictionary nowhere suggests that company is not an institution. The company being a person in accordance with the scheme of the Act is entitled to benefit of section 12A.

Thus the test whether an assessee could be registered u/s.12A is not the status of the ‘person’, but on the basis that whether the person (assessee) was established for charitable or religious purpose.

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(2011) 131 ITD 1 (Ahd.) ITO Ward-2(4), Ahmedabad v. Chandrakant R. Patel A.Y.: 2006-07. Dated: 8-4-2011

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Section 55A r.w.s. 48 — Reference to DVO can be made under specific circumstances prescribed u/s.50C and fair market value determined by DVO cannot be replaced for full value of consideration.

Facts:

The assessee had shown long-term capital gain on sale of land. There was a common sale deed executed along with co-owners in respect of two plots. The assessee had showed sale consideration of Rs.41,860 per sq.mt. The ‘Jantri’ rate as per ‘Stamp Duty Authority’ was Rs.4500 and Rs.7000 per sq.mt. respectively, for the plots. The AO considering the area of the property referred valuation of the same to the DVO. The valuation report of the DVO valued the same at Rs.45,000 per sq.mt. The AO on the basis of report of DVO made the addition.

On appeal the assessee contended that reference made u/s.50C was illegal. The CIT(A) opined that reference to the DVO can be made u/s.142A, or u/s.55A, or u/s.50C. The CIT(A) was of opinion that section 142A has a limited scope for reference to Valuation cell i.e., for estimating an investment as prescribed u/s.69 and u/s.69B for certain assets (bullion, jewellery, valuable articles). Section 55A is in respect of ascertaining the fair market value for purpose of determining the cost of acquisition u/s.55(2)(b). As per section 50C reference is possible only if sale consideration is less than the stamp duty value fixed by stamp valuation authority. Thus, the CIT(A) held that addition made by the AO was not lawfully sustainable.

Aggrieved the Revenue appealed before the ITAT.

Held:
(1) The language in section 55A does not refer ‘value of consideration’ but only uses the term ‘Fair market value’. So, the scope of the section gets confined to determine the fair market value of a capital asset only. Thus, considering the language of section 48 the value so determined cannot be substituted for ‘Full value of consideration’.

(2) Section 50C states that the AO can refer to the DVO u/s.55A only if the assessee claims that the value adopted by the stamp valuation authority exceeds their fair market value or the value so adopted by stamp valuation authority has not been disputed by any authority, Court or High Court.

(3) Thus, the valuation made by the DVO and the consequential addition as made by the AO was reversed and the view taken by the CIT(A) was upheld.

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(2011) 129 ITD 200 (Delhi) Honda Siel Cars India Ltd. v. ACIT A.Y.: 2003-04. Dated: 16-5-2008

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Section 37(1) — Nature of payment made for acquiring technical know-how is capital or revenue expenditure depends upon whether payment is made to acquire any proprietary rights in technical know-how or right to use same for the business for limited period of time.

Section 92 — Transfer Pricing Officer (TPO) is not concerned, nor is he competent to decide as to whether payment for technical rights is capital or revenue — Tribunal decision regarding nature of payment for technical rights by assessee could not be deferred at the request of Department till TPO determines arm’s-length price. Such course was not contemplated by law.

Section 37(1) — Expenditure incurred on advertisement is undisputedly business expenditure —Assurance given by assessee to give away car at its own cost to winner of advertisement scheme launched by paint company might be beneficial to the assessee in the long run and allowable as business expenditure.

Facts: I

The assessee paid Rs.29.40 crore being lump-sum fee for technical know-how and Rs.18.55 crore being royalty to Honda Motor Company Ltd. (HMCL) under technical collaboration agreement. Under the said agreement the assessee acquired right to use technical information provided by HMCL and ownership rights continued to remain with HMCL. As the assessee got only limited right to use and exploit know-how and did not acquire any intellectual property, he claimed the expenditure as revenue. However AO did not accept the assessee’s contention to treat the expenditure as revenue. He disallowed the same and treated the same as capital expenditure on the ground that know-how was crucial for setting up of the assessee’s business and not towards running an existing business.

Facts: II


Reference was made by the Revenue to TPO, to determine arm’s-length price of the amount paid for technical know-how and royalty. The Revenue requested ITAT that it should not give any finding on nature of the above payment till TPO determines its arm’s-length price.
Facts: III

Nerolac Paint launched a sales promotion scheme where the winner would get Honda City car. The assessee-company agreed to bear the cost of the car.

The Revenue disallowed the above advertisement expenditure in the books of the assessee as they were of the opinion that Nerolac Paint stood to benefit from the campaign and not the assessee.

Held: I


In order to ascertain whether payment made for acquiring technical know-how is capital or revenue expenditure, test that is to be applied in such case is whether the assessee got any proprietary/ownership rights or he merely got right to use the same for his business, irrespective of whether expenditure was incurred at the time of initiation of business or at any point of time subsequent thereto.

After noticing all the terms of technical know-how agreement, the ITAT held that on payment for technical know-how the assessee did not become owner of the same. HMCL continued to retain ownership rights in the technical know-how. HMCL merely granted licence to the assessee for manufacture of cars. The manufacture of the cars was the business for which the company was established. Payment made to HMCL was not in connection with setting up of plant but to enable the assessee to manufacture Honda cars in India which formed part of its stock in trade.

Therefore the payment of lump-sum fees for technical know-how and the royalty were treated as part of revenue expenditure.

Held: II

The function of TPO under the provisions of section 92 to 92C is to determine arm’s-length price and he is not concerned with deciding whether it is capital or revenue, nor is he competent in law to decide such question.

The ITAT held that it is first necessary to determine nature of payment and if it is held to be capital then it is not allowable as deduction and determination of arm’s-length price by TPO may not be necessary. However if it held to be revenue, then while giving effect to the order, the AO may, if so advised, refer the question of determination of arm’s-length price to TPO. But decision of tribunal regarding nature of payment cannot be deferred till determination of arm’s-length price by TPO. Such path was not contemplated by law.

Therefore, the request made by the Revenue was rejected.

Held: III


Any expenditure which is not capital or personal nature is allowable as deduction provided it is incurred wholly and exclusively for the purpose of the business according to section 37(1). Expenditure incurred wholly and exclusively for the purpose of the business does not cease to be so merely because it also benefits some other person.

As long as the expenditure benefits the assessee it should be allowed as deduction. Assurance of giving away Honda car at its own cost to the winner of Nerolac Paint promotion scheme may be beneficial to the assessee’s business in long run and is business expenditure. Hence, the expenditure incurred on advertisement should be allowed.

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(2011) 62 DTR (Mum.) (Trib.) 349 Free India Assurance Services Ltd. v. DCIT A.Ys.: 2001-02 to 2004-05. Dated: 30-3-2011

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Bogus purchases — Assessee made payments by cheques to two parties, received cash against the cheque payments and utilised such cash to purchase cloth from the grey market and the same has been recorded in the closing stock — Such purchases are allowed as deduction and cannot be treated as bogus.

Facts:

At the time of search and seizure, it was found that the assessee had made purchases amounting to Rs.30,80,730 for which the assessee had issued cheque and in lieu thereof he received cash. The assessee admitted the fact that such cash received was actually used to purchase fabric from the grey market. Thus the purchase bills were taken from parties to cover up the purchase actually made in the grey market. The fabric was purchased in the previous year and was lying in stock as on the last day of the previous year. The AO treated the same as bogus purchases and disallowed the same. The CIT(A) stated that as long as the stock is reflected in the books of account to that extent the credit for fabrics purchased ought to be given. But the CIT(A) disallowed 20% of total purchase u/s.40A(3) on the ground that the assessee had admitted that the purchases were from grey market.

Held:
In the absence of any material to show that no such cheque payments were made by the assessee or cash amount received by the assessee against the cheque payments was utilised by the assessee other than the purchases or the entry recorded in the closing stock is found to be fictitious or false, the assessee has made cash purchases of Rs.30,80,730 and the same needs to be allowed since they were undisputedly found recorded in the inventory of the assessee.

Regarding the application of provisions of section 40A(3), no such material was found to show that the assessee had made cash payments in the violation of section 40A(3). Disallowance cannot be merely based on a presumption basis.

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Revision: Power of Commissioner: section 264: A.Y. 1996-97: Exempt income offered for taxation by mistake: Commissioner not justified in rejecting application for revision.

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For the A.Y. 1996-97, in the return of income the assessee had offered an amount of Rs.7,18,050 being interest on FCNR deposits as taxable income. In appeal, the Commissioner (Appeals) had remanded the matter to the Assessing Officer. In the course of fresh assessment proceedings, the assessee realised that the interest of FCNR deposits was exempt u/s.10(15) (iv)(fa) of the Income-tax Act, 1961. Therefore, by a letter dated 5-1-2000, the assessee requested the Assessing Officer to exclude the amount from the taxable income. The Assessing Officer did not consider the request. The assessee, preferred a revision application u/s.264 to the Commissioner requesting for the relief. The Commissioner rejected the revision application.

The Gujarat High Court allowed the writ petition filed by the assessee and held as under:

“(i) The income-tax authorities under the Incometax Act, 1961, are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or on not being properly instructed, is overasses-sed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected.

(ii) Once the assessee had approached the Commissioner u/s.264, the Commissioner was required to apply his mind to whether the assessee was entitled to the relief prayed for. He was not justified in dismissing the application merely on the ground that it was the assessee who had shown the interest as his income for the year under consideration.

(iii) The Commissioner (Appeals) upon appreciation of the evidence on record had, as a matter of fact, found that the assessee was not ordinarily resident during the relevant periods. The present year fell between the said assessment years. Hence, it was apparent that the assessee was ‘not ordinarily resident’ for the year under consideration. The Commissioner was, therefore, not justified in rejecting the application u/s.264.”

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Export profit: Deduction u/s.80HHC: A.Y. 1998- 99: Supply of food and beverages to foreign airlines leaving India: Amount received deemed to be convertible foreign exchange: Assessee entitled to deduction u/s.80HHC.

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The assessee engaged in the business of hotelier supplied food and beverages in sealed containers to international flights leaving India. Such foods and beverages were cleared for transmission to the aircrafts and were also escorted by the Customs authorities at international airports. The Assessing Officer disallowed the claim for deduction u/s.80HHC of the Income-tax Act, 1961. The disallowance was upheld by the Tribunal.

On appeal by the assessee, it was contended by the Revenue that the assessee had charged sales tax on those items of food and beverages from the airline authority and such conduct itself indicates that the transactions were sales of items within the country. The Calcutta High Court reversed the decision of the Tribunal and held as under:

“(i) Though the word ‘export’ has not been defined in the Act, the word is to be interpreted in the light of the language of section 80HHC including the Explanation added thereto and if the formalities required in section 80HHC are fully complied with, it is not necessary that all the other formalities prescribed under the Customs Act, 1962, for export of the articles also required to be fully complied with by an assessee in addition to those prescribed u/s.80HHC.

(ii) There is no estoppel for the mistake of an assessee in treating the actual nature of transaction and the taxing authority cannot refuse to give appropriate benefit of deduction of tax merely for the mistake of an assessee if the mistake is lawfully rectified. If the assessee had wrongly realised sales tax on the item of export by treating the sale as within the State, the law would take its own course for such wrong action of the assessee, but such fact could not be a ground for refusing a just benefit available under the Act.

(iii) The certificate issued by the Commissioner of Customs indicated that the assessee in the process of selling the food and beverages in the airport had complied with the conditions mentioned in Explanation (aa) of section 80HHC. The Foreign Exchange Department, RBI certified that the provisions regarding treatment of the amounts received in rupees by a hotel company out of repatriable funds would also apply under the Foreign Exchange Management Regulations. In the absence of any evidence disputing the assertion of the officer concerned, the assessee had also complied with in condition mentioned in Explanation (a) and (aa) of section 80HHC of the Act.

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Export: Exemption u/s.10B: A.Y. 2003-04: Assessee an approved EOU and manufacturing articles for export: Some work done on job basis by sister concern: Not relevant: Assessee entitled to exemption u/s.10B.

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The assessee was an approved export-oriented unit and was manufacturing articles for export and was eligible for exemption u/s.10B of the Income-tax Act, 1961. For the A.Y. 2003-04, the Assessing Officer disallowed the exemption u/s.10B on the ground that the assessee had done some work on job basis from its sister concern. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“(i) There was no dispute that the assessee was an approved export-oriented unit and making exports. The authorities below recorded a finding that the assessee was involved in manufacture of an article or thing and the mere fact that it was getting some works done on job basis from its sister concern would not deprive the assessee of its claim to be an export-oriented manufacturing unit.

(ii) The Assessing Officer himself had recorded in respect of the assessee’s own case for the A.Y. 2004-05 that its unit fulfilled the conditions u/s.10B and allowed deduction. Even for the A.Y. 2005-06, the appeal filed by the assessee had already been allowed by the Commissioner (Appeals) holding the assessee to be entitled to claim deduction u/s.10B.

(iii) The assessee was entitled to exemption u/s.10B for the A.Y. 2003-04.”

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Depreciation: Intangible assets: section 32(1) (ii): A.Y. 2004-05: Depreciation is allowable on abkari licence u/s.32(1)(ii).

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The assessee was owning a bar attached hotel. For the A.Y. 2004-05, the assessee claimed depreciation on the value of the abkari licence u/s.32(1)(ii) of the Income-tax Act, 1961 as an intangible asset. The Assessing Officer disallowed the claim. The Tribunal observed that purchase of licence is a capital asset, but held that the assessee is not entitled to depreciation as the abkari licence does not depreciate.

On appeal by the assessee, the Kerala High Court reversed the decision of the Tribunal and held as under:

“Abkari licence is a business right given to the party to carry on liquor trade. The abkari licence squarely falls u/s.32(1)(ii) on which the assessee is entitled to depreciation at 25% of the written down value.”

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Is it fair to make amendments that may cause unintended hardship (Sub-clauses (e) and (f) of Section 80IB vis-à-vis sub-clause (c)

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Introduction:

Section 80IB(10) provides for 100% deduction of profits and gains from housing projects for certain period if it satisfies various conditions prescribed in the section. Section 80IB(10)(c) prescribes the condition restricting the size of residential unit to maximum built-up area of one thousand sq.ft if the residential unit is situated within the cities of Delhi or Mumbai and one thousand five hundred sq.ft at any other place.

In case of housing project having houses beyond this size, the developers used to circumvent the provisions by showing one house as two adjacent houses on paper, sell these premises to one person or persons belonging to one family and then combine it.

To avoid any such misuse, sub-clauses (e) and (f) were inserted by Finance Act, 2009 w.e.f. 1-4-2010. According to sub-clause (e), deduction shall be denied to the undertaking if more than one residential unit in the housing project is allotted to an individual.

Further, as per sub-clause (f), such deduction shall be denied to the undertaking, if one residential unit is allotted to an individual and at the same time the other unit is allotted to

(i) him or the spouse or his/her minor child, or

(ii) HUF of which he is a karta. Thus insertion of clause (e) and (f) definitely provided a check in the case of undertakings where the size of units was more than 1000 or 1500 sq.ft as the case may be. However, it created a hurdle even where the combined size of units was less than the prescribed area. In other words, if two units of 500 sq.ft each are allotted to husband and wife, respectively, then in that case the undertaking may lose the deduction even though the cumulative area does not exceed the prescribed area. This was certainly not the intention of the Legislature.

The unfairness:
How far is it logical to deny the deduction to an undertaking just because the condition in sub-clause (e) or (f) is not satisfied even though the prescribed condition of total built-up area to a family of an individual is satisfied, or not violated.

In fairness sub-clause (e) or (f) should have been drafted in such a way that the area allotted to a family of an individual collectively shall not exceed the prescribed area. In fact, that was the intention of the Legislature in inserting clauses (e) and (f).

In the situation where the question of denial of deduction arises where the areas of some of flats are exceeding the prescribed area or the flats are allotted as stated above, the solace is available to an undertaking in view of the decisions given below in which it was held that in such a situation, deduction may be denied only in respect of those units where the area exceeds the prescribed limit or the condition as above is not satisfied.

The said decisions are as follows:

(1) Sanghavi & Doshi Enterprise v. ITO, (Third member ITAT Chennai) (2011) 131 ITD 151/12 Taxmann. com 240

(2) CIT v. Bengal Ambuja Housing Development Ltd., (ITA 458 of 2006 dated 5-1-2007)

Conclusion:
In short, the purpose of introducing sub-clauses (e) and (f) was to curb the practice of claiming tax benefits by circumventing the limits of area. However, in the process, there has been an overdoing of the remedy, due to which even the genuine cases involving the total area within prescribed limits are also adversely affected. It is desirable that a suitable proviso be inserted or a clarification issued to the effect that the deduction or the tax benefits would not be denied so long as the total area is within the limits. In fact section 80-IB was introduced to encourage housing projects and in view of this, one may even feel that clauses (e) and (f) may prove to be harsh on the assessees.

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USA — Disciplinary proceedings against Auditors to be made public.

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A bipartisan pair of influential senators introduced legislation that would make disciplinary hearings against auditing firms public.

The bill would change a provision of the Sarbanes- Oxley Act that requires the Public Company Accounting Oversight Board to keep disciplinary proceedings against auditing firms confidential. The proposed legislation, sponsored by Senators Jack Reed and Chuck Grassley is called the PCAOB Enforcement Transparency Act of 2011.

The current chairman of the PCAOB, also has called for making the disciplinary proceedings public, arguing that “secrecy has a variety of unfortunate consequences” and this “state of affairs is not good for investors, for the auditing profession, or for the public at large.”

The PCAOB is responsible for ensuring that auditors of public companies meet the highest standards of quality, independence, and ethics,” Reed said in a statement. “Reliable financial reporting is vital to the health of our economy and we must take the legislative steps necessary to enhance transparency in the PCAOB’s enforcement process. Currently, Congress, investors, and others are being denied critical information about an auditor’s disciplinary process. Investors and companies alike should be aware when the auditors and accountants they rely on have been charged or sanctioned for violating professional auditing standards.”

Lack of transparency surrounding disciplinary proceedings under current law can provide unscrupulous firms with an incentive to litigate cases in order to continue to shield conduct from the public.

One accounting firm that was the subject of a disciplinary proceeding issued no fewer than 29 additional audit reports on public companies during the course of the proceedings, they noted. Because of the confidential nature of the proceedings, those public companies and their investors were completely unaware there was a potential auditing problem with this accounting firm. Before the firm was expelled from public company auditing, it issued those audit reports, knowing all the while that it was subject to disciplinary proceedings, but investors were denied this information.

“Sunshine is the best disinfectant,” Grassley said. “This legislation levels the playing field between auditors reviewed by the SEC and auditors reviewed by the PCAOB. Currently, PCAOB proceedings are secret while SEC proceedings are not. The secrecy provides incentives to bad actors to extend the proceedings as long as possible, so they can continue to do business without notice to businesses about potential problems with a particular auditor. This bill ends the secrecy and brings the kind of transparency that adds accountability to agency proceedings.”

They argued that the PCAOB’s closed proceedings run counter to the public enforcement proceedings of other regulators. Not only the SEC, but also the Labour Department, the Federal Deposit Insurance Corporation, the U.S. Commodity Futures Trading Commission, and other government agencies use public proceedings, as does the self-regulating Financial Industry Regulatory Authority. Nearly all administrative proceedings brought by the SEC against public companies, brokers, dealers, investment advisers and others are open, public proceedings.

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Supreme Court : Lending firms must follow norms before ‘re-possession’.

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The Supreme Court last week cautioned hire purchase firms not to take goods forcibly but follow the norms set by the Reserve Bank of India. In the judgment, Citicorp Maruti Finance Ltd. v. S. Vijayalaxmi, it emphasised that “in case of mortgaged goods subject to hire purchase agreements, the recovery process has to be in accordance with law.” The Court noted that the recovery process referred to in the agreements also contemplated such recovery to be effected in due process of law and not by use of force. “Till such time as the ownership is not transferred to the purchaser, the hirer normally continues to be the owner of the goods, but that does not entitle him on the strength of the agreement to take back possession of the vehicle by use of force. The guidelines which had been laid down by the Reserve Bank of India support and make a virtue of such conduct. If any action is taken for recovery in violation of such guidelines or the principles as laid down by this Court, such an action cannot but be struck down.”
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It’s disruption, not dissent: Deepak Parekh

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HDFC chairman Deepak Parekh and MP Ashok Ganguly issued a statement urging corporate India to throw its weight behind the government on the retail FDI issue. “We felt very strongly about this because we had raised the issue of policy inaction and now that they are trying to do something, there is so much opposition. What is happening today is disruption, not dissent,” said Parekh. He added that industry was unanimously in support of FDI in retail and so were Indian farmers.

“Nowhere in the world is there a four-times difference between what the farmer gets and what the retailer pays,” he said. According to the two leaders, opposition to FDI is coming from vested interests to the detriment of the majority. It points out that indigenous retail outlets — the kirana stores — suffer more because of political bandhs than because of competition. “FDI in retail has not been a sudden decision taken by the government. On the contrary, the idea has been toyed with for over 14 years. Detailed discussions with various stakeholders have been held, experts consulted and studies commissioned based on international experiences of organised retailing.”

“What is intriguing and bewildering is that the false alarm of FDI is continuing to be used after so many years, as a bogey in modern times against foreigners and foreign investment,” it said. The statement comes at a time when filibustering over the bill to allow FDI in retail has derailed the Parliament functioning. “There are 32 bills in this winter session of the Parliament for consideration and passing, many of which are of far greater consequence and importance for the country than FDI in retail. The protests on FDI in retail are misconceived and unfortunate, but hope to salvage this situation should not be lost,” the statement said.

The authors have pointed out that earlier this year many concerned with the country’s economic prospects had asked the government to stem the slowdown, increase investments and bring in new reforms. “No one objected till then. But when the government began to act, what have we, but chaos and adjournments over a decision to allow foreign direct investment in retail,” the statement said.

The group of 14 which had come together on issues relating to the economy included Wipro’s Azim Premji, ICICI’s N. Vaghul, industrialists Keshub Mahindra, Jamshyd Godrej and Anu Aga, former RBI governors M. Narasimham and Bimal Jalan (now a Rajya Sabha member), Justices B. N. Srikrishna and Sam Variava, architect of key Sebi and RBI regulations Yezdi Malegam, member of the PM’s Economic Advisory Council A. Vaidyanathan, and banker-turned-social worker Nachiket Mor.

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Reebok working on $ 1 shoe

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After low-cost airlines and vehicles, it’s now time for low-cost footwear. Sportswear maker Reebok is working on a project that could lead to the introduction of a shoe that is priced at $1, or around Rs.50. Reebok International, which is in the process of rolling out the project, said it will soon test the technical feasibility of ‘producing a durable, functional and affordable shoe’ before launching it in India.

In 2008, Herbert Hainer, CEO Adidas Group, which consists of the brand Reebok, had begun discussions with Grameen Bank founder Muhammad Yunus. This was followed by the development, marketing and distribution of low-cost footwear in Bangladesh in the form of a social business, which the Adidas Group expressed interest in.

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8 Indians in world’s top thinkers list

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India’s intellectual potential just got a branding shot in the arm when eight Indians made it to Thinkers 50 — a bi-annual global ranking of 50 most influential thinkers.

At number three is Vijay Govindarajan, professor of international business at Tuck School of Business at Dartmouth College in New Hampshire in the US, while Nitin Nohria, dean of Harvard Business School came in at number 13 on the list, compiled by consultancy Crainer Dearlove promoted by Stuart Crainer and Des Dearlove.

Govindarajan, author of The Other Side of Innovation that focusses on how to turn an innovative idea into a successful commercial business, moved up from 24th position in the 2009 list and 23rd position in the 2007 list.

In 2008, on a sabbatical from his university, he joined General Electric (GE) for 24 months as its first Professor in Residence and Chief Innovation Consultant. Govindarajan also created ripples in the world of innovation when he posed a global challenge of how to build a $300 house.

“The Thinkers 50 ranking has kept pace with ideas that are shaping the daily agenda of global businesses and managers, and the ranking is a guide to which thinkers are in, and who have been consigned to business history,” According to the Thinkers 50 website, to arrive at the list of the final 50, panelists rely on criteria such as “originality of ideas, practicality of ideas, presentation style, written communication, loyalty of followers, business sense, international outlook, rigour of research, impact of ideas and the elusive guru factor.”

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New Quit India Movement? — India’s billionaires talk of getting out.

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The government may have saved its political skin by putting FDI in retail on hold, but it has added to the sense of gloom that’s engulfing India Inc. For the past several weeks, there’s been a depressing drumbeat of stories of Indian businessmen choosing the relatively low growth, high-stability option of investing abroad over the uncertainty of launching new ventures at home.

Says the India-head of a fabled global investment bank, “For me, there’s no slowdown. My plate’s full with mandates from Indian companies looking at acquisitions abroad”.

But it’s not just about the flight of investments anymore. Several Indian billionaires say they are frustrated enough to want to shift base overseas and run their increasingly transnational business empires from cities like London and Singapore. “I’m sick and tired of what’s happening here. I don’t want to live in this country anymore,” said one of India’s biggest barons.

The reasons are mainly twofold: the policy paralysis brought on by a politically weak and scam-struck government, compounded by obstructionist competitive politics; and the climate of fear that has spread because of the raids on and arrests of businessmen. They have a third, more specific grouse (not that it’s new): the time and hassle it takes to get environmental clearance and acquire land.

Bulge-bracket businessmen — from industries as diverse as telecom and textiles, aviation and steel, real estate and minerals — are talking ‘Quit India’, but obviously not in public. They may be exaggerating their angst, but for the first time since the dawn of liberalisation 20 years ago, the India story seems to be dimming compared to the welcoming lights of foreign shores. As RPG Enterprises chairman Harsh Goenka quips, “We are looking for the red carpet, not for red tape.”

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A.P. (DIR Series) Circular No. 58, dated 15-12-2011 — Risk management and interbank dealings.

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This Circular has, with immediate effect, made the following changes:

(1) Under contracted exposures — Forward contracts booked by residents irrespective of the type and tenor of the underlying exposure, once cancelled, cannot be rebooked.

(2) Under probable exposure based performance:

(a) For importers availing of the above past performance facility, the facility stands reduced to 25% of the limit as computed above, i.e., 25% of the average of the previous three financial years’ (April to March) actual import/ export turnover or the previous year’s actual import/export turnover, whichever is higher. In case of importers who have already utilised in excess of the revised/reduced limit, no further bookings may be allowed under this facility.

(b) All forward contracts booked under this facility by both exporters and importers hence forth will be on fully deliverable basis. In case of cancellations, exchange gain, if any, must not be passed on to the customer.

(3) All cash/tom/spot transactions can be undertaken for actual remittances/delivery only and cannot be cancelled/cash-settled.

(4) Hedging by FII — Forward contracts booked by the FII, once cancelled, cannot be rebooked. The forward contracts may, however, be rolled over on or before maturity.

(5) Treasury functions of authorised dealers

(a) Net Overnight Open Position Limit (NOOPL) to be reduced across the board.

(b) Intra-day open position/daylight limit must not exceed the existing NOOPL approved by RBI.

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A.P. (DIR Series) Circular No. 57, dated 13-12-2011 — Foreign Exchange Management Act, 1999 (FEMA) — Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules) — Compounding of Contraventions under FEMA, 1999.

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Presently, all applications for compounding are received and processed by the Compounding Authority at RBI Central Office at Mumbai.

This Circular has decentralised compounding contraventions in respect of the following at its Regional Office:

(i) Delay in reporting of inward remittance,

(ii) Delay in filing of form FC-GPR after allotment of shares, and

(iii) Delay in issue of shares beyond 180 days.

All applications must be made to the Regional Offices at:

(i) Bhopal, Bhubaneshwar, Chandigarh, Guwahati, Jaipur, Jammu, Kanpur, Kochi, Patna and Panaji for amount of contravention below Rupees one crore (Rs.10,000,000).

(ii) Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi for amount of contravention without any limit.

All applications other than those dealt with by the Regional Offices will continue to be dealt with by the Compounding Authority at RBI Central Office at Mumbai.

Also, annexed to this Circular are formats required to be submitted along with the compounding application in respect of the following contraventions :

(1) Details to be furnished along with application for compounding of contravention relating to Foreign Direct Investment in India.

(2) Details to be furnished along with application for compounding of contravention relating to External Commercial Borrowing.

(3) Details to be furnished along with application for compounding of contravention relating to overseas investment.

(4) Details to be furnished along with application for compounding of contravention relating to branch/liaison office in India.

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A.P. (DIR Series) Circular No. 56, dated 9-12-2011 — Foreign investment in pharmaceuticals sector — Amendment to the Foreign Direct Investment Scheme.

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This Circular, based on Press Note 3 (2011 Series), dated November 8, 2011, has amended FDI policy for pharmaceuticals sector as under:

(i) FDI, up to 100%, under the Automatic Route, would continue to be permitted for greenfield investments in the pharmaceuticals sector.

(ii) FDI, up to 100%, would be permitted for brownfield investment (i.e., investments in existing companies), in the pharmaceutical sector, under the Approval Route.

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A.P. (DIR Series) Circular No. 55, dated 9-12-2011 — Foreign Direct Investment (FDI) in India — Issue of equity shares under the FDI scheme allowed under the Government route.

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Presently, companies are permitted to issue equity shares/preference shares under the Approval Route by conversion of import of capital goods/ machineries/ equipment (including second-hand machineries) and pre-operative/pre-incorporation expenses (including payments of rent, etc.), subject to terms and conditions.

This Circular has modified two of the conditions as follows:

 

 

 

A.P.
(DIR Series)

Earlier
condition

Revised
condition

Circular
No. 74,

 

 

 

 

 

dated
30-6-2011

 

 

 

 

 

 

 

 

Para 3(I)(d)

All
such conversions of import payables for

Applications
complete in all respects, for

 

capital
goods into FDI should be completed

conversion
of import payables for capital

 

within
180 days from the date of shipment of

goods
into FDI being made within 180 days

 

goods.

from
the date of shipment of goods.

 

 

 

Para 3(II)(d)

The
capitalisation should be completed within

The
applications complete in all respects,

 

the
stipulated period of 180 days permitted for

for
capitalisation being made within the

 

retention
of advance against equity under the

period
of 180 days from the date of in-

 

extant
FDI policy.

corporation
of the company.

 

 

 

 

 

 

S. 2(24) — Income — Whether the receipts of non-occupancy charges, transfer fees and voluntary contribution from its members by the cooperative housing society is taxable — Held, No.

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11. ITO v. Grand Paradi CHS
Ltd.


ITAT ‘G’ Bench, Mumbai

Before D. K. Agarwal (JM)
and

A. L. Gehlot (AM)

ITA No. 521/Mum./ 2010

A.Y. : 2005-06. Decided on :
27-8-2010

Counsel for revenue/assessee
: A. K. Nayak/Dharmesh Shah

S. 2(24) of the Income-tax
Act, 1961 — Income — Whether the receipts of non-occupancy charges, transfer
fees and voluntary contribution from its members by the cooperative housing
society is taxable — Held, No.

Per D. K. Agarwal :

Facts :

The assessee was a
co-operative housing society. During the year under appeal, it had shown
following receipts in its accounts which is the subject matter of dispute :


(i) Non-occupancy
charges (sub letting charges) — Rs.13.24 lakh;

(ii) Transfer fees of
Rs.1.95 lakh;

(iii) Voluntary
contribution (Donation) from outgoing members and incoming members Rs. 54.52
lakh;


The assessee contended that
all the above three receipts were exempt from tax on the principle of mutuality.
However, the AO, following the decisions of the Bombay High Court in the case of
Presidency Co-op. Housing Society Ltd. (216 ITR 321) taxed the above receipts.
On appeal, the CIT(A) relying on the decisions of the Bombay High Court in the
cases of Shyam Co-op. Housing Society Ltd. (ITA Nos. 92, 93 and 206, dated
17-7-2009) and Su Prabhat



Co-op. Housing Society Ltd. v. ITO, (ITA No. 1972 of 2009, dated 1-10-2009),
allowed the appeal of the assessee.

The Revenue challenged the
order of the CIT(A) before the Tribunal on the ground that the two decisions
relied on by the CIT(A) have not been accepted by the Department and the same is
challenged before the higher authority. Thus, according to it, the matter was
sub-judice.

Held :

As regards non-occupancy
charges — the Tribunal relying on the decision of the Bombay High Court in the
cases of Su Prabhat Co-op. Housing Society Ltd. upheld the order of the CIT(A).
With regard to transfer fee and voluntary contribution — it agreed with the
assessee and held that its case was covered in favour of the assessee by the
decision of the Bombay High Court in the case of Sind Co-op. Housing Society
Ltd. v. ITO, (317 ITR 47).

According to the Tribunal, the decision of
the Bombay High Court in the case of Presidency Co-op. Housing Society Ltd.
relied on by the Revenue, had been distinguished by the Bombay High Court in the
case of Sind Co-op. Housing Society Ltd. Further, it observed that the Revenue
was not able to show any other contrary decisions. As regards the Revenue’s
contention about the non-acceptance of the Bombay High Court decisions, since
the same have been challenged, the Tribunal based on the Bombay High Court
decision in the case of Bank of Baroda v. H. C. Srivastava and another, (256 ITR
385) held that the ground taken by the Revenue was devoid of any merit and
accordingly, the same was rejected.

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Explanation (aa) to S. 80HHC — Date of export out of India — Held that the relevant date was the date when the goods were dispatched and cleared by the customs and not the date as per the bill of lading.

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22. Dy. CIT v. Vallabh Metal Inc..


ITAT ‘H’ Bench, Delhi

Before I. P. Bansal (JM) and

Shamim Yahya (AM)

ITA No. 2564/Del./2009

A.Y. : 2004-05. Decided on : 27-11-2009

Counsel for revenue/assessee : Piyuash Kaushik/

N. K. Chand

Explanation (aa) to S. 80HHC — Date of export out of India
— Held that the relevant date was the date when the goods were dispatched and
cleared by the customs and not the date as per the bill of lading.

Per Shamim Yahya :

Facts :

One of the issues before the tribunal was regarding the
year in which the exports made by the assessee under certain invoices fall.
The AO noted that exports under Invoice Nos. 435 to 444, though dated March,
the corresponding bills of lading were dated April. The assessee contended
that during the financial year itself the goods were dispatched and the custom
clearance was obtained. However, the AO held that these goods cannot be
considered as export of the current year. On appeal the CIT(A) held that the
AO’s view that the bill of lading was the date of sale was absolutely contrary
to the provisions of explanation (aa) of S. 80HHC.


Before the Tribunal the Revenue submitted that the bill of
lading was the authoritative document for dealing with the period of export
sales. It was further submitted that those goods had been exported on FOB
(Free on Board) wherein risk passes to buyer, once goods were delivered on
board of the ship by the seller.


Held :


The Tribunal noted the following facts :


(a) it had been regular system of accounting wherein
exports were accounted according to the date of export invoices;

(b) the goods had been dispatched from the factory
premises of the assessee and had been duly cleared by the customs during the
financial year;


Further, referring to Explanation (aa) to S. 80HHC defining
‘export out of India’ and relying on the decision of the Apex Court in the
case of Silver and Arts Place which explains what is ‘export out of India’,
the Tribunal upheld the order of the CIT(A).


Case referred to :



CIT v. Silver and Arts Place, 259 ITR 684 (SC).



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S. 37(1) — Capital or revenue expenditure — Cost of tools and dies — Allowed as expenditure on its issue for production.

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21. Central Electronics Ltd. v. AO


ITAT ‘B’ Bench, New Delhi

Before R. P. Tolani (JM) and

R. C. Sharma (AM)

ITA. Nos. 233 & 1821/Del. of 2009

A.Ys. : 2004-05 & 2005-06. Decided on : 27-11-2009

Counsel for assessee/revenue : R. S. Singhvi/Ashima Nab &
Manish Gupta

S. 37(1) — Capital or revenue expenditure — Cost of tools
and dies — Allowed as expenditure on its issue for production.

S. 145A — Valuation of inventory in accordance with the
method of accounting regularly followed — Assessee justified in valuing three
years old inventory at nil value.

Per R. P. Tolani :

Facts :

The assessee was engaged in the business of developing and
producing various electronic components, sophisticated systems, solar
photovoltaic cells and other allied items for defence and other government
departments. In its accounts it used to treat items of loose tools and small
dies used in production as consumables. At the time of purchase of tools/dies
the same were entered in the stock as consumable tools and were charged to
consumption as and when issued for production activities. However, the AO
treated the same as of capital nature subject to depreciation @ 25%, the rate
applicable to plant and machinery.

Out of the other issues before the Tribunal — the one was
regarding allowability of Rs.50.2 lakhs claimed by the assessee towards
provision for slow moving inventory. As per the method of accounting regularly
followed, the assessee used to write off all inventories which were more than
three years old. According to the AO — the writing off was premature and was
not allowable under the Act. The assessee justified its method of accounting
on the ground of obsolescence resulting from change and/or upgradation in
technology with the passage of time. It was submitted that the inventory so
written off had no market value and for all practical purposes had only scrap
value. The same was shown as income in the year of sale.

Held :

The Tribunal noted that the assessee was a Government
undertaking and the accounting policy was being followed consistently. Its
accounts were audited by CAG. Further, relying on the judgment of Rajasthan
High Court in the case of Wolkem India Ltd., it allowed the claim of the
assessee.

Case referred to :


CIT v. Wolkem India Ltd., 221 CTR 767 (Raj.)

 

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Explanation to S. 73 — Speculation business — Assessee company earning income from the sale of shares — AO holding that income earned was from speculation — On the facts held that income earned was in the nature of capital gains.

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20. Axis Capital Markets (India) Ltd. v. ITO


ITAT ‘A’ Bench, Mumbai

Before N. V. Vasudevan (JM) and

R. K. Panda (AM)

ITA No. 4098/Mum./2007

A.Y. : 2004-05. Decided on : 30-11-2009

Counsel for assessee/revenue : Rajan R. Vora and Sheetal
Shah/Vikram Gaur

Explanation to S. 73 — Speculation business — Assessee
company earning income from the sale of shares — AO holding that income earned
was from speculation — On the facts held that income earned was in the nature
of capital gains.

Per R. K. Panda :

Facts :

The assessee was a public limited company engaged in the
business of investment, dealing in shares/ securities/bonds, etc. The assessee
during the impugned assessment year had shown income under the head capital
gain at Rs.22,98,229 the break-up of which was as under :

 

Rs.

Long-term capital
gains

41,85,744

Less :

 

Adjusted b/f
long-term capital loss

18,80,681

Less :

 

Short-term capital
loss

6,834

 

22,98,229

On being questioned the assessee explained that in the
current year no shares were purchased or sold as stock in trade. It was only
the shares held as investment that were sold during the year. However, the
Assessing Officer did not accept the contention of the assessee on account of
the reasons, amongst followings :

(a) The assessee had claimed deduction of entire expenses
on share dealings as business expenses though the transactions shown were
for sale of investments;

(b) In earlier years also the assessee had not shown any
stock in trade, even though, shares were acquired for resale;

(c) Memorandum of Association of the assessee company
showed that it was formed with the main objective of carrying on the
business of share trading along with other activities mentioned therein.

(d) As per Note in Part I of Schedule VI of the Companies
Act — for an investment company, shares take the character of stock in trade
and as such, shares shown as investment in the balance sheet could be
stock-in-trade also. The Companies Law does not differentiate between the
capital or revenue nature of transactions of investments and stock-in-trade.

Further, relying on a couple of decisions, the Assessing
Officer concluded that Explanation to S. 73 of the Act was applicable to the
transactions in question. He accordingly treated the net result of the profit
and loss of such transactions as arising out of speculation business. He
further did not allow any set-off of the brought forward long-term capital
loss of the preceding year against the income of the current year.

Before the CIT(A) the assessee submitted that the original
intention of the assessee at the time of entering into share transactions was
to earn dividend and hold them for appreciation in value. The shares were held
as investment and not as stock-in-trade. However, the CIT(A) held that the
claim of the assessee cannot be sustained on the following reasons :

(a) Although the appellant admitted that in the earlier
years as well as in the subsequent year, transactions in share trading were
carried out but not during the current year, in earlier years also no
stock-in-trade of shares was shown in the balance sheet. Shares were always
shown as investments only;

(b) All the expenses incurred on transactions in share
investments were claimed as business expenses in the Profit and Loss A/c.;

(c) The appellant had shown short-term capital loss of Rs.6,834. It means that it was engaged in frequent purchase and sale of shares during the year under consideration, which fact clearly proves the intention of the appellant for dealing in shares as stock-in-trade.

Held :

The Tribunal found merit in the submission of the assessee that the provisions of Explanation to S. 73 were not applicable to the facts of the present case for the reasons that :

    a) In the assessment order passed u/s.143(3) of the Act for the A.Ys. 2005-06 and 2006-07, the Assessing Officer in the orders had considered the income from sale of shares as income from long-term capital gain/short-term capital gain and not as speculation business.

    b) There is no purchase or sale of shares during the year and the assessee has sold the shares/units of mutual funds which were shown under the head investment.

    c) The shares were held for a long period and no borrowed fund had been utilised by the assessee for purchase of shares/units.

As regards the Assessing Officer disallowing the expenses of Rs.4 lakhs out of the total expenses of Rs.6.16 lacs on the ground that the same could have been incurred for earning of speculation income, the Tribunal agreed with the assessee’s contention that the entire expenditure relates to maintaining the corporate entity of the assessee. Accordingly it held that no part of expenditure was disallowable.

S. 50C — Substitution of sales consideration on transfer of land and building with the value adopted by the stamp valuation authority — Assessee objecting to the substitution of sales price — AO has no discretion and should refer the matter to Valuation O


    19. Abbas T. Reshamwala v. ITO

        ITAT ‘A’ Bench, Mumbai

        Before N. V. Vasudevan (JM) &

        R. K. Panda (AM)

        ITA No. 3093/Mum./2009

        A.Y. 2006-07. Decided on 30-11-2009

        Counsel for assessee/revenue : Ajay R. Singh/

        Vikram Gaur

        S. 50C — Substitution of sales consideration on transfer of land and building with the value adopted by the stamp valuation authority — Assessee objecting to the substitution of sales price — AO has no discretion and should refer the matter to Valuation Officer to determine fair value.

        Per R. K. Panda :

        Facts :

        During the year the assessee had sold an industrial gala for a consideration of Rs.20 lakhs. Based thereon the assessee had offered to tax the sum of Rs.18.73 lacs by way of capital gains. The Assessing Officer noted that the stamp duty authorities had valued the said property at Rs.44.62 lakhs. The assessee brought to the notice of the AO the various negative factors. He also filed a valuation report of the registered valuer, according to which, the value of the said premises was Rs.18.66 lakhs. He also requested the Assessing Officer if the valuation report was not accepted, then the same may be referred to the DVO u/s.50C of the Act.

        However, the Assessing Officer did not accept the contention of the assessee. He was of the opinion that since the assessee had not taken objection before the Registrar in the initial stages when the property was sold and it was only during the stage when objection was raised, the assessee filed a valuation report of registered valuer after giving second thought. Therefore, he was not under obligation to refer the matter to the DVO. He accordingly adopted the value determined by the stamp duty authorities at Rs.44.62 lakhs u/s.50C and made the addition of Rs.25.88 lakhs as short-term capital gain being the difference between the amount declared by the assessee and the amount finally determined by him. In appeal the learned CIT(A) upheld the action of the Assessing Officer.

        Before the Tribunal the Revenue submitted that the Assessing Officer can refer the matter to the DVO only if the assessee claims that the value adopted or assessed by the stamp valuation authority exceeded the fair market value of the property on the date of transfer and the value adopted or assessed by the stamp valuation authority had not been disputed in any appeal or revision or no reference had been made before any authority. According to it, in the absence of the word ‘or’ between sub clause (a) and (b) of S. 50C(2), both the conditions, as per clauses (a) and (b) of S. 50C(2), are to be fulfilled before referring the matter to the DVO.

        Held :

        According to the Tribunal, the word ‘may’ used in Ss.(2) of S. 50C had to be read as ‘should’ and the Assessing Officer had no discretion but to refer the matter to the DVO for the valuation of the property when the assessee had raised an objection that the value adopted or assessed by the stamp valuation authority exceeded the fair market value of the property. Accordingly, the matter was referred back to the file of the Assessing Officer with a direction to refer the matter to the DVO and decide the issue afresh as per law.

S. 43(6)(c) — When an asset is sold, the block of assets stands reduced only by moneys payable on account of sale of the asset and not by the fair market value of the asset sold.

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18. DCIT v. Cable Corporation of India Ltd.


ITAT ‘E’ Bench, Mumbai

Before Pramodkumar (AM) and

V. D. Rao (JM)

ITA No. 5592/Mum./2002

A.Y. : 1995-96. Decided on : 29-10-2009

Counsel for revenue/assessee : Vandana Sagar/

Arvind Sonde

S. 43(6)(c) — When an asset is sold, the block of assets
stands reduced only by moneys payable on account of sale of the asset and not
by the fair market value of the asset sold.

Per Pramodkumar :

Facts :

During the previous year relevant to the assessment year
under consideration, the assessee sold a flat which formed part of block of
assets and on which depreciation was claimed and was allowed @ 5%, for a
consideration of Rs.9,00,000. The District Valuation Officer (DVO), on a
reference by the Assessing Officer (AO), valued the flat at Rs.66,44,902. For
the purposes of computing the amount of depreciation allowable, the AO
computed the written down value of the block by reducing the value determined
by the DVO instead of reducing the consideration for which the flat was sold.
He, therefore, disallowed depreciation of Rs.2,96,551.

Aggrieved, the assessee preferred an appeal to the CIT(A)
who allowed the appeal and held that for computing written down value it is
only the sale consideration of the asset sold, which needs to be deducted and
not the fair market value of the asset sold.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

In view of the provisions of S. 43(6)(c) read with
Explanation 4 to S. 43(6) and also Explanation below S. 41(4), when an asset
is sold, the block of assets shall stand reduced by ‘moneys payable’ in
respect of the asset sold. The expression moneys payable refers to ‘the price
at which it is sold’. What really matters is the price at which the asset is
sold and not its fair market value. The AO does not have any power to tinker
with the sale price of the asset sold. The AO ought to take the sale price for
computing the WDV of the block.

The Tribunal dismissed the appeal filed by the Revenue.

S. 45 and S. 48 — Amount received by the society from the builder for permitting him to construct additional floors on existing building of the society by utilising TDR FSI belonging to him is not chargeable to tax since there is no cost of acquisition.

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17. Om Shanti Co-op Hsg. Society Ltd. v. ITO


ITAT ‘C’ Bench, Mumbai

Before D. Manmohan (VP) and

R. K. Panda (AM)

ITA No. 2550/Mum./2008

A.Y. : 1999-2000. Decided on : 28-8-2009

Counsel for assessee/revenue : Subhash Shetty/

Virendra Ojha

S. 45 and S. 48 — Amount received by the society from the
builder for permitting him to construct additional floors on existing building
of the society by utilising TDR FSI belonging to him is not chargeable to tax
since there is no cost of acquisition.

Per D. Manmohan :

Facts :

The assessee, a co-operative society, on request of the
developer granted him permission to construct 2 floors having 8 flats, on the
existing building of the assessee by utilising TDR FSI available to the
developer. As consideration, the developer paid Rs.26 lakhs to the assessee
and Rs.5.50 lakhs to each of the 12 members of the assessee.

According to the assessee, the members owned a piece of
land on which 12 flats were constructed by utilising maximum FSI available to
them. These persons formed a society. Since the assessee had no right to
construct further structure, there was no question of exploiting any of its
available right so as to earn income out of it. The assessee had regarded the
amounts received by it as not being chargeable to tax.

The Assessing Officer held that the permission granted by
the assessee-society resulted into transfer by way of relinquishment of the
right i.e., ‘to load TDR and construct additional floors’ and since
there was no cost of acquisition, in absence of details, he taxed the entire
consideration of Rs.26 lakhs as long-term capital gains.

Aggrieved, the assessee preferred an appeal to the CIT(A)
who enhanced the assessment and charged even Rs.66 lakhs, being the amount
paid by the developer to individual members of the society, as long-term
capital gains in the hands of the assessee.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The assessee and its members had exhausted the right
available while constructing the flats and therefore the assessee and its
members had no right to construct additional floors on the existing building.
The Tribunal noted that TDR was not obtained by the assessee and sold to the
developer. The Tribunal held that the assessee had not transferred any
existing right to the developer, nor any cost was incurred/suffered prior
to permitting the developer to construct the additional floors. Since there
was no cost of acquisition, following the ratio of the decision of the Apex
Court in B. C. Srinivasa Shetty 128 ITR 294 (SC), the consideration was held
to be not assessable as capital gains.


The Tribunal dismissed the appeal filed by the Revenue.


Cases referred to :

1. CIT v. B. C. Srinivasa Setty, (1981) 128 ITR
294 (SC)

2. Deepak S. Shah v. ITO, (2009) 29 SOT 26 (Mum.)

3. M/s. New Shailaja CHS Ltd. v. ITO, ITA
512/M/2007 dated 2-12-2008

4. Maheshwar Prakash-2 Co-op Hsg. Soc. Ltd v. ITO,
(2009) 118 ITD 223 (Mum.)




 

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S. 28 — Contractual payment made by the assessee firm to its retiring partners, in terms of the partnership deed, is not includible in the total income of the assessee since to that extent income has never reached the hands of the assessee.

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16. RSM & Co.
v. ACIT


ITAT ‘D’ Bench, Mumbai

Before P. M. Jagtap (AM) and

R. S. Padvekar (JM)

ITA No. 3269/Mum./2007

A.Y. : 2004-05. Decided on : 12-10-2009

Counsel for assessee/revenue : Sunil M. Lala & Dhanesh
Bafna/Sanjay Agarwal

S. 28 — Contractual payment made by the assessee firm to
its retiring partners, in terms of the partnership deed, is not includible in
the total income of the assessee since to that extent income has never reached
the hands of the assessee.

Per R. S. Padvekar :

Facts :

The assessee, a partnership firm, claimed a sum of Rs.10
lakhs towards payment made by it to its retiring partner, as per the terms of
the partnership deed. The partnership deed provided that a partner retiring
after a specified age would be entitled to receive from the firm an amount,
computed in the manner stated in the deed, for a period of 5 years from the
date of retirement. Before the Assessing Officer (AO) the claim was made
u/s.37 of the Act. The AO held that the amount was not allowable as a
deduction.

Aggrieved, the assessee preferred an appeal to the CIT(A)
where this sum was contended to be not taxable on the principles of diversion
of income by overriding title. The CIT(A) held that the amount paid was
application of income. He, accordingly, dismissed the assessee’s appeal.

Aggrieved, the assessee preferred an appeal to the
Tribunal. The Tribunal noted the relevant clause of the partnership deed and
also the judicial precedents relied upon by the assessee.

Held :

Payment of retirement benefits for a period of five years
from retirement was a contractual obligation of the assessee. The retired
partner had nothing to do with the profit earned or losses suffered by the
assessee firm, but the quantum of retirement benefits had been fixed. On
facts, there was a charge on the profits of assessee firm. The Tribunal upon
considering the facts and the legal principles laid down in the precedents
relied upon by the assessee held that there was diversion of income to the
extent of the retirement benefits paid by the assessee firm to the retired
partner. The Tribunal held that the retirement benefit paid in accordance with
the terms of the partnership deed was not to be included in the total income
of the assessee firm as to that extent the income never reached the hands of
the assessee.

The assessee’s appeal was allowed.


Cases referred to :

1. CIT v. Sitaldas Tirathdas, 41 ITR 367 (SC)

2. CIT v. Crawford Bayley & Co., 106 ITR 884 (Bom.)

3. CIT v. Nariman B. Bharucha & Sons, 130 ITR 863
(Bom.)

4. CIT v. C. N. Patuk, 71 ITR 713 (Bom.)

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S. 275 read with S. 271B — Bar of limitation for imposition of penalty also applies to penalty imposed u/s.271B

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New Page 1

Part B — Unreported Decisions

(Full texts of the following Tribunal decisions are available
at the Society’s office on written request. For members desiring that the
Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)


21 Motilal Vishwakarma HUF v.
ITO


ITAT ‘B’ Bench, Mumbai

Before M. A. Bakshi (VP) and

R. K. Panda (AM)

ITA No. 7055/Mum./2007

A.Y. : 2003-04. Decided on : 27-8-2007

Counsel for assessee/revenue : Ajay C. Gosalia/

Garima Jain

 

S. 275 read with S. 271B of the Income-tax Act, 1961 — Bar of
limitation for imposition of penalty — Whether limitation period applicable to
penalty imposed u/s.271B — Held, Yes.

 

Per M. A. Bakshi :

Facts :

The issue before the Tribunal was whether the penalty of
Rs.23,520 imposed on the assessee u/s.271B was barred by limitation. The
show-cause notice was issued and served in June 05 and the order imposing
penalty was passed on 27-2-2006. The contention of the assessee was that the
order has to be passed within six months from the date of initiation of the
proceeding.

 

Held :

The Tribunal agreed with the assessee that since the penalty
order has been passed after the expiry of six months from the end of June 2005,
it was barred by the period of limitation. Relying on the Special Bench decision
of the Chandigarh Tribunal in the case of Dewan Chand Amrit Lal & Ors., the
Tribunal allowed the appeal of the assessee.

 

Case referred to :


Dewan Chand Amrit Lal & Ors. v. DCIT, 283 ITR (AT) 203 (Chandigarh) (SB)

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A.P. (DIR Series) Circular No. 52, dated 23-11-2011 — External Commercial Borrowings (ECB) Policy — Parking of ECB proceeds.

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Presently, borrowers are permitted to either keep ECB proceeds abroad or remit these funds to India, pending utilisation for permissible end-uses.

This Circular states that henceforth all proceeds of ECB raised abroad and meant for Rupee expenditure in India should be brought back immediately by the borrowers for credit to their Rupee accounts with banks in India. These Rupee funds cannot be used for investment in capital markets, real estate or for inter-corporate lending. Only ECB proceeds meant for foreign currency expenditure can be retained abroad pending utilisation.

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Pantaloon Retail (India) Limited (30-6-2010)

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Section A : Disclosures on Clause 21 of CARO, 2003 regarding
fraud noticed or reported on or by the company during the year


10. Pantaloon Retail (India) Limited (30-6-2010)

From Auditor’s Report :

To the best of our knowledge and belief and according to the
information and explanations given to us, no fraud on or by the Company has been
noticed or reported during the year, although there were some instances of fraud
on the Company by the Management, the amounts whereof were not material in the
context of the size of the Company and the nature of its business and the
amounts were adequately provided for.


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Godrej Consumer Products Ltd. (31-3-2010)

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Section A : Disclosures on Clause 21 of CARO, 2003 regarding
fraud noticed or reported on or by the company during the year


9. Godrej Consumer Products Ltd. (31-3-2010)

From Auditor’s Report :

Based upon the audit procedures performed by us, to the best
of our knowledge and belief and according to the information and explanations
given to us by the management, no fraud on or by the Company has been noticed or
reported during the year except in one case where certain claims amounting to
Rs.2,424.18 lakhs have been made on the Company on account of the unauthorised,
illegal and fraudulent acts of one of its employee whose services have since
been terminated. The Company has been legally advised that it has a strong legal
case in the matter.


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Kingfisher Airlines Ltd. (31-3-2010)

New Page 1

Section A : Disclosures on Clause 21 of CARO, 2003 regarding
fraud noticed or reported on or by the company during the year


8. Kingfisher Airlines Ltd. (31-3-2010)

From Auditor’s Report :

As per the information and explanations furnished to us by
the management, no material frauds on or by the Company and causing material
misstatements to financial statements have been noticed or reported during the
course of our audit, except for charge backs received by the Company aggregating
to Rs.475.44 lacks from the credit card service providers due to misutilisation
of credit cards by third parties.

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Thomas Cook (India) Ltd. (31-12-2009)

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Section A : Disclosures on Clause 21 of CARO, 2003 regarding
fraud noticed or reported on or by the company during the year


7. Thomas Cook (India) Ltd. (31-12-2009)

From Auditor’s Report :

During the course of our examination of the books and records
of the Company carried out in accordance with the Auditing Standards generally
accepted in India, we have neither come across any instance of fraud by the
Company noticed or reported during the year, nor have been informed of such case
by the management. Fraud on the Company or misappropriation of assets
aggregating to Rs.49,87,000 by employees of the Company were noticed and
reported. The management has since recovered Rs.7, 50,000 of the total amount
[Refer Note 2(t) of the Schedule Q].

From Notes to Accounts :

Employees of the Company and other parties misappropriated
assets aggregating to Rs. 4,987,000 (previous year Rs.7,251,682) during the
year. The cases are under investigation and the Company has taken steps for
recovering the balance amount. There is no open exposure on the profit for the
year in respect of misappropriated assets except for Rs. Nil (previous year
Rs.751,100).

 

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Appeal : ITAT : Reference to Third Member : S. 255(4) does not empower the President/Third Member to go beyond the reference and to enlarge, restrict and modify and/or formulate any question of law on his own on the difference of opinion referred to by t

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II. Reported :



35. Appeal : ITAT : Reference to Third Member : S. 255(4) of
Income-tax Act, 1961 : A.Y. 1990-91 : S. 155(4) does not empower the
President/Third Member to go beyond the reference and to enlarge, restrict and
modify and/or formulate any question of law on his own on the difference of
opinion referred to by the Members of Tribunal.


[Dynavision v. ITAT, 217 CTR 153 (Mad.) :

In this case, when the appeal was heard by the Tribunal,
the Accountant Member and the Judicial Members differed in their opinions.
While referring the matter to the President for constituting Third Member
Bench u/s.255(4) of the Income-tax Act, 1961, there was no unanimity between
them in identifying the point of difference. The President, with a view to
identify the point of difference, reframed the questions and decided the
appeal as Third Member.

 

The assessee filed writ petition challenging the order of
the Third Member. The Madras High Court quashed the order of the Third Member
and held as under :

“(i) From a reading of S. 255(4), it is clear that the
order of reference to the Third Member shall contain the difference of
opinion between the Members of the Bench. The President or the Third Member
has no right to go beyond the scope of reference and they have to consider
only the difference of opinion stated by the Members of the Bench. S. 255(4)
does not vest such power with the President or the Third Member. They have
also no right to formulate the question on their own. Framing the question
on their own goes beyond the jurisdiction.

(ii) The Third Member must confine himself to the order
of reference. Therefore, he has no right to enlarge, restrict and modify
and/or formulate any question of law on his own on the difference of opinion
referred to by the Members of the Tribunal. In this case, the JM and the AM
had the difference of opinion and formulated the questions. The President
had no right to go beyond the scope of reference. For the foregoing reasons
and in the interest of justice, the order of the Third Member is set aside
with a direction to rehear only on the difference of opinion referred to by
the Members of the Division Bench and consider and pass orders in accordance
with law.”

 


 


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Appeal to CIT(A) : Scope of ‘tax’ u/s.249(4) : ‘Tax’ does not include interest.

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II. Reported :

34 Appeal to CIT(A) : Condition precedent :
Scope of ‘tax’ u/s.249(4) of Income-tax Act, 1961 : ‘Tax’ does not include
interest.

[CIT v. Manojkumar Beriwal, 217 CTR 407 (Bom.) :

In this case while filing appeal before the CIT(A), the
assessee had paid disputed tax, but the amount paid was not sufficient to cover
the interest u/s.234B and u/s.234C of the Act. The CIT(A) dismissed the appeal
filed by the assessee on the ground that the condition of payment of tax
u/s.249(4) of the Income-tax Act, 1961 is not satisfied. He was of the view that
tax u/s.249(4) includes interest u/s.234B and u/s.234C of the Act. The Tribunal
allowed the assessee’s appeal and held that for the purposes of S. 249(4), the
deposit of tax which is a condition precedent, does not include interest
u/s.234B and u/s.234C of the Act.

 

On appeal filed by the Revenue, the Bombay High Court upheld
the decision of the Tribunal and held as under :

“(i) It is well settled that when the Legislature seeks to
make a law denying a remedy on failure to comply with deposit, the Courts
would save the remedy, if possible by the interpretative process. Further, in
taxing statute, if a view can be taken in favour of an assessee, that view is
ordinarily preferred.

(ii) On the literal reading of S. 249(4), the language used
by the Legislature is ‘has paid tax dues’. The expression tax has been defined
in S. 2(43). Tax as per the definition does not include interest which has
been independently referred to u/s.2(28A). When the Legislature itself has
used two different expressions and defined separately, then whilst considering
the language of a Section, the Courts are bound to look at the definitions in
the legislation for the purpose of interpreting and construing the expressions
and words under the Act. The object being to avoid conflict and have a
harmonious interpretation, unless the context otherwise requires.

(iii) In these circumstances, the expression ‘tax’ does not
include interest for the purpose of s. 249(4).”

 


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Compulsory purchase of property : Chapter XX-A/Chapter XX-C : Agreement dated 15-9-1986 : Chapter XX-A applies and not Chapter XX-C

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I. Unreported :



33 Compulsory purchase of property : Chapter
XX-A/Chapter XX-C of Income-tax Act, 1961 : Agreement dated 15-9-1986 for
purchase of bungalow to be constructed : Competent Authority held that it is not
a fit case for acquiring under Chapter XX-A : Appropriate Authority passed order
of purchase under Chapter XX-C : Not valid : Chapter XX-A applies and not
Chapter XX-C.

[Mr. Jaipal Jain and Ors. v. Appropriate Authority and
Ors. (Bom.) : W. P. 680 of 1993; Dated 1-12-2008 : (Not reported)]

Under an agreement dated 15-9-1986, the petitioners had
agreed to purchase from the builder a residential bungalow to be constructed. On
13-10-1986 the petitioners filed a declaration in Form 37EE seeking NOC from the
Competent Authority under Chapter XXA of the Income-tax Act, 1961. By an order
dated 30-12-1992 passed u/s.269UF(7) of the Act, the Competent Authority held
that the property in question is not a fit case for acquiring under Chapter XX-A
of the Act. On the other hand, on a declaration filed in Form No. 37-I by the
vendors, the Appropriate Authority passed an order of purchase u/s.269UD(1) of
Chapter XX-C of the Act on 26-12-1986. The Bombay High Court set aside the said
order on 16-12-1992 with a direction to pass a fresh order in accordance with
law. The Appropriate Authority once again passed an order u/s. 269UD(1) on
24-2-1993, directing purchase of the property.

 

On a writ petition filed by the petitioner challenging the
validity of the order, the Bombay High Court quashed the said order dated
24-2-1993 and held as under :

“(i) In the case of Hiten R. Mehta v. Union of India,
(2008) 167 Taxman 338 (Bom.), this Court in a similar case held that the
provisions of Chapter XX-A would apply to the transactions entered into prior
to 1-10-1986 relating to transfer of immovable property as also transactions
where a person acquires any right in or with respect to any building or part
of a building by becoming a member or acquiring shares in a cooperative
society.

(ii) In the present case, the agreement in question was
entered into on 15-9-1986 i.e., prior to the introduction of Chapter
XX-C of the Act. Thus the issue raised in this petition is squarely covered by
the judgment of this Court in the case of Hiten R. Mehta (supra)
against the Revenue and, therefore, the impugned order passed under Chapter
XX-C of the Act cannot be sustained.”



 

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Business deduction : Bad debts : S. 36(1)(vii) : After amendment w.e.f. 1-4-1989 writing off of bad debt in the accounts is sufficient for allowing deduction — Not necessary to prove that debt has become bad

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I. Unreported :

32 Business deduction : Bad debts : S.
36(1)(vii) of Income-tax Act, 1961 : After amendment w.e.f. 1-4-1989 writing off
of bad debt in account is sufficient for allowing deduction. It is not necessary
to prove that debt has become bad.

[CIT v. M/s. Star Chemicals (Bombay) P. Ltd. (Bom.);
ITAL No. 1915 of 2007; Dated 27-2-2008]

The following question was raised before the High Court in
the appeal filed by the Revenue u/s.260A of the Income-tax Act, 1961.

“Whether on the facts and in the circumstances of the case
and in law, the Tribunal is right in confirming the order of CIT(A) in
deleting the disallowance of Rs.79,27,211 on account of bad debt despite the
debt has not become bad ?”

 


The Bombay High Court held as under :

“The issue arises from the amendment to S. 36(1)(vii) of
the Income-tax Act. Subsequent to the amendment the Board has issued Circular
551, dated 23-1-1990. The issue pertained to bad debt in para 6.6. The
relevant portion of the direction reads as under :

“In order to eliminate the disputes in the matter of
determining the year in which a bad debt can be allowed and also to
rationalise the provisions, the Amending Act, 1987 has amended clause (vii) of
Ss.(1) and clause (i) of Ss.(2) of the Section to provide that the claim for
bad debt will be allowed in the year in which such a bad debt has been written
off as irrecoverable in the accounts of the assessee.”

 

It is thus clear from the reading of the Section itself and
the Circular that if the assessee has written off the debt as bad debt, that
would satisfy the purpose of the Section. Considering the law as stated in so
far as the view taken by the Tribunal cannot be faulted.”

 


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TRF Ltd. (31-3-2010)

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Section A : Disclosures on Clause 21 of CARO, 2003 regarding
fraud noticed or reported on or by the company during the year


6. TRF Ltd. (31-3-2010)

From Auditor’s Report :

To the best of our knowledge and according to the information
and explanations given to us, no material fraud on or by the Company has been
noticed during the year except for the misstatement in the financial reporting
having a net effect of Rs.239.90 lacks as disclosed in Note (xiii) on Schedule
19 which was perpetrated on the Company.

Note (xiii) on Schedule 19 :

Certain contract costs recorded without underlying
transactions in earlier years were noted during years ended March 31, 2010 and
March 31, 2009. Management has now initiated an investigation into the matter as
well as payments made thereagainst, if any. Pending completion of investigation,
such wrong costs and consequential revenues recorded in the earlier years have
been reversed in the current year and the previous year to the extent identified
by management as summarised below :

Profit & Loss Account :

Prior period
items

31-3-2010

31-3-2009

 

Rs. in lakhs

Rs. in lakhs

Sales & services erroneously
recognised in previous year, reversed

1,149.56

4,615.08

Corresponding adjustment/reversal in

 

 

— Raw material and components

60.96

843.88

— Payments to sub-contractors

712.00

—

— Contracts in
progress

136.69

2,439.42

(Net)

(239.91)

(1,331.78)

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Depreciation : WDV : S. 32 and S. 43(1) of Income-tax Act, 1961 : A.Ys. 2001-02 and 2002-03 : Depreciation is a privilege : WDV can only be on basis of depreciation ‘actually allowed’ and not ‘notionally allowed’.

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Reported :

34. Depreciation : WDV : S. 32 and S. 43(1) of Income-tax
Act, 1961 : A.Ys. 2001-02 and 2002-03 : Depreciation is a privilege : WDV can
only be on basis of depreciation ‘actually allowed’ and not ‘notionally
allowed’.

[CIT v. Hybrid Rice International (P) Ltd., 185
Taxman 25 (Del.)]


The assessee company was engaged in the business of
producing superior-quality hybrid seeds of rice for supply to farmers. For
that purpose, it was using germplasm seeds. Prior to the A.Y. 2001-02, the
assessee had not claimed depreciation on the germplasm seeds. In the relevant
years, the assessee claimed depreciation on the germplasm seeds on the basis
of the actual cost taking it as the WDV. The Assessing Officer found that the
germplasm seeds were purchased in the preceding years and therefore held that
even though depreciation was not claimed or allowed in the preceding years,
the WDV for the relevant years has to be determined after reducing the
notional depreciation for the preceding years. The Tribunal allowed the
assessee’s claim.


On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :


“(i) In the instant case, in the earlier assessment
years, there did not arise any question of calculation of actual cost,
because no depreciation was claimed in the earlier years. Therefore, it
could not be understood as to how the assessee was taking advantage of his
own wrong as contended by the Revenue. Once it was held that depreciation is
a privilege and can only be on the basis of ‘actually allowed’ and not
‘notionally allowed’, there did not remain any issue of any wrong by the
assessee. There was no wrong and as held by the Supreme Court in CIT v.
Mahendra Mills, 243 ITR 56 (SC), it is only a privilege which the
assessee may choose to exercise or not.

(ii) Therefore, the Tribunal was correct, in law, in
allowing depreciation to the assessee on the actual cost of the germplasm
seeds and the actual cost incurred by the assessee much before becoming an
assessee could still be treated as an actual cost to the assessee when
depreciation had to be claimed.”



 


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Company in liquidation : Director’s liability : S. 179 of Income-tax Act, 1961 : Liability of director u/s.179 is limited to tax and it does not extend to penalty and interest.

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Reported :

33. Company in liquidation : Director’s liability : S. 179 of
Income-tax Act, 1961 : Liability of director u/s.179 is limited to tax and it
does not extend to penalty and interest.

[H. Ebrahim v. Dy. CIT, 185 Taxman 11 (Kar.)]


Dealing with the scope of the director of a company u/s.179
of the Income-tax Act, 1961, the Karnataka High Court held in this case as
under :


“The phrase ‘tax’ as contemplated u/s.179 does not
include penalty and interest, insofar as the directors of the company are
concerned. However, this interpretation of phrase ‘tax would not be’ is
u/s.179 and does not encompass the company. Indeed the company was liable to
pay all the three components, i.e., ‘tax’, ‘interest’ and ‘penalty’
and any other sum due or recoverable from it as contemplated u/s.222.”

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Assessment : Notice u/s.143(2) of Income-tax Act, 1961 : Service : A.Y. 2001-02 : Service of notice by affixture on last day after office hours : Not valid service : Assessment not valid.

New Page 1

Reported :

  1. Assessment : Notice u/s.143(2) of Income-tax Act, 1961 :
    Service : A.Y. 2001-02 : Service of notice by affixture on last day after
    office hours : Not valid service : Assessment not valid.

[CIT v. Vishnu and Co. P. Ltd., 319 ITR 151 (Del.)]

For the A.Y. 2001-02, the assessee had filed the return of
income on 28-9-2001. A valid notice u/s. 143(2) of the Income-tax Act, 1961,
was required to be served on or before 30-9-2002. On 30-9-2002, the Assessing
Officer issued a notice u/s.143(2) and got it served by affixture on the
office premises of the assessee after the office hours on that day. The
Tribunal cancelled the assessment made pursuant to the said notice holding
that there was no valid service of notice u/s.143(2) within the prescribed
period.

In appeal, the Revenue contended that the assessee having
appeared in the assessment proceedings it should be treated as a valid notice.
The Delhi High Court upheld the decision of the Tribunal and held as under :

“(i) S. 143(2) of the Income-tax Act, 1961, is a
mandatory provision whether from the standpoint of a regular assessment or
from the standpoint of an assessment under Chapter XIV-B.

(ii) The Revenue could not disclose as to when the
assessee had appeared, namely, whether the assessee had appeared on October
10, 2002, pursuant to the affixation or on a later date after the alleged
service of the subsequent notice. Even such appearance by the assessee, on a
date when the proceedings had become time-barred because of no proper
service of notice, would be of no consequence.”

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TDS : Fees for technical services : Ss.9(1)(vii) & 195 : Payment for use of Internet bandwidth is not fees for technical services : No obligation to deduct tax at source from payment.

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II. Reported :


43. TDS : Fees for technical services : S. 9(1)(vii) and S.
195 of Income-tax Act, 1961 : A.Y. 2001-02 : Assessee using Internet bandwidth
of US party T and providing access to its subscribers : Payment for use of
Internet bandwidth is not fees for technical services : No obligation to deduct
tax at source from payment.



[CIT v. Estel Communications (P) Ltd., 217 CTR 102
(Del.)]

The assessee was using Internet bandwidth of US party,
Teleglobe, for providing access to its subscribers. For the services
rendered by the assessee to the subscribers in India, it levies a charge and
out of this, some amount is paid to the US party. The Assessing Officer
invoked the provisions of S. 9(1)(i) and S. 9(1)(vii) of the Income-tax Act,
1961 and held that the assessee is liable to deduct tax at source from the
payments made to the US party. The Tribunal held that the assessee is not
liable to deduct tax at source.

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :

“(i) The Tribunal considered the agreement that had been
entered into by the assessee with Teleglobe and came to the conclusion that
there was no privity of contract between the customers of the assessee and
Teleglobe. In fact, the assessee was merely paying for an Internet bandwidth
to Teleglobe and then selling it to the customers.

(ii) The use of Internet facility may require
sophisticated equipment, but that does not mean that technical services were
rendered by Teleglobe to the assessee. It was a simple case of purchase of
Internet band width by the assessee from Teleglobe. No technical services
were rendered by Teleglobe to the assessee.

(iii) The Tribunal has rightly dismissed the appeal after taking into
consideration the agreement between the assessee and Teleglobe and the
nature of services provided by Teleglobe to the assessee.”


 

 


 

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Refund : Delayed return claiming refund : On facts refusal to condone delay not justified : Order of rejection set aside for fresh disposal as per directions.

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Unreported :

31. Refund : Delayed return claiming refund : On facts
refusal to condone delay not justified : Order of rejection set aside for fresh
disposal as per directions.

[Sitaldas K. Motwani v. DGIT (International Taxation) (Bom.);
W.P. No. 1749 of 2009, dated 15-12-2009]

The assessee petitioner is a non-resident Indian. In the
previous year relevant to the A.Y. 2000-01, the assessee had invested in
shares of Indian companies and earned short-term capital gains of Rs.
2,09,05,250. The concerned bank deducted tax at source at the rate of 30%. The
said short-term capital gain was taxable at the rate of 20% and accordingly
the assessee was entitled to a refund of Rs. 20,78,871. The assessee filed
belated return on 24-9-2003 and claimed refund. Along with the return the
assessee had filed an application u/s.119(2)(b) of the Income-tax Act, 1961
for condonation of delay in filing of return. The DGIT (International
Taxation) rejected the application for condonation of delay relying on the
CBDT Instruction No. 13 of 2006, dated 22-12-2006. Accordingly, he refused to
grant refund.

The Bombay High Court allowed the writ petition filed by
the assessee and held as under :

“(i) The Board Circular prescribes that at the time of
considering the case u/s.119(2)(b) of the Act, it is necessary for the
authorities to consider that the income declared and the refund claimed are
correct and genuine and that the case is of genuine hardship on merits and
correctness of the refund claim.

(ii) While considering the genuine hardship, the
respondent No. 1 was not expected to consider a solitary ground as to
whether the petitioner was prevented by any substantial cause from filing
return within due time. Other factors ought to have been taken into account.

(iii) The phrase ‘genuine hardship’ used in S. 119(2)(b)
should have been construed liberally even when the petitioner has complied
with all the conditions mentioned in Circular dated 12th October, 1993. The
Legislature has conferred the power to condone delay to enable the
authorities to do substantial justice to the parties by disposing of the
matters on merit.

(iv) The expression ‘genuine’ has received a liberal
meaning and while considering this aspect, the authorities are expected to
bear in mind that ordinarily the applicant, applying for condonation of
delay does not stand to benefit by lodging its claim late.

(v) Refusing to condone delay can result in a meritorious
matter being thrown out at the very threshold and cause of justice being
defeated. As against this, when delay is condoned the highest that can
happen is that a cause would be decided on merits after hearing the parties.
When substantial justice and technical considerations are pitted against
each other, cause of substantial justice deserves to be preferred for the
other side cannot claim to have vested right in injustice being done because
of a non-deliberate delay.

(vi) There is no presumption that delay is occasioned
deliberately, or on account of culpable negligence, or on account of mala
fides. A litigant does not stand to benefit by resorting to delay. In
fact he runs a serious risk. The approach of the authorities should be
justice-oriented so as to advance cause of justice. If refund is
legitimately due to the applicant, mere delay should not defeat that claim
for refund.

(vii) Whether the refund claim is correct and genuine,
the authority must satisfy itself that the applicant has a prima facie
correct and genuine claim, does not mean that the authority should examine
the merits of the refund claim closely and come to a conclusion that the
applicant’s claim is bound to succeed. This would amount to prejudging the
case on merits. All that the authority has to see is that on the face of it
the person applying for refund after condonation of delay has a case which
needs consideration and which is not bound to fail by virtue of some
apparent defect. At this stage, the authority is not expected to go deep
into the niceties of law. While determining whether the refund claim is
correct and genuine, the relevant consideration is whether on the evidence
led, it was possible to arrive at the conclusion in question and not whether
that was the only conclusion which could be arrived at on that evidence.

(viii) The Respondent No. 1 did not consider the prayer
for condonation for delay in its proper perspective. As such, it needs
consideration afresh. In the result, we set aside the impugned order and
remit the matter back to the respondent No. 1 for consideration afresh, with
the direction to decide the question of hardship as well as that of
correctness and genuineness of the refund claim in the light of the
observations made hereinabove.”

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Speculative loss/business loss : S. 28(i) & S. 43(5) : Transaction of purchase and sale ultimately settled by actual delivery : Not speculative transaction : Loss arising is business loss and not speculative loss.

New Page 1

II. Reported :


42 Speculative loss/business loss : S. 28(i)
and S. 43(5) of Income-tax Act, 1961 : A.Y. 1990-91 : Transaction of purchase
and sale ultimately settled by actual delivery : Not speculative transaction:
loss arising is business loss and not speculative loss.


[Sripal Satyapal v. ITO, 217 CTR 337 (Raj.)]

The assessee is a cotton merchant and carries on business
of purchase and sale of cotton bales. In the previous year relevant to A.Y.
1990-91 the appellant purchased certain cotton bales from one R through the
commission agent J, but however did not take delivery. He subsequently sold
the said goods to Os Co. through commission agent Om. The ultimate purchaser
Os Co. took delivery of the goods from R. The Assessing Officer treated the
loss arising out of the transaction as speculative loss on the ground that the
appellant had not taken delivery of the goods. The Tribunal upheld the
decision of the Assessing Officer.

 

In appeal the following question was raised before the
Rajasthan High Court :

“Whether the Tribunal was justified in disallowing the
claim for set-off of business loss of Rs.2,54,068 in the hands of the
appellant by applying S. 43(5) of the IT Act, 1961 and treating the same as
speculative loss merely for the reason that transportation charges were not
shown to be paid by the appellant ?”

 


The Rajasthan High Court reversed the decision of the
Tribunal and held as under :

“The fact of taking physical delivery of the goods by the
assessee is not the test for determining the speculative transaction in
terms of S. 43(5), but the test is settlement of the transaction entered
into by the assessee or on his behalf otherwise than by actual delivery of
the commodity. Even though the assessee itself or its agent did not obtain
actual delivery of the goods, but the goods having been specifically
identified at the godown and actual delivery to purchaser from the assessee
having been effected by transport of goods directly from the godown,
transaction entered into by the assessee could not be termed as speculative
transaction.”




 

 


 

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Reassessment : Scope : S. 147 : Addition in respect of items other than the one on which notice is given : Permissible only when the AO assesses any income with respect to which he had ‘reason to believe’ to be so : Otherwise reassessment proceedings beco

New Page 1

II. Reported :


41 Reassessment : Scope : S. 147 of
Income-tax Act, 1961 : Addition in respect of items other than one on which
notice is given : Permissible only when AO assesses any income with respect to
which he had ‘reason to believe’ to be so : Otherwise reassessment proceedings
become invalid.

[CIT v. Shri Ram Singh, 217 CTR 345 (Raj.)]

In the course of search of some business establishment, a
diary was found, which showed some entry regarding purchase of plot of land by
the assessee for a consideration of Rs.1,66,000, while in the agreement it was
shown to have been purchased for Rs.45,000. On this basis the Assessing Officer
issued notice u/s.148. In the course of the reassessment proceedings the
Assessing Officer was satisfied with the source of investment in land and no
addition was made on that count. However, in the course of reassessment
proceedings the Assessing Officer found that during the relevant year the
assessee had made deposits of Rs.1,65,000 cash, for which there was no
explanation. He therefore made an addition of Rs.1,65,000 and completed the
reassessment proceedings. The Tribunal found that the Assessing Officer has
accepted the investment in the plot of land which was the very basis of
reopening. The Tribunal held that when the very base of the reopening goes, the
reason for reopening also goes. The Tribunal, therefore, held that the action
taken by the Assessing Officer is illegal and accordingly quashed the
reassessment order.

 

On appeal by the Revenue, the Rajasthan High Court upheld the
decision of the Tribunal and held as under :


“Once the Assessing Officer came to the conclusion that the
income with respect to which he had entertained ‘reason to believe’ to have
escaped assessment, was found to have been explained, his jurisdiction came to
a stop at that. He did not continue to possess jurisdiction to put to tax any
other income, which subsequently came to his notice in the course of
reassessment proceedings, which was found by him to have escaped assessment.”

New industrial undertaking in backward area : Deduction u/s.80HH : A.Y. 1999-00 : Interest received for belated settlement of bills by sundry debtors : Directly relatable to business of assessee : Is profit and gains derived from business and considered f

New Page 1

II. Reported :


40 New industrial undertaking in backward
area : Deduction u/s.80HH of Income-tax Act, 1961 : A.Y. 1999-00 : Interest
received for belated settlement of bills by sundry debtors : Directly relatable
to business of assessee : To be included as profit and gains derived from
business and considered for deduction u/s.80HH.

[CIT v. Bhansali Engineering Polymers Ltd., 306 ITR
194 (Bom.)]

The assessee had an industrial undertaking in backward area,
eligible for deduction u/s.80HH of the Income-tax Act, 1961. For the A.Y.
1999-00, the assessee included the interest received for belated settlement of
bills by sundry debtors for computing deduction u/s.80HH. The Assessing Officer
excluded the amount of interest. The Tribunal allowed the claim of the assessee.

 

On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under :

“The Tribunal was right in holding that the interest
received on belated payments from sundry debtors to whom the industrial unit
of the assessee had sold goods could be treated as interest income derived
from the industrial undertaking, even though the assessee had realised income
from other sources and in directing the Assessing Officer to recompute the
deduction u/s.80HH.”

Deemed dividend : S. 2(22)(e) : Partners of assessee firm shareholders of company : Company advanced loan to firm : Loan not to be treated as deemed dividend in the hands of the firm

New Page 1

II. Reported :



 


38 Deemed dividend : S. 2(22)(e) of
Income-tax Act, 1961 : Partners of assessee firm shareholders of company :
Assessee firm not a shareholder of company : Company advanced loan to firm :
Loan not to be treated as deemed dividend in hands of firm.

[CIT v. Hotel Hilltop, 217 CTR 527 (Raj.)]

In the scrutiny assessment u/s.143(3) of the Income-tax Act,
the Assessing Officer made an addition of Rs.10,00,000 as deemed dividend
u/s.2(22)(e), being advance received from M/s. Hilltop Palace Hotels (P) Ltd. in
which the two partners of the assessee firm held 48.33% of the shares. CIT(A)
deleted the addition holding that the assessee firm is not a shareholder of the
company, and therefore, the amount of Rs.10,00,000 cannot be assessed to tax in
the hands of the assessee firm. The Tribunal dismissed the appeal filed by the
Revenue.

 

On appeal by the Revenue the Rajasthan High Court upheld the
decision of the Tribunal and held as under :

“(i) The important aspect, being the requirement of S.
2(22)(e) is, that “the payment may be made to any concern, in which such
shareholder is a member or the partner, and in which he has substantial
interest, or any payment by any such company, on behalf, or for the individual
benefit of any such shareholder . . .” Thus, the substance of the requirement
is, that the payment should be made on behalf, or for the individual benefit
of any such shareholder. Obviously, the provision is intended to attract the
liability of tax on the person, on whose behalf, or for whose individual
benefit, the amount is paid by the company, whether to the shareholder, or to
the concerned firm, in which event, it would fall within the expression
‘deemed dividend’.

(ii) Obviously, income from dividend is taxable as income
from other sources u/s.56, and in the very nature of things, the income has to
be of the person earning the income. The assessee in the instant case is not
shown to be one of the persons, being shareholder. Of course the two
individuals being ‘R’ and ‘D’ are the common persons, holding more than
requisite amount of shareholding and are having requisite interest in the
firm. But then, thereby the deemed dividend would not be deemed dividend in
the hands of the firm, rather it would obviously be deemed dividend in the
hands of the individuals, on whose behalf, or for whose individual benefit,
being such shareholder, the amount is paid by the company to the concern.

(iii) Thus the significant requirement of S. 2(22)(e) is
not shown to exist. The liability of tax as deemed dividend could be attracted
in the hands of the individuals, being the shareholders, and not in the hands
of the firm.”

 


 

levitra

Income or capital receipt : Non-compete fees : S. 10(3) and S. 45  : Payment for loss of office as director with freedom to carry on other employment without involving in software develop- ment : Is capital receipt not liable to tax.

New Page 1

II. Reported :


39. Income or capital receipt : Non-compete fees : S. 10(3)
and S. 45 of Income-tax Act, 1961 : A.Y. 2000-01 : Payment for loss of office as
director with freedom to carry on other employment without involving in software
development: Is capital receipt not liable to tax.


[Rohitasava Chand v. CIT, 306 ITR 242 (Del.)]

The assessee, a shareholder and director of a company
entered into non-compete agreements with a foreign company and received
certain sums under the agreements from periods relevant to A.Ys. 1998-99 to
2000-01. During the currency of the non-compete agreements, the assessee was
restrained from soliciting, interfering, engaging in or endeavouring to carry
on any activity, including supply of services or goods concerning software
development. For the A.Y. 1998-99 the Assessing Officer accepted the claim of
the assessee that the receipt is a capital receipt not liable to tax. However,
for the A.Y. 2000-01 the Assessing Officer rejected the claim of the assessee
and included the amount in the income of the assessee. The Tribunal upheld the
addition.

 

On appeal by the assessee, the Delhi High Court reversed
the decision of the Tribunal and held as under :

 


“(i) Where an amount is received by way of compensation
under a restrictive covenant or under a non-compete agreement, it would
amount to a capital receipt in the hands of the recipient, but a lot would
depend on the agreement entered into between the parties.

(ii) The non-compete agreement incorporated a restrictive
covenant on the right of the assessee to carry on his activity of
development of software. While it might not alter the structure of his
activity, in the sense that he could carry on the same activity in an
organisation in which he had a small stake, it certainly impaired the
carrying on of his activity. To that extent it was a loss of a source of
income for him and it was of an enduring nature, as contrasted with a
transitory or ephemeral loss. The covenant was an independent obligation
undertaken by the assessee not to compete with the new agents in the same
field for a specified period, which came into operation only after the
agency was terminated and was wholly unconnected with the assessee’s agency
termination. Therefore, that part of the compensation attributable to the
restrictive covenant was a capital receipt not assessable to tax.

(iii) The non-compete agreement was independent of the
first agreement whereby the assessee agreed to transfer his shares to the
foreign company. The receipt in the hands of the assessee was a capital
receipt inasmuch as it denied his profit making capabilities.”

Capital gains : Exemption u/s.54F : Construction of new house : If the assessee has invested the net consideration before the specified period, exemption cannot be denied on ground that construction not completed within that period.

New Page 1

II. Reported :


37 Capital gains : Exemption u/s.54F of
Income-tax Act, 1961 : A.Y. 2001-02 : Construction of new house : Requirement is
that assessee has to construct a residential house within a period of three
years after date of transfer : If assessee has invested net consideration before
specified period, exemption cannot be denied on ground that construction is not
completed within that period.

[CIT v. Sardarmal Kothari, 217 CTR 414 (Mad.)]

For the A.Y. 2001-02, the Assessing Officer disallowed the
claim of the assessee for exemption of the capital gain u/s.54F of the
Income-tax Act, 1961 on the ground that the construction of the new house was
not completed. The CIT(A) allowed the claim observing that the assessee had
invested the capital gain in the land and the construction was substantially
completed. The Tribunal upheld the decision of the CIT(A).

 

On appeal by the Revenue, the Madras High Court upheld the
decision of the Tribunal and held as under :

“(i) There is no dispute about the fact that the assessee
has invested the entire net consideration of sale of capital asset in the land
itself and subsequently the assessee has invested large sums of money in
construction of the house. The one and only ground on which the Assessing
Officer has non suited the assessee for the claim of exemption was that the
house has not been completed. There remains some more construction to be made.

(ii) The requirement of the provision is that the assessee,
within a period of three years after the date of transfer, has to construct a
residential house in order to become eligible for exemption. In the case on
hand, it is not in dispute that the assessee has purchased the land by
investing the capital gain and he has also constructed residential house.

(iii) On a reading of the Board Circular No. 667, dated
18-10-1993, relied on by the Revenue, we are of the view that the Circular
would not in any way advance the case of the Revenue to come to the conclusion
that in order to have the benefit u/s.54F of the Act, the construction should
have been completed.

(iv) The Tribunal has also taken note of its own earlier
orders, wherein the Tribunal has held that in order to get the benefit
u/s.54F, the assessee need not complete the construction of the house and
occupy the same. It is enough if the assessee establishes that the assessee
had invested the entire net consideration within the stipulated period. The
said view taken consistently by the Tribunal has been applied in this case
also.

(v) There is no material to entertain this appeal. The
appeal fails and the same is dismissed.”

 


 

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Business expenditure : Amortisation of preliminary expenses : S. 35D : Interest received on share application money : Can be set off against public issue expenses : Interest accrued not taxable.

New Page 1

II. Reported :


36 Business expenditure : Amortisation of
preliminary expenses : S. 35D of Income-tax Act, 1961 : Interest received on
share application money : Can be set off against public issue expenses :
Interest accrued not taxable.

[CIT v. Neha Proteins Ltd., 306 ITR 102 (Raj.)]

The assessee had claimed set-off of the interest earned on
the share application money against the public issue expenses which were to be
amortised in future under and in accordance with the provisions of S. 35D of the
Income-tax Act, 1961. The assessee had therefore claimed that the interest
income is not taxable. The Assessing Officer disallowed the claim for set-off
and added the interest amount to the income of the assessee. The Tribunal held
that the assessee was entitled to set-off of the interest against the public
issue expenses and deleted the addition.

 

The Rajasthan High Court dismissed the appeal filed by the
Revenue and held as under :

“(i) The amount of interest accruing on the share
application money could not be used by the assessee for any purpose whatever,
other than those mentioned in S. 73(3) and S. (3A) of the Companies Act, 1956,
and on the allotment of shares, the assessee was to take stock of things about
the expenditure incurred by it, being the public issue expenses, and the
interest accrued did reduce that expenditure and it was rightly required to be
adjusted against the expenditure, i.e., the assessee was entitled to
claim amortisation of the public issue expenses only on the figure so reduced,
after setting off, or adjusting.

(ii) The interest accrued on the share application money
lying with the bank under the mandate of S. 73 of the Companies Act was not
taxable as ‘Income from other sources’ and was required to be set off or
adjusted against the public issue expenses, so as to reduce the amount of
public issue expenses, for the purpose of enabling the assessee to claim
amortisation, under and in accordance with the provisions of S. 35D of the
Income-tax Act, 1961.

(iii) The assessee had not claimed adjustment of
this interest against other liability of the assessee to pay interest on the
borrowed money and it was nobody’s case that this was to be taxed as income
from “Profits and gains of business or profession”. It could not be said to be
a short-term deposit either.”

 


 

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SKS Microfinance Ltd. (31-3-2010)

New Page 1

Section A : Disclosures on Clause 21 of CARO, 2003 regarding
fraud noticed or reported on or by the company during the year


5. SKS Microfinance Ltd. (31-3-2010)

From Auditor’s Report :

Based upon the audit procedure performed for the purpose of
reporting the true and fair view of the financial statements and as per the
year, though there were some instances of fraud on the Company by its employees
and borrowers as given below :

(a) Eighty-two cases of cash embezzlements by the employees
of the Company aggregating Rs.15,024,158 were reported during the year. The
services of all such employees involved have been terminated and the Company
is in the process of taking legal action. We have been informed that
thirty-seven of these employees were absconding. The outstanding balance (net
of recovery) aggregating Rs. 8,663,302 has been written off.

(b) Sixty-one cases of loans given to non-existent
borrowers on the basis of fictitious documentation created by the employees of
the Company aggregating Rs.13,645,345 were reported during the year. The
services of all such employees involved have been terminated and the Company
is in the process of taking legal action. The outstanding loan balance (net of
recovery) aggregating Rs. 11,029,667 has been written off; and

(c) Thirty-one cases of loans taken by certain borrowers,
in collusion with and under the identity of other borrowers, aggregating Rs.
6,025,000, were reported during the year. The Company is pursuing the
borrowers to repay the money. The outstanding loan balance (net of recovery)
aggregating Rs.2,359,930 has been written off.


From Directors’ Report :

In terms of the provisions of S. 217(3) of the Companies Act,
1956, the Board would like to place on record an explanation to the Auditors’
comments in their Audit Report dated 4th May 2010 :

(a) There is an inherent risk involved in our operations as
all the transactions at the field are in cash. The Company has taken legal or
remedial action in almost all the cases of embezzlement of cash and issue of
fake loans by employees. The Company has recovered an amount of Rs. 2,226,304
out of cash embezzled from the employees and an amount of Rs.4,134,552 from
the Insurance Company, as the company has the adequate insurance coverage in
place;

(b) To mitigate this risk the Company has formed the policy
which is as follows :



  •   Not to deploy the Sangam Manager in their hometown



  •   Rotate the Centres handled by Sangam Manager’s in every six months



  •   Transfer Sangam Manager/Branch Manager in a span of 9 to 12 months.



In addition to the above, stringent monitoring systems at all
levels have been implemented and checked/verified by risk/audit team on a
monthly basis. Going forward at Head Office level we are implementing automated
dropouts of dormant members month on month to mitigate the risk of fake loans.

(c) While the system of Joint Liability Groups in the
Centre and changing Centre Leader every one year persists, intentional and
fraudulent Centre Leaders have been identified and we have initiated legal
proceedings with the help of Group Leaders and respective members. The net
impact of frauds comes to around 0.029% of the total amount disbursed during
the year. The company is working towards bringing down this percentage to the
least possible by making process improvements, covering the loss by having
adequate insurance policy and by increasing the number of opportunities for
direct contact with our members.

 


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Disclosure regarding Foreign Currency Convertible Bonds (FCCBs) and premium on redemption of FCCB

New Page 1

10 Disclosure regarding Foreign Currency
Convertible Bonds (FCCBs) and premium on redemption of FCCB


Fame India Ltd. — (31-3-2008)


From Notes to Accounts :


On 21 April 2006, the Company, pursuant to a resolution of
the Board of Directors dated 28 January 2006 and by a resolution of the
shareholders dated 8 March 2006, issued

(i) 12000, Zero Coupon Series A Unsecured Foreign Currency
Convertible Bonds (‘Series A Bonds’) of the face value of US $ 1000; and

(ii) 8,000, 0.5% per annum Series B Unsecured Foreign
Currency Convertible Bonds (‘Series B Bonds’) of the face value of US $ 1000
aggregating to USD 20,000,000 (approximately Rs.901,000,000) due in 2011 (the
Series A Bonds and the Series B Bonds are collectively called the ‘Bonds’).
The Series Bonds bear interest at the rate of 0.5% per annum, which accrues
semi-annually in arrears on 31 December and 30 June of each year. Interest
will accrue on each interest payment date and on maturity, accrued interest
will be paid. The Bonds will mature on 22 April 2011.

 


The Bonds are convertible at any time on or after 21 May 2008
and prior to 12 April 2011 at the option of the Bond holders into newly issued,
ordinary equity share of par value of Rs.10 per share (‘Shares‘), at an initial
conversion price of

(i) Rs.90 per share for Series A Bonds; and

(ii) Rs.107 per share for Series B Bonds

(as defined in terms and conditions for the Bonds) at the
rate of exchange equal to the US Dollar to Rupees exchange rate as announced
by the Reserve Bank of India (the ‘RBI’) on the business day immediately prior
to the issue date. The conversion price is subject to adjustment in certain
circumstances.

 


Unless previously converted, redeemed or repurchased and
cancelled,

(i) the Series A Bonds will be redeemed on 22 April 2011 at
137.01% of their principal amount representing a gross yield to maturity of
6.5%; and

(ii) the Series B Bonds will be redeemed on 22 April 2011
at 140.69% of their principal amount representing a gross yield to maturity of
7.5%.

 


During the year 1,504,999 (31 March 2007; Nil) equity shares
of Rs.10 each were allotted against 3000 Series A Foreign Currency Convertible
Bonds (FCCB) of US $ 1,000 each at an exercise price of Rs.90 per share and
1,687,850 (31 March 2007; Nil) equity shares of Rs.10 each were allotted against
4000 Series B FCCB of US $ 1,000 each at an exercise price of Rs.107 per share,
thus aggregating to a total allotment of 3,192,849 equity shares of Rs.10 each
of the Company.

 

Exchange gain/loss arising on such conversion have been
adjusted against share premium reserve. Premium on FCCB amortised and adjusted
to the share premium account up to the date of conversion has been reversed.

 

The Bond issue expenses have been adjusted against share
premium as per the provision of Section 78 of the Act.

 

Utilisation up to 31 March 2008 of the proceeds from the FCCB
issue is as under :

Purpose Amount in Rs.
(a) New cinema
complexes 		705,645,427
(b) Expansion/modernisation
of existing cinema complexes 		83,027,839
(c) FCCB issue
expense 		29,813,462
Total 818,486,728


(Currency :
Indian Rupees)




Balance
unutilised funds have been invested in :		  
(a) Deposit
accounts 		10,180,107
(b) Current
accounts 		 
— in India
 20,832,448
— outside
India 		8,151,235

The proceeds utilised have been converted at an average
exchange rate of Rs.42.58 per US $ and the balance outstanding as at 31 March
2008 is translated at the exchange rate of Rs.39.97 per US $, being the exchange
rate as at 31 March 2008.

 Premium on redemption of Foreign Currency Convertible Bonds (FCCB)

* Premium payable on redemption of FCCB charged to the securities premium account has been provided pro rata for the year. In the event the conversion option is exercised by the holders of FCCB in future, the amount of premium charged to the securities premium account will be suitably adjusted in the respective years.


Opinion of Expert Advisory Committee of ICAI not followed regarding revenue recognition

Opinion of Expert Advisory Committee of ICAI not followed regarding treatment of dredger spares

New Page 1

8 Opinion of Expert Advisory Committee of
ICAI not followed regarding treatment of dredger spares


Dredging Corporation of India Ltd. — (31-3-2008)

From Notes to Accounts :

On a reference made by DCI regarding accounting treatment of
spares issued to dredgers, the Expert Advisory Committee of Institute of the
Chartered Accountants of India gave its opinion on 27th May 2008, which was
received by the Company on 31st May 2008. As per the opinion, if the spares are
of capital nature and purchased subsequent to the acquisition of particular
dredger, these need to be capitalised and depreciated systematically over the
remaining useful life of the particular dredger. In case where the useful life
of the particular dredger has been completed, the same is to be charged to
Profit & Loss A/c through depreciation. Since the opinion has come after the
close of the accounting period and several complexities are involved, no
adjustments have been made in the accounts for the year in this regard. The
Company proposes to implement the same from Financial Year 2008-09 onwards after
examining all the issues involved.

 

From Auditors’ Report :

Reference is invited to Note 9(g) of Notes on Accounts. As
per the Expert Advisory Committee of ICAI’s opinion, the accounting practice of
charging off spares to expenditure as when issued to dredgers is not in
accordance with the provisions of AS- 10 and its effect on current year’s profit
is not quantifiable.

levitra

Block assessment — Only brought forward losses of the past years under Chapter VI and unabsorbed depreciation u/s.32(2) were to be excluded while aggregating the total income or loss of each previous year in the block period, but set-off of the loss suffe

New Page 2

  1. Block assessment — Only brought forward losses of the past
    years under Chapter VI and unabsorbed depreciation u/s.32(2) were to be
    excluded while aggregating the total income or loss of each previous year in
    the block period, but set-off of the loss suffered in any of the previous
    years in the block period against the income assessed in other previous years
    in the block period was not prohibited.

[ E. K. Lingamurthy & Anr. v. Settlement Commission (IT
and WT) & Anr., (2009) 314 ITR 305 (SC)]

The Income-tax Department conducted a search u/s.132 of the
Act on 11-10-1996 on the business premises of the petitioner-assessees as well
as on their family members who were partners in various firms. The assessment
proceedings were initiated under Chapter XIV-B of the Act. A consolidated
application was filed before the Settlement Commission for the block period
1-4-1986 to 11-10-1996. The said application was admitted. The petitioners
claimed unabsorbed depreciation and business loss for the A.Y. 1995-96 and
1996-97 comprised in the block period. The claim was rejected by the
Settlement Commission by referring to S. 158BB(4) and Explanation (a) to S.
158BA(2) holding that the unabsorbed loss and current depreciation claimed in
the regular return should be determined and allowed to be carried forward for
future adjustment only in the regular assessment and consequently, the claim
for adjustment of unabsorbed depreciation against the undisclosed income in a
block assessment would not be considered. The High Court rejected the writ
petition filed by the petitioners holding that the provisions of Chapter XIV-B
did not indicate even a remote possibility for considering a claim of set-off
or brought forward losses under Chapter VI or unabsorbed depreciation
u/s.32(2) to be considered in determination of undisclosed income.

Before the Supreme Court the assessee contended that there
was a conceptual difference between current depreciation and carried forward
unabsorbed depreciation. It was the case of the assessee that Explanation (a)
to S. 158BB did not rule out current year’s losses or current year’s
depreciation; it only ruled out the brought forward losses or unabsorbed
depreciation u/s.32(2).

The Supreme Court held that S. 158BB, inter alia,
states that undisclosed income of the block period shall be “the aggregate of
the total income of the previous years falling within the block period”
computed in accordance with the provisions of Chapter IV. ‘Total income’ is
defined in S. 2(45) to mean the total amount of income referred to in S. 5,
computed in the manner laid down in the Act. In other words, Chapter XIV does
not rule out Chapter IV of the Act in the matter of computation of undisclosed
income under Chapter XIV-B. Ordinarily, in the case of regular assessment, the
unit of assessment is one year consisting of twelve months whereas in the case
of block assessment, the unit of assessment consists of ten previous years and
the period up to the date of the search. S. 158BB provides for aggregation of
income/loss of each previous year comprised in the block period. The block
period assessment under Chapter XIV-B is in addition to regular assessment.

According to the Supreme Court, analysing S. 158BB(4) read
with Explanation (a) thereto, it was clear that only brought forward losses of
the past years under Chapter VI and unabsorbed depreciation u/s.32(2) were to
be excluded while aggregating the total income or loss of each previous year
in the block period, but set-off of the loss suffered in any of the previous
years in the block period against the income assessed in other previous years
in the block period was not prohibited. According to the Supreme Court the
Settlement Commission had erred in disallowing the application of the assessee
for set-off of inter se losses and depreciation accruing in any of the
previous years in the block period against the income returned/assessed in any
other previous year in the block period.

Depreciation — Balancing charge — Assets whose cost does not exceed Rs.5,000 — Depreciation claimed at 100% — Sale of scrap — Those purchased after 1-4-1995 taxable u/s.50 — Those purchased prior to 1-4-1995, not liable to tax.

New Page 2

  1. Depreciation — Balancing charge — Assets whose cost does
    not exceed Rs.5,000 — Depreciation claimed at 100% — Sale of scrap — Those
    purchased after 1-4-1995 taxable u/s.50 — Those purchased prior to 1-4-1995,
    not liable to tax.

[Nectar Beverages P. Ltd. v. Dy. CIT, (2009) 314 ITR
314 (SC)]

The assessee (Nectar Beverages P. Ltd.), a company which
derived income from manufacture and sale of soft drinks, claimed depreciation
in respect of the bottles and crates (trays) purchased by it at 100 percent
under the proviso to S. 32(i)(ii) of the Act, which was allowed from time to
time. During the financial year relevant to the A.Y. 1991-92, the assessee
sold scrap of bottles and trays (crates) for Rs. 50,850. However, in the
computation of income, the assessee reduced the sale consideration from the
income on the ground that the amount received was a capital receipt and since
it did not form part of the block of assets, even the provision of S. 50 of
the said Act relating to short-term capital gain on sale of depreciable asset
was not attracted. The Assessing Officer held that depreciation having been
allowed to the assessee, the proviso to S. 50 of the Act was applicable. The
Commissioner of Income-tax (Appeals) dismissed the appeal, however, holding
that a deduction had been made in the earlier assessment year in respect of
the expenditure incurred and, subsequently, the assessee having obtained the
amount in respect of such expenditure, the same was chargeable to tax
u/s.41(1) of the Act. The Tribunal confirmed the order of the Commissioner of
Income-tax (Appeals). The High Court also dismissed the appeal.

On appeal, the Supreme Court held that prior to April 1,
1988, S. 41(1) and S. 41(2), both existed on the statute book. S. 41(2)
specifically brought to tax the balancing charge as a deemed income under the
1961 Act. It stated that where any plant owned by the assessee and used for
business purposes was sold, discarded or destroyed and the moneys payable in
respect of such plant exceeded the written down value, then so much of the
surplus which did not exceed the difference between the actual and the
written-down value was made chargeable to tax as business income of the
previous year in which moneys payable for the plant became due. In other
words, S. 41(2) made the balancing charge taxable as business income.
According to the Supreme Court if the argument of the Department of reading
the balancing charge u/s.41(2) into S. 41(1) was to be accepted, then it was
not necessary for the Parliament to enact S. 41(2) in the first instance. In
that event, S. 41(1) alone would have sufficed. The Supreme Court held that,
S. 41(1), S. 41(2), S. 41(3) and S. 41(4) operated in different spheres.

In another batch of appeals, the Supreme Court considered
the effect of introduction of the Finance (No. 2) Act, 1995, with effect from
April 1, 1996. The Supreme Court noted that by the above Finance Act, the
first proviso to S. 32(1)(ii) stood deleted with effect from April 1, 1996.
Consequently, bottles, crates and cylinders whose individual cost did not
exceed Rs.5,000 also came to be included in the block of assets. One of the
assessees, M/s. Goa Bottling Company Pvt. Ltd. was a company registered under
the Companies Act, 1956, and was in the business of manufacture and sale of
soft drinks. For the purposes of its business, it bought bottles and crates
whose cost per unit did not exceed Rs. 5,000. During the year ending March 31,
1998, the company received a sum of Rs.6,89,91,901 on sale of scrap bottles
and crates. The sale proceeds were segregated in two parts :

(a) in respect of bottles and crates purchased prior to
March 31, 1995; and

(b) those purchased after April 1, 1995.

In the return of income filed, the sale proceeds relating
to bottles and crates purchased after April 1, 1995, were taken into
consideration for the purpose of computation of short-term capital gains
u/s.50 whereas the sale proceeds relating to bottles and crates purchased
prior to March 31, 1995, was not offered for short-term capital gains on the
ground that the assets stood depreciated at 100% under the proviso to S.
32(1)(ii) and hence did not form part of the block of assets.

For the reasons given hereinabove, the Supreme Court held
that the bottles and crates purchased prior to March 31, 1995, did not form
part of the block of assets, hence, profits on sale of such assets were not
taxable as a balancing charge, neither u/s.41(1) nor u/s.50. In respect of
bottles and crates purchased after April 1, 1995, on account of deletion of
the proviso to S. 32(1)(ii) (vide Finance Act, 1995) such bottles and crates
formed part of block of assets and consequently such assets purchased after
April 1, 1995, in this case, became exigible to capital gains tax u/s.50.

Capital or revenue expenditure — Matter remanded to the High Court to decide whether the assessee had acquired assets of enduring benefit.

New Page 2

  1. Capital or revenue expenditure — Matter remanded to the
    High Court to decide whether the assessee had acquired assets of enduring
    benefit.

[Shreyas Industries Ltd. v. CIT, (2009) 314 ITR 302
(sc)]

The appellant was running a paper mill at Ahmedgarh in
District Sangrur, Punjab. During the previous year relevant to the A.Y.
1996-97, the appellant applied to the Pollution Control Board and the Forest
Department to allow it to discharge its effluent water from its mill to the
Village Tallewal. The Department of Environment and Forests agreed to provide
forest land for an open drain to be constructed by the assessee (user agency)
for carrying its effluent to the Tallewal drain, subject to certain
conditions. One of the conditions was that the appellant will transfer 4.063
hectares of non-forest land in favour of the Forest Department. That was done.
The appellant claimed that an amount of Rs. 70,79,862 incurred by the
appellant on construction of the open drain for disposal of effluents was
revenue expenditure. According to the Department, the expenditure was on
capital account, particularly, when the appellant had debited the building
account to the extent of Rs.70,79,862.

The Commissioner of Income-tax (Appeals) as well as the
Tribunal held that the expenditure incurred was on revenue account. However,
aggrieved by the decision of the Tribunal the matter was carried by the
Department in appeal to the High Court. The High Court reversed the concurrent
finding given by the Commissioner of Income-tax (Appeals) as well as by the
Tribunal.

On appeal the Supreme Court held that the basic question
which the High Court was required to answer was whether the assessee
(appellant) had acquired assets of enduring benefit. For that purpose, the
High Court was required to examine the terms and conditions on which the
Forest Department had permitted the appellant to construct an open drain. The
High Court was required to consider the effect of diversion of forest land. It
was not in dispute that the open drain ran for approximately fourteen
kilometers. It was not in dispute that it cuts through the forest land. It was
not in dispute that in lieu of this diversion, non-forest land came to be
surrendered by the appellant in lieu of the forest land. Further, the
appellant was required to raise plantation on both sides of the open drain.
Under the terms and conditions, it was stipulated that the Forest Department
shall have afforestation on both sides of drain having tree growth with an
amount of Rs.1.62 lakhs to be paid by the user agency (appellant) for raising
and maintenance of plantation. Further, even with regard to the open drain,
the terms and conditions made it very clear that the open drain would be lined
to avoid any seepage/leakage of effluent in due course of time. None of the
terms and conditions imposed by the Forest Department had been examined in the
above circumstances for deciding the question framed hereinabove.

The Supreme Court therefore set aside the order of the High
Court and remitted the matter to the High Court for fresh consideration in
accordance with law.

 

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Business expenditure — Provision for warranty expenses at certain percentage of turnover of the company based on past experience is allowable as a deduction u/s.37.

New Page 2

 

  1. Business expenditure — Provision for warranty expenses at
    certain percentage of turnover of the company based on past experience is
    allowable as a deduction u/s.37.

[ Rotork Controls India P. Ltd. v. CIT, (2009) 314
ITR 62 (SC)]

The appellant-company sold valve actuators. The bulk of the
sales was to BHEL. At the time of sale, the appellant (assessee) provided a
standard warranty whereby in the event of any beacon rotork actuator or part
thereof becoming defective within 12 months from the date of commencing or 18
months from the date of dispatch, whichever was earlier, the company undertook
to rectify or replace the defective part free of charge. This warranty was
given under certain conditions stipulated in the warranty clause. For the A.Y.
1991-92, the asessee made a provision for warranty at Rs.10,18,800 at the rate
of 1.5% of the turnover. This provision was made by the assessee on account of
warranty claims likely to arise on the sale of effected by the appellant and
to cover up that expenditure. Since the provision made was for Rs.10,18,800
which exceeded the actual expenditure, the appellant revised Rs.5,00,246 as
reversal of excess provision. Consequently, the assessee claimed deduction in
respect of the net provision of Rs.5,18,554 which was disallowed by the
Assessing Officer on the ground that the liability was merely a contingent
liability not allowable as a deduction u/s.37 of the Act. This decision was
upheld by the Commissioner of Income-tax (Appeals). The matter was carried in
appeal to the Tribunal by the appellant. It was held by the Tribunal that
right from the A.Y. 1983-84 the Commissioner of Income-tax (Appeals) as well
as the Tribunal had allowed the warranty claim(s) on the ground that valve
actuators are sophisticated equipment; that in the course of manufacture and
sale of valve actuators a reasonable warranty was given to the purchases; that
every item of sale was covered by the warranty scheme; that no purchaser was
ready and willing to buy valve actuators without warranty and consequently
every item sold had a corresponding obligation under the warranty clause(s)
attached to such sales. All through this period between the A.Y. 1983-84 and
the A.Y. 1991-92, the Tribunal took the view that the provision made by the
appellant was realistic. Applying the rule of consistency, the Tribunal held
that the assessee on the facts and circumstances of the case was entitled to
deduction u/s.37 of the 1961 Act in respect of the provision for warranty
amounting to Rs. 5,18,554. Aggrieved by the decision of the Tribunal, the
Department carried the matter in appeal to the Madras High Court.

The High Court held that the assessee was not entitled to
deduction in respect of the provision made for warranty claims. It was held
that no obligation was ever cast on the date of the sale and consequently
there was no accrued liability. According to the High Court, the warranty
provision was made against the liability which had not crystallised against
the appellant and consequently it was a provision made for an unascertained
liability and, therefore, the appellant was not entitled to claim deduction
u/s.37 of the 1961 Act.

On appeal, the Supreme Court held that in the case of
manufacture and sale of one single item, the provision for warranty could
constitute a contingent liability not entitled to deduction u/s.37 of the said
Act. However, when there is manufacture and sale of an army of items running
into thousands of units of sophisticated goods, the past events of defects
being detected in some of such items lead to a present obligation which
results in an enterprise having no alternative to settling that obligation in
the present case.

The appellant has been manufacturing valve actuators in
large numbers. The statistical data indicated that every year some of these
manufactured actuators are found to be defective. The statistical data over
the years also indicated that being sophisticated item no customer is prepared
to buy a valve actuator without a warranty. Therefore, the warranty became
integral part of the sale price of the valve actuators. In other words, the
warranty stood attached to the sale price of the product. Therefore, the
warranty provision was needed to be recognised because the appellant was an
enterprise having a present obligation as a result of past events resulting in
an outflow of resources. Also, a reliable estimate could be made of the amount
of the obligation.

The Supreme Court observed that there are following options
for accounting the warranty expense :

(a) account warranty expense in the year in which it is
incurred;

(b) to make a provision for warranty only when the
customer makes a claim; and

(c) to provide for warranty at certain percentage of
turnover of the company based on past experience (historical trend).
According to the Supreme Court, the first opinion is unsustainable since it
would tantamount to accounting for warranty expenses on cash basis, which is
prohibited both under the Companies Act as well as by the Accounting
Standards which require accrual concept to be followed. In the present case,
the Department is insisting on the first option which, as stated above, is
erroneous as it rules out the accrual concept. The second option is also
inappropriate since it does not reflect the expected warranty costs in
respect of revenue already recognised (accrued). In other words, it is not
based on the matching concept. Under the matching concept, if revenue is
recognised the cost incurred to earn that revenue including warranty costs
has to be fully provided for. When valve actuators are sold and the warranty
costs are an integral part of that sale price, then the appellant has to
provide for such warranty costs in its account for the relevant year,
otherwise the matching concept fails. In such a case the second option is
also inappropriate. Under the circumstances, the third option is the most
appropriate because it fulfils accrual concept as well as the matching
concept.

Special audit of accounts — Order u/s. 142(2A) cannot be passed without giving reasonable opportunity of being heard.

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 12 Special audit of accounts — Order u/s.
142(2A) cannot be passed without giving reasonable opportunity of being heard.


[Sahara India (Firm) v. CIT, (2008) 300 ITR 403 (SC)]

This matter was placed before a three-Judge Bench in view of
a common order dated December 14, 2006, passed by a two-Judge Bench. The order
read as follows :

“When the matter was taken up, the learned counsel for the
petitioner placed reliance on a decision of this Court in Rajesh Kumar v.
Deputy CIT. According to the learned counsel for the petitioner, before
any direction can be issued u/s.142(2A) of the Income-tax Act, 1961 (in short
‘the Act’) for special audit of the accounts of the assessee, there has to be
a pre-decisional hearing and an opportunity has to be granted to the assessee
for the purpose. A close reading of the decision shows that the observations
in this regard appear to have been made in the context of the assessments in
terms of S. 158BC (block assessment) of the Act. Such assessments are
relatable to a case when a raid has been conducted at the premises of an
assessee. Had that been so, limited to the facts involved in that case, we
would have negatived the contentions of the learned counsel for the
petitioner. But, certain observations of general nature have been made. The
effect of these observations appears to be that in every case where the
Assessing Officer issues a direction in terms of S. 142(2A) of the Act, the
assessee has to be heard before such order is passed. This does not appear to
us to be the correct position of law. Therefore, we refer the matter to a
larger Bench. The records be placed before the Hon’ble Chief Justice of
India for constituting an appropriate Bench.”

 


Although no specific question had been formulated for
determination by the larger Bench but from the afore-extracted order it was
discernible that the Bench had doubted the correctness of the decision of this
Court in Rajesh Kumar v. Deputy CIT, to the extent that it laid down as
an absolute proposition of law that in every case where the Assessing Officer
issues a direction u/s.142(2A) of the Act, the assessee has to be heard before
such an order is passed. In other words, the Bench of two learned Judges has
felt that it may not be necessary to afford an opportunity of hearing to an
assessee before ordering special audit in terms of S. 142(2A) of the Act. The
larger Bench after noting the legal position, was in respectful agreement with
its decision in Rajesh Kumar that an order u/s.142(2A) does entail civil
consequences. The Supreme Court after taking note of the insertion of the
proviso to S. 142(2D) w.e.f. 1-6-2007 observed that even after the obligation to
pay auditor’s fees and incidental expenses has been taken over by the Central
Govt., civil consequences would still ensue on the passing of an order for
special audit and held that since an order u/s.142(2A) does entail civil
consequences, the rule audi alteram partem is required to be observed.
The Supreme Court further held that it is well settled that the principle of
audi alteram partem can be excluded only when a statute contemplates a
post-decisional hearing amounting to a full review of the original order on
merit, which was not the case here. Accordingly, the Supreme Court reiterated
the view expressed in Rajesh Kumar’s case. The Supreme Court also noted that by
the Finance Act, 2007, a proviso to S. 142(2A) has been inserted with effect
from June 1, 2007, which provides that no direction for special audit shall be
issued without affording a reasonable opportunity of hearing to the assessee.

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Substantial question of law — Whether credit for MAT is to be allowed before charging of interest u/s.234B and u/s.234C of the Act is a question of law.

New Page 2

11 Substantial question of law — Whether
credit for MAT is to be allowed before charging of interest u/s.234B and
u/s.234C of the Act is a question of law.

[ CIT v. Xpro India Ltd., (2008) 300 ITR 337 (SC)]

The following substantial question of law arose for
determination u/s.260A of the Income-tax Act, 1961.

“Whether, on the facts and in the circumstances of the
case, the Hon’ble High Court was right in allowing credit for MAT, u/s.115JAA
of the Income-tax Act, 1961, before charging interest u/s.234B and u/s.234C of
the Income-tax Act ?”

 


The Supreme Court held that the High Court erred in coming to
the conclusion that no substantial question of law arose, and consequently the
Department’s appeal was dismissed. The Supreme Court was of the view that, in
the present case, the question of interpretation of S. 234B in the context of
short payment of interest on advance tax arose for determination before the High
Court, which warranted interpretation of S. 115JAA of the 1961 Act read with S.
234B and S. 234C. The shortage in payment according to the respondent was on
account of applicability of S. 115JAA. The High Court in that connection was
required to decide the nature of the levy u/s.234B, whether the levy is penal or
mandatory. It had also not considered the judgment of the Bombay High Court in
the matter of CIT v. Kotak Mahindra Finance Ltd., (2004) 265 ITR 119. The
civil appeal was therefore allowed by the Supreme Court and the impugned
judgment was set aside with the direction to the High Court to consider the
above question in accordance with law.

 

 

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Companies — Minimum Alternate Tax — In respect of company consistently following the practice of debiting the depreciation at the rates prescribed by the Income-tax Rules, the Assessing Officer cannot for the purposes of S. 115J rework the net profit by s

New Page 2

 9 Companies — Minimum Alternate Tax — In
respect of company consistently following the practice of debiting the
depreciation at the rates prescribed by the Income-tax Rules, the Assessing
Officer cannot for the purposes of S. 115J rework the net profit by substituting
depreciation at the rates prescribed in Schedule XIV to the Companies Act, 1956.


[Malayala Manorama Co. Ltd. v. CIT, (2008) 300 ITR 251
(SC)]

The main question which had arisen for consideration before
the High Court was whether in respect of a company consistently charging
depreciation in its books of account at the rates prescribed in the Income-tax
Rules, the Income-tax Officer has jurisdiction u/s.115J of the Income-tax Act,
1961, to rework net profit by substituting the rates prescribed in Schedule XIV
to the Companies Act, 1956 ? The Kerala High Court (253 ITR 378) had held that
for the purposes of S. 115J the depreciation must be calculated in terms of the
Companies Act. On an appeal to the Supreme Court, it was submitted on behalf of
the appellant that in the profit and loss account the assessee has debited
depreciation at the rates prescribed by the Income-tax Rules, 1962. This has
been the consistent practice of the assessee throughout. S. 211(2) of the 1956
Act mandates that every profit and loss account of a company shall give a true
and fair view of the profit or loss of the company for the financial year and
shall comply with the requirements of Parts II and III of Schedule VI so far as
they are applicable thereto. The accounts of the assessee for the relevant A.Ys.
1988-89 and 1989-90 are audited u/s.227 of the 1956 Act. The audit report
confirms that the accounts of the assessee represent a true and fair view. The
accounts have further been passed and approved by the general body of
shareholders at the annual general meeting. The said accounts have been filed
with the Registrar of Companies and no objections have been raised in relation
to them. It was further submitted that u/s.115J the assessee has the obligation
to prepare his profit and loss account as per Parts II and III of Schedule VI to
the 1956 Act. No dispute has been raised at any stage of the proceedings by the
Revenue that the profit and loss account of the assessee is not in compliance
with the provisions of the 1956 Act, particularly Schedule VI, Parts II and III.
In Schedule VI, there is no reference to S. 205 and S. 350 or Schedule XIV to
the 1956 Act. The appellant referred to Note 3(iv) of Part II (Requirements as
to profit and loss account) of Schedule VI to the 1956 Act which reads as
under : “(iv) The amount provided for depreciation, renewals or diminution in
value of fixed assets. If such provision is not made by means of a depreciation
charge, the method adopted for making such provision. If no provision is made
for depreciation, the fact that no provision has been made shall be stated and
the quantum of arrears of depreciation computed in accordance with S. 205(2) of
the Act shall be disclosed by way of a note”. It was submitted that this made it
clear that Schedule VI to the 1956 Act does not create any obligation on a
company to provide for any depreciation much less provides for depreciation as
per Schedule XIV to the Act. It was also submitted by the appellant that it is a
long-standing accepted position by the Company Law Department that the rates of
depreciation prescribed in Schedule XIV are the minimum rates (See : Circular
No. 2 of 1989, dated Mach 7, 1989). Paragraph (3) of the said Circular reads as
under :

“(3) Can higher rates of depreciation be charged ?

It is stated that Schedule XIV clearly states that a
company should disclose depreciation rates if they are different from the
principal rates specified in the Schedule. On this basis, it is suggested that
a company can charge depreciation at rates which are lower or higher than
those specified in Schedule XIV. It may be clarified that the rates as
contained in the Schedule XIV should be viewed as the minimum rates and,
therefore, a company shall not be permitted to charge depreciation at rates
lower than those specified in the Schedule in relation to assets purchased
after the date of applicability of the Schedule.”

 


Moreover, Note 5 of Schedule XIV contemplates that rate may
be different from the rates specified in the said Schedule. This note reads as :

“5. The following information should also be disclosed in
the accounts :

(i) depreciation methods used; and

(ii) depreciation rates or the useful lives of the
assets, if they are different from the principal rates specified in the
Schedule.”

 



It was submitted by the learned counsel on behalf of the
appellant that this case was squarely covered by a three-Judge Bench decision of
this Court in Apollo Tyres Ltd. v. CIT, (2002) 9 SCC 1. Referring to
Explanation (ha)(iv) to S. 115J, the Revenue submitted that before the High
Court, it was argued by counsel for the Revenue that S. 205 of the Companies
Act, 1956 has been legislatively incorporated into the Income-tax Act for the
purposes of S. 115J and since this is a legislation by incorporation, the said
provision of the Companies Act, 1956, has to be applied as indicated by that
provision in the Companies Act. It was also pointed out that in S. 205 of the
Companies Act, it has been provided that for the purposes of calculating
depreciation u/s.205(1), the same could be provided to the extent specified
u/s.350 of the Companies Act. A reference to S. 350 of the Companies Act would
show that the amount of depreciation to be deducted shall be the amount,
calculated with reference to the written-down value of the assets, as shown by
the books of the company at the end of the financial year expiring at the
commencement of the Act or immediately thereafter and at the end of each
subsequent financial year and the rates specified in Schedule XIV to the
Companies Act. Therefore, according to the Revenue, the calculation of
depreciation in terms of the Companies Act and Schedule XIV thereof becomes a
must, while assessing an assessee u/s.115J of the Income-tax Act.

The Supreme Court allowing the appeal of the appellant, held
that the controversy involved in this case was no longer res integra. Its
three-judge Bench in Apollo Types (supra) had clearly interpreted S. 115J
of the Act and there was no scope for any further discussion.

 

 

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Transfer of a case — Power u/s.127 can also be exercised in respect of a block assessment.

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 10 Transfer of a case — Power u/s.127 can
also be exercised in respect of a block assessment.


[ K. P. Mohammed Salim v. CIT, (2008) 300 ITR 302
(SC)]

A search was conducted by the officers of the Income-tax
Department in the residence as also in the business premises of the assessee,
his sons and other associates, consequent whereupon, it was proposed to transfer
the cases pertaining to the assessee to the Income-tax (Inv.) Circle, Calicut,
to facilitate effective and co-ordinated investigation. An order was passed to
that effect by the Chief Commissioner of Income-tax, Bangalore, u/s.127(2) of
the Act. A notice was issued by the Assessing Officer u/s.158 BC of the Act to
file a return setting forth the total income including the undisclosed income
for the block period. The assessee filed a writ petition in the High Court of
Karnataka challenging the said order of transfer of cases passed by the Chief
Commissioner of Income-tax. The said writ petition was dismissed. A notice was
thereafter issued by the assessing authority asking the assessee to file a
return setting forth the total income including the undisclosed income for the
block period. Pursuant thereto, the return was filed. The purported undisclosed
income of the assessee was determined. The said order of the Assessing Officer,
Calicut was challenged on the ground that he had no jurisdiction to make the
block assessment, as the authority therefor remained with the Assessing Officer
originally having the jurisdiction over the assessee. A Division Bench of the
High Court by reason of the impugned judgment opined that the provisions of S.
127 of the Act can also be resorted to for a block assessment. On an appeal, the
Supreme Court held that an order of transfer is passed for the purpose of
assessment of income. It serves a larger purpose. Such an order has to be passed
in public interest. Only because in the said provision the words ‘any case’ has
been mentioned, the same, in the opinion of the Supreme Court, would not mean
that an order of transfer cannot be passed in respect of cases involving more
than one assessment year. It would not be correct to contend that only because
Explanation appended to S. 127 refers to the word ‘case’ for the purpose of the
said Section as also S. 120, the source of power for transfer of the case
involving block assessment is relatable only to S. 120 of the Act. It is a
well-settled principle of interpretation of statutes that a provision must be
construed in such a manner as to make it workable. When the Income-tax Act was
originally enacted, Chapter XIV-B was not in the statute book. It was brought in
the statutes book only in the year 1996. The power of transfer in effect
provides for a machinery provision. It must be given its full effect. It must be
construed in a manner so as to make it workable. Even S. 127 of the Act is a
machinery provision. It should be construed to effectuate a charging Section so
as to allow the authorities concerned to do so in a manner wherefor the
statute was enacted. Affirming the decision the Andhra Pradesh High Court in
Mukutla Lalita v. CIT reported in (1997) 226 ITR 23 the Supreme Court held
that the word ‘any’ must be read in the context of the statute and for the said
purpose, it may in a situation of this nature, means all. The Supreme Court held
that the power u/s.127 can also be exercised in respect of a block assessment.

 

 

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Appeal — Appeals of Revenue cannot be entertained if it has accepted and not challenged the ruling of the High Court passed on the issue.

New Page 2

 8 Appeal — Appeals of Revenue cannot be
entertained if it has accepted and not challenged the ruling of the High Court
passed on the issue.


[ ACIT v. Surat City Gymkhana, (2008) 300 ITR 214
(SC)]

The respondent-assessee claimed exemption u/s. 10(23) of the
Income-tax Act, 1961, for the A.Ys. 1991-92 and 1992-93. The said exemption was
claimed on the basis that the objects of the respondent-assessee were
exclusively charitable. The Assessing Officer rejected the claim. The appeals
filed before the Commissioner of Income-tax (Appeals) were dismissed. Aggrieved
thereby, the assessee filed further appeals before the Tribunal. The Tribunal,
by its order dated January 20, 2000, allowed the
appeals filed by the respondent-assessee. The Revenue filed appeals before the
High Court of Gujarat. The Revenue claimed that the following two substantial
questions of law arise from the order of the Tribunal :

(A) Whether, on the facts and circumstances of the case,
the Income-tax Appellate Tribunal was justified in law in holding that the
objects of the trust restricting benefits to the members of the club would
fall within the purview of the act of ‘general public utility’ u/s.2(15) of
the Income-tax Act constituting as a section of public and not a body of
individuals ?

(B) Whether, on the facts and circumstances of the case,
the Income-tax Appellate Tribunal was justified in law in holding that
registration u/s.12A was a fait accompli to hold the AO back from
further probe into the objects of the trust ?

 


The High Court dismissed the appeals, in limine,
relying on a decision of the same Court in the case of Hiralal Bhagwati v.
CIT, (2000) 246 ITR 188; (2000) 161 CTR 401. Being dissatisfied by the order
of the High Court, the Revenue has filed these appeals. The Supreme Court, on
July 22, 2002, granted leave in respect of question No. ‘B’ only. The appeals
were not entertained in respect of the question No. ‘A’ and it was noted that
the appeals were rightly dismissed by the High Court insofar as question No. ‘A’
is concerned, as the appellant did not challenge the correctness of the judgment
in the case of Hiralal Bhagwati (supra). At the hearing the Supreme Court
found that on a perusal of the judgment of the Gujarat High Court in the case of
Hiralal Bhagwati (supra), question No. ‘B’ was also concluded by the said
judgment (for 1st para of page 196). Further, since the Revenue had not
challenged the decision in the said case, the same has attained finality. The
Supreme Court held that question No. ‘B’, therefore, should also meet the same
fate as question No. ‘A’, as this Court had declined to grant leave in respect
of question No. ‘A’ on the ground that the Revenue did not challenge correctness
of the decision in the case of Hiralal Bhagwati (supra). It appeared that
the fact that question No. ‘B’ was also covered by the aforementioned judgment,
was not brought to the notice of their Lordships and, therefore, leave granted
was restricted to question No. ‘B’. In this view of the matter, the appeals were
dismissed.

 

 

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Reference — Penalty — High Court cannot go into facts in the absence of the question that the finding of the Tribunal was perverse.

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 7 Reference — Penalty — High Court cannot go
into facts in the absence of the question that the finding of the Tribunal was
perverse.


[Sudarshan Silks and Sarees v. CIT, (2008) 300 ITR 205
(SC)]

A search was conducted on the premises of the assessees on
October 14/15, 1987, and incriminating documents evidencing concealment of
income by the assessee were unearthed apart from cash and jewellary found at the
time of search. It was found that the appellant was maintaining double set of
books and was accounting for only 50% of sales in the regular set of books. This
fact was admitted by Shri J. S. Ramesh, a partner of the firm in the statement
recorded u/s.132(4) of the Act. Shri J. S. Ramesh was the person-in-charge of
the entire group. The total turnover suppressed by the assessee for the A.Y.
1987-88 was found to be to the tune of Rs.44,07,783. The AO estimated that the
sales of the assessee were Rs.50,000 per day, whereas the accounted sales were
not found even 50% of the total sales. Apart from this, it was found that
certain purchases were also not being accounted for. Similarly, certain payments
made were not being accounted for. All these were pointed out to the assessee.
The assessee filed a revised return on March 31, 1989, declaring a total income
for the A.Y. 1987-88 at Rs.3,74,226 as against the earlier amount of Rs.43,650.
This was accepted and after verification the assessment was completed on
December 29, 1989. During the course of recording the statement u/s.132(4) of
the Act, Shri Ramesh agreed to declare such additional income as had been
estimated by the search party in the office of the appellant and its sister
concerns. On the basis of these calculations, revised returns were filed by the
appellant for A.Ys. 1984-85, 1985-86 and 1986-87. The incomes as per revised
returns were also accepted in toto. In the course of assessment proceedings,
penal action u/s.271(1)(c) of the Act was initiated and after considering the
reply filed by the appellant, the AO chose to levy maximum penalty u/s.
271(1)(c). On appeal the CIT(A) noticed that no books of account or other
documentary evidence was discovered that proved any concealment for the earlier
years. The CIT(A) held that no penalty is leviable when unproved income is
offered to purchase peace, particularly considering that the additional income
returned, has only been on the basis of the appellant’s own estimates and the
appellant’s own admission, unsupported by the discovery of any other documentary
evidence relevant to years for which higher incomes were returned. The Tribunal
upheld the findings recorded by the CIT(A). The High Court on consideration of
the matter concluded that the findings recorded by the Tribunal and the CIT(A)
being perverse, which no reasonable person could have taken, were liable to be
set aside and accordingly accepted the reference and held that in the facts and
circumstances of the case, the Tribunal was not right in upholding the order of
the CIT(A) in cancelling the penalty levied u/s.271(1)(c). It was held that in
the facts of the case the penalty u/s. 271(1)(c) is clearly exigible. On appeal
the Supreme Court held that the question of law referred to the High Court for
its opinion was, as to whether the Tribunal was right in upholding the findings
of the Commissioner of Income-tax (Appeals) in cancelling the penalty levied
u/s.271(1)(c). Question as to perversity of the findings recorded by the
Tribunal on facts was neither raised nor referred to the High Court for its
opinion. The Tribunal is the final court of fact. The decision of the Tribunal
on the facts can be gone into by the High Court in the reference jurisdiction
only if a question has been referred to it which says that the finding arrived
at by the Tribunal on the facts is perverse, in the sense that no reasonable
person could have taken such a view. In reference jurisdiction, the High Court
can answer the question of law referred to it and it is only when a finding of
fact recorded by the Tribunal is challenged on the ground of perversity, in the
sense set out above, that a question of law can be said to arise. Since the
frame of the question was not as to whether the findings recorded by the
Tribunal on facts were perverse, the High Court was precluded from entering into
any discussion regarding the perversity of the findings of fact recorded by the
Tribunal. Accordingly, the orders under appeal were set aside by the Supreme
Court and that of the Commissioner of Income-tax (Appeals) and the Tribunal
restored.

 

 

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Double Taxation Avoidance Agreement — India and Malaysia — Dividend income received from Malaysian company is not liable to be taxed in India in the hands of the recipient assessee

New Page 2

6 Double Taxation Avoidance Agreement — India
and Malaysia — Dividend income received from Malaysian company is not liable to
be taxed in India in the hands of the recipient assessee.


[Dy. CIT v. Torqouise Investments and Finance Ltd., (2008) 300 ITR 1
(SC)]

The assessee-respondent, filed its return of income for the
A.Y. 1992-93, declaring an income of Rs.4,30,06,580 by showing its business as
investment and finance, which was processed u/s.143(1)(a) of the Income-tax Act,
1961, on January 18, 1996, on the same income. Along with the return the
assessee claimed refund amounting to Rs.29,16,660 on the basis of credit of
deemed TDS on dividend received from a Malaysian company i.e., Pan
Century Edible Oils SND.BHD, Malaysia. The Assessing Officer raised a demand of
Rs.1,07,370 after rejecting the credit claimed by the assessee on the basis of
deemed credit on dividend received from the aforesaid Malaysia company. Being
aggrieved, the assessee filed an appeal before the Commissioner of Income-tax
(Appeals), which was accepted. The Revenue thereafter filed an appeal before the
Income-tax Appellate Tribunal. The Tribunal disposed of the appeal with the
observation that the Double Taxation Avoidance Agreement entered into by the
Government of India with Government of Malaysia would override the provision of
the Act if they are at variance with the provisions of the Act. It was held that
from a plain reading of Article XI of the DTAA, it was clear that dividend
income would be taxed only in the Contracting State where such income accrued.
On further appeal, the High Court, following the decision of the Madras High
Court in the case of CIT v. Vr. S.R.M. Firm reported in (1994) 208
ITR 400, which was affirmed by the Supreme Court in the case of CIT v.
P.V.A.L. Kulandagan Chettiar reported in (2004) 267 ITR 654, held that the
Tribunal was justified in holding that the dividend income derived by the
assessee from a company in Malaysia is not liable to be taxed in the hands of
the assessee in India under any of the provisions of the Act. On an appeal to
the Supreme Court, the Supreme Court after going through the judgment of the
Madras High Court in CIT v. Vr. S.R.M. Firm (1994) 208 ITR 400 and its
judgment in CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 held
that the point involved in the appeals stood concluded in favour of the assessee
and against the Revenue by the decision of the Madras High Court in CIT v. Vr.
S.R.M. Firm (1994) 208 ITR 400, which was duly affirmed by it in the case of
CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654. The Supreme Court
further observed that the review petition filed against the decision of this
Court in CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 was also
dismissed on November 1, 2007.

 

Notes :

(i) There was an inordinate delay of 1027 days in filing
the review petition for which no satisfactory explanation had been offered.
The Supreme Court even otherwise did not find any ground to entertain the said
petition (2008) 300 ITR 5 (SC).

(ii) The effect of the judgment of the Apex Court in the
case of Kulandagan Chettiar (267 ITR 654) should now be considered with the
Notification (No. 91 of 2008, dated 28th August, 2008) issued u/s.90(3)
dealing with the scope of words ‘may be taxed’ used in DTAAs — [218 CTR (St.)
13].

 

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Tax audit : S. 44AB of Income-tax Act, 1961 : In the case of individual carrying on business as a sole proprietor, it is necessary to comply with the provisions of S. 44AB only in respect of his business income and not in respect of his other income.

New Page 1

Reported :

37. Tax audit : S. 44AB of Income-tax Act, 1961 : In the case
of individual carrying on business as a sole proprietor, it is necessary to
comply with the provisions of S. 44AB only in respect of his business income and
not in respect of his other income.

[Ghai Construction v. State of Maharashtra, 184
Taxman 52 (Bom.)]

In this case the question for consideration before the
Bombay High Court was as to whether an individual who has income from
different sources including income from business is bound to have his income
from sources other than the business also audited u/s.44AB of the Income-tax
Act, 1961 ?

The Bombay High Court held as under :

“(i) The recommendation for the presentation of the
audited account was in all ‘cases of business or profession’ and not in
respect of the entire income of a person carrying on a business or a
profession. It is these recommendations which were accepted in the form of
S. 44AB of the Income-tax Act.

(ii) In the case of an individual carrying on business as
a sole proprietor, it is necessary to comply with the provisions of S. 44AB
only in respect of his business income. It would not be necessary to comply
with the provisions of S. 44AB in respect of his other income. In the case
of a professional, it is his professional income and not his income from
other sources which would be covered by the provisions of S. 44AB.”

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Income : Deemed dividend : S. 2(22)(e) of Income-tax Act, 1961 : A.Y. 1996-97 : Trade advance to shareholder, etc. : Not assessable as deemed dividend.

New Page 1

Reported :

36. Income : Deemed dividend : S. 2(22)(e) of Income-tax Act,
1961 : A.Y. 1996-97 : Trade advance to shareholder, etc. : Not assessable as
deemed dividend.

[CIT v. Raj Kumar, 318 ITR 462 (Del.)]


The assessee was in the business of manufacturing
customised kitchen equipments. He was also the managing director and held
nearly 65% of the paid-up share capital of a company C. A substantial part of
the business of the assessee, was obtained through C. For this purpose, C
could pass on the advance received from its customers to the assessee to
execute the job work entrusted to the assessee. The Assessing Officer held
that the advance money received by the assessee is in the nature of the loan
given by C to the assessee and accordingly is deemed dividend within the
meaning of the provisions of S. 2(22)(e) of the Income-tax Act, 1961. He
therefore made the addition by treating the advance money as the deemed
dividend income of the assessee. The Tribunal deleted the addition.


On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :


“(i) The word ‘advance’ has to be read in conjunction
with the word ‘loan’. Usually attributes of a loan are that it involves the
positive act of lending, coupled with acceptance by the other side of the
money as loan : it generally carries interest and there is an obligation of
repayment. On the other hand in its widest meaning the term ‘advance’ may or
may not include lending. The word ‘advance’ if not found in the company of
or in conjunction with the word ‘loan’ may or may not include the obligation
of repayment. If it does, then it would be a loan.

(ii) The word ‘advance’ which appears in the company of
the word ‘loan’ could only mean such advance which carries with it an
obligation of repayment. Trade advances which are in the nature of money
transacted to give effect to a commercial transaction would not fall within
the ambit of the provisions of S. 2(22)(e) of the Act.

(iii) The trade advance given to the assessee by C could
not be treated as deemed dividend u/s. 2(22)(e) of the Act.”

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Educational institution : Exemption u/s. 10(23C)(vi) of Income-tax Act, 1961 : A.Y. 2007-08 : Assessee, deemed university, modified its MOA as per the UGC guidelines to include in the objects clause extra mural studies, extension programmes and field outr

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Reported :

35. Educational institution : Exemption u/s. 10(23C)(vi) of
Income-tax Act, 1961 : A.Y. 2007-08 : Assessee, deemed university, modified its
MOA as per the UGC guidelines to include in the objects clause extra mural
studies, extension programmes and field outreach activities to contribute to the
development of society : Assessee entitled to approval for exemption
u/s.10(23C)(vi).

[Jaypee Institute of Information Technology Society v.
DGIT (Exemption), 185 Taxman 110 (Del.)]


The assessee was a registered society. It was imparting
formal education by running an institute of information technology. On its
request, the UGC conferred on it the status of deemed university, subject to
the condition that the institute would revise/amend its Memorandum of
Association (MOA)/Rules as per the UGC model/guidelines. Accordingly the
assessee amended the MOA to include in the object clause extra mural studies,
extension programmes and field outreach activities to contribute to the
development of society. The assessee’s application for grant of approval for
exemption u/s.10(23C)(vi) of the Income-tax Act, 1961 was rejected on the
ground that education was not the only objective of the assessee-institute
inasmuch as the objective clause in the MOA mentioned that the institute was
also established for undertaking extra mural studies, extension programmes and
field out reach activities to contribute to the development of society.


On a writ petition filed by the assessee challenging the
said rejection, the Delhi High Court held as under :


“(i) In the instant case, the assessee was running an
educational institute imparting education in a systematic manner. The very
fact that it was granted the status of ‘Deemed university’ by the UGC, would
be a clinching factor insofar as institutionalised education conducted by
the assessee was concerned. It was imparting education in an organised and
systematic manner and was accountable to UGC even for maintaining the
standard of education. Further, in the assessee-institute, teachers were
employed and students enrolled were taught by these teachers; and they
remained under their control and supervision.

(ii) The main reason given by the respondent in rejecting
the application of the assessee was that the assessee-institute was having
multiple objectives and education was only one of them. In coming to that
conclusion, the respondent had been swayed by the so-called other
objectives, namely, ‘greater interface with society through extra mural,
extension and field action-related programmes’ stipulated in MOA. What was
perceived by the respondent was that those objectives were independent of
each other and it could not be said that the main object was education and
others were related to it. The first aspect which was totally ignored was
that said object was included at the instance of UGC, without which the UGC
would not have entertained the application of the assessee-institute for
grant of status of ‘Deemed university’. Obviously, the UGC would not insist
on including an objective, which was unrelated to ‘education’. There was a
clear purpose behind it. The aforesaid activity/objective was stated by the
UGC as a part of education. Normal schooling was provided by the assessee-institute.
What was emphasised by the UGC by necessitating incorporation of the
aforesaid objective was that imparting education was not limited to seeking
knowledge through textbooks alone. The UGC also wanted students to have
greater interface with society. That was necessary because of the modern
concept of education which needs to be imparted at schools’ and
universities’ levels.

(iii) If pure learning, which is one of the purposes of
the universities, is to survive, it will have to be brought into relation
with the life of the community as a whole, not only with the refined
delights of a few gentlemen of leisure. Real education is one which makes a
student socially relevant. For this purpose, his greater interface with
society is required. UGC perceives that this can be achieved through extra
mural, extension and field action-related programmes. These programmes may
include NSS and NCC activities, other social service programmes and
projects. It was with that purpose in mind that the aforesaid objective was
introduced so that students in the assessee-institute were able to get
‘real’ education. The main purpose, therefore, remained ‘education’ which
was imparted in a formal way by the assessee-institute with the status of
‘Deemed university’ through the help of teachers. The aforesaid activities
would only develop the knowledge, skill or character of the students further
by achieving education in true sense.

(iv) Therefore, the assessee-institute fulfilled the
requirement of imparting formal education by a systematic instruction. If an
institute/university introduces the courses with the objective of ‘greater
interface with the society through extra mural, extension and field
action-related programmes’, these are not the objectives independent of
education, but are an aid to the education. Therefore, the assessee-institute
fulfilled all the requirements of S. 10(23C)(vi) and was, thus, entitled to
grant of registration and, consequently, exemption under the aforesaid
provision.”

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Impact of IFRS on the telecom sector : Dialling a new reporting framework

IFRS

Impact of IFRS on the telecom sector : Dialling a new reporting
framework


As Indian companies get poised to converge with IFRS
commencing April 1, 2011, one of the industries which will witness significant
changes in the financial statements is the telecom industry. This article seeks
to discuss these changes and their related impact in greater detail.

Revenue recognition :

Presently in India, revenue recognition is governed by the
principles outlined in AS-9 ‘Revenue Recognition’. The corresponding standard
under IFRS — IAS 18 ‘Revenue’ along with related IFRICs serve as the required
starting point for developing accounting policies, even if they are not
necessarily specific to the telecom sector. The key changes from the present
accounting practices with respect to revenue recognition are as follows :

Arrangements involving more than one component (Bundled
arrangements) :

Telecom companies often offer customers bundled products,
which involve multiple components such as sale of equipment when the customer
signs up for a service contract. A typical example of this would be the schemes
where companies offer mobile handsets, modems, set top boxes, etc. (either at
full price or subsidised prices or at no separate price) when the customer signs
up for the respective services.

Under IFRS, IAS 18 has detailed guidance for identification
of arrangements having more than one component and their consequent separation
for the purposes of revenue recognition. Due to limited guidance available under
Indian GAAP for the same, entities presently account for such arrangements based
on their legal form and not based on the substance of such transactions.

IAS 18 requires that two or more transactions be considered a
single arrangement “when they are linked in such a way that the commercial
effect cannot be understood without reference to the series of transactions as a
whole.”

Having identified the transactions which are part of a single
arrangement, the standard requires entities to identify the various components
of the arrangement and account for the respective component based on the
applicable revenue recognition criteria.

For the purposes of separation of components the following
criteria is required to be fulfilled :



  •  the component has stand-alone value to the customer, and



  •  the
    fair value of the component can be measured reliably.


There is no specific guidance in IAS 18 for allocation of the
overall consideration to the respective components. However, based on the
guidance available in IFRIC 13 revenue could be allocated to components using
either of the following methods :



  •  Relative fair values, or



  •  Fair value of the undelivered components (residual method)


Using the relative fair values, the total consideration is
allocated to the different components based on the ratio of the fair value of
the components relative to each other. Using the residual method, the
undelivered components are measured at fair value and the remainder of the
consideration is allocated to the delivered components.

Telecom companies generally charge less for deliverables in a
bundled arrangement than they charge for each component separately. The relative
fair value method allocates this discount across all separately identifiable
components while the residual method would result in allocation of the discount
to undelivered components.

Customer incentives in the form of free minutes :

Telecom companies generally offer customers bonus talktime
without any additional revenue for the same. Presently under Indian GAAP,
revenue recognition is based on actual utilisation of talktime by the customer
with no revenue being recognised while the bonus talktime is being used. Under
IFRS, revenue recognition per minute is to be adjusted for the impact of the
bonus talktime (after considering the impact of forfeiture).

For example, Telecom T runs a promotion for its prepaid
telecom base. A customer purchasing a standard prepaid card for Rs.50 normally
would receive 100 minutes of calling time. However, during the promotion the
customer receives an additional 20 bonus minutes.

The revenue per minute of airtime is Rs.0.42 (50/120).
Therefore T will recognise revenue of Rs. 0.42 for every minute of airtime used
by the customer assuming that the customer shall use the bonus minutes entirely.

Activation revenue :

Activation revenue is normally collected from customers at
the point of their entry into the network. Accounting practices under Indian
GAAP varies with some companies recognising the activation revenue upfront,
while others recognising it over the expected life of the customer on the
network.

Under IFRS, such revenue is recognised over the expected life
of the customer and is not permitted to be recognised upfront.

Customer loyalty programs :

Telecom companies often offer customer loyalty points for
amounts spent on airtime and a customer can redeem those points for money off
their monthly bill or obtain a handset upgrade. Presently under Indian GAAP, due
to limited guidance telecom companies do not defer any revenue on account of the
loyalty points.

IFRIC 13 provides specific guidance with respect to
accounting for customer loyalty programs with the following features:



  •  Telecom companies grant award credits to a customer as part of a sales
    transaction; and



  •  Subject to meeting of other conditions, the customer can redeem the award
    credits for free or discounted goods or services in the future.


In addition to loyalty points offered by telecom companies,
IFRIC 13 would cover a wide range of sales incentives that might include, for
example, vouchers, coupons and discounts or renewals.

In summary, IFRIC 13 requires revenue to be deferred to account for an entity’s future obligation in respect of loyalty programs awarded. Recognition of revenue in accordance with IFRIC 13 would require allocation of revenue to award credits. Allocation of revenue is to be based on either relative fair value method or fair value of the award credits (i.e., residual value method). In estimating the fair value credits the telecom company is required to consider the following:

  •    Fair value of the goods and services that can be obtained from the exercise of the award credits, and

  •     The proportion of award credits granted that are expected not to be redeemed i.e., expected forfeitures.

Revenue from award credits is recognised as the telecom company fulfils its obligations to provide the free or discounted goods or services or as the obligation lapses.

Gross v. net presentation of revenue:

IAS 18 provides specific guidance for determination of gross or net presentation of revenue. For example, arrangement with respect to content available for downloads, involve the telecom companies earning a commission based on user access to the content. Typically such arrangements do not result in the telecom companies acquiring content rights. Accordingly, an assessment shall be required to be performed for gross v. net presentation based on the specific features of the arrangements.

Capacity transactions:

Telecom companies often enter into arrangements whereby they convey to other telecom companies ‘the right to use’ equipment, fibres or capacity (bandwidth) for an agreed period of time, in return for a payment or a series of payments. In relation to such capacity transactions, the telecom companies can be either providers (sellers) or customers or both. The capacity sellers usually retain the ownership of the network assets and convey the ‘right to use’ the asset to the customer for an agreed period of time. An agreement that conveys the exclusive right to use is generally referred to as ‘indefeasible right of use’ (IRU) in the telecom industry.

IRU contracts may not be described explicitly as lease contracts, but what matters is the substance of the agreement, which should be evaluated to determine whether the arrangement constitutes a lease. The analysis is based on the requirements of IFRIC 4 and accordingly based on the fulfilment of the following conditions:

  •     Whether the provision of a service depends on the use of one or more specific assets; and

  •     Whether a right of use of these assets is conveyed through the arrangement.

For the purpose of determining whether the arrangement conveys a right of use for specified assets, the telecom companies shall be required to assess whether:

(a)    the customer has the ability or right to operate the asset (including to direct how others should operate the asset), and at the same time obtain or control more than an insignificant amount of the asset’s output;

(b)    the customer has the ability to control physical access to the asset while obtaining more than an insignificant amount of the asset’s output;

(c)    the possibility of another party taking more than an insignificant amount of the asset’s output during the term of the arrangement is remote, and if yes, whether the customer pays a fixed price per unit of output which is not based on market price.

The facts and circumstances of the case would determine whether the customer acquires the right to use interchangeable capacity from an overall physical telecom asset; or whether the customer acquires the right to use a specific portion of the physical asset (for example, a physically identifiable portion of the wavelength) . Generally, rights to use ‘general capacity’ would not qualify as leases. However, rights to use specific telecom assets/portion of telecom assets may qualify as leases.

Property plant and equipment:
Depreciation:

Presently in India, telecom companies depreciate their fixed assets primarily based on the rates prescribed in Schedule XIV of the Companies Act, 1956. However, some companies depreciate certain fixed assets at rates based on the respective useful lives of the assets.

Under IFRS, companies are required to depreciate property plant & equipment based on their useful lives. The revised draft of Schedule XIV prescribes indicative useful lives and unlike its predecessor, is not expected to represent the minimum rates. Accordingly, all companies including the telecom companies will have to charge depreciation based on the useful lives of the related item of property plant and equipment.

Components of cost of property plant and equipment:

Presently, under Indian GAAP, companies capitalise costs which may not be directly attributable to bringing the fixed asset into its present location and condition. E.g., foreign exchange fluctuations related to long-term borrowing with respect to fixed assets are currently permitted to be capitalised under Indian GAAP.

However, under IFRS, only those costs which are directly attributable to bringing the asset into its present location and condition are permitted to be capitalised. Accordingly, items like foreign exchange fluctuation, administrative expenses, etc. shall not be permitted to be capitalised to the cost of property plant and equipment.

Asset retirement obligations:

As per the requirement of AS-29 ‘Provisions, Contingent Liabilities and Contingent Assets’, companies are required to recognise the entire undiscounted value of asset retirement obligation as a part of the cost of the related item of property plant and equipment.

However, under IFRS, IAS 37, the corresponding standard, requires the obligation to be discounted and accordingly, the present value of the asset retirement obligation is required to be included in the cost of the asset.

Deferred credit arrangements:

Telecom companies often have arrangements with creditors for purchase of property plant and equipment requiring payment on deferred terms i.e., on deferred credit terms. Under Indian GAAP, no specific adjustment is required for such arrangements and accordingly the related item of property plant and equipment is capitalised at the gross value of the amount payable to the creditor.

However, under IFRS, since all financial instruments have to be fair valued on initial recognition, the liabilities towards purchase of property plant and equipments (being financial liabilities) are required to be discounted on initial recognition. Accordingly, the related item of property, plant and equipment shall be capitalised at the present value of the amount payable to the creditor at the end of the extended credit period. The unwinding shall be through accrual of interest expense on the discounted liability for each reporting period.

Conclusion:

As the convergence date with IFRS is approaching, telecom entities have to be well prepared to ensure that the transition is smooth. Entities also have to be mindful of the ‘carve-outs’ (areas where accounting treatment under the IFRS converged standards in India may differ from IFRS issued internationally) which are being presently considered by the regulators.

Lastly, telecom companies would need to carefully consider the impact of IFRS convergence on their IT systems. This is especially true for changes impacting revenue recognition, given that revenue recognition in the telecom industry is highly technology-intensive.

IFRS 8 : Operating Segments

Background information :

IFRS 8 on ‘Operating Segments’ sets out requirements for disclosure of information about an entity’s operating segments and also about the entity’s products and services, the geographical areas in which it operates, and its major customers.

(1) Core principle :

    The core principle of IFRS 8 is that an entity shall disclose such information as to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.

(2) Applicability of IFRS 8 :

    IFRS 8 shall apply to the separate/individual/consolidated financial statements of an entity. IFRS 8 is not applicable to all entities. It is applicable only to those companies whose securities are either listed or are in the process of listing in a public market.

(3) Management approach :

(a) Management approach :

    IFRS requires segment disclosure based on the components of the entity that management monitors in making decisions about operating matters (the ‘management approach’). Such components (operating segments) are identified on the basis of internal reports that the entity’s Chief Operating Decision Maker (‘CODM’) reviews regularly in allocating resources to segments and in assessing their performance.

    The management approach is based on the way in which management organises the segments within the entity for making operating decisions and in assessing performance. Consequently, the segments are evident from the structure of the entity’s internal organisation and the information reported internally to the CODM. The adoption of the management approach results in the disclosure of information for segments in substantially the same manner as they are reported internally (and used by the entity’s CODM) for purposes of evaluating performance and making resource allocation decisions. In that way, financial statements users are able to see the entity ‘through the eyes of management’.

(b) Identifying the CODM :

    The term CODM refers to a function, rather than to a specific title. The function of the CODM is to allocate resources to the operating segments of an entity and to assess the operating segments’ performance. The CODM usually is the highest level of management (e.g., CEO or COO), but the function of the CODM may be performed by a group rather than by one person (e.g., a board of directors, an executive committee or a management committee).

    For example, an entity has a CEO, a COO and a president. These individuals comprise the executive committee. The responsibility of the executive committee is to assess performance and to make resource allocation decisions related to the individual operations of the entity, and each of these individuals has an equal vote. The executive committee is the CODM because the committee is the highest level of management that performs these functions. The segment financial information provided to and used by the executive committee to make resource allocation decisions and to assess performance is the segment information that would be the basis for disclosure for external financial reporting purposes.

    However, the mere existence of an executive committee, management committee or other high-level committee does not necessarily mean that one of those committees constitutes the CODM. Assume the same fact pattern as in the previous example except that the managing director can override decisions made by the executive committee. Because the managing director essentially controls the committee and therefore has control over the operating decisions that the executive committee makes, the managing director will be the CODM for purposes of applying IFRS 8.

(4) Identifying operating segments :

    An operating segment is a component of an entity :

    (a) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity),

    (b) whose operating results are regularly reviewed by the entity’s CODM to make decisions about resources to be allocated to the segment and assess its performance, and

    (c) for which discrete financial information is available.

    An operating segment generally has a segment manager. Essentially, the segment manager is directly accountable for the functioning of the operating segment and maintains regular contact with the CODM to discuss operating activities, forecasts and financial results. Like the CODM, a segment manager is a function, rather than a specific title.

    (a) Business activity is essential :

        A corporate headquarters would carry out some, or all, of the functions in the treasury, legal, accounting, information systems and human resources areas. However, corporate activities generally would not qualify as operating segments under IFRS 8, because typically they are not business activities from which the entity earns revenues.

    (b) Multiple segment information reviewed by CODM :

        Apart from the core principle as mentioned above, the additional factors that can be considered in determining the appropriate operating segments are as under :

        (a) the nature of the business activities of each component;

        (b) the existence of managers responsible for the components;

        (c) information presented to the board of directors; and

        (d) information provided to external financial analysts and on the entity’s website.

Some entities use a ‘matrix’ form of organisation, whereby business components are managed in more than one way. For example, some entities have segment managers who are responsible for geo-graphic regions, and different segment managers who oversee products and services. If the entity generates financial information about its business components based on both geography and products or services (and the CODM reviews both types of
information, and both have segment managers), then the entity determines which set of components constitutes the operating segments by reference to the core principle to IFRS 8 as mentioned above.

For example, an entity has six business components (A, B, C, D, E and F). Three of these business components (A, B and C) are located in India and each manufactures and sells a different product to customers in India. The CEO (who is the CODM) assesses performance, makes operating decisions and allocates resources to these business components based on financial information presented on a product-line basis. The entity also has three business components in the U.S. (D, E and F), which are organised to mirror the India operations (i.e., each manufactures and sells its products to customers located in the U.S.). However, the CODM assesses performance, makes operating decisions and allocates resources based on the financial information presented for the U.S. as a whole. The entity’s presi-dent of the U.S. operations is responsible for assessing performance, making operating decisions and allocating resources to the business components within the U.S. The entity’s president of the U.S. operations also is directly accountable to the CODM. The entity therefore has four operating segments: Segments A, B and C, which are determined on a product-line basis, and Segment U.S., which consists of business components D, E and F and is determined on a geographic basis. There is no requirement to disaggregate information for segment reporting purposes if it is not provided to the CODM in a disaggregated form on a regular basis.

Further, determination of the industry in which a business component of an entity operates generally is not decisive for purposes of identifying properly all of the operating segments under IFRS 8. For example, an entity historically reported that it had one industry segment (mining), but presented financial information in its MD&A and press releases on the following business components: gold, copper and coal. The entity determines that the CODM does, in fact, make resource allocation decisions based on the financial performance of each of these three business components. Accordingly, each of the three business components is an operating segment under IFRS 8, despite the fact that they all are in the mining industry.

c) Discrete and sufficient financial information :

In order to assess performance and to make resource allocation decisions, the CODM must have financial information about the business component. This information must be sufficiently detailed to allow the CODM to assess performance and to make resource allocation decisions. For example, an entity’s CODM receives revenue information for three different services delivered by segment A (Segment A is one of the five operating units of the entity). However, its operating expenses are reported to the CODM on a combined basis for the entire segment. Because a measure of profit or loss by service is not presented, the CODM might not have enough information to assess the performance or make resource (capital) allocation decisions regarding the individual services. Thus Segment A, in aggregate, is likely to be one operating segment, as opposed to the three individual services delivered by the Segment A.

5) Aggregation of segments :

Two or more operating segments may be aggregated into a single operating segment if

a) aggregation is consistent with the core principle of IFRS 8,

b) the segments have similar economic characteristics, and

c) the segments are similar in each of the following respects :

  •     the nature of the products and services;

  •     the nature of the production processes;

  •     the type or class of customer for their products and services;

  •     the methods used to distribute their products or provide their services; and

  •     if applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities.

    6) Reportable segments :

    a) Quantitative thresholds :

An entity shall report separately information about an operating segment that meets any of the following quantitative thresholds :

    a) Its reported revenue, including both sales to external customers and inter-segment sales or transfers, is 10% or more of the combined revenue, internal and external, of all operating segments.

    b) The absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of

  •     the combined reported profit of all operating segments that did not report a loss and
  •     the combined reported loss of all operating segments that reported a loss.

    c) Its assets are 10% or more of the combined assets of all operating segments.

Operating segments that do not meet any of the quantitative thresholds may be considered reportable, and separately disclosed, if management believes that information about the segment would be useful to users of the financial statements or more reportable segments need to be identified until at least 75% of the entity’s revenue is included in reportable segments.

The term ‘combined’ in each of the three tests as mentioned above means the total amounts for all operating segments before the elimination of intra-group transactions and balances (i.e., not the entity’s financial statement amounts). It does not include reconciling items and activities that do not meet the definition of an operating segment under IFRS 8 (e.g., corporate activities).

b) Use of different accounting policies for segment reporting :

The measures of the segment amounts are based on the amounts reported to the CODM. As a result, the entity can measure the segment amounts based on segment accounting policies that may be different from the entity’s accounting policy for preparation of financial statements. In such cases, the entity measures the segment amounts based on segment accounting policies and provides additional disclosure reconciling the segment amounts to the entity’s financial statements.

c) Measures for profits, assets or liabilities :

The segment information is based on the actual measure of segment profit or loss that is used by the CODM for purposes of evaluating each reportable segment. Adjustments and eliminations made in preparing the entity’s financial statements, as well as allocations of revenue, expenses, gains or losses, are included in the reported segment profit or loss only if these items are included in the segment profit or loss measure used by the CODM. Additionally, the allocation of amounts included in the measure of segment profit or loss must be on a reasonable basis.

d) Use of multiple measures of profits, assets or liabilities for different segments :

If the CODM uses more than one measure of a segment’s profit or loss, or more than one measure of a segment’s assets or the segment’s liabilities, then the measure disclosed in reporting segment profit or loss, or segment assets or liabilities, should be the measure that management believes is determined in accordance with the measurement principle most consistent with the corresponding amounts in the entity’s financial statements.

For instance, the CODM receives and uses the operating profit, operating profit less corporate charges and operating profit less corporate charges and an allocated cost of capital measures of segment profit or loss for each of the operating segments, the measure of segment profit or loss used to report segment profit or loss should be operating profit because this measure is most consistent with the corresponding amounts in the entity’s financial statements.

e) Operating segments below quantitative thresholds :

An entity is allowed to combine information about two or more such operating segments that do not meet the quantitative thresholds (as discussed above) to produce a reportable segment only if the operating segments have similar economic characteristics and share a majority (but need not be all) of the aggregation criteria listed in point 5 above.

If the total of external revenue reported by operating segments constitutes less than 75% of total consolidated revenue, then additional operating segments are identified as reportable segments (even if they do not meet the quantitative threshold criteria) until at least 75% of the total consolidated revenue is included in reportable segments.

Information about other business activities and operating segments that are not reportable shall be combined and disclosed in an ‘all other segments’ category separately from other reconciling items. The sources of the revenue included in the ‘all other segments’ category shall be described.

7. Change in reportable segments :

a) Operating segment becomes reportable segment only in current period :

If an operating segment is identified as a reportable segment in the current period in accordance with the quantitative thresholds, segment data for a prior period presented for comparative purposes shall be restated to reflect the newly reportable segment as a separate segment, even if that segment did not satisfy the criteria for reportability in the prior period, unless the necessary information is not available and the cost to develop it would be excessive.

b) Operating segment was reportable segment in previous period but does not meet quantitative thresholds in current period :

An operating segment that historically has been a reportable segment might not exceed any of the quantitative thresholds in the current period. In this situation if management expects it to be a reportable segment in the future, then the entity should continue to treat that operating segment as a reportable segment in order to maintain the inter-period comparability of segment information.

c) Change in composition of operating segments :

If an entity changes the structure of its internal organisation in a manner that causes the composition of its reportable segments to change, the corresponding information for earlier periods, including interim periods, shall be restated unless the information is not available and the cost to develop it would be excessive. Following a change in the composition of its reportable segments, an entity shall disclose whether it has restated the corresponding items of segment information for earlier periods.

The entity shall disclose segment information for the current period on both the old basis and the new basis of segmentation, unless the necessary information is not available and the cost to develop it would be excessive.

    8) Disclosure of segment information :

    a) Disclosures :

An entity shall disclose the following for each period for which a statement of comprehensive income is presented :

  •     general information as described in point b below

  •     information about reported segment profit or loss, including specified revenues and expenses included in reported segment profit or loss, segment assets, segment liabilities (refer point c below) and the basis of measurement (refer point d below) and

  •     reconciliations of the totals of segment revenues, reported segment profit or loss, segment assets, segment liabilities and other material segment items to corresponding entity amounts. Reconciliations of the amounts in the statement of financial position for reportable segments to the amounts in the entity’s statement of financial position are required for each date at which a statement of financial position is presented. (refer point e below).


b) General information :

IFRS 8 requires an entity shall disclose the following general information about its segments :

  •     factors used to identify the entity’s reportable segments, including the basis of organisation (for example, whether management has chosen to organise the entity around differences in products and services, geographical areas, regulatory environments, or a combination of factors and whether operating segments have been aggregated), and

  •     types of products and services from which each reportable segment derives its revenues.

c) Information about profit or loss, assets and liabilities : Segment profit or loss disclosures :

IFRS 8 requires an entity to report a measure of profit or loss and total assets for each reportable segment, and a measure of liabilities for each reportable segment if such an amount is provided regularly to the CODM. It also requires that an entity disclose the following about each reportable segment if the specified amounts are included in the measure of segment profit or loss reviewed by the CODM or are otherwise provided regularly to the CODM, even if not included in that measure of segment profit or loss :

  •     revenues from external customers;

  •     revenues from transactions with other operating segments of the same entity;

  •     interest revenue;

  •     interest expense;

  •     depreciation and amortisation;

  •     material items of income and expense disclosed in accordance with paragraph 97 of IAS 1 Presentation of Financial Statements (as revised in 2007);

 

  •     the entity’s interest in the profit or loss of associates and joint ventures accounted for by the equity method;

  •     income tax expense or income; and

  •     material non-cash items other than depreciation and amortisation.

If the amounts specified above are inherent in the measure of segment profit or loss used by the CODM, then those amounts are required to be disclosed even if they are not provided explicitly to the CODM.

Segment asset disclosures :

IFRS 8 requires an entity to disclose the following about each reportable segment if the specified amounts are included in the measure of segment assets reviewed by the CODM or are otherwise regularly provided to the CODM, even if not included in the measure of segment assets :

  •     the amount of investment in associates and joint ventures accounted for by the equity method, and

  •     the amounts of additions to non-current assets (i.e. PPE and Intangible assets) other than financial instruments, deferred tax assets, post-employment benefit assets and rights arising under insurance contracts.

d) Disclosure of measurement basis :

IFRS 8 requires an entity to provide an explanation of the measurements of segment profit or loss, segment assets and segment liabilities for each reportable segment. At a minimum, an entity shall disclose the following :

  •     the basis of accounting for any transactions between reportable segments;

  •     the nature of any differences between the measurements used for segments reporting (i.e. for profits or losses, assets and liabilities) and the entity’s financial statements (if not apparent from the reconciliations as required under point e below). Those differences could include accounting policies and policies for allocation of common items of income, expenses, assets and liabilities that are necessary for an understanding of the reported segment information.

  •     the nature of any changes from prior periods in the measurement methods used to determine re-ported segment profit or loss and the effect, if any, of those changes on the measure of segment profit or loss.

  •     the nature and effect of any asymmetrical allocations to reportable segments. For example, an entity might allocate depreciation expense to a segment without allocating the related depreciable asset to that segment.

e) Reconciliation disclosures :

IFRS 8 requires an entity to provide reconciliations of all of the following :

  •     the total of the reportable segments’ revenues to the entity’s revenue.

  •     the total of the reportable segments’ measures of profit or loss to the entity’s profit or loss before tax and discontinued operations. However, if an entity allocates to reportable segments items such as tax expense (tax income), the entity may reconcile the total of the segments’ measures of profit or loss to the entity’s profit or loss after those items.

  •     the total of the reportable segments’ assets to the entity’s assets

  •     the total of the reportable segments’ liabilities to the entity’s liabilities

  •     the total of the reportable segments’ amounts for every other material item of information disclosed to the corresponding amount for the entity.

All material reconciling items shall be separately identified and described. For example, the amount of each material adjustment needed to reconcile reportable segment profit or loss to the entity’s profit or loss arising from different accounting policies shall be separately identified and described.

9) Entity-wide disclosures :

Entity-wide disclosures about products and services (refer point a below), geographic areas (including country of domicile and individual foreign countries, if material) (refer point b below) and major customers (refer point c below) for the entity as a whole are required, regardless of whether the information is used by the CODM in assessing segment performance. These disclosures apply to all entities subject to IFRS 8, including entities that have only one reportable segment. However, information required by the entity-wide disclosures need not be repeated if it is included already in the segment disclosures.
 
a) Information about products and services :

There might be situations in which additional disclosures of external revenue from products and services are necessary on an entity-wide basis when those revenues are not evident from the operating segment disclosures (including situations in which the operating segment disclosures are determined by products and services). For example, an entity might not be organised on the basis of related products and services, and therefore its individual reportable segments include revenues from a broad range of essentially different products and services. In this situation supplemental disclosure of revenues by groups of similar products and services is required, unless the necessary information is not available and the cost to develop it would be excessive. In this case that fact is disclosed.

b) Information about geographical areas :

An entity is required to report the following geo-graphical information :

    1. revenues from external customers :

  •     attributed to the entity’s country of domicile and

  •     attributed to all foreign countries in total from which the entity derives revenues. If revenues from external customers attributed to an individual foreign country are material, those revenues shall be disclosed separately. An entity shall disclose the basis for attributing revenues from external customers to individual countries.

    2. non-current assets other than financial instruments, deferred tax assets, post-employment benefit assets, and rights arising under insurance contracts :

  •     located in the entity’s country of domicile and

  •     located in all foreign countries in total in which the entity holds assets. If assets in an individual foreign country are material, those assets shall be disclosed separately.

c) Information about major customers :

Revenue from individual external customers that represents 10% or more of an entity’s total revenue must be disclosed. Specifically, the total amount by significant customer and the identity of the segment that includes the revenue must be disclosed. However, IFRS 8 does not require the identity of the customer or the amount of revenues that each segment reports from that customer to be disclosed.

d) Measure of segment profits, assets and liabilities for entity-wide disclosures :

The entity-wide disclosures should be based on the same financial information that is used to produce the entity’s financial statements (i.e., not based on the management approach). Accordingly, the revenue reported for these disclosures should equal the entity’s total revenue. Further, if the necessary information is not available and the cost to develop it would be excessive, that fact shall be disclosed.

10) Issues on first-time adoption :

There is no specific first-time adoption exemption within IFRS 1 for presentation of segment information. However, the reportable segments which, in the past, were identified based on management’s assessment of dominant source and nature of entity’s risks and returns, shall now be identified based on the manner in which the entity’s Chief Operating Decision Maker (‘CODM’) reviews the business components regularly in allocating resources to segments and in assessing their performance.

11) Summary of key differences compared to AS 17 :


Conclusion :

The management needs to reassess the identified business segments based on the manner in which the entity’s Chief Operating Decision Maker (‘CODM’) reviews the business regularly in allocating resources to segments and in assessing their performance.

Is this move to a management approach a good thing ? There is some risk that moving to a management approach may reduce comparability between entities because entity-specific measures override ‘normal’ measurement requirements. But this risk will be offset by the user understanding how does the management assess their own performance and see the business ‘through the eyes of the management’.

Block assessment proceedings — The question whether the proviso appended to S. 113 imposing surcharge from 1-6-2002 is prospective or retrospective referred to a Larger Bench by the Supreme Court.

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  1. Block assessment proceedings — The question whether the
    proviso appended to S. 113 imposing surcharge from 1-6-2002 is prospective or
    retrospective referred to a Larger Bench by the Supreme Court.

[ CIT v. Vatika Township P. Ltd., (2009) 314 ITR 338
(SC)]

In the case before the Supreme Court, the search and
seizure took place on October 6, 2001. An order of block assessment in terms
of S. 158BC was made in respect of the A.Ys. 1984 to 2003. The surcharge was
levied on June 30, 2003.

The question which fell for consideration before the High
Court was as to whether the proviso appended to S. 113 of the Income-tax Act,
1961, is clarificatory and/or curative in nature. The Delhi High Court
following its decision in CIT v. Devi Dass Malhan dismissed the appeal
holding that no substantial question of law arose from the finding of the
Tribunal that proviso is prospective in effect.

Before the Supreme Court in support of his contention that
the said proviso was retrospective in nature, the learned Additional Solicitor
General relied upon a Division Bench decision of the Supreme Court in CIT
v. Suresh N. Gupta, (2008) 297 ITR 322 (2008) 4 SCC 362, 379.

The Supreme Court held that as the said proviso was
introduced with effect from June 1, 2002, i.e., with prospective effect
and by reason thereof, tax chargeable u/s.113 of the Income-tax Act is to be
increased by surcharge levied by a Central Act, it was of the opinion that
keeping in view the principles of law that the taxing statute should be
construed strictly and a statute, ordinarily, should not be held to have any
retrospective effect, it was necessary that the matter be considered by a
larger Bench.

Salary : Profit in lieu of salary : S. 17(3) : In order to characterise a particular payment received from an employer on termination of employment as ‘profit in lieu of salary’, it has necessarily to be shown that said amount is due or received as ‘compe

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40. Salary : Profit in lieu
of salary : S. 17(3) of Income-tax Act, 1961 : A.Y. 2001-02 : In order to
characterise a particular payment received from an employer on termination of
employment as ‘profit in lieu of salary’, it has necessarily to be shown that
said amount is due or received as ‘compensation’ : If payment is made as ex
gratia or voluntary by the employer out of his own sweet will and is not
conditioned by any legal duty or legal obligation, such payment is not to be
treated as ‘profit in lieu of salary’ u/s.17(3)(i).


[CIT v. Deepak Verma,
194 Taxman 265 (Del.)]

At the time of his
retirement, the assessee had received certain payment from his employer in
addition to normal benefits. The employer had deducted the tax at source on that
amount also. In the assessment proceedings for the A.Y. 2001-02, the assessee
claimed that the said amount was not exigible to tax being an ex gratia payment
which was outside the scope and ambit of S. 17(3). The Assessing Officer held
that the said payment was made as ‘compensation’ for his services and,
therefore, was liable to tax u/s.17(3)(i). The Tribunal deleted the addition
holding that it was not chargeable to tax u/s.17(3)(i) as ‘profit in lieu of
salary’.

On appeal by the Revenue the
Delhi High Court upheld the decision of the Tribunal and held as under :

“(i) Though sub-clause
(iii) squarely covered the nature of payment received by the assessee, that
did not exist in the relevant assessment year and was incorporated only with
effect from 1-4-2002. Therefore, that provision was not applicable to the
instant case.

(ii) Under sub-clause (i),
in order to characterise a particular payment received from the employer, on
termination of the employment, as ‘profit in lieu of salary’, it has
necessarily to be shown that this amount is due or is received as
‘compensation’.

(iii) When the payment is
to be received as ‘compensation’, the employee would have a right to receive
such a payment. If the employee has no right, it cannot be treated as a
‘compensation’. It is for this reason that if the payment is made as ex gratia
or voluntary by an employer out of his own sweet will and is not conditioned
by any legal duty or legal obligation, whether on sympathetic reasons or
otherwise, such payment is not to be treated as ‘profit in lieu of salary’
under sub-clause (i).

(iv) In the instant case,
all dues admissible to the assessee on his resignation were otherwise paid by
the employer to him. In addition, the employer agreed to pay ‘in its
discretion’ certain amount as an ‘exceptionable’ and ‘one off ex gratia
payment’. It was very clearly stated in the letter of the employer that
management had agreed to pay that amount in its discretion. It was not
compelled by any obligation to pay that amount which would assume the nature
of any ‘compensation’. The amount was also described as not only exceptionable
but ex gratia. It, therefore, clearly partook the character of voluntary
payment and could not be termed as a payment by way of ‘compensation’.
Therefore, the receipt of that payment by the assessee would not be covered
under sub-clause (i) of clause (3) of S. 17.

(v) Thus, the amount received by the
assessee was not ‘profit in lieu of salary’ and, therefore, was not an income
exigible to tax.”

levitra

TDS:Paymentstocontractors/sub-contractors: S. 194C : Assessee is a society constituted by truck operators : It entered into contracts with companies for carriage of goods by its members : Companies deducted tax at source from payments made to assessee : A

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39. TDS : Payments to
contractors/sub-contractors : S. 194C of Income-tax Act, 1961 : Assessee is a
society constituted by truck operators : It entered into contracts with
companies for carriage of goods by its members : Those companies deducted tax at
source from payments made to assessee : Assessee paid entire amount received by
it to its members, who had actually carried goods, after deducting a nominal
amount towards administrative expenses : Members not sub-contractors of assessee.
Assessee not liable to deduct tax at source on payments so made to respective
members.


[CIT v. Sirmour Truck
Operators Union, 195 Taxman 62 (HP)]

The assessee-society was
constituted by the truck operators. It entered into contracts with companies for
carriage of goods. Those companies deducted 2% of the amount paid to the
assessee on account of TDS in terms of S. 194C(1). The assessee-society paid the
entire amount received by it to its members, who had actually carried the goods,
after deducting a nominal amount of Rs. 10 or Rs.20 for administrative expenses
of running of the society. The Assessing Officer held that the assessee was
liable to deduct tax at source at the rate of 1% from the amount paid to the
members/truck operators in terms of S. 194C(2). The Tribunal held that the
provision of S. 194C(2) was not attracted, since there was no sub-contract
between the assessee-society and its members.

On appeal by the Revenue,
the Himachal Pradesh High Court upheld the decision of the Tribunal and held as
under :




“(i) It was urged on behalf of the Revenue
that since the assessee, being a person was paying a sum to the members-truck
operators’ who were resident within the meaning of the Act, TDS was required
to be deducted. That argument did not take into consideration the heading of
the Section and the entire language of S. 194C(2) which clearly indicates that
the payment should be made to the resident who is a sub-contractor.

(ii) The concept of
sub-contract is intrinsically linked with S. 194C(2). If there is no
sub-contract, then the person is not liable to deduct tax at source, even if
payment is being made to a resident. To understand the nature of the contract,
it would be relevant to mention that in the instant case the assessee-society
was created by the transporters themselves. The transporters formed the
society or union with a view to enter into a contract with the companies. The
companies entered into contract for transportation of goods and materials with
the society. However, the society was nothing more than a conglomeration of
the truck operators themselves. The assessee-society had been created only
with a view to make it easy to enter into a contract with the companies as
also to ensure that the work to the individual truck operator was given
strictly in turn so that every truck operator had an equal opportunity to
carry the goods and to earn income.

(iii) The society itself
did not do the work of transportation. The members of the society were
virtually the owners of the society. A finding of fact had been rendered by
the authorities that the societies were formed with a view to obtain the work
of carriage from the company, since the companies were not ready to enter into
a contract with the individual truck operator but had asked them to form a
society.

(iv) Admittedly, the
society did not retain any profits. It only retained a nominal amount as
‘parchi charge’ which was used for meeting the administrative expenses of the
society. There was no sub-contract between the society and the members.

(v) In fact, if the entire
working of the society was seen, it was apparent that the society had entered
into a contract on behalf of the members. The society was nothing but a
collective name of all the members and the contract entered into by the
society was for the benefit of the constituent members and there was no
contract between the society and the members.

(vi) For the foregoing
reasons, S. 194C(2) was not attracted and the assessee-society was not liable
to deduct tax at source on account of payments made to the truck owners, who
were also members of the society.”


levitra

Revision : S. 264 : S. 10(26AAA) was introduced by Finance Act, 2008 with retrospective effect from 1-4-1990 after completion of assessment for relevant years : Assessee’s application u/s.264 for relief under new Section with application for condonation

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38. Revision : S. 264 of
Income-tax Act, 1961 : A.Ys. 1997-98 to 2005-06 : S. 10(26AAA) was introduced by
Finance Act, 2008 with retrospective effect from 1-4-1990 after completion of
assessment for relevant years : Assessee’s application u/s.264 for relief under
new Section with application for condonation of delay should be allowed.


[Danny Denzongpa v. CIT,
194 Taxman 415 (Bom.)]

The assessee was an Indian
national of Sikkimese origin. For the relevant assessment years, his
assessments had been completed. Thereafter,
S. 10(26AAA) was introduced by the Finance Act, 2008 with retrospective effect
from 1-4-1990. The assessee was entitled to benefit under the new S. 10(26AAA).
Therefore, for the A.Ys. 1997-98 to 2005-06, the
assessee made an applications for revision u/s.264 of the Income-tax Act, 1961
to the Commissioner on 4-9-2008 with the application for condonation of delay
for grant of relief under the new S. 10(26AAA). The Commissioner rejected the
applications on the ground that those have been filed beyond the time limit
prescribed in the Act.

The Bombay High Court
allowed the writ petition filed by the assessee and held as under :

“(i) A reading of S.
264(6) discloses that if the assessee had been prevented by sufficient cause
from making the application within the period prescribed and the Commissioner
is satisfied with the reasons given by the assessee for not filing the said
application within the period prescribed, he may admit the application made
after expiry of the period. Indubitably, in the instant case, the application
u/s.264 came to be filed by the assessee on account of the introduction of S.
10(26AAA) which came into operation with retrospective effect from 1-4-1990.
By the said provision, the assessee, who was Sikkimese by origin, was entitled
to certain benefits. Obviously there seems to be a rationale in introducing
the said provisions as the Government was of the view that the said benefit is
required to be granted for the upliftment of the people of Sikkimese origin.

(ii) There can be no
dispute that the Finance Act, by which the said provision was introduced,
received the assent of the President on 10-5-2008. The assessee had made an
application immediately after a period of four months of the said Finance Act
receiving assent of the President. The reasons as to why the assessee did file
the applications at the said point of time, had been mentioned by him in the
applications for each of the assessment years. However, as could be seen from
the impugned order, the Commissioner had not even adverted to the reasons
mentioned by the assessee in the application for condonation of delay and had,
in a cryptic manner, rejected the said application by observing that he was
unable to entertain the assessee’s petitions beyond the time limit prescribed.

(iii) Once the
Commissioner is vested with the power of condonation of delay, then it is
incumbent upon him to take into consideration the reasons mentioned by the
assessee seeking condonation of the delay. A reading of the impugned order,
however, did not indicate that the reasons mentioned by the assessee had been
considered. In fact, the said reasons had not even been adverted to by the
Commissioner.

(iv) In matters of this
kind, wherein a benefit is sought to be given to an assessee, that too with a
retrospective effect, a highly technical and pedantic approach is required to
be eschewed and one which furthers the intent and purport of the legislation
is required to be adopted.

(v) Though in the normal
circumstances, for the reasons mentioned hereinabove, we would have set aside
the orders and remanded the matter back to the Commissioner for a de novo
consideration, however, for the reasons which we have mentioned hereinabove,
we do not deem it appropriate to do so and, therefore, allow these petitions
by making the Rule absolute in terms of prayer clauses (a) and (b)”.

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