Month: September

The assessee, an infrastructure company, issued Deep Discount
Bonds worth Rs.30 crore in 2000 to Mutual Funds, Public Financial Institutions
and Scheduled Banks. The assessee claimed deduction of Rs.6,08,03,230 in the A.Y.
2003-04 on account of interest paid. However, the AO was of the view that since
the total interest will be paid at the maturity of the Deep Discount Bonds,
deduction was to be allowed only on actual payment. On appeal, the Commissioner
(Appeals) affirmed the view of the AO on a different ground, i.e., since
interest was to be paid on maturity, there was no question of accrual of
interest for the period.

As per the mercantile system of accounting employed by the
assessee, though the payment was to be made only at the maturity, it was not
wrong to provide for interest in a pro rata manner as the liability has accrued.
This view was seconded by the Circular No. 2 of 2002, dated 16-2-2002 of the
CBDT.

Thus, the interest which had accrued during the period,
though not paid was still allowable to the assessee. Moreover, it was affirmed
that S. 43B(e) was not applicable to payment of interest to Mutual Funds. Also,
in case of Public Financial Institutions, S. 43B(d) is attracted only on payment
of interest to its loans/borrower. In the given case, interest was paid on Deep
Discount Bonds which are like deposits. So, provisions regarding payment of
interest on loans/by a borrower as per S. 43B(d) and S. 43B(e) were not
applicable. Therefore, the disallowance made for interest in respect of Deep
Discount Bonds was to be deleted.

In A.Y. 2004-05, the Assessing Officer on scrutiny of the
assessee’s case was of the view that unabsorbed depreciation and brought forward
losses of non-STPI unit should be adjusted against the profits of STPI unit
before claiming deduction u/s.10A. The aggrieved assessee appealed to the CIT(A),
who upheld the order of the Assessing Officer.

The AO obtained the details of export of incurred in foreign
exchange. The details as given by the assessee included an item ‘allowance paid
to engineers on overseas contract’. The Assessing Officer held that the said
expenditure is for technical services and accordingly excluded the same from
export turnover.

The Tribunal relied on the decisions of ACIT v. Yokogawa
India Ltd., (2007) (13 SOT 470) (Bang.) and Huawei Technologies (Ind.) P. Ltd. [ITA
No. 9(B) of 2007, Order dated 8-11-2007] and held that the business loss or
unabsorbed depreciation of non-STPI should not be set off with the STPI unit.
The following observations were also made :

1. The words total income used in S. 10A means total
income as computed under the provisions of the Act. The substituted S. 10A
does not mean that profits as mentioned u/s.10A should not be included in
the total income.

2. The Legislature has used the words ‘profits and gains
as derived by an undertaking’. The assessee may have more than one
undertaking and in that case one has to consider the profits and gains of
that undertaking which qualifies for deduction u/s.10A.

3. S. 10A nowhere mentions that the deduction has to be
restricted to the total income of the assessee as computed as per the
provisions of the Act. The only interpretation which is possible in respect
of S. 10A is that deduction of the unit qualifying for exemption is to be
given to the extent of income computed in respect of that unit as per the
provisions of the Act.

The assessee’s tanks and terminals were damaged due to an
earthquake during the relevant financial year. The assessee incurred an
expenditure of Rs.3,83,04,364 for repair, reconstruction and refurbishment of
the said tanks and terminals. As against this, the assessee received a total sum
of Rs.1,57,28,124 from the insurance company in two instalments. During the
relevant financial year, the assessee deducted the amount of first instalment
(i.e., Rs.1,25,00,000) received from the insurance company from total
expenditure incurred (i.e., Rs.3,83,04,364). The balance amount was shown as WIP
in the balance sheet. In the next year, the assessee deducted the second
instalment received from the said WIP and included certain other expenses
incurred. The final amount was then capitalised and depreciation u/s.32 was
claimed on the said amount.

The AO pointed out that the provisions of S. 45(1A) r.w. S.
50 should be applied to the assessee’s case. Thus the insurance receipt of
Rs.1,57,28,124 should be deducted from the WDV of the block of plant and
machinery.

The assessee was a domestic company engaged in the business
of co-generation of power. It had earned interest income of Rs. 51,21,287 on
which tax was deducted at source. The said interest income arose out of a
statutory deposit made by the assessee. The said interest income was deducted
from expenditure incurred for the installation of machinery. The Assessing
Officer, however, did not give credit of tax deducted on this interest income on
the ground that the same was not offered to tax but was capitalised.

Relying on the decisions of Karnal Co-operative Sugar Mills
Ltd. (243 ITR 2) (SC) and Toyo Engg. India Ltd. v. JCIT, (5 SOT 616), the ITAT
held that :

(1) When deposit is linked with the installation of
machinery, income earned on such deposit is incidental to the installation.
Accordingly, the interest is a capital receipt and would go to reduce the
cost of asset. The assessee had rightly deducted the interest income from
the cost of asset and while doing so it has indirectly offered the income to
tax.

(2) When a particular income is received after deduction
of tax, the TDS has been duly deposited with the bank and the assessee has
received the requisite certificate to this effect, then on production of the
said certificate the assessee becomes entitled to the credit of
TDS even if the income is not directly offered for tax.

(3) The assessee should be rightly allowed the credit of
tax deducted. The Government cannot benefit by taking advantage of legal
technicalities.

(1) The question of excluding interest income and
miscellaneous income is dependent upon the nature of incomes — Whether they
are directly connected to operations of the assessee’s business. Simply
because the assessee had claimed deduction without reducing 90% of aforesaid
incomes, it cannot be said that the assessee has concealed income or has
made incorrect claim. The assessee’s claim was a bona fide one and assessee
has disclosed all material facts. Hence, no penalty u/s.271(1)(c) is to be
levied.

(2) As far as deduction u/s.80I is concerned, penalty
u/s.271(1)(c) has been correctly levied. No reason or explanation was given
by the assessee as to why it made a claim for deduction u/s.80I when it was
known to the assessee that the deduction is available only up to the A.Y.
1996-97.

The Assessing Officer started making enquiry and on enquiry,
the assessee informed the AO that the first year of deduction was A.Y. 1989-90.
Even, thereafter the assessee did not withdraw the claim made u/s.80I.

Hence the Explanation I to S. 271(1)(c) is squarely
applicable to assessee’s case inasmuch as the assessee failed to offer any
explanation.

(1) The question of excluding interest income and
miscellaneous income is dependent upon the nature of incomes — Whether they
are directly connected to operations of the assessee’s business. Simply
because the assessee had claimed deduction without reducing 90% of aforesaid
incomes, it cannot be said that the assessee has concealed income or has made
incorrect claim. The assessee’s claim was a bona fide one and assessee has
disclosed all material facts. Hence, no penalty u/s.271(1)(c) is to be levied.

(2) As far as deduction u/s.80I is concerned, penalty
u/s.271(1)(c) has been correctly levied. No reason or explanation was given by
the assessee as to why it made a claim for deduction u/s.80I when it was known
to the assessee that the deduction is available only up to the A.Y. 1996-97.

The Assessing Officer started making enquiry and on enquiry,
the assessee informed the AO that the first year of deduction was A.Y. 1989-90.
Even, thereafter the assessee did not withdraw the claim made u/s.80I.

Unitex Products Ltd. v. ITO

The Assessing Officer completed the assessments of the
assessee for the relevant years u/s.143(3). Subsequently, a survey u/s.133A was
carried out at the business premises of the assessee. On the basis of the
statement recorded of the estate manager (R), the Assessing Officer reopened the
assessment for A.Ys. 1996-97 and 1997-98 and disallowed the assessee’s claim for
depreciation and maintenance expenses of one building as R had stated that the
building was under structural renovation during the period and was vacated by
the assessee. The CIT(A) confirmed the Assessing Officer’s action.

The Tribunal reversed the orders of the lower authorities.
The Tribunal noted as under :

Nirmala P. Athavale v. ITO

The assessee, husband of the appellant, a well known social
reformer and philosopher and having lakhs of followers spread all over the
world, had established a movement called ‘Swadhyaya’ for the upliftment of the
masses. The assessee had devoted his whole life to the cause of this movement
and had never charged any fee or remuneration from his followers or the persons
who attended his lectures at any point of time. During the relevant previous
year, the assessee had received voluntary gifts of certain sum on his 80th
birthday from his admirers and well-wishers in recognition of his personal
qualities and noble thoughts and claimed the same to be exempt from taxation.
The Assessing Officer held that conducting spiritual discourses amounted to a
vocation and, hence, the provisions of S. 28(iv) were squarely applicable to the
instant case. The Assessing Officer, therefore, treated the amount of gifts
received by the assessee as his income from profession and brought the same to
tax. The CIT(A) confirmed the action of the Assessing Officer.

The Tribunal set aside the orders of the lower authorities.
The Tribunal noted as under :

Tej Pratap Singh v. ACIT

The return filed by the assessee was processed u/s.143(1)(a)
by the Assessing Officer. Subsequently, the Assessing Officer reopened the said
assessment of the assessee for the reason that the valuation of the land was
estimated by the DVO at Rs.2,73,281 as against Rs.50,000 shown by the assessee
and, thus, the income chargeable to tax had escaped assessment for the A.Y.
1999-2000.

The Assessing Officer completed the reassessment proceedings
by calculating capital gains based on the fair market value as determined by the
DVO. The CIT(A) confirmed the computation done by the Assessing Officer.

The Tribunal ruled in the assessee’s favour. The Tribunal
noted as under :

Prabhandam Prakash v. ITO

For the relevant A.Y., the assessee claimed exemption
u/s.54/54F in respect of investment in 3 adjoining flats on the same floor and
one flat on another floor. Two of these flats were occupied by the assessee and
the other two flats were let out.

The Assessing Officer denied the exemption on the ground that
all the flats were independent, having separate kitchens and with no
inter-connection. The CIT(A) upheld the disallowance.

The Tribunal allowed the exemption to the assessee in respect
of the 2 flats occupied by him after considering the decisions in the following
cases :

Mrs. Meena S. Patil v. ACIT (Intl. Taxation)

The assessee purchased immovable property in Bangalore,
paying a sum of Rs.25,00,000 on March 05, 2001 and the balance sale
consideration of Rs.75,00,000 at the time of registration of the sale deed,
i.e., October 23, 2001, but failed to deduct TDS on such payments made. The
seller paid an advance tax of Rs.4,25,126 and filed a return on July 18, 2002,
in which long-term capital gains of Rs.16,80,782 were disclosed in respect of
the property purchased by the assessee. The seller filed a revised return on
March 23, 2003, declaring an income of Rs.62,28,370 and also paid interest
u/s.234B and u/s.234C of the Income-tax Act, 1961. The total amount paid was
Rs.10,30,674. The assessee received an order S. 201(1A), by which liability of
interest of Rs.75,560 was imposed. The assessee filed an appeal and the
Commissioner (Appeals) by order dated March 31, 2004, cancelled the order
u/s.201(1A). The Assessing Officer passed a fresh order u/s.201(1A) on October
20, 2004, by which a demand of Rs.4,78,640 of interest up to October 31, 2004
was raised. The assessee filed an appeal against this order which was dismissed
by the Commissioner (Appeals).

On appeal to the ITAT, the Tribunal held the following on
various grounds of appeal :

As per the assessee, the AO was not competent to pass an
order u/s.201(1A) in October, 2004, especially when the earlier order was
cancelled by CIT(A) vide order in March, 2004.

While placing reliance on Ashok & Co. v. CIT, (1992)
195 ITR 786 (Karn.) and VLS Finance Ltd. v. CIT, (2007) 289 ITR 286
(Del.), it was held that CIT(A), by order dated 31st March 2004, cancelled the
order as according to him the principles of natural justice were not followed
and it was unnecessary to mention that the order may be remanded. Thus, the AO
was competent to pass a fresh order.

The applicability of S. 195 — Held that the agreement of sale
of the property clearly mentioned that the sellers were non-resident as the
address mentioned in the agreement showed that they were residing abroad. There
was no evidence to suggest that the assessee was in a belief that the sellers
were residents. Hence, the assessee was liable to deduct tax u/s.195.

Period for which interest u/s.201(1A) is to be levied and the
amount on which it has to be levied — Held that interest u/s.201(1A) can be
charged only up to the date of payment of tax by payee. Further, the total tax
payable by seller was Rs.12,74,629 of which Rs.4,25,126 was paid in advance, and
hence the tax payable was only 8,49,503. However, the total tax deductible at
the rates in force was 19,38,000.

Held that when the Revenue was not paying any interest to the
deductee on the amount so deductible by charging interest from the deductor,
then it was not justifiable to charge interest from the deductor. Interest was
chargeable on the amount of tax actually paid. The wording in S. 201(1A) is that
interest to be charged on such tax which was not paid. Accordingly interest
u/s.201(1A) was chargeable on the sum of Rs.8,49,503 from the date on which the
tax was deductible.

The assessee-company claimed deduction of Rs.40.91 crores
towards travelling expenditure, out of which Rs.58.30 lakhs was incurred in
connection with travelling of auditors, retainers, consultants, etc. The company
disallowed on its own Rs.8.92 lakhs under Rule 6D. The AO disallowed balance
Rs.49.38 lakhs, as it had not been incurred by the employees or executives of
the company. He further disallowed 1% of the claim of Rs.33.72 lakhs over and
above the said disallowance on account of possibility of personal and pleasure
trips. The CIT(A) deleted the addition. On Revenue’s appeal, the ITAT upheld the
order of CIT(A) on the following grounds :

On appeal to the Tribunal, the assessee filed some additional
evidence in support of its claim. Although the Accountant Member accepted the
additional evidence, the Judicial Member objected that there was no formal
application u/r.29 of the ITAT Rules for admission of additional evidence.

The Third Member held that on going through the rule, no
requirement was found therein that there should be a formal written application
before the Tribunal for admission of the additional evidence.

The Tribunal noted as under :

(1) These are rules of procedure and in a fit case and
depending on the circumstances it would be open to the Tribunal to admit
additional evidence when it is produced in the Court and an oral application
is made.

(2) Rule 29 permits the Tribunal to admit the additional
evidence for any substantial cause. The intention behind the rule is that
substantial justice should be done and the interest of justice should be the
overriding consideration.

(3) Therefore, there was no error in the Accountant Member admitting the
additional evidence.

The assessee, a non-resident, had made substantial deposits
in non-resident accounts in Indian Bank. She filed her return of income showing
total income as NIL. The Assessing Officer passed assessment order and assessed
the aforesaid deposits as the income of the assessee u/s.69. On appeal, the
CIT(A) confirmed the Assessing Officer’s action.

The Tribunal held that since the assessee had brought the
money into India through banking channel, the onus on the assessee u/s.69 stood
discharged, and, therefore, it was not taxable in India u/s.5(2)(b). The CBDT
Circular No. 5 in F.No.73A/2(69)-IT(A-II), dated 20-2-1969 squarely supports the
case of the assessee.

The Tribunal noted as under :

(1) It is seen from Ss.(2) of S. 5 that a person, who is
a non-resident, has to pay tax only on that income which is either received
by him in India or is deemed to be received by him in India or accrues to
him in India or arises to him in India or is deemed to accrue to him in
India or is deemed to arise to him in India during the year. The words ‘in
India’ appearing in Ss.(2) of S. 5 are crucial. The principle underlying S.
5 makes the chargeability of income depend upon the ‘locality’ of accrual or
receipt.

(2) A non-resident person, having money in a foreign
country, could not be called upon to pay income-tax on that money in India
because in respect of that money it will not be possible for the Assessing
Officer to say that it was either received by him in India or it was deemed
to be received by him in India or it accrued to him in India or it arose to

him in India or it was deemed to accrue to him in India or it was deemed to
arise to him in India.

(3) If a non-resident person, having money in a foreign
country, brings that money to India, through a banking channel, he cannot be
called upon to pay income-tax on that money in India, firstly for the
reasons stated above and secondly because the remittance of money into India
through banking channel will make the onus on the assessee u/s.69
discharged.

(4) If certain income, profits or gains was ‘received’ by
the assessee outside India, it does not become chargeable to income-tax in
India by reason of that money having been brought into India. This is
because what is chargeable is the first ‘receipt’ of the money and not a
subsequent dealing by the assessee with the said money. In that event, the
money is brought by the assessee as his own money which he had already
‘received’ and had control over it and it does not take the character of
income, profits and gains after being brought in India.

The assessee was importing gold bars from Union Bank of
Switzerland (UBS). In one consignment shipped by UBS there was excess supply of
some gold bars. The customs authorities seized the excess quantity and also took
legal action against the assessee-company. UBS accepted its mistake and admitted
the human error at their end. The appellate customs authority absolved and
acquitted the company. The company filed a suit against UBS in the High Court of
London. Finally, an out-of-court settlement was reached between UBS and the
company and UBS paid Rs.41.58 lacs as compensation against loss of reputation
and goodwill and Rs.14.46 lacs towards legal expenses, etc. The assessee offered
the sum of Rs.14.46 lacs for taxation voluntarily by including it in the
miscellaneous income and claimed the amount of Rs.41.58 lacs as capital receipt
not chargeable to tax in the computation of income. The Assessing Officer held
that the amount of Rs.41.58 lacs representing compensation received by the
assessee was a revenue receipt chargeable to tax. On appeal, the CIT(A) upheld
the action of the Assessing Officer.

The Tribunal, relying on the decisions in the following
cases, ruled in favour of the assessee :

(1) CIT v. A.R.J. Security Printers, (2003) 264 ITR
206/131 Taxman 297 (Delhi)

(2) Oberoi Hotel (P.) Ltd. v. CIT, (1999) 236 ITR 903/103
Taxman 236 (SC)

(3) CIT v. Bombay Burmah Trading Corpn. Ltd., (1986) 161
ITR 386/27 Taxman 314 (SC)

(4) Rohitasava Chand v. CIT, (2008) 306 ITR 242/ 171
Taxman 147 (Delhi)

(5) Serum Institute of India v. Dy. CIT, (2008) 111 ITD
259 (Pune)

While treating the amount of Rs.41.58 lacs as a capital
receipt, the Tribunal noted as under :

(1) The word ‘income’ has to be understood in the generic
sense. If a receipt bears the traits of income as per the plain and natural
meaning, the same will still be included within the scope of S. 2(24) even
if there is no specific mention of such item in the definition clause.

(2) It is trite law that any receipt in the nature of
compensation, costs, damage, etc., by whatever name called, towards loss of
income is a revenue receipt. However, any receipt to compensate for the loss
of source of income is a capital receipt.

(3) Loss of source of income does not necessarily mean
that the source must be absolutely extinguished. If the source of income has
been severely beaten, thereby causing serious damage to the income-earning
apparatus itself, it will also be construed as the loss of source of income.

(4) As in this case, if goodwill of the business is
damaged and later on some compensation is awarded in lieu of that, it will
also fall in the same category of loss to the source of income and,
consequently, such a receipt will also qualify to be characterised as a
capital receipt.

The assessee obtained a contract from Indian Oil Corporation
Ltd. (IOC) for transportation of LPG cylinders and in turn, such transportation
was being done through another contractor. The balance sheet filed alongwith the
return of income showed amount receivable from IOC and also showed the amount
payable to transport contractor. No profit and loss account was prepared. Fixed
percentage of gross receipts was considered by the assessee to be its income.
The assessee used to retain a percentage of amounts received by IOC and the
balance was paid to truck owners with whom the assessee was having agreements.
The payments were made without deduction of income-tax at source. Credit was
claimed in respect of income-tax deducted at source by IOC. Before the Assessing
Officer (AO), it was contended that the provisions of S. 44AE are applicable and
therefore the provisions of S. 40(a)(ia) do not apply. The AO held that the
transport business of the assessee was a contract with IOC and a sub-contract
with the truck owners and therefore, in view of the proviso to S. 194C(2), the
assessee was required to deduct tax at source in respect of payments made to
sub-contractors. Since no tax was deducted at source, he disallowed the
expenditure of Rs.11,26,500 u/s. 40(a)(ia).

Aggrieved the assessee preferred an appeal to the CIT(A)
where it contended that it merely acted on behalf of the truck owners and had
not entered into any sub-contract with the truck owners and also that it had not
debited the amount to profit and loss account and therefore the same cannot be
treated as expenditure to be disallowed u/s. 40(a)(ia). The CIT(A) noted that
the assessee had entered into a contract with IOC and had entered into agreement
with truck owners wherein he was described as transporter and truck owner was
treated as contractors. He held that the payments made to truck owners
constituted sub-contract payments and hence the provisions of S. 194C(2) were
applicable. He also held that the assessee did not own trucks and therefore the
provisions of
S. 44AE are not applicable. He confirmed the action of the AO.

Aggrieved the assessee preferred an appeal to the Tribunal.

The Tribunal on perusal of the agreement entered into by the
assessee with IOC noted that it mentioned that the contractor (the assessee) was
owner and operator of new/old capacity trucks and had undertaken to maintain the
trucks in good working order for the period of the contract, the agreement inter
alia provided that the contractor had to pay the entire operation cost of the
trucks which include and be deemed always to include the expenses enumerated in
the agreement and the agreement also provided that the contractor shall not be
entitled to assign, subrogate, subject or part with his right under the contract
or change the ownership of the trucks. The contractor (assessee) was also
prohibited from changing constitution of its firm without obtaining prior
written consent of the Corporation.

The Tribunal also noted that in order to comply with the
clauses of the agreement entered into by the assessee with IOC, the assessee had
entered into an MOU with a truck owner wherein the truck owner agreed to act as
a manager of the transport business of the assessee. This MOU also provided that
upon the expiry of the contract the truck will be resold by the assessee to Shri
Athaulla Khan (the truck owner). The assessee under this agreement was entitled
to retain 3% of the commission.

As regards the contention on behalf of the assessee that the
assessee was registered with IOC and the truck owner was not registered with IOC
and therefore the contract was taken for the benefit of the person owning the
truck, the Tribunal observed that this may be de facto relationship. However,
one has to consider the legal agreements between the assessee and the IOC and
also considering the MOU between the assessee and the truck owner and from such
agreements, one has to draw a conclusion that de jure relationship of the
assessee with IOC was in the form of a person who has been awarded the contract.
The assessee was required to abide by the conditions mentioned in the agreement.

The Tribunal held that as per the agreement with the truck
owner, the assessee became the owner of two trucks for the period of contract.
The original truck owner became a manager for the transport business of the
assessee. In respect of contract with IOC, the assessee was owner of two trucks.
Since there was no tax audit report in respect of transport contract business,
therefore the income was to be ascertained as per S. 44AE of the Act. Once
income has been ascertained as per provisions of S. 44AE of the Act, then
provisions of S. 40(a)(ia) will not be applicable.

The Tribunal also upheld the alternative contention on behalf
of the assessee viz. that the AO should have restricted the disallowance to
Rs.5,14,725 being the amount paid by the assessee to the truck owner. From the
gross amount due to the assessee from IOC, deductions were made by IOC towards
diesel and TDS. IOC made deduction towards diesel made available for plying the
truck. The amount deducted by IOC was not paid to the truck owner, but only the
net amount received from IOC was paid to the truck owner and hence the amount on
which tax was deductible at source was the net amount of Rs.5,14,725.

Income-tax Act, 1961 — S. 251, S. 254. While the powers of
CIT(A) are co-terminus with the powers of Assessing Officer, AO has no power to
admit fresh claim otherwise than by way of revised return but Appellate
Authorities including CIT(A) and ITAT have power to admit such claim. The Apex
Court in the case of Goetze (India) Ltd. has itself clarified that their finding
does not impinge on the power of ITAT u/s.254 of the Act, CIT(A) has similar
power u/s.251(1)(c).

The assessee in its return of income did not make any claim
of Rs.98.36 lakhs on account of prior period adjustments. In the course of
assessment proceedings, it pressed such claim. The Assessing Officer (AO) did
not entertain the claim.

Aggrieved the assessee preferred an appeal to the CIT(A) who
relying on the decision of the Supreme Court in Goetze (India) Ltd. (284 ITR
323) (SC) held that the claim for deduction can be made only in the return of
income filed and that a claim which is not made in the return of income cannot
be subsequently made. He upheld the action of the AO.

Aggrieved the assessee preferred an appeal to the Tribunal.

The Tribunal having considered the observations of the
Supreme Court in the case of Goetze (India) Ltd. (supra) and also the powers of
the first Appellate Authority as examined by the Supreme Court in CIT v.
Nirbheram Deluram, (224 ITR 610) (SC) held as under :

(1) The Apex Court clarified in Goetze (India) Ltd.
(supra) itself that their finding does not impinge on the power of the
Income-tax Appellate Tribunal u/s.254 of the Act. We find that the CIT(A)
has also similar power u/s.251(1)(c) of the Act.

(2) The AO has no power to admit fresh claim otherwise
than revised return but Appellate Authorities including the CIT(A) and ITAT
have power to admit such claim.

The Tribunal held that without prejudice to its above finding
the claim of the assessee is in accordance with the judgment of the Apex Court
in the case of Goetze (India) Ltd. The Tribunal in the interest of natural
justice and keeping in view the ratio laid down by the Apex Court in the case of
Goetze (India) Ltd. remitted the matter back to the file of the CIT(A) with a
direction to decide the issue on merit in accordance with law and after
providing reasonable opportunity of hearing to both the sides.

The assessee credited an amount of Rs.149.77 crores as profit
on transfer of assets to its wholly-owned subsidiary to its profit & loss
account. It claimed the exemption u/s.47(iv) of the Act. While working out the
book profits for the purpose of S. 115JB, the assessee reduced this profit and
claimed that it cannot form part of the book profits. A Special Bench was
constituted to adjudicate the matter.

The AO has power to alter the net profits as shown in the P &
L A/c only in two cases; (1) if it is discovered that P & L A/c is not drawn up
in accordance with Part II and Part III of Schedule VI of the Companies Act, (2)
if accounting policies, accounting standards are not adopted for preparing such
accounts and methods, rates of depreciation which have been incorrectly adopted
for preparation of P & L A/c laid before the annual general meeting.

Part II & Part III of Schedule VI of the Companies Act
require the P & L A/c of a company to disclose every material feature including
credits or receipts and debits or expenses in respect of non-recurring
transactions or transactions of an exceptional nature. As held by the Bombay
High Court in the case of CIT v. Veekaylal Investment Co. (P) Ltd., 249 ITR 597,
the capital gain should be included for the purposes of computing book profits
under MAT provisions.

It is an undisputed fact that the long-term capital gain
earned by the assessee is included in the net profit determined as per P & L A/c
prepared as per Part II and Part III of Schedule VI of the Companies Act. It is
not the case of the assessee that the capital gain earned by the assessee was
not included in the net profit determined as per P & L A/c of the assessee
prepared under the Companies Act. The taxability of capital gain is relevant
only for the purpose of computation of income under the normal provisions of the
Income-tax Act, and has nothing to do with the preparation of P & L A/c in
accordance with the provisions of Part II and Part III of Schedule VI of the
Companies Act. Under these circumstances, as long as long-term capital gain is
part of profit included in the P & L A/c prepared in accordance with the
provisions contained in Parts II and III of Schedule VI of the Companies Act, it
cannot be excluded from the net profit unless so provided under Explanation to
S. 115JB for the purpose of computing book profit. In the absence of any
provision for exclusion of capital gains in the computation of book profit under
the above provision, the assessee is not entitled to the exclusion claimed. The
decision of the Calcutta Special Bench of the Tribunal in the case of Sutlej
Cotton Mills Ltd. v. ACIT, 45 ITD 22 held to be reversed by the decision of the
Bombay High Court in the case of Veekaylal Investment Co. (P) Ltd. (supra).

The Ss.(5) of S. 115JB provides that “save as otherwise
provided in this Section, all other provisions of this Act shall apply to every
assessee, being a company, mentioned in this Section”. The contention of the
assessee that since all other provisions of this Act shall also apply, it is
entitled to reduce the long-term capital gain exempted u/s.47(iv) is not
accepted. All other provisions of the Act shall apply, but subject to the
provisions otherwise provided in S. 115JB. The provision for computing book
profit by increasing or reducing the net profit as shown in the P & L A/c
prepared in accordance with the provisions of Part II and Part III of Schedule
VI of the Companies Act are specifically provided in S. 115J or S. 115JA or S.
115JB itself, as the case may be, and consequently all other provisions of the
Act providing the manner of computation of total income under normal provisions
of the Act cannot be applied while computing book profit u/s.115J or u/s.115JA
or u/s.115JB, as the case may be. The decision of ITO v. Frigsales (India) Ltd.,
4 SOT 376 (Mum.) is overruled.

The assessee company is engaged in the management
consultancy, investment advisory and equity research services and also dealing
in investments. It filed return of income declaring profits of Rs.1.03 crores
earned by it on sale of shares as long-term and short-term capital gains. The AO
noted that the assessee was regularly dealing in the shares throughout the year
and held that the profit/gain earned from dealing in the shares is a business
income. Upon further appeal, the CIT(A) also confirmed the assessment order on
this issue.

The balance sheet filed by the assessee and as per the books
of account, the assessee has treated the entire investment in the shares as an
investment only and not as a stock-in-trade. Another important aspect to be
considered here is that the assessee is not a share-broker, nor is he having a
registration with any stock exchange. Moreover, some scrips are held for more
than five years and it is not the case of the AO that there were any derivative
transactions by the assessee, nor is it a case of the AO that there were
transactions without delivery. In the present case, both the authorities have
not disputed that the transactions are complete with delivery. The assessee has
not borrowed any money for investing in shares and used his own surplus funds
and these facts have not been disputed by the AO. In the case of the assessee,
in the preceding years, the assessee is consistently declaring the gain/profit
on the sale of the shares under the head ‘capital gains’ either
long-term or short-term and the same has been accepted by the AO. It is true
that the rule of res judicata is not applicable to the income-tax proceedings,
but at the same time, it is also well-settled principle that if there is no
change in the facts, then there should be consistency in the approach of the
Revenue authorities while deciding the tax liability of the assessee. Another
aspect to be considered here is that the assessee has received substantial
dividend and that is also disclosed. After considering the totality of the
facts, it was held that the transactions of sale and purchase of the shares by
the assessee cannot be treated in the line of trading in the shares, nor can it
be treated as an adventure in the nature of the trade.

As a member of BSE and NSE, the assessee company had paid
various charges like VSAT charges, lease line charges, BOLT charges, Demat
charges, etc. to the stock exchange. According to the AO, the aforesaid sum paid
by the assessee to the stock exchange was a fee for technical services and,
therefore, the assessee ought to have deducted tax at source on such payment.
Since, the assessee had not deducted tax at source on such payment, the
aforesaid sum claimed as deduction was disallowed by the AO.

Following the decision of Skycell Communications Ltd. v. DCIT,
251 ITR 53 (Mad.) it was held that stock exchanges do not provide any technical
services by installing VSAT network. It is the facility provided to its members
and hence such payment cannot be said to be fees for any technical services
rendered. The AO in coming to the conclusion that the payment was for fees for
technical services has relied on the fact that the screen-based trading is a
sophisticated method of trading. This by itself will not be sufficient to hold
that technical services are rendered. The AO has held that services are not
available to the public at large but only to registered members, again this by
itself will not make the services in question as technical services. Another
reason given by the AO is the speed at which transactions were completed. This
again is not a relevant criteria for holding that the services rendered were
technical services. All the above features present in screen-based trading saves
time. This is the result of improved technology. That does not mean that stock
exchange is providing technical services. Stock exchanges are not the owner of
this technology to provide them for a fee to prospective users. They are
themselves consumers of the technology. Therefore the payment in question is not
fee for technical services.