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Joint property – Preference of succession – Death of co-owner issueless: Hindu Succession Act 1956, section 8 & 9

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Mangala & Anr vs. Dhuruwa & Other AIR 2013 Chhattisgarh 5

The late Seera Singh had three sons, namely;

(a) Amru- wife Soniya
(b) Chiter Singh – wife Hirabai
(c) Shriram – Daughter Kevrabai

According to the appellants/plaintiffs, the defendant – Dhuruwa had no title over the undivided property of late Seera Singh. They had further pleaded that Dhuruwa had taken possession of 5.55 acres of land and was attempting to take possession of the entire property. It was also pleaded that Dhuruwa was not the son of Kewrabai, therefore, he was not entitled to any share in the property and that the will executed in his favour was forged and fabricated.

According to the defendants, Amru (son of late Seera Singh) had died prior to coming into force of Hindu Succession Act, 1956 leaving no male descendant. His widow – Soniabai was only having limited interest in the property and was only entitled to be maintained out of the corpus of Hindu Undivided Family property. After the death of Amru, his share in the property devolved upon surviving sons of late Seera Singh, namely, Chiter Singh and Shriram. Chiter Singh died issueless, and therefore, his undivided share in the property devolved upon Shriram and thus Shriram became full owner of the entire property. Kewrabai was the daughter of Shriram and was married to one Shyam Ratan by custom of ‘Chudi’. Prior to her Chudi marriage with Shyam Ratan, her marriage was solemnised with Shiv Prasad. Out of wedlock with Shiv Prasad, she had a daughter – Santrabai and Santrabai was blessed with a son, namely, Hemal. Kewrabai had executed a will in favour of defendant No. 1 – Dhuruwa. The Honourable Court observed as per Section 9 of the Act of 1956, among the heirs specified in the Schedule, those in class-I shall take simultaneously and to the exclusion of other heirs; those in the first entry in class-II shall be preferred to those in the second entry, those in the second entry shall be preferred to those in the third entry, and so on in succession.

Admittedly, Chiter Singh left behind only two heirs, one Soniyabai, widow of his brother – Amru and Shriram, i.e., his brother. Both were class-II heirs. Brother’s name finds place in the second entry whereas the name of brother’s widow finds place in sixth entry. As per section 9 of the Act of 1956, heirs in the first entry in class-II shall be preferred to those in the second entry; those in the second entry shall be preferred to those in the third entry and so on in succession. Therefore, the share of Chiter Singh in the property, after his death, would devolve upon only in favour of Shriram, and not in favour of Soniyabai.

Admittedly, Kewrabai was only class-I legal heir of Shriram. After his death, Shriram’s 2/3rd share in the property, being only class-I legal heir of late Shriram, would devolve solely upon her. Kewrabai had executed a Will in favour of the respondent No. 1 – Dhuruwa, which was found to be duly proved by both the Courts below, therefore, after her death, the property in the hands of Kewrabai would devolve upon Dhuruwa and Dhuruwa became co-owner of the property to the extent of 2/3rd share, i.e., share of Shriram in the joint property. Kewrabai, being the only heir of Shriram, was competent to dispose of her 2/3rd undivided interest in the property, as per section 30 of the Act of 1956, even to the exclusion of her legal heir.

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Interest u/s. 234A: A. Y. 1996-97: Tax paid before due date but return filed late: Interest u/s. 234A not leviable

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Bharatbhai B. Shah vs. ITO; 255 CTR 278 (Guj):

The due date for filing of the return of income for the A. Y. 1996-97, was 31-8-/1996. The assessee had filed the return of income late, on 27-3-1998. However, he had paid tax of Rs. 10 lakh u/s. 140A of the Income Tax Act, 1961 on 30-8-1996. The Assessing Officer processed the return u/s. 143(1)(a) of the Act and assessed the tax at Rs. 15,08,474/- and after deducting the TDS of Rs. 25,533/-, determined the tax liability at Rs. 14,82,941/-. He also levied the interest u/s. 234A of the Act on the said amount ignoring the amount of Rs. 10 lakh paid on 30-8-1996.

The assessee filed a writ petition contending that interest u/s. 234A could be levied not on the entire amount of Rs. 14,82,941/-, but only on the amount of Rs. 4,82,941/- after reducing the amount of Rs. 10 lakh paid before the due date.

The Gujarat High Court allowed the petition and held as under:

“i) If the Revenue is allowed to recover interest on the tax which is already paid within the due date, merely because the return was not filed in time, would make the provision penal in nature and expose it to challenge of its vires.

ii) In the present case, the assessee had already deposited tax of Rs. 10 lakh before the due date of filing return. The return, of course, was filed belatedly. While framing the assessment of such belated return, the Assessing Officer held that the assessee should pay further tax of Rs. 4,82,941/-. Thus, the Revenue’s demand for interest for the entire amount of Rs. 14,82,941/- u/s. 234A would fall foul to the ratio of the decision of the Delhi High Court in the case of Dr. Prannoy Roy vs. CIT; 254 ITR 755 (Del) which has been confirmed by the Supreme Court in CIT vs. Pranoy Roy; 309 ITR 231 (SC).

iii) Revenue can collect interest u/s. 234A only on the additional sum of Rs. 4,82,941/- and not on the entire amount.”

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Housing project: Deduction u/s. 80-IB: A. Ys. 2004-05 to 2008-09: Built-up area of some flats exceeding 1500 sq.ft.: Within a composite housing project, where there are eligible and ineligible units, the assessee can claim deduction in respect of eligible units in the project and even within the block, the assessee is entitled to claim proportionate relief in the units satisfying the extent of the built-up area

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Viswas Promoters (P) Ltd. vs. ACIT; 255 CTR 149 (Mad)

The assessee was engaged in the business of development and construction of flats. The assessee was eligible for deduction u/s. 80-IB(10). Out of its four projects, two projects had all the flats of the specified built-up area less than 1500 sq.ft. In respect of these two projects, the Assessing Officer allowed the claim for deduction u/s. 80-IB(10) of the Act. In the remaining two projects, there were 32 flats of built-up area more than 1500 sq.ft. in one project and one flat of built up area more than 1500 sq. ft. in the other project. The assessee claimed deduction u/s. 80-IB(10) in respect of these two projects on proportionate basis corresponding to the flats of built-up area of less than 1500 sq. ft. The Assessing Officer disallowed the claim in respect of these two projects, on the ground that the condition as regards the built-up area of the flats is not satisfied. The CIT(A) allowed the assessee’s claim. The Tribunal upheld the decision of the Assessing Officer. On appeal by the assessee, the Madras High Court reversed the decision of the Tribunal and held as under:

“i) Going by the definition of the “housing project” under Explanation to section 80HHBA as the construction of “any building” and the wordings in section 80-IB(10), the question of rejection in entirety of the project on account of any one of the blocks not complying with the conditions, does not arise.

ii) In respect of each of the blocks, the assessee is entitled to have the benefit of deduction in respect of residential units satisfying the requirement of built up area of 1500 sq.ft. u/s. 80-IB(10)(c). The assessee would be entitled to the relief on a proportionate basis.”

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Deduction u/s. 80JJA: A. Ys. 2003-04 and 2004- 05: Business of making fuel briquettes from bagasse: Bagasse is a biodegradable waste and the same is collected on consideration by assessee from sugar factory: Assessee entitled to deduction u/s. 80JJA

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CIT vs. Smt. Padma S. Bora; 255 CTR 1 (Bom)

Assessee was engaged in the business of manufacturing fuel briquettes from bagasse purchased from sugar factory for consideration. For the A. Ys. 2003- 04 and 2004-05, the Assessing Officer disallowed the assessee’s claim for deduction u/s. 80JJA of on the following grounds:

“i) Bagasse is not a waste;

ii) It is not generated in municipal/urban limits i.e., by local authorities;

iii) It is not collected but it is purchased; and

 iv) The process does not involve any treatment or recycling of a biodegradable waste.

The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) Bagasse is a biodegradable waste and the same is collected on consideration by the assessee from the sugar factory. Term “waste” has to be understood contextually i.e., place where it arises and the manner in which it arises during the processing of some article. The fact that the sugar industry regards bagasse as waste is evident from circular dated 4-2-2006, issued by the Sugar Commissioner, Maharashtra State. Besides, the ITC classification of Exim Policy also classifies bagasse as a waste of sugar industry under Chapter 23, Heading 23.20 thereof. Further, Central Excise Teriff Act, 1985 also regards bagasse as waste of sugar manufacture and has classified the same under Chapter 23, Heading 23.01.

ii) Contention of the Revenue that collection means collecting free of charge and not by purchasing is not tenable. Word “collecting” means to gather or fetch. It is a neutral word and does not mean collection for consideration or collection without consideration. In the instant case, the assessee has collected bagasse from sugar factories after making payment for the same. Thus, the requirement of collecting biodegradable waste as provided u/s. 80JJA is satisfied.

iii) Circular No. 772 dated 23rd December, 1998 does not restrict its benefits only to local bodies. In any event, the circular cannot override the clear words of section 80JJA which provides deduction in respect of profits and gains derived from the business of collecting and processing/treating of biodegradable waste for making briquettes for fuel.

iv) Therefore, Tribunal was justified in allowing deduction u/s. 80JJA on the profits derived from the business of manufacturing fuel briquettes from bagasse.”

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Charitable or religious trust: Section 11: A. Ys. 1998-99 to 2000-01: Exemption of income from property held under trust: Accumulation of income: For purposes of section 11(2), Form No. 10 could be furnished during reassessment proceedings

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Association of Corporation & Apex Societies of Handlooms vs. Asst. DIT; 30 Taxman.com 22 (Del)

The Tribunal rejected the assessee’s claim for accumulation of income u/s. 11(2) of the Income Tax Act, 1961 on the ground that Form No. 10 had not been furnished along with the return, but was filed during the course of reassessment proceedings.

On appeal by the assessee, the assessee contended as under:

“i) The assessment included reassessment as was evident from section 2(8).

ii) Whether the assessment was an original assessment or a part of reassessment, it would not make any difference and it would be entitled to file Form No. 10 in either of the two proceedings and the revenue would have to take the said form into account.

The contention of the Department was that in view of the judgment of the Supreme Court rendered in the case of CIT vs. Nagpur Hotel Owners Association [2001] 247 ITR 201/ 114 Taxman 255 (SC) during reassessment proceedings the Form No. 10 could not be furnished by an assessee.

The Delhi High Court reversed the decision of the Tribunal, allowed the assessee’s appeal and held as under:

“i) One has to keep in mind the fact that while reopening of an assessment cannot be asked for by the assessee on the ground that it had not furnished Form No. 10 during the original assessment proceedings, this does not mean that when the revenue reopens the assessment by invoking section 147, the assessee would be remediless and would be barred from furnishing Form No. 10 during those assessment proceedings.

ii) Therefore, Form No. 10 could be furnished by the assessee-trust during the reassessment proceedings.”

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PART A: Decisions of the Supreme Court

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Penalty on Chief State Information Commissioner

One Mr. Anbarasam filed an application u/s. 6(1) of the Right to Information Act, 2005 (Act) and sought certain documents and information from the Public Information Officer – Deputy Registrar (Establishment) of the High Court of Karnataka (hereinafter referred as Respondent No. 1). His prayer was for the supply of certified copies of some information/documents regarding guidelines and rules pertaining to scrutiny and classification of the writ petitions and the procedure followed by the Karnataka High Court in respect of Writ Petition Nos. 26657 of 2004 and 17935 of 2006. Respondent No. 1 disposed of the application of Mr. Anbarasam vide order dated 3-8-2007 and intimated him that the information sought by him is available in the Karnataka High Court Act and the Rules and he can obtain certified copies of the order sheets of the two writ petitions by filing appropriate application under High Court Rules.

Mr. Anbarasam filed complaint dated 17-1-2008 u/s. 18 of the Act before the Karnataka Information Commission (for short, ‘the Commission’) and made a grievance that the certified copies of the documents had not been made available to him despite payment of the requisite fees. The Commission allowed the complaint of Mr. Anbarasam and directed Respondent No. 1 to furnish the High Court Act, Rules and certified copies of order sheets free of cost.

PIO of the High Court of Karnataka challenged the order of Karnataka Information Commission before the High Court of Karnataka which was decided by a single judge. The Single Judge noted:

“Various information as sought by the respondent are available in Karnataka High Court Act and Rules made there under. The said Act and Rules are available in market. If not available, the respondent has to obtain copies of the same from the publishers. It is not open for the respondent to ask for copies of the same from petitioner. But strangely, the Karnataka Information Commission has directed the petitioner to furnish the copies of the Karnataka High Court Act & Rules free of cost under Right to Information Act. The impugned order in respect of the same is illegal and arbitrary.”

“According to the Rules of the High Court, it is open for the respondent to file an application for certified copies of the order sheet or the relevant documents for obtaining the same. (See Chapter-17of Karnataka High Court Rules, 1959). As it is open for the respondent to obtain certified copies of the order sheet pending as well as the disposed of matters, the State Chief Information Commissioner is not justified in directing the petitioner to furnish copies of the same free of costs. If the order of the State Chief Information Commissioner is to be implemented, then, it will lead to illegal demands. Under the Rules, any person who is party or not a party to the proceedings can obtain the orders of the High Court as per the procedure prescribed in the Rules mentioned supra.”

 “The State Chief Information Commissioner has passed the order without applying his mind to the relevant Rules of the High Court. The State Chief Information Commissioner should have adverted to the High Court Rules before proceeding further. Since the impugned order is illegal and arbitrary, the same is liable to be quashed.”

Mr. Anbarasam did not challenge the Order of the Single Judge. However, the Commission filed an appeal along with an application for condonation of 335 days’ delay. The Division Bench dismissed the application for condonation of delay and also held that the Commission cannot be treated as an aggrieved person.

On the said dismal of appeal, the Chief Information Commissioner (instead of the Commission) filed a petition to the Supreme Court. The Supreme Court noted and ruled:

“What has surprised us is that while the writ appeal was filed by the Commission, the special leave petition has been preferred by the Karnataka Information Commissioner. Learned counsel could not explain as to how the petitioner herein, who was not an appellant before the Division Bench of the High Court, can challenge the impugned order. He also could not explain as to what was the locus of the Commission to file appeal against the order of the learned Single Judge whereby its order had been set aside. The entire exercise undertaken by the Commission and the Karnataka Information Commissioner to challenge the orders of the learned Single Judge and the Division Bench of the High Court shows that the concerned officers have wasted public money for satisfying their ego. If Mr. Anbarasam felt aggrieved by the order of the learned Single Judge, nothing prevented him from challenging the same by filing writ appeal. However, the fact of the matter is that he did not question the order of the learned Single Judge. The Commission and the Karnataka Information Commissioner had no legitimate cause to challenge the order passed by the learned Single Judge and the Division Bench of the High Court. Therefore, the writ appeal filed by the Commission was totally unwarranted and misconceived and the Division Bench of the High Court did not commit any error by dismissing the same.”

“This petition filed by Karnataka Information Commissioner for setting aside order dated 15-6-2012 passed by the Division Bench of the Karnataka High Court in Writ Appeal No. 3255/2010 (GM-RES) titled Karnataka Information Commission vs. State Public Information Officer and another cannot but be described as frivolous piece of litigation which deserves to be dismissed at threshold with exemplary costs.”

“With the above observations, the special leave petition is dismissed. For filing a frivolous petition, the petitioner is saddled with cost of Rs.1,00,000/. The amount of cost shall be deposited by the petitioner with the Supreme Court Legal Services Committee within a period of two months from today. If the needful is not done, the Secretary of the Supreme Court Legal Services Committee shall recover the amount of cost from the petitioner as arrears of land revenue.”

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Court & Tribunal – Distinction – Revenue Tribunal – Is akin to Court – Appointment of its President has to be with Consultation of High Court: Gujarat Revenue Tribunal Rules, 1982

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State of Gujarat & Anr vs. Gujarat Revenue Tribunal Bar Association & Anr AIR 2013 SC 107

The High Court had allowed the writ petition filed by the Respondents striking down Rule 3(1)(iii)(a) of the Gujarat Revenue Tribunal Rules 1982 which conferred power upon the State Government to appoint the Secretary to the Government of Gujarat, as the President of the Revenue Tribunal constituted under the Bombay Revenue Tribunal Act, 1957 (the Act). His appointment was challenged by the Respondents, on the ground that the office of the Chairman, being a “judicial office” could not be usurped by a person who had been an Administrative Officer all his life.

The High Court, vide impugned judgment had held that the Tribunal was in the strict sense, a “court” and that the President, who presides over such a Tribunal could therefore, only be a “Judicial Officer”, a District Judge etc., for which, concurrence of the High Court is necessary under Article 234 of the Constitution of India. The State of Gujarat filed an appeal in the Supreme Court.

The Honourable Supreme Court observed that although the term ‘court’ has not been defined under the Act, it is indisputable that courts belong to the judicial hierarchy and constitute the country’s judiciary as distinct from the executive or legislative branches of the State. Judicial functions involve the decision of rights and liabilities of the parties. An enquiry and investigation into facts is a material part of judicial function. The legislature, in its wisdom, has created the tribunal and transferred the work which was regularly done by the civil courts to them, as it was found necessary to do so in order to provide an efficacious remedy and also to reduce the burden on the civil courts and further, also to save the aggrieved person from bearing the burden of heavy court fees etc. Thus, the system of tribunals was created as a machinery for the speedy disposal of claims arising under a particular Statute/Act.

A Tribunal may not necessarily be a court, in spite of the fact that it may be presided over by a judicial officer, as other qualified persons may also possibly be appointed to perform such duty. One of the tests to determine whether a tribunal is a court or not, is to check whether the High Court has revisional jurisdiction so far as the judgments and orders passed by the Tribunal are concerned. Supervisory or revisional jurisdiction is considered to be a power vesting in any superior court or Tribunal, enabling it to satisfy itself as regards the correctness of the orders of the inferior Tribunal. This is the basic difference between appellate and supervisory jurisdiction. Appellate jurisdiction confers a right upon the aggrieved person to complain in the prescribed manner, to a higher forum whereas, supervisory/revisional power has a different object and purpose altogether, as it confers the right and responsibility upon the higher forum to keep the subordinate Tribunals within the limits of the law. It is for this reason that revisional power can be exercised by the competent authority/court suo motu, in order to see that subordinate Tribunals do not transgress the rules of law and are kept within the framework of powers conferred upon them. In the generic sense, a court is also a Tribunal. However, courts are only such Tribunals as have been created by the concerned statute and belong to the judicial department of the State as opposed to the executive branch of the said State.

Tribunals have primarily been constituted to deal with cases under special laws and to hence provide for specialised adjudication alongside the courts. Therefore, a particular Act/set of Rules will determine whether the functions of a particular Tribunal are akin to those of the courts, which provide for the basic administration of justice. An authority may be described as a quasi-judicial authority when it possesses certain attributes or trappings of a ‘court’, but not all.

The present case is also required to be examined in the context of Article 227 of the Constitution of India, with specific reference to the 42nd Constitutional Amendment Act 1976, where the expression ‘court’ stood by itself, and not in juxtaposition with the other expression used therein, namely, Tribunal’. The power of the High Court of judicial superintendence over the Tribunals, under the amended Article 227 stood obliterated. By way of the amendment in the sub-article, the words, “and Tribunals” stood deleted and the words “subject to its appellate jurisdiction” have been substituted after the words, “all courts”. In other words, this amendment purports to take away the High Court’s power of superintendence over Tribunal. Moreover, the High Court’s power has been restricted to have judicial superintendence only over judgments of inferior courts, i.e. judgments in cases where against the same, appeal or revision lies with the High Court. A question does arise as regards whether the expression ‘courts’ as it appears in the amended Article 227, is confined only to the regular civil or criminal courts that have been constituted under the hierarchy of courts and whether all Tribunals have in fact been excluded from the purview of the High Court’s superintendence. Undoubtedly, all courts are Tribunals but all Tribunal are not courts.

Section 13(1) of the Act, provides that in exercising the jurisdiction conferred upon the Tribunal, the Tribunal shall have all the powers of a civil court as enumerated therein and shall be deemed to be a civil court for the purposes of sections 195, 480 and 482 of the Code of Criminal Procedure, and that its proceedings shall be deemed to be judicial proceedings, within the meaning of sections 193, 219 and 228 of the Indian Penal Code.

Taking into consideration various statutes dealing with not only the revenue matters, but also covering other subjects, make it crystal clear that the Tribunal does not deal only with revenue matters provided under the Schedule I, but has also been conferred appellate/revisional powers under various other statutes. Most of those statutes provide that the Tribunal, while dealing with appeals, references, revisions, etc., would act giving strict adherence to the procedure prescribed in the Code of Civil Procedure, for deciding a matter as followed by the Civil Court and certain powers have also been conferred upon it, as provided in the Code of Criminal Procedure and Indian Penal Code. Thus, it was held that the Tribunal is akin to a court and performs similar functions.

The Apex Court dismissed the appeal.

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Plots for sale with assurance of subsequent development on such plots is not mere transfer of immovable property – it is a ‘service’ as per the provisions of Consumer Protection Act, 1986.

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Facts

Appellants were offering plots of land for sale with assurance of layout approvals of development of infrastructure/amenities, etc. as a package. The question for consideration before the Apex Court was, can such activities be regarded as a ‘service’ within the meaning of clause (o) of section 2(1) of the Consumer Protection Act, 1986 (the Act) and, therefore, can the buyer of such plots be regarded as a “consumer of service” and consequently be eligible for relief/s under the Act?

Held

 The Honourable Supreme Court, relying upon its own decisions viz. Lucknow Development Authority (1994) 1 SCC 243 and Bangalore Development Authority (2007) 6 SCC 711, held that activities of offering plots of land for sale with assurance of layout approvals of development of infrastructure/ amenities etc. as a package would be regarded as a ‘service’ within the meaning of clause (o) of section 2(1) of the Consumer Protection Act, 1986 and consequently buyers of such plot would be eligible for relief/s under the said Act.

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Maintenance and repairs of runways to receive same treatment as that of roads and thus exempt from the levy of service tax.

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Facts

Appellant was engaged in the maintenance and repairing of roads and runways and was registered under the category of “management, maintenance or repairs”. SCN was issued proposing to levy service tax on repairs and maintenance of roads and runways. The adjudicating authority as well as CCE Appeals confirmed the levy. The Honourable Tribunal, while partly dispensing with the pre-deposit requirement, held that maintenance and repairs of roads are exempt and not runways and hence ordered proportionate pre-deposit of Rs. 3 crore.

Held

The Honourable High Court observed that runways at the airport are species of the genus ‘road’ and hence, should receive the same treatment as roads for service tax purpose and hence, directed the Tribunal to hear the appeal afresh on the merits of the case at the earliest, without insisting on pre-deposit, and the Tribu

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Pre-determined Sale vis-à-vis Exempted Sale u/s.6(2) of CST Act – Controversy Settled

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Introduction

As per the scheme of Central Sales Tax Act (CST) when subsequent sale is effected in the course of the same movement, then it is exempted from tax as per section 6(2) of the CST Act, subject to production of C form and E1/E-II form as the case may be. There are a number of judgments throwing light on the various aspects of exempted sale u/s. 6(2). Reference can be made from important judgments like, State of Gujarat vs. Haridas Mulji Thakker (84 STC 317)(Guj), M/s.Fatechand Chaturbhujdas vs. State of Maharashtra (S.A.894 of 1990 dated.12-8-1991) (M.S.T. Tribunal), M/s.Duvent Fans P. Ltd. vs. State of Tamil Nadu (113 STC 431)(Mad.) and M/s. G. A. Galiakotwala & Co. (37 STC 536) (SC).

However, a controversy developed after the judgment of Hon. Supreme Court in case of A & G Projects & Technologies (19 VST 239)(SC).

Issue in A & G Projects & Technologies (19 VST 239) (SC)

The issue before the Supreme Court was from the judgment of Karnataka High Court. The accepted position in the Karnataka High Court judgment was that the Karnataka Sales Tax Assessing Authority considered the sale of A & G Projects as effected under section 3(a) of the CST Act in Tamil Nadu. Inspite of holding so, the tax was levied in Karnataka under CST Act. Before the Supreme Court the issue was whether tax can be levied in Karnataka inspite of holding the transaction as covered by section 3(a) in Tamil Nadu? In effect, the Supreme Court considered the application of section 9(1) of the CST Act. There was no issue about interpretation of section 6(2) of CST Act which is about “sale by transfer of documents of title to goods”, also popularly known as “in transit sale”. However, Hon. Supreme Court has made certain observations in the above judgment regarding “In transit sale”, because of which there was confusion. The relevant observations can be reproduced as under for ready reference:

“Within section 3(b) fall sales in which property in the goods passes during the movement of the goods from one State to another by transfer of documents of title thereto whereas section 3(a) covers sales, other than those included in clause (b), in which the movement of goods from one State to another is under the contract of sale and property in the goods passes in either States [SEE: Tata Iron & Steel Co. Ltd. vs. S.R. Sarkar – (1960) 11 STC 655 (SC) at page 667]. The dividing line between sales or purchases u/s. 3(a) and those falling u/s. 3(b) is that in the former case the movement is under the contract whereas in the latter case the contract comes into existence only after the commencement and before termination of the inter-State movement of the goods.” (Underlining ours)

Due to the above observations the sales tax authorities were taking a view that if the customer to whom sale by transfer of documents is to be effected was known prior to movement then it will be a pre determined sale and will not fall in the exempted category of section 6(2) of CST Act. This created a number of difficulties for the trading community.

Recent judgment of Hon. M. S. T. Tribunal in case of Ajay Trading Company (S A No.111 of 2010 dated12- 12-2012).

Facts of this case

The appellant is a trader and reseller of machinery in Maharashtra. The outside state buyers, herein after referred to as ‘ultimate buyers’ placed an order for purchase of machinery from the appellant. The ultimate buyers were from the state of Gujarat and Rajasthan. The appellant, in turn placed order on local manufacturers in Maharashtra for manufacture of those machineries. The appellant has instructed the manufacturers to dispatch the goods to the ultimate buyers. As per the instructions of the appellant, the manufacturers manufactured the machineries and dispatched them to the ultimate buyers in respective states. The invoices, delivery Challan and the lorry receipts i.e. dispatch proof was sent to the appellant. The appellant signed the lorry receipts and delivered the same to the ultimate buyers. In invoice, the local manufacturer levied CST @ 4%. The appellant raised invoice on the ultimate buyers without levying CST. Turnover of such sales to the tune of Rs. 58,26,750/- was claimed by the appellant in his returns for the period 2005-06 as a subsequent sale u/s. 6(2) of CST Act, as such exempted from central sales tax.

The appellant issued C form to the local manufacturers, who in turn issued an E1 form to the appellant. The ultimate buyers, on receiving the machinery, issued ‘C’ form to the appellant

The assessing officer assessed the appellant for the year 2005-06 and disallowed the claim of subsequent sale u/s. 6(2) holding that both the sales were interstate sales u/s. 3(a) of the CST Act. According to him, property in the machineries was transferred to the outside buyers before the movement of machineries outside the state. As such there is no subsequent sale u/s 6(2) by transfer of documents of the title. Hence, the turnover of the subsequent sale claimed by the appellant was held as not exempt. He levied sales tax on the same, considering it as sales u/s 3(a), on the basis of the decision of the Karnataka High Court in case of State of Karnataka vs. M/s A & G Projects and Technologies Ltd (13 VST 177) and Supreme Court in case of A & G Projects & Technologies vs. State of Karnataka (19 VST 239)(SC).

Arguments

The appellant contended that the local manufacturers have moved the machinery outside the state of Maharashtra as per the instructions of the appellant and sent the dispatch proof i.e. lorry receipt along with the invoice to the appellant. He submitted that the appellant signed the lorry receipts and delivered it to the ultimate buyers. He submitted that the first sale is an interstate sale u/s. 3(a) of the CST Act, and the sale by the appellant to the ultimate buyer is effected by the transfer of documents of title to goods during interstate movement and it is a subsequent sale u/s 3(b) r.w.s 6(2) of CST Act and as such it is exempted from central sales tax. It was submitted that both the authorities below committed an error in relying on the decision of Karnataka High Court and Supreme Court in case of M/s A & G Projects and Technologies Ltd. (cited supra).

Judgment

The Tribunal held that the facts of the present case are similar to the cases of Bayyana Bhimayya & Sukhdevi Rathi vs. Govt. of A.P. (12 STC 147), Onkaral Nandlal vs. State of Rajasthan (60 STC 314) and Haridas Mulji Thakker vs. State of Gujarat (84 STC 319).

The Tribunal observed that the appellant agreed to supply future goods to ultimate buyers outside the state. Delivery to them was on a future date. The appellant in turn placed an order on local manufacturers to manufacture those goods as required by the ultimate buyers and incorporated the term of delivery in the contract to deliver the goods to its ultimate purchasers on its behalf. The local manufacturer manufactured the goods and delivered the goods to the transporter for delivery to ultimate buyers. The local manufacturers moved the goods outside the state of Maharashtra. The contract of sale among them and appellant occasioned the movement of goods outside the state of Maharashtra. It fulfills the requirement of section 3(a) of CST Act and section 3(a) is attracted.

The Tribunal further observed that the law permits two sales simultaneously. Referring to Omkarlal Nandlal’s case Tribunal observed that the same sale may be both a sale in course of inter-state trade or commerce u/s. 3 of CST Act as also a sale inside state. Applying these observations to the facts of the present case, the sale among the local manufacturer and appellant was held as first inter state sale u/s. 3(a) of CST Act, and not a local sale. The subsequent sale by appellant to the ultimate buyer was held as exempt u/s.6(2) r.w.s. 3(b) of CST Act, 1956.

Conclusion

From above judgment the theory of subsequent exempted sale gets reiterated and also shows that A & G Projects judgment has not made any difference in interpretation of section 6(2) of CST Act. It is also expected that the assumed theory of predetermined sale will also get settled now and the trade community will have sigh of relief.

Important High Court Ruling: Recovery Proceedings Pending Stay Application

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Background

The Central Board of Excise and Customs (“CBEC”) in supersession of seven previous circulars on the same subject issued Circular No. 967/01/2013 CX on 1st January, 2013, directing the departmental officers to initiate recovery actions in cases where 30 days have expired after the filing of appeal by an assessee before an appellate authority. This action by CBEC is most unprecedented and totally unjust and unfair inasmuch as it has resulted in penal consequences for reasons beyond the control of an assessee and has rendered the statutory right of appeal nugatory. The said CBEC Circular is unjust and unfair for various reasons and in particular due to the fact that in large number of cases, stay applications are not disposed of due to inaction at the end of the concerned appellate authority and for no fault of the assessee.

In this regard, significant observations made by the Honourable Supreme Court of India (reproduced hereafter) in Commissioner of Cus & CE vs. Kumar Cotton Mills Pvt. Ltd. (2005) 180 ELT 434 (SC), have been totally ignored by CBEC:

“Para 6

The sub-section which was introduced in terrorem cannot be construed as punishing the assessees for matters which may be completely beyond their control For example, many of the Tribunals are not constituted and it is not possible for such Tribunals to dispose of matters. Occasionally by reason of other administrative exigencies for which the assessee cannot be held liable, the stay applications are not disposed within the time specified. ….”

Bombay High Court Ruling in Larsen & Toubro Ltd. vs. UOI (2013) 288 ELT 481 (Bom) – Automatic Stay of recovery after filing of Stay Application – No coercive actions unless assessee resorts to dilatory tactics.

A Writ Petition was filed under Article 226 of the Constitution challenging the CBEC Circular dated 1-1-2013. The Petitioners pleaded that when the stay application remains to be disposed of due to inability of the appellate authority to take up the application for hearing and disposal without any default on the part of the assessee, it would be arbitrary to penalise the assessee by enforcing the recovery, despite the pendency of the application for stay. The Honourable High Court noted the ruling in Collector vs. Krishna Sales (P) Ltd. (1994) 73 ELT 519 (SC) and relied on the rulings in CCE vs. Kumar Cotton Mills Pvt. Ltd. (2005) 180 ELT 434 (SC); Mark Auto Industries Ltd. vs. UOI (1998) 102 ELT 542 (DEL) and Nedumparambil P George vs. UOI (2009) 242 ELT 523 (BOM), while making important observations set out hereafter. As regards CBEC’s directive that even though stay application was filed before Commissioner (Appeals)/CESTAT which is pending, recovery could be initiated upon completion of 30 days after filing of appeal if no stay is granted, the following was observed:

 • If on failure of Appellate Authority to dispose of appeal or stay is not due to default of assessee or their dilatory tactics, to initiate recovery by coercive measures in the meantime, is unjustified, arbitrary, travesty of justice and violative of Article 14 of Constitution of India.

• It is unjust to penalise the assessee for inability of judicial/quasi judicial authority to dispose stay application within thirty days. The fact that a period of thirty days is allowed to lapse after filing of appeal is immaterial as Commissioner (Appeals)/CESTAT may not have heard the stay application within these thirty days.

• Lack of adequate infrastructure, unavailability of officer before whom stay application had been filed, absence of bench of CESTAT or sheer volume of work, are some causes due to which applications for stay remain pending, which are beyond control of assessee.

• Protection of revenue has to be balanced with fairness to assessee. That is why even though Section 35C(2A) of Central Excise Act, 1944 prescribes that stay order stands vacated where appeal before Tribunal is not disposed of within 180 days, it is not applicable where appeal remains pending for reasons not attributable to assessee. In such a scenario, Revenue’s plea that when there is no stay and thus there is no prohibition of recovery of confirmed demand immediately, and it is a matter of government policy to how long it should wait before initiating recovery is rejected.

• The fact that Revenue officers initiating recovery are independent of adjudicating/appellate forum, and have no means of verifying status of stay application and it is for assessee to inform them when recovery action is initiated, is not a valid justification for penalising assessee whose conduct is otherwise free from blame with modern technology, this can be overcome. However, if a stay application remains pending for more than reasonable period, due to default/improper conduct of assessee, recovery proceedings can be initiated. As regards CBEC’s directive that in cases where Commissioner (Appeals)/CESTAT or the High Court confirms the demand, recovery has to be initiated immediately, the Court observed as under:

• This directive ‘deprives’ the assessee even a reasonable time to exercise the remedy provided to them under the law of filing an appeal with CESTAT, High Court or Supreme Court as the case may be along with an application of stay.

• Further, there is no justification to commence recovery immediately following the order–in– appeal where period of limitation has been laid down for challenging it under the law. As regards adoption of modern information technology in regard to appeal and adjudication processes, the following important observations, were made by the Court at Para 16:

• Union Ministry of Finance should take steps to ensure that proceedings before the adjudicating authorities as well as the Appellate Authorities including the Commissioner (Appeals) and the CESTAT are recorded in the electronic form.

• Once an appeal is filed before the Commissioner (Appeals), the filing of the appeal must be recorded through an entry made in the electronic form. Every appellant, including the assessee, must indicate, when an appeal is filed, an email ID for service of summons and intimation of dates of hearing.

• The Commissioner (Appeals) must schedule the hearing of stay applications and provide dates for the hearing of those applications which must be published in the electronic form on the website. The order sheets or roznamas of every case must be duly uploaded on the website to enable both the officers of the Revenue and assessees to have access to the orders that have been passed and to the scheduled dates of hearing.

• We would also recommend to the Union Ministry of Finance the urgent need to introduce electronic software that would ensure that the orders and proceedings of the CESTAT are duly compiled, collated and published in the electronic form.

• Matters involving Revenue have large financial implications for the Union Government. The incorporation of electronic technology in the functioning of judicial and quasi-judicial authorities constituted under the Central Excise Act, 1944, the Customs Act, 1962 and cognate legislation would provide a measure of transparency and accountability in the functioning of the adjudicating officers, the appellate Commissioners as well as the Tribunal. But equally significant is the need to protect the interest of the Revenue which the adoption of electronic technology would also achieve.

•    The fact that an application for stay may be kept pending for an indefinitely long period of time at the behest of an unscrupulous assessee and a willing administrative or quasi judicial authority. This would be obviated by incorporating the requirement of disseminating and uploading the proceedings of judicial and quasi-judicial authorities under the Central Excise Act 1944 as well as the Customs Act 1962 in an electronic form. This would ensure that a measure of administrative control can be retained with a view to safeguarding the position of the Revenue as well as in ensuring fairness to the assessees.

The Court finally at Para 17 held as follows:

“For these reasons, we have come to the conclusion that the provisions contained in the impugned circular dated 1st January, 2013 mandating the initiation of recovery proceedings thirty days after the filing of an appeal, if no stay is granted, cannot be applied to an assessee who has filed an application for stay, which has remained pending for reasons beyond the control of the assessee. Where however, an application for stay has remained pending for more than a reasonable period, for reasons having a bearing on the default or the improper conduct of an assessee, recovery proceedings can well be initiated as explained in the earlier part of the judgment”

Stay by other Courts

In addition to Bombay High Court, interim stay has been granted against operation of CBEC Circular dated 1-1-2013 by the High Courts of Andhra Pradesh, Delhi, Karnataka and Rajasthan. [Reference can be made to Bharat Hotels Ltd. vs. UOI (2013) 288 ELT 509 (DEL); Texonic Instruments vs. UOI (2013) 288 ELT 510 (KAR) and R.S.W. M Ltd vs. UOI (2013) 288 ELT 511 (RAJ)

Directions given by the Bombay High Court in Patel Engineering Limited 2013-TIOL-150-HC -MUM-ST The assessee had filed a writ petition in the Bombay High Court against the Circular dated 1-0-2013. The assessee’s facts are similar to those of Larsen & Toubro case (supra). The Honourable High Court after considering the decision in Larsen & Toubro (supra ) held that recovery proceedings be stalled and further issued directions for the authorities to issue a circular to follow the directions as stated in the Larsen & Toubro case (supra) before initiating recovery proceedings. Further, the Honourable High Court also held that the law laid by the Court is applicable to all the authorities under the jurisdiction of this Court.

Conclusion

The above assumes greater importance for the simple reason that despite the Court Rulings of Larsen & Toubro (supra), it is understood that at practical level, field formations are initiating recovery actions based on CBEC Circular insisting that Court Ruling is applicable to the concerned petitioner only. It is high time that the Supreme Court intervenes in the matter and issues appropriate directions or alternatively, the Union Ministry of Finance urgently acts upon the directions given by the Honourable High Court and move towards establishing accountability and reforming tax administration in the country.

DTAA between India and Malaysia – Notification no. 7 dated 29th January, 2013

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1: DTAA between India and Malaysia – Notification no. 7 dated 29th January, 2013 –

DTAA between India and Malaysia signed on 9th May, 2012 shall enter into force on 26th December, 2012

2: Income tax (First amendment) Rules, 2013 Notification No- 8 dated 31st January, 2013–

New Rule 17CA has been inserted to enumerate the functions of an electoral trust. Form 10BC has been prescribed as an Audit Report for such electoral trusts.

3: Electoral Trusts Scheme 2013 notified under Section 10(22AAA) – Notification No- 9 dated 31st January, 2013

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Section 28 – Merely by initiating the compensation suit, the amount claimed therein cannot be treated as assessee’s income unless the other party admits the liability to pay compensation or there is a decree in favour of the assessee.

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17. ACIT v. Trident Textile Mills Limited
ITAT Chennai `A’ Bench
Before Abraham P. George (AM)  
and S. S. Godara (JM)
ITA No. 1169/Mds/2012
A.Y.: 2008-09. Dated: 17-12-2012.
Counsel for revenue/assessee: Shaji P. Jacob /M. Karunakaran

Section 28 – Merely by initiating the compensation suit, the amount claimed therein cannot be treated as assessee’s income unless the other party admits the liability to pay compensation or there is a decree in favour of the assessee.


Facts

The assessee, manufacturer and domestic seller of grey fabric, filed its return of income for the AY 2008-09 declaring a loss of Rs. 31,31,568. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had acquired a 1250 MW windmill, from M/s Suzlon Energy, for captive consumption. The purchase order contained compensation clause, which provided that the assessee was entitled to compensation in case of any loss of generation on account of non-availability of the machine below 95% @ 3.67/ KWH or as per the TNEB tariff during the warranty period. He also noticed that the generation of power unit did not touch the assured level of 37 lakh units. The assessee had filed a compensation case before the Jurisdictional High Court raising claim of Rs. 17,58,014 upto 15-9-2007 for shortfall in generation of power. Since the other party had not accepted the assessee’s claim for compensation and also the case was pending before the Court, the assessee had not declared the amount claimed as its income. The AO held that, since the assessee was entitled to compensation as per the agreement, he taxed the sum of Rs. 17,58,014 as the income of the assessee. Aggrieved, the assessee preferred an appeal to the CIT(A) who deleted the addition made by the AO. Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held

The Tribunal noted that the capacity assured was never achieved and the assessee had initiated compensation proceedings before the Honourable High Court. The High Court had referred the case to the Sole Arbitrator, who expired during the pendency of the arbitration proceedings. The Tribunal held that it is unable to concur with the stand of the Revenue that merely by initiating the compensation suit, the amount claimed therein is liable to be assessed as assessee’s income. It also noted that the other party has not admitted any compensation or its part as payable to the assessee nor there any decree in favour of the assessee so as to realise the amount. It held that once the arbitration proceedings are pending, the outcome of the assessee’s claim involved still hangs in balance. It observed that when there is no actual receipt of any amount or accrual, the same cannot be taken as income of the assessee. It held that the amount claimed by the assessee as compensation cannot be taken to be its income. The Tribunal upheld the order of CIT(A). The appeal filed by the Revenue was dismissed.

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Surety/Guarantor – State Financial Corporation – Taking possession of property mortgaged by guarantor – SFC Act 1951 section 29

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Shanti Sarap Sharma vs. State of Punjab & Ors AIR 2013 Punjab & Haryana 13

The case of the petitioner as pleaded was that the son of the petitioner Rupinder Kumar Sharma was the sole proprietor of industrial concern M/s Aditi Agro Mills, which had obtained a term loan of Rs. 40 lakh from the Corporation vide mortgage deed dated 31-3-1993. The house in question was the absolute ownership of Ved Parkash Sharma, father-in-law of the present petitioner and said Ved Parkash Sharma being the maternal grandfather of Rupinder Kumar Sharma in his capacity as surety/guarantor offered the said house as collateral security with respondent No. 2 for the purpose of raising loan and the same was, thus, mortgaged with the Corporation as per mortgage deed dated 31-3-1993. The properties belonging to the industrial concern as well as the factory building alongwith the machinery was also mortgaged. The said industrial concern M/s Aditi Agro Mills, started committing default from 15-3-1994 and accordingly, the Corporation took over the property u/s. 29 of the Act. The father-in-law of the petitioner Ved Parkash Sharma passed away on 4-2-2008 executing a will dated 13-11-2006 whereby he bequeathed the said residential house in favour of his son-in-law, on the basis of which the present petitioner has become owner of the property. The Corporation purportedly exercising its powers u/s. 29 of the Act has taken over the deemed possession of the house on 17-10-2002 in order to enforce the liability of the guarantor/surety.

It was further pleaded that proceedings u/s. 29 of the Act could not be invoked against the guarantor and the Corporation had a right u/s. 31(aa) for enforcing the liability of any surety and the claim of the Corporation was also time barred as default in repayment of loan was on 15-3-1994 and the last payment was due against the industrial concern on 15-3-2001.

On behalf of the respondents, it was pleaded that the liability of the principal debtor and the surety was co-extensive and the value of the property was highly insufficient to discharge the liability and since the principal debtor has committed default in not paying the amount so advanced with stipulated interest, the Corporation was justified in taking action u/s. 29 of the Act for recovery of the loan with interest by taking over possession of the residential house.

The court observed that section 29 of the Act specifically provides that whenever an industrial concern which is under liability to the Financial Corporation in pursuance to an agreement, makes any default in repayment of any loan or advance in relation to any guarantee given by the Corporation or otherwise fails to comply with the terms of its agreement with the Financial Corporation, the Corporation shall have the right to take over the management or possession or both of the industrial concern and realise the property pledged, mortgaged, hypothecated or assigned to the Corporation. Similar matter came up for consideration before the Honourable Apex Court in Karnataka State Financial Corporation’s vs. N. Narasimahaiah & Ors AIR 2008 SC 1797, where while upholding the judgment of the Karnataka High Court, it was held that Section 29 confers an extraordinary power upon the Corporation and it is expected to exercise its statutory powers reasonably and bona fide. The powers of the Corporation u/s. 31 & 32G of the Act were also taken into consideration and it was observed that there would not be any default as envisaged in Section 29 of the Act by a surety or a guarantor and the power was granted to the Corporation against the surety only in terms of Section 31 of the Act and not u/s. 29 of the Act.

The Full Bench decision of this Court in Shiv Charan Singh v. Haryana State Industrial & Infrastructure AIR 2012 P & H 50. The question which was referred to the Full Bench was as under:-

Whether the parties can agree to confer jurisdiction to the financial Institution to proceed against the guarantor in exercise of the powers conferred u/s. 29 of the Act?

 After taking into consideration the provisions of the bond of guarantee and the judgment of the Apex Court in Karnataka State Financial Corporation’s case (supra), the Full Bench came to the conclusion that the parties could not confer jurisdiction under the statute which was not provided and accordingly, held that the Corporation has no right to proceed against the guarantor u/s. 29 of the Act and can only proceed against him u/s. 31 and 32G of the Act.

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Section 40(A)(3) – Once the addition has been made by increasing the gross profit rate then there is no further scope of making separate additions.

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14. ITO vs. Nardev Kumar Gupta
ITAT Jaipur Bench ‘A’ Jaipur
Before B. R. Mittal (J. M.) and B. R. Jani (A. M.)
ITA No. 829/JP/2012
A. Y.: 2009-10.
Dated: 23-01-2013
Counsel  for  Revenue/Assessee:  Roshanta
Meena/Mahendra Gargieya

Section 40(A)(3) – Once the addition has been made by increasing the gross profit rate then there is no further scope of making separate additions.


Facts

The assesse derives income from newspaper agency. During the assessment, the AO rejected the books of accounts u/s. 145(3). While making the best judgment, the AO accepted the sales as declared by the assesse but applied the higher gross profit rate and made addition of Rs. 3.19 lakh. Besides, the addition of Rs. 21.6 lakh was also made u/s. 40A(3) on account of payments made in cash for purchase of newspaper. On appeal, the CIT(A) deleted the addition made u/s. 40A(3) and the addition of Rs. 3.19 lakh made by the AO was restricted to Rs. 1 lakh.

Before the tribunal, the revenue justified the order of the AO and placed reliance on the Gujarat high court decision in the case of CIT vs. Hynoup Food & Oil Ind. Pvt. Ltd. (290 ITR 702) and justified the disallowance made by the AO for the payments made in cash exceeding the prescribed limit u/s. 40A(3).

Held

The tribunal noted the ratio laid down in the decisions listed below, viz. that, once the addition has been made by increasing the gross profit rate then there is no further scope of making separate additions under different provisions. Based thereon, the tribunal upheld the decision of the CIT(A).
The decisions relied on by the tribunal were as under:
1. CIT vs. G. K. Contractor (19 DTR 305)(Raj);
2. CIT vs. Pravin & Co. 274 ITR 534 (Guj);
3. Choudhary Bros. (ITA No. 1177/JP/2010 dt. 31-5- 2010;
4. CIT vs. Banwari Lal Banshidhar 229 ITR 229 (All)

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S/s. 40(a)(ia), 80IB(10), – In case of an undertaking qualifying for deduction u/s. 80IB(10), amount disallowed u/s. 40(a)(ia) is allowable as deduction u/s. 80IB(10).

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34. 2013-TIOL-146-ITAT-MUM
ITO vs. Dharti Enterprises
A. Y.: 2007-08, Dated: 18- 1-2012

S/s. 40(a)(ia), 80IB(10), – In case of an undertaking qualifying for deduction u/s. 80IB(10), amount disallowed u/s. 40(a)(ia) is allowable as deduction u/s. 80IB(10).


Facts

The assessee was in the business of construction. It filed return of income declaring total income at Rs. Nil after claiming deduction u/s. 80IB(10) of the Act. In the course of assessment proceedings, the AO noticed that the profit as per P & L Account was Rs. 51,34,648 and to this, the assessee had added the amount of Rs. 13,35,990 being the amount of expenditure on which TDS was deposited later than the due date and Rs. 81,81,030 being amount of expenditure on which TDS was not deposited as per tax audit report. Thus, on a gross total income of Rs. 1,46,51,668, the assessee claimed deduction u/s. 80IB(10) of Rs. 1,46,51,668.

On being asked as to why deduction u/s. 80IB(10) should not be disallowed on Rs. 95,17,020 the assessee submitted that no disallowance u/s. 40(a)(ia) was called for and even if the amount is disallowed the assessee is eligible for deduction u/s. 80IB(10) on the entire amount of profit derived from the housing project as computed under the Act, which is included in the gross total income of the assessee.

The AO after considering the decision of the Apex Court in Liberty India vs. CIT 317 ITR 218 (SC) held that the assessee has wrongly claimed the deduction u/s. 80IB(10) on the amount of Rs. 95,17,020 which is not a profit of the eligible enterprise, but has to be taxed because of the violation of the provisions of section 40(a)(ia) of the Act. He disallowed the claim of deduction u/s .80IB(10) on the amount of Rs. 95,17,020.

Aggrieved the assessee preferred an appeal to the CIT(A) who allowed the appeal of the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held

The Tribunal noted the ratio of the following decisions –

(i) S B Builders & Developers vs. ITO (ITA No. 1245/ Mum/2009)(AY 2006-07) order dated 14-5-2010;

(ii) ITO vs. Shri Ganesh Developers and Builders (ITA No. 4328/Del/2009)(AY 2006-07) order dated 11-3-2011; and

(iii) ACIT vs. Sri Lakshmi Builders and vice versa in ITA No. 244/Vizag/2008 and in ITA No. 323/Vizag/2010 (AY 2005-06) order dated 22-11-2010.

It noted that in the case of Sri Lakshmi Builders (supra) on the issue of disallowance of deduction u/s. 80IB(10) on the amount disallowed u/s. 40(a)(ia) it has been held by the Tribunal that the disallowance so made can only be treated as income derived from the impugned business activity, when the income after making the said disallowance is subjected to tax as the business profit.

Applying the ratio of the abovementioned decisions to the facts of the assessee’s case, the Tribunal held that since the AO had treated the disallowance u/s. 40(a) (ia) of Rs. 95,17,020 as income from business and it is not the case of the Revenue that the income derived by the assessee is other than the business income from developing and building housing project, the assessee is entitled to deduction u/s. 80IB(10) in respect of total profits including the profits of Rs. 95,17,020 computed as business profits of the housing project for the year under appeal. The Tribunal upheld the order of the CIT(A).

The appeal filed by the Revenue was dismissed.

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S/s. 50C, 271(1)(c) – The mere fact that the AO had invoked section 50C(2) and adopted guideline value for computing capital gains ignoring what was disclosed by the assessee ipso facto cannot be the sole basis for imposing penalty.

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33. 2013-TIOL-39-ITAT-MAD
C Basker vs. ACIT
A. Y.: 2007-08, Dated: 12-10-2012

S/s. 50C, 271(1)(c) – The mere fact that the AO had invoked section 50C(2) and adopted guideline value for computing capital gains ignoring what was disclosed by the assessee ipso facto cannot be the sole basis for imposing penalty.


Facts

The assessee filed its return of income which return of income was subsequently revised. In the original return of income as also in the revised return of income, the assessee had computed and offered for taxation capital gains arising on sale of land. The capital gains were computed by adopting the consideration as per sale agreement to be full value of consideration. In the course of assessment proceedings, the AO noticed that the sale consideration as per agreement was Rs. 28,54,200, whereas the value of the property as per guideline value was Rs. 95,40,000. He assessed total income by computing capital gains by adopting the guideline value to be full value of consideration. He also initiated penalty proceedings. The assessee did not file any appeal against the application of guideline value by the AO. The AO levied penalty u/s. 271(1)(c) of the Act inter alia on the ground that but for information obtained by him from AIR data, correct capital gains would have escaped assessment as the assessee failed to disclose the same either in original return of income or in the revised return of income filed subsequently.

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

Held

The Tribunal noted that it was not the case of the AO that the assessee has received consideration in excess of the amount stated in the sale deed. The mere fact that the AO had invoked section 50C(2) of the Act and adopted guideline value for computing capital gains ignoring what was disclosed by the assessee ipso facto cannot be the sole basis for the purpose of computing capital gains. The Tribunal noticed that the Mumbai Bench of the Tribunal in the case of Renu Hingorani vs. ACIT has held that penalty merely on the basis of invoking section 50C(2) of the Act cannot be sustained. It further observed that the same law has been reiterated in the case of Shri Chimanlal Manilal Patel vs. ACIT (ITA No. 508/Ahd/2010) and DCIT vs. Japfa Comfeed India Private Limited (2011-TIOL-703-ITAT-DEL). The Tribunal held that section 50C(2) is only a deeming provision which cannot be taken as to be an understatement for the purpose of imposing penalty. In order to attract imposition of penalty, the assessee must be held to have concealed particulars of income or furnished inaccurate particulars. In the instant case, there were no such allegations against the assessee. The Tribunal held that the CIT(A) erred in confirming the penalty imposed by the AO. The Tribunal decided the appeal in favour of the assessee.

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S/s. 139(1), 139(5), 142(1), 143(2), 145 – Even in cash method of accounting, every receipt is not income but the receipt which is in the nature of income is liable to be assessed as income. Even in the case of an assessee following cash system of accounting, return of income can be revised and the amount received and offered as income can be eliminated to give effect to the decision of the High Court, rendered after the end of the financial year, holding that the said amount is not taxable.

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32. 2013-TIOL-141-ITAT-DEL
ACIT vs. Dexterity Developers A. Y. : 2008-09, Dated: 18-1-2013

S/s. 139(1), 139(5), 142(1), 143(2), 145 – Even in cash method of accounting, every receipt is not income but the receipt which is in the nature of income is liable to be assessed as income. Even in the case of an assessee following cash system of accounting, return of income can be revised and the amount received and offered as income can be eliminated to give effect to the decision of the High Court, rendered after the end of the financial year, holding that the said amount is not taxable.


Facts

The assessee firm, following cash system of accounting, had filed its return of income, declaring the total income to be Rs. 5,36,83,629. In the original return filed, the assessee had disclosed profit of Rs. 9,73,36,034 on sale of land for a total consideration of Rs. 20,55,78,119 on 11-2-2008. contention of the DR that since the The plot of land under consideration originally belonged to Ambika Mills Ltd., a company under liquidation. The Gujrat High Court constituted a committee, headed by the Official Liquidator as the Chairman, for disposal of the assets of the company in liquidation. On the basis of the report of the Official Liquidator and the open bid in the Court, the highest bid of Rs. 14.30 crore made by M/s Bheruji Estate, was accepted by the Court by order dated 23-12-2003. As the auction purchaser subsequently could not make the full payment, he requested that the freehold land be registered in the name of his nominee, Mr. Manubhai M. Patel, who would make the balance payment. However, M/s Bheruji Estate subsequently went back on this request. On 8-8-2005, the Honourable Court directed the Official Liquidator to execute sale deed in favour of Manubhai Patel, subject to the outcome of the appeal filed by M/s Bheruji Estate. On 19-10-2007, the assessee entered into an MoU with Shri Manubhai Patel for sale of freehold land, and also acted as a mediator between the two parties i.e. M/s Bheruji Estate and Shri Manubhai M. Patel. The consent terms between the disputing parties were taken on record by the Appellate Court, and the final order was passed on 23-1-2008 disposing of the appeal by M/s Bheruji Estate. In the meantime, on 29-10-2007, the Official Liquidator executed the sale deed of the freehold land in favor of Shri Manubhai M. Patel. On 11-2-2008, a registered sale deed was executed by Shri Manubhai Patel, as vendor, the assessee as confirming party and M/s Sential Infrastructures Ltd., as purchaser for a consideration of Rs. 55,67,78,119, out of which Rs. 21,60,28,119 was to be received by the assessee.

Subsequently, one of the original bidders of the auction sale of 2003, Shri Jayesbhai Patel filed an appeal against the original sale made by the Official Liquidator in favour of M/s Bheruji Estate, and on his appeal, the Gujrat High Court vide order dated 9-3-2009 held that the sale effected on 11-2-2008 should be treated to have been made by the Official Liquidator in favour of M/s Sential Infrastructure Ltd., and the intervening parties, i.e. M/s Bheruji Estate, Shri Manubhai Patel and the assessee were only entitled to their expenditure to the extent of actual investments, services rendered and cost of litigation. It was directed that the assessee was liable to return the amount of Rs. 20 crore to the Official Liquidator within one month from the date of the order, retaining only Rs. 1,60,28,119. On the basis of this High Court order dated 9-3-2009, the assessee firm filed its revised return of income showing nil income, enclosing a profit & loss account in which no sale of land was disclosed and the liability of Rs 20 crore was disclosed in its balance sheet.

The Assessing Officer held that the assessee was not entitled to revise its return on the basis of events which had occurred after the close of the previous year as it followed cash system of accounting. He held that the effect of the Court order dated 9-3-2009 could only be reflected in AY 2009-10.

Aggrieved, the assessee preferred an appeal to CIT(A) who accepted the assessee’s contention and directed the AO to accept the revised return which was filed within time and was within four corners of law.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held

The Tribunal noted that the only dispute of the Revenue was that there was no omission or wrong statement in the original return which may be revised. The Tribunal noted that the High Court had held that the assessee was not entitled to the profit on sale of land, but was entitled only to the expenditure to the extent of actual investment and the cost of litigation. Therefore, the assessee was not entitled to the amount credited to its profit & loss account towards profit on sale of land. The Tribunal held that there was certainly an omission in the original return of income. Though the order of the High Court was subsequent to the end of the relevant previous year, it effected the transaction entered into during the previous year which was liable to be taxed in the assessment year under consideration. Since the assessment of the said year was still pending, the Tribunal held that the assessee was fully justified in revising its return in the light of the decision of the Honourable Jurisdictional High Court.

As regards the AO’s reliance on the method of accounting followed by the assessee being cash, the Tribunal held that after the order of the High Court, when the assessee is not entitled to any profit from the sale of land, the nature of the amount received from the buyer of the land cannot be considered as sale proceed or profit in the hands of the assessee, but its nature would be only an amount received in trust which the assessee is liable to refund as per the direction of the Court. Even in the cash method of accounting, every receipt is not income but the receipt which is in the nature of income is liable to be assessed as income.

As regards the contention of the DR that since the assessee had preferred an appeal against the order of the High Court, in the event of the decision being reversed in appeal, how would the Department be able to recover the tax on such income from sale of land, the Tribunal held that if any such event happens, the Revenue would be at liberty to take appropriate action in accordance with law. The Tribunal noted that as on date of its decision, the decision of the Jurisdictional High Court holds good and is binding on the parties. The assessment of the income of the assessee cannot be made, ignoring the above decision of the Honourable Jurisdictional High Court.

The Tribunal held that the CIT(A) was justified in directing the AO to consider the revised return. It upheld the order of the CIT(A) and dismissed the appeal filed by the Revenue.

The appeal filed by the revenue was dismissed.

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Amount received on transfer of carbon credits is a capital receipt

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31. (2013) 81 DTR 173 (Hyd)
My Home Power Ltd. vs. DCIT A.Y.: 2007-08, Dated: 2-11-2012

Amount received on transfer of carbon credits is a capital receipt


Facts

The company, engaged in the business of power generation, received carbon emission reduction certificates (CERs) popularly known as ‘carbon credits’ for the project activity of switching off fossil fuel from naphtha and diesel to biomass. The part of CERs was sold and sale proceeds of Rs. 12.87 crore were treated as capital in nature and not taxable. The Assessing Officer held the same to be a revenue receipt, since the CERs are a tradable commodity and even quoted in stock exchange. The CIT(A) confirmed the order of the Assessing Officer.

Held

The carbon credit is in the nature of “an entitlement” received to improve world atmosphere and environment by reducing carbon, heat and gas emissions. The entitlement earned for carbon credits can, at best, be regarded as a capital receipt and cannot be taxed as a revenue receipt. It is not generated or created due to carrying on business, but it accrues due to “world concern”. It has been made available assuming character of transferable right or entitlement only due to world concern. The source of carbon credit is world concern and environment. Due to that, the assessee gets a privilege in the nature of transfer of carbon credits. Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head of income. It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56. Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business. Further, carbon credits cannot be considered as a by-product. It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. Thus, the assessees who have surplus carbon credits can sell them to other assessees to have capped emission commitment under the Kyoto Protocol. Transferable carbon credit is not a result or incidence of one’s business and it is a credit for reducing emissions.

The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one’s negative point carbon credit. The amount received is not received for producing and/or selling any product, by-product or for rendering any service for carrying on the business. Carbon credit is entitlement or accretion of capital and hence, income earned on sale of these credits is capital receipt. The carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business, but it is generated due to environmental concerns. It does not increase profit in any manner and does not need any expenses. It is a nature of entitlement to reduce carbon emission. However, there is no cost of acquisition or cost of production to get this entitlement. Carbon credit is not in the nature of profit or in the nature of income.

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Settlement of cases: Chapter XIXA: A. Ys. 2001- 02 to 2006-07: Order passed by Settlement Commission is final: No Income Tax Authority can initiate proceedings in respect of period and income covered by such order: Settlement Commission cannot delegate its power

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CIT vs. Smt. Diksha Singh; 350 ITR 157 (All)

The Settlement Commission passed an order u/s. 245D(4), whereby the undisclosed income of the assessee was settled at Rs. 43 lakh for the assessment years under consideration. While passing the order, the Settlement Commission observed in paragraph 7 as follows:

“The Commissioner of Income-tax/Assessing Officer may take such action as appropriate in respect of the matter not placed before the Commission by the applicant, as per the provisions of section 245F(4) of the Income Tax Act, 1961”

The Assessing Officer issued notice and finally estimated the income at Rs. 75,84,900/- in addition to the agricultural income of Rs. 1,75,000 and made the additions accordingly. The CIT(A) and the Tribunal deleted the addition.

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

“i) A plain reading of section 245D r.w.s. 245F makes it clear that once a matter falls within the domain of the Settlement Commission, no authority of the Income-tax Department will have jurisdiction to asses tax for the same financial year and the finding of the Settlement Commission shall be conclusive and final u/s. 245-I.

ii) A mere observation of the Settlement Commission will not empower the assessing or appellate authority to reassess on any ground, whatsoever, for the same financial year with regard to which the Settlement Commission had exercised jurisdiction and given a finding.

iii) The Legislature in its wisdom had conferred power on the Settlement Commission to reopen the proceedings in certain circumstances and to deal with the situation in the event of commission of fraud. Once power has been conferred on the Settlement Commission itself to deal with the contingency, such power cannot be delegated directly or indirectly to any authority of the Income-tax Department. The discretionary administrative power entrusted by the statute to a particular authority cannot be further delegated except as otherwise provided in the statute. In other words, when the Act prescribes a particular body or officer to exercise a power, it must be exercised by that body or officer and none else unless the Act by express words or necessary implication permits delegation, in which event, it may also be exercised by the delegate if delegation is made in accordance with the terms of the Act but not otherwise.

iv) The Settlement Commission cannot make an observation delegating its power to the assessing authority to reopen the case in certain circumstances for the same financial year, when it had been conferred wide power to deal with the situation under the statutory provisions.

v) The Tribunal has rightly decided the appeal on the sound principles of law. The appeal being devoid of merit is hereby dismissed.”

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Section 14A, Rule 8D – No disallowance can be made in respect of expenses in relation to dividend received from trading in shares. In view of the judgment of Karnataka High Court in the case of CCI Ltd vs. JCIT, the decision of the Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Ltd. cannot be followed.

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16. Vivek Mehrotra v. ACIT
ITAT Mumbai `F’ Bench
Before Rajendra Singh (AM) and Amit Shukla (JM)
ITA No. 6332/Mum/2011 A.Y.: 2008-09.
Dated: 11-1-2013
Counsel for assessee/revenue: Rajiv Mehrotra/Om Prakash Meena

Section 14A, Rule 8D – No disallowance can be made in respect of expenses in relation to dividend received from trading in shares. In view of the judgment of Karnataka High Court in the case of CCI Ltd vs. JCIT, the decision of the Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Ltd. cannot be followed.


Facts

The assessee received exempt income in the form of dividend from personal investments and also from shares held for trading. It also received tax free interest from relief bonds. The assessee maintained separate accounts including separate bank accounts and balance sheets for personal investments and trading activities in which expenses relating to these two activities were shown separately.

In the course of assessment proceedings, on being asked to show cause as to why expenses relating to such income should not be disallowed u/s. 14A of the Act, the assessee submitted that from the separate accounts maintained, it is clear that personal investments were made out of profit earned in the past and not from borrowings. It also contended that no expenses were incurred in respect of such investment. As regards shares held for trading it was contended that the provisions of section 14A are not applicable. The AO relying on the decision of the Special Bench in the case of Daga Capital Management Pvt. Ltd. (ITA No. 8057/Mum/2003) held that section 14A does apply even to shares held as stock-in-trade. The AO disallowed the expenses in respect of both shares held as personal investment as well as shares held for trading.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that, on facts, no disallowance was to be made in respect of shares held as personal investments. As regards shares held for trading he held that the provisions of section 14A are applicable and disallowance made by the AO was confirmed by him.

Aggrieved, both the assessee and the Revenue, preferred an appeal to the Tribunal.

Held

The Tribunal noted that the CIT(A) had given a clear finding that the assessee maintained separate accounts including separate bank accounts and balance sheets for the two activities. He gave a finding that the personal investments were made out of own funds, investments in RBI Relief Bonds and LIC had been made in earlier years and since the assessee was having vast experience in these matters, he was personally handling these investments, there were no expenses required. Similarly, the shares which were of unlisted group companies held for the purpose of retaining control over these companies, did not require any day to day expenses. The Tribunal confirmed the action of the CIT(A) in holding that no disallowance is called for in relation to shares held as personal investments.

As regards the shares held for trading, the Tribunal noted that subsequent to the decision of the Special Bench of ITAT in the case of Daga Capital Management Pvt. Ltd. (supra), in which it has been held that section 14A would apply even to dividend income for trading in shares, the Karnataka High Court in the case of CCI vs. JCIT (250 CTR 290)(Kar) has in relation to trading shares held that the assessee had not retained shares with the intention of earning dividend income which was only incidental to shares which remained unsold by the assessee. The High Court held that no disallowance of expenses was required in relation to dividend from trading shares. The Tribunal also noted that the Mumbai Bench of the Tribunal in the case of DCIT vs. India Advantage Securities Ltd. (ITA No. 6711/Mum/2011, Assessment Year: 2008-09; order dated 14-9-2011) held that in view of the judgment of the Karnataka High Court in the case of CCI Ltd. vs. JCIT, the decision of the Special Bench in the case of Daga Capital Management Pvt. Ltd., could not be followed and no disallowance could be made of expenses in relation to dividend received from trading in shares. The Tribunal set aside the order of CIT(A) and deleted the disallowance upheld by him in relation to trading in shares.

 The appeal filed by the assessee was allowed and the appeal filed by the Revenue was dismissed.

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Search and seizure: Authorisation u/s. 132(1) of I. T. Act, 1961: Validity: Reason to believe: Affidavit of Dy DIT stating that he got information that there was a “likelihood” of the documents belonging to the DS Group being found at the residence of the assessee: Would amount only to surmise or conjecture and not to solid information: Warrant of authorisation not valid and is liable to be quashed

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Madhu Gupta vs. DIT(Inv).; 350 ITR 598 (Del): 256 CTR 21 (Del) The assessee challenged the validity of the search action u/s. 132 of the Income Tax Act, 1961 by filing a writ petition.

The Delhi High Court allowed the petition and held as under:

“i) The warrant of authorisation can only be issued by competent person in consonance of information in his possession and after he has formed a reason to believe that the conditions stipulated in cls. (a), (b) and (c) of section 132(1) existed. The information must be credible information and there must be a nexus between the information and the belief. Furthermore, the information must not be in the nature of some surmise or conjecture, but it must have some tangible backing. Until and unless information is of this quality, it would be difficult to formulate a belief because the belief itself is not just an ipse dixit, but is based on reason and that is why the expression used is “reason to believe” and not simply “believes”.

ii) In the present case, the so-called information is undisclosed and what exactly that information was, is also not known. At one place in the affidavit of Dy. Director of IT, it has been mentioned that he got information that there was a “likelihood” of the documents belonging to the DS Group being found at the residence of the petitioner. That by itself would amount only to a surmise and conjecture and not to solid information and since the search on the premises of the petitioner was founded on this so-called information, the search would have to be held to be arbitrary. It may also be pointed out that when the search was conducted on 21-1-2011, no documents belonging to the DS Group were, in fact, found at the premises of the petitioner.

iii) With regard to the argument raised by the counsel for the Revenue that there was no need for the competent authority to have any reason to believe and a mere reason to suspect would be sufficient, it may be pointed out that the answer is provided by the fact that the warrant of authorisation was not in the name of DS Group but was in the name of the petitioner. In other words, the warrant of authorisation u/s. 132(1) had been issued in the name of the petitioner and, therefore, the information and the reason to believe were to be formed in connection with the petitioner and not the DS Group.

iv) None of the clauses (a), (b) or (c) mentioned in section 132(1) stood satisfied. Therefore, the warrant of authorisation was without any authority of law. Therefore, the warrant of authorisation would have to be quashed.

v) Once that is the position, the consequence would be that all proceedings pursuant to the search conducted on 21/01/2011 at the premises of the petitioner would be illegal and, therefore, the prohibitory orders would also be liable to be quashed. It is ordered accordingly. The jewellery/other articles/ documents are to be unconditionally released to the petitioner.”

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Provisional attachment u/s. 281B: A. Y. 2008-09: Provisional attachment remains in operation only till the passing of the assessment order

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Motorola Solutions India (P) Ltd. vs. CIT; 254 CTR 569 (P&H)

In the course of the assessment proceedings for the A. Y. 2008-09, the Assessing Officer passed the provisional attachment order u/s. 281B and issued letters/ notices on 2-1-2012 to the Standard Chartered Bank and sundry debtors not to make payment to the assessee petitioner. The assessee challenged the validity of the order by filing a writ petition. In the mean while, on 8-11-2012, assessment order was passed raising a demand of Rs. 2,10,57,87,648/-. The Petitioner contended that the provisional attachment order u/s. 281B of the Act ceases to operate after passing of the assessment order on 8-11-2012. The contention of the Department was that the provisional attachment order will be in operation for a period of six months.

The Punjab and Haryana High Court accepted the contention of the Petitioner assessee and held as under:

“i) According to section 281B, during the pendency of any assessment proceeding or proceedings in pursuance to reassessment that in order to safeguard the interests of the Revenue, after recording the reasons for the same in writing and seeking the approval from the concerned authority, an order for provisional attachment can be passed. Circular No. 179 dated 30-9-1975 clearly envisages that where during the pendency of any proceeding for assessment or reassessment of any income, the raising of demand is likely to take time due to investigations and there is apprehension that the assessee may thwart the collection of that demand to be made. This supports the interpretation that it is only till actual demand is created by passing an assessment order that the provisional attachment order will remain in operation.

ii) There are sufficient provisions in the Act, like section 220(1), proviso to safeguard the interest of the Revenue in case the Assessing Officer has apprehension that the assessee by adopting extraneous method may thwart the recovery of the legitimate tax dues of the State. In view of the above, the interpretation put by the Revenue that even after passing of the assessment order, provisional attachment order shall still remain in force for six months, does not merit acceptance and is, thus, rejected.”

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Interest-free loans advanced to overseas wholly-owned subsidiaries cannot be regarded as quasi equity capital.

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New Page 1

Tribunal News

Part C — Tribunal & AAR International Tax Decisions

Geeta Jani
Dhishat B. Mehta
Chartered Accountants

20 Perot Systems vs DCIT

2010-TIOL-51-ITAT-DEL

Section 92,

Dated: 30.10.2009

 

Issues:

  • Interest-free loans advanced to overseas
    wholly-owned subsidiaries cannot be regarded as quasi equity capital.


  • Notional arm’s length interest on a loan to
    an AE can be taxed having regard to applicable transfer pricing provisions
    .

Facts:

  • The assessee, a company
    incorporated in India, is engaged in the business of developing and designing
    technology for business solutions and also providing business consultancy
    services.

  • The assessee advanced
    interest-free foreign currency loans to its two wholly-owned subsidiaries (WOS)
    situated in Bermuda and Hungary. The funds were used by the WOS for making
    long-term investments in step down operating subsidiaries.

  • During the course of the
    assessment proceedings, the tax authorities held that the loan was an
    international transaction and grant of interest-free loan was inconsistent
    with the arm’s length principles of section 92 of the Income Tax Act.

  • The assessee resisted the
    notional assessment by contending that:

(a) The overseas entities were 100% subsidiaries. The
assessee had neither any intention nor had earned any interest, and that it
was commercially expedient to extend such interest-free loans to WOS.

(b) Interest-free loans were in the form of quasi equity as
the subsidiaries had very small capital base. Further, unavailability of easy
borrowing means to the newly set up WOS was one of the main reasons for the
funding.

(c) Requisite approval of the RBI was obtained by the
assessee for such remittance. The Income Tax Act and the OECD Guidelines
support the contention that the effect of government control/intervention
should be considered while determining ALP

(d) Reliance was placed on Para 1.37 of 1995 OECD
Guidelines to support proposition that it is legitimate to consider the
economic substance of a transaction. The thin capitalisation rules of Hungary
were also referred to support the view that debt in excess of three times the
equity of the subsidiary is to be treated as equity.

(e) Relying on the Supreme Court’s Judgments in CTV. KRMTT
Thiagaraja Chetty & Co. 24 ITR 525 and Morvi Industries Ltd v CIT 82ITR835 it
was contended that the term income includes real income and not fictitious
income, and notional income assessment was not justified.

 

Held:


 


The ITAT upheld the contentions of the tax department and
held:

(a) The agreements between the parties indicate that the
assistance to the WOS was in the nature of loans and not in the nature of
capital.

(b) The concept of real income cannot be applied in respect
of international transactions covered by transfer pricing provisions.

(c) Reliance by the assessee on OECD guidelines and thin
capitalisation norms of the source country was not apt as they dealt with the
issue from the perspective of the borrower and the recipient country, and not
from the perspective of the lender. In any case, the thin capitalisation norms
of Hungary only regulated admissibility of interest expenditure in the hands
of the payer.

(d) Interest-free loans granted in Bermuda (situated in a
tax haven) would result in higher income in the hands of the AE and the
taxpayer’s income in India would reduce by the corresponding amount. This
would result in reduction of the overall tax incidence of the group, resulting
in a case of violation of the TP norms where profits are shifted to lower tax
regimes to bring down the aggregate tax incidence of multinational groups.

(e) The approval of the Reserve bank of India does not
validate or approve the true character of the transaction from a TP
perspective. RBI regulations could not be applied for the purpose of TP under
the Income Tax Act.

(f) Based on the above, the ITAT upheld the order of the
CIT(A) and held that the transaction to provide interest-free loans was an
international transaction subject to the TP guidelines, and income thereof,
arising from such transaction, should be determined under the provisions of
Income Tax Act.

 



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Payments received from the supply of software products cannot be considered as ‘royalties’, taxable under the provisions of the Income-tax Act, 1961 or under India-Japan tax treaty.

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New Page 1

19 Dassault Systems K. K

2010-TIOL-02-ARA-IT

Articles 5, 7 and 12, India-Japan DTAA; Section 9(1)(vi),
Dated: 29.01.2010

 

Issues:

  • Payments received from the supply of software
    products cannot be considered as ‘royalties’, taxable under the provisions of
    the Income-tax Act, 1961 or under India-Japan tax treaty.

  • In absence of a Permanent Establishment (PE)
    of non-resident in India, business income from distribution of software
    through independent distributors cannot be taxed in India.



 

Facts:

  • The applicant, a company
    incorporated in Japan, was engaged in the business of providing ‘Products
    Lifecycle Management’ (PLM) software solutions, applications and services. The
    applicant was marketing software products through a distribution channel
    comprising of Value Added Resellers (VAR).

  • The VAR were independent
    third party resellers engaged in the business of selling software to
    end-users. The applicant entered into a General VAR Agreement (GVA) with the
    VAR, authorising them to act as resellers of the products on a non exclusive
    basis. As per the business model, software solutions were sold to VAR for a
    consideration based on the standard list price, after deducting the agreed
    discount. The VAR, in turn, sold the products to end-users at a price
    independently negotiated between them and the end-users. Upon receipt of the
    order from end user, the VAR placed a back-to-back order on the applicant. The
    end-users entered into End User License Agreement with the applicant (with the
    VAR being a party) containing the terms of software license. The applicant
    thereupon provided a license key via e-mail so that the customer could
    download the product, hosted on a server located outside India through the web
    link. After download of the product, the end-user activated the software on
    the customer’s designated machine, using the license key.

  • The issue before the AAR
    was whether the payments received by the applicant on sale of the software
    products were taxable as business profits under Article 7 of the tax treaty or
    ‘royalty’ as defined in article 12 of the tax treaty.

  • The applicant contended
    that:


(a) What was transferred to the end-user was copyrighted
software. The copyright of the software continued to be with the applicant and
was neither made available to the VAR or end-users.

(b) Limited right to use the copyrighted products is not
equivalent to use of copyright for commercial exploitation — and consideration
for use of copyright for commercial exploitation alone could constitute
royalty.

(c) Each VAR was a distinct legal and independent entity
who acted as a non- exclusive distributor on a principal-to-principal basis.
Such entity did not constitute agency PE.

  • The tax authority claimed
    that the payments by the VAR were royalty payments by contending that:


(a) The payments made by the end-users were for transfer of
rights in respect of the copyright of the software, i.e., for use of the
computer programme.

(b) The Copyright Act makes a distinction between the
copyright of a literary work like a book and a computer programme. The right
to sell, in relation to a computer programme, is specifically treated as the
use of copyright under the Copyright Act.

(c) The concept of “copyrighted article” is apt for a book
or music CD, but is inapt for software where one or more rights in copyright
need to be necessarily transferred to make the same workable

(d) The End User License Agreement (EULA) makes it clear
that software use is licensed for a fee.

(e) In any case, consideration can be treated as royalty as
it is for the right to use the process.

(f) The VAR constituted agency PE as they were
substantially controlled and directed by the applicant.

 

Held:


 


The AAR accepted the contentions of the applicant and held
that there was no payment of royalty as:

(a) Computer software enjoys protection under the Copyright
Act. The term copyright needs to be understood as per the Copyright Act.

(b) Assignment of a right of the owner of a copyright is
essential to trigger royalty taxation. A non-exclusive and non-transferable
license for enabling the use of the copyrighted product is not equivalent of
the authority to enjoy the rights of the copyright owner.

(c) Parting of the IPR, inherent and attached to the
software product, in favour of the licensee is a mandatory requirement of the
Income Tax Act and the tax treaty to trigger royalty taxation.

(d) The right to copy, reproduce or store given to the
end-user is incidental to providing use of the copyrighted product. The
end-user has to use the license within the limitation of non-exclusive
self-user license. Section 52(aa) of the Copyright Act does specifically
permit the lawful possessor of the copy of computer programme to use the same
for self use, take back-up for archival purposes or protect against loss,
destruction, etc. This also supports the view that the license to the end-user
offered a limited right of use of the copyrighted product and was not meant
for commercial exploitation.

(e) The payments for the software could not be construed as
royalty, as the use of the programmes contained in the software could be
construed as the use of the process or acquisition of any rights in relation
thereto.

Capital gains arising on transfer of Indian assets by way of amalgamation of overseas companies with an Indian company, is exempt from tax in the hands of the overseas amalgamating companies under section 47(vi), read with section 2(1B) of the Act.

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New Page 1

18 Star Television Entertainment Limited

(AAR) (2010–TIOL-01-ARA-IT)

Sections 47(vi), 47(vii), 2(1B)

Dated: 21.01.2010

 

Issues:


  • Capital gains arising on transfer of Indian
    assets by way of amalgamation of overseas companies with an Indian company, is
    exempt from tax in the hands of the overseas amalgamating companies under
    section 47(vi), read with section 2(1B) of the Act.


  • Shareholders of overseas amalgamating companies
    are entitled to exemption under section 47(vii), read with section 2(1B) of
    the Act.


  • Taxpayers are entitled to plan affairs so as to
    avail of the benefit of tax exemptions and are not precluded from minimising
    their tax burden. Only a sham or a nominal transaction or a transaction which
    is a contrived device, solely for tax avoidance, can be ignored.



 

Facts:

  • The applicants — three
    group entities of the Star Group — were foreign companies registered in UAE/BVI.
    These companies (herein Amalgamating Companies) owned Indian telecasting
    channel rights, as also certain overseas assets. The Amalgamating Companies
    disposed of their non-Indian assets and proposed a scheme of amalgamation with
    another group company in India (viz. SIPL). SIPL is held by two Mauritius
    companies.

  • The main reason for the
    amalgamation was stated to be to obtain operational synergies, enhanced
    flexibility and to create a strong base for future growth of the entities.
    Upon amalgamation, SIPL was to issue shares to the shareholders of the
    Amalgamating Companies, based on a fair swap ratio determined by the valuer.

  • The scheme of amalgamation
    was filed with the Bombay High Court for approval, as required under the
    provisions of sections 391 and 394 of the Companies Act, 1956. The application
    to the AAR was filed at the time when the amalgamation petition was pending
    before the High Court for approval.

  • The issue before AAR was
    whether the scheme of amalgamation would result in any capital gains tax
    liability in the hands of the Amalgamating Companies or their shareholders.

  • The applicant’s
    contentions before the AAR were:



(a) The conditions stipulated for exemption under sections
47(vi) and (vii), read with section 2(1B) were fulfilled and, hence, capital
gains were exempt from tax.

(b)
The scheme of amalgamation
had specifically provided that all liabilities including arrears of tax dues
of the Amalgamating Companies would vest in and would be ultimately recovered
from the assets of the amalgamated Indian company. As a result, the interests
of the tax department were not likely to be prejudiced.



 

  • The tax
    department contended that the application was to be rejected as:


(a) The object of the scheme of amalgamation was to avoid
capital gains tax arising on the transfer of business by the Amalgamating
Companies.

(b) Had the parties directly transferred the shares of the
amalgamating companies to the amalgamated company, capital gains arising on
such transfer would have attracted tax in India.

(c) The scheme of amalgamation should be kept on hold until
the high court has accorded its sanction, as the tax department would then be
able to present its case before the court on the adverse financial
repercussions of merger.

(d) There was no business or commercial purpose for the
proposed amalgamation. The object of the scheme was primarily to avoid payment
of taxes and it was a plan to artificially inflate profits and reduce
liability of the amalgamating companies.

 

Held

The AAR accepted the applicant’s contentions and held:

(a) Capital gains arising due to the proposed amalgamation
would be exempt from tax in the hands of the Amalgamating Companies as well as
their shareholders, as the conditions prescribed under section 47 (vi)/(vii)
of the Income Tax Act would be fulfilled.

(b) The contention of the tax department that acceptance of
the application should be kept in abeyance until the high court has accorded
its approval, cannot be accepted as it would lead to the AAR, a statutory
authority, refusing to exercise jurisdiction vested in it by law. The Ruling
was sought and was also provided on the basis that the scheme will have
approval of the Court. The ruling would take effect only after the court’s
approval. The AAR can provide its ruling on the proposed transaction in the
interest of providing a firm idea of tax implications in India.



(c) The scheme is not
likely to jeopardize the interests of the tax department as all tax dues of
the amalgamating companies vest in and can be recovered from SIPL.

(d) The application cannot be rejected on the ground that
it is a pure and simple design to avoid capital gains tax. Relying on the Apex
Court’s decision in the case of Azadi Bachao Andolan and the Gujarat High
Court’s decision in the case of Sakarlal Balabhai , the AAR held that it was
possible for a taxpayer to enter into a transaction in such a manner that
legitimate tax exemptions are availed of and the tax liability is reduced. The
AAR also observed that:



Consolidated return filed after due date in S. 139(1), held valid as in substance, a relevant provision complied with

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21 Nicholas Applegate South East Asia Fund
Ltd.
v.
ADIT

(2009 TIOL 74 ITAT Mum-TM]

S. 139, 292B, Income-tax Act

A.Y. : 2001-02. Dated : 9-1-2009

Issue :

On facts, consolidated return filed after the date prescribed
in S. 139(1), held valid as in substance and in effect the relevant provision
was complied with.

 

Facts :

The assessee was a company incorporated in Mauritius under
the Protected Cells Companies Act. It had four Cells. For A.Y. 2001-02, it filed
separate returns of income of four Cells. These returns were filed on 30th
October 2001, i.e., within the time prescribed u/s.139(1) of Income-tax
Act. The assessee subsequently realised that being a single entity (company), it
was required to file consolidated return at entity level i.e., for all
four Cells. Accordingly, on 29th October 2002 it filed a consolidated return for
all four Cells.

 

The assessee had derived income from dividend (which was
claimed exempt u/s.10(33) of the Income-tax Act) and short-term capital loss,
which the AO had found in order. However, the AO issued show-cause notice to the
assessee to explain why consolidated return filed on 29th October 2002 should
not be considered as original return and four separate returns filed on 30th
October 2001 should not be considered invalid.

 

The assessee explained that it filed separate returns for
four Cells as it was of the view that the Cells had separate legal existence.
Further, the original returns of four Cells did not suffer from any defect
mentioned in S. 139(9) of the Income-tax Act and hence the subsequent
consolidated return filed on 29th October 2002 was only a revised return. The
AO, however, held that the earlier returns were invalid and only the subsequent
return was valid. Therefore, he did not allow carry forward of loss. The CIT(A)
upheld the order of the AO.

 

On account of differences in the views of Tribunal members,
the case was referred to the Third Member. The assessee put forth the following
propositions :

(i) Provisions of S. 139(1), S. 139(3) and S. 139(4) must
be harmoniously construed.

(ii) S. 139 is a machinery provision as against a fiscal
provision, and must be interpreted in a liberal and equitable manner.

(iii) The original returns filed by the Cells have only
been consolidated in the subsequent returns dated October 29, 2002 and as
observed by this Tribunal, there is no mala fide intention on the part
of the appellant in doing so.

(iv) Benefit u/s.139(5) cannot be denied on technical
grounds.

(v) The information contained in the revised return dated
October 29, 2002 is congruent to the information provided in the four separate
returns filed by the Cells and there is no variance whatsoever, hence there is
no loss of revenue. Further, information contained in the belated return
cannot be held as invalid so as to be overlooked by the Assessing Officer.

(vi) It is provided u/s.292B of the Income-tax Act that no
return of income furnished or made shall be invalid or shall be deemed to be
invalid merely by reason of any mistake, defect or omission in such return of
income, if such return of income is in substance and effect in conformity with
or according to the intent and purpose of this Act.

(vii) The ‘purpose’ of the Income-tax Act, as is evident
from S. 292B of the Income-tax Act, is to achieve/determine the correct total
income and when correct total income was given in four returns filed
simultaneously and later in the return consolidating figures were given, the
original four returns filed were valid.

 


The tax authorities contended that there was difference,
though minor, between the earlier four returns and the subsequent consolidated
return. Further, u/s.139(3) of the Income-tax Act, only a valid return can be
revised.

 

Held :

The Tribunal referred to the decisions in CIT v. Kulu
Valley Transport Co. P. Ltd.,
(1970) 77 ITR 518 (SC) and State Bank of
Patiala v. S. K. Sharma,
(1996) 3 SCC 364 and held that as all the relevant
and correct information was given in prescribed time, the four Cells filing four
separate returns had complied in substance and in effect with the intent and
purpose of the Income-tax Act and that the subsequent consolidated return was
not revised return but mere consolidation of the four earlier returns.

 

Compilers note :

The issue whether a Protected Cell Company should file a
consolidated return or different returns for each cell was neither raised before
the Tribunal, nor was it examined by the Tribunal.

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Concept of economic employer — Reimbursement under Secondment Agreement to legal employer on actual cost basis represented salary paid to secondee — No tax was required to be deducted at source.

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20 IDS Software Solutions (India) Pvt Ltd
v. ITO

(2009 TIOL 82 ITAT Bang.)

S. 195, S. 9(1)(vii), Income-tax Act; Article 12(4),

India-USA DTAA

A.Y. : 2006-07. Dated : 21-1-2009

Issue :

Concept of economic employer and that reimbursement under
Secondment Agreement to legal employer on actual cost basis represented salary
paid to secondee, wherein no tax was required to be deducted at source.

 

Facts :

The assessee was wholly-owned subsidiary of an American
company. The assessee was engaged in software development business. To assist it
in its business, the assessee executed Secondment Agreement with its parent
company (which was an American company) for providing services of certain
personnel (‘secondee’). The secondee was to report to, and be responsible to,
the assessee and was to act in accordance with assessee’s instructions and
directions. Though the American company remained the legal employer of the
secondee as per the agreement, the secondee was appointed as per the articles of
association of the assessee and was to act in accordance with reasonable
requests, instructions and directions of the assessee. The assessee was obliged
to reimburse to the American company the entire remuneration (including bonus
and other incidental costs) of the secondee on actual cost basis without any
mark-up. The assessee was also obliged to indemnify the American company for all
claims that may arise as a consequence of any act or omission committed by the
secondee. The American company hired a qualified person and seconded him as
managing director to the assessee.

 

The assessee applied u/s.195 to the AO for reimbursement of
remuneration to the American company without deduction of tax, on the ground
that for all practical purposes, the secondee was assessee’s employee and salary
received by him from the American company was offered to tax in India in his
individual capacity. The AO held that payment by the assessee to the American
company cannot be considered as mere reimbursement exempt from tax and further
that in absence of employer-employee relationship, the proposed remuneration
cannot be considered as salary. Accordingly, remuneration would be considered as
Fees for Technical Services (‘FTS’) in terms of Explanation 2 to S. 9(1)(vii) of
the Income-tax Act. The assessee’s contention that no technical services were
made available was rejected by the AO who directed it to deduct tax @10%. The
CIT(A) upheld the order of the AO.

 

Before the Tribunal, the assessee contended that for all
practical purposes, the secondee was an employee of the assessee and
employer-employee relationship existed between the assessee and the secondee.
Accordingly, payment made by the assessee to the American company was only
reimbursement of ‘salary’ cost. The assessee relied on the decisions in CIT
v. Lady Navajbai R. J. Tata,
(1947) 15 ITR 8 (Bom.), K. R. Kothanda-raman
v. CIT,
(1966) 62 ITR 348 (Mad.), Lakshmi-narayan Ram Gopal and Son Ltd.
v. Government of Hyderabad,
(1954) 25 ITR 449 (SC), Anderson v. James
Sutherland,
(1941) SC 203 (Scottish Court of Sessions) and Ram Prashad v.
CIT,
(1972) 86 ITR 122 (SC) and also certain extracts from Professor Klaus
Vogel’s Commentary to support its contention of employer-employee relationship.

 

On facts of the assessee’s case, the Tribunal observed that
the assessee was ‘economic employer’ of the secondee. The secondee was rendering
services to the assessee under the control and supervision of the assessee, the
salary costs were borne by the asseesse by way of cross charge, the asseesee
could have terminated the services of the secondee as per articles and the
assessee could regulate the powers and duties of the secondee.

 

The Tribunal then considered the issue whether the amount
paid to the American company could be considered as FTS. The Tribunal held that
certain terms in Secondment Agreement, like indemnification and duties of the
secondee being mentioned clearly indicated that the secondee was an employee and
— usually not found in an agreement for rendering technical services. These
facts went against the tax authorities’ contention that the payment was FTS.

 

Held :

Payment by the assessee to the American company under
Secondment Agreement was not FTS, but represented reimbursement of salary paid
by the American company to the secondee. The agreement represented an
independent contract of service in respect of employment of the secondee even
though the agreement was per se between the assessee and the American
company. Since tax was deducted at source from salary and was remitted to the
tax authorities in India, the assessee was not liable to deduct tax from the
amount reimbursed to the American company.

 

levitra

Although services under Secondment Agreement constituted provisions of services of technical personnel, as the essence of transaction was for mutual business development and not to derive income for service, no FTS can be said to have accrued to foreign

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Part C — Tribunal and International Tax Decisions

 

19 Cholamandalam MS General Insurance Co.
Ltd.
In re


(2009 TIOL 02 ARA IT)

S. 9(1)(vii), Income-tax Act; Article 13.4,

India-Korea DTAA

Dated : 29-1-2009

 

Issue :

Although services under Secondment Agreement constituted
provisions of services of technical personnel, as the essence or substance of
transaction was for mutual business development and not to derive income for
service and the parties never contemplated payment of FTS, no income in the
nature of FTS can be said to have been accrued to the foreign employer.

 

Facts :

The applicant is an Indian company, which is engaged in
non-life insurance business. It is interested in developing business
relationship with Indian affiliates of Korean and Japanese companies. For this
purpose, it requires persons who are well-versed with insurance business,
respective language, etc.

 

To this end, the applicant executed Secondment Agreement with
a Korean company for deputation of Korean company’s employee (‘secondee’) for a
period of two years. The terms of the arrangement for secondment were for mutual
interests. As far as the applicant was concerned, it would benefit from the
services of seconded employees, whereas from the perspective of Korean provider
company, the arrangement would not only promote its business in India but also
that wherever possible, the reinsurance business would be placed with the Korean
company.

 

In terms of the agreement, the applicant was to reimburse
Korean company for only a part of the salary and other benefits and no payment
was to be made by the applicant to the secondee. The Korean company continued to
remain legal employer of the secondee and pay salary to him. It also deducted
tax from his salary and the tax was deposited with the tax authorities.

 

The services to be performed by the secondee were defined to
mean : (a) introduce applicant to potential business contacts; (b) assist
applicant to develop insurance products for Indian market; (c) furnish applicant
with necessary expertise to establish and develop business; and (d) to provide
applicant with inputs on design of reinsurance programmes.

 

Secondment Agreement provided for consideration by way of
reimbursement of the secondee’s salary and benefits, which was not to exceed
those applicable to the applicant’s employees of the same or equivalent grade.
AAR noted that the secondee had no right or authority to conclude any contract
on behalf of the applicant and that the Korean company was not in the business
of supply of manpower.

 

The tax authorities had initially contended that the secondee
could be regarded as the Korean company’s agent and consequently, it had an
agency PE in India. However, this contention was not pursued. Factually, it was
noticed that reimbursement by the applicant constituted about 55% of salary,
house rent, etc. paid by the Korean company to the secondee.

 

The AAR referred to definition of Fees for Technical Services
(‘FTS’) in Explanation 2 to S. 9(1)(vii) and Article 13.4 of India-Korea DTAA
and observed that the definitions were substantially similar.

 

In this background, the issues before the AAR were :

(i) Whether amount payable by the applicant to the Korean
company was in the nature of income requiring deduction of tax at source under
Income-tax Act ?

(ii) If answer to (i) is in affirmative, what should be the
rate of tax to be deducted at source ?

(iii) Whether the Korean company could be considered to
have PE in India requiring attribution of income to that PE ?

 


The AAR admitted that it is debatable whether the term
‘including provision of services of technical or other personnel’ is independent
of, or integral part of, the term ‘managerial, technical or consultancy
services’. Applying the ratio of decisions in Intertek Testing Services India P
Ltd. In re (2008) 307 ITR 418 (AAR) and G V K Industries Ltd. v.
Income-tax Officer,
(1997) 228 ITR 564 (AP), it held that the secondee’s
services were technical in nature involving specialised knowledge and expertise
in insurance business. Accordingly, the Korean company did provide services of
technical personnel.

 

The AAR then considered the question whether amount paid by
the applicant could be construed as ‘consideration’ for the provision of
services of technical personnel. It observed that the agreement represented a
mutually beneficial arrangement and its essence or substance was not to derive
income by way of fee for service, but only partial reimbursement of the cost.
Thus, no income in the nature of FTS was generated. Viewed in this light, the
parties never contemplated payment of FTS, either under Income-tax Act or under
DTAA.

 

The AAR examined the ratio of the decisions in CIT v.
Dunlop Rubber Co Ltd.,
(1983) 142 ITR 493 (Cal.) and CIT v. Industrial
Engineering Projects (P) Ltd.,
(1993) 202 ITR 1014 (Del.) wherein nature of
receipt of reimbursement of expenses were considered and the respective Courts
had, on facts, held that reimbursement of expenses did not constitute income.

 

The tax authorities had relied on AAR’s rulings in A T & S
India P Ltd., In re (2006) 287 ITR 421 (AAR) and Danfoss Industries P
Ltd., In re (2004) 268 ITR 1 (AAR), wherein similar payment for
deputation of technical personnel under secondment agreement and for rendering
services to group companies was considered as FTS. The AAR distinguished these
rulings on facts and particularly because in the present case the details
furnished showed that it was only partial reimbursement of cost incurred by the
Korean company.

Purpose of DTAA may be relevant also in cases involving discrimination. (ii) India-Germany DTAA, Indian subsidiary of German parent company listed on German Stock Exchange considered ‘company in which public are substantially interested’.

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Part C — Tribunal and International Tax Decisions


18 Daimler Chrysler India (P) Ltd. v.
DCIT

(2009) 120 TTJ 803 (Pune)

S. 2(18), S. 79, S. 90(1)(a), Income-tax Act; Article 24(4),
India-Germany DTAA

A.Y. : 1999-2000. Dated : 21-1-2009

Issues :



(i) Purpose of tax treaty may be relevant not only in
case of double taxation and prevention of fiscal evasion, but also in cases
involving discrimination.


(ii) Due to ‘ownership non-discrimination’ protection
under Article 24(4) of India-Germany DTAA, Indian subsidiary of German parent
company listed on German Stock Exchange would be considered a ‘company in
which public are substantially interested’.


 


Facts :

The assessee is an Indian company (‘I Co’) in which Daimler
Benz AG (‘DBAG’), a German company held 81.33% equity share capital. DBAG was
listed on stock exchange in Germany.

 

During the relevant year, DBAG and Chrysler Corporation USA,
an American company decided to merge their respective businesses. Hence, a new
company, namely, Daimler Chrysler AG (‘DCAG’) was incorporated in Germany. DBAG
and Chrysler Corporation became wholly-owned subsidiaries of DCAG. Thereafter,
DBAG merged into DCAG. Thus, all the assets and liabilities of DBAG were
transferred to DCAG. Inter alia, these included DBAG’s shareholding in I
Co.

In terms of S. 2(18) of the Income-tax Act, I Co was not a
‘company in which public are substantially interested’.

S. 79 of Income-tax Act disentitles carry forward of losses
of a company in case shares having not less than 51% of the voting power are
transferred.

I Co had suffered loss in its business for several years and
had substantial carried-forward losses. Since DBAG’s shareholding in I Co was
transferred to DCAG, and since DBAG was not listed on stock exchange in India,
the AO proposed to apply provisions of S. 79 to I Co. In respect of the
immediately succeeding year, S. 79 was amended with a view to exempt all cases
similar to that of I Co from the rigours of S. 79. I Co contended that the
amendment was clarificatory and having retrospective effect and requested the AO
to hold that S. 79 was not attracted. The AO however did not accept the
contention and held that I Co was not entitled to carry forward and set off the
accumulated losses. The CIT(A) confirmed the decision of the AO.

Before the Tribunal, I Co also put forth the additional
ground for invoking of ‘ownership non-discrimination’ under Article 24(4) of
India-Germany DTAA.

The tax authorities contended that there was no question of
treaty override or treaty applicability since there was no double taxation of
any income. The Tribunal referred to S. 90(1)(a) of the Income-tax Act and noted
that Clause (a) of S. 90 was substituted with effect from 1st April 2004, to
grant relief even in respect of income only in one jurisdiction and the relief
could be with a view to ‘promote mutual economic relations, trade and
investment’.

The next issue before the Tribunal was whether a resident
assessee could qualify to access protection under DTAA. The Tribunal referred to
Article 24 of India-Germany DTAA and observed that excepting the case of
invoking of PE non-discrimination, it is not necessary that the assessee seeking
treaty protection in one country must belong to or be resident of or be national
of the other country.

To seek protection under Article 24(4) in India, it is
necessary that taxation or any requirement connected therewith in India should
not be other or more burdensome (for a company which is wholly or partly owned
or controlled by a German resident) than the taxation and connected requirements
to which similar Indian enterprises may be subjected. This requires examination
of a ‘similar Indian company’ and ‘taxation or any requirement connected
therewith’ applicable to such similar Indian company. The Tribunal noted that
the basis of differentiation was the stock exchange on which the shares of DBAG
were listed, since if they were listed on a stock exchange in India, S. 79 would
not be attracted. Further, considering that S. 21 of the Securities (Contract)
Regulation Act, 1956 and draft listing agreement indicate that listing agreement
is possible only with ‘a company duly formed and registered under the Indian
Companies Act’, it would not be possible for the German parent company to list
its shares on a stock exchange in India. The Tribunal thereafter observed that
while there were no judicial precedents in India, there were several judgments
by foreign judicial bodies. While such precedents cannot have binding values,
they do deserve due and careful consideration. The Tribunal did refer to these
decisions.

 

Held :



(i) Provisions of tax treaty may be relevant even when
income is not taxed in the hands of assessee. Substitution of Clause (a) of S.
90(1) reflects the ground realities and rightly indicates that in today’s
world, the role of treaties is not only confined to avoiding double taxation
or to give relief in respect of doubly taxed income. Tax treaties are seen as
instruments of fostering economic relations, trade and investment. Treaty
override, even before amendment in 2004, covered all the provisions of the tax
treaties, including the provisions relating to non-discrimination.

(ii) It is not necessary that the assessee seeking treaty
protection in one country must belong to or be resident of or be national of
the other country, and a resident assessee would qualify for protection under
DTAA. As per Article 24(4) of the treaty, it is not necessary that the
taxpayer, in whose cases non-discrimination is invoked, should be a resident
of the other contracting state. Since the capital of the taxpayer is
substantially owned by a resident of Germany, the coverage criteria under the
enterprise non-discrimination clause of the treaty is satisfied.

(iii) Having regard to the provisions of Article 24(4), the
disability [u/s.79 read with S. 2(18)], of carry forward and set off of
accumulated losses on account of change in shareholding pattern, cannot be
extended to Indian subsidiaries of German parent companies so long as German
parent companies are listed on a German stock exchange recognised under their
domestic laws. To this extent, the rigours of the domestic law relating to
carry forward of losses must stand relaxed due to treaty overriding domestic
tax.

 


Precedent, Consistency, Limitation ……..Need for a Rethink

“I agree with you but I am bound by the actions of my predecessor”. This is a phrase that most of my colleagues would have heard in their careers from various authorities. With any forum be it judicial or administrative the weight of a precedent is enormous. The importance of precedent as a part of judicial discipline is well understood. The question is whether a precedent is a support or a millstone around your neck. Must the weight of a precedent force you to drown and then be rescued by a lifeline, or can one attempt to get rid of it and swim ashore? The doctrine of precedent is often misapplied either deliberately or through ignorance. One understands that in certain areas one must follow the decisions of a concurrent jurisdiction, for not to do so will result in anarchy. However, this principle cannot be used as a fortress to withstand the attack on the correctness of the decision of a predecessor.

Like precedents, we all swear by the principle of consistency. Undoubtedly, one must be consistent but such consistency must not be of mistake or inaction. The reason why precedent and consistency are treated as sacrosanct is that we tend to judge and evaluate the action of any person not on the touchstone of whether he acted diligently, correctly or reasonably, but whether he followed the past. Any departure from the past is looked upon with suspicion, with regard to the integrity of the person who takes a different decision. This results in an attempt by senior officers to fix responsibility on a junior official or pass the buck upward.

If an officer comes to a conclusion that his predecessor has made an error, he must not only be entitled to do what is required to rectify that error, but also be duty bound to not compound the mistake by repeating it. Such a departure should be evaluated based on the merit of the decision and it should not affect the careers of both these officers if they have acted bonafide. A system has to be evolved, whereby this can be achieved. Not only should one officer be required to rectify past erroneous action, the same officer should also be required to make a different decision from the one he made in the past, if he truly believes that it was erroneous and he must not be hounded for this if it satisfies the acid test of bonafide action.

Another aspect which needs reconsideration is the law of limitation qua certain events, actions obligations and claims. A striking example of this is that, for a citizen the period of limitation to claim a debt is three years while the State can raise a claim for taxes pertaining to a period from which 30 years have elapsed. Must we therefore accept that the government can function with only one tenth of the efficiency of a citizen? I am conscious that what I said sounds simplistic but the attempt is only to illustrate the stark contrast. If the State makes a claim which is three decades old, it must establish beyond doubt that the claim is valid and subsisting, and not shift this onus on the hapless citizen. Like the law of limitation for making a claim there must be a timeframe within which action, whether civil or criminal, ought be initiated. Further, there must be a limitation of time from an event, within which investigation must commence. No purpose will be achieved by investigating an event of 1984 and 1992 and utilise precious national resources in that activity. So much water has flown under the bridge that many of the perpetrators of the alleged crime as well as the victims have receded into oblivion. Investigation into events older beyond a certain period should not be started, for it is unlikely to unearth anything worthwhile. If an investigation for an event beyond the decided period of limitation has not reached a particular stage, it should be abandoned. Many would be critical of this suggestion as it will mean that certain criminals and fraudsters will go scot-free and unpunished. But for a nation with scarce resources, I believe, that the priority should be preventing crime rather than attempting to bring to book someone for an event which has faded from national memory.

We are a nation with a glorious past, living in a turbulent present. If we are to have a great future, for which we have the requisite potential, the principles, precedent consistency and limitation to which I made a reference, need a serious rethink.

Penalty for inadvertent errors – Penalty not imposable when no malafide intention alleged in the Show Cause Notice.

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Facts

Appellant inadvertently availed CENVAT credit of the value of invoice instead of the amount of service tax. On being pointed out, the Appellant immediately reversed the inadmissible portion of the credit and also paid interest.

Held

Show Cause Notice did not allege any malafide intention on part of the Appellant. Moreover, Appellant has shown its bonafide by reversing CENVAT credit on being pointed out and also paying interest on the same. Tribunal set aside the penalty.

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The value of study materials is excludible from the value under the taxable category of “commercial Training and Coaching services” in terms of Notification No.12/2003-ST.

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Facts

The Appellant engaged in providing the services of commercial training and coaching discharged service tax after excluding the value of study materials supplied to the students as per Notification No.12/2003. Based on CBEC Circular No. 59/8/2003 dated 20-6- 2003, Revenue contended that the exemption was available only to standard textbooks and not to the study material supplied as part of the service.

Held

Though the word “standard textbook” was used in CBEC Circular, the same was not used in the Notification No.12/2003. Also, the department did not dispute the fact of supply of study materials to students and documentary evidence for the same and thus satisfying all the conditions of 12/2003-ST. Held that there was no merit in the contention of the Respondent as the said notification has not used the word “standard textbook” and the books sold are of another entity and hence the appeal was allowed.

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Debit notes issued by the service provider. No formal Invoice, Bill or challan issued. Can such debit note be considered as a valid document to avail CENVAT credit – Held, yes.

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Facts

The service provider raised debit notes for provision of services instead of raising an Invoice or a challan. The Appellant having availed CENVAT credit on the basis of such debit notes, the Respondent objected to the same stating that they were not eligible documents as prescribed under Rule 9(1)(f) and disallowed the credit. Whether is it necessary to verify that service tax is paid by the vendor before claiming the CENVAT credit?

Held

The Honourable Tribunal allowed the CENVAT credit by applying the principle of Substance over Form. It stated that “a ‘bill’ is that which gives right to an actionable claim”. A party raising the bill communicates its intention to the recipient of such service, making him aware of his contractual obligation and value involved to provide such service. The Appellant cannot be denied benefit of CENVAT credit in case of reimbursement of expenses as it is already included in the taxable value. The Tribunal in this regard held that the department on its own can verify the claim and in the event of failure of such verification, the law will take its own recourse.

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Can recovery be made from the bank in spite of interim stay granted by Tribunal?

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Facts

The Appellant had filed an appeal along with the stay application with CESTAT in March, 2012. Hearing for the stay application was listed on 14th January, 2013 for which the department sought adjournment. However, the Tribunal granted interim stay as mentioning was made by the Appellant. In the meantime, the department had issued an attachment notice to the banker and the banker had deposited an amount of Rs. 6 crore into the exchequer.

Held

Interim stay was granted by the Tribunal vide its order dated 14th January 2013 and hence, it directed the department to refund the amount to the Appellant and not to proceed with the recovery proceedings during the pendency of the stay application.

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Circulars No.158/9/2012-ST and No.154/5/2012-ST challenged on the ground that they are contrary to the Act and hence the differential service tax of 2% in case of chartered accountant’s services provided and invoices raised before 1st July 2012 and consideration received later than the said date cannot be collected.

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Facts

The question of law arose as to when a “taxable event” occurs for the levy of service tax. In Association of Leasing & Financial Service Companies vs. UOI 2010-TIOL-87-SC-ST-LB, the Supreme Court held that the taxable event was the rendition of the service. However, from 1-4-2011, the Point of Taxation, 2011 were notified and accordingly, the point of taxation would be the point in time when a service is deemed to be provided. Rule 7(c) of the Point of Taxation Rules, 2011 provided the point of taxation for the 8 specified categories of service providers (one of them being chartered accountant) to be the time of receipt of consideration. The said Rule 7 was amended w.e.f. 1st April, 2012 and as a result, the said Rule 7(c) was deleted. Accordingly, the 8 categories of services (including CAs) are required to pay service tax on the date of issuance of invoice, instead of on the date of the receipt of consideration with effect from 1st April, 2012. The dispute arose on account of Government’s Circular No.154 (supra) read with Circular No.158 (supra) which provided to the effect that for the eight categories of persons (including CAs) even cases when invoice was raised prior to 31st March, 2012 (when the prevailing service tax rate was 10.3%) for a service provided before 31-3-2012, if the fee/consideration was received on or after 1st April, 2012, the new rate i.e. 12.36% amended with effect from 1-4-2012 would be applicable.

The Appellant pleaded that the Rule 4(a)(ii) of the Point of Taxation Rules, 2011 specifically covers a situation determining the point of taxation in case of change in rate of tax and the Appellant’s case falls under the said sub-clause and therefore the point of taxation would be the date of issuance of invoice.

Held

Circulars were quashed holding them contrary to the Finance Act, 1994 and the Point of Taxation Rules, 2011 and it was observed that in case a circular is contrary to the Act or the Rules, it has no existence in law.

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Right to use trademark being intangible, whether it was “deemed sale” as defined under the Kerala Value Added Tax Act, 2003 when service tax was paid on royalty received.

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Facts

Petitioner is engaged in marketing, trading, export and import of jewellery, diamond ornaments, platinum, watches etc. and the sole proprietor of the trademark “Malabar Gold”. The petitioner has entered into franchise agreements with several companies situated inside and outside Kerala and also abroad, to use the trademark and receives royalty as consideration. The petitioner paid service tax on royalty. The respondent contended that the transfer to use trademark is transfer of goods and therefore exigible to Kerala Value Added Tax Act, 2003.

The petitioner on receipt of show causes notices filed writ petition before the Honourable High Court. The petitioner relied on the case of Imagic Creative (P) Ltd vs. Commissioner of Commercial Taxes 2008 (9) STR 337 (SC) and BSNL vs. UOI 2006 (2) STR 161 (SC) while the respondents relied on the provisions of Article 366(29A) of the Constitution of India and decisions of Tata Consultancy Services vs. State of A.P. 2004 (178) ELT 22 (AP) and other similar decisions of the Kerala High Court. According to the petitioner, the cases relied by the respondent were prior to the application of the Finance Act, 1994 and they had paid service tax on the use of trademark and therefore, VAT should not have been levied as decided by the Supreme Court in the case of Imagic Creative (supra) and that VAT and service tax are mutually exclusive and both cannot be levied on the same transaction. The petitioner also contended that the right to use trademark not to the exclusion to the transferor was transferred and as held in BSNL (supra) this was one of the necessary attributes for treating the transaction as sale of goods not satisfied.

Held

The Honourable High Court held that the facts of the present case wherein it has been conceded by the petitioner that trademark is transferred for use for consideration i.e. royalty is distinguishable from the facts of BSNL case (supra) wherein the issue examined was whether BSNL provided sale or service in the light of the fact that BSNL was retaining physical control and possession and hence, BSNL case (supra) could not be considered. The Honourable High Court also held that the transfer of trademarks for use was exigible to Kerala VAT tax and as the petitioner did not challenge the applicability of service tax on such a transaction, it did not comment upon the same and hence, Imagic Creative (supra) could not be relied upon.

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Cash credits : Section 68: A. Y. 2004-05: Assessee sold shares and claimed to have earned capital gains: Assessee produced purchase bills of shares, letter of transfer, sale bills, accounts with brokers, purchase and sale chart and copy of quotations from stock exchange showing rate of shares at relevant time and letters from brokers confirming sale of shares: Payment of sale price was made through bank channel and not in cash: Sale transactions of shares could not be disbelieved only for reaso<

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CIT vs. Sudeep Goenka; 29 Taxman.com 402 (All)

In the A. Y. 2004-05, the assessee had showed long term capital gains on sale of shares. The Assessing Officer found that the assessee had purchased the shares for a price of Rs. 1,37,750/- in April 2002 and had sold the shares in May and November 2003 for a price of Rs. 42,34,350/-. The Assessing Officer found that the shares were sold for a price more than 30 times of the purchase price. He therefore held that the transactions are bogus. Therefore, he treated the sale price of the shares as the income from undisclosed sources u/s. 68 of the Income Tax Act, 1961. The Commissioner (Appeals) deleted the addition as the assessee had filed purchase bills of shares, letters of transfer, sale bills, accounts of brokers, purchase and sale chart, copy of quotations of Stock Exchange showing the rate of shares at relevant times and letters from broker confirming sale. On an independent inquiry, ICICI Bank informed that payment of sale price of shares was made through bank draft. Thus, documentary evidence proved that the transactions were actual and not fictitious accommodation entries. On appeal, the Tribunal upheld the order of Commissioner (Appeals).

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

“i) The Commissioner (Appeals) after considering entire evidence of record, found that purchase and sale transactions were proved. He further found that payment of the sale price was made to the assessee through bank channel and not in cash and as such, the transactions are actual transactions and not a fictitious accommodation entries.

 ii) The sale transactions cannot be disbelieved only for the reason that the assessee could not give the identity of the purchasers.”

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Capital gains: Exemption u/s. 54F: A. Y. 2008-09: Exemption in case of investment in residential house: For claiming deduction u/s. 54F, new residential house need not be purchased by assessee exclusively in his own name: Purchase of new house in name of wife: Exemption could not be denied

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CIT vs. Kamal Wahal; 30 Taxman.com 34 (Del)

The assessee sold his joint property which gave rise to proportionate long term capital gains. He invested the sale proceeds in a residential house in the name of his wife and claimed deduction u/s. 54F. The Assessing Officer denied the claim for deduction holding that for deduction u/s. 54F, investment in residential house should be in the assessee’s name. The Commissioner (Appeals) allowed the assessee’s claim. The Tribunal confirmed the order of the Commissioner (Appeals), holding that section 54F, being a beneficial provision enacted for encouraging investment in residential houses, should be liberally interpreted.

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

“i) In CIT vs. Ravinder Kumar Arora [2012] 342 ITR 38 /[2011] 203 Taxman 289/ 15 taxmann.com 307 (Delhi), it was held that where the entire purchase consideration was paid only by the assessee and not a single penny was contributed by any other person, preferring a purposive construction against a literal construction, more so when even applying the literal construction, there is nothing in section 54F to show that the house should be purchased in the name of the assessee only.

ii) Section 54F in terms does not require that the new residential property shall be purchased in the name of the assessee; it merely says that the assessee should have purchased/constructed ‘a residential house’.

iii) Therefore, the predominant judicial view for the purposes of section 54F is that the new residential house need not be purchased by the assessee in his own name nor is it necessary that it should be purchased exclusively in his name. It is moreover to be noted that the assessee in the present case has not purchased the new house in the name of a stranger or somebody who is unconnected with him. He has purchased it only in the name of his wife.

iv) The substantial question of law is answered in favour of the assessee and against the revenue.”

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Appeal to CIT(A): S/s. 245C and 251: Appeal can be made only by assessee: Assessee cannot withdraw appeal: Order of CIT(A) allowing assessee to withdraw appeal is not valid

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M. Loganathan vs. ITO; 350 ITR 373 (Mad)

While the assessee’s appeals were pending before the CIT(A), the assessee moved the Settlement Commission for settlement of the cases. Thereafter, the assessee withdraw the appeals and the CIT(A) allowed the assessee to do so for the A. Ys. 1992-93,1993-94 and 1996-97. The Settlement Commission passed an order that by reason of the withdrawal of the appeals after the date of filing of the application, and that there was no appeal pending before the authorities, the application itself was not maintainable for the A. Ys. 1992-93,1993-94 and 1996-97. It proceeded with the settlement of the case for the A. Y. 1997-98 alone. The assessee preferred appeals before the Tribunal against the orders of the CIT(A) allowing the assessee to withdraw the appeals. The Tribunal dismissed the assessee’s appeals.

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

“i) Section 251 of the Income Tax Act, 1961, provides that the powers of the Commissioner (Appeals) extend not only to the subject matter of the appeal against the assessment, but, in a given case, it is open to him to even enhance the assessment. Thus, apart from confirming an assessment or granting relief to the assessee or cancelling the assessment, he has the power of an Assessing Officer to enhance the assessment which is under appeal before him. He has the jurisdiction to examine all matters covered by the assessment order and correct the assessment in respect of all such matters even to the prejudice of the assessee.

ii) An assessee having once filed an appeal cannot withdraw it. After filing an appeal, the tax payer could not, at his option or at his discretion, withdraw an appeal to the prejudice of the Revenue.

 iii) The Tribunal was not justified in its reasoning that the order passed by the first appellate authority allowing the withdrawal of appeal was justifiable on the facts as the Revenue had not objected to the same.

 iv) We have no hesitation in setting aside the order of the Tribunal and restoring the matter back to the file of the Commissioner of Income Tax (Appeals) for considering the assessment on the merits and pass orders thereon in accordance with law, after giving the assessee an opportunity. In the result, the appeals stand allowed.”

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Method of Accounting – Valuation of Stock – Manufacturer of sugar – the closing stock of incentive sugar to be valued at levy price which was less than the cost

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CIT vs. Bannari Amman Sugars Ltd. [2012] 349 ITR 708 (SC)

The assessee is a company engaged in the business of manufacture and sale of sugar. The assessee filed its return of income for the assessment year 1997-98. In its return of income, confined to its Karnataka unit, the assessee valued the closing stock of incentive sugar (free sugar) at levy price. The Assessing Officer valued the closing stock of incentive sugar at cost, whereas the assessee claimed that the said stock should be valued at levy price which has less than the cost.

The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee. The Tribunal and the High Court dismissed the appeal of the Revenue. According to the Supreme Court, to answer that above controversy, the following facts are required to be noted. By virtue of the provisions of the Essential Commodities Act, 1955, and the Sugar Control Order read with the Notification issued thereunder, a sugar manufacturer (assessee in this case) was required to sell 40 % of his sugar production at the notified levy price to the public distribution system. At the relevant time, on an average, the levy price came to be less than the manufacturers’ cost of production. Consequently, it was found by the manufacturers that under the above price control regime, the establishment of new sugar manufacturing units was not viable. It was found that even the existing sugar manufacturing units had become unviable and uneconomical. Therefore, an incentive scheme was framed, as suggested by the Sampat Committee, the committee that was set up to examine the economic viability by establishing new sugar factories and expanding the existing factories. The Sampat Committee gave its report. Under the report, an incentive scheme was evolved. The said incentive scheme provided an inducement for persons to set up new sugar factories or to expand the existing one. Under the scheme, 40 % of the total sugar production was permitted to be sold at market price (“incentive sugar” for short). However, the scheme provided that excess amount realised by the manufacturer over the levy price by sale of incentive sugar would be utilised only for repayment of loans taken from the banks/financial institutions for establishing the new units. In regard to utilisation of excess realisation towards repayment of loans, the sugar mills were directed to file certificate of chartered accountant subject to which further release orders would be issued by the Directorate of Sugar. This scheme came up for consideration before the Supreme Court in the case of CIT vs. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) in which it was held that the excess amount realised by the manufacturer over the levy price by sale of incentive sugar should be treated as a capital receipt which was not taxable under the Income-Tax Act, 1961. In that case, one of the arguments advanced on behalf of the Department, as in this case, was that the excess amount realised by the manufacturer over the levy price should be treated as a revenue receipt.

The Supreme Court observed that there are different methods of valuation of closing stock. The popular system is cost or market, whichever is lower. However, adjustments may have to be made in the principle having regard to the special character of assets, the nature of the business, the appropriate allowances permitted, etc., to arrive at taxable profits. The Supreme Court noted that in the present case, it was the case of the assessee, that following the judgment in Ponni Sugar and Chemicals Ltd. (supra), the closing stock of incentive sugar should be allowed to be valued at levy price, which on facts is found to be less than the cost of manufacture of sugar (cost price). According to the Supreme Court, there was merit in this contention. In Ponni Sugars and Chemicals Ltd. (supra), on examination of the scheme, it was held that, the excess realisation was a capital receipt, not liable to be taxed and in view of the said judgment, the Supreme Court held that the assessee was right in valuing the closing stock at levy price.

The Supreme Court dismissed the civil appeals filed by the Department.

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Business Expenditure – Scheduled Commercial Banks – Bad and doubtful debts – Entitled to deduction of irrecoverable debts written off u/s. 36(1)(vii) in addition to the deduction of provision for bad and doubtful debts u/s. 36(1)(viia).

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Dy. CIT (Assessment) & Anr. vs. Karnataka Bank Ltd. [2012] 349 ITR 705 (SC)

The Assessing Officer noticed that for the relevant assessment year, while the assessee had claimed a deduction of a sum of Rs.3,36,78,394 under clause (vii) of s/s. (1) of section 36, the assessee had also claimed a deduction in terms of section 36(1)(viia) to the extent of Rs.5,75,00,000 and therefore, being of the opinion that the deduction claimed u/s. 36(1)(vii) being less than the amount claimed u/s. 36(1)(viia) disallowed the entire amount of deduction claimed u/s. 36(1)(vii). It was this dispute which had been carried to the first appellate authority by the assessee which was not successful but in the appeal before the Appellate Tribunal, the Tribunal purporting to follow its decision in the case of the very assessee for the assessment years 1990-91 to 1993-94 and having allowed the assessee’s appeals for the relevant assessment year thought it fit to allow the appeal for the year relevant to the subject-matter of the appeal.

The High Court while examining the very questions in the case of the very assessee and for the years 1993-94 and 1994-95, had answered similar questions in favour of the assessee and against the Revenue and dismissed the appeals as per the judgment dated 19th March, 2008 [Deputy CIT vs. Karnataka Bank Ltd. [2009] 316 ITR 345 (Karn)].

The Supreme Court held that the issue involved in these cases was covered in favour of the assessee, vide its judgment in the case of Catholic Syrian Bank Ltd. v. CIT reported in (2012) 343 ITR 270.

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Small Scale Industrial Undertaking – Reference not to be made to the Eleventh Schedule for the purposes of consideration of the claim u/s. 80-IB. Manufacture – Process of blending of Extra Neutral Alcohol (ENA) to make various products like whiskey, brandy, rum, etc. is a manufacturing activity.

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CIT vs. Vinbros And Co. [2012] 349 ITR 697 (SC)

The assessee, a small–scale industry recognised as such by the Director of Industries, Pondichery, set up a second unit to manufacture and bottle Indian manufactured foreign liquor (IMFL) at Pondichery. In its return for the assessment years 2003-04 and 2004-05, it claimed deduction u/s. 80-IB of the Act in respect of the profits and gains derived from the second unit. The Assessing Officer, however, rejected the plea on the issue that the process carried on by the assessee for its product, did not constitute ‘manufacture’ within the meaning of section 80-IB. He further held that setting up of the second unit was only an expansion or reconstruction of the existing unit. Aggrieved by the same, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).

In the proceedings before the Commissioner of Income Tax (Appeals), the assessee explained the process of blending as follows:

The assessee purchased rectified spirit or extra neutral alcohol (ENA) made of grain or grapes or malt to which it added demineralised water in required proportion to reduce the strength of the ENA to make various products like whiskey, brandy, rum, etc. Apart from that, other ingredients like caramel, sugar, etc., were also added as per the blending formulations. This blend was subject to filtration for required time, blend inspection and then bottling in empty bottles. The finished products were packed and sold.

The Commissioner of Income Tax (Appeals) considered the fact that the alcoholic strength of ENA which was around 95 % v/v was reduced to a maximum of 42.8 % v/v. Consequently, the Commis- sioner of Income Tax (Appeals) held that there was no manufacture or production of any new article or thing as the alcohol which was the input remained as alcohol. In the circumstances, he rejected plea for deduction u/s. 80-IB of the Act.

On further appeal before the Tribunal, the assessee reiterated the contentions as regards the process undertaken to result in a totally different marketable commodity. Considering the entirety of the issue and applying the decision of the Allahabad High Court in the case of CIT vs. Rampur Distilleries and Chemicals Co. Ltd., reported in [2005] 277 ITR 416 (All), the Tribunal held that the rectified spirit is not mentioned in the first item of the Eleventh Schedule ‘beer, wine and other alcoholic spirits’ and, consequently, the assessee as a small-scale industrial unit was entitled to deduction u/s. 80-IB of the Act.

On appeal by the Revenue before the High Court, it was held that a perusal of section 80-IB showed that a deduction under the said provision is available only where the assessee engages in the manufacture or production of an article or thing, not being an article or thing as specified in the list in the Eleventh Schedule or operates one or more cold storage plant or plants in any part of India. The proviso to sub-clause (iii) of s/s. (2) of section 80-IB of the Act showed that the condition with reference to the list in the Eleventh Schedule did not apply at all to the case of an industry being a small scale undertaking or an undertaking referred to in s/s. (4). The industry run by the assessee was admittedly a small-scale industry, reference to the Eleventh Schedule for the purpose of consideration of the claim u/s. 80-IB of the Act did not arise.

As regards the second issue as to whether the assessee had engaged itself in the manufacturing or producing of an article or thing by the act of blending, the High Court observed that (i) the assessee did not just add water and sell the final product, apart from water, the assessee had to add several items to make it fit for human consumption; (ii) the assessee was not a manufacturer of ENA which was the basic raw material required for making various IMFL products; (iii) it was mixing water and other ingredients with ENA formulations; (iv) the alcoholic strength of the ENA which was around 95 % v/v was reduced to a maximum of 42/8 % v/v in respect of the final marketable commodity, namely, whiskey, brandy, rum, vodka and gin; (v) the blending was subject to filtration for required time and thereafter only, the final product was sold. On the face of the facts stated above, the High Court opined that it was not possible for it to accept that the blending should not be treated as a manufacturing activity u/s. 80-IB of the Act.

The Supreme Court dismissed the civil appeal filed by the Revenue holding that there was no infirmity in the impugned judgment of the high Court.

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Section 9(1)(vii) – Royalty received by a non resident (NR) from various NR manufacturers of CDMA equipments (which were sold worldwide, including India) is not taxable in India, as the NR manufacturer did not carry on a business in India nor did the customers who purchased the equipment constitute the source of income in India.

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21. TS-35-ITAT-2013(Del)
Qualcomm Incorporated vs. ADIT
A.Ys.: 2000-2001 to 2004-05, Dated: 31-1-2013

Section 9(1)(vii) – Royalty received by a non resident (NR) from various NR manufacturers of CDMA equipments (which were sold worldwide, including India) is not taxable in India, as the NR manufacturer did not carry on a business in India nor did the customers who purchased the equipment constitute the source of income in India.


Facts

 A US Company (Taxpayer) had licensed certain intellectual property (IP) relating to the manufacture of Code Division Multiple Access (CDMA) mobile handsets and network equipment to non-resident Original Equipment Manufacturers (OEMs). The OEMs used the licensed IP to manufacture CDMA handsets and wireless equipment outside of India and sold them to customers worldwide, including India. The Indian customers, in turn, sold the handsets to end-users of telecom services in India.

The tax authority assessed a part of royalty, to the extent it related to equipment sold to customers in India by suggesting that part was taxable in India as the IP that was licensed was utilised in a business carried on in India or was for earning income from India sources (the secondary source rule) as per section 9(1)(vii)(c) of the Act. The CIT(A) upheld the order of the tax authority. Aggrieved, the Taxpayer filed an appeal before the Tribunal.

Held

The Tribunal based on the following ruled that the secondary source rule was not applicable to the facts of the case, as the OEMs did not carry on a business in India nor did the Indian customers who purchased the equipment constitute the source of income. Accordingly, the royalty was not taxable in the hands of the taxpayer.

Onus of proof is on tax authority to establish that the non-resident (NR) was carrying on business in India. It is not important whether the right or property is used “in” or “for the purpose of a business”, but to determine whether such business is “carried on by the NR in India”.

Sale to Indian customers without any operations being carried out in India would amount to business ‘with’ India and not business ‘in’ India. For business to be carried out in India, there should be some activity carried out in India.

Further, the IP was not used in India. Use of the products by Indian customers which embed the licensed technology does not amount to use of the IP by the OEMs in India. The OEMs manufactured the products outside India. Hence, the license for the IP of the Taxpayer was used by the OEMs in manufacturing the products outside India. The source of royalty is the place where patent (right, property or information) was exploited, and in the facts of the case, it is where the manufacturing activity took place, which was outside India. Further, as per the agreement, the title of the equipment passed to the Indian customers in high seas before arrival in India. Notwithstanding this, the mere passing of the title with no other activity in India does not result in any income being attributable to the NR for taxation in India.

The clarification inserted to the definition of royalty by the Finance Act, 2012 with regard to taxability of computer software as royalty, has no effect in the present case as the issue on hand was regarding taxability of royalty on patents relating to licensing of IP for manufacture of CDMA handsets and equipment and not on licensing of any computer software.

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Taxability of Capital Gains in India in Respect of Transfer of Shares of a Non-resident Entity Holding Shares of an Indian Company, Between two Non-residents in a Tax treaty Situation

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Background

In the present era of globalisation, cross border movement of goods, services, capital and people has gone up significantly over the years. With the increased quantum of international trade, commerce and services, issues relating to double taxation of income in two different countries/ jurisdictions assume a lot of significance. Issues and considerations relating to cross border taxation of income have become a very important part of the structuring of businesses, entities and transactions, in the case of Multinational Enterprises/corporations [MNCs].

In order to encourage cross border movement of goods, services, capital and people and avoidance of double taxation, various bilateral Double Taxation Avoidance Agreements [DTAAs] have been entered into, between various countries. India has so far entered into DTAAs with 84 countries.

To minimise the tax cost of undertaking the cross border business/commerce, various measures are evaluated in depth and adopted in structuring various cross border business entities/transactions. This has led to growth/ identifications of various low tax jurisdictions/ tax havens, through which business entities/ transactions are structured/entered into, to save/ lower overall tax cost of the MNCs and/or to shift profits to low tax jurisdictions.

One of the most common measures used is to Mayur Nayak Tarunkumar G. Singhal, Anil D. Doshi Chartered Accountants International taxation create intermediate holding companies in the low tax/nil tax jurisdictions which would hold shares in the operating subsidiary companies in the source countries where the operations of the MNCs are carried out through the wholly owned subsidiaries and/or joint ventures. At the intended time of exit/transfer of business of the subsidiary, instead of transfer of the shares in the subsidiary company in the source country, the shares of the intermediate company are transferred by the MNCs to the prospective nonresident buyers, whereby no tax is payable in the source country, but at the same time, business is effectively transferred to the prospective nonresident buyers. This kind of practice has led to erosion of tax base of various countries and significantly impacted the tax revenues of those countries. Accordingly, the governments/ revenue department of various counties have, in order to protect their tax base, taxed such transactions based on various prevalent/innovative legal principles.

In this regard, in the Indian context, the case of Vodafone International Holdings BV (Vodafone) generated a lot of discussions and has been intensely debated in the country and outside.

Vodafone’s case

Vodafone International Holdings BV (Vodafone), a company resident for tax purposes in Netherlands, acquired the entire share capital of CGP Investments (Holdings) Ltd. (CGP), a company resident for tax purposes in Cayman Islands qua a transaction dated 11-2-2007. On 31-05-2010, the Revenue passed an order u/s. 201(1) and 201(1A) of the Income-tax Act, 1961 [the Act] declaring the transaction to be taxable under the Act. Revenue raised a demand for tax on capital gains arising out of the sale of CGP share capital contending that CGP, while not a tax resident in India, held the underlying Indian assets of Hutchison Essar Ltd. [HEL] and the aim of the transaction was the acquisition of a 67% controlling interest in HEL, an Indian company. On a writ petition by Vodafone against the order u/s. 201(1)/201(1A), the Bombay High Court held against the assessee. Vodafone challenged this decision successfully before the Supreme Court [SC] where SC held in favour of Vodafone. [Vodafone International Holdings B.V. vs. Union of India [2012] 341 ITR 0001 (SC)].

Hutch group (Hong Kong) through participation in a joint venture vehicle invested in telecommunications business in India in 1992. The JV later came to be known as Hutchison Essar Ltd. (HEL). In 1998, CGP was incorporated in Cayman Islands, with limited liability and as an “exempted company”. CGP later became a wholly owned subsidiary of a company which in turn became a wholly owned subsidiary of a Hong Kong company – HTL, which was later listed on the Hong Kong and New York Stock Exchanges in September, 2004.

Vodafone, though not directly a case involving Tax-Treaty implications on domestic tax laws (there being no tax Treaty between India and Cayman Islands), nevertheless considered the application and interpretation of Indian Tax Legislation (the ‘Act’) in the context of an applicable and operative tax treaty, since the correctness of Union of India vs. Azadi Bachao Andolan [2003] 263 ITR 703 [SC] [Azadi Bachao] was raised by Revenue. Revenue contended that Azadi Bachao requires to be over-ruled to the extent it departs from McDowell and Co. Ltd. vs. CTO [1985] 154 ITR 148 [SC] [McDowell] and on the ground that Azadi Bachao misconstrued the essential ratio of McDowell and had erroneously concluded that Chinnappa Reddy, J’s observations were not wholly approved by the McDowell majority qua the leading opinion of Ranganath Misra, J.

Relevant observations/conclusions in Vodafone

Tracing the history and evolution of relevant principles by the English Courts commencing with IRC vs. Duke of Westminster 1936 AC 1[Duke of Westminster] through W.T. Ramsay vs. IRC 982 AC 300 [ Ramsay]; Furniss (Inspector of Taxes) vs. Dawson [1984] 1 All E. R. 530 [Furniss] and Craven vs. White (1988) 3 All E. R. 495 [Craven], the Supreme Court in Vodafone explained that the Westminster principle was neither dead nor abandoned; Westminster did not compel the court to look at a document or transaction isolated from the context to which it properly belonged and it is the task of the court to ascertain the legal nature of the transaction and while so doing, to look at the entire transaction as a whole and not adopt a dissecting approach;

The Court ruled that Westminster, read in the proper context, permitted a “device” which was colourable in nature to be ignored as a fiscal nullity; Ramsay enunciated the principle of statutory interpretation rather than an over-arching anti-avoidance doctrine imposed upon tax laws; Furniss re-structured the relevant transaction, not on any fancied principle that anything done to defer the tax must be ignored, but on the premise that the inserted transaction did not constitute “disposal” under the relevant Finance Act; from Craven the principle is clear that Revenue cannot start with the question as to whether the transaction was a tax deferment/saving device but must apply the “look at” test to ascertain its true legal nature; and that strategic tax planning has not been abandoned.

McDowell majority held that tax planning may be legitimate, provided it is within the framework of law; colourable devices cannot be a part of tax planning and it would be wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods; and agreed with Chinnappa Reddy, J’s observations only in relation to piercing the (corporate) veil in circumstances where tax evasion is resorted to through use of colourable devices, dubious methods and subterfuges.

McDowell does not hold that all tax planning is illegal/illegitimate/impermissible. While artificial schemes and colourable devices which constitute dubious methods and subterfuges for tax avoidance are impermissible, they must be distinguished from legitimate avoidance of tax measures.

The court held that reading McDowell properly and as above, in cases of treaty shopping and/ or tax avoidance, there is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal vs. State of Madhya Pradesh [1999] 8 SCC 667 [Mathuram].

Vodafone on International Tax aspects of holding structures

In matters of corporate taxation, provisions of the Act delineate the principle of independence of companies and other entities subject to income tax. Companies and other entities are viewed as economic entities with legal independence vis-à-vis their shareholders/participants. A subsidiary and its parent are distinct taxpayers. Consequently, entities subject to income tax are taxed on profits derived by them on stand-alone basis, irrespective of their actual degree of economic independence and regardless of whether profits are reserved or distributed to shareholders/participants.

It is fairly well-settled that for tax treaty purposes, a subsidiary and its parent are totally separate and distinct taxpayers.

The fact that a group parent company gives principle guidance to group companies by providing generic policy guidelines to group subsidiaries and the parent company exercises shareholder’s influence on its subsidiaries, does not legitimise the assumption that subsidiaries are to be deemed residents of the State in which the parent company resides. Mere shareholder’s influence (which is the inevitable consequence of any group structure) and absence of wholesale subordination of the subsidiaries’ decision making to the parent company, would not per se legitimise ignoring the separate corporate existence of the subsidiary.

Whether a transaction is used principally as a colourable device for the division of earnings, profits and gains, must be determined by a review of all the facts and circumstances surrounding the transaction. It is in the aforementioned circumstances that the principle of lifting the corporate veil or the doctrine of substance over form or the concept of beneficial ownership or of the concept of alter ego arises.

It is a common practice in international law and is the basis of international taxation, for foreign investors to invest in Indian companies through an interposed foreign holding company or operating company (such as Cayman Islands or Mauritius based) for both tax and business purposes. In doing so, foreign investors are able to avoid the lengthy approval and registration processes required for a direct transfer, (i.e., without a foreign holding or operating company) of an equity interest in a foreign invested Indian company.

Holding structures are recognised in corporate as well as tax law. Special purpose vehicles (SPV) and holding companies are legitimate structures in India, be it in Company law or Takeover Code under the SEBI and provisions of the Act.

When it comes to taxation of a holding structure, at the threshold, the burden is on Revenue to allege and establish abuse in the sense of tax avoidance in the creation and/or use of such structure(s). To invite application of the judicial anti-avoidance rule, Revenue may invoke the “substance over form” principle or “piercing the corporate veil” test only after Revenue establishes, on the basis of the facts and circumstances surrounding the transaction, that the impugned transaction is a sham or tax- avoidant. If a structure is used for circular trading or round tripping or to pay bribes (for instance), then such transactions, though having a legal form, could be discarded by applying the test of fiscal nullity. Again, where Revenue finds that in a holding structure an entity with no commercial/ business substance was interposed only to avoid tax, the test of fiscal nullity could be applied and Revenue may discard such inter-positioning. This has however to be done at the threshold. In any event, Revenue/Courts must ascertain the legal nature of the transaction and while doing so, look at the entire transaction holistically and not adopt a dissecting approach.

Every strategic FDI coming to India as an investment destination should be seen in a holistic manner; and in doing so, must keep in mind several factors: the concept of participation in investment; the duration of time during which the holding structure exists; the period of business operations in India; generation of taxable Revenues in India; the timing of the exit; and the continuity of business on such exit. The onus is on the Revenue to identify the scheme and its dominant purpose.

There is a conceptual difference between a pre-ordained transaction which is created for tax avoidance purposes, on the one hand, and a transaction which evidences investment to participate in India. In order to find out whether a given transaction evidences a preordained transaction in the sense indicated above or constitutes investment to participate, one has to take into account the factors enumerated hereinabove, namely, duration of the time during which the holding structure existed, the period of business operations in India, generation of taxable revenue in India during the period of business operations in India, the timing of the exit, the continuity of business on such exit, etc. Where the court is satisfied that the transaction satisfies all the parameters of “participation in investment”, then in such a case, the court need not go into the questions such as de-facto control vs. legal control, legal rights vs. practical rights, etc.

A company is a separate legal persona and the fact that all its shares are owned by one person or by its parent company has nothing to do with its separate legal existence. If the owned company is wound up, the liquidator, and not the parent company, would get hold of the assets of the subsidiary and the assets of the subsidiary would in no circumstance be held to be those of the parent, unless the subsidiary is acting as an agent. Even though a subsidiary may normally comply with the request of the parent company, it is not a mere puppet of the parent. The dis-tinction is between having power and having a persuasive position.

Unlike in the case of a one man company (where one individual has a 99% shareholdings and his control over the company may be so complete as to be his alter ego), in the case of a multinational entity, its subsidiaries have a great measure of autonomy in the country concerned, except where subsidiaries are created or used as sham. The fact that the parent company exercises shareholders’ influence on its subsidiary cannot obliterate the decision making power or authority of its (subsidiary’s) Directors. The decisive criterion is whether the parent company’s management has such steering interference with the subsidiary’s core activities that the subsidiary could no longer be regarded to perform those activities on the authority of its own managerial discretion.

Exit is an important right of an investor in every strategic investment and exit coupled with continuity of business is an important telltale circumstance, which indicates the commercial/ business substance of the transaction.

Court’s Analysis of the transaction and persona of CGP

Two options were available for Vodafone acquiring a controlling participation in HTIL, the CGP route and the Mauritius route. The parties could have opted for anyone of the options and opted for the CGP route, for a smooth transition of business on divestment by HTIL. From the surrounding circumstances and economic consequences of the transaction, the sole purpose of CGP was not merely to hold shares in subsidiary companies but also to enable a smooth transition of business, which is the basis of the SPA. Therefore, it cannot be said that the intervened entity (CGP) had no business or commercial purpose.

The above conclusions, of the business and commercial purpose of CGP, were arrived at despite noticing that under the Company laws of Cayman Islands an exempted company was not entitled to conduct business in the Cayman Islands; that CGP was an exempted company; and its sole purpose is to hold shares in a subsidiary company situated outside Cayman Islands.

Revenue’s contention that the situs of CGP shares exist where the underlying assets are situated (i.e., in India), was rejected on the ground that under the Companies Act, 1956, the situs of the shares would be where the company is incorporated and where its shares can be transferred. On the material on record and the pleadings, the court held that the situs of the CGP shares was situated not in India where the underlying assets (of HEL) are situated but in Cayman Islands where CGP is incorporated, transfer of its shares was recorded and the register of CGP shareholders was maintained.

The Supreme Court in Vodafone concluded that the High Court erred in assuming that Vodafone acquired 67% of the equity capital of HEL. The transaction is one of sale of CGP shares and not sale of CGP or HEL assets. The transaction does not involve sale of assets on itemised basis. As a general rule, where a transaction involves transfer of the entire shareholding, it cannot be broken up into separate individual component assets or rights such as right to vote, right to participate in company meetings, management right, controlling right, controlled premium, brand licenses and so on, since shares constitute a bundle of rights – Charanjit Lal Chowdhury vs. UoI AI 1951 SC 41; Venkatesh (Minor) vs. CIT [1999] 243 ITR 367 (Mad) and Smt. Maharani Ushadevi vs. CIT [ 1981] 131 ITR 445 [MP] were referred to with approval and followed.

Merely since at the time of exit capital gains tax does not become payable or the transaction is not assessable to tax, would not make the entire sale of shares a sham or tax avoidant.

Parties to the transaction have not agreed upon a separate price for the CGP share and a separate price for what is called “other rights and entitlements” [including options, right to non-compete, control premium, customer base, etc]. It is therefore impermissible for Revenue to split the payment and consider a part of such payment for each of the above items. The essential character of the transaction as an alienation is not altered by the form of consideration, the payment of the consideration in installments or on the basis that the payment is related to a contingency (“options”, in this case), particularly when the transaction does not contemplate such a split up.

Retrospective amendments in sections 2(14), 2(47) and 9(1)(i) of the Act by the Finance Act, 2012

Provisions of sections 2(14), 2(47) and 9(1) (i) of the Act were amended by the Finance Act, 2012, to operate with retrospective effect from 1-4-1962, effectively to nullify the impact of the judgement of the Supreme Court in the case of Vodafone and to protect the tax base as well as to safeguard revenue’s interest in many such similar cases.

In this connection, it is important to note the relevant portion of the Finance Minister’s speech on 7-5-2012, while introducing the Finance Bill, 2012, which reads as under:

“7.    Hon’ble Members are aware that a provision in the Finance Bill which seeks to retrospectively clarify the provisions of the Income Tax Act relating to capital gains on sale of assets located in India through indirect transfers abroad, has been intensely debated in the country and outside. I would like to confirm that clarificatory amendments do not override the provisions of Double Taxation Avoidance Agreement (DTAA) which India has with 82 countries. It would impact those cases where the transaction has been routed through low tax or no tax countries with whom India does not have a DTAA.” (emphasis added)

Taxability of capital gains in India in respect of transfer of shares of a non-resident entity holding shares of an Indian Company, between two non-residents in a tax treaty situation

As mentioned above, in the Vodafone’s case, there was no Tax treaty involved as shares of a Cayman Islands company were transferred by the Hongkong based holding company to the Netherlands based Buyer company Vodafone and India does not have any DTAA with Cayman Islands or Hong Kong.

In the context of taxability of capital gains in India in respect of transfer of shares of a non-resident entity holding shares of an Indian Company, between two non-residents, in a similar case but in a tax treaty situation, some very important questions arise for consideration, which are, inter alia, as follows:

(1)    Whether an intermediate entity [IE] is not with commercial substance; is a sham or illusory contrivance, a mere nominee of its holding company and/or holding company being the real, legal and beneficial owner(s) of Indian Company’s [Indco] shares; and a device incorporated and pursued only for the purpose of avoiding capital gains liability under the Act?

(2)    Whether it can be said that an investment, initially made by the holding company through IE in Indco, a colourable device designed for tax avoidance? If so, whether the corporate veil of IE must be lifted and the transaction (of the sale of the entirety of IE shares by Holdco to non -resident buyer) treated as a sale of Indco’s shares?

(3)    Is such a transaction (on a holistic and proper interpretation of relevant provisions of the Act and the applicable DTAA), liable to tax in India?

(4)    Whether retrospective amendments to provisions of the Act (by the Finance Act, 2012) alter the trajectory or impact provisions of the DTAA and/or otherwise render the trans-action liable to tax under the provisions of the Act?

Andhra Pradesh High Court’s [High Court] land-mark decision in the case of Sanofi Pasteur Holding SA [2013] 30 taxmann.com 222 (AP) dated 15-2-2013

On similar issues which arose for consideration of the Andhra Pradesh High Court in the Writ petitions filed by Sanofi Pasteur Holding SA and others, the AP High Court, in a very detailed, very well considered and articulated judgement, has affirmed certain long established principles. Primarily, it has reiterated the view that the retrospective amendment does not alter the provisions of tax treaty. It has also reaffirmed the various factors brought out in the Vodafone decision while considering whether an entity is a sham entity or conceived only for tax-avoidance purposes.

The court also refused to lift the corporate veil in the absence of sound justification and more so where a case of tax avoidance is not established. This decision also reiterated that an Indian Tribunal or Court is bound by the ruling of jurisdictional superior judicial authority.

The brief facts of the case, issues before court, the tax department’s contention, the petitioner’s contention and the conclusions of the High Court are summarised below.

Brief facts:

Shantha Biotechnics Limited (SBL) is a company incorporated under the Companies Act, 1956 having its registered office in Hyderabad, India. Sanofi Pasteur Holding (Sanofi) is a company incorporated under the laws of France. During the year 2009, Sanofi had purchased 80.37 % of the share capital of another French company (i.e. ShanH) from Merieux Alliance (MA), a French company, and balance 19.63 % share capital of ShanH from Groupe Industriel Marcel Dassault (GIMD), another French company. ShanH held 82.5 % of the share capital of SBL.

The tax department passed an order on Sanofi dated 25th May 2010, u/s. 201(1)/(1A) of the Act, holding Sanofi as an `assessee-in-default’ for not withholding taxes on payments made to MA and GIMD on acquisition of shares of ShanH. MA and GIMD made an application to the Authority for Advance Ruling (the AAR) on the taxability of the transaction. The AAR in November 2011 ruled that the capital gain arising from the sale of shares of ShanH by MA and GIMD was taxable in India in terms of Article 14(5) of the India-France tax treaty.

Later, both the parties i.e. the Buyer (Sanofi) and Sellers (MA and GIMD) filed writ petitions before the High Court.

Department’s contentions

The Share Purchase Agreement (SPA) dated 10th July, 2009 between MA, GIMD and Sanofi was only for the acquisition of the control, management and business interests in SBL and was not mere divestment of shares of ShanH. As a result, capital assets in India were transferred and capital gains had accrued to MA and GIMD in India. ShanH is not a company with an independent status and is only an alter ego of MA and GIMD, the latter are the legal and beneficial owners of shares of SBL. ShanH had no control over SBL management nor enjoyed any rights and privileges in SBL as a shareholder. ShanH is at best a nominee of MA in relation to SBL’s shares.

There was no conflict between the provisions of the Act pursuant to the retrospective amendments carried out by the Finance Act, 2012 and the tax treaty. The transaction was taxable in India since the right was allocated to India under Article 14(5) of the tax treaty. For a proper and purposeful construction of the tax treaty provisions, the expression ‘alienation of shares’ in Article 14(5) of the tax treaty must be understood as direct as well as indirect alienation.

The retrospective amendments to section 2(47) of the Act, by the Finance Act, 2012, clarifies that ‘transfer’ would mean and would deem to have always meant the disposal of an asset whether directly or indirectly or voluntarily or involuntarily. The retrospective clarificatory amendments do not seek to override the tax treaty. In case of a conflict between the domestic law and the tax treaty, the tax treaty will prevail in terms of Section 90 of the Act. In the present case, there is however, no conflict between the tax treaty and the provisions of the Act. Therefore, once the right to tax the gains stand allocated to the source country, domestic law provisions of the source country will have to be read into the tax treaty in terms of Article 3(2) of the tax treaty, where any expression has not been defined in a tax treaty. Since ‘alienation’ is not defined in the tax treaty, its meaning has to be imported from the domestic law, as amended by the FA 2012. This exercise does not amount to overriding the tax treaty and in fact amounts to giving effect to Article 3(2) of the tax treaty.

Since MA and GIMD are owners of SBL shares, both legal and beneficial, it is MA and GIMD which have the participating interest in SBL. The disposal of participating interest, whether directly or through a nominee entity like ShanH would not take the capital gains out of the ambit of Article 14(5) of the tax treaty. If the right to tax vests in India, the mode of disposal was immaterial, whether direct, indirect or deemed disposal.

Petitioner’s contentions

On a reading of section 90 of the Act with relevant provisions of the tax treaty, the capital gain in the Sanofi’s transaction was taxable only in France. Only Article 14(4) of the tax treaty permits a limited ‘see through’, not Article 14(5) of the tax treaty. Neither in law nor qua Article 14 of the tax treaty could an asset held by a company be treated as an asset held by a shareholder.

Controlling interest is not a separate asset independent of shares. Even if controlling interest over SBL by ShanH is viewed as a separate right or asset, the situs of the controlling Interest was located and taxable only in France under Article 14(6) of the tax treaty.

Since the cost of acquisition was not determinable for controlling rights and underlying assets; there being no date of acquisition nor there being any part of the consideration apportionable to these rights, the computation provision of capital gains would fail and taxing the transaction on the underlying assets theory would be inoperative.

ShanH is a company incorporated in France. It is a joint venture between MA and GIMD to act as an investment vehicle. It had a separate Board of Directors and was filing tax returns in France. Setting up of SPVs (France) is considered necessary to protect the interest of investors. Without incorporation of ShanH as a distinct investment entity, it would not have been possible to interest GIMD (with no expertise in the field of vaccines to come on board ShanH, as an investment partner.)

Further, ShanH obtained FIPB approval for investment in the shares of SBL. The AAR ruling is contrary to settled legal principles and erroneous. Since the transaction was not taxable in India, Sanofi was not required to withhold tax.

Relevant issues before High Court

Is ShanH not an entity with commercial substance? Is it a mere nominee of MA and/or MA/ GIMD who are the real, legal and beneficial owners of SBL’s shares? Is ShanH a device incorporated and pursued only for the purpose of avoiding capital gains liability under the Act?

Was the investment, initially by MA and thereafter by MA and GIMD through ShanH in SBL, a colourable device designed for tax avoidance? If so, whether the corporate veil of ShanH must be lifted and the transaction (of the sale of the entirety of ShanH shares by MA/GIMD to Sanofi) treated as a sale of SBL shares?

Is the transaction (on a holistic and proper interpretation of relevant provisions of the Act and the tax treaty), liable to tax in India?

Whether retrospective amendments to provisions of the Act (by the Finance Act, 2012) alter the trajectory or impact provisions of the tax treaty and/or otherwise render the transaction liable to tax under the provisions of the Act?

Decision of the High Court

In respect of commercial substance of ShanH

The High Court observed that ShanH as a French resident corporate entity is a distinct entity of commercial substance, distinct from MA and GIMD. It was incorporated to serve as an investment vehicle, this being the commercial substance and business purpose i.e. of foreign direct investment in India by way of participation in SBL.

ShanH received and continues to receive dividends on its SBL shareholding which have been and are assessable to tax under provisions of the Act; and even post the transaction in issue, the commercial and business purpose of ShanH as an investment vehicle is intact. These indicators/ factors are, in the light of Vodafone International Holdings B.V., adequate base to legitimise the conclusion that ShanH is not a sham or conceived only for Indian tax-avoidance structure.

In respect of lifting of corporate veil of ShanH

The High Court observed that, on an analysis of the transactional documents and surrounding circumstances, ShanH was not conceived for avoiding capital gains liability under the provi-sions of the Act. The same has also not been contested by the tax department. Further, the High Court observed that in the light of the ratio laid down by the SC in Azadi Bachao Andolan and Vodafone International Holdings B.V., ShanH is not a corporate entity brought into existence and pursued only or substantially for avoiding capital gains tax liability under the provisions of the Act.

As observed in the Vodafone International Holdings B.V. factual context (equally applicable in this case), ShanH was conceived and incorporated in conformity with MA’s established business prac-tices and organisational structure.

The fact that a higher rate of capital gains tax is payable and has been remitted to Revenue in France, lends further support to the Sanofi’s contention that ShanH was not conceived, pursued and persisted with, to serve as an India tax-avoidance device. Since the tax department failed to establish that the genesis and continuance of ShanH establishes as an entity of no commercial substance and/or that ShanH was interposed only as a tax avoidant device, no case was made out for piercing or lifting the corporate veil of ShanH. Even subsequent to the transaction in issue and currently as well, ShanH continues in existence as a registered French resident corporate entity and as the legal and beneficial owner of shares of SBL.

Independent of the conclusion that there was no case piercing the corporate veil of ShanH, the transaction in issue was clearly one of transfer by MA and GIMD of their shareholding in ShanH to Sanofi and it was not a case of transfer of shareholding in SBL, which continues with ShanH.

In respect of impact of retrospective amendments

The meaning and trajectory of the retrospective amendments to the Act must be identified by ascertaining the legal meaning of the amendments, considered in the light of the provisions of the Act and the mischief that the amendments are intended to address. The retrospective amendments do not alter the provisions of the tax treaty and given the text of section 90(2) of the Act, these amendments do not alter the taxability of the present transaction.

Further, the retrospective amendments in section 2(14), 2(47) and section 9 of the Act are not fortified by a non -obstante clause to override the provisions of the tax treaties.

No liability to tax in India

The present transaction was for alienation of 100 %    of shares of ShanH held by MA and GIMD in favour of Sanofi and such transaction falls within Article 14(5) of the tax treaty. The transaction neither constitutes the transfer nor deemed transfer of shares or of the control/management or underlying assets of SBL.

The controlling interest of ShanH over the affairs, assets and management of SBL being identical to its shareholding and not a separate asset, it cannot be considered or computed as a distinctive value. The assets of SBL cannot be considered as belonging to a shareholder (even if a majority shareholder). The value of the controlling rights over SBL attributable to ShanH shareholding is also incapable of determination and computation. There was also the issue of value of Shantha West, a subsidiary of SBL. For these reasons, the computation component which is inextricably integrated to the charging provision (section 45 of the Act) fails, and consequently the charging provision would not apply. The transaction was not liable to tax in India under the provisions of the Act read with the provisions of the tax treaty.


Conclusions

It appears that in the case of Sanofi, the fact that the intermediate company ShanH was located in France and tax was paid in France on the capital gains at a rate of tax higher than in India, may have had significant influence in deciding the case in favour of the petitioners.

In this connection, attention of the readers is invited to the Report of the Expert Committee on Retrospective Amendments relating to Indirect Transfer headed by Shri Parthasarathi Shome.

Considering the decision of Vodafone, subsequent retrospective amendments by the Finance Act, 2012 and the landmark decision of the AP high Court in Sanofi’s case, it may be plausible to take a view that in similar transactions, in a tax treaty situation, the same may not be liable to tax in India. Media reports indicate that many such cases are pending before various high courts. However, keeping in mind the past trend and the approach of the tax department, surely the final word on the subject would be probably said only after the decision of the SC is rendered on the issue.

US Tax Goes Global

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Introduction

Ensuring tax compliance and establishing tax discipline is the basic objective of lawmakers and for some unexplained reasons, jumping the tax payments is many tax payers’ delight across the world. Eventually when law enforcers realise the weakness of the stick, they offer carrots of amnesty schemes now and then and the United States of America is no exception.

In 2009 and 2011 the Internal Revenue Service (IRS) offered schemes of Overseas Voluntary Disclosure Initiatives (OVDI) for tax defaulters to come clean about paying their taxes on their hitherto undisclosed foreign income and also to adhere to the requirements of yearly disclosure of foreign financial assets under the Foreign Bank Account Reporting (FBAR). Having received a lukewarm response to the OVDI, the IRS introduced Overseas Voluntary Disclosure Programme (OVDP), which is presently open. Apart from this, Foreign Assets Tax Compliance Act (FATCA) has become effective from the year 2011.
Under FATCA, tax payers who are US citizens, Green Card holders or resident aliens are required to declare their foreign financial assets to the IRS. However, through FATCA, US lawmakers have, probably for the first time, also sought to stretch the geographical limits of the IRS jurisdiction to almost all the nations, and the responsibility of collecting taxpayer’s information is cast on global institutions. No doubt, Double Tax Treaties grant abundant rights to tax authorities to seek tax payer’s information, but FATCA turns the tables by entrusting the responsibility of collecting and providing information as regarding financial affairs of all US citizens and US address accounts on banks, mutual funds, insurance companies, broking houses and other financial institutions across the world, thereby tightening the IRS grip to control possible tax evasion.
[http://www.treasury.gov/press-center/press-releases/ Pages/tg1759.aspx]
Effective 1st January, 2014 many Non-Resident Indians (NRI) of US who by ignorance or otherwise have failed to submit FBAR and FATCA reports or declare Indian income in US tax returns may face punitive action. It would therefore, be prudent for every NRI to understand and address these important changes being implemented next year. The most innocent mistake NRIs residing in the US tend to make is the non-declaration of their Indian assets owned prior to migration and financial assets inherited or received through partition of family which are otherwise covered by reporting requirements of FBAR and FATCA and non-payment of tax on income generated out of such assets.
US Engaging with India for compliance
US Treasury has initiated the signing of agreements with various Governments requiring domestic financial institutions operating in their country to provide requisite information for the calendar year 2013 of all US citizens and US addressee customers to the IRS from 1st January, 2014. While governments of UK, Denmark and Mexico have already signed such an agreement. France, Germany, Spain, and Italy are in the process of concluding the agreements. Efforts are being made to enter into similar agreements with many other countries.
As posted in the US Embassy report, US Treasury Secretary Mr. Timothy Geithner and US Federal Reserve Chairman Mr. Ben Bernanke met the Finance Minister of India and the Prime Minister of India on the 9th October, 2012 and discussed various options and possible actions for combating tax evasion by US-based NRIs.[http://newdelhi.usembassy.gov/sr100913.html].
As a consequence, the Reserve Bank of India has been asked to draft a domestic legislation requiring Indian banks, mutual funds, insurance companies, broking houses and other financial institutions to provide information of investments of US citizens and US addressees to the IRS from 1st January, 2014. [http://articles.economictimes.indiatimes.com/2012-11- 27/news/35385827_1_financial-assets-fatca-financialinstitutions ]

To take an overview of the subject, salient features of the FBAR, FATCA and taxability of global income under US tax laws are briefly discussed below.

FBAR
It is a simple form to collect basic information of US citizens or US residents of their overseas financial accounts in their names or wherein they have signing authority or control.
Applicability: The FBAR is required to be filed by a person who is a US citizen, resident of US, a US partnership firm, a Limited Liability Company (LLC) or trust (referred as United States Person) which has financial interest or signing authority in overseas financial investment exceeding INR621,672 during a calendar year. It may be noted that filing of tax returns jointly by a married couple is common in US but the limit of INR621,672 is for each individual.
Foreign Financial Account:
It includes all accounts maintained with a financial institution and also includes:
• Securities or brokerage account;
 • Bank account including savings, current or deposits held as NRE, NRO, FCNR account and also Resident account.
• Commodity Futures & Options Accounts;
• Whole life insurance policy and any annuity with cash value;
 • Mutual fund or similar pooled fund and
• Any account maintained with a foreign financial institution or other person performing the services of a financial institution. It may be noted that investment in a partnership or proprietorship firm, private limited company, personal loans and personal assets like jewellery are not included and hence not required to be reported. Immovable properties are also not covered under FBAR but bank balances generated by funds remitted for purchase of immovable property in India need to be reported. Financial Interest: A United States person is said to have a financial interest in a foreign financial account if:
 • He is the owner of record or holder of legal title, or
• The owner of record or holder of legal title is another person who may be:

a) an agent, nominee, attorney or a person acting on behalf of the US person with respect to the account;

 b) a corporation/company in which the US person owns directly or indirectly more than 50% of the total value of shares or voting power;

 c) a partnership in which the US person owns directly or indirectly or has interest greater than 50% of the profits or capital;

d) a trust of which the US person is the trust grantor and has an ownership interest in the trust for US federal tax purposes;

e) a trust in which the US person has a more than 50% beneficial interest in the assets or income of the trust for the calendar year; or

f) any other entity in which the US person owns directly or indirectly more than 50% of the voting power or total value of equity interest or total assets or interest in profits.

Joint Owners: A husband and wife owning a joint account need not file separate reports. But if either spouse has a financial interest in any other account not held jointly then such a person should file a separate report for all accounts including those owned jointly with the spouse.

Form and Filing: The report is to be submitted in form TD F 90-22.1 with the US Department of the Treasury, Detroit by June 30 of the following year.

Penalty:
Improper filing of FBAR attracts penalty of $10,000 whereas wilful failure to file FBAR is liable to penalty of greater of $100,000 or 50% of the balance at the time of violation and also is subjected to criminal penalties.

FATCA

FATCA is enacted with the primary goal to gain information about US persons and requires US persons to report their foreign financial assets to the IRS and also requires foreign financial institutions to report directly to the IRS details of financial accounts of US persons held with them.

Applicability: Individuals who are US citizens, tax residents, non-residents who elect to be resident aliens and non-residents who are bonafide residents of American Samoa or Puerto Rico having foreign financial assets above the threshold limit.

Foreign Financial Assets:
It includes following financial assets:

•  Checking, savings and deposit accounts with banks held as NRE, NRO, FCNR or Resident accounts;

•    Brokerage accounts held with brokers & dealers;

•    Stocks or securities issued by a foreign corporation;

•    Note, bond or debenture issued by a foreign person;

•    Swaps of all kinds including interest rate, currency, equity, index, commodity and similar agreements with a foreign counterparty;

•    Options or other derivative instruments of any currency, commodity or any other kind that is entered into with a foreign counterparty or issuer;

•    Partnership interest in a foreign partnership;

•    Interest in a foreign retirement plan or deferred compensation plan;

•    Interest in a foreign estate;

•    Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value; and

•    Any account maintained with a foreign financial institution and every foreign financial asset, income or gain whereof is to be reported in the tax return to be filed with the IRS.

It is significant to note, that unlike FBAR, FATCA covers investments of any and every size in equity shares of a private limited company, capital in partnership or proprietorship, loans and advances including personal loans, etc. Immovable properties are excluded. If the US person is not required to file US tax return for any reason, then he is not required to file the FATCA report.

Both FBAR and FATCA cover erstwhile investments in India and inherited or partitioned family assets.

Reporting Threshold: Individuals are covered by FATCA if the value of foreign financial assets exceeds $50,000 as on 31st December or $75,000 during the tax year and in case of married couple tax-payers $100,000 and $150,000 respectively.

For individual tax-payers living abroad these limits are raised to $200,000 and $300,000 respectively and $400,000 and $600,000 for a married couple filing joint return.

Joint Owners: The tax return of a married couple will include assets of both the spouses.

Form and Filing:
The report is to be submitted in form 8938 with the IRS with the tax return. The due dates for filing tax returns with the IRS including extension provisions will apply accordingly.

Penalty: Failure to file Form 8938 by the due date or filing an incomplete form attracts a penalty of $10,000. Additional penalty of $10,000 per month up to a maximum penalty of $ 50,000 may become payable for failure to file inspite of IRS notice.

Tax Withholding: FATCA also requires 30% tax withholding on certain payments of US source income paid to non participating foreign financial institution or account holders who fail to provide requisite information. [http://www.irs.gov/uac/Treasury,-IRS-Issue-Proposed-Regulations-for-FATCA-Implementation]

Global Income of US Persons being Taxed in the US

Internal Revenue Code (IRC) requires a US citizen irrespective of his place of residence or resident of the US to declare and pay income tax on worldwide income. Of course, taxpayers having income in India can choose between the IRC and the regulations of India-USA Double Tax Treaty for income arising in India, and opt to be governed by provisions which are more beneficial to him, subject to conditions as may be applicable.

US Offshore Voluntary Disclosure Programme

The IRS has once again given an opportunity for voluntary disclosure of overseas assets and income thereon under the OVDP.

The OVDP is similar to the earlier OVDI under which tax payers are required to pay tax on hitherto undisclosed income of earlier eight tax years together with interest thereon, and in addition to a penalty of 27.5% of the highest balance of hitherto undisclosed foreign bank accounts and/or value of foreign assets over the last eight years. For balance upto $ 75,000 reduced penalty of 12.5% applies. In cases of tax payers disclosing and paying tax on foreign incomes but failing only to file FBAR returns, delinquent reports may be filed possibly saving oneself from penal provisions. [http://www.irs.gov/uac/2012-Offshore-Voluntary-Disclosure-Program]

Many NRIs may not have abided by the FBAR provisions and few by ignorance have also failed to pay tax on their Indian income in the US but ignorance of law cannot be an excuse, and therefore, it would be appropriate for US-based NRIs and Chartered Accountants advising them to take advantage of the OVDP before the programme is discontinued.

Service tax paid under reverse charge mechanism under the category of “Business Auxiliary Services” whether is a valid input service as defined in Rule 2(l) of the CCR, 2004.

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Facts

The Appellant engaged in providing renting of immoveable property and export of customised software appointed Syntel Inc., USA as its agent for identifying customers overseas. Appellant paid commission to Syntel Inc., USA and discharged service tax liability under the category of “Business Auxiliary Services”. Since the Appellant was unable to utilise the total credit, filed refund claim of unutilised CENVAT credit under Rule 5 of CCR, 2004. The Appellant’s claim was rejected on the grounds that no proof was submitted proving the nexus of business auxiliary services to the output services.

Held

On perusal of the Business Associates Agreement between Syntel International Pvt. Ltd. and Syntel Inc., USA, the services were held in the nature of sales promotion and thus covered under “business auxiliary services”, a valid input service and eligible of refund. Further, the department had allowed subsequent refund claim and hence, the above refund was also allowed.

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Exemption under Explanation (b) to S. 9(1)(i) can apply only where income is ‘deemed to accrue or arise in India’ u/s.5(2)(b), but not where ‘income accrue or arise in India u/s.5(2)(b).

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20 (2011) TII 05 ITAT-Del.-Intl.

S. 5(2)(b), Explanation (b) to 9(1)(i) of

Income-tax Act

A.Ys. : 1999-2000 to 2005-2006

Dated : 12-11-2010

 

(i) Exemption under Explanation (b) to S. 9(1)(i) can
apply only where income is ‘deemed to accrue or arise in India’ u/s.5(2)(b),
but not where ‘income accrue or arise in India u/s.5(2)(b).

(ii) The question of actual or deemed accrual or arrisal of
income in India should be seen from standpoint of the taxpayer and not of any
other person.

Facts:

The taxpayer was a company incorporated in HongKong (HKCo).
HKCo was a subsidiary of a company based in BVI (BVICo). BVICo had entered into
agreement with various customers for assisting them in locating suppliers of
apparels and garments in India. HKCo was engaged in providing facilitation
services for procurement of goods from various countries in Asia (Including
India). HKCo had also set up Liaison Offices (LOs) in India at several places.
BVICo sub-contracted the work to HKCo and received commission from its buyers as
coordinating agency. The taxpayer received remuneration of 1% FOB value of goods.

During the course of survey at one of the LOs of HKCo, it was
found that the LO was engaged in various services, such as product design and
development, sourcing, merchandising follow-up, quality control, factory
evaluation and shipping coordination, supply chain management, etc. The
statements of certain key personal of HKCo were also recorded. Based on these,
the AO concluded that BVICo was a non-functional entity and did not play any
role in the goods sourced from India; employees of HKCo directly corresponded
with clients; website of HKCo mentioned that it was a one-stop global sourcing
solution provider; and hence, based on the functions performed by the LO, 90% of
the commission received was attributable to the Indian operations.

In appeal, the CIT(A) upheld the order of the AO and
attributed 72% of commission received to PE in India.

Held:

The Tribunal held as follows :

(i) Section 5(2)(b) of the Income-tax Act has two components
: (a) Income which accrues or arises in India; and (b) Income which is deemed to
accrue or arise in India. The second component (deeming fiction) is linked to
section 9(1) of the Income-tax Act. The exclusion under explanation (b) to
section 9(1)(i) would apply only to a taxpayer who is engaged in exports.
Further, it cannot be applied to a case where income accrues or arises in India.
If income accrues or arises in India, question of its deemed to accrue or arise
in India cannot arise.

(ii) The question whether any income accrues or arises or is deemed to accrue
or arise to the taxpayer in India has to be seen from the standpoint of the
business of the taxpayer and not from the standpoint of the business of BVICo.

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Supernormal profits making company should be excluded from the comparables set, as they have a tendency to skew the results and cannot be considered as general representative of the industry.

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19 Adobe Systems India Private Limited v. ACIT

(2011) TII 13 ITAT-Del.-TP

S. 90C of Income-tax Act

A.Y. : 2006-2007. Dated : 21-1-2011

 

Supernormal profits making company should be excluded from
the comparables set, as they have a tendency to skew the results and cannot be
considered as general representative of the industry.

 

Facts:

The taxpayer was an Indian company (‘ICo’). ICo was a
wholly-owned subsidiary of an American company. ICo was engaged in providing
software development services and marketing development services to its
Associate Enterprises (AE’s). In respect of financial year 2005-06, ICo had
earned operating margin (operating profits/operating costs) of 14.96%. Based on
transfer pricing study done by ICo, ICo contended that its profit was higher
than the margins earned by comparable uncontrolled companies and therefore its
international transactions were at arm’s length. The Transfer Pricing Officer (‘TPO’)
conducted fresh comparables search and determined operating margin at 24.91% by
including three comparables having profit margins of 91% to 160%. Further, the
TPO also used updated data for financial year 2005-06 as were available at the
time of assessment as against taxpayer’s data as of date of tax filing.

Being aggrieved, ICo filed its submissions before Dispute
Resolution Panel (‘DRP’). However, DRP upheld the adjustment proposed by the TPO.

ICo filed appeal with the Tribunal against TP adjustment.

Held:

The Tribunal held as follows :

The TPO had brushed aside the contention of the taxpayer
without giving any cogent reasons and ignoring the documents submitted by ICo.
The TPO had also not commented on objections of ICo against one of the
companies.

It was not in dispute that the three companies had shown
supernormal profits as compared to other comparables and there was merit in the
argument of ICo for exclusion of these three companies. If these companies were
excluded, the average margin would be 17.5%, which would be within ±5% range of
the margin of ICo.

The order passed by DRP was very cursory and laconic without
going into the voluminous submissions made by ICo and such approach was contrary
to the provisions of Income-tax Act.

Linmark International (Hong Kong) Ltd. v. DDIT

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On facts, TRC issued by Netherlands tax authority was sufficient proof of beneficial ownership of royalty received by a Netherlands company from an Indian company. Such royalty was chargeable to tax @10% in terms of India-Netherlands DTAA.

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18 ADIT v. Universal International Music BV (Unreported)

ITA No. 6063/M/2004, 2304/M/2006,

5064/M/2006

Article 12, India-Netherlands DTAA,

A.Ys. : 2000-01 to 2003-2004. Dated : 31-1-2011

 


On facts, TRC issued by Netherlands tax authority was
sufficient proof of beneficial ownership of royalty received by a Netherlands
company from an Indian company. Such royalty was chargeable to tax @10% in terms
of India-Netherlands DTAA.

Facts:

The taxpayer was a Netherlands company (‘DutchCo’). It was a
tax resident of the Netherlands. It was engaged in the following activities :

  •  Manufacture of audio and video recording.


  •  Development and exploitation internet activities.


  • Acquisition, alienation, exploitation, assignment and managing of copyrights,
    production and reproduction rights, licences, patents, trademark, all forms of
    Industrial and intellectual property rights, royalty rights as well as
    production and publication of sheet music, music scores, etc.


DutchCo had acquired certain rights from another group
company, which had entered into contracts with various artists. The Company
entering into contracts with artists is known as ‘Repertoire Company’. As per
the group policy, in respect of any business outside the home territory of the
Repertoire Company, the commercial exploitation rights were transferred to other
group company (such as DutchCo), which would, on request from any other group
company, licence the exploitation rights to such other group company for
exploitation within the home territory of such other group company. Ultimately
the group companies were licence holders to commercially exploit the rights
around the world.

Thus, DutchCo acquired rights from Repertoire Company and
sub-licensed to a group company, which was an Indian company (‘IndCo’) for
exploitation within India. DutchCo had
received royalty income from IndCo for granting exploitation rights.

In terms of Article 12 of India-Netherlands DTAA, DutchCo
offered tax @ 10% on the royalty received from IndCo. However, as per the AO,
DutchCo could not file copies of the agreement between it and Repertoire
Company. Further, as DutchCo could not file evidence of beneficial ownership of
royalty, the AO concluded that DutchCo was only a collecting agent of Repertoire
Company and therefore, it was not eligible for benefit under Article 12.
Accordingly, the AO charged tax @30% on the royalty as was the applicable rate
under the Income-tax Act.

Before the CIT(A), DutchCo filed various documents to
establish its beneficial ownership together with Tax Residence Certificate (‘TRC’)
issued by Netherlands tax authority. The CIT(A) concluded that DutchCo was
beneficial owner of royalty.

Held:

The Tribunal held as follows:

  •  In
    terms of the Supreme Court’s decision in UOI v. Azadi Bachao Andolan,
    (2003) 263 ITR 706 (SC), TRC issued by the tax authority of the contracting
    state has to be accepted as sufficient evidence regarding the residential
    status and beneficial ownership of DutchCo even if agreement with Repertoire
    Company had not been filed.


  •  The
    agreement between DutchCo and IndCo clearly stated that the catalogue of
    recording licence by DutchCo to IndCo was owned and controlled by DutchCo. It
    was also mentioned that the royalty agreement was approved by the Government
    of India. The Government is not expected to approve royalty agreement without
    being satisfied that DutchCo was owner of royalty and if the AO had any
    doubts, he could have made reference to Netherlands tax authority.



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Section 50C does not apply to transfer of immovable property held through company.

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15. Irfan Abdul Kader Fazlani vs. ACIT ITAT Mumbai bench ‘I’ Mumbai BeforeI.P.Bansal(J.M.)andD.KarunakaraRao (A. M.)
ITA No. 8831/Mum/11
A.Y.: 2007-08.
Dated: 2-1-2013
Counsel for Assessee/Revenue: K. Shivaram & Paras S. Savla/P.K. Shukla

Section 50C does not apply to transfer of immovable property held through company.


Facts

The assessee was holding 306 equity shares of Rs. 100 each in a private company (‘the company’). The total share capital of the company was 3,813 equity shares of Rs. 100 each. The company owned two flats in a residential building and was earning rent income from the same. During the year under appeal the assessee sold the shares for Rs. 37.51 lakh and capital gain was offered on that basis. According to the AO the assesse engineered the sale of the shares of all other shareholders of the company and thereby effectively transferred the immovable property belonging to the company. According to him, it was an indirect way of transferring the immovable properties, being the flats in the building. He accordingly ‘pierced the corporate veil and invoked the provisions of section 50C and computed the capital gains by adopting the stamp duty value of the flats.

Held

The tribunal noted that the provisions of section 50C applies on fulfillment of two conditions viz., (i) when a transfer of “capital asset, being land or building or both” takes place; and (ii) the consideration for a transfer is less than the value “assessed” by any authority of a State Government for stamp duty purposes. It further observed that the term “transfer” as used in the provisions would only cover direct transfer. While in the case of the assesse, the assets transferred were shares in a company and not land and/or building. The flats were owned by the company who continues to remain its owner even after the transfer of the shares by the assesse. Secondly, the consideration for transfer received by the assesse is also not “assessed” by any authority. Thus, the other condition to attract the provisions of section 50C is also not complied with. According to it, since the provisions of section 50C are deeming provisions, the same have to be interpreted strictly in accordance with the spirit of the provisions. Therefore, the appeal filed by the assesse was allowed and it was held that the AO’s decision to invoke the provisions of section 50C to the tax planning adopted by the assessee was not proper and it does not have the sanction of the provisions of the Act.

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The total amount of adjustment, along with the arm’s length price already reported by an assessee, cannot exceed the total amount of revenues earned by the assessee and its associated enterprises from third party customers.

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Tribunal News

Part C — Tribunal & AAR International Tax Decisions

Geeta Jani
Dhishat B. Mehta
Chartered Accountants


 


21 DCIT vs Global Vantedge Pvt. Ltd.

2010-TIOL-24-ITAT-DEL

Section 92

Dated: 17.12.2009

 

Issues:

 

  • The total amount of adjustment, along with
    the arm’s length price already reported by an assessee, cannot exceed the
    total amount of revenues earned by the assessee and its associated enterprises
    from third party customers.

  • In undertaking a transfer pricing analysis,
    the least complex entity should be selected as the tested party. However,
    selecting an overseas entity as the tested party may not be appropriate;
    because it is difficult to obtain all relevant facts and data required for
    undertaking a proper analysis of functions, assets and risks (FAR) and making
    the requisite adjustments
    .

 

Facts:

 

  • Global Vantedge Pvt. Ltd.
    (GV), is an Indian company engaged in providing IT enabled services. RCS
    Centre Corp (RCS), a company incorporated in USA, is a customer of GV. GV and
    RCS are held by a common parent company and, hence, are associated enterprises
    (AE).

  • RCS is engaged in the
    business of providing debt collection and telemarketing services to clients in
    USA. RCS contracts with third party customers in USA. In turn, RCS enters into
    contracts with GV which has the requisite infrastructure and capacity for
    providing the services which RCS has contracted to render to its customers.

  • RCS retains 9.4% of the
    revenues earned from third party customers in USA and remits the balance 90.6%
    to GV. GV is also engaged in rendering services to other independent clients
    which constitute approximately 18% of its total revenue.

  • GV selected RCS as the
    tested party for the purpose of TP analysis. The TPO rejected selection of RCS
    as the tested party by contending that it is difficult to benchmark an entity
    in overseas jurisdiction.

  • The TPO selected GV as the
    tested party and by making a comparative analysis, he arrived at an average
    operating margin of 11.88%, as against the loss of 53.5% incurred by GV. As a
    result, GV was virtually assessed on revenue of Rs 101.1 as against the
    transaction value with RCS of Rs 90.8, and as against the billing of Rs 100
    raised by RCS on third party customers.

  • Aggrieved, the assessee
    preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)].
    Before the CIT(A), the assessee, inter-alia, contended that:

(a) The least complex entity (RCS in the present
case) needs to be selected as a tested party for the purpose of carrying out
transfer pricing analysis because a simpler party requires fewer and more
reliable adjustments to be made to its operating margins.

(b) Without prejudice, the adjustment to the transfer price
between the AE and the taxpayer cannot be more than the revenue earned by the
group from independent third parties. Also, the transfer price needs to be
determined after excluding a fair remuneration payable to the AE, from the
revenue earned from third parties.

  • Based
    on the contentions of the assessee, the CIT(A) held as follows:

(a) The least complex entity should be selected as a tested
party.

(b) However, selection of RCS as a tested party and
consequent use of international comparables would be inappropriate, as it is
difficult to benchmark ALP in different jurisdictions on account of the
differences in facts and circumstances in each geographical area.

(c) The total amount of adjustment along with the arm’s
length price already reported by the assessee cannot exceed the total revenue
earned by the assessee and its associated enterprise from dealing with third
party clients.

(d) Also, the ALP of the assessee in the present case
cannot be 100% of revenues earned from third party customers. RCS was
admittedly rendering market support for which it was entitled to a fair
consideration.

(e) ALP remuneration of RCS was determined @1.4% by
adopting a report issued by the Information and Credit Rating Agency of India
Limited (ICRA report) on marketing expenses in the BPO industry.

(f) The balance 98.6% (100 – 1.4) of the revenues was held
to represent an arm’s length price between GV and RCS.

 

Held:



 


The ITAT upheld the order of the CIT(A) as neither GV nor the
tax authority was able to controvert the its findings.


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Sale of abandoned cargo, whether it was liable for service tax under the category of “Cargo Handling Service” and “Storage Warehousing Service”.

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Facts

The Appellant was selling abandoned cargo and paying VAT thereon. Commissioner demanded service tax on sale of such abandoned cargo after meeting various expenses incurred under the category of “Cargo Handling Service” and “Storage Warehousing Service”. The Appellant relied on the Circular no.11/1/2002-TRU, dated 1st August 2002 and on cases of Mysore Sales International Ltd. vs. Assistant Commissioner 2011 (22) STR 30 (Tribunal) and India Gateway Terminal Pvt. Ltd. vs. Commissioner 2010 (20) STR 338 (Tribunal).

Held

It was held that sale of abandoned cargo is not exigible to service tax as the circular mentioned above clearly states that no service tax was to be levied on the activities of the custodian where he auctions abandoned cargo and VAT is paid in respect of sales. Placing reliance on Mysore Sales International Ltd. (supra) and India Gateway Terminal Pvt. Ltd (supra), the impugned order was set aside.

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The Countdown to Ind-AS — careful evaluation of policy choices

IFRS

On January 14, 2011, the Institute of Chartered Accountants
of India (ICAI) issued the much-awaited ‘near final’ version of the
IFRS-converged Indian Accounting Standards (Ind-AS). The issuance of these
standards brings us closer to answering the question — would the Indian version
of IFRS be different from the international version of IFRS?

An analysis of these near-final Ind-AS brings out that whilst
every effort seems to have been made to keep these standards as close to IFRS,
we have also chosen a different approach in the application of a few of these
standards, to suit our economic scenario, and to address the concerns raised by
Indian companies. This article segregates these deviations into four categories:
clear deviations from IFRS, removal of certain choices given under IFRS,
optional deviations from the application of IFRS and additional guidance under
Ind-AS.

Deviations from IFRS:


The exclusion/inclusion of these principles in the Ind-AS
standards have created an anomaly with the IFRS-equivalent standards, making
companies affected by these principles clearly non-compliant with IFRS. These
deviations (carve-outs) have been summarised below:

  • The near-final Ind-AS
    standard on revenue recognition has not adopted IFRIC 15 for revenue
    recognition from real estate development. Consequently, these agreements have
    been included in the scope of construction contracts, making it mandatory for
    real estate developers in India following Ind-AS to recognise revenue using
    the percentage completion method. This also means that Ind-AS financial
    statements of such real estate developers cannot be considered as
    IFRS-compliant.


  • Ind-AS, in its definition
    of equity instruments, includes the equity conversion option embedded in a
    foreign currency convertible bond (FCCB). FCCBs will be considered compound
    financial instruments under Ind-AS and split between the liability and equity
    component at inception, as opposed to being split between liability and
    derivative component under IFRS. This would ensure that the issuer’s income
    statement is not volatile due to changes in value of the conversion option
    driven by changes in the market price of its own equity shares.


  • Ind-AS requires that the
    measurement of fair value of financial liabilities designated at fair value
    through profit and loss at inception should not include fair value changes
    arising out of changes in the entity’s own credit risk. However, since the
    option to designate financial liabilities as at fair value through profit and
    loss at inception is not widely exercised, this is expected to impact only the
    few entities which exercise this option.


  • Ind-AS requires the
    recognition of bargain purchase gain on day one accounting for a business
    combination in capital reserve, as opposed to profit or loss account under
    IFRS. This is also consistent with the existing principles under Indian GAAP
    enunciated in the current accounting standards on amalgamations and
    consolidation. Our experience indicates that such situations will be rare.


  • Ind-AS requires the use
    of government bond rate as discount rate for measurement of employee benefit
    obligations, as opposed to a highly rated corporate bond rate required under
    IAS 19 (unless a deep corporate bond market does not exist). One of the key
    reasons for this deviation is in the argument that a deep bond market does not
    exist in India.


  • IFRS 1 mandatorily
    requires a company to present comparative financial statements on first-time
    adoption. Ind-AS gives companies a choice in presenting comparative financial
    statements on first-time adoption. However, the choice to present comparatives
    for the prior year is also only on a memoranda basis and hence would not meet
    the IFRS 1 requirements. Clearly then, an Indian company’s first-time-adopted
    Ind-AS financial statements will not be IFRS 1-compliant financial statements.
    However, this specific carve-out will not impact Ind-AS financial statements
    beyond the first period of transition.


Eliminations of certain options available under IFRS:


The removal of the following choices given under IFRS from
the relevant Ind-AS standards does not result in non-compliance with IFRS, but
merely restricts choices for Indian companies:

  • Ind-AS 1 requires
    entities to present analysis of expenses in the profit and loss account only
    by nature of expenses, e.g., personnel costs, depreciation and amortisation,
    removing the option of reporting expenses by function under IFRS. This is
    expected to be further clarified by the format of financial statements in the
    revised Schedule VI.


  • Ind-AS removes the choice
    of subsequently measuring investment property at fair values and requires
    these to be subsequently measured using only the cost model. This may not have
    a significant implication, since companies generally would be inclined to
    adopt the cost model to reduce the volatility in the income statement.


  • Ind-AS requires the
    recognition of all actuarial gains and losses arising from employee benefits
    directly in equity, unlike the corridor approach or recognition directly in
    the profit and loss account which are also permitted by IFRS. This is a
    deviation from the current Indian GAAP practice of recognising these directly
    in the profit and loss account. This will reduce the volatility in the income
    statement due to fluctuations in various actuarial assumptions, such as
    discount rate, salary escalation rate, employee attrition rate, etc.

  •     Ind-AS removes the option of deducting capital grants from the government from the cost of the underlying fixed asset and allows it only to be set up as deferred income. It also removes the option of initially measuring non-monetary government grants at their nominal value and requires such grants to be measured only at their fair value at inception. This will result in grossing up the balance sheet.

  •     IAS 27 includes in its scope an exemption for entities from preparing consolidated financial statements if certain criteria are met. This exemption has not been included in Ind-AS, making it mandatory for all companies to present consolidated financial statements. Currently, under Indian GAAP, only listed companies are required to prepare consolidated financial statements. However, the scope of entities covered in this standard is much wider and covers all unlisted and private companies, including subsidiaries of listed companies.


Optional    deviations from application of IFRS:

The adoption of the following options permitted by Ind-AS would result in non-compliance with IFRS as issued internationally. These anomalies with IFRS can be avoided by companies by choosing optimal accounting policies that are aligned to IFRS.

  •     Ind-AS gives a choice on first-time adoption whereby the carrying value as on the transition date for all property, plant and equipment capitalised before 1st April, 2007, can be the ‘deemed cost’ for first-time adoption of Ind-AS. This exemption entails that all depreciation adjustments to these assets would be applied from the date such deemed cost has been established. Since this is an option, companies may alternatively choose to restate their property, plant and equipment to comply with principles laid in Ind-AS on a retrospective basis, making adjustments for decapitalisation of preoperative expenses, foreign exchange differences and depreciation methods to ensure compliance with international IFRS as well. Entities choosing the carrying value exemption will need to make certain disclosures till the time significant value of the block of existing fixed assets is retained in the books of accounts.


  •     Ind-AS gives entities a policy choice to defer the recognition of foreign exchange fluctuations on long-term monetary assets and liabilities over the period of their maturity in an appropriate manner. IAS 21 requires full recognition of such exchange differences in the income statement in the period when incurred. The option under Ind-AS is a one-time accounting policy choice with Indian entities on the date of transition. This policy choice needs careful evaluation, since this will also impact other aspects of accounting, such as capitalisation of borrowing costs and application of hedge accounting principles.


  •     Derecognition provisions for financial assets can be applied prospectively from the transition date. Companies who choose to take this exemption will be non-compliant with IFRS till such time that the underlying financial assets continue in the books.


  •     Ind-AS also gives an additional ‘impracticability’ exemption for financial instruments to be carried at amortised cost, i.e., if it is impracticable for the effective interest rate or impairment requirements under Ind-AS 39 to be applied retrospectively from the date of the financial instrument. In such a case, for financial assets, the fair value as on the transition date would be the deemed cost as on the transition date.



Additional guidance under Ind-AS where IFRS currently has no guidance:

  •     Ind-AS gives additional guidance on accounting for common control transactions which are currently excluded from the scope of IFRS 3 — Business Combinations. Ind-AS requires accounting for these transactions as per the pooling of interest method and requires the acquisition to be accounted for at book values of the acquiree entity on the combination date. All reserves of the acquiree entity will be carried forward in the acquiring entity with any difference between the book value of net assets and consideration recorded as goodwill or capital reserve, as the case may be. Further, this transaction needs to be reflected from the beginning of the earliest period presented in the financial statements, and financial statements in respect of prior periods should be accordingly restated.


Since IFRS currently has no guidance on this topic, companies take the option of either accounting for such transactions at book values or at fair values under IFRS. However, this topic is currently an open project at the IASB level, and the deviation from IFRS would be clearly understood only when final guidance under IFRS is issued.

  •     There is additional guidance under Ind-AS 33 Para 12, on earnings per share ‘Where any item of income or expense which is otherwise required to be recognised in profit or loss in accordance with Indian Accounting Standards is debited or credited to securities premium account/other reserves, the amount in respect thereof shall be deducted from profit or loss from continuing operations for the purpose of calculating basic earnings per share.’ This guidance has been added since Indian laws may continue to override accounting standards. Accordingly, if companies are permitted to account for income/expenses directly in reserves pursuant to any law, the impact of the same is appropriately captured in the EPS (a key performance metric for companies).


In summary, barring certain transactions summarised in part 1 of this discussion, Indian companies can choose to be compliant with IFRS through making optimal accounting policy choices on transition. It should be recognised that while the carve-outs discussed above would ease the transition process, the management of each company needs to give careful thought in deciding on accounting policy choices on transition to Ind-AS. The reporting strategy would depend on whether a company wishes to be fully compliant with IFRS on an ongoing basis and fully benefit from the advantages of convergence, i.e., achieve comparability with global peers, avoid dual reporting for raising capital overseas and move towards international quality of financial reporting.


Revenue recognition principles under IFRS for Real Estate Industry

IFRS

Background


Around the world, real estate development and sale
transactions are structured with various permutations and combinations, in order
to comply with local tax regulations, local practices and other market
conditions. As a result, a sale deed may be entered on the date of allotment or
it can be entered into on the date of delivery. Many geographies also permit the
developers to sell the underlying land first to be followed by the development
of land.

The divergence in the manner in which real estate
transactions are carried out was also reflected in the accounting principles
applied by companies prior to the introduction of IFRIC 15 in respect of revenue
recognition from real estate development. Some developers accounted for such
agreements under IAS 18 Revenue, i.e., revenue is recognised when the completed
real estate is delivered to the buyer. Other developers accounted for them under
IAS 11 Construction Contracts, i.e., revenue is recognised by reference to the
stage of completion as construction progresses.

The International Accounting Standards Board (‘IASB’) noted
that divergence in practice exists in these circumstances with regard to the
identification of the applicable accounting standard for the construction of
real estate and the timing of the associated revenue recognition. To address
this, IFRIC 15 – Agreements for the construction of real estate, was issued on 3
July 2008 and is effective for annual periods beginning on or after January
2009.

IFRIC 15 addresses this divergence and provides guidance on
the accounting for agreements for the construction of real estate with regard
to:

  • the accounting standard to
    be applied (IAS 11 or IAS 18); and


  • the timing of revenue
    recognition.


The scope of the interpretation also includes agreements that
are not solely for the construction of real estate, but which include a
component for the construction of real estate.

Revenue recognition

Broadly, the analysis required by IFRIC 15 has four possible
outcomes with the following revenue recognition requirements in each case:


(1) Agreements meet the definition of a construction
contract in accordance with IAS 11 Construction Contracts – revenue recognised
by reference to the stage of completion of the contract activity (“stage of
completion approach”).

Example:
Company A, owner of the land, appoints Company B to construct a residential
property for a fixed sum of INR 1 million. Company A decides the technical
specifications of the residential property and will remain the owner of the
land as well as the constructed property. This will be a contract specifically
negotiated for construction of an asset as specified in paragraph 3 of IAS 11.

Accordingly, revenue will be recognised by the stage of
completion set out in IAS 11.

(2) Agreements which are only for rendering of services in
accordance with IAS 18 Revenue – stage of completion approach.

If an entity is not required to acquire and supply
construction materials, the agreement may be only an agreement for the
rendering of services, which need to be accounted for under IAS 18. For
example: an agreement to maintain a real estate property.

(3) Agreements for the sale of goods but the
revenue recognition criteria of IAS 18.14 are met continuously as construction
progresses – stage of completion approach.

Example: Company A, a real estate developer, who owns a
piece of land, enters into an agreement with Company B to construct a bungalow
on the aforementioned land for a fixed sum of INR 1 million. As per the terms
of the agreement, the title and risk and rewards of the land as well as the
property under construction get transferred to Company B.

This principle is discussed in further detail in the
following paragraphs. In case a transaction meets the continuous transfer of
risk and rewards criteria, Company A will recognise revenue by the stage of
completion approach set out in IAS 11.

(4) Agreements for the sale of goods other than those in
type 3 – revenue recognised when all of the criteria of IAS 18.14 are
satisfied (“sale of goods approach”).

Example:
Company A, a real estate developer, who owns a piece of land, enters into an
agreement with Company B to construct a bungalow on the aforementioned land
for a fixed sum of INR 1 million. The title to the land and the property under
construction gets transferred to Company B. However, Company A still continues
to have managerial involvement and control over the property under
construction (for e.g. Company A controls the design and specifications of the
property, Company B’s right to sell / let / sub-let the property is
established only on physical completion of the property etc.).



Principle of continuous transfer of risk and rewards

One of the practical difficulties faced in the above assessment is the identification of agreements, which will fulfil the continuous transfer of risk and rewards and control (i.e. those which fall with in type 3 above), and so qualify for stage of completion accounting on the grounds that the revenue recognition criteria of IAS 18.14 are met continuously as construction progresses.

The approach of meeting the revenue recognition criteria in IAS 18.14 on continuous basis has not previously been common under IFRS. Historically, it was generally assumed that the stage-of-completion method for construction of real estate was only ap-plicable if the activity fell within the scope of IAS
11. However, other GAAPs (like Indian GAAP for example) have permitted stage-of-completion basis more readily than was generally the case under IFRS, prior to IFRIC 15. IFRIC 15 itself does not provide extensive guidance on identifying when this approach may be appropriate, though it includes some simplistic illustrative examples.

Paragraph 17 of IFRIC 15 states the following:

“The entity may transfer to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as con-struction progresses. In this case, if all the criteria in paragraph 14 of IAS 18 are met continuously as construction progresses, the entity shall recognise revenue by reference to the stage of completion using the percentage of completion method. The requirements of IAS 11 are generally applicable to the recognition of revenue and the associated expenses for such a transaction”.

Paragraph 14 of IAS 18 states the following:

“14    Revenue from the sale of goods shall be recognised when all the following conditions have been satisfied:

  •     the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;

  •     the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

  •     the amount of revenue can be measured reliably;

  •     it is probable that the economic benefits associated with the transaction will flow to the entity; and

  •     the costs incurred or to be incurred in respect of the transaction can be measured reliably.”

Identifying indicators of continuous transfer under IAS 18.14

In the context of the requirement of paragraph 14 above, it will be important to identify which indicators / factors are more important to assess the question of whether continuous transfer is, or is not, occurring while the con-struction activity progresses.

Some factors, collectively or individually, may in-dicate that continuous transfer is occurring while construction progresses:

  •     The construction activity takes place on land owned by the buyer and the buyer has clear title to the land and the construction work in progress;

  •     The buyer cannot cancel the contract before the construction is complete;

  •     If the agreement is terminated before construc-tion is complete, the buyer retains the work in progress and the entity has the right to be paid for the work performed; and

  •     The agreement gives the buyer the right to take over the work in progress (albeit with a penalty) during construction, e.g., to engage a different entity to complete the construction.

Some other factors, collectively or individually, may indicate that continuous transfer is not occurring while construction progresses:

  •     The sales agreement gives the buyer the right to acquire a specified unit in an apartment building when it is ready for occupation;

  •     The sales agreement restricts the right of the buyer to sell / let or sub-let the property while under construction, or requires the developer’s explicit permission;

  •     The deposit paid by the buyer is refundable if the entity fails to deliver the completed unit in accordance with the contractual terms;

  •     The developer is required to perform significant obligations (for e.g. rental guarantee commitment) subsequent to completion of the property; and

  •     the balance of the purchase price is paid only on contractual completion, when the buyer obtains possession of its unit.

 

Other factors to be considered

It will be important to consider all the relevant facts and circumstances of the agreement before reaching a conclusion on which category the sale agreement should fall into. In addition to the illustrative examples set out in IFRIC 15, the following questions, collectively or individually, may provide indicators as to whether the continuous transfer of risk and rewards and control is met during the construction phase:

  •     Which party is able to sell / let / sublet or mortgage the property under construction?

  •     What are the rights of the buyer in case the developer is unable to complete the construction (i.e. if the developer files for bankruptcy)?

In such a case, will the buyer be able to enforce his rights on the property under construction? Will the buyer have preferential rights over other parties i.e. creditors of the developer?

  •     Are the payments made by the buyer to the developer held in an escrow account to be used solely for the construction of the property? Or are these funds available for the developer to fund his other projects?

  •     Which party bears the construction risk and which party bears the market risk related to the value of the property?

  •     Who bears the risk of loss or damage to the construction in progress and who pays the insurance cost of damage to the construction work? Who bears the loss in case the actual loss exceeds the insurance cover?

  •     Which party has the right to cancel / withdraw from the contract?

  •     Does the buyer have the right to complete the construction by replacing the developer?

Accounting for real estate development under current Indian GAAP

Based on the Guidance note on recognition of revenue by real estate developers issued by the Institute of Chartered Accountants of India, on the seller transferring all significant risks and rewards of ownership to the buyer, revenue can be recognised at that stage, provided the following conditions of AS 9, Revenue recognition, are fulfilled:
    a) no significant uncertainty exists regarding the amount of the revenue; and

    b) it is not reasonable to expect ultimate collection, provided the seller has no further substantial acts to complete under the contract.

However, in case the seller is obliged to perform any substantial acts after the transfer of all significant risks and rewards of ownership, revenue is recognised by applying percentage of completion method as stated under AS 7, Construction Contracts.

In India, the title to the property is considered to be transferred on entering into a sale deed / agreement to sell with the buyer. However, the developer retains control and has managerial involvement in the property under development till physical possession is handed over to the buyer. The developer also retains the significant obligation of completing and handing over the property to the buyer.

As the developer still retains the obligation to construct and deliver the property, revenue is generally recognised on stage of completion basis under Indian GAAP. However, the Guidance note on recognition of revenue by real estate developers does not explicitly require the entity to consider if the risk and rewards and control over the property under construction have been transferred to the buyer on a continuous basis throughout the construction period, as required by IAS 18 and IFRIC 15.

Summary

To summarise, under IFRS, there is specific guidance on when one can use the completed contract method vis -à-vis the stage of completion method, in order to recognise revenue from real estate development held for sale. IFRS lays emphasis on absence of continuing managerial involvement to the degree usually associated with ownership and effective control over the constructed real estate, which impact the timing of revenue recognition.

Further, determining whether an agreement falls within one of the four categories outlined earlier is not a matter of accounting policy choice, but rather an application of a single accounting policy to specific facts and circumstances. That is, the specific terms of each agreement should be analysed in the context of the relevant legal jurisdiction in
order to determine which of the aforementioned categories it falls into.

In case an entity wants to continue the current Indian GAAP mode of recognising revenue on percentage of completion basis (as per the Guidance note on recognition of revenue by real estate developers), it will have to make a positive assertion in respect of continuous transfer of risk and rewards and control (to be classified as a type 3 arrangement mentioned earlier) based on the various indicators discussed earlier in this article. This positive assertion will be based on facts and circumstances specific to each arrangement, taken individually or collectively. Such judgements in the application of the accounting policy will need to be disclosed in accordance with IFRIC 15.20(a).

Currently there is limited guidance available on ‘continuous transfer’ requirements in the nature of illustrative examples and this will be developed over a period of time. In the interim, there will continue to be some divergence in actual implementation of IFRIC 15, based on the legal laws practised in different geographies. Due to the practical challenges in being able to demonstrate continuous transfer of risk and rewards and control, IFRIC 15 will prompt more and more entities to recognise revenue on completion or delivery of the projects.

Companies — Minimum Alternate Tax — Credit is admissible against tax payable before calculating interest u/s.234A, u/s.234B and u/s.234C. Interpretation of statutes — A form prescribed under the rules can never have any effect on the interpretation or ope

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20 Companies — Minimum Alternate Tax — Credit is admissible
against tax payable before calculating interest u/s.234A, u/s.234B and u/s.234C.
Interpretation of  statutes — A form prescribed under the rules can never have
any effect on the interpretation or operation of the parent statute.


[CIT v. Tulsyan NEC Ltd., (2011) 330 ITR 226 (SC)]

The issue involved a batch of civil appeals filed by the
Department before the Supreme Court, related to the question of whether MAT
credit, admissible in terms of section 115JAA, had to be set off against tax
payable (assessed tax) before calculating interest u/s.234A, u/s.234B and
u/s.234C of the Income-tax Act, 1961 (the Act).

The Supreme Court, at the outset, observed that there was no
dispute with regard to the eligibility of the assessee for set-off of tax paid
u/s.115JA. The dispute was only with regard to the priority of adjustment for
the MAT credit.

The Supreme Court observed that the relevant provisions
u/s.115JAA of the Act, introduced by the Finance Act, 1997, with effect from 1st
April, 1997, i.e., applicable for the A.Y. 1997-1998 and onwards,
governing the carry forward and set-off of credit available in respect of tax
paid u/s.115JA, showed that when tax is paid by the assessee u/s.115JA, then the
assessee becomes entitled to claim credit of such tax in the manner prescribed.
Such a right gets crystallised no sooner tax is paid by the assessee u/s.115JA,
as per the return of income filed by the assessee for a previous year (say, year
one). [See section 115JAA(1)]. The said credit gets limited to the tax
difference between tax payable on book profits and tax payable on income
computed under the normal provisions of the Act [see section 115JAA(2)] in year
one. Such credit is, however, allowable for a period of five succeeding
assessment years, immediately succeeding the assessment year in which the credit
becomes available (say, years two to six) [See section 115JAA(3)]. However, the
MAT credit is available for set-off against tax payable in succeeding years
where the tax payable on income computed under the normal provisions of the Act
the exceeds tax payable on book profits computed for the year [See section
115JAA(4),(5)]. The statute envisages u/s.115JAA ‘credit in respect of the tax
so paid’, because the entire tax is not an automatic credit but has to be
calculated in accordance with sub-section(2) of section 115JAA. Sub-section.(4)
of section 115JAA allows ‘tax credit’ in the year tax becomes payable. Thus, the
amount of set-off is limited to tax payable on the income computed under the
normal provisions of the Act less the tax payable on book profits for that year.
[Refer section 115JAA(4) and section 115JAA(5)]. The Assessing Officer may vary
the amount of tax credit to be allowed, pursuant to completion of summary
assessment u/s.143(1) or regular assessment u/s.143(3) for year one, in terms of
section 115JAA(6). As a consequence of such variation, the tax credit to be
allowed for year one is liable to change. With every change in the amount of tax
payable on book profits and/or tax payable on income computed under the normal
provisions of the Act, the tax credit to be allowed would have to be changed by
the Assessing Officer by passing consequential orders, deriving authority from
section 115JAA(6) of the Act. Thus, the tax credit allowable can be set off by
the assessee while computing advance tax/self-assessment tax payable for years
two to six, limited to the difference between tax payable on income computed
under the normal provisions and tax payable on book profits in each of those
years, as per the assessee’s own computation. Although the right to avail of tax
credit gets crystallised in year one, on payment of tax u/s.115JA and the
set-off thereof, follows statutorily, the amount of credit available and the
amount of set-off to be actually allowed, as in all cases of
deductions/allowances u/s.30/u/s.37, is fluid/inchoate and subject to final
determination are only on adjudication of assessment either u/s.143(1) or
u/s.143(3). The fact that the amount of tax credit to be allowed or to be set
off is not frozen and is ambulatory, does not tax away/destroy the right of the
assessee to the amount of the tax credit.

In the cases before the Supreme Court, it was not in dispute
that the assessees were entitled to set off the MAT credit carried forward from
year one. In fact, the Assessing Officer did set off the MAT credit while
calculating the amount of tax payable for years two to six. However, while
calculating interest payable u/s.234B and u/s.234C, the Assessing Officer
computed the shortfall of tax payable without taking into account the set-off of
MAT credit.

The Supreme Court observed that u/s.234B, ‘assessed tax’
means tax on the total income determined u/s.143(1) or on regular assessment
u/s.143(3), as reduced by the amount of tax deducted or collected at source, in
accordance with the provisions of Chapter XVII, on any income which is subject
to such deduction or collection and which is taken into account in computing
such total income. The definition, thus, at the relevant time, excluded MAT
credit for arriving at assessed tax. This led to immense hardship. The position
which emerged was that due to the omission, on one hand, the MAT credit was
available for set-off for five years u/s.115JAA; but the same was not available
for set-off while calculating advance tax. This dichotomy was more spelt out
because section 115JAA did not provide for payment of interest on the MAT
credit. To avoid this situation, the Parliament amended Explanation 1 to section
234B by the Finance Act, 2006, with effect from 1st April, 2007, to provide
along with tax deducted or collected at source, the MAT credit u/s.115JAA also
to be deducted while calculating assessed tax.

The Supreme Court held that any tax paid in
advance/pre-assessed tax paid, can be taken into account in computing tax
payable subject to one caveat, viz., that where the assessee on the basis
of self-computation unilaterally claims set-off or the MAT credit, the assessee
does so at its risk, as in case it is ultimately found that the amount of tax
credit availed of was not lawfully available, the assessee would be exposed to
levy of interest u/s.234B on the shortfall in the payment of advance tax. The
Supreme Court reiterated that it was unable to accept the case of the
Department because it would mean that even if the assessee does not have to pay
advance tax; in the current year, because of his brought forward MAT credit
balance, he would nevertheless be required to pay advance tax, and if he fails,
interest u/s.234B would be chargeable. The consequence of adopting the case of
the Department would mean that the MAT credit would lapse after five succeeding
assessment years u/s.115JAA(3); that no interest would be payable on such credit
by the Government under the proviso to section 115JAA(2); and that the assessee
would be liable to pay interest u/s.234B and u/s.234C on the shortfall in the
payment of advance tax, despite existence of the MAT credit standing to the
account of the assessee.

The Supreme Court further held that it was immaterial that the relevant form prescribed under the Income-tax Rules, at the relevant time (i.e., before 1st April, 2007), provided for set-off of the MAT credit balance against the amount of tax plus interest i.e., after the computation of interest u/s.234B. This was directly contrary to a plain reading of section 115JAA(4). A form prescribed under the rules can never have any effect on the interpretation or operation of the parent statute.

Interconnect agreements — Transaction relating to technology should be examined by technical experts from the side of the Department before deciding the tax liability arising from such transaction.

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19 Interconnect agreements — Transaction relating to
technology should be examined by technical experts from the side of the
Department before deciding the tax liability arising from such transaction.


[CIT v. Bharti Cellular Ltd., (2011) 330 ITR 239 (SC)]

Respondent No. 1, a cellular service provider, had an
interconnected agreement with BSNL/MTNL. Under such agreement, Respondent No. 1
paid interconnect/access/port charges to BSNL/MTNL. Bharti Cellular, BSNL, MTNL,
Hutchison are all service providers. All are governed by National Standards of
CCS No. 7, issued by Telecom Engineering Centre. Under National Standards, M/s. Bharti Cellular Limited is required to connect its network with the network
of BSNL (the service provider) and similar concomitant agreement is provided
for, under which BSNL is required to interconnect its network with M/s. Bharti
Cellular Ltd.

The question basically involved in the lead case before the
Supreme Court was : whether tax was deductible by M/s. Bharti Cellular Ltd when
it paid interconnect charges/access/port charges to BSNL ?

The Supreme Court observed that the problem which arose in
such cases was that there was no expert evidence from the side of the Department
to show how human intervention takes place, particularly during the process when
calls take place, let us say, from Delhi to Nainital and vice versa. If,
for example, M/s. Bharti Cellular Ltd (in this example, in the judgment , it
appears that BSNL is inadvertently mentioned) had no network in Nainital,
whereas it had a network in Delhi, the interconnect agreement enabled M/s.
Bharti Cellular Ltd to access the network of BSNL in Nainital; and the same
situation could arise vice versa in a given case. During the traffic of
such calls, whether there is any manual intervention, was one of the points
which required expert evidence. Similarly, on what basis was the ‘capacity’ of
each service provider fixed when interconnection agreements were arrived at ?
For example, as informed, each service provider is allotted a certain
‘capacity’. On what basis such ‘capacity’ is allotted and what happens if a
situation arises where a service provider’s ‘allotted capacity’ gets exhausted
and it wants, on an urgent basis, ‘additional capacity’ ? Whether at that stage,
any human intervention was involved was required to be examined, which again
required technical data. According to the Supreme Court, these type of matters
could not be decided without any technical assistance available on record.

The Supreme Court directed the Assessing Officer (TDS) in
each case to examine a technical expert from the side of the Department and to
decide the matter. Liberty was also given to the respondents to examine its
expert and to adduce any other evidence.

The next question which arose was whether the Department was
entitled to levy interest u/s. 201(1A) of the Act or impose penalty for non-deduction of tax. The Supreme
Court was of the view, that in the facts and circumstances of the case, it would
not be justified for the following reasons : Firstly, there was no loss of
revenue. Though the tax had not been deducted by the payee, tax had been paid by
the recipient. Secondly, the question involved in the present cases before it
was the moot question of law, which was yet to be decided. The Supreme Court
would have closed the file because these cases were only with regard to levy of
interest but the matter was remitted to the Assessing Officer (TDS) only because
this issue was a live issue and it needed to be settled at the earliest. Once
the issue gets settled, the Department would be entitled to levy both a penalty
and an interest, but as far as the facts and circumstances of the cases before
it were concerned, the Supreme Court was of the view that the interest was not
justified at this stage. Consequently, it held that there would be no levy of
penal interest prior to the date of fresh adjudication order.

levitra

Assessment Order passed at the dictates of higher authority is a nullity – Though the revision and reassessment were held to be not maintainable, the Supreme Court in the exercise of its jurisdiction under 142 of the Constitution of India, directed the as

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29 Assessment Order passed at the dictates of higher
authority is a nullity – Though the revision and reassessment were held to be
not maintainable, the Supreme Court in the exercise of its jurisdiction under
142 of the Constitution of India, directed the assessment to be reopened by the
Commissioner of Income Tax, Delhi.


[CIT vs Greenworld Corporation, (2009)

314 ITR 81 (SC)]

M/s Green World Corporation, a partnership concern of Shri R.
S. Gupta and his wife Smt. Sushila Gupta, had set up two units for manufacturing
exercise books, writing pads, etc., at Parwanoo, in the state of Himachal
Pradesh, in the year 1995. The said units were established after declaration and
enforcement of a policy for tax holiday for a certain period specified in the
Union Budget. They had also set up a third unit for manufacturing computer
software. They started filing income-tax returns from the assessment year
1996-97 showing huge profits. In the return for the assessment year 2000-01,
they disclosed their total sales to the tune of Rs 1, 51, 69,515, of which a sum
of Rs 74, 69,314 was shown as net profit. Thus, the profits bore a proportion of
49 per cent to the gross sales. For the earlier assessment year, i.e.,
1999-2000, the proportion of the net profit to the total sales was as high as 66
per cent; of the total sales of Rs 2,97,12,106, net profits were declared to be
to the tune of Rs 1,96,77,631. For the subsequent three assessment years, i.e.,
2001-02, 2002-03 and 2003-04, the proportion of net profit to the gross sales
were 81 per cent, 95 per cent and 95 per cent respectively. The total investment
on plant and machinery for Unit No. I was shown to be just Rs 1, 25,000, and a
very small amount of money was shown to have been spent on plant and machinery
for the second unit.

On or about February 7, 2000, the Assessing Officer (“AO” )
conducted a survey at the premises of the assessee in terms of section 133A of
the Income-tax Act, 1961 (hereinafter referred to for the sake of brevity as,
“the said Act”) and verified for herself the following: (a) factum of the
existence and actual working of the unit; (b) installation of plant and
machinery working with the aid of power; (c) presence of requisite number of
workers, some of whose statements were recorded; (d) availability of stock of
raw, semi-finished and finished material prior to the assessment year 2000-01.
On or about December 19, 2002, the AO, after completing the proceeding for
assessment, passed an order for the assessment year 2000-01, accepting the
income returned by the assessee.

In the said order of assessment, the AO recorded a note which
read as follows:

“The case was thoroughly discussed with (sic) records and
relevant worthy Commissioner of Income Tax, Shimla, in the presence of the
learned Additional Commissioner of income Tax, Solan Range, Solan. Commissioner
of Income Tax has directed that since the reply submitted by the assessee is
satisfactory and up to the mark, no more information is required to be called
for and to assess the case as such. He, therefore, directed in presence of the
learned Additional Commissioner of Income-tax, Solan Range, Solan, to
incorporate that discussion in the body of the order sheet. A copy of the draft
assessment order was sent to the Additional Commissioner of Income Tax, Solan
Range, Solan, under the office letter No. ITO/PWN. 2002/03/2127, dated December
13, 2002, for according necessary approval. Approval to complete the assessment
was received telephonic from the office of the Additional Commissioner of
Income-tax, Solan Range, Solan, and assessment has been completed and the
assessment order has been served upon the assessee on December 19, 2002”.

The Commissioner of Income Tax (‘CIT”, for short), on whose
dictates the order of assessment, dated December 19, 2002, purported to have
been passed, was transferred and his successor, on or about December 5, 2003,
issued notice to the assessee under section 263 of the Act for the assessment
year 2000-01 only, inter alia, on the premise that the said order of assessment
dated December 19, 2002, was prejudicial to the interests of the revenue.

The CIT (Shimla) passed an order dated July 12, 2004, under
section 263 of the Act, inter alia, on the premise that the AO, while finalizing
the assessment had not examined the case properly. In the said order, the
following directions were issued:

a. To estimate the assessee’s income from the units at
Parwanoo at 5 per cent of the declared turnover. The income shown in excess of
5 per cent was to be treated as undisclosed income from undisclosed sources.

b. As the assessee did not fulfil many of the conditions
for being entitled to deduction under section 80-IA/IB, no part of total
income — not even the income estimated at 5 per cent of the turnover at
Parwanoo — would be entitled for deduction u/s. 80-IA/IB.

c. To charge interest under section 234B/C for non-payment
of advance tax.

d. To initiate penalty proceedings under section 271(1)
(c).

e. To examine the case records for all the preceding
assessment years including those for the assessment year 1996-97, and initiate
necessary proceedings under section 148, within a week.

f. To examine the succeeding assessment years also, i.e.,
the assessment year 2001-02, 2002-03 and 2003-04 and initiate appropriate
action under section 148/143(2), as may be applicable, in a week’s time.

The assessee preferred an appeal against the order dated July
12, 2004, before the Income Tax Appellate Tribunal (for short “ITAT”). In its
memo of appeal, the assessee raised contentions relating to: (1) Jurisdiction,
(2) Bias on the part of the CIT (Shimla), and (3) On the merits of the matter.

By reason of an order dated April 15, 2005, the ITAT allowed
an appeal filed by the assessee, setting aside the order of the CIT (Shimla) on
the jurisdictional issue alone. It did not enter into the merits of the matter.

Pursuant to the said order dated July 12, 2004 or in
furtherance thereof, notices under section 148 of the Act were issued to the
assessee for the assessment year 1996-97 to 1999-2000, 2001-02 and 2002-03.

On or about July 5, 2005, a notice under section 148 of the
Act was also issued for the assessment year 2000-01.

The assessee questioned the legality of the notice under
section 148 of the Act by filing a writ petition before the Himachal Pradesh
High Court.

Also, the CIT (Shimla) preferred an appeal before the High
Court under section 260A of the Act.

The High Court by its order dated March 2, 2006, while
allowing the appeal filed by the CIT (Shimla), dismissed the writ petitions
filed by the assessee.

On an appeal, the Supreme Court held that section 263 provides for a power of revision. It has its own limitations. An order can be interfered with suo motu by the said authority not only when an order passed by the AO is erroneous but also when it is prejudicial to interests of the revenue. Both the conditions for exercising the jurisdiction under section 263 of the Act are conjunctive and not disjunctive. An order of assessment should not be interfered with only because another view is possible.

The Supreme Court held that only in terms of the directions issued by the Commissioner under section 263 of the Act, notices under section 148 were issued. The CIT (Shimla) had no jurisdiction to issue directions. Notices issued pursuant thereto would be bad in law.

The Supreme Court considered the effect of the “noting” made by the Assessing Officer. The Supreme Court observed that the noting was specific. It was stated so in the proceedings sheet at the instance of higher authorities. No doubt in terms of the circular letter issued by the CBDT, the Commissioner or for that matter any other higher authority may have supervisory jurisdiction, but it is difficult to conceive that even the merit of the decision shall be discussed and the same shall be rendered at the instance of the higher authority who, as noticed hereinabove, is a supervisory authority. It is one thing to say that while making the orders of assessment the AO shall be bound by statutory circulars issued by the Central Board of Direct Taxes, but it is another thing to say that the assessing authority, exercising a quasi judicial function and keeping in view the scheme contained in the Act, would lose its independence to pass an order of assessment. The Supreme Court held that when a statute provided for different hierarchies and forums in relation to passing of an order as also appellate or original order, by no stretch of imagination can a higher authority interfere with the independence, which is the basic feature of any statutory scheme involving adjudicatory process.

The Supreme Court, in its conclusion observed that the case before it posed some peculiar questions. Whereas the order under section 263 and consequently the notices under section 148 have been held to be not maintainable, the Supreme Court was constrained to think that the AO had passed an order at the instance of the higher authority, which was illegal. The Supreme Court was of the view that for the aforementioned purpose, it may not go into the question of the authorities acting bona fide or otherwise under the Income Tax Act. They might have proceeded bona fide, but the assessment order passed by the AO on the dictates of the higher authorities being wholly without jurisdiction, was a nullity.

The Supreme Court, therefore, was of the opinion that with a view to do complete justice between the parties, the assessment proceedings should be gone through again by the appropriate assessing authorities. The Supreme Court, therefore, in the exercise of jurisdiction under article 142 of the Constitution of India, directed the assessment to be reopened by the CIT, Delhi.

Interest u/s.234B — Interest can be charged on tax calculated on book profits u/s.115JA/115JB.

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18 Interest u/s.234B — Interest can be charged on tax
calculated on book profits u/s.115JA/115JB.


[Joint CIT v. Rolta Indian Ltd., (2011) 330 ITR 470
(SC)]

The question which arose for determination before the Supreme
Court was whether interest u/s.234B can be charged on the tax calculated on book
profits u/s.115JA ? In other words, whether advance tax was at all payable on
book profits u/s.115JA ?

The assessee furnished a return of income on 28th November,
1997, declaring total income of Rs. Nil. On 28th March, 2000, an order
u/s.143(3) was passed determining the total income at nil after set-off of
unabsorbed business loss and depreciation. The tax was levied on the book profit
worked out at Rs.1,52,61,834, determined as per the provisions of section 115JA.
The interest u/s.234B of Rs.39,73,167 was charged on the tax on book profit, as
worked out in the order of assessment. Aggrieved by the said order, the assessee
went in appeal before the Commissioner of Income-tax (Appeals). The appeal on
the question in hand was dismissed. On charging of interest u/s.234B, the appeal
was dismissed by the Tribunal on the ground that the case fell u/s.115JA and not
u/s.115J, hence, the judgment of the Karnataka High Court in the case of Kwality
Biscuits Ltd. was not applicable. At one stage, the Bombay High Court decided
the matter in favour of the Department, but later on, by way of review, it took
the view, following the judgment of the Karnataka High Court in the case of
Kwality Biscuits Ltd., that interest u/s.234B cannot be charged on tax
calculated on book profits. Hence, the Commissioner of Income-tax went to the
Supreme Court by way of civil appeal.

The Supreme Court held that section 207 envisages that tax
shall be payable in advance during the financial year on current income, in
accordance with the scheme provided in section 208 to
section 219, in respect of the total income of the assessee that would be
chargeable to tax for the assessment year immediately following that financial
year. Section 215(5) of the Act defines what is ‘assessed tax’. Tax determined
on the basis of regular assessment, so far as such tax relates to advance tax.
The evaluation of the current income and the determination has to be made
comprising section 115J/115JA of the Act. Hence, levying of interest was
inescapable. The Supreme Court further held that it was clear from reading
section 115JA and section 115JB that a specific provision is made on that
section, which says all the provisions of the Act shall apply to the MAT
company. Further, amendments have been made in relevant Finance Acts, providing
for payment of advance tax u/s.115JA and u/s.115JB. As far as interest leviable
u/s.234B was concerned, the Supreme Court held that the section was clear in
that it applied to all companies.

The Supreme Court further held that the pre-requisite condition for applicability of section 234B is that the assessee
is liable to pay tax u/s.208 and the expression ‘assessed tax’ is defined to
mean tax on the total income determined u/s.143(1) or u/s.143(3), as reduced by
the amount of tax deducted or collected at source. Thus, there is no exclusion
of section 115JA in the levy of interest u/s.234B. The expression ‘assessed tax’
is defined to mean tax assessed on regular assessment which means tax determined
on the application of section 115J/115JA in the regular assessment.

The Supreme Court observed that the question which remained to be considered was whether the assessee, which is a MAT company, was not in a position to estimate its profits of the current year prior to the end of the financial year on 31st March. In this connection, the as-sessee had placed reliance on the judgment of the Karnataka High Court in the case of Kwality Biscuits Ltd. v. CIT, reported in (2000) 243 ITR 519; and, according to the Karnataka High Court, the profit as computed under the Income-tax Act, 1961 had to be prepared and thereafter the book profit, as contemplated u/s.115J of the Act, had to be determined; and then, the liability of the assessee to pay tax u/s.115J of the Act arose only if the total income, as computed under the provisions of the Act, was less than 30% of the book profit. According to the Karnataka High Court, this entire exercise of computing income or the book profits of the company, could be done only at the end of the financial year; and, hence, the provisions of section 207, section 208, section 209 and section 210 (predecessors of section 234B and section 234C) were not applicable until and unless the accounts stood audited and the balance-sheet stood prepared; because till then even the assessee may not know whether the provisions of section 115J would be applied or not. The Court, therefore, held that the liability would arise only after the profit is determined in accordance with the provisions of the Companies Act, 1956 and, therefore, interest u/s.234B and u/s.234C is not leviable in cases where section 115J is applied. This view of the Karnataka High Court in Kwality Biscuits Ltd. was not shared by the Gauhati High Court in Assam Bengal Carriers Ltd. v. CIT, reported in (1999) 239 ITR 862; and the Madhya Pradesh High Court in Itarsi Oil and Flours (P) Ltd. v. CIT, reported in (2001) 250 ITR 686; as also by the Bombay High Court in the case of CIT v. Kotak Mahindra Finance Ltd., reported in (2003) 130 Taxman 730 which decided the issue in favour of the Department and against the assessee. It appeared that none of the assessees challenged the decisions of the Gauhati High Court, Madhya Pradesh High Court as well as the Bombay High Court in the Supreme Court. The Supreme Court observed that the judgment of the Karnataka High Court in Kwality Biscuits Ltd. was confined to section 115J of the Act. The order of the Supreme Court dismissing the special leave petition in limine filed by the Department against Kwality Biscuits Ltd. was reported in (2006) 284 ITR 434. Thus, the judgment of the Karnataka High Court in Kwality Biscuits Ltd. stood affirmed. However, the Karnataka High Court had thereafter, in the case of Jindal Thermal Power Co. Ltd. v. Deputy CIT, reported in (2006) 154 Taxman 547, distinguished its own decision in the case of Kwality Biscuits Ltd. (supra) and held that section 115JB, with which the Supreme Court was concerned, was a self-contained code pertaining to MAT, which imposed liability for payment of advance tax on MAT companies; and, therefore, where such companies defaulted in payment of ad-vance tax in respect of tax payable u/s.115JB, it was liable to pay interest u/s.234B and u/s.234C of the Act. The Supreme Court, therefore, concluded that interest u/s.234B and u/s.234C would be payable on failure to pay advance tax in respect of tax payable u/s.115JA/115JB. The Supreme Court further held that for the aforestated reasons, Circular No. 13 of 2001, dated November 9, 2001 issued by the Central Board of Direct Taxes, reported in (2001) 252 ITR (St.) 50, had no application. Moreover, in any event, para 2 of that Circular itself indicated that a large number of companies liable to be taxed under the MAT provisions of section 115JB were not making advance tax payments. In the said Circular, it had been clarified that section 115JB was a self-contained code and thus, all companies were liable for payment of advance tax u/s.115JB, and consequently the provisions of section 234B and section 234C, imposing interest on default in payment of advance tax, were also applicable.

Manufacture or production of article – Ship breaking activity gives rise to the production of a distinct and different article

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28 Manufacture or production of article – Ship breaking
activity gives rise to  the production of a distinct and  different article


[Vijay Ship Breaking Corporation & Ors. vs CIT, (2009) 314
ITR 309 (SC)]

The assessee firm was engaged in the business of ship
breaking at Alang port during the previous year, relevant to the assessment year
1995-96. Old and condemned ships were acquired by the assessee for demolishing.
The Assessing Officer in his order, inter alia, applying the ratio of decision
in CIT vs N.C. Budharaja & Co. [204 ITR 412 (SC), held that ship breaking would
not constitute a manufacturing activity and, therefore, disallowed the claim of
deductions u/s. 80 HH and 80-I of the Act. The Commissioner of Income Tax
(Appeals) agreed with the above view of the Assessing Officer. On appeal, the
Tribunal, relying on the decision in Ship Scrap Traders (251 ITR 806) and
Virendra & Co. vs ACIT (251 ITR 806), inter alia, held that ship breaking
results in production of articles and amounts to manufacture, and that
deductions should be allowed to the assessee under sections 80HH and 80-I of the
Act. On appeal by the revenue, the High Court, inter alia, reversed the order of
the Tribunal holding that ship breaking activity is not an activity of
manufacture or production of any article or thing for the purpose of availing of
the benefit of deductions under section 80HH and 80I of the Act.

On appeal by the assessee, the Supreme Court observed that
the impugned judgment of the Gujarat High Court proceeds on the basis that when
a ship breaking activity is undertaken, the articles which emerged from the
activity continued to be part of the ship; such parts did not constitute new
goods and, consequently, the assessee was not entitled to claim the benefits
under sections 80HH and 80-I of the 1961 Act, as there was neither production
nor manufacture of new goods by the process of ship breaking.

The Supreme Court held that the legislature has used the
words “manufacture” or “production”. Therefore, the word “production” cannot
derive its colour from the word “manufacture”. Further, even in accordance with
the dictionary meaning of the word “production” , the word “produce” is defined
as something which is brought forth or yielded either naturally or as a result
of effort and work (see Webster’s New International Dictionary). It is important
to note that the word “new” is not used in the definition of the word “produce”.
The Supreme Court also drew support from its judgment in CIT vs Sesa Goa Ltd
[2004] 271 ITR 331, which affirmed the judgment of the Bombay High Court in the
case of Ship Scrap Traders (supra). The Supreme Court held that the Tribunal, in
the present case, was right in allowing the deductions under section 80 HH and
80-I to the assessee, holding that the ship breaking activity gave rise to the
production of a distinct and different article.

Another question that arose before the Supreme Court in this
petition was whether the assessee was bound to deduct TDS under section 195(1)
of the Act, in respect of usance interest paid for the purchase of vessel for
ship breaking. The Supreme Court held that it was not required to examine this
question because after the impugned judgment which was delivered on March 20,
2003, the Income Tax Act was amended on September 18, 2003, with effect from
April 1, 1983. By reason of the said amendment, Explanation 2 was added to
section 10(15) (iv) (c). On reading Explanation 2, it was clear that usance
interest was exempt from payment of income-tax, if paid in respect of ship
breaking activity. The assessee was not bound to deduct tax at source once
Explanation 2 to section 10(15)(iv)(c) stood inserted, as TDS arises only if the
internet is assessable in India. And since internet was not assessable in India,
there was no question of TDS being deducted by the assessee.

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Business Expenditure – Allowable only on actual payment – Bank guarantee is nothing but a guarantee for payment on some happening and cannot be equated with actual payment as required under section 43B of the Act for allowance as deduction in the computat

New Page 127 Business Expenditure – Allowable only on actual payment –
Bank guarantee is nothing but a guarantee for payment on some happening and
cannot be equated with actual payment as required under section 43B of the Act
for allowance as deduction in the computation of profits – Bottling Fees is
neither cess nor tax, hence does not fall within the purview of section 43B.


[CIT vs Mc Dowell & Co. Ltd. (No.1), (2009)

314 ITR 167 (SC)]

 

The dispute relates to the assessment year 1988-89. The
question arose in the background of the view of the Assessing Officer as well as
the Commissioner of Income Tax (Appeals), Jodhpur (in short “the Commissioner”),
that the assessee was not entitled to deductions in terms of section 43B of the
Act. The amount in question related to payability of excise duty on wastage. The
assessee took the stand that the provision for excise duty made on wastage of
IMFL in transit which is debited to the customer’s account and credited to this
account does not attract section 43B of the Act. The Income Tax Officer as well
as the Commissioner held that the assessee’s stand was not acceptable. An appeal
was filed before the Income-tax Appellate Tribunal, Jodhpur Bench, Jodhpur (in
short “the ITAT”) which decided the issue in favour of the assessee. In the High
Court, the assessee took the stand that a bank guarantee had been furnished in
respect of the amount and, therefore, there was no scope for applying section
43B of the Act. It was also submitted that section 43B of the Act applied to
payments relatable to tax, duty, cess, or fee. But bottling fees, chargeable
from the assessee under the Rajasthan Excise Act, 1950 (in short “the Excise
Act”) and the Rajasthan Excise Rules, 1962 (in short “the Rules”), and interest
chargeable for late
payment, did not amount to tax, duty and cess. The High Court held that such
fees were not covered under the ambit of section 43B.

The revenue appealed against the said view of the High Court
which, nevertheless, held that furnishing of bank guarantee was not the same as
making payment as stipulated in section 43B of the Act. The Supreme Court held
that the requirement of section 43B of the Act is actual payment and not deemed
payment as condition precedent for making the claim for deduction in respect of
any of the expenditure incurred by the assessee during the relevant previous
year specified in section 43B. The furnishing of bank guarantee cannot be
equated with actual payment which requires that money must flow from the
assessee to the public exchequer, as required under section 43B. By no stretch
of imagination can it be said that furnishing of bank guarantee is actual
payment of tax or duty in cash. The bank guarantee is nothing but a guarantee
for payment on some happening and that cannot be actual payment as required
under section 43B of the Act for allowance as deduction in the computation of
profits.

The Supreme Court further held that section 43B, after
amendment with effect from April 1, 1989, refers to any sum payable by the
assessee by way of tax, duty or fee by whatever name called under any law for
the time being in force. The basic requirement, therefore, is that the amount
payable must be by way of tax, duty and cess under any law for the time being in
force. The bottling fees for acquiring a right of bottling of IMFL which is
determined under the Excise Act and rule 69 of the Rules is payable by the
assessee as consideration for acquiring the exclusive privilege. It is neither
fee nor tax but the consideration for grant of approval by the government as
terms of contract in the exercise of its rights to enter into a contract in
respect of the exclusive right to deal in bottling liquor in all its
manifestations. Referring to various precedents on the subject, the Supreme
Court concluded that the High Court was justified in holding that the amount did
not fall within the purview of section 43B.

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Circulars — Issued by the Board — It is not open to the officers administering the law working under the Board to say that the Circulars issued by Board are not binding on them.

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 17 Circulars — Issued by the Board — It is
not open to the officers administering the law working under the Board to say
that the Circulars issued by Board are not binding on them.


[State of Kerala & Ors. v. Kurian Abraham Pvt. Ltd. & Anr.,
(2008) 303 ITR 284 (SC)]

M/s. Kurian Abraham Pvt. Ltd., the assessee, was engaged in
the business of buying rubber, processing the same and selling the processed
rubber. The assessee purchases field latex (raw material) in Kerala, but since
its processing factories were in Tamil Nadu, it transported field latex to Tamil
Nadu for processing into centrifuged latex and returned it back to Kerala.
Thereafter, the centrifuged rubber was sold by the assessee either locally in
Kerala or inter-State.

With respect to centrifuged latex sold locally, the assessee
claimed exemption from payment of tax on the purchase turnover of field latex
(raw rubber). With respect to inter-State sale of centrifuged latex, the
assessee paid the tax under KGST Act on the purchase of field latex and claimed
exemption in respect of (‘CST’) under Notification S.R.O. No. 173/93 read with
S.R.O. No.215/97. The returns filed by the assessee were accepted by the
Assessing Officer.

They were also accepted by the Department on the basis of
Circular No. 16/98, dated May 28, 1998 issued by the Board of Revenue
u/s.3(1A)(c). Under the said Circular, field and centrifuged latex were treated
as one and the same commodity in view of entry 110 of the First Schedule to the
1963 Act.

During the interregnum, in the case of Padinjarekkara
Agencies Ltd. v. Assistant Commissioner
reported in (1996) 2 KLT 641, a
learned single judge of the Kerala High Court took the view that centrifuged
latex is a commercially different product from field latex.

In view of the judgment of the High Court in Padinjarekkara’s
case, notices were issued by the Department proposing to reopen KGST and CST
completed assessments.

The Department also reopened the assessments on the ground
that the assessee had taken field latex and, therefore, the assessee was liable
to sales tax on the sales turnover of centrifuged latex under entry 110(a)(ii)
on the ground that the assessee had sold centrifuged latex brought from outside
the State of Kerala.

Aggrieved by the reopening of the assessments, the
respondent-assessee moved the High Court under Article 226 of the Constitution
for quashing the orders of reassessment, inter alia, on the ground that
they were contrary to the said Circular No. 16/98 issued by the Board of Revenue
(Taxes). The writ petition filed by the assessee stood allowed. Hence, civil
appeals were filed by the Department. The Supreme Court noted that the judgment
of the Kerala High Court in Padinjarekkara’s case related to A.Ys. 1983-84 to
1986-87 during which time Entries 38 and 39 were in force, whereas the present
case was concerned with the A.Ys. 1997-98 and 1998-99 when Entry 110 was in
force. That the structure of Entries 38 and 39 which existed in the past was
materially different from the structure of Entry 110.

The Supreme Court after taking note of Entries 38 and 39
which were substituted from 1-4-1988 and also Circular No. 16/98, dated
28-5-1998 clarifying that with effect from April 1, 1988, the judgment in
Padinjarekkara Agencies’ case cannot have any application for deciding whether
centrifuged latex is a commodity commercially different from latex, the Supreme
Court held that the said Circular granted administrative relief to the business.
It was entitled to do so. Therefore, it cannot be said that the Board had acted
beyond its authority in issuing the said Circular. Whenever such binding
Circulars are issued by the Board granting administrative relief(s) business
arranges its matters relying on such Circulars. Therefore, as long as the
Circular remains in force, it is not open to the subordinate officers to contend
that the Circular is erroneous and not binding on them. The Supreme Court
further held that in the present case, completed assessments were sought to be
reopened by the Assessing Office on the ground that the said Circular No. 16/98
was not binding. Such an approach was unsustainable in the eyes of law. If the
State Government was of the view that such Circulars are illegal or that they
were ultra vires S. 3(IA), which it was not, it was open to the State to
nullify/withdraw the said Circular. The said Circular had not been withdrawn. In
the circumstance, it was not open to the officers administering the law working
under the Board of Revenue to say that the said Circular was not binding on
them.


Note : The Supreme Court has made following observations
in its judgment : “The administration is a complex subject. It consists of
several aspects. The Government needs to strike a balance in the imposition of
tax between collection of revenue on one hand and business-friendly approach on
the other hand. Today, the Government has realised that in matters of tax
collection, difficulties faced by the business have got to be taken into
account. Exemption, undoubtedly, is a matter of policy. Interpretation of an
entry is undoubtedly a quasi-judicial function under the tax laws. Imposition of
taxes consists of liability, quantification of liability and collection of
taxes. Policy decisions have to be taken by the Government. However, the
Government has to work through its senior officers in the matter of difficulties
which the business may face, particularly in matters of tax administration. That
is where the role of the Board of Revenue comes into play. The said Board takes
administrative decisions, which includes the authority to grant administrative
reliefs. This is the underlying reason for empowering the Board to issue orders,
instructions and directions to the officers under it.”

 

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Film production — Amortisation of expenses — Amortisation loss computed under Rule 9A is not subject to provisions of S. 80 and S. 139 of the Act.[CIT v. Joseph Valakuzhy, (2008) 302 ITR 190 (SC)]

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18 Film production — Amortisation of
expenses — Amortisation loss computed under Rule 9A is not subject to provisions
of S. 80 and S. 139 of the Act.

[CIT v. Joseph Valakuzhy, (2008) 302 ITR 190 (SC)]

During the previous year relevant to the A.Y. 1992-93, the
assessee, a film producer, produced two films, namely, (i) Ex Kannikcodi; and
(ii) Santhwanam. While the first film was released and
exhibited for more than 180 days, the second film was released and exhibited for
less than 180 days. In his return of income, the assessee claimed the benefit of
carry forward of Rs.39,43,830 as amortisation expenses relying on Rule 9A(3)
which according to the assessee provided that the cost of production of the film
equal to the amount realised by the film producer by exhibiting the films that
year should be allowed as deduction in computing the profit and loss of the said
previous year and the balance, if any, carried forward to the next following
previous year and allowed as deduction in that year.

The Assessing Officer allowed the amortisation as claimed.
But the Commissioner of Income Tax in exercise of the power u/s.263 of the Act
set aside the order and directed the Assessing Officer to withdraw the benefit
of loss in view of S. 80, as the assessee had not filed his return of income
within the time prescribed u/s.139(3) of the Act.

The assessee filed an appeal to the Tribunal against the
order passed u/s.263. In the meantime, the Assessing Officer passed a fresh
assessment order in terms of the order passed in revision. The assessee filed an
appeal before the CIT(A) against the said order.

The CIT(A) took the view that S. 80 of the Act could not be
applied to the situation to which Rule 9A(3) was applicable. The CIT(A) however
found that the computation of amortisation expenses to be carried forward, as
shown by the assessee was not correct. The CIT(A) directed the AO to obtain
separate accounts in respect of the different films produced by the assessee and
determine the claim of the amortisation in accordance with the Rule 9A,
clarifying that in case there was a loss in respect of the old film on such
computation, that would have to be subject to the provisions of S. 139(3) and S.
80 of the Act. In regard to the second film, it was held that the amortisation
allowance for the next year was not subject to the provisions of S. 80 and S.
139(3) of the Act.

 

Being aggrieved by the order of the CIT(A), the Revenue filed
an appeal before the Tribunal. Both the appeals were taken up together for
hearing by the Tribunal and were dismissed with certain clarifications.

 

The High Court held that the amortisation loss computed under
Rule 9A was not subject to the provisions of S. 80 and S. 139 of the Act.

 

On appeal, the Supreme Court held that the balance cost of
production which amortised under Rule 9A(2) and allowed as deduction for the
next year is not a business loss. Admittedly, the second film Santhwanam was not
exhibited for a period of 180 days in the previous year, and had not covered the
cost of production of the film. The assessee was therefore entitled to carry
forward the balance of the cost of production to the next following previous
year and claim deduction of the same in the year. The Supreme Court therefore
dismissed the appeals.

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Refund of TDS to deductor: Circular No. 285, dated 21-10-1980: A.Ys. 2002-2003 and 2003-2004: Interest payable to IDBI not accruing to it and not liable to tax: Tax paid by petitioner by way of TDS in respect of said interest is to be refunded to petition

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56 Refund of TDS to deductor: Circular No. 285, dated
21-10-1980: A.Ys. 2002-2003 and 2003-2004: Interest payable to IDBI not accruing
to it and not liable to tax: Tax paid by petitioner by way of TDS in respect of
said interest is to be refunded to petitioner.


[Pasupati Acrylon Ltd. v. CBDT, 237 CTR 138 (Del.)]

For the A.Ys. 2002-2003 and 2003-2004, the petitioner company
had deducted tax at source of Rs.40,65,917 and Rs.51,59,393, respectively, on
the interest payable to IDBI and had deposited the said amount in the Government Treasury by
way of TDS. It was then found that the interest did not accrue to IDBI and
accordingly was not liable to tax. Therefore, the petitioner applied for the
refund of the amount of TDS so deposited, but the application was rejected.

The petitioner filed a writ petition against the said
rejection order. The Delhi High Court allowed the writ petition and held as
under :

“Interest payable by the petitioner to IDBI not having
accrued to it and not liable to tax, the tax paid by the petitioner by way of
TDS in respect of the said interest is to be refunded to the petitioner in view
of Circular No. 285, dated 21-10-1980.”

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Survey: Section 133A of Income-tax Act, 1961: A.Y. 2005-06: An admission made during survey is not conclusive : It is subject to the other evidence explaining the discrepancy.

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57 Survey: Section 133A of Income-tax Act, 1961: A.Y.
2005-06: An admission made during survey is not conclusive : It is subject to
the other evidence explaining the discrepancy.


[CIT v. Dhingra Metal Works, 196 Taxman 488 (Del.)]

During the course of a survey at the business premises of the
assessee-firm, the tax officials noticed some discrepancies in stock. One of the
partners of the assessee could not explain the difference at that time and,
therefore, to get a peace of mind, certain additional income was offered for
assessment. Subsequently, the assessee submitted that the statement of the
partner about the stock was incorrect; and that the impugned discrepancy had
been reconciled as it was only a mistake. Consequently, the assessee withdrew
the offer of additional income for taxation on account of excess stock. However,
the Assessing Officer did not accept the assessee’s claim and made an addition
as per the statement recorded in the course of survey. 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) From a reading of section 133A, it is apparent that it
does not mandate that any statement recorded u/s.133A would have an
evidentiary value. For a statement to have evidentiary value, the Survey
Officer should have been authorised to administer oath and to record sworn
statement. This would also be apparent from section 132(4).

(ii) It is apparent that while section 132(4) specifically
authorises an officer to examine a person on oath, section 133A does not
permit the same.

(iii) Moreover, the word ‘may’ used in section 133A(iii)
clarifies beyond doubt that the material collected and the statement recorded
during the survey are not conclusive piece of evidence by themselves.

(iv) In any event, it is a settled law that though an
admission is extremely important piece of evidence, it cannot be said to be
conclusive and it is open to the person, who has made the admission, to show
that it is incorrect.

(v) Since in the instant case, the assessee had been able
to explain the discrepancy in the stock found during the course of survey by
production of relevant record including the excise register of its associate
company, the Assessing Officer could not have made the aforesaid addition
solely on the basis of the statement made on behalf of the assessee during the
course of survey.

(vi) In view of the aforesaid, instant appeal being bereft of merit, was to
be dismissed.”

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Notice: Signing v. Issue of : Limitation: Section 148 and section 149 of Income-tax Act, 1961: A.Y. 2003-04 : Notice u/s.148 signed on 31-3-2010 but sent to the speed-post centre on 7-4-2010: Notice issued on 7-4-2010 i.e., beyond period of limitation of

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55 Notice: Signing v. Issue of : Limitation: Section 148 and
section 149 of Income-tax Act, 1961: A.Y. 2003-04 : Notice u/s.148 signed on
31-3-2010 but sent to the speed-post centre on 7-4-2010: Notice issued on
7-4-2010 i.e., beyond period of limitation of six years : Notice not valid.


[Kanubhai M. Patel (HUF) v. Hiren Bhat, 237 CTR 544 (Guj.)]

For the A.Y. 2003-2004, the Assessing Officer signed the
notice u/s.148 on 31-3-2010, but the notice was sent to the speed-post centre
for booking on 7-4-2010. The assessee filed a writ petition and challenged the
validity of the notice on the ground of the period of limitation.

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

“(i) The expression ‘to issue’ in the context of issuance
of notices, writs and processes, has been attributed the meaning, to send out;
to place in the hands of the proper officer for service. The expression ‘shall
be issued’ as used in section 149 would therefore have to be read in the
aforesaid context.

(ii) In the present case, the impugned notices have been
signed on 31-3-2010, whereas the same were sent to the speed-post centre for
booking only on 7-4-2010. Considering the definition of the word ‘issue’, it
is apparent that merely signing the notice on 31-3-2010, cannot be equated
with issuance of notice as contemplated u/s.149.

(iii) The date of issue would be the date on which the same
were handed over for service to the proper officer, which in the facts of the
present case would be the date on which the said notices were actually handed
over to the post office for the purpose of booking for the purpose of
effecting service on the petitioners. Till the point of time the envelops were
properly stamped with adequate value of postal stamps, it cannot be stated
that the process of issue is complete.

(iv) In the facts of the present case, the impugned notices
having been sent for booking to the speed-post centre only on 7-4-2010, the
date of issue of the said notices would be 7-4-2010 and not 31-3-2010, as
contended on behalf of the Revenue.

(v) In the circumstances, the impugned notices u/s.148 in
relation to A.Y. 2003-2004, having been issued on 7-4-2010, which is clearly
beyond the period of six years from the end of the relevant assessment year,
are clearly barred by limitation and as such, cannot be sustained.”

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Income: Accrual of: Section 5(1)(b) and section 145 of Income-tax Act, 1961: A.Y. 1997-1998: Coaching Classes; Fees for full course received in advance : Services to be rendered in next year: Mercantile system: Income not recognised unless services render

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54 Income: Accrual of: Section 5(1)(b) and section 145 of
Income-tax Act, 1961: A.Y. 1997-1998: Coaching Classes; Fees for full course
received in advance : Services to be rendered in next year: Mercantile system:
Income not recognised unless services rendered : Income does not accrue.


[CIT v. Dinesh Kumar Goel, 331 ITR 10 (Del.)]

The assessee running coaching classes followed mercantile
system of accounting. Total fees for the entire course, which may be of two
years duration was taken in advance at the time of admission of the students.
For the A.Y. 1997-1998, the assessee claimed that the fees received in the
relevant year were to be carried forward to the next assessment year as they
related to the next financial year. The Assessing Officer rejected the claim on
the ground that the assessee was following the mercantile system of accounting.
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) The relevant yardstick for the purpose of taxation is
the time of accrual or arisal. In order to be chargeable, the income should
accrue or arise to the assessee during the previous year. Unless the revenue
is earned, it is not accrued; likewise, unless the expenses are incurred, cost
in respect thereof cannot be treated as accrued. Under Accounting Standard 9,
revenue is recognised only when the services are actually rendered. If the
services are rendered partially, revenue is to be shown proportionate with the
degree of completion of services.

(ii) Though at the time of admission, the students were
required to deposit the whole fee for the entire course, that was only a
deposit or advance and it could not be said that this fee has become due at
the time of deposit.

(iii) The fee was charged in advance for the entire course,
presumably because there should not be any default by the students during the
period of course. The fee was not due at the time of deposit. Services in
respect of financial year 1997-98, for which also the payment was taken in
advance were yet to be rendered.”


Note : Similar view has been taken in this order in respect of
assessees in the beauty and slimming business.


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Capital gain/agricultural income: A.Y. 1991-1992: Sale of land shown in Revenue records as agricultural: No agricultural income shown in return: Gain is agricultural income not chargeable to tax.

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52 Capital gain/agricultural income: A.Y. 1991-1992: Sale of
land shown in Revenue records as agricultural: No agricultural income shown in
return: Gain is agricultural income not chargeable to tax.


[CIT v. Smt. Debbie Alemao, 331 ITR 59 (Bom.)]

On 28-2-1988 the assesses had purchased an agricultural land
(shown in Revenue records as agricultural) at the cost of Rs.8,00,000. They sold
the said land to a company on 3-9-1990 for a consideration of Rs.73,00,000. In
the returns of income the assesses claimed that the gain is exempt as
agricultural income. The Assessing Officer rejected the claim on the ground that
the land had non-agricultural potential and the fact that it was sold at nearly
10 times the purchase price within two years from its purchase and it was
purchased by the purchaser for the purpose of a beach resort showed that the
land was not agricultural land. The Tribunal allowed the assessee’s claim.

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

“(i) The Department’s observation that the land was not
actually used for agricultural purposes inasmuch as no agricultural income was
derived from this land and was not shown by the assessees in their income-tax
returns was explained saying that there were coconut trees in the land but the
agricultural income derived by sale of the coconuts was just enough to
maintain the land and there was no actual surplus.

(ii) If an agricultural operation does not result in
generation of surplus that cannot be a ground to say that the land was not
used for agricultural purposes. Admittedly the land was shown in the Revenue
records as used for agricultural purposes and no permission was ever obtained
for non-agricultural use by the assessee. Permission for non-agricultural use
was obtained for the first time by the purchaser after it had purchased the
land.

(iii) Thus the finding that the land was used for the
purposes of agriculture was based on appreciation of evidence and by
application of correct principles of law.”

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Charitable purpose : Section 2(15) and section 12AA of Income-tax Act, 1961 : Assessee-corporation established under Warehousing Corporation Act, 1962 : Application for registration u/s.12AA rejected on ground that assessee was earning income and was decl

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53 Charitable purpose : Section 2(15) and section 12AA of
Income-tax Act, 1961 : Assessee-corporation established under Warehousing
Corporation Act, 1962 : Application for registration u/s.12AA rejected on ground
that assessee was earning income and was declaring dividends : Not justified.


[CIT v. Haryana Warehousing Corporation, 196 Taxman 260
(P&H)
]

The assessee was a corporation established under the
provisions of the Warehousing Corporation Act, 1962. It was earlier claiming
exemption u/s.10(29), but after deletion of the said provision with effect from
1-4-2003, it applied for registration u/s.12AA. The said application was
rejected by the Commissioner mainly on the ground that the assessee was earning
income and was declaring dividends. The profits were ploughed back for expanding
its activities to earn larger incomes. Thus, the activities were on commercial
principles for profit motive which could not be held to be charitable in nature.
The Tribunal allowed the assessee’s claim.

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

“(i) It was clear by reference to the statutory provisions
of the Act that the assessee had been constituted with the object of
warehousing of agricultural produce and other activities and matters connected
therewith. Constitution of the assessee was under the statutory provisions by
way of a Notification in the Official Gazette by the State Government with the
approval of the Central Warehousing Corporation. The Central Warehousing
Corporation is constituted u/s.3 by the Central Government. The functions of
the assessee were statutory functions of acquiring and building godowns and
warehouses and running of such warehouses for storage of agricultural produce
and other similar commodities; providing facilities for transport of
agricultural produce and to act as an agent of the Central Warehousing
Corporation for purchasing, selling, storing and distribution of such produce.
These being statutory functions of the assessee they clearly fell u/s.2(15)
and, therefore, no fault could be found with the finding recorded by the
Tribunal.

(ii) Mere fact that the assessee could acquire, hold and
dispose of the property which was feature of every juristic person and that it
was deemed to be a company and could declare dividend would not in any manner
deviate it from the character of the charitable institution.

(iii) In view of aforesaid, the Tribunal was right in law,
in directing to grant the registration u/s.12AA, even when under the
Warehousing Corporation Act, the assessee-corporation was a deemed company and
was liable for income-tax in respect of its income, profits and gains.”

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Business expenditure : Interest on borrowed capital: Section 36(1)(iii) of Income-tax Act, 1961: A.Y. 1997-1998 : Interest on loans borrowed to settle liability of sister concern to retain business premises of assessee: Interest has to be allowed.

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51 Business expenditure : Interest on borrowed capital:
Section 36(1)(iii) of Income-tax Act, 1961: A.Y. 1997-1998 : Interest on loans
borrowed to settle liability of sister concern to retain business premises of
assessee: Interest has to be allowed.


[CIT v. Neelakanth Synthetics and Chemicals P. Ltd., 330
ITR 463 (Bom.)
]

The assessee-company had taken a business premises on lease
from its sister concern for a period of 12 years on a lease rent of Rs.20,000
per month. The assessee-company had sub-leased the said
business premises to a bank for Rs.2,26,800 per month, inclusive of water
charges and taxes. The said business premises was offered as collateral security
for raising finance from the bank by a sister concern. Due to heavy losses
incurred, the sister concern could not repay that loan and accordingly the
premises was liable to be disposed off by the bank for realisation of the loan
amount. In such circumstances a settlement was reached between the
assessee-company and the bank whereby a loan was advanced by the bank in the
name of the assessee-company and the same was used to settle the liability of
the sister concern. The assessee did not charge any interest from its sister
concern. For the A.Y. 1997-1998, the Assessing Officer disallowed the amount of
interest on the said loan on the ground that the said loan was not utilised for
the purposes of the business of the assessee-company. The Tribunal allowed the
assessee’s claim.

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

“(i) Both the authorities below concurrently proceeded on
the footing that any expenditure incurred for protecting the business asset
held by an assessee for its business or any expenditure incurred for the
protection and maintenance of the business premises would be an allowable
expenditure. It was only to retain the business premises that the assessee had
to borrow the funds from the bank and as such, interest payable on the
borrowing for retaining the premises would be an allowable deduction
u/s.36(1)(iii) of the Income-tax Act, 1961, because the loan was used for the
purpose of retaining the business premises which was necessary to carry on the
business activities of the assessee.

(ii) The Assessing Officer accepted the income received by
the assessee from the leased premises as rental income and assessed it as
income from other sources. In such circumstances, the finding was that in
order to safeguard the interest of the lease premises and also to bail out its
sister concern, the loan was obtained from the bank. The findings were
reasonable and could not be said to be perverse.”

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Business expenditure: Disallowance u/s. 40A(2) of Income-tax Act, 1961: Disallowance on the ground that the assessee paid higher rate to its sister concern: Sister concerns paying tax at the same rate as the assessee: Disallowance u/s.40A(2) not warranted

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50 Business expenditure: Disallowance u/s. 40A(2) of
Income-tax Act, 1961: Disallowance on the ground that the assessee paid higher
rate to its sister concern: Sister concerns paying tax at the same rate as the
assessee: Disallowance u/s.40A(2) not warranted/justified.


[CIT v. Siya Ram Garg (HUF), 237 CTR 321 (P&H)]:

The Assessing Officer had made disallowance u/s. 40A(2) of
the Income-tax Act, 1961 in respect of the cotton and waste purchased from the
sister concerns on the ground that the purchases were at a higher rate. The
Tribunal deleted the disallowance.

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

“(i) The details filed by the assessee showed that its
sister concerns were being taxed at the same rate at which the assessee was
being taxed, proving that there was no reason for the assessee to show higher
rate purchases made by the assessee from its sister concerns.

(ii) The assessee’s sister concerns had offered their
income from such sales, which fact has not been disputed. Therefore, the
Assessing Officer erred in invoking the provisions of section 40A(2) of the
Act.”

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Prosecution: I. T. Act, 1961 and IPC: Withdrawal of prosecution by Public Prosecutor does not require permission from Central Government

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Reported
:

58 Prosecution: I. T. Act, 1961 and IPC: Withdrawal of
prosecution by Public Prosecutor does not require permission from Central
Government

[G.S.R. Krishnamurthy Vs. ITO 228 CTR 562 (Mad)]

 

In 1984, the Income-tax Department had filed a complaint
before the Chief Judicial Magistrate against a number of accused for offences
under the Income-tax Act, 1961 and the corresponding provisions under IPC. In
2006 the Public Prosecutor filed application for seeking consent to  withdraw
the prosecution against Accused Nos. 1 to 3. The operative portion of the order
passed by the Magistrate dismissing the application reads as under:

“12. In view of the above findings that IPC offences u/ss.
120B and 420 are still on record for prosecution and no permission has been
granted by the Central Government to the Special Public Prosecutor to withdraw
the entire case including the IPC offences against A1 to A3, the present
petition to withdraw the case against A1 to A3 is not maintainable and the
same is liable to be dismissed.”

Being aggrieved, the Accused Nos. 1 to 3 filed revision
petitions before the Madras High Court. The High Court allowed the petition
and held as under:

“i) A Public Prosecutor who is appointed by the Central
Government was not required to obtain permission from the Central Government
to withdraw the prosecution against the accused for offences under the IPC and
I. T. Act.

ii) Therefore, the Addl. Chief Judicial Magistrate
misdirected himself in refusing to give consent to withdraw the prosecution
for want of permission of the Central Government.

iii) The impugned order is set aside and the matter is
remitted back to the Magistrate for disposal as per law”

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Offences and Prosecution: Wilful attempt to evade tax: S. 276C of I. T. Act, 1961: A. Y. 1983-84: Disallowance of payment by company to proprietary concern of director: Reduction of disallowance by Tribunal: Reasonableness of payment disputed question of

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Reported
:

57 Offences and Prosecution: Wilful attempt to evade tax: S.
276C of I. T. Act, 1961: A. Y. 1983-84: Disallowance of payment by company to
proprietary concern of director: Reduction of disallowance by Tribunal:
Reasonableness of payment disputed question of fact: No deliberate intent to
evade tax: S. 276C not applicable



[K. K. Mohta Vs. Asst. CIT; 320 ITR 387 (Del)]

 


In the A. Y. 1983-84 the assessee company had claimed
deduction of an expenditure of Rs. 29,46,422/- being the amount paid to HSP
towards the work of annealing and pickling of steel slabs at the rate of Rs.
2,500/- per metric tonne. HSP was a proprietary concern of one of the directors
of the company. The Assessing Officer allowed the expenditure at the rate of Rs.
500/- per metric tonne as reasonable. The Tribunal increased the allowance to
Rs. 1,250/- per metric tonne. A complaint was filed by the Asst. Commissioner
u/s. 276C(1) of the Income-tax Act, 1961, on the basis of the disallowance made
by the Assessing Officer. Charge was directed to be framed against the
petitioner (the managing director) and the company for offence u/s. 276C(1) of
the Act. The petitioner filed a revision petition before the trial court. The
revision petition was dismissed on the ground of maintainability.

 

The petitioner, therefore, filed a petition u/s. 482 of the
Code of Criminal Procedure, 1973 before the Delhi High Court for quashing the
proceedings. The High Court allowed the petition and held as under:

“i) The power of High Court u/s. 482 of the Code of
Criminal Procedure, 1973, is intended to ensure that there is no miscarriage
of justice. The High Court may exercise its jurisdiction u/s. 482 of the Code
in a given case even where a revision petition against an order on charge has
already been dismissed by the trial court. The scope of interference by the
Court in such cases u/s. 482 would depend on the facts of a particular case.
In other words, the merits of the case would necessarily have to be examined
in order to determine if interference u/s. 482 is warranted.

ii) If the issue whether the amount paid by the company to
HSP was reasonable or not admitted of more than one point of view, as was
evident from the orders of the Assessing Officer and the Tribunal, then
certainly the essential ingredients of section 276C(1) of the Act of a
deliberate intent on the part of the company to evade the payment of
income-tax could not be said to exist in the present case.”

 


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Full value of consideration: S. 50C of I. T. Act, 1961: A. Y. 2004-05: Section 50C providing for deeming the value for stamp duty purposes as full value of consideration is applicable only for capital assets and not for business assets

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Reported
:

56 Full value of consideration: S. 50C of I. T. Act, 1961: A.
Y. 2004-05: Section 50C providing for deeming the value for stamp duty purposes
as full value of consideration is applicable only for capital assets and not for
business assets

[CIT Vs. Thiruvengadam Investments P. Ltd.; 320 ITR 345
(Mad)]

The assessee was engaged in the business of
investment in shares and property development. In the relevant year, i.e. A. Y.
2004-05, the assessee had sold a property held as business asset for a
consideration of Rs. 5 crores. The Sub-Registrar took the guideline value of Rs.
6,94,45,920/-. The Assessing Officer invoked the provisions of section 50C of
the Income-tax Act, 1961 and substituted the stamp duty value of Rs.
6,94,45,920/- for the consideration of Rs. 5 crores. The Tribunal held that the
invocation of the provisions of section 50C was not warranted as the property
was never held by the assessee as capital asset and as per the accounts also the
amount given to the owner of the property has been shown as loans and advances
thereby the property had been treated as a business asset and not as a capital
asset.

 

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

“i) Since the property in the hands of the assessee was
treated as a business asset and not as a capital asset, there was no question
of invoking the provisions of section 50C which pertains to determining the
full value of the capital asset.

ii) The Tribunal had come to the correct
conclusion”


Editor’s Note: The Finance Bill 2010 has proposed an
amendment which accepts this ratio

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Company: Book profit: S. 115J of I. T. Act, 1961: A. Y. 1989-90: Book profit as per the accounts prepared in accordance with Parts II and III of Sch. VI of the Companies Act and not as per the accounts approved at the annual general meeting has to be cons

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Reported
:

54 Company: Book profit: S. 115J of I. T. Act, 1961: A. Y.
1989-90: Book profit as per the accounts prepared in accordance with Parts II
and III of Sch. VI of the Companies Act and not as per the accounts approved at
the annual general meeting has to be considered

[Dy. CIT Vs. Arvind Mills Ltd.; 228 CTR 208 (Guj)]

 

In the A. Y. 1989-90, for the purpose of section 115J of the
Income-tax Act, 1961, the assessee company had worked out the book profits in
the accounts prepared in accordance with Sch. VI, part II and III of the
Companies Act. The Assessing Officer adopted the book profit as worked out in
the P & L a/c as per published audited accounts, approved by the annual general
meeting. The Tribunal accepted the assessee’s claim.

 

In the appeal filed by the Revenue, the following question
was raised before the Gujarat High Court:

“That the Tribunal has seriously erred in law and on facts
in holding that preparation of P & L a/c in accordance with Sch. VI, part II
and III of the Companies Act, which is different from the P & L a/c approved
at the annual general meeting is permissible”

 


The Gujarat High Court upheld the decision of the Tribunal
and held as under:

“i) The only requirement of provisions of sub-section (1A)
of section 115J is that the accounts, more particularly, the P & L a/c, for
the relevant previous year has to be
prepared in accordance with Part II and III of Sch. VI of the Companies Act
and accounts so prepared have to be certified by the Chartered Accountant. In
the facts
of the present case, it is not found by any authority that the revised
accounts submitted with revised return of income were not audited. In fact,
the positive averment made by the assessee before CIT(A) remains unrefuted.

ii) In the circumstances, the AO had no powers or
jurisdiction under the provisions of the Act to take a different view of the
matter and had no option but to proceed to determine the taxable profits u/s.
115J as per the said provisions without disturbing the accounts in any manner
whatsoever, including discarding of such accounts, except to the extent
provided in the Explanation to s. 115J. The AO is not vested with any powers
to ignore accounts prepared in accordance with requirements of Parts II and
III of Sch. VI of the Companies Act.

iii) Therefore, the impugned order of Tribunal which holds
so does not suffer from any legal infirmity so as to warrant interference”

 


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Deduction u/s. 80-IA of I. T. Act, 1961: A. Y. 1997-98: Interest received from trade debtors is part of sale price: Is profit derived from industrial undertaking: Is eligible for deduction u/s. 80-IA

New Page 1

Reported
:

55 Deduction u/s. 80-IA of I. T. Act, 1961: A. Y. 1997-98:
Interest received from trade debtors is part of sale price: Is profit derived
from industrial undertaking: Is eligible for deduction u/s. 80-IA

[CIT Vs Advance Detergents Ltd.: 228 CTR 356 (Del)]

 

The assessee is an industrial undertaking which manufactured
and supplied goods to its customers. Some of these customers did not make
payments in time. The dues which were payable by those buyers attracted interest
on late payment charges. In this manner, ultimately, the payments which were
received by the assessee against the supply of goods also included interest on
overdue payments. The Tribunal allowed the assessee’s claim for deduction u/s.
80-IA of the Income-tax Act, 1961 in respect of the sale price including the
interest.


 


In appeal by the Revenue, before the Delhi High Court the
following question was raised:

“Whether the Tribunal was correct in law in holding that
the interest earned by the assessee on late payment received from the
customers is eligible for deduction u/s. 80-IA of the IT Act, 1961?”

 


The Delhi High Court considered the judgment of the Supreme
Court in Liberty India Vs. CIT; 317 ITR 218 (SC). The Court concurred with the
judgment of the Gujarat High Court in Nirma Industries Ltd. Vs. Dy. CIT; 283 ITR
402 (Guj) and upheld the decision of the Tribunal. The Court held as under:

“i) According to the Gujarat High Court, when interest is
paid on delayed payment, it can be treated as higher sale price which is the
converse situation to offering of cash discount because the transaction
remains the same and there is no distinction as to the source. Looking from
this angle, the interest becomes part of the higher sale price and is clearly
derived from the sales made and is not divorced therefrom. It is, thus, the
direct result of the sale of goods and the income is derived from the business
of the industrial undertaking.

ii) We answer this question in favour of the assessee and
against the Revenue”


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Agricultural income — Even in case of an assessee having composite business of growing and manufacturing tea, income from sale of green tea leaves is purely income from agricultural products and is liable to be entirely taxed under the State Act and canno

New Page 1

16 Agricultural income — Even in case of an
assessee having composite business of growing and manufacturing tea, income from
sale of green tea leaves is purely income from agricultural products and is
liable to be entirely taxed under the State Act and cannot be taxed under
Income-tax Act, 1961.


[Union of India v. Belgachi Tea Co. Ltd. & Ors.,
(2008) 304 ITR 1 (SC)]

The assessee, a public limited company carrying on the
composite business of growing and manufacturing tea in the district of
Darjeeling, has tea gardens known as Belgachi Tea Estate, which consists of the
gardens and a factory for manufacture of tea. The asseessee-company sells the
tea grown and manufactured in the said tea gardens. The factory in the said tea
gardens is licensed under Factories Act. The assessee-company is also selling
tea leaves produced in its tea gardens which are agricultural produce. The
assessee is also involved in manufacturing of tea. The income from such business
has been assessed all along under the provisions of the Income-tax Act, 1961.
The claim of the assessee-company is that the entire income should be assessed
under the provisions of the 1961 Act and after the income is assessed, tax
should be charged on 40% of such income under the 1961 Act and on the balance
60%, the State can tax under the Bengal Agricultural Income-tax Act, 1944.
According to the assessee, in view of the scheme of the 1961 Act read with Rule
8 of the Income-tax Rules, 1962, the income derived from the sale of the tea
grown and manufactured by a seller in India should be computed under the
provisions of the Act by the Income-tax Officer on the basis of the
aforementioned formula and that the sale proceeds of green tea leaves should be
treated as incidental to business and its income should also be computed on the
basis of aforementioned formula.

 

The Supreme Court observed that :

(i) There was no dispute on the fact that from the income
assessed, 60% is taxable by the State under the 1944 Act and 40% is taxable by
the Centre under the 1961 Act.

(ii) The object behind taxing the 60% and 40%
shares of the income assessed appears that there
are common expenses on establishment and staff for the two different
activities that is tea grown and tea manufactured. There can be independent
income from the sale of green tea leaves and by sale of tea, that is, after
processing of green tea leaves when green tea leaves become tea for use.
Income from agriculture is taxable by the State and sale of tea after
manufacturing is taxable by the Union of India as business income. To
segregate income and expenses from the two combined activities of the assessee
is not possible, but at the same time there cannot be two assessments of
income by two different authorities. Therefore, there can be only one
assessment of income from the tea business.

(iii) For the purpose of tax on agriculture income, the
Agriculture Income-tax Officer will go by the assessment order made under the
provisions of the 1961 Act and the contents of the assessment for the year
made by the Assessing Officer under the 1961 Act shall be conclusive evidence
of the contents of such order and he has to go by the assessment and tax only
60% income made under the assessment for the purpose of the 1944 Act. If there
is any apparent mistake in the order of the Income-tax Officer, he can bring
it to the notice of the Income-tax Officer and that can be rectified by the
Income-tax Officer, but no separate assessment of the income from ‘tea grown
and manufactured’ business can be made by the Agricultural Income-tax Officer
under the 1944 Act. He cannot once again assess that business income under the
1944 Act.

 


According to the Supreme Court, the question which however
required to be considered was whether the agriculture income be taxed under the
1961 Act. The Supreme Court noted that both Rule 8 of the Income-tax Rules,
1962, and S. 8 of the 1944 Act provide how the mixed income from the growing tea
leaves and manufacturing can be taxed. ‘Mixed income’ means the income derived
by an assessee from the combined activities, i.e., growing of tea leaves
and manufacturing of tea. Therefore, for purpose of computation of income under
the 1961 Act, it should be the mixed income from ‘tea grown and manufactured’ by
the assessee. The Supreme Court observed that if the income is by sale of green
tea leaves by the assessee, it cannot be called income assessable under the 1961
Act for the purpose of 40 : 60 share between the Centre and the State. In both
the provisions, i.e., Rule 8 of the Income-tax Rules, 1962, and S. 8 of
the 1944 Act, the words used are income derived from the sale of ‘tea grown and
manufactured’. The Supreme Court held that the income from sale of green tea
leaves is purely income from the agricultural products. There is no question of
taxing it as incidental income of the assessee when there is a specific
provision and authority to tax that income, i.e., the State under the
1944 Act. In that view of the matter, the agricultural income could not be tax
under 1961 Act.

Capital or revenue receipt: S. 17(3)(iii) of I. T. Act, 1961: A. Ys. 2003-04 and 2004-05: Amount received by way of compensation for denial of job on basis of gender discrimination: Not in nature of “profit in lieu of salary”: Capital receipt:

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Reported
:

53 Capital or revenue receipt: S. 17(3)(iii) of I. T. Act,
1961: A. Ys. 2003-04 and 2004-05: Amount received by way of compensation for
denial of job on basis of gender discrimination: Not in nature of “profit in
lieu of salary”: Capital receipt:


[CIT
Vs. Smt. Rani Shankar Mishra; 320 ITR 542 (Del)]


The assessee applied for a job in the Voice of America which
is a state owned broadcasting agency. The assessee was denied a job on the basis
of gender discrimination. On a class action suit filed on behalf of the women
who had been denied employment, a proposal was made by the Government of United
States to settle the entire class action. The settlement offer was accepted and
a consent decree was drawn up awarding compensation of $ 508 million to the
persons who were not offered the job. The Assessing Officer made addition to the
income of the assessee in respect of the compensation amount and interest
received by the assessee treating it as “profit in lieu of salary” u/s.
17(3)(iii) of the Income-tax Act, 1961. The Tribunal deleted the addition and
held that the amount received by the assessee was in the nature of capital
receipt since the amount was received by the assessee by way of compensation in
respect of job not offered to the assessee on the basis of gender
discrimination.

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

“The Tribunal was justified in holding that the amount
received by way of compensation for not being offered the job on the basis of
gender discrimination was a capital receipt.”

 


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Business Income: Deemed Profit: S. 41(1) of I. T. Act, 1961: A. Y. 2002-03: Write back/off of amount which had not entered P & L a/c: S. 41(1) has no application

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Reported
:

52 Business Income: Deemed Profit: S. 41(1) of I. T. Act,
1961: A. Y. 2002-03: Write back/off of amount which had not entered P & L a/c:
S. 41(1) has no application

[CIT Vs. Saden Vikas India Ltd.; 320 ITR 538(Del)]


 


The assessee had received Rs. 50 lakhs as advance from PAL
for supply of components for automobiles manufactured by the latter. After
receipt of the amount a strike took place in the plant of PAL which resulted in
the suspension of the production and all transactions. PAL requested the
assessee to subscribe the said amount of Rs. 50 lakhs in its sister concern.
Accordingly the assessee invested the sum of Rs 50 lakhs in 12% optionally
convertible debentures of the said sister concern of PAL. However, both PAL and
its sister concern ran into difficulties and the assessee did not receive any
interest from the debentures and even the prospect of recovery of the maturity
value of the debentures became uncertain. The assessee therefore decided to
write off the amount both in the debit and credit sides of the balance-sheet.
The Assessing Officer made an addition of Rs. 50 lakhs invoking the provisions
of section 41(1) of the Income-tax Act, 1961. The Commissioner (Appeals) deleted
the addition and held that the assessee was entitled to write off the amount.
The Tribunal confirmed the order of the Commissioner (Appeals).

 

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

“i) The assessee had received the sum of Rs. 50 lakhs only
on the capital account for infrastructure on behalf of PAL and it had a right
to use such capital asset for manufacture of air-conditioning systems for cars
to be produced by PAL. The undisputed fact was that the amount of Rs. 50 lakhs
written off was not allowed as deduction nor did it represent trading
liability which had gone into the computation of income for earlier years.

ii) The Tribunal noted the above facts and held that
writing off the amount would not attract the provisions of section 41(1). The
conclusion arrived at by the Tribunal was correct and justified.”


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Block assessment: S. 158BD of I. T. Act, 1961: Block period from 01/04/1996 to 28/10/2002: Notice for filing return: Satisfaction must be of the officer issuing notice and not of another officer: No assessment pursuant to notice: Assessee cannot be asked

New Page 1

Reported:


51 Block assessment: S. 158BD of I. T. Act, 1961: Block
period from 01/04/1996 to 28/10/2002: Notice for filing return: Satisfaction
must be of the officer issuing notice and not of another officer: No assessment
pursuant to notice: Assessee cannot be asked to file a return again: Notice
calling for return “as a company” : Status of assessee for earlier year accepted
as individual: Notice invalid.

[Subhas Chandra Bhaniramka Vs. Asst.; 320 ITR 349 (Cal)]

 

By a notice dated 18/08/2005, the Asst. Commissioner, Central
Circle called upon the petitioner to file a return of undisclosed income in the
status of a company for the block period from 01/04/1996 to 28/10/2002 u/s.
158BD(a) of the Income-tax Act, 1961. As the petitioner was assessed as an
individual, the petitioner filed the return in that status. However, the Asst.
Commissioner of the Central Circle by a letter intimated that since jurisdiction
was with the Asst. Commissioner of Circle 38, proceedings initiated u/s. 158BD
of the Act had been dropped. Thereafter, the petitioner received notice u/s.
158BD of the Act issued by the Asst. Commissioner of Circle 38 calling upon him
to file a return in the status of a company for the block period. The petitioner
requested him to furnish a certified copy of the satisfaction required for
issuing the notice u/s. 158BD. But it was not furnished.

 

The Calcutta High Court allowed the writ petition filed by
the petitioner and held as under:

 


“i) Under the Act “an individual” and “a company” are
separate entities. In the assessment for the assessment year 2004-05 the
Department had accepted the status of the petitioner as an individual.
However, by notice dated 31/08/2007 the petitioner was requested to file a
return “as a company”. The notice also described the petitioner “as a
company”. Since the Department had accepted the status of the petitioner as an
“individual”, and as the status of the petitioner had been incorrectly
described in the notice dated 31/08/2007, the notice was ex facie bad and
illegal.

ii) Since proceedings u/s. 158BD may have financial
implications, the satisfaction of the Assessing Officer must reveal the mental
and the dispassionate thought process of the Assessing Officer in arriving at
a conclusion and must contain reasons which should be the basis of initiating
the proceedings u/s. 158BD. Therefore, though section 158BD contains the word
“satisfy” and does not contain the words ” record his reasons” as postulated
in section 148, before proceeding, the Assessing Officer has to record his
reasons for being “satisfied”, which in the instant case was absent. There was
nothing on record to show that there was subjective and independent
satisfaction.

iii) Though the affidavit revealed that the Asst.
Commissioner of the Central Circle had recorded his satisfaction, there was
nothing to show that the Asst. Commissioner of Circle 38 had been satisfied.
He could not use the satisfaction recorded by the other officer. Therefore,
the proceeding was illegal.

iv) Since the earlier notice had not been declared invalid
by any court of law and a return was filed pursuant thereto, on which no
assessment had been made, the Asst. Commissioner of Circle 38 could not call
for another return.

v) The respondents had tried to justify the act by
supplementing reasons in their affidavit. The validity of an order has to be
judged from the order itself. The act which was not within the parameters of
section 158BD could not be validated by additional or supplementary grounds
later brought by way of affidavits.”


 

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Reassessment: Proviso to S. 147 and 148 of I. T. Act, 1961: A. Y. 2002-03: Assessment u/s. 143(3): Notice u/s. 148 beyond 4 years: Conditions not satisfied: Notice invalid:

New Page 1

Not Reported
:

50 Reassessment: Proviso to S. 147 and 148 of I. T. Act,
1961: A. Y. 2002-03: Assessment u/s. 143(3): Notice u/s. 148 beyond 4 years:
Conditions not satisfied: Notice invalid:


[Bhavesh
Developers Vs. AO (Bom); W. P. No. 2580 of 2009 dated 12/01/2010]


 

The petitioner assessee was engaged in the business of
developing and constructing buildings. The petitioner was entitled to deduction
u/s. 80-IB(10) of the Income-tax Act, 1961 and the same was granted by the
Assessing Officer. For the A. Y. 2002-03 the Assessing Officer had passed the
assessment order u/s. 143(3) of the Act on 17/01/2005 allowing deduction of Rs.
3,85,75,992/- u/s. 80-IB(10) of the Act. Subsequently, he issued a notice u/s.
148 dated 30/03/2009 for reopening the assessment. The following reasons were
recorded for reopening the assessment:

 

“On verification of case records, it is seen that the
assessee is claiming deduction u/s. 80-IB for an amount of Rs. 3,85,75,992/-.
However, as per details filed and P & L A/c. it is further observed that during
the year assessee has other income of Rs. 50,13,307/- which mainly comprises of
society deposit of Rs. 47,80,517/-, stilt parking Rs. 1,25,000/- and Sundry
Credit Balances of Rs. 1,07,712/-. Since this income does not qualify as the
income eligible for deduction u/s. 80-IB, I have reason to believe that the
income to this extent has escaped assessment and it is a fit case for issuing
notice u/s. 148 of the I. T. Act, 1961.”

 

The Bombay High Court allowed the writ petition challenging
the validity of the notice and held as under:

“i) In support of the claim for deduction u/s. 80-IB(10),
the assessee had placed certain material before the Assessing Officer. The
material that was filed with the return of income included a duly filled up
Form 10CCD. The form contained details as specified, including item 19, the
total sales of the undertaking; in item 21, the profits and gains derived by
the undertaking from the eligible business; and, in item 22, disclosed that
the deduction has been claimed under sub-section (10) of section 80-IB. The
form was certified by a Chartered Accountant. The statement of total income
and the balance sheet as on 31st March 2002 was appended to the return. The
profit and loss account for the year ending 31st March 2002 contained a
disclosure of other income in the amount of Rs. 50,13,307.16. Schedule G to
the Balance Sheet contains a break-up of the other income of Rs. 50.13 lakhs.
In addition to this disclosure, during the course of the assessment
proceedings, a letter was addressed on behalf of the assessee, by its
Chartered Accountant to the Assessing Officer. The letter inter alia contains
an explanation of the other income as reflected in the profit and loss
account. The assessee also furnished to the Assessing officer a statement of
sales and other income for each wing and for the flats comprised in the
construction as of 31st March 2002.

ii) In this background, it would be necessary to scrutinize
the basis on which a notice was issued u/s. 148 for reopening the assessment.
Ex-facie, the reasons which have been disclosed to the assessee would show
that the inference that the income has escaped assessment is based on the
disclosure made by the assessee itself. The reasons show that the finding is
based on the details filed by the assessee and from the profit and loss
accountant. Quite clearly, therefore, it was impossible for the Assessing
Officer to even draw the inference that there was a failure on the part of the
assessee to disclose fully and truly all material facts necessary for his
assessment for A. Y. 2002-03.

iii) Significantly, the reasons that have been disclosed to
the assessee do not contain a finding to the effect that there was a failure
to fully and truly disclose all necessary facts, necessary for the purpose of
assessment. In these circumstances, the condition precedent to a valid
exercise of the power to reopen the assessment, after lapse of four years from
the relevant Assessment Year, is absent in the present case.”


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S. 192 and S. 201 : Misuse of free meal coupons by employees : No presumption of misuse : Tax not deducted at source : No default.

New Page 1

66 TDS : Salary: S. 192 and S. 201 of
Income-tax Act, 1961 : Misuse of free meal coupons by employees: No presumption
of misuse : Tax not deducted at source on such amount : No default.


[CIT v. Reliance Industries Ltd., 308 ITR 82 (Guj.)]

The assessee-company distributed free meal coupons to its
employees. It had entered into an agreement with A for this purpose. The
assessee-company did not deduct tax at source on the amount paid to A, on the
ground that it did not constitute perquisite. The AO held that the coupons had
been misused by some of the employees. He therefore estimated certain amount as
being taxable perquisite in the hands of the employees and passed orders
u/s.201, u/s.201(1A) and u/s.271C of the Income-tax Act, 1961 for default of
non-deduction of tax at source on such estimated amount. The Tribunal held that
the assessee had not committed any default.

 

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

“With regard to the free meal coupons the employer could not
presume that a particular percentage of employees, out of the total work force,
misused the facility so as to warrant deduction of tax at source. Furthermore,
correspondingly such tax deducted at source had to be given credit in the
assessment of the employee concerned and unless and until the tax deduction
certificate specified the employee concerned there could be no corresponding
credit given to the employee. The assessee could not be treated as being in
default in respect of such sum.”

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Business expenditure: Deduction only on actual payment: Ss. 43B and 36(1)(va) of I. T. Act, 1961: A. Y. 2002-03: Employee’s contribution to PF: Paid beyond due date under PF Act but before due date for filing return of income: Deduction allowable in the r

New Page 1

Not Reported
:

49 Business expenditure: Deduction only on actual payment:
Ss. 43B and 36(1)(va) of I. T. Act, 1961: A. Y. 2002-03: Employee’s contribution
to PF: Paid beyond due date under PF Act but before due date for filing return
of income: Deduction allowable in the relevant year:


[CIT
Vs. Animil Ltd. (Del); ITA No1063 of 2008 dated 23/12/2009]


 

In the previous year relevant to the A. Y. 2002-03 the
assessee had paid the employer’s contribution and the employees’ contribution
towards Provident Fund and ESI after the due date, as prescribed under the
relevant Act/Rules. The Assessing Officer made additions of Rs. 42,58,574/-
being employees’ contribution u/s. 36(1)(va) of the Income-tax Act, 1961 and Rs.
30,68,583/- being employer’s contribution u/s. 43B of the Act. The CIT(A)
deleted the addition and the Tribunal upheld the order of the CIT(A).

In appeal u/s. 260A of the Act, by the Revenue, the following
question was raised:

“Whether the ITAT was correct in law in deleting the
addition relating to employees’ contribution towards Provident Fund and ESI
made by the Assessing Officer u/s. 36(1)(va) of the Income-tax Act, 1961?”

 


The Delhi High Court upheld the decision of the Tribunal and
held as under:

“If the employees’ contribution is not deposited by the due
date prescribed under the relevant Acts and is deposited late, the employer
not only pays interest on delayed payment but can incur penalties also, for
which specific provisions are made in the Provident Fund Act as well as ESI
Act. Therefore, the Act permits the employer to make the deposit with some
delay, subject to the aforesaid consequences. In so far as the Income-tax Act
is concerned, the assessee can get the benefit if the actual payment is made
before the return is filed, as per the principles laid down by the Supreme
Court in CIT Vs. Vinay Cement Ltd., 213 CTR 268 (SC).”

 


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S. 133A : In absence of statement by client that its books of account are at premises of C.A., survey conducted in premises of C.A. and impounding books is invalid.

New Page 1

65 Survey : Scope and validity : S. 133A of
Income-tax Act, 1961 : Survey of premises of C.A., lawyer, etc. in connection
with survey of client : In the absence of a statement by the client that its
books of account are kept at the premises of C.A., survey conducted in the
premises of the C.A.’s firm and impounding books, documents, etc. is invalid.


[U. K. Mahapatra & Co. v. ITO, 221 CTR 328 (Ori.)]

The petitioner is a firm of Chartered Accountants engaged in
the practice of accountancy involving auditing, consultancy, financing and other
services to their clients. A survey party conducted a survey at the premises of
the petitioner-firm and also impounded certain books of account and documents.

 

On writ petition challenging the validity of survey action,
the Orissa High Court allowed the petition and held as under :

“(i) The precondition for conducting survey u/s. 133A in
the premises of a Chartered Accountant, lawyer, tax practitioner in connection
with survey of the business place of their client is that the client in the
course of survey must state that his books of account/documents and records
are kept in the office of his Chartered Accountant/lawyer/tax practitioner.
Unless this precondition is fulfilled, the IT authority does not assume any
power to enter the business premises/office of the Chartered
Accountant/lawyer/tax practitioner to conduct survey u/s.133A in connection
with survey of the premises of their client.

(ii) There being no material to show that survey of
premises of firm of Chartered Accountants was undertaken consequent upon any
statement of its client that its books of account were kept in the premises of
the Chartered Accountants, survey conducted at the premises of Chartered
Accountant’s firm was without authority of law.”


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Assessment u/s.143(3) on basis of directions of CIT : Sub-sequent CIT exercising power u/s.263 : Not justified.

New Page 1

64 Revision : S. 263 of Income-tax Act,
1961 : A.Ys. 1980-81 to 1986-87 : Assessment made u/s.143(3) on basis of
directions of CIT : Subsequent CIT exercising power u/s.263 : Not justified.


[Virendra Kumar Jhamb v. N. K. Vohra, 176 Taxman 11
(Bom.)]

The assessee was doing various types of construction work and
was not maintaining regular books of account. For the A.Ys. 1980-81 to 1986-87,
it approached the Deputy Director of Intelligence (Investigation) under the
Amnesty Scheme and offered the taxable income to be computed at the rate of 4%
of the total receipts. Finally, after discussing with the Deputy Director of
Intelligence and the Commissioner, it was mutually agreed upon that the assessee
would file revised returns for the relevant assessment years at the rate of 8%
of the gross receipts. This was confirmed by the second Commissioner by his
letter dated 30-11-1997. On the basis of the said letter of the Commissioner,
the Assessing Officer completed the assessment u/s. 143(3) of the Income-tax
Act, 1961 computing the income at the rate of 8% of the gross receipts.
Subsequently, third Commissioner issued notices u/s.263 seeking to revise the
assessment orders for the relevant years.

 

The assessee filed writ petition and challenged the notices.
The Bombay High Court allowed the writ petition, quashed the notices and held :

“(i) The Assessing Officer had passed revised assessment
orders based on the revised returns at 8%. The said orders were solely based
on the directive given by the earlier Commissioner and the same could not be
revised by the subsequent Commissioner exercising the power u/s.163.

(ii) Over and above, there was no error or anything
unsustainable in law. On the contrary, when the second Commissioner had
consistently taken the view that 8% would be a fair percentage, the third
Commissioner could not consider the same as ‘erroneous’ or unsustainable in
law. Therefore, the notices issued u/s. 163 as well as revised assessment
orders passed by the Commissioner were totally unsustainable in law for the
aforesaid reasons. Hence, all the notices issued u/s.263 as well as the
assessment orders passed by the Commissioner had to be quashed and set aside.”


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S. 147 and S. 148 : Change of opinion is not valid basis for reopening assessment

New Page 1

62 Reassessment : S. 147 and S. 148 of
Income-tax Act, 1961 : A.Y. 2003-04 : Change of opinion is not valid basis for
reopening assessment.


[Asteroids Trading and Investments P. Ltd. v. DCIT,
308 ITR 190 (Bom.)]

In the regular assessment u/s.143(3) of the Income-tax Act,
1961 for the A.Y. 2003-04, the AO had allowed the assessee’s claim for deduction
u/s.80M of the Act. Subsequently, a notice u/s.148 of the Act, dated 27-12-2006
was issued claiming that the income chargeable to tax has escaped assessment.
The objection filed by the assessee-company to the issue of notice was rejected.

The Bombay High Court allowed the writ petition filed by the
assessee challenging the validity of the notice and held :

“(i) The power conferred u/s.147 of the Income-tax Act,
1961, cannot be used like the power of review to reopen the assessment.
U/s.147 of the Act, assessments cannot be reopened on a mere change of
opinion.

(ii) The assessee-company had fully disclosed material
facts necessary for claiming deduction u/s.80M of the Act and there was
application of mind by the AO in allowing the deduction claimed by the
assessee in the assessment order. Though the notice u/s.148 was issued on the
ground that there was reason to believe that the income had escaped
assessment, there was neither any change of law, nor had any new material been
brought on record between the date of the assessment order and the date of
formation of opinion by the AO. It was merely a fresh application of mind by
the Officer to the same set of facts and the reassessment proceedings were
initiated based on the change of opinion of the Officer.”

 


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S. 147 and S. 148 : Change of opinion is not valid basis for reopening assessment.

New Page 1

63 Reassessment : S. 147 and S. 148 of
Income-tax Act, 1961 : A.Y. 2003-04 : Change of opinion is not valid basis for
reopening assessment.


[Asian Paints Ltd. v. DCIT, 308 ITR 195 (Bom.)]

For the A.Y. 2003-04, the assessee’s claim for deduction of
expenditure on wages, provident fund contribution, gratuity and superannuation
fund was allowed by the Assessing Officer after calling for details in respect
of the same. Subsequently a notice u/s.148 was issued on 27-12-2006 for
reopening the assessment. The assessee’s objection that the assessment cannot be
validly reopened merely on the basis of change of opinion was rejected.

 

The Bombay High Court allowed the writ petition filed by the
assessee challenging the validity of the notice and held :

“(i) When a regular order of assessment is passed in terms
of S. 143(3) of the Income-tax Act, 1961, a presumption can be raised that
such an order has been passed on application of mind. If non-application of
mind by the Assessing Officer in passing an order would itself confer
jurisdiction upon the Assessing Officer to reopen the proceeding without
anything further, it would amount to giving premium to an authority exercising
quasi-judicial function to take benefit of its own wrong. The Legislature has
not conferred power on the Assessing Officer to review its own order.

(ii) Initiation of reassessment proceedings would amount to
change of opinion of the Assessing Officer as it was merely a fresh
application of mind by the Assessing Officer to the same set of facts. Since
the Assessing Officer had failed to apply his mind to the relevant material
while framing the assessment order, he could not take advantage of his own
wrong and reopen the assessment u/s.147 of the Act.”

 


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S. 23 : Standard rent not fixed : Annual value determined on basis of actual rent received

New Page 1

61 Income from house property : Annual
value : S. 23 of Income-tax Act, 1961 : Standard rent not fixed : Annual value
to be determined on the basis of actual rent received.


[CIT v. Sarabhai (P) Ltd., 176 Taxman 6 (Guj.)]

As per the rental agreement, the assessee-company had
received rental income of Rs.27,467 in the relevant year. The assessee-company
computed the house property income on the basis of the rent of Rs.27,467 so
received. The AO computed the house property income on the basis of the rental
value of Rs.1,36,508 fixed by the Small Causes Court and determined the annual
letting value of the property at Rs.1,57,675. The Tribunal deleted the addition.

 

On appeal by the Revenue, the Gujarat High Court upheld the
decision of the Tribunal and held :

“(i) As in the instant case, there was no fixation of
standard rent by any competent Court under the rent control legislation, the
same would not apply or if the standard rent was to be fixed as per the scheme
of the Rent Control Legislation, it might be required to be computed and
calculated. However, as per the language of the
relevant provisions of the Act, the higher amount is to be considered and it
was not a case of the Revenue, that the standard rent, if assessed as per the
rent control legislation, may exceed the
actual rental income received by the assessee; the income as assessed based on
the actual rental income was rightly approved by the Tribunal.

(ii) The Tribunal was right in setting aside the assessment
based on the annual rental value and was right in directing the assessment to
be made based on the actual rental income received by the assessee on the
basis of the rental agreement.”

 


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Purchase of goods by advance payment to seller : Interest earned on advance is business income eligible for deduction u/s.10B

New Page 1

60 Exemption of income : S. 10B of
Income-tax Act, 1961 : A.Ys. 1993-94 and 1994-95 : Assessee purchasing goods by
making advance payment to seller: Interest earned on advance amount is business
income eligible for deduction u/s.10B.


[CIT v. Hycon India Ltd., 308 ITR 251 (Raj.)]

The assessee had made advance payment for purchase
of goods on which the assessee earned interest income. For the A.Y. 1993-94 the
AO granted exemption u/s.10B of the Income-tax Act, 1961, in respect of such
interest income also. Exercising the powers u/s.163, the Commissioner held that
the assessee is not entitled to exemption u/s.10B in respect of the interest
income. The Tribunal reversed the order of the Commissioner and held that the
interest income was the income from business. The same view was taken by the
Tribunal for the A.Y. 1994-95.

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

“(i) ‘Profits and gains of business or profession’ and
‘income from other sources’ are different
species of income. S. 2(24) of the Income-tax Act, 1961, does not categorise
separately, profits and gains of business or profession. The expression
‘profits and gains’ used in S. 2(24) is wider and is not confined to ‘profits
and gains of business or profession’. S. 10B provides for
exemption with respect to any ‘profits and gains’ derived by the assessee, and
is not confined to ‘profits and gains of business or profession’.

(ii) The interest income received by the assessee did fall
within the expression ‘profits and gains’ and was eligible for exemption as
business income u/s.10B.”


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Capital gains : Ss. 45, 48 and 55A : Computation : Full value of consideration is actual consideration : Market value has no relevance : Reference to Valuation Officer not valid.

New Page 1

58 Capital gains : Computation : S. 45, S.
48 and S. 55A of Income-tax Act 1961 : A.Y. 1998-99 : Computation u/s.48 : Full
value of consideration is actual consideration : Market value has no relevance :
Reference to Valuation Officer u/s.55A not valid.


[CIT v. Smt. Nilofer I. Singh, 221 CTR 277 (Del.)]

In the previous year relevant to the A.Y. 1998-99 the
assessee had sold two properties for considerations of Rs.10,00,000 and
Rs.23,50,000, respectively. The AO referred the matter to the Valuation Officer
who valued the two properties at Rs.14,55,200 and Rs.53,73,000, respectively.
The AO computed the capital gain on the basis of the market value which resulted
in the addition of Rs.34,72,000. The Tribunal deleted the addition.

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

“(i) The expression ‘full value of the consideration’ used
in S. 48 does not have any reference to the market value, but only to the
consideration referred to in the sale deeds as the sale price of the assets
which have been transferred.

(ii) In the case of sale simplicitor where the full value
of consideration is the sale price of the asset transferred, there is no
necessity of computing fair market value. Hence, the Assessing Officer could
not have referred the matter to the Valuation Officer. The events under which
a reference u/s.55A can be made are like the ones occurring in S. 45(4) and S.
45(1A).”



Editor’ note : W.e.f. 2003-04, the provisions of S. 50C
would also need to be considered.

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Refund from excise duty is income derived from business eligible for deduction u/s.80-IB

New Page 1

59 Deduction u/s.80-IB of Income-tax Act,
1961 : A.Y. 2000-01 : Refund from excise duty is income derived from business of
industrial undertaking eligible for deduction u/s. 80-IB.


[CIT v. Dharam Pal Prem Chand Ltd., 221 CTR 133
(Delhi)]

For the A.Y. 2000-01 the assessee’s claim for deduction
u/s.80-IB of the Income-tax Act, 1961 included refund of excise duty amounting
to Rs.2,61,92,386 in respect of the industrial unit in question. The Assessing
Officer disallowed the claim for deduction, holding that the refund received on
account of excise duty was not ‘income derived from any business of the
industrial undertaking’. The Tribunal allowed the assessee’s claim.

 

The Delhi High Court upheld the decision of the Tribunal and
held :

“(i) The assessee was granted exemption from payment of
excise duty under various Notifications. Modality of exemption was that the
assessee, in the first instance, had to pay excise duty on clearance of goods
and after verification by the excise authorities, refund was granted. In the
circumstances, the contention of the Revenue that refund of excise duty has no
direct nexus with the assessee’s industrial activity and that it was dependent
on Notification is not tenable.

(ii) Other contention of the Revenue that if deduction
u/s.80-IB was granted, the assessee would get double benefit, once as relief
u/s.80-IB and secondly, the assessee would pass on the excise duty paid to the
customers and recover in the form of sale price is equally untenable, as
firstly, no such claim was set up by the Revenue before any of the lower
authorities and secondly, goods manufactured by the assessee not being inputs
for any other goods, apprehension of the Revenue has no substance.”


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Section A : Disclosures in Unaudited Quarterly Results regarding treatment of foreign exchange fluctuations for the period/quarter ended 31-12-2008

From Published AccountsTata Motors Ltd.

2. Net Loss after tax of Rs.26,326 lakhs for the quarter
ended December 31, 2008 includes notional exchange loss (net) of Rs.22,652 lakhs
on revaluation of foreign currency borrowings, deposits and loans given. Net
Profit after tax of Rs.40,984 lakhs for the nine months ended December 31, 2008
includes notional exchange loss (net) of Rs.63,255 lakhs on revaluation of
foreign currency borrowings, deposits and loans given.

4. Effective from April 1, 2008 the Company has applied hedge
accounting principles in respect of forward exchange contracts as set out in
Accountings Standards (AS) 30 — Financial Instruments : Recognition and
Measurement, issued by the Institute of Chartered Accountants of India.
Accordingly, all such contracts outstanding as on December 31, 2008 are marked
to market and a notional loss aggregating to Rs.16,481 lakhs (net of tax)
arising on contracts that were designated and effective as hedges of future cash
flows, has been directly recognised in the Hedging Reserve Account to be
ultimately recognised in the Profit and Loss Account depending on the exchange
rate fluctuation till and when the underlying forecasted transaction occurs.
Earlier such notional loss/gain was recognised in the Profit and Loss Account on
the basis of exchange rate on the reporting date.

&
GMR Infrastructure Ltd.


The foreign exchange loss (Net) of Rs.2,524 lakhs for the
quarter ended December 31, 2008 (2007 : Gain of Rs.96 lakhs) and Rs.12,986 lakhs
for the nine months period ended December 31, 2008 (2007 : Gain of Rs.1,829
lakhs), accounted pursuant to Accounting Standard 11 on the Effects of Changes
in Foreign Exchange Rates include the following :

(a) Vemagiri Power Generation Limited (VPGL), a notional
loss of Rs.477 lakhs for the quarter ended December 31, 2008 (2007 : Gain of
Rs.122 lakhs) and Rs.2,639 lakhs for the nine months period ended December 31,
2008 (2007 : Gain of Rs.1,392 lakhs)

(b) GMR Hyderabad International Airport Limited (GHIAL), a
notional loss of Rs.2,501 lakhs for the quarter ended December 31, 2008
(2007 : NIL) and Rs.11,012 lakhs for the nine months period ended December 31,
2008 (2007 : NIL)


The above notional foreign exchange losses of these two
subsidiaries have been accounted on the conversion of their project loans
denominated in foreign currency into Indian Rupees, using closing rates as at
the reporting date. However, both these subsidiaries have adequate foreign
currency revenues to provide hedge against any currency fluctuation risks that
may arise as and when the interest payments and principal repayments of these
loans are made and hence forex risks associated with these loans will not have
any bearing on the profitability of these two subsidiaries.

&
Reliance Industries Ltd.


The Company has continued to adjust the foreign currency
exchange differences on amounts borrowed for acquisition of fixed assets, to the
carrying cost of fixed assets in compliance with Schedule VI to the Companies
Act, 1956 as per legal advice received which is at variance to the treatment
prescribed in Accounting Standards (AS-11) on ‘Effects of Changes in Foreign
Exchange Rates’ notified in the Companies (Accounting Standards) Rules 2006. Had
the treatment as per the AS-11 been followed, the net profit after tax for the
nine months period ended 31st December 2008 would have been lower by Rs.1,177
crore (US $ 242 million).

&
The Great Eastern Shipping Co. Ltd.


1. Even though not yet mandatory, in accordance with the
recommendations of the Institute of the Chartered Accountants of India, the
Company has with effect from April 01, 2008 adopted the principles enunciated in
Accounting Standard (AS) 30, Financial Instruments : Recognition and Measurement
in respect of hedge accounting and recognition and measurement of derivatives.
Consequently, the revaluation gain/(loss) on designated hedging instruments that
qualify as effective hedges has been appropriately recorded in the hedging
reserve account. Designated hedging instruments include foreign currency loan
liabilities and currency, interest rate and bunker derivatives. Earlier, the
revaluation gain/(loss) on the foreign currency loan liabilities was recognised
in the profit and loss account, whereas the gain/(loss) on currency, interest
rate and bunker derivatives was recognised on settlement. Consequent to the
designation of foreign currency loan liabilities as hedging instruments, the
profit of the Company for the quarter and nine months ended December 31, 2008 is
higher by Rs.62.60 crores and Rs.252.18 crores, respectively. Gain/(loss) on
revaluation of ineffective hedge transactions and on settlement of hedge
transactions is recognised in the Profit and Loss Account.

2. Exceptional item includes :

(a) Net Compensation (paid)/received on cancellation of
vessel construction/sale contracts for the quarter and nine months ended
December 31, 2008 was Rs.(14.85) crores. (for the quarter and nine moths ended
December 31, 2007 the corresponding amount was Rs. ‘Nil’).

(b) Exchange gain/(loss) on revaluation of foreign currency
loan liabilities in accordance with As-11 for the quarter and nine months
ended December 31, 2008 were Rs. ‘Nil’ and Rs.(138.57) crores,
respectively. (For the quarter and nine months ended December 31, 2007 the
corresponding amounts were Rs.22.42 crores and Rs.186.49 crores,
respectively.)

Tata Steel Ltd.


Notional exchange loss during the period includes an unrealised translation loss of Rs.753.38 crores (Rs.153.56 crores for the quarter) on Convertible Alternate Reference Securities (CARS) issued in September 2007. The liability has been translated at the exchange rate as on 31st December 2008. CARS are convertible into equity shares only between 4th September 2011 and 6th August 2012 and are redeemable in foreign currency only in September 2012, if not converted into equity, and are neither convertible nor redeemable ti114th September 2011.

Bharti  Airtel  Ltd.

As reported in the last quarter, the Company has followed the accounting policy to adjust foreign exchange fluctuation on loan liability for fixed assets till June 30, 2008, as per requirement of Schedule VI of the Companies Act, 1956 based on legal advice. During the nine months period effective April I, 2008, the Company has adopted the treatment prescribed in Accounting Standard (AS-11) ‘Effect of Changes in Foreign exchange Rates’ notified in the Companies (Accounting Standard) Rules 2006 dated December 7, 2006. Instead of capitalising/ recapitalising such fluctuation as per policy hitherto followed, the Company has changed/ credited such fluctuations directly to the Profit & Loss Account.

Had the Company continued with the earlier policy net profit after tax would have been higher by Rs.245.09 crore and Rs.900.12 crore for the quarter and nine months ended December 31, 2008, respectively, for the Company and the net profit after tax would have been higher by RS.248.42 crore and Rs.929.94 crore for the quarter and nine months ended December 31, 2008, respectively, for the Group.

Reliance  Communications   Ltd.

The Company is pursuing aggressive capex plans which include significant expansion of nationwide wireless network. The Company has funded these initiatives primarily by long-term borrowings in foreign currency and Foreign Currency Convertible Bonds (‘FCCBs’). In compliance of Schedule VI of the Companies Act, 1956 and on the basis of legal advice received by the Company, short-term fluctuations in foreign exchange rates relate to such liabilities and borrowings related to acquisition of fixed assets are adjusted in the carrying cost of fixed assets. Had the accounting treatment as per Accounting Standard (AS) 11 been continued to be followed by the Company, the net profit after tax for the quarter and nine months ended 31st December 2008 would have been lower by Rs.59,566 lakh and Rs.84,837 lakh for realised and Rs.2,757 lakh and Rs.1,80,359 lakh for unrealised currency exchange fluctuation, respectively. This excludes an amount of Rs.21,048 lakh and Rs.1,14,674 lakh for the quarter and nine months ended on 31st December 2008 on FFCBs for which the Company will not be liable, if FCCBs are converted on or before the due date i.e., 1st May 2011 and 18th February 2012. This matter was referred to by the auditors of the Company in their limited review report.

 Jet Airways  Ltd.

The Company,  based  on legal advice has, from the first quarter of the current year, adjusted the foreign currency differences on amounts borrowed for acquisition of fixed assets acquired from outside India aggregating Rs.38,081 lac and Rs.188,454 lac for quarter and nine months ended 31st December 2008 to the carrying cost of the fixed assets, in compliance with Schedule VI of the Companies Act, 1956 which is in variance with the treatment prescribed in Accounting Standard (AS) 11 on ‘Effects of Changes in Foreign Exchange Rates’ notified in the Companies (Accounting Standards) Rules. Had the treatment as per AS-ll been followed, the net loss before tax for the quarter and nine months ended 31st December 2008 would have been higher by Rs.35,791 lac and Rs.185,227 lac, respectively.

Consequent to following this practice from the first quarter of the current year, the foreign currency difference (gain) previously credited to the profit and loss account aggregating Rs.20,727 lac has been reversed from the opening balance of profit and loss account and adjusted to the cost of fixed assets.

These are matters of reference in limited review report of statutory auditors.

Ranbaxy  Laboratories  Ltd.

3. Foreign exchange Loss/(Gain) on loans represents exchange differences arising during the period(s) on foreign currency borrowings including Foreign Currency Convertible Bonds.

4. (A) Pursuant to ICAI Announcement’ Accounting for Derivatives’ on the early adoption of Accounting Standard (AS) 30 – Financial Instruments: Recognition and Measurement, the Company has early adopted the said Standard with effect from October I, 2008, to the extent that the adoption does not conflict with existing mandatory accounting standards and other authoritative pronouncements, company law and other regulatory requirements. Pursuant to the adoption:

i) Transitional loss mainly representing the loss on fair valuation of foreign currency options, determined to be ineffective cash flow hedges on the date of adoption, amounting to Rs.ll,788 million (net of tax) has been adjusted against the opening balance of revenue reserves as of January I, 2008.

ii) Loss on fair valuation of forward covers, which qualify as effective cash flow hedges amounting to Rs.723 million (net of tax), on the date of adoption, has been recognised in the hedging reserve account.

B) For the quarter, foreign exchange loss arising on account of change in fair value of foreign currency options determined to be ineffective cash flow hedge, amounted to Rs.7,843 million before tax and has been recognised under ‘Exceptional items’. Net of tax the loss is Rs.5,177 million.

Essar Oil Ltd.

2. Exceptional items consist of (a) forex loss of Rs.679 crore on account of unprecedented depreciation in the value of rupee during the quarter, and (b) provision of Rs.524 crore on account of write down of inventory to net realisable value due to steep fall in crude/petroleum product prices during the quarter.

3. The Company has recognised exchange difference on all foreign currency monetary items as at the end of the period. There is no loss (net) on outstanding commodity derivative contracts at the end of the period.

Let’s not paint all bureaucrats with the same brush

Editorial

We all talk about corrupt and inefficient bureaucracy. How
many times do you think, talk or compliment those honest and efficient officers,
who against all odds try to do their job. It’s only when their life is lost or
comes in danger that these officers get recognition in the media and in the eyes
of the public.

In January this year, the additional collector of Malegaon in
Maharashtra was burnt alive when he noticed mafia stealing oil and tried to call
other government officials to the site. The gruesome murder made news. Till then
he and his work were unknown.

Just a few days back Krishna, an IIT graduate, who was the
district collector of Maoist hit Malkangiri in Orissa was abducted along with a
junior engineer. The 30-year-old IAS officer had reportedly done excellent work
in the area and had gained the appreciation, respect and confidence of the
locals. Fortunately, he and the junior engineer have been released, but not
before the State government conceded to the demands of the Maoists.

Few years back Satyendra Dubey, an engineer employed with the
National Highway Authority of India and working on the Golden Quadrilateral
Project was reprimanded, received threats to his life and eventually murdered
when he wrote to the Prime Minister exposing financial irregularities in the
Project.

These are only a few cases of officers who did their duty in
an environment where honesty and efficiency is often rewarded with their
resistance, reprimands, departmental enquiries, frequent transfers and in
occasional cases death. Such officers may be a minority, but they do exist and
in a good number doing their duty silently. So let us not paint all bureaucrats
with the same brush. There will be many officers who, given a chance and
motivation would rather be honest and efficient. We need to recognise this and
appreciate the good work of officers. Maybe that will encourage many more
officers to muster up the courage to resist corruption and opt for a different
path.

A few days back I had an opportunity to make a presentation
to young IRS recruits at the National Academy of Direct Taxes in Nagpur. These
young officers would be joining the field force in the next few months. Like
these young recruits, the youth joining various civil other services are a
bright and intelligent lot having passed a tough entrance examination after
graduation. They, in a sense, are the cream of the society. I see hope in them.
Let us endeavour to see that they don’t become victims of the system. If we
citizens while condemning corruption, also appreciate good work and honesty, we
will certainly have a better bureaucracy.

By the time this issue of the Journal reaches you, the Union
Budget 2011-12 and the Finance Bill will have been presented before the
Parliament. With the Direct Taxes Code and the Goods and Service Tax on the
horizon, one wonders if the Finance Minister will want to do substantial
amendments to the Income Tax Act or the law relating to the Service Tax. May be
there will be retrospective amendments, as usual, to nullify some court
decisions!

Following the Budget, there will be meetings, lectures,
seminars, workshops to analyse the provisions of the Finance Bill. At the same
time, the World Cup matches will also be on. Let’s see what the Finance Minister
does. Will he succeed in weaning the tax professionals and citizens at large,
from watching the World Cup matches?


Sanjeev Pandit
Editor

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Budget 2010 – A Significant Change for the Better?

Editorial

This year’s Finance Bill was
unusual for most of us. We have now got so accustomed to encountering wholesale
changes in direct tax laws (normally, over 100 clauses), that on seeing only 55
clauses dealing with direct tax amendments, we were left wondering as to whether
we had gone through the full text of the Finance Bill or whether we had missed
out on some part. One feels that the Finance Minister, Mr. Pranab Mukherjee,
must be complimented for this.

However, when one realises that
this reduction in amendments was more on account of the fact that wholesale
amendments would come in shortly in the form of the Direct Taxes Code (DTC), and
not actuated by thought of the need for stability in tax laws, one realises that
perhaps nothing has changed in the attitude of the Finance Ministry.

This is brought home by the
fact that the bane of previous Finance Bills—retrospective amendments—still
continues. One sees many such amendments this year as well. One often wondered
whether the Government would be able to save much time and effort by just
inserting a provision in the tax laws that in case any decision of the Tribunal,
High Courts or Supreme Court takes a view adverse to that held by the Tax
department, the law would be deemed to have been amended with retrospective
effect from 1961 (or the date of the relevant provision) to clarify that the Tax
department’s view is the correct one. The one positive feature this time is that
some of the retrospective amendments result in correction of earlier drafting
anomalies or are in favour of the taxpayer. One hopes that this positive trend
continues instead of the usual one-sided retrospective amendments.

The reduction in the fiscal
deficit also seems to be a good thing, given the profligacy of the government in
the past. However, when one looks back at last year, one realises that last
year’s budget bore the brunt of the earlier year’s election year budget, and
contained certain expenditure such as arrears for government employees due to
implementation of the Pay Commission recommendations. Such expenditure is absent
in 2010-11. Further, divestment of public sector undertakings is also expected
to rake in sizeable amounts, along with the auction of 3G spectrum. Hence the
magic of
reduction of deficit is not something which can be sustained, but is more due to
one-time items. Nevertheless, it is a good beginning towards financial reform.

The one thing for which the
Finance Minister must be really complimented is for doing away with the
accounting jugglery of non-accounting for oil and fertilizer subsidies by issue
of bonds, which was being recognised as expenditure only in the year of
redemption. This is a long overdue reform, as the Government itself certainly
should not resort to such window-dressing of accounts.

This time, while the service
tax rate itself has remained unchanged, contrary to expectations, the service
tax provisions seem to be fairly harsh. To tax sale of residential houses, where
the inputs are already subjected to various taxes such as VAT and service tax,
does seem unjustified. It is obvious that builders will pass on the entire
additional tax burden to buyers, irrespective of the actual effective tax burden
on the builders—one more excuse to raise prices. The very fact that homes in
India are still unaffordable for the vast majority of us, is all the more reason
why such a tax ought not to have been levied. One hopes that this amendment will
be reviewed. When air travel has just become affordable to a large number of
people, taxing domestic air travel also seems premature. These amendments would
be more appropriate when the Goods and Service Tax (GST) is actually
implemented, so that the impact is not as much, due to the full set off on taxes
paid on inputs being available against the final tax payable.

With a fresh date of 1st April
2011 now being announced for both GST and the DTC, the same date as for
implementation of IFRS , and with the Companies Bill expected to be shortly
passed, we have to unlearn what we already know and gear ourselves up to go back
to our studies to learn the major part of our professional areas of practice
afresh. Maybe we should now ask for a practice holiday, like a tax holiday, to
enable us to equip ourselves through this relearning!

Gautam Nayak

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Indian Economy — A Victim of Bad Politics ?

Editorial

The recent budget (really a vote on account) was an
eye-opener for the Indian public. Unlike normal budgets, this budget was not
cluttered with the baggage of numerous amendments to various laws, and therefore
the focus was on the budgeted figures and the actual figures for the current
year. The budget was also in the focus on account of the fact that the world
economy is in doldrums, and people were keen to know the actual impact on India
so far.

A budget is supposed to be an estimate of and a guide to
future spending. In the corporate sector, employees are taken to task for
exceeding budgeted figures, which are regarded as sacrosanct. In the context of
the Government of India, budget figures of expenditure have always been
exceeded, though normally only by a small percentage. This year being an
election year, the budget seems to have been thrown completely to the winds.
According to the estimates, the revenue deficit as a proportion of GDP for
2008-09 will be 4.4 times the budgeted figure, while the fiscal
deficit will be double the budgeted figure.

This is only the disclosed figure. If one factors in the oil
bonds and fertiliser bonds issued, which are off-budget items in the year of
issue but show up only in the year of redemption, the actual deficit is much
higher. Is there any sanctity to the budgeted figures, or is it just something
put together for public consumption because it is required by statute ?

What does this reflect ? It reveals the lack of importance
our political leaders attach to the budget process, and their sheer disregard
for all consequences to the economy in an election year.

The profligacy of politicians in power in the last few years
has ensured that the advantages of buoyant tax revenues from the booming economy
have been frittered away in good years, without saving anything for the bad
times. Now that the economy is going through a bad patch and the time has come
for the Government to spend freely to revive the economy, the Government would
obviously find it difficult to find the funds to do so.

The problem has been compounded by the fact that from the
date the election schedule is announced, the Government is totally paralysed,
and prevented from taking any major policy decisions. Most economists are
unanimous in their view that a slowdown or depression of this nature calls for
swift and decisive action by the Government. The world over, governments are
taking drastic decisions almost every week to hold up their economies. A
recession of this nature calls for concerted efforts of all governments in a co-ordinated
manner. We have the double disadvantage of a Government taking decisions from an
election viewpoint, rather than from an economic perspective, followed by a
period of indecision. Further, it seems unlikely that the elections will give a
mandate to any single political grouping. So, even thereafter, the new
Government is likely to be swayed in its decision-making by political necessity
arising out of its alliances with different parties with differing views, rather
than by economic commonsense.

In that sense, one can say that if India continues to grow,
it would be in spite of its political leaders. Our growth and prosperity would
have been significantly higher if we had leaders of the right calibre, who truly
had the national interest in mind above everything else. One wishes and hopes
that the recent public awakening witnessed after the terrorist attacks, results
in emergence of a new and better political force, which, through the sincerity
and honesty of its purpose, could help this country achieve its true potential !

Gautam Nayak

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Travel business : Expenditure on development of website is revenue expenditure allowable u/s.37(1).

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57 Business expenditure : Revenue/Capital :
S. 37(1) of Income-tax Act, 1961 : A.Y. 2001-02 : Assessee in travel business :
Expenditure on development of its website : Is revenue expenditure allowable
u/s.37(1).


[CIT v. Indian Visit.com (P) Ltd., 176 Taxman 164 (Del.)]

The assessee was engaged in travel business. The assessee
made all kinds of arrangements for its clients such as booking of hotel rooms,
providing taxi services, booking of air tickets and railway tickets, etc. During
the relevant year the assessee had incurred an expenditure of Rs.20,23,317 on
development of its website. The assesse’s clients could use the said website for
the purpose of availing of the services provided by it. The assessee had claimed
the deduction of the said expenditure as business expenditure u/s.37(1) of the
Income-tax Act, 1961. The Assessing Officer disallowed the claim holding that
the expenditure was of capital nature inasmuch as the assessee had acquired an
asset, which would provide it with an enduring benefit. The Tribunal allowed the
assessee’s claim.

 

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

“(i) Considered in the light of the principles enunciated
by the Supreme Court, it is clear that just because a particular expenditure
may result in an enduring benefit it would not make such an expenditure
capital in nature. What is to be seen is what is the real intent and purpose
of the expenditure and as to whether there is any accretion to the fixed
capital of the assessee. In the case of expenditure on website, there is no
change in the fixed capital of the assessee. Although the website may provide
an enduring benefit to an assessee, the intent and purpose behind a website is
not to create an asset, but only to provide a means for disseminating the
information about the assessee. The same could very well have been achieved
and, indeed, in the past, it was achieved by printing travel brouchers and
other published material and pamphlets. The advance of technology and the
wide-spread use of the Internet has provided a very powerful medium to
companies to publicise their activities to a larger spectrum of people at a
much lower cost. Websites enable companies to do what the printed brouchers
did, but in a much more efficient manner as well as in a much shorter period
of time and covering a much larger set of people worldwide.

(ii) The Tribunal has correctly appreciated the facts as
well as the law on the subject and has come to the conclusion that the
expenditure on the website was of a revenue nature and not a capital nature.”


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Appellate : Powers in matters remitted by High Court restricted to directions by High Court.

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56 Appellate Tribunal : Powers in matters
remitted by High Court : Powers restricted to directions by the High Court.


[Harsingar Gutkha (P) Ltd. v. ITAT, 176 Taxman 137
(All.)]

In an appeal filed by the assessee against the order of the
Tribunal the Allahabad High Court remanded the matter back to the Tribunal to
redecide the case on the basis of the material on record. Thereafter, by its
order dated 25-7-2008 the Tribunal directed the Assessing Officer to record the
statements of D and G to ascertain certain facts.

On a writ petition filed by the assessee challenging the said
order of the Tribunal, the Allahabad High Court held as under :

“(i) We are of the view that it was not open for the
Income-tax Appellate Tribunal to take fresh material on record by the impugned
order dated 25-7-2008. The Tribunal has directed the Assessing Authority to
record the statements of Shri Dinesh Singh, ACA and Shri G. L. Lath,
chartered accountant, which will amount to additional evidence/material in
the case. By the judgment and order passed by this Court, the Tribunal was
directed to adjudicate the matter afresh on the basis of the material on
record.

(ii) When a direction is issued to an Authority or Tribunal
to do a thing in certain manner, the thing must be done in that manner and no
other manner. Other methods of performance are necessarily forbidden.

(iii) In the instant case, the matter was remitted to the
Tribunal by this Court with certain directions and it was not open for the
Tribunal to take fresh evidence in the matter, as no such direction was issued
by this Court. The impugned order by which a fresh direction has been issued
by the Tribunal to the Assessing Officer is legally not sustainable.”


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GAPs in GAAP – Are We Really Converging to IFRS ?

Accounting standards

On a perusal of Ind-ASs, the Indian IFRS equivalent, it is
clear that they are not the same as IFRS as issued by IASB in many respects. The
differences are so numerous that people are questioning the need to change from
existing Indian GAAP to another form of Indian GAAP. Is the change and hard work
justifiable, if Indian entities are unable to proclaim that their financial
statements are IFRS-compliant and use them for cross-border fund raising or
other purposes ?

Certainly each country should have its own endorsement
process to notify accounting standards. However, that process should not be used
for ‘carve-outs’ unless they are absolutely necessary in the rarest of rare
circumstances and on sound technical grounds. The main concerns on Ind-AS are as
follows.

    (a) IFRS as issued by IASB are accepted globally on all major stock exchanges. As Ind-AS contain significant deviations from IFRS, the same may not be accepted for the purpose of raising funds from capital markets outside India. Adopting IFRS without carve-outs will make capital flows in and out of India seamless.

    (b) Global and local investors and the analyst community may not find Ind-AS financial statements very useful, as they will not be comparable with peer group companies across the globe.

    (c) In India, there are many entities with a presence in more than one part of the world, for example, they may have foreign parents/subsidiaries. Such companies look at conversion to IFRS as an opportunity to have one accounting language across all their units and eliminate the need for preparing financial statements under multiple GAAPs. The only way this can be achieved is if the entity complies with IFRS as issued by the IASB in entirety.

    (d) There is a threat that IASB may publicly disown Ind-AS as being IFRS-compliant, in which case India’s G-20 and commitments made to European Union may be put to question.

    (e) Adopting IFRS without deviations would help India’s young accounting work force to seek global opportunities and also significantly enhance its BPO potential.

Many of the differences between Ind-AS and IFRS do not
represent the economic substance of the transaction and hence may be a
disservice to all investors and providers of risk capital (and not just global
investors), for whom these financial statements are predominantly prepared. For

example:

  • The option to defer
    exchange differences on long-term monetary items is given with an intention to
    provide relief to companies who want to smoothen the impact of exchange
    differences on its statement of profit and loss. Notwithstanding the
    intention, amortisation will not result in smoothening in all cases. If
    exchange rates show an increasing trend, then exchange difference impact of
    earlier years will cause a major dent in subsequent years close to repayment
    of those long-term monetary items — for example — A company has taken a loan
    of USD 100 in year 1999-2000 repayable after three years when the exchange
    rate was 1 USD = Rs. 43. Exchange rates at the end of year 1999-2000,
    2000-2001 and 2001-2002 were 1 USD 43.63, Rs. 46.46 and Rs. 48.89,
    respectively. If the company does not avail the option, it will charge off
    exchange loss of Rs. 63, Rs. 283, Rs. 243 in each of the year respectively.
    With the use of option, charge to P&L in each of the year will be Rs. 21, Rs.
    163 and Rs. 406, respectively. It is clear that the use of option will lead to
    backloading charge of earlier years in certain situations.

  • Whilst
    smoothening may be preferred by some preparers of financial statements, what
    is relevant to investors and analyst is a full recognition policy, as that
    depicts the position of the company as at a particular date, which an
    amortisation policy distorts. Assuming all things remain the same, a company
    would be preferred by an investor if it did not have a carry forward exchange
    loss.

    Further, there are other related issues which are not addressed in Ind-AS —
    for example — whether deferment of gains/losses as per the option will impact
    the calculation of adjustment to interest cost as per Ind-AS 23 or how hedge
    accounting will work if a company has taken fair value hedge against the
    underlying foreign currency monetary item ?

  • Unlike IFRS, Ind-AS
    40 does not permit the use of fair value model, for measurement of investment
    property. Ind-AS 40, however, mandates the fair value disclosure for
    investment property. A big accounting firm recently conducted a survey on IFRS
    financial statements of 30 global real estate companies. Out of these 30
    companies, 27 have used the fair value model. Considering the global practice,
    Indian real estate companies should also be allowed to reflect true value of
    their assets in their balance sheet as that is the only relevant yardstick
    from an investor ‘s perspective. Whilst under Ind-AS 40 information on fair
    value will be required in the notes to financial statements these would not be
    prepared with the same level of rigidity as it would if those were recorded in
    the financial statements.

  • As per IAS 19,
    the rate used to discount post-employment benefit obligations is determined by
    reference to market yields on high quality corporate bonds. IAS 19 allows the
    use of market yields on government bonds as a fall-back if there is no deep
    market in corporate bonds. In contrast, Ind-AS mandates the use of market
    yields on government bonds for discounting, in all cases. Many Indian
    companies have operations all across the globe including regions where there
    are deep and liquid markets for high-quality corporate bond rates only. Ind AS
    should permit the use of high-quality corporate bond rates in such instances
    to avoid practical difficulty in re-computing defined benefit obligation of
    foreign operation who were determining their defined benefit liability using
    IAS 19 or equivalent principles. This will also result in the saving of time
    and cost for preparers of financial statements.

  • Ind-AS 101 does
    not mandate comparative information to be given as per Ind-AS. The comparative
    information will be under the Indian GAAP. It is difficult to understand how
    investors or analysts can understand these financial statements that do not
    contain comparable numbers prepared under the same framework.

In addition, it is likely that practice related differences are likely to emerge between IFRS and Ind-AS. For example, globally under IFRS, rate regulated assets are not recognised as they do not fulfil the definition of an asset under the IFRS framework. Under the current Indian GAAP practice is to recognise rate-regulated adjustments as assets. It is most likely that this practice under the Indian GAAP may be carried forward under Ind-AS. Another example is that of agricultural accounting. Under IFRS biological assets are fair valued under IAS 41. However, Ind-AS will not contain any standard on agricultural accounting for the time being and consequently the practice of measuring biological assets at cost under the Indian GAAP most likely would be carried forward under Ind-AS.

Regulatory hurdles may also widen the gap between Ind-AS and IFRS — for example — depreciation rates under Schedule XIV of the Companies Act may de facto become the norm though those may not reflect the useful life of an asset for a company and hence may not comply with IFRS. The Companies Act needs to be amended to disable certain sections which are not aligned to IFRS accounting, for example, section 391 and section 394 permit departure from accounting standards in an amalgamation or restructuring exercise. Even if these sections are amended, those probably can only have a prospective effect. Therefore it is not clear what happens to the accounting prescribed in court sanctioned schemes prior to amendment of section 391 and section 394 which may be in conflict with IFRS.

Further, more changes may emerge in the future between the two frameworks, as IFRS standards undergo a change, which may not be incorporated in Ind-AS. Given the existing date uncertainty on IFRS implementation, and the substantial dilution of IFRS, the global community would question India’s ability to push through major reforms. By adopting IFRS as it were, India could have played a leading role in the global arena; unfortunately, this is a missed opportunity, for a nation that aims to become the third largest economy in the next few decades. People will continue to question the need to move from one set of Indian GAAP to another set of Indian GAAP.

GAPs in GAAP – Accounting for Agriculture

Accounting Standards

IAS-41 prescribes the accounting treatment for agriculture,
which includes biological transformation of living animals or plants for sale,
into agricultural produce, or into additional biological assets. IAS-41 requires
measurement at fair value less estimated point-of-sale costs from initial
recognition of biological assets up to the point of harvest, except in rare
cases.

IAS-41 requires that a change in fair value less estimated
point-of-sale costs of a biological asset be included in profit or loss for the
period in which it arises. Under a historical cost accounting model, a
plantation forestry enterprise might report no income until first harvest and
sale, perhaps 30 years after planting. On the other hand, IASB believes an
accounting model that recognises and measures biological growth using current
fair values reports changes in fair value throughout the period between planting
and harvest.

Where market-determined prices or values are not available
for a biological asset in its present condition, IAS-41 requires use of the
present value of expected net cash flows from the asset discounted at a current
market-determined pre-tax rate in determining fair value.

When IAS-41 was issued it met with severe criticism because
many agricultural assets are simply not subject to reliable estimates of fair
value. Take for instance, a pony which is kept as a potential breeding stock,
grows into a fine stallion. The stallion starts winning race events. The
stallion earns substantial amount for its owner from breeding services. The
stallion gets older, his utility decreases. Eventually the stallion dies of old
age and the carcass used as pet food. At each stage in the life of the horse,
the fair values would change significantly, but estimating the fair values could
be extremely subjective and difficult. In many ways, the stallion reminds one of
fixed assets. Changes in fair value of fixed assets are not recognised in the
income statement, then why should the treatment be different in the case of
agricultural non-financial assets ?

Vineyards and coffee and tea plantations have similar
measurement issues. The relationship between the vines and coffee or tea plants
and the land that they occupy is unique and integrated. The vine or plant itself
has relatively little value. However, in conjunction with the land, they do have
value. Determining the fair value for a vineyard, coffee or tea plantation
involves estimating the production along with sales prices and costs for a
number of years in the future, together with estimating a terminal value and the
application of a discount rate to calculate the net present value — an
enormously complex and subjective task. The value of the vines and plants would
then have to be determined as a residual because it would be calculated by
deducting the value of the unimproved land and the value of the infrastructure
from the aggregate value. It is clear that the valuation, as a result of the
estimates and subjectivity, is open to substantial variability.

Because biological assets are subject to droughts, floods and
diseases, the unrealised gains arising from changes in fair value can give a
distorted picture of the financial results of the agricultural enterprise. It
could be misunderstood and may lead to inappropriate decision-making, such as
dividend declaration from unrealised profits. Another question about the
reliability of measurements relates to the homogeneity of the assets. During the
transformation process, it could be very difficult to determine the likely
quality. Even if the quality is known, estimating the price and the market where
the produce would be ultimately sold could become a challenge.

Although the recognition of unrealised gains and losses on
financial assets is achieving wider acceptance, the IASB has not yet put forward
any convincing arguments in favour of a fair value model for non-financial
assets.

IAS-38, Intangible Assets, allows intangible assets to be
carried at revalued amounts. However, for intangible assets to be carried at
revalued amounts, IAS-38 imposes strict criteria — an active market is
necessary, which requires items traded to be homogeneous, with willing buyers
and sellers normally being found at any time and prices being available to the
public. However, IAS-41 does not impose the same hurdles for agricultural assets
and requires them to be fair valued except in rare cases. The IAS-41 approach
therefore is inconsistent with other international standards.

In India, there is no accounting standard on biological
assets and agricultural produce. Accounting standard on agriculture is the need
of the hour as many Indian companies are venturing in these businesses in big
way due to thrust on retail, dairy, horticulture, etc. Given the criticisms on
fair valuation and the fact that commercial farming enterprises in India operate
as private companies and surely don’t need the additional cost burden that may
not produce reliable results, the ICAI should develop a standard based on the
historical cost model.

levitra

Restriction on Deduction due to section 80-IA(9)

Controversies

Issue for consideration :

Chapter VIA of the Income-tax Act, 1961 deals with various
deductions. Part A of this Chapter details the scheme of deductions, while part
C contains the provisions for allowing certain deductions in respect to profits
and gains from a business. Section 80A, falling in part A, provides that
deductions are to be made from the gross total income, and that the aggregate
amount of the deductions shall not exceed the gross total income.

Section 80AB, also falling in part A of Chapter VIA, provides
that where any deduction is required to be made or allowed under any section
falling in part C of that Chapter, in respect of any income of the nature
specified in any of the relevant sections which is included in the gross total
income, the amount of income of that nature as computed in accordance with the
provisions of the Income-tax Act shall be deemed to be the amount of income of
that nature derived or received by the assessee and included in his gross total
income.

Section 80IA(9), which falls in part C of Chapter VIA,
provides as under :

“Where any amount of profits and gains of an undertaking or
an enterprise is claimed and allowed under this section for any assessment
year, deduction to the extent of such profits and gains shall not be allowed
under any other provision of this Chapter under the heading
‘C — Deductions in Respect of Certain Incomes’, and shall in no case exceed
the profits and gains of such eligible business of undertaking or enterprise,
as the case may be.”

The question that repetitively arises for the consideration
of the courts is about the quantum of deduction in cases where an assessee is
eligible to claim deduction under more than one section of part C of Chapter VIA
based on different criteria, for instance, u/s.80HHC for export profits and
section 80IA for new industrial undertaking, and the manner of computation of
deductions under both the sections. While the Delhi and Kerala High Courts have
held that for the purpose of computing deduction u/s.80HHC, the deduction
already allowed u/s.80IA has to be reduced from the eligible business profits,
the Bombay and Madras High Courts have taken a contrary view that the amount of
such deduction u/s.80IA is not to be reduced in computing the export profits for
the purpose of deduction u/s.80HHC, so however the aggregate of the deductions
under both the provisions is restricted to the business profits derived from the
eligible business.

To illustrate, if the profits of an eligible business are 100
and the deduction u/s.80IA is 20, the issue is whether, for the purpose of
computation of the deduction u/s.80HHC, the profits of the business are to be
considered as 80 (as held by the Delhi High Court) or as 100 (as considered by
the Bombay High Court). There is no dispute that the total deduction cannot
exceed 100. The issue, therefore, really is whether the profits eligible for
computation of the deduction u/s.80HHC is impacted by the provision of section
80IA(9), or whether the said provision restricts the quantum of deduction
u/s.80HHC after it is computed.

Though the decisions covered in this column pertain to
deductions u/s.80IA and u/s.80HHC, and deduction u/s.80HHC is no longer
available, the principle laid down by these decisions would still be applicable
in the context of section 80IA and other deductions under part C of Chapter VIA.

Great Eastern Exports case :

The issue arose recently before the Delhi High Court in the
case of Great Eastern Exports v. CIT, 237 CTR (Del.) 264, and four other
cases disposed of through a common order.

In all these cases, the assessees had claimed deductions
under both section 80HHC and section 80IA. The Assessing Officer reduced the
amount of business profits by the deduction allowed u/s.80IA for computing the
deduction u/s.80HHC, negating the stand of the assessees that for computing
deduction u/s.80HHC, the eligible profits were to be taken, irrespective of the
deduction allowed u/s.80IA i.e., without reducing such profits by the
amount of deduction claimed u/s.80IA.

The Delhi High Court examined the provisions and the history
of Chapter VIA, and noted that prior to the amendment made by insertion of
section 80IA(9) in 1999, it had been held by the courts that each relief under
Chapter VIA was a separate one and had to be independently determined, and would
not be abridged or diluted by any of the other reliefs.

The argument on behalf of the assessees was that this
amendment had not made any change as to the manner of computation and deduction
of various provisions under part C of Chapter VIA, but only restricted the total
deduction under all those sections to the profits and gains. It was argued that
section 80AB, the controlling and governing section for all deductions under
part C of Chapter VIA, was a non obstante clause and would therefore
prevail over section 80IA(9); it referred to ‘gross total income’, and not ‘net
income’. It was also argued that a harmonious construction should be given
rather than a literal interpretation, considering the object of section 80IA(9)
of preventing deduction of more than 100% of profits and gains of the
undertaking by claiming multiple deductions under different sections.

The Delhi High Court, analysing the provisions of section
80IA(9), observed that by reading the plain language, once an assessee was
allowed deduction u/s.80IA to the extent of such profits and gains, he was not
to be allowed further deductions under part C of Chapter VIA in respect of such
profits and gains, and that in no case the deduction would exceed the profits
and gains of such eligible business. According to the Delhi High Court, the
expressions used ‘deduction to the extent of such profits’ and the word ‘and’ in
this section were very crucial. According to the Court, while the first
expression signified that if an assessee was claiming benefit of deduction of a
particular amount of profits and gains u/s.80IA, to that extent profits and
gains were to be reduced while calculating the deductions under part C of
Chapter VIA. The use of the word ‘and’, signified that the said provision was
independent — namely, the total deduction should not exceed the profits and
gains in a particular year.

The Delhi High Court observed that even a layman who had some proficiency in English would understand the meaning of that provision in the manner that they had explained, and that the provision aimed at achieving two independent objectives. According to the Delhi High Court, if the language of the statute was plain and capable of one and only one meaning, that obvious meaning had to be given to the provision. The Delhi High Court rejected the argument that section 80AB would be rendered otiose by such interpretation, by holding that there was no conflict within the two provisions, as section 80AB dealt with computation of deductions on gross total income, whose purpose was achieved, even otherwise, on reading these provisions and interpreting them in the manner they had done. The Delhi High Court refused to consider the clarification given by CBDT Circular number 772, on the ground that the notice and objects of accompanying reasons were only an aid to construction, which was needed only when literal reading of the provisions led to an ambiguous result or absurdity.

The Delhi High Court therefore held that for the purpose of computing deduction u/s.80HHC, the deduction already allowed u/s.80IA had to be reduced from the profits of the business.

Associated Capsules’ case:

The issue again recently came up before the Bombay High Court in the case of Associated Capsules (P) Ltd. v. Dy. CIT & Anr., 237 CTR (Bom.) 408.

In this case, the assessee had claimed deduction u/s.80IA at 30% of the profits and gains from the eligible business undertakings and deductions u/s.80HHC at 50% of the profits from the export of goods. The Assessing Officer computed the deduction u/s.80HHC on the business profits computed after deducting 30% of such profits which was allowed u/s.80IA.

The Commissioner (Appeals) held that section 80IA(9) did not authorise the Assessing Officer to reduce the amount of profits of business allowed as deduction u/s.80IA from the total profits of business while computing deduction u/s.80HHC, that both deductions have to be computed independently, and thereafter the deduction computed u/s.80IA has to be allowed in full and the deduction computed u/s.80HHC was to be restricted to the balance profits of the business duly reduced by the deduction allowed u/s.80IA, so that the aggregate of the deductions did not exceed the profits of the business of the undertaking.

The Income Tax Appellate Tribunal reversed the order of the Commissioner(Appeals), following the decision of the Special Bench of the Tribunal in the case of Asst. CIT v. Hindustan Mint & Agro Products (P) Ltd., 119 ITD 107 (Del). The Tribunal held that section 80IA(9) had the effect of reducing the eligible profits available for deduction u/s.80HHC.

Before the Bombay High Court, on behalf of the assessee, it was argued that the restriction imposed by section 80IA(9) was not applicable at the state of computation of deduction u/s.80HHC(3), but was applicable at the stage of allowing deduction u/s.80HHC(1). It was argued that the plain reading of section 80IA(9) did not suggest that the deduction allowable u/s.80HHC had to be computed by reducing the amount of profits allowed u/s.80IA. It was argued that wherever the Legislature intended that the deduction allowed under one section shall affect the computation of deduction allowable under another section, the Legislature had specifically stated so by using the term ‘such part of profits shall not qualify’, which term was not used in section 80IA(9). It was further argued that the expression ‘profits of the business’ for the purpose of deduction u/s.80HHC had been defined in that section, and that section 80IA(9) did not use a non obstante provision to override that definition.

It was further argued on behalf of the assessee that the basis for deduction u/s.80IA and u/s.80HHC were totally different, and that therefore the restriction imposed u/s.80IA(9) had no relation to the computation of deduction u/s.80HHC. It was further urged that the two restrictions contained in section 80IA(9) have to be read together and on such a reading, it was clear that the restrictions were with reference to allowability and not computability of deductions under other provisions of part C of Chapter VIA. Reliance was placed on the explanatory memorandum to the Finance Bill, 1998 explaining the reasons for inserting section 80IA(9), and to the CBDT Circular number 772, dated 23rd December 1998 for this proposition. Lastly, it was argued that deduction u/s.80IA was on one part of the profits (profits of an industrial undertaking), while deduction u/s.80HHC was on a different part of the profits (profits derived from exports), and that both deductions were not allowed on the same profit.

On behalf of the Revenue, it was argued that a plain reading of section 80IA(9) showed that the deduction to the extent of profits claimed and allowed u/s.80IA could not be taken into account while computing deduction u/s.80HHC. It was claimed that in order to check the misuse of double deduction, it was necessary to exclude the deduction allowed u/s.80IA from profits available for deduction u/s.80HHC. Reliance was placed on the decision of the Delhi High Court in the case of Great Eastern Exports (supra) and on the decision of the Kerala High Court in the case of Olam Exports (India) Ltd. v. CIT, 229 CTR (Ker.) 206, where a similar view had been taken by the courts. Lastly, it was argued that the restrictions u/s.80IA(9) affected the whole of section 80HHC, and not just the allowability.

The Bombay High Court analysed the background and object behind insertion of section 80IA(9), as explained in the explanatory memorandum to the Finance Bill, 1998, 231 ITR (St) 252. The Bombay High Court also examined the language of section 80IA(9) which provided that the deduction to the extent of profits allowed u/s.80IA shall not be allowed under any other provisions, which, according to the Bombay High Court, did not even remotely refer to the method of computing deduction under other provisions, but merely sought to curtail allowance of deduction and not computability of deduction under any other provision of part C of Chapter VIA. According to the Bombay High Court, the words ‘shall not be allowed’, could not be interpreted as ‘shall not qualify’.

The Bombay High Court considered the decision of the Delhi High Court in the case of Great Eastern Exports (supra), and noted that the Delhi High Court had failed to consider one of the arguments of the counsel for the Revenue in that case. The counsel had argued that in the matter of grant of deduction, the first stage was computation of deduction and the second stage was the allowance of deduction, and that computation of deduction had to be made as provided in the respective sections and it was only at the stage of allowing deduction u/s.80IA(1) and also under other provisions of part C of Chapter VIA, that the provisions of section 80IA(9) came into operation. The Bombay High Court noted that the Delhi High Court had not rejected this argument and therefore could not have arrived at the conclusion that it did without rejecting that argument. The Bombay High Court expressed its dissent with the views of the Kerala High Court for the same reasons.

The Bombay High Court noted that the object of section 80IA(9) was to prevent taxpayers from claiming repeated deductions in respect of the same amount of eligible income and in excess of the eligible profits, and not to curtail the deductions allowable under various provisions of part C of Chapter VIA. The Bombay High Court therefore held that section 80IA(9) did not affect the computability of deduction under various provisions of part C of Chapter VIA, but affected the allowability of such deductions, so that the aggregate deduction u/s.80IA and other provisions under part C of Chapter VIA did not exceed 100% of the profits of the business of the assessee.

A similar view had been taken by the Madras High Court in the case of SCM Creations v. Asst. CIT, 304 ITR 319.

Observations:

The purpose behind insertion of section 80IA(9) has been set out in CBDT Circular No. 772, dated 23rd December, 1998 as under:
“It was noticed that certain assessees claimed more than 100% deduction on such profits and gains of the same undertaking, when they were entitled to deductions under more than one Section of Chapter VIA. With a view to providing suitable statutory safeguard in the Income-tax Act to prevent the taxpayer from taking undue advantage of the existing provisions of the Act by claiming repeated deductions in respect of the same amount of eligible income, even in cases where it exceeds such eligible profits of an undertaking or a hotel, inbuilt restrictions in section 80HHD and section 80IA have been provided by amending the Section, so that such unintended benefits are not passed on to the appellant.”

The purpose of the amendment gathered from the understanding of the Board clearly seems to be to restrict the total of the deductions to 100% of the eligible profits. Had the Delhi High Court appreciated this part of the contention of the assessee that even the Board, the administrative body, was of the view that the scope of the provision contained in section 80IA(9) was to restrict the aggregate of the deductions under the two provisions of the Chapter C to the overall profits and gains, its conclusion may have been different. The Court instead rejected any need to apply its mind to such an analogy on the ground that adopting such an insidious approach was not called for where the language of the provision was clear. The stand of the Board is clearly derived from the memorandum explaining the provisions of section 80IA(9). In any case, the stand taken by the Board could have been taken as a concession conferred on the taxpayer by the Government.

The Chapter is replete with the provisions introduced for curtailing the base for deduction like section 80HHB(5), section 80HHBA(4), section 80HHD(7), section 80IE(4), section 80P, etc. These provisions use a language materially different to the language employed by section 80IA(9) for restricting the scope of the computation of deduction itself. The Parliament where desired had adopted a clear and different language to convey its aim of diluting the basis of deduction and restricting the scope of the computable income.

Section 80IA(9) as explained by the Memorandum and the Circular merely provides that when a deduction u/s.80IA has been allowed, deduction to the extent of such profits and gains shall not be allowed under any other provision, and does not state that such profits and gains shall not be taken into account for computing such other deductions. The Bombay High Court has appreciated in the proper perspective the difference between inclusion of such profits in a computation and inclusion of such profits in the actual deduction as explained by the Memorandum and the Circular.

G. P. Singh in ‘Principles of Statutory Interpretation’ suggests a departure from the rule of literal interpretation as under:
“It has already been seen that a statute has to be read as a whole and one provision of the Act should be construed with reference to other provisions in the same Act so as to make a consistent enactment of the whole statute.

Such a construction has the merit of avoiding any inconsistency or repugnancy either within a section or between a section and other parts of the statute. It is the duty of the Courts to avoid a ‘head on clash’ between two sections of the same Act and whenever it is possible to do so, to construe provisions which appear to conflict so that they harmonise.”

The Bombay High Court’s interpretation in Associated Capsule’s case is a step towards harmonising the provisions of section 80AB, section 80HHC and section 80IA(9).

It is significant to note, specially in the context of section 80HHC, that the deduction under that section is required to be computed w.r.t. the profits of the business which is artificially defined under Explanation (baa) of the said section and such artificial profits are far detached form the profit that is eligible for deduction u/s.80IA and therefore it is difficult to hold that the double deduction is claimed on the same profit. In any case, as noted, the basis on which the amount of deduction is computed under the two different provisions is significantly different.

A provision introduced for restricting the scope of a benefit under another provision has to contain a non obstante clause which is found missing in section 80HHC and on this count alone, any attempt to curtail the basis of the profit eligible for deduction u/s.80HHC should be avoided. Section 80IA(9) should at the most be seen to be achieving the same thing as is achieved by section 80AB and may be taken as a provision introduced to achieve greater clarity on the subject.

The decision of the Bombay High Court has the effect of overruling the two decisions of the Special Bench in the case of Rogini Garments & Others, 111 TTJ 274 (Chennai) and Hindustan Mint & Agro Products (P) Ltd., 123 TTJ 577 (Del.) and dissenting with the two decisions of the High Courts of Delhi and Kerala. In view of the sharp division of views of the Courts and considering the fact that the issue has the large tax effect, it is desired that the issue be settled at the earliest by the Apex Court.