Month: September

China Trust Commercial Bank v. ADIT

(International Taxation)

A.Y. : 1998-99. Dated : 15-5-2009

S. 140C, S. 244A(2) — Where power of attorney has not been
attached to the return of income filed by a non-resident Company, which has
been processed u/s.143(1)(a) and also assessment made u/s.143(3) without power
of attorney, grant of interest u/s.244A(2) cannot be denied on the ground that
the delay is attributable to the assessee.

Facts :

The assessee, M/s. China Trust Commercial Bank incorporated
in Taiwan was engaged in the business of international banking services. The
assessee filed its return of income for A.Y. 1998-99 on 28-11-1998 declaring
taxable income of Rs.71,94,840. The return was processed u/s.143(1)(a) on
31-3-1999 and the assessment order u/s.143(3) was passed on 29-12-2000
accepting the income declared in the return of income. The Assessing Officer
issued a refund as claimed in the return of income, however, he did not grant
interest u/s.244A of the Act. The assessee filed an application u/s.154 of the
Act requesting the AO to rectify the mistake by granting interest u/s.244A.
The application u/s.154 of the Act was rejected on the ground that the
assessee had not filed valid power of attorney in due time, which was filed
only after the lapse of a long delay and, therefore, delay in issuing refund
was attributable to the assessee. He, therefore, denied granting interest
u/s.244A of the Act.

The CIT(A) held that the issue of declining interest
u/s.244A(2) to the assessee is well beyond the scope of proceedings u/s.154
being an issue on which two views are always possible. He upheld the order of
the AO.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The Tribunal noted that the power of attorney was filed on
30-9-2002. Non-grant of interest was because the power of attorney was not
filed alongwith the return. The refund became due on processing the return
u/s.143(1)(a) on 31-3-1999. The Tribunal noted the provisions of S. 140C of
the Act which mandate that in case of a non-resident company, the return of
income is to be signed and verified by a person who holds a valid power of
attorney and the power of attorney be attached to the return. The Tribunal
also noted that the return was processed without the power of attorney, the
assessment u/s. 143(3) was also made without the power of attorney. In the
circumstances, the Tribunal held that the refund due on such processing or on
making the assessment cannot be withheld because of the absence of such power
of attorney. The Tribunal held that if without the power of attorney the
return could be processed and assessment could be made, the refund could also
be prepared and made to the assessee. The Tribunal held that from a bare
reading of the Section it is evident that the delay is to be seen with
reference to the proceedings resulting in refund and the delay is attributable
in such proceedings, to the assessee. The proceedings which result in refund
are the processing of the return or making an assessment u/s.143(3) and since
these proceedings were completed long back even without the power of attorney,
the delay in filing the power of attorney was not the cause for delay in the
proceedings resulting in refund.

However, the Tribunal noted that the provisions of S.
244A(2) provide that where the question arises as to which period is to be
excluded, it shall be decided by the Chief Commissioner or the Commissioner
whose decision thereon shall be final. Since the AO had not referred the
matter for the decision of the Chief Commissioner or the Commissioner the
Tribunal set aside the order of the CIT(A) and the AO and remitted the matter
back to the file of the AO to decide the issue of excluding the period for
granting interest to be decided by the Chief Commissioner or the Commissioner,
as the case may be, and follow his decision on that.

Mrs. Shakuntala Devi v. DDIT (International
Taxation)

A.Y. : 2005-06. Dated : 23-6-2009

S. 54 — Where assessee paid advance to a builder for
purchase of a house, but due to inability to arrange funds, could not purchase
the property and got the advance back, the conditions of purchase/construction
within time specified in S. 54 are not satisfied. In such a case, exemption
can be denied only on expiry of time period of 3 years from date of transfer
of original asset.

Facts :

During the previous year relevant to assessment year
2005-06 the assessee sold two flats — one at Prithvi Apartments and another at
Embassy Diamante, Bangalore. Long-term capital gain arising on sale of these
two flats was worked out at Rs.46,51,537. The assessee advanced a sum of
Rs.98,69,970 to the builder towards the purchase of the flat at Embassy
Habitat. Accordingly, it claimed the sum of Rs.46,51,537 to be deductible
u/s.54 of the Act. In an order passed u/s.143(3) r.w.s. 147 of the Act, the
Assessing Officer stated that the assessee failed to furnish either the
registered sale deed or the purchase agreements to substantiate her claim both
for sale of two properties and also for purchase of the flat at Embassy
Habitat. He also noted that the statement of affairs as on 31-3-2006 did not
reflect the flat at Embassy Habitat as her asset. He held that the since the
title of the property was not transferred to the assessee the provisions of S.
54 were violated and accordingly, he denied the exemption claimed by the
assessee u/s.54 of the Act.

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

Aggrieved, the assessee preferred an appeal to the
Tribunal. On behalf of the assessee it was submitted that the assessee had
entered into an agreement for purchase of a house and had paid an advance, but
subsequent to the payment of advance the assessee could not raise the
necessary funds for purchase of the flat and therefore, the agreement entered
into by the assessee was terminated and cancelled and the assessee received
back the advance paid by her. It was also contended that it is premature to
decide upon denial of exemption. It was submitted that unutilised amount is to
be brought to tax in the assessment year relevant to the previous year in
which the period of three years from the time of transfer of original asset
ends. For this proposition reliance was placed on provisions of S. 54(2) of
the Act which provides for depositing the amount of gain into a Capital Gain
Account and utilisation therefrom within the prescribed time period. Upon
failure to utilise the amount deposited in Capital Gain Account for purchase
or construction within the prescribed time period, the unutilised amount is
charged to tax in the previous year relevant to the assessment year in which
the period of three years from the time of transfer of original asset (that
resulted in the capital gains arising in the first place) ends.

Held :

Since the transaction entered into by the assessee did not
culminate into purchase of residential house either one year before or two
years after the date of transfer nor a residential house was constructed
within a period of three years after the date of transfer, the CIT(A) was
justified in denying the claim of exemption u/s.54 of the Act.

As regards the alternative contention raised the Tribunal
restored the issue to AO with a direction to decide the same as per facts and
law, after providing due opportunity of hearing to the assessee.

ACIT v. Shree Dhootapapeshwar Ltd.

A.Ys. : 2001-02 and 2002-03.

Dated : 30-3-2009

S. 28, S. 45 — Gain arising on transfer of land held by the
assessee as its capital asset in lieu of 50% of the constructed areas to be
constructed by the developer at his own cost without any construction activity
to be carried on by the assessee is chargeable to tax as capital gains.

Facts :

The assessee company was engaged in the business of
manufacturing and trading in ayurvedic medicines. It was owner of land
acquired by it in 1936 on which it had constructed a factory for manufacturing
ayurvedic products. The land was held by it as a fixed asset and was
consistently shown as fixed asset in its accounts. The assessee had not
converted this land into its stock-in-trade. The development agreement entered
into by the assessee recorded that the assessee did not have the requisite
expertise and know-how to undertake the development of the said land. As per
the agreement, the assessee was to part with the land and in lieu thereof was
entitled to receive 50% of the constructed area without carrying out any task
of development. The assessee was not required to meet any of the expenses
towards construction of the buildings.

The AO noted that — (i) the agreement described the
assessee as the owner and the developer as the licensee; and (ii) under the
agreement the assessee was given absolute rights to sell all the residential
as well as commercial property developed and handed over by the developers at
whatever rate as per the prevalent market conditions. Considering these, the
AO charged the profit arising on transfer of land under the head ‘Income from
Business’.

The CIT(A) allowed the assessee’s appeal.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that CIT(A) has observed that (a) the
constructed area was to be shared amongst the parties; (b) the parties were
free to deal with their respective areas in the manner they thought fit; (c)
this was not a case where the parties by virtue of the agreement have decided
to share the profit from the project; (d) the assessee was to receive 50% of
the constructed area, irrespective of the cost of development incurred by the
developer.

On facts and having noted the observations of the CIT(A),
the Tribunal held that the agreement could not be regarded as a joint venture
and the constructed area received by the assessee was consideration for
transfer of land. The Tribunal agreed with the conclusion of the CIT(A) and
noted that the conclusion of the CIT(A) is supported by the following judicial
decisions :

(a) CIT v. Smt. Radha Bai, (272 ITR 265) (Del.)

(b) CIT v. B. K. Bhaumik, (245 ITR 614) (Del.)

(c) CIT v. Mohakampur Ice and Cold Storage, (281
ITR 354) (All.)

The appeal filed by the Revenue was dismissed.

Mrs. Yogesh Aurora v. ITO

A.Y. : 2005-06. Dated : 9-4-2009

S. 28, S. 45 and S. 56 — Amount of liquidated
damages received by the assessee from the vendor of the property under an
agreement for purchase of property constitutes a capital receipt not
chargeable to tax.

Facts :

The assessee was working as a consultant with a
pharmaceutical company. She had entered into an agreement for purchase of
property for Rs.17,95,175 and paid an advance of Rs.10 lakhs. The agreement
for purchase inter alia provided that if the vendor fails to register a
sale deed within the period mentioned in the agreement in favour of the
assessee or her nominee he shall be liable to pay liquidated damages of Rs.5
lakhs. The vendor did not execute the sale deed. The assessee obtained legal
opinion and was advised that the only legal recourse available to her was to
accept liquidated damages. The assessee contended that the amount of
liquidated damages received by her constituted capital receipt not exigible to
tax.

The Assessing Officer (AO) charged this sum to
tax.

The CIT(A) was of the view that the property
sought to be purchased was huge considering the fact that the assessee was a
professional. He, therefore, held that the transaction was an adventure in the
nature of trade. However, since on the date of receipt of the amount the
adventure in the nature of trade had not come into full-fledged existence, he
held that the amount be charged to tax under the head ‘Income from Other
Sources’.

Aggrieved, the assessee preferred an appeal to
the Tribunal where it was contended that the compensation was received on
foregoing a right to acquire a capital asset and therefore, it is a capital
receipt. Reliance was placed on the decision of the Apex Court in the case of
Kettlewell Bullen and Co. Ltd. v. CIT, (53 ITR 261) and also in the
case of Oberoi Hotels Pvt. Ltd. v. CIT, (236 ITR 903).

Held :

The Tribunal noted that the Gujarat High Court in
the case of CIT v. Hiralal Manilal Mody, (131 ITR 421) and Calcutta
High Court in the case of CIT v. Ashoka Marketing Ltd., (164 ITR 664)
had considered similar issue. Following the ratio of the decisions of these
two Courts the Tribunal held the amount of liquidated damages to be capital
receipt. It also observed that because no cost can be attached to the right,
therefore, following the ratio of the decision of the Apex Court in the case
of CIT v. B. C. Srinivasa Shetty, (128 ITR 294) the amount cannot be
taxed as capital gain.

The appeal filed by the assessee was allowed.

Travel Agents Association of India v. ACIT

A.Ys. : 1997-98, 1998-99, 2001-02

Dated : 10-2-2008

Assessee was a mutual concern in the strict sense as all
the members were travel agents in India, and convention receipts, membership
and subscription fees and interest therefrom were exempt being in the nature
of mutual receipts — Hence, having regard to the fact that once said receipts
were taken out of computation of excess of income over expenditure, such
receipts could not decide the character of activities carried out by the
assessee and in such circumstances, when assessee was held to be a mutual
concern, S. 115JA was not applicable to it.

The assessee was a company incorporated u/s.25 of the
Companies Act, to promote interests of travel agents in India. Distribution of
income or property was prohibited by the Memorandum of Association & Articles
of Association. The assessee contended that it conformed with the requirements
of a mutual association and hence income was exempt from taxation on the
grounds of mutuality. The assessing authority held that even if the assessee
was a company registered u/s.25, it was liable for assessment u/s.115JA. The
CIT(A) held that as the Profit & Loss A/c had been prepared in accordance with
Schedule VI, book profit was liable to be taxed u/s.115JA.

On appeal to the Tribunal it was held :

1. S. 115JA deals with companies earning normal business
profits. The assessee was earning ‘income’ and not profits. The expression
‘income’ was a little different from ‘profits’, and hence S. 25 of the
Companies Act provides that such company has to prepare ‘Income &
Expenditure Account’, instead of ‘Profit & Loss A/c’. Companies carrying on
activities of charitable purposes or mutual interest are registered u/s.25.

2. Where the mutual association like the assessee does
not carry on any business and almost entire income is derived from mutual
activities, it is exempt from tax. Only when such a company indulges in
activity of earning profits and distributing the same, it comes out of the
tax exemption.

3. It is possible that a mutual association may earn
income from services/facilities provided to non-members. If such activity is
the major activity, then the question of taxability would arise in a
substantial way, and the rule of mutuality would be questioned.

4. In the instant case, the assessee was a professional
association and there was no case of non-members being involved in the
affairs of the company. Therefore, the activities carried on by the assessee
company were meant only for the member travel agents and were mutual in
character. It was held that the assessee was a mutual concern, it did not
declare dividends, nor distribute its income. Therefore, it did not come
under the MAT regime.

Hence, the computation of income made for the relevant
assessment years u/s.115JA was to be set aside.

On the following grounds, AAR held that MAT provisions did
not apply to foreign companies that had no business presence in India :

The taxpayer, UAE Company (UAECO) provides geophysical
services to the oil and gas industry in India. For this purpose, the taxpayer
entered into agreements for hiring the vessels (equipment) pursuant to BCA on
global-usage basis. Under the agreements, the lessor (owner) provided the
vessels to the taxpayer on hire without providing any crew or other services.
The terms of the agreement had the following features :

The charges paid pursuant to the agreement were not covered
by royalty definition u/s.9(1)(vi) of the Act in view of provisions of S. 44BB
of the Act. The taxpayer contended that the hire charges were not taxable in
India as it represented income earned by non-resident owners outside India.

The Tax Department sought to assess the amount on gross basis
u/s.44BB of the Act by contending that the income accrued/arose in India due to
use of vessels in India.

The AAR accepted contentions of the taxpayer and held :

22 Egain Communications Pvt. Ltd. v.
ITO Pune

The applicant contended that the remittance did not attract
tax implications either in terms of domestic Act provisions or in terms of
India-USA treaty.

Incidentally, the decision has considered only domestic law
provision. It is not clear whether any of the recipients had benefit of a
treaty.

Dy. CIT v. LG Electronics (I) Ltd.

A.Y. : 2002-03. Dated : 30-1-2009

S. 37(1) — Provision for service warranty expenses on
actuarial basis allowed as expense.

The assessee-company, which was providing a one year
service warranty on sale of its electronics products, made a provision towards
services warranty expenses on actuarial basis and claimed deduction in respect
of the same u/s.37(1), which was disallowed by the Assessing Officer. On
appeal, the CIT(A) allowed the assessee’s claim.

The Tribunal, relying on the decisions of the following
cases, allowed the assessee’s claim :

(a) CIT v. Indian Transformers Ltd., (2004) 270
ITR 259; (2005) 142 Taxman 429 (Ker.)

(b) Bharat Earth Movers v. CIT, (2000) 245 ITR
428; 112 Taxman 61 (SC)

(c) Calcutta Co. Ltd. v. CIT, (1959) 37 ITR 1 (SC)

(d) IRC v. Mitsubishi Motors New Zealand Ltd.,
(1996) 222 ITR 697 (PC)

(e) CIT v. Vinitek Corpn. (P.) Ltd., (2005) 278
ITR 337; 146 Taxman 313 (Delhi )

The Tribunal noted as under :

1. In the light of plethora of judgments of both of the
Supreme Court as well as various High Courts it is well settled that once
the assessee is maintaining its accounts on the mercantile system, the
liability already accrued in a year though to be discharged at a future
date, would be a proper deduction while working out the profit and gains of
business, regard being had to the accepted principle of commercial practice
and accountancy. It is not as if such deduction is permissible only in the
case of amounts actually expended or paid.

2. The expression ‘the liability already accrued in the
year’ signifies that a business liability must have definitely arisen in
that accounting year. In other words, for allowing the deduction of a
liability while working out the profits and gains of business, a business
liability should have definitely arisen in that accounting year. What should
be certain is the incurring of the liability. The definite liability must be
in praesenti and not de futuro. The liability must have arisen under a
definite obligation. The obligation of the trader must not be of a purely
contingent nature for it to be a permissible outgoing or allowance or
deduction in the year of account.

3. The other condition to be satisfied is that the
definite liability in praesenti should also be capable of being estimated
with reasonable certainty though the actual quantification may not be
possible.

4. In the instant case, the issue related to the
assessee’s claim of deduction towards warranty liability under a condition
or stipulation made in the sale document imposing a liability upon the
assessee to discharge its obligation under warranty clause for the period of
warranty.

5. The assessee had made the provision of warranty
liability having regard to the past factor of actual expenses incurred by it
towards warranty liability. It had worked out the amount of liability by
applying a multiplying factor on the total sales made during the year on the
basis of past results. This method had been followed by the assessee
uniformly right from the first year of commencement of production.

Dy. CIT v. Mahesh M. Chheda

A.Y. : 1999. Dated : 29-1-2009

S. 28(iv) — Revaluation of assets by firm before conversion
into a Company — Value of shares received by partners in excess of their
capital was not taxable.

The assessee was a partner in a firm which revalued its
assets before conversion into a Company which allotted shares to the partners
of the firm against their revalued capitals. The Assessing Officer taxed the
value of shares received by the partners in excess of their capital before the
revaluation of assets by the firm as value of perquisite or benefit arising to
the partners in terms of S. 28(iv). The CIT(A) upheld the assessment order.

The Tribunal, relying on the decision of the Gujarat High
Court in CIT v. Smt. Chetanaben B. Sheth, (1993) 203 ITR 24, deleted
the addition. The Tribunal noted as under :

1. One of the conditions necessary for applicability of
S. 28(iv) is that the benefit or perquisite sought to be taxed must be
arising in the course of business carried on.

2. The Gujarat High Court has held in the above-mentioned
case that the amount received by an assessee-partner of a firm towards
valuation of goodwill and assets of the firm at the time of retirement from
the firm does not attract provisions of S. 28(iv), since the same cannot be
said to be a perquisite arising from the business and that even otherwise it
would not partake the character of income. Besides the above, increase in
capital of a partner as a result of revaluation of assets of the firm has no
nexus with the business of firm and, therefore, it cannot be brought within
the ambit of S. 28(iv). Therefore, the provisions of S. 28(iv) could not be
applied to bring the sum in question to tax in the hands of the partners of
the firm.

On the issue whether there was any capital gains as a
result of increase in capital of the partners consequent to revaluation of
assets of the firm, the Tribunal noted as under :

1. The stand taken by the Revenue in the grounds of
appeal was that partner’s interest in the firm was transferred to the
Company at a higher value and, hence, the benefit should be taxed in the
hands of the partners. It had been further contended in the grounds of
appeal that the definition of ‘transfer’ as given in S. 2(47) is an
inclusive definition and, therefore, de hors the provisions of S.
45(4) capital gains can be brought to tax in the hands of the partners.

2. There was no transfer whatsoever by the partners. It
was the firm which got converted into a Company. On such conversion, capital
gain on such transfer could be brought to tax only in the hands of firm and
not in the hands of the partner. This was clear from the provisions of S.
45(4). Consequently, no ‘capital gain’ arose in the hands of the partners by
reason of revaluation of assets of the firm and the consequent increase in
capital account of the partners of the firm.

3. Transfer by the firm or consequent succession of the
firm by a Company should not be brought to tax in view of the provisions of
S. 47(xiii). The fact that such transfer and the resultant capital gains
could not be brought to tax was no ground to explore the possibility of
taxing capital gain in the hands of partners on the ground that there was
capital gain consequent to revaluation of assets and increase in capital of
the partners.

AAR No. 802 of 2009

S. 9(1), Income-tax Act; Article 7,

India-South Africa DTAA

Dated : 29-7-2009

No tax is required to be deducted from commission
paid to agent outside India if no services performed in India or no fixed
place of business in India.

Facts :

The applicant was an Indian company engaged in
the business of manufacture and sale of industrial pesticides. The applicant
appointed a South African company (‘SA Co’) to promote and market its products
in South Africa. In consideration of its services, SA Co was to receive
commission from the applicant in respect of completed transactions. SA Co was
to : (i) procure orders from different buyers; (ii) negotiate price and other
terms and intimate the same to the applicant; (ii) re-negotiate the
terms/price if necessary, based on the instructions of the applicant; (iv)
follow up in getting purchase orders from customers and forward the same to
the applicant; (v) follow up regarding LC opening, shipment and payment; (vi)
attend to queries in regard to shipment. The orders were to be directly
executed by the applicant. Sale consideration would also be directly received
by the applicant in India. After receipt of the sale consideration, the
applicant would remit commission to SA Co.

The applicant had raised the following issues for
ruling by AAR :

(i) Whether amount paid to SA Co was liable to
tax deduction u/s.195 of the Act read with India-South Africa DTAA.

(ii) As SA Co did not have permanent
establishment in India, whether amount paid to it was liable to tax
deduction.

(iii) Whether amount paid to SA Co could be
treated as ‘fees for technical services’ under the Act.

The applicant contended that : SA Co rendered all
its services outside India; it did not maintain any establishment in India;
the income received by SA Co was its business income; and hence, the income
cannot be taxed under the Act as SA Co did not have any business connection or
permanent establishment in India. The applicant also clarified that SA Co has
no authority to conclude contracts on its behalf or to take any decision
without referring to the applicant.

In support of its contention, the applicant
relied on CBDT’s Circular No. 23, dated 23rd July 1969, Circular No. 786 of
7th February 2000 and also on the decisions in CIT v. R. D. Aggarwal & Co.,
(1965) 56 ITR 20 and CIT v. T.I. and M. Sales Ltd., (1987) 166 ITR 93.

The AAR referred to Article 7 of India-South
Africa DTAA. The AAR also cited with approval certain observations of the
Supreme Court in CIT v. Toshoku Ltd., (1980) 125 ITR 525 (SC).

Held :

(i) As no business operations are carried out
in India by SA Co, no income can be attributed under Explanation (a) and
therefore no income can be deemed to accrue or arise in India.

(ii) SA Co has no fixed place of business in
India and hence, none of the sub-clauses of Article 5(2) are applicable.
Accordingly, the business profits of SA Co for services rendered as
commission agent in SA Co could not be brought to tax in India.

(iii) As SA Co will not be rendering services
of a managerial, technical or consultancy nature, provisions dealing with
fee for technical services cannot be invoked.

(iv) As commission paid by the applicant to SA
Co is not chargeable to tax in India by virtue of Art.7 of DTAA and S.
9(1)(i) read with the Explanation thereto, the applicant is not obliged to
deduct tax u/s.195 of the Act..