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S. 234B — Assessee is not liable to pay interest u/s.234B when by retrospective amendment made later the amount becomes taxable. The fact that administrative relief can be obtained by the assessee cannot erode the powers of the Tribunal while dealing with

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Part B :
Unreported
Decisions

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

 

 


5 Sun Petrochemicals Pvt. Ltd. v. ITO
ITAT ‘D’ Bench, Ahmedabad
Before R. V. Easwar (VP) and D. C. Agarwal (AM)
ITA No. 1010/Ahd./2009


A.Y. : 2006-07. Decided on : 5-6-2009 Counsel for assessee/revenue
: S. C. Jalan/ Abani Kanta Nayak

S. 234B — Assessee is not liable to pay interest u/s.234B
when by retrospective amendment made later the amount becomes taxable. The fact
that administrative relief can be obtained by the assessee cannot erode the
powers of the Tribunal while dealing with a valid appeal laid before it.

Per R. V. Easwar :

Facts :

The assessee company while computing book profit u/s.115JB of
the Act deducted the deferred tax amounting to Rs.4,94,21,478 and fringe benefit
tax of Rs.62,279. At the time when the assessee filed the return of income,
there was no specific provision in the Section to the effect that deferred tax
was not deductible while arriving at the book profit. However, by the Finance
Act, 2008 an amendment was made to the Section with retrospective effect from
1-4-2001, that is, w.e.f. A.Y. 2001-02, that the deferred tax cannot be deducted
in arriving at the book profit.

The Assessing Officer (AO) in the order passed u/s.143(3) of
the Act computed the book profits by adding back the amount of deferred tax and
fringe benefit tax to book profits computed by the assessee and gave a direction
to charge interest accordingly. Aggrieved the assessee filed an appeal to the
CIT(A) on the ground that levy of interest was illegal since the amount of
deferred tax became liable to be added to the book profit only because of the
retrospective amendment made to the Section which could not be anticipated by
the assessee.

The CIT(A) was of the view that levy of interest was
mandatory and power was vested with the CBDT to waive or reduce the same,
subject to certain conditions, one of which is that no interest can be charged
if addition or disallowance is due to a retrospective amendment in law. He
upheld the levy but held that it was open to the assessee to seek
waiver/reduction from the CCIT/DGIT.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal held that the following judgments support the
case of the assessee :

(1) CIT v. Revathi Equipment Limited, (298 ITR 67) (Mad.)

(2) Haryana Warehousing Corporation v. DCIT, (75 ITD 155)
(TM)

(3) Priyanka Overseas Ltd. v. DCIT, (79 ITD 353) (Del.)

(4) ACIT v. Jindal Irrigation Systems Ltd., (56 ITD 164) (Hyd.)

It observed that the judgment of the Madras High Court is a
case of liability arising on account of a retrospective amendment, as in the
present case. It held that levy of interest in respect of the amount of deferred
tax deducted while arriving at the book profit in the return is invalid.

As regards the argument raised at the time of hearing that
since powers of reduction/waiver are vested in the CBDT whether the Tribunal can
examine the validity of the levy of interest, the Tribunal having noted that the
Supreme Court has in the case of Central Provinces Manganese Ore (160 ITR 961)
held that if the assessee denies his liability to pay interest the appeal on
that point was maintainable. Based on the ratio of the decision of the Apex
Court and also having noted that there is no express or implied restriction on
the powers of the Tribunal while disposing of the appeal, it held that the appeal of the assessee is
maintainable. It further held that the fact that the administrative relief can
be obtained by the assessee cannot erode the powers of the Tribunal while
dealing with a valid appeal before it.

The appeal filed by the assessee was partly allowed.

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Section 254 — Ex-parte order passed for non-appearance as the assessee’s representative went to attend phone call when the matter came up for hearing – Whether reasonable and sufficient ground for non-appearance — Held : Yes.

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  1. Ajanta Offset & Packaging Ltd. vs. DCIT

ITAT
Delhi Bench ‘Friday’ New Delhi

Before I. P. Bansal (J.M.) and R. C. Sharma (A.M.)

MA No.459/D/08 in ITA No.1510/Del./2007

A. Y.
2001-02. Decided on 27.03.2009


Counsel for Revenue/Assessee : V. P. Gupta and Basant Kumar/B. K. Gupta

 

Section 254 — Ex-parte order passed for non-appearance as
the assessee’s representative went to attend phone call when the matter came
up for hearing – Whether reasonable and sufficient ground for non-appearance —
Held : Yes.

Per I. P. Bansal

Facts :

Vide
miscellaneous application the assessee has sought recall of the ex-parte
order passed by the Tribunal. According to the assessee, its director was
present in the Court for taking adjournment, as the counsel of the assessee
was busy in the High Court waiting for his turn. When the case of the assessee
was to come for hearing, the director had gone out of the Courtroom to attend
to the phone call and when he came back, the case was already decided as
ex-parte.

Held :

The
Tribunal was satisfied with the explanation and held that the assessee was
prevented by reasonable and sufficient cause for non-appearance before the
Tribunal. Accordingly, as per Rule 24 of the Appellate Tribunal Rules, 1983,
the ex-parte order passed was set aside.

Note :

All the decisions
reported above are selected from the website www.itatindia.com.

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Section 36 (i)(iii) — Allowance of interest paid — Where interest-free fund was more than the alleged investment in non-business assets, whether the interest paid could be disallowed —Held : No.

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  1. Almona Investment & Marketing Pvt. Ltd. vs.
    ITO

ITAT Mumbai
Bench ‘A’ Mumbai.

Before R. S. Syal (A.M.) and Asha Vijayaraghavan (J.M.)

ITA No. 4908/Mum/2006

A. Y.
2003-2004. Decided on : 30.03.2009

Counsel for
Assessee/Revenue : Hiro Rai/Sanjeev Jain.

Section 36 (i)(iii)
— Allowance of interest paid — Where interest-free fund was more than the
alleged investment in non-business assets, whether the interest paid could be
disallowed —Held : No.

 

Per R. S. Syal

Facts :

The assessee was a non-banking finance company.
As per its accounts, the accumulated loss was of Rs.52.2 lacs. It had claimed
deduction of Rs.4.37 lacs towards interest. The AO noted that the assessee had
invested Rs.40 lacs in shares, which according to it, was not for the purpose
of the business activity of the assessee company. Therefore, the entire amount
of interest of Rs.4.37 lacs was disallowed. On appeal the CIT(A) upheld the
order of the AO.

Held :

From the accounts of the assessee the Tribunal
noted that the assessee had interest-free loan and share capital aggregating
to Rs.1.26 lacs and after adjusting the debit balance in the Profit and Loss
account, the net interest free funds available at the disposal of the assessee
was of around Rs.53 lacs. As against this, the investment in the shares was
only to the tune of Rs.40 lacs. The Tribunal referred to the decision of the
Mumbai High Court in the case of Reliance Utilities & Power Ltd. where it was
held that if there were funds, both interest-free and interest bearing, then a
presumption would be that the investment would be out of the interest-free
fund generated or available with the company, if the interest-free funds were
sufficient to meet the investments. Relying on the same, it held that since in
the case of the assessee, the interest-free funds were more than the
investment made in shares, the sustenance of disallowance of interest by the
CIT(A) was not justified.

Case referred to :

CIT vs. Reliance Utilities & Power Ltd.,
(2009) 18 DTR (Bom) 1.

Editor’s Note :

During the relevant
assessment year, dividend income was taxable.

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Section 32 — Depreciation — Income assessed applying the net profit rate of 8% to the turnover — Whether the assessee’s claim for allowance of depreciation from the income so determined tenable — Held : Yes.

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New Page 1ACIT vs. Keshav Kumar Tiwari


ITAT Delhi
Bench ‘H’ New Delhi

Before G. C. Gupta (J.M.) and K. G. Bansal (A.M.)

ITA No.1386/Del/2005

A. Y.
1999-2000. Decided on : 13.03.2009

Counsel for
Revenue/Assessee : Jagdeep Goel/O. P. Sapra

Section 32 —
Depreciation — Income assessed applying the net profit rate of 8% to the
turnover — Whether the assessee’s claim for allowance of depreciation from the
income so determined tenable — Held : Yes.

 

Per G. C. Gupta

Facts :

The assessee
failed to produce books of account and supporting vouchers before the AO. He
applied the provisions of Section 44AD and assessed the income. He rejected
the assessee’s claim to allow depreciation out of the income estimated. Before
the CIT(A) the assessee contended that since his turnover was more than Rs.40
lacs, the provisions of Section 44AD were not applicable, hence its claim for
depreciation was justifiable. The CIT(A) accepted the assessee’s contention
and allowed the appeal of the assessee.

Before the
Tribunal the Revenue accepted the fact that the turnover was above Rs.40 lacs.
However, it justified the action of the AO in applying the provisions of
Section 44AD, as according to it, the correctness of the accounts statement
filed by the assessee was not verifiable and all the conditions for
application of the said provisions were present and satisfied. For the same,
it relied on the Board Circular no. 684, dt. 10.06.1994.

Held :

The Tribunal
accepted the contention of the assessee and held that since the turnover of
the assessee was more than Rs. 40 lacs, the provisions of Section 44AD were
not applicable. It also held that the Revenue was justified in rejecting the
book result and in applying a flat rate of 8%, though the issue admittedly was
not before it. However, as regards the allowance of depreciation, it held in
favour of the assessee by relying on the decision of the Allahabad high court
in the case of Bishambhar Dayal & Co. and upheld the order of the CIT(A).

Cases referred to :

CIT vs.
Bishambhar Dayal & Co., 210 ITR 118 (All.)

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Section 41(1) — Whether the sum of Rs.1,77,27,681 reflected in the Balance Sheet of the assessee as on 31.3.1996 and thereafter carried forward in all subsequent balance sheets till 31.3.2002, which sum represented untaxed income of A.Ys. 1995-96 and 1996

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New Page 1ACIT vs. Amit Anil Biswas


ITAT ‘F’ Bench, Mumbai.

Before Sunil Kumar Yadav (JM) and D. Karunakara
Rao (AM)

ITA No. 1019/Mum/2006 and ITA No. 5762/Mum/2006

A.Ys. : 1997-98 and
2003-04. Decided on : 30.3.2009.

Counsel for Revenue/Assessee : None/Arvind
Sonde

Section 41(1) —
Whether the sum of Rs.1,77,27,681 reflected in the Balance Sheet of the
assessee as on 31.3.1996 and thereafter carried forward in all subsequent
balance sheets till 31.3.2002, which sum represented untaxed income of A.Ys.
1995-96 and 1996-97, could be taxed in AY 2003-04 on the ground that upon
transfer to capital account during the financial year 2002-03 it has assumed
the character of income, as it was no more payable and did not represent
liability as falsely disclosed in the accounts by the assessee — Held : No.

 

Per Sunil Kumar Yadav :

Facts :

The assessee had received professional fees for
executing off-shore project during the financial years 1994-95 and 1995-96.
The gross bills raised in relation to the work were to the tune of
Rs.2,46,95,375 and after setting off various expenses and amounts written off,
the net professional fees were to the tune of Rs.1,77,27,681. This sum was
grouped under ‘current liabilities’ as off-shore project advances in the
balance sheet as on 31.3.1996 and then carried forward to subsequent years
till 31.3.2002. During the financial year 2002-03, this amount of
Rs.1,77,27,681 was transferred by the assessee to his capital account.

The Assessing Officer (AO) added this sum on a
protective basis to the income of the assessee for the AY 1997-98, after
reopening the assessment on the ground that the assessee had earned this
income in that assessment year and also made an addition on substantive basis
in AY 2003-04 on the ground that this amount had assumed the character of
taxable income, as it was no more payable and did not represent any liability
as falsely disclosed in the accounts by the assessee. The AO invoked the
provisions of S. 41(1) of the Act. He also held that the opening balance was a
Revenue receipt which was transferred to capital account in financial year
2002-03 and therefore this amount was taxed by him on a substantive basis as
income of AY 2003-04.

The CIT(A) decided the issue in favour of the
assessee and held that the income had accrued during the financial year
relevant to A.Y.s 1995-96 and 1996-97 and only because of transfer of receipt
to the capital account in the year relevant to AY 2003-04, it cannot be held
to be taxable in AY 2003-04.

Aggrieved, the Revenue preferred an appeal to the
Tribunal.

Held :

On perusal of the documents filed, the Tribunal
noted the following facts :

The agreement for rendering particular services
was executed on 23rd Feb., 1995 between the assessee and Mazgaon Docks Ltd.
and according to the work schedule, the required work was to be completed
pre-monsoon 1995. The invoices were raised between 23rd March, 1995 to 26th
April, 1995. The work was completed before start of the monsoon. The payments
were received by the assessee between 6.4.1995 to 1.6.1995. While making
payments, the payer had deducted TDS. Accounts were finally settled within
financial year 1996-97.

Based on the above facts, the Tribunal held that
as per mercantile system of accounting the income was earned by the assessee
in AY 1996-97, though the assessee had grouped this receipt as current
liability. The Tribunal observed that any nomenclature given to a Revenue
receipt would not change its character. It observed that it is unfortunate
that this income generated by the assessee was not noticed by the Revenue and
the treatment given by the assessee to this receipt was accepted by them. In
AY 2003-04 when the assessee transferred the amount to capital account, the
Revenue realised its mistake and tried to tax this as income in AY 2003-04 or
in AY 1997-98 by reopening the assessment. The Tribunal held that since the
income was not generated in those assessment years it cannot be taxed by
applying any method of accounting. The Tribunal observed that the Revenue
should be more vigilant to keep a check and make necessary verification if
they have any doubt, but they have no power to tax the income of a different
assessment year in a year in which they notice the mischief committed by the
assessee. The Tribunal held that the law in this regard is very clear that the
Revenue can make the assessment of any undisclosed income within the
permissible limit, but they cannot tax the income of different assessment
years in a year in which they notice it.

The Tribunal confirmed the order of the CIT(A).

Case referred :


1 CIT vs.
T. V. Sundaram Iyengar & Sons Ltd., 222 ITR 344 (SC).

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Section 36(1)(vii) r.w.s. 36(2), S. 28 — Whether loss due to irrecoverability of security deposit given for taking godown on rent is allowable as a business loss — Held : Yes.

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  1. ACIT vs. Foseco India Ltd.

ITAT ‘F’ Bench, Mumbai

Before R. S. Syal (AM) and V. Durga Rao (JM)

ITA No. 7307/Mum/2007 and CO No. 63/Mum/2008

A.Y. : 2003-04. Decided
on : 25.3.2009.

Counsel for Revenue/Assessee : J.
V. D. Langstich/H. P. Mahajani.

Section 36(1)(vii)
r.w.s. 36(2), S. 28 — Whether loss due to irrecoverability of security deposit
given for taking godown on rent is allowable as a business loss — Held : Yes.

Per R. S. Syal :

 

Facts :

The assessee had given a security deposit of
Rs.5,00,000 to one Mr. Agrawal for taking his godown on rent. The assessee
stated that the owner had not returned the money and accordingly claimed the
same as ‘bad debt’. This amount was written off by the assessee. The Assessing
Officer (AO) held that since the provisions of S. 36(2) were not fulfilled the
claim for bad debt could not be allowed. No relief was allowed in the first
appeal. On an appeal to the Tribunal,

Held :

Sub-Section (2) of Section 36 provides that no
deduction for bad debt shall be allowed unless such debt or part thereof has
been taken into account in computing the income of the assessee of the
previous year in which the amount of such debt or part thereof is written off
or of an earlier previous year, or represents money lent in the ordinary
course of business of banking or money lending which is carried on by the
assessee.

The Tribunal noted that this amount was not taken
into account in computing the income of the assessee of an earlier or current
year.

Satisfaction of the provisions of S. 36(2) is a
pre-condition for claiming deduction u/s. 36(1)(vii). Since the assessee had
not satisfied the provisions of S. 36(2), it was not entitled to claim
deduction u/s 36(1)(vii).

However, the Tribunal noted that the amount was
given as security for acquiring godown for carrying on the business. The
Tribunal noted that the Apex Court has in the case of Mysore Sugar Co. held
that loss due to irrecoverable advance/security given for the purpose of trade
is allowable. The Tribunal also noted that the Bombay High Court had in the
case of IBM World Trade Corporation held that the money advanced by the
assessee to the landlord for the purposes of and in connection with the
acquisition of the premises on lease was not recoverable, such loss of advance
was a business loss.

The Tribunal found the facts of the present case
to be on all fours with the facts of the case before the Bombay High Court. It
accordingly allowed this ground of the cross-objection.

Cases referred :



1 CIT vs. Mysore Sugar Co. Ltd., 46 ITR
649 (SC)

2 IBM World Trade Corporation Ltd. vs. CIT,
186 ITR 412 (Bom).

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Appellant claimed CENVAT credit — Based on delivery notes — Revenue’s contention — Delivery notes cannot be considered as valid documents for availment — Held, credit cannot be denied — Delivery notes valid for availment of credit.

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(2012) 25 STR 428 (Kar.) — CCE, Bangalore v. Saturn Industries.

Appellant claimed CENVAT credit — Based on de-livery notes — Revenue’s contention — Delivery notes cannot be considered as valid documents for availment — Held, credit cannot be denied — Delivery notes valid for availment of credit.


Facts:

The appellant claimed CENVAT/Modvat of the duty paid on the basis of the delivery notes. The Revenue in its appeal against the Tribunal’s order, contended that delivery notes cannot be considered as valid legal document for availment of the credit.

Held:

It was held that the benefit cannot be denied on the grounds of non-compliance with procedures when sufficient evidence about the duty payment on inputs was available on records.

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Basic design services provided by US entity which includes preparation of plan, concept design, schematic design, design development and other related consultancy services during construction phase are part of architectural services provided by the US ent

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New Page 1Part C : Tribunal &
AAR International Tax Decisions

8 HMS Real Estate
(2010) TIOL 17 ARA-IT
Article 12 of the India-US DTAA,
S. 115A & S. 195 of the Income-tax Act
Dated : 18-3-2010

Basic design services provided by US entity which includes
preparation of plan, concept design, schematic design, design development and
other related consultancy services during construction phase are part of
architectural services provided by the US entity. Payment received for such
services are fees for included services as it involved development and transfer
of technical plan and design. The agreement needs to be read having regard to
the predominant features of the contract and by taking into account crux and
substance of the contract.

Remittance made to the US entity for making payment to
consultants for the services rendered by such consultants directly to the
taxpayer represents reimbursement of actual expenses and does not represent
income chargeable to tax.

Facts :

The US entity entered into agreement with the Indian company
for providing architectural design services in connection with development and
management of commercial real estate project of ICO. In terms of the agreement,
the US entity was obliged to develop master plan, prepare concept design,
schematic designs, etc. Additionally, it was also obliged to :

(i) understand the specifications from ICO and get the
designs approved by ICO;

(ii) assist ICO in bidding and contractor selection
process;

(iii) observe construction progress;

(iv) provide alternative proposals for cost reduction; and

(v) co-operate with the local director in getting the
requisite approvals or modify the designs to conform with the regulations,
etc.

The agreement was for a fixed fee. The fee was payable on the
basis of the milestones achieved. The US entity was also entitled to
reimbursement of fees paid by it to the consultants who assisted the US entity
in rendering services if such consultants were appointed with the consent of ICO.

For rendering services, personnel of the US entity were
present in India for a period of 50 days. There was no dispute that the presence
of the US entity did not result in emergence of service PE in India.

ICO as a payer contended that substantial portion of the
consideration was for transfer and sale of designs on an outright basis. By
relying on the specific provision of the agreement, it was contended by ICO that
all the rights in designs, including right to use the designs for the other
projects vested in ICO. Hence, the contract was for sale of design which was
concluded outside India and hence not taxable, either under the IT Act or in
terms of DTAA.

AAR held :

  • The AAR rejected contention of the ICO that the agreement
    merely involved transfer of right, title and interest in the drawings, models
    and work product and that the transaction can be regarded as one of sale of
    designs. The AAR concluded that the contract was for rendering of services
    having regard to the following :

  1. The agreement needs to
    be read as a whole. The true scope and dominant object of the contract needs
    to be ascertained having regard to the predominant features of the contract
    and by taking holistic view of the matter.


  2. The US entity developed
    the designs after in depth interview with ICO and participated as an expert
    service provider at every stage from the conceptualisation till the stage of
    completion. This supported that the contract was a service contract.


  3. The role of the
    applicant did not end upon transfer of plans, drawings and designs.

  4. The substance
    and crux of the contract was rendering of services and the sale of designs
    was incidental. To contend that the essence of the contract was the sale of
    designs, models and that the services were to distort and stultify true
    nature and dominant purpose of the contract.



  • The consideration
    was for development and transfer of a technical plan and designs, which is
    specifically covered as fees for included services. Article 12(4)(b) covers
    transfer of technical plan or design which arises as a sequel to and as an
    integral part of the service contract.

  • The decision of
    the Calcutta High Court in CIT v. Davy Ashmore, (190 ITR 626) is
    distinguishable as that case involved transfer of designs which were already
    available on an outright basis and did not appear to be a case of tailor-made
    designs and drawings.


  • The remittance
    made to the US entity for reimbursements towards the fees of the consultants
    who assisted the US entity in rendering architectural services and who were
    appointed with the consent of ICO represented remittance towards reimbursement
    of actual expenses. Accordingly, it was not income chargeable to tax.

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Branch Transfer of Parts, Components vis-à-vis Inter-State Sale

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The issue whether transfer of goods from head office to a branch office is a branch transfer or inter- State sale is always highly debatable. As per section 6A(1) of the CST Act, 1956, when the transfer is not pursuant to a pre-existing contract of sale, it will amount to a branch transfer. However, whether the movement from head office to a branch or from one branch to another branch in another State is due to the pre-existing sale contract or not is a contentious issue and has to be decided on facts of the case. There are number of judgments, which throw light on the above subject.

Branch transfer of goods can be of two types, (a) finished goods and (b) intermediatory goods. In case of finished goods, there can be factual position that the goods have been moved because of a pre-existing sale order and hence it may amount to inter-State sale. However, in respect of intermediatory goods like parts and components, the situation may be different. Some aspects about transfer of components and parts can be examined as under:

Reference can be made to judgment of the Andhra Pradesh High Court in the case of Bharat Electronics Ltd. v. Deputy Commissioner (CT), No. II Division, Vijayawada & Another, (46 VST 179) (AP). The facts in this case are that the unit of the above appellant dealer at Machilipatnam in Andhra Pradesh dispatched certain materials to its branch in another State. The goods dispatched were manufactured goods at Machilipatnam, like night-vision devices, etc. The said goods were to be incorporated in the equipment manufactured at the branch in another State (where the goods were dispatched) and the finished goods were supplied by that branch to the customer. On the sale of finished goods, tax was discharged in the said State of sale. However, the Andhra Pradesh authorities disallowed branch transfer claim on the ground that such transfer was connected with pre-existing sale order and hence it G. G. Goyal Chartered Accountant C. B. Thakar Advocate VAT was inter-State sale. The issue was contested before the Andhra Pradesh High Court.

The High Court examined the nature of inter-State sale and its requirements. The High Court referred to observations in the case of K.C.P. Ltd. (Ramakrishna Cements) 1993 (88 STC 374) (AP) and reproduced following portion:

“that the company may have several units or divisions located at different places engaged either in the same line of manufacture or trading or in different manufacturing or trading activities. Normally, the units or divisions will have no separate identity of their own, much less a distinct legal entity. There may be separate establishments, separate planning and separate management, but these aspects by themselves do not detract from the basic characteristic of communion with the corporate body that had created these units or divisions. They can claim no independent existence apart from the company itself. The property of these units or divisions is legally held by the company. The profits generated by the units formed part of the company’s income and would go to the benefit of the general body of shareholders of the company. So also, the liabilities or losses incurred by the individual units, in the ultimate analysis, would have to be borne by the company. It was the company that could sue for the recovery of property or dues or be used for the outstandings due on account of dealing of the units. A single balance sheet was prepared by the company in respect of all the units and divisions owned and controlled by the company . . . .”

The Andhra Pradesh High Court also referred to law laid down by the Supreme Court in the case of Bharat Heavy Electricals Ltd. (102 STC 345) (SC) and reproduced the following observations:

“The Tribunal missed to note that the plant and equipment which is the subject-matter of contract such as boiler package or turbo-generator package is incapable of being manufactured and despatched as a finished unit. Necessarily, the equipment/components or assembled units have to be despatched to the customer’s site and installed there. The contract does not contemplate the dispatch of a readymade finished product to the customer’s place for instantaneous use in the power-plants, etc. On the other hand, it is clear from the terms of the contract, especially the price payment clause, that the components and parts forming part of the larger package should be supplied from time to time by BHEL. It is not at all possible to transfer the finished product such as ‘boiler package’ at a time. It may be noticed that the Tribunal itself has given a different reasoning for excluding the inter-unit transfers from the taxable net at paragraph 29, sub para 3. The Tribunal rightly puts it on the ground that the article transferred from the petitioner unit to the executing unit (Trichy, etc.) loses its identity as it is incorporated into a larger component or equipment. There is yet another closely allied reasoning to say that the goods sent to Trichy or other executing unit does not stand on the same footing as those sent direct to the customer’s site. In the case of the former, there is interruption of movement and the snapping of inextricable bond that should exist between the inter-State movement and the contract of sale. In regard to the goods sent to Trichy unit (or other executing units), the dispatch therefrom to inter-State customer takes place after assembling or processing and it is the sole concern of that unit. Trichy unit can even retain the goods for itself and divert them for any other use. There is nothing to indicate that the goods sent by Hyderabad unit to Trichy or other units are earmarked for any particular contract. The Hyderabad unit had no inkling of their ultimate utilisation and whether, how and when the goods will be moved to the customer’s place by Trichy unit. As far as Hyderabad unit is concerned, it is a case of pure and simple stock transfer to another unit under ‘F’ forms. At best, the inter-State movement, or to put it in other words, the inter-unit movement to Trichy can only be said to be for the purpose of fulfilling the contract, but not in the course of fulfilment of the contract of sale, a distinction recognised in the Tata Engineering & Locomotive Co.’s case (1971) 27 STC 127 (SC); AIR 1971 SC 477; (1971) 2 SCR 849. The movement to Trichy in our opinion is not a necessary consequence of the contract, nor is it incidental to the contract that goods of this nature should first be moved to Trichy. As already observed, there is no inextricable and uninterrupted bond between the contract and the movement of goods to Trichy or other sister units of the petitioner.”

After noting the above legal position, the High Court observed as under about the facts of the particular case before it:

“It is only if the goods, which move from one State to another, are sold as they are and are not incorporated in, or do not form part of, other goods would the question of such transfer of goods attracting levy of tax under the CST Act, as an inter-State sale, arise. It is not in dispute that the goods supplied by the Machilipatnam unit, to other units of BEL located outside the State, are merely components of, and are incorporated in, the goods manufactured by other units of the petitioner company locate outside the State of A.P., and the goods transferred by the Machilipatnam unit are not sold to the Armed Forces as they are. The transfer of goods by the Machilipatnam unit, to other units of the petitioner-company located outside the State, fall within the ambit of section 6A(1) of the CST Act, and are not inter-State sales exigible to tax u/s.6 of the Act. The order of the first respondent, holding that the transfer of such components by the Machilipatnam unit to other units of the petitioner-company situated outside the State constitutes inter-State sales under the CST Act, must therefore be quashed.”

Thus, the legal position emerges is that if the goods transferred are supplied as it is to the customer and link between transfer and such sale is established, then it may amount to inter -State sale from the moving State. However, if the transfer is of components and parts, then even if they are in relation to pre-existing order of finished goods in which such parts and components are to be incorporated, there is no possibility of inter-State sale of such parts and components from the moving State. This also clarifies the position that the movement should be linked with the ultimate goods to be supplied to the customer and not with the intermediatory goods which may be incorporated in the ultimate goods to be supplied. This judgment will certainly be a guiding judgment on the above-referred issue.

Circular on issuance of TDS Certificates in Form No. 16A downloaded from TIN Website.

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Circular No. 1 of 2012 [F.No. 276/34/2011-IT(B)], dated 9th April, 2012 — Copy available for download on www.bcasonline.org

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S. 140A(3) : Assessee offers explanation for failure to pay S.A. tax — Full tax and interest paid — Penalty not justified

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10 Dy. CIT v. Kamala Mills
Ltd.

ITAT ‘K’ Bench, Mumbai

Before G. E Veerabhadrappa (VP) &

Ms. Sushma Chowla (JM)

ITA No. 7775-77/Mum./2004

A.Ys. : 2000-01, 2001-02 and 2002-03.

Decided on : 31-10-2007

Counsel for revenue/assessee : Mohit Jain/

Jitendra Jain

S. 140A(3) of the Income-tax Act, 1961 — Failure to pay
self-assessment tax — Assessee deemed to be in default — assessee offers full
explanation for non-payment — Taxes fully paid together with interest — Whether
imposition of penalty justified — Held, No.

 

Per G. E Veerabhadrappa :

Facts :

The assessee had filed its return of income for A.Y. 2000-01
to 2002-03 in time, but did not make the payment of S.A. Tax. The AO asked the
assessee to explain as to why penalty should not be imposed u/s.221, read with
S. 140A(3) of the Income-tax Act. The assessee explained that it could not make
payment due to financial crunch on account of paucity of funds. The AO was not
satisfied with the explanation and imposed penalty of Rs.20 lacs for A.Y.
2000-01, Rs.50 lacs for A.Y. 2001-02 and Rs.20 lacs for A.Y. 2002-03.

 

Being
aggrieved, the assessee appealed before the CIT(A) who considered the
explanation offered by the assessee and deleted the penalty mainly on the
following grounds :

(1) Paucity
of funds at the material time when S.A. Tax was to be paid does constitute a
reasonable cause for the default of non-payment of S.A. Tax.

(2) The
assessee has paid the entire tax, together with applicable interest u/s.234B,
u/s.234C and u/s.220(2), before show-cause notice u/s.221 was served on the
assessee. This shows that the assessee had no mala fide intention to
withhold the payment of S.A. Tax.

(3)
Initiation of penalty proceedings after a long period is contrary to the
spirit of the provisions relating to bar of limitation for imposing penalties
and hence imposition of penalty was illegal.

 


The Department appealed to the ITAT.

 

Held :

The Tribunal examined the provisions of S. 220(4) and S. 221,
together with provisions of S. 140A(3) and came to a conclusion that in the
present case, the assessee has paid all the taxes, together with interest and it
cannot be held that the assessee is in default or deemed to be in default, and
as such, there is no merit in the levy of penalty u/s.221 of the Act, specially
when there is no clear provisions for imposition of penalty u/s.140A(3), after
the amendment in S. 140A(3) in the year 1987. The Tribunal therefore confirmed
the order of CIT(A) and dismissed the Revenue’s appeal.

 

Errata :

Attention of the readers is drawn to the Tribunal decision
reported at Sr. No. 26 in March 2008 issue of the Journal. The last line of the
said decision on page no. 638 should be read as “Accordingly, the assessee could
not be treated as an assessee in default.” The error is regretted.

 

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S. 263 : Assessed income higher than income determined by CIT — CIT’s order bad

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9 Bhuppindera Flour Mills Pvt.
Ltd. v. ITO

ITAT Amritsar Bench, Amritsar

Before Joginder Pall (AM) and

A. D. Jain (JM)

ITA Nos. 457 and 540/Asr./2005

A.Y. : 2000-01. Decided on : 15-2-2008

Counsel for assessee/revenue : P. N. Arora/

Tarsem Lal

S. 263 of the Income-tax Act, 1961 — Revision of
orders — Power of the Commissioner of Income-tax — Income assessed u/s.143(3)
higher than the income determined u/s.263 — Held, that the order passed u/s.263
by the CIT bad in law.

 

Per Joginder Pall :

Facts :

The assessee had filed its return of income
declaring loss of Rs.1.47 lacs. However, the assessee had not filed the accounts
hence, in the order dated 1-8-2001 passed u/s.143(1)(a), the loss returned was
disallowed by the Assessing Officer. Subsequently, the Assessing Officer
assessed the income u/s.143(3) vide his order dated 12-3-2003, determining a
long-term capital gain of Rs.46.07 lacs. On appeal the CIT(A) vide his order
dated 14-5-2003 deleted the addition made by the Assessing Officer. According to
the CIT, the order passed by the Assessing Officer u/s.143(3) was erroneous and
prejudicial to the interest of the Revenue inasmuch as the book profit u/s.115JA
of Rs.1.13 crore liable to tax was not considered by the AO. Being aggrieved,
the assessee appealed before the Tribunal.

 

Held :

According to the Tribunal in order to confer
jurisdiction on the CIT u/s.263, both the conditions viz., the order
passed by the Assessing Officer must be (i) erroneous; and (ii) prejudicial to
the interest of the Revenue, must be fulfilled. The Tribunal found that at the
time of making assessment u/s. 143(3), the income computed as per regular
provisions of the Act was higher at Rs.46.07 lacs as against income u/s.115JA of
Rs.33.93 lacs (30% of Rs.1.13 crore). Therefore, according to the Tribunal, the
provisions of S. 115JA were not attracted. Therefore, it held that the order
passed by the Assessing Officer cannot be said to be erroneous, because the same
was as per the provisions of the Act. It further held that the order passed was
also not prejudicial to the interest of the Revenue, because there was no loss
of revenue. Therefore, the assumption of jurisdiction by the CIT u/s.263 was bad
in law.

 

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Notification No. 14/2012 (F.No. 142/31/2011- TPL)/S.O. 626 (E), dated March 28, 2012 — Income-tax (third amendment) Rules, 2012 — Amendment in Rule 12 and substitution of Forms ITR 1, ITR 2, ITR 3 ITR 4S, ITR 4 and ITR V.

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The gist of the amendment is as under:

(1) An individual or HUF must file the return of income electronically for the A.Y. 2012-13 and in subsequent years if his/its total income exceeds Rs.10 lakh.

(2) A resident individual or a resident HUF must file the return of income electronically for the A.Y. 2012-13 and subsequent years, if he/it has: (a) assets (including financial interest in any entity) located outside India; or (b) signing authority in any account located outside India.

(3) The prescribed ITR Form SAHAJ — ITR 1 and SUGAM — ITR 4S cannot be used by a resident

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Section 40(a)(ia) — Disallowance of expenditure for failure to pay TDS within the time stipulated u/s.200(1) — Payment/expenditure was incurred throughout the year — Whether payment of TDS made after the end of the accounting year but before the due date for filing of return was allowable as deduction — Held, Yes.

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Piyush C. Mehta v. ACIT
ITAT ‘C’ Bench, Mumbai Before N. V. Vasudevan (JM) &
N. K. Billaiya (AM)
ITA No. 1321/Mum./2009
A.Y.: 2005-06. Decided on: 11-4-2012
Counsel for assessee/revenue:
Prakash K. Jotwani/Pitambar Das

Section 40(a)(ia) — Disallowance of expenditure for failure to pay TDS within the time stipulated u/s.200(1)

— Payment/expenditure was incurred throughout the year — Whether payment of TDS made after the end of the accounting year but before the due date for filing of return was allowable as deduction — Held, Yes.


Facts:

The assessee is an individual engaged in the business of building repairs, and construction works contracts. In the course of assessment proceedings the AO noticed that the assessee had not paid the TDS deducted on the labour charges/ advances paid to various contractors within the time stipulated u/s.200(1). The assesses had made payments/advances to the contractors throughout the year, but had deposited the TDS only on 31-5-2005. According to the AO, the assessee was required to deduct TDS on the dates the payments were made. Since that was not done, he held that in terms of provisions of section 40(a)(ia) the payments of Rs.1.41 crore were not allowable. On appeal, the CIT(A) confirmed the order of the AO.

Held:

According to the Tribunal, the amendment to section 40(a)(ia) by the Finance Act, 2008 made two categories of defaults, causing disallowance on the basis of the period of the previous year in which tax was deductible. The first category of disallowances included the cases in which tax was deductible and was so deducted during the last month of the previous year, but there was failure to pay such tax on or before the due date specified in section 139(1). The second category included those cases where tax was deductible and was deducted during the first eleven months of the previous year, i.e., till February, 2005 in the case of the assessee. In such case, the disallowance was to be made if the assessee failed to pay it before 31st March, 2005.

Then came the amendment by the Finance Act, 2010. The said amendment dispensed with the earlier two categories of defaults brought about by the Finance Act, 2008. It has not made any change qua the first category described above. With reference to the second category, the Tribunal noted that the hitherto requirement of paying it before the close of the previous year has been eased to extend such time for payment of tax up to the due date u/s.139(1) of the Act. The effect of this amendment is that, now the assessee, deducting tax either in the last month of the previous year or first eleven months of the previous year, shall be entitled to deduction of the expenditure in the year of incurring it, if the tax so deducted at source, is paid on or before the due date u/s.139(1). As regards the applicability of the amendment by the Finance Act, 2010 to the case of the assessee, the Tribunal relied on the decision of the Calcutta High Court in the case of Virgin Corporation (ITA No. 302 of 2011 GA 3200/2011 decided on 23-11-2011), where it was held that the said amendment was retrospective from 1-4-2005 and accordingly, allowed the appeal of the assessee.

As regards the applicability of the decision of the Mumbai Special Bench in the case of Bharati Shipyard Ltd. v. DCIT, where it was held that the amendment by the Finance Act, 2010 was prospective and not retrospective from 1-4-2005, the Tribunal relying on the Delhi Tribunal decision in the case of Tej International (P) Ltd. v. Dy. CIT, (2000) 69 TTJ (Del) 650 read with the Bombay High Court decision in the case of CIT v. Godavaridevi Saraf, 113 ITR 589 (Bom.), held that as per the hierarchical judicial system in India, the wisdom of the Court below has to yield to the wisdom of the higher Court. The fact that the judgment of the higher judicial forum is from a non-jurisdictional High Court does not alter the position. Accordingly, the decision of the Calcutta High Court prevailed over the decision of the Mumbai Special Bench.

In view of the above, the Tribunal held that the Amendment to the provisions of section 40(a)(ia) of the Act, by the Finance Act, 2010 was retrospective from 1-4-2005. Consequently, any payment of tax deducted at source during the previous years relevant to and from A.Y. 2005-06 can be made to the Government on or before the due date for filing return of income u/s.139(1) of the Act.

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Section 54EC — The limit of Rs.50 lakh referred to in the proviso to section 54EC is with reference to a financial year — If subscription for eligible investment was not available to the assessee during the period of six months, then investment made beyond a period of six months qualifies for deduction u/s.54EC.

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Aspi Ginwala v. ACIT
ITAT ‘C’ Bench, Ahmedabad
Before D. K. Tyagi (JM) and
A. Mohan Alankamony (AM)
ITA No. 3226/Ahd./2011
A.Y.: 2008-09. Decided on: 30-3-2012
Counsel for assessee/revenue:
S. N. Soparkar/S. P. Talati

Section 54EC — The limit of Rs.50 lakh referred to in the proviso to section 54EC is with reference to a financial year — If subscription for eligible investment was not available to the assessee during the period of six months, then investment made beyond a period of six months qualifies for deduction u/s.54EC.


Facts:

The assessee sold a house property on 22-10-2007. The long-term capital gain arising on such sale was computed and returned at Rs.1,30,32,450 after claiming exemption of Rs.100 lakh u/s.54EC, on account of investment of Rs.50 lakh each made in REC bonds (invested on 31-12-2007) and bonds of NHAI (invested on 26-5-2008). During the period from 1-4-2008 to 26- 5-2008 no subscription for eligible investment was available to the assessee. The Assessing Officer (AO) held that the assessee is entitled to exemption of up to Rs.50 lakh u/s. 54EC of the Act. He, accordingly, allowed exemption in respect of amount invested in bonds of REC and did not allow exemption in respect of amount invested in bonds of NHAI. 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 noted that there is no dispute about the fact that the assessee could have invested the amounts in eligible investment within six months of the date of transfer i.e., on or before 21-4-2008 to avail of exemption u/s.54EC of the Act. Also, there is no dispute that during the period from 1-4-2008 to 26-5-2008 subscription to eligible investment was not available to the assessee and the assessee had subscribed on the 1st day of reopening of subscription. It also noted that the dispute which remained to be decided was whether as per the provisions of section 54EC, the assessee is entitled for exemption of Rs.1 crore as six months period for investment in eligible investment involves two financial years. If the answer to this question is yes, whether investment made by the assessee on 26-5-2008 beyond six months period is eligible for exemption in view of the fact that no subscription for eligible investment was available to the assessee from 1-4-2008 to 26-5-2008. It is clear from the proviso to section 54EC that where the assessee transfers his capital asset after 30th September of the financial year, he gets an opportunity to make an investment of Rs.50 lakh each in two different financial years and is able to claim exemption up to Rs.1 crore u/s.54EC of the Act. The language of the proviso being clear and unambiguous, the benefit available to the assessee cannot be denied, the assessee is entitled to get exemption up to Rs.1 crore in this case. Various judicial authorities have taken a view that delay in making an investment due to non-availability of bonds is a reasonable cause and exemption should be granted in such cases. Relying on the observations of the Mumbai Bench of the ITAT in the case of Ram Agarwal v. JCIT, (81 ITD 163) (Mum.) the Tribunal held that the investment s made by the assessee on 26-5- 2008 beyond six months is eligible for exemption in view of the fact that no investment was available from 1-4-2008 to 26-5-2008. The Tribunal allowed the appeal filed by the assessee.

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Section 40(a)(ia) — Per majority — Section 40(a)(ia) can apply only to expenditure which is outstanding as on 31st March and does not apply to expenditure which is paid during the previous year.

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Merilyn Shipping & Transports v. ACIT ITAT Special Bench, Visakhapatnam
Before D. Manmohan (VP),
S. V. Mehrotra (AM) and Mahvir Singh (JM) ITA No. 477/Viz./2008

A.Y.: 2005-06. Decided on: 29-3-2012 Counsel for assessee/revenue: Subramanyam/T. L. Peter and D. Komali

Section 40(a)(ia) — Per majority — Section 40(a)(ia) can apply only to expenditure which is outstanding as on 31st March and does not apply to expenditure which is paid during the previous year.


Facts:

The assessee-firm incurred brokerage expenses of Rs.38,75,000 and commission of Rs.2,43,253without deducting TDS. Of the aggregate amount of Rs.41,18,253 incurred during the previous year, the amounts outstanding as on 31st March were Rs.1,78,025. In the course of assessment proceedings the assessee’s representative agreed for disallowance. The AO disallowed Rs.41,18,253 u/s.40(a)(ia).

Aggrieved, the assessee preferred an appeal before the CIT(A) and contended that on a careful reading of the provisions of section 40(a)(ia) and also on going through the expert opinion, the disallowance u/s.40(a)(ia) should be Rs.1,78,025, being the amount of brokerage and commission outstanding as on 31st March on which tax was not deducted at source, and not the entire sum of Rs.41,18,253. The CIT(A) rejected the contention made on behalf of the assessee and upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal. Since the Division Bench did not agree with the decision rendered by the Hyderabad Bench of the ITAT in the case of Teja Constructions, (ITA No. 308/Hyd./2009 relating to A.Y. 2005-06, order dated 23-10-2009), on which reliance was placed by the counsel of the assessee, it referred the matter to the President to constitute a Special Bench (SB). The President constituted the SB to decide the following question:

“Whether section 40(a)(ia) of the Income-tax Act can be invoked only to disallow expenditure of the nature referred to therein, which is shown as ‘payable’ as on the date of the balance sheet or it can be invoked also to disallow such expenditure which became payable at any-time during the relevant previous year and was actually paid within the previous year?”

Held:

The majority view (VP and JM) of the SB was as under:

By replacing the words ‘amounts credited or paid’, as proposed by the Finance Bill, 2004 with the ‘payable’, at the time of enactment (by the Finance Act, 2004), the Legislature has clarified its intent that only outstanding amounts or the provisions for expenses liable for TDS under Chapter XVII-B of the Act is sought to be disallowed in the event there is a default in following the obligations casted upon the assessee under Chapter XVII-B. Section 40(a)(ia) creates a legal fiction by virtue of which even genuine and admissible expenditure can be disallowed due to non-deduction of tax at source. A legal fiction has to be limited to the area for which it is created. The word ‘payable’ must be understood in its natural, ordinary or popular sense and construed according to its grammatical meaning. Such a construction would not lead to absurdity because there is nothing in this context or in the object of the statute to suggest to the contrary. The word ‘payable’ is to be assigned strict interpretation, in view of the object of the legislation which is intended from the replacement of the words in the proposed and enacted provision.

The majority view of the SB was that section 40(a) (ia) is applicable only to the amounts of expenditure which are payable as on 31st March of every year and it cannot be invoked to disallow the amounts which have been actually paid during the previous year, without deduction of tax at source.

The AM held that the object of section 40(a)(ia) is to ensure that the TDS provisions are scrupulously implemented without any default. The term ‘payable’ cannot be assigned a narrow interpretation. Section 40(ia) is to be interpreted harmoniously with the TDS provisions. Accordingly, section 40(a)(ia) applies to all expenditure which is actually paid and also which is payable as at the end of the year.

The SB, by a majority view, decided the question referred to it in favour of the assessee.

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Carry forward and set-off in case of Nil Return v. Reassessment at Loss — Unabsorbed depreciation entitled to be carried forward and set off even if return showing nil income was filed — Also, loss determined in Appellate proceedings and not claimed by assessee eligible to be carried forward.

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(2012) 67 DTr (Ahd.) (Trib.) 470
ACIT v. Mehsana District Co-operative Milk
Producers Union Ltd.
A.Y.: 1999-2000. Dated: 30-6-2011

Carry forward and set-off in case of Nil Return v. Reassessment at Loss — Unabsorbed depreciation entitled to be carried forward and set off even if return showing nil income was filed — Also, loss determined in Appellate proceedings and not claimed by assessee eligible to be carried forward.

Facts:

The assessee, a co-operative society had filed nil return of income u/s.139(1). The assessment was completed u/s.143(3) r.w.s. 147 at total income of Rs.48.19 crore. The assessee went into appeal and after Appellate proceedings, the income of the assessee was determined at loss of Rs.5.41 crore. The assessee vide application u/s.154 requested the AO to permit carry forward of such loss to subsequent year. The AO vide his order u/s.154 held that loss can be carry forward only if the same is determined in pursuance to return filed u/s.139(3). In this case as per return of income, the income declared was nil and the loss was determined only on giving appeal effect which was could not be carry forward as per the AO.

On further appeal, the CIT(A) upheld the stand of the AO. He further stated that in this case, the assessment was reopened by issue of notice u/s.148. Placing reliance on the decision of the Apex Court in the case of CIT v. Sun Engineering Works (P) Ltd., (198 ITR 297), the CIT(A) held that section 147 was for the benefit of the Revenue and the assessee cannot be allowed relief not claimed by him in the original assessment. However, out of the total loss of Rs.5.41 crore, sum of Rs.5.10 crore pertained to unabsorbed depreciation. The CIT(A) permitted carry forward of such unabsorbed depreciation referring to Explanation 5 to section 32 wherein benefit is allowed even if deduction not claimed by the assessee. Both the Revenue as well as the assessee went into appeal.

Held:

As per section 32(2), for carry forward of unabsorbed depreciation, the only condition is that full effect cannot be given to depreciation allowable u/s.32(1) on account of there being insufficient profit. Carry forward of unabsorbed depreciation as per section 32(2) is automatic. No other condition is required to be fulfilled by the assessee for carry forward of unabsorbed depreciation. Hence, assessee is eligible to carry forward unabsorbed depreciation even if not claimed in return of income. Regarding balance business loss, as per section 72, the assessee is not required to fulfil any conditions so as to be eligible for carry forward of loss. The only requirement is that the result of computation under the head ‘Income from Business or Profession’ should be loss. However, for denying the benefit of carry forward of loss, the Revenue has relied upon section 139(3). The Tribunal held that section 139(3) would have application only where the assessee files the return disclosing the loss. If the assessee files the return disclosing the loss, then he is required to file return as per section 139(1). In the given case, firstly, the assessee has not disclosed any loss in the return of income, so 139(3) should not be applicable. Even if applied, only condition u/s.139(3) is for filing return before due date as stated u/s.139(1) which has been filed by the assessee. So, benefit of carry forward of loss is to be allowed.

The judgment of the Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd., (supra) was distinguished since that case could have relevance during the assessment/Appellate proceedings. In the given case the assessment as well as Appellate proceedings are already completed. The AO has himself given effect to Appellate orders and determined the loss. Hence, once the orders of Appellate authorities have become final and the effect has been given and loss is determined thereby, the same has to be carried forward as per provisions of the Income-tax Act.

Hence, even though nil return of income was filed by the assessee u/s.139(1), he is entitled to carry forward entire loss as determined under Appellate proceedings.

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Section 80G — Approval for the purpose of section 80G cannot be denied simply because the trust is not registered as charitable trust.

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(2011) 131 ITD 117 (Hyd.)
Kamalakar Memorial Trust v. DIT (Exemptions)
Dated: 5-3-2010

Section 80G — Approval for the purpose of section 80G cannot be denied simply because the trust is not registered as charitable trust.


Facts:

The assessee was engaged in running of old-age home as a charitable trust and was claiming a deduction u/s.80G. On filing of application for renewal of exemption certificate, the Director of Income-tax (DIT) rejected the application stating that running an old-age home constitutes as business activity. Further the DIT observed that the assessee is not registered as a charitable trust under the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowment Act, 1987. He thus held that the trust is not eligible for renewal of exemption certificate.

Held:

Running an organisation purely with the intentions of no profit cannot be termed as trade activity. The nature of activity depends not only on the economies of scale of organisation but also on the motives of organisation. In the given case, the assessee had applied for renewal of exemption certificate required for the purposes of section 80G which as per the Director of Income-tax is against the laws. The assessee contended that the fees charged by them for inmates are nominal fees for the services rendered for the inmates and further stated that these fees only fulfilled a partial amount of expenses which the organisation actually incurred for the inmates. Five members out of seventeen were admitted for free. Thus, there is no profit motive of the assessee, as there was no benefit from the fees charged from the inmates. Also it mentioned that for the year ended 31-3-2007 there was excess of expenditure over income of Rs.60,923 which shows that there is no intention of making profits. The assessee further relied on the decision given by the Nagpur Bench, in the case of Agricultural Produce & Market Committee v. CIT, (2006) 100 ITD 1.

Thus, in the light of the justifications presented by the assessee, it is clear that though it is not registered as a charitable trust, one cannot ignore its intentions and objectives of the organisation. Thus the DIT was directed to accept the application for renewal of approval u/s.80G within three months from the date of receipt of this order.

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Section 153A read with section 143 — Non-service of notice u/s.143(2) when a return is filed u/s.153(A), AO cannot make addition and is bound to accept income returned.

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(2011) 130 ITD 509 (Agra) Narendra Singh v. ITO-2(3), Gwalior A.Y.: 2001-02. Dated: 30-11-2010

Section 153A read with section 143 — Non-service of notice u/s.143(2) when a return is filed u/s.153(A), AO cannot make addition and is bound to accept income returned.


Facts:

The assessee filed return of income u/s.153A. The Assessing Officer completed the assessment wherein he made certain addition to the assessee’s income. On appeal, the assessee raised an objection that the assessment framed without issuing notice u/s.143(2) was void ab initio. The CIT(A) rejected the assessee’s objection. Aggrieved the assessee made an appeal to the ITAT.

Held:

Section 153(A) states that all other provisions of the act shall apply to the return filed in response to notice issued under this section as if such return is a return required to be furnished u/s.139. It does not provide for any methodology for making assessment. It only states that the AO shall assess or reassess the total income in respect of each assessment year falling within such six assessments. The section creates a legal fiction that all the provisions of the Act so far as they are applicable to return filed u/s.139 shall apply to the return filed u/s.153A. The provisions of both the sections 139 and 153A are under Chapter XIV. The word ‘shall’ makes it mandatory that all the provisions of this Act as are applicable to section 139 will apply to the return filed in response to notice issued u/s.153A.

According to section 143, the AO is permitted to process the return based on the return filed by the assessee. AO shall have no power to make an assessment unless he has issued the notice within the prescribed time.

Thus it was held that in the absence of service of such notice the AO cannot make addition in the income of the assessee and AO is bound to accept the income as returned by the assessee.

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Section 271(1)(c), read with section 10(13A) of the Income-tax Act, 1961 — Mere making of a claim, which is not mala fide but which is not sustainable in law by itself does not amount to furnishing of inaccurate particulars regarding income of assessee so as to attract levy of penalty u/s. 271(1)(c).

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(2011) 130 ITD 378/9 taxmann.com (Delhi) N. G. Roa v. Dy. CIT, Circle 47(1), New Delhi A.Y.: 2004-05. Dated: 7-4-2010

Section 271(1)(c), read with section 10(13A) of the Income-tax Act, 1961 — Mere making of a claim, which is not mala fide but which is not sustainable in law by itself does not amount to furnishing of inaccurate particulars regarding income of assessee so as to attract levy of penalty u/s. 271(1)(c).


Facts:

The assessee had claimed exemption u/s.10(13A) for two residential accommodations taken on rent. The assessee, in view of CIT v. Justice S. C. Mittal T.C. 32R 593 (Punj. & Har.), was under a belief that he was entitled to exemption with regard to both the residential accommodations held by him. Whereas, the Assessing Officer disallowed the exemption claimed with respect to one property, holding that exemption u/s.10(13A) could be allowed only qua one residential accommodation. Further, the Assessing Officer levied penalty u/s.271(1)(c). On appeal, the Commissioner (Appeals) also confirmed the levy of penalty. Aggrieved, the assessee went for second appeal.

Held:

(1) The factum of the assessee taking two residential accommodations on rent was not disputed. The only issue was whether by claiming exemption with regard thereto, the assessee had rendered himself liable to levy of penalty for furnishing inaccurate particulars of income.

(2) The meaning of word ‘particulars of income’ has been clearly laid down by the Supreme Court in CIT v. Reliance Petroproducts (P.) Ltd. As held in this case, there has to be a concealment of the particulars of the income of the assessee; the assessee must have furnished inaccurate particulars of his income; the meaning of the word ‘particulars’ used in the section would embrace the details of the claim made and to attract penalty, the details supplied by the assessee should in his return must not be accurate, not exact or correct, not according to the truth or erroneous. Also it was held that mere making of a claim which is not sustainable in law by itself will not amount to furnishing inaccurate particulars regarding the income of the assessee and there is no question of inviting penalty u/s.271(1)(c) for the same.

(3) The instant case of the assessee is squarely covered under the above decision. In the instant case, the assessee had accurately and truthfully disclosed all particulars of the residential accommodations rented and payments made. It was only, as such, a case of difference of opinion where the claim made by the assessee [exemption u/s.10(13A)] relying on earlier relevant decision was viewed differently by the Department. Thus, no concealment penalty was, in such situation, attracted. Thus the appeal of the assessee was to be allowed and penalty levied was to be cancelled.

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Section 140A r.w.s. 244A — Whether an assessee is entitled to interest on excess payment of selfassessment tax from date of payment upto the date the refund is actually granted — Held, Yes.

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2011) 130 ITD 305
11 ADIT v. Royal Bank of Scotland N.V.
A.Y.: 2007-08. Dated: 3-11-2010

Section 140A r.w.s. 244A — Whether an assessee is entitled to interest on excess payment of self-assessment tax from date of payment upto the date the refund is actually granted — Held, Yes.


Facts:

The assessee was into the business of banking. The return of income filed by the assessee, in the relevant assessment year was processed u/s.143(1) to determine the final income tax liability of Rs.272.93 crore. Against this, the credit of Rs.346.36 crore was allowed which was aggregate of T.D.S, advance tax and self-assessment tax. Accordingly the refund was issued, but as it didn’t include any interest element u/s.140A, the assessee filed an application u/s.154. On appeal the CIT(A) allowed the assessee’s claim.

Held:

The CIT(A) relying on the decision of the Madras High Court in the case of Ashok Leyland Ltd. (2002) (254 ITR 641/125) and Cholamandalam Investment & Finance Co. Ltd. (2008) 166 Taxmann 132, held that computation of interest on excess payment of selfassessment tax has to be paid in terms of section 244A(1)(b) i.e., from the date of payment of such amount up to the date on which refund is actually granted.

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Section 40(a)(ia) of the Income-tax Act, 1961 — Provisions of section 40(a)(ia) can be invoked only in event of non-deduction of tax at source but not for lesser deduction of tax at source.

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(2012) 49 SOT 448 (Mumbai)
Dy. CIT v. Chandabhoy & Jassobhoy
A.Y.: 2006-07. Dated: 8-7-2011

Section 40(a)(ia) of the Income-tax Act, 1961 — Provisions of section 40(a)(ia) can be invoked only in event of non-deduction of tax at source but not for lesser deduction of tax at source.

Accountants, had employed 18 consultants with whom it entered into agreements for a period of two years renewable further at the option of either parties. These consultants were prohibited from taking any private assignments and worked full time with the assessee. During the year, the assessee had paid an amount of Rs.26.75 lac to the said consultants by way of salary after deduction of tax at source u/s.192 and claimed deduction of the same. The Assessing Officer after analysing the agreements entered by the assessee-firm with the said consultants came to a conclusion that there was no employer-employee relationship and that the payment made to the consultants was in the nature of fees for professional services. He, therefore, held that the assessee should have deducted tax at source u/s.194J and, invoking the provisions of section 40(a)(ia), he disallowed the entire payment made to the consultants. The CIT(A) deleted the disallowance made by the Assessing Officer.

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

(1) There is no dispute with reference to the deduction of tax u/s.192 and also the fact that in the individual assessments of the consultants these payments were accepted as salary payments.

(2) It is also not the case that the assessee has not deducted any tax.

(3) The assessee had indeed deducted tax u/s.192 and so the provisions of section 40(a)(ia) also do not apply since the said provisions can be invoked only in the event of non-deduction of tax at source, but not for lesser deduction of tax.

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Section 12AA of the Income-tax Act, 1961 — When assessee had not carried out any activity other than running school or hostel and all properties owned by it were held in trust for purpose of carrying on charitable activities, there was nothing unlawful in assessee acquiring assets and buildings and registration u/s.12AA could not be denied to it.

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(2012) 49 SOT 242 (Chennai)
Anjuman-e-Khyrkhah-e-Aam v. DIT (e)
Dated: 18-7-2011
The assessee-trust was running a school with hostel facilities. Its application for grant of registration u/s.12AA was rejected on the ground that the activities carried on by it were not charitable in nature. The Tribunal allowed the appeal of the assessee and directed the authority to grant registration u/s.12AA. This order was challenged before the High Court which remitted the matter back to the DIT(E) for fresh disposal. The DIT(E) considered the issue again and finally reached at a conclusion that the assessee was not eligible for getting registration u/s.12AA on the ground that the main activity of the assessee was to accumulate huge investments in purchase of assets and earn rental income from those assets without engaging itself in any charitable activities.

The Tribunal held in favour of the assessee. The Tribunal noted as under:

(1) It was true that the assessee-trust had been established since more than 100 years and it was running the school with hostel facilities attached to it.

(2) Amounts collected by the assessee-trust had been used for the purpose of running the school and hostel and also in constructing buildings. A major portion of the outgoings of the assessee-trust had been towards construction of buildings.

(3) If the object of the assessee-trust was to run educational institution and the assessee had been carrying on that activity alone, the construction of buildings and purchase of property could not be treated as a point against the assessee. The assessee might be purchasing properties and constructing buildings for the purpose of letting out to earn income necessary for carrying on the charitable activity in the nature of running the school and hostel.

(4) All the properties owned by the assessee-trust were held in trust for the purpose of carrying on charitable activities. There was nothing unlawful in the assessee acquiring assets and buildings.

(5) If the entire activities carried on by the assessee were charitable in nature, the expenses incurred for construction of buildings and purchase of assets also qualified to be considered as application of funds for charitable purposes.

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Should Gains be Recognised due to ‘Own’ Credit Deterioration

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Since the start of the global financial crisis in 2008, the credit risk of counter parties has become increasingly important. Globally, the financial environment has been very volatile and has created a lot of uncertainty in the minds of stakeholders as well as prospective investors.

 Volatility in credit worthiness of entities, not only has a significant impact on the business of these entities (ability to raise funds and capital at attractive rates), but has also resulted in a unique accounting implications.

This implication arises from provisions relating to gains/ losses due to ‘changes in fair value of financial liability due to changes in ‘own’ credit risk’ in certain cases.

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board’s (FASB) inclusion of own credit risk in liability measurement has proved controversial over the years. Several media articles have focused on the fact that due to EU accounting rules, banks may have systematically overstated their net assets and distributed non-existent profits as dividends and bonuses.

Let us take an example to understand how change in own credit risk, results in reflecting a better performance and increases the net assets for entities.

Balance sheet for Bank XYZ

*Measured at fair value through profit or loss account Keeping all other external parameters constant, if the creditworthiness of Bank XYZ decreases, it will result in an increase in its credit spreads (as the cost of funds for a more risky instrument will be higher). This in turn will result in a reduction in the fair value of the underlying instruments issued by the Bank. The revised balance sheet of XYZ may be as under (fair value is presumed to be Rs 800)

Balance sheet for Bank XYZ (Rs)

This reduction in the financial liability by Rs 200 is recorded as a gain in the income statement and has a favourable impact on reported PAT and EPS of the Bank.

Relevant accounting literature under IFRS supporting the aforesaid accounting treatment

IAS 39 “Financial Instruments: Recognition and Measurement” permits an entity to classify any financial liability into the category of “Fair value through profit or loss (FVTPL)” when:

• It is acquired or incurred principally for the purpose of selling or repurchasing it in the near term

• Part of a portfolio managed together and evident by recent pattern of short term profit taking

•    It contains more than one embedded derivatives.

Generally derivative liabilities, structured financial products etc are recognised by entities at fair value.

IAS 39 requires an entity to reflect credit quality in determining the fair value of financial instruments and related changes in fair value are accounted in the profit and loss account.

Impact on results

During 2011, a number of international banks reported positive earnings in spite of increasing credit spreads i.e., declining credit worthiness. This outcome was due to own-credit-risk adjustments allowed in terms of IAS 39 (referred above) and similar guidance under US GAAP laid down in FASB Standard No. 159 “Fair Value Option for Financial Assets and Financial Liabilities”. Own-credit risk adjustments can result in unrealised losses as well when banks’ creditworthiness improves.

Below is a summary of the impact, this provision had on the performance results of a few large banks

One can logically argue that it is misleading for an entity to report a gain on its liabilities as a direct result of its own creditworthiness deteriorating, particularly as the entity would not be able to realise this gain unless it repurchases its debt at current market prices. However, there is another view in support of fair valuation, which is based on the principle of “increase in shareholder value”. As per this view increase in shareholder value resulting from a credit downgrade is based on differing contractual claims of shareholders and bondholders. Under this approach wealth is transferred from the existing bondholders, who have already committed to a lower interest rate and thus bear the risk of changes in interest rates, to the shareholders. If bondholders had waited to purchase the obligations they may well have received a higher interest rate. Thus, the gain is attributable to the lower interest rate that the entity enjoys in the current period as compared to the market interest rate (for another entity with the present (deteriorated) credit rating).

In India, The Ministry of Corporate Affair (MCA) has issued accounting standards which are aligned to IFRS (known as “Ind AS’), to be notified at a future date. Ind AS 39 “Financial Instruments: Recognition and Measurement” prescribes that in determining fair value of a financial liability, which on initial recognition is designated at fair value through profit or loss, any change in fair value consequent to changes in the company’s own credit risk should be ignored. This was a concious difference from IFRS incorporated under Ind AS. This difference was because Indian standard setters were not comfortable with companies recognising ‘gains’ in the financial statements just because their credit worthiness has deteriorated.

Even Basel III rules, require banks to “derecognise in the calculation of Common Equity Tier 1, all unrealised gains and losses that have resulted from changes in the fair value of liabilities that are due to changes in the bank’s own credit risk.” This rule ensures that an increase in credit risk of a bank does not lead to a reduction in the value of its liabilities, and thereby an increase in its common equity.

Given the ongoing volatility in the economic environment, this is an area which needs to be closely monitored, particularly due to the implications on reported financial performance and capital adequacy considerations.

Section A: AS 29: Disclosures regarding provision for potential civil and criminal liability

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Section A: AS 29: Disclosures regarding provision for potential civil and criminal liability

Ranbaxy Laboratories Ltd Year ended 31-12-2011

From Notes to Accounts (Rupees in millions)

On 20th December 2011, the Company agreed to enter into a Consent Decree with the Food and Drug Administration (“FDA”) of United States of America (“USA”) to resolve the existing administrative actions taken by FDA against the Company’s Paonta Sahib and Dewas facilities. The Consent Decree was approved by the United States District Court for the District of Maryland on 26th January 2012. The Consent Decree establishes certain requirements intended to further strengthen the Company’s procedures for ensuring the integrity of data in its US applications and good manufacturing practices at its Paonta Sahib and Dewas facilities. Successful compliance with the terms of the Consent Decree is required for the company to resume supply of products from the Dewas and Paonta Sahib facilities to USA.

Further, the Company is negotiating towards a settlement with the Department of Justice (“DOJ”) of USA for resolution of potential civil and criminal allegations by DOJ. Accordingly, the Company has recorded a provision of Rs. 26,480 million ($500 million) which the Company believes will be sufficient to resolve all potential civil and criminal liability.

From Auditor’s Report

Without qualifying our opinion, we draw attention to note 2 of schedule 24 of the financial statements, wherein it has been stated that the management is negotiating towards a settlement with the Department of Justice (“DOJ”) of the United States of America for resolution of potential civil and criminal allegations by the DOJ. Accordingly, a provision of Rs. 26,480 million has been recorded which the management believes will be sufficient to resolve all potential civil and criminal liability.

From CARO report
According to the information and explanations given to us, the provisions created for FDA/DOJ for Rs. 26,480 million (as explained in Note 2 of Schedule 24) by the Company has resulted into long-term funds being lower by Rs. 21,754.09 million compared to long-term assets as at 31st December 2011. Accordingly, on an overall examination of the balance sheet of the Company as at 31st December 2011, it appears that short term funds of Rs. 21,754.09 million have been used for long-term purposes during the current year (without considering the impact of excess remuneration paid to Chief Executive Officer and Managing Director as explained in paragraph (d) of the audit report). As represented to us by the management, the shortfall is temporary in nature, hence resulting in long-term funds being lower.

From Directors’ Report

With regard to qualifications contained in the auditors’ report, explanations are given below:

i) Long term funds lower than long term assetsnote no. 2 of Schedule 24 to the financial statements.

The Company has made a provision of Rs. 26,480 million for settlement with the Department of Justice (DoJ) of U.S.A., which the Company believes will be sufficient to resolve all potential civil and criminal liability. This has resulted into long-term funds being lower by Rs. 21,754.09 million compared to long-term assets as at 31st December 2011. The Company believes that the abovementioned shortfall is temporary in nature.

From Management Discussions and Analysis statement

Regulators across the world have become stricter, in respect of compliance to requirements with even more severe consequences for non-compliance.

Ranbaxy signed a Consent Decree (“CD”) with the United States Food & Drug Administration (“US FDA”) in December 2011 to resolve the existing administrative actions taken by the US FDA against the Company’s Poanta Sahib, Dewas and Gloversville facilities. The CD was subsequently approved by the United States District Court for the Court of Maryland on 25th January, 2012. The CD establishes certain requirements intended to further strengthen the Company’s procedures for ensuring the integrity of data in the US applications and good manufacturing practices at its Poanta Sahib and Dewas facilities.

Specifically, the CD requires that Ranbaxy comply with detailed data integrity provisions before FDA will resume reviewing drug applications containing data or other information from the afore-mentioned plants. These provisions include:

1. Hire a third party expert to conduct a thorough review at the facilities and audit applications containing data from affected plants;

2. Implement procedures and controls sufficient to ensure data integrity in the Company’s drug applications; and

3. Withdraw any applications found to contain untrue statements of material fact and/or a pattern or practice of data irregularities that could affect approval of the application.

The Company will have to relinquish 180 days exclusivity for 3 pending generic drug applications. This will not have material impact on the performance of the Company. The Company could also be liable for liquidated damages to cover potential violations of the law and CD. The implementation of CD, is expected to put to rest the legacy issue that impacted Ranbaxy, and requires strict adherence.

The Company separately announced a provision of $500 Mn in connection with the investigation of the Department of Justice, which the Company believes will be sufficient to resolve all potential civil and criminal liabilities. The Company has taken corrective actions to address the CD concerns and is confident of working together with the regulators towards its satisfactory closure.

Ranbaxy Laboratories Ltd Year ended 31-12-2012

From Notes to Accounts (Rupees in millions)

The Company is negotiating towards a settlement with the Department of Justice (“DOJ”) of the USA for resolution of potential civil and criminal allegations by DOJ. Accordingly, the Company had recorded a provision of Rs 26,480 ($500 Million) in the year ended 31st December 2011, which on a consideration of the progress in the matter so far, the Company believes will be sufficient to resolve all potential civil and criminal liability. The Company and its subsidiaries are in the process of negotiations which will conclusively pave the way for a Comprehensive DOJ Settlement. The settlement of this liability is expected to be made by the Company in compliance with the terms of settlement, once concluded and subject to other regulatory/statutory provisions.

From Auditor’s Report
No mention

From CARO Report


Clause 10
The accumulated losses of the Company at the end of the year are not less than fifty percent of its net worth (without adjusting accumulated losses). As explained to us, these are primarily due to provision created for settlement with the Department of Justice (DOJ) of the United States of America for resolution of potential civil and criminal allegations by the DOJ (refer to note 8 of the financial statements). The Company has not incurred cash losses in the current financial year though it had incurred cash losses in the immediately preceding financial year.

Clause 17

According to the information and explanations given to us, the provision created for settlement with the DOJ amounting to Rs. 26,480 million (refer to note 8 of the financial statements) by the Company in the previous accounting year have resulted in long-term funds being lower by Rs. 5,558.22 million compared to long-term assets as at 31st December 2012. Accordingly, on an overall examination of the Balance Sheet of the Company as at 31st December 2012, it appears that short term funds of Rs. 5,558.22 million have been used for long-term purposes. As represented to us by the management, the shortfall is temporary in nature and action is being taken to have long term funds within a short period of the amount being actually paid.

From Directors’ Report
In continuation of signing of the Consent Decree with the USFDA, the Company is in the final stage of settlement with the U.S. Department of Justice (DOJ) to resolve civil and criminal liabilities.

With regard to comments contained in the Auditors’ Report, explanations are given below:

i)    The accumulated losses of the Company at the end of the year are not less than fifty percent of its net worth:

The accumulated losses are primarily due to provision of Rs. 26,480 million created by the Company in the year ended 31st December, 2011 for settlement with the DOJ for resolution of potential civil and criminal allegations by the DOJ.

ii) Short term funds used for long term purposes:

The Company had made a provision of Rs. 26,480 million in the previous accounting year for settlement with the DOJ. This has resulted into long-term funds being lower by Rs. 5,558.22 million compared to long-term assets as at 31st December, 2012. Accordingly, short-term funds of Rs. 5,558.22 million have been used for long-term purposes which are temporary in nature.

Reassessment: S/s. 147 and 148: A. Y. 2007-08: Where AO has acted only under compulsion of audit party and not independently, action of reopening assessment is not valid:

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Vijay Rameshbhai Gupta vs. ACIT; 32 Taxman.com 41 (Guj):

In the course of assessment proceedings u/s. 143(3), the Assessing Officer took a view that income earned by assessee from leasing out his restaurant was taxable as business income. Subsequently, the Assessing Officer initiated reassessment proceedings on the ground that aforesaid lease income was liable to be taxed as income from other sources and, thus, business expenses were wrongly allowed against said income.

The assessee filed writ petition challenging the validity of reassessment proceedings contending that the Assessing Officer was compelled by the audit party to reopen the assessment, though on the reasons recorded, the Assessing Officer was of the belief that no income chargeable to tax had escaped assessment.

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

“i) From the series of evidence, it stands clearly established that the Assessing Officer was under compulsion from the audit party to issue notice for reopening. This is so because after the audit party brought the controversial issue to the notice of the Assessing Officer, he had not agreed to the proposal for reexamination of the issue. Thereupon, he in fact, wrote a letter and gave elaborate reasons why he did not agree to make any addition on the controversial issue.

ii) In the said letter, the Assessing Officer firmly asserted that the assessee’s income from lease was to be assessed as business income and not as income from other sources. Despite his firm assertion, the audit party once again wrote to the jurisdictional Commissioner that the reply of the Assessing Officer was not acceptable.

iii) Thus, it is apparent on the face of the record that the Assessing Officer was compelled to issue notice for reopening, though he held a bona fide he had accorded in the original assessment was as per the correct legal position.

iv) By now, it is well settled that even if an issue is brought to the notice of the Assessing Officer by the audit party, it would not preclude the Assessing Officer from acting on such communication as long as the final opinion to take appropriate action is that of the Assessing Officer and not that of the audit party. It is equally well settled however that if the Assessing Officer has acted only under compulsion of the audit party and not independently, the action of reopening would be vitiated.

v) In view of above, the impugned notice seeking to reopen the assessment was to be quashed.”

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Penalty: Limitation: S/s. 271D and 275(1)(c): A. Y. 2001-02: On 27/03/2003 AO served show cause notice for penalty u/s. 271D: Matter referred to Jt. CIT on 22/03/2004: Jt. CIT passed order of penalty u/s. 271D on 28/05/2004: The order is barred by limitation u/s. 275(1)(c):

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CIT Vs. Jitendra Singh Rathore; 257 CTR 18 (Raj):

For the A. Y. 2001-02, the assessment was completed by an order u/s. 143(3), 1961 dated 25/03/2003. The Assessing Officer noticed that the assessee had accepted cash loans exceeding the limit specified u/s. 269SS to the tune of Rs. 4,00,000/- and the same being in contravention of section 269SS initiated penalty proceedings u/s. 271D of the Act and served show cause notice on the assessee on 27/03/2003. The matter was referred to the Jt. CIT on 22/03/2004, who was the competent authority to impose such penalty u/s. 271D. On 28/05/2004, the Jt. CIT passed an order of penalty u/s. 271D imposing the penalty of Rs. 4,00,000/-. The Tribunal cancelled the penalty holding that the order is barred by limitation.

In appeal by the Revenue, the following question was raised:

“Whether on the facts and in the circumstances of the case as well as in the law, the learned Tribunal was justified in deleting the penalty u/s. 271D holding that the penalty was not imposed within the prescribed period u/s. 275(1)(c) from the date of initiation by the AO ignoring the legal provision that the authority competent to impose penalty u/s. 271D was Jt. CIT and hence the period of limitation should be reckoned from the issue of first show cause by the Jt. CIT?”

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

“i) Even when the authority competent to impose penalty u/s. 271D was Jt. CIT the period of limitation for the purpose of such penalty proceedings was not to be reckoned from the issue of first show cause by the Jt. CIT, but the period of limitation was to be reckoned from the date of issue of first show cause for initiation of such penalty proceedings.

ii) For the purpose of the present case, the proceedings having been initiated on 25/03/2003, the order passed by the Jt. CIT u/s. 271D on 28/03/2004 was hit by the bar of limitation.

iii) The CIT(A) and the Tribunal have, thus, not committed any error in setting aside the order of penalty. Consequently, the appeal fails and is, therefore, dismissed.”

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Penalty: S/s. 269SS and 271D: Amount received by assessee from her father-in-law for purchasing property: Transaction genuine and source disclosed: Penalty u/s. 271D not to be imposed:

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CIT vs. Smt. M. Yeshodha: 351 ITR 265 (Mad):

In the previous year relevant to A. Y. 2005-06, the assessee received a loan of Rs. 20,99,393/- in cash from her father-in-law for purchasing property. In the penalty proceedings u/s. 271D r/w. s. 269SS, the assessee claimed that the amount received in cash from father-in-law was a gift and not a loan. The Assessing Officer held that the assessee had received the amount as a loan and not as a gift, because the amount was shown as a loan in the balance sheet of the assessee, which was filed with the return of income. He therefore imposed penalty of Rs. 20,99,393/- u/s. 271D of the Act. The Tribunal held that the transaction was between the father-in-law and the daughter-in-law and the genuineness of the transaction in which the amount had been paid by the father-in-law for the purchase of property was not disputed, and the cash taken by the assessee from her father-in-law was not a loan transaction. The Tribunal, accordingly, deleted the penalty.

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

“i) The contention of the Revenue is that the amount received by the assessee from her fatherin- law has to be treated only as a loan and if it is a loan, then the assessee is liable to pay penalty u/s. 271D of the Act.

ii) Whether it is a loan or other transaction, still the other provision, namely, section 273B, comes to the rescue of the assessee, if she is able to show reasonable cause for avoiding penalty u/s. 271D. The Tribunal has rightly found that the transaction between the daughter-in-law and the father-in-law is a reasonable transaction and a genuine one owing to the urgent necessity of money to be paid to the seller. We find that this would amount to reasonable cause shown by the assessee to avoid penalty u/s. 271D of the Act.

iii) The Tribunal has rightly allowed the appeal. We do not find any error or infirmity in the order of the Tribunal to warrant interference. Accordingly, the substantial question of law is answered in favour of the assessee.”

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Exemption: Interest on tax free bonds: Section 10(15) : A. Y. 1988-89: Interest for period between application for allotment and actual allotment: Entitled to exemption: CIT vs. Bharat Heavy Electricals Ltd.; 352 ITR 88 (Del):

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For the A. Y. 1988-89, the assessee had claimed exemption of interest on tax free bonds u/s. 10(15). The Assessing Officer disallowed the claim for exemption in respect of the interest for the period from the date of application for allotment and the date of actual allotment. The Tribunal held that the assessee was entitled to exemption.

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

“i) In view of the amplitude of section 10(15)(iv), the fact that interest was paid for a brief period of about six days would not make it any less an amount of interest payable “in respect of bonds”.

ii) The assessee was entitled to exemption on the interest earned on tax free bonds between the date of their application by the assessee and the date of their allotment.”

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Double taxation relief: Section 91(1): A. Y. 1997- 98: Income earned in foreign country: Relief of taxes paid abroad: Relief not dependent upon payment of taxes being made in foreign country in previous year:

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CIT vs. Petroleum India International; 351 ITR 295 (Bom):

The assessee had paid taxes of Rs. 82 lakh in Kuwait on the income earned in Kuwait by it during the period relevant to the A. Y. 1997-98. Its claim for deduction of the said amount u/s. 91(1), was denied by the Assessing Officer on the ground that the payment of taxes in Kuwait was not made in the previous year relevant to the A. Y. 1997-98. The Tribunal allowed the assessee’s claim.

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

“i) There was no requirement that the benefit of section 91(1) would be available only when payments of taxes had been made in the previous year relevant to the assessment year under consideration.

ii) The object of section 91(1) is to give relief from taxation in India to the extent taxes have been paid abroad for the relevant previous year. This deduction/ relief is not dependent upon the payment also being made in the previous year.

iii) The payment of taxes on the income earned in Kuwait during the previous year had been examined and found to be correct. Therefore, the assessee was entitled to double taxation benefit for the taxes paid in Kuwait.”

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Depreciation(Unabsorbed): Carry forward and set off: A. Y. 2006-07: Effect of amendment of section 32(2) w.e.f. 01/04/2002: Unabsorbed depreciation from A. Y. 1997-98 to 2001-02 got carried forward to A. Y. 2002-03 and became part thereof: It is available for carry forward and set off against the profits and gains of subsequent years, without any limit:

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General Motors India (P) Ltd. vs. Dy. CIT; 257 CTR 123 (Guj):

In this case, the question for consideration before the Gujarat High Court was as to “whether the unabsorbed depreciation pertaining to A. Y. 1997-98 could be allowed to be carried forward and set off after a period of eight years or it would be governed by section 32 as amended by Finance Act 2001?”. The reason given by the Assessing Officer is that section 32(2), was amended by Finance Act No. 2 Act of 1996 w.e.f. A.Y. 1997-98 and the unabsorbed depreciation for the A. Y. 1997-98 could be carried forward up to the maximum period of 8 years from the year in which it was first computed. According to the Assessing Officer, 8 years expired in the A. Y. 2005-06 and only till then, the assessee was eligible to claim unabsorbed depreciation of A. Y. 1997-98 for being carried forward and set off. But the assessee was not entitled for unabsorbed depreciation of Rs. 43,60,22,158/- for A. Y. 1997-98, which was not eligible for being carried forward and set off against the income for the A. Y. 2006-07.

The Gujarat High Court held as under:

“i) Amendment of section 32(2) by Finance Act, 2001 is applicable from A. Y. 2002-03 and subsequent years. Therefore unabsorbed depreciation from A. Y. 1997-98 upto the A. Y. 2001-02 got carried forward to the A. Y. 2002-03 and became part thereof.

ii) It came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and was available for carry forward and set off against the profits and gains of subsequent years, without any limits whatsoever.”

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Capital or revenue receipt: A. Y. 2003-04: Business of Multiplexes and Theatres: Exemption from entertainment tax under Scheme of Incentive for Tourism Project, 1995 to 2000 for giving boost to tourism sector: Scheme offering incentive for recouping or covering capital investment:

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Is capital receipt: Dy. CIT vs. Inox Leisure Ltd.; 351 ITR 314 (Guj):

The assessee was engaged in the business of operating multiplexes and theatres in Pune and Baroda. During the previous year relevant to the A. Y. 2003-04 the assessee received an amount of Rs. 1,14,47,905/- by way of exemption from payment of entertainment tax relating to its Baroda multiplex unit. The exemption was granted by the State Government under the New Package Scheme of Incentive for Tourism Projects 1995 to 2000. Likewise, the assessee also received a similar entertainment tax exemption of Rs. 1,85,06,998/- from the State of Maharashtra under its own incentive scheme for its multiplex unit at Pune. The assessee claimed that the incentives were granted for covering the capital outlay and, therefore, the receipt was capital in nature. The Assessing officer treated the receipt as revenue receipt. The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) The character of receipt of a subsidy in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is granted. In other words, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. If the object of the subsidy is to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the scheme is to enable the assessee to set up a new unit or expand the existing unit then the receipt of subsidy would be on capital account.

ii) The salient features of the scheme showed that the incentive was being offered for recouping or covering a capital investment or outlay already made by the assessee.

iii) The Tribunal was right in holding that the entertainment exemption of Rs. 1,85,06,998/- and Rs. 1,14,47,905/- in respect of Pune and Baroda multiplexes, respectively, was a capital receipt, which was not eligible to tax for the A. Y. 2003-04.”

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Capital or revenue receipt: Entertainment subsidy: Object of subsidy to promote cinema houses by constructing Multiplex Theatres: Subsidy is capital receipt:

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CIT vs. Chaphalkar Bros.; 351 ITR 309 (Bom):

The following question was raised before the Bombay High Court in this case:

“Whether the entertainment duty subsidy given to the assessee by the State Government for construction of multiplexes is in the nature of revenue receipt or capital receipt?”

The High Court held as under:

“i) The purpose for which the subsidy was given is the relevant factor and if the object of subsidy was to enable the assessee to setup a new unit then the receipt of subsidy would be on capital account.

ii) Since the object of the subsidy was to promote construction of multiplex theatre complexes, the subsidy would be on capital account. The fact that the subsidy was not meant for repaying the loan taken for construction of multiplexes should not be ground to hold that the subsidy receipt was on revenue account because if the object of the scheme was to promote cinema houses by constructing multiplex theatres, irrespective of whether the multiplexes had been constructed out of the assessee’s own funds or borrowed funds, the receipt of subsidy would be on capital account.

iii) Therefore, the decision of the Tribunal that the amount of subsidy received by the assessee is on capital account could not be faulted.”

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Capital gains: Exemption u/s. 54/54F: A. Y. 2007-08: A residential house includes a building with a basement, ground floor, first floor and second floor constituting two residential units: Exemption allowable:

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CIT vs. Gita Duggal; 257 CTR 208 (Del): 214 Taxman 51 (Del): 30 Taxman.com 320 (Del):

Under a development agreement the assessee received by way of consideration Rs. 4 crore and a building consisting of basement, ground floor, first floor and the second floor constituting two residential units. In the computation of income for the A. Y. 2007-08, the assessee had computed capital gain with reference to the cash consideration of Rs. 4 crore. The Assessing Officer estimated the cost of construction of the said building at Rs. 3,43,72,529/- and included the same in the total sale consideration. The Assessing Officer rejected the assessee’s claim for exemption u/s. 54, but allowed the claim for exemption u/s. 54F in respect of one residential unit. The assessee’s reliance on the judgment of the Karnataka High Court in CIT vs. D. Anand Basappa; (2009) 309 ITR 329 (Kar) was not accepted by the Assessing Officer. Accordingly, he recomputed the capital gain and made an addition of Rs. 98,20,722/-. The CIT(A) allowed the assessee’s claim following the judgment of the Karnataka High Court. The Tribunal upheld the decision of the CIT(A).

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

“i) Fact that the residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of the exemption u/s. 54/54F. It is neither expressly nor by necessary implication prohibited.

ii) Tribunal was therefore justified in allowing exemption u/s. 54F in respect of entire investment in construction of a building consisting of two residential units.”

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Business expenditure: Fines and penalties: Section 37(1) : A. Y. 2004-05: Dishonour of export commitment in view of losses: Encashment of bank guarantee by Export Promotion Council: Payment recorded as penalty in assessee’s books and claimed as deduction: Compensatory in nature:

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Deduction allowable: CIT vs. Regalia Apparels Pvt. Ltd.; 352 ITR 71 (Bom):

The assessee is a manufacturer of garments. The Apparel Export Promotion Council granted to the assessee entitlements for export of garments and knit ware. In consideration of the export entitlements, the assessee furnished a bank guarantee in support of its commitment that it shall abide by the terms and conditions in respect of the export entitlements and produce proof of shipment. It was also provided that failure to fulfill the obligation to export would render the bank guarantee liable to being forfeited/ encashed. In view of the fact that the assessee was incurring losses, it decided not to utilise the export entitlements. This led the Council to encash the bank guarantee. The assessee recorded the payment as penalty in its books of account. The assessee claimed deduction of the said amount u/s. 37 of the Income-tax Act, 1961 for the A. Y. 2004-05. The Assessing Officer disallowed the claim holding that it is in the nature of penalty. The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) The finding of fact recorded by the Commissioner (Appeals) and upheld by the Tribunal was that the assessee took a business decision not to honour its commitment of fulfilling the export entitlements in view of losses being suffered by it. The Assessing Officer did not dispute the fact nor did he doubt the genuineness of the claim of the expenditure being for business purposes.

ii) In these facts the Tribunal held that the assessee had not contravened any provisions of law and, thus, the forfeiture of the bank guarantee was compensatory in nature u/s. 37(1) of the Act.

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Consortium of members formed for the purpose of joint bid does not constitute AOP if each of the members has specified responsibility independent of the other member and consideration flowing to each of the member is separate. Certain common covenants inc

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New Page 1

Part C : Tribunal &
AAR International Tax Decisions

7 Hyundai Rotem Co.
(2009) TIOL 798 ARA-IT
Dated : 23-3-2010

Consortium of members formed for the purpose of joint bid
does not constitute AOP if each of the members has specified responsibility
independent of the other member and consideration flowing to each of the member
is separate. Certain common covenants including agreeing to joint and several
liability for the comfort of the customer does not alter the situation.

Facts :


Five companies (one Korean, two Japanese and two Indian)
entered into a consortium named MRMB to bid for tender floated by Delhi Metro
Rail Corporation (DMRC). The bid was for designing, manufacturing, supplying,
commissioning, training and transfer of technology of 192 numbers of EMUs. The
contract was for a fixed consideration and was apportioned amongst various cost
centres and was linked to various milestones.

Responsibility of each of the member was clearly identified.
For example, Korean company was responsible for mechanical work, the Indian
company 1 was responsible for electric work, etc. Consideration of each one of
the members was clearly identified. Japco 1 was appointed as a consortium
leader. The amount collected from the customer was disbursed by the consortium
leader to the various members as per the pre-agreed ratio.

The tax authorities were of the view that the consortium
constituted an AOP on account of the following features :

(a) Joint participation of the consortium members in the
tender process.

(b) Bid having been submitted by the consortium.

(c) Execution of single contract.

(d) Appointment of common project director for planning,
organising and controlling execution of the project.

(e) Nomination of a consortium leader and its appointment
as a contact point between the customer and the members.

(f) Constitution of the project Board with nominee of each
member for overall planning, organising or controlling the execution of the
project.

(g) Furnishing of joint bank guarantee.

(h) Joint and several liability for the undertaking of the
contract. The overall responsibility of the consortium was to design,
manufacture, supply, etc. of 192 EMUs for which considerations was also
prefixed.

(i) All in all, there were collaborative efforts on the
part of the parties to undertake the contract which in view of the Tax
Department resulted in formation of the AOP.

AAR held :

  1. AAR noted that
    there is no definition of AOP in the IT Act or under the general law. It
    observed that AOP differs from the partnership and it falls short of a
    partnership, but the degree of distinction between the AOP or the firm is not
    clear.

  2. The constitution
    of AOP is fact-based and there are no hard and fast rules.

  3. In the context of
    IT Act, the association must be one the objects of which is to produce income,
    profits or gains by deploying assets in a joint enterprise with a view to make
    profit.

  4. The facts of the
    present case were akin to the facts before the AAR in case of Van Oord Acz BV
    (248 ITR 399). In view of the AAR, the present consortium did not constitiute
    an AOP on account of the following features :

(a) Nature of work undertaken and capable of being executed
by each member was materially different. Skill-set of each member was
different. Work of one member could not have been relocated to another.

(b) Bid evaluation by the costomer was done keeping in mind
competency of each member. There was no interchangeability or reassignment of
work or overseeing the work of each other.

(c) There was deduction in the original bid amount and the
discount agreed by each member was different. This was indicator of the fact
that economics of each of the members were detemined independently.

(d) In addition to the joint performance guarantee, each
member provided separate guarantee and undertaking.

(e) The agreement specifically clarified that there was no
intent between the parties to create any partnership or a joint venture.

(f) The covenant of joint and several liability was a
safeguard for the client to have better control over the consortium members.


  1. The facts of the case before AAR in GeoConsult ZT GMBH (304
    ITR 283) where the arrangement was regarded as giving rise to AOP were
    distinguishable. In GeoConsult’s case, there was intention to create a joint
    venture; the members had the same skill-set and scope of their work was
    overlapping. Also, the members had assisted each other in performance of the
    work and the members had unrestricted access to the work carried out by the
    other members, etc. The features in the present arrangement were different.

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Payments made towards the share of the cost incurred in respect of research and development activities pursuant to cost contribution arrangement (CCA) is not the payment towards fees for technical services or royalty. Such contribution is not liable to ta

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New Page 1Part C : Tribunal &
AAR International Tax Decisions

6 ABB Limited
(2010) TIOL 94 ARA-IT
S. 2(24), S. 195 of the Income-tax Act,
Articles 5 & 7 of India-Switzerland DTAA
Dated : 15-3-2010

Payments made towards the share of the cost incurred in
respect of research and development activities pursuant to cost contribution
arrangement (CCA) is not the payment towards fees for technical services or
royalty. Such contribution is not liable to tax in the hands of the co-ordinating
agency.

There is no obligation of tax withholding if the amount does
not represent income chargeable to tax.

Facts :


The applicant is a company incorporated in India and part of
the ABB Group, which is a leader in power and automation technologies. The Group
has presence in more than 100 countries.

As per Group’s R&D policy, all basic R&D is coordinated and
directed through group entity in Switzerland (Swissco).

The group entities who wish to participate in basic R&D enter
into a CCA with Swissco. As per the terms of CCA, the entire costs of basic R&D
is shared amongst the participants based on a pre-agreed allocation key. The
participating entities are allowed a royalty-free unlimited access to the
research results, including any Intellectual Property Rights (IPRs) generated
from basic R&D. Any revenue earned from third party is reduced from the total
cost recovered from the participants. The research programme and policy is
decided by the research Board which has nominee from the participating entities.
The research Board decides on the research to be undertaken, the budgeted cost,
recovery to be made from various participants based on budget and adjustment to
be made based on the actual cost incurred and third-party revenue earned, etc.
The research Board gets the research carried out through various research
centres to whom the remuneration is paid on cost plus basis.

CCA made it clear that though the economic benefits of
research vest in various participants, for administrative reasons and
convenience, the IPRs generated are legally registered in the name of Swissco.

In addition to the cost contribution payments, each
participant also paid a ‘coordination fee’ to Swissco for its role as
administrator and coordinating agency under the CCA. Such fee was accepted to be
chargeable to tax in India and no question was raised on taxability of such
amount.

The applicant sought the ruling on the tax implications of
the contributions proposed to be made to Swissco. The primary contentions of the
applicant before the AAR were (i) that the CCA was merely a pooling and
coordinating arrangement and represented reimbursement of actual cost incurred
in carrying out the research jointly; (ii) the contribution did not partake the
character of income and was, therefore, not chargeable to tax in India; and
(iii) even if the contribution constituted income, it represented business
income of Swissco, which in absence of PE in India, was not chargeable to tax.

AAR held :

  • The payments made to
    Swissco are not in the nature of FTS since Swissco had not rendered any
    managerial, technical or consultancy service to the participants of CCA.
    Swissco did not deploy any personnel to perform any services in India.


  • The contribution was not
    payment on account of royalty. It is true that research results in creation of
    IPR in the form of information, technical knowledge and experience. However,
    payment made to Swissco was not for getting rights to such IPRs. The contract
    research organisation through whom the research board got the research carried
    out merely works as contractor without retaining IPR or right to commercial
    exploitation of the research.


  • Even though the IPRs
    generated from the research were to be registered in the name of Swissco,
    their economic benefits and beneficial ownership vested in the contributories.
    Admittedly, all participants had royalty-free and perpetual access to IPR.
    Also, amounts received from third party or from exploitation of IPR reduced
    the cost of the research to the participants. The arrangement was thus for the
    benefit of all the participants where the resources were pooled by various
    participants for undertaking R&D for common benefit.


  • The arrangement was such
    that each participant reimbursed the actual cost incurred by making the
    proportionate contribution. The OECD Guidelines on CCA arrangement also makes
    it clear that each participant is effective owner of the IPR generated through
    common pool and hence the contribution is not royalty paid to any other
    person.


  • The amount of
    reimbursement was not chargeable to tax in India and consequentially not
    liable to TDS.


  • The AAR clarified that
    its decision on non-taxability however does not preclude enquiry in
    appropriate proceedings about the nature of contribution on an armed-length
    basis.



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No income arises to the foreign company in India in the course of deputing personnel to an Indian company, who work under the control and supervision of the Indian company and thus become employee of the Indian company. Amount of salary of deputed employe

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New Page 1Part C : Tribunal &
AAR International Tax Decisions

5 DDIT v. Tekmark Global Solutions LLC
(ITA 671/2007) (ITAT-Mum.)
Article 5(2), 7 of India-USA DTAA
Dated : 23-2-2010


No income arises to the foreign company in India in the
course of deputing personnel to an Indian company, who work under the control
and supervision of the Indian company and thus become employee of the Indian
company. Amount of salary of deputed employees reimbursed to the foreign company
is not taxable in India.

Facts :

Lucent Technologies Hindustan Private limited (ICO), an
Indian company, entered into an agreement with the assessee, a tax resident of
USA, to have their personnel deputed as per specifications of ICO.

ITAT considered the following terms of the contract between
ICO and the assessee to conclude that the arrangement between them was not for
providing of services by the assessee through its employees but that of
selecting and offering personnel for working as employees of ICO :

  • ICO provided
    specifications of the employees whom it (ICO) required pursuant to deputation
    arrangement.

  • The deputed personnel
    worked under the direction, supervision and control of ICO.


  • The assessee was not
    responsible for the work done or actions taken by the deputed personnel.


  • The lodging, boarding and
    other related expenses of deputed personnel were arranged by ICO.


  • The agreement made it
    clear that the agreement was for providing employees as per specifications of
    ICO and not for providing services to ICO.


The ITAT did note that the deputed personnel continued to be
on the payroll of the assessee and that the salary of the deputed personnel was
paid by the assessee for recoupment by way of reimbursement from ICO.

The Tax Department contended that the arrangement involved
rendering of services by the assessee to ICO through its employees in India and
that there was emergence of Service PE of the assessee in India. Accordingly,
the amounts were held chargeable in the hands of the assessee.

ITAT held :

The ITAT held :

  • No part of technical
    services were rendered by the assessee to ICO.


  • The deputed personnel for
    all practical purposes became the employees of ICO and carried out work
    allotted to them by ICO. The assessee had no control over the activities or
    the work performed by the deputed personnel. ICO alone had the right to remove
    the deputed personnel.


  • When the services
    rendered are independent of, and not under the control of, the assessee, the
    deputed personnel do not give rise to emergence of PE of the assessee in
    India.


  • In the circumstances, the
    amount received was reimbursement of salary which the assessee had disbursed
    as advance on behalf of and to the employees of ICO.


  • Even on an assumption
    that there is emergence of PE, there was no income embedded in the
    reimbursement of expenses.



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Provisions of Section 195 are not attracted where the payment represents reimbursement of expenses having no element of income.

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New Page 1

Part C — International Tax Decisions




  1. Cairn Energy India Pty Ltd. vs. ACIT
    [2009-TIOL-220-ITAT-MAD] (Chennai)

A.Ys. : 1996-97 to 1999-2000

Date : 20.02.2009

Sections 40(a)(i), 42 and 195.

Issue :

 

@ Provisions of Section 195 are not attracted where the
payment represents reimbursement of expenses having no element of income.

@ Where income is computed under the special provisions of Section 42, no
disallowance can be made under Section 40(a)(i).

Facts :



Ø The assessee, an Australian company, was engaged in the
business of prospecting for and production of mineral oils in India. Since
the exploration and production activities carried out by the assessee were
covered by Production Sharing Contract (PSC) approved by the Parliament, the
assessee was admittedly covered by provisions of Section 42 of the Act.

Ø The assessee made certain reimbursements to its parent
company outside India in connection with business activity carried on by the
assessee in India. These reimbursements were claimed as expenditure under
Section 42. The AO disallowed the claim on the ground that assessee had
failed to deduct tax at source.

Ø The assessee submitted before the Tribunal that the
expenditure was in connection with petroleum operations and were charged to
the assessee on cost-to-cost basis in terms of the PSC. Since the charge was
at cost without any mark-up, withholding in terms of 195 was not required.
The assessee also argued that Section 42 had an overriding effect and is a
separate code by itself and accordingly the general computational provisions
of the Act cannot be applied. Reliance in this behalf was made to Supreme
Court decision in the case of Enron Oil and Gas India Ltd. [305 ITR 75].
Alternatively, based on judicial precedents it was submitted that there
cannot be any withholding on reimbursement where there was no element of
income.


Held :



Ø The Supreme Court in Enron (referred above) has
analysed the scope of Section 42 and held that the Section is a special
provision, is a code by itself for computing the income in respect of the
business of prospecting, extraction or production of mineral oils.

Ø In terms of Section 42, any expenditure which is
referred to in PSC, whether revenue or capital in nature is allowed as a
deduction. The scheme of Section 42 overrides all general computational
provisions including Section 40(a)(i). Hence, no disallowance can be made in
terms of Section 40(a)(i).

Ø As regards withholding on the payment, the Tribunal
held that the auditors of the parent company had certified that such payment
represented actual expenses and there was no reason to disbelieve such
certificate. Even, PSC provided and regulated that charges shall be equal to
the actual cost of providing services and shall not include any element of
profit. The Tribunal relied on decisions of CIT vs. Industrial Engg.,
[202 ITR 1014] (Delhi) and CIT vs. Dunlop Rubber Company, [142 ITR
493] (Calcutta) and held that no income accrued to the parent company from
payments representing reimbursement of expenses and hence provisions of
Section 195 did not apply.


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Whether income earned from transportation of cargo in international traffic by aircraft owned, chartered or leased by other airlines is covered by Article 8 of India-USA Treaty.

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New Page 1

Part C — International Tax Decisions




  1. ADIT vs. Federal Express Corporation, USA
    [2009-TIOL-179-ITAT-Mumbai]

A.Y. : 1998-99 to 2000-01

Date : 29.01.2009

Article 8 of India-USA Treaty

Issue :

Whether income earned from transportation of cargo in
international traffic by aircraft owned, chartered or leased by other airlines
is covered by Article 8 of India-USA Treaty.

 

Facts :



Ø The assessee, a US company was engaged in integrated
air and ground transportation of time sensitive and time definite shipments
to various destinations worldwide (airport to airport services). It also
provided door-to-door delivery service for international shipment
(door-to-door delivery).

Ø The assessee had its own fleet of aircrafts, however,
in case of shipments which required express custom clearance it had entered
into interline arrangement with other airlines.

Ø In India, it was granted approval by the Director
General of Civil Aviation (DGCA) to operate air cargo services to and from
India. During the relevant year, in absence of approval from DGCA, the
assessee entered into interlines arrangement with other airlines for
carrying its cargo to India. In respect of monitoring of movement of cargo
within India, it entered into collaboration with Blue Dart Express which
performed actual pick-up and delivery of cargo. It established branches in
India and operated air cargo services to and from India.

Ø The Assessing Officer held that the assessee was
engaged in courier activities and not in the business of operation of
aircrafts in international traffic. Accordingly he denied benefit of
exemption of Article 8 of India-USA Treaty as claimed by the assessee. The
claim was however accepted by the CIT(A).

Ø The Department preferred appeal on the ground that
unless assessee establishes linkage between transportation of cargo carried
by other airlines with the carriage from the hub by the assessee, it cannot
be allowed the benefit of Article 8. Reliance was placed on Mumbai Tribunal
decision in the case of Cia de Navegacao Norsul [27 SOT 316]. The Department
argued that the term ‘profits from operation of ship or aircraft in
international traffic’ is defined in Article 8(2) of the Treaty and hence no
reference can be made to the commentaries and other support/guidance to
interpret. Article 8(2)(b) includes activities directly connected with
transportation of goods by the owners or lessees or charterers but would not
include cargo carried in international traffic by other airlines or inland
transportation of cargo.

Ø Before the Tribunal, the assessee submitted it had
entered into interline arrangements for transportation of cargo to a hub
from where aircrafts of the assessee were used for transportation of the
same in international traffic under slot arrangement. Reliance was also
placed on Mumbai Tribunal decision in the case of Balaji Shipping (UK) Ltd.
[25 SOT 325], where it was held that the expression ‘Profits from operation
of ships’ in UK Treaty would include not only profits from operation of
ships owned, chartered or leased, but also transportation through other
ships under slot arrangement. It further submitted that services of other
airlines were merely incidental to the main activity and hence covered by
Article 8. Alternatively it was submitted that the arrangements were pool
arrangement providing reciprocal services covered by Article 8(4) of the
Treaty.

Ø As regards inland transportation, assessee contended
that these activities were directly connected to the main activity of
transportation of cargo in international traffic covered by Article 8(2)(b).


Held :



Ø The assessee could be said to be engaged in the
business of transportation of cargo in the international traffic (and not in
courier services) as it is engaged in the business of transporting cargo
through a large fleet of globally-owned aircraft and it was recognised as
such by the authorities in India and in the USA. It was a registered member
of the International Air Transport Association.

Ø In the decision of Balaji, the Mumbai Tribunal referred
to OECD commentary since the term ‘profits from operation of ship’ is not
defined in UK Treaty. However, since the term ‘profits from operation’ has
been defined in Article 8 of US Treaty, relying on its decision in Delta
Airlines, where no reference was made to the commentary, the Tribunal held
that the benefit of Article 8 would be available only to the extent the
activity falls under the definition of Article 8(2).

Ø The transportation by aircraft, which is neither owned
nor leased by assessee would be outside the scope of the term ‘profits from
operation of ships or aircraft’ as defined in Article 8(2) of the US Treaty.
Accordingly, the Tribunal held that the income from operation involving
interline arrangement would not be exempt in India.

Ø The term ‘other activity directly connected with such
transportation’ would only mean transportation as referred in Article 8(2)
and as already concluded, the assessee is not covered by Article 8(2).
Accordingly, relying on decisions of the Mumbai Tribunal in Safamarine
Containers Lines [24 SOT 211] and Delhi Tribunal in KLM Royal Dutch Airlines
[307 ITR 142] (AT), the Tribunal held that inland transportation was also
not connected with the main activity and would be outside the scope of
Article 8.

Ø Where the income is not covered by the provisions of
Article 8, it would be treated as business profits under Article 7 of the
treaty and accordingly, the claim of the assessee would be examined under
Article 7.

Ø In respect of the alternative, claim of exemption under
Article 8(4) as pool arrangement, the Tribunal held that the same could be
examined by ascertaining whether the profits were derived from participation
in a pool, joint business or an international operating agency. Also, as the
claim of the assessee of having chartered the aircraft by booking some space
therein was made for the first time, it would have to be examined by the AO.
Further, as the meaning of the word ‘chartered’ as appearing in the Article
is not clear from the definition itself.

Whether royalty income earned by the taxpayer can be said to be ‘effectively connected’ with its permanent establishment (PE) in India, so as to be taxable as per the ‘business income’ article of the India-Australia Tax Treaty (Treaty).

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New Page 1

Part C — International Tax Decisions



  1. Worley Parsons Services Pty. Ltd.

[2009-TIOL-06-ARA-IT] (AAR)

Date : 30.03.2009

Article 12 of India-Australia DTAA

Issues :

Whether royalty income earned by the taxpayer can be said
to be ‘effectively connected’ with its permanent establishment (PE) in India,
so as to be taxable as per the ‘business income’ article of the
India-Australia Tax Treaty (Treaty).

 

Facts :



Ø A company incorporated in Australia (Ausco), is in the
business of providing professional services to the energy and resources
industry. Ausco entered into a contract with Reliance Petroleum Limited, an
Indian Company (ICo) for providing certain services in connection with the
ICo’s project of laying cross-country pipelines for the transportation of
hydro-carbons.

Ø Ausco entered into the following separate contracts
with the ICo :

G Basic Engineering and Procurement Services Contract
(BE&P), which was divided into two phases. Phase I was further divided
into 2 parts, viz., Basic Engineering and Procurement Services. In
respect of Basic Engineering services, 80% of the work was performed in
Australia and the balance was performed in India. In respect of the work
which was performed in India, Ausco’s employee had made short duration
visits to India for inspection, topography study, preparation of route
map, etc.).

G Ausco was entitled to a lump sum consideration for
all components under the BE&P.

G Project Management Services Contract (PMS). For this
Ausco’s employees were present in India for a significant period. The
employees were provided office space by the local engineering contractor,
for the performance of services under PMS.

G In terms of India-Australia Treaty, it was admitted
by the applicant that the amount was chargeable to tax in India under
Article XII of the Treaty as royalty income. The applicant also submitted
that it had PE in India.

Ø In its application, Ausco submitted before the AAR that
both (a) the contract BE&P and PMS were integral part of single contract and
hence entirety of royalty income was ‘effectively connected’ with the PE in
India; (b) In terms Article XII (4) (herein referred to as ‘the PE exclusion
rule’) of the Treaty, the amount was chargeable to tax as business income in
terms of Article VII of the Treaty; and (c) In terms of Article VII, only
that part of the profits, which was attributable to the PE, can be charged
to tax in India. For this, the applicant relied on the SC decision in
Ishikawajima Harima Heavy Industries [288 ITR 408], to contend that where
income is in respect of services rendered outside India, it is not liable to
be taxed in India in terms of the domestic law provisions.

Ø The Tax Department however contended that services
performed outside India in terms of Phase I of the BE&P were not
‘effectively connected’ with the PE of the Taxpayer in India and hence the
PE exclusion rule did not apply. Consequently, the royalty receipts were
taxable in terms of Article XII of the Treaty. The department obtained that
the SC decision in Ishikawajima’s case was distinguishable.


Held :

The AAR considered the taxability of the applicant under
Article XII and Article VII of the Tax Treaty. The AAR held :

1. Article VII (7), which paves way for the operation of
other specific articles of the Treaty, does not dilute the impact of the PE
exclusion Rule contemplated in terms of other Articles of the Treaty. If the
specific Articles provide for taxation of income under Article 7, the
receipt will be taxable as business income in terms of other provisions of
the treaty.

2. In case of royalty, the PE exclusion rule applies
where there is an ‘effective connection’ between the royalty generating
services and the PE. Mere presence of a PE for carrying out some other
activities is not sufficient for establishing an effective connection. For
royalty to be ‘effectively connected’ to the PE, the PE in India should be
engaged in the performance of royalty generating services and should
facilitate performance of such services.

3. ‘Effectively connected’ means ‘really connected’ and
the connection should not only be in ‘form’, but also in ‘substance’. A
pragmatic and purposive approach needs to be adopted for construing whether
or not an ‘effective connection’ exists between the PE and the royalty
income. The set-up, the functions, the purpose and duration of the PE, etc.
are relevant factors for determining this aspect.

4. The words ‘effectively connected with the PE’ are not
words of redundancy and should be given their due meaning. A real and
perceptible connection should exist to fulfil the condition before the
receipt can be treated as effectively connected with PE.

5. For the PE exclusion rule to get triggered, the PE
must have substantial activities and such securities must be carried out
over a period of time. A nominal establishment with skeletal staff,
attending to minimal or negligible work may not be sufficient to trigger the
PE exclusion rule on the ground of ‘effective connection’.

6. In the case of the applicant, BE&P and PMS contracts
are separate contracts covering different phases of the projects having
different rights and obligations. The nature of services and consideration
in respect of each one are separate and distinct. As a result, each
contract, although relating to the same project, needs to be seen
independently for determining the effective connection with the PE.

7. The SC ruling in the case of Ishikawajima cannot be
read to mean that the mere existence of a PE is enough to trigger the PE
exclusion rule and cause royalty income to be assessed as business income.
It does, however, imply that there may be situations where, though the
royalty may be ‘effectively connected’ with the PE, it may still not be
‘attributable’ to the PE.

8. The AAR observed that the SC decision is
distinguishable and not applicable to the facts of the present case. The AAR
held that the SC was concerned with the PE exclusion rule in respect of the
India-Japan Tax Treaty, which gets triggered when ‘right, property or
contract’ is ‘effectively connected.

S. 163, and India — Japan Treaty

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New Page 16 Masuzawa Punjab Silk Ltd. v.
ACIT

(113 TTJ 878) (Asr)

A.Y. : 2000-01. Dated : 4-12-2007

S. 163 and India-Japan Treaty.



l
Salaries including perquisites provided to NR technical personnel deputed
to Indian JVCO to provide erection and installation services are chargeable to
tax u/s.9(1)(ii) of the Act. In the circumstances of the case, Indian JVCO can
be regarded as an agent of the expatriates u/s.163(1)(c) and u/s.163(1)(b) of
the Act.


l
Reimbursement of actual travel expenses of employees are exempt u/s.10(14).


 


Facts :




(1) MCL (A company of Japan — herein Japco) entered into
joint venture agreement with another Indian company. The joint venture was
carried through the assessee-company. In terms of the joint venture agreement,
Japco had agreed to supply certain equipments which hitherto were used by Japco
at Japan.

(2) The plant at Japan was discontinued and the equipments
were dismantled for the purpose of refurbishing and installation at the
premises of the assessee-company. In terms of the agreement, Japco had
obligation to refurbish and install the equipments and to ensure that the
plant provided certain minimum production of specified quality.

(3) In terms of the overall arrangement, the Japanese
company had to provide certain technical personnel during the stage of
erection, installation, commissioning as also during the initial years of
plant operation.

(4) During the set-up phase of plant, the responsibility of
meeting cost of the technical personnel was that of Japco.

During the first and the second year of operation of the
plant, the assessee company had obligation to pay certain consolidated charge
towards providing of personnel by Japco. The assessee also had to meet the
cost of travel and accommodation of such personnel. The employees however were
to continue to be employees of Japco and their salary was to be paid by Japco.

(5) During post-installation period, two engineers,
residents of Japan, had stayed in India for a longer duration. The duration
had elongated because the production was not of desired quantity and quality.
In terms of the agreement, the assessee had paid for travel of the employees
and provided accommodation to them. Salary of these two engineers was paid at
Japan by Japco.

(6) It was common ground that the engineers were liable to
tax in India in respect of services rendered in India in view of their long
stay in India. Also, engineers were admittedly employees of Japco and salary
to them was paid by Japco at Japan.

(7) There was difference of opinion on true scope and
interpretation of the agreement as to who was responsible to bear cost of
salary. The assessee’s contention was that since the basic obligation of
setting up plant was of Japco, the cost obligation was of Japco, as the plant
was not set up as desired. As against that, the Department’s contention was
that even during pre set-up period, the assessee had obligation to meet cost
of certain engineers and for the years under reference, and for the two
engineers covered by the notice u/s.163, the assessee was obliged to meet the
cost of such personnel.

(8) The assessee had remitted certain amount to Japco and
had deducted tax at source by treating it to be remittance towards fees for
technical services. The tax so deducted was duly paid. In addition to such
compliance, the Department was seeking to treat the assessee as an agent
u/s.163 in respect of salary taxation of two engineers who were employees of
Japco, on the ground that their salary burden was ultimately borne by the
assessee.

(9) The AO passed order u/s.163 and held the assessee to be
an agent in relation to two engineers. The assessee was held to be an agent
u/s.163(1)(c), on the ground that the assessee was a person from or through
whom the non-resident engineers were in receipt of the income indirectly.

(10) The assessee was also held to be an agent
u/s.163(1)(b), on the ground that the assessee had business connection with
Japco which was carrying on business in India through the medium of the
assessee company.

 


Held :



l
On factual front, the Tribunal concurred with the Department that the assessee
was responsible for meeting the cost of two engineers for whom it was held to
be an agent u/s.163.


l
The Tribunal also concurred with the lower authorities and held that the
assessee was rightly held to be agent of two non-resident engineers.


l
In the view of the Tribunal, provisions of S. 163(1)(c) are wide enough to
cover income earned directly or indirectly. Though the two engineers deputed
by Japco were employees of Japco, salary received by non-resident engineers
was for services rendered to the assessee and therefore the salary income can
be said to have been received by non-resident engineers through the assessee
who was obliged to meet the cost of such personnel.


l
The Tribunal also concurred with the lower authorities that the assessee can
also be treated as an agent u/s.163(1)(b), on the ground that the assessee had
business connection with the non-resident. The Tribunal held that Japco had
agreed to provide exclusive marketing support and also had equity
participation in the capital of the assessee-company.


l
Apart from proportionate salary, the housing accommodation provided by the
assessee to the non-resident engineers was held chargea

India USA Treaty — Article 12(4) of India-US treaty — Scope of fees for included services

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New Page 15 ICICI Bank Ltd. v.
DCIT (20 SOT 453) (Mum.)

A.Y. : 1997-98. Dated : 9-10-2007

India-USA Treaty.

 

Amount remitted to credit rating agency for the purpose of
obtaining rating in respect of issue of Floating Rate Euro Notes (FRENs) is not
fees for included services in terms of Article 12(4) of India-US treaty and is
therefore not chargeable to tax in India.

 

Facts :

The assessee bank appointed Moody’s Investor Services (MIS),
a credit rating agency of the USA, for the purpose of obtaining rating in
respect of one of its FRENs issues. MIS rendered rating services outside India.
The assessee remitted fees towards such services without deducting tax at
source. The contention of the assessee was that the amount represented charges
towards commercial services chargeable as business income and since the services
were rendered outside India, the same was not chargeable to tax in India.

The AO held that the amount was chargeable to tax in India,
as the same represented fees for technical services covered by S. 9(1)(vii)(b)
of the Act. The AO also concluded that services were covered by Article 12 of
the DTAA and hence payment was subject to withholding tax obligation in India.

 

Before the Tribunal, the assessee submitted that rating is
required to be done as per international practice for the benefit of investors
and no technical skill or process was transferred to the assessee. The assessee
relied on the following decisions to support its contention that payments for
rating services were not fees for included services and hence were not liable to
taxation in India :

1. Raymond Ltd. v. DCIT, (86 ITD 791) (Mum.)

2. Wockhardt Life Science Ltd. [IT Appeal No. 3625 (Mum.)
of 2000]

3. Gujarat Ambuja Cements Ltd. v. DCIT, (2 SOT 784)
(Mum.)

4. Bajaj Auto v. DCIT, [IT Appeal Nos. 2662 and 2663
(Mum.) of 2000]

5. Wipro Ltd. v. ITO, (1 SOT 758) (Bang.)

6. Mc Kinsey & Co. Inc (Philippines) v. ADIT, (99
ITD 549) (Mum.)

 


The assessee also relied on Memorandum of Understanding to
India-US DTAA on the scope for fees for included services as also on example VII
given in the said protocol to support the contention that commercial services
were not fees for included services and were not covered by Article 12 of the
treaty.

 

Held :



l
The Tribunal observed that the rating services were commercial services. In
view of the Tribunal, though skill, expertise, know-how were used by the
service provider for rendering services, the service was not technical in
nature. Also, skill, expertise or know how was not made available to the
assessee, so as to get covered by the scope of fees for included services.


l
The Tribunal referred to and relied on decision of Mumbai Tribunal in the case
of Raymonds and that in case of McKinsey to support that the concept of ‘make
available’ requires that the person acquiring the service is enabled to apply
the technology in his own right to the exclusion of the service provider.


l
Since the amount was not chargeable to tax in India, the assessee had no
obligation to deduct tax at source u/s.195 of the Act.


 


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India Mauritius Treaty — Payment for liasoning with legal and financial advisors — commercial services — Not royalty

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New Page 14 Spice Telecom v.
IPO (113 TTJ 502) (Bang.)

A.Y. : 2001-02. Dated : 3-2-2006

India-Mauritius Treaty



l
Payment for liasing with legal and financial advisors and negotiations with
vendors and financial institutions for vendor loans and long-term project
finance are commercial services not liable to source taxation in India as
royalty.


l
Providing of information constitutes royalty if information has perpetual
or extended use. Suggestions on ways and means on the basis of
data/information collected by the assessee itself is not royalty.


 


Facts :

(1) The assessee was engaged in the business of providing
telecommunication services. For this purpose, it entered into technical and
operating service agreement with one M/s. Distacom of Mauritius [herein Mauco].
Mauco had an obligation of providing certain know-how and other support
services.

 

(2) The assessee-company remitted certain amounts to Mauco on
account of :

(a) Provision of expertise and training on the
technological aspect of mobile telephony business;

(b) Provision of advisory and support services in respect
of financial and operational aspects of business.

 


(3) The assessee deducted tax at source in respect of payment
covered by 2(a) above by treating it to be payment of royalty. In respect of
payment covered by 2(b) above, no tax was deducted on the ground that the same
represented remittance towards commercial services rendered by Mauco outside
India.

 

(4) On further inquiries, it was found that the payment
covered by 2(b) viz. advisory and support services comprised of two
components :

(a) Payment for liaising with legal and financial advisors
and negotiating with vendors and financial institutions for obtaining vendor
credit and long-term project finance.

(b) Providing support for developing sales distribution
channels, promoting brand awareness, promoting customer-care programmes,
formulating marketing strategy, suggestions on pricing strategies billing
systems, etc.

 


(5) The assessee claimed that the remittance covered by para
4 was towards services provided from Mauritius and was not in respect of royalty
payment. The amount was claimed by the assessee to be not chargeable in the
hands of the recipient in view of India-Mauritius treaty which does not have
specific Article dealing with fees for technical services (FTS). The fee was
claimed to be treated at par with any other offshore business income.

 

(6) The Department contended that the payment was pursuant to
the know-how contract and was in respect of grant of know-how or for imparting
information concerning industrial, commercial or scientific knowledge of Mauco
and was therefore chargeable to tax as royalty income.

 

Held :

The Tribunal held :


l
The agreement under reference was for providing of services apart from
providing certain know-how and access to intellectual property rights. The
scope of agreement required Mauco to provide know-how as also give advice and
assistance in technical, administrative, accounting and finance field. Payment
concerning know-how covered by para 2(a) was rightly treated as royalty and
liable to tax as such.


l
The contract for services is different compared to the know-how contract. In
case of any know-how contract, the person uses his already existing knowledge
base and experience which is unrevealed to the public. As against that, in
service contract, the person undertakes to use his customary skills and
executes work himself. In a know-how contract, the supplier has to little
exert while he leverages upon his knowledge and experience, whereas in a
service contract, he undertakes greater level of expenditure of his efforts.


l
Having regard thereto, part of the contract which dealt with legal and
financial advice and negotiations with vendors, financial institutions
represented contract for services. The services were commercial in nature. In
absence of special article in India-Mauritius treaty dealing with fees for
technical services, the amount was chargeable as any other business income.
Since the services were rendered from outside India, the same were not taxable
in India. The payment covered by para 4(a) was held to be not chargeable to
tax in India.


l
As regards the second limb [viz. payment covered by para 4(b) above],
the Tribunal observed that the amount may constitute royalty, depending on the
nature of information and support provided. The Tribunal referred to various
meanings of the term know-how. The Tribunal observed that grant of know-how
will result in access to information which is of perpetual or extended use. As
against that, if Mauco provided support on the basis of facts and information
collected by the assessee, the same would, prima facie, be in the
nature of providing of services, which is not equivalent to grant of access to
know-how. So observing, the Tribunal set aside the matter to ITO to determine
taxability of the payment made in the circumstances gisted at para 4(b).


 


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filing appeal by Revenue: Instruction No. 3 of 2011, dated 9-2-2011 is retrospective: Department must show ‘cascading effect’.

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[CIT v. Varsha Dilip Kohle (Bom.) (Aurangabad Bench); ITA No. 7 of 2010 dated 5-3-2012]

In this appeal filed by the Revenue in the year 2010 the tax amount in dispute was Rs.6,69,770. CBDT Instruction No. 3 of 2011, dated 9-2-2011 prescribed the limit of Rs.10,00,000 for filing an appeal before the High Court u/s.260A of the Income-tax Act, 1961. The High Court observed that since the tax effect does not exceed Rs.10 lakh, the appeal is required to be dismissed in view of the CBDT Instruction No. 3 of 2011, dated 9-2-2011.

The Department contended that (i) as the appeal has been filed prior to the issuance of the Circular, the Circular did not apply; and (ii) as the appeal had a ‘cascading effect’ involved a ‘common principle’, the appeal could not be dismissed in view of the Supreme Court’s verdict in Surya Herbals.

The Bombay High Court dismissed the appeal and held as under: “

(i) In CIT v. Smt. Vijaya V. Kavekar, (Tax Appeal No. 78 of 2007 with Tax Appeal No. 76 of 2007) decided on 29-7-2011, a Division Bench of this Court, while interpreting the very Circular No. 3 of 2011, has held that the Circular has a retrospective operation and instructions contained in the Circular would apply even to the pending cases.

(ii) As regards Surya Herbals case, the appeal does not involve any ‘cascading effect’ as the Department has not shown whether there are other appeals which raise the same point.”

levitra

A. P. (DIR Series) Circular No. 94 dated 1st April, 2013

21. A. P. (DIR Series) Circular No. 94 dated 1st April, 2013

Foreign investment in India by SEBI registered FIIs in Government Securities and Corporate Debt

This circular has revised, with immediate effect, the guidelines relating to investment in Government Securities & Corporate Debts by removing/merging the sub-limit in each category into a single limit. The details of the said revision are as under: –

The above limits are not applicable to Non-Resident Indians and they can invest without any limit in Government Securities as well as corporate debt.

Recent Global Developments in International Taxation – Part II

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In this Article, we have given brief information about the recent developments in U.S.A. in the sphere of international taxation which could be of relevance and use in day to day practice and which would keep the readers abreast with various happenings across the globe in the arena of international taxation. We intend to keep the readers informed about such developments from time to time in future.

United States (i) FAQs released for streamlined procedures for delinquent US taxpayers overseas

The US Internal Revenue Service (IRS) has released frequently asked questions (FAQs) regarding the streamlined filing compliance procedures for nonresident, non-filer taxpayers, which went into effect on 1st September 2012.

The streamlined procedures were introduced to provide US taxpayers residing overseas, including dual citizens, who have not filed US federal income tax returns or Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, FBAR) with an opportunity to comply with their tax requirements by filing their delinquent income tax returns for the past 3 years and filing their delinquent FBARs for the past 6 years.

The streamlined procedures are designed for taxpayers who present a low compliance risk, which is generally specified as a tax liability of less than $ 1,500 for each delinquent year.

In addition, the streamlined procedures provide retroactive relief for taxpayers who failed to make a timely election for income deferral on certain foreign retirement and savings plans (e.g., Canadian Registered Retirement Savings Plans) for which relevant treaties allow deferral only if an election is made on a timely basis.

The FAQs include the following clarifications:

• Taxpayers will not be disqualified from admission to the streamlined procedures even if their tax liability exceeds $ 1,500 for any of the 3 years. However, submissions by such taxpayers may be determined to be higher risk, and applicable penalties and an examination may ensue.

• If qualifying taxpayers have been accepted into one of the offshore voluntary disclosure programs (OVDPs) prior to 1st September 2012, they may opt out of the OVDP and request the streamlined procedures

• Qualifying taxpayers may have their case reconsidered under the streamlined procedures even if they have entered into a closing agreement (IRS Form 906) with the IRS under one of the OVDPs. For the streamlined procedures, taxpayers should use IRS Form 1040 (US Individual Income Tax Return), except that taxpayers should use IRS Form 1040X (Amended US Individual Income Tax Return) if they are submitting amended returns for the sole purpose of submitting late-filed IRS Form 8891 (US Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans).

The FAQs indicate a last reviewed or updated date of 27th February 2013.

(ii) IRS issues updated Publication 519 – US Tax Guide for Aliens

The US IRS has released the 2013 revision of Publication 519 (US Tax Guide for Aliens). The publication is dated 7th March 2013 and is intended for use in preparing tax returns for 2012.

Publication 519 provides detailed guidance for resident and non-resident individuals to determine their liability for US federal income tax. Specifically, Publication 519 discusses:

• the rules for determining US residence status (e.g. the US green card test and the US substantial presence test);

• the rules for determining the source of income;

• exclusions from US gross income;

• the rules for determining and computing US tax liability;

• US tax liability for a dual-status tax year (i.e. where an individual has periods of US residence and US non-residence within the same tax year);

• filing information;

• paying tax through withholding tax or estimated tax;

• benefits under US income tax treaties and social security agreements;

• exemptions for employees of foreign governments and international organisations under US tax treaties and US tax law;

• sailing and departure permits for departing aliens; and

• how to get tax help from the IRS. Publication 519 also includes:

• a table of US tax treaties (updated through 31 December 2012);

• appendix A (Tax Treaty Exemption Procedure for Students), which contains the statements non-resident alien students and trainees must file with IRS Form 8233 (Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Non-resident Alien Individual) to claim a tax treaty exemption from withholding of tax on compensation for dependent personal services; and

• appendix B (Tax Treaty Exemption Procedure for Teachers and Researchers), which contains the statements non-resident alien teachers and researchers must file for the same purpose as appendix A. Revised Publication 519 provides information on relevant tax changes for 2012, including:

• increase in the personal exemption amount to $ 3,800;

• disqualification of interest paid on non-registered (bearer) bonds from treatment as portfolio interest that is eligible for exemption from US withholding tax, effective for obligations issued after 18th March 2012;

• extension of the treatment of a regulated investment company (RIC, or mutual fund) as a qualified investment entity (QIE) under The Foreign Investment in Real Property Tax Act of 1980 [FIRPTA] through 2013 for purposes of taxing RIC distributions that are attributable to gains from the sale of US real property interests;

• extension of the withholding exemption on certain interest-related dividends and shortterm capital gain dividends paid by a mutual fund or other RIC through 2013; and

• increase in the withholding rate on effectively connected income of a partnership that is allocable to non-corporate partners to 39.6%.

Additionally, Publication 519 refers to the other IRS publications that are relevant in this context, including:

• Publication 514 (Foreign Tax Credit for Individuals); Publication 515 (Withholding of Tax on Non-resident Aliens and Foreign Entities);

• Publication 597 (Information on the United States-Canada Income Tax Treaty); and

• Publication 901 (US Tax Treaties). Publication 519 is available on the IRS website.

(iii) Public comments requested on cross-border transfer of stocks and securities

The US IRS and the US Treasury Department have issued a notice requesting comments on final regulations (TD 8770, Certain Transfers of Stock or Securities by US Persons to Foreign Corporations and Related Reporting Requirements) and final regulations (TD 8862, Stock Transfer Rules) issued in connection with cross-border transfers of stock and securities. TD 8770 was issued with regulations on the transfer of stocks and securities in international transactions under section 367(a), (b), and (d) of the US Inter nal Revenue Code (IRC) and IRC section 6038B to address:

• the tax treatment of transfers of stocks and securities to foreign persons in outbound reorganisation transactions;

• the terms and conditions for entering a gain recognition agreement (GRA) with the IRS with regard to such transfers;

• the tax treatment of stock transfers under IRC section 351 dealing with incorporation transactions and IRC section 368(a)(1)(B) dealing with stock-for-stock reorganisations; and

• the rules for complying with the notice and information reporting requirements when property is transferred by a US person to a foreign person.

•    TD 8862 was issued with regulations under IRC section 367(b), which is intended to prevent the avoidance of US tax when stock or assets are transferred outside the US taxing jurisdiction pursuant to corporate transactions that would otherwise qualify for tax-free treatment under the IRC.

TD 8862 provides guidance on:

•    the treatment of US-inbound transactions (i.e. repatriation transactions where assets are transferred from a foreign corporation to a US domestic corporation) and foreign-to-foreign transactions (i.e. where stock or assets are transferred between foreign corporations that have US ownership);

•    the tax consequences for the parties to such transactions, including foreign currency aspects; and

•    the requirement that persons who realised income from such transactions file a notice with the IRS.

(iv)    Public comments requested on bilateral safe harbours for transfer pricing

The US IRS has issued a News Release (IR-2013-30) with the announcement that it is seeking public comments regarding the development of a model memorandum of understanding between competent authorities on certain transfer pricing issues. Specifically, the IRS is requesting comments on bilateral safe harbours with regard to arm’s length compensation for routine distribution functions.

On 6th June 2012, the Organization for Economic Co-Operation and Development (OECD) issued a discussion draft on safe harbours as part of its project to improve the administrative aspects of transfer pricing. The discussion draft is entitled “Discussion Draft – Proposed Revision of the Section on Safe Harbours in Chapter IV of the OECD Transfer Pricing Guidelines and Draft Sample Memoranda of Understanding for Competent Authorities to Establish Bilateral Safe Harbour”.

This discussion draft includes proposed revisions of the section on safe harbours in Chapter IV of the Transfer Pricing Guidelines and related sample memoranda of understanding for competent authorities to establish bilateral safe harbours.

The OECD has released public comments to the discussion draft in the form of a report entitled “The Comments Received with respect to the Draft on the Revision of the Safe Harbour Section of the Transfer Pricing Guidelines”

The IRS notes that such safe harbours could support sound tax administration. The IRS requests comments that are highly specific to the issues at hand, to the point of proposing text for draft model agreements involving routine distribution functions.

(v)    Public comments requested on information return for stock ownership of foreign corporations

The US IRS and the US Treasury Department have issued a notice requesting comments on IRS Form 5471 (Information Return of US Persons With Respect to Certain Foreign Corporations) and related schedules.

IRS Form 5471 and the related schedules are used to satisfy the reporting requirements of sections 6038 and 6046 of the US IRC and the regulations issued thereunder, which require US persons to file reports with the IRS if they have certain ownership interests in a foreign corporation.

IRS Form 5471 is required to be filed by any US person who falls into one of the following categories:

•    any US person that has acquired 10% or more of the stock of a foreign corporation (either combined with stock already owned or without regard to such stock);

•    any US person that has control (i.e. has more than a 50% stock ownership, by voting power or value) of a foreign corporation; and

•    any US person who owns 10% of more of the voting stock of a controlled foreign corporation (CFC) or owns any stock in a CFC that is also a captive insurance company.

The term US person generally includes a US citizen or resident, a domestic corporation, a domestic partnership, or an estate or trust other than a foreign estate or trust.

IRS Form 5471 is also required to be filed by any US citizen or resident who is an officer or director of a foreign corporation in which a US person owns or acquires 10% or more of the stock either by voting power or value.

(vi)    IRS issues updated Publication 515 – With-holding of Tax on Non-resident Aliens and Foreign Entities.

The US IRS has released the 2013 revision of Publication 515 (Withholding of Tax on Non-resident Aliens and Foreign Entities). The publication is dated 4 February 2013 and is intended for use in 2013.

Publication 515 provides guidance for withholding agents who pay income to foreign persons, including non-resident aliens, foreign corporations, foreign partnerships, foreign trusts, foreign estates, foreign governments and international organisations.

The topics discussed in Publication 515 include:

•    the persons responsible for withholding (withholding agents);

•    the types of income subject to withholding;

•    the information return and tax return filing obligations of withholding agents;

•    withholding by a partnership on its income effectively connected with a US trade or business that is allocable to its foreign partners;

•    withholding on transfer or distribution of a US real property interest under FIRPTA; and

•    how to get tax help from the IRS.

Revised Publication 515 also contains the following US tax treaty tables:

•    Table 1 lists the withholding rates under US tax treaties on income other than personal service income for 2013 (i.e. interest, dividends, and royalties).

•    Table 2 lists the different types of personal service income that are entitled to an exemption from, or reduction in, withholding under US tax treaties.

•    Table 3 lists US tax treaties (updated through 31 December 2012) with information on where the full text of each treaty and protocol may be found in the IRS Cumulative Bulletin, which is available on the IRS web site.

Revised Publication 515 includes discussion of the new rules regarding:

•    information reporting for interest paid to non-residents on US deposits on or after 1st January 2013

•    exclusion of interest paid on non-registered (bearer) bonds from portfolio interest, effective for obligations issued after 18th March 2012

•    extension of the treatment of a regulated investment company (RIC, or mutual fund) as a qualified investment entity (QIE) under FIRPTA through 2013 for purposes of taxing RIC distributions that are attributable to gains from the sale of US real property interests

•    extension of the withholding exemption on certain interest-related dividends and short-term capital gain dividends paid by a mutual fund or other RIC through 2013

•    increase in the withholding rate for non-corporate partners to 39.6%); and

•    the FATCA withholding requirement for US withholding agents with regard to certain types of payments made to non-participating foreign financial institutions (NPFFIs) beginning in 2014.

Additionally, Publication 515 refers to the other IRS publications that are relevant in this context, including:

•    IRS Publication 15 (Circular E, Employer’s Tax Guide);

•    Publication 15-A (Employer’s Supplemental Tax Guide);

•    Publication 15-B (Employer’s Tax Guide to Fringe Benefits);

•    Publication 51 (Circular A, Agricultural Employer’s Tax Guide);

•    Publication 519 (US Tax Guide for Aliens); and

•    Publication 901 (US Tax Treaties).

Publication 515 is available on the IRS web site at www.irs.gov.

(vii)    IRS issues updated Publication 514 – Foreign Tax Credit for Individuals.

The US IRS has released the 2013 revision of Publication 514 (Foreign Tax Credit for Individuals). The publication is dated 29th January 2013 and is intended for use in preparing 2012 tax returns.

Publication 514 explains the provisions of US federal income tax law that apply to US citizens and resident aliens who paid or accrued taxes to a foreign country on foreign source income and intend to take a US credit or itemised deduction for such taxes. Publication 514 discusses:

•    claiming a credit or deduction for foreign income taxes;

•    benefits of claiming the foreign tax credit (FTC);

•    persons eligible for the FTC;

•    taxes eligible (or not eligible) for the FTC;

•    computation of the FTC, including application of the US basket system;

•    carry-back and carry-over of the FTC;

•    procedures for claiming the FTC; and

•    information on how to obtain tax help from the IRS.

Revised Publication 514 includes information on:

•    new rules for determining who is considered to pay a foreign income tax when the tax is imposed on the combined income of multiple persons; and

•    inclusion of Iraq in the list of countries that participate in international boycotts, with the result that taxpayers may be denied a US FTC for taxes paid to Iraq in addition to taxes paid to the other countries on the list.

Publication 514 also refers to the other IRS publications that are relevant in this context, including IRS Publication 54 (Tax Guide for US Citizens and Resident Aliens Abroad), Publication 519 (US Tax Guide for Aliens), and Publication 570 (Tax Guide for Individuals With Income From US Possessions).

Additionally, Publication 514 provides two examples with filled- in IRS Form 1116, Foreign Tax Credit (Individual, Estate, or Trust). To claim an FTC, it is generally required to file a Form 1116 with the income tax return. A separate Form 1116 is required for taxes paid on certain designated categories of income, including separate basket income, for which a foreign tax credit is claimed.

Publication 514 is available on the IRS web site at www.irs.gov.

(viii)    Proposed regulations issued on gain recognition in cross-border corporate transactions

The US Treasury Department and the IRS have issued proposed regulations (REG-140649-11) regarding gain recognition in cross-border corporate transactions. The regulations propose amendments to the existing rules on failures to file gain recognition agreements (GRAs) and related documents, or to satisfy other reporting obligations, in connection with certain transfers of property to foreign corporations in non-recognition transactions.

Section 367(a) of the US IRC imposes tax on US outbound reorganisations and other corporate transactions that would otherwise qualify for tax-free treatment if undertaken in a domestic context. Section 367(a) permits exceptions in certain cases, however, including the outbound transfer of stock or securities of foreign corporations in cross-border corporate transactions (i.e. incorporations, liquidations, mergers, acquisitions, and other reorganizations). These exceptions generally require the US transferor, among other things, to file a GRA and other related documents under Treasury Regulation section 1.367(a)-8 (the IRC section 367(a) GRA regulations).

IRS section 367(e)(2) further provides exceptions with regard to recognition of gain on a liquidation of an 80%-owned subsidiary into a foreign parent in a transaction described in IRC section 332 (i.e. an US outbound liquidation in the case of a liquidation of a US subsidiary, or a foreign-to-foreign liquidation in the case of a liquidation of a foreign subsidiary).

In addition, under IRC section 6038B and the related regulations, a US transferor of property to a foreign corporation in a non-recognition transaction covered by IRC section 367(a) is required to file IRS Form 926 (Return by a US Transferor of Property to a Foreign Corporation), describing the transferee foreign corporation and the property transferred.

Under the current regulations, a US transferor is subject to full gain recognition under IRC section 367(a)(1) if the US transferor fails to timely file an initial GRA, or to comply in any material respect with the IRC section 367(a) GRA regulations or with the terms of an existing GRA. Relief may be granted if the US transferor demonstrates that its failure was due to reasonable cause and not wilful neglect.

The proposed regulations remove the reasonable cause requirement, and accordingly gain recognition will apply only if the taxpayer’s failure is wilful. The proposed regulations provide guidance on the interpretation of a wilful failure, which will generally be based on the facts and circumstances in each case, and include illustrative examples.

The proposed regulations also eliminate the current requirement that the IRS must respond within 120 days to requests received from taxpayers seeking relief from gain recognition due to non-compliance under IRC section 367. The IRS will no longer be subject to a strict processing time for taxpayer requests in this regard.

The current reasonable cause standard, however, will continue to apply to a US transferor seeking relief from penalty for failure to satisfy the IRC section 6038B reporting requirement. Therefore, a US taxpayer seeking relief from IRC section 6038B penalty will still need to demonstrate that its failure was due to reasonable cause and not wilful neglect.

In addition, the proposed regulations provide rules similar to the rules under the IRC section 367(a) GRA regulations and related IRC section 6038B regulations for failures to file the required documents or statements and failures to comply under the IRC section 367(e)(2) regulations and related section 6038B regulations with respect to liquidation transactions.

The proposed regulations also modify the information that must be reported to the IRS with respect to liquidating distributions under the IRC section 367(e)(2) regulations, including the addition of a requirement to report the basis and fair market value of the property distributed.

The current Treasury Regulation section 1.367(a)–3 also require certain other statements to be filed in connection with certain transfers of stock or securities, but do not provide rules of application for taxpayers who fail to meet these requirements. The proposed regulations incorporate rules in this regard that are similar to the rules that apply with respect to failures to file or failures to comply with the IRC section 367(a) GRA regulations. The proposed regulations are designated Treasury Regulation sections 1.367(a)-3 and -8, 1.367(e)-2, and 1.6038B-1.

The proposed regulations will apply to documents or statements that are required to be filed with a timely filed return on or after the date on which the regulations are published as final, as well as to requests for relief that are submitted on or after the date on which the regulations are published as final.

(ix)    Public comments requested on allocation of interest expenses by foreign corporations engaged in US business

The US IRS and the US Treasury Department have issued a notice requesting comments on final regulations (TD 9465, Determination of Interest Expense Deduction of Foreign Corporations).

The final regulations were issued u/s. 882(c) of the US IRC to provide guidance on the determination of the interest expense deduction for foreign corporations engaged in a trade or business within the United States.

The final regulations adopted, without substantive change, the temporary regulations (TD 9281) issued on this topic. The temporary regulations, among other things, also implemented the views of the US Treasury Department and IRS that were expressed in IRS Notice 2005-53 regarding the operation of the three-step formula used to allocate interest expenses to the United States (see United States-1, News 21st July 2005).

The final regulations made substantial modifications to the three-step formula in Treasury regulation section 1.882-5. In particular, the final regulations increased the fixed-ratio that may be used by foreign banks to compute US-connected liabilities in Step 2 from 93% to 95%.

The final regulations also provided guidance for coordinating the interest allocation rules of Treasury regulation section 1.882-5 with US income tax treaties that, pursuant to the authorised OECD approach (AOA), apply the OECD Transfer Pricing Guidelines, by analogy, in determining the profits of a permanent establishment. The final regulations recognised that an income tax treaty or accompanying documents might provide alternative rules for allocating interest expense to a permanent establishment.

(x)    Final regulations issued on requirements under FATCA

The US Treasury Department and the IRS issued final regulations (TD 9610) on 17th January 2013 to provide guidance on account identification, information reporting, and withholding requirements that the Foreign Account Tax Compliance Act (FATCA) imposes on foreign financial institutions (FFIs), other foreign entities, and US withholding agents.

The final regulations adopt with modifications the proposed regulations (REG-121647-10) issued on 15 February 2012 , and the amendments described in IRS Announcement 2012-42 issued on 24th October 2012. The final regulations are effective 28th January 2013.

The issuance of the final regulations was announced in a Press Release issued by the Treasury Department on 17th January 2013. The Press Release states that the final regulations implement FATCA in the following manners:

•    The final regulations coordinate the obligations for FFIs under the regulations and the intergovernmental agreements in order to reduce administrative burdens for FFIs that operate in multiple jurisdictions.

•    The final regulations phase in over an extended transition period to provide sufficient time for FFIs to develop necessary systems.

•    The final regulations align the regulatory timelines with the timelines described in the intergovernmental agreements to avoid confusion and unnecessary duplicative procedures.

•    The final regulations provide relief from with-holding with respect to certain grandfathered obligations and certain payments made by non-financial entities.

•    The final regulations expand and clarify the treatment of certain categories of low-risk institutions, such as governmental entities and retirement funds.

•    The final regulations permit certain investment entities to be reported by the FFIs with which they hold accounts rather than being required to register as FFIs and report to the IRS.

•    The final regulations clarify the types of passive investment entities that must be identified and reported by FFIs.

•    The final regulations provide more stream-lined registration (which will take place through an online system) and compliance procedures for groups of financial institutions, including commonly managed investment funds.

•    The final regulations provide additional detail regarding FFIs’ obligations to verify their compliance under FATCA.

FATCA was enacted in 2010 as Sections 1471 to 1474 of the US IRC to combat non-compliance by US taxpayers using foreign accounts. FATCA requires FFIs to report to the IRS information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.

FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to US investments

(xi)    Final regulations issued to prevent tax-avoidance in stock acquisitions by related corporations

The US Treasury Department and the IRS have issued final regulations (TD 9606) to prevent tax-avoidance in connection with stock acquisitions by related corporations under section 304 of the US IRC.

IRC section 304 is intended to prevent the use of stock sales between brother-sister or parent-subsidiary corporations as a means to produce capital gains rather than dividend treatment.

Specifically, IRC section 304(a)(1) provides that, if a corporation (acquiring corporation), in return for property, acquires stock in another corporation (issuing corporation) from a transferor in control of each of the two corporations, property received by the transferor is treated as a distribution in redemption of the stock of the acquiring corporation.

The redemption is then analysed under the tests described in IRC section 302(b), which are intended to distinguish a true stock redemption (treated as a sale) from a distribution of corporate earnings. If none of the tests are met, the transaction is treated as a corporate distribution with possible dividend consequences, rather than as a sales transaction.

In determining the amount of the corporate distribution that is a dividend, the earnings and profits (E&P) of both the acquiring corporation and the issuing corporation are taken into account under IRC section 304(b)(2). IRC section 304(b)(5) limits the amount of E&P of a foreign acquiring corporation that are taken into account for this purpose. Under IRC section 301(c)(2) and (3), if the amount of the distribution exceeds the combined E&P of the acquiring corporation and the issuing corporation, the excess reduces the transferor’s basis in the stock and is treated as a tax-free return of capital to that extent and as gain from a sale of the stock to the extent of any further excess.

It was observed that some taxpayers attempted to artificially eliminate the amount of a distribution constituting a taxable dividend by, for example, having an existing corporation with a positive E&P account form a new corporation with no E&P and having the newly formed corporation (“acquiring corporation”) acquire the stock of an issuing corporation using the capital contributed by the existing corporation (“deemed acquiring corporation”) to form the acquiring corporation.

On 14th June 1988, the Treasury Department and the IRS promulgated Treasury regulation section 1.304-4T (TD 8209) to treat the deemed acquiring corporation as having acquired the stock of the issuing corporation if the deemed acquiring corporation controls the acquiring corporation and the acquiring corporation was created, organised, or funded primarily to avoid the application of IRC section 304 to the deemed acquiring corporation.
    
On 30th December 2009, temporary regulations (TD 9477) and proposed regulations (REG–132232–08) were issued to extend the application of the anti-abuse rule of Treasury regulation section 1.304-4T to a “deemed issuing corporation”. A deemed issuing corporation refers to a corporation that is controlled by an issuing corporation if the issuing corporation is a newly formed corporation having no E&P and the issuing corporation acquired the stock of the deemed issuing corporation in connection with the acquisition of the stock of the issuing corporation by an acquiring corporation with a principal purpose of avoiding the application of IRC section 304 to the deemed issuing corporation. The acquiring corporation then will be treated as acquiring the stock of the deemed issuing corporation subject to the regular IRC section 304 analysis described above.

The final regulations adopt the 2009 temporary regulations without change. The final regulations are designated Treasury regulation section 1.304-4.

The final regulations are effective on 26th December 2012 and apply to acquisitions of stock occurring on or after 29th December 2009.

(xii)    Treaty between US and Norway – IRS releases competent authority agreement regarding source of income

The US IRS has released the official text of the recent competent authority agreement between the United States and Norway.

The agreement clarifies the meaning of the phrases “remuneration described in article 17 (Governmental Functions)” and “payments described in article 19 (Social Security Payments)” as used in the last sentence of article 24(6) (Source of Income) of the 1971 US-Norway Income Tax Treaty.

The first sentence of article 24(6) provides a general source rule for compensation received by an individual for his personal services, under which such compensation is treated as income from sources within a contracting state only if the services are performed in that state.

The last sentence of article 24(6) provides an exception to the general source rule with regard to remuneration described in article 17 and payments described in article 19. Such remuneration is treated as income from sources within a contracting state only if paid by, or from the public funds of, that state.

According to the competent authority agreement, the following understandings have been reached for the purposes of article 24(6):

•    remuneration described in article 17 is limited to income paid by, or from public funds of, one of the contracting states to a citizen of that contracting state, and thus, for example, remuneration that is paid by Norway to a person who is not a citizen of Norway would be subject to the general source rule instead of the exception;

•    payments described in article 19 refers to Social Security payments and other public pensions paid by a contracting state to a resident of the other contracting state or to a US citizen, without regard to the location in which the underlying services are performed;

•    remuneration that is not described in article 17 is subject to the provisions of the applicable article; and

•    the saving clause of article 22(3) (General Rules of Taxation) applies if remuneration described in article 17 is paid by Norway to a citizen of Norway who is also either a US citizen or a US lawful permanent resident (i.e. a green card holder), and the entire amount of the payment will be treated as income from sources without the United States for the purpose of applying article 22(3) (Relief from Double Taxation).

The competent authority agreement was entered into under article 27(2) (Mutual Agreement Procedure) of the Treaty.

[Acknowledgment: We have compiled the above information from the Tax News Service of the IBFD for the period 18-12-2012 to 18-03-2013.]

UK’s drive for competitiveness

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The UK has undertaken a series of changes in its tax policy in recent years with the aim of improving the attractiveness of the UK as a place to do business. These changes are continuing with a key goal of making the UK tax system the most competitive in the G20. This is becoming a reality as a result of a number of measures that have recently been introduced.

The change in tax policy was brought about by the threat that existing UK businesses were considering moving their headquarters outside the UK (referred to as ‘inversions’) and that international businesses were choosing other locations for investment. As a result the UK government has three clear goals in making the changes it has made:

1. To keep existing business activities in the UK (both UK groups and international groups with existing UK businesses);

2. To stimulate new business activity by existing UK businesses; and

3. To attract new business activity to the UK. One of the countries which the UK government is specifically targeting for new investment in the UK is India. Historically, Indian groups have made significant investments into the UK and the UK government is keen for this to continue.

In this article, we will look at the key changes that have been implemented in the UK under the tax reforms and how the UK is positioned today as a holding company and regional hub location.

Perceived “barriers” to the UK’s competitiveness The UK tax regime has traditionally had some key attributes that groups look for in headquarter or holding company jurisdictions. For example, the UK does not, under its domestic tax law, levy withholding tax on dividend distributions paid to overseas investors in UK companies. It also exempts capital gains derived from share disposals from tax.

However, several areas of UK tax law continued to make the UK appear uncompetitive especially when viewed against territories such as Singapore, Ireland and the Netherlands. These included the UK’s comparatively high corporation tax rate, the system of taxing dividends received by UK companies, the taxation of overseas branch profits and the CFC rules.

Foreign profits reform

Reduction in corporation tax rate

The “Corporate Tax Roadmap” released by the HM Treasury in November 2010 set out the plans for the reduction in the corporation tax rate. The rate at that time was set to steadily decline to 22% by 2014. The government has since announced a further reduction to 20% from April 2015. This would make the UK’s main corporation tax rate the lowest in the G20 alongside Russia, Turkey and Saudi Arabia.

Introduction of the UK’s foreign dividend exemption

Prior to the introduction of this new regime, the UK taxed the receipt of foreign dividends with credits potentially available for overseas and withholding tax suffered under the UK’s “double taxation relief” regime. This regime grew increasingly complex – creating an administrative and commercial burden on UK plc, which required reserves and cash to fund shareholder distributions. In many cases, the regime resulted in UK companies having to “top up” corporation tax payable even after taking credits, particularly when the headline UK corporation rate was as high as 30%.

Following representations from business and a consultation period, the UK’s dividend exemption was introduced with effect from 1 July 2009. The system introduced a number of “exempt classes” into which the vast majority of distributions should now fall. The main areas where dividends may still be taxable are if the distribution is itself deductible for overseas tax purposes, or where a distribution is funded from a previous structure designed to erode the UK corporation tax base.

Introduction of the “branch profits exemption”

Another area where the UK was seen as lagging behind other more competitive territories was the taxation of overseas branches of UK companies. As with distributions from overseas companies, the UK taxed the overseas branch profits of UK companies, with a credit for local tax suffered. Again this was a complex regime which often meant that additional UK corporation tax was payable, and impacted a purely commercial decision as to whether it was more efficient to enter a new territory via a branch or an overseas incorporated company.

To remove this barrier the UK authorities introduced an extremely flexible “branch profits exemption” with effect from 2011. Broadly, the regime allows a UK company to elect for its overseas branches to be exempt from UK tax. Electing companies will be exempt from UK tax on branch profits, but will not receive loss relief in respect of branch losses. There are certain conditions which need to be met in order to qualify for the election. For example, the branches must be ‘good’ branches as determined by applying the principles under the CFC rules. Also, if the UK company had taken the benefit of the losses of the branch, these losses must first be offset with taxable profits before the company can elect into the branch exemption rules. The branch profits are calculated using tax treaty principles. With this “optin” system, groups have the choice of applying the regime on a UK company-by-company basis through an election system. This is particularly useful as it allows groups to maintain the “old” position where it makes sense to do so – for example where a UK company has branches, or a majority of branches, with losses or “high tax” profits.

Fundamental relaxation of the UK CFC rules

Compared to the above changes, which could be termed “easy wins”, the relaxation of the UK CFC rules has been the most discussed and involved process. The previous incarnation of these rules was one of the primary drivers behind some of the corporate “inversions” mentioned earlier (where existing UK businesses were moving their headquarters outside the UK), and in some cases prevented overseas groups from viewing the UK as a viable holding or regional holding company jurisdiction. A particular complaint of UK groups was that the rules were applied in a disproportionate manner. In order to tax profits artificially diverted from the UK they also often caught profits generated overseas through genuine commercial operations, i.e., amounting to an effective system of “worldwide taxation” employed by the UK.

After significant consultation, the revised CFC rules are now on the statute book and have taken effect from 1 January 2013. The driving principle behind the new rules is one of “territoriality”. The revised CFC rules have been carefully crafted only to apply to target profits which are shown to have been “artificially diverted” from the UK. Profits which have been generated overseas through genuine economic activities and through activities which pose no risk to the UK corporation tax “base” should be left untaxed by the new UK CFC rules.

The rules remain relatively detailed, but include a wide-range of exemptions from the CFC rules, only one of which has to apply to prevent a CFC charge. As such, we anticipate that a majority of overseas subsidiaries of UK companies should be exempt under the new CFC rules. For overseas trading activities, only where it can be shown that profits have arisen, to a significant extent, due to UK activities (such as key decision makers or developers of intellectual property being in the UK) do we expect to see taxation of profits under the UK CFC provisions.

For interest income, the UK regime includes UK CFC taxation at one quarter of the UK headline corporation tax regime (which would be a rate of 5% by 2015), with the potential for 0% under certain specific conditions.

Whilst the UK has chosen to retain CFC rules and is therefore at a disadvantage compared to other territories which does not have such rules, the practical impact of the UK CFC rules for groups which choose to locate their headquarters or holding or regional holding companies in the UK is likely to be limited to that of compliance going forward.

‘Above the line’ research and development (“R&D”) tax incentive

The UK has had an R&D tax incentive for large companies for over 10 years but following a series of consultations it was decided by the government that a fundamental change is required in order to make the incentive more attractive to innovative businesses. Under the old rules, a ‘super deduction’ was available, i.e. a deduction in addition to that for the qualifying R&D expenditure was available. For example 130% of qualifying expenditure was deductible in certain cases.

Under the new rules, the benefit by way of credit will be ‘above the line’. This will allow the benefit of the R&D relief to be accounted for as a reduction of R&D expenditure within the Profit & Loss account. The associated tax credit is offset against corporation taxes payable.

The change to an above the line credit is being made in order for the benefit of the incentive to be more directly linked to the amount of R&D expenditure and also to show an improved pre -tax profit as a result. By applying the credit against the R&D expense, thus reducing the cost of the R&D in the accounts of the company and reflecting the impact within the pre-tax profit, it is thought that the incentive will have more of an effect in encouraging R&D activity in the UK.

The new credit will be a taxable credit of 10% of qualifying expenditure. The credit will be fully payable to companies which have no corporation tax liability, subject to a cap equivalent to the Pay As You Earn/National Insurance Contributions (PAYE/NIC – employment and social security) liabilities of the company. The new credit will be available for qualifying expenditure incurred on or after April 1, 2013 and will initially be available as an alternative to the current super deduction, before completely replacing the super deduction from April 1, 2016.

This is of great benefit to loss making groups in that they will be able to obtain payment for the credit, subject to the PAYE/NIC cap.

Patent Box

As part of the UK Government’s aim to encourage innovation in the UK and ensure the commercialisation of UK inventions in the UK, a new 10% tax rate has been introduced from 2013 and will apply to Patent Box profits. This is a significant saving as compared to the main headline tax rate of 20% (by 2015).

The relief applies to worldwide profits from pat-ented inventions protected by the UK Intellectual Property Office of the European Patent Office as well as patents granted by other recognised patent offices. It is not only royalties and income from the sale of IP that qualifies for this regime – all profits (less a routine profit and marketing charge) from sales of products which incorporate a patented invention qualify. This is a very broad definition and is intended to ensure that the tax rate of 10% applies to all profits arising from patents and not just the profits attributable to the patent itself.

A company qualifies if it has the ownership (or an exclusive licence) of patents and the company (or the wider group) has performed qualifying development and has the responsibility for and is actively involved in the ongoing decision making concerning the further development and exploitation of the IP. This allows a business to benefit from the regime even where they did not develop the IP originally. This supports the objectives of the Patent Box to encourage continuing development and commercial exploitation of patents by UK businesses.

The new Patent Box provides an attractive opportunity for businesses to reduce the costs associated with the commercial exploitation of patented IP. The regime is flexible and generous and should prompt global businesses to favourably consider using the UK as a place to invest in innovation.

Substantial Shareholdings Exemption (SSE)

The Substantial Shareholdings Exemption (SSE) regime was introduced in 2002. The SSE broadly exempts from UK corporation tax any capital gain on disposals by trading companies or groups, of substantial shareholdings in other trading companies or groups. Generally speaking, ‘trading’ refers to operating companies/groups with an active trade/business. The important point here is that the business should be an operating business with income from its operations (as against a business with minimal operations receiving mainly passive income). However, the legislation has also set out detailed technical conditions for the exemption to apply, and anti-avoidance provisions, all of which must be met. Care in particular cases is therefore needed in order to determine the availability of this relief.

Broadly, there are three sets of conditions which must be satisfied in order to obtain the exemption:

1.    The substantial shareholding requirement – The investing company (the company making the disposal) must own at least 10% of the ordinary share capital of the investee (company whose shares are being disposed) for a continuous period of 12 months preceding the disposal

2.    Conditions relating to the ‘investing’ company/ group, i.e., the company/group making the disposal – The investing company must be a ‘sole trading company’ or a member of a ‘qualifying group’. This condition must be met from the start of the latest 12 months period for which the substantial shareholding requirement (above) is satisfied, until the time of the disposal. It must also be met immediately after the disposal takes place. A ‘sole trading company’ is a company which is not a member of a group, which is carrying on trading activities and whose activities do not to a substantial extent include activities other than trading activities. A ‘qualifying group’ is a group, the activities of whose members, taken together, do not to a substantial extent include activities other than trading activities. Intra-group activities, such as intercompany loans, rental streams or royalty charges are ignored for this purpose. As stated earlier, ‘trading’ here refers to operating companies/groups with an active trade/business, i.e. the business should be an operating business with income from its operations. Whether a company or group is carrying on trading activities requires a consideration of the activities, income, assets, liabilities and people functions of the relevant company/group.

3.    Conditions relating to the ‘investee’ company/ sub-group, i.e., the company/sub-group being disposed of – The investee must have been a ‘qualifying company’ from the start of the latest 12 month period for which the substantial shareholding requirement (above) is satisfied, until the time of the disposal. This condition must also be met immediately after the disposal. A ‘qualifying company’ means a trading company or the holding company of a trading group or a trading sub-group. Broadly, this means that the activities of the company being sold and its 51% subsidiaries (if any) will be considered. To qualify for the exemption, at least one of these companies must be carrying on trading activities. Also, the activities of all the group/subgroup companies, taken together, must not include to a substantial extent activities other than trading activities. As stated earlier, ‘trading’ here refers to operating companies/groups with an active trade/business, i.e. the business should be an operating business with income from its operations. Whether a company or group is carrying on trading activities requires a consideration of the activities, income, assets, liabilities and people functions of the relevant company/group.

Where these conditions are met, gains arising on the disposal of shares will be exempt from corporation tax on chargeable gains. Equally, capital losses arising on such disposals are not allowable. Where there is significant uncertainty on the applicability of the SSE to a proposed transaction, an application can be filed with the UK tax authorities, Her Majesty’s Revenue and Customs (HMRC) to obtain a clearance that the conditions of the SSE would be considered to be met.


General Anti-Abuse Rule (GAAR)

There has been substantial consultation by the UK government on the introduction of a GAAR.

The GAAR is not part of the package of measures (discussed above) which have a key goal of making the UK tax system the most competitive in the G20. While the introduction of a GAAR could be considered to introduce some uncertainty, the government has clearly stated that the aim of the GAAR is to target only artificial and abusive schemes.

In addition, the introduction of the UK GAAR will bring the UK in line with most other European (and other) countries, which already have GAARs.

The government has confirmed that the GAAR should only apply to arrangements which begin after the legislation becomes the law (expected to be by July 2013) and it will apply only to arrangements which pass two tests. Arrangements will pass the first test if one of their main purposes is to obtain a tax advantage, judged objectively. The second test is a reasonableness test which will only be met if the arrangements entered into cannot be regarded as a reasonable course of action, having regard to the consistency of the substantial results of the arrangements with the principles and policy underlying the relevant tax provisions. Tax advantages which are caught by the GAAR will be counteracted on a just and reasonableness basis.

As part of the GAAR being introduced, an advisory panel will be formed which will have two main roles. Firstly, to provide opinions on the potential application of the GAAR, after representations have been made to them, and secondly to approve the guidance which HMRC will prepare on the GAAR.

It is the stated aim that the GAAR should target and counteract only artificial and abusive schemes. On the basis that any tax planning undertaken by Indian businesses generally has commercial substance, the GAAR is not expected to have any significant impact on normal commercial transactions undertaken by Indian groups in the UK.

The UK is ‘open for business’


As mentioned above, the recently announced changes to the UK corporate tax system are part of a package of measures which have been introduced over the last few years. To summarise, the most significant of the changes include:

•    A continued reduction in the UK’s main rate of corporation tax to 20% from 1 April 2015 (the rate is currently 23% and was 30% before April 2008).

•    A Patent Box regime, from 1 April 2013, which will result in qualifying patent box profits being taxed at a significantly reduced rate of only 10%, the aim being to encourage the development and exploitation of patents and other similar intellectual property in the UK.

•    An exemption system for most dividends received by UK companies and for gains made on the sale, by a UK company, of most shareholdings in trading companies.

•    An elective exemption system for overseas activities of a UK company (overseas branches).

•    A reformed controlled foreign companies (CFC) regime which is targeted at only taxing profits that have been artificially diverted from the UK.

•    The introduction of the new ‘above the line’ R&D tax incentive.

These changes have resulted in the UK’s tax system becoming more territorial and making the UK a very attractive location for regional holding and “hub” companies, acquisition companies and publicly listed parent companies, particularly when combined with a number of long standing attractive features, including being the G20 country with the most double tax treaties and the absence of a withholding tax on dividends paid by a UK company.

The UK as a headquarter and holding company jurisdiction

Over the last three years, a number of groups, particularly US groups (for example – Ensco Inter-national and Rowan Companies), have relocated their headquarters to the UK, partly because they understood that there should no longer be adverse UK corporation tax implications from doing so. Other US and non- US groups have also been actively using the UK as a regional holding company jurisdiction, particularly since the structure of the new UK CFC rules has been settled. The interaction between HMRC and these groups has also been encouraging, with HMRC actively engaging in pre-transaction discussions with businesses and offering pre-transaction clearances.

For Indian groups investing overseas, particularly into Europe and the US, the UK is now competitive with other more traditional holding company jurisdictions such as Singapore, Netherlands and Luxembourg. In addition to offering similar benefits in terms of low or zero holding company corporation tax, many groups often have substantial existing operations in the UK. This, combined with the UK’s extensive double tax treaty network, offers plenty of potential for multinationals to use the UK as an efficient regional management and financing hub.

Appeal filing Forms ST-5, ST-6 & ST-7 amended Notification No. 5/2013 – ST dated 10th April, 2013

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By this Notification, Service Tax Rules, 1944 have been amended which may be called Service Tax (Second Amendment) Rules, 2013 effective from 1st June, 2013. Under the amended Rules Form ST-5, ST-6 & ST-7 for filing appeal to Appellate Tribunal have been amended.

MVAT UPDATE

Mvat Notifications
Notification No. VAT-1513/CR-46(1)/Taxation-1 dated 30-03-2013

Vide this notification various amendments have been effected in Schedules A, B, C and D with effect from 01-04-2013.

Notification No VAT.1513/CR 46(7)/Taxation -1 dated 04-04-2013

By this notification, MVAT rate has been increased from 1% to 1.1% for sale of diamonds, articles made of precious metals and precious metal for the financial year 2013-2014. For pearls, precious stones and semiprecious stones, the MVAT rate continues to remain at 1%.

LA BILL XI OF 2013

Introduction of Maharashtra Tax Laws [Levy and Amendment] Bill, 2013, thereby providing amendments to the Maharashtra Stamp Act, the Maharashtra Value Added Tax Act, 2002 and the Maharashtra Tax on Lotteries Act, 2006.

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S. 32 r.w. S. 43(1) : Depreciation allowable on second-hand vehicle on original cost to previous owner

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New Page 1

8 Shashikant Janardan Kulkarni v.
ITO

ITAT Pune Bench SMC, Pune

Before Mukul Shrawati (JM)

ITA No. 1357 /PN/2005

A.Y. : 2001-02. Decided on : 27-4-2007

Counsel for assessee/revenue : Arvind Kulkarni/

Vilas Shinde

S. 32 read with Explanation 3 to S. 43(1) of the Income-tax
Act, 1961 — Depreciation on second-hand vehicle — Previous owner had not used
the vehicle for the purpose of business, nor claimed any depreciation — Vehicle
transferred to the assessee at the original cost to the previous owner — Whether
the present owner justified in claiming depreciation on its original cost to the
previous owner — Held, Yes.

 

Facts :

A vehicle in question was purchased by the assessee’s HUF in
the year 1997 at Rs.3.87 lac. It was brought to the business by the assessee in
his individual capacity in the previous year relevant to the A.Y. 2001-02 at the
original cost of Rs.3.87 lac and depreciation @ 25% was claimed thereon. The
assessee justified his action on the ground that no depreciation was claimed by
the HUF till the time it remained its owner. However, applying Explanation 3 to
S. 43(1) of the Act, the AO held that the assessee had claimed excessive
depreciation by enhancing the cost. He therefore, reduced the cost to Rs.2 lac
and computed the depreciation accordingly. The CIT(A) on appeal confirmed the
AO’s action.

 

Held :

According to the Tribunal, as per Explanation 3 to S. 43(1),
the AO is empowered to substitute the cost of vehicle only if the following two
conditions were satisfied viz. :


à
The asset in question was at any time used by any person for the purpose of
business; and

à
He is satisfied that the assessee had taken resort to a subterfuge or a device
in order to avoid tax or acted fraudulently or the transaction was colourable.

 


It also agreed with the view expressed by the CIT(A) that the
vehicle being three years old, ought to have been subjected to wear and tear.
However, it noted that the applicable provisions did not take into account such
a situation and did not give discretion of any kind to the AO. Thus, since the
vehicle in question had not been used by the HUF for the purpose of business and
no depreciation thereon was claimed in the past on such vehicle, the Tribunal
held that the AO had no jurisdiction to substitute the value by any other
figure.

 

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CENVAT credit of the service tax paid — Input services such as rent-a-cab service, outdoor catering services provided by the manufacturer to its employees working in the factory — held that such services are in relation to manufacture of final product — Hence, eligible input service.

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(2012) 25 STR 428 (Kar.) — CCE, Bangalore v. Bell Ceramics Ltd.

CENVAT credit of the service tax paid — Input services such as rent-a-cab service, outdoor catering services provided by the manufacturer to its employees working in the factory — held that such services are in relation to manufacture of final product — Hence, eligible input service.


Facts:

The appellant claimed Cenvat credit of service tax paid by the appellant under rent-a-cab service and outdoor catering service to transport its employees to the factory and back and to provide food for them. The appellant was of the view that these services fall under input services which were entitled to credit.

Held:

Any service used by the manufacturer whether directly or indirectly in relation to the manufacture of the final product shall be considered to be eligible input service. Hence, CENVAT credit of the same can be availed.

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Policy paralysis causing long-term damage to PSUs

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Imagine a train without an engine. That’s the state of some of the key state-run financial institutions, viz., LIC of India, UTI, SAT, GIC, IRDA, New India Assurance, etc. that are without full-time chief executives, including two where millions of Indians invest their hard-earned money. The state of the government, blamed for policy paralysis, is affecting these vital institutions built over decades, which serve public interest.

Institutions such as Life Insurance Corporation and UTI are trusted household names, and dithering over key appointments in such organisations could send wrong signals apart from affecting their operations. Appointments in the government are an elaborate process, but it is supposed to start on time and ensure that decision-making does not suffer. The absence of chief executives, in some cases fulltime ones, is hurting. This, at a time when the economy is becoming strained, forcing companies to come up with their own solutions. Most of the institutions are stable at this point of time. But leaving these institutions headless may result in certain important decisions getting postponed, which can cause damage in the long term. Indecision can lead to these companies ceding ground to nimble private sector rivals, who are out to capitalise on such opportunities. These are not institutions where investors are looking for quarterly earnings that could keep the management on its toes, but closed ones whose financials are not even known or scrutinised. The absence of key personnel at the regulator may not look as problematic as it is with corporations, but they are vital for markets just as much.

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Health chief warns: Age of safe medicine is ending, says WHO chief

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The world is entering an era where injuries as common as a child’s scratched knee could kill, where patients entering hospital gamble with their lives and where routine operations such as a hip replacement become too dangerous to carry out, the head of the World Health Organisation (WHO) has warned.

There is a global crisis in antibiotics caused by rapidly evolving resistance among microbes responsible for common infections that threaten to turn them into untreatable diseases, said Margaret Chan, director general of WHO.

She said: “Antimicrobial resistance is on the rise in Europe and elsewhere in the world.

We are losing our first-line antimicrobials. “Replacement treatments are more costly, more toxic, need much longer durations of treatment, and may require treatment in intensive care units.

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Mild exercise can cut heart attack risk

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The interheart study shows the link between a sedentary lifestyle and heart problems.

The interheart study in fact focusses a lot on physical activity at leisure that can help control heart problems. “The study shows that people doing any activity can reduce their heart attack risk (compared to those who don’t do any activity at all) by almost 50%,’’ said Dr. Aashish Contractor, who is attached to the Asian Heart Institute in BKC.

“The study says that people who do 30 minutes of activity per week in their leisure time could reduce their heart attack risk by 21%. Those who do 210 minutes of activity per week can reduce the risk by over 44%,’’ he said. Those who pursued activity for 60-180 minutes per week could reduce their risk by 40%. “The Interheart study shows that one need not do fabulously hard work to stay fit. Even small steps — just 30 minutes per week — will help keep your heart healthy.’’ (Source: The Times of India, dated 12-1-2012)

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35% MLAs ‘criminals’, 66% crorepatis — Criminalisation of politics

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More than one third of the politicians elected in the just-concluded assembly polls have criminal cases against them, with Uttar Pradesh MLAs topping the list.

About 35% or 252 of the 690 MLAs elected to the assemblies in UP, Punjab, Uttarakhand, Manipur and Goa have a criminal background, while 66% or 457 of the MLAs are ‘crorepatis’.

The analysis by Association for Democratic Reforms and National Election Watch, based on the affidavits submitted to the Election Commission, also shows that compared to the 2007 assembly polls, there is an over-32% increase in the number of crorepati MLAs and about 8% rise in the number of legislators with a criminal past.

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Risk of ‘cultural revolution’ if no reforms: Wen

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Chinese premier Wen Jiabao warned his Communist colleagues recently that the dark days of the Cultural Revolution (1966-76) would return if political restructuring wasn’t carried out in real earnest.

Wen said much of the economic advancement achieved by China would come undone if political restructuring did not take place. His warning is bound to cause a stir in the Chinese industry, because the Cultural Revolution had tried to purge the country of all capitalist elements.

It was apparent that Wen was using his last press conference before completing the 10-year term till early 2013 to convey some important message to hardcore sections within the party opposed to political reforms.

 “As the economy continues to develop, new problems like income disparities, lack of credibility and corruption have occurred. We must press ahead with economic and political structural reforms, particularly reform in the leadership system of our party and country,” he said. These won’t succeed without the ‘consciousness, support, enthusiasm and creativity’ of the Chinese people, Wen said. (Source: The Times of India, dated 15-3-2012)

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Fast foods — A dangerous addiction

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The Sunita Narain-headed Centre for Science and Environment (CSE), a non-profit organisation, has analysed fast food, checking for fats, carbs, salt and trans-fat. The results are as follows:

Fried potato chips

It has around 33% fats. A standard-sized packet of chips (65-75gm) meets half of your daily fats quota. Unlike in a balanced diet, where 30% calories should come from fats, 50-60% of calories come from fats in chips.

Indian snacks

If you are fond of bhujia with tea, you get high doses of salt and trans-fats, along with a high amount of calories.

Instant noodles

This tasty meal comes with high salt, empty calories. A packet of noodles has around 3 gm of salt; recommended intake is 6 gm per day.

French fries

Fries are laden with fats: 20% of its weight is fats, 1.6% of its weight is trans-fats. By eating a large serving (220 gm), one exceeds the safe limit for trans-fats. Burgers 35% of calories in a veg burger come from fats. In non-veg burgers, 47% calories are from fats.

Carbonated drinks

The 300 ml serving that one drinks with fast food has enough sugar (over 40 gm) to exceed one’s daily sugar quota of 20 gm. After this, forget the cup of tea, one should not even eat fruits.

Fried chicken

A two-piece fried chicken has nearly 60 gm of fats, which is recommended for the whole day. Pizza By far, basic pizzas were found to be healthy compared to other fast foods. They have low levels of salt and fats; levels of trans-fats were also low.

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Fortune names N. R. Narayana Murthy among greatest entrepreneurs

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Infosys co-founder N. R. Narayana Murthy is among the 12 greatest entrepreneurs today, according to a Fortune magazine list. Apple’s late chief Steve Jobs leads the bunch. The list includes Microsoft founder Bill Gates and Facebook chief executive officer Mark Zuckerberg for turning ‘concepts into companies’ and changing the ‘face of business’.

The US publication said as the visionary founder of Infosys, Murthy has built one of the largest companies in India, helping to transform the economy and put it on the world stage. Murthy, 65, proved “India could compete with the world by taking on the software development work that had long been the province of the West; Murthy helped spark the outsourcing revolution that has brought billions of dollars in wealth into the Indian economy and transformed his country into the world’s back-office,” the magazine said.

Fortune cited his lesson that an organisation starting from scratch must coalesce into a team of people with an enduring value system. “It is all about sacrifice today, fulfilment tomorrow,” it quotes Murthy, who is ranked 10th, as saying. “It is all about hard work, lots of frustration, being away from your family, in the hope that some day you will get adequate returns from it.”

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Encyclopaedia Britannica goes out of print, enters digital world

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The oldest English-language encyclopaedia in print is moving solely into the digital age.

The Encyclopaedia Britannica, which has been in continuous print since it was first published in Edinburgh, Scotland in 1768, said on Tuesday it will end publication of its printed editions and continue with digital versions available online. The flagship, 32-volume printed edition, available every two years, was sold for INR85,947. An online subscription costs around INR4,297 per year and the company recently launched a set of apps ranging between INR122 and INR306 per month. The company said it will keep selling print editions until the current stock of around 4,000 sets ran out. It first flirted with digital publishing in the 1970s, published a version for computers in 1981 for LexisNexis subscribers and first posted to the Internet in 1994.

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‘Thank You’ to Income-Tax Department for ruining Indian Economy

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Jaithirth Rao, renowned entrepreneur, expresses deep anguish at the arbitrary manner in which the Income-tax Department is harassing Global BPO companies and raising bogus tax demands, forcing them to relocate their operations to foreign countries like the Philippines and China. This shortsighted approach of the Income-tax Department will ruin the Indian economy, he warns.

Jaithirth Rao, entrepreneurial whiz-kid, has launched a blazing attack on the Income-tax Department for its arbitrary policies which is forcing large bluechip MNCs to shift their BPOs from India to more reasonable countries.

In a thought-provoking article in the Indian Express, Jaithirth Rao spoofs a letter from the Finance Minister of Philippines to the Finance Minister of India ‘thanking’ the latter for the ‘vicious harassment’ that the Income-tax Department has heaped on the Indian IT and BPO industries which has caused a shift of BPO businesses from India to the Philippines.

The Income-tax Department is raising tax demands on captive units of global companies using their global profits as the basis and points out that this one decision alone would cause several of these companies not only to stop growing their Indian subsidiaries, but actually start winding them down.

Jaithirth Rao points out that the Income-tax Department has launched a ‘concerted strategy‘ over the past several years by making frequent and arbitrary changes in rules and says that this has resulted in ‘vicious harassment’ of Indian IT and BPO industries. In sarcastic & death-gallows humour, Jaithirth Rao says that Philippines counts the Indian income-tax authorities amongst its ‘best friends’ and requests that the names of the ‘worthy individuals’ who are behind this ‘wonderful strategy of weakening this labour-intensive Indian industry’ be given so that they can be awarded special ‘Magsaysay Awards’ and be honoured as ‘Friends of the Philippines’.

On a serious note, Jaithirth Rao points out that the Indian income-tax authorities are particularly targeting captive BPO companies, which were till recently being regarded as the ‘poster-boys of Indian I. T. Industry’, by asking them to re-compute their taxable profits based on arbitrary and changing transfer pricing guidelines without adequate safe harbour provisions, which are commonplace in most countries.

While in forums like the WTO, India has been vehemently arguing in favour of free movement of labour and opposing the stand of US political groups that it is not ‘body-shopping’, the Incometax Department has taken the reverse position that revenues from such activities do not constitute ‘service exports’ and that it really is ‘bodyshopping’.

He says that this ‘capricious behaviour’ has resulted in many captive units stopping the growth of their Indian BPO outfits and accelerating the growth of their units in foreign countries.

 He also laments that the Income-tax Department is raising tax demands on captive units of global companies using their global profits as the basis and points out that this one decision alone would cause several of these companies not only to stop growing their Indian subsidiaries, but actually start winding them down.

Jaithirth Rao says these ‘business-unfriendly’ ideas of the Income-tax Department will shrink the Indian BPO industry and while these ‘rapacious tax demands’ will in due course be struck down by the courts, in the meantime, the companies will have to pay up, be out of cash and will be spending their time and money on expensive tax lawyers instead of focussing on their operating businesses. In this unfortunate state of affairs, all BPOs close shop in India and move to the Philippines and China, he says. The Income-tax Department is “determined to wreck one of the few industries where India has achieved world class and where Indian companies are considered formidable operators” and their action of reopening past assessments and raising huge untenable demands by terming ‘service export revenues’ as ‘body shopping revenues’ (despite earlier explicit and emphatic assurances that on-site project implementation revenues would be treated as export income) is forcing large and successful world-class companies to flee India. He says that this flight of capital is making China and Philippines ‘salivate’ at the prospect of global corporations setting up operations in those countries in preference to India.

As opposed to the unreasonable stand adopted by the Income-tax Department, the Revenue in Philippines and China have decided to do exactly the opposite and are reasonable in their tax demands, simple and transparent in their transfer pricing rules and generous in their tax holidays, he says.

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HC notice to CBDT for linking promotions with tax collection

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The Gujarat High Court has issued notices to the chairman of the Central Board of Direct Taxes (CBDT) and Chief Commissioner of Income-tax Department in the state on a petition challenging CBDT’s decision to link promotions and postings of officers with tax collection made by them.

The notices were issued by a division bench of acting Chief Justice Bhaskar Bhattacharya and Justice J. B. Pardiwala while hearing a public interest litigation filed by Prakash Kapadia, chairman of an NGO, Jagega Gujarat Sangharsh Samiti.

The Court has sought an explanation about the circular that stated that promotions of the Incometax officers would depend on achievement of targets (of tax collection).

According to the petitioner, the practice of the Income-tax Department to set annual targets for tax collections and to give incentives to its staff for meeting those targets was hurting the taxpayers. The petitioner has challenged the instruction issued by CBDT chairman on February 7 to all chief commissioners and directors general of I-T to generate more collections.

 The petitioner’s counsel, Rashmin Jani, cited three cases of assessees who have suffered at the hands of tax officers due to this policy. He argued that after issuance of such instructions, the officials have started sending demand notices and passed mala fide orders in order to achieve targets.

The petitioner has also contended that the promise of promotion and posting in plum positions may result in serious prejudice to assessees. He also cited an order by the Bombay High Court quashing similar instructions issued by the CBDT chairman earlier.

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EAC Opinion – Accounting for payments made in respect of land pending execution of conveyance deeds and borrowing costs incurred in respect thereof

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Facts

The Government of India directed a State Port Trust (SPT) to construct a new Port. Accordingly SPT acted as the executing agency and completed a Port. For this, the Government of India provided a sum of Rs.426.11 crore to SPT towards implementation of the Port. The Government of India vide their letter dated 14-2-2002 directed SPT to handover the completed Port to ABC Limited, (‘the company’) which is owned by the Government of India and was incorporated with the specific purpose of corporatising the Port.

The company has stated that the Port has been developed and constructed on land acquired from Government agencies. The total consideration paid for acquisition of land was Rs.24.89 crore. Of which, Rs.14.89 crore was paid by SPT and balance Rs.10 crore was paid by the company. In the financial year 2007-08, the Government of India decided that land be owned by the company and therefore directed the company to pay to SPT the amount of Rs.14.89 crore together with interest of Rs.16.51 crore i.e., totaling Rs.31.40 crore. The company had shown the entire amount of Rs.24.89 crore in its books as ‘Advance for Land’ under the head ‘Loans & Advances’, as nature of title that will accrue to the company was not known at the time of making these payments.

Based on the subsequent development in this regard between the company, the Government and Government agencies involved in this issue, the company expects to get ‘Orders of Alienation of Title’ for the land from the respective vendors of the land in due course of time. The company has informed that the formal transfer of title of the land would be through issuance of ‘Orders of Alienation of Title’ by the transferor Government.

Query

On these facts the company has sought the opinion of EAC that (i) whether the company can capitalise the value of land at Rs.24.89 crore in the financial year 2010-11 with a suitable disclosure in the Notes to Accounts as ‘Pending receipt of formal Orders of Alienation of Title’, and (ii) whether the company can charge the interest of Rs.16.51 crore paid to SPT to its profit and loss account for the financial year 2010-11, as separate line item being extraordinary and non-recurring?

Opinion

After considering paragraphs 17 & 35 of Accounting Standard (AS) 1 ‘Disclosure of Accounting Policies’ and paragraphs 35, 49, 58 & 88 of ‘Framework for the Preparation and Presentation of Financial Statements’ the Committee is of the view that the company should capitalise the total amount of Rs.41.40 crore paid by both the company and SPT as ‘Land’ and not as ‘Advance for Land’ from the date when the company possess the beneficial interest in the land and not in the financial year 2010-11. However, the company should give suitable disclosures to convey to the users of financial statements that the execution of conveyance deeds in favour of the company is in progress. Further, the Government has made reference to a rate of interest as a means to compute final sale consideration of the land. Therefore, the amount so determined is in substance not ‘interest’. So the question of treating interest as revenue expenditure and disclosure of interest paid as an extraordinary item does not arise.

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Disciplinary case

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In the case of ICAI v. CA Ajay Kumar Gupta, the CIT Delhi filed a complaint before ICAI that the member had issued an audit report in Form No. 10CCAC certifying that the assessee had made exports and that it was eligible for deduction u/s.80HHC of Rs.18.32 lac. During the assessment proceedings, the claim for deduction u/s.80HHC was found to be false and the assessee admitted this fact. The assessee’s accounts showed that the sale proceeds for exports were not received during the year within the prescribed period.

 ICAI conducted the enquiry and found the member guilty of professional misconduct under clause (7) of Part I of Second Schedule of the C.A. Act. It recommended to the Delhi High Court that the name of the member be removed from the Register of Members for a period of 3 years.

The defence of the member before the High Court was that he was in practice for 21 years without a single incident of professional misconduct or negligence. He also argued that he could not put up his defence before ICAI properly because he had suffered paralytic attack and the assessee had taken away the file. He submitted that a lenient view may be taken in his case.

The High Court has held as under:

(i) The accountants’ profession occupies a place of pride amongst various professions of the world and makes observance of professional duties and propriety more imperative. When conduct of a member of the profession is contrary to honesty, or opposed to good morals, or is unethical, it is misconduct-warranting consequences indicated in the Statute. A breach of confidence is a stigma not only on the individual concerned, but is also likely to have effect on credibility of the profession as a whole.

(ii) The CA’s explanation that the assessee had taken away the file and that he suffered a paralytic stroke does not inspire any confidence because the relevant documents and information were supplied to him. The assessee accepted the fact that section 80HHC claim was not maintainable during the assessment proceedings. Once it is established that no payment was received against the export, the certificate issued by the CA was false. It is a bogey raised by the CA that he has verified all the documents and only then issued the certificate. On the quantum of punishment, on the one hand, the CA pleads his sickness, has an otherwise unblemished practice of 21 years and incident is old. On the other hand, the misconduct is of serious nature because submitting a false/ bogus certificate to the client to enable him to make false claim of deduction under the Incometax Act, is of serious offence. That the CA made an attempt to dupe the tax authorities and help the assessee to avoid the tax to that extent such a conduct has to be taken seriously.

He accordingly cannot be let off merely by giving him reprimand. Some penalty needs to be imposed so that it acts as deterrent and such professional misconduct is not committed. Weighing the circumstances, the ends of justice would be subserved by removing his name from the Register of Members for a period of six months. (itatonline — 9-3-2012).

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Audit & Auditors under the Companies Bill, 2012

The Companies Bill 2012 (the Bill) was tabled in
the Parliament on 18th December, 2012. The Bill has been undergoing
reviews prior to that and may shortly become an Act. Clauses 139 to 148
under the Chapter X of the Bill deal with “Audit and Auditors”. It would
not be out of place to mention here that the new provisions regarding
Auditing and Auditors will materially change our professional
responsibilities. This article attempts to discuss the criticalities and
the key issues relating to the Chapter in the Bill that deals with our
profession.

Appointment of Auditors [Clause 139]

Key
Provisions The Bill provides that a company will appoint an individual
or a firm as an auditor at its first AGM. Such auditor shall hold the
office till the conclusion of its sixth AGM and thereafter till the
conclusion of every sixth Annual General Meeting. Though the appointment
is for five years, ratification of such appointment is necessary at
every AGM. [Clause 139(1)]

In case of listed companies and
certain other classes of companies to be prescribed compulsory rotation
of audit is provided for a) In case of Individual auditor, after one
term of five years; and b) In case of a firm, after two terms of five
years [Clause 139(2)].

The auditor, after completion of his
term/s, will not be eligible for reappointment for a period of five
years. Also, a firm, which has common partners with the outgoing audit
firm on the date of appointment, cannot be appointed as the auditor of
the company. [Clause 139(2)]

Every company will need to comply
with these requirements within three years from the date when these
provisions come into force. [Clause 139(2)]

Members of the
company may also decide that a) Audit Partner and audit team shall be
rotated after certain interval or b) Audit shall be carried out by joint
auditors. [Clause 139(3)]

RBI and IRDA have powers to regulate
the banking/ insurance companies respectively under the relevant Acts.
Being regulators, these institutions have issued guidelines for
appointment and rotation of auditors. The rotation and the joint audit
requirements enacted by IRDA and RBI, being stricter and by virtue of
special powers given to them in this regard, will prevail over the
provisions of the Bill. In such a case, the appointment criteria will
continue to be as per their respective norms.

An audit firm
(including an LLP) eligible to be appointed should have majority
partners practicing in India qualified for appointment. However, only a
qualified chartered accountant partner will be eligible to sign the
audit report. [Clause 141(2)] Eligibility of an LLP for being appointed
as an auditor is now a part of the Bill. [Clause 139(4)] Under the
Companies Act, 1956 (the Act) a notification was issued to the effect
that an LLP will not be considered as a body corporate for the purpose
of Section 226(3)(a) of the Act. However, doubts were expressed whether
that was sufficient for an LLP to be appointed as an auditor of a
company.

A company may remove the auditor before the expiry of
five year term by passing a special resolution and obtaining prior
approval of the Central Government. [Clause 140(1)]

An auditor
may resign. However, he has to file a statement with ROC and also with
the CAG in case of a company where the appointment of the auditor has
been made by CAG, giving facts and reasons for the resignation [Clause
140(2)].

Comments
Prior to the Bill, the Government
had published the Voluntary Corporate Governance Guidelines in December
2009. According to these Guidelines, rotation of audit firm after five
years was suggested and it provided for compulsory rotation of audit
partner after three years. This entire thought process was aimed towards
providing strict norms of corporate governance and enhancing investor
confidence. However, compulsory rotation of audit partner and
appointment of joint auditors have been left to the discretion of the
members of the company in the Bill. Also, the Bill mandates two terms of
5 years where auditor is a firm as against one term under the above
Guidelines. To that extent, there is dilution from the original
corporate governance norms.

A study of regulatory framework with
regard to appointment of auditors prevailing in various countries shows
that there exists a joint audit system in different forms in many
countries. Joint audit is common in countries like Denmark, Germany,
Switzerland and France. In France, joint audit became a legal
requirement in 1966. All publicly listed companies in France and Denmark
that prepare consolidated (group) financial statements are required to
be audited jointly by two independent auditors and a single audit report
is to be issued. Some mandatory provisions in the Bill in this regard
would have only given boost to the investor sentiments.

Further,
in case of listed companies which have long term audit relationships,
it would be a challenge to cope with a sudden rotation. The new auditor
will have no time for understanding the intricacies of business of the
company. This, in fact, enhances the need for joint audit system prior
to rotating out the existing audit firm and would have provided
continuity and at the same time helped more quality audit firms to
emerge in the country. Nevertheless, the corporate world and auditing
community can come together to take advantage of voluntary provision of
joint audit to overcome these challenges.

As regards the
appointment/reappointment clause in the Bill, existing companies are
required to comply with the regulation within three years. However, the
wording of the clause providing for transition is not clear. Presently,
an auditor is appointed annually. After the enactment of the Bill, the
appointment will take place for 5 years. Hence, the audit firm may be
considered as eligible for appointment for two terms after the
provisions become applicable, since the audit firm will not have
completed the `term’ under clause 139(2)(b) of the Bill though the firm
may have been the auditor of the company for 10 years or more. However,
if we were to go by the spirit and the intent of the Bill, it seems that
the fact that companies are given transition period for three years,
indicates that the firm will not be eligible to be reappointed after
three years post the enactment of the Bill if it has already been the
auditor for 10 years or more.

A question remains whether an
audit firm, which has been the auditor of a company for more than 5
years when the provisions come into force, can be appointed as the
auditor of the company for 5 years at all after? Such appointment will
result in the firm being auditor of the company for more than 10 years
after the transition period. It may be noted that there is no provision
in the Bill to appoint auditor for a period shorter than 5 years. Can
the audit firm, in such a case, issue eligibility certificate under the
Bill?

Considering this, one is not clear how these provisions are going to be implemented in the initial years.

Eligibility, Qualification & Disqualifications of the Auditors [Clause 141]

Key Provisions

A person will not be eligible for appointment as auditor if he, his
relative, or his partner holds any security of or interest in or is
indebted to the company, its subsidiary, holding or associate company or
subsidiary of such holding company.

A person or an audit firm
will be disqualified for appointment if he/it has direct or indirect
business relationships with all types of entities mentioned above.

A
person whose relative is a director or key managerial person by
whatever designation in the company is not eligible for appointment.

A person who is auditor in more than 20 companies will also not be eligible for being appointed as the auditor.

A
person who is convicted by a court of an offence involving fraud is not
eligible for the appointment as auditor for 10 years from the date of
such conviction.

Comments

It is significant to note
that the term used in this clause is “Person”. This term is not defined
in the Bill. In only case of “Business relationship” the term “firm” is
also used. However, in clause 139 the Bill uses the terms “Individual
auditor” and “firm”. Going by the spirit, in my opinion, term “person”
in the context means each individual partner of the firm.

Considering
this, going by the wording of the provisions, it is not clear whether
to attract disqualification to the firm should itself hold any security
or interest etc. in the company? Also, if a partner or his relative is
holding security, whether the firm will be disqualified? Clarification
may be needed on this. Also, where one partner is individually holding
appointment as auditor in more than 20 companies, whether his firm will
be disqualified? Going by the spirit of the clause, this does not seem
to be the case, though the drafting is susceptible to such
interpretation.

Keeping track of whether any relative is holding
any security above rupees one thousand (or the prescribed amount) or is
indebted to the auditee company is going to be extremely difficult. In
case of strained relationship with any of the relatives, a member will
find himself on helpless ground if any of the relatives decides to make
him ineligible for appointment or complains after the signing of audit
report that he was ineligible.

Surprisingly, a person or a
partner whose relative has a business relationship with the auditee
company or its subsidiary, associate etc. is not disqualified. Also, the
clause does not refer to `partner of the firm’ but only to the firm.
Does it mean a partner of a firm can have business relationship with the
company in his individual capacity without the firm attracting
disqualification?

The existing limit of undertaking audit of 20
companies per partner though continues under the Bill, this limit will
now apply while appointing auditors of private companies as well. Under
the Act, this limit is not applicable to private companies. The Bill has
also done away with the sub-limit 10 companies where the paid up share
capital of the company is Rs. 25 lakh or more. It is not clear from the
text of the Bill whether signing of consolidated financial statement in
addition to the stand alone financial statements of the company would be
construed as a separate audit assignment to be covered under the limit
of 20 companies.

The intent of the legislation seems good.
However the drafting of the Clause 141 is highly vulnerable to varied
interpretation (or misuse) . Overall, this clause will require great
amount of deliberations especially from the point of view of severity of
the punishments for violating any of the provisions.

Powers, Duties, Auditing Standards and Reporting Formalities [Clause 143,145,146]

Key Provisions

The
Bill provides that the auditor of a holding company will have right of
access to the records of all its subsidiaries so far as it relates to
consolidation of financial statements.

The Bill also requires the
auditor to report whether he has any reasons to believe that an offence
involving fraud is being or has been committed by any of its officers
or employees. The auditor will have the responsibility to report the
matter to Central Government within the time and manner as may be
prescribed.

At present, the auditor is required to report any
observation with any adverse effect on the functioning of the company in
bold/italics in the audit report. The Bill mandates that such
observation/comments should read at the AGM and can be inspected by any
member.

Currently auditor is required to comment on the internal
control matters and whether such system is commensurate with the size of
the company and nature of its business in respect of purchase of
inventory, fixed assets and for the sale of goods and services. The Bill
requires auditor to comment whether adequate internal financial control
is in place and whether it is operating effectively.

The Bill specifically provides that it is the duty of the auditor to comply with the auditing Standards. [Clause 143(9)].

The
Bill provides for mandatory attendance of auditor’s authorised
representative who is qualified to be appointed as an auditor at the AGM
of the company.

Comments

The right of access to
the auditor to the records of all subsidiaries of the auditee company
for the purposes of consolidation may create certain issues among the
auditors in case the auditor of the subsidiary is different from the
auditor of the holding company.

Requirement of adherence to
auditing standards under the Bill (which was hitherto requirement of
ICAI alone) coupled with the penalties attached for non compliance has
substantially increased the auditors’ responsibility. The cost of audit
will increase and small audits may become unaffordable to both the
company and the auditor.

The scope of audit is materially
broadened with the reporting responsibility on the existence of a fraud.
As per SA240 that deals with the “Auditor’s responsibility relating to
frauds in an audit of financial statements”, the primary responsibility
of prevention and detection of fraud rests with management together with
those charged with governance of the entity. Fraud detections require
an attitude which is inherently different from the at-titude required
for the purpose of an audit. Further, in India in case of audit of
banks, the regulator has prescribed the fraud reporting responsibilities
on the statutory auditor. However, the regulator has given clear
directions with regard to the materiality and corresponding reporting
responsibility to various authorities. The Bill does not state any
materiality limits for the fraud reporting. All these indicate that
auditor has to inform all frauds detected/suspected during course of
audit to the Central Government.

Reporting on effectiveness of
internal control is highly subjective. Any comment thereon in the report
may impact the entity significantly. This will increase the
professional responsibility as well as the liability of the audit firm
very significantly.

Further in respect of reporting on fraud, in
the absence specific guidelines, there is a possibility of difference of
opinion whether any offence involving fraud has taken place. For
example, any strategic investment made by the company that is managed by
relatives of the top management or the Board, or divestment of
investment below market value but much above the cost of acquisition to a
company that is substantially influenced by the relatives of top
management or the board members may be construed to be a fraud. Such
interpretational issues may have to be dealt with very carefully
considering the penalties involved in non compliance of reporting
requirement.

Prohibition of undertaking certain services [Clause 144]

Key Provisions

The
Bill provides stringent norms for independence of the auditors. Under
the Bill, an audit firm will not be able to provide certain services
directly or indirectly to a company where it is appointed as the auditor
or to its holding company or subsidiary

companies. (Clause 144) The prohibited services are as under: –

1.    Accounting and book keeping services

2.    Internal Audit

3.    Management services

4.    Design and implementation of any financial sys-tems

5.    Actuarial services

6.    Rendering of outsourced financial services

7.    Investment banking or advisory services

It
is important to note that the restrictions of undertaking the above
mentioned prohibited services apply not only to the firm undertaking the
audit but to all other connected entities of the firm namely:

i)  All its partners;

i)    Its parent, subsidiary or associate entity; and

ii)   
Any other entity in which the firm or any of its partners has (or can
exercise) significant influence or control or whose name, trade-mark,
brand is used by the firm of any of its partners.

The auditor
will have to comply with the above restrictions before the end of the
first financial year after the enactment of the Bill.

Comments

The
Bill uses term “Management Services” for one of the prohibited
services. Under ICAI standard, the term “Management Consultancy
Services” is used for indicating prohibited service. The term
“Management Consultancy Services” used by ICAI at present specifically
excludes Tax services. In my opinion, though there is minor difference
in the terminology used in the Bill and by ICAI, an auditor will be able
to render services related to Direct Taxes and Indirect Taxes.

Punishment for contraventions [Clause 147]


Key Provisions
If
there are any contraventions of any of the provisions relating to audit
and auditor by the company then the company and every officer in
default will be punishable with a minimum fine of Rs. 10,000 and maximum
of Rs. 5 lakh and/or imprisonment extending up to 1 year. [Clause
147(1)]

In a case the auditor contravenes provisions of clauses
139 or 143 to 145 of the Bill, the auditor may become liable to a
minimum fine of Rs. 25,000, which may extend to Rs. 5 lakh. However, if
it is proved that the contraventions have taken place knowingly or
wilfully with the intent to deceive the company, its shareholders, its
creditors, or tax authorities, the auditor will be punishable with
imprisonment for a term up to one year and minimum fine of Rs. 1 lakh
which may go up to Rs. 25 lakh. [Clause 147(2)]

In the event the
auditor is convicted of intentionally deceiving the company,
shareholder, creditors or tax authorities he will be liable to refund
the remuneration received by him to the company and incur liability to
pay damages to all such persons/ authorities for loss arising out of
incorrect or misleading statements made in his audit report. [Clause
147(3)]

Further, if proved that partner or partners of the audit
firm have acted in a fraudulent manner or abetted or colluded in fraud
then the liability for such act will be that of the firm and the
concerned partners jointly and severally. [Clause 147(s) and Explanation
to Clause 140(5)]

Members or depositors or any class of them are
entitled to claim damages, compensation or demand any suitable action
from/or against audit firm for any improper or misleading statement made
in the audit report. [Clause 245(1)(g)(ii)]

Comments

The
Bill rests a heavy responsibility on the audit profession and the
provisions are open to abuse. Eventually, even if the auditor is able to
prove that his actions were not fraudulent or that he had sufficient
evidence to support his comment in the report he has submitted, the
audit firm carries the risk of damage to reputation on account of
accusations. It is necessary to provide sufficient defense measure for
the auditing community at large.

National Financial Reporting Authority [Clause 132]

The
discussion in regard to audit and auditors cannot be complete without
mentioning the immergence of the new authority National Financial
Reporting Authority (NFRA). The existing advisory committee under the
Act known as NACAS will be replaced by NFRA with much wider powers. It
will a) Make recommendation on formulation and laying down accounting
and auditing standards; b) Monitor and enforce the compliance of
accounting and auditing standards; c) Oversee the quality of service of
the professions associated with ensuring compliances with standards and
suggest measures required for improvement in the quality of service; and
d) Perform such other functions as may be prescribed.

NFRA has
been also entrusted with wide powers such as to investigate suo moto or
on reference made by the Central Government into matters of professional
or other misconduct committed by a chartered accountant or a firm of
chartered accountants. Once NFRA commences investigation, ICAI or any
other body cannot initiate or continue proceedings in such matters. NFRA
will have the same powers as vested in a civil court under Code of
Civil Procedures.

For proven misconduct, NFRA will have power to
levy penalty amounting to not less than Rs. 1 lakh but which may extend
to five times the fees received in a case of an individual and not less
than Rs. 10 lakh but which may extend to ten times in case of a firm.

NFRA
will also have the authority to debar a firm or a member from engaging
in practice as a member of ICAI for a minimum period of six months or
such higher period not exceeding 10 years as may be decided by NFRA.

Comments

NFRA
is authorised to act as a regulator for members registered under the CA
Act. This means it may also take action against the company officials
if they are chartered accountants. With constitution of NFRA, powers of
ICAI in regulating members’ conduct will be diminished.

Excessive Powers to Make Rules

In
spite of having in the Bill stringent regulations relating to the audit
and auditors, the Bill has given powers to the Central Government to
prescribe rules at as many as 19 places in Chapter X alone (in the
entire Bill at 346 places). A summary of provisions where powers to
prescribe rules have been given is as under:

Procedure for selection of auditors [Clause 139(1)]

Eligibility conditions for appointment as auditor [Clause 139(1)]

Classes of companies that require rotation of auditor [Clause 139(2)]

Approval from Central Government for removal of auditor [Clause 140(1)]

Statement by the auditor to be filed with ROC in case of resignation [Clause 140(2)]

The value of security that my be held in auditee company [Clause 141(3)(d)(i)]

Amount up to which auditor may be indebted to auditee company [Clause 141(3)(d)(ii)]

Amount of guarantee that may be given to the company in respect of any third person [Clause 141(3)(d)(iii)]

Nature of business relationship with the company [Clause 141(3)(e)]

Information to be included in the “financial Statements” [Clause 143(2)]

Matters that an audit report should include [Clause 143(3)(j)]

Duties and powers of auditors in respect of branches outside India [Clause 143(8)]

Time limit and manner of reporting of fraud to the Central Government [Clause 143(12)]

Prohibited services by an auditor [Clause 145]

Class of companies that need to maintain Cost re-cords [Clause 148(1)]

Items of cost that should be included in books of account [Clause 148(1)]

Net worth or turnover of the companies that require Cost audit [Clause 148(2)]

Manner of calculating remuneration of a Cost Audi-tor [Clause 148(3)]

Conclusion

It
is necessary for all of us to take serious cognizance of all these
provisions in the Bill. We need to understand the entire direction in
which the legislation is moving and be ready to build necessary
professional expertise as well as safeguards in the interest of the
profession.

Right of Privacy – Instruction issued by Election Commission empowering its officer to randomly and indiscriminately search any vehicle on road – Ultra Vires – Constitution of India Art. 21.

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A Writ Petition (PIL) was filed at the instance of a registered N.G.O. substantially challenging the provisions of Chapters 4 and 5 of the Instructions on Election Expenditure Monitoring (2012) issued by the Election Commission of India under the purported exercise of power under Article 324 of the Constitution of India. According to the Instructions, various teams, such as, flying squad, static surveillance team, expenditure monitoring cell, etc. have been constituted. The teams which have been constituted have been empowered to intercept and search indiscriminately any vehicle or any person/individual at any time. On search, if any cash of more than Rs.2.5 lakh or any other articles, such as, gold, diamonds, etc. are found from the possession of such a person, then the members of the said team have been empowered to interrogate the particular person, and if unexplained cash, without proper documents is found in the possession of any person and is suspected to be used for bribing the voters, it would be seized and action would be taken under the provisions of the law. The Instructions further provide that if cash found is more than Rs.2.5 lakh and no criminality is suspected, i.e., without any election campaign material and no party functionary or worker of the contesting candidates/parties are present in the vehicle, to prove the nexus, then the members of the team would intimate about the recovery of such cash to the Assistant Director of Income Tax in charge of the district. The Assistant Director would depute the Inspector or he himself would reach at the spot for taking appropriate action according to the provisions of the Income Tax Laws.

The Honourable Court observed that powers vested in the Election Commission under Art. 324 (1) of the Constitution of India are wide in nature. The exercise of powers is, however, not without a check. The power has to be exercised with legal circumspection. It is rather more to supplement to the grey areas where no law or legislation is existing and it is necessary to issue directions or pass orders to ensure free and fair poll. The power is complementary and supplemental. It cannot be exercised contrary to the provisions of law, nor should it violate the existing laws.

Action of the authorities in intercepting vehicles indiscriminately on the road at random and then carrying out the search in the hope or nurturing a doubt that the vehicle may contain a cash of more than Rs.2.5 lakh or other articles, without establishment of prima facie grounds or without there being any basis or subjective satisfaction on the part of the authorities would definitely be a violation of the right to privacy of such citizens. If there is a concrete information with the authorities that a vehicle is to pass through a particular route carrying a large amount of currency or other articles like liquor, arms, etc. likely to be used in the election process, then perhaps the authorities may be justified in intercepting the same and effecting the seizure of the same. In the present case, a very unique mode is being adopted. Even if the authorities are satisfied that the cash recovered from a particular individual is not to be used for any election purpose, but still the authorities would inform the Income-tax officials regarding the same for taking appropriate action. This amounts to direct intrusion on the powers of the Income-tax authorities as laid down under Income-tax Act, 1961.

The Honourable Court held that the instruction issued by the Election Commission insofar as it empowers its officers to randomly and indiscriminately search any vehicle on the road and seize cash of Rs.2.5 lakh, if recovered from the vehicle or an individual or a person, as ultra vires being violative of Article 21 of the Constitution and also beyond the powers conferred on the Election Commission. The Court directed the Election Commission that the instructions shall not be implemented and there shall not be any indiscriminate or random search or seizure of any vehicle, unless there is any reliable or credible information with the Election Commission reduced into writing.

Bhagyoday Janparishad (Reg. NGO) through President vs. State of Gujarat thro. CS & Ors. AIR 2013 Gujarat 14

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Recovery of tax – Company in liquidation – First charge – Conflict between State legislation and Central legislation – Central legislation must prevail : Companies Act Section 529A & 530.

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This appeal was directed against the order of the Official Liquidator wherein the present appellant (Commercial Tax, Government of M.P.) had been ranked as a preferential creditor. The appellant contended that in terms of the provisions of section 33C of the Madhya Pradesh General Sales Tax Act, 1958 and section 53 of the M.P. Commercial Tax Act, 1994, any amount of tax/penalty/interest payable by a dealer or other Person under this Act shall be first charge on the property of the dealer or Such person and as such he be treated pari passu with the secured creditors. The claim of the appellant is in the sum of Rs. 1,40,60,422 ; they are sales tax, Central tax and entry tax dues payable by the company (in liquidation) for its Morena unit and Gwalior unit. The appellant is aggrieved by the finding returned by the Official Liquidator that he be ranked as a preferential creditor and not a secured creditor.

The Court observed that the statutory mandate contained in this provision is clear. It starts with a non obstante clause. It clearly states that notwithstanding any thing contained in any other provision of this Act or any other law for the time being in force, the dues of the workmen and debts due to the secured creditors to the extent that such debts rank under clause (c)of the proviso to s/s. (1) of section 529 shall be paid pari passu and in priority to all other debts.

The claims made by the appellant relate to his tax dues which as per his submission would categorise u/s. 53 of the M.P. Commercial Tax Act, 1994. Section 53 of the M.P. Commercial Tax Act,1994 clearly stipulates that this provision is subject to the provision of section 530 of the Companies Act,1956. Section 530 deals with the dues of the company to a Central or a State or a local authority of Revenue, taxes, cesses, etc.

Provisions of section 529A of the Companies Act (a Central legislation) have to override the provisions of section 53of the M.P. Commercial Tax Act of 1994 (a State legislation). Even otherwise section 53 of the Act of 1994 (under which the appellant is claiming his right) clearly specifies that the tax liability will be subject to the provisions of section 530 of the Companies Act; section 530 of the Companies Act has to be read subject to the provisions of section 529A of the said Act. There appears to be no conflict between the State Act and the Central Act. That apart, even if there is a conflict between a State legislation and a Central legislation, the Central legislation must prevail.

Commissioner, Commercial Tax, Government of M.P. vs. Official Liquidator (2012) 56 VST 335 (Del.) (High Court)

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Nomination – Nominee Director – Withdrawal to take effect immediately – Resignation to take effect moment letter is sent: Companies Act, 1956:

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The first accused “M/s. Subhiksha Trading Services Ltd” is a company incorporated under the Companies Act of 1956. The complainant is a banking company. A complaint was filed against a company and its directors for an offence punishable under sec. 138 of the Negotiable Instruments Act, 1881. The petitioner, who was one of the accused, filed a petition u/s. 482 of the Code of Criminal Procedure, 1973, contending that (i) she was a nominee director who had submitted her resignation prior to issuance of the cheque which had been dishonoured; (ii) that the shareholder company which had nominated her to the board of directors of the accused – company had sent the letter of withdrawal to the accused company as well as to the Registrar of Companies, which was acknowledged; (iii) that she had also intimated her resignation to the board of directors of the accused company; and (iv) that there was absence of specific averments as to how she was in charge of day to day affairs of the company;

The Honourable Court observed that under the articles of association, the shareholder company had the right to withdraw its nominee. The moment the nomination was withdrawn, the withdrawal became effective and the nominee director ceased to be a director of the company. From the letter of withdrawal sent to the first accused company and the letter of information sent to the Registrar of Companies, it had been prima facie proved by means of unimpeachable documents that the petitioner was not a nominee director of the first accused company on or after 8th January, 2009. Therefore, she was not liable for punishment u/s. 138 of the 1881 Act for the offence said to have been committed by the company subsequent to the date of withdrawal. The Court further observed that resignation of a director will take effect from the moment the resignation letter is sent and it is later on acknowledged by the company.

The question of resigning from the office of director will arise, only if, the person happens to be a director and not a nominee director. If he is a nominee director, he is primarily responsible for the company which nominated him. He may send his resignation to the company which nominated him and even without any such resignation letter, the company which nominated him will be at liberty to withdraw his nomination. In either event, if a resignation letter is submitted by a nominee director to the company which nominated him, thereafter it is for that company to act upon it and to withdraw the nomination of the nomination of the nominee director. As there is no provision for resignation by the director, there is no provision for withdrawal also in the Companies Act, 1956. But such withdrawal is governed by the memorandum and articles of association.

Renuka Ramanath vs. Yes Bank Ltd. (2012) 174 Comp. Cas 465 (Mad.)

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License or lease – Determination – Distinction : Transfer of Properly Act Sec. 105

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The Petitioner, a Publisher-cum-Chief Editor of a local news paper published from Tirupathi, challenged the legality and validity of the orders passed by the second respondent on 16.03.2012 declining to extend the period of license and requesting the petitioner to vacate the premises under his occupation within three days.

In accordance with the terms of the license, the petitioner was granted permission to carry on the business. Condition No. 5 thereof required the licensee to pay the license fee by the 5th of every succeeding month and non-payment of the license fee entailed cancellation of the license apart from the levy of penalty of 24% p.a. on the arrears of the license fee till the date of payment in full. Condition No. 10 thereof set out that the licensee shall not act to the detriment of the interests of the Devasthanams in any manner. Condition No. 13 reserved the right of access and entry into the licensed premises and to carry out inspection by the Officers and Staff of the T.T.D. Condition No. 15 set out that the license was liable to be cancelled for violation of any of these terms and conditions of the license. The writ petitioner quietly entered upon the demised premises on 04-08-2008 and he was entitled to remain in possession thereof for a period of three years, which was to expire on 03-08-2011, subject of course to his payment of the monthly license fee of Rs. 4,535/-.

The Court observed that section 52 of the Indian Easements Act, defined “license” as, where one person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property. It is manifestly clear that every license originates in a grant made by one person in favour of another or a definite number of other persons. By implication a license cannot be granted to a fluctuating body of persons who will not be answering the expression of definite number of other persons. Most importantly, what has been granted was only to do something which would in the absence of such grant be unlawful to be done by the other persons. Equally important to notice is the fact that the person to whom the grant is made, does not acquire any right whatsoever, including easementary right or any interest in the property. It can, therefore, be deduced that a grant, which is called license merely authorised the person or persons to whom the grant is made, a right of possession for enjoyment and hence such a right is not juridical possession but amounts to mere occupation.

Possession being a legal concept, one of the most essential ingredients of it is the specification of the actual period of time granted for such occupation. Therefore, a bare license, without anything more is always revocable at the will of the licensor, since the grant itself is limited by a period of time, and the payment of license fee does not by itself create an interest in the licensed property. Consequently, mere acceptance of the license fee even for the periods subsequent to the revocation of the license would not amount to acquisance of the possession of the licensee. It merely amounts to fictional or unreal extension of the period of license without in any manner affecting the rights of the owner from securing eviction of the person or persons to whom the grant is initially made. In law, grantor or the licensor is always liable to be treated to be in possession of the land in question all through the subsistence of the license and even beyond. Hence, it would be open to the licensor to re-enter the premises and reinstate himself once the period of license granted by him expires. This power to re-enter or to reinstate himself is conditioned by not using more force than is actually necessary. As per Section 54 of the Easements Act, the grant of a license may be express or implied from the conduct of the grantor, and Section 60 of the said Act sets out the circumstances when a license can be revoked and Section 61 sets out that such a revocation can be express or even implied. Section 62 listed out nine circumstances when a license is deemed to be revoked.

Of them, Clause (c) clearly discloses that a license is deemed to be revoked when it has been granted for a limited period and the said period expired. Thus, it becomes evident that a license granted for a limited period is deemed to have been revoked upon expiry of the period of grant. Section 63 recognised that, where a license is revoked, the licensee is entitled to a reasonable time to leave the property affected thereby and to remove any goods which he has been allowed to place on such property. What would be the reasonable time required for achieving these objectives is therefore dependent upon the facts and circumstances prevailing in each case. No hard and fast rule can be prescribed in this regard. Section 64 recognised the right of the licensee, when he was evicted without any fault of his by the grantor before he has fully enjoyed, under the license, the right which he was granted, to recover compensation from the grantor, for the breach of the grant.

The term ‘Lease’ has been defined in Section 105 of the Transfer of Property Act, 1882. The expression ‘lease’ normally connotes the preservation of the demised estate put in occupation and enjoyment thereof for a specified period or in perpetuity for consideration; the corpus user thereof does not disappear and at the expiry of the term or on successful termination the same is handed over to the lessor subject to the terms of the contract, either express or implied (see State of Karnataka and others vs. Subhash Rukmayya Guttedar and others (1993) Supp 3 SCC 290).

In juxtaposition, a license confers a right to do or continue to do something in or upon immovable property of grantor which but for the grant of the right, may be unavailable. It creates no estate or interest in the immovable property of the grantor. Thus, the distinction between the ‘lease’ and license’ lies in the interest created in the property demised. It is therefore essential to gather the intention of the parties to an instrument from the terms contained therein and also by scrutinising the same in the light of the surrounding circumstances. The description ascribed by the parties to the terms may, evidence the intention but may not be very decisive. The crucial test, therefore, is whether the instrument is intended to create or not to create an interest in the property which is the subject matter of agreement between the parties. If it is in fact intended to create an interest in the property, it becomes a lease and if it does not, it is a mere license. In determining whether the agreement creates a lease or a license, the test of exclusive possession, though not decisive, is of great significance. Thus, there is no readily available litmus test to distinguish a ‘lease’ as defined in Section 105 of the Transfer of Property Act, from a ‘license’ as defined in Section 52 of the Easements Act, 1882, but the nature and character of the transaction, the terms settled by the parties and the intent of the parties hold the key. Therefore, if an interest in the immovable property entitling the transferee to enjoyment is created it becomes a lease, and if mere permission to use without right to exclusive possession is alone granted, it becomes a license.

The conditions of the grant leave no doubt that the parties have only intended the transaction to be a mere license but not a lease. Particularly, condition No. 13, which reserved the right of entry into the licensed premises and to carry out inspection by the officers and staff of the T.T.D any time during the subsistence of the license makes the position clear that the possession of the licensed premises remained with the second respondent – Devasthanam, all through, and the writ petitioner has only been granted a license to use the premises. Further, the monthly fee, which formed the consideration for the grant, was called as license fee. Right to recall the grant for violation of the terms and conditions, prematurely, is another pointer.

In view of the above it was held that Suit premises was not leased out but granted on license only.

Clarification issued by Board – Binding on officers: Central Excise Tariff Act, 1985

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The petitioners were engaged in the business of manufacturing of plain particle boards and prelaminated particle boards popularly known as ‘Bagasse boards’, which are goods falling under Chapter 44 of the First Schedule to the Central Excise Tariff Act, 1985.

According to the petitioners, bagasse is remains of sugarcane after the juice has been extracted by pressure between rolls of a mill. The Central Government issued a notification u/s. 5A of the Central Excise Act dated 1st March 2006, thereby granting exemption as well as concessional rate of duties for various goods. At Serial No. 82 of the Table of this Notification, “Bagasse boards” are classified at clause (vi) and rate of duty prescribed for these goods is nil.

The petitioner company came to know from the Association that the goods in question were chargeable to nil rate of duty and that other members of the Association at Kolhapur, State of Maharashtra, were allowed to clear these goods at nil rate of duty. Petitioner wrote a letter dated 1st June 2006 requesting the Assistant Commissioner for clarification whether Bagasse boards manufactured by the petitioner were chargeable to nil rate of duty or not. The petitioner did not receive any response from the excise authorities. As there was no reply at the end of the Assistant Commissioner or from any other excise authorities, the petitioner started clearing their goods, namely, bagasse boards at nil rate of duty.

Ultimately, the Additional Commissioner of Central Excise issued a show-cause notice dated 20th June 2007, proposing to recover a sum of Rs. 28,75,624/- as excise duty on the quantities of Bagasse boards cleared by the petitioner company on the ground that the goods were covered under another Notification dated 1st March 2006.

In the course of hearing of Writ Petition, it was pointed out three clarification were issued by the Government of India and the Board, two letters of the C.B.E. & C. addressed to the Chief Commissioner, Hyderabad and the Chief Commissioner, Pune are specifically relied upon by the Commissioner, Central Excise, Pune while allowing benefit to one M/s. Eco Board Industries Limited.

It had been clarified by the Government of India through the Board that benefit of Notification was available to pre-laminated bagasse board, such clarification is binding to all Central Excise Officers and no officer of the Central Excise could take a contrary view, more so, when the Central Excise Officers of Patna, Lucknow, Sholapur, Kolhapur, Pune, Hyderabad, etc. have followed the clarifications and allowed the benefit of exemption for similar products, namely, pre-laminated bagasse board, to manufacturers within their jurisdiction.

The Court observed that firstly, any clarification issued by the Board is binding on the Central Excise Officers who are duty-bound to observe and follow such circulars. Whether Section 37B is referred to in such circular or not is not relevant. The Court quoted the observations made by the Supreme Court in the case of Ranadey Micronutrients vs. Collector of Central Excise 1996 (87) ELT 19 (SC), wherein a circular which was in favour of the assessee issued by the Board was sought to be repudiated by the Central Excise Department on the ground that it was only a letter and not an order issued u/s. 37B. The Apex Court observed in paragraph 13 of the judgment as under:

“There can be no doubt whatsoever, in the circumstances, that the earlier and later circulars were issued by the Board under the provisions of Section 37B, and the fact that they do not so recite does not mean that they do not bind Central Excise Officers or become advisory in character. There can be no doubt whatsoever that after 21st November, 1994, Excise duty could be levied upon micronutrients only under the provisions of Heading 31.05 as “other fertilisers”. If the later circular is contrary to the terms of the statute, it must be withdrawn. While the later circular remains in operation, the Revenue is bound by it and cannot be allowed to plead that it is not valid.”

Therefore, the submission that the letters issued by the Board in the present case were communications answering queries raised by the Commissioners of particular areas and hence, such letters were not binding because they were not issued u/s. 37B is not the correct proposition as canvassed by the Counsel appearing for the Revenue.

When other Central Excise authorities of equal and higher rank have followed and acted as per the clarifications, the Commissioner, Surat, could not have taken a contrary view on the assumption that the clarifications were only letters and not orders u/s. 37B.

If Excise authority of a particular Commissionerate or State refuses to allow benefit of exemption to manufacturers located in that Commissionerate or State but other manufacturers located elsewhere are allowed such exemption, then the same would be in violation of Article 14 of the Constitution of India and also of Article 19(1)(g)of the Constitution of India.

Darshan BoardLam. Ltd vs. UOI 2013 (287) E.L.T. 401 (Guj.)

levitra

Service of notice u/S.143(2)

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Issue for consideration

Section 143
of the Income-tax Act, 1961 (‘the Act’) provides for assessment by an
Assessing Officer (‘AO’) of the tax payable by an assessee for a
particular assessment year. Section 143 is a purely procedural or
machinery section laying down the procedures for making assessment in
various contingencies. Broadly, section 143 prescribes two types of
assessment — ‘summary assessment’ u/s.143(1) and ‘scrutiny assessment’
u/s.143(2).

As the name suggests, under ‘summary assessment’,
the AO makes regular assessment without inquiry and makes adjustments,
if any, to the income, limited to any arithmetical error in the return
or an incorrect claim which is apparent from any information in the
return. Section 143(2) on the other hand provides for regular assessment
after detailed inquiry. Section 143(2)(ii) enables the AO to make a
regular assessment after detailed inquiry.

The proviso to
section 143(2)(ii) of the Act prescribes the service of notice on the
assessee within a particular period as a pre-requisite to enable the AO
to complete an assessment other than summary assessment. The notice
should specify a date and should call upon the assessee either to attend
before the officer on that date or produce or cause to be produced
before the officer, on that date, any evidence which the assessee may
rely upon in support of his return and it is then up to the assessee to
satisfy the officer by producing necessary material that the return is
correct and complete. At present, the proviso to section 143(2)(ii)
specifies six months from the end of the financial year in which the
return is furnished, as the time-limit within which notice needs to be
served on the assessee for valid assessment of his return of income.

Section
143(2)(ii) and the proviso thereto, read as under: “Section 143(2)
Where a return has been furnished u/s.139, or in response to a notice
u/ss.(1) of section 142, the Assessing Officer shall, —
(i) ……..

(ii)
notwithstanding anything contained in clause (i), if he considers it
necessary or expedient to ensure that the assessee has not understated
the income or has not computed excessive loss or has not underpaid the
tax in any manner, serve on the assessee a notice requiring him, on date
to be specified therein, either to attend his office or to produce, or
cause to be produced, any evidence on which the assessee may rely in
support of the return; Provided that no notice under clause (ii) shall
be served on the assessee after the expiry of six months from the end of
the financial year in which the return is furnished.”

The controversy
sought to be discussed here, revolves around the issue as to whether the
expression ‘served’ used in the proviso to section 143(2) (ii) of the
Act needs to be given a literal meaning of ‘actual physical receipt of
notice by the assessee’ or otherwise needs to be construed as giving a
meaning of ‘issue’ of notice by the AO.

The Punjab and Haryana High
Court had an occasion to deal with this issue, holding that the date of
receipt of notice by the assessee was not relevant to determine whether
the notice had been served within the prescribed time, and that the
expression ‘serve’ meant the date of ‘issue of notice’. In deciding the
issue, the Punjab and Haryana High Court specifically dissented with the
findings of other earlier judgments of the Punjab and Haryana High
Court on the subject.

V.R.A. Cotton Mills’ case

The issue came up
recently before the Punjab and Haryana High Court in the case of V.R.A.
Cotton Mills (P) Ltd. v. Union of India and Others, (CWP No. 18193 of
2011) dated 27 September 2011 (reported in www.itatonline.org). V.R.A.
Cotton Mills filed a writ petition challenging the notice dated 30
September 2010 issued by the AO u/s.143(2) for A.Y. 2009-10, on the
ground that the notice was not served within the prescribed time limit
and accordingly, claimed that the initiation of assessment proceedings
by the AO was bad in law. The Court opined that the expressions ‘serve’
and ‘issue’ were interchangeable, relying on the following legal
precedents to construe the expression ‘serve’ as the date of issue of
notice:

  •  Banarsi Debi and Anr. v. ITO, (53 ITR 100);
  • Collector of
    Central Excise v. M/s. M. M. Rubber & Co., (1991 AIR 2141 SC);
  • Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas & Co.,
    (AIR 1966 SC 543); and
  • State of Punjab v. Khemi Ram, (AIR 1970 SC
    214). 

The High Court dissented from its own earlier judgment in the case
of CIT v. AVI-OIL India (P.) Ltd., (323 ITR 242), on the ground that
the legal precedents referred to above were not placed before the Court
in the case of AVI-OIL India (supra) and therefore, the Court, in
ignorance of law, had given literal meaning to the word ‘served’ in that
case. Treating the decision of AVI-OIL India (supra) as per incuriam,
the Court in V.R.A. Cotton Mills case (supra) held that the purpose of
the statute would be better served, only if the expression ‘served’ was
considered as being issue of notice. The Court, in light of the
aforesaid findings, dismissed the writ petition of the assessee and
construed the expression ‘served’ as meaning ‘issue’ of notice.

AVI-OIL
India’s case

This issue had come up earlier before the Punjab and
Haryana High Court in the case of CIT v. AVI-OIL India (P.) Ltd.
(supra).

In that case, the assessee filed its return of income on 29
October 2001 for A.Y. 2001-02 and notice u/s.143(2) was issued on 29
October 2002. The notice server visited the factory premises of the
assesseecompany on 31 October 2002 and as per the report of the notice
server, the office was found closed. The AO then directed the notice
server to serve the notice by affixture. This mode of service of notice
by affixture was challenged in appeal and the Court upheld the decision
of the Tribunal that such service of notice was not in accordance with
section 282 of the Act and Rules as prescribed under the Code of Civil
Procedure, 1908.

In addition, another notice dated 30 October 2002, was
also issued by the AO and sent by Registered post on 30 October 2002.
This notice was served upon the assessee on 1 November 2002. Relying on
the proviso to section 143(2)(ii) of the Act, the assessee-company
submitted that the second notice was non est in law considering that it
was served on the assessee beyond the then prescribed time limit of 12
months from the end of the month in which the return was furnished.

On
perusal of section 143(2) of the Act, the Court held that a notice under
that section is not only to be issued but also has to be served upon
the assessee within the time-limit as provided under the proviso to
section 143(2)(ii) for a valid assessment. The Court further held that
belated service of notice cannot be considered as curable u/s.292B of
the Act, as this section deals with issue of notice and not service of
notice.

In light of these facts, the Court upheld the decision of the
Tribunal of service of notice on the assessee not being a valid service
of notice u/s.143(2).

Observations

Section 143 of the Act corresponds in material particulars to section 23(1) to section 23(3) of the Income-tax Act, 1922 (‘the 1922 Act’). Section 143 has received major overhauls due to changes in the assessment procedures vide Taxation Laws (Amendment) Act, 1970 and Direct Tax Laws (Amendment) Act, 1987. Over the years, amendments have been carried out in the provisions of section 143, to reach its present form. The condition of service of notice on the assessee and the time-limit thereof was introduced in section 143 by the Direct Tax Laws (Amendment) Act, 1987. Circular No. 549, dated 31 October 1989 issued by the Central Board of Direct Taxes (CBDT), 182 ITR 19 (St.), explains the scope of the amendment in the proviso to section 143(2) of the Act, as under:

“5.10 Commencement of proceedings for scrutiny and completion of scrutiny proceedings [s.s (2) and (3) of section 143] —………….

5.12 Since, under the provisions of s.s (1) of new section 143, an assessment is not to be made now, the provisions of s.s (2) and (3) have also been recast and is entirely different from the old provisions…….

5.13 A proviso to s.s (2) provides that a notice under the sub-section can be served on the assessee only during the financial year in which the return in furnished or within six months from the end of the month in which the return in furnished, whichever is later. This means that the Department must serve the said notice on the assessee within this period, if a case is picked up for scrutiny. It follows that if an assessee, after furnishing the return of income does not receive a notice u/s.143(2) from the Department within the aforesaid period, he can take it that the return filed by him has become final and no scrutiny proceedings are to be started in respect of that return.”

The Legislature, by inserting proviso to section 143(2) has intended that if no notice is received by the assessee within the prescribed time-limit, then the assessee can consider that the return filed by him has become final and that no scrutiny proceedings have been started. The notice can only be received on actual service, and therefore the intention seems to have been to place a time-limit for actual service, and not merely for issue, of the notice.

This position is further supported by Circular No. 621, dated 19 December 1991, 195 ITR 154 (St.), which clarifies as under:

“Extending the period of limitation for the service of notice u/ss.(2) of section 143 of the Income-tax Act — 49. Under the existing provisions of section 143 of the Income-tax Act relating to the assessment procedure, no notice u/ss.(2) thereof can be served on the assessee after the expiry of the financial year in which the return is furnished or the expiry of six months form the end of the month in which the return is furnished, whichever is later.

49.1 The aforesaid period of limitation for the service of notice u/ss.(2) of section 143 does not allow sufficient time to the Assessing Officers to select the returns for scrutiny before assessment. Therefore, s.s (2) has been amended to provide that the notice thereunder can be served on the assessee within twelve months from the end of the month in which the return in furnished.”

This interpretation of the proviso to section 143(2)(ii) of the Act is also supported by the enactment of sections 282 and 292BB. Section 282 prescribes the procedure and manner in which service of notice needs to be generally effected under the provisions of the Act and further, section 292BB of the Act vide a legal fiction holds certain notices as valid service of notice under the Act, based on satisfaction of certain conditions.

Further, section 34 of the 1922 Act corresponds to section 148, section 149 and section 150 of the Act (collectively referred to as ‘reassessment provisions’) which deals with procedure and conditions for reassessment of income of the assessee for a particular assessment year. On comparison of the language of section 143(2) of the Act with the reassessment provisions, one finds that the reassessment provisions have used both the expressions ‘issue of notice’ and ‘service of notice’, as against the provisions of section 143(2), which have consistently used only the expression ‘service of notice’.

The decision of the Supreme Court in the case of Banarsi Debi and Anr. v. ITO (supra) relied upon by the High Court in the V.R.A. Cotton Mills’ case (supra) was delivered in the context of section 34 of the 1922 Act. The Apex Court was considering an amendment in section 34 of the 1922 Act vide section 4 of the Amending Act of 1959, which sought to save the validity of notices issued beyond the prescribed period. Since section 34 used the term ‘served’ and not the term ‘issued’ while the amendment sought to cover notices ‘issued’ beyond the prescribed time, the Supreme Court, in that case, held as under:

(1)    The clear intention of the Legislature was to save the validity of notice as well as the assessment from an attack on the ground that the notice was served beyond the prescribed period;

(2)    That intention could be effectuated if a wider meaning was given to the expression ‘issued’, whose dictionary meaning took into account the entire process of sending the notice as well as the service thereof;

(3)    The word ‘issued’ in section 4 of the Amending Act had to be construed as interchangeable with the word ‘served’ or otherwise the amendment would become unworkable.

On perusal of these findings, one notices that the Apex Court confirmed that the expression ‘issue of notice’ had two meanings. The word ‘issue of notice’ was equated to as being ‘service of notice’ in a wider sense and of ‘notice sent’ in a narrower sense. In order to make the section workable and to further the intention of the Legislature of enacting section 4 of the Amending Act, 1959, the Court had to interpret the word ‘issue of notice’ as ‘service of notice’ in a contextual sense.

When the applicability of these findings were sought to be applied to corresponding reassessment provisions of the 1961 Act, the Supreme Court in the case of R. K. Upadhyaya v. Shanabhai P. Patel, (166 ITR 163), distinguished the decision of Banarsi Debi and Anr. v. ITO, (supra) holding that the scheme of the 1961 Act so far as notice for reassessment was concerned was quite different; and that a clear distinction had been made out between the ‘issue of notice’ and ‘service of notice’ under the 1961 Act.

The decision of Banarsi Debi and Anr. v. ITO (supra) was also distinguished by the High Courts in the following decisions on similar lines:

  •     Jai Hanuman Trading Co. Ltd. v. ITO, (110 ITR 36) (P&H) (FB);

  •     CIT v. Sheo Kumari Devi, (157 ITR 13) (Pat) (FB); and

  •     New India Bank Ltd. v. ITO, (136 ITR 679) (Del.)

Further, the following extracts of observations in the context of ‘issue of notice’ and ‘service of notice’ of the Full Bench of the Patna High Court in the case of Sheo Kumar Devi (supra), need to be noted:

“Once the maze of precedents is out of the way, one might as well examine the issue refreshingly on principle. To my mind, the fallacy that seems to have crept in this context is to suggest that (barring some very peculiar or compulsive textual compulsion) in plain ordinary English, the word ‘issue’ and the word ‘serve’ are synonyms or identical in terms. With great respect, it is not so. Their plain dictionary meaning runs directly contrary to any such assumption. No dictionary says that the issuance of an order is necessarily the service of order on a person as well, or in reverse, that the service of an order on a person is the mathematical equivalent to its issuance. In Chamber’s Twentieth Century Dictionary, the relevant meanings given to the word ‘issue’ are act of sending out, to put forth, to put into circulation, to publish, to give out for use. On the other hand, the word ‘serve’ in the same dictionary has been given the meaning, as a term of law, to deliver or present formally, or give effect to. Similarly in the New Illustrated Dictionary, the relevant meaning attributed to the word ‘issue’ is come out, be published, send forth, publish, put into circulation whilst the relevant meanings attributed to the word ‘serve’ are to supply a person with, make legal delivery of (writ, etc.), deliver writ, etc., to a person. Thus it would appear that the words ‘issue’ and ‘serve’ are distinct and separate and the indeed the gap between the two may be wide, both in point of time and place. An order or notice may be issued today, but may be served two years later. An order or notice may be issued at one place and may be served at a point 1,000 or more miles away. An order issued may not require any service at all……. shape of notification…….. Merely because a statute may provide that an order issued should also be properly served subsequently on the person directly affected would not, in my view, in any way render the words ‘issue’ and ‘serve’ as either synonymous or identical. A very peculiar situation in a statute and the compulsion of sound cannon of construc-tion may sometimes require the enlargement or extension of a word to save the legislation from being rendered nugatory. That, indeed, was the situation in Banarsi Debi case (supra).”

On similar lines, the other decisions as relied on by the Court in the case of V.R.A. Cotton Mills (supra) are not relevant in the context of the issue under consideration, since none of these decisions dealt with the expression ‘issue; or ‘service’ of notice.

On the contrary, the following decisions of the High Courts, delivered in the context of section 143(2), upholding the interpretation of service of notice not being synonymous with issue of notice, were not considered by the High Court in the case of V.R.A. Cotton Mills (supra):

  •     CIT v. Shanker Lal Ved Prakash, (300 ITR 243) (Del.) — in this case, the High Court even issued directions to AOs to dispatch notices at least a fortnight before the expiry of the date of limitation;

  •     CIT v. Yamu Industries Ltd., (306 ITR 309) (Del.) — the principles of section 282 were also applied in this case in interpreting the expression ‘service’ of notice;

  •     CIT v. Cebon India Ltd., (34 DTR 119) (P&H);

  •     CIT v. Pawan Gupta and Others, (318 ITR 322) (Del.) and Rajat Gupta v. CIT, (41 DTR 265) (Del.) — In context of block assessment;

  •     CIT v. Bhan Textiles (P) Ltd., (287 ITR 370) (Del.);

  •     CIT v. Vardhman Estate (P) Ltd., (287 ITR 368) (Del.); and

  •     CIT v. Dewan Kraft Systems (P) Ltd., (165 Taxman 139)(Del.).

One also needs to keep in mind that the requirement of service of notice within the specified period, and not issue of notice within that time, has been provided for to ensure that AOs do not show a notice as having been issued at an earlier date, though issued and dispatched much later, as that could have resulted in possible harassment of assessees.

In the light of the above, the better view is that the expression ‘served’ as referred to in section 143(2)(ii) of the Act and its proviso thereof, has to be given literal meaning of ‘actual receipt of notice by the assessee’ as against the meaning of issue of notice. The decision of the Punjab and Haryana High Court in the case of V.R.A. Cotton Mills case (supra), with due respect, therefore requires reconsideration.

Further, the principle of judicial propriety and judicial discipline demanded that the matter in the case of V.R.A. Cotton Mills Ltd. (supra) should have been referred to a Larger Bench of the Punjab and Haryana High Court, more particularly after the fact that the same High Court in the cases of Cebon India (supra) and AVI-OIL India Ltd. (supra) had decided otherwise in the context of section 143(2).

OffShore Transaction of Transfer of Share between Two NRs Resulting in Change in Control & Management of Indian Company —Withholding Tax Obligation and Other Implications

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Part-III
(Continued from last month)
VIH’s obligation to withhold tax — Section 195

3.14 As stated in Part II of this write-up, the Apex Court held that the capital gain in question is not chargeable to tax u/s.9(1)(i) of the Act and as such, question of deduction of TAS does not arise.

3.15 While deciding the issue relating to withholding tax obligation of VIH, the Court analysed the provisions of section 195 and the implications thereof and made certain observations such as: if, in law, the responsibility for payment is on a Non-Resident (NR), the fact that the payment was made under the instructions of NR to its agent/ nominee in India or its PE/Branch Office, will not absolve the Payer of his liability to deduct Tax At Source (TAS) u/s.195; the liability to deduct TAS is different from the assessment under the Act, etc. The Court then took a view that in the present case the transaction is of ‘outright sale’ between two NRs of a capital asset (share) situated outside India and the transaction was entered into on a principal-to-principal basis. Therefore, no liability to deduct TAS arose.

3.15.1 On the issue of withholding tax obligation of VIH, the Court effectively held that since the capital gain arising on transfer of share of CGP is not chargeable to tax in India, question of deduction of TAS u/s.195 does not arise. The Court also further stated that Tax Presence has to be viewed in the context of the transaction that is subjected to tax and not with reference to an entirely unrelated matter. The Tax Presence must be construed in the context, and in a manner that brings the NR assessee under the jurisdiction of the Indian Tax Authorities. The investment made by VG Companies in Bharati did not make all the entities of that group subject to the Indian Income Tax Act and the jurisdiction of the tax authority. The Court also noted that in the present case, the Revenue has failed to establish any connection with section 9(1)(i). Under these circumstances, the Court concluded that section 195 is not applicable.

3.15.2 Even the concurring judgment concludes that there was no obligation on the part of VIH to withhold tax. However, this judgment has gone a step further and considered the issue of applicability of section 195 extra-territorially. After considering the hosts of statutory compliance requirements for a tax deductor, apart from deducting tax and paying to the Government, other provisions relating deduction of TAS, such as 194A, 194C, 194J, etc. and the normal presumption of applicability of the provisions of Indian law to its own territory, this judgment took the view that section 195 is intended to cover only Resident Payers who have presence in India. The tax presence has to be considered in the context of the transaction that is subject to tax and not with reference to entirely unrelated matter. Finally, this judgment interpreted the expression ‘any person responsible for paying’ to mean only person resident in India and accordingly, took a view that section 195 “would apply only if payments made from a resident to another non-resident and not between two non-residents situated outside India”.

Applicability of section 163

3.16 In view of the fact that the transaction relates to transfer of capital asset situated outside India between two NR’s, both the judgments took a view that the VIH cannot be considered as representative assessee for HTIL u/s.163.

Mauritius Tax Treaty

3.17 Since the issue before the Court did not invoke the application of treaty, the majority judgment has not specifically dealt with the impact of Mauritius Tax Treaty in the case under consideration. However, the concurring judgment specifically dealt with the Mauritius Tax Treaty and in that judgment certain observations have also been made in that context after referring to the judgments of the Apex Court in the case of Azadi Bachao Andolan (supra).

 3.17.1 In this judgment, principles laid down in the case of Azadi Bachao Andolan (supra) governing the application of Mauritius Tax Treaty have been reiterated. Accordingly, it is held that in the absence of Limitation of Benefit (LOB) Clause and in the presence of the Circular No. 789, dated 13-4-2000 and the TRC, the Tax Department cannot deny the benefit of Mauritius Tax Treaty to Mauritius companies, on the ground that: principal company (foreign parent) is resident of a third country; or all the funds were received by the Mauritius company from a foreign parent; or the Mauritius subsidiary is controlled/managed by the principle company; or the Mauritius company had no assets or business other than holding the investments/shares in Indian company; or the foreign principal of the Mauritius company had played a dominant role in deciding the time and price of the disinvestment/sale/transfer; or the receipt of sale proceeds by the Mauritius company was ultimately remitted to the foreign principal, etc. Setting-up of a WOS in Mauritius for substantially long-term FDI in India through Mauritius, pursuant to Mauritius Tax Treaty, can never be considered to be set up for tax evasion.

3.17.2 According to this judgment, the LOB and look through provisions cannot be read into Mauritius Tax Treaty. However, the question may arise as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction. In this context, the judgment further observed as under (page 102):

 “. . . . . DTAA and Circular No. 789, dated 13-4-2000, in our view, would not preclude the Income-tax Department from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company has been interposed as a device, it is open to the Tax Department to discard the device and take into consideration the real transaction between the parties, and the transaction may be subjected to tax. In other words, TRC does not prevent enquiry into a tax fraud, for example, where an OCB is used by an Indian resident for round-tripping or any other illegal activities, nothing prevents the Revenue from looking into special agreements, contracts or arrangements made or effected by Indian resident or the role of the OCB in the entire transaction.”

3.17.3 Referring to the issue of round tripping, based on the reports which are afloat that millions of rupees go out of the country only to be returned as FDI or FII, it is stated that round tripping can take many formats like under-invoicing and over-invoicing of exports and imports. It also involves getting the money out of India, say, Mauritius, and then bring back to India by way of FDI or FII in Indian company. With the idea of tax evasion, one can also incorporate a company off-shore, say, in a Tax Haven, and then create WOS in Mauritius and after obtaining a TRC may invest in India. Large amounts, therefore, can be routed back to India using TRC as a defence. If it is established that such an investment is black money or capital that is hidden, it is nothing but circular movement of capital known as round tripping; then TRC can be ignored, since the transaction is fraudulent and against the national interest.

3.17.4 Accordingly, in view of the above, the concurring judgment takes further view that though the TRC can be accepted as a conclusive evidence for accepting status of residence as well as beneficial ownership for applying the Mauritius Tax Treaty, it can be ignored if the treaty is abused for the fraudulent purpose of evasion of tax.

Conclusion

In view of the above judgment of the Apex Court the following principles governing tax implications of an offshore transaction of transfer of share between two NRs may emerge or get re-iterated:

4.    Section 9(1)(i) of the Act is not a ‘look through’ provision to include the transfer of shares of a foreign company holding shares in an Indian company by treating such transfer as equivalent to transfer of shares of an Indian company on the premise that section 9(1)(i) covers direct and indirect transfer of capital asset. Accordingly, section 9(1)(i) does not cover indirect transfer of capital asset situated in India.

4.1 Section 195(1) is attracted only if the sum in question is chargeable to tax. According to the concurring judgment, in case of a NR Payer, the obligation of withholding tax u/s.195(1) does not arise if NR Payer does not have any tax presence whatsoever in India. For this, support can also be drawn from the observations made in the majority judgment. However, there is no clarity as to the meaning of tax presence in India. It seems that if the entity has tax presence in India that should suffice. If the entity has permanent establishment or branch office, etc. in India, it is desirable to treat the entity as having tax presence in India.

4.1.1 In the concurring judgment, a view is taken that section 195(1) applies only in cases where Resident makes a payment to NR and the same is not applicable to payments between two NRs outside India. This view may have a great persuasive value for the lower authorities/courts. However, it seems advisable not to take recourse to this view to avoid deduction of TAS. This could, of course, be a good defence in case of a default.

4.2 In view of the fact that the transfer in question in the above case was of a capital asset situated outside India, the NR Payer (VIH) was also not to be treated as representative assessee u/s. 163 of the Act.

4.3 There is no conflict between the judgments of the Apex Court in the case of McDowell & Company Ltd. (supra) and the judgment in the case of Azadi Bachao Andolan (supra). In this context, the Court has further held that to decide the issue relating to allegation of tax avoidance/evasion, it is the task of the Court to ascertain the legal nature of the transaction and while doing so, it has to look at the entire transaction as a whole and not to adopt dissecting approach.

4.3.1 In the above context, referring to the majority judgment in the McDowell’s case, the Court reiterated the principle that tax planning may be legitimate provided it is within the frame work of law and it should not be a colourable device.

4.4 Carrying on business by a large business group through subsidiaries under the control of a Holding Company (HC) is a normal method of carrying on business. Setting up of such subsidiaries, even in low-tax jurisdiction, by itself should not be regarded as a device.

4.4.1 Such holding structures give rise to tax issues such as double taxation, tax deferrals, tax avoidance, implication of GAAR, etc. In the absence of an appropriate provision in the statute/treaty regarding the circumstances in which judicial GAAR would apply, when it comes to taxation of a holding structure, at the threshold, the burden is on the Revenue to establish the abuse, in the sense of tax avoidance in the creation and/or use of such structure. For this, the Revenue must apply look at test and the Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/ savings device but it should apply the look at test to ascertain its legal nature.

4.4.2 Holding company, as a shareholder, will have influence on its subsidiaries and in that sense, will be in a persuasive position. However, that cannot reduce the subsidiary or its directors’ puppets. The power of persuasion cannot be construed as a right in legal sense. The decisive criteria is whether the parent company’s management has such steering interference with the subsidiaries core activities that subsidiary can no longer be regarded to perform its activities on the authority of its own directors. The concept of ‘de facto’ control, in genuine cases, conveys a state of being in control without any legal right to such a state.

4.4.3 A case of FDI should be seen in a holistic manner and while doing so, various factors enumerated by the Court should be taken into account. Cases of participative investment should not be construed as tax avoidant/device.

4.5 In transactions of divestment of investment of this type, it becomes necessary for the parties to enter into SPA for various commercial reasons and for recording various terms and to give smooth effect to the transaction.

4.6 When the structure is held to be a device/ tax avoidant on the basis of various tests referred to in para 3.5 of Part II of this write-up, the Revenue would be entitled to ignore this structure and tax the actual entity and to re-characterise the transaction appropriately for that purpose.

4.7 For the purpose of entering into any such transaction efficiently, if more than one routes are available, then it is open to the parties to opt for any one of those routes available to them.

4.8 Under such arrangement, call options to acquire shares of a company cannot be equated with interest in share capital of that company. The legal understanding as to acquisition of shares in Indian company for the purpose of compliance with FDI norms and the commercial understanding of the parties in that respect with regard to the transactions could be different.

4.9 In case of transactions involving the transfer of shares lock, stock and barrel for a lump-sum consideration, the same cannot be broken up into separate individual components or rights, such as right to vote, management rights, controlling rights, etc.

The above principles are, now, subject to the follow-ing proposals contained in the Finance Bill, 2012 and accordingly, the same will have to be read with the final amendments which are expected to be carried out by the Finance Act, 2012.

5.    In the Finance Bill, 2012, stated clarificatory amendments are proposed in various sections such as: Section 2(14) (to clarify that property includes any rights in or in relation to Indian company, including rights of management, control, etc.), section 2(47) (extending the scope of the definition of the term ‘transfer’ to include disposing of or parting with an asset or any interest therein, or creating an interest in any asset in any manner whatsoever, directly or indirectly, etc. even if, transfer of such rights has been characterised as being effected or dependent upon or flowing from transfer of shares of a foreign company) and section 9(1) to effectively provide that the section is a ‘look through’ provision and also to provide that an asset or capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if it derives, directly or indirectly, its value substantially from the assets located in India. These amendments are proposed with retrospective effect from 1st April, 1962. These amendments are intended to effectively nullify all the major effects (favourable to the taxpayers) of the judgment of the Apex Court in the above case. Some of these proposals, if enacted in the present form, will also have far-reaching other implications and the same will not necessarily confine to only offshore transactions.

Considering the nature of above proposed amendments and their far-reaching unreasonable consequences and effects, it is difficult to digest that these amendments are clarificatory in nature as claimed by the Government. If the amendments are carried out in the present form, it is likely that the validity of the retrospective effect thereof may come up for questioning. In the past, the Parliament’s power to make retrospective law has been upheld. However, the manner in which these amendments are proposed is matter of serious concern and will have a far-reaching long-term implications in Indian tax jurisprudence. Therefore, we will have to wait and watch as to how this complex constitutional issue gets further developed. But one thing is certain that such an approach of the Government is highly unfair and also raises a question about the respect for rule of law in the tax matters.

5.1 Similarly retrospective amendment is also proposed in section 195 to effectively provide that all persons, including all NRs, will be under an obligation to comply with the requirements of section 195(1). For this purpose, whether the NR has a residence or place of business or business connection in India or any other presence in any manner whatsoever in India or not will not be relevant. Even this amendment, is proposed with retrospective effect from 1st April 1962. One may wonder whether any retrospective amendment of this kind can be made in the provisions dealing with TDS creating an obligation on the ‘person’ to deduct TAS with retrospective effect. The validity of the retrospective provision of this kind could be open to question. Even the validity of prospective operation of the applicability of this provision to NR having no presence whatsoever in India may come up for questioning and will have to be tested on the basis of the principles laid down by the Constitution Bench of the Apex Court in the case of GVK Ind. Ltd. (332 ITR 130). This judgment was analysed by us in this column in the June and July, 2011 issues of this Journal.

5.2 The Finance Bill, 2012 also proposes to introduce set of provisions dealing with the General Anti- Avoidance Rules (GAAR) w.e.f. 1-4-2013. These provisions, inter alia, specifically provide that the period for which the arrangement exists, the fact of payment of taxes, directly or indirectly, under the arrangement in question and the fact that exit route is provided by the arrangement shall not be taken into account for determining whether an arrangement lacks commercial substance or not. It may be noted that this provision was not made in the GAAR proposed in the Direct Tax Code Bill, 2010 (DTC).

The above-referred tests are part of the tests (referred to in para 3.5 of Part II of this write-up) considered by the Apex Court for determining the genuineness of the arrangement of the Hutchison Group in Vodafone’s case to conclude that the arrangement was having commercial substance.

5.3 The introduction of the GAAR provisions will also have a practical impact on the effect and implications of Mauritius Tax Treaty (and, of course, also other such Tax Treaties) and therefore, many of the observations made in the concurring judgment in the above case in that respect will have to be read with the GAAR provisions. It may also be noted that the applicability of the proposed GAAR provisions is not restricted only to offshore transactions, but the same will also apply to all other transactions including domestic transactions. Considering the wide discretionary powers sought to be granted to the assessing authorities, these provisions may also create enormous amount of unintended hardships at the implementation level.

The unrestricted and highly discretionary unguided powers sought to be given to the Government under the provisions relating to GAAR has raised quite a few genuine issues of far-reaching implications and such excess delegation of effectively unguided powers may come up for judicial scrutiny if, such provisions are enacted in the present form.

Vodafone – Part III

5.4 In the context of the manner in which retrospective amendments are proposed in the Finance Bill, 2012 the following observations of the learned authors of the book ‘Nani Palkhivala, The Courtroom Genius’ are worth mentioning:

“……….There is complete absence of any fair-play in the administration of tax laws. If a decision of the court or the tribunal is in favour of the assessee, the relevant statutory provision is promptly amended retrospectively with very little regard for the enormous hardship that it causes to the assessee. One can only conclude with the last passage of the last preface written by Palkhivala:

‘Every Government has a right to levy taxes. But no Government has the right, in the process of extracting tax, to cause misery and harassment to the taxpayer and the gnawing feeling that he is made the victim of the palpable injustice’.”

(Concluded)

Censorship by Didi

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The Trinamool Congress (TMC) ended the 34-year-old rule of the Left Parties in West Bengal and came to power with a thumping majority. Chairperson of the ruling party Ms. Mamata Banerjee – Didi – is known for her simplicity and integrity. She is a poet and painter, and holds Rabindranath Tagore in great esteem. Her views on economic policies are controversial. One may argue and oppose the same, but she’s entitled to her beliefs in a democratic setup that India follows. As Voltaire said, “I may not agree with what you say, but I will defend to the death your right to say it.”

Bengal is considered to be the State of intellectuals. Kolkata has a rich tradition of culture, literature and art. Literature and art thrive when there is freedom – freedom to think and freedom to express. But, under the rule of the present government, it is this freedom that is under attack. It is against the spirit of democracy and the Constitution of India.

Recently, the West Bengal Government headed by Mamata Banerjee issued an order to various government and government-aided libraries, instructing them about the newspapers that could be subscribed to by the libraries. The order banned these libraries from subscribing to all newspapers, except a few which are reportedly controlled by supporters of the ruling party.

The role of media, including newspapers, in dissemination of information is vital. The press plays an important role in the formation of opinions. It is considered the fourth pillar of democracy. Ideally, newspapers should not have any bias. But one cannot ban newspapers having leanings towards certain political parties. It is only when various views, opinions and perspectives are freely expressed that the public can form its own opinion. Every individual has the right to express himself as well as to decide what he wants to read. The ruling government cannot decide what the people should read or think. But whenever there is concentration of power in any government or authority or individual, there is always a danger of attempt being made to curb the freedom of expression.

In 1986, the Queen’s Bench Division (R. vs. Ealing Borough Council, ex. p. Times Newspapers Ltd. (1987) 85 L.G.R. 316) quashed decisions by certain UK councils banning publications of Times Newspapers and News Group Newspapers from public libraries. The court held that the order banning the newspapers was abuse of power under the Public Libraries and Museums Act, 1964 of the UK. The principle applies equally in India. Any edict or order of the government, which curbs this freedom, needs to be opposed and struck down. It is patently against the right to information and freedom of expression.

A few days ago, a professor was arrested for circulating on the Internet a cartoon on TMC supremo Mamata Banerjee. The arrest was defended and justified by the authorities. Political opponents and media were blamed, alleging attempts to malign Mamata Banerjee. There were protests in various quarters opposing the arrest. The professor himself was physically attacked by supporters of TMC. The incident showed how the government is intolerant towards any expression or views, which are not in sync with the government of the day.

Partho Sarothi Ray, an eminent scientist, was arrested recently for allegedly participating in a rally, though he was not present at the venue. His offence – supporting the demand for compensation for the people evicted from slums on the eastern fringes of Kolkata. He had to languish in jail for 10 days before he was freed on bail. Both arrests created a huge public outcry amongst academicians and social activists. Partho Ray stated that his arrest was a clear infringement of the fundamental rights of freedom of expression and freedom to assemble peacefully.

TMC leaders have urged their party workers not to socialise with their political opponents, not even to share a cup of tea, visit their homes or marry a family member of their political opponents. In short, the cadre is directed to boycott political opponents socially.

This trend in West Bengal is bizarre and surely worrying. The state is trying to control what a person should read, what one should think, what one should do in his or her social life. Anybody with a different view and thought is considered an enemy. TMC in its manifesto has stated that its mission is to reconstruct Bengal with a positive attitude, creativity, empathy and always with a human face. The manifesto promised to end Cadre Raj and the party-centric model of governance.

But what we see today is a completely different approach. The attack on freedom of expression is possibly the result of arrogance that comes with power combined with a sense of insecurity.

All over the world, in democratic states, freedom of thought, freedom of expression and right to information are considered sacrosanct. In a civilised democratic society, it is important that people have freedom to think and express without fear. One may or may not accept the other’s point of view, but for a healthy democracy, it is necessary that each one is entitled to his point of view. The West Bengal government, under the leadership of Mamata Banerjee, is attacking just that. This attack, this censorship should end.

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Seva: Humanitarian service is central theme of sikh philosophy

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“The best way to find yourself is to lose yourself in service of others.” — Mahatma Gandhi
The concept of community service or Seva is central to the spirit of the Sikh faith. God is all pervasive, and what better way to realise Him than through service? He is no separate from His creation; so serving Him by serving what He has created is the ultimate duty of every Sikh. The Sikh often prays as did Guru Arjun Dev: ‘As Your servant, I beg for Seva of your people, which is available through good fortune alone.’

Seva or service occupies the central place in Sikhism where no worship is conceivable without Seva. The spirit of service not only creates in one’s heart, love and affection for others, but also helps the person overcome his ego, the main obstacle in the path of spiritual realisation. Service is suggested as a practical way of life for a Sikh, and he is expected, among other things, to meditate on the Name of God and perform service for the welfare of humanity.

Service could be any kind — serving the poor and needy; giving charity, providing food or shelter, helping a person in distress, saving someone in danger or reading the scriptures for his solace or providing services for the common good. These acts are considered far superior to countless sacrificial fires and performance of ceremonies or mere meditation and worldly knowledge, says Bhai Gurudas.

Seva can be rendered in any form through labour, feelings or material means. The first is considered the highest of all and is prescribed for every Sikh.

Dignity of labour is realised the foremost in Guru Ka Langar, the community kitchen, and in serving the Sangat, the holy assembly. Langar is the unique way of combining worship with Seva. One can contribute in cutting of vegetables, cooking of food, distribution of water in

Langar, washing of utensils, cleaning of the premises, taking care of footwear as well as in collection of rations. Langar, therefore, becomes a place of training in voluntary service and helps develop the notion of equality, hospitality and love for human beings. It makes you humble by helping curb your ego. Humility is a special virtue recommended to the Sikhs. It can be acquired through Seva. The Sikh prayer, Ardas, ends with a supplication for the welfare of all, ‘Sarbat da Bhala’. The attitude of compassion should be combined with a practical way of serving God through His creation.

Seva through material means should be a silent and non-personal contribution. It is meant for the welfare of the community and the whole humanity, and should be done in a way as to help dissolve one’s ego. Even in serving others, one serves not the person concerned, but God Himself through him. Even as one feeds the hungry, it has been the customary Sikh practice to pray: “The grain, O God, is your own gift. Only the Seva is mine, which please be gracious enough to accept.”

Service should be rendered without any expectation of reward. Desire for any reward in return turns it into a bargain, and it ceases to be a service. ‘He who serves without reward, he alone attains God’. True Seva, as pro-claimed by the Gurus, must be performed in humility, with purity of intention and without any desire for reward. Service is its own reward that leads to liberation. ‘We get eternal bliss through service of God and merge in the peace of poise,’ says the Guru Granth Sahib.

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CAS-14 — Cost Accounting Standard on pollution control cost.

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The Institute of Cost Accountants of India has issued the Cost Accounting Standard CAS 14 on ‘Pollution Control Cost’ and it deals with principles and methods of determining the pollution control costs. This standard deals with the principles and methods of classification, measurement and assignment of pollution control costs, for determination of cost of product or service, and the presentation and disclosure in cost statements. It is issued with the objective of bringing uniformity and consistency in the principles and methods of determining the pollution control costs with reasonable accuracy. It is to be applied to cost statements which require classification, measurement, assignment, presentation and disclosure of pollution control costs including those requiring attestation.

Full version of the same can be accessed at
http://casbicwai.org/CASB/docs/CASB/CAS_14_Pollution_ Control_Final.pdf

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S. 36(1)(vii) : Unrealisable amount due to a share broker from client allowable as bad debts

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New Page 1

7 ACIT v. Olympia
Securities Ltd.

ITAT ‘G’ Bench, Mumbai

Before K. P. T. Thangal (VP) and

V. K. Gupta (AM)

ITA No. 4053/Mum./2002

A.Y. : 1997-1998. Decided on : 21-12-2006

Counsel for revenue/assessee: T. Shivkumar/

Rajiv Khandelwal

S. 36(1)(vii) of the Income-tax Act, 1961 — Bad
debts — Assessee, a share broker — Payments made towards purchase price of
shares on behalf of client turned bad — Whether allowable as bad debts — Held,
Yes.

 

Per V. K. Gupta :

Facts :

The assessee was a share broker. It had made
certain payments to the stock exchange on the day of settlement in respect of
purchases and sale of shares made through it by its clients. However, the client
failed to make payment and the assessee wrote off Rs.27.04 lacs as bad debts.
According to the AO, the assessee had failed to prove that the debt had become
bad. Accordingly, he disallowed the claim of the assessee, both as bad debts and
as trading loss u/s.28. On appeal, the CIT(A) deleted the addition and held that
the claim of the assessee was allowable both, u/s.36(1)(vii) as bad debts and as
trading loss u/s.28.

 

Before the Tribunal, the Revenue contended that the
assessee had not fulfilled the conditions of S. 36(2) viz., that the
amount claimed as bad debts had not been taken into account in computing the
income of the assessee for the previous year or any other earlier years.
Secondly, unlike banking company or money lender, the brokerage income earned by
the assessee was not of the category of interest on loan, hence, the loss
arising out of non-payment of amount by the clients was a capital loss. Further,
it relied on the decisions of the Mumbai Tribunal in the case of Harshad J.
Choksi and B. N. Khandelwal.

 

Held :

The Tribunal noted that as per the provisions of S.
36(2), the deduction of bad debt or part thereof can be allowed only when such
debt or part thereof has been taken into account in computing the income of
the assessee.

 

According to the Tribunal, the income of any
assessee was not the gross receipts, but it was the excess of gross receipts
over the expenditure. Thus, in the case of share brokers or agents, gross income
by way of brokerage or commission was credited in the profit and loss account
against which the expenses were claimed. To further explain, it gave an
hypothetical example wherein the assessee credits Rs.105 in profit and loss
account and debits the same in the client’s account. Simultaneously, the
assessee debits profit and loss account with Rs.100 being the value of shares,
treating the purchases of shares on behalf of the client as on its own account
and the sale thereof, by including the brokerage amount in the sale price, as
its gross margin. In that situation, according to the Tribunal, all the
conditions of S. 36(2) would stand satisfied as per the Revenue. However,
according to the Tribunal, even the crediting of only gross brokerage amount of
Rs.5 in profit and loss account would reflect the transaction from which it
emerged and the transaction of creating a debt which was taken into account
impliedly or notionally in computing the income of the assessee. Thus, the
Tribunal opined that the conditions of S. 36(2) stand satisfied even in cases
where only income had been credited in the profit and loss account. According to
the Tribunal, the provisions of allowing the claim in case of money-lending or
finance business as provided in S. 36(2) further support the view expressed
above. Since the claim of the assessee was allowed u/s.36(1)(vii), no finding
was given about the allowability of the claim u/s.28 of the Act.

 

Cases referred to:



1. Harshad J. Choksi v. ACIT, (1995) 52
ITD 511

2. ACIT v. B. N. Khandelwal, (2006) 101
TTJ (Mum.) 717



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Alteration to Schedule XIV of Companies Act — Inclusion of intangible assets created under certain circumstances.

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The Ministry of Corporate Affairs has issued a notification dated 17th April 2012 to make alterations in Schedule XIV of the Companies Act pertaining to the rates of depreciation, to insert the category of intangible assets created under Build, Operate and Transfer, Build, Own, Operate and Transfer or any other form of Public-Private Partnership Route. Full version of the Circular can be accessed at

http://www.mca.gov.in/Ministry/notification/pdf/ GSR_(E)_17apr2012.pdf

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Timeline for submission of annual audited financial results for financial year 2011-12.

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SEBI vide its Circular No. CFD/LA/SK/AT/8278/2012, dated 11th April 2012 has given an option to listed entities for submission of financial results for quarter ended F.Y. 2011-12 and in respect of annual audited results for F.Y. 2011-12, to either:

  • Submit limited reviewed Q4 results within 45 days from end of the quarter and thereafter submit annual audited results as soon as they are approved by the Board. (or)
  •  Submit annual audited results within 60 days from the end of the fourth quarter along with Q4 results.

This one-time measure has been taken in view of the difficulty faced in submission of annual financial results along with Q4 results owing to the first-time adoption of the revised Schedule VI.

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Amendments to the Equity Listing Agreement — Change in format for interim disclosure of results.

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The Ministry of Corporate Affairs has vide Circular No. CFD/DIL/4/2012, dated 16-4-2012, revised the format of Balance Sheet under Schedule VI of the Companies Act as was notified in Notification dated 28-2-2011. Pursuant to the same, it has been decided to carry out consequential amendments to listing Agreement regarding interim disclosure of financial results by listed entities to the stock exchange. Full version of the Circular is available on SEBI website at www.sebi.gov.in under the categories ‘Legal Frame and Listing.’

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A.P. (DIR Series) Circular No. 104, dated 4-4- 2012 — Authorised Dealer Category-II — Permission for additional activity and opening of Nostro account.

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1. Issue of foreign exchange pre-paid cards

Presently,
only Authorised Dealers Category-I banks are permitted to issue foreign
exchange pre-paid cards to residents travelling on private/business
visit abroad.

This Circular now permits Authorised Dealers
Category-II also to issue foreign exchange pre-paid cards to residents
travelling on private/business visits abroad, provided:

 (1) AD Category-II adheres to KYC/AML/CFT requirements.

(2) Settlement in respect of foreign exchange prepaid cards is effected through AD Category-I banks.

2. Opening of Nostro Accounts

This Circular permits AD Category-II to open Nostro accounts subject to the following terms and conditions:

(i) Only one Nostro account for each currency must be opened.

(ii)
Balances in the account must be utilised only for the settlement of
remittances sent for permissible purposes and not for the settlement in
respect of foreign exchange prepaid cards.

(iii) Idle balance cannot be maintained in the said account.

(iv) Reporting requirements as prescribed are complied with.

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A.P. (DIR Series) Circular No. 101, dated 2-4-2012 — Overseas Direct Investments — Liberalisation/Rationalisation.

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Presently, an Indian Party requires prior permission of RBI to open, hold and maintain Foreign Currency Account in a foreign country for the purpose of overseas direct investments in that country. This Circular permits an Indian Party to open, hold and maintain Foreign Currency Account (FCA) abroad for the purpose of overseas direct investments without obtaining prior permission from RBI, provided:

(1) The Indian Party is eligible to undertake overseas direct investments.

(2) The host country Regulations require that investments into the country are to be routed through a designated account in that country.

(3) FCA is opened, held and maintained as per the regulations of the host country.

 (4) Remittances sent to the FCA by the Indian party are utilised only for making overseas direct investment into the overseas JV/WOS.

(5) Any amount received in the account by way of dividend and/or other entitlements from the overseas JV/WOS are repatriated to India within 30 days from the date of credit.

 (6) The Indian Party submits details of debits and credits in the FCA on yearly basis to the designated bank along with a certificate from the Statutory Auditors of the Indian party certifying that the FCA was maintained as per the host country laws and applicable FEMA regulations/provisions.

(7) FCA so opened must be closed immediately or within 30 days from the date of disinvestment from overseas JV/WOS or cessation thereof.

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A.P. (DIR Series) Circular No. 100, dated 30-3-2012 — Trade credits for imports into India — Review of all-in-cost ceiling.

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This Circular states that the present all-in-cost ceiling or Trade Credits, as mentioned below, will continue up to September 30, 2012:

Sr.

No.

Average maturity period

All-in-cost over 6 month LIBOR for the respective
currency of borrowing or applicable benchmark

1

Up to one year

350 bps

2

More than 1 year and up to 3 years

350 bps

All-in-cost ceiling will include arranger fee, upfront fee, management fee, handling/processing charges, out-of-pocket and legal expenses, if any.

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A.P. (DIR Series) Circular No. 99, dated 30-3-2012 — External Commercial Borrowings (ECB) Policy — Review of all-in-cost ceiling.

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This Circular states that the present all-in-cost ceiling for ECB, as mentioned below, will continue up to September 30, 2012:

Sr.

Average maturity period

All-in-cost over 6 month No. LIBOR for the respective currency of borrowing or applicable benchmark

1

Three years and
up to five years

350 bps

2

More than five years

550 bps

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A.P. (DIR Series) Circular No. 98, dated 30-3- 2012 — Discontinuation of supplying printed GR forms by Reserve Bank.

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This Circular states that with effect from July 1, 2012, GR forms will only be available online from RBI website www.rbi.org.in at the following link:

“Notification -> FEMA -> Forms -> For Printing of GR Form”.

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Notification No. 15/2012 [F.No. 149/21/2010- S.O. (TPL)]/S.O. 694 (E), dated March 30, 2012 — Income-tax (fourth amendment) Rules, 2012 — Amendment in the New Appendix I.

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Depreciation on windmills installed after March 31, 2012 shall be restricted to 15%.

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Exports — Taxability of profits u/s.28 — Deduction under Chapter VIA — DEPB is ‘cash assistance’ receivable by a person against exports and fall under clause (iiib) of section 28 and is chargeable to tax even before it is transferred by the assessee (in the year of entitlement) and profit on transfer of DEPB fall under clause (iiid) of section 28 and were chargeable to tax in the year of transfer — If the assessee having export turnover of more than Rs.10 crore does not satisfy the two conditio<

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[Topman Exports v. CIT, (2012) 342 ITR 49 (SC)]

During the previous year relevant to the A.Y. 2002- 03, the assessee, a manufacturer and exporter of fabrics and garments, sold the DEPB and DFRC (Duty Free Replenishment Certificate) which had accrued to it on export of its productions. The assessee filed a return for the A.Y. 2002-03 claiming a deduction of Rs.83,69,303 u/s.80HHC of the Act. The Assessing Officer held that if the profit on transfer of the export incentive was deducted from the profits of the assessee, the figure would be a loss and there will be no positive income of the assessee from its export business and the assessee will not be entitled to any deduction u/s.80HHC of the Act as has been held by this Court in IPCA Laboratory Ltd. v. Deputy CIT, (2004) 266 ITR 521 (SC). Aggrieved, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) and contended that the profits on the transfer of DEPB and DFRC were not the sale Kishor Karia Chartered Accountant Atul Jasani Advocate Glimpses of supreme court rulings proceeds of the DEPB and the DFRC amounting to Rs.2,06,84,841 and Rs.1,65,616, respectively, but the difference between the sale value and face value of the DEPB and the DFRC amounting to Rs.14,35,097 and Rs.19,902, respectively, and if these figures of profits on transfer of the DEPB and the DFRC are taken, the income of the assessee would be positive and the assessee would be entitled to the deduction u/s.80HHC of the Act. The Commissioner of Income-tax (Appeals) rejected this contention of the assessee and held that the assessee had received an amount of Rs.2,06,84,841 on sale of the DEPB and an amount of Rs.1,65,612 on sale of the DFRC and the costs of acquisition of the DEPB and the DFRC are to be taken as nil and hence the entire sale proceeds of the DEPB and the DFRC realised by the assessee are to be treated as profits on transfer of the DEPB and the DFRC for working out the deduction u/s.80HHC of the Act and directed the Assessing Officer to work out of the deduction u/s.80HHC of the Act accordingly.

Aggrieved, the assessee filed an appeal before the Income-tax Appellate Tribunal (for short ‘the Tribunal’). A Special Bench of the Tribunal heard the appeal and held that there was a direct relation between the entitlement under the DEPB Scheme and the customs duty component in the cost of imports used in the manufacture of the export products. The Tribunal further held that the DEPB accrues to the exporter soon after export is made and application is filed for the DEPB and the DEPB is a ‘cash assistance’ receivable by the assessee and is covered under clause (iiib) of section 28 of the Act, whereas profit on the transfer of the DEPB takes place on a subsequent date when the DEPB is sold by the assessee and is covered under clause (iiid) of section 28 of the Act. The Tribunal compared the language of section 28(iiib) of the Act in which the expression ‘cash assistance’ is used, with the language of section 28(iiia), (iiid) and (iiie) of the Act in which the expression ‘profit’ is used and held that the words ‘profit on transfer’ in section 28(iiid) and (iiie) of the Act would not represent the entire sale value of the DEPB but the sale value of the DEPB less the face value of the DEPB. With these reasons, the Tribunal set aside the orders of the Assessing Officer and the Commissioner of Incometax (Appeals) and directed the Assessing Officer to compute the deduction u/s.80HHC of the Act accordingly.

Against the judgment and order of the Tribunal, the Commissioner of Income-tax, Mumbai, filed appeal u/s.260A of he Act before the High Court and by the impugned order the High Court disposed of the appeal in terms of the judgment delivered in CIT v. Kalpataru Colours and Chemicals, [ITA(L) 2887 of 2009] (328 ITR 451). In Commissioner of Income-tax v. Kalpataru Colours and Chemicals (supra), the High Court formulated the following two substantial questions of law (page 454 of 328 ITR):

“(a) Whether the Tribunal is justified in holding that the entire amount received on the sale of the Duty Entitlement Pass Book does not represents profits chargeable u/s.28(iiid) of the Income-tax Act, 1961, and that the face value of the Duty Entitlement Pass Book shall be deducted from the sale proceeds?

(b) Whether the Tribunal is justified in holding that the face value of the Duty Entitlement Pass Book is chargeable to tax u/s.28(iiib) at the time of accrual of income, i.e., when the application for Duty Entitlement Pass Book is filed with the competent authority pursuant to the exports made and that the profits on the sale of the Duty Entitlement Pass Book representing the excess of the sale proceeds over the face value is liable to be considered u/s.28(iiid) at the time of sale?”

In its judgment, on the first question of law formulated under (a), the High Court held that the Tribunal was not justified in holding that the entire amount received on the sale of the DEPB does not represent profits chargeable u/s.28(iiid) of the Act and in holding that the face value of the DEPB shall be deducted from the sale proceeds of the DEPB. On the second question of law formulated under (b), the High Court in its judgment did not agree with the Tribunal that the face value of the DEPB is chargeable to tax as income of the assessee u/s.28(iiib) of the Act and instead held that the entirety of sale consideration for transfer of the DEPB would fall within the purview of section 28(iiid) of the Act.

Against the judgment and order of the High Court the assessee appealed before the Supreme Court under Article 136 of the Constitution. The Supreme Court on a reading of the Hand Book on the DEPB and the Export and Import Policy of the Government of India, 1997-2002, observed that it was clear that the objective of the DEPB Scheme was to neutralise the incidence of customs duty on the import content of the export productions. Hence, it had direct nexus with the cost of the imports made by an exporter for manufacturing the export products. The neutralisation of the cost of customs duty under the DEPB Scheme, however, was by granting a duty credit against the export product and this credit could be utilised for paying customs duty on any item which is freely importable. DEPB was issued against the exports to the exporter and was transferable by the exporter.

It was clear from reading of the provisions of section 28 that under clause (iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India is by itself income chargeable to income-tax under the head ‘Profits and gains of business or profession’. DEPB was a kind of assistance given by the Government of India to an exporter to pay customs duty on its imports and it was receivable once exports were made and an application was made by the exporter for the DEPB. The Supreme Court therefore, held that the DEPB was ‘cash assistance’ receivable by a person against exports under the scheme of the Government of India and fell under clause (iiib) of section 28 and was chargeable to Income-tax under the head ‘Profits and gains of business or profession’ even before it was transferred by the assessee.

Under clause (iiid) of section 28, any profit on transfer of the DEPB is chargeable to Income-tax under the head ‘Profits and gains of business or profession’ as an item separate from cash assistance under clause (iiib). The Supreme Court held that the word ‘profit’ meant the gross proceeds of a business transaction less the costs of the transaction.

It was further held that ‘Profits’ therefore, imply a comparison of the value of an asset when the asset is acquired with the value of the asset when the asset is transferred and the difference between the two values is the amount of profit or gain made by a person. As DEPB had a direct nexus with the cost of imports for manufacturing an export product, any amount realised by the assessees over and above the DEPB on transfer of the DEPB would represent profit on the transfer of the DEPB.

The Supreme Court therefore held that while the face value of the DEPB would fall under clause (iiib) of section 28 of the Act, the difference between the sale value and the face value of the DEPB would fall under clause (iiid) of section 28 of the Act and the High Court was not right in taking the view in the impugned judgment that the entire sale proceeds of the DEPB realised on transfer of the DEPB and not just the difference between the sale value and the face value of the DEPB represent profit on transfer of the DEPB.

(i)    The Supreme Court further held that: (i) cost of acquiring the DEPB was not nil, because the person acquired it by paying customs duty on the import content of the export product and the DEPB which accrues to a person against exports had a cost element in it. Accordingly, when the DEPB is sold by a person, his profit on transfer of the DEPB would be the sale value of the DEPB less the face value of DEPB which represents the cost of the DEPB.

(ii)    The DEPB represents part of the cost incurred by a person for manufacture of the export product and hence even where the DEPB is not utilised by the exporter but is transferred to another person, the DEPB continues to remain as a cost to the exporter. When, therefore, the DEPB is transferred by a person, the entire sum received by him on such transfer does not become his profits. It is only the amount that he receives in excess of the DEPB which represents his profits on transfer of the DEPB.

(iii)    If in the same previous year the DEPB accrues to a person and he also earns profit on transfer of the DEPB, the DEPB will be business profits under clause (iiib) and the difference between the sale value and the DEPB (face value) would be the profits on the transfer of the DEPB under clause (iiid) for the same assessment year. Where, however, the DEPB accrues to a person in one previous year and the transfer of the DEPB takes place in a subsequent previous year, then the DEPB will be chargeable as income of the person for the first assessment year chargeable under clause (iiib) of section 28 and the difference between the DEPB credit and the sale value of the DEPB credit would be income in his hands for the subsequent assessment year chargeable under clause (iiid) of section 28.

The Supreme Court then held that s.s (1) of section 80HHC, makes it clear that an assessee engaged in the business of export out of India of any goods or merchandise to which this section applies shall be allowed, in computing his total income, a deduction to the extent of profits referred to in s.s (IB), derived by him from the export of such goods or merchandise. S.s (IB) of section 80HHC gives the percentages of deduction of the profits allowable for the different assessment years from the A.Ys. 2001-02 to 2004-05. S.s (3)(a) of section 80HHC provides that where the exports out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such exports shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee.

Explanation (baa) u/s.80HHC states that ‘profits of the business’ in the aforesaid formula means the profits of the business as computed under the head ‘Profits and gains of business or profession’ as reduced by (1) ninety per cent of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature including any such receipts and (2) the profits of any branch office, warehouse or any other establishment of the assessee situated outside India. Thus, ninety per cent, of the DEPB which is ‘cash assistance’ against exports and is covered under clause (iiib) of section 28 will get excluded from the ‘profits of the business’ of the assessee if such DEPB has accrued to the assessee during the previous year. Similarly, if during the same previous year, the assessee has transferred the DEPB and the sale value of such DEPB is more than the face value of the DEPB, the difference between the sale value of the DEPB and the face value of the DEPB will represent the profit on transfer of DEPB covered under clause (iiid) of section 28 and ninety per cent of such profit on transfer of DEPB certificate will get excluded from ‘profits of the business’. But, where the DEPB accrues to the assessee in the first previous year and the assessee transfers the DEPB certificate in the second previous year, only ninety per cent of the profits on transfer of DEPB covered under clause (iiid) and not ninety per cent of the entire sale value including the face value of the DEPB will get excluded from the ‘profits of the business’.

To the figure of profits derived from exports worked out as per the aforesaid formula u/ss. (3) (a) of section 80HHC, the additions as mentioned in first, second, third and fourth proviso u/s.(3) are made to profits derived from exports. Under the first proviso, ninety per cent of the sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 are added in the same proportion as export turnover bears to the total turnover the business carried on by the assessee. In this first proviso, there is no addition of any sum referred to in clause (iiid) or clause (iiie). Hence, profit on transfer of the DEPB or the DFRC are not be added under the first proviso.

The second proviso to s.s (3) of section 80HHC states that in case of an assessee having export turnover not exceeding Rs.10 crore during the previous year, after giving effect to the first proviso, the export profits are to be increased further by the amount which bears to ninety per cent of any sum referred to in clauses (iiid) and (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assesses. The third proviso to s.s (3) states that in case of an assessee having export turnover exceeding Rs.10 crore, similar addition of ninety per cent of the sums referred to in clause (iiid) of section 28 only if the asses-see has the necessary and sufficient evidence to prove that (a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate or credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme. Therefore, if the assessee having export turnover of more than Rs.10 crore does not satisfy these two conditions, he will not be entitled to the addition of profit on transfer of DEPB under the third proviso to s.s (3) of the section 80HHC.

TDS : S. 194C(2) of Income-tax Act, 1961 : Payment to sub-contractors : Assessee a registered co-operative society constituted by truck operators : Contracts with companies for transportation of their goods : Contracts executed by member truck operators :

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17 TDS : S. 194C(2) of Income-tax Act, 1961 : Payment to
sub-contractors : Assessee a registered co-operative society constituted by
truck operators : Contracts with companies for transportation of their goods :
Contracts executed by member truck operators :

Companies make payment to assessee after deduction of tax u/s.194C : Member
truck operators are not sub-contractors : Assessee not required to deduct tax at
source on payment to member truck operators u/s.194C(2)



[CIT v. Ambuja Darla Kashlog Mangu Transport Co-op. Society,
188 Taxman 134 (HP)]

The assessee was a registered co-operative society
constituted by truck operators. It entered into contracts with companies such
as cement manufacturers for transport of their goods. The company, which had
entered into contract with the assessee, deducted tax at source u/s.194C(1) on
payments made to the assessee. Thereafter, the assessee-society paid that
entire amount to its members, who had actually carried the goods, after
deducting a nominal amount of Rs.10 or Rs.20 for administrative expenses known
as ‘parchi charges’ for running of the society. The Assessing Officer held
that the assessee was liable to deduct tax at source from the amount paid to
the members/truck operators in terms of S. 194C(2). The Tribunal held that
since there was no sub-contract between the society and its members, the
provision of S. 194C(2) was not attracted.

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

“(i) The main contention of the Revenue was that since the
assessee had a separate juristic identity and each of the truck operators, who
were members of the assessee, had separate juristic identity, they were
covered within the meaning of S. 194C(2). It was urged by the Revenue that
since the assessee was a person paying a sum to the member-truck operator who
was a resident within the meaning of the Act, TDS was required to be deducted.
That argument did not take into consideration the heading and entire language
of S. 194C(2) which clearly indicates that the payment should be made to the
resident who is a sub-contractor. The concept of a sub-contract is
intrinsically linked with S. 194C(2) and if there is no sub-contract, then the
person is not liable to deduct tax at source, even if payment is being made to
a resident.

(ii) In the instant case, the assessee-society was created
by the transporters themselves who formed the societies or unions with a view
to enter into a contract with companies. The companies entered into contracts
for transportation of goods and materials with the society. However, the
society was nothing more than a conglomeration of the truck operators
themselves and had been created only with a view to make it easy to enter into
a contract with the companies as also to ensure that the work to the
individual truck operators was given strictly in turn, so that every truck
operator had an equal opportunity to carry the goods and earn income. The
society itself did not do the work of transportation. The members of the
society were virtually the owners of the society. It might be true that they
both had separate juristic entities, but the fact remained that the reason for
creation of the society was only to ensure that work was provided to all the
truck operators on an equitable basis. A finding of fact had been rendered by
the authorities that the society was formed with a view to obtain the work of
carriage from the companies since the companies were not ready to enter into a
contract with individual truck operators but had asked them to form a society.

(iii) Admittedly, the society did not retain any profits.
It only retained a nominal amount as ‘parchi charges’ which was used for
meeting the administrative expenses of the society. There was no dispute with
the submission that the society had an independent legal status and was also a
contractor within the meaning of S. 194C. It was also not disputed that the
members had a separate status, but there was no sub-contract between the
society and the members. In fact, if the entire working of the society was
seen, it was apparent that the society had entered into a contract on behalf
of the members. The society was nothing but a collective name for all the
members and the contract entered into by the society was for the benefit of
the constituent members and there was no contract between the society and the
members.


(iv) For the
foregoing reasons, S. 194C(2) was not attracted and the assessee-society was
not liable to deduct tax at source on account of payments made to the truck
owners who were also members of the society.”



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TDS : S. 194A of Income-tax Act, 1961 : Interest other than interest on securities : Once a decree is passed, it is a judgment and order of Court which culminates into final decree being passed which has to be discharged only on payment of amount due unde

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16 TDS : S. 194A of Income-tax Act, 1961 : Interest other
than interest on securities : Once a decree is passed, it is a judgment and
order of Court which culminates into final decree being passed which has to be
discharged only on payment of amount due under said decree : Judgment debtor is
not liable to deduct tax at source on interest component of decree.




[Madhusudan Shrikrishna v. Enkay Exports, 188 Taxman
195 (Bom.)]

In this case the dispute was settled and while passing the
order and decree, the counsel appearing on behalf of defendants raised a query
regarding deduction of TDS on the interest component of the decree.
Apprehension was expressed by the learned counsel appearing on behalf of
defendants that under the provisions of S. 194A of the Income-tax Act, on the
interest component which is payable, tax has to be deducted at source and if
it is not so done, the person who does not deduct tax at source on the
interest component would be liable for prosecution and penal consequences
under the provisions of the Income-tax Act. It was, therefore, submitted that
the defendants had withheld the payment of the amount which is payable to the
Income-tax Department as TDS and a certificate to that effect was also kept
ready.

The Bombay High Court held as under :

“Once a decree is passed, it is a judgment and the order of
the Court, which culminates into final decree being passed which has to be
discharged only on payment of the amount due under the said decree. The
judgment debtor, therefore, cannot deduct tax at source, since it is an order
and direction of the Court and, as such, would not be liable for penal
consequences for non-deduction of the tax due. Tax, if payable, can be decided
by the ITO after the amount is paid to the decree holder. The defendants,
therefore, were not entitled to withhold the payment on the pretext that it
had to be deducted as tax at source. Defendants would, therefore, pay the said
amount to the plaintiff and for that purpose they would not be liable for
non-deduction of tax at source as that issue had to be decided by the
income-tax authorities and if tax was payable, the same would be paid by the
plaintiff.”

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Industrial undertaking : Deduction u/s.80-IA of Income-tax Act, 1961 : A.Y. 2000-01 : Computation of eligible amount to be on the basis of the profits of the eligible unit : Adjustment of loss of other unit not proper : Deductible amount not to exceed the

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15 Industrial undertaking : Deduction u/s.80-IA of Income-tax
Act, 1961 : A.Y. 2000-01 : Computation of eligible amount to be on the basis of
the profits of the eligible unit : Adjustment of loss of other unit not proper :
Deductible amount not to exceed the total income.




[CIT v. Accel Transamatic Systems Ltd., 230 CTR 206
(Ker.)]

The assessee was entitled to deduction u/s.80-I of the
Income-tax Act, 1961. The assessee had two units. In the relevant year i.e.,
A.Y. 2000-01, there was profit from one unit and a loss from the other unit.
The assessee was eligible for deduction of 25% of the profit of the eligible
unit. The assessee computed the eligible amount at Rs.18,12,770 being 25% of
the profit of the first unit and limited the claim for deduction to
Rs.8,51,697 being the total income. The Assessing Officer did not accept the
method of computation adopted by the assessee. The Tribunal accepted the
assessee’s method.

On appeal by the Revenue, the Revenue relied on the
judgment of the Supreme Court in the case of Synco Industries Ltd.; 299 ITR
444 (SC) wherein the disallowance of the claim for deduction was upheld on the
ground that the total income was nil and claimed that the eligible amount
should be computed on the basis of the net figure of first unit after setting
off the loss of the second unit. The Kerala High Court explained the judgment
of the Supreme Court and held as :

“(i) U/s.80A(2) total deduction under Chapter VI-A have to
be limited to the gross total income of the assessee computed under the
provisions of the Act. Therefore, the assessee cannot claim deduction
u/s.80-IA in excess of gross total income computed, no matter eligible amount
may be higher than such income.

(ii) The procedure to be followed for the purpose of
granting deduction u/s.80-IA is to first compute the profits and gains of the
eligible unit and then to determine the eligible deduction therefrom in terms
of S. 80-IA(5). Thereafter, in the computation of total income under the
provisions of the Act, the eligible deduction has to be reduced and if the
total income computed is less than the eligible amount, deduction has to be
limited to such amount.

(iii) Since there have been variations in the total income
computed by virtue of disallowances and later orders of the higher authorities
allowing it, the Assessing Officer is directed to rework the total income and
therefrom allow eligible deduction u/s.80-IA(5) with reference to the profits
of the eligible unit, but limiting it to the total income, if the claimed
amount is higher than such amount.”

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Industrial undertaking : Deduction u/s.80-I of Income-tax Act, 1961 : A.Ys. 1992-93 to 1995-96 and 2000-01 : Computation of eligible amount to be on the basis of the profits of the eligible unit : Adjustment of loss of other unit not proper.

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14 Industrial undertaking : Deduction u/s.80-I of Income-tax
Act, 1961 : A.Ys. 1992-93 to 1995-96 and 2000-01 : Computation of eligible
amount to be on the basis of the profits of the eligible unit : Adjustment of
loss of other unit not proper.




[CIT v. Sona Koyo Steering Systems Ltd., 230 CTR 251
(Del.)]

The assessee was entitled to deduction u/s.80-I of the
Income-tax Act, 1961. The assessee had two units, one making profit and the
other incurring losses. The assessee computed the amount deductible u/s.80-I
on the basis of the profits of the unit making profits ignoring the loss of
the other unit. For the A.Ys. 1992-93 to 1995-96 and 2000-01, the Assessing
Officer did not accept the computation and computed the eligible amount after
setting off the loss of the other unit. The Tribunal allowed the assessee’s
claim.

On appeal by the Revenue, the Revenue relied on the
judgment of the Supreme Court in the case of Synco Industries Ltd.; 299 ITR
444 (SC) wherein the disallowance of the claim for deduction was upheld on the
ground that the total income was nil. The Delhi High Court explained the
judgment of the Supreme Court, upheld the decision of the Tribunal and held as
under :

“(i) In view of S. 80-I(6), the quantum of deduction is to
be computed as if the industrial undertaking were the only source of income of
the assessee during the relevant years. In other words, each industrial
undertaking or unit is to be treated separately and independently. It is only
those industrial undertakings, which have a profit or gain, which would be
considered for computing the deduction. The loss-making industrial undertaking
would not come into the picture at all.

(ii) The plain reading of the provision suggests that the
loss of one such industrial undertaking cannot be set off against the profit
of another such industrial undertaking to arrive at a computation of the
quantum of deduction that is to be allowed to the assessee u/s.80-I(1).”

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Industrial undertaking : Deduction u/s.80-IB of Income-tax Act, 1961 : A.Y. 2001-02 : Sum offered to tax by assessee to cover up certain discrepancies : Is income from industrial undertaking eligible for deduction u/s.80-IB ?

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13 Industrial undertaking : Deduction u/s.80-IB of Income-tax
Act, 1961 : A.Y. 2001-02 : Sum offered to tax by assessee to cover up certain
discrepancies : Is income from industrial undertaking eligible for deduction
u/s.80-IB ?




[CIT v. Allied Industries, 229 CTR 462 (HP)]

The assessee was in the business of manufacturing tractors
and automobile components. The assessee was entitled to deduction u/s.80-IB of
the Income-tax Act, 1961. In the course of the assessment proceedings for the
A.Y. 2001-02, the assessee offered a sum of Rs.2,50,000 for taxation to cover
up all discrepancies. The Assessing Officer added the amount but disallowed
the claim for deduction u/s.80-IB in respect of this amount. The Tribunal
allowed the assessee’s claim and held that the amount offered by the assessee
as addition for the purposes of taxation would amount to profits and gains of
business and were entitled for deduction u/s.80-IB.

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

“Additional income surrendered by the assessee firm having
been added to the income of the business itself, is to be considered while
work-ing out deduction u/s.80-IB, in the absence of any finding of any
authority that the said income was derived from any undisclosed source.”

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Company : Book profits : S. 80HHC and S. 115JA of Income-tax Act, 1961 : In case of MAT assessment amount deductible u/s. 80HHC has to be computed on the basis of adjusted book profits and not on basis of profit computed under the normal provisions.

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12 Company : Book profits : S. 80HHC and S. 115JA of
Income-tax Act, 1961 : In case of MAT assessment amount deductible u/s. 80HHC
has to be computed on the basis of adjusted book profits and not on basis of
profit computed under the normal provisions.




[CIT v. SPEL Semiconductor Ltd., 188 Taxman 130 (Mad.)]

The assessee-company was engaged in manufacture and sale of
integrated circuits. For the relevant year, the assessment was completed u/s.
115JA. The assessee claimed that the amount deductible u/s.80HHC has to be
computed on the basis of the adjusted book profits and not on the basis of the
profit computed under the normal provisions. The Assessing Officer rejected
the assessee’s claim. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Madras High Court upheld the
decision of the Tribunal following its judgment in the case of CIT v.
Rajanikant Schnelder & Associates (P) Ltd., 302 ITR 22 (Mad.).

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Capital gains : Cost of acquisition : A.Y. 2003-04 : Interest on loan taken for purchase of property : Interest to be included in the cost of acquisition for computing capital gain on sale of property.

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11 Capital gains : Cost of acquisition : A.Y. 2003-04 :
Interest on loan taken for purchase of property : Interest to be included in the
cost of acquisition for computing capital gain on sale of property.




[CIT v. Sri Hariram Hotels (P) Ltd.; 229 CTR 455
(Kar.), 188 Taxman 178 (Kar.)]

The assessee company had purchased an immovable property
out of borrowed funds. On sale of the property, for computation of capital
gain the assessee company included the interest on the borrowed funds in the
cost of acquisition of the property. The Assessing Officer held that the
interest on the borrowed funds does not form part of the cost of acquisition.
The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Karnataka High Court followed
its decision in the case of CIT v. Maithreyi Pai, 152 ITR 247 (Kar.) and
upheld the decision of the Tribunal.

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Capital receipt or income from other sources : Interest on share capital during pre-operative period : A.Ys. 2001-02 and 2002-03 : Due to legal entanglement with respect to title of land to be acquired for the assessee, share capital contribution put in f

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10 Capital receipt or income from other sources : Interest on
share capital during pre-operative period : A.Ys. 2001-02 and 2002-03 : Due to
legal entanglement with respect to title of land to be acquired for the
assessee, share capital contribution put in fixed deposit with bank : Interest
earned on fixed deposit is capital receipt liable to be set off against
pre-operative expenses : Not income from other sources.




[Indian Oil Panipat Power Consortium Ltd. v. ITO, 230
CTR 199 (Del.)]

Due to legal entanglement with respect to title of land
which was sought to be acquired by the Government for the assessee, share
capital contribution was temporarily put by the assessee in fixed deposit with
bank. Interest earned on fixed deposit in the A.Ys. 2001-02 and 2002-03 was
assessed by the Assessing Officer as income from other sources. The CIT(A)
accepted the stand of the assessee that the interest was in the nature of
capital receipt which was liable to be set off against pre-operative expenses.
The Tribunal reversed the decision of the CIT(A).

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

“(i) The test is whether the activity which is taken up for
setting up of the business and the funds which are generated are inextricably
connected to the setting up of the plant. The clue is perhaps available in S.
3 which states that for newly set up business the previous year shall be the
period beginning with the date of setting up of the business. Therefore, as
per the provisions of S. 4 which is the charging Section, income which arises
to an assessee from the date of setting of the business but prior to
commencement is chargeable to tax depending on whether it is of a revenue
nature or capital receipt. It is clear upon a perusal of the facts as found by
the authorities below that the funds in the form of share capital were infused
for a specific purpose of acquiring land and the development of
infrastructure. Therefore, the interest earned on funds primarily brought for
infusion in the business could not have been classified as income from other
sources.

(ii) Since the income was earned in a period prior to
commencement of business, it was in the nature of capital receipt and hence
was required to be set off against pre-operative expenses.

(iii) On account of the finding of fact returned by the
CIT(A) that the funds infused in the assessee by the joint venture partner
were inextricably linked with the setting up of the plant, the interest earned
by the assessee could not be treated as income from other sources.

(iv) The Tribunal misdirected itself in law in holding that
interest which accrued on funds deployed with the bank could be taxed as
income from other sources and not as capital receipt liable to be set off
against pre-operative expenses.”

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Business expenditure : A.Y. 2004-05 : Premium paid by assessee-firm on keyman insurance policy of partner is business expenditure allowable as deduction.

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8 Business expenditure : A.Y. 2004-05 : Premium paid by
assessee-firm on keyman insurance policy of partner is business expenditure
allowable as deduction.




[CIT v. M/s. B. N. Exports (Bom.); ITA No. 2714 of
2009, dated 31-3-2010]

The assessee is a partnership firm. For the A.Y. 2004-05,
the assessee’s claim for deduction of the premium paid by the assessee-firm on
the keyman insurance policy of the partners was disallowed by the Assessing
Officer. The Tribunal allowed the assessee’s claim.

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

“(i) The Circular No. 762, dated 18-2-1998 issued by the
CBDT clarifies the position by stipulating that the premium paid for a keyman
insurance policy is allowable as business expenditure.

(ii) In the present case, on the question whether the
premium which was paid by the firm could have been allowed as business
expenditure, there is a finding of fact by the Tribunal that the firm had not
taken insurance for the personal benefit of the partner, but for the benefit
of the firm, in order to protect itself against the setback that may be caused
on account of the death of the partner.

(iii) The object and purpose of a keyman insurance policy
is to protect the business against the financial setback which may occur, as a
result of a premature death, to the business or professional organisation.
There is no rational basis to confine the allowability of the expenditure
incurred on the premium paid towards such a policy only to a situation where
the policy is in respect of the life of an employee.

(iv) A keyman insurance policy is obtained on the life of a
partner to safeguard the firm against a disruption of the business that may
result due to the premature death of the partner. Therefore, the expenditure
which is laid out for the payment of premium on such a policy is incurred
wholly and exclusively for the purpose of business.”

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Deemed dividend : S. 2(22)(e) of Income-tax Act, 1961 : A.Y. 2003-04 : Loans and advances from one company to another with common shareholder with substantial interest : Deemed dividend to be assessed in the hands of the shareholder and not in the hands o

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9 Deemed dividend : S. 2(22)(e) of Income-tax Act, 1961 :
A.Y. 2003-04 : Loans and advances from one company to another with common
shareholder with substantial interest : Deemed dividend to be assessed in the
hands of the shareholder and not in the hands of the recipient company.




[CIT v. Universal Medicare Pvt. Ltd. (Bom.); ITA No.
2264 of 2009, dated 22-3-2010]

An amount of Rs.32,00,000 was transferred from the bank
account of a company CSPL to the bank account of the assessee in the Chembur
branch of the State Bank of India. There was a common shareholder holding the
number of shares in the two companies as specified in S. 2(22)(e) of the
Income-tax Act, 1961. The amount was misappropriated by an employee of the
assessee and the transaction was not entered in the accounts of the assessee.
The Assessing Officer treated the said amount as deemed dividend u/s.2(22)(e)
of the Act and made the addition of the said amount. The Tribunal held that
the amount was part of a fraud committed on the assessee and the transaction
was not reflected in its books of account. The Tribunal therefore held that S.
2(22)(e) was not applicable. The Tribunal further held that even otherwise,
the amount would have to be taxed in the hands of the shareholder who obtained
the benefit and not in the hands of the assessee-company.

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

“(i) The Tribunal has found that as a matter of fact no
loan or advance was granted to the assessee, since the amount in question had
actually been defalcated and was not reflected in the books of account of the
assessee. Consequently, according to the Tribunal the first requirement of
there being an advance or loan was not fulfilled. In our view, the finding is
a pure finding of fact which does not give rise to any substantial question of
law.

(ii) Even on the second aspect which has weighed with the
Tribunal, we are of the view that the construction which has been placed on
the provisions of S. 2(22)(e) is correct.

(iii) The effect of clause (e) of S. 22 is to broaden the
ambit of the expression ‘dividend’ by including certain payments which the
company has made by way of a loan or advance or payments made on behalf of or
for the individual benefit of a shareholder. The definition does not alter the
legal position that dividend has to be taxed in the hands of the shareholder.
Consequently, in the present case the payment, even assuming that it was a
dividend, would have to taxed not in the hands of the assessee, but in the
hands of the shareholder.”

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TDS : S. 199 : TDS on interest on Deep Discount Bonds — Payment on behalf of ‘owner of security’

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20 TDS : Credit of : S. 199 of Income-tax
Act, 1961 : A.Y. 2002-03 : TDS in relation to interest on Deep Discount Bonds is
required to be treated as payment on behalf of ‘owner of security’ or ‘unit
holder’.


[CIT v. Smt. Sonal Bansal, 167 Taxman 311 (P&H); 215
CTR 65 (P&H)]

On 1-1-2001, the assessee had purchased Deep Discount Bonds
1997 of IDBI at the rate of Rs.9,700 each from one ‘V’ who had originally
purchased the same at the rate of Rs.5,500. On maturity, the IDBI deducted tax
at source of Rs.91,800 on the interest income of Rs.9 lakhs. In the A.Y.
2002-03, the assessee had declared the income of Rs.1,07,140 which included
Rs.60,000 being interest on the said Bonds as the secondary purchaser. The
assessee had also claimed credit of the said tax deducted at source of Rs.91,800
on the said interest of Rs.9 lakhs. The Assessing Officer allowed credit for TDS
of Rs.6,120 only, proportionate to the interest income of Rs.60,000 offered by
the assessee and disallowed the balance. The CIT(A) and the Tribunal allowed the
full claim.

 

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

“(i) A perusal of the provisions of S. 199 shows that any
deduction made of tax at source and paid to the Central Government is required
to be treated as payment of tax on behalf of the person from whose income the
deduction was made. However, with effect from 1-4-1997, amendments were
introduced by Finance Act, 1996, which resulted in addition of words
‘depositor’ or ‘owner of property’ or ‘owner of security’ or ‘unit holder’, as
the case may be. Therefore, it is clear that any deduction made of tax at
source and paid to the Central Government is required to be treated as payment
of tax on behalf of ‘owner of security’ or ‘unit holder’.

(ii) In the instant case, it is obviously the assessee-secondary
purchaser who was owner of security and, therefore, tax deducted at source had
to be regarded as payment made on her behalf. Moreover, certificate u/s.203
had also been issued to the assessee.”

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Refund : S. 119, S. 237 : Belated return for refund : Delay condoned due to genuine hardship to assessee

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19 Refund : Condonation of delay : S. 119 and S. 237 of
Income-tax Act, 1961 : A.Y. 1997-98 : Belated return for refund : Delay should
be necessarily condoned in case of genuine hardship to assessee.






[Pala Marketing Co-operative Society Ltd. v. UOI, 167
Taxman 238 (Ker.)]

The assessee co-operative society was entitled to exemption
u/s.80P of the Income-tax Act, 1961. For the A.Y. 1997-98, the assessee had
filed return of income claiming refund of advance tax and TDS. There was delay
in filing the return as there was delay in audit of the accounts. The Assessing
Officer rejected the return as time-barred and, consequently declined the
refund. The assessee’s application u/s.119(2)(b) for condonation of delay in
filing return was also rejected by the Board.



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

“(i) If delay is not condoned by the Board u/s. 119(2)(b),
such application cannot be processed u/s.139(1) or u/s.139(4). Therefore, in
order to consider belated return for refund on merits, delay has to be
necessarily condoned by the Board u/s.119(2)(b).

(ii) In S. 119(2)(b), it is stated that if the Board
considers it desirable or expedient for avoiding genuine hardship to the
assessee, it should condone the delay. In other words, what the Board should
consider is hardship to the party if delay is not condoned. The Board should
condone the delay if failure to condone the delay causes genuine hardship to
the assessee, no matter whether the delay in filing return is meticulously
explained or not.

(iii) Strangely, the Board had stated in its order that it
was not possible to investigate (scrutinise) the return of income because the
statutory time limit had already elapsed. It is not clear on what basis that
statement was made, because even in a case where a claim of refund is made,
the Assessing Officer has to examine the liability for Income-tax of the
assessee and refund is made only if tax is not payable or the amount paid is
in excess of the tax, interest, etc., payable.

(iv) The delay in audit by the auditor was not attributable
to the assessee. Besides showing sufficient cause for delay in filing the
return for refund, the assessee had also established its case of genuine
hardship inasmuch as it had suffered losses in the five succeeding years. The
genuine hardship contemplated u/s. 119(2)(b) obviously is financial hardship
caused to the assessee if delay is not condoned. If delay in the instant case
was not condoned, the assessee would be deprived of Rs.10 lakhs and odd, which
it was otherwise not liable to pay by virtue of the exemption u/s.80P.

(v) In the circumstances, impugned order was quashed
declaring the assessee’s entitlement for condonation of delay u/s.119(2)(b)
and, the Assessing Officer was directed to process assessee’s claim for refund
u/s.237 and grant refund to the extent eligible.”









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Charitable trust: Assessee, a marketing committee entitled to registration u/s.12A/12AA and exemption u/s.11

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II. Reported :



 


17 Charitable trust : Registration u/s.12A
and u/s.12AA of Income-tax Act, 1961 : Assessee, a marketing committee eligible
for exemption u/s.10(29) : Exemption withdrawn w.e.f. 1-4-2003 : Assessee not
disentitled to registration 12A and 12AA and exemption u/s.11.

[CIT v. Krishi Upaj Mandi Samiti, 215 CTR 54 (MP)]

The assessee, a marketing committee, was entitled to
exemption u/s.10(29) of the Income-tax Act, 1961. The exemption was withdrawn
w.e.f. 1-4-2003. The assessee made application for registration u/s.12A and
u/s.12AA of the Act. The Commissioner rejected the application, on the ground
that the exemption u/s.10(29) has been withdrawn. In appeal the Tribunal
directed the Commissioner to permit the registration.

 

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

“(i) The first contention raised by the counsel for the
appellant is that the intention of the legislature in deleting S. 10(29) and
introduction of S. 10(20) itself shows that the legislature did not want to
extend the benefit of exemption to Krishi Upaj Mandi Samiti. This argument is
without any force because S. 10(20) and S. 10(29) provide for exemption to all
the local authorities and exemption under this section was a blanket exemption
without fulfilling any condition. S. 11 provides for exemption on certain
conditions. Thus, the intention behind the amendment was to remove the blanket
exemption to the local authorities and provide exemption only if they fulfil
the conditions u/s.11.

(ii) As per S. 11, the exemption can be granted to the
marketing committees provided that they spend amount for charitable purposes
as required by S. 11(2). Marketing committees are bound to spend their income
as per S. 39 of the 1972 Adhiniyam and as per said Section, the amount could
be spent only for public amenities like construction of roads, market, etc. S.
2(15) provides that if the amount is spent towards public amenities, it will
be deemed that the amount is spent for charitable purposes. Hence, by virtue
of S. 2(15), it will have to be deemed that the amount spent by the marketing
committees is spent towards public purposes.

(iii) Respondent marketing committees fulfil all the
requirements of S. 11 to get exemption and therefore, are entitled to
registration u/s.12A and u/s.12AA and hence, the Tribunal has rightly allowed
the appeals and set aside the orders passed by the CIT.


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Income from other sources : S. 56, 57 : Interest on borrowed money prior to commencement of business — Deductible u/s 57

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18 Income from other sources : S. 56 and S. 57 of Income-tax
Act, 1961 : A.Ys. 1997-98 and 1998-99 : Interest income prior to commencement of
business : Interest on borrowed money could be allowed as deduction.






[CIT v. VGR Foundations, 298 ITR 132 (Mad.)]

The assessee was engaged in the real estate business. It
incurred expenses prior to commencement of business and also earned interest
income from out of the fixed deposits with the bank and the said income had been
set off against the expenses. The Assessing Officer assessed the interest income
as income from other sources, but did not allow any deduction of expenses. The
Tribunal held that the interest on moneys borrowed for the period prior to the
commencement of business could be allowed as deduction from the interest u/s.57
of the Income-tax Act, 1961.



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

“(i) The Tribunal allowed the claim of the assessee by
following its own earlier order and had rightly come to the conclusion that
interest on moneys borrowed for the period prior to the commencement of
business could be allowed as deduction u/s.57 while computing income from
other sources in respect of the interest received.

(ii) The Revenue was unable to give any further materials
or evidence and to furnish information as to whether they had filed any appeal
against the earlier order or not. Therefore there was no error or legal
infirmity in the order of the Tribunal so as to warrant interference. “





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Capital gains : Sale of property received under will : Expenditure on obtaining probate & travel expenses of executors deductible

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II. Reported :



 


16 Capital gains : Computation : Deduction :
A.Y. 1996-97 : Sale of property received under will : Expenditure incurred on
obtaining probate and travel expenses of executors are deductible.

[Mrs. June Perrett v. ITO, 298 ITR 268 (Kar); 215 CTR
267 (Kar.)]

In the A.Y. 1996-97, the assessee had sold a property
inherited by her under a will. While computing capital gain, she claimed
deduction of the expenditure incurred on obtaining probate and travel expenses
of executors. The claim was disallowed by the Assessing Officer. Disallowance
was upheld by the Tribunal.

 

On appeal by the assessee, the Karnataka High Court allowed
the claim and held as under :

“(i) While computing the capital gains u/s.48(i) of the
Income-tax Act, 1961, any expenditure incurred wholly and exclusively in
connection with the transfer of the property has to be deducted, and similarly
the cost incurred by the assessee for any improvement thereto is deductible.

(ii) The executors who were residing in London were
required to obtain probate and letters of administration and any expenses
incurred by the executors in order to obtain probate and letters of
administration were to be treated as expenses incurred by them in connection
with the transfer of property in question, since the executors could not sell
the property to any party without letters of administration.

(iii) Similarly, without paying the court fee, no letter of
administration would be issued by the court. Therefore, Rs.1,23,000 paid by
the executors as court fee at the time of obtaining the letters of
administration had to be treated as expenditure incurred in connection with
the transfer of property.”

 


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