1.1 Scope of ‘Inputs’/Input Services — Subject of extensive litigations:
The scope of ‘inputs’ and ‘input services’ eligible to CENVAT credit under the CENVAT Credit Rules, 2004 (CCR) has been subject of extensive judicial controversy having significant implications.
The Supreme Court had interpreted the scope of ‘inputs’ narrowly in the case of Maruti Suzuki Ltd. v. CCE, (2009) 240 ELT 41 (SC).
In Chemplast Ltd. v. CCE, (2010) 17 STR 253, it was held that ‘input services’ definition including activities relating to business cannot be interpreted to include post-manufacturing activities. In Kbace Tech Pvt. Ltd. (2010) 18 STR 281, a narrow interpretation of ‘input service’ was made on the basis of Supreme Court ruling in Maruti Suzuki (supra).
In the mean time, the Bombay High Court in a landmark ruling in Coca Cola India Pvt. Ltd. v. CCE, (2009) 15 STR 657 (Bom.) held that scope of ‘input services’ is very wide to cover all business related services.
However, in CCE v. Manikgarh Cements Works, (2010) 18 STR 275 (Tri.-Mumbai), the Tribunal, held that the Bombay High Court ruling in Coca Cola case has been impliedly overruled by the Supreme Court ruling in Maruti Suzuki in regard to inputs, and a narrow interpretation was given to the scope of ‘input service’. This ruling was confirmed by the Bombay High Court in CCE v. Manikgarh Cement, (2010) 20 STR 456 (Bom.).
In a subsequent ruling by the Bombay High Court in CCE v. Ultratech Cement Ltd., (2010) 20 STR 577 (Bom.), after considering the Supreme Court ruling in Maruti Suzuki and the Bombay High Court ruling in Coca Cola, a wide interpretation has been given to the scope of ‘input services’ eligible to CENVAT credit.
Amidst all this, in a subsequent ruling, the Supreme Court in Ramala Sahkari Chini Mills Ltd. (2010) 260 ELT 321 (SC) doubted the Supreme Court ruling in Maruti Suzuki and has referred the matter to a larger Bench.
On this backdrop, significant and far-reaching changes have been made in CCR w.e.f. 1-4-2011, in particular relating to scope of ‘inputs’/ ‘input services’ eligible to credit rule providing for proportionate credit rules, point of credit availment, etc.
The more important amendments, essentially from a service provider’s perspective are discussed hereafter.
1.2 Government clarification:
Relevant extract from the Department clarification dated 28-2-2011 explaining the amendments is as under:
Para 1.1
The changes in the Cenvat Credit Rules are guided inter alia by the following considerations:
(a) Describe the scope of eligible inputs and input services more clearly so as to minimise disputes in their interpretation;
(b) Eliminate distortions and areas of tax avoidance arising from differential treatment of goods and services used for similar purposes;
(c) Provide a practical scheme for the segregation of Cenvat credits used in respect of final products and output services where they are partially exempted with condition that no such credits shall be taken;
(d) Liberalise the provisions in certain areas to meet the legitimate demands of business;
Overall comments:
An overall study of the amendments in CCR in totality clearly indicates that the CENVAT credit benefit of service tax paid on input services, would be substantially curtailed with effect from 1-4-2011.
The rate of service tax was increased from 5% to 10% during a short period of about 15 months. At that time, questions were posed before the Government, as to how would the business and end consumers absorb the 100% increase in a short time. At that time, Government had explained to the effect that impact of increase in the rate of service tax would be substantially neutralised by introduction of CENVAT credit mechanism across goods and services. The amendments are clearly against the stated position of the Government.
Further, it is the cardinal principle of VAT/GST tax system prevalent in over 100 countries that taxes paid on expenditure incurred for the purpose of business can be set off against VAT/GST payable at the output stage. Amendments in CENVAT credit denying credit of service tax paid on business expenses, is against the principles of VAT/ GST system prevalent world-wide.
Further, amendments do not appear to be trade/ taxpayer-friendly in the backdrop of imminent introduction of GST regime.
2. Exempted services:
Definition of ‘exempted services’ in Rule 2(e) of CCR has been amended to include taxable service, which is partially exempted, on the condition that no credit of inputs/input services used for taxable service shall be taken.
An Explanation has been added to clarify that ‘exempted services’ includes trading.
Comments:
(a) It is commonly found that a person is often engaged in trading activity (buying and selling of goods/services). The same could exist in one or more of the following combinations:
- Only trading
- Manufacturing and trading
- Services and trading
- Manufacturing, services and trading
As regards pure trading activity, it was very clear that benefit of CENVAT credit (viz. Service Tax paid on input services and excise duty paid on inputs/capital goods) would not be available to such dealer.
In Metro Shoes Pvt. Ltd. v. CCE, (2008) 10 STR 382 (Tri.-Mumbai) it was observed as under:
“. . . . . . Credit availed on the services which are directly/wholly attributable to the trading activity is ineligible to be availed as input service credit.”
In regard to persons engaged in trading activities along with manufacturing/services/or both, there was no clarity as regards availment of CENVAT credit on common input services.
In the case of Orion Appliances Ltd. v. CST, (2010) 19 STR 205 (Tri.-Ahd.) where the assessee, providing taxable services and engaged in trading activity, availed CENVAT credit on iput services used for taxable services as well as trading activity, the Tribunal held as under:
Trading activity is nothing but purchase and sales and cannot be called a service and therefore it cannot be considered as exempted service.
Rules 6(2) and 6(3) of CCR only deal with a situation where service provider is providing taxable and exempted services. Therefore, since trading activity is not an exempted service, Rule 6 cannot be applied to such a situation.
(b) On this backdrop, the burning issue of common input services in regard to trading activity is sought to be addressed by treating ‘trading’ as ‘exempted service’ through insertion of an Explanation in Rule 2(e) of CCR which defines ‘exempted services’.
This is a significant amendment, spelling out an important policy perspective, which is likely to result in curtailment on CENVAT credit available to service providers involved in trading business. It is felt that a clarification need to be issued to the effect that the amendment would be effective 1-4-201
Further, one can understand ‘trading activities’ being treated on similar lines as ‘exempted services’ for the limited purpose of determination of proportionate credit under Rule 6 of CCR. However, amendment made in section 2(e) of CCR, is likely to result in larger legal issues as to whether ‘trading activity’ can be regarded as ‘service’ at all so as to be regarded as ‘exempted services’.
(c) It seems that all services in respect of which, abatement is claimed (in terms of Notification No. 1/2006-ST) would now get treated as ‘exempted services’. Thus services like mandap keeper construction of complex commercial or industrial construction, catering, etc. where abatement is allowed subject to the condition that CENVAT credit is not availed, would all be now treated as ‘exempt servi
ITO v. Galaxy Saws P. Ltd. ITAT ‘G’ Bench, Mumbai Before Rajendra Singh (AM) and V. D. Rao (JM) ITA No. 3747/Mum./2009 A.Y.: 2005-06. Decided on: 11-3-2011 Counsel for revenue/assessee: Pawan Ved/ Jitendra Jain
Facts:
During the year the assessee sold its office premises for Rs.96 lakh. Its book value was Rs.3.29 lakh. However, the assessee revalued the said premises at Rs.97.44 lakh. The gain on revaluation of Rs.94.15 lakh was credited to revaluation reserve. Based on the revalued figure, the loss on sale of the premises was determined at Rs.1.44 lakh.
During the year the assessee had returned its income as per section 115JB. According to the AO, the revaluation of property made by the assessee was only a device to reduce the book profit. Further, he also relied on the decision of the Bombay High Court in the case of Veekaylal Investment Pvt. Ltd. (249 ITR 597). Therefore, the book profit as computed by the assessee was adjusted by him by adding the sum of Rs.92.71 lac to the book profit. On appeal, the CIT(A) following the Supreme Court decision in the case of Apollo Tyres Ltd. (255 ITR 273) allowed the appeal.
Before the Tribunal the Revenue relied on the decision of the Karnataka high Court in the case of CIT v. Brindavan Beverages Ltd., (321 ITR 197) in which case, according to the Revenue, the judgment in the case of Apollo Tyres Ltd. was considered. It also referred to the observation of the Supreme Court in the case of Motibhai Phulabhai Patel & Co. (AIR 1970 SC 829) that no rule of law should be interpreted so as to permit or encourage its circumvention. It pointed out that the assessee had not revalued all its assets and he had revalued only the immovable property, which makes it clear that the assessee had used it as a device to avoid tax.
Held:
Relying on the Supreme Court decision in the case of Apollo Tyres Ltd., the Tribunal noted that once the profit and loss accounts prepared as per Part II and Part III of the Schedule VI of the Companies Act and adopted at the Annual General Meeting of the company, the net profit disclosed in such accounts can only be adjusted for items specified in Explanation I to section 115JB(2).
In respect of the decision of the Karnataka High Court in the case of Brindavan Beverages Ltd. relied on by the Revenue, the Tribunal noted that in the said decision, the Court had only remanded the matter back to the AO and it was not held that the gain arising from the sale of the assets had to be added to the book profit.
As regards the contention of the Revenue that the assessee had adopted colourable device, hence, should be struck down applying the ratio of the Supreme Court decision in the case of McDowell & Co. (154 ITR 148), the Tribunal noted that the para 13 of the accounting standard on Fixed Assets (AS- 10) allows the assessee to revalue any property and para 13.7 of the Standard requires that increase in net book value on account of revaluation to be taken to the capital account as revaluation reserve and was not available for distribution. It also rejected the argument of the Revenue that the assessee had made selective revaluation to avoid payment of tax, since according to it, the Standard required that the whole class of assets should be revalued. And the assessee had only one immovable property which had been revalued and therefore, the entire class of immovable property got revalued in accordance with the Standard.
The Tribunal also noted that as per the provisions of Explanation 1 to section 115JB(2), the amount carried to any reserve had to be added to the net profit if the amount had been debited to the profit and loss account. In the case of the assessee, the amount had been directly taken to the balance sheet without debit to the profit and loss account. Further, the clause (iia) of Explanation 1 inserted w.e.f. 1-4- 2007 only provides for making adjustment qua the depreciation on account of revaluation of assets. It does not provide for addition of revaluation reserve to the net profit even if the same was not debited to the profit and loss account.
In view of the forgoing, the Tribunal upheld the order of the CIT(A) and dismissed the appeal filed by the Revenue.
Rajesh Keshav Pillai v. ITO ITAT ‘D’ Bench, Mumbai Before D. Manmohan (VP) and Rajendra Singh (AM) ITA No. 6661/M/2009 A.Y.: 2006-07. Decided on: 23-2-2011 Counsel for assessee/revenue: S. E. Dastur and H. S. Raheja/R. N. Jha
Facts:
The assessee earned long-term capital gain on sale of two residential houses. The assessee purchased two residential houses and claimed exemption u/s.54 of the Act on the ground that the aggregate investment in purchase of two residential houses was more than the aggregate long-term capital gain arising on sale of two residential houses. The Assessing Officer (AO), referring to the decision of the Special Bench of the Tribunal in the case of ITO v. Sushila M. Jhaveri, [292 ITR (AT) 1], held that the assessee is entitled to exemption u/s.54 in respect of long-term capital gain arising on sale of one residential house with the corresponding investment in one residential house. He, accordingly, charged to tax long-term capital gain arising on sale of other residential house.
Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the view taken by the AO.
Aggrieved, by the order of the CIT(A), the assessee preferred an appeal to the Tribunal.
Held:
There is no restriction placed anywhere in section 54 that exemption is available only in relation to sale of one residential house. Therefore, in case the assessee has sold two residential houses, being long-term capital assets, the capital gain arising from the second residential house is also capital gain arising from transfer of a long-term capital asset being a residential house. The provisions of section therefore will also be applicable to the sale of second residential house and also to a third residential house and so on. Whenever exemption is restricted to one asset, a suitable provision is incorporated in the relevant section itself. Considering the language used in section 54(1), exemption will be available in respect of transfer of any number of long-term capital assets being residential houses if other conditions are satisfied.
The decision of the Special Bench of ITAT in the case of Sushila M. Jhaveri (supra) is distinguishable. There the issue was whether exemption was available in case the gain from sale of a house is invested in more than one residential houses and it was held that exemption will be available only for one house. But exemption will be available in respect of sale of any number of residential houses if there are corresponding investments in residential houses and all other conditions are fulfilled.
In case there is sale of more than one residential house, the exemption will be available in relation to each set of sale and corresponding investment in the residential house. In case there are sales of more than one residential houses, exemption has to be computed considering each set of sale of residential hose and the corresponding investment in one residential house and the combination which is beneficial to the assessee has to be allowed. The exemption cannot be calculated considering the aggregate of capital gain and aggregate of investment in the residential houses.
This appeal filed by the assessee was allowed.
Sony India Pvt. Ltd. v. ACIT ITAT ‘G’ Bench, Delhi Before C. L. Sethi (JM) and K. G. Bansal (AM) ITA Nos. 4008/Del./2010 and 4994/Del./2010 A.Ys.: 2005-06 and 2006-07 Decided on: 8-4-2011 Counsel for assessee/revenue: N. Venkat Raman & Ors./Gajanand Meena & Ors.
Facts:
The assessee was engaged in manufacturing and trading business. During the previous year relevant to A.Y. 2005-06 the assessee, as a part of restructuring of its business, closed down the manufacturing operations of its unit at Dharuhera. A voluntary retirement scheme known as ‘Employees Voluntary Retirement Scheme — 2004’ was framed which was applicable only to the employees of the closed unit. One-fifth of the expenditure incurred on voluntary retirement was claimed as a deduction u/s.35DDA.
The Assessing Officer (AO) disallowed the claim on the ground that since the scheme was not framed in accordance with Rule 2BA, the scheme is not VRS but a substitution of retrenchment compensation payable to the employees and hence the provisions of section 35DDA are not applicable. As regards the allowability of the expenditure u/s.37 he held that deduction can be allowed u/s.37(1) only in respect of those expenses which are incurred for the purposes of business. This, according to the AO, pre-supposes that the business continues to be carried on by the assessee. Since the expenditure under consideration was incurred in the closure of business or the transfer of business, the AO held that the same is not deductible u/s.37.
Aggrieved, the assessee preferred an appeal to the CIT(A) who held that the expenditure under consideration was incurred in terms of VRS and was not in the nature of retrenchment compensation. However, he held that the expenditure is not allowable u/s.35DDA since the VRS of the assessee did not comply with the conditions laid down by Rule 2BA.
Aggrieved, the assessee preferred an appeal to the Tribunal where it was contended that the Department has not challenged the finding of the CIT(A) that the expenditure is not in the nature of retrenchment compensation but is an expenditure on VRS and therefore such a finding has become final.
Held:
The Tribunal, for the following reasons, held the scheme of the assessee to be VRS, to which the provisions of section 35DDA are applicable:
(a) the deletion of conditionalities originally incorporated in the Bill shows that the legislative amendment was not to incorporate all the conditions of section 10(10C) in section 35DDA;
(b) the Legislature left the scheme of voluntary retirement open ended and did not place any restriction on the scheme. Thus, plain language of the provision supports the case of the assessee;
(c) it is not a case of taking guidance from a definition section;
(d) for sustaining the arguments of the learned DR, the provision contained in section 35DDA will have to be modified by incorporating a part of section 10(10C) in it. In our view, such an incorporation does not find support from any rule of construction stated before us.
The expenditure under consideration was held to be allowable u/s.35DDA.
As regards allowability u/s.37(1) of the Act, the Tribunal held that the assessee was required to prove that the closed unit was a part and parcel of the same business of the assessee. It stated that in order to give a finding, the assessee was required to prove that common control and management; interlinking of finances; common employees, no material effect of closure of the business on other businesses. Since the requisite material to give these findings was not on record the Tribunal did not give its finding on this aspect.
The appeal filed by the assessee on this ground was allowed.
Nayan Builders & Developers Pvt. Ltd. v. ITO ITAT ‘B’ Bench, Mumbai Before R. S. Syal (AM) and Asha Vijayaraghavan (JM) ITA No. 2379/M/2009 A.Y.: 1997-98. Decided on: 18-3-2011 Counsel for assessee/revenue: Sanjiv M. Shah/Hari Govind Singh
Facts:
The Assessing Officer (AO) levied penalty u/s.271(1) (c) in respect of additions to total income of the assessee of Rs.1,04,76,050 towards income from Spectrum Corporate Services Ltd., disallowance of brokerage of Rs.10,79,221 and disallowance of legal fees of Rs.2,00,000 which additions were upheld by the Tribunal.
Aggrieved the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.
Aggrieved by the order passed by the CIT(A) the assessee preferred an appeal to the Tribunal.
Held:
Having noted that the additions in respect of which the penalty was levied have been held by the jurisdictional High Court as involving a substantial question of law, the Tribunal held that when the High Court admits a substantial question of law on an addition, it becomes apparent that the addition is certainly debatable. In such circumstances, penalty u/s.271(1)(c) cannot be levied. The admission of substantial question of law by the High Court lends credence to the bona fides of the assessee in claiming the deduction. Once it turns out that the claim of the assessee could have been considered for deduction as per a person properly instructed in law and is not completely debarred, the mere fact of confirmation of disallowance would not per se lead to the imposition of penalty.
The Tribunal ordered deletion of the penalty. The Tribunal allowed the appeal filed by the assessee.
Cases referred to:
(i) Rupam Mercantile v. DCIT, (2004) 91 ITD 237 (Ahd.) (TM)
(ii) Smt. Ramila Ratilal Shah v. ACIT, (1998) 60 TTJ 171 (Ahd.)
Synergy Entrepreneur Solutions Pvt. Ltd. v. DCIT ITAT ‘J’ Bench, Mumbai Before D. K. Agarwal (JM) and Pramod Kumar (AM) ITA No. 3076/M/2010 A.Y.: 2005-2006. Decided on: 31-3-2011
Section 263 — Revision order, if passed for a reason not mentioned in the show-cause notice, is invalid.
Facts:
The assessee was engaged in share trading activity. The assessee had claimed set-off of trading losses against trading profits which set-off was accepted by the Assessing Officer (AO) in an order passed u/s.143(3) of the Act. The CIT issued a show-cause notice u/s.263 in which he claimed that share trading losses were speculation losses u/s.73 and the same could not be set off against trading income. The assessee, in response to show cause, clarified that the trading losses were eligible for being set off against trading profits. The CIT, without rejecting the claim of the assessee, passed an order u/s.263 on the ground that the AO had not taken the details to verify whether the profits and loss from future trading amounts to speculation profit or loss. He directed the AO to obtain complete details and conduct necessary enquiries and examine the same for the assessment year under consideration. Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
The Tribunal noted that the show-cause notice stated that the assessee was not eligible for set-off of losses on speculation transactions, whereas the revision has been on the ground that the AO did not make necessary verifications about the transactions. Relying on the ratio of the decision of the Tribunal in Maxpack Investments Ltd. v. ACIT, 13 SOT 67 (Del.) and the decision of the Punjab & Haryana High Court in the case of CIT v. Jagadhri Electric Supply and Industrial Co. Ltd., 140 ITR 490 (P & H), the Tribunal held that if a ground of revision is not mentioned in the show-cause notice issued u/s.263, that ground cannot be made the basis of the order passed under the section, for the simple reason that the assessee would have had no opportunity to meet the point. The Tribunal quashed the order passed u/s.263 of the Act.
On merits, the Tribunal found the issue to be covered in favour of the assessee by the decision of the jurisdictional High Court in the case of CIT v. Lokmat Newspapers Pvt. Ltd., (322 ITR 43) (Bom.) wherein it has been held that irrespective of whether or not the profits on sale of shares arose from deliverybased trading or non-delivery-based trading, as long as the assessee is hit by Explanation to section 73, the entire profits will be deemed to be speculation profits and, accordingly, losses from non-deliverybased activity will also be eligible for set-off against profits from delivery-based transactions as well.
The appeal filed by the assessee was allowed.
TDS: Commission or brokerage: Section 194H of Income-tax Act, 1961: A.Ys. 2004-05 to 2007- 08: Agent of airline companies permitted to sell tickets at any rate between fixed minimum commercial price and published price: Difference between commercial price and published price not commission or brokerage: Not liable to TDS.
In an appeal preferred by the Revenue, the following question was raised:
“Whether on the facts and in the circumstances of the case and in law, the difference in amount between commercial price and published price is special commission in the nature of commission or brokerage within the meaning of Explanation (i) to section 194H of the Income-tax Act, 1961?”
The Bombay High Court held as under:
“(i) The agents of the assessee-airlines were granted permission to sell the tickets at any rate between the fixed minimum commercial price and the published price. The assessee would have no information about the exact rate at which the tickets were ultimately sold by its agents. It would be impracticable and unreasonable to expect the assessee to get a feedback from its numerous agents in respect of each ticket sold.
(ii) The permission granted to the agents to sell the tickets at a lower price could neither amount to commission, nor brokerage in the hands of the agents.
(iii) Thus the tax at source was not deductible on the difference between the commercial price and the published price.”
Recovery of tax: Stay of recovery: S. 220(6) of Income-tax Act, 1961: Factors to be considered: Existence of prima facie case warrants stay.
In this case, the order rejecting the application of the assessee u/s.220(6) of the Income-tax Act, 1961 for stay of recovery was challenged by the assessee by filing a writ. It was pointed out that the factor that as regards the existence of the prima facie case was not considered while rejecting the application.
The Delhi High Court allowed the writ petition, set aside the order of rejection and directed to pass a fresh order specifically dealing with the existence of prima facie case.
DCIT v. Bharat Kunverji Kenia ITAT ‘B’ Bench, Mumbai Before D. Manmohan (VP) and Pramod Kumar (AM) ITA No. 929/Mum./2010 A.Y.: 2006-07. Decided on: 2-2-2011 Counsel for revenue/assessee: Hari Govind Singh/Pradip N. Kapasi
Facts:
During the year the assessee had shown short-term capital gain of Rs.40.31 lac from purchase and sale of shares. The AO noticed that the volume of purchase and sale was worth Rs.2.5 crore and the number of transactions aggregated to 276 in number. Based on the same he concluded that: the data indicated that the assessee intended to deal in shares as a trader and not as an investor. When the assessee contended that in the earlier years, under the similar circumstances, the income was taxed as capital gains and not as a business income, the AO observed that the doctrine of res judicata could be applicable to the decisions of Civil Courts and it cannot be invoked while deciding income-tax matter.
On appeal, the CIT(A) had the benefit of the order of the ITAT in the assessee’s own case for the A.Y. 2005-06 (ITA No. 6544/Mum./2008 dated 15-5-2009) wherein on identical facts, the Tribunal decided the issue in favour of the assessee. Applying the principle of consistency, the CIT(A) allowed the appeal of the assessee.
Before the Tribunal the Revenue relied on the order of the AO and further submitted that the volume, frequency and regularity of the transaction was one of the essential tests to consider the nature of transactions. Further, relying on the following two decisions, it was contended that where facts were distinguishable or fresh facts were brought on record, principles of res judicata did not come into play and the authority was free to take a different view on the matter. The decisions relied upon were as under:
- Sadhana Nabera v. ACIT, (ITA No. 2586/M/2009, dated 26-3-2010; and
- Rakesh J. Sanghvi v. DCIT, (ITA Nos. 4607/ M/2008 and 5710/M/2009, dated 31-8-2009).
Held:
According to the Tribunal, no single criteria laid down by the Courts or in the Board Circular (No. 4 of 2007, dated 15-6-2007) was decisive and they had to be considered cumulatively to bring out the real intention of the assessee before entering into such transactions. Referring to a chart prepared by the assessee, which was showing compliance with various conditions of the Board Circular, the Tribunal noted that he had complied with all the requirements mentioned in the Circular. In addition the Tribunal noted as under:
- The shares held were all along treated as an investment;
- The assessee had not borrowed funds for the purpose of making investments;
- Shares once sold were not purchased again;
- Average holding period of the shares sold by the assessee was of 181 days.
In view of the above and the Tribunal’s decision in the assessee’s own case for the earlier year, the Tribunal dismissed the appeal filed by the Revenue. According to the Tribunal, the case laws relied upon by the Revenue were distinguishable on the facts.
51 DTR (Bang.) (Trib.) 173 Hewlett Packard India Sales (P) Ltd. v. CIT A.Y.: 2006-07. Dated: 16-8-2010
Facts:
The assessee had paid Rs.1.25 crores as rent for parking slots. These slots were used for parking cars of employees of the assessee. The FBT assessment was completed without considering this rent as fringe benefit. The CIT u/s.263 set aside the assessment relying upon the CBDT Circular No. 8 of 2005, dated 29th August, 2005.
Held:
In the present case, even though the rent pertaining to the car parking slots was mentioned distinctly and separately in the lease deed, the assessee was paying the sum as part of the overall rent paid to the landlord. The essential facilities attached to a rented building have to be treated as part of the building itself and therefore the rent or licence fee paid for such facilities should be treated as forming part of rent.
Further, the head of expenditure relied on by the CIT to hold the assessee liable for FBT in respect of rent relating to car parking area is ‘running, maintenance and repair expenses of cars’. The running expenses of a motor car usually include fuel oil and other incidental expenses. It may include the driver’s wages as well. It may even include the taxes. But it is very difficult to argue that car parking expenses are in the nature of running expenses. It is not possible to treat parking slot expenses as analogous to repair and maintenance. Hence, they cannot be included within the fringe benefits.
51 DTR (Mumbai) (Trib.) 283 DCIT v. Ushdev International Ltd. A.Y.: 2002-03. Dated: 9-10-2010
Facts:
The Assessing Officer had made two additions to the returned income under normal provisions of the Act which were upheld by the Tribunal. However the addition made to book profits on account of diminution in the value of investments for the purpose of computation u/s.115JB was deleted by the Tribunal. While passing the consequential order the tax payable was determined u/s.115JB since tax payable under normal provisions of the Act was nil.
The AO imposed penalty u/s.271(1)(c) in respect of disallowances made under normal provisions of the Act.
Held:
The additions which constitute the foundation for imposition of penalty u/s.271(1)(c), were made while computing income under the regular provisions of the Act. However, tax u/s.115JB was determined by making an addition on account of diminution in the value of investment, which finally stands deleted by the Tribunal. Thus the basis of assessment under the regular provisions of the Act is no more relevant because of the AO finally computed income u/s.115JB pursuant to the order passed by the Tribunal. Thus the additions which were made in the original assessment as per the regular provisions of the Act, have become academic inasmuch as they have not entered the final computation of total income made by the AO. Neither the total income has increased with such additions, nor has the loss scaled down.
The assessment under regular provisions of the Act, in which such additions were made, has been substituted with that u/s. 115JB, and in the latter case, such additions were either not made or finally deleted by the Tribunal. As such there cannot be any question of imposing or confirming the penalty u/s.271(1)(c) qua these additions.
The argument of the Revenue that penalty should be sustained since the assessee was granted credit in respect of tax paid on deemed income u/s.115JAA was not accepted as the tax credit was not available for tax paid u/s.115JB till A.Y. 2005-06.
127 ITD 257 (Mum.) Torrential Investments (P.) Ltd. v. ITO, Ward-2(3)(3), Mumbai A.Y.: 1996-97. Dated: 11-8-2009
Facts:
The assessee had income from long-term capital gains of Rs.25,47,670 during the year which accrued to the assessee in the months of May, 1995 and July, 1995. The assessee paid advance tax instalments as per section 234C (as amended by Finance Act, 1996). However, the Assessing Officer charged interest u/s. 234C from the first instalment consequently holding that the amendment u/s. 234C is prospective.
Held:
(1) The amendment (by the Finance Act, 1996) was enacted to remove the hardship to the assessee as the entire tax had to be paid at short notice as per the original provision even before the sale proceeds were received.
(2) The amendment to proviso to section 234C is clarificatory in nature and has to be applied retrospectively.
(3) The assessee had paid taxes as a part of the instalments due after the date of sale of the asset and hence, was not in default as stipulated u/s. 234C. Thus, no interest was chargeable from it u/s. 234C.
(2010) 127 ITD 217 (Agra.) (SB) S. K. Jain v. CIT A.Y.: 2000-01. Dated: 13-4-2010
Facts:
The assessee had explained the source of investment made of Rs.4,50,000 as cash received from his mother under a will which was found to be genuine by the AO to the extent of Rs.4,00,000 and Rs.50,000 was added. However on appeal, the CIT(A) deleted the addition and the Revenue went for further appeal.
However during the pendency of the appeal, the CIT invoked the provisions of section 263 for revision of order stating the reasons that the AO had failed to examine whether the will had been probated or not, whether bequest of cash and jewellery was as per Hindu Succession Act.
The contention of the assessee was that since the matter has already been considered in the appeal, then the order of the AO got merged with the order of the CIT(A) and the CIT has no right to invoke the provisions of section 263 as per explanation (c) to section 263(1).
Held:
Once a particular matter of appeal has been considered and decided in the appeal, only because a particular point relating to the same remains unconsidered by the CIT(A), does not render the matter as unconsidered. Therefore the order of the AO merged with that of the CIT A and the CIT loses his right to invoke the provisions of section 263 as per the explanation (c) to section 263.
136 TTJ 263 (Mumbai) (TM) ACIT v. Dharti Estate ITA Nos. 2808 (Mum.) of 2002 and 5056 (Mum.) of 2003. A.Ys.: 1998-99 and 1999-2000 Dated: 29-10-2010
The assessee, a partnership firm, was engaged in the business of construction. For the relevant assessment years, the assessee valued its closing WIP at historical cost as per its past policy. Such historical cost was the average rate realised for all the years including current year. The Assessing Officer valued the WIP at the current year’s rate of realisation and made addition to the profit. The CIT(A) held that the Assessing Officer was not justified in making the additions.
Since there was a difference of opinion between the Members of the Tribunal the matter was referred to the Third Member u/s.255(4).
The Third Member, holding in favour of the assessee, noted as under:
(1) It is not in dispute that the assessee has followed percentage completion method consistently since inception and has been declaring income/loss from year to year and the same was accepted in earlier years.
(2) Despite the AO’s stand for the A.Ys. 1998-99 and 1999-2000, with regard to correctness of the method of accounting followed by the assessee, in the year 2000-01, when the assessee declared profit of more than Rs.5 crores on completion of the project, the AO appears to have accepted the same method to accept the income declared therein, which in itself is an indication that the method of accounting followed by the assessee is an approved method of accounting.
(3) Categorical finding of the learned CIT(A) to highlight that assessee has not deviated from guidelines issued by the ICAI (under AS-7), was not challenged before the Tribunal by learned Departmental Representative by producing any evidence thereof. The learned CIT(A) has discussed the issue elaborately and met each point of dispute raised by the Assessing Officer to highlight that there is no merit in the conclusion reached by the Assessing Officer.
(2011) TIOL 209 ITAT-Mum. ACIT v. American School of Bombay Education Trust ITA No. 136 to 138/Mum./2010 A.Ys.: 2000-01 to 2002-03. Dated: 4-2-2011
Facts:
The assessee was running a school popularly known as ‘American School of Bombay’. In the course of survey u/s.133A of the Act, conducted on 24-1-2006 it was found that the assessee had failed to deduct tax at source from the salaries paid to expatriate teachers by South Asia International Educations Services (SAIESF) outside India. The Assessing Officer, upon issuing show-cause notice and considering the explanations offered by the assessee, in an order passed an order u/s.201(1) and 201(1A) held the assessee to be in default for not deducting tax at source u/s.194C. He also levied interest u/s.201(1A) and initiated penalty proceedings, after obtaining approval from the Add. CIT(TDS), by issuing notice to the assessee. Not being satisfied with the explanation offered by the assessee, the AO levied penalty u/s.271C of the Act.
Aggrieved, the assessee preferred an appeal to CIT(A) who noted that the Tribunal has quashed the order passed by the DCIT(TDS) u/s.201(1) and 201(1A) on the ground that initiation of proceedings was beyond a period of six years and hence was barred by limitation. He deleted the penalty levied u/s.271C.
Aggrieved, the Revenue preferred an appeal to the Tribunal.
Held:
The Tribunal noted that in the case of the assessee for the A.Y. 1997-98 to 1999-2000, the Tribunal has held that — a bare perusal of section 271C(1) indicates that penalty u/s.271C can be imposed only when there is a failure on the part of the assessee to deduct or pay the whole or any part of tax and, then, the quantum of penalty is equal to the amount of tax which such person failed to deduct or pay. From here, it emerges that there must be some sum which such person failed to deduct or pay. Such amount constitutes the basis for imposition of penalty u/s.271C. In other words, the liability of the assessee u/s.201(1) is a pre-condition for imposition of penalty u/s 271C. If the very order passed u/s.201(1) creating liability has been set aside on account of limitation and there is no possibility of any fresh order being likely to be passed u/s.201(1), there remains no question of the assessee being deemed to be an assessee in default in respect of such tax. The natural corollary which, therefore, follows is that if the order u/s.201(1) ceases to be operative, it will have the effect of the assessee not being in default. Once the assessee is not in default for failure to deduct or pay tax at source, naturally, there cannot be any question of imposing penalty u/s.271C for the reason that the very basis of such penalty is the amount of tax which such person failed to deduct or pay as per law and when there is no such amount in existence, the possibility of imposing penalty will automatically be ruled out.
The Tribunal noted that the effect of the Tribunal’s order quashing the order passed u/s.201(1) and 201(1A) on account of limitation is that the assessee is not deemed to be in default in respect of any failure to deduct or pay tax at source. It held that in such circumstances the question of penalty u/s.271C cannot arise.
The appeal filed by the Revenue was dismissed.
(2011) TIOL 197 ITAT-Mum. Bharat Bijlee Ltd. v. Addl. CIT ITA No. 6410/Mum./2008 A.Y.: 2005-06. Dated: 11-3-2011
Facts:
During the previous year relevant to the assessment year under consideration, the assessee, pursuant to a Court-approved scheme of arrangement u/s.391 r.w.s 394 of the Companies Act, 1956, transferred its Lift Field Operations Undertaking (‘the undertaking’), as a going concern, to Tiger Elevators Pvt. Ltd. As consideration for transfer the assessee was entitled to receive preference shares and bonds. The price for transfer was a lump sum consideration without assigning any value to any of the individual items. In the return of income filed the assessee did not return any capital gains on the ground that since the cost of undertaking is not ascertainable the machinery for computing capital gains fails. It was also pointed out that the transfer was an exchange and not a sale and therefore did not fall within the purview of the definition of slump sale u/s.2(42C) of the Act.
The Assessing Officer (AO) held the transaction of transfer of the undertaking to be a transaction of slump sale, taxable as per provisions of section 50B of the Act.
Aggrieved, 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 having considered the definition of ‘slump sale’ u/s.2(42C) of the Act, held that it is only a transfer as a result of sale that can be construed as a slump sale. Therefore, any transfer of an undertaking otherwise than as a result of sale will not qualify as a slump sale. On perusal of the clauses of the scheme the Tribunal noted that the scheme of arrangement did not mention monetary consideration for the transfer. The parties were ad idem that the scheme of arrangement was that the assessee was to transfer the undertaking and take bonds/preference shares as consideration. Thus, it was held to be a case of exchange and not sale and consequently the provisions of section 2(42C) were held to be not applicable. Therefore, the provisions of section 50B were also held to be not applicable to the facts and circumstances of the assessee’s case.
Since individual items of capital assets were not being transferred and aggregate of individual assets in the form of an undertaking was a capital asset which was transferred, the transfer being one of going concern, it was held that it is not possible to ascertain the profit or gain from transfer of undertaking, since cost of acquisition and the cost of improvement of the undertaking cannot be ascertained and consequently, computation provisions cannot be applied and the charge of capital gain fails.
This ground of appeal filed by the assessee was allowed.
D B Zwirn Mauritius Trading No. 3 Ltd. AAR No. 878 of 2010 Article 13(4) of India-Mauritius DTAA; Section 195 of Income-tax Act Dated: 28-3-2011
Facts:
The appellant was a company incorporated in Mauritius (‘MCo’). Mauritius tax authority had issued Tax Residence Certificate (‘TRC’) to MCo. MCo held equity shares of an Indian company. MCo sold the shares to another Mauritius company resulting in capital gains.
MCo sought ruling of AAR on the following questions:
Whether MCo was liable to tax on capital gain under Income-tax Act and India-Mauritius DTAA?
Whether the sale of shares was subject to withholding tax u/s. 195 of Income-tax Act?
MCo contended that in terms of Article 13(4) of India-Mauritius DTAA, capital gain arising from sale of shares was not liable to tax in India and that TRC constituted valid and sufficient evidence of residential status under India-Mauritius DTAA. MCo also relied on Supreme Court’s decision in Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706 (SC) and Circular No. 789 of 2000 of CBDT.
Held:
In terms of Article 13(4) of India-Mauritius DTAA, power of taxation of gains is vested only in the state of residence (i.e., in this case, Mauritius). If the provision in DTAA is more beneficial, the taxpayer is entitled to seek benefit under DTAA. Hence, MCo was not liable to pay tax in India on capital gains.
Sale of share is not subject to withholding tax u/s. 195 of T I Act.
A Press Note bearing No.402/92/2006-MC dated 17th April, 2014 has been issued by CBDT giving instructions to Assessing Officers, laying down Standard Operating Procedure (‘SOP’) for verification and correction of tax-demand. The taxpayers can get the outstanding tax demand reduced/ deleted by applying for rectification along with documentary evidence of tax/demand already paid. The SOP also makes special provisions for dealing with the tax demand upto Rs. 1,00,000/- in the case of Individuals a<
Jupiter Construction Services Ltd. vs. DCIT ITAT Ahmedabad `A’ Bench Before Pramod Kumar (AM) and S. S. Godara (JM) ITA No. 2850 and 2144/Ahd/11 Assessment Year: 1995-96 and 1996-97. Decided on: 24th April, 2015. Counsel for assessee / revenue: Tushar P. Hemani / Subhash Bains
Facts:
There was a different of opinion between the members of Division Bench while deciding the appeal of the assessee relating to levy of penalty. The difference was referred to the Third Member who agreed with the Accountant Member and confirmed the levy of penalty.
At the stage of Division Bench giving effect to the order of the Third Member, the assessee claimed that the order of the Third Member could not be given effect to as it was unsustainable and in complete disregard to binding judicial precedents. The assessee claimed that the matter of whether effect could be given to such an order was required to be referred to a Special Bench.
Held:
Post the decision of the jurisdictional High Court in the case of CIT vs. Vallabhdas Vithaldas 56 taxmann.com 300 (Guj) the legal position is that the decisions of the division benches bind the single member bench, even when such a single member bench is a third member bench.
A larger bench decision binds the bench of a lesser strength because of the plurality in the decision making process and because of the collective application of mind. What three minds do together, even when the result is not unanimous, is treated as intellectually superior to what two minds do together, and, by the same logic, what two minds do together is considered to be intellectually superior to what a single mind does alone. Let us not forget that the dissenting judicial views on the division benches as also the views of the third member are from the same level in the judicial hierarchy and, therefore, the views of the third member cannot have any edge over views of the other members. Of course, when division benches itself also have conflicting views on the issues on which members of the division benches differ or when majority view is not possible as a result of a single member bench, such as in a situation in which one of the dissenting members has not stated his views on an aspect which is crucial and on which the other member has expressed his views, it is possible to constitute third member benches of more than one members. That precisely could be the reason as to why even while nominating the Third Member u/s. 255(4), the Hon’ble President of this Tribunal has the power of referring the case “for hearing on such point or points (of difference) by one or more of the other members of the Appellate Tribunal”. Viewed from this perspective, and as held by Hon’ble Jurisdictional high Court, the Third Member is bound by the decisions rendered by the benches of greater strength. That is the legal position so far as at least the jurisdiction of the Gujarat High Court is concerned post Vallabhdas Vithaldas (supra) decision, but, even as we hold so, we are alive to the fact that the Hon’ble Delhi High Court had, in the case of P. C. Puri vs. CIT 151 ITR 584 (Del), expressed a contrary view on this issue which held the field till we had the benefit of guidance from the Hon’ble jurisidictional High Court. The approach adopted by the learned Third member was quite in consonance with the legal position so prevailing at that point of time.
At the time of giving effect to the majority view, it cannot normally be open ot the Tribunal to go beyond the exercise of giving effect to the majority views, howsoever mechanical it may seem. In the case of dissenting situations on the division bench, the process of judicial adjudication is complete when the third member, nominated by the Hon’ble President, resolves the impasse by expressing his views and thus enabling a majority view on the point or points of difference. What then remains for the division bench is simply identifying the majority view and dispose of the appeal on the basis of the majority views. In the course of this exercise, it is, in our humble understanding, not open to the division bench to revisit the adjudication process and start examining the legal issues.
Heranba Industries Ltd. vs. DCIT ITAT Mumbai `H’ Bench Before R. C. Sharma (AM) and Sanjay Garg (JM) ITA No. 2292 /Mum/2013 Assessment Year: 2009-10. Decided on: 8th April, 2015. Counsel for assessee / revenue: Rashmikant C. Modi / Jeetendra Kumar
Facts:
The assessee company was engaged in manufacture of pesticides, herbicides and formulations. It filed its return of income for assessment year 2009-10 returning therein a total income of Rs.1.49 crore. In the course of assessment proceedings, the Assessing Officer (AO) noticed that during the previous year under consideration, the assessee had received share application money of Rs. 89.50 lakh. He asked the assessee to furnish details with supporting evidences. In response, the assessee expressed its inability to provide the necessary details and stated that in order to buy peace, it agreed to offer the share application money of Rs. 89.50 lakh as its income.
The AO added Rs. 89.50 lakh to the assessee’s income u/s. 69A and also levied penalty u/s. 271(1)(c).
Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO.
Aggrieved, the assessee preferred an appeal to Tribunal.
Held:
The Tribunal noted that the assessee, at the very first instance, surrendered share application money with a request not to initiate any penalty proceedings. Except for the surrender, there was neither any detection nor any information in the possession of the department. There was no malafide intention on the part of the assessee and the AO had not brought any evidence on record to prove that there was concealment. No additional material was discovered to prove that there was concealment. The AO did not point out or refer to any evidence to show that the amount of share capital received by the assessee was bogus. It was not even the case of the revenue that material was found at the assessee’s premises to indicate that share application money received was an arranged affair to accommodate assessee’s unaccounted money.
The Tribunal noted that the Supreme Court in the case of CIT vs. Suresh Chandra Mittal 251 ITR 9 (SC) has observed that where assessee has surrendered the income after persistence queries by the AO and where revised return has been regularised by the Revenue, explanation of the assessee that he has declared additional income to buy peace of mind and to come out of vexed litigation could be treated as bonafide, accordingly levy of penalty u/s. 271(1)(c) was held to be not justified.
The Tribunal held that in the absence of any material on record to suggest that share application money was bogus or untrue, the fact that the surrender was after issue of notice u/s. 143(2) could not lead to the inference that it was not voluntary.
The amount was included in the total income only on the basis of the surrender by the assessee. It held that in these circumstances it cannot be held that there was any concealment. When no concealment was ever detected by the AO, no penalty was imposable. Furnishing of inaccurate particulars was simply a mistake and not a deliberate attempt to evade tax. The Tribunal did not find any merit in the levy of penalty u/s. 271(1)(c).
The appeal filed by the assessee was dismissed.
DCIT vs. Aanjaneya Life Care Ltd. Income Tax Appellate Tribunal “A” Bench, Mumbai Before D. Manmohan (V. P.) and Sanjay Arora (A. M.) ITA Nos. 6440&6441/Mum/2013 Assessment Years: 2010-11 & 2011-12. Decided on 25.03.2015 Counsel for Revenue / Assessee: Asghar Zain / Harshavardhana Datar
Facts:
Due to financial crunch the assessee was not able to pay the self-assessment tax within the stipulated period. However, according to the AO, the assessee could not prove its contention with cogent and relevant material. Further, he observed that substantial funds were diverted to related concerns. He therefore levied penalty u/s. 221(1) of the Act. On appeal, the CIT(A) allowed the appeal of the assessee and deleted the penalty imposed.
Held:
According to the Tribunal, the Revenue was unable to show that the assessee had sufficient cash/bank balance so as to meet the tax demand. Secondly, it also could not show if any funds were diverted for non-business purposes at the relevant point of time so as to say that an artificial financial scarcity was created by the assessee. In view of the same the tribunal accepted the contention of the assessee and upheld the order of the CIT(A).
[2015] 152 ITD 533 (Jaipur) Asst. DIT (International taxation) vs. Sumit Gupta. A.Y. 2006-07 Order dated- 28th August 2014.
Income cannot be said to have deemed to accrue or arise in India when the assessee pays commission to non-resident for the services rendered outside India and the non-resident does not have a permanent establishment in India. Consequently, section 195 is not attracted and so the assessee is not liable to deduct TDS from the said payment.
FACTS
The assessee exported granite to USA and paid commission on export sales made to a US company but it did not deduct tax u/s. 195.
The Assessing Officer held that the sales commission was the income of the payee which accrued or arose in India on the ground that such remittances were covered under the expression fee for technical services’ as defined u/s. 9(1)(vii)(b). He thus held that the assessee was liable deduct tax u/s. 195 and he was in default u/s. 201(1) for tax and interest.
On Appeal, CIT (Appeals) held that commission does not fall under managerial, technical or consultation services and therefore, no income could be deemed to have accrued or arisen to the non-resident so as to attract provisions of withholding tax u/s. 195.
On Appeal-
HELD THAT
The order of CIT(A) was to be upheld as the non-resident recipients of commission rendered services outside India and claimed it as business income and had no permanent establishment in India. Thus, provisions of section 9 and section 195 were not attracted.
[2015] 55 Taxmann.com 111 (Mumbai – CESTAT) Deshmukh Services vs. CCE & ST.
Facts:
The appellant undertook job work activities in the nature of mixing of soap bits provided by the supplier company and returning the same in 50 kg. or bigger bags as per company’s instruction and multi-piece packing for which they received consideration. The department contended and confirmed the demand considering the activities as business auxiliary service.
Held:
The Tribunal observed that as per section 2(f)(iii) of the CE Act, 1944 ‘manufacture’ includes any process which in relation to the goods specified in the 3rd Schedule involves packing or re-packing of such goods in a unit container or labeling or re-labeling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment to the goods to render the products marketable to the consumer and soaps were covered under Serial No. 40 of the said 3rd Schedule. Therefore, multi-piece packaging would fall under the category of “packing or re-packing of goods” and would be an activity of ‘manufacture’. The department’s contention that soap is already in packed condition and hence manufacture is said to be completed was not accepted by the Tribunal on the ground that, multi-piece packaging is done on the soaps already packed and therefore, it would amount to repacking and accordingly the activity would be covered under the definition of ‘manufacture’ u/s. 2(f)(iii). It was further held that if the soap noodles are sold as such after mixing and packing/re-packing, then the activity undertaken by the appellant would amount to ‘manufacture’. On the other hand, if they are not sold as such, but are subject to further processes, since the goods are moved under Rule 4(5)(a) of the CENVAT Credit Rules, 2004 it will be an intermediary process in the course of manufacture of soaps and since such movements are permitted without payment of excise duty, the question of levy of service tax would not arise at all in terms of Notification No.8/2005-ST dated 01/03/2005. However, since there was no finding in the order except that the appellant did not contest the duty, the matter was remitted back to give specific finding as to why the activity of the appellant did not amount to manufacture and if it does not amount to manufacture, why benefit of Notification No. 8/2005-S.T. cannot be extended.
Housing project: Deduction u/s. 80-IB(10): A. Y. 2007-08: Amendment w.e.f. 01/04/2005 requiring certificate of completion of project within four years of approval: Not applicable to projects approved prior to that date: Assessee entitled to deduction:
The assessee, a real estate developer obtained approval for a housing project on 16-03-2005 from the Development Authority. It completed the project in 2008 and by a letter dated 05-11-2008 applied to the Competent Authority for the issue of the completion certificate. The assessee’s claim for deduction u/s. 80-IB(10) was denied inter alia, on the ground that the completion certificate was not obtained within the period of four years as prescribed by the Finance Act, 2004 w.e.f. 01-04-2005. The Tribunal allowed the assessee’s claim for deduction accepting the assessee’s claim that, since the approval was granted to the assessee 16-03-2005 i.e., prior to 01-04-2005, the assessee was not expected to fulfill the conditions which were not on the statute when such approval was granted to the assessee.
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) The approval for the project was given by the Development Authority on 16-03-2005. Clearly, the approval related to the period prior to the amendment, which insisted on the issuance of the completion certificate by the end of the four year period, was brought into force. The application of such stringent conditions, which are left to an independent body such as the local authority who is to issue the completion certificate, would have led to not only hardship but absurdity.
ii) As a consequence, the Tribunal was not, therefore, in error of law while holding in favour of the assessee.”
Constitutional validity – Amendment made in section 80-IB(9) by adding an Explanation was not clarificatory, declaratory, curative or made “small repair” in the Act – On the contrary, it takes away the accrued and vested right of the Petitioner which had matured after the judgments of ITAT. Therefore, the Explanation added by the Finance (No.2) Act 2009 was a substantive law – Explanation added to section 80-IB(9) by the Finance (No.2) Act, of 2009 is clearly unconstitutional, violative of Arti<
Niko Resources Ltd. vs. UOI: [2015] 55 taxmann.com 455 (Guj):
The
Petitioner is a foreign company based in Canada and has set up a
project office in India with the permission of Reserve Bank of India.
The Petitioner has been claiming benefit of deduction of 100% of the
profits and gains from the production of mineral oil and natural gas
u/s. 80-IB(9) of the Income Tax Act, 1961, as it stood prior to the
amendment by the Finance (No.2) Act 2009. In these proceedings, the
constitutional validity of the amendment to sub-section (9) of section
80-IB and Explanation added to it under the Act by the Finance (No.2)
Act, 2009, has been challenged.
The disputed question was as to
whether the benefits of tax holiday of seven years was available on each
undertaking which has now been taken away by the amendment made in
section 80-IB(9) by adding on Explanation that provides that all blocks
licensed under a single contract shall be treated as a single
undertaking.
The Gujarat High Court held as under:
“i)
Arbitrarily, the 100% tax deduction benefit could not be withdrawn by
the Finance Minister or the legislature by amending section 80-IB(9) of
the Act retrospectively from an anterior date.
ii) The amendment
in such cases where already tax benefit had accrued and vested in the
assessee could not be taken away by giving retrospective amendment to
section 80-IB(9) which is nothing but a substantive provision inserted
by amendment and it can only operate prospectively and not
retrospectively.
iii) Explanation added to section 80-IB(9) by
Finance (No.2) Act, of 2009 is clearly unconstitutional, violative of
Article 14 of the Constitution of India and is liable to be struck
down.”
[2014] 43 taxmann.com 363 (Madras) CST vs. Sangamitra Services Agency
Facts:
The issue before the High Court was, whether various charges towards freight, labour, electricity, telephone etc, which were reimbursed by the principal to the C & F Agent on the basis of actuals, were required to be added to the value of the taxable service in relation to the clearing and forwarding services provided by a C&F agent of the Principal.
On behalf of the respondent, nobody represented the matter. The Revenue contended that, in terms of the provisions of Rule 6(8) of the Service Tax Rules, 1994, the value of taxable service in relation to the services provided by the Clearing and Forwarding Agent to the client for rendering services of the Clearing and Forwarding operations, in any manner, shall be deemed to be the gross amount of remuneration or commission (by whatever name called) paid to such agent by the client, engaging such agent and considering this, the charges collected towards freight, labour, electricity, telephone etc., in connection with the Clearing and Forwarding Services, would form part of the remuneration/commission.
Held
Rejecting the revenue’s contention, the Hon’ble High Court held that the gross amount referred to in Rule 6(8) of the Service Tax Rules, 1994 would apply to receipts of such sum, which would bear the character of remuneration or commission in that. In the absence of any material to show the understanding between the Principal and the Client that the commission payable by the principal was all inclusive, it is difficult to hold that the gross amount of remuneration/commission would nevertheless include expenditure incurred by the assessee providing the services; that all incidental charges for running of the business would also form part of the remuneration or commission (by whatever name called). The phrase “by whatever name called” must necessarily have some link or reference with the nature of the receipt of remuneration or commission. Thus, if a receipt is for reimbursing the expenditure incurred for the purpose per se, would not justify that the same had the character of the remuneration or commission.
2014 (33) STR 501 (Guj.) Commissioner of C. Ex. & Customs vs. Ultratech Cement Ltd.
Facts:
The respondents, cement manufacturers availed the CENVAT Credit of Service Tax paid on insurance services for the residential colony and of the vehicles specially used for travelling of workers from their colony to the factory. Placing reliance on the decision of the Delhi Tribunal in the case of M/s. Triveni Engg & Industrial Ltd. vs. CCC, Meerut, 2008 (12) S.T.R. 330, the Tribunal had upheld the assessee’s contention that the phrase “activities in relation to business” used in the inclusive part of the definition of input services was wide enough to cover such services.
Held:
The Hon’ble High Court observed the case of Commissioner vs. Gujarat Heavy Chemicals Ltd. 2011 (22) S.T.R. 610 (Guj), wherein the Hon’ble Gujarat High Court had analysed various decisions and had held that if providing residential quarters and security services was voluntary, the activities were not covered within the definition of input services and therefore, the CENVAT Credit was not available. Relying on this, the CENVAT was not allowed as not in relation to business.
Exceptio Probat Regulam
The maxim describes the role of an exception in inferring,
establishing, confirming and explaining the general rule to which the exception
relates. Understood in its ordinary and literal sense, it means that presence of
an exception establishes that a general rule exists. Derived from medieval Latin
legal principle Exceptio probat regulam in casibus non exceptis,
it indicates existence of a rule having application in cases other than those
stated in the exception.
2. Fowler in ‘Modern English Usages’ explains the principle
with the help of example of an order giving “special leave for men to be out of
barracks tonight till 11 p.m.” Application of the maxim will interpret grant of
special leave as implying a general rule requiring men to be in earlier.
Similarly, a sign that says “parking prohibited on Sundays” (the exception)
proves that parking is allowed on other six days of the week (the rule). The
phrase is also invoked to claim the existence of a rule that usually applies,
when a case to which it does not apply is specially mentioned.
3. The above is, however, a view of the rule somewhat loosely
worded and works differently in different contexts. At times the word ‘prove’
actually means ‘test’. An unusual case in that sense is used to test whether or
not a rule is valid. If the rule stands up to the unusual case, then that
reinforces its truth, if not, then the rule is disproved. In such a case the
main rule and the exception supplement each other in which one gives meaning to
other.
4. Exceptions in law are generally by way of a negative
provision, specific exclusion, proviso or explanation. In tax laws while the
general rule is stated by way of the main provision, exclusions are provided for
by proviso to the general rule. A proper understanding of the law therefore,
requires reading the general rule and the proviso together. The proviso in tax
laws apart from proving the existence of the general rule, confirming,
explaining or harmonising the provision, gets its scope and meaning from the
general rule of which it is an exception.
5. Explaining the purpose of a proviso in a taxing statute,
the Supreme Court in Commissioner of Income-Tax vs. Indo-Mercantile Bank Ltd.
[1959] 36 ITR 1, observed, “The proper function of a proviso is that it
qualifies the generality of the main enactment by providing an exception and
taking out, as it were, from the main enactment, a portion which, but for the
proviso, would fall within the main enactment. Ordinarily, it is foreign to the
proper function of a proviso to read it as providing something by way of an
addendum or dealing with a subject which is foreign to the main enactment.” In
this case whereas the main provision contained in Section 24(1) of the
Income-tax Act, 1922 provided for set-off of loss under one head against profit
under another, the proviso which restricted such set-off was attempted to be
used to prevent set off within the same business head arising from two different
businesses. The Court refused to accept the argument observing that a proviso
must be considered with relation to the principal matter to which it stands as a
proviso. Since the proviso in dispute has no positive words which would support
an interpretation in favour of the disintegration of the head ‘business’, it
cannot stop set-off within the same head of income.
6. To put if differently, in taxing statutes an exception
contained in a proviso takes its scope and meaning from the main provision.
Being a carved out exception, in no circumstance can it be construed in such a
manner as to obliterate and swallow up the main provision to which it is a
proviso. In Commissioner of Income-Tax vs. Ajax Products Ltd., (55 ITR
741 SC) Section10(2)(vii) of the I.T. Act, 1922 [Section 41(2) of I.T. Act,
1961] came for consideration in reference to insertion of words “whether during
the continuance of the business or after cessation thereof” in the proviso by
Act 67 of 1949. Arguments were advanced for the Revenue that insertion of these
words takes away the essential condition in the main provision that the asset
should have been used for business conducted during the previous year. Rejecting
the argument and reiterating their observations in Indo- Mercantile Bank case (supra)
about the scope of the proviso, the Court held that as a result of the amended
proviso, surplus arising from machinery sold or discarded or demolished or
destroyed can be taxed even when such events take place after cessation of
business, but only if the machinery was used in the business carried on for any
part during that financial year, as the amended provision has to be considered
with relation to the principal matter to which it stands as a proviso. Unless
the language is so clear that a proviso may be construed as a substantive
clause, it cannot do violence to the main provision.
7. Harmonious construction of the provision and the exception
contained in proviso thereto require consideration of the two as a whole so as
not to set at naught the real object of the main enactment or put in danger the
legitimacy of the rule in its globality. Deciding about retrospective or
prospective application of the proviso to Section 43B inserted by the Finance
Act, 1987 making exception to the general rule contained in Section 43B in
respect of payments of tax, duty, cess or fees, if payment of such liability is
made on or before the due date of furnishing of return, the Orissa High Court in
Commissioner of Income Tax vs. Pyarilal Kasam Manji and Co. 198 ITR 110
went into the intention of the Legislature, the objects and reasons of the main
provision, the mischief sought to be remedied and came to the conclusion that
the proviso, although stated to be applicable w.e.f. 1.4.1988, is to
cover cases from April 1, 1984.
8. In CIT vs. Hico Products Pvt. Ltd. (No.2) Bom, 201
ITR 575 the issue was whether proviso to Section 40A (5)(a) carves out a
different category of director-employees so as to free them from separate
ceilings of allowability of expenditure on payment of salary as laid down in
sub-clause (i) of clause (a) and on provision of perquisite as laid down in
sub-clause (ii) or subjects them, like any other employee, to such separate
ceilings subject to overall ceiling of Rs.72,000. Applying the characteristics
of a proviso as laid down by the Courts, the Bombay High Court held that the
proviso carves out a separate category of employee-directors and, unlike other
employees, subjects them to uniform ceiling of Rs.72,000.
9. What applies to provisos equally applies to specific
provisions laying down exceptions to the general rule. Reference may be made to
the provisions of Section 37(1) containing the general rule of allowability of
business expenditure laid out or expended wholly and exclusively for the
purposes of the business or profession. Exceptions to the general proposition
are contained in Sections 40 and 40A. It will be too simplistic to hold that what is not excepted is allowable under the general rule as the allowability of unexcepted is still to be judged by the touchstone of the broad basis in Section 37(1). The same applies to exceptions contained in explanations. Section 37(1) itself has an explanation carving out exception to the general rule in respect of expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law.
10. To sum up ‘exceptio probat regular’ is a rule of commonsense in which exceptions prove existence of a general rule and the two make a cohesive whole wherein each derives its scope and meaning from the other. The two cannot be read independently unless there are clear words indicating the exception as laying down a substantive provision.
Autrefois acquit
1. ‘Autrefois acquit’ is a preemptory plea to be taken
by the defendant in a criminal proceeding to estop the government from carrying
on with a trial against him. Its etymology is derived from Anglo-French meaning
‘formerly acquitted’. Related to this is ‘Autrefois convict’ and ‘autrefois
attaint’ literally meaning ‘formerly convicted’ and ‘formerly attainted’.
2. The significance of the term lies in the precept embedded
in Anglo-Saxon common law predating the eleventh century, which protects a
person from being tried and indicted for the same offence more than once. Once a
defendant is found not guilty; the case cannot be re-opened for holding him
guilty regardless of any compelling inculpatory evidence found subsequently, nor
can he be tried for the same offence under the same or any different Act.
Conversely, ‘autrefois convict’ protects a person convicted once to be
convicted again under any Act in any criminal proceeding involving action on the
same set of facts.
3. The roots of the principle, as stated by Bhagwati J. in
Maqbool Hussain v. State of Bombay, AIR 1953 SC 325, are to be found in the
well-established rule of common law of England that “where a person has been
convicted of an offence by a court of competent jurisdiction, the conviction is
a bar to all further criminal proceedings for the same offence”. [Per Charles J.
in Reg. v. Miles, (1890) 24 QBD 423(A)]. To the same effect is the
ancient maxim ‘Nimo bis debut punir pro uno delicto’ meaning no one ought
to be twice punished for one offence or, as it is sometimes written, ‘pro
eadem cause’ i.e., for the same cause. This is the principle on which
the party persued has available to him the plea of ‘autrefois convict’ or
‘autrefois acquit’.
4. The fifth amendment of the American Constitution
enunciated the principle as :
“. . . . . . nor shall any person be subject for the same
offence to be twice put in jeopardy of life or limb, not shall be compelled,
in any criminal case, to be witness against himself”.
The principle of protection against double jeopardy, as it
has come to be known, is another expression for ‘autrefois convict’ or ‘autrefois
acquit’.
5. The principle is embodied in Indian laws in S. 26 of the
General Clauses Act, 1897, which states that “where an act or omission
constitutes an offence under two or more enactments, then the offender shall be
liable to be prosecuted and punished under either or any of those enactments,
but shall not be liable to be punished twice for the same offence”. The maxim
finds expression also in S. 403(1) of criminal Procedure Code 1898 when it says,
“A person who has been tried by a Court of competent jurisdiction for an offence
and convicted or acquitted of such offence shall, while such conviction or
acquittal remains in force, not be liable to be tried again for the same
offence, nor on the same facts for any other offence for which a different
charge from the one made against him might have been made u/s.236, or for which
he might have been convicted u/s.237”.
6. The aforesaid common law doctrine and provisions in Indian
as well as foreign laws provided the background for the guarantee of fundamental
right enshrined in Article 20(2) of the Constitution of India, which reads as
under :
“No person shall be prosecuted and punished for the same
offence more than once.”
S. 3(38) of the General Clauses Act, applicable for the
interpretation of the constitution by virtue of Article 367, defines an
‘offence’ to mean any act or omission made punishable by any law for the time
being in force. Expatiating on Article 20(2), the Supreme Court in Maqbool
Hussain case (supra) observed :
“It incorporated within its scope the plea of ‘autrefois
convict’ as known to the British Jurisprudence or the plea of double jeopardy
as known to the American constitution but circumscribed it by providing that
there should be not only a prosecution, but also a punishment in the first
instance in order to operate as a bar to a second prosecution and punishment
for the same offence.”
The Court also, having regard to the whole background,
imported the requirement of prosecution and punishment ‘before a Court of law or
judicial Tribunal’ for invoking Article 20(2) of the constitution and held that
“in order that the protection of Art. 20(2) be invoked by a citizen, there must
have been a prosecution and punishment in respect of the same offence before a
Court of law or a Tribunal required by law to decide the matters in controversy
judicially on evidence on oath, which it must be authorised by law to
administer, and not before a Tribunal which entertains a departmental or an
administrative enquiry, even though set up by a statute, but not required to
proceed on legal evidence given on oath”.
7. The applicability of these two essential ingredients
viz. (i) prosecution and punishment, and (ii) by a Court of law or judicial
Tribunal, came to be examined in the above case where the question to be decided
was whether confiscation of gold by Customs authorities with option to pay an
amount in lieu of such confiscation is punishment by Court of law/judicial
Tribunal to justify the plea based on ‘autrefois convict’ against
pursuing criminal proceedings under the Sea Customs Act and Foreign Exchange
Regulations Act. The Court concluded that far from being authorities bound by
rules of evidence or procedure established by law and invested with power to
ensure their own judgments or orders, the Sea Customs Authorities are merely
constituted administrative machinery for the purpose of adjudging confiscation,
increased rates of duty and penalty prescribed in the Act. As to the nature of
confiscation, it was held that confiscation is more in the nature of proceedings
in rem than proceedings in personam. On both the counts the
protection of ‘autrefois convict’ was denied.
8. In effect the decision in earlier proceedings not only provides res judicata for the succeeding ones, but prevents proceedings to go ahead. In tax laws where an act or omission attracts penalty and is also subjected to prosecution, plea of double jeopardy has been raised in certain prosecution proceedings based on the order imposing penalty. In Gulab Chand Sharma v. H. P. Sharma, Commissioner of Income-tax, Delhi, 95 ITR 117, penalty was imposed u/s.274 read with S. 271 and S. 273 for making a false return and prosecution proceedings were also launched u/s.277 of the Income-tax Act, S. 193 of IPC and also S. 467/471 of IPC, the prosecution proceedings were sought to be quashed on the plea of ‘autrefois convict’. The Court after detailed discussion of various provisions held that the proceedings for the imposition of penalty taken against the accused under the Income-tax Act are distinct from the criminal complaints filed against him. They can, therefore, continue simultaneously. Imposition of penalty is neither a prosecution, nor a punishment for any offence to bar prosecution proceedings. The objects of the two provisions are different. It is an anathema to suppose that when a civil remedy is available, criminal prosecution is completely barred. The two types of actions are quite different in content, scope and import [Pratibha Rani v. Suraj Kumar, 155 ITR 190 (SC)]. The one containing the prosecution and punishment is to vindicate public justice by punishing the offender, whereas the object of the penalty proceedings is to render evasion unprofitable and to secure to the State the compensation for the damages for attempted evasion. They are mutually exclusive remedies [Po Ummali Umma V. lAC, (1967) 64 ITR 669 (Ker.)]
Section 80IB(10) — Assessment Year 2003-04 — Whether in a case where a project comprising residential housing units and also commercial establishments has been approved by a local authority as a ‘housing project’, deduction under S.80IB(10), as applicable
-
2009-TIOL-218-ITAT-PUNE-SB
Brahma Associates vs. JCIT
A.Y. : 2003-2004. Date of Order : 6.4.2009
Section 80IB(10) — Assessment Year 2003-04 — Whether in a
case where a project comprising residential housing units and also commercial
establishments has been approved by a local authority as a ‘housing project’,
deduction under S.80IB(10), as applicable prior to 1.4.2005, is admissible qua
the profits of the entire project i.e., including the profits on sale of
commercial units — Held : Yes.Whether in a case where such a project is approved by the
local authority as a ‘residential-cum-commercial project’, deduction
u/s.80IB(10), as applicable prior to 1.4.2005, is admissible —Held : Yes, if
the commercial establishments are up to 10% of the built-up area. Whether in a
case where in such a project the area of commercial establishments is more
than 10% of the built-up area, but the profits of residential units can be
ascertained separately and also the size of the plot after excluding the area
utilised for construction of commercial establishment exceeds one acre and all
other conditions are satisfied by considering construction of residential
units as a separate project on a stand-alone basis, deduction u/s. 80IB(10),
as applicable prior to 1.4.2005, is admissible in respect of profits of
residential units — Held : Yes.
Facts :
The assessee was an AOP who constructed a project in Pune,
which project was started on 14th August, 2000 and was completed on 3rd Oct.,
2005. The total area of the plot was 34,209.79 sq. mts. The built-up area of
the residential units was 24,583.31 sq. mts, whereas built-up area of
commercial premises was 7,128.87 mts. The percentage of commercial area to the
total area was 20.83%. The Pune Municipal Corporation had approved the project
as a ‘New/Residential + Commercial’.The assessee, at the assessment stage, claimed deduction
u/s.80IB(10) in respect of profits attributable to the residential units or
dwelling unit segment of the overall project. The Assessing Officer (AO)
rejected the claim of the assessee on the ground that prior to A.Y. 2005-06 a
project qualified for deduction u/s.80IB(10) only if it was a purely
residential project and did not involve construction of commercial areas at
all. He also noted that the commercial areas constructed in the project of the
assessee were far in excess of the limits prescribed in DC Regulations for
convenience shopping and also the commercial units constructed violated the
norms prescribed in DC Regulations as regards size and the purpose for which
the same could be used.The Commissioner of Income-tax (Appeals) upheld the order
of the AO.Aggrieved, the assessee preferred an appeal to the
Tribunal. The Division Bench noted that there were divergent views in various
decisions of the Division Benches and therefore, a Larger Bench was
constituted to consider the following questions :
1 Whether deduction u/s. 80IB(10), as applicable prior to
1st April, 2005, is admissible in case of ‘housing project’ comprising
residential housing units and commercial establishments ?2 In case questions no.1 is answered in the affirmative,
whether considering the facts and circumstances of a particular case, a
propor-tionate deduction should be allowed ?3 In case the answers to questions no. 1 and 2 are in
affirmative, whether the limit prescribed by clause (d) of S. 80IB(10)
should operate ?
Held :
The Special Bench held the amendment to S.80IB(10)
w.e.f. 1.4.2005 laying down the limit up to which a housing project can
have commercial areas to be prospective and not retrospective. It observed
that the 2005 amendment placed a restriction on commercial user and also shows
that commercial user was permissible even prior to that.The Bench noted that this Section is aimed at promoting
construction of housing projects so as to address the problem of shortage of
dwelling units and it cannot be said that the object is to encourage house
building activity per se, irrespective of whether these are dwelling or
commercial units.The Special Bench held that for a period prior to 1.4.2005,
(a) A project involving construction of commercial areas
along with dwelling units would qualify for deduction u/s. 80IB(10) if such
a project was approved by local authority as a ‘housing project’. Such an
approval by the local authority will be conclusive and no further inquiry
needs to be made on the extent of commercial use in such a project. Profits
of such a project, subject to satisfaction of other conditions specified in
S.80IB(10), will qualify for deduction u/s.80IB(10). The entire profits of
the project and not only profits attributable to dwelling units will qualify
for deduction u/s.80IB(10).(b) Given that under the DC Rules (of Pune) there cannot
be a pure residential project and it is incumbent on the developer to
reserve a part of the plot for shopping, commercial use of area must be
regarded as an integral part of housing project and consequently in case a
project involved construction of dwelling units and commercial areas and the
project was approved by a local authority as ‘residential-cum-commercial
project’, such a project will qualify for deduction u/s.80IB(10) if the
commercial areas are up to 10% of the built-up area. Once such a project is
regarded as housing project qualifying for deduction u/s.80IB(10), subject
to satisfaction of other conditions stated in S.80IB(10), entire profits of
the project will be eligible for deduction and not only the profits
attributable to construction of residential dwelling units.
Section 10B of the Income-tax Act, 1961 — Formula under S. 10B(4) — Whether any expenses on freight, telecommunication charges or insurance attributable to the delivery of articles or things or computer software outside India or any expenses incurred in f
-
2009-TIOL-187-ITAT-MAD-SB
ITO vs. Sak Soft Ltd.
A.Ys. : 2002-2003 and 2003-04.
Date of Order : 6.3.2009
Section 10B of the Income-tax Act, 1961 — Formula under S.
10B(4) — Whether any expenses on freight, telecommunication charges or
insurance attributable to the delivery of articles or things or computer
software outside India or any expenses incurred in foreign exchange in
providing technical services outside India, which are required to be excluded
from export turnover as defined in Explanation 2(iii) below S. 10B, ought also
to be excluded from the figure of total turnover while applying the formula
prescribed by Ss (4) of S. 10B. — Held : Yes.
Facts :
The assessee was a company engaged in export of computer
software. In the return of income filed by the assessee it claimed an
exemption of Rs.3,07,77,341 u/s. 10B of the Act. While computing the amount of
deduction u/s. 10B of the Act the assessee had taken export turnover at
Rs.8,33,64,528 and total turnover at Rs.9,26,23,216. In the course of
assessment proceedings, the Assessing Officer (AO) noticed that assessee had
incurred the following expenses in foreign currency.
Employer’s NIC contribution Rs.2,19,672
Salary at London office Rs.20,92,763
Lodging expenses at London Rs.6,263
Travelling expenditure Rs.5,62,896
Professional charges at London office Rs.25,462
Total Rs.29,07,056
The AO held that in terms of clause (iii) of Explanation 2
below S.10B the above expenditure was to be deducted from export turnover. He,
accordingly, reduced the sum of Rs 29,07,056 from export turnover of
Rs.8,33,64,528. The AO thereafter worked the deduction u/s.10B in accordance
with the formula prescribed by S.10B(4). He, however, did not reduce this sum
of Rs.29,07,056 from total turnover in the denominator.
The assessee’s contention was that there should be parity
between the figures of export turnover and total turnover, and the figure of
Rs.29,07,056 should be excluded from both the export turnover and the total
turnover, which are the numerator and denominator, respectively, in the
formula.
The question before the Special Bench (SB) was whether AO
should have taken the total turnover in the formula to be Rs.8,97,16,160
(Rs.9,26,23,216 minus expenditure of Rs.29,07,056).
Held :
(a) As held by the SC in the case of LMW, there has to be
an element of turnover in the receipt if it has to be included in the total
turnover. That element is missing in the case of freight, telecom charges or
insurance attributable to the delivery of the goods outside India and
expenses incurred in foreign exchange in connection with providing of
technical services outside India. These receipts can only be received by the
assessee as reimbursement of such expenses incurred by him. Mere
reimbursement of expenses cannot have an element of turnover. It is in
recognition of this position that in the definition of ‘export turnover’ in
S. 10B the aforesaid two items have been directed to be excluded.
(b) The definition of export turnover contemplates that
the amount received by the assessee in convertible foreign exchange should
represent ‘consideration’ in respect of the export. This can only refer to
the price of the computer software exported out of India. Any reimbursement
of the two items of expenses mentioned in the definition can under no
circumstances be considered to represent ‘consideration’ for the export of
the computer software or articles or things. Thus, there is evidence
inherent in the definition of ‘export turnover’ itself that it should
represent ‘consideration’ for export of the articles or things or computer
software. It follows that the expression ‘total turnover’ which is not
defined in S.10B should also be interpreted in the same manner. Thus, the
two items of expenses referred to in the definition of ‘export turnover’
cannot form part of the total turnover since the receipts by way of recovery
of such expenses cannot be said to represent consideration for the goods
exported.
(c) Ss 10A, 10B, 80HHC, 80HHE and 80HHF provide for
relief from export profits and in that sense they are of the same genre. It
cannot be disputed that the object of these Sections is to promote exports.
If some of the Sections such as S.80HHE and S.80HHF provide for a formula
for calculating the deduction which is identical with the formula prescribed
by S. 10B, it follows that it would be incongruous to interpret Section 10B
in a manner different from these two Sections merely because there is no
definition of ‘total turnover’ in that Section.
(d) Statutorily parity is maintained between export
turnover and total turnover in S.80HHE and S.80HHF. We do not see why such
parity cannot be maintained between export turnover and total turnover in
S.10B just because ‘total turnover’ has not been defined in that Section.
(e) In clause (iii) of Explanation 2 to S. 10B, the
freight, telecom charges and insurance attributable to the delivery of the
goods outside India and expenses incurred in foreign exchange in providing
technical services outside India have been excluded from export turnover.
Therefore, the same have to be excluded also from the total turnover though
that expression has not been defined in the Section.
(f) While explaining the rationale for introduction of
the definition of ‘total turnover’ with retrospective effect in S.80HHC, the
CBDT has in circular no. 621, dated 19.12.1991 by implication at least,
taken the view that parity should be maintained between both the
expressions.
The appeals filed by the Department were dismissed.
Section 271(1)(c) of the Income-tax Act, 1961 —Concealment penalty — Whether in a case where an assessee in penalty proceedings successfully explains his position and is not trapped within the parameters of clause (c) of S. 271(1)(c) along with the Explan
-
2009-TIOL-193-ITAT-MUM
ACIT vs. VIP Industries Ltd.
A.Y. : 2000-2001. Date of Order : 20.3.2009
Section 271(1)(c) of the Income-tax Act, 1961 —Concealment
penalty — Whether in a case where an assessee in penalty proceedings
successfully explains his position and is not trapped within the parameters of
clause (c) of S. 271(1)(c) along with the Explanations deeming the concealment
of income, penalty cannot be imposed — Held : Yes. Whether ratio decidendi of
the judgment of Apex Court in Dharmendra Textiles Processors and Ors. is
confined to treating willful concealment as not vital for imposing penalty
u/s. 271(1)(c) and not that in all cases where addition is confirmed, the
penalty shall mechanically follow — Held : Yes.
Facts :
The assessee claimed deduction u/s. 35 for scientific
research expenditure @ 100% inter alia towards cost of motor car
purchased during the year. The tax audit report filed by the assessee
categorically mentioned that deduction was claimed on Research & Development
Expenditure including deprecia-tion. The Assessing Officer (AO) added back
this amount and allowed depreciation @ 20% by treating it as car used for
ordinary business purpose not connected with the scientific research and
development activity. This addition was confirmed by the Tribunal.
The AO levied penalty u/s. 271(1)(c).
The CIT(A) allowed the appeal of the assessee and deleted
the penalty levied by the AO.
In an appeal by the Revenue to the Tribunal heavy reliance
was placed on the decision of the Apex Court in the case of Dharmendra
Textiles Processors and Ors. (306 ITR 277).
Held :
The Tribunal after considering the decision of the Apex
Court in Dharmendra Textiles Processors held that :
(a) the mere fact that addition is confirmed cannot
per se lead to the confirmation of penalty because quantum and penalty
proceedings are independent of each other;
(b) Explanation 1 to S. 271(1)(c) is attracted when
either of the following three ingredients is satisfied viz. :
(i) the assessee fails to offer an explanation; or
(ii) he offers an explanation which is found by the
authorities to be false; or
(iii) the person offers an explanation which he is not
able to substantiate and fails to prove that such explanation is bona
fide and that all the facts relating to the same have been disclosed
by him.
(c) the judgment of the Supreme Court in Dharmendra
Textiles Processors which holds that penalty u/s. 271(1)(c) is a civil
liability and that ‘willful concealment’ and ‘mens rea’ are not
essential ingredients for imposing penalty cannot be read to mean that in
all cases where addition is confirmed, penalty shall automatically follow.
In order to attract S. 271(1)(c), there must be concealment — the fact that
the same is willful or unintentional is irrelevant;
(d) where an assessee genuinely claims a deduction after
disclosing necessary facts, there is no ‘concealment’ even if the claim is
rejected. If penalty is imposed under such circumstances also there will
remain no course open to an assessee to raise disputed claims and such
proposition is beyond recognised canons of law.
The Tribunal upon examining the facts found that the
assessee had bona fide made a claim for deduction u/s. 35 in respect of
cost of car purchased for the purpose of R & D activity by disclosing all the
necessary particulars in the audit report. The Tribunal found this to be a
case of genuine difference of opinion between the assessee and the AO. The
Tribunal held that the assessee had not concealed its income and also none of
the ingredients necessary to be satisfied for invoking Explanation 1 was
satisfied. The Tribunal confirmed the action of CIT(A) and dismissed the
appeal of the Revenue.
Once an assessee is maintaining its accounts as per the mercantile system, any liability which has accrued in a year, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of business.
-
[2008] 304 ITR (AT) 130 (Pune)
Thermax Babcock & Wilcox Ltd. vs. Addl. CIT
A.Y. : 1997-98 Dated : 02.03.2007
Once an assessee is maintaining its accounts as per the
mercantile system, any liability which has accrued in a year, though to be
discharged at a future date, would be a proper deduction while working out the
profits and gains of business.
There exists a stipulation in the contract agreements
entered into by the assessee with its customers for manufacture of boilers
that liquidated damages would be paid by either party for causing delay in
executing or erecting or commissioning the work. For the relevant A.Y., the
assessee made a provision of Rs.40,73,360 for liquidated damages. The
Assessing Officer held it to be a contingent liability and hence not
allowable. The disallowance was also upheld by the CIT(A).
On Second Appeal, the ITAT held that :
1. The condition for payment of liquidated damages for
delay in work is inbuilt in the contract agreement itself. Therefore, there
exists an undertaking given by the parties to execute the work within
specified time, and if any delay is caused in completing the work within the
specified time, the defaulter has agreed to pay damages on account thereof.
This undertaking is not found to be conditional.2. This certain act or event of not completing the work
within the stipulated time has imported a definite and absolute liability on
the assessee and merely because of the fact that liability would be
discharged at a future date and there is a difficulty in estimating the
correct amount thereof would not convert this definite and absolute
liability into conditional one.3. There could be a dispute only with regard to the exact
quantification thereof, but that by itself would not convert the definite
liability into a contingent one. Where no dispute has been raised as to the
assessee’s liability to pay liquidated damages for delay in executing the
contract work, the provision for liability may be claimed in the year to
which the transaction relates, provided it can be fairly ascertained or
estimated on agreed and admitted terms of the contract.4. From the Notification No. S.O. 69(E), dt. 25th Jan.,
1996, issued by the CBDT under S.145(2), it is clear that the Department has
itself accepted the principle that a provision should be made for all known
liabilities and losses even though the amount cannot be determined with
certainty and represents only a best estimate in the light of available
information.
Based on the above observations, the ITAT remanded the
matter back to the Assessing Officer to ascertain and determine the accrued
liability pertaining to the relevant A.Y. in light of the terms and condition
of the agreement and accordingly allow the deduction.
Cases relied upon :
1. Calcutta Co. Ltd. vs. CIT, (1959) 37 ITR 1 (SC)
2. Metal Box Company of India Ltd. vs. Their Workmen,
(1969) 73 ITR 53 (SC)
3. Bharat Earth Movers vs. CIT, (2000) 245 ITR 428
(SC).
Whether Assessing Officer can make a reference to DVO u/s. 142A where he is of the opinion that the figure of investment in property is overstated; Held : No.
-
[2008] 304 ITR (AT) 354 (Jodhpur)
Saraswati Devi Gehlot (SMT) vs. ITO
A.Y. : 2002-03 Dated : 31.08.2007
Whether Assessing Officer can make a reference to DVO u/s.
142A where he is of the opinion that the figure of investment in property is
overstated; Held : No.
The assessee has shown an investment in shops at Rs.
26,45,100 and the Assessing Officer made reference to the DVO as in his
opinion this figure should be less. Hence, the Assessing Officer made a
reference to the DVO. The valuation given by the DVO Rs.23,33,177 was adopted
as cost of construction by the Assessing Officer, which resulted into a short
term capital gain of Rs. 2,50,823 against loss of Rs. 61,100 declared by the
assessee. This addition was also upheld by the CIT(A).
The Tribunal observed that :
1. Basis of cost of construction of shops shown by the
assessee has not been disputed by the Assessing Officer and no adverse
comment has been made by him in this regard. Thus, the cost of acquisition
declared by the assessee does not warrant any interference.
2. Reference to DVO u/s. 142A can be made for the purpose
of Sec. 69, 69A or 69B. All these Sections refer to a situation where either
the assessee is found to be owner of some valuables not recorded in the
books or the value recorded by him is less than the investment made by him.
However, in the present case, the Assessing Officer was of the view that the
value recorded by the assessee is more than the investment made by him.
Reference to DVO u/s. 142A is not permissible in such situation.
3. Further, reference as contemplated under S.55A is for
ascertaining the fair market value of a capital asset and not for
determining the cost of acquisition or construction.
Thus, the ITAT was of the view that reference to DVO is
void ab initio and the report supplied by the DVO is of no consequence.
Case Referred to :
· Smt. Amiya Bala Paul vs. CIT, (2003) 182 CTR
(SC) 489; (2003) 262 ITR 407 (SC) and also Circular No. 5 of 2005, dt. 15th
July, 2005.
Payments made by assessee, a co-operative society running sugar mills, to Zone Samitis formed by the cane growers, for spending the same on harvesting, cutting and transporting sugarcane to assessee’s factories on behalf of cane growers, which were debite
Kamrej Vibhag Sahakari Khand Udyog Mandli Ltd. vs. ITO
and
Sayan Vibhag Sahakari Khand Udyog
Mandli Ltd. vs. ITO
A.Ys. : 2003-04 & 2004-05 Dated : 30.05.2008
Payments made by assessee, a co-operative society running sugar mills, to Zone Samitis formed by the cane growers, for spending the same on harvesting, cutting and transporting sugarcane to assessee’s factories on behalf of cane growers, which were debited to cane growers’ advance account and ultimately adjusted against the cost of cane — Whether provisions of Section 194C applicable ? Held : No.
The assessee is a co-operative society running sugar mills. Farmers, who are members of the assessee society, form committees every season known as Zone Samitis for the purpose of undertaking the collective work of harvesting, cutting and transportation of sugarcane to the factory sites. The assessee made advance payments at a fixed rate to the Samitis for spending the same on harvesting, cutting and transporting sugarcane to its factories which was the liability of the cane growers. The Assessing Officer held that the assessee was liable to deduct tax at source u/s. 194C from these payments and accordingly he raised demands u/s. 201 against the assessee with interest. These orders were also upheld by the CIT(A).
On second appeal to the ITAT, the Tribunal observed that there were conflicting judgments in case of Shree Chalthan Vibhag Khand Udyog Sahakari Mandli Ltd. vs. ITO, 104 TTJ 654 (AHD) and Shree Mahuva Pradesh Sahakari Khand Udyog Mandli Ltd. Because of these two orders, the President constituted a Special Bench to decide the controversy.
The Special Bench held as follows :
1. Section 194C applies when payments are made for carrying out any work including supply of labour for carrying out any such work in pursuance of a contract between the contractor and the persons stated therein. By sub-Section (1) of S.194C a liability to deduct tax at source is cast upon the person responsible for paying any such sum. Here, the responsibility of paying the sum for harvesting, cutting and transporting is of the cane growers. This is clearly established by the fact that the payments, though made in instalments, were debited to the individual accounts of the cane growers, maintained by the assessee and adjusted ultimately against the cost of the cane.
2. The payments are, no doubt, made to the labour hired for this purpose but these payments were made by the Samiti or by the assessee as alleged by the Revenue, not on its own account; they were for and on behalf of the cane growers.
3. The assessee was required to pay the fixed price and make the payment to the cane growers for the cost of the cane; The payments, though in instalments, were debited to the cane growers’ advance account and adjusted ultimately as cost of the cane.
4. The assessee had given and Samitis have taken the amount from the assessee for and on behalf of the cane growers and on their behalf; Samitis have also paid that amount to the labourers on account of the cane growers.
5. Surplus and deficit is ultimately adjusted in the cane growers’ account through the Samitis who have paid and received that amount from the assessee-company.
Thus assessee is not liable to deduct tax at source under S.194C from these payments.
Cases Relied upon :
· Associated Cement Company Ltd. vs. CIT, (1993) 201 ITR 435 (SC)
· BDA Ltd. vs. ITO, (2006) 281 ITR 99 (Bom)
· Balsara Home Products Ltd. vs. ITO, (2005) 94 TTJ (Ahd) 970
· Birla Cement Works vs. CBDT, (2001) 248 ITR 216 (SC)
· CIT vs. Dabur India Ltd., (2006) 283 ITR 197 (Del)
Whether fee received from clients in advance by advocate following a cash method is income of the year in which it is received, Held : No. Whether a mistake in one assessment year should be carried over to the assessment proceedings of the next assessment
K. K. Khullar vs. Dy. CIT
A.Y. : 2002-03 Dated : 18.01.2008
Whether fee received from clients in advance by advocate following a cash method is income of the year in which it is received, Held : No. Whether a mistake in one assessment year should be carried over to the assessment proceedings of the next assessment year, Held : No i.e., it is not compulsory for the A.O. to carry forward the interpretations and findings of the earlier orders without application of mind.
The assessee, an Advocate, recovered fees from his clients in advance. The proportionate fees relating to the work performed and the balance of fees is shown as advance received from clients. The Assessing Officer made an addition of the advance fees to the income of the year in which it was received in view of Section 145 of Income-tax Act, 1961, stating that there are only two methods of accounting viz., Cash and Accrual. As per cash system of accounting, the amount of fess received should be liable to tax in the year of receipt itself. Also the CIT(A) was of the opinion that since the assessee was a professional, the method of accounting followed should be in consortium with other professionals i.e., cash basis.
On further appeal to the Tribunal, it was held as follows :
1. Income only to the extent of the amount pertaining to services rendered vested in the assessee. The rest of the amount was taken as liability to be vested in subsequent years as and when the services were rendered.
2. The excess amount would have to be returned in case the service was not performed in subsequent years and therefore, in respect of such amount, no debt came into existence in favour of the assessee.
3. The levy of Income-tax is a levy on income. The Act takes into account two points of time at which the liability to tax is attracted, namely, the accrual of income and its receipt. However the substance of the matter is ‘Income’.
4. The findings of the CIT(A) that the assessee was following a hybrid system of accounting on the ground that the whole of the amount received from clients as retainer fees was not declared as income in the year of receipt of the amount was not correct.
5. A wrong decision rendered by the Assessing Officer in one year or in number of years would not bind the Assessing Officer in the assessment of a subsequent year as there could not be any estoppel against law. The principle of res judicata does not apply to Income-tax proceeding as each assessment year is a separate unit.
On the above reasoning, the ITAT deleted the addition made by the Assessing Officer.
Cases Relied upon :
1. CIT vs. M/s. Shoorji Vallabhdas & Co., [1962] 46 ITR 144(SC)
2. Radhasoami Satsang vs. CIT, [1992] 193 ITR 321 (SC).
Section 271(1)(c) — When Assessing Officer recalculates total income in accordance with law and such total income is different from that calculated by the assessee, there is no concealment of particulars of income or furnishing of inaccurate particulars o
Mimosa Investment Co. (P.) Ltd. vs. ITO
A.Y. : 2004-05. Dated 15.01.2009
Section 271(1)(c) — When Assessing Officer recalculates total income in accordance with law and such total income is different from that calculated by the assessee, there is no concealment of particulars of income or furnishing of inaccurate particulars of income or deemed concealment in accordance with Explanation 1 to Section 271(1).
For the relevant assessment year, the Assessing Officer made some addition on a pro rata basis in terms of Section 14A. Thereafter, the Assessing Officer levied penalty u/s.271(1)(c) on ground that the assessee had not furnished full particulars for purpose of computation of its income. The CIT(A) confirmed the penalty by observing that the assessee had concealed its income and had furnished inaccurate particulars of its income.
The Tribunal deleted the penalty. The Tribunal noted as under :
1. There cannot be a straitjacket formula for detection of defaults of concealment or of furnishing inaccurate particulars of income. Concealment of particulars of income and furnishing of inaccurate particulars of income may at times overlap. It depends upon the facts of each case.
2. On consideration of facts of the instant case it was not found that the assessee had concealed the particulars of his income or had furnished inaccurate particulars of such income. The assessee had furnished a note along with the return of income stating, “the interest expenditure was not considered as disallowed u/s.14A as the investments had not been made for the purpose of earning dividend income but for business consideration including capital appreciation. However, without prejudice to the above contentions, if any interest was to be considered as being in relation to dividends earned, the disallowance would amount to Rs.41.18 lacs as per the relevant annexure”, which was also enclosed by the assessee.
3. Hence, the assessee had disclosed all the relevant material facts for the purpose of computation of total income. The assessee had also offered explanation in this regard, which was not found to be false by the Assessing Officer. The explanation of the assessee regarding claim of interest expenditure was bona fide. The assessee had substantiated his explanation.
4. When the assessee had furnished all the material facts for the purpose of computation of total income, the Assessing Officer was duty-bound to calculate correct total income in accordance with law, which might have been different than the total income calculated by the assessee.
5. Mere fact that the Assessing Officer while discharging his duty was recalculating the total income in accordance with law and such income was not the same as calculated by the assessee, it could not be held that the assessee had concealed particulars of his income or had furnished inaccurate particulars of such income or there was a deemed concealment in accordance with Explanation 1 to Section 271(1)(c).
Therefore, penalty u/s.271(1) read with Explanation 1 could not be invoked. The penalty levied by the Assessing Officer was deleted.
Section 194D does not apply to each and every payment made by any person by way of commission or otherwise; it applies to remuneration or reward paid for soliciting or procuring insurance business.
General Insurance Corpn. of India vs. Asst. CIT (TDS)
A.Ys. : 2004-05 to 2006-07. Dated 13.02.2009
a. Section 194D does not apply to each and every payment made by any person by way of commission or otherwise; it applies to remuneration or reward paid for soliciting or procuring insurance business.
b. Since commission paid by assessee to insurance companies was in nature of compensation towards cost of procurement incurred by insurance companies for originally accepting insurance business from agents, provisions of Section 194D would not be attracted.
The assessee public sector undertaking, engaged in the business of re-insurance, accepted re-insurance contracts from other insurance companies and paid commission on the re-insurance premium earned without deducting tax at source on such commission. The Assessing Officer treated the assessee to be in default for non-deduction of tax u/s.194D. The CIT (A) upheld the order of the Assessing officer.
The Tribunal held that Section 194D was not attracted on the facts of the instant case. The Tribunal noted as under :
1. In terms of Section 194D, tax deduction is to be made from income which is in the nature of remuneration or reward (whether it is called commission or otherwise) for soliciting or procuring insurance business. Section 194D does not apply to each and every payment made by any person by way of commission or otherwise; it applies only to remuneration or reward paid for soliciting or procuring insurance business. The language of Section 194D makes it abundantly clear that if the commission or other payments are made by any assessee not by way of remuneration or reward for soliciting or procuring insurance business, then Section 194D would not apply.
2. In the instant case, the insurance companies did not procure business for the assessee-company nor did the assessee-company pay any commission or other payment for soliciting the business from the insurance companies.
3. Such commission was allowed by the assessee-company in order to compensate the insurance companies for the brokerage and other costs incurred in procuring the business by the ceding company. Considering the nature of the payment made by the assessee-company to the insurance companies by way of commission, it could be said that the same did not fall within the category of payments by way of remuneration or reward for soliciting or procuring insurance business from the insurance companies.
2. As held in the case of Gujarat Gas Financial Services Ltd. vs. Asst.CIT (2008) 115 ITD 218 (Ahd.)(SB), deposits cannot be equated with loans or advances. The Special Bench had held that the two expressions ‘loans’ and ‘deposits’ are different and the distinction can be summed up by stating that in the case of loan, the needy person approaches the lender for obtaining the loan therefrom. The loan is clearly lent at the terms stated by the lender. In case of deposits, however, the depositor goes to the depositee for investing his money primarily with the intention of earning interest.
3. Section 2(22)(e) enacts a deeming fiction whereby the scope and ambit of the word ‘dividend’ has been enlarged to bring within its sweep certain payments made by a company as per the situations enumerated in the said Section.
4. Such a deeming fiction could not be given a wider meaning than what it purports to be. The provision would necessarily be accorded strict interpretation and the ambit of the fiction would not be pressed beyond its true limits.
5. The requisite condition for invoking Section 2(22)(e) is that payment must be made by way of loan or advance. Since there is a clear distinction between inter-corporate deposits vis-à-vis loans / advances, the lower authorities were not right in treating the same as deemed dividend u/s.2(22)(e).
Section 2(22)(e) — Inter Corporate Deposits (ICDs) are different from loans or advances and would not come within purview of deemed dividend u/s.2(22)(e).
-
(2009) 28 SOT 383 (Mum.)
Bombay Oil Industries Ltd. vs. Dy. CIT
A.Y. : 2001-02. Dated 22.01.2009
Section 2(22)(e) — Inter Corporate Deposits (ICDs) are
different from loans or advances and would not come within purview of deemed
dividend u/s.2(22)(e).
During the relevant assessment year, the assessee-company
had taken unsecured loans from three companies by way of ICDs for the purpose
of its business. The Assessing Officer treated these amounts as deemed
dividend u/s.2(22)(e). The CIT(A) upheld the order of the Assessing Officer.
The Tribunal held that ICDs do not come within the purview
of Section 2(22)(e). The Tribunal noted as under :
1. The lower authorities had not controverted the claim
of the assessee that the amounts received from the three companies were
inter-corporate deposits. The Assessing Officer held it against the assessee
only on account that it had failed to explain that the investment was
neither loan nor advance.
2. As held in the case of Gujarat Gas Financial Services
Ltd. vs. Asst.CIT (2008) 115 ITD 218 (Ahd.)(SB), deposits cannot be
equated with loans or advances. The Special Bench had held that the two
expressions ‘loans’ and ‘deposits’ are different and the distinction can be
summed up by stating that in the case of loan, the needy person approaches
the lender for obtaining the loan therefrom. The loan is clearly lent at the
terms stated by the lender. In case of deposits, however, the depositor goes
to the depositee for investing his money primarily with the intention of
earning interest.
3. Section 2(22)(e) enacts a deeming fiction whereby the
scope and ambit of the word ‘dividend’ has been enlarged to bring within its
sweep certain payments made by a company as per the situations enumerated in
the said Section.
4. Such a deeming fiction could not be given a wider
meaning than what it purports to be. The provision would necessarily be
accorded strict interpretation and the ambit of the fiction would not be
pressed beyond its true limits.
5. The requisite condition for invoking Section 2(22)(e)
is that payment must be made by way of loan or advance. Since there is a
clear distinction between inter-corporate deposits vis-à-vis loans /
advances, the lower authorities were not right in treating the same as
deemed dividend u/s.2(22)(e).
Section 11 read with Section 12A — An Institution or Trust having mixed activities of charity as well as religion cannot be denied exemption u/s.11(1)(a).
-
(2009) 28 SOT 148 (Cochin)
Calicut Islamic Cultural Society vs. Asst. CIT
A.Y. : 2003-04. Dated 31.07.2008.
Section 11 read with Section 12A — An Institution or Trust
having mixed activities of charity as well as religion cannot be denied
exemption u/s.11(1)(a).
The assessee was an Islamic Society registered under the
Societies Registration Act, 1860 as a charitable society. Its claim for
exemption of income u/s.11 was not allowed by the Assessing Officer on the
ground that the activities of the assessee were partly religious and partly
charitable in nature and, thereby, they were not eligible for claiming
exemption of their income u/s.11(1)(a).The CIT (A) confirmed the order of the Assessing Officer.
The Tribunal, relying on the decisions in the following
cases, held that the assessee was entitled to exemption u/s.11 :
a. Hiralal Bhagwati vs. CIT, (2000) 246 ITR 188 (Guj.)
b. CIT vs. Surat City Gymkhana, (2008) 170 Taxman
612 (SC)
The Tribunal noted as under :
1. The assessee was not constituted only for the benefit
of the backward community but for the benefit of the entire public.
Moreover, in the institutions run by the assessee, more particu-larly the
educational institutions, members of other communities were also admitted.
They were also giving support to the poor.2. The entire controversy was thus revolving around the
interpretation of Section 11(1)(a). It was interpreted that as per the words
used in Section 11(1)(a), any institution or trust must perform either
wholly charitable or wholly religious activities.3. The interpretation given by the Assessing Officer as
well as by the CIT(A) that the purpose should be wholly charitable or wholly
religious was only academic. When the Legislature has categorically defined
the purposes like religious and charitable and if the assessee is engaged as
per their objects in mixed activities, which are partly charitable and
partly religious, it cannot be said that Section 11(1)(a) does not
contemplate such a situation.4. Once registration is granted to the assessee by the
CIT u/s.12A, the Assessing Officer cannot probe into the objects and the
purpose of the trust or institution — that is within the exclusive domain
and jurisdiction of the Commissioner. What the Assessing Officer can do at
the most is that he can investigate into the matter within the four corners
of Section 13. In the instant case, the Assessing Officer had gone ahead
with investigating and probing the basic objects of the trust by entering
into the shoes of the Commissioner and such exercise was not permissible.
In view of the above, the assessee was allowed the benefits
of Section 11.
S. 2(14) r.w. S. 45 : Receipt on sale of immovable property is capital gain, irrespective of imperfect title
15 (2007) 110 TTJ 460 (Pune)
ITO v. Rina B. Parwani
ITA No.1426 (Pune) of 2004
A.Y. 2001-02. Dated : 31-5-2007
S. 2(14) read with S. 45 of the Income-tax Act, 1961 —
Receipt from sale of immovable property is capital gains, irrespective of
imperfect title.
For the relevant assessment year, the Assessing Officer held
that the receipt from sale of immovable property was to be taxed as mesne profit
to be included under ‘Income from Other Sources’ and also denied exemption
u/s.54F, on the ground that there were vital defects in the assessee’s legal
title to the immovable property and that there were certain Court disputes in
connection with this property and there were decisions against the assessee. The
CIT(A), however, allowed the assessee’s claim for long-term capital gain and
exemption u/s.54F.
The Tribunal, relying on the decision in the case of
Ashoka Marketing Ltd. v. CIT, (1986) 53 CTR 152 (Cal.)/(1987) 164 ITR 664
(Cal.), held that receipt from sale of immovable property, with howsoever
imperfect title, is chargeable as capital gains.
The Tribunal noted as under :
(a) All that the assessee is required to have, in order
that gains on sale of which can be taxed as ‘capital gains’, is a capital
asset and rights to a property, howsoever imperfect, constitute a capital
asset.
(b) There is no dispute that the assessee acquired these
rights in 1980 and the same were duly reflected in her tax returns. There is
also no dispute that these rights were sold in the relevant previous year. The
objections are only to the imperfections in the rights, but then that aspect
of the matter is not really relevant for the present purposes.
(c) As the CIT(A) has rightly observed that in case the
sale proceeds of these rights cannot be taxed as capital gains, it cannot be
taxed at all. The definition of income includes only such capital receipts as
are chargeable to tax u/s.45. In other words, capital receipts, not chargeable
to tax u/s.45, are outside the ambit of ‘income’.
(d) The receipt in question being referable to a capital
asset, i.e., the rights have been acquired by the assessee in
connection with the bungalow, the receipt can only be treated as capital
receipt. A receipt which is neither a capital gain nor a revenue receipt will
be outside the ambit of income chargeable to tax. One can also safely infer
that merely because a receipt is not a capital gain chargeable to tax, it
would not mean that such a receipt is revenue receipt in nature.
Section 28(i) — Penalty paid on account of failure to maintain margin money and not recovered from client, was an allowable loss.
-
(2009) 27 SOT 469 (Mum.)
ITO vs. VRM Share Broking (P.) Ltd.
A.Y. : 2004-05. Dated 03.11.2008
1. Section 28(i) — Penalty paid on account of failure to
maintain margin money and not recovered from client, was an allowable loss.
2. Section 37(1) of the Income-tax Act, 1961 —Penalty paid to SEBI for ‘excess
utilisation limits’ was an allowable business expense.
For the relevant assessment year, the Assessing Officer
disallowed the following amounts claimed by the assessee as expenses :
a. Amount not recovered from client on account of failure
to maintain margin money of 20% of the price of the securities proposed to
be purchased by the client.b. Amount paid to the NSE for violation of the margins
imposed by SEBI on the share brokers.
Both the disallowances were deleted by the CIT(A).
The Tribunal, following the decision of the Bombay High
Court in the case of CIT vs. Gwalior Rayon Silk Manufacturing (Wvg.)
Co. Ltd. [1999] 237 ITR 23/102 Taxman 433, also held in favour of the
assessee. The Tribunal noted as under :
1. From the perusal of various Notifications issued by
SEBI, it was apparent that they were issued mainly in the context of risk
management rather than as penal provisions for punishing the defaulters or
deeming the transactions as illegal. In view of the same, it was held that
irrespective of whether the margin money was available or not, the loss
could not be held as illegal loss. The benefit of set-off of the same
against the income or allowing the same to be carried forward to the later
years cannot be denied to the assessee.2. The amount paid was a penalty levied for violation of
the margins imposed by SEBI on the sharebrokers. From the Notification
issued by SEBI, it was found that such margins were imposed in order to
reduce the risk components and, therefore, those were basically risk
management oriented penalties, which were routine in nature. Having regard
to the purpose of the provisions of Section 37(1) which is aimed at
providing deterrence for infraction of laws of the country, the violation in
the instant case was not such that it would attract the provisions of
Section 37(1).
Convergence of AS with IFRS:
Part D : Company Law
31 Convergence of AS with IFRS:
I. The Core Group constituted by the Ministry of Corporate
Affairs has approved the roadmap recommended by Sub-group I in respect of
convergence of Indian Accounting Standards with International Financial
Reporting Standards (IFRS) for Insurance companies, Banking companies and
non-banking finance companies as under : (http://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPRGOV0604010.pdf)
1. Insurance companies :
(i) All insurance companies will convert their opening
balance sheet as at 1st April, 2012 in compliance with the converged Indian
Accounting Standards.
2. Banking companies :
(i) All scheduled commercial banks and those urban
co-operative banks (UCBs) which have a net worth in excess of Rs.300 crores
will convert their opening balance sheet as at 1st April, 2013 in compliance
with the first set of Accounting Standards (i.e., the converged Indian
Accounting Standards).(ii) Urban co-operative banks which have a net worth in
excess of Rs.200 crores but not exceeding Rs.300 crores will convert their
opening balance sheets as at 1st April, 2014 in compliance with the first
set of Accounting Standards (i.e., the converged Indian Accounting
Standards).(iii) Urban co-operative banks which have a net worth not
exceeding Rs.200 crores and Regional Rural banks (RRBs) will not be required
to apply the first set of Accounting Standards i.e., the converged Indian
Accounting Standards (though they may voluntarily opt to do so) and need to
follow only the existing notified Indian Accounting Standards which are not
converged with IFRSs.
3. Non-banking
financial companies :
(i) The following categories of non-banking financial
companies (NBFCs) will convert their opening balance sheet as at 1st April,
2013 if the financial year commences on 1st April (or if the financial year
commences on any other date, then on the date immediately following 1st
April, 2013) in compliance with the first set of Accounting Standards (i.e.,
the converged Indian Accounting Standards). These NBFCs are :(a) Companies which are part of NSE — Nifty 50
(b) Companies which are part of BSE — Sensex 30
(c) Companies, whether listed or not, which have a net
worth in excess of Rs.1,000 crores.(ii) All listed NBFCs and those unlisted NBFCs which do
not fall in the above categories and which have a net worth in excess of
Rs.500 crores will convert their opening balance sheet as at 1st April 2014
if the financial year commences on 1st April (or if the financial year
commences on any other date, then on that date following 1st April 2014) in
compliance with the first set of Accounting standards (i.e., converged
Indian Accounting Standards).Unlisted NBFCs which have a net worth of Rs.500 crores or
less will not be required to follow the first set of accounting standards
(i.e., the converged Indian accounting standards), though they may voluntarily
opt to do so, but need to follow only the notified Indian Accounting Standards
which are not converged with the IFRSs.II. The Securities and Exchange Board of India (SEBI)
has, vide Circular No. CIR/CFD/DIL/1/2010 dated 5th April, 2010, reviewed
and amended the Equity Listing Agreement with respect to the following in
exercise of its powers under Section 11 and S. 11A of the Securities and
Exchange Board of India Act, 1992 :(i) Requirement of Auditors’ Certificate for accounting
treatment under schemes of arrangement(ii) Timelines for submission and publication of
financial results by listed entities(iii) Voluntary adoption of International Financial
Reporting Standards by listed entities having subsidiaries.(iv) Requirement of a valid peer review certificate for
statutory auditors(v) Interim disclosure of balance sheet items by listed entities
Adjustment of Refund of F.Y. 2009-10 in F.Y. 2010-11 — Trade Circular No. 15T of 2010, dated 15-3-2010.
Part B : Indirect Taxes
MVAT
30 Adjustment of Refund of F.Y. 2009-10 in F.Y. 2010-11 —
Trade Circular No. 15T of 2010, dated 15-3-2010.
Dealers who have excess credit less than rupees 1 lac in the
return for the period ending on 31st March, 2010 can adjust their refund in the
return to be filed for F.Y 2010-11. But dealers who have already filed the claim
of refund would not be allowed to carry forward to the next financial year. This
facility is provided only for current year, that is, for 31st March, 2010 only.
Change in rate of tax — Trade Circular No. 14T of 2010, dated 31-3-2010.
Part B : Indirect Taxes
MVAT
29 Change in rate of tax — Trade Circular No. 14T of 2010,
dated 31-3-2010.
Commodities under MVAT Schedule Entry A-9A & A-51 currently
being tax-free, the same would continue to be tax-free.
Concessional tax rate for raisins and currants under Schedule
Entry No. C-108(1)(a), tea in leaf and powder form (including instant tea) under
Schedule Entry No. C-108 (1) (b) would continue but with increased MVAT rate
from 4% to 5% w.e.f. 1-4-2010 with the result that rates for these commodities
would be 5% from 1-4-2010.
For aviation turbine fuel (duty paid) covered by Schedule
Entry D-11, when sold within Maharashtra, excluding the geographical limit of
Brihan Mumbai Corporation & Pune District, concessional rate of tax 4% would
continue. It is clarified that this exemption would continue up to 31st March,
2011 or till the Goods & Service Tax Law is implemented in the State, whichever
is earlier.
No extension of concession to timber and dry fruits (other
than raisins and currants) which were taxable 4% up to 31st March, 2010. So
w.e.f. 1-4-2010 they would be taxable @12.5%.
Extension of due date for submission of MVAT Audit Report — Trade Circular No. 13T of 2010, dated 31-3-2010.
Part B : Indirect Taxes
MVAT
28 Extension of due date for submission of MVAT Audit Report
— Trade Circular No. 13T of 2010, dated 31-3-2010.
Due date for submission of MVAT audit report in Form 704 for
the period 2008-09 is extended from 31st March, 2010 to 30th April, 2010 and the
statement of submission of such report along with required documents can be
submitted on or before 10th May, 2010.
Notification No. 22/2010-Service Tax — Dated 30-3-2010.
Part B : Indirect Taxes
Service Tax
27 Notification No. 22/2010-Service Tax — Dated 30-3-2010.
By this Notification, Notification No. 09/2010-Service Tax,
dated the 27th February, 2010 and Notification No. 1/2006-Service Tax, dated the
1st March, 2006 regarding abatement of 70% in case of transport of goods by rail
are amended for a further period of 3 months i.e., the substitution of the word
‘Transportation of Goods in Containers by Rail’ by the words ‘Transportation of
Goods by Rail’ will be effective from 1st July, 2010.
Notification No. 21/2010-Service Tax — Dated 30-3-2010.
Part B : Indirect Taxes
Service Tax
26 Notification No. 21/2010-Service Tax — Dated 30-3-2010.
By this Notification, earlier Notification No.
08/2010-Service Tax, dated the 27th February, 2010 is amended to defer exemption
from levy of service tax on services provided in relation to transport of goods
by rails for specified goods for a further period of 3 months i.e., exemption
shall be effective from 1st July, 2010.
Notification No. 20/2010-Service Tax — Dated 30-3-2010.
Part B : Indirect Taxes
Service Tax
25 Notification No. 20/2010-Service Tax — Dated 30-3-2010.
By this Notification, earlier Notification No.
07/2010-Service Tax, dated the 27th February, 2010 is amended to defer
rescinding of exemption from levy of service tax on services provided by
transportation of goods in container by railway for further period of 3 months
i.e., up to 30th June, 2010.
Declaration to be submitted by specified assessees who were registered before the launch of ACES — Trade Notice No. 1/ ST/ 2010, dated 8-3-2010.
Part B : Indirect Taxes
Service Tax
24 Declaration to be submitted by specified assessees who
were registered before the launch of ACES — Trade Notice No. 1/ ST/ 2010, dated
8-3-2010.
All assesses, who are compulsorily covered for e-returns and
e-payment as aforesaid, who were registered before the launch of ACES and who
yet do not have their login and password, need to apply in the ‘Declaration Form
for ACES’ to the concerned Division/Range officer. The Form can be downloaded
from the website http://www.servicetaxdelhi.gov.in.
Procedure for electronic filing of service tax returns and e-payment of Service Tax — Circular No. 919/09/2010-CX, dated 23-3-2010.
Part B : Indirect Taxes
Service Tax
23 Procedure for electronic filing of service tax returns and
e-payment of Service Tax — Circular No. 919/09/2010-CX, dated 23-3-2010.
By this Circular a detailed procedure has been provided for
electronic filing of service tax return and electronic payment of service tax,
which has been earlier made mandatory w.e.f. 1-4-2010 vide Notification No.
01/2010-ST, dated 19th February, 2010 for the assessee who has paid total
service tax of Rs.10 lacs or more (including amount paid by way of utilisation
of CENVAT Credit) in preceding financial year. The detailed procedure is
available at the website http://www.cbec.gov.in.
Notification No. 24 vide F. No.164/02/-2008-ITA.I, dated 8-4-2010. — REC Bonds.
Part A : Direct Taxes
22 Notification No. 24 vide F. No.164/02/-2008-ITA.I, dated
8-4-2010. — REC Bonds.
The Central Government has notified ten-year Deep Discount
Bond to be issued by Rural Electrification Corporation Limited (REC) by 31st
March 2011 as Zero Coupon Bonds for the purpose of S. 2(48) of the Income-tax
Act, 1961.
The Double Tax Avoidance Treaty and protocol signed between
Mexico and India on 10th September 2007 has been notified to be entered into
force on 1st February, 2010. The Treaty shall apply from 1st January, 2011 for
Mexico and from 1st April, 2011 for India.
Notification No. 22 of 2010; F.No.142/5/2010-SO (TPL), dated 13-4-2010. — Specified Territories for S.90
Part A : Direct Taxes
21 Notification No. 22 of 2010; F.No.142/5/2010-SO (TPL),
dated 13-4-2010. — Specified Territories for S.90
The Central Government has approved notification of (i)
Bermuda, (ii) British Virgin Islands, (iii) Cayman Islands, (iv) Gibraltar, (all
British Overseas Territories); (v) Guernsey, (vi) Isle of Man, (vii) Jersey,
(all British Crown Dependencies); (viii) Netherlands Antilles (an Autonomous
Part of the Kingdom of Netherlands); and (ix) Macau (a Special Administrative
Region of the People’s Republic of China) as ‘specified territory’ for the
purpose of Explanation 2 to S. 90 of the Income-tax Act, 1961. S. 90 of the
Income-tax Act was amended by the Finance Act, 2009 to enable the Central
Government to enter into an agreement with any specified territory outside
India, in addition to the already existing provision of agreement with the
government of any country. Now the Central Government can initiate and negotiate
agreements for exchange of information for the prevention of evasion or
avoidance of income tax and assistance in collection of income tax with these
nine specified territories.
Income-tax (Second Amendment) Rules, 2010 — Notification No. 23/2010, dated 8-4-2010. — Valuation Rules
Part A : Direct Taxes
20 Income-tax (Second Amendment) Rules, 2010 — Notification
No. 23/2010, dated 8-4-2010. — Valuation Rules
Rules 11U and 11UA have been inserted, which provide for
determination of fair market value of the property other than immovable property
for the purpose of valuation u/s.56 of the Act. The said rules shall come into
force from 1st October, 2009. These Rules define the valuation of jewelery,
artistic work, quoted shares and securities as well as unquoted instruments for
the purpose of computation of income u/s.56(vii) of the Act.
A.P. (DIR Series) Circular No. 37, dated 16-4-2008 — Direct receipt of Import Bills/Documents for Import of Rough Precious & Semi-Precious Stones — Liberalisation.
Given below are the highlights of RBI Circulars.
30 A.P. (DIR Series) Circular No. 37, dated
16-4-2008 — Direct receipt of Import Bills/Documents for Import of Rough
Precious & Semi-Precious Stones — Liberalisation.
Presently, remittances for imports up to US $ 100,000 can be
made even when the import bills/ documents are directly received by the importer
from the overseas supplier.
This Circular has increased this limit to US $ 300,000 in
case of import of rough precious and semi-precious stones by non-status holder
exporters. Hence, non-status holder exporters of rough precious and
semi-precious stones can now make remittances for imports up to US $ 300,000
even when the import bills/documents are directly received by them from the
overseas supplier. Thus, they have been brought on par with non-status holder
exporters who import rough diamonds.
New returns of income notified for A.Y. 2008-09 : Income-tax (Sixth Amendment) Rules, 2008 dated 28-3-2008.
S. 11 r.w. S. 2(15) and S. 13 — Objects for benefit to a section of public are charitable
19 (2008) 111 ITD 238 (Rajkot) (SMC)
Rajkot Visha Shrimali Jain Samaj v. ITO
A.Y. 2002-2003. Dated : 1-6-2006
S. 11 r.w. S. 2(15) and S. 13 — In order to serve a
charitable purpose, it is not necessary that the object of the assessee trust
should be to benefit the whole of mankind or all persons in a country. It is
sufficient if the intention is to provide benefit to a section of the public as
distinguished from specified individual.
Facts :
The assessee-trust was incorporated on 11-8-1960. The
charitable nature of the activities of the trust was limited to Vishwa Shrimali
Jains, which was a small community. For A.Y. 2002-03, it claimed deduction of
expenditure incurred by it towards earthquake relief. The AO as well as the
CIT(A) disallowed the claim u/s.13(1)(b) on the ground that :
(1) the assessee’s charitable nature of activities was
limited to the benefit of a small religious community;
(2) the CIT(A) also declined to accept the assessee’s
contention that the trust is incorporated before the commencement of the Act,
on the ground that this was an additional ground and this plea was not before
the AO. It is pertinent to note that the documentary evidence with regard to
incorporation was very much on record. On further appeal, the ITAT allowed the
exemption by referring to the following :
(a) An object which is beneficial to a section of public is
an object of general public utility.
(b) The section of the community sought to be benefited
must be sufficiently definite and/or identifiable by some common quality of
public or impersonal nature.
(c) The additional ground which raises a purely legal plea
and which goes to the very root of the matter, the same deserves to be
admitted.
Cases referred to :
(i) National Thermal Power Co. Ltd. v. CIT, (1998)
229 ITR 383 (SC)
(ii) CIT v. Maheshwari Agarwal Marwari Panchayat, (1982) 136 ITR 556
10 Taxman 183 (MP)
S. 115JB — Extra-ordinary items in profit and loss a/c to be deducted for MAT
18 (2008) 111 ITD 124 (Hyd.)
Gulf Oil Corporation Ltd. v. ACIT,
Circle-1(4), Hyderabad
A.Y. 2002-2003. Dated : 21-9-2006
S. 115 JB — Extra-ordinary items appearing in profit and loss
a/c to be deducted in computing MAT liability.
The assessee company returned a loss of Rs.34.27 crores.
Provisions of S. 115JB were attracted. The as-sessee had shown two
extra-ordinary items — credit of write-offs/provisions : Rs.3.06 lacs and debit
of Advisory fee for sale of investments : Rs.109.96 lacs — in the P & L A/c. It
was contended by the Revenue that these items are generally classified as part
of P & L Appropriation A/c and hence should be ignored while computing MAT
liability. The assessee computed MAT liability on Rs.978.55 lacs, whereas the
Revenue contended that it should be on Rs.1085.45 lacs. (Ignoring the two referred above).
The learned CIT(A) confirmed the addition, on the ground that
the above items pertain to previous year. The Tribunal allowed the appeal and
referred to the following :
(a) Part-II and Part-III of Schedule VI does not make any
distinction between P & L A/c and P & L Appropriation A/c. It is a manner of
presentation.
(b) Generally, P & L Appropriation A/c includes items of
extra-ordinary nature, dividend, etc. However, as per schedule VI to Companies
Act, 1956, all these items form part of P & L A/c.
(c) The starting point for computing book profits should be
Profit & Loss A/c carried to balance sheet. From this amount, the various
adjustments (additions and deductions) as stated in S. 115 JB should be made.
Explanation to S. 115 JB does not provide for increase/decrease of
extra-ordinary items.
(d) AS-5 merely states that prior period expenses and
extra-ordinary items should be shown separately to know their impact on
operating results. It does not say that these items do not form part of P & L
A/c.
Cases referred :
(i) Apollo Tyres Ltd. v. CIT, (2002) 255 ITR 273
(ii) Bastar Wood Products Ltd. v. Dy. CIT, (1995) 78
Taxman 126
(iii) NSC Estates (P) Ltd. v. Dy. CIT, (2002) 125
Taxman 220
S. 37 r.w. S. 43B — Interest on account of default in repaying interest-free sales tax loan is compensatory in nature and allowable — S. 43B are not applicable
17 (2008) 111 ITD 1 (Hyd.)
Southern Electrodes Ltd. v. ACIT
A.Y. 2002-2003. Dated : 31-8-2006
S. 37 r.w. S. 43B of the Income-tax Act, 1961 — Interest
arising on account of default on part of the assessee in repaying interest-free
sales tax loan was compensatory in nature and was to be allowed u/s.37 and also
provisions of S. 43B are not applicable.
Facts :
The Govt. of Andhra Pradesh had given an interest-free sales
tax loan to the assessee company. When the loan was not repaid, interest was
charged to the assessee. The AO as well as the CIT(A) disallowed the said
interest on the following grounds :
(i) The assessee defaulted in repayment of loan and
interest is charged for non-payment of sales tax within the time allowed.
(ii) Interest charged is also in the nature of sales tax;
is penal and covered by S. 43B and hence not allowable.
On further appeal, the ITAT deleted the disallowance
referring to the following :
(a) The charging of interest in case of default is
automatic.
(b) The charging of interest is not within the discretion
of any authority.
(c) Interest payable is not an act of penal nature but it
is only compensatory in nature.
Cases referred to :
(i) Mewar Motors v. CIT, (2003) 260 ITR 218 (Raj.)
(ii) Swadeshi Cotton Mills Co. Ltd. v. CIT, (1998)
233 ITR 199 (SC)
(iii) Padmavati Raje Cotton Mills Ltd. (1999) 239
ITR 355 (Cal.)
(iv) Western Indian State Motors (1987) 167 ITR
395/31 Taxman 412 (Raj.) CIT v. Pheros & Co. (P.) Ltd., (1989) 178 ITR
472/44 Taxman 43 (Gauhati) and a few more.
S. 147, S. 148 : (a) Notice not valid if issued on basis of transaction not made by assessee. 144 (b) Notice invalid if issued in status of individual while assessment in status of HUF
16 (2007) 110 TTJ 834 (Del.) (TM)
Suraj Mal HUF v.
ITO
ITA No.1125 (Del.) of 2005
A.Y. 1996-97. Dated : 17-8-2007
S. 147 & 148 of the Income-tax Act, 1961 —
(a) Notice u/s.148 issued to the assessee on the
basis of a transaction which was made by some other person and not by the
assessee was not valid.
(b) Notice issued to the assessee in the status of
individual while the assessment was eventually made in the status of HUF.
Notice was invalid.
(c) After having issued notice u/s.148 to the
assessee as an individual, ITO had no jurisdiction to assess the HUF of the
assessee, even though the assessee had consented to assessment in the status
of HUF.
For A.Y. 1996-97, a notice u/s.147 was issued to Suraj Mal in
respect of land sold by him, in respect of which income from capital gains had
escaped assessment. The ITO, based on submissions made by Suraj Mal, passed
order u/s.148 in the name of Suraj Mal HUF. Before the CIT(A), the assessee
raised the issue that assessment was bad in law, as notice was issued in the
status of individual, whereas the assessment was made in the status of HUF. The
CIT(A), however, held that the Assessing Officer was fully justified in holding
the status of the assessee as that of HUF as against the claim of the status of
an individual.
The Tribunal held that the assessment was without
jurisdiction and could not be sustained. The Tribunal relied on the decisions in
the following cases :
(a) CIT v. K. Adinarayana Murty, (1967) 65 ITR 607
(SC)
(b) AAC v. Late B. Appaiah Naidu, 1974 CTR 147
(SC)/(1972) 84 ITR 259 (SC)
The Tribunal noted as under :
(a) The Impugned notice suffers from several legal
infirmities. In the first place, the transaction noticed related to sale of
some agricultural land sold to KS Ltd. not by the assessee. This is not the
transaction with which the assessee was connected. So, notice was issued in
respect of some other transaction carried out by some other person. Secondly,
the notice is admittedly issued to the assessee as individual. No notice was
issued to the HUF in which status the assessment was subsequently made. The
assessee has vehemently contended throughout that no notice u/s.148 was served
on the assessee. There is neither any finding, nor is there any material to
refute the claim of the assessee.
(b) Notices were issued without application of mind. It is
a settled law that there must be valid reasons, material and circumstances
leading to the belief that income had escaped assessment. Any good or bad
reason is not sufficient to sustain initiation of proceedings u/s.147/148 as
valid. Therefore, no valid proceedings were initiated u/s.147/148.
(c) The Income-tax Act recognises status of HUF different
from individual status of Karta of the HUF. The two are treated as different
legal entities. Therefore, it is necessary that notice u/s.148 should be sent
in a correct status, because jurisdiction to make assessment is assumed by
issuing valid notice.
(d) It is also settled law that assessment under the
Income-tax Act has to be made in accordance with statutory provisions and not
on agreement or consent of the assessee. Therefore, after having issued notice
u/s.148 to the individual, the ITO had no jurisdiction to assess HUF of the
assessee. He could assume jurisdiction by issuing valid notice u/s.148 after
satisfying conditions laid down u/s.147. This was not done and, therefore,
entire proceedings have to be held to be illegal and without jurisdiction.
(e) The Department cannot be permitted to change the status
from individual to HUF. In the first place, the Assessing Officer had no
jurisdiction to assess HUF, as he did not issue any notice u/s.147/148 in the
case of the HUF. This defect of jurisdiction could not be cured by obtaining
consent from the assessee.
Clarification from RBI for deduction of tax at source on remittance of foreign exchange for import purposes : No. FE.CO.FID.5759/22.20.001/2007-08, dated 11-9-2007.
24. Clarification from RBI for deduction of
tax at source on remittance of foreign exchange for import purposes : No.
FE.CO.FID.5759/22.20.001/2007-08, dated 11-9-2007.
As per the provisions of S. 195 of the Act, while remitting
any sum chargeable under the Act to a non-resident, tax needs to be deducted at
source. There was some confusion regarding tax to be deducted from remittances
for import of articles or things or computer software, etc. As per A.P. (DIR
Series) Circular No. 3, dated 19 July 2007, RBI clarified that remittance for
such imports also would need CA certification and the procedures prescribed in
CBDT Circular No. 10/2002 (F.No. 500/152/96-FTD) need to be followed. Since
various trade bodies and banks have approached RBI expressing their
apprehensions and difficulties in this matter, RBI has once again taken up the
matter with CBDT. Pending any clarification from the Board, it has been
clarified that the procedure prescribed by CBDT needs to be followed and in case
there are any doubts, the taxpayer needs to approach the Board directly.
Method prescribed for determining the amount of expenditure relating to exempt income : Income-tax (Fifth Amendment) Rules, 2008, dated 24-3-2008.
23 Method prescribed for determining the
amount of expenditure relating to exempt income : Income-tax (Fifth Amendment)
Rules, 2008, dated 24-3-2008.
Pursuant to an amendment in S. 14A of the Act, the Board has
prescribed a method to determine an amount of expenditure which can be
attributed to exempt income in cases when either the AO is not satisfied with
the correctness of the claim of the assessee for such expenditure or when the assessee has
claimed that no expenditure is incurred in relation to exempt income. As per the
said method the expenditure in relation to exempt income shall be aggregate of
the following 3 amounts :
- Expenses directly relating to exempt income
- Interest not directly relating to exempt income * Average of the amount of
investment, on the first and the last days of the year, which generates exempt
income/average of total assets as appearing on the balance sheet on the first
day and the last day of the year.
- One-half percent of the average value of investment, on the first and the last
days of the year, which generates exempt income.
For the purpose of this Rule, total assets shall mean, total
assets as appearing in the balance sheet excluding the increase on account of
revaluation of assets but including the decrease on account of revaluation of
assets.
S. 153C read with S. 153A — Documents found during search at the premises of another person which were in his own handwriting though may refer to the works proposed on behalf of the assessee, the same cannot be considered as ‘documents belonging to the as
Part A: Reported Decisions
18 (2010) 36 DTR (Ahd.) (Trib.) 187
Meghmani Organics Ltd. v. DCIT
A.Ys. : 2000-01 to 2004-05. Dated : 16-1-2009
S. 153C read with S. 153A — Documents found during search at
the premises of another person which were in his own handwriting though may
refer to the works proposed on behalf of the assessee, the same cannot be
considered as ‘documents belonging to the assessee’ which is a prerequisite for
initiating action u/s.153C — Re-agitating the concluded issues in S. 153C
proceedings without any documents relating thereto belonging to the assessee
cannot be considered in such assessment u/s.153C — In assessments u/s. 153C the
unconnected issue can be considered only if the pending assessment is abated and
not otherwise.
Facts :
Some handwritten documents were found and seized from the
residential premises of other persons. These documents showed estimate for the
purpose of land, building and machinery works for the assessee and statements of
steel and cement issued and deduction thereof for the purpose of computing the
amount payable to the contractor for the work carried out on behalf of the
assessee.
The Assessing Officer noted that although the seized
documents do not reveal any specific undisclosed income on verification, but the
proceedings validly initiated have to be completed in the manner prescribed
u/s.143(2) and u/s.143(3) of the Act. The Assessing Officer completed assessment
whereby the claim of deduction u/s.80HHC and u/s.80-IA of the Act was reduced.
No addition was either proposed or made in respect of so-called papers found
during the course of search and seized from the premises of other persons.
The original assessments were completed prior to initiation
of action u/s.153C of the Act and the issues regarding deductions u/s.80HHC and
u/s.80-IA were subject matter of earlier proceedings in original assessment and
were in further litigation before the CIT(A) and Tribunal.
Held :
Though these documents may refer to the work proposed on
behalf of the assessee, the same cannot be considered as ‘documents belonging to
the assessee’, which is a prerequisite for initiating action u/s.153C. If the
assessee has engaged the services of a professional and if the professional
maintains his own record for the purpose of rendering his services, the
documents cannot be said to be belonging to such assessee. Therefore, the
assessments were set aside.
Further, since the original assessments have been completed
before the initiation of action u/s.153C, these assessments have not abated. The
Assessing Officer was not competent to assume jurisdiction u/s.153C of the Act
(in relation to addition pertaining to deduction u/s.80HHC and u/s.80-IA) since
the original assessments have not abated. What were pending were only the
appeals. Since the appeals do not abate, the original assessments survive and
hence cannot be reopened u/s.153C proceedings. The Assessing Officer is
precluded from re-agitating the assessments that have attained finality in
original assessment proceedings, though pending in for the appeals. So far as
the Assessing Officer is concerned, his jurisdiction is ousted and is a ‘functus
officio’ so far as the original assessments are concerned. Therefore,
re-agitating the concluded issues in S. 153C proceedings without any documents
relating thereto belonging to the assessee cannot be considered in such
assessment u/s.153C of the Act.
S. 40(a)(ia) — If the assessee has paid the impugned amount and the amount is not payable at the end of the year on the date of balance sheet, then the provisions of S. 40(a)(ia) are not applicable.
Part A: Reported Decisions
17 (2010) 36 DTR (Hyd.) (Trib.) 220
Teja Constructions v. ACIT
A.Y. : 2005-06. Dated : 23-11-2009
S. 40(a)(ia) — If the assessee has paid the impugned amount
and the amount is not payable at the end of the year on the date of balance
sheet, then the provisions of S. 40(a)(ia) are not applicable.
Facts :
Since the assessee was not maintaining proper books of
account and also failed to produce vouchers for verification, the Assessing
Officer rejected the books of account and estimated the income at certain
percentage of the gross receipts. Further, he disallowed certain payments made
to sub-contractors without deducting the TDS by invoking provisions of S.
40(a)(ia) of the Act.
Held :
It was held that the books of account of the assessee were
not relied, they were rejected by the Assessing Officer and the same was
confirmed. Now, based on the reliance on the same books, for the purpose of
invoking the provisions of S. 40(a)(ia) is improper. The estimation of income
takes care of the irregularities committed by the assessee. Further addition by
invoking S. 40(a)(ia) amounts to punishing the assessee for a same offence on
double occasions, which is not permitted by law.
Further, it was held that the bare provision of S. 40(a)(ia)
provides for non-deduction of amount which remains payable to a resident in
respect of fees for technical services, etc. It is not applicable where
expenditure is paid. It is applicable only in cases where the payments are due
and outstanding. S. 40(a)(ia) otherwise being a legal fiction needs to be
construed strictly in view of the decision of the Supreme Court in CIT v. Mother
India Refrigeration Industries (P) Ltd., (155 ITR 711). If the assessee has paid
the impugned amount and it is not payable at the end of the year on the date of
balance sheet, then the provisions of S. 40(a)(ia) are not applicable. It is
only applicable in respect of ‘payable amount’ shown in the balance sheet as
outstanding expenses on which TDS has not been made. There is a difference
between the words ‘paid’ and ‘payable’. The Legislature used the word very
carefully in S. 40(a)(ia) and in all its wisdom. The language used in the S.
40(a)(ia) is very simple, clear and unambiguous. Literal rule of interpretation
has to be applied.
S. 36(1)(iii) — Issue of secured premium notes — Premium payable on the same — Allowable as it was very much in the nature of interest payable on the borrowings made.
Part A: Reported Decisions
16 (2010) 123 ITD 1 (Mum.)
JCIT v. Bombay Dyeing Mfg. Co. Ltd.
A.Y. 1998-99. Dated : 16-4-2009
S. 36(1)(iii) — Issue of secured premium notes — Premium
payable on the same — Allowable as it was very much in the nature of interest
payable on the borrowings made.
The assessee-company raised funds by issue of Secured Premium
Notes. In respect of the same, it paid certain premium. The entire amount of
premium was payable before the date of final settlement. The premium was claimed
on proportionate basis in the form of provision made in the books of accounts.
Further, the liability to pay the premium arose in the fourth year, though the
assessee had utilised the funds from the first year itself. The deduction in
respect of the premium was claimed by the assessee u/s.36(1)(iii) of the Act.
The Assessing Officer disallowed the deduction on the ground that the funds
raised were for the purpose of expansion of business and therefore were capital
in nature.
On appeal to the Tribunal, it was held, that case was covered
in favour of the assessee in its own case for A.Y. 1996-97. In the order passed
earlier, the Tribunal held that the premium payable was nothing but in the
nature of interest for the borrowings made by the assessee. The assessee has
been following mercantile system of accounting and so provision has been made on
accrual basis towards the liability arising. The liability provided by the
assessee was an ascertained liability and not a contingent liability. The
Tribunal also relied on the decision of Madras Industrial Investment Corporation
Ltd. v. CIT, (225 ITR 892) (SC).
Further, it was held that though the liability to pay starts
from the fourth year, this does not mean that the funds for the first three
years were interest free. It was only in view of terms and conditions that
premium was payable from the fourth year. Hence the liability for the premium
was very much eligible for deduction.
S. 41(1) — Loan taken by the assessee from a group company — Waiver of the loan by the group company — Whether the same should be taxable u/s.41(1) — Held, No.
Part A: Reported Decisions
15 (2010) 122 ITD 486 (Mum.)
Mindteck (India) Ltd. v. ITO
A.Y. : 1999-2000. Dated : 15-7-2008
S. 41(1) — Loan taken by the assessee from a group company —
Waiver of the loan by the group company — Whether the same should be taxable
u/s.41(1) — Held, No.
The assessee-company incurred huge losses and ran into
financial difficulties. It invited a new group to infuse capital into it. As per
the agreement entered into with this group, the assessee has to fulfil certain
conditions. One of these was to fulfil all existing liabilities so as to hand
over a clean balance sheet to the new management. For this, the assesee borrowed
certain amounts of money from a group company for four months. However, this
loan was later on waived off by the group company. The same was so written off
in the books of the assessee also.
The Assessing Officer held that the above loan was taxable
u/s.41(1) of the Act since the amount was received to recoup the losses. These
losses were incurred by the assessee over a period of time. The CIT(A) upheld
the assessment order. He held that even if the amount was a loan, it changes its
character at the time of forfeiture. Hence the same was taxable.
On appeal, the Tribunal held that, in the instant case, the
amount of loan received has no connection with the deduction or allowance
referred to in S. 41(1) of the Act. Although the assessee has received certain
benefits on remission or cessation of liability, the same in no way relates to
any trading liability. The said amount was given by the group company to make
the assessee company fit for the takeover. Provisions of S. 41(1) can be applied
only when a benefit is received in respect of a loss, expenditure or trading
liability, which was allowed as deduction or allowance in earlier years.
Further, it was also observed by the Hon’ble Tribunal that it
is a settled law that ‘a debt waived by the creditor cannot be the income of the
debtor’. [Relying on British Mexican Petroleum Co. Ltd. v. Jackson (1932) 16 TC
570 (HL) affirmed in the case of CIT v. P. Ganesa Chettair (1982) 133 ITR 103
(Mad.)]
A.P. (DIR Series) Circular No. 36, dated 4-4-2008 — Liberalised Remittance Scheme for Resident Individuals — Reporting.
Given below are the highlights of RBI Circulars.
29 A.P. (DIR Series) Circular No. 36, dated
4-4-2008 — Liberalised Remittance Scheme for Resident Individuals — Reporting.
Presently, banks are required to furnish information to RBI
in respect of the Liberalised Remittance
Scheme on a quarterly basis in the prescribed format.
This Circular requires the information to be submitted by the
banks on a monthly basis from April, 2008 onwards in the format annexed to this
Circular.
New procedure for issuance of statutory declaration and forms under C.S.T. Act, 1956 : Trade Circular No. 15T.
M-VAT
28 New procedure for issuance of statutory
declaration and forms under C.S.T. Act, 1956 : Trade Circular No. 15T.
To overcome the difficulties faced by the dealers as well as
the staff of the Sales Tax office at Mazgaon, procedure for obtaining the
statutory declarations/ forms such as ‘C’, ‘H’ and ‘F’ have been streamlined
wherein certain days have been allocated for certain tasks and certain officers
are also dedicated for this purpose. The timings and days as per new procedure
are summarised as under :
It may be noted that there would no change for dealers making
on-line application as well as dealers outside Mumbai city and suburbs. The new
procedure would apply from 28-4-2008.
Uncertainty over CST rate cut : Maharashtra Govt. asks dealers to continue collecting 3% on interstate sales : Trade Circular No. 14T of 2008, dated 15-4-2008.
M-VAT
27 Uncertainty over CST rate cut :
Maharashtra Govt. asks dealers to continue collecting 3% on interstate sales :
Trade Circular No. 14T of 2008, dated 15-4-2008.
The Finance Minister in the Budget speech has informed the
reduction in the CST rate from 3% to 2% with effect from 1-4-2008. However, a
Notification giving effect to such change is yet not issued. Hence the
Maharashtra Government has advised dealers to deduct CST @ 3% till the
Notification for reduction in the rate is issued and gazetted.
Refund of Service Tax paid on taxable services : Instruction F. No. 341/15/2007-TRU, dated 17-4-2008.
26 Refund of Service Tax paid on taxable
services : Instruction F. No. 341/15/2007-TRU, dated 17-4-2008.
The Board has issued instructions for refund claims of
Service Tax paid on taxable services which could be attributable to exports, but
which are not input services, stating that the refund claims need to be
processed within 30 days of filing of the application by the exporter. In case
it is not processed within the set time limit, the matter needs to be reported
by the Commissioners to the Chief Commissioners in prescribed format by 10th of
every month. Further in case the matter is not settled within 45 days of filing,
then the matter needs to be escalated to the Member (Service Tax).
Clarification regarding Service Tax Refund for export of services : Policy Circular No. 1 (RE-08)/2004-2009, dated 11-4-2008.
Service tax :
25 Clarification regarding Service Tax
Refund for export of services : Policy Circular No.
1 (RE-08)/2004-2009, dated 11-4-2008.
In addition to the various Circulars that have been notified
in the recent past pursuant to the decision to refund/exempt Service Tax on
export of services, further clarifications have been issued as under :
- Services which would be exempt from Service Tax include participation in
exhibition outside India, services availed outside the country such as Customs
House Agent (CHA) Services, Accountancy Services, etc.
- For the newly introduced service ‘Foreign exchange dealer’, there would be no
Service Tax on exports as well as imports.
- Clearing and forwarding agency, handling of exports cargo would not be liable
to Service Tax
- In case there are new areas notified for levy of Service tax, simultaneous
refund notifications would also be issued for exports wherever proper linkages
can be established.
S. 254(2) — The order pronounced at the conclusion of the hearing is an order of the Tribunal — It cannot be called a tentative order or a prima facie view — If there is mistake apparent on record, the order pronounced in the Court which is an oral order
Part A: Reported Decisions
14 (2010) 36 DTR (Chennai) (TM) (Trib) 42
ITO v. M. Vijayan/ITO v. Smt. V. Meenakshi
A.Ys. : 1999-00 to 2004-05. Dated : 18-12-2009
S. 254(2) — The order pronounced at the conclusion of the
hearing is an order of the Tribunal — It cannot be called a tentative order or a
prima facie view — If there is mistake apparent on record, the order pronounced
in the Court which is an oral order can be recalled to rectify such mistake.
Facts :
In this case, a survey u/s.133A was conducted at the business
premises of the assessee (M. Vijayan). During the course of survey, certain
documents pertaining to income and investment were found. Sworn statements were
recorded from the assessee and his wife. On the basis of sworn statements
supplied during the course of the survey, the Assessing Officer inferred that
the income and investment shown in the name of the wife actually belonged to the
assessee and he therefore made the impugned addition in the hands of the
assessee on substantive basis and in thehands of the wife on protective basis.
Upon assessee’s appeal, the learned CIT (A) found that the
wife had independent sources of income. He also found that there is no finding
that the money was actually invested by the husband or that he enjoyed the
profits earned from the business and investment in the name of his wife. Hence,
he allowed the assessee’s appeal and deleted the addition in the hands of the
husband.
Upon further appeal by the Revenue, the Tribunal decided the
issue in favour of the assessee relying on the decision of the jurisdictional
High Court in the case of CIT v. S. Khader Khan Son, (300 ITR 157) (Mad.)
wherein it was held that the materials collected and the statements recorded
during the survey u/s.133A were not conclusive piece of evidence by itself. The
order was pronounced in the open Court as well as communicated orally to the
parties concerned.
The Judicial Member subsequently proposed to recall the order
on the ground of non-consideration of the judgment of the jurisdictional High
Court in the case of H. Shahul Hameed v. ACIT, (258 ITR 266) (Mad.). Difference
of opinion arose between the Members regarding refixing the matter for hearing
and also on merits of the issue and therefore the matter was referred to the
Third Member.
Held :
The order pronounced at the conclusion of the hearing is an
order of the Tribunal. It cannot be called a tentative order or a prima facie
view. In the present case, the order is pronounced as well as communicated
orally to the parties concerned and hence it is an order. De hors the facts of
the present case, if there is mistake apparent on record, the order pronounced
in the Court which is an oral order can be recalled to rectify such mistake.
In the present case, there was no search but only survey
u/s.133A. In the decision of S. Khader Khan Son (supra), the jurisdictional High
Court has distinguished the provisions of S. 132(4) with those of S. 133A and
held that the material collected and statements recorded during the survey
u/s.133A are not conclusive piece of evidence and that the same cannot be the
basis for making any addition. Therefore the judgment based upon which the
Judicial Member has proposed to recall the order is not applicable to the facts
of the case. Further, the fact that the Judicial Member had to devote nearly
twenty-five pages to point out the error and then to set it aside for
reconsideration, itself proves that the conclusion of the Judicial Member is the
result of a long drawn-out process of reasoning on points where there may
conceivably be two opinions and thus, there was no mistake apparent from record.
Further, instead of acting upon what had been conclusively
pronounced in the Court, the Judicial Member kept the matter pending with him
and expressed his opinion to reopen the case after three months as against the
long-standing convention of passing dissenting orders within fifteen days.
Therefore, the matter cannot be refixed for hearing on the ground that there is
a mistake apparent from record.
S. 271(1)(c) read with S. 271(1B) — The penalty was initiated for filing inaccurate particulars of income, but it was levied for concealment of income
Part A: Reported Decisions
13 (2010) 36 DTR (Agra) (Trib.) 453
ITO v. Chhail Behari
A.Y. : 2002-03 Dated : 15-10-2009
S. 271(1)(c) read with S. 271(1B) — The penalty was initiated
for filing inaccurate particulars of income, but it was levied for concealment
of income — If the satisfaction arrived at during the assessment proceedings was
for one reason, penalty cannot be levied for another reason — Even after
retrospective insertion of S. 271(1B), the difference between the two limbs of
S. 271(1)(c) is not erased and still remains.
Facts :
The Tribunal in appeal against the order levying penalty
u/s.271(1)(c) held that there was no proper satisfaction arrived at as required
u/s.271(1)(c) of the Act. It was held that the satisfaction was qua ‘furnishing
inaccurate particulars of income’ as recorded in the assessment order, but in
the order levying penalty u/s.271(1)(c), the same was qua ‘concealment of
particulars of income’. Hence, the penalty was
deleted.
The Revenue filed a miscellaneous application and contended
that by the Finance Act, 2008, an amendment has been made retrospectively w.e.f.
1st April, 1989 to provide that where an assessment order contains a direction
for initiation of penalty proceedings, such an order of assessment shall be
deemed to constitute satisfaction of the Assessing Officer for initiation of
penalty proceedings for concealment in respect of any amount added or disallowed
in computing the total income or loss of the assessee. Thus it can be said that
the mention by the Assessing Officer of direction for initiation of proceedings
u/s.271(1)(c) of the Act in the assessment order would cover both the actions of
the assessee i.e., ‘concealment of particulars of income’ as well as ‘furnishing
of inaccurate particulars of income.’
Held :
If the satisfaction arrived at during the assessment
proceedings was for one reason, penalty cannot be levied for another reason
relying upon the decision of the Supreme Court in the case of Dilip N. Shroff
(291 ITR 519) (SC). Thus the Tribunal had not cancelled the penalty on the
ground that there was no satisfaction recorded in the assessment order. Even
after retrospective amendment, since the difference between two limbs of S.
271(1)(c) is not erased or is considered as one, the distinction between
‘concealment of particulars of income’ and ‘furnishing of inaccurate particulars
of income’ is still maintained. Hence it cannot be said that there is any
mistake apparent on record.
S. 144 — CIT(A) set aside the assessment — No direction to re-do the assessment given — Assessing Officer has no jurisdiction to re-do the assessment.
Part A: Reported Decisions
12 (2010) 123 ITD 53 (Chennai)
DCIT v. Jaya Publication
A.Ys. : 1991-92 to 1993-94. Dated : 30-11-2007
S. 144 — CIT(A) set aside the assessment — No direction to
re-do the assessment given — Assessing Officer has no jurisdiction to re-do the
assessment.
The original assessment was set aside by the CIT(A).
Subsequently, the Assessing Officer issued notice u/s.142(1) of the Act. The
assessee complied with the said notice. However, not satisfied by the assessee’s
explanations, the Assessing Officer completed the assessment u/s.144 considering
the entire issues and making various additions. The assessee went in to appeal
on the ground that the assessment done by the Assessing Officer was without
jurisdiction and without any specific direction from the CIT(A).
Relying on various decisions, the Tribunal held that the
CIT(A) has set aside the assessment means that he has annulled the assessment,
since he has not given any direction to re-do the assessment. Hence, the
Assessing Officer had no jurisdiction to re-do he assessment. The only remedy
with the Department was that it has to file an appeal against the order of the
CIT(A).
S. 153A — In an assessment u/s.153A of the Act addition can be made only on the basis of material found as a result of search.
Part A: Reported Decisions
11 2010 TIOL 177 ITAT (Mum.)
Anil Khimani v. DCIT
A.Ys. : 1999-2000 to 2004-05.
Dated : 23-2-2010
S. 153A — In an assessment u/s.153A of the Act addition can
be made only on the basis of material found as a result of search.
Facts :
The assessee was the proprietor of M/s. Ronak Enterprises
trading in oil and electrical contract works. In an action conducted u/s.132A of
the Act about 4 kgs of gold and cash of Rs.79,000 was seized from the assessee.
Earlier the assessee had filed returns of incomes. In response of notice issued
u/s.153A the assessee filed the same return of income, as was originally filed.
For all the assessment years, the Assessing Officer (AO) completed the
assessments u/s.143(3) read with S. 153A by making addition on account of low
withdrawal and from opening
balance in capital account. None of the additions were based on any material
found during the course of search. Aggrieved the assessee preferred an
appeal to the CIT(A).
The CIT(A) deleted the addition made on account of opening
capital account. On the issue of additions made on account of low withdrawals,
he confirmed the same.
Aggrieved the assessee preferred an appeal to the Tribunal.
Held :
The Tribunal noted that the only addition in each of the
assessment years was on account of low withdrawals and that the addition was not
based on any material found either during the course of search or during the
course of assessment proceedings. The Tribunal made a reference to the decision
of the Delhi Bench of ITAT in the case of Anil Kumar Bhatia v. ACIT, where it
has been held that :
(i) S. 153A does not authorize the making of a de novo
assessment. While under the 1st proviso, the AO is empowered to frame
assessment for six years, under the 2nd proviso, only the assessments which
are pending on the date of initiation of search abate. The effect is that
complete assessments do not abate. There can be two assessments for the same
assessment year. Assessments which are not pending before the AO on the date
of search but are pending before an Appellate Authority will survive.(ii) An assessment can be said to be ‘pending’ only if the
AO is statutorily required to do something further. If a S. 143(2) notice has
been issued, the assessment is pending. However, the assessment in respect of
a return processed u/s.143(1) is not ‘pending’ because the AO is not required
to do anything further about such a return.(iii) The power given by the proviso to ‘assess’ income for
six assessment years has to be confined to the undisclosed income unearthed
during search and cannot include items which are disclosed in the original
assessment proceedings.(iv) On facts, the returns had been processed u/s. 143(1),
the assessments were not ‘pending’ and as no material was found during the
search, the additions could not be sustained.
Following the ratio laid down by the above- mentioned
decision, the Tribunal deleted all the additions and allowed the appeals filed
by the assessee.
.
S. 195, S. 234B — Once the income is subjected to TDS provision, then that amount is outside the provisions of the advance tax as per the mandate of S. 209 of the Act. Merely because there is a failure on the part of the person who made payments to the as
Part A: Reported Decisions
10 2010 TIOL 172 ITAT (Mum.)
DDIT v. Daimler Chrysler AG
A.Y. : 1997-98. Dated : 24-3-2010
S. 195, S. 234B — Once the income is subjected to TDS
provision, then that amount is outside the provisions of the advance tax as per
the mandate of S. 209 of the Act. Merely because there is a failure on the part
of the person who made payments to the assessee to deduct tax at source to which
provisions of S. 195(1) are attracted, no liability to pay advance tax is put on
the recipient.
Facts :
The assessee, a tax resident of Germany, filed return of
income in which royalty received from Bajaj Tempo was declared. Originally, the
as-sessee’s assessment was completed u/s.143(3) r.w. S. 147 of the Act
determining the income at Rs.6,93,14,161. The said assessment order was subject
matter of challenge before the CIT(A) and then to the ITAT. The Tribunal set
aside the matter to the file of the Assessing Officer (AO). As per the
directions of the Tribunal, the AO passed assessment order determining the total
income at Rs.3,54,28,070 and also charged interest u/s.234B of the Act.
Aggrieved by the levy of interest u/s. 234B, the assessee preferred an appeal to
the CIT(A).
The CIT(A) held that the assessee is a foreign company and
its income was subject to the provisions of TDS u/s.195 and hence the assessee
was not required to pay any advance tax u/s.208 r.w. S. 209. The CIT(A) placed
reliance on the following decisions :
(i) CIT v. Halliburton Offshore Services Inc., 271 ITR 395
(Uttaranchal)(ii) Motorola Inc. v. DCIT, 95 ITD 269 (Del.) (SB)
(iii) SNC-Lavalin International Inc. v. DCIT, 13 DTR 449
(Del.) (Trib.)(iv) Sedco Forex International, 75 ITD 415 (Del.)
Aggrieved the Revenue preferred an appeal to the Tribunal.
Held :
The Tribunal noted that the assessee is a non-resident and
payments made to it are subjected to TDS u/s.195(1) of the Act. Merely because
there is a failure on the part of the person who made payments to the assessee
to deduct tax at source to which the provisions of S. 195(1) are attracted, to
the extent of the income/payments which are in the mischief of TDS provision no
liability to pay advance tax is put on the recipient. Once the income is
subjected to TDS provision, then that is outside the provisions of the advance
tax as per mandate of S. 209 of the Act. The Tribunal observed that this view
has been fortified by the decision of the Bombay High Court in the case of NGC
Network Asia LLC (222 CTR 86) (Bom.). The principles laid down in the case of
NGC Network Asia LLC were held to be squarely applicable to the facts of the
case.
The Tribunal dismissed the appeal filed by the Revenue.
S. 115JAA, S. 234C and S. 244A — MAT credit which is available for set-off falls within the meaning of ‘advance tax’. If the credit of MAT u/s.115JAA has to be allowed first before working out the liability of the assessee to pay advance tax, the refund g
Part A: Reported Decisions
9 2010 TIOL 171 ITAT (Mum.)
DCIT v. Bharat Aluminium Co. Ltd.
A.Y. : 1998-1999. Dated : 19-2-2010
S. 115JAA, S. 234C and S. 244A — MAT credit which is
available for set-off falls within the meaning of ‘advance tax’. If the credit
of MAT u/s.115JAA has to be allowed first before working out the liability of
the assessee to pay advance tax, the refund granted to the assessee was held to
be not out of MAT credit available to the assessee, but out of excess amount of
advance tax paid by the assessee.
Facts :
In an order passed u/s.154/254 of the Act, the Assessing
Officer (AO) held that the assessee was entitled to tax credit u/s.115JAA of the
Act to the extent of Rs.9,61,45,549. He allowed the credit of this amount as per
provisions of S. 115JAA(1) r.w. S. 115JAA(5) of the Act. He also held that no
interest u/s.244A is to be allowed to the assessee on this amount of tax credit
of Rs.9,61,45,549 in view of the proviso to S. 115JAA(2). The AO had also
charged interest u/s.234C amounting to Rs.55.52 lakhs before giving effect to
MAT credit relief u/s.115JAA. Aggrieved, the assessee preferred an appeal to the
CIT(A) on both the issues.
The CIT(A) allowed the appeal of the assessee on both the
grounds.
Aggrieved by the order of the CIT(A) the Revenue preferred an
appeal to the Tribunal.
Held :
The Tribunal noted that the Delhi High Court has in the case
of Jindal Exports Ltd. (314 ITR 137) (Del.) considered the question whether
prior to 1-4-2007, while computing the interest u/s.234B and u/s.234C, credit
for tax paid u/s.115JAA was to be considered and has held that in the year when
the assessee is eligible for tax credit u/s.115JAA, such tax credit represents
tax already paid and available as credit at the beginning of the year and
consequently the assessee cannot be charged interest on something which it had
already paid. Following the ratio of this decision, the Tribunal held that for
charging interest u/s.234C, tax credit available to the assessee u/s.115JAA has
to be reduced from the liability of the assessee for making payment of advance
tax and such interest has to be computed after setting off the tax credit
available to the assessee.
The Tribunal held that the order of the CIT(A) does not call
for any interference because as per the decision of the Delhi High Court in the
case of Jindal Exports, credit of MAT u/s.115JAA has to be allowed first before
working out the liability of the assessee to pay advance tax, therefore, the
refund granted to the assessee is not out of MAT credit available, but is out of
excess amount of advance tax paid by the assessee. There is no dispute that if
the refund is on account of excess payment of advance tax, interest u/s.244A is
allowable to the assessee as per S. 244A(1)(a) of the Act. As to whether the
refund granted is out of MAT credit or out of advance tax, the Tribunal agreed
with the CIT(A) that, following the ratio of the decision of the Delhi High
Court, effect of MAT credit u/s. 115JAA has to be first considered and the
assessee is liable to pay only the balance amount as advance tax and if the
assessee paid lesser amount of advance tax as compared to this amount of advance
tax payable by the assessee after considering MAT credit u/s.115JAA, the
assessee is liable to pay interest u/s.234B and u/s.234C and if such payment of
advance tax by the assessee is in excess than this amount of advance tax payable
by the assessee, then the refund is on account of excess payment of advance tax
which is eligible for interest u/s.244A.
The appeal filed by the Revenue was dismissed by the
Tribunal.
Section 244/244A, Proviso to S. 115JAA and Circular No. 763 issued by CBDT — Income-tax Act, 1961 — Assessment Year 2003-04 — Whether where after giving credit for MAT paid in earlier years, there is still tax payable and further credit is given to TDS an
-
2009-TIOL-215-ITAT-MAD
Hyundai Motor India Ltd. vs. DCIT
A.Y. : 2003-2004.
Date of Order : 21.11.2008
Section 244/244A, Proviso to S. 115JAA and Circular No. 763
issued by CBDT — Income-tax Act, 1961 — Assessment Year 2003-04 — Whether
where after giving credit for MAT paid in earlier years, there is still tax
payable and further credit is given to TDS and Advance Tax, can refund, if
any, be said to have been originating from payment of Advance Tax or credit of
TDS —Held : Yes. Whether such a refund becomes entitled to interest in terms
of S. 244 and S. 244A —Held : Yes.
Facts :
Vide an order passed u/s. 154 of the Act, the Assessing
Officer (AO) granted credit for MAT at Rs.6,36,82,480. After having granted
credit for MAT the AO gave credit for TDS and Advance Tax and there was a net
refund due to the assessee. No interest was granted on such refund due to the
assessee.
The CIT(A) rejected the claim of the assessee on the basis
of Circular No. 763, dated 18.2.1998, which clarifies that credit allowed
against MAT will not bear any interest.
Aggrieved, the assessee preferred an appeal to the
Tribunal.
Held :
The Tribunal upon considering the provisions of S. 115JAA
of the Act held that the only interpretation which could be given to the
Circular which has explained the proviso to S. 115JAA is that interest cannot
be allowed for intervening period. That is, if MAT is paid, for example, in AY
2001-02 and the same is credited in AY 2003-04, then for the intervening years
of 2001-02 and 2002-03 no interest is payable on such MAT credit. However, for
the year in which ultimately MAT credit is given and credit for other tax
payments is also given, then refund becomes due not because of MAT credit but
because of other tax. This legal position is absolutely clear from the fact
that payment of MAT is not refundable and it can only be used as a matter of
credit, that too, subject to the conditions laid down in S. 115JAA of the Act.
The Tribunal noted that the issue about priority of various
credits to be allowed against tax payable by an assessee was considered by the
Delhi Bench of the Tribunal in the case of Ajanta Offset
(2008-TIOL-164-ITAT-Del) and concurred with the Delhi Bench that first of all
the credit for MAT has to be given and then only credit for TDS and Advance
Tax, etc. has to be given.
The Tribunal noted that the AO had himself, in the order
passed u/s. 154, allowed the MAT credit before the credit for TDS and Advance
Tax. It stated that it is absolutely clear that refund is originating not
because of MAT credit but because of TDS and Advance Tax and, therefore, the
assessee has to be paid interest on such excess payment of TDS or Advance Tax.
The Tribunal set aside the order of CIT(A) and directed the AO to allow
interest in accordance with law.
S. 37(1) : Expenses to keep company afloat is allowable business expenditure
14 (2007) 110 TTJ 445 (Del.)
ITO v. Mokul Finance (P.) Ltd.
ITA Nos. 4562 & 4563 (Del.) of 2005
A.Ys. 2002-03 & 2003-04. Dated : 13-7-2007
S. 37(1) of the Income-tax Act, 1961 — Company having not
closed its business, expenditure incurred during the period of dormancy of
business in order to keep the company afloat is allowable business expenditure.
During the relevant assessment year, the company had income
only from interest and dividend and no business activity was carried on.
The Assessing Officer disallowed the loss claimed by the
assessee, holding that since there was no business activity during the year, no
expenses could be allowed. The CIT(A), however, allowed the assessee’s claim of
loss.
The Tribunal, relying on the decisions in the following
cases, allowed the assessee’s claim :
(a) CIT v. Ganga Properties Ltd., (1993) 199 ITR 94
(Cal.)
(b) Nakodar Bus Service (P) Ltd. v. CIT, (1990) 85
CTR (P & H) 25/(1989) 179 ITR 506 (P & H)
(c) CIT v. Rampur Timbery & Turnery Co. Ltd., (1981)
21 CTR (All.) 76/(1981) 129 ITR 58 (All.)
(d) L. VE. Vairavan Chettiar v. CIT, (1969) 72 ITR
114 (Mad.)
The Tribunal noted as under :
(a) The assessee being an artificial juridical person, it
needs to incur certain expenditure to keep itself afloat and have its
continued existence. Unlike a natural person, a company can only operate
through other natural persons — whether employees or others.
(b) In the case of corporate assessees, such expenses have
to be allowed as deduction, irrespective of whether or not the assessee is
engaged in active business and even if assessee has only passive incomes.
(c) Not carrying on business activity in a particular
period cannot be equated with closure of business, as it takes an
unsustainably narrow view of the scope of cessation of a business.
(d) Unless the business is abandoned or closed and even if
business is at a dormant stage waiting for proper market conditions to
develop, the expenditure incurred in the course of such a business is to be
allowed as deduction.
S. 143 r.w. S. 133A : Assessee can retract offer of additional income by furnishing details of income in course of assessment proceedings
13 (2007) 17 SOT 574
Jain Trading Co. v. ITO
ITA No.5935 (Mum.) of 2002.
A.Y. 1999-2000. Dated : 30-10-2006
S. 143 read with S. 133A of the Income-tax Act, 1961 — An
assessee who makes an offer of additional income during the course of an inquiry
can retract by furnishing full details of his income in the course of assessment
proceedings.
During the course of survey proceedings u/s.133A, the
assessee offered an additional income of Rs.25 lacs, but did not disclose such
income in the return of income filed. The assessee contended that since in the
assessment proceedings it had furnished complete particulars of its business
transactions and disclosed the complete details of trading results, it was not
bound by the additional income offered at the time of survey. The Assessing
Officer did not accept the explanation of the assessee and held that after
having admitted suppression of business income to the extent of 25 lacs, it was
not open to the assessee to retract from the additional income declared during
the survey proceedings. He, therefore, added Rs.25 lacs to the income of the
assessee. On appeal, the CIT(A) upheld the order of the Assessing Officer.
The Tribunal deleted the addition and noted as under :
(1) An assessee who makes an offer of additional income
during course of an enquiry by Income-tax authorities is not bound by his
offer of additional income for all time to come. At the same time, the burden
cast upon an assessee, who chooses to retract his earlier statement, is very
heavy.
(2) In the instant case, during the course of assessment
proceedings, the assessee had completely explained entire business
transactions leading up to the date of survey and had given the details of its
trading activity.
(3) The Assessing Officer had not raised even a finger of
doubt at the account statement furnished by the assessee during the course of
assessment proceedings.
(4) Therefore, the assessee had been able to discharge the
heavy burden that rested upon him while retracting from offer of additional
income at the time of survey. Even at that stage, the case of the assessee was
that the offer was made to buy peace and not because of any concealment of
income or discrepancy in accounts detected by survey party.
S. 23 : If property held with intention to let out and efforts made to let it out, annual letting value to be calculated u/s.23(1)(c)
12 (2007) 17 SOT 293 (Mum.)
Premsudha Exports (P.) Ltd. v. ACIT
ITA No. 6277 and 6278 (Mum.) of 2006
A.Y. 2003-04. Dated : 31-5-2007
S. 23 of the Income-tax Act, 1961 — If a property is held
with an intention to let out and efforts are made to let it out, the annual
letting value will be calculated u/s.23(1)(c) as if it is a let-out property.
As per its Memorandum of Association, the assessee-company
was entitled to purchase property for letting it out and to earn rental income.
During the year, the assessee’s property remained vacant, though the assessee
made continuous efforts to let out the property. The assessee submitted that the
annual letting value (ALV) of the property should be computed as per provisions
of clause (c) of S. 23 (1), and that since the property remained vacant for the
whole year, the ALV of the property had to be taken as NIL. The Assessing
Officer did not deliberate on the submission of the assessee and computed the
ALV of the impugned property as per clause (a) of S. 23(1) and determined it at
8.5% of the cost of property. The CIT(A) upheld the order.
The Tribunal set aside the order of the lower authorities and
upheld the assessee’s claim.
The Tribunal noted as under :
(1) The sole dispute, in the instant case, was regarding
the interpretation of the words ‘property is let’ in clause (c) of S. 23(1).
For this, it is to be determined as to whether actual letting out is a must
for a property to fall within the purview of clause (c) of S. 23(1).
(2) From a reading of the provisions of sub-section (3) of
S. 23, it appears that the Legislatures in their wisdom have used the words
‘house is actually let’. This shows that the words ‘property is let’ cannot
mean actual letting out of the property, because, had it been so, there was be
no need to use the word ‘actually’ in sub-section (3) of S. 23.
(3) If the property is held by the owner for letting out
and efforts are made to let it out, that property is covered by clause (c) and
this requirement has to be satisfied in each year that the property was being
held to let out, but remained vacant for whole or part of the year.
(4) In the instant case, the assessee-company was entitled
to purchase the property for its let out and to earn rental income. Copy of
resolution of the board of directors was also placed on record, wherefrom it
was evident that one of the directors was authorised to take necessary steps
to let out the property in question. The assessee had also fixed the monthly
rent and the security deposit of the property. Consequent to the resolution,
the assessee had approached various estate and finance consultants for letting
out the property and the request was also duly acknowledged by those
consultants. Unfortunately, during the year under appeal, the assessee could
not get a suitable tenant on account of hefty rent and security deposit. Thus,
during the whole year, the assessee made continuous efforts to let out the
property and, under these circumstances, this property could be called as to
be let out property in terms of observations made above. Since the property
had been held to be let out property, its annual letting value could only be
worked out as per clause (c) of S. 23(1) and, since the rent received or
receivable from the said property during the year was nil, the same was to be
taken as the annual value of the property in order to compute the income from
house property.
S. 12AA r.w. S. 12A : If order u/s.12AA not passed within stipulated period, registration deemed to have been granted
11 (2007) 17 SOT 281 (Delhi) (SB)
Bhagwad Swarup Shri Shri Devraha Baba Memorial
Shri Hari Parmarth Dham Trust v. CIT
ITA Nos. 363 (Delhi) of 2003
Dated : 31-8-2007
S. 12AA read with S. 12A of the Income-tax Act, 1961 — If
order u/s.12AA is not passed within the stipulated period, then registration is
deemed to have been granted.
The CIT passed the order refusing registration u/s.12A to the
assessee-trust beyond the stipulated period of six months from the end of the
month in which application for registration was filed. The assessee appealed
before the Tribunal and contended that once the time limit fixed by S. 12AA(2)
expired without the CIT having passed any order, it must be deemed that the
registration had been granted.
The Special Bench, following the decisions in the
undermentioned cases, allowed the assessee’s appeal :
(a) Karnataka Golf Association v. DIT, (2004) 91 ITD
1 (Bang.)
(b) Sardari Lal Oberoi Memorial Charitable Trust v. ITO,
(2005) 3 SOT 229 (Delhi)
(c) People Education & Economic Development Society v.
ITO, (2006) 100 ITD 87 (TM) (Chennai).
The Special Bench noted as under :
(1) The statutory authorities have no option, but to obey
the mandate of the law.
(2) Unless the statute provides for exceptions, the order
must be passed by statutory authorities in accordance with the time limit set
by the law. Ss.(2) of S. 12AA does not admit of any exception to the rule.
(3) Therefore, it is mandatory for the CIT to dispose of
the application for registration made u/s.12A within six months from the end
of the month in which the application was filed.
(4) While exercising such an important power available
u/s.12AA, the CIT should also pass an order within the time limit provided. It
would be incongruous to hold that conducting an enquiry into the claim for
registration is an important excise of the power, whereas passing of the order
within the time limit provided is not, and it can be done at any time.
S. 115JA : Lease equalisation charges debited not to be added back for book profit
10 (2007) 17 SOT 173 (Delhi)
GE Capital Transportation Financial Services Ltd. v.
ACIT
ITA No.2362 (Del.) of 2002
A.Y. 1998-99. Dated : 20-7-2007
S. 115JA of the Income-tax Act, 1961 — Lease equalisation
charges debited to Profit & Loss A/c. cannot be added back while computing book
profit u/s.115JA.
In the Profit and Loss A/c. filed along with the return of
income for the A.Y. 1998-99, the assessee leasing company had deducted the
amount of lease equalisation charges from the lease rental income. In the
computation of total income, the said amount had been added back; but the same
was not added to the profit while computing book profit u/s. 115JA.
The Assessing Officer and the CIT(A) held that lease
equalisation charges debited to the Profit & Loss A/c. by the assessee leasing
company was a notional charge on the profits of the company and represented an
amount set aside out of profits/surplus to equalise the imbalance between lease
rental and depreciation charges over the period of lease. The impugned amount
was added back to the book profit under Explanation (1) to S. 115JA(2).
The Tribunal, relying on the decision of the Supreme Court in
respect of the distinction between a ‘provision’ and a ‘reserve’ in the case of
State Bank of Patiala v. CIT, (1996) 219 ITR 706/85 Taxman 416, set aside
the orders of the lower authorities.
The Tribunal noted as under :
1. The provision for lease equalisation charges was made
following the guidelines issued by the Institute of Chartered Accountants of
India (ICAI) on ‘Accounting of income, depreciation and other aspects for
leasing company’. The Assessing Officer held that the said guidelines issued
by ICAI on creation of lease equalisation charge were only recommendatory and
not mandatory.
2. The amount to be transferred to a reserve is debited to
Profit and Loss Appropriation A/c. and the purpose of creating the reserve is
to enable the firm to tide over a difficult financial period and not to meet
any particular contingency. The amount of lease equalisation charges, however,
was not debited by the assessee-company to its Profit and Loss Appropriation
A/c. and the purpose of the same was not to enable the assessee to tide over a
difficult financial period.
3. The amount provided for the lease equalisation charges
was not transferred by the assessee-company in its books of account to any
reserve account, but the same was adjusted against depreciation/WDV of the
relevant fixed assets given on lease.
4. The amount of lease equalisation charge, however, is
neither the portion of earnings/profits of an enterprise, nor is the same
appropriated for a general or specific purpose. The same is a charge against
the profit to arrive at true and correct profits of the leasing business,
which by no means can be treated as part of undistributed profits or capital
of the business.
5. If the nature and character of lease equalisation
charge, as is evident from the purpose for which the same was provided as well
as the accounting treatment given thereto in the books of account, was
considered in the light of the meaning of the expression ‘reserve’ as defined
in the context of terms commonly used in financial statements as well as by
the Apex Court in the judicial pronouncement, it was to be held that the
provision made for lease equalisation charges could not be regarded as an
amount transferred to reserves as envisaged in Explanation (b) to S. 115JA
(2).
6. Therefore, the adjustment made by the Assessing Officer
by adding the amount of lease equalisation charges while computing the book
profit u/s.115JA was not permissible, since the said amount was not covered
within any of the clauses of Explanation below S. 115JA(2) including clause
(b).
S. 36(1)(iii) r.w. S. 43(1) : Interest on capital borrowed for acquiring machinery, deductible u/s.36(1)(iii), whether put to use or not
9 (2007) 17 SOT 90 (Del.)
Simbhaoli Sugar Mills Ltd. v. ACIT
ITA Nos. 2856 and 2857 (Delhi) of 2005
A.Ys. 2000-01 and 2001-02
Dated : 11-5-2007
S. 36(1)(iii) read with S. 43(1) of the Income-tax Act, 1961
— Interest on capital borrowed for acquiring machinery required to be used for
its business is eligible for deduction u/s.36(1)(iii), irrespective of fact
whether machinery was put to use or not in accounting year.
The AO and the CIT(A) held that since machinery acquired by
the assessee was not put to use in the year under consideration, the assessee in
view of Explanation 8 to S. 43(1), was not entitled to claim deduction
u/s.36(1)(iii) in respect of interest paid
on the capital borrowed for acquiring the machinery.
The Tribunal allowed the assessee’s claim. The Tribunal noted
as under :
(1) In view of a catena of decisions of the Supreme Court
and various High Courts on the question of allowability of interest
u/s.36(1)(iii), it is clear that the expenditure incurred on interest on
capital borrowed for acquiring the machinery required to be used for the
business of the assessee is eligible for deduction u/s.36(1)(iii),
irrespective of the fact whether the machinery was put to use or not in the
accounting year relevant to assessment year under consideration.
The Tribunal referred to the following cases :
(a) CIT v. Associated Fibre & Rubber Industries (P.)
Ltd., (1999) 236 ITR 471/102 Taxman 700 (SC)
(b) CIT v. Modi Industries, (1993) 200 ITR 341/68
Taxman 114 (Delhi)
(c) CIT v. Dalmia Cement (Bharat) Ltd., (2000) 242
ITR 129/109 Taxman 363 (Delhi)
(d) CIT v. Orissa Cement Ltd., (2003) 260 ITR 626
(Delhi)
(e) CIT v. J. K. Synthetics Ltd., (1988) 169 ITR
267/22 Taxman 260 (All.)
(f) ITO v. Malwa Vanaspati & Chemical Co. Ltd.,
(1997) 226 ITR 253/92 Taxman 262 (M.P.)
(g) CIT v. Bhillai Iron Foundry (P.) Ltd., (1998)
234 ITR 661 (M.P.)
S. 33AC : Profit from business means profit generated during course of business of operation of ships and not only from operation of ships
8 (2007) 17 SOT 54 (Mum.)
Mercator Lines Ltd. v. Dy. CIT
ITA Nos. 8045 to 8047 (Mum.) of 2003
and 53 (Mum.) of 2004
A.Ys. 1997-1998, 1999-2000 and 2001-02. Dated : 25-6-2007
S. 33AC of the Income-tax Act, 1961 — Profit from business
means any profit generated during course of business of operation of ships and
is not confined only to income from operations of ships — Sale of
scrap is an income derived from business of shipping operation and was eligible
for deduction u/s.33AC.
The Assessing Officer and the CIT(A) disallowed the
assessee’s claim for deduction u/s.33AC in respect of income from sale of scrap
and income from interest on FDRs.
The Tribunal allowed the claim of the assessee and noted as
under :
(1) ‘Profit derived from business’ used in S. 33AC means
any profit generated during the course of business of operation of ships and
does not confine only to operation of ships.
(2) Income from sale of scrap is certainly an income
generated during the course of business of operation of ships — it is an
income derived from the business of shipping operation and is eligible for
deduction u/s.33AC.
(3) In respect of interest earned on FDRs, since nothing
had been placed on record by the assessee regarding whether it was received
during the course of business of operation of ships, the matter was restored
to the file of the Assessing Officer to re-adjudicate the issue. However, if
the FDRs were purchased to obtain the credit limit or on account of business
exigencies, the interest generated thereon would certainly be business income
and was eligible for deduction u/s.33AC. In case surplus funds were put in
FDRs and interest was generated thereon, that interest income would not
qualify to be business income of the assessee and also would not be eligible
for deduction u/s.33AC.
S. 12A, S. 12AA : CIT cannot refuse registration to trust on extraneous considerations, when no fault with objects, genuineness of activities
7 (2007) 109 TTJ (Asr.) 850
Dream Land Educational Trust. v. CIT
ITA No. 481 (Asr.) 2005
Dated : 5-4-2007
S. 12A and S. 12AA of the Income-tax Act, 1961 — CIT, having
found no fault with objects of the trust and genuineness of its activities, was
not justified in refusing registration u/s.12A on extraneous considerations.
The CIT rejected the assessee’s application for registration
u/s.12A, on the following grounds :
(a) Dissolution deed of the firm of which property was
settled on trust was not registered.
(b) No transfer deed was executed regarding property
transferred to trust.
(c) The takeover action was unilateral.
(d) No objection certificate was not obtained from bankers.
(e) On dissolution of firm, it was left to the trustees to
decide the fate of net assets.
The Tribunal held that the CIT was not justified in refusing
registration u/s.12A. The Tribunal noted as under :
(1) U/s.12AA, the CIT was only required to satisfy himself
with regard to the objects and genuineness of the activities of the trust.
(2) The CIT has not, anywhere in the impugned order,
doubted either the genuineness of the activities of the trust or its objects.
It has not been stated that any object of the trust is not that of charity or
that the income of the trust has been used for the purpose of the trustee or
their families and has not been utilised for charity.
(3) In the absence of any dissatisfaction of the CIT with
regard to either the objects or the genuineness of the activities of the
trust, registration has been refused to the trust in violation of the
provision of S. 12AA. The reasons recorded for such rejection of registration
are entirely extraneous to the requirement of the said Section.
The Tribunal relied on the decisions in the following cases :
(1) Sanjeevamma Hanumanthe Gowda Charitable Trust v.
Director of IT (Exemption), (2006) 203 CTR (Kar.) 533; (2006) 285 ITR 327
(Kar.)
(2) St. Don Bosco Educational Society v. CIT, (2004)
84 TTJ (Lucknow) 805; (2004) 90 ITD 477 (Lucknow)
(3) Smt. Mansukhi Devi Bihani Jan Hitkari Trust v. CIT,
(2004) 83 TTJ (Jd) 763; (2005) 94 ITD 1 (Jd)
(4) People Education & Economic Development Society (Peeds)
v. ITO, (2006) 104 TTJ (Chennai) (TM) 467; (2006) 100 ITD 87 (Chennai)
(TM)
(5) Acharya Sewa Niyas Uttaranchal v. CIT, (2006)
105 TTJ (Del.) 761
S. 154 r.w. S. 43B: Relief entitled can not be denied merely because omitted by mistake
6 (2007) 109 TTJ (Jp.) 794
Lustre Tiles Ltd. v. Addl. CIT
ITA No. 489 (Jp.) 2003
A.Y. 1995-96. Dated : 28-7-2006
S. 154 read with S. 43B of the Income-tax Act, 1961 — If on
the basis of material on record, the assessee is entitled to a relief which has
remained to be allowed, then it would constitute mistake apparent from record
and, consequently, such relief cannot be denied merely because the assessee, by
oversight, had omitted to make the claim.
The assessee’s application for rectification u/s.154 for
allowing claim u/s.43B was rejected by the Assessing Officer and the CIT(A), on
the ground that no such claim was made in the return of income, nor in
subsequent proceedings.
The Tribunal allowed the assessee’s claim and observed as
under :
(1) In a Note in Schedule 1 to the balance sheet, it has
been clearly mentioned in the balance sheet that Rs.53 lacs being interest on
the term loan has been converted into equity shares of equal value.
(2) CBDT Circular No. 669, dated 25th October 1993,
allowing entertainment of rectification application in such matters, is
binding on the Department.
(3) ‘Record’ for purposes of S. 154 would include all
documents available at the time of passing of order subjected to rectification
proceedings and the claim was clearly reflected in the Note appended to
Schedule 1 of the balance sheet.
(4) The Supreme Court in the case of Anchor Pressings P.
Ltd. v. CIT, (1986) 58 CTR 126 held that the jurisdiction u/s.154 to
rectify a mistake is very wide and relief could be allowed in the
rectification proceedings if all factual materials necessary for allowing the
relief were available on record and such relief could not be denied merely
because the assessee had omitted to claim the same.
The Tribunal relied on the following further decisions :
(1) CIT v. K. N. Oil Industries, (1982) 30 CTR (MP)
137; (1983) 142 ITR 13 (MP)
(2) West Bengal Warehousing Corpn. v. CIT, (1986) 54
CTR (Cal.) 21; (1986) 157 ITR 149 (Cal.)
(3) CIT v. Smt. Aruna Luthra, (2001) 170 CTR (P&H) (FB)
73; (2001) 252 ITR 76 (P&H) (FB)
S. 37(1) : (a) One-time charges paid by assessee company to NSDL for converting shares into demat form, allowed as revenue expenditure (b) Expenditure on installation of traffic signal for benefit of employees is allowable business expenditure (c) Deduc
5 (2007) 109 TTJ (Bang.) 631
Infosys Technologies Ltd. v.
Jt. CIT
ITA No. 1022 (Bang.) 2003
A.Y. 1998-99. Dated : 7-4-2006
(a) S. 37(1) of the Income-tax Act, 1961 — Payment
made by assessee company as one-time charges to National Security Depository
Ltd. (NSDL) for converting shares of company from physical into dematerialised
form is allowable as revenue expenditure.
(b) S. 37(1) of the Income-tax Act, 1961 — Assessee
installed traffic signals at a circle in the vicinity of its office premises
to help its employees out of traffic jams, so that they may reach the office
in time, and handing over the same to traffic police, expenditure was
allowable being wholly and exclusively for assessee’s business.
(c) S. 80G read with S. 10A & S. 14A of the
Income-tax Act, 1961 — Deduction u/s.80G is allowable even if it is made out
of exempted income; S. 14A does not apply to S. 80G.
(a) Relying on the decisions in the cases of CIT v.
Tirrihannah Co. Ltd., (1992) 195 ITR 393 (Cal.) and Karjan Cooperative
Cotton Sales Ginning & Pressing Society v. CIT, (1992) 106 CTR (Guj.)
47/(1993) 199 ITR 17 (Guj.), the Tribunal allowed the assessee’s claim of
Rs.44.43 lacs paid to NSDL as one-time charges for converting the company’s
shares from physical to dematerialised form. The Tribunal, inter alia,
observed that :
(1) The dematerialisation has helped significantly in
reducing the administrative costs. Even if certain expenses result into some
benefit to the shareholders, the expenditure incurred in respect of or in
connection with the shareholders, is allowable as revenue expenditure.
(2) The expenditure can even be considered in the nature of
compliance with listing requirements. The CBDT by its Circular Letter
F.No.10/67/65-IT(A-1), dated 26th August 1965 opined that expenses incurred by
company on getting its shares listed in stock exchange should be considered as
laid out wholly and exclusively for the purpose of business and therefore
admissible as business expenditure u/s.37(1).
(3) The guidelines of SEBI mandate that the shares to be
traded in stock exchange can only be in dematerialised form. Thus, the charges
paid to NSDL, having not brought into existence any capital asset and being
for the purpose of efficient functioning of the business, are to be held as
business revenue expenses and allowable as such.
(b) The Tribunal allowed the expenditure of Rs.7.38 lacs
incurred by the assessee for installation of traffic signals as business
expenditure. The Tribunal relied on the decisions in the following cases :
(1) Atherton v. British Insulated & Helsby Cables Ltd.,
(1925) 10 Tax Case 155
(2) 191 (HL), Eastern Investment Ltd. v. CIT, (1951)
20 ITR 1 (SC); SCR 594
(3) CIT v. Chandulal Keshavlal & Co., (1960) 38 ITR
601 (SC)
(4) Mysore Kirloskar Ltd. v. CIT, (1987) 61 CTR (Kar.)
265; (1987) 166 ITR 836 (Kar.)
(5) CIT v. Royal Calcutta Turf Club, (1961) 41 ITR
414 (SC)
(6) CIT v. Madras Refineries Ltd., (2004) 266 ITR
170 (Mad.)
The Tribunal noted as under :
(1) As a result of getting repeatedly involved in traffic
jams and other hazards, the workers are a distressed lot. The incurrence of
expenditure was prompted solely with a view to benefit its employees. The
expenditure was incurred in the character as a trader and was prompted by
commercial expediency.
(2) What is to be seen is not whether it was compulsory for
the assessee to make the payment or not, but the correct test is that of
commercial expediency.
(3) As long as the payment which is made is for the
purposes of the business, and not disallowable specifically under the Act, the
same would be allowable as a deduction. If there is incidental benefit to a
party other than the assessee, it could not be relevant to decide whether the
expenditure is allowable or not.
(4) Since the expenditure was incurred to secure the
benefit to its employees, which in turn has also achieved its social objects,
it can still be considered as “wholly and exclusively for the purpose of
business” and, hence, allowable u/s.37(1).
(c) The donation of Rs.15.00 lacs made by the assessee was
paid out of ‘K’ unit, the profit of which was exempt u/s.10A. The Assessing
Officer and the CIT(A) disallowed deduction u/s.80G, holding that since the
expenditure is made out of exempt income, the issue is covered u/s.14A. the
Tribunal allowed the deduction and noted as under :
(1) The donation cannot be considered as ‘expenditure
incurred’ for the purpose of earning income, which is exempt under the Act.
(2) S. 10A is an exemption Section, whereas S. 80G is a
deduction Section and, therefore, there would be no double deduction of the
same item even if a benefit under both the Sections has been claimed. There
has been no double deduction in respect of the same item of expenditure.
(3) There is no stipulation in S. 80G that the donation has
to be made out of taxable income only for qualifying as a deduction.
(4) The provisions of S. 14A would not be applicable to a
deduction u/s.80G, as S. 14A is limited in its operation to chapter IV only,
where-as deduction u/s.80G falls under chapter VI-A and donation made does not
constitute expenditure. S. 14A applies to expenditure only.
(5) S. 80G would be available even when the said donations are made out of capital or gifts received or exempted income or income of earlier years.
S. 199 : Credit for TDS to be given pro rata in assessment year in which corresponding income assessable
4 (2007) 109 TTJ (Chd.) (TM) 445
Pradeep Kumar Dhir v. ACIT
ITA No. 798 (Chd.) 2006
A.Y. 2003-04. Dated : 27-4-2007
S. 199 of the Income-tax Act, 1961 — Credit for TDS is to be
given to the assessee in the assessment year in which the corresponding income
is assessable. If only a portion of income is found assessable in the relevant
assessment year, credit has to be allowed only on that portion on pro-rata basis
and the credit for the balance TDS is to be allowed only in future when the
remaining income is assessable.
The assessee was following cash system of accounting. The
Assessing Officer and the CIT(A) held that the credit for TDS was allowable only
with respect to the income which was assessable for this year and not the entire
amount of TDS claimed by the assessee as per the TDS certificates.
The Third Member, relying on the decisions in the following
cases, also confirmed the order of the lower authorities :
(a) Smt.Varsha G. Salunke v. Dy. CIT, (2006) 101 TTJ
(Mum.) (TM) 703
(b) Tej Ram v. ITO, (2005) 92 TTJ (Chd.) 1185/(2005)
93 ITD (Chd.)
The Third Member noted as under :
(1) Important conditions for getting benefit of TDS as per
S. 199 are :
(a) The assessee should produce the certificate for the
amount of TDS.
(b) The assessee should show that income subjected to TDS
is disclosed in the return of the assessment year as ‘assessable’.
Both the abovementioned conditions are to be satisfied.
(2) Therefore, the assessee will not be entitled to have
benefit or credit for the amount, though mentioned in the certificate for the
assessment year, if income relatable to the amount is not shown and is not
assessable in that assessment year. If instead of entire income referable to
amount of tax deducted, only a portion of income is found assessable, the
benefit has to be allowed only on the portion shown. If balance income on
account of system of accounting followed by the assessee or for some other
reason is found to be assessable in future, then the credit for the balance
TDS can be allowed only in future when income is assessable.
(3) The CBDT Circular No. 5 of 2001, dated 2nd March 2001
also supports the view that where tax is deducted from the amount which is
liable to be assessed and spread over more than one financial year, credit
shall be allowed for TDS on pro-rata basis and in the same proportion
in which such income is offered for taxation in different assessment years.
IS IT FAIR TO HAVE TAX COLLECTION TARGET FOR REVENUE AUTHORITIES?
December is normally a hectic season with most of us busy in completion of time-barring assessments. However, there seems to be no respite even thereafter due to the recovery proceedings.
The importance of timely tax collection needs no emphasis as without it the budgetary process will lose practicality.
Budget is an estimate for Government’s expenditure and earnings. The same would undergo a change depending upon the performance of the economy. Also tax, which is one of the important sources of revenue collection of the Government, is basically a charge on the profits, sales or production, etc. depending upon the nature of tax.
It is the duty of each individual, enterprise or entity to pay the right amount of tax. So also the Revenue authorities are legislatively empowered to demand the correct tax from the public by making assessments that can stand the scrutiny of judicial review.
Along with this judicial aspect, there is an administrative side of any Revenue department. Based on the budgeted receipts and expenditure, each revenue-earning department is given its target. These targets are normally given to assist government to facilitate its revenue collections. This also helps to seal revenue leakages in the system. Further, Revenue Officers are also motivated to work with alertness with a certain goal before them.
The problem starts when the Revenue authorities focus only on their targets. This creates confusion in the role of a Revenue authority. Instead of focussing on charging correct tax, they focus on collecting taxes to achieve their annual collection targets. In the whole process the aspect of legality gets lost.
The approach of meeting ‘collection targets’ results into the following types of undesired consequences :
1. The assessees face ad hoc, fictitious disallowances in the assessments.
2. This results into unwanted litigation and harassment of assessees.
3. Many times the Assessing Officers admit that the disallowances will get struck down at appellate level, but they make the disallowance to meet the collection target.
4. No refunds are granted to the assessees in the month of February and March.
5. The Assessing Officers call up taxpayers during the first weeks of September, December and March to ascertain the quantum of advance tax.
6. Assessments of TDS returns get focussed on collections rather than considering merits of the case.
7. Even the first appellate authority i.e., Commissioners of Income-tax (Appeals) get driven by these targets and at times are reluctant to either fix the hearing or pass orders in March, especially if their order will result into granting immediate refund/relief.
8. At times the Assessing Officers demand payment of tax as per the ‘demand’ even though there are apparent mistakes in the order and application for rectification is pending. They say that the mistake would be rectified in April and refunds would be granted.
9. The pressure of collection also results into rejection of ‘stay of demand’ applications — even in cases where granting of stay is otherwise justified.
10. The assessees at times are threatened with coercive steps, such as attachment of bank accounts and other assets.
There could be many other consequences which would result into hardships to the assessee due to ‘collection targets’. At times it has been observed that even in the Courts, the representatives of the Revenue Department unofficially admit that certain acts of the Assessing Officers are result of the ‘collection pressure’.
This attitude of the Revenue authorities could result into change in the mindset of honest tax-payers and in the process losing faith in the system.
In fact the targets given to the Revenue authorities should be to complete assessments, pass rectification orders and grant refunds, etc. Further, in the monthly/yearly evaluation, each officer should be evaluated not only on targets achieved by him, but also on the basis of orders passed by him, analysing as to how many orders have been subjected to appeal or revision by the Commissioner; or rectification. The additions made in the assessment order should be sustainable. Only correct tax collection would help the Government meet its budget. The additions/disallowances made should be monitored by the authorities, keeping in mind how these would stand the test of legality. The target of the Government should be to collect ‘tax judiciously’ in a simpler way instead of collecting ‘more’ tax coercively, a large part of which would ultimately get refunded subsequently. Collection of tax should not be a ‘cash flow’ objective of the Government.
To conclude, I would say :
Fixing of targets is good because targets motivate and encourage performance. However, fixing of unrealistic targets is against the taxpayer’s charter and vitiates the economic environment.
I am sure, my suggestion fits into the philosophy of ‘Kautilya’.
Is it fair to delay the issuance of profession tax certificates inordinately ?
Introduction :
The Maharashtra State Tax on Professions, Trades, Callings &
Employments Act, 1975 requires every person carrying on a business or profession
to obtain an enrolment certificate and pay profession tax annually as per the
provisions of the said Act.
The said Act also requires every employer, paying more than
Rs.2500 p.m. as salary or wages to get himself registered under the act and pay
tax on salaries and wages paid by him to his employees. The profession tax can
be recovered from the salaries and wages of the employees.
The implementation of this Act has been very slow and even
today a large number of persons and employers have not been brought under the
tax net. Also in case of registered and enrolled persons, the recovery and
assessment of tax has not been followed up effectively by the Sales Tax
Department of Maharashtra.
Amnesty Scheme, 2007 :
In order to bring such un-enrolled and un-registered persons
under the tax net and offer an opportunity to such persons and also to recover a
large amount of outstanding profession tax, the Government of Maharashtra had
introduced an ‘Amnesty Scheme’ during the period September-October 2007. (The
scheme was further extended up to 31st October 2007). As per the scheme, the
un-enrolled and un-registered as well as registered and enrolled persons were
required to pay outstanding tax for previous five years along with interest and
penalty of 10% of the actual interest/penalty payable as per the provisions of
the Act.
People’s response :
In response to the scheme, a large number of persons and
employers had submitted their applications for enrolment and registration and
paid tax, interest and penalty as per the scheme. Even after the expiry of the
Amnesty Scheme, a huge number of applications for enrolment and registration are
received by sales tax department every day. Initially, the sales tax department
was issuing the enrolment/registration certificate to the applicant and
thereupon the person was required to pay tax along with applications for
availing Amnesty Scheme benefits. With the number of applications increasing,
the deparment issued verbal instructions to pay the tax based on the application
serial no. for which number of taxpayers had to struggle with banks for
acceptance of payments.
Sales Tax Department’s action :
Today after nearly 5 months of the last date of the Amnesty
Scheme, many of the applicants have not received their enrolment/registration
certificates.
The enrolled persons are required to deposit the profession
tax due by them for the financial year before 30th June every year. With this,
the tax for the year 2008-09 is due on 30th June 2008. The applicants, who are
yet to receive any communication from the sales tax departments, are clueless
about discharge of liability without the identification number which the
revenue-collecting banks insist on every challan for payment of tax.
Further, the un-registered persons are required to file
monthly, quarterly or annual returns based on their total liability during the
previous financial year. In the aforementioned situation, the registered
employers are not able to meet the statutory obligation of payment of tax and
filing of returns for want of registration no. for which they have been waiting
for last 5-6 months.
As regards the procedure for issuance of enrolment and
registration certificate, the applicants are required to submit necessary
documentary evidences with application and no further inquiry or scrutiny is
carried out by the sales tax authorities before issuing the certificates to the
applicants.
The people’s concern :
In view of this, the questions which arise are :
1. Is it fair on the part of the Sales Tax Department to
delay the issue of certificate to the applicants
2. Will the applicant be liable to pay interest and penalty
for delay in payment of tax or filing of return ?
Suggestions :
Registration certificates should be issued either on the
spot, or at least the numbers be made available ‘on-line’, so that the taxpayers
can download their respective certificates.
Indian Employees senT on deputation abroad — Determination of Residential Status in the year OF return upon completion of assignment under Domestic Law — A Case Study
Nowadays Indian companies, particularly those engaged in
software development, IT-enabled services, financial & professional services,
are deputing their Indian employees for rendering onsite services at the
workplace of their customers or associates. Period of deputation could be
short-term i.e., less than 12 months spread over two financial years or
medium-term or long-term i.e., more than a year. Short-term deputation of
employees creates tax issues as the employee could be Resident of India in terms
of S. 6(1) of the Income-tax Act, 1961 (the Act) and hence, his remuneration
received in the foreign country is taxable in India in accordance with S. 5 of
the Act (subject to Double Taxation Relief pursuant to Article 23 of the
applicable DTAA or S. 91 of the Act).
As the taxpayers and their tax advisors are regularly faced
with this issue and in view of conflicting judicial decisions in the matter,
this simple case study seeks to highlight the issues which arise in such a
situation and how, in an appropriate case, the affairs can be better
planned/managed from the tax perspective.
In this case study, we have not dealt with Articles 4 and 16
of Indo-German DTAA as they were not relevant in light of the facts of the case
study.
1 Facts of the case :
(a) Mr. A, working as a software engineer with an Indian
software development and services company (‘the assignee’), was deputed outside
India for the first time, for the purpose of working on a short-term assignment
with a group company in Germany. He was paid remuneration by the German company
during the period of his deputation with the German company.
(b) The assignee (the querist) left India on 25th March 2009
(F.Y. 2008-09) and returned to India after finishing the assignment on 5th
December, 2009 (F.Y. 2009-10). In between, he visited India for 9 days for
attending a social event in the family from 5th May 2009 to 13th May, 2009.
Thus, he was present in India for 126 days during the financial year 2009-10.
(c) The querist contends that Explanation (a) to S. 6(1)(c)
which extends the period of stay in India from 60 days to 182 days in the case
of a person who leaves India for the purposes of the employment outside India,
is applicable in his case as he left India on 25th March, 2009 for the purposes
of his deputation to Germany. Placing reliance on the decision of the Hon’ble
Authority for Advance Ruling in the case of British Gas India (P.) Ltd., In re
(2006) 285 ITR 218, where it was held that for the purposes of employment
outside India, covers the cases where an assessee is sent outside India on
deputation by an Indian employer, the querist contends that clause (a) of
Explanation to S. 6(1)(c) will be applicable and, therefore, he is to be treated
as a person being non-resident of India.
(d) The querist further contends that clause (b) of
Explanation to S. 6(1)(c) is also applicable in his case as he came on a
visit to India. The fact that he came to India permanently, is not relevant.
Since the querist has come on visits to India for less than 182 days during the
F.Y. 2009-10, as per S. 6(1)(c) read with Explanation (b), his status should be
taken as non-resident.
(e) The querist is of the view that once a citizen of India
or person of Indian origin, who is outside India and who comes on a visit to
India, Explanation (b) to S. 6(1)(c) of the Act gets
attracted and the 60 days’ period referred to in S. 6(1)(c) of the Act
gets extended to 182 days. The fact that the querist came back permanently to
India does not alter this position.
(f) The querist, relying upon favourable advance ruling in
the case of Shri Anurag Chaudhary (2010) 322 ITR 293, contends that he was
non-resident during the F.Y. 2009-10 and, therefore, the salary earned by him on
account of his deputation outside India, would not be taxable in India.
(g) However, his colleagues expressed doubts on his
contentions and also on the correctness of the advance ruling and hence, he has
approached for guidance in the matter.
(h) Mr. A has also raised a hypothetical question that
whether his tax situation would have been different if he could have planned to
be sent abroad on or after 1st day of April, 2009 or had managed to return to
India on completing the assignment on or after 1st day of February, 2010.
2 Provisions of S. 6 :
The residential status is to be determined as per the
provisions of S. 6(1) of the Act. S. 6(1) along with Explanation is reproduced
below for ready reference :
“1 An individual is said to be resident in India in any
previous year, if he :(a) is in India in that year for a period or periods
amounting in all to one hundred and eighty-two days or more; or(b) ** ** **
(c) having within the four years preceding that year been
in India for a period or periods amounting in all to three hundred and
sixty-five days or more, is in India for a period or periods amounting in
all to sixty days or more in that year.
Explanation — In the case of an individual, :
(a) being a citizen of India, who leaves India in any
previous year as a member of the crew of an Indian ship as defined in clause
(18) of S. 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the
purposes of employment outside India, the provisions of sub-clause (c) shall
apply in relation to that year as if for the words ‘sixty days’,
occurring therein, the
words ‘one hundred and eighty-two days’ had been substituted;
(b) being a citizen of India, or a person of Indian origin
within the meaning of Explanation to clause (e) of S. 115C, who, being
outside India, comes on a visit to India in any previous year, the
provisions of sub-clause (c) shall apply in relation to that year as if for the
words ‘sixty days’, occurring therein, the words ‘one hundred and eighty-two
days’ had been substituted.” (Emphasis supplied.)
3 Legislative history :
3.1 Explanations (a) and (b) were introduced by the Direct
Tax Laws (Second Amendment) Act, 1989. By the amendment effected by the 1989
Amendment Act, it was provided that the words ’60 days’ occurring in S. 6(1)(c)
will be read as ‘150 days’ in case a citizen of India comes on a visit to India
in the previous year. In the statement of objects and reasons, it was mentioned
as under :
“One of the prime needs of the country is to ensure proper balance of payment and encourage inflow of foreign exchange into the country. With a view to achieve this, it is proposed to amend S. 48 of the Income-tax Act in order to provide for computation of the capital gains in the case of non-resident Indians by calculating the cost price and the sale price in the foreign currency in which the investment was made instead of taking the value in Indian currency as at present. This will make investments in shares by non-resident Indians more attractive and thereby encourage inflow of foreign exchange into the country.
S. 6 of the Act is also being amended with the same objective. It will liberalise the criterion for detetmining the residential status so as to facilitate non-resident Indians to stay in India for a longer period in order to look after their investments without losing their ‘non-resident’ status. Besides, S. 195 of the Act is also proposed to be amended to provide for deduction of tax at source on payment of interest to non-residents by the Government, public sector banks and public financial institutions only at the time of payment instead of at the time of credit of such income.”
3.2 Period of 150 days or more as occurring in Explanation (b) to S. 6(1) was further increased to the period of 182 days by the Finance Act, 1994. In the Memorandum explaining the provisions of the Finance Bill, 1994, in respect of the fact as to why the period of stay is being increased from 150 days to 182 days, it was mentioned as under :
“Extending the period of stay in India in the case of the non-resident Indians without their losing the non-resident status.
Under the provisions of clause (1) of S. 6 of the Income -tax Act, an individual is said to be resident in India in any previous year, if he has been in India during that year, :
i. for a period or periods amounting to one hundred and eighty-two days or more, or
ii. for a period or periods amounting to sixty days or more and has also been in India within the preceding four years for a period or periods amounting to three hundred and sixty-five days or more.
However, the period of sixty days is increased to one hundred and fifty days in the case of a non-resident Indian, i.e., a citizen of India or a person of Indian origin within the meaning of Explanation to clause (e) of S. 115C of the Act, who, being outside India, comes on a visit to India.
Suggestions have been received to the effect that the aforesaid period of one hundred and fifty days should be increased to one hundred and eighty-two days. This is because the non-resident Indians who have made investments in India, find it necessary to visit India frequently and stay here for proper supervision and control of their investments. The Bill, therefore, seeks to amend clause (b) of the Explanation to S. 6(1)(c) of the Income-tax Act, in order to extend the period of stay in India in the case of the aforesaid individuals from one hundred and fifty days to one hundred and eighty-two days, for being treated as resident in India, in the previous year in which they visit India. Thus, such non-resident Indians would not lose their ‘non-resident’ status if their stay in India, during their visits, is up to one hundred and eighty-one days in a previous year.
The proposed amendment will take effect from 1-4-1995 and will, accordingly, apply in relation to the A.Y. 1995-96 and subsequent years, i.e., each previous year commencing on or after 1-4-1994.”
Analysis and discussion on provisions of S. 6(1)(c) r/w Explanation thereto in respect of A.Y. 2010-11 (F.Y. 2009-10) :
Let us now examine the provisions of S. 6(1)(c) and the Explanation thereto :
4.1 Re-applicability of Explanation (b) to S. 6(1)(c) :
It is very clear that S. 6(1)(a) is not applicable and, therefore, the status of the querist is to be determined as per provisions of S. 6(1)(c) of the Act. S. 6(1)(c) along with Explanation has been reproduced above.
There is also no doubt that the querist was in India for a period amounting to 365 days and more during the four years preceding the F.Y. 2009-10.
As the querist had left India on 25th March,2009, i.e., during the previous year 2008-09, in our opinion, the Explanation (a) will not be applicable as he has not left India during the previous year 2009-10. Explanation (a) applies only to an individual in relation to the previous year in which he leaves India. As the querist has left India on 25th March, 2009, i.e., previous year relevant to the A.Y. 2009-10, Explanation (a) cannot be applied while determining his residential status for A.Y. 2010-11.
In our view, the above-referred Explanation (a) is applicable to that previous year in which the assessee, being a citizen of India, leaves India. It is true that the word ‘any previous year’ is mentioned when an assessee, a citizen of India, leaves India; but then, it is clearly mentioned that provisions of sub-clause (c) of S. 6(1) shall apply in relation to ‘that year’. (Emphasis supplied.) The word ‘that year’ refers to the previous year in which the assessee has left India for the purpose of employment outside India. Hence, clause (a) of Explanation to S. 6(1)(c) will not be applicable in the case of the querist because he has left India in the previous year relevant to the A.Y. 2009-10.
4.2 Re-applicability of Explanation (b) toS. 6(1)(c) :
Let us now consider the querist’s main contention that in case a person has made a visit to India in any previous year, then the words ‘60 days’ as appearing in S. 6(1)(c) should be substituted as 182 days, irrespective of the fact that the assessee came to India permanently upon completion of the assignment during the same previous year. Let us again read Explanation (b) which is as under :
“(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of S. 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words ‘sixty days’, occurring therein, the words ‘one hundred and eighty-two days’ had been substituted.”
Considering the legislative history of amendments and the purpose for which the amendments were introduced, one has to consider the purpose of entry of the person in India during the previous year. If all the entries are in India for the purposes of visit, then the period of 60 days as mentioned in S. 6(1)(c) will be substituted to 182 days. However, in our opinion, if in the previous year, the assessee has come to India permanently after completing his assignment outside India, then the Explanation(b) will not be applicable. In other words, if a person returns to India for stay in India after complet-ing his assignment/employment outside India, he cannot be considered to have come to India ‘on a visit’ and therefore, the criterion of 182 days as pre-scribed in explanation (b) to S. 6(1)(c) would not be applicable.
4.3 Thus, in our opinion, the querist is not entitled to the benefit of either Explanation (a) or Explanation (b) to S. 6(1)(c). Since he was in India for a pe-riod amounting to more than 365 days in the four years prior to 1st April, 2009, and more than 60 days during F.Y. 2009-10, he is a resident of India in F.Y. 2009-10 and, therefore, his salary received for the period of employment outside India is taxable in India, subject to Double Taxation Relief under Article 23 of India-Germany DTAA.
4.4 Our view is strongly supported by the decision of the Bangalore Bench of the Tribunal in the case of Manoj Kumar Reddy v. ITO, (2009) 34 SOT 180 (Bang.). It is also supported by the decision of the Punjab and Haryana High Court in the case of V. K. Ratti v. CIT, (2008) 299 ITR 295/(2007) 165 Taxman 177 (P & H).
4.5 The following important observations of the Bangalore Tribunal in Manoj Kumar Reddy’s case (supra) are also worth noting :
Considering the legislative history of amendments and the purpose for which the amend-ments have been introduced, one has to consider the entry of the person in India during the previous year. If all the entries are in India for the purpose of a visit, then the period of 60 days as mentioned in S. 6(1)(c) will be substituted to 182 days. However, if in the previous year, the assessee has come to India permanently after leaving his employment outside India, then the Explanation (b) will not be applicable. (Para 3.15)
We had already pointed out that a visit to India does not mean that if he comes for one visit, then Explanation (b) to S. 6(1) will be applicable, irrespective of the fact that he came permanently to India during that previous year. Looking to the legislative intention, we hold that the status of the assessee cannot be taken as resident on the ground that he came on a visit to India and, therefore, the period of 60 days as mentioned in S.6(1)(c) should be extended to 182 days by ignoring his subsequent visit to India after completing the deputation outside India. (Para 3.16)
During the course of proceedings before us, the learned AR has raised an alternative contention regarding the status given as resident. The learned AR submitted that 60 days referred to in S. 6(1) should exclude the period of stay in India on visit. If this is not accepted, then it will lead to absurd result as stated in para 2.1 of rejoinder to remand report. The learned AR has tried to explain the absurdity in case the period of stay in India on visit is not excluded. In Example A, the learned AR submitted that a person comes on visit and his stay in India on visit is 120 days. He will be treated as non-resident as per clause (b) of the Explanation. In Example B, if a person comes on visit and stays in India for 90 days and returns abroad and, later on, comes back to India permanently and he stays in India for a period of 30 days, he will become a resident according to the
Assessing Officer. This is because his stay in India has exceeded 60 days if period of visit is also included. In both the cases, the stay is only 120 days. However, in Example B, a person becomes a resident while in Example A, he remains non-resident. (Para 3.17)
Advance ruling in the case of Shri Anurag Chaudhary, (2010) 322 ITR 293 :
Since the querist has strongly relied upon the afore-said advance ruling, let us examine the ruling :
5.1 Brief facts :
In this case, the applicant, an individual, left India for the USA, on deputation to an associate company in the USA on 31st March, 2008 and came back to India, after completion of the assignment on 29th November, 2008. Thus, during the F.Y. 2008-09, he was in India for 122 days. The issue before the AAR was, whether the applicant was non-resident in the F.Y. 2008-09.
5.2 We reproduce the important operative paragraphs of the Ruling :
“From a reading of S. 5(1)(c) it is clear that for the income earned by the applicant on account of employment in the USA to be taxable in India, the applicant should have been resident of India during the relevant previous year. In other words, if the applicant is held to be a ‘resident’ of India during the F.Y. 2008-09, then, his salary income from employment in the USA would be taxable under the Income-tax Act, 1961. S. 6 Ss.(1), which determines the residential status of an individual, requires that either the applicant should have been in India for 182 days [vide clause (a)] or for 60 days or more, if he was in India for 365 days or more in four preceding years [(vide clause (c)]. The Explanation to this sub-section provides that a citizen of India who leaves India for the purpose of employment outside India can be considered as resident of India, if he has been in India for 182 days or more even though he may have been in India for more than 365 days in 4 preceding years. The net effect of S. 6(1) read with the Explanation is that for an individual who has left India for employment outside India, he should be treated as resident of India only if he was in India during the relevant period/year for 182 days or more. In other words, if an individual has spent less than 182 days in India during a previous year and was outside India for the purposes of employment, then regardless of his being in India for 365 days or more during 4 preceding previous years, he cannot be treated as a resident of India.
There is no information regarding the applicant’s stay in India during 4 preceding years. If the applicant was not present in India for more than 365 days in 4 preceding years, then clause (a) of Ss.(1) of S. 6 would apply and it requires stay of 182 days or more in India to be treated as resident. On the other hand, if the applicant was present in India for 365 days or more during 4 preceding few years, then clause (c) of Ss.(1) to S. 6 read with Explanation (a) would apply and it requires stay of 182 days or more for a person who leaves India for employment outside, to be treated as resident of India.
From the facts available in the application, the applicant satisfies neither clause (a), nor clause (c) of S. 6(1) so as to merit treatment as a resident of India during the relevant period. It necessarily follows that the applicant was
‘non-resident’ during the relevant period. Consequently his income that accrued outside India in the USA by reason of his employment there cannot form part of the total income taxable in India. The Department in its comments dated 28-1-2010 has also clarified that the applicant may be treated as NRI as he remained in India for 123 days during the F.Y. 2008-09.
In the light of the foregoing, the question is answered in the negative. To elaborate, the applicant being a non-resident during the previous year 2008-09, the income earned by him from his employment in the USA cannot be taxed under Income-tax Act, 1961.”
5.3 With respect, we are not in agreement with the conclusions of the AAR, as the AAR has not advanced any cogent reasons for arriving at its conclusions. We may mention that the ap-plicant was not present before the AAR and the Tax Department submitted that the applicant may be treated as a non-resident during the F.Y. 2008-09. In our opinion, the decision of the Bangalore Tribunal in Manoj Kumar Reddy’s case (supra) represents a correct and better interpretation of the applicable legal provisions in respect of Explanation (a) and (b) to S. 6(1)(c).
Planning possibilities :
With regard to the hypothetical situation presented by the querist, if the querist would have been deputed to Germany on or after 1st day of April, 2009, Explanation (a) to S. 6(1) would have been applicable and the querist would have been a non-resident in F.Y. 2009-10.
Alternatively, if the querist would have returned to India on or after 1st February, 2010, he would be a non-resident in India in F.Y. 2009-10, as he would have not met the criteria/tests laid down in S. 6(1)(a) or 6(1)(c) for being considered as resident in India.
Summation :
Explanation (a) to S. 6(1)(c) applies only to an individual in relation to the previous year in which he leaves India for the purpose of employment outside India. As the querist had already left India 25th March, 2009, i.e., previous year relevant to the A.Y. 2009-10, Explanation (a) cannot be applied while determining his residential status for A.Y. 2010-11. Hence, clause (a) of Explanation to S. 6(1)(c) will be applicable for the previous year in which an assessee leaves India for the purpose of his employment.
Therefore, in our view Explanation (a) is not applicable in the case of the querist for A.Y 2010-11.
Considering the legislative history of amendments and the purpose for which the amendments have been introduced, one has to consider the purpose of entry of the person in India during the previous year. If all the entries in India are for the purpose of visits, then the period of 60 days as mentioned in S. 6(1)(c) will be substituted to 182 days. However, in our opinion, if in the previous year, as the querist had returned to India permanently after completing his assignment outside India, the Explanation (b) will not be applicable in his case.
Thus, in our opinion, the querist is not entitled to the benefit of either Explanation (a) or Explanation (b) to S. 6(1)(c). Since he was in India for a period amounting to more than 365 days in the four years prior to 1st April, 2009 and present in India for 126 days during F.Y. 2009-10, in our opinion he is a resident of India in F.Y. 2009-10 and, therefore, his salary received for the period of employment out-side India is taxable in India, subject to Double Taxation Relief under Article 23 of India-German DTAA.
Residential status of a foreign company owned by Indian residents
‘Residence’
is one of the primary factors to fasten the tax liability on any taxpayer in a
country, be it an individual, a company or any other entity. Determination of a
residential status of an assessee thus assumes significant importance in
international taxation. Elaborate rules are prescribed in tax laws of every
country and/or in tax treaties prevalent worldwide. Liberalisa-tion of exchange
regulations in India has opened up many opportunities for Indian residents to do
business through global companies incorporated overseas. Many a time, a
controversy arises about the residential status of such companies. In this
write-up, the authors have highlighted crucial aspects of determination of
residential status of a company where control and management assumes
significance over other tests.
1.0 Residential Status under a Tax Treaty :
In order to take advantage of a tax treaty, a company should
be resident of either of the contracting states. Article 4 of the UN Model
Convention (UN MC) and the OECD Model Convention (OECD MC) provide almost
similar definitions except that UN MC also includes place of incorporation as
one of the decisive criteria that may be used for determination of the
residential status in case of entities other than individuals.
Paragraph 1 of Article 4 of the UN MC provides “for the
purposes of this Convention the term ‘resident of a Contracting State’ means any
person who, under the laws of that State, is liable to tax therein by reason of
his domicile, residence, place of incorporation, place of management or any
other criterion of similar nature . . .”
Paragraph 3 of Article 4 further provides that “where by
reason of the provisions of paragraph 1, a person other than an individual is a
resident of both the Contracting States, then it shall be deemed to be a
resident of the Contracting State in which its place of effective management is
situated.”
The place of effective management would be relevant only if
the entity is resident of both the Contracting States.
The position is the same in majority of Indian Tax Treaties.
Thus, a reading of Article 4(1) would show that to determine
the residential status of an assessee in a Contracting State, one has to
necessarily look to the applicable laws of that state and ascertain whether the
assessee is a resident of that Contracting State within the meaning of the laws
of that State1.
Therefore, it is imperative for us to know the provisions of the Income-tax Act
in this regard.
2.0 Residential Status of a Company under the Income-tax Act, 1961 :
U/s.6(3) of the Income-tax Act, 1961, the residential status
of a company is to be determined for the purpose of the said Act in the
following manner :
“(3) A company is said to be resident in India in any
previous year, if :
(i) it is an Indian company; or
(ii) during that year, the control and management of
its affairs is situated wholly in India2.”
U/s.6(3)(ii) of the Act, a company can be said to be a
resident in India if during that year, the control and management of its
affairs is situated wholly in India. Therefore, in the case of a foreign
company, even if some control and management is exercised from outside India, it
would not fall within the ambit of S. 6(3)(ii) of the Act and the company would
be treated as a non-resident. This concept is opposite to the concept of
determining a residential status of HUF, firm or AOP in terms of S. 6(2) of the
Income-tax Act, wherein the entities shall be resident in India even if partial
control and management of their affairs is situated in India. While in the case
of HUF, firm or AOP, it is incumbent on the assessee to establish that control
is wholly outside India for them to be treated as a non-resident, in the
case of a company the Income-tax Department has to establish that the control
and management of its affairs is situated wholly in India for the company to be
treated as a resident in India. The above view finds support from the decision
in the case of Narottam & Pereira Ltd. v. CIT, (1953) 23 ITR 454 (Bom.).
2.1 Meaning of the term ‘Control and Management’ :
The meaning of the expression ‘control and management’ as
used in S. 6(3)(ii) of the Act was the subject-matter of judicial interpretation
in the past. The legal position is now well settled that the expression ‘control
and management’ means control and management and not carrying on a day-to-day
business3.
What is decisive is not the place where the management
directives take effect, but rather the place where they are given. (Klaus Vogel
on Double Taxation Conventions, Para 105 on page 262) Thus, it is ‘planning’ and
not ‘execution’ which is decisive.
Control and management signifies the controlling and
directive power, the head and brain. The head and brain of a company can be
considered to be located at the place where the company does business which
yields profits. [Narottam and Pereira Ltd. v. CIT, (supra)].
In the case of V.V.R. N. M. Subbaya Chettiar v. CIT,
(1951) 19 ITR 168, the Supreme Court held that even a partial control of the
company outside India is sufficient to hold the company as a non-resident.
In the case of CIT v. Nandlal Gandalal, (1960) 40 ITR 1, the Supreme Court has given guidelines as to how the expression ‘control and management’ would operate in different cases. The guidelines in respect of determination of control and management for individuals and companies as mentioned in Nandlal’s case are given below for the benefit of our readers:
- The words’ control and management’ have been figuratively described as ‘the head and brain’.
- In the case of an individual, the test is not necessary because his residence for a certain period is enough; it being clear that within the taxable territories he would necessarily have his ‘head and brain’ with him.
- The head and brain of a company is the Board of Directors and if the Board of Directors exercise complete local control’, then the company is also deemed to be resident.
In the case of Radha Rani Holdings (P.)Ltd.”, it was held that “since the Board of Directors, subject to the overall supervision of shareholders, actually control and manage the affairs of a company effectively as against the day-to-day operation of the company, the situs of the Board of Directors of the company should determine the place of control and management of the company. This does not mean where one or more of the Directors normally reside, but where the Board actually meets for the purpose of determination of the key issues relating to the company.”
In the case of Saraswati Holding Corpn. Inc, the Delhi Tribunal held that “the law is well settled that control and management of affairs does not mean the control and management of the day-to-day affairs of the business. The fact that discretion to conduct operations of business is given to some person in India would not be sufficient. The word ‘control and management of affairs’ refers to head and brain, which directs the affairs of policy, finance, disposal of profits and such other vital things consisting the general and corporate affairs of the company.”
From the above discussion, it is clear that under the provisions of the Income-tax Act, 1961, even if a part of the company’s affairs are controlled and managed from outside India, then such a company would be regarded as a non-resident of India.
3.0 Tie-breaking in case of Dual Residence of a Company:
As seen earlier in terms of Paragraph 3 of Article 4 of the UNMC, when an entity is resident of both the Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated. However, this presupposes that the entity is resident of both Contracting States. However, in case of Saraswati Holding Corpn. Inc (supra), the Assessing Officer applied the tests of place of effective management to a company which was resident only of Mauritius. The observations of the Delhi Tribunal are worth noting here:
“In the present case it is noticed that the asses-see is a company incorporated in Mauritius. The assessee is not an Indian company. Therefore, the residential status of the assessee has to be determined on the basis of the test laid down in S. 6(3)(ii) of the Act, which provides that during the previous year the control and management of the affairs of the company should be situated wholly in India. It is only when the above test is satis-fied that the provisions of Article 4(3) of the DTAA between India and Mauritius will stand attracted. It is only in such a situation that the test of determining the residential status of the company by looking at the place of day-to-day management of the company can be resorted to. The Assessing Officer as well as the CIT (Appeals) in total disregard of the above legal position have proceeded to analyse the place of effective management of the assessee. This was impermissible in law.”
It must be understood that the test laid down in S. 6(3)(ii) of the Act is different from the test of place of effective management contemplated by Article 4(3) of a tax treaty. While the former deals with the fact of ascertaining the place of ‘control and management’ (in the Indian context whether the same are being situated wholly in India or not ?), the latter deals with ‘place of effective management’. In every treaty situation, before invoking provisions of Article 4(3), in respect of a non-resident company for its source of income in India, one has to first satisfy the test laid down u/ s.6(3)(ii) of the Act. By doing so the non-resident company would be regarded as resident of both the Contracting States, namely, (State of Source and Residence) and then the ‘place of effective management’ criteria would be used to break the tie.
In other words, a tax treaty requires the test of ‘place of effective management’ to be applied only for the purposes of the tie-breaker clause in Article 4(3) which could be applied only when it is found that a person other than an individual is a resident of both Contracting States. There is no purpose or justification in applying treaty provisions in this respect in any other situation.
4.0 Meaning of the term ‘Place of Effective Management’ :
The OECD Model Commentary? states that “The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made. The place of effective management will ordinarily be the place where the most senior person or group or persons (for example board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined”. According to the UN Model Commentary in determining the place of effective management, the relevant criteria are: (i) the place where a company is actually managed and controlled, (ii) the place where the decision-making at the highest level on the important policies essential for the management of the company takes place, the place that plays a leading part in the management of a company from an economic and functional point of view, and (iv) the place where the most important accounting books are kept.
To summarise, the criteria generally adopted to identify Place of Effective Management under the treaty are:
- Where the head and the brain is situated.
- Where de facto control is exercised and not where ultimate power of control exists. Where top-level management is situated. Where business operations are carried out. Where directors reside.
- Where the entity is incorporated
- Where shareholders make key management & commercial decisions.
- According to Dr. Klaus Vogel, place of effective management exists where management directives are given and not where they take effect.
The place of residence of a manager who exercises control could also be relevant.
As stated earlier in case of Radha Rani Holdings (P.) Ltd. (supra), it is the situs of the Board of Directors of the company and the place where the Board actually meets for the purpose of determination of the key issues relating to the company, which would be relevant in determining the place of control and management of a company.
5.0 Summation:
The residential status of a company first has to be determined under the domestic tax law of the relevant country. In the Indian context what is relevant is the place of control and management. In order for a foreign company to be resident of India, its control and management should be situated wholly in India. Even if some control and management is situated outside India, then the company cannot be treated as resident of India. By applying the criteria under the domestic tax laws, if the company is found to be resident of both the Contracting States of a Tax Treaty, then and then only the tie-breaking test in terms of ‘Place of Effective Management’ should be applied. In such a scenario the company would be deemed to be resident of the Contracting State from where it is effectively controlled and managed. The place of management of a company exists where management directives are given and not where they take effect. It is also important to note that what is contemplated is de facto control and management and not merely power to control.
Operation and Maintenance Service — whether Consulting Engineering Service
II. Tribunal :
9. Operation and Maintenance Service — whether Consulting Engineering
Service ?
GVK Power & Infrastructure Ltd. v. CC., CE., S.T.
Visakhapatnam, 2008 (10) STR 146 (Tri.-Bang).
â A demand was raised
on the appellant under ‘Consulting Engineer’ service for the activity of
operation and maintenance of power plant. The Commissioner (Appeals) upheld the
same and remanded the case back to find out value of services relating to
consultancy and recompute the duty liability.
The appellant contended that their contract was not of an
engineering consultancy. They relied upon the decision of M/s. Rolls Royce
Industries Power (I) Ltd. v. CCE, 2006 (3) STR 292, wherein it was held that
it is the responsibility of the operator to operate the plant smoothly and if
any engineering problem arose, it was his responsibility to find out solution
and operate the machine. The operator was not required to render advice or
consultancy, no service tax was payable.
Citing Daelim’s case, the act of the Commissioner (Appeals)
to remand the case for recalculation was not accepted.
GVK Power Infrastructure Ltd. v. CCE, 2008 (10) STER 146
(Tri. Bang).
â The service on
providing operation and maintenance (O&M) power plant was treated by the Revenue
as Consulting Engineering Service. The facts of the case were considered
identical to those existed in the case of M/s. Rolls Royce Industries Power
(I) Ltd. v. CCE, 2006 (3) STR 292 (Tri.). Further, the Rolls Royce case was
followed by the Chennai Bench in the case of CMS (I) Operations & Maintenance
Co. Pvt. Ltd. v. CCE, Pondicherry 2007 (7) STR 369 (Tri.). Relying on the
ratio of these decisions and also considering the Daelim’s case 2006 (3) STR 124
(Trib.) that contract cannot be vivisected to levy tax on a part of the
contract, the appeal was set aside.
Non payment of tax collected
II. Tribunal :
8. Non payment of tax collected :
Febin Advertisers v. CCE, Calicut, [2008 (10) STR 50
(Tri.-Bang)]
â Tax was demanded on
collection of rentals for hoardings under Advertising Service. The appel-lant’s
contention that they rented spaces for display of advertisement did not provide
‘Advertising Service’ was upheld. However, for collecting service tax and not
paying to the Government, interest and penalty were levied.
New evidences produced by authorities relied upon
II. Tribunal :
7. New evidences produced by authorities relied upon :
Shrinath Tourist Agency v. CCE, Jaipur, [2008 13 STT 176
(New Delhi – CESTAT)].
â Service tax along
with penalty was demanded from the appellant under the category of Tour
Operator. The appellant contended that they were only booking agents of other
tour operators and were not covered as tour operators. Copies of the agents’
licence issued by the RTO, Udaipur were produced in support of contention.
The Revenue challenged this after getting information from
the RTO, Udaipur that the appellant was having 19 all-India tourist permits and
produced copy of letter received from the RTO, Udaipur. Thus, the Revenue
claimed that the appellant had tour permits and was working as tour operator and
therefore liable for service tax as tour operator.
It was held that since the evidence produced by the Revenue
was not available before the lower authority, the case was fit to be remanded to
the adjudicating authority.
Mining Service — Interpretation issue
II. Tribunal :
6. Mining Service — Interpretation issue :
National Mining Co. Ltd. v. CCE, Dibrugarh, 2008 (10) STR
136 (Tri. – Kolkata)
â Service tax with
interest and penalty was demanded by the Revenue under the category of ‘Site
Formation & Clearance, Excavation and Earth-moving and Demolition Services’ on
receipts of the appellant in pursuance of contract with M/s. North Eastern Coal
Field, Coal India Ltd., Assam.
The appellant had collected tax amount from the client and
hence did not contest the tax amount in the appeal. They challenged the levy of
interest and penalty, contending that services rendered were in the nature of
mining service which was brought under the tax net w.e.f. 1-6-2007 and therefore
for period prior to 1-6-2007, no service was taxable and liability of interest
and penalty did not arise.
It was held that since liability of tax was not challenged by
the appellant, interest was required to be discharged. However, penalty was set
aside, based on disputed nature of service, interpretation of the scope of
service and the facts of appellant’s discharge of service tax liability.
Delay in filing appeal
II. Tribunal :
5. Delay in filing appeal :
Encore Events v. Commissioner of Central Excise, Bangalore,
(2008) 13 STT 173 (Bang – CESTAT).
â The Commissioner
(Appeals) dismissed the appeal filed as barred by limitation. The appellant
filed appeal along with an application for condonation of delay, on the ground
that they received the order only on 8-9-2006. After verifying the facts with
the postal authorities it was found that order was dispatched on 2-1-2006 and
received by the appellant on 5-1-2006, the Commissioner (Appeals) for want of
reason in support of delay dismissed the same.
On verifying records and findings of the Commissioner
(Appeals) that postal acknowledgement contained seal and signature of the
appellant confirming the receipt of order on 5-1-2006, dismissed the appeal.
Chartered Accountant’s Service
II. Tribunal :
3. Chartered Accountant’s Service :
Sri Mogam Pullaiah v. CCE, Guntur (2008 TIOL 469 CESTAT
BANG).
â The appellant, a
chartered accountant, entered into contract with APCPDCL/AP Transco to carry out
the activity of billing for them. The Revenue demanded service tax under
Chartered Accountancy Service on receipts from such activity.
The appellant contended that billing was only a clerical
activity and such contracts were even granted to non-chartered accountants. The
work was done by staff who were not even SSC. The Tribunal relied on the
decision rendered by the Larger Bench in the case of CCE v. Umakanth & Co.
and allowed the appeal.
Cargo Handling Service
II. Tribunal :
2. Cargo Handling Service :
CCE, Jaipur-I v. Laxmi Trading Co. (2008 TIOL 541 CESTAT
DEL)
â The appellant entered
into contract of transportation of limestone from mines. Through the said
contract, it undertook series of services like mining, loading, transporting &
unloading, all incidental to the main contract. The demand was raised alleging
that loading and unloading service was liable for service tax under Cargo
Handling Service specifying that out of total billing, the amount attributable
to loading can be separated and be subjected to tax.
The Tribunal upheld the finding of the Commissioner (Appeals)
that bills have been raised for transportation of limestone and work of
loading/unloading was incidental to the transportation of limestone and
accordingly, not liable for service tax. Further, it was observed that
incidental activities were required to carry out the work of transportation and
therefore, the services rendered by the appellant to himself to execute the
contract cannot be made liable for service tax.