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Year: 2009

Agricultural income — Even in case of an assessee having composite business of growing and manufacturing tea, income from sale of green tea leaves is purely income from agricultural products and is liable to be entirely taxed under the State Act and canno

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16 Agricultural income — Even in case of an
assessee having composite business of growing and manufacturing tea, income from
sale of green tea leaves is purely income from agricultural products and is
liable to be entirely taxed under the State Act and cannot be taxed under
Income-tax Act, 1961.


[Union of India v. Belgachi Tea Co. Ltd. & Ors.,
(2008) 304 ITR 1 (SC)]

The assessee, a public limited company carrying on the
composite business of growing and manufacturing tea in the district of
Darjeeling, has tea gardens known as Belgachi Tea Estate, which consists of the
gardens and a factory for manufacture of tea. The asseessee-company sells the
tea grown and manufactured in the said tea gardens. The factory in the said tea
gardens is licensed under Factories Act. The assessee-company is also selling
tea leaves produced in its tea gardens which are agricultural produce. The
assessee is also involved in manufacturing of tea. The income from such business
has been assessed all along under the provisions of the Income-tax Act, 1961.
The claim of the assessee-company is that the entire income should be assessed
under the provisions of the 1961 Act and after the income is assessed, tax
should be charged on 40% of such income under the 1961 Act and on the balance
60%, the State can tax under the Bengal Agricultural Income-tax Act, 1944.
According to the assessee, in view of the scheme of the 1961 Act read with Rule
8 of the Income-tax Rules, 1962, the income derived from the sale of the tea
grown and manufactured by a seller in India should be computed under the
provisions of the Act by the Income-tax Officer on the basis of the
aforementioned formula and that the sale proceeds of green tea leaves should be
treated as incidental to business and its income should also be computed on the
basis of aforementioned formula.

 

The Supreme Court observed that :

(i) There was no dispute on the fact that from the income
assessed, 60% is taxable by the State under the 1944 Act and 40% is taxable by
the Centre under the 1961 Act.

(ii) The object behind taxing the 60% and 40%
shares of the income assessed appears that there
are common expenses on establishment and staff for the two different
activities that is tea grown and tea manufactured. There can be independent
income from the sale of green tea leaves and by sale of tea, that is, after
processing of green tea leaves when green tea leaves become tea for use.
Income from agriculture is taxable by the State and sale of tea after
manufacturing is taxable by the Union of India as business income. To
segregate income and expenses from the two combined activities of the assessee
is not possible, but at the same time there cannot be two assessments of
income by two different authorities. Therefore, there can be only one
assessment of income from the tea business.

(iii) For the purpose of tax on agriculture income, the
Agriculture Income-tax Officer will go by the assessment order made under the
provisions of the 1961 Act and the contents of the assessment for the year
made by the Assessing Officer under the 1961 Act shall be conclusive evidence
of the contents of such order and he has to go by the assessment and tax only
60% income made under the assessment for the purpose of the 1944 Act. If there
is any apparent mistake in the order of the Income-tax Officer, he can bring
it to the notice of the Income-tax Officer and that can be rectified by the
Income-tax Officer, but no separate assessment of the income from ‘tea grown
and manufactured’ business can be made by the Agricultural Income-tax Officer
under the 1944 Act. He cannot once again assess that business income under the
1944 Act.

 


According to the Supreme Court, the question which however
required to be considered was whether the agriculture income be taxed under the
1961 Act. The Supreme Court noted that both Rule 8 of the Income-tax Rules,
1962, and S. 8 of the 1944 Act provide how the mixed income from the growing tea
leaves and manufacturing can be taxed. ‘Mixed income’ means the income derived
by an assessee from the combined activities, i.e., growing of tea leaves
and manufacturing of tea. Therefore, for purpose of computation of income under
the 1961 Act, it should be the mixed income from ‘tea grown and manufactured’ by
the assessee. The Supreme Court observed that if the income is by sale of green
tea leaves by the assessee, it cannot be called income assessable under the 1961
Act for the purpose of 40 : 60 share between the Centre and the State. In both
the provisions, i.e., Rule 8 of the Income-tax Rules, 1962, and S. 8 of
the 1944 Act, the words used are income derived from the sale of ‘tea grown and
manufactured’. The Supreme Court held that the income from sale of green tea
leaves is purely income from the agricultural products. There is no question of
taxing it as incidental income of the assessee when there is a specific
provision and authority to tax that income, i.e., the State under the
1944 Act. In that view of the matter, the agricultural income could not be tax
under 1961 Act.

Interest : S. 234B of I. T. Act, 1961 : A. Ys. 1989-90 to 2000-01 : Interest u/s. 234B is compensatory in nature: Interest not leviable where there is no loss of revenue to Government.

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  1. Interest : S. 234B of I. T. Act, 1961 : A. Ys. 1989-90
    to 2000-01 : Interest u/s. 234B is compensatory in nature: Interest not
    leviable where there is no loss of revenue to Government.

 

[CIT vs. Anand Prakash; 179 Taxman 44 (Del)].

In 1989, the assessee’s land was acquired by the State
Government. Order enhancing compensation was passed on 04/04/2000. Enhanced
amount included interest relatable to A. Ys. 1989-90 to 2000-01. Interest was
assessed in the respective years by invoking the provisions of section 147 of
the Income-tax Act, 1961. The Assessing Officer also levied interest u/s. 234B
on the ground of short payment of advance tax. The Tribunal observed that at
the time when the assessee filed his return of income for all the relevant
years, there was no order for grant of interest on additional compensation and
the right to receive additional sums came to the assessee’s knowledge by the
order dated 04/04/2000 which was much later than the dates of completion of
the assessments. The Tribunal held that chargeability of interest was in the
nature of quasi punishment and, therefore, should not be imposed
retrospectively. The Tribunal accordingly, deleted the interest so charged.

On appeal by the Revenue, the Delhi High Court held as
under :

“i) The levy u/s. 234B is compensatory in nature and is
not in the nature of penalty.

ii) Although the conclusion of the Tribunal with regard
to the levy of interest u/s. 234B being penal in nature was not correct, yet
the ultimate conclusion arrived at by the Tribunal could not be interfered
with, because interest u/s. 234B is clearly by way of compensation. What the
revenue proposed to do in the facts and circumstances of the case was to
charge interest for the default in payment of advance tax in the years in
question. It can only justify such levy of charge if it has suffered a loss.
This follows from the conclusion that the levy of interest u/s. 234B is
compensatory in nature.

iii) The fact remained that no money belonging to the
Government was withheld by the assessee in the years in question. In fact,
the interest payable on account of the enhanced compensation was not even in
the knowledge of the assessee till completion of the assessments. The
assessee could not be expected to have paid advance tax on something which
had not been received by him and which would not have been in his
contemplation. In other words, the assessee could not have included the
interest received on enhanced compensation in the A. Y. 2001-02 while
estimating his income for the purpose of calculation of advance tax for the
relevant years.

iv) It is a well-known principle that the law cannot
compel any one to do the impossible. The Government, itself, on the one
hand, delayed the payment of compensation to the assessee and on the other
hand, it expected to levy interest on the assessee for having allegedly
defaulted in making payment towards the advance tax. The revenue had not
suffered any loss and, therefore, there could be no question of levying
interest u/s. 234B”.

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Depreciation — Manufacture of tea — In cases where Rule 8 applies, the income which is brought to tax as ‘business income’ is only 40% of the composite income and consequently proportionate depreciation is required to be taken into account because that is

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  1. Depreciation — Manufacture of tea — In cases where Rule 8
    applies, the income which is brought to tax as ‘business income’ is only 40%
    of the composite income and consequently proportionate depreciation is
    required to be taken into account because that is the depreciation ‘actually
    allowed’.

[CIT v. Doom Dooma India Ltd., (2009) 310 ITR 392
(SC)]

The respondent-assessee was in the business of growing and
manufacturing of tea. The assessee filed its return of income for the
assessment years 1988-89 to 1991-92. The Assessing Officer completed the
assessments determining total income at a figure higher than what was
reflected in the returns. The assessee filed an appeal before the Commissioner
of Income-tax (Appeals). The assessee raised additional grounds before the
Commissioner of Income-tax (Appeals) at the time of hearing of the appeal,
inter alia, stating that the Assessing Officer had erred in determining the
opening ‘written down value’ of the block of assets without following the
provisions of S. 43(6)(b) of the 1961 Act. According to the assessee, for
arriving at the opening ‘written down value’ of the block of assets, the
Assessing Officer erred in deducting 100% of the depreciation for the
preceding year calculated at the prescribed rate from the opening ‘written
down value’. However, the assessee claimed that only 40% of the depreciation
allowed at the prescribed rate ought to have been deducted and not 100% as
done by the Assessing Officer. The assessee sought a direction from the
Commissioner of Income-tax (Appeals) to the Assessing Officer to determine the
‘written down value’ in accordance with the provisions of S. 43(6)(b) by
deducting only 40% of the depreciation computed at the prescribed rate, being
the depreciation actually allowed. Though the additional ground was allowed to
be raised, the argument of the assessee came to be rejected by the
Commissioner of Income-tax (Appeals).

Aggrieved by the decision, the assessee carried the matter
in appeal to the Tribunal. By its decision the Tribunal, following the
decision of Calcutta High Court in the case of CIT v. Suman Tea and
Plywood Industries P. Ltd. [1993] 204 ITR 719, held that since 40% of the
assessee’s composite income is chargeable u/s.28 of the 1961 Act, for the
purposes of com-puting the “written down value” of depreciable assets used in
the tea business, only 40%, instead of 100% of depreciation allowable at the
prescribed rate shall be deducted in the case of the assessee. This view of
the Tribunal was affirmed by the impugned judgment of the High Court.

On an appeal, the Supreme Court observed that the key word
in S. 43(6)(b) of the 1961 Act is ‘actually’ and in this context referred to
its decision in Madeva Upendra Sinai v. Union of India, [1975] 98 ITR
209 (SC) in which the meaning of the words ‘actually allowed’ in S. 43(6)(b)
was clearly laid down to mean — “limited to depreciation actually taken into
account or granted and given effect to, i.e., debited by Income-tax
officer against the incomings of the business in computing taxable income of
the assessee”.

The Supreme Court also referred to its decision in the case
of CIT v. Nandlal Bhandari Mills Ltd., [1966] 60 ITR 173 (SC), which
judgment was in the context of composite income and, the question, inter
alia, which arose was whether depreciation ‘actually allowed’ would mean
depreciation deducted in arriving at the taxable income or the depreciation
deducted in arriving at the world income (composite income). In that case, it
was held that the depreciation deducted in arriving at the taxable income
alone could be taken into account and not the depreciation taken into account
for arriving at the world income (composite income).

According to the Supreme Court, the above referred
judgments were squarely applicable to the present case and therefore, there
was no infirmity in the impugned judgment of the High Court. The Supreme Court
held that, in cases where Rule 8 applied, the income which is brought tax as
‘business income’ is only 40% of the composite income and consequently
proportionate depreciation is required to be taken into account because that
is the depreciation ‘actually allowed’.

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New industrial undertaking in backward areas — Deduction u/s.80HH — In the absence of particulars of outsourcing activity deduction cannot be allowed.

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  1. New industrial undertaking in backward areas — Deduction
    u/s.80HH — In the absence of particulars of outsourcing activity deduction
    cannot be allowed.

[CIT v. R. Pratap, (2009) 310 ITR 405 (SC)]

The Supreme Court was concerned with the case of an
assessee who claimed to be a processor of cashew kernels. The Supreme Court
noted that the said processing consisted of various stages like drying
followed by heating followed by decorticating which resulted in emergence of
the kernel covered by the skin which was ultimately sold. The Supreme Court
observed that if an assessee claims that he is the processor who has
outsourced some of its activities to its sister concern then the nature of the
activity undertaken by the industrial undertaking has got to be demonstrated
by the assessee who claims deduction u/s.80HH(1). The Supreme Court further
observed that the object underlying the enactment of S. 80HH(1) is to
encourage setting up of new industrial undertakings in backward areas. The
Supreme Court noted that in the present case, the assessee who had claimed
deduction had not given any particulars regarding the activity undertaken by
it, the activity outsourced by it to its sister concern, whether those sister
concerns were located in or outside the backward areas, etc. There was no
claim made by the assessee that its sister concerns were its job workers. No
details had been given as to whether after the process stands undertaken by
its sister concerns, whether or not, the material came back to the assessee
for further activities before export. There was no averment that the assessee
was the principal manufacturer. In the circumstances, the Supreme Court held
that the assessee was not entitled to claim the benefit of S. 80HH in the
assessment year in question. The Supreme Court however clarified that the
Department had given the benefit of 20% of the profits vis-à-vis the
number of bags processed in the assessee’s own factory situated/located in the
backward area and to that extent the findings given by the Assessing Officer
as well as by the Commissioner of Income-tax (Appeals) remained undisturbed.



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Industrial undertaking — Deduction u/s. 80-I — To determine whether manufacturing is carried out in the industrial undertaking, assessee should place all the relevant material before the Tribunal which is the highest fact finding authority — Whether the a

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  1. Industrial undertaking — Deduction u/s. 80-I — To determine
    whether manufacturing is carried out in the industrial undertaking, assessee
    should place all the relevant material before the Tribunal which is the
    highest fact finding authority — Whether the activity of supply of ammonia gas
    to heavy water plant and return of the same after extracting deuterium
    amounted to manufacture — Matter remanded.

[Krishak Bharati Co-op. Ltd. v. Jt. CIT, (2009) 310
ITR 400 (SC)]

The appellant, a multi-state co-operative society engaged
in the business of manufacturing urea and ammonia at its plant at Hazira, used
to supply ammonia gas through pipe connections from its plant at Hazira
directly to the heavy water plant (HWP) of the Heavy Water Board (HWB),
which is a Department of Atomic Energy. The HWP was located next to the
appellant’s plant. In fact, it was in the precincts of the appellant’s plant.

On September 14, 1994, an agreement came to be executed
between the appellant and HWB. Under that agreement, the appellant was
entitled to be reimbursed the cost of ammonia manufactured by it and supplied
to the Board and in addition thereto it was also entitled to receive service
charges and incentives from HWB.

In respect of the assessment year 1993-94, the Commissioner
of Income-tax (Appeals) held that since the receipt of service charges was not
directly connected or linked with the manufacturing activity carried out in
the industrial undertaking of the assessee, the service charges received by
the assessee from the said activity of producing heavy water cannot be
considered as profit derived from its industrial undertaking so as to qualify
for deduction u/s.80-I of the Act.

This view of the Commissioner of Income-tax (Appeals) was
affirmed by the judgment of the Tribunal as well as by that of the Delhi High
Court.

The Supreme Court at the outset, noted the brief process of
manufacturing heavy water. Heavy water is employed as a coolant in pressurised
heavy water nuclear reactors. Synthesis gas is produced at the ammonia plant
of the appellant. It contains deuterium. Synthesis gas containing deuterium is
taken to heavy water plant, where deuterium is extracted in extraction towers
and the balance synthesis gas is returned to the ammonia plant of the
appellant. The Supreme Court observed that the appellant’s plant which is
known as ammonia plant from which synthesis gas flows to HWP at Hazira owned
by the Department of Atomic Energy and which is known as Hazira Ammonia
Extension Plant (‘HAEP’). HAEP is an extension of the ammonia plant. According
to the Supreme Court this aspect was important for deciding the appeal before
it as it indicated the inseverability between the two plants.

The Supreme Court further observed that unfortunately, in
this case, the appellant herein had failed to place before the Tribunal, which
is the highest fact finding authority under the Act, the relevant contracts
and other data. In fact, the appellant had failed to produce the relevant
contracts and the connected data before the Tribunal. The Supreme Court
therefore, held that there was no fault with the impugned judgment of the High
Court. Normally, it would have dismissed this civil appeal for lack of due
diligence. However, looking to the importance of the matter and in view of
special features of the contract, Supreme Court decided to entertain the civil
appeal by grant of special leave. The Supreme Court noted that in this case,
the appellant had placed reliance only on an agreement dated September 14,
1994, for operation and maintenance of heavy water plant at Hazira. They had
failed to produce the contracts dated August 5, 1986, and July 11, 1990.
According to the Supreme Court the exact meaning of the manufacturing carried
out in the industrial undertaking of the appellant required in-depth
examination.

The Supreme Court held that as the appellant had failed to
produce relevant data before the authorities below it was permitted to do so,
subject to the payment cost of Rs.25,000 as a condition precedent to the
hearing of the appeal by the Tribunal.

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Liability of Trust : Assessee, a provident fund trust of employees : Assessable in the status of individual : Not liable to TDS u/s.194A

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55 TDS : Liability of Trust : S. 194A of
Income-tax Act, 1961 : A.Ys. 2002-03 to 2005-06 : Assessee Corporation, a
provident fund trust of employees : Assessable in the status of individual : Not
liable to deduct tax at source u/s.194A.



[CIT v. Food Corporation of India Contributory Provident
Fund Trust, 218 CTR 625 (Del.)]

The assessee is a provident fund trust of the employees.
The Assessing Officer found that the amounts being credited to the account of
the ex-employees after cessation of employment, had the character of interest.
The AO held the assessee was required to deduct tax at source u/s.194A of the
Income-tax Act, 1961 on the interest so credited. The assessee having failed
to do so was treated as being in default and demands were raised u/s.201(1) &
201(1A) of the Act. The Tribunal held that the assessee being assessed to tax
in the status of an individual, was not liable to deduct tax at source
u/s.194A and accordingly deleted the demands.

 

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

“Assessee corporation, a provident fund trust of employees
created after seeking exemption u/s. 16 of the Employees Provident Fund Act,
1952, being assessable in the status of individual, was not liable to deduct
tax at source u/s.194A while crediting amounts to the account of
ex-employees.”

Vote We Must !

Editorial

We are now well into the national election season with the run-up to the Lok Sabha polls, with the newspapers full of reports of alliances and break-ups between various political parties and groupings. Reading about these developments and actions of politicians with absolute disregard for ethics and principles, one wonders as to whose interests our politicians really have at heart — that of the voters whom they are supposed to represent, or their own. It is but natural that one feels revolted by the type of money-based or caste-based politics practised in India, and seeks to maintain a distance from politics. This disgust for politics ultimately gets reflected in our abstention from voting in the elections. Is this however the right approach for educated professionals to take ?

In India, one faces so many problems in day-to-day life — corruption, official apathy, violence, etc. — that one takes the easy way out, by trying to ensure that one does not have to face the issue directly. We tend to believe that so long as the issue does not directly impact us, we should ignore it, not get involved, but just carry on with our day-to-day lives. This tendency of most of us to isolate ourselves from the problems faced by our society and our refusal to tackle them head-on, has resulted in further aggravation of the problems. Most people now realise, after the recent terrorist attacks, that pretending that a problem does not exist does not make the problem go away or diminish — it only increases, till it ultimately threatens to engulf all of us.

If we wish to maintain or improve our lifestyles and those of future generations, if we cherish our freedom, we cannot function in isolation from the society that we live in. We have to contribute to ensuring that the principles that we cherish are protected. We cannot just be passive bystanders. As educated professionals, we owe it to ourselves and to our society to act as a catalyst for change. One of the essential action points for this is ensuring that we vote in elections.

Given the disgust of most educated people with politics, there have been many suggestions made to improve the quality of politics and the system of elections. One such suggestion has been the grant of a right to voters to cast a negative vote — i.e., a vote for none of the candidates. This, it is felt, would indicate to candidates that the voters are not satisfied with any of the candidates standing for election. While this would be a means of sending out a message to politicians, it would not be sufficient by itself.

 

Today, in any case, it is amply clear to politicians that the educated electorate is frustrated with the type of politics one witnesses of late in this country. Yet, one does not see any inclination from our existing bunch of politicians to mend their ways, because they feel there is no alternative to them. What is really needed is an alternative that voters can look forward to, an alternative based on principles and ethics, and an attitude of service to the country and to its people. Fortunately, this election seems to bring a ray of hope, as one sees professionals willing to take the plunge into the cesspool of politics.

Under such circumstances, it is essential that we exercise our rights as voters to show our support to candidates who are eager and willing to usher in change, who are not willing to sacrifice their principles for money, and who can help in stemming the rot that has set in into our political system. At the municipal level, in Mumbai in the recent past, we have seen some deserving candidates being elected with the aid of citizen’s groups interested in improving the governance of their areas. We need to take this forward, so that the entire country is run by politicians interested in improving the lot of the people, and who are accountable to the people.

It is also perhaps time that the manner in which ministers are appointed should undergo a change, so that meritorious persons can be appointed regardless of their political affiliations. This would however require major changes to our political system, which would be possible only when we have a majority of our politicians interested in a change for the better.

Normally, one witnesses mass voting by uneducated voters, organised by politicians. One hopes that this time one will witness mass voting by educated professionals and the business class, who wish to ensure a better future for their country and for themselves. Each one of us needs to take the small step of voting in this election towards this end. Only then do we have the right to demand a better future for ourselves and future generations.

Gautam Nayak

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Deductibility of additional liability arising on account of exchange rate difference (on revenue account) at the year end

Introduction :

    1.1 With the increase in cross-border transactions in the business, transactions entered into Foreign Currency are required to be reported in Indian Rupees. This raises various accounting and tax issues. Primarily, in most cases, accounting treatment of such transactions is guided by Accounting Standard 11, issued by the Institute of Chartered Accountants of India (ICAI) under the title ‘The Effects of Changes in Foreign Exchange Rates’. In the case of companies, the Companies Accounting Standards Rules, 2006 prescribe various Accounting Standards, in which also similar Accounting Standard 11 (hereinafter referred to as AS 11) has been prescribed, which is largely similar to the one issued by the ICAI. The recent amendment made in such Accounting Standard prescribed under the said Companies Rules (which made major difference with the Accounting Standard of the ICAI) is not relevant for the purpose of this write-up and hence not referred to in this write-up.

    1.2 Primarily, with some exceptions, as per AS 11, at the initial stage, a foreign currency transaction is required to be reported in rupee terms by applying the exchange rate on the date of transaction and at the balance sheet date, Foreign Currency Monetary items are required to be reported at the closing rate. On account of this, exchange difference may result in the same year due to change in the exchange rate between the transaction date and the date of settlement/re-settlement of such monetary items on the balance sheet date. If such transaction is settled in the subsequent year, generally, the exchange difference also results in the current year on account of difference in the exchange rate between the date of transaction and the date of restatement of monetary items at the closing rate on the balance sheet date and such difference (as well as the exchange difference due to settlement of such transaction in same year with which we are not concerned in this write-up), under the accounting treatment are required to be recognised in the year of transaction. We are not concerned with the effect of exchange difference in the subsequent year in this write-up. Likewise, as stated earlier, in this write-up, we are also not concerned with the amendment made in the accounting standard prescribed under the Companies rules.

    1.3 So far as the Income-tax Act (the Act) is concerned, it is a settled position that fluctuations in the rates of foreign exchange resulting into gain or loss are on revenue account, if the foreign currency is held by the assessee on revenue account or a trading account or as a part of circulating capital used in the business (hereinafter such cases are referred to as Revenue Account Cases) and accordingly, in such cases, any appreciation or depreciation in the value of the foreign currency is regarded either as profit or loss on trading/revenue account. On the other hand, if the foreign exchange liability arises in relation to acquisition of fixed asset, the corresponding gain or loss is regarded as of a capital nature (hereinafter referred to as Capital Account Cases).

    1.4 The loss arising on account of difference in the foreign exchange rate prevailing on the date of transaction and the closing rate on the date of balance sheet (when the transaction is settled for the subsequent year) on account of re-statement of outstanding loans on the balance sheet date is merely a notional or contingent loss or should be considered as accrued and allowable, for tax purposes, is an issue that the department had kept alive by taking a stand that such loss should be deductible in the year of actual payment. The issue relates to Revenue Account Cases. So far as Capital Account Cases are concerned, effectively, the same should be governed by the provisions of S. 43A, with some exceptional cases which are ignored for the purpose of this write-up as we intend to deal with the effect of Revenue Account Cases only. This issue with regard to effect of such exchange difference was dealt by the Delhi High Court (294 ITR 451) in the batch of cases with the lead case of Woodward Governor India P. Ltd. (and other appeals) in which the contention of the department was not accepted.

    1.5 Primarily, the effect of exchange difference in Capital Account Cases under the Act is governed by the specific provisions of S. 43A. Effectively, in substance, S. 43A of the Act deals with the adjustment in the actual cost of the relevant asset (for the purpose of depreciation, computation of capital gain etc.), if change in liability has taken place on Capital Account Cases. The Apex Court in the case of Arvind Mills (193 ITR 255) has held that S. 43A lays down, firstly, that the increase or decrease in liability should be taken into account to modify the figure of actual costs, and secondly, that such adjustment should be made in the year in which the increase or decrease in liability arises on account of fluctuation in the rate of exchange. Subsequently, an amendment has been made in S. 43A by the Finance Act, 2002 (w.e.f. the A.Y. 2003-04) to effectively provide that such necessary adjustments under the said provisions should be made in the year of actual payment of liability.

1.6 Recently, the Apex Court had an occasion to consider the issue referred to in Para 1.4 above and the judgment of the Delhi High Court referred to therein and the issue now gets settled. Considering the importance and usefulness of the same, it is thought fit to consider the same in this column. However, in the said Delhi High Court judgment as well as in the judgment of the Apex Court, the issue relating to the effect of exchange difference in Capital Account Cases has also been decided in the context of the provisions of S. 43A, prior to its amendment by the Finance Act, 2002, which is not dealt with in this write-up, as the same would primarily be governed by the amended provisions of S. 43A of the Act.

CIT v. Woodward India P. Ltd., 312 ITR 254 (SC) :

2.1 A batch of various appeals was taken-up by the Apex Court with the above lead case to decide the following question:

“(i) Whether, on the facts and circumstances of the case and in law, the additional liability arising on account of fluctuation in the rate of exchange in respect of loans taken for revenue purposes could be allowed as deduction ul s.37(1) in the year of fluctuation in the rate of exchange or whether the same could only be allowed in the year of repayment of such loans ?:

2.1.1 In addition to the above, a question with regard to the effect of exchange difference in Capital Account Cases was also before the Court. However, as stated in para 1.6 above, we are not concerned with the same in this write-up.

2.2 In the above case, the brief facts of the lead case were: The assessee had claimed deduction of Rs.29,49,088 on account of loss due to foreign exchange fluctuations on the last date of the accounting year by debiting to the Profit & Loss Account. In the earlier years, there were gains on similar account, which were taxed as income by the Department. The assessee was following the Mercantile System of Accounting. There was no dispute that such loss was on revenue account. The Assessing Officer (AO) took a view that the liability as on the last day of the previous year was contingent liability, it was not a certain liability and hence it was disallowed as unrealised loss due to foreign ex change fluctuations. This view was confirmed by the First Appellate Authority. When the matter came-up before the Appellate Tribunal, the issue was decided in favour of the assessee relying on the decision of the Tribunal in the case ‘of the assessee in the earlier years. The decision of the Appellate Tribunal was confirmed by the judgment of the Delhi High Court referred to in para 1.4 above. Accordingly, at the instance of the Department, the issue referred in para 1.4 above came up for consideration before the Apex Court.

2.3 On behalf of the Department,it was, inter alia, contended that: The assessee’s claim is u/s.37, there being no specific provision dealing with the adjustment due to foreign exchange fluctuations on revenue account, as S. 43A deals with such adjustment in Capital Account Cases. For deductibility under’ S. 37, the increase in liability must fulfil the twin requirements of ‘expenditure’ and the factum of such expenditure having been ‘laid out or expended’. The expression ‘expenditure’ is ‘what is paid out’ and ‘some thing, which is gone irretrievably’. The increase in liability at any point of time prior to payment cannot fall within the meaning of the word ‘expenditure’ in S. 37(1). In short, it was effectively contended that the requirement of S. 37(1) are not satisfied in the case of additional liability arising on account of such fluctuation in foreign exchange rate and hence the same is not deductible.

2.4 On behalf of the appellant in the lead case, it was, inter alia, contended that: The assessee has been following the Mercantile System of Accounting, under which whenever an amount is credited to the account of the creditor, the liability has been incurred though it is not actually paid, for which reliance was also placed on the term ‘paid’ as defined in S. 43(2). In the earlier years, the gain arising on similar account has been taxed by the Department. Therefore, when it comes to ‘income’, the Department takes one stand, but when it comes to ‘loss’, the Department takes exactly the contrary stand and hence such double standards cannot be permitted. The effect was also explained by giving hypothetical example.

2.4.1 Another counsel (appearing for M/s. Maruti Udyog Ltd.) adopted similar arguments and, inter alia, further contended that: In the earlier year, in the case of his assessee, similar loss has been allowed as the deduction and gain on similar account has been taxed as income. Accordingly, the Department having accepted the system of accounting of the assessee, it was not open to the Department to introduce new system of accounting. It was further contended that liability to repay the loan in foreign currency accrues, the moment the contract is entered into and it has nothing to do with the time of payment/repayment. According to him, S. 145 of the Act ties down the AO to the accounting system consistently followed by the assessee and if the AO seeks to introduce a new system of accounting, he has to give reasons in his order pointing out defects in the existing accounting system and there is no such finding in the assessment order. The existence of liability stands crystallised on the date of contract and it has nothing to do with the time of payment.

2.5 Having considered the contentions raised on behalf of both the sides, before proceeding to decide the issue, the Court observed as under (pages 260/ 261): “As stated above, on the facts in the cases of M/s. Woodward Governor India P. Ltd., the De-partment has disallowed the deduction/debit to the profit and loss account made by the assessee in the sum of Rs.29,49,088being unrealised loss due to for-eign exchange fluctuation. At the very outset, it may be stated that there is no dispute that in the previ-ous years whenever the dollar rate stood reduced, the Department had taxed the gains which accrued to the assessee on the basis of accrual and it is only in the year in question when the dollar rate stood increased, resulting in loss that the Department has disallowed the deduction/ debit. This fact is important. It indicates the double standards adopted by the Department”.

2.6 The Court then noted that the dispute in this batch of the cases, centres around the year in which deduction would be admissible for the increased liability u/s.37(1). The Court then noted the relevant Sections, namely S. 28(i), S. 29, S. 37(1) and S. 145.

2.7 For the purpose of deciding the issue, the Court noted one of the main arguments raised on behalf of the Department to the effect that such a loss is not an ‘expenditure’, which has gone irretrievably as contemplated in S. 37(1) and conse-quently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallise till payment. The Court then stated that the word ‘expenditure’ is not defined in the Act and therefore, is required to be understood in the context in which it is used. S. 37 provides that any expenditure not being an expenditure of the nature described in S. 30. to S. 36 laid out or expended wholly and exclusively for the purpose of business should be allowed in computing the Business Income. In S. 30 to S. 36, the expressions, ‘expenses incurred’ as well as ‘allowances and depreciation’ have also been used. However, in S. 37, the expression used is ‘any expenditure’, which covers both. Therefore, the expression ‘expenditure: as used in S. 37, in the circumstances of particular case, covers an amount which is really a ‘loss’, even though the said amount has not gone out of the pocket of the assessee. For this, the Court also referred to the judgment of the M.P. High Court in the case of M.P. Financial Corporation (165 ITR 765), in which similar view has been taken with regard to the expression ‘expenditure’ and stated that this view has been approved by the Apex Court in the case of Madras Industrial Investment Corpn. Ltd. (225 ITR 802). It seems that the Court, in the context of the issue on hand, was not impressed by the reliance placed on the judgment of the Apex Court in the case of In-dian Molasses Company (37 ITR 66) by the counsel of the Department in support of his above argument for non-applicability of S. 37 in the present case.

2.8 Further explaining the effect of S. 37, the Court stated as under (Page 263) :

“… According to the Law and Practice of Income Tax by Kanga and Palkhivala, S. 37(1) is a residuary Section extending the allowance to items of business expenditure not covered by S. 30 to S. 36. This Section, according to the learned author, covers cases of business expenditure only, and not of business losses which are, however, deductible on ordinary principles of commercial accounting. (see page 617 of the eighth edition). It is this principle which attracts the provisions of S. 145. That Section recognises the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads u/s.30 to u/s.43C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word ‘paid’ in S. 43(2), which is used in several S. 30 to S. 43C, as meaning actually paid or incurred according to the method of accounting upon the basis on which profits or gains are computed u/s.28/29. That is why in deciding the question as to whether the word “expenditure” in S. 37(1) includes the word “loss” one has to read S. 37(1) with S. 28, S. 29 and S. 145(1) …. “,

2.9 Dealing with the effect of accounts regularly maintained by the assessee in the course of business and effect of provision of S. 145 on S. 37, the Court further stated as under (Page 263) :

“…. One more principle needs to be kept in mind. Accounts regularly maintained in the course of business are to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. One more aspect needs to be highlighted. U /s.28(i), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take into account stock-in-trade for determination of profits. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the profit and loss account the value of the stock-in-trade at the beginning and at the end of the year should be entered at cost or market price, which-ever is the lower. This is how business profits arising during the year need to be computed. This is one more reason for reading S. 37(1) with S. 145 …. “,

2.10 The Court then reiterated the settled general principle that the profit for income tax purposes should be determined in accordance with the ordinary principles of commercial accounting subject to specific provisions contained in the Act. The Court then also noted that the unrealised profit in the shape of appreciated value of the goods remaining unsold at the year end is not subject to tax as a matter of practice, though loss due to fall in the price below the cost is allowed as deduction even though such a loss has not been realised actually. The Court also explained the philosophy behind this practice and stated that while anticipated loss is taken into account, anticipated profit is not considered as no prudent trader would care to show increased profit before the actual realisation. The Court also noted the provisions of S. 145(2) under which, the Central Government is empowered to notify from time to time the accounting standard to be followed and also noted the provisions of S. 209 of the Companies Act, which makes Mercantile System of Accounting mandatory for the companies. According to the Court, but for the specific provision or applicability of S. 145(3), the method of accounting undertaken by the assessee continuously is supreme unless the AO gives a finding otherwise for the reasons to be stated.

2.11 With the above and earlier referred observations and discussion, on the major issue raised on behalf of the Department, the Court concluded as under (Page 264) :

“For the reasons given hereinabove, we hold that, in the present case, the ‘loss’ suffered by the assessee on account of the exchange difference as on the date of the balance-sheet is an item of expenditure u/s.37(1) of the 1961 Act”.

2.12 Further, after considering the general principles with regard to method of valuation of closing stock (i.e. cost or market value, whichever is less) and the general principles of commercial accounting for determining the profits, the Court stated that S. 145(1) is enacted for the purpose of S. 28 and S. 56. In the present case, S. 28 is relevant and hence, S. 145(1) is attracted. Accepting the relevance of method of accounting for computing business income as provided in S. 145(1), the Court explained the effect of Mercantile System of Accounting, under which the expenditure is debited when a legal liability has been incurred before it is actually disbursed. The Court then expressed the view that the accounting method consistently followed by the assessee needs to be presumed as correct till the AO comes to the conclusion for the reasons to be given that the system does not reflect true and correct profits.

2.13 The Court then stated that having come to the conclusion that valuation is part of accounting system and the business losses are deductible u/s. 37(1) on the basis of ordinary principles of commer-cial accounting and having come to the conclusion that the Central Government has made Accounting Standard 11 (AS 11) mandatory, one needs to examine the said Accounting Standard. The Court then noted various requirements of AS11 including the requirement of recording the transaction at the exchange rate of that date and re-statement of outstanding liability on the closing rate of exchange (referred to in Para 1.2 above). The Court also noted the requirements that any difference, loss or gain, arising on conversion of the said liability at the closing rate should be recognised in the profit and loss account of the reporting period. The Court, then, explained the fact of this requirement by the following hypothetical example (Page 266) :

“A company imports raw material worth US $ 250000 in January 15, 2002, when the exchange rate was Rs.46 per US $. The company records the transaction at that rate. The payment for the imports is made on April 15, 2002, when the exchange rate is Rs.49 per US $. However, on the balance-sheet date, March 31, 2002, the rate of exchange is Rs.50 per US $. In such a case, in terms of AS-II, the effect of the exchange difference has to be taken into the profit and loss account. Sundry creditors is a monetary item and hence such item has to be valued at the closing rate, i.e. Rs.50 at March 31, 2002, irrespective of the payment for the sale subsequently at a lower rate. The difference of Rs.4 (50-46) per US $ is to be shown as an exchange loss in the profit and loss account and is not to be adjusted against the cost of raw materials”.

2.14 Finally, the Court reiterated the settled principles to determine the nature of the exchange difference (referred to in Para 1.3 above) and concluded on the issue as under (Page 267) :

“In conclusion, we may state that in order to find out if an expenditure is deductible the following have to be taken into account (i) whether the system of accounting followed by the assessee is the mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it be-comes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bonafide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation”.

Conclusion:

3.1 In view of the above judgment of the Apex Court, it is now clear that such loss on account of exchange difference arising due to restatement of liability at the year end exchange rate is not to be regarded as notional/contingent loss, when the assessee follows Mercantile System of Accounting.

3.2 In view of the above judgment of the Apex Court, it is now clear that for income tax purpose, in the case of assessee following the Mercantile System of Accounting, such loss arising on account of fluctuation in the foreign exchange rate at the year end is deductible while computing the business income in all bonafide cases.

3.3 While taking the above view, it seems that the Court was also largely guided by the fact that in the earlier years profit on similar account has been offered for tax by the assessee and the same has also been taxed as income by the Department. As such, it seems that the Court has, though impliedly, accepted the contention raised on behalf of the assessee that such double standards cannot be permitted.

3.4 In particular circumstances, in the context of S. 37, the expression, ‘expenditure’ includes ‘loss’. It seems that this conclusion should be read in the context of the question raised and the arguments advanced on behalf of the Department. Otherwise, in general, the difference between the ‘loss’ and the ‘expenditure’ still survives.

3.5 It seems that the requirement of adopting method for making entries in the books in respect of losses and gains as per nationally accepted accounting standard mentioned by the Court also should be read and considered in the context of the issue involved in the cases before the Court.

3.6 The Court has also reiterated the settled position that the method of accounting consistently followed by the assessee should be presumed to be correct unless the AO comes to the conclusion for the reasons  to be given that  the system  does not reflect the true and correct profits. Accordingly, such method can be disregarded only by justifiable reasons to be recorded in the order.

3.7 Though in the above write-up we have not considered the effect of exchange difference in Capital Account Cases, we may mention that the above judgment is also an authority to hold that amendment made by the Finance Act, 2002 (w.e.f. A.Y. 2003-4) is prospective.

Green Shoots ?

Editorial

As we finish another audit and tax return filing season, and
have a little time to relax after Diwali (scrutiny assessments permitting), we
get a little time to ponder on some broader issues of how the Indian economy and
business are faring, and their impact on our practices. It is now a little over
a year since the financial crisis struck, impacting economies and businesses
worldwide. Is the worst now behind us and can we expect better times?

If one reads reports of GDP growth, many economies worldwide
(including the USA and Europe) are now showing signs of positive growth, though
slow. Most economists seem to be of the view that measures taken by Governments
and Central Banks have had an impact of arresting the negative growth. Banks
which were in trouble, have been bailed out by infusion of fresh funds,
restoring public confidence in the financial system. Insurance companies with
worldwide operations indicate that credit insurance claims, which had peaked
towards the end of 2008 and early 2009, have abated to lower levels, though
still higher than the level prevalent before the start of the financial crisis.
Generally, the consensus seems to be that the bottom has been reached, and that
we can now expect a recovery, though perhaps gradual.

What we must however remember is that this recovery has been
based on money being pumped in by Governments by following an easy money policy.
Governments realise that an easy money policy has consequences in the form of
unsustainable deficits, higher inflation and bubbles in various markets, such as
stock markets or property markets. Cheap borrowing rates encourage investment in
stocks, properties or other assets, in the hope that the return from such assets
will exceed the borrowing cost. In India, the interest rates on savings were
lower than the consumer inflation rate, due to lower lending rates. We have seen
property markets starting to recover from the lows, and stock markets almost
doubling to nearly reach their historic highs. These inflated values seem to
have been fuelled by rising liquidity due to infusion of Government funds into
the economy, as well as inflow of foreign funds into an economy which was seeing
positive growth in spite of the slowdown.

The Reserve Bank of India has just announced an end to this
easy money policy, with a view to controlling inflation. This is bound to have
an impact, on interest rates on savings and lending, which are bound to rise, on
stock markets, which will see stocks being replaced by bonds in investment
portfolios leading to fall in stock values, and real estate prices, where
builders will find it difficult to hold on to unsold stocks of real estate with
higher borrowing costs. We may therefore witness an end to the high stock market
and real estate prices. One only hopes that the decline in both these sectors is
gradual, and does not cause major upheavals and pain that an abrupt fall would
trigger off.

Fortunately, India is still seen as an attractive investment
destination, notwithstanding the infrastructural, bureaucratic and taxation
barriers to growth. Therefore, the inflow of foreign funds should cushion the
economy to some extent from the impact of the end of the easy money policy.
However, we need to keep in mind the fact that many of our businesses are now
dependent on foreign markets for their growth, and these businesses would
continue to feel the impact of the worldwide slow growth. Our expectations need
to be tempered to understand that while we will surely witness economic and
business growth, such growth will be measured and steady, and will not be as
rapid and frenzied as witnessed during the boom preceding the financial crisis.

Our profession continues to enjoy a good reputation in India, notwithstanding
the battering that its public perception took in India over the last one year.
Given the economic scenario, one can therefore expect reasonable professional
growth. One hopes that the fall in standards of quality and integrity of the
profession that the recent scandals have pointed to, are arrested and reversed.
The important lesson that all of us need to keep in mind is that while earning
well from one’s profession is essential, such earning should not be at the cost
of relaxation of one’s professional or ethical standards. One can look forward
to enough professional work even while maintaining one’s professional and
ethical standards. With our increasing professional competence, worldwide
opportunities today beckon us. We need to gear up and be capable of grasping
these opportunities and growing in a sustainable and satisfying manner. The
current lull should be effectively utilised to hone or diversify our skillsets,
based on our individual perception of our professional drawbacks.

Gautam Nayak

 

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MAT : S. 80HHC and S. 115JA of Income-tax Act, 1961 : A.Y. 1998-99 : Computation of deduction u/s.80HHC to be worked out on the basis of adjusted book profits u/s.115JA.

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II. Reported :

  1. MAT : S. 80HHC and S. 115JA of Income-tax Act, 1961 : A.Y.
    1998-99 : Computation of deduction u/s.80HHC to be worked out on the basis of
    adjusted book profits u/s.115JA.



[CIT v. K. G. Denim Ltd., 180 Taxman 590 (Mad.)]

For the A.Y. 1998-99 the assessee-company was assessed
u/s.115JA of the Income-tax Act, 1961. The assessee had computed deduction
u/s.80HHC with reference to book profit ascertained u/s.115JA and the same was
allowed by the Assessing Officer. Subsequently, invoking the powers u/s.263 of
the Act, the Commissioner revised the assessment order and held that the
deduction u/s.80HHC has to be computed with reference to the normal profits
and not with reference to book profits u/s.115JA. The Tribunal set aside the
order of the Commissioner.

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

    “(i) In CIT v. Rajnikant Schnelder & Associates (P)
    Ltd.,     302 ITR 22 (Mad.), the High Court held that the Assessing Officer
    is not entitled to touch the profit and loss account prepared by the
    assessee as per the provisions contained in the Companies Act, while
    arriving at the book profit u/s.115JA and the book profit so arrived at
    should be the basis for taxation and, therefore, the computation of
    deduction u/s.80HHC should be limited to the case of profits of eligible
    category only.

    (ii) In view of the aforesaid decision, the Tribunal was
    right in law, in holding that the deduction u/s.80HHC in a case of MAT
    assessment is to be worked out on the basis of the adjusted book profit
    u/s.115JA.”

 

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Litigation — Public Sector undertakings — Clearance of Committee on Disputes — Time for reference within a period of one month is not rigid — Delay in approaching the Committee does not make it illegal but the delay should not be due to lethargy.

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1 Litigation — Public Sector undertakings —
Clearance of Committee on Disputes — Time for reference within a period of one
month is not rigid — Delay in approaching the Committee does not make it
illegal but the delay should not be due to lethargy.

[CIT v. Oriental Insurance Co. Ltd.,
(2008) 304 ITR 55 (SC)]

The assessee, an insurance company was covered by
the Insurance Act, 1938. According to the appellant, every insurance company
has to be assessed u/s.44 of the Income-tax Act, 1961 as per Rule 5 of the
First Schedule. An assessment was made and the same was upheld by the
Commissioner of Income-tax (Appeals). The Income-tax Appellate Tribunal
deleted the addition made. The Tribunal accepted the stand of the
respondent-insurance company. The question arose as to whether the Department
would prefer appeals and/or file petitions without obtaining necessary
clearance from the Committee of Disputes (in short ‘the COD’) constituted in
terms of order of the Supreme Court. According to the High Court, it was
necessary to refer the matter to the said Committee. The High Court held that
the same was to be done within a period of one month in terms of the order of
the Supreme Court in Oil and Natural Gas Commission v. Collector of Central
Excise, (2004) 6 SCC 437. The High Court dismissed the appeal. The High
Court held that since this Court had set the time frame, there was no scope
for any deviation therefrom.

On an appeal to the Supreme Court, it was
clarified that there was actually no rigid time frame indicated by it. The
emphasis on one month’s time was to show the urgency needed. Merely because
there is some delay in approaching the Committee that does not make the action
illegal. The Committee is required to deal with the matter expeditiously, so
that there is no unnecessary backlog of appeals which ultimately may not be
pursued. In that sense, it is imperative that the concerned authorities take
urgent action, otherwise the intended objective would be frustrated. There is
no scope for lethargy. It is to be tested by the Court as to whether there was
any indifference and lethargy and in appropriate cases refuse to interfere. In
the instant case the Supreme Court found that factual position was not that.
The Supreme Court therefore, set aside the order of the High Court and
directed consideration of the question of desirability to proceed in the
matter before it on receipt of the report from the concerned Committee.

 

Learned counsel for the Department submitted to
the Supreme Court that even if the Committee has declined to grant permission,
it was still open to raise the issues in appropriate proceedings. The Supreme
Court expressed no opinion in that regard, but observed that where the
Committee has declined to deal with the matter on the ground of belated
approach, the same cannot be sustained. The Committee has to consider the
matter on merits.

The Supreme Court further observed that where
permission has been granted by the Committee, there is no impediment on the
Court to examine the matter and take a decision on merits. But where there is
no belated approach, the matter has to be decided. The Court has to decide
whether because of unexplained delay and lethargic action it would decline to
entertain the matters. That would depend on the factual scenario in each case,
and no straitjacket formula can be adopted.

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Business expenditure/loss : Assessee federal society of primary milk societies : Milk rate difference determined in March and paid in subsequent year : Is allowable business expenditure/loss.

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II. Reported :

  1. Business expenditure/loss : Assessee federal society of
    primary milk societies : Milk rate difference determined in March and paid in
    subsequent year : Is allowable business expenditure/loss.

[CIT v. Solapur Distt. Co-op. Milk Producers & Process
Union Ltd., 180 Taxman 533 (Bom.)]

The assessees were federal societies of primary milk
societies and their business was to purchase milk from their members and other
producers at the rate to be fixed by their board of directors on the basis of
fat content of milk and to sell the milk to various parties. The assessee
fixed the rate of purchasing of milk at the beginning of the year on the basis
of the price declared by the State Government and price which other buyers
paid to the vendors. Those rates were revised from time to time and were
provisional to the final milk rate difference which was to be determined in
the month of March every year and was to be paid to primary milk societies in
the following year. The Assessing Officer refused to allow deduction of the
final rate difference on the ground that it was made on the basis of the
accrued profit of the year and, hence, would amount to distribution of profit.
The Tribunal allowed the claim and observed that the resolutions to pay final
rate difference were always passed in the month of March every year, i.e.,
before profit could be said to accrue; and that rate difference was paid only
on the basis of quantity of milk supplied during year and not in proportion of
shareholding, so as to amount to distribution of profit.

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

    “(i) It was not the case of distribution of profit as the
    amount to be paid was not out of the profit ascertained at the annual
    general meeting. It was not paid to all shareholders. The amount was paid to
    the members who supplied milk and in some cases also to non-members. The
    payment was for the quantity of milk supplied and in terms of the quality
    supplied.

    (ii) The commercial expediency for payment of that price
    were the market condition, and the need to procure more milk from the
    members and non-members to the assessee. Therefore, the amount paid, by no
    stretch of imagination, could be said to be dividend to the members or
    shareholders or payment in the form of bonus, as bonus also had to be paid
    from the accrued profits.

    (iii) The Tribunal was justified in deleting the addition
    made by the Assessing Officer.”

     

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Gratuity : Deduction u/s.10(10)(iii) of Income-tax Act, 1961 : No distinction between gratuity paid under Payment of Gratuity Act or otherwise : Where gratuity amount paid to employee was within the limit prescribed by Notification, deduction of income-ta

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II. Reported :

  1. Gratuity : Deduction u/s.10(10)(iii) of Income-tax Act,
    1961 : No distinction between gratuity paid under Payment of Gratuity Act or
    otherwise : Where gratuity amount paid to employee was within the limit
    prescribed by Notification, deduction of income-tax at source from gratuity
    amount was unjustified.


[North West Karnataka Road Transport Corporation v. Dy.
Labour Commissioner, 180 Taxman 489 (Kar.)]

The deceased employee of the petitioner-corporation had
filed a claim petition under the Payment of Gratuity Act, 1972 before the
controlling authority claiming the difference of gratuity amount on the ground
that he was not paid the full gratuity. The gratuity amount paid to the said
employee was less than the limit prescribed by the Notification. However,
while making payment of the difference, the petitioner-corporation deducted
income-tax at source. The petitioner-corporation contended before the
Karnataka High Court that income-tax was deducted from the amount of gratuity
since in terms of S. 10(10)(iii), the exemption was given only in respect of
gratuity amount under the provisions of the Payment of Gratuity Act, and not
in respect of payment of amount under the regulation.

The Karnataka High Court held as under :

    “(i) S. 192 requires the employer to deduct income-tax
    from the salary. S. 10(10) deals with the exclusion of the gratuity amount
    from the total income. By a reading of the provisions of S. 10(10)(iii), it
    is clear that in all the cases of payment of gratuity, an exclusion of
    gratuity amount is given from the total income, i.e., excluding the
    gratuity from the payment of tax to the extent of limit prescribed by
    Notification issued in this behalf by the Central Government. It also makes
    it clear that the Notification will be at par with the employees of the
    Government. The Income-tax Act excludes the gratuity amount from the total
    income up to the limit fixed. The contention of the Corporation that it was
    only in respect of payment of gratuity under the Act and not under the
    regulations, was not tenable and was not in consonance with the provisions
    of the Act.

    (ii) The Act excludes the gratuity amount to the extent
    of limit prescribed under the Income-tax Act. In the instant case, the
    gratuity amount payable to the employee was less than the pre-scribed
    amount. Hence the deduction of income-tax by the corporation was per se
    contrary to the provisions of S. 10(10)(iii). There is no distinction
    between gratuity paid under Payment of Gratuity Act or otherwise.
    Accordingly, the contention that gratuity amount was also liable for
    income-tax was to be rejected.

    (iii) The deduction of the income-tax from the gratuity
    amount was not justified.”

 

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Waiver of interest and penalty : S. 139(8), S. 217, S. 271(1)(a), S. 273 and S. 273A of Income-tax Act, 1961 : A.Ys. 1987-88 and 1988-89 : Commissioner waived penalty but refused to waive interest : Not justified.

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I. Unreported :


  1. Waiver of interest and penalty : S. 139(8), S. 217, S.
    271(1)(a), S. 273 and S. 273A of Income-tax Act, 1961 : A.Ys. 1987-88 and
    1988-89 : Commissioner waived penalty but refused to waive interest : Not
    justified.

[Sun Deep Jewellers v. CIT (Bom.), W.P. No. 888 of
1994, dated 20-4-2009 (Not reported)]

For the A.Ys. 1987-88 and 1988-89 the petitioner-firm and
its partners filed their returns belatedly on 7-2-1990. The Assessing Officer
completed the assessment u/s.143(1) of the Income-tax Act, 1961 accepting the
returned income. The Assessing Officer charged interest u/s.139(8) and u/s.217
of the Act and also imposed penalty u/s.271(1)(a) and u/s.273 of the Act. On
an application for waiver of interest and penalty the Commissioner waived
penalty but refused to waive interest.

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

“(i) Admittedly, the petitioners had submitted the
income-tax returns voluntarily without any notice or any action being taken
by the Income-tax Department and had also deposited the income-tax as per
their own assessment. The AO found the assessment correct and the returns
were accepted without any objection. It shows that the petitioners had, in
fact, co-operated in the assessment and the enquiry which could be held
before or after filing of such income-tax returns. This indicates that they
acted in good faith and they had made full and true disclosure of their
income voluntarily.

(ii) They had also given reasons and the circumstances in
which the income-tax returns could not be submitted within time. Those
reasons were accepted for the purpose of waiver of penalty. If the
conditions were satisfied and if the reasons given by the petitioners were
good for waiver of penalty, it is difficult to understand why they could not
be good for waiver of interest, particularly when it appears that the delay
was not intentional and because of the circumstances, in which they found
themselves, the returns could not be submitted within time.”

The High Court quashed and set aside the order of the
Commissioner refusing to waive interest and directed the refund of the
interest paid by the petitioner.

Co-operative Housing Society : Transfer fees : Principle of mutuality applies to transfer fees received in accordance with the bye-laws and as per restriction by Government regulations : Excess amount not permissible under bye-laws, etc. to be returned :

New Page 2

 

I. Unreported :

  1. Co-operative Housing Society : Transfer fees : Principle of
    mutuality applies to transfer fees received in accordance with the bye-laws
    and as per restriction by Government regulations : Excess amount not
    permissible under bye-laws, etc. to be returned : If not returned will be
    taxable.


[Sind Co-op. Hsg. Society v. ITO (Bom.), ITA No. 931
of 2004 dated 17-7-2009 (Not reported)]

In a group of appeals concerning the taxability of transfer
fees received by a co-operative society the Bombay High Court has considered
and decided the following question of law.

“Whether on the facts and in the circumstances of the
case any part of transfer fees received by the assessee societies — whether
from outgoing or incoming members — is not liable to tax on the ground of
mutuality ?”

The Bombay High Court has held as under :

“(i) The principle of mutuality will apply to a
co-operative housing society which has its predominant activity, the
maintenance of the property of the society which includes its building or
buildings and as long as there is no taint of commerciality, trade or
business.

(ii) As the main activity of a co-operative housing
society is to maintain the property owned by it and to render services to
its members by way of usual privileges, advantages and conveniences, there
is no profit motive involved in these activities. The amount legally
chargeable and received goes into the fund of the society which is utilised
for the repairs of the property and common benefits to its members.

(iii) Charging of transfer fees as per bye-laws has no
element of trading or commerciality. There therefore being no taint of
commerciality, the question of earning profits would not arise when the
housing society from the funds received applies the money received towards
maintenance of the society and providing the members with usual privileges,
advantages and conveniences.

(iv) The transfer fee can be appropriated only if the
transferee is admitted to membership. The fact that a proposed transferee
may make payment in advance by itself is not relevant. The amount
can only be appropriated on the transferee being admitted as a member. If it
is held that the payment of transfer fee is by a stranger, it will certainly
be in the nature of gift and not income.

(v) Whether it is voluntary or not would make no
difference to the principle of mutuality. Payments are made under the
bye-laws which con-stitute a contract between the society and its members
which is voluntarily entered into and voluntarily conducted as a matter of
convenience and discipline for running the society.

(vi) If it is the case that amount more than permissible
under the Notification has been received under pressure or coercion or
contrary to Govt. directions, then considering S. 72 of the Contract Act,
that amount will have to be refunded. At any rate if the society retains the
amount in excess of binding Govt. Notification or the bye-laws, that amount
will be exigible to tax as it has an element of profiteering.

(vii) An argument has been advanced that the societies
are charging more than the amount as notified or permitted by the Government
Notification dated 9-8-2001. The cases before us are for the assessment
years previous to that. Earlier Notification dated 20-12-1989 provided that
only if the bye-laws were amended in terms of Notification dated 27-11-1989,
then the society could not charge more than what was set out in the
Notification. We really would not be concerned therefore, in this group of
cases with Notification as now notified by the Government. If therefore, any
amount has been received beyond the amount notified by the Government and
that amount has not been refunded to the members, to that excess amount as
already held, the principle of mutuality will apply.”

Co-operative Bank : Income from banking business : Deduction u/s.80P(2)(a)(i) of Income-tax Act, 1961 : Interest received from investments made in Kisan Vikas Patra and Indira Vikas Patra out of voluntary reserve : Is income from banking business exempt u

New Page 2

 

I. Unreported :

  1. Co-operative Bank : Income from banking business :
    Deduction u/s.80P(2)(a)(i) of Income-tax Act, 1961 : Interest received from
    investments made in Kisan Vikas Patra and Indira Vikas Patra out of voluntary
    reserve : Is income from banking business exempt u/s. 80P(2)(a)(i).

[CIT v. The Solapur Nagari Audyogic Sahakari Bank Ltd. (Bom.),
ITA No. 46 of 2008 dated 16-6-2009 (Not reported)]

The following question was raised before the Bombay High
Court in the appeal filed by the Revenue :

“Whether the interest income received by a co-operative
bank from investments made in Kisan Vikas Patra (‘KVP’ for short) and Indira
Vikas Patra (‘IVP’ for short) out of voluntary reserves is income from
banking business exempt u/s. 80P(2)(a)(i) of the Income-tax Act, 1961 ?”

The Bombay High Court answered the question in the
affirmative and in favour of the assessee and held as under :

“(i) This Court in the case of CIT v. Ratnagiri
District Central Co-operative Bank Ltd., 254 ITR 697, after considering
various provisions of the Maharashtra Co-operative Societies Act, 1960 and
the Banking Regulation Act, 1949 has held that the investments made by a
co-operative bank in IVP out of the funds generated from the banking
business would have direct and proximate connection with or nexus with the
earning from banking business and attract the provisions of S. 80P(2)(a)(i)
of the Act. In other words, this Court in the above case has held that the
interest income earned by a co-operative bank from IVP would be income from
banking business, if the investment in IVP represented the funds generated
from the banking business. The said decision has been upheld by the Apex
Court by dismissing the Special Leave Petition filed by the Revenue.

(ii) Thus, it is clear that investment in KVP/IVP by a
co-operative bank is a permissible banking business and for availing
deduction u/s. 80P(2)(a)(i) of the Act, the co-operative bank has only to
show that the investment in KVP/IVP have been made from the funds generated
from the banking business. Whether the investments in KVP/IVP have been made
out of statutory reserves or non-statutory reserves is wholly irrelevant, so
long as the funds in the statutory reserves or the non-statutory reserves
are the funds generated from the banking business.

(iii) It is not the case of the Revenue that the amounts
in the non-statutory reserves were not the amounts generated from the
banking business. In these circumstances, the decision of the Tribunal in
holding that the interest income from KVP/IVP was from the business of
banking eligible for deduction u/s.80P(2)(a)(i) of the Act cannot be
faulted.”

Cash credit : S. 68 of Income-tax Act, 1961 : A.Y. 1998-99 : Sale of jewellery declared under VDIS 1997 and capital gain offered to tax : Addition of whole of consideration for sale u/s.68 as unexplained cash credit : Not justified.

New Page 2

 

I. Unreported :

  1. Cash credit : S. 68 of Income-tax Act, 1961 : A.Y.
    1998-99 : Sale of jewellery declared under VDIS 1997 and capital gain offered
    to tax : Addition of whole of consideration for sale u/s.68 as unexplained
    cash credit : Not justified.

[CIT v. Uttamchand Jain (Bom.), ITA No. 634 of 2009,
dated 2-7-2009 (Not reported)]

The respondent assessee had declared diamond jewellery
weighing 65.75 carats under the Voluntary Disclosure of Income Scheme, 1997 (VDIS,
1997). The said declaration was accepted by the Department and a certificate
was issued to the assessee under VDIS, 1997. In the return of income filed by
the assessee-respondent for the A.Y. 1998-99 the assessee had claimed to have
sold the said jewellery declared under VDIS, 1997 to M/s. Dhananjay Diamonds
on 20-1-1999 for Rs.10,35,562 and the resultant long-term capital gain of
Rs.1,75,520 was offered to tax. The return was accepted u/s.143(1)(a) of the
Income-tax Act, 1961 on 23-7-1999.

On 31-3-2000, in the course of a survey, the statement of
Mr. Vishnudatt Trivedi, proprietor of M/s. Dhananjay Diamonds was recorded,
wherein Mr. Trivedi stated that he was not doing actual business of trading
and manufacture of diamonds and that the transactions reflected in his books
of account were merely accommodation entries given to various VDIS declarants.
As per the statement Mr. Sanjay Saxena, a resident of Kalyan used to visit Mr.
Trivedi with cash and only a description of the diamonds and not the actual
diamonds. The cash given by Sanjay Saxena was deposited in one of the bank
accounts of Mr. Trivedi and thereafter purchase bills as well as cheques were
issued in the names of the parties furnished by Mr. Sanjay Saxena towards the
sale price of the diamond jewellery declared under VDIS, 1997 allegedly sold
by those parties. Based on the said statement of Mr. Trivedi the assessment of
the assessee for A.Y. 1998-99 was reopened on 16-5-2001 and in the course of
the reassessment proceedings Mr. Trivedi appeared before the Assessing Officer
and made a statement on oath confirming the purchase of diamonds from the
assessee and that the assessee was not introduced to him by Mr. Sanjay Saxena.
However, the Assessing Officer made the entire amount of Rs.10,35,562 as
undisclosed income of the assessee, which was originally claimed and accepted
as sale proceeds of the diamond jewellery declared under VDIS, 1997. The CIT(A)
upheld the addition and held that the statement of Mr. Trivedi was backed by
the evidence of non-existence of diamond jewellery at the time of survey,
allegedly purchased by Mr. Trivedi and the cash deposits made in the bank
accounts of Mr. Trivedi before issuing cheques to various parties.

In appeal, two Members of the Tribunal differed in their
view and the matter was referred to the third Member. In the light of decision
of the third member, the appeal filed by the assessee was allowed and the
addition was deleted.

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

“(i) At the outset, we may note that the certificate
issued by the Revenue under VDIS, 1997 to the effect that the assessee had
diamond jewellery weighing 65.75 carats continues to be valid and
subsisting. In fact, no proceedings have been initiated so far to cancel the
certificate issued to the assessee under VDIS, 1997.

(ii) As the VDIS, 1997 certificate issued by the
Department is valid and subsisting, it is not open to the Revenue to contend
that there was no jewellery which could be sold by the assessee on
20-1-1999. It is not the case of the Revenue that the assessee continues to
be in possession of the said diamond jewellery even after the sale effected
on 20-1-1999 or that the said jewellery has been sold to third parties. In
these circumstances, the decision of the Tribunal in accepting the claim of
the assessee that the amount of Rs.10,35,562 represented the sale proceeds
of the diamond jewellery declared under VDIS, 1997 cannot be faulted.

(iii) The fact that the diamond jewellery claimed to have
been sold by the assessee was not found with the purchaser (Dhananjay
Diamonds) or his associates cannot be held against the assessee, because,
admittedly, the said diamond jewellery declared under VDIS, 1997 is also not
found with the assessee after the sale is effected. If existence of the
diamond jewellery with the assessee prior to the sale is evidenced by the
VDIS, 1997 certificate and on sale of the said jewellery the assessee has
received the consideration which is duly accounted for, then the mere fact
that the jewellery sold by the assessee is not found with the purchaser
cannot be a ground to hold that the transaction was bogus and the
consideration received by the assessee was the undisclosed income of the
assessee.

(iv) The decision of the Assessing Officer in discarding
the sale and holding that the amount received by the assessee from Mr.
Trivedi represented the undisclosed income of the assessee is based on
conjectures and surmises and is not based on any independent evidence
gathered prior to or during the course of reassessment proceedings. In these
circumstances, in the absence of any cogent evidence brought on record, the
decision of the Tribunal in holding that the Assessing Officer has failed to
established the nexus between the cash amount deposited in the bank account
of Mr. Trivedi is attributable to the cheque issued by Mr. Trivedi in favour
of the assessee cannot be faulted.

(v) Consequently, the decision of the Tribunal in
deleting the addition of Rs.10,35,562 cannot be faulted.”

Unaccounted income : A.Y. 2001-02 : Value of closing stock given to bank higher than value as per books : Difference added as unaccounted income : Difference in value of closing stock should be reduced by similar difference in opening stock.

New Page 1

 12 Unaccounted income : A.Y. 2001-02 : Value of closing stock given to bank
higher than value as per books : Difference added as unaccounted income :
Difference in value of closing stock should be reduced by similar difference
in opening stock.


[CIT v. Capital Tyres Manufacturing Unit, 176 Taxman
178 (Delhi)]

For the A.Y. 2001-02 the AO found that the assessee had
hypothecated its stock with the bank for availing overdraft facility and that
the value of the stock declared to the bank was much higher than the value of
stock declared in its books of account. The AO rejected the assessee’s
explanation in respect of the difference and made an addition of the
difference as unaccounted income. The CIT(A) held that the addition made on
account of the difference of valuation of the closing stock has to be reduced
by the similar difference in the opening stock. The Tribunal confirmed the
decision of the CIT(A).

On appeal by the Revenue, the Delhi High Court
upheld the decision of
the Tribunal and held : “Both the authorities had taken into account the
opening and closing stock of last year and had rightly excluded the inflated
stock pertaining to the immediately preceding year. Thus, the approach of the
Tribunal could not be said to be perverse or erroneous.”


levitra

Interest : Head of income : S. 28 and S. 56 of Income-tax Act, 1961 : A.Y. 1992-93 : Construction business : Development of properties : Interest on deposit of surplus money received from customers : Interest income is assessable as business income and no

New Page 1

 10 Interest : Head of income : S. 28 and S. 56 of
Income-tax Act, 1961 : A.Y. 1992-93 : Construction business : Development of
properties : Interest on deposit of surplus money received from customers :
Interest income is assessable as business income and not as income from other
sources.

[CIT v. Lok Holdings, 308 ITR 356 (Bom.)]

The assesee firm was in the construction business. It
received monies from the purchasers of flat as advance. Interest received from
the deposit of the surplus amount was treated by the assessee as business
income. For the A.Y. the Assessing Officer assessed the interest income as
‘income from other sources’. On a finding that the entire interest sprang from
the business activity of the assessee and not out of any independent activity,
the Tribunal allowed the assessee’s claim and held that the interest income
was business income.

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

“The Tribunal was justified in holding that the interest
income received by the assessee was assess able as business income.”

 


levitra

Interest : Waiver or reduction : S. 220(2A) of Income-tax Act, 1961 : A.Ys. 1993-94 to 1995-96 : Conditions need not co-exist : Those are alternatives : No reasoning given : Order refusing waiver set aside for fresh disposal.

New Page 1

 11 
Interest : Waiver or reduction : S. 220(2A) of

Income-tax Act, 1961 : A.Ys. 1993-94 to 1995-96 : Conditions need not co-exist
: Those are alternatives : No reasoning given : Order refusing waiver set
aside for fresh disposal.

[M. V. Amar Shetty v. Chief CIT, 309 ITR 93 (Kar.)]

For the A.Ys. 1993-94 to 1995-96 the assessee had made an
application u/s.220(2A) of the Income-tax Act, 1961 for waiver of interest
levied u/s.220(2) of the Act. The Chief Commissioner rejected the assessee’s
request on the ground that the assessee had not fulfilled condition (iii) of
S. 220(2A). Assessee’s writ petition challenging the rejection was dismissed
by the single judge of the Karnataka High Court.

The Division Bench of the Karnataka High Court allowed the
assessee’s appeal, set aside the rejection order of the Chief Commissioner and
held as under :

“(i) S. 220(2A) of the Income-tax Act, 1961, prescribes two
grounds by reason of which a reduction or waiver of the amount of interest
paid or payable by an assessee can be sought, viz., (i) payment of such
amount has caused or would cause genuine hardship to the assessee; and (ii)
default in the payment of the amount on which interest has been paid or was
payable U/ss.(2) was due to circumstances beyond the control of the assessee.
Since the word ‘and’ is absent after clause (i) of Ss.(2A) of S. 220 and the
word ‘and’ is inserted after clause (ii) of Ss.(2A) of S. 220, the two
circumstances are mutually exclusive and it is only when a situation where
clause (ii) occurs that the condition under clause (iii) is not applicable to
a case falling under clause (i) of Ss.(2A) of S. 220. All the three conditions
laid down in subsection (2A) of S. 220 need not co-exist before interest can
be waived under the said provision.

(ii) In the order refusing relief U/ss.(2A) of S. 220,
however, while there was a passing reference to ill health of the assessee
there was no application of mind on clause (i) and clause (ii) of Ss.(2A) of
S. 220. The order merely stated that the assessee had not satisfied any of the
conditions and in particular had not co-operated with the Department in filing
of the returns, nor in the assessment proceedings/payment of tax demand,
therefore the assessee’s petition was rejected. There was no reasoning with
regard to the genuine hardship of the assessee or on the fact that the default
in the payment of the amount was due to circumstances beyond the control of
the assessee.”

The order of the Single Judge was set aside and the
authorities were directed to consider the request made by the assessee for
waiver of interest.

 


levitra

Interest : S. 234B of Income-tax Act, 1961 : A.Ys. 1996-97 and 1997-98 : Assessee non resident compay was employed by another non-resident company : Failure by employer to deduct tax at source : Employee not liable to pay interest u/s.234B.

New Page 1

9
Interest : S. 234B of Income-tax Act, 1961 : A.Ys. 1996-97 and 1997-98 :
Assessee non
resident compay was employed
by another non-resident company : Failure by employer to deduct tax at source
: Employee not liable to pay interest u/s.234B.


[CIT v. Tide Water Marine International Inc., 309
ITR 85 (Uttarakhand)]

The assessee, a non-resident foreign company, was engaged
in the business of mineral oils by another non-resident foreign company. For
the A.Ys. 199697 and 1997-98 the employer company did not deduct tax at source
u/s.195 of the Income-tax Act, 1961 on payments to the assessee. While
assessing the assessee’s income u/s.143 of the Act the Assessing Officer
charged interest u/s.234B of the Act. The Tribunal held that the interest was
not payable by the assessee.

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

“There was no illegality in the Tribunal’s order since the
assessee could not be made liable to pay the interest u/s.234B of the Act as
it was the duty of the non-resident foreign company which had engaged the
assessee to deduct the tax at source.”

 

levitra

Interest : S. 115JA, S. 234B and S. 234C of Income-tax Act, 1961 : Assessment of company u/s.115JA : Interest u/s.234B and u/s. 234C is not leviable.

New Page 1

 8. Interest : S. 115JA, S. 234B and S. 234C of
Income-tax Act, 1961 : Assessment of company
u/s.115JA : Interest u/s.234B and u/s. 234C is not leviable.

 [Snowcem India Ltd. v. Dy. CIT, 221 CTR
594 (Bom.)]

In the instant case income of the assessee
company was computed u/s.115JA of the Income-tax Act, 1961. The Assessing
Officer also levied interest u/s. 234B and u/s.234C of the Act. Levy of
interest was upheld by the Tribunal.

In appeal, the assessee raised the following
question : “Whether on the facts and in the circumstances of the case and in
law, the Tribunal was right in holding that interest u/s.234B and u/s.234C was
leviable in case of computation of income under the provisions of S. 115JA of
the Act ?”

The Bombay High Court noted that in CIT v.
Kotak Mahindra Finance Ltd., 265 ITR 119 (Bom.), the Bombay High Court has
taken a view that even in a case covered by S. 115J the provisions of S. 234B
and S. 234C are attracted and also noted that in that case the Bombay High
Court had disagreed with the judgment of the Karnataka High Court in the case
of Kwality Biscuits Ltd. v. CIT, 243 ITR 519 (Kar.) wherein it was held
that where the income is computed u/s.115J of the Act, interest u/s.234B and
u/s.234C are not attracted.

In the instant case the Bombay High Court noted
that the appeal against the said judgment of the Karnataka High Court has been
dismissed by the Supreme Court and held as under :

“(i) In the instant case we are concerned with S.

115JA under Chapter XII-B. The terminology used
in S. 115JA is the same or similar as contained in S. 115J.

(ii) The judgment of the Karnataka High Court was
taken in appeal by way of Special Leave to the Supreme Court in CIT v.
Kwality Biscuits Ltd., 284 ITR 434 (SC), and the following order was
passed :

“The appeals are dismissed.”

(iii) If the Special Leave Petition had only been
dismissed, then perhaps it would have been possible to say that there was no
merger of the judgment of the Karnataka High Court and the Supreme Court had
refused to grant Special Leave to appeal and consequently it was not an order
of affirmation. See Kunhayammed v. State of Kerala, (2000) 162 CTR (SC)
97. However, the order passed by the Supreme Court is “The Appeals are
dismissed” being Civil Appeal Nos. 1284 and 1285 of 2001. Once the Appeals are
dismissed then it can be said that the judgment of the Karnataka High Court
has been affirmed by the Supreme Court. That would not be the case in the
event only Special Leave Petitions had been dismissed, in which event it would
be said that the Supreme Court chose not to interfere with the judgment of the
Karnataka High Court. In such an event the doctrine of merger would not apply.
Once the judgment of the Karnataka High Court in Kwality Biscuits Ltd. (supra)
has been affirmed by the Supreme Court by dismissing the appeals, in our
opinion, the law binding on us would be the judgment in Quality Biscuits. (supra).

(iv) Considering the above, in our opinion, the
appeal will have to be allowed. Accordingly, the question as framed is
answered in the negative against the Revenue and in favour of the assessee.”


 

levitra

Section A : Illustration of accounts and audit report of a company based in United States where the assumption of Going Concern is questioned

General Motors Corporation, USA — (31-12-2008)

From Notes to Consolidated Financial Statements :
Note 2 : Basis of Presentation :

Going Concern :

The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realisation of assets and the liquidation of liabilities in the normal course of business. We have incurred significant losses from 2005 through 2008, attributable to operations and to restructurings and other charges such as support for Delphi and past, present and future costcutting measures. We have managed our liquidity during this time through a series of cost reduction initiatives, capital markets transactions and sales of assets. However, the global credit market crisis has had a dramatic effect on our industry.

In the second half of 2008, the increased turmoil in the mortgage and overall credit markets (particularly the lack of financing to buyers or lessees of vehicles), the continued reductions in U.S. housing values, the volatility in the price of oil, the recession in the United States and Western Europe and the slowdown of economic growth in the rest of the world created a substantially more difficult business environment. The ability to execute capital markets transactions or sales of assets was extremely limited, and vehicle sales in North America and Western Europe contracted severely and the pace of vehicle sales in the rest of the world slowed. Our liquidity position, as well as our operating performance, were negatively affected by these economic and industry conditions and by other financial and business factors, many of which are beyond our control.

These conditions have not improved through January 2009, with sales of total vehicles for the U.S. industry falling to 657,000 vehicles, or a seasonally adjusted rate of 9.8 million vehicles, which was the lowest level for January since 1982. We do not believe it is likely that these adverse economic conditions, and their effect on the automotive industry, will improve significantly during 2009, notwithstanding the unprecedented intervention by governments in the United States and other countries in the global banking and financial systems.

Due to this sudden and rapid decline of our industry and sales, particularly in the three months ended December 31, 2008, we determined that, despite the far-reaching actions to restructure our U.S. business, we would be unable to pay our obligations in the normal course of business in 2009 or service our debt in a timely fashion, which required the development of a new plan that depended on financial assistance from the U.S. Government. On December 31, 2008, we entered into a Loan and Security Agreement (UST Loan Agreement) with the United States Department of the Treasury (UST), pursuant to which the UST agreed to provide us with a $ 13.4 billion secured term loan facility (UST Loan Facility). We borrowed $ 4.0 billion under the UST Loan Facility on December 31, 2008, an additional $ 5.4 billion on January 21, 2009 and $ 4.0 billion on February 17, 2009. As a condition to obtaining the UST Loan Facility, we agreed to achieve certain restructuring targets within designated time frames as more fully described in Note 15.

Pursuant to the terms of the UST Loan Facility and as described more fully in Note 15, we submitted to the UST on February 17, 2009 our plan to return to profitability and to operate as a going concern (Viability Plan). In order to execute the Viability Plan, we have requested additional U.S. Government funding of $ 22.5 billion to cover our baseline scenario liquidity requirements and $ 30.0 billion to cover our downside sensitivity liquidity requirements. We proposed that the funding could be met through a combination of a secured term loan of $ 6.0 billion and preferred equity of $ 16.5 billion under a Viability Plan baseline scenario, representing an increase of $ 4.5 billion over our December 2008 request, reflecting changes in various assumptions subsequent to the December 2, 2008 submission and $ 9.1 billion incremental to the $ 13.4 billion currently outstanding. We have suggested to the UST that the current amount outstanding as of February 28, 2009 of $ 13.4 billion under the UST Loan Facility plus an incremental $ 3.1 billion requested in 2009 could be provided in the form of preferred stock. We believe this structure would provide the necessary medium-term funding we need and provide a higher return to the UST, commensurate with the higher returns the UST receives on other preferred stock investments in financial institutions.

Under a Viability Plan downside sensitivity sce-nario, an additional $ 7.5 billion of funding would be required above the amounts described above, which we have requested in the form of a secured revolving credit facility. The collateral used to sup-port the current $ 13.4 billion UST Loan Facility would be used to support the proposed $ 7.5 billion secured revolving credit facility and the $ 6.0 billion term loan. Our Viability Plan also assumes $ 7.7 billion in loans under the provisions of the Energy Independence and Security Act of 2007 (Section 136 Loans) from the Department of Energy. Our 2009 baseline vehicle sales forecast is 10.5 million vehicles in the United States and 57.5 million vehicles globally. In 2009, our liquidity, under our Baseline plan, is dependent on obtaining $ 4.6 billion of funding from the UST in addition to the $ 13.4 billion received to date; a net $ 2.3 billion from other non-U.S. governmental entitles the receipt of $ 2.0 billion in Section 136 Loans; and the sale of certain assets for net proceeds of $ 1.5 billion. This funding and additional amounts described above are required to provide the necessary working capital to operate our business until the global economy recovers and consumers have an available credit and begin purchasing automobiles at more historical volume levels. In addition, the Viability Plan is dependent on our ability to execute the bond exchange and voluntary employee beneficiary association (VEBA) modifications contemplated in our submissions to the UST and our ability to achieve the revenue targets and execute the cost reduction and other restructuring plans. We currently have approximately $1 billion of outstanding Series D convertible debentures that mature on June 1, 2009. Our funding plan described -above does not include the payment at maturity of the principal amount of these debentures. If we are unable to restructure the Series D convertible debentures prior to June 1, 2009, or otherwise satisfactorily address the payment due on June I, 2009, a default would arise with respect to payment of these obligations, which could also trigger cross defaults in other outstanding debt, thereby potentially requiring us to seek relief under the U.S. Bankruptcy Code.

The following is a summary of significant cost reduction and restructuring actions contemplated by the Viability Plan:

(Not reproduced here)

Report of Independent Registered Public Accounting Firm :

We have audited the accompanying Consolidated Balance Sheets of General Motors Corporation and subsidiaries (the Corporation) as of December 31, 2008 and 2007, and the related Consolidated Statements of Operations, Cash Flows and Stockholders’ Equity (Deficit) for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Over-sight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of General Motors Corporation and subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements for the year ended December 31,2008, have been prepared assuming that the Corporation will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Corporation’s recurring losses from operations, stockholders’ deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 3 to the consolidated financial statements, the Corporation: (1) effective January 1, 2008, adopted Statement of Financial Accounting Standards No.157, Fair Value Measurements, (2) effective January 1, 2007, adopted the recognition and measurement provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109, (3) effective January 1, 2007, changed the measurement date for defined benefit plan assets and liabilities to coincide with its year end to conform to Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132 (R) (SFAS No.158), and (4) effective December 31, 2006, began to recognise the funded status of its defined benefit plan in its consolidated balance sheets to conform to SFAS No. 158.

As discussed in Note 4 to the consolidated financial statements, on November 30,2006, the Corporation sold a 51% controlling interest in GMAC LLC, its former wholly-owned finance subsidiary. The Corporation’s remaining interest in GMAC LLC is accounted for as an equity method investment.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Corporation’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organisations of the Treadway Commission and our report dated 4-3-2009 expressed an adverse opinion on the Corporation’s internal control over financial reporting.

Wealth tax : Assessment of trust/trustee : S. 21(1) of Wealth-tax Act, 1957 : A.Y. 1980-81 : Official trustee appointed by operation of statute is not covered by scope and ambit of S. 21(1)

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II. Reported :

  1. Wealth tax : Assessment of trust/trustee : S. 21(1) of
    Wealth-tax Act, 1957 : A.Y. 1980-81 : Official trustee appointed by operation
    of statute is not covered by scope and ambit of S. 21(1)

[Official Trustee, Maharashtra State v. CWT, 180
Taxman 595 (Bom.)]

Sir Jamsetjee Jejeebhoy Baronatcy Trust was reconstituted
under the Sir Jamsetjee Jejeebhoy Baronatcy Trust Act, 1915. The State of
Maharashtra amended the Sir Jamsetjee Jejeebhoy Baronatcy Trust Act, 1915 by
the Maharashtra Act No. XXVIII of 1974 and the trustees in respect of the
trust were substituted by the official trustee appointed under the Official
Trustee Act, 1913. For the A.Y. 1980-81 the official trustee filed the return
of wealth of the trust and claimed that the trustee is not assessable
u/s.21(1) of the Wealth-tax Act, 1957. The Assessing Officer rejected the
claim and the same was upheld by the Tribunal.

On reference by the official trustee, the Bombay High Court
reversed the decision of the Tribunal and held as under :

“(i) The official trustee could not be said to be a person
appointed under a trust ‘declared by a duly executed instrument in writing’.
The word ‘instrument’ does not include statute. The Wealth-tax Act does not
define the word ‘instrument’ and does not specifically include ‘statute’
within the meaning of the term. In the instant case, the official trustee was
not appointed under any rule-making power which might have amounted to
statutory instrument but under the statute itself.

(ii) Once it was held that S. 21(1), which is the main
charging section, did not apply to the assessee, it must necessarily follow
that S. 21(1A) would also not be applicable to him. In that view of the
matter, the assessment of the assessee in the instant case could not have been
effected u/s.21. In the circumstances, the order of the Tribunal was not
justified.”

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Revision : S. 263 of Income-tax Act, 1961 : A.Y. 2002-03 : Notice u/s.263 referring to four issues and final order passed referred to nine issues : Order of revision bad in law.

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II. Reported :



     



  1. Revision : S. 263 of Income-tax Act, 1961 : A.Y. 2002-03 :
    Notice u/s.263 referring to four issues and final order passed referred to
    nine issues : Order of revision bad in law.



[CIT v. Ashish Rajpal, 180 Taxman 623 (Del.)]

The assessee was a builder engaged in the business of
construction of properties. For the A.Y. 2002-03 the case of the assessee was
taken up for scrutiny and the assessment was completed u/s.143(3) of the
Income-tax Act, 1961. Subsequently the Commissioner issued notice u/s.263 on
four grounds. After hearing the assessee the Commissioner passed order
u/s.263, revised the assessment order and crystallised nine issues which,
according to him, required an enquiry and investigation. The Tribunal set
aside the order of the Commissioner.

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

“The notice dated 11-5-2006 issued by the Commissioner
before commencing the proceedings u/s.263 referred to four issues; while the
final order dated 18-19-1-2007 passed referred to nine issues; some of which
obviously did not find mention in the earlier notice and, hence, resulted in
the proceedings being vitiated as a result of the breach of the principles
of natural justice.”


 

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S. 192 and S. 201 : Misuse of free meal coupons by employees : No presumption of misuse : Tax not deducted at source : No default.

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66 TDS : Salary: S. 192 and S. 201 of
Income-tax Act, 1961 : Misuse of free meal coupons by employees: No presumption
of misuse : Tax not deducted at source on such amount : No default.


[CIT v. Reliance Industries Ltd., 308 ITR 82 (Guj.)]

The assessee-company distributed free meal coupons to its
employees. It had entered into an agreement with A for this purpose. The
assessee-company did not deduct tax at source on the amount paid to A, on the
ground that it did not constitute perquisite. The AO held that the coupons had
been misused by some of the employees. He therefore estimated certain amount as
being taxable perquisite in the hands of the employees and passed orders
u/s.201, u/s.201(1A) and u/s.271C of the Income-tax Act, 1961 for default of
non-deduction of tax at source on such estimated amount. The Tribunal held that
the assessee had not committed any default.

 

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

“With regard to the free meal coupons the employer could not
presume that a particular percentage of employees, out of the total work force,
misused the facility so as to warrant deduction of tax at source. Furthermore,
correspondingly such tax deducted at source had to be given credit in the
assessment of the employee concerned and unless and until the tax deduction
certificate specified the employee concerned there could be no corresponding
credit given to the employee. The assessee could not be treated as being in
default in respect of such sum.”

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S. 133A : In absence of statement by client that its books of account are at premises of C.A., survey conducted in premises of C.A. and impounding books is invalid.

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65 Survey : Scope and validity : S. 133A of
Income-tax Act, 1961 : Survey of premises of C.A., lawyer, etc. in connection
with survey of client : In the absence of a statement by the client that its
books of account are kept at the premises of C.A., survey conducted in the
premises of the C.A.’s firm and impounding books, documents, etc. is invalid.


[U. K. Mahapatra & Co. v. ITO, 221 CTR 328 (Ori.)]

The petitioner is a firm of Chartered Accountants engaged in
the practice of accountancy involving auditing, consultancy, financing and other
services to their clients. A survey party conducted a survey at the premises of
the petitioner-firm and also impounded certain books of account and documents.

 

On writ petition challenging the validity of survey action,
the Orissa High Court allowed the petition and held as under :

“(i) The precondition for conducting survey u/s. 133A in
the premises of a Chartered Accountant, lawyer, tax practitioner in connection
with survey of the business place of their client is that the client in the
course of survey must state that his books of account/documents and records
are kept in the office of his Chartered Accountant/lawyer/tax practitioner.
Unless this precondition is fulfilled, the IT authority does not assume any
power to enter the business premises/office of the Chartered
Accountant/lawyer/tax practitioner to conduct survey u/s.133A in connection
with survey of the premises of their client.

(ii) There being no material to show that survey of
premises of firm of Chartered Accountants was undertaken consequent upon any
statement of its client that its books of account were kept in the premises of
the Chartered Accountants, survey conducted at the premises of Chartered
Accountant’s firm was without authority of law.”


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Assessment u/s.143(3) on basis of directions of CIT : Sub-sequent CIT exercising power u/s.263 : Not justified.

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64 Revision : S. 263 of Income-tax Act,
1961 : A.Ys. 1980-81 to 1986-87 : Assessment made u/s.143(3) on basis of
directions of CIT : Subsequent CIT exercising power u/s.263 : Not justified.


[Virendra Kumar Jhamb v. N. K. Vohra, 176 Taxman 11
(Bom.)]

The assessee was doing various types of construction work and
was not maintaining regular books of account. For the A.Ys. 1980-81 to 1986-87,
it approached the Deputy Director of Intelligence (Investigation) under the
Amnesty Scheme and offered the taxable income to be computed at the rate of 4%
of the total receipts. Finally, after discussing with the Deputy Director of
Intelligence and the Commissioner, it was mutually agreed upon that the assessee
would file revised returns for the relevant assessment years at the rate of 8%
of the gross receipts. This was confirmed by the second Commissioner by his
letter dated 30-11-1997. On the basis of the said letter of the Commissioner,
the Assessing Officer completed the assessment u/s. 143(3) of the Income-tax
Act, 1961 computing the income at the rate of 8% of the gross receipts.
Subsequently, third Commissioner issued notices u/s.263 seeking to revise the
assessment orders for the relevant years.

 

The assessee filed writ petition and challenged the notices.
The Bombay High Court allowed the writ petition, quashed the notices and held :

“(i) The Assessing Officer had passed revised assessment
orders based on the revised returns at 8%. The said orders were solely based
on the directive given by the earlier Commissioner and the same could not be
revised by the subsequent Commissioner exercising the power u/s.163.

(ii) Over and above, there was no error or anything
unsustainable in law. On the contrary, when the second Commissioner had
consistently taken the view that 8% would be a fair percentage, the third
Commissioner could not consider the same as ‘erroneous’ or unsustainable in
law. Therefore, the notices issued u/s. 163 as well as revised assessment
orders passed by the Commissioner were totally unsustainable in law for the
aforesaid reasons. Hence, all the notices issued u/s.263 as well as the
assessment orders passed by the Commissioner had to be quashed and set aside.”


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S. 147 and S. 148 : Change of opinion is not valid basis for reopening assessment

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62 Reassessment : S. 147 and S. 148 of
Income-tax Act, 1961 : A.Y. 2003-04 : Change of opinion is not valid basis for
reopening assessment.


[Asteroids Trading and Investments P. Ltd. v. DCIT,
308 ITR 190 (Bom.)]

In the regular assessment u/s.143(3) of the Income-tax Act,
1961 for the A.Y. 2003-04, the AO had allowed the assessee’s claim for deduction
u/s.80M of the Act. Subsequently, a notice u/s.148 of the Act, dated 27-12-2006
was issued claiming that the income chargeable to tax has escaped assessment.
The objection filed by the assessee-company to the issue of notice was rejected.

The Bombay High Court allowed the writ petition filed by the
assessee challenging the validity of the notice and held :

“(i) The power conferred u/s.147 of the Income-tax Act,
1961, cannot be used like the power of review to reopen the assessment.
U/s.147 of the Act, assessments cannot be reopened on a mere change of
opinion.

(ii) The assessee-company had fully disclosed material
facts necessary for claiming deduction u/s.80M of the Act and there was
application of mind by the AO in allowing the deduction claimed by the
assessee in the assessment order. Though the notice u/s.148 was issued on the
ground that there was reason to believe that the income had escaped
assessment, there was neither any change of law, nor had any new material been
brought on record between the date of the assessment order and the date of
formation of opinion by the AO. It was merely a fresh application of mind by
the Officer to the same set of facts and the reassessment proceedings were
initiated based on the change of opinion of the Officer.”

 


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S. 147 and S. 148 : Change of opinion is not valid basis for reopening assessment.

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63 Reassessment : S. 147 and S. 148 of
Income-tax Act, 1961 : A.Y. 2003-04 : Change of opinion is not valid basis for
reopening assessment.


[Asian Paints Ltd. v. DCIT, 308 ITR 195 (Bom.)]

For the A.Y. 2003-04, the assessee’s claim for deduction of
expenditure on wages, provident fund contribution, gratuity and superannuation
fund was allowed by the Assessing Officer after calling for details in respect
of the same. Subsequently a notice u/s.148 was issued on 27-12-2006 for
reopening the assessment. The assessee’s objection that the assessment cannot be
validly reopened merely on the basis of change of opinion was rejected.

 

The Bombay High Court allowed the writ petition filed by the
assessee challenging the validity of the notice and held :

“(i) When a regular order of assessment is passed in terms
of S. 143(3) of the Income-tax Act, 1961, a presumption can be raised that
such an order has been passed on application of mind. If non-application of
mind by the Assessing Officer in passing an order would itself confer
jurisdiction upon the Assessing Officer to reopen the proceeding without
anything further, it would amount to giving premium to an authority exercising
quasi-judicial function to take benefit of its own wrong. The Legislature has
not conferred power on the Assessing Officer to review its own order.

(ii) Initiation of reassessment proceedings would amount to
change of opinion of the Assessing Officer as it was merely a fresh
application of mind by the Assessing Officer to the same set of facts. Since
the Assessing Officer had failed to apply his mind to the relevant material
while framing the assessment order, he could not take advantage of his own
wrong and reopen the assessment u/s.147 of the Act.”

 


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S. 23 : Standard rent not fixed : Annual value determined on basis of actual rent received

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61 Income from house property : Annual
value : S. 23 of Income-tax Act, 1961 : Standard rent not fixed : Annual value
to be determined on the basis of actual rent received.


[CIT v. Sarabhai (P) Ltd., 176 Taxman 6 (Guj.)]

As per the rental agreement, the assessee-company had
received rental income of Rs.27,467 in the relevant year. The assessee-company
computed the house property income on the basis of the rent of Rs.27,467 so
received. The AO computed the house property income on the basis of the rental
value of Rs.1,36,508 fixed by the Small Causes Court and determined the annual
letting value of the property at Rs.1,57,675. The Tribunal deleted the addition.

 

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

“(i) As in the instant case, there was no fixation of
standard rent by any competent Court under the rent control legislation, the
same would not apply or if the standard rent was to be fixed as per the scheme
of the Rent Control Legislation, it might be required to be computed and
calculated. However, as per the language of the
relevant provisions of the Act, the higher amount is to be considered and it
was not a case of the Revenue, that the standard rent, if assessed as per the
rent control legislation, may exceed the
actual rental income received by the assessee; the income as assessed based on
the actual rental income was rightly approved by the Tribunal.

(ii) The Tribunal was right in setting aside the assessment
based on the annual rental value and was right in directing the assessment to
be made based on the actual rental income received by the assessee on the
basis of the rental agreement.”

 


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Purchase of goods by advance payment to seller : Interest earned on advance is business income eligible for deduction u/s.10B

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60 Exemption of income : S. 10B of
Income-tax Act, 1961 : A.Ys. 1993-94 and 1994-95 : Assessee purchasing goods by
making advance payment to seller: Interest earned on advance amount is business
income eligible for deduction u/s.10B.


[CIT v. Hycon India Ltd., 308 ITR 251 (Raj.)]

The assessee had made advance payment for purchase
of goods on which the assessee earned interest income. For the A.Y. 1993-94 the
AO granted exemption u/s.10B of the Income-tax Act, 1961, in respect of such
interest income also. Exercising the powers u/s.163, the Commissioner held that
the assessee is not entitled to exemption u/s.10B in respect of the interest
income. The Tribunal reversed the order of the Commissioner and held that the
interest income was the income from business. The same view was taken by the
Tribunal for the A.Y. 1994-95.

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

“(i) ‘Profits and gains of business or profession’ and
‘income from other sources’ are different
species of income. S. 2(24) of the Income-tax Act, 1961, does not categorise
separately, profits and gains of business or profession. The expression
‘profits and gains’ used in S. 2(24) is wider and is not confined to ‘profits
and gains of business or profession’. S. 10B provides for
exemption with respect to any ‘profits and gains’ derived by the assessee, and
is not confined to ‘profits and gains of business or profession’.

(ii) The interest income received by the assessee did fall
within the expression ‘profits and gains’ and was eligible for exemption as
business income u/s.10B.”


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Capital gains : Ss. 45, 48 and 55A : Computation : Full value of consideration is actual consideration : Market value has no relevance : Reference to Valuation Officer not valid.

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58 Capital gains : Computation : S. 45, S.
48 and S. 55A of Income-tax Act 1961 : A.Y. 1998-99 : Computation u/s.48 : Full
value of consideration is actual consideration : Market value has no relevance :
Reference to Valuation Officer u/s.55A not valid.


[CIT v. Smt. Nilofer I. Singh, 221 CTR 277 (Del.)]

In the previous year relevant to the A.Y. 1998-99 the
assessee had sold two properties for considerations of Rs.10,00,000 and
Rs.23,50,000, respectively. The AO referred the matter to the Valuation Officer
who valued the two properties at Rs.14,55,200 and Rs.53,73,000, respectively.
The AO computed the capital gain on the basis of the market value which resulted
in the addition of Rs.34,72,000. The Tribunal deleted the addition.

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

“(i) The expression ‘full value of the consideration’ used
in S. 48 does not have any reference to the market value, but only to the
consideration referred to in the sale deeds as the sale price of the assets
which have been transferred.

(ii) In the case of sale simplicitor where the full value
of consideration is the sale price of the asset transferred, there is no
necessity of computing fair market value. Hence, the Assessing Officer could
not have referred the matter to the Valuation Officer. The events under which
a reference u/s.55A can be made are like the ones occurring in S. 45(4) and S.
45(1A).”



Editor’ note : W.e.f. 2003-04, the provisions of S. 50C
would also need to be considered.

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Refund from excise duty is income derived from business eligible for deduction u/s.80-IB

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59 Deduction u/s.80-IB of Income-tax Act,
1961 : A.Y. 2000-01 : Refund from excise duty is income derived from business of
industrial undertaking eligible for deduction u/s. 80-IB.


[CIT v. Dharam Pal Prem Chand Ltd., 221 CTR 133
(Delhi)]

For the A.Y. 2000-01 the assessee’s claim for deduction
u/s.80-IB of the Income-tax Act, 1961 included refund of excise duty amounting
to Rs.2,61,92,386 in respect of the industrial unit in question. The Assessing
Officer disallowed the claim for deduction, holding that the refund received on
account of excise duty was not ‘income derived from any business of the
industrial undertaking’. The Tribunal allowed the assessee’s claim.

 

The Delhi High Court upheld the decision of the Tribunal and
held :

“(i) The assessee was granted exemption from payment of
excise duty under various Notifications. Modality of exemption was that the
assessee, in the first instance, had to pay excise duty on clearance of goods
and after verification by the excise authorities, refund was granted. In the
circumstances, the contention of the Revenue that refund of excise duty has no
direct nexus with the assessee’s industrial activity and that it was dependent
on Notification is not tenable.

(ii) Other contention of the Revenue that if deduction
u/s.80-IB was granted, the assessee would get double benefit, once as relief
u/s.80-IB and secondly, the assessee would pass on the excise duty paid to the
customers and recover in the form of sale price is equally untenable, as
firstly, no such claim was set up by the Revenue before any of the lower
authorities and secondly, goods manufactured by the assessee not being inputs
for any other goods, apprehension of the Revenue has no substance.”


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Companies — MAT — Provision for bad and doubtful debts is not for meeting liability and cannot be added back in computing ‘book profits’ under Section 115JA(2)(c).

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10.  Companies — MAT — Provision for bad and doubtful
debts is not for meeting liability and cannot be added back in computing ‘book
profits’ under Section 115JA(2)(c).


 

[CIT vs. HCL Comnet Systems and Services Ltd.,
(2008) 305 ITR 409 (SC)].

The assessee-company was engaged in trading in data
communication equipment and satellite communication services. During the
course of assessment proceedings, the Assessing Officer found that the
assessee had debited an amount of Rs.92,15,187 on account of bad debts to the
profit and loss account. However, on the ground that it was a provision for
bad and doubtful debts, the Assessing Officer added the aforestated amount to
the book profits as per Explanation (c) to Section 115JA of the Act.

On appeal, the Commissioner of Income-tax (Appeals) allowed
the assessee’s appeal. That decision of the Commissioner of Income-tax
(Appeals) stood affirmed by the Tribunal and also by the High Court.

On further appeal by the Revenue, the Supreme Court held
that the Assessing Officer does not have the jurisdiction to go beyond the net
profit shown in the profit and loss account except to the extent provided in
the Explanation. The Assessing Officer has to make adjustment permissible
under the Explanation given in Section 115JA of the 1961 Act.

The said Explanation has provided six items, viz.,
item Nos. (a) to (f), which if debited to the profit and loss account can be
added back to the net profit for computing the book profit.

Item (c) deals with amount(s) set aside as provision made
for meeting liabilities, other than ascertained liabilities. The assessee’s
case would, therefore, fall within the ambit of item (c) only if the amount is
set aside as provision; the provision is made for meeting a liability; and the
provision should be for other than an ascertained liability, i.e., it
should be for an unascertained liability. The Supreme Court observed that
there are two types of ‘debt’. A debt payable by the assessee is different
from a debt receivable by the assessee. A debt is payable by the assessee
where the assessee has to pay the amount to others, whereas the debt
receivable by the assessee is an amount which the assessee has to receive from
others. In the present case, the ‘debt’ under consideration was a ‘debt
receivable’ by the assessee. The provision for bad and doubtful debt,
therefore, is made to cover up the probable diminution in the value of the
asset, i.e., debt which is an amount receivable by the assessee.
Therefore, such a provision cannot be said to be a provision for a liability,
because even if a debt is not recoverable, no liability could be fastened upon
the assessee. In the present case, the debt is the amount receivable by the
assessee and not any liability payable by the assessee and, therefore, any
provision made towards irrecoverability of the debt cannot be said to be a
provision for liability. The Supreme Court therefore was of the view that item
(c) of the Explanation was not attracted to the facts of the present case. In
the circumstances, the Assessing Officer was not justified in adding back the
provision for doubtful debts of Rs.92,15,187 under clause (c) of the
Explanation to Section 115JA of the 1961 Act.

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Export Business — Deduction U/s. 80 HHC — For the Assessment Year 1990-91, Section 80 HHC(3) statutorily fixes the quantum of deduction on the basis of proportion of business profits under the head ‘Profits and gains of business or profession’, irrespecti

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9.  Export Business — Deduction U/s. 80 HHC — For the
Assessment Year 1990-91, Section 80 HHC(3) statutorily fixes the quantum of
deduction on the basis of proportion of business profits under the head ‘Profits
and gains of business or profession’, irrespective of what could strictly be
described as profits derived from export of goods out of India.


 

[Modyset P. Ltd. vs. CIT (2008) 305 ITR 276 (SC)].

The asessee, a limited company, purchased 105 computers for
Rs.90,91,063. It exported them and realised export sales of Rs.90,91,063.
There was no export profit during the relevant assessment year 1990-91. The
Income-tax Officer allowed the claim of deduction under Section 80HHC at
Rs.15,81,389 as the total business income of the assessee stood at
Rs.55,31,941 by applying the ratio in terms of Section 80HH(3)(b) as follows :

Export Profits = 90,91,063 x 55,31,941

3,18,01,941

The Commissioner of Income-tax revised the aforesaid
assessment order in exercise of his powers under Section 263 denying the
deduction under Section 80 HHC, holding that Section 80 HHC confers the
benefit only on those assessees who have not only carried on the export
business, but who have also derived profits on such business. On an appeal,
the Tribunal allowed the assessee’s appeal following the decision of its Delhi
Special Bench in International Research Park Laboratories Ltd. vs. Asst.
CIT [(1995) 212 ITR (AT) 1], in which it was held that profits need not be
earned in the export business alone to claim special deduction under Section
80 HHC. On a reference by the Revenue, the Karnataka High Court following the
decision of the Supreme Court in Ipca Laboratory Ltd. vs. Dy CIT
[(2004) 266 ITR 521] held that since the assessee had not earned profits from
export sales during the year in question, the assessee was not entitled for
deduction under Section 80 HHC. On an appeal to the Supreme Court by the
assessee, it was held that the eligibility for deduction is contemplated by
Section 80 HHC(1), whereas the quantum of deduction is determined under
Section 80 HHC(3). In the matter of determining the quantum of deduction, the
‘principle of proportionality’ applied. There are two situations which are
covered by Section 80HHC (3), namely, turnover only from export sales and
secondly turnover from composite sales (domestic and export business). In both
cases the formula applied as under :

Section 80 HHC concession = export profit =

Profits of business x Export turnover

Total turnover

The Supreme Court on facts held that the calculation had
been correctly done by the Income-tax Officer. The Supreme Court further held
that the High Court had erred in relying upon the judgment in case of Ipaca
Laboratories Ltd., inasmuch as the provisions as applicable in that case were
for the assessment year 1996-97 which were different from the provisions for
the assessment year 1990-91 with which it was concerned and that for the
relevant assessment year the CBDT Circular No. 564 indicated that Section
80HHC (3) statutorily fixes the quantum of deduction on the basis of a
proportion of business profits under the head ‘Profits and gains of business
or profession’, irrespective of what could strictly be described as profits
derived from export of goods out of India. According to the Supreme Court, the
Circular supported its above reasoning. The Supreme Court however, clarified
that the above reasoning was strictly applicable to the law as it stood during
the relevant assessment year.

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Rectification — Mistake apparent from record — Failure to apply judgment of jurisdictional High Court is a mistake apparent from record.

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8. Rectification — Mistake apparent from record — Failure
to apply judgment of jurisdictional High Court is a mistake apparent from
record.


    [ACIT vs. Saurashtra Kutch Stock Exchange Ltd., (2008) 305 ITR 227 (SC)].

    The assessee, Saurashtra Kutch Stock Exchange Ltd., a company registered under Section 25 of the Act made an application on 10-02-1992 for registration under Section 12A of the Act. The assessee filed its return of income for the assessment year 1996-97, declaring nil income claiming exemption u/s. 11 of the Act, though it had not been registered u/s. 12A of the Act. The return was processed u/s. 143(1)(a) of the Act. On 07-11-1997 a notice was issued to the assessee u/s. 154 to show cause why the exemption granted u/s. 11 should not be withdrawn. In reply it was stated that as it had made an application for registration it was entitled to exemption u/s.11 of the Act. Meanwhile, the CIT on 20-02-1998 granted registration to the assessee on condition that the eligibility regarding exemption u/s. 11 of the Act would be examined by the A. O. for the each assessment year. In an order dated 03-12-1999 passed u/s. 143(3) of the Act, the A. O. rejected the claim of exemption u/s. 11 of the Act. The CIT(A) rejected the appeal of the assessee. The Tribunal also dismissed the appeal of the assessee. The assessee filed a miscellaneous application u/s. 254(2) of the Act to rectify the error committed by the Tribunal in the decision rendered by it in appeal. The Tribunal allowed the miscellaneous application and recalled its earlier order passed in appeal. For allowing the application, the Tribunal relied upon the decision of the jurisdictional High Court.

    Dissatisfied with the order passed by the Tribunal in miscellaneous application, the Revenue filed a writ petition which was dismissed by the High Court. On an appeal, the Supreme Court first considered as to what is a mistake apparent from record. After noting the precedent, the Supreme Court held that a patent, manifest and self-evident error which does not require elaborate discussion of evidence or argument to establish it, can be said to be an error apparent on the face of the record and can be corrected while exercising certiorari jurisdiction. An error cannot be said to be apparent on the face of the record if one has to travel beyond the record to see whether the judgment is correct or not. An error apparent on the face of the record means an error which strikes on mere looking and does not need a long drawn out process of reasoning on points where there may conceivably be two opinions. Such error should not require any extraneous matter to show its incorrectness. To put it differently, it should be so manifest and clear that no Court would permit it to remain on record. If the view accepted by the Court in the original judgment is one of possible views, the case cannot be said to be covered by an error apparent on the face of the record.

    The Supreme Court thereafter considered as to whether non-consideration of a decision of a jurisdictional Court or of the Supreme Court can be said to be a mistake apparent from record.

    The Supreme Court held that it was well settled that a judicial decision acts retrospectively. Accordingly to Blackstonian theory, it is not the function of the Court to pronounce a ‘new rule’, but to maintain and expound the ‘old one’. In other words, Judges do not make law, they only discover or find the correct law. The law has always been the same. If a subsequent decision alters the earlier one, it (the latest decision) does not make new law. It only discovers the correct principle of law which has to be applied retrospectively. To put it differently, even where an earlier decision of the Court operated for quite some time, the decision rendered later on would have retrospective effect clarifying the legal position which was earlier not correctly understood.

    The Supreme Court held that in the present case, according to the assessee, the Tribunal decided the matter on October 27, 2000. Hiralal Bhagwati was decided a few months prior to that decision by the jurisdictional High Court, in which it was held that a trust could claim exemption under Section 11, but it was not brought to the attention of the Tribunal. In the circumstances, the Tribunal had not committed any error of law or of jurisdiction in exercising power under sub-Section (2) of Section 254 of the Act and in rectifying the ‘mistake apparent from the record’. Since no error was committed by the Tribunal in rectifying the mistake, the High Court was not wrong in confirming the said order. Both the orders, therefore, in the opinion of the Supreme Court, were strictly in consonance with law and no interference was called for.

Business expenditure — Interest expenditure — Matter remanded to the High Court to determine whether the transactions were entered into with the idea of evading tax.

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26. Business expenditure — Interest expenditure — Matter
remanded to the High Court to determine whether the transactions were entered
into with the idea of evading tax.

[CIT v. Ashini Lease Finance P. Ltd., (2009) 309 ITR
320 (SC)].

The Assessing Officer for the A.Y.s 1996-97 and 1997-98
found that borrowed funds were invested to acquire control of AEC.
Accordingly, he disallowed the interest expenses u/s.36(1)(iii). This was on
the footing that the assessee had paid interest to Torrent Financiers and
Torrent Leasing and Finance Private Limited (sister companies of the assessee).
According to the order of assessment, the borrowed funds were deployed by the
assessee-company during the relevant year in order to purchase equity shares
of AEC, which company was subsequently taken over not by the assessee but by
the Torrent group. During the relevant year, the total investment made by the
assessee in the takeover and acquisition of business of AEC amounted to only
Rs.22,59,969. The Assessing Officer detected that after acquiring the shares
of AEC Ltd. the assessee sold the shares of AEC at Rs.63,57,925 and further
that subsequently, the said AEC Ltd. had been taken over and acquired by the
Torrent group. The record indicated, prima facie, that the assessee-company
had acquired the shares of AEC through finances arranged mainly from the
Torrent group (sister companies) along with two other companies, only to
enable the Torrent group to acquire and take over the business of AEC.

The Commissioner of Income-tax (Appeals) as well as the
Tribunal both however found that the borrowings were for the purposes of
business. The question, therefore, which arose for consideration before the
High Court was: Whether the assessee was entitled to deduction in respect of
interest paid by it to the Torrent group? The High Court held that whether the
borrowings were for the purpose of business or not, was basically based on the
finding of fact. The High Court held that considering the concurrent finding
of fact, there was no perversity in the order. On an appeal the Supreme Court
held that prima facie, it appeared that the High Court had lost sight
of the facts which, if proved and established, indicate circular trading was
entered into solely with the idea of evading tax. The Supreme Court expressed
the prima facie view only in support of its order as relevant aspects
had not been considered by the Tribunal and, observed that the above reasons
should not be taken as its conclusion. Therefore, according to the Supreme
Court the High Court had erred in dismissing the appeals on the ground that no
substantial question of law arose for determination.

The Supreme Court set aside the judgment of the High Court
and restored tax appeals to the file of the High Court with a direction to the
High Court to dispose of these appeals in accordance with law.

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Industrial undertaking — In order to constitute an industrial undertaking the important criteria to be applied is to identify the item in question, the process undertaken by it and the resultant output

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25. Industrial undertaking — In order to constitute an
industrial undertaking the important criteria to be applied is to identify the
item in question, the process undertaken by it and the resultant output — Matter
remanded to Tribunal in the absence of details of activities of a hospital.

[Down Town Hospital Ltd. v. CIT, (2009) 308 ITR 188
(SC)]

The appellant-assessee, a hospital, had made investment in
plant and machinery. It operated a nursing home in Guwahati. The assessee
claimed deduction u/s.80HH for the A.Y. 1994-95. The Assessing Officer (AO)
held that the assessee was not an industrial undertaking. It was, therefore,
not eligible for deduction and, consequently, the assessee’s claim for
deduction stood disallowed.


Aggrieved by the said order the matter was carried in
appeal to the Commissioner (Appeals). The Commissioner (Appeals) allowed the
relief following his earlier decision for A.Y. 1993-94, that the assessee was
an industrial undertaking. On appeal the Tribunal held that in view of two
decisions of two separate High Courts, namely, the Rajasthan High Court [CIT
v. Trinity Hospital, (1997) 225 ITR 178 (Raj.)] and the Kerala High Court
[CIT v. Upasana Hospital, (1997) 225 ITR 845 (Ker)] the assessee-hospital
was an industrial undertaking entitled to deduction u/s.80HH.


On an appeal by the Department, the Guwahati High Court
(251 ITR 683) held that in the absence of any materials to show that the
activities carried on in the Hospital or nursing home amounted to manufacture
or production of any article or thing, the assessee was not entitled to relief
u/s.80HH and u/s.80I.


On an appeal, the Supreme Court held that in order to
constitute an industrial undertaking, u/s.32A or u/s.80HH, the important
criteria to be applied by the Assessing Officer is to identify the item in
question, the process undertaken by it and the resultant output. For example,
if the item is a data processing machine/computer, the question as to whether
the printout from that computer is as a result of manufacture is one of the
tests to be applied in judging whether the undertaking which buys this article
is an industrial undertaking or not. Unfortunately, in the present case there
was no identification of the items installed in the hospital by the Tribunal
and, therefore, it was not possible for it to express any opinion as to
whether the assessee was entitled to deduction u/s.80HH of the Income-tax Act.


The impugned order of the Guwahati High Court was set aside
therefore, by the Supreme Court, and the matter was remitted to the Tribunal
for deciding the case de novo in accordance with law.



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Appeals — Revenue cannot file an appeal involving a dispute for which no appeal is filed for earlier years if there is no change in the fact situation.

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24. Appeals — Revenue cannot file an appeal involving a
dispute for which no appeal is filed for earlier years if there is no change in
the fact situation.

[CIT v. J. K. Charitable Trust, (2009) 308 ITR 161
(SC)]

The challenge in the appeals in each case before the
Supreme Court was to the order passed by a Division Bench of the Allahabad
High Court answering the reference made by the Income-tax Appellate Tribunal,
Allahabad Bench (in short ‘the ITAT’) u/s.256(1) of the Income-tax Act, 1961
(in short ‘the Act’) in favour of the assessee and against the Revenue. For
answering the references in favour of the assessee, the High Court relied upon
its judgment for two previous assessment years, i.e., 1972-73 and
1973-74 in the assessee’s case which is reported in CIT v. J. K. Charitable
Trust, (1992) 196 ITR 31. The present dispute relates to several
assessment years i.e., 1972-73 (in respect of an assessment reopened
u/s.147(1) of the Act) and the A.Y.s 1975-76 to 1982-83.


Learned counsel for the Revenue-appellant submitted before
the Supreme Court that each assessment year is a separate assessment unit and
the factual scenario had to be seen. The dispute related to the question
whether the respondent-assessee’s trust was hit by the provisions of S.
13(1)(c) and S. 13(2)(a)(f) and (h) of the Act and, therefore, could not be
given the benefit of exemption provided u/s.11 of the Act.


Learned counsel for the assessee submitted before the
Supreme Court that for several years no appeal had been filed even though the
factual position was the same, i.e., for the A.Y. 1983-84 up to the A.Y.
2007-08. No appeal was filed even against the decision reported in CIT v.
J. K. Charitable Trust, (1992) 196 ITR 31. It was also pointed out that
several other High Courts had taken a similar view and no appeal was preferred
by the Revenue against any of the judgments of the different High Courts.
Reference is made to the decisions reported in CIT v. Trustees of the Jadi
Trust, (1982) 133 ITR 494 (Bom.), CIT v. Hindusthan Charity Trust,
(1983) 139 ITR 913 (Cal.), CIT v. Sarladevi Sarabhai Trust, (No. 2)
(1988) 172 ITR 698 (Guj.) and CIT v. Nirmala Bakubhai Foundation,
[1997] 226 ITR 394 (Guj).


Learned counsel for the Revenue submitted that even though
appeal had not been preferred in respect of some assessment years, that did
not create a bar for the Revenue filing an appeal for other assessment years.


Reliance was placed on a decision of the Supreme Court in
C. K. Gangadharan v. CIT, (2008) 304 ITR 61.


The Supreme Court noted that the factual scenario was
undisputed that for a large number of assessment years no appeal had been
filed. The basic question, therefore, was whether the Revenue could be
precluded from filing an appeal even though in respect of some other years
involving identical dispute no appeal was filed.


The Supreme Court observed that in this case, it was
accepted by the learned counsel for the appellant-Revenue that the fact
situation in all the assessment years was the same. According to him, if the
fact situation changes, then the Revenue could certainly prefer an appeal
notwithstanding the fact that for some years no appeal was preferred. The
question was of academic interest in the present appeals as undisputedly the
fact situation was the same. The Supreme Court therefore held that the appeals
were without merit and were accordingly dismissed.



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Manufacture/Production — Conversion of jumbo rolls of photographic films into small flats and rolls in the desired sizes amounted to manufacture /production of a article or thing.

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23. Manufacture/Production — Conversion of jumbo rolls of
photographic films into small flats and rolls in the desired sizes amounted to
manufacture /production of a article or thing.

[India Cine Agencies v. CIT, (2009) 308 ITR 98(SC)]

In all the appeals before the Supreme Court the common
question that was involved was related to the entitlement of benefit in terms
of S. 32AB, S. 80HH and S. 80-I of the Income-tax Act, 1961 (in short the
‘Act’). In all the cases the issue was the effect of conversion of jumbo rolls
of photographic films into small flats and rolls in the desired sizes. The
assessees’ contention was that the same amounted to manufacture/production, as
the case may be. The stand of the Revenue was that it was not either
manufacture or production. In some cases the High Court held that in any
event, because of item 10 of the Eleventh Schedule, no deduction was
permissible. The High Court decided in favour of the Revenue and, therefore,
the appeals were filed by the assessee before the Supreme Court. The Supreme
Court after referring the dictionary meaning of the words ‘manufacture’ and
‘produce’ and noting the precedents on the subject held that the assessee was
entitled to the allowance u/s.32AB, u/s.80HH and u/s.80I of the Act. The
Supreme Court observed that the matter could yet be looked from another angle.
If there was no manufacturing activity, then the question of referring to item
10 of the Eleventh Schedule for the purpose of exclusion did not arise. The
Eleventh Schedule, which was inserted by the Finance (No. 2) Act, 1977, with
effect from 1-4-1978, has reference to S. 32A, S. 32AB, S. 80CC(3)(a)(i), S.
80-I(2), S. 80J(4) and S. 80A(3)(a)(i) of the Act. The appeals were allowed.

Authors’ Note :

Finance (No. 2) Act, 2009 has introduced definition of the
term ‘manufacture’ in S. 2(29BA) w.e.f. 1.4.09.

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Search — Levy of surcharge on block assessment — Surcharge is leviable even to cases relating to assessment years prior to the insertion of S. 113.

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7. Search — Levy of surcharge on block assessment — Surcharge
is leviable even to cases relating to assessment years prior to the insertion of
S. 113.

[ CIT v. Rajiv Bhatara, (2009) 310 ITR 105 (SC)]

Search was conducted on April 6, 200. The Assessing Officer
in his order dated May 22, 2002, imposed surcharge and an application u/s.154
of the Act filed by the assessee for rectification was dismissed vide order
dated September 17, 2003, with the observation that the surcharge was levied
as per the provisions of Part I of the First Schedule appended to the Finance
Act, 2000. However, the Commissioner of Income Tax (Appeals), Ludhiana, [for
brevity ‘the CIT(A)’] reversed the order passed by the Assessing Officer and
took the view that surcharge was not leviable in cases where the search had
taken place prior to June 1, 2002. In that regard, reliance was placed on a
Division Bench judgment of the Punjab and Haryana High Court in the case of
CIT v. Ram Lal Babu Lal, 234 ITR 776. On further appeal by the Revenue the
Tribunal upheld the order dated September 12, 2005, passed by the Commissioner
of Income-tax (Appeals) holding that the search in the present case took place
on April 6, 2000, which was much prior to the date of amendment made in S.
113. The amendment was incorporated on June 1, 2002, by inserting a proviso to
S. 113 by the Finance Act, 2002. It was by the amendment that the levy of
surcharge on the undisclosed income was specifically provided with effect from
June 1, 2002. The provision has not been given retrospective effect, and
therefore, the Tribunal held that it applied only to cases where searches were
carried out after June 1, 2002. The High Court dismissed the appeal relying on
its decision in the case of CIT v. Roshan Singh Makkar, (2006) 287 ITR
160 (P&H) and also referred to two other decisions of the Madras High Court in
CIT v. Neotech Company, (Firm) (2007) 291 ITR 27 and CIT v. S.
Palanivel, (2007) 291 ITR 33.

On an appeal before the Supreme Court, the learned counsel
for the appellant (Revenue) submitted that the case at hand was squarely
covered by a decision of the Supreme Court in CIT v. Suresh N. Gupta,
(2008) 297 ITR 322.

According to the appellant, prior to June 1, 2002, the
position was ambiguous as it was not clear even to the Department as to
whether surcharge was levied with reference to the rates provided for in the
Finance Act of the year in which the search was initiated or the year in which
the search was concluded or the year in which the block assessment proceedings
u/s.158C were initiated or the year in which block assessment order was
passed. The Supreme Court held that to clear that doubt precisely, the proviso
was inserted in S. 113 by which it is indicated that the Finance Act of the
year in which the search was initiated would apply. Therefore, the proviso to
S. 113 was clarificatory in nature. It only clarifies that out of the four
dates, Parliament has opted for the date, namely, the year in which the search
was initiated, which date would be relevant for applicability of a particular
Finance Act. The above position was highlighted in Suresh N. Gupta’s case. The
Supreme Court therefore allowed the appeal of the revenue.

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Substantial Question of Law — Cancellation of penalty on the ground that the benefit under the amnesty scheme was available to the assessee even though there was material to show that the return was not voluntary gives rise to a substantial question of la

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5. Substantial Question of Law — Cancellation of penalty on
the ground that the benefit under the amnesty scheme was available to the
assessee even though there was material to show that the return was not
voluntary gives rise to a substantial question of law.

[CIT v. C. A. Taktawala, (2009) 309 ITR 340 (SC)]

The Supreme Court held that the High Court had erred in not
answering the following question, which in its opinion was a substantial
question of law.

“Whether, on the facts and circumstances of the case, the
Tribunal was right in law and on facts in cancelling the penalty levied
u/s.271(1)(a) and u/s.273(2)(a) of the Income-tax-Act on the ground that the
benefit under the amnesty scheme was available to the assessee, particularly
when subsequent to search operation, the assessee itself had revised its
returns on a number of occasions, which would go to show that the return was
not voluntary”.

 

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Substantial Question of Law — Whether on conversion of a partnership firm into a company under Part IX of the Companies Act the revaluation of the depreciable assets prior to conversion would be liable to capital gain tax is a question of law.

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6. Substantial Question of Law — Whether on conversion of a
partnership firm into a company under Part IX of the Companies Act the
revaluation of the depreciable assets prior to conversion would be liable to
capital gain tax is a question of law.

[CIT v. Well Pack Packaging, (2009) 309
ITR 338 (SC)]

The respondent-assessee was a partnership firm.
On August 30, 1995, it filed its original return of income in respect of the
A.Y. 1995-96 declaring a total income of Rs.1,93,930. The said return was
processed u/s.143(1)(a) of the Income-tax Act, 1961 (for short, ‘the Act’), on
January 29, 1996. Subsequently, the Assessing Officer noticed that the
assessee had revalued the depreciable assets and enhanced the value at
Rs.1,28,13,831 on July 31, 1994. It was also noticed by him that the
partnership firm was converted into a company under Part IX of the Companies
Act, 1956, and was registered as such u/s.567 of the said Act on October 17,
1994. Therefore, proceedings u/s.148 of the Act for reassessment were
initiated. After considering the explanation of the respondent, the Assessing
Officer determined the total income of the respondent at Rs.1,30,07,761. The
Assessing Officer made an addition of capital gains of Rs.1,28,13,831 on
account of transfer of the depreciable assets at enhanced value on conversion
to company under Part IX of the Companies Act , which was a separate entity.
The Commissioner (Appeals) dismissed the appeal. The Tribunal allowed the
appeal and set aside the orders of the Commissioner (Appeals) and the
Assessing Officer.

Before the High the following four questions of
law were said to be arising from the order of the Tribunal :

“(1) Whether the Income-tax Appellate Tribunal
is right in law and on the facts of the case in holding that revaluation of
the assets of the assessee-firm and subsequent conversion of the firm into
limited company under Part IX of the Companies Act which has taken over such
assets at the enhanced value will not result into any capital gains
liability under the Income-tax Act ?

(2) Whether the Income-tax Appellate Tribunal
is right in law and on the facts of the case in holding that there is no
transfer involved when the assessee gets itself registered under Part IX of
the Companies Act, 1956 ?

(3) Whether the Income-tax Appellate Tribunal
is right in law and on facts of the case in holding that the assessee is not
liable to any capital gains tax either u/s.45(1) or u/s.45(4) of the
Income-tax Act ?

(4) Whether the Income-tax Appellate Tribunal
is right in law and on the facts of the case in directing to delete the
addition of Rs.1,28,13,831 ?”

The High Court, by the impugned order, dismissed
the appeal by passing a short order observing, that no question of law much
less a substantial question of law arose from the order of the Tribunal.

On an appeal, the Supreme Court held that it did
not agree with the view taken by the High Court. In its opinion, the questions
of law as raised by the Revenue before the High Court were substantial
questions of law which arose from the order of the Tribunal.

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Export business — Deduction u/s.80HHC — If the assessee is a supporting manufacturer, on producing disclaimer certificates from export house, he would be entitled to claim the benefit u/s.80HHC.

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3. Export business — Deduction u/s.80HHC — If the assessee is
a supporting manufacturer, on producing disclaimer certificates from export
house, he would be entitled to claim the benefit u/s.80HHC.

[Janatha Cashew Exporting Co. v. CIT, (2009) 309 ITR
440 (SC)]

The assessee, a cashew exporter, had made direct and
indirect exports for the A.Y. 1992-93 and had claimed total deduction of an
amount of Rs.97,54,515 u/s.80HHC(1) and S. 80HHC(1A) of the Income-tax Act.
The Assessing Officer granted deduction u/s.80HHC(1) and u/s.80HHC(1A) in
respect of direct and indirect exports in all amounting to Rs.91,10,306 as
against the claim of Rs.96,54,515. However, while granting deduction under the
proviso to S. 80HHC(3) the Assessing Officer excluded sales to export houses
from the export turnover and he re-worked the relief at Rs.12,63,532.
Aggrieved by the said order the assessee took up the matter before the
Commissioner of Income-tax (Appeals). The order of the Assessing Officer was
upheld on the ground that export turnover included only direct exports since
S. 80HHC(3) dealt with quantification of deduction in case of direct exports
and the quantum of deduction had to be computed only on the basis of direct
export turnover. The Commissioner of Income-tax (Appeals) also took note of
the deduction separately granted on indirect exports u/s.80HHC(1A) of the Act.
However, when the assessee carried the matter in appeal to the Tribunal it
took the view that, the Assessing Officer should compute the income of the
assessee and allow benefits admissible to the export house if such export
house had issued a disclaimer certificate. Aggrieved by the said decision the
Department moved the High Court by way of appeal u/s.260A of the Income-tax
Act. The decision of the Tribunal was, however, set aside by the High Court
which took the view that since S. 80HHC(1) read with S. 80HHC(3) provided for
computation and deduction of profit on direct exports only and the assessee
was not entitled to the benefit in that regard qua indirect exports made
through the export house. The High Court also proceeded on the basis that the
sales turnover from sales effected by the assessee to the export houses did
not answer the description of export turnover and, therefore, the assessee was
not entitled to take the indirect exports into account while calculating sales
turnover in the formula mentioned in S. 80HHC(3).

On an appeal, the Supreme Court held that the matter needed
to be remitted to the Assessing Officer. Firstly, because in this case, there
was no factual finding recorded by the High Court as to whether the sales made
through the export houses by the assessee were supported by a disclaimer
certificate from such export houses. According to the Supreme Court, under the
provisions of S. 80HHC(3), if the assessee is a supporting manufacturer, on
his producing such disclaimer certificate the assessee would be entitled to
claim the benefit of deduction under the said section. Secondly, fresh
computation was now required to be done in view of three subsequent judgments,
in the case of CIT v. K. Ravindranath Nair, (295 ITR 228) A. M. Mosa
v. CIT, (294 ITR 1) and Lalsons v. Dy. CIT, (89 ITD 25).

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Appellate Tribunal — Scope of powers — The Tribunal is not authorised to take back the benefit granted to the assessee by the Assessing Officer — The Tribunal has no power to enhance the assessment.

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4. Appellate Tribunal — Scope of powers — The Tribunal is not
authorised to take back the benefit granted to the assessee by the Assessing
Officer — The Tribunal has no power to enhance the assessment.

Lease transaction if found to be sham, depreciation cannot
be allowed — Alternative argument that only interest component be treated as
income rejected.

[M. Corpn. Global P. Ltd. v. CIT, (2009) 309 ITR 434
(SC)]

During the relevant assessment year 1991-92, the assessee
carried on the business of trading in lamination machines and binding and
punching machines. In addition, it was engaged in the leasing business. During
the year in question, the assessee had bought 5,46,000 soft drink bottles from
M/s. Glass and Ceramic Decorators worth Rs.19,54,953. The bottles were
directly supplied to M/s. Coolade Beverages Pvt. Ltd. (‘M/s. Coolade’ for
short) in terms of lease dated February 15, 1991. Vide assessment order dated
March 28, 1994, the Assessing Officer found that M/s. Coolade had received
only 42,000 bottles out of the total of 5,46,000 bottles receivable by them
from the assessee and that the remaining bottles stood received after March
31, 1991, i.e., between the period April 3, 1991, and April 18, 1991,
and, consequently, the Assessing Officer restricted the depreciation only to
42,000 bottles and consequently disallowed the depreciation of Rs.18,04,572.
In appeal the Commissioner of Income-tax (Appeals) after formulating the ‘user
test’ remanded the matter to the Assessing Officer who on remand held that all
5,46,000 bottles stood paid for and dispatched before March 31, 1991, and
therefore, the assessee was entitled to 100% depreciation on all 5,46,000
bottles. This finding was given when the appeal was pending before the Income
Tax Appellate Tribunal. The said finding of the Assessing Officer (on remand)
was not challenged. However, when the appeal came before the Tribunal, it was
held that since the lease was not renewed and since the bottles were not
returned on expiry the transaction in question was only a financial
arrangement and not a lease, hence, the Income Tax Appellate Tribunal
disallowed the depreciation claim of the assessee which finding stood
confirmed by the High Court.

On an appeal, the Supreme Court held that in the case of
Hukumchand Mills Ltd. v. CIT, reported in (1967) 63 ITR 232 it had held
that u/s.33(4) of the Income-tax Act, 1922 (equivalent to S. 254(1) of the
1961 Act), the Tribunal was not authorised to take back the benefit granted to
the assessee by the Assessing Officer. The Tribunal has no power to enhance
the assessment. Applying the ratio of the said judgment to the present case,
the Supreme Court was of the view that, in this case, the Assessing Officer
had granted depreciation in respect of 42,000 bottles out of the total number
of bottles (5,46,000). By reason of the impugned judgment of the High Court
that benefit was sought to be taken away by the Department, which was not
permissible in law. This was the infirmity in the impugned judgment of the
High Court and the Tribunal. There was one more aspect which attracted the
attention of the Supreme Court. It observed that, according to the impugned
judgment of the High Court and the Tribunal, the transaction dated February
15, 1991, was a financial transaction and not a lease. If depreciation is to
be granted for 42,000 bottles under the transaction dated February 15, 1991,
then it cannot be said that 42,000 bottles came within the lease dated
February 15, 1991, and the balance came within the so-called financial
arrangement. In the circumstances, the Supreme Court held that the benefit of
depreciation given to the assessee by the Assessing Officer in respect of
42,000 bottles out of 5,46,000 bottles could not be withdrawn by the
Department and for that reason alone the assessee should succeed in the civil
appeal. The Supreme Court further observed that, in this case the Commissioner
of Income-tax (Appeals) had remitted the matter to the Assessing Officer who
on remand came to the conclusion that all 5,46,000 bottles stood sold before
March 31, 1991. This finding of fact had become final. It had not been
challenged. Hence, the Department had erred in disallowing the depreciation of
Rs.18,04,572.

Another lease transaction was also the subject matter of
the appeal. On March 15, 1991, lease was executed between the assessee as
lessor and M/s. Aravali Leasing as lessee whereas there was a sub-lease
between M/s. Aravali Leasing and M/s. Unikol Bottles dated March 8, 1991. The
Assessing Officer came to the conclusion that the transaction dated March 15,
1991, was not proved. It was a sham. Accordingly, the Assessing Officer
disallowed the depreciation amounting to Rs.30,17,122. This finding has been
accepted by the Tribunal and the High Court. The Supreme Court found no
infirmity in the concurrent findings of fact recorded by the authorities
below. The Supreme Court also rejected the alternative submission made on
behalf of the assessee that, if the said transaction was a financial
arrangement, as held by the Department even then the assessee could be taxed
only on interest embedded in the amount of lease rental received from the
lessee on the ground that the transaction was not proved by the assessee.


levitra

Export business — Deduction u/s.80HHC (prior to 1989) — Deduction only to the extent it is covered by the reserve created for the said reserve.

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2. Export business — Deduction u/s.80HHC (prior to 1989) —
Deduction only to the extent it is covered by the reserve created for the said
reserve.

[Parekh Brothers v. CIT, (2009) 309 ITR 446 (SC)]

The Supreme Court dismissed the appeal from the decision of
the Kerala High Court to the effect that, where the reserve created for the
purpose of the special deduction u/s.80HHC of the Income-tax Act, 1961, is of
a lesser amount then deduction would be allowed only of the lesser sum
supported by the creation of the reserve.

 

levitra

Substantial Question of Law — Applicability of S. 35AB — For applicability of S. 35AB, the nature of expenditure is required to be decided at the threshold because if the expenditure is found to be revenue in nature, then S. 35AB may not apply — However,

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1. Substantial Question of Law — Applicability of S. 35AB —
For applicability of S. 35AB, the nature of expenditure is required to be
decided at the threshold because if the expenditure is found to be revenue in
nature, then S. 35AB may not apply — However, if it is found to be capital in
nature, the question of amortisation and spread over, as contemplated by S. 35AB
would come into play.

[CIT v. Swaraj Engines Ltd., (2009) 309 ITR 443
(SC)]

The High Court dismissed the Department’s appeal in limine
following its earlier judgment in the case of CIT v. JCT Electronics Ltd.,
(2008) 301 ITR 290 (P&H) on the following question of law :

“Whether, on the facts and in the circumstances of the
case, the Hon’ble Income-tax Appellate Tribunal is right in upholding the
decision of the Commissioner of Income-tax (Appeals) that the payments of
the royalty made by the assessee company to M/s. Kirloskar Oil Engine Ltd.
to acquire technology know how under the agreement dated October 19, 1989,
is a revenue expenditure and does not come within the ambit of the
provisions of S. 35AB of the Income-tax Act, 1961, whereas the payment is a
capital expenditure in view of the following judgments.

(A) Fenner Woodroffe and Co. Ltd. v. CIT, (1976)
102 ITR 665 (Mad.);

(B) Ram Kumar Pharmaceuticals Works v. CIT, (1979)
119 ITR 33 (All.);

(C) CIT v. Warner Hindusthan Ltd., (1986) 160 ITR
217 (AP); and

(D) CIT v. Southern Switchgear Ltd., (1984) 148
ITR 272 (Mad.).”

On an appeal the Supreme Court noted that, M/s. Swaraj
Engines Ltd. (respondent herein) entered into an agreement of transfer of
technology know-how and trade mark with Kirloskar Oil Engines Ltd. under which
royalty was payable by it. The claim for deduction in respect of the said
payment was made by the respondent. During the relevant A.Y. 1995-96, royalty
was paid by the assessee as a percentage of net selling price of the licensed
goods products.

According to the Supreme Court, two questions arose for its
determination. Firstly, whether the question regarding applicability of S.
35AB of the Income-tax Act, 1961, was ever raised by the Assessing Officer in
this case ? The second question which arose for determination in this case was
whether the expenditure incurred was revenue expenditure or whether it was an
expenditure which was capital in nature and depending on the answer to the
said question, the applicability of S. 35AB of the Income-tax Act needed to be
considered.

The Supreme Court observed that, on the first question,
there was considerable amount of confusion. It appeared that prior to the A.Y.
1995-96, the Department had been contending that the royalty expenditure came
within the ambit of S. 35AB. However, there was some doubt as to whether the
said contention regarding applicability of S. 35AB was at all raised. In this
regard, the order of the Assessing Officer was not clear principally because
it had focussed only on one point, viz., whether such expenditure is
revenue or capital in nature. The Supreme Court held that even for the
applicability of S. 35AB, the nature of expenditure is required to be decided
at the threshold because if the expenditure is found to be revenue in nature,
then S. 35AB may not apply. However if it is found to be capital in nature,
then the question of amortisation and spread over, as contemplated by S. 35AB,
would certainly come into play. Therefore in the view of the Supreme Court, it
was not correct to say that in this case, interpretation of S. 35AB was not in
issue and the above reasoning was further fortified by the question framed by
the High Court.

The Supreme Court therefore held that the said question
needed to be decided authoritatively by the High Court as it was an important
question of law, particularly, after insertion of S. 35AB and therefore,
remitted the matter to the High Court for fresh consideration in accordance
with law.

The Supreme Court did not express any opinion on the second
question observing that it was for the High Court to decide, after construing
the agreement between the parties, whether the expenditure was revenue or
capital in nature and, depending on the answer to that question, the High
Court would have to decide the applicability of S. 35AB of the Income-tax Act.
The Supreme Court kept all contentions on both sides expressly open.

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Income deemed to accrue or arise in India : S. 9 of Income-tax Act, 1961 r/w Article 15 of DTAA between India and UK : A.Y. 1996-97 : Assessee non-resident rendering services in India : Assessee liable to be taxed in India only for that part of income att

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 7 Income deemed to accrue or arise in India :
S. 9 of Income-tax
Act, 1961 r/w Article 15
of DTAA between India
and UK : A.Y. 1996-97 : Assessee non-resident rendering services in India :
Assessee liable to be taxed in India only for that part of income attributable
to services rendered by it in India and utilised in India.

[Clifford Chance v. Dy. CIT, 176 Taxman
458 (Bom.)]

The assessee was an international firm of
solicitors resident in the United Kingdom. It had no office or fixed base in
India. During the A.Y. 1996-97, it was appointed as the English law legal
adviser for four projects in India. Its partners were in India for more than
90 days. It filed its return of income showing income attributable to its
operations in India in respect of the said four projects. However, the
Assessing Officer held that the entire fees received by the assessee from the
four projects, whether services were rendered in India or outside India, was
taxable in India. The Tribunal upheld that view.

On appeal by the assesee the Bombay High Court
reversed the decision of the Tribunal and held as under :

“(i) The territorial nexus doctrine plays an
important part in the assessment of tax. Tax is levied on one transaction
where the operations, which may give rise to income, may take place partly in
one territory and partly in another territory. Income arising out of
operations in more than one jurisdiction would have territorial nexus with
each of the jurisdiction on actual basis. If that be so, it may not be correct
to contend that the entire income ‘accrues or arises’ in each of the
jurisdiction.

(ii) In the case of Ishikawajima Harima Heavy
Industries Ltd. v. DIT, (2007) 288 ITR 408, the Supreme Court, while
interpreting the provisions of S. 9(1)(vii)(c), has observed that it requires
two conditions to be met — the services which are the source of the income
that is sought to be taxed, have to be rendered in India, as well as utilised
in India, to be taxable in India. Both the above conditions have to be
satisfied simultaneously. Thus, for a non-resident to be taxed on income for
services, such a service needs to be rendered within India and has to be part
of a business or profession carried out by such person in India.

(iii) As per the judgment of the Supreme Court,
territorial nexus for the purpose of determining the tax liability is an
internationally accepted principle. An endeavor should, thus, be made to
construe the taxability of a non-resident in respect of income derived by it.
Having regard to the internationally accepted principle and the DTAA, no
extended meaning can be given to the words ‘income deemed to arise in India’
as expressed in S. 9 which incorporates various heads of income on which tax
is sought to be levied by the Republic of India. Whatever is payable by a
resident to a non-resident by way of fees for services, thus, would not always
come within the purview of S. 9(1)(vii). It must have sufficient territorial
nexus with India so as to furnish a basis for imposition of tax. Whereas a
resident would come within the purview of S. 9(1)(vii), a non-resident would
not, as services of a non-resident to a resident utilised in India may not
have much relevance in determining whether the income of a nonresident accrues
or arises in India. It must have a direct link with the services rendered in
India. When such a link is established, the same may again be subjected to any
relief under the DTAA. A distinction may also be made between rendition of
service and utilisation
thereof.


(iv)
The above
understanding of the law laid down by the Apex Court and S. 9(1)(vii)(c),
read in its plain language, envisage the fulfillment of two conditions:
services, which are source of income sought to be taxed in India, must
be (i) utilised in India; and (ii) rendered in India. In the instant
case, both those conditions had not been satisfied simultaneously.

(v)
In the above view of
the matter, contentions raised by the assessee were to be accepted. Thus the
income of the assessee charged on hourly basis in India and utilised in
India would only be chargeable to income-tax as disclosed in the return of
income.”

 

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Income : S. 2(24) of Income-tax Act, 1961 : A.Ys. 1987-88 and 1988-89 : Refund collected by producing bogus TDS certificates is income taxable under residuary head.

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 6 Income : S.
2(24) of Income-tax Act, 1961 :
A.Ys. 1987-88 and
1988-89 : Refund collected by producing bogus TDS certificates is income
taxable under residuary head.

[CIT v. K. Thangamani, 309 ITR 15 (Mad.)]

The assessee was engaged in tax consultancy and
audit work. For the A.Ys. 1987-88 and 1988-89 the Assessing Officer assessed
the refunds received by the assessee on the basis of bogus TDS certificates as
income from other sources. The Tribunal deleted the addition holding that the
amount of refunds received by the assessee by fraudulent means could not be
assessed as income of the assessee.

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

“(i) The expression ‘income’ in S. 2(24) of the
Income-tax Act, 1961 is wide and the object of the Act being to tax income it
has to be given an extended meaning. Any kind of income earned by the assessee
attracts income-tax at the point of earning and tax law is not concerned with
the ultimate event how the income is expended. The Act makes an obligation to
pay tax on all income received. The Act considers income earned legally as
well as tainted income alike.

(ii) When the Tribunal found that the assessee
had indulged in fabricating TDS certificates and got refunds from the
Department, it should not have come to the conclusion that such income was not
taxable. There is a clear factual finding recorded by the Assessing Officer as
well as the Commissioner (Appeals) to the effect that the assessee had
indulged in filing bogus TDS certificates and got refund of the amount from
the Department. It was also the admitted case of the assessee before the
Department as well as the Central Bureau of Investigation during the course of
investigation into the offence that he had indulged in the act of fabricating
TDS certificates and collecting refunds from the Department.”

 

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Educational institution : Exemption u/s. 5 10(23C)(vi) of Income-tax Act, 1961 : Application filed after prescribed time : No statutory bar for condonation : Application for condonation of delay should be considered.

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 5 Educational institution : Exemption u/s.
5 10(23C)(vi) of
Income-tax Act, 1961 : Application filed after prescribed time : No statutory
bar for condonation : Application for condonation of delay should be
considered.



[Padmashree Krutarth Acharya Institute of
Engineering and Technology v. Chief CIT, 309 ITR 13 (Ori.)]

The assessee is an educational institution
eligible for exemption u/s.10(23C)(vi) of the Income-tax Act, 1961. It filed
an application for grant of approval for exemption u/s.10(23C)(vi) of the Act.
The Chief Commissioner rejected the application on the ground that the
application was filed beyond time and the proviso added to S. 10(23C)(vi) did
not empower him to condone the delay.

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

“(i) The Commissioner while deciding the rights
of the parties acts in a quasi-judicial capacity and has to decide the rights
after a hearing. Any authority exercising such quasi-judicial functions should
also have incidental power of condoning delay if there was a justifiable
ground for such condonation. There is no clear statutory bar precluding such
condonation.

(ii) The Commissioner was to decide the
application for condonmation of delay on the merits and then consider the
application for exemption on the merits.”

 


levitra

Busness expenditure : S. 37(1) of Income-tax Act, 1961 : Textile business : Closure of one unit : Retrenchment compensation, interest, PF to employees, legal expenses and reimbursement of loss to PF trust on sale of securities is allowable business expend

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 3 Busness expenditure : S. 37(1) of Income-tax
Act, 1961 : Textile business : Closure of one unit : Retrenchment
compensation, interest, PF to employees, legal expenses and reimbursement of
loss to PF trust on sale of securities is allowable business expenditure.

[CIT v. DCM Ltd., 221 CTR 513 (Del.)]

The assessee was in the business of textile
manufacturing. It closed one of its manufacturing units out of four units. It
paid Rs.8,71,20,781 by way of retrenchment compensation. It had incurred an
expenditure of Rs.1,86,69,703 by way of interest on monies borrowed for the
purpose of payment of retrenchment compensation and PF to the employees of the
closed unit. It had also incurred an expenditure of Rs.3,57,700 as legal
expenses on account of the closure of the unit. The Assessing Officer
disallowed the claim for deduction of the these expenses.

On termination of services of the employees of
the closed unit when the PF dues were required to be paid, the employees PF
trust approached the RPF Commissioner to obtain approval for sale of
Government securities, in order to make payment to the employees. The RPF
Commissioner granted the permission with a caveat that in the event of any
deficiency on sale of securities the burden would have to be borne by the
assessee, in order to assure that the employees would get the rate of interest
equivalent to the rate paid by the Central Government. The loss so incurred by
the employees PF trust was Rs.1,80,20,261 and the same was reimbursed by the
assessee to the trust. The assessee’s claim for deduction of the said
expenditure was rejected by the Assessing Officer relying on the provisions of
S. 14A of the Act. The Tribunal allowed the assessee’s claims.

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

“(i) As found by the Tribunal there was no
closure of business since DCM mill unit was only a part of the textile
manufacturing operations, which continued even after the closure of the DCM
mill unit as the assessee continued in the business of manufacture of textiles
in the three remaining units. It is specifically noted that the assessee
prepared a consolidated P & L a/c and balance sheet of all its manufacturing
units taken together. The control and management of the assessee was
centralised in the head office, and also, the fact that all important policy
decisions were taken at the head office. The Tribunal came to the conclusion
that there was interconnection, interlacing and unity of control and
management, common decision-making mechanism and use of common funds in
respect of all four units. It repelled the arguments of the Revenue for
consideration that the DCM mill unit was a separate business and hence with
the closure of the DCM mill unit, the assessee ought not to be allowed
deduction of the expenses, based on the fact that in respect of the DCM mill
unit the assessee maintained separate books of account and engaged separate
workers. In view of the finding of fact returned by the Tribunal, no fault can
be found with the
reasoning of the Tribunal.

(ii) Expenditure incurred by the assessee company
to make up the deficiency arising on sale of securities by the employees PF
trust in order to ensure that its employees are paid a rate of interest
equivalent to that paid by the Central Government was an expenditure incurred
by the assessee towards its employees and, therefore, provisions of S. 14A
were not applicable.”

 

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Business expenditure : Bonus : S. 36(1)(ii) of Income-tax Act, 1961 : A.Y. 1985-86 : Customary bonus over and above payable under the Bonus Act : Paid for last 10 years as a practice : Eligible for deduction u/s.36(1)(ii) second proviso.

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 4 Business expenditure : Bonus : S. 36(1)(ii)
of Income-tax Act, 1961 : A.Y. 1985-86 : Customary bonus over and above
payable under the Bonus Act : Paid for last 10 years as a practice : Eligible
for deduction u/s.36(1)(ii) second proviso.

[CIT v. Sesa Goa Ltd., 221 CTR 590 (Bom.)]

As a general practice in the business, the
assessee had paid an amount of Rs.18,73,192 by way of bonus to the employees
over and above the statutory bonus prescribed under the Bonus Act and claimed
the deduction. The Assessing Officer disallowed the claim for deduction
holding that it is not permissible u/s.36 of the Income-tax Act, 1961. The
Tribunal allowed the claim.

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

“(i) It is true that wherever a bonus is paid to
an employee in excess or otherwise than what is required to be paid under the
Bonus Act, such a payment is not entitled for deduction automatically, but the
assessee has to satisfy all the three ingredients, namely, the pay of the
employee and the condition of his service; the profits of the business or
profession for the previous year in question; and the general practice in
similar business and profession. The determination of these conditions should
lead to bonus being reasonable, and therefore, entitled to deduction in terms
of second proviso to S. 36(1)(ii).

(ii) In the present case, the assessee had been
paying bonus for the last 10 years otherwise in excess of the Bonus Act and
this had become a practice and the CIT(A) as well as the Tribunal have
recorded the finding that such bonus was payable as a general practice
followed in similar business or profession. The finding in question being a
primary question of fact, there is no reason to interfere with the impugned
order.”

 


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Appellate Tribunal : A.Y. 2001-02 : Order passed beyond four months after hearing and without giving reasons : Quashed as not valid.

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 2  Appellate Tribunal : A.Y. 2001-02 : Order passed
beyond four months after hearing and without giving reasons : Quashed as

not valid.


[Shivsagar Veg Restaurant, 176 Taxman 260 (Bom.)]

For the A.Y. 2001-02 the Tribunal had heard the
assessee’s appeal on 2-6-2005, but the order was passed on 21-10-2005 i.e.,
almost after a delay of more than four months dismissing the appeal without
recording reasons, discussing propositions of law and case law relied upon by
the assessee.

On appeal filed by the assessee the Bombay High
Court set aside the order of the Tribunal for fresh disposal and held as under :

“(i) The Appellate Tribunal being the final author-ity
of facts, it is incumbent upon it to appreciate the evidence, consider the
reasons of the authorities below and assign its own reasons as to why it
disagrees with the reasons and findings of the authorities below. Merely because
the Tribunal happened to be an appellate authority, it does not get the right to
brush aside reasons or findings recorded by the first authority or the lower
appellate authority. It has to examine validity of the reasons given and
findings recorded. Mere recording that the conclusions arrived at did not
require discussion of the case law and other propositions of law is no
consideration. Merely by saying that the findings of the Commissioner (Appeals)
are just, fair and in accordance with the law can hardly tantamount to giving
reasons. The absence of reasons had rendered the impugned order of the Tribunal
unsustainable.

 

(ii) The basic rule of natural justice requires
recording of reasons in support of the order. The order has to be
self-explanatory and should not keep the Higher Court guessing for reasons.
Reasons provide live link between conclusion and evidence and that vital link
is a safeguard against arbitrariness, passion and prejudice.

(iii) Reason is a manifestation of mind of
adjudicator. It is a tool for judging the validity of the order under
challenge. It gives opportunity to the Higher Court to see whether or not the
adjudicator has proceeded on the relevant consideration, material and
evidence.

(iv) Having said so, the inordinate unexplained
delay in pronouncement of the impugned judgment had also rendered it
vulnerable.”

 

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Appeal to CIT(A) : S. 143(1) and S. 246 of Income-tax Act, 1961 : A.Y. 1995-96: CIT(A) allowed appeal in respect of one claim and rejected in respect of another : Not justified : Claims on basis of facts on record should be considered : Tax can be collect

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 1 Appeal to CIT(A) : S. 143(1) and S. 246 of 
Income-tax Act, 1961 : A.Y. 1995-96: CIT(A) allowed appeal in respect of one
claim and rejected in respect of another : Not justified : Claims on basis of
facts on record should be considered : Tax can be collected only as per law.

[Balmukund Acharya v. Dy. CIT, 176 Taxman
316 (Bom.)]

In the return of income for the A.Y. 1995-96 the
assessee had computed long-term capital gain on sale of godown taking the cost
of acquisition as Nil. However, he had not claimed exemption of the capital
gain. The Assessing Officer passed an order u/s.143(1) of the Income-tax Act,
1961 and sent an intimation and demand notice including interest u/ s.234C of
the Act. In appeal before the CIT(A) the assessee raised two grounds. In the
first ground the assessee claimed that the interest liability u/s.234C is not
applicable in the case of capital gain, as there was no obligation for payment
of advance tax. In the second ground the assessee claimed that there is no tax
liability on the capital gain, since the cost of acquisition was Nil. The
CIT(A) allowed the first ground and directed the Assessing Officer to
recalculate the same. The Tribunal rejected the assessee’s appeal.

On appeal by the assessee, the Bombay High Court allowed the
assessee’s claim and held as under : “(i) For the A.Y. 1995-96, appeal lies
against an intimation u/s.143(1).

(ii) The authorities under the Act are under an
obligation to act in accordance with law. Tax can be collected only as
provided under the Act. If any assessee, under a mistake, misconceptions or on
not being properly instructed, is over-assessed, the authorities under the Act
are required to assist him and ensure that only due legitimate taxes are
collected. If a particular levy is not permitted under the Act, tax cannot be
levied by applying the doctrine of estoppel.

(iii) Acquiescence cannot take away from a party the relief
that she is entitled to where the tax is levied or collected without
authority of law. In the instant case, it was obligatory on the part of
the Assessing Officer to apply his mind to the facts disclosed in the
return and assess the assessee, keeping in mind the law holding the field.

 

(iii) One more aspect needs to be touched while
disposing of the appeal. The
Commissioner (Appeals) had entertained appeal in part and rejected in part.
If the appeal is not maintainable, it is not maintainable at all. It cannot
be said that for a particular ground, an appeal is maintainable and for
another it is not. Once the appeal is filed and entertained, then all
grounds can be raised by the appellant requiring consideration. If the
Revenue was of the view that an appeal itself was not maintainable before
the Commissioner (Appeals), in that event, the order of the Commissioner
(Appeals) allowing appeal in part was bad order and that part of the order
ought to have been challenged by the Revenue. The Revenue did not challenge
the said order believing maintainability of the appeal. The Revenue at that
stage could not be allowed to contend otherwise. It could not be allowed to
blow hot and cold. Thus, taking an overall view of the matter and for the
reasons recorded, the appeal preferred by the assessee was very much
maintainable.”

 

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Search and Seizure : Ss. 10(22) and 132(5) of I. T. Act, 1961 : A. Ys. 1984-85 to 1990-91 : Summary assessment u/s. 132(5) : Assessee claiming exemption u/s. 10(22) : Prima facie correctness of claim has to be considered.

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  1. Search and Seizure : Ss. 10(22) and 132(5) of I. T. Act,
    1961 : A. Ys. 1984-85 to 1990-91 : Summary assessment u/s. 132(5) : Assessee
    claiming exemption u/s. 10(22) : Prima facie correctness of claim has to be
    considered.

[Anjum Hami-E-Islam vs. CIT; 310 ITR 37 (Bom)]

    Petitioner Trust was running 12 educational institutions and was entitled to exemption u/s. 10(22) of the Income-tax Act, 1961. In February 1991 search proceedings were carried out in the premises of the Petitioner Trust and fixed deposits worth Rs. 93 lakhs were seized and an order u/s. 132(5) was passed determining the tax liability without considering the exemption allowable u/s. 10(22) of the Act. The Commissioner also rejected the application u/s. 132(11) without considering the claim for exemption u/s. 10(22) of the Act.

    On a writ petition filed by the Petitioner challenging the order, the Bombay High Court held as under :

    “i) When a public trust like the petitioner which ran a number of educational institutions had claimed exemption in view of the provisions of section 10(22) of the Act, the Officer passing orders u/s. 132(5) had to find out at least prima facie as to why and how such trust was not entitled to exemption.

    ii) The order to the extent that he refused to consider the plea of the petitioner for exemption u/s. 10(22) of the Act was liable to be quashed”.

Return : Defect in return : Ss. 139(9) and 292B of I. T. Act, 1961 : Failure by assessee to sign and verify return : Defect could not be cured : Return invalid : Consequent assessment invalid : Tribun

New Page 1

  1. Return : Defect in return : Ss. 139(9) and 292B of I. T.
    Act, 1961 : Failure by assessee to sign and verify return : Defect could not
    be cured : Return invalid : Consequent assessment invalid : Tribun



 


[CIT vs. Harjinder Kaur; 310 ITR 71 (P&H)].

The return filed by the assessee was neither signed by the
assessee nor verified by the assessee. The Tribunal held that the return of
income was not valid and therefore, the consequent assessment order is also
invalid.

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

“i) The provisions of section 292b of the Income-tax Act,
1961, do not authorise the Assessing Officer to ignore a defect of a
substantive nature and therefore, the provision categorically records that a
return would not be treated as invalid, if the same “in substance and effect
is in conformity with or according to the intent and purpose of this Act”.

ii) The return did not bear the signature of the assessee
and had not also been verified by her. Hence, the return was an absolutely
invalid return as it had a glaring inherent defect which could not be cured
in spite of the deeming effect of section 292B”.

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Reference to Valuation Officer : S. 55A of I. T. Act, 1961 : A. Y. 1996-97 : Reference to Valuation Officer can be made only after AO records opinion that the value had been underestimated by the assessee: Reference before filing of return by assessee : N

New Page 1

  1. Reference to Valuation Officer : S. 55A of I. T. Act,
    1961 : A. Y. 1996-97 : Reference to Valuation Officer can be made only after
    AO records opinion that the value had been underestimated by the assessee:
    Reference before filing of return by assessee : Not valid.



 


[Hiaben Jayantilal Shah vs. ITO; 310 ITR 31 (Guj)].

For the A. Y. 1996-97, the petitioner assessee had filed
the return of income on 27.08.1996. The assessee had computed capital gain by
adopting the market value of the asset as on 01.04.1981, determined by the
registered valuer to be the cost of acquisition by exercising option u/s.
55(2) of the Income-tax Act, 1961. The assesee received a notice from the
Valuation Officer informing that a reference was made by the Assessing Officer
on 26/04/1996 u/s. 55A of the Act.

On a writ petition filed by the assessee challenging the
reference, the Gujarat High Court held as under :

“i) Clause (b) of section 55A of the Income-tax Act,
1961, can be invoked only when the value of the asset claimed by the
assessee is not supported by the valuation report of a registered valuer.
For invoking section 55A of the Act, there has to be a claim made by the
assessee, before the Assessing Officer can record his opinion either under
clause (a) or clause (b) of section 55A of the Act to make a reference to
the Valuation Officer.

ii) In so far as the fair market value of the property as
on 01/04/1981, was concerned, the petitioner had claimed it at a sum of
Rs.6,25,000 as per the registered valuer’s report. Therefore, the Assessing
Officer was required to form an opinion that the value so claimed was less
than the fair market value. The estimated value proposed by the Valuation
Officer was shown at Rs.3,97,000 which was less than the fair market value
shown by the assessee. Therefore, clause (a) of section 55A of the Act could
not be made applicable.

iii) Clause (b) of section 55A of the Act can be invoked
only in any other case, namely, when the value of the asset claimed by the
assessee was not supported by an estimate by a registered valuer. In the
facts of the present case, clause (b) of section 55A of the Act also could
not be invoked.

iv) The reference was made on 26/04/1996, whereas the
return of income had been filed by the assessee only on 27/08/1996. Hence on
the date of making the reference by the Assessing Officer, no claim was made
by the assessee and the Assessing Officer could not have formed any opinion
as to the existence of prescribed difference between the value of the asset
as claimed by the assessee and the fair market value. Therefore also, the
provisions of section 55A of the Act, could not be resorted to.

v) The only ground on which reference was made to the
Valuation Officer was that the value declared by the assessee as on the date
of the execution and registration of the sale deed was lower by more than
25%. There was no provision in the Act which permits the Assessing Officer
to disturb the sale consideration, at least section 55A of the Act could not
be invoked for the said purpose.

vi) The reference to the valuation officer was not
valid”.

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Business expenditure : Disallowance u/s. 40A(2) of I. T. Act, 1961 : A. Ys. 1991-92 and 1992-93: Incentive commission paid to sister concern : Sister concern paying tax at a higher rate : Not a case of evasion of tax: Deduction to be allowed.

New Page 1

  1. Business expenditure : Disallowance u/s. 40A(2) of I. T.
    Act, 1961 : A. Ys. 1991-92 and 1992-93: Incentive commission paid to sister
    concern : Sister concern paying tax at a higher rate : Not a case of evasion
    of tax: Deduction to be allowed.



 


[CIT vs. Indo Saudi Services (Travel) P. Ltd., 310
ITR 306 (Bom)].

The assessee was a general sales agent of a foreign airline
S. For the A. Ys. 1991-92 and 1992-93 the Assessing Officer found that the
incentive commission paid by the assessee to the sister concern was half
percent more than that paid to other sub-agents. Relying on the provisions of
section 40A(2) of the Income-tax Act, 1961, the Assessing Officer disallowed
the excess commission paid to the sister concern at the rate of half percent.
The Tribunal deleted the additions.

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

“i) Under the CBDT Circular No. 6-P, dated 06/07/1968, it
is stated that no disallowance is to be made u/s. 40A(2) in respect of the
payments made to the relatives and sister concerns where there is no attempt
to evade tax.

ii) The learned Advocate appearing for the appellant was
not in a position to point out how the assessee evaded payment of tax by the
alleged payment of higher commission to its sister concern since the sister
concern was also paying tax at higher rate and copies of the assessment
orders of the sister concern were taken on record by the Tribunal.

iii) In view of the aforesaid admitted facts we are of
the view that the Tribunal was correct in coming to the conclusion that the
Commissioner of Income-tax (Appeals) was wrong in disallowing half percent
commission to the sister concern”.

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Appeal to Appellate Tribunal : Fees : S. 253(6) of I. T. Act 1961 : Appeal against levy of penalty : Appeal fees is Rs.500 and not based on income assessed : Tribunal calling for fees based on income assessed : Not proper.

New Page 1

Reported :

  1. Appeal to Appellate Tribunal : Fees : S. 253(6) of I. T.
    Act 1961 : Appeal against levy of penalty : Appeal fees is Rs.500 and not
    based on income assessed : Tribunal calling for fees based on income assessed
    : Not proper.

 

[Dr. Ajit Kumar Pandey vs. ITAT; 310 ITR 195 (Pat)].

In respect of an appeal filed by the assessee before the
Tribunal, against levy of penalty u/s. 271 of the Income-tax Act, 1961, the
assessee had paid Rs.500 as appeal fees. The appeal was decided ex parte.
The assessee applied for restoration of the ex parte order. The
Tribunal agreed to recall the ex parte order and to decide the appeal
on merits provided the assessee furnished the deficit court fee of Rs.8,330.

The assessee challenged the order by filing a writ
petition. The Patna High Court allowed the writ petition and held as under :

“i) In the case of an appeal where the total income of
the assessee is ascertainable from the appeal itself, i.e. when the
appellant was seeking to challenge the assessment of his total income, fees
as mentioned in clauses (a), (b) and (c) would be required to be paid.

ii) Clause (d) deals with other appeals. Imposition of
penalty u/s. 271 of the Act had no connection or bearing with the total
income of the assessee. If a person aggrieved by an order imposing penalty,
approaches the Tribunal by preferring an appeal, imposition of penalty
having no nexus with the total income of the assessee, it would not be
discernible what is the total income of the appellant and accordingly such
an appeal would be covered by clause (d).

iii) The important words used in clauses (a), (b) and (c)
of sub-section (6) of section 253 are ‘total income of the assessee’.
Therefore that may not be discernible.

iv) The order of the Tribunal was liable to be set aside
and the appeal was remitted for decision on merits.”

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Business expenditure : Deduction u/s. 37(1) of I. T. Act, 1961 : A. Y. 2000-01 : Provision for liability is deductible if there is an element of certainty that it shall be incurred : Provision for ‘long service award’ is allowable as deduction.

New Page 1

Reported :

  1. Business expenditure : Deduction u/s. 37(1) of I. T.
    Act, 1961 : A. Y. 2000-01 : Provision for liability is deductible if there is
    an element of certainty that it shall be incurred : Provision for ‘long
    service award’ is allowable as deduction.



 


[CIT vs. Insilco Ltd.; 179 Taxman 55 (Del)].

The assessee company had evolved a scheme whereby,
employees who rendered long period of service to the assessee, were made
entitled to monetary awards at various stages of their employment equivalent
to a defined period of time. On the basis of actuarial calculation the
assessee made provision for ‘long service award’ payable to its employees
under the scheme and claimed deduction of the same. The Assessing Officer
disallowed the claim on the ground that the grant of award was at the
discretion of the management and therefore, it could not be said to be a
provision towards ascertained liability. The Tribunal allowed the assessee’s
claim.

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

“i) There was no merit in the submission of the revenue
that the liability of the assessee under the long service award scheme was
contingent as the payment under the said scheme was dependent on the
discretion of the management. It is well-settled that if the liability
arises within the accounting period, the deduction should be allowed though
it may be quantified and discharged at a future date. Therefore, the
provision for a liability is amenable to a deduction, if there is an element
of certainty that it shall be incurred and it is possible to estimate
liability with reasonable certainty even though actual quantification may
not be possible, such a liability is not of a contingent nature.

ii) In the instant case, since the provision for ‘long
service award’ was estimated based on actuarial calculations, the deduction
claimed by the assessee had to be allowed.”

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Collection of tax at source : S. 206C of I. T. Act, 1961 : Tax not collected by petitioner during period of stay by High Court : No failure to collect : No liability to pay u/s. 206C(6).

New Page 1

Unreported :

  1. Collection of tax at source :
    S. 206C of I. T. Act, 1961 : Tax not collected by petitioner during period of
    stay by High Court : No failure to collect : No liability to pay u/s. 206C(6).

 

[The Satpuda Tapi Parisar Sahakari Sakhar Karkhana Ltd.
vs. CIT (Bom); W. P. No. 3357 of 1996; Dated 13/04/2009.].

The petitioner is a co-operative sugar factory and is a
manufacturer of country liquor. When the provisions of section 206C of the
Income-tax Act, 1961 were made applicable to the sale of country liquor, the
purchasers of country liquor challenged the provision by filing writ
petitions. The High Court granted stay of the operation of the provision and
the petitioner was directed by the High Court not to collect tax u/s. 206C in
respect of the sale of country liquor to such purchasers. Subse-quently, the
stay was vacated by the High Court. In respect of such cases the petitioner
did not collect tax on such sales only during the period of stay. For the
remaining period and in all other cases the petitioner had collected tax and
had deposited it in the treasury. After the stay was vacated the ITO Nashik
held that during the period of stay the petitioner was required to collect tax
at source of Rs.25,40,738. He therefore held that the petitioner is liable to
pay the said amount u/s. 206C(6) in spite of the fact that the petitioner had
not collected the amount in view of the stay order passed by the High Court.
Accordingly, he raised a demand of Rs.25,40,738 u/s. 206C(6) of the Act. The
Commis-sioner of Income-tax dismissed the revision petition.

The Bombay High Court allowed the writ petition challenging
the said order and the demand and held as under :

“i) The short question that we are called upon to
consider is whether considering the interim relief granted by this Court
whereby the petitioner herein was restrained from collecting the tax from
the purchasers, would invite the provisions of section 206C of the Act.

ii) U/s. 206C(1) every person, being a seller, had to
collect from the buyer of any goods of the nature specified in clause (2) of
the Table a sum equal to a percentage specified in the said Table. Under
sub-section (6) of section 206C any person responsible for collecting tax in
accordance with the provisions of this section shall, notwithstanding such
failure, be liable to pay the tax to the credit of the Central Government in
accordance with the provisions of sub-section (3). Sub-section (3) of
section 206C sets out that any person collecting any amount has to credit
the same to the credit of the Central Government as prescribed.

iii) On an order passed by this Court restraining the
petitioner from collecting the tax for the period, from the date of stay
till its vacation, is the petitioner liable pursuant to the provisions of
section 206C(6) ? The language used is any person responsible for collecting
the tax and who fails to collect the tax. It is true that the petitioner
being a seller is normally responsible. However, does it amount to ‘failure
to collect’ when he was restrained from collecting the tax ? Would he then
be responsible to collect the tax ? In the instant case admittedly
considering the language of the interim relief itself the petitioner who
otherwise was responsible for collecting the tax was prevented from
collecting the tax. Once the petitioner was prevented from collecting the
tax, it cannot be said that he was ‘a person responsible for collecting the
tax’. The responsibility would have arisen if he could collect the tax. The
expression ‘responsible’, therefore, has to be read in the context of
statutory duty to collect which the petitioner was bound to perform by
virtue of the provisions.

iv) The order of the Court would be binding and had to be
complied with. The issue of collection would arise at the point of sale. The
interim order was a blanket order of restriction from collecting. The
question of the petitioner, therefore, collecting the tax and therefore,
being responsible would not arise. There was bar on him to collect the tax.
If he could not collect the tax at the point of time of order, the question
of he depositing the sum u/ss. (3) or (6) of section 206C would not arise
till such period the disability disappeared. Alterna-tively on account of
the interim relief it cannot be said to be ‘failure to collect’. Failure
would contemplate an act of omission on the part of the party. The party was
aware that he had to collect the tax. This Court however, at the instance of
the buyer restrained him from collecting the tax.

v) In the instant case the disability disappeared on the
stay being vacated by this Court. Thus for the period when the stay was in
operation, as the petitioner was prevented from collecting the tax it cannot
be said that he would be liable under sub-section (6) of section 206C. A
duty was cast on the petitioner by operation of law. Petitioner could not
discharge that duty by virtue of an order of this Court. The question,
therefore, of calling on him to pay the amount which he was disabled to
collect would be illegal. If the petitioner had collected the tax it would
have been in contempt of this Court. We are, therefore, clearly of the
opinion that even though it can be said that considering the provisions of
section 206C a duty had been cast on persons like the petitioner to collect
the tax, by virtue of the interim relief he could not collect the tax for
the relevant period. Section 206C would, therefore, not be attracted.”

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Churn and Changes in the Profession

Editorial

The year gone by was a significant one in many ways — one
witnessed the severe worldwide economic downturn, failure of large international
financial services institutions, and the terrorist attack on Mumbai. It has also
been a year which has witnessed significant acquisitions of established and
reputed medium-sized chartered accountancy firms by the Big Four worldwide
accounting firms in India. One hears rumours of considerations running into
multiples of the gross turnover being paid for the acquisitions.

Earlier, in the 1990s, one had witnessed significant
recruitment of individual practising chartered accountants by the Big Four. A
few large firms had joined the ranks of the Big Four. A large number of fresh
chartered accountants were recruited by them since then. Acquisition of
mid-sized firms has been a new trend in India. One also now witnesses the
practice of job hopping becoming common in the ranks of the Big Four, to such an
extent that whenever one meets a friend who’s part of the Big Four, one is
tempted to ask “With whom are you currently working ?”.

The changing trend of acquisition of medium-sized practices
indicates a trend of consolidation of the accounting profession. With practice
becoming even more demanding and challenging, the need to have skills in
different spheres of practice is becoming all the more imperative. The
significant influx of foreign companies in the industrial and services sectors
has increased client expectations from the profession regarding quality of
service and speed of response. Therefore, every accountancy firm, whether large,
medium or small, feels the need to have professionals with high level of skills
in different areas of practice. Given the shortage of such professionals,
obviously firms are willing to go to great lengths to acquire such
professionals. The larger the acquirer firm, the greater is its need and
willingness to pay better remuneration and acquisition consideration.

With many of the significant Indian firms having been
acquired, does such acquisition and consolidation signal the end of the road for
small and medium practices ? It is no doubt true that, given the appetite of the
Big Four for acquisitions and recruitment, many such medium and small firms are
finding it increasingly difficult to attract and retain good people. However,
the very high scale of fees charged by the Big Four makes the fees charged by
local Indian firms seem highly attractive to medium-sized corporates, which
desire value for money. The challenge for local firms is really to ensure the
quality of their service, while charging reasonably well so as to be able to pay
employees well, while retaining enough differentiation from the fees charged by
the Big Four, to attract clients.

The worldwide experience shows that the largest corporates
normally prefer the Big Four, at least for statutory audits. The fees charged by
the Big Four are also significantly higher than the fees charged by other firms.
The number of people employed by the Big Four normally exceeds the number of
people employed by other firms.

On the other hand, with the increasing need being felt for
segregation of the auditor and the consultant, there is now potential for
rendering non-audit services even to large corporates. Further, to some extent,
the personalised services which a medium or small firm can provide to a client
can give it an edge over a large firm. A niche practice will always have a good
scope.

One also needs to keep in mind that being a part of the Big
Four is not an unmixed blessing, with only high remuneration and high-quality
clients. It also brings with it pressures to perform, pressures to market one’s
services and bring in clients, etc. Burnout due to such pressures is also a
distinct possibility, with early retirement, even with the retirement age being
far lower than in other industries. To a great extent, being a part of the
practice of a Big Four firm requires one to have the attitude of an employee of
a business, rather than that of a traditional professional.

There are many of us who choose not to be a part of the
hectic life that being a part of the Big Four entails. With the Indian economy
still growing, though at a slower pace, there is potential for such
professionals as well. There is enough work available for accounting
professionals at all levels. It only requires a gearing up by each of us in
terms of quality, networking and knowledge sharing (and perhaps joining hands)
with other similar-minded professionals. The Society provides a platform for
such interaction to each one of us, which we should take full advantage of.

Wishing each one of you a happy and professionally fulfilling new year !

Gautam Nayak

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Time for Introspection & Action

Editorial

The Satyam fraud has rocked not just the entire Indian
corporate world, but has had its echoes worldwide. It has raised various issues
regarding the role of independent directors and auditors. Our profession, so far
seen as having a low profile, is the subject matter of heated discussion in the
media as well as in the corporate world. In the public perception, the rating of
our profession has touched new lows. Though all the facts relating to the fraud
are not yet fully out in the open (and the trial by the media does seem
premature), the fundamental issues raised by the very revelation of the fraud
cannot be swept under the carpet, and must be tackled head-on by our profession.
We need to do a significant amount of soul-searching, if we desire the
profession to retain the esteem that it has justifiably been held in so far.

Did the auditors follow the prescribed auditing and assurance
standards ? If so, are the auditing and assurance standards in need of
revision ? Advances in computer imaging technology have facilitated forgery. In
that light, do our auditing procedures need any change ? Are we laying too much
stress on adherence to standard procedures leaving no room for exercise of
judgment ? Are the auditing and assurance standards in existence only on paper
or are they being generally adhered to by the profession ?

If the auditing and assurance standards were not followed,
the concerned chartered accountants should certainly be taken to task. Given the
magnitude of this fraud, and its worldwide implications, it was imperative that
not only should action have been taken but that it should be seen to have been
taken swiftly and after a thorough enquiry. It appears that the Institute is
restrained from acting swiftly by its rules and regulations. Further, it seems
that the Institute, which grants the right to use a firm name, does not have the
powers to bring to task an errant firm, if its partners act in a manner contrary
to the prescribed procedures. The Institute is bound by the laws and rules and
regulations framed by the Government. Should the Government not remove the
fetters of the Institute by amending the laws and regulations governing it, so
that it can function more efficiently and effectively ?

The public expectations from an audit that it should be
capable of detecting any significant fraud, should provide warning signs of
collapse, etc., are quite different from what a statutory audit can really do on
account of the fact that there are inherent limitations in an audit. Have public
expectations from audit been raised to an unduly high level, to justify the
higher audit fees being charged ? If so, is the profession itself guilty of
misselling its services ?

Is it that the system of declaration of quarterly results by
listed companies, within one month of the end of the quarter, does not provide
enough time to carry out a proper and meaningful audit following all audit
procedures ? The audit of Satyam’s annual accounts was completed within 21 days
of the year end. Are we capable of resisting management pressures to declare
audited results within a short time span of the end of the accounting period ?

Are unethical practices seeping in our profession,
threatening the very existence of the profession ? If so, is our profession
taking any significant or meaningful measures to arrest such practices ? Is our
disciplinary mechanism strong and fast enough to act as a deterrent to corrupt
practices ? What other measures should be taken to tackle corrupt practices by
members ?

Is it that the auditors are being made a scapegoat for acts
done by the promoter in connivance with politicians, by twisting the facts in a
so-called confession ? If so, should attempts not be made by the profession to
bring the true facts out in the open at the earliest, so as to expose the
businessman-politician nexus ?

Is independence of auditors impaired by the fact that their
appointment and remuneration are de facto controlled by the management ? Should
appointment and fixation of remuneration of auditors be done by an independent
body ? Does consulting for an auditee affect the independence of an auditor ?
Should there be rotation of auditors every three years or every five years ? Or
should there be compulsory rotation of audit partners ? Should all companies
above a particular size have joint auditors ?

All these and many more issues can no longer be ignored or
brushed aside if we wish to continue to be members of a respected profession.
The Satyam episode should act as a warning to all of us that as a profession, we
have to act and act quickly, decisively and dispassionately in addressing all
these issues. While doing so, the public also needs to be made aware of such
measures taken, so that the confidence of the public, on which the very
existence of our profession is based, is restored and retained.

Gautam Nayak

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Introduction of IFRS

Editorial

Many centuries ago, Indian
saint and philosopher Dnyaneshwar said ‘Hey Vishwachi Maazhe Ghar’ i.e., this
entire world is my home. Today, in the era of globalisation the world has, in
fact, become an economic village. Free flow of capital between various political
and economic jurisdictions has become a reality. On this background, a set of
robust accounting standards that results in transparent and informative
financial statements which are applicable across various jurisdictions, will
bring about comparability of financial statements reducing attendant risks and
costs to the investors and others. The Financial Accounting Standards Board (FASB)
of USA and the International Accounting Standards Board (IASB) have committed to
bring about convergence between International Financial Reporting Standards (IFRS)
and US GAAP. The European Union has adopted IFRS through the process of
endorsement.

India started opening its
economy over a decade ago. Consequentially, there is a substantial increase in
inbound and outbound investments. Considering these developments, India has no
alternative but to align itself with the developments in the field of accounting
in the rest of the world.

Towards this objective, the
Institute of Chartered Accountants of India (ICAI), in 2007, published a Concept
Paper on Convergence with IFRS in India. It decided to adopt IFRS
for public interest entities i.e., listed companies, banks, insurance companies and other large-sized
entities from accounting periods beginning on or after 1st April, 2011. It
proposed :



(a)
The Accounting Standards Board (ASB) should
determine whether each IFRS meets specified criteria set out in local
legislation/regulations;


(b)
ASB should endorse the IFRS in the form of IFRS-equivalent
Indian Accounting Standards. In rare circumstances, it may be necessary to
carve out certain IFRS requirements keeping in view the existing local
conditions in the public interest;


(c)
ASB should present the Indian Accounting
Standards so developed to National Advisory Committee on Accounting Standards
(NACAS) for its approval for the purpose of Government notification.


The ICAI, in the Concept Paper
also proposed to formulate a separate standard for Small and Medium-sized
Entities (SMEs) based on standards that may be issued by the IASB for the SMEs.

Although, the present Indian
Accounting Standards are based on IFRS and are fairly consistent with them,
there are significant differences between Indian GAAP and IFRS. For example,
most Indian companies provide for depreciation at the rates prescribed in
Schedule XIV of the Companies Act. Under IFRS, depreciation is based only on the
useful life of an asset. AS 14 — Accounting for Amalgamations permits using the
pooling of interest method. It also permits accounting to be done based on the
treatment prescribed in the scheme approved by the High Court. This will not be
permissible under IFRS. Definition of subsidiary under the Companies Act is at
variance with the definition of subsidiary under IFRS. There is a conceptual
difference in AS 22 — Accounting for Taxes on Income and the corresponding IFRS.
Accounting for preference shares could also be different under IFRS.
Presentation of financial statements under IFRS is different from the form in
Schedule VI of the Companies Act. Concept of ‘Comprehensive Income’ is alien to
Indian GAAP.

Adopting IFRS will require
changes in the various laws, regulations and rules. The Ministry of Corporate
Affairs (MCA) needs to spell out its strategy in this respect. It needs to
clarify whether India would adopt IFRS and Interpretations issued by the
International Financial Reporting Interpretations Committee (IFRIC) or it will
issue separate standards which converge with IFRS. The Companies Bill, 2009
proposes that a National Advisory Committee on Accounting and Auditing Standards
will be constituted to advise the Central Government on formulation and laying
down of accounting and auditing policies and standards. Effectively, the Central
Government will lay down the standards and ICAI will only be consulted by the
National Advisory Committee. Tax authorities need to consider the impact of
adopting IFRS and whether adoption will bring about further diversion between
the reported income and the taxable income leading to increased litigation in
the field of direct taxes. All regulators — SEBI, IRDA, Reserve Bank, MCA need
to deliberate on IFRS at the earliest.

IFRS themselves are not free
from criticism. IFRS are moving towards ‘fair value’ based accounting. In the
context of financial instruments, IFRS have come under substantial criticism.
There is a section that believes that valuation of financial assets at ‘fair
value’ or current market value aggravated the recent financial crisis. As a
result, very recently, the European Commission postponed the application of
first stage of IFRS 9 — Financial Instruments. European Central Bank and
European regulators believe that accounting rules should be a tool to ensure
economic and financial stability. Back home, the recent amendment to ‘AS 11 —
The Effects of Changes in Foreign Exchange Rates’ permitting amortisation of
certain foreign currency fluctuation differences, is an example of using
accounting rules to attempt to ensure economic and financial stability. This
would not be possible once IFRS are adopted.

IFRS themselves are under the
process of revision. There are various projects undertaken by IASB which will
bring about further changes in IFRS. Thus, the goal of convergence or
harmonisation itself is like shooting a moving target. If MCA decides to issue
separate accounting standards that converge with IFRS, the process will be even
more difficult, but India will have retained the right to make changes in IFRS
as applicable in India, where necessary.

The International Organisation
of Securities Commission (IOSCO) has a significant influence in formulation of
IFRS. These standards are therefore not necessarily suitable for SMEs
considering the cost of compliance and sophistication involved. Realising this,
IASB has recently issued a separate standard for application by SMEs. MCA, ICAI
and other stakeholders need to discuss the desirability or otherwise of its
adoption in India.

In the whole process, the accounting and auditing profession should not be caught unawares. The Journal has been publishing articles on IFRS for some time now. BCAS is celebrating December as ‘IFRS month’. In line with that, this issue of the Journal focusses on IFRS with three articles on the subject.

Experience shows that the Government issues notifications making new regulations only at the last moment and when infrastructure is still not fully in place. However, considering the importance of and complexities involved in the application of IFRS, one hopes that MCA will bring clarity to the issue at the earliest and make the transition to IFRS as smooth as possible.

Ordinary Taxpayers or Superhumans ?

Editorial

Our tax laws are replete with
instances where taxpayers are required to do acts which are near impossible,
which are beyond their powers, or for which they have to go to extraordinary
lengths. Not only that, failure to comply with such provisions attracts either
additional taxes, interest or penalties. Unfortunately, with the passage of
time, tax authorities tend to take the provisions at their face value and
compliance with them by taxpayers for granted. One hoped that the recent budget
would rationalise some of these provisions, but on the contrary, some new
provisions have added to the taxpayers’ burden.

Let us look at some of the
ridiculous provisions as interpreted by tax authorities :


  • A taxpayer is expected to accurately estimate
    his income for the year and pay taxes in advance even on unanticipated income
    which may arise towards the end of the year — else he has to pay interest
    thereon. Tax authorities interpret advance tax provisions as requiring even a
    new company set up towards the end of the year to pay advance tax even before
    it comes into existence !




  • A person required to deduct tax at source on
    behalf of the Government by provision of law, is supposed to obtain and
    mention the permanent account number (PAN) of each person to whom he is making
    payments subject to TDS, even though he has no statutory powers to force such
    person to disclose his PAN.




  • Taxpayers are expected to anticipate
    retrospective amendments many years in advance, such as the recent one
    relating to provision for diminution in value of assets for computing book
    profits under MAT, and compute their income on that basis. Else, they are
    liable to pay not only taxes due to such amendments, but also interest for
    non-payment of such taxes earlier.




  • Every year, each tax deductor is supposed to be
    aware of the daily actions of the President of India and ensure that the
    amended rates are applied from the very day that the President of India gives
    his/her assent to the Finance Bill !




  • Every foreign company or non-resident paying any
    amount of taxable income to an Indian resident (other than professional fees
    to lawyers or CAs) is expected to deduct tax at source from such payment, and
    for that purpose obtain a PAN, a TAN, file TDS returns, etc., even though such
    foreign company/non-resident may have no office or agent or any presence in
    India and therefore not even be aware of such provisions. Failure to comply
    could result in payment of interest, penalty or prosecution of the foreign
    company ! All this on account of having the misfortune of having had stray or
    even one-time transactions with an Indian resident !



Some of the additions made by
the recent budget to this list are :


  • Every individual or HUF buying an immovable
    property or shares and securities or a work of art should be a valuation
    expert and know in advance what the accurate ‘fair market value’ of such
    property is on the date of purchase (even though such value may be a mere
    estimate), should ensure that he buys the property or asset only at that
    price, and in case he is getting it at a lower price, he should either insist
    on paying the higher price or may have to pay tax on the discount that he is
    getting !




  • An individual or HUF agreeing to purchase an
    immovable property which is under construction, is expected to anticipate at
    the time of booking, the ‘fair market value’ of the immovable property which
    would be prevalent when the purchase is completed, and ensure that the
    property purchase price is fixed only at that amount. If the fair market value
    is higher when the property is completed and handed over, he may have to pay
    taxes on the difference between such value and his price determined at the
    time of booking.




  • Every business having a turnover of less than
    Rs.40 lakhs is expected to know in advance whether its turnover for the entire
    year would exceed Rs.40 lakhs or not. If it is fortunate in growing its
    business, and towards the end of the year its turnover exceeds Rs.40 lakhs, it
    would be liable for interest for non-payment of advance tax in the first two
    instalments, which it did not pay based on its anticipation that it was
    covered under the presumptive scheme of S. 44AD. Of course, it always has the
    choice of choosing to refuse to do additional business so that its turnover
    does not cross Rs.40 lakhs !




  • All small businesses, such as tuitions,
    hair-cutting saloons, commission agents, traders in derivatives or shares,
    etc., should ensure that their profit from such transactions is at least 8% or
    be willing to pay taxes on 8% of the turnover/receipts, or else bear the cost
    of a compulsory audit !




  • Developers of large residential projects need to
    ration out the flats that they sell to companies. If any company approaches
    them to acquire a large number of flats for staff quarters, even in such
    difficult times for the real estate industry, the developers have to choose
    between refusal to sell more than one flat to the company, and the tax holiday
    u/s.80-IB.



There are many more such
provisions, which are not listed here for want of space. One hopes that such
ridiculous provisions would not find a place in the new Direct Taxes Code.
However, going by experience in the recent past, it is more likely that more
irrational provisions will be added to the existing ones ! I would love to be
proved wrong in this forecast !

Gautam Nayak

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Search and seizure : Penalty u/s.158BFA(2) : Is directory and not mandatory : AO has discretion to levy or not to levy penalty

New Page 1

54 Search and seizure : Penalty
u/s.158BFA(2) of Income-tax Act, 1961 : Is directory and not mandatory : AO has
discretion to levy or not to levy penalty.


[CIT v. Dodsal Ltd., 218 CTR 430 (Bom.)]

In this case penalty imposed by the Assessing Officer
u/s.158BFA(2) of the Income-tax Act, 1961 was deleted by the CIT(A) and the
order of the CIT(A) was upheld by the Tribunal. In appeal filed by the Revenue
before the Bombay High Court the following questions were raised :

“(i) Whether on the facts and in the circumstances of the
case and in law, the Tribunal is correct in deleting the penalty levied
u/s.158BFA(2) of the Income-tax Act, 1961 without appreciating the fact that the
assessee has failed to comply with the conditions stipulated in the 1st proviso
to S. 158BFA(2) of the Income-tax Act, 1961 ?

(ii) Whether on the facts and in the circumstances of the
case and in law, the Hon’ble Tribunal is correct in interpreting the condition
stipulated in the 1st proviso to S. 158BFA(2) of the Income-tax Act, 1961 as
directory and not mandatory ?”

 

The Bombay High Court upheld the decision of the Tribunal and
held as under :

“(i) The terminology of S. 158BFA(2) makes it clear that
there is a discretion in the Assessing Officer to direct payment of penalty.
The proviso supports this interpretation. Only if the authority decides to
impose penalty, then it will not be less than the tax leviable, but shall not
exceed three times the tax so leviable.

(ii) It is therefore, not possible to accept the submission
on behalf of the Revenue that once the Assessing Officer comes to the
conclusion that there is breach of the mandate of S. 158BFA(1), then the
penalty should be imposed. Merely because the expression used is “shall not be
less than the amount of tax leviable or not exceeding three times the tax”,
does not result in reading the first part of the Section as mandatory. The
proviso to the sub-section makes it clear that there is discretion conferred
on the CIT(A) for the reasons which are set out therein.

(iii) In the instant case, both the CIT(A) and the Tribunal
have recorded reasons for exercise of their discretion. The Revenue has not
challenged the said finding of fact as to the exercise of discretionary power.
Therefore, the view taken by the Tribunal that the Section is directory and
not mandatory is upheld.”

Reassessment : S. 147 and S. 148 : Reason to believe : AO recording reasons and AO issuing notice u/s.148 different : Notice not valid.

New Page 1

52 Reassessment : S. 147 and S. 148 of
Income-tax Act, 1961 : A.Ys. 1990-91 and 1991-92 : Reason to believe : AO
recording reasons and AO issuing notice u/s.148 different : Notice u/s.148 not
valid.


[Hynoup Food and Oil Industries Ltd. v. ACIT, 307
ITR 115 (Guj.)]

For the A.Ys. 1990-91 and 1991-92 the Assessing Officer
issued notices u/s.148 for reopening the assessments. But the Assessing
Officer who had issued the notice was different from the officer who had
recorded the reasons.

 

On a writ petition filed by the assessee challenging the
validity of the notice u/s.148, the Gujarat High Court quashed the notice and
held as under :

“(i) The opening portion of S. 147 of the Income-tax Act,
1961, stipulates that action may be initiated if the Assessing Officer has
reason to believe that any income chargeable to tax has escaped assessment
for any assessment year. This provision must be read in conjunction with S.
148(2) of the Act which mandates that the Assessing Officer shall, before
issuing any notice u/s.148 of the Act, record his reasons for issuing the
notice. It is, therefore, clear that the officer recording the reasons
u/s.148(2) and the officer issuing notice u/s.148(1) has to be the same
person.

(ii) In the instant case, the officer who had issued the
notice u/s.148 was different from the officer who had recorded the reasons
and hence, the notices for both these years were invalid and deserved to be
quashed.”

 


 


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S. 139 and S. 140 : Return signed by assessee was filed after his death. Not a valid return.

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53 Return of income : Signature : S. 139 and
S. 140 of Income-tax Act, 1961 : A.Y. 2003-04 : Return of income signed by
assessee was filed after his death. Not a valid return.



[CIT v. Moti Ram, 175 Taxman 27 (P&H)]

The assessee expired on 14-9-2003. Before death, the
assessee had signed the return of income for the A.Y. 2003-04. The return was
filed on 28-11-2003 i.e., after his death. The Assessing Officer
completed the assessment u/s.143(3) of the Income-tax Act, 1961 in spite of
contention raised by the legal heirs that the return filed by the assessee was
null and void. The CIT(A) cancelled the assessment holding that the return
filed in the name of the assessee after his death was null and void ab
initio, and hence any action taken on such a return was also null and
void. The Tribunal upheld the decision of the CIT(A).

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

“(i) In the instant case the return was filed on
28-11-2003. On that day, the assessee had already expired. The return filed
with the signatures of the assessee after his death cannot be taken as valid
return filed by the assessee himself. Undisputedly, the return was neither
signed, nor verified by the legal heirs of the deceased.

(ii) The return filed in this case was null and void. In
our opinion, no valid assessment could have been made on the basis of an
invalid and void return.”

 


 


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Ss. 147, 148 and Ch. XIV-B : Block period ending on 24-11-1995 : No jurisdiction to reopen block assessment by issuing notice u/s.148.

New Page 1

51 Reassessment : Block assessment : S. 147,
S. 148 and Ch. XIV-B of Income-tax Act, 1961 : Block period ending on
24-11-1995 : There is no jurisdiction to reopen a block assessment by issuing
notice u/s.148.


[Cargo Clearing Agency (Gujarat) v. JCIT, 307 ITR 1 (Guj.);
218 CTR 541 (Guj.)]

Pursuant to a search on 24-11-1995 block assessment was made
u/s.158BD of the Income-tax Act, 1961 in the case of the petitioner.
Subsequently, a notice u/s.148 was issued by the Assessing Officer for reopening
the block assessment. The petitioner filed writ petition challenging the
jurisdiction to reopen the block assessment by issuing notice u/s.148 of the
Act.

The Gujarat High Court allowed the petition and held as
under :

“(i) When one considers the entire scheme relating to the
procedure for assessment/reassessment as laid down in the group of Sections
from S. 147 to S. 153 and compares with the special procedure for assessment
of search cases under Chapter XIV-B of the Act, it becomes apparent that the
normal procedure laid down by the Chapter XIV of the Act has been given a
go-by when Chapter XIV-B itself lays down that the said Chapter provides for a
special procedure for assessment of search cases. Clause (f) under Ss.(1) of
S. 158BB of the Act provides for reducing the aggregate of the total income
computed for the block period by the aggregate of the total income, in a case
where an assessment for undisclosed income had been made earlier under clause
(c) of S. 158BC, on the basis of such assessment. In other words, it only
means that where a previous assessment has been framed under Chapter XIV-B of
the Act, the aggregate of such total income assessed for the block period in
case of a search where the block period is a different block from the earlier
block period, has to be deducted for assessing for a subsequent block period.

(ii) When this provision is read in the context of S.
158BC, more particularly the first proviso thereunder, it becomes clear that
the Legislature does not intend to reopen a block assessment. Any such
interpretation would run counter to the legislative intent as noted from the
contemporaneous exposition through the memorandum explaining the Finance Bill
as well as the various circulars issued by the Central Board of Direct Taxes
explaining different amendments. In S. 158BA of the Act, there is a positive
mandate to the Assessing Officer to assess the undisclosed income in
accordance with the provisions of Chapter XIV-B of the Act, notwithstanding
anything contained in any other provisions of the Act. As against that, S.
158BH states that except as otherwise provided in Chapter XIV-B of the Act,
all other provisions of the Act, shall apply to assessment made under Chapter
XIV-B. Therefore, once the period of limitation has been prescribed u/s.158BE
of the Act, the time limit for completion of assessment of undisclosed income
has to be as provided under the said section.

(iii) The entire Chapter XIV-B of the Act relates to
assessment of search cases, viz., undisclosed income found as a result
of search. One cannot envisage escapement of undisclosed income once a search
has taken place and material recovered, on processing of which undisclosed
income is brought to tax. S. 147 of the Act itself indicates that it is in
relation to income escaping assessment and applies in a case where either
income chargeable to tax has escaped assessment by virtue of either
non-disclosure by way of non-filing of the return, or non-disclosure by way of
omission to disclose fully and truly all material facts for the purpose of
assessment, or processing of material already available on record, if it is
within the stipulated period of limitation. Therefore, to contend that the
undisclosed income has escaped assessment despite an assessment having been
framed under Chapter XIV-B of the Act by adopting the special procedure
prescribed by the said Chapter, is to contend what is inherently not possible.

(iv) It cannot be a case of non-filing of return
considering the provisions of S. 158BC of the Act. It cannot be a case of
non-disclosure of material facts considering the fact that everything which
was undisclosed has already been unearthed at the time of search and the
definition of ‘undisclosed income’ itself indicates that not only what has
been seized or recovered, but even income or property which has not been or
would not have been disclosed for the purpose of the Act has been roped in.
Further-more, S. 158BB of the Act also provides not only for acquisition of
books of account or other documents, but on the basis of evidence found as a
result of search and such other materials or information as are available with
the Assessing Officer, undisclosed income of block period shall be computed.
Therefore, even if assuming that some income has not been disclosed in the
return furnished u/s. 158BC of the Act, the AO is bound to assess all
undisclosed income after processing the entire material available with the AO.
The AO could not be heard to state that undisclosed income has escaped
assessment because the officer failed to apply his mind to the material
available on record, there being no lack of disclosure.

(v) The entire scheme under Chapter XIV of the Act, more
particularly from S. 147 to S. 153 of the Act, pertaining to reassessment and
the special procedure for assessing the undisclosed income of the block period
under Chapter XIV-B of the Act are not only separate and distinct from each
other, but if an effort is made to incorporate the scheme under Chapter XIV of
the Act, for the purpose of assessment of block period there is a conflict
between the provisions which becomes apparent on a plain reading. In the
circumstances, by the established rules of interpretation, unless and until a
plain reading of the two streams of assessment procedure does not result in
the procedures being independently workable, the question of resolving the
conflict would not arise. But in the light of the provisions of S. 158BH of
the Act, once there is a conflict between the two streams of procedure the
provisions of Chapter XIV-B of the Act shall prevail and have primacy. Once
assessment has been framed u/s.158BA of the Act in relation to undisclosed
income for the block period as a result of search, there is no question of the
AO issuing notice u/s.148 of the Act for reopening such assessment as the said
concept is repugnant to the special scheme of assessment of of undisclosed income for the block period. The first proviso u/s.158BC(a) of the Act specifically provides that no notice u/ s. 148 of the Act is required to be issued for the purpose of proceedings under Chapter XIV-B.”

Cash credits : S. 68 : Share application money : Department must show that investment made by subscribers emanated from coffers of assessee to be treated as undisclosed income of assessee.

New Page 1

49 Cash credits : S. 68 of Income-tax Act,
1961 : A.Y. 2001-02 : Company : Share application money : Department must show
that investment made by subscribers actually emanated from coffers of assessee
to be treated as undisclosed income of assessee.



[CIT v. Value Capital Services P. Ltd., 307 ITR 334
(Del.)]

The assessee had received an amount of Rs.51 lakhs as share
application money from 33 persons in the previous year relevant to A.Y.
2001-02. The Assessing Officer accepted the explanation and the statement
given by three of these persons, but found that the response from the others
was either not available or was inadequate. Therefore, he added an amount of
Rs.46 lakhs pertaining to 30 subscribers to the income of the assessee u/s.68
of the Income-tax Act, 1961. The CIT(A) confirmed the addition.

 

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

“(i) The principle that has been laid down by the various
decisions rendered by this Court from time to time is that if the existence
of the applicant is proved, normally no further inquiry is necessary.

(ii) Learned counsel for the Revenue submits that the
creditworthiness of the applicant can nevertheless be examined by the
Assessing Officer. It is quite obvious that it is very difficult for the
assessee to show the creditworthiness of strangers. If the Revenue has any
doubt with regard to their ability to make the investment, their returns may
be reopened by the Department.

(iii) In any case, what is clinching is the additional
burden on the Revenue. It must show that even if the applicant does not have
the means to make the investment, the investment made by the applicant
actually emanated from the coffers of the assessee, so as to enable it to be
treated as the undisclosed income of the assessee. This has not been done
insofar as the present case is concerned and that has been noted by the
Tribunal also.”

 


 


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Incentive prize received on coupon given on strength of NSC : Is not lottery : Is casual and non-recurring receipt exempt u/s.10(3).

New Page 1

50. Casual and non-recurring receipt :
Exemption u/s.10(3) of Income-tax Act, 1961 : A.Y. 1994-95 : Incentive prize
received on coupon given on the strength of NSC : Is not a lottery : Is casual
and non-recurring receipt exempt u/s.10(3).


[B. K. Suresh v. ITO, 221 CTR 80 (Kar.)]

The assessee, a professor in Engineering College, had
purchased National Saving Certificates (NSCs) in F.Y. 1992-93. The Director of
Small Savings, Government of Karnataka, as a measure to encourage small savings,
framed a scheme under which it offered different prizes to the persons who had
made investment in a small savings scheme, through a lucky draw. By virtue of
the purchase of NSCs, the assessee had become entitled for a coupon.
Accordingly, a coupon was issued to him. In a lucky draw he was adjudged as
prize winner, having bagged third prize. The prize was Indira Vikas Patra of
face value of Rs.5,00,000, the market value being Rs.3,50,000. The assessee
claimed exemption u/s.10(3) of the Income-tax Act, 1961 of the said amount of
Rs.3,50,000. The AO disallowed the same treating the same as a lottery and made
addition of Rs.3,50,000 in his order u/s.143(1)(a) of the Act. The Tribunal
confirmed the addition.

 

On appeal by the assessee, the following questions were
raised :

“1. Whether in the facts and in the circumstances of the
case, the Tribunal was right in law in holding that incentive award received
by the appellant-assessee constitutes lottery income on the facts and in the
circumstances of the case ?

2. Whether the Tribunal was right in law in holding that
the purchase of National Savings Certificates by the appellant-assessee
constitutes payment of consideration to participate in the lottery ?”

 


The Karnataka High Court concurred with the view of the
Madras High Court in CIT v. Dy. Direcor of Small Savings, (2004) 266 ITR
27 (Mad.) that giving of coupons against National Savings Certificates would not
fall within the definition of ‘lottery’. The Court allowed the assessee’s claim
and held as under :

“(i) The definition of ‘lottery’ inserted by the Finance
Act, 2001 is prospective and not retrospective.

(ii) We have no hesitation to hold that all the authorities
below committed an error in adding the prize money awarded to the assessee on
coupon and draw thereof to the income of the assessee. Thus the said orders
deserve to be set aside and quashed and are hereby set aside and quashed.”

 



 



 

 


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Where percentage of commission is not fixed and varies depending on decision of board of directors, commission paid to directors would not be remuneration u/s.40(c).

New Page 1

48 Business expenditure : Disallowance u/s.
40(c) of Income-tax Act, 1961 : Remuneration to director : Where percentage of
commission is not fixed and varies depending on decision of Board of directors,
commission paid to directors would not be remuneration as contemplated
u/s.40(c).


[J. K. Synthetics Ltd. v. CIT, 175 Taxman 22 (Del.)]

The assessee-company paid different amounts to its directors
by way of commission. The Assessing Officer held that wherever payment was above
the ceiling limit of Rs.72,00,000, it was to be disallowed u/s.40(c) of the
Income-tax Act, 1961. Accordingly, he made the disallowance. The disallowance
was upheld by the Tribunal.

 

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

“(i) A perusal of the special resolution passed by the
assessee-company, in terms of which commission was paid to directors made it
clear that the quantum of commission was to be determined at the discretion of
its Board of directors. The commission, that had to be paid in terms of the
special resolution, was up to a maximum limit of 3% of the net profits of the
company. In other words, there was no fixed commission paid to any of the
directors and the amount of commission varied depending upon the decision of
the Board. The factors that the Board was required to take into consideration
had not been spelt out, but one had to proceed on the basis of the decision of
the Board, presuming that the commission payable to the directors was to be
determined on the basis of services
rendered by them or some similar requirements.

(ii) It was possible that the percentage might have a nexus
with the turnover achieved (which was also variable) or the amount of business
given by the director to the assessee (which was also variable). The factors
to be taken into conside-ration for determining the percentage of commission
had not been spelt out in the special resolution. So long as the percentage
was not fixed and was variable, it could not
partake the nature of salary and, therefore, could not partake the nature of
remuneration, which according to the Revenue, is similar to salary.

(iii) Consequently, the commission paid to the directors
could not be said to be remuneration as contemplated by S. 40(c).”

 


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Deduction u/s.36(1)(vii) for bad debt allowable independently, irrespective of deduction for provision for bad and doubtful debts allowable u/s.36(1)(viia) subject to limitation that amount should not be deducted twice

New Page 1

46 Business expenditure : Assessee bank :
Deduction of bad debt u/s.36(1)(vii) and provision for bad debt u/s.36(1)(viia)
of Income-tax Act, 1961 : A.Ys. 1993-94 and 1994-95 : Deduction u/s.36(1)(vii)
for bad debt is allowable independently and irrespective of deduction for
provision for bad and doubtful debts allowable u/s.36(1)(viia) subject to
limitation that amount should not be deducted twice.


[DCIT v. Karnataka Bank Ltd., 218 CTR 273 (Kar.)]

The assessee is a scheduled bank. For the A.Ys. 1993-94 and
1994-95 the assessee bank had claimed deduction of bad debts written off
u/s.36(1)(vii) and also deduction of provision for bad and doubtful debts
u/s.36(1)(viia) of the Income-tax Act, 1961. The Assessing Officer allowed the
claim for deduction of provision for bad and doubtful debts u/s. 36(1)(viia),
but disallowed the claim u/s.36(1)(vii) for bad debts written off. The CIT(A)
upheld the disallowance. The Tribunal allowed the assessee’s claim.

 

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

“The Tribunal was correct in holding that deduction
u/s.36(1)(vii) is allowable independently and irrespective of the provision
for bad and doubtful debts created by the assessee in relation to the advances
of the rural branches u/s.36(1)(viia), subject to the limitation that an
amount should not be deducted twice u/s.36(1)(vii) and u/s. 36(1)(viia)
simultaneously.”

 




 

 


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“Good work reward” by assessee to employee : Amount has no relation to profit earned : Does not amount to bonus : Amount not deductible u/s.36(1)(ii) but deductible u/s.37(1).

New Page 1

47 Business expenditure : Bonus : S.
36(1)(ii) and S. 37(1) of Income-tax Act, 1961 : ‘Good work reward’ given by
assessee for good work done by employee : Amount having no relation to profit
earned : Does not amount to bonus : Amount not deductible u/s.36(1)(ii), but
deductible u/s.37(1).


[Shriram Pistons and Rings Ltd. v. CIT, 307 ITR 363
(Del.)]

The following question was raised before the High Court in a
reference filed by the Revenue :

“Whether the Tribunal was right in holding that the
payments made by the assessee to its employees under the nomenclature ‘Good
work reward’ did not constitute bonus within the meaning of S. 36(1)(ii) of
the Income-tax Act, 1961 and were allowable as normal business expenditure
u/s. 37 ?”

 


The Delhi High Court held as under :

“(i) The word ‘bonus’ has not been defined anywhere
including the Payment of Bonus Act, 1965. However, for the purpose of
industrial law, four types of bonus have been recognised : (a) production
bonus, (b) contractual bonus, (c) customary bonus usually associated with
festivals, and (d) profit-sharing bonus.

(ii) The ‘good work reward’ that was given by the assessee
to some employees on the recommendation of senior officers of the assessee did
not fall in any of the categories of bonus specified under the industrial law.
There was nothing to suggest that the good work reward given by the assessee
to its employees had any relation to the profits that the assessee may or may
not make.

(iii) The reward had relation to the good work done by the
employee during the course of his employment and at the end of the financial
year on recommendation of a senior officer of the assessee, the reward was
given to the employee. Consequently, the ‘good work reward’ could not fall
within the ambit of S. 36(1)(ii) of the Act.

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

 


levitra

Ss. 36(1)(ii) and 37(1) : Ex-gratia payment over and above statutory limits prescribed under Payment of Bonus Act, 1965, is allowable as business expenditure.

New Page 1

45 Business expenditure : Bonus : S.
36(1)(ii) and S. 37(1) of Income-tax Act, 1961 : A.Y. 1993-94 : Ex gratia
payment over and above statutory limits prescribed under the Payment of Bonus
Act, 1965, is allowable as business expenditure.


[CIT v. Maina Ore Transport (P) Ltd., 218 CTR 653 (Bom.)]

In the A.Y. 1993-94 the assessee had made payment of ex
gratia in the sum of Rs.2,37,702 to its employees in excess of the limit of
8.33% prescribed under the Payment of Bonus Act. The assessee had claimed the
deduction of the said ex gratia payment as business expenditure. The AO
disallowed the claim on the ground that it is in excess of 8.33% maximum
statutory limit under the Act. The CIT(A) allowed the deduction holding that the
amount was paid to maintain healthy relations and industrial peace. The Tribunal
confirmed the decision of the CIT(A).

 

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

“Ex gratia payment in excess of the limits prescribed under
the Payment of Bonus Act, 1965, is allowable as business expenditure, although
the payment did not cover contractual payment or customary payment.”

 


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Order giving effect to appellate order is inherent in S. 143 and 144 : Not order u/s.154 : Limitation u/s.154(7) not applicable.

New Page 1

44 Assessment : Limitation : S. 143, S. 144
and S. 154 of Income-tax Act, 1961 : A.Y. 1994-95 : Order giving effect to
Appellate order is order inherent in S. 143 and S. 144 : Not an order u/s.154 :
Limitation u/s.154(7) not applicable.


[Peninsula Land Ltd. v. CIT, 307 ITR 183 (Bom); 175
Taxman 58 (Bom)]

For the A.Y. 1994-95 the AO passed an order u/s.154 of the
Income-tax Act, 1961, on 9-6-2006 giving effect to the order of the Commissioner
(Appeals). In that order he allowed set-off of carried forward depreciation of
the preceding years. Subsequently, he passed another order u/s.154 dated
22-2-2007 withdrawing the earlier order u/s.154, dated 9-6-2006 claiming it to
be beyond the period of limitation as prescribed u/s.154(7). The Commissioner
rejected the revision application made u/s.264 of the Act.

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

“(i) It was clear from the order dated 9-6-2006, that the
set-off was granted in order to pass on to the assessee the benefit that it
had obtained under the order passed by the Appellate authority in the
statutory appeal. This order was not an order passed u/s.154 of the Act. The
power to pass such order was inherent in S. 143 or S. 144.

(ii) The power of the Income-tax Officer to amend the
assessment in consequence of decision in an appeal, revision, reference or by
a High Court or Supreme Court was not traceable to S. 154, but was inherent
and traceable to S. 143 and S. 144 of the Act. Therefore the limitation as
contained in S. 154(7) would not apply to the passing of such an order.

(iii) The finding that the order passed on 9-6-2006 was
beyond the period of limitation as prescribed u/s.154(7) was erroneous.”

 


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Interest — Tax — Interest as Government securities not chargeable to Interest Tax

New Page 1

  1. Interest — Tax — Interest as Government securities not
    chargeable to Interest Tax

 

[CIT vs. Ratnakar Bank Ltd. (2008) 305 ITR 257 (SC)].

The question involved before the Supreme Court was whether
interest earned by the assessee-bank on Government securities was liable to be
assessed under Section 2(7) of the Interest-tax Act ? The Tribunal had held
that it was not chargeable. The High Court had upheld the view of the
Tribunal. The Supreme Court observed that the issue was considered by it
earlier in CIT vs. Corporation Bank, (2007) 295 ITR 193 (SC), wherein
the appeals filed by the Department were dismissed. However, the learned
counsel for the Department submitted that the said decision related to the
interest on Government securities. The learned counsel for the assessee
submitted that in the instant case, the interest earned was on Government
securities only. This stand was denied by the learned counsel for the
Department. In the circumstances, the Supreme Court remitted the matter back
to the Tribunal to examine the factual position as to whether the interest
involved in the present case was on Government securities. The Supreme Court
clarified that if the interest was earned on Government securities, the ratio
of the decision in Corporation Bank’s case would apply to the facts of the
present case and if the interest earned was not solely on Government
securities, the ratio of the decision would not apply.

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Appeal — Order set aside to the High Court as the relevant decision was not considered.

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 12. Appeal — Order set aside to the High Court as the
relevant decision was not considered.

[CIT vs. Madras Engineering Construction Co-op. Society
Ltd., (2008) 306 ITR 10 (SC)].

The Assessing Officer negatived the claim of deduction
under Section 80P(2)(a)(i) of the Act on the ground that the income reflected
by the assessee can neither be attributed to actual labour of the members nor
can be treated as arising out of collective disposal of its labour. The
Commissioner of Income Tax (Appeals) following the earlier orders, allowed the
appeal. The Tribunal dismissed the Revenue’s appeals. Before the Supreme
Court, the Revenue contended that the High Court had failed to notice that the
profit earned by the Society in executing the work was retained by the members
themselves. The Supreme Court, however, found that its decision in Madras
Auto Rickshaw Drivers’ Co-op. Society vs. CIT, (2001) 249 ITR 330 (SC),
which had prima facie relevance, was not noticed by the High Court. The
Supreme Court therefore set aside the order of the High Court and remitted the
matter to it for a fresh consideration in the light of the aforesaid decision.

Section A : Disclosures in Unaudited Quarterly Results regarding treatment of foreign exchange fluctuations for the period/quarter ended 31-12-2008

From Published AccountsTata Motors Ltd.

2. Net Loss after tax of Rs.26,326 lakhs for the quarter
ended December 31, 2008 includes notional exchange loss (net) of Rs.22,652 lakhs
on revaluation of foreign currency borrowings, deposits and loans given. Net
Profit after tax of Rs.40,984 lakhs for the nine months ended December 31, 2008
includes notional exchange loss (net) of Rs.63,255 lakhs on revaluation of
foreign currency borrowings, deposits and loans given.

4. Effective from April 1, 2008 the Company has applied hedge
accounting principles in respect of forward exchange contracts as set out in
Accountings Standards (AS) 30 — Financial Instruments : Recognition and
Measurement, issued by the Institute of Chartered Accountants of India.
Accordingly, all such contracts outstanding as on December 31, 2008 are marked
to market and a notional loss aggregating to Rs.16,481 lakhs (net of tax)
arising on contracts that were designated and effective as hedges of future cash
flows, has been directly recognised in the Hedging Reserve Account to be
ultimately recognised in the Profit and Loss Account depending on the exchange
rate fluctuation till and when the underlying forecasted transaction occurs.
Earlier such notional loss/gain was recognised in the Profit and Loss Account on
the basis of exchange rate on the reporting date.

&
GMR Infrastructure Ltd.


The foreign exchange loss (Net) of Rs.2,524 lakhs for the
quarter ended December 31, 2008 (2007 : Gain of Rs.96 lakhs) and Rs.12,986 lakhs
for the nine months period ended December 31, 2008 (2007 : Gain of Rs.1,829
lakhs), accounted pursuant to Accounting Standard 11 on the Effects of Changes
in Foreign Exchange Rates include the following :

(a) Vemagiri Power Generation Limited (VPGL), a notional
loss of Rs.477 lakhs for the quarter ended December 31, 2008 (2007 : Gain of
Rs.122 lakhs) and Rs.2,639 lakhs for the nine months period ended December 31,
2008 (2007 : Gain of Rs.1,392 lakhs)

(b) GMR Hyderabad International Airport Limited (GHIAL), a
notional loss of Rs.2,501 lakhs for the quarter ended December 31, 2008
(2007 : NIL) and Rs.11,012 lakhs for the nine months period ended December 31,
2008 (2007 : NIL)


The above notional foreign exchange losses of these two
subsidiaries have been accounted on the conversion of their project loans
denominated in foreign currency into Indian Rupees, using closing rates as at
the reporting date. However, both these subsidiaries have adequate foreign
currency revenues to provide hedge against any currency fluctuation risks that
may arise as and when the interest payments and principal repayments of these
loans are made and hence forex risks associated with these loans will not have
any bearing on the profitability of these two subsidiaries.

&
Reliance Industries Ltd.


The Company has continued to adjust the foreign currency
exchange differences on amounts borrowed for acquisition of fixed assets, to the
carrying cost of fixed assets in compliance with Schedule VI to the Companies
Act, 1956 as per legal advice received which is at variance to the treatment
prescribed in Accounting Standards (AS-11) on ‘Effects of Changes in Foreign
Exchange Rates’ notified in the Companies (Accounting Standards) Rules 2006. Had
the treatment as per the AS-11 been followed, the net profit after tax for the
nine months period ended 31st December 2008 would have been lower by Rs.1,177
crore (US $ 242 million).

&
The Great Eastern Shipping Co. Ltd.


1. Even though not yet mandatory, in accordance with the
recommendations of the Institute of the Chartered Accountants of India, the
Company has with effect from April 01, 2008 adopted the principles enunciated in
Accounting Standard (AS) 30, Financial Instruments : Recognition and Measurement
in respect of hedge accounting and recognition and measurement of derivatives.
Consequently, the revaluation gain/(loss) on designated hedging instruments that
qualify as effective hedges has been appropriately recorded in the hedging
reserve account. Designated hedging instruments include foreign currency loan
liabilities and currency, interest rate and bunker derivatives. Earlier, the
revaluation gain/(loss) on the foreign currency loan liabilities was recognised
in the profit and loss account, whereas the gain/(loss) on currency, interest
rate and bunker derivatives was recognised on settlement. Consequent to the
designation of foreign currency loan liabilities as hedging instruments, the
profit of the Company for the quarter and nine months ended December 31, 2008 is
higher by Rs.62.60 crores and Rs.252.18 crores, respectively. Gain/(loss) on
revaluation of ineffective hedge transactions and on settlement of hedge
transactions is recognised in the Profit and Loss Account.

2. Exceptional item includes :

(a) Net Compensation (paid)/received on cancellation of
vessel construction/sale contracts for the quarter and nine months ended
December 31, 2008 was Rs.(14.85) crores. (for the quarter and nine moths ended
December 31, 2007 the corresponding amount was Rs. ‘Nil’).

(b) Exchange gain/(loss) on revaluation of foreign currency
loan liabilities in accordance with As-11 for the quarter and nine months
ended December 31, 2008 were Rs. ‘Nil’ and Rs.(138.57) crores,
respectively. (For the quarter and nine months ended December 31, 2007 the
corresponding amounts were Rs.22.42 crores and Rs.186.49 crores,
respectively.)

Tata Steel Ltd.


Notional exchange loss during the period includes an unrealised translation loss of Rs.753.38 crores (Rs.153.56 crores for the quarter) on Convertible Alternate Reference Securities (CARS) issued in September 2007. The liability has been translated at the exchange rate as on 31st December 2008. CARS are convertible into equity shares only between 4th September 2011 and 6th August 2012 and are redeemable in foreign currency only in September 2012, if not converted into equity, and are neither convertible nor redeemable ti114th September 2011.

Bharti  Airtel  Ltd.

As reported in the last quarter, the Company has followed the accounting policy to adjust foreign exchange fluctuation on loan liability for fixed assets till June 30, 2008, as per requirement of Schedule VI of the Companies Act, 1956 based on legal advice. During the nine months period effective April I, 2008, the Company has adopted the treatment prescribed in Accounting Standard (AS-11) ‘Effect of Changes in Foreign exchange Rates’ notified in the Companies (Accounting Standard) Rules 2006 dated December 7, 2006. Instead of capitalising/ recapitalising such fluctuation as per policy hitherto followed, the Company has changed/ credited such fluctuations directly to the Profit & Loss Account.

Had the Company continued with the earlier policy net profit after tax would have been higher by Rs.245.09 crore and Rs.900.12 crore for the quarter and nine months ended December 31, 2008, respectively, for the Company and the net profit after tax would have been higher by RS.248.42 crore and Rs.929.94 crore for the quarter and nine months ended December 31, 2008, respectively, for the Group.

Reliance  Communications   Ltd.

The Company is pursuing aggressive capex plans which include significant expansion of nationwide wireless network. The Company has funded these initiatives primarily by long-term borrowings in foreign currency and Foreign Currency Convertible Bonds (‘FCCBs’). In compliance of Schedule VI of the Companies Act, 1956 and on the basis of legal advice received by the Company, short-term fluctuations in foreign exchange rates relate to such liabilities and borrowings related to acquisition of fixed assets are adjusted in the carrying cost of fixed assets. Had the accounting treatment as per Accounting Standard (AS) 11 been continued to be followed by the Company, the net profit after tax for the quarter and nine months ended 31st December 2008 would have been lower by Rs.59,566 lakh and Rs.84,837 lakh for realised and Rs.2,757 lakh and Rs.1,80,359 lakh for unrealised currency exchange fluctuation, respectively. This excludes an amount of Rs.21,048 lakh and Rs.1,14,674 lakh for the quarter and nine months ended on 31st December 2008 on FFCBs for which the Company will not be liable, if FCCBs are converted on or before the due date i.e., 1st May 2011 and 18th February 2012. This matter was referred to by the auditors of the Company in their limited review report.

 Jet Airways  Ltd.

The Company,  based  on legal advice has, from the first quarter of the current year, adjusted the foreign currency differences on amounts borrowed for acquisition of fixed assets acquired from outside India aggregating Rs.38,081 lac and Rs.188,454 lac for quarter and nine months ended 31st December 2008 to the carrying cost of the fixed assets, in compliance with Schedule VI of the Companies Act, 1956 which is in variance with the treatment prescribed in Accounting Standard (AS) 11 on ‘Effects of Changes in Foreign Exchange Rates’ notified in the Companies (Accounting Standards) Rules. Had the treatment as per AS-ll been followed, the net loss before tax for the quarter and nine months ended 31st December 2008 would have been higher by Rs.35,791 lac and Rs.185,227 lac, respectively.

Consequent to following this practice from the first quarter of the current year, the foreign currency difference (gain) previously credited to the profit and loss account aggregating Rs.20,727 lac has been reversed from the opening balance of profit and loss account and adjusted to the cost of fixed assets.

These are matters of reference in limited review report of statutory auditors.

Ranbaxy  Laboratories  Ltd.

3. Foreign exchange Loss/(Gain) on loans represents exchange differences arising during the period(s) on foreign currency borrowings including Foreign Currency Convertible Bonds.

4. (A) Pursuant to ICAI Announcement’ Accounting for Derivatives’ on the early adoption of Accounting Standard (AS) 30 – Financial Instruments: Recognition and Measurement, the Company has early adopted the said Standard with effect from October I, 2008, to the extent that the adoption does not conflict with existing mandatory accounting standards and other authoritative pronouncements, company law and other regulatory requirements. Pursuant to the adoption:

i) Transitional loss mainly representing the loss on fair valuation of foreign currency options, determined to be ineffective cash flow hedges on the date of adoption, amounting to Rs.ll,788 million (net of tax) has been adjusted against the opening balance of revenue reserves as of January I, 2008.

ii) Loss on fair valuation of forward covers, which qualify as effective cash flow hedges amounting to Rs.723 million (net of tax), on the date of adoption, has been recognised in the hedging reserve account.

B) For the quarter, foreign exchange loss arising on account of change in fair value of foreign currency options determined to be ineffective cash flow hedge, amounted to Rs.7,843 million before tax and has been recognised under ‘Exceptional items’. Net of tax the loss is Rs.5,177 million.

Essar Oil Ltd.

2. Exceptional items consist of (a) forex loss of Rs.679 crore on account of unprecedented depreciation in the value of rupee during the quarter, and (b) provision of Rs.524 crore on account of write down of inventory to net realisable value due to steep fall in crude/petroleum product prices during the quarter.

3. The Company has recognised exchange difference on all foreign currency monetary items as at the end of the period. There is no loss (net) on outstanding commodity derivative contracts at the end of the period.

Penalty : Ss. 44AB and 271B of I. T. Act, 1961 : A. Y. 1992 – 93 : Provisions of s. 44AB not complied with on the basis of legal opinion contained in Tax Audit Manual published by the Bombay Chartered Accounts’ Society : Reasonable cause for default : Pen

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40. Penalty : Ss. 44AB and 271B of I. T. Act, 1961 : A. Y.
1992 – 93 : Provisions of s. 44AB not complied with on the basis of legal
opinion contained in Tax Audit Manual published by the Bombay Chartered
Accounts’ Society :  Reasonable cause for default : Penalty u/s. 271B not
justified.

[ITO vs. Sachinum Trust, 223 CTR 152 (Guj.)]

For the A. Y. 1992 – 93, the assessee trust did not get its
accounts audited under the provisions of Section 44AB of the Income-tax Act,
1961, on the basis of the legal opinion contained in the Tax Audit Manual
published by the Bombay Chartered Accountants’ Society. The Assessing Officer
was of the view that the assessee was under an obligation to get its accounts
audited u/s. 44AB of the Act. He therefore, imposed penalty u/s. 271B of the
Act. The Tribunal cancelled the penalty.


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


“Legal opinion contained in Tax Audit Manual published by
the Bombay Chartered Accountants’ Society constituted reasonable cause for the
bona fide belief of the assessee that its interest receipts i.e.,
gross receipts, and not loan advanced i.e., turnover, being less than
Rs. 40 laks, the provisions of s. 44AB are not applicable in its case and,
therefore, penalty u/s. 271B is not leviable.”



 


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TDS : Ss. 194A, 201(1) and 201(1A) of I. T. Act 1961 : A. Y. 2000 – 01 : Assessee in default : Interest u/s. 201(1A) : Assessee, insurance co. failed to deduct tax at source on interest on compensation to the victims of motor vehicle accidents : Assessee

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41. TDS : Ss. 194A, 201(1) and 201(1A) of I. T. Act 1961 : A.
Y. 2000 – 01 : Assessee in default : Interest u/s. 201(1A) : Assessee, insurance
co. failed to deduct tax at source on interest on compensation to the victims of
motor vehicle accidents : Assessee liable to TDS and interest : Revenue directed
to collect tax from recipient of interest and refund the amount of TDS to the
assessee.

[CIT vs. Oriental Insurance Co. Ltd., 223 CTR 102 (Kar.)]

Pursuant to the order made under the Motor Vehicles Act,
the respondent insurance company paid compensation to the victims of motor
vehicle accidents. The award amount consisted of the compensation and interest
liability. The Assessing Officer held that the respondent assessee has failed
to deduct tax at source u/s. 194A of the Income-tax Act, 1961 and directed the
assessee company to deposit the TDS amount and interest on the TDS amount. The
Tribunal permitted the assessee to split the interest liability for the
respective assessment years and set aside the order for payment of interest
u/s. 201(1A) of the Act.


On appeal by the Revenue, the Karnataka High Court held as
under :


“i) Levy of interest u/s. 201(1A) cannot at any rate be
construed as penalty. In that view, the contrary finding of the Tribunal is
set aside.

ii) The Tribunal has rightly directed that the interest
paid above Rs. 50,000 is to be split and spread over the period from the
date interest is directed to be paid till its payment. If the spread over is
given, in majority of cases, the respondent may not incur liability to pay
any TDS.


iii) In the event, the respondent remits TDS amount as
directed by the Tribunal, the Revenue is directed to hold suo moto
enquiry by issuing notices to the persons who have received compensation to
find out their tax liability on the interest received. If it is found that
there is a tax liability on the person concerned, the Revenue should collect
the tax from the person concerned and refund the amount to the respondent. So
also, if there is no tax liability on the person concerned, the TDS collected
should be refunded to the respondent, of course, with interest in either
case.”

 

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Depreciation : Option to claim : Deduction under Chapter VI-A of I. T. Act, 1961 : A. Y. 1997 – 98 : Assessee did not claim depre-ciation for computing gross total income : Whether for the purposes of availing deduction under Chapter VI-A, gross total inc

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In the High Court

K. B. Bhujle
Advocate

38. Depreciation : Option to claim : Deduction under Chapter
VI-A of I. T. Act, 1961 : A. Y. 1997 – 98 : Assessee did not claim depre-ciation
for computing gross total income :  Whether for the purposes of availing
deduction under Chapter VI-A, gross total income is required to be computed by
deducting allowable depreciation ?  : Question referred to larger Bench.

[Plastiblends India Ltd. vs. Add. CIT, 223 CTR 291 (Bom.)]

In view of the contrary decisions in the case of Grasim
Industries Ltd. vs. ACIT 245 ITR 677 (Bom) and Scoop Industries (P)
Ltd. vs. ITO 289 ITR 195 (Bom) the following question has been referred
to the Larger Bench :

"Whether for the purposes of availing allowable special
deduction under Chapter VI-A, the gross total income is required to be
computed by deducting allowable depreciation even though the assessee has
disclaimed the same for the purposes of regular assessment ? ".

 

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Investment allowance : S. 32A of I. T. Act, 1961 : A. Y. 1991 – 92 : Purchase of plant and machinery in earlier years : Reserve account not created in earlier years in view of loss : Reserve account created and investment allowance claimed in the A. Y. 19

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39. Investment allowance : S. 32A of I. T. Act, 1961 : A. Y.
1991 – 92 : Purchase of plant and machinery in earlier years : Reserve account
not created in earlier years in view of loss : Reserve account created and
investment allowance claimed in the A. Y. 1991 – 92 : Assessee entitled to
investment allowance.

[Velan Textiles Pvt. Ltd., 312 ITR 56 (Karn.)]

For the A. Ys. 1985 – 86 to 1987 – 88 the assessee could
not claim investment allowance on account of the loss incurred in those years.
Accordingly, the assessee did not create reserve account in those years. For
the A. Y. 1991 – 92 the assessee filed the return of income disclosing income
of Rs. 39,78,083. In this year the assessee created the reserve account and
claimed investment allowance of Rs. 11,02,807 relating to A. Ys. 1985 – 86 to
1987 – 88. The Assessing Officer disallowed the claim. The Tribunal upheld the
disallowance and held that the claim for investment allowance had to be made
during the relevant assessment year and not when the assessee had adequate
funds for creation of the reserve.


On appeal by the assessee, the Karnataka High Court
reversed the decision of the Tribunal and held as under :


“i) The purpose of the amendment to clause (ii) of
sub-Section (4) of Section 32A of the Income-tax Act, 1961, as brought about
by the Finance Act, 1990, retrospectively from 01/04/1976, is to enable the
assessee to create a reserve in any of the years between the year of
installation of plant and machinery and the year of actual deduction.
Consequently, the assessee need not create a reserve in the year of
installation. If there is no sufficient profit, the assessee can create it
in the year of actual deduction.

ii) It remained undisputed by the Department that the
assessee incurred losses in the A.Ys. 1985-86 to 1987-88. The question of
creating reserve account did not arise since it incurred loss during the A.
Ys. 1985 – 86 to 1987 – 88. Therefore, the Tribunal’s order was to be
quashed.”

 

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Capital gain/loss : Ss. 2(47) and 45 of I. T. Act, 1961 : A. Y. 1998 – 99 : Application for shares : Assessee failed to pay balance amount on allotment of shares : Forfeiture of share application money : Assessee’s right in shares extinguished : Loss on f

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36. Capital gain/loss : Ss. 2(47) and 45 of I. T. Act,
1961 : A. Y. 1998 – 99 : Application for shares : Assessee failed to pay balance
amount on allotment of shares : Forfeiture of share application money : Assessee’s
right in shares extinguished : Loss on forfeiture is short-term capital loss.

[Dy. CIT vs. BPL Sanyo Finance Ltd., 312 ITR 63 (Karn) : 223
CTR 461 (Karn.)]

The assessee company had applied for the shares of IDBI and
had remitted the share application money. IDBI allotted 89,200 shares to the
assessee and called upon the assessee to pay the balance sum for issuance of
shares in its favour. The assessee failed to remit the balance outstanding
allotment money. Therefore, the IDBI cancelled the allotment and forfeited the
share application money. In the return of income for the A. Y. 1998 – 99, the
assessee claimed the forfeited amount as short-term capital loss. The
Assessing Officer disallowed the claim. The Tribunal allowed the assessee’s
claim.

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

“Consequent to the assessee’s default of not paying the
balance of money on allotment, its rights in the shares stood extinguished on
forfeiture by IDBI. The loss suffered by the assessee, i.e., the
non-recovery of the share application money was consequent to the forfeiture
of its rights in the shares and was to be understood to be within the scope
and ambit of transfer. The Tribunal was justified in holding that it would
amount to short-term capital loss to the assessee.”

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Compounding of offences : S. 279(2) of I. T. Act, 1961 : Offences can be compounded during the pendency of appeal.

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37. Compounding of offences : S. 279(2) of I. T. Act,
1961 : Offences can be compounded during the pendency of appeal.

[Chairman CBDT vs. Smt. Umayal Ramanathan, 313 ITR
59 (Mad.)]

Against the conviction and sentence order passed by the
Trial Court, the respondent filed a petition u/s. 279(2) of the Income-tax
Act, 1961 seeking compounding of the offences u/s. 278 of the Act and Sections
120B, 420 read with Section 109 of the Indian Penal Code, 1860. The Joint
Director of Income-tax refused to compound the offences on the ground that the
respondent had been convicted by the Trial Court. The Single Judge set aside
the order passed by the Joint Director of Income-tax stating that the refusal
to compound the offence on the sole ground that the Criminal Court had
convicted her was discriminatory and that in the case of a similarly placed
assessee the appellants had compounded the offence.

On appeal by the Revenue, the Division Bench of the Madras
High Court upheld the decision of the Single Judge and held as under :

“i) The appeal against the order of conviction and
sentence passed by the Trial Court was a prescribed course of action for
enforcing a legal right. The appellants could have compounded the offence
sought for by the respondent during the pendency of the appeal.

ii) The Single Judge had rightly set aside the order
passed by the Joint Director of Income-tax. The respondent was permitted to
pay the amount demanded by the appellants for compounding the offence.”

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Format and disclosures for financial statements prepared using IFRS

Revision of Financial Statements

Lok Housing and Constructions Ltd.


    — (31-3-2009)

    From Notes to Accounts :

    (2a) The global economy in general and the real estate industry in particular is passing through recession, which has resulted into financial meltdown of an un-precedental scale. During the previous financial years the Company had entered into various agreements for sale of its real estate, plots, properties, development rights and constructed premises, held by it as stock in trade. In accordance with the consistently followed accounting practice of the Company, sales revenue and profit thereon were recognised at the time of entering into such agreement to sell. Due to the above-mentioned financial meltdown some of the parties to whom sales had been effected have failed to meet their commitment. Considering the overall interest of the Company, the management decided to reacquire the properties by mutually terminating the agreements for sale entered into in the previous financial years. During the current financial year the Company has entered into 53 agreements resulting into cancellations of sale. These agreements for cancellation of sales pertain to sales and revenue/profits recognised during financial year 2006-07 and 2007-08. Though the cancellation of sales was effected during the current year and accordingly in normal course the sales return and reversal of profit thereon should be effected during the current financial year. However, the Company has been legally advised that on the doctrine of ‘Real Income’ and ‘Relation Back’, the cancellation effect should be effected in the year in which the sales and profits were originally recognised and not in the year in which the actual cancellation has taken place (that is the current financial year). Accordingly the Company has revised and re-casted its financial statements for financial years 2006-07 and 2007-08 on the above-mentioned principles. Accordingly, during the year under review, sales return and reversal of profit are not reflected, though the cancellations of sales have occurred during this financial year. The aggregate value of sales return and profit reversal as mentioned above are Rs.181.56 crores and Rs.91.23 crores, respectively for financial year 2006-07 and Rs.100.58 crores and Rs.77.78 crores, respectively for financial year 2007-08. The auditors do not concur with the above view of revising the financial statements of earlier years on the principle of ‘Relation Back’ and ‘Real Income’, instead are of the opinion that the sales return and its consequence on the profit and loss account should be reflected in the year in which such sales return takes place (cancellation of sales agreements), accordingly in the opinion of the auditors the sales return and reversal of profit thereon should be accounted/reflected during the current financial year and not in the earlier years as done by the Company.

    (2b) The Company has revised its financial statements for financial years 2006-07 and 2007-08, giving effect of cancellation of sales, in the respective years, in the manner stated in note 2(a) above. The revised financial statements are already approved by the Board of Directors at its meeting held on 30th March 2009, However the revised financial statements 2006-07 and 2007-08 are not yet adopted and approved by the shareholders. It is proposed to get the revised financial statements for financial years 2006-07 and 2007-08 at the forthcoming Annual General Meeting, along with the financial statements for 2008-09. The act of revision of the Financial Statements for F.Y. 2006-07 and 2007-08 is in accordance with the Circular No. 17/75/2002-CL.V, dated 13-1-2003 issued by the Ministry of Finance and Company Affairs permitting revision of financial statements under certain circumstances.

    From Auditors’ Report :

    (e) In our opinion and to the best of our knowledge and according to the explanation given to us and subject to the specific reference being drawn on :

    (i) note # 2(a) regarding non-accounting of sales returns of Rs.2,82,14.46 lacs effected during the year under review (instead of sales return being accounted in earlier years). The resulting impact being that sales/gross revenue for the year is over-stated by Rs.2,82,14.46 lacs and the net loss after tax is under-stated by Rs.1,69,01.50 lacs, however the reserves and surplus and inventories remaining the same; and

    (ii) note # 2(b) regarding the current financial statements for financial year 2008-09 are subject to the approval of the revised financial statements of financial year 2006-2007 and 2007-2008 by the shareholders at the forthcoming general meeting of the shareholders;

    (iii) . . . .

    (iv) . . . .

    (v) . . . .

    the said Balance Sheet, Profit and Loss Account and Cash Flow Statement read together . . . .

    From Directors’ Report :

    Review of Operations :

    . . . .

    In Financial Year 2008-09, number of agreements for sale have been cancelled, such agreements pertaining to Financial Years 2006-2007 and 2007-2008. The Company has been legally advised that since cancellation of sales pertains to sales recognised earlier, the financial statements of the period during which sales and profits were recognised need re-construction/amendment on the doctrine of ‘Relation-back’ to determine ‘Real-income’. Accordingly the Company has amended the financial statements of the relevant previous years i.e., 2006-2007 and 2007-2008 and shall submit them before the shareholders to adopt the same in this forthcoming Annual General Meeting. An elaborate explanation in this respect has been given in the Explanatory Statement of Notice convening this Annual General Meeting. (not reproduced here)

Lok Housing and Constructions Ltd.

— (31-3-2008 — revised)

    From Notes to Accounts :

During the year under review the Company had entered into several ,agreements in respect of sale of residential flats, commercial shops, properties and developments rights. Sales and revenue in respect of which is accounted in accordance with the consistently followed method of revenue recognition as mentioned in note no. 1 above. During the financial year 2008-09 the Company has entered into 48 agreements having aggregate sales value Rs.100,58.14Iacs, resulting into cancellation of sales recognised during the year under review. This cancellation of agreements have resulted into reduction in gross sales by Rs.100,58.14 lacs and corresponding reduction in net profit after tax by Rs.77,78.03 lacs. Though the cancellation of sales in respect of sales effected during the year under review has happened during the financial year 2008-2009, the Company has been legally advised that on the doctrine of ‘Real Income’ and ‘Relation Back’, the cancellation effect in respect of the above transaction should be effected in the year under review and not at the time when actual cancellation took place. Accordingly the Company has redrafted its financial statements on the above-mentioned principles as if the transaction for sales had not occurred at all. Consequently during the year under review, sales and net profit before tax is reduced compared to the original financial statements prepared for the year under review. In view of the amendment to the financial statements of the Company giving effect to the above-mentioned cancellation transactions, the Company is once against presenting the amended financial statements to the members for their approval.

The financial statements are revised in accordance with the Circular number 1/2003, dated 13th January 2003, issued by the Ministry of Finance and Company Affairs. The auditors have relied on the management’s interpretation of the said Circular that the proposed revision of the financial statements is in accordance with the letter and spirit of the said Circular, thereby the revision of financial statements is in accordance with the provisions of the Companies Act, 1956.

From Auditors’ Report:

As per our opinion, which opinion is also supported by the Institute of Chartered Accountants of India, a company cannot reopen and revise the accounts once adopted by the shareholders at an Annual General Meeting. Contrary to this opinion, the Board of Directors of the Company has reopened and revised the aforesaid accounts in terms of Circular of the Ministry of Finance and Company Affairs dated 13-1-2003 in compliance with the accounting standards.

We have considered the earlier Auditor’s Report dated 30th June 2008 on the original accounts and have examined the changes made therein, which are as under:

Cancellation of sale amounting to Rs.l00,58.14 lacs reversal of cost of sales thereto amounting to Rs.22,80.10 lacs and resulting reduction in profit after tax by Rs.77,78.03 lacs.

e) In our opinion and to the best of our knowledge and according to the explanation given to us and subject to the specific reference being drawn on note # 2(a) regarding the treatment for cancellation of sale agreements aggregating to Rs.100,58.14 lacs and resulting reduction in profit after tax by Rs.77,78.03 lacs and thereby revising the financial statements of the said year, the said Balance Sheet, Profit & Loss Account and Cash Flow Statement read together with the notes ….

From Directors’ Report:

Your Company had entered into several transactions for sale of various real estate products and properties during the year under review, when the market situations were at its pinnacle. As it is the practice in the real estate industries the payments are deferred and paid over a period of time. In accordance with the consistent accounting practice of the Company as mentioned in the notes to account the sale and profit in respect of these sale transactions were recorded. However, after the sub-prime crises, fall of giant financial institutions like Fannie Mai, Freddi Mac, Lehman Brothers, the world economy has gone into severe recession and financial meltdown, consequent of which the prices in all markets and real estate in particular have fallen by over 50-60%. The parties who had transacted in the past started defaulting on their payments. Considering the peculiarity of our business and the over-all interest of the Company, your management thought of mutually terminating some of the transactions for sale, so as to avoid the property from going into prolonged and unproductive litigation.

These cancellations of sales happened during November-December 2008, that is falling into the financial year 2008-09. In normal and regular course these sales would be shown as sales return during financial year 2008-09, however the Company has been legally advised that on the principle of ‘Real income’ and on the doctrine of ‘Relation back’, the Company should revise its financial statements for the year in which the original sales transaction hapened. Accordingly the financials statements of financial year 2007-08 are revised.
 
The Company has approached the shareholders to consider and adopt the Revised Annual Accounts and relevant Report there on for the financial Year 2007-2008.

Lok Housing and Constructions Ltd. – (31-3-2007 – revised)

From Notes to Accounts:

During the year under review the company had entered into several agreements in respect of sale of residential flats, commercial shops, properties and development rights. Sales and revenue in respect of which is accounted in accordance with the consistently followed method of revenue recognition as mentioned in note no. 1 above. During the financial year 2008-2009 the Company has entered into agreements having aggregate sales value Rs.1,81,5633 lacs resulting into cancellation of sales recognised during the year under review. This cancellation of agreements has resulted into reduction in gross sales by Rs.1,81,56331acs and corresponding reduction in net profit after tax by Rs.91,23.47 lacs. Though the cancellation of sales effected during the year under review has happened during the financial year 2008-2009, the Company has been legally advised that on the doctrine of ‘Real Income’ and ‘Relation Back’, the cancellation effect in respect of the above transactions should be effected in the year under review and not at the time when actual cancellation took place. Accordingly the Company has redrafted its financial statements on the above-mentioned principles as if the transaction for sales had not occurred at all. Consequently during the year under review, sales and net profit before tax is reduced compared to the original financial statements prepared for the year under review. In view of the amendment to the financial statements of the Company giving effect to the above-mentioned cancellation transactions, the Company is once again presenting the amended financial statements to the members for their approval.

The financial statements are revised in accordance with the Circular number 1/2003, dated 13th January 2003, issued by the Ministry of Finance and Company Affairs. The auditors have relied on the management’s interpretation of the said Circular, that the proposed revision of the financial statements is in accordance with the letter and spirit of the said Circular, thereby the revision of financial statements is in accordance with the provisions of the Companies Act, 1956.

From Auditors’ Report:

As per our opinion, which opinion is also supported by the Institute of Chartered Accountants of India, a company cannot reopen and revise the accounts once adopted by the shareholders at an Annual General Meeting. Contrary to this opinion, the Board of Directors of the Company. has reopened and revised the aforesaid accounts in terms of the Circular of the Ministry of Finance and Company Affairs dated 13-1-2003 in compliance with the accounting standards.

We have considered the earlier Auditor’s Report dated 28th June, 2007 on the original accounts and have examined the changes made therein which are as under:

Cancellation of sales amounting to Rs.l,81,56.333Iacs reversal of cost of sales thereto amounting to Rs.90,32.86 lacs and resulting in reduction in profit after tax by Rs.91,23.47 lacs.

These financials statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

e) In our opinion and to the best of our knowledge and according to the explanation given to us and subject to the specific reference being drawn on note # 2, regarding the treatment for cancellation of certain sale agreements aggregating to Rs.l,81,56.33 lacs and resulting into reduction in profit after tax by Rs.91,23.47 lacs and thereby revising the financial statements of said year, the said Balance Sheet, Profit & Loss Account and Cash Flow Statement read together with the notes …


From Directors’ Report:

Not reproduced since similar to disclosures in Directors’ Report for 31-3-2008 (revised).

Indian Economy — A Victim of Bad Politics ?

Editorial

The recent budget (really a vote on account) was an
eye-opener for the Indian public. Unlike normal budgets, this budget was not
cluttered with the baggage of numerous amendments to various laws, and therefore
the focus was on the budgeted figures and the actual figures for the current
year. The budget was also in the focus on account of the fact that the world
economy is in doldrums, and people were keen to know the actual impact on India
so far.

A budget is supposed to be an estimate of and a guide to
future spending. In the corporate sector, employees are taken to task for
exceeding budgeted figures, which are regarded as sacrosanct. In the context of
the Government of India, budget figures of expenditure have always been
exceeded, though normally only by a small percentage. This year being an
election year, the budget seems to have been thrown completely to the winds.
According to the estimates, the revenue deficit as a proportion of GDP for
2008-09 will be 4.4 times the budgeted figure, while the fiscal
deficit will be double the budgeted figure.

This is only the disclosed figure. If one factors in the oil
bonds and fertiliser bonds issued, which are off-budget items in the year of
issue but show up only in the year of redemption, the actual deficit is much
higher. Is there any sanctity to the budgeted figures, or is it just something
put together for public consumption because it is required by statute ?

What does this reflect ? It reveals the lack of importance
our political leaders attach to the budget process, and their sheer disregard
for all consequences to the economy in an election year.

The profligacy of politicians in power in the last few years
has ensured that the advantages of buoyant tax revenues from the booming economy
have been frittered away in good years, without saving anything for the bad
times. Now that the economy is going through a bad patch and the time has come
for the Government to spend freely to revive the economy, the Government would
obviously find it difficult to find the funds to do so.

The problem has been compounded by the fact that from the
date the election schedule is announced, the Government is totally paralysed,
and prevented from taking any major policy decisions. Most economists are
unanimous in their view that a slowdown or depression of this nature calls for
swift and decisive action by the Government. The world over, governments are
taking drastic decisions almost every week to hold up their economies. A
recession of this nature calls for concerted efforts of all governments in a co-ordinated
manner. We have the double disadvantage of a Government taking decisions from an
election viewpoint, rather than from an economic perspective, followed by a
period of indecision. Further, it seems unlikely that the elections will give a
mandate to any single political grouping. So, even thereafter, the new
Government is likely to be swayed in its decision-making by political necessity
arising out of its alliances with different parties with differing views, rather
than by economic commonsense.

In that sense, one can say that if India continues to grow,
it would be in spite of its political leaders. Our growth and prosperity would
have been significantly higher if we had leaders of the right calibre, who truly
had the national interest in mind above everything else. One wishes and hopes
that the recent public awakening witnessed after the terrorist attacks, results
in emergence of a new and better political force, which, through the sincerity
and honesty of its purpose, could help this country achieve its true potential !

Gautam Nayak

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Prosperity without Security ?

Editorial

The elections have thrown up a
pleasant surprise in the form of a relatively stable government. The stock
markets are booming in anticipation of a fiscal stimulus package and economic
reforms. It is almost as if the markets believe that the worst of the recession
is now behind us and that henceforward it is all smooth sailing for the country.
Is this really justified ?

With a stable government in
place committed to economic reforms, it is highly likely that India would not be
as badly affected by the worldwide recession as other countries, and would be
able to ride out the storm. The real problem facing the country’s growth however
lies elsewhere — in the stability of our neighbourhood. Growth is not
sustainable without stability.

In the last few months, we have
seen an internal battle being waged by the Pakistani Government against the
fundamentalist Taliban, and the threat being posed by such fundamentalist forces
to the very existence of Pakistan. The monster created by the Pakistani
Government now threatens to engulf the entire country. Such proximity to our
borders, given the attitude of such fundamentalist forces towards India and the
violent methods being used to achieve their ends, is bound to create security
problems within India, endangering the prospects of growth. The very thought
that Pakistan’s nuclear weapons may fall into the hands of such fundamentalists
is a cause of great concern.

On our northern borders, Nepal,
which had so far not posed a problem to India’s security, is facing serious
internal problems. The Maoists who had given up their violent tactics to join
the Government, had to quit. India is being blamed for their plight, and the
Maoists are unlikely to take things lying down. Their making common cause with
China is bound to create security issues for India. Whether the Maoists are in
power or out of power, Nepal is likely to be a thorn in India’s security for the
next few years.

On the eastern front, though
relations with Bangladesh have improved for the time being, the politics of
Bangladesh being what it is, one wonders how long this improved relationship
will last. India’s border debate with China remains unresolved, with issues
suddenly raising their heads from time to time.

To top it all, many Indian
States are facing violent tactics of Maoists and Naxalites. All in all, India
seems to be situated in the most dangerous location worldwide, so far as the
safety and security of its residents are concerned. The top priority of the new
Government should therefore be to take measures to improve the internal and
external security of the country.

This involves not merely the
strengthening of internal security forces and the armed forces, but also making
the right moves in respect of our foreign policy. Economic reforms can take a
country far, but security of life and property is essential for the business
sector to flourish. Over the past decade, India has been seen as an attractive
investment and business destination on account of its comparatively peaceful
atmosphere. To some extent, this image has taken a beating due to the series of
recent terrorist attacks.

No country can hope to be
regarded as an attractive place to do business unless peace prevails there. Take
the cases of Vietnam, Ireland, and so many others. Once ravaged by war or civil
war, these countries were then regarded as death-traps. Today, these are
considered as investment destinations worldwide, on account of the peace and
stability that they have enjoyed for over a decade.

The biggest challenge before
the new Government is to take steps to ensure that peace and internal stability
are maintained, notwithstanding the developments in our immediate neighbourhood.
Our arms purchases, our expenditure on defence and police, should not be victim
to party politics or corruption, but should be regarded as an essential
expenditure for national growth. Our foreign policy should be guided by
long-term considerations of peaceful co-existence and not by short-term
prejudices of the party in power, nor by ambitions of becoming a super power.
This is an opportunity for this Government to show that right approach can make
a difference. Only time will tell whether our hopes will be realised or not !

Gautam Nayak

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Improving the effectiveness of Tax Laws

Editorial

As I write this editorial, the Union Budget for 2009-10 is
yet to be presented, but will be in your hands before you read this (since this
Special Issue is being released at the AGM on 10th July). Expectations from this
budget are running high, particularly as the newly re-elected Congress
Government is no longer constrained by pulls and pressures from its allies.
Perhaps the public expectations are running too high, given the constraints on
Government finances and the worldwide economic recession. Also, the short time
between the swearing in of this Government and the presentation of this budget
leaves very little scope to actually carry out any major changes. This Budget is
therefore more likely to express the intentions of the Government to carry out
further changes over the next five years, rather than actually effect any
immediate major changes.

On the taxes’ front, as usual, various rumours of expected
changes are doing the rounds, ranging from drastic changes such as abolition of
Fringe Benefit Tax to minor changes such as restricting allowability of
depreciation to Charitable Trusts. We have got so used to numerous amendments to
tax laws carried out through the Finance Act each year, that we take such
changes for granted.

The Government has been talking of simplification of tax laws
for the past several years, and has been deleting various incentive provisions
every year with this stated objective. The justification for simplification of
tax laws is that it will improve compliance on account of better understanding
of tax provisions. Does simplification really serve this purpose ?

A recent research paper on Behavioural Economics and Tax
Policy presented at the National Tax Association’s 2009 Spring Symposium in USA
by two researchers from the Brookings Institution and a Professor at Harvard
University does raise some doubts about such claims. This paper points out that
the standard economic assumptions about individual behaviour are not accurate,
and that behavioural economics shows that people do not act rationally, that
they are not perfectly self-interested and that they hold inconsistent
preferences. Using these findings of behavioural economics would lead to more
effective tax policy, from the perspective of welfare consequences of taxation,
use of the tax system as a platform for policy implementation and using taxes as
an element of policy design.

Tax efficiency depends on the elasticity of the response to
tax rates. Since elasticity is really a parameter derived from a behavioural
response, and behavioural economics shows that how people respond to taxes is
less straightforward than what is normally presumed, the rationale for tax
simplicity needs to be re-examined.

Normal policy dictates that the recipe for good taxes is that
they should be simple, they should impose low rates on wide bases, and in case
of taxes on goods, they should be imposed on goods for which the demand is
relatively inelastic. Simplicity is associated with efficiency. The view is that
low tax rates on large bases are simpler as compared to taxes with many
exemptions from income, which leads to smaller bases and higher tax rates.
Complex taxes increase the cost of tax compliance and administration. Provisions
complicating the tax laws are often seen as being more politically motivated,
than economically justified.

Behavioural economics shows that individuals respond to tax
rates not as they are set, but as they construe them. Complex or obscure taxes
may not be perceived accurately or may be ignored. Therefore, the elasticity to
such taxes is low, making such taxes efficient. For example, sales tax which is
a part of the commodity price, is often ignored by taxpayers. Similarly, if a
separate tax is raised for a specific purpose, though it complicates tax laws,
behavioural economics shows that taxpayers associate that particular tax with
the intended benefit, leading to better compliance.

Balancing tax complexity with tax fairness is another area
where behavioural economics can contribute. The fairest tax code is normally not
the simplest. Adding fairness to a tax system adds to the complexity, but
taxpayers generally prefer an equitable or fair tax system though it adds
complexity, as behavioural economics shows that they care about the welfare of
others and are not perfectly self-interested.

Behavioural Economics also shows that implementation of
non-tax policies along with tax laws is easier, since the process of filing of
returns and payment is almost automatic compared to other government procedures.
It is therefore far easier to implement such programmes through tax laws, rather
than have a separate procedure for such programmes.

Another area where behavioural economics is of help is by
showing that tax reductions structured as bonuses are more likely to be spent by
taxpayers, than if structured as tax rebates. Similarly, a reduction in tax
deduction rate is more likely to be spent by taxpayers, rather than a lump sum
reduction. This understanding facilitates structuring of reduction in taxes by
the Government, where the intention is that the tax savings should be spent by
taxpayers in order to boost the economy.

This study serves as a beginning to understand the nuances of
taxpayer attitudes to tax laws, which are not as rational as made out to be so
far. This certainly raises many more questions in relation to the current
perceived wisdom, particularly as to whether simplification of tax laws is
desirable if it is at the cost of fairness.

Gautam Nayak

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Capital gain : Capital asset : Agricultural land : S. 2(14) of I. T. Act, 1961 : Purchase of agricultural land in 1989 to set up industry : Shortly thereafter, land acquired by Government : AO treated land as capital asset and assessed capital gain : Not

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35. Capital gain : Capital asset : Agricultural land : S.
2(14) of I. T. Act, 1961 : Purchase of agricultural land in 1989 to set up
industry :  Shortly thereafter, land acquired by Government :  AO treated land
as capital asset and assessed capital gain : Not justified.

[Hindustan Industrial Resources Ltd vs. ACIT, 180
Taxman 114 (Del.)]

The assessee had purchased an agricultural land in 1989
with an object of setting up an industry. Shortly thereafter it was acquired
under the Land Acquisition Act, 1894 and compensation was paid to the assessee
by the Government. The assessee claimed that the land was an agricultural land
and therefore, no taxable capital gain accrued. The Assessing Officer assessed
the capital gains to tax, holding that land ceased to be agricultural land
when the assessee purchased it from the agriculturist for setting up an
industry. The Tribunal upheld the decision of the Assessing Officer.

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

“i) The Tribunal’s finding of fact was contrary to its
own record and, therefore, was in the realm of perversity. That was so,
because the Tribunal clearly held that at the point of time when the
assessee purchased the said land, it was an agricultural land. The Tribunal
also noted that the award passed on 01.04.1992 by the District Collector
(Land Acquisition) was a document which established beyond doubt that the
land in question was an agricultural land. Thus on the date of purchase, the
land in question was an agricultural land and on the date of acquisition,
the character of the land continued to be agricultural. When those two
findings had been returned, it was apparent that in the transitional period,
that was, between purchase and acquisition, the nature and character of the
land did not change.

ii) The fact that the assessee intended to use that land
for industrial purposes did not alter the nature and character of the land
in any way. The further fact that the assessee did not carry out any
agricultural operations also did not result in conversion of the
agricultural land into an industrial land. It was nobody’s case that the
assessee carried out any operations for setting up any plant and machinery
or of the like nature so as to lead to an inference that the nature and
character of the land had been changed from agricultural to industrial.

iii) In any event, that discussion was not relevant in
the backdrop of the clear finding given by the Tribunal that on the date of
the purchase and also on the date of acquisition, the land in question was
an agricultural land. Having come to such a conclusion, the Tribunal ought
not to have gone into the question of intention of the assessee and
definitely not into the question of intention of the land acquiring
authority, the later being a wholly irrelevant consideration.

iv) In those circumstances, the Tribunal was not
justified in holding that the land acquired from the ownership of the
assessee was not an agricultural land. The impugned order passed by the
Tribunal was to be set aside.”

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Travel business : Expenditure on development of website is revenue expenditure allowable u/s.37(1).

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57 Business expenditure : Revenue/Capital :
S. 37(1) of Income-tax Act, 1961 : A.Y. 2001-02 : Assessee in travel business :
Expenditure on development of its website : Is revenue expenditure allowable
u/s.37(1).


[CIT v. Indian Visit.com (P) Ltd., 176 Taxman 164 (Del.)]

The assessee was engaged in travel business. The assessee
made all kinds of arrangements for its clients such as booking of hotel rooms,
providing taxi services, booking of air tickets and railway tickets, etc. During
the relevant year the assessee had incurred an expenditure of Rs.20,23,317 on
development of its website. The assesse’s clients could use the said website for
the purpose of availing of the services provided by it. The assessee had claimed
the deduction of the said expenditure as business expenditure u/s.37(1) of the
Income-tax Act, 1961. The Assessing Officer disallowed the claim holding that
the expenditure was of capital nature inasmuch as the assessee had acquired an
asset, which would provide it with an enduring benefit. The Tribunal allowed the
assessee’s claim.

 

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

“(i) Considered in the light of the principles enunciated
by the Supreme Court, it is clear that just because a particular expenditure
may result in an enduring benefit it would not make such an expenditure
capital in nature. What is to be seen is what is the real intent and purpose
of the expenditure and as to whether there is any accretion to the fixed
capital of the assessee. In the case of expenditure on website, there is no
change in the fixed capital of the assessee. Although the website may provide
an enduring benefit to an assessee, the intent and purpose behind a website is
not to create an asset, but only to provide a means for disseminating the
information about the assessee. The same could very well have been achieved
and, indeed, in the past, it was achieved by printing travel brouchers and
other published material and pamphlets. The advance of technology and the
wide-spread use of the Internet has provided a very powerful medium to
companies to publicise their activities to a larger spectrum of people at a
much lower cost. Websites enable companies to do what the printed brouchers
did, but in a much more efficient manner as well as in a much shorter period
of time and covering a much larger set of people worldwide.

(ii) The Tribunal has correctly appreciated the facts as
well as the law on the subject and has come to the conclusion that the
expenditure on the website was of a revenue nature and not a capital nature.”


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Appellate : Powers in matters remitted by High Court restricted to directions by High Court.

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56 Appellate Tribunal : Powers in matters
remitted by High Court : Powers restricted to directions by the High Court.


[Harsingar Gutkha (P) Ltd. v. ITAT, 176 Taxman 137
(All.)]

In an appeal filed by the assessee against the order of the
Tribunal the Allahabad High Court remanded the matter back to the Tribunal to
redecide the case on the basis of the material on record. Thereafter, by its
order dated 25-7-2008 the Tribunal directed the Assessing Officer to record the
statements of D and G to ascertain certain facts.

On a writ petition filed by the assessee challenging the said
order of the Tribunal, the Allahabad High Court held as under :

“(i) We are of the view that it was not open for the
Income-tax Appellate Tribunal to take fresh material on record by the impugned
order dated 25-7-2008. The Tribunal has directed the Assessing Authority to
record the statements of Shri Dinesh Singh, ACA and Shri G. L. Lath,
chartered accountant, which will amount to additional evidence/material in
the case. By the judgment and order passed by this Court, the Tribunal was
directed to adjudicate the matter afresh on the basis of the material on
record.

(ii) When a direction is issued to an Authority or Tribunal
to do a thing in certain manner, the thing must be done in that manner and no
other manner. Other methods of performance are necessarily forbidden.

(iii) In the instant case, the matter was remitted to the
Tribunal by this Court with certain directions and it was not open for the
Tribunal to take fresh evidence in the matter, as no such direction was issued
by this Court. The impugned order by which a fresh direction has been issued
by the Tribunal to the Assessing Officer is legally not sustainable.”


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Direct Taxes Code

Editorial

The Finance Minister has kept
his word and released the draft of the Direct Taxes Code for public comment
within the promised time — in fact, one week in advance. It is now time for us
to study the code in detail, understand its implications and make
representations to the Government. The question that we need to ask is — at
first glance, has the Direct Taxes Code really lived up to the expectations ?

Undoubtedly, significant
efforts have gone into drafting of the Direct Taxes Code and into simplification
of complex provisions. The language of the Direct Taxes Code is definitely a
significant improvement on the legalistic and convoluted language of the Income
Tax Act. Unnecessary complications such as the concepts of previous year and
assessment year, which made understanding of the income tax provisions difficult
to most laymen, have been sought to be eliminated. To that extent, the
Government certainly needs to be complimented for its efforts.

Most individual taxpayers have
been enthused by the significant proposed reductions in individual tax rates,
with taxes at the Rs.10 lakh and Rs.25 lakh levels coming down from Rs.2,10,120
and Rs.6,73,620 levels to Rs.84,000 and Rs.3,84,000, respectively. However, one
aspect which most people have not realised is that their taxable incomes would
also be much higher under the Direct Taxes Code, on account of taxation of
withdrawal of provident fund monies, taxation of insurance monies, taxation of
capital gains on sale of equity shares at normal rates of tax, etc. Tax
exemption schemes would effectively be replaced by tax deferment schemes under
the EET method.

There are quite a few other
fundamental changes to the tax laws which are being made through the Direct
Taxes Code. Minimum Alternate Tax (‘MAT’) would no longer be based on book
profits, but on the gross assets of the company. The entire rationale behind
introduction of MAT, to tax companies which showed book profits and paid
dividends but paid no taxes, is therefore now being tossed aside, and MAT sought
to be justified by the rationale of need for productivity. Would MAT on gross
assets really increase productivity of companies, or just further hamper
loss-making companies ? The Government seems to believe that companies choose to
make losses, even when they are capable of making profits ! By that logic, the
day may not be far off when norms for productivity of different industries would
be laid down, and any company not meeting the norms of profitability would be
taxed on the income which, in the Government’s opinion, it ought to have earned.

The reduction in corporate tax
rates is being neutralised by MAT and changes in incentive provisions. Incentive
deductions for various industries, such as infrastructure, power, etc., are
being replaced effectively by accelerated depreciation, which is really not a
substitute for the profit deduction which has hitherto been available. Would
such an incentive be sufficient to enthuse companies to undertake such priority
activities ? It may perhaps be better not to have any such incentive at all, but
to ensure speedy project approvals and clearances to encourage such activities.
Unfortunately, we may end up with the worst of both — a poor tax incentive, as
well as delays in project approvals.

The general anti-avoidance rule
being sought to be introduced has the maximum potential for misuse by tax
authorities. Given the approach of tax authorities, who view every transaction
with a jaundiced eye, regarding it as having been entered into for tax
avoidance, such a provision should have inbuilt effective safeguards, if at all
it is to be introduced. Otherwise, the amount of litigation being seen in
relation to transfer pricing would certainly be dwarfed by litigation which
would be unleashed by such a provision. One thought that the objective behind
the new code is to reduce uncertainty and litigation, not encourage it. Such a
provision is therefore inconsistent with the objectives of the new code.

It is not only domestic
taxpayers who would end up with difficulties under the Direct Taxes Code. Though
all existing tax treaties may be renotified to override the Direct Taxes Code,
the general anti-avoidance rules, the provisions relating to rectification,
reassessment and revision on the basis of any order in the case of any person,
could see tax proceedings dragging on without finality.

All these provisions would
certainly mean plenty of work for chartered accountants and tax lawyers. But I
think no self-respecting professional would like such additional work if it is
at the cost of difficulties and uncertainties caused to the business community
and to taxpayers in general. One hopes that the Government will at least really
pay some heed to the representations which would be made, and not enact such
provisions which would offset the good work done in the Direct Taxes Code.


Gautam Nayak

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Backdoor Taxation ?

Editorial

One often hears claims by tax
officials that India has one of the lowest tax rates in the world for
individuals, that the effective taxes paid by companies in India as a percentage
of their profits is very low as compared to that paid by companies in other
countries, etc. Are such claims really true ? Do such claims take into account
the real effects of our tax system on taxpayers ?

What one needs to keep in mind
is that the taxes as per the rates found in the Finance Act are not the only
taxes that a taxpayer ends up paying. MAT, wealth tax and FBT add to the tax
burden. The provisions of our tax laws ensure that a taxpayer ends up paying
taxes not only on his real income, but on various other items added to his
income for non-tax reasons. To illustrate, salaried employees pay taxes on
retirement compensation (which is really a capital receipt), on stock options
which may not fetch any return, etc. Businessmen pay taxes on delayed payments
of provident fund, taxes, duties and fees, on cash expenses exceeding certain
limits, on expenses on which tax is not deducted at source, and on penalties
incurred in course of business. Most people pay taxes on capital appreciation on
sale of assets, though at current prices they may be worse off, since cost
inflation index neutralises only 75% of consumer inflation. Over the years, one
has learnt to live with such unfair provisions, which result in more tax than
the fair tax on one’s income.

In recent years, one sees a new
dimension being added to such backdoor taxation. Let us look at some
developments :


  • Software used for processing of income tax
    returns is defective, computing wrong amounts of tax in respect of long term
    capital gains, giving rise to incorrect demands and lower refunds.




  • Online system of TDS is started, and the
    return-processing software gives credit only on the basis of the online tax
    credit as per the TIN system, which is normally less than half the amount of
    TDS claimed. Demands are raised and refunds refused on basis of such non-grant
    of tax credit (TDS). Applications for rectification remain unattended to, in
    spite of all relevant TDS certificates being filed. There is no provision for
    speedy redressal of such grievances.




  • Banks are asked to upload tax payment details
    online into the TIN system. Invariably, bank clerks make errors, on account of
    which the taxpayer does not get credit for taxes paid. The taxpayer has to
    approach the Assessing Officer a number of times to get credit for each such
    payment incorrectly entered by banks. Wrong demands are raised and refunds
    refused on account of credits not granted.




  • Even before the TIN system has stabilised, and
    while thousands of crores of taxes paid by way of TDS and advance taxes are
    lying unadjusted against the correct taxpayer PAN, TDS credit rules are
    amended to provide that credit shall be given not on the basis of TDS
    certificate, but on the basis of quarterly e-TDS statements filed by the tax
    deductor. No provision is made for any method for the deductee to ensure that
    his PAN is quoted correctly by the deductor. The deductee is now therefore
    left at the mercy of the TIN system and the tax deductor for getting credit of
    TDS.




  • E-filing and centralised processing of tax
    returns are introduced ostensibly to speed up the processing of tax returns.
    It is then realised that the e-filed returns cannot be processed by the
    software, which is not yet operational, and that the whole process of refunds
    will get held up.




  • No effort is made to ensure that rectifications
    and appellate effects are speeded up.



Taking each of these happenings
in isolation, one can understand that these could be due to teething problems.
However, when one sees that no efforts are being made to sort out past problems,
that existing problems are sought to be kept under wraps, and that new problems
are being created without a care for taxpayer difficulties, one wonders whether
there is more to this than meets the eye.

Computerisation of the tax
system was supposed to make the whole process of tax payment and recovery more
taxpayer-friendly. In reality, the system is being experimented with at the cost
of the taxpayer. Given India’s famed skills in software, the computerisation
efforts should not have caused so much difficulty to so many.

The least that the CBDT can do
to dispel taxpayer doubts is :


  • Admit the problems being faced and share with
    taxpayers the progress being made in resolving the problems on an ongoing
    basis;




  • Set up alternative mechanisms to deal with
    computerisation/software defects & failures, so that taxpayers do not suffer
    due to such defects; and


  • Ensure that in future, computerisation of processes by taxpayers is not made
    mandatory unless the software and systems are ready, tested, and found to be
    mistake-proof and reliable.





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TDS Compliance

Editorial

The best way to ensure
statutory compliance is to make the process as simple as possible, so that the
person who has to comply with the law, finds it less burdensome to comply with,
rather than undergoing penalty for non-compliance. Unfortunately, as witnessed
by the recent amendments in tax deduction at source (TDS) procedures, the CBDT
is seeking to make compliance so cumbersome that it makes the compliance
extremely onerous, if not impossible for most tax deductors.

All these years, the CBDT has
failed miserably in its attempts to ensure that there was proper compliance with
TDS provisions, and that tax collection by way of TDS matched with tax credit
given for TDS. This was on account of the complicated and ambiguous provisions,
which made the law difficult for most tax deductors to understand, and the
manner in which the law was administered, with many tax officers not fully
conversant with the correct provisions of law. Poor tax administration caused
revenue leakages in the system.

Realising that it was unable to
set its own house in order, the CBDT now seems to be going to the other extreme
of casting the entire burden of creating the data, on the tax deductors. This is
acceptable to some extent, given the benefits of computerisation that would flow
to tax deductors and deductees. But the extent of compliance being cast now
makes it so onerous, that it would require almost every business to hire
additional people to comply with such requirements, the total number of people
required probably exceeding the size of the entire Income Tax Department.

The requirements of Form 24C
seem to reveal a mindset of the CBDT, that businesses are in existence only to
comply with the requirements of the tax authorities. It would be almost
impossible to compile the monthly data in the manner sought. Just to give an
example, details of total payments to contractors during the month have to be
given, including those from which taxes have not been deducted. Payments to
contractors may be debited to printing & stationery, travel & conveyance,
advertisement, staff welfare and dozens of other accounts. To identify and
compute the monthly value of such payments and others every quarter would
involve more work than that required for filing the return of income !

Is this a financial stimulus
package being thought up of by the CBDT to create employment ? It will certainly
have the opposite effect, as businesses already suffering from eroded
profitability will not be able to bear the burden. Maybe taxes could be reduced
on businesses to ease the burden, by reduction of the size of the Income Tax
Department, given the extent to which its functions are being outsourced.

The increasing scope of
mandatory e-payments and e-filing also makes one wonder whether the CBDT is
aware of the ground realities in this country, where most places do not even
have continuous electric power to run their computers, or where internet
connectivity is often irregular. Outside Mumbai, one often hears narratives of
how all details were filled in and payment or uploading was about to be done,
when there was a power or internet or website failure, necessitating initiation
of the entire process again after power or connectivity was restored.

Only 30 banks permit e-payment
of taxes. What about those deductors who have their accounts with other banks ?
Many people prefer not to have internet banking, on account of their fear of
fraud.

Under such circumstances, it
would perhaps have been far better to make e-payments and e-filing optional
rather than mandatory. The least that one would expect is to keep such e-payment
or e-filing as simple as possible, so that it is easy to comply with, given the
constraints that we suffer from.

The worst part of the
amendments is the new rule 37BA providing that credit for TDS would be granted
on the basis of the returns filed by tax deductors and reflected in the TIN
system, instead of on the basis of TDS certificates. Today, it is well-known
that on account of various flaws in the system, the credit appearing in the TIN
system rarely reflects more than 50% of the TDS deducted from a taxpayer as
evidenced by TDS certificates. The major culprits for such failure are
nationalised banks and Government Departments, which do not comply with the
requirements or do so incorrectly. There is no provision for a taxpayer to
penalise or force a tax deductor to file his TDS returns correctly. When the tax
authorities, with their powers to penalise and prosecute, have not been able to
enforce proper TDS compliance, how can a mere taxpayer without any powers ensure
this ?

Such a provision amounts to
cheating a taxpayer of the legitimate taxes contributed by him, for no fault of
his. It amounts to expropriation of taxpayers’ money by the Government over and
above the taxes that it has recovered. One understands that even today, a
sizeable amount of taxes paid to the Government has not been credited to
accounts of taxpayers but is lying in suspense, on account of incorrect PAN,
other details, etc., mentioned by tax deductors or banks. The CBDT cannot escape
its responsibility to come out with a better scheme to ensure that every
taxpayer gets credit for all taxes deducted from his income, besides all taxes
paid by him.

Gautam Nayak

 

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Penalty : S. 271B r/w. ss. 44AB and 80P of I. T. Act, 1961 : Failure to get accounts audited within prescribed time : No tax payable by assessee society in view of s. 80P : Penalty u/s. 271B not to be imposed

New Page 1

  1. Penalty : S. 271B r/w. ss. 44AB and 80P of I. T. Act,
    1961 : Failure to get accounts audited within prescribed time : No tax payable
    by assessee society in view of s. 80P : Penalty u/s. 271B not to be imposed.



 


[CIT vs. Iqbalpur Co-operative Cane Development Union
Ltd.; 179 Taxman 27 (Uttarakhand)].

The income of the assessee co-operative society was
exempted u/s. 80P of the Income-tax Act, 1961. The assessee society failed to
get its accounts audited u/s. 44AB of the Act within the prescribed time.
Therefore, the Assessing Officer imposed penalty u/s. 271B of the Act. The
Tribunal cancelled the penalty.

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

“i) There appeared no intention on the part of the
assessee to conceal the income or to deprive the Government of revenue as
there was no tax payable on the income of the assessee, in view of the
provisions of section 80P. Thus, it was not necessary for the Assessing
Officer to impose penalty u/s. 271B.

ii) On going through the impugned order passed by the
Tribunal, no sufficient reason was found to interfere with the satisfaction
recorded by the Tribunal as to the finding of fact that the assessee had no
intention to cause any loss to the revenue and as such, the penalty was not
necessarily required to be imposed by the Assessing Officer.

iii) Agreeing with the view of the Tribunal, it was to be
held that though an assessee is liable to penalty u/s. 271B for failure to
comply with the provisions of section 44AB but since in the instant case, no
tax was payable by the assessee in view of the provisions contained in
section 80P, the Tribunal had commited no error of law in setting aside the
penalty imposed by the Assessing Officer”.

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Gaps in GAAP Amendment to AS-11

The Central Government, vide Notification dated 31 March 2009, has amended Accounting Standard (AS) 11 The Effects of Changes in Foreign Exchange Rates, notified under the Companies (Accounting Standard) Rules, 2006. Pursuant to the amendment, a new paragraph has been inserted in AS-11 to allow amortisation/capitalisation of foreign exchange differences arising on long-term monetary items. The amendment has far-reaching consequences, than is apparent on a plain reading.

The option permitted is not in accordance with IAS-21 Effect of Changes in Foreign Exchange Rates. The Institute of Chartered Accountants of India (ICAI) and The Ministry of Corporate Affairs (MCA) have committed to adopt IFRS with effect from April 1, 2011. Availability of the option only till March 31, 2011 clearly reinforces ICAI and MCA commitment towards adopting IFRS by 2011. Companies should take serious note of this, and start preparing for IFRS, given that the IFRS conversion process is a lengthy process.

In Annexure 1, through a simple example, the author has tried to explain the practical application of the amendment when a loan is taken for working capital purposes with regards to (a) retrospective application of the standard, (b) write-off of unamortised balance at 31 March 2011 and (c) the method of amortisation. In Annexure 2, the example remains the same, except that the loan is taken for acquiring fixed assets.

The key salient features are :

1. Exchange differences on monetary items under AS-11 are required to be recognised in the P&L Account. The amendment to AS-11 allows an alternative treatment of amortising/capitalising exchange differences on long-term monetary items.

2. If a company avails the option given in the Notification, it needs to be adopted for all long-term foreign currency monetary items. In other words, cherry picking of monetary items is not permitted.

3. The alternative treatment is optional and has to be exercised in the first reporting period after the date of the Notification. The option once exercised is irrevocable.

4. The alternative treatment applies to exchange differences, i.e., both exchange gains and losses.

5. The Notification is issued by The Ministry of Corporate Affairs (MCA) as per the authority granted under the Companies Act, 1956 which is applicable to companies. For non-corporate entities, such as partnership firms, trusts and HUFs, the ICAI has clarified that the AS-11 amendment would not apply.

6. The exchange differences to the extent falling within paragraph 4(e) of AS-16 would continue to be governed by the said requirements since these do not fall within the purview of AS-11. The option given in the Notification is available only in respect of exchange differences to the extent these are governed under AS-11.

7. If the long-term foreign currency monetary item relates to other than an acquisition of a depreciable capital asset, exchange differences should be accumulated in the ‘Foreign Currency Monetary Item Translation Difference Account’ and amortised over the life of the monetary item but not beyond 31 March 2011. If the monetary item is settled, then exchange differences cannot be carried forward and will need to be recognised immediately.

8. If the long-term foreign currency monetary item relates to acquisition of a depreciable capital asset, exchange differences arising on such monetary items should be added to or deducted from the cost of the asset.

9. Capitalisation of exchange differences as cost of depreciable asset and accumulation of exchange differences in the ‘Foreign Currency Monetary Item Translation Difference Account’ are not two separate options. Thus, if a company decides to capitalise exchange differences on foreign currency loan taken for acquisition of a depreciable capital asset, it would also need to defer the exchange differences to the ‘Foreign Currency Monetary Item Translation Difference Account’ on the foreign currency loan taken for working capital.

10. Schedule VI has been amended to remove the requirement with regard to capitalisation of exchange differences. Henceforth, the requirement with regard to capitalisation of exchange difference will be dealt with only under Accounting Standards notified in the Companies (Accounting Standards) Rules.

11. Unlike pre-revised Schedule VI, the amendment does not make any distinction in respect of fixed assets acquired from outside India or otherwise. Hence the optional treatment in the Notification would have to be applied in respect of all depreciable assets, whether acquired from within or outside India.

12. A company cannot apply this amendment with prospective effect or to accounting periods commencing before 7 December 2006. The Notification is applicable to all accounting periods commencing on or after 7 December 2006. If a company follows financial year, then the Notification would apply to all long-term monetary items that existed on 1 April, 2007 and thereafter. If a company follows calendar year, then the Notification would apply to all long-term monetary items that existed on 1 January, 2007 and thereafter.

13. To the extent the adjustment relates to earlier years (for example 1-4-2007 to 31-03-2008), the same has to be effected through the general reserve account.

14. Companies need to carefully evaluate the impact of current taxes, deferred taxes and impairment. With regards to the retrospective adjustment through the general reserve (effect of earlier years), deferred tax on that component will be adjusted to (a) in the case of a ‘Foreign Currency Monetary Item Translation Difference Account’ to a reserve account, (b) in the case of capitalisation to fixed asset it is less clear, whether the same should be adjusted to the P&L account, reserve account or ignore it as a permanent difference.

15. Networth of company will increase if exchange loss is capitalised in fixed assets and vice-versa. Exchange differences on long-term monetary assets and liabilities accumulated in ‘Foreign Currency Monetary Item Translation Difference Account’ will have no effect on networth of the company when compared to the existing AS-11 requirements.

It may be noted that AS-ll does not deal with derivatives in general, other than forward exchange contractswhich are entered into to hedge assets and liabilities on the balance sheet. AS-l1 also does not cover forward contracts that are entered into to hedge highly probable transactions and firm commitments. The AS-l1 amendment applies to monetary items.Derivatives are not monetary items within the definition of AS-l1. Therefore AS-11 amendment does not apply to derivative accounting; however, because the derivatives are entered into for hedging monetary items, the amendment has significant impact in the way such derivatives are accounted for.

The existing requirements relating to (a)A5-11with regards to forward exchange contracts, (b) Announcement of the ICAI with regards to derivatives in general, (c) AS-30 Financial Instruments: Recognition and Measurement (applicable from 1-4-2009 on recommendatory basis and 1-4-2011on mandatory basis), (d) the fact that AS-30 has not yet been notified in the Companies (Accounting Standards) Rules, and (e) the current amendment to AS-l1 creates a permutation and combination of numerous situations and complexities for which there may be no answer in current Indian GAAP literature other than by conjecture. It is possible that numerous practices would emerge. This was clearly visible in the implementation by companies of the Announcement on Derivatives issued by the ICAL This amendment will only further add to that confusion.

Consider the following situation. Company has entered into an option contract to hedge foreign currency loan liability of USD 100 taken for operations. As per the amendment, exchange difference on long-term loan liability for working capital purpose should be accumulated in Foreign Currency Monetary Item Difference Account. The following accounting treatments are theoretically possible for the option contract:

a) Account for mark-to-market losses on the option contract in the profit and loss account disregarding accounting for exchange differences on the underlying hedged item. Gains, if any, may be ignored.

b) Alternatively, gains on the option contracts may be recognised if the company can demonstrate that it is complying with AS-30 principles, to the extent possible.

c) If option is an effective hedge, adjust mark-to-market changes on option contract with exchange difference on underlying loan and account for net exchange difference on loans in Foreign Currency Monetary Item Difference Account. If there is net MTM gain, then it may be ignored.

d) The treatment in (c) above could also be used for an ineffective hedge, provided it is reasonably an economic hedge.

e) The same as scenario (c), but company may recognise net MTM gains on option contract in Reserve account if the company is following principles of AS-30 for derivative contracts.

Annexure  1

How are exchange differences accumulated in the ‘Foreign Currency Monetary Item Translation Difference Account’ amortised? Consider the following scenario:

i) FXLimited’s financial year ends on 31 March.

ii) On 1 April 2006,FXhas taken foreign currency loan amounting to Euro 300,000,for use in the working capital.

iii) The loan is repayable after 6 years, i.e., on 31 March 2012.

iv) Given in a table at the top of the next column, is the amount of exchange gain/ loss arising on the loan at each reporting date

v) FX has decided to amortise exchange differences as per the option given in the Notification.

Response

In respect of exchange differences arising on restatement of long-term monetary items not pertaining to acquisition of depreciable capital assets, the Notification provides that the same should be accumulated in the ‘Foreign Currency Monetary Item Translation DifferenceAccount’ and amortised over the remaining lifeof the loan but not beyond 31 March 2011.As per the Notification, the amendment is applicable retrospectively in respect of accounting periods commencing on or after 7 December 2006. Thus, the company would adopt the following treatment:

i) Exchange difference arising during the year ended 31 March 2007 continues to be recognised in the P&L. No retrospective adjustment is allowed for these differences.

ii) FXneeds to retrospectively adjust the amount of exchange loss recognised in the year ended 31 March 2008. The amount of retrospective’ adjustment is computed as below:

iii) FX would determine amount to be amortised in each of subsequent years as shown in the table appearing at top on the following page.

The amortisation is based on the remaining life of the loan and period to 31 March 2011, whichever is earlier. In this case,31March2011 is earlier; thus amortisation is one-third, one-half and one for years ending 31 March 2009, 31 March 2010 and 31 March 2011, respectively.

iv) No exchange differences can be carried beyond 31 March 2011 and exchange differences arising in the year ended 31 March 2012 need to be recognised immediately. In any case, FX should have adopted IFRS from 1 April 2011 and application of IAS-21 would also require exchange differences on monetary items to be recognised immediately.

An interesting observation is that since the amendment has a retrospective effect, previous exchange differences that were recognised in profit or loss would be transferred to the ‘Foreign Currency Monetary Item Translation Difference Account’ through general reserve. As this account is amortised to profit or loss of FX, there would be a double recording of the exchange difference in the profit or loss; once in previous years’ profit or loss and once going ahead by way of amortisation in future profit or loss.

Note 1

There can be various methods of determining amortisation. For example, one may argue on the following possible methods of amortisation:

i) The loan repayment is after 5 years from the date of retrospective application, i.e., 1 April 2007. Thus, amortisation for the year ended 31 March 200S is 1/ 5th of the exchange differences for the year. Since the Notification does not allow carry forward beyond 31 March 2011, any amount remaining at 31 March 2011 is written off at the said date.

ii) Year ended 31 March 200S is the 2nd year of the loan and the total period of the loan is 6 years. Thus, appropriate amortisation for the year is 2/ 6th of exchange differences for the year ended 31 March 200S.

iii) Year ended 31 March 200S is the 2nd year of the loan and the Notification allows carry forward only up to 31 March 2011. Thus, appropriate amortisation for the year is 2/5th of exchange differences for the year ended 31 March 200S.

iv) As per the Notification, FX can apply the amendment from 1 April 2007 and it is allowed to amortise exchange differences arising on the loan up to 31 March 2011. Thus, maximum deferral period for exchange differences arising and accumulated on the loan during the year ended 31 March 200S is 4 years. Accordingly, 1/4th of exchange differences is appropriate amortisation for the exchange differences.

The author is of the view that method (iv) is the most appropriate method for amortising exchange differences. Thus, the calculation is based on this method.

Annexure    2

Capitalisation of Exchange Difference

Consider the following scenario:

i) FX Limited’s  financial  year ends  on 31 March.

ii) On 1 April 2006, FX has taken foreign currency loan amounting to Euro 300,000, for acquiring plant. At the date of loan, exchange rate was Euro 1 = INR 60.

iii) FX purchased the plant amounting to INR lS,OOO,OOOusing loan amount.

iv) The useful life of the plant is 10 years and depreciation is based on the straight-line method. The loan is repayable after 6 years, i.e., on 31 March 2012.

v) Given at top on the next page in a table is the amount of exchange gain/ loss arising on the loan at each reporting date

vi) FX has decided to capitalise exchange differences as per the option given in the Notification.

Response
In respect of exchange differences arising on restatement of long-term monetary items pertaining to acquisition of depreciable capital assets, the Notification provides that the same should be adjusted to the cost of the asset and should be depreciated over the balance life of the asset (as against the life of the loan). As per the Notification, the amendment is applicable retrospectively in respect of accounting periods commencing on or after 7 December 2006. Thus, the company would adopt the following treatment:

(i) Exchange difference arising during the year ended 31 March 2007 continues to be recognised. No retrospective adjustment is required/ allowed for these differences.

(ii) FXneeds to retrospectively adjust the amount of exchange loss recognised in the year ended 31 March 2008. For exchange differences capitalised in a year, it is assumed that the same arises evenly during the year. Accordingly, the company charges 50% depreciation on such addition. On this basis, the amount to be capitalised for previous periods is determined as shown in the table alongside.

(iii) FX passes the following entry to apply the option retrospectively (at 1 April 2008)

Debit Plant INR…………….. 850,000
Credit General Reserve……………. INR 850,000

(iv) For subsequent years, FX determines capitalisation and depreciation as shown in the table below:

(v) Exchange differences arising in the year ended 31 March 2012 need to be recognised as income/ expense immediately and cannot be capitalised. In any case, FX should have adopted IFRS from 1 April 2011 and application of IAS-21 would also require exchange differences on monetary items to be recognised immediately. Also, carrying amount of plant would be determined based on IAS-16/ IFRS 1 principles.

GAPs in GAAP – Accounting for Agriculture

Accounting Standards

IAS-41 prescribes the accounting treatment for agriculture,
which includes biological transformation of living animals or plants for sale,
into agricultural produce, or into additional biological assets. IAS-41 requires
measurement at fair value less estimated point-of-sale costs from initial
recognition of biological assets up to the point of harvest, except in rare
cases.

IAS-41 requires that a change in fair value less estimated
point-of-sale costs of a biological asset be included in profit or loss for the
period in which it arises. Under a historical cost accounting model, a
plantation forestry enterprise might report no income until first harvest and
sale, perhaps 30 years after planting. On the other hand, IASB believes an
accounting model that recognises and measures biological growth using current
fair values reports changes in fair value throughout the period between planting
and harvest.

Where market-determined prices or values are not available
for a biological asset in its present condition, IAS-41 requires use of the
present value of expected net cash flows from the asset discounted at a current
market-determined pre-tax rate in determining fair value.

When IAS-41 was issued it met with severe criticism because
many agricultural assets are simply not subject to reliable estimates of fair
value. Take for instance, a pony which is kept as a potential breeding stock,
grows into a fine stallion. The stallion starts winning race events. The
stallion earns substantial amount for its owner from breeding services. The
stallion gets older, his utility decreases. Eventually the stallion dies of old
age and the carcass used as pet food. At each stage in the life of the horse,
the fair values would change significantly, but estimating the fair values could
be extremely subjective and difficult. In many ways, the stallion reminds one of
fixed assets. Changes in fair value of fixed assets are not recognised in the
income statement, then why should the treatment be different in the case of
agricultural non-financial assets ?

Vineyards and coffee and tea plantations have similar
measurement issues. The relationship between the vines and coffee or tea plants
and the land that they occupy is unique and integrated. The vine or plant itself
has relatively little value. However, in conjunction with the land, they do have
value. Determining the fair value for a vineyard, coffee or tea plantation
involves estimating the production along with sales prices and costs for a
number of years in the future, together with estimating a terminal value and the
application of a discount rate to calculate the net present value — an
enormously complex and subjective task. The value of the vines and plants would
then have to be determined as a residual because it would be calculated by
deducting the value of the unimproved land and the value of the infrastructure
from the aggregate value. It is clear that the valuation, as a result of the
estimates and subjectivity, is open to substantial variability.

Because biological assets are subject to droughts, floods and
diseases, the unrealised gains arising from changes in fair value can give a
distorted picture of the financial results of the agricultural enterprise. It
could be misunderstood and may lead to inappropriate decision-making, such as
dividend declaration from unrealised profits. Another question about the
reliability of measurements relates to the homogeneity of the assets. During the
transformation process, it could be very difficult to determine the likely
quality. Even if the quality is known, estimating the price and the market where
the produce would be ultimately sold could become a challenge.

Although the recognition of unrealised gains and losses on
financial assets is achieving wider acceptance, the IASB has not yet put forward
any convincing arguments in favour of a fair value model for non-financial
assets.

IAS-38, Intangible Assets, allows intangible assets to be
carried at revalued amounts. However, for intangible assets to be carried at
revalued amounts, IAS-38 imposes strict criteria — an active market is
necessary, which requires items traded to be homogeneous, with willing buyers
and sellers normally being found at any time and prices being available to the
public. However, IAS-41 does not impose the same hurdles for agricultural assets
and requires them to be fair valued except in rare cases. The IAS-41 approach
therefore is inconsistent with other international standards.

In India, there is no accounting standard on biological
assets and agricultural produce. Accounting standard on agriculture is the need
of the hour as many Indian companies are venturing in these businesses in big
way due to thrust on retail, dairy, horticulture, etc. Given the criticisms on
fair valuation and the fact that commercial farming enterprises in India operate
as private companies and surely don’t need the additional cost burden that may
not produce reliable results, the ICAI should develop a standard based on the
historical cost model.

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