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Year: 2008

S. 10B, S. 32(2) & S. 72 : Set off of business loss and unabsorbed depreciation of earlier assessment years allowable against the profits and gains of unit eligible for deduction u/s.10B.

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31 (2008) 114 TTJ 881 (Chennai)


Ford Business Services Center (P) Ltd. v. ACIT

ITA No. 308 (Mad.) of 2005 &

C.O. No. 170 (Mad.) of 2005

A.Y. 2001-02. Dated : 22-6-2007

S. 10B, S. 32(2) and S. 72 of the Income-tax Act, 1961 —
Set-off of business loss and unabsorbed depreciation of earlier assessment years
is allowable against the profits and gains of a unit eligible for deduction
u/s.10B.

 

For the relevant assessment year, the assessee, engaged in
the business of IT-enabled accounting services and software development, claimed
set-off of carried forward business loss and unabsorbed depreciation against the
income of the unit on which deduction u/s.10B was claimed. The Assessing Officer
and the CIT(A) disallowed the claim. The CIT(A) noted that once the profits and
gains of the unit are eligible for S. 10B deduction, it cannot be taken into
consideration for set-off u/s.70 or u/s.71 or for application of S. 72 and,
therefore, loss from other undertaking cannot be set off against this profit.

 

The Tribunal allowed the assessee’s claim. The Tribunal
observed as under :

(a) The heading of Chapter III of the Income-tax Act,
i.e. ‘Incomes which do not form part of total income’ cannot be conclusive
about the exact purport of any provision contained in the said chapter.

(b) When S. 10B was introduced w.e.f. 1st April 1989, there
was total exclusion of such income from the total income. Subsequently,
however, the total exclusion was removed and deduction was provided for.
Similar is the case for S. 10A, S. 10AA and S. 10BA.

(c) Once deduction u/s.10B has to be allowed, the total
income of the undertaking will enter the computation and then only deduction
will be given to the assessee. If that is the case, then the stand of the
CIT(A) that S. 10B is a secluded provision cannot be accepted. Had it been a
case where total exclusion from income was provided for, then perhaps, the
observation of the CIT(A) that such income cannot be taken into consideration
for set-off u/s.70, u/s.71, or u/s.72 would have been proper.

 


Therefore, the Assessing Officer is directed to consider the
set-off of unabsorbed business losses and depreciation after availing deduction
u/s.10B.

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S. 54EC : Exemption cannot be denied when investment in bonds made in joint names

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30 (2008) 114 TTJ 803 (Del.)


ITO v. Smt. Saraswati Ramanathan

ITA No. 2624 (Del.) of 2007

A.Y. 2004-05. Dated : 19-7-2007

S. 54EC of the Income-tax Act, 1961 — Exemption cannot be
denied when investment in notified bonds is made in joint names of assessee and
her son and not in her own name exclusively.

 

During the relevant assessment year, the assessee invested
her capital gains income in notified bonds and claimed exemption u/s.54EC. The
Assessing Officer denied the exemption on the ground that the investment in the
bonds was in the joint names which is not permitted under the above Section
under which it is the assessee who has to invest the gains in her own name. The
CIT(A), however, held that there is no such requirement in the Section and since
the assessee had invested the sale proceeds of the shares in the REC bonds
without any contribution from her son, the Section was complied with and the
exemption cannot be denied.

 

The Tribunal, relying on the decisions in the following
cases, allowed the exemption :

(a) Jt. CIT v. Smt. Armeda K. Bhaya, (2006) 99 TTJ
(Mum.) 358, (2005) 95 ITD 313 (Mum.)

(b) R. B. Jodha Mal Kuthiala v. CIT, (1971) 82 ITR
570 (SC)

(c) CGT v. N. S. Getti Chettiar, 1972 CTR (SC) 349,
(1971) 82 ITR 599 (SC)

 


The Tribunal observed as under :

(1) If development of infrastructure is the object of S.
54EC, it would hardly matter whether the investment is made in the name of the
assessee exclusively or in the joint names of the assessee and somebody else.
The only condition is that the funds used for the investment must be traceable
to the sale proceeds of the capital asset.

(2) The assessee was 69 years old at the relevant time and
it was only a matter of convenience and to avoid any problem in future that
the son’s name was included.

(3) It is difficult to imagine that it would have been the
intention of the Act to place restrictions on such freedoms given to the
citizens of the country or on their right to take such precautions in the
interests of a secure future. Income tax is only one aspect of life and that
too for a minuscule part of the citizens of this country.

(4) While everyone is given the freedom to make investments
in any name he likes, there is no reason why such freedom should be taken away
in the case of Income-tax assessees, when the substantial ingredients of the
Section are complied with and the sale proceeds of the capital asset are
channelled into the assets in the national interest which is the main and
vital requirement of the Section.

(5) It is a well-settled rule of interpretation in IT law
that a beneficial Section has to be construed liberally, having due regard to
the object which it intends to serve.

(6) The Assessing Officer has interpreted the word
‘invested’ in S. 54EC to mean “invested in the assessee’s name”, an approach
which has no justification as it adds words into the Section and also ignores
the purpose which the Section is intended to serve.


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S. 32 & S. 43(6) : Assessee claiming depreciation for first time on assets purchased and used in earlier year, entitled to claim on the original cost of assets

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29 (2008) 114 TTJ 145 (Ahd.)


National Dairy Development Board v. ACIT

ITA No. 454 (Ahd.) of 2006

A.Y. 2003-04. Dated : 17-8-2007

S. 32 and S. 43(6) of the Income-tax Act, 1961 — Assessee not
being a taxable entity in earlier years, it was entitled to depreciation on the
original cost of the assets without reducing from original cost the notional
depreciation accounted for in the books of assessee.

 

For the relevant assessment year, the assessee claimed
depreciation for the first time on the original cost of certain assets, even
though these assets were purchased and used by it in earlier years.

 

The assessee claimed that as per the provisions of S. 43(6),
the WDV had to be computed by reducing the depreciation actually allowed against
the cost of the assets and that there was no concept of mental calculations of
the depreciation as having been allowed in the tax-free period. Therefore,
depreciation during the current year has to be computed on the original cost of
the assets. The Assessing Officer rejected the contention of the assessee, as in
his view, the principle governing the depreciation allowance is the effective
life of the depreciable assets and the expenditure incurred on its wear and tear
for the period of its consideration and since the assessee had been using the
assets in question for years, such assets must have depreciated greatly by their
use and some of them might have reached the stage of being discarded. Hence, in
order to arrive at the correct income, normal wear and tear of the assets had to
be taken into account. The CIT(A) upheld the AO’s order.

 

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

(a) CIT v. Straw Products Ltd., (1966) 60 ITR 156
(SC)

(b) CIT v. Dharampur Leather Co. Ltd., (1966) 60 ITR
165 (SC)

(c) CIT v. Mahendra Mills, (2000) 159 CTR (SC) 381,
(2000) 243 ITR 56 (SC)

(d) Madev Upendra Sinai v. Union of India & Ors.,
(1975) 98 ITR 209 (SC)

 


The Tribunal observed as under :

(1) S. 32 provides for depreciation on the WDV of the
asset. S. 43(6) defines the WDV to mean, in case of asset acquired in the
previous year, the actual cost to the assessee and in other cases, the actual
cost to the assessee less all depreciation actually allowed to him under the
Act.

(2) The short controversy is whether the “WDV of the asset
is to be taken at the original cost or as reduced by the notional depreciation
accounted for in the books of assessee and deemed to have been allowed in the
earlier years when the assessee was not chargeable to tax”.

(3) The term ‘actually allowed’ means allowed actually
under the Act and not notionally.

(4) In the earlier years the assessee was not liable to tax
and, therefore, the question of allowing any depreciation to the assessee
would not arise. The depreciation of the exempted period cannot be said to
have been allowed to the assessee.

(5) Wherever the legislature has wanted to reduce the WDV
to be ascertained after allowing notional depreciation, it has specifically
provided so, e.g., in S. 10A(6) providing for the deemed allowance of
depreciation for the assessment years ending before 1st of April 2001. S.
10B(6) also provides for similar deemed allowance of depreciation for any of
the relevant assessment years ending before the 1st of April 2001.

(6) As the income of the assessee was exempt until the
earlier year, no notional depreciation can be assumed and, therefore, it would
be entitled to the depreciation on the original cost of the assets.

 


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The interest rate for Employees’ Provident Fund for the financial year 2007-08 has been declared at 8.5% : Notification no. Invst II/(3)(2)133/07-08/ROI/pt, dated 17-7-2008.

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New Page 1Part D :
OTHERS

69 The interest rate for Employees’
Provident Fund for the financial year 2007-08 has been declared at 8.5% :
Notification no. Invst II/(3)(2)133/07-08/ROI/pt, dated 17-7-2008.

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Whether mesne profits received under consent decree by Apex Court was revenue receipt chargeable to tax or capital receipt not chargeable — Held, Not chargeable

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28 (2008) 111 ITD 1 (Mum.) (SB)

Narang Overseas (P.) Ltd. v. ACIT

ITA No. 4632 (Mum.) 2005

A.Y. 2002-03. Dated : 20-7-2008

Whether the mesne profits received by the assessee under the
consent decree granted by the Apex Court was revenue receipt chargeable to tax
or capital receipt not chargeable to tax — Held, Not chargeable to tax.

 

The assessee-company, promoted by the members of one family,
owned various properties including one building. The said property was given by
the assessee on leave-and-licence basis to another company ‘N’ promoted by the
same family. Under the agreement, the licensee i.e., N, could use and
occupy the premises for carrying on the business of selling fastfood under the
name ‘Croissants’, subject to payment of commission by way of certain percentage
of sale proceeds received by N. Within a period of few months, disputes arose
between the family members in respect of their properties. Thereafter various
family settlements were arrived at, including the settlement that consequent to
the termination of licence created in favour of ‘N’ in respect of property in
question, N shall vacate the said premises on or before 31-3-1992.

 

The members decided to implement the family settlements and
also to have all suits decreed by a consent decree. As a result, the Supreme
Court decreed all the suits. Pursuant to the said order, the licence created by
the assessee in favour of ‘N’ was cancelled and agreed to hand over quiet,
peaceful and vacant possession of the said premises to the assessee on or before
1-1-2002 and also to pay the arrears of commission for occupation of the said
premises along with the interest and further to simultaneously pay damages and
mesne profits for wrongful use and occupation of the said premises from 1-4-1992
till 31-12-2001, at the rate of Rs.10 lakhs per month along with interest.
Accordingly, the assessee received Rs.33,47,01,137 during the A.Y. 2002-03.
However, in return of the relevant assessment year, the assessee did not offer
the said amount as income, on the grounds that the damages/mesne profits
received by it were on capital account and, hence, not liable to tax. The AO,
however held that the amount received by the assessee could not be treated as
mesne profits as the same represented arrears of commission payable by ‘N’ to
the assessee under the licence agreement and that the same were revenue in
nature.

 

On appeal, the Commissioner (Appeals) held that the amount
received by the assessee under the consent decree passed by the Apex Court
represented mesne profits. As regards the nature of the same receipt, he
observed that the judgment of the Madras High Court in CIT v. P. Mariappa
Gounder (1984) 147 ITR 676/17 Taxman 292 was in Revenue’s favour and the
same was affirmed by the Supreme Court in P. Mariappa Gounder v. CIT,
(1998) 232 ITR 2. He, therefore, held that the mesne profits received by the
assessee constituted revenue receipt.

 

On second appeal, the dispute before the Division Bench was
whether the mesne profit received by the assessee pursuant to the consent decree
passed by the Supreme Court constituted revenue receipt assessable to tax. The
revenue contended that the issue stood concluded against the assessee by the
decision of the Special Bench of the Tribunal in Sushil Kumar & Co. v. Jt.
CIT (2004) 88 ITD 35 (Kol.), wherein it was held that the judgment of the
Madras High Court in P. Mariappa Gounder (supra), holding that the mesne
profit received by the assessee was revenue receipt chargeable to tax got merged
in the subsequent judgment of the Supreme Court and consequently the mesne
profit received by the assessee was taxable as revenue receipt.

 

However, the assessee contended that the issue was not
correctly decided by the Special Bench in Sushil Kumar & Co. (supra),
inasmuch as the issue that the taxability of mesne profit was neither raised
before nor considered by the Supreme Court.

 

The assessee further contended that the Madras High Court had
decided two issues — (1) the issue regarding the taxability of the mesne profit,
and (2) the year of assessability; the High Court decided both the issues
against the assessee; however, the issue regarding the taxability of mesne
profit was never raised before nor considered by the Supreme Court, since the
assessee challenged only the issue regarding the year in which the mesne profit
could be taxed; the Apex Court held that the High Court rightly held the same to
be taxable in the A.Y. 1963-64 and, therefore the judgment of the Madras High
Court regarding the issue of taxability of mesne profit did not merge in the
judgment of Supreme Court. In view of assessee’s contentions, the Division Bench
found it difficult to concur with the view expressed by the Special Bench in
Sushil Kumar & Co. (supra). Consequently, it referred the matter to the
Special Bench of three Members.

 

The Special Bench was of the view that the correctness of the
Special Bench’s decision in Sushil Kumar (supra) could be decided only by
a Larger Bench. Accordingly, a Special Bench comprising of five Members was
constituted.

 

S. 37(1) — Software in disk is tangible asset — Ownership, enduring benefit and functional tests to be applied to decide nature of expenditure on software — Whether capital or revenue

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27 (2007) 114 TTJ 476 (Del.) (SB)


Amway India Enterprises v. Dy. CIT

ITA No. 72 (Del.) of 2006

A.Ys. 2001-02 to 2002-03. Dated : 15-2-2008

S. 37(1) of the Income-tax Act 1961 — Computer software in a
disk is a tangible asset — Ownership test, enduring benefit test and functional
test are applied to decide the nature of expenditure on computer software —
whether capital or revenue.

For A.Y. 2001-02, the assessee claimed deduction in respect
of software expenditure incurred for purchase of various types of application
software for use in its business. The Assessing Officer held that the softwares
were part of plant and machinery and gave enduring benefit to the assessee,
since they had long-lasting use of more than three four years. This treatment of
software being capital expenditure was confirmed by the CIT(A), since he found
that the assessee had not upgraded or replaced the software frequently.

 

The Division Bench of the ITAT found that divergent views
were expressed on the issue by the various Division Benches in various cases
and, since this issue was expected to occur regularly in many cases, it felt the
need for a Special Bench to consider this matter.

 

The Special Bench noted as under :

(1) The cardinal rule is that the question whether certain
expenditure is capital or revenue should be decided from the practical or
business view-point and in accordance with sound accountancy principles and
this rule is of special significance in dealing with expenditure on expansion
and development of business.

(2) Three tests generally applied to decide whether an
expenditure is capital or revenue in nature are :


l
Ownership test


l
Test of enduring benefit


l
Functional test


(3) Computer software has not been defined in the Act but
in Note 7 to Appendix 1 to the IT Rules it has been explained to include
computer programme recorded on any disk, tape, perforated media or other
information storage device. Therefore, computer software is goods and a
tangible asset by itself. An assessee purchasing such software, or the licence
to use such software, becomes owner thereof. (Decision of the Supreme Court in
the case of Tata Consultancy Services v. State of Andhra Pradesh, 192
CTR 257/137 STC 620 applied.)

(4) In terms of the enduring benefit test, the duration of
time for which the assessee acquires the right to use the software becomes
relevant. What is material to consider is the nature of the advantage in a
commercial sense and it is only where the advantage is in capital field that
expenditure would be disallowable on the application of this test.

(5) The period of advantage in the context of computer
software should not be viewed from the point of view of different assets or
advantages like tenancy or use of know-how, because software is a business
tool enabling a businessman’s ability to run his business. (Decision of the
Supreme Court in the case of Empire Jute Co. Ltd. v. CIT, 17 CTR
113/124 ITR 1 applied.)

(6) Having regard to the fact that software becomes
obsolete with technological innovation and advancement within a short span of
time, it can be said that where the life of the software is short (say, less
than two years), then it may be treated as revenue expenditure. Any software
having its utility to the assessee for a period beyond two years can be
considered as accrual of benefit of enduring nature.

(7) Once the tests of ownership and enduring benefit are
satisfied, it has to be seen from the point of its utility to the businessman
and to see how important an economic or functional role it plays in the
business. Therefore, the functional test becomes more important because of the
peculiar nature of the software and its possible use in different areas of
business touching either capital or revenue field or its utility to a
businessman which may touch either capital or revenue field.

(8) If the advantage consists merely in facilitating the
assessee’s trading operations or enabling the management and conduct of the
business to be carried on more efficiently or more profitably while leaving
the fixed capital untouched, then the expenditure would be on revenue account
even though the advantage may endure for an indefinite future.

(9) Merely because the software is acquired on a licence,
it cannot be concluded whether it is revenue in nature if on application of
the functional test it is found that the expenditure operates to confer a
benefit in the capital field. Similarly, some software having a very limited
economic life cannot be treated as capital in nature even if it is owned by
the assessee.

 


The matter was remanded to the Assessing Officer for deciding
the issue afresh based on the above criteria.

Gain on exchange fluctuation under EEFC account, interest thereon and FDRs maintained as guarantee for export and DEPB credits eligible for deduction u/s.80HHC

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26 (2007) 112 TTJ 754 (Mum.)


Shah Originals v. ACIT

ITA Nos. 3206 (Mum.) of 2006 and 1254 to 1256 and 4065 (Mum.)
of 2007

A.Ys. 2000-01 to 2004-05. Dated : 25-10-2007

S. 80HHC of the Income-tax Act, 1961 — Gain on foreign
exchange fluctuation under EEFC account, interest on EEFC account, interest on
FDRs maintained as guarantee for export business and DEPB credits are eligible
for deduction u/s.80HHC.

 

For the relevant assessment years, the Assessing Officer
disallowed the assessee’s claim u/s.80HHC in respect of the following incomes :

(a) Gain on foreign exchange rate fluctuation under EEFC
account.

(b) Interest on EEFC account.

(c) Interest on bank FDRs maintained as guarantee for
export business.

(d) Income form DEPB.

The Tribunal allowed the assessee’s claim in respect of all
these incomes. The Tribunal noted as under :

1. In respect of allowability of foreign exchange rate
fluctuation gain, the tribunal relied on the following decisions :

(i) Smt. Sujata Grover v. Dy. CIT, (2002) 74 TTJ 347
(Del.)

(ii) S. S. Industries (ITA No. 2732/Mum./1997, dated 30th
Jan. 2000)

(iii) Mohindra Impex (ITA No. 1492/Del.)

(iv) M. B. Mehta & Co. (ITA No. 4607/Mum./2004 dated 27th
June 2006)

(v) Fountainhead Exports (ITA Nos. 5817 & 5823/Mum./2000)

2. In respect of allowability of interest on EEFC account,
the Tribunal relied on the decision in the case of Fountainhead Exports (supra).

3. In respect of allowability of interest on Bank FDRs
maintained as guarantee for export business, the Tribunal held that since
furnishing of guarantees is closely linked up with the export business, there is
no reason why the interest earned on such FDRs should not be considered as
business income of the assessee.

4. In respect of allowability of DEPB credits, the Tribunal
noted that DEPB credits arise directly out of the export business operations
and, hence, should be considered as business income of the assessee.

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S. 2(29B), S. 2(42A) and S. 48 — When ownership rights transferred partly and later some floors of new building sold with proportionate share in land, sale consideration has to be apportioned between land and superstructure to determine capital gains

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25 (2007) 112 TTJ 593 (Kol)


The Statesman Ltd. v. ACIT

ITA No. 1692 (Kol.) of 2006

A.Y. 2003-04. Dated : 31-1-2007

S. 2(29B), S. 2(42A) and S. 48 of the Income-tax Act, 1961 —
When ownership rights were transferred partly and later some floors of the newly
constructed building were sold along with proportionate undivided share in land,
the sale consideration has to be apportioned between the land and the
superstructure to determine long-term/short-term capital gains.

 

The assessee-company owned and held a plot of land on
perpetual lease. It transferred 56.8% of the land to a developer under a
development agreement, retaining 43.2% ownership. Pursuant to the agreement, the
developer constructed two superstructures on the land and handed over one
building to the assessee-company. The assessee sold 4 floors of this building
during this year. The assessee computed long-term capital gain arising on
transfer of proportionate undivided portion of the land attributable to the 4
floors sold by it. It also computed short-term capital gains arising on transfer
of the built-up superstructure area of the 4 floors sold by it. The Assessing
Officer treated the entire amount as short-term capital gains, ignoring the
bifurcation done by the assessee. This was upheld by the CIT(A).

 

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

(a) ITC Ltd. v. Dy. CIT, (2003) 80 TTJ 15 (Kol.)
(TM)/86 ITD 135

(b) CIT v. Estate of Omprakash Jhunjhunwala, (2002)
172 CTR 325 (Cal.)/254 ITR 152

 


The Tribunal noted as under :

(1) The first objection by the Assessing Officer while
treating the sale of 4 floors as income from short-term capital gains is based
on the observation that the rights of the assessee-company in the land and
building forming part of the property were extinguished as soon as the same
were handed over to the developer for development through construction of new
multistoreyed buildings. As evident from the plain reading of terms of
agreement between the assessee-company and the developer, the fact that
emerges is that the assessee at no point of time has relinquished or
transferred the right of ownership on such land to the extent of 43.2% and the
assessee always held the ownership of 43.2% of the land. Therefore, the first
objection by the Revenue, while denying the computation of capital gain by the
assessee, does not hold any merit.

(2) The second objection by the Revenue basically disputing
apportionment of sales consideration by the assessee-company between the value
of land and superstructure is without any concrete and sound reasoning.

(3) Since the assessee is the owner of the building and
43.2% of the land on which such building had been constructed, the assessee
has rightly apportioned the sale consideration in its books of accounts on the
sale of the 4 floors.

(4) For the purpose of apportionment, the assessee has
rightly taken the market value of land as on 1st April 1981, since the land
was acquired before 1981 and the gain arising on disposal of the land was
long-term capital gain and the gain on disposal of the above 4 floors of the
building has rightly been treated as short-term capital gain.

(5) Even otherwise, when there is some difficulty in
bifurcation/apportionment, the same cannot be a ground for rejecting the claim
of the assessee. The Tribunal relied on decisions in the following cases :

(a) ITC Ltd. v. Dy. CIT, (2003) 80 TTJ (Kol.) (TM)
15; (2003) 86 ITD 135 (Kol.) (TM)

(b) CIT v. Estate of Omprakash Jhunjhunwala, (2002)
172 CTR (Cal.) 325; (2002) 254 ITR 152 (Cal.)

 


The Tribunal also relied on the decisions in the following
cases :

(a) CIT v. Dr. D. L. Ramchandran Rao, (1998) 147 CTR
(Mad.) 314; (1999) 236 ITR 51 (Mad.)

(b) CIT v. Vimal Chand Golecha, (1993) 110 CTR
(Raj.) 216; (1993) 201 ITR 442 (Raj.)

(c) CIT v. C. R. Subramanian, (2000) 159 CTR (Kar.)
218; (2000) 242 ITR 342 (Kar.)

(d) CIT v. Best & Co. (P) Ltd., (1966) 60 ITR 11
(SC)


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S. 50C does not apply where transferred property is not the subject-matter of registration and question of valuation for stamp duty has not arisen

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23 (2007) 112 TTJ 76 (Jd)


Navneet Kumar Thakkar v. ITO

ITA No. 679 (Jd) of 2006

A.Y. 2003-04. Dated : 8-3-2007

S. 50C of the Income-tax Act, 1961 — S. 50C does not apply to
cases in which the transferred property is not the subject-matter of
registration and the question of valuation for stamp duty purposes has not
arisen.

 

For the relevant assessment year, the Assessing Officer
observed that the fair market value of the plot of land sold by the assessee
seemed to be much higher than the sale consideration shown in the sale
agreement. He referred the matter to the Asst. Valuation Officer u/s.55A and
made additions for the differential amount. The CIT(A) accepted the sale value
adopted by the Assessing Officer and confirmed the additions.

 

The Tribunal, applying the decisions in the following cases,
held that unless the property transferred has been registered by sale deed and
for that purpose the value has been assessed and stamp duty has been paid by the
parties, S. 50C cannot come into operation :

(a) CIT v. Amarchand N. Shroff, (1963) 48 ITR 59
(SC)

(b) CIT v. Mother India Refrigeration Industries Pvt.
Ltd., (1985) 48 CTR 176/155 ITR 711 (SC)

 


The Tribunal noted as under :

(1) A legal fiction has been created in S. 50C only in
respect of the cases where the consideration received by the assessee is less
than the value adopted or assessed by the stamp valuation authority of the
State Government for the purpose of payment of stamp duty ‘in respect of such
transfer’.

(2) It is a trite law that the legal fiction cannot be
extended beyond the purpose for which it is enacted. S. 50C embodies the legal
fiction by which the value assessed by the stamp duty authorities is
considered as the full value of consideration for the property transferred. It
does not apply to cases in which the transferred property has not become the
subject-matter of registration and the question of valuation for stamp duty
purposes has not arisen.

(3) What is relevant for the attractability of S. 50C is
that the property which is under transfer from the assessee to another person,
should have been assessed at a higher value for stamp valuation purpose than
that received or accruing to the assessee.

(4) Unless the property transferred has been registered by
a sale deed and for that purpose the value has been assessed and stamp duty
has been paid by the parties, S. 50C cannot come into operation. In such a
situation, the position existing prior to insertion of S. 50C would apply and
the onus would be upon the Revenue to establish that the sale consideration
declared by the assessee was understated. In such cases the decisions in the
cases of K. P. Verghese v. ITO, (1981) 24 CTR 358 (SC)/131 ITR 597 and
CIT v. Shivakami Co. (P.) Ltd., (1986) 52 CTR 108 (SC)/ 159 ITR 71
would come into operation and govern the determination of the full value of
consideration.

(5) As the Assessing Officer has not embarked upon making
enquiries from the purchaser about the actual sale consideration, and has not
brought on record any other material worth the name to show that the sale
consideration declared by the assessee was understated, the addition was
wrongly made and sustained.

 


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(a) S. 37(1) — Expenditure on implementation of new ERP package is revenue expenditure. (b) Only expenditure of capital nature on repairs of leased premises is covered by Explanation 1 to S. 32(1)

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22 (2007) 112 TTJ 94 (Chd.)


Glaxo Smith Kline Consumer Healthcare Ltd. v.
ACIT

ITA Nos. 379 & 534 (Chd.) of 2004 and 309 & 310 (Chd.) of
2005

A.Ys. 1998-99 to 2001-02. Dated : 21-3-2007




(a) S. 37(1) of the Income-tax Act, 1961 —
Expenditure on implementation of new ERP package is revenue expenditure.


(b) S. 30 & S. 32(1) of the Income-tax Act 1961 —
Only expenditure of capital nature incurred on repairs of leased premises is
covered by Explanation 1 to S. 32(1).



Implementation of ERP package :

The Assessing Officer rejected the assessee’s claim for
deduction of expenses incurred on implementation of a new ERP package for
recording of manufacturing and accounting transactions. The Assessing Officer
held that such expenditure was capital in nature, since it would provide the
assessee with enduring benefits. The CIT(A), however, allowed the assessee’s
claim.

The Tribunal allowed the assessee’s claim. The Tribunal noted
as under :

1. The majority of the expense was relating to salaries,
travelling and other routine business expenses.

2. The expenditure does not result in acquisition of any
asset in the hands of the assessee.

3. An efficient and reliable recording of activities of
accounting, finance, inventory management, processing of purchases, sales,
etc. would enable the assessee to be more efficient and profitable in carrying
out its main business activity of manufacturing. Where the assessee incurs
expenditure to further improve and upgrade its manner of recording of
accounting and other related transactions, it does have an impact on
generation of income, since the assessee acquires improved inputs to take
business decisions.

4. However, it does not add to the capital apparatus of the
assessee. Therefore, the resultant benefits, in the shape of carrying on
business more efficiently and smoothly, cannot be said to be an advantage
accruing in the capital field.

 


Renovation of leased premises :

In respect of expenditure incurred by the assessee on
renovation of office premises taken on lease, the Assessing Officer and the
CIT(A) held that in terms of Explanation 1 appended to S. 32(1) of the Act, any
expenditure incurred towards the renovation/ improvement of leased building is
to be held as capital in nature.

 

The Tribunal, relying on a plethora of cases, held that only
‘capital expenditure’ is covered within the purview of the said Explanation —
each and every expenditure does not fall within the realm of the Explanation.

 

The Tribunal noted as under :

(1) The expenditure envisaged in the Explanation, inter
alia, includes expenditure by way of renovation or expansion or of
improvement to the building, provided of course that the same is to be of
capital nature.

(2) If it is found that the expenditure is revenue
expenditure, then notwithstanding that it is incurred on a leased building,
the same will not fall within the purview of the Explanation 1 to S. 32(1).

 


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Ab inconvenienti

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The Word

Literal interpretation is normally the rule, unless such an
interpretation leads to injustice, absurdity, extreme hardship or fails to avoid
the mischief sought to be avoided when different rules of interpretation are
applied to arrive at the most probable legislative intent conforming to the
objectives of the legislation. An interpretation is sometimes assailed on ground
of inconvenience likely to be faced if a particular view is taken. Such
challenges based on argumentum ‘ab inconvenienti’, though relevant in
judicial decisions, have a limited force and is generally applied with great
care.


2. “Every Legislation” as observed by Krishna Iyer, J in
Swantraj & Others v. State of Maharashtra, 1974 AIR 517 “is a social
document and judicial construction seeks to decipher the statutory mission,
language permitting, taking the cue from the rule in Heydon’s case of
suppressing the evil and advancing the remedy”. Laws enacted for general
advantage do sometimes result in individual hardship, notably in laws relating
to limitation, registration, attestation and the like. Such individual hardships
or injustice are not taken as having bearing on the legality and do not become
the basis for rejecting a natural construction. Arguments based on inconvenience
assume significance only when the resulting hardship is likely to be faced by
the community at large or affects the general good of the society.

3. The aforesaid view finds expression in Mohinder Singh
Gill and Anr. v. The Chief Election Commissioner, [1978 AIR 851 (SC)] where
an order of the Election Commission directing repoll in the entire constituency,
on destruction of papers and ballot boxes of some segments in a mob violence,
was challenged as arbitrary and violative of any vestige of fairness. The
failure of the Commission to provide opportunity before directing a repoll was
an argument taken by the appellant against which the plea ‘ab inconvenienti’
was advanced on behalf of the Commission, considering the supposedly large
number of persons affected. Reliance was placed on the earlier decision of the
Supreme Court in Subhash Chander Sinha’s case (1970) 3 SCR 963, where
re-examination was ordered by the Board after the examination was vitiated by
adoption of unfair means on a mass scale. In that case Hidayatullah, J repelled the plea of violation of natural
justice in not affording opportunity of hearing to affected persons. The Court
upheld the action taken without prior opportunity, considering that students
generally had outside assistance in answering question which results in
impossible plurality, frustrating the feasibility of notice and hearing.

4. While agreeing with the ratio of Subhash Chander (supra)
based on argument ‘ab inconvenienti’ dispensing with natural justice of
providing hearing in that case, the Supreme Court in Mohinder Singh Gill (supra)
distinguished that case from the case directing repoll. The Court observed
“attractively ingenious and seemingly precedented, argumentum ‘ab
inconvenienti’ has its limitation and cannot override established
procedures”. Whereas vitiated examination was not a case of any particular
individual who was charged and rested on conduct of a vast majority of examinees
at a particular centre, there is no such plurality in vitiated election as the
candidates concerned stand on a different footing from the electorate in
general. The plea of ‘ab inconvenienti’ was, therefore, held
inapplicable, and not giving the notice was taken an infirmity. As observed by
the Court, there may be a parallel in electoral situation if the Election
Commission cancels a poll because it is satisfied that the procedure adopted has
gone away on a wholesale basis.

5. Even in cases of hardship or inconvenience to persons in
general, Courts are generally reluctant to go by such considerations if the
interpretation/action otherwise conforms to the purpose and objective of the
legislation and such difficulties are possible to be taken care of by other
measures. A few decided cases will bring out the judicial approach in the
matter. In Smt. Ujjain Bai v. State of Uttar Pradesh, 1962 AIR 1621 (SC)
the issue was the entertainability of a writ petition challenging the order of
the sales tax officer, which was filed when the appellate proceedings before the
sales-tax authorities were in the midstream. The Court disapproved the argument
‘ab inconvenienti’ of the State. As it is the duty of the Court to
enforce a fundamental right of a party, if any authority has infringed his
rights, considerations based upon inconvenience are, of no relevance”. In a
situation like this, the Court indicated measures to avoid alleged inconvenience
including allowing the petitioner to withdraw the petition with liberty to file
it at a later stage, or, if the party does not agree to withdraw, may adjourn it
sine die till after the remedies are exhausted.

6. Swantraj and Ors v. State of Maharashtra, (supra),
was a case where the issue involved was whether the licence under the Drugs and
Cosmetics Act, 1940 which permitted stocking and selling drugs in a specified
vehicle, covered the brief interval of storage in the godown before loading the
drugs on to the appellant’s van. An argument ‘ab inconvenienti’ was
advanced from the side of the appellant and it was contended that it would be
impossible to furnish the details of very many possible places where for short
intervals drugs may have to be stored awaiting the arrival of the van. Krishna
Iyer, J speaking for the Court, referred to the paramount purpose of the
regulations through licensing as setting in motion vigilant medical watch over
the proper protection of drugs and medicines and held that the objective will be
frustrated if godowns, temporary stores, etc. can be unlicensed. The argument
‘ab inconvenienti’ was held to be affording no answer.

7. In Bengal Immunity Company Ltd. v. The State of Bihar and Ors., (1954) INSC 120, the Court was to decide the constitutionality of inter-state sales tax levied by the State of Bihar in respect of sales made in some other State but delivered in Bihar for consumption purpose. Delivering the dissenting judgment holding it constitutional, J. Das, Venkatararna Ayyer and B. P. Sinha JJ considered, among other, the argument ‘ab inconvenienti’ and disapproved its application. They observed that “even with reference to the inconvenience that might result from the multiplicity of assessment proceedings, it is one which is capable of being removed without disturbing the existing scheme of the Constitution, by Parliament enacting a law constituting an Authority under Article 367 and conferring on it power to receive from the sellers one consolidated statement of all their sales outside their State and determining the precise extent thereof effected in the several States and making that determination final for purposes of assessment by the States. That would, on the one hand, secure to the States the finance legitimately due to them and at the same time, save the sellers from the harassment of multiplicity of proceedings.

8. The  question   as  to  whether   a voluntary income-tax return showing income less than the taxable limit filed on the last day would be a valid return so as to deprive the Department of the power to initiate reassessment proceedings u/s.34(1) of the Income-tax Act, 1922, was decided in assessee’s favour rejecting the Department’s argument ‘ab inconvenienti’. Countering the argument that if the return is held valid, the Department will be drivert to complete the assessment proceedings within a few hours or lose the right to send a notice u/s.34(l), the Court observed that the Income-tax Officer could have avoided the result by issuing a notice u/ s.23(2) and not remaining inactive until the period was about to expire. All laws of limitation lead to some inconvenience and hard cases. The remedy is for the Legislature to amend the law suitably [The Commissioner of Income-tax, Bombay v. V Ranchhoddas Karsondas, 1959 AIR 1154 (SC)].

Sub-silentio

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The Word

Literally sub-silentio means ‘under or in silence’.
When used in relation to a finding in a judicial decision, it refers to ‘without
notice being taken or without making a particular point of the matter in
question’ [Merriam-Webster’s Dictionary of Law]. As a doctrine, it determines
the value, as a precedent, of a decision to be followed in other cases.

2. The cardinal rule of ‘Stare Decisis’ requires
standing by the decided cases, upholding precedents and maintaining former
adjudication. The doctrine of binding precedence ensures stability and
uniformity in judicial interpretation and keeps the scale of justice even and
steady without being liable to waiver with every new judge’s opinion. The
question, however, arises as to whether all declarations or conclusions
constitute binding precedents. A decision which is not express and is not
founded on reasons, nor does it proceed on consideration of issues, cannot be
deemed to be a law or authority of a general nature binding as a precedent. Such
a decision is sub-silentio and is deprived of its value as precedent. As
observed by R. M. Sahai J in State of U.P. and Anr. v. M/s. Synthetics and
Chemicals Ltd. and Anr., (1992) 87 STC 289 (SC), “Restraint in dissenting or
overruling is for sake of stability and uniformity, but rigidity beyond
reasonable limits is inimical to the growth of law. Law declared is not that can
be culled out, but that which is stated as law to be accepted and applied. A
conclusion without reference to relevant provisons of law is weaker than casual
observation. In the absence of any discussion or any argument, the order was
founded on a mistake of fact and, therefore, it could not be held to be law
declared”. Overruling its own earlier decision in Synthetics and Chemicals
Ltd. v. State of U.P. and Anr., (1990) 1 SCC 109, the Court held that the
decision fell in both the exceptions viz. the rule of sub-silentio
and being in per incurrium to the binding authority of the precedents.

3. The issue involved in the case was the competency of the
U.P. State Legislature to impose sales tax on industrial alcohol in view of the
Ethyl Alcohol (Price Control) Order, enabling the Central Government to control
its prices. The High Court, following the earlier 1990 decision of the Supreme
Court (supra) held the levy as beyond the legislative competence. In
appeal, it was argued before the Supreme Court that reference to sales tax in
their earlier decision was accidental, in per incurrium and not arising
from the judgment. The levy of sales tax was not in question at any stage of
arguments, nor was the question considered as it was not in issue and the Court
gave no reason whatsoever for abruptly stating that sales tax was not leviable.
Agreeing with the arguments, the Court in 1992 decision held the earlier
decision as not an authority for the proposition canvassed by the assessee.

4. In Armit Das v. State of Bihar, 2000 AIR SCW 2037,
where the issue involved was the crucial date for determination whether a person
is juvenile as per the Juvenile Justice Act. Various decisions were cited to
canvass the view that the crucial date was commission of offence. Disagreeing
with their value as precedent, the Court observed that “a decision not
expressed, not accompanied by reasons and not proceeding on conscious
consideration of an issue cannot be deemed to be a law declared to have a
binding effect as is contemplated by Article 141. That which has escaped in the
judgment is not ratio decidendi. This is the rule of sub-silentio
in the technical sense when a particular point of law was not consciously
determined”.

5. In CIT v. Kanji Shivji & Co., (242 ITR 0124) where
there were conflicting decisions of the Supreme Court itself as to the
applicability of Explanation to S. 40(b) — whether prospective or retrospective
— the Court overruled its own decision in Rasik Lal & Co. v. CIT, (229
ITR 458), which held the explanation as prospective on the ground that in that
case, the explanation was not really an issue. In Chamber of Income-Tax
Consultants v. Central Board of Direct Taxes, (1994) 209 ITR 660, the Bombay
High Court considered the observations of the Supreme Court in Associated Cement
Co. (1993) 201 ITR 435 as to the inclusion of professional services within the
ambit of S. 194 C and held the same as not constituting a precedent when read as
a whole.

6. A decision is the outcome of consideration of the facts of
the case in reference to different related and inter-dependent provisions of
law. A declaration as to the meaning of any word or expression in the statue is
possible on reading the provision as a whole. If, for whatever reason, including
the failure on the part of the party to the proceeding to bring it to the
Court’s notice, the decision is made without consideration of another provision
or aspect of the matter which would have had a material influence on the
outcome, the declaration or conclusion becomes sub-silentio. In
Dhrangadhra Municipality v. Dhrangadhra Chemical Works Ltd., [174 ITR 77 (Guj.)],
where the issue concerned maintainability of suit u/s.72 of the Contract Act for
claiming refund of octroi paid under mistake and reliance was placed on the
Supreme Court decisions in Sales Tax Officer v. Kanhaiya Lal, AIR 1959 SC
135 and D. Cawasji & Co. v. State of Mysore, AIR 1975 SC 813 upholding
such maintainability, the Gujarat High Court did not go by those decisions for
the reason that in these cases the Court’s attention was never invited on that
aspect of the matter which concerned any prejudice or legal injury suffered by
the aggrieved party. The Court cannot be assumed to have spoken on it though it
was never canvassed before it. “Precedents sub-silentio and without
arguments are of no moment”, observed the Court in Divisional Controller
KSRTC v. Mahadeva Shetty, 7 SCC (2003) 199.

7. Courts may sometimes conclusively decide in favour or
against a party because of some legal point which it pronounces upon, ignoring
another point which too should have been decided in favour or against for
arriving at the conclusion reached. In such a case, that point passes sub-silentio
and the decision cannot be an authority so far as the point ignored is
concerned.

8. It is now well settled that a decision is not deprived of
the authority of precedent merely because it was badly argued or inadequately
reasoned. While total absence of argument and consideration vitiates the
precedent, inadequate arguments or consideration do not, unless they miss
something vital to the total outcome in a decision.

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S. 32 r.w. S. 147, S. 133A — Depreciation cannot be denied on asset forming part of block of assets is not used

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50 (2008) 22 SOT 249 (Mum.)

Unitex Products Ltd. v. ITO

ITA Nos. 153 and 154 (Mum.) of 2003

A.Ys. 1996-97 & 1997-98. Dated : 25-1-2008

S. 32 r.w. S. 147 and S. 133A of the Income-tax Act, 1961 —
Once an asset was part of block of assets and depreciation was granted on that
block, it cannot be denied in subsequent year on the ground that one of the
assets was not used by the assessee in that year.

 

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 :

(a) Apart from R’s Statement, the Department had not
brought anything on record for negating the claim of the assessee with regard
to depreciation.

(b) Contrary to the facts possessed by the Assessing
Officer, the assessee had demonstrated that the building, though was under
renovation, yet was not totally abandoned; it had been using this building for
business purposes and it had incurred electricity expenses, telephone expenses
and made sales and purchases from this building. The assessee had also pointed
out that all correspondence was being made in that building only. The demand
notice was also served on these premises. It was also pointed out that
registered office address was also of this building.

(c) If one weighed the material produced by the assessee
vis-à-vis the solitary statement of R elicited by the authority during the
course of survey, then scale would tilt in favour of the assessee, because the
statement was recorded U/ss.(3)(iii) of S. 133A without administering the oath
to R. This was information which required corroboration for deciding an issue
against the assessee. The Assessing Officer had not brought any corroborative
piece of evidence in support of this information.

(d) It was also submitted by the assessee that the building
was part of its block of assets. The Tribunal in Packwell Printers v. ACIT,
(1996) 58 ITD 340 (Jab.) has considered a similar issue. This order of the
Tribunal was subsequently followed in Natco Exports v. Dy. CIT, (2003)
86 ITD 445 (Hyd.), etc. According to these decisions, once the asset is part
of block of assets and depreciation is granted on that block, it cannot be
denied in the subsequent year on the ground that one of the assets was not
used by the assessee in some of the years. The user of the assets has to apply
upon the block as a whole instead of an individual asset. The Revenue could
not cite any other decision contrary to the said decisions of the Tribunal.

 


Therefore, the assessee was entitled to depreciation and other expenses in
respect of the building.

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(a) S. 23 — Notional interest on interest- free deposit cannot be considered for determining annual letting value. (b) Standard rent under Rent Control Act, can be taken as ALV; in absence of standard rent, municipal rateable value to be taken — If muni

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49 (2008) 22 SOT 245 (Mum.)

Delite Enterprises (P.) Ltd. v.
ITO

ITA Nos. 433, 2983-4887 and 5708 (Mum.) of 2005

A.Ys. 2001-02 & 2002-03. Dated : 26-2-2008

S. 23 of the Income-tax Act,.1961-




(a) Notional interest on interest-free deposit cannot
be considered for determining the Annual Letting Value (ALV)


(b) When Rent Control Act applies, only standard rent
can be taken as ALV; in the absence of standard rent, municipal rateable value
is to be taken and where municipal rateable value is less than actual rent,
then actual rent shall be the fair market value.


 


During the relevant assessment year, the assessee had let out
a property in New Delhi for an annual rent of Rs.0.60 lacs and took security
deposit of Rs.370.60 lacs. The assessee computed the annual letting value of the
said property u/s.23(1)(b) by taking the rent received at Rs.60,000 and offered
the same to tax in its return of income. It submitted before the Assessing
Officer that the Municipal Rateable Value (MRV) of the said property as per
Delhi Municipal Authority was Rs.22,230 only and, therefore, the higher of the
two had to be taken into consideration while computing the annual letting value
u/s.23(1)(b). The Assessing Officer held that there was an interest-free
security deposit of Rs.370.60 lacs and the interest had to be considered while
arriving at the fair market value of the property. He further held that S.
23(1)(b) was not applicable to the facts of the case and only S. 23(1)(a) had to
be considered. Further, the Assessing Officer relied upon some property
newspaper and computed the annual rent at Rs.14.40 lacs. The CIT(A) upheld the
order.

 

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

1. Interest on security deposit :



The Assessing Officer cannot consider notional interest on
deposit while arriving at the fair market value u/s.23(1)(b) of the Act. The
judgment of the jurisdictional High Court in case of J. K. Investors (Bombay)
Ltd. (2001) 248 ITR 723/112 Taxman 107 has been approved by the Supreme Court.

 


2. Determination of ALV


(a) A reading of the order of the Tribunal in ITO v.
Makrupa Chemicals (P.) Ltd., (2007) 108 ITD 95 (Mum.) shows that the
standard rent is the upper limit. The property in question was situated in
Delhi and was indisputably covered under the Rent Control Act. Hence, the
standard rent had to be arrived at. Further, fair market value should be based
on the facts and circumstances of the case.

(b) The Assessing Officer had not made any attempt
whatsoever to decide the standard rent and, under these circumstances, the
municipal rateable value assumed significance. As the actual rent received was
more than municipal rateable value, the actual rent received should be taken
as municipal rateable value. In any event, as the Rent Control Act applied to
the property in question, only standard rent could be taken as the annual
letting value. In the absence of standard rent, municipal rateable value was
to be taken. As municipal rateable value was less than the actual rent, the
actual rent would be the fair market value of property. Therefore, the
assessee had rightly computed annual letting value of the said property
u/s.23(1)(b) by taking into consideration actual rent received.

 

 

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S. 28(iv) — Gifts received by social reformer and philosopher from followers could not be taxed u/s.28(iv).

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48 (2008) 22 SOT 197 (Mum.)

Nirmala P. Athavale v. ITO

ITA No. 1084 (Mum.) of 2005

A.Y. 2001-02. Dated : 29-2-2008

S. 28(iv) of the Income-tax Act, 1961 — Gifts received by a
social reformer and philosopher from followers in recognition of personal
qualities and noble thoughts could not be taxed u/s.28(iv).

 

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 :

(a) The work done by the assessee was a mass movement or
campaign and not a vocation. Even if it was treated as vocation, then having
regard to the fact that the assessee had never charged any fee or remuneration
for his imparting of knowledge and practising of values based on ‘Shrimad
Bhagawat Gita’ and also the fact that the assessee did not have any vested
right to receive any kind of payment for these activities from his
disciples/followers, the gift made by the followers, without being under any
contractual or legal or customary obligations to do so, could not be treated
as a consideration arising out of carrying on of vocation.

(b) In Helios Food Improvers (P.) Ltd. v. Dy. CIT,
(2007) 14 SOT 546 (Mum.) the Tribunal has held that the provisions of S.
28(iv) can be applied in a number of situations, but the bottomline or crucial
fact would always be circumvention of income by taking or receiving income in
other forms. Since, in the instant case, there was no intention of
circumvention of income on the part of the assessee or receiving income in
other forms, provisions of S. 28(iv) could not be applied.

(c) Further, the term ‘perquisite’ as per dictionary
meaning means ‘privilege or benefit given in addition to one’s salary or
regular wages’, which means that it is an additional benefit and not a
complete substitution of one’s income. The assessee had never charged any
consideration from his followers or persons who attended his lectures. Hence,
it could not be termed as ‘benefit’ or ‘perquisite’ within the meaning of S.
28(iv).


 

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(a) S. 69 — Investments not recorded in books of account are covered. 695 (b) S. 28(iv) — Condition that chargeable income should arise from business — Purchase of investment, at lower value not covered

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47 (2008) 22 SOT 174 (Mum.)

Rupee Finance & Management (P.) Ltd. v.
ACIT

ITA Nos. 3264 (Mum.) of 2006 and

2300 & 2881 (Mum.) of 2007

A.Ys. 2002-03 and 2003-04. Dated 05.02.2007




(a) S. 69 of the Income-tax Act, 1961 — U/s.69, only
such investments are covered, which are not recorded in books of account.


(b) S. 28(iv) of the Income-tax Act, 1961 — The
condition for invoking S. 28(iv) is that the chargeable income should arise
from the business/profession — Purchase, by way of an investment, at a lower
value is not covered.


 


Pursuant to an MOU between the assessee-company and the group
of promoters, shares of two group companies were transferred to the assessee at
cost. The Assessing Officer, applying S. 69, made an addition on account of the
difference between the market value and purchase price of the shares. The CIT(A)
held that the benefits derived by the assessee were clearly chargeable to tax
u/s.28(iv) and, accordingly, upheld the addition.

 

The Tribunal held that addition u/s.69 was not sustainable
and there was no income u/s.28(iv). The Tribunal noted as under :

1. S. 69 :


(a) It was not disputed that the investments purchased were
recorded in the books of account.

(b) U/s.69, only such value of the investments may be
deemed to be the income of the assessee for the financial year, if they are
not recorded in the books of account. Thus, S. 69 was not applicable to the
instant case.

(c) The first Appellate Authority possibly realising this
difficulty had chosen to invoke S. 28(iv) and not to give a decisive finding
as to whether S. 69 was applicable or not.

(d) There was no allegation or evidence from the Revenue
that the apparent consideration was not the real consideration. The only
grouse of the Revenue authorities was that the assessee-company had purchased
the shares at a price which was much lesser that the market price.

(e) On these facts, therefore, no addition would be
sustained u/s.69.

 

2. S. 28(iv) :


(a) The condition for invoking S. 28(iv) is that the
chargeable income of the assessee should arise from the business or in the
exercise of profession. There must be a nexus between the business of the
assessee and the benefit the assessee derived.

(b) In the instant case the assessee purchased certain
shares at a certain price and was required to hold these shares for a period
of three years. It was not in dispute that this was an investment made by the
assessee. Hence, irrespective of the fact as to whether these investments were
made in pursuance of the MOU or not, such investments could not be said to be
a benefit arising out of the business of the assessee.

(c) The effect of this Section has been explained by the
CBDT, from which it is clear that when an assessee purchases goods or assets
at a price lower than the market price, under whatever circumstances, the same
cannot be brought to tax u/s.28(iv).

(d) Only if the seller had incurred an expense or a
liability or had provided a facility to the purchaser, then the value in cash
of such expenses or benefit or perquisite shall be treated as income. In the
instant case, the seller had not incurred any expenses or liability, nor had
provided a facility. It sold its shares at a reduced price.

(e) Therefore, the purchase of shares at a particular price
which was below the market price as an investment was not income by any
stretch of imagination. It could not also be deemed as income u/s.28(iv), as
it was neither benefit or perquisite that had arisen to the assessee from the
business or in the exercise of a profession.


 

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A.P. (DIR Series) Circular No. 37, dated 16-4-2008 — Direct receipt of Import Bills/Documents for Import of Rough Precious & Semi-Precious Stones — Liberalisation.

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Given below are the highlights of RBI Circulars.


 

30 A.P. (DIR Series) Circular No. 37, dated
16-4-2008 — Direct receipt of Import Bills/Documents for Import of Rough
Precious & Semi-Precious Stones — Liberalisation.

Presently, remittances for imports up to US $ 100,000 can be
made even when the import bills/ documents are directly received by the importer
from the overseas supplier.

This Circular has increased this limit to US $ 300,000 in
case of import of rough precious and semi-precious stones by non-status holder
exporters. Hence, non-status holder exporters of rough precious and
semi-precious stones can now make remittances for imports up to US $ 300,000
even when the import bills/documents are directly received by them from the
overseas supplier. Thus, they have been brought on par with non-status holder
exporters who import rough diamonds.

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S. 271B : If income of a partner, excluding the income from the firm, less than Rs.10 lacs, not liable to audit u/s.44AB — Penalty deleted.

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1) Hitesh D. Gajaria v. ACIT


ITAT ‘K’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 992/Mum./2007

A.Y. : 2003-04. Decided on : 22-2-2008

Counsel for assessee/revenue : Deepak Shah/

Manvendra Goyal

S. 271B r.w. S. 44AB of the Income-tax Act, 1961 — Penalty
for failure to get accounts audited — Assessee, a chartered accountant by
profession, being proprietor and also a partner in a firm — Gross receipts
excluding his share of income from the firm was less than Rs.10 lacs — Penalty
imposed for failure to get the accounts audited — Whether AO justified — Held,
No.

Per P. Madhavi Devi :

Facts :

The assessee was a chartered accountant by profession. He had
a proprietory concern besides being a partner in Bharat S. Raut & Co. During the
year, he received share of profit and remuneration from the said firm, each of
which was more than Rs.10 lacs. However, the gross receipts earned by his
proprietary concern were less than Rs.10 lacs. According to the AO, the
provisions of S. 44AB were applicable. However, the assessee relying on the
opinion of the senior counsel contended that partner’s allocated amounts were
not gross receipts as contemplated in S. 44AB and accordingly, he was not
required to get the accounts audited. However, the AO did not agree and levied a
penalty u/s.271B r.w. S. 274 of the Act. On appeal, the CIT(A) confirmed the
AO’s order.

Held :

The Tribunal noted that assessee’s major income was not from
profession, but from the share of his profit from the professional firm.
According to it, share of profit cannot be equated with income from profession.
Further, it noted that the assessee had relied on the opinion of the senior
counsel, where-in it was opined that it was not necessary to get the accounts
audited. Therefore, relying on the Jodhpur Bench decision in the case of Dr.
Sunderlal Surana, the Tribunal held that the assessee had reasonable cause for
the failure to get his accounts audited as required u/s.44AB of the Act.
Accordingly, the penalty imposed by the lower authorities was deleted.

Case referred to :


Dr. Sunderlal Surana v. ITO, (2006) 105 TTJ (Jd) 907

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Service tax levy on goods transport by road services — Circular No. 104/07/2008-ST, dated 6-8-2008.

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Part B : INDIRECT
TAXES


Service tax

68 Service tax levy on goods transport by
road services — Circular No. 104/07/2008-ST, dated 6-8-2008.

Certain clarifications have been provided by this Circular as
under :


  • Abatement of 75% would be available to the consolidated amount mentioned in
    the invoice which includes various intermediary and auxiliary services
    provided by GTA and included in the invoice, since these services are not
    provided as independent activities but are the means for successful provision
    of the principal service, namely, the transportation of goods by road.


  • Where service is provided by a person who is registered as GTA service
    provider and issues consignment note for transportation of goods by road in a
    goods carriage and the amount charged for the service provided is inclusive of
    packing, then the service shall be treated as GTA service and not cargo
    handling service.


  • In case of time-sensitive transportation of goods by road carriage, if the
    entire transportation is done by road and the person transporting the goods
    issues a consignment note, then the service would be GTA service and not
    courier services.



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Certain services in connection with sports activities notified u/s.194J : Notification No. 88/2008, dated 21-8-2008 being rendered by the following persons.

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Part A : DIRECT TAXES


67 Certain services in connection with
sports activities notified u/s.194J : Notification No. 88/2008, dated 21-8-2008
being rendered by the following persons.

The CBDT has notified the following services in relation to
sports activities as ‘Professional Services’ for deduction of tax at source
u/s.194J of the Act  :



  • Sports persons,



  • Umpires and referees,



  • Coaches and trainers,



  • Team physicians and physiotherapists,



  • Event managers,



  • Commentators,



  • Anchors, and

  • Sports columnists.


 


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Certain clarifications have been issued by RBI to all the banks in connection with TDS on 8% Savings (Taxable) Bonds, 2003 : RBI/2008-2009/121 — Ref. DGBA.CDD. No. H — 1311/13.01.299/2008-09, dated 5-8-2008.

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Part A : DIRECT TAXES


66 Certain clarifications have been issued
by RBI to all the banks in connection with TDS on 8% Savings (Taxable) Bonds,
2003 : RBI/2008-2009/121 — Ref. DGBA.CDD. No. H — 1311/13.01.299/2008-09, dated
5-8-2008.

While referring to the earlier Circular issued by RBI —
DGBA.CDD No. H-3024/13.01.299/2007-08, dated September 19, 2007, RBI has issued
further clarifications on deduction of tax at source on the subject matter based
on clarifications received from the CBDT. The important clarifications in this
matter are as under :



  • The date from which TDS needs to be deducted is 1-6-2007. Accordingly,
    irrespective of the date of investment, if interest is credited to the account
    of any investor after 1-6-2007, TDS needs to be deducted.



  • Forms 15H and 15G (exemption from TDS) need to be accepted if the conditions
    mentioned for the said forms are satisfied.



  • In case of cumulative schemes of investment of bonds, TDS would be deducted as
    and when the interest is credited, irrespective of the fact that the payment
    is made at the end of the tenure of the bonds.



  • Lower deduction/NIL deduction certificate from the tax authorities is required
    in case of charitable institutions, for exemption from deduction of tax at
    source from interest eligible by such institutions.


 


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Clarification issued by CBDT in connection with TDS on service tax u/s.194J of the Act : Letter F.No./275/3/2007-IT(B), dated 30-6-2008.

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Part A : DIRECT TAXES


65 Clarification issued by CBDT in
connection with TDS on service tax u/s.194J of the Act : Letter F.No./275/3/2007-IT(B),
dated 30-6-2008.

The Board had earlier clarified vide Dir.Tax/761, dated
5-5-2008 that TDS would not be applicable on Service tax element of rental
income u/s.194I of the Act. In this Notification it has been clarified that
u/s.194I, what has been covered is rental income, whereas u/s.194J, what is
covered is any sum paid as professional or technical fees. Hence, for the
purpose of S. 194J, TDS needs to be deducted on the total amount including
Service tax element.

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Relaxation in the rules for mention of PAN in the TDS returns : Internal instructions.

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Part A : DIRECT TAXES


64 Relaxation in the rules for mention of
PAN in the TDS returns : Internal instructions.

As per the recent Circulars of CBDT, threshold limits were
laid for mentioning of PAN of deductees in the TDS return. However, due to
practical difficulties faced by the assessees, these norms have been relaxed.
Now, if the payment has been made for the total amount of TDS and the
information is available of few deductees, then return can be filed with the PAN
of those deductees. Consequently, the cor-rection return can be filed after
obtaining the PAN of the remaining deductees. Care needs to be taken that the
amount paid as TDS needs to tie up with the total amount mentioned in both the
TDS returns.

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Scrutiny of Tax Audit Report during assessment proceedings : Instruction No. 9/2008, dated 31-7-2008 (reproduced below)

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Part A : DIRECT TAXES


63 Scrutiny of Tax Audit Report during
assessment proceedings : Instruction No. 9/2008, dated 31-7-2008 (reproduced
below)

Kindly refer to the above.

 

2. C&AG and carried out a systems review of Third Party
certification under the Income-tax Act. This has brought out that in many cases
the information available in the tax audit reports is not being properly
analysed during assessment proceedings, thereby defeating the very purpose of
providing for audit of accounts in the Income-tax Act i.e., to ensure
that correct deductions are claimed by the assessee. It is, therefore,
reiterated that the tax audit reports as well as other statutory audit reports
should be critically examined along with connected records and other available
evidence, and the information as available in these reports should be
effectively utilised while finalising the assessment of cases selected under
scrutiny. In case of e-filed returns as well as annexure-less returns, tax audit
reports and other statutory audit reports should be requisitioned and thoroughly
examined during the assessment proceedings in cases under scrutiny.

 

3. With effect from 10th August 2006, the ‘Accountants’ are
required to indicate in Form 3CD as to whether a certificate has been obtained
from the respective assessees regarding payment relating to any
expenditure/taking or accepting of loans or deposits or repayment of the same
through account-payee cheque/bank draft (refer points 17(h) and 24(c) of Form
No. 3CD).

 

4. Instead of simply relying on the said certificates given
by the assessees, the assessing officers should undertake a test-check of such
transactions while completing the assessments under scrutiny. Results of such
test-check should also be kept on record. In case, any violation is noticed,
follow-up action as per the Income-tax Act including invoking of penal
provisions should be taken.

 

5. In cases where any factual misrepresentation by the
Accountants is observed, suitable action should be taken against them as
provided u/s.288 of the Income-tax Act, 1961.

 

This may be brought to the notice of all concerned for strict
compliance.

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Norms relaxed for the corporate tax returns : Internal instructions.

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Part A : DIRECT TAXES


62 Norms relaxed for the corporate tax
returns : Internal instructions.




  •  Scrutiny not to be undertaken for top 1000 companies, provided no disputes are
    pending against them.



  • If the Tax Department has not raised a demand for more than 10 lakhs over and
    above the taxes paid by the companies, then those companies’ cases would not
    be picked up for scrutiny.



  • In case the capital infused in the company is more than 50 lakhs, then the
    case may be picked up for scrutiny.



  • In case the company has filed for any tax exemption viz. S. 10A, S.
    80IC etc., then the return may be picked up for scrutiny.


 


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S. 48 r.w. S. 147 — Capital gain to be taxed on basis of provisions of S. 48 and not on basis of fair market value as determined by valuation officer — assessment on the basis of DVO report not permissible.

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46 (2008) 22 SOT 156 (Delhi)

Tej Pratap Singh v. ACIT

ITA No. 4601 (Del.) of 2004

A.Y. 1999-2000. Dated : 31-12-2007

S. 48 read with S. 147 of the Income-tax Act, 1961 — Capital
gain is to be computed and taxed on the basis of provisions contained u/s.48 and
it cannot be computed on the basis of fair market value of asset as determined
by Valuation Officer. Therefore, assessment cannot be reopened for taxing
capital gain in respect of an asset on basis of market value of asset as
estimated by DVO.

 

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 :

(a) A perusal of the reasons recorded for the reopening
indicates that the belief of the Assessing Officer regarding escapement of the
income of the assessee is based only on the opinion of
the Valuation Officer. It is also found that before making reference no
material was examined by him. He did not see any other material except the
valuation report. Thus, it is clear that the Assessing Officer has not made
any judicial application of mind for reopening the assessment. He made no
enquiry from the assessee or from any other source, nor examined the books of
account of the assessee before doing so.

(b) In view of the above facts, the reference made to the
Valuation Officer was itself illegal and consequently non est. When the
reference itself is illegal and non est in law, the report submitted in such
reference, consequently, cannot be relied upon to initiate reassessment
proceedings. It was so held by the Rajasthan High Court in the case of
Brig. B. Lall v. ITO, (1981) 127 ITR 308. In the case of Bhagwandas
Jain v. Dy. CIT, (2000) 246 ITR 632, the M.P. High Court, after following
the decision of the Rajasthan High Court in the case of Brig. B. Lall (supra),
held that reopening of the assessment on the basis of valuation report is not
valid.

(c) On examination of S. 48, it is clear that the capital
gain is to be computed by deducting from the ‘full value’ of the consideration
received or accruing as a result of the transfer of the capital asset the cost
of acquisition and expenditure incurred in connection with the transfer. The
expression ‘full value of the consideration’ does not mean ‘market value’ or
‘fair market value’ of the asset transferred. Hence, capital gain tax cannot
be computed and levied with reference to the market value determined on the
basis of valuation report.

(d) The Delhi Bench of the ITAT in the case of Ashok
Soni v. ITO, (2006) 10 SOT 39 (URO), after following the decisions of the
Supreme Court in the cases of K. P. Verghese v. ITO, (1981) 131 ITR 597
and CIT v. George Henderson & Co. Ltd., (1967) 66 ITR 622 (SC) and
various other authorities, has observed as under :

“In the absence of any material with the Assessing Officer
to show that the assessee has received more amount than the consideration
shown in the concerned document, the action of the Assessing Officer in
substituting the full value of consideration by the fair market value as
stated by the Departmental Valuation Officer in his report for computation of
capital gains was not valid.”

(e) The valuation report is an expert opinion at the most.
In relation to the transaction of transfer such report cannot be treated to be
proof of the fact that there is some underhand dealing and consideration has
passed more than what is disclosed.

 

 

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S. 54 — Where several flats in same building and contiguous with each other, treated as one house for purposes of S. 54.

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 Part A — Reported Decisions



45 (2008) 22 SOT 58 (Hyd.)

Prabhandam Prakash v. ITO

ITA No. 147 (Hyd.) of 2007

A.Y. 2001-02. Dated : 25-1-2008

S. 54 of the Income-tax Act, 1961 — Where several flats are
purchased in same building and are contiguous with each other, they would be
treated as one house and not several houses for purposes of S. 54.

 

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 :

(a) Shiv Narain Chaudhari v. CWT, (1977) 108 ITR 104
(All.)

(b) B. B. Sarkar v. CIT, (1981) 132 ITR 150 (Cal.)/7
Taxman 239

(c) K. G. Vyas v. Seventh ITO, (1986) 16 ITD 195 (Bom.)

(d) CIT v. Kodandas Chanchlomal, (1985) 155 ITR
273/23 Taxman 579

(e) D. Anand Basappa v. ITO, (2004) 91 ITD 53
(Bang.)

(f) Smt. Hansa Bai Sanghi v. ITO, (2004) 89 ITD 239
(Bang.)

 


The Tribunal noted as under :

1. Where several flats are purchased in the same building
and are contiguous to each other, they would be treated as one house and not
as several houses. Whether one or more municipal numbers are given is of no
consequence. The purpose is to see whether the assessee and his family are
using those several dwelling units for their residence or not.

2. However, where the assessee, after acquiring the new
property has not put it to use for his own residence but has let it out, it
means that it was not meant for immediate residence. In the present case, out
of the four flats acquired, two flats on the first floor were occupied by the
assessee and the remaining two were let out. Therefore, respectfully following
the judgment of the Gujarat High Court in the case of Kodandas Chanchlomal (supra),
we hold that the assessee be given pro rata exemption in respect of the
two flats occupied by him.


 

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S. 195 — Interest payable for failure to deduct tax at source only on sum not paid and not on sum deductible

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 Part A — Reported Decisions



44 (2008) 300 ITR (AT) 317 (Bang.)

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

ITA No. 224 (Bang.) of 2006

A.Y. 2002-03. Dated : 29-3-2007

S. 195, S. 201(1A) — Assessee purchased immovable property
from a non-resident — Failure to deduct tax u/s.195 — Sum deductible calculated
at rates in force much higher than tax actually payable by seller according to
assessment order — Interest payable for failure to deduct tax at source only on
sum not paid and not on sum deductible.

 

Facts :

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 :

Ground no. 1 :

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.

 

Ground no. 2 :

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.

 

Ground no. 3 :

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.

 

Cases referred to :



(i) CIT v. Adidas India Marketing Pvt. Ltd., (2007)
288 ITR 379 (Delhi) and many others.


 

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II. Travelling expenses incurred by non-employees allowable if for business. 691 IV. Sponsorship, prize money revenue expenditure for business purposes. 691 VI. Repairs of building owned by assessee used by directors for residence, allowable expenditu

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 Part A — Reported Decisions


43 (2008) 112 ITD 57 (Kol.) (SB)

JCIT, Special Range 16 Kolkata v. ITC Ltd.

A.Y. 1997-98. Dated : 7-9-2007

 

In the reported case the Tribunal has considered various
grounds which have been described in the case as fact-I, fact-II and so on. Out
of XI grounds, the following grounds appear to be more relevant and important.

 

Fact-II :

Travelling expenses incurred even by non-employees is
allowable if it is for the business.

 

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 :

(1) The assessee had various factories, godowns, stock
points apart from branches and offices at various locations.

(2) The travelling expenditure was very much incurred for
the business.

(3) It is immaterial whether it is incurred by the employee
or non-employee.

(4) The AO had nowhere brought on record that the
expenditure was not incurred for the business.

 


Cases referred to :



(i) ACIT v. Perfect Project Ltd., (2002) 253 ITR 16
(AT) Calcutta Bench

(ii) Sayaji Iron & Engg. Co. v. CIT, (2002) 253 ITR
749 (Guj.)

(iii) Dinesh Mills Ltd. v. CIT, (2002) 254 ITR 673
and a few more.

 


Fact-IV :

Expenditure for sponsorship, prize money, etc. is revenue
expenditure for the purposes of business.

 

Payments made to clubs by the assessee included expenditure
for sponsorship, prize money, etc. The AO disallowed the same, observing that
the same was not incidental to the business. The CIT(A) deleted the addition by
following the earlier appellate order for A.Y. 1994-95. On Departmental appeal,
the ITAT upheld the order of CIT(A) and allowed the expenditure on the following
grounds :

(1) The assessee submitted proper details in respect of the
expenditure which was incurred by it for sponsorship of events.

(2) Nowadays it is very common to sponsor some sports or
events to advertise the products of the company or for the company’s corporate
image.

(3) The AO has not given any congent reason for disallowing
the expenditure.

(4) The said expenditure is very much revenue expenditure
for the purposes of business.

 


Case referred to :



(i) CIT v. Delhi Cloth & General Mills Co., (1999)
240 ITR 9 (Delhi).

 


Fact-VI :

Repairs to the building owned by the assessee-company used by
its directors for residence is an allowable expenditure. Secondly, expenditure
on reinstallation of machinery from one factory to another factory is not
capital expenditure.

 


(A) The assessee-company incurred expenditure on repairs to
buildings, which included repairs to company flats. The said flats were
exclusively used by the directors and the higher executives of the company.
The AO disallowed 25% of such claim on the ground that the personal element in
the expenditure could not be ruled out.

(B) The assessee-company also incurred expenditure on
repairs to machinery, which included expenditure on reinstallation of Loga
machine at Bangalore factory. The said machine was brought from company’s
Saharanpur factory. The AO disallowed the same as it was a capital
expenditure. The CIT(A) deleted both the additions. On Revenue’s appeal, the
ITAT upheld the CIT(A)’s order and referred to the following :


(A) (1) The flats were owned by the assessee company
and were utilised by the assessee-company’s directors and executives.

(2) Hence, the expenditure incurred on maintenance
cannot be said to be personal nature just because the flats are occupied
by the directors for their residence.

(3) The expenditure incurred by the company for
personal benefit of directors cannot be considered as personal expenditure
of assessee company, since the assessee and the employees are two
different entities.

 




Regarding the installation expenditure of machinery it held
that :



(B) (1) The machinery from Saharanpur has been shifted
to Bangalore unit for its effective utilisation.

(2) This has not resulted into any addition to the
assets of the assessee-company and hence it cannot be considered as
capital expenditure.

 




Cases referred to :



(i) Sitapur Sugar Works Ltd. v. CIT, (1963) 49 ITR
160

(ii) Otis Elavators Co. (India) Ltd. v. CIT, (1992)
195 ITR 682

 


Fact-IX :

S. 36(1)(iii) – The interest on borrowed funds is an allowable expenditure if the assessee has sufficient own funds to justify interest-free advances to sister concerns.

The assessee borrowed money and claimed deduction of interest paid thereon. The assessee had also made interest-free advances to its subsidiaries. The AO disallowed the interest by calculating notional interest @ 18% p.a. on loans to subsidiaries, observing that interest-free advances were made to subsidiaries out of borrowed funds. The CIT(A) deleted the addition. On Departmental appeal, the ITAT upheld the order of CIT(A) and allowed the interest on the following grounds:

  • The AO has not made a case that these advances were not made in the course of business for commercial expediency and for the purpose of business.
  • The assessee is making such interest-free advances to its sister concerns since long, during the regular course of business.
  • The assessee has shown substantial profit to justify the claim of the assessee to have made advances out of own fund.


Cases referred to:
CIT v. Britannia Industries Ltd., (2006) 280 ITR 525 and a few more.

S. 54EC — Exemption is allowable even though investment of gains in specified bonds is done in joint names

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5 (2008) 300 ITR (AT) 410 (Delhi)


ITO v. Smt. Saraswati Ramanathan

A.Y. : 2004-05. Dated : 19-7-2007

S. 54EC — Exemption is allowable even though investment of
gains in specified bonds is done in joint names.

 

Facts :

The assessee invested proceeds of sale of shares in Rural
Electrification Bonds. The investment was in joint names of herself and her son.
The son did not contribute anything to the investment. The AO denied the
exemption, on the ground that the investment was made in joint names which was
not permitted by the Section. On appeal, the CIT(A) held that there is no such
requirement in the section. Investment in joint names is just a matter of
convenience and hence allowed the exemption. On departmental appeal, the ITAT
dismissed the appeal of the Department and allowed the exemption on the
following grounds :

1. There is no such requirement in the Section that the
investment should be in the name of the assessee.

2. The main object of investment in such corporations is
the development of infrastructure.

3. Once the investment is made in these corporations for
infrastructural development, it would hardly matter whether the investment is
made by the assessee exclusively or in the joint names of the assessee and
somebody else.

4. In the above case, the name of the son was included for
convenience in future since the assessee was 69 years old. Further, the son
also did not contribute anything to the investment.

5. The ITAT also relied on the decision of ITAT, Mumbai
Bench in the case of Joint CIT v. Smt. Armeda K. Bhaya, (2005) 95 ITD
313 wherein the exemption u/s.54 was allowed even though the assessee
purchased the flat in the names of himself, his father and mother.

 


Cases referred to :



(i) CGT v. N. S. Getti Chettiar, (1971) 82 ITR 599
(SC) (para 4)

(ii) CIT (Joint) v. Armeda K. Bhaya (Smt.), (2005)
95 ITD 313 (Mumbai) (para 5)

(iii) R. B. Jodha Mal Kuthiala v. CIT, (1971) 82 ITR 570 (SC) (para
4)

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S. 69 — On-money received on surrender of leasehold rights in agricultural land is capital receipt and cannot be brought to tax u/s.69 as income from undisclosed sources & S. 45 r/w S. 55 — The gain on surrender of tenancy right could not be taxed u/s.45

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 4 (2008) 114 ITD 127 (Ahd.)


ITO v. Heena Agriculture (P) Ltd.

A.Y. 1992-93. Dated : 8-9-2006

S. 69 — On-money received on surrender of leasehold rights in
agricultural land cannot be brought to tax u/s.69 as income from undisclosed
sources —It is a capital receipt.

 

S. 45 r/w S. 55 — The gain on surrender of tenancy right
could not be taxed u/s.45, for the period prior to the amendment brought into
statute with effect from 1-4-1995, in the provisions of S. 55(2).

 

Facts :

The assessee had acquired leasehold rights for a period of 98
years in an agricultural land. In the relevant assessment year, it surrendered
the said rights in favour of the original owner allegedly without any
consideration. However, during the course of search, the director of the
assessee company had given a statement on oath that he had received a sum of
Rs.30 lakhs as on-money on behalf of the assessee on surrendering the leasehold
rights in a land. The sum of Rs.30 lakhs had been brought to tax under these
circumstances, under the provisions of S. 69.

 

On appeal, the CIT(A) deleted the addition.

 

On Revenue’s appeal, the Tribunal held the following :

1. The amount had been taxed on the basis of statement of
the director recorded u/s.132(4) and there was no evidence on record to show
that the said amount related to any other source. Therefore, the amount had
been rightly treated by the CIT(A) as being related to the surrender of
leasehold rights of subject agricultural land. Therefore, addition could not
be made u/s.69 because subject sum was not an un explained investment as
rightly held by the CIT(A).

2. There cannot be any dispute on the argument that
leasehold rights constitute capital asset. However, there was no material on
record to suggest that the assessee had incurred any cost for acquiring the
said tenancy right. The contention of the assessee in this regard was that
there being no cost of acquisition of tenancy right, the gain arising
therefrom cannot be taxed as capital gain as per decision of SC in the case of
CIT v. B. C. Srinivasa Shetty. Following the said case, the Special
Bench in the case of Cadell Weaving Mill Co. (P) Ltd. has held that the amount
received for surrender of tenancy right is not liable for capital gains tax
prior to the amendment brought into the statute in the provisions of S. 55(2)
w.e.f. 1-4-1995.

3. In view of the said legal and factual aspects, the
Commissioner (Appeals) was right in holding that the amount of Rs.30 lakhs
could not be brought to tax, his order is upheld and the appeal of the
Department is dismissed.

 


Cases referred to :



(i) Cadell Weaving Mill Co. (P.) Ltd v. ACIT, (1955)
55 ITD 137 (Bom.) (SB),

(ii) Rajendra Mining Syndicate v. CIT, (1961) 43 ITR
460 (AP),

(iii) CIT v. Sandu Bros. Chembur (P.) Ltd., (2005)
273 ITR 1,

(iv) CIT v. B. C. Srinivasa Shetty, (1981) 128 ITR
294.

 

 

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S. 253 — Faulty internal working in a department not sufficient cause for condoning delay in filing appeal — Department’s contention of communication gap could not be accepted and the appeal being time barred by limitation was to be dismissed

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 3 (2008) 114 ITD 121 (Chd.)


ACIT v. Ranbir Chemicals Industries (P) Ltd.

A.Y. : 1994-95. Dated : 25-2-2007

S. 253 — Faulty internal working in a department cannot be
considered as a sufficient cause for condoning delay in filing appeal — Against
the order of the CIT(A), Revenue filed appeal after 8 years and 47 days, and it
was submitted that the delay was on account of communication gap between the
officers of the Department, and hence should be condoned — Based on the facts,
the Department’s contention could not be accepted and the appeal being time
barred by limitation was to be dismissed in limine.

 

Facts :

For the A.Y. 1994-95, the Commissioner (Appeals) vide an
order dated 8th January 1998, allowed the assessee’s claim for depreciation.
Against this order, the Revenue filed an appeal before the Tribunal after a
delay of 8 years and 47 days, along with an application for condonation of
delay, on the ground that the instant appeal was not filed in time, possibly due
to communication gap between the office of the Commissioner (Appeals) and the
Assessing Officer.

 

Based on the facts of the case, the Tribunal made the
following observations :

1. No reasonable cause had been explained by the Department
for filing the appeal belatedly. Even when the Commissioner (Appeals) in her
order dated 28th July 1998, and the Tribunal in its order dated 23rd September
2003, for the A.Y. 1995-96 pointed out that no appeal had been filed by the
Department against the order of the Commissioner (Appeals) for the A.Y.
1994-95, no action was taken by the Department.

2. It could, therefore, not be believed that there was a
communication gap in the Department which had been claimed as main reason for
filing the appeal belatedly, since the fact was in the notice of the
Department in the year 1998 itself when the order of the Commissioner
(Appeals) was received by the Department. This contention of the Department
could not be accepted and faulty internal working in the Department cannot be
considered to be a sufficient cause for condoning the delay.

3. The appeal was therefore, barred by limitation and
accordingly was to be dismissed in limine.

 


Cases relied on :



(i) J. B Advani & Co. (P.) Ltd. v. R. D. Shah, CIT
(1969) 72 ITR 395 (SC),

(ii) CIT v. Grindlays Bank Ltd., (1994) 208 ITR 700
(Cal.).

(iii) CIT v. Ram Mohan Kabra, (2002) 257 ITR 773
(P&H)

(iv) Soorjamull Nagarmal v. Golden Fibre & Products,
AIR 1969 (Cal.) 381

 

 

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S. 69 — Unexplained investments — Seizure of silver bullion in search explained as inherited by the assessee’s two sons from assessee’s mother — wnership affirmed by the assessee’s sons — Held, the addition in the hands of the assessee was not justified,

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 2 (2008) 114 ITD 1 (Agra) (TM)


Kanhaiyalal Agarwal v. ACIT

A.Y. : Block period 1-4-1996 to 3-11-1996

Dated : 7-11-2007

S. 69 — Unexplained investments — In a search operation
conducted at assessee’s business premises, silver bullion weighing 265.9 kgs was
seized —Assessee explained that 240 kgs of the same was inherited by the
assessee’s two sons from assessee’s mother — Ownership of the bullion was
affirmed by the assessee’s sons — Held, the addition on this account in the
hands of the assessee was not justified, and same had to be considered in the
hands of his sons who were assessees in their own right.


 

Facts :

During the course of a search operation u/s.132(1) conducted
at the business premises of the assessee, silver bullion weighing 265.9 kgs was
seized. The assessee explained that 240 kgs of the silver bullion originally
belonged to his father, who was carrying on silver bullion business, and he gave
the same to his wife prior to his death. The same then continued to remain in
the possession of the assessee’s mother as her property. The silver bullion was
further inherited by the assessee’s sons from their grandmother, and was found
at their residence. The Assistant Commissioner did not accept the explanation
and made the addition as unexplained investment in the hands of the assessee.

 

On assessee’s appeal before the Tribunal, the judicial member
accepted the assessee’s explanation, and deleted the addition. However, the
accountant member opined that the AO was correct in making the addition. Owing
to the difference in opinion, the matter was referred to Third Member.

 

The Third Member observed that :

1. On consideration of the rival submissions made, and the
material brought on record, it was clear that the silver bullion was seized
from the house belonging to the two sons of the assessee, who claimed
ownership of the same. Though there was no direct evidence to prove the factum
of gift of the silver bullion of 240 kgs by the assessee’s mother to her
grandsons, as no Will was executed by her, but that could, however, be the
situation because of the common features prevailing in the Indian families.

2. Based on the circumstantial evidence and material on
record, i.e., the fact that the assessee’s father was carrying on
silver business, and before his death, 240 kgs of silver bullion was handed
over to his wife, the claim of the assessee needs to be accepted.

3. The suspicion entertained by the AO that the assessee’s
mother had handed over the said bullion received from her husband to the
assessee to be distributed equally among his two sons stood explained by the
affidavit stating that she resided with the assessee and his family, who had
taken care of her in old age.

4. The ownership of the bullion was affirmed by the
assessee’s sons. Non-disclosure of the silver bullion by the two sons in their
wealth tax returns was stated to be not liable to tax under the Wealth Tax
Act.

5. On these facts and circumstances, the addition on
account of the silver bullion made in the hands of the assessee to the extent
of 240 kgs of silver might not be justified, and the same had to be considered
in the hands of his sons who were assessees in their own rights.

 


Cases referred to :



(i) CIT v. Smt. Jayalaxmi Devrajan, (2006) 286 ITR
412 (Ker.),

(ii) CIT v. Durga Prasad More, (1971) 82 ITR 540
(SC),

(iii) Mehta Parikh & Co. v. CIT, (1956) 30 ITR 181
(SC).

 

 

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‘Provision for expenses’ on project claimed by estimating liability, substantial part of which incurred within six months from the end of previous year — Balance amount offered for taxation u/s.41(1) — Held, the estimation of liability was reasonable, an

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 1 (2008) 114 ITD 1 (Delhi)


Dy. CIT v. Lurgi India Co. Ltd.

A.Ys. : 2000-01 & 2001-02. Dated : 24-8-2007

Assessee debited certain amount to project expenses as
‘provision for expenses’ and claimed the same u/s.37(1) — Assessing Officer
disallowed the said amount on the grounds that provision was made to meet
certain anticipated expenditure which had not accrued till last date of relevant
previous year. It was found that assessee had estimated its liability in respect
of two projects at certain amount, a substantial part of which was incurred
within six months from the end of previous year — Further the assessee submitted
that the balance amount has been offered for taxation u/s.41(1) — Held, based on
the facts, the estimation of liability by the assessee was a reasonable one, and
the liability was an accrued liability.

 

The assessee had claimed Rs.13,26,724 as ‘provision for
expenses’ in respect of two projects. The Assessing Officer disallowed the
amount, holding that the provision was made to meet certain anticipated
expenditure which had not accrued till the last day of the previous year. Before
the CIT(A), the assessee pointed out that out of the said amount, a sum of
Rs.11,67,210 had actually been utilised or paid before 30-9-2000, and the
balance was offered to tax in the subsequent assessment year. The Commissioner
(Appeals) accepted the above submissions of the assessee, and accordingly
deleted the additions.

 

On Revenue’s appeal, the Tribunal held that :

1. Any liability which is fastened on the assessee in the
case of a completed project, accrues or arises on the date when the project is
completed.

2. It might be difficult at that point to exactly determine
the amount of liability. However, if such amount of liability can be estimated
on a reasonable basis, then such a liability would be an accrued liability and
not a contingent or expected liability. The assessee had estimated its
liability in respect of the two projects at Rs.13,24,724, against which an
expenditure of Rs.11,67,210 had been incurred within six months from the end
of the previous year. Based on the above facts, the estimation of liability by
the assessee could be termed as reasonable, and therefore subject to
verification of the balance amount being offered for taxation, the liability
was an accrued liability.

3. In case the balance amount had been offered for tax in
the subsequent year, then the expenditure represented deductible expenditure.
However, if it was found that the balance amount had not been offered for tax
in the subsequent year, the allowance would be restricted to the expenditure
actually incurred, i.e., Rs.11,67,210.

 


Cases referred to :



(i) Handicrafts & Handloom Exports Corporation of India
v. CIT, (1983) 140 ITR 532,

(ii) K. L. Agarwal v. CIT, (1991) 190 ITR 303,

(iii) CIT v. Indian Textile Engineers (P.) Ltd.,
(1983) 141 ITR 69,

(iv) CIT v. Girharram Hariram Bhagat, (1985) 154 ITR
10.

 

 

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New returns of income notified for A.Y. 2008-09 : Income-tax (Sixth Amendment) Rules, 2008 dated 28-3-2008.

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22 New returns of income notified for A.Y.
2008-09 : Income-tax (Sixth Amendment) Rules, 2008 dated 28-3-2008.


The CBDT has notified new forms of return of income for A.Y.
2008-09 along with the instructions for filling these forms.

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S. 11 r.w. S. 2(15) and S. 13 — Objects for benefit to a section of public are charitable

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19 (2008) 111 ITD 238 (Rajkot) (SMC)


Rajkot Visha Shrimali Jain Samaj v. ITO

A.Y. 2002-2003. Dated : 1-6-2006

S. 11 r.w. S. 2(15) and S. 13 — In order to serve a
charitable purpose, it is not necessary that the object of the assessee trust
should be to benefit the whole of mankind or all persons in a country. It is
sufficient if the intention is to provide benefit to a section of the public as
distinguished from specified individual.

Facts :

The assessee-trust was incorporated on 11-8-1960. The
charitable nature of the activities of the trust was limited to Vishwa Shrimali
Jains, which was a small community. For A.Y. 2002-03, it claimed deduction of
expenditure incurred by it towards earthquake relief. The AO as well as the
CIT(A) disallowed the claim u/s.13(1)(b) on the ground that :

(1) the assessee’s charitable nature of activities was
limited to the benefit of a small religious community;

(2) the CIT(A) also declined to accept the assessee’s
contention that the trust is incorporated before the commencement of the Act,
on the ground that this was an additional ground and this plea was not before
the AO. It is pertinent to note that the documentary evidence with regard to
incorporation was very much on record. On further appeal, the ITAT allowed the
exemption by referring to the following :

(a) An object which is beneficial to a section of public is
an object of general public utility.

(b) The section of the community sought to be benefited
must be sufficiently definite and/or identifiable by some common quality of
public or impersonal nature.

(c) The additional ground which raises a purely legal plea
and which goes to the very root of the matter, the same deserves to be
admitted.


Cases referred to :



(i) National Thermal Power Co. Ltd. v. CIT, (1998)
229 ITR 383 (SC)

(ii) CIT v. Maheshwari Agarwal Marwari Panchayat, (1982) 136 ITR 556
10 Taxman 183 (MP)





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S. 115JB — Extra-ordinary items in profit and loss a/c to be deducted for MAT

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18 (2008) 111 ITD 124 (Hyd.)


Gulf Oil Corporation Ltd. v. ACIT,

Circle-1(4), Hyderabad

A.Y. 2002-2003. Dated : 21-9-2006

S. 115 JB — Extra-ordinary items appearing in profit and loss
a/c to be deducted in computing MAT liability.

The assessee company returned a loss of Rs.34.27 crores.
Provisions of S. 115JB were attracted. The as-sessee had shown two
extra-ordinary items — credit of write-offs/provisions : Rs.3.06 lacs and debit
of Advisory fee for sale of investments : Rs.109.96 lacs — in the P & L A/c. It
was contended by the Revenue that these items are generally classified as part
of P & L Appropriation A/c and hence should be ignored while computing MAT
liability. The assessee computed MAT liability on Rs.978.55 lacs, whereas the
Revenue contended that it should be on Rs.1085.45 lacs. (Ignoring the two referred above).

The learned CIT(A) confirmed the addition, on the ground that
the above items pertain to previous year. The Tribunal allowed the appeal and
referred to the following :

(a) Part-II and Part-III of Schedule VI does not make any
distinction between P & L A/c and P & L Appropriation A/c. It is a manner of
presentation.

(b) Generally, P & L Appropriation A/c includes items of
extra-ordinary nature, dividend, etc. However, as per schedule VI to Companies
Act, 1956, all these items form part of P & L A/c.

(c) The starting point for computing book profits should be
Profit & Loss A/c carried to balance sheet. From this amount, the various
adjustments (additions and deductions) as stated in S. 115 JB should be made.
Explanation to S. 115 JB does not provide for increase/decrease of
extra-ordinary items.

(d) AS-5 merely states that prior period expenses and
extra-ordinary items should be shown separately to know their impact on
operating results. It does not say that these items do not form part of P & L
A/c.


Cases referred :



(i) Apollo Tyres Ltd. v. CIT, (2002) 255 ITR 273

(ii) Bastar Wood Products Ltd. v. Dy. CIT, (1995) 78
Taxman 126

(iii) NSC Estates (P) Ltd. v. Dy. CIT, (2002) 125
Taxman 220







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S. 37 r.w. S. 43B — Interest on account of default in repaying interest-free sales tax loan is compensatory in nature and allowable — S. 43B are not applicable

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17 (2008) 111 ITD 1 (Hyd.)


Southern Electrodes Ltd. v. ACIT

A.Y. 2002-2003. Dated : 31-8-2006

S. 37 r.w. S. 43B of the Income-tax Act, 1961 — Interest
arising on account of default on part of the assessee in repaying interest-free
sales tax loan was compensatory in nature and was to be allowed u/s.37 and also
provisions of S. 43B are not applicable.

Facts :

The Govt. of Andhra Pradesh had given an interest-free sales
tax loan to the assessee company. When the loan was not repaid, interest was
charged to the assessee. The AO as well as the CIT(A) disallowed the said
interest on the following grounds :

(i) The assessee defaulted in repayment of loan and
interest is charged for non-payment of sales tax within the time allowed.

(ii) Interest charged is also in the nature of sales tax;
is penal and covered by S. 43B and hence not allowable.

On further appeal, the ITAT deleted the disallowance
referring to the following :


(a) The charging of interest in case of default is
automatic.

(b) The charging of interest is not within the discretion
of any authority.

(c) Interest payable is not an act of penal nature but it
is only compensatory in nature.



Cases referred to :



(i) Mewar Motors v. CIT, (2003) 260 ITR 218 (Raj.)

(ii) Swadeshi Cotton Mills Co. Ltd. v. CIT, (1998)
233 ITR 199 (SC)

(iii) Padmavati Raje Cotton Mills Ltd. (1999) 239
ITR 355 (Cal.)

(iv) Western Indian State Motors (1987) 167 ITR
395/31 Taxman 412 (Raj.) CIT v. Pheros & Co. (P.) Ltd., (1989) 178 ITR
472/44 Taxman 43 (Gauhati) and a few more.







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S. 147, S. 148 : (a) Notice not valid if issued on basis of transaction not made by assessee. 144 (b) Notice invalid if issued in status of individual while assessment in status of HUF

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16 (2007) 110 TTJ 834 (Del.) (TM)


Suraj Mal HUF v.
ITO

ITA No.1125 (Del.) of 2005

A.Y. 1996-97. Dated : 17-8-2007

S. 147 & 148 of the Income-tax Act, 1961 —




(a) Notice u/s.148 issued to the assessee on the
basis of a transaction which was made by some other person and not by the
assessee was not valid.


(b) Notice issued to the assessee in the status of
individual while the assessment was eventually made in the status of HUF.
Notice was invalid.


(c) After having issued notice u/s.148 to the
assessee as an individual, ITO had no jurisdiction to assess the HUF of the
assessee, even though the assessee had consented to assessment in the status
of HUF.



For A.Y. 1996-97, a notice u/s.147 was issued to Suraj Mal in
respect of land sold by him, in respect of which income from capital gains had
escaped assessment. The ITO, based on submissions made by Suraj Mal, passed
order u/s.148 in the name of Suraj Mal HUF. Before the CIT(A), the assessee
raised the issue that assessment was bad in law, as notice was issued in the
status of individual, whereas the assessment was made in the status of HUF. The
CIT(A), however, held that the Assessing Officer was fully justified in holding
the status of the assessee as that of HUF as against the claim of the status of
an individual.

The Tribunal held that the assessment was without
jurisdiction and could not be sustained. The Tribunal relied on the decisions in
the following cases :

(a) CIT v. K. Adinarayana Murty, (1967) 65 ITR 607
(SC)

(b) AAC v. Late B. Appaiah Naidu, 1974 CTR 147
(SC)/(1972) 84 ITR 259 (SC)


The Tribunal noted as under :

(a) The Impugned notice suffers from several legal
infirmities. In the first place, the transaction noticed related to sale of
some agricultural land sold to KS Ltd. not by the assessee. This is not the
transaction with which the assessee was connected. So, notice was issued in
respect of some other transaction carried out by some other person. Secondly,
the notice is admittedly issued to the assessee as individual. No notice was
issued to the HUF in which status the assessment was subsequently made. The
assessee has vehemently contended throughout that no notice u/s.148 was served
on the assessee. There is neither any finding, nor is there any material to
refute the claim of the assessee.

(b) Notices were issued without application of mind. It is
a settled law that there must be valid reasons, material and circumstances
leading to the belief that income had escaped assessment. Any good or bad
reason is not sufficient to sustain initiation of proceedings u/s.147/148 as
valid. Therefore, no valid proceedings were initiated u/s.147/148.

(c) The Income-tax Act recognises status of HUF different
from individual status of Karta of the HUF. The two are treated as different
legal entities. Therefore, it is necessary that notice u/s.148 should be sent
in a correct status, because jurisdiction to make assessment is assumed by
issuing valid notice.

(d) It is also settled law that assessment under the
Income-tax Act has to be made in accordance with statutory provisions and not
on agreement or consent of the assessee. Therefore, after having issued notice
u/s.148 to the individual, the ITO had no jurisdiction to assess HUF of the
assessee. He could assume jurisdiction by issuing valid notice u/s.148 after
satisfying conditions laid down u/s.147. This was not done and, therefore,
entire proceedings have to be held to be illegal and without jurisdiction.

(e) The Department cannot be permitted to change the status
from individual to HUF. In the first place, the Assessing Officer had no
jurisdiction to assess HUF, as he did not issue any notice u/s.147/148 in the
case of the HUF. This defect of jurisdiction could not be cured by obtaining
consent from the assessee.







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Clarification from RBI for deduction of tax at source on remittance of foreign exchange for import purposes : No. FE.CO.FID.5759/22.20.001/2007-08, dated 11-9-2007.

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24. Clarification from RBI for deduction of
tax at source on remittance of foreign exchange for import purposes : No.
FE.CO.FID.5759/22.20.001/2007-08, dated 11-9-2007.


As per the provisions of S. 195 of the Act, while remitting
any sum chargeable under the Act to a non-resident, tax needs to be deducted at
source. There was some confusion regarding tax to be deducted from remittances
for import of articles or things or computer software, etc. As per A.P. (DIR
Series) Circular No. 3, dated 19 July 2007, RBI clarified that remittance for
such imports also would need CA certification and the procedures prescribed in
CBDT Circular No. 10/2002 (F.No. 500/152/96-FTD) need to be followed. Since
various trade bodies and banks have approached RBI expressing their
apprehensions and difficulties in this matter, RBI has once again taken up the
matter with CBDT. Pending any clarification from the Board, it has been
clarified that the procedure prescribed by CBDT needs to be followed and in case
there are any doubts, the taxpayer needs to approach the Board directly.

 

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Method prescribed for determining the amount of expenditure relating to exempt income : Income-tax (Fifth Amendment) Rules, 2008, dated 24-3-2008.

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23 Method prescribed for determining the
amount of expenditure relating to exempt income : Income-tax (Fifth Amendment)
Rules, 2008, dated 24-3-2008.


Pursuant to an amendment in S. 14A of the Act, the Board has
prescribed a method to determine an amount of expenditure which can be
attributed to exempt income in cases when either the AO is not satisfied with
the correctness of the claim of the assessee for such expenditure or when the assessee has
claimed that no expenditure is incurred in relation to exempt income. As per the
said method the expenditure in relation to exempt income shall be aggregate of
the following 3 amounts :



  •  Expenses directly relating to exempt income



  •  Interest not directly relating to exempt income * Average of the amount of
    investment, on the first and the last days of the year, which generates exempt
    income/average of total assets as appearing on the balance sheet on the first
    day and the last day of the year.



  •  One-half percent of the average value of investment, on the first and the last
    days of the year, which generates exempt income.


 


For the purpose of this Rule, total assets shall mean, total
assets as appearing in the balance sheet excluding the increase on account of
revaluation of assets but including the decrease on account of revaluation of
assets.

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Press Note No. 6 (2008), dated 12-3-2008. —FDI Policy for mining of titanium bearing minerals and ores.

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Part C : RBI/FEMA

Given below are the highlights of 6 Press Notes issued by the
Ministry of Commerce & Industry.

 

21 Press Note No. 6 (2008), dated 12-3-2008.
—FDI Policy for mining of titanium bearing minerals and ores.

The guidelines for mining of titanium bearing minerals and
ores are :

 

FDI up to 100% is allowed after obtaining prior approval of
FIPB in mining and mineral separation of titanium bearing minerals and ores, its
value addition and integrated activities, subject to sectoral regulations and
the Mines and Minerals (Development and Regulation) Act, 1957.

 

In case of separation of titanium bearing minerals and ores,
the following additional conditions will apply :



(a) Value addition facilities are set up in India along
with transfer of technology.

(b) Disposal of tailing during mineral separation will be
carried out in accordance with regulations framed by the Atomic Energy
Regulatory Board.

 


FDI will not be allowed in mining of ‘prescribed substances’
listed in the Government of India Notification No. S.O. 61(E), dated 18-1-2006
issued by the Department of Atomic Energy.

 

FDI policy Annexed to Press Note No. 4 (2006), dated 10-2-2006 stands
modified to the extent stated above.

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Press Note No. 5 (2008), dated 12-3-2008. — Rationalisation of FDI Policy for the Petroleum & Natural Gas Sector.

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New Page 1

Part C : RBI/FEMA

Given below are the highlights of 6 Press Notes issued by the
Ministry of Commerce & Industry.

 

20 Press Note No. 5 (2008), dated 12-3-2008.
— Rationalisation of FDI Policy for the Petroleum & Natural Gas Sector.

FDI policy in the Petroleum & Natural Gas sector has been
rationalised as under :



(a) The condition of compulsory divestment of up to 26%
equity within 5 years, in case of 100% foreign ownership in companies engaged
in actual trading and marketing of petroleum products, stands deleted.

(b) FDI up to 49% is allowed after obtaining prior approval
of FIPB in petroleum refining by Public Sector Undertakings (PSU) without
involving any divestment or dilution of equity in existing PSU.

 


FDI policy Annexed to Press Note No. 4 (2006), dated
10-2-2006 stands modified to the extent stated above.

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Press Note No. 4 (2008), dated 12-3-2008. — FDI Policy for the Civil Aviation Sector.

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New Page 1

Part C : RBI/FEMA

Given below are the highlights of 6 Press Notes issued by the
Ministry of Commerce & Industry.

 

19 Press Note No. 4 (2008), dated 12-3-2008.
— FDI Policy for the Civil Aviation Sector.

The guidelines for Foreign Direct Investment (FDI) in Civil
Aviation sector are :

Airports :



(a) Greenfield projects — FDI up to 100% is permitted under
the automatic route.

(b) Existing projects — FDI up to 100% is allowed. However,
investment beyond 74% will require FIPB approval.

 


Air Transport Services :



(a) Scheduled Air Transport Service/Domestic Scheduled
Passenger Airline — FDI up to 49% and investments by Non-Resident Indians (NRI)
up to 100% under the automatic route. However, foreign airlines cannot make
any investment, direct or indirect.

(b) Non-Scheduled Air Transport Service/Non-Scheduled
Airlines & Chartered Airlines — FDI up to 74% and investments by NRI up to
100% under the automatic route. However, foreign airlines cannot make any
investment, direct or indirect.

(c) Cargo Airlines — FDI up to 74% and investments by NRI
up to 100% under the automatic route.

(d) Helicopter Services/Seaplane Services requiring DGCA
approval — FDI up to 100% allowed under the automatic route.

 


Civil Aviation Sector :



(a) Ground Handling Services — FDI up to 74% and
investments by NRI up to 100% under the automatic route. This is subject to
sectoral regulations and security clearances.

(b) Maintenance and Repair organisations, flying training
institutes and technical training institutions — FDI up to 100% allowed under
the automatic route.

 


FDI policy Annexed to Press Note No. 4 (2006), dated
10-2-2006 stands modified to the extent stated above.

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Press Note No. 3 (2008), dated 12-3-2008. — Guidelines for Foreign Direct Investment (FDI) in Credit Industrial Parks.

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New Page 1

Part C : RBI/FEMA

Given below are the highlights of 6 Press Notes issued by the
Ministry of Commerce & Industry.


 


18 Press Note No. 3 (2008), dated 12-3-2008.
— Guidelines for Foreign Direct Investment (FDI) in Credit Industrial Parks.

This press note clarifies that FDI up to 100% under the
automatic route will be allowed in established Industrial Parks as well as for
setting new Industrial Parks and the conditions mentioned in Press Note 2 (2005)
would not be applicable, provided :

1. The Industrial Park comprises of 10 units and no single
unit occupies more than 50% of the allocable area.

2. The minimum area allocated for industrial activity is
not less than 66% of the total allocable area of the Industrial Park.


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Press Note No. 2 (2008), dated 12-3-2008 — Guidelines for foreign Investment in Commodity Exchanges.

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New Page 1

Part C : RBI/FEMA

Given below are the highlights of 6 Press Notes issued by the
Ministry of Commerce & Industry.


17 Press Note No. 2 (2008), dated 12-3-2008
— Guidelines for foreign Investment in Commodity Exchanges.

The guidelines for foreign investment in Commodity Exchanges
are :



1. Foreign investment i.e., Foreign Direct
Investment (FDI) and Portfolio Investment Scheme (PIS) is allowed up to 49%
after obtaining prior approval from FIPB.

2. Investment by FII under PIS will be limited to 23% and
they can buy only in the secondary market.

3. Investment under FDI will be limited to 26%.

4. No foreign investor/entity, including persons acting in
concert, can hold more than 5% of the equity in these companies.



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Press Note No. 1 (2008), dated 12-3-2008. — Guidelines for Foreign Investment in Credit Information Companies.

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New Page 1

Part C : RBI/FEMA

Given below are the highlights of 6 Press Notes issued by the
Ministry of Commerce & Industry.

 

16 Press Note No. 1 (2008), dated 12-3-2008.
— Guidelines for Foreign Investment in Credit Information Companies.

The guidelines for foreign investment in Credit Information
Companies (CIC) are :



1. Foreign investment in CIC is subject to the Credit
Information Companies (Regulation) Act, 2005.

2. Foreign investment i.e., Foreign Direct
Investment (FDI) and Portfolio Investment Scheme (PIS) is allowed up to 49%
after obtaining prior approval from Foreign Investment Promotion Board (FIPB)
and regulatory clearance from RBI.

3. Foreign Institutional Investors (FII) can invest up to
24% in CIC listed on Stock Exchanges, provided :



(a) No single FII can directly or indirectly hold more
than 10% of the equity.

(b) Any acquisition in excess of 1% will have to be
reported to RBI.

(c) FII cannot seek representation on the Board of
Directors based on their shareholding.

 




In Annex to Press Note No. 4 (2006), dated 10-2-2006 ‘Credit
Reference Agencies’ is deleted from list of NBFC activities.

 

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Non-filing of VAT returns : Trade Cir. No. 7T of 2008, dated 5-3-2008.

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Maharashtra VAT :


 

15 Non-filing of VAT returns : Trade Cir.
No. 7T of 2008, dated 5-3-2008.

The Circular states that in cases where show-cause notices
for prosecution due to non-filing of returns have been issued, and pursuant to
notices, the dealers file their returns before actual launch of prosecution
proceedings, the prosecution proceedings would be dropped. However, the interest
and penalty provisions would apply in these cases also. This relaxation would be
available only till 31-3-2008.

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E-returns under MVAT : Trade Cir. No. 8T of 2008 No. VAT/AMD-1007/1B/Adm-6 Mumbai, dated 19-3-2008.

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Maharashtra VAT :

14 E-returns under MVAT : Trade Cir. No. 8T
of 2008 No. VAT/AMD-1007/1B/Adm-6 Mumbai, dated 19-3-2008.

It has now been made mandatory for registered dealers of
Maharashtra, whose tax liability in the previous year was Rs.1 crore or more to
file returns electronically for the periods starting on or after 1st February
2008. The condition which has been prescribed is that the tax payment needs to
be made first before filing the e-return. New forms have been prescribed in this
new scheme. Since it is a new scheme, for these dealers who are e-filing their
return of Vat, for the month of March, the due date has been extended till 31
March 2008. Templates of new return forms as well as detailed guidance is
provided on the new website of the Sales Tax Department www.mahavat.gov.in In
case the dealer has a digital signature, then the return can be uploaded along
with the signature, otherwise a paper return needs to be filed within 10 days of
uploading the e-return. In case of dealers not required to file the e-return,
they have the option to file their returns in the old or new forms. There is a
new procedure prescribed for certain dealers under the Package Scheme of
Incentives. Certain dealers were permitted to file separate returns for their
respective places or constituents of the business. This permission stands
withdrawn. There are other amendments also made for filing of returns by deemed
authorised dealers, as also change in periodicity for newly registered dealers.

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Service Tax (Publication of Names) Rules, 2008 : Notification No. 15/2008-Service Tax, dated 1-3-2008.

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New Page 1

Service tax


 

13 Service Tax (Publication of Names) Rules,
2008 : Notification No. 15/2008-Service Tax, dated 1-3-2008.

These Rules have been notified so as to prescribe the rules
for publication of names and particulars of specified persons who have
intentionally evaded or failed to pay Service Tax. These names could be
published only after due dates of filing appeals at various stages have expired
and no appeals have been filed in this respect. Also, the jurisdictional
Commissioner of Excise would forward the proposal to print the names of
defaulters in the format prescribed to the Chief Commissioner who would in turn
clear/reject it within 15 days. In case it is cleared, then the proposal is
passed on to the Board, who on their own also, would publish such names. Further
guidelines have been issued in this matter vide Circular No. 100/3/2008-ST,
dated 12-3-2008.

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In case of a person located outside India, who for his customer who is also located outside India, books accommodation in hotel in India, then provision of taxable service by such person is exempted from Service Tax : Notification No. 14/2008-Service Tax,

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Service tax


 

12 In case of a person located outside
India, who for his customer who is also located outside India, books
accommodation in hotel in India, then provision of taxable service by such
person is exempted from Service Tax : Notification No. 14/2008-Service Tax,
dated 1-3-2008.

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Unconditional exemption from service tax is being provided to the extent of 75% of the gross amount charged as freight for services provided by a goods transport agency in relation to transport of goods by road in a goods carriage : Notification No. 13/20

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Service tax


11 Unconditional exemption from service tax
is being provided to the extent of 75% of the gross amount charged as freight
for services provided by a goods transport agency in relation to transport of
goods by road in a goods carriage : Notification No. 13/2008-Service Tax, dated
1-3-2008.

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Goods Transport Agency service is being excluded from the scope of output service under CENVAT Credit Rules, 2004 : Notification No. 12/2008-Service Tax, dated 1-3-2008.

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Service tax


 

10 Goods Transport Agency service is being
excluded from the scope of output service under CENVAT Credit Rules, 2004 :
Notification No. 12/2008-Service Tax, dated 1-3-2008.

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Limit for registration of special category of persons and exemption from registration has been increased from 7 lacs to 9 lacs w.e.f. 1-4-2008 : Notification No. 9/2008, 10/2008 and 11/2008-Service Tax, dated 1-3-2008.

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Service tax


 

9 Limit for registration of special
category of persons and exemption from registration has been increased
from 7 lacs to 9 lacs w.e.f. 1-4-2008 : Notification No. 9/2008, 10/2008 and
11/2008-Service Tax, dated 1-3-2008.

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S. 44AA : Assessee in contract business : Provision for compulsory maintenance of books of accounts not applicable

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Part A — Reported Decisions



42 (2008) 300 ITR (AT) 310 (Cochin)

C. H. Aboobacker Haji v. ITO

A.Y. 2004-05. Dated : 14-7-2006

S. 44AA, S. 271A —Assessee engaged in contract business —
Provision for compulsory maintenance of books of accounts not applicable —
Survey action after issuing notice — Circumstances that AO unable to compute
income of assessee due to non-maintenance of accounts as required by S. 44AA(2)
does not arise — Held, penalty is not leviable.


Facts :

The assessee, a civil contractor had filed his return of
income for A.Y. 2004-05 showing a turnover of Rs.69,22,579 and he had estimated
the income at the rate of 5% of total contract receipts. For earlier years (A.Y.
2000-01 and 2001-02), the assessee had declared his income at the rate of 8% of
the gross contract receipts. Subsequently, there was a survey action against the
assessee u/s.133A and on finding that the assessee had omitted some contract
receipts, the AO concluded that the assessee had violated the provisions of S.
44AA and issued a notice u/s.274 r.w.s. 271A on 10-1-2005 while the actual
assessment order was passed on 23-6-2006. The assessee challenged the impugned
order of the AO before the CIT (A) but without any success.

On appeal to ITAT, the Tribunal held that the penalty was not
leviable and referred to the following :

(1) On the perusal of the provisions of S. 44AA held that
the assessee’s case was not covered by S. 44AA(1).

(2) At most, S. 44AA(2) may be applicable but for
attracting the said Section the condition that the AO was unable to compute
the income of the assessee was not satisfied, because the AO had passed the
penalty order prior to the completion of the assessment.

(3) It may be worth mentioning that the assessee had
offered Rs.5 lakhs as an additional income from his contract business, which
has been accepted without further comments or observation by the AO.

(4) Further, reliance was also placed on well-settled
principle of law as laid down by the Apex Court in the case of Hindustan Steel
Ltd. (1972) 83 ITR 26 (SC) that penalty proceedings are quasi-criminal in
nature and it must be brought on record by the AO that the assessee has
deliberately acted in defiance of law or was guilty of conduct contumacious or
dishonest, but in the reasoning given by the AO in the assessment order,
nothing has been mentioned. Hence, the penalty levied by the AO u/s.271A was
deleted.


Case referred to :

(i) Hindustan Steel Ltd. v. State of Orissa, (1972) 83 ITR 26 (SC).

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U/s. 80-IB : Profit out of processing, selling and exporting marine products is profit attributable to cold storage and hence entitled to deduction

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Part A — Reported Decisions



41 (2008) 300 ITR (AT) 182 (Mumbai)

Sumaraj Seafoods Pvt. Ltd. v. ITO

A.Y. 2001-02 to 2003-04.

Dated : 26-6-2007

U/s.80-IB — Profit out of processing, selling and exporting
marine products is profit attributable to cold storage and hence entitled to
deduction u/s. 80IB.

The assessee company was engaged in the business of marine
products, storing it in the cold storage and exporting it. The AO denied the
deduction u/s.80-IB on the ground that processing of fish could not be held as
an industrial undertaking. The Appellate Authority denied the deduction on the
ground that separate computation of profit from cold storage was not provided by
the assessee.

On appeal to ITAT, it allowed the deduction u/s.80-IB and
referred to the following :

(1) The only activity conducted by the assessee is to
purchase, process, store (fish and other sea foods) in its cold storage plant
and then export the same.

(2) Thus, the operation of its cold storage plant is a very
essential and critical element in this activity of undertaking.

(3) The operation of a cold storage plant would definitely
result in certain value addition to a product and such value addition should
be considered as profits derived from operation of a cold storage plant.

(4) The profits derived from the industrial undertaking
have a close and proximate nexus with the operation of its cold storage plant.


Cases referred to :



(i) CIT v. Asian Marine Products Pvt. Ltd., (1999)
239 ITR 349 (Mad.)

(ii) CIT v. George Marjo Exports Pvt. Ltd., (2001)
250 ITR 446 (Mad.)

(iii) CIT v. Relish Foods, (1999) 237 ITR 59 (SC)

(iv) CIT v. Sterling Foods, (1999) 237 579 (SC)

(v) National Thermal Power Corporation Ltd. v. Addl.
CIT, (2004) 91 ITD 101 (Delhi)

(vi) Pandian Chemicals Ltd. v. CIT, (2003) 262 ITR
278 (SC)



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S. 234B : Advance tax : Interest on shortfall in payment of advance tax — Interest is payable up to the date of regular assessment and not up to the date of AO consequential to the Tribunal order

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Part A — Reported Decisions



40 (2008) 300 ITR (AT) 96 (Delhi)

Freightship Consultants P. Ltd. v. ITO

A.Ys. 1996-97 & 1997-98.

Dated : 25-5-2007

S. 234B — Advance tax — Interest on shortfall in payment
of advance tax — Interest is payable up to the date of regular assessment and
not up to the date of order passed by Assessing Officer in consequence of the
order passed by the Tribunal.


Facts :

The Assessing Officer did not allow the claim of the assessee
u/s.80-O of the Income-tax Act, 1961 for A.Ys. 1996-97 and 1997-98. On appeal,
CIT(A) allowed it in totality. However, in second appeal before Tribunal filed
by the Revenue, ITAT directed the AO to allow deduction u/s.80-O of the Act on
net income. As per the order of ITAT, the Assessing Officer determined the
income for both the years and issued demand notices and also charged interest
u/s.234B up to the date of assessment orders. The said demands were paid by the
assessee.

The AO subsequently passed order u/s.154 of the Act as he was
of the opinion that interest charged by him u/s.234B up to the date of
assessment was wrong and it should have been charged up to the date of
reassessment framed u/s.254/143(3) of the Act. This order was upheld by the
CIT(A). On appeal to the Tribunal it was held that :

(1) As per Explanation 1 to S. 234B of the Act, ‘assessed
tax’ means the tax on the total income determined u/s.143(1) or on ‘regular
assessment’ as reduced by amount of tax deducted or collected at source in
accordance with provisions of chapter XVII on any income which is subject to
such deduction or collection.

2. The Supreme Court in Modi Industries Ltd. v. CIT,
(1995) 216 ITR 759 laid down that ‘regular assessment’ has been defined in S.
2(40) to mean the assessment made u/s.143 or u/s.144.

3. Hence, it was the duty of the assessing officer to
charge interest u/s.234B of the Act up to the date of passing the assessment
order and not up to the date of order passed by him in consequence of the
order passed by the Tribunal.


Cases referred to :



(i) CIT v. Anjum Ghaswala, (2001) 252 ITR 1 (SC)

(i) Modi Industries Ltd. v. CIT, (1995) 216 ITR 759
(SC)


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S. 80-I/80-IA : Assessee manufacturing gutka and pan masala containing tobacco not entitled to deduction

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Part A — Reported Decisions


39 (2008) 300 ITR (AT) 50 (Pune) (SB)

Dhariwal Industries Ltd. v. ACIT

A.Ys. 1993-94 to 1995-96 and 1997-98 to 2000-01. Dated :
14-8-2007

S. 80I, S. 80IA, S. 143, S. 263, Sch. XI (item 2) —Assessee
manufacturing gutka and pan masala containing tobacco claiming deduction
u/s.80-I and u/s.80-IA — Deduction not allowed stating that the item is covered
under ‘tobacco preparations’, ‘chewing tobacco’ as mentioned in item (2) of Sch.
XI — Held, gutka would fall within the meaning of term ‘tobacco preparations’
and ‘chewing tobacco’.

Facts :

The assessee, a company engaged in the business of
manufacturing gutka and pan masala containing tobacco, had claimed deduction
u/s.80-I/80-IA, which was allowed by the AO. The CIT invoked S. 263 by stating
that gutka manufactured by the assessee is a ‘tobacco preparation’ within the
meaning of item no. 2 in the Sch. XI and thus not eligible for deduction
u/s.80-I/80-IA and the order passed by the AO was erroneous and prejudicial to
the interest of the Revenue.

On appeal to the ITAT, the Special Bench of the Tribunal,
relying on the following grounds, held that the assessee’s business of
manufacturing gutka was not entitled to deduction u/s.80-IB, as the same is
covered by item no. 2 of Sch. XI :

(1) Reliance was placed on the decision of the Allahabad
Tribunal in the case of Kothari Products Ltd., (1991) 37 ITD 285 wherein it
was held that zarda yukt pan masala does not fall under the expression
‘tobacco preparation’. Further, the Allahabad High Court and also the Suprme
Court have declined to interfere with the aforesaid order, thus ruling that
the question under consideration is a question of fact and not a question of
law.

(2) Further, ‘tobacco preparation’ would cover all those
preparations and products which are prepared using tobacco, if the properties
of tobacco are retained in the preparation without undergoing any
metamorphosis as a result of addition of other ingredients. Hence, even 6–7%
content of tobacco in gutka is sufficient to call it ‘tobacco preparation’.

(3) The expression ‘tobacco preparation’ has to be
understood in contradistinction to a ‘tobacco-less preparation’. As a
‘tobacco-less preparation’ cannot become a ‘tobacco preparation’, by the same
logic ‘tobacco preparation’ cannot become ‘tobacco-less preparation’. Hence,
it cannot be said that ‘gutka’ is a ‘tobacco-less preparation’.

(4) Further, the words ‘such as’ used in item 2 of Sch. XI
do not limit the ambit to the specific 7 items in item no. 2. The words ‘such
as’ are illustrative and not exhaustive.

(5) In addition, without prejudice to the above, even if it
is assumed that the words ‘such as’ in item no. 2 of Sch. XI are in the nature
of limitation, gutka and pan masala would fall under ‘chewing tobacco’, an
item mentioned in item no. 2 of Sch. XI.

(6) Further, classification by various provisions of the
Acts dealing with Central Excise and Sales Tax, as relied upon by the
assessee’s authorised representative, is hardly relevant for deciding the
scope of ‘tobacco preparations’ and ‘chewing tobacco’ under the I.T. Act.

(7) Hence, the CIT was correct in invoking the provisions
of S. 263 as the presumptions made by the AO regarding the nature of the
business of the assessee and the profits arising from them were completely
incorrect and the AO had granted deduction without taking note of the most
crucial part of the case i.e., the assessee was manufacturing gutka and
it was held that the assessee was not entitled to deduction u/s.80-IB.


Cases referred to :




(i) Bajaj Tempo Ltd. v. CIT, (1992) 196 ITR 188
(SC);

(ii) Collector of Central Excise v. Parle Exports P.
Ltd., (1990) 183 ITR 624 (SC);

(iii) CIT v. Taj Mahal Hotel, (1971) 82 ITR 44 (SC);

(iv) CIT v. Venkateswara Hatcheries (P.), (1999) 237
174 (SC);

(v) Kothari Products Ltd. v. ACIT, (1991) 37 ITD 285
(All.);

(vi) Malabar Industrial Co. Ltd. v. CIT, (2000) 243
ITR 83 (SC) and many others.



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Employees’ Provident Fund (Third Amendment) Scheme 2008; and Employees’ Pension (Third Amendment) Scheme 2008 : Notification No. F.No. S-35012/05/2008. SS-II dated 1-10-2008.

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New Page 1Part D :
Miscellaneous

13 Employees’ Provident Fund (Third
Amendment) Scheme 2008; and Employees’ Pension (Third Amendment) Scheme 2008 :
Notification No. F.No. S-35012/05/2008. SS-II dated 1-10-2008.

The Ministry of Labour and Employment, Government of India
has cleared the abovementioned scheme which modifies the Employees’ Provident
Fund Scheme, 1952. This scheme has enlarged the applicability to all non-Indians
employed in India and all Indians employed abroad.

 

A new category has been introduced of an ‘International
Worker’, defined to mean an Indian employee who has worked/or going to work in a
foreign country with which India has a social security agreement on reciprocal
basis. This is with the condition that the employee is eligible under the social
security agreement. International Worker also includes an employee, other than
an Indian employee, holding other than an Indian passport and working for an
establishment in India to which the PF Act applies. This scheme is however not
applicable to International Workers who is contributing to the Social Security
Schemes of his country of origin viz. Belgium, France and Germany with
whom, India has signed Social Security Agreements or Totalisation Agreements
thereby enjoying the status of a detached worker. This scheme is also applicable
to International Workers who are employed by third parties. These changes will
result in additional financial burden of 12% of base pay (8.33% towards
Provident Fund and 3.67% towards Pension Scheme) on the employees and a similar
amount (i.e. 12% of base pay) on the employer. Employers have to incur
additional compliance cost by way of filing returns with the Indian authorities
on a regular basis. This amendment would be effective once notified in the
gazette.

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A.P. (DIR Series) Circular No. 36, dated 4-4-2008 — Liberalised Remittance Scheme for Resident Individuals — Reporting.

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Given below are the highlights of RBI Circulars.


 

29 A.P. (DIR Series) Circular No. 36, dated
4-4-2008 — Liberalised Remittance Scheme for Resident Individuals — Reporting.

Presently, banks are required to furnish information to RBI
in respect of the Liberalised Remittance
Scheme on a quarterly basis in the prescribed format.

This Circular requires the information to be submitted by the
banks on a monthly basis from April, 2008 onwards in the format annexed to this
Circular.

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New procedure for issuance of statutory declaration and forms under C.S.T. Act, 1956 : Trade Circular No. 15T.

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M-VAT

28 New procedure for issuance of statutory
declaration and forms under C.S.T. Act, 1956 : Trade Circular No. 15T.

To overcome the difficulties faced by the dealers as well as
the staff of the Sales Tax office at Mazgaon, procedure for obtaining the
statutory declarations/ forms such as ‘C’, ‘H’ and ‘F’ have been streamlined
wherein certain days have been allocated for certain tasks and certain officers
are also dedicated for this purpose. The timings and days as per new procedure
are summarised as under :

It may be noted that there would no change for dealers making
on-line application as well as dealers outside Mumbai city and suburbs. The new
procedure would apply from 28-4-2008.

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Uncertainty over CST rate cut : Maharashtra Govt. asks dealers to continue collecting 3% on interstate sales : Trade Circular No. 14T of 2008, dated 15-4-2008.

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M-VAT

27 Uncertainty over CST rate cut :
Maharashtra Govt. asks dealers to continue collecting 3% on interstate sales :
Trade Circular No. 14T of 2008, dated 15-4-2008.

The Finance Minister in the Budget speech has informed the
reduction in the CST rate from 3% to 2% with effect from 1-4-2008. However, a
Notification giving effect to such change is yet not issued. Hence the
Maharashtra Government has advised dealers to deduct CST @ 3% till the
Notification for reduction in the rate is issued and gazetted.

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Refund of Service Tax paid on taxable services : Instruction F. No. 341/15/2007-TRU, dated 17-4-2008.

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26 Refund of Service Tax paid on taxable
services : Instruction F. No. 341/15/2007-TRU, dated 17-4-2008.


The Board has issued instructions for refund claims of
Service Tax paid on taxable services which could be attributable to exports, but
which are not input services, stating that the refund claims need to be
processed within 30 days of filing of the application by the exporter. In case
it is not processed within the set time limit, the matter needs to be reported
by the Commissioners to the Chief Commissioners in prescribed format by 10th of
every month. Further in case the matter is not settled within 45 days of filing,
then the matter needs to be escalated to the Member (Service Tax).

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Clarification regarding Service Tax Refund for export of services : Policy Circular No. 1 (RE-08)/2004-2009, dated 11-4-2008.

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Service tax :


25 Clarification regarding Service Tax
Refund for export of services : Policy Circular No.
1 (RE-08)/2004-2009, dated 11-4-2008.


In addition to the various Circulars that have been notified
in the recent past pursuant to the decision to refund/exempt Service Tax on
export of services, further clarifications have been issued as under :



  •  Services which would be exempt from Service Tax include participation in
    exhibition outside India, services availed outside the country such as Customs
    House Agent (CHA) Services, Accountancy Services, etc.



  •  For the newly introduced service ‘Foreign exchange dealer’, there would be no
    Service Tax on exports as well as imports.



  •  Clearing and forwarding agency, handling of exports cargo would not be liable
    to Service Tax



  • In case there are new areas notified for levy of Service tax, simultaneous
    refund notifications would also be issued for exports wherever proper linkages
    can be established.


 

 

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Exemption limit for small service providers increased from 8 lacs to 10 lacs with effect from 1 April, 2008 : Notification No. 8/2008-Service Tax, dated 1-3-2008.

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Service tax


 

8 Exemption limit for small service providers
increased from 8 lacs to 10 lacs with effect from 1 April, 2008 : Notification
No. 8/2008-Service Tax, dated 1-3-2008.

 

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Works Contract (Composition Scheme for Payment of Service Tax Amendment) Rules, 2008 : Notification No. 7/2008-Service Tax, dated 1-3-2008.

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Service tax


 7 Works Contract (Composition Scheme for
Payment of Service Tax Amendment) Rules, 2008 : Notification No. 7/2008-Service
Tax, dated 1-3-2008.

The rate prescribed for optional scheme for payment of
Service Tax for works contract service has been enhanced from the present rate
of 2% of the total value of the contract to 4% of the total value of the
contract.

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Taxation of Services (Provided from outside India and received in India) Rules, 2006 : Notification No. 6/2008-Service Tax, dated 1-3-2008.

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Service tax


6 Taxation of Services (Provided from outside
India and received in India) Rules, 2006 : Notification No. 6/2008-Service Tax,
dated 1-3-2008.

Under the reverse charge method, provision of notified
services through Internet, etc. in relation to any goods or materials or any
immovable property, as the case may be, situated in India at the time of
provision of service, whether or not partly performed outside India, shall be
treated as performed in India and leviable to Service Tax.

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Export of Services (Amendment) Rules, 2008 : Notification No. 5/2008-Service Tax, dated 1-3-2008.

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Service tax

5 Export of Services (Amendment) Rules, 2008
: Notification No. 5/2008-Service Tax, dated 1-3-2008.

Export of service rules have been amended to consider
services including management, maintenance or repair, technical testing and
analysis and technical inspection and certification services which are provided
remotely through Internet or an electronic network including a computer network
or any other means, in relation to any goods or materials or any immovable
property, situated outside India at the time of provision of service, whether or
not partly performed in India, shall be treated as performed outside India and
treated as export of service.

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Service Tax (Amendment) Rules, 2008 : Notification No. 4/2008-Service Tax dated 1-3-2008.

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Service tax

4 Service Tax (Amendment) Rules, 2008 :
Notification No. 4/2008-Service Tax dated 1-3-2008.

The following major amendments have been carried out by this
notification :


à
The Board has allowed payment of advance Service Tax, provided intimation is
submitted with the jurisdictional office and in the next return of Service
Tax, the said advance tax is duly disclosed.

à
Self-adjustment of excess service tax paid is enhanced from Rs.50000 up to
Rs.1 lakh for a relevant month or quarter, as the case may be.

à
Period for filing of revised return has been increased from sixty days to
ninety days.

à
Penalty for late filing of return may be reduced or waived by the concerned
officer on being satisfied that there was reasonable cause for delay.

 


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Clarification issued by the Finance Ministry on retrospective amendment to S. 271(1)(c) : Press Release BSC/SS/GN-67/08 dated 14-3-2008.

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3 Clarification issued by the Finance
Ministry on retrospective amendment to S. 271(1)(c) : Press Release BSC/SS/GN-67/08
dated 14-3-2008.


It has been clarified that the amendment has been made only
to settle the contrary views expressed by different Courts. However,
retrospective amendment will not prejudice taxpayers’ right to agitate the levy
of penalty on merits. Further, while no separate satisfaction is required to be
recorded before initiating penalty proceedings, it is still incumbent upon the
Assessing Officer to record his satisfaction before levying the penalty.
Accordingly, there is neither violation of the principle of natural justice, nor
any prejudice caused to the taxpayer as a result of the retrospective amendment.

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Clarification regarding transactions under Securities Lending and Borrowing Scheme issued by SEBI : Circular No. 2/2008, dated 22-2-2008.

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2 Clarification regarding transactions under
Securities Lending and Borrowing Scheme issued by SEBI : Circular No. 2/2008,
dated 22-2-2008.


It has been clarified that the exemption under Section 47(xv)
of the Act would apply to transfers/ transactions under the new scheme notified
by SEBI vide Circular No. MRD/DoP/SE/DEP/Cir. 14/2007, dated 20-12-2007.
Consequently there would be no capital gains liability on these transfers/
transactions. Also securities transaction tax would not be levied on these
transactions.

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Explanatory notes to the provisions of the Finance Act, 2007 : Circular no. 3/ 2008, dated 12-3-2008

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1 Explanatory notes to the provisions of the
Finance Act, 2007 : Circular no. 3/ 2008, dated 12-3-2008.


A detailed Circular has been issued by the CBDT to clarify as
well as explain the amendments made by the Finance Act, 2007 i.e., the
Budget of last year.

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S. 272A(2)(e) : No penalty imposable where net income before deduction u/s.11 below taxable limit

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Tribunal News

1) Hitesh D. Gajaria v. ACIT


ITAT ‘K’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 992/Mum./2007

A.Y. : 2003-04. Decided on : 22-2-2008

Counsel for assessee/revenue : Deepak Shah/

Manvendra Goyal

S. 271B r.w. S. 44AB of the Income-tax Act, 1961 — Penalty
for failure to get accounts audited — Assessee, a chartered accountant by
profession, being proprietor and also a partner in a firm — Gross receipts
excluding his share of income from the firm was less than Rs.10 lacs — Penalty
imposed for failure to get the accounts audited — Whether AO justified — Held,
No.

Per P. Madhavi Devi :

Facts :

The assessee was a chartered accountant by profession. He had
a proprietory concern besides being a partner in Bharat S. Raut & Co. During the
year, he received share of profit and remuneration from the said firm, each of
which was more than Rs.10 lacs. However, the gross receipts earned by his
proprietary concern were less than Rs.10 lacs. According to the AO, the
provisions of S. 44AB were applicable. However, the assessee relying on the
opinion of the senior counsel contended that partner’s allocated amounts were
not gross receipts as contemplated in S. 44AB and accordingly, he was not
required to get the accounts audited. However, the AO did not agree and levied a
penalty u/s.271B r.w. S. 274 of the Act. On appeal, the CIT(A) confirmed the
AO’s order.

Held :

The Tribunal noted that assessee’s major income was not from
profession, but from the share of his profit from the professional firm.
According to it, share of profit cannot be equated with income from profession.
Further, it noted that the assessee had relied on the opinion of the senior
counsel, where-in it was opined that it was not necessary to get the accounts
audited. Therefore, relying on the Jodhpur Bench decision in the case of Dr.
Sunderlal Surana, the Tribunal held that the assessee had reasonable cause for
the failure to get his accounts audited as required u/s.44AB of the Act.
Accordingly, the penalty imposed by the lower authorities was deleted.

Case referred to :


Dr. Sunderlal Surana v. ITO, (2006) 105 TTJ (Jd) 907


2) ITO
v.
Lalitaben B. Kapadia



ITAT ‘K’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 8763/Mum./2004

A.Y. : 2001-02. Decided on : 20-9-2007

Counsel for assessee/revenue : N. R. Agarwal/

Milind Bhusari

S. 55A of the Income-tax Act, 1961 — Reference to
Valuation Officer — Value returned by the assessee was more than the fair market
value arrived at by the Valuation Officer and accepted by the AO — Whether
action of the AO in making reference to the Valuer justifiable — Held, No.


Per P. Madhavi Devi :

Facts :

The assessee had returned income under the head long-term
capital gain from the sale of immovable property. For the purpose, the assessee
had shown fair market value (FMV) as on 1-4-1981 as Rs.10 lacs. U/s.55A, the AO
made reference to the Valuation Officer who valued the property at Rs.6.6 lacs
as on the said date. On appeal, the CIT(A) took the FMV at Rs.9.36 lacs. Being
aggrieved, the Revenue appealed before the Tribunal.

Held :

According to the Tribunal, reference u/s.55A could be made
only if the AO was of the opinion that the value returned by the assessee was
less than its FMV. The act of the AO in accepting the valuation made u/s.55A,
which was undoubtedly less than the FMV claimed by the assessee, proved that the
AO was of the opinion that the assessee’s claim was more than its FMV. Thus,
according to the Tribunal, the AO was not justified in making reference to the
Valuation Officer. Therefore, relying on the decision of the Mumbai Tribunal in
the case of Rubab M. Kazerani, the Tribunal dismissed the appeal filed by the
Revenue.

Case referred to :


Rubab M. Kazerani v. JCIT, 97 TTJ (TM) 698 (Mum.)


3. Manisha R. Chheda v. ITa Mukesh P. Chheda v. ITa ITAT ‘B’ Bench, Mumbai Before J. Sudhakar Reddy (AM) and P. Madhavi Devi OM) ITA No. 5961 and 5962/Mum./2004
A.Y. : 2001-02. Decided on: 17-8-2007 Counsel for assessee/revenue: Pradeep Kapasi/ Chet Ram

s. 263 of the Income-tax Act, 1961 – Power to revise AO’s order – AO making certain additions to the income returned – Whether the Commissioner has power to revise AO’s order in order to sustain the addition but on different reasons – Held, No.

Per J. Sudhakar Reddy:

Facts:

In their return of income filed, both the assessees had returned besides other income, income from agriculture. According to the AO, the assessees had not proved with evidence that they were engaged in agricultural activities. Therefore, the income so declared was treated by the AO as income from other sources.

According to the CIT, the reasons for additions given by the AO were grossly inappropriate and inadequate for sustaining the additions. In order to strengthen the case of the Revenue, he held both the orders passed by the AO as erroneous and prejudicial to the interest of the Revenue. Accordingly, he directed the AO to make fresh assessment. The assessees challenged the orders passed by the CIT before the TribunaL

Held:

According to the Tribunal, the crr wanted to indicate the same thing what the AO had indicated, but for different reasons. It further observed that an order u/ s.263 cannot be passed for giving additional reasons or substituting reasons by a higher authority to support the same cause. According to it, when the AO had in fact rejected the claim of the assessee, it cannot be said that any prejudice was caused to the Revenue. Merely because the CIT was not happy with the reasons given by the AO, the same did not give jurisdiction to invoke the powers conferred on him u/ s.263. The Tribunal further observed that once an addition was made, the issue if appealed against, travelled to the First Appellate Authority whose powers were co-terminus with that of the Assessing Officer. The first appellate authority, according to the Tribunal, can always, if he feels that the reasoning given by the Assessing Officer was not sufficient, strengthen the order by giving his own reasons, if the situation so permitted. If the assessees did not carry the matter in appeal, the assessment orders attain finality. Thus, it was noted that, in either case, the scheme of the Act does not permit the supervisory Commissioner to give additional reasons for supporting the same additions that had been made by the AO.

For the reasons stated as above, the Tribunal quashed both the orders passed by the CIT u/ s.263 and allowed the appeals filed by the assessee.

4. Boon Industries v. ITO ITAT ‘K’ Bench, Mumbai Before O. K. Narayanan (AM) and Sushma Chowla OM) ITA No. 6736 and  6737/Mum./2006 A.Ys. : 1998-99 & 1999-2000. Decided on: 27-11-2007

Counsel  for assessee Zrevenue :

Prakash  Jhunjhunwala/Malathi Sridharan

S. 271(1)(b) read with S. 142(1) and S. 143(2) of the Income-tax Act, 1961 – Penalty for non-compliance with notices issued – On the facts held that penalty cannot be imposed.

Per O. K. Narayanan:

Held:

The penalty of Rs.0.2 lac each imposed for the years under appeal for non-compliance of statutory no-tices issued u/s.142(1) and S. 143(2) were deleted by the TribunaL According to it, it cannot be said that the assessee was indifferent in the matter and did not co-operate with the assessing authorities, when it complied with the requirements twelve times out of the sixteen times. It further held that the non-compliance cannot be said to be willful when the time given to the assessee to attend be-fore the AO was only four to six days. According to it, the failure of the assessee to sought adjournment or inform the AO was not that much material in the light of the conduct of the assessee by appearing before the AO for not  less  than twelve times.

5. Jayram Rajgopal Poduval v. ACIT ITAT ‘H’ Bench, Mumbai Before R. S. Syal (AM) and Sushma Chowla OM) ITA No.  7072/M/2004 AY. : 2001-02. Decided on:    18-1-2008 Counsel for assessee/revenue: Rajan Vora/ B. K. Singh

S. 6(6) of the Income tax Act, 1961 – Resident but not ordinarily resident – Whether the two conditions specified in the provisions are cumulative – Held, No.

Per  R. S. Syal :

Facts:

The  assessee’s stay in India in the  preceding 10 years was as under:


According to the AO, the assessee was not ‘non-resident’ in 9 out of 10 years and had also resided in India for more than 730 days in the preceding 7 years. Hence, he held that the status of the assessee was ‘Resident and ordinarily resident’ (ROR). According to the CIT(A), in order that a person could be considered as Resident but not ordinarily resident (RNOR), he must fulfil the following two conditions given in S. 6(6)(a) viz. :

  •     He has not been resident in India in nine out of the ten previous years; and


  •     He has not during the seven previous years preceding that year been in India for a period of 730 days or more.

 
Since the assessee’s stay in India was for more than 730 days in the 7 preceding years, he, relying on the decision of the Gujarat High Court in the case of Pradeep J. Mehta, dismissed the appeal filed by the assessee.

Held:

The Tribunal noted that the provisions of S. 6(6)(a) uses the term ‘or’ and not ‘and’ between the two conditions given therein. Accordingly, the person would be considered as RNOR if he complies with either of the two conditions given therein. It dis-agreed with the CIT(A) that in order to qualify as RNOR, the assessee should fulfil both the condi-tions. In the case of the assessee, since he was not resident in India in nine out of ten previous years, his status would be that of RNOR. In support it also relied on the decision of the Apex Court in the case 4 of Morgenstern Werner.

Cases referred to :

1. Cl’T and Another v. Morgenstern Werner, (2003) 259 ITR 486 (SC)
2. PradeepJ. Mehta v. CIT, (2202) 256 ITR 647 (Guj.)

Note: The provisions of S. 6(6) have been substituted by the Finance Act, 2003 w.e.f. 1-4-2004. As per the substituted provisions, in order to qualify as RNOR, the person should be non-resident in nine out of ten previous years. The other alternative condition remains unchanged.


6. Innerwheel Club of Bombay v. ADIT ITAT ‘e’ Bench, Mumbai Before O. K. Narayanan (AM) and P. Madhavi Devi OM) ITA No.  4855/Mum.l2003

AY. : 1999-2000.  Decided on: 12-10-2007 Counsel for assessee/revenue: Jayesh Dadia/ J. K. Garg

S. 272A(2)(e) r.w. S. 139(4A) of the Income-tax Act, 1961 – Penalty for failure to file return of income – Net income before claiming deduction u/s.11 be-low the taxable limit – Whether AO justified in levying penalty for delay in filing of return – Held, No.

Per  P. Madhavi Devi  :

Facts:

The assessee was a public charitable trust eligible for deduction u/s.ll. During the year under appeal, its gross total income was Rs.0.71 lac and after deducting establishment expenses of Rs.0.7Iac, the surplus remained was only Rs.353. It filed its return of income on 15-5-2000. For delay in filing return of income, the AO imposed a penalty of Rs.13,500 which was confirmed by the CIT(A).

Held:

The Tribunal noted that the AO had not rejected the audited accounts of the assessee. And as per the accounts, the net income of the assessee was below taxable limit even before claiming deduction u/s.11.
 
Therefore, relying on the decision of the Mumbai Tribunal in the case of Durgadevimata and of the Delhi Tribunal in the case of Purakh Chand Askaran Pugella Charitable Trust, the Tribunal held that the AO was not justified in levying penalty.

Cases  referred to:

1. Durgadevimata  v. lTG,  (ITA No. 36/M/2000)
2. Purakh Chand Askaran Pugella Charitable Trust, 124 Taxman (Mag) 74 (Del.)

S. 6(6) : The two conditions specified in the provision are not cumulative

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5) Jayram Rajgopal Poduval
v. ACIT


ITAT ‘H’ Bench, Mumbai

Before R. S. Syal (AM) and

Sushma Chowla (JM)

ITA No. 7072/M/2004

A.Y. : 2001-02. Decided on : 18-1-2008

Counsel for assessee/revenue : Rajan Vora/

B. K. Singh

S. 6(6) of the Income tax Act, 1961 — Resident but not
ordinarily resident — Whether the two conditions specified in the provisions are
cumulative — Held, No.

Per R. S. Syal :

Facts :

The assessee’s stay in India in the preceding 10 years was as
under :

No.


Assessment Year

No. of
days in India

1.

1991-92

29

2.

1992-93

15

3.

1993-94

23

 

(A)

67

 4.

1994-95

24

5.

1995-96

92

6.

1996-97

366

7.

1997-98

365

8.

1998-99

359

9.


1999-2000

365

10.

2000-01

366

 

(B)


1,937

 

(A)
+ (B)

2004

According to the AO, the assessee was not ‘non-resident’ in 9
out of 10 years and had also resided in India for more than 730 days in the
preceding 7 years. Hence, he held that the status of the assessee was ‘Resident
and ordinarily resident’ (ROR). According to the CIT(A), in order that a person
could be considered as Resident but not ordinarily resident (RNOR), he must
fulfil the following two conditions given in S. 6(6)(a) viz. :

  • He has not been resident in India in nine out of the ten previous years; and

  •     He has not during the seven previous years pre-ceding that year been in India for a period of 730 days or more.

Since the assessee’s stay in India was for more than 730 days in the 7 preceding years, he, relying on the decision of the Gujarat High Court in the case of Pradeep J. Mehta, dismissed the appeal filed by the assessee.

Held:

The Tribunal noted that the provisions of S. 6(6)(a) uses the term ‘or’ and not ‘and’ between the two conditions given therein. Accordingly, the person would be considered as RNOR if he complies with either of the two conditions given therein. It disagreed with the CIT(A) that in order to qualify as RNOR, the assessee should fulfil both the conditions. In the case of the assessee, since he was not resident in India in nine out of ten previous years, his status would be that of RNOR. In support it also relied on the decision of the Apex Court in the case 4 of Morgenstern Werner.

Cases referred to :

    1. CIT and Another v. Morgenstern Werner, (2003) 259 ITR 486 (SC)

    2. PradeepJ. Mehta v. CIT, (2202) 256 ITR 647 (Guj.)

Note: The provisions of S. 6(6) have been substituted by the Finance Act, 2003 w.e.f. 1-4-2004. As per the substituted provisions, in order to qualify as RNOR, the person should be non-resident in nine out of ten previous years. The other alternative condition remains unchanged.


S. 271(1)(b) : Penalty for non-compliance with notices deleted, where inadequate notice given

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4) Boon Industries v. ITO


ITAT ‘K’ Bench, Mumbai

Before O. K. Narayanan (AM) and

Sushma Chowla (JM)

ITA No. 6736 and 6737/Mum./2006

A.Ys. : 1998-99 & 1999-2000. Decided on : 27-11-2007

Counsel for assessee/revenue :

Prakash Jhunjhunwala/Malathi Sridharan

S. 271(1)(b) read with S. 142(1) and S. 143(2) of the
Income-tax Act, 1961 — Penalty for non-compliance with notices issued — On the
facts held that penalty cannot be imposed.

Per O. K. Narayanan :

Held :

The penalty of Rs.0.2 lac each imposed for the years under
appeal for non-compliance of statutory notices issued u/s.142(1) and S. 143(2)
were deleted by the Tribunal. According to it, it cannot be said that the
assessee was indifferent in the matter and did not co-operate with the assessing
authorities, when it complied with the requirements twelve times out of the
sixteen times. It further held that the non-compliance cannot be said to be
willful when the time given to the assessee to attend before the AO was only
four to six days. According to it, the failure of the assessee to sought
adjournment or inform the AO was not that much material in the light of the
conduct of the assessee by appearing before the AO for not less than twelve
times.

 

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S. 263 : Commissioner has no power to revise AO’s order by giving additional reasons for sustaining same additions

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3) Manisha R. Chheda
v.
ITO


Mukesh P. Chheda


v. ITO


ITAT ‘B’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 5961 and 5962/Mum./2004

A.Y. : 2001-02. Decided on : 17-8-2007

Counsel for assessee/revenue : Pradeep Kapasi/

Chet Ram


S. 263 of the Income-tax Act, 1961 — Power to revise AO’s
order — AO making certain additions to the income returned — Whether the
Commissioner has power to revise AO’s order in order to sustain the addition but
on different reasons — Held, No.

Per J. Sudhakar Reddy :

Facts :

In their return of income filed, both the assessees had
returned besides other income, income from agriculture. According to the AO, the
assessees had not proved with evidence that they were engaged in agricultural
activities. Therefore, the income so declared was treated by the AO as income
from other sources.

According to the CIT, the reasons for additions given by the
AO were grossly inappropriate and inadequate for sustaining the additions. In
order to strengthen the case of the Revenue, he held both the orders passed by
the AO as erroneous and prejudicial to the interest of the Revenue. Accordingly,
he directed the AO to make fresh assessment. The assessees challenged the orders
passed by the CIT before the Tribunal.

Held :

According to the Tribunal, the CIT wanted to indicate the
same thing what the AO had indicated, but for different reasons. It further
observed that an order u/s.263 cannot be passed for giving additional reasons or
substituting reasons by a higher authority to support the same cause. According
to it, when the AO had in fact rejected the claim of the assessee, it cannot be
said that any prejudice was caused to the Revenue. Merely because the CIT was
not happy with the reasons given by the AO, the same did not give jurisdiction
to invoke the powers conferred on him u/s.263. The Tribunal further observed
that once an addition was made, the issue if appealed against, travelled to the
First Appellate Authority whose powers were co-terminus with that of the
Assessing Officer. The first appellate authority, according to the Tribunal, can
always, if he feels that the reasoning given by the Assessing Officer was not
sufficient, strengthen the order by giving his own reasons, if the situation so
permitted. If the assessees did not carry the matter in appeal, the assessment
orders attain finality. Thus, it was noted that, in either case, the scheme of
the Act does not permit the supervisory Commissioner to give additional reasons
for supporting the same additions that had been made by the AO.

For the reasons stated as above, the Tribunal quashed both
the orders passed by the CIT u/s.263 and allowed the appeals filed by the
assessee.




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S. 55A : AO cannot make reference to valuation officer when value returned as at 1-4-1981 is more than fair market value determined by valuation officer

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2) ITO
v.
Lalitaben B. Kapadia



ITAT ‘K’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 8763/Mum./2004

A.Y. : 2001-02. Decided on : 20-9-2007

Counsel for assessee/revenue : N. R. Agarwal/

Milind Bhusari


S. 55A of the Income-tax Act, 1961 — Reference to
Valuation Officer — Value returned by the assessee was more than the fair market
value arrived at by the Valuation Officer and accepted by the AO — Whether
action of the AO in making reference to the Valuer justifiable — Held, No.

Per P. Madhavi Devi :


Facts :

The assessee had returned income under the head long-term
capital gain from the sale of immovable property. For the purpose, the assessee
had shown fair market value (FMV) as on 1-4-1981 as Rs.10 lacs. U/s.55A, the AO
made reference to the Valuation Officer who valued the property at Rs.6.6 lacs
as on the said date. On appeal, the CIT(A) took the FMV at Rs.9.36 lacs. Being
aggrieved, the Revenue appealed before the Tribunal.

Held :

According to the Tribunal, reference u/s.55A could be made
only if the AO was of the opinion that the value returned by the assessee was
less than its FMV. The act of the AO in accepting the valuation made u/s.55A,
which was undoubtedly less than the FMV claimed by the assessee, proved that the
AO was of the opinion that the assessee’s claim was more than its FMV. Thus,
according to the Tribunal, the AO was not justified in making reference to the
Valuation Officer. Therefore, relying on the decision of the Mumbai Tribunal in
the case of Rubab M. Kazerani, the Tribunal dismissed the appeal filed by the
Revenue.

Case referred to :


Rubab M. Kazerani v. JCIT, 97 TTJ (TM) 698 (Mum.)


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Notification No. FEMA. 174/2007-RB, dated 25-11-2007 — Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations, 2008.

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Part C : RBI/FEMA


Given below are the highlights of RBI Circulars and
Notifications.


 

 

13 Notification No. FEMA. 174/2007-RB, dated
25-11-2007 — Foreign Exchange Management (Foreign Currency Account by a Person
Resident in India) Regulations, 2008.


This notification substitutes Regulation 6 of the Foreign
Exchange Management (Foreign Currency Account by a Person Resident in India)
Regulations, 2000 with effect from April 30, 2007.

 

It permits the opening, holding and maintaining of Foreign
Currency Account in India by :

1. Shipping or airline company incorporated outside India or
its agent in India for meeting local expenses in India of the shipping or
airline company out of freight or passage collected in India or out of inward
remittances through normal banking channels from office/principal outside India.

2. Ship-manning/crew managing agencies in India for undertaking transactions
in the ordinary course of their business.



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Notification No. FEMA. 171/2007-RB, dated 10-12- 2007 — Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) (Second Amendment) Regulations, 2007.

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Part C : RBI/FEMA


Given below are the highlights of RBI Circulars and
Notifications.



12 Notification No. FEMA. 171/2007-RB, dated
10-12- 2007 — Foreign Exchange Management (Foreign Currency Account by a Person
Resident in India) (Second Amendment) Regulations, 2007.

This notification amends the proviso to Regulation 9(1) of
the Foreign Exchange Management (Foreign Currency Account by a Person Resident
in India) Regulations, 2000 with effect from April 30, 2007 as under :

“The EEFC account referred to in Regulation 4, shall be
opened, held or maintained in the form of an account in terms of such
directions as may be issued by the RBI from time to time”.


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A.P. (DIR Series) Circular No. 41, dated 28-4-2008 — Foreign investment in Commodity Exchanges — Amendment to the Foreign Direct Investment Scheme.

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New Page 2

Part C : RBI/FEMA


Given below are the highlights of RBI Circulars and
Notifications.


11 A.P. (DIR Series) Circular No. 41, dated
28-4-2008 — Foreign investment in Commodity Exchanges — Amendment to the Foreign
Direct Investment Scheme.

Pursuant to Press Note No. 2 (2008) issued by Commerce
Ministry (see April 2008 BCAJ, page 97).

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A.P. (DIR Series) Circular No. 40, dated 28-4-2008 — Foreign investment in Credit Information Companies — Amendment to the Foreign Direct Investment Scheme.

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Part C : RBI/FEMA


Given below are the highlights of RBI Circulars and
Notifications.


 



10 A.P. (DIR Series) Circular No. 40, dated
28-4-2008 — Foreign investment in Credit Information Companies — Amendment to
the Foreign Direct Investment Scheme.

Pursuant to Press Note No. 1 (2008) issued by Commerce
Ministry (see April 2008 BCAJ, page 97).

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A.P. (DIR Series) Circular No. 39, dated 28-4-2008 — Bids in foreign currency for projects to be executed in India.

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Part C : RBI/FEMA


Given below are the highlights of RBI Circulars and
Notifications.


 

9 A.P. (DIR Series) Circular No. 39, dated
28-4-2008 — Bids in foreign currency for projects to be executed in India.

Presently, person resident in India can incur liability in
foreign exchange and to make or receive payments in foreign exchange in respect
of global bids only where the Central Government has authorised such projects to
be executed in India and approval of the concerned Administrative Ministry has
been obtained.

 

This circular has done away with the requirement of obtaining
prior permission of Administrative Ministry/Authorisation from Central Govt. may
not be necessary for International Competitive Bidding (ICB). Hence, persons
resident in India are now permitted to incur liability in foreign exchange and
to make or receive payments in foreign exchange in respect of global bids for
projects to be executed in India without insisting on prior approval of the
concerned Administrative Ministry for ICB.

 


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Amendments in the Cenvat Credit Rules, 2004 w.e.f. 1-4-2008 — Clarification about Rule 6 : Circular No. 868/6/2008-CX dated 9-5-2008.

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Part A : DIRECT TAXES Part
B : Indirect taxes


8 Amendments in the Cenvat Credit Rules, 2004
w.e.f. 1-4-2008 — Clarification about Rule 6 : Circular No. 868/6/2008-CX dated
9-5-2008.

In the Finance Act, 2008, certain amendments are made, among
others, to Rule 6 of Cenvat Credit Rules, 2004. The above circular clarifies
certain doubts relating to these amendments.

 

Others :

Employees’ State Insurance Corporation has amended the
Regulation 26 of the ESI (General) Regulations, 1950 and the Return of
Contributions in Form 5. The salient features of the amendments made in the Form
5 are as under :

Sr.
No. 		Category of dealers
 Eligibility criteria
 Period of
first return 		Due date of
submission of such first return
1 Dealers eligible to
file monthly returns		 (1) Taxes paid more
than Rs.10 lac or Refund was more than Rs.1 crore during the previous year		 April 2008 21-5-2008
2 Dealers eligible to
file quarterly returns

(1) Dealers under Package Scheme of Incentive. to
30-6-2008

(2) Taxes paid more than Rs.1 lac and less than Rs.10 lac
or Refund more than Rs.10 lac and less than Rs.1 crore during the previous
year

 1-4-2008 21-7-2008
3 Dealers eligible to
file six-monthly returns 		(1) Newly registered
dealers

(2) Retailers
opted for Composition

 (3)
Taxes paid less than Rs.1 lac or Refund less than Rs.10 lac during the
previous year

 1-4-2008 to 30-9-2008
Scheme		 21-10-2008




  • Self declaration by the employers, regarding maintenance of records and
    registers, submission of declaration forms, distribution of
    temporary/permanent identity cards, coverage of employees directly or through
    immediate employers and wages paid to workers.



  • All employers employing 40 or more employees, shall append a certificate duly
    certified by a Chartered Accountant, in the revised format of Return of
    Contributions.


All employers, employing less than 40 employees, will provide
self certification without any certification by a C.A.


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Amendments to VAT rule for periodicity of filing of returns under Rule 17 of Maharashtra Value Added Tax Rules 2005 : Trade Circular No. 17T of 2008 dated 5-5-2008.

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Part A : DIRECT TAXES Part
B : Indirect taxes




M-VAT

7 Amendments to VAT rule for periodicity of
filing of returns under Rule 17 of Maharashtra Value Added Tax Rules 2005 :
Trade Circular No. 17T of 2008 dated 5-5-2008.

The Government by Notification No. VAT/1507/CR 17/Taxation 1
dated 31-10-2007 and No. VAT/1507/CR 94/Taxation 1 dated 14-3-2008 has carried
out certain amendments to Rule 17 of Maharashtra Value Added Tax Rules, 2005
pertaining to the periodicity of filing of return.

 

As per the amendments the periodicity of filing of Returns
for the periods starting on or after 1st April 2008 will be as under :




  • The earlier return forms 221, 222, 223, 224 and 225 have been replaced with
    the new return forms 231,232, 233, 234 and 235, respectively.



  • The dealers whose tax liability in the previous year i.e. 2006-07 was
    equal to or above Rs.1 crore, have to file their return from February 2008
    onwards in electronic form.



  • The dealers whose tax liability in the previous year i.e. 2007-08 was
    equal to or above Rs.10 lakhs, have to file their return for the month of May
    2008 onwards in electronic form.



  • The dealers eligible to file electronic return under MVAT Act Rules should
    file their Central Sales Tax return in Form IIIE electronically.



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Post Budget notifications to give effect to the provisions of Finance Act, 2008 (18 of 2008) dated 10-5-2008 (Press release reproduced).

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Part A : DIRECT TAXES Part
B : Indirect taxes


Service tax :

6 Post Budget notifications to give effect to
the provisions of Finance Act, 2008 (18 of 2008) dated 10-5-2008 (Press release
reproduced).

The Finance Bill, 2008 received the assent of the President
of India on the 10th May 2008 and consequently the Finance Act, 2008 is being
published in the Gazette of India dated 10th May 2008 as Act No. 18 of 2008.
Central Government has issued seven notifications relating to service tax so as
to give effect to various provisions of the Finance Act, 2008.


 

2. Transaction between associated enterprises :



2.1 In the Finance Act, 2008, S. 67 has been amended. As per
this amendment, service tax is required to be paid by the person liable to pay
service tax on the taxable services provided even if the consideration for the
taxable services provided is not actually received. In such cases, service tax
is required to be paid immediately after crediting/debiting of the amount in the
books of accounts or receipt of payment, whichever is earlier. However, this
provision is restricted to transaction between associated enterprises and shall
come into force w.e.f. 10th May 2008. Explanation to Rule 6(1) of the Service
Tax Rules, 1994 has been added as removal of doubts stating that any payment
received towards the value of taxable service shall include any amount credited
or debited, as the case may be, to any account, whether called ‘Suspense
account’ or by any other name, in the books of account of a person liable to pay
service tax (Refer Notification No. 19/2008-Service Tax dated 10-5-2008).


 

3. Certain provisions relating to the levy of service tax in
the Finance Act, 2008 shall come into force from a date to be notified. For this
purpose, Notifications No. 18/2008 to 24/2008-Service Tax, all dated 10th May,
2008 have been issued.

 

4. Following changes/amendments shall come into force w.e.f.
16-5-2008 :


à
Seven services which are specifically mentioned in the category of taxable
services and amendments made relating to existing taxable services.


à
Amendments made in S. 65 (defines taxable services and specified terms used in
relation to taxable services) and S. 66 (charging section) vide the Finance
Act, 2008.


à
Amendments made in Export of Services Rules, 2005 and the Taxation of Services
(Provided from Outside India and Received in India) Rules, 2006 so as to
categorise the newly specified taxable services under Rule 3 [Refer
Notification No. 20/2008-Service Tax dated 10-5-2008 and Notification No.
21/2008-Service Tax dated 10-5-2008].


à
Optional Scheme for payment of service tax on Purchase or Sale of foreign
currency : Service tax is leviable on purchase or sale of foreign currency,
including money changing, provided by an authorised dealer in foreign currency
or an authorised money changer, or a foreign exchange broker. Where the
consideration for the services provided in relation to purchase or sale of
foreign currency is not explicitly indicated, the person liable to pay service
tax has been given the option to pay service tax calculated at the rate of
0.25% of the gross amount of currency exchanged. The method is prescribed
under Rule 6(7B) of the Service Tax Rules, 1994. [Refer Notification No.
19/2008-Service Tax dated 10-5-2008].


5. Government of India has already notified, vide
Notifications No. 41/2007-Service Tax, dated 6-1-2007 and 43/2007-ST, dated
29-11-2007, sixteen taxable services attributable to export goods, whether or
not in the nature of input services, providing refund of service tax paid on the
said sixteen taxable services. Consequent upon the enactment of the Finance Act,
2008, Government has notified 16-5-2008 as the effective date for the
specifically included taxable services vide the Finance Act, 2008. Out of the
said taxable services, refund of service tax paid by exporters has been extended
to the following additional 3 services :


à
Purchase or sale of foreign currency under banking and other financial
service,


à
Purchase or sale of foreign currency under foreign exchange broking service,


à
Supply of tangible goods for use of service (refer Notification No.
24/2008-ST, dated 10-5-2008)


6. Notifications No. 18/2008 to 24/2008-Service Tax, all
dated 10th May 2008 are available on the CBEC website http://www.cbec.gov.in.
For details, relevant provisions of the law and notifications may be referred of
the Ministry of Finance, Department of Revenue, Tax Research Unit, Govt. of
India.


Revision of monetary limits for filing appeals by the Income-tax Department before ITAT, HC and SC : Instruction No. 5/2008, dated 15-5-2008.

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Part A : DIRECT TAXES



5 Revision of monetary limits for filing
appeals by the Income-tax Department before ITAT, HC and SC : Instruction No.
5/2008, dated 15-5-2008.

Appeals shall be filed by the Department after 15th May,
2008, only if the cases where tax effect exceeds monetary limits given
hereunder :

Sr. No.
Appeals in Income tax matters
Monetary limit (In Rs.)
1
Appeal before Appellate Tribunal
2,00,000
2
Appeal u/s.260A before High Court
4,00,000
3
Appeal before Supreme Court
10,00,000

Tax effect has been defined to mean difference between tax
assessed and tax that would have been chargeable on disputed issues (to apply to
loss cases also). It is also clarified that ‘tax’ shall not include interest. In
the cases of penalty orders, the tax effect will mean quantum of penalty deleted
or reduced in the order to be appealed against. The instructions also specify
the cases, wherein appeal can be filed by Department irrespective of the
monetary limit and the mode of computation for consolidated appeals which cover
more than one assessment year. It has been clarified that non-filing of appeal
by department due to monetary limits as prescribed does not mean the decision as
taken by the appropriate authority is accepted. Also there are instances
specified when the appeal needs to be filed irrespective of the quantum
involved.

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Clarification on deduction of tax at source on service tax component on rental income u/s.194-I.

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Part A : DIRECT TAXES


4 Clarification on deduction of tax at source
on service tax component on rental income u/s.194-I.

CBDT has clarified that TDS provisions u/s.194-I would be
applicable only on the net rent paid/payable excluding the service tax
component.


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India has signed a DTAA with Mexico. The said agreement shall enter into force on a date to be notified in due course.

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Part A : DIRECT TAXES


3 India has signed a DTAA with Mexico. The
said agreement shall enter into force on a date to be notified in due course.

 

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Benign Assessment procedure for assesses engaged in diamond manufacturing and/or trading : Instruction No. 2/2008 dated 22-2-2008.

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Part A : DIRECT TAXES


2 Benign Assessment procedure for assesses
engaged in diamond manufacturing and/or trading : Instruction No. 2/2008 dated
22-2-2008.

In the last Budget, the Finance Minister had announced a
Benign Assessment procedure for assesses engaged in diamond manufacturing and/or
trading. The main features of the scheme are :



  •  If the assessee offers 6% or more of its total turnover as business income,
    the same should be accepted by AO



  •  Separate books of account need to be maintained



  •  6% would not be a precedent for that or any other assessee



  • This procedure would not apply when :



* assessment is pursuant to search, survey, requisition or seizure action


* 50% or more of such income is claimed as a deduction


* Where there is information of income being escaped




  •  The said procedure shall apply for assessments made during the financial year
    2008-09.




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The Finance Bill, 2008 received the assent of the President of India on 10th May 2008, after certain amendments to clauses of Finance Bill, 2008.

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Part A : DIRECT TAXES


1 The Finance Bill, 2008 received the assent
of the President of India on 10th May 2008, after certain amendments to clauses
of Finance Bill, 2008.

 

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No contract between assessee transporter and agents/suppliers who enabled the assessee to get the truck hired, but with truck owners and drivers — Deduction of tax u/s.194C not applicable

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38 Assessee engaged in Transportation of
goods — No contract between assessee and the agents/suppliers who enabled the
assessee get the truck hired, but with the truck owners and drivers — Deduction
of tax u/s.194C — Held, Not applicable.


 

Facts :

The assessee company is engaged in the business of
transportation of goods for various clients all over India on a contract basis.
The AO, subsequent to survey action u/s.133A, concluded that the appellant had
not deducted taxes properly on payments made to truck owners or agents in
accordance with the provisions of S. 194C. The assessee had made total payments
of Rs.17,08,39,119 to various parties whose trucks were engaged. The AO
estimated an ad hoc 90% of the total payment as payment exceeding
Rs.20,000 and computed tax liability thereon @ 1% + 2% surcharge. Further, he
also levied interest u/s.201(1A). The CIT(A) deleted the demand raised by the
AO, stating that the provisions of S. 194C were not applicable.

 

On appeal to the Tribunal, it was held that :

1. From various correspondences and confirmations, it is
clear that the suppliers/agents were contacted for reference purposes only and
the negotiations for a particular destination were made with the truck
drivers/owners and not with the suppliers/agents.

2. Further, no contracts were entered into between the
assessee and agent/supplier, but were entered into with the truck
owners/drivers. In addition, no payments exceeding Rs.20,000 were made to
truck owners/drivers and where the payment so exceeded, tax has been
appropriately deducted at source and deposited into the treasury.

3. Further, Circular 715 issued by the CBDT was squarely
applicable to the facts and thus, it was clear that if the contracts are with
the truck owners/drivers and GR is separate, then the payment made for the
truck has to be a separate payment. Consequently, it cannot be said that there
was contract with the suppliers and not with the truck owners/drivers. Hence,
the CIT(A) was held right in stating that the provisions of S. 194C were not
applicable.

 


Case referred to :


City Transport Corporation v. ITO, [(2007) 13 SOT 479 (Mum.)]

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Concept of ‘Real Income’ — Assessee-company did not recognise interest income on debentures due to financial difficulties of issues — No interest income accrued to the assessee.

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37 (2008) 300 ITR (AT) 159 (Delhi)


Pranav Vikas (India) Ltd. v.
ACIT

ITA No. 3322/Del./2004 (A.Y. 2001-02)

A.Y. 2001-02. Dated : 27-7-2007

Concept of ‘Real Income’ — Investment in debentures —
Assessee-company decided not to recognise interest income on debentures due to
financial difficulties of M/s. PAL Enterprise (P) Ltd. — Held that, No interest
income accrued to the assessee.

 

Facts :


The assessee-company had received interest free advance of
Rs.20 lakhs from M/s. Premier Automobiles Ltd. (PAL) for development of certain
products and since the said project was being delayed considerably, M/s. PAL
required the assessee to invest the said amount in their other group company
i.e., M/s. PAL Enterprise (P) Ltd. (PALEL) by way of 13% unsecured
optionally convertible debentures. For the F.Y. 2000-01, the assessee company
did not recognise the revenue arising out of interest on debenture, because both
M/s. PAL as well as M/s. PALEL became sick and there was no possibility of
recovery of any interest on the debenture. The AO made an addition of
Rs.2,40,000 disregarding AS-9 issued by ICAI, which was mandatory u/s.211(3C) of
the Companies Act, 1956 for the assessee company and the minutes of the BOD
acknowledging the uncertainty of collection of the said interest and the same
was also confirmed by the CIT(A).

 

On appeal to the Tribunal, it was held that :

1. The request of M/s. PALEL to treat the investment made
by the assessee-company as interest-free was accepted by it insofar as the
year under consideration is concerned and the right to receive interest income
on the said debentures, thus, was waived by it with prospective effect. The
decision to take the ‘appropriate measures’ as discussed in the meeting of the
BOD is to be understood to be restricted to the recovery of principal amount
and the interest accrued thereon for the earlier years.

2. Further, even if a decision of waiver is taken after the
F.Y., but within a reasonable proximity such that it results into a formal
resolution, it cannot be said that the said decision is inapplicable to the
relevant F.Y.

3. In the instant case, as the right to receive interest
income on the said debentures was waived by the assessee company for the year
under consideration, there was no real income that can be bought to tax in the
hands of the assessee company on accrual basis. Hence, the impugned order of
the CIT(A) was set aside deleting the addition of Rs.2,40,000.

 


Cases referred to :



(i) CCE v. Dai Ichi Karkaria Ltd., [(1995) 156 CTR
172];

(ii) Ashokbhai Chimanbhai [(1956) 56 ITR 42];

(iii) CIT v. Shoorji Vallabhdas and Co., [(1962) 46
ITR 144];

(iv) State Bank of Travancore v. CIT, [(1986) 158
ITR 102] and others.

 

(2008) 300 ITR (AT) 193 (Mumbai)

ITO v. Bhoruka Roadlines Ltd.

A.Y. 2002–03. Dated : 27-6-2007

S. 194C, S. 201 and S. 201(1A)


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Sum received under non-compete agreement — Capital receipt.

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36 (2008) 300 ITR (AT) 113 (Delhi) (SB)


Saurabh Srivastava v. DCIT

ITA No. 3014 (Delhi) 2004

A.Y. 1998-99. Dated : 7-12-2007

S. 17(2)(v); S. 17(3)(i) and S. 28(ii)

Sum received under non-compete agreement — Held, that it is
capital receipt.

 


Facts :

The assessee, a computer engineer associated with software
and information technology, was the promoter, founder and the managing director
of a software company holding 866,450 shares therein. The company was taken over
by a U.K. group whereby 76% of the subscribed equity capital was agreed to be
transferred in favour of the U.K. company. In addition to share transfer
agreement, the U.K. group also entered into a non-compete agreement with the
assessee, whereby the assessee received a sum of Rs.1,07,36,570 as non-compete
fee for F.Y. 1997-98. Thereafter, under a new service agreement, the assessee
was employed as the managing director of the U.K. company and received salary
accordingly. The assessee claimed exemption of non-compete fees as being a
capital receipt.

 

The AO taxed the non-compete fee as revenue receipt
u/s.28(ii). The CIT(A) upheld the order of AO.

 

On appeal to ITAT, the Hon’ble Tribunal held that the said
non-compete fee is a capital receipt, not liable to tax and referred to the
following :

1. The non-compete agreement was independent, distinct and
separate from the service agreement.

2. It was not dependent on his continuing in employment
with the company.

3. It did not arise from employer-employee relationship.

4. The fee was received for accepting restrictive
covenants, as the assessee was restrained from carrying out any software
development activity for any other person who directly or indirectly competed
with the U.K. group.

5. Thus, the same was not taxable u/s.17.1

6. The assessee was not carrying on any business and the
non-compete fee did not arise in the course of business and hence was not
taxable as business income.

7. The same was also not liable to tax as capital gains or
as income from other sources.

 


Cases referred to :




(i) CIT v. Saroj Kumar Poddar, [(2005) 279 ITR 573
(Cal.)];

(ii) CIT v. A. S. Wardekar, [(2006) 283 ITR 432
(Cal.)];

(iii) Swamy (R.K.) v. Asst. CIT, [(2004) 88 ITD 185
(Chennai)] and others.

 

1 Clause (iii) of Ss.(3) of S. 17 was inserted w.e.f. the
Finance Act, 2001 and not with retrospective effect and hence was not
applicable for A.Y. 1998-99. However, the said amount, if received subsequent
to the introduction of the said sub-section may stand on a different footing
as compared to that, in the case discussed.


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S. 234B read with S. 208 & S. 209 : Assessee having only salary income not liable to pay advance tax.

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35 (2008) 21 SOT 549 (Delhi)


Asst. Director of Income-tax, International Taxation
v. Western Geco International Ltd.

ITA Nos. 4847 to 4941 (Delhi) of 2007

A.Y. 2006-07. Dated : 21-2-2008

S. 234B read with S. 208 and S. 209 of the Income-tax Act,
1961 — There is no question of payment of advance tax by an employee whose total
income comprises of salary from which tax at source is to be deducted as per
statutory provisions and, hence, there is no question of applying provisions of
S. 234B to such a person who is not liable to pay advance tax.

 

Company ‘G’ was agent of many foreign nationals. It paid
salary to different non-resident assessees and filed returns on their behalf.
The assessees/employees only had salary income, which was subjected to deduction
of tax at source. They claimed deduction u/s.10(10CC) on account of tax paid by
the employer on their salary as per agreement. The Assessing Officer refused to
allow the said deduction and added tax paid on income through multiple grossing
instead of single grossing. This led to additional liability and demand
representing the difference between the assessed tax and tax deducted at source
leading to levy of interest u/s.234B for non-payment of advance tax. On appeal,
the CIT(A) held that the Assessing Officer was not right in levying interest
u/s.234B upon the assessees and, accordingly, deleted the same.

 

The Tribunal, following the decision in the case of
Motorola Inc. v. Dy. CIT, (2005) 95 ITD 269 (Delhi) (SB) held that the
assessees were not liable to pay advance tax, and consequently, were also not
liable to pay any interest u/s.234B. The Tribunal noted as under :

(1) Clause (d) of S. 209(1) clearly provides that while
computing advance tax, the amount of income-tax which is deductible or
collectible at source, will be deducted from the advance tax payable. In other
words, advance tax payable will be reduced by the amount of tax at source
‘deductible or collectible’.

(2) Therefore, when tax is deductible or collectible at
source from salary, which is the only source of income, no advance tax would
be payable by such an employee.

(3) In the instant case, there was no dispute that total
income of the assessee was subjected to deduction of tax at source u/s.192.
The assessee had no amount of advance tax payable if tax at source deductible
from the assessee’s salary was taken into account.

(4) Advance tax is payable in the financial year on the
current income. It cannot be paid after the close of the year. However, a
salaried person, whose salary is subject to deduction of tax at source, cannot
come to know of any short recovery or no recovery of tax at source till the
close of the financial year in which tax is deductible. If the employer has
not correctly deducted tax at source from the salary in one month u/s.192, the
deficiency can be made good U/ss.(3) of S. 192. Therefore, the employer can
always make good the deficiency in deduction of tax at source within the
financial year. If in one month there is short deduction of tax at source, the
employer can make higher deduction in other months in the financial year and
make good the short deduction.

(5) Therefore, a salaried employee would not know that
there had been short, wrong or no deduction of tax at source unless the
financial year is over. By the time he would come to know about short recovery
or no recovery of tax at source in his case, the time for payment of advance
tax would be over. In case of short recovery the employer is liable to pay
interest and penalty and not the employee. That is the scheme of the Act.

(6) Therefore, there is no question of payment of advance
tax by an employee whose total income comprises of salary from which tax at
source is to be deducted as per statutory provisions. Further, there is no
question of applying provisions of S. 234B to such a person who is not liable
to pay advance tax.



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S. 115JB : Capital receipts which do not constitute income, cannot be brought to tax by S. 115JB.

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34 (2008) 21 SOT 79 (Mum.)


ITO v. Su-raj Jewellery (India) Ltd.

ITA Nos. 8800 and 8801 (Mum.) of 2004

A.Ys. 1997-98 and 2001-02.

Dated : 10-10-2007

S. 115JB of the Income-tax Act, 1961 — Capital receipts which
do not constitute income under the Act cannot be brought to tax by employing
mechanism of S. 115JB.

 

For A.Y. 2001-02, the assessee credited certain capital
receipts to its profit & loss appropriation account and claimed that such
capital receipts did not form part of its book profits for the purpose of MAT
profit u/s.115J since they were not liable to tax. The Assessing Officer
rejected the claim of the assessee and included these sums in book profits for
the purpose of calculating MAT. The CIT(A), however, upheld the assessee’s
claim.

 

The Tribunal also allowed the assessee’s claim. The Tribunal
noted as under :

(1) The intention of bringing S. 115JB on the statute was
that companies should be made to pay taxes on the basis of the net profits
shown in their profit and loss account. For the purpose of computing the MAT
profit u/s.115JB, business profits as declared in the profit and loss account
are to be considered by the Assessing Officer after making certain
adjustments.

(2) In this case, the assessee was not liable to pay any
tax on the capital receipt i.e., gain arising on transfer of its assets
to holding company. Such profit was exempt from tax u/s.47(v).

(3) Although for computing the MAT profit u/s.115JB,
business profits shown in the profit and loss account are to be adopted, in
case the said profits include certain receipts which are not in the nature of
income, the same are to be excluded before making any calculations in that
regard.

(4) Further, S. 349 of the Companies Act clearly provides
that credit for the profit arising on sale of any immovable property or fixed
assets of capital nature should not be taken into profit and loss account and,
accordingly, the profits/ gains arising on transfer of assets to the holding
company were not includible in the profits of the assessee-company.

(5) The CIT(A) had rightly held that capital receipts which
do not constitute income under the Act cannot be brought under the tax net by
employing the mechanism of S. 115JB and the said Section has not intended to
bring all non-income items within the domain of the Act.


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S. 14A : Interest paid on funds invested in shares which yielded no dividend income cannot be disallowed.

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33 (2008) 21 SOT 42 (Mum.) (SMC)


Shree Shyamkamal Finance & Leasing Co. (P) Ltd. v.
ITO

ITA No. 15 (Mum.) of 2006

A.Y. 2002-03. Dated : 15-10-2007

S. 14A of the Income-tax Act, 1961 — Interest paid on funds
invested in shares which have yielded no dividend income cannot be disallowed
u/s.14A.

 

During the relevant assessment year, the assessee-company
which was engaged in the business of finance and investment in equity shares,
acquired unquoted equity shares of its subsidiary company out of unsecured loan
taken. The interest paid on the loan was claimed as deductible expenditure. The
Assessing Officer required the assessee to explain as to when there was no
income from investment and if any income accrued at all as dividend which was
exempt from tax u/s.10(33), then why should not the disallowance of interest on
loan be made u/s.14A. The assessee’s contention that since it had not received
any dividend and, further, since it had not claimed any exemption of income, S.
14A could not be applied was not accepted by the Assessing Officer and he
disallowed the interest expense u/s.14A. The CIT(A) upheld the disallowance.

 

The Tribunal, relying on the decision in the case of Jt.
CIT v. Holland Equipment Co. B. V., (2005) 3 SOT 810, held that no
disallowance could be made u/s.14A.

 

The Tribunal noted as under :

(1) By virtue of S. 10(33), as it stood at relevant time,
dividend income referred to in S. 115-O does not form part of the total
income. If the assessee earned income which is not includible in the total
income, then the expenditure could be disallowed u/s.14A, because it speaks of
expenditure incurred by the assessee in relation to income which does not form
part of the total income.

(2) A reading of S. 14A makes it clear that while computing
the income under Chapter IV, deduction would not be allowed with regard to
expenditure incurred by the assessee in relation to an income which does not
form part of the total income under the Act.

(3) In the instant case, there was no dividend income
earned by the assessee. Therefore, there was no income which could be termed
as ‘income which does not form part of the total income under the Act’.
Therefore, the provisions of S. 14A were not applicable.



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S. 28(iv) : Gift received by assessee in return for helping the donor on various occasions was not income

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32 (2007) 18 SOT 362 (Delhi)


ITO v. Sunil Mittal

ITA No. 4350 (Delhi) of 2004

A.Y. 2001-02. Dated : 28-9-2007

S. 28(iv) of the Income-tax Act, 1961 — Gift received in
return for help rendered to a person on various occasions is not income within
the meaning of S. 28(iv).

 

During the year, the assessee received a gift of Rs.6 lacs
from a person whom he had helped on various occasions. The donor confirmed the
gift and the reason for giving the gift. The Assessing Officer, however, held
that gift was received during the course of the assessee’s business and,
accordingly, treated the same as income u/s.28(iv). The CIT(A) treated the gift
as genuine and deleted the addition made by the Assessing Officer.

 

The Tribunal held that the gift received by the assessee was
not income u/s.28(iv). The Tribunal observed as under :

(1) It was an accepted fact that the addition was not made
u/s.68 as unexplained cash credit. It was also accepted that the identity and
creditworthiness of the party were established and the transaction was
genuine.

(2) As per S. 28(iv), the value of any benefit or
perquisite, whether convertible into money or not, arising from the business
or the exercise of a profession, shall be treated as income chargeable to
income-tax under the head ‘Profits and gains of business or profession’.

(3) The amount was received by cheque and was not in any
intangible form in the nature of benefit or perquisite. The amount was not
received in kind. Thus, it could not be treated as benefit or perquisite.

(4) The assessee helped the donor on various occasions.
Thus, it was not in the course of carrying on the assessee’s business that any
benefit or perquisite was received.

 


Therefore, the gift amount was outside the scope of income in
terms of S. 28(iv).

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S. 145 r.w. S. 35E — Change in method of accounting — Assessee engaged in prospecting and exploring minerals changed its method of capitalising expenditure incurred to charging same to P/L A/c. — Change bona fide.

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16 DCIT v. ACC Rio Tinto Exploration Ltd.


ITAT ‘C’ Bench, New Delhi

Before R. K. Gupta (JM) and

K. G. Bansal (AM)

ITA Nos. 4908 /Del./2005

A.Y. : 2001-02. Decided on : 26-9-2008

Counsel for revenue/assessee : Suresh K. Jain/

Salil Kapoor


S. 145 read with S. 35E of the Income-tax Act, 1961 — Change
in method of accounting — Assessee engaged in the business of prospecting and
exploring ores and minerals changed its earlier method of accounting of
capitalising the expenditure incurred to charging the same to profit and loss
account — Whether the change was bona fide — Held, Yes.


Per K. G. Bansal :

Facts :

The assessee was engaged in the business of prospecting and
exploring ores and minerals. As per its method of accounting, expenditure
incurred on such activities was capitalised. During the year under appeal the
assessee changed its accounting policy in respect of the same and the
expenditure incurred on such activities was charged to profit and loss account.
The AO did not accept the change for the following reasons :



  • Change was not bona fide and it was made only to get over the provisions of S.
    35E;



  • New method of accounting led to mismatch of the expenditure with the receipts;



  •  Business of the assessee i.e., mining minerals and ores, had not commenced;



  • To
    align its accounting policy with its parent company was not a good ground to
    justify the change.



The CIT(A) on appeal came to the conclusion that the assessee
was in the business of exploration, and not mining as held by the AO. Further,
being satisfied that the change made in accounting policy was bona fide, the
CIT(A) allowed the assessee’s appeal.

Before the Tribunal the Revenue contended that the assessee
had changed its policy only to frustrate the provisions contained in S. 35E of
the Act and submitted that the order of the AO be restored.

Held :

Referring to the main objects as per the Memorandum of
Association of the assessee company, the Tribunal noted that the assessee
company was formed to carry on the business of prospecting or exploring the ores
and minerals. According to it, the conclusion got further strength from the FIPB
approval received by the assessee, which was only for carrying out exploration
activity. Thus, the Tribunal held that the mainstay of AO that the business of
the assessee had not commenced and therefore, the expenses cannot be charged to
profit and loss account failed. Further, the Tribunal held that to align the
accounting policy with that of one’s parent, could be a valid ground and it did
not agree with the AO that it was not a good ground to permit the change.
According to it, the change would lead to more appropriate preparation and
presentation of the financial statement for the reason that the losses will not
unnecessarily be carried forward as work-in-progress, when there was none.


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S. 254 — When pendency of Department’s appeal not pointed out at hearing of appeal, no error in hearing only assessee’s appeal.

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15 ACIT v. Changepond Technologies Pvt. Ltd.


ITAT ‘A’ Bench, Chennai

Before T. R. Sood (AM) and Vijay Pal Rao (JM)

M.P. No. 137/Mds/08 in ITA No. 731/Mds/07

A.Y. : 2003-04. Decided on : 14-8-2008

Counsel for revenue/assessee : Shaji P. Jacob/

H. Padamchand Khincha

S. 254 of the Income-tax Act, 1961 (‘the Act’) — When the
fact of pendency of Department’s appeal was not pointed out at the time of
hearing of the appeal of the assessee, can it be said that the Tribunal has
committed an error while hearing only the assessee’s appeal — Held, No.

Per Vijay Pal Rao :

Facts :

The Tribunal in ITA No. 731/Mds./2007 passed an order on
15-2-2008 in an appeal filed by the assessee, whereas the appeal filed by the
Department was not disposed of together. The assessee had made a petition with
the registry of the Tribunal for clubbing of both the appeals and being heard
together. Since the appeal of the Department was not heard along with the
assessee’s appeal, the Revenue filed this miscellaneous petition contending that
there was an error in the order of the Tribunal dated 15-2-2008. The Revenue
pointed out that the Apex Court in the case of Vijai Int. Udyog has held that
cross appeals of the assessee and the department should be heard together and if
the Departmental appeal is not heard along with the assessee’s appeal, then the
order passed in the assessee’s appeal is clearly erroneous. Thus, it was
contended that the appeal was disposed of by overlooking the mandatory direction
of the Apex Court and the order dated 15-2-2008 of the Tribunal may be recalled
and heard along with the appeal of the Department.

Held :

The Tribunal noted that admittedly, the fact of pendency of
Department’s appeal was not pointed out at the time of hearing of the appeal of
the assessee. The Tribunal observed that the appeal of the Department was
allowed by the Apex Court in the case of Vijai Int. Udyog, because both the
parties consented to the rehearing of the case. It also noted that the Apex
Court has in para 13 of the decision in the case of Vasant Manganlal Chokshi
held that unless and until the Department had pointed out to the Tribunal that
its appeal was also pending, the Tribunal cannot be said to have committed an
error by adjudicating only the assessee’s appeal. The Tribunal also noted that
though the order of the Apex Court in the case of Vasant Manganlal Chokshi was
by way of dismissal of SLP, it was a case of dismissal with reasons. As the Apex
Court had in the case of Kunhayammed & Others held that when the Apex Court
passes an order in SLP and also gives reasons, then such order would also
constitute binding precedent on the lower Courts. Accordingly, the Tribunal held
that it has not committed an error while hearing only the assessee’s appeal. The
Tribunal found that there was no error apparent from the order of the Tribunal.
The miscellaneous petition was rejected.

Cases referred to :



1. Commissioner of Sales Tax v. Vijai Int. Udyog, (152 ITR
111)(SC)

2. Commissioner of Customs v. Vasant Manganlal Chokshi,
(204 ELT 5) (SC)

3. Kunhayammed & Others v. State of Kerala & Another, (245
ITR 360) (SC)

4. V. M. Salgaocar & Bros. (P) Ltd. v. CIT, 243 ITR 383
(SC)

5. CIT v. Balwant Singh Arora, (180 ITR 400) (Punjab &
Haryana)

6. DCIT v. Smt. P. Shanti, (MP No. 266/Mds./2005) (ITAT —
Chennai)


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Processing of returns for A.Y. 2007-08 and steps to clear the backlog. Instruction No. 12/2008, F.No.225/106/2008-ITA-II dated 5-9-2008 (reproduced).

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2 Processing of returns for A.Y. 2007-08 and
steps to clear the backlog. Instruction No. 12/2008, F.No.225/106/2008-ITA-II
dated 5-9-2008 (reproduced).

Kindly refer to the above.

 


2. A review of CAP-II statements for June and July 2008 shows
a large pendency of returns for A.Y. 2007-08 in almost all CCIT Regions. The
Board had earlier kept a target of 4-6 months for processing of returns. The
criteria for matching claims for granting TDS certificates were relaxed in June
2006, in order to expedite the processing of pending returns and necessary
instruction in this regard was issued vide Instruction No. 6/2008, dated 18th
June, 2008. However, the number of returns processed has not shown any
significant improvement. A large number of electronic returns for A.Y. 2007-08
as also refund returns are still pending for processing. The Board is concerned
about the slow pace of progress in this regard. In order to speed up the
processing of pending returns for A.Y. 2007-08, it has been decided to adopt the
following strategy :

(1) All pending returns for A.Y. 2007-08 involving refund
claims (including electronic returns with refund claims) must be processed on
priority basis by 30th September, 2008. Where any scrutiny assessment is
pending in these cases, refund should be issued only after completion of the
scrutiny assessment.

(2) For processing electronic returns involving refund
claims, TDS data supplied by DGIT (Systems) on CDs along with AST instructions
68 may be utilised.

(3) Refund returns involving inter-RCC migration of PAN may
be processed on TMS.

(4) Since data of electronic returns is already on the
system, once this is acquired into the RCC data base, it will become part of
the selection process under CASS. Therefore, electronic returns for A.Y.
2007-08 not involving refund claims can be taken up for processing after 30th
September. However, it has to be ensured that all such returns are acquired
and incorporated into RCC data base before the next round of CASS is run.

(5) Returns in forms ITR-4 and 5 filed in paper made by
business assessees and not covered by S. 44AB of the Income-tax Act, 1961
should be taken up for processing on AST at the stations on network on
priority basis at the earliest before the next round of selection through
CASS.

(6) Salary returns for A.Y. 2007-08 in which there is no
refund or demand and the TDS claim is below Rs.5 lakh, may be given the last
priority for processing.

 


This may be brought to the notice of all concerned for strict
compliance. Any difficulties arising in processing of returns on AST may be
brought to the notice of DGIT (Systems) and, wherever necessary, to the Board.

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