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Year: 2009

S. 48 — Capital gains on sale of land — Land purchased out of borrowed funds — Whether registration charges and interest paid on borrowings eligible for deduction and indexation — Held, Yes.

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  1. Ishtiaque Ahmad v. ACIT



ITAT Bench ‘C’, New Delhi

Before D. R. Singh (JM) and

K. G. Bansal (AM)

ITA No. 863/D/2009

A.Y. : 2002-03. Decided on : 28-8-2009

Counsel for assessee/revenue : J. J. Mehrotra/

D. N. Kar

S. 48 — Capital gains on sale of land — Land purchased out
of borrowed funds — Whether registration charges and interest paid on
borrowings eligible for deduction and indexation — Held, Yes.

Per K. G. Bansal :

Facts :

The assessee had purchased a piece of land in October 2006
out of borrowed funds. The land was sold in the year under appeal. While
returning income as long term capital gains — it claimed registration charges
of Rs.4.63 lacs and the interest paid by him during the years 1997-98 to
2001-02 aggregating to Rs.72 29 lacs, as the cost of improvement. The claim
was disallowed by the AO. On appeal the CIT(A) allowed the claim qua the
registration charges, however, the claim for indexation was denied. In respect
of interest paid, the CIT(A) agreed with the AO and held that the interest
payable on loan taken for acquisition of the land was not part of the cost of
acquisition/improvement.

Held :

The Tribunal noted that the registration charges paid was
treated as cost of improvement of the land and as such allowed as deduction by
the CIT(A). Referring to the provisions of second proviso to S. 48, it agreed
with the submission of the assessee that the provisions contained in clause
(ii) shall have the effect as if for the words ‘cost of acquisition’ and ‘cost
of any improvement’, the words ‘indexed cost of acquisition’ and ‘indexed cost
of any improvement’ had respectively been substituted. Therefore, it was held
that the assessee was entitled to indexation with reference to the
registration charges paid.

In respect of interest paid — the Tribunal agreed with the
assessee that as held by the Delhi High Court in case of CIT v. Mithlesh
Kumari, the actual cost of the asset need not be only those costs incurred
on the date of acquisition. Accordingly, relying on the decision of the Delhi
High Court (supra), it held that interest paid on borrowed funds for
purchase of land after its actual purchase constituted cost of the land. It
further held that in terms of second proviso to S. 48, the cost has to be
indexed for working out the capital gains.

Case referred to :


CIT v. Mithlesh Kumari, (1973) 92 ITR 9 (Del.)

 

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S. 37(1) — Business expenditure — Reimbursement of expenditure incurred in running the school — Whether allowable — Held, Yes.

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  1. Tata International Ltd. v. ACIT



ITAT ‘I’ Bench, Mumbai

Before A. L. Gehlot (AM) and

Sushma Chowla (JM)

ITA No. 5591/M/2005

A.Y. : 1999-2000. Decided on : 11-9-2009

Counsel for assessee/revenue : Dinesh Vyas/

R. P. Meena

S. 37(1) — Business expenditure — Reimbursement of
expenditure incurred in running the school — Whether allowable — Held, Yes.

Per A. L. Gehlot :

Facts :

The assessee was engaged in the business of export. One of
the issues before the Tribunal was regarding the allowability of expenditure
incurred on the maintenance of a school run by TATA at Dewas. The school was
situated at the place where the assessee’s factory was located and substantial
number of students of the school were children of the assessee’s employees.
During the year the assessee had paid the sum of Rs.1,88,540 by way of
reimbursement, part of the expenditure incurred in running the School. The
same was disallowed by the lower authorities.

Held :

According to the Tribunal, the case of the assessee was
covered by the Tribunal decision in the assessee’s own case for the A.Ys.
1992-93, 1993-94 and 1994-95 which was later affirmed in the
assessee’s own case for the A.Ys. 1996-97 to 1998-99. Noting the fact that the
school was situated at the same place where the assessee’s factory was located
and substantial number of students of the school were children of the
assessee’s employees, the expenditure claimed was allowed.

Case referred to :

Tata International Ltd. ITA No. 4823 to 4825/M/2005 dated
26-3-2009.

 

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S. 28, S. 36(1)(vii), S. 37. Amount paid by the assessee under Performance Guarantee Bond is allowable as a business loss/expenditure. Mere fact that the assessee has claimed the amount written off in the course of business as ‘bad debt’ does not preclude

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6. Anang Tradevest Pvt. Ltd. v. ITO

ITAT ‘A’ Bench,
Mumbai

Before D.
Manmohan (VP) and

Abraham George
(AM)

ITA No.
10/Mum./2008

A.Y. : 2003-04.
Decided on : 10-8-2009

Counsel for assessee/revenue :

Prakash Jhunjhunwala/R.
S. Srivastava

S. 28, S.
36(1)(vii), S. 37. Amount paid by the assessee under Performance Guarantee
Bond is allowable as a business loss/expenditure. Mere fact that the assessee
has claimed the amount written off in the course of business as ‘bad debt’
does not preclude him from claiming the same as business loss/expenditure.

Per Abraham P.
George :

Facts :

The assessee, as a
part of its business activity, was introducing certain clients to M/s. Joindre
Capital Services Ltd., who entered into share purchase and sale transactions
for such clients. As per the terms of the agreement entered into between the
assessee and M/s. Joindre Capital Services Pvt. Ltd., assessee had to
indemnify Joindre Capital Services Ltd., in case clients introduced by the
assessee failed to honor any of their commitments.

During the previous
year in respect of three parties, assessee had shown a sum of Rs.11,90,779 as
bad debts written off. The Assessing Officer (AO) held that such claim could
not be allowed since assessee was a sub-broker and the debt was never taken
into account for computing the income of the assessee for the relevant
previous year or any preceding previous years.

The CIT(A) held that
the bad debt written off was rightly disallowed by the AO.

Aggrieved, the
assessee preferred an appeal to the Tribunal where disallowance of bad debt of
Rs. 11,90,779 was taken as a ground. In the course of the hearing, the
assessee withdrew the original ground and by way of an additional ground
claimed that this sum of Rs.11,90,779 paid under a performance guarantee bond
be allowed either as business expenditure u/s.37(1) or as business loss. On
behalf of the assessee it was contended that the Tribunal has in the case of
India Infoline Securities (P) Ltd. v. ACIT, (25 SOT 123) (Mum.) held
that losses incurred by an assessee in the course of his business as a stock
broker, on account of default of his clients, could be claimed as a business
loss.

Held :


Neither the AO nor the CIT(A) had gone through the agreement entered into by
the assessee with Joindre Capital Services Ltd., for verifying whether such
claim could be allowed as business expense or loss. The fact that the assessee
had claimed the amount as bad debt would not preclude it from claiming the
amount as business loss or expenses, since the write off was done in the
course of business only.

With a view to
verify whether the claim of the as-sessee was in relation to clients
introduced by it to M/s. Joindre Capital Services Ltd., as also whether the
indemnity agreement with Joindre Capital Services Ltd. was applicable, in
relation to such write off effected by the assessee, the Tribunal set aside
the orders of the AO and the CIT(A) and restored the matter back to the AO for
considering the issue afresh in accordance with law after giving proper
opportunity to the assessee to represent its case.

S. 271(1)(c) — Penalty for concealment of income — Whether non bifurcation of short term capital loss from the overall business loss amounted to concealment of income and furnishing of inaccurate particulars of income — Held, No.

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  1. Nera (India) Limited v. DCIT

ITAT ‘F’ Bench, New
Delhi

D. R. Singh (JM)
and K. G. Bansal (AM)

ITA No.
107/Del./2009

A.Y. : 2004-05.
Decided on : 4-8-2009

Counsel for assessee/revenue :
A. K. Mittal/

Sunita Singh

S. 271(1)(c) —
Penalty for concealment of income — Whether non bifurcation of short term
capital loss from the overall business loss amounted to concealment of income
and furnishing of inaccurate particulars of income — Held, No.

Per D. R.
Singh :

Facts :

The assessee had
filed return of income declaring business loss of Rs.1.37 crore. During the
course of assessment proceedings, it was noticed by the AO that the Auditors
in Form No. 3CD had reported that debit to the Profit & Loss account included
capital expenditure by way of fixed assets written off amounting to Rs.l0.17
lacs, which was not added back by the assessee. The same was added to the
income (reduced from the loss) of the assessee and the business loss was
assessed accordingly. According to the AO since the assessee accepted the
mistake only after the show cause was issued, he was of the view that the
assessee had concealed his income and furnished inaccurate particulars of
income. He therefore levied penalty of Rs.3.65 lacs u/s.271(1)(c) of the Act.
On appeal, the CIT(A) confirmed the same.

Before the Tribunal
the assessee explained that instead of classifying the sum of Rs.10.17 lacs as
short term capital loss, which was allowable to be carried forward u/s.70 of
the Act, the assessee in its return made a technical error of not bifurcating
short term capital loss from the overall business loss of the company. The
assessee claimed that the same cannot by any assumption be deemed to be
concealment of income or furnishing of inaccurate particulars of the income.

Held :

According to the
Tribunal, a mere omission or negligence would not constitute a deliberate act
of suppression. It agreed with the assessee that its explanation cannot be
treated as false and inaccurate simply because of its mistake in wrongly
classifying heads of loss. Accordingly, the penalty imposed was deleted.

S. 195, S. 244A. When tax which was deducted at source and deposited with the Government pursuant to an order passed u/s. 195(2) of the Act is refunded to the assessee, upon the CIT(A) deciding the appeal in favor of the assessee, the assessee is entitled

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  1. 2009 TIOL 602 ITAT Mum.

Addl DIT
v. Reliance Infocomm Ltd.

ITA No. 6100 to
6110/M/2008

Dated : 9-9-2009

S. 195, S. 244A.
When tax which was deducted at source and deposited with the Government
pursuant to an order passed u/s. 195(2) of the Act is refunded to the assessee,
upon the CIT(A) deciding the appeal in favor of the assessee, the assessee is
entitled to refund of amount paid with interest u/s.244A.

Facts :

The assessee
approached the DDIT, International Taxation, with a request to issue a
certificate for making payment to M/s. ECI Telecom — NGTS Ltd., Israel, for
purchase of certain software for the purpose of operation of Wireless
Telecommunication Network, without deduction of tax at source. The DDIT passed
an order u/s.195(2) of the Act holding that the payment was in the nature of
‘Royalty’ and accordingly, tax was required to be deducted at source. The
assessee deducted the tax and made payment to the authorities as directed by
the aforesaid order passed by the DDIT.

The assessee
preferred an appeal against the said order u/s.195(2) of the Act, which was
allowed by CIT(A). Pursuant to the appeal order, the DDIT passed an order
giving effect to the order of CIT(A) and granted refund of amount paid by the
assessee but did not grant interest on the amount refunded on the ground that
refund has arisen not under the Income-tax Act as such.

Aggrieved, assessee
preferred an appeal to the CIT(A) who held that the assessee was entitled to
interest u/s.244A of the Act on the refund of TDS u/s.195.

Aggrieved by the
order of CIT(A) directing the DDIT to grant interest on refund of TDS, Revenue
preferred an appeal to the Tribunal.

Held :

The Tribunal found
the issue under consideration to be covered against the revenue by various
decisions including the decision of ITAT in the case of Tata Chemicals Ltd.;
16 SOT 418 and in the case of Star Cruises India Travel Services Pvt. Ltd. in
ITA No. 6498 & 6500/Mum./06 order dated 24th March, 2009 (2009 TIOL 351 ITAT
Mum). Since the facts were identical to the decisions mentioned above the
Tribunal confirmed the order passed by CIT(A) and held that the assessee is
entitled to interest on refund of amount paid pursuant to an order passed u/s.
195(2).

The appeal filed by
the department was dismissed.

S. 70(3), S. 111A, S. 115D. As per the provisions of S. 70(3) r.w. S. 111A and S. 115AD, the assessee has an option to set off the short term capital loss against the short term capital gains. Short term capital loss suffered after 1-10-2004 could be set

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  1. 2009 TIOL 547 ITAT Mum.

First State
Investments (Hongkong) Ltd. v. Addl. DIT (International Tax)

ITA No.
2895/Mum./2008

A.Y. : 2005-06.
Dated : 23-7-2009

S. 70(3), S.
111A, S. 115D. As per the provisions of S. 70(3) r.w. S. 111A and S. 115AD,
the assessee has an option to set off the short term capital loss against the
short term capital gains. Short term capital loss suffered after 1-10-2004
could be set off against short term capital gains earned before 30-9-2004.

Facts :

For A.Y. 2005-06,
the assessee computed short term capital gain of Rs.331.33 lakhs. The amount
of short term capital gain and short term capital loss for the period upto
30-9-2004 and after 30-9-2004 was as under :

Particulars

upto 30-9-2004

after 30-9-2004

Total

 

Rupees in lakhs

Short term capital
gain

36.54

472.16

508.70

Short term capital
loss

8.14

169.23

177.37

Total

28.40

302.93

331.33

The assessee sought
to set off the short term capital loss suffered in the period after 30-9-2004
against short term capital gain for a period before 30-9-2004 and contended
that the short term capital gain upto 30-9-2004 was Rs.Nil and that the entire
short term capital gain was for a period after 30-9-2004 and therefore was
taxable @ 10%.

According to the
Assessing Officer, the assessee could not set off the short term capital loss
for a period after 30-9-2004 with the short term capital gain arising in a
period prior to 1-10-2004 since in the period prior to 1-10-2004 short term
capital gain was chargeable at normal rates whereas in the period after
30-9-2004 short term capital gain on which STT was paid was chargeable at
concessional rate of 10%. He, held that Rs.28.40 lakhs is capital gain for the
period upto 30-9-2004 and Rs.302.93 lakhs is capital gain arising during the
period after 30-9-2004.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

S. 80, S. 139(3) and S. 139(5) — Loss return filed within time could be revised and loss carried forward.

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  1. (2009) 119 ITD 119 (Delhi ITAT)

Escorts Mahle
Ltd. v. DCIT

A.Y. : 2001-02.
Dated : 21-3-2008

S. 80, S. 139(3)
and S. 139(5) — Loss return filed within time could be revised and loss
carried forward.

Facts :

The assessee company
filed a return of loss on 31-10-2001 which was accompanied by the unaudited
profit and loss account and balance sheet. Further the tax audit report was
also not filed. On 27-3-2003, the assessee company filed another return in
which a higher loss was claimed. The profit and loss account, balance sheet
and audit report were attached to subsequent return.

The assessing
officer took the view that since the return filed on 31-10-2001 was not
accompanied by audited accounts, the same was not a valid return. He,
therefore, considered the return filed on 27-3-2003 as the first valid return.
Further, he held that since the return filed on 27-3-2003 was filed beyond the
time limit prescribed u/s.139(1) of the Income-tax Act, 1961 (‘the Act’), the
loss declared therein could not be carried forward.

The CIT(Appeals)
held that the return filed on 27-3-2003 was revised return filed u/s.139(5) of
the Act and took the place of the original return filed on 31-10-2001. It
should, therefore, be taken to have been filed within the time limit
prescribed u/s.139(3) of the Act.

On Revenue’s appeal,
the Delhi ITAT observed that the assessing officer processed the return filed
on 31-10-2001 u/s.143(1) of the Act and also did not issue any defect notice
u/s.139(9) of the Act. Thus, the said return cannot be said to have been
considered as invalid return. This being the case, the return filed on
27-3-2003 was to be treated as valid revised return. The revised return took
the place of original return and the original return having been admittedly
filed within time allowed u/s.139(1) of the Act, the loss was to be carried
forward. The return of loss filed on 31-10-2001 was filed in accordance with
S. 139(3) of the Act and could be validly revised u/s.139(5) of the Act.

Even though assessee might have committed a serious economic offence, yet he could not be charged to income unless it was proved beyond doubt that said income was generated to him alone.

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  1. (2009) 119 ITD
    71 (Bang.)

Ibrahim Vittal
v. ITO, Ward 2(3), Mangalore

A.Y. : 2003-04.
Dated : 25-4-2008

Even though
assessee might have committed a serious economic offence, yet he could not be
charged to income unless it was proved beyond doubt that said income was
generated to him alone.

Facts :

A search was made in
the residence of appellant u/s.37(3) of Foreign Exchange Management Act, 1999
(FEMA) on the basis of certain information by Directorate of Enforcement
(DOE). During search, some documents were seized which disclosed that assessee
had received a cash of Rs.23,15,000. The contention of assessee that it was
received from his brothers and brother-in-law working abroad for construction
of their houses was rejected by DOE and penalty was imposed on him. On this
basis, AO treated the said money as unexplained and taxed it u/s.69A. On
appeal to CIT(A), it confirmed the addition. On appeal to Tribunal, it held
that the AO did not make any independent enquiries. Rather he relied upon the
letter received from one of the brothers-in-law which was signed by him on
behalf of all the other persons and hence was not having any evidential value.
In a search conducted under FEMA, no other property was confiscated from
assessee. Hence, the assessee had received the amount on behalf of his
brothers and brothers-in-law.

It was not the case
of the AO that the assessee had made any investments or the assessee was found
to be the owner of any bullion, jewellery or other valuable articles. So, the
AO was not right, in law, in completing the assessment u/s.69A.

S. 147 — Reopening of the assessment for the second time to take a different view on the same matter is bad in law and liable to be quashed.

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  1. (2009) 119 ITD 21 (Mum.)

Aum Chemicals
v.
ACIT, Palghar
Circle, Palghar

A.Y. : 1998-99.
Dated : 30-4-2008

Held 1 :

S. 147 —
Reopening of the assessment for the second time to take a different view on
the same matter is bad in law and liable to be quashed.

Held 2 :

S. 45 — A
partnership firm consisting of 2 partners was converted into company —
Partners were given shares of Company A to the extent of their credit balances
in Capital Account — It was held that since the condition of distribution of
capital assets on dissolution of firm is not fulfilled, S. 45(4) is not
applicable. Even otherwise after deducting cost of capital which was equal to
book value, capital gain would be nil.

Fact 1 :

The assessee firm
decided to sell its assets and liabilities to a private limited company.
Subsequently, the said consideration was distributed among partners and the
firm was dissolved. The Assessing Officer reopened the assessment and added
certain amount as Short Term Capital Gain u/s.45(4). The CIT(A) deleted the
addition. Afterwards AO again reopened the assessment on the ground that the
partners made an arrangement to avoid tax by not assigning values to
individual assets and added the value difference of assets to the income of
the assessee. On appeal to Tribunal, it held that there was nothing on record
to show that there was any failure on the part of assessee. It had disclosed
all material facts at the time of first reopening of assessment. Hence, it was
not permissible to reopen the assessment on the same reason to take different
view. Consequently, second time reopening of assessment was bad in law and
liable to be quashed.

Fact 2 :

On distribution of
assets and liabilities to the company, the company allotted shares to partners
in proportion to their capital contribution. The AO taxed short term capital
gain by invoking provisions of S. 45(4). It was held that for invoking S.
45(4) following two conditions are to be satisfied :

    1. Transfer by way
    of distribution of capital asset.

    2. Transfer should
    be on the dissolution of the firm or otherwise.

There is a
difference between vesting in private limited company and distribution of
capital assets. In case of vesting of property, the property vests in the
company as it exists. On the other hand, distribution on dissolution
presupposes processes of division, realisation, encashment of assets and
apportionment of the realised amount.

In the given case
there was no transfer of assets on dissolution of firm. Hence, first condition
is not satisfied. Further, even if S. 45(1) is applied, the full value of
consideration for the firm is book value of assets as allocation of shares had
no correlation of vesting of properties in company. Hence, capital gain would
be Nil.

Powers of CIT(A) — Rule 24 of Appellate Tribunal Rules, 1963 — Whether CIT(A) can dismiss appeal for want of prosecution by assessee — Held, No. Whether CIT(A) is bound to dispose of appeal on merits, even when there is default of non-appearance — Held, Y

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31 2008 TIOL 601 ITAT Mum.


British Pharmaceutical Laboratories v. ACIT

ITA No. 6263/Mum./2006

A.Y. : 1999-2000. Dated : 1-10-2008

Powers of CIT(A) — Rule 24 of Income-tax Appellate Tribunal
Rules, 1963 — Whether CIT(A) can dismiss the appeal for want of prosecution by
the assessee — Held, No. Whether CIT(A) is bound to dispose of the grounds of
appeal on merits, even when there is a default of non-appearance by the
appellant — Held, Yes.

 

Facts :

The assessee filed a return of income declaring a loss of
Rs.2,19,69,182. The Assessing Officer passed an order u/s.143(3) of the Act
assessing the total income of the assessee at Rs.19,75,603. Aggrieved, the
assessee preferred an appeal to the CIT(A), but failed to attend the
proceedings before the CIT(A). The CIT(A) did not record decision on merits on
the ground of assessee’s failure to attend the proceedings and by taking a
clue from the decision of the Delhi Tribunal in the case of Multiplan (India)
Ltd., he dismissed the appeal. Aggrieved, the assessee preferred an appeal to
the Tribunal.

 

Held :

The Tribunal noted that under Rule 24 of the Income Tax
Appellate Tribunal Rules, 1963 the Tribunal has the power to dismiss an appeal
for want of prosecution and it is also empowered to recall that order, if
satisfied about the existence of reasonable cause subsequently shown by the
appellant. The Tribunal held that since the CIT(A) does not have such a power
under the Income-tax Act, 1961, he is bound to dispose of the grounds of
appeal on merits, even when there is a default of non-appearance by the
appellant. Since the CIT(A) had not recorded decision on merits, the Tribunal
set aside his order and restored the appeal to the file of the CIT(A) for
fresh disposal in accordance with law, after giving reasonable opportunity of
being heard to the assessee.

 


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S. 22 and S. 24 of the Income-tax Act, 1961 — Rent, being only a surrogate measure of annual value, has to be reduced by the expenses not connected with property but incurred by landlord for enjoyment of property by tenants, such as salary and bonus to sw

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  1. (2009) 120 TTJ 1127 (Ahd.)


J. B. Patel & Co. (Co-owners) v. Dy. CIT

ITA No. 4033 (Ahd.) of 2004

A.Y. : 1993-94. Dated : 29-2-2008

S. 22 and S. 24 of the Income-tax Act, 1961 — Rent, being
only a surrogate measure of annual value, has to be reduced by the expenses
not connected with property but incurred by landlord for enjoyment of property
by tenants, such as salary and bonus to sweeper, pumpman and liftman and
electricity charges for pump motor and common passage.

For the relevant assessment year, the assessee computed
rental income under ‘Income from House Property’ after claiming deductions in
respect of the following expenses :

(a) Salary and bonus paid to sweepers/pumpman/liftman

(b) Electricity charges for pump motor and common
passage.

Since these expenses were not covered by S. 23 and S. 24,
the Assessing Officer denied the assessee’s claim. The disallowance was upheld
by the CIT(A).

The Tribunal, deciding in assessee’s favour, noted as
under :

(1) The rent being charged by the assessee is only a
surrogate measure of the said annual value. The expenditure on the aforesaid
items, i.e. the salary (including bonus) to the maintenance staff of
the facilities such as electric motors, lift, cleaning, etc., as well as
that on the electricity consumed in respect of any common area and the
electric motors, is not attributable directly to the house property as such,
but to its enjoyment by the tenants/users thereof.

(2) In a given case it may happen that the said
expenditure is incurred by the tenant or tenants (collectively), with the
landlord having no locus standi or role therein. Who incurs the expenditure
in the first instance is only a matter of mutual arrangement or convenience
and thus, of no consequence where the bona fides of such expenditure are, as
in the present case, not in doubt. The rent being charged by the assessee,
which represents the measure of its annual value, would, in such a case
stand correspondingly reduced.

(3) As such, although the assessee, being entitled only
to the deductions in respect of the said expenditure in the computation of
income under the said head of income only in terms of its provisions, would
not be entitled to the impugned deductions, we consider that the annual
value of its house property be assumed at the reduced value, i.e.
after deducting the impugned amounts (from the rental), being only in
relation to the expenditure required to be necessarily incurred for the
enjoyment/user of the relevant property and, therefore, can only be
considered as having been included at the said amount, i.e. at cost
by the two parties in the determining of the rental.

(4) The standard deduction admissible to the assessee on
account of repairs @ 1/6th of the annual value of its house property is in
relation to the repairs, whether actually incurred or not, by the assessee
during the relevant year. The impugned sums are not in relation to any
repairs to the house property, but for the maintenance of the facilities
enjoined therewith and necessary for its useful enjoyment.

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S. 143(1) and S. 263 of the Income-tax Act, 1961 — Provisions of S. 263 are not applicable where only intimation u/s.143(1) has been issued.

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  1. (2009) 120 TTJ 1009 (Agra) (TM)


Vinod Kumar Rai v. CIT

ITA No. 234 (Agra) of 2005

A.Y. : 2002-03. Dated : 21-11-2008

S. 143(1) and S. 263 of the Income-tax Act, 1961 —
Provisions of S. 263 are not applicable where only intimation u/s.143(1) has
been issued.

For the relevant assessment year, the CIT passed a revision
order u/s.263 in respect of the return of income processed u/s.143(1). Before
the Tribunal, the assessee contended that the processing u/s.143(1) is neither
an assessment nor an assessment order and the same cannot be subjected to
revision u/s.263 and the revision order made by the CIT may, therefore, be
declared as bad in law.

On account of difference of opinion between members of the
Bench, the matter was referred to the Third member u/s.255(4).

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

(a) After an intimation u/s.143(1) is issued, the
Assessing Officer had full power to issue a notice u/s.143(2) and make a
regular assessment u/s.143(3). The Assessing Officer could also proceed
u/s.147/148, if applicable.

(b) There was no explanation as to why these provisions
were not applied in this case.

(c) Various High Courts in India are not unanimous
whether provisions of S. 263 are applicable where only intimation u/s.143(1)
has been issued, whether such intimation is an order or assessment to
attract provisions of S. 263. The Supreme Court, at an appropriate time,
will take up and settle the issue.

(d) It is clear from the record that two reasonable views
of the matter are possible. In such a situation, it has been laid down by
the Supreme Court in numerous cases that the view which is favoring the
assessee has to be taken.

Therefore, it was held that the intimation u/s.143(1)
cannot be sought to be revised u/s.263.

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S. 32 of the Income-tax Act, 1961 — Commercial right comes into existence whenever the assessee makes payment of non-compete fee and such non compete right is an intangible asset eligible for depreciation.

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New Page 1

  1. (2009) 120 TTJ 983 (Chennai)


ACIT v. Real Image Tech. (P) Ltd.

ITA No. 201 (Mad.) of 2007

A.Y. : 2001-02. Dated : 15-2-2008

S. 32 of the Income-tax Act, 1961 — Commercial right comes
into existence whenever the assessee makes payment of non-compete fee and such
non compete right is an intangible asset eligible for depreciation.

During the relevant assessment year, the non-compete fees
paid by the assessee in pursuance of non-compete agreements entered into by it
with certain companies was claimed as revenue expenditure and the claim was
disallowed by the Assessing Officer. Under an application to the Joint CIT
u/s.144A, the assessee made an alternate plea for treating such fees as
capital expenditure — it should be treated as an intangible asset u/s.32 and
depreciation be allowed accordingly. The Jt. CIT did not allow the same,
holding that the payment was capital in nature i.e. neither a revenue
expenditure nor a capital expenditure. The CIT(A) allowed the assessee’s
claim.

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

(b) ACIT v. Radaan Media Works India Ltd., ITA No.
2241 (Mad.) of 2006 dated 14-12-2007

(c) Techno Shares & Stocks Ltd. v. ITO, (2006) 101
TTJ 349 (Mum.)

The Tribunal noted as under :

(1) When a businessman pays money to another businessman
for restraining the other businessman from competing with the assessee, he
gets a vested right which can be enforced under law and without that the
other businessman can compete with the first businessman.

(2) When by payment of non-compete fee, the businessman
gets his right what he is practically getting is kind of monopoly to run his
business without bothering about the competition.

(3) Generally, non-compete fee is paid for a definite
period which in this case is five years. The idea is that by that time the
business would stand firmly on its own footing and can sustain later on.
This clearly shows that a commercial right comes into existence whenever the
assessee makes payment for non-compete fee.

(4) The term ‘or any other business or commercial rights
of similar nature’ has to be interpreted in such a way that it would have
some similarities as other assets mentioned in clause (b) of Expln. 3. The
other assets mentioned are know-how, patents, copyrights, trade marks,
licences, franchises, etc. In all these cases no physical asset comes into
possession of the assessee. What comes in is only a right to carry on the
business smoothly and successfully and, therefore, even the right obtained
by way of non-compete fee would also be covered by the term ‘or any other
business or commercial rights of similar nature’ because after obtaining
non-compete right, the assessee can develop and run his business without
bothering about the competition. The right acquired by payment of
non-compete fee is definitely an intangible asset.

(5) This right (asset) will evaporate over a period of
time (of five years in this case) because after that the protection of
non-competition will not be available to the assessee. This right is subject
to wear and tear by the passage of time, in the sense that after the lapse
of a definite period of five years, this asset will not be available to the
assessee and, therefore, this asset must be held to be subject to
depreciation.

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S. 56(2)(v) of the Income-tax Act, 1961 — Interest-free loan obtained by assessee from sister concerns for purchase of a flat from one of them cannot be said to be without consideration because while the assessee was benefited by interest-free loan, lende

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New Page 1

  1. (2009) 121 TTJ 145 (Mumbai)


Chandrakant H. Shah v. ITO

ITA No. 3966 (Mum.) of 2008

A.Y. : 2005-06. Dated : 12-1-2009

S. 56(2)(v) of the Income-tax Act, 1961 — Interest-free
loan obtained by assessee from sister concerns for purchase of a flat from one
of them cannot be said to be without consideration because while the assessee
was benefited by interest-free loan, lenders were benefited by profit embedded
in the sale consideration, hence not exigible to tax u/s.56(2)(v).

During the relevant assessment year, the assessee took
interest-free loans of Rs.54.70 lacs from four builders (sister concerns) for
purchasing a flat from one of them. The assessee was also employed with one of
the concerns. The Assessing Officer formed an opinion that the assessee was
working with the group for several decades and, hence, having regard to the
said association, these parties gave such a huge loan to the assessee without
any security and interest as a mark of gratitude irrespective of his repayment
capacity and, therefore, in the absence of any obligation on the part of the
assessee to repay these loans, the entire transaction was of the nature of
gift which was given a colour of loan. Accordingly, he added a sum of Rs.54.45
lacs after giving a rebate of Rs.25,000 u/s.56(2)(v) to the total income of
the assessee.

The CIT(A) held that such loan transactions were abnormal
in the sense that there was no interest or any repayment stipulation, and
hence, the said sums were without consideration and upheld the addition.

The Tribunal, relying on various decisions, deleted the
addition.

The Tribunal noted as under :

(1) All these loans have been shown in the balance sheet
submitted along with the return of income as loans and the lenders have also
confirmed the same as such. Thus, apparently, it is a case of loan
transactions and not a case of gift.

(2) Since some of the loans were repaid partly/fully, it
was a material fact so as to rebut the presumption of the Assessing Officer
that the assessee was not under any obligation to repay the loans and this
fact also proves the assessee’s claim that no opportunity was granted by the
Assessing Officer to the assessee before making such addition.

(3) This type of addition also leads to a situation of
having two provisions for charging one type of income i.e. the
legislature has provided two charging sections i.e. S. 68 and S. 56
(2)(v) which cannot be possible. In that case, the legislature would have
made the provisions of S. 56(2)(v) either of overriding nature by stating
that ‘notwithstanding anything contained in S. 68’ or by providing for
applicability of provisions of S. 56(2)(v) in any other manner, in case
provisions of S. 68 could not be invoked. When a specific provision exists
in law for a particular thing, then that thing is liable to be examined
thereunder only and if that item cannot be taxed under that provision, then
that thing cannot be charged to tax under other provisions of the Act.

(4) In the present case, it is not that provisions of S.
68 were not applicable at all and, hence, the Assessing Officer invoked the
provisions of S. 56(2)(v). On the contrary, the Assessing Officer has made
necessary enquiries in that regard and he has not made addition u/s.68 for
the reason that all the requirements of that section i.e. identity,
creditworthiness and genuineness of transactions have been proved. Hence, a
loan transaction has to be treated as a loan transaction only and it should
be examined in the light of provisions of S. 68 and not under provisions of
S. 56(2)(v) and for this reason alone, this addition is liable to be
deleted.

(5) It is important to note that in S. 56(2)(v), the term
‘consideration’ is neither prefixed by the word ‘adequate’ nor it is
suffixed by the words ‘money or money’s worth’. Hence, if in any transaction
there exists consideration as per the provisions of the Indian Contract Act,
1872 such transaction would not come into the ambit of this section.

(6) Consideration for a promise may consist of either
some benefit conferred on the promisor or detriment suffered by the promisee
or both. Hence, on this criteria, the assessee has gained by way of
interest-free loan and the lenders have suffered by giving interest-free
loans and such suffering has got some value and, therefore, the said
transaction cannot be said to be without consideration.

(7) There is another very important aspect of the matter,
i.e. lenders have sold the flat to the assessee. In that sale
consideration, they have earned profit because it is nobody’s case that the
flat to the assessee has been sold at cost. Therefore, lenders have also
derived some benefit which has got value and, therefore, the same forms
consideration for giving interest-free loans to the assessee. Other three
lenders are the sister concerns of the company who actually built or sold,
hence the benefit derived by such company is a good consideration for other
three lenders. Benefit conferred to a third party not connected with the
promissor or promise in a pecuniary capacity would also be a good
consideration to support the transaction. There can be consideration without
any apparent monetary consideration and the only requirement is that the
consideration should create a legal relationship between the contracting
parties and this fact is not in dispute in the present case. Hence, the
transaction is with consideration. The term ‘consideration’ in legal sense,
is somewhat different from what is generally understood and the Revenue’s
decision is based on general understanding and, therefore, the same is not
correct in law. The transaction meets all the requirements of general law
which is only to be looked into while invoking provisions of S. 56(2)(v)
and, therefore, it is a transaction having a consideration and, therefore,
the same does not fall within the ambit of the provisions of S. 56(2)(v) for
this reason also.

 

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S. 14A and S. 48 of the Income-tax Act, 1961 (i) Interest on funds borrowed for acquisition of shares is to be taken into account towards the cost of acquisition for the purpose of computation of capital gains as prescribed u/s.48(ii)

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New Page 1

  1. (2009) 120 TTJ 397 (Pune)


Balan alias Shanmugam Balkrishnan Chettiar v.
Dy. CIT

ITA No. 1859 (Pune) of 2005

A.Y. : 2002-03. Dated : 31-1-2008

S. 14A and S. 48 of the Income-tax Act, 1961 :


(i) Interest on funds borrowed for acquisition of
shares is to be taken into account towards the cost of acquisition for the
purpose of computation of capital gains as prescribed u/s.48(ii)


(ii) Capital gain on the sale of shares being part of
the total income of the assessee and not an exempt income, S. 14A has no
application.



For the relevant assessment year, the Assessing Officer and
the CIT(A) disallowed the assessee’s claim for inclusion of interest paid on
funds borrowed for investment in shares in the cost of acquisition for the
purpose of computing capital gains.

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

(a) CIT v. Mithilesh Kumari, (1973) 92 ITR 9
(Del.)

(b) Addl. CIT v. K. S. Gupta, (1979) 119 ITR 372
(AP)

(c) CIT v. Maithreyi Pai, (1984) 43 CTR 88 (Kar.)/
(1985) 152 ITR 247 (Kar.)

The Tribunal noted as under :

(1) In the past, the assessee had always capitalised the
interest.

(2) S. 48 says that capital gain is to be computed by
deducting from the consideration the cost of acquisition of the asset and
the cost of any improvement thereto.

(3) Once it is established that the assessee had borrowed
the funds for acquisition of shares and the burden of interest had been
capitalised, that interest burden cannot be segregated from the amount of
investment.

In response to the argument of the Revenue that since
interest had a nexus to exempt income, the provisions of S. 14A should be
applied, the Tribunal noted as under :

(1) The words ‘in relation to income which does not form
part of the total income under this Act’ mean if an income does form part of
the total income, then the related expenditure is out of the ambit of the
applicability of S. 14A. The capital gain shown by the assessee had formed
part of the total income of the assessee. Otherwise also, capital gain is
not exempt income and without any ifs and buts, always being taxed in the
hands of a taxpayer. Therefore, the Revenue authorities have proceeded on a
wrong premise that the interest expenditure was in respect of an income
which was exempt or did not form part of the total income.

 

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S. 28(i) and S. 45 of the Income-tax Act, 1961 — Profit from sale of shares out of investment portfolio was taxable as capital gains and not as business income.

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New Page 1

  1. (2009) 120 TTJ 216 (Luck.)


Sarnath Infrastructure (P) Ltd. v. ACIT

ITA No. 301 (Luck.) of 2006

A.Y. : 2004-05. Dated : 20-12-2007

S. 28(i) and S. 45 of the Income-tax Act, 1961 — Profit
from sale of shares out of investment portfolio was taxable as capital gains
and not as business income.

The assessee-company was dealing in shares both as business
as well as investment and keeping separate accounts in respect of the two
portfolios. Valuation of holdings in investment portfolio was done at cost
only and holdings were reflected in Balance Sheet as investment. For the
relevant assessment year, the profit on sale of shares out of the investment
portfolio was treated by the Assessing Officer as business income and not as
long term capital gain. The CIT(A) upheld the addition.

The Tribunal held that the said profit was to be treated as
long term capital gain and not as business income. The Tribunal’s decision was
arrived at after examining various decisions.

The Tribunal noted as under :

(1) The material on record showed that the assessee had
clear independent portfolios for investment in shares as well for trade and
it has kept separate accounts in respect of the two portfolios.

(2) The shares which were sold out of investment
portfolio during this year and on which capital gains have been offered by
the assessee were held by it for more than two years and in some cases for
more than three years.

(3) No material is brought on record by the Department to
show that demarcation line between business and investment is hazy or that
assessee has not maintained an investment portfolio and it was dealing in
shares only like a trader.

(4) Valuation of holdings has been done at cost for
investment portfolio. They were reflected in the Balance Sheet as
investment.

(5) The frequency of such purchase or sale in this
portfolio is not large enough to doubt that the investment portfolio is only
a device to pay lesser taxes by parking some stock-in-trade in the
investment portfolio.

(6) Turnover to stock ratio in investment portfolio is
very low as compared to that in trading portfolio. Further, there is no
material to show that these shares in the investment portfolio were also
traded in the same and like manner as those which were in stock-in trade
portfolio.

(7) All the sales out of the investment portfolio were
identifiable to purchases made in the same portfolio.

(8) In view of the above facts, the assessee had
discharged its primary onus by showing that it was maintaining separate
accounts for two portfolios and there was no intermingling. The onus then
shifted on the Revenue to show that apparent was not real. There was no
material brought in by the Revenue to show that separate accounts of two
portfolios were only a smoke screen and there was no real distinction
between the two types of holdings. This could have been done by showing that
there was intermingling of shares and transactions and the distinction
sought to be created between two types of portfolios was not real but only
artificial and arbitrary.

Therefore, in absence of any material to the contrary and
on appreciation of cumulative effect of several factors present, it was held
that the surplus was chargeable to capital gains only and the assessee was not
to be treated as trader in respect of sales and purchases of shares in the
investment port-folio.

 

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Income-tax Act, 1961 — S. 194A — Whether a chit fund agreement is not a money lending contract but a special type of contract — Held, Yes. Whether in a scheme of chit fund there is neither any money borrowed nor any debt incurred, the dividends paid by th

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New Page 1

  1. 2009 TIOL 328 ITAT (Bang.)


ITO v. Margasoochi Chits Pvt. Ltd.

ITA No. 995/Bang./2008

A.Y. : 2005-2006. Dated : 16-1-2009

Income-tax Act, 1961 — S. 194A — Whether a chit fund
agreement is not a money lending contract but a special type of contract —
Held, Yes. Whether in a scheme of chit fund there is neither any money
borrowed nor any debt incurred, the dividends paid by the foreman to the
subscribers of the chit cannot be said to be answering the definition of
interest — Held, Yes.

Facts :

In these cases the AO relying on the instructions issued by
CBDT held that the dividend payments made to the subscribers of chit fund were
in the nature of interest and were liable for deduction of tax at source
u/s.194A. Since the assessees had not deducted tax u/s.194A, the AO passed
orders u/s.201(1) and u/s.201(1A) in respect of five assessees for the
impugned assessment years by creating demand on the dividends paid but not
subjected to tax deduction at source. Since identical orders were passed in
all the fifteen appeals they were taken up together by the Tribunal.

The CIT(A) held that a chit agreement is not a money
lending contract, but a special type of contract and any payment with
reference to a chit agreement being referred to as interest payment does not
arise and installments in chit fund being non-refundable in nature cannot be
equated with ‘deposit’ and consequently, the dividend or discount credited to
the account of the subscribers would not constitute interest. He also held
that the CBDT circulars are not binding on the appellate authorities.

Aggrieved by the orders of CIT(A), Revenue preferred an
appeal to the Tribunal.

Held :

The Tribunal noted that the scheme of Chit Funds is
regulated by The Chit Funds Act, 1982 and S. 3 in Chapter I of the Chit Funds
Act provides that the provisions of the Act override all other laws,
memoranda, articles, etc. save as otherwise expressly provided in the Act. In
view of the non obstante clause the Tribunal held that the definitions of the
expression ‘discounts’, ‘dividends’, ‘prize amount’ as given in the said Chit
Funds Act will prevail over similar definition as found in the Income-tax Act.
The Tribunal held that in a scheme of chit fund there is neither any money
borrowed nor a debt incurred and since interest is defined in the Income-tax
Act as interest payable in any manner in respect of any monies borrowed or
debt incurred (including deposit) and in a chit fund there is neither any
money borrowed nor a debt incurred, the dividends paid by the foreman to the
subscribers of the chit cannot be said to be answering the definition of
interest. The Tribunal held that the demands created u/s.201(1) and
u/s.201(1A) were not justified. It upheld the order of the CIT(A) and
dismissed the appeals filed by the revenue.

 

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Income-tax Act, 1961 — S. 40(a)(ia) and S. 194C — Whether an agreement entered into by the assessee with distributors whereby revenue was shared was a works contract and therefore liable to TDS u/s.194C — Held, No.

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New Page 1

  1. 2009 TIOL 273 ITAT (Del.)


Competent Films Pvt. Ltd. v. ITO

ITA No. 3397/Del./2008

A.Y. : 2005-2006. Dated : 9-2-2009

Income-tax Act, 1961 — S. 40(a)(ia) and S. 194C — Whether
an agreement entered into by the assessee with distributors whereby revenue
was shared was a works contract and therefore liable to TDS u/s.194C — Held,
No.

Facts :

The assessee company was engaged in the business of running
of cinema hall, canteen and food courts. It had entered into a Memorandum of
Understanding (MOU) with M/s. Mukta Movies Distributors (Distributors) which
inter alia provided that — the assessee was to be a booking agent for
the cinema hall for three years; the assessee had exclusive rights to book
Hindi films for the said cinema and to run a certain number of shows daily as
per the local laws; the MOU also fixed the rate of admission to the cinema
hall; stated revenue at full capacity and the amount due to the assessee on a
weekly basis subject to the exceptions provided in the MOU.

The distributor raised a bill on the assessee under which
the daily collections were shown and after reducing the payment to be made to
the assessee for the cinema hall hired, a bill was raised for the balance by
the Distributor which bills were paid by the assessee. The Assessing Officer
(AO) held that the MOU was in the nature of a works contract and held the
assessee liable to deduct tax at source u/s.194C. Since the assessee had not
deducted tax on payments made to distributor pursuant to the said MOU, the AO
disallowed a sum of Rs.72,43,965 by invoking provisions of S. 40(a)(ia).

The CIT(A) upheld the order of the AO. Aggrieved, assessee
preferred an appeal to the Tribunal.

Held :

The Tribunal upon a close reading of the agreement held it
to be a profit sharing agreement. It further held that the agreement was not
for services rendered but for sharing the profits with the assessee. Following
the ratio of the decisions of Ahmedabad Bench of ITAT in Sunsel
Drive-in-Cinema (P.) Ltd. v. ITO, (2006) 5 SOT 64 (Ahd.) and Mumbai Bench
of ITAT in ITO v. Shrinagar Cinemas (P.) Ltd., (2008) 20 SOT 480 (Mum.)
it held that there was no works contract and, therefore, the assessee was not
liable to deduct any tax u/s.194C of the Act. The Tribunal found that the
distributor has only given the right to exhibit the films and the assessee had
only rendered the services of exhibiting the films and therefore the question
of deduction of tax by the assessee did not arise. The claim of the assessee
was allowed.

 

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Income-tax Act, 1961 — S. 158BFA — Whether for levy of penalty u/s.158BFA issuance of notice is mandatory — Held, Yes. Whether in the absence of issuance of pre-requisite notice, the entire penalty proceedings are to be held as illegal and without jurisdi

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New Page 1

  1. 2009 TIOL 300 ITAT Bang.


ITO v. H. E. Distillery Pvt. Ltd.

IT(SS)A No. 28 (Bang.)/2008

Block Period : 1-4-1990 to 18-1-2001 Dated : 30-1-2009

Income-tax Act, 1961 — S. 158BFA — Whether for levy of
penalty u/s.158BFA issuance of notice is mandatory — Held, Yes. Whether in the
absence of issuance of pre-requisite notice, the entire penalty proceedings
are to be held as illegal and without jurisdiction — Held, Yes.

Facts :

The assessee, in response to notice u/s158BC, filed return
for block period on 13-8-2001 admitting undisclosed income of Rs.73,80,526.
The AO assessed the undisclosed income at Rs.2,42,47,658 and initiated
proceedings for levy of penalty u/s.158BFA(2) on the ground that the assessee
failed to disclose the income and furnished inaccurate particulars of income.
Against the order assessing undisclosed income the assessee filed an appeal on
the ground that business loss suffered by the assessee during the block period
and depreciation have to be set off against undisclosed income. The CIT(A) and
the Tribunal decided the appeal against the assessee.

The assessee vide letter dated 15-12-2005 was asked to
offer explanation to the proposed penalty. No reply was received from the
assessee. The AO levied a minimum penalty of Rs.1,18,40,726.

The assessee filed an appeal to the CIT(A) and challenged
levy of penalty on the ground that no notice for initiation of penalty was
issued. The CIT(A) cancelled the penalty.

Aggrieved, the revenue preferred an appeal to the Tribunal
where on behalf of the Revenue it was inter alia contended that the assessment
order did mention that penalty proceedings u/s.158BFA(2) are initiated; the
assessee attended the proceedings for levy of penalty; during the penalty
proceedings when the AO was transferred the new AO did issue a notice before
imposing penalty. It was submitted that CIT(A) took a rigid and narrow view
that physical service of notice was a must before imposition of penalty for
concealment. The intention of the AO to levy penalty was never in doubt.

Held :

The Tribunal relying on the decision of the Supreme Court
in the case of 82 ITR 821, 61 ITR 147, 76 ITR 696, 168 ITR 705 and also on the
decision of the co-ordinate bench of the Tribunal in IT(SS)A. No.
21/Bang./2001 in the case of Nemichand held that issuance of notice is a
pre-requisite for assuming jurisdiction to levy penalty u/s.158BFA(2) and in
the absence of issuance of a pre-requisite notice, the entire penalty
proceedings were held to be illegal and without jurisdiction. It held that
CIT(A) was perfectly justified in canceling the penalty. The Tribunal
confirmed the order of CIT(A) and dismissed the appeal filed by the revenue.

 

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Income-tax Act, 1961 — S. 36(1)(v), S. 40A(7) and S. 263 — Whether it is necessary for CIT to make further inquiries before cancelling the assessment order of the AO — Held, No. Whether the CIT can regard an order as erroneous on the ground that the AO sh

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New Page 1

  1. 2009 TIOL 317 ITAT (Mad.) SB


Rajalakshmi Mills Ltd.
v. ITO

ITA No. 1074/Mds./1987

A.Y. : 1981-82. Dated : 24-4-2009

Income-tax Act, 1961 — S. 36(1)(v), S. 40A(7) and S. 263 —
Whether it is necessary for CIT to make further inquiries before cancelling
the assessment order of the AO — Held, No. Whether the CIT can regard an order
as erroneous on the ground that the AO should have made further inquiries
before accepting the statements made by the assessee in his return — Held,
Yes. Whether the word ‘erroneous’ in S. 263 includes cases where there has
been failure to make the necessary inquiries — Held, Yes. Whether it is
incumbent on the AO to investigate the facts stated in the return when
circumstances would make such an inquiry prudent and the word ‘erroneous’ in
S. 263 includes cases where there has been failure to make such an enquiry —
Held, Yes. Whether it is correct to say that the provision made by the
assessee in the accounts for the purposes of making contributions to approved
gratuity fund should be allowed despite the fact that there was no incremental
liability towards the gratuity due for the assessment year under consideration
— Held, No.

Facts :

For the A.Y. 1981-82 the balance sheet of the assessee
company reflected provision for gratuity at Rs.7,85,600 which sum was claimed
by the assessee, in its return of income, u/s.36(1)(v). The AO allowed the
same without making any discussion in the assessment order. The Commissioner
of Income-tax (CIT) assumed jurisdiction u/s.263 as in his opinion the order
was erroneous and prejudicial to the interest of the revenue.

The CIT found that the approved (sic actuarial) gratuity
liability as on 31-3-1981 and 31-3-1980 was Rs.55,35,469 and Rs.51,974,80
respectively. Hence, the amount payable as contribution to the fund was
Rs.3,37,989. The AO had allowed Rs.7,85,600. Accordingly, the CIT by relying
on the decision of the Apex Court in the case of Shree Sajjan Mills Ltd. (156
ITR 585) directed the AO to withdraw the excess allowance of Rs.4,47,611.

In an appeal to the Tribunal the assessee contended that
the conditions precedent for invoking S. 263 have not been satisfied and also
that it is entitled to claim deduction of Rs.7,85,600 being provision for
gratuity actually paid to an approved gratuity fund.

The President of the ITAT constituted a Special Bench to
consider the following questions :

(1) Whether the CIT was correct in invoking the
provisions of S. 263 and in withdrawing the claim of deduction of
Rs.7,85,600, allowed by the AO, being the amount actually paid to an
approved gratuity fund and in allowing incremental actuarial liability
worked out at Rs.3,37,989 ?

(2) Whether the assessee was entitled to claim deduction
of Rs.7,85,600 being the provision of gratuity in terms of S. 36(1)(v) of
the Act, actually paid to an approved gratuity fund on the facts and in the
circumstances of the case ?

(3) Whether the Appellate Tribunal’s order dated
21-6-1990 in ITA No. 529(Mds.)/87 rendered in the assessee’s own case for
A.Y. 1982-83 could be said to be an order rendered per incuriam and not
binding in view of non-consideration of correct legal position in this
regard ?


Held :

The Special Bench (SB) found that the AO had not made any
inquiries regarding the allowability of the sum of Rs.7,85,600 claimed by the
assessee as provision for gratuity actually paid to an approved gratuity fund.
The SB after considering the ratio of the decision of the Apex Court in the
case of Rampyari Devi Saraogi v. CIT, (67 ITR 84) (SC) held as under :

“It is not necessary for the CIT to make further
enquiries before cancelling the assessment orders of the AO. The CIT can
regard the order as erroneous on the ground that in the circumstances of the
case the AO should have made further inquiries before accepting the
statements made by the assessee in his return. The reason is obvious. Unlike
a Civil Court which is neutral in giving a decision on the basis of evidence
produced before it, an AO is not only an adjudicator but also an
investigator. He cannot remain passive in the face of a return which is
apparently in order but calls for further enquiry. It is the duty of the AO
to ascertain the truth of the facts stated in the return when the
circumstances of the case are such as to provoke inquiry. The meaning to be
given to the word ‘erroneous’ emerges out of this context. The word
erroneous would include cases where there has been failure to make the
necessary inquiries. It is incumbent on the AO to investigate the facts
stated in the return when the circumstances would make such an inquiry
prudent and the word ‘erroneous’ in S. 263 includes the failure to make such
an enquiry. The order becomes erroneous because such an enquiry has not been
made and not because there is anything wrong with the order if all the facts
stated therein are assumed to be correct.”

Accordingly, it held that the order passed by AO was
erroneous and prejudicial to the interest of the revenue and that the
conditions precedent for exercising jurisdiction u/s.263 did exist in the
facts of the present case.

As regards the contention of the assessee that since the
provision was made by the assessee for the purpose of payment of a sum by way
of contribution towards the approved gratuity fund, the amount of provision
should be allowed within the meaning of S. 40A(7)(b), the SB following the
ratio of the decision of Madras High Court in CIT v. Loyal Textile Ltd.,
(231 ITR 573) held that it would be incorrect to say that provision made by
the assessee in the accounts for the purposes of making contributions to
approved gratuity fund should be allowed u/s.40A(7)(b)(i) despite the fact
that there was no incremental liability towards the gratuity due for the
assessment year under consideration. It held that an expenditure which is
deductible for income-tax purposes is towards a liability actually existing at
the time, but setting apart money which might become expenditure on the
happening of an event is not expenditure allowable under the law. Since the
assessee did not place anything to demonstrate the nature of liability nor was
there any material to come to a conclusion that the liability was an
ascertained liability the contention of the assessee was rejected.

S. 28 and S. 37(1) — Exchange loss arising on application of AS-11 — Allowable as business loss/expenditure — Ultimate utilisation of fund for investment purpose would not affect the al-lowability of loss.

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  1. Karisma Kapoor v. ACIT



ITAT ‘A’ Bench, Mumbai

Before D. K. Agarwal (JM) and

B. Ramakotaiah, (AM)

ITA No. 6780/Mum./2008

A.Y. : 2004-05. Decided on : 20-10-2009

Counsel for assessee/revenue : K. Gopal/

Virendra Ojha

S. 28 and S. 37(1) — Exchange loss arising on application
of AS-11 — Allowable as business loss/expenditure — Ultimate utilisation of
fund for investment purpose would not affect the al-lowability of loss.

Per B. Ramakotaiah :

Facts :

The assessee was a film actress. She had shown her
professional receipts to the tune of Rs.6.12 crore and declared a total income
of Rs.6.04 crore. During the course of assessment the AO noticed that the
assessee had claimed foreign exchange loss of Rs.7.25 lacs. As per the
assessee the loss was arising out of exchange rate difference in the EEFC
account. The assessee had a large amount of dollar fund in the account at the
beginning of the year and after deposits during the year into the same
account, it was closed and converted into Indian Rupees. On conversion, due to
reduction in the value of dollar vis-à-vis Rupee, there was a
loss/reduction in the professional income accounted, which was claimed as a
loss.

This method of accounting, which was based on Ac-counting
Standard 11, was consistently followed by the assessee and the Department had
also assessed the profits earned therefrom in earlier years. However, during
the year, the AO disallowed the exchange loss, holding that the funds after
conversion were utilised for investing in tax relief bonds/fixed deposits.
Thus, since according to the AO, the utili-sation
of foreign currency balance was not for profes-sional purposes, the exchange
loss was disallowed.

Before the Tribunal the Revenue contended that the
Assessing Officer’s finding was correct that the amount was not utilised for
professional activities. It also relied on the decision of the Calcutta High
Court in the case of invest import and contended that the capital loss cannot
he allowed.

Held :

According to the Tribunal the facts do indicate that the
assessee had deposited her professional receipts in the said EEFC account.
Secondly, as noted by the CIT(A), the assessee was consistently following the
Mercantile system of accounting and also AS-11. Further, according to it, the
ultimate utilisation of the professional receipts after its conversion from
dollar to Indian Rupee was not material (relevant). The subsequent utilisation
of the amount cannot convert such loss as capital loss. According to it, the
Calcutta high Court decision relied on by the revenue, was distinguishable by
facts and hence, cannot be applied to the facts of the assessee’s case.

If further observed that the CIT(A) also erred in
up-holding that it was a notional loss. This was an actual loss after
conversion of balance in US $ into Indian Rupee. Accordingly, it was held that
the loss was an allowable loss against professional receipts.

Case referred to :


CIT v. Invest Import, 137 ITR 310 (Cal.)



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S. 28 and S. 45 — Gains arising to the society on sale of 50% of the areas constructed by the builder, at his own cost, by utilising additional FSI received by society from BMC in lieu of roads taken over by BMC are chargeable to tax as Capital Gains.

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  1. ACIT v.




Sai Ashish Bandra Co-op. Hsg. Soc. Ltd.

ITAT ‘E’ Bench, Mumbai

Before R. K. Gupta (JM) and A. K. Garodia (AM)

ITA No. 5232/Mum./2004

A.Y. : 2000-2001. Decided on : 22-8-2007

Counsel for revenue/assessee : K. Kamakshi/

Vijay Mehta

S. 28 and S. 45 — Gains arising to the society on sale of
50% of the areas constructed by the builder, at his own cost, by utilising
additional FSI received by society from BMC in lieu of roads taken over by BMC
are chargeable to tax as Capital Gains.

Per R. K. Gupta :

Facts :

The assessee co-operative society was formed in 1971. The
land on which the building of the society stood had roads on two sides. The
BMC acquired some part of the society’s land in 1991 and again in 1994 for the
purposes of road widening and as compensation therefor granted additional FSI
to the society which the society decided to utilise on existing building.
Accordingly, the society entered into an Agreement with the builder pursuant
to which the builder agreed to put up the entire construction at his own cost
and in turn would be entitled to 50% of the area of the constructed flats. The
society was entitled to the balance 50% of the area of the constructed flats.
The construction was completed in 1999. Upon completion of construction, the
flats coming to the share of the society were sold for Rs.1,06,18,000. The
sale consideration of flats was returned by the society as long term capital
gains. The AO reassessed this amount under the head ‘Income from Business’ on
the ground that the society did not have funds for construction and therefore
it indirectly has obtained loan from the builder and has instructed the
builder for appointing architect for getting various sanctions of plans and
approvals to construct the flats. These factors, according to him, were
indicative that the society was engaged in a trade with profit motive.

Aggrieved, the society preferred an appeal to the CIT(A)
where it contended that the income be assessed as long term capital gains or
alternatively, if it is assessed as business income, then, in terms of S.
45(2), fair market value of FSI on date of conversion should be taken as cost
for computing profits of the said business. The CIT(A) held that the income
was chargeable to tax as ‘Income from Capital Gains’.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

There is no evidence on record that the amount spent by the
assessee was loan. The builder was to put up construction at its own cost and
in turn would be entitled to 50% of the area of the constructed flats and
after completion of the project the remaining 50% of the area shall be given
to the society which can be sold by the society. BMC had allowed FSI to the
society in lieu of land taken over by the BMC. The Tribunal concurred with the
findings and decision of the CIT(A) viz. that there were no business
considerations in undertaking the transaction by the assessee, the assessee
could have either sold FSI or utilised it by constructing additional areas; by
deciding to utilise it in construction of additional areas it had maximised
its gains but maximisation of gains cannot by itself impress a transaction
with the character of business; the society did not have profit sharing
arrangement with the builder; the transaction under consideration cannot be
held to be a business transaction.

The Tribunal dismissed the appeal filed by the Revenue.



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S. 50C in the event of the assessee contending that valuation as done by Stamp Valuation Authority is not acceptable to him and asking the Assessing Officer to make a reference to the Valuation Officer, it is mandatory on the part of the Assessing Officer

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  1. Kalpataru Industries v. ITO



ITAT ‘H’ Bench, Mumbai

Before S. V. Mehrotra (AM) and

P. Madhavi Devi (JM)

ITA No. 5540/Mum/2007

A.Y. : 2005-06. Decided on : 24-8-2009

Counsel for assessee/revenue : K. Shivram/

Pradip Hedaoo

S. 50C in the event of the assessee contending that
valuation as done by Stamp Valuation Authority is not acceptable to him and
asking the Assessing Officer to make a reference to the Valuation Officer, it
is mandatory on the part of the Assessing Officer to make such a reference
notwithstanding that the assessee has not filed an appeal against such
valuation.

Per P. Madhavi Devi :

Facts :

The assessee, a partnership firm, filed its return of
income declaring total income of Rs.1,75,108. The assessee had sold its
factory premises for a consideration of Rs.15,05,000 and had shown profit on
sale of factory premises amounting to Rs.10,94,721. The market value of the
factory premises as per stamp valuation authorities was Rs.43,98,500. The
assessee drew the attention of the AO to the observations of the Bombay High
Court while admitting the petition filed by Practicing Valuers Association
and Others v. State of Maharashtra, (Writ Petition No. 2027 of 2001) and
contended that the valuation given in the stamp duty ready reckoner cannot be
universally accepted. It was also submitted that it had not preferred an
appeal against the valuation as done by Stamp Valuation Authorities since the
purchaser had already paid stamp duty. However, the assessee requested the AO
to make a reference to the valuation cell of the Department as per the
provisions of S. 50C. The AO held that the reference to the valuation officer
is optional and since the assessee had not objected to the value adopted by
the stamp valuation authority there was no need to refer the matter to the
valuation officer. He, accordingly, adopted the value of the property at
Rs.43,98,500 and computed short term capital gain at Rs.35,89,503.

The CIT(A) confirmed the order passed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal
where it mainly argued that the matter be sent back to the file of the AO with
a direction to refer the same to the valuation officer for valuing the
property at market rate. It was also pointed out that the assessee was not the
owner of the land but was only a lessee and capital gain has arisen on
transfer of leasehold rights. It was also contended that in the case of
assignment of rights after obtaining necessary permission, S. 50C is not
applicable.

Held :

The assessee had transferred leasehold rights and had
itself offered capital gain on the same. S. 50C is a special provision for
determining full value of consideration in certain cases. The assessee while
making the claim before the AO has to satisfy him that the valuation adopted
by the stamp valuation authority is not based on sound criteria. In such a
case, the AO is bound to refer the matter to the DVO for arriving at the fair
market value of the property. The assessee had vide its letter filed with the
AO relied upon two decisions to the effect that the valuation given in the
stamp duty ready reckoner cannot be universally adopted. In such cases, it is
necessary for the AO to refer the matter to the DVO. The Tribunal has in
ITO v. Smt. Manju Rani Jain, 24 SOT 24 (Del.) and Mehraj Baid v. ITO,
(2008) 23 SOT 25 (Jodh.) held that the word ‘may’ used in S. 50C should be
read as ‘should’ and the AO has no discretion but to refer the matter to the
DVO for the valuation of the property. The Tribunal remanded the issue to the
file of the AO with a direction to refer the valuation of the property to the
DVO and determine the value in accordance with law.

The assessee’s appeal was allowed.


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S. 271(1)(c) — Penalty for concealment of income — Additions/disallowances sustained by the appellate authority — Whether sufficient ground for levy of penalty — Since full disclosure of particulars of transactions were made and additions were on ac-count

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  1. ACIT v. Enpack Motors Pvt. Ltd.




ITAT ‘E’ Bench, Mumbai

Before D. Manoharan (VP) and

R. K. Panda (AM)

ITA No. 914/Mum./2008

A.Y. : 2004-05. Decided on : 23-10-2009

Counsel for revenue/assessee : S. K. Singh/

Arvind Dalal

S. 271(1)(c) — Penalty for concealment of income —
Additions/disallowances sustained by the appellate authority — Whether
sufficient ground for levy of penalty — Since full disclosure of particulars
of transactions were made and additions were on ac-count of different view
adopted, penalty cannot be imposed.

Per R. K. Panda :

Facts :

The assessee was a company incorporated in 1983. During the
year it had not carried on the business and it had returned a loss of Rs.1.41
crore. On account of the flood which took place on 26/27 July in Mumbai, all
its records and documents got destroyed and it was not able to produce
documents asked for by the AO. However, a copy of the police complaint and the
certificate issued by the Chartered Engineer evaluating the bad impact of the
flood and loss of material were furnished by the assessee. The AO however,
completed the assessment u/s.144 determining income at Nil after setting off
carried forward loss of Rs.11.15 lacs. The major disallowances made were as
under :


à
Stock valuation : A plot of land of Rs.6.56 crore, held as stock in
trade, was mortgaged to a bank. In order to recover its dues, the bank had
initiated the process of the sale of plot and the sale price mentioned was
Rs.5.2 crore. In view of the same, the assessee had valued the plot of land
at the said price thereby resulting into a loss of Rs.1.35 crore. The AO was
not satisfied with the explanation and disregarded the downward valuation of
stock;


à
Depreciation : Since the Company was defunct, according to the AO, it
cannot be allowed depreciation of Rs.9.74 lacs.


The assessee did not prefer any appeal when the AO’s order
was upheld by the CIT(A). The AO initiated penalty proceedings and after
hearing, held that the assessee was in default u/s.271(1)(c) read with
Explanation 4(a). He accordingly, levied penalty of Rs.54.46 lacs being the
minimum penalty @100% of tax sought to be evaded.

The CIT(A) on appeal cancelled the penalty levied as
according to him, no inaccurate particulars were furnished by the assessee and
the disallowance was not based on any independent evidence brought on record
by the AO.

Before the Tribunal the Revenue submitted that the
non-filing of any appeal against the assessment order amounted to the
acceptance by the assessee that it had furnished inaccurate particulars.
Further, relying on the decision of the Supreme Court in the case of
Dharmendra Textiles Processors & Others, it contended that mens rea was not an
essential condition for levying of penalty.

Held :

The Tribunal noted that the assessee had made full
disclosure of all the particulars relating to the transactions in its accounts
filed with the Income-tax Department. The additions were made merely because
the AO did not share the views of the assessee. It was not disputed that the
plot of land was treated as stock in trade and was sold at a loss. As regards
claim for depreciation, it was noted that there were diverse decisions, both
for and against the assessee when the business was discontinued. As regards
the other expenses disallowed, it agreed with the assessee that in order to
maintain the corporate entity, certain expenses need to be incurred. Thus,
according to it, the decision of the Supreme Court in the case of Dharmendra
Textiles was not applicable to the facts of the case of the assessee. Further,
according to it there was sufficient force in the assessee’s submission that,
in view of the huge amount of brought forward losses, no appeal was filed
against the CIT(A)’s order. For the reasons stated as above, it was held that
the CIT(A) was justified in cancelling the penalty.

Case referred to :

Dharmendra Textiles Processors & Others, 306 ITR 277 (SC).



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S. 70 read with S. 10A — Exemption u/s.10A was of income earned without setting off of loss of non-STPI unit — Loss of the non-STPI unit is allowed to be carried forward.

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  1. ACIT v. Honeywell Technology Solutions Lab
    Pvt. Ltd.




ITAT ‘A’ Bench, Bangalore

Before Shailendra Kumar Yadav (JM) and

A. Mohan Alankamony (AM)

ITA Nos. 344 & 345/Bang./2009

A.Ys. : 2003-04 & 2004-05. Decided on : 4-8-2009

Counsel for revenue/assessee :

Vishweshwar Mudigonda/Preeti Garg

S. 70 read with S. 10A — Exemption u/s.10A was of income
earned without setting off of loss of non-STPI unit — Loss of the non-STPI
unit is allowed to be carried forward.

Per Shailendra Kumar Yadav :

Facts :

The assessee, a wholly owned subsidiary of Honeywell, USA,
was engaged in the business of performing high quality software development,
offer testing and support services to other units of the Honeywell group. One
of its units was a 100% software development export oriented undertaking under
the Software Technology Parks Scheme of Government of India. One of the issues
before the tribunal was whether the exemption u/s.10A was of the income earned
without setting off of loss of the non-STPI unit.

Held :

Analysing the provisions of S. 10A, the tribunal noted
that :


à
The provisions of S. 10A were placed under Chapter III which only relates to
‘Incomes which do not form part of total income’;


à
The word ‘such’ refers to the profits and gains of the undertaking which is
engaged in the export of articles or things or computer software; and


à
The word ‘an’ which qualifies the word ‘undertaking’ means that it refers to
a single undertaking.


Referring to the provisions governing computation of
business income, it was noted that as per S. 29, profits and gains of business
are to be computed in accordance with the provisions contained u/s.30 to
u/s.43D. Thus, the provisions of S. 10A do not form part of the sections
mentioned in S. 29. It further noted that the provisions of S. 70 govern
setting off of a loss from one source against income from another source under
the same head of income. Therefore, it observed that since S. 10A was not
forming part of the sections mentioned in S. 29, business losses of the
undertaking whose income was not exempt u/s.10A cannot be set off against the
profits of the undertaking whose income is exempt u/s.10A. Further, relying on
the decisions of the Bangalore tribunal in the cases of Yokogawa India Ltd.
and in the case of Nous Infosystems Pvt. Ltd., the tribunal upheld the
decision of the CIT(A) directing the AO to allow exemption u/s.10A without
setting off of loss of non-STPI unit and consequently, allowing the carry
forward of such losses of non-STPI unit.

Cases referred to :



1. ACIT v. Yokogawa India Ltd., 111 TTJ 548/13 SOT
470 (Bang.);

2. Nous Infosystems Pvt. Ltd. v. ITO, (ITA No.
1042/ Bang./2007 dated 3-6-2008)



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Social Security Agreement signed with Belgium effective from 1-9-2009

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Spotlight – Part D

Part D :
Miscellaneous





  1. Social Security Agreement signed with Belgium effective
    from 1-9-2009    .


The Government of India had signed a Social Security
Agreement (‘SSA’) with the Government of Belgium on 3 November 2006 to avoid
the hardship of double payment of the social security contribution by
employees and employers in India and Belgium having cross-border operations in
both countries.

It has now been announced that the SSA shall come into
effect from 1st September 2009. Further, the Government has issued a handbook
and FAQs clarifying a few terms/aspects of the SSA.

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Mandatory E-filing of returns for all periods from April-2005. Notification No. VAT/AMD-1007/IB/Adm-6, dated 4-3-2009

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13 Mandatory E-filing of returns for all periods from April-2005.
Notification No. VAT/AMD-1007/IB/Adm-6, dated 4-3-2009 :


E-filing has been made mandatory w.e.f. 1-3-2009. of all the pending returns
in respect of any of the periods starting on or after 1st April, 2005 and
ending on or before 30th September, 2008 including fresh and revised
returns.


 

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S. 194J r.w. S. 40(a)(ia) — S. 194J does not apply to fees paid by stockbroker to exchanges.

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30 (2008) 25 SOT 440 (Mum.)


Kotak Securities Ltd. v. Addl.CIT

ITA No. 1955 (Mum.) of 2008

A.Y. : 2005-06. Dated : 26-8-2008

S. 194J read with S. 40(a)(ia) of the Income-tax Act, 1961 —
S. 194J does not apply to transaction fees paid by stockbroker to stock
exchanges.

For the relevant assessment year, the Assessing Officer
invoked S. 40(a)(ia) in respect of transaction charges paid by the
assessee-broker to the stock exchanges and disallowed the transaction charges
paid on account of non-deduction of tax at source. The CIT(A) upheld the
disallowance.

The Tribunal, relying on the decisions in the following
cases, deleted the disallowance :

(a) Techno Shares & Stocks Ltd. v. ITO, [ITA No. 778
(Mum.) of 2004]

(b) Tata Warehouse Securities v. Dy. CIT, [ITA No.
6600 (Mum.) of 2004]

(c) Kandwalla Finance Ltd. [ITA No. 6986 (Mum.) of 2002]

(d) Manjesh J. Patel [ITA No. 3710 (Mum.) of 1997]

(e) Peninsular Capital Market Ltd. v. Asst. CIT,
(2008) 19 SOT 421 (Cochin)

(f) Omprakash B. Salicha [ITA No. 11 (Mum.) of 2007, dated
12-3-2008]

(g) Skycell Communications Ltd. v. Dy. CIT, (2001)
251 ITR 53/119 Taxman 496 (Mad.)

 

The Tribunal noted as under :

(1) To call a payment as ‘fees for technical services’ it
should have been paid in consideration of rendering by the recipient of
payment of (a) Managerial Service or (b) Technical or Consultancy Service.

(2) The stock exchanges merely provide facility to its
members to purchase and sell shares, securities, etc., within the framework of
its bye-laws. In the event of dispute it provides for mechanism for settlement
of dispute. It regulates conditions subject to which a person can be a member
and as to when and in what circumstances membership can be transferred,
cancelled, suspended, etc. The exchange provides for a place where the members
can meet and transact business. The stock exchanges do not render any
managerial service, nor do they render any technical consultancy service.

(3) The transaction fee paid is on the basis of volume of
transaction effected by a member. The transaction fee is not paid in
consideration of any service provided by the stock exchange. It is a payment
for use of facilities provided by the stock exchange and such facilities are
available for use by any member.

(4) Therefore, the transaction fee paid could not be said
to be a fee paid in consideration of any technical services rendered by the
stock exchange to the assessee. The provisions of S. 194J were, thus, not
attracted.

 


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S. 72A r.w. S. 35 — On demerger, unabsorbed capital expenditure on research u/s.35(1)(iv) not different from unabsorbed depreciation for S. 72A(4) and assessee entitled to carry forward unabsorbed research expenditure.

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29 (2008) 25 SOT 46 (Mum.)


ITO v. Mahyco Vegetable Seeds Ltd.

ITA No. 6171 (Mum.) of 2004

A.Y. : 2001-02. Dated : 28-7-2008

S. 72A read with S. 35 of the Income-tax Act, 1961 — On
demerger, unabsorbed capital expenditure on scientific research u/s.35(1)(iv) is
not different from unabsorbed depreciation for purposes of S. 72A(4) and,
therefore, assessee is entitled to carry forward unabsorbed scientific research
expenditure.

The assessee-company came into effect following demerger of a
division of ‘M’ Ltd. The assessee claimed the benefit of S. 72A(4) read with S.
35(4) in respect of unabsorbed depreciation and expenditure on scientific
research. The AO allowed the benefit of S. 72A(4) in respect of unabsorbed
depreciation. However, benefit of carry forward in respect of expenditure on
scientific research was denied. The CIT(A) allowed the assessee’s claim.

The Tribunal upheld the CIT(A)’s order and allowed the
unabsorbed capital expenditure on scientific research to be carried forward.

The Tribunal noted as under :

(a) ‘Unabsorbed depreciation’ for the purpose of S. 72A has
been defined in Ss.(7) to mean so much of the allowance for depreciation of
the demerged company which remains to be allowed and which would have been
allowed to the demerged company under the provisions of this Act if the
demerger had not taken place.

(b) In S. 35(1)(iv) it can be seen that the unabsorbed
capital expenditure on scientific research has to be dealt with in the same
manner as the unabsorbed depreciation u/s.32(2). There is no difference in the
depreciation allowance and the allowance of capital expenditure on scientific
research u/s.35 but for the fact that the deduction which would otherwise have
been spread over a number of years in the form of depreciation is allowed in
the year of incurring of such capital expenditure u/s.35.

(c) On a conjoint reading of these provisions the
inescapable conclusion which follows is that the unabsorbed capital
expenditure of scientific research of the demerged company has been considered
as similar to and at par with the unabsorbed depreciation. The amount
representing the unabsorbed capital expenditure on scientific research
u/s.35(1)(iv) was not different from the unabsorbed depreciation for the
purposes of S. 72A(7) and, hence, the assessee was entitled to carry forward
the unabsorbed scientific research expenditure.

 


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S. 41(1) — Remission of principal of loan cannot be waiver of trading liability and not within purview of S. 41(1); remission not remission of depreciation claimed by assessee on assets acquired by loan amount

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28 (2008) 118 TTJ 563 (Visakha)


Coastal Corporation Ltd. v. Jt. CIT

ITA No. 407 (Vizag.) of 2006

A.Y. : 1998-99. Dated : 30-5-2008

S. 41(1) of the Income-tax Act, 1961 — Remission of principal
portion of loan cannot be termed as waiver of trading liability and does not
fall within the purview of S. 41(1); remission of loan would not amount to
remission of depreciation claimed by the assessee on the assets acquired by
availing of the loan.

 

During the relevant assessment year, the company had, under
the Rehabilitation Scheme of the Government of India, opted for a one-time
settlement of term loans and interest. The reduction of principal amount payable
was credited to Capital Reserve. The waiver of the interest portion was
reflected as income and offered to tax. The Assessing Officer considered the
same in the assessment.

 

Subsequently, after the expiry of four years, a notice
u/s.148 was issued in respect of depreciation claimed by assessee on the fixed
assets in respect of which the term loan was reduced. The Assessing Officer held
that the claim of deduction towards depreciation is in the nature of expenditure
as it reduced the liability of the assessee to pay income-tax on such amount
and, thus, upon waiver of the loan liability which was utilised for purchase of
the asset, the consequent depreciation claimed thereon can be said to have been
recovered by the assessee and, therefore, provisions of S. 41(1) of the Act are
applicable. The CIT(A) upheld the disallowance.

 

The Tribunal, relying on the decisions in the following cases
held that remission of principal portion of loan does not fall within the
purview of S. 41(1) :

(a) Polyflex (India) (P) Ltd. v. CIT, (2002) 177 CTR
(SC) 93; (2002) 257 ITR 343 (SC)

(b) CIT v. Phool Chand Jiwan Ram, (1981) 131 ITR 37
(Del.)

(c) CIT v. Cochin Co. (P) Ltd., (1990) 81 CTR (Ker.)
115; (1990) 184 ITR 230 (Ker.)

 

The Tribunal noted as under :

1. As per the definition of ‘Actual Cost’ in S. 43(1), the
only deduction permissible from the actual cost is the amount which has been
met by any other person or authority. The words ‘which has been met by another
person or authority’ would mean the non-refundable amount given by any other
person or authority for the purpose of meeting the cost of the asset.

2. If the term loan is utilised for acquiring any asset, it
cannot be termed as ‘meeting of a portion of cost of the asset’.

3. There is no force in the contention of the Revenue that
in view of nexus between the term loan and acquisition of assets, remission of
loan will amount to remission of depreciation.

4. The principal portion of loan amount, which has been
waived, has not been claimed as deduction in any of the years. Hence, waiver
of principal portion of loan cannot be termed as waiver of trading liability
and, hence, the second clause of S. 41(1), relating to trading liability,
shall not be applicable in this case.


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S. 32(1)(i) and (ii) — Catering right acquired for consideration was tool for business and eligible for depreciation u/s.32(1)(ii).

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27 (2008) 118 TTJ 344 (Mum.)


Skyline Caterers (P) Ltd. v. ITO

ITA No. 2965 (Mum.) of 2007

A.Y. : 2003-04. Dated : 28-12-2007

S. 32(1)(i) and (ii) of the Income-tax Act, 1961 — Right of
catering acquired for a consideration was a tool to carry on business and
eligible for depreciation u/s.32(1)(ii).

 

As per agreement dated 16-8-2000, the assessee paid Rs.27
lacs for acquiring the catering business for HLL along with equipment, etc.
lying at HLL canteen and debited the same to ‘Goodwill’ account in its books.
Depreciation @ 25% claimed by the assessee was disallowed by the Assessing
Officer on the following grounds :

(a) Goodwill does not find place in S. 32 as part of
intangible assets, which included only know-how, patents, copyrights,
trademarks, etc.

(b) The expression ‘similar nature’ in S. 32(1)(ii) would
not include the goodwill.

 

The assessee’s appeal did not find favour with the CIT(A) who
upheld the disallowance on the grounds that :

(a) the assessee had not acquired any commercial right.

(b) the entire payment was in fact on account of
non-compete clause which amounted to capital expenditure not covered by S.
32(1)(ii) of the Act.

 

The Tribunal, applying the decision in the case of
Kedarnath Jute Mfg. Co. Ltd. v. CIT, (1971) 82 ITR 363 (SC), held in favour
of the assessee. The Tribunal noted as under :

1. The combined reading of all the clauses and the preamble
of the agreement reveals that the assessee had paid the sum of Rs.25 lacs for
acquiring all the rights under the contract between the first party and HLL as
well as certain assets belonging to the first party. On the other hand, the
sum of Rs.2 lacs has been paid on the ground that the first party shall not
compete with the assessee either by himself or through his agents in any
business of catering at HLL canteen.

2. The payment of Rs.25 lacs was specifically made for
acquiring all the rights under the catering contract between R and HLL and for
acquiring articles and paraphernalia belonging to the first party which were
lying in the canteen.

3. Since the payment related to the acquisition of rights
under the contract, it cannot be said that the payment was either on account
of goodwill or on account of non-compete clause.

4. Merely because the assessee showed the said payment on
account of goodwill in the books of accounts, no adverse inference can be
drawn against the assessee.

5. A perusal of S. 32(1)(ii) shows that the Legislature has
specified certain intangible assets on which depreciation can be claimed,
namely, know-how, patents, copyrights, trademarks, licences, franchises. These
specific intangible assets are followed by the expression ‘any other business
or commercial rights of similar nature’. In such a situation, the rule of
ejusdem generis would apply. The general words take the colour from the
specific words. The specific words in the above Section reveal the similarity
in the sense that all the intangible assets specified are tools of the trade
which facilitate the carrying on of the business.

6. If this test is applied, then the rights acquired by the
assessee under the agreement would fall within the expression mentioned above
since the catering business at HLL canteen could be carried on only with the
help of such rights under the contract and, consequently, the assessee would
be entitled to depreciation.

7. The articles and paraphernalia lying in the canteen of
HLL acquired by the assessee, being tangible assets, would be eligible for
depreciation under clause (i) of S. 32(1) and, therefore, their value will
have to be ascertained by the Assessing Officer and the balance amount shall
be allocated for the intangible asset for the purpose of granting depreciation
under clause (ii) of S. 32(1).

 


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Assessment done u/s.16(3) — Whether it can be done after 4 years from end of A.Y. without assessee’s failure to disclose facts — Held, No.

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26 (2008) 303 ITR (AT) 145


C. K. Govindankutty Nair v. WTO


A.Ys. : 1989-90 to 1991-92. Dated : 31-5-2006

Where the original assessment has been completed u/s.16(3),
whether reassessment can be done after expiry of 4 years from the end of
assessment year without assessee’s failure to disclose facts — Held, No.

 

For A.Y. 1989-90, the assessee has adopted a particular value
of land (with area of 40 cents) and building for determining value of his
interest in the firm. Subsequently he filed a revised return to avail the
benefit of valuation under Schedule III read with S. 7(2) and declared a much
lower value of the said land and building. The Assessing Officer accepted such
lower valuations. The said firm was dissolved in 1986 and the Assessing Officer
held that assessee’s share — 10.580 cents of land and building was distinctly
identifiable and hence valuation of entire plot of 40 cents and building as one
unit resulted in escapement of wealth. The Assessing Officer initiated
reassessment u/s.17 which was upheld by the Commissioner (Appeals).

 

On further appeal by the assessee, the ITAT held that :

1. S. 17 of the Wealth Tax Act is analogous to S. 147 of
the Income-tax Act.

2. Once assessment is completed u/s.16(3) of the Act, no
action can be taken by the Assessing Officer after the expiry of 4 years from
the end of the assessment year, unless

(a) there is a failure on the part of the assessee to
make a return under S. 14 or S. 15 or in response to a notice U/ss.(4) of S.
16 or S. 17(1); or

(b) the assessee fails to disclose fully and truly all
material facts necessary for his assessment.

3. A perusal of the assessment order clearly showed that
the fact of dissolution of the firm and the method of valuation was duly
disclosed before the Assessing Officer and he has applied his mind on the said
facts at the time of framing the original assessment.

4. Reassessment cannot be initiated on mere change of
opinion of the Assessing Officer. Therefore the reassessment proceedings
initiated by the Assessing Officer u/s.17 of the Act need to be cancelled.

 

Case relied upon :

(i) CIT v. Foramer France, (2003) 264 ITR 566 (SC)

 


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Whether claim for deduction made for first time before Commissioner (Appeal) is to be considered by him — Held, Yes.

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25 (2008) 303 ITR (AT) 110 (Cochin)


Thomas Kurian v. ACIT

A.Y. : 1999-2000. Dated : 5-5-2006

Whether a claim for deduction made for the first time before
the Commissioner (Appeal) is to be considered by him — Held, Yes.

The assessee, an exporter, did not claim deduction u/s.80HHC
in the return of income and not even before the Assessing Officer. Such claim
was made for the first time before the Commissioner (Appeals), who rejected the
claim.

On assessee’s appeal, the ITAT held that :

(i) Being a quasi-judicial authority, the Assessing Officer
must act in a fair and not in a partisan manner. He is duty bound to determine
the correct tax liability of the assessee.

(ii) In discharging such duty, he is bound to consider all
the deductions and exemptions available to the assessee.

(iii) When the facts were available with the Assessing
Officer that the assessee was in the export business of seafoods, he should
have asked the assessee why deduction u/s.80HHC has not been claimed.

(iv) The Commissioner (Appeal) should have asked for a
remand report from the Assessing Officer to verify the claim of deduction and
then decide the issue in accordance with law. He cannot plainly refuse to
consider a legal claim made by the assessee.

(v) The judgment of a larger Bench of Supreme Court in the
case of National Thermal Power Co. Ltd. v. CIT, (229 ITR 383) should
prevail over the judgment of Division Bench in the case of Stepwell Industries
Ltd. (228 ITR 171). Hence the Department cannot reject the assessee’s claim by
relying on Stepwell Industries case.

Based on the above reasonings, the ITAT restored the matter
to the Assessing Officer for considering the assessee’s claim for deduction
u/s.80HHC in accordance with law.

Cases referred to :


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

(ii) Stepwell Industries Ltd., 228 ITR 171

 


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Whether CIT can pass order u/s.263 on grounds different from those in notice for revision — Held, No

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24 303 ITR (AT) 7


Colorcraft v. ITO (Mum.)

A.Y. : 2000-01. Dated : 12-5-2006

Whether the CIT can pass order u/s.263 on grounds different
from those specified in the notice issued for initiating revision proceedings —
Held, No.

 

The assessee filed its return for A.Y. 2000-01 claiming
deduction u/s.80HHC, which was allowed by the Assessing Officer during
assessment u/s.143(3). Subsequently, the Commissioner issued notice u/s. 263.
One of the grounds for revision stated in the notice was that deduction
u/s.80HHC was allowed on export profits including duty drawbacks which did not
qualify for deduction u/s.80HHC. However, subsequently a revision order was
passed holding that excessive deduction u/s.80HHC was allowed for 3 reasons :

(i) Export incentive should have been excluded in entirety
instead of 90%.

(ii) Excise Refund and Sales Tax Set-off should have been
included in the total turnover, and

(iii) Excise Refund and Sales Tax Set-off should have been
excluded from export profits.

 

On assessee’s appeal against the above order of revision
u/s.263, the ITAT held that :

(a) Before assuming jurisdiction u/s.263, the assessee
should be given an opportunity of being heard, by issue of a show-cause
notice.

(b) A person, who is required to show cause against a
proposed action, must know the basis of the proposed action. Then only the
opportunity granted will be an effective opportunity.

(c) There must be a nexus between the reasons stated in the
notice and the order passed u/s. 263.

 

Applying the above principles, the ITAT held that since in
the instant case, notice was issued for excluding duty drawback from the quantum
of deduction u/s.80HHC, but the revision order was passed on 3 altogether
different grounds, the revision order was not valid.

 

Cases referred to :


(i) Bagsu Devi Bafna v. CIT, (1966) 62 ITR 506
(Cal.)

(ii) CIT v. G. K. Kabra, (1995) 211 ITR 366 (AP)

 


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Section 244/244A, Proviso to S. 115JAA and Circular No. 763 issued by CBDT — Income-tax Act, 1961 — Assessment Year 2003-04 — Whether where after giving credit for MAT paid in earlier years, there is still tax payable and further credit is given to TDS an

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  1. 2009-TIOL-215-ITAT-MAD

Hyundai Motor India Ltd. vs. DCIT

A.Y. : 2003-2004.

Date of Order : 21.11.2008

Section 244/244A, Proviso to S. 115JAA and Circular No. 763
issued by CBDT — Income-tax Act, 1961 — Assessment Year 2003-04 — Whether
where after giving credit for MAT paid in earlier years, there is still tax
payable and further credit is given to TDS and Advance Tax, can refund, if
any, be said to have been originating from payment of Advance Tax or credit of
TDS —Held : Yes. Whether such a refund becomes entitled to interest in terms
of S. 244 and S. 244A —Held : Yes.

 

Facts :

Vide an order passed u/s. 154 of the Act, the Assessing
Officer (AO) granted credit for MAT at Rs.6,36,82,480. After having granted
credit for MAT the AO gave credit for TDS and Advance Tax and there was a net
refund due to the assessee. No interest was granted on such refund due to the
assessee.


The CIT(A) rejected the claim of the assessee on the basis
of Circular No. 763, dated 18.2.1998, which clarifies that credit allowed
against MAT will not bear any interest.


Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The Tribunal upon considering the provisions of S. 115JAA
of the Act held that the only interpretation which could be given to the
Circular which has explained the proviso to S. 115JAA is that interest cannot
be allowed for intervening period. That is, if MAT is paid, for example, in AY
2001-02 and the same is credited in AY 2003-04, then for the intervening years
of 2001-02 and 2002-03 no interest is payable on such MAT credit. However, for
the year in which ultimately MAT credit is given and credit for other tax
payments is also given, then refund becomes due not because of MAT credit but
because of other tax. This legal position is absolutely clear from the fact
that payment of MAT is not refundable and it can only be used as a matter of
credit, that too, subject to the conditions laid down in S. 115JAA of the Act.


The Tribunal noted that the issue about priority of various
credits to be allowed against tax payable by an assessee was considered by the
Delhi Bench of the Tribunal in the case of Ajanta Offset
(2008-TIOL-164-ITAT-Del) and concurred with the Delhi Bench that first of all
the credit for MAT has to be given and then only credit for TDS and Advance
Tax, etc. has to be given.


The Tribunal noted that the AO had himself, in the order
passed u/s. 154, allowed the MAT credit before the credit for TDS and Advance
Tax. It stated that it is absolutely clear that refund is originating not
because of MAT credit but because of TDS and Advance Tax and, therefore, the
assessee has to be paid interest on such excess payment of TDS or Advance Tax.


The Tribunal set aside the order of CIT(A) and directed the AO to allow
interest in accordance with law.


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S. 37(1) — Premium on Keyman Insurance Policy is allowable business expenditure

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21 (2008) 118 TTJ 263


Sunita Finlease Ltd. v. Dy. CIT

ITA No. 203 (Nagpur) of 2007

A.Y. : 2004-05. Dated : 15-2-2008

S. 37(1) of the Income-tax Act, 1961 — In view of CBDT
Circular No. 762, dated 18th February 1998, premium on Keyman Insurance Policy
is allowable business expenditure.

 

The premium paid by the assessee-company on a Keyman
Insurance Policy was disallowed by the Assessing Officer to the extent of 30%,
on the grounds that the sum assured and the premium paid were excessive
vis-à-vis the worth of the company. The disallowance was confirmed by the
CIT(A).

 

The Tribunal allowed the assessee’s claim on the basis of
Circular No. 762, dated 18-2-1998 [(1998) 145 CTR (St.) 5]. The Tribunal noted
as under :

(1) The policy known as ‘Keyman Insurance Policy’ provides
for an insurance policy taken by a business organisation on the life of some
important persons in the organisation, generally called as Keyman in the
insurance nomenclature.

(2) In Circular No. 762, dated 18th February 1998,
clarifying with regard to the treatment of the premium paid of Keyman
Insurance Policy whether it should be allowed as a capital expenditure or a
revenue expenditure, the Board has clarified that the premium paid on the
Keyman Insurance Policy be allowed as business expenditure.

 


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S. 28(i) read with S. 56 of the Income-tax Act — Whether the amount received by licensed bookmaker from hedge bets placed with another bookmaker was integral part of his business activity as a bookmaker and was not liable to be taxed u/s.115BB — Held, Yes

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23 (2008) 114 ITD 638 (Pune)


ACIT v. Raghunath B. Taware

A.Ys. : 1991-92, 1992-93, 1994-95

Dated : 31-5-2007

S. 28(i) read with S. 56 of the Income-tax Act — Assessee was
a licensed bookmaker who ran a business of booking races — Besides, he also used
to bet on horse races to minimise his probable losses —Whether the amount so
received by the assessee from hedge bets placed with another bookmaker had close
nexus or link with total amount received or paid for bets accepted by him on a
particular horse, and hence, same was integral part of his business activity as
a bookmaker and was not liable to be taxed u/s.115BB — Held, Yes.

 

Facts :

The assessee was a licensed bookmaker operating at the Pune
race course, under the terms and conditions for a bookmaker’s licence formulated
by Royal Western India Turf Club (RWITC). The assessee used to accept bets for
‘win’ or ‘place’ from the punters on the horse races as per the guidelines
formulated by RWITC. To minimise losses, a bookmaker, under the club rules, is
permitted to make a hedge bet with another bookmaker, subject to the condition
that total amount of such hedge bet laid over by one bookmaker should not exceed
the total amount of the bets accepted by him on a particular horse, at the time
of such lay-over. In case, the amount of laid-over bet exceeds the total amount
of bets accepted, then the last laid-over bet will be treated as independent
bet. Winnings from such hedge bets was called ‘Tote Winnings’.

 

During the relevant assessment years, the assessee had earned
income from tote winnings. The AO was of the view that such income was taxable
under the head ‘Income from Other Sources’ u/s.56(2)(ib), and not as business
income.

 

On appeal, the CIT(A) held that hedge betting was a part of
the business transactions in respect of business of bookmaking, inasmuch as
hedging was permitted, and such tote winnings was to be brought to tax as
business income.

 

On Revenue’s appeal, the Tribunal held as under :

1. The bookmaker is allowed to make hedge bet with another
bookmaker to the extent of total amount of bets collected by him on horsewise
basis and not with reference to aggregate total amount of bets collected by him
on all the horses. Thus, hedge betting by one bookmaker with another in respect
of the bets already accepted by him on a particular horse is an integral part of
the activity of a bookmaker accepting bets on horse races from others. The
position of the assessee-bookmaker is distinct and different from that of a
punter, and he cannot be deemed to have stepped in the shoes of the punter while
making a hedge bet.

2. Taking reference to CBDT Circular No. 461, dated 9-7-1986,
the Tribunal observed that where there is an integral relation of any payment as
to the very source of activity, the same should be treated as a part of the same
primary transaction or activity, and cannot be viewed independently so as to
divorce the same from its source. Thus, as is in the case of gross winnings from
lotteries and certain percentage deducted therefrom by the Government or lottery
agencies conducting the lottery, hedge betting by a bookmaker will also be
considered to be an integral part of the same activity.

3. The receipts from hedge betting cannot be considered in
isolation from the receipts and payments made by the assessee as a bookmaker on
bets accepted by him, so as to permit the revenue authority to tax the same
independently, at the rates specified u/s.115BB. Therefore, the same were
chargeable to tax as business income, and not income from other sources.

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S. 43B — Business disallowance — Certain deductions to be made only on actual payment — A service provider acts as an agent of the Government and is not entitled to claim deduction on account of service tax — S. 43B not applicable to service tax

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22 114 ITD 573 (Mad.)


ACIT v. Real Image Media Technologies (P.) Ltd.

A.Y. : 2002-03. Dated : 31-12-2007

 

S. 43B of Income-tax Act — Business disallowance — Certain
deductions to be made only on actual payment — A service provider acts as an
agent of the Government and is not entitled to claim deduction on account of
service tax. — For applicability of S. 43B, claim should be first preferred by
assessee, and the same should be disallowed for reason of failure to make
payment — in the instant case, assessee had not even preferred a claim towards
service tax — Whether on this account alone, addition u/s.43B could not have
been made, and CIT(A) had correctly deleted addition so made — Held, Yes.

 

Facts :

The assessee company was engaged in the business of running a
recording and dubbing studio, production of advertisement films, software
development, etc. During the assessment proceedings, the AO noticed that service
tax was not being routed through the Profit & Loss Account, and the assessee had
shown a liability towards service tax of Rs. 5,72,374 as on 31-3-2002 in its
balance sheet. The AO made additions to the assessee’s income contending that
the service tax had been collected, but had not been paid to the Government.

 

In its appeal before the CIT, the assessee made two-fold
submission, stating that for the applicability of S. 43B, claim should be
preferred by the assessee, and disallowance could be made only on account of
failure to make actual payment, and secondly with reference to Rule 6 of Service
Tax Rules, service tax is required to be paid only on the value of taxable
service received in a month or quarter and not on the gross amount charged or
billed. The CIT(A) having found force in the assessee’s submissions deleted the
addition.

 

On Revenue’s appeal before the Tribunal, it was held as under
:

1. S. 43B starts with the non-obstante clause and specifies
that the deduction ‘otherwise allowable’ under the Act shall not be allowed
unless it is actually paid. The rigour of S. 43B might be applicable to excise
or sales tax, but the same could not be applicable in the case of service tax
due to two reasons :

(i) The assessee merely acts as an agent of the
Government in collection of service tax, and is not entitled to claim
deduction on account of service tax.

(ii) S. 43B(c) uses the expression ‘any sum payable’. For
making any disallowance, it has to be established that such sum is payable.
A reading of Rule 6 of the Service Tax Rules states that the liability to
pay such service tax arises on receipt of payments towards the value of
taxable service. If there is no liability to make the payment to the
Government, because of non-receipt of payments from the receiver of
services, then it cannot be said that such service tax had become payable in
terms of S. 43B(a).

2. S. 145A includes sales tax, excise duty, etc. in the
turnover of purchases and sales of goods, but it does not apply to services
and hence service tax cannot be included in the turnover.

3. In the given case, the assessee had not preferred a
claim for the amount of service tax. Further, there was no liability on the
assessee to make payments to the credit of Central Government because of
non-receipt of payments from the receiver of services. Therefore, the rigour
of S. 43B is not attracted and the CIT(A) was right in deleting the additions
made on account of disallowance u/s.43B.

 

Case referred to :

(i) Srikaollu Subbarao & Co. v. Union of India,
(1988) 173 ITR 708 (AP)

 


Case distinguished :



(i) Chowranghee Sales Bureau Ltd. v. CIT, (1977) 110
ITR 385 (Cal.)

 

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S. 45 — Conversion of shares into stock-in-trade valid u/s.45(2) even if assessee not carrying on the business of shares and securities before such conversion

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20 (2008) 23 SOT 512 (Mum.)


ACIT v. Jehangir T. Nagree

ITA No. 7503 (Mum.) of 2004 and

3927 (Mum.) of 2005

A.Y. : 2001-02. Dated : 10-4-2008

S. 45 of the Income-tax Act, 1961 — Conversion of shares into
stock-in-trade would be valid u/s.45(2) even if the assessee was not carrying on
the business of shares and securities before such conversion.

 

On 1-4-2000 the assessee, a manufacturer and seller of
furniture, having short-term capital loss in earlier years, converted his
investment in shares brought forward from A.Y. 2000-01 into stock-in-trade.

 

Besides trading in shares and securities which were
converted, the assessee had made further purchases of shares and securities and
during the accounting year he had engaged himself in speculation of shares of
very high volume. The assessee incurred loss in share transaction activity and
also in speculation of shares and claimed deduction of the same as business
loss. The Assessing Officer rejected the assessee’s claim, holding that the
provision of S. 45(2) contained the words ‘of business carried by him’ and since
as on date of conversion the assessee had no business of share transaction, the
said conversion was not valid. The Assessing Officer, accordingly, held that by
this arrangement, the assessee had gained immensely by setting off income in
various other heads against the business loss, which benefit would not have been
available had this loss been treated as a short-term capital loss and disallowed
the assessee’s claim.

 

The CIT(A) held that the conversion made by the assessee was
valid and not a device, especially in view of the fact that the assessee had
done large volume of transactions during the year in speculation account and had
also made fresh purchases of shares for share business.

 

The Tribunal held that the assessee was entitled to benefit
u/s.45(2). The Tribunal noted as under :

(1) Having seen the volume of transactions undertaken by
the assessee in the impugned assessment year, it was very difficult to hold
that the assessee still held the investment in shares and securities. It was
the sweet will of the assessee to decide as to when he intended to convert his
investment in stock-in-trade.

(2) In S. 45(2), the words ‘business carried on by him’ do
not mean that before conversion of investment or capital assets into
stock-in-trade the assessee must carry on business of share transaction or
such a business must be in existence.

(3) The restrictive meaning as suggested by the Revenue
should not be given to the words ‘business carried on by him’ in the light of
the use of the words in other Sections like S. 28(i).

(4) The assessee could undertake multiple business
activities under his proprietary concern. Besides the manufacturing and sale
of furniture, the assessee could also deal in trading in shares in the name of
same proprietary concern keeping the stock-in-trade of shares separate.

(5) Thus, conversion of investment in shares and securities
into stock-in-trade would be valid u/s.45(2) even if business of trading of
shares is not carried on by the assessee before such conversion.

 


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S. 271(1)(c) — Whether penalty can be levied in case where rental income is assessed under head ‘Income from House Property’ as against ‘Income from Business’ — Held, No.

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Part B — Unreported Decisions

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





27 ACIT 8(3) v. Vazir Glass
Works Ltd.


ITAT ‘F’ Bench, Mumbai

Before S. V. Mehrotra (AM) and

V. D. Rao (JM)

ITA No. 332/Mum./2007

A.Y. : 2001-02. Decided on : 24-11-2008

Counsel for revenue/assessee : J. V. D. Langstein/ B. V.
Jhaveri

S. 271(1)(c) of the Income-tax Act, 1961 — Whether penalty
can be levied in a case where rental income is assessed under the head ‘Income
from House Property’ as against ‘Income from Business’ as returned by the
assessee – Held, No.

 



Per S. V. Mehrotra :

Facts :


The assessee-company was engaged in the business of glass
vials and bottles. One of the issues before the Tribunal was whether the AO was
justified in levying a penalty u/s.271(1)(c) in respect of the assessment of
rental income under the head ‘Income from House Property’ as against the
assessee’s claim of it being chargeable under the head ‘Income from Business’.

Held :

The Tribunal found that out of the gross receipt of Rs.23.14
lacs, the sum of Rs.11.14 lacs received by the assessee was by way of
reimbursement of expenses incurred towards electricity and telephone. And the
balance sum of Rs.12 lacs was credited by the assessee to miscellaneous receipts
account and shown accordingly in the Profit and Loss Account. According to the
Tribunal this was a case of honest difference of opinion between the assessee
and the Department on whether rental income was assessable as ‘Income from House
Property’ or as ‘Business Income’. The Tribunal also observed that it was not
the case of the AO that the expenses incurred were not genuine. Thus, the
explanation of the assessee that the income was assessable as income from
business was found bona fide one. Therefore, the Tribunal held that this
case cannot be said to be a case of furnishing inaccurate particulars of income.
According to the Tribunal the assessee had not concealed any facts from the
Department and, therefore, no penalty can be levied u/s. 271(1)(c).

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S. 145 — Method of accounting — Assessee has more sources of income under head ‘Business income’ — Whether assessee can follow different method of accounting for each source — Held, Yes.

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New Page 1

Part B — Unreported Decisions

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





26 ACIT v. Mehul J. Somaiya


ITAT ‘B’ Bench, Mumbai

Before N. V. Vasudevan (JM) and

Karunakara Rao (AM)

ITA No. 7118/Mum./2006

A.Y. : 2002-03. Decided on : 10-12-2008

Counsel for revenue/assessee : G. Gurusamy/

C. N. Vaze

S. 145 of the Income-tax Act, 1961 — Method of accounting —
Assessee having more than one source of income under the head ‘Business income’
— Whether the assessee has the option to follow different method of accounting
in respect of each of the different sources of income under the head — Held,
Yes.

 

Per N. V. Vasudevan :

Facts :

During the year the assessee had returned income under the
head salary, business and income from other sources. In respect of income under
the head business, he had three different sources of income viz., (i)
Remuneration from partnership firm where he was a partner; (ii) income from
proprietary concern; and (iii) consultancy fee. In respect of the first two
sources of business income, the assessee was following mercantile system of
accounting, while in case of the latter, the assessee claimed that it was
following cash method of accounting. Accordingly, from the consultancy fee of
Rs.7.87 lacs receivable, he offered to tax the sum of Rs.41,344 i.e., the
sum equal to the tax deducted at source by the client and for which the TDS
certificate was received by him, for tax.

 

According to the AO, the assessee was not allowed to adopt
different methods of accounting for different sources of income falling under
the same head. Therefore, he brought to tax the entire consultancy fee of
Rs.7.87 lacs. On appeal, the CIT(A) allowed the appeal of the assessee.

 

Held :

The Tribunal noted that the object of the amendment of S. 145
made by the Finance Act, 1995 was only to do away with the mixed system of
accounting, by which certain transactions relating to a particular source
were recorded following one system and the other transactions following the
other system of accounting. According to the Tribunal, if there were more than
one sources of income falling under the same head of income, and the assessee
follows either cash or mercantile system of accounting for different sources
income, it cannot be said that the hybrid system of accounting for different
sources of income is being followed. According to it, so long as for a
particular source either cash or mercantile system was followed, there can be no
objection. Thus, as noted by the CIT(A), since the assessee was consistently
following the cash system of accounting for his consultancy income, it accepted
the submission of the assessee and dismissed the appeal filed by the Revenue.

 

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Sale of depreciable assets — Sale of two units — Consideration for both units based on individual value of land, building, plant and machinery –– Whether sale of two units covered by S. 50 and not by S. 50B — Held, Yes.

fiogf49gjkf0d

New Page 1

Part B — Unreported Decisions

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


25 Accelerated Freeze Drying Co. Ltd.
v. DCIT


ITAT Cochin

Before N. Barathvaja Sankar (AM) and

N. Vijayakumaran (JM)

ITA No. 611/Coch/08

A.Y. : 2002-03. Decided on : 5-12-2008

Counsel for assessee/revenue : R. Sreenivasan/

V. M. Thyagarajan

S. 50 and S. 50B of the Income-tax Act, 1961 — Sale of
depreciable assets or slump sales — Sale of two manufacturing units along with
immovables and movables — Consideration for both the units was based on the
individual value of each of the lands, buildings and plant and machinery ––
Whether the sale of these two units was covered by S. 50 and not by S. 50B —
Held, Yes.

 

Per N. Vijayakumaran :

Facts :

The assessee is engaged in the business of processing frozen
foods. During the relevant assessment year, the assessee sold two of its units
for valuable considerations. Both the units were sold to two different buyers
and the consideration for both the units was arrived at based on the separate
valuations done for land, building and each of the items of plant and machinery.
The assessee regarded these transactions as sale of depreciable assets as per
provisions of S. 50 of the Act. The Assessing Officer by way of reassessment
u/s.148, brought these amounts to tax as slump sale within the meaning of S. 50B
of the Act. Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld
the action of the AO. Aggrieved by the order of the CIT(A), the assessee
preferred an appeal to the Tribunal.

 

Held :

The Tribunal observed that there is ample evidence which
shows that there is bifurcation of sale profits, splitting up of the value
between movable and immovable assets and the assets are depreciable assets. The
Tribunal held that this is a case where S. 50 is squarely applicable. It is not
the aggregate value taken as the net worth for the purpose of application of
slump sale provision as u/s.50B. The Tribunal found the decision of the Cochin
Tribunal in the case of International Creative Foods P. Ltd. to be squarely
applicable to the facts of the case. Accordingly, the Tribunal set aside the
order of the authorities below and following the decision of the Cochin Tribunal
in the case of International Creative Foods P. Ltd. allowed the claim of the
assessee.

 

Cases referred to :


ACIT v. International Creative Foods P. Ltd., ITA Nos.
227/Coch./2006 and 447/Coch./2007, dated 10-9-2008.

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S. 40A(3) — Cash payment exceeding prescribed limits — S. 40A(3) read with Rule 6DD — Purchases in cash towards supplies of carcass in business of processing and export of meat and meat products — Allowable under clause (l) of Rule 6DD — Also as per claus

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  1. (


  1. (2009) 120 itd 89 (Delhi)


Dy. CIT v.
Hind Industries Ltd.

A.Y. : 2003-04. Dated : 26-9-2008

 

S. 40A(3) — Cash payment exceeding prescribed limits — S.
40A(3) read with Rule 6DD — Purchases in cash towards supplies of carcass in
business of processing and export of meat and meat products — Allowable under
clause (l) of Rule 6DD — Also as per clause (f) of Rule 6DD and, therefore, no
disallowance could be made u/s.40A(3).

The assessee-company was engaged in the business of
processing and export of meat and meat products. The assessee had made all the
purchases in cash and had regularly withdrawn huge cash from bank and
ostensibly made payments for supplies of carcass. The Assessing Officer was of
the view that the payments made in cash would be hit by provisions of S.
40A(3). On appeal, the Commissioner (Appeals) opined that since the payments
had been made to agents in respect of purchases of carcass, there was no room
to interpret clause (f) of Rule 6DD in favour of the assessee. However, so far
as the assessee’s claim for exclusion under clause (l) of Rule 6DD was
concerned, the Commissioner (Appeals) held that payments in cash to agents for
purchases of products of animal husbandry could not be disallowed u/s.40A(3).

 

On the Revenue’s appeal, the ITAT held that :

(1) The AO had disallowed the claim of the assessee in
view of the decision of the Allahabad High Court in the case of CIT v.
Pehlaj Raj Daryanmal, (1991) 190 ITR 242. The decision by the Allahabad
High Court was rendered in 1991 whereas clause (l) was inserted by the IT
Amendment Rules in the year 1995. Therefore, the ratio of the decision of
the Allahabad High Court would not be applicable to the facts of the instant
case.

(2) The contention of the department, that there was no
agent, did not sound good because the AO himself had disallowed the payments
for the reason that they were not made directly to producers/cultivators but
through intermediaries or agents.

(3) Though the Commissioner (Appeals) had rejected the
claim under clause (f), yet, in view of Rule 27 of the Income-tax (Appellate
Tribunal) Rules, 1963, the claim of the assessee was allowable as per clause
(f) of Rule 6DD.

Accordingly, the order of the Commissioner (Appeals) was to
be confirmed.


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S. 32 — Whether road is eligible for depreciation in category of ‘building’ at rate applicable to buildings — Held, Yes.

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New Page 2

  1. (2009) 120 ITD 20 (Chennai)


Tamil Nadu Road Development Co. Ltd. v. ACIT/ITO

A.Ys. : 2003-04 and 2004-05

Dated : 24-10-2008

S. 32 — Whether road is eligible for depreciation in
category of ‘building’ at rate applicable to buildings — Held, Yes.

The assessee-company was incorporated for construction,
development and maintenance of roads at various places in Tamil Nadu as per
the agreement entered into with the Government of Tamil Nadu. Its claim for
depreciation on roads at the rate of 25% (as plant and machinery), was
rejected by the Assessing Officer as road did not figure in the depreciation
schedule. He further observed that roads were not buildings, entitled to
depreciation. On appeal, the Commissioner (Appeals) upheld the Assessing
Officer’s view.

On second appeal by the assessee, the Tribunal held that :

(1) Merely because some optical fibre lines or connection
lines had been laid, the road could not get converted into a plant.

(2) The assessee-company was entitled to collect fixed
amount of toll per vehicle for which it could have created any kind of
barrier for collection of such toll. If the assessee had chosen to install
automated toll plaza, then mere construction of one toll plaza would not
change the nature of the asset which remained the road.

(3) After the A.Y. 1988-89, all the appendices,
prescribing the table of rates of depreciation had the note that building
would include road. Therefore, the assessee would become entitled to
depreciation on the road in the category of ‘building’.

 


In these circumstances, the order of the Commissioner
(Appeals) was set aside and the Assessing Officer was directed to allow
depreciation on the road at the rate applicable to the buildings.


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Collection of tax at source u/s.206C — Collection of octroi under Bombay Provincial Municipal Corporation Act, 1949 was neither for parking lot nor at toll plaza nor for mining or quarrying nor it was for purpose of business, and, therefore, collection of

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New Page 2

  1. (2009) 120 ITD 7 (Nag.)


Akola Municipal Corporation v. ITO

A.Ys. : 2005-06 to 2007-08

Dated : 21-5-2008

 

Collection of tax at source u/s.206C — Collection of octroi
under Bombay Provincial Municipal Corporation Act, 1949 was neither for
parking lot nor at toll plaza nor for mining or quarrying nor it was for
purpose of business, and, therefore, collection of octroi by agent appointed
by assessee would not fall in S. 206C(1C).

 

The assessee-corporation had appointed an agent for
collection of octroi, as levied by the assessee under the Bombay Provincial
Municipal Corporation Act, 1949. The assessing authority held that the
assessee was to collect tax at source on the octroi which was in the nature of
‘Toll Plaza’ within meaning of S. 206C(1C). On appeal, the Commissioner
(Appeals) confirmed the order of the assessing authority.

 

On second appeal by the assessee :

(1) On a close reading of the legislation like the Bombay
Provincial Municipal Corporation Act, 1949, the Constitution, the Tolls Act,
1851 and the Supreme Court and the High Courts’ decisions and various
dictionary meanings, it could be said that ‘toll’ is a different thing than
‘octroi’. Octroi is normally a tax levied on entry of goods into local
areas, whereas ‘toll’ is a tax levied as compensation for the purpose of
temporary use of land or allowing passage of vehicles through the land.

(2) In the instant case, the contract of the
assessee-corporation with the agent for collecting octroi, was different
from clause (e) of the said section dealing with ‘toll’.

 


Accordingly, the orders of the Commissioner (Appeals) as
well as the Assessing Officer were to be vacated and the appeal of the
assessee was to be allowed.


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Deductions u/s.80-IB — Conditions stipulated U/ss.(2) of S. 80-IB are to be fulfilled only if eligible assessee is an industrial undertaking within meaning of Ss.(3) to Ss.(5) of said section — Where assessee was engaged in business of carrying out scient

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New Page 2

  1. (2009) 119 itd 427 (Mum.)


Enem Nostrum Remedies (P.) Ltd. v. ACIT

A.Ys. : 2003-04 and 2004-05

Dated : 28-8-2008

Deductions u/s.80-IB — Conditions stipulated U/ss.(2) of S.
80-IB are to be fulfilled only if eligible assessee is an industrial
undertaking within meaning of Ss.(3) to Ss.(5) of said section — Where
assessee was engaged in business of carrying out scientific research and
development and was not an industrial undertaking and had been approved by
Government of India, for claiming benefit of deduction u/s.80-IB(8A),
conditions of Ss.(2) of S. 80-IB were not required to be fulfilled by it.

 

The assessee-company had been approved as an R&D company by
the department of scientific and industrial research. It claimed deduction
u/s.80-IB(8A). The Assessing Officer denied the deduction u/s.80-IB(8A) by
observing that :

(1) The assessee had not claimed deduction u/s.80-IB(8A)
in the initial year,

(2) Subsequent claim made by it in the relevant
assessment years could only lead to the surmise that its business was formed
by splitting up, or the reconstruction of a business already in existence;

(3) The certificate by the Chartered Accountant in Form
10CCB was not produced.

 


On appeal, the Commissioner (Appeals) held that the
assessee did not fulfill the conditions of S. 80-IB(2)(iii) as it was not
manufacturing or producing any article or thing, and, accordingly, upheld the
view of the Assessing Officer on a different count.

On second appeal by the assessee, the Tribunal held that :

(1) The four conditions stipulated U/ss.(2) of S. 80-IB
are to be fulfilled only if the eligible assessee is an industrial
undertaking within the meaning of S. (3) to S. (5) of said Section, as the
case may be.

(2) If the assessee is not an ‘industrial undertaking’
but is otherwise eligible for deduction under any of other sub-sections of
S. 80-IB, then there is no requirement for importing the conditions
stipulated in Ss.(2) of S. 80-IB which are applicable to industrial
undertakings.

(3) Since in the instant case, the assessee was engaged
in the business of carrying out scientific research and development and had
been approved by the Government of India, for claiming the benefit of
deduction u/s.80-IB(8A), the conditions of Ss.(2) of S. 80-IB were not
required to be fulfilled by it.

Based on the above observations, the Tribunal directed the
Assessing Officer to allow deduction as claimed by the assessee.


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S. 194J of the Act are applicable to payments made for availing bandwidth services and port charges — Held, No.

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New Page 26
2009 TIOL 130 ITAT Mum.


Pacific Internet (India) Pvt. Ltd.
ITA Nos. 1607 to 1609 (Mum.) of 2006
A.Ys. : 2003-04 to 2005-06. Dated : 23-12-2008



Whether payments made to MTNL/VSNL for availing
bandwidth services and port charges are technical services — Held, No. Whether
provisions of


S. 194J of the Act are applicable to payments
made for availing bandwidth services and port charges
— Held, No.

Facts :

The assessee-company was engaged in the business
of providing internet access services to corporate clients and consumers. In
the course of survey action u/s.133A of the Act against the assessee, on
29-10-2004, it was found that the assessee had made huge payments to avail
services of MTNL and VSNL for using bandwidth and network operating. The
Assessing Officer was of the opinion that in respect of payments made to MTNL/VSNL
for availing bandwidth services and port charges, the assessee should have
deducted tax at source as required u/s.194J of the Act. The Assessing Officer,
therefore, treated the assessee as in default within the meaning of S. 201(1)
and passed the order, raising the demand against the assessee for failure to
deduct tax in respect of payments made to MTNL/VSNL and also levied interest
as per the provisions of S.


201(1A) of the Act. Aggrieved, the assessee
preferred an appeal to CIT(A), challenging the order passed by the Assessing
Officer treating the assessee in default within the meaning of S. 201(1), but
did not find favour.

On an appeal by the assessee to the Tribunal,

Held :

The bandwidth services and other infrastructure
availed by the assessee for providing Internet access to its customers are
standard facilities. The Tribunal was of the view that the case of the
assessee is covered by the decision of Delhi High Court in the case of Estel
Communications (P.) Ltd. and accordingly held that payment made by the
assessee company to MTNL/VSNL and other concerns for availing the service of
bandwidth network infrastructure cannot be said to be technical services
within the meaning of S. 194J of the Act read with Explanation 2 to clause
(vii) of S. 9(1) of the Act. The appeal filed by the assessee was allowed and
the orders passed by the Assessing Officer u/s.201(1) and u/s.201(1A) of the
Act were cancelled.

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S. 23 of the Income-tax Act, 1961 — Annual Value — In respect of a let-out property whether association maintenance charges are deductible while computing annual letting value of the property u/s.23 of the Act — Held, Yes.

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New Page 25 2009 TIOL 126 ITAT Bang.


Sheriff Constructions v. ACIT
ITA No. 975/Bang./2008
A.Y. : 2005-2006. Dated : 23-12-2008

 




S. 23 of the Income-tax Act, 1961 — Annual
Value — In
respect of a let-out property whether association maintenance charges are
deductible while computing annual letting value of the property u/s.23 of
the Act — Held, Yes.

Facts :

The assessee-firm was owner of a property by
the name ‘The Summit’ from which rent of Rs.18,39,027 was declared and in
doing so, the assessee deducted association maintenance charges of
Rs.1,77,000. The AO disallowed the claim by holding that this is not an
allowable expenditure u/s.24 of the Act.

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

In an appeal before the Tribunal, the assessee
contended that since the association maintenance charges have to be paid by
the owner of the property, it depresses the annual letting value of the
property and thus the amount of rent which the property may be reasonably
expected to let from year to year would be an amount against which the
maintenance charges have to be reckoned with. Therefore, the association
maintenance charges were claimed u/s.23(1)(b) of the Act while computing the
annual letting value of the property.

Held :

The issue under consideration is squarely
covered in favour of the assessee in view of the decision of the Delhi Bench
of the Tribunal in the case of Neelam Cable Manufacturing Co. and the
decisions of Mumbai Bench of Tribunal in the case of Sharmila Tagore and
also in the case of Bombay Oil Industries Ltd. The Tribunal observed that no
order or judgment taking a contrary view was brought to its notice by the
Department. Accordingly, the AO was directed to deduct association
maintenance charges paid by the assessee to the Summit Apartment Owners’
Association while computing the annual letting value of the property u/s.23
of the Act.

Cases referred to :

  1. Neelam Cable Manufacturing Co. v. ACIT, (1997) 63 ITD 1 (Del.)

  2. Sharmila Tagore v.
    JCIT,     (2005) 93 TTJ 483 (Mum.)

  3. Bombay Oil Industries,
    ITA No. 550/Mum./ 2000 dated 15-11-2000.

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S. 10B of the Income-tax Act, 1961 — Second proviso to S. 10B(1) and Ss.(4) of S. 10B — When the assessee had domestic sales of more than 25% of total sales value during A.Y. 2001-02, is the asses-see still entitled to partial deduction proportionately on

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New Page 24 2009 TIOL 124 ITAT Mad.-TM


Tube Investments of India Ltd. v. ACIT
ITA No. 12/Mds./2006
A.Y. : 2001-2002. Dated : 5-1-2009

S. 10B of the Income-tax Act, 1961 — Second
proviso to S. 10B(1) and Ss.(4) of S. 10B — When the assessee had domestic
sales of more than 25% of total sales value during A.Y. 2001-02, is the
asses-see still entitled to partial deduction proportionately on export
turnover in view of S. 10B(4) — Held, Yes. Whether excise duty needs to be
included in domestic turnover while computing the value of domestic sales to
find out the domestic sales as a percentage of total turnover — Held, Yes.

Facts :

The assessee had in its return of income claimed
a sum of Rs.2,88,84,327 as exempt u/s.10B of the Act in respect of income of
100% EOU. In the course of assessment proceedings, the AO noted that the
details of sales were as under :

Domestic Sales     Rs. 901.40 lakhs

Export Sales         Rs. 2,227.34 lakhs

Total Sales           Rs. 3,128.74 lakhs

The AO held that since the domestic sales were
28.8%, the assessee was not entitled to deduction u/s.10B of the Act. The
domestic sales as mentioned above were taken to be inclusive of excise duty.

On an appeal by the assessee, the CIT(A)
confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to
the Tribunal where it contended that the amount of domestic sales to be
considered should be exclusive of excise duty. Also, since during the
assessment year under consideration, second proviso to as well as Ss.(4) were
both on the Statute Book, therefore, it is entitled to claim deduction
u/s.10B, if not at 100%, on proportionate basis in terms of Ss.(4) of S. 10B.

As regards inclusion of excise duty in computing
the value of domestic sales, the Tribunal held that in view of the ratio of
the decision of SC in the case of Chowranghee Sales Bureau P. Ltd., excise
duty and sales tax are part of trading turnover and therefore, excise duty
needs to be included in domestic sales to find out the value of domestic
sales.

The Accountant Member held that since during the
assessment year, both, the second proviso as well as Ss.(4) were on the
statute book, an assessee whose domestic sales were less than 25% would be
covered by the second proviso and would be entitled to 100% deduction and if
the domestic sales exceeded this limit of 25%, then Ss.(4) would apply and the
assessee would be entitled to deduction on a proportionate basis. In the
present case, since the domestic sales exceeded 25% of the total sales, the AO
was directed to allow deduction on a proportionate basis u/s.10B(4).

The Judicial Member disagreed with the Accountant
Member on the issue of grant of proportionate deduction and held that during
the period relevant to the A.Y. 2001-02, if an assessee had domestic sale of
more than 25%, then the assessee would not be entitled to exemption u/s.10B of
the Act.

Upon a difference of opinion amongst the Members,
the TM was asked to consider the question as to whether when the assessee had
domestic sales of more than 25% of the total sale value during the A.Y.
2001-02, he is still entitled to partial deduction on export turnover in view
of provisions of 10B(4) ?

On a reference the Third Member

Held :

The eligibility criteria are laid down in Ss.(1).
The second proviso is an additional incentive which has been granted to the
assessee to provide economic flexibility and to allow it to dispose of the
export-rejects and by-products, etc. The second proviso no way governs the
eligibility criteria. No interdict is laid down in the statute to withdraw the
total benefit of S. 10B in the eventuality of domestic sales being in excess
of 25% limit. There is no ambiguity in the language of the statute. The
interpretation that benefit of S. 10B is not available in the eventuality of
domestic sales exceeding the percentage mentioned in the second proviso would
render the provisions of Ss.(4) otiose. On the panoply of the second proviso
deduction cannot be denied. Accordingly, he held that the assessee was
entitled to claim deduction proportionately on export turnover in view of the
provisions of S.10B(4).



The view of the Accountant Member became the
majority view. The ground raised by the assessee stood allowed.

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S. 10(10D) read with S. 37(1) of the Income-tax Act, 1961 — Keyman Insurance Policy premium paid by firm in respect of policy on lives of partners is an allowable deduction.

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New Page 23 (2009) 27 SOT 476 (Mum.)


 ITO v. Modi Motors
 ITA No. 6900 (Mum.) of 2006

A.Y. : 2003-04. Dated : 12-12-2008
 

 
S. 10(10D) read with S. 37(1) of the Income-tax Act, 1961
— Keyman Insurance Policy premium paid by firm in respect of policy on
lives of partners is an allowable deduction.

For the relevant assessment year, the assessee’s
claim for deduction of premium paid by it on the Keyman Insurance Policy in
respect of the lives of two working partners u/s.37(1) was disallowed by the
Assessing Officer on the grounds that :

  1. Keyman Insurance Policy
    premium was allowable only in case an assessee who was an employer, paid the
    amount in respect of the life of an employee.

  2. the partnership firm could
    not be termed as ‘Another person’ within the meaning of S. 10(10D), as a
    firm is not independent and distinct from its partners.

The CIT(A) held that the Assessing Officer was
not justified in presuming that there was no distinction between the partners
and the firm, and the conditions of S. 37 were also satisfied because that
expenditure had been incurred for the purpose of business and, accordingly, he
deleted the disallowance made by the Assessing Officer.

The Tribunal allowed the claim of the assessee.
The Tribunal noted as under :


  1. In view of
    the various judicial opinions and also the legislative change in the Act, it
    was to be held that under the Income-tax Act, a partnership firm is an
    entity separate from its partners and if there exists any specific provision
    in the Income Tax law modifying the partnership law, then such specific
    provision shall be applied.




  2. The
    wordings of Explanation to S. 10(10D) are also relevant, wherein it has been
    mentioned that “Keyman Insurance Policy life insurance taken by the person
    on the life of another person who is or was the employee of a
    first-mentioned person or is or was connected in any manner whatsoever with
    the business of the first-mentioned person”. Hence, the Legislature has also
    envisaged various kinds of relationships (in addition to employer-employee
    relationship) which may exist between the person paying the premium and the
    person on whose life such

     





Keyman Insurance Policy is taken.


  1. The CBDT
    vide its Circular No. 762, dated 182-1998 has explained the provisions of S.
    10(10D) wherefrom it is abundantly clear that in order to allow the premium
    paid on Keyman Insurance Policy as business expenditure, there can exist
    relationships other than that of an employer and employee.




  2. The amount
    received on maturity or surrender of Keyman Insurance Policy is taxable
    under the head ‘Income from salary’ u/s.17(3)(ii) or ‘Income from profits
    and gains of business or profession’ u/s.28(1)(vii) or ‘Income from other
    sources u/s.56(2)(iv)’. Hence, if the Legislature would have intended that
    such premium was allowable as deduction only in cases where employer and
    employee relationship existed, then the amount received on
    maturity/surrender would have been made taxable only under the head `Income
    from salary’.





  3. In view of
    the above, Keyman Insurance Premium paid by the firm on the life of its
    partners is allowable as business expenditure.



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Tax avoidance — For application of Ss.(7) of S. 94, all the three conditions mentioned in clauses (a), (b) and (c) thereof must be cumulatively satisfied; conditions of three months before and after record date for purchase and sale respectively of units

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New Page 22 (2008) 304 ITR (AT) 36 (Delhi)


ITO v. Shambhu Mercantile Ltd. ITA No. 2056/Del./2006
A.Y. : 2004-2005. Dated : 29-2-2008

S. 94(7) and CBDT Circular No. 14 of 2001

Tax avoidance — For application of Ss.(7) of
S. 94, all the three conditions mentioned in clauses (a), (b) and (c) thereof
must be cumulatively satisfied; conditions of three months before and after
record date for purchase and sale respectively of units not having been
satisfied cumulatively in all the transactions, loss incurred in those
transactions could not be disallowed by invoking Ss.(7) of S. 94.

The assessee had purchased units of three mutual
funds on the record date for declaration of dividend. These units were sold
after a period of three months from the said record date at a loss of
Rs.1,88,47,816.

The Assessing Officer held that S. 94(7) can be
invoked even if any one of the conditions is fulfilled. Since the units were
purchased on the record date, he held the case to be one of dividend stripping
and disallowed the loss invoking the provisions of S. 94(7), even though they
were sold after three months from the record date. The CIT(A) accepted the
claim of the assessee that all three conditions of S. 94(7) are to be
cumulatively satisfied. On Revenue’s appeal, the ITAT held that :

  1. The question that arises for consideration is as to whether clauses (a), (b)
    and (c) of S. 94(7) need to be satisfied cumulatively or not. One may take a
    look at the language used in other portions of the IT Act, 1961, where such
    requirement for satisfying one of the many conditions or all conditions
    cumulatively is laid down.

  2. The case where only one condition is needed to be satisfied as laid down in
    the proviso to S. 139(1) relating to one by six scheme, may be taken for
    instance. The language of such provision uses the expression ‘or’ at the end
    of each condition.

  3. The Legislature, when it desired that all conditions are to be satisfied
    cumulatively, has used the word ‘and’ in the relevant provision. For
    example, one may take the language used in provisions of S. 80-O, where the
    conditions of receipt of income in convertible foreign exchange and such
    income should be for services rendered outside India are cumulatively
    required to be satisfied.

  4. A
    plain reading of the provision of S. 94(7) shows that it has neither used
    the expression ‘or’ nor the expression ‘and’. The Revenue wants to say that
    each of the conditions laid down in S. 94(7) is independent and if an
    assessee satisfies any one of the conditions, then he should be held to be
    covered within the mischief of the law. But the use of words, ‘such person’,
    ‘such unit’, ‘such date’, ‘such securities or units’ in clauses (b) and (c)
    of S. 94(7) also indicates that the three clauses have to be read
    together—Such an interpretation also finds support from CBDT Circular No. 14
    of 2001.

On these reasonings, the ITAT upheld the claim of
the assessee that all the conditions laid down in clauses (a), (b) and (c) of
Ss.(7) of S. 94 have to be satisfied before the said provisions can be applied
in a given case.

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Assessee engaged in loading and unloading iron and steel at railway siding using a mobile crane cannot be said to be carrying on civil construction work within the meaning of S. 44AD and, therefore, she is not liable to penalty u/s.271B for failure to get

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Nirmal Jain (Smt.) v. ITO
ITA No. 273/Pat./2005
A.Y. : 2000-01. Dated : 8-2-2007

S. 44AB, S. 44AD, S. 271B, S. 273B

Assessee engaged in loading and unloading iron
and steel at railway siding using a mobile crane cannot be said to be carrying
on civil construction work within the meaning of S. 44AD and, therefore, she is
not liable to penalty u/s.271B for failure to get accounts audited u/s.44AB,
even though she has shown income below 8% of the gross receipts.

The assessee was engaged in loading and unloading
iron and steel at railway siding using a mobile crane. She declared net profit
at a rate lower than 8% of the gross receipts. The Assessing Officer held that
she should have got her accounts audited as required under clause (c) of S. 44AB
and accordingly imposed penalty u/s.271B. The said order of penalty was upheld
by the CIT(A). On second appeal, the ITAT held that :

1. Use of mobile crane for loading and unloading iron and steel cannot be said to be civil construction work. Once the provisions of S. 44AD are enacted for computing profits and gains of business of civil construction, then any other work which is not in the nature of civil construction cannot be brought within the mischief of this Section.

2. ‘Works contract’ cannot be construed to mean any contract relating to work. Therefore, the assessee was under a bona fide belief that her case does not fall u/s.44AD and that she was not required to get her accounts audited, even though she has shown income below 8% of the gross receipts.

3. Her gross receipts being less than Rs. 40 lacs, there was no compulsion to get the accounts audited u/s.44AB.

4. The principle of ejusdem generis has to be invoked when particular words pertaining to a class or category or genre are followed by general words, and the general words are construed as limited to words of the same kind as those specified. This principle would apply when : (i) the statute contains an enumeration of specified words; (ii) the subject of enumeration constitutes a class or category; (iii) that class or category is not entrusted by enumeration; (iv) each term follows enumeration; and (v) there is no indication of a different legislative intent.

5. There is no legislative intent to infer that works contract can mean any works contract other than civil construction. The heading of S. 44AD clearly says “Special provision for computing profits and gains of business of civil construction, etc.” Ss.(1) of S. 44AD provides that a sum equal to 8% of the gross receipts paid or payable to the assessee can be assessed as income from civil construction or supply of labour for civil construction. Therefore, intention of the Legislature is clear that S. 44AD has been enacted for the purpose of computing profits and gains of business of civil construction and nothing else.

Cases referred to :

    CIT v. Shree Warna Sahakari Sakhar Karkhana, (2002) 253 ITR 226 (Bom.), and

    CIT v. Mohd. Ishaque Gulam, (1998) 232 ITR 869 (MP)

In view of specific provision in Indo-Swiss treaty, income from shipping business does not qualify for benefit under DTAA and hence, such income would be taxable in terms of provisions of Income-tax Act.

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  1. Gearbulk AG (AAR)

(2009 TIOL 24 ARA IT)

AAR No. 803 of 2009

Article 7, 22, India-Switzerland Treaty

Dated : 30-9-2009

 

Issue :

In view of specific provision in Indo-Swiss treaty, income
from shipping business does not qualify for benefit under DTAA and hence, such
income would be taxable in terms of provisions of Income-tax Act.

Facts :


The applicant is a non-resident shipping Company
incorporated under the laws of Switzerland. The applicant enters into medium
and long term shipping contracts for the transportation of cargo worldwide.

During the financial years 2007-08 and 2008-09, the
applicant entered into a shipping contract with non resident charter for
transportation of cargo from Indian ports to overseas ports. The customers
were procured with the help of assistance of independent agents in UK. In
India, independent agent was appointed for shipping agency, clearing &
forwarding services and for acting as port agent. Admittedly, the applicant
had no physical presence or dependent agent anywhere including in India.

There was no dispute that the applicant trigged tax
liability in India in terms of provisions of S. 172 of the Act but, claimed
exemption by relying on treaty provisions.

Treaty between India and Switzerland as signed in the year
1994 is peculiarly worded. Article 7(1) of the treaty specifically excludes
profits from the operation of ships in international traffic. Article 8 of the
treaty is restricted in its application to the operation of aircraft in
international traffic. The treaty was amended in the year 2001 and ‘other
income’ article was added. In terms of ‘other income’ article, income not
dealt with in the foregoing articles was made taxable only in the Country of
Residence (COR) unless right or property in respect of which income paid is
effectively connected with PE in source country.

The applicant’s contention was that the profits from the
operation of ships in international traffic which stands excluded by Article 7
of the DTAA, is covered by ‘other income’ Article of the treaty; and in
absence of PE in India, the income cannot be taxed in India after amendment of
treaty in the year 2001.

Held :

The AAR held :

The Treaty provisions show that shipping business income
earned by a non-resident is not intended to be covered by Indo–Swiss treaty.
The language and scheme of the provisions of the treaty as also a comparative
study of Treaties of India & Switzerland with others lead to the inevitable
conclusion that shipping income derived from international operations is
sought to be kept outside the purview of the Treaty.

Article 7 of the treaty is explicit and specifically
excludes profits from shipping activity. While specific provision is made for
air transportation business, no such provision was made in the treaty for
shipping business.

The residuary Article 22, concerning ‘other incomes’ was
introduced in 2001. Till then, there was no dispute that the profits derived
from the operation of ships in international traffic was left untouched by the
Treaty because of the specific exclusion in Article 7. The obvious implication
of the exclusion is that such income is subjected to domestic tax law
provisions.

If such legal position was intended to be changed by the
amendments made to the treaty in 2001, specific reference to that effect was
required by amendment to Article 7 and/or in ‘other income’ Article. The AAR
observed :

‘Nor is there explicit language in Article 22 to bring it
within the coverage of the Article. When a particular species of income
excluded from the ambit of the Treaty is sought to be brought within the
scope of the Treaty for the first time, we would expect clear and specific
language to express the intendment rather than leaving it to be taken care
of by Article 22 by implication’.

Shipping profits is specie of business income. As a result
profits of shipping business can be considered to have been dealt with by
Article 7. In any case, when an article concerning business profits
specifically refers to profits from the operation of ships in international
traffic, it can be said that the shipping profits have been dealt with in a
manner as provided by Article 7 of DTAA and the exclusion clause clearly
depicts the intention of the authors of the treaty not to treat the shipping
profits at par with the business profits. As a result, for the purpose of
Article 22, Article 22 cannot apply as the profits arising from the operation
of ships cannot be treated as an item not dealt with in the preceding articles
of the treaty.

The AAR noted the commentary on UNMC and Prof. Klaus Vogel,
which was brought to the notice of the AAR by the applicant, on the rationale
of the provision of reserving the right of taxation to the country of
residence in respect of aircraft and shipping operations. The AAR however
contended that in the absence of clear words in the Indo Swiss Treaty, the
shipping profits could not be placed at par with international air transport.


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Reassessment u/s.147 — When the assessee has made full and true disclosure of all the facts to the AO, the assessment cannot be reopened on the same ground of failure to disclose all the material facts. Further, once the assessee has disclosed all the mat

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  1. (2009) 120 ITD 374 (Delhi)

Moonbeam Finvest Lease Ltd. v. ITO, Ward-5(4), New
Delhi

A.Y. : 1998-99. Dated : 31-1-2008

Reassessment u/s.147 — When the assessee has made full and
true disclosure of all the facts to the AO, the assessment cannot be reopened
on the same ground of failure to disclose all the material facts. Further,
once the assessee has disclosed all the material facts, the proviso to S. 147
cannot be applied and hence reopening is invalid beyond 4 years from the
relevant assessment year.

Facts :

The assessee’s return for A.Y. 1998-99 was processed
u/s.143(1)(a). In the course of assessment proceedings, the details of ‘Lease
Equalisation Account’ charges were asked for by the AO The assessee submitted
his reply and assessment was completed u/s.143(3). On 7-3-2005 the AO reopened
the assessment by issuing notice u/s.148 on the ground of failure on the part
of the assessee to disclose fully and truly all the material facts. The
assessee challenged the reopening of the assessment on the ground of mere
change of opinion as well as on the ground that it was barred by limitation as
notice was issued after 4 years from the end of relevant A.Y. The CIT(A)
confirmed the action of AO. On appeal to Tribunal, it held that the duty of
the assessee was to make full and true disclosure of all material facts and
the AO had to decide what inference can be drawn therefrom. If assessee had
disclosed all the material facts, reopening could not be justified as it would
amount to mere change of opinion on the part of the AO. Since, in the instant
case the AO was satisfied with the explanation of the assessee at the time of
original assessment, it was not allowed to him to reopen the assessment on the
same ground. Further, as there was no failure on the part of the assessee to
disclose all the facts, proviso to S. 147 could not be applied and notice
u/s.148 could not be validly issued beyond 4 years from the end of relevant
assessment year.



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S. 50C — When the stamp valuation authority has accepted the consideration declared by the assessee in the sale deed, there is no question of once again referring the matter to Departmental Valuation Officer (DVO) u/s.50C.

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  1. (2009) 120 ITD 233 (ASR)


Punjab Poly Jute Corpn. v. ACIT, Cir.-1,
Bhatinda

A.Y. : 2005-06. Dated : 11-4-2008

S. 50C — When the stamp valuation authority has accepted
the consideration declared by the assessee in the sale deed, there is no
question of once again referring the matter to Departmental Valuation Officer
(DVO) u/s.50C.

Facts :

The assessee had sold certain land at the rate of Rs.
220.81 per sq.yd. (total consideration Rs.16.34 lakhs) which rate was accepted
by stamp valuation authority. However, according to AO the value applicable to
the land as per Punjab State Rules, was at the rate of Rs.500 per sq.yd.
Hence, he referred the matter to DVO thus determining full value of
consideration at Rs.72 lakhs and capital gains at Rs.62.40 lakhs. On appeal to
CIT (A), it confirmed the order of the AO.

On appeal to Tribunal, it held that S. 50C comes into play
only when there is valuation at a higher value for stamp valuation purposes by
the State Authority than declared by assessee in sale deed. When there is such
difference noticed, valuation adopted by stamp valuation authority has to be
substituted with the sale consideration of such property mentioned in the sale
deed. In the instant case, the value of sale consideration was accepted by the
stamp valuation authority as the property was registered with the rate of
Rs.220.81 i.e. rate at which sale of land was made. When the stamp
valuation authority has accepted the consideration declared by the assessee in
the sale deed, there can not be any question of once again referring the
matter to Departmental Valuation Officer (DVO) u/s.50C.

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Penalty u/s.271(1)(c) — When the explanation offered by the assessee was bona fide but assessee could not establish its case for deduction in quantum proceedings that would not automatically become a case for levy of penalty for concealment or furnishing

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  1. (


  1. (2009) 120 ITD 151 (Luck.)


Ashok Grih Udyog Kendra (P.) Ltd. v. ACIT-VI,
Kanpur

A.Y. : 2000-01. Dated : 11-4-2008

Penalty u/s.271(1)(c) — When the explanation offered by the
assessee was bona fide but assessee could not establish its case for deduction
in quantum proceedings that would not automatically become a case for levy of
penalty for concealment or furnishing of inaccurate particulars of income.

Facts :

The assessee company filed its return of income for A.Y.
2000-01 claiming an expenditure of Rs.2.37 lakhs as LTC paid to an employee
under the head travelling expenses. The AO disallowed the expenditure on the
ground that the expenditure had not been incurred for the purposes of
business. Further, it was also contended by the Department that if expenses
were incurred on account of travelling of the employee, no TDS had been
deducted and also that the employee was closely related to the director of the
company and hence the expenditure was disallowable u/s.40A(2)(b) as well. The
AO also imposed penalty u/s.271(1)(c) for claiming wrong deduction. The CIT(A)
confirmed the action of AO. On appeal to Tribunal regarding the allowability
of the expenditure, it confirmed the action of AO. Thereafter the assessee
preferred appeal for imposition of penalty u/s.271(1)(c). The Tribunal held
that there was only difference of opinion regarding the allowablility of
expenditure between assessee and department. Although, the disallowance of
expenditure has been upheld by the Tribunal, the department has never
challenged the genuineness of expenditure. It is well settled law that
findings in the assessment proceedings are relevant but not conclusive in
penalty proceedings because the considerations that arise in penalty
proceedings are different from those that arise in the assessment proceedings.
In the instant case, the assessee had disclosed all the material facts
necessary for assessment. Consequently, although the expenditure is
disallowed, the penalty u/s. 271(1)(c) for concealment or furnishing of
inaccurate particulars of income cannot be imposed.

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S. 45, S. 48 and S. 55(2) — Assessee, CHS, owned land and building — Upon enactment of DCR, assessee became entitled to additional FSI which was transferred for consideration — Is right transferred covered by S. 55(2) — Held, No. Whether since right trans

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Part B — Unreported Decisions

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


24 New Shailaja CHS Limited
v. ITO, 22(1)(4)


ITAT ‘B’ Bench, Mumbai

Before R. S. Syal (AM) and

V. Durga Rao (JM)

ITA No. 512/Mum./2007

A.Y. : 2003-04. Decided on : 2-12-2008

Counsel for assessee/revenue : Tarun Ghia/

Pitamber Das

S. 45, S. 48 and S. 55(2) of the Income-tax Act, 1961 (‘the
Act’) — A.Y. 2003-04 — Assessee, a co-operative housing society, owned land and
building — Upon enactment of Development Control Regulations, 1991 (DCR), the
assessee became entitled to additional FSI of around 11,000 sq.ft. which
additional FSI was transferred by the assessee for a consideration of
Rs.48,96,225 — Is the right transferred covered by any of the items mentioned in
S. 55(2) of the Act — Held, No. Whether since the right transferred emanated
from amendment to DCR and is not covered by any of the items of S. 55(2) and
does not have any cost of acquisition no capital gain can be charged on transfer
of additional FSI — Held, Yes.

 

Per R. S. Syal :

Facts :

The assessee, a co-operative housing society, had acquired
land in the year 1972 along with building thereon constructed by use of FSI of
approx. 11,000 sq.ft. Upon enactment of Development Control Regulations, 1991
(DCR) the assessee became entitled to an additional FSI of around 11,000 sq. ft.
The assessee sold such entitlement/right to M/s. D. K. Builders for a
consideration of Rs.48,96,225. The Assessing Officer (AO) computed capital gain
arising on sale of this entitlement to be Rs.1.22 crores, by considering the
value of residential flat as arrived at by stamp valuation authorities. The
assessee preferred an appeal to the CIT(A) who dismissed the same. Aggrieved,
the assessee preferred an appeal to the Tribunal.

 

Held :

The Tribunal noted that the concept of transferable
development right has been introduced in Mumbai in the Development Control
Rules, 1991 of the Bombay Municipal Corporation. These rights are given in the
form of a Development Right Certificate (DRC) which is issued by the Municipal
Corporation. TDR means the development potential. The FSI of a plot of land is
separated from the plot and is allowed to be transferred. TDR can be used by the
person/ owner/lessee in whose favour it is granted on his land in the receiving
zone. He can use it fully or partly or sell it fully or partly at will. The
Tribunal stated that while it is true that such right is a capital asset as per
the provisions of S. 2(14) but in order to compute capital gain, apart from the
existence of capital asset there should be sale consideration accruing as a
result of the transfer of capital asset as well as the cost of acquisition of
the asset along with the cost of improvement, if any. The Tribunal observed that
the cost of land and the existing building structure could not be attributed in
the additional FSI received by means of 1991 rules since the assessee was the
owner of the land and building and continued to remain the same even after the
transfer of the said capital asset. The Tribunal noted that the Apex Court has
in B. C. Srinivasa Shetty’s case held that transfer of capital asset which does
not have any cost of acquisition does not result into capital gain chargeable
u/s.45. The Tribunal held that there is a difference in the situation when cost
of acquisition is Rs.Nil and where the cost of acquisition cannot be ascertained
or no cost of acquisition has been incurred. The Tribunal noted that the items
of capital assets specified in S. 55(2) are those for which the cost of
acquisition shall be taken to be Nil for computing capital gain. It held that if
the assessee had not incurred any cost of acquisition on a capital asset and
such capital asset does not fall in the category of the capital assets specified
in S. 55(2), then the judgment of the Apex Court in the case of B. C. Srinivasa
Shetty shall apply and no capital gains shall be charged. In the light of the
above, the Tribunal held that the right transferred emanated from the 1991 rules
making the assessee eligible to additional FSI. The right transferred is not
covered by any of the items mentioned in S. 55(2) and it does not have any cost
of acquisition and therefore no capital gain can be charged on transfer of
additional FSI for sale consideration of Rs.48.06 lakhs for the reason that it
has no cost of acquisition. It held that its view is fortified by the decision
of the Mumbai Bench in Jethalal D. Mehta, which decision has not been modified
or reversed by the Hon’ble High Court.

 

Cases referred to :



(1) Jethalal D. Mehta v. DCIT, (ITA No. 672/Mum./2000)
(Mum.)

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

 


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Diplomatic Authorities of Republic of South Africa deleted. Notification No. VAT/1509/CR-9/Taxation1, dated 18-2-2009

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12 Diplomatic Authorities of Republic of South Africa deleted.
Notification No. VAT/1509/CR-9/Taxation1, dated 18-2-2009 :


Refund is granted to tax collected by any registered dealer on his sales
made to the diplomatic authorities and international bodies or organisations
listed in column (2) of the Schedule appended to the Notification No.
VAT-1507/CR-41/Taxation-1, dated 25-6-2007. By this Notification, ‘Republic
of South Africa’ has been deleted from this Schedule.

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New rates of profession tax prescribed w.e.f. 1-7-2009 in Maharastra.

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Spot Light

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Buyback/Prepayment of Foreign Currency Convertible Bonds (FCCBs)

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Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars

  1. A. P. (DIR Series) Circular No. 65, dated April 28, 2009

Buyback/Prepayment of Foreign Currency Convertible Bonds
(FCCBs)

Presently, buyback of FCCB up to US $ 50 million is
permitted, subject to certain terms and conditions, under the approval route.

This Circular has raised this limit for buyback out of
internal accruals from US $ 50 million to US $ 100 million, subject to the
following :

i) Minimum discount of 25 per cent of book value for
redemption value up to USD 50 million;

ii) Minimum discount of 35 per cent of book value for the
redemption value over USD 50 million and up to USD 75 million; and

iii) Minimum discount of 50 per cent of book value for
the redemption value of USD 75 million and up to USD 100 million.

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External Commercial Borrowings (ECB) Policy — Liberalisation

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Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars

  1. A. P. (DIR Series) Circular No. 64, dated April 28, 2009

External Commercial Borrowings (ECB)
Policy — Liberalisation

Presently, ECB could be obtained, up to June 30, 2009, at
rates higher than the all-in-cost ceilings by obtaining approval of RBI under
the approval route.

This Circular has extended this date for borrowing at rates
higher than the all-in-cost ceilings by obtaining approval of RBI under the
approval route from June 30, 2009 to December 31, 2009.

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Is it fair to administer any law in a ridiculous manner ? (Installation of a tea-coffee vending machine in office)

1. Introduction :

    As tax-practitioners, readers are familiar with the queer and incomprehensible manner in which the tax laws are administered. In the present article, I have for reference, an interesting news item that appeared in the press a few weeks ago. It is in the context of Mumbai Municipal Corporation Act, 1888.

2. Tea/coffee vending machine in office — Tea shop ?

    It happened like this. In a well-known elite office complex, there are several multi-storeyed buildings in which the offices of large reputed corporates are located. In one of the offices, there was a mishap due to some electrical problem while operating a tea-vending machine. Immediately, there was a survey by the vigilance squad of the municipality and they issued show-cause notices to all the corporate offices in the complex requiring them to explain as to why they did not obtain licence for carrying on Trade as ‘Tea & Coffee Shop’ under the Mumbai Municipal Corporation Act, 1888.

    As a sequel to the said notices, there was also an enthusiasm to issue prosecution notices. A few managing directors could not remain present before the Magistrate. Immediately, there were warrants against them.

    All this was indeed a big farce and it caused lot of panic and commotion among the managements of all these offices.

    About the nuisance value of the concerned officers, the less said the better.

3. Remedy :

    Two such affected companies moved the Bombay High Court in its Writ jurisdiction. Normally, the High Courts are not inclined to exercise their extra-ordinary jurisdiction in matters pending before lower judicial authorities. However, in the instant case, upon pointing out the patent illegality and the absurdity, the High Court was convinced about the need for exercising the extraordinary jurisdiction.

    In the course of arguments, the following facts were brought to their notice :

    (a) Such offices employed about 100 employees on an average.

    (b) There were controls on outsiders entering these offices.

    (c) Visitors are provided entry-passes and/or their names are entered in the register. Thus, no unauthorised person can enter the office.

    (d) It is very common and customary to provide tea-coffee to the members of the staff and such visitors. The question of selling such things to any outsiders or to passerby does not arise.

    It was argued that by no stretch of imagination, it could be said that these corporate offices were engaged in the ‘business of serving tea or coffee’.

    The High Court was then convinced about the merits. It also noted the fact that the municipal authorities could not prove that the tea was ‘sold for some consideration’. Therefore, it was held that this was not a business activity at all.

    The High Court expressed displeasure that summons were issued in such straight and trivial matters. The High Court is on record to say that the Magistrates should not act as mere ‘rubber stamps’ to issue summons by accepting everything that the prosecution alleges; but that they (magistrates) should satisfy themselves about the merits. The High Court then quashed the prosecution.

    Incidentally, it was revealed that many other affected companies bowed to the pressures of the administrative authorities, just to avoid litigation and botheration !

4. Conclusion :

    Administration and bureaucracy are capable of making a mockery of any law or any scheme of the Government. It requires courage to stand up against such attitude. Otherwise, the scenario will be indeed very gloomy. It is all the more required in our field of revenue administration. Are we too submissive ?

    (Refer Criminal Writ Petition No. 238/2009)

Is it fair To infer ‘Concealment’ without giving opportunity to disclose ? [S. 271(1)(c) of Income-tax Act, 1961]

Is It Fair

1. Introduction :


Of late, there has been a storm over conflicting decisions of
the Apex Court on ‘mens rea’ as an essential element of penalty for
‘concealment of income or furnishing inaccurate particulars of income ? The two
conflicting decisions particularly under reference are

— Dilip Shroff’s case 291 ITR 519 and Dharmendra Textiles
case 306 ITR 227.


The January 2009 issue of BCAJ carries an article on the
judicial analysis of these decisions. The purpose of the present article is to
bring out certain practical aspects occasioned by the e-regime.

2. As readers are aware, the process of submission of returns
has undergone a structural change in the last couple of years. Firstly,
corporate and other large entities like firms with tax audit are required to
file an on-line return. One has to fill in only what is prescribed in the form.
There is no room to furnish any explanation.

Secondly, others who file paper returns, can submit only the
return-form without any enclosures; not even a statement of income.

Now, under Income Tax, there are innumerable issues which are
debatable; many claims which are arguable. Assessees may have bona fide
claims e.g., on S. 14A; 40(a)(ia) — rate of deduction; 50C, 2(22)(e) and
so on. One may want to make a claim by placing on record the relevant facts,
reasoning and case law, if any relied on to be transparent. But he is deprived
of this opportunity and is permitted to submit only the arithmetic calculation.
This is unfair. In this context all these decisions now need to be reconsidered.

3. ‘Mens rea’ — a viewpoint. Admittedly, words like
‘deliberately’ or ‘wilfully’ are missing before the expression — ‘concealed or
furnished.’ However, one view is that the expressions ‘concealed’, ‘furnished
inaccurate particulars’, and tax ‘sought to be evaded’ — essentially connote
some deliberate or conscious act. Thus, the concept of ‘mens rea’ is
embedded in these three expressions without there being a need for separate
words like ‘deliberate’ or ‘wilful’. So also, in the two recent decisions cited
earlier, there is an issue as to whether an ‘obiter dicta’ can prevail
over the ‘ratio’.

4. It is unfortunate that on the one hand, there is chaotic
ambiguity in the provisions of law; on the other hand, there is no opportunity
to disclose your viewpoint proactively. This is aggravated by the ill-motivated
administration. Further, conflicting judicial decisions also make the life of an
assessee difficult. In the environment an assessee could suffer about 68%
outgoing in terms of tax and penalty, apart from interest.

5. Is it then fair to :



  •  try to punish honest taxpayers ?



  • make all lawful remedies ill-affordable ?



  • force an assessee to yield to unlawful demands ?



To make the law fair :



  • penalty and interest should not be levied unless there exists ‘mens rea’.



  •  an assessee should have the opportunity of giving reasons for a claim for
    deduction or an expenditure.
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Is it fair for the tax administration to knowingly indulge in wasteful paper-work ?

Is It Fair

1. Introduction :


In recent years, all the Government Departments are
embarking upon massive computerisation. Use of technology is always welcome as
it is expected to enhance efficiency and transparency. In the Income-tax Act,
there are provisions that are progressively making on-line submission of tax
returns and TDS returns compulsory. The amendments in S. 203, S. 206C(4) and
other relevant provisions are on cards for past few years. The implementation
is being postponed obviously on the ground that the whole machinery is not yet
geared up. It is a dream to allow on-line credit of taxes deducted at source
as well as of other tax-payments. There can be no two opinions about the
sanctity of the purpose. However, there appears to be excessive enthusiasm in
implementing it in the processing of returns. This is causing tremendous
hardship to the assessees.

2. Chaotic processing u/s.143(1) :



2.1 For A.Y. 2007-08, thousands of assessees have been
receiving intimations u/s.143(1) almost invariably resulting into sizeable
amount of tax-demand. The common reason in all such cases is non-giving of the
credit for TDS, advance tax and self-assessment tax.

2.2 Corporate and a few non-corporate assessees have been
pushed into the regime of on-line submission of returns. So also, for those
who are permitted to file paper-returns, are not allowed to submit any
enclosures. All the information is to be filled in the return itself. There
are columns requiring details of TDS (such as TAN of deductor) other tax
payments (such as BSR code or CIN of the Bank). On the basis of this
information, the Department is expected to allow credit. The TDS certificates
and receipted challans remain with the assessees.

2.3 The on-line information available with the Department
almost never matches with the claims made by the assessees. There are several
reasons for such discrepancies — such as non-filing of e-TDS returns by
deductors, incorrect entries made by deductor, defaults committed by deductor,
errors committed by banks in transmitting the information, other technical
problems at NSDL or other monitoring agencies and so on. On none of these
factors, the assessee has any control. He only holds original certificates and
challans. Gradually, even this is sought to be discontinued.

2.4 The obvious result is that there are huge tax demands,
panic among individual taxpayers, applications and correspondence for
rectification, repeated follow-up with the Department and all those unhealthy
consequences which are too well-known. It may so happen that the bureaucrats
may even refuse to grant credit unless the details are seen on their ‘screen’.
They will make the assessees and their representatives run from pillar to
post, with a sword of tax-demand hanging on their heads.

2.5 Needless to state that for such services, no one will
be willing to pay fees to the concerned professional. It will be a colossal
waste of man-days of our staff, our professional time, stationery and
unrequired effort. A totally futile exercise. It is a great wastage of
resources, causing unbearable botheration to all concerned — including the
staff of the Department.


3. Suggestions :


Wherever there is a mismatch between the claim and the
on-line information, the Department can send a simple interview-memo or
communication, asking the assessees to furnish relevant documents. Apparently,
the limitation of time prescribed in S. 143(1) proviso — may be a hurdle. This
can be overcome by suitable administrative instructions or even by an
amendment. It is not to suggest that the progress towards computerisation
should be stalled. But efforts should continue with a little application of
mind and human touch and without causing harassment to the ‘tax-payer’.

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Is it fair to have such a cumbersome process for refund under MVAT Act, 2002

Is It Fair

The MVAT Act, 2002, as we all know, has been made effective
from 1-4-2005 after wide-ranging protests and demonstration by business
community. The benefits of Vat, as academically explained in many books &
literature, were mainly — removing the cascading effect of tax on taxes,
transparency in the administration, self assessment, phasing out of CST & Octroi,
taxpayer-friendly approach, etc.


It is the 4th year of MVAT in Maharashtra and the tax
practitioner community perhaps knows better – how far these objectives have been
achieved; especially on administrative front. This article examines some of the
hardships experienced by the taxpayers in the implementation of the new levy :

1. The Return forms under MVAT have been amended TWICE in a
short period of 3½ years. (The fundamental accounting presumption of
consistency does not apply to so-called user-friendly tax administration)

2. Even the Vat Audit Report (Form 704) has been amended.
The Amendment comes in the midst of financial year, which results into several
hardhips on the Dealer as the information asked in the Audit Form 704 was not
required to be provided in return forms. The dealer has to recompile the
information at the time of preparing Audit Report in Form 704.

3. There were several extensions to the filing of Vat Audit
report for the financial year 2005-2006 and 2006-2007. (The repeated extension
of due date of audit must be unique to the Indian Tax System.)

4. Certain information viz. cash purchases, cash
sales, Maharashtra sales, oms sales, etc. and asking the reason for change
with reference to the previous year seems irrelevant. What purpose is going to
be served by having such information, is beyond comprehension.

5. Refund : Since MVAT is a multi-stage system of
taxation; it gives rise to refunds in many situations, such as exporters,
resellers, etc. The MVAT Act does not allow carry forward of such refunds to
the subsequent financial year. However, till financial year 2006-07, such
carry forward was allowed under administrative Circular issued by the Sales
Tax Department. But this practice has been discontinued from Financial Year
2007-08 and a dealer has to compulsorily claim refund of excess set-off by
making an application in Form No. 501. Some of the difficulties and hardships
suffered by the dealers in such procedure are as below :

(a) The dealer has to pay the tax liability arising in
subsequent period from his own pocket, even though excess tax paid by him in
the earlier period is lying with Government in the form of this refund claim.

(b) There is no monetary compensation to the dealer in the
form of interest.

(c) The dealer has to furnish bank guarantee to obtain
refund. (optional)

(d) The dealer is required to furnish copies of challans
and returns even when the data is already available, since the returns are
already filed online.

(e) Details of purchases for the relevant period are to be
submitted in a specified format as well as on a CD. Compilation of data in the
specified format itself is a cumbersome task, as the software used by the
dealer might not be able to generate the data of purchases in the specified
format. This information is to be given in respect of all the purchases during
a given period, irrespective of the amount of refund. This sometimes becomes a
very difficult exercise for a dealer. e.g., if there is a refund claim
of Rs.10000 only, but the turnover of purchases is Rs.5 crores, the details of
all purchases have to be submitted, which is a time-consuming exercise.

(f) Recent Trade Circular No. 35T of 2008, dated 10th
October 2008 has devised a new scheme known as Voluntary Refund Scheme. Under
this scheme, refund claim will be restricted to those purchases whose
suppliers’ return filing is confirmed.

(g) It also specifies that the dealer may voluntarily
furnish the proof of filing return by suppliers.

(h) For the balance refund arising due to subsequent
confirmation of filing of return by the suppliers, the dealer has to make
another application. Thus for the default committed by the suppliers, the
dealer may be penalised in the form of late refund or even no refund.

(i) The newly registered Large Taxpayer Units are to be
processed on priority basis. Where does the small dealer go who has been
paying taxes ?


It is a known phenomenon that difficulties on administrative
fronts are the main causes of corruption and tax evasion. If the Government
really wants to make the administration transparent and taxpayer friendly, this
entire process of obtaining refund should be done away with. Refund should be
granted immediately on the basis of returns filed by the dealer (similar to the
process under the Income-tax Act), with selective scrutiny and stringent
penalties for false claim — like S. 271(1)(c) of the Income-tax Act, 1961.
Alternatively, the option of carry forward of excess set-off to subsequent
periods should be restored.

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Gram Nyayalayas Act, 2008 to become operative from 2nd October 2009 — Press Release dated 29-9-2009.

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  1. Gram Nyayalayas Act, 2008 to become operative from 2nd
    October 2009 — Press Release dated 29-9-2009.

The Gram Nyayalayas Act, 2008 has been enacted to provide
for the establishment of the Gram Nyayalayas at the grass roots level for the
purpose of providing access to justice to the citizens at their door steps.
This Act shall come into force from Gandhi Jayanti this year i.e. 2nd
October 2009.

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A.P. (DIR Series) Circular No. 11, dated 5-10-2009 : Issue of Bank Guarantee on behalf of service importers.

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Given below are the highlights of certain RBI Circulars.

9. A.P. (DIR Series) Circular No. 11, dated 5-10-2009 : Issue
of Bank Guarantee on behalf of service importers.

Presently, an importer of services is permitted to issue a
Bank Guarantee up to US $ 100,000 or its equivalent in favour of the foreign
supplier of services, subject to certain terms and conditions.

This circular has increased the limit for issuing Bank
Guarantee in favour of the foreign supplier of services from US $ 100,000 to
US $ 500,000 for all importers (other than Public Sector
Companies/Undertakings and Central/State Government Departments), provided the
transaction is a bonafide transaction and the Bank Guarantee is issued to
secure a direct contractual liability arising out of a contract between a
resident and a non-resident. The importer is required to submit in the normal
course, to the Bank issuing the Bank Guarantee, documentary evidence for
import of services.

In the case of Public Sector Companies/Undertakings and
Central/State Government Departments the limit will continue to be US $
100,000. For issue of Bank Guarantee in excess of US $ 100,000 or its
equivalent prior permission is required to be obtained from the Ministry of
Finance, Government of India.

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A.P. (DIR Series) Circular No. 10, dated 5-10-2009 : Foreign Exchange Management Act, 1999 — Advance remittance for import of services.

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Given below are the highlights of certain RBI Circulars.

  1. A.P. (DIR Series) Circular No. 10, dated 5-10-2009 :
    Foreign Exchange Management Act, 1999 — Advance remittance for import of
    services.

Presently, the limit for advance remittance for all
permissible current account transactions for import of services without
obtaining a Bank Guarantee from the foreign supplier is US $ 500,000 or its
equivalent.

This circular clarifies that the said limit of US $ 500,000
or its equivalent is not applicable to Public Sector Companies/Undertakings
and Central/State Government Departments. And the limit for them continues to
be US $ 100,000 or its equivalent. For advance remittance in excess of US $
100,000 or its equivalent prior permission is required to be obtained from the
Ministry of Finance, Government of India.

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Foreign Exchange Management (Deposit) Regulations, 2000 — Loans to Non-Residents/Third Party against security of Non-Resident (External) Rupee Accounts [NR(E)RA]/Foreign Currency Non-Resident (Bank) Accounts [FCNR(B)] — Deposits

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Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars

  1. A. P. (DIR Series) Circular No. 66, dated April 28, 2009

Foreign Exchange Management (Deposit) Regulations,
2000 — Loans to Non-Residents/Third Party against security of Non-Resident
(External) Rupee Accounts [NR(E)RA]/Foreign Currency Non-Resident (Bank)
Accounts [FCNR(B)] — Deposits

Presently, loans up to Rs. 20 lakh can be availed by the
account holder/third party against security of deposits in NR(E)RA and FCNR(B)
accounts.

This Circular has increased this limit from Rs. 20 lakh to Rs. 100 lakh.
Hence, account holder/third party can avail loans up to Rs. 100 against
security of deposits in NR(E)RA and FCNR(B) accounts.

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Foreign Direct Investment (FDI) in India — Transfer of Shares/Preference Shares/Convertible Debentures by way of sale — Modified Reporting Mechanism

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Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars

  1. A. P. (DIR Series) Circular No. 63, dated April 22, 2009

Foreign Direct Investment (FDI) in India — Transfer of
Shares/Preference Shares/Convertible Debentures by way of sale — Modified
Reporting Mechanism

This Circular has made the following changes, with
immediate effect, in respect to reporting requirements in case of transfer of
shares/preference shares/convertible debentures by way of sale from resident
to non-resident and vice versa :

1. Form FC-TRS has been revised as per format attached to
this Circular.

2. Proforma for reporting of inflows/outflows by banks
has also been revised as per format attached to this Circular.

3. Bank receiving the remittance/handling the transaction
will have to carry out KYC non-resident purchaser as per format (Annex II)
attached to this Circular.

4. The resident transferor/transferee will have to submit
Form FC-TRS to the bank within 60 days from the date of receipt of the
amount of consideration.

5. In case of deferment of consideration (which continues
to require prior approval of RBI) the bank carrying out the transaction will
have to submit Form FC-TRS to RBI within 60 days from the date of receipt of
the full and final amount of consideration.

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External Commercial Borrowings (ECB) Policy —Liberalisation — Issue of guarantee for operating lease

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New Page 2

Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars

  1. A. P. (DIR Series) Circular No. 62, dated April 20, 2009

External Commercial Borrowings (ECB)
Policy —Liberalisation — Issue of guarantee for operating lease

Presently, AD Category – I banks are permitted to convey
‘no objection’ under FEMA for creation of charge on immoveable assets,
financial securities and issue of corporate pr personal guarantees in favour
of overseas lender/security trustee, to secure ECB to be raised by the
borrower, subject to compliance with prescribed conditions.

This Circular, in addition to the above, allows AD
Category – I banks to convey ‘no objection’ under FEMA for issue of corporate
guarantee in favour of the overseas lessor, for operating lease in respect of
import of aircraft/aircraft engine/helicopter, subject to compliance with
prescribed conditions.

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Decisions of CIC

Part A : Decisions of CIC


Personal information — Sections 8(1)(j)

    Mr. Shailesh Gandhi, Information Commissioner in Central Information Commission has delivered a few very significant decisions covering some of the basic issues under the RTI Act. The said issues have been major areas of conflict in the operation of the RTI Act and which have resulted in denial of information from the public authorities to the citizens. One such issue is the interpretation of section 8(1)(j) dealing with exemption of ‘personal’ information, the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of an individual.

    In this case, the applicant had sought certain information from the PIO of Government of NCT of Delhi, Home (General) Department in connection with issue of armed licences from January 2000 to December 2007. In reply, he was informed that no such records are managed by that department. The Appellate Authority, along with certain other observations, ruled that the information is exempt u/s.8(1)(j).

    Before the CIC, the PIO claimed that the information could not be given as it would intrude on the privacy of the applicants and the provisions of section 8(1)(j) exempt providing such information.

CIC’s decision :

    Words in a law should normally be given the meanings given in common language. In common language we would ascribe the adjective ‘personal’ to an attribute which applies to an individual and not to an institution or a corporate. From this it flows that ‘personal’ cannot be related to institutions, organisations or corporates. (Hence we could state that Section 8 (1) (j) cannot be applied when the information concerns institutions, organisations or corporates).

    The phrase “disclosure of which has no relationship to any public activity or interest” must be interpreted to mean the information must have some relationship to a public activity.

    Various public authorities in performing their functions routinely ask for ‘personal’ information from citizens, and this is clearly a public activity. When a person applies for a job, or gives information about himself to a public authority as an employee, or asks for permission, licence or authorisation, all these are public activities. Applying for an arms licence certainly falls in this category. As a matter of fact Section 4 (1) (b) (xiii) requires a suo moto publishing of ‘particulars of recipients of concessions, permits or authorisations granted by it.’

    Commenting on the phrase which states that releasing the information would lead to an unwanted intrusion of privacy, the decision states :

    “We can also look at this from another aspect. The State has no right to invade the privacy of an individual. There are some extraordinary situations where the State may be allowed to invade on the privacy of a citizen. In those circumstances special provisos of the law apply, always with certain safeguards. Therefore, it can be argued that where the State routinely obtains information from citizens, this information is in relationship to a public activity and will not be an intrusion on privacy.

    Certain human rights such as liberty, freedom of expression or right to life are universal and therefore would apply uniformly in all countries. However, the concept of ‘privacy’ is related to society and different societies would look at these differently. India has not codified this right so far, hence in balancing the Right to Information of citizens and the individual’s Right to Privacy, the citizen’s Right to Information would be given greater weightage.

    Therefore, we can accept that disclosure of information which is routinely collected by the public authority and routinely provided by individuals, would not be an invasion on the privacy of an individual and there will only be a few exceptions to this rule which might relate to information which is obtained by a Public Authority while using extraordinary powers such as in the case of a raid or phone-tapping. The applicant for a licence or permit or authorisation gives information of his own volition since he does not regard giving of this information as an intrusion on his privacy.”

    Based on the above reasoning, the CIC ruled that providing names of persons who applied for arms licences cannot be construed as an invasion of privacy and directed that information sought be provided.

    On reading the full decision of this case, I am wondering whether it should be possible to get information on the return of income of any third party under the RTI Act. In Mumbai, in one famous case reported in this column a few years before, the Department had rejected the application/appeal when one Mrs. Hoosenalli sought the information on the returns of income of Applause Bhansali Films Pvt. Ltd, the producer of the film : ‘BLACK’ (see BCAJ, July 2006 and earlier issues).

    [Mr. Jagvesh Kumar Sharma vs. Joint Secretary, Home & PIO, Home (General) Department, Government of NCT of Delhi : Decision No.CIC/WB/A/2008/00993/SG/2219, dated 16.03.2009].

Second case on section 8(1) (j) – Personal Information

    Mr. Mahesh Kumar Sharma (MKS) sought information to get certified copies of the documents under which NOC had been issued to Zile Singh for getting water connection.

    MKS claimed to be the son of said Mr. Zile Singh. Water connection is for the building which at the time of application was owned by Ms. Archana Sharma (Ms. A.S.). She is the daughter of Mr. Zile Singh. The PIO treated it as a third-party information and u/s.11 asked Ms. A.S. whether she has any objection in providing the information sought by Mr. MKS. It was objected by Ms. A.S., besides contesting the claim of Mr. MKS that he is the son of the late Mr. Zile Singh.

    Contentions of Ms. A.S. for objecting to the disclosure of the information to Mr. MKS are :

    1. The information has been given in a fiduciary relationship [Section 8(1)(e)].

    2. Disclosing it would be an intrusion on her privacy [section 8(1)(j)].

    3. Third party has the right to refuse to divulge with information relating to him and unless a large public interest can be established, the information will not be disclosed.

She also sought to justify her claim for denial of information by taking support from the judgment of the High Court of Gujarat, in Reliance Industries Ltd. vs. Gujarat State Information Commission & Others (covered in this column in Nov. & Dec. 2007 and January 2008). The Commission dealt with the above 3 grounds of objection as under:

o The information has been given in a fiduciary relationship. The third party is invoking the protection of Section 8(1)(e) of the RTI Act:

A fiduciary relationship is one where the key element is that the relationship is principally characterised by trust and the information is given for use only for the benefit of the giver. Here the information has been given as per the rules to get an authorisation to get a water connection from a public authority. The traditional definition of a fiduciary is a person who occupies a position of trust in relation to someone else, therefore requiring him to act for the latter’s benefit within the scope of that relationship. In business or law, we generally mean someone who has specific duties, such as – those that attend a particular profession or role, e.g., financial analyst or trustee. In the instant case a key element of the relationship between the applicant for a water connection and the Delhi [al Board certainly cannot be said to be primarily of trust by the applicant in the public authority, nor can it be said that the information was given for the benefit of the giver. The information was provided to get an authorisation    for a water connection. Accordingly, this submission    has no merit.

Disclosing it would be an intrusion on her privacy:

The third party is invoking the protection of Section 8(1)(j) of the RTI Act. On this point, same paras are stated as in the Order in the case reported as above dated 16th March 2009. Accordingly, this submission also has no merit.

Third party has the right to refuse to divulge information relating to him, and unless a larger public interest can be established, the information will not be disclosed :

No legal provision    has been  cited.

We will now look at the main contentions relied upon by the third party from the judgement of the Hon’ble Gujarat High Court:

a) It is necessary that a larger public interest must be justified and the purpose of the applicant and his profile and credentials looked at.

b) The Public Information Officer is charged with the duty to ensure that the Right does not become a tool in the hands of a busy body.

Right to Information is a fundamental right of citizens. The Act has elegantly and crisply defined its objective in Section 3 where it states “Subject to the provisions of this Act, all citizens shall have the right to information.”

The test of public interest is to be applied to give information, only if any of the exemptions of Section 8 apply. Even if the exemptions apply, the Act enjoins that if there is a larger Public interest, the information would still have to be given. There is no requirement in the Act of establishing any public interest for information to be obtained by the sovereign Citizen, nor is there any requirement to establish larger Public interest, unless an exemption is held to be valid. Insofar as looking at the credentials of the applicant is concerned, the lawmaker has categorically stated in Section 6(2), “An applicant making request for information shall not be required to give any reason for requesting the information or any other personal details except those that may be necessary for contacting him.” Thus, it is clear that the credentials of the applicant are of no relevance, and are not to be taken into account at all when giving the information. Truth remains truth and it is not important who accesses it. If there is a larger public interest in disclosing a truth, it is not relevant who gets it revealed to. Hence, we respectfully disagree with the contention of the Hon’ble Gujarat High Court.

Under this Act, providing information is the rule and denial an exception. Any attempt to constrict or deny information to the sovereign citizen of India without the explicit sanction of the law will be going against the rule of law. The citizen needs to give no reasons nor are his credentials to be checked for giving the information. If the third party objects to giving the information, the Public Information Officer must take his objections and see if any of the exemption clauses of Section 8(1) apply. If any of the exemption clauses apply, the PIa is then obliged to see if there is a larger public interest in disclosure. If none of the exemption clauses apply, information has to be given.

The third party’s objections made before the Commission about the exemptions of Section 8(1)(e)& (j)are disallowed. Hence, the information would have to be given.

[Mr. Mahesh Kumar Sharma vs. PI~, Delhi Jal Board, Govt. of NeT of Delhi: Decision No CIC/ AT / A/ 2008/01262/SG/2109 of 27.02.2009].


Part B : The RTI Act

Standing Committee of the Parliament on RTI Act, 2005 :

National Campaign for People’s Right to Information (NCPRI) has made a presentation before the above committee. Some of the items of the said presentation are worth noting to understand present deficiencies of the RTI Act.

In previous three issues of BCAJ, 7 items have been reported:

  •     Level of awareness
  •     Use and  misuse  of the RTI Act
  •     Reduction of 20-year period for keeping documents
  •     Voluntary  disclosures
  •     Changes  in Section  8
  •     Penalties
  •     Use of the RTI Act and  refusal  of information

Now  three  more  items  are being  reported:

  • Grievance    redressal

We believe that there is an urgent need to set up statutory public grievance commissions across the country, which have powers to redress grievances and to punish errant officials. A working model can be seen in Delhi, though it has limited powers. A draft legislation for such commissions has also been circulated by people’s movements to the Government.

Perhaps equally important, there is urgent need to take cognisance of the fact that RTI applicants, especially those belonging to the poorer and weaker segments of society, are being threatened, beaten and even killed for seeking information. RTI applicants and activists have been beaten up in many parts of the country, including Delhi. Efforts to dissuade people from exercising their fundamental right to information are a violation of both the spirit and the letter of the RTI Act. Therefore, Information Commissions should set up a system by which complaints of threats and violence related to the RTI are received and conveyed to the relevant authorities, and the action taken monitored and reported to the recommended RTI Council.

  • Application fee

We believe it is a good idea to have an application fee as it gives a greater sense of ownership to the applicant, and results in better recording of applications by public authorities, because of the necessity of issuing money receipts. However, we do not think that the amount should be raised above Rs. 10 for the moment. It would, along with penalties need to be subsequently revised upwards to reflect inflation.

Raising the fee would adversely affect the ability of the poor, many of whom do not have a BPL card even though they eminently deserve one to exercise their right to information. The belief that a higher fee might deter those who file a large number of applications is misconceived. Our study shows that most of these multiple applicants belong to urban areas and are relatively well off. It is, therefore, unlikely that even doubling or tripling the fee would discourage them, even if discouraging them were a desirable objective. However, raising the fee would certainly make it difficult for many of the poor to seek information.

  • Strengthening the RTI Act

At this point of the Act the most important step required from the Government is to ensure that there are extensive awareness campaigns and that all PIOs are trained and oriented to servicing the Act. Our study suggests that a large proportion of the PIOs are not trained in the RTI.Even those who have been trained need further training and need support materials like manuals and guides. Our study also revealed that over a third of the PIOsdid not even have a copy of the RTI Act.

There also needs to be regular monitoring of the functioning of the RTI Act. Towards this end, the Government needs to urgently set up a National Council for the Right to Information (along the lines of the NREGA Council). The minister in-charge of the nodal department in the Government of India could chair this council and members could include representatives of RTI movement, other prominent people from outside the Government, and secretaries of some of the critical departments.

The council could also have, as a permanent invitee, the Central Chief Information Commissioner, and as special invitees, other Chief Information Commissioners and Information Commissioners,on a rotation basis, from the Central and State Information Commissions.

This council should meet at least once in three months and review the functioning of the Act and of all its stakeholders. It should look into complaints and suggestions and advise the Government on corrective and additional measures required.

We also feel that little purpose is being served by insisting that a first appeal should be made in the department itself. Therefore, we suggest that the provision for a first appeal be deleted and applicants be allowed to directly appeal to the Information Commission.

The first appeal process should be replaced by a process where any refusal of information should be officially approved by a senior officer, and the senior officershould then also be liable for penalties if an offence is committed in refusing the information.

Also, we feel that nodal officers at various levels must be given the responsibility of monitoring the functioning of the RTI Act and take corrective action, where required. They must also report on the outcome of this monitoring to the Information Commission. Therefore, the Collector of each district and the secretary of each department should be given this role.


Part C : Other News

  • Padma Shri

If you know the right people, you could get Padma Shri as a gift, it seems.

Above  point  came out of RTI application    filed by a professor of a college to the Ministry of Home Affairs.

It appears that Jaipal Reddy, Union Urban Development Minister had recommended the name Dr. Sankara Reddy, a retired principal of Delhi’s Sri Venkateshwara College, as the said Principal had hired the wife of the Minister’s private secretary as professor of history even though there were other more deserving candidates.

CMS Rawat, President  of the Teachers’  Association, said  the hiring  of professor  Namita  was  a gross violation of university  guidelines.  “She only had an rMA degree and no teaching  experience.  There were candidates  who were PhDs, but Namita  got the job because of her husband’s  position.  She was initially hired on an ad hoc basis for four months, but she has been here for more  than  a year  now”.

It is also reported that during Sankara Reddy’s tenure, the college had been slapped with fines of over Rs.40 lakh for violating several building norms. Sankara had to oblige [aipal Reddy to get out of this mess. So he got the wife of Reddy’s private secretary a job with the college.

The college was also fined around Rs.27lakh by the ‘Electricity Department for misuse of power.

  • Health status of PM and the President

The Centre has refused to disclose information on PM’s and President’s health status, including details of medical expenses borne for the same, under the RTI Act, terming them as classified documents.

Refusing to divulge information on the health of all PMs to an RTI applicant, the Director, Emergency and Medical Relief said, “As the medical care scheme for the PM is a classified document, it is regretted that the information cannot be provided as per the exemption clause of the RTI Act.”

The President’s secretariat also rejected a similar RTI plea, asking for information on health status of the President.

  • Info on housing  co-op. Societies

Vijay Chauhan had asked 14 questions pertaining to housing societies – such as the names of societies where administrators had been appointed, names of deputy registrars who appointed the administrators and the tenure of administrators.

In his order, SIC Ramanand Tiwari said the RTI Act had its limitations. “It guarantees furnishing of available information. But as the appellant has prescribed a 14 point format and wants information of the whole department, this does not seem feasible.”

Surprisingly, State Chief Information Commissioner Suresh Joshi on the same point in January, 09 had ordered that the same information should be provided;

Tiwari relied on Section 7(9) of the Act for denying the information.

Shailesh Gandhi, Central Information Commissioner, is of the view that Section 7(9) does not permit the rejection of the application and only specifies that if the information could not be given in the format sought by the applicant, the PIO can provide the information in another format or give options like inspection of files. Section 7(9) cannot be used for denying information.

In this context, it may be noted that Mr. Tiwari faced a volley of grievances from RTI activists who participated in the discussion on the role of the Act and better governance at a seminar organised by Janhit Manch on 28.3.2009. While some of the queries questioned his Orders, in which he was reportedly soft on the PIOs, others related to his inaction against officers who disregarded SIC orders. Tiwari brushed aside most of the queries, saying they were ‘personal in nature’. Further, he stated: “I know there have been complaints like me being too soft on PIOs, but my disposal rate has been good. For me, the priority lies in providing information, but since the issue has been raised, I will try to improve and impose more penalties in future”.

  • Interesting report on RTI in Maharashtra in The Times of India

The  Right    to Information Act  (RTI) received a phenomenal response last year with 4.16 lakh queries being filed by citizens across the State.

The three -and-a-half-year-old Act has now become an effective weapon for lakhs of people who have been fighting to procure information. “Maharashtra has beaten all other States in the country and perhaps even the world, in the number of applications received” an exuberant State Chief Information Commissioner Suresh Joshi told TOL “There was a 33% increase in the number of RTI applications received by various Government organisations and public sector undertakings last year than that in 2007”.

The State Urban Development Department topped the list and received 1.04 lakh RTI queries. The queries usually relate to unauthorised construction permission for building proposals, assessments and establishment regulations. The Revenue Department, with 70,491applications came second on the list. People filed queries to procure details of land records from the Revenue Department as a lot of data still need to be updated and computerised.

The home department with 45,363 queries, came third. People began using the Act to find out the status of their FIRs and police investigations. In many instances, the police were forced to take action after the RTI query was filed.

The BMC received 46,967 applications filed by citizens on various local issues. The State Information Commission has penalised 256officers who had denied information and has levied a penalty of Rs.34.01 lakh over the past one year.

  • 4 members of the last Parliament break norms

In a reply to an RTIquery, the Lok Sabha Secretariat clearly said MPs travelling on official assignments should not seek five-star hotel comforts. But that is precisely what MPs N. N. Krishnadas (CPM), Jaisingrao Gaikwad Patil (NCP), Lal Mani Prasad (BSP) and Bhupendrasinh Solanki (BJP) were enjoying on November 26, when terrorists struck the Taj Hotel. The law makers were in Mumbai as part of a IS-member Lok Sabha Committee on Subordinate Legislation to hold meetings with the top brass of HPCL and other PSUs.

MPs had the nightmarish experience of the terror attack and had ducked under tables to escape bullets. The cost of board, lodging and transport of the panel during the tour is borne by the LS Secretariat as per the guidelines and not by PSUs, the RTI reply said.

  • Prime Minister’s  foreign travels

PM Manmohan Singh has run up a travel bill of Rs. 233.8crore for official foreign visits in the last five years, according to data released by the Government in response to an RTI query. His predecesor Atal Bihari Vajpayee spent Rs. 185.60 crore on foreign tours during 1999-2003, as per official data. The PM’s eight-day visit to Brazil and Cuba in Septemeber 2006 cost the exchequer Rs. 15.89crore and tops in foreign tour expenditure.

The seven-day visit to France, the US and Germany in September 2005 comes second with a travel expenditure of Rs. 13.4crore. The eight-day visit to the UK and the US came third with a travel bill of Rs. 11.9 crore.

A quick hop to neighbouring Dhaka for three days in November 2005 for a summit meeting of Saarc nations cost the taxpayers Rs. 3.70crore. The bill for his three-day tour of China last January was Rs. 6.80 crore.

And to think that such extravagant spending takes place in a country which ranks 94th in the Global Hunger Index of 119 countries as per the recent report brought out by the United Nations World Food Programme.

Flowering Trees

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Namaskaar

It was a lovely morning. I was enjoying my walk, admiring the
beauty of nature around me, and paying my silent tribute to the creator who
created this wonderful world. My eyes rested on a tree standing tall in its
majestic glory and fully decked with lovely flowers. I started thinking about
flowering trees. How many did I know ? I could recall about twenty in my mind.
And then it dawned on me, and what I had learnt came to my mind. Every tree
(unless it be a cone bearing one) is a flowering tree ! Every tree has to have
flowers. Only we fail to see the flowers. We do not have eyes for them.

And my mind wandered further. This principle applies to us
humans too. All of us have some wonderful qualities. Every one of us is great
and unique in some special way. God has made every one of us different. No two
persons have the same fingerprints. Each one’s DNA is different. Each one of us
is gifted with some good qualities.

It is said that no one is perfect. But it is equally true
that no one is totally devoid of good qualities. A 100% hero or a 100% villain
exists only in romantic films, novels of ‘Mills and Boon’ type or in TV serials.
Even in ‘Mahabharat’, ‘Ramayana’ and other epics, we find that the authors
realised this and depicted it correctly. Even great personalities like
Bhishma and Drona were not devoid of faults and weaknesses.
Bhishma silently witnessed the dishonour of Draupadi without
attempting to stop Kauravas, and Drona for the sake of money
backed the wrong side.

On the other hand Duryodhan stood firmly besides
Karna and conferred instant princehood on Karna when he was being
humiliated because of his alleged birth in a low caste family. He also chose to
fight Bhima and met his death at his hands when he could have well chosen
any of the other four of Pandavas who were no match for him in fighting
with Gada. Karna also magnanimously gave away knowingly his
Kavatch and Kundals which were providing him with invincibility, to
God Indra who came dressed as a beggar, knowing that he was signing his
own death warrant. Even Ravana had his good qualities. Laxman was
sent by Rama to seek wisdom from Ravana, when Ravana was
dying on the battlefield.

There are also numerous instances where the latent goodness
comes out and a person gets transformed from being a sinner to a saint. We all
know how Valya the dreaded robber became saint Valmiki and gave us
the priceless gift of Ramayana. In not too a distant past Leo Tolstoy
completely changed from leading life full of vices to reach great heights. He
became a champion of poorest of poor and started living a very simple life with
only bare necessities. He became one of the three major influences in Mahatma
Gandhi’s life. There is a current case of one Laxman Gode who was sentenced
eight times for as many as 19 criminal offences. Reading Mahatma Gandhi’s work
while in jail, completely transformed him. He came out clean, confessed to his
wrong deeds and is today totally devoted to Gandhiji’s ideals. He has been
responsible for spreading Gandhiji’s message amongst hardened criminals and
transforming many of them !

In Bhagvad Gita lord Krishna describes the qualities of good
persons in the first three shlokas of the 16th Chapter.

The Blessed Lord said :

Fearlessness, cleanness of life, steadfastness in the Yoga of
wisdom, almsgiving, self-restraint and sacrifice and study of the Scriptures,
austerity and straightforwardness,

Harmlessness, truth, absence of wrath, renunciation,
peacefulness, absence of crookedness, compassion to living beings,
uncovetousness, mildness, modesty, absence of fickleness,

Vigour, forgiveness, fortitude, purity, absence of envy and
pride, all these are his who is born with the divine properties, O Bharata.

Many of us do not posses several of these. But if we look
around carefully we will certainly find these in people around us. Let us find
such people and do not hesitate to learn from them, howsoever humble and lowly
they may appear. Let us then see that the best in us comes out and the tree of
our life flowers in full bloom.


“I look only to the good qualities of man. Not being
faultless myself, I won’t presume to probe into faults of others.”

— Mahatma Gandhi

SME Sector : Legal Overview

1. Introduction :

    1.1 The Small and Medium Enterprise (‘SME’) sector is the growth engine of the Indian economy. This sector is the fulcrum based on which the Indian economy would leapfrog into the next orbit. It also represents one of the largest employers in the country. As per some estimates, there are more than 12 million SMEs in the country, manufacturing over 8,000 different products and contributing about 9% of the GDP. Further, they also have a 35% share in Indian exports.

    1.2 However, inspite of these statistics, one must also bear in mind that the business mortality rate is also the highest amongst this sector. Hence, it is important that they get adequate support from the Government. Recognising their importance, the Government has enacted various legal provisions to safeguard them. This Article examines the different laws/provisions which deal with the SME sector.

2. MSME Act :

    2.1 The most important step taken was the enactment of the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSME Act’). The Act was enacted recognising the need for a comprehensive Act to provide an appropriate legal framework to facilitate the growth and development of the SME sector and to enhance their competitiveness. This Act was officially notified in the Gazette on 18th July 2006.

    2.2 The Act applies to Micro, Small and Medium Enterprises. Before understanding these three definitions, let us understand the meaning of an ‘enterprise’. It means :

  •     an industrial undertaking/business concern/other establishment by any other name,

  •     which is engaged in the manufacture or production of goods pertaining to an industry specified in the Industries (Development and Regulations) Act; or

  •     which is engaged in providing or rendering any service.

    Thus, it can be a manufacturer SME or a service-sector SME. A third type of an SME would not be covered. For instance, would a kirana store (a small-time grocer) be covered under this definition ? In a sector where a vast percentage of the businesses are small-time traders, one wonders why the Act did not think of covering them. There is no definition of the terms service, manufacture and production. Further, the manufacturing activity should only be of those goods which are specified in the First Schedule to the IDRA Act. It is quite strange, that the Act sought to restrict manufacturing only to a limited type of goods and did not think it fit to enlarge the canvass to cover all types of production activity.

    However, the legal form of the enterprise is not relevant, i.e., it could be a sole proprietorship, partnership, LLP, company, HUF, society, AOP, any other legal entity, etc.

    2.3 Under the MSME Act, the Central Government has, vide Notification dated 29th September 2006, classified enterprises as given in table below :

    In calculating the investment in plant and machinery, the Government has notified certain items which should be excluded. Further, in the case of imported machinery, items such as, import duty, shipping charges, customs clearance charges and VAT should be taken into account.

2.4 There is a requirement of filing with certain designated authorities, a Memorandum known as “Entrepreneur’s Memorandum” as given below.
2.5 Where any supplier, which is a micro or a small enterprise and has filed the Memorandum, has supplied goods/rendered service to any buyer, then the buyer must make payment to him within the time agreed upon between them. The maximum duration for payment must be within 45 days from the day of acceptance. If the buyer does not pay as per this schedule, then he is liable to pay compound interest with monthly rests at thrice the bank rate notified by the RBI. Thus, the defaulter has perforce to pay interest for the period of delay at 3 times the bank rate of interest notified, from time to time, by RBI (which is presently 6% and three times thereof will be 18% p.a.) compounded with monthly rests, notwithstanding any condition to the contrary in the contract between the ‘buyer’ and the ‘supplier’. Medium enterprises are not eligible for this protection.

2.6 Disclosure in accounts:

2.6.1 S. 22 of the MSME Act requires every buyer, who is required to get his accounts audited under any law, to furnish the following information in his annual  accounts:

a) The principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of the accounting year.

b) The amount of interest paid by the buyer in terms of S. 18, along with the amounts of the payment made to the supplier beyond the appointed day during each accounting year.

c) The amount of interest due and payable for the period of delay in making payment (which has been made but beyond the appointed day during the year) but without adding the interest specified under this Act.

d) The amount of interest accrued and remaining unpaid at the end of each accounting year.
    
e) The amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure u/ s.23 of the Act. This clause uses the words small enterprise. Does this mean that payments to a micro enterprise are not covered ‘by this clause?

The penalty for non-compliance is a fine which shall not be less than Rs. 10,000.

3. Schedule VI of Companies Act:

3.1 Schedule VI to the Companies Act, 1956 was also amended by Notification No. GSR 719(E)dated
16-11-2007. Part I dealing with the format of the Balance Sheet requires the following information to be provided under the heading ‘Sundry Creditors’ :

a) total outstanding dues of micro enterprises and small enterprises; and

b) total outstanding dues of creditors other than micro enterprises and small enterprises

3.2 Further, the Schedule also requires the following information (which is also required u/s.22 of the MSME Act) to be disclosed under the Notes  to Accounts  of the Company:

a) the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year;

b) the amount  of interest  paid  by the buyer  in terms of S. 16 of the Micro, Small and Medium Enterprises Development Act, 2006, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year;

c) the amount of interest due and payable for the period of delay in making payment (which has been made but beyond the appointed day dur-ing the year) but without adding the interest specified under the Micro, Small and Medium Enterprises Development Act, 2006;

(d)  the amount  of interest  accrued and remaining unpaid at the end of each accounting year; and

(e) the amount  of further  interest  remaining  due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure u/s.23 of the Micro, Small and Medium Enterprises Development Act, 2006.

3.3  Saral    Schedule    VI:

3.3.1 The Ministry of Corporate Affairs has issued two drafts of revised Schedule VI for comments, namely Saral Schedule VI for Small and Medium Companies (SMCs) and other for Non Small and Medium Companies. ‘Small and Medium Sized Companies’ (SMCs) are defined in Rule 2(f) of Companies (Accounting Standards) Rules, 2006. SMCs are defined to mean a company which fulfills and satisfies the conditions mentioned here-under as at the end of the relevant reporting period:

i) whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India;

ii) which is not a bank, financial institution or an insurance c0mpany;

iii) whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding reporting period;

iv) which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding reporting period; and

v) which is not a holding or subsidiary company of a company which is not a small and medium-sized company.

3.3.2 The proposed ‘Saral Schedule VI’ to the Companies Act, 1956has been proposed to take care of the following  needs:

a) make it simple  and  user friendly  for SMCs

b) have minimum  disclosure  requirements

c) ensure that the accounts have compatibility and convergence with IFRS

d) users needs  are limited

4. Income-tax Act :

4.1 5.23 amends the Income-tax Act to provide that the amount of interest payable or paid by any buyer in accordance with the provisions of the Act, would not be allowed as a deduction for computing its income. Thus, in addition to the penal interest payable by the buyer, he will also have to bear the liability to income-tax thereon, as such interest on delayed payments to MSEs (whether already paid or remaining accrued due and payable) will be added to the taxable income of the buyer and subjected to income-tax, year after year, until it is finally paid to the affected supplier. Therefore, the only way for the buyers to avoid such interest and income-tax liability is to pay promptly the supplier’s bills.

4.2 In pursuance of the provisions of the MSMED Act, the CBDT has notified instructions to all assessing officers, vide their Instruction No. 12/2006 dated 14-12-2006, thereby directing them to implement:

a) The provisions u/s.22 of the said Act, which require the aforesaid disclosures, would enable the assessing officers to ascertain the correct amount of disallowance on account of interest payment or paid by the buyer, and

b) S. 23 of said Act lays down that the amount of interest payable or paid by any buyer under or in accordance with the provisions of MSME Act shall not be allowed as deduction in the computation of income.

4.3 Recently, Appendix II, in Form No. 3CD was amended by Notification No. 36/2009, dated 13-4-2009. A new item # 17A has been inserted, which requires the disclosure of the amount of interest inadmissible u/ s.23 of the Micro, Small and Medium Enterprises Development Act, 2006. Thus, by the amendment a duty is now cast also on the auditors of the (buyers) asses sees to reporting of any interest payable to such suppliers and the con-sequential disallowance of the same.

5. Role of CAs:
5.1 Chartered Accountants should bear in mind the requirements under the above laws while auditing the accounts of companies which have dealings with SMEs or which are SMEs themselves (once the Saral Schedule VI) is notified.

Our valuable treasures

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Namaskar

“There is a sufficiency in the world for man’s needs but not
for man’s greed”

—
Mahatma Gandhi


As human beings, we are blessed with the wonderful priceless
treasure of resources. Internal resources, in the form of intellect, emotions,
mind, senses, thought power along with valuable external resources provided in
nature.

But, do we sincerely appreciate the worth of these valuable
resources bestowed upon us by the Almighty ?

Our present life style of ‘Instant & Disposable’, ‘Use
& Throw’, reflects nothing but disregard and abuse of the resources. Credit
card facilities, consumer finance, free home delivery, exchange offers, etc.
have made life easy, but at the cost of most risky attitude to ‘Take things
for granted’ and hence losing their values. Unless we are conscious about
our intrinsic values we can’t be just and fair to the use of external resources
gifted by nature to nourish us.

Being, a civilised persona, in our pursuit of protecting the
social values we need to ensure about prudent and optimum utilisation of
resources.

We have to first learn to distinguish between ‘need’ & ‘want’
to ensure optimum utilisation of resources. Once we act mindfully with rational
approach, we would be just and fair to ourselves as well as to the society as a
whole.

To share here a conversation of Buddha with his
disciple, which I feel conveys the essence very nicely.

One day, one of the disciples of Buddha approached him
and said humbly “Oh my teacher ! While you are so much concerned about the
world, why don’t you look into the welfare and needs of your own disciples
also ?”


Buddha : “OK. How I can help you ?”


Disciple : “Master ! My attire is worn out and is beyond
decency to wear the same. Can I get a new one, please ?”


Buddha found that the robe indeed was in a bad condition
and needed replacement. He asked the store keeper to give the disciple a new
robe to wear. Then, he asked the disciple, “Is it comfortable ? Do you need
anything more ?”


Disciple : “Thank you. The attire is indeed very
comfortable. I need nothing more.”


Buddha : “Having got the new one, what did you do with
your old attire ?”


Disciple : “I am using it as my bed spread.”


Buddha : “Then . . hope you have disposed of your old bed
spread.”


Disciple : ” No, Master. I am using my old bedspread as
my window curtain.”


Buddha : ” What about your old curtain ?”


Disciple : “Being used to handle hot utensils in the
kitchen.”


Buddha : ” Can you tell me what did they do with the old
cloth they used in kitchen.”


Disciple : “It is being used to wash the floor.”


Buddha : ” Then, the old rug being used to wash the
floor . . .?”


Disciple : “Master, we used it as a twig in the oil lamp
which is right now lit in your study room….”


Buddha smiled in contentment and left for his room.

If not to this extent of implementation, can we at least
start thinking on this direction in our pursuit to achieve the optimum level of
utilisation of our valuable resources ? The depth of spirit reflected in this
dialogue could prove to be of tremendous value from economic, social as well as
spiritual perspective.

Such mindful thought process and conservative approach would
turn out to be most favourable in the present chaotic atmosphere of global
economic recession, lay offs and cut-offs. Cases of depression, violence,
suicides have multiplied in the society. It is time to pause and think
rationally to arrive at a balancing solution. We need to evaluate the resources
at our disposal so as to ensure their optimum utilisation by assigning the real
utility values.

Our religious tradition teaches us that we have been given
dominion over the resources on this earth, but we must be good stewards of them.
Our constant endeavor should be towards developing the value culture to bequeath
in legacy for our generation.

From spiritual perspective, the concept of ‘Aparigrah’
has great significance for the soul seeking liberation. To grow internally and
enrich our inner self, we must create the space by least of accumulation.


Let us worship God by respecting the values of His divine grace showered in
the form of precious resources in our life !

levitra

Inbound Investments and Recent Developments in FDI Policy

Lecture Meeting

Subject : Inbound Investments and Recent Developments in
FDI Policy

Speaker : Mr. Somashekhar Sundaresan, Advocate

Venue : IMC Hall, Churchgate, Mumbai.

Date : 8th April, 2009

1.
Introduction of the Subject :


 a) The learned speaker at the outset observed that the Foreign Direct Investment (FDI) Policy has always been a contentious issue. Recently in an attempt to simplify the FDI policy, the Dept. of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry has issued three Press Notes being PN 2, PN 3 and PN 4 all of 2009. These notes and related issues will be the subject matter of today’s discussion. To describe in nutshell, Press Note No 2 seeks to bring in clarity, uniformity, consistency and homogeneity into the methodology of calculation of direct and indirect investment in Indian Companies engaged in varied sectors and activities. Press Note No. 3 gives guidelines for transfer of ownership and control of Indian Companies from the hands of resident Indians to non-resident entities. Press Note No. 4 lays down the policy of downstream investment by Indian Companies.

    b) As a normal rule, investments of Non-Resident Individuals, Companies and other N.R. bodies in Indian Companies require approval of Govt. The issue becomes complex where the investment is made by Indian Companies in which there is already a foreign shareholding. Till recently, though the condition of getting approval from Foreign Investment Promotion Board (FIPB) was prescribed, the criteria and expected norms and preconditions to be fulfilled for getting such approval were never laid down or prescribed. Again, one has to keep in mind the various rules and norms applicable to investments, depending on category and nature of activity of Investee Co. For example foreign investment is prohibited in Defence-related sectors, whereas certain caps or ceilings on percentage of foreign holdings are applicable to other categories. There are also some automatic routes not requiring approvals. In software industry for example even 100% foreign investment is permitted. Where F.I.P.B. initiated action against companies for not taking required approvals, F.I.P.B. required the companies to get their offences compounded through RBI. In the absence of specific guidelines on the criteria to be applied, the position of so-called erring industries was unenviable and precarious.

    c) After explaining the background, the Learned Speaker moved to detailed analysis of each Press Note and gave his comments thereon.

2. Press Note No. 2 of 2009

    Press Note 2 has introduced a new concept of treating an Indian Company as a foreign Co., for the purpose of FDI, if it is owned and controlled by persons other than Indian citizens and Indian Cos. For deciding exact category of such investee Co., the concept of owning 50% plus one share will be the determining factor.

    The concept of takeover and control regulation, where control is exercised without owning 50% plus one share is not adopted as is apparent from Press Note No. 2. What is being adopted is ability to control the composition of Board of Directors. The nationality of Directors is not relevant. So, if 50% plus one share is owned by foreign individuals and/or foreign body corporates, such Indian Co. will be deemed to be Foreign Co., for purposes of deciding the percentage of foreign investment in any Indian investee Co. For deciding the question of approval of F.I.P.B., it will also be necessary to look into issues like nature of activity, prohibited fields, sectoral caps on investments, etc. So long as investor Co. is owned and controlled by Indians, the existence of foreign shareholding in such Investing Co. can be ignored.

3. The line drawn by Press Note No. 2 is that so long as the percentage of foreign investment is less than 50%, the Co. will be treated as owned and controlled by Indians, giving it freedom to make investments in other Cos. and will be considered as investment by Indian Co. There is a general rule that the status of holding Co. whether an Indian Co. or foreign Co, decides status of its wholly-owned subsidiary. If there is a wholly-owned subsidiary of a deemed foreign holding Co. and the holding Co. in turn is owned and controlled by foreign interest, even then the subsidiary Co. will not automatically become deemed foreign Co., but the degree of foreign control will be measured by percentage of foreign stake in the holding Co. This is a departure from general rule made by Press Note No. 2.

4. Press Note No. 3 of 2009

    This Note deals with issues arising from transfer of shares. Earlier the Reserve Bank Master Circular of October 2004 dealt with threshold caps, cross-border transfers and pricing of such transfers. Now, as per this Press Note, any transfers of shares from Resident to Non-Resident, if not resulting in a change in ownership and control from Indian hands to foreign hands, does not require approval of F.I.P. Board.

5. Press Note No. 4 of 2009

    a) This deals with downstream investment where an Indian Co. having foreign shareholding invests in another Co. If such Co. makes investment in shares of other Indian Co., it is called downstream investment.

    b) Any economic sector in which such Indian Co. is operating will be its operating field. This will include even Non-Banking Financial Cos. Investment of such operating Co. in another Co. is considered by this Press Note.

    c) If the activity of a Co. is not prohibited as in case of Defence-related fields, then investment in that Co. through FDI will be permitted, subject to sectoral restrictions or ceiling on percentage holding. To illustrate, a software activity is not a prohibited activity, so any investment in such software company even by deemed foreign company is not prohibited, nor will it be violation of Exchange Control Regulations. However, where a company wants to act purely as investment company and does not participate in the activity of investee Co., then the approval of F.I.P.B. will be required.

    d) In respect of Non-Banking Financial Cos. having many activities such as financing, hire-purchase, underwriting shares and rendering other services, then approval will have to be taken by NBFC.

e) Where a foreign company wants to buy and sell shares on Indian stock market, FII Registration will be necessary. There are restrictions on holdings and dealings of Foreign Institutional Investors in Indian companies; percentage caps, sectoral restrictions govern such investments. In contrast with restrictions on purchase of shares, sale of shares by Non-resident on stock exchange is permitted. After such sale, the proceeds can be repatriated without any prior permissions or approvals.

f) There is restriction on buying shares on stock exchange. Where shares are purchased for investment purposes, the approval of F.I.P.B. will be necessary. For operating-cum-holding company the real test will be whether ultimate investee company is on automatic route or whether there exist any restrictions qua activity, or percentage holding.

6. The learned Speaker thereafter ably replied various questions raised by participants. The meeting then terminated with a vote of thanks to the learned Speaker Mr. Somashekhar Sundaresan.

MVAT Audit — Some important issues

Lecture Meeting

Subject : MVAT Audit — Some important issues



Speaker : Govind Goyal, C.A.


Venue : I.M.C. Hall, Churchgate, Mumbai.



Date : 21st January 2009








(1) While introducing the subject, the speaker said that
Notification of October 2008, introduced new Form No. 704 being Report of the
Auditor. The Commissioner of Sales Tax issued a Circular stating that all
Reports submitted after 10th November 2008 shall be in new Form No. 704 and not
in old Form.

(2) After studying the new Form, the WIRC of the Institute
made representation to the Commissioner of Sales Tax (CST) that certain clauses
in the new Form need to be changed, since they cannot be certified by Chartered
Accountants and are inconsistent with provisions of law. After discussion, the
Commissioner agreed that those clauses need to be changed. Another Circular was
issued in December 2008 clarifying that for year 2007-2008, the Auditor will
have an option to submit his Report either in the old Form or in the new Form
No. 704 and the same should be submitted before 31st January 2009.

(3) In Part-I of old Form No. 704, there were 9 statements to
be certified by the Auditor. This number is now increased to 15 certificates. He
has now to certify that he has read and understood the instructions given in the
new Form. He has also to certify that the dealer was carrying on his business
activity from the principal place and additional places registered with the
Sales Tax Department. It is difficult for the Auditor to issue such certificate.
His duty is to audit books with the supportings. Similarly, the new Form
requires him to certify that all transactions recorded in the books of accounts
are reflected in bank statements. This is not possible particularly when the
dealer followed mercantile system.

(4) In Part-II, general information about business of auditee
is required to be given. Now certain ratios are to be reported and they are :

à
Net turnover to total turnover


à
Cash Sales to Total Sales


à
Cash Purchases to Total Purchases


However, neither the MVAT Act nor the Central Sales Tax Act
defines Cash Sales or Cash Purchases. It is not clear whether they include
cheques, or credit card.

(5) The auditor has to certify details of purchases over
Rs.5,00,000 from new local suppliers. The term new local suppliers means persons
from whom no purchases were made in preceding year. This casts additional
responsibility to find out the position for preceding year also. This makes the
Auditor’s duty onerous.

(6) Part-III of Report contains schedules :


In one schedule, the Auditor has to certify figures of
Sales/Purchases per returns, the figure determined from books and
re-conciliation of differences with reasons.

(7) In reporting, the Auditor has to give details of the
Auditor who has certified the accounts statements under the Income-tax Act. The
speaker observed that this is again inconsistent because there may be cases
where audit is conducted under the Companies Act or Co-op Societies Act or Trust
Act; but those may not be required under the Income-tax Act.

(8) Determination of Gross Turnover of Sales and Purchases :


Turnover means aggregate of Sale Price or Purchase Price of
transactions effected during the year. Sales/Purchase includes not only
Sale/Purchases of goods traded or manufactured by the dealer, but also covers
spares, components, packing materials, fuel. It also includes Capital goods. Net
turnover will not include taxes collected or paid. However, the gross turnover
of Sales/Purchase will include tax collection. Labour charges are to be excluded
since they are not sale of goods. Deduction should also be made of goods
returned within 6 months from the date of sale. While determining the turnover
the Auditor must take note of sale/purchase of scrap, sale/purchase of capital
goods like plant and machinery and miscellaneous purchases included in printing
& stationery, in repairs and maintenance charges, and in sales promotion
expenses. The Auditor must keep in mind the accounting standards, and the
guidance note of the Institute states that taxes collected by dealer as well as
excise duty shall not form part of income. If any portion of collection of tax
and duty has remained unpaid, the same should be shown as liability.

(9) For determining turnover of inter-State sales, deduction
is also to be made of freight and transport charges included in sale price.
Thereafter for Gross turnover of sales, the taxes collected and excise duty is
to be added.

For quantifying taxable sales in Maharashtra, deduction is to
be made of inter state sales, exempt sales, labour charges and taxes and excise
duty collected, to arrive at net taxable turnover liable for MVAT.


Computation of Tax : The taxable turnover is to be
bifurcated into five Schedules according to their categories. The tax rates are
NIL for Sch. A (exempt goods), 1% for Sch. B Goods, 4% for Sch. C and specified
rate for petroleum and liquor referred in Sch. D and for residuary goods in Sch.
E the rate is 12.5%. The Auditor will determine and state net taxable sale under
each schedule giving entry No. and tax rate. If the dealer has collected excess
tax, the same stands forfeited in favour of Government.

(10) In turnover of purchases after necessary deductions, the
Auditor has to verify taxes paid on purchases for determining set-off or input
tax credit.

Conditions for allowance of set-off :

a) Goods purchased should be from registered dealers.

b) The entries in the register should be supported by tax invoices.

c) The purchase register and tax invoice should give the date, invoice No., name and address of supplier, registration No., net purchase price and VAT charged separately. The provisions of Rules 52, 53 and 54 dealing with set-off working should .be borne in mind. If the VAT charged is not mentioned separately, set-off will not be granted. The aggregate amount of set-off is subject to statutory deduction per Rule 53 and negative list per Rule 54.

11) Tax on purchase of goods and packing materials used for manufacture and packing of tax-free goods is not allowed for set-off.
 
12) Where there is difference in tax due or set-off claimable per working by Auditor and per returns of dealer, the auditee should be advised to file revised return and pay the difference before finalising and submitting Form No 704. A note should be taken of revised return. In the said report, the auditor should also state the period for which further set-off is due and resultant refund due.

13) Works  contracts:

In works contracts, determination of taxable quantum of sale forming part of Final Bill and the tax rate applicable thereon is the most complicated region in M-VAT Audit.

14) Whether a particular contract is a works contract or a sale simpliciter is a matter of controversy. Judgments of the Apex Court on works contracts of almost similar nature vary from each other. Assuming a particular contract is a works contract, determination of sale component is equally challenging. The gross amount of bill is a composite figure involving sale of material and sale of services. Tax is not leviable on service element under MVAT. Rule 58 prescribes mode of determination of sale price. From gross amount of bill eight items of deduction are to be made; some of which are:

i) Architect’s  or designer’s  fees

ii) Labour and service charges in respect of contract

iii) Water charges

iv) Profit margin of dealer in respect of Labour/ service charges. The balance constitutes sale price on which tax is payable @4% or @12.5% (general rate) or @ 8% under the composition scheme, depending on category of goods involved.

15) In actual practice, dealers undertaking works contracts are reluctant to disclose items like expenses on services, architects fees and their profit margin. To overcome this, the State Government has evolved a table for various types of contracts, such as construction contract, fabrication, painting, air conditioning, repairing and annual maintenance contract. The rate of deduction for component of services are mentioned against each category of con-tract. To illustrate, in building construction contract the value of services will be taken” at 30% and the balance of 70% will be treated as sale of material liable to VAT.

16) In Practice, it was found that contractors felt that in spite of prescribed table, it is not possible for them to make invoice. A representation was made to design a scheme akin to composition scheme. So u/s.42 of the MVAT Act, composition scheme is designed providing 8% of total contract value will be regarded as MVAT payable. Another representation was made requesting for reduction of rate of 8% on construction contract which was reduced to 5% from 20th June 2006.

If construction contractor is opting for composition, then their set-off on purchases is reduced.

17) Where composition is not opted, the normal set-off as per Rule is permitted. If, it is opted, the set-off claim is scaled down, if composition is un-der 8% scheme, set-off amount will be reduced by 36%. If composition is under 5% scheme, set-off clause will be reduced by an amount being 4% of total purchase price. The normal composition rate is 8% applicable to all works contracts, whereas building contractors can opt for 5% for construction contract and 8% for contract other than construction contract. The set-off on works contract other than construction contract is to be scaled down by 3% of purchase amount and for construction contract this scaling down is by 4%.

18) Unlike the composition scheme applicable to hoteliers or retailers where entire turnover is required to be considered, construction contractors can opt composition @ 5% qua contract. Similarly, under other composition scheme the dealer is not permitted to collect tax from customers. But under the works contract composition scheme, the dealer can collect tax. These aspects must be kept in mind while determining gross turnover and net turnover. While going through profit & loss account, the Auditor should verify whether hire charges are credited to profit & loss account. These may be in respect of leasing of goods. Earlier there was a separate Act-‘Right to use goods Act’. All amounts received for leasing of goods, machinery, furniture were liable to MVAT atapplicable rates which are 12.5% for leasing of machinery, furniture and 4% for computers. So these receipts should be considered in determining gross and net turnovers.

19) Provisions applicable to mandap decorators, hotel industries, 2nd-hand car dealers, retailers and bakary dealers:

Though the composition scheme to  mandap decorators was announced in 2007, the same was made applicable from 1-4-2005. All these dealers can discharge their tax liability by paying 1.5% tax on total turnover.

In case of dealers in hotel industries, second-hand car trade, retailers and bakery dealers, the Auditor should verify weather they have applied for in prescribed form to the Revenue authorities for coming under the composition scheme. Application has to be made either at the time of registration or at the beginning of financial years. Once the dealer opts for the scheme, he cannot come out of the scheme till the end of that financial year. Similarly these dealers are not permitted to collect tax from customers. This is a pre-condition. Therefore, sale price will not be treated as inclusive of tax. The tax @ 8% will be payable on entire sale price. In case of hotels charging rent for rooms, since rooms are immovable property, the rent earning is not liable to MYAT tax.

Where room hire charges are inclusive of breakfast or breakfast & lunch or breakfast, lunch & dinner, the charges attributable to these facilities are determined by applying the following table to gross rent collection, viz. :

For breakfast        –  5% of total rent
For breakfast & lunch    –  10%
For breakfast, lunch  & dinner   –  15%

The amount worked out at applicable rate to gross room rent will have to be considered for arriving at taxable sale price.

20) Determination of taxable turnover in case of C.F.I. Units located in backward area:

Where units are enjoying incentives whereby they do not have to pay any tax on turnover of sales, turnover of sales and purchases are determined in normal manner but set-off on purchases will not be allowed, but they are entitled to claim refund of taxes paid on purchase including tax paid on capital goods.

CFI unit in backward area, similar deduction is to be made. From final bill, the payment is made to CFI units for purchase of goods used in works contract. The remaining amount will be liable to tax @ 4% or 12.5% as the case may be.

21) As regards refunds till March 2007, the refunds due per return up to March 2007 were allowed to be carried forward. But refunds due for 2007-2008 cannot be carried forward. Refund due as per return or revised return for March 2008 or due as per Audit Report cannot be carried forward.

22) Re : Medicine  dealers  if pharmacies:

Till June 2007, turnover was determined as per MRP Scheme. From July 2007 the determination is to be made as done in normal dealers. Till June 2007 tax was collected from manufacturers on basis of MRP. The said scheme is discontinued. All medicine dealers had to submit stock statement as on 30-6-2007.

23) MVAT applicable to liquor licence dealers: S. 61:

Turnover limit of Rs.40 lakhs applicable to normal dealers does not apply to liquor licence dealers.

The dealer may permit other dealer to use his licence for liquor trading. The person using the licence has also to get his accounts audited, irrespective of the amount of turnover.

24) As regards Kirana merchants, they can opt for the composition scheme. If they have opted for the composition scheme, the tax rate will be 5% or 8%. If they have not opted, difficultly arises in determination of turnover of various categories of goods liable for different rates e.g., sugar, wheat, pulses are tax free, whereas on items like toothpaste, tax is 5% and on sale of dry fruit the rate is 4%. Very often he makes one cash memo for all these items, so also he does not make cash memo but records sales in his diary. As per Circular of the Commissioner and guidance note of WIRC, in all such cases, the turn-over of sales is to be determined in ratio of turnover of purchases as per purchase register. By applying above ratio, the sales turnover is determined.

25) Textile  processors:

Till 31st March 2005, they were exempt from tax. This was withdrawn under the MVAT Act. Processing is a works contract. On basis of purchases of chemicals and other materials, the taxable turnover is determined. In response to representation of Textile Processors Associations, the Finance Minister in Budget speech, assured that textile processing will not be treated as works contract and their trade will be exempt. Notification was then issued granting exemption to textile processors. Set-off will not be allowed on taxes paid on purchase of materials and capital goods. However, per Notification of 23rd October 2008 as per Rule 53(10) they will be entitled to claim set-off on purchases of capital goods and taxes on material used for processing. The exemption being applicable from 1-4-2005, those textile processors who have paid VAT as works contractors, can revise their returns and claim refund of taxes paid.

The revised Audit Report will have to be submitted giving reasons for revision. Revised Report should be filed only after the revised returns are filed by the dealer.

26) Verification  of CST  Returns:

S. 5(1) to S. 5(3) describe three different categories of inter-State sale, export sale & export sale without taking delivery of import. In such cases the ultimate consumer should pay charges of Bill of Entry, Customs duty and forwarding charges. Otherwise claim u/ s.5(2) may get disallowed.

S. 5(3) deals with transaction where the sale is effected to actual exporter. Such dealer should furnish declaration Form H which can be given for inter-State purchases as well as local purchases. Sale on Form 11 is treated as inter-State sale even if exporter is located within Maharashtra.

Export of goods without taking delivery through negotiation of Railway receipt or lorry receipt. The movement of goods should not be broken, if the claim of inter-State sale is to be proved. Secondly all dealers in the transaction must be registered dealers. Under CST, it is also necessary to collect Form E-1 from the selling dealer and Form ‘C’ from the purchasing dealer. In the event the dealer negotiating the documents fails to collect Form E-1, but collects only Form C, then such transaction will be treated as inter-State transaction liable to CST. The dealer negotiating Railway or lorry receipt has to issue Form E-2 to the purchasing dealer.

S. 6A of the CST Act deals with branch consignment transfer.

(27) Branch  transfer and  consignment sales:

Where movement of goods from one State to another State is otherwise than under contract of sale, then it is to be considered as branch transfer or consignment transfer. The conditions for falling under category of branch transfer are:

a) Sale is not under  contract  of sale

b) The consignee or branch should furnish declaration in Form F.

The Auditor should make note of missing Form C and Form F, and if the same are expected to be received, tax difference need not be paid. The revised return also need not be filed if dealer is confident of receiving missing forms. Suffice if the Auditor clarifies his stand in final report on chances of receiving missing forms.

(28) Time limit  for submitting    Audit Report:

As regards due date for submitting Audit Report in Form-704 it is 31st January 2009; the speaker informed that representation is made to the Commissioner for extending the date up to 31st March 2009. The speaker advised that without waiting for such extension, the Auditor should file report by 31st January 2009.

The learned speaker then replied queries raised by some members. The meeting terminated with a vote of thanks to the learned speaker.

TDS Law & Procedure – Recent Developments

Subject : TDS Law & Procedure — Recent Developments

Speaker : Rajesh Kothari, C.A., Past President, B.C.A.S.

Venue : I.M.C. Hall, Churchgate, Mumbai.

Date : 13th May, 2009.

1. Mr. Kothari, while introducing the subject remarked that the provisions of TDS are not only complex, difficult to interpret and still more difficult to implement. It expects the deductor to discharge his duties gratis on time bound basis. For due performance there is no reward but any failure on his part attracts not only interest, penalty and prosecution but he has to suffer disallowance. The injustice is aggravated where procedural changes are made in last week of March made effective from 1st April of the year following. For example, introduction e-payment of TDS is to be made after 1st April, 2009 instead of using paper challans. On 11th April, 2009, the Press Note has extended the time limit for e-payment till 1st July, 2009. Till then TDS can be paid by using challans presently in use.

2. Changes made in Sections & Rules :

i) Sec. 199(1) of the Act dealing with grant of credit of TDS was amended to provide for a situation where income becomes assessable in the hands of person other than the recipient due to operation of Sections 60, 61, 64, 93 & 94 of the Act.

ii) In case of AOP or Trust, the Rule provides that where the income is assessed in the hands of a member, the credit for TDS thereon will be available to him.

iii) In case of a Trust the credit will be given to Trustee. Where the income is assessable in hands of beneficiary, the credit will be available to him.

iv) Where the asset generating the income is held by Partner on behalf of firm, the credit for TDS will be available to the firm.

v) Where deductee is holding asset as Karta of his HUF the credit of TDS will be available to the HUF. A practical difficulty may arise where asset of HUF is held by a member other than Karta, the income though gets assessed in hands of HUF, the credit of TDS may be in jeopardy. Similar difficulty may arise in case of partial partition of HUF. In that case, the assessment of income will get continued as HUF income even though the partitioned asset will go outside the books of HUF.

vi) In case of a property deposit, security, units or shares held by an individuals jointly with others the credit of TDS will be given in the ratio of share of deductee and other co-owners.

3. The mechanism provided for claiming of Credit :

    In the above situations the concerned deductees have to furnish a declaration to the deductor giving details of names, addresses and PAN of or co-owners to whom the credit of TDS is to be given. There is no specific Form of Declaration. It can be given on plain paper also. Though no time limit is prescribed for furnishing the information to deductor, the deductee should ensure that such declaration is submitted before deductor effects deduction.

    The deductor has to issue certificate of deduction in the names of persons mentioned in the declaration.

4. Method of Accounting decides the Year of Assessability

    The speaker observed that different methods of accounting followed by deductor & deductee may cause mismatch of information given by deductor to I.T. Dept. and the year in which the deductee is submitting such income to tax. The deductee will be entitled to get credit.

5. Judicial views on TDS provisions :

    Delhi High Court as well as P & H High Court have taken a stand that credit should not be denied to the assessee on technical ground.

    i) In case of Escorts Ltd. the company was following accrual method. The Certificate for TDS was not available at the time of filing the return. The assessment was completed. The assessee claimed the credit in the year in which TDS certificate was received.

    ii) The Delhi High Court held that Sec.155 (14) empowers the Assessing Officer to consider the TDS even after 2 years from completion of assessment. Hence the A.O. should have given the refund of tax even though the assessment was completed.

    iii) In case of Sonal Bansal before the P & H High Court, the assessee, holding Deep Discount Bonds, received proceeds on maturity. The difference between maturity value and issue price was treated as interest by Bond issued and TDS was effected thereon. However, these bonds were purchased in the market at premium. The bond holder treated the difference between maturity value and his cost as interest since the seller of Bonds to him had paid Capital gain tax. So in such case, interest accounted will be less than income adopted for TDS. The Court took the view that he is entitled to tax credit because otherwise no one would get credit for TDS suffered.

6. Other Procedural Amendments

i) Rule-38 has been amended. There is no change in time permitted for effecting payment of TDS to Government. The only change is applicable to tax deducted by Government. Such tax had to be paid into the treasury on same day. Now, the time limit as is applicable to Non-Government organisation will apply even to Govt. So now the time limit will be 7 days from end of month in which tax is deducted. The time limit of 2 months will not apply, as the Government accounts are on cash basis.

ii) The payments can be made quarterly after obtaining permission of A.O. The mode of payment is for the first time prescribed in the Rule. Instead of challan No.280, now the challans should be in Form No.17 to be paid electronically.

iii) No consequences are prescribed for not paying challans electronically after 1st July, 2009. Tax deducted prior to 31.03.2009 can be paid by old challans.

iv) The new mode of payment will also apply to Government. In Form No.17, there is no need to put Assessment year but Unique Transaction Reference No. (UTN) is to be put. The challan has to make reference deductee-wise, giving the PA Nos. of the deductees , if they are ten or less. If the deductees are more than ten, a separate statement is to be prepared. In the Challan you have to give PAN of Deductor & the name of his Bank. Last year on 14th July, 2008, CBDT has come out with a Circular No.5 of 2008 to deal with payment from third party’s Bank A/c. The software will develop unit Transaction No. which is to be given in all statements submitted to LT. Department. There may be situations where PAN is not validated or where deductee’s PAN is wrong put, there may be some difficul ties.

v) Challan No.17 does not provide for the information under which Section the tax is deducted. However, in Form 26Q the section under which payment is made is to be given; as well as Name and PAN of deductees section-wise. Therefore Form No.17 must be used separately for each section.

vi) Form 27Q applies  to TDS from payment  to Non-Residents or Residents but not Ordinary Residents.

Similar difficulty may arise in case of concerns having multiple branches and multiple PAN Nos./TAN Nos. Difficulties AI will arise in matching payments. Though payments can be made by credit card or Debit card, no facilities are available in software on websites. Similarly, in case where service tax is paid in a Bank other than permitted Bank, the assessee can’t be asked to pay tax again.

vii) As regards Tax Collected at Source, the Press Note states that the time limit will be 7 days from end of month & the time limit of 2 months does not apply to TCS.

7. Amendments in time limit for Issue of TDS Certificates

i) Rule 31 deals with issue of IDS Certificate. It applies from 01.07.2009. Formats of Form No. 16 & 16A remain unchanged. In respect of provision made in the accounts at year end, the TDS was payable before 31st May. Thereafter deductor was duty bound to issue certificate within 7 days i.e. 7th June. Now, it is provided that certificate should be given within one week from date of payment to Government. A Consolidated Certificate can therefore be issued within 1 month from close of the year. So, in cases where tax is paid after 30th April to 31st May, a separate certificate will have to be given.

As regards duplicate certificate the only change is that deductor should certify it as duplicate certificate.

8. Additional Information to be provided in Forms of TDS Certificates & in the Returns

i) Form No.16 has been modified. The new form includes TDS certificate No.(optional), UTN, Information whether PAN is uploaded and validated by LT. Department, Information about Gross Amount paid/ credited to such employee. This amount will be different from amount chargeable as salary due to perquisites and exempt allowances. The details of perquisites are required to be given in Form 12-BB (though now not in existence).

ii) Form 16A certifies payments other than Salary. Certificate of TCS is to be given in Form No. 27E. Earlier there was a provision for issue of consolidated certificate, the consolidation of TCS between two periods, April to September and October to March is now deleted. Now TCS Certificate is to be issued every month.

iii) Rule-31A  –  Quarterly   Statement   of TDS and TCS – This is to be furnished in Form 24C. If any deductor has to cancel the TAN, he has to approach TDS Officer for cancellation. Till the cancellation is not effected, obligation of filing Returns, Challans & other information continues.

iv) It is now provided that Form No.24C is to be filed on quarterly basis whereas Forms 24Q, 26Q, 27Q should be compiled on quarterly basis but the same are to be e-filed collectively before 15th June of succeeding financial year. Uptil now the obligation to submit Form 24Q and 26Q on software like diskettes or CDs was applicable to bodies corporate or concerns and individuals to whom Tax audit was applicable or where number of deductees are less than 50. Now, since every assessee has to make e-filing, hence filing through diskettes or C.D. Rom is not necessary.

v) The time limit for submitting Form 24C is 15th July, 15th October, 15th January and for March quarter it will be 15th June. Form 24C is newly introduced and is designed afresh. The information is to be filed on quarterly basis.

9. Filing of the details of total expenses incurred each month under each head to which TDS applies i.e. Sec. 192 to 195

i) The total expenses will include revenue as well as capital expenditure on which IDS is deductable. It will also include the amounts on which tax is not deducted due to submission of declarations or orders of Assessing Officer permitting non-deduction.

ii) Where u/s:194C, TDS is required to be made the debit effect may be to various account heads like Printing and Stationery, Advertisement and Publicity, Repairs and Maintenance etc. Therefore, Form 24C should contain the details of all such account heads and expenses from which IDS is made. This creates the need to keep back up support if TDS assessment is taken up.

iii) As regards salary, the Form requires you to mention expenses for the month on which TDS is liable to be deducted as well as the amount of salary on which IDS is deducted. As per law, for working out TDS on Salary, a bonafide estimate of salary for the whole year is required to be made for ascertaining TDS amount. As regards exemption and allowances, it is difficult to ascertain on monthly basis.

iv) As regards Returns for Tax collection at source, Similar Form Nos. 24Q, 26Q & 27Q are not to be filed every quarter though the back up information is to be maintained. Form 16AA is omitted.

10. New Requirements of Form No.27 BB applicable to TDS on payment to Non Residents. (applicable Forms No. 15CA & 15CB)

As per Form 15CA, information is to be given by a person making payment to NR. Such person has first to obtain certificate from Chartered Accountant. Such certificate will be in Form 15CB and remittance cannot be made unless this Form is submitted. After the Form is submitted electronically thereafter print out is to be signed and submitted to tax authority through deductor. The PAN of the recipient is also to be given.

11. Recently, Bombay High Court has held (293 ITR) that even if deductor has not deducted the tax, it cannot be recovered by the LT. Department from the deductee.

12. In 115 TTJ it is held that if the employer is not issuing certificate in Form 16 to employee then the A.O. must use his statutory power to enforce compliance from employer.

13. In Hindusthan Coca Cola’s case it was held that if the tax is deducted from employee, he will not be liable to pay to Govt. any shortfall in deduction for any mistakes of the deductor. In such cases, deductor may suffer disallowance u/s. 40(a).

14. In case of Mahindra and Mahindra vs. DCIT it was held by Special Bench that time limit for reopening as applicable to normal assessment will also apply to l’DS assessment. No enquiry can be initiated after expiry of 4 years or 6 years depending on facts and circumstances.

15. Supreme Court in Larsen and Toubro case has held that employer is not under obligation to collect supporting evidence in respect of claims of employees. Similarly, TDS is required to be deducted from salary to foreign employee even if income is not liable to tax.

The meeting then terminated with a vote of thanks to the learned speaker Mr. Rajesh Kothari.

Interpretation of Tax Treaties

 Interpretation of Tax Treaties has been a very vexed issue, full of controversies and complexities. Basically tax treaties have dual nature in that they are international tax treaties between two sovereign States and at the same time they are a part of the domestic tax law of each country applying such treaties. This adds to the complexities in their interpretation. Tax Treaties fall under public international laws. There are certain commonly accepted principles of interpretation as enshrined in Vienna Convention. Interpretation also depends upon the approach adopted for the purpose. Besides this, preparatory work, rulings from Tribunals and Courts provide useful aid in interpretation of tax treaties. In this Article, an attempt is made to cull out some important principles in interpretation of tax treaties, commonly accepted as well as emanating from Indian rulings. Various sources or aids in interpretation of tax treaties are also highlighted at relevant places.

1.0 Introduction : Monist v. Dualist Views :

    Tax treaties are signed between two sovereign nations by competent authorities under the delegated powers from the respective Governments. Thus, an international agreement has to be respected and interpreted in accordance with the rules of international law as laid down in the Vienna Convention on Law of Treaties, 1969. These rules of interpretation are not restricted to tax treaties but also apply to any treaty between two countries. So any dispute between two nations in respect of Article 25 relating to Mutual Agreement Procedure of the OECD/UN Model Conventions has to be solved in the light of the Vienna Convention.

    However, when it comes to application of a tax treaty in the domestic forum, the appellate authorities and the courts are primarily governed by the laws of the respective countries for interpretation. Fortunately, in India, even before insertion of S. 90(2) by the Finance (No. 2) Act, 1991, with retrospective effect from 1-4-1972, the CBDT had clarified vide Circular No. 333 dated 2-4-1982 that where a specific provision is made in the Double Taxation Avoidance Agreements (DTAA), the provisions of the DTAA will prevail over the general provisions contained in the Income-tax Act and where there is no specific provision in the DTAA, it is the basic law i.e. the provisions of the Income-tax Act, that will govern the taxation of such income. This position has been upheld in many of judicial decisions in India. The prominent amongst them are CIT v. Visakhapatnam Port Trust, (1983) 144 ITR 146 (AP); Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706; CIT v. Kulandagan Chettiar (P.V.A.L.), (2004) 267 ITR 654 (SC).

    Thus, in India, treaty override over domestic tax law has a legal sanction. Internationally this situation falls under Monist View, wherein International and National laws are part of the same system of law and where DTAA overrides domestic law. Some other countries which follow such a system are: Argentina, Italy, the Netherlands, Belgium and Brazil.

    The other prevalent view is known as Dualistic View wherein International Law and National Law are separate systems and DTAA becomes part of the national legal system by specific incorporation/legislation. In case of Dualistic View, DTAAs may be made subject to provisions of the National Law. Some of the countries that follow Dualistic View are Australia, Austria, Norway, Germany, Sri Lanka, UK.

    Interpretation of any statute, more so international tax treaties, require that we follow some rules of interpretation. In subsequent paragraphs we shall deal with rules of statutory construction.

2.0 Basic principles of interpretation of a Treaty :

    Principles or rules of interpretation of a tax treaty would be relevant only where terms or words used in treaties are ambiguous, vague or are such that different meanings are possible. If words are clear or unambiguous then there is no need to resort to different rules for interpretation.

    Prior to the Vienna Convention, treaties were interpreted according to the customary international law. Just as each country’s legal system has its own canons of statutory construction and interpretation, likewise, several principles exist for the interpretation of treaties in the customary international law. Some of the important principles of Customary International law in interpretation of tax treaties are as follows :

    (i) Golden Rule — Objective interpretation :

    Ideally any term or word should be interpreted keeping its objective or ordinary or literal meaning in mind. The term has to be interpreted contextually.

    Words and phrases are in the first instance to be construed according to their plain and natural meaning. However, if the grammatical interpretation would result in an absurdity, or in marked inconsistency with other portions of the treaty, or would clearly go beyond the intention of the parties, it should not be adopted1.

    (ii) Subjective interpretation :

    Under this approach, the terms of a treaty are to be interpreted according to the common intention of the contracting parties at the time the treaty was concluded. The intention has to be found from the words used in the treaty and the context thereof.

In Abdul Razak A. Meman’s case’, the Authority for Advanced Rulings (the AAR) relied on the speeches delivered by Shri Manmohan Singh, Minister of Finance (as he then was) and His Highness Sheik Harridan- Bin Rashid Al-Maktoum, Minister of Finance and Industry in the presence of His Highness Sheik Zayed Bin Sultan Al-Nahyan, the President of the UAE to arrive at the intention of parties in signing the India-UAE Tax Treaty.

iii) Teleological or purposive  interpretation:

In this approach the treaty is to be interpreted so as to facilitate the attainment of the aims and objectives of the treaty. This approach is also known as the ‘objects and purpose’ method.

In case of Union of India v. Azadi Bachao Andolani, the Supreme Court of India observed that “the principles adopted for interpretation of treaties are not the same as those in interpretation of statutory legislation. The interpretation of provisions of an international treaty, including one for double taxation relief, is that the treaties are entered into at a political level and have several considerations as their bases.” The Apex Court also agreed to the argument put forth by the Appellant that “the preamble to the Indo-Mauritius DTAC recites that it is for the ‘encouragement of mutual trade and investment’ and this aspect of the matter cannot be lost sight of while interpreting the treaty”.

iv) The principle  of effectiveness:

According to this principle, a treaty should be interpreted in a manner to have effect rather than to be void.

This principle, particularly stressed by the Permanent Court of International Justice, requires that the treaty should be given an interpretation which ‘on the whole’ will render the treaty ‘most effective and useful’, in other words, enabling the provisions of the treaty to work and to have their appropriate effects”.

In Cyril Eugene Pereira”, the AAR held that “a tax treaty has to be given a liberal interpretation to make it workable but that would only mean ironing out of the creases, as it is called, which would be within  the realm  of interpretation.”

v) Principle  of contemporaneity:

A treaty’s terms are normally to be interpreted ‘on the basis of their meaning at the time the treaty was concluded. However, this is not a universal principle.

In Abdul Razak A. Memans case”, the AAR observed that “there can be little doubt that while interpreting treaties, regard should be had to material contemporanea expositio. This proposition is embodied in Article 32 of the Vienna Convention, referred to above, and is also referred to in the decision of the Supreme Court in K. P. Varghese v. ITO, (1981) 131 ITR 597.”

vi) Liberal construction:

If is a general principle of construction with respect td treaties that they shall be liberally construed so as to carry out the apparent intention of the parties.

In John N. Gladden  v, Her Majesty the Queen”, the principle of liberal interpretation of tax treaties was reiterated by the Federal Court, which observed: “Contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of tne parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated in so far as the particular item under consideration is concerned.”

 The Court  further  recognised  that  “we cannot  expect to find  the same nicety  or strict definition  as in modern  documents,  such  as deeds,  or Acts of F   Parliament;  it has  never  been  the habit  of those engaged  in diplomacy  to use  legal  accuracy  but rather  to adopt  more  liberal  terms.”

(vii) Treaty  as a whole – Integrated approach:

A treaty should be construed as a whole and effect should be given to each word which would be construed in the same manner wherever it occurs. Any provision should not be interpreted in isolation; rather the entire treaty should be read as a whole to arrive at its object and purpose.

To quote  Prof. Roy Rohatgi”:

a) tax treaties tend to be less precise and require a broad purposive interpretation;

b) the purpose  is not the same as the subjective intention of Contracting States. It refers to the goals of the treaty as reflected objectively by the treaty as a whole.

viii) Reasonableness  and consistency”  :

Treaties should be given an interpretation in which the reasonable meaning of words and phrases is preferred, and in which a consistent meaning is given to different portions of the instrument. In accordance with the principles of consistency treaties should be interpreted in the light of existing international law.

One  thing    may  be noted regarding the  rules of interpretation, that they are not rules of law and are not to be applied like the rules enacted by the legislature in an Interpretation Act. In Maunsel v. Olins Lord Reid observed that U They are not rules in the ordinary sense of having some binding force. They are our servants not our masters. They are aids to construction, presumptions or pointers. Not infrequently one ‘rule’ points in one direction, another in a different direction. In each case, we must look at all relevant circumstances and decide as a matter of judgement what weight to attach to any particular ‘rule”‘.

3.0 Principles  of interpretation as per the Vienna Convention:

The Vienna Convention of 1969 codified the then existing public international law. Worldwide treaties are entered and interpreted taking into account provisions of the Vienna Convention. Even though India is not a signatory to this Convention, it has a great persuasive value as it is the authentic, codified customary public international law. Courts in India have recognised and referred to principles enshrined in this Convention. Some of the important Articles of this Convention which provide great help in interpretation of a tax treaty are as follows:

3.1  Article  26:  Pacta stint  servanda :

Every treaty in force is binding upon the parties to it and must be performed by them in good faith.

3.2  Article  27 : Internal  Law and observance of Treaties:

A party to a treaty cannot invoke the provisions of internal law as justification for its failure to perform a treaty.

In India the concept of ‘Treaty Override’ is well accepted. Moreover S. 90 (2) provides that provisions of domestic tax laws vis-a-vis treaty would be applied to the extent the same are more beneficial to the assessee.

3.3 Article 30: Application of successive treaties relating to the same subject matter:

Sometimes parties to the treaty subject themselves to provisions of other tax treaties that may be entered at a later date; in such cases the provisions of that later treaty shall prevail. For example, MFN Clause in the protocol on DTA with France provided that in respect of Dividends, Interest, Royalties and FTS if India signed a treaty after 1st September 1989 with any OECD country wherein these incomes are taxed at a lower rate or the scope is narrower, then provisions of India-France Treaty would stand modified to. that extent.

3.4  Article 31 : General rules of interpretation:

Treaties should be interpreted in Good Faith in accordance with the ordinary meaning in the light of its Object and Purpose and Context.

As per this Article primacy is given to the ‘ordinary meaning’ and ‘textual approach’ while preserving the role of ‘objects and purpose’. The context for the purpose of the interpretation of a treaty shall comprise in addition to the text, including its preamble and annexes.

In Abdul Razak A. Meman’s case”, the AAR observed that “these recitals’? indicate that the purpose of entering into the treaty is to promote mutual economic relations by concluding an agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital”. (emphasis supplied)

Article 31(3) further provides that there shall be taken into account, together with the context:
    
a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;

b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; and

c) any relevant rules of international law applicable in the relations between the parties.

Further, Article 31(4) provides that a special meaning shall be given to a term if it is established that the parties so intended.

3.5 Article 33 : Interpretation of Treaties authenticated in two or more languages:


Both texts are equally authoritative, unless treaty provides or parties agree that in case of divergence, a particular text shall prevail.

Indian tax treaties invariably provide that both Hindi and English are authentic texts, however in case of divergence, the text in English shall prevail.

4.0 Extrinsic aids to interpretation of a tax treaty:

A wide range of extrinsic material is permitted to be used in interpretation of tax treaties. According to Article 32 of the Vienna Convention the supplementary means of interpretation include the preparatory work of the treaty and the circumstances of its conclusion.

4.1 According to Prof. Starke one may resort to following extrinsic aids to interpret a tax treaty-‘ provided that clear words are not thereby contradicted:

    i) Interpretative Protocols, Resolutions and Committee Reports, setting out agreed interpretations;

    ii) A subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions [Article 31(3) of the Vienna Convention];

    iii) Subsequent conduct of the state parties, as evidence of the intention of the parties and their conception of the treaty;

    iv) Other treaties, in pari materia,in  case of doubt;

Provisions in parallel tax  treaties:

If the language used in two tax treaties (say treaties: X and Y) are same and one treaty is more elaborative or clear in its meaning (say treaty X) can one rely on the interpretation/explanations provided in a treaty X while applying provisions of a treaty Y?

In case of Raymond Ltd.13the Tribunal relied on the examples given in the Memorandum of Understanding concerning Fees for Included Services in respect of Article 12 of the India-US Tax Treaty while interpreting the concept of ‘make available’ under the India-UK Treaty as the language used in both the treaties is similar.

However, the views of the Indian Judiciary are not consistent in this respect. There is contradictory judgments by Indian Courts/Tribunals in this regard as mentioned below:

For:

  •      UOI    v. Azadi    Bachao    Andolan,    (2003) 263 ITR 706 (SC)
  •     AEG Telefunkenv. CIT, (1998) 233 ITR 129 (Kar.)
  •     P. No. 28 of 1999, In re (2000) 242 ITR 208 (AAR)
  •     P. No. 16 of 1998, In re (1999) 236 ITR 103 (AAR)
  •     DCIT   v.  Boston   ConsultingGroup   Pte.  Ltd., (2005) 93 TTJ 293 (Mum.)

Against:

  •     Mashreq Bank PSC v. DOlT, (2007) 108 TIJ 554 (Mum.)
  •     CIT v. PV AL Kulandagan Chettiar, (2004) 267 ITR 654 (SC)
  •     CIT v. Vijay Ship Breaking Corpn., (2003)261 ITR 113 (Guj.)
  •     Essar Oil Ltd. v. JCIT, (2006) 102 TTJ 270 (Mum.)

4.2 Technical explanation on US MC:

    US has published Technical Explanation accompanying the United States Model Income Tax Convention on Nov. IS, 1996. This explanation though refers extensively to the OECD Commentary, it highlights differences and provides basic explanation of US treaty policy for all interested parties.

Similarly, there ‘is a technical explanation for the India-US tax treaty as well.

4.3 International Articles/Essays/Reports:

In DCIT v. ITC Ltd., (2003) 85 ITD 162 (Kol.) the Tribunal referred to an essay to support its observations. Similarly, in case of CIT v. Vishakhapatanam Port Trust, (1983) 144 ITR 146 (AP), the High Court obtained ‘useful material’ through international articles.

4.4  Cahiers published by  IFA, Netherlands:

Cahiers were relied upon in case of Azadi Bachao Andolan’s (supra) case by the sc.

4.5 Protocol:

A protocol is an integral part of a tax treaty and has the same binding force as the main clauses therein.
[Sumitomo Corpn. v. DCIT, (2007) 110 TTJ 302 (Del.)]

Protocol to India-US tax treaty provides many ex-amples to elucidate the meaning of the term ‘make available’. Protocol to India France treaty contains the Most Favoured Nation Clause. Thus, one must refer to protocol before reaching to any final conclusion in respect of any tax treaty provision.

4.6 Preamble:

Preamble to a tax treaty could guide in interpretation of a tax treaty. In case of Azadi Bachao Andolan, the Apex Court observed that ‘the preamble to the Indo-Mauritius Double Tax Avoidance Convention (DTAC) recites that it is for the ‘encouragement of mutual trade and investment’ and this aspects of the matter cannot be lost sight of while interpreting the treaty’. These observations are very significant whereby the Apex Court has upheld ‘economic considerations’ as one ofthe objectives of a Tax Treaty.

4.7  Mutual Agreement Procedure (MAP) :

MAP helps to interpret any ambiguous term/provision through bilateral negotiations. MAP is more authentic than other aids as officials of both countries are in possession of materials/ documents exchanged at the time of signing the tax treaty which would clearly indicate the object or purpose of a particular provision. Successful MAPs also serve as precedence in case of subsequent applications.

5.0 Commentaries on DECD/UN Models:
OECD Model Commentary has been widely used in interpretation of tax treaties. Paragraph 29.3 of the July 2008 version of the Commentary on the OECD Model Convention states that: “the Commentaries have been cited in the published decisions of the courts of the great majority of Member countries. In many decisions, the Commentaries have been extensively quoted and analysed, and have fre-quently played a key role in the judge’S delibera-tions.” Phillip Baker regards the OECD Commen-taries as an aid to tax treaty interpretation in sev-eral countries. In US v. Al Burbank & Co. Ltd.,14 the US Second Circuit Court of Appeal referred to the Commentaries as an ‘aid to interpretation’.

In CIT v. Vishakhapatanam Port Trust’s case,”, the Andhra Pradesh High Court observed that “the OECD provided its own commentaries on the technical expressions and the clauses in the Model Convention. Lord Radcliffe in Ostime v. Australian Mutual Provident Society, (1960) AC 459, 480; 39 ITR 210,219 (HL), has described the language employed in these agreements as the ‘international tax language.’

Both UN and OECD Model Commentaries are great help in interpretation of tax treaties. Their importance in interpretation of tax treaties can hardly be over emphasised. [Credit Lyonnais v. DCIT, (2005)94 ITD 401 (Mum)]

Model Commentaries give the authoritative interpretation of the provisions of DTAAs. [Sonata Information Technology Ltd. v. ACIT, (2006) 103 ITD 324 (Bang.)]

UN Commentary reproduces significant part of the OECD Model Commentary and thus, OECD plays a greater role in providing standardised or systematised approach in interpretation of tax treaties.

6.0 Foreign Courts’ decisions:

In CIT v. Vishakhapatanam Port Trust’s case,”; the Andhra Pradesh High Court observed that, “in view of the standard OECD Models which are being used in various countries, a new era of genuine ‘international tax law’ is now in the process of developing. Any person interpreting a tax treaty must now consider decisions and rulings worldwide relating to similar treaties. The maintenance of uniformity in the interpretation of a rule after its international adoption is just as important as the initial removal of divergences. Therefore, the judgments rendered by courts in other countries or rulings given by other tax authorities would be relevant.”

In undernoted cases, foreign court cases have extensively been quoted for interpretation of treaty provisions:

i) Union of India v. Azadi Bachao Andolan”
 (ii) CIT v. Vishakhapatanam Port Trust”
iii) Abdul  Razak A. Meman’s  case’?

7.0 Ambulatory  v. Static Approach:

Whenever a reference is made in a treaty to the provisions of domestic tax laws for assigning meaning to a particular term, a question often arises as to what meaning is to be assigned to the said term the one which prevailed on the date of signing a tax treaty or the one prevailing on the date of application of a tax treaty. There are two views on,the subject, namely,  Static and Ambulatory.
    
Static:

Static approach looks at the meaning at the time when  the treaty was signed.

Ambulatory:

Ambulatory approach provides that one looks, to the meaning of the term at the time of application of treaty provisions. All Model Commentaries ” including the Technical Explanation on US Model Tax Convention favors ambulatory approach, however with one caution and that is ambulatory approach cannot be applied when there is a radical amendment in the domestic law thereby changing the sum and substance of the term.’

India-Australia Treaty, in para 3(2) adds the expression ‘from time to time in force’ to provide for an ‘ambulatory’ interp retation.

8.0 Ambulatory approach subject to contextual interpretation: –

Paragraph 3 of the OECD Model Convention provides that meaning of the term not defined in the treaty shall be interpreted in accordance with the provisions of the lax laws of the Contracting State that may be applying the Convention. However, this provision is subject to one caveat and that is if the context requires interpreting the term ‘otherwise’, then the meaning should be assigned accordingly. For example, India-US treaty provides that assignment of meaning under the domestic law t9 any term not defined in the treaty shall be according to the common meaning agreed by the Competent Authorities pursuant to the provisions of Article 27 (Mutual Agreement Procedure). And if it is not so agreed then only meaning would be assigned from the domestic tax law that too provided the context  does not require otherwise.

In case of Union of India v. Elphinstone Spinning and Weaving Co. Lid.,”, the Supreme Court observed that “when the question arises as to the meaning of certain provisions in a Statue it is not only legitimate but proper to read that provision in its context. The Context means the statute as a whole, the previous state of law, other statutes in pari materia, the general scope of statute and the mischief that it was intended to remedy.”

In Pandit Ram Narain v. State of Uttar Pradesh”, the Supreme Court observed that the meaning of words and expressions used in an Act must take their colour from the context in which they appear.
 
9.0 Objectives of Tax Treaties:

Objectives for signing a tax treaty also playa significant role in its interpretation as they determine the context in which a particular treaty is signed. For example, OECD and UN Model Conventions have different objectives to achieve. The same are as follows:

9.1  OECD  Model  Convention:

Principal objectives of the OECD Model Convention are as follows:

The principal purpose of double taxation conventions is to promote, by eliminating international double taxation, exchange of goods and services and the movement of capital and persons. It is also a purpose of tax conventions to prevent tax avoidance and evasion”.

9.2  UN Model  Convention:

Principal objectives of the UN Model Convention are as follows: .

  • To protect taxpayers against double taxation (whether direct or indirect)
  • To encourage free flow of international trade and investment
  • To encourage  transfer  of technology
  • To prevent  discrimination  between  taxpayers
  • To provide a reasonable element of legal and fiscal certainty to the investors and traders
  • To arrive at an acceptable basis to share tax revenues between two States
  • To improve the co-operation between taxing authorities in carrying out their duties.

9.3  Indian  Tax Treaties:

S. 90 of the Income-tax Act, 1961 contains the objectives of signing tax treaties in general. The same areas follows :

    a) for the granting  of relief in respect  of :

    i) income on which taxes have been paid, both income-tax under this Act and income-tax in that country; or

    ii) income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment”, or

    b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or

    c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or

    d) for recovery of income-tax under this Act and under the corresponding law in force in that country.

Thus, it can be observed that there are several objectives for entering into tax treaties by the Government of India besides the primary objective of avoidance of double taxation as enumerated in clause (b) above. Besides avoidance of double taxa-tion, Indian treaties are aimed at achieving two more important objectives, namely, ‘prevention of fiscal evasion and recovery of taxes’.

The amendment made by the Finance Act,”2003, to the Indian Income-tax Act, 1961, clarifies that the Government may enter into tax treaty for the purposes of ‘promotion of mutual economic relations, trade and investment’. This amendment is more in the nature of clarification because there are several existing treaties whose preambles suggest that they were entered into for the purposes of encouragement of mutual trade and investments and/ or pro-motion of mutual economic relations. For example, treaties with Mauritius, Turkmenistan, UAE, Germany, Ukraine”, and Switzerland’? are entered into for various economic reasons, besides the main objectives of avoidance of double taxation and prevention of fiscal evasion.

10.0 Conclusion:


There is a famous saying by one judge in his order. He wrote “Language at best is an imperfect instrument for the expression of human thoughts and emotions”. It is the inadequacy of language which creates lot of communication gaps in application of a tax treaty. Determination of intent of parties, prevalent at the time of entering into agreement, after considerable lapse of time is a herculean task in absence of “Travaux Preparatories’ i.e. Prepara tory work.

Tax Treaties are result of prolonged negotiations between two Contracting States. Ideally, therefore the same should be interpreted keeping in mind the objectives with which they are entered into. Minutes of negotiations, exchange of notes, letters etc. are important material in determining the object of a particular treaty provision. However, absence of any such document in public domain makes the task of interpretation very difficult.

Interpretation of tax treaties is an evergreen subject of controversy considering the complexities involved. Application of international rules of interpretation while giving effect of provisions under the domestic law creates further confusion. Even courts are not unanimous in their rulings. A general technical explanation on the lines of India-USA tax treaty may be published by the Indian Government to reduce the disputes in interpretation of tax treaties.

Part A — Supply of tangible goods for use

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New Page 1

1. Introduction :

In most of the States, VAT (commonly known as Lease Tax) is
charged on the amount received by the supplier, permitting right to use the
goods where the possession and control is transferred to the user. However in
many cases, more particularly where machinery or equipment is of a highly
technical nature and operation of the same requires special skills and
experience, possession and effective control of such machinery or equipment is
not transferred to the user. Such transactions do not attract sales tax/VAT.


Under service tax, generally transactions of hire/lease of
moveable assets hitherto did not constitute taxable service under the Finance
Act, 1994 (Act). (However, transactions in the nature of financial lease, were
being taxed under Banking & Other Finance Services category.)

Hence, transactions of hire/lease of movables, wherein
effective control and possession of such goods is not transferred by the
supplier to the user, there was no liability to VAT as well as service tax.

2. Position under VAT/Sales Tax :

Before analysing the newly introduced services category of
“supply of tangible goods for use”, it is felt that, understanding of the
conceptual aspects as to the existing levy of lease tax under sales tax/VAT is
essential. The same are explained hereafter briefly.

(a) Transfer of Right to Use :

As per Article 366(29A)(d) of the Constitution of India,
‘sale’ includes a transfer of right to use any goods for any purpose (whether or
not for a specified period) for cash, deferred payment or other valuable
consideration.

Definition on similar lines has been adopted in S. 2(g)(iv)
of Central Sales Tax Act, 1956 and many State VAT legislations.

(b) ‘Transfer’ implies exclusive possession to transferee :

In a Supreme Court ruling having far-reaching implications
viz. Bharat Sanchar Nigam Ltd. V. UOI, (2006) 146 STC 91 (SC 3-Member
Bench), the following important observations have been made by the Apex Court :

Para 97 :

“To constitute
a transaction for the transfer of the right to use the goods, the transaction
must have the following attributes :

(a) there
must be goods available for delivery;

(b) there
must be a consensus ad idem as to the identity of goods

© the
transferee should have a legal right to use the goods — consequently all legal
consequences of such use including any permissions or licences required
therefor should be available to transferee

(d) for the
period during which the transferee has such legal right, it has to be to the
exclusion to the transferor — this is the necessary concomitant of the plain
language of the statute viz. a ‘transfer of the right to use’ and not
merely a licence to use the goods.

(e) having
transferred, the owner cannot again transfer the same right to others.”

Relying on the
BSNL case stated above, the Gauhati High Court in the case of HLS Asia Ltd.
V. State of Assam, (2007) 8 VST 314 has held that the delivery of physical
possession of goods is not essential precondition for levy of sales tax. The
relevant observations in paras 26 and 27 are as under :

“The
equipment, plants and machinery were available and identified by the parties.
Under the contract, OIL derived the legal right to use the goods having hired
the same on payment of charges. Customs duty had also been paid by it on the
equipment imported by the contractor for executing the works. Under the
stringent contractual terms, the contractor was bound to keep the equipment
engaged exclusively for the works. The fact that the same had been operated by
its technically qualified personnel does not militate against the element of
exclusiveness in the use thereof for the services and benefit of OIL. During
the subsistence of the contract, the appellant-company was neither authorised
nor permitted to transfer the equipment or detain the same for others. The
parties consciously limited the tax liability to the rental component only.

The
provisions of the contract understandably have to be construed in the context
of the service accorded to be rendered. The transfer of right to use the
equipments has to be perceived in the context of the nature, manner and extent
of engagement thereof. The retention of physical possession thereof by the
appellant company cannot be decisive. The parties entered into the contract
understanding the implications of each and every provision thereof, which
according to us, demonstrate an obvious dominion and control of OIL over the
equipment used by the appellant for the execution of the works during the
period of the contract. We, thus, have no hesitation to hold that the
transaction in question involved transfer of right to use the equipment,
plants and machinery under the lease within the meaning of S. 2(33)(iv) of the
Act.”

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‘Transfer’ is different from ‘allowed to use’ or ‘permitted to use’ :

‘Transfer’ in
the context of Lease Tax implies exclusiveness to the user. For example, if a
passenger boards a bus, can it be said that the bus owner has ‘transferred’
right to use the bus to the passenger ? Obviously the answer is No. The bus
owner has only ‘allowed’ or ‘permitted’ the use of the bus to the passenger on a
non-exclusive basis.

(d) Lease tax is attracted only on ‘goods’ and not on
immovable property :

Lease is taxable only if it is in respect of goods (viz. movable property). Tax cannot be levied if plant and machinery fixed in building is leased, as it is immovable property and not ‘goods’ – Reference can be made to Karthik Engineering Works v. State of Kamataka, (2000) 119 STC 88 (Karn HC DB) – same view in CTO v. Sadulshshar Krai Vikrai Sahakari Samiti, (2004) 135 STC 90 (Raj HC).

In CST v. Bombay Sound Service, (1999) 112 STC 290 (Born HC DB), it was held that hire of recording studio with instruments embedded to earth is not transfer of right to use ‘goods’ as it is not movable property. Similarly in CST v. Pralhad Industries, (1999) 112 STC 548 (All HC), it was held that lease of factory along with plant and machinery fastened to earth is not transfer of ‘goods’, as plant and machinery is immovable property. Reference can also be made to DCST v. Bobby Rubber Industries, (1998) 108 STC 410 (Ker HC DB).

However, in such cases, there could be liability to service tax under ‘Renting of Immovable Property’ services category, subject to satisfaction of taxability criteria specified therein.

e) When is hire of goods taxable under sales tax/ VAT? :

It is commonly found that goods (e.g., furniture, utensils, machinery, equipments, etc.) are given on hire. These are returned after prescribed period and hire charges are paid by the user. This is ‘transfer of right to use for consideration’ and can be treated as ‘sale’ within extended definition of ‘sale’.

In Rashtriya Ispat Nigam v. CTO, (1990) 77 STC 182 (AP HC DB), [confirmed by the Supreme Court in 126 STC 114 (SC)], it was held that hire charges are taxable only when full possession and control is given to the hirer. If the owner (person giving equipment) retains effective control over the equipment, it is not ‘transfer of right to use’. In this case, the assessee had given sophisticated machinery to the contractors for execution of work entrusted to them. However, the machinery continued to be in possession of assessee. The contractor was not free to use the machinery for other work, and hence there is no ‘transfer of right to use’.

The principle enunciated above is popularly referred to as ‘concept of effective control and ownership’.

Some judicial rulings are given hereafter for reference:

  • In New Central Group Engg. v. ACCT, (2001) 124 STC 637 (WBTT), a dealer provided machines (dumpers, loaders and cranes) with his men and machines to carry out specified work. It was held that it is not a ‘transfer of right to use goods’ [same view in case of excavators given on hire in Alpha Clays v. State of Kerala, (2004)135 STC 107 (Ker HC DB)].

  • In Great Eastern Shipping v. State of Karnataka, (2004) 136 STC 519 (Karn HC DB), a dealer supplied tug (towing vessel) on hire to port trust under Charter Party Agreement. Agreement provided for handing over possession and control in all respect of the tug to the port trust. It was held that this is agreement to transfer right to use the tug. It was also held that since the tugs were within territorial waters, it is a sale within the State, as powers of the State Government extend to the territorial waters adjacent to the State.

  • In Lakshmi Audio Visual Inc. v. ACCT, (2001) 124 STC 426 (Kar HC), the petitioner was providing audio visual and multimedia equipment to customers for specified period and collecting hire charges. He was taking equipment to site, installing, operating, dismantling and bringing it back. Possession and effective control always remained with petitioner. It was held that it is not ‘deemed sale’ as customer never got right to use the equipment.


3. Effective  date  of levy :

The new levy of ‘Supply of Tangible Goods for Use’ has been notified w.e.f. 16-5-2008 and hence would apply to transactions for the period on or after 16-5-2008.

4.  Scope  of the levy :

The scope of the new levy has been explained vide Ministry’s Circular D.O.F. No. 334/1/2008 – TRU, dated 29-2-2008, as under:

4.4 Supply  of tangible goods  for use:

4.4.1 Transfer of the right to use any goods is leviable to sales tax/VAT as deemed sale of goods [Article 66(29A)(d) of the Constitution of India]. Transfer of right to use involves transfer of both possession and control of the goods to the user of the goods.

4.4.2 Excavators, wheel loaders, dump trucks, crawler carriers, compaction equipment, cranes, etc., off-shore construction vessels & barges, geo-technical vessels, tug and barge flotillas, rigs and high-value machineries are supplied for use, with no legal right of possession and effective control. Transaction of allowing another person to use the goods, without giving legal right of possession and effective control, not being treated as sale of goods, is treated as service.

4.4.3 Proposal is to levy service tax on such services provided in relation to supply of tangible goods, including machinery, equipment and appliances, for use, with no legal right of possession or effective control. Supply of tangible goods for use and leviable to VAT/ sales tax as deemed sale of goods, is not covered under the scope of the proposed service. Whether a transaction involves transfer of possession and control is a question of fact and is to be decided based on the terms of the contract and other material facts. This could be ascertainable from the fact whether or not VAT payable or paid.”

5. Essential  criteria  for taxability:

S. 65(105)(zzzzj) of the Act defines taxable service as under:

Any service provided or to be provided to any person –

by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances.

The essential criteria for taxability can be summarised as under:

  • The service provider can be any person
  • The service  receiver  can be any other person
  • The service must be in relation to supply of goods
  • The goods so supplied  must be tangible goods
  • The supply  of tangible  goods must be for use
  • The supply of tangible goods must be without transferring right of possession and effective control of those goods.


6. Specific tax exemption for goods carriage to Goods Transport Agency (GTA) :

Representations were made to the Govt. by the All India Confederation of Goods Vehicle Owners’ Association and also the All India Motor Transport Congress requesting to provide relief on account of levy of service tax on supply of goods carriage to GTA for use in transport of goods. It stated that GTAs often provide services in relation to transportation of goods by road using the goods carriage obtained on rent or hire basis. The relief was sought on various grounds inter alia that the service tax paid on renting/hiring of goods carriage, without right of possession and effective control, could not be taken as input credit for payment of service tax towards GTA service.

Service tax for the GTA service provided is payable only on 25% of the amount charged for providing the GTA service tax. In view of this provision, GTAs are not entitled to take input credit under Cenvat Credit Scheme on goods and services used for GTA service. Moreover service tax for GTA services provided in seven specified cases is not required to be paid by the GTA service provider but by the person making payment towards the freight. Services provided in relation to supply of tangible goods for use, without transfer of possession and effective control, has been made as separate taxable service w.e.f. 16-5-2008. Consequently, supply of goods carriage to the GTA, without transfer of possession and effective control, for using the said goods carriage for transport of goods by road had become leviable to service tax.

The Central Government has issued Notification No. 29/08 ST, dated 26-6-2008 to exempt fully from levy of service tax the supply of transport vehicles (goods carriage) to GTA to be used for transport of goods by road.

The exemption granted is in line with the intention of the Govt. as stated in the Union Finance Minister’s Budget Speech on 8-7-2004 while introducing service tax on GTA, that truck owners would not be subjected to service tax.

7. Some  issues:

7.1 X is engaged in the business of giving equipments on hire for a specific period of time, wherein the said goods would effectively remain in the custody and control of the user. X has not been registered under VAT and accordingly is not charging VAT.X has now registered himself with Service Tax Dept. under the new category ‘Supply of Tangible Goods for Use’. Can the sales tax authorities demand and recover VAT from X ?

7.1A Comments:

The intention of the Govt. behind introduction of the new levy has been. very clear to tax those cases of hire/lease, which were escaping sales tax/VAT liability. Under the facts of X, it appears that since effective control and possession of equipments is transferred to the users, it would be liable to sales tax/VAT and not service tax. The mere fact that X has decided to pay service tax, though there was no liability for the same, cannot absolve X from discharging liability to sales tax/VAT. Hence Sales Tax authorities can demand sales tax/VAT from X for the past period as well as for the period during which X has paid service tax.

7.2 Y, a partnership company, is engaged in the business of giving cranes on hire to foreign companies, whereby effective control and possession re-mains with Y through their technical and operating staff. Hence there was no sales tax/VAT liability on hire transactions. Y has entered into an annual contract in March 2008 with a foreign company for hire of cranes during the period 1-4-2008 to 31-3-2009. The entire annual hire of Rs.90 lakh has been received by Y before 31-3-2008. Whether Y would be liable to service tax for the period 16-5-2008 to 31-3-2009. If yes, whether Rs.10-lakh exemption can be availed of by them and what would be the time within which service tax liability is to be discharged by Y?

7.2A Comments:

Though service tax payment to the Government is linked to receipt of consideration for services (either actual or advance), taxable event for levy of service tax, is ‘provision of service’ and not receipt of consideration’. Hence, it would reasonably appear that, Y would be liable to service tax on hire charges attributable to the period 16-5-2008 to 31-3-2009.

This position is impliedly made clear under Rule 6(1) of Service Tax Rules, relevant extract of which is reproduced hereafter:

Rule  6(1) – Payment of Service Tax

The service tax shall be paid to the credit of the Central Government by the 5th of the month immediately following the calendar month in which the payment is received, towards the value of taxable services :

Provided that where the assessee is an individual or proprietary firm or partnership firm, the service tax shall be paid to the credit of the Central Government by the 5th of the month immediately following the quarter in which the payments are received, towards the value of taxable services:

Provided further that notwithstanding the time of receipt of payment towards the value of services, no service tax shall be payable for the part or whole of the value of services, which is attributable to services provided during the period when such services were not taxable:

Provided also that the service tax on the value of taxable service received during the month of March, or the quarter ending in March, as the case may be, shall be paid to the credit of the Central Government by the 31st day of March of the calendar year.

Explanation – For the removal of doubt it is hereby clarified that in case the value of taxable service is received before providing the said service, service tax shall be paid on the value of service attributable to the relevant month, or quarter, as the case may be.

It is felt that if conditions under ten-lakh Exemption Notification are satisfied, one can avail exemption up to ten lakh for the period 16-5-2008to 31-3-2009.

Service tax liability for the entire period (16-5-2008 to 31-3-2009) would have to be discharged by 5th July 2008.

7.3 Z is in the business of giving specialised machines on hire, wherein effective control and possession remains with Z. During the year ended 31-3-2008, Z has purchased 5 new machines on which substantial amount of Excise Duty has been paid. Can Z avail Cenvat Credit of Excise Duty paid on the said machines and set off the same against service tax to be paid on hire charges on or after 16-5-2008 ?

7.3A Comments:

a) In this connection, attention is invited to CBEC Clarification vide letter F No. 137/120/2008 – Cx 4, dated 24-6-2008,extracts of which, are reproduced hereafter:

1. “M/ s. Hindustan Construction Company (HCCL) imported an aircraft last year, which was cleared on payment of appropriate customs duty (i.e., CVD). After its import, the aircraft was being let out by HCCL on hire basis without transferring right of possession and effective control. From 16-5-2008, ‘supply of tangible goods for use, without transferring right of possession and effective control’ is brought under taxable service. After 16-5-2008, such activity attracts service tax on the hire charges received by HCCL. In this regard, it has been requested that HCCL should be allowed to take credit of the CVD paid on the aircraft and utilise it for paying service tax. The modality suggested is to amend the Cenvat Credit Rules, 2004 so as to specifically include aircraft within the definition of capital goods, as has been done in case of motor vehicles for providing specified services.

The matter has been examined. It is noticed that in this specific case, the aircraft was imported last year and till 15-5-2008,the service provided by HCCL was outside the scope of the S. 66 of the Finance Act and thus was covered under the definition of the term ‘exempted services’ under the Cenvat Credit Rules, 2004. As per Rule 6(4),no Cenvat Credit can be taken on capital goods, which are used in providing only exempted services. Therefore, ab initio, HCCL was not eligible to take credit of CVD. Such being the case, the credit which was ab initio ineligible, does not become eligible after the service tax is imposed on the service at a later date. It is therefore clarified that no Cenvat credit of the CVD paid on the said aircraft should be taken, even if it is specifically included within the definition of ‘capital goods’.”

The above is self-explanatory.

b) In this regard, attention is also drawn to a Larger Bench ruling in the case of Spenta International Ltd. v. CCE, (2007) 216 ELT 133 (Tri – LB, WZB), wherein it has been held that eligibility to credit is to be determined with reference to the dutiability of the final product as on the date of receipt of capital goods. The ratio of the said ruling would be relevant for service tax as well.

c) In light of (a) and (b) above, it would appear that, if Cenvat Credit is availed by Z upon compliance of stipulated conditions (non-claiming of depreciation, etc.), the same would be disputed by service tax authorities.

The substance our world is built of

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Namaskaar

There is one implicit underlying belief that truly motivates
nearly all our actions. We don’t notice it, yet we are infused with it. When we
go to bed we believe that we will wake up the next morning. When we leave home
each morning we believe that we will return. When we buy something we believe
that it will function the way it’s expected to. When we delegate work to our
team we believe it will get done. Without this one attribute, human
relationships turn into poison, families collapse, society deteriorates,
countries turn suspicious and stand in arms against each other. That belief is
Trust in ourselves and others.

TRUST — is the one vital foundation on which our life is
built, sustained and fulfilled. Can you imagine a person — who mistrusts most
people; who suspects the outcomes of his efforts to be adverse, who generally
disbelieves what others say; who often doubts the coming moment to turn
untoward; who is consistently wary of motives behind good deeds of others. What
would these beliefs make such a person ? Possibly a bundle of nervousness,
apprehension and defensiveness, which eventually leads to resentment,
frustration, blame, hostility and total dysfunction. Without TRUST, life RUSTs
(note the partial anagram)

The increasing challenge we face today is that of diminishing
interpersonal trust, within families, in businesses, in polity and
internationally. A friend from Japan who was visiting Mumbai recently, mentioned
that the driver of a taxi she took was a fine man. As they talked during the
ride he mentioned that people these days did not trust one another and therefore
the situation had turned the way it was. Today we wonder when we get financial
advice or a medical prescription — whether it is really for our benefit or it’s
going to benefit the advisor only. The collapse of financial markets reveals
that trust was breached by many who were trustees of wealth and savings. The
author of MEGATRENDS 2010 has put it well when she writes :

Greed destroys wealth. Trust and integrity, by contrast
foster prosperity.

Having said this, the question is — Where does change lie ? A
contemporary author Stephen M. R. Covey writes beautifully in his book to tell
us to start with ‘Self Trust’. Self trust, he writes, is made of :



  •  Integrity (congruence between intent and behaviour),



  • Intent (your agenda),



  • Capabilities (the skills, knowledge, attitude that make you relevant), and



  • Results (your record of behaviour — how and what you got out of your actions).


Recently, I had a powerful experience of broken trust. The
people I trusted most, broke a commitment. They spoke about a self-created rule
on which their actions were based. The same people represented an institution
that taught right living, but in action they were not walking their talk. Former
US Fed Chief Greenspan wrote :

“Rules cannot take the place of character.” How
true !

The thing I like best is how Covey articulates capabilities.
He calls it the sum total of T-A-S-K-S — Talents, Attitudes, Skills, Knowledge
and Style. Only when we improve upon our capabilities, constantly upgrade our
knowledge and behaviour then we can be trusted. If our knowledge is current,
then we remain relevant. Tiger Woods, the legendary golfer, is an example of
someone who continually improved himself even though he was better than the
best. He took a year and half ‘slump’ to improve his swing. The Golf Digest
aptly referred to his ways as the :

“Tiger Creed : I improve therefore I am.”

But at the end of the day nothing works like results. Results
speak the loudest. Results want people to extend more trust. On the other hand,
result sans the other three attributes makes them unsustainable. It’s all about
walking the talk. As an anonymous writer has put it :


People don’t listen to as you speak; they watch your feet.


Happy walking this new year 2009 !

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Health and Mind

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Namaskaar

Each one of us perceives the world in our own individual way.
Hence we experience health, disease and the purpose of disease individually.

The words ‘health’ and ‘heal’ originate from the word
‘whole’, which means ‘complete’, or to ‘integrate’. The subjective experience of
feeling whole from within is very individual and unique to each one of us. Thus
one’s experience of health (physical and emotional) may be radically different
from another’s understanding of the same.

In this era of modernisation and standardisation, society
offers us certain norms that define health and disease. These norms were
originally designed to assist us in our already inherent and intuitive
understanding of our own inner balance, of how it feels to be whole. In an
almost comic twist of events, we lost touch with our inner health-barometer and
we now find ourselves dependent on the judgment of a system outside us, when the
most powerful healer lies within. Health is basically a state of being, an ‘avastha’,
an experience of ease, joy and peace.

Disease is nothing but the loss of ease. When there is a lack
of ease in a part or in the mind, it is a clear indicator that there is
something that requires attention. Attention is different from judgment or
action. Those come much later. Let us give it that attention. Today the
perspective toward health is principally focussed on finding where and what is
diseased. The investigative thought process is directed towards all that can go
wrong. The time has come for us to shift the focus from disease to wellness;
from knowledge to wisdom . . .

Every event has the potential of the exact opposite. Peace
cannot be realised in an already existing state of peace. It can be realised
only when it is born out of a thirst created out of non-peace. Let us respect
that distress or disturbance for helping us realise peace.

Every illness brings with it a very specific personal
message. Once the disease is understood in the light of this learning, it ceases
to be a disease and becomes an opportunity to understand that part of oneself
that lies yet undiscovered deep in the ocean of the unconsciousness. The choice
to discovery is up to us. Once the discovery has been made, the disease has
completed its purpose and finds its own way out of the system. There is no
question of making it happen, but simply of letting it happen.

Had Columbus not lost his way, he would not have discovered
his destiny. Let us respect the apparent disharmony of things just so that the
experience of harmony can be more thrilling . . .

Everything here has a purpose — the day the purpose is
fulfilled, it dissolves !

To heal ourselves and have a healthy life we need to develop
positive thinking by synchronising mind and body. Intention is all it takes to
make it happen !
 

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Learning to pray

Mayur Nayak in two excellent articles taught us that ‘Prayer Makes One Complete’. I would like to share a few thoughts on the subject of Praying.

What is a prayer ?

    Let us understand what a ‘prayer’ really is and what it is not. Prayer is conversation with God. It is when we open our heart and talk. It is not raising a charter of demands or submitting a list of wishes to God. In a prayer one does not go to God with a begging bowl. Prayer is essentially an expression of our gratitude to God Almighty.

When does one pray ?

    In my younger days, I came across this couplet which has left a lasting impression on my mind :

    How true ! Only when we face difficulties in our lives we look up to God and remember Him. Never when we are happy.

    Personally I have remembered Him in my happy days, and that has really rewarded me with ‘mental peace’.

    Kahlil Gibran says,

    “You pray in your distress and your need,

    would that there might pray also in the fullness of your joy and in your days of abundance.”

    The right time to pray then is now, whether you be happy or unhappy.

When to start praying ?

    A question may arise as to what is the age when one starts praying. Is it only meant for old and aged people ?

    Adi Shankaracharya laments in ‘Bhaj Govindam’ that,

    “In the boyhood one is attached to play; in youth to sense objects, in old age one is obsessed with anxiety. At no age one is attached to the Supreme.”

    Hence I believe : the right time to pray is now, whether one be happy or unhappy, young or old. Whatever be our age we must pray. Tomorrow might be too late.

How should one pray ?

    Our prayer must be with faith, trust, and confidence in God that He will look after us. He will do what is best for us. There is a bhajan, a favourite of Mahatma Gandhi, which very lucidly express this :

    We must give over the reins of our lives in the hands of God, and know that He will do what is best for us. We must pray with full faith in Him. We must understand what faith means.

    In words of St. Augustine

    “Faith is to believe what you do not yet see; the reward for that faith is to see what you believe.”

    As Wayne Dyer puts it “You will see it when you believe it.”

Where does one pray ?

    And where does one pray to God ? Where does one find Him ? We confine our prayers to temples and mosques, churches and gurudwaras, as if God stays only there ! Gurudev Tagore answers it beautifully as under :

    “Leave this chanting and singing and telling of beads! Whom dost thou worship in this lonely dark corner of a temple with doors all shut ? Open thine eyes and see thy God is not before thee !

    He is there where the tiller is tilling the hard ground and where the path maker is breaking stones. He is with them in sun and in shower, and his garment is covered with dust.”

    The lines of the song from Yatrik come to my mind :

    So let us look for Him within and find Him in our hearts. He is very much there within all of us.

    Let us then start praying right now in the right manner and at the right place. We must always continue to pray and thereby attain eternal peace.

The Pathway to Progress

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Namaskaar

Our earth is inhabited by billions of people. Though all of us have been given life by the Almighty, Life of each one is different. Out of the billions, for most of the people life is just one day lived many times over. One day is no different from the other. They end their lives where they started. There is no progress.


For making progress one requires a clear purpose, a goal, which will give one a sense of direction. Unless we decide where to go, we will not reach anywhere. We will spend our lives like driftwood tossed around by every wave on the seas of life. Setting of a goal is thus essential for our progress. The first step on the path to progress is to have a clear goal set in our mind. We must be clear about our destination. Setting of goals is clearly the first step . . . . A step which will begin our thousand-mile journey.

When we look at the goals set by people, we find that most of them centre around amassing wealth and material things, getting education and acquiring power. If one examines these things, whether it be wealth, education or power, one finds that these by themselves are neither good nor bad. The use to which these are put determines whether they are good or bad. The second step that we have to take is to ensure that what we acquire is for a good purpose and put to a good use. A shloka in Sanskrit explains this :


Education is for needless debates and arguments, wealth for becoming proud and arrogant, and power for harassing others . . . . that is what an evil person thinks. But truly, education is for real knowledge, for wisdom, wealth for donating, and power for protecting the weak.

Thus whatever we desire as a goal must have a noble purpose attached to it. It must be for good of ourselves and also others. The moment one understands and accepts this, the goals become far more meaningful. They cease to be selfish. In the pursuit of such goals one finds that happiness is a by-product. Happiness just starts flowing in one’s life.

I am not talking of goals like taking sanyasa or laying down one’s life for the country. Such heroic goals are not meant for ordinary people like us. But even in our life, as a householder, a student, a worker, or just anybody, there are numerous opportunities to wipe a tear, to restore a smile and be of some help to people around us.

The second step then, is to ensure that whatever we achieve as our goal is put to good use, a noble use.

But then we come to the third and the final step. It is not difficult to set goals and put them to good use. The third step, which is the most difficult one, is to do good deeds without any pride. This is well expressed in the Bhajan ‘Vaishnav Jana’ by Narsinha Mehta :

“Vaishnava jana to tehne kahiye . . . . . .

Para dukkhe upkaar kare thoye

This is a very difficult test to pass. I have been trying and failing again and again. Yes. A keen desire to help others is always there, but a feeling of ‘doership’ persists. A word of praise gladdens my heart, and non-recognition leaves me with an empty feeling !

I am attempting that there should not be any sense of pride. After all what I am doing is only my duty and natural obligation to return something to the society from which I have received countless benefits. May be some day I will succeed. Till then the struggle continues. I would end with an excerpt from a letter :

“I am glad I was born, glad I suffered so, glad I did make big blunders, glad to enter peace. Whether this body will fall and release me or I enter into freedom in the body, the old man is gone, gone for ever, never to come back again !

Behind my work was ambition, behind my love was personality, behind my purity was fear. Now they are vanishing and I am adrift.”

Can one believe that these are the words of Swami Vivekananda, written shortly before his death ? No wonder the third step of doing away with a sense of doership is not easy for people like us ! However one must not give up. Some goals are so worthy, its glorious even to fail.

Taxability of profits from purchase of goods from India

International Taxation

Attribution of profits to a Permanent Establishment/Business
Connection is an evergreen controversial subject. Article on ‘Business Profits’
in a tax treaty and S. 9 of the Income-tax Act, 1961 deal with this subject.
However, many a time activities of an enterprise in the source State are
restricted to purchase of goods. In such a scenario, whether the same results in
any tax liability or not, is discussed in this Article.


1.0 Introduction :


Many a time, activities of a foreign enterprise are
restricted to purchase of goods from India. As per the provisions of the Foreign
Exchange Management Act, 1999 (FEMA), a branch or a liaison office in India of a
foreign enterprise is permitted to carry out limited activities only. In
Rahim v. CIT, (1949) 17 ITR 256 (Orissa) and CIT v. Rodriguez, (1951)
20 ITR 247 (Mad.), it was held that a part of profits may be attributed to the
buying activities. However, the Supreme Court, in case of Anglo-French Textile
Co. Ltd., (1954) 25 ITR 27 (SC), held that if the act of buying is negligible,
it may not justify the allocation of any portion of the profits to that
activity. In CIT v. Ahmedbhai Umarbhai, (1950) 18 ITR 472 (SC), the Apex
Court held that “when considering the place of accrual of profits u/s.5, in
cases where the assessee carries on both manufacturing and selling operations,
the whole of the profits should not be considered as accruing from the sale or
at the place of sale, but a part of the profits should be held to accrue at the
place where the goods are manufactured.” Thus, it can be interpreted here that
profits accrue not only on final sale of the product but at every stage, right
from buying, manufacturing, processing and final selling. The complexities arise
where the above activities take place in two or more countries. How the
resultant profits are to be attributed to various activities, is a major area of
concern and controversy worldwide. Let us understand the position from the
perspective of the Indian tax law.


2.0 Domestic Tax Law
Provisions :


2.1 Provisions under the Income-tax Act, 1961 :


The relevant provisions under the Income-tax Act, 1961 are S.
5 and S. 9. S. 5 provides that income of a non-resident is taxed in India if it
is received or is deemed to be received or if it accrues or arises or is deemed
to accrue or arise to him in India. Relevant extracts from S. 9 which deals with
income deemed to accrue or arise in India in respect of a non-resident assessee
are as follows :

“S. 9 : Income deemed to accrue or arise in India

(1) The following income shall be deemed to accrue or
arise in India :

(i) all income accruing or arising, whether directly or
indirectly, through or from any business connection in India, or through
or from any property in India, or through or from any asset or source of
income in India, or through the transfer of a capital asset situate in
India.




Explanation 1 : For the purposes of this Clause :

(a) in the case of a business of which all the operations
are not carried out in India, the income of the business deemed under this
clause to accrue or arise in India shall be only such part of the income as
is reasonably attributable to the operations carried out in India;

(b) in the case of a non-resident, no income shall be
deemed to accrue or arise in India to him through or from operations which
are confined to the purchase of goods in India for the purpose of export;

(c) “



From Clause (a) mentioned above, it is clear that even in
case where the business connection in India is established, only the profits
which are attributable to such business connection would be taxable in India.
Clause (b) clearly provides that if the non-resident’s activities in India are
confined to purchase of goods for the purpose of exports, then no income shall
be deemed to accrue or arise in India.

2.2 CBDT Circulars :


CBDT Circular No. 23, dated 23-7-1969 provides that
maintaining a branch office in India for the purchase of goods or appointing an
agent in India for the systematic and regular purchase of raw materials or other
commodities would tantamount to business connection in India.

However, Paragraph 3(5) of the said Circular further
clarifies that a non-resident will not be liable to tax in India on any income
attributable to operations confined to purchase of goods in India for export,
even though the non-resident has an office or an agency in India for this
purpose. Where a resident person acts in the ordinary course of his business in
making purchases for a non-resident party, he would not normally be regarded as
an agent of the non-resident u/s.163. But where the resident person is closely
connected with the non-resident purchaser and the course of business between
them is so arranged that the resident person gets no profits or less than the
ordinary profits which might be expected to arise in that business, the
Income-tax Officer is empowered to determine the amount of profits which may
reasonably be deemed to have been derived by the resident person from that
business and include such amount in the total income of the resident person.

The Circular further provides that the taxability of the
apportionment of any income under Explanation (a) to S. 9(1)(i) to an agent of a
non-resident in India will be subject to the exemption provided in Clause (b) of
the said Explanation.

CBDT Circular No. 163, dated 29-5-1975 further clarifies that lithe correct legal position is that in the case of a non-resident, no income shall be deemed to accrue or arise in India through or from operations which are confined to purchase of goods in India for the purpose of export. Accordingly, the mere existence of an agency established by a non-resident in India will not be sufficient to make the non-resident liable to tax, if the sole function of the agency is to purchase goods for export”.

In view of these CBDT Circulars and provisions of law, it is clear that even though the activities of purchase of goods in India for the purpose of exports in case of non-residents are effectively connected to a business connection, no income is attributable to it.

In spite of these clear legal provisions, the matter has come up for judicial interpretation in some cases. In the following paragraphs the same are discussed.

3.0 Judicial Rulings:

3.1 In CIT v. N. K. lain, (1994) 206 ITR 692 (Del.), it was held that no income could be deemed to have accrued to the non-resident assessee in India where, on his instructions, his agent purchased dress material, got it stitched into garments and exported such garments to him abroad.

3.2 The AAR in the case of Angel Garments Ltd., (2006) 287 ITR 341 (AAR) had occasion to decide a similar issue, the facts of which are given below.

Angel Garments Ltd., which was incorporated in Hong Kong, proposed to set up liaison office in India. The proposed activities of the liaison office were as follows:

a) Collecting information and samples of various garments and textiles from various manufacturers, traders and exporters;

b) Passing on information with regard to various garments and textiles products available in India to the applicant’s head office at Hong Kong;

c) Co-ordinate and act as the channel of communication between the applicant and the Indian exporters; and

d) Follow up with the Indian exporters for timely export of goods ordered by the applicant.

Angel Garments applied for an advance ruling seeking determination of taxability or otherwise of the above transactions in India.

Usually, Article 5 of a tax treaty provides that the maintenance of a fixed place of business solely for the purpose of purchase of goods or merchandise or of collecting information for the enterprise does not constitute a permanent establishment. However, since M/ s. Angel Garments Ltd. was incorporated ~ in Hong Kong with which India does not have a tax treaty, the Advance Ruling Authority examined the issue under the provisions of the Income-tax Act, 1961. The Authority concluded that u/s.9 of the Act, lino income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of exports”. The Authority further held that Explanation to S. 9(1)(i) does not specify that the export should be made to the country of which the applicant is the tax resident (in the instant case it was Hong Kong). Exports can be made to any country.

3.3  Ikea  Trading  (Hong Kong)  Ltd.  (2009) 308 ITR 422 (AAR):

In this case also the AAR reached identical conclusions. Brief facts of the case were as follows:

The applicant set up a liaison office in India to carry out the following activities:

i) Enquiry into and consideration of potential suppliers for the IKEA product range.

ii) Collecting information and samples of various home-furnishing items from manufacturers and passing on information with regard to various textiles, rugs & carpets and other material (such as plastics, metals and lighting products) available in India.

iii) Doing quality check of the various products at labs to see whether they adhere to the costing and quality parameters as prescribed by IKEA group.

iv) Coordinating and acting as the channel of communication between the applicant and the Indian exporters.

v) Follow up with the Indian exporters for timely export of goods ordered by the applicant and supervising the inland logistics.

vi) Doing social audit of the suppliers to ensure that they adhere to various environmental and other regulations.

The applicant shared the office with Ikea Trading (India) Pvt. Ltd., a Group company. The items purchased by the applicant were to be invoiced by the Indian suppliers directly to the applicant who in turn would sell the same to the wholesale companies outside India and the sale price would be received by the applicant outside India and no revenue-generating activities would take place in India. In this case, the consignee was different from the buyer as with a view to save freight, travel and other expenses, the Indian suppliers had been requested to deliver the goods directly to Ikea Group distribu-tion outlets at Belgium and other countries. Further, the export remittances were made to Indian suppli-ers by Ikea Switzerland (and not by the Ikea Hong Kong on whose names invoices were raised) as the said company in Switzerland carried out the function of ‘Central treasury’.

The AAR in this case held that “no income can be attributed to the purchase operations in India by resorting to the deeming fiction u/s.9(1)(i) because the Explanation clearly excludes such attribution. In the case of Mushtaq Ahmed (2008) 307 ITR 401 (AAR), this Authority had noted that Clause (b) of Explanation 1 acts as an embargo against attributing any income to the purchase operations carried out in India, if such purchases are for the purpose of export”.

3.4  Nike Inc. v. ACIT,  (2008 TIOL 255 ITATBang.) :

3.4.1 Recently, the Bangalore Tribunal had occasion to consider similar facts in the above case.

3.4.2 Facts of the case:

i) Nike Inc (the assessee) set up a liaison office in India with the approval of the Reserve Bank of India (RBI) to act as a communication channel between manufacturers in India, the assessee and affiliates of the assessee.

ii) The activities of the Indian liaison office, amongst others, included:

  •     Liaisoning between the manufacturers and the assessee;
  •     Giving  opinion  on reasonability  of prices;
  •     Ensuring  the quality  of goods exported;
  •     Tracking delivery  dates;
  •     Shipment  tracking

iii) The assessee as a buying agent for its affiliates, directly entered into an agreement with manu-facturers in India for procurement of goods from India. The goods would be directly shipped to the affiliate’s location by the manufacturers. The assessee earned a commission for performing the buying agency services.

3.4.3 The Tax Authorities contended that:

i) The assessee is not purchasing goods from the manufacturer and does not take title to the goods which are directly exported to the affiliates.

ii) The exclusion to business connection in respect of purchase of goods by a non-resident for the purpose of export would not apply to the assessee.

iii) The activities of liaison office are beyond its activities as approved by RBI as the staff of the liaison office trained factories, evaluated samples, certified auditors, etc.

iv) Nike Inc has a business connection/Permanent Establishment in India and is chargeable to tax to the extent of income which is attributable to the activities carried out in India or accruing or arising in India.

v) 5% of the FOB value of exports could be reasonably considered as income attributable to Ind!a operation.

The Commissioner of Income-tax (Appeals) upheld the view of the Assessing Officer as regards the taxability of sourcing operations carried on by the liaison office in India.

3.4.4 The assessee  contended    that:

i) The Revenue authorities cannot travel beyond the Income-tax Act. Violation if any from RBI approval could only be examined by RBI authorities.

ii) The assessee is a one-window procurement agency for distribution and sale by its affiliates.

iii) The assessee is performing the role of an agent for its various affiliates in respect of procurement of goods.

iv) Assessee acting as an agent and assessee acting on its own are more or less parallel to one another, since both end up only in purchase.

v) All the activities performed by the liaison office are within the ambit of purchase function.

vi) Exclusion to business connection under Explanation (l)(b) to S. 9(1)(i) of the Act is clearly attracted because it is export in the course of purchase. Hence no income accrues or arises in India.

3.4.5 The Tribunal held in favour of the assessee as follows:

The assessee is a purchasing agent of the various affiliates. The liaison office was clearly not floating tenders, placing purchase orders and taking physical delivery of the goods, since it was only an agency office of the assessee. It merely ensured that various affiliates receive the goods they require and the quality they expect.

There are three ways  to purchase:
 
1) Purchase of goods and receipt of goods at the same time at one place where the office of the assessee is located.

2) Purchase information sent by the assessee, but goods despatched to its various sales outlets.

3) The assessee as an agent of the buyers indicates to the manufacturers the rate at which the goods will be supplied, the names and addresses of the buyers where the goods have to be sent.

The Tribunal observed that situations 2 and 3 are more or less similar. In the present case which is similar to 3, the affiliates have purchased the goods with the help of the agent. Irrespective of whether the purchase is by the principal directly or through an agent, so long as the purchase is for the purpose of export, the activity would be excluded from the gamut of business connection.

The Tribunal also observed that the assessee is not in anyway representing the manufacturer and is not an agent of the manufacturer but of the affiliates. The liaison office only ensures and supervises the manufacturing activity as an agent of the affiliates. The manufacturer does not receive any services from the liaison office or the assessee. The activities of the liaison office are well within the limits pre-scribed by RBI.

4.0  Provisions under a Tax Treaty :

Normally Paragraph 4 of Article 5 of a tax treaty contains specific exclusions from the definition of the term ‘Permanent Establishment’. Paragraph 4 of Article 5 of the United Nation’s Model Convention reads as follows:

“4.    Notwithstanding the preceding provisions of this Article, the term ‘permanent establishment’ shall be deemed not to include:

a) the use of facilities solely for the purposes of storage or display of goods or merchandise belonging to the enterprise;

b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display;

c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;

e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character.”

Clause (d) of Paragraph 4 of Article (5) relevant to our discussions, of the OECD Model is similarly worded.

From the above provisions, it is clear that maintenance of a fixed place of business solely for the purpose of purchase of goods or merchandise or of collecting information for the enterprise does not constitute a permanent establishment in the source country.
 
5.0 Conclusion:

From the above discussion, the following principles emerge in respect of exclusion provided under clause (b) of the Explanation to S. 9(1)(i) of the Act:

i) Goods may be exported to any country and not necessarily to the country of the concerned non-resident entity whose activities in India are under question;

ii) Goods may be exported directly by Indian suppliers / exporters;

iii) Delivery of goods may be made to a country different from the country of the concerned non-resident entity i.e., consignee may be different from the buyer;

iv) Payment may be made from a group company from a third country.

Recent decision in the case of E*Trade Mauritius Limited — issues arising therefrom

International Taxation

1. Background

1.1 After the Supreme Court’s [SC] decision in Azadi Bachao Andolan’s case [2003] 263 ITR 706 and the CBDT’s Circular No. 789 dated 13th April 2000, taxpayers and tax planners were clear that the matter was settled and closed and that Mauritius entities holding Tax Residency Certificates [TRCs] issued by Mauritius Tax Authorities could claim exemption from Capital gains tax on sale of shares in Indian Companies under Article 13(4) of Indo-Mauritius Tax Treaty [DTAA] without any hassles. The recent Bombay High Court’s orders dated 26th September, 2008 and dated 23rd March, 2009 in Writ Petition No. 2134 of 2008 have caused consternation in the minds of overseas investors and their tax and investment advisors. This decision seems to have rekindled the controversy in the matter.

    1.2 E*Trade Mauritius Limited [ETM] is a wholly owned subsidiary of Converging Arrows Inc. USA [CAI], which in turn is a wholly owned subsidiary of E*Trade Financial Corporation, USA [ETFC], listed on NASDAQ. ETM acquired a substantial stake [43.85%] in M/s. IL&FS Investsmart Ltd., [IIL] a listed company in India. ETM sold its holding in IIL to HSBC Violet Investments (Mauritius) Limited [HSBC Violet]. As a result, substantial capital gains accrued to ETM.

    1.3 ETM applied to ADIT (IT), Mumbai [AO] for issue of a Certificate under section 197 of the Income-tax Act, 1961 [the Act] for authorising HSBC Violet not to deduct any tax at source from amounts payable to ETM in view of Article 13(4) of the DTAA. However, the AO directed HSBC Violet to withhold tax @ 21.11% on the gross amount of the sale consideration rather than on the net amount of capital gains.

    1.4 ETM challenged the AO’s order u/s. 197 of the Act before the Bombay High Court in the aforesaid writ petition. The Bombay High Court, with the consent of both the parties, directed ETM to file a revision petition before the Director of Income-tax (International Taxation) [DIT(IT)] within a week and the DIT(IT) was directed to decide upon the revision petition within a period of three months from the date of filing of the revision petition. The High Court further directed that HSBC Violet should deduct a sum of Rs.24.50 Crores from the sale consideration and deposit the same with the Court and directed the DIT(IT) to pass appropriate order about the disposal of the amount.

    1.5 Being Orders relating to summary proceedings u/s. 197, the High Court’s Orders do not discuss the facts of the case in detail and the legal issues arising therein, which have been discussed in detail in the AO’s Certificate u/s. 197 and the DIT(IT)’s Order u/s. 264. As the said Certificate and Order are now in public domain, having been placed in writ proceedings before the Bombay High Court, we intend to summarise and analyse the facts and legal issues mentioned therein.

2. Summary of AO’s Certificate u/s. 197


2.1 The AO, based upon the Public Announce-ment [PA] made by HSBC Securities and Capital Markets (India) Private Limited [HSCI] and HSBC Violet alongwith persons acting in concert [PACs] [the Acquirers] under the provisions of the SEBI Takeover Code and the Share Purchase Agreement between Infrastructure Leasing & Financial Services Limited [IL&FS] and HSCI dated 16th May, 2008 [IL&FS Share Purchase Agreement] drew attention to the fact that one of the conditions precedent to the IL&FS Share Purchase Agreement was completion of the E*Trade Share Purchase Agreement between ETM & HSBC Violet dated 16th May, 2008.

The AO also drew attention to the statement in the PA under the Reasons for the Offer and Future Plans that pursuant to the substantial acquisition, the acquirers will be in control of the management of the target company. The acquirers propose to reconstitute the Board of Directors of the target company upon completion of the offer formalities.

It is worth noting that upon the acquisition of shares by the Acquirers from IL&FS and ETM under both the abovementioned agreements, the acquirers’ shareholding in IIL would amount to 73.21%, besides the acquisition of shares from other minority shareholders.

2.2 The AO rejected the contentions of the ETM based upon Article 13(4) of the DTAA and drew the following inferences and held as follows :

a. “It is inferred that the transaction is prima facie, liable to Income Tax in India. E*TRADE, by reason of this transaction has earned income liable for Capital Gains Tax in India as the income was earned towards sale consideration of transfer of its business/economic interests, in favour of the acquirers.”

b. “Like most other taxing jurisdictions, the Indian Income Tax Act follows the twin basis for taxation, (i) based on residence or domicile and (ii) based on source of income. While Indian residents are taxed on global income under Section 5(1), non residents are taxed only on the income, which has its source in India under Section 5(2). The non-residents should have either received or deemed to have received the income in India or the income should have arisen or accrued in India or should be deemed to have accrued or arisen in India. The deeming provision is enumerated in section 9 of the Income Tax Act. It is the submission of the Revenue that the income or capital gains of E*TRADE is deemed to have accrued or arisen in India and therefore, it squarely falls within the ambit of Section 9 and is hence chargeable to Income Tax.”

c. “The question that arises for considera-tion in the present case is

(i) what was the subject matter of the transaction;

(ii) whether the subject matter can be said to be a capital asset;

(iii) whether the transaction involved transfer of a capital asset situate in India.

(i) The subject matter of the present transaction between the acquirer and E*TRADE is nothing but transfer of interests, tangible and intangible, in Indian company in favour of the acquirer and not an innocuous acquisition of shares of some Mauritian Company.

ii) From the facts and material available as of now, it is demonstrable that a strong prima facie case is made out to show that the transaction entered into by the Acquirer amounts to transfer of capital asset situated in India. The above transfer is a transfer of a capital asset and not merely a transfer simpliciter of controlling interest ipso facto in a corporate entity. It is :

a) A transfer  of a bundle  of interests;

b) Substitution of the Acquirer as a successor in interest;
    
c) Transfer of Controlling Interest in an Indian Company; and

d) Transfer  of Management  Rights

iii) Mode of transfer of an asset is not determinative of the nature of the asset.

Shares in themselves may be an asset but in some case like the present one, shares may be merely a mode or a vehicle to transfer some other asset(s). In the instant case, the subject matter of transfer as contracted between the parties is not actually the shares of a Mauritian Company, but the assets situated in India. The choice of the acquirer in selecting a particular mode of transfer of these right enumerated above will not alter or determine the nature or character of the asset.

It is seen that E*TRADE Mauritius Limited, a limited company formed under the laws of Mauritius is a subsidiary of E*TRADE’ Financial Corporation, a company incorporated under the laws of the State of Delaware, USA. The very purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian company, by other foreign company. This being the dominant purpose of the transaction, the transaction would certainly be subject to laws of India, including the Indian Income Tax Act.

d. Prima facie on the basis of details available on record and submissions of the applicant, it is seen that the Capital Gains have accrued in India. The transaction is not a transaction merely of shares but is a transaction which is not covered under article 13(4) of the India-Mauritius DTAA. Also it may be mentioned here that this application is an application for tax deduction at source and not an assessment proceeding.”

Thus, the AO ignored ETM’s submissions based on Article 13(4) of the DTAA and decided to tax the capital gains u/s. 9(1) of the Act.

2.3 Accordingly, the AO directed HSBC Violet to deduct tax at source @ 21.11% on gross payments to be made to ETM. This was the Order u/s. 197 which was subject matter of the writ petition before the Bombay high court.

3. Findings and observations of the DIT(IT) in his order u/s. 264

3.1 Pursuant to the order of the High Court on 26.9.2008, ETM filed a revision petition u/ s. 264 with the DIT(lT) on 3.10.2008, urging the DIT(IT) to quash / set aside the Order of the AO u/s. 197. The ETM submitted as follows:

a) The applicant is a company incorpo-rated in Mauritius and holds a Tax Residency Certificate issued by the competent authority of that country.

b) Consequent to that, Circular No 789 issued by the Board is applicable to the facts of the case, and

c) As a corollary to the above two facts, capital gains earned from the sale of shares of the Indian Company IlL, would not be taxable in India in view of Article 13(4) of the Indo-Mauritius Tax Treaty.

3.2 The DIT(IT), in his order u/s. 264 dated 1st January, 2009 essentially upheld the Order of the AO but on different grounds. However, the DIT(IT) directed the AO to substitute the quantum of the capital gains by the net amount of capital gains instead of gross sales consideration adopted by the AO in his order u/s. 197. He further upheld the rate of tax @ 21.11% as against tax rate of 10% sought by ETM as per proviso to section 112. The findings and observations of the DIT(IT) are summarised in the following paragraphs.

3.3 On the basis of the enquiries made and information gathered by the DIT(IT) from the public domain, mainly through Internet, the DIT (IT) noted and observed as under:

(i) The CAI was incorporated in November 2000 in the State of Nevada, USA. It holds various investments in equity shares and manages corporate cash and investments on behalf of ETFC.

ii) Dilemma of the Managerial Spectrum : The DIT noted the composition of Board of Directors of CAI (about Two Directors), ETFC (10 Directors), ETM (5 Directors) and IlL, before sale of shares by ETM (17 Directors).

iii) The DIT (IT) further noted that certain key personnel from ETFC, USA and group companies were deputed to the Indian Company IlL, including the MD & CEO of Indian Company, who prior to joining IlL was employed with ETFC USA as its Vie-President Finance-Capital Markets and who was also on ETM’s Board for some period. He noted that these key personnel were neither shareholders in ETM nor its employees nor its Directors except one person. The DIT(IT) concluded from these facts that ETFC, the ultimate parent company of ETM, was exercising the rights available to a Shareholder in appointment of Directors in the Indian Company and the management of the Indian company through deputation of its senior managerial personnel. It may be noted that ETM declined to furnish the aforesaid information on the ground that they were not concerned as the matter relates to ETFC whom it did not represent and the DIT(IT) obtained the information from the public domain through Internet and the Indian Company.

iv) Intricacies of the Financial Conundrums: The DIT(IT) noted, observed and concluded as follows:

a) ETM was incorporated in October, 2004. In November, 2004 it entered into Share Purchase Agreements (with 3 Companies) for purchase of share in IlL i.e. from a Mauritian Company, a Japanese Company and IL&FS, aggregating to 48.80 Lakhs shares.

b) IIL, the investee company, was a party to a Share Purchase Agreement under which it undertook to furnish an Annual Certificate to the US parent ETFC under the US tax laws in relation to its status as Passive Foreign Investment Company as per section 1297 of the US Internal Revenue Code.

c) Thereafter, between December 2005 to November 2006, ETM acquired GDRs issued by IlL and thus increased its holding in IlL to 37.67%, which exceeded the holding of the Indian Promoter namely IL&FS of 29.36%. ETM further acquired shares by an open offer increasing its shareholding in IlL to 43.85% at a Total Cost of Rs. 494.38 Crores.

d) The DIT(IT) noted from the Bank Statements of ETM that these funds were contributed either by CAlor ETFC. He further noted that in some cases dividends due to ETM were remitted to E*Trade Securities (HK) Ltd., as an associate company of ETFC.

e) He further analysed the Bank Statements of ETM for the year ended 31.12.2005, 31.12.2006 & 31.12.2007 and based on his analysis he concluded that not only the funds for investments have been completely sourced from the parent companies but even their allocation in the accounts of ETM are not clear and dividends received from IlL have been remitted as reimbursement of excess funds.

f) Accordingly, the DIT (IT) came to a conclusion, that “The Financial element was routed through the Mauritian entities whereas the management of those routed funds invested in the Indian Company was ensured by” deputation of senior key personnel from ETFC and group companies.

g) The DIT(IT) has extracted relevant information from Annual Report of IlL for FY 2004-05, Prospectus dated 13th July, 2005 issued by IlL and Public Announcement of offer to the equity shareholders of IlL by ETFC dated 7th October, 2006 to arrive at an inference that “This ingeniously planned affair appears to have been conceptualised by and between both the Groups i.e. IL&FS, the Indian Promoter Group and E Trade Group, USA in the year 2004 itself when E* Trade made its first investment in the Indian company. The Mauritius subsidiary was set up in October, 2004. Some of the disclosures made in the Annual Report of IlL for the Year 2004-05, in the Prospectus and in the appointments of MD &  CEO as well as deputationists indicate and prove this inference.”

h) Based on the above discussions, the DIT(IT) concluded as follows:

“Three issues emerge from the entire discussion above, one which is certain that there existed a Permanent establishment of the parent company, ETFC in terms of Article 5 (2) (l) of the India-US Tax Treaty, and the second one, that whether a permanent establishment of the Mauritian company, ETM existed would depend on further enquiries. It is a fact that Mr. James Leslie Whiteford was director in ETM from October 2004 till May 2008 and was also MD & CEO in I1L from May 2007 to May 2008 when ETM thought to divest its 43.85% stake in IlL. The discussions in respect of the managerial and financial aspects throw light in that direction to some extent. Another situation may emerge where the comingling of assets and management of the Indian company by persons from US company and their activities in India may lead to their carrying on business of the US entity in India and the Mauritian entity is simply a facade. At this moment, the evidence captured indicates such a possibility but more evidence is surely needed to hold so. The fact of direct exercise of rights available to a shareholder and remittance of dividend received from IlL immediately after the receipt thereof coupled with deployment of ETFC’s senior personnel on deputation and with the Board of Directors in the Indian company IlL, is a clear indication for such a possibility.”

4. Taxpayer’s  Response

4.1 The taxpayer challenged the inquiries made to ascertain the facts and circumstances by contending that this amounts to exercise of jurisdiction under Section 263 of the Act and not under Section 264. It was asserted that the DIT(IT) can make enquiry only concerning the record of the proceedings which were before the AO and grant relief to the taxpayer in light of the legal position on the subject matter of the revision petition.

4.2 The DIT(IT) repelled the said contention of the tax payer as follows:

a) The High Court had observed that all the contentions available to both the sides are kept open to be raised before the revision authorities;

b) The statutory provisions empower the Revision Authority to make such enquiry or cause such enquiry to be made and pass such order thereon, as he thinks fit. However, the order passed under Section 264 should not be prejudicial to the assessee. Explanation 1 to Section 264 defines what should not be considered as prejudicial to the assessee. There is no mandate in the section that whatever relief is sought for by the assessee must be allowed to him.

(c)    The assessee has contended that under Section 264, the revision authority is required to rectify the order of the AO for just and equitable relief. Such a mandate is not discernible from a reading of Section 264 of the Act.

5. Applicability of Circular 789 and Supreme Courts decision in Azadi Bachao Andolan’s case

5.1 The taxpayer’s main argument was that in view of Tax Residency Certificate issued by the Mauritius Revenue Authority, it is a tax resident of Mauritius. Accordingly, it claimed to be entitled to the benefit available under Article 13(4) of the Treaty, as per Circular 789 issued by the CBDT and the judgement of Hon’ble Apex Court in the case of Azadi Bachao Andolan reported in (2003) 263 ITR 706.

5.2 The DIT (IT) repelled the taxpayer’s argument in the following words:

a) “The facts and circumstances discussed above leave the question wide open whether the said Treaty would at all apply here. Assuming for a moment – though not admitting that it is so, it is a fact that Circular 789 was issued to provide that where a Tax Residency Certificate is issued by the Mauritian Revenue Authority, the provision of India-Mauritius Tax Treaty should be given effect to. That situation does not exist in the present case and needs further examination.”

b) “The explanation of the applicant was also called for especially in the context of judgement dated 14th October 2008 of the Hon’ble Apex Court in the case of Commissioner of Central Excise vs. Ratan Melting & Wire Industries 2008 (231) ELT 22 (SC). The applicant, inter alia, replied vide letter dated 15th December 2008 that the above referred decision has no impact or effect on the validity, applicability, and maintainability of the CBDT Circular No 789.”

c) “The moot question is whether India-Mauritius Tax Treaty would apply on the given facts or India-US Tax Treaty would be applicable in the light of overwhelming facts indicative of the ownership of shares resting with the US Company. These complex issues which do not admit solution through doctrinaire or straight jacket formula cannot be decided in these summary proceedings. Since ETM is regularly assessed to tax by the ADIT (IT) -3 (2), Mumbai, these issues can be examined in greater detail in the course of regular assessment and be decided therein.”

6. Decision  of the  DIT(IT)

6.1 The DIT(IT) citing the following High Court Decisions held that provision of the section 195 of the Act is only for the tentative deduction of income-tax subject to regular assessment and the rights of the parties are, not adversely affected in any manner and that the orders u/s. 195(2)/ 197 are not conclusive and they do not pre-empt the tax department from passing appropriate assessment orders:

a) CIT vs. Tata Engineering and Locomotive Company Limited [2000] 245 ITR 823 (Bom)    

b) CIT vs. Elbee Services Private Limited [2001] 247 ITR 109 (Born).

6.2 Based on the above discussions, the DIT(IT) crystallised the following three issues for decision:

1. Whether tax should be deducted from the gross sale consideration received on the sale of shares of the Indian company, IlL by the Mauritian company ETM ?

2. Whether such capital gains are exempt from tax in view of the benefit available under Article 13(4) of the India- Mauritius Tax Treaty in view of Circular 789 issued by CBDT and ratio of the Hon’ble Apex Court in the case of Azadi Bachao Andolan reported in 263 ITR 706?

3. What would be the rate of tax, if the gains are to be taxed ?

6.3 The DIT(IT) decided the above issues as follows:

a) Tax should be deducted from the net amount of capital gains instead of gross sale consideration as adopted by the AO. He thus reversed the direction of the AO on this point and granted partial relief to the taxpayer.

b) It can not be said at this stage that capital gains have arisen to the Mauritian entity, ETM and not to the US entity and much is left to be looked into as apparent does not appear to be real. There are enough flaws, defects and discrepancies in the claim of the applicant which need to be explained by it before the claim of the applicant can be accepted. In view of the same, in so far as this finding of the AO is concerned that capital gains are made by ETFC, at this stage, no interference is called for.

c) Following the Mumbai Tribunal’s decision in the case of BASF Aktiengesellschaft vs. Deputy Director of Income tax (International Taxation) [2007] 12 SOT 451/110 TTJ (MUM.) 741, the DIT (IT) held that proviso to Section 112would not apply in the case of long term capital gains arising on account of sale of shares of a listed company and consequently, the rate of tax on long term capital gains computed under the first proviso to section 48 would be 20 per cent.

d) In view of the above, the DIT(IT) ordered that an amount of Rs. 18.94 lakhs be returned to the taxpayer and a sum of Rs. 24.31 crores be deposited with the AO.

7. Analysis

7.1 It appears that the DIT(IT) has virtually lifted the corporate veil of ETM to ascertain the beneficial ownership of such capital gains and in order to bypass the application of the Indo-Mauritius DTAA. It may be pointed out here that the concept of beneficial ownership is applicable to Article 10 (Dividends) and Article 11 (Interest) and not to Article 13 of the Treaty in respect of Capital Gains.

7.2 The matter will be finally decided by the AO in the regular assessment proceedings wherein the taxpayer would have opportuni ty to furnish all such facts, documents, explanations and legal submissions as may be appropriate in its case and the tax department would also be able to make such further inquiries and collect such further evidence as it may deem necessary. However, the AO is unlikely to adopt a line different from that of his superior. Hence, the matter may be tested in successive appeal proceedings.

7.3 In the meantime, the tax officers, in appropriate cases, are likely to use this precedent, depending upon the facts and circumstances of each case, to deny the benefit of Article 13(4) of the DTAA to Mauritius entities resulting in protracted litigation and it may impact flow of investments through Mauritius.

7.4 In view of this precedent, such investors and their investment and tax advisors would be well advised to take proper precautions to ensure that there is substance in the operations of the Mauritius entities and that financial transactions are routed through Mauritian entities and not directly with other group entities Iaccounts. The recording of the transactions in the books of accounts and their documentation should be done very meticulously and various financial disclosures to various regulatory authorities are well thought out and vetted by the tax advisors.

7.5 It is important to note that from the orders of the High Court it appears that the Taxpayer did not vehemently urge its case based on the CBDT’s Circular No. 789 and the decision of the Supreme Court in Azadi Bachao Andolan’s case (Supra). Had it been so, perhaps the decision of the High Court could have been different, even in a case involving summary proceedings u/s. 1971 195(2).

7.6 The DIT(IT) has relied upon the SC’s decision in the case of Ratan Melting and Wire Industries (Supra) to rebut the tax payer’s reliance upon the aforesaid CBDT Circular No. 789. In Ratan Melting’s case, the SC held that Circulars and instructions issued by the Central Board of Excise and Customs are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the Court to direct that the circular should be given effect to and not the view expressed in a decision of this Court or the High Court. So far as the clarifica tions I circulars issued by the Central Government and State Govern-ments are concerned, they represent merely their understanding of the statutory provisions. They are not binding upon Courts. It is for the Court, and not for the Executive, to declare what the particular provision of a statute says. Further, a circular which is contrary to the statutory provisions has really no existence in law.

The DIT(IT) ought to have appreciated that the legal validity of the said CBDT Circular No. 789 has been upheld by the SC in unequivocal terms in Azadi Bachao Andolan’s case (Supra) and it is not a case where the court has held that the said circular is contrary to the statutory provisions. Thus, in our view, Ratan Melting’s case has no application in respect of the validity and the binding nature of the said Circular No. 789.

7.7 Media reports appearing at the point in time when the said Circular No. 789 was issued, suggest that the same was issued keeping in mind the then prevailing economic conditions, fiscal situation, position of the forex reserves and the need to attract foreign investments into the country, both FDI as well as FII investments. In addition, in view of notices being issued/inquiries being made by the revenue authorities to/with Mauritius-based FIls and investors, a huge hue & cry was made by such investors severely impacting the stock markets adversely as well as the fear of negatively impacting the inflow of the foreign investments into the country leading to issuance of the said circular by the CBDT, probably under political pressure. The veracity of this statement cannot be verified and it is in the realm of speculation.

To ensure that the decision of E*Trade Mauritius’s case does not create uncertainty in the minds of the FIls’ and the Investors coming through Mauritius and such other jurisdictions, it would be perhaps in the fitness of things that Political leadership, Revenue authorities in both the countries, Investors and Tax Advisors put their heads together to find a viable and acceptable solution to the issue. This would help in removing the uncertainties from the minds of the investors and also in avoiding protracted litigation.

7.8 The moot point is whether in respect of a matter which has been concluded and settled by the SC and which under Article 141 of the Constitution becomes the law of the land, is it open to the revenue authorities to reagitate the matter for some reason or the other?

7.9 There is no doubt that the provisions of India Mauritius DTAA have been used for Treaty shopping and may cause loss of revenue. Treaty Shopping has been clearly upheld by the Supreme Court in Azadi Bachao Andolan’s case. A more appropriate course of action would be for the political leadership to take a firm stand in the matter to renegotiate the treaty about which we have been hearing for a long time but there is no real action on the ground.

7.10 In view of the experience in Vodafone’s case and E*Trade Mauritius’s case, the tax payer would be well advised to submit to the tax authorities requisite facts, documents and information during such summary proceedings as well as regular assessment proceedings in order to avoid antagonism and protracted litigation because the tax authorities are now becoming more tech savvy and are able to gather lot of relevant information available in the public domain through Internet or from the filings with the regulatory authorities in domestic/foreign jurisdictions.

OECD estimates $11 tn parked in tax havens

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  1. OECD estimates $11 tn parked in tax havens

The
Organisation for Economic Cooperation and Development (OECD) has estimated
that about $11 trillion, more than 10 times the amount committed by G-20
leaders to revive the world economy, is held in tax havens, even as it
released the black list of non-cooperative nations. Estimates of the
value of assets held in tax havens range from $1.7 trillion to $11.5 trillion,
the OECD said while naming Malaysia, the Philippines, Uruguay and Costa Rica
as countries that have not agreed to implement international tax standards.
Mauritius, the country from where large amounts of investments are routed
to India, figures among the nations that have substantially implemented tax
standards. Among the countries that have committed themselves to the
internationally agreed tax standards but have not yet implemented them are
Singapore, Switzerland, Bahamas, Bermuda, British Virgin Islands, and Cayman
islands.

(Source : Media
Reports & Internet, 03.04.2009)

levitra

Income-tax files throw up tough posers for political parties

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  1. Income-tax files throw up tough posers for political
    parties

Did the
Bharatiya Janata Party spend the money collected in the name of the Gujarat
Relief Fund on itself ?

Why did the
Income-tax (I-T) Department take a sudden U-turn to grant Income-tax exemption
to the Congress ? How can leaders of the Communist Party of India justify
purchase of shares in private limited companies with party funds ? And how can
political parties contest elections in Bihar when they are either bankrupt or
have meagre funds ?

Questions,
and more questions, came up as DNA carried out an exhaustive analysis of the
I-T returns filed by the country’s major political parties seeking tax
exemption. These returns have for years remained secret, but thanks to recent
efforts and many spirited appeals by the Association for Democratic Reforms,
an NGO working for improving transparency in the electoral process, the
details are now tumbling out.

Over the
past several days, DNA has been combing through these returns with the
assistance of experts. Several startling facts have emerged, foremost being
the callousness with which the I-T Department has been scrutinising these
returns. There are huge gaps in the claims of many political parties in their
I-T returns. How could the bankrupt RJD of Lalu Prasad contest elections in
Bihar year after year ? How was it possible for the Janata Dal (United) to
fight elections in Bihar with assets worth just a few lakh rupees ? The BJP’s
balance sheets for 2001-06 show that it collected Rs.2.68 crore as a ‘Gujarat
Relief Fund’ during this period, but not a single paisa from that was
disbursed for relief. Also, it’s not clear if this relief fund is part of
BJP’s net worth of Rs.102.70 crore in the financial year 2005-06.

There were
two I-T cases pending against the Congress. Soon after the Congress-led United
Progressive Allian’The balance sheet of 2001-02 shows that the AO raised tax
demands of Rs.1.80 crore and Rs.14.79 lakh, respectively, on the two
donations. Strangely, the Congress returns do not show who donated these
amounts. In 2002-03, when the BJP-led NDA was still in power, the Assessing
Officer increased the tax demand on these donations to Rs.2.57 crore and
Rs.18.12 lakh, respectively. The Congress went in for fresh appeal to the CIT
(Appeals). Within months of coming to power, the party got a favourable order.
The CPI(M) had disclosed donations worth only Rs.27.70 lakh to the Election
Commission between 2003 and 2007, placing it among India’s poorest national
parties. DNA has published a series of reports on donations declared by
political parties to the Commission.

But the
CPI(M) is among the richest parties in the country. According to its returns,
the party’s donations, a majority of which are below Rs.20,000 each, add up to
a whopping Rs.84.84 crore between 2001 and 2006.

For the CPI,
the returns bring up some uncomfor-table questions. The party’s auditor, Pune-based
P. G. Bhagwat, has stated that several private equity shares running into
lakhs have been purcha-sed by CPI leaders. The auditors have, however, not
given out names of the CPI leaders in whose names the shares were purchased.
What makes things more suspicious is that 2 of the private firms, both based
in Mumbai, are shown to have closed business.

(Source : DNA,
Media Reports & Internet, 06.04.2009 )

 

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DIPP set to clear confusion on PN-1

17. DIPP set to clear confusion on PN-1

    The Department of Industrial Policy and Promotion (DIPP) would soon come out with a clarification stating Press Note 1 of 2005 would not be applicable in cases where joint ventures involving foreign companies do not exist anymore. Press Note 1 makes it mandatory for a foreign company to get a no-objection certificate from its Indian partner before setting up a new business in the country in the same field. The Department is bringing out the clarification to clear confusion among foreign investors as they tend to seek Foreign Investment Promotion Board’s (FIPB’s) approval pertaining to PN-1 even if they have discontinued their partnerships.

    (Source : The Economic Times, 31.03.2009)

Tata Industries gets I-T demand on round-tripping

 16. Tata Industries gets I-T demand on round-tripping

    The Income-tax (I-T) Department has sent a notice to Tata Industries, raising a demand of Rs.298 crore on capital gains on the sale of shares in Idea Cellular, held through a wholly-owned Mauritius-based subsidiary, Apex Investments, to Birla TMT Holdings in India.

    In this connection, the Department depended on the Securities Exchange Commission (SEC) filings made by US-based Cingular AT&T, the merged entity of Cingular Wireless and AT&T, when it sold its shareholding in Idea.

    Earlier, the international tax division of the Department had sent a show-cause notice to the company for not paying tax deducted at source (TDS) on payments made to Cingular AT&T.

    The Department has also said that the transaction violates Foreign Exchange Management Act (FEMA) regulations on overseas investments by Indian companies in joint ventures and wholly-owned subsidiaries.

    These investments, according to the notice, have also violated telecom regulations in India since Tata Industries held two licences simultaneously – one directly and the other through substantial holdings in Idea, which it has now exited, the report said. Officials said the Enforcement Directorate, which is responsible for enforcing exchange control laws, was also being asked to look into the issue. In a response to a questionnaire, a Tata Industries official said, “TIL has received an order from the I-T Department under Section 143(3) of the IT Act for assessment year 2007-08. TIL has filed an appeal with CIT Appeals and the hearing is awaited”.

    (Source : Media Reports & Internet, 08.04.2009)

    (Source : The Times of India, 19.03.2009)

Tax havens : OECD efforts yield rich dividends; Standards become global benchmark for exchange of tax information

15. Tax havens : OECD efforts yield rich dividends; Standards become global benchmark for exchange of tax information
    Following the G20 meeting and communiqué, the OECD Secretariat has provided a detailed report on progress by financial centres around the world towards implementation of an internationally agreed standard on exchange of information for tax purposes. The report available here consists of four parts :

  •      Jurisdictions that have substantially implemented the internationally agreed tax standard.

  •     Tax havens that have committed to the internationally agreed tax standard, but have not yet substantially implemented it.

  •     Other financial centres that have committed to the internationally agreed tax standard, but have not yet substantially implemented it.

  •      Jurisdictions that have not committed to implement the internationally agreed tax standard.

    Welcoming the outcome of the G20 meeting, OECD Secretary General Angel Gurria said, “Recent developments reinforce the status of the OECD standard as the international benchmark and represent significant steps towards a level playing field. We now have an ambitious agenda, that the OECD is well placed to deliver on. I am confident that we can turn these new commitments into concrete actions to strengthen the integrity and transparency of the financial system”.

OECD’s future challenges :

  •      Achieving a rapid and effective implementation of standards : Many of these commitments will require legislative changes and the negotiation of specific bilateral agreements in order to become effective, and the OECD stands ready to assist jurisdictions in their implementation.

  •      Speeding up the negotiations of tax information exchange agreements (TIEAs) : Small tax havens lack the resources to enter into negotiations with a large number of countries. The OECD’s 2002 Model Agreement on Exchange of Information on Tax Matters sets out an option for multilateral rather than bilateral TIEAs that the OECD intends to explore over the coming weeks. The OECD is also examining how the Nordic experience of multilateral negotiations leading to simulta-neous bilateral agreements could be adopted more widely.

  •      Extending the scope and role of the OECD’s action : The OECD Global Forum currently encompasses more than 80 jurisdictions and carries out self reviews and peer reviews to assess progress in implementation of the standard.

  •      The time has now come to re-examine the membership, the architecture and the role of the Global Forum in setting standards and evaluating progress. The Global Forum will undertake more robust reviews to strengthen the implementation of the standard.

    Politics behind listing of tax havens : Since China and France locked horns over naming of tax havens, US President Obama had to broker a peace. And that is how Hong Kong and Macau escaped from being named as non-compliant tax havens. They were in the declaration mentioned only as China’s Special Administrative Regions. Even Swtizerland was named as a non-compliant ‘financial centre’ rather than tax haven. Three other tax havens which escaped the dragnet prepared by the OECD are Isle of Man, Guernsey and Jersey.

    Three European Union Members which have been put in the gray list are Belgium, Austria and Luxembourg. All of them have protested but agreed to legislative amendments to peel off banking secrecy regulations.

    (Source : Media Reports & Internet, 05.04.2009)

CBDT task force to advise on preventing tax treaty misuse

14. CBDT task force to advise on preventing tax treaty misuse

    The Central Board of Direct Taxes (CBDT) has set up a special task force to suggest ways to prevent abuse of double taxation avoidance agreements (DTAAs), said a government official, who did not wish to be identified. The task force would look at the prevalent global best practices adopted by the US and others to see how they can be replicated here and ensure India’s tax treaties are transparent and promote information-sharing.

    India’s attempts to amend the treaty with Mauritius, from where the country receives 43% of its foreign investments, have so far met with tremendous diplomatic resistance from the island nation.

    The just-concluded G-20 summit on global financial crisis in London had raised the pitch on scrapping DTAAs. DTAAs are pacts between two countries that seek to eliminate double taxation of income or gains arising in one country and paid to residents or companies of the other country. The idea is to ensure that the same income is not taxed twice.

    However, in some cases, these treaties are misused to avoid taxes, leading to a loss of revenue to a country’s exchequer. This is called treaty shopping, where residents of a third country take advantage of a tax treaty between two countries by routing their investments from there to avoid taxation. As per some available estimates, India loses more than $600 million every year in revenues on account of the DTAA with Mauritius.

    New Delhi had also considered a limitation of benefit clause in the treaty, to prevent ineligible entities from taking advantage, the official said. Through this clause, the government can put in conditions such as listing on the local stock exchange in any of the countries, ceiling on turnover and cap on expenditure for carrying out operations in one of the contracting States.

    (Source : Media Reports & Internet, 06.04.2009)

The awful truth about tax havens

13. The awful truth about tax havens

    The crackdown on tax havens is already being hailed as one of the good things to come out of the financial crisis. Rightly so. Now that punitive tax rates have disappeared, there’s no justification for errant rich states, pesky principalities and dodgy developing nations to profit from helping the rich of the world stay that way.

    Looking at the threatened sanctions, it’s easy to see why the tax havens rolled over. The ‘toolbox’ of counter-measures includes cutting off aid to poor countries, withholding taxes on cross-border payments and not allowing tax deductions for business expenses in the bad lands. That’s enough to change tax evasion from a national profit centre to an economic disaster.

    The G20’s success is welcome, but raises two impertinent questions. First, considering how quickly the promises of compliance came once the G20 nations got tough, why did it take so long ? The answer is simple. Politicians weren’t really keen to put substantial pressure on Switzerland, Luxembourg, Andorra, Vanuatu and the like. Tax havens — like offshore havens for gambling, prostitution and other vices — are fun to condemn but pleasant to use. Second, will the G20 nations stick to their resolve ? Post-crisis resolutions could easily prove as durable as the typical New Year variety. The newly beefed up global Financial Stability Board and the OECD’s Financial Action Task Force are supposed to ensure enforcement. They should work fast and hard to establish good habits. Otherwise, politicians and their rich friends will once again discover the need for a safe haven from populist extremists.

    (Source : Business Standard, 06.04.2009)

New partnership law in place, but legal and tax hurdles remain

12. New partnership law in place, but legal and tax hurdles remain

    The Ministry of Corporate Affairs (MCA) has started registering firms under the newly-enacted Limited Liability Partnership (LLP) Act. However, a flow of applications is unlikely till tax laws are changed, say experts. At present, the Income-tax Act does not recognise LLP firms.

    A limited liability entity is a hybrid of existing partnership firms and full-fledged companies. A minimum of two partners will be required for formation of an LLP and there will not be any limit to the number of partners, unlike the current limit of 20 members in a partnership firm.

    On the other hand, in the traditional law on a partnership firm, every partner is liable, jointly with all other partners and also severally, for all acts of the firm done while he is a partner, irrespective of his stake.

    India recognises several forms of business entities, including sole proprietorship, Hindu Undivided Families, partnership firms (which provide flexibility, but with unlimited liability jointly or severally) and companies, which have limited liability but far less flexibility and high compliance requirements.

    Under the LLP model, chartered accountants, company secretaries or even advocates can set up multi-disciplinary firms that will act as ‘one-stop’ shop for people to avail of various professional services. Existing laws impose the restriction that these professional services cannot be carried out through companies, but only through partnership firms.

    The Income-tax law does not recognise an LLP. There are two ways to tax an LLP : The first is to tax only the partners and not the firm. This is followed in the US under what is called a ‘pass- through vehicle.’ The second way it to tax an LLP firm on the lines of corporates.

    Both the Corporate Affairs Ministry and the Parliamentary panel had recommended that companies and firms be exempted from capital gains tax for the purpose of conversion to LLP.

    The ICAI Act hasn’t recognised LLP but it is being considered by the Council. A group has given draft recommendations to the Council, which would come out with a regulation soon.

    (Source : Business Standard, 05.04.2009)

Interpretation issue : Excluded services under commercial construction services

1. Preamble :

    Recently on July 27, 2009, the Government issued Notification No. 24/2009-ST, whereby services provided in relation to management, maintenance or repairs of roads is notified as exempt from the whole of the levy of service tax. This prima facie appears to have been done to put an end to the controversy over the issue of taxability of these services. However, the question arises here is, can the Government exempt a service which was always outside the purview of the levy ? The issue of the Notification does not end the controversy over taxability of the services for the period prior to July 27, 2009, as it would mean that the services covered under the Notification were taxable till such date. Whether the services at least of repairs of roads were excluded from the purview of service tax or otherwise is discussed and analysed below.

2. Background :

    2.1 Construction service was introduced w.e.f. September 10, 2004 in clause (30a) of S. 65 of the Finance Act, 1994 (The Act). The definition inter alia excluded construction of road, dams, tunnels, etc. CBEC vide its Circular F.No.B2/8/2004-TRU dated 10-9-2004 explained the scope of this service. Subsequently, with effect from 16-6-2005 this service was renamed as ‘commercial or industrial construction service’ under clause (25b) of S. 65 and the erstwhile clause (30a) defined taxable service called ‘construction of complex’. The new clause (25b) also excluded services provided in respect of roads, tunnels and dams along with construction services in respect of airports, railways, transport terminals and bridges. Further, when execution of works contract service was introduced vide clause (zzzza) in S. 65(105) of the Act from 1-6-2007, this category also excluded works contract in respect of the same items. The relevant definitions are reproduced here :

    S. 65(25b) :

    ‘Commercial or industrial construction service’ means —

        (a) construction of a new building or a civil structure or a part thereof; or

        (b)

        (c)

        (d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit,

which is —

        (i) used, or to be used, primarily for; or

        (ii) occupied, or to be occupied, primarily with; or

        (iii) engaged, or to be engaged, primarily in, commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams”. (emphasis supplied)

S. 65(105)(zzzza) :

‘Taxable service’ means any service provided or to be provided to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

Explanation — For the purposes of this sub-clause, ‘works contract’ means a contract wherein, —

        (i)

        (ii) such contract is for the purposes of carrying out, —

(a)

(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

(c) ……………

(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or

(e) (emphasis supplied)

    The above definitions clearly indicate inclusion of repair, alteration, renovation or restoration or similar services in relation to commercial building or civil structure, pipeline or conduit in sub-clause (d) alongside construction services in sub-clause (a) and (ii)(b), respectively in the above definitions.

    2.2 Under another category of service viz. ‘management, maintenance or repair’ in S. 65(64) of the Act, maintenance or repair of properties whether immovable or not has been made taxable w.e.f. May 01, 2006. The definition is reproduced here :

“65(64) ‘management, maintenance or repair’ means any service provided by :

(i)

(ii)

(a) ;

(b) maintenance or repair of properties, whether immovable or not; or

(c)

Explanation — For the removal of doubts, it is hereby declared that for the purposes of this clause, —

(a)

(b) ‘properties’ includes information technology software”. (emphasis supplied)

    2.3 Thus, there has been an overlap of repair services in relation to immovable properties under both the above taxing entries. This gave rise to dispute with the authorities for the assessees particularly in relation to (b) different construction services in relation to road and other areas (a) repairs or restoration services in relation to roads.

3. Repair services in respect of roads :

    3.1 Different kinds of services are provided by construction service providers in cases of both public and private roads. For instance, widening of existing roads, resurfacing, relaying, concretisation, etc. Since commercial or industrial construction service as well as execution of works contract service clearly include services in relation to repairs, alteration, renovation or restoration of any building or civil structure and exclude such services in relation to roads, the issue arose as to whether repair, renovation, etc. of road is classifiable under commercial or industrial construction service, or works contract service, as the case may be, on one side or under management, maintenance or repair service under the other. Service tax authorities at various places adopted divergent practices. On referring the matter to the Board by the Department, Circular No. 110/4/2009-ST, dated 23-2-2009 was issued providing the following clarification :

“2. Commercial or industrial construction service [S.65(105) (zzq) specifically excludes construction or repairs of roads. However, management, maintenance or repair provided under a contract or an agreement in relation to properties, whether immovable or not, is leviable to service tax u/s. 65(105) (zzg) of the Finance Act, 1994. There is no specific exemption under this service for maintenance or repair of roads, etc. Reading the definitions of these two taxable services in tandem leads to the conclusion that while construction of road is not a taxable service, management, maintenance or repair of roads are in the nature  of taxable services,  attracting  service tax.

The next issue requiring resolution is the types of activities that can be called as ‘construction of road’ as against the activities which should fall under the category of maintenance or repair of roads. In this regard the technical literature on the subject indicate that the activities can be categorised as follows, :

A) Maintenance  or repair  activities:

I. Resurfacing

II. Renovation

III.  Strengthening

IV. Relaying

V. Filling of potholes

B) Construction  activities:

I. Laying  of a new  road

II. Widening of narrow road to broader road (such as conversion of a two-lane road to a four-lane road)

III. Changing road surface (gravelled road to metalled road/metalled road to black-topped/blacktopped to concrete, etc.)

4. The cases may be decided/revenue should be protected based on the above classification. Suitable trade and public notices may be issued for information of the trade and field formations.”

3.2 The above Circular appears to be not in harmony with the rules for classification of services required to be followed when a taxable service is prima facie classifiable under two or more taxing entries. S. 65A of the Act contains these rules. According to the first rule, specific description is always preferred over general description. Accordingly, if roads are specifically excluded from commercial or industrial construction service, as well as execution of works contract service and as both these categories specifically include repairs, renovation, restoration, etc. of buildings or civil structures as construction services, the sub-clause in management, maintenance or repair service of maintenance or repair of immovable ‘properties’ appears generic in nature for services in relation to roads. The Tribunal in the case of Dr. Lal Path Lab. Pvt. Ltd. v. CCE, Ludhiana 2006 (4) STR 527 (Tri.-Del.) held “What is specifically kept out of a levy by the Legislature cannot be subjected to tax by the Revenue administration under another entry”. “In the present case, Revenue is seeking to discard the specific entry and to bring the appellant’s services under a very general entry only because under the specific entry, no tax is payable. This approach is contrary to the scheme of legislation.” Also, under the excise law, similar view was held inter alia in the cases of Tata Tea Ltd. v. CCE, 2004 (164) ELT 0315 and TTK Healthcare Ltd. v. CCE, 2008 (231) ELT 0273. In the case of CCE v. Konkan Marine Agencies, 2009 (13) STR 7 (Kar.), it was held to the effect that once the definition of the taxing entry excluded a specific aspect, service tax could not be levied. It appears therefore a reasonable view that the above Circular restricts the scope of the taxing entries viz. commercial or industrial construction service and execution of works contract service. “Circulars contrary to the correct legal interpretation are not binding on judicial authorities” was held in the case of Videocon International Ltd. v. Commissioner, 2004 (167) ELT 33 (Tri.-Mum). Similarly, it was held in the case of Mahakaushal Builders Welfare Association v. Supdt., 2006 (3) STR 721 (MP) that Circular does not create liability for payment of service tax if assessee not liable to pay tax under law relating to service tax. In the case of Pahwa Chemicals Pvt. Ltd. v. Commissioner, 2005 (181) ELT 339 (SC), it was held that the Board can issue directions only for purpose and in furtherance of and not contrary and derogation to provisions of the Central Excise Act, 1944.

3.3 Construction services per se cover repairs, renovation or restoration services as these services also involve’ construction’ and / or reconstruction in part. Roads are per se civil structures. When an existing road is redone completely, it can be called restoration. Clause (d) in the relevant definition cannot be rendered redundant by issuing a Circular. Further, there is a thin line of distinction between the terms ‘relaying’ and ‘laying of a new road’. Can ‘relaying’ not be covered by the terms ‘renovation’ or ‘alteration’ ? A further question arises as to whether the word ‘renovation’ used in the Circular directing that it is a maintenance service liable for service tax and the same word used in clauses (25b) or (zzzza) mean different? It is a cardinal principle of interpretation of taxing status that interpretation leading to absurdity cannot be accepted. By the parameter adopted by the Circular, even repair services in respect of a dam, bridge or any airport also would be considered taxable under clause (64) of S. 65 as all such services are also provided under a contract. Admittedly, revenue consideration of the authorities is on a higher footing than any other parameter like natural or grammatical meaning, principle of harmonious construction in a statute or principle of legality.

3.4 In effect, the Board’s Circular interprets the definition of commercial or industrial construction service in a restrictive manner merely to suit the Revenue needs. If sub-clause (a) under commercial or industrial construction service and sub-clause (ii)(b) under execution of works contract service, which provide for construction of a new building or a civil structure or a part thereof apply to the respective exclusionary part of the definition, why would sub-clause (d) under both the definitions providing for repair, alteration, renovation or restoration or similar services in relation to building or civil structure, etc., cannot apply to the exclusionary clause? If the scope of the definition is comprehensive enough to extend coverage to various services in relation to construction including those of repair, restoration aspects, the same ‘expansive’ scope applies to the exclusionary clause of the definition containing such services provided in respect of roads, airports, tunnels, dams, etc.” Such clarification being binding on the lower authorities would certainly create litigation than relief for the period prior to July 27,2009 when Notification No. 24/2009-ST was issued.

4. Services of construction of dam, tunnel and road:

4.1 The above Circular in no ambiguous terms clarifies that construction of road is not a taxable

The project was completed in February 2007. The tax demanded for the period April 2005 to March 2008 was  made  in the following manner:

  • Tax was computed on the entire amount received from WBSEB without granting abatement of 67%.

  • Computation of liability was made on the gross value even though service tax was not collected.

  • Invoked extended period of limitation on the charge of mis-representation and mala fide intention of evasion.

4.2 The Noticee’s case contained chiefly the following grounds :

  • Scope of the service included civil works structures of dams, tunnels and roads and did not include designing of power generation system or providing electrical and mechanical works for the plant.

  • The service was covered more appropriately under execution of works contract service introduced from 1-6-2007, whereas the project was completed in February 2007.

  • Filing of return or taking registration under wrong category could not be the basis for the levy.

  • Declaration of the entire value of the contractual service and claiming exemption on the proach or a voyage of discovery of the authorities ground  of exclusion  of dams, tunnels  and roads in the definition of commercial or industrial construction service in various returns from time to time and providing copy of the agreement in October 2005 to the Department evidenced against the charge of suppression or evasion.

  • Wide range of activities described in the scope of work in the contract under different nomen-clature related only to construction of dams, tunneling and roads.

  • Each activity described in the agreement was clarified to prove construction/civil works related to dams, roads and tunnels.

4.3 Order in a nutshell contained the following observations:

  • Based on examination of definition of ‘dam’ cited in Encyclopedia Britannica and the reading of the agreement clauses concluded that construction of dam involves several auxiliary works. Exclusion of dam in the purview of the definition would mean exclusion of all auxiliary works and that there was no scope to view the exclusion provision in narrow meaning.

  • No distinction could be made between construction of ordinary dams, tunnels and roads and tunnels, dams and roads as an integral part of the hydroelectric power project as the statute does not provide for it and therefore the statute cannot permit such distinction. Moreover, the dams are generally used for generating hydroelectric power.

  • There is no scope for segregating the agreement for considering any part of the work as taxable service.

  • Allegation of suppression also being unmeritous, the case failed both on the question of merit and the question of limitation.

5. In conclusion, to issue a half-baked Circular which generates controversy rather than settling it and then to combat it, issue a Notification or another Circular which also would not end the existing controversy is peculiar to the administration of the levy of service tax. The analysis and discussion above amply demonstrate the state of administration of the levy which otherwise contains several ambiguities and limiting factors leading to litigation due to dichotomy in interpretation. In most cases, it appears frivolous and a result of innovative approach or a voyage of discovery of the authorities at the peril of assessees at large.

A.P. (DIR Series) Circular No. 70, dated 30-6-2009 : Export of goods and software : Realisation and repatriation of export proceeds : Liberalisation.

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Part C : RBI/FEMA

Given below are the highlights of certain RBI Circulars.


  1. A.P. (DIR Series) Circular No. 70, dated 30-6-2009 : Export
    of goods and software : Realisation and repatriation of export proceeds :
    Liberalisation.

Presently, exporters are permitted to realise and
repatriate the full export value of the goods or soft-ware exported within
twelve months from the date of export, as against the norm of realising and
repatriation of the full export value of the goods or software exported within
six months from the date of export.

This Circular has extended this relaxation for a further
period of one year i.e., up to June 30, 2010. As a result exporters can
repatriate the full export value of the goods or software exported up to June
30, 2010 within twelve months from the date of export.

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On-line downloading of GR Forms

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New Page 1

Part C : RBI/FEMA

Given below are the highlights of certain RBI Circulars and Press Notes
issued by DIPP

  1. A. P. (DIR Series) Circular No. 60, dated March 26, 2009

On-line downloading of GR Forms

Presently, exporters are required to purchase GR Forms from
Regional Offices of RBI. Now, in addition to the above facility of purchasing
the GR Forms, exporters have been given an option of downloading the said GR
Forms from RBI website www.rbi.org.in and use the same.


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Buyback/Prepayment of Foreign Curren-cy Convertible Bonds (FCCBs)

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Part C : RBI/FEMA

Given below are the highlights of certain RBI Circulars and Press Notes
issued by DIPP

  1. A. P. (DIR Series) Circular No. 58, dated March 13, 2009

Buyback/Prepayment of Foreign Curren-cy Convertible
Bonds (FCCBs)


As per A. P. (Dir Series) Circular No. 39, dated December
8, 2008 the entire procedure of buyback was to be completed by Indian
companies by March 31, 2009.


This Circular has extended the said date from March 31,
2009 to December 31, 2009.


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Clarificatory guidelines on downstream investment by Indian companies

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New Page 1

Part C : RBI/FEMA

Given below are the highlights of certain RBI Circulars and Press Notes
issued by DIPP

  1. Ministry of Commerce & Industry, DIPP (FC Section) —
    Press Note No. 4 (2009), dated February 25, 2009

Clarificatory guidelines on downstream investment by
Indian companies

This Press Note aims to bring clarity into the Policy for
downstream investment by investing Indian companies.


The Policy on downstream investment comprises policy for :


(a) Only operating companies — Foreign investment in
such companies would have to comply with the relevant sectoral conditions on
entry route, other conditions and caps with regard to the sectors in which
such companies are operating.

(b) Operating-cum-investing companies — Foreign
investment into such companies would have to comply with the relevant
sectoral conditions on entry route, other conditions and caps with regard to
the sectors in which such companies are operating. Further, the subject
Indian companies into which downstream investments are made by such
companies would have to comply with the relevant sectoral conditions on
entry route, other conditions and caps in regard of the sector in which the
subject Indian companies are operating.

(c) Only investing companies — Foreign investment in
investing companies will require prior Government/FIPB approval, regardless
of the amount or extent of foreign investment. The Indian companies into
which downstream investments are made by such investing companies would have
to comply with the relevant sectoral conditions on entry route, other
conditions and caps in regard of the sector in which the subject Indian
companies are operating.

(d) Others companies — Government/FIPB approval is
required for infusion of funds into companies that do not have any
downstream investments. Further, as and when such company commences
business(s) or makes downstream investment, it will have to comply with the
relevant sectoral conditions on entry route, other conditions and caps.


Downstream investments can be made by
operating-cum-investing companies, only investing companies and other
companies, subject to the following conditions :


(a) Such company must notify SIA, DIPP and FIPB of its
downstream investment within 30 days of such investment even if equity
shares/CCPS/CCD have not been allotted along with the modality of investment
in new/existing ventures (with/without expansion programme).

(b) Downstream investment by way of induction of foreign
equity in an existing Indian company to be duly supported by a resolution of
the Board of Directors supporting the said induction as also a shareholders’
agreement if any.

(c) Issue/transfer/pricing/valuation of shares shall be
in accordance with applicable SEBI/RBI guidelines.

(d) Investing companies would have to bring in requisite
funds from abroad and not leverage funds from domestic market for such
investments. This would, however, not preclude downstream operating
companies to raise debt in the domestic market.


This Press Note has amplified Annexure to Press Note 7
(2008), dated June 16, 2008 to the extent stated therein.




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Guidelines for transfer of ownership or control of Indian companies in sectors with caps from resident Indian citizens to non-resident entities

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Part C : RBI/FEMA

Given below are the highlights of certain RBI Circulars and Press Notes
issued by DIPP

  1. Ministry of Commerce & Industry, DIPP (FC Section) —
    Press Note No. 3 (2009), dated February 13, 2009

Guidelines for transfer of ownership or control of
Indian companies in sectors with caps from resident Indian citizens to
non-resident entities



Presently, transfer of shares from residents to
non-residents, including acquisition of shares in an existing company, is on
the automatic route, subject to the sectoral policy on FDI. This Press Note
lays down guidelines for transfer of ownership or control of Indian companies
in sectors with caps from resident Indian citizens to non-resident entities.

Foreign investment shall include all types of foreign
investments i.e., FDI, investment by FIIs, NRIs, ADRs, GDRs, Foreign
Currency Convertible Bonds (FCCB) and convertible preference shares,
regardless of whether the said investments have been made under Schedule 1, 2,
3 and 6 of FEMA (Transfer or Issue of Security by Persons Resident Outside
India) Regulations.

In sectors with caps, including inter alia defence
production, air transport services, ground handling services, asset
reconstruction companies, private sector banking, broadcasting, commodity
exchanges, credit information companies, insurance, print media,
telecommunications and satellites, Government approval/FIPB approval would be
required in all cases, where :

1. An Indian company is being established with foreign
investment and is owned by a non-resident entity or

2. An Indian company is being established with foreign
investment and is controlled by a non-resident entity or

3. The control of an existing Indian company, currently
owned or controlled by resident Indian citizens and Indian companies, which
are owned or controlled by resident Indian citizens, will be/is being
transferred/passed on to a non-resident entity as a consequence of transfer
of shares to non-resident entities through amalgamation, merger,
acquisition, etc. or

4. The ownership of an existing Indian company, currently
owned or controlled by resident Indian citizens and Indian companies, which
are owned or controlled by resident Indian citizens, will be/is being
transferred/passed on to a non-resident entity as a consequence of transfer
of shares to non-resident entities through amalgamation, merger,
acquisition, etc.

These guidelines will not apply for sectors / activities
where there are no foreign investment caps, that is, 100% foreign investment
is permitted under the automatic route.

This Press Note has amplified Annexure to Press Note 7
(2008), dated June 16, 2008 to the extent stated therein.



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