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Year: 2008

S. 271(1)(c) : Denial of claim for deduction resulting into higher assessed income cannot be ground for imposition of penalty

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(Full texts of the following Tribunal decisions are available
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16 Nasu Properties Pvt. Ltd. v. ITO


ITAT ‘I’ Bench, Mumbai

Before K. C. Singhal (JM) and

D. K. Srivastava (AM)

ITA Nos. 1160 and 1161/Mum./2006

A.Ys. : 2000-01 and 2001-02. Decided on : 21-1-2008

Counsels for assessee/revenue : Jayesh Dadia/Ashima Gupta

S. 271(1)(c) of the Income-tax Act, 1961 — Penalty for
concealment of income — Claim for deduction denied resulting into higher
assessed income — Whether AO justified in imposing penalty — Held, No.

 

Per D. K. Srivastava :

Facts :

The assessee’s claim for deduction of Rs.5 lacs towards
diminution in the value of investment was disallowed by the AO and confirmed in
appeal by the CIT(A) as well as the Tribunal.

 

In response to the show-cause notice with reference to the
penalty u/s.271(1)(c), the assessee contended that full facts necessary for the
assessment were disclosed in the return of income filed. Therefore, it did not
amount to concealment of income. However, the AO levied the penalty which was
confirmed by the CIT(A).

 

Held :

The Tribunal noted that the assessee had furnished all the
relevant particulars in its return of income. Thus, the charge of furnishing of
inaccurate particulars of income by the assessee was not established. According
to it, simply because the Departmental authorities had not accepted the claim of
the assessee or the assessee had lost appeals filed against the orders of the
Departmental authorities, dismissing the claim of the assessee, cannot ipso
facto lead to the establishment of charge of furnishing of any inaccurate
particulars of income. Accordingly, the penalty levied was cancelled by the
Tribunal.

 

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S. 9(1)(vii), 40(a)(i), 195 — Payments made for purchase of Internet bandwidth and TDS — Not FTS, not subject to TDS

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New Page 19 DCIT
v. M/s. Estel
Communications Pvt. Ltd. (Delhi ITAT) (Unreported)


S. 9(1)(vii), S. 40(a)(i), S. 195
of the Act


A.Y. : 2003-04. Dated : 10-3-2008

 

Issue :

Disallowance u/s.40(a)(i) of the Act for
non-deduction of tax u/s.195 of the Act from payments made for purchase of
internet bandwidth and TDS.

 

Facts :

The assessee-company had entered into a reseller
agreement with a non-resident company. In terms of the agreement, the
non-resident company was to provide various internet services on non-exclusive
basis to the assessee-company for resale of these services to the end-user
customers in the territory. The Internet services pertained to provisions of
bandwidth with certain minimum performance speed. The privity of contract was
between the assessee-company and the non-resident company and there was no
privity of contract between the non-resident company and the end-user customers.
In terms of the agreement, the assessee-company had made certain payments to the
non-resident company. While making the payments, the assessee-company had not
deducted any tax at source. According to the AO, the assessee-company was
required to deduct tax u/s.195 of the Act, but since it had not deducted the
tax, he disallowed such payments u/s.40(a)(i) of the Act.

 

In the assessee-company’s appeal before him, the
CIT(A) observed that the issue was identical to the decision in Wipro Ltd. v.
ITO, (2003) 80 TTJ 191 (Bang). In that case, the Bangalore Tribunal had held
that the agreement was for use of standard facility and standard services; the
payments were for utilisation of customer-based circuits; the payments were not
fees for technical services u/s.9(1)(vii) of the Act and were not subject to
deduction u/s.195 of the Act. The CIT(A) therefore held that the payments were
not subject to TDS u/s.195 of the Act and that the disallowance u/s.40(a)(i) of
the Act was not warranted.

 

The Department preferred an appal to the Tribunal
against the order of the CIT(A). The Tribunal referred to several clauses of the
reseller agreement and observed that the assessee-company was not paying any
fees for technical services but making payment for the purchase of internet
bandwidth. Even though sophisticated equipment was being used and though the
Internet connectivity was through satellite link, the assessee-company cannot be
said to be availing technical services. Further, the Tribunal also noted that in
the assessee-company’s case for A.Y. 2001-02, the Tribunal had considered
similar issue of disallowance and held in favour of the assessee.

 

Held

Following the order of
the Bangalore Tribunal in the aforementioned case, the Tribunal upheld the Order
of the CIT(A) and held that :

(i) The payment made
by the assessee-company was not towards rendering of any managerial, technical
or consultancy services, but was merely for use of Internet access facility
and accordingly, the payment was not subject to tax u/s.9(1)(vii) of the Act.

(ii) As such the
assessee-company was not required to deduct tax at source u/s.195 of the Act.

(iii) Since there was
no liability to deduct tax u/s.195 of the Act, the amount could not be
disallowed u/s.40(a)(i) of the Act.

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S. 195 — Reimbursement of expenses incurred by non-resident promoters outside India — Not subject to TDS.

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New Page 18 Bangalore
International Airport Ltd. v.
ITO (2008) 6 DTR (Bang.) (Trib.) 15


S. 195 of the Act


A.Y. : 2006-07. Dated :
17-12-2007

 

Issue :

Whether reimbursement of expenses incurred by
non-resident promoters prior to their participation in joint venture company is
subject to tax deduction u/s.195 of the Act ?

 

Facts :

The assessee-company was a joint venture company
established for development of international airport at Bangalore, having equity
participation from certain non-resident companies, which were also the promoters
of the assessee. The non-resident promoters had incurred various expenses
towards technical and other consultations. These consultations were undertaken
outside India prior to the award of the contract to the non-resident promoters
and payments were also made by the non-resident promoters outside India. The
shareholders’ agreement pertaining to the assessee-company provided for
reimbursement of development cost to the promoters. In pursuance thereof, the
Board of Directors of the assessee-company passed a resolution to the effect
that “The offshore expenses shall be advanced by private promoters. All
expenses will be reimbursed and capitalised after financial close“. The
reimbursement of the expenses was to be limited to 50%. Accordingly, the
assessee-company reimbursed 50% of the expenses to the non-resident promoters.

 

In his order u/s.195 of
the Act, the AO had accepted the fact that the amount was being paid much after
the incurring of the expenses by the promoters. However, since the expenses
included element of technical services and since they were incurred after the
execution of shareholders agreement, he was of the opinion that tax should have
been deducted or should be deducted. In this context, the assessee-company
brought to the attention of the AO the decision in Hyder Consulting Ltd., In
re (1999) 236 ITR 640 (AAR) and also contending that reimbursement of
expenses in no way involves any element of profit and further since the expenses
were incurred by the non-resident in respect of services rendered by another
non-resident outside India, TDS provisions were not attracted. The AO, however,
did not accept this contention and concluded as follows and proceeded to compute
the tax to be withheld by the assessee-company.

(a) The foreign
shareholders of the applicant company had provided certain services to the
applicant company.

(b) The contention
that part of these services were obtained from other parties is of no
consequence.

(c) All these services
which are proposed to be paid for by the applicant company now, have been
utilised by the applicant company in India.

(d) All these services
called by the applicant as ‘consultancy services’ fall squarely within the
meaning of fees for technical services, as provided for in Article 12 of both
the relevant DTAAs as also the IT Act.

(e) Thus, the
consideration payable for such services is chargeable to tax, even if its
nomenclature is ‘reimbursement’, as the income is deemed to accrue or arise in
India.

(f) Hence, withholding
provisions of S. 195 are clearly invoked.

(g) The rate of
withholding tax is 10% as per the respective DTAAs, in view of the fact that
it is the rate beneficial to the payees.

(h) The above
conclusions, based on the facts and information as provided by the applicant,
are to be seen in the context of S. 195 of the IT Act. The provisions of S.
195 are necessarily summary and are only for the purpose of determining the
issue and quantum of withholding tax. It follows that the said tentative
conclusion is subject to the test of final determination at the stage of
assessment.

 

In appeal by the assessee-company, the CIT(A) noted
the agreement and arrangement between the share-holders and also the arguments
of the assessee-company. CIT(A) did not dispute assessee-company’s claim of it
being a case of reimbursement of expenses and also that the reimbursement was
only to the extent of 50% of the actual expenses. However, observing as follows,
he held that the AO was justified in his conclusions :

(i) The nature of
services are such as would be prima facie covered by the definition of
FTS in IT Act as well as respective DTAAs.

(ii) Adequate support
in respect of quantification of costs reimbursed has not been furnished by the
appellant.

 


In appeal before the Tribunal, the Tribunal noted that the expenses were incurred by the non-residents out of India in their capacity as promoters and at the relevant time, S. 5 or S. 9 was not applicable, since it was not a payment by a resident to a non-resident. The payment by the assessee-company to the non-resident promoters was a case of reimbursement of expenses incurred and such reimbursement was limited to 50%, which could not be equated to amount paid for technical services. As such it would not involve any profit element. The expenses were incurred to ascertain the feasibility and viability of the project for the promoters to decide whether to participate in the project. One of the bidders whose bid was not accepted had also incurred certain expenses, 50% of which were reimbursed and the Department had permitted such reimbursement without any TDS. The Tribunal noted that there was no difference between the bidder whose bid was not accepted and the bidder whose bid was accepted.

Held:

The Tribunal held that on facts and circumstances, the reimbursement of 50% of the expenses incurred by the non-resident promoters outside India did not attract provisions of S. 195(2) of the Act.

India-USA DTAA — Examination fee paid to US Company — Not taxable

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New Page 17 KnoWerX Education (India) Private


Limited, In re
(AAR) (unreported)


Articles 1, 4, 5, 7 of India-USA DTAA;


Sections 4, 5, 9, 195 of the Act


Dated : 30-4-2008

Issues :

(i)
Examination fee
collected in India by resident on behalf of American professional
organisations and remitted to them outside India — Taxability thereof :

(a) in terms of
the Act; and

(b) in terms of
India-USA DTAA.

(ii)
Characterisation of the income mentioned in (i) above.


(iii)
TDS obligations of the resident
in respect of the income mentioned in (i) above

 



Facts :

The applicant was an Indian company which had
entered into agreement with an American entity for promotion of professional
certification programmes and examinations conducted by the American entity. It
was also in the process of entering into agreement with another American entity
for the same purpose. Under both the agreements, the applicant was to act as
their agent. The applicant would carry out promotional and marketing activities;
collect registration forms and fees from candidates in India desirous of
enrolling for the programmes/examinations; and remit the fees to the American
entities after deducting certain administration expenses and commission. The
American entities would conduct examinations either through the applicant or
through other entities in India; evaluate answer sheets; award certificates to
the candidates; forward these certificates to the applicant; and the applicant
would in turn distribute them to the candidates.

 

The AAR considered the
following questions :


1. (a) Whether
examination fees collected by the applicant in India on behalf of the
American entities and remitted to them were their ‘income’ liable to tax in
India ?

(b) If answer to (a)
is in affirmative, how should that income be classified — as business
income, royalty or fees for technical services ?

2. Whether the
applicant was required to deduct tax at source in respect of the remittances
and if so, at what rate ?

 



The AAR first examined the questions in light of S.
5 of the Act and observed that in terms of S. 5(2), income of a non-resident
includes income which accrues, arises or is received in India, or which is
deemed to accrue, arise or to be received in India, from any source in India. In
this context, the AAR referred to the Supreme Court’s decisions in CIT v.
Ahmedbhai Umarbhai and Co., (1950) 18 ITR 472 (SC), CIT v. Ashokbhai
Chimanbhai, (1965) 56 ITR 42 (SC) and Seth Pushalal Mansinghka (P) Ltd.
v. CIT, (1967) 66 ITR 159 (SC) and observed that while the income did not
accrue or arise, nor was it deemed to accrue or arise in India, it was received
in India as an agent of the American entities in India. It further observed that
the income was in the nature of business income. The applicant was receiving
income in India on behalf of the American entities as their agent. Hence, in
terms of S. 4 and S. 5 of the Act, the examination fee collected by the
applicant on behalf of the American entities would be taxable in India.

The AAR then considered the questions in light of
India-USA DTAA. The applicant had stated in his application that the American
entities were non-profit organisations, which were determined by American tax
authorities as ‘tax exempt organisations’. In response, the Department had
contended that since these were ‘tax exempt organisations’, they could not be
regarded as tax residents of the USA and consequently, provisions of India-USA
DTAA could not apply. For this purpose, the Department relied on the provisions
of Articles 1 and 4 of India-USA DTAA. The Department also contended that
partnerships, trusts, etc. were regarded as ‘transparent entities’ in the USA
and were not liable to pay tax there. In response, the applicant filed
additional documents and submissions to prove that the American entities were
corporations incorporated in the USA; were not ‘transparent entities’; were
liable to pay tax in the USA; but being in certain specified category, were
exempted from payment of tax. The AAR, therefore, held that they were tax
residents of the USA and provisions of India-USA DTAA would apply.

 

The Department also put forth the argument that the
applicant should be treated as PE in India of the American entities. After
examining the provisions of Articles 7 and 5 of India-USA DTAA, the AAR found
that the applicant did not conclude any contract on behalf of the American
entities and the admission of candidates for programme/examination was solely
done by them. Further, the applicant did not carry on any of the other
activities mentioned in Article 5 (such as storage of goods, etc.); on facts, it
could not be considered as dependent agent; it had liberty to have similar
relationship with others; it was not wholly or substantially dependent on the
American companies; it appeared to carry on promotion in the ordinary course of
its business; and it was not subject to any control of the American entities
with regard to the manner of carrying on it.

S. 36(1)(vii) : Unrealisable amount due to a share broker from client allowable as bad debts

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7 ACIT v. Olympia
Securities Ltd.

ITAT ‘G’ Bench, Mumbai

Before K. P. T. Thangal (VP) and

V. K. Gupta (AM)

ITA No. 4053/Mum./2002

A.Y. : 1997-1998. Decided on : 21-12-2006

Counsel for revenue/assessee: T. Shivkumar/

Rajiv Khandelwal

S. 36(1)(vii) of the Income-tax Act, 1961 — Bad
debts — Assessee, a share broker — Payments made towards purchase price of
shares on behalf of client turned bad — Whether allowable as bad debts — Held,
Yes.

 

Per V. K. Gupta :

Facts :

The assessee was a share broker. It had made
certain payments to the stock exchange on the day of settlement in respect of
purchases and sale of shares made through it by its clients. However, the client
failed to make payment and the assessee wrote off Rs.27.04 lacs as bad debts.
According to the AO, the assessee had failed to prove that the debt had become
bad. Accordingly, he disallowed the claim of the assessee, both as bad debts and
as trading loss u/s.28. On appeal, the CIT(A) deleted the addition and held that
the claim of the assessee was allowable both, u/s.36(1)(vii) as bad debts and as
trading loss u/s.28.

 

Before the Tribunal, the Revenue contended that the
assessee had not fulfilled the conditions of S. 36(2) viz., that the
amount claimed as bad debts had not been taken into account in computing the
income of the assessee for the previous year or any other earlier years.
Secondly, unlike banking company or money lender, the brokerage income earned by
the assessee was not of the category of interest on loan, hence, the loss
arising out of non-payment of amount by the clients was a capital loss. Further,
it relied on the decisions of the Mumbai Tribunal in the case of Harshad J.
Choksi and B. N. Khandelwal.

 

Held :

The Tribunal noted that as per the provisions of S.
36(2), the deduction of bad debt or part thereof can be allowed only when such
debt or part thereof has been taken into account in computing the income of
the assessee.

 

According to the Tribunal, the income of any
assessee was not the gross receipts, but it was the excess of gross receipts
over the expenditure. Thus, in the case of share brokers or agents, gross income
by way of brokerage or commission was credited in the profit and loss account
against which the expenses were claimed. To further explain, it gave an
hypothetical example wherein the assessee credits Rs.105 in profit and loss
account and debits the same in the client’s account. Simultaneously, the
assessee debits profit and loss account with Rs.100 being the value of shares,
treating the purchases of shares on behalf of the client as on its own account
and the sale thereof, by including the brokerage amount in the sale price, as
its gross margin. In that situation, according to the Tribunal, all the
conditions of S. 36(2) would stand satisfied as per the Revenue. However,
according to the Tribunal, even the crediting of only gross brokerage amount of
Rs.5 in profit and loss account would reflect the transaction from which it
emerged and the transaction of creating a debt which was taken into account
impliedly or notionally in computing the income of the assessee. Thus, the
Tribunal opined that the conditions of S. 36(2) stand satisfied even in cases
where only income had been credited in the profit and loss account. According to
the Tribunal, the provisions of allowing the claim in case of money-lending or
finance business as provided in S. 36(2) further support the view expressed
above. Since the claim of the assessee was allowed u/s.36(1)(vii), no finding
was given about the allowability of the claim u/s.28 of the Act.

 

Cases referred to:



1. Harshad J. Choksi v. ACIT, (1995) 52
ITD 511

2. ACIT v. B. N. Khandelwal, (2006) 101
TTJ (Mum.) 717



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S. 148 : When time limit for issuance of notice u/s.143(2) not expired, notice u/s.148 invalid.

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




15 B. R. Industries v. ITO


ITAT ‘A’ Bench, Jaipur

Before I. C. Sudhir (JM) and B. P. Jain (AM)

ITA No. 988/J.P./2006

A.Y. : 2003-04. Decided on : 31-12-2007

Counsels for assessee/revenue : Mahendra Gargieya/L. R. Meena

S. 148 of the Income-tax Act, 1961 — Validity of issuance of
Notice — When time limit for issuance of notice u/s.143(2) had not expired,
whether Assessing Officer was justified in issuing notice u/s. 148 — Held, No.

 

Per B. P. Jain :

Facts :

The assessee had filed return of income on 2-12-2003, which
was processed u/s.143(1)(a) on 10-3-2004. Thereafter a notice u/s.148 was issued
on 8-4-2004 and served on 9-4-2004. The assessee was also served a notice
u/s.143(2) on 29-7-2005. The assessee challenged the validity of the notice
u/s.148 of the Act which was rejected by the AO and the CIT(A) as well.

 

The assessee contended that once the AO was having the
statutory time available with it for the issuance and service of a notice
u/s.143(2), during the pendency and availability of such time, he could not have
issued the notice u/s.148. The original return of income was filed on 2-12-2003
and as per the proviso below S. 143(2) of the Act, such a notice could have been
issued validly on or before 31-12-2004. The AO however, without waiting until
the expiry of the said period i.e., up to 31-12-2004, issued a notice
u/s.148 on 8-4-2004.

 

Held :

The Tribunal agreed with the assessee that when the statutory
time limit was a available with the AO for issuance of notice u/s.143(2) of the
Act, then the notice u/s.148 cannot be issued during the pendency of the
proceedings. Further, it observed that the notice u/s.143(2) could be served
within 12 months from the end of the month in which the return was furnished as
per proviso to S. 143(2) of the Act and since in the present case, the notice
u/s.143(2) was served on 29-7-2005 i.e., after the expiry of 12 months
from the end of the month in which the return was furnished, the same was also
not valid. Further, relying on the decisions listed below, the Tribunal allowed
the appeal of the assessee.

 

Cases referred to :



(1) DCIT v. Krishan Lal Leela, 34 TW 40 (Jp)

(2) R. B. Securities Ltd. v. JCIT, 141 Taxman 49
(Digest) (Del.)

(3) Bapa Lal Exports Co. v. JCIT, (2007) 289 ITR 371
(Mad.)

(4) KLM Royal Dutch Airlines v. ADI, (2007) 159
Taxman 191 (Del.)

 


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S. 23(1)(b) : Stamp duty and brokerage paid by the landlord allowable as deduction from rent received.

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


14 Govind S. Singhania v. ITO

ITAT ‘K’ Bench, Mumbai

Before R. K. Gupta (JM) and

V. K. Gupta (AM)

ITA No. 4581/Mum./2006

A.Y. : 2002-03. Decided : on 3-4-2008

Counsels for assessee/revenue : Vijay Mehta/

L. K. Agarwal

 

S. 23(1)(b) of the Income-tax Act, 1961 — Income from house
property — Annual letting value — Whether Stamp Duty and brokerage paid by the
landlord-assessee allowable as deduction from the rent received — Held, Yes.

 

Per V. K. Gupta :

Facts :

The assessee gave his premises at Mittal Towers on lease and
incurred expenses of Rs.30,000 for Stamp Duty and Rs.85,000 for payment of
brokerage on account of renewal of Lease Agreement. The Assessing Officer,
however, held that the expenses were not allowable against the income from house
property, because the expenses allowable therefrom had been specified by the
Legislature and these expenses did not fall in that category. On appeal, the
CIT(A) also, confirmed the action of the Assessing Officer.

 

The assessee contended before the Tribunal that without
incurring these expenses, he could not have earned the rental income, because
Stamp Duty had to be paid as per the provisions of the Stamp Duty Act, which was
a mandatory requirement and since the premises was let out through the broker,
there was also an obligation on the part of the assessee to pay the brokerage.
The assessee further contended that he could have asked the tenant to pay the
same and adjust the same from the rent and in that event the assessee would have
got only net rent.

Held :

The Tribunal agreed with the assessee that without incurring
these expenses, the assessee would not have earned the rental income. It further
noted that the assessee had computed the annual letting value u/s.23(1)(b) of
the Act. Hence, according to it, such rent had to be net of these expenses. The
Tribunal also found substance in the alternative argument of the assessee that
had these expenses been borne by the tenant, then only the net amount would have
been the annual letting value within the meaning of S. 23(1)(b) of the Act.
Further, the case laws relied on by the assessee (listed below) also support
this view. In this view of the matter, the Tribunal held that the annual letting
value should be taken net of Stamp Duty and brokerage paid by the assessee.

Cases referred to :



(1) Varma Family Trust v. Sixth ITO, 7 ITD 392
(Mum.)

(2) Sharmila Tagore v. JCIT, 93 TTJ 483 (Mum.)

(3) Realty Finance & Leaseing (P) Ltd. v. ITO, 5 SOT
348 (Mum.)

(4) Nandita Banerjee v. ITO, (ITA. No.
1360/Mum./2000) dated 8-4-2004.

 


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Salary income of an expatriate who partly rendered services in India and partly outside India not chargeable to tax in India in respect of proportionate period for which services performed outside India

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13 DCIT v.
Mr. Erick Moroux C/o. Air France and Others

(2008) (TIOL 145 ITAT Del.)

S. 9(1)(ii) of the Act

A.Y. : 2001-02. Dated : 15-2-2008

Issues :



l
Salary income of an expatriate who partly rendered services in India and
partly outside India would not be chargeable to tax in India in respect of
proportionate period for which services are performed outside India.


l
Contribution towards social securities and other funds in terms of labour law
regulations in France represents diversion of salary at source and is not
taxable in India.


 


Facts :

The assessee, an employee of Air France, was posted in India
since August 2000. For the year under reference, he was R but NOR. In terms of
his employment agreement, apart from rendering services in India, the assessee
was also required to supervise operations in France as well as in South Asia.
The employment agreement itself contemplated that about 20% of the time of the
assessee would be for operations outside India.

 

For the year under reference, the assessee was outside India
for a period of 19 days. The assessee claimed that the salary attributable to
the period for which he rendered services outside India was not taxable in
India.

The Department rejected the claim primarily on the ground
that the assessee provided no evidence of the service that he rendered while
being outside India. The Department also relied on the Explanation to S.
9(1)(ii) inserted with effect from A.Y. 2000-01 to contend that the salary for
period outside India was salary for leave/rest period and hence taxable in terms
of amended S. 9(1)(ii).

The second controversy was about deduction/exclusion in
respect of contributions made towards various schemes in France. The assessee
had made mandatory contributions towards various social security schemes for
health insurance, for retirement scheme, for pension scheme, insurance coverage
for long illness and for widowhood, etc. in France. These amounts were claimed
to be non-chargeable on the ground that the same represented diversion of income
at source.

The Department rejected the contention by holding that the
payments were in the nature of application akin to the payment of provident fund
or some such investment schemes applicable in India.

Held :



l
The ITAT accepted the assessee’s contention that salary attributable to
service outside India was not taxable in India. The ITAT relied on Special
Bench decision in the case Air France viz. J. Calle and Others, (ITA
5921 to 5929/Del). In the view of ITAT, the fact that the employment contract
mandated the assessee to oversee operations outside India coupled with the
assessee’s actual presence outside India did amply support the claim of the
assessee.


 


The Tribunal also held that the amended explanation to S.
9(1)(ii) was not applicable, as the period of absence from India was neither
rest period, nor leave period.

 

The ITAT relied on earlier decision of the Mumbai Tribunal in
the case of Gallotti Raoul v. ACIT, (1997) (61 ITD 453) to hold that
since there was no discretion available to the assessee with regard to statutory
deduction, such contribution was a diversion of income by overriding title and
cannot be brought to tax.

 

The Tribunal noted the following observations from the
decision of Galloti Raoul (supra) and concurred with them.

“The concept of such compulsory contribution to social
security is not prevalent in India. Unlike the schemes in India which are saving
schemes, the scheme of social security is not a saving scheme, but a scheme to
protect the French nationals from various calamities. From this point of view,
the amount that was contributed to the social security organisation was a
diversion of income by overriding title at the stage of earning point itself.
The affiliation being compulsory, making the social security organisation an
earning partner alongside of the assessee i.e., assessee earned not only
for himself, but also for the social security organisation. The assessee had no
right over it at all and thereby no domain on it. Hence the social security
charges were to be deducted from the salary income as a prior charge by
overriding title and it would be only the net salary after such deduction that
should be treated as gross salary within the meaning of S. 16.”

levitra

Prosecution under Central Excise Laws

Excise Duty Spectrum

Prosecution is one of the means of enforcing law.


1.1 The dictionary meaning of the word ‘prosecution’ is
‘prosecuting of someone in respect of a criminal charge’. The word is an
extension of ‘prosecute’ which itself means instituting legal proceedings.

1.2 S. 9 of the Central Excise Act, 1944 hereinafter
referred to as ‘the act’ contains provisions regarding penalties and offences.

This Section provides for imprisonment of 6 months to 7 years
and fine in cases where revenue involved in an offence is more than Rs.1 lac and
in other cases 3 years imprisonment and/or fine. For the second and subsequent
offence the imprisonment may extend to seven years and fine. Offences u/s.9
however are non-cognizable, as defined in Code of Criminal Procedure, 1973 by
virtue of S. 9A(1) of the Act. However, S. 9A(1) of the Act provides that for
adequate reasons, which are to be recorded in judgment, imprisonment can be for
less than 6 months. Very specifically the following are not adequate
reasons :



  •  first-time conviction
  •  levy of penalty paid or confiscation of goods
  • any other action taken or proceedings initiated under the Act
  •  accused is not the principal offender
  • the age of the accused.




2.1
Offences entailing prosecution :





  • Evasion of duty.



  • Removal of excisable goods in contravention of any of the provisions of the
    Act or rules made thereunder.



  • Possession of in transporting, depositing, keeping, concealing, selling or
    purchasing, or in any other manner dealing with excisable goods which he knows
    or has reason to believe are liable to confiscation.



  • Contravention of any of the provisions of this Act or the rules made
    thereunder in relation to credit of any duty allowed to be utilised towards
    payment of excise duty on final products.



  • Failure to supply any information required by the Excise rules.



  • Supplying false information.



  • An attempt to commit, or abet commission of any of the above offences.



2.2 It is because of the possession of excisable goods that
transporters, warehouse keepers and purchasers also are caught in the Excise
net. Similarly next time when the Department asks for information and an
assessee either does not furnish it or furnishes false information we know the
force behind it.

2.3 It is important to note that even an attempt to commit an
offence is enough to entail prosecution and fine.

Who can be prosecuted — S. 9AA of the 1944 Act :

3.1 S. 9AA provides that every person who, at
the time the offence was in charge of the company, and/or was responsible for
the conduct of the business, as well as the company shall be deemed to be guilty
of the offence and shall be liable to be proceeded against and punished. The
phrase ‘every person’ can lead to the highest officer viz. : managing
director, whole-time director and the person authorised to sign the excise
documents.

3.2 S. 9AA(2) provides that if the offence is committed and
it is proved that the offence has been committed with the consent or connivance
of, or is attributable to, any neglect on the part of any director, manager,
secretary or other officer of the company, then such person shall also be deemed
to be guilty of that offence and shall be liable to be proceeded against and
punished accordingly.

3.3 However, if a person proves that the offence was
committed without his knowledge or that he had exercised all due diligence to
prevent the commission of an offence, then such person will not be liable for
prosecution.

3.4 Persons involved in the removal of excisable goods.

3.5 Persons in possession of excisable goods.

Guidelines for launching prosecution :

4.1 The Central Board of Excise & Customs (CBEC) has issued
guidelines and procedures vide Circular Nos. 15/90-CX.6, dated 9-8-1990;
208/31/97-CX, dated 4-4-1994, 35/35/94-CX, dated 29-4-1994, 30/30/94-CX, dated
4-4-1994 and 208/21/2007-CX, dated 15-6-2007.

4.2 These instructions are as follows:

1.    Prosecution should be launched with the final approval of the Chief Commissioner or Director General of Central Excise Intelligence in specified cases after the case has been carefully examined by the Commissioner in the light of the guidelines.

2.    Prosecution should not be launched in case default is of technical nature or where the additional claim of duty is based totally on a difference of interpretation of law.

3.    Before launching any prosecution, it is necessary that the Department should have evidence to prove that the person, company or individual was guilty, had knowledge of the offence, or had intention to commit the offence, or in any manner possessed mens rea (mental element) which would indicate his guilt.

4.    In case of public limited companies, prosecution should not be launched indiscriminately against all directors of the company, but it should be restricted to only against directors like the managing director, director-in-charge of marketing and sales, director (finance) and other executives who are incharge of day-to-day operations of the factory.

5.    For the purpose of initiating proceedings, the Commissioners should go through the case file and satisfy themselves that action is taken only against those directors/partners/executives/officials where reasonable evidence exists of their involvement in duty evasion. For example, nominee directors of financial institutions, who are not concerned with day-to-day management should not be prosecuted unless there exists definite evidence to the contrary.

6.    A monetary limit of Rs.25,OO,OOOis prescribed for initiation of prosecution. However, if evidence to show exists that the person or the company has been systematically engaged in evasion over a period of time and evidence to prove mala fides is available, prosecution should be considered irrespective of the monetary limit.

7.    Persons liable to prosecution should not normally be arrested unless their immediate arrest is necessary. Arrest should be made with the approval of the Assistant Commissioner or the senior-most officer available. Cases of arrest should be reported at the earliest opportunity to the Commissioner, who will consider whether there is a fit case for prosecution.

8.    Decision on prosecution should be taken immediately on completion of the adjudication proceedings. Prosecution may be launched even during the pendency of the adjudication proceedings if it is apprehended that undue delay would weaken the Department’s case.

9.    Prosecution should not be kept in abeyance on the ground that the party has gone in appeal! revision.

10.    It is necessary to reiterate that in order to avoid delays, the Commissioner should indicate at the time of passing the adjudication order itself whether he considers the case to be fit for prosecution so that it could be further processed for being sent to the Chief Commissioner for sanction.

Procedure for prosecution:

1.    In all such cases where the Commissioner of Central Excise incharge of judicial work is satisfied that prosecution should be launched, an investigation report should be carefully prepared and signed by an Asstt. Commissioner endorsed by the Commissioner and forwarded to the Chief Commissioner for decision within one month of the adjudication of the case. Report should be in the prescribed format.

2.    A criminal complaint in a Court of Law should be filed only after the sanction of the jurisdictional Chief Commissioner or Director General of Central Excise Intelligence in specified cases has been obtained.

3.    Prosecution, once launched, should be vigorously followed. The officer incharge of judicial work should monitor cases of prosecution at monthly intervals and take corrective action wherever necessary to ensure that progress of the prosecution is satisfactory.

4.    In large cities, where a number of Central Excise divisions are located, all prosecution cases could be centralised in one office, so that it will be easier for the officers to deal with the cases.

5.    In order that the prosecution may have a deterrent effect, conviction should be secured with utmost speed. Hence, regular monitoring of the progress of prosecution case is mandated.

6.    As a matter of practice, whenever in a case approval of the Chief Commissioner is sought for launching prosecution, the concerned officer should immediately take charge of all documents, statements and other exhibits that would be required to be produced before a Court. The list of exhibits, etc. should be finalised in consultation with the Public Prosecutor at the time of drafting of the complaint. It should be ensured that all exhibits are kept in safe custody.

7.    It is apparent that generally in cases of sizable evasion, persons convicted under the Act suffer very light penalties which is contrary to the spirit of the Act, as well as the purpose of launching prosecution. The Board, therefore, desires that the Commissioners of Central Excise responsible for the conduct of prosecution, should study the judgments of the Courts and where it is found that the accused persons have been let off with light punishment, the question of filing appeal should be examined with reference to the evidence on record within the stipulated time. This is equally applicable to cases where the Court orders acquittal without recording sufficient reasons in the judgment despite existence of adequate evidence which was provided to the Court.

8.    S. 9B of the Act grants power to publish the name and place of business of person, etc. convicted by a Court of Law. The power is being exercised very sparingly by the Courts. The Board desires that in all cases of conviction, the Department should make a prayer to the Court to invoke this Section. The Board vide Circular No. 849/7/2007-CX, dated 19-4-2007 has issued guidelines in this regard.

9.    For launching prosecution where there is only one Adjudicating officer for a number of factories located under different Commissionerates, procedure prescribed in the Board’s instruction No. 35/35/94-CX, dated 29-4-1994 also needs to be followed.

Either before or after the institution of prosecution, any offence under this Chapter can be compounded by the Chief Commissioner on payment of demanded sum and compounding fees. The Board has issued detailed instructions regarding compounding of offences. Procedures and guidelines for withdrawal of prosecution have also been prescribed by the Board.

Judicial decisions:

Having considered the law and the guidelines, let us consider some of the decisions of the Supreme Court and High Courts on prosecution:

1.    I. T.e. Limited v. Collector of Central Excise, Delhi 1996 (84) ELT 404 SC:

Penalty:

Majority order of the CEGAT holding that penalty is imposable for each transaction with reference to each gate pass and clearances under Rule 9(2) of Central Excise Rules – Supreme Court found no ground to interfere with the said majority opinion – Appeal to Supreme Court dismissed – S. 35L of the Act.

Prosecution:

Difference of opinion amongst Members of the Tribunal on the question of quantum of penalty – Consequent upon imposition of penalty, no prosecution should be launched against the assessee – S. 9 of the Act.

2.    Collector of Central Excise, Hyderabad v. Electrolytic Foils Ltd., 1997 (91) ELT 543 sc:

Appeal for prosecution  dismissed when respondents cannot be served notice since the unit was completely closed down and even land on which unit stood had been sold – S. 35L of the Act.

Order:

The service on the respondent has not been possible because the unit has closed down and the information supplied by the Deputy Commissioner (Legal) is that even land on which the unit stood has since been sold to M/s. Nagarjuna Palma (India) Ltd. which is constructing its own factory on the land purchased by it. It is, therefore, obvious that the respondent unit has completely closed down and even the parcel of land owned by it has been dis-posed of and, therefore, we see no reason in permitting the appellant to pursue this appeal. We dispose of the appeal since the respondent cannot be served.

3.    Santram Paper Mills v. Collector of Central Excise, Ahmedabad 1997 (96) ELT 19 SC:

Prosecution:

Tribunal deciding against assessee – Effect – Prosecution in a Criminal Court is to be determined on its own merits and according to law, uninhibited by the findings of the Tribunal – S. 9, S. 33 and S. 35D of the Act.

4.    Parsin  Chemicals  Ltd.  v. Asstt.  Commissioner, 2003 (154) ELT A176 SC:

Prosecution:

Whether to be quashed if launched by authority contrary to Circulars issued by Board ? (2) – Contravention and evasion of duty spread over two years – Whether Board Circular No. 15/90-CX. 6, dated 9-8-1990is applicable? – (3) Whether Board’s Circular No. 208/31/97-CX. 6, dated 12-12-1997 is perspective in nature?

The Supreme Court granted leave in petition for special leave to appeal filed by Parsin Chemicals Ltd. Against order of the Andhra Pradesh High Court 2002 (146) ELT 39 (A.P.). While granting leave, the Supreme Court passed the following order:

Leave granted. Stay to continue.

The Andhra Pradesh    High Court had held that:

  • as per the guidelines in Board’s Circular No. 15/ 90-CX. 6, dated 9-8-1990 , prosecution should be considered irrespective of the monetary limit when the contravention and evasion of excise duty is not in relation to any particular incident, but spread over two years.

  • the prosecution is not to be quashed even if launched by an authority contrary to Circulars issued by the Board, as it is for the Court to decide as to whether there is any contravention.

  • Board Circular letter ENo. 208/31/37-CX. 6, dated 12-12-1997 for enhancing the monetary limit for prosecution to Rs.25 lakh is prospective in nature and is applicable in cases where contravention and evasion is subsequent to 12-12-1997.

5.    P. Krishnamurthi v. Assistant Collector of c. Ex., IDO, Shivakasi 1978 ( 2) ELT (J 628) Mad. :

Prosecution:

A minor cannot be prosecuted for offences merely on the ground that he is a partner of a firm which is being prosecuted for violation of Central Excise Law, because he cannot look after the affairs of the factory.

6.    Kedar Nath Goenka v. Superintendent of Central Excise, 1978 (2) ELT (J 538) Cal. :

Prosecution:

It is clear from the words ‘whoever commits’ in S. 9(1) that a person is made personally liable for an offence committed under the Central Excises Act and the liability cannot be extended to any other person merely by virtue of an office or position he holds in a company or firm, unless it is specifically averred in the complaint that he is guilty of an act of commission or omission which amounts to an offence punishable under the Act.

7.    Union of India v. [asbhai and another, (8) ELT902 M.P. :

Summary    trial  for offence:

If the offence committed was punishable with imprisonment for a term exceeding two years such as in Central Excise Act, the trial Magistrate was not competent to try an accused summarily u/s. 461 of the Code of Criminal Procedure and if so tried, the trial is absolutely void. [para 9]

Scope of S. 9 of the Act, and S. 260 and S. 461 of Criminal Procedure Code.

8.    Union of India v. Ram Narayan Sahu, 1986 (25) ELT 148 Cal. :

Prosecution:

Acquittal  invalid  when  complaint filed u/s.9(1)(d) (ii) of the Act treated as summons case instead of warrant case – Warrant case envisages sentence for more than two years, while S. 9(1)(d)(ii) prescribes three years imprisonment – Hence complaint u/s.9 is a complaint case – Case remanded to the Trial Court for retrial treating the case as warrant case – S. 2(w) and S. 256 of the Code of Criminal Proce-dure.

Distinction between a warrant case and a summons case

Warrant case means a case relating to an offence punishable with imprisonment for a term exceeding two years, while summons case is one which is not a warrant case. In determining the nature of the case, the Court will have to be guided by the consideration of the maximum punishment liable to be imposed on the accused according to the disclosures made in the petition of complaint. The advantage of following this procedure is that treating the case as a warrant case, the Magistrate trying the case will be competent to impose the minimum punishment, while the disadvantage of treating the case as a summons case he would not be in a position to impose the maximum punishment prescribed for the gravity of the offence, if the offence so demands. [para 5]

Prosecution:

An order of acquittal passed in a summons case u/s.256 of the Code of Criminal Procedure is not treatable as an order of discharge u/ s.249 of the Code of Criminal Procedure.

The difficulty in construing the order of acquittal u/ s.256 as an order of discharge u/ s.249 of the Code is that a fresh complaint for the same offence filed .hereafter is barred u/ s:468 of the Code. [para 5]

The Trial Magistrate is directed to treat the case as a warrant case and try it according to the procedure prescribed therefor by the Code. [AIR 1938 Cal. 205; AIR 1909 Pat. 105 relied upon], [para 5]
 

9.    Sharadchandra Shripad Marathe v. Gurushant Gangadhar Kamble, 1986 (25) ELT 915 (Bombay) :

Prosecution of a new  employee:

Complaint regarding conspiracy to evade excise duty – Process issued by the Trial Court quashable when petitioner joined service a few days before the excise raid – Inherent powers exercisable, if the process of Trial Court results in abuse of the process and gross injustice to the petitioner – Asking the petitioner to approach the Trial Court for discharge in the face of the admitted position is not worth-while – S. 482 of the Code of Criminal Procedure read with Article 226 of the Constitution of India.

Prosecution of New Director:

Accused Director joining company only a few days before raid and not a participant in conspiracy to evade taxes – Inherent powers of the High Court invokable where allowance of prosecution would amount to abuse of process of Court and gross injustice to the accused – Process issued quashable – S. 9(1)(d) of the Act, read with S. 120B of the Indian Penal Code, – S. 482 of the Code of Criminal Procedure, and Article 227 of the Constitution of India.

Vicarious    liability    :

Deeming provision for vicarious liability of Directors for acts committed by the Company is inapplicable against Directors not holding office prior to introduction of provision from 27-12-1985 – S. 9AA of the Act.

10.    Mulki Suryanarayanrao Rau and Anoher v. Gurushant Gangadhar Kamble and Others, 1987 (30) ELT 712 (Born.) :

Prosecution: Evasion of duty :

S. 9 of the Act and S. 120B of the Indian Penal Code – Conspiracyto evade payment of duty – If on proper evidence, the Court is satisfied that certain persons did conspire to commit the offence of tax evasion, the company as well as the persons who committed or conspired to commit such offence are punishable with imprisonment and fine. – Persons will include all those who aided and abetted the commission of an offence, whether inside or outside the company.

Prosecution:

Criminal conspiracy – Conspiracy is a matter of inference deducible from some criminal acts of the parties accused, done in pursuance of an apparent criminal purpose and to carry it into execution.

When conspiracy continued even after the retirement of accused Nos. 8, 9 and 10, it could be inferred that the tax evasion must be with complete knowledge of all the conspirators including those who retired.


Defence:

Merely because Secretary of the company was working under superior direction is no defence for criminal acts – therefore, he cannot be absolved from liability of tax evasion.

Proceedings Character:

The grant of Central Excise licence would partake the character of adjudication proceedings and not the character of criminal proceedings.

Prosecution:

Initiation of criminal process by Magistrate against accused not quashable when there is sufficient material to show that the said accused were in league with the company in the matter of evasion of duty.

Criminal conspiracy:

Agreement of two or more persons to do an illegal act is a positive fact which could be proved by direct or circumstantial evidence.

Criminal conspiracy to evade payment of duty – Modus operandi of levying a surcharge over the price of goods for freight, insurance and handling charges whether came up before the Board of Directors or not is a matter of evidence and prosecution cannot shut up from leading such evidence – S. 9 of the Act, 1944 and S. 120B of the Indian Penal Code.

Criminal conspiracy to evade payment of duty – Evidence of documents as defence not necessary to prove the innocence at this stage of initiation of proceedings – Only prima facie evidence is required to be considered for the allegations made in the complaint.
 
Vicarious    liability    :

Penalty – Firm – Directors of a firm – Penalty irnposable on the Directors for their individual acts and not on the principle of vicarious liability.

11.    Brahm Vasudeva and Others v. K. L. Bajaj, Assistant Collector, Central Excise Division, Jalandhar, 1988 (33) ELT 20 (P&H) :

Complaint without disclosing the manner in which the petitioners were concerned with the commission of offence or manufacture of goods – Complaint not maintainable – S. 9 of the Act, 1944.

12.    G. P. Goenka v. Asstt.  Collector of Central Excise, 1988 (37) ELT 167 (A.P.) :

For launching criminal prosecution proceeding against a company. The accused company must be represented by some person who is in charge of overall affairs of company – S. 9AA of the Act, 1944. (A.P.)

13.    K. K. Girdhar v. M. S. Kathuria,  1988 (37) ELT 353 (Delhi) :

Personal presence of accused – Offence u/ s. 9(1)(a) of the Act, 1944 – Granting of remand to custody at the instance of police, personal presence of the accused is not required before the Magistrate – though, as a matter of caution, personal presence of the accused is desirable, so that the accused may move an application for his release on bail- S. 344 of the Criminal Procedure Code.

14.    Hrushikesh Panda v. Union of India, 1992 (61) ELT 591 (Orissa):

Prosecution:

Clearance of goods by firm without excise gate passes and recovering duty from consignees but not crediting it to Excise Department – Managing Director liable under Rule 225 of Central Excise Rules, 1944 for non-payment of duty – Conviction and sentencing of petitioner u/s.9(1)(b) and (bb) of the Act, valid.

15.    Utkal Fero Alloys Ltd. v. State of Orissa, 1992 (61) ELT 600 (Orissa) :

Prosecution:

Detailed reasons not required to be given at the stage of cognizance of offence as there exists a prima facie- case against the accused – Order of the Magistrate valid S. 9(1), (b), (bb) of the Act read with Rules 9(1), 53, 173B, 173C, 173F, 173G of Central Excise Rules, and S. 204 of Code of Criminal Procedure, 1973.

16.    Toesta Electronics v. Asstt. Collector of Central Excise, Bangalore, 1995 (75) ELT 456 (Kar.) :

Prosecution:

There is no statutory requirement for sanction of any prescribed authority for prosecuting a person u/s.9 of the Act read with Rule 207 of Central Excise Rules, Prosecution – Compounding of offence – Natural justice – Provisions of Rule 210A of Central Excise Rules, applicable to offences punishable u/s.9 of Central Excises and Salt Act, – But there being no need for any sanction of any authority for launching prosecution u/s.9. The question of issue of notice making an offer to the accused for compounding the offence at the stage of sanction for prosecution does not arise.

Prosecution against companies and firms (apart from their officers concerned) maintainable, there being no obligatory sentence of imprisonment in all cases u/s.9 of the Act. A specific averment as to the involvement of directors, managers, partners, etc. in the complaint is not mandatory – It is sufficient if papers enclosed with the complaint indicate their involvement prima facie – S. 9 of the Act.

Goods manufactured and cleared without obtaining licence – Exemption from payment of excise duty to excisable goods does not dispense with requirement of obtaining licence – Prosecution against petitioner for not having obtained licence, proper – S. 6 of the Act read with Rule 174 and Rule 9(1)(b) of Central Excise Rules.

17.    Vasu Chemicals v. Assistant Commissioner of Central Excise, Madurai 2001 (134) ELT 24 (Mad.) :

Prosecution:

Criminal proceedings not to be stayed till disposal of appeal against order of confiscation, because confiscation proceedings having nothing to do with criminal prosecution – S. 482 of the Code of Criminal Procedure.

18.    H. S. Ranka v. P. K. Mehra, Asstt. Collector, Dept. of Central Excise, [aipur 2002 (150) ELT 1413 (Raj.) :

Prosecution:

Order of Collector against accused of non-accountal of goods in RG-1 register set aside by Tribunal on basis of some correspondence without recording any evidence – Prosecution launched not on basis of that order, but on physical verification of excisable goods – Held : criminal proceedings could not be quashed on basis of decision of the Tribunal finding in favour of accused, though Criminal Court may take that into account – S. 9 of Act. However, judgments in rem of Civil Court have binding effect on Criminal Court – S. 41 of Evidence Act,1872. [para 10]

Prosecution:

Offence by company – No allegation made in complaint or evidence brought on record that the chairman of the company was personally guilty of any omission or commission of a punishable offence – Petition for prosecution u/ s.482 of Code of Criminal Procedure set aside – S. 9 of the Act. [paras 11, 12]

19.    Rajni v. Union of India, 2003 (156) ELT 28 All. :

Prosecution:

Arrest of person under the Act has to be made only when there is a prima facie case against the accused and that too by following the due process of law except in cases prescribed u/s.13 – Authorities working under a special act such as Central Excise Act, cannot override the provisions of the Code of Criminal Procedure as regards the arrest or filing of the complaint – S. 9AA, S. 13 and S. 19 – On completion of the enquiry the authorities have power to file a complaint and pray before the Court for action in accordance with law. [paras 24 and 25]

20.    Kamaiaka  Minerals  & Mfg. Co. Ltd. v. Asstt.  CC & CE.,  Davangere,  2005 (184) ELT 356 Kar. :

Complaint filed against company and Managing Director and Director of company for having committed an offence punishable u/s.9(1)(i) of Central Excise Act, – No allegation was made that accused were in charge of company or responsible for conduct of business of the company at the time of commission of offence – Complaint also did not disclose essential ingredients of the offence – Held: proceedings cannot be launched against company u/s.9(1)(i) of the Act – read with S. 482 of Code of Criminal Procedure. [paras 9, 10]

21. Inder Setia v. Central Excise Department,  Noida, 2008 (224) ELT 385 All. :

Bail :

Arrest made for offence punishable u/s.9 and u/s. 9AA of Central Excise Act, read with Indian Penal Code – Power of arrest u/s.13 is confined to offences prescribed in Central Excise Act, – Offences u/ s.420, u/ s.467, u/ s.468 and u/ s.471 IPC were added for which Central Excise officers have no power to arrest – Arresting without any notice and without summoning, held power u/s.13 was exercised arbitrarily. Dispute as to who is responsible for payment of excise duty, can be settled only by the proper forum and the High Court abstained from recording any finding thereon – S. 9A makes offences non-cognizable and S. 9A(2) makes offences compoundable either before or after the institution of prosecution – In spite of existence of such provision, without ascertaining facts, S. 13 was resorted to for arresting the applicant – As there was no charge of tampering of evidence or charge of absconding – The applicant was released on bail.

I would conclude by stating:

1.    To avoid harassment and eliminating chances of prosecution of Directors the Board of Directors of a company should delegate, authorise and make responsible a person for each unit registered under the Central Excise Act, 1944 and at regular intervals take a compliance report from such person. It would be advisable also to have the compliance reports audited by internal auditors and or secretary of the company.

2.    The challenge in this ever-changing environment of increasing litigation where at times the individuals concerned take the safer course of initiating prosecution proceedings is to ensure awareness of and compliance with the relevant laws, rules and regulations to avoid even the remote chance of prosecution. Let us always be aware of the fact that prosecution impacts both business and reputation.

Valuation of closing stock : Change in method of valuation as per AS 2 : Resultant variation in income : Not taxable.

New Page 2

11 Valuation of closing stock : A.Y.
2001-02 : Change in the method of valuation as per Accounting Standard 2, which
is mandatory : Resultant variation in income : Not taxable.


[CIT v. George Oakes Ltd., 303 ITR 357 (Mad.)]

For the A.Y. 2001-02, the Assessing Officer made an addition
representing the reduction of profit due to change in the method of valuing the
closing stock. In the relevant year the closing stock was valued in accordance
with the Accounting Standard 2, which is mandatory. The Tribunal deleted the
addition on the ground that that the change of accounting method was bona
fide.

 

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

“(i) When the change of accounting method is bona fide
and is recognised in accounting principles, the resultant variation in income
cannot be forced to be taxed upon the assessee.

(ii) Being compulsory, the company had adopted the
Accounting Standard (AS-2) as per the guidelines prescribed by the ICAI. There
was a specific finding that the assessee valued its opening stock in one way
and the closing stock in another method, during the relevant year when the
Accounting Standard (AS-2) had come into effect in the earlier year. The
change in the accounting method had not been found to have been made with a
mala fide intention. Such a change in the method of accounting was bona
fide and was made mandatory by the ICAI to be followed in the preparation
of financial accounts. Under such circumstances, in the year of change, some
discrepancy was bound to happen in the profitability of the company as
compared to the previous year. However, in succeeding years, there would not
be any discrepancy on this account.

(iii) The reasons given by the Tribunal were based on valid materials and evidence, and did not warrant any interference.”

levitra

TDS : Works contract : S. 194C : Purchase of packing material carrying printed work : Essentially a sale/purchase : Not a works contract : Purchaser not liable to deduct tax at source.

New Page 2

10 TDS : Works contract : S. 194C of
Income-tax Act, 1961 : A.Y. 2005-06 : Purchase of packing material carrying
printed work : Essentially a sale/purchase : Not a works contract : Purchaser
not liable to deduct tax at source.


[CIT v. Dy. Chief Accounts Officer, Markfed, Khanna,
304 ITR 17 (P&H)]

The assessee had purchased printed packing material, but did
not deduct tax at source on the payment therefor. The Assessing Officer was of
the view that the transaction was a works contract. Therefore, he levied penalty
and interest for not deducting tax at source u/s.194C of the Income-tax Act,
1961. The Tribunal deleted the penalty and the interest.

 

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

“(i) There was no dispute that the main purpose of the
assessee in buying packing material was to obtain goods for the purpose of
packing its finished products. The factum of such packing material carrying
some printed work could only be regarded as the work executed by the supplier
incidental to the sale to the assessee. The fact of some printing being done
as a part of supply was of no consequence to the contract being essentially of
a sale of chattel. The predominant object underlying the contracts was
sale/purchase of goods and the only intention of the assessee was to buy
packing material.

(ii) Admittedly, the raw material for the manufacturing of
such packing material was not supplied by the assessee. Thus, it was a case of
sale and not a contract for carrying out any work.

(iii) The purchase of particular printed packing material
by the assessee was a contract for sale and outside the purview of S. 194C.”

 


levitra

Investment allowance : S. 32A : Dumpers, tippers and hydraulic excavators are construction equipment vehicles, not road transport vehicles : Eligible for investment allowance

New Page 2

8 Investment allowance : S. 32A of
Income-tax Act, 1961 : A.Ys. 1989-90, 1990-91 and 1992-93 : Dumpers, tippers
and hydraulic excavators are construction equipment vehicles and not road
transport vehicles : Eligible for investment allowance.


[CIT v. Gotan Lime Stone Khanij Udyog, 170 Taxman
442 (Raj.)]

The assessee was engaged in the business of running
hydraulic excavators and tippers for cement companies on hire basis by
realising rent for operation of the same. For the A.Ys. 1989-90, 1990-91 and
1992-93, its claim for investment allowance on the hydraulic excavators and
tippers was declined by the Assessing Officer on the ground that they were
road transport vehicles and, moreover, the same were not used by the assessee
for its own business. The Commissioner(A) and the Tribunal allowed the
assessee’s claim.

 

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

“(i) Under the Motor Vehicles Act, 1989, the dumpers,
tippers and hydraulic excavators are construction equipment vehicles within
the definition of Rule 2(ca) of the 1989 Rules and are non-transport
vehicles by virtue of Explanation attached to this definition, and cannot be
categorised as road transport vehicles for the purpose of entitlement of
investment allowance u/s.32A.

(ii) The construction equipment vehicles like dumpers,
tippers and hydraulic excavators are not road transport vehicles and profit
gained out of it by letting them out on hire basis to a cement producing
industrial undertaking could not debar them from claiming investment
allowance u/s.32A.”

Penalty : Concealment of income : S. 271(1)(c) : Estimated addition : No evidence of concealment of income : Penalty could not be imposed

New Page 2

9 Penalty : Concealment of income : S.
271(1)(c) of Income-tax Act, 1961 : A.Y. 1992-93 : Estimated addition : No
evidence of concealment of income : Penalty could not be imposed.


[CIT v. Sangrur Vanaspati Mills Ltd., 303 ITR 53
(P&H)]

For the A.Y. 1992-93, the assessee had filed return of
income disclosing income of Rs.65,18,970. The Assessing Officer rejected the
accounts, estimated the sales and made an addition of Rs.66,16,865. The
Assessing Officer also imposed penalty u/s.271(1)(c) of the Income-tax Act,
1961 for concealment of income. The Tribunal deleted the penalty on the ground
that there was no conclusive evidence that sales estimated by the Assessing
Officer were made outside the books of account.

 

On appeal by the Revenue, the Punjab and Haryana High Court
held that the Tribunal was justified in cancelling the penalty.

 


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Export profit : Deduction u/s.80HHC of Income-tax Act, 1961 : A.Y. 2001-02 : Separate accounts maintained for export sales and domestic sales : Deduction not to be on basis of total turnover of all business : Assessee entitled to deduction fully on export

New Page 2

6 Export profit : Deduction u/s.80HHC of
Income-tax Act, 1961 : A.Y. 2001-02 : Separate accounts maintained for export
sales and domestic sales : Deduction not to be on basis of total turnover of all
business : Assessee entitled to deduction fully on export profits.


[CIT v. M. Gani and Co., 301 ITR 381 (Mad.)]

The assessee was a manufacturer of garments and fancy items
and an exporter. For the A.Y. 2001-02 the assessee claimed deduction u/s.80HHC
of the Income-tax Act, 1961 on the export turnover ignoring the results of
domestic turnover. The Assessing Officer considered the composite turnover
comprised of both export turnover and domestic turnover and recomputed the
deduction u/s. 80HHC. The Tribunal allowed the claim of the assessee.

 

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

“The assessee having maintained separate books of account
for export business and domestic business, it was entitled to deduction
u/s.80HHC of the Act fully on the export profit.”

 


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Income : Dividend : In whose hands to be taxed : A sold shares to B : Change in ownership of shares not registered : Income from dividend assessable in the hands of A and not in the hands of B

New Page 2

7 Income : Dividend : In whose hands to be
taxed : A.Y. 1994-95 : A sold shares to B : Change in ownership of shares not
registered : Income from dividend assessable in the hands of A and not in the
hands of B.


[CIT v. Aatur Holdings P. Ltd., 302 ITR 92 (Bom.)]

For the A.Y. 1994-95, the Assessing Officer made an addition
to the total income of the assessee as dividend income. The CIT(A) found that
the shares were not registered in the name of the assessee and deleted the
addition holding that the dividend income had to be received by the registered
share holders only. The Tribunal upheld the decision of the CIT(A).

 

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

“(i) Merely because a person may have purchased or been in
receipt of shares, in the absence of the shares being registered in his name
in the books of account of the company, such a person is not entitled to
receive the dividend. The dividend has to be paid by the company in the name
of registered shareholders and it is the registered shareholders alone who
can claim dividend u/s.27 of the Securities Contracts (Regulation) Act,
1956.

(ii) Nothing was brought to show that under the provisions
of the Companies Act or the provisions of Securities Contracts (Regulation)
Act, 1956, there were any other standard or statutory rules under the
Income-tax Act by which dividend could be taxed in the hands of the assessee.
Moreover, the burden of proving that an amount received in the year of
account was taxable lies on the Department.”

 


 


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Revision : S. 263 : Commissioner should consider explanation offered by assessee and not set aside assessment order for consideration by AO

New Page 1

9 Revision : S. 263 of Income-tax Act, 1961 : A.Y. 1992-93 :
Commissioner should consider explanation offered by assessee in response to
notice and decide the question : He is not to set aside the assessment order for
consideration of the explanation by the AO.


[Smt. Leela Choudhury v. CIT, 167 Taxman 1 (Gau.)]

For the A.Y. 1992-93, the assessment of the assessee was
completed u/s.143(3) of the Income-tax Act, 1961. The Commissioner found that
the Assessing Officer had not made enquiry as regards the investment in the
house property. Therefore the Commissioner issued a show-cause notice to the
assessee in exercise of his power u/s.263. The assessee contended that the house
property in question was owned by her and the investments made therein from her
own sources. She submitted the yearly investments made by her in the house
property in question along with her return for the assessment year in question,
balance sheets for the period 31-3-1988 to 31-3-1992, showing the position of
her assets and liabilities; and the details of the funds available with the
assessee. The Commissioner, after considering the explanation of the assessee
and documents brought on record, by his order dated 1-11-1996, directed the
Assessing Officer to examine the matter in proper manner and complete the
assessment in accordance with law.

The Gauhati High Court allowed the writ petition filed by the
assessee challenging the revision order passed by the Commissioner u/s.263 of
the Act and held as under :

“(i) The foundation for the exercise of the power being the
formation of an opinion or conclusion, there is no escape from the view that
the Commissioner must record his conclusion in the matter before setting aside
an order of assessment in exercise of the powers conferred u/s.263. It will
again be futile to embark upon any discussion as to the ‘intensity’ or
‘strength’ of the conclusion that must be reached by the Commissioner before
setting aside an assessment u/s.263, as the answer to the said question would
really depend upon the facts that may be confronting the Commissioner in any
given case. The position can be best resolved by saying that, in certain
situations, the opinion or conclusion recorded would be the final opinion,
while in other situation, it may be ‘less than final’. What would be necessary
is to take note of the fact that there has to be an opinion that the
assessment which has been set aside is, indeed, erroneous and prejudicial to
the interest of the Revenue. Furthermore, the power u/s.263 being
quasi-judicial, such conclusion must be reached after hearing the assessee,
which is mandated by the statute itself and after recording the reasons for
the conclusions reached, a requirement, imposition of which would be
consistent with the well-settled principles for exercise of quasi-judicial
powers.

(ii) It could be noticed from the impugned order of the
Commissioner that the Commissioner had not recorded any opinion that the order
of assessment of the assessee for the A.Y. 1992-93 was erroneous and
prejudicial to the interest of the Revenue. The said opinion was recorded in
the show-cause notice issued to the assessee and the same must be understood
to be a highly rebuttable view. Such view/opinion was required to be recorded
after hearing the assessee and after holding the necessary enquiry.

(iii) On receipt of the show-cause notice the assessee
submitted an elaborate reply laying material before the Commissioner to show
that sufficient proof of her income was laid before the Assessing Officer to
enable the said authority to come to the conclusion that the investments in
the house property were made from the known sources of income of the assessee.
The said materials were in the form of balance sheets and details of the funds
available to the assessee from time to time. In the above facts, the assessee
contended that the assessment order in question was not erroneous and
prejudicial to the interest of the Revenue.

(iv) The Commissioner, on receipt of the reply of the
assessee, could not have ignored the same. Rather, it was incumbent on the
Commissioner to consider the explanations offered and on that basis to record
his opinion/conclusion as to whether he still considered the assessment order
in question to be erroneous and prejudicial to the interest of the Revenue
and, if so, reasons therefor. The Commissioner did not do so. Instead, in its
order, the Commissioner had recorded that the assessee had filed a written
submission giving an exhaustive explanation and enclosing copies of various
deeds, certificates, etc., which were required to be verified in detail. The
Commissioner, in the above facts, set aside the assessment order and directed
the Assessing Officer to make a fresh assessment after examining the
submissions and contentions advanced by the assessee and after due scrutiny of
the documents adduced.

(v) The course of action adopted by the Commissioner was
clearly impermissible in law in the absence of a finding that on consideration
of the explanation submitted and for reasons shown, the assessment had to be
treated to be erroneous and prejudicial to the interest of the Revenue.
Unfortunately, the Commissioner did not do so, which omission would have the
effect of rendering the impugned order legally fragile.

(vi) In view of the above, the instant writ petition was to
be allowed.”


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Exemption : S. 10(11) : Interest income accrued in provident fund account of employees after retirement : Continue to qualify for exemption u/s.10(11).

New Page 2

4 Exemption : S. 10(11) of Income-tax Act,
1961 : A.Ys. 2001-02 to 2004-05 : Interest income accrued in the provident fund
account of employees after retirement : Would continue to qualify for exemption
u/s.10(11).


[Subhash Bansal v. ITO, 170 Taxman 601(P&H)

The petitioner was a senior citizen and an employee and a
retired employee of the Punjab State Electricity Board. In this case, in the
writ petition filed by the petitioner, the question before the Punjab and
Haryana High Court was as to whether interest income, that had accrued on the
credit balance in the provident fund governed by the Provident Fund Act, 1925
after the retirement, would continue to qualify for exemption from income-tax.

 

The High Court held as under :

“(i) A perusal of S. 10(11) would show that any payment
received by an assessee from a provident fund, to which the 1925 Act applies,
would not constitute a part of total income. In other words, it would, thus,
qualify for exemption from income-tax. It is, thus, obvious that since payment
of interest is received by the assessee-employee from provident fund, it would
also qualify for exemption from income-tax, provided the provisions of 1925
Act apply.

(ii) The reply given by the CBDT in its letter dated
15-6-2006 clarified the issue that interest on GPF is exempt from income-tax
as per the provisions of S. 10(11) and no TDS is required to be deducted from
the payment of interest on GPF after the date of retirement of an employee.

(iii) The petition succeeded and the Revenue was to be
directed to extend the benefit of exemption from income-tax to the interest
income that had accrued to the employees of the Board on the credit balance
which had been retained by them by exercising option in their provident fund
account after their retirement in terms of Regulation 38.”

 


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Charitable Trust : Certificate u/s.80G : Renewal of certificate denied on the ground that one particular expenditure is for an activity termed as spending for a particular religion : Not justified.

New Page 2

3 Charitable Trust : Certificate u/s.80G of
Income-tax Act, 1961 : Renewal of certificate denied on the ground that one
particular expenditure is for an activity which may be termed as spending for a
particular religion : Not justified.


[Umaid Charitable Trust v. UOI, 171 Taxman 94 (Raj.)]

The assessee trust was granted exemption certificate u/s.80G
of the Income-tax Act, 1961 for the period from 1-4-2001 to 31-3-2004. However,
renewal of the certificate for a further period was refused on the ground that
the assessee had incurred expenditure exceeding 5% of its total income on a
particular religion, namely, colouring and repairing of Lord Vishnu’s temple.

Allowing the writ petition filed by the Trust, the Rajasthan
High Court held as under :

“(i) Mere one contribution by the assessee trust to another
trust which carried out repairs and renovation of Lord Vishnu’s temple, did
not disentitle the assessee from renewal of its exemption certificate u/s.80G.
The line of distinction between the religious purpose and a charitable purpose
is very thin and no watertight compartment between the two activities can be
very well established. Unless the objective of the charitable trust in
question itself is of spending its income for a particular religion and it is
so found in the trust deed, the Income-tax Department cannot reject the
renewal of the trust as a charitable trust u/s.80G, merely because one
particular expenditure is for an activity which may be termed as spending for
a particular religion.

(ii) In the instant case, the repairs and renovation of
Lord Vishnu’s temple did not necessarily mean that expenditure in question was
for a particular religion only. All people, who have faith in Lord Vishnu’s
temple, belong to different sects and have faith in different religions and
also visit the temple of Lord Vishnu. The Revenue had not shown that entry in
the said temple was restricted to the persons of one particular community or
sect following one religion. Hinduism is not one particular religion and
different sects following Hindu philosophy do visit temple of Lord Vishnu, be
that Jains, Sikhs, Brahmins, etc. There is no watertight compartment between
different castes or sects following one particular religion. Freedom of
religion is guaranteed by the Constitution of India under Article 25.
Therefore, by taking such a pedantic and narrow approach, it could not be said
that character of the charitable trust was lost if one particular expenditure
was made for repairs and renovation of Lord Vishnu’s temple and that too by
way of contribution to another trust.

(iii) A perusal of the trust deed of the assessee produced
on record showed that the objective of the trust was clearly charitable one
and was not for any particular religion even wholly or substantially. Nothing
had been pointed out in the impugned order that the assessee had been
constantly spending money for a particular religion.

(iv) There was no leaning in favour of any particular
religion in the trust deed of the assessee-trust and, therefore, once such
exemption was granted to the assessee upon scrutiny of its application and it
held for at least three years, as was shown by the impugned order itself and
the trust deed indicated that the said trust was constituted long back on
27-8-1963 and had been carrying on such charitable activities, there was no
justification for rejecting its renewal u/s.80G, which is a matter of right.”


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Business deduction : S. 43B : Deposit with customs authorities as per demand notice under the head Special Value Branch (SVB) is deductible in the year of actual payment.

New Page 2

1 Business deduction : S. 43B of Income-tax
Act, 1961 : A.Y. 1999-00 : Deduction to be allowed on actual payment : Deposit
with customs authorities as per demand notice under the head Special Value
Branch (SVB) is deductible in the year of actual payment.


[CIT v. Hughes Escorts Communications Ltd., 170 Taxman
571 (Del.)]

In the previous year relevant to the A.Y. 1999-00, the
assessee company had paid Rs.26,60,128 by way of Special Value Branch (SVB)
deposit as per the demand notice issued by the Customs authorities. The said
amount was not claimed by way of deduction before the AO. The claim for
deduction was made for the first time before the CIT(A) by way of additional
ground. It was the contention of the assessee that the additional payment was
called a deposit pending final determination of the actual duty and it is an
amount that is to be paid on demand to the Customs authorities, that the
assessee really had no option but to make the payment. The CIT(A) allowed the
claim for deduction and held that if the whole or any part of this amount is
found to be not payable to the Customs authorities on the relevant goods, then
such amount shall be brought to tax u/s.41(1)(a) of the Act, in the relevant
year. The Tribunal upheld the decision of the CIT(A).

 

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

“(i) The assessee really had no option but to make the
payment as per the demand notice issued by the Customs authorities. At the
time of making the payment it was not known whether the demand would fall
short of the actual liability or in excess of the actual liability. Taking
this into consideration, the Tribunal felt that it would not be appropriate to
limit the claim of the assessee only to the extent of the actual liability. It
was found that there is no error in directing the Assessing Officer to make a
verification with regard to the excess payment, if any, and to tax the amount
if it has not already been taxed. The Tribunal also limited the liability of
the actual amount to the assessment year under consideration.

(ii) We cannot find any fault in the view taken by the
Tribunal primarily because the liability was required to be discharged by the
assessee on demand and the assessee had no option but to make the payment.
This clearly falls within S. 43B(a) of the Act.”

 


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Business expenditure/bonus : S. 37(1) and S. 36(1)(ii) : ‘Good work reward’ paid to employees, not dependent on profit/loss : does not constitute ‘bonus’ u/s. 36(1)(ii) : Allowable as normal business expenditure u/s.37(1)

New Page 2

2 Business expenditure/bonus : S. 37(1) and
S. 36(1)(ii) of Income-tax Act, 1961 : ‘Good work reward’ paid to employees, not
dependent on profit/loss : Does not constitute ‘bonus’ u/s.36(1)(ii) : Allowable
as normal business expenditure u/s.37(1).


[Shriram Pistons & Rings Ltd. v. CIT, 171 Taxman 81
(Del.)]

The assessee had claimed the deduction of the ‘good work
reward’ paid to the employees as business expenditure u/s.37(1) of the
Income-tax Act, 1961. The Tribunal considered as to whether it constitutes
‘bonus’ within the meaning of S. 36(1)(ii) of the Act. The Tribunal held that it
does not constitute bonus.

 

In reference, the Delhi High Court upheld the decision of the
Tribunal and held as under :

“(i) There is nothing to suggest that the ‘good work
reward’ given by the assessee to its employees has any relation to the profits
that the assessee may or may not make. It appears from the order of the
Tribunal that it has relation to good work that is done by the employee during
the course of his employment and that at the end of the financial year on the
recommendation of a senior officer of the assessee, the reward is given to the
employee. Consequently, the ‘good work reward’ cannot fall within the ambit of
S. 36(1)(ii) of the Act as contended by the Revenue.

(ii) The ‘good work reward’ is allowable as business
expenditure u/s.37(1) of the Act.”

 


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Penalty : Failure to get accounts audited in time : S. 44AB and S. 271B : Condition precedent : Tribunal to record a finding whether assessee deliberately failed to submit audit report in time : Matter remanded

New Page 1

19 Penalty : Failure to get accounts audited
in time : S. 44AB and S. 271B of Income-tax Act, 1961 : A.Y. 2001-02 : Condition
precedent : Tribunal to record a finding whether assessee deliberately failed to
submit audit report in time : Matter remanded.


[Gramin Vidyut Sahkari Samity Maryadit. v. ACIT, 305
ITR 89 (MP)]

For the A.Y. 2001-02, the assessee, a co-operative society
did not get its accounts audited as required u/s.44AB of the Act. The Assessing
Officer therefore, imposed a penalty of Rs.1,00,000. The CIT(A) deleted the
penalty. The Tribunal upheld the penalty order and held that there was no
illegality or infirmity in the order of the Assessing Officer.

 

On appeal, the Madhya Pradesh High Court remanded the matter
back to the Tribunal for fresh decision according to law, and held as under :

“(i) An order imposing penalty for failure to carry out a
statutory obligation is the result of a quasi-criminal proceeding and penalty
will not ordinarily be imposed unless the party obliged either acted
deliberately in defiance of law or was guilty of conduct contumacious or
dishonest or acted in conscious disregard of its obligation. The penalty will
not be imposed merely because it is lawful to do so. Whether the penalty
should be imposed for failure to perform a statutory obligation is a matter of
discretion of the authority to be exercised judicially and on consideration of
all the relevant circumstances. Even if minimum penalty is prescribed, the
authority competent to impose the penalty will be justified in refusing to
impose penalty, when there is a technical or venial breach of the Income-tax
Act, 1961, or where the breach flows from a bona fide belief that the
offender is not liable to act in the manner prescribed by the statute.

(ii) It is obligatory on the part of the Tribunal to record
a finding whether the assessee had acted deliberately in defiance of the
provisions of S. 44AB of the Act and is guilty of conduct contumacious or
dishonest, warranting imposition of penalty by the AO u/s.271B of the Act.

(iii) The Tribunal, apart from stating that there was no
denial by the assessee that the provisions of S. 44AB were not applicable to
it and there was delay in getting the accounts audited, had not applied its
mind and recorded any cogent or germane reasons as is imperative in law.
Therefore, the order of the Tribunal is liable to be set aside and the matter
remitted to it for reconsideration.”

Penalty : Failure to deduct tax at source : S. 194A and S. 271C : Bona fide belief based on opinion of senior counsel : Penalty not justified.

New Page 1

18 Penalty : Failure to deduct tax at
source : S. 194A and S. 271C of Income-tax Act, 1961 : A.Ys. 1994-95 and
1995-96 : Bona fide belief based on opinion of senior counsel :
Penalty not justified.


[CIT v. Wishwapriya Financial Services and Securities
Ltd., 303 ITR 122 (Mad.)]

The assessee was engaged in retail and financial services,
corporate and advisory services and securities trading. An advertisement was
given in the newspaper in the name of the assessee, stating that the return on
the investment made with the company would not attract tax deduction at source
and accordingly, the assessee did not deduct tax at source on interest paid on
such investments. For the A.Ys. 1994-95 and 1995-96, the Assessing Officer
issued show-cause notice proposing to impose penalty u/s.271C of the Income-tax
Act, 1961 for failure to deduct tax at source u/s.194A on interest paid on such
investments. The assessee replied that he had acted under the bona fide
belief that the income received from the investments did not attract the
liability for deduction of tax at source and therefore, when the amounts were
distributed among the investors, no tax was deducted at source. It was also
contended that an opinion from a senior counsel was obtained before devising the
scheme to the effect that no tax need be deducted at source on the payments made
to the investors. The Assessing Officer rejected the contention and imposed the
penalty. The Tribunal deleted the penalty.

 

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

“(i) The mere fact that the bona fide claim stood
disallowed did not itself lead to the inference that the company consciously
and deliberately flouted the provisions of the Act. The assessee thought that
there was no relationship of debtor and creditor or borrower and lender and
that, S. 194A, S. 201(1), S. 201(1A) read with S. 2(28A) of the Act were not
attracted. It was clear from the order of the Tribunal that it had accepted
the explanation and given a finding that there was a reasonable cause for not
deducting tax at source.

(ii) The assessee acted in a bona fide manner on the
basis of the opinion obtained from a senior counsel before devising the
scheme. The finding that there was a reasonable cause was a finding of fact
and it was not perverse. The concurrent findings given by both the authorities
below were based on valid materials and evidence and did not warrant
interference. The Tribunal was justified in deleting the penalty levied
u/s.271C of the Act.”

Penalty : Deposits/loans in cash in excess of prescribed limits : S. 269SS, S. 269T, S. 271D and S. 271E : Finding that the amounts were mere book entries and transactions on behalf of family members : No violation of S. 269SS and S. 269T : Penalty could

New Page 1

17 Penalty : Deposits/loans in cash in
excess of prescribed limits : S. 269SS, S. 269T, S. 271D and S. 271E of
Income-tax Act, 1961 : A.Y. 1991-92 : Finding that the amounts were mere book
entries and transactions on behalf of family members : No violation of S. 269SS
and S. 269T : Penalty could not be imposed.


[CIT v. Natwarlal Purshottamdas Parekh, 303 ITR 5 (Guj.)]

The assessee was carrying on the business of money-lending
and trading in jewellery. For the A.Y. 1991-92, the AO imposed penalty u/s.271D
and u/s.271E of the Income-tax Act, 1961 on account of receipt/repayment of
deposits/loans otherwise than by way of account-payee cheque. The Tribunal found
that most of the amounts represented book entries except amounts of NSCs of
family members which had matured and which were reinvested. The Tribunal also
found that the assessee had acted under bona fide belief in view of the
opinion of an advocate and income-tax practitioner of standing of 33 years who
had opined that the assessee would not violate the provisions of S. 269SS and S.
269T of the Act if the assessee receives amounts from the family members and
repays to different family members. Accordingly the Tribunal cancelled the
penalty.

 

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

“(i) The Tribunal had found on the facts and in the light
of the evidence on record that there was no violation of either the provisions
of S. 269SS or S. 269T of the Act.

(ii) The Tribunal had further found that there was
reasonable cause, assuming that there was any violation by the assessee.

(iii) Hence the Tribunal had rightly deleted the penalties
levied u/s.271D and u/s.271E.”

 


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Penalty : Deposits in cash in excess of prescribed limits : S. 269SS, S. 269T, S. 271D and S. 271E : Firm accepting cash from partners in belief that it was not different from them : Reasonable ground : Penalty could not be imposed.

New Page 1

15 Penalty : Deposits in cash in excess of
prescribed limits : S. 269SS, S. 269T, S. 271D and S. 271E of Income-tax Act,
1961 : A.Y. 1990-91 : Firm accepting cash from partners in belief that it was
not different from them : Reasonable ground : Penalty could not be imposed.


[CIT v. Lokhpat Film Exchange (Cinema), 304 ITR 172 (Raj.)]

In the A.Y. 1990-91 the Assessing Officer had levied
penalties u/s.271D and u/s.271E of the Income-tax Act, 1961 in respect of
transactions between the assessee-firm and its partners described as deposits
from the partners. The assessee had claimed that in view of the fact that the
partners and the firm are not independent of each other and the firm is not a
juristic person, these transactions cannot be considered as intra-person, but
were only for the purpose of carrying on partner’s own business. The fact that
under the Income-tax Act, the firm and the partners of the firm are recognised
as independent units, the same cannot be treated for all purposes to be separate
and independent. The assessee had contended that in that view of the matter,
they had not violated the requirement of S. 269SS and S. 269T while conducting
these transactions. However, the Assessing Officer did not accept this
explanation and imposed penalties u/s.271D and u/s.271E. The Tribunal relying on
a decision in CIT v. R. M. Chidambaram Pillai, (1977) 106 ITR 292 wherein
the Supreme Court had said that there cannot be a contract of service, in strict
law, between a firm and one of its partners, so as to consider the salary paid
to the partner as income from salary held that for the purpose of S. 269SS and
S. 269T also the firm and partners cannot be considered to be separate entities
and deleted the penalty.

 

The Rajasthan High Court dismissed the appeal filed by the
Revenue and held as under :

“The assessee had acted bona fide and its plea that
inter se transactions between the partners and the firm were not
governed by the provisions of S. 269SS and 269T was a reasonable explanation.
Penalty could not be imposed.”

 


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Penalty : Deposits/Loans in cash in excess of prescribed limits : S. 269T and S. 271E : Repayment of advance towards share application money : Neither deposit nor loan : Bona fide belief : Penalty not justified.

New Page 1

16 Penalty : Deposits/loans in cash in
excess of prescribed limits : S. 269T, and S. 271E of Income-tax Act, 1961 : A.Y.
1990-91 : Repayment of advance towards share application money : Neither deposit
nor loan : Bona fide belief : Penalty not justified.


[CIT v. Rugmini Ram Ragav Spinners P. Ltd., 304 ITR
417 (Mad.)]

The assessee is a closely held company. For the A.Y. 1990-91
the Assessing Officer imposed penalty of Rs.5,90,416 u/s.271E of the Income-tax
Act, 1961 on the ground that during the year of account the assessee had repaid
some of the share application money which it had received earlier in cash. The
Tribunal cancelled the penalty.

 

The Madras High Court dismissed the appeal filed by the
Revenue and held as under :

“(i) The assessee had received cash over a period of time
as advance towards allotment of shares from 16 persons without stipulating any
time frame towards return/refund of money without interest, in case of
non-allotment of shares either fully or partly. The money retained by the
company was neither deposit nor loan, it was only share capital advance.

(ii) The advance of share application money and repayment
of such advances had not flowed from any undisclosed income of the assessee or
the concerned persons. The assessee had not paid any interest at all on any of
the advances repaid after some time. If the intention was to receive them as
loan or deposit, then certainly the lenders would not have made the advances
gratuitously. The assessee was not called upon to explain the default
u/s.269SS of the Act on receipt of the advances of the earlier years, which
would show that the assessee’s case was not governed by the said provisions.

(iii) Penalty u/s.271E is not automatic, and a bona fide
belief to the effect that the receipt of the advance against allotment of
shares would not be termed as loan or deposit, would be sufficient to drop the
penalty leviable unless and until the material on record positively showed
that the money received was only a deposit or loan.

(iv) There was no dispute that the advances were
only against allotment of shares and not by way of loans or advances. In this
case the reasonable cause was that the assessee was under bona fide
belief that the money received was only for the purpose of allotment of
shares. There was no material or evidence or any compelling reason produced by
the Revenue to prove that the money received was a deposit or loan.”

 


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Penalty : Concealment of income : S. 271(1)(c) : No penalty proceeding initiated in the preceding year on similar issue : Finding by Tribunal that a case of difference of opinion and not concealment of income : Proper.

New Page 1

14 Penalty : Concealment of income : S.
271(1)(c) of Income-tax Act, 1961 : A.Y. 1983-84 : No penalty proceeding
initiated in the preceding year on similar issue : Finding by Tribunal that a
case of difference of opinion and not concealment of income : Proper.


[CIT v. Sood Harvester, 304 ITR 279 (P&H)]

For the A.Y. 1983-84, the Assessing Officer imposed penalty
u/s.271(1)(c) of the Income-tax Act, 1961 for concealment of income. The
Tribunal found that in respect of the addition made on the same issue for the
A.Y. 1982-83, the AO had not initiated penalty proceedings. The Tribunal
recorded that the assessee had disclosed complete facts before the AO along with
the return, as well as during the course of assessment proceedings and held that
it was a case of difference of opinion and not concealment of income. The
Tribunal also held that there was no reason for the Revenue to take a different
view for the A.Y. 1983-84 on the same set of facts and without assigning
reasons.

 

The Punjab and Haryana High Court dismissed the appeal filed
by the Revenue and held as under :

“(i) The Tribunal had followed the correct approach by
concluding that it was a case of difference of opinion and not concealment of
income on the reasoning that in the preceding year the facts were almost the
same and still no penalty proceedings u/s.271(1)(c) was initiated.

(ii) The Revenue had to maintain consistency for the
purpose of finality in all litigation and a decision on the same question
would not be re-opened unless some new facts were found with material
difference in the subsequent years.”

 


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Penalty : Concealment of income : S. 271(1)(c) : Cash compensatory support not included in original return, but in revised return : No concealment of income : Penalty could not be imposed.

New Page 1

13 Penalty : Concealment of income : S.
271(1)(c) of Income-tax Act, 1961 : Cash compensatory support not included in
original return : Amount included in revised return: No concealment of income:
Penalty could not be imposed.


[CIT v. Mentha and Allied Products P. Ltd., 304 ITR
214 (All.)]

In the original return of income the assessee had not
included the cash compensatory support amounting to Rs.65,61,640. Subsequently,
the Finance Act, 1990, brought about an amendment, with retrospective effect,
that the cash assistance was taxable. In view of this amendment, the assessee
voluntarily filed a revised return and included the cash compensatory support
therein. The Assessing Officer levied penalty u/s.271(1)(c) of the Income-tax
Act, 1961. The Tribunal cancelled the penalty. In appeal before the High Court,
the Revenue contended that the Tribunal had cancelled the penalty wrongly on the
basis that the assessee has voluntarily filed the revised return when in fact
the revised return was filed after issuance of notice u/s.142(1) on 30-1-1991.

 

The Allahabad High Court dismissed the appeal filed by the
Revenue and upheld the decision of the Tribunal.

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Penalty : Concealment of income : S. 271(1)(c) Expl. 1 : Surrender of income by assessee : No separate enquiry necessary before imposing penalty : Assessee to explain about bona fides in penalty proceedings : Matter remanded

New Page 1

12 Penalty : Concealment of income : S.
271(1)(c) Expl. 1 of Income-tax Act, 1961 : A.Y. 1989-90 and 1990-91 : Surrender
of income by assessee : No separate enquiry necessary before imposing penalty :
Assessee to explain about bona fides in penalty proceedings:
Matter remanded.


[Dy. Director of Income-tax v. Chirag Metal Rolling Mills
Ltd., 305 ITR 29 (MP)]

For the A.Ys. 1989-90 and 1990-91, in the course of
assessment proceedings the assessee offered incomes of Rs.74,92,919 and
79,00,198 by way of disallowance u/s.40A(3) of the Income-tax Act, 1961. The
Assessing Officer made the additions and also imposed penalty u/s.271(1)(c) for
concealment of the added amount. In appeal, the CIT(A) cancelled the penalty.
The Tribunal dismissed the appeal filed by the Revenue.

 

On appeal by the Revenue, the Madhya Pradesh High Court
remanded the matter back to the Tribunal for fresh decision according to law,
and held :

“(i) The combined reading of Explanation 1 to S. 271(1)(c)
of the Act and the verdict of the Hon’ble Apex Court in the matter of Sir
Shadilal Sugar and General Mills Ltd. v. CIT, (1987) 168 ITR 705 and K.
P. Madhusudhan v. CIT, (2001) 251 ITR 99, it is crystal clear that prior
to Explanation 1, the position of law was if the assessee agrees for addition
of his income to buy peace, then it will not follow that agreed amount to be
added was concealed income and the Revenue was required to prove the mens
rea. Because of this view taken by the Hon’ble Apex Court in the matter of
Sir Shadilal Sugar and General Mills Ltd. v. CIT, (1987) 168 ITR 705
Explanation 1 to S. 271(1)(c) of the Act was added to the Income-tax Act and
after taking into consideration the Explanation, the Hon’ble Apex Court, in
the matter of K. P. Madhu-sudhan (2001) 251 ITR 99, has laid down that no
separate enquiry is necessary for imposing the penalty. However, from a plain
reading of the Explanation, it is evident that some sort of enquiry is
necessary, therefore, the proceedings initiated by the Revenue for imposing
the penalty u/s.271(1)(c) of the Act shall be treated as proceedings and the
assessee is at liberty to show his bona fides in that proceedings. If
the assessee fails to show his bona fides, in that case penalty can be
imposed by the Revenue.

(ii) This Court is of the view that the learned Tribunal is
not justified in holding that the onus is on the Revenue to prove mala
fides, even when the primary onus was on the assessee to prove that there
was no concealment in view of Explanation 1 to S. 271(1)(c) of the Act. In
view of the answer to the first question, it appears that no separate enquiry
is necessary before imposing the penalty. In the penalty proceedings itself,
initiated by the Revenue, the assessee can explain his bona fides and
that all the facts relating to the same and material to the computation of his
total income have been disclosed by him.”

 


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Income : Statutory and contractual interest awarded by arbitrator accrues from year to year

New Page 1

5 Income : Accrual of : A.Y. 1996-97 : Compensation/interest
awarded by arbitrator : Statutory and contractual interest accrues from year to
year : Other compensation is not taxable.


[Konkan Barge Builders P. Ltd. v. ITO, 297 ITR 39 (Bom.)]

The assessee had signed two contracts with MDL for
fabrication of panels from steel plates and for erection of panels. There was a
dispute between the assessee and MDL, pursuant to which an arbitrator came to be
appointed. The arbitrator passed an award in favour of the assessee in an amount
of Rs.1,12,66,929 as compensation and interest. The Assessing Officer treated
the interest awarded of Rs.43,99,404 as a revenue receipt and added it to the
total income for the A.Y. 1996-97. The Tribunal confirmed the addition.

On appeal by the assessee the Bombay High Court held as under
:

“(i) If interest were awarded and the arbitrator was not
seeking to give effect to or to recognise a right to interest conferred by the
statute or contract, it would not be taxable. On the other hand, if the
interest arose by virtue of the statute or by agreement and the arbitrator or
the High Court merely gives effect to that right in awarding of interest on
the amount of compensation, then it would be a revenue receipt which would be
taxable.

(ii) The amount of interest was assessable as income.

(iii) Interest was awarded at the rate of 12% per annum
from July 31, 1989, till payment or the date of decree on this award,
whichever was earlier. The interest income accrued from year to year and the
entire amount of interest could not be assessed in the year of receipt.”



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House property : S. 23 : Annual value is the rent received/receivable by owner from tenant, even if tenant receives higher rent by subletting property

New Page 1

4 House Property : Annual value : S. 23 of Income-tax Act,
1961 : Property sublet by tenant : Annual value is the rent received or
receivable by the assessee-owner from the tenants, irrespective whether the
tenants have received higher rents by subletting the properties.


[CIT v. Akshay Textiles Trading & Agencies (P) Ltd.,
214 CTR 316 (Bom.)]

In the appeal filed by the Revenue, the following questions
were raised before the Bombay High Court :

(i) Whether on the facts and in the circumstances of the
case and in law, the rent paid by ultimate user will be treated as Annual
Letting Value of the property as against rent received by the assessee ?

(ii) Whether on the facts and in the circumstances of the
case and in law, the Tribunal was justified in holding that the annual letting
value has to be determined with reference to the annual rent received by the
assessee and not what has been received by its tenants from the ultimate
users ?

The Bombay High Court held that the annual value of the
properties let out by the assessee is the rent received or receivable by the
assessee-owner from the tenants, irrespective of whether the tenants have
received higher rents by subletting the properties.

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Expenditure on lease rent : S. 37 : Lease rent paid in lump sum for 20 years : Revenue expenditure

New Page 1

3 Expenditure on lease rent : Capital or revenue : S. 37 of
Income-tax Act, 1961 : A.Y. 1997-98 : Lease rent for premises paid in lump sum
for 20 years : Revenue expenditure.


[CIT v. UCAL Fuel Systems Ltd., 296 ITR 702 (Mad.)]

For the A.Y. 1997-98, the assessee claimed as revenue
expenditure sums of Rs.30 lakhs and Rs.8 lakhs paid for taking land and building
on lease for 20 years for the purpose of setting up the new unit at an
industrial estate at Pondichery. The Assessing Officer disallowed the claim
treating it as capital expenditure. Tribunal allowed the claim.

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

“Had the assessee chosen to pay the rent annually for each
and every year of lease, such expenditure would have to be regarded as revenue
expenditure. The fact that the payment was made in a lump sum for the entire
duration of the lease did not alter the character of its being a revenue
expenditure.”


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Capital Gain : Compulsory acquisition — If compensation award and major part of compensation received in later years, capital gain cannot be assessed in year of handing over possession

New Page 1

2 Capital gain : Accrual : A.Y. 1984-85 : Compulsory
acquisition of land : Land acquired and possession taken on 23-12-1983
i.e., A.Y. 1984-85 : Small part of compensation received by assessee in
A.Y. 1985-86 : Compensation award was given on 18-9-1986 : As-sessee
received balance compensation on 3-9-1987 : Capital gain cannot be assessed in
A.Y. 1984-85.


[CIT v. Prem Kumar, 214 CTR 452 (All.)]

The assessee’s land was acquired under the Land Acquisition
Act, 1894. The land acquisition notification was issued on 15-11-1975. S. 17(4)
of the Land Acquisition Act was applied. Possession of the land
was taken on 23-12-1983 (i.e., in A.Y. 1984-85). A small part of the
compensation that is Rs.25,000, was received by the assessee on 11-7-1984 (i.e.,
in A.Y. 1985-86). Compensation award was given by the
Collector/Land Acquisition Officer on 18-9-1986. The balance compensation of
Rs.1,77,708 was received by the assessee on 3-9-1987. The Tribunal held
that no capital gain is exigible to tax in A.Y. 1984-85.

The Allahabad High Court dismissed the reference application
filed by the Revenue and held as under :

“(i) In substance relying upon the aforesaid authorities
and also relying upon the definition given in S. 2(47) of the Income-tax Act,
1961, the contention of the Department is that for determining the assessment
year in which capital gain should be taxed, it is the date of transfer which
has to be considered and because u/s.16 of the Land Acquisition Act, 1894, the
title passes to the Government upon taking the possession, therefore, the date
of transfer in compulsory land acquisition would be the date on which
possession is taken.

(ii) We have considered the matter and we are of the
opinion that the contention of the Department in respect of the A.Y. 1984-85
overlooks the vital facts, namely, that where S. 17 of the Land Acquisition
Act, 1894 has been invoked for the purposes of acquisition of land, possession
can be taken even where no award of compensation has been given.

(iii) If we accept the contention of the Department, it
would mean that the assessee whose land has been acquired will have to file a
return disclosing the amount of capital gain arising to him without even
knowing what the amount of that capital gain would be, because that amount can
become known to him only after the award has been given. ‘Lex non cogit ad
impossibilia’ is age-old maxim meaning that the law does not compel a man
to do which he cannot possibly perform. Requiring the assessee to file a
proper and complete return by including the income under the head ‘Capital
gain’ would be impossible for the assessee, in cases of the nature referred
above.

(iv) The assessee was required to invest the capital gain
in the specified securities, like capital gain bonds issued from time to time
or in a residential house under the various provisions of the Income-tax Act,
1961, from S. 54 onwards within the time specified therein as computed from
the date of transfer. It is obvious that in order to invest the money in the
specified items, the assessee must first receive the money. Therefore,
accepting the contention of the Department would mean depriving the assessee
of those benefits or tax relief in all cases where S. 17 of the Land
Acquisition Act, 1894, has been applied.

(v) The Tribunal was justified in holding that no capital
gain is exigible to tax in A.Y. 1984-85 on the facts and circumstances of the
case.”



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S. 239 & S. 140 : Return claiming refund signed by authorised signatory other than managing director : Defective return : Assessee to be given opportunity to cure defect

New Page 1

36  Refund : S. 239 and S. 140 of Income-tax Act, 1961 :
A.Ys. 2000-01 to 2002-03 : Return claiming refund signed by authorised signatory
other than managing director : Defective return : Refund is not to be rejected :
Assessee to be given opportunity to cure defective return.


[Hind Samachar Ltd., 169 Taxman 302 (P&H)]

For the A. Ys. 2000-01 to 2002-03, the assessee company had
filed returns of income claming refund. The verification of the returns was
signed by one ‘K’ who was neither the managing director, nor the director of the
assessee company, but was authorised to sign by a board resolution. The
Assessing Officer processed the returns u/s.143(1) of the Income-tax Act, 1961
and computed the refund payable to the assessee. Subsequently he issued notices
u/s.154 requiring the assessee to justify the genuineness of the returns in view
of the fact that ‘K’ who had signed the verification in returns did not fall in
the category of persons authorised to sign the return u/s.140(c). In response,
the assessee submitted that owing to an impass going on in the board of
directors of the company, a resolution was passed duly authorising ‘K’ to sign
and file the returns on behalf of the assessee and further, that the non-signing
of the returns by the managing director or any other director was at best a
curable defect. The assessee prayed for an opportunity to rectify the defect.
The assessee company also filed fresh returns duly signed by the managing
director and pleaded that the defects stood rectified. The Assessing Officer
rejected the assessee’s plea and held that the returns earlier filed were
invalid and accordingly withdrew the refund earlier allowed. The Commissioner
(Appeals) reversed the said order holding that if the returns were not signed by
the person mentioned in S. 140, it was only a curable defect. While giving
effect to the order of the Commissioner (Appeals), the Assessing Officer
rejected the plea of the assessee that the defect has been cured by filing new
return forms duly signed by the managing director on the ground that the same
were filed beyond the time permissible under the Act. Accordingly, the Assessing
Officer refused to grant refund.

The Punjab and Haryana High Court allowed the writ petition
filed by the assessee and held as under :

“(i) The return is required to be signed mandatorily by the
managing director of the company and in his absence, due to certain reasons,
by the director thereof.

(ii) S. 139(9) specifies the circumstances in which a
return would be regarded as a defective return. The list of defects mentioned
in the Explanation thereof is illustrative and not exhaustive.

(iii) S. 292B provides that no return of income shall be
invalid merely by reason of any mistake, defect or omission, if such return
is, in substance and effect, in conformity with or according to the intent and
purpose of the Act. The Section has applicability to those cases where purely
technical objection without substance arises in a case of a return of income.
S. 139(9) contains a non obstante clause, namely, ‘notwithstanding
anything contained in any other provision of this Act’ and would, therefore,
override the other provisions of the Act including S. 292B. If any curable
defect is noticed in the return, the Assessing Officer is required to provide
an opportunity to the assessee to rectify the same within the stipulated time
and in a case where any of the specified defects is not removed within the
time allowed u/s. 139(9), the return shall be treated as an invalid or non
est return.

(iv) However, a different situation would arise where a
return is not at all signed and verified. The question of rectifying of defect
in such a situation does not arise as the defect goes to the very root and
jurisdiction of the validity of the return.

(v) In the instant case, the return was signed by an
employee, who had been duly authorised by a resolution of the board to do so,
as there was litigation going on between the management. Thus the return was
not signed by the person authorised u/s.140(c). However, the return was got
signed and verified by the managing director and was filed along with a letter
dated 13-10-2003. Even on an opportunity provided by the Assessing Officer to
remove the defect in pursuance to the order of the Commissioner (Appeals), the
managing director attended the office of the Assessing Officer on 8-3-2005 and
signed the verification of the return. In such circumstances, the return filed
by the assessee could not be treated to be invalid or non est return.

(vi) The Assessing Officer, having failed to raise any issue
with regard to the plea of S. 239 at appropriate stage and the Commissioner
(Appeals) having remanded the case for purposes of getting the defect cured and
to give effect to that order, could not raise a new plea inconsistent with the
remand order. Still further, in the instant case, the provisions of S. 240 would
be attracted whereunder an obligation is cast upon the Revenue to refund the
amount to the assessee without having to make any claim in that regard in case
of refund arising on account of appeal or other proceedings under the Act.”

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New Industrial Undertaking — Special deduction — The gross total income of the assessee has first got to be determined after adjusting losses, etc., and if the gross total income of the assessee is ‘nil’, the assessee would not be entitled to deductions u

New Page 2

2 New Industrial Undertaking — Special
deduction — The gross total income of the assessee has first got
to be determined after adjusting losses, etc., and if the gross total income of
the assessee is ‘nil’, the assessee would not be entitled to deductions under
Chapter VI-A of the Act.


[Synco Industries Ltd. v. CIT, (2008) 299 ITR 444
(SC)]

The appellant-assessee is a company incorporated under the
provisions of the Companies Act, 1956. It is engaged in the business of oil and
chemicals. It has a unit for oil division at Sirohi District, Rajasthan. It has
also a chemical division at Jodhpur. The appellant had earned profit in the
A.Ys. 1990-91 and 1991-92 in both the units. However, the appellant had suffered
losses in the oil division in earlier years. The appellant claimed deductions
u/s.80HH and u/s.80-I of the Act, claiming that each unit should be treated
separately and the loss suffered by the oil division in earlier years is not
adjustable against the profits of the chemical division while considering the
question whether deductions u/s.80HH and u/s.80-I were allowable.

 

The Assessing Officer noticed that the gross total income of
the appellant before deductions under Chapter VI-A was ‘nil’. Therefore, he
concluded that the assessee was not entitled to the benefit of deductions under
Chapter VI-A. Feeling aggrieved, the appellant carried the matters in appeal
before the Commissioner of Income-tax (Appeals) who confirmed the view of the
Assessing Officer by dismissing the same. Therefore, the appellant preferred
appeals before the Income-tax Appellate Tribunal.

 

The Tribunal held that gross total income of the appellant
had got to be computed in accordance with the Act before allowing deductions
under any Section falling under Chapter VI-A and as the gross total income of
the appellant after setting off the business losses of the earlier years was
‘nil’, the appellant was not entitled to any deduction either u/s.80HH or S.
80-I of the Act. In that view of the matter the Tribunal dismissed the appeals
filed by the appellant. The High Court also dismissed the same by judgment dated
July 23, 2001.

 

On further appeal, the Supreme Court held that Ss.(1) of S.
80A lays down that while computing the total income of an assessee, deductions
specified in S. 80C to S. 80U shall be allowed from his gross total income. This
Section has introduced a new concept of ‘gross total income’ as distinguished
from the ‘total income’ i.e., the net or taxable income.

 

Clause (5) of S. 80B defines the expression ‘gross total
income’ to mean the total income computed in accordance with the provisions of
the Act before making any deductions under Chapter VI-A of the Act. It follows,
therefore, that deductions under Chapter VI-A can be given only if the gross
total income is positive and not negative. If the gross total income of the
assessee is determined as ‘nil’, then there is no question of any deduction
being allowed under Chapter VI-A in computing the total income.

 

The Assessing Officer has to take into account the provisions
of S. 71 providing for set-off of loss from one head against income from another
and S. 72 providing for carry forward and set-off of business losses. S. 32(2)
makes provisions for carry forward and set-off of the unabsorbed depreciation of
a particular year. The effect of the abovementioned provisions is that while
computing the total income, the losses carried forward and depreciation have to
be adjusted and thereafter the Assessing Officer has to work out the gross total
income of the assessee.

 

Ss.(2) of S. 80A specifically enacts that the aggregate of
deductions under Chapter VI-A should not exceed the gross total income of the
assessee. If the gross total income is found to be a net loss on account of the
adjustment of losses of the earlier years or ‘nil’, no deduction under this
Chapter can be allowed.

 

As noticed earlier clause (5) of S. 80B of the Act is that
‘gross total income’ to mean the total income computed in accordance with the
provisions of the Act without making any deductions under Chapter VI-A. The
effect of clause (5) of S. 80B of the Act is that “gross total income” will be
arrived at after making the computation as follows :

(i) making deductions under the appropriate computation
provisions;

(ii) including the incomes, if any u/s.60 to u/s.64 in the
total income of the individual;

(iii) adjusting intra-head and/or inter-head losses; and

(iv) setting off brought forward unabsorbed losses and
unabsorbed depreciation, etc.

 


The Supreme Court therefore held that the High Court was
justified in holding that the loss from the oil division was required to be
adjusted before determining the gross total income and as the gross total income
was ‘nil’, the assessee was not entitled to claim deduction under Chapter VI-A
which includes S. 80-I also. The proposition of law, emerging from the above
discussion is that the gross total income of the assessee has first got to be
determined after adjusting losses, etc., and if the gross total income of the
assessee is ‘nil’, the assessee would not be entitled to deductions under
Chapter VI-A of the Act.

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Business expenditure — If income from an activity is assessed as an income, expenditure incurred in respect of that activity should be allowed.

New Page 2

1 Business expenditure — If income from an
activity is assessed as an income, expenditure incurred in respect of that
activity should be allowed.


[Kerala Road Lines v. CIT, (2008) 299 ITR 343 (SC)]

The assessee entered into an agreement with M/s. Peirce
Leslie (India) Ltd. on September 27, 1983, for purchase of 466 cents of land
with buildings thereon at Calicut. It was agreed that the sale deed will either
be got executed in favour of the assessee or its nominees. As per the agreement,
if the purchase price was not paid within the specified time, the assessee was
liable to pay interest at the rate of 18% per annum. The buildings standing on
the lands were demolished and the scrap materials were sold for Rs.5,88,001.
This income was treated as business income. Under the agreement, the assessee
had to pay an interest of Rs.4 lakhs for the delayed payment of purchase
consideration.

 

The assessee claimed this amount as a revenue expenditure.
The assessing authority disallowed the claim of the assessee on the ground that
the payment of interest on the purchase of the property would be in the nature
of capital expenditure and not revenue expenditure.

 

This order of the assessing authority was confirmed by the
Commissioner of Income-tax (Appeals). It was held that the intention of the
assessee was to enter into an adventure in the nature of trade and ultimately
the assessee had retained only 65.57 cents of land with it and the remaining
land was purchased by the sister concerns of the assessee in small pieces. It
was held that since the assessee was only an intermediary for the other sister
concerns, the part of interest referable to the lands sold to the sister
concerns could not be allowed as revenue expenditure. Thus, the Commissioner of
Income-tax gave part relief and allowed the interest referable to 65.57 cents of
land retained by the assessee. The assessee, being aggrieved, filed an appeal
before the Income-tax Appellate Tribunal.

 

The Tribunal accepted the appeal, set aside the order passed
by the Commissioner of Income-tax (Appeals). It was held that the assessee had
entered into an agreement to purchase the entire property including buildings
standing thereon. The buildings were demolished and structures standing thereon
were sold as scrap material for Rs.5,88,001. This sum was offered for assessment
as business income and assessed as such. The payment of interest of Rs.4 lakhs
for the delayed payment of purchase consideration has been provided in the
agreement and thus, the payment of interest was a contractual obligation. It was
held by the Tribunal that, the payment of interest was to be viewed as an
expenditure u/s.37 of the Income-tax Act, 1961, especially when the sale
proceeds of the scrap materials from the demolished structures have been treated
as business income and ultimately allowed the claim of the assessee for
deduction of interest.

 

The High Court, without answering the question as to whether
the expenditure is capital or revenue in nature, reversed the decision of the
Tribunal by holding that the assessee was not doing the business in real estate;
that the business of the assessee was transport only and, therefore, the
expenditure would not be covered by the provisions of S. 37(1) of the Act.

 

On appeal to the Supreme Court by the Department, it was held
that once the Revenue has accepted the sum of Rs.5,88,001 (being sale proceeds
from the scrap material of the structures standing on the lands) as business
income, then correspondingly the assessee would be entitled to claim the sum of
Rs.4 lakhs as revenue expenditure paid as interest on the delayed payment of the
purchase consideration.

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Business expenditure — Interest on borrowings — Assessee has to establish, in the first instance, its right to claim deduction under one of the Sections between S. 30 to S. 38 and in the case of the firm if it claims special deduction, it has also to prov

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5 Business expenditure — Interest on
borrowings — Assessee has to establish, in the first instance, its right to
claim deduction under one of the Sections between S. 30 to S. 38 and in the case
of the firm if it claims special deduction, it has also to prove that it is not
disentitled to claim deduction of applicability of S. 40(b)(iv).


[Munjal Sales Corporation v. CIT, (2008) 298 ITR 298
(SC)]

In August/September, 1991, the appellant-assessee granted
interest-free advances to its sister concerns which were disallowed by the
Department on the ground that the said advances were not given from the firm’s
own funds but from interest bearing loans taken by the assessee-firm from third
parties. Accordingly, the assessee’s claim for deduction u/s.36(1)(iii) was
disallowed by the Department for the A.Y. 1992-93.

 

However, the Tribunal deleted the disallowance, saying that
the assessee had given such advance from its own funds. In the next A.Y. 1993-94
, the same situation look place. During the A.Y. 1994-95, no further advances
were made by the assessee-firm in favour of its concerns. However, during the
A.Y. 1995-96, a small interest-free loan of Rs.5 lakhs was advanced by the
assessee-firm to its sister concern and during the year in question the assessee
had profits of Rs.1.91 crores. The said advance/loan got finally repaid in the
A.Y. 1997-98.

 

For the A.Y. 1994-95, the Department disallowed the claim for
deduction u/s.40(b)(iv), saying that in this case there was diversion of funds
by raising of interest-free loans. The Assessing Officer did not accept the
submission of the assessee that advance(s) made by the assessee were out of
income of the firm. According to the Assessing Officer, the said interest-free
advances to sister concerns were out of monies borrowed by the firm from third
parties on payment of interest, hence the assessee was not entitled to deduction
u/s.40(b) of the 1961 Act. This view was confirmed by the Tribunal.

 

For the A.Ys. 1995-96 and 1996-97, the Tribunal held that
during the said years, no interest-free advances to sister concerns were made
and, therefore, there was no nexus between ‘interest-bearing loans’ taken and
‘interest-free advances’. However, the Tribunal found that there was no material
to show that advances were made to sister concerns out of the firm’s own income
and, therefore, the assessee was not entitled to deduction u/s.40(b)(iv) of the
1961 Act.

 

The Supreme Court after analysing the scheme of the Act and
in particular the provision of S. 36(1)(iii) and S. 40(b), held that every
assessee including a firm has to establish, in the first instance, its right to
claim deduction under one of the Sections between S. 30 to S. 38 and in the case
of the firm if it claims special deduction it has also to prove that it is not
disentitled to claim deduction by reason of applicability of S. 40(b)(iv).

 

The Supreme Court on the facts held that for the A.Y. 1992-93
and the A.Y. 1993-94, the Tribunal held that the loans given to the sister
concerns were out of the firm’s funds and that were advanced for business
purposes. Once it is found that the loans granted in August/September, 1991
continued up to A.Y. 1997-98 and that the said loans were advanced for business
purposes and that interest paid thereon did not exceed 18/12% per annum, the
assessee was entitled to deductions u/s.36(1)(iii) read with S. 40(b)(iv) of the
1961 Act.

 

Further, the Supreme Court observed that during A.Y. 1995-96,
apart from the loan given in August/September, 1991, the assessee advanced
interest-free loan to its sister concern amounting to Rs.5 lakhs. According to
the Tribunal, there was nothing on record to show that the loans were given to
the sister concern by the assessee-firm out of its own funds and, therefore, it
was not entitled to claim deduction u/s.36(1)(iii).

 

The Supreme Court held that finding of the Tribunal was thus
erroneous. The opening balance as on April 1, 1994, was Rs.1.91 crores, whereas
the loan given to the sister concern was a small amount of Rs.5 lakhs. According
to the Supreme Court, the profits earned by the assessee during the relevant
year were sufficient to cover the impugned loan of Rs.5 lakhs. The Supreme Court
accordingly allowed the appeal.

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Business expenditure — Interest on borrowed capital — Prior to insertion of proviso to S. 36(1)(vi) w.e.f. 1-4-2004, an assessee was entitled to claim deduction of interest on capital borrowed for the purposes of its business, irrespective of its use bein

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4 Business expenditure — Interest on borrowed
capital — Prior to insertion of proviso to S. 36(1)(vi) w.e.f. 1-4-2004, an
assessee was entitled to claim deduction of interest on capital borrowed for the
purposes of its business, irrespective of its use being for capital or revenue
purpose.


[Dy. CIT v. Core Health Care Ltd., (2008) 298 ITR 194
(SC)]

The assessee-company was engaged in the business of
manufacture and sale of intravenous solutions. For the A.Y. 1992-93 the assessee
claimed deduction towards expenses aggregating to Rs.2,12,05,459 which included
interest on borrowings of Rs.1,56,76,000 utilised for purchase of machinery.

 

During the assessment year under consideration the assessee
had installed new machinery. The Assessing Officer, disallowed the amount of
Rs.1,56,76,000 placing reliance on the judgment of this Court in Challapalli
Sugar Ltd. v. CIT, (1975) 98 ITR 167, inter alia, on the ground that
during the assessment year under consideration the assessee had installed new
machinery on which production had not started.

 

On appeal, the Commissioner of Income-tax (Appeals) confirmed
the addition of interest amount on borrowings of Rs.1,56,76,000. The matter was
carried in appeal by the assessee. The Tribunal held that the Department was not
justified in adding Rs.1,56,76,000 in the income of the assessee. This decision
was confirmed by the High Court.

 

On appeal by the Department, the Supreme Court noted that
before the High Court it was not the case of the Department that a new business
was set up or commenced during the assessment year under consideration. It was
undisputed before the High Court that three additional machines were installed
by the assessee during the assessment year under consideration for the
production of intravenous injectibles.

 

The Supreme Court upon reading the provisions of S.
36(1)(iii) held that interest on moneys borrowed for the purposes of business is
a necessary item of expenditure in a business. For allowance of a claim for
deduction of interest under the said Section, all that is necessary is that,
firstly, the money i.e., capital, must have been borrowed by the assessee;
secondly, it must have been borrowed for the purpose of business; and, thirdly,
the assessee must have paid interest on the borrowed amount. All that is germane
is : whether the borrowing was, or was not, for the purpose of business.

 

The expression ‘for the purpose of business’ occurring in S.
36(1)(iii) indicates that once the test of ‘for the purpose of business’ is
satisfied in respect of the capital borrowed, the assessee would be entitled to
deduction u/s.36(1)(iii). This provision makes no distinction between money
borrowed to acquire a capital asset or a revenue asset. All that the Section
requires is that the assessee must borrow capital and the purpose of the
borrowing must be for business which is carried on by the assessee in the year
of account.

 

What clause (iii) emphasises is the user of the capital and
not the user of the asset which comes into existence as a result of the borrowed
capital unlike S. 37 which expressly excludes an expenses of a capital nature.
The Legislature has, therefore, made no distinction in S. 36(1)(iii) between
‘capital borrowed for a revenue purpose’ and ‘capital borrowed for a capital
purpose’. An assessee is entitled to claim interest paid on borrowed capital
provided that capital is used for business purpose irrespective of what may be
the result of using the capital which the assessee has borrowed.

 

Further, the words ‘actual cost’ do not find place in S.
36(1)(iii) of the 1961 Act. The expression ‘actual cost’ is defined in S. 32,
32A, etc. of the 1961 Act, which is essentially a definition Section which is
subject to the context to the contrary. S. 43(1) defines ‘actual cost’. The
definition of ‘actual cost’ has been amplified by excluding such portion of the
cost as is met directly or indirectly by any other person or authority.
Explanation 8 has been inserted in S. 43(1) by Finance Act, 1986 (23 of 1986),
with retrospective effect from April 1, 1974.

 

It is important to note that the words ‘actual cost’ would
mean the whole cost and not the estimate of cost. ‘Actual cost’ means nothing
more than the cost accurately ascertained. The determination of actual cost in
S. 43(1) has relevance in relation to S. 32 (depreciation allowance), S. 32A
(investment allowance), S. 33 (development rebate allowance), and S. 41
(balancing charge). The ‘actual cost’ of an asset has no relevance in relation
to S. 36(1)(iii) of the 1961 Act, the Supreme Court however observed that in the
present appeal it was concerned with the A.Ys. 1992-93, 1993-94, 1995-96 and
1997-98.

 

The Supreme Court noted that a proviso has been inserted in
S. 36(1)(iii) of the 1961 Act which denies deductions of interest for the period
beginning from the date on which the capital was borrowed for acquisition of
asset till the date on which the asset was first put to use. The Supreme Court
held that proviso has been inserted by the Finance Act, 2003, with effect from
April 1, 2004. Hence, the said proviso will not apply to the facts of the
present case. The Supreme Court therefore held that the said proviso would
operate prospectively.

 

The Supreme Court held that the Assessing Officer was not
justified in making disallowance of Rs.1,56,76,000 in respect of borrowings
utilised for purchase of machines.

 


Note : The said decision was followed in the following
cases :

1. Jt. CIT v. United Phosphorous Ltd., (2008) 299
ITR 9 (SC)

2. ACIT v. Arvind Polycot Ltd., (2008) 299 ITR 12
(SC)

3. Dy. CIT v. Gujarat Alkalies & Chemicals Ltd.,
(2008) 299 ITR 85(SC)

 


In United Phosphorus Ltd.’s case there was another question
regarding option in law to claim partial depreciation in respect of any block of
assets. The matter was remanded back to the High Court.

 

Method of Accounting — Chit fund — Chit discount accounting on completed contract method cannot be rejected especially when it is revenue neutral.

New Page 2

3 Method of Accounting — Chit fund — Chit
discount accounting on completed contract method cannot be rejected especially
when it is revenue neutral.


[CIT v. Bilahari Investment P. Ltd., (2008) 299 ITR I
(SC)]

The assessees are private limited companies subscribing to
chits as their business activities. They were maintaining their accounts on the
mercantile basis and they were computing profit/loss, as the case may be, at the
end of the chit period following the completed contract method, which was
earlier accepted by the Department over several years.

 

However, for the A.Ys. 1991-92 to 1997-98, the Assessing
Officer came to the conclusion that the completed contract method was not
accurate in recognising/identifying ‘income’ under the 1961 Act, and according
to him, therefore, in the context of the ‘chit discount’, the correct method was
deferred revenue expenditure calculated on proportionate basis. In other words,
the Assessing Officer has preferred the percentage of completion method as the
basis for recognising/identifying ‘income’ under the 1961 Act in substitution of
the completed contract method.

 

According to the Department, chit dividend had to be
subjected to tax on accrual basis as the assessees were following the mercantile
system of accounting. As far as the chit dividend is concerned, the Department
rejected the completed contract method as suggested by the assessees, which has
been accepted by the Tribunal and the High Court. However, in the matter of chit
discount, the High Court, overruling the Tribunal, has held that the completed
contract method of accounting adopted by the assessees was valid and that the
Department had erred in spreading the discount over the remaining period of the
chit on proportionate basis.

 

In the matter of chit dividend, the assessees accepted the
view of the Tribunal and the High Court that the completed contract method was
not correct.

 

Before the Supreme Court the limited controversy was whether
the completed contract method of accounting adopted by the assessees as method
of accounting for chit discount was required to be substituted by the percentage
of completion method. The Supreme Court noted that Chit funds are basically
saving schemes in which a certain number of subscribers join together and each
contributes a certain fixed sum each month, the total number of months being
equal to the total number of subscribers. The subscriptions are paid to the
manager of the fund by a certain prescribed date each month and the total
subscriptions to the fund are auctioned each month amongst the subscribers. At
each auction, the lowest bidder is paid the amount of his bid and the balance
received from out of the total subscriptions received is distributed equally
amongst other subscribers, as premium. The manager is paid a certain percentage
of the collections each month on account of expenses and charges for conducting
the auction. In the auction, a maximum amount, which the highest bidder agrees
to forgo, is the amount, which is distributed to the other members, subject to
deduction of the manager’s commission.

 

Before the Supreme Court, it was the case of the assessees
that, profits (loss) accrued to the assessees only when the dividends exceeded
the discount paid and that the difference could be known only on the termination
of the chit when the total figure of dividend received and discount paid would
be available. That, it would be possible for the assessees to make profits only
when the sum total of the dividend received exceeded the sum total of discounts
suffered which is debited to the profit and loss account. According to the
assessees, the Department has all along been accepting the completed contract
method and, therefore, there was no justification in law or in facts for
deviating from the accepted practice. According to the assessees, a chit
transaction has been treated by the various Courts as one single scheme running
for the full period and, therefore, according to the assessees, the completed
contract method adopted by it over the years was not required to be substituted
by any other method of accounting.

 

The Supreme Court observed that recognition/identification of
income under the 1961 Act is attainable by several methods of accounting. It may
be noted that the same result could be attained by any one of the accounting
methods. The completed contract method is one such method. Similarly, the
percentage of completion method is another such method. Under the completed
contract method, the revenue is not recognised until the contract is complete.
Under the said method, costs are accumulated during the course of the contract.
The profit and loss is established in the last accounting period and transferred
to the profit and loss account. The said method determines results only when the
contract is completed. On the other hand, the percentage of completion method
tries to attain periodic recognition of income in order to reflect current
performance. The amount of revenue recognised under this method is determined by
reference to the stage of completion of the contract. The stage of completion
can be looked at under this method by taking into consideration the proportion
that costs incurred to date bear to the estimated total costs of contract.

 

The Supreme Court held that it was concerned with the A.Ys.
1991-92 to 1997-98. In the past, the Department had accepted the completed
contract method and because of such acceptance, the assessees, in these cases,
had followed the same method of accounting, particularly in the context of chit
discount. Every assessee is entitled to arrange its affairs and follow the
method of accounting, which the Department has earlier accepted. It is only in
those cases where the Department records a finding that the method adopted by
the assessee results in distortion of profits, can the Department insist on
substitution of the existing method.

 

Further, in the present cases, the Supreme Court noted from
the various statements produced before us, that the entire exercise, arising out
of change of method from the completed contract method to deferred revenue
expenditure, is revenue neutral. Therefore, the Supreme Court did not wish to
interfere with the impugned judgment of the High Court.

 Before concluding, the Supreme Court noted that u/s.211(2) of the Companies Act, Accounting Standards (‘AS’) enacted by the Institute of Chartered Accountants of India have now been adopted. The learned counsel for the Department, had placed reliance on AS-22 as the basis of his argument that the completed contract method should be substituted by deferred revenue expenditure (spreading the said expenditure on proportionate basis over a period of time). He also relied upon the concept of timing difference introduced by AS-22.

The Supreme Court observed that all these developments were of recent origin and it was open to the Department to consider these new accounting standards and concepts in future cases of chit transactions. The Supreme Court however expressed no opinion in that regard, stating that these new concepts and accounting standards had not been invoked by the Department in the present batch of civil appeals.

Salary — Perquisite — Stock option issued subject to conditions is not a ‘perquisite’ — Law amended by insertion of S. 17(2)(iii)(a) in the Act w.e.f. 1-4-2000 is not retrospective.

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10 Salary — Perquisite — Stock option issued
subject to conditions is not a ‘perquisite’ — Law amended by insertion of S.
17(2)(iii)(a) in the Act w.e.f. 1-4-2000 is not retrospective.


[CIT v. Infosys Technologies Ltd., (2008) 297 ITR 167
(SC)]

The respondent-assessee, a public limited IT company based in
Bangalore, to implement the Employees’ Stock Option Scheme (‘the ESOP’), created
a trust known as Technologies Employees’ Welfare Trust and allotted 7,50,000
warrants at Re.1 each to the said trust. Each warrant entitled the holder
thereof to apply for and be allotted one equity share of the face value of Rs.10
each for a total consideration of Rs.100. The trust was to hold the warrant and
transfer the same to the employees of the company under the terms and conditions
of the scheme governing the ESOP. During the A.Ys. 1997-98, 1998-99 and
1999-2000, warrants were offered to the eligible employees at Re.1 each by the
Trust. They were issued to the employees based on their performance, security
and other criteria. Under the ESOP scheme, every warrant had to be retained for
a minimum period of one year. At the end of that period, the employee was
entitled to elect and obtain shares allotted to him on payment of the balance
Rs.99. The option could be excised at any time after 12 months, but before the
expiry of the period of five years. The allotted shares were subject to a
lock-in period. During the lock-in period, the custody of the shares remained
with the trust. The shares were non-transferable. The employee had to continue
to be in service for 5 years. If he resigned or if his services be terminated
for any reason, he lost his right under the scheme and the shares were to be
re-transferred to the trust for Rs.100 per share. Intimation was also given to
the BSE that 7,34,500 equity shares were non-transferable and would not
constitute good delivery. Till September 13, 1999, all the shares were stamped
with the remark ‘non-transferable’. Thus the said shares were incapable of being
converted into money during the lock-in period.

 

For the A.Y. 1999-2000, the Assessing Officer held that the
total amount paid by the employees, consequent to the exercise of option was
Rs.6.64 crores, whereas the market value of those shares was Rs.171 crores. He
held that the ‘perquisite value’ was the difference between the market value and
the price paid by the employees for exercise of the option. He, therefore,
treated Rs.165 crores as ‘perquisite value’ on which TDS was charged at 30%. It
was held that the respondent-assessee was a defaulter for not deducting TDS
u/s.192 amounting to Rs.49.52 crores on the above perquisites value Rs.165
crores. Similar orders were also passed by the Assessing Officer for the A.Y.s
1997-98 and 1998-99. These orders were confirmed by the Commissioner of
Income-tax (Appeals). No weightage was given by both the authorities to the
lock-in period. Both the authorities took into account the ‘perquisite value’ as
on the date of exercise of option. Aggrieved by the aforesaid decisions, the
respondent-assessee carried the matter in appeal to the Tribunal, which took the
view that the right granted to the employee for participating in the scheme was
not a ‘perquisite’ u/s.17(2)(iii) of the Act. This decision of the Tribunal
stood confirmed by the judgment delivered by the Karnataka High Court on
December 15, 2006. On civil appeals by the Department, the Supreme Court noted
that during the A.Ys. 1997-98, 1998-99 and 1999-2000, there was no provision in
the Act which made the benefit by way of ESOP taxable as income specifically. It
became specifically taxable only with effect from April 1, 2000, when S. 17(2)(iii)(a)
stood inserted. However, the issue before it was not with regards to the
taxability of the perquisite, but was with regards to the value of perquisite.
The Supreme Court held that a warrant is a right without an obligation to buy.
Therefore, a ‘perquisite’ cannot be said to accrue at the time when warrants
were granted. The same would be the position when options vested in the
employees after a lapse of 12 months, as it was open to the employees not to
avail of the benefit of option. It was open to the employees to resign and there
was no certainty that the option would be exercised. Further, the shares were
not transferable for a period of 5 years (lock-in-period). If an employee
resigned during the lock-in-period the shares had to be retransferred. During
the lock-in-period, possession of the shares remained with the trust. The shares
were not transferable and it was not open to hypothecate or pledge the said
shares during the lock-in-period. During the said period, the shares had no
realisable value, hence, there was no cash inflow to the employees on account of
mere exercise of options. On the date when the option was exercised, it was not
possible for the employees to foresee the future market value of the shares.
Therefore, the benefit, if any, which arose on the date when the option stood
exercised was only a notional benefit whose value was unascertainable. The
difference in the market value of shares on the date of exercise of option and
the total amount paid by the employees consequent upon exercise of the said
option therefore cannot be treated as perquisite. The Supreme Court further held
that S. 17(2)(iii)(a) inserted by the Finance Act, 1997 w.e.f. 1-4-2000 was not
clarificatory and retrospective in operation because till 1-4-2000, in the
absence of the definition of ‘cost’, the value of the option was
unascertainable. The Supreme Court held that the Department was not justified in
treating Rs.165 crores as the perquisite value for the A.Y.s 1997-98 to
1999-2000 and the assessee was not in default for not deducting tax thereon.

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Export — Deduction u/s.80 HHC — Export profits in the business of growing, manufacturing and exporting of tea — Deduction u/s.80 HHC to be computed after apportionment, only against 40% of proportionate income

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8 Export — Deduction u/s.80 HHC — Export
profits in the business of growing, manufacturing and exporting of tea —
Deduction u/s.80 HHC to be computed after apportionment, only against 40% of
proportionate income.


[CIT v. Williamson Financial Services & Ors., (2007)
297 ITR 17 (SC)]

Rule 8(1) of the Rules provides that 40% of the composite
income from sale of tea, grown and manufactured, arrived at on making of the
apportionment “shall be deemed to be income liable to tax”.

 

The assessee exported tea in the accounting year. They were
entitled to deduction u/s.80HHC, in respect of the export. They were in the
business of growing and manufacturing tea. Since they earned composite income,
their case stood covered by Rule 8(1). In the returns, the assessee claimed S.
80HHC deduction against the entire composite income before application of Rule
8(1). This working was rejected by the Assessing Officer who took the view that
the deduction u/s.80HHC can be allowed after the 60 : 40 apportionment as 40%
income was the gross total income. However, in appeal, the Commissioner of
Income-tax (Appeals) reversed the decision of the Assessing Officer by holding
that the Assessing Officer should have first granted the S. 80HHC deduction
against the entire tea income before applying Rule 8(1). Against the said
decision of the Commissioner of Income-tax (Appeals), the matter was carried in
appeal to the Tribunal who took the view that the Assessing Officer was right in
allowing S. 80HHC deduction only against part of the income from tea, which was
taxable under the 1961 Act, namely, 40% of the income. This view of the Tribunal
stood reversed by the High Court. On appeal, the Supreme Court held that
‘Agricultural income’ falls in the category of exempted income. It is neither
chargeable nor includible in the total income. On the other hand, deduction
under Chapter VI-A is for ‘income’ which forms part of total income but which is
tax-free. Rule 8(1) segregates agricultural income which is exempted income from
business income which is chargeable to tax. Therefore, to the extent of 40% only
the income is chargeable and computable. In this view of the matter, the
assessee cannot claim S. 80HHC(3)(c) deduction u/s.80HHC(3)(a) against the
entire tea composite income and can claim only against proportionate income.

Export — Deduction u/s.80HHC — Amendment made by the Finance (No. 2) Act, 1991, in S. 80HHC of the Income-tax Act, 1961, with effect from April 1, 1992, to the effect that for the purpose of the special deduction thereunder business profits will not inclu

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9 Export — Deduction u/s.80HHC — Amendment
made by the Finance (No. 2) Act, 1991, in S. 80HHC of the Income-tax Act, 1961,
with effect from April 1, 1992, to the effect that for the purpose of the
special deduction thereunder business profits will not include receipts by way
of brokerage, commission, interest, service charges, etc., is only prospective
in nature.


[K. K. Doshi & Co. v. CIT, (2008) 297 ITR 38 (SC)]

The Bombay High Court in CIT v. K. K. Doshi & Co.,
(2000) 245 ITR 849 (Bom.) had held that amendment in law from the A.Y. 1992-93
that the business profits would not include receipts by way of brokerage,
commission, interest, rent charges or any other receipt of a similar nature was
clarificatory in nature and therefore retrospective in operation. On an appeal,
the Supreme Court following its decision in P. R. Prabhakar (2006) 284 ITR 548
(SC) held that the amendment in question was prospective in nature.

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Charitable Trust — For claiming benefit u/s.11(1)(a), registration u/s.12A is a condition precedent.

New Page 2

7 Charitable Trust — For claiming benefit
u/s.11(1)(a), registration u/s.12A is a condition precedent.


[U.P. Forest Corporation & Anr. v. Dy. CIT, (2008) 297
ITR 1 (SC)]

The U.P. Forest Corporation, the appellant, was constituted
by a Notification issued u/s.3 of the U.P. Forest Corporation Act, 1974. In the
year 1977, the Income-tax authorities issued a notice to the corporation to file
its return of income for the A.Y. 1976-77. The corporation challenged the said
notice by filing writ petition which was disposed of by the High Court by
holding that the corporation was a local authority u/s.10(20) of the Act and was
entitled to claim exemption. Since the said order was not challenged by the
Revenue, the same became final and remained in force till a contrary view was
taken by the Supreme Court in respect of the A.Ys. 1977-78, 1980-81 and 1984-85
in the case of CIT v. U.P. Forest Corporation, reported in (1998) 230 ITR
945.

 

For the A.Y. 1977-78, the corporation’s income was assessed
by making some additions of income and deleting some deductions claimed in the
return of income. On an appeal being filed, the Commissioner (Appeals) upheld
that the corporation was exempt from paying tax, on the ground that it was a
‘local authority’ within the meaning of S. 10(20) of the Act. Insofar as the
relief sought regarding additions of income and deleting of deductions is
concerned, the Commissioner declined to decide the said issue. The Tribunal set
aside the said order of the Commissioner (Appeals) and held that the corporation
was not a ‘local authority’ and remanded the appeals to the Commissioner
(Appeals) for rehearing on the merits on the issue of grant of relief relating
to additions/deductions. Since the corporation was also assessed for the A.Y.
1984-85 as was assessed for the A.Y. 1977-78, the corporation preferred writ
petition before the High Court of Allahabad which was accepted, and the High
Court declared that the corporation was a ‘local authority’ and was entitled to
exemption u/s.10(20) of the Act. It was held that it was entitled to exemption
u/s.11(1)(a) of the Act being a charitable institution.

 

Aggrieved by the said order, the Department chose to file
special leave petition before the Supreme Court, wherein leave was granted and
ultimately the appeals were accepted and order passed by the High Court was set
aside. It was held that even though S. 3(3) of the U.P. Forest Corporation Act
regards the corporation as being a local authority for the purpose of the Act,
it would not, in law, make the corporation a local authority for the purpose of
S. 10(20) of the Act. On the question whether the corporation was to get itself
registered u/s.12A of the Act for invoking the provisions of S. 11(1)(a) of the
Act to claim exemption being a charitable institution, it was held that since
the question had not been raised before any of the authorities below, the High
Court should have remanded the case back to either the assessing authority or
the Tribunal for a decision. The Supreme Court, under the peculiar facts and
circumstances of the case, directed the assessing authority to consider the
claim of the appellant-corporation as to whether the appellant was not liable to
be taxed in view of the provisions of S. 11(1)(a) of the Act as a charitable
institution.

 

In the meantime, following the decision of the High Court in
W.P., the Commissioner (Appeals) allowed the appeals of the corporation in
respect of the A.Ys. 1977-78 and 1980-81 allowing exemption u/s.10(20) and S.
11(1)(a) of the Act.

 

The appellant-corporation, on July 11, 1988, moved an
application before the competent authority for being registered u/s.12A of the
Act, which was rejected after a gap of nine years on March 18, 1997.

Against the said rejection, the corporation filed writ
petition before the High Court during the pendency of which the corporation
filed another application for the purpose on May 4, 1998. The High Court allowed
the writ petition and set aside the order of the competent authority rejecting
the application of the corporation for registration, on the ground that the
Commissioner had passed an order in violation of the principles of natural
justice inasmuch as the appellant-corporation had not been given an opportunity
of hearing and directed the Commissioner to redecide the corporation’s
application for registration after giving an opportunity of hearing to the
corporation. The Commissioner decided against the corporation against which
order an appeal filed by the corporation before the Tribunal at Lucknow is
pending decision.

 

After the matter was remanded by the Supreme Court in the
case of CIT v. U.P. Forest Corporation, (1998) 3 SCC 530, the assessing
authority held that the appellant was not a charitable institution and assessed
the income in respect of the A.Ys. 1977-78, 1980-81 and 1984-85 to tax. The
Commissioner (Appeals) partly allowed the appeals of the appellant-corporation
granting some relief on issues of additions/deductions. The
appellant-corporation as also the Revenue filed appeals against the said order
before the Tribunal. The Tribunal allowed the appeals filed by the Revenue and
set aside the relief granted to the corporation on the issue of
additions/deductions, on the ground that this Court had remanded the matter only
to decide one issue. Being aggrieved, the corporation filed an appeal u/s.260A
of the Act before the High Court. The High Court remanded the matter to the
Tribunal for considering the matter afresh. Aggrieved by the said order, the
corporation filed appeal before the Supreme Court. The Revenue also filed an
appeal against the said order. The Revenue also challenged a subsequent order
passed by the High Court, wherein the above question had not been decided in
view of the pendency of the aforementioned appeals. The Supreme Court held that
for claiming benefit u/s.11(1)(a), registration u/s.12A is a condition
precedent. Unless and until an institution is registered u/s.12A of the Act, it
cannot claim the benefit of S. 11(1)(a) of the Act. Keeping in view the fact
that the appellant-corporation had not been granted registration u/s.12A of the
Act, it was held that the appellant was not entitled to claim exemption from
payment of tax u/s.11(1)(a) and u/s.12 of the Act. The Supreme Court dismissed
the appeals filed by the corporation without deciding the merits of the dispute.
In view of the dismissal of these appeals, the appeals filed by the Revenue were
also dismissed. However, in order to protect the interest of the assessee as
well as the Revenue, the Tribunal was directed to take up the matter on priority
basis and decide the same as expeditiously as possible without being influenced
by any of the findings recorded by the High Court in its order.

National Tax Tribunal — Petitions to be heard after the amendments in the provisions of the Act were made.

New Page 1

15 National Tax Tribunal — Petitions to be heard after the
amendments in the provisions of the Act were made.


[Sandeep Goyal v. UOI, (2008) 298 ITR 10 (SC)]

The Supreme Court noted the various provisions which were
under challenge in the petitions filed and the contents of the affidavit filed
by the Union of India stating that it would make appropriate amendments in the
Act in this regard. The Supreme Court was of the view that it would be proper to
examine the matter after such amendments as the Government may think appropriate
are made. Liberty was granted to mention the matter for listing after the
amendments in the provisions were made.

levitra

Business expenditure — Interest on borrowings — Assessee has to establish, in the first instance, its right to claim deduction under one of the Sections between S. 30 to S. 38, and in the case of a firm if it claims special deduction, it has also to prove

New Page 1

18 Business expenditure — Interest on
borrowings — Assessee has to establish, in the first instance, its right to
claim deduction under one of the Sections between S. 30 to S. 38, and in the
case of a firm if it claims special deduction, it has also to prove that it is
not disentitled to claim deduction by reason of applicability of S. 40(b)(iv).


[Munjal Sales Corporation v. CIT, (2008) 298 ITR 298
(SC)]

In August/September, 1991, the appellant-assessee granted
interest-free advances to its sister concerns, which were disallowed by the
Department on the ground that the said advances were not given from the firm’s
own funds but from interest-bearing loans taken by the assessee-firm from third
parties. Accordingly, the assessee’s claim for deduction u/s. 36(1)(iii) was
disallowed by the Department for the A.Y. 1992-93. However, the Tribunal deleted
the disallowance saying that the assessee had given such advance from its own
funds. In the next A.Y. 1993-94 , the same situation look place. During the A.Y.
1994-95, no further advances were made by the assessee-firm in favour of its
concerns. However, during the A.Y. 1995-96, a small interest-free loan of Rs.5
lakhs was advanced by the assessee-firm to its sister concern and during the
year in question, the assessee had profits of Rs.1.91 crores. The said
advance/loan got finally repaid in the A.Y. 1997-98. For the A.Y. 1994-95, the
Department disallowed the claim for deduction u/s.40(b)(iv) saying that in this
case there was diversion of funds by raising of interest-free loans. The
Assessing Officer did not accept the submission of the assessee that advance(s)
made by the assessee were out of the income of the firm. According to the
Assessing Officer, the said interest-free advances to sister concerns were out
of monies borrowed by the firm from third parties on payment of interest, hence
the assessee was not entitled to deduction u/s.40(b) of the 1961 Act. This view
was confirmed by the Tribunal. For the A.Ys. 1995-96 and 1996-97, the Tribunal
held that during the said years, no interest-free advances to sister concerns
were made and, therefore, there was no nexus between ‘interest-bearing loans’
taken and ‘interest-free advances’. However, the Tribunal found that there was
no material to show that advances were made to sister concerns out of the firm’s
own income and, therefore, the assessee was not entitled to deduction
u/s.40(b)(iv) of the 1961 Act. The Supreme Court after analysing the scheme of
the Act and in particular the provision of S. 36(1)(iii) and S. 40(b), held that
every assessee, including a firm, has to establish, in the first instance, its
right to claim deduction under one of the Sections between S. 30 to S. 38 and in
the case of the firm, if it claims special deduction, it has also to prove that
it is not disentitled to claim deduction by reason of applicability of S.
40(b)(iv). The Supreme Court on the facts held that for the A.Y. 1992-93 and the
A.Y. 1993-94, the Tribunal held that the loans given to the sister concerns were
out of the firm’s funds and that were advanced for business purposes. Once it is
found that the loans granted in August/September, 1991 continued up to A.Y.
1997-98 and that the said loans were advanced for business purposes and that
interest paid thereon did not exceed 18/12 per cent per annum, the assessee was
entitled to deductions u/s.36(1)(iii) read with S. 40(b)(iv) of the 1961 Act.
Further, the Supreme Court observed that during A.Y. 1995-96, apart from the
loan given in August/September, 1991, the assessee advanced interest-free loan
to its sister concern amounting to Rs. 5 lakhs. According to the Tribunal, there
was nothing on record to show that the loans were given to the sister concern by
the assessee-firm out of its own funds and, therefore, it was not entitled to
claim deduction u/s.36(1)(iii). The Supreme Court held that finding of the
Tribunal was thus erroneous. The opening balance as on April 1, 1994, was
Rs.1.91 crores, whereas the loan given to the sister concern was a small amount
of Rs.5 lakhs. According to the Supreme Court, the profits earned by the
assessee during the relevant year were sufficient to cover the impugned loan of
Rs.5 lakhs. The Supreme Court accordingly allowed the appeal.

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Method of Accounting — Chit fund — Chit discount accounting on completed contract method cannot be rejected, especially when it is revenue neutral.

New Page 1

16 Method of Accounting — Chit fund — Chit
discount accounting on completed contract method cannot be rejected, especially
when it is revenue neutral.


[CIT v. Bilahari Investment P. Ltd., (2008) 299 ITR I
(SC)]

The assessees are private limited companies subscribing to
chits as their business activities. They were maintaining their accounts on the
mercantile basis and they were computing profit/loss, as the case may be, at the
end of the chit period following the completed contract method, which was
earlier accepted by the Department over several years.

 

However, for the A.Ys. 1991-92 to 1997-98, the Assessing
Officer came to the conclusion that the completed contract method was not
accurate in recognising/identifying ‘income’ under the 1961 Act, and according
to him, therefore, in the context of the ‘chit discount’, the correct method was
deferred revenue expenditure calculated on proportionate basis. In other words,
the Assessing Officer has preferred the percentage of completion method as the
basis for recognising/identifying ‘income’ under the 1961 Act in substitution of
the completed contract method.

 

According to the Department, chit dividend had to be
subjected to tax on accrual basis as the assessees were following the mercantile
system of accounting. As far as the chit dividend is concerned, the Department
rejected the completed contract method as suggested by the assessees, which has
been accepted by the Tribunal and the High Court. However, in the matter of chit
discount, the High Court, overruling the Tribunal, has held that the completed
contract method of accounting adopted by the assessees was valid and that the
Department had erred in spreading the discount over the remaining period of the
chit on proportionate basis. In the matter of chit dividend, the assessees
accepted the view of the Tribunal and the High Court that the completed contract
method was not correct.

 

Before the Supreme Court the limited controversy was whether
the completed contract method of accounting adopted by the assessees as method
of accounting for chit discount was required to be substituted by the percentage
of completion method.

 

The Supreme Court noted that chit funds are basically saving
schemes in which a certain number of subscribers join together and each
contributes a certain fixed sum each month, the total number of months being
equal to the total number of subscribers. The subscriptions are paid to the
manager of the fund by a certain prescribed date each month and the total
subscriptions to the fund are auctioned each month amongst the subscribers. At
each auction, the lowest bidder is paid the amount of his bid and the balance
received from out of the total subscriptions received is distributed equally
amongst other subscribers, as premium. The manager is paid a certain percentage
of the collections each month on account of expenses and charges for conducting
the auction. In the auction, a maximum amount, which the highest bidder agrees
to forgo, is the amount which is distributed to the other members, subject to
deduction of the manager’s commission.

 

Before the Supreme Court, it was the case of the assessees
that profits (loss) accrued to the assessees only when the dividends exceeded
the discount paid and that the difference could be known only on the termination
of the chit when the total figure of dividend received and discount paid would
be available. That, it would be possible for the assessees to make profits only
when the sum total of the dividend received exceeded the sum total of discounts
suffered which is debited to the profit and loss account. According to the
assessees, the Department has all along been accepting the completed contract
method and, therefore, there was no justification in law or in facts for
deviating from the accepted practice. According to the assessees, a chit
transaction has been treated by the various Courts as one single scheme running
for the full period and, therefore, according to the assessees, the completed
contract method adopted by it over the years was not required to be substituted
by any other method of accounting.

 

The Supreme Court observed that recognition/identification of
income under the 1961 Act is attainable by several methods of accounting. It may
be noted that the same result could be attained by any one of the accounting
methods. The completed contract method is one such method. Similarly, the
percentage of completion method is another such method. Under the completed
contract method, the revenue is not recognised until the contract is complete.
Under the said method, costs are accumulated during the course of the contract.
The profit and loss is established in the last accounting period and transferred
to the profit and loss account. The said method determines results only when the
contract is completed.

 

On the other hand, the percentage of completion method tries
to attain periodic recognition of income in order to reflect current
performance. The amount of revenue recognised under this method is determined by
reference to the stage of completion of the contract. The stage of completion
can be looked at under this method by taking into consideration the proportion
that costs incurred to date bears to the estimated total costs of contract.

 

The Supreme Court held that it was concerned with the A.Ys.
1991-92 to 1997-98. In the past, the Department had accepted the completed
contract method and because of such acceptance, the assessees, in these cases,
had followed the same method of accounting, particularly in the context of chit
discount. Every assessee is entitled to arrange its affairs and follow the
method of accounting, which the Department has earlier accepted. It is only in
those cases where the Department records a finding that the method adopted by
the assessee results in distortion of profits, the Department can insist on
substitution of the existing method.

 

Further, in the present cases, the Supreme Court noted from
the various statements produced before them that the entire exercise, arising
out of change of method from the completed contract method to deferred revenue
expenditure, is revenue-neutral. Therefore, the Supreme Court did not wish to
interfere with the impugned judgment of the High Court.

 

Penalty S. 271(1)(c) Explanation 5 : Assessee admitted acquisition of asset in statement u/s.132(4) : Immunity to be granted

New Page 1

6 Penalty : S. 271(1)(c) Explanation 5 of Income-tax Act,
1961 : A. Ys. 1984-85 and 1988-89 : In statement u/s.132(4), assessee admitted
acquisition of asset in A.Y. 1987-88 and offered income of Rs.3,50,000 spread
over 5 years from A.Y. 1984-85 to 1988-89 : Immunity under Explanation 5 should
be granted.


[CIT v. Kanhaiyalal, 214 CTR 611 (Raj.)]

In the course of a search action, in a statement u/s.132(4)
of the Income-tax Act, 1961, the assessee accepted the acquisition of the asset
of value Rs.3,50,000 in the A.Y. 1987-88 and offered the amount to tax spread
over in the A.Ys. 1984-85 to 1988-89. The Assessing Officer imposed penalty
u/s.271(1)(c) of the Act and refused to grant immunity under Explanation 5, on
the ground that the whole of the amount should have been offered in the A.Y.
1987-88. The Tribunal deleted the addition and held that the assessee is
entitled to immunity under Explanation 5.

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

“Immunity under Explanation 5 of S. 271(1)(c) is not taken
away for the simple reason that income disclosed by assessee in his statement
u/s.132(4) for a particular year was spread over in the returns of several
years, more so, when the Assessing Officer had also made assessment in
assessment years as returned by the assessee, though after making some quantum
reshuffling.”



levitra

Wipro Ltd.

New Page 1

WIPRO LTD. —
(31-3-2008) (consolidated)


From Accounting Policies :

Foreign currency transactions :

The Company is exposed to currency fluctuations on foreign
currency transactions. Foreign currency transactions are accounted in the books
of accounts at the average rate for the month.

 

Transaction :

The difference between the rate at which foreign currency
transactions are accounted and the rate at which they are realised is recognised
in the profit and loss account.

 

Translation :

Monetary foreign currency assets and liabilities at
period-end are translated at the closing rate. The difference arising from the
translation is recognised in the profit and loss account.

 

Derivative instruments and Hedge accounting :

The Company is exposed to foreign currency fluctuations on
foreign currency assets and forecasted cash flows denominated in foreign
currency. The Company limits the effects of foreign exchange rate fluctuations
by following established risk management policies including the use of
derivatives. The Company enters into forward exchange and option contracts,
where the counterparty is a bank. Since March 2004, based on the principles set
out in International Accounting Standard (IAS 39) on Financial Instruments’ the
Company has designated forward contracts and options to hedge highly probable
forecasted transactions as cash flow hedges. The exchange differences relating
to these forward contracts and gains/losses on such options were being
recognised in the period in which the forecasted transactions were expected to
occur. The exchange differences relating to forward contracts/options, other
than designated forward contracts/ options, were recognised in the profit and
loss account as they arose.

 

Effective April 1, 2007, based on the recognition and
measurement principles set out in the Accounting Standard (AS) 30 on Financial
Instruments: Recognition and Measurement, the changes in the fair values of
forward contracts and options designated as cash flow hedges are recognised
directly in shareholders’ funds and are reclassified into the profit and loss
account upon the occurrence of the hedged transaction. The gains/losses on
forward contracts and options designated as cash flow hedges are included along
with the underlying hedged forecasted transactions. The changes in fair value
relating to the ineffective portion of the cash flow hedges and forward
contracts/options not designated as cash flow hedges are recognised in the
profit and loss account as they arise. The Company has also designated forward
contracts and options as hedges of net investment in non-integral foreign
operation. The portion of the changes in fair value of forward contracts and
options that is determined to be an effective hedge is recognised in
shareholders’ fund and would be recognised in profit and loss account on the
disposal of foreign operation. The portion of the changes in fair value of
forward contracts and options that is determined to be an ineffective hedge is
recognised in the profit and loss account.

 

The Institute of Chartered Accountants of India (ICAI) has
recently issued an announcement ‘Accounting for Derivatives’ on accounting for
derivatives and early adoption of AS 30. The Company has already been applying
the principles of AS 30 in accounting for derivative instruments and the
announcement did not have any impact on the Company.

 

Integral operations :

In respect of integral operations, monetary assets and
liabilities are translated at the exchange rate prevailing at the date of the
balance sheet. Non-monetary items are translated at the historical rate. The
items in the profit and loss account are translated at the average exchange rate
during the period. The differences arising out of the translation are recognised
in the profit and loss account.

 

Non-integral operations :

In respect of non-integral operations, assets and liabilities
are translated at the exchange rate prevailing at the date of the balance sheet.
The items in the profit and loss account are translated at the average exchange
rate during the period. The differences arising out of the translation are
transferred to translation reserve.

 

From Notes to Accounts :

The Company designated forward contracts and options to hedge
highly probable forecasted transactions based on the principles set out in
International Accounting Standard (IAS 39) on Financial Instruments :
Recognition and Measurement. Until March 31, 2007, the exchange differences on
the forward contracts and gain/loss on such options were recognised in the
profit and loss account in the periods in which the forecasted transactions were
expected to occur.

 

Effective April 1, 2007, based on the recognition and
measurement principles set out in the Accounting Standard (AS) 30 on Financial
Instruments : Recognition and Measurement, the changes in the derivative fair
values relating to forward contracts and options that are designated as
effective cash flow hedges are recognised directly in shareholders’ funds until
the hedged transactions occur. Upon occurrence of the hedged transactions the
amounts recognised in the shareholders’ funds would be reclassified into the
profit and loss account along with the underlying hedged forecasted
transactions. During the year ended March 31, 2008 the Company has reclassified
net exchange gains of Rs.951 Million along with the underlying hedged forecasted
transaction. In addition, the Company also designates forward contracts as
hedges of the net investment in non-integral foreign operations. The changes in
the derivative fair values relating to forward contracts and options that are
designated as net investments in non-integral foreign operations have been
recognised directly in shareholders’ funds within translation reserve. The
gains/losses in shareholders’ funds would be transferred to profit and loss
account upon the disposal of non-integral foreign operations.


Infosys Technologies Ltd.

New Page 1INFOSYS TECHNOLOGIES LTD.

— (31-3-2008)

From Accounting Policies :

Foreign currency transactions :

Revenue from overseas clients and collections deposited in
foreign currency bank accounts are recorded at the exchange rate as of the date
of the respective transactions. Expenditure in foreign currency is accounted at
the exchange rate prevalent when such expenditure is incurred. Disbursements
made out of foreign currency bank accounts are reported at the daily rates.
Exchange differences are recorded when the amount actually received on sales or
actually paid when expenditure is incurred, is converted into Indian Rupees. The
exchange differences arising on foreign currency transactions are recognised as
income or expense in the period in which they arise.

Fixed assets purchased at overseas offices are recorded at
cost, based on the exchange rate as of the date of purchase. The charge for
depreciation is determined as per the company’s accounting policy.

Monetary current assets and monetary current liabilities that
are denominated in foreign currency are translated at the exchange rate
prevalent at date of the balance sheet. The resulting difference is also
recorded in the profit and loss account.

Forward contracts and options in foreign

currencies :

The company records the gain or loss on effective hedges in
the foreign currency fluctuation reserve until the transactions are complete. On
completion, the gain or loss is transferred to the profit and loss account of
that period. To designate a forward contract or option as an effective hedge,
management objectively evaluates and evidences with appropriate supporting
documents at the inception of each contract whether the contract is effective in
achieving off-setting cash flows attributable to the hedged risk. In the absence
of a designation as effective hedge, a gain or loss is recognised in the profit
and loss account.

From Notes to Accounts :

Forward contracts outstanding :

Reliance Petroleum Ltd.

New Page 1RELIANCE PETROLEUM LTD.

— (31-3-2008)

From Accounting Policies :

Derivative Transactions :

In respect of Derivative Contracts, premium paid, provision
for losses on restatement and gains/losses on settlement are recognised along
with the underlying transactions and charged to Profit and Loss Account/Project
Development Expenditure Account.

 

From Notes to Accounts :

Financial and Derivative Instrument :



(a) Nominal amount of derivative contracts entered into by
the Company for hedging currency and interest rate related risks and
outstanding as on 31st March 2008 amounts to Rs.77330187080 (Previous year
Rs.47122063440). Category wise break-up is given below :

In Rupees


Particulars
 As at
31-3-2008 		As at
31-3-2007
1 Interest
rate swaps 		44132000000
 10867500000
2 Currency
swaps 		14470737830
 10500000000
3 Options
 12053125000
 24114330450
4 Forward
Contracts 		6674324250
 1640232990

(b) All financial and derivative contracts entered into by
the Company are for hedging purposes only.

(c) In respect of outstanding derivative contracts which
are stated in para ‘a’ above, there is a net unrealised gain as on 31st March,
2008 which has not been recognised in the books, considering the principles of
prudence as enunciated in Accounting Standard 1 “Disclosure of Accounting
Policies” notified in the Companies (Accounting Standards) Rules 2006.

(d) Foreign currency exposures that are not hedged by
derivative or forward contracts as on 31st March 2008 amounts to
Rs.108075292858 (Previous year Rs.43470000000).

 

 

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Tata Consulting Services Ltd.

New Page 1TATA
CONSULTING SERVICES LTD.

— (31-3-2008) (Consolidated)

From Accounting Policies :

Foreign currency transactions :

Income and expenses in foreign currencies are converted at
exchange rates prevailing on the date of the transaction. Foreign currency
monetary assets and liabilities other than net investments in non-integral
foreign operations are translated at the exchange rate prevailing on the balance
sheet date. Exchange difference arising on a monetary item that, in substance,
forms part of an enterprise’s net investments in a non-integral foreign
operation are accumulated in a foreign currency translation reserve.

 

Premium or discount on forward contracts and currency options
are amortised and recognised in the profit and loss account over the period of
the contract. Forward contracts and currency options outstanding at the balance
sheet date, other than designated cash flow hedges, are stated at fair values
And any gains or losses are recognised in the profit and loss account.

 

For the purpose of consolidation, income and expenses are
translated at average rates and the assets and liabilities are stated at closing
rate. The net impact of such change is disclosed under Foreign exchange
translation reserve.

 

Derivative instruments and hedge accounting :

The Company uses foreign currency forward contracts and
currency options to hedge its risks associated with foreign currency
fluctuations relating to certain firm commitments and forecasted transactions.
The Company designates these hedging instruments as cash flow hedges applying
the recognition and measurement principles set out in the Accounting Standard 30
‘Financial Instruments : Recognition and Measurement’ (AS-30).

 

The use of hedging instruments is governed by the Company’s
policies approved by the board of directors, which provide written principles on
the use of such financial derivatives consistent with the Company’s risk
management strategy.

 

Hedging instruments are initially measured at fair value, and
are re-measured at subsequent reporting dates. Changes in the fair value of
these derivatives that are designated and effective as hedges of future cash
flows are recognised directly in shareholders’ funds and the ineffective portion
is recognised immediately in profit and loss account.

 

Changes in the fair value of derivative financial instruments
that do not qualify for hedge accounting are recognised in profit and loss
account as they arise.

 

Hedge accounting is discontinued when the hedging instrument
expires or is sold, terminated, or exercised, or no longer qualifies for hedge
accounting. At that time for forecasted transactions, any cumulative gain or
loss on the hedging instrument recognised in shareholder’s funds is retained
there until the forecasted transaction occurs. If a hedged transaction is no
longer expected to occur, the net cumulative gain or loss recognised in
shareholders’ funds is transferred to profit and loss account for the period.

 

From Notes to Accounts :

Derivative financial instruments :

TCS Limited, in accordance with its risk management policies
and procedures, enters into foreign currency forward contracts to mange its
exposure in foreign exchange rates. The counter party is generally a bank. These
contracts are for a period between one day and eight years.

 

During the year ended March 31, 2008, TCS Limited has
re-evaluated its risk management program and hedging strategies in respect of
forecasted transactions. Upon completion of the formal documentation and testing
for effectiveness, TCS Limited has designated certain foreign currency options
in respect of forecasted transactions, which meet the hedging criteria, as Cash
Flow Hedges:

 

TCS Limited has following outstanding derivative instruments
as on March 31, 2008 :

(i) The following are outstanding Foreign Exchange Forward
contracts, which have been designated as Cash Flow Hedges, as on :

The following are outstanding Currency Option contracts, which have been designated as Cash Flow Hedges, as on :

Net loss on derivative instruments of Rs.21.83 crores recognised in Hedging Reserve as on March 31, 2008 is expected to be reclassified to the Profit and loss account by March 31, 2009.

The movement in Hedging Reserve during period ended March 2008, for derivatives designated as Cash Flow Hedges is as follows:

In addition to the above cash flow hedges, the Company has outstanding foreign exchange forward contracts and currency option contracts aggregating Rs.2,141.90 crores (previous year: Rs.2062.61 crores), whose fair value showed a loss of Rs.4.46 crores as on March 31, 2008 (previous year: gain of Rs.9.22 crores) to hedge the future cash flows. Although these contracts are effective as hedges from an economic perspective, they do not qualify for hedge accounting and accordingly these are accounted as derivatives instruments at fair value with changes in fair value recorded in the Profit and Loss Account.

Exchange gain of Rs.283.96 crores (previous year gain of Rs.45.13 crores) on foreign currency forward exchange contracts have been recognised in the period ended March 31, 2008.


Disclosures regarding Premium payable on redemption of FCCB

New Page 1

Section B : Miscellaneous


5 Disclosures regarding Premium payable on redemption of FCCB

WOCKHARDT LTD. — (31-12-2007)

From Notes to Accounts :



(d) 108,500 (previous year — 108,500) Zero-coupon Foreign
Currency Convertible Bonds of USD 1,000 each are :

(i) Convertible by the holders at any time on or after
November 24, 2004 but prior to close of business on September 25, 2009. Each
bond will be converted into 94.265 fully paid-up equity shares with par
value of Rs.5 per share at a fixed price of Rs.486.075 per share.


(ii) redeemable, in whole but not in part, at the option
of the Company at any time on or after October 25, 2007, but not less than
seven business days prior to maturity date i.e., October 25, 2009,
subject to the fulfillment of certain terms and obtaining requisite
approvals.


(iii) redeemable on maturity date at 129.578 percent of
its principal amount, if not redeemed or converted earlier.


 



The bonds are considered as monetary liability. The bonds are
redeemable only if there is no conversion of the bonds earlier. Hence the
payment of premium on redemption is contingent in nature, the outcome of which
is dependent on uncertain future events. Hence no provision is considered
necessary, nor has it been made in the accounts in respect of such premium
amounting to a maximum of Rs.775.98 million. (Previous Year — Rs.581.74 million)

 

From Auditors’ Report :

Without qualifying our opinion, we state that the financial
statements are without provision for premium payable on 108,500 Zero-Coupon
Foreign Currency Convertible bonds of USD 1000 each [refer note 30(d) to the
financial statements] as the premium payable on redemption which is contingent
upon a future uncertain event, namely, the redemption of such bonds is presently
not determinable.

 

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Straight-lining of lease rent pursuant to clarification by EAC of ICAI

New Page 1

Section B : Miscellaneous


 3 Straight-lining of lease rent pursuant to
clarification by EAC of ICAI


 

BATA INDIA LTD. — (31-12-2007)

From Notes to Accounts :

Pursuant to clarification issued by Expert Advisory Committee
of Institute of Chartered Accountants of India on Accounting Standard-19 on
Leases on recognition of operating lease rent expense, the Company has decided
to recognise the scheduled rent increases over the lease term on a straight-line
basis in respect of all lease rent agreements entered on or after April 1, 2001
and still in force. The total impact in respect of these agreements till
December 31, 2006 of Rs.29,712 (Net of deferred tax impact of Rs.2,540) is
disclosed as ‘Prior period item’ in Schedule-21 in accordance with Accounting
Standard-5 on ‘Net Profit or Loss for the Period, Prior Period items and Changes
in Accounting Policies’.

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Scheme of arrangement for transfer of amalgamation reserve to restructuring reserve and one-time restructuring costs adjusted

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Section B : Miscellaneous



4 Scheme of arrangement for transfer of
amalgamation reserve to restructuring reserve and one-time restructuring costs
adjusted

GILLETTE INDIA LTD. — (30-6-2007)

From Notes to Accounts :

Consequent upon the scheme of arrangement u/s. 391 of the
Companies Act, 1956 as approved by the shareholders and confirmed by the Hon’ble
High Court of Rajasthan a sum of Rs.85,00,000 was transferred from the
amalgamation Reserve forming part of the Capital Reserves of the Company to a
Reconstruction Reserve Account. Further, vide a clarification dated December 4,
2006, the Hon’ble High Court has clarified that the transfer of expenses to the
Reconstruction Reserve Account should be gross of tax.

 

A detailed break-up of Rs.65 22 74 068 as has been utilised
towards the Business Restructuring expenses up to June 30, 2007 is given below :


One-time expenditure for the restructuring
Maximum amount as sanctioned by the Court
Actual expenses upto June 30, 2007
  Rs. Rs.

Employee separation, Relocation and related costs 		536000000 490835509

Costs associated with change in Go to Market and Distribution model 		212000000 139415791
Estimated value of
asset write down w.r.t.
the restructure		 43500000 8117433

Transition costs including travel/ training/ communication and other related
costs 		35000000 13905335

Other miscellaneous restructuring items including contingencies 		23500000 —

Total 		850000000 652274068

 

The said Business Restructuring is expected to be completed
during the next financial year.

 

From Auditors’ Report :

Attention is invited to Note B2 of the Schedule 18 annexed to
and forming part of the financial statements regarding charging off of Business
Restructuring expenses to Capital Reserve. Pursuant to the approval given by the
High Court of Rajasthan dated August 22, 2006 and December 04, 2006 to the
Scheme of Arrangement filed by the Company under Section 391 of the Companies
Act, 1956, in respect of charging off of ‘business restructuring expenses —
gross of tax’ to the capital reserve; the Company has been permitted to transfer
an amount of up to Rs.8500.00 lakhs from the Capital Reserve to a
‘Reconstruction Reserve Account’. The total expenses charged off to
Reconstruction Reserve Account for the period from January 01, 2006 to June 30,
2007 amounted to Rs.6522.74 lakhs. Had the restructuring expenses not been
adjusted to Capital Reserve under the order of the High Court of Rajasthan and
debited to the Profit and Loss Account as per the generally accepted accounting
principles, the net profit after tax (inclusive of the effect of deferred tax)
would have been lower and the Capital Reserve been higher for the period from
January 01, 2006 to June 30, 2007 by Rs.5538.72 lakhs.

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Qualifications in certificate on corporate governance

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Section B : Miscellaneous


2 Qualifications in certificate on corporate governance

BATA INDIA LTD. — (31-12-2007)

In our opinion and to the best of our information and
according to the explanations given to us, subject to the following :

1. Chairman of Audit Committee Meeting Mr. V. Narayanan was
not present in the Annual General Meeting held on 27th June 2007.

2. Code of conduct and quarterly results are not available
on the website of the company.


We certify that the Company has complied with the conditions
of Corporate Governance as stipulated in the above-mentioned Listing Agreement.

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TDS : S. 199 : TDS on interest on Deep Discount Bonds — Payment on behalf of ‘owner of security’

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20 TDS : Credit of : S. 199 of Income-tax
Act, 1961 : A.Y. 2002-03 : TDS in relation to interest on Deep Discount Bonds is
required to be treated as payment on behalf of ‘owner of security’ or ‘unit
holder’.


[CIT v. Smt. Sonal Bansal, 167 Taxman 311 (P&H); 215
CTR 65 (P&H)]

On 1-1-2001, the assessee had purchased Deep Discount Bonds
1997 of IDBI at the rate of Rs.9,700 each from one ‘V’ who had originally
purchased the same at the rate of Rs.5,500. On maturity, the IDBI deducted tax
at source of Rs.91,800 on the interest income of Rs.9 lakhs. In the A.Y.
2002-03, the assessee had declared the income of Rs.1,07,140 which included
Rs.60,000 being interest on the said Bonds as the secondary purchaser. The
assessee had also claimed credit of the said tax deducted at source of Rs.91,800
on the said interest of Rs.9 lakhs. The Assessing Officer allowed credit for TDS
of Rs.6,120 only, proportionate to the interest income of Rs.60,000 offered by
the assessee and disallowed the balance. The CIT(A) and the Tribunal allowed the
full claim.

 

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

“(i) A perusal of the provisions of S. 199 shows that any
deduction made of tax at source and paid to the Central Government is required
to be treated as payment of tax on behalf of the person from whose income the
deduction was made. However, with effect from 1-4-1997, amendments were
introduced by Finance Act, 1996, which resulted in addition of words
‘depositor’ or ‘owner of property’ or ‘owner of security’ or ‘unit holder’, as
the case may be. Therefore, it is clear that any deduction made of tax at
source and paid to the Central Government is required to be treated as payment
of tax on behalf of ‘owner of security’ or ‘unit holder’.

(ii) In the instant case, it is obviously the assessee-secondary
purchaser who was owner of security and, therefore, tax deducted at source had
to be regarded as payment made on her behalf. Moreover, certificate u/s.203
had also been issued to the assessee.”

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Refund : S. 119, S. 237 : Belated return for refund : Delay condoned due to genuine hardship to assessee

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19 Refund : Condonation of delay : S. 119 and S. 237 of
Income-tax Act, 1961 : A.Y. 1997-98 : Belated return for refund : Delay should
be necessarily condoned in case of genuine hardship to assessee.






[Pala Marketing Co-operative Society Ltd. v. UOI, 167
Taxman 238 (Ker.)]

The assessee co-operative society was entitled to exemption
u/s.80P of the Income-tax Act, 1961. For the A.Y. 1997-98, the assessee had
filed return of income claiming refund of advance tax and TDS. There was delay
in filing the return as there was delay in audit of the accounts. The Assessing
Officer rejected the return as time-barred and, consequently declined the
refund. The assessee’s application u/s.119(2)(b) for condonation of delay in
filing return was also rejected by the Board.



The Kerala High Court allowed the writ petition filed by the
assessee and held as under :

“(i) If delay is not condoned by the Board u/s. 119(2)(b),
such application cannot be processed u/s.139(1) or u/s.139(4). Therefore, in
order to consider belated return for refund on merits, delay has to be
necessarily condoned by the Board u/s.119(2)(b).

(ii) In S. 119(2)(b), it is stated that if the Board
considers it desirable or expedient for avoiding genuine hardship to the
assessee, it should condone the delay. In other words, what the Board should
consider is hardship to the party if delay is not condoned. The Board should
condone the delay if failure to condone the delay causes genuine hardship to
the assessee, no matter whether the delay in filing return is meticulously
explained or not.

(iii) Strangely, the Board had stated in its order that it
was not possible to investigate (scrutinise) the return of income because the
statutory time limit had already elapsed. It is not clear on what basis that
statement was made, because even in a case where a claim of refund is made,
the Assessing Officer has to examine the liability for Income-tax of the
assessee and refund is made only if tax is not payable or the amount paid is
in excess of the tax, interest, etc., payable.

(iv) The delay in audit by the auditor was not attributable
to the assessee. Besides showing sufficient cause for delay in filing the
return for refund, the assessee had also established its case of genuine
hardship inasmuch as it had suffered losses in the five succeeding years. The
genuine hardship contemplated u/s. 119(2)(b) obviously is financial hardship
caused to the assessee if delay is not condoned. If delay in the instant case
was not condoned, the assessee would be deprived of Rs.10 lakhs and odd, which
it was otherwise not liable to pay by virtue of the exemption u/s.80P.

(v) In the circumstances, impugned order was quashed
declaring the assessee’s entitlement for condonation of delay u/s.119(2)(b)
and, the Assessing Officer was directed to process assessee’s claim for refund
u/s.237 and grant refund to the extent eligible.”









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Charitable trust: Assessee, a marketing committee entitled to registration u/s.12A/12AA and exemption u/s.11

New Page 1

II. Reported :



 


17 Charitable trust : Registration u/s.12A
and u/s.12AA of Income-tax Act, 1961 : Assessee, a marketing committee eligible
for exemption u/s.10(29) : Exemption withdrawn w.e.f. 1-4-2003 : Assessee not
disentitled to registration 12A and 12AA and exemption u/s.11.

[CIT v. Krishi Upaj Mandi Samiti, 215 CTR 54 (MP)]

The assessee, a marketing committee, was entitled to
exemption u/s.10(29) of the Income-tax Act, 1961. The exemption was withdrawn
w.e.f. 1-4-2003. The assessee made application for registration u/s.12A and
u/s.12AA of the Act. The Commissioner rejected the application, on the ground
that the exemption u/s.10(29) has been withdrawn. In appeal the Tribunal
directed the Commissioner to permit the registration.

 

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

“(i) The first contention raised by the counsel for the
appellant is that the intention of the legislature in deleting S. 10(29) and
introduction of S. 10(20) itself shows that the legislature did not want to
extend the benefit of exemption to Krishi Upaj Mandi Samiti. This argument is
without any force because S. 10(20) and S. 10(29) provide for exemption to all
the local authorities and exemption under this section was a blanket exemption
without fulfilling any condition. S. 11 provides for exemption on certain
conditions. Thus, the intention behind the amendment was to remove the blanket
exemption to the local authorities and provide exemption only if they fulfil
the conditions u/s.11.

(ii) As per S. 11, the exemption can be granted to the
marketing committees provided that they spend amount for charitable purposes
as required by S. 11(2). Marketing committees are bound to spend their income
as per S. 39 of the 1972 Adhiniyam and as per said Section, the amount could
be spent only for public amenities like construction of roads, market, etc. S.
2(15) provides that if the amount is spent towards public amenities, it will
be deemed that the amount is spent for charitable purposes. Hence, by virtue
of S. 2(15), it will have to be deemed that the amount spent by the marketing
committees is spent towards public purposes.

(iii) Respondent marketing committees fulfil all the
requirements of S. 11 to get exemption and therefore, are entitled to
registration u/s.12A and u/s.12AA and hence, the Tribunal has rightly allowed
the appeals and set aside the orders passed by the CIT.


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Income from other sources : S. 56, 57 : Interest on borrowed money prior to commencement of business — Deductible u/s 57

New Page 4

18 Income from other sources : S. 56 and S. 57 of Income-tax
Act, 1961 : A.Ys. 1997-98 and 1998-99 : Interest income prior to commencement of
business : Interest on borrowed money could be allowed as deduction.






[CIT v. VGR Foundations, 298 ITR 132 (Mad.)]

The assessee was engaged in the real estate business. It
incurred expenses prior to commencement of business and also earned interest
income from out of the fixed deposits with the bank and the said income had been
set off against the expenses. The Assessing Officer assessed the interest income
as income from other sources, but did not allow any deduction of expenses. The
Tribunal held that the interest on moneys borrowed for the period prior to the
commencement of business could be allowed as deduction from the interest u/s.57
of the Income-tax Act, 1961.



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

“(i) The Tribunal allowed the claim of the assessee by
following its own earlier order and had rightly come to the conclusion that
interest on moneys borrowed for the period prior to the commencement of
business could be allowed as deduction u/s.57 while computing income from
other sources in respect of the interest received.

(ii) The Revenue was unable to give any further materials
or evidence and to furnish information as to whether they had filed any appeal
against the earlier order or not. Therefore there was no error or legal
infirmity in the order of the Tribunal so as to warrant interference. “





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Capital gains : Sale of property received under will : Expenditure on obtaining probate & travel expenses of executors deductible

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II. Reported :



 


16 Capital gains : Computation : Deduction :
A.Y. 1996-97 : Sale of property received under will : Expenditure incurred on
obtaining probate and travel expenses of executors are deductible.

[Mrs. June Perrett v. ITO, 298 ITR 268 (Kar); 215 CTR
267 (Kar.)]

In the A.Y. 1996-97, the assessee had sold a property
inherited by her under a will. While computing capital gain, she claimed
deduction of the expenditure incurred on obtaining probate and travel expenses
of executors. The claim was disallowed by the Assessing Officer. Disallowance
was upheld by the Tribunal.

 

On appeal by the assessee, the Karnataka High Court allowed
the claim and held as under :

“(i) While computing the capital gains u/s.48(i) of the
Income-tax Act, 1961, any expenditure incurred wholly and exclusively in
connection with the transfer of the property has to be deducted, and similarly
the cost incurred by the assessee for any improvement thereto is deductible.

(ii) The executors who were residing in London were
required to obtain probate and letters of administration and any expenses
incurred by the executors in order to obtain probate and letters of
administration were to be treated as expenses incurred by them in connection
with the transfer of property in question, since the executors could not sell
the property to any party without letters of administration.

(iii) Similarly, without paying the court fee, no letter of
administration would be issued by the court. Therefore, Rs.1,23,000 paid by
the executors as court fee at the time of obtaining the letters of
administration had to be treated as expenditure incurred in connection with
the transfer of property.”

 


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Capital gains : S.55(2)(b) : Sale of shares acquired before 1-4-1981 held as stock in trade up to 1987 — Market value as on 1-4-1981 is cost of acquisition

New Page 9

II. Reported :

14 Capital gains : Cost of acquisition : S. 55(2)(b) of
Income-tax Act, 1961 : Shares acquired prior to 1-4-1981 and held as stock in
trade up to 2-11-1987 : Sale of shares : Assessee entitled to adopt market value
as on 1-4-1981 as cost of acquisition.

[CIT v. Jannhavi Investments (P) Ltd.; 215 CTR 72 (Bom.)]

The assessee had acquired shares prior to 1-4-1981. Up to
2-11-1987, the shares were held as stock in trade when those were converted into
capital assets. On sale of the shares the assessee claimed the market value of
the shares as on 1-4-1981 as the cost of acquisition relying on the provisions
of S. 55(2)(b) of the Income-tax Act, 1961. The Assessing Officer rejected the
claim, on the ground that the shares were held as stock in trade till 2-11-1987.
Relying on the judgment of the Bombay High Court in the case of Keshavji
Karsondas v. CIT; 207 ITR 737 (Bom.) the Tribunal allowed the assessee’s
claim.

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

“(i) On behalf of the Revenue, it was sought to be
contended that the decision in the case of Keshavji Karsondas is
distinguishable in the facts of the present case. He pointed out that by
Finance Act, 1992, w.e.f. 1993, the mode of computation of income chargeable
under head ‘Capital gain’ had changed and the concept of ‘indexed cost of
acquisition’ had been introduced and defined under Explanation III to the 5th
proviso of S. 48. According to him the concept ‘indexed cost of acquisition’
was calculable on the basis of the cost of acquisition for the first year in
which the asset was held or on the first day of April, 1981, whichever was
later. He drew our further attention to S. 55(2)(b) which related to
calculation of ‘any other capital asset’.

(ii) In our view, there is no substance in the contention
of the Revenue. The amendment of 1993 referred to hereinabove does not in any
way nullify or dilute the ratio as laid down in the case of Keshavji Karsondas.
The cost of acquisition can only be the cost on the date of the actual
acquisition. In the present case, there was no acquisition of shares on
2-11-1987 when the same were converted from stock in trade to a capital
asset.”


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Capital gain : Interest on borrowing for investment in shares to be added to cost of acquisition of shares

New Page 4

15 Capital gains : cost of acquisition : A.Y. 2000-01 :
Interest on capital borrowed for investment in shares is liable to be added to
the cost of acquisition of shares.


[CIT v. Trishul Investments Ltd., 215 CTR 96 (Mad.)]

The assessee company was carrying on business of investment
in shares and securities. In the books of the assessee company, the interest
liability on the borrowed funds was debited. The assessee claimed that the
interest should be included in the cost of acquisition of the shares. The
Assessing Officer rejected the claim. The Tribunal allowed the claim.

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

“(i) The Tribunal correctly held that the interest paid for
acquisition of shares would partake character of cost of share and therefore
the same was rightly capitalised along with the cost of acquisition of shares.
There is no denial regarding the borrowed money for the acquisition of shares
by the assessee. The Tribunal correctly held that the interest payable thereon
should be added to the cost of acquisition of shares. The reasons given by the
Tribunal are based on valid materials and evidence.

(ii) Under these circumstances, we do not find any error or
legal infirmity in the order of the Tribunal so as to warrant interference.”

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Principle of mutuality : Entrance fees, commutation value of subscription for life members received by sports club — Capital Receipt

New Page 1

A. Unreported :

13 Income/capital receipt : Principle of
mutuality : A.Y. 1992-93 : Assessee is a sports club : Entrance fees : Commuted
value of subscription for life members : Is capital receipt not chargeable to
tax as principle of mutuality applies ?

[CIT v. Willingdon Sports Club (Bom.); ITA No. 121 of
2005; dated 18-3-2008 (Not reported)]

The assessee is a sports club. Its members are described as
gymkhana member, corporate member, short-term member all of whom are entitled to
the advantages or privileges of membership of the club except that of being
present or of voting at the general body meetings of the club or of serving on
the general committee and of proposing or seconding for elections as members of
the club. Apart from these members, there are life/founder/ordinary/super number
members. For the A.Y. 1992-93, the Assessing Officer assessed the total income
at Rs.15,75,900. In appeal, the Commissioner (Appeals) noted the two distinct
kind of members and held that the first category of members who were not allowed
to vote during the general body meeting were also not eligible to participate or
share in the surplus of the club on its winding up, and relying on the judgment
of the Bombay High Court in CIT v. WIAA Club; 136 ITR 569 (Bom.), held
that entrance fees and commutation of fees both have to be taken as revenue
receipts and dismissed the appeal. The Tribunal held that the entrance fees is
capital receipt not chargeable to tax in view of the decision in the case of
CIT v. WIAA Club; 136 ITR 569 (Bom.), which has been followed in CIT v.
Diners Business Services Pvt. Ltd.; 263 ITR 139 (Bom.). Accordingly, the
Tribunal allowed the appeal.

 

In appeal by the Revenue, the following questions were
raised :

“(a) Whether on the facts and in the circumstances of the
case and in law, the Tribunal was right in holding that the entrance fees
received by the assessee is capital receipt not chargeable to tax as the
principle of mutuality applies ?

(b) Whether commuted value of subscription for life members
has to be taxed or treated as capital receipts in the light of the decision of
the Bombay High Court in CIT v. WIAA Club, 136 ITR 569 (Bom.) ?”

 


Following the judgment of the Supreme Court in CIT v.
Bankipur Club; 226 ITR 97 (SC), the Bombay High Court held as under :

“(i) The Revenue it appears have based their submission on
the judgment of this Court in CIT v. WIAA Club; 136 ITR 569. The
membership of the club consisted of ordinary members and life members. The
ordinary members were paying entrance fees and annual subscription. The life
members were paying larger entrance fees without any liability to pay annual
subscription. The club was extending similar facilities both to ordinary and
life members. The issue of mutuality was neither argued nor raised or was on
issue before the learned Bench of this Court. It is on the facts there and
without considering the principle of mutuality that the learned Bench
proceeded to hold that the amount paid by the members had two elements in it.
The part of the amount paid was entrance fees which were paid to the club with
a view to acquiring the right to avail of the services and facilities extended
by the club. The other part was a consolidated commuted payment in lieu of
annual subscription. The Court held that that part of the entrance fees which
was a compounded payment for annual subscription would be income and the
balance would be capital receipt. In our opinion, considering the judgment of
the Supreme Court in Bankipur (supra) and the issue of mutuality which
has been raised in the present appeal, the judgment in WIAA Club (supra)
is clearly distinguishable. Even otherwise, in our opinion, it is doubtful
whether it would be correct law considering the judgment in Bankipur (supra).

(ii) From the principles which have been set out above and
more so in the judgment in Bankipur (supra), even if there be temporary
or honorary members who are not entitled to vote, the assessee would not cease
to be governed by the principle of mutuality. Once the assessee is governed by
the principle of mutuality, its income earned would not be income which would
be assessable to tax.

(iii) For the aforesaid reasons, we are of the view that
there is no infirmity in the judgment and consequently the questions as raised
are devoid of merit and consequently appeal dismissed.”


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S. 80IB : Customs duty drawback derived from business of industrial undertaking is entitled to deduction

New Page 1

34 Industrial undertaking : Deduction u/s.
80-IB of Income-tax Act, 1961 : A.Y. 2001-02 : Customs duty drawback derived
from business of industrial undertaking is entitled to deduction u/s.80-IB.


[CIT v. ELTEK SGS P. Ltd., 300 ITR 6 (Del.)]

The assessee was engaged in the business of processing prawns
and other seafood which it had exported. For the A.Y. 2001-02, the Assessing
Officer disallowed the claim for deduction of Customs Duty drawback of
Rs.42,92,725 u/s.80-IB of the Income-tax Act, 1961 by relying on the judgment of
the Supreme Court in CIT v. Sterling Foods, 237 ITR 579 (SC) which was
concerned with S. 80HH of the Act. The Tribunal allowed the claim for deduction.

 

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

“(i) There is a material difference between the language
used in S. 80HH and S. 80-IB of the Income-tax Act, 1961. While S. 80HH
requires that the profits and gains should be derived from the industrial
undertaking, S. 80-IB of the Act requires that the profits and gains should be
derived from any business of the industrial undertaking. In other words, there
need not necessarily be a direct nexus between the activity of an industrial
undertaking and the profits and gains. The source of the duty drawback is the
business of the industrial undertaking which is to manufacture and export
goods out of raw material that is imported and on which Customs Duty is paid.
The entitlement for duty drawback arises from S. 75(1) of the Customs Act,
1962, read with the relevant notification issued by the Central Government in
that regard.

(ii) An assessee would be entitled to special deduction
u/s.80-IB in respect of Customs Duty drawback.”

S. 147 : A completed assessment cannot be reopened merely on the basis of suspicion

New Page 1

35 Reassessment : S. 147 of Income-tax Act,
1961 : A.Y. 1989-90 : A completed assessment cannot be reopened merely on the
basis of suspicion : Reason to believe v/s reason to suspect.


[CIT v. Smt. Paramjit Kaur, 168 Taxman 39 (P&H)]

For the A.Y. 1989-90, the assessment was completed u/s.143(3)
of the Income-tax Act, 1961. On receiving the information from the Department’s
survey wing that the assessee had prepared a demand draft, which was not
accounted for in the books of account, the Assessing Officer issued a notice to
the assessee u/s.148 and completed the reassessment u/s.147 by adding the amount
of the draft to the income of the assessee. The Tribunal held that since the
Assessing Officer had failed to incorporate material and its satisfaction for
reopening the assessment, the same was invalid.

 

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

“(i) In the instant case, it was undisputed that the
Assessing Officer had initiated reassessment proceedings on the basis of
information received from the survey circle that the assessee had got prepared
a demand draft which was not accounted for in the books of account of the
assessee. But the Assessing Officer had not examined and corroborated the
information received from the survey circle before recording his own
satisfaction of escaped income and initiating reassessment proceedings. The
Assessing Officer had, thus, acted only on the basis of suspicion and it could
not be said that the same was based on belief that the income chargeable to
tax had escaped assessment. The Assessing Officer has to act on the basis of
‘reason to believe’ and not on ‘reason to suspect’.

(ii) The Tribunal had, thus, rightly concluded that the
Assessing Officer had failed to incorporate the material and his satisfaction
for reopening the assessment and, therefore, the issuance of notice u/s.148
for reassessment proceedings was not valid.”

 


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S. 28(iv) : Notional interest on interest free deposit can not be treated as benefit or perquisite

New Page 1

33 Income : Business income : S. 28(iv) read
with S. 23 of Income-tax Act, 1961 : A.Ys. 1995-96 and 2000-01 : Assessee
received interest-free deposit in respect of shops given on rent : Notional
interest on interest-free deposit can-not be treated as benefit or perquisite
u/s. 28(iv) : Notional interest not income.


[CIT v. Asian Hotels Ltd., 168 Taxman 59 (Del.)]

 

The assessee company had received interest-free deposit in
respect of shops given on rent. For the A.Ys. 1995-96 and 2000-01, the Assessing
Officer added notional interest on the said deposit to the assessee’s income on
the ground that by accepting the interest-free deposit, benefit had accrued to
the assessee, which was chargeable to tax u/s.28(iv) of the Income-tax Act,
1961. The Tribunal deleted the addition and held that notional interest on the
interest-free deposit received by the assessee in respect of a shop let on rent
was neither taxable as business profit u/s.28(iv), nor as income from house
property u/s.23(1)(a).

 

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

“(i) A plain reading of the provisions of S. 28(iv)
indicates that the question of any notional interest on an interest-free
deposit being added to the income of an assessee on the basis that it may have
been earned by the assessee if placed as fixed deposit, does not arise. S.
28(iv) is concerned with business income and is distinct and different from
income from house property. It talks of the value of any benefit on perquisite
whether convertible into money or not from the business or the exercise of a
profession.

(ii) S. 23(1)(a) is relevant for determining the income
from house property and concerns determination of the annual letting value of
such property. That provision talks of the sum for which the property might
reasonably be expected to let from year to year. This contemplates the
possible rent that the property might fetch and not certainly the interest on
fixed deposit that may be placed by the tenant with the landlord in connection
with the letting out of such property. It must be remembered that in a taxing
statute, it would be unsafe for the Court to go beyond the letter of the law
and try to read into the provision more than what is already provided for. The
attempt by the Revenue to draw an analogy from the Wealth-tax Act, 1957 was
also to no avail. It is an admitted position that there is a specific
provision in the Wealth-tax Act, which provides for considering of a notional
interest, whereas S. 23(1)(a) contains no such specific provision.”

 


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S. 80P(2)(a)(i) : Co-operative Society carrying on banking business : Interest on loans to nominal members is entitled to deduction.

New Page 1

32  Co-operative Society : Deduction u/s. 80P(2)(a)(i)
of Income-tax Act, 1961 : A.Y. 1999-00 : Co-operative Society carrying on
banking business : Interest on loans to nominal members is entitled to
deduction.



[CIT v. Punjab State Co-operative Bank Ltd., 300 ITR
24 (P&H)]

The assessee was a co-operative society carrying on the
business of banking and extending credit facilities to its members and nominal
members. For the A.Y. 1999-00, the Assessing Officer disallowed the claim for
deduction u/s.80(2)(a)(i) of the Income-tax Act, 1961 in respect of interest
derived from the loans advanced to the nominal members. The Tribunal allowed
the claim.

 

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

“(i) The provisions of S. 80P of the Income-tax Act,
1961, were introduced with a view to encouraging and promoting the growth of
the co-operative sector in the economic life of the country and in pursuance
of the declared policy of the Government. The different heads of exemption
enumerated in the Section are separate and distinct heads and are to be
treated as such. Clause (a)(i) of Ss.(2) of S. 80P talks of a co-operative
society engaged in carrying on the business of banking or providing credit
facilities to its members. The carrying on of the business of banking by a
co-operative society or providing credit facilities to its members are two
different types of activities which are covered under this sub-clause. The
word ‘or’ used in this sub-clause cannot be read as ‘and’. If the literal
reading of the whole of a Section or sub-section or a clause is quite clear
and there is no ambiguity, then the plain meaning to the Section should be
given effect and the word ‘or’ should not be read as ‘and’. Any interest
income received by the co-operative society engaged in carrying on the
business of banking activities from its members or non-members is liable for
exemption under this sub-clause.

(ii) A nominal member who had become a member of the
society after its registration on payment of the prescribed fees as per
bye-laws of the society, would also be considered as a member of the society
as per the definition given under the Co-operative Societies Act. In any
case, it made no difference whether the income was derived from the loan
advanced to the nominal members or members or otherwise to a third party,
because every income of interest derived by a co-operative banking society
from the banking activity was entitled to special deduction u/s.80P.”

TDS : Consequences of failure : Limitation : Ss. 153, 201(1), (1A) : Period of limitation not prescribed : Reasonable period is 4 years.

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 31 TDS : Consequences of failure :
Limitation : Ss. 153, 201(1), (1A) of Income-tax Act, 1961 : A.Y. 1990-91 :
Period of limitation not prescribed : Reasonable period is 4 years : Proceedings
initiated in 1999 for A.Y. 1990-91 : Barred by limitation.


[CIT v. NHK Japan Broadcasting Corporation, 305 ITR
137 (Del.)]

The assessee is a Government-company of a foreign country and
is carrying on the business in India. In respect of its employees in India it
pays salary in Indian Rupees and also pays something called ‘global salary’ to
the employees in the home country. In respect of the salary paid to the
employees in India, the assessee deducted tax at source, but with respect to the
global salary, the assessee did not deduct tax at source. On November 19, 1998,
a survey was conducted by the Revenue in the premises of the assessee and these
facts came to light for the first time. The assessee did not dispute its
liability to deduct tax at source in respect of global salary and the tax due
thereon was paid by the assessee and interest was also paid. In December 1999,
the Assessing Officer issued show-cause notice, and thereafter passed an order
treating the assessee as being in default for the purposes of S. 201 of the
Income-tax Act, 1961. The Tribunal cancelled the order holding that the
proceedings have not been initiated within a reasonable period of time.

 

The Delhi High Court dismissed the appeal filed by the
Revenue and held as under :

“(i) There is no dispute that S. 201 of the Act does not
prescribe any limitation period for the assessee being declared as an assessee
in default.

(ii) S. 153(1)(a) prescribes the period of two years from
the end of the assessment year for completing the assessment. Therefore, the
time limit would be three years from the end of the financial year. Even
though the period of three years would be a reasonable period as prescribed by
S. 153 of the Act for completion of proceedings, we have been told that the
Income-tax Appellate Tribunal has, in a series of decisions taken the view
that four years would be the reasonable period of time for initiating action
in a case where no limitation is prescribed. The rationale for it seems to be
quite clear — if there is a time limit for completing the assessment, then the
time limit for initiating the proceedings must be the same, if not less.
Nevertheless the Tribunal has given a greater period for commencing or
initiation of proceedings. We are not inclined to disturb the time limit of
four years prescribed by the Tribunal and are of the view that in terms of the
decision of the Supreme Court in Bhatinda District Co-op. Milk Producers Union
Ltd. (2007) 9 RC 637; 11 SCC 363, action must be initiated by the competent
authority under the Income-tax Act, where no limitation is prescribed as in S.
201, within a period of four years.

(iii) It appears that the assessee paid the tax voluntarily
as well as interest thereon, but the acceptance of the liability by the
assessee would not by itself extend the period of limitation, nor would it
extend the reasonable time that is postulated by the scheme of the Income-tax
Act. The assessee cannot be put, in a sense, in a worse position merely
because it has admitted its liability. The fact that the assessee agreed to
pay the tax voluntarily cannot put the assessee in a situation worse than if
it had contested its liability.”

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Profits and gains from foreign projects: Deduction u/s.80HHB : Project in Iraq : Payment received as per terms of agreement between Govt. of India and Iraq in RBI bonds and interest on them : Deduction allowable on interest.

New Page 1

 30 Profits and gains from foreign projects :
Deduction u/s.80HHB of Income-tax Act, 1961 : A.Ys. 1997-98 and 2000-01 :
Project in Iraq : Payment held up due to war in Iraq : Payment received in terms
of agreement between Governments of India and Iraq in terms of RBI bonds and
interest on RBI bonds : Deduction u/s.80HHC allowable on interest component
also.


[CIT v. Arvind Construction Co., 172 Taxman 5 (Del.)]

The assessee carried out certain construction work in two
different projects in Iraq as a subcontractor of the Indian Railway Construction
Corporation (IRCON). On account of the outbreak of war in Iraq, the payments to
IRCON were held up. Subsequently, by an agreement between the Governments of
India and Iraq, a settlement was arrived at by which the payment would be made
to IRCON on the deferred basis. The total sum due to the assessee together with
interest was calculated at Rs.54.93 crores for the A.Y. 1997-98 and the said sum
was settled as under :

(i) RBI Bonds Rs. 42,69,91,452

(ii) ECGC Bonds Rs. 5,61,12,153

(iii) Interest on RBI Bonds Rs. 6,61,83,046

 

The assessee claimed deduction u/s.80HHB of the Income-tax
Act, 1961, inter alia in respect of interest on RBI Bonds. The Assessing
Officer rejected the claim on the ground that the interest on RBI Bonds was not
an income derived from the business activities of the assessee. The Tribunal
allowed the claim.

 

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

“We find that as regards the interest on the RBI Bonds,
this was part of the total settlement package by which the assessee was to
receive Rs.54.93 crores for the works undertaken in Iraq as a sub-contractor
of IRCON. In the facts and circumstances of the case, it is not possible to
view the interest received on the RBI Bonds as payment de hors the
activity of the assessee pursuant to the execution of the contract.”


 

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Hotel in a place of pilgrimage : Deduction u/s.80-IA(4)(iii) : Hotel certified by prescribed authority : IT Authority has no jurisdiction to decide on basis of own criteria that assessee not entitled to deduction

New Page 1

 28 Hotel in a place of pilgrimage :
Deduction u/s.80-IA(4)(iii) of Income-tax Act, 1961 : Hotel granted
certification by prescribed authority : Income-tax authority has no jurisdiction
to decide on basis of his own criteria that assessee is not entitled to
deduction u/s.80-IA(4)(iii).


[Gujarat JHM Hotels Ltd. v. DGIT (Exemption), 305 ITR
386 (Guj.)]

The petitioner’s hotel was located at S, which is an
important place of pilgrimage as required u/s.80-IA(4)(iii) of the Income-tax
Act, 1961. The petitioner made an application for exemption u/s.80-IA(4)(iii) of
the Act. In support of the necessary conditions the petitioner filed a
certificate issued by the Director, Tourism, Gujarat Govt., dated 18-6-1996 and
a certificate issued by the Department of Tourism, Govt. of India, dated
11-6-1996. The Director General of Income-tax (Exemption) rejected the
application. He observed that it was a well-known fact that S was an important
industrial town, having existent infrastructure/tourism facilities, to promote
industrial and tourism development and that a place like S did not require the
additional benefit of S. 80-IA(4)(iii).

The Gujarat High Court allowed the writ petition filed by the
petitioner and held as under :

“(i) A bare perusal of the documents furnished by the
petitioner vis-à-vis S. 80-IA(4)(iii) of the Act and Rule 18BBC made it
clear that the petitioner had fulfilled all the necessary conditions for grant
of the approval.

(ii) The authority had only considered that the petitioner
did not fulfil the pilgrimage test without dealing with the two certificates
issued by the prescribed authorities. Once the prescribed authorities grant
certificates, if the authority wants to reject it, valid and justifiable
reasons must be given therefor. Rejecting the application on merely
considering the fact whether S is a place which could be considered as
requiring approval for notification for promotion of pilgrimage, was an
extraneous consideration to the provisions of the Act and the Rules and the
benefit could not be refused to the petitioner on this ground.”


 

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Investment allowance : S. 32A : Computation : Agreement providing for escalation of price : Extra amount paid to be taken into account

New Page 1

29 Investment allowance : S. 32A of
Income-tax Act, 1961 : A.Y. 1986-87 : Computation : Actual cost to be determined
in each year : Agreement providing for escalation of price : Extra amount paid
in relevant year to be taken into account.


[DCIT v. Official Liquidator, 305 ITR 418 (Mad.)]

The assessee had imported machinery from Italy for polynostic
staple fibre plant and installed it in the accounting year relevant to the A.Y.
1981-82. The agreement for purchase provided for an escalation clause. In
pursuance of the escalation clause, the assessee made certain payments towards
cost of escalation of the machinery and escalation in the customs duty and
technical consultancy fees. The total payments amounted to Rs.1,40,60,651. For
the A.Y. 1986-87, the assessee filed a revised return wherein the investment
allowance was enhanced to Rs.47,20,648 from Rs.10,55,608 as originally claimed.
The Assessing Officer allowed the claim, but the Commissioner acting u/s.263
rejected the claim. The Tribunal set aside the order of the Commissioner.

 

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Export Profit : Deduction u/s.80HHC : Computation : Manufacture and export including job works : Investment in raw materials, labour, etc. on own account alone includible in total profit.

New Page 1

 

27 Export Profit : Deduction u/s.80HHC :
Computation : S. 80HHC Expl. (baa) of Income-tax Act, 1961 : Manufacture and
export including job works for others : Investment in raw materials, labour,
etc. by assessee on own account alone includible in total profit.


[William Goodacre and Sons India Ltd. v. CIT, 305 ITR
365 (Ker.)]

The assessee was engaged in the business of manufacture and
export of products. The assessee was also engaged in doing job works for others
particularly exporters. The Assessing Officer excluded 90% of the job work
receipts from the business profit in the computation of the export profit by
referring to clause (baa) of the Explanation to S. 80HHC(4B) of the Income-tax
Act, 1961. The Tribunal confirmed the order of the Assessing Officer.

 

On appeal by the assessee, the Kerala High Court remanded the
matter back to the Assessing Officer and held as under :

“(i) The scheme of S. 80HHC of the Income-tax Act, 1961
provides for computation of the export profit of an assessee engaged in local
business and export business based on the formula provided in the Section to
find out the proportionate profit on export with reference to the total
turnover and total profit. Under the formula, eligible export profit is the
total profit divided by the total turnover and multiplied by export turnover.

(ii) The scheme of exclusion of certain items of income
which come within the description of business profits by virtue of the
inclusion clause contained in S. 28 of the Act, is to ensure that in the
course of working out the eligible export profit on a proportionate basis with
reference to the total turnover and export turnover, the net result should not
be a distorted figure. In other words, the formula seeks to achieve
determination of export profit as realistically and as near as possible. The
purpose of clause (baa) of the Explanation to S. 80HHC(4B) of the Act, is to
exclude such items of receipts which are not derived from business turnover.
Brokerage, commission, interest and rent, etc. are items which are essentially
in the nature of net receipts and are not derived out of total turnover of the
assessee. Besides the four items enumerated in clause (baa)(1), the charges or
any other receipt of a similar nature should also be excluded. If charges are
not comparable to any of these items, then such items cannot be excluded from
the business profits in terms of clause (baa) of the Explanation.

(iii) If raw materials are supplied by the awarder or if
the assessee purchased the raw materials separately in its name and claimed
separate re-imbursement, then the turnover of the transaction does not get
included in the total turnover and the receipt is net receipt, 90% of which
has to be excluded as charges under clause (baa).

(iv) The rubber backing charges and rubber edging charges
could not be excluded from the total profit by referring to clause (baa) of
the Explanation to the Section. The authorities below failed to consider the
claim of the assessee that it purchased raw materials on its own account and
used them in manufacture of the final product leading to value addition at the
assessee’s cost on the awarder’s raw material like doormats and coir carpets.
Unless the cost of the raw material is borne by the assessee in its own
account forming its sale value as total turnover, the assessee could not claim
the benefit of inclusion of full charges so collected in the total profit.

(v) If the entire raw material cost is borne by the awarder
and the assessee did only job work with machinery and employed its own labour,
such charges were comparable to commission or brokerage which were income
earned by incurring labour and other charges covered under clause (baa) of the
Explanation.”


 

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Educational Institution: Exemption u/s.10(22): Funds need not be invested in modes specified in S. 11(5).

New Page 1

 26 Educational Institution : Exemption u/s.
10(22) of Income-tax Act, 1961 : A.Y. 1997-98 : Funds of educational institution
need not be invested in modes specified in s. 11(5) : Effect of CBDT Circular
No. 712, dated 25-7-1995.


[DI (Exemption) v. Dalmia Shiksha Pratishthan, 305 ITR
327 (Del.)]

The assessee trust was imparting education through four
educational institutions. Up to the A.Y. 1996-97 the assessee was allowed
exemption u/s.10(22) of the Income-tax Act, 1961. For the A.Y. 1997-98, the
Assessing Officer denied the exemption for the reasons that (i) the assessee had
let out a property owned by it on rent; (ii) the assessee had earned some amount
on sale of books and thus it existed for purposes of profit, and (iii) the main
ground was that the assessee had invested its funds with a non-Governmental
body. The Tribunal allowed the claim for exemption u/s.10(22).

 

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

“(i) A perusal of the CBDT Circular No. 712, dated
25-7-1995 would show that there is no restriction regarding the mode of
investment of funds by an educational institution. There is no obligation that
an educational institution must invest its funds in the modes specified in S.
11(5) of the Act.

(ii) The rent from the property let out is only Rs. 4,500.
This amount was far too insignificant for taking a decision against the
assessee and denying it exemption u/s.10(22). The assessee had earned only an
amount of Rs.9,603 through sale of books. This could not be construed to mean
that the assessee did not exist solely for educational purposes but had a
profit motive. The assessee invested its funds and the intention was to use
the funds and any interest earned thereon for educational purposes.

(iii) For the subsequent assessment year, that is, A.Y.
1998-99, without there being any change in circumstances, the contention of
the assessee that it continued to be an educational institution and was
entitled to exemption u/s. 10(22) of the Act was accepted. The present A.Y.
1997-98 was the only odd assessment year for which the assessee has been
denied exemption and that too for reasons that were not at all germane to the
issue. The assessee was entitled to exemption.”


 

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Educational Institution : Exemption u/s.10(22) : Object of educating public in safety : All income used for promotion of objects : Entitled to exemption.

New Page 1

25 Educational Institution : Exemption u/s.
10(22) of Income-tax Act, 1961 : A.Y. 1993-94 : Registered society with object
of educating public in safety : Entire income used for promotion of objects of
society : Society entitled to exemption.


[DI (Exemption) v. National Safety Council, 305 ITR
257 (Bom.)]

The assessee was a society registered with the principle
object of educating the public concerning safety. For the A.Y. 1993-94, the
Assessing Officer denied the assessee exemption u/s.10(22) of the Income-tax
Act, 1961, on the ground that the assessee is not a university or other
educational institute existing solely for educational purposes. The Tribunal
allowed the assessee’s claim holding that the assessee was covered within the
meaning of the term ‘any other educational institution’ u/s.10(22) of the Act.

 

The Bombay High Court dismissed the appeal filed by the
Revenue and affirming the decision of the Tribunal held as under :

“The return filed for the A.Y. 1993-94 revealed that the
entire income has been utilised for the purpose of its objects. Therefore, the
finding of the Tribunal was not perverse and there was no substantial question
of law.”


 

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Educational Institution : Exemption u/s. 10(22) : Institution run for educational purposes : No evidence that capitation fees charged : Institution entitled to exemption u/s.10(22)

New Page 2

5 Educational Institution : Exemption u/s.
10(22) of Income-tax Act, 1961 : A.Y. 1997-98 : Institution run for educational
purposes : No evidence that capitation fees had been charged : Institution
entitled to exemption u/s. 10(22).


[CIT v. Khalsa Rural Hospital and Nursing Training
Institute, 304 ITR 20 (P&H)]

The assessee-trust was running a rural hospital and training
institute for nurses. During the course of assessment proceedings for the A.Y.
1997-98, the Assessing Officer noticed that the assessee had claimed exemption
u/s.11 of the Income-tax Act, 1961. The Assessing Officer disallowed the
exemption u/s.11 and made an addition of Rs.40 lakhs on account of capitation
fee. The Tribunal allowed exemption u/s.10(22) of the Act.

 

The Punjab & Haryana High Court dismissed the appeal filed by
the Revenue and held as under :

“There was nothing on record to show that the assessee-trust
was charging any capitation fee. The Assessing Officer had not found any
irregularity in the accounts of the trust. There was no document to show that
the trust was being run for any purpose of profit except that for any
educational purposes. The assesse was entitled to exemption u/s.10(22).”

 


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Capital gains : Immovable property : S. 50C : Constitutional validity : Provision not arbitrary or violative of Article 14 : Constitutionally valid.

New Page 1

24 Capital gains : Immovable property : Cost
of acquisition : S. 50C of Income-tax Act, 1961 : A.Y. 2003-04 : Constitutional
validity : Complete safeguard provided for assessee in Stamp Act and Income-tax
Act : Provision not arbitrary or violative of Article 14 : Provision
constitutionally valid.


[K. R. Palanisamy v. UOI, 306 ITR 61 (Mad.)]

The assessee sold his capital assets for a price lower than
the market price. The Assessing Officer applied S. 50C of the Income-tax Act,
1961 for computation of capital gain. The assessee filed a writ petition
challenging the constitutional validity of S. 50C.

 

The Madras High Court upheld the validity of S. 50C and held
as under :

“(i) S. 50C of the Act was incorporated to prevent
large-scale undervaluation of the real value of the property in the sale deed
so as to defraud the Government of revenue it was legitimately entitled to by
pumping in black money.

(ii) Article 246 of the Constitution of India gives
exclusive power to Parliament to make laws in respect of the matters
enumerated in List I of the Seventh Schedule. The legislative competence of
Parliament to insert a provision for arresting leakage of income had been
considered by the Supreme Court in several cases and the uniform opinion in
all those cases was that the entries in the legislative Lists should be
construed more liberally and in their widest amplitude and not in a narrow or
restricted sense. Every safeguard had been provided under the provisions of
the Stamp Act to the assessee to establish before the authorities the real
value for which the capital asset had been transferred.

(iii) Thus, what was stated in S. 50C as real value
could not be regarded as a notional or artificial
value and such real value is determinable only after hearing the assessee in
accordance with the statutory provisions. There was no indication either in
the provisions of S. 50C of the 1961 Act, or S. 47A of the Stamp Act or rules
made thereunder about the adoption of the guideline value. Hence, the
contention that S. 50C was arbitrary and violative of Article 14 of the
Constitution of India could not be accepted.

(iv) The principle of determining the market value of the
assets had been stated in detail in rule 5 of the Tamil Nadu Stamp (Prevention
of Undervaluation of Instruments) Rules, 1968. Hence the question of the
guideline value forming the basis for determination of the full value did not
arise.

(v) Capital assets and trading assets or stock-in-trade
were treated differently under the scheme of the Act. They could not be
compared on par with each other by considering them as a class of assets. The
discrimination on the ground of valid consideration which answers the test of
intelligible differentia did not attract Article 14 of the Constitution of
India.

(vi) A provision could be rendered inoperative only when it
was found to be violative of the constitutional mandate. The provision could
not be rendered inoperative on the ground that the speech of the Finance
Minister or the administrative instructions issued by the Central Board of
Direct Taxes had not explained the reasons for incorporation of the provision
when the object was evident from the provision itself.


 

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Reassessment : Notice to agent of non-resident assessee : Limitation : S. 149(3), S. 163(2) Specific order u/s.163(2) not necessary : Notice issued u/s.148 after expiry of two years is time-barred

New Page 1

8 Reassessment : Notice to agent of non-resident : Limitation
: Ss. 149(3) and Ss. 163(2) of Income-tax Act, 1961 : A.Y. 1996-97 : MC filed
return as agent of non-resident assessee : No specific order u/s.163(2) as agent
: Order not necessary : Notice u/s.148 issued to assessee on 14-1-2000, after
expiry of two years is time-barred u/s.149(3).


[CIT v. Madhwan Bashyam, 214 CTR 335 (Del.)]

For the A.Y. 1996-97, M/s. Mariben Corporation (MC) filed the
return of income as agent of the non-resident assessee on 24-6-1996. On
14-1-2000, the Assessing Officer issued notice u/s.148 of the Income-tax Act,
1961 and served on the assessee on 31-1-2000. Before the Tribunal, the assessee
contended that in view of the provisions of S. 149(3), the notice should have
been served to the assessee on or before 31-3-1999 and therefore the notice was
time-barred. The Revenue contended that no order was passed to the effect that
MC was the agent of the assessee and therefore the provisions of S. 149(3) are
not applicable. The Tribunal accepted the contention of the assessee and held
that the notice issued to the assessee u/s.148 of the Act, was barred by time.

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

“(i) On a plain reading of S. 163(2), it appears that when
an order adverse to the assessee/agent is passed by the Assessing Officer,
then a written order is required to be made. However, if there is no objection
to the agent continuing the proceedings on behalf of the assessee, no specific
order needs to be passed by the Assessing Officer. If a person filing a return
as an agent of the assessee is not accepted as an agent for further
proceedings, then the Assessing Officer must pass an order, so that the agent
or assessee can file an appeal. But as in the present case, if the proceedings
have gone on as if there is no objection to the person filing a return being
treated as an agent of the assessee, no specific order needs to be passed in
this regard.

(ii) Under the circumstances, there is no error in the view
taken by the Tribunal in coming to the conclusion that the notice was issued
to the assessee beyond the period prescribed by law.”


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Penalty u/s.271C and u/s.271B : Failure to deduct tax u/s.194C : Partner only matriculate, assessee new firm, followed advice given by its CA : Penalty cancelled

New Page 1

7 Penalty for failure to deduct tax at source : Ss.194C,
Ss.271C and Ss.273B of Income-tax Act, 1961 : A.Ys. 2000-01 and 2001-02 : New
firm : Partner a matriculate : Assessee explained that it was not advised by its
Chartered Accountant that it was liable to deduct tax at source u/s.194C :
Explanation bona fide : Penalty cancelled.


[CIT v. Fourways International, 166 Taxman 461 (Del.)]

In the A.Ys. 2000-01 and 2001-02, the assessee had made
certain payments for fabrication charges, but had not deducted tax at source.
The Assessing Officer held that the assessee has failed to deduct tax at source
u/s.194C of the Income-tax Act, 1961 without reasonable cause and therefore
imposed penalty u/s.271C of the Act. The contention of the assessee was that it
was not advised by its Chartered Accountant that it was liable to deduct tax at
source u/s.194C of the Act and therefore the failure to deduct tax at source was
bona fide. The assessee therefore contended that there is no
justification of imposition of penalty u/s.271C of the Act. The Tribunal
accepted the contention of the assessee and cancelled the penalty.

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

“(i) The Tribunal found the explanation to be bona fide.
The Tribunal concluded that the assessee was not avoiding its liability and
had cooperated with the Revenue in the payment of tax. It also held that the
assessee has not been correctly advised by its Chartered Accountant in regard
to its liability.

(ii) We may note that S. 273B of the Act does not make a
levy of penalty u/s.271C of the Act mandatory. The assessee would not be
liable to penalty if he is able to prove that there was a reasonable cause for
failing to deduct the tax. The assessee in the present case had given an
explanation which found favour with the Tribunal. We think that the view taken
by the Tribunal is one that could have possibly been taken in the matter. It
is not perverse as to warrant interference or which gives rise to a
substantial question of law.”



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Section A : Notes regarding Revenue Recognition Disputed Interest income 59

New Page 1Hotel Leelaventure Ltd. — (31-3-2008)

From Notes to Accounts :

The Honourable Supreme Court of India has upheld the interest
claim of the Company against HUDCO vide their order dated 12th February 2008.
The Company has recognised interest income of Rs.46.15 crores (Previous years
Rs.10.63 crores) during the year under review. Computation of interest payable
is disputed by HUDCO and the matter is pending before the Execution Court
i.e., The High Court of Delhi. Total disputed interest income recognised by
the Company till 31st March 2008 amounted to Rs.110.30 crores.

From Auditors’ Report :



(f) In our opinion, and to the best of information and
according to the explanation given to us, the said accounts, give the
information required by the Companies Act, 1956 in the manner so required,
subject to our inability to express an opinion on the impact of disputed
interest income recognised as referred to in Note 10 of Schedule K to the
accounts and read with other notes, give a true and fair view :


Recognition of Sales on despatch of goods from works


Setco Automotive Ltd. — (31-3-2008)


From Accounting Policies :




(i) Sales and services are accounted for on dispatch of
products from the works.


From Notes to Accounts :

The sales determined in accordance with the accounting policy
followed (Refer Note 7, Schedule 17) include Rs.954.80 lacs (Rs.312.55 lacs)
being sales value of dispatches in transit as on 31st March 2008. The inventory
value thereof amounts to Rs.690.83 lacs (Rs.223.47 lacs).

From Auditors’ Report :

In our opinion, the Balance Sheet, Profit & Loss Account and
Cash Flow Statement dealt with by this report comply with the accounting
standards referred to in sub-section (3C) of Section 211 of the Companies Act,
1956; except as regards :

(i) Accounting Standard-9, which provides for recognition of
revenue from sales only on transfer of significant risks and rewards of
ownership to the buyer, whereas the Company has been recognising sales on
dispatch of goods from works. As a result, goods in transit valued at Rs.690.83
lacs have been recognised as sales at a value of Rs.954.80 lacs. [Refer
Accounting Policy 7(i) of Schedule 17 and Note 08 of Schedule 18]


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Shares in subsidiary company (ordered to be wound up) : Written off : Deductible business loss.

New Page 1

23 Business loss : Shares held in subsidiary
company : Subsidiary company ordered to be wound up : Shares became of
insignificant value and written off : Loss to be treated as business loss
eligible for deduction.


[CIT v. H. P. Mineral and Industrial Development
Corporation Ltd., 305 ITR 111 (HP)]

One of the assessee’s subsidiary companies was ordered to be
wound up. The assessee had held the shares as stock in trade. The assessee
decided to write off the value of the shares held by it in the said subsidiary
company and claimed deduction of the same as business loss. The Tribunal allowed
the deduction, holding that there was no question of selling off the shares as
the subsidiary company had gone into liquidation.

 

On reference by the Revenue, the Himachal Pradesh High Court
upheld the decision of the Tribunal and held as under :

“Once a company had been ordered to be wound up, there was
no question of any party dealing in the shares of that company. The Tribunal
had come to a finding that the shares were stock-in-trade and had therefore,
allowed the loss. The loss had to be treated as a trading loss. The mere fact
that the shares were not sold was of no significance, since in fact the shares
could not have been sold and had become worthless.”

 

 

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Power of Appellate Tribunal : To allow claim for deduction not made in return : Assessee claimed 1/5th revenue expenditure on deferred basis : Tribunal can allow full revenue expenditure on accrual basis.

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22 Appellate Tribunal : Power of : A.Y.
1990-91 : The Tribunal has power to allow claim for deduction which was not made
in the return of income : Assessee claimed 1/5th revenue expenditure on deferred
basis: Tribunal can allow full revenue expenditure on accrual basis.


[CIT v. Jai Parabolic Springs Ltd., 172 Taxman 258
(Del.)]

For the A.Y. 1990-91, the assessee had written off in the
books certain revenue expenditure over a period of 5 years from the relevant
assessment year and, accordingly, the assessee claimed deduction of 1/5th of the
expenses in the relevant year on deferred basis. The claim was allowed by the
AO. In appeal, the CIT(A) allowed the claim for deduction of the entire revenue
expenditure in the relevant year. The Tribunal restored the matter to the AO to
consider the issue afresh. The AO again disallowed the claim holding that the
same was not claimed in the return of income. The CIT(A) allowed the claim. The
Tribunal upheld the order of the CIT(A).

 

In appeal before the High Court, the Revenue contended that
the Tribunal was not right, in law, in allowing the deduction when no such claim
was made in the return of income. The Delhi High Court dismissed the appeal
filed by the Revenue and held as under :

“(i) The revenue expenditure, which is incurred wholly and
exclusively for the purpose of business, must be allowed in its entirety in
the year in which it is incurred. It cannot be spread over a number of years
even if the assessee has written it off in his books over a period of a number
of years.

(ii) There is no prohibition on the powers of the Tribunal
to entertain an additional ground which according to the Tribunal arises in
the matter for the just decision of the case. Therefore, there was no
infirmity in the order of the Tribunal.”


 

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Extracts from Certificate on Corporate Governance

New Page 1Section B :
Miscellaneous

Extracts from Certificate on Corporate Governance

Based on such a review and to the best of our information and
according to the explanations given to us, in our opinion, the Company has
complied with the conditions of Corporate Governance as stipulated in Clause 49
of the Listing Agreement of the Stock Exchange of India, except the following :

I. The Company has not applied certain Accounting Standards
as referred to Para 3(d) of our Audit Report dated 31st July 2007;

II. Two complaints of shareholders could not be resolved by
the Company within a reasonable time period of 1 month.


Since the relevant records were not made available to us, we
are unable to comment on the disclosure of all the pecuniary relationships and
transactions of the Company with the Directors.


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Prosecution : Willful attempt to evade tax and false verification : S. 276C and S. 277 : Firm : Partners liability : Failure by prosecution to adduce evidence to show partners had active role in business : Trial Judge acquitting accused : Proper.

New Page 1

21 Prosecution : Willful attempt to evade
tax and false verification : S. 276C and S. 277 of Income-tax Act, 1961 : A.Y.
1981-82 : Firm : Partners liability : Failure by prosecution to adduce evidence
to show partners had active role in business : Trial Judge acquitting accused :
Proper.


[UOI v. Nalinidevi and another, 304 ITR 382 (MP)]

The accused in this case were partners of the assessee firm.
The two accused set up the defence that they being only housewives were not in
charge of the business of the firm. On the basis of the evidence led by the
prosecution, the trial judge found that the two individual members of the firm
were not guilty of any offence and as such they were acquitted.

 

The Madhya Pradesh High Court dismissed the appeal filed by
the Revenue and held as under :

“(i) Every partner of the firm is an agent and thus
vicariously liable, but that liability is restricted only to civil liability
and does not extend to criminal liability. The burden is always upon the
prosecution to prove that the accused person had an active role to play in the
business of the firm.

(ii) As the prosecution had failed to adduce any evidence to show that the
acquitted women had any active role to play in the business of the firm, the
Trial Court had no option but to acquit the accused members of the firm.”

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Prosecution : Delay in filing return and false statement : S. 276CC and S. 277 : No evidence that delay was willful : Acquittal by criminal court : High Court would not interfere merely because another view possible.

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20 Prosecution : Delay in filing return and
false statement : S. 276CC and S. 277 of Income-tax Act, 1961 : A.Y. 1981-82 :
No evidence that delay was willful : Acquittal by criminal court : High Court
would not interfere merely because another view possible.


[UOI v. Dinesh, 304 ITR 345 (MP)]

For the A.Y. 1981-82 the assessee accused had filed the
return of income disclosing income of Rs.52,997. Thereafter the assessee filed a
revised return on 16-4-1983. On a complaint filed by the Department for offences
u/s.276CC and u/s.277 of the Income-tax Act, 1961 the Trial Court acquitted the
accused assessee.

 

The Department filed appeal before the Madhya Pradesh High
Court. The case of the prosecution was that in accordance with S. 139 of the
Income-tax Act, 1961 the return was not filed in time, but was filed after a
lapse of almost about 20 months. It was submitted that in both the returns the
income was not shown correctly and, therefore, the accused has committed
offences punishable u/s.276CC and u/s.277 of the Act. It was also submitted that
the Court below took a hyper-technical view of the matter and wrongly acquitted
the accused.

 

The Madhya Pradesh High Court dismissed the appeal and held
as under :

“(i) In the matter of Narayan v. UOI, (1994) 208 ITR
82, this Court has observed that if except the length of delay, there is
nothing on the record and there does not appear to be any willful default,
then the Court would not be unjustified in acquitting the accused. In the said
matter, the appellant-accused was convicted by the lower Court, but the High
Court after finding that there was no willful default acquitted the accused.
The High Court has also observed that mere failure to file the return in time
in itself would not be sufficient, but the burden is upon the Department to
prove that non-action or inaction was a willful default.

(ii) In the present case, the Court below after giving its
anxious consideration to the facts of the case has come to the conclusion that
there was no willful default on the part of the accused. It would be trite to
say that the High Court would not interfere in an acquittal simply because yet
another view is possible.”


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Kar Vivad Samadhan Scheme, 1998 — What is conclusive is the order passed U/ss.(1) of S. 90 of the Scheme determining the sum payable under the Scheme and the terms ‘direct tax enactment’ or ‘indirect tax enactment’ or ‘any other law for the time being in

New Page 1

6. Kar Vivad Samadhan Scheme, 1998 — What is
conclusive is the order passed U/ss.(1) of S. 90 of the Scheme determining the
sum payable under the Scheme and the terms ‘direct tax enactment’ or ‘indirect
tax enactment’ or ‘any other law for the time being in force’ refer only to
those statutes under which the order had been passed. Immunity is only in
respect of institution of any proceeding for prosecution of any offence under
direct tax enactment or indirect tax enactment or from imposition of penalty
under any of such enactments.


[ Master Cables P. Ltd. v. State of Kerala and
Anr., (2008) 296 ITR 8 (SC)]

The appellant was engaged in the business of manufacture and
sale of insulated electrical cable. It was registered under the Kerala General
Sales Tax Act, 1963 (for short, ‘the Act’). Assessment proceedings in respect of
the A.Ys. 1995-96 and 1996-97 were completed relying upon or on the basis of the
books of account maintained by it. An inspection, however, was carried out in
the premises of the appellant. A certain amount of unaccounted production and
sale of goods was found. The appellant admittedly took recourse to the
provisions of the Kar Vivad Samadhan Scheme. Declaration made by it thereunder
was accepted. By an order dated January 14, 2003, the earlier assessment order
was set aside. The appellant filed an appeal before the Kerala Sales Tax
Appellate Tribunal. The matter was remitted to the Deputy Commissioner for its
re-examination. By an order dated May 20, 2003, the assessment in respect of the
A.Y. 1996-97 was set aside. The said authority directed reassessment for the
year 1995-96 by an order dated November 7, 2003. Questioning the said orders,
appeals were filed by the appellant before the Tribunal, which by reason of a
common judgment dated December 21, 2005, were dismissed. Two sales tax revisions
were filed thereagainst before the High Court, which by reason of the impugned
judgment had been dismissed. Before the Supreme Court it was contended by the
appellant that having regard to the provisions of Ss.(3) of S. 90 of the Scheme,
the term ‘any other law for the time being in force’ must be given a wide
meaning, so as to cover not only the direct tax or indirect tax envisaged
thereunder, but also the sales tax laws of the State in the light of the
provisions of clause (3) of Article 286 of the Constitution of India and
sub-clauses (c) and (d) of clause (29A) of Article 366 thereof. After
considering the provision of S. 90(3) and S. 91 of the Kar Vivad Samadhan
Scheme, the Supreme Court held that what is conclusive is the order passed U/ss.(1)
of S. 90 of the Scheme determining the sum payable under the Scheme. The terms
‘direct tax enactment’ or ‘indirect tax enactment’ or ‘any other law for the
time being in force’ refer only to those statutes under which the order had been
passed. Immunity is in respect of institution of any proceeding for prosecution
of any offence under direct tax enactment or indirect tax enactment or from
imposition of penalty under any of such enactments. The terms ‘direct tax
enactment’ and ‘indirect tax enactment’ have been defined u/s.87(h) and 87(j) of
the Scheme. Admittedly, the case of the appellant did not come within the
purview thereof. The amplitude of the provisions of the Scheme having been
extended only to the enactments made by Parliament, having regard to the
constitutional scheme contained in Article 246 of Constitution of India, the
same cannot be extended to assessment of sales tax under a State legislation.
The legislative field to enact a law relating to sales tax is within the
exclusive domain of a State Legislature in terms of entry 54, List II of the
Seventh Schedule to the Constitution of India. The Supreme Court held that once
it is found that a statutory authority had the jurisdiction to reopen a
proceeding or set aside the order of the assessing authority, only the higher
authorities can interfere therewith. Only because the appellant had taken
recourse to the Scheme, the same would not attract either Ss.(3) of S. 90 of the
Scheme or S. 91 thereof, so as to cover a subject which is within an exclusive
domain of the State Legislature. The appeal was therefore dismissed.

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Charitable purpose — Charitable Institution — Statutory body established for the predominant purpose of development of minor ports the management of which is with the State Government and where there is no profit motive covered within the meaning of the w

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5 Charitable purpose — Charitable Institution
— Statutory body established for the predominant purpose of development of minor
ports the management of which is with the State Government and where there is no
profit motive covered within the meaning of the words any other object of
general public utility in S. 2(15) of the Act and is entitled to registration
u/s.12A


[ CIT v. Gujarat Maritime Board, (2007) 295
ITR 561 (SC)]

The Gujarat Maritime Board is a statutory authority
constituted u/s.3(2) of the Gujarat Maritime Board Act, 1981. The Board was
registered as ‘local authority’ in terms of definition u/s.3(31) of the General
Clauses Act, 1897, and was availing of exemption as local authority u/s.10(20)
of the 1961 Act. By the Finance Act, 2002, an Explanation was added in S. 10(20)
of the Income-tax Act, by which ‘local authority’ was defined. It gave a
restricted meaning to the words ‘local authority’. By reason of the said
Explanation, the expression ‘local authority’ was confined to panchayats,
municipality, municipal committee, district board and cantonment board. Thus,
the Maritime Board did not come within the definition of the expression ‘local
authority’. Under the circumstances, the Gujarat Maritime Board made an
application to the Commissioner for registering it (Board) as a ‘charitable
institution’ as defined u/s.2(15) of the Income-tax Act, 1961. Accordingly, they
claimed exemption as charitable institution in respect of income derived from
their profit/business u/s.11 of the 1961 Act. This has been denied by the
Department. One of the objections raised on behalf of the Department was that
the Gujarat Maritime Board was not entitled to the benefit of S. 11 of the 1961
Act, as the said Board was not a trust under the Public Trusts Act and,
therefore, it was not entitled to claim registration u/s.12A of the 1961 Act.
The Department’s case was that the Maritime Board was a statutory authority. It
was the case of the Department that the Board was performing statutory
functions. Development of minor ports in the State of Gujarat cannot be termed
as the work undertaken for charitable purposes and in the circumstances the
Commissioner rejected the Board’s application u/s.12A of the 1961 Act. On an
appeal, after perusal of number of decisions which have interpreted the words in
S. 2(15), namely, ‘any other object of general public utility’, the Supreme
Court held that the said expression is of the widest connotation. The word
‘general’ in the said expression means pertaining to a whole class. Therefore,
advancement of any object of benefit to the public or a section of the public as
distinguished from benefit to an individual or a group of individuals would be
charitable purpose. The said expression would prima facie include all
objects which promote the welfare of the general public. It cannot be said that
a purpose would cease to be charitable even if public welfare is intended to be
served. If the primary purpose and the predominant object are to promote the
welfare of the general public, the purpose would be charitable. When an object
is to promote or protect the interest of a particular trade or industry, that
object becomes an object of public utility, but not so if it seeks to promote
the interest of those who conduct the said trade or industry. If the primary or
predominant object of an institution is charitable, any other object which might
not be charitable, but which is ancillary or incidental to the dominant purpose,
would not prevent the institution from being a valid charity. According to the
Supreme Court, the present case was squarely covered by its judgment in the case
of CIT v. Andhra Pradesh State Road Transport Corporation, (1986) 159 ITR
1 (SC), in which it has been held that since the Corporation was established for
the purpose of providing efficient transport system, having no profit motive,
through it earns income in the process, it is not liable to Income-tax. The
Supreme Court further observed that under the scheme of S. 11(1) of the 1961
Act, the source of income must be held under trust or under other legal
obligation. Applying the said test, it was clear that the Gujarat Maritime Board
was under legal obligation to apply the income which arose directly and
substantially from the business held under trust for the development of minor
ports in the State of Gujarat. Therefore, they were entitled to be registered as
‘charitable trust’ u/s.12A of the 1961 Act.

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Disallowance : u/s.43B : Contribution to P.F. and ESI within two to four days after grace period, before filing of return — Amount deductible.

New Page 1

1 Business expenditure : Disallowance u/s. 43B of Income-tax
Act, 1961 : A.Y. 2001-02 : Contributions to Provident Fund and Employees’ State
Insurance within two to four days after grace period but before filing return :
Amount deductible.


[CIT v. Dharmendra Sharma, 297 ITR 320 (Del.)]

Dealing with the scope of S. 43B of the Income-tax Act, 1961
for the A.Y. 2001-02, the Delhi High Court held as under :

“Contributions made towards Provident Fund and Employees’
State Insurance within 2 to 4 days after the grace period, but before filing
the return are entitled to the benefit provided u/s. 43B.”


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BCAS recognises Challenges of change . . . . helps members stay ahead !

History

The Bombay Chartered Accountants’ Society (BCAS) has entered
its Diamond Jubilee year. Founded by seven visionaries 59 years ago, it is an
institution with a membership of around 8000 members, from the entire length and
breadth of the country.

During these six decades, India has been transformed, from an
impoverished nation after 150 years of the British Raj to being a country which
the whole world looks at as a global player. It is on the threshold of becoming
an economic super power. In the economic meltdown through which the world is
passing today, it is a country that will possibly be the least affected. In
these 60 years, the profession has faced many challenges. The Society’s role has
been to help members meet these challenges and remain ahead. This write up is
not an attempt to trace the Society’s history, for that would require a separate
publication; but the endeavour is to place before you how the Society has been
in sync with the theme of this conference ‘Challenges of change — always ahead.’

BCAS — An educational institution striving for excellence :

BCAS is an educational institution. It has to its credit many
firsts in the field of member education. It held its first seminar on taxation
in the year 1960. The Direct Tax refresher course, where participants heard
speakers on various topics of current significance was organised in 1968 where
400 participants enrolled.

Residential refresher courses :

BCAS is the first organisation that recognised that a course
where members would learn together in an informal atmosphere would not only
enhance learning but would create a bond between members. To meet this
objective, the Society, commencing from 1969, has organised 41 residential
refresher courses (RRC) to date. These have witnessed many new endeavours with a
record 610 participants for the 35th RRC, and a course wherein all papers were
with case studies as the concept. The RRC remains till date one of the most
sought after events.

The concept of learning and bonding has become so popular
that, the Society organises a separate residential course on international
taxation titled ‘International Tax & Finance conference’. With service tax
continuously increasing in its scope, the indirect tax committee also organises
a separate residential refresher course in the area of indirect taxes.

Journal :

The Bombay Chartered Accountant Journal (BCAJ) is the
flagship of the Society. It is a journal respected by every professional. Its
publication commenced in 1969, and is in its 40th year of publication. It has a
circulation of over 12000. It caters to every need of a Chartered Accountant. It
covers the entire gamut of taxation, corporate laws, and economic legislation.
Different features are added to the journal to ensure that it retains its
utility to the professional.

Referencer and Diary :

A chartered accountant has to advise his clients on a number
of laws and regulations. The compliance with these provisions is made by
different due dates. To enable him to discharge his duties, the Society brings
out a Referencer & Diary. It is the most sought after pub-lication and is used
by more than 10000 professionals.

Other publications :

The Society has over 250 publications to its credit, many of
them the first of their kind. When tax audit was introduced in 1984, the Society
published a Tax audit manual which was revised in 2004. Its audit checklist is
extremely popular with users. When transfer pricing came on the scene, it
published a transfer pricing manual which is now revised. As India emerged on
the global scene, it arranged with OECD to make their publications available to
its members. After service tax was introduced in 1994, it published a number of
publications on that subject.

Technology absorption :

The Society is deeply conscious that it is essential to
harness technology to cater to the increasing expectations of members. Paucity
of time and space has made the utilisation of information technology imperative.
The Society maintains a vibrant website. It has recently launched two e-learning
modules. Conscious of the need to have a working knowledge of information
technology, to update knowledge, the Society organises a course on computer
training for its senior members. It has made available to members its journal
for the past years on a CD, with search facility.

Long term duration courses :

It was recognised that in order to enable members to attain
the requisite expertise in emerging areas, knowledge imparted at lectures,
seminars and workshops was inadequate. The Society therefore organised,
structured long duration courses. The subjects covered were, internal audit,
business consultancy, arbitration and conciliation.

The concept of corporate governance required independent
directors on the boards of listed companies. Considering this opportunity, a
long-term course on independent directors was organised. The course was so
popular that a special programme for the armed forces was also arranged.

In the field of international taxation, a long-term course on
Double Tax Avoidance agreements is organised on a regular basis.

The primary objective of the Society has been the spread of
knowledge. Its programmes whenever felt necessary, are arranged also for persons
other than CAs. The Society has organised programmes for the Regional Training
Institute of Direct Taxes where training is imparted to income tax officials.

Realising that the training/knowledge imparted up to the
stage of graduation was insufficient, the Society designed a course titled
‘Professional Accountant’. The course is immensely popular and six such courses
have been conducted.

Research :

The Society has a permanent research committee, which has
also published a number of publications on off-beat subjects. Recently the
committee has decided to arrange a programme to guide chartered accountants
about how to obtain a PhD.

Initiatives for students :

The Society recognised early that students are the future of the profession. It has always strived to cater to their needs. In 1963, it had student observers during seminars, to introduce students to this method of learning. Since 1974 it started publishing a students’ diary. It holds a number of programmes for students, including a crash course to enable them to understand and appreciate the nuances of each subject. The course is organised jointly with the Western India Regional Council of the Institute of Chartered Accountants of India. In June 2008; it launched a students’ forum to make available a platform to students.

Making members better citizens:

The BCAS visionaries were  of the view that  it is not sufficient that a member becomes a competent professional, but it is necessary that he becomes a good citizen and a compassioriate human being. The Human resources development committee runs programmes with a goal to make members part of happier families. It arranges public speaking courses, leadership camps which aspire to make members complete human beings.

Service to general public:

The Society is always in the forefront in rendering service to citizens. Each year it publishes a lucid analysis of the finance bill in four languages, English, Hindi, Gujarati and Marathi. It makes representations to the authorities when any change in legislation is unfair or unjust to the citizens. Whenever administrative actions create hardships for the tax paying public, the Society interacts with the administrators in an attempt to mitigate those hardships. The Society published a booklet on Survey, search and seizure, with an emphasis on the rights of citizens during surveyor search.

Aware that social organisations are not easily able to avail of professional assistance, it runs a charitable trust clinic, where experts address the problems faced by charitable institutions and their trustees.

BCAS Foundation:

The BCAS is aware of the obligations that a professional has towards society, not as a professional, but as a citizen. It therefore started the BCAS foundation, an independent charitable trust. The foundation helped victims of the tsunami disaster. The endeavour is to launch many projects which will be of utility to the public.

Right to Information Act 2005:

The Society supports a clinic which guides the members of the public as to how the Act can be used to solve their problems. It runs a special feature in the journal on the Right to Information Act.

Conclusion:

The Society has always attempted to be an organisation with a difference. Many of its endeavours have been emulated by other organisations. The Society is happy that it has been able to bring into the public domain, a fund of knowledge and its efforts have helped members, students and citizens.

The goal of the Society in the coming years will be to spread an awareness of its activities so that more people can benefit from the same. For achieving its objectives the Society has been ever willing to change. The aim is constant improvement with the ultimate goal of perfection. The Society believes in what Winston Churchill said, “To improve is to change; to be perfect is to change often”.

S. 54B : Tube wells and trees are part of the agricultural land for the relief.

New Page 1

31 Capital gains : Exemption u/s.54B of Income-tax Act,
1961 : A.Y. 1978-79 : Notification for acquisition of agricultural land on
14-1-1977 and 12-5-1977 : Possession of land taken on 26-6-1977. Purchase of
agricultural land with wells and trees on 15-6-1979 : Assessee entitled to
deduction u/s.54B : Deduction available on cost of wells and trees also.



[CIT v. Janardhan Das, 299 ITR 210 (All)]

The assessee’s agricultural land was acquired by the
Government by issuing Notifications dated 14-1-1977 and 12-5-1977. The
possession of the land was taken on 26-6-1977 : The assessee purchased
agricultural land with tubewells and trees on 15-6-1979. The assessee’s claim
for deduction u/s.54B was rejected by the AO on the ground that the purchase
of the agricultural land was beyond the period of two years. The Tribunal
allowed the claim. Since the agricultural land contained tubewells and
standing trees, the Department contended that the value of the tubewells and
the standing trees should be deducted from the total investment made by the
assessee in purchasing the agricultural land. The Tribunal rejected the claim
of the Revenue.

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

“(i) The assessee was an agriculturist and he received
the initial compensation on 12-7-1977, and having invested the compensation
within two years from that date, was entitled to get the benefit of S. 54B.

(ii) The tubewells and trees were part of the
agricultural land purchased by the assessee and their value could not be
deducted from the total investment made by the assessee in the purchase of
the agricultural land.”

 


 


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S. 153 : Exclusion of period during which assessment proceedings are stayed: Does not include the period during which the order transferring the case is stayed.

New Page 1

30 Assessment : Limitation : Computation of
period : S. 153 of Income-tax Act, 1961 : A.Y. 1986-87 : Exclusion of period
during which assessment proceedings are stayed : Does not include the period
during which the order transferring the case is stayed : Suspension of order
transferring the case does not amount to stay of assessment proceedings.


[CIT v. V. K. Ferro Alloys Industries P. Ltd., 299 ITR
191 (AP)]

For the A.Y. 1986-87, the assessee’s case was transferred
from Hyderabad to Visakhapatnam on 1-8-1988. On a writ petition filed by the
assessee, the High Court suspended the order of transfer till further orders.
Despite the interim order of the Court, the AO of Visakhapatnam completed the
assessment ex-parte. During the pendency of the appeal by the assessee,
the Court quashed the transfer order. As a result, the Commissioner (Appeals)
Visakhapatnam set aside the assessment order of the AO at Visakhapatnam with a
direction for de novo consideration by the appropriate Assessing
Authority. The case was transferred back to Hyderabad. Subsequently, the AO at
Hyderabad completed the assessment u/s.144. The assessee contended that the
assessment was barred by limitation. The Tribunal accepted the claim.

In the appeal preferred by the Revenue, the Revenue contended
that for computing the period of limitation, the provisions of Explanation 1(ii)
to S. 153(3) will have to be applied and the period during which the transfer
order was suspended by the Court has to be excluded.

The Andhra Pradesh High Court rejected the contention of the
Revenue and held as under :

“The order transferring the case was suspended and not the
assessment proceedings themselves. Explanation 1(ii) to S. 153(3) had no
application to the case on hand as the interim order of the Court did not
amount to stay of assessment proceedings.”

However, the High Court upheld the validity of the assessment
order on the ground of limitation based on the direction of the Commissioner
(Appeals) Visakapatnam while setting aside the assessment.

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S. 260A : Territorial jurisdiction to be determined on the basis of place of passing assessment order and not on basis of Assessing Officer exercising jurisdiction over assessee after transfer of case.

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29 Appeal to High Court u/s.260A of
Income-tax Act, 1961 : Territorial jurisdiction : Jurisdiction is to be
determined on the basis of place of passing assessment order and not on basis of
Assessing Officer who exercises jurisdiction over assessee after transfer of the
case.


[CIT v. Motorola India Ltd., 168 Taxman 1 (P&H)]

For the A.Y. 1996-97, the AO (Bangalore) completed the
assessment of the assessee. The Commissioner (Bangalore) passed an order u/s.263
of the Income-tax Act, 1961, setting aside the assessment order holding that it
was erroneous and prejudicial to the interest of the Revenue and directed to
pass fresh assessment order in accordance with the directions. The Tribunal
(Bangalore) vacated the order of the Commissioner. In the meanwhile, the case of
the assessee was transferred from AO at Bangalore to the AO at Gurgaon. Against
the order of the Tribunal the Revenue preferred an appeal u/s.260A of the Act in
the Punjab and Haryana High Court. The assessee raised preliminary objection
that the jurisdiction u/s.260A lies with the Bangalore High Court and not the
Punjab and Haryana High Court.

The P&H High Court agreed with the preliminary objection of
the assessee and held that the jurisdiction of the Court is to be determined on
the basis of place of passing of assessment order by the AO, and not on the
basis of AO who exercises jurisdiction over assessee after transfer of the case.
Accordingly, the P&H High Court dismissed the appeal on the ground that it had
no territorial jurisdiction over an order passed by the AO at Bangalore.

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Sons of the Soil — Bad Economics ?

Editorial

With this issue, the Journal enters the 40th year of its
publication. While we continue to update you on the latest developments relevant
to the profession, during the course of this year, we also intend to bring you
articles which would provide an insight into what the profession can expect in
the future.


The last couple of months have seen certain political parties
canvassing the ‘sons of the soil’ theory in Maharashtra, and violence being
committed against immigrants from certain other parts of the country. Similar
stands have been taken at times by politicians in different States as well. An
emotional appeal is sought to be made against immigration, on the ground that it
results in jobs being snatched away from locals by the immigrants. Violence is
certainly morally and legally indefensible, and needs to be condemned. Given the
fact that the immigrants are also Indians, and are entitled under the
Constitution to equal opportunities, such a stand is legally indefensible. The
short-term losses caused to industry and trade are clearly visible. The larger
question is — does immigration really adversely financially affect the local
people in the long run ?

It is now universally acknowledged that a country or region
which welcomes immigrants prospers. An expanding workforce facilitates faster
growth, since most immigrants are young and therefore productive.

The classic case of immigration facilitating prosperity is
that of the USA, which has had a high rate of immigration. A large part of the
US economic success is due to the inflow of migrants into that country over the
last couple of centuries. London has become the world’s financial capital,
helped greatly by its policy of welcoming migrants. Countries that take in
immigrants, such as Sweden, Ireland, the USA and the UK, have done better
economically than countries which do not.

The very economic growth of Mumbai itself can largely be
attributed to the influx of immigrants. What would the economy of Mumbai have
been today if it were not for the Parsis, the Marwaris and the Gujaratis, who
came from other places and set up their businesses in Mumbai ?

A United Nations Secretary General report of May 2006 on
International Migration and Development has important findings on the subject,
which equally apply to intra-country migration between different regions.
Growing income differentials have spurred migration. Advanced economies need
migrant workers to fill jobs that cannot be outsourced and that do not find
local workers willing to take up at going wages. As younger generations become
better educated, they are less willing to take up lower paid and physically
demanding jobs. Migration may reduce wages or lead to higher unemployment among
low-skilled workers; however, most migrants complement the skills of domestic
workers instead of competing with them. By performing tasks that either would go
undone or cost more, migrants allow natives to perform other, more productive
and better-paid jobs. They also maintain viable economic activities that would
otherwise be outsourced. By enlarging the labour force and the pool of consumers
and by contributing their entrepreneurial capacities, migrants boost economic
growth in receiving countries.

The report notes that for the full benefits of migration to
be realised, the rights of migrants must be respected. States have the
obligation and must take effective action to protect migrants against all forms
of human rights violations and abuse, and also combat all forms of
discrimination, xenophobia, ethnocentrism and racism. In turn, migrants, just as
citizens, have the obligation to abide by the laws and regulations of receiving
States. Migration policy needs to be complemented by strategies to manage
diversity and promote cross-cultural learning. Migrants have been and continue
to be indispensable to the prosperity of many countries. The leaders of those
countries have a responsibility for shaping public opinion accordingly,
especially through communication strategies that articulate and explain how
existing migration policies are consistent with society’s ability to accommodate
and integrate migrants.

Besides this, what the Government needs to ensure is that
migration is properly managed by ensuring that our public spaces are not
encroached upon by migrants (whether hailing from Maharashtra or outside) for
their stay.

Reservation of jobs for locals is also not the solution.
Reservation in any form is harmful, as it ultimately leads to favouritism,
corruption, suppression of merit and lower productivity. For obvious reasons,
our politicians seek to push through various types of reservations. For
sustainable growth, we must encourage merit, irrespective of the caste or place
of origin of the person.

The only form of help that a meritorious person from a
backward or disadvantaged background needs to come up in life is equal
opportunity and, if required, economic assistance to study — his merit and his
will to succeed will thereafter ensure that he comes up in life, and that the
country as a whole benefits. One hopes that the day is not too far off when
India will move in that direction, notwithstanding the best efforts of some of
her politicians to the contrary !


Gautam Nayak

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Search and seizure — Surcharge is leviable on income assessed under Chapter XIV-B and the proviso to S. 113 inserted by Finance Act, 2002 was only clarificatory in nature.

New Page 1

13 Search and seizure — Surcharge is leviable on income
assessed under Chapter XIV-B and the proviso to S. 113 inserted by Finance Act,
2002 was only clarificatory in nature.


[CIT v. Suresh N. Gupta, (2008) 297 ITR 322 (SC)]

On January 17, 2001, a search u/s.132 of the 1961 Act was
carried out at the premises of the representative-assessee, an individual. The
search unearthed an unexplained investment of Rs.65,000 being the value of
household valuables and Rs.97,427 on account of unexplained marriage expenses
(undisclosed income). Accordingly, in the block assessment, the Assessing
Officer determined the assessee’s undisclosed income at Rs.1,62,427. He computed
tax thereon at 60% in terms of S. 113 of the 1961 Act amounting to Rs.97,456, on
which surcharge was levied at 17%, i.e., Rs.16,504.

The levy of surcharge was challenged by the assessee in
appeal before the Commissioner of Income-tax (Appeals). The said appeal was
allowed. The decision of the Commissioner of Income-tax (Appeals) was confirmed
by the Tribunal and the High Court.

On civil appeal, the Supreme Court held that the concept of a
charge on the ‘total income’ of the previous year under the 1961 Act is retained
even under Chapter XIV-B. Therefore, S. 158BB which deals with computation of
undisclosed income of the block period has to be read with computation of total
income under Chapter IV of the 1961 Act and once S. 158BB is required to be read
with S. 4 of the 1961 Act, then the relevant Finance Act of the concerned year
would automatically stand attracted to the computation under Chapter XIV-B. S.
158BB looks at S. 113.

The Section fixes the rate of tax of 60%. Bare perusal of
various Finance Acts starting from 1999 indicates that Parliament was aware of
the rate of tax prescribed by S. 113 and yet in the various Finance Acts,
Parliament has sought to levy surcharge on the tax in the case of block
assessment. In the present case the Assessing Officer had applied the rate of
surcharge at 17% which rate finds place in paragraph A of Part I of the First
Schedule to the said Finance Act of 2001. Therefore, surcharge leviable under
the Finance Act was a distinct charge, not dependent for its leviability on the
assessee’s liability to pay income-tax but on assessed tax.

The Supreme Court held that even without proviso to S. 113
(inserted vide the Finance Act, 2002, with effect from June 1, 2002), of
paragraph A of Part I of the First Schedule to the Finance Act 2001, was
applicable to block assessment under Chapter XIV-B. The Supreme Court further
held that the said proviso to S. 113 inserted vide the Finance Act, 2002 was
clarificatory in nature.


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S. 206C — State Govt. liable to collect tax at source from leaseholders and deposit it with Central Government

New Page 2

II. Reported :




 


50 Collection of tax at source : S. 206C of
Income-tax Act, 1961 : Applicability to State Govt. : State Govt. comes within
the purview of ‘person’ u/s.206C(1C) and is liable to collect tax at source from
lease-holders and deposit it with the Central Govt.

[Government of Madhya Pradesh v. TRO, 217 CTR 137
(MP)]

 

The Government of Madhya Pradesh had granted various quarry
leases to private persons. The State Govt. had failed to collect tax at source
as required u/s.206C of the Income-tax Act, 1961. The IT Department raised
demand for such failure and initiated coercive steps for recovery of the demand.
The State Govt. filed writ petition challenging the action.

 

The Madhya Pradesh High Court upheld the action taken by the
Revenue and held as under :

“(i) Article 289 exempts property and income of the State
Govt. from taxation by the Union of India. In the present case, the proposed
action of the respondent Department or the Union of India is not to tax the
property or income of the State Govt. What is being taxed in this case is
income accrued by the leaseholders to whom
lease is granted by the State Govt. It is, therefore, taxing the income earned
by the leaseholders on the basis of the grant made by the State Govt.
Accordingly, the provisions of Article 289 of the Constitution of India will
not apply.

(ii) Complete reading of the provisions indicate that the
person collecting tax u/s.206C would include not only a company but also the
Central Govt. and the State Govt. and therefore, the word every ‘person’
appearing in S. 206C would include both the Central Govt. and the State Govt.
Complete reading of this Section
along with definition of ‘person’ clearly indicates that the State Govt. comes
within the purview of ‘person’ as contemplated u/s.206C(1C) and is liable to
collect tax at source from the lease-holders and deposit it with the Central
Govt.

(iii) So far as the argument with regard to the word
‘every person’ missing after the word ‘seller’ is concerned, the word ‘seller’
and ‘every person’ u/s.206C(1) and u/s.206C(1C) are used with
regard to different purpose. Mere absence of the word ‘every person’ in the
definition of ‘seller’ as contained in Explanation cl. (c) to S. 206C
cannot be construed to mean that the provisions of S. 206C do not apply to the
State Govt.”

S. 56(2)(id) — Interest on Govt. securities not maturing in previous year, then amount in P&L account is not material

New Page 2

II. Reported :






 



51 Income : Accrual of : S. 56(2)(id) of
Income-tax Act, 1961 : A.Y. 1989-90 : Banking company : Interest on Government
securities not maturing in relevant previous year : Amount shown in profit and
loss account : Not material : Amount not assessable in A.Y. 1989-90.

[CIT v. Federal Bank Ltd., 301 ITR 188 (Ker.)]

 The assessee was a banking company. Interest on Government
securities was credited in its profit and loss account in the A.Y. 1989-90. The
assessee claimed that the interest was not assessable as the securities did not
mature during the previous year. The Assessing Officer rejected the claim and
assessed the interest income. The Tribunal accepted the claim and deleted the
addition.


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


“(i) After the amendment of 1988, interest on securities
was assessable as income from other sources u/s.56(2)(id) of the Income-tax
Act, 1961, unless it is chargeable to income-tax under the head ‘Profits and
gains of business or profession’. Income accrued obviously means income that
has become due or receivable by the assessee.

(ii) Since the assessee was banking company, the interest
on securities was assessable under the head ‘Profits and gains of business and
profession’. Since the securities had not matured for payment, the assessee
was obviously not entitled to interest, and the interest was really not due to
them in the previous year. Merely because the assessee had declared it as
amount receivable in the course of time, it did not mean that interest on
income had in fact accrued to the assessee. Though interest due or receivable
is assessable under the mercantile system, since the interest on securities
involved in this case was neither received, nor receivable during the previous
year, such interest could not be assessed.”

S. 12A — Non-consideration of registrration application within time fixed would result in deemed registration

New Page 2

II. Reported :



 


49 Charitable Trust : Registration u/s.12A
of Income-tax Act, 1961 : Effect of non-passing of order within the time limit :
Non-consideration of the registration application within the time fixed by S.
12AA(2) would result in deemed registration.

[Society for the promotion of Education Adventure Sport &
Conservation of Environment v. CIT, 216 CTR 167 (All.)]

 

The petitioner is a society running a school. Up to A.Y.
1998-99 it was exempted u/s.10(22) of the Income-tax Act, 1961. Therefore, it
did not seek separate registration u/s.12A of the Act so as to claim exemption
u/s.11. S. 10(22) being omitted by the Finance Act, 1998, the petitioner applied
for registration u/s.12A of the Act, with retrospective effect, that is since
the inception of the petitioner society; i.e., 11-1-1993. The application
was made on 24-6-2003. No order was passed on the application within the time
period of six months as required u/s.12AA(2) of the Act. Therefore, the
petitioner filed writ petition before the Allahabad High Court contending that
the registration should be deemed to have been granted.

 

The Allahabad High Court allowed the writ petition and held
as under :

“(i) Taking the view that non-consideration of the
registration application within the time fixed by S. 12AA(2) would result in
deemed registration, may at the worst cause loss of some revenue or income-tax
payable by the individual assessee. On the other hand, taking the contrary
view and holding that not taking a decision within the time fixed by S.
12AA(2) is of no consequence would leave the assessee totally at the mercy of
the IT authorities, inasmuch as the assessee has not been provided any remedy
under the Act against non-decision.

(ii) Besides, the above view does not create any
irreversible situation, because, u/s.12AA(3), the registration can always be
cancelled by the CIT, if he is satisfied that the objects of such trust or
institution are not genuine or the activities are not being carried out in
accordance with the objects of the trust or institution. The only drawback is
that such cancellation would operate prospectively.

(iii) Moreover, this view furthers the object and purpose
of the aforesaid statutory provision. For the interpretation of a statute
‘purposive construction’ of the enactment which gives effect to the
legislative purpose/intendment, if necessary must be followed and applied.
Considering the pros and cons of the two views, by far the better
interpretation would be to hold that the effect of non-consideration of the
application for registration within the time fixed by S. 12AA(2) would be a
deemed grant of registration.

(iv) There is no good reason to make the assessee suffer
merely because the IT Department is not able to keep its officers under check
and control, so as to take timely decisions in such simple matters, such as
consideration of application for registration even within the large six months
period provided u/s.12AA(2).

(v) Accordingly, the respondents are directed, subject to
any order which may be passed u/s. 12AA(3), to treat the petitioner society as
an institution duly approved and registered u/s. 12AA and to recompute its
income by applying the provisions of S. 11. Accordingly, a formal certificate
of approval will be issued forthwith to the petitioner by respondent No. 2.”

 


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S. 163 — Assessee neither has business connection with NRI, nor any income received by NRI, then assessee not a trustee of NRI

New Page 2

II. Reported :

47 Agent of non-resident : Liability in
special cases : S. 163 of Income-tax Act, 1961 : Search and seizure : Block
assessment u/s.158BD : Assessee was not having any business connection with the
non-resident Indian brother, nor any income came into existence as having been
received by the non-resident : Assessee not a trustee of non-resident :
Provisions of S. 163(1)(c) and (d) not attracted : Tribunal justified in not
treating assessee as agent of non-resident.

[CIT v. Rakesh Chander Goyal, 216 CTR 136 (P&H)]

 

In the course of search at the residential premises of the
assessee, it was found that the non-resident brother of the assessee, Shri Raj
Kumar Goyal, was maintaining some bank accounts which needed explanation.
Therefore, proceedings u/s.158BD of the Income-tax Act, 1961 were initiated in
the case of the non-resident brother. The Assessing Officer passed an order
u/s.163 of the Act, treating the assessee as an agent of the non-resident
brother. The CIT(A) set aside the order of the AO holding that neither there is
any business connection, nor the existence of income u/s.9(1) of the Act to the
non-resident Indian, which is a condition precedent for invoking sub-clause (c)
and (d) of S. 163(1) of the Act. The Tribunal upheld the decision of CIT(A).

 

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

“In view of its conclusion that the assessee was not having
any business connection with the non-resident Indian brother, nor any income
came into existence as having been received by the non-resident Indian and the
Department having also failed to prove the assessee as a trustee of the
non-resident Indian, the Tribunal was justified in not treating the assessee
as an agent of non- resident.”

 


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S. 131 and S. 143 — Assessee not allowed to cross-examine third party. Assessment order not valid

New Page 2

II. Reported :



 


48 Assessment : Validity : S. 131 and S. 143
of Income-tax Act, 1961 : Statement of third party relied on by AO : Third party
retracted statement subsequently : Assessee not allowed to cross-examine third
party : Principles of natural justice violated: Assessment order not valid.

[Prakash Chand Nahta v. CIT, 301 ITR 134 (MP)]

 

The assessee was carrying on the business of trading in
silver ornaments, utensils, etc. Certain silver ornaments found in the course of
search were explained by the assessee as being purchased by the assessee from
one R. R who had initially denied the transaction in his statement, but he
subsequently retracted the statement and accepted the transaction. The assessee
had filed the correspondence made by him and R regarding the payment of the
amount. The Assessing Officer accepted all the entries recorded in the amanat
book except the entries pertaining to R. The affidavit of R and the bank
transaction made by him were ignored. On the basis of the original statement
made by R, the Assessing Officer made an addition of Rs.3,49,225. The assessee
made a prayer u/s.131 of the Act to summon R for cross-examination. The prayer
was not acceded to and the assessment order was passed. The Tribunal upheld the
assessment order observing that the statement of R was fairly communicated to
the assessee and that apart, it was not the case of the assessee that he did not
know what R had stated.

 

The Madhya Pradesh High Court allowed the appeal filed by the
assessee and held as under :

“The Assessing Officer had not summoned R in spite of the
request made u/s.131 of the Act, the evidence of R could not have been used
against the assessee and in the absence of affording a reasonable opportunity
of being heard by summoning the said witness, the assessment order was
vitiated.”

 


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S. 220(6) — Order on stay application to be passed by AO, not by subordinate

New Page 2

I. Not reported :


46 Recovery : Stay during pendency of appeal
before CIT(A) : S. 220(6) of Income-tax Act, 1961 : Order on stay application
should be passed by the Assessing Officer and not by a subordinate authority :
In view of CBDT Instruction No. 96, dated 21-8-1969, in case of high pitched
assessment, i.e., where the assessed income is twice or more than
the returned income, assessee would be entitled to an absolute stay of the
demand in the normal course.


[Valvoline Cummins Ltd. v. DCIT and ors. (Del.), WP(C)
2511/2008 dated 20-5-2008]

 

For the A.Y. 2005-06, the petitioner-company had filed the
return of income computing the income of Rs.7.5 crores. The Additional
Commissioner having jurisdiction to assess the assessee-company assessed the
income at Rs.58.68 crores and raised a demand of Rs.25.01 crores. The assessee-company
preferred an appeal before the CIT(A) and made an application to the Assessing
Officer (the Additional Commissioner) for stay of the demand u/s.220(6) of the
Income-tax Act, 1961 during the pendency of the appeal before the CIT(A). The
Additional Commissioner advised the assessee to approach the Dy. Commissioner
who had concurrent jurisdiction in the matter. Accordingly, the assessee moved
an application on 8-2-2008, requesting the Dy. Commissioner to stay the demand.
When these applications for stay were pending, the assessee was served with a
notice u/s.221 of the Act, dated 14-2-2008 requiring it to show why penalty
should not be levied since the demand of tax has not been deposited by the
assessee. Therefore, the assessee moved another application to the Dy.
Commissioner on 22-2-2008, requesting to stay the demand. On 27-2-2008, the Dy.
Commissioner passed an order directing the assessee to pay 15% of the net
demand; i.e., Rs.3.75 crores on or before 3-3-2008. The assessee pointed
out that Rs.1 crore had already been paid and requested for instalment for the
balance Rs.2.75 crores. Since there was no response, apprehending coercive
action by the Department, the assessee filed a writ petition before the Delhi
High Court.

 

The Delhi High Court allowed the petition and held :

“(i) Pursuant to the order dated 16-5-2007 read with a few
subsequent letters in this connection, the Commissioner of Income-tax passed a
jurisdiction order dated 1-8-2007, whereby the Additional Commissioner was
entitled to exercise the powers and perform the function of an AO in respect
of some cases (including that of assessee). It is pursuant to these orders
that the Additional Commissioner passed an assessment order on 30-12-2007 in
the case of the assessee. The Additional Commissioner/AO does not become
functus officio immediately on passing an assessment order, he continues
to be the AO in respect of the assessee and therefore he must deal with the
application filed by the assessee u/s.220(6) of the Act.

(ii) The contention of the Revenue is that the Dy.
Commissioner has concurrent jurisdiction over the matter along with the
Additional Commissioner and, therefore, he was fully competent to dispose of
the stay petition filed by the assessee. On the issue of concurrent
jurisdiction, in the case of Berger Paints India Ltd. v. ACIT, 246 ITR
133 (Cal.) the Calcutta High Court had explained the meaning of the expression
concurrent to mean two authorities having equal powers to deal with a
situation, but the same work cannot be divided between them. It appears to us
quite clearly that there is a distinction between concurrent exercise of power
and joint exercise of power; when power has been conferred upon two
authorities concurrently, either one of them can exercise that power and once
a decision is taken to exercise the power by any one of those two authorities,
that exercise must be terminated by that authority only. It is not that one
authority can start exercising a power and the other authority having
concurrent jurisdiction can conclude the exercise of that power. This perhaps
may be permissible in a situation where both the authorities jointly exercise
power, but it certainly is not permissible where both the authorities
concurrently exercise power.

(iii) In the facts of the present case, since the
Additional Commissioner had exercised the power of an AO, he was required to
continue to exercise that power till his jurisdiction in the matter was over.
His jurisdiction in the matter was not over merely on the passing of the
assessment order, but it continued in terms of S. 220(6) of the Act in dealing
with the petition for stay. What has happened in the present case is that
after having passed the assessment order, the Additional Commissioner seems to
have washed his hands off the matter and left it to the Dy. Commissioner to
decide the stay application filed u/s.220(6) of the Act. We are of
the opinion that this was not permissible in law.

(iv) Learned counsel for the Revenue, however, sought to
justify this by referring to an order dated 21-8-2007 passed by the Additional
Commissioner, in which it is stated as follows : For the removal of doubts it
is further clarified that after completion of assessment, the remaining
functions in the cases specified in the Schedule, appended hereto, whether
legal or administrative, shall be discharged by the DCIT, Circle-17(1), New
Delhi in accordance with law. In our opinion, the above paragraph relied upon
by the counsel for the Revenue goes well beyond the power conferred upon the
Additional Commissioner, in the sense that he has virtually abdicated the
power conferred upon him by S. 220(6) of the Act. The power u/s.220(6) of the
Act being a statutory power, the Additional Commissioner could not abdicate or
relinquish it. That apart, we find that the Additional Commissioner had no
authority in law to delegate his power to the Dy. Commissioner when he was
conferred a statutory power by the CBDT. The Principle of delegates non
potest delegare would clearly apply.

(v) Under the circumstances, we are of the opinion that
learned counsel for the assessee is right in his contention that the
application filed by the assessee on 1-2-2008 was required to be dealt with
only by the Assessing Officer, which in this case was the Additional
Commissioner.

vi) Learned counsel for the Revenue submitted that by addressing further letters to the Dy. Commissioner on 8-2-2008 and 22-2-2008, the assessee had acquiesced in the jurisdiction or power of the Dy. Commissioner to deal with the application for stay filed by the assessee. We are of the opinion, and this is well settled, that mere acquiescence in the exercise of power by a person who does not have jurisdiction to exercise that power, cannot work as an estoppel against him. Consequently, the mere fact that the assessee addressed letters dated 8-2-2008 and 22-2-2008 to the Dy. Commissioner does not mean that the Dy, Commissioner had jurisdiction over the matter. The assessee could not confer jurisdiction on the Dy. Commissioner to deal with the application filed u/ s. 220(6) of the Act. Moreover, we also find that the assessee had approached the Dy. Commissioner (apparently) only on the asking of the Additional Commissioner, otherwise the fact still remains that the assessee had made its first request to the Additional Commissioner on 1-2-2008. It was only at the instance of the Ad-ditional Commissioner that the assessee had approached the Dy. Commissioner with the letters dated 8-2-2008 and 22-2-2008. Surely, this cannot be used to the disadvantage of the assessee.

vii) It may be recalled that the returned income of the assessee was Rs.7.2S crores, but the assessed income is Rs.58.68 crores, which is almost 8 times the returned income. CBDT Instruction No. 96, dated 21-8-1969 provides that where the income determined is substantially higher than the returned income, that is, twice the latter amount or more, then the collection of tax in dispute should be held in abeyance till the decision on the appeal is taken. In this case, the assessment is almost 8 times the returned income. Under the circumstances, we are of the view that the assessee would, in normal course, be entitled to an absolute stay of the demand on the basis of the above Instruction.”

Section A : Treatment of Profit/loss on Derivative Transactions

From Published Accounts

Compiler’s Note :


Also refer BCAJ June 2008 for other disclosures on the above.

&
Hexaware Technologies Ltd. — (31-12-2007)


From Notes to Accounts :

The Company, in the month of November 2007, reported about
having entered into foreign currency transactions (financial derivatives) which
were not communicated to the senior management and the Board of Directors. These
transactions have since been settled and the net loss on account of such
transactions aggregates Rs.1,029.95 million at the year end. The Company’s
profit for the year, turned into a loss, consequent to the loss on such foreign
currency transactions. The said loss being one-time and non-recurring has been
considered and disclosed as an exceptional item in the Profit and Loss account.

The Company, during the year, suffered a foreign exchange
loss of Rs.750.05 million, which is aggregate of foreign exchange gain (net) of
Rs.279.90 million and exceptional foreign exchange loss (net) of Rs.1,029.95
million as stated in the Note No. 7 of schedule 12(B). Considering the aggregate
loss on foreign currency transactions during the year as aforesaid, the foreign
exchange loss of exceptional nature of Rs.1,029.95 million has been disclosed as
stated in the Note No. 7 of Schedule 12(B) and the balance amount of Rs.279.90
million (gain) has been disclosed under ‘Administration and other expenses’ and
previous year’s figures have been accordingly regrouped.

&
The Great Eastern Shipping Co Ltd.


— (31-3-2008)

From Notes to Accounts :

Hedging Contracts :

The Company uses foreign exchange forward contracts, currency
and interest swaps and options to hedge its exposure to movements in foreign
exchange rates. The use of these foreign exchange forward contracts, currency
and interest swaps and options reduce the risk or cost to the Company and the
Company does not use the foreign exchange forward contracts, currency and
interest swaps and options for trading or speculation purposes.


(i) Derivate instruments outstanding:

(a) Commodity futures contracts for import of Bunker :

Details not reproduced

(b) Forward exchange contracts :

Details not reproduced

(c) Forward Exchange Option contracts :

Details not reproduced

(d) Interest rate swap contracts :

Details not reproduced

(e) Currency Swap Contract :

Details not reproduced


(ii) Un-hedged foreign currency exposures as on March 31 :

Details not reproduced

(iii) The above-mentioned derivative contracts having been
entered into, the hedge foreign currency risk and the exposure to bunker price
risk, are being accounted for on settlement as per the accounting policy
consistently being followed by the Company for the past several years. The
mark-to-market (loss)/gain on the foreign exchange derivative contracts and the
mark-to-market gain on the commodity futures outstanding as on March 31, 2008
amounted to Rs.(5520) lakhs and Rs.17 lakhs, respectively. The said losses and
gains have not been provided for in the accounts for the year ended March 31,
2008.

From Auditors’ Report

(e) Without qualifying our opinion, we draw attention to :

(iii) Note 17(iii) of Schedule 20, Notes to Accounts
regarding derivative contracts entered into by the Company to hedge foreign
currency risks and bunker price risk. As per the policy consistently followed
by the Company in the past, such derivative contracts are accounted only on
settlement and the mark-to-market (loss)/ gain thereon amounting to Rs.(5520)
lakhs and Rs.17 lakhs, respectively has not been provided for in the accounts
for the year ended March 31, 2008.


&
Mangalore Refinery and Petrochemicals Ltd.


— (31-3-2008)

From Notes to Accounts :

Forward Contracts to cover Forex Risk :

Forward contracts to the tune of US$ 208 million are
outstanding as on 31st March 2008, which were entered into to hedge the risk of
changes in foreign currency exchange rates on future export sales against
existing long-term export contract. The notional mark-to-market loss on these
unexpired contracts as on 31-3-2008 amounting to Rs.120.47 million has not been
considered in the financial statements. The actual gain/loss could vary and be
determined only on settlement of the contract on their respective due dates.

&
ALSTOM Projects India Ltd. — (31-3-2008)


From Significant Accounting Policies :




2.8.4 Forward Exchange Contracts not intended for trading
or speculation purposes

The premium or discount arising at the inception of
forward exchange contracts is amortised as expense or income over the life
of the contract. Exchange differences on such contracts are recognised in
the statement of profit and loss in the year in which the exchange rates
change. Any profit or loss arising on cancellation or renewal of forward
exchange contract is recognised as income or as expense for the year.



Derivative instruments :

The Company uses derivative financial instruments such as forward exchange contracts to hedge its risks associated with foreign currency fluctuations. Accounting policy for forward exchange contracts is given in note 2.8.4.

The foreign exchange contracts other than those covered under AS-l1, enter,ed for non-speculative purposes, including the underlying hedged items, are valued on the basis of a fair value on marked-to-market basis and any loss on valuation is recognised in the Profit and Loss account, on a port-folio basis. Any gain arising on this valuation is not recognised by the Company in line with the principle of prudence as enunciated in Accounting Standard 1 – ‘Disclosure of Accounting Policies’. Any subsequent changes in fair values, occurring after the balance sheet date are accounted for in the period in which they arise.

Finolex  Cables  Ltd. –   (31-3-2008)

From Notes  to Accounts

10A. Quantitative information of derivative instruments outstanding as at the balance sheet date:

Not reproduced.

B. The Company has entered into derivative transactions with an objective to hedge the financial risks associated with its business viz. foreign exchange and interest rate.

C. The Company has not hedged the following foreign currency exposures:

i) Borrowings grouped under secured loans equivalent to Rs.999.250 Million (Previous year Rs.1,476.875 million) and under unsecured loans equivalent to Rs.739.657 million. (Previous year Rs.652.678 million).

ii) Creditors for imports equivalent to Rs.39.393 million (Previous year 45,961 million).

iii) Receivables equivalent to RS.171.991million. (Previous year Rs.195.630 million).

d) Loss on derivative/forex transactions in-cludes Rs.92.000 million loss on certain outstanding derivatives at the balance sheet date assessed by the management based on the principle of prudence. In respect of other contracts, since they are in the nature of ef-fective hedge, profit/loss, if any, has not been ascertained separately.

ITC Ltd. –   (31-3-2008)

From Notes  to Accounts:

Derivative    Instruments:

The company uses Forward Exchange Contracts and Currency Options to hedge its exposures in foreign currency related to firm commitments and highly probable forecasted transactions. The information on Derivative Instruments is as follows:

a) Derivative Instrument outstanding as at year end:

Not  reproduced.

b) Foreign exchange currency exposures that have not been hedged by a derivative instrument or otherwise as at year end:

Not reproduced.

c) Consequent to the announcement issued by the Institute of Chartered Accountants of India in March 2008 on Accounting for Derivatives, the Company has marked to market the outstanding derivative contracts as at 31st March, 2008 and accordingly, unrealised gains of Rs.9.05 crores (net of taxes) have been ignored. As a result, profit after tax for the year and reserves are lower by Rs.9.05 crores.

Housing Development Finance Corporation Ltd. – (31-3-2008)

From Notes to Accounts:

ii) As on March 31, 2008, the Corporation has foreign currency borrowings (excluding FCCB) of USD 1,079.58 million equivalent (Previous year USD 1,068048 million). The Corporation has undertaken principal-only swaps, currency options and forward contracts on a notional amount of USD 808 million equivalent (Previous year USD 777 million) to hedge the foreign currency risk. Further, interest rate swaps on a notional amount of USD 230 million equivalent (Previous year USD 391 million) are outstanding, which have been undertaken to hedge the interest rate risk on the foreign currency borrowings. As on March 31,2008, the Corporation’s net foreign currency exposure on borrowings net of risk management arrangements is USD 447.13 million (Previous year USD 100.17 million).

As a part of asset liability management and on account of the increasing response to the Corporation’s Adjustable Rate Home Loan product as well as to reduce the overall cost of borrowings, the Corporation has entered into interest rate swaps wherein it has converted its fixed-rate rupee liabilities of a notional amount of Rs.12,265 crores (Pre-vious year Rs.7,265 crores) as on March 31,2008 for varying maturities into floating rate liabilities linked to various benchmarks. In addition, the Corporation has entered into cross-currency swaps of a notional amount of USD 652 million equivalent (Previous year USD 643 million), wherein it has converted its rupee liabilities into foreign currency liabilities and the interest rate is linked to the benchmarks of respective currencies.

iii) Gains/losses arising out of foreign exchange fluctuations in respect of foreign currency borrowings, net of risk management arrangements, are to the account of the Corporation. Wherever the Corporation has entered into a forward contract or an instrument, that is in substance, a forward exchange contract, the difference between the forward rate and the exchange rate on the date of the transaction is recognised as income or expense over the life of the contract. The amount of exchange difference in respect of such contracts to be recognised as expense in the Profit and Loss account over subsequent accounting periods is Rs.97.78 crores (Previous year Rs. 45.54 crores).

Other monetary assets and liabilities in foreign currencies are revalued at the rates of exchange prevailing at the year end. The reduced liability, net of risk management arrangements, of Rs.8.67 crores (Previous year Rso4.31cores [net of loss on mark to market of derivatives Rs.103.04 crores]) arising upon revaluation at the year end (based on the prevailing exchange rate) has been credited to the Provision for Contingencies account.

iv) Cross-currency swaps and other derivatives have been marked to market at the year end. The net gain of Rs.293.59 crores on such mark to market of derivatives is included under Advance Payments (Schedule No.7) and not recognised in the Profit and Loss account in view of the recent announcement by the Institute of Chartered Accountants of India (ICAI), which requires the principle of prudence to be followed in accounting for mark-to-market gains/losses on derivatives.

SRF Ltd. –   (31-3-2008)

From Significant  Accounting Policies

a) Transactions in foreign currencies are recorded at the rate prevalent on the date of transactions.

b) All foreign currency liabilities and monetary assets are stated at the exchange rate prevailing as at the date of balance sheet and the difference taken to Profit and Loss account as exchange fluctuation loss or gain.

c) Pursuant to ICAI announcement for adoption of AS-30 Financial Instruments: Recognition and Measurement, the Company has accounted for the hedge accounting of all the hedging instruments including derivatives in accordance with paragraph 99 and 106 of the said standard, affecting either the Profit and Loss account or hedging reserve (equity segment) as the case may be. The debit balance, if any, in the hedging reserve is being shown as a deduction from free reserves.

d) The Company discloses the open and hedged foreign exchange exposure as note to the accounts.

From Notes  to Accounts:

SRF has entered into long-term contracts for the transfer / sale of Carbon Emission Reductions (CER) with reputable global buyers. The cash flow from these sales forms the mainstay of SRF’s multi-year capital expansion plan, and as such these cash flows need to be both stable and secure. To ensure stability of revenues in foreign currency from the transfer / sale of CERs, the Company has entered into forward contracts with the banks to part sell Euros to be earned out of future CER sales.

The details of the forex exposure of the Company as on 31 March, 2008 are as under:

Details not reproduced.

The Company has not entered into any hedging transactions in the nature of speculation in 2007-08 (Previous year Nil).

Tube Investments  of India  Ltd. (31-3-2008)
From Significant Accounting Policies:

The Company uses forward contracts to hedge its risks associated with foreign currency fluctuations relating to certain firm commitments and forecasted transactions. The Company designates these as cash flow hedges.

The use of forward contracts is governed by the Company’s policies on the use of such financial derivatives consistent with the Company’s risk management strategy. The Company does not use derivative financial instruments for speculative purposes.

Forward contract derivatives instruments are initially measured at fair value, and are remeasured at subsequent reporting dates. Changes in the fair value of these derivatives that are designated and effective as hedges of future cash flows are recognised directly in ‘Hedge Reserve Account’ under shareholders’ funds and the ineffective portion is recognised immediately in the Profit and Loss account.
 
Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the Profit and Loss account as they arise.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or ( exercised, or no longer qualifies for hedge account-ing. At that time, for forecasted transactions, any cumulative gain or loss on the hedging instrument recognised under shareholders’ funds is retained there until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised under shareholders’ funds is transferred to the Profit and Loss account for the year.

From Notes  to Accounts:

Pursuant to the announcement of the Institute of Chartered Accountants of India (ICAI) in respect of ‘Accounting for Derivatives’, the Company has opted to follow the recognition and measurement principles relating to derivatives as specified in AS-30 ‘Financial Instruments, Recognition and Measurement’, issued by the ICAI, from the year ended 31st March,2008.

Consequently, as of 31st March 2008, the Company has recognised mark-to-market (MTM) losses of Rs.3.03 cr. relating to forward contracts and other derivatives entered into to hedge the foreign currency risk of highly probable forecast transactions that are designated as.effective cash flow hedges, in the Hedge Reserve Account as part of the shareholders funds.

The MTM net loss on undesignated/ineffective forward contracts amounting to Rs.0.65 cr. has been recognised in the Profit & Loss account.

Joint ventures for oil and gas fields

New Page 1VIDEOCON INDUSTRIES LTD.

7. Joint ventures for oil and gas fields :

In respect of joint ventures in the nature of Production
Sharing Contracts (PSC) entered into by the Company for oil and gas exploration
and production activities, the Company’s share in the assets and liabilities as
well as income and expenditure of joint venture operations are accounted for
according to the participating interest of the Company as per the PSC and the
joint-operating agreements on a line-by-line basis in the Company’s financial
statements.

Exploration, development and production costs :

The Company follows the ‘Successful Efforts Method’ of
accounting for oil and gas exploration, development and production activities as
explained below :

(a) Exploration and production costs are expensed in the
year/period in which these are incurred.

(b) Development costs are capitalised and reflected as
‘Producing Properties’. Costs include recharges to the joint venture by the
operator/affiliate in respect of the actual cost incurred and as set out in
the Production Sharing Contract (PSC). Producing properties are depleted using
the ‘Unit of Production Method’.


Abandonment costs :

Abandonment Costs relating to dismantling, abandoning and
restoring offshore well sites and allied facilities are provided for on the
basis of ‘Unit of Production Method’. Aggregate abandonment costs to be incurred
are estimated, based on technical evaluation by experts.

Revenue recognition :

(a) Revenue is recognised on transfer of significant risk and reward in respect of ownership.

(b) Sale of crude oil and natural gas are exclusive of sales tax. Other sales/turnover includes sales value of goods, services, excise duty, duty drawback and other recoveries such as insurance, transportation and packing charges, but excludes sale tax and recovery of financial and discounting charges.

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