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Category: Direct Taxes

Revision – Jurisdiction of CIT – Sections 153A and 263 – A. Y. 2008-09 – Search and seizure – Once the proceedings u/s. 153A are initiated the Assessing Authority can take note of the income disclosed in the earlier return, any undisclosed income found during search or/and any other income to find out what is the “total income” – By virtue of section 263, the CIT gets no jurisdiction to initiate proceedings under the said provisions –

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Canara Housing Development Company vs. Dy.CIT; 274 CTR 122 (Karn):

For the A. Y. 2008-09 the assessment was made u/s. 143(3) of the Income-tax Act, 1961 on 31/12/2010. Subsequently, search took place in the premises of the assessee and proceedings u/s. 153A of the Act were initiated. In the mean while CIT initiated proceedings u/s. 263 of the Act, on the ground that the order dated 31/12/2010 passed u/s. 143(3) of the Act was erroneous and prejudicial to the interest of the Revenue. The assessee’s objection was rejected and an order u/s. 263 was passed directing the assessing authority to enhance the total income as directed. The Tribunal dismissed the assessee’s appeal.

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

“i) Once the proceedings are initiated u/s. 153A the assessing authority can take note of the income disclosed in the earlier return, any undisclosed income found during search or/and also any other income which is not disclosed in the earlier return or which is not unearthed during the search, in order to find out what is the “total income” of each year and then pass the assessment order.

ii) Therefore, the CIT by virtue of the power u/s. 263 gets no jurisdiction to initiate proceedings under the said provisions.”

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Remuneration from foreign enterprise – Deduction u/s. 80-O – A. Y. 1994-95 – Assessee conducting services for benefit of foreign companies – Services rendered “from India” and “in India” – Distinction – Report of survey submitted by assessee not utilised in India though received by foreign agency in India – Mere submission of report within India does not take assessee out of purview of benefit –

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CIT vs. Peters and Prasad Association; 371 ITR 206 (T&AP):

The assessee was an agency undertaking the activity of conducting services for the benefit of foreign companies or agencies. After conducting a survey on the assigned subject, the reports were submitted to the foreign agencies. For the A. Y. 1994-95, the assessee claimed deduction u/s. 80-O in respect of the remuneration received from the foreign enterprise for such services. The Assessing Officer denied the deduction on the ground that the survey report was submitted in India and thereby section 80-O was not attracted. The Tribunal allowed the assessee’s claim..

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

“i) It was not the case of the Revenue that the report of survey submitted by the assessee was utilised within India, though it was received by the foreign agency within India. It is only when it was established that the survey report submitted to the foreign agency was, in fact, used or given effect to, in India, that the assessee becomes ineligible for deduction.

ii) The mere fact that the submission of the report was within India, did not take away the matter from the purview of section 80-O. If that was to be accepted, the very purpose of providing the Explanation becomes redundant.

iii) Thus, the assessee was entitled to deduction u/s. 80-O.”

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Recovery of tax- Garnishee proceedings u/s. 226(3) – Recovery of rent – TRO cannot enhance the rent unilaterally –

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Union Bank of India vs. TRO; 274 CTR 396 (Pat):

Petitioner bank was a tenant of the premises owned by one S. As a part of the tax recovery of S, garnishee notice u/s. 226(3) of the Income-tax Act, 1961 was issued and rent was recovered by the TRO from the petitioner bank. The petitioner was regularly paying the rent to the landlord, and after the premises was taken over by the IT Department by issuing notice u/s. 226(3) of the Act has been paying rent to TRO. TRO unilaterally sought to enhance the rent payable by the petitioner manifold and to recover the same from the account of the petitioner maintained by the RBI.

The Patna High Court allowed the writ petition filed by the petitioner challenging the action and held as under:

“i) TRO has no jurisdiction to unilaterally enhance the rent being paid by the assesses. The contention of the Department that the TRO has been compelled to take action in the matter by applying the provisions of section 23(1)(a) has no force. Provisions of section 23(1)(a) relate to the determination of income from house property for the purpose of filing returns and assessment thereof and the same has no relevance at all so far as the fixation of rent payable by a tenant to the landlord is concerned. Any such fixation of fair rent or higher rent can only be either on the basis of agreement between the parties or by the competent authorities under the Rent Control Act and not unilaterally by the TRO or any other officer of the Income Tax Department.

ii) Any amount which may have been recovered from the account of the petitioner is to be refunded to the petitioner forthwith.”

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The assessee was engaged in the business of manufacturing and selling of abrasives, refractories, grinding wheels etc. For the A. Y. 1992-93 the Assessing Officer allowed deduction u/s. 80-I of the Income-tax Act, 1961. Subsequently he rectified the assessment order u/s. 154 notionally carrying forward the losses of the earlier years and setting of the losses against the profit available during the A. Y. 1992-93 and thereby negative the claim for deduction u/s. 80-I.

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Carborundum Universal Ltd. vs. JCIT; 371 ITR 275 (Mad):

The assessee was engaged in the business of manufacturing and selling of abrasives, refractories, grinding wheels etc. For the A. Y. 1992-93 the Assessing Officer allowed deduction u/s. 80-I of the Income-tax Act, 1961. Subsequently he rectified the assessment order u/s. 154 notionally carrying forward the losses of the earlier years and setting of the losses against the profit available during the A. Y. 1992-93 and thereby negative the claim for deduction u/s. 80-I. Similarly, he also withdrew the deduction for the A. Y. 1993-94. The Tribunal upheld the order of the Assessing Officer:

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

“i) Once the depreciation allowance and the development rebate for the past assessment years were fully set off against the total income of the assessee for those assessment years, the question of carrying forward of losses does not arise, for the purpose of determining the deduction u/s. 80-I of the Income-tax Act, 1961.

ii) The losses incurred by the industrial undertaking claiming deduction u/s. 80-I, which had been already set off against the profits of the industrial undertaking, should not be notionally carried forward and set off against the profits generated by the industrial undertaking during the relevant assessment year for determining deduction u/s. 80-I.”

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Income or capital receipt – Section 4 – A. Ys. 2006-07 to 2009-10 – Entertainment tax exemption subsidy granted to assessee engaged in business of running of multiplex cinema halls and shopping malls is capital receipts –

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CIT vs. Bougainvillea Multiplex Entertainment Centre (P.) Ltd.; [2015] 55 taxmann.com 26 (Delhi):

The assessee was engaged in the business of running of multiplex cinema halls and shopping malls. It had been the beneficiary of a scheme promulgated by the State Government wherein it had been granted exemption from entertainment tax payment. It claimed deduction to the extent of entertainment tax collected in the corresponding financial years terming the amounts as capital receipts. The Assessing Officer disallowed the said claims. The Tribunal allowed the deduction claimed by the assessee.

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

“i) The UP Scheme under which the assessee claims exemption to the extent of entertainment tax subsidy, claiming it to be capital receipt, is clearly designed to promote the investors in the cinema industry encouraging establishment of new multiplexes. A subsidy of such nature cannot possibly be granted by the Government directly. Entertainment tax is leviable on the admission tickets to cinema halls only after the facility becomes operational. Since the source of the subsidy is the public at large which is to be attracted as viewers to the cinema halls, the funds to support such an incentive cannot be generated until and unless the cinema halls become functional.

ii) The State Government had offered 100 per cent tax exemptions for the first three years reduced to 75 per cent in the remaining two years. Thus, the amount of subsidy earned would depend on the extent of viewership the cinema hall is able to attract. After all, the collections of entertainment tax would correspond to the number of admission tickets sold. Since the maximum amount of subsidy made available is subject to the ceiling equivalent to the amount invested by the assessee in the construction of the multiplex as also the actual cost incurred in arranging the requisite equipment installed therein, it naturally follows that the purpose is to assist the entrepreneur in meeting the expenditure incurred on such accounts. Given the uncertainties of a business of this nature, it is also possible that a multiplex owner may  not be able to muster enough viewership to recover all his investments in the five year period.

iii) Seen in the above light, it was unreasonable on the part of the Assessing Officer to decline the claim of the assessee about the subsidy being capital receipt. Such a subsidy by its very nature, was bound to come in the hands of the assessee after the cinema hall had become functional and definitely not before the commencement of production. Since the purpose was to offset the expenditure incurred in setting up of the project, such receipt (subject, of course, to the cap of amount and period under the scheme) could not have been treated as assistance for the purposes of trade.

iv) The facts that the subsidy granted through deemed deposit of entertainment tax collected does not require it to be linked to any particular fixed asset or that is accorded ‘year after year’ do not make any difference. The scheme makes it clear that the grant would stand exhausted the moment entertainment tax has been collected (and retained) by the multiplex owner meeting the entire cost of construction (apparatus, interiors etc. included), even if it were ‘before completion of five years’.

v) For the foregoing reasons, the Tribunal in the impugned orders has taken a correct view of law on the basis of available facts to conclude that the assessee is entitled, in terms of the UP Scheme, to treat the amounts collected towards entertainment tax as capital.

vi) The question of law raised in these appeals is, thus, answered in the negative against the revenue.”

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Depreciation – Rate – Section 32 and R. 9B of I. T. Rules, 1962 – A. Y. 2010-11 – Broadcasting/ exhibition rights and satellite rights in feature films amount to distribution rights – Assessee entitled to 100% depreciation –

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CIT vs. Smt. Achila Sabharwal; 371 ITR 219 (Del):

For the A. Y. 2010-11, the assessee claimed depreciation of Rs. 1.2 crore on cinematographic film at 100%. The Assessing Officer allowed only 25% depreciation observing that the assessee did not purchase any cinematographic films for consumption but what was purchased were broadcasting or exhibition rights and satellite rights. The Tribunal allowed the assessee’s claim.

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

“i) The Assessing Officer took a very narrow view of the term “distribution rights” and held that exhibition rights, television rights and satellite rights cannot be treated as distribution rights. What was purchased and sold by the assessee were distribution rights.

ii) The right would include and consist of acquisition and transfer of rights to exhibit and broadcast and satellite rights. These rights are integral and form and represent rights of film distributor.

iii) Even otherwise, if Rule 9B of the Income-tax Rules 1962 would not be applicable, purchase and sale of film would result in a business transaction, i.e., sale consideration received less purchase price paid. Appeal is accordingly dismissed.”

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Educational institution- Exemption u/s. 11- A.Y. 2007-08- Capital expenditure incurred for attainment of object of institution is application of income- Assessee is entitled to exemption u/s. 11-

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CIT vs. Silicon Institute of Technology; 370 ITR 567 (Orissa)

The main object of the assessee trust was to impart education. Year after year the assessee generated profits and created fixed assets. The assessee claimed capital expenditure as application of income u/s. 11. The Assessing Officer held that the assessee was not entitled to exemption u/s. 11 inter alia on the ground that the capital expenses were not application of income. CIT(A) and the Tribunal allowed the assessee’s claim.

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

“If capital expenditure is incurred by an educational institution for attainment of the objects of the society, it would be entitled to exemption u/s. 11. Thererfore, the assessee was eligible for exemption u/s. 11.”

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company- Section 179- A. Y. 2003-04- Recovery proceedings on the ground of non-filing of the returns by company- Order u/s. 179 is not valid-

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Ram Prakash Singeshwar Rungta vs. ITO; 370 ITR 641 (Guj):

The Assessing Officer passed order u/s. 179 against the directors for recovery of the tax dues of the private company. The Gujarat High Court allowed the writ petition filed by the petitioner challenging the said order and held as under:

“The sole ground on the basis of which the order u/s. 179 had been passed was that the directors were responsible for the non-filing of returns of income and that the demand had been raised due to the inaction on the part of the directors. Clearly, therefore, the entire focus and discussion of the ITO in the order was in respect of the directors’ neglect in the functioning of the company when the company was functional. On a plain reading of the order, it was apparent that nothing had been stated therein regarding any gross negligence, misfeasance or breach of duty on the part of the directors due to which the tax dues of the company could not be recovered. The order u/s. 179 was not valid.”

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Business expenditure – Section 37 – A. Y. 2005- 06- Premium on keyman insurance on partners paid by firm – Premium is deductible

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CIT vs. Agarwal Enterprises; 374 ITR 240 (Bom):

The assessee
partnership firm had taken keyman insurance policies on its partners.
For the A.Y. 2005-06, the Assessing Officer disallowed the claim for
deduction of premium on such policies. 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)
Keyman insurance is a life insurance taken by a person on the life of
another person who is or was the employee of the first mentioned person
or is or was connected in any manner whatsoever with the business of the
first mentioned person.

(ii) The record indicated that the firm
comprised of two partners. It was dealing in securities and shares. A
keyman insurance policy was obtained for the benefit of the firm
inasmuch as the firm’s business would be adversely affected, in the
event, one of the partners met with any untimely death. The premium on
the insurance was deductible.”

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Deemed dividend – Section 2(22)(e) – A. Y. 2007- 08 – Where assessee itself was not shareholder of lending company addition made by AO by invoking provisions of section 2(22)(e) was not sustainable –

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CIT vs. Jignesh P. Shah; [2015] 54 taxmann.com 293 (Bom): 274 CTR 198 (Bom):

The assessee was a 50 % shareholder of ‘L’. ‘L’ had advanced money to one ‘N’ company who in turn advanced money to assessee. The Assessing Officer brought to tax the amount of loan received by the assessee from ‘N’ as deemed dividend u/s. 2(22)(e). On appeal, the Commissioner (Appeals) held that the loan given by ‘N’ to the assessee was not the payment made by it to its shareholder and thus, section 2(22)(e) had no application. The Commissioner (Appeals) deleted the addition. The Tribunal upheld the order of the Commissioner (Appeals).

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

“i) In the present facts, it is an admitted position that assessee is not a shareholder of ‘N’ from whom he has received loan. Therefore, no fault can be found with the decision of the Tribunal in having followed the decision of the High Court in CIT vs. Universal Medicare (P.) Ltd. [2010] 324 ITR 263/190 Taxman 144 (Bom.). This view has been further reiterated by another division bench of this court in CIT vs. Impact Containers (P.) Ltd. [2014] 367 ITR 346/225 Taxman 322/48 taxmann.com 294 (Bom.)

ii) The issue raised by the revenue stands concluded by the order of this court, no sustainable question of law arises. Accordingly, appeal is dismissed.”

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Co-operative Society- Special deduction u/s. 80P- A. Y. 2010-11- Multi-purpose co-operative credit society registered under the Karnataka Act- Sub-section (4) of section 80P is not applicable- Society entitled to special deduction-

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Venugram Multipurpose Co-operative Credit Society Ltd. vs. ITO; 370 ITR 636 (Karn):

The assessee is a multi-purpose co-operative credit society. For the A. Y. 2010-11 the assessee claimed the entire amount as deduction u/s. 80P(2)(a)(i) of the Income-tax Act, 1961. The Assessing Officer declined deduction on the ground that the assessee was a primary co-operative bank disentitled to the benefit of deduction u/s. 80P(2)(a)(i), in the light of section 80P(4). This was confirmed by the Tribunal.

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

“i) Section 80P(4) of the Act disentitles any “co-operative bank” other than a “primary agricultural credit society” or “primary co-operative agricultural and rural development bank” to benefits of deduction u/s. 80P. The explanation to sub-section (4) states that “co-operative bank” and “primary agricultural credit society” shall have the meanings respectively assigned to them in part V of the Banking Regulation Act, 1949.

ii) The assessee was a multi-purpose co-operative credit society registered under the Karnataka Co-operative Societies Act, 1959 and it fell within the definition of multipurpose co-operative society u/s. 2(f)(1) of the 1959 Act, and also under the definition of the term primary agricultural credit co-operative society”. Regard being had to section 5(cciv) as provided u/s. 56 of the Banking Regulation Act, 1949, the assessee being a primary agricultural credit co-operative society, coupled with the fact that under its bye-laws, a co-operative society can not become a member, complied with the requirement of the Act.

iii) In that view of the matter, the exception carved out in subsection (4) of section 80P of the Act squarely applies to the assessee. Hence, the assessee was entitled to the deduction u/s. 80P(2)(a)(i).”

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DCIT vs. L & T Infrastructure Finance Co. Ltd. ITAT Mumbai `A’ Bench Before R. C. Sharma (AM) and Sanjay Garg (JM) ITA No. 5329 /Mum/2013 Assessment Year: 2007-08. Decided on: 3rd December, 2014. Counsel for revenue / assessee: Asghar Jain / Heena Doshi

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Sections 35AD, 271(1)(c) – Following the decision of Apex Court in Waterhouse Coopers Pvt. Ltd. vs. CIT (348 ITR 306)(SC), penalty deleted on the ground that that the assessee had committed bonafide error and it was not a case of concealment of income.

Facts:
The assessee company was formed on 18.4.2006. The first return of income was filed for AY 2007-08. In the return of income the assessee had claimed, u/s. 35D, one-fifth of expenditure incurred towards ROC fees for increase in authorised share capital. In the course of assessment proceedings, on being called to explain the claim, the assessee withdrew the claim. The Assessing Officer (AO) thereafter levied penalty u/s. 271(1)(c) holding that the assessee had furnished inaccurate particulars of income.

Aggrieved, the assessee preferred an appeal to the CIT(A) and in the course of appellate proceedings contended that since it was the first return of income, the expenditure was erroneously claimed and the fact that expenditure was incurred after commencement of business operations. Upon the same being noticed, the claim was withdrawn. The claim was not willful and was made inadvertently. The CIT(A) observed that the assessee had committed a bonafide error and it was not a case of concealment of income or furnishing of inaccurate particulars. Relying on the decision of the Apex Court in the case of Waterhouse Coopers Pvt. Ltd. vs. CIT 348 ITR 306 (SC), he deleted the penalty levied by the AO.

Aggrieved, the revenue preferred an appeal to Tribunal.

Held: The Tribunal observed that the assessee had explained that the error committed by it was inadvertent and due to a bonafide mistake. This was not a case for attraction of provisions of section 271(1)(c). The Tribunal agreed with the CIT(A) that the levy of penalty was not justified. The Tribunal upheld the order passed by CIT(A).

The appeal filed by revenue was dismissed.

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Assessment pursuant to search in case of third party – Section 153C: A. Ys. 2006-07 to 2011- 12 – ‘Satisfaction’ that the documents found in search belong to third party is a precondition – ‘Satisfaction’ should be recorded and should be supported by material on recorded – Presumption that the document belongs to the searched person has to be rebutted:

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Pepsi Food (P) Ltd. vs. ACIT; 270 CTR 459 (Del); CIT vs. Pepsi India Holdings (P) Ltd. vs. ACIT; 270 CTR 467 (Del):

In these cases, the petitioners filed writ petitions and challenged the validity of notices issued u/s. 153C of the Income-tax Act, 1961. The Delhi High Court allowed the writ petitions and held as under:

“i) Whenever a document is found from a person who is being searched, the normal presumption is that the said document belongs to that person. It is for the Assessing Officer to rebut that presumption and come to the conclusion or “satisfaction” that the document in fact belongs to somebody else.

ii) There must be some cogent material available with the Assessing Officer before he arrives at the satisfaction that the seized document does not belong to the searched person but to somebody else. Surmises and conjectures do not take the place of “satisfaction”. Mere use or mention of the word “satisfaction” or the words “I am satisfied” in the order or the note would not meet the requirement of the concept of satisfaction as used in section 153C.

iii) In order that the Assessing Officer of the searched person comes to the satisfaction that documents or material found during the search belong to a person other than the searched person, it is necessary that he arrives at the satisfaction that the said documents or materials do not belong to the searched persons. First of all, it is nobody’s case that the J Group had disclaimed the documents in question as belonging to them. Unless and until it is established that the documents do not belong to searched person, the provisions of section 153C do not get attracted.

iv) In the satisfaction note, there is nothing to indicate that the seized documents do not belong to the J Group where search took place. Secondly, the finding of photocopies in the possession of the searched person does not necessarily mean and imply that they ‘belong’ to the person who holds the originals. Further, the Assessing Officer should not confuse the expression ‘belongs to’ with the expression ‘relates to’ or ‘refers to’.

v) Going through the contents of the satisfaction note, one is unable to discern any “satisfaction” of the kind required u/s. 153C. Ingredients of section 153C have not been satisfied in this case. Consequently, the notices u/s. 153C are quashed.”

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Appeal before CIT(A) – A. Y. 2003-04 – Claim made for the first time before CIT(A) – CIT(A) can allow the claim on the basis of material on record:

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CIT vs. Mitesh Impex; 367 ITR 85 (Guj): 270 CTR 66 (Guj):

In the return of income for the A. Y. 2003-04, the assessee had not made the claim for deduction u/s. 80HHC and 80- IB of the Income-tax Act, 1961 though the assessee was entitled to such deduction. For the first time the assessee made the claim for deduction before the CIT(A). CIT(A) allowed the claim on the basis of the material on record. The Tribunal upheld the order of the CIT(A).

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

“i) The Courts have recognised the jurisdiction of CIT(A) and Tribunal to entertain new ground or a legal contention. A ground would have a reference to an argument touching a question of fact or a question of law or mixed question of law and facts. A legal contention would ordinarily be a pure question of law without raising any dispute about the facts. Not only such additional ground or contention, the Courts have also recognised the powers of the CIT(A) and the Tribunal to entertain a new claim for the first time though not made before the Assessing Officer.

ii) This is primarily on the premise that if a claim though available in law is not made either inadvertently or on account of erroneous belief of complex legal position, such claim cannot be shut out for all times to come, merely because it is raised for the first time before the appellate authority without resorting to revising the return before the Assessing Officer.

iii) Therefore, any ground, legal contention or even a claim would be permissible to be raised for the first time before the appellate authority or the Tribunal when facts necessary to examine such ground, contention or claim are already on record. In such a case the situation would be akin to allowing a pure question of law to be raised at any stage of the proceedings.

iv) This is precisely what has happened in the present case. The CIT(A) and the Tribunal did not need to nor did they travel beyond the materials already on record, in order to examine the claims of the assessee for deduction u/ss. 80-IB and 80HHC of the Act. We answer the question against the revenue and in favour of the assessee.”

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Reassessment: Reopening at the instance of audit party – Sections 147 and 148 – A. Y. 2009- 10 – AO contested the audit objection but still reopened the assessment – Reopening is at the instance of the audit party – AO has not applied mind independently – Reopening is bad in law:

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Raajratna Metal Industries Ltd. vs. ACIT (Guj); SCA No. 7140 of 2014 dated 30-07-2014:

For the A. Y. 2009-10, the assessment of the assessee petitioner was completed by an order u/s. 143(3) of the Income-tax Act, 1961 dated 24-12-2010. Subsequently, a notice u/s. 148 dated 11-03-2013 was issued for reopening the assessment. The assessee’s objections were rejected.

On a writ petition filed by the assessee challenging the notice u/s. 148, the Gujarat High Court found that the audit party had raised objections as regards the issue in question but the Assessing Officer had contested the audit objections and supported the assessment order. The High Court allowed the writ petition filed by the assessee and held as under:

“i)To satisfy ourselves, whether the reassessment proceedings have been initiated at the instance of the audit party and solely on the ground of audit objections, we called upon the Advocate for the Respondent to provide the original file from the Assessing Officer. On perusal of the files, the noting made therein and the relevant documents, it appears that the assessment is sought to be reopened at the instance of the audit party, solely on the ground of audit objections.

ii) It is also found that, as such, the Assessing Officer tried to sustain his original assessment order and submitted to the audit party to drop the audit objections.

iii) If the reassessment proceedings are initiated merely and solely at the instance of the audit party and when the Assessing Officer tried to justify the assessment order and requested the audit party to drop the objections and there was no independent application of mind by the Assessing Officer with respect to the subjective satisfaction for initiation of reassessment proceedings, the impugned reassessment proceedings cannot be sustained and the same deserve to be quashed and set aside.

iv) Present petition succeeds on the aforesaid ground alone, i.e., the assessment was reopened solely on the ground of audit objections raised by the audit party. Consequently, the impugned reassessment proceedings are hereby quashed and set aside.”

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Disallowance u/s. 14A – Expenditure relating to exempt income – Section 14A and Rule 8D of I. T. Rules – A. Ys. 2007-08 and 2008-09 – Disallowance cannot be made if there is no exempt income or if there is a possibility of the gains on transfer of the shares being taxable:

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CIT vs. Holcim India P. Ltd. (Del): ITA Nos. 299 and 486 of 2014 dated 05-09-2014:

The Tribunal held in this case that disallowance u/s. 14A of the Income-tax Act, 1961 cannot be made if there is no exempt income or if there is a possibility of the gains on transfer of the shares being taxable. On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) On the issue whether the assessee could have earned dividend income and even if no dividend income was earned, yet section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in CIT vs. M/s. Lakhani Marketing Inc. made reference to two earlier decisions of the same Court in CIT vs. Hero Cycles Limited, 323 ITR 518 and CIT vs. Winsome Textile Industries Ltd. 319 ITR 204 to hold that section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in CIT vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj). The third decision is of the Allahabad High Court in CIT vs. Shivam Motors (P) Ltd;

ii) Income exempt u/s. 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year.

iii) It is an undisputed position that assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc., cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax;

iv) What is also noticeable is that the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the assessee for conducting business. The CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A).

v) In these circumstances, we do not find any merit in the present appeals. The same are dismissed.”

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Capital Gains – Status of Assessee – Compensation received on acquisition of inherited land by the Government is to be assessed in the hands of the sons in their status as “individual’s” and not jointly in the status of “Association of Persons.”

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CIT vs. Govindbhai Manaiya [(2014) 367 ITR 498 (SC)]

Capital Gains – Interest on the enhanced compensation u/s. 28 of 1894 Act is to be taxed in the year in which it is received.

The respondents were three brothers. Their father died leaving the land admeasuring 17 acres and 11 gunthas to the three brothers and two other persons who relinquished their rights in favour of the brothers. A part of this, bequeathed land was acquired by the State Government and compensation was paid for it. On appeal, the compensation amount was enhanced and additional compensation along with interest was awarded. The respondents filed their return of income for each assessment years claiming the status of “individual.” Two questions arose for consideration before the Assessing Officer. One was as to whether these three brothers could file separate returns claiming the status of the “individual” or they were to be treated as an “association of persons” (AoP). The second question was regarding the taxability of the interest on the enhanced compensation and this interest which was received in a particular year was to be assessed in the year of receipt or it could be spread over the period of time.

The Assessing Officer passed an assessment order by treating their status as that of an AOP. The Assessing Officer also refused to spread the interest income over the years and treated it as taxable in the year of receipt.

The High Court held that these persons were to be given the status of “individual” and assessed accordingly and not as an AOP and that the interest income was to be spread over from the year of dispossession of land, that is the assessment year 1987-88 till the year of actual payment which was received in the assessment year 1999-2000 applying the principles of accrual of income.

The Revenue approached the Supreme Court challenging the decision of the High Court.

The Supreme Court observed that the admitted facts were that the property in question which was acquired by the Government, came to the respondents on inheritance from their father, i.e., by the operation of law. Furthermore, even the income which was earned in the form of interest was not because of any business venture of the three assesses but it was the result of the act of the Government in compulsorily acquiring the said land. In these circumstances, according to the Supreme Court, the case was squarely covered by the ratio of the judgment laid down in Meera and Co. [(1997) 224 ITR 635 (SC)] inasmuch as it was not a case where any “association of persons” was formed by volition of the parties for the purpose of generation of income. This basic test to determine the status of AOP was absent in the present case.

In so far as the second question was concerned, the Supreme Court held that it was also covered by its another judgment in CIT vs. Ghanshyam (HUF) reported in [(2009) 315 ITR 1 (SC)] albeit, in favour of the Revenue, in which it was held that whereas interest u/s. 34 was not treated as a part of income subject to tax, the interest earned u/s. 28, which was on the enhanced compensation, was treated as a accretion to the value and, therefore, part of the enhanced compensation or consideration making it exigible to tax. After holding that interest on the enhanced compensation u/s. 28 of the 1894 Act was taxable, the court dealt with the other aspect, namely, the year of tax and answered this question by holding that it had to be taxed on receipt basis, which meant that it would be taxed in the year in which it is received.

levitra

Search And Seizure – Block Assessment – Surcharge – The charge in respect of surcharge, having been created for the first time by insertion of proviso to section 113 was substantive provision and hence was to be construed as prospective in operation and was effective from 1st June, 2002.

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CIT vs. Vatika Township P. Ltd. [2014] 367 ITR 466 (SC)

There was a search and seizure operation u/s. 132 of the Act on the premises of the assessee on 10th February, 2001. Notice u/s. 158BC of the Act was issued to the assessee on 18th June, 2001, requiring him to file his return of income for the block period ending 10th February, 2000. In compliance, the assessee filed its return of income for the block period from 1st April, 1989 to 10th February, 2000. The block assessment in this case was completed u/s. 158BA on 28th February, 2002, at a total undisclosed income of Rs. 85,18,819. After sometime, the Assessing Office on verification of working of calculation of tax, observed that surcharge had not been levied on the tax imposed upon the assessee. This was treated as a mistake apparent on record by the Assessing Officer and, accordingly, a rectification order was passed u/s. 154 of the Act on 30th June, 2003. This order u/s. 154 of the Act, by which surcharge was levied by the Assessing Officer, was challenged in appeal by the assessee. The said order was cancelled by the Commissioner of Income Tax (Appeals)-I, New Delhi, vide order dated 10th December, 2003, on the ground that the levy of surcharge is a debatable issue and therefore, such an order could not be passed resorting to section 154 of the Act. The undisclosed income was revised u/s. 158BA/158BC by the Assessing Officer, vide his order dated 9th September, 2003, to Rs.10,90,000, to give effect to the above order of the Commissioner of Income Tax (Appeals), and thereby removing the component of the surcharge.

As the Department wanted the surcharge to be levied, the Commissioner of Income Tax (Central-I), New Delhi, issued a notice u/s. 263 of the Act to the assessee and sought to revise the order dated 9th September, 2003, passed by the Assessing Officer by which he had given effect to the order of the Commissioner of Income Tax (Appeals), and in the process did not charge any surcharge. In the opinion of the Commissioner of Income Tax, this led to income having escaped the assessment. According to the Commissioner of Income Tax, in view of the provisions of section 113 of the Act as inserted by the Finance Act, 1995, and clarified by the Board Circular No. 717, dated 14th August, 1995, surcharge was leviable on the income assessed. According to the Commissioner of Income Tax, the charging provision was section 4 of the Act which was to be read with section 113 of the Act that prescribes the rate and tax for search and seizure cases and rate of surcharge as specified in the Finance Act of the relevant year was to be applied. In this particular case, the search and seizure operation took place on 14th July, 1999, and treating this date as relevant, the Finance Act, 1999, was to be applied.

The Commissioner of Income Tax, accordingly, cancelled the order dated 9th September, 2003, not levying surcharge upon the assessee, as being erroneous and prejudicial to the interests of the Revenue. The Assessing Officer was directed by the Commissioner of Income Tax, to levy surcharge at 10 % on the amount of income-tax computed and issue revised notice of demand. The order covered the block period 1st April, 1989, to 10th February, 2000. This order of the Commissioner of Income Tax u/s. 263 of the Act was passed on 23rd March, 2004. The assessee filed the appeal before the Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal”) against the said order of the Commissioner of Income Tax. The Tribunal, vide its order dated 23rd June, 2006, allowed the appeal of the assessee. The Tribunal held that the insertion of the proviso to section 113 of the Income-tax Act cannot be held to be declaratory or clarificatory in nature and was prospective in its operation. Against the order of the Tribunal dated 23rd June, 2006, the Revenue approached the High Court of Delhi by way of an appeal filed u/s. 260A of the Act for the block period 1st April, 1989 to 10th February, 2000. This appeal was been dismissed, vide order dated 17th April, 2007 by the High Court.

The High Court took the view that the proviso inserted in section 113 of the Act by the Finance Act, 2002, was prospective in nature and the surcharge as leviable under the aforesaid proviso could not be made applicable to the block assessment in question of an earlier period, i.e., the period from 1st April, 1989, to 10th February, 2000, in the instant case.

On further appeal, the Supreme Court noted that the issue about the said proviso to section 113, viz., whether it is clarificatory and curative in nature and, therefore could be applied retrospectively or it is to take effect from the date, i.e., 1st June, 2002, when it was inserted by the Finance Act, 2002, was considered by its Division Bench in the case of CIT vs. Suresh N. Gupta [(2008) 297 ITR 322 (SC)]. The Division Bench held that the said proviso was clarificatory in nature. However, when the instant appeal came up before another Division Bench on 6th January, 2009, for hearing, the said Division Bench expressed its doubts about the correctness of the view taken in Suresh N. Gupta and directed the Registry to place the matter before the Hon’ble the Chief Justice of India for constitution of a larger Bench.

A five judge Bench was constituted to hear the matter. The Supreme Court held that on examining the insertion of the proviso in section 113 of the Act, it was clear that the intention of the Legislature was to make it prospective in nature. This proviso could not be treated as declaratory/statutory or curative in nature. The Supreme Court observed that in Suresh N. Gupta itself, it was acknowledged and admitted that the position prior to amendment of section 113 of the Act whereby the proviso was added, whether surcharge was payable in respect of block assessment or not was totally ambiguous and unclear. The court pointed out that some Assessing Officers had taken the view that no surcharge was leviable. Others were at a loss to apply a particular rate of surcharge as they were not clear as to which Finance Act, prescribing such rates, was applicable. The surcharge varied from year to year. However, the Assessing Officers were not clear about the date with reference to which rates provided for in the Finance Act were to be made applicable. They had four dates before them, viz.:

(i) Whether surcharge was leviable with reference to the rates provided for in the Finance Act of the year in which the search was initiated;
(ii) The year in which the search was concluded; or
(iii) The year in which the block assessment proceedings u/s.158BC of the Act were initiated; or
(iv) The year in which block assessment order was passed.

In the absence of a specified date, it was not possible to levy surcharge and there could not have been an assessment without a particular rate of surcharge. The choice of a particular date would have material bearing on the payment of surcharge. Not only the surcharge was different for different years, it varied according to the category of assesses and for some years, there was no surcharge at all.

According to the Supreme Court, the rate at which the tax is to be imposed is an essential component of tax and where the rate is not stipulated or it cannot be applied with precision, it could be difficult to tax a person. In the absence of certainty about the rate because of uncertainty about the date with reference to which the rate is to be applied, it could not be said that surcharge as per the existing provision was leviable on block assessment qua undisclosed income. Therefore, it could not be said that the proviso added to section 113 defining the said date was only clarificatory in nature. The Supreme Court took note of the fact that the Chief Commissioners at their conference in 2001 accepted the position, that as per the language of section 113, as it existed, it was difficult to justify the levy of surcharge.

The Supreme Court held that the charge in respect of the surcharge, having been created for the first time by the insertion of the proviso to section 113, was clearly a substantive provision and, hence, has to be construed prospective in operation. The amendment was neither clarificatory nor was there any material to suggest that it was so intended by Parliament. Furthermore, an amendment made to a taxing statute could be said to be intended to remove “hardships” only of the assessee, not of the Department. On the contrary, imposing a retrospective levy on the assessee would have caused undue hardship and for that reason Parliament specifically chose to make the proviso effective from 1st June, 2002.

The Supreme Court overruled the Judgment of the Division Bench in Suresh N. Gupta treating the proviso as clarificatory and giving it retrospective effect.

Taxability of Carbon Credits

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Synopsis
Purchase and Sale of Carbon Credits is undertaken globally as a part of the Clean Development Mechanism (CDM), which is targeted towards reduction of Green Houses Gases in the atmosphere. Under this mechanism, Carbon Credits are purchased and sold for a consideration. The taxability of the gains arising from such sale have been a matter of litigation. The esteemed authors have analysed the conflicting decision and discussed the intricate points related to the taxability under the Income-tax Act, 1961 of the consideration received on the sales of these credits.

Issue
To limit concentration of Green House Gases (GHGs), in the atmosphere, for addressing the problem of global warming, the United Nations Framework Convention on Climate Change (UNFCCC) was adopted in 1992. Subsequently, to supplement the convention, the Kyoto Protocol came into force in February 2005, which sets limits on the maximum amount of emission of GHGs by countries. The Kyoto Protocol commits certain developed countries to reduce their GHG emissions. In order to enable the developed countries to meet their emission reduction targets, the Kyoto Protocol provides three market-based mechanisms, one of which is the Clean Development Mechanism (CDM).

Under the CDM, a developed country can take up a GHG reduction project activity in a developing/least developed country where the cost of GHG reduction is usually much lower, and in consideration for undertaking the activity the developed country would be given carbon credits for meeting its emission reduction targets. Alternatively, entities in developing/least developed countries can set up a GHG reduction project, in their respective countries, get it approved by UNFCCC and earn carbon credits. Such carbon credits generated, by the entities in the developing/least developed country, can be bought, for a consideration, by the entities of the developed countries responsible for emission reduction targets. Under the CDM, carbon credits are measured in terms of Certified Emission Reduction (CER) where one CER is equal to 1 metric tonne of carbon dioxide equivalent, and for which a certificate is issued, which certificate is saleable.

The question has arisen, under the Indian tax laws, as to whether the consideration received by an entity for sale of carbon credits generated by it is of a capital nature or a revenue nature, and whether such amount is taxable or not. Incidental questions are whether such income is eligible for deduction under chapter VIA and whether it is liable for MAT. While the Hyderabad, Jaipur and the Chennai benches of the tribunal have taken the view that sale proceeds of carbon credits are not taxable, being capital receipts arising out of environmental concerns and not out of the business, the Cochin bench of the tribunal has taken the view that the sale proceeds of such carbon credits are taxable as a benefit arising out of business.

My Home Power’s case
The issue first arose for consideration before the Hyderabad bench of the tribunal in the case of My Home Power Ltd vs. Dy. CIT 21 ITR (Trib) 186.

In this case, the company was engaged in the business of power generation through biomass power generation unit. During the relevant year, it received 1,74,037 Carbon Emission Reduction Certificates (CERs) or carbon credits for the project activity of switching off fossil fuel from naphtha and diesel to biomass. It sold 1,70,556 CERs to a foreign company and received Rs. 12.87 crore. It accounted this receipt as capital in nature and did not offer it for taxation.

The assessing officer treated the sale proceeds of the CERs to be a revenue receipt, since they were a tradable commodity, and even quoted on stock exchanges. He accordingly added a net receipt of Rs. 11.75 crore to the returned income. The Commissioner(Appeals) confirmed the order of the assessing officer and further held that it was not income from business and was therefore not entitled for deduction u/s. 80-IA.

Before the Tribunal, it was argued on behalf of the assessee that the main business activity of the assessee was generation of biomass-based power. The receipt had no relationship with the process of production, nor was it connected with the sale of power or with the raw material consumed. It was also not the sale proceeds of any by-product. It was further argued that CERs were issued to every industry, which saved emission of carbon, and was not limited to power projects. Further, the certificates were issued keeping in view the production relating to periods prior to the previous year. It was claimed that the amount was not compensation for loss suffered in the process of production or for expenditure incurred in acquisition of capital assets.

It was further argued that the certificates issued by the UNFCCC under the Kyoto protocol only recognised the achievement made by the assessee in emitting lesser quantity of gases than the assigned quantity, and had no relation to either revenue or capital expenditure incurred by the assessee. The certificate itself did not have any value unless there were other industries which were in need of such certificate, and was not dependent on production. In a hypothetical situation where all the industries in the world were able to limit emissions of gases to the assigned level, it was argued that there would be no value for such certificates issued by UNFCCC.

It was claimed that the process of business commenced from purchase of raw material and ended with the sale of finished products, and that the gain was not earned in any of the in-between processes, nor did it represent receipt to compensate the loss suffered in the process. Therefore, the amount did not represent any income in the process or during the course of business. It was also claimed that the amount did not represent subsidy for establishing the industry or for purchase of raw material or a capital asset. UNFCCC did not reimburse either revenue or capital expenditure, and in fact did not provide any funds, but merely certified that the industry emitted a particular quantity of gases as against the permissible quantity. It was therefore not a subsidy granted to reimburse losses. In fact, no payment was made by UNFCCC, but only a certificate was issued without any consideration of profit or loss or the cost of acquisition of capital assets.

It was also argued that the amount could not be considered to be a perquisite, as it was not received from any person having a business connection with the company, and was not received in the process of carrying on the business. It was claimed that unless there existed a business connection, no benefit or perquisite could be derived.

It was also claimed that the amount did not fall within the definition of income u/s. 2(24). It did not represent an incentive granted in the process of business activity, as the amount was not received under any scheme framed by the government or anybody to benefit the industry or to reimburse either the cost of the raw material or the cost of capital asset. The amount was not an award for the revenue loss suffered by the company, as it was granted without relevance to the financial gains or losses. The payment was made without any relevance to the financial transactions of the assessee and there was no consideration for paying this amount. The amount was paid in the interest of the international community and not in the interest of industry as such, or in the interest of the assessee as a compensation for the loss or expenditure during the course of business, and was therefore a sort of gift given by UNFCCC for the distinction achieved by the assessee in achieving emission of lesser amount of gases than the assigned amount. It was therefore not an income within the meaning of section 2(24) or section 28.

Reliance was placed on the decision of the Supreme Court in the case of CIT vs. Sterling Foods 237 ITR 579, for the proposition that just as certificates issued by the government for export of goods which were capable of sale, was held as not arising from the industrial undertaking, but from the export promotion scheme of the government, so also such CER certificates were attributable to the climatic protection scheme of the UNFCCC, which had no relevance to the business activities of the assessee.

It was further pointed out that under the draft Direct Taxes Code (DTC), such items were regarded as income, yet no amendment had been made to the Income-tax Act to bring such items to tax as income. Therefore, the intention of Parliament was not to tax such CERs till such time as DTC came into force.

It was pointed out that in the case of subsidies, subsidies received on revenue account alone would be taxed as income, while subsidies received on capital account were not to be taxed, but would be reduced from the cost of the capital asset for the purposes of claiming depreciation. Further, subsidy received for the public good was held as not taxable. In the case of the assessee, the amount did not represent composition for loss on revenue account, nor a gain during business activities, nor a reimbursement of any capital expenditure. It was claimed that the amount received was for public good and was therefore not taxable.

Besides claiming that it was a capital receipt, it was alternatively claimed that the income was not assessable for the relevant assessment year, since it related to reduction of carbon emissions during earlier years, that the amount was eligible for deduction u/s. 80-IA since the assessing officer was of the view that it was connected to the production of power and that, if it all it was to be taxed, the expenditure relatable to earning certificates had to be arrived at by taking into consideration the assets used and the materials consumed in the earlier years and such amount had to be reduced from the gross receipts to arrive at the taxable amount.

On behalf of the revenue, it was argued that the underlying intention behind the technological implementation by a company in the developing world is not only to reduce the pollution of atmosphere, but also to earn some profit from out of excess units that can be generated by implementation of the CDM project. It was claimed that the CER credits can be considered as goods, as they had all the attributes of goods, viz. utility, capability of being bought and sold, and capability of being transmitted, transferred, delivered, stored and possessed. According to the revenue, the purchase agreement between the assessee and the foreign company indicated that the sale transaction of CERs was nothing but a transaction in goods.

It was further argued on behalf of the revenue that by implementing the CDM project, the assessee got the benefit of efficiency in respect of reduction of pollution. Had there been no other benefits attached to it, under normal circumstances, the assessee would not have bothered to obtain CERs. It was because of the expenditure incurred for implementation of the project as a pollution reduction measure that the assessee got the benefit of the certificates. The expenditure incurred was claimed in its profit and loss account. Since it was known that the UNFCCC certificates had intrinsic value and had a ready market for redemption or trading, the assessee obviously pursued obtaining of these certificates. Further, these certificates were traded and were therefore akin to shares or stocks transacted in the stock exchange, and were therefore revenue receipts rightly brought to tax by the assessing officer.

The Tribunal observed that carbon credits were in the nature of an entitlement received to improve world atmosphere and environment, reducing carbon, heat and gas emissions. According to the Tribunal, the entitlement earned for carbon credits could at best be regarded as a capital receipt and could not be taxed as a revenue receipt. It was not generated or created due to carrying on of business, but it accrued due to world concern. Its availability and assumption of the character of transferable right or entitlement was only due to the world concern.Therefore, the source of carbon credits was world concern and environment, to which the assessee got a privilege in the nature of transfer of carbon credits. Therefore, the amount received for carbon credits had no element of profit or gain and could not be subject to tax in any manner under any head of income.

According to the Tribunal, carbon credits were made available to the assessee on account of saving of energy consumption and not because of its business. Transferable carbon credits was not a result or incidence of one’s business but was a credit for reduction of emissions. In its view, carbon credits could not be considered to be a by-product. It was a credit given to the assessee under the Kyoto Protocol and because of international understanding. According to the Tribunal, the amount received was not received for producing and selling any product, by-product or of rendering any service in the course of carrying on of the business, but was an entitlement or accretion of capital, and hence income earned on sale of these credits was a capital receipt.

The Tribunal relied on the decision of the Supreme Court in the case of CIT vs. Maheshwari Devi Jute Mills Ltd. 57 ITR 36, where it was held that consideration for transfer of surplus loom hours by one mill to another mill under an agreement for control of production was a capital receipt and not an income. It was held that such sale proceeds was on account of exploitation of a capital asset, and it was a capital receipt and not an income. According to the Tribunal, the consideration received by the assessee for carbon credits was similar to the consideration received by transfer of loom hours.

Accordingly, the Tribunal held that carbon credits was not an offshoot of business, but an offshoot of environmental concerns, and that carbon credits did not increase profits in any manner and did not need any expenses. It was a nature of entitlement to reduce carbon emissions, with no cost of acquisition or cost of production to get such entitlement. Therefore, carbon credits was not in the nature of profit or in the nature of income, but a capital receipt.

The view taken by the Hyderabad bench of the Tribunal in this decision was followed by the Chennai bench of the tribunal in the cases of Ambika Cotton Mills Ltd vs. Dy CIT 27 ITR (Trib) 44 and Sri Velayudhaswamy Spinning Mills (P) Ltd vs. Dy CIT 27 ITR (Trib) 106 and recently, the Jaipur bench in the case of Shree Cements Ltd. vs. ACIT, 31 ITR(Trib) 513 has followed the decisions of the Chennai bench.

    Apollo Tyres’ case

The issue again came up before the Cochin bench of the Tribunal in the case of Apollo Tyres Ltd. vs. ACIT 149 ITD 756, 31 ITR(Trib) 477.

In this case, the assessee received Rs. 3.12 crore from sale of CERs or carbon credits generated in the gas turbine unit. The assessee claimed that the income earned on sale of carbon credits was directly and inextricably linked to generation of power and that the assessee would therefore be entitled to deduction u/s. 80-IA. However, the assessing officer and the DRP held that the income was not derived from eligible business and was therefore not eligible for deduction u/s. 80-IA.

Before the Tribunal, the assessee raised an additional ground that the income received on sale of carbon credits was in the nature of capital receipt, and therefore not liable for taxation.

On behalf of the assessee, it was argued before the tribunal that the entitlement to carbon credits arose from the undertaking of the developed countries to reduce global warming and climate change mitigation across the world. It was claimed that carbon credits was an incentive provided to a project which employed a methodology to effect demonstrable and measurable reduction of emission of carbon dioxide in the atmosphere. The mechanism provided for trading CERs provided an opportunity to the holder of such certificate to dispose of the same to an actual user to acquire such credit to be counted toward fulfilment of its committed target reduction. Therefore, the mechanism provided by the United Nations provided an incentive for employment of new technology which helped in emission reduction, and therefore contributed to the desired object to protect the world environment. The purpose of Kyoto protocol was to protect the global environment and incorporate green initiative by adopting new technologies. The underlying object of CERs by the UNFCCC was focused on climate change mitigation by reducing the harmful effect of GHG emission and not to ensure that the recipient of such CER could run his business in a more profitable or cost effective manner.

It was argued on behalf of the assessee that all capital receipts were not income, but only capital gains chargeable u/s. 45 by virtue of the specific definition contained in section 2(24) (vi). Reliance was placed on the decision of the Hyderabad bench of the Tribunal in the case of My Home Power Ltd. (supra) for the proposition that the amount received on transfer of carbon credits was a capital receipt, and therefore not liable for taxation. It was alternatively argued that in case the tribunal found that the income on sale of carbon credits was a revenue receipt, then the assessee was entitled to deduction u/s. 80-IA, because it was inextricably linked to the business of the assessee.

On behalf of the revenue, it was argued that income or amount received by termination or sterilisation of a capital asset would fall in the capital field, but if the amount was received in the course of regular business activity due to sale of a product or entitlement incentive received due to a scheme of the government or the international community, then it would fall in the revenue field. According to the revenue, in the case before the tribunal, there was no sterilisation of any capital asset. The assessee generated power by using a gas turbine. What was given to the assessee was an incentive in the course of its regular business and therefore the amount received on sale of carbon credits had to be treated as a revenue receipt.

It was further submitted that the income on sale of carbon credits was not derived from the industrial undertaking. Though there might be a nexus between the business of the assessee and the receipt of income on sale of carbon credits, the income had to be necessarily derived from the industrial undertaking. In the case before the Tribunal, the income was derived on account of the scheme of the UNFCCC and not from the industrial undertaking. It was therefore argued that the assessee was not entitled to deduction u/s. 80-IA.

The Tribunal analysed the concept of carbon credits. According to it, carbon credits was nothing but an incentive given to an industrial undertaking for reduction of the emission of GHGs, including carbon dioxide. It noted that there were several ways for reduction of emission of GHGs, such as by switching over to wind and solar energy, forest regeneration, installation of energy-efficient machinery, landfill methane capture, etc. According to the Tribunal, it was obvious that carbon credits was nothing but a measurement given to the amount of GHG emission rates in the atmosphere in the process of industrialisation, manufacturing activity, etc. Therefore, carbon credits was a privilege/entitlement given to industries for reducing the emission of GHGs in the course of their industrial activity.

While considering whether the receipt was a capital receipt or a revenue receipt, the Tribunal analysed the decision of the Hyderabad bench of the tribunal in the case of My Home Power Ltd. (supra). It noted that the Tribunal in that case had placed reliance on the judgement of the Supreme Court in Maheshwari Devi Jute Mills Ltd. (supra), and that it had held that the amount received on sale of carbon credits was on sale of entitlement conferred on the assessee by UNFCCC under Kyoto Protocol. It also noted that sale of carbon credits did not result in sterilisation of any capital asset.

Analysing the decision of the Supreme Court in the case of Maheshwari Devi Jute Mills Ltd. (supra), the Cochin bench of the Tribunal noted that in the case before the Supreme Court, it was accepted by the revenue at the lower levels that the loom hours were assets belonging to each member and that it was only at the Supreme Court level, that the revenue contended that the loom hour was a privilege, and not an asset. The Supreme Court did not consider the aspect of whether the loom hours was a capital asset, since it had been accepted to be a capital asset, right up to the proceedings before the High Court, and a change in stand was not permitted by the Supreme Court. It was based on these facts that the Supreme Court held that the receipt on sale of loom hours must be regarded as capital receipt and not as income. The Tribunal according held that the said decision did not really help the case of the assesee as it was delivered on the facts of the case and therefore found that the Hyderabad bench was unduly influenced by the said decision of the Supreme Court in concluding that the carbon credits were capital assets.

The Cochin bench of the Tribunal noted that in the case before it, right from the assessment proceedings before the assessing officer till before the Tribunal, the assessee had not made any claim that the carbon credit was a capital asset as defined in section 2(14). Further, the assessee had claimed deduction u/s. 80-IA in respect of sale of carbon credits. Therefore, the assessee had effectively conceded that carbon credits were not capital assets. According to the Tribunal, had the assessee claimed that the carbon credits were capital assets, it would not have claimed deduction u/s. 80-IA on the income derived from sale of the carbon credits. The Tribunal observed that the assessee itself treated the carbon credits as an entitlement or privilege generated in the course of business activity.

The Tribunal noted that the assessee was engaged in the business of manufacture of tyres and for the purpose of captive consumption, the assessee generated electric power by using a gas turbine. In the process of power generation, the assessee reduced emission of carbon dioxide and therefore received carbon credits. According to the Tribunal, it was obvious that carbon credits were obtained by the assessee in the course of its business activity. The Tribunal was of the view that when the carbon credits was an entitlement or privilege accruing to the assessee in the course of carrying on of manufacturing activity, it could not be said that such carbon credits was an accretion of a capital asset. It noted that carbon credits was not a fixed asset or tool of the assessee to carry on its business. According to it, the sale of carbon credits was a trading or revenue receipt.

The Tribunal also considered the aspect of whether import entitlement was at par with carbon credits. It noted that both import entitlements and carbon credits came from a scheme, one of the government and one of the UNFCCC under the Kyoto protocol. It was therefore of the view that both were on par. Following the decision of the Kerala High Court in the case of OK Industries vs. CIT 42 CTR 82, which had held that import entitlement was generated in the course of business activity and could not be treated as an asset within the meaning of section 2(14), the Tribunal held that carbon credits also could not be treated as capital assets.

The Cochin bench of the Tribunal observed that the provisions of section 28(iv) read with section 2(24)(vd), which brought to tax the value of any benefit or privilege arising from business, were not brought to the notice of the Hyderabad bench of the Tribunal in the case of My Home Power Ltd. (supra), and that therefore that decision was not applicable to the case before it.

The Tribunal therefore held that the sale of carbon credits constituted revenue receipts and profits and gains of the business u/s. 28(iv) read with section 2(24)(vd).

    Observations

Sale proceeds of carbon credits have not been specifically included in section 28, or in the definition of income u/s. 2(24). The legislature when desired, has amended the Income-tax Act to include certain specific receipts as income, even though the character of such receipts may not necessarily be in the nature of income. For instance, profits on sale of import entitlements and certain other specified receipts are specifically included as an income u/s. 28(iiia) to (iiie) read with section 2(24)(va) to (ve). Similarly, amounts received under an agreement for not carrying out any activity in relation to business is specifically taxable u/s. 28(va) read with section 2(24)(xii). The Cochin bench of the Tribunal does not seem to have considered this important fact of the omission, to expressly provide for the taxation of the carbon credits, which fact convey the intent of the legislature to not expose such receipts to taxation, which intent is further strengthened by clause(ii) to the proviso to section 28(va).

There is a specific exclusion, from taxation, under the clause(ii) to the proviso to section 28(va) for compensation received from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone Layer under the United Nations Environment Programme. Such compensation is similar in character to carbon credits, in the sense that both are received under a multilateral convention for protection of the environment for doing or not doing a particular activity, which results in environment improvement. The intention therefore appears to be not to tax such amounts, since these are rewards for benefiting the world and public in general.

The Cochin bench of the Tribunal seems to have been largely influenced by the fact that the assessee, in the initial stages before the tax authorities, had taken the stand that the amount was taxable and was relatable to its power generation business. It therefore proceeded on the footing that the assessee itself had considered the carbon credits as the receipts arising from its power generation business.

The fact that carbon credits are transferable or that they are traded on stock exchanges is irrelevant for deciding the fact as to whether they are capital receipts or revenue receipts. Similarly, it is not necessary that all benefits arising from business activity are of a revenue nature. For instance, by carrying on business, goodwill or a brand may be generated, which is of a capital nature. In fact the various receipts, now specifically made taxable under different clauses of section 28 aforesaid, are the cases of business receipts in the nature of capital, that are made taxable under specific legislation.

The real issue is whether the carbon credits, even where regarded as benefits or perquisites, arise from the business? The Hyderabad bench of the Tribunal, relied on the Supreme Court’s decision in the case of Sterling Foods (supra) to take a view that the export entitlements did not arise from the business of the industrial undertaking, but from the scheme of the Government. The view of the Cochin bench of the Tribunal, however meritorious, that the carbon credits arose on account of the manner in which the business was carried on, and was not totally divorced from the business activity, is at the most debatable. Considering the importance of the environment protection and the need to promote the measures to protect it, the Government should specifically amend the law if it believes that the carbon credits are taxable as income. In fact, the intention seems to have been to tax it once the DTC came into force, as the draft DTC had provisions for taxing such amount. If the intention is to tax it now, the Income-tax Act needs to be amended on the lines of Clauses (va) to (ve) of section 2(24) and Clauses (iiia) to (iiie) of section 28 for that purpose.

However, for the time being, the issue seems to have been concluded in favour of the assessee, by the Andhra Pradesh High Court, which approved the decision of the Hyderabad bench of the Tribunal in the case of CIT vs. My Home Power Ltd., 365 ITR 82. The Andhra Pradesh High Court agreed with the findings of the Tribunal that carbon credit is not an offshoot of business, but an offshoot of environmental concerns, and that no asset is generated in the course of business, but is generated due to environmental concerns. According to the High Court, the carbon credit was not even directly linked with power generation. The High Court held that the amount received on sale of excess carbon credits, was a capital receipt, and not a business receipt or income.

TRANSFER PRICING METHODOLO GY – RESALE PRICE METHOD AND COST PLUS METHOD

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1 Introduction

The concept of
‘Transfer Pricing’ analysis refers to determination of ‘Arms Length
Price’ of transactions between related persons [also known as Associated
Enterprise (AE)]. The computation of Arm’s Length Price is required to
be based on a scientific approach and methodology, wherein the fair
value of transaction between two or more related persons is determined
as if the relationship would have not influenced the pricing of
transaction.

The various transfer pricing methods used in India are as follows:

Traditional Transaction Methods:
• Comparable Uncontrolled Price Method (CUP)
• Resale Price Method (RPM)
• Cost Plus Method (CPM)

Transaction Profit Methods:
• Profit Split Method (PSM)
• Transactional Net Margin Method (TNMM)

In
the October issue of BCAJ, an analysis of CUP method was discussed. In
this article, we will be analysing Resale Price Method (RPM) and Cost
Plus Method (CPM).

2. Resale Price Method – Meaning:

2.1 The Provision of Income Tax Act:

Under the Indian Income tax law, the statutory recognition of this method is provided in section 92C of Act read with Rule10B.

Rule
10B(1)(b) prescribes the manner by which arm’s length price can be
determined using RPM. The relevant extract is as follows:

“Determination of arm’s length price u/s. 92C

10B.
(1) For the purposes of s/s. (2) of section 92C, the arm’s length price
in relation to an international transaction or a specified domestic
transaction shall be determined by any of the following methods, being
the most appropriate method, in the following manner, namely :—

(a)…

(b) R esale price method, by which,-

(i)
the price at which property purchased or services obtained by the
enterprise from an associated enterprise is resold or are provided to an
unrelated enterprise, is identified;

(ii) such resale price is
reduced by the amount of a normal gross profit margin accruing to the
enterprise or to an unrelated enterprise from the purchase and resale of
the same or similar property or from obtaining and providing the same
or similar services, in a comparable uncontrolled transaction, or a
number of such transactions;

(iii) the price so arrived at is
further reduced by the expenses incurred by the enterprise in connection
with the purchase of property or obtaining of services;

(iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices,
if any, between [the international transaction or the specified
domestic transaction] and the comparable uncontrolled transactions, or
between the enterprises entering into such transactions, which could
materially effect the amount of gross profit margin in the open market;

(v) the adjusted price arrived at under sub-section;

(iv)
is taken to be an arm’s length price in respect of the purchase of the
property or obtaining of the services by the enterprise from the
associated enterprise.”

Based on the plain reading of the rule,
it can be observed that RPM is applicable in case the property is
purchased or service is obtained from an AE and resold to an unrelated
party. Accordingly, RPM would be suitable for distributors or resellers
and is less useful when goods are further processed or incorporated into
other products and where intangibles property is used.

However,
it is pertinent to examine whether RPM can be used in a reverse
situation i.e. when the property is purchased or service obtained by an
enterprise from an unrelated enterprise which is thereafter resold or
are provided to an AE.

In this respect, the Mumbai Tribunal in the case of Gharda Chemicals Limited vs. DCIT [2009-TIOL-790- ITAT-Mum]
had an occasion to consider this issue and rejected RPM on the ground
that RPM could be applied only in a case where Indian enterprise
purchases goods or obtain services from its AE and not in a reverse
case.

The resale price method focuses on the related sales
company which performs marketing and selling functions as the tested
party in the transfer pricing analysis. RPM is more appropriate in a
business model when the entity performs basic sales, marketing and
distribution functions and there is little or no value addition by the
reseller prior to resale of goods.

Further, if the sales company
acts as a sales agent that does not take title to the goods, it is
possible to use the commission earned by the sales agent represented as a
percentage of the uncontrolled sales price of the goods concerned as
the comparable gross profit margin. The resale price margin for a
reseller performing a general brokerage business should be established
considering whether it is acting as an agent or a principal.

Also,
if the property purchased in a controlled sale is resold to AE’s in a
series of controlled sales before being resold in an uncontrolled sale
to unrelated party, the applicable resale price is price at which
property is resold to uncontrolled party or the price at which
contemporaneous resale of the same property is made. In such a case, the
determination of appropriate gross profit will take into account the
functions of all the members of group participating in the series of
controlled sales and final uncontrolled sales as well as other relevant
factors

2.2 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrators:

RPM
is also discussed in detail in the Transfer Pricing guidelines1
developed by OECD. It states that the method begins with a price at
which a product that has been purchased from an AE is resold to an
independent enterprise. This price (resale price) is then reduced by an
appropriate gross margin (i.e., “resale price margin”) representing the
amount out of which the seller would seek to cover its selling and
operating expenses and in the light of the functions performed make an
appropriate profit. Further, after making adjustment of other expenses
what is left can be considered as an Arm’s Length Price of the product
purchased from AE.

If there is material differences that affect
the gross margins earned in the controlled and the uncontrolled
transactions, adjustments should be made to account for such
differences. Adjustments should be performed on the gross profit margins
of the uncontrolled transactions.

The operating expenses in
connection with the functions performed and risks incurred should be
taken into account in this respect as differences in functions performed
are frequently conveyed in operating expenses.

The guidelines
also discuss the situation where such model should be used, practical
difficulties and application of the method in particular situations.

2.3 U N Practical Manual on Transfer Pricing for Developing Countries:

Similar
to OECD guidelines, UN guidelines also provide guidance for RPM. The UN
practical manual states that the starting point of the analysis for
using the method is the sales company. Under this method the transfer
price for the sale of products between the sales company and a related
company can be described in the following formula:

TP = RSP X (1-GPM)

Where,

• TP = the transfer price of a product sold between a sales company and a related company;

• RSP = the resale price at which a product is sold by a sales company to unrelated customers; and
    GPM = the Gross Profit Margin that a specific sales company should earn, defined as the ratio of gross profit to net sales. Gross Profit is defined as Net sales minus cost of goods sold.

2.4 Most suitable situations for applicability of RPM:

The applicability of the method depends upon the facts of each case. However, various commentaries like OECD and UN has laid down situations where RPM would most likely be the suitable option in order to determine the arm’s length price. The same has been discussed in the ensuing paragraphs.

If comparable uncontrolled transactions can be identified, the CUP method may very well be the most direct and sound method to apply the Arm’s Length Principle. If the CUP method cannot be applied, however, other traditional transaction methods to consider are the Cost Plus Method and the Resale Price Method.

In a typical intercompany transaction involving a full-fledged manufacturer owning valuable patents or other intangible properties and affiliated sales companies which purchase and resell the products to unrelated customers, the resale price method is a method to use if the CUP method is not applicable and the sales companies do not own valuable intangible properties.

The situations where RPM could apply are discussed below:

    The OECD guidelines states that RPM can be used where the reseller does not add substantial value to the products. Thus the reseller should add relatively little or no value to the goods. It may be difficult to apply RPM where goods are further processed and identity of goods purchased from AE is lost. For example, let say a reseller is doing limited enhancements such as packaging, repacking, labelling etc. In this case, this sort of activities does not add significant value to the goods and hence RPM could be used for determining ALP.

However,  significant  value  addition  through  physical modification such as converting rough diamonds into cut and polished diamonds adds significant value to the goods and hence, RPM cannot be applied for such value added activity.

Another example could be, say, mineral water is imported from AE and sold in the local market by adding the brand name of Indian company, RPM cannot be applied since there is significant addition in value of goods due to the use of brand name of Indian company.

    A Resale Price Margin is more accurate where there is shorter time gap between purchase and sale. The more time that elapses between the original purchase and resale the more likely it is that other factors like changes in the market, in rates of exchange, in costs, etc, would affect the price and hence would also be required to be considered for comparability analysis.

    Further, in RPM the comparability is at the gross margin level and hence, RPM requires a high degree of functionality comparability rather than product comparability. Hence, a detailed analysis showing the close functional comparability and the risk profile of the tested party and comparables should be clearly brought out in the Transfer Pricing study report in order to justify comparability at gross profit level under RPM. Thus, RPM is useful when the companies are performing the similar functions.

However, a minor difference in products is acceptable if they are less likely to have an effect on the Gross Profit Margin. For example, Gross Profit Margin earned from trading of microwave ovens in controlled transaction can be compared with the Gross Profit Margin earned by unrelated parties from trading in toasters since both are consumer durables and fall within the same industry.

2.5 Steps in application of RPM:

    Identify the transaction of purchase of property or services;

    Identify the price at which such property or services are resold or provided to an unrelated party (resale price);

    Identify the normal Gross Profit Margin in a comparable uncontrolled transaction;

    Deduct the normal gross profit from the resale price;
    Deduct expenses incurred in connection with the purchase of goods;

    Adjust the resultant amount for the functional and other differences such as accounting practices etc that would materially affect the Gross Profit Margin in the open market;

    The price arrived at is the Arm’s Length Price of the transaction.

The application of the resale price method can be understood with the following example:

The international transaction entered into by AE1 Ltd. with AE2 Ltd. which should be determined on the basis of Arm’s Length Price.

In another uncontrolled transaction, AE1 Ltd. had purchased from unrelated supplier (K Ltd.) and sold to unrelated customer (M Ltd.) and earned Gross Profit Margin of 15%.

The differences in sale to K Ltd. and A Ltd. are on account of the following:

    Sale to A Ltd. was ex-shop and sale to M Ltd. was FOB basis. This accounted for additional 2% difference in Gross Profit Margin as sales price increased but corresponding expenses are not debited to trading but profit and loss account.

    Quantity discount was provided to A ltd and not M Ltd. Impact is 1% on GP margin.

The differences in purchase from AE2 and K Ltd. are as follows:

    Additional freight expenses incurred of Rs. 10 per unit and quantity discount received of Rs. 15 per unit on purchases from AE2 ltd and not on purchases from K Ltd. Further, Rs. 25/- towards custom duty is incurred on purchases in both the cases.

2.6 Advantages and Challenges of the RPM:

Advantages of RPM

    The method is based on the resale price i.e., a market price and thus represent demand driven method

    The method can be used without forcing distributors to in appropriately make profits. Hence, unlike other methods, distributor could incur losses on net basis due to huge selling expenses even if there is an Arm’s Length Gross Margin. Hence, this method could be used without distorting the figures.

Challenges of RPM

    Non availability of gross margin data of comparable companies from public database is the biggest challenge in applying RPM since Companies Act, 1956 does not require Gross Profit Margin calculation to be reported and Tax Audit Reports which contain Gross

Profit Margin are not available in public database. Hence, difficulty would arise on account of external comparables.

    Differential accounting policies followed across the globe makes application of RPM very difficult. Example:
    Some companies include exchange loss/gain in purchase/sale whereas some companies show it as part of administrative and other expenses. Example

    Some companies include excise duty on purchase in Purchase A/c whereas some companies show it as part of rent, rates and taxes.

    RPM is unlikely to give accurate result if there is difference in level of market, function performed or product sold. Further, due to lack of availability of information on functions performed by the comparables, comparing the level of functions is difficult.

    Another disadvantage is, for certain industries such as Pharmaceutical industry, wherein it is difficult to identify companies exclusively performing trading operations as most of the companies are into manufacturing and trading.

    Further, usage of RPM in case of services could be a challenge considering the difference of surrounding situations in service transactions vs. product transactions as well as the financial disclosure norms applicable for service entities.

2.7 RPM – Comparability Parameters:

The following factors may be considered in determining whether an uncontrolled transaction is comparable to the controlled transaction for purposes of applying the resale price method as well as to determine whether suitable economic adjustments should be made to account for such differences:

    Factors like business experiences (start-up phase or mature phase), management efficiency, cost structures etc that have less effect on price of products than on costs of performing functions should be considered. Such differences could affect Gross Margin even if they don’t affect Arm’s Length Prices of products.

    A Resale Price Margin requires particular attention in case the reseller adds substantially to the value of the product (e.g., by assisting considerably in the creation or maintenance of intangible property related to the product (e.g., trademarks or trade names) and goods are further processed into a more complicated product by the reseller before resale).

    Level of activities performed and risks borne by reseller. E.g., A buying and selling agent would obviously obtain higher compensation then a pure sales agent.

    If the reseller performs a significant commercial activity besides the resale activity itself, or if it employs valuable and unique assets in its activities (e.g., valuable marketing intangibles of the reseller), it may earn a higher Gross Profit Margin.

    The comparability analysis should take into account whether the reseller has the exclusive right to resell the goods, because exclusive rights may affect the Resale Price Margin.

    The reliability of the analysis will be affected by differences in the value of the products distributed, for example, as a result of a valuable trademark.

    In practice, significant difference in operating expenses is often an indication of differences in functions, assets or risks. This may be remedied if operating expense adjustments can be performed on the unadjusted gross profit margins of uncontrolled transactions to account for differences in functions performed and the level of activities performed between the related party distributor and the comparable distribution companies. Since these differences are often reflected in variation of the operating expenses, adjustments with respect to differences in the SG & A expenses to sales ratio as a result of differences in functions and level of activities performed may be required.

    The differences in inventory levels and valuation method will also affect the Gross Profit Margin.

    Further, adjustment on account of differences in working capital could also be considered (i.e., credit period for payables and receivables, the cycle of inventory, etc).

For RPM, product differences would be less relevant, since one would expect a similar level of compensation for performing similar functions across different activities for broadly similar products. Hence, typically RPM is more applied on the basis of functional comparability rather than product comparability. However, the distributors engaged in sale of markedly different products should not be compared.

Further, differences in accounting practices may be on account of:

    Sales and purchases have been accounted inclusive or exclusive of taxes;
    Methods of pricing of goods namely, FOB or CIF;

    Fluctuations in foreign exchange, etc.

In actual practice, the resale may also be out of opening stock. Similarly, the goods purchased during the said year may remain in closing stock. The process of determination under RPM culminates in cost of sales rather than value of purchases. This cost of sales should be converted into cost of purchases. For this, closing stock of goods purchased from AE should be added and opening stock of purchases from AE should be deducted.

2.8 Judicial Precedents on RPM:

The applicability of the said method on a particular transaction is subject matter of litigation. Some of the decisions are discussed in brief hereunder.

    DCIT vs. M/s Tupperware India Pvt. Ltd. [ITA No. 2140/Del/2011 & ITA No 1323/Del/2012]

    The tax payer operates as a distributor of plastic food storage and serving containers. It has subcontracted the manufacturing activity to contract manufacturers.

The moulds required to manufacture the product are leased in by the tax payer from the AE’s and thereafter supplied to contract manufacturers. The moulds are owned and developed by the overseas group entities.

    The tax payer contended that it did not add any value to the products and carries out the functions of a pure reseller. Further, the tax payer contended that it merely procures the moulds from the AE’s and supplies them to the contract manufacturers. Thereafter, it procures finished goods from contract manufacturers and sells them in Indian market without adding any value thereon. Further, there is strong correlation and interdependence between the purchase of mould and core activity of distributor. Accordingly, RPM is most appropriate method.

    The Transfer Pricing Officer (TPO) rejected the same and computed the Arm’s Length Price by applying Transactional Net Margin Method (TNMM).

    The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the said addition and the Income Tax Appellate
Tribunal (ITAT) upheld the decision of CIT(A).

    ITAT held as follows:

    It is clear that there was hardly any value addition made by the tax payer relating to the transaction.

    The function of the tax payer was that of the reseller and hence RPM is the most appropriate method in this case.

    The TPO without any analysis concluded that

TNMM is the most appropriate method is not based on any facts relevant to the case.

    Mattel Toys (I) Pvt Ltd vs. DCIT

    The tax payer is a wholly owned subsidiary of Mattel Inc., USA. During the year under consideration, the tax payer imported finished goods and sold them in India as well as exported to AE’s. The tax payer also imported raw material from AE for manufacturing the toys in India.

    The tax payer had benchmarked the said transaction using TNMM and in their study report had rejected
RPM method.

    The TPO segregated the activities into 3 segments – (i) import of goods from AE and sale in domestic market; (ii) import of goods from AE and sold to AE; and (iii) import of goods from AE and export to third parties outside India.

    The TPO worked out operating margin for all the three segments separately and proposed an adjustment. The assessee had contended before TPO for adoption of RPM as most appropriate method. However, TPO rejected the contention of the tax payer.

    CIT(A) upheld the view of TPO and confirmed the addition.
    The tax payer before ITAT contended that for determination of Arm’s Length Price for distribution activity, RPM is most appropriate. Further, the tax payer contended that its gross profit margin was higher than that of comparables.

    ITAT held as follows:-

    The nature of product was not much relevant but the functions performed of the comparability are to be seen. It observed, “the main reason is that the product differentiation does not materially effect the Gross Profit Margin as it represents gross compensation after the cost of sales for specific functions performed. The functional attribute is more important while undertaking the comparability analysis under this method. Thus, in our opinion, under the RPM, products similarity is not a vital aspect for carrying out comparability analysis but operational comparability is to be seen.”

    It further held that gross profit margin earned by an independent enterprise was a guiding factor in
RPM.

    Accordingly, RPM is the most appropriate method for determining Arm’s Length Price for distribution activity. Since the tax payer had adopted TNMM, the matter is remitted back to TPO for de novo adjudication. ITAT directed TPO to determine the Arm’s Length Price based on fresh comparables after considering RPM as the most appropriate method.

 ITO vs. L’Oreal India Pvt. Ltd. [ITA No, 5423/ Mum/2009]

    The tax payer, a wholly owned subsidiary of L’Oreal SA

France, is engaged in business of manufacturing and distribution of cosmetic and beauty products.

    The tax payer operates in two business segments (i) manufacturing and (ii) distribution.

    It had incurred huge losses on account of selling and distribution activities incurred as a part of marketing strategy.

    In case of distribution segment, the tax payer adopted RPM as the most appropriate method. However, TPO rejected the taxpayer contention and concluded TNMM to be the most appropriate method.

    CIT(A) deleted the entire addition on the income of the tax payer.

    ITAT held as follows:-

    OECD states that in case of distribution and marketing activities, where the tax payer purchases from AE and sales to unrelated parties without adding much value, RPM is the most appropriate method.

    In the instant case there is no dispute that the tax payer buys the products from its AEs and sells to unrelated parties without any further processing.

    RPM has been accepted in preceding as well as succeeding years in respect of distribution segment of the taxpayer.

    Hence, RPM is appropriate method.

    Panasonic Sales & Services (I) Company Limited vs. ACIT [ITA No 1957/Mds/2012]

    The tax payer is a subsidiary of Panasonic Holdings

(Netherland BV) which is ultimately held by Matsushita

Electronic Co. Ltd., Japan.

    The tax payer is engaged in the import of consumer electronic products from its AE for sale in domestic market and also provides market support services.

    In case of purchase and resale activity, the tax payer adopted RPM method and for providing market support services, it adopted TNMM method. There was no issue in the value of international transaction and the method adopted by the tax payer to determine the arm’s length price. However, the dispute was as regards the determination of selling price and the calculation of gross profit margin.

    The TPO reduced the cash discount offered by the taxpayer for early realisation of dues on account of sales while calculating the gross profit margin. Further, the TPO added the freight and storage charges treating them as direct expenses in relation to purchase of goods.

    However, the tax payer contended that TPO erred in considering cash discount with trade discount. Further, the freight and storage expenses incurred are towards outward sales and not inward. The rules clearly states that only expenses incurred in connection with the purchases are required to be reduced from sales.

    ITAT held as follows:-

    Cash discounts offered to the customers are in nature of financial charges. Further, it is only an incentive
offered for early realisation. Thus held that TPO erred in equating cash discount with trade discount and that the cash discount in the present case was offered after completion of sales which is entirely different in nature from trade discounts.

    Further, in case of freight and storage expenses incurred the same were incurred towards the cost of packing and transportation of goods from the warehouse to the customers and hence in the nature of selling and distribution expenses. Thus, it cannot be reduced from the selling price to determine the cost of goods sold.

    Danisco (India) Pvt. Ltd. vs. ACIT

    The tax payer is engaged in the business of manufacturing food flavours and trading of food additives/ingredients. For manufacturing, the tax payer purchases raw material from its AE. It also imports ingredients from its AE and resells them to its customers in India through distribution chain.

    During the year under consideration, the tax payer selected TNMM as the appropriate method to benchmark its transaction. Further, it also carried out supplementary analysis in case of import of goods using RPM as the most appropriate method.

    However, TPO rejected the 4 companies selected by the tax payer as comparables on the ground that these companies had negative net worth or persistent loses. Accordingly TPO made an adjustment.

    On filing of objections, Dispute Resolution Panel (DRP) upheld the addition made by the TPO. The tax payer went into appal before ITAT.

    The tax payer contended that TPO erred in making

the addition on the entire transaction and failed to appreciate the fact that the tax payer had also undertaken transactions with third party. Further, the companies only in manufacturing activity and not in trading activity cannot be considered as comparables. Lastly, TPO should have used segmental accounts furnished by the tax payer to examine the trading and manufacturing activity separately and should have used RPM for trading activity as it is widely used method.

    Additionally, assessee relied on OECD guidelines and contended that it merely imported and resold goods without adding any value. Hence, RPM should be applied.

    ITAT accepted the contention of the tax payer and restored the matter to the file of TPO for fresh adjudication. It gave the direction to TPO to apply RPM as a most appropriate method for trading transactions of imported goods.

2.9    Berry Ratio – An alternate method of benchmarking for distributor arrangements:

In relation to the distribution arrangements, in addition to the application of RPM as a benchmarking method, International transfer pricing principles have evolved over time. In 2010, OECD updated its transfer pricing guidelines and analysed use of Berry Ratio as a financial indicator for examining the Arm’s Length Price.

The Berry Ratio compares the ratio of gross profit to operating expenses of the tested party with the ratios of gross profit (less unrelated other income) to operating costs (excluding interest and depreciation) of third party comparable companies.

The underlying assumption of the Berry Ratio is that there is a positive relationship between the level of operating expenses and the gross profit. The more operating expenses that a distributor incurs, the higher the level of gross profit that should be derived.

Generally, Berry ratio should only be used to test the profits of limited risks distributors and service providers that do not own or use any intangible assets.

The challenges in using Berry Ratio could be identifying functionally similar comparable entities; comparables used should not own or use significant intangible assets, classification of costs by the comparable entities etc.

However, Berry Ratio could be extremely useful where operating margins are used as a measure of profitability in distribution business with exponential growth patterns.

Having discussed the RPM at length, we will elaborate CPM in the forthcoming paragraphs.

    Cost Plus Method – Meaning:

3.1 The Provision of Income Tax Act:

Section 92C of the Act prescribes the method for computation of Arm’s Length Price, wherein Cost Plus Method (CPM) is enlisted as one of the methods. The same is not defined in the Act itself, but has been discussed at length in the Income Tax Rules.

Rule 10B prescribes the manner in which CPM can be applied. The text reads as follows:

“Determination of Arm’s Length Price u/s. 92C.

10B. (1) For the purposes of s/s. (2) of section 92C, the Arm’s Length Price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :—

    …

    …

    cost plus method, by which,—

    the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined;

    the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined;

    the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market;

    the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii);
    the sum so arrived at is taken to be an Arm’s Length Price in relation to the supply of the property or provision of services by the enterprise;”

3.2 OECD Transfer Pricing Guidelines for Multinational

Enterprises and Tax Administrators:

Cost Plus Method is discussed in the OECD Transfer Pricing guidelines2. It states that the CPM method begins with the costs incurred by the supplier of property/services in a controlled transaction for property transferred or services provided to an associated enterprise. An appropriate mark up is then added to the said cost, in view of the functions performed and the market conditions. Such price is known as the arm’s length price.

Thereafter, the guidelines go on to define the most appropriate situation where CPM may be used, i.e., if one of the following two conditions get satisfied:

    none of the differences between the transactions being compared, or between the enterprises undertaking those transactions, materially affect the cost plus mark up in the open market; or

    reasonably accurate adjustments can be made to eliminate the material effects of such differences.

The guidelines also stress that in principle, cost plus methodology should compare margins at gross profit level, however there may be practical difficulties in doing so. Thus, the computation of margins should be flexible to such extent.

The OECD guidelines discuss, at length, the applicability of CPM to various situations, determination of appropriate cost base and various adjustments and practical difficulties that may arise for the application of this method.

3.3 UN  Practical  Manual  on  Transfer  Pricing  for Developing Countries:

The UN Practical Manual also discusses Cost Plus Method as a traditional transaction method, and goes on to define the same as per the OECD guidelines.

It further defines the mechanism of CPM, by prescribing the following formula:

TP = COGS x (1 + cost plus mark-up)

Where,

    TP = the Transfer Price of a product sold between a manufacturing company and a related company;
    COGS = the Cost of Goods Sold to the manufacturing company; and
    Cost plus mark-up = gross profit mark-up defined as the ratio of gross profit to cost of goods sold. Gross profit is defined as sales minus cost of goods sold.

From the above, it can be seen that UN Manual also prescribes the practical application of Cost Plus Method, and breaks down the process in formulae and practical steps.

3.4    Most suitable situations for applicability of CPM:

The applicability of a method varies from one case to the other. However, there are certain standard cases where CPM would, most likely, be the most suitable option. The said cases are discussed hereunder:

    Sale of semi-finished goods:

The application of CPM to the sale of semi-finished goods has been recommended by the OECD guidelines. However, in order to benchmark the transaction, a functional analysis of the same has to be conducted. Semi-finished goods are of various types, such as complete assembly of goods before sale, or a semi knocked down (SKD) condition. It has to be ascertained that how independent parties would arrive at a mark up, and determine their prices in such cases.

Hence, an appropriate cost base as well as mark up is essential to be derived at in order to benchmark the transactions, and arrive at the arm’s length price. The purpose of benchmarking is to ensure that prices set should give the same price to the associated enterprise as they would if the sales were made to independent parties. In such cases, internal comparable, i.e. sales made by the same manufacturer to associated enterprises as well as third parties, would be the ideal scenario.

However, if the manufacturer is not making similar sales to third parties, external comparables can also be used. For example, say, a manufacturer produces wheat products in a semi finished state, out of the raw material, and then sells the same to its AEs as well as non-AEs at a cost plus mark up of 15%. In this case, it is easy for the manufacturer to determine the cost of the raw materials and the mark up for the functions carried out. In this case, internal comparables are also available, and hence, the benchmarking process becomes considerably simpler.

    Joint facility agreements, or Long-term buy & supply arrangements:

The OECD guidelines recommend Cost Plus Method for agreements or arrangements where the manufacturer acts as a contractual manufacturer. A contractual manufacturer is typically one who carries low risk and carries out low-level functions, whereas an entrepreneurial manufacturer is the one who carries majority of the risk and has entrepreneurial and more complex functions. In these cases, functional analysis of the entity is important to determine the category of manufacturer. Mere claim of the entity is not sufficient, and the agreements as well as functions of the entity have to be verified.

After it is determined whether an entity is a contractual or entrepreneurial entity, the comparables can be selected accordingly. This is due to the fact that a contractual manufacturer, bearing low risks, would likely have a less mark up than an entrepreneurial manufacturer, who essentially bears majority of the risks involved.

For example, say, A is a contractual manufacturer, which produces spare parts of computer hardware for its AE, as per the instructions and technical know-how of the AE. In this case, the functionality of ‘A’ is easy to determine, as it is a simpler entity, and thus the costs can be most appropriately determined. Due to less complexity of functions, the mark up to the cost can also be computed as per the agreements with the AE as well as the functions performed by ‘A’. In such a case, CPM is the most appropriate method.

    Provision of services:

This is the third broad category which has been recommended by OECD guidelines for the use of CPM. In this category, CPM can be used wherein the services provided by the entity are low-end services. This is due to the fact that high end service providers do not charge fees on a cost plus basis. The true value in such cases is of the service provided, and not of the cost incurred for the provision of the same. For instance, a Chartered Accountant does not charge his fees based on the costs incurred for a study report, but for his expertise and service provided. In such cases, CPM is not the most appropriate method.

However, in low end services, such as in the case of job workers, the worth of the intangibles for value addition does not form a major part of the price, and hence, an appropriate mark up to cost can be easily determined. Hence, CPM is an appropriate method to derive the Arm’s Length Price.

In order to come to the decision whether CPM can be applied to a particular transaction/entity, the actual risk allocation has to be verified. The OECD guidelines3 provide an example, wherein the actual risk allocation is used to determine whether CPM can be used or not. The example reads as follows:

“Company A of an MNE group agrees with company B of the same MNE group to carry out contract research for company B. All risks of a failure of the research are born by company B. This company also owns all the intangibles developed through the research and therefore has also the profit chances resulting from the research. This is a typical setup for applying a cost plus method. All costs for the research, which the associated parties have agreed upon, have to be compensated. The additional cost plus may reflect how innovative and complex the research carried out is.”

Broadly, the CPM is most suitable to the aforesaid situations, but the applicability of the same varies on the facts of each case.

3.5    Situations wherein Cost Plus Method is NOT appropriate:

Furthermore, the UN Practical Manual4 has specified certain transactions wherein the application of CPM is not suitable. It states that where the transactions involve a full-fledged manufacturer which owns valuable product intangibles (i.e., an entrepreneurial manufacturer), independent comparables would be difficult to obtain. Hence, it will be difficult to establish a mark up that is required to remunerate the full-fledged manufacturer for owning the product intangibles. In such structures, typically the sales companies (i.e., commisionaries) will normally be the least complex entities involved in the controlled transactions and will therefore be the tested party in the analysis. The Resale Price Method is typically more easily applied in such cases.

3.6    Steps in application of CPM:

The steps for application of Cost Plus Method, as per

Rule 10B of the Indian Income Tax Act, are as follows:

    Ascertain the direct and indirect cost of production.

    Ascertain a normal gross profit mark-up to such costs.

    Adjust the normal gross profit mark-up referred to in

(2) above to take in to account the functional and other differences.
    The costs referred to in (1) above are increased by the adjusted gross profit mark-up referred to in (3) above.
    The sum so arrived at is taken to be an arm’s length price.

The application of the aforesaid steps is being shown in the following example:

    Production Costs of AE-India = 50

    20% = Gross Profit Margin on production costs earned by 3P-India on sales made by other Indian comparable companies

3.7    Advantages and Challenges of CPM:

Advantages of CPM:

    The applicability of CPM is based on internal costs, for which the information is readily available with the entity
    Reliance is on functional similarities

    Fewer adjustments are required on account of product differences than CUP
    Less vitiated by indirect expenses which are not “controllable”

Challenges of CPM:

    Practical difficulties in ascertaining cost base in controlled and uncontrolled transactions
    Difficulties in determining the gross profit of the comparable companies on the same basis, because of, say, different accounting treatments for certain items

    Difficult to make adjustments for factors which affect the cost base of the entity/transaction
    No incentive for an entity to control costs since the method is based only on actual costs
    The level of costs might be disproportionately lower as compared to the market price, e.g., when lower costs of research leads to the production of a high value intangible in the market

3.8    Peculiar Issues in Application of CPM:

The OECD guidelines examine various practical difficulties in the application of CPM, which are being discussed in brief, hereunder:
Determination of costs and mark up:

While, an enterprise would mostly cover its costs over a period of time, it is plausible that those costs might not be determinant of the appropriate profit for a particular transaction of the specific year. For instance, some companies might need to reduce their prices due to competitive pricing, or there might be instances wherein the cost incurred on R&D is quite low in comparison to the market value of the product.

Further, it is important to apply an apt comparable mark up. For example, if the supplier has employed leased assets to carry out its business activities, its cost cannot be compared to the supplier using its own business assets. In such a case, an appropriate margin is required to be derived. For this purpose, the differences in the level and types of expenses, in light of the functions performed and risks assumed, must be compared. Such comparison may indicate the following:

    Expenses may reflect a functional difference which has not been taken into account in applying the method, for which an adjustment to the cost plus mark-up may be required.

    Expenses may reflect additional functions distinct from the activities tested by the method, for which separate compensation may need to be determined.

    Sometimes, differences in expenses are merely due to efficiencies or inefficiencies of the enterprises, for which no adjustment may be appropriate.

    Accounting consistency:

Where accounting practices are different in controlled and uncontrolled transactions, appropriate adjustments need to be made in order to ensure consistency in the use of same types of costs. Entities might also differ in the treatment of costs which affect the gross mark-up, which need to be accounted for.

3.9    Critical Points while Determining the Cost Base:

In CPM, it is most important to ensure that all the relevant costs have been included in the cost base in order to determine the Arm’s Length Price. The basic principle is to determine what price would have been charged, had the parties not been connected/associated. The OECD guidelines have discussed the same in depth.

An independent entity would ensure that all costs are covered and that a profit is earned on a transaction with a third party. The usual starting point in determining the cost base would be the accounting practices. The AE might consider a certain kind of expense as operating, while the third party may not do so. In such cases, appropriate adjustments need to be made so as to ensure accounting consistency.

Further, in principal, historical costs should be attributed to individual units of production. However, some costs, such as the cost of materials, would vary over a period of time, and it would be appropriate to average the costs over the period in question. Averaging might also be appropriate across product groups or over a particular line of production, and also for fixed costs where the different products are produced simultaneously and the volume of activity fluctuates.

Another difficulty arises on the allocation of costs between suppliers and purchasers. It may be so that the purchaser bears certain costs so as to diminish the supplier’s cost base, on which mark-up would be computed. In practical situations, this may be solved by not allocating costs which are being shifted to the purchaser in the above manner. For instance, say ‘S’ is the manufacturer of semi-finished goods, and supplies to its AE, viz. ‘P’. For this purpose, ‘S’ purchases raw material from a third party. Ideally, the cost of idle raw material should be borne by the supplier, i.e., ‘S’. However, there might be mutual agreements, wherein the purchaser, i.e., ‘P’, bears such cost of idle raw material, and hence, the cost burden of ‘S’ goes down. In such cases, while deriving at the cost base, appropriate adjustments should be made.

Thus, it is evident that no straight jacket formula can be derived for dealing with all cases. It has to be ensured that there is consistency in the determination of costs, between the controlled and uncontrolled transactions, so as to ensure that the appropriate Arm’s Length Price is obtained.

3.10 Cost Plus Model vs. Cost Plus Method:

Due to the ambiguity in the difference between Cost Plus Method and Cost Plus Model, the same is being discussed hereunder:

Cost Plus Model

    It is a pricing model

    Mark-up is added on operating costs/total cost
    Method adopted in fact is TNMM

    Comparison of Net Margins

Cost Plus Method

    Method of determining arm’s length price

    Mark-up is added on cost of goods sold

    Comparison of Gross Margins

3.11 Judicial Precedents on CPM:

The applicability, benchmarking and cost base of CPM has been debated in the courts of law, both Indian and International, time and again. Some of the major judicial precedents are discussed in brief hereunder:

Wrigley  India  Private  Limited  vs.  Addl.  CIT [(2011) 142 TTJ (Del) 23]:

    The taxpayer is a subsidiary of a US based company, engaged in the business of manufacture and sale of chewing gums.

    The import of raw materials by the taxpayer from its AE constituted 14% of the total raw material consumed.
The taxpayer was selling products in domestic as well as international market.

    In case of export to AEs, it benchmarked its transactions using TNMM.

    The TPO applied CPM, and held that since the goods exported were same as the ones sold in domestic market to unrelated parties, the domestic transactions could be used as ‘comparable’ to the international transactions.

    The ITAT upheld the additions made by using CPM, and observed that the goods sold to AE as well as non-AEs, were the same goods manufactured in the same factory using the same raw materials.

    The use of internal comparables was also upheld, as the raw material purchased from the AE was only 14% of the total consumption, and hence, internal CPM could be used by taking GP/direct cost of production as PLI.

    ITAT also held that though there was difference in domestic and export market, it should have had a positive impact on margins of the taxpayer as per capita income was higher in foreign countries than India and
the goods sold by the taxpayer were not ‘necessities of life’, but were consumed by middle and higher class people in the society.

    Thus, internal CPM was considered to be the most appropriate method.

    Diamond Dye Chem Ltd. vs. DCIT [2010-TII-20-ITAT-MUM-TP]:

    The taxpayer is engaged in the business of manufacturing Optical Brightening Agents (OBAs), and exported its products both to AEs and non-AEs.

    The sales made to AEs were more than 6 times of the sales made to non-AEs. The company adopted TNMM as the most appropriate method to benchmark the transaction.

    TPO rejected the said method, and adopted CPM as the most appropriate method, and made an addition of Rs. 3,07,89,380/-.

    The taxpayer preferred an appeal before the CIT(A) wherein it submitted that that there were a lot of functional differences between the sales made to AEs and those to unrelated parties, and hence, gross profit mark-up cannot be applied. Without prejudice to the same, the taxpayer also claimed that adjustments for differences on account of volume discounts, and staff & travelling cost of marketing and technical persons must be made while computing the Arm’s Length Price.

    The CIT(A) did not accept the contention of the taxpayer for application of TNMM as the most appropriate method. The CIT(A) confirmed the application of CPM by the TPO, but allowed the adjustment on account of “staff and travelling cost of dedicated marketing personnel”. Thus, the CIT(A) arrived at an ALP of 55.27%, and after allowing the benefit of +/- 5% range, confirmed the addition to the extent of Rs. 38,67,421/-.

    The ITAT upheld the use of CPM, and held that the taxpayer did not explain substantial differences in functional and risk profile to reject CPM. The ITAT held that the taxpayer could not satisfactorily explain as to what are the substantial differences in the functional and risk profiles of the activities undertaken by the taxpayer in respect of exports made to the AEs and non-AEs.

    The ITAT further held that since the cost data for the manufacture of products are available as per cost audit report, the report thereof is assured, and hence, CPM is the most appropriate method.

    However, it allowed discount adjustment on account of differences in volumes of sales since the sales made to AEs are almost 6 times to the sales made to non-AEs.

    ACIT vs. L’Oreal India Pvt. Ltd. [ITA No. 6745/M/2008]:

    The taxpayer is engaged in the business of manufacturing and distribution of cosmetic and beauty products, and is a 100% subsidiary of L’Oreal SA France.

    During the AY 2002-03, the taxpayer had purchased raw materials from its associated enterprise and had used CPM to benchmark the same.

    The Transfer Pricing Officer (TPO) rejected the same, and computed the Arm’s Length Price by applying Transactional Net Margin Method (TNMM).

    The CIT(A) deleted the said addition, and the ITAT upheld the decision of the CIT(A).

    ITAT held as follows:

    CPM adopted by the taxpayer is based on the functions performed and not on the basis of types of product manufactured, as normally the pricing methods get precedence over profit methods.

    Even according to the OECD guidelines, the preferred method is that which requires computation of ALP directly based on gross margin, over other methods which require computation of ALP in an indirect method, because comparing gross margins extinguishes the need for making adjustments in relation to differences in operating expenses, which could be different from enterprise to enterprise.

    CPM had been accepted by the TPO in subsequent assessment years.

    The Department went in appeal against the aforesaid order before the High Court, wherein the decision of the ITAT was upheld by the High Court.     

ACIT vs. MSS India (P.) Ltd. [(2009) 32 SOT 132 (Pune)]:

    The taxpayer is a 100% EOU, engaged in the business of manufacturing of strap connectors. It made sales to both its AEs and non-AEs.

    83% of the total sales were made to the AEs.

    It incurred a loss of 2.35% at the net level.

    In order to justify arm’s length price, the taxpayer used CPM as well as TNMM. In TNMM, the taxpayer compared its net loss to the other companies which were incurring more losses. While, in using CPM, the taxpayer used internal comparables, i.e., it compared the margins from AEs and non-AEs.

    TPO rejected the use of CPM on the basis that the division of cost was not verifiable. The comparables selected by the taxpayer were also rejected by the

TPO, and fresh comparables were selected.

    TPO applied TNMM to benchmark the transactions and make adjustments to the value of sales to derive at an arm’s length price.

    The CIT(A) and ITAT both upheld the use of CPM.

    The ITAT held as follows:

    The TPO rejected the use of CPM stating that “while distributing various costs, it is always difficult to exactly find out the correct ratio in which all these costs should be allocated and if the distribution of all these costs is not done correctly, it may give undesirable results”. The ITAT held that a method cannot be rejected merely because of its complexity.

    The relevant considerations for selection of appropriate method ought to be the nature and class of international transaction, the class of AEs, FAR analysis and availability, coverage and reliability of data, the degree of comparability between related and unrelated transactions and ability to make reliable and accurate adjustment in case of differences.

    It was not necessary that AEs should enter into international transaction in such a manner that a reasonable profit margin would be earned by the AE, but what was necessary that price charged for such transactions had to be at arm’s length.


    ACIT vs. Tara Ultimo (P.) Ltd. [(2012) 143 TTJ (Mum) 91]:

    The taxpayer, engaged in manufacture and trade of jewellery, sold finished goods to its AE and adopted CPM to compute ALP of the transaction, using Sales/ GP as the PLI.

    TPO rejected the ALP computation made by the taxpayer, and made an adjustment to the taxpayer’s income, using TNMM.

    On appeal, the CIT(A) deleted the addition made, and the Revenue went into appeal before the ITAT.

    The ITAT made the following observations:

    CIT(A) examined only one aspect of the matter i.e. sales of finished goods to the AEs, but failed to examine other aspects of import of diamonds from

AE and export of diamonds to AEs. Hence, the ITAT held that the CIT(A) had erred in rejecting TNMM.

    The taxpayer had not placed on record any evidence to support ALP of diamonds imported and exported or to justify that the transactions were made at prevailing market price.

    In the absence of documentation to support use of direct method such as CUP, CPM or Resale Price method, it was imperative to use indirect methods of determination of ALP i.e., TNMM or profit Split method.

    The taxpayer had made comparison on ‘global level’ instead on ‘transaction level’. Further, one of the important input i.e., diamond had been imported from AEs where the arm’s length nature of the transaction was not established.

    In view of the above, ITAT rejected the CPM method, and remanded the matter back to the CIT(A) for fresh determination.

    Conclusion:
Various guidelines have been developed to assist the countries in proper tax administration, as well as MNEs to reasonably attribute the appropriate profit to each jurisdiction. In a global economy, where MNEs play a prominent role, transfer pricing is a major issue for tax administrations as well as taxpayers. In order to ensure that the respective governments receive the revenue that they are entitled to, and that the MNEs pay proper tax without suffering the consequence of double taxation, various methods and guidelines have been developed.

Resale Price Method and Cost Plus Method, have been discussed at length herein. However, it is pertinent to mention that the facts of each case may be unique, and need to be scrutinised independently before coming to a conclusion for the applicability of the most appropriate method. The purpose of the method is merely to arrive at the arm’s length price, for which several adjustments may need to be applied. It is important to use the above method with suitable flexibility for the same. It is advisable to reject the other methods before accepting most appropriate method for computation of arm’s length price. In conclusion, it is the intent and the essence of the provisions and the method to be kept in mind, and not merely the procedure.

Further, recently OECD has launched an Action Plan on Base Erosion and Profit Shifting (BEPS) identifying 15 specific actions needed in order to equip governments with the domestic and international instruments to address the challenge of MNEs adopting aggressive tax planning and profit shifting. The objective of this plan is to prevent double non-taxation and proper allocation of profits between various jurisdictions. The said objective can be achieved by appropriate FAR analysis and by selecting the most appropriate method for benchmarking the transaction between two associated enterprises.

ParmanandTiwari vs. Income-tax Officer “SMC(B)” ITAT bench: Kolkata Before Mahavir Singh, JM I.T.A No.2417/Kol/2013 Assessment Year: 2008-09. Decided on 02.09.2014 Counsel for Assessee / Revenue: None / David Z. Chawngthu

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Section 199 and Rule 37BA – Credit for TDS granted even though the certificates issued were not in the name of the assessee.

Facts:
The assessee is an individual and a professional Chartered Accountant. Earlier, the assessee was a partner in the firm M/s. Tiwari & Co.The said firm was dissolved w.e.f. 30.12.2006 and the assessee became proprietor of this firm fromthe said date. During the course of assessment proceedings the AO found that all the TDS certificates were issued in the name of M/s.Tiwari & Co. with PAN which belonged to the erstwhile partnership firm.The assessee contended before the AO that he has included the underlying income in the TDS certificates in his return of income and accordingly, the credit for TDS should also be allowed to him in accordance with Rule 37BA of the Rules.The AO disallowed the claim of the assessee by observing that Rule 37BA of the Rules was inserted w.e.f. 01.04.2009 only and hence, the credit in the hand of the assessee cannot be allowed.

On appeal the CIT(A) upheld the order of the AO stating that the credit of TDS cannot be given to the assessee as the deductee (in this case M/s. Tiwari & Co., partnership firm), had failed to file a declaration with the deductor as required under Rule 37BA.

Held:
The Tribunal noted that the total income of the assessee included income qua the TDS certificates which were issued in the name of M/s. Tiwari & Co., the erstwhile partnership firm. It also noted that these receipts were earned by M/s. Tiwari & Co., as proprietary concern of the assessee. Further, the AO had also completed the assessment including therein the said income. However, the AO did not allow the credit for TDS on the ground that the TDS certificate is not in the PAN of Parmanand Tiwari, in his individual capacity. According to the tribunal the TDS certificates not being in the name of the assessee was only a technical breach. According to it, wrong submission of PAN by deductor does not debar the assessee from claiming credit of TDS deducted particularly when the income is assessed in the hands of the assessee. Further, according to the Tribunal, the insertion of the proviso to sub-Rule (2) of Rule 37BA was to mitigate the hardship faced by assessee for claiming credit of TDS. As regards whether the amended Rule is a beneficial provision and in turn could be declared as retrospective and applicable to all pending matters, the Tribunal referred to the decision of the Supreme Court in the case of Allied Motors Pvt.Ltd. vs. CIT (1997) 224 ITR 677 and held that the said amended Rule was retrospective in nature and would apply to all pending matter. The Tribunal allowed the appeal filed by the assessee.

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DCIT vs. UAE Exchange & Financial Services Ltd. ITAT Bangalore `C’ Bench Before P. Madhavi Devi (JM) and Abraham P. George (AM) ITA No. 91/Bang/2014 Assessment Year: 2009-10. Decided on: 10th October, 2014. Counsel for revenue/assessee: Dr. K. Shankar Prasad/Cherian K. Baby

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Section 32 – Printers, scanners, port switches and projectors qualify for depreciation @ 60% being the rate applicable to computers.

Facts:
The assessee company was carrying on business of money transfer, money changing, travel and ticketing, insurance support services and gold loan. In the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee had claimed depreciation @ 60% on printers, scanners, Port switches, projectors, etc. He was of the view that these items qualify for depreciation @ 15% since these do not suffer same rate of obsolescence as computers and they cannot be classified as computers. He rejected the argument of the assessee that these are parts of PCs and cannot independently work in isolation. He, accordingly, allowed depreciation on these @ 15%.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the CIT(A) has followed the decision of the Special Bench of the Tribunal in the case of DCIT vs. Datacraft India Ltd. (40 SOT 295)(Mum)(SB) wherein it is held that routers and switches are to be classified as computer peripherals and depreciation at the rate of 60% be allowed. The CIT(A) had also considered the decision of the Delhi High Court in the case of CIT vs. M/s. Bonanza wherein it is held that depreciation @ 60% is allowable on computer peripherals.

The Tribunal held that the printers, scanners, projectors as well as port-switches are all functionally dependent on computers and therefore, the order of CIT(A) is in consonance with the precedents on the issue. It observed that the DR was not able to place any other contrary decision before it. The Tribunal confirmed the order of the CIT(A).

The appeal filed by the revenue was dismissed.

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Lodha Builders Pvt Ltd. & five other group companies vs. ACIT ITAT“E” Bench, Mumbai Before D. Karunakara Rao, (A. M.) and VivekVarma, (J. M.) I.T.A. No.475 to 481/M/2014 A.Y. 2009-10. Decided on: 27-06-2014 Counsel for Assessee/Revenue: P.J. Pardiwala, Sunil MotiLala, Paras S. Savla and Gautam Thacker/Girija Dayal

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Section 269SS/269T and section 271D/E – Transactions involving the receipts and payments of loans and advances among the group settled by way of “journal entries” – Penalty imposed deleted on the ground of “reasonable cause.”

Facts:
The assessees and five other appellants belong to the Lodha group which is engaged in the business of land development and construction of real estate properties. There were large number of transactions aggregating to Rs. 495.23 crore involving the receipts and payments of loans and advances among the group settled by way of “journal entries”. During the assessment proceedings, the AO asked the assessee to show cause as to why loans were accepted/repaid otherwise than by the account payee cheque/draft.

In this regard, assessee informed that the said loans/advances were transacted with the sister concerns only by way of “journal entries” and there were no cash transactions involved. The core transactions were undertaken by way of cheques only. It was further explained that the assessees resorted to the journal entries for transfer/assignment of loan among the group companies for business consideration. Journal entries were passed to transfer/ assign liabilities or to take effect of actionable claims/ payments received by group companies on behalf of the assessee. It was contended by the assessee that the said transactions with the sister concerns were for commercial expediencies which should be kept outside the scope of the provisions of sections 269SS/269T of the Act. The journal entries were also passed in thebooks of accounts for reimbursement of expenses and for sharing of the expenses within the group to which the provisions of section 269SS of the Act have no application and for this, the assesses relied on the judgment of the Madras High Court in the case of CIT vs. Idhayam Publications Ltd. [2007] 163 Taxman 265. It also relied on the CBDT Circular No.387, dated 6th July, 1984 and contended that the purpose of introducing section 269SS of the Act was to curb cash transactions only and the same was not aimed at transfer of money by transfer/assignment of loans of other group companies.

The Addl. CIT relied on the decision of the Bombay High Court in the case of Triumph International (I) Ltd., dated 12-06-2012 reported in 22 taxmann.com 138/345 ITR 370 where it was held that where the loan/deposit were repaid by debiting the amount through journal entries, it must be held that the assessee has contravened the relevant provisions. According to him even bona fide and genuine transactions, if carried out in violation of provisions of section 269SS of the Act would attract the provisions of section 271D of the Act. Accordingly, he levied a penalty of Rs. 495.24 crore u/s. 271D.

On appeal, the CIT(A) relied on the judgment of the Bombay High Court in the case of Triumph International (I) Ltd. dated 17-08-2012, for the proposition that receiving loans and repayments through “journal entries” constitutes “violation” within the meaning of provisions of section 269SS and 269T of the Act.

Held:
According to the Tribunal, the CIT(A) ignored the finding of the Bombay High Court in the case of Triumph International (I) Ltd. which judgment was relied on by him viz., that “the transactions in question were undertaken not with a view to receive loans/deposits in contravention of section 269SS but with a view to extinguish the mutual liability of paying/receiving the amounts by the assessee and its sister concern to the customers. In the absence of any material on record to suggest that the transactions in question were not reasonable or bona fide and in view of section 273B of the Act, we see no reason to interfere with the order of the Tribunal in deleting the penalty..”. Further, referring to the judgment of the Bombay High Court in the case of Triumph International (I) Ltd. dated 12-06-2012, the Tribunal agreed with the revenue that the journal entries are hit by the relevant provisions of section 269SS of the Act. However, it added that as per the said judgment completing the “empty formalities” of payments and repayments by issuing/receiving cheque to swap/square up the transactions, was not the intention of the provisions of section 269SS of the Act, when the transactions were otherwise bona fide or genuine. Such reasons of the assessee constitute “reasonable cause within the meaning of section 273B of the Act. The Tribunal further noted that there is no finding of AO that the impugned transactions constituted unaccounted money and are not bona fide or not genuine. In the language of the Bombay High court, “neither the genuineness of the receipt of loan/deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business has been doubted in the regular assessment”.

According to the Tribunal, admittedly, the transactions by way of journal entries were aimed at the extinguishment of the mutual liabilities between the assessees and the sister concerns of the group and such reasons constitute a reasonable cause. The Tribunal further noted that the causes shown by the assessee for receiving or repayment of the loan/deposit otherwise than by accountpayee cheque/bank draft, was on account of the following, namely: alternate mode of raising funds; assignment of receivables; squaring up transactions; operational efficiencies/ MIS purpose; consolidation of family member debts; and correction of errors. According to it, all these reasons were, prima facie, commercial in nature and they cannot be described as non-business by any means. The tribunal agreed with the assessee as to why should the assessee under consideration take up issuing number of account payee cheques/bank drafts which can be accounted by the journal entries. What is the point inissuing hundreds of account payee cheques/account payee bank drafts betweenthe sister concerns of the group, when transactions can be accounted in books using journal entries, which is also an accepted mode of accounting? In its opinion, on the factual matrix of these cases under consideration, journal entries should enjoy equal immunity on par with account payee cheques or bank drafts. Therefore, the tribunal held that though the assessee had violated the provisions of section 269SS/269T of the Act in respect of journal entries, the assessee had shown reasonable cause and, therefore, the penalty imposed u/s. 271D/E of the Act were not sustainable.

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Wealth Tax – Valuation of asset – If in the opinion of the Assessing Officer, if the value determined by the taxpayer on the basis of rules 3 to 7 is absurd or has no correlation to the fair market value or otherwise not practicable, in such a case, it is open to the Assessing Officer to invoke rule 8 of Schedule III and determine the value of the asset either under rule 20 or refer u/s. 16A, for determination of the valuation of the asset

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Amrit Banaspati Co. Ltd. vs. CIT [2014] 365 ITR 515 (SC)

The dispute before the Supreme Court related to wealthtax return of the appellant-assessee for the assessment year 1993-94. The assessee filed its return of taxable wealth at Rs.1,31,76,000 against which the assessment was completed at net wealth of Rs. 3,90,93,800. The dispute was about the valuation of the property in question being a residential flat situated in Worli, Bombay, which was owned by the assessee and used as a guest house. The immovable property was acquired by the assessee before 1st April, 1974, and the assessee filed return on self-assessment as per rules 3 to 7 of Schedule III to the Wealth-tax Act, 1957 (hereinafter referred to as the “Act”). In the course of assessment proceedings, the Assessing Officer (for short, “AO” ) was of the opinion that the value of the said flat as disclosed in the return (as Rs.1,55,139) did not appear to be in consonance with the market value for a similar size flat in Mumbai and referred the matter to the Departmental Valuation Officer under Rule 20 of Schedule III who valued the flat at Rs. 2,60,73,000. The Assessing Officer also relied upon the agreement to sell of the said flat dated 15th September, 1995, entered by the assessee with its vendor. In the said agreement, the price of the flat was shown at Rs.10,26,000. The Assessing Officer was of the opinion that due to wide variation between the alleged market value as determined by the Departmental Valuation Officer and the value as disclosed by the assessee, it was not practicable to value the property as per rules 3 to7 hence, rule 8(a) was attached.

The Assessing Office further observed that as the assessee had taken plea that it was paying rent at Rs. 500 per month prior to the purchase of the flat and incurred expenditure on the improvement of the said flat, it was difficult for the Assessing Officer to ascertain the price and, therefore, it would be impracticable to apply rule 3.

On appeal, preferred by the assessee, the Commissioner of Wealth-tax (Appeals) dismissed the appeal. The appellate order was confirmed by the Income-tax Appellate Tribunal. Thereafter, the assessee preferred a miscellaneous application u/s. 35 of the Act seeking rectification of mistakes of fact and law apparent from the Tribunal’s order. It was rejected by the Income-tax Appellate Tribunal. Finally, the High Court also affirmed the view taken by the Revenue.

Further on appeal, the Supreme Court, after referring to various provisions held that a conjoint reading of the various provisions makes it clear that the Legislature has not laid down a rigid directive on the Assessing Officer that the valuation of an asset is mandatorily required to be made by applying rule 3; the Assessing Officer has the discretionary power to determine whether rule 3 or rule 8 is applicable in a particular case. If the Assessing Officer is of the opinion that it is not practicable to apply rule 3, the Assessing Officer can apply rule 8 and value of the asset can be determined in the manner laid down in rule 20 or section 16A.

The word ‘practicable’ is to be construed widely. In the present context if in the opinion of the Assessing Officer, if the value determined by the taxpayer on the basis of rules 3 to 7 is absurd or has no correlation to the fair market value or otherwise not practicable, in such a case, it is open to the Assessing Officer to invoke rule 8 of Schedule III and determine the value of the asset either under rule 20 or refer u/s. 16A, for determination of the valuation of the asset.

The Supreme Court held that the invocation of rule 8(a) cannot be based on ipse dixit of the Assessing Officer. The discretion vested in the Assessing Officer to discard the value determined as per rule 3 has to be judicially exercised. It must be reasonable, based on subjective satisfaction; the power must be shown to be objectively exercised and is open to judicial scrutiny.

The Supreme Court observed that in the present case, the Assessing Officer refused to accept self-assessment for the following reasons:

(i) T here was a wide variation between the market value and the valuation done by the assessee as per the municipal taxes.

(ii) T he property was used as a guest house.

(iii) T he value for levy of municipal tax was very low, as the total rateable value of the assessee was done by the municipal authorities at Rs.6,573 per annum.

(iv) T he assessee was a tenant of the property at Rs.500 per month. After purchase of the property a lot of expenditure was incurred from time to time on improvement of the property which was very difficult to ascertain.

(v) T he value of the building was grossly understated as the assessee himself entered into an agreement to sell the same in the year 1995 for a sum of Rs.10,26,000.

Considering the above factors, the Assessing Officer assessed the value of the property at Rs. 2,60,73,000 as valued by the Department Valuation Officer.

The Commissioner of Wealth-tax held that the reference made by the Assessing Officer to the Department Valuation Officer was justified. The Income-tax Appellate Tribunal also justified the action of the Assessing Officer and on appeal, the same was affirmed by the High Court, vide the impugned judgment.

The Supreme Court after careful consideration of the facts and circumstances of the case and the submission made by the learned counsel for the parties, was of the opinion that the Assessing Officer was justified in holding that it was not practicable to apply rule 3 in the instant case and rightly referred the matter to the Valuation Officer u/s. 16A for determination of the value of the asset. The Assessing Officer, thereafter, has rightly assessed the wealth-tax on the basis of such value determined by the Valuation Officer. The Supreme Court did not find any merit in this appeal and the same was accordingly, dismissed.

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Capital gains –Exemption – In peculiar facts of the case, namely that the sale deed could not be executed in pursuance of agreement to sell for the reason that the assessee had been prevented from dealing with the residential house by an order of a competent court, which could not have been violated, the relief u/s. 54 should not be denied.

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Sanjeev Lal & Anr. vs. CIT & Anr. [2014] 365 ITR 389 (SC)

A residential house, being house No.267 situated in Sector 9-C, Chandigarh, was a self acquired property of Shri Amrit Lal, who had executed a Will whereby life interest in the aforesaid house had been given to his wife and upon death of his wife, the house was to be given in favour of two sons of his pre-deceased son – Late Shri Moti Lal and his widow. Upon the death of Shri Amrit Lal, possession of house was given to his widow. His widow, Smt. Shakuntala Devi expired on 29th August, 1993. Upon the death of Smt. Shakuntala Devi, as per the Will, the ownership in respect of the house in question came to be vested in the assessee and another grandchild of the late Shri Amrit Lal.

The assessee had decided to sell the house and with that intention they had entered into an agreement to sell the house with Shri Sandeep Talwar on 27th December, 2002, for a consideration of Rs.1.32 crore. Out of the said amount, a sum of Rs.15 lakh had been received by way of earnest money. As the assessee had decided to sell the house in question, he had also decided to purchase another residential house bearing house No.528 in Sector 8, Chandigarh, so that the sale proceeds, including capital gain, can be used for purchase of the aforesaid house No.528. The said house was purchased on 30th April, 2003, i.e., well within one year from the date on which the agreement to sell had been entered into by the assessee.

The validity of the Will had been questioned by Shri Ranjeet Lal, who was another son of the deceased testator, Shri Amrit Lal, by filing a civil suit, wherein the trial court, by an interim order had restrained the appellants from dealing with the house property. During the pendency of the suit, Shri Ranjeet Lal expired on 2nd December, 2000, leaving behind him no legal heirs. The suit filed by him had been dismissed in May, 2004, as there was no representative on his behalf in the suit.

Due to the interim relief granted in the above stated suit, the assessee could not execute the sale deed till the suit came to be dismissed and the validity of the Will was upheld. Thus, the assessee executed the sale deed in 2004 and the same was registered on 24th September, 2004.

Upon transfer of the house property, long-term capital gain had arisen, but as the assessee had purchase a new residential house and the amount of the capital gain had been used for purchase of the said new asset. Believing that the long-term capital gain was not chargeable to income-tax as per the provisions of section 54 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), the assessee did not disclose the said long-term capital gain in his return of income filed for the assessment year 2005-06.

In the assessment proceedings for the assessment year 2005-06 under the Act, the Assessing Officer was of the view that the assessee was not entitled to any benefit u/s. 54 of the Act for the reason that the transfer of the original asset, i.e., the residential house, had been effected on 24th September, 2004, whereas the assessee had purchased another residential house on 30th April, 2003, i.e., more than one year prior to the purchase of the new asset and, therefore, the assessee was made liable to pay income-tax on the capital gain u/s. 45 of the Act.

The appeal, as far as it pertained to the benefit u/s. 54 of the Act was concerned, had been dismissed by the Commissioner of Income-tax (Appeals) and, therefore, the appellants had approached the Income-tax Appellate Tribunal. The Tribunal also upheld the orders passed by the Commissioner of Income-tax (Appeals) and, therefore, the appellants had approached the High Court by filing appeals u/s. 260A of the Act, which were dismissed. Thus, the assessee approached the Supreme Court.

The Supreme Court observed that upon plain reading of section 54 of the Act, it is very clear that so as to avail of the benefit u/s. 54 of the Act, one must purchase a residential house/new asset within one year prior or two years after the date on which transfer of the residential house in respect of which the long-term capital gain had arisen has taken place.

The Supreme Court noted that in the instant case, the following three dates were not in dispute. The residential house was transferred by the appellants and the sale deed had been registered on 24th September, 2004. The sale deed had been executed in pursuance of an agreement to sell which had been executed on 27th December, 2002, and out of the total consideration of Rs.1.32 crore, Rs.15 lakh had been received by the appellants by way of earnest money when the agreement to sell had been executed and a new residential house/new asset had been purchased by the appellants on 30th April, 2003. It was also not in dispute that there was litigation wherein the will of the late Shri Amrit Lal had been challenged by his son and the assessee had been restrained from dealing with the house in question by a judicial order and the said judicial order had been vacated only in the month of May, 2004, and, therefore, the sale deed could not be executed before the said order was vacated though the agreement to sell had been executed on 27th December, 2002.

The Supreme Court remarked that if one considers the date on which it was decided to sell the property, i.e., 27th December, 2002, as the date of transfer or sale, it cannot be disputed that the assessee would be entitled to the benefit under the provisions of section 54 of the Act, because longterm capital gain earned by the appellants had been used for purchase of a new asset/residential house on 30th April, 2003, i.e., well within one year from the date of transfer of the house which resulted into long-term capital gain.

According to the Supreme Court, the question therefore to be considered was whether the agreement to sell which had been executed on 27th December, 2002, can be considered as a date on which the property, i.e., the residential house had been transferred.

The Supreme Court held that in normal circumstances by executing an agreement to sell in respect of an immoveable property, a right in person is created in favour of the transferee/vendee. When such a right is created in favour of the vendee, the vendor is restrained from selling the said property to someone else because the vendee, in whose favour the right in personam is created, has a legitimate right to enforce specific performance of the agreement, if the vendor, for some reason is not executing the sale deed. Thus, by virtue of the question is whether the entire property can be said to have been sold at the time when an agreement to sell is entered into. In normal circumstances, the aforestated question has to be answered in the negative. However, looking at the provisions of section 2(47) of the Act, which defines the word “transfer” in relation to a capital asset, one can say that if a right in the property is extinguished by execution of an agreement to sell, the capital asset can be deemed to have been transferred.

Consequences of execution of the agreement to sell are also very clear and they are to the effect that the appellants could not have sold the property to someone else. in practical life, there are events when a person, even after executing an agreement to sell an immovable property in favour of one person, tries to sell the property to another. In our opinion, Such an act would not be in accordance with law because once an agreement to sell is executed  in favour of one person, the said person gets a right  to get the property transferred in his favour by filing  a suit  for specific performance and, therefore, without hesitation it could be said that some right, in respect of the said property, belonging to the assessee had been extinguished and some right had been created in favour of the vendee/ transferee, when the agreement to sell had been executed.

Thus,  a  right  in  respect  of  the  capital  asset,  viz.,  the property in question had been transferred by the assessee in favour of the vendee/transferee on 27th december, 2002. The sale deed could not be executed for the reason that the assessee had been prevented from dealing with the residential house by an order of a competent court, which they could not have violated.

In view of the aforesaid peculiar facts of the case and looking at the definition of the term “transfer” as defined u/s. 2(47) of the Act, the Supreme Court was of the view that the assessee was entitled to relief u/s. 54 of the act in respect of the long-term capital gain, which he had earned in pursuance of transfer of his residential property being house No. 267, Sector-9-C, situated in Chandigarh and used for purchase of a new asset/residential house.

Acceptance and Repayment of Loans & Deposits – Applicability Journal Entries

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Issue For Consideration

Section
269SS of the Income-tax Act provides that no person shall take or accept
any loan or deposit otherwise than by an account payee cheque or bank
draft or by use of ECS through a bank account if the amount or the
aggregate of amounts of loan or deposit is twenty thousand rupees or
more. Likewise, section 269T provides that any loan or deposit shall be
repaid by an account payee cheque or bank draft drawn in the name of the
person who has made the loan or deposit or by use of ECS through a bank
account, if the amount of loan or deposit together with interest is Rs.
20,000 or more.

A violation of the provisions of section 269SS
attracts the penalty u/s. 271D and of section 269T attracts the penalty
u/s. 271E of an amount that is equivalent to the amount of loan or
deposit taken or repaid. No penalty however, is leviable where the
person is found to be prevented by a reasonable cause for the failure to
comply with the provisions of section 269Ss or section 269T in terms of
section 273B of the Act.

These sections list certain exceptions
wherein the specified transactions shall not be regarded as in
violation of the provisions. None of the exceptions specifically exclude
the transactions that are settled by an accounting entry or adjustment
of accounts. This has led to a controversy in a case where a transaction
of a loan or a deposit is executed or settled by a journal entry not
involving any movement of cash or funds. The Bombay High Court has held
that repayment of a loan by settlement of account through a journal
entry violated the provisions of section 269T while the Delhi High Court
has held otherwise.

Triumph International Finance(I) Ltd .’s case
In
CIT vs. Triumph International Finance (I) Limited, 345 ITR 270(Bom),
the High Court was asked by the Revenue to consider the following
question;

“Whether, on the facts and in the circumstances of the
case, the Tribunal was justified in law in holding that transactions
effected through journal entries in the books of the assessee would not
amount to repayment of any loan or deposit otherwise than by account
payee cheque or account payee bank draft within the meaning of section
269T to attract levy of penalty u/s. 271E of the Income-tax Act, 1961?”

The
assessee, a Public Limited Company, a member of the NSE and a Category I
Merchant Banker, registered with SEBI, which was engaged in the
business of shares, stock broking, investment and trading in shares and
securities had accepted a sum of Rs. 4,29,04,722/- as and by way of
loan/inter-corporate deposit from the Investment Trust of India before
1st April, 2002, which was repayable during the assessment year
2003-2004. On 3rd October, 2002, it had transferred 1,99,300 shares of
Rashal Agrotech Limited, held by it, to the Investment Trust of India
for an aggregate consideration of Rs.4,28,99,325/-. As a result, the
assessee, on one hand, was liable to repay the loan/ inter-corporate
deposit amounting to Rs. 4,29,04,722/- to the Investment Trust of India
and on the other hand, to receive Rs. 4,28,99,325/- from the Investment
Trust of India towards sale price of the shares of Rashal Agrotech
Limited sold to the Investment Trust of India.

Instead of
repaying the loan/inter-corporate deposit to the Investment Trust of
India and separately receiving the sale price of the shares from the
Investment Trust of India, both the parties agreed that the amounts
payable/ receivable be set-off in the respective books of account by
making journal entries and the balance be paid by account payee cheque.
Accordingly, after setting off of the mutual claims through journal
entries, the balance amount of Rs. 5,397/- due and payable by the
assessee to the Investment Trust of India was paid by a crossed cheque
dated 19th February, 2003 drawn on Citibank.

It had filed its
return of income declaring loss of Rs. 17,27,21,815/- for the assessment
year 2003-2004. The assessment was completed u/s. 143(3) determining
the loss at Rs. 9,84,92,500/-.

Relying on the comments in the Tax
Audit Report regarding repayment of loan/inter-corporate deposit,
otherwise than by an account payee cheque or draft, the AO issued a
show-cause notice u/s. 271E, calling upon the assessee to show cause as
to why action should not be taken against the assessee for violating the
provisions of section 269T of the Act.

The detailed reply
however, was ignored by the AO who by an order dated 21st March, 2006
passed under section 271E of the Act, on the basis of the report of the
Joint Parliamentary Committee of Lok Sabha and Rajya Sabha on the Stock
Market Scam, imposed penalty amounting to Rs. 4,28,99,325/- on the
ground that the assessee had repaid the loan/inter-corporate deposit to
the extent of Rs. 4,28,99,325/- in contravention of the provisions of
section 269T of the Act.

On appeal filed by the assessee, the
Commissioner (Appeals) confirmed the penalty levied by the AO. On
further appeal filed by the assessee, the Tribunal allowed the appeal by
following its decisions in some of the group cases, and held that the
payment through journal entries did not fall within the ambit of section
269SS or 269T of the Act and consequently no penalty could be levied
either u/s. 271D or 271E of the Act.

The Revenue, in its appeal
to the High Court, submitted that the assessee belonged to the Ketan
Parekh Group, which was involved in the securities scam. It submitted
that the Ketan Parekh Group was found to be indulging in large scale
manipulation of prices of select scrips through fraudulent use of bank
and other public funds and had flouted all the norms of risk management
by making transactions through a large number of entities so as to hide
the nexus between the sources of funds and their ultimate use with the
sole motive of evading tax. It was further submitted that since the
language of section 269T of the Act was clear and unambiguous, the
tribunal ought to have held that repayment of the loan/inter-corporate
deposit otherwise than by account payee cheque or demand draft was in
violation of the provisions of section 269T of the Act and, hence, the
penalty imposed u/s. 271E of the Act was justified.

The
assessee, on the other hand, submitted that section 269T of the Act was
enacted to curb the menace of giving false explanation of the
unaccounted money found during the course of search and seizure; that
the bonafide transaction of repayment of loan or deposit by way of
adjustment through book entries carried out in the ordinary course of
business would not come within the mischief of the provisions of section
269T of the Act; the legislative history as also the circulars issued
by the CBDT confirmed that the provisions were not meant to hit genuine
transactions and the legislative intent was to mitigate any unintended
hardships caused by the provisions to genuine transactions; that in the
present case, genuineness of the transactions entered into by the
assessee with the Investment Trust of India was not in doubt; that no
additions on account of the transactions had been made in the regular
assessment; section 269T postulated that if a loan or deposit was repaid
by an outflow of funds, the same had to be by an account payee cheque
or demand draft and that discharge of the debt in the nature of loan or
deposit in a manner otherwise than by an outflow of funds would not be
hit by the provisions of section 269T.

The assessee  further submitted that instead of repaying the amount by account payee cheque/demand  draft  and receiving back the amount by way of demand draft/cheque, the parties, as and by way of commercial prudence, had settled the account by netting off the accounts and paid the balance by account payee cheque. relying on a decision of the apex Court in the case of J.

B.    Boda and Company P. Limited, 223 ITR 271(SC), it was submitted that the two-way traffic of forwarding bank draft and receiving back more or less same amount by way of bank draft was unnecessary and, therefore, in the facts of the present case, no fault could be found with the repayment of loan through journal entries. it was also submitted that the plain reading of section 269t, that each and every loan or deposit had to be repaid only by an account payee cheque or draft if accepted, would lead to absurdity because, by such interpretation not only mala fide transactions, but even genuine transactions would be affected.

Relying on the judgments of the apex Court in the cases of Kum. A. B. Shanti, 255 ITR 258 (SC) and J. H. Gotla, 156 ITR 323, the assessee submitted that if a strict and literal construction of a statute led to an absurd result, a result not intended to be subserved by the object of the legislation as ascertained from the scheme of the legislation and, if
another construction was possible apart from the strict and literal construction, then, that construction should be preferred to strict literal construction.

Inviting the attention of the court to the provisions of the Code of Civil Procedure and the books on accountancy, the assessee submitted that set-off of the claim/counter- claim otherwise than by account-payee cheque or bank draft was legally permissible in commercial transactions as also in the accounting practice. therefore, it must be held that genuine transactions like the transaction in the present case involving repayment of loan through journal entries did not violate section 269t of the act.

In any event, it was contended that having regard to the commercial dealings between the parties it must be held that there was reasonable cause for repaying the loan through journal entries. in view of section 273B of the act, penalty was not imposable u/s. 271 e of the act. In support of the above contention, reliance was placed on the decisions of the high Courts in the cases of Noida Toll Bridge Company Limited, 262 ITR 260 (Del.), Shree Ambica Flour Mills Corporation) 6 DTR 169 (Guj.) and Motta Constructions P. Limited, 338 ITR 66 (Bom.).

On careful consideration of the rival submissions, the court observed that the basic question to be considered in  the  appeal  was  whether  repayment  of  loan  of  Rs. 4,28,99,325/- by making journal entries in the books of account maintained by the assessee was in contravention of section 269t of the act, and, if so, for failure to comply with the provisions of Section 269T, the assessee was liable for penalty u/s. 271e of the act.

The court observed that the argument advanced by the counsel for the assessee that the bonafide transaction of repayment of loan/deposit by way of adjustment through book entries carried out in the ordinary course of business would not come within the mischief of section 269t could not be accepted, because, the section did  not make  any distinction between the bonafide and non-bonafide transactions and required the entities specified therein not to make repayment of any loan/deposit together with the interest, if any otherwise than by an account payee cheque/bank draft if the amount of loan/deposit, with interest if any, exceeded the limits prescribed therein. Similarly, the argument that only in cases where any loan or deposit was repaid by an outflow of funds, section 269t  provided  for  repayment  by  an  account  payee cheque/draft, could not be accepted because section 269t neither referred to the repayment of loan/deposit by outflow of funds nor referred to any of other permissible modes of repayment of loan/deposit, but merely provided for an embargo on repayment of loan/deposit except by the modes specified therein. Therefore, in the case before it, where loan/deposit had been repaid by debiting the account through journal entries, it must be held that the assessee had contravened the provisions of section 269t of the act.

The court found that the reliance on the decision of the apex court in the case of J. B. Boda & Company P. Limited (supra) was misplaced as the aforesaid decision had no relevance to the facts of the present case, because, section 80-o and section 269t operated in completely different fields. The object of section 80-O was to encourage Indian Companies to develop technical knowhow and make it available to foreign companies and foreign enterprises so as to augment the foreign exchange earnings, whereas, the object of section 269t was to counteract evasion of tax.  for  section  80-o,  receiving  income  in  convertible foreign exchange is the basic requirement, where as, for section 269t, compliance of the conditions set out therein is the basic requirement. Section 80-O does not prescribe any particular mode for receiving the convertible foreign exchange,   whereas,   section   269t   bars   repayment of loan or deposit by any mode other than the mode stipulated under that section and for contravention of section 269t penalty is imposable u/s. 271e of the act. In these circumstances, the decision of the apex Court rendered in the context of section 80-o cannot be applied while interpreting the provisions of section 269t of the act.

The  high  Court  further  noted  that  on  reading  section 269t, 271e and 273B together, it became clear that  u/s. 269T it was mandatory for the persons specified therein to repay loan/deposit only by account payee cheque/draft if the amount of loan/deposit together with interest, if any, exceeded the limits prescribed therein; non-compliance of the provisions of section 269t rendered the person liable for penalty u/s. 271e in the absence of the reasonable cause for failure to comply with the provisions of section 269t of the act.

The court refused to accept the argument advanced on behalf of the assessee that if section 269t was construed literally, it would lead to absurdity, because, repayment  of loan/deposit by account payee cheque/bank draft was the most common mode of repaying the loan/deposit and making such common method as mandatory did not lead to any absurdity. Having held so, the court however observed that, in some cases, genuine business constraints necessitated repayment of loan/deposit by a mode other than the mode  prescribed  u/s.  269t  and  to  cater  to  the  needs of such exigencies, the legislature had enacted section 273B which provided that no penalty u/s. 271e should be imposed for contravention of section 269t if reasonable cause for such contravention was shown. the court noted that in the present case, the cause shown by the assessee for repayment of the loan/deposit otherwise than by account-payee cheque/bank draft was reasonable, as it was on account of the fact that the assessee was liable to receive amount towards the sale price of the shares sold by the assessee to the person from whom loan/deposit was received by the assessee, in as much as it would have been an empty formality to repay the loan/deposit amount by account-payee cheque/draft and receive  back almost the same amount towards the sale price of the shares.

Neither the genuineness of the receipt of loan/deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business had been doubted in the regular assessment and there was nothing on record to suggest that the amounts  advanced  by  investment  trust  of  india  to  the assessee represented the unaccounted money of the investment trust of india or the assessee. The fact that the assessee company belonged to the Ketan Parekh Group which was involved in the securities scam could not be a ground for sustaining penalty and it was not in dispute that settling the claims by making journal entries in the respective books was also one of the recognised modes of repaying loan/deposit.

In  the  result,  the  court  held  that  the  tribunal  was  not justified in holding that repayment of loan/deposit through journal entries did not violate the provisions of section 269T of the Act. However, in the absence of any finding recorded in the assessment order or in the penalty order to the effect that the repayment of loan/deposit was not a bonafide transaction and was made with a view to evade tax, it was held that the cause shown by the assessee was a reasonable cause and, therefore, in view of section 273B of the act, no penalty u/s. 271e could be imposed for contravening the provisions of section 269t of the act.

Worldwide Township projects lTD.’s case
The issue   inter alia   recently arose for consideration of the delhi high Court in the case of CIT vs. Worldwide Townships Projects Ltd., 269 CTR 444, wherein the revenue challenged the order of the tribunal holding that the penalty order passed by the ao u/s. 271d of the act was unsustainable in law.

In this case, the assessee filed its return of income for the assessment year 2007-08 on 30-10-2007, which return was taken up for scrutiny. the ao found that during the year in question, the assessee had shown purchases of land  worth  rs.  14.22  crore,  which  had  remained  to  be paid at the end of the year. This was accordingly reflected as Sundry Creditors in the name of one PACL India Ltd., which had purchased lands on behalf of the assessee from several land owners on payments made by it through demand drafts to various land owners on behalf of the assessee.

The AO held  that the transactions amounted to extending of a loan to the assessee by PACL India Ltd and that the said transaction fell foul of the provisions of sections 269SS and 269T of the Act, since no funds had passed through the bank accounts of the assessee for acquisition of the lands. The ao levied a  penalty u/s.  271d holding the assesssee responsible for violation of the provisions of section 269SS for sums aggregating Rs.14,25,74,302/- that, in his view,  were transferred to the loan account    in the form of book entries, otherwise than through an account payee cheque or a account payee draft.

In the appeal by the assessee, the Cit (appeals), relying on the decision of the delhi high Court in the case of Noida Toll Bridge Co. Ltd,: 262 itr 260, disagreed with the findings of the AO and deleted the penalty in the given circumstances  of  the  case.  The  tribunal  held  that  the order passed by the ao was beyond the time permissible u/s. 275(1)(a) and was not tenable in law.

On a further appeal to the high Court by the revenue, the delhi high Court was unable to appreciate as to how, in the given circumstances of the case, there was an offence u/s. 269SS of the Act. The High Court observed that a plain reading of the provision indicated that the import of the above provision was limited and it applied only to a transaction where a deposit or a loan was accepted by an assessee, otherwise than by an account payee cheque or an account payee draft. the ambit of the section was clearly restricted to transactions involving acceptance of money and was not intended to affect cases where a debt or a liability arose on account of book entries. the object of the section was to prevent transactions in currency, which fact was also clearly explicit from Clause (iii) of the explanation to section 269SS of the Act, which defined  a loan or deposit to mean “loan or deposit of money.”  The liability recorded in the books of account by way of journal entries, i.e., crediting the account of a party to whom monies were payable or debiting the account of a party from whom monies were receivable in the books  of account, was clearly outside the ambit of the provision of section 269SS of the Act, because passing such entries did not involve acceptance of any loan or deposit of money. in the present case, admittedly  no  money was transacted other  than  through  banking  channels in as much as PACL India Ltd. made certain payments through banking channels to land owners on behalf of the assessee, which were recorded by the assessee in its books by crediting the account of PACL India Ltd, and in view of that admitted position, no infringement of section 269SS of the Act was made out.

The  delhi  high  Court  noted   that  the  court,  in  the  case of Noida Toll  Bridge Co. Ltd. (supra), had considered     a similar case where a company had paid money to the Government of Delhi for acquisition of a land on behalf  of the assessee therein. It noted that, in the said case, the ao had levied a penalty for alleged violation of the provisions of section 269SS, which was confirmed by the Commissioner(appeals), but was deleted by the tribunal. In an appeal by the Revenue, the High Court held as under:-

“While holding that the provisions of section 269SS of the Act were not attracted, the Tribunal has noticed that: (i) in the instant case, the transaction was by an account payee cheque, (ii) no payment on account was made in cash either by the assessee or on its behalf, (iii) no loan was accepted by the assessee in cash, and (iv) the payment of Rs. 4.85 crore made by the assessee through IL & FS, which holds more than 30% of the paid-up capital of the assessee, by journal entry in the books of account of the assessee by crediting the account of IL & FS. Having regard to the aforenoted findings, which are essentially findings of fact, we are in complete agreement with the Tribunal that the provisions of section 269SS were not attracted on the facts of the case. Admittedly, neither the assessee nor IL & FS had made any payment in cash. The order of the Tribunal does not give rise to any question of law, much less a substantial question of law.”

The  high  Court  accordingly  held  that  there  was  no violation of the provisions of section 269SS on passing of the journal entries for accepting a liability that arose on account of the payment made by a person on behalf of the assessee.

Observations.
Chapter XXB containing sections 269SS to section 269TT were introduced by the Income-tax (Second Amendment) act, 1981 with effect from 11th july, 1981 with a view to counter the evasion of tax. the object of the provisions are explained by the CBDT in its Circular no. 345 dated 28-06-1982 stating that the proliferation of black money posed a serious threat to the national economy and to counter that major economic evil, Chapter XXB was introduced.

It is apparent that the provisions were introduced to control the transactions in cash  and  where  found  to  be without reasonable cause, to punish the persons executing such transactions. any interpretation placed on these provisions shall have to factor in the objective behind the insertion of these provisions, a fact which has been the guiding factor for the judiciary, in case after case, while deciding the issues that routinely arise in applying the  provisions.  this  aspect  has  been  appreciated  by the Bombay high Court when it stated that settling the claims by making journal entries in the respective books was also one of the recognised modes of repaying loan/ deposit and once such settlement is found to be genuine, the question of levy of penalty does not arise. With this finding, in our opinion, the court accepted the principle that the non cash transactions were outside the scope of the set of the provisions, collectively read.

A literal interpretation of these provisions, also, in our respectful opinion, does not lead to bringing an accounting entry within the ambit of these provisions. a loan or deposit has to be ‘taken’ or ‘accepted’ or ‘repaid’ for attracting the provisions. there has to a receipt or a payment;  has to be received or paid. taking, accepting or repaying is a sine qua non of these provisions, failing which the provisions shall not apply. It is essential that this fact is established by the revenue before applying these provisions. these terms, when understood in common parlance, cannot by any stretch of imagination include the act of passing an accounting entry. In ordinary course, one does not take a loan by passing an accounting entry and so it is, in the case of a repayment. An accounting entry can pave a way for settlement or settling a transaction and may consequently result in creation of a debt or extinguishing a debt but cannot be construed as an acceptance or repayment which, in the ordinary meaning of the terms, are acts that require transfer of funds, which, in the case under consideration, is cash. In the absence of any movement of cash, the provisions have no role to play. Any other interpretation would rope in all those transactions wherein a debt is converted into a loan or a deposit.

Any doubt remaining in the matter of interpretation of these provisions is further dispelled by Clause (iii) of the Explanation to both the provisions, section 269 SS and 269T which defines a ‘loan or deposit’ to mean loan or deposit of money. unless a transaction involves money changing hands, the provisions have no role to play. We respectfully submit that it is this aspect of the provisions that the court failed to appreciate; may be due to the fact, recorded in the order, that the assessee admitted that the provisions of s.269t were applicable to its case.

The attention of the Bombay high Court was drawn by the assessee, not with success, to impress that the provisions were not applicable to the cases involving accounting entries, by relying on the decisions in the cases of noida Toll Bridge Company Limited, 262 ITR 260 (Del), Shree Ambica Flour Mills Corporation, 6 DTR 169 (Guj) and Motta Constructions P. Limited, 338 ITR 66 (Bom).

In Motta Constructions P. Limited, 338 ITR 66 (Bom), the same high Court was asked to examine the applicability of section 269 SS to the case of the journal entry passed by the company for acknowledging the debt in favour of a director, who had incurred some expenditure on behalf of the company. the court, in the circumstances, held that the said provisions had no application to the case where a debt was created by a journal entry, in as much as no loan or deposit could be said to have been received by the assessee company.

In Noida Toll Bridge Company Limited, 262 itr 260 (Del.), the High Court held that the provisions of s. 269SS were not applicable to a case of the company crediting the account of one IL & FS on payments made by IL & FS on behalf of the company, where none of the parties had made payment in cash. in Shree Ambica Flour Mills Corporation(2008, ) 6 DTR 169 (Guj) it was held that the payments made by sister concerns for each other were not in violation of section 269SS or section 269T of the Act.

The allahabad  high  Court  also,  in  the  case  of  CIT  vs. Saurabh Enterprises 269 CTR 451, has taken a view that where no cash was involved, but merely adjusting book entries, there was no violation of sections 269SS or 269T. the  income-tax  appellate  tribunal     has,  through  its various decisions, taken a consistent stand that the provisions of section 269SS and section 269T do not apply to the case of a debt created or extinguished by accounting entries. Please see, Bombay Conductors & Electrical Ltd. 56 TTJ (Ahd) 580, Muthoot M. George, 47 TTJ (Coch) 434, Sunflower Builders (P.) Ltd. 61 ITD 227 (Pune). the decision of the ahmedabad tribunal was later on confirmed by the Gujarat High Court reported in 301 itr 328.

Significantly, it is required to be appreciated that even otherwise, an accounting entry may not be and cannot be said to have the effect of resulting in a loan or a deposit. The Supreme Court, in the case of Bombay Steam Navigation Co., 56 ITR 52, observed as under; “An agreement to pay the balance of consideration, due by the purchaser, does not in truth give rise to a loan.    A loan of money results in a debt but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources . Every creditor who is entitled to receive a debt cannot be a lender.”

While it is true that the provisions do not expressly exclude journal entries from the application of section 269SS and section 269T, it is also true that the entries, by themselves, cannot be said to have resulted in receiving a loan or repaying a loan, and without doubt, not in money. the decision of the Bombay high Court, on this limited aspect, needs to be reviewed.

Comparable Uncontrolled Price (‘CUP’) Method – Introduction and Analysis

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1 Background

Transfer pricing
provisions in section 92 of the Income-tax Act, 1961 (‘the Act’)
prescribe that the arm’s length price (‘ALP’) of international/specified
domestic transactions between associated enterprises (‘AEs’) needs to
be determined with regard to the ALP, by applying any of the following
methods:

– Price-based methods: CUP Method
– Profit-based
methods: Resale Price Method (‘RPM’), Cost Plus Method (‘CPM’), Profit
Split Method (‘PSM’) and Transactional Net Margin Method (‘TNMM’)
– Prescribed methods: Other Method

The
provisions of the Act prescribe the choice of the Most Appropriate
Method having regard to the nature of the transaction, availability of
relevant information, possibility of making reliable adjustments, etc,
and do not prescribe an hierarchy or preference for any method1.

In
this article, the authors have sought to explain the conceptual
framework of the CUP Method, considerations for its applicability and
practical issues concerning industry-wise application of the CUP Method.
Judicial precedents have been referenced as appropriate, for further
reading.

2. Conceptual framework
The CUP Method has
been defined in Rule 10B(1)(a) of the Income-tax Rules, 1962. The
various nuances surrounding the application of CUP Method ( on the basis
of the sub clauses in the rule ) have been analysed below:

(i)“The
price charged or paid for property transferred or services provided in a
comparable uncontrolled transaction, or a number of such transactions,
is identified;”

Analysis
The CUP Method compares the
price in a controlled transaction to the price in an uncontrolled
transaction in comparable circumstances. If there is any difference in
the two prices, underlying factors remaining constant, it may suggest
that the conduct of the related parties to the transaction is not at
arm’s length, i.e. the controlled price ought to be substituted by the
uncontrolled price.

The CUP can be Internal or External. An
internal CUP is the price that the assessee has charged/paid in a
comparable uncontrolled transaction with a third party. An external CUP
is the price of a comparable uncontrolled transaction between third
parties (i.e. no involvement of the assessee). Refer to section 4 for
discussion of the issue governing selection of Internal CUPs and
External CUPs.

A potential issue could arise as regards whether
the provisions prescribe the use of a comparable ‘hypothetical
transaction’, i.e. transaction for which a price/consideration ‘is to be
paid’ or ‘would have been paid’.

Please refer to sections 5 and 6 for detailed discussions.

“(ii)
such price is adjusted to account for differences, if any, between the
international/ specified domestic transaction and the comparable
uncontrolled transactions or between the enterprises entering into such
transactions, which could materially affect the price in the open
market”

Analysis
In an ideal scenario, none of the
differences between the transactions being compared or between the
enterprises undertaking these transactions should materially affect the
price in the open market. One needs to assess whether reasonably
accurate adjustments can be made to eliminate the material effects of
such differences.

Accordingly, the application of the CUP Method
prescribes stringent comparability considerations which need to be
addressed before the determination of ALP, which makes the application
of the CUP Method extremely difficult.

Currently, there is no
prescribed guidance on the manner of computing adjustments. Accordingly,
one can take guidance from the Organisation for Economic Cooperation
and Development (‘OECD’) Guidelines which specify different types of
comparability adjustments.

The characteristics of the
goods/services/property/ intangibles under consideration, including
their end use, have a bearing on the comparability under the CUP Method
and require suitable adjustment. To illustrate, the prices of imported
unprocessed food products would not be the same as imported processed
food products.

Differences in contractual terms, i.e. credit
terms, transport terms, sales or purchase volumes, warranties,
discounts, etc., also play an important role whilst undertaking
comparability adjustments under the CUP Method and adjustments can
typically be made for these quantitative differences. Further, the
comparable uncontrolled transactions should ideally pertain to the
same/closest date, time, volume, etc., as that of the controlled
transaction.

The prices of various products may also differ due
to the differences in the geographic markets, owing to the demand and
supply conditions, income levels and consumer preferences,
transportation costs, regulatory and tax aspects, etc. Indian judicial
precedents have recognised these differences.

A potential issue
may arise in cases where it is not possible to quantify the exact
adjustment to be made to the uncontrolled transaction where the
differences are on account of qualitative attributes, say, for example,
adjustment for difference in quality of Indian products visà- vis
Chinese products.

Further, there may arise differences in the
intensity of functions performed and risks assumed by the assessee,
vis-à-vis a comparable uncontrolled transaction, where it may not be
possible to effect/adjust such differences. In such cases, it is
advisable to maintain robust transfer pricing documentation to identify
and address such material differences and reject the CUP method. To
illustrate, the ownership of intangibles such as trademarks/brands,
etc., could impair the application of the CUP Method.

“(iii) the
adjusted price arrived at under sub-clause (ii) is taken to be an arm’s
length price in respect of the property transferred or services
provided in the international/ specified domestic transaction.”

Analysis
The
results derived from an appropriate application of the CUP Method
generally ought to be the most direct and reliable measure of an ALP for
the controlled transaction. The reliability of the results derived from
the CUP Method is affected by the completeness and accuracy of the data
used and the reliability of assumptions made to apply the method.

3. Application & pertinent issues
The
Indian transfer pricing authorities have indicated a strong preference
for applying the CUP Method given that CUP directly focuses on the
international transaction under review. Even though the degree of
comparability required for application of the CUP Method is high,
unadjusted or inexact CUPs have been routinely applied by the
authorities.

Appellate Tribunals have dealt with the issue of
the application of CUP Method in several transactions pertaining to
various industry sectors and have thrown some light on the guidelines
and reasonable steps that need to be undertaken to make appropriate and
reasonable adjustments to the CUPs in order to arrive at the ALP.
Further, the Tribunals have also adjudicated on the preference of
selection of Internal CUPs over External CUPs. These industry-wide
transactions and the issues concerning application of CUP method in
regard to various categories of payments have been elucidated below:

(i) Payment/Receipt of brokerage:

Under
the internal CUP approach, the brokerage charged by the assessee
(broker) to its AEs could be compared to the brokerage charged by the
assessee to a third party. However, it would be important to consider
the following factors since they have a direct bearing on the pricing of
the respective transactions:

a.    the contractual terms and conditions, i.e. underlying functions and control exercised by each transacting party (e.g. settlement terms, margin money stipulations etc.)
b.    Volume of transactions and resultant discounts, if any
c.    functions  performed  by  the  assessee  in  earning the brokerage from the related party as well as unrelated party.

The Mumbai Tribunal in  the  case  of  RBS  Equities  has upheld the use of the CUP method for brokerage transactions after providing for an adjustment for differences in marketing function, research functions and differences in volumes.

(ii)    Payment/receipt of guarantee fees:

Placing reliance on international guidance and several judicial precedents2 , arm’s length guarantee fees are a factor of the following:

a.    nature – whether the guarantee under consideration is a quasi-equity guarantee.
b.    Whether the benefit derived by the recipient is implicit/ explicit in nature
c.    Purpose of guarantee – A financial or unsecured guarantee would warrant a higher compensation as opposed to a performance or secured guarantee
d.    the  value  of  assets  at  risk/anticipated  loss  given default of the borrower and anticipated probability of default of the borrower
e.    the rate at which guarantees are extended by banks in the country of the lender/borrower
f.    Credit rating of the borrower

In view of the above, it could also be argued that guarantee rates obtained from independent bank websites are generic in nature and not specific to any particular transaction that has been carried out.  thus, not only are they negotiable, they also vary depending on the terms and conditions of the transactions, and the relationship between the banks and the customer. hence, they cannot be used directly to represent the guarantee fee charged on a particular tested transaction.  this principle is supported by indian judicial precedents as well.

(iii)    Financial services – Intercompany loans/ deposits:

Placing reliance on several judicial precedents3, it could be argued that in a case where foreign currency loans/ deposits are advanced by an indian assessee to its overseas subsidiary (say in the USA), the rate of interest on the intercompany loan could be determined with reference  to  CUPs,  i.e.  the  london  interbank  offered Rate plus basis points, appreciating that arm’s length interest rates are a factor of the following:

a.    the value of the assets at risk, or the anticipated loss given the default of the borrower;
b.    anticipated probability of default of the borrower;
c.    the level of interest rates, in terms of risk-free rates for given tenor and currency;
d.    the market price of risk, or credit spreads; and
e.    taxes;
f.    Whether the loan/deposits are quasi-equity in nature (i.e. convertible to equity upon maturity);
g.    Purpose of the loan – i.e. whether the loans were extended for further investment purposes.

(iv)    Pharmaceuticals, chemicals – Import of raw materials/Active Pharmaceutical Ingredients (‘APIs’):

The  mumbai  Bench  of  the  indian  tax  tribunal,  in  the cases of Serdia4 Pharmaceuticals and Fulford India5, have provided useful insights on transfer pricing issues related to the pharmaceutical industry.

In the case of Serdia, the prices of off-patented APIs imported by the taxpayer from foreign aes were compared by the Revenue authorities with the prices of generic APIs purchased by competitors from third party suppliers, by using the CUP Method.

Before decoding the Serdia verdict, it would be essential to delve into the decision of the Canadian federal Court of Appeal (‘FCA’) rendered in the case of GlaxoSmithKline Inc (‘GSK’)6 , as it has been quoted and relied upon by the Tribunal in the case of Serdia.

GSK imported APIs from its AE for secondary manufacture and distribution of the drug named “Zantac”. GSK also had a license agreement with its AE, which provided GSK with the right to use the “Zantac” trademark. applying  the CUP Method, the Revenue compared GSK’s import prices of APIs from AEs with the prices of generic APIs purchased by competitors from third party suppliers, and an adjustment was proposed for the difference in prices. Eventually, the FCA ruled that GSK’s license agreement with its ae must be considered as a circumstance relevant to the determination of the ALP of the APIs imported by GSK from its AE, and thereafter restored the matter back to the lower authorities for fresh adjudication.

What logically follows from the conclusion is that the price of a generic product cannot simply be a CUP for another product, which is accompanied with a license or right to use intellectual property (‘IP’), which in the aforesaid case was a valuable trademark. holding this to be the pivotal principle, let us revert to the Serdia ruling, where there was no evidence furnished by the taxpayer relating to the licensing of any accompanying intangible based on which a higher price to AEs could be justified. Further, the Tribunal clearly distinguished the facts of Serdia’s case from those in the case of uCB india7 and stated that the CUP Method cannot blindly be rejected without giving due consideration to the facts of each and every case.

Fulford,  however,  put  forth  an  argument  before  the Mumbai Tribunal against the use of the CUP Method applied by the revenue, to benchmark the prices of import of off-patented APIs from AEs with prices of generic APIs. Fulford’s primary contention was that the said comparison was flawed, as it had been undertaken in complete disregard of the functions, assets, and risks (‘FAR’) profile or characterisation of the parties to the transaction and Fulford’s FAR was of routine distributor entitled to profits commensurate to its distribution function. Fulford argued that application of the CUP Method in such cases might result in the indian distributor earning exorbitant margins or profits, a significant portion of which it might not deserve, being related to the intangibles owned and the various risks, including product liability risks borne by the foreign principal. Another issue faced by taxpayers has been the application of the CUP Method using secret comparables. Section 133(6) of the Act empowers the Indian Revenue authorities to call for information from various public sources in order to determine the ALP of the transaction, i.e. comparing the import prices of  APIs  imported  by the pharmaceutical companies with the prices of APIs available from such sources. In this regard, it is pertinent to note that without furnishing requisite details such as the quantum of transactions, quality of the API purchased, shelf life of the products, it is extremely difficult to make reliable adjustments as contemplated under the CUP method. A number of pharmaceutical companies face the double-edged sword where reduced import prices (owing to transfer pricing disallowances) are generally not considered by the Customs authorities for the purposes of customs duty assessment.

(v)    Information technology and Software – Payment of service fee:

The charge-out rates in the case of some it companies are determined having regard to the qualification/designation of the employees, i.e. per month/per man hour rates.     In this regard, some judicial precedents8 issued by the Indian Tribunals favour the application of the CUP Method as opposed to the tnmm method, since the rates are not determined on the basis of software developed or volume of work. In the case of Velankani Software, the Tribunal upheld the use of the internal CUP Method where the technology, asset and marketing support was provided by the ae in the controlled transaction as opposed to the uncontrolled transaction, where the assessee used its own technology, assets and marketing infrastructure, since the assessee operated on a billing ‘on time and material’ basis, i.e. rates based on man months at different prices for different skill sets of employees for aes as well as non aes, subject to the detailed documentation furnished by the taxpayer.

(vi)    Purchase and sale of power:

It is a known fact that a number of taxpayers set up captive power production units in order to source power at economical rates and achieve synergies and long term economies of scale. for the purposes of determining the appropriate quantum of deduction under the provisions of Chapter Vi-a of the act read with section 92Ba of the act, it is essential that the transfer of power by such captive units to the operating manufacturing plants is undertaken at fair market value/ALP. In this regard, guidance is provided by recent judicial precedents9    of the tribunals, wherein it is prescribed that any of the following values could be used as a CUP to determine the FMV of the controlled transaction

a.    Price at which excess power, if any, is sold by the captive power unit to the State Electricity Board
b.    Price at which power is purchased by the operating companies from the State Electricity Board
c.    Grid rates according to the Tariff card of the State electricity Board

(vii)    Purchase and sale of diamonds:
In the diamond industry, there is a huge dissimilarity and variation of features which leads to differences in prices. the  pricing  of  the  diamonds  depends  upon  various parameters/factors like size of the diamond, carat weight, various types of shape, colour, clarity, grade, etc., which leads to differential pricing of the diamonds. Thus, in such a condition, it becomes very difficult to apply the CUP method in benchmarking the pricing of diamonds.

4.    Internal vs. External CUPs

The  indian  revenue  authorities  tend  to  accept  the  use of Internal CUPs as well as External CUPs to determine the ALP of the controlled transactions. However, the oeCd Guidelines as well as several judicial precedents10 promote the preference of the internal methods over the external methods since the assessee itself is the party  to the controlled as well as the uncontrolled transaction and the quality of such data is more reliable, accurate and complete as against external comparables, which is the most important consideration in determining the possible application of the CUP Method. In case of external CUP, data may be derived from public exchanges or publicly quoted data. The external CUP data could be considered reliable if it meets the following tests:

a.    the data is widely and routinely used in the ordinary course of business in the industry to negotiate prices for uncontrolled sales

b.    the data derived from external sources is used to set prices in the controlled transaction in the same way it is used by uncontrolled assessees in the industry

c.    the  amount  charged  in  the  controlled  transaction is adjusted to reflect the differences in product quality and quantity, contractual terms, market conditions, transportation costs, risks borne and other factors that affect the price that would be agreed to by uncontrolled assessees

5.    Can quotations be used as CUPS?

Given the above absence of realistic internal/external CUP data for benchmarking the controlled transaction, can it be said that quotations obtained from third parties could constitute valid CUPs?

In the case of KTC Ferro Alloys Pvt. Ltd. (TS 20 ITAT 2014 (Viz) TP), Adani Wilmar Ltd. (TS 171 ITAT 2013 (Ahd) TP), Reliance Industries Ltd. (TS 368 ITAT 2012 (Mum)), Ballast Nedam Dredging (TS 25 ITAT 2013 (Mum) TP) and
A.    M. Todd Co. India P. Ltd. (TS 117 ITAT 2009 (Mum)), various benches of the Tribunals had accepted quotations and rates published in magazines and newspapers as CUPs, subject to necessary adjustments.

However, in the case of Redington India Ltd. (TS 123 ITAT 2013 (CHNY) – TP), the Chennai ITAT rejected the ‘list price’ published on the manufacturer’s website as    a CUP, observing that it is only an indicative price and the CUP can only be based on actual sales. Further, in Sinosteel India Pvt. Ltd. (TS 341 ITAT 2013 (DEL) TP), the Delhi ITAT held that ALP under the CUP Method is  to be determined  based on ‘the price charged or paid’  in a comparable uncontrolled ‘transaction’ and hence, a quotation which has not fructified into a transaction could not be accepted as a CUP.

6.    Introduction of the sixth method – Other Method

The  Central  Board  of  direct  taxes  has  inserted  a  new rule 10AB by notifying the “other method” apart from the five methods already prescribed:

“For the purposes of clause (f) of sub-section (1) of section 92C, the Other Method for determination of the arms’ length price in relation to an international transaction shall be any method which takes into account the price which has been charged or paid,  or would have been charged or paid, for the same   or similar uncontrolled transaction, with Methods of Computation of Arm’s Length Price or between non- associated enterprises, under similar circumstances, considering all the relevant facts.”

The Guidance Note on Transfer Pricing issued by the institute of Chartered accountants  of  india  (august 2013 – revised) explains that the introduction of the other method as the sixth method allows the use of ‘any method’ which takes into account (i) the price which has been charged or paid or (ii) would have been charged   or paid for the same or similar uncontrolled transactions, with or between non-AES, under similar circumstances, considering all the relevant facts.

The    various    data    which    may    possibly    be    used for comparability purposes under the ‘Other Method’ could be:

(a)    Third party quotations; (b) Valuation reports; (c) tender/Bid  documents;  (d)  documents  relating  to  the negotiations; (e) Standard rate cards; (f) Commercial & economic business models; etc.

It is relevant to note that the text of rule 10aB does not describe any methodology but only provides an enabling provision to use any method that has been used or may be used to arrive at the price of a transaction undertaken between non-AEs. Hence, it provides flexibility to determine the price in complex  transactions  where  third party comparable prices or transactions may not exist, i.e. a more lenient version of the CUP Method. The  wide  coverage  of  the  other  method  would  provide flexibility in establishing ALPs, particularly in cases where the application of the five specific methods is not possible due to reasons such as difficulties in obtaining comparable data due to uniqueness of transactions such as intangibles or business transfers, transfer of unlisted shares, sale of fixed assets, revenue allocation/splitting, guarantees provided and received, etc. however, it would be necessary to justify and document reasons for rejection of all other five methods while selecting the ‘Other Method’ as the most appropriate method. the OECD Guidelines also permit the use of any other method and state that the taxpayer retains the freedom to apply methods not described in the OECD Guidelines to establish prices, provided those prices satisfy the ALP.

The  general  underlying  principle  is  that  as  long  as the quotation can be substantiated by an actual uncontrolled transaction to be considered as a price being representative of the prevailing market price, it can be considered as a comparable under the CUP Method. For all other purposes, the quotation would be considered as a comparable under the other method.

7. Conclusion

The CUP Method is the most direct and reliable measure of an ALP for the controlled transaction, using a comparable uncontrolled transaction, subject to an adjustment for differences,  if  any.  the  reliability  of  the  results  derived from the CUP Method is affected by the completeness and accuracy of the data used and the reliability of assumptions made to apply the method.

Application of the CUP Method entails, among others, a close similarity of the following comparability parameters like quality of the product, nature of services, contractual terms and conditions, level of the market, geographic market in which the transaction takes place, date of the transaction, foreign currency risks and intangible property ownership which could materially affect the price charged in an uncontrolled transaction.

Generally, internal CUPs are preferred over external CUPs in view of availability of reliable and accurate comparable data. A quotation could be considered as a CUP, so long as it is substantiated by an actual transaction and is a clear reflection of the prevailing market price.

ACIT vs. Gopalan Enterprises. ITAT Bangalore ‘B’ Bench Before N. V. Vasudevan (JM) and Jason P. Boaz (AM) ITA No. 241/Bang/2013 A.Y.: 2004-05. Decided on: 13-06-2014. Counsel for revenue/assessee: L. V. Bhaskar Reddy/B. K. Manjunath.

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S/s. 28, 37, 80IB (10) – Even in an assessment u/s 143(3) r.w.s. 147 addition to income on account of bogus purchases will qualify for deduction u/s. 80IB (10).

Facts:
The assessment of total income of the assessee, a partnership firm, engaged in the business of property development was completed vide order dated 26-12-2006 passed u/s. 143(3) of the Act.

The Assessing Officer based on information received from AO of a sister concern of the assessee reopened the assessment u/s. 147 of the Act.

The assessee raised objections regarding validity of the service of notice u/s. 148 of the Act and non-furnishing of reasons recorded. The assessee was furnished with the reasons recorded by the AO on 24-12-2010.

The assessee did not participate in the proceedings for assessment and the assessment was completed u/s. 144 of the Act. In the assessment order, the AO having discussed about fictitious purchases found in the case of assessee’s sister concern concluded that an addition of Rs. 1,66,41,525 was required to be made on account of fictitious purchases. He also stated that since there was no reply from the assessee, the fictitious purchases are treated as debited to revenue/income for which section 80IB is not applicable. He, accordingly, added Rs. 1,66,41,525 to the total income of the assessee.

Aggrieved, the assessee preferred an appeal to CIT(A) where without prejudice to its contention that the expenditure is incurred for the purpose of business and therefore is allowable prayed that in view of the decision of Tribunal in the case of S. B. Builders & Developers vs. ITO (45 SOT 335)(Mum) the deduction u/s. 80IB(10) be allowed on enhanced profits. The CIT(A) upheld the addition but allowed the alternative claim of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The AO came to the conclusion that the fictitious claim of purchases to the extent of Rs. 1,61,41,525 was considered as not relatable to the receipts which are eligible for deduction u/s. 80IB(10) of the Act because the assessee did not give any reply or participate in the assessment proceedings. In our view, such conclusion by the AO was without any basis. The AO ought to have identified it with reference to the evidence available on record as to whether fictitious purchases are relatable to the receipts which are eligible for deduction u/s. 80IB(10) of the Act.

Be that as it may, in the proceedings before the CIT(A), the assessee has categorically made a claim that the fictitious expenses are relatable to the receipts which are eligible for deduction u/s. 80IB(10) of the Act. The CIT(A), in our view, has only directed to verify the claim of the assessee and if it is found correct to allow deduction u/s. 80IB(10) of the Act in respect of enhanced income. In our view, the claim made by the assessee was that the expenses disallowed were inextricably linked with the profits on which the claim for deduction u/s. 80IB(10) was made. As rightly pointed out by the ld. Counsel for the assessee, the Hon’ble Supreme Court in its decision in the case of CIT vs. Sun Engineering Works Pvt. Ltd. (198 ITR 297) (SC) has visualised a situation where the assessee cannot be permitted to challenge reassessment proceedings at an appellate or revisional proceeding and seek relief in respect of items earlier rejected or claimed relief in respect of items not claimed in the original assessment proceedings. The Hon’ble Court has, however, given a rider that if such claims are relatable to escaped income, the same can be agitated. In our view, the claim for fictitious purchases if it is relatable to profits/receipts which are eligible for deduction u/s. 80IB(10) of the Act, the disallowance of such expenses will go to enhance the income/ profits eligible for deduction u/s. 80IB(10) of the Act on which the assessee will be entitled to claim deduction u/s. 80IB(10) of the Act. It cannot be said that the disallowed expenditure cannot be considered as profits derived from the housing project or as operational profit.

The Tribunal confirmed the directions given by CIT(A).

The appeal filed by the revenue was dismissed.

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K. Prakash Shetty vs. ACIT ITAT Bangalore ‘B’ Bench Before N. V. Vasudevan (JM) and Jason P. Boaz (AM) ITA No. 265 to 267/Bang/2014 A.Y.: 2006-07, 2008-09 and 2009-10. Decided on: 05-06-2014. Counsel for assessee/revenue: H. N. Khincha/ Farahat H. Qureshi

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S/s. 271(1)(c), 271AAA, 292BB – Show cause notice issued u/s. 274 of the Act not spelling out the grounds on which penalty is sought to be imposed is defective. Consequently, an order imposing penalty is invalid.

Facts:
The assessee was an individual who belonged to M/s. Gold Finch Hotel Group. There was a search u/s. 132 of the Act on 20-11-2009 in the case of the assessee. On 30-12-2011, assessment orders were passed u/s. 143(3) r.w.s. 153A for AY 2006-07, 2008-09 and 2009-10. In each of these years, the income returned in response to notice issued u/s. 153A exceeded the returned income declared in return of income filed u/s. 139. The difference between the income returned u/s. 139 and income returned u/s. 153A of the Act was due to disclosure made by the assessee consequent to search u/s. 132 of the Act.

For AY 2006-07, the Assessing Officer (AO) initiated penalty proceedings u/s. 271(1)(c) of the Act and for AY 2008-09, he initiated penalty proceedings u/s. 271(1) (c)/271AAA of the Act and for AY 2009-10, he initiated penalty proceedings u/s 271AAA of the Act. In respect of all the three years, the AO imposed penalty u/s. 271(1) (c) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the order passed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal, where it challenged the validity of orders imposing penalty on the ground that the show cause notice issued u/s. 274 of the Act was defective for AY 2006-07 and that for AY s 2008-09 and 2009-10 notice u/s. 274 of the Act had been issued for imposing penalty u/s. 271AAA of the Act, but the order imposing penalty was passed u/s. 271(1)(c) of the Act.

Held:
The show cause notice issued u/s. 274 of the Act is defective as it does not spell out the grounds on which the penalty is sought to be imposed. The show cause notice is also bad for the reason that in A.Y.s 2008-09 and 2009-10 the show cause notice refers to imposition of penalty u/s. 271AAA whereas the order imposing penalty has been passed u/s. 271(1)(c) of the Act. It held that the aforesaid defect cannot be said to be curable u/s. 292BB of the Act, as the defect cannot be said to be a notice which is in substance and effect in conformity with or according to the intent and purpose of the Act. Following the decision of the Karnataka High Court in the case of CIT & Anr vs. Manjunatha Cotton and Ginning Factory (359 ITR 565) (Kar), the Tribunal held that the orders imposing penalty in all assessment years to be invalid and consequently it cancelled the penalty imposed.

The appeal filed by the assessee was allowed.

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Capital gain: Exemption u/s. 54: A. Y. 2007- 08: Sale of bungalow jointly owned with wife: Purchase of adjacent flats one in the name of assessee and other jointly with wife and used as single residential house: Assessee entitled to exemption u/s. 54 in respect of investment in both houses:

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CIT vs. Devdas Naik (Bom): ITA No. 2483 of 2011 dated 10/06/2014: In the A. Y. 2007-08, the assessee sold a bungalow jointly owned with wife for a consideration of Rs. 3 crore. With this sum they bought three flats, one in the assessee’s name, another in the name of assessee and his wife and third in the name of the wife. The assessee claimed exemption u/s. 54 of the Income-tax Act, 1961 in respect of his investment by him in two flats. The two flats were adjacent, converted into single residential house with one common kitchen, though purchased from two different sellers under two distinct agreements. The Assessing Officer held that the assessee was entitled to exemption u/s. 54 in respect of only one flat and disallowed the claim in respect of the second flat. The Tribunal relied on the decision of the Special Bench in ITO vs. Ms. Sushila M. Jhaveri;107 ITD 327 (Mum)(SB) and allowed the assesee’s claim.

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

“i) Admitted fact is that the flats were converted into one unit and for the purpose of the residence of the assessee. It is in these circumstances the Commissioner held that the acquisition of the flats may have been done independently but eventually they are a single unit and house for the purpose of residence. This factual finding could have been made the basis for recording a conclusion in favour of the assessee. We do not find that such a conclusion can be termed as perverse.

ii) R eliance placed by the Tribunal on the order passed by it in the case of Ms. Sushila M. Jhaveri and which reasoning found favour with this Court is not erroneous or misplaced. The language of the section has been noted in both the decisions and it has been held that so long as there is a residential unit or house, then the benefit or deduction cannot be denied.

iii) I n the present case, the unit was a single one. The flats were constructed in such a way that they could be combined into one unit. Once there is a single kitchen, then, the plans can be relied upon.

iv) We do not think that the conclusion is in any way impossible or improbable so as to entertain this appeal. In this peculiar factual backdrop, this appeal does not raise any substantial question of law. The appeal is devoid of any merits and is dismissed.”

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Business expenditure: Disallowance u/s. 43B r.w.s. 36(1)(va): A. Y. 2006-07: Employees’ contribution to PF: Paid by the employer-assessee to the Fund before the due date for filing of return of income for the relevant year: Allowable as deduction in the relevant year u/s. 43B r.w.s. 36(1)(va):

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CIT vs. M/s. Hindustan Organic Chemicals Ltd. (Bom); ITA No. 399 of 2012 dated 11-07-2014:

For
the A. Y. 2006-07, the Assessing Officer disallowed the claim for
deduction of the employees’ contribution to the Provident Fund on the
ground that the same was paid by the employer after the due date under
the Provident Fund Scheme. The CIT(A) allowed the deduction to the
extent of the payment made during the grace period and disallowed the
balance claim of Rs. 1,82,77,138/- paid by the assesee beyond the grace
period but before the due date for filing the return of income under the
Income-tax Act, 1961. Considering the amendment of section 43B by the
Finance Act, 2003 w.e.f. 01-04-2004 and the Judgment of the Supreme
Court in the case of CIT vs. Alom Extrusion Ltd.; 319 ITR 306 (SC), the
Tribunal allowed the assess’s claim for deduction of the said amount.

In
appeal, the Revenue contended that admittedly there was a delay in
payment of the employees’ contribution to PF amounting to Rs.
1,82,77,138/- and therefore, as per the provisions of section 43B
r..w.s. 36(1)(va) of the Act, deduction on account of the said
contribution towards PF was not allowable if the payments were made
after the due dates specified in the relevant Act.

The Bombay High Court rejected the contention of the Revenue, upheld the decision of the Tribunal and held as under:

“i)
We find that the ITAT was fully justified in deleting the addition of
Rs. 1,82,77,138/- on account of delayed payment of Provident Fund of
employees’ contribution.

ii) We therefore find that no
substantial question of law arises as sought to be contended by Mr.
Malhotra on behalf of the Revenue.”

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Export – Deduction u/s. 80HHC – Turnover to include sale of goods dealt in and sale of scrap is not includible

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Commnr. of Income Tax-VII, New Delhi vs. Punjab Stainless Steel Industries (Civil Appeal No.5592 of 2008 dated 5th May, 2014)

The assessee was a manufacturer and exporter of stainless steel utensils. In the process of manufacturing stainless steel utensils, some portion of the steel, which could not be used or reused for manufacturing utensils, remained unused, which was treated as scrap and the respondent-assessee disposed of the said scrap in the local market and the income arising from the said sale was also reflected in the profit and loss account. The respondent-assessee not only sold utensils in the local market but also exported the utensils.

For the purpose of availing deduction u/s. 80HHC of the Act for the relevant Assessment Year, the assessee was not including the sale proceeds of scrap in the total turnover but was showing the same separately in the Profit and Loss Account.

For the purpose of calculating the deduction, according to the provisions of section 80HHC of the Act, one has to take into account the profits from the business of the assessee, export turnover and total turnover. The deduction, subject to several other conditions, incorporated in the section, is determined as under:

P_r_o_fi_ts_ _o_f _th_e_ _B_u_s_in_e_s_s_ X__ E_x_p_o_r_t _T_u_rn_o_v_e_r

Total Turnover

According to the Revenue, the sale proceeds from the scrap should have been included in the ‘total turnover’ as the respondent-assessee was also selling scrap and that was also part of the sale proceeds.

The assessee had objected to the aforestated suggestion of the Revenue because inclusion of the sale proceeds of scrap into the total turnover would reduce the amount deductible under the provisions of section 80HHC of the Act.

By virtue of the judgment delivered by the High Court, the accounting method followed by the respondent assessee had been approved and therefore, Revenue filed an appeal before the Supreme Court.

The Supreme Court observed that to ascertain whether the turnover would also include sale proceeds from scrap, one has to know the meaning of the term ‘turnover’. The term ‘turnover’ has neither been defined in the Act nor has been explained by any of the CBDT circulars.

The Supreme Court held that in the aforestated circumstances, one has to look at the meaning of the term ‘turnover’ in ordinary accounting or commercial parlance.

Normally, the term ‘turnover’ would show the sale effected by a business unit. It may happen that in the course of the business, in addition to the normal sales, the business unit may also sell some other things. For example, an assessee who is manufacturing and selling stainless steel utensils, in addition to steel utensils, the assessee might also sell some other things like an old air conditioner or old furniture or something which has outlived its utility. When such things are disposed of, the question would be whether the sale proceeds of such things would be included in the ‘turnover.’ Similarly, in the process of manufacturing utensils, there would be some scrap of stainless steel material, which cannot be used for manufacturing utensils. Such small pieces of stainless steel would be sold as scrap. Here also, the question is whether sale proceeds of such scrap can be included in the term ‘sales’ when it is to be reflected in the Profit and Loss Account.

In ordinary accounting parlance, as approved by all accountants and auditors, the term ‘sales,’ when reflected in the Profit and Loss Account, would indicate sale proceeds from sale of the articles or things in which the business unit is dealing. When some other things like old furniture or a capital asset, in which the business unit is not dealing are sold, the sale proceeds therefrom would not be included in ‘sales’ but it would be shown separately.

In simple words, the word “turnover” would mean only the amount of sale proceeds received in respect of the goods in which an assessee is dealing in. For example, if a manufacturer and seller of air-conditioners is asked to declare his ‘turnover,’ the answer given by him would show the sale proceeds of air-conditioners during a particular accounting year. He would not include the amount received, if any, from the sale of scrap of metal pieces or sale proceeds of old or useless things sold during that accounting year. This clearly denotes that ordinarily a businessman by word “turnover” would mean the sale proceeds of the goods (the things in which he is dealing) sold by him.

So far as the scrap is concerned, the sale proceeds from the scrap may either be shown separately in the Profit and Loss Account or may be deducted from the amount spent by the manufacturing unit on the raw material, which is steel in the case of the respondent assessee, as he is using stainless steel as raw material, from which utensils are manufactured. The raw material, which is not capable of being used for manufacturing utensils will have to be either sold as scrap or might have to be re-cycled in the form of sheets of stainless steel, if the manufacturing unit is also having its re-rolling plant. If it is not having such a plant, the manufacturer would dispose of the scrap of steel to someone who would re-cycle the said scrap into steel so that the said steel can be re-used.
When such scrap is sold, in according to the Supreme Court, the sale proceeds of the scrap could not be included in the term ‘turnover’ for the reason that the respondentunit is engaged primarily in the manufacturing and selling of steel utensils and not scrap of steel. Therefore, the proceeds of such scrap would not be included in ‘sales’ in the Profit and Loss Account of the respondent-assessee.

The situation would be different in the case of the buyer, who purchases scrap from the respondent-assessee and sells it to someone else. The sale proceeds for such a buyer would be treated as “turnover” for a simple reason that the buyer of the scrap is a person who is primarily dealing in scrap. In the case on hand, as the respondent-assessee was not primarily dealing in scrap but is a manufacturer of stainless steel utensils, only sale proceeds from sale of utensils would be treated as his “turnover.”

The Supreme Court referred to the “Guidance Note on Tax Audit U/s. 44AB of the Income Tax Act” published by The Institute of Chartered Accountants of India and observed that the meaning given by the ICAI clearly denotes that in normal accounting parlance the word “turnover” would mean “total sales.” The said sales would definitely not include the scrap material which is either to be deducted from the cost of raw material or is to be shown separately under a different head. The Supreme Court did not find any reason for not accepting the meaning of the term “turnover” given by a body of Accountants, which is having a statutory recognition.

For the aforesaid reasons, the Supreme Court dismissed the appeal.

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Fresh Claim outside Return of Income or in Appeal

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Synopsis
Admissibility of a claim (which is not made by filing of revised return) before assessing officer/appellate authority, have always been a vexed issue. There are various judicial pronouncements that support the contention that an additional claim can be raised before the appellate authorities, even if it has not been raised before the Assessing Officer nor claimed in the return of income. However, recently the Chennai Tribunal in the case of Chiranjeevi Wind Energy, has held that such claim cannot be entertained.

In this Article, the learned Authors have done a detailed analysis of this decision in view of various judicial pronouncements.

An assessee is required to file his return of income, u/s. 139(1), before the due date specified in Explanation 2 to that section. In case he discovers any omission or any wrong statement in such return of income, he can file a revised return before the expiry of one year from the end of the relevant assessment year, or before the completion of assessment, whichever is earlier, in accordance with the provisions of section 139(5).

Very often, the assessee discovers a mistake or omission in the return of income after the expiry of the time prescribed for revision of his return of income u/s. 139(5). This generally happens during the course of assessment proceedings u/s. 143(2), which normally take place only towards the end of the time limit for completion of assessment, which is two years from the end of the relevant assessment year. The issue arises whether in such cases the assessee can make a claim for a deduction, before the assessing officer or before the appellate authorities, which has not been claimed in the return of income, when he is not in a position to revise his return of income. The Income-tax Department is of the view that such a claim can be made only through a revised return of income filed in time. Relying on the decision of the Supreme Court in the case of Goetze (India) Ltd vs. CIT 284 ITR 323, the department contends that no such claim can be made outside the revised return of income. The case of the assessees has been that any rightful claim whenever made, should be allowed, if not by the assessing officer, at least by the Commissioner(Appeals) or the Income Tax Appellate Tribunal, a stand that is objected to by the Income-tax department on the ground that any claim not considered by the assessing officer cannot be considered by the Commissioner (Appeals) or the Income Tax Appellate Tribunal.

While the Mumbai bench and other benches of the tribunal has taken the view that the decision of the Supreme Court in Goetze India’s case does not apply to the claim made before the appellate authorities, who can consider any additional claim at their discretion, the Chennai bench of the tribunal has recently taken a contrary view holding that a claim not made before the assessing officer could not be considered by the Commissioner (Appeals).

Mahindra & Mahindra’s case
The issue came up before the Mumbai bench of the Income Tax Appellate Tribunal in the case of Mahindra & Mahindra Ltd vs. Addl. CIT 29 ITR (Trib) 95.

In this case, during the course of the assessment proceedings, the assessee filed a letter with the assessing officer pointing out that the sale proceeds of R & D assets had been added to taxable income u/s. 41(1) in the computation of income, but the sale proceeds had already been reduced from R & D expenses claimed for the year u/s. 35(2AB). Effectively, the same income had been offered to tax twice through oversight. It was therefore claimed by the assessee, during the course of the assessment proceedings, that the addition made to the taxable income u/s. 41(1), in computing the total income, be ignored.

The assessing officer rejected the assessee’s claim on the ground that such a claim was not arising out of the return of income and that such a claim could only be made by filing a revised return of income, in view of the decision of the Supreme Court in Goetze India’s case(supra). The action of the assessing officer was confirmed by the Commissioner (Appeals).

On appeal by the assessee, the Tribunal noted that the Bombay High Court, in the case of Pruthvi Brokers & Shareholders Pvt. Ltd. 349 ITR 336, had held that even if a claim was not made before the assessing officer, it could be made before the appellate authorities. The tribunal therefore held that an assessee was entitled to raise not merely additional legal submissions before the appellate authorities, but was also entitled to raise additional claims before them. According to the Tribunal, the appellate authorities had the discretion whether or not to permit such additional claims to be raised, but it could not be said that they had no jurisdiction to consider the same. They therefore had the jurisdiction to entertain a new claim, but that they may choose not to exercise their jurisdiction in a given case was another matter.

The Tribunal therefore held that the claim of the assessee, made before the assessing officer and also made before the appellate authorities, was to be allowed, subject to verification of the evidence filed by the assessee before the assessing officer.

Chiranjeevi Wind Energy’s case
The issue again came up before the Chennai bench of the Tribunal in the case of Chiranjeevi Wind Energy Ltd. vs. ACIT 29 ITR (Trib) 534.

In this case, the assessee had claimed deduction of Rs. 10,78,976 u/s. 80-IB before the assessing officer which deduction was allowed by the assessing officer. The assessee however raised an issue of additional/ higher deduction of Rs. 50,61,142 u/s. 80-IB before the Commissioner(Appeals), on the ground that the action by the assessing officer, in disallowing certain other claims, has resulted in assessment of the total income at a higher figure and as a consequence thereof the assessee was qualified to claim a higher deduction u/s. 80IB. The Commissioner(Appeals) did not entertain such a claim presumably, on the ground that such a claim was permissible only by filing a revised return of income by relying on the decision of the Supreme court in the Goetze (India)’s case (supra).

On further appeal by the assessee, it was contended by the assessee that it was entitled to a higher deduction on account of the additions to the qualifying income returned by it. The Tribunal noted that the claim made by the assessee of Rs. 10,78,976, was allowed by the assessing officer. Higher deduction claim was never made before the assessing officer and was made before the Commissioner(Appeals) for the first time. It therefore rejected the assessee’s claim for allowance of higher deduction u/s. 80-IB.

Observations
It is a matter of serious concern that the Chennai bench of the Tribunal, in a somewhat brief decision, brushed off the claim of the assessee without considering the developed case law on the subject, in favour of the entertainment of the claim. No specific reason has been given by the tribunal but for stating that the claim was not made before the assessing officer, not realising that the need for the claim arose for the first time on account of the higher assessment by the assessing officer. It was the ground that became available to the assessee on account of the change in circumstances and the same did not exist at the time of filing the return of income.

The Bombay High Court, in the case of Pruthvi Brokers & Shareholders (supra) has discussed the issue in great detail. It observed as under:

“A long line of authorities establish clearly that an assessee is entitled to raise additional grounds not merely in terms of legal submissions, but also additional claims not made in the return filed by it.

From a consideration of decision of the Supreme Court in the case of Jute Corpn. of India Ltd. vs. CIT 187 ITR 688, it is clear that an assessee is entitled to raise not merely additional legal submissions before the appellate authorities, but is also entitled to raise additional claims before them. The appellate authorities have the discretion whether or not to permit such additional claims to be raised. It cannot however be said that they have no jurisdiction to consider the same. They have the jurisdiction to entertain the new claim. That they may choose not to exercise their jurisdiction in a given case is another matter.”

The high court in that case further held that the decision in the Jute Corporation’s case (supra)  did  not curtail  the ambit of the jurisdiction of the appellate authorities stipulated earlier. it did not restrict the new/additional grounds that might be taken by the assessee before the appellate authority only to those that were not available when the return was filed or even when the assessment order  was  made.  The  appellate  authorities  therefore have jurisdiction to deal not merely with additional grounds which became available on account of change of circumstances or law, but with additional grounds which were available even when the return was filed. Similarly, in National Thermal Power Corpn. Ltd. vs. CIT 229 ITR 383, the  supreme  Court  held  that  the  power  of  the tribunal is expressed in the widest possible terms. It noted that the purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. As observed by the supreme Court, if, for example, as a result of a judicial decision given while the appeal is pending before the tribunal,  it  is  found  that  a  non-taxable  item  is  taxed  or a permissible deduction is denied, the assessee is not prevented from raising that question before the tribunal for the first time, so long as the relevant facts are on record in respect of that item. It therefore held that the tribunal is not prevented from considering questions of law arising in assessment proceedings although not raised earlier.

The Bombay high Court, in another judgment in the case of Balmukund Acharya vs. Dy CIT ITA No.217 of 2001 dated 19-12-2008 (reported on www.itatonline.org), has taken the view that even in the case of an intimation u/s.143(1), where the assessee had erroneously offered certain capital gains to tax in the return of income and the returned income was accepted, in appeal, the assessee was entitled to claim that the income which was wrongly offered to tax cannot be taxed.

Importantly, the Supreme Court, in Goetze India’s case (supra), has made it clear that the issue in that case was limited to the power of the assessing authority, and did not  impinge  on  the  power  of  the  income  tax appellate tribunal u/s. 254.

Therefore,   given   the   wide   powers   of   the   appellate authorities, an additional claim can be raised before the appellate authorities, even if it has not been raised before the assessing officer nor claimed in the return of income.

It is interesting to note that the CBdt, as far back as in 1955, vide its Circular no. 14-XL(35) dated 11-04-1955, have stated that:

“Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due    to him. This attitude would, in the long run, benefit the department for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessee on whom it is imposed by law, officers should —

(a)        Draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;
(b)    Freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.”

The law developed, post Goetze (india)’s case, has made it abundantly clear that:

a)    an assessee is entitled to make a fresh claim for deduction or relief before the appellate authorities, during the course of the appellate proceedings, irrespective of the claim not being made by revising the return of income or before the assessing officer during the course of the assessment proceedings. The decision in Goetze (India)’s case has not prohibited such a claim before the appellate authorities.
b)    an assessing officer when confronted with the valid claim, though not made in the return of income or the revised return of income, is required to consider the same on merits and not reject simply on the ground that the claim was made outside the return of income.

In CIT vs. Jai Parabolic Springs Ltd. 306 ITR 42 (Del), the  delhi high Court held that the tribunal had power to allow deduction for expenditure to assessee to which it was otherwise entitled to even though no claim was made by the assessee in the return of income. in this case, the decision of Supreme Court in Goetze (India) Ltd. was considered. Again, the Cochin tribunal in the case of Thomas Kurian 303 ITR (AT) 110 (Coch), held that the Cit(a) had the power to entertain a claim not made in the return of income. In   Lupin Agrochemicals Ltd. ITA No. 3178 (Mum), the case of Goetze (I) Ltd. was considered and it was held that said decision did not prevent an assessee to make legal claim in assessment proceedings and that such claim could be made even in appellant proceedings. In Abbey Chemicals 94 TTJ (Ahd) 275, it was held that the Cit(a) having allowed assessee’s claim for exemption u/s. 10B after considering the facts of the case as well as the case law, could not recall his order by taking recourse to section 154, as the error of judgement, if any, committed by the CIT (A), tcould not be qualified as a “mistake” within the meaning of section 154.

The position in respect of the eligibility of the assessee to place a fresh claim, before the assessing officer, is equally good. in Chicago Pneumatic Ind. Ltd. 15 SOT 252 (Mum), the mumbai tribunal  held  that  the  a.o.  was obliged to give relief to the assessee even where the same was not claimed by the assessee by way of    a revised return. In the above case, it was observed   that the government was entitled to collect only the tax legitimately due to it and therefore one had to look into the duties of the a.o. rather than his powers to avoid undue  hardship  to  the  assessees.  the  hon.  Tribunal also referred to the CBDT Circular No. 14 (XL-35) dt. 11.04.1955, which directed the officers as back in 1955 to draw attention of the assessees to refunds and reliefs to which they were entitled but had failed to claim for some reason  or  the  other.  The  case  also  referred  to  another Circular No. F-81/27/65-IT (B) dt. 18.05.1965 and stated that the above circulars were binding on the departmental authorities.  the  above  decision  was  considered  and followed  by  the  hon.  mumbai  tribunal  in  the  case  of Emerson Network Power Ind. 27 SOT 593 (Mum) wherein the Mumbai tribunal held that the assessing officer was obliged to consider the legitimate claim of the assessee made before him but not made in the return of income or by a revised return. In  Rajasthan Commercial House v/s. DCIT,  26 SOT 51 (Uro) (Jodh),  the jodhpur tribunal held that relief claimed by the assessee could be allowed by the a.o. when such claim was made by the assessee vide a rectification application u/s. 154. Also see Dodsal Pvt. Ltd. ITA No. 680/M/04 (Mum). Lastly, the Bombay high court in the case of Balmukund Acharya ITA No. 217 of 2001 (Bom) dated 19-12-2008 again confirmed the power and the duty of the assessing officer when it inter alia held that the authorities under the act were under  an obligation to act in accordance with law and that tax could be collected only as provided under the act and that if any assessee, under a mistake, misconception or on not being properly instructed was over assessed, the authorities under the act were required to assist him and ensure that only legitimate taxes due were collected.

Today, the state of affairs are such that, leave aside the tax payers being advised of reliefs due to them, any claim for such relief by them is denied by Assessing Officers, and when entertained by the appellate authorities, is strongly resisted in appeal, sometimes even by taking the matter to the high Court or supreme Court. What is perhaps required is a change in approach of the income- tax department, where only fair share of taxes is collected, and not maximum tax by any means.  This would perhaps require not just changes to law, but change in attitude of the tax authorities. No government should be happy by short changing its citizens and surely not when they are ignorant of their rights and reliefs.

Century Metal Recycling Pvt. Ltd. vs. DCIT ITAT Delhi `B’ Bench Before H. S. Sidhu (AM) and H. S. Sidhu (JM) ITA No. 3212/Del/2014 A.Y.: 2007-08. Decided on: 5th September, 2014. Counsel for revenue/assessee: Satpal Singh/ Sanjeev Kapoor

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Sections. 79, 271(1)(c) – Penalty u/s. 271(1)(c) is not leviable in a case where claim to carry forward capital loss was denied due to change in majority shareholding.

Facts:
For assessment year 2007-08 the Assessing Officer (AO) in an order passed u/s.143(3) of the Act assessed the returned income to be the total income. However, the claim of carry forward of loss of Rs. 23,09,722 was denied on the ground that there was a change in majority shareholding of the assessee and therefore by virtue of section 79 the said loss cannot be carried forward.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO. The assessee after receiving the order of CIT(A) did not carry forward the capital loss of Rs. 23,90,722 in its return of income for AY 2012-13. The AO levied a penalty of Rs. 8,05,000 u/s. 271(1)(c) of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the carry forward of long term capital loss of AY 2005-06 and 2006-07 had been duly accepted as correct as per returns filed and assessment orders passed by the AO in the relevant years. In the AY 2006-07 the AO specifically mentioned that carry forward of long term capital loss is allowed.

The Tribunal also noted that in the assessment order of AY 2007-08 there was no mention that the assessee had furnished any inaccurate particulars of income or had made any wrong claim of carry forward of long term capital loss. The disallowance of carry forward of long term capital loss was on technical ground and not on account of any concealment of any particulars of income. The Tribunal noted that section 271(1)(c) postulates imposition of penalty for furnishing of inaccurate particulars and concealment of income. It observed that the conduct of the assessee cannot be said to be contumacious so as to warrant levy of penalty. The Tribunal held that the levy of penalty was not justified. It set aside the orders of the authorities below and deleted the levy of penalty.

The appeal filed by the assessee was allowed.

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Shri G. N. Mohan Raju vs. ITO ITAT Bangalore `C’ Bench Before P. Madhavi Devi (JM) and Abraham P. George (AM) ITA No. 242 & 243/Bang/2013 Assessment Years: 2006-07 and 2007-08. Decided on: 10th October, 2014. Counsel for assessee/revenue: Padamchand Khincha/ Dr. Shankar Prasad

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Sections. 143(2), 147 – AO cannot suo moto treat the return of income filed before issue of notice u/s. 148 to be a return filed in response to the said notice. Notice u/s. 143(2) issued before the assessee has filed a return in response to notice u/s. 148 cannot be treated as a valid notice.

Facts:
For the assessment year 2006-07 the assessee filed his return of income u/s 139 on 10.7.2007. In the computation filed along with the said return the assessee stated that it has received Rs. 97,80,000 which has been treated as capital receipt. The said return of income was processed u/s. 143(1) of the Act.

On 24.12.2009, a notice u/s. 148 of the Act was issued for reopening the assessment. In response to the said notice the assessee did not file any return of income. On 23.9.2010, a notice u/s. 143(2) dated 17.9.2010 was dispatched by registered post. On 5.10.2010, an authorised representative of the assessee appeared before the AO and stated that the return of income originally filed could be treated as return filed pursuant to the notice u/s. 148 of the Act. On 5.10.2010, the AO issued a notice u/s. 142(1) of the Act but there was no notice u/s 143(2) of the Act.

The AO completed the assessment u/s 143(3) r.w.s. 147 of the Act.

Aggrieved by the action of the AO in framing an assessment u/s. 143(3) r.w.s. 147 without issue of a notice u/s. 143(2) of the Act, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to Tribunal.

Held:
The Tribunal noted that in the case before it a notice u/s. 143(2) of the Act had been issued to the assessee, but on the date when such notice was issued viz. 23.9.2010, assessee had not filed any return pursuant to the reopening notice u/s. 148 of the Act. It, further, noted that the first instance when the assessee requested the AO to treat the returns originally filed by it as returns filed pursuant to the notices u/s. 148 of the Act, was on 5.10.2010 which was clear from the narration in the order sheet. It observed that the crux of the issue is whether notices u/s.143(2) is mandatory in a reopened procedure and whether notices issued prior to the reopening would satisfy the requirement specified u/s. 143(2) of the Act.

The Tribunal noted that in the case of M/s. Amit Software Technologies Pvt. Ltd. (ITA No. 540(B)/2012 dated 7.2.2014), the co-ordinate Bench has after considering the decision of the Madras High Court in the case of Areva T and D India Ltd. and also the decision of the Delhi High Court in the case of M/s. Alpine Electronics Asia PTE Ltd. (341 ITR 247)(Del), held that section 143(2) of the Act was a mandatory requirement and not a procedural one.

If the income has been understated or the income has escaped assessment, an AO is having the power to issue notice u/s. 148 of the Act. Notice u/s. 148 of the Act issued to the assessee required it to file a return within 30 days from the date of service of such notice. There is no provision in the Act, which would allow an AO to treat the return which was already subject to a processing u/s. 143(1) of the Act, as a return filed pursuant to a notice subsequently issued u/s. 148 of the Act. However, once an assessee itself declares before the AO that the earlier return could be treated as filed pursuant to a notice u/s. 148 of the Act, three results can follow. AO can either say no, this will not be accepted, you have to file a fresh return or he can say that 30 days time period being over I will not take cognisance of your request or he has to accept the request of the assessee and treat the earlier returns as one filed pursuant to the notice u/s. 148 of the Act. In the former two scenarios, AO has to follow the procedure set out for a best judgment assessment and cannot make an assessment u/s. 143(3). On the other hand, if the AO chose to accept assessee’s request, he can indeed make an assessment u/s. 143(3). In the case before us, assessments were completed u/s 143(3) r.w.s. 147. Or in other words AO accepted the request of the assessee. This in turn makes it obligatory to issue notice u/s. 143(2) after the request by the assessee to treat his earlier return as filed in pursuance to notices u/s. 148 of the Act was received. This request, in the given case, has been made only on 5.10.2010. Any issue of notice prior to that date cannot be treated as a notice on a return filed by the assessee pursuant to a notice u/s. 148 of the Act. In other words, there was no valid issue of notice u/s. 143(2) of the Act, and the assessments were done without following the mandatory requirement u/s. 143(2) of the Act. This, it held, renders the subsequent proceedings invalid. The Tribunal, quashed the assessment done for the impugned years.

The appeals filed by the assessee were allowed.

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2014-TIOL-723-ITAT-DEL Rajasthan Petro Synthetics Ltd. vs. ACIT ITA No. 1397 /Del/2013 Assessment Year: 2008-09. Date of Order: 22.8.2014

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Sections 2(47), 45, 50 – Taking over of the possession of the capital asset by the secured lendor does not amount to transfer of asset and short term capital gain on such transfer cannot be charged. A restraint on dealing with the assets in any manner resulting in from issuance of notice for recovery is merely a prohibition against private alienation and does not pass any title to the authority which held a lien or charge on the aforesaid class of assets.

Facts:
The assessee company was engaged in the business of manufacture and trade of synthetic yarn and freight forwarding. The assessee filed its return of income declaring a Nil income. The assessee submitted that it had borrowed loans from various financial institutions to purchase capital assets prior to 1999. When it ran into losses and upon its net worth being fully eroded, it became sick as per provisions of Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). In the meanwhile, the assessee was served a notice u/s. 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) from Stressed Assets Stabilization Fund (SASF) (a financial institution which had taken over the loans advanced by IDBI Bank Ltd) who was authorised to act on behalf of self and all the secured lenders of the assessee. The SASF took over physical possession of the secured movable and immovable assets of the assessee u/s. 13(4) of SARFAESI on 28.9.2007.

The assets of the assessee were sold by SASF sometime in March, 2008 for a sale price of Rs. 10 crore. The principal amount of loans outstanding to the secured lenders amounted to Rs. 97.42 crore, of which Rs. 24.46 crore was due on account of unpaid principal amount of borrowings utilised for working capital. It was stand of the assessee that the amount of Rs. 24.46 crore being the unpaid amount of working capital borrowings can form part of its taxable income and Rs. 72.96 crore (Rs 97.42 crore minus Rs. 24.46 crore) on account of unpaid principal amount of borrowings utilised for creation of depreciable fixed assets cannot form part of taxable income.

The Assessing Officer (AO) added a sum of Rs. 61,73,27,400 to the total income of the assessee as short term capital gain on the ground that the assets of the assessee have been sold for a certain consideration and in return the assessee has received as benefit waiver of entire loan of Rs. 97.42 crore outstanding in its books. Since the WDV of the assets as per books was Rs 11.23 crore the AO charged Rs 61.73 crore as short term capital gains.

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

Held:
The AO erred in applying the provisions of section 2(47) of the Act in considering that the secured lendor acquires title to the secured assets of the assessee company on taking over of possession of assets of the assessee by overlooking the fact that what the secured lenders acquired on taking over of the possession of the secured assets were merely a special right to execute or implement the recovery of its dues from dealing with those assets of the assessee company. Had the assessee company tendered the amounts payable to the secured lenders before the date of sale of such assets without any further act, deed or thing being required to be carried out or completed towards title of the assets, the assessee company could have regained or taken possession of the secured assets from the secured lenders.

The ownership rights in the assets did not at any stage stand transferred to the secured lenders by taking over the possession of the secured assets. Thus, the sale consideration received by the secured lender actually belonged to the borrower which by operation of law remained retained by the secured lenders to recover their costs, dues, etc. Further, if the consideration to the assessee is to be considered as the sale amount received by the lending banks, then, the loans waived by such banks (availed by the assessee for the purchase of capital assets such as land, building, plant and machinery, etc) was nothing but a capital receipt not liable for tax since neither the provisions of section 28(iv) nor section 41(1) of the Act are attracted.

This ground of appeal of the assessee was allowed.

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2014-TIOL-757-ITAT-MUM ITO vs. Dr. Jaideep Kumar Sharma ITA No. 3892/Del/2010 and 5784/Mum/2011 Assessment Years: 2007-08 and 2008-09. Dateof Order: 25.7.2014

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Section 40(a)(ia) – Second proviso to section 40(a)(ia), inserted w.e.f. 1.4.2013, is curative in nature and hence has retrospective effect.

Facts:
In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee was getting professional and technical services from SRL Ranbaxy and had paid Rs. 64,55,563 for the same. He held that tax on this sum was deductible u/s.194J of the Act. He also noticed that a sum of Rs. 88,689 was paid by the assessee for getting MRI envelopes, visiting cards, forms, etc printed for exclusive use of the assessee. This amount, according to the AO, was liable for deduction of tax at source u/s 194C of the Act. Since the assessee had not deducted tax at source on these amounts, he disallowed both these amounts u/s. 40(a)(ia).

Aggrieved, the assessee preferred an appeal to the CIT(A) who deleted the addition of Rs. 64,55,563 by holding that assessee was an agent of M/s. SRL Ranbaxy Ltd. and hence was not liable for deduction u/s. 194J. He also deleted the addition of Rs. 88,689 by considering the said transaction to be purchase of goods and not a case of job work liable for TDS u/s. 194C.

Aggrieved, the revenue preferred an appeal to the Tribunal. Before the Tribunal, the assessee filed necessary confirmation from the payee that they have paid the taxes on the amounts received from the assessee and contended that the second proviso to section 40(a)(ia) is clarificatory and therefore operates retrospectively.

Held:
The Tribunal noted the second proviso, inserted by Finance Act, 2012 w.e.f. 1.4.2013, and held that even though the said proviso has been inserted w.e.f. 1.4.2013, the Agra Bench of the Tribunal has in the case of Rajiv Kumar Aggarwal (ITA No. 337/Agra/2013 order dated 29.5.2013) following the jurisdictional High Court in the case of CITR vs. Rajinder Kumar (362 ITR 241)(Del) held that the second proviso is declaratory and curative in nature and has retrospective effect from 1.4.2005.

Following the above mentioned decision of the Agra Bench, the Tribunal directed the AO to verify whether the payee has filed his return of income and paid taxes within the stipulated time. If it has done so, no disallowance u/s. .40(a)(ia) in respect of the above payments be made.

The Tribunal set aside the two cases to the file of the AO for the limited purpose of examination whether the payee has filed its return of income and paid taxes on the same within the stipulated time.

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2014] 150 ITD 34 (Mumbai) Agrani Telecom Ltd. vs. Asst. CIT A.Y. 2006-07 Order dated – 13th Sept 2013

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Section 37(1): If there is continuity of business with common management and fund, then even if the assessee starts a new line of business in a particular year, the payment made for carrying out running of such new business, is a business expenditure which has to be allowed in the year in which it has been incurred.

If the expenditure incurred by the assessee, to do business for earning some profit, does not impact its fixed capital, then such expenditure has to be reckoned on revenue account, even though the advantage from the expenditure so incurred, may endure in future.

Facts:
The assessee company was mainly engaged in the business of trading in telecom and security equipment and providing transportation service.

During the year under consideration, it had entered into the business of Fleet Management services and providing security products and networking solutions.

The assessee had paid consultancy charges to a consultant, who had provided various kinds of advisory services and had also contributed in identifying prospective customers, for rendering of the aforesaid services.

The Assessing Officer disallowed consultancy charges by treating the same as capital expenditure

On appeal before CIT(A), the assessee contended that the Assessing Officer had completely misunderstood the facts and that it had incurred the said consultancy charges only after setting up of the new business and for developing the existing new business, which was in the service industry.

On scrutinising the books of accounts of the assessee, CIT(A) noted that the income offered from new business services were meagre as compared to the income offered from existing business of trading and transportation service. He thus held that such consulting charges can neither be capitalised nor allowed as revenue expenditure. It was clear cut case of capital expenditure not allowable u/s. 37(1).
On appeal before the Tribunal.

Held:
For deciding the issue whether the expenditure is capital or revenue in nature, the concept of enduring benefit is quite a paramount factor but such test of enduring benefit cannot be held to be conclusive. There may be a case where expenditures have been incurred for obtaining advantage of enduring benefit but nonetheless they may be on revenue account. What has to be seen is the nature of advantage in a commercial sense, that is, whether it is in the capital field or for the running of the business. If the advantage is necessitating the business operations for enabling the assessee to do business for earning some profit without having impact on fixed capital, then such expenditure has to be reckoned on revenue account, even though the advantage may endure in future.

In the present case, there is no augmentation of asset to the assessee but the expenditure has helped the assessee to develop a proper guidance for running the new line of service industries. Thus, in our opinion, the payment for consultancy charges is on account of revenue field only and has to be allowed as revenue expenditure u/s. 37(1) as it is wholly and exclusively for the purpose of business.

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[2014] 150 ITD 48 (Bangalore) Smt. T. Gayathri vs. CIT(A) A.Y. 2009-10 Order dated – 8th Aug 2013

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Section 2(47), read with section 45- Amount received by assessee pursuant to a Court decree in lieu of her share in self acquired property of father who died intestate, cannot be said to result in ‘transfer’ as the provisions of section 2(47)(i) or (ii) of the Income-tax Act are not attracted.

Facts:
‘B’ died intestate leaving behind 4 sons and 6 daughters including the assessee, who filed a suit for partition of self acquired property of their father. The suit was ultimately compromised between the parties duly recognised by Court, according to which each daughter was to receive their 1/10th share in property coming to Rs. 87.5 lakh (for each daughter) from their brothers in cash.

The assessee’s brothers subsequently entered into a joint development agreement of the property, in terms of which, the developer directly paid Rs. 87.5 lakh each to the daughters of ‘B’ including assessee therein. On receiving the amount, the daughters of ‘B’ executed a release deed of disputed property in favour of their brothers.

During the relevant assessment year, the assessee did not offer this Rs. 87.5 lakh to tax under the head ‘Capital Gain’. The assessee took a stand that the amount was received as a result of a family arrangement, and therefore there was no transfer of asset to attract the provisions of section 45.

The assessing officer was of the view that the daughters of ‘B’, including the assessee, have sold the property to the developer and therefore, it was a case of transfer within the meaning of section 2(47), giving rise to long term capital gain, and hence he made certain additions to asseessee’s income under the head ‘capital gain’.

The Commissioner (Appeals) confirmed the order of Assessing Officer.

On second appeal.

Held:
The 4 daughters of late ‘B’ filed suit claiming 1/10th share each over the properties left behind by ‘B’. The claim was on the basis that as class-I legal heirs under the Hindu Succession Act, 1956, they are entitled to 1/10th share each over the properties of late ‘B’ who died intestate and in respect of the properties which were his self-acquired properties. The 4 sons claimed that the properties were joint family properties comprising of the 4 sons and late ‘B’. The trial court found the plea to be not acceptable and the plea of the daughters for 1/10th share each over the properties of the deceased was decreed.

The compromise recorded before the High Court recognises/ accepts the decree of the trial court and a decree in terms of the compromise was passed. The plaintiffs (4 daughters) and the 2 other daughters of the deceased gave up their right to mesne profits and took their share of the property in kind and not by way of division by metes and bounds. The compromise decree does not have any ingredients of a family arrangement and hence the money received by the assessee is not pursuant to a family arrangement.

Now, it is to be examined as to whether the money received pursuant to a court decree in lieu of a share in the properties, can be said to result in a transfer attracting the provisions of section 2 (47) (i) or (ii) of the Act, though the other clauses of 2(47) of the Act are admittedly not applicable to the present case.

One of the reasons given by the learned CIT(A) is that u/s. 47(i) of the Act, it is only distribution of capital assets on the total or partial partition of a Hindu undivided family is not regarded as transfer and therefore in the present case which was not a case of partition of an HUF, there is a transfer u/s. 2(47) of the Act.

However, the view expressed by the CIT(A) is not acceptable. The provisions are intended to clarify that when a partition is made, no gains are made by the HUF and therefore levy of tax on capital gain, which can only be on the transferor, does not arise at all. Even in the absence of such a provision the revenue cannot seek to levy tax on capital gain because tax on capital gain can be imposed only on transferor and the HUF on a partition receives nothing. Therefore it cannot be said that provisions of section 47(i) of the Act by implication can justify levy of tax on capital gain wherever there is a partition between co-owners of properties which does not involve a HUF.

Partition is any division of real property or Personal Property between co-owners, resulting in individual ownership of the interests of each. In the present case, on death of Mr. B and his wife, their 10 children, 4 sons and 6 daughters became entitled to 1/10th share each over the property by way of intestate succession. A partition of the share of each of the 1/10th co-owner was effected through Court. Since a physical division by metes and bounds of each of the 1/10th share was not possible, the 4 sons took the property and the 6 daughters took money equivalent of their 1/10th share each over the property.

The sum received by the assessee is thus traceable to the realisation of her rights as legal heir on intestate succession and not to any sale, relinquishment or extinguishment of right to property. This is clear from the terms of the memorandum of compromise dated 11.1.2008 entered into between all the legal heirs of late Mr. B, which ultimately was recognised by the Court and a decree in terms of the compromise recorded and passed.

As per clause-2 of the compromise the property was valued at Rs. 8.75 crore. The sons agreed to take the property and further agreed that they would deposit Rs. 5.25 crore being the value of 6/10th share of the property. As per clause 4 of the memorandum of compromise the 6 daughters agreed that they would receive Rs. 87.50 lakh each towards their 1/10th share each over the property. Under clause-5 of the memorandum of compromise the daughters agreed to execute a release deed after the receipt of Rs. 87.50 lakh each by them. It is thus clear that the release deed which was later executed by the 6 daughters in favour of the 4 sons on 23.7.2008 was only to confer better title over the property and that document did not create, extinguish or modify the rights over the property either of the sons or the daughters.

Ultimately, the sum of Rs. 87.50 lakh was paid only through the Court and not at the time of registration of the deed of release. It is also significant to note that the document of release is between the 6 daughters and the 4 sons and the developer is not a party to the document. The developer is also not a party to the suit for partition. Therefore the conclusions of the revenue authorities that there was a conveyance of the share of the daughters in favour of the developer based on statement of the sons and the developer is contrary to the written and registered document and cannot be sustained.

The issue can be looked at from another angle as well. Suppose the deceased had left behind him deposits in a Bank Account and the bank pays l/10th each of such deposits to the legal heirs, would the receipt be chargeable to tax as income in the hands of the legal heirs. The answer is obviously in the negative. Suppose money is received in lieu of a share over immovable property of the deceased, as in the present case, it cannot be brought to tax, as it is not in the nature of income. In such an event it is not possible to compute the capital gain as there would be no cost of acquisition. The provisions of section 55(2) (b) & section 55(3) of the Act which provides for determining cost of acquisition in different situations cannot also be applied because, those provisions are applicable only for the purpose of section 48 and 49 of the Act. Section 48 and 49 of the Act would apply only when section 45 of the Act applies i.e., there is a transfer of a capital asset giving raise to capital gain. The AO was therefore not right in computing the capital gain in the manner in which he did so.

For the aforesaid reasons, the money received
pursuant to a court decree in lieu
of a share in the properties, cannot be said to result in transfer as it does
not attract the provisions of section 2 (47) (i) or (ii) of the Income-tax Act and the revenue authorities were not justified in
bringing to tax amount in question as capital gain in the hands of the
assessee.

(2014) 108 DTR 255 (Pune) Malpani Estates vs. ACIT A.Ys.: 2008-09 to 2010-11 Dated: 30-01-2014

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Sections 80-IB(10) & 153A : Assessee is eligible for deduction u/s. 80-IB(10) in relation to undisclosed income offered in a statement u/s. 132(4) in course of search and subsequently declared in return filed in response to notice u/s. 153A(1)(a)

Facts:
The assessee is a partnership firm engaged in construction business. It was subject to a search action u/s. 132(1) on 6th October, 2009. In the course of search, the partner of the assessee-firm in a statement recorded u/s. 132(4), admitted certain undisclosed income in relation to a housing project undertaken by the firm. The additional income declared was on account of on-money received from the customers to whom flats were sold in the said project. The assessee duly reflected such additional income in the returns of income filed in response to notice issued u/s.153A(1)(a) for the captioned assessment years as the profits from its housing project, and since the said housing project was eligible for deduction u/s. 80-IB(10), it claimed deduction u/s. 80-IB(10) in relation to such additional income.

The Assessing Officer did not allow the claim of the assessee for deduction u/s. 80-IB(10). Firstly, according to the Assessing Officer enhancement of claim u/s. 80- IB(10), was not permissible in an assessment u/s. 153A. Secondly, the on-money received by the assessee on sale of flats was not taxable as ‘business income’ and hence assessee was not eligible for deduction u/s. 80-IB(10).

The Commissioner (Appeals) affirmed the action of the Assessing Officer in denying the deduction u/s. 80-IB(10). As per the Commissioner (Appeals), the claim of the assessee was not maintainable because (i) the undisclosed income declared by the assessee could not be assessed under the head ‘business income’ but under the head ‘income from other sources’; and, (ii) the benefits of Chapter VI-A, which include section 80-IB(10), are not applicable to assessments made u/s. 153A to S. 153C.

The learned Departmental Representative submitted that the assessment in cases of search action or requisition are made u/s. 153A or 153C of the Act in order to assess undeclared incomes and such provisions are for the benefit of the Revenue and therefore a claim u/s. 80IB(10) of the Act cannot be considered in such proceedings, especially when such a claim was not made in the return of income originally filed u/s. 139 of the Act.

Held:
It is not in dispute that the assessee has derived income from undertaking a housing project, which is eligible for section 80-IB(10) benefits. In the return of income originally filed u/s. 139(1), assessee had claimed deduction u/s. 80-IB(10) in relation to the profits derived from the said housing project and the same stands allowed even in the impugned assessment which has been made u/s. 153A(1)(b) as a consequence of a search action u/s. 132(1).

It cannot be denied that the additional income in question relates to the housing project undertaken by the assessee. The material seized in the course of search; the deposition made by the assessee’s partner during search u/s. 132(4); and, also the return of income filed in response to notice issued u/s. 153A(1)(a) after the search, clearly show that the source of impugned additional income is the housing project. The aforesaid material on record depicts that the impugned income is nothing but unaccounted money received by the assessee from customers on account of sale of flats of its housing project. Clearly, the source of the additional income is the sale of flats in the housing project. Therefore, once the source of income is established the assessability thereof has to follow. The nature of income, thus on facts, has to be treated as ‘business income’ albeit, the same was not accounted for in the account books. In this manner, the stand of the Assessing Officer or of the Commissioner (Appeals) that the said income is not liable to be taxed as ‘business income’ cannot be accepted.

In terms of clause (i) of the Explanation to section 153A(2), it is evident that all the provisions of the Act shall apply to an assessment made u/s. 153A save as otherwise provided in the said section, or in section 153B or S. 153C.

Section 153A(1)(b) requires the Assessing Officer to assess or reassess the ‘total income’ of the assessment years specified therein. Ostensibly, section 80A(1) prescribes that in computing the ‘total income’ of an assessee, there shall be allowed from his ‘total income’ the deductions specified in Chapter VI-A. The moot point is as to whether the aforestated position prevails in an assessment made u/s. 153A(1)(b) or not?

Having regard to the expression ‘all other provisions of this Act shall apply to the assessment made under this section’ in Explanation (i) of section 153A, it clearly implies that in assessing or reassessing the ‘total income’ for the assessment years specified in section153A(1)(b), the import of section 80A(1) comes into play, and there shall be allowed the deductions specified in Chapter VI-A, of course subject to fulfillment of the respective conditions.

The other argument of the Ld. CIT-DR to the effect that the return of income was not accompanied by the prescribed audit report on the enhanced claim of deduction is too hyper-technical, and superficial. Pertinently, the Assessing Officer has not altogether denied the claim of deduction and in any case, the claim was initially made in the return originally filed, which was duly accompanied by the prescribed audit report.

The learned Departmental Representative supported the disallowance of claim on the basis of the judgment of the Hon’ble Supreme Court in the case of Sun Engineering Works (P.) Ltd. In the case before the Hon’ble Supreme Court, assessee wanted to set-off loss against the escaped income which was taxed in the re-assessment proceedings and the claim of such set-off was not made in the return of income originally filed. According to the Hon’ble Supreme Court, the claim was not entertainable because the said claim not connected with the assessment of escaped income. The judgment of the Hon’ble Supreme Court in the case of Sun Engg. Works (P.) Ltd. (supra) only precludes such new claims by the assessee which are unconnected with the assessment of escaped income. In the present case, the claim of deduction u/s. 80IB(10) of the Act was made in the return of income originally filed and in the return filed in pursuance to the notice u/s. 153A(1)(a) of the Act, the claim u/s. 80IB(10) of the Act is only enhanced and therefore, it is not a fresh claim. Therefore, the assessee’s claim for deduction u/s. 80- IB(10) even with regard to the enhanced income was well within the scope and ambit of an assessment u/s. 153A(1) (b) and the Assessing Officer was obligated to consider the same as per law.

Further, the claim for deduction u/s. 80-IB(10) with regard to the additional income declared for A.Y. 2010-11 stands on an even stronger footing than in the other assessment years because in A.Y. 2010-11 there was no return of income originally filed but only a single return has been filed as per the provisions of section 139, though after the search action.

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(2014) 107 DTR 357 (Mum) Ramesh Gunshi Dedhia vs. ITO A.Y.: 2008-09 Order dated: 14-03-2014

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Section 80-IB(10): Notification No. 1/2011 dated 5-1-2011 restricting eligibility of section 80- IB(10) deduction to projects approved under Slum Rehabilitation scheme on or after 1-4- 2004 and before 31-3-2008 is inconsistent/ contrary to proviso to clauses (a) and (b) of section 80-IB(10)

Facts: The assessee had claimed deduction u/s. 80IB(10) in respect of profit from development of three housing projects under the Slum Rehabilitation Scheme (SRS) of the Government of Maharashtra. The details of three projects under SRS projects are as under:—

The Assessing Officer denied the claim of the assessee on the ground that the conditions prescribed under clause (b) of section 80-IB(10) regarding minimum area of 1 acre of the plot had not been satisfied by the assessee. The assessee claimed that all the three plots of land should be considered as one project for the purpose of deduction u/s. 80-IB(10). The Assessing Officer did not accept the contention of the assessee and disallowed the claim of the assessee.

On appeal, apart from merging all the plots, the assessee had also contended that the slum rehabilitation scheme had been notified by the Board vide notification dated 05- 01-2011 and, therefore, the condition of minimum area of 1 acre of land was not applicable in the case of the assessee.

The CIT(A) noted that under the notification dated 5.1.2011 the slum redevelopment scheme of the Government of Maharashtra has been notified subject to the condition that the projects approved before 01-04-2004 do not fall under the scheme notified by the CBDT and since assessee’s project was approved before 01-04-2004, he confirmed disallowance.

Held: For the assessment years 2003-04 to 2005-06, the Tribunal had considered and held that assessee had not fulfilled the conditions laid down u/s. 80-IB(10) because assessee carried out development on three different plots; each of those plots was less than one acre. These plots were not contiguous to each other. Though these plots were located at Dharavi, Mumbai, they were at different places. In other words, there were other slums in between these three slum areas which were rehabilitated by the assessee.

For the assessment year 2006-07, the Tribunal by following the earlier order of this Tribunal has decided this issue.

The issue of merger of three plots for the purpose of area of plot being 1 acre had been decided against the assessee consistently by this Tribunal. Following the earlier years order of this Tribunal, there was no error or illegality in the impugned order of Commissioner (A).

As regards the benefit of proviso to section 80-IB(10), the conditions enumerated in clauses (a) & (b) are relaxed if the housing project is carried out in accordance with the scheme framed by the Central or State Government for reconstruction/redevelopment of slum area declared therein. However, such schemes are required to be notified by the Board in this behalf. It is pertinent to note that in the earlier years when this matter came before the Tribunal this scheme was not notified by the Board and only on 5-1-2011, the Board has notified the scheme.

As per this Notification, the Board has stated that this notification shall be deemed to apply to the projects approved by the local authority under the SRS scheme on or after 1-4-2004 and before 31-3-2008. It was further clarified that the income arising from such projects was eligible for deduction u/s. 80-IB(10) from the assessment year 2005- 06 onwards. The question arises whether while notifying the scheme the Board can attach any condition for the eligibility of the project to avail the benefit of proviso to section 80-IB(10)(a) and (b).

The deduction u/s. 80-IB(10) is available to the housing project which fulfils the conditions stipulated thereunder. One of the conditions is that the project is on the size of plot of land which has a minimum area of 1 acre under clause (b) of section 80-IB(10). An exclusion has been carved out under the proviso to clauses (a) and (b) of section 80-IB(10) whereby the condition stipulated under clauses (a) and (b) shall not apply to the housing project carried out in accordance with the scheme framed by the Central Government or State Government for reconstruction or redevelopment of area declared as slum area under the law. The projects of the assessee are under the slum rehabilitation scheme framed by the State Government which has been notified by the board vide notification dated 5-1-2011. The plain reading of the proviso inserted by the Finance Act, 2004 to clauses (a) and (b) of sub-section (10) of section 80-IB clearly manifests the requirement of notification of the scheme so framed either by the Central Government or by the State Government. Also, it is relevant to see the intent of the Legislature while amending the provisions of section 80-IB(10), to relax the condition for such project under the slum rehabilitation scheme. The memorandum explaining the provisions in the Finance Bill, 2004 states that with a view to increase the redevelopment of slum dwellers, it has proposed to relax the condition of minimum plot size of 1 acre in case of housing project carried out in accordance with the scheme framed by the Central Government or State Government for reconstruction or redevelopment of existing building and notified by the board in this behalf. Thus, the intent of legislature is to exempt the condition of minimum of 1 acre plot size in the case where the housing project is carried out in accordance with the slum reconstruction scheme framed by the Central Government or State Government and such scheme is notified by the Board. Therefore, to avail the benefit of the proviso to clauses (a) and (b) of section 80-IB(10), the following requirements are to be satisfied, viz., (i) the housing project is carried out in accordance with the scheme of reconstruction or redevelopment of slum area (ii) such scheme is framed by the Central Government or State Government (iii) such scheme is notified by the Board in this behalf.

There is no dispute that the projects in question are carried out in accordance with the scheme for redevelopment of the slum area as framed by the State Government of Maharashtra and the same has been notified by the Board vide notification dated 5-1-2011. The second part of this notification contemplates a new condition which is not provided even under clause (a) of section 80- IB(10). The condition inserted in the notification says that the notification shall be deemed to apply to the projects approved by the local authority on or after 1-4-2004 and before 31-3-2008. This condition contemplated under the notification is repugnant to the conditions provided u/s. 80-IB(10). The proviso in question has been inserted to relax the condition provided under clauses (a) & (b) of section 80-IB(10) and not for adding any new condition which is otherwise not required for housing projects for availing the benefit of deduction u/s. 80-IB(10). Even otherwise the condition as stipulated in clause (a) of section 80-IB(10) with respect to sanction of the project is only for the time period of completion of the project and there is no such condition that if a project is approved prior to 1-4-2004, it is not entitled for the benefit u/s. 80-IB(10). Once the scheme is notified all projects carried out in accordance with such scheme are entitled for the benefit of the proviso whereby the conditions prescribed under clauses (a) and (b) are relaxed. Thus the second part of the notification dated 5-1-2011 is inconsistent/contrary to the proviso of clauses (a) and (b) of section 80-IB(10) as well as to the intent of the Legislature inserting the said proviso. The Board cannot insert a new condition in the provisions of a statute which is repugnant to the provisions itself as well as
against the very object and scheme of the said provision of the statute.
Accordingly the assessee was entitled for benefit of the proviso to clauses and (b) of
section 80-IB(10) and, therefore, was eligible for deduction u/s. 80-IB(10) if
the other conditions as prescribed under clauses (c) to (e) are satisfied.

Income – Deemed dividend – Section 2(22)(e) – Loan to shareholder – Assessee shareholder let out premises to company – Company incurred substantial expenditure on repair and renovation of premises – Not a case of advance or loan – No deemed dividend in the hands of the shareholder:

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CIT vs. Vir Vikram Vaid; 367 ITR 365 (Bom):

The assessee holding 76.26% of the shareholding of a company had let out a premises owned by him to the company. The company incurred expenses of Rs. 2.51 crore towards construction and improvement of the premises which it continued to use. The Assessing Officer held that the amount of Rs. 2.51 crore was paid on behalf of the assessee. He therefore treated the sum of Rs. 2.51 crore as deemed dividend u/s. 2(22)(e) of the Income-tax Act, 1961 and made the addition. The Tribunal deleted the addition and held that it is not deemed dividend.

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

“i) No money had been paid to the assessee by way of advance or loan nor was any payment made for his individual benefit. The fact that the company had spent money had not been called into question. Thus, it was deemed that the company did spend Rs. 2.51 crore towards repairs and renovation on the premises owned by the assessee. There was no dispute about the fact that the company had taken the premises on rent.

ii) Thus, it was a case where the asset of the assessee may have enhanced in value by virtue of repairs and renovation but this could not be brought within definition of the advance or loan to the assessee. Nor could it be treated as payment by the company on behalf of the assessee shareholder or for the individual benefit of such shareholder.”

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Income: Deemed dividend – Section 2(22)(e) – A. Y. 2008-09: Assessee having current account with company and earning interest income by advancing funds to company – Credit balance only for a period of 55 days – No tax evasion – Section 22(e) not applicable:

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CIT vs. Suraj Dev Dada; 367 ITR 78 (P&H):

The
assessee was having a current account with a company DM and was earning
interest income by advancing money to the company as per its need. The
assessee was a shareholder of the company. The assessee’s account with
the company showed credit balance for a period of 55 days. In view of
the said credit balance, the Assessing Officer made an addition of Rs.
2,75,00,000/- u/s. 2(22)(e) of the Income-tax Act, 1961 for the A. Y.
2008-09. The CIT(A) and the Tribunal deleted the addition.

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

“i)
The assessee had a running account with the company and had been
advancing money to it. The provisions of section 2(22)(e) of the Act
were not attracted in the present case as this provision was inserted to
stop the misuse by the assessee by taking the funds out of the company
by way of loan advances instead of dividend and thereby avoid tax.

ii)
In the present case, the assessee had in fact advanced money to the
company and there was a credit for only 55 days for which the provisions
of section 2(22)(e) of the Act could not be invoked.

iii) No substantial question of law arises in this appeal. Appeal is dismissed.”

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Capital gain – Expenditure incidental to sale – Section 48 – A. Y. 2006-07 – Expenditure for cancellation of earlier sale is deductible u/s. 48 as expenditure incidental to sale:

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CIT vs. Kuldeep Singh; 270 CTR 561 (Del):

In the return of income for the A. Y. 2006-07, the assessee had disclosed capital gain on sale of residential house on which exemption u/s. 54 was claimed. In computing the capital gain the assessee had claimed a deduction of Rs. 7,50,000/- as expenditure incidental to the sale. Out of this amount, Rs. 5,00,000/- was the cancellation charges for cancelling the earlier agreement for sale and the balance Rs. 2,50,000/- is the brokerage paid for the same. The Assessing Officer disallowed the claim. The Tribunal allowed the claim.

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

“i) The finding of the Tribunal is that the assessee had entered into an earlier agreement to sell the property and had recovered Rs. 10,00,000/- from one AS. However, this agreement was cancelled to enable the assessee to enter into the transaction resulting in the capital gain. Rs. 10,00,000/- was refunded to AS and Rs. 5,00,000/- was paid as cancellation charges. Rs. 2,50,000/- was paid to one RK who acted as a broker in the first deal.

ii) The payments cannot be challenged on the ground that they were not genuine or were not made. Findings of the Tribunal are factual and cannot be categorised or treated as perverse. Similarly, it cannot be said in the facts of the present case that these payments were not directly relatable to the transaction for sale dated 03-06-2005, which had resulted in income by way of capital gains.

iii) By cancelling earlier transaction and ensuring that the rights created by the earlier agreement to sell do not obstruct the sale transaction, payments of Rs. 5,00,000/- to AS and Rs. 2,50,000/- to AK, have been made. Finding of the Tribunal in the said aspect is quite clear and on the basis of the said facts, the Tribunal has rightly held that the expenditure was incurred and was wholly connected with the sale transaction dated 03-06-2005. We do not think that any substantial question of law arises and thus the present appeal is dismissed.”

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Capital gain – Computation: Reference to DVO – Sections 48, 50C and 55A – A. Y. 2006-07 – Sale of immovable property in July 2005 – Consideration more than stamp duty valuation – Reference to DVO not justified:

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CIT vs. Gauranginiben S. Sodhan: 367 ITR 238 (Guj):

In July 2005, the assessee had sold an immovable property for a consideration of Rs. 8,51,00,000/- which was more than the stamp duty value of the property. In the course of the assessment proceedings for the A. Y. 2006-07, the Assessing Officer referred the case to the DVO for valuation as on the date of sale and also as on 01-04-1981. The DVO valued the property as on the date of sale at Rs. 13,73,90,000/-. The DVO also valued the property as on 01-04-1981 at Rs. 94,00,000/- as against Rs. 1,03,00,000/- determined by the registered valuer of the assessee. As a result the Assessing Officer made an addition of Rs. 81,57,643/- to the total income. CIT(A) deleted the addition on the ground that the reference to the DVO was not valid. This was affirmed by the Tribunal.

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

“i) The sale consideration reflected in the sale deeds was higher than the valuation adopted by the stamp valuation authority. The reference to the DVO for ascertaining the fair market value of the capital asset as on the date of sale in the present case was wholly redundant.

ii) The reference to the DVO for ascertaining the fair market value as on 01-04-1981 also was not competent. The assessee had relied on the estimate made by the registered valuer for the purpose of supporting its value of the asset. Any such situation would be governed by clause (a) of section 55A of the Act and the Assessing Officer could not have resorted to clause (b) thereof.”

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Business expenditure: Accrual of liability – A. Ys. 1988-89 to 1994-95 – Disputed enhanced power tariff – Amount not paid to electricity board – No acknowledgment of liability – No accrual of liability – Amount not deductible:

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Coromandal Garments Ltd. vs. CIT; 367 ITR 144 (T&AP):

In the year 1988-89, the A. P. Electricity Board had revised the power tariff. The assessee challenged the revision of the power tariff by filing a writ petition which was dismissed. The assessee preferred an appeal before the Supreme Court. The assessee had not paid the enhanced tariff. In the A. Y. 1994-95, the assessee claimed a deduction of Rs. 4,53,83,917/-being the difference in tariff for the period from 1988-89 to A. Y. 1994-95. The Assessing Officer and the Tribunal disallowed the claim.

On appeal by the assessee, the Telangana and the Andhra Pradesh High Court upheld the decision of the Tribunal and held as under:

“i) The stand of the assessee was wavering throughout. In the three or four assessment years, for which the liability accrued, deduction was not even claimed. Except that the provision was made, it was neither stated that the amount was paid to the electricity supplier or that the liability had been acknowledged.

ii) It is only when the actual accrual takes place, that allowance can be permitted, irrespective of the actual payment. Such accrual would take place only when the matter is settled amicably between the parties to the contract or the adjudication has reached finality. Admittedly, nothing of that had taken place. Therefore, the appellate authorities had rightly rejected the claim of the assessee.”

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Jai Surgicals Ltd. vs. ACIT ITAT “D”, New Delhi Before R. S. Syal, (A.M.) and C. M. Garg, (J.M.) ITA No.844/Del/2013 A.Y.: 2009-10. Decided on: 26-06-2014 Counsel for Assessee/Revenue: Sanjay Jain/S.N. Bhatia

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Explanation to section 37(1) – Payments to Related Party made without obtaining prior approval of the Central Government in accordance with the provisions of section 297 of the Companies Act, 1956 was merely an irregularity and cannot be disallowed treating the same as an offence or prohibited by law.

Facts:
The assessee is engaged in the business of manufacture and export of surgical blades. The AO noted that the assessee had entered into transactions of payment of job work charges to a related party, viz., M/s. Razormed Inc. during thefinancial year relevant to the assessment year under consideration without obtaining prior approval of the Central Government inaccordance with the provisions of section 297 of the Companies Act, 1956. The assessee submitted that the post facto approval for the said transactions was obtained from the Company Law Board on payment of compounding charges for the condonation of delay and hence, there was no violation of law. However, the AO opined that the facts of post facto approval and the condonation of delay were not relevant because on the day of payment of such expenditure, there was no prior approval of the job charges paid to M/s. Razormed Inc., which triggered the Explanation to section 37(1) of the Act. He accordingly, added the sum of Rs. 41.24 lakh paid by the assessee towards job work charges. On appeal, the CIT(A) confirmed the order of the AO.

Held:
The Tribunal referred to the provisions of section 297 of the Companies Act, 1956 more particularly s/s. (5) of the said provision. As per the said provisions if the consent is not accorded to any contract under the section, then anythingdone in pursuance of the contract is voidable at the option of the Board of the Company. Thus, according to the Tribunal, if the Board, despite no prior sanction, agrees to go ahead with the contract referred to in s/s. (1) of section 297 of the Companies Act, such contract would be valid. In the case of the assessee, the tribunal noted that the Board had not objected to the contracts between the assessee and Razormed Inc., thus making such contract for doing of job work valid. Thus, there was no violation of section 297 of the Companies Act inasmuch as the so-called violation as per s/s. (1) stood regularised by s/s. (5) of section 297 to the Companies Act, 1956, thereby making this transaction of payment of job charges in accordance with the provisions of the Companies Act.

Thus, according to the Tribunal, the payment made by the assessee was neither an offence nor prohibited by law, but it only committed a breach by not obtaining the necessary approval from the Central Government in time.Thus, the payment is otherwise for a lawful purpose. Further, referring to Explanation to section 37(1), the Tribunal observed that in order that the said provisions is applied, it is essential to examine the object and consideration for the expenditure incurred. If the purpose of the expenditure is either an offence or is prohibited by law, then it would suffer disallowance. If, however, the purpose of the expenditure is neither to commit an offence nor is prohibited by any law, then there can be no question of disallowance. Thus, according to it, if the expenditure is otherwise lawful and neither amounted to offence nor is prohibited by law, but the procedural requirements for incurring it were not complied with, only the irregularity will creep in, but such irregularity would not make the expenditureitself as unlawful so as to be brought within the scope of the Explanation.

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2014-TIOL-324-ITAT-MUM Javed Akhtar vs. ACIT ITA No. 39/Mum/2011 A.Y.: 2006-07. Date of Order: 07-05-2014

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Section 37 – Where the professional and residential set up of an assessee are in the same apartment, that portion of cost of lift installed by the assessee, in the premises of the society, which can be considered to be for professional purposes can be claimed as revenue expenditure.

Facts:
The assessee, a lyricist and well known film personality, operated his profession from the premises on 6th and 7th floor of Juhu Sagar Samrat Co-op. Housing Society Ltd. The building of the society was an old seven storied building having one lift. Since the lift used to get out of order very frequently, it caused substantial hardship to the persons visitng the assessee for professional purposes. Since the society was reluctant to spend money to replace the lift, the assessee spent a sum of Rs. 17,32,436 for installation of a new lift. This sum was debited to P & L Account as Society Development Expenditure and was claimed as a deduction.

The Assessing Officer (AO) disallowed the claim on the ground that lift was an essential part of the building and therefore, the expenditure was capital in nature. However, since the ownership thereof did not belong to the assessee, he denied even depreciation thereon.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that 50% of expenditure claimed by the assessee be capitalised and depreciation thereon be allowed.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the building in question was consisting of 7 floors and 14 flats out of which the assessee was owner of two flats. From one flat the assessee was doing his professional work and the other flat was used for residential purposes.

The advantage and facility of the new lift is not restricted exclusively for the professional activity of the assessee but it was also enjoyed by assessee as well as family members of the assessee other than the professional purpose. The usage of the lift by the other members of the society was not considered to be relevant for the purpose of allowablity of deduction. The assessee had incurred the expenditure keeping in view its professional and family requirements. For allowing the expenditure u/s. 37 of the Income Tax Act, the mandatory condition is that the expenditure has to be laid out wholly and exclusively for the purpose of business or profession of the assessee. However it should not be on the capital field. Since the assessee did not acquire any advantage in the capital account or any new asset for its professional purpose and the lift in question is not an apparatus of generating the professional income, therefore, the Tribunal held that it cannot be considered as an expenditure of capital nature as it does not create any new asset belonging to the assessee. It agreed with the view of the CIT(A) to the extent that 50% of the expenditure to be considered for professional purpose. Therefore, 50% of the total expenditure which was considered to be for professional purposes and was held to be allowable as revenue expenditure.

The Tribunal partly allowed the appeal filed by the assessee.

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2014-TIOL-391-ITAT-AHM General Mechanical Works vs. ACIT ITA No. 2032 /Ahd/2010 A.Y.: 2002-03. Date of Order: 14-03-2014

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S/s. 28, 37(1) – A reasonable amount of profit is to be estimated and taxed when purchases are found to be bogus. The entire amount of purchases found to be bogus cannot be disallowed.

FACTS:
The assessee was engaged in the business of undertaking contract for mechanical work viz., fabrication and erection of steel structures, piping, stop log gates, coarse screens, travelling water screens mainly for various Thermal Power Projects undertaken.

The Assessing Officer (AO) observed that in an inquiry conducted by the Department in the case of M/s. Prakash Marbles Engineering Company, for AY 2002-03 it was found that bogus purchase by way of accommodation bills for purchase of material (without the material being received) were procured from Shri Jabbarsingh Chauhan, Proprietor of M/s. Girnar Sales Corporation and Shri Navin Raval, proprietor of M/s. Shiv Metal Corporation. It was found that these parties had issued bogus bills to various parties in the market and the assessee was one of them. During the financial year relevant to assessment year 2002-03 the purchases of the assessee from these two parties amounted to Rs. 14,32,750.

The AO relying on the affidavit of the persons who had issued the bills and observing that the assessee had failed to prove the genuineness of purchases by way of furnishing confirmation from the seller concerned or producing the seller for taking necessary statement disallowed the sum of Rs. 14,32,750 representing aggregate amount of bogus purchases from these two parties.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted the decision of the co-ordinate `A’ Bench of ITAT in the case of Shri Alap Shirishbhai Derasary vs. ACIT (ITA No. 1101, 1102 & 1103/Ahd/2009 for AY 2002-03, 2003-04 and 2004-05, order dated 21-09- 2012) where the Bench confirmed addition @ 12.50% on the bogus purchases. It also noted that the decision relied upon by the DR in the case of ITO vs. Shri Gumanmal Misrimal (ITA No.s. 2536 & 2537/Ahd/2008 for AY 2003- 04 & 2004-05) where the Bench was dealing with a case where bogus purchases from very same parties viz., Girnar Sales Corporation and M/s. Shiv Metal Corporation. The Bench in this case confirmed profit of 30% of the amount of bogus purchases.
The Tribunal observed that the assessee had not proved the purchases to be genuine. The supplier had given affidavits that they have given bogus bills to the assessee. Therefore, the burden was heavily on the assessee to prove that the transactions are genuine which was not established by it. It is established fact that these are bogus purchases to the extent of Rs. 14,32,750. It held that the decision in the case of Shri Gumanmal Misrimal (supra) squarely applies to the facts of the present case. The Tribunal directed the AO to calculate 30% net profit on bogus purchases.
The appeal filed by the assessee was partly allowed.

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2014-TIOL-396-ITAT-COCHIN Kerala Vision Ltd. vs. ACIT ITA No. 794/Coch/2013 A.Y.: 2009-10. Date of Order: 06-06-2014

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S/s. 40(a)(ia), 194J – In a case where non-deduction of tax at source was supported by the ratio of the decision of a HC, disallowance u/s. 40(a)(ia) of the Act cannot be made on account of non-deduction of tax due to a retrospective amendment.

FACTS:
The assessee company was engaged in the business of distributing cable signals. The assessee was liable to make payment to various channel companies like Star Den Media Ltd., Zee Turner Limited, M.S.M. Discovery P. Ltd., etc., for receiving from them, satellite signals in its capacity as a multi system operator. During the previous year relevant to the assessment year 2009-10, the assessee paid amounts aggregating to Rs. 163.30 lakh as “Pay Channel Charges” to satellite companies.

In view of the ratio of the decision of Madras High Court in the case of Skycell Communications Ltd. (251 ITR 53) (Mad) and the decision of Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. vs. DIT (332 ITR 340)(Del) the assessee did not deduct tax at source from payment of Pay channel charges to various satellite companies.

The Assessing Officer (AO) held that the payment of Pay channel charges is ‘royalty’ and consequently such payment is liable for deduction of tax at source. He also held that the decision rendered by the Madras High Court in the case of Skycell Communications Ltd. (supra) is not applicable to the facts of the assessee’s case. He disallowed a sum of Rs. 163.30 lakh u/s. 40(a)(ia) of the Act.

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

Aggrieved the assessee preferred an appeal to the Tribunal where it contended that the disallowance u/s. 40(a)(ia) should not be made on the basis of a subsequent amendment made with retrospective effect.

HELD:
Transmitting television channels or signals by receiving these signals through satellite is included in the definition of “Process” under Explanation 6 which has been inserted by the Finance Act, 2012 with retrospective effect. Therefore, payment made by the assessee as “Pay Channel Charges” falls in the category of “royalty” as defined in Clause (i) of Explanation 2 to section 9(1) of the Act.

The Tribunal noted that that the view entertained by the assessee that the pay channel charges cannot be considered as royalty gets support from the decision rendered by the Delhi High Court in the case of Asia Satellite Telecommunication Co. Ltd. (supra). It also noted that the following decisions have held that the assessee cannot be held to be liable to deduct tax at source relying on the subsequent amendments made in the Act with retrospective effect –

Sonata Information Technology Ltd. vs. DCIT (2012-TII-132-ITAT -MUM-INTL)

Infortech Enterprises Limited vs. Addl CIT (2014-TII- 26-ITAT -HYD-TP)

Channel Guide India Ltd. vs. ACIT (2012-TII-139- ITAT -MUM-INTL)

The Tribunal held that though the Explanation 6 to section 9(1)(vi) inserted by the Finance Act, 2012 is clarificatory in nature, yet in view of the fact that the view entertained by the assessee gets support from the decision of the Delhi High Court, the assessee cannot be held to be liable to deduct tax at source from the Pay Channel Charges. The AO was not justified in disallowing the claim of Pay Channel Charges by invoking the provisions of section 40(a)(ia) of the Act. The Tribunal set aside the order passed by CIT(A) and directed the AO to delete the impugned disallowance.
The appeal filed by the assessee was allowed.

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[2013] 148 ITD 70 (Ahmedabad – Trib.) GE India Industrial (P.) Ltd. vs. CIT(A) A.Y. 2004-05: Date of order: 04-01-2013

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Section 271(1)(c), section 275(1)(a) – CIT(A)
enhanced assessee’s income and initiated penalty proceedings –
Assessee’s plea to keep penalty proceedings in abeyance till disposal of
appeal by Tribunal was rejected – Held – as per section 275(1)(a), the
CIT(A) will get six months time to dispose of penalty proceedings from
end of month in which order of Tribunal is received by Commissioner or
Chief Commissioner – The CIT(A) was directed to keep penalty proceedings
in abeyance till disposal of quantum appeal by Tribunal.

Facts:
Assessment
u/s. 143(3) was completed by the AO by making a few disallowances. On
further appeal, the CIT(A) deleted certain disallowances but also
enhanced the income of the assessee. The CIT(A) initiated penalty
proceedings u/s. 271(1)(c) of the Act for disallowances made by him.

The
assessee contended before the CIT(A) that since the assessee proposed
to file an appeal before the Tribunal on the quantum proceedings, the
penalty should be kept in abeyance till the disposal of appeal by
Tribunal. Reliance was placed on the section 275(1)(a), wherein it is
provided that where an appeal has been filed before Tribunal, the time
limit for disposal of penalty proceeding is six months from the end of
the month in which the order of the Tribunal is received by the
Commissioner/Chief Commissioner. However, the request of the assessee
was not accepted by ld. CIT(A) and hence the assessee filed a stay
petition.

Held:
As per the section 275(1)(a) of the
Act, the AO cannot pass an order imposing penalty u/s. 271(1)(c) of the
Act till relevant assessment is subject matter of appeal before ld.
CIT(A) (i.e., the first appellate authority). By the same analogy, the
assessee’s prayer for stay of penalty proceedings undertaken by ld.
CIT(A) till the disposal of appeal by the Tribunal does not appear to be
unreasonable.

If the CIT(A) is allowed to proceed with the
penalty proceedings, prejudice will cause to the assessee as it will
have to face multiplicity of the proceedings. In case assessee succeeds
in quantum appeal, the penalty order passed by CIT(A) will have no legs
to stand while in a situation the assessee fails, CIT(A) will get ample
time of six months to dispose of the penalty proceedings. Therefore, to
prevent multiplicity of proceedings and harassment to the assessee, the
CIT(A) was directed to keep the penalty proceedings in abeyance till the
disposal of quantum appeal by the Tribunal.

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(2014) 105 DTR 1 (Del) Sahara India Financial Corporation Ltd. vs. DCIT A.Y.: 2009-10 Date of order: 10-01-2014

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Disallowance of expenditure u/s. 14A cannot exceed the exempt income earned.

Facts:
The assessee earned exempt income amounting to Rs. 68,37,583 against which the assessee voluntarily disallowed the expenses of the investment division on pro rata basis amounting to Rs. 26,646. However, the Assessing Officer applied the provisions of Rule 8D and added Rs. 2,16,51,917 representing the excess of the expenses disallowable as per Rule 8D over the expenses already disallowed by the assessee. While doing so, the Assessing Officer also disallowed the proportionate interest expenditure rejecting the claim of the assessee that it had sufficient interest-free funds in the nature of share capital and reserves. The CIT (A) also upheld the said disallowance and revised it upward marginally to Rs. 2,19,47,772.

Held:
If the method of Rule 8D is applied mechanically, it leads to manifestly absurd results in as much as for tax-free income of Rs. 68,37,583, disallowance of Rs. 2,16,51,917 [enhanced by CIT(A) at Rs. 2,19,47,772] is made u/s. 14A which exceeds the exempt income. The interpretation of provisions of section 14A r/w Rule 8D is leading to unanticipated absurdities which cannot be the intention of legislature. Under these circumstances, help of external aids of construction for interpretations of statute is called for. Looking at the varying interpretation offered by various courts and benches of tribunal in relation to section 14A, it is difficult to precisely decide the issue. The Tribunal followed the decision of Chandigarh Tribunal in the case of Punjab State Co-op & Marketing Federation Ltd. [ITA No. 548/Chd/2011] and held that disallowance u/s. 14A cannot exceed tax free income. A holistic view is required to be taken that disallowance in terms of section 14A can be maximum to the extent of exempt income which is Rs. 68,37,583 in this case. It implies that reasonable expenditure less than the exempt income can be disallowed. Therefore, in the interest of justice it was held that it will be reasonable to estimate and disallow, 50% of exempt income as relatable to exempt income u/s. 14A r/w Rule 8D.

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(2014) 104 DTR 289 (Del) DCIT vs. Messe Dusseldorf India Pvt. Ltd. A.Y.: 2005-06 Date of order: 19-03-2014

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Amount received by the assessee-company from its parent company towards its erosion of net worth constitutes capital receipt.

Facts I:
The assessee had received an amount of Rs. 34,511,880 from its promoters which were foreign companies, which was treated as capital receipt and classified under capital reserve in the accounts. It was claimed that the said amount was received to resurrect the financial position and to rejuvenate the company. The amount was received essentially for restoration of its capital structure, i.e, net worth required for the revival of company in. However, the Assessing Officer held that the receipt in question was in the revenue field. Before the ITAT also, it was argued by the Department that the amount is a non-refundable, non-distributable and non-convertible contribution by a shareholder, and was used for the purpose of its current business and hence, was required to be regarded as a revenue receipt. It was further pointed out that the RBI permitted the assessee to receive the amount in question for recoupment of accumulated losses.

Held:
It was held that the amount was received for restoration of the capital structure by recoupment of net worth. The assessee company had incurred accumulated losses and this has resulted in erosion of net worth. It received non refundable financial assistance from its shareholder company. The RBI also approved the same with subjectmatter given as “financial assistance towards erosion of net worth.” Therefore, the ITAT , upholding the factual finding of the CIT (A) that the amount was received towards erosion of net worth of the company, held that it should be regarded as a capital receipt.

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Refund: Interest: S/s. 237 and 243 : A. Y. 2010-11: Assessee, a civil contractor, receiving payments from Govt. Depts. after TDS: CPC issuing only part of refund: Mismatch between details uploaded by deductor and details furnished by assessee in return: Mismatch not attributable to assessee: Assessee entitled to refund with interest:

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Rakesh Kumar Gupta vs. UOI; 365 ITR 143 (All):

The
assessee is a civil contractor. In the previous year relevant to the A.
Y. 2010-11, the assessee had received certain payments from Government
Departments from which a total sum of Rs. 3,14,766/- was deducted as tax
at source by the Government Departments. The assessee filed the return
of income and claimed refund of Rs. 2,32,370/-. The Central Processing
Centre, Bangalore, issued a refund of Rs. 43,740/-. No intimation was
given to the assessee as to why the balance amount of Rs. 1,88,630/- was
not refundable. Assessee’s application u/s. 154 of the Income-tax Act,
1961 for refund of the balance did not get any response.

Therefore,
the assessee filed a writ petition praying for a writ of mandamus for
the balance refund with interest. The Allahabad High Court allowed the
writ petition and held as under:

“i) No effort was made by the
Assessing officer to verify whether the deductor had made the payment of
the tax deducted at source in the Government account. There was a
mismatch between the details uploaded by the deductor and the details
given by the assessee in the return. The assessee suffered the tax
deduction at source but had not been given due credit in spite of the
fact that he had been issued a tax deducted at source certificate by a
Government Department.
ii) T here was presumption that the deductor
had deposited the tax deducted at source amount in the Government
account especially when the deductor is a Government Department.
iii)
Denying the benefit of the tax deducted at source to the assessee
because of the fault of the deductor not only caused harassment and
inconvenience but also made the assessee feel cheated.
iv) T here was
no fault on the part of the assessee. The fault, if any, lay with the
deductor. Nothing had been indicated that the fault lay with the
assessee in furnishing false details. Therefore, the authority was to
refund an amount of Rs. 1,88,631/- with interest in accordance with the
law.”

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Recovery of tax: Stay of recovery: A. Ys. 2007-08 and 2008-09: Tribunal rejected the stay application only on the ground that the assessee had not made out a case of irreparable loss without considering the other issues raised by the assessee:

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Rejection not proper: Coca-Cola India P. Ltd. vs. ITAT: 364 ITR 567 (Bom):

When the appeal for the A. Ys. 2007-08 and 2008-09 were pending before the Tribunal, the Assessing Officer rejected the stay application made by the assessee without considering the issues raised by the assessee. The Tribunal also rejected the stay application only on the ground that the assessee had not made out a case of irreparable loss which could not be compensated in terms of money in case the stay was not granted, without considering the issues raised by the assessee.

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

“i) I n an application for stay, though the Assessing Officer is not expected to analyse the entire evidence there must be some consideration of the facts and an indication thereof in the order. The Assessing Officer did not advert to any of the factors indicated in the order of the Special Bench in the case of L. G. Electronics India P. Ltd.
ii) T he Appellate Tribunal also in its order did not address itself to the relevant facts and issues. It merely rejected the application on the ground that the assesee had not made out a case of irreparable loss which could not be compensated in terms of money in case the stay was not granted.
iii) T he question of irreparable loss is not the only consideration while dealing with an application for stay. The assessee had serious issues to urge, some of which had so far not been dealt with either in the assessment order or in the orders on the stay application. The orders in question are liable to be quashed.
Iv) The rule is made absolute in terms of prayers (a) and (b).”

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Income: Business income or house property income: S/s. 22 and 28(i) : A. Y. 1996-97: Assessee owned a shopping mall: Let out a portion of mall and used balance portion for its business: Rental income is business income and not house property income:

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CIT Vs. Prakash Agnihotri; [2014] 46 taxmann.com 145 (All):

The assessee owned an immovable property, i.e., a shopping mall. During relevant year, assessee let out a portion of said mall. The assessee claimed that rental income derived from mall was taxable as income from business. The Assessing Officer rejected the claim and assessed the rental income under the head “Income from house property.” The Tribunal allowed the assessee’s claim.

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

“i) T he law is well settled that whether a particular letting is a business has to be decided in the circumstances of each case and each case has to be looked into from the businessman’s point of view to find out whether letting was the doing of business or exploitation of his property by an owner.

ii) There being categorical findings of fact by the appellate authority as well as the Tribunal that letting out was for the purposes of business after considering all relevant facts and the fact that the premises City Centre, the Mall, has been taken back by the assessee and further in major portion of the premises assessee was already carrying out his own business, it is opined that assessee has rightly shown his rental income as business income.”

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Income: Capital or revenue receipt: A. Y. 2007-08: Assessee engaged in generation of power: Sale of carbon credits: Not an offshoot of business: No asset generated in the course of business but generated due to environmental concerns: Sale receipt is a capital receipt: No cost of acquisition: Profit is not assessable to tax:

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CIT vs. My Home Power Ltd.; 365 ITR 82 (AP):

The assessee was carrying on the business of power generation. In the A. Y. 2007-08, the assessee claimed that the receipts on sale of carbon credits is a capital receipt and not income. The assesee further claimed that there was no cost of acquisition and accordingly that the profit on sale of carbon credit is not assessable to tax. The Assessing Officer rejected the claim and assessed the receipts as business income. The Tribunal allowed the assessee’s claim.

In appeal before the High Court, the Revenue contended that the generation of carbon credits is intricately linked to the machinery and processes employed in the production process by the assessee. The Revenue also contended that the Tribunal is not correct in holding that there is no cost of acquisition or cost of production to get entitlement for the carbon credits. The Andhra Pradesh High Court upheld the decision of the Tribunal and held as under:

“i) T he Tribunal has factually found that ‘carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business but it is generated due to environmental concerns.’
ii) We agree with this factual analysis as the assessee is carrying on the business of power generation. The carbon credit is not even directly linked with power generation.
iii) O n the sale of excess carbon credits the income was received and hence as correctly held by the Tribunal it is capital receipt and it cannot be business receipt or income.
iv) In the circumstances, we do not find any element of law in this appeal. The appeal is accordingly dismissed.”

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Assessment: S/s. 143(3) and 144C: A. Y. 2009- 10: Transfer pricing proceedings: Pursuant to order of TPO, AO passed a final order u/s. 143 (3) instead of passing a draft assessment order u/s. 144C: There being a failure on part of AO to adhere to statutory provisions of Act, impugned order was to be quashed: AO could not cure defect existing in impugned order:

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Vijay Television (P) Ltd. vs. Dispute Resolution Penal: [2014] 46 taxmann.com 100 (Mad):

The
case of the petitioner company was taken up for scrutiny assessment for
the A. Y. 2009-2010. Since the petitioner company had entered into
international transactions during the relevant year, the case was
referred to the Transfer Pricing Officer (TPO) for determination of the
arm’s length price. The TPO passed an order on 30-01-2013 and pursuant
to the said order, the Assessment Officer, instead of passing a
provisional order u/s. 144C of the Income-tax Act, 1961, passed a final
assessment order u/s. 143(3) on 26-03-2013. After realising the folly
that a final order ought not to have been passed pursuant to the order
passed by the TPO, the Assessment Officer issued a Corrigendum on
15-04-2013 modifying the final order of assessment passed on 26-03- 2013
to be read as a draft assessment order purported to have been passed
u/s. 144C of the Act. On receipt of the corrigendum, the petitioner
company filed their objections before the Dispute Resolution Panel,
Chennai on 26/04/2013 specifically questioning the validity of the
corrigendum issued by the Assessing Officer. It was specifically
contended that the corrigendum issued by the Assessing Officer is
without jurisdiction and such an order was passed beyond the period of
limitation. The Dispute Resolution Penal refused to entertain the
objections filed by the petitioner company. The assessee-petitioner
filed writ petition challenging the orders.

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

“i)
U /s. 144C of the Act, it is evident that the Assessing Officer is
required to pass only a draft assessment order on the basis of the
recommendations made by the TPO after giving an opportunity to the
assessee to file their objections and then the Assessing Officer shall
pass a final order. According to the learned senior counsel for the
petitioners, this procedure has not been followed by the Assessing
Officer (second Respondent) inasmuch as a final order has been
straightaway passed without passing a draft assessment order.
ii) A s
rightly pointed out by the learned senior counsel for the petitioners,
in the order passed on 26-03-2013, the second respondent even raised a
demand as also imposed penalty. Such demand has to be raised only after a
final order has been passed determining the tax liability. The very
fact that the taxable amount has been determined itself would show that
it was passed as a final order. In fact, a notice for demand u/s. 156 of
the Act was issued pursuant to such order dated 26-03-2013 of the
second respondent. Both the order dated 26-03-2013 and the notice for
demand thereof have been served simultaneously on the petitioner.
Therefore, not only the assessment is complete, but also a notice dated
28-03-2013 was issued thereon calling upon the petitioner to pay the tax
amount as also penalty u/s. 271 of the Act. Thereafter, the petitioner
was given an opportunity of hearing on 12-04-2013. Subsequently, the
second respondent realised the mistake in passing a final order instead
of a draft assessment order which resulted in issuing a corrigendum on
15-04-2013. In the corrigendum it was only stated that the order passed
on 26-03-2013 u/s. 143(3) of the Act has to be read and treated as a
draft assessment order as per section 144C r.w.s. 93CA (4) r.w.s. 143
(3) of the Act. In and by the order dated 15- 04-2013, the second
respondent granted thirty days time to enable the assessee to file their
objections.
iii) S uch an order dated 26-03-2013 passed by the
second respondent can only be construed as a final order passed in
violation of the statutory provisions of the Act. The corrigendum dated
15-04-2013 is also beyond the period prescribed for limitation. Such a
defect or failure on the part of the second respondent to adhere to the
statutory provisions is not a curable defect by virtue of the
corrigendum dated 15-04-2013. By issuing the corrigendum, the
respondents cannot be allowed to develop their own case. Therefore,
following the order passed by the Division Bench of the Andhra Pradesh
High Court in the case of Zuari Cement Limited vs. Assistant
Commissioner of Income Tax, Circle 2 (1) passed in WP No. 5557 of 2012
dated 21-02-2013, which was also affirmed by the Honourable Supreme
Court by dismissing the Special Leave Petition filed thereof, on
27-09-2013, the orders, which are impugned in this writ petition are
liable to be set aside. Accordingly, the orders, which are impugned in
this writ petition are set aside and the writ petition is allowed.”

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Assessment: Time limit for completion of assessment: Limitation: Extention of period: Section 153 Expl 1(ii): A. Y. 1986-87 to 1989- 90: Stay of assessment proceedings by order of Court: Limitation restarts immediately on vacation of the stay order and not on receipt by the Department of the order vacating the stay:

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CIT vs. Chandra Bhan Bansal; [2014] 46 taxmann.com 108 (All):

On 08-11-1989, the Assessing Officer issued notices u/s. 148 of the Income-tax Act, 1961 for reopening of the assessment. Assessee filed writ petition challenging the reopening. The Allahabad High Court admitted the petition by an order dated 24-03-1992 and granted stay of the assessment proceedings. Thereafter, on 01-08-1995 the High Court dismissed the petition and accordingly stay was vacated on that day. The Assessing Officer passed the reassessment order on 04-01-1996. The assessee challenged the validity of the reassessment order on the ground that the reassessment order passed on 04-01- 1996 is barred by limitation since a valid reassessment order could have been passed only upto 30-09-1995. The Tribunal accepted the assessee’s claim.

In the appeal, it was contended by the Revenue that the order vacating the stay was communicated to the Assistant Commissioner of Income Tax (Investigation) on 18-12-1995 and accordingly, the reassessment order passed on 04-01-1996 is within the period of limitation and hence is a valid order. The Allahabad High Court upheld the decision of the Tribunal and held as under:

“i) T he statutory scheme of Explanation 1(ii) of section 153 clearly indicates that for computing the period of limitation the period during which the assessment proceedings is stayed shall be excluded. In excluding the above period, the concept of communication of the order of the Court cannot be imported. The exclusion of the period has been provided because of stay or injunction by any Court during which the assessment proceedings are stayed

ii) T he submission of the revenue that the limitation will start again only when the order is communicated to the Department cannot be accepted. The other reason for not accepting the above submission is equally potent. Explanation 1(v) and (vi) to section 153 are also part of the same statutory scheme. In Explanation 1(v) and (vi) to section 153 the statutory scheme provides for computing the period of limitation from the date when the order under s/s. (1) of section 245D and 245Q is received by the Commissioner.

iii) T hus, the legislature has provided for excluding the period from the date of communication of the order where they so intended. The use of concept of communication of receiving the order in the same provision which is absent in Explanation 1(ii) concerned clearly indicates that for the purposes of Explanation 1(ii), the communication of the order of the Court vacating the stay or injunction is not contemplated.

iv) In view of aforesaid, the Tribunal is justified in law in coming to the conclusion that the assessments made by the Assessing Officer was barred by limitation on 30-9-1995.

v) The question is answered in favour of the assessee and against the Revenue. The appeal is dismissed.”

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Assessment: Company: Amalgamation w.e.f. 01/04/2009: A. Y. 2010-11: Notice dated 20/06/2012 u/s. 142 to amalgamating (transferor) for assessment of the company for A. Y. 2010-11 is not valid:

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Khurana Engineering Ltd. vs. Dy. CIT; 364 ITR 600 (Guj):

Under
a scheme of amalgamation, the transferor company was amalgamated with
the assessee company w.e.f. 01-04-2009. On 20-06-2012, the Assessing
Officer issued notice u/s. 142 of the Income-tax Act, 1961 to the
amalgamating (transferor) company for assessment of the company for the
A. Y. 2010-11.

The Gujarat High Court allowed the writ petition
filed by the assessee-amalgamated company challenging the said notice
and held as under:

“i) A s per the order of the High Court
allowing the scheme of amalgamation, the appointed date for amalgamation
is 01-04-2009. The transferor company would no longer be amenable to
assessment proceedings for the A. Y. 2010-11.

ii) T he notice for producing documents for such assessment would, therefore, be invalid. Impugned notice is quashed.”

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2014-TIOL-630-ITAT-DEL Jcdecaux Advertising India Pvt. Ltd. vs. DCIT A. Y. : 2007-08. Date of Order: 08-09-2014

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Ss. 3, 4 – The business of selling ad space on bus queue shelters is set up on entering into a contract with a municipal body. Once the business is set up revenue expenditure incurred becomes eligible for deduction.

Facts:
The assessee company was incorporated to carry on the business of advertising on bus shelters, public utilities, parking lots, bill boards, etc. The assessee was awarded its first contract by New Delhi Municipal Corporation (NDMC) in March 2006 for construction of 197 Bus Queue Shelters (BQS) on Build-Operate-Transfer (BOT) basis. Under this contract, the assessee was required to undertake preliminary investigations, study, design, finance, construct, operate and maintain BQS’s at its own cost. In consideration, the assessee was allowed to commercially exploit the space allotted in these BQS’s by means of display of advertisement for a period of 15 years. During the said period of 15 years the title and other rights in BQSs were to vest in NDMC.

During the previous year the assessee claimed a deduction of Rs. 18,36,62,145 incurred in discharge of its obligations under NDMC contract. The assessee also claimed deduction of Rs. 3,17,91,180. The AO disallowed Rs. 18,36,62,145 on the ground that it is capital expenditure and sum of Rs. 3,17,91,180 was admitted by the AO to be revenue in nature but was not allowed since according to the AO the business would commence only when the BQSs would be ready to provide space for advertisement to the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO by observing that the business was not set up and therefore the revenue expenditure is also not deductible.

Aggrieved, the assessee preferred an appeal to the Tribunal where it did not press its ground for allowability of capital expenditure.

Held
The Tribunal noted that during the previous year the assessee formally signed a contract with NDMC on 08-03- 2006. On 30-03-2006, the assessee entered into manufacturing agreement with a supplier for manufacture and installation of BQSs and also made advance payment. It also arranged for credit facility and obtained overdraft limit as well as term loan. A security deposit was also placed with NDMC under the contract.

The Tribunal noted that the case made out by the lower authorities was that the business would commence only when the BQSs are ready for providing the space to the assessee for advertisement, being the source of its income. This, according to the Tribunal, was fallacious understanding of the concept of setting up of business. It held that the business of a building contractor is set up on his having all the necessary tools and equipments ready to take up the construction activity. Only when he gets construction contract and takes the first step in the direction of doing the construction activity, he commences his business. It cannot be said that the business of the contractor has not been set up till the construction work, undertaken pursuant to the contractor, goes on.

The assessee’s business was set up when it was prepared for undertaking the activity of building BQSs on receipt of contract from NDMC. It cannot be related to the completion of construction of BQSs. As the setting up of the business was over in the previous year, at the maximum, on entering into manufacturing agreement for manufacture and on installation of BQSs on 30-03-2006 not only the business was set up but had also commenced. Section 3 read with section 4 refers to the starting of the previous year from the date of setting up of a new business.

The expenditure of Rs. 3.17 crore had been disallowed since it was held to be incurred before commencement of the business and hence was in the nature of pre-operative expenses. Upon setting up of the business, all revenue expenses become eligible for deduction. The Tribunal held that the sum of Rs. 3.17 crore was allowable as deduction.

This ground of appeal of the assessee was allowed.

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2014-TIOL-656-ITAT-MUM ACIT vs. Gagandeep Infrastructure Pvt. Ltd. A. Y. : 2008-09. Date of Order: 23-04-2014

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Section 68 – Share premium is a capital receipt and
not income in ordinary sense. Even if it is held that excess premium is
charged, it does not become income as it is a capital receipt. In case
of share capital, if identity is proved, no addition can be made u/s.
68.

Facts:
During the previous year, the assessee
company issued equity shares of face value of Rs. 10 each at a premium
of Rs. 190 per share. The face value of shares issued was Rs. 81,25,000
and the amount received as share premium was Rs. 6,69,75,000. The book
value of the shares at the time of issue of fresh capital was Rs. 10.
The AO asked the assessee to furnish the supporting details of
subscribers and to justify the share premium charged.

The
assessee stated that the premium was charged based on future prospects
of the assessee company. From the submissions made, the AO noticed that
the applicants were all group companies operating from the same address
where the assessee was operating its business. The share application
forms were all signed by the same person. The persons from whom premium
were charged were newly established companies and their source of funds
was from share capital. The funds raised by the assessee company were
invested in shares of M/s .Omni Infrastructure Pvt. Ltd., which was also
a group company. These shares were subscribed at a premium of Rs.
12,490 per share. The AO made an addition of Rs. 7,53,00,000 u/s. 68 of
the Act.

Aggrieved, the assessee preferred an appeal to the
CIT(A) who observed that the AO has not given any reason as to why the
investment with a premium is not genuine when the assessee has produced
all the details of investors in the form of share application form, bank
account details, copies of return of income and balance sheet. He
allowed this ground of appeal.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The
Tribunal noted that the assessee had filed all the requisite
details/documents which are required to explain credits in the books of
accounts by the provisions of section 68 of the Act. It stated that the
assessee has successfully established the identity of the company which
has purchased the shares at a premium. The assessee has also filed bank
account details to explain the source of the shareholders and the
genuineness of the transaction was also established by filing copies of
share application forms and Form No.2 filed with the Registrar of
Companies.

No doubt a non-est company or a zero balance sheet
company asking for a premium of Rs. 190 per share defies all commercial
prudence but at the same time it cannot be ignored that it is a fact
that it is a prerogative of the Board of Directors of the company to
decide the premium amount and it is the wisdom of the share holders
whether they want to subscribe to such heavy premium. The Revenue
authorities cannot question the charging of such huge premium without
any bar from any legislated law of the land.

The Tribunal
observed that the amendment to section 56(2) by insertion of clause
(viib) is applicable w.e.f. A.Y. 2013-14. In the year under
consideration, the transaction has to be considered in the light of
provisions of section 68 of the Act. It held that the assesse has
discharged the initial burden of proof. Even if it is held that excess
premium has been charged, it does not become income as it is a capital
receipt. The receipt is not in the revenue field. What is to be probed
by the AO is whether the identity of the assessee is proved or not. In
the case of share capital, if the identity is proved, no addition can be
made u/s. 68 of the Act. The tribunal dismissed this ground of appeal
filed by the revenue.

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[2014] 148 ITD 619 (Delhi) Vineet Sharma vs. CIT (Central)-II, New Delhi. A.Y. 2005-06 and 2006-07 Order dated- 8th November 2013

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S. 264- CIT cannot pass order prejudicial to the assessee u/s. 264, CIT cannot pass order u/s. 263 prejudicial to the assessee, otherwise it would make the prohibition u/s. 264 that the CIT cannot pass the order prejudicial to the assessee nullity.

Facts:
A search u/s. 132 was conducted at the business/residential premises of the assessee and in response to notice u/s. 153A, the assessee filed the return of income disclosing certain taxable income.

The Assessing Officer, having completed his assessment passed a penalty order u/s. 271(1)(c) in respect of substantial part of additional income disclosed by the assessee in the return filed in response to notice u/s. 153A, but not on the entire additional income disclosed by the assessee.

The assessee filed a revision petition u/s. 264 before CIT for quashing the penalty order.

The CIT held the penalty order u/s. 271(1)(c) to be erroneous on the ground that the Assessing Officer had not levied the penalty in respect of the entire additional income offered in the return filed in response to notice u/s. 153A.

Hence, during the pendency of the revision petition u/s. 264 with CIT, the CIT passed an order u/s. 263 setting aside the penalty order and also treated the assessee’s petition u/s. 264 infructuous on the ground that the penalty order had already been set aside during the proceedings u/s. 263.

In the fresh penalty order passed in pursuance of order u/s. 263, the Assessing Officer levied the penalty on the entire additional income disclosed by the assessee in the return filed in response to notice u/s.153A.

Aggrieved, the assessee preferred an appeal before the Tribunal.

Held:
It is evident that u/s. 264, the Commissioner can revise any order passed by any authority subordinate to him on his own motion or on the application made by the assessee and can pass the order as he thinks fit but cannot pass an order prejudicial to the assessee.

The CIT cannot pass an order prejudicial to the assessee u/s. 264, and hence it was held that once the assessee approaches CIT for getting relief u/s. 264, CIT cannot pass order u/s. 263 prejudicial to the assessee, otherwise it would make the prohibition u/s. 264 that the CIT cannot pass the order prejudicial to the assessee nullity.

Even on facts, it was held that the order u/s. 263 cannot be sustained because it is a settled position that penalty u/s. 271(1)(c) is not to be levied on every income. The penalty is to be levied only when the conditions prescribed u/s. 271(1)(c) are satisfied.

When one looks at the language of section 271(1)(c), even in regard to concealed income, the levy of penalty is not automatic because discretion has been given to the Assessing Officer to levy or not to levy the penalty which would be clear from the use of the words ‘may’ in section 271(1)(c).

Moreover, Assessing Officer has also been given discretion to levy the penalty at the rate ranging between 100 % to 300 % of the tax sought to be evaded.

Therefore, if the Assessing Officer levies the penalty u/s. 271(1)(c) on the part of the additional income, it cannot be said that the order of the Assessing Officer is erroneous as well as prejudicial to the interests of the revenue within the meaning of section 263.

In the instant case, the penalty had already been levied on the substantial portion of the additional income. Also in the penalty order, the Assessing Officer had discussed each and every fact as well as legal position in detail and, at the end, he had also mentioned the amount of concealment worked out by him and then calculated penalty thereon.

In such a case, merely because in the opinion of the Commissioner the penalty should have been levied on the entire returned/assessed income, it would not vest the Commissioner with the power of suo motu revision u/s. 263.

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Search and seizure: Block assessment: Block period: S/s. 132A and 158B(a): Period up to which “requisition was made”: Meaning of: Date on which the authorisation u/s. 132A was issued is to be taken and not the dated of execution of the authorisation: Warrant of authorisation u/s. 132A issued on 18-09-2001: Warrant executed and books of account and other documents received on 21-03-2003: The block period will be from 01-04-1995 to 18-09-2001 and not from 01- 04-1996 to 21/03/2003 as taken by the<

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Sanjay Gupta vs. CIT; 366 ITR 18 (Delhi):

The assessee derived income from purchase and sale of properties and from trading of transistor parts. He also worked as an informer for the Directorate of Revenue Intelligence. On 15-06-2001, the CBI conducted a search at the premises of the assessee and seized cash amounting to Rs. 1,12,50,000/-. The Director of Incometax (Investigation) issued a warrant of authorisation u/s. 132A of the Income-tax Act, 1961 on 18-09-2001. The Income Tax Authorities executed the warrant and received the books of account and other documents on 21-03- 2003. The Assessing Officer passed block assessment order u/s. 158BC for the block period from 01-04-1996 to 21-03-2003.

When the dispute reached the High Court in appeal the Delhi High Court held as under:

“i) “Block period” has been defined to mean the period comprising previous years relevant to the six assessment years preceeding the previous year in which search u/s. 132 of the Income-tax Act, 1961, is conducted or requisition u/s. 132A is made. It also includes the part of the previous year till the date when the search u/s. 132 is conducted or such requisition u/s. 132A is made.

ii) Making a requisition would not be the same as receiving the articles that are requisitioned. The expression “a requisition was made” cannot be equated to receiving the articles that were requisitioned. There was no reason to read the expression “requisition was made” not to mean the date on which the authorised officer made the requisition, but to mean the date when he received the records and assets pursuant thereto.

iii) The block period adopted by the Assessing Officer was not in accordance with the provisions of the Act, the assessment made by the Assessing Officer would also be required to be reviewed. Thus, the matter was remanded to the Assessing Officer to assess the income for the block period 01-04-1995 to 18-09-2001.”

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Revision: S/s. 143 and 263: A. Y. 2006-07: ITO had jurisdiction at the time issuing notice u/s. 143(2): Assessment order u/s. 143(3) passed by ITO when jurisdiction was with Dy. Commissioner/ Assistant Commissioner as per Departmental Circular: Assessment order not invalid: Commissioner does not have power to revise such order u/s. 263:

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CIT vs. Kailash Chand Methi: 366 ITR 333 (Raj):

For the A. Y. 2006-07, the assessee had filed the return of income declaring income of Rs. 2,32,969/-. The ITO completed the assessment u/s. 143(3) of the Incometax Act, 1961 making an addition of Rs. 4,50,000/-. The Commissioner initiated proceedings u/s. 263 of the Act, but being satisfied with the submissions of the assessee dropped the proceedings. Subsequently, another Commissioner set aside the order of the ITO holding that the ITO had no jurisdiction to complete the assessment as the income of the subsequent A. Y. 2007-08 was over Rs. 5 lakh and the jurisdiction lay with the Dy. Commissioner/ Asst. Commissioner and not with the ITO . The Tribunal set aside the order of revision.

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

“i) T he Commissioner does not have unfettered or unchequered discretion to revise the order u/s. 263 of the Income-tax Act, 1961. He can do so within the bounds of the law and has to satisfy the need of fairness in action. The Commissioner cannot invoke the powers to correct each and every mistake or error committed by the Assessing Officer. Every loss to the Revenue cannot be treated as prejudicial to the interest of the Revenue.

ii) T he notice u/s. 143(2) was issued on 11-01-2007 by the ITO and at that particular time, the income for the subsequent A. Y. 2007-08 was not submitted, rather the financial year had not ended by then and the ITO assumed valid jurisdiction. The return for the A. Y. 2007-08 was submitted on 31-08-2007, and merely because the assessment order was passed after 31- 08-2007, the assessment order u/s. 143(3) passed by the ITO on 30-09-2008, could not be said to be without jurisdiction. The assessment order passed on 30-09- 2008 was within jurisdiction and validly passed.

iii) M oreover, one Commissioner had issued notice u/s. 263 for the same assessment year and he having been satisfied dropped the proceedings and it was only thereafter that another Commissioner came to the conclusion about the jurisdiction while the earlier Commissioner was also aware of this fact. The order of the Commissioner was at best a result of change of opinion and tantamount to abuse of powers granted to the Commissioner. The practice adopted by the Commissioner is de hors and it amounts to unnecessary harassment to the assessee for no fault of his. Therefore, the order of revision was not valid.

iv) We do not find any infirmity or perversity in the order of the Tribunal. The appeal, being devoid of any merits, is hereby dismissed.”

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Income: Unexplained investment: Section 69: A. Y. 2005-06: Search and seizure: Jewellery found during search: Instruction No. 1916 dated 11-05- 1994: Jewellery within prescribed limits: Addition of value of part of jewellery as undisclosed income: Not justified:

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CIT vs. Satya Narayan Patni; 366 ITR 325 (Raj):

There
was a search action in the case of the Appellant on 30-06-2004,
wherein, besides other items, gold jewellery weighing 2202.464 gms,
valued at Rs. 10,53,520/- was found. Looking to the status of the
assessee and the statement given during the course of search operation
by various family members and considering the fact that there were four
married ladies in the house including the wife of the assessee, no
jewellery was seized. However, jewellery to the extent of 1600 grams,
was treated as reasonable by the Assessing Officer which had been
received by them at the time of their marriage. The balance jewellery
weighing 602.464 gms, was treated as unexplained in the absence of any
satisfactory explanation from the assessee and the value thereof of Rs.
2,88,176/- was added to the income of the assessee as unexplained
investment u/s. 69 of the Income-tax Act, 1961. The CIT(A) and the
Tribunal deleted the addition.

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

“i)
O n a perusal of Instruction No. 1916 dated 11/05/1994 issued by the
CBDT, it is clear that in the case of a wealth-tax assessee, whatever
gold, jewellery and ornaments have been found and declared in the
wealth-tax return, need not be seized. However, subclause (ii)
prescribes that in the case of a person not assessed to wealth-tax, gold
jewellery and ornaments to the extent of 500 gms. per married lady, 250
gms. per unmarried lady and 100 gms per male member of the family need
not be seized. Sub-clause (iii) also prescribes that the authorised
officer may, having regard to the status of the family, and the customs
and practices of the community to which the family belongs and other
circumstances of the case, decide to exclude larger quantity of
jewellery and ornaments from seizure.

ii) A dmittedly looking to
the status of the family and the jewellery found in the possession of
the four ladies, it was held to be reasonable and therefore, the
authorised officer, in the first instance, did not seize the jewellery
as being within the limit or limits prescribed by the Board and the
subsequent addition was not justifiable on the part of the Assessing
Officer and rightly deleted by both the two appellate authorities.

iii)
T he Tribunal has correctly analysed the circular of the Board and we
do not find any infirmity or perversity in the order of the Tribunal.
The appeal, being devoid of any merits, is hereby dismissed.”

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House property income: Annual letting value: Section 23(a): A. Y. 2005-06: For determining annual value of property municipal rateable value may not be binding on Assessing Officer only in cases where he is convinced that interest free security deposit and monthly compensation do not reflect prevailing rate: In such a case, Assessing Officer can himself resort to enquire about prevailing rate in locality: Where a premises is covered by Rent Control Act, Assessing Officer must undertake exercise<

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CIT vs. Tip Top Typography: [2014] 48 taxmann.com 191 (Bom):

In the A. Y. 2005-06, the assessee had let out commercial premises. The assessee had received Rs. 3,60,000/- as rent and Rs. 5,25,00,000/- as interest free security deposits from the tenants. The Assessing Officer noticed that the rent received by the assessee was nominal and the circumstantial evidence indicated that the fair market value was higher. Therefore, he obtained instances of the rental amount prevailing in the market and particularly in the area and confirmed that the property was not covered by the Rent Control Act. On the basis of such comparable instance, the annual letting value u/s. 23(1)(a) was determined at Rs. 85,72,608/- as against Rs. 3,60,000/- shown by the assessee. The Tribunal remitted the matter back to the Assessing Officer and directed him to verify the rateable value fixed by the Municipal authorities and if the same is less than Rs. 3,60,000/-, then the actual rent received should be taxed. In appeal filed by the Revenue, the following questions of law were raised:

“i) Whether on the facts and circumstances of the case and in law, Tribunal was right in holding that the fair rental value specified in section 23(1)(a) is the municipal value or actual rent received whichever is higher and not the annual letting value on the basis of comparable instances as adopted by the Assessing Officer, though the property under consideration was not covered by the Rent Control Act?

ii) Whether on the facts and circumstances of the case and in law, Tribunal was right in remitting the matter back to the file of the Assessing Officer with direction to verify the rateable value fixed by the Municipal Authorities and if the same is less than the actual rent received, then the actual rent received should be taxed?”

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

“i) T he rateable value, if correctly determined, under the municipal laws can be taken as Annual Letting Value u/s. 23(1)(a) of the Act. To that extent we agree with the contention of the learned Counsel of the assessee. However, we make it clear that rateable value is not binding on the assessing officer. If the assessing officer can show that rateable value under municipal laws does not represent the correct fair rent, then he may determine the same on the basis of material/ evidence placed on record.

ii) We are of the view that where Rent Control Legislation is applicable and as is now urged the trend in the real estate market so also in the commercial field is that considering the difficulties faced in either retrieving back immovable properties in metro cities and towns, so also the time spent in litigation, it is expedient to execute a leave and license agreements. These are usually for fixed periods and renewable. In such cases as well, the conceded position is that the Annual Letting Value will have to be determined on the same basis as noted above.

iii) I n the event and as urged before us, the security deposit collected and refundable interest free and the monthly compensation shows a total mismatch or does not reflect the prevailing rate or the attempt is to deflate or inflate the rent by such methods, then, as held by the Delhi High Court, the Assessing Officer is not prevented from carrying out the necessary investigation and enquiry. He must have cogent and satisfactory material in his possession and which will indicate that the parties have concealed the real position.

iv) H owever, we emphasise that before the Assessing Officer determines the rate by the above exercise or similar permissible process he is bound to disclose the material in his possession to the parties. He must not proceed to rely upon the material in his possession and disbelieve the parties. The satisfaction of the Assessing Officer that the bargain reveals an inflated or deflated rate based on fraud, emergency, relationship and other considerations makes it unreasonable must precede the undertaking of the above exercise. After the above ascertainment is done by the Officer he must, then, comply with the principles of fairness and justice and make the disclosure to the Assessee so as to obtain his view.

v) The following conclusions are drawn:-

a) AL V would be the sum at which the property may be reasonably let out by a willing lessor to a willing lessee uninfluenced by any extraneous circumstances.

b) An inflated or deflated rent based on extraneous consideration may take it out of the bounds of reasonableness.

c) A ctual rent received, in normal circumstances, would be a reliable evidence unless the rent is inflated/ deflated by reason of extraneous consideration.

d) Such ALV, however, cannot exceed the standard rent as per the Rent Control Legislation applicable to the property.

e) If standard rent has not been fixed by the Rent Controller, then it is the duty of the assessing officer to determine the standard rent as per the provisions of rent control enactment.

f) T he standard rent is the upper limit, if the fair rent is less than the standard rent, then it is the fair rent which shall be taken as ALV and not the standard rent.

vi) We do not see as to how we can uphold the submissions of Mr. Chhotaray that the notional rent on the security deposit can be taken into account and consideration for the determination. If the transaction itself does not reflect any of the afore-stated aspects, then, merely because a security deposit which is refundable and interest free has been obtained, the Assessing Officer should not presume that this sum or the interest derived therefrom at Bank rate is the income of the assessee till the determination or conclusion of the transaction.

vii) The Assessing Officer cannot brush aside the rent control legislation, in the event, it is applicable to the premises in question. Then, the Assessing Officer has to undertake the exercise contemplated by the rent control legislation for fixation of standard rent. The attempt by the Assessing Officer to override the rent control legislation and when it balances the rights between the parties has rightly been interfered with in the given case by the Appellate authority. The Assessing Officer either must undertake the exercise to fix the standard rent himself and in terms of the Maharashtra Rent Control Act, 1999 if the same is applicable or leave the parties to have it determined by the Court or Tribunal under that Act. Until, then, he may not be justified in applying any other formula or method and determine the “fair rent” by abiding with the same. If he desires to undertake the determination himself, he will have to go by the Maharashtra Rent Control Act, 1999. Merely because the rent has not been fixed under that Act does not mean that any other determination and contrary thereto can be made by the Assessing Officer.

viii)We are of the opinion that wherever the Assessing Officer has not adhered to the above principles, and his finding and conclusion has been interfered with, by the higher Appellate Authorities, the revenue cannot bring the matter to this Court as no substantial question of law can be arising for determination and consideration of this Court. Then, the findings by the last fact finding Authority, namely the Tribunal and against the revenue shall have to be upheld as they are consistent with the facts and circumstances brought before it. If they are not vitiated by any perversity or error of law apparent on the face of the record, the appeals of the revenue cannot be entertained. They would have to be accordingly dismissed.”

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51 taxmann.com 1 (Mumbai) Johnson & Johnson Ltd. vs. Addl. CIT SA No. 288 /Mum/2014 Assessment Year: 2009-10. Date of Order: 31.10.2014

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If the Tribunal has granted stay, even if there is consent of the assessee, the Officer should not collect the amount stayed.

Facts:
By
this stay application the assessee sought stay of collection of
outstanding demand of Rs. 43,24,08,871. The AO after reference to
determine transfer pricing adjustments u/s. 92C of the Act passed an
order determining the income of the assessee at Rs. 353.30 crore and
raised an additional demand of Rs. 116.27 crore. The Tribunal while
dealing with stay application dated 19.2.2014 noticed that most of the
issues stated before the Tribunal have been decided in favor of the
assessee in the orders passed by the Tribunal in assessee’s own cases
for earlier years and therefore it granted stay and directed the AO not
to make any adjustment except for the amount of Rs. 7.50 crore.

The
AO, despite the specific direction by the Bench, obtained consent
letter from the assessee and collected Rs. 16.64 crore during the
subsistence of the stay order. The amount outstanding had been reduced
to Rs. 43.24 crore.

Since the DR sought adjournment from time to time, the assessee filed a fresh stay application for extension of stay.

Held:
In
the proceedings for hearing the second stay application the Tribunal
noticed that the AO followed an innovative method of collection of taxes
despite specific directions of the Bench. The Tribunal clarified that
neither the assessee nor the Revenue has the right to flout the decision
of the Tribunal and being an officer functioning under the Government
of India it is his obligation to follow the directions of the superior
authority and even if there is consent he should not have collected the
amount.

The Tribunal having noticed that in few other cases also
similar consent letters were obtained and tax collected despite the
stay order being passed by the Tribunal, the Bench deplored this
practice and directed the Chief Commissioner of Income-tax to issue a
letter to all concerned officers not to adopt this kind of approach of
obtaining consent letters and to respect the order passed by the
Tribunal as otherwise the Tribunal would be constrained to view the
conduct of the Department adversely.

The Tribunal extended the
stay for a further period of six months and also directed the AO to
refund the amount collected, contrary to the order passed by ITAT in
S.A. No. 50/Mum/2014, along with interest within 15 days and to furnish
the proof of having refunded the amount before the Bench.

The stay application filed by the assessee was allowed.

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49 taxmann.com 578 (Cochin) Three Star Granites (P.) Ltd. vs. ACIT ITA No. 11/Cochin/2011 Assessment Years: 2007-08. Date of Order: 25.4.2014

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Section 40(a)(ia) – No disallowance can be made u/s 40(a)(ia) in cases of short deduction of tax at source.

Facts :
In respect of certain payments made by the assessee to resident contractors the Tribunal vide its order dated 29th March, 2012 decided that the assessee was liable to deduct tax at source u/s. 194I and not u/s. 194C as was the contention of the assessee. Aggrieved by this order of the Tribunal, the assessee carried the matter, by way of an appeal u/s. 260A, to the High Court. The High Court vide its order dated 26th November, 2013 held that the assessee was liable to deduct tax at source u/s. 194I and not u/s. 194C. For the limited purposes of applicability of section 40(a)(ia) of the Act in respect of short deduction of tax, i.e., deduction of tax at 2.06 % instead of 10 % u/s. 194-I of the Act, the High Court restored the matter to the file of the Tribunal.

Held:
The Tribunal noted that the issue of disallowance in respect of short deduction of of tax at source has been considered by the co-ordinate Bench in the case of Apollo Tyres Ltd. vs. Dy. CIT [2013] 60 SOT 1 (Cochin). Having considered the provisions of section 40(a)(ia) and also the provisions of section 201(1A), the Tribunal held that section 40(a)(ia) does not envisage a situation where there was short deduction/lesser deduction as in case of section 201(1A) of the Act. There is an obvious omission to include short deduction/lesser deduction in section 40(a) (ia) of the Act. Therefore, the entire expenditure whose genuineness was not doubted by the Assessing Officer, cannot be disallowed. The Tribunal set aside the orders of lower authorities and deleted the entire disallowance.

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Period of Holding on Conversion of Leasehold Property into Ownership

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Issue for Consideration
When an
immovable property held as a capital asset is transferred, for
computation of the capital gains, it is essential to first identify the
period of holding of the asset transferred for determining as to whether
the property was a long-term capital asset or a short term capital
asset by applying the definitions of long-term capital asset and short
term capital asset contained in sections 2(29A) and 2(42A) respectively,
of the Income-tax Act, 1961. If the immovable property was held for
more than 36 months, it is a long-term capital asset, or else it is a
short term capital asset. Such classification is important, because the
manner of computation of the gains is more beneficial in the case of
long-term capital gains. Such gains are also taxable at a lower rate,
besides qualifying for certain exemptions.

The complication
arises when the immovable property that is being transferred was to
begin with taken on lease by the assessee, and the leasehold rights
therein were thereafter converted into ownership rights within a period
of 36 months prior to the date of transfer of the immovable property,
with the combined total period of lease and ownership put together
exceeding 36 months. In such cases, the question that has arisen for
consideration is whether the property that is under transfer can be said
to have been held for more than 36 months or not, and accordingly
whether it will be regarded as a long-term capital asset or whether it
would be treated as a short term capital asset.

While the
Karnataka and the Bombay High Courts have taken the view that the gains
arising on sale of the property under such circumstances would be a
short term capital gains, the Allahabad High Court has taken a contrary
view and held that the gains would be classified as longterm capital
gains .

Dr. V. V. Mody’s case
The issue first came up before the Karnataka High Court in the case of CIT vs. Dr. V. V. Mody 218 ITR 1.

In
this case, the assessee was allotted a site by the development
authority in 1972 on lease with a stipulation that the asset in question
would be sold after a period of 10 years to the assesse. A
lease-cum-sale agreement was executed at that point of time, providing
for payment of certain amount by the assessee, and that on payment of
the entire sale consideration, conveyance was agreed to be executed in
favour of the assessee at the end of the 10th year. Subsequently, in
pursuance of the said agreement, a sale deed was executed in favour of
the assessee in March 1982, which was registered in May 1982. The
assessee sold the site in November 1982, and claimed that the capital
gains arising on sale was a long term capital gain, since he held the
site since 1972.

The assessing officer treated the gains as a
short term capital gain, holding that the assessee acquired the site
only in March 1982, when the conveyance was executed in his favour and
the asset that was transferred was a short term capital asset in the
hands of the assessee. The Commissioner(Appeals) allowed the assessee’s
appeal, agreeing with the view of the assessee that the site had been
held by him since 1972. On appeal by the revenue, the tribunal held that
the rights acquired under the lease-cum-sale agreement were also
capital assets. It held that on transfer of the site, the assessee had
in fact transferred a bundle of rights, a part of which (half) were held
as a long term capital asset. It accordingly directed that 50% of the
sale consideration should be regarded as received pertaining to the
transfer of the short term capital asset , with 50% of the consideration
being regarded as pertaining to the transfer of the long term capital
asset, with 50% of the cost of the asset being attributed to each of the
components.

Before the Karnataka High Court, on behalf of the
assessee, it was argued that the lease rights held by the assessee was a
capital asset, since the expression “property of any kind” in the
definition of capital asset in section 2(14) was wide enough to include
rights enjoyed by an assessee in respect of immovable property, even
though such rights were inferior to the rights of ownership of the
property. It was argued that transfer of such lights would legitimately
give rise to capital gains, and since these rights were held for more
than 36 months, the gains was to be treated as a long-term capital gain.

The Karnataka High Court noted that there were two questions
which arose for consideration before it – what was the capital asset
that had been transferred by the assessee giving rise to the capital
gains, and since when was that capital asset held by the assessee.
According to the High Court, the answers to these questions were
straight and simple. The asset transferred was title to the site, which
the assessee held on the basis of the conveyance in his favour since
March 1982. The gain was therefore a short term capital gain.

The
High Court noted that the approach adopted by the tribunal implied that
the transfer made by the assessee pertained to both the lease rights as
well as title to the property, which in turn meant that as on the date
of the transfer in favour of the purchaser, the assessee combined in
himself the dual capacity of being not only the owner of the property,
but also the lessee thereof. According to the High Court, this approach
was not legally sound and ignored the legal effect of the transfer of
absolute title in favour of the assessee, who was holding the site in
question till March 1982, only on the basis of the leasecum- sale
agreement.

The significance of the transfer was that it brought
about a merger of the lesser interest held by the assessee in the bigger
estate acquired by him under the sale deed in his favour. Merger
implied the vesting of lesser rights held by an individual in the larger
estate that he may acquire qua the property in question. It postulated
the extinction of the lesser estate, whenever the person holding any
such estate acquired a greater estate in respect of the same property.
In the event of the lesser and the greater estate is coinciding in the
same individual, the lesser got annihilated, ground or sunk in the
larger. The doctrine owed its origin to the English common law, but with
equity intervening, the position in England was that merger would be
deemed to take place only in case the party acquiring the larger estate
intended so. The High Court noted that this position was accepted, even
in India except to the extent that the statutory provisions like the
Transfer of Property Act, 1882 mandated otherwise. The High Court noted
the observations made by the Supreme Court in Jyotish Thakur vs.
Tarakant Jha AIR 1963 SC 605 in this regard.

The Karnataka High
Court noted that the assessee held the site in question under an
agreement of lease cum sale, and that it was not in dispute that in so
far as an agreement to sell was concerned, it did not create any right
in the property agreed to be sold. The assessee had valuable interest in
the site in his capacity as a lessee, which leasehold rights was a
capital asset. These rights, being a lesser estate in comparison to the
larger one representing the title or the property, merged with the
larger estate upon the assessee acquiring the title to the property
under the sale deed.

The  Karnataka  high  Court  noted  that  there  were  two questions which arose for consideration before it – what was the capital asset that had been transferred by the assessee giving rise to the capital gains, and since when was that capital asset held by the assessee. According to the high Court, the answers to these questions were straight  and  simple.  The  asset  transferred  was  title  to the site, which the assessee held on the basis of the conveyance in his favour since march 1982. the gain was therefore a short term capital gain.

The high Court noted that the approach adopted by the tribunal implied that the transfer made by the assessee pertained to both the lease rights as well as title to the property, which in turn meant that as on the date of the transfer in favour of the purchaser, the assessee combined in himself the dual capacity of being not only the owner of the property, but also the lessee thereof. According to the high Court, this approach was not legally sound and ignored the legal effect of the transfer of absolute title    in favour of the assessee, who was holding the site in question till march 1982, only on the basis of the lease- cum-sale agreement.

The significance of the transfer was that it brought about a merger of the lesser interest held by the assessee in the bigger estate acquired by him under the sale deed in his favour. Merger implied the vesting of lesser rights held by an individual in the larger estate that he may acquire qua the property in question. It postulated the extinction of the lesser estate, whenever the person holding any such estate acquired a greater estate in respect of the same property. in the event of the lesser and the greater estate is coinciding in the same individual, the lesser got annihilated,  ground  or  sunk  in  the  larger.  The  doctrine owed its origin to the english common law, but with equity intervening, the position in england was that merger would be deemed to take place only in case the party acquiring the larger estate intended so. the high Court noted that this position was accepted, even in india except to the extent that the statutory provisions like the transfer of Property act, 1882 mandated otherwise. The high Court noted the observations made by the Supreme Court in jyotish  Thakur  vs. Tarakant  Jha AIR  1963  SC 605 in this regard.

The Karnataka high Court noted that the assessee held the site in question under an agreement of lease cum sale, and that it was not in dispute that in so far as an agreement to sell was concerned, it did not create any right in the property agreed to be sold. The assessee had valuable interest in the site in his capacity as a lessee, which leasehold rights was a capital asset. these rights, being a lesser estate in comparison to the larger one representing the title or the property, merged with the larger estate upon the assessee acquiring the title to the property under the sale deed.

The Karnataka high Court noted the provisions of section 111(d) of the transfer of Property act, which provided that a lease of immovable property determined in case the interests of the lessee and the lessor in the whole of the property became vested at the same time in one person in the same right. According to the high Court, this provision recognised what was true even on first principles, i.e., a person cannot be a tenant and landlord qua the same property at the same time. In the opinion of the high Court, the question of the assessee intending to keep the two capacities or estates, namely one of leasehold rights and the other of ownership, separately from each other or any such separation of the interests held by him being beneficial to the assessee, did not arise. The question of intention of the assessee or his interest would arise only if the situation was not covered by the provisions of section 111 (d).

The  Karnataka  high  Court  noted  that  from  the  date of sale in favour of the assessee, the assessee  had  only one capacity to describe himself qua the land in question, and that was the capacity of being the absolute owner of the same. it was in that capacity alone that the assessee transferred his title over the site in favour of the purchaser. the sale did not describe the transfer made in favour of the purchaser to be one of the rights which the assessee held in respect of the site prior to the sale deed. All such rights had sunk or drowned in the larger estate and therefore stood extinguished. The legal effect of the transfer made in favour of the assessee was that he had become the absolute owner of the property and therefore all that he could convey and did actually convey to the transferee was the absolute title in the property without any reference to any inferior rights that the assessee had held prior to his becoming owner.

Viewed from that angle, according to the Karnataka high Court, it was apparent that what the assessee transferred had been held by him only from the date of the sale deed in his favour and not earlier to that. Therefore, in the view of the high Court, the question of splitting up the sale price or the cost of acquisition of the asset separately for the purposes of short-term and long-term capital gains did not arise.

The  high  Court  rejected  the  argument  of  the  assessee regarding the transfer of leasehold rights by the assessee, which were long-term capital assets.  according  to  it, the issue was not whether such leasehold rights were    a property or a capital asset, but  whether  any  such right existed and could be transferred by the assessee after it had merged in the larger estate acquired by the assessee.  This  was  so  because  what  was  transferred by the assessee was not the lesser  interest  held  by him prior to becoming the absolute owner, but the total interest acquired by him in the form of absolute title to the property. Unless it was possible for the assessee to hold the two estates simultaneous and independent of each other, the transfer of the title in the property could not be deemed to be a transfer of both the larger and the lesser estates, so as to make them amenable to the process of splitting into long term and short term capital gains.

The   Karnataka   high   Court   therefore   held   that   as from march 1982, the assessee had only one estate representing the title to the property, and the capital gain arising from the transfer of this estate gave rise to a short term gain.

A similar view was taken by the Bombay high Court in the case of CIT vs. Dr. D. A. Irani 234 ITR 850, where it dealt with a case of an assessee having tenancy right over a flat, who acquired the ownership rights to the flat and sold the flat within 5 months of acquisition. In that case as well, the Bombay high Court applied the provisions of section 111(d) of the transfer of Property act, to hold that the gain on sale of the flat was a short term capital gain.

Rama rani kalia’s case
the issue again came up recently before the allahabad high Court in the case of CIT vs. Smt. Rama Rani Kalia 358 ITR 499. in this case, the assessee acquired a property on leasehold basis in 1984. She applied for freehold rights, which were granted by the collector in march 2004. Within 3 days thereafter, the property was sold. the assessee claimed the capital gains on sale of the property to be long term capital gains.

The assessing officer took the view that since the property was sold within 3 days of conversion of the leasehold rights into freehold rights, the capital gains was a short term  capital  gains.  The  Commissioner(appeals)  held that the conversion of leasehold property into freehold property was an improvement of title over the property, since the assessee was the owner of the property even prior to conversion. He therefore held that the gain was a long term capital gains. The Tribunal confirmed the order of the Commissioner(appeals).

The  allahabad  high  Court  noted  that  the  difference between a short term capital asset and a long-term capital asset was the period for which the property had been held by the assessee, and not the  nature of title  or the property. according to the high Court, the lessee  of the property had rights as owner of the property for all  purposes,  subject  to  covenants  of  the  lease.  The lessee may transfer the leasehold rights of the property with the consent of the lessor, subject to covenants of the lease deed. The conversion of the rights of the lessee in the property from leasehold right into freehold was only by way of improvement of rights over the property, which she enjoyed.

According to the allahabad high Court, the conversion would not have any effect on the taxability of gains from such property, which was related to the period over which the property was held. Since the property was held by the assessee as a lessee since 1984, and was transferred  in march 2004, after the leasehold rights were converted into freehold rights of the same property, which was in her possession, the conversion was by way of improvement of title, which, according to the high Court, would not have any effect on the taxability of profits .

The allahabad high Court therefore held that the gains arising on sale of property was long term capital gains.

The  allahabad  high  Court,  in  yet  another  decision, delivered in ita no. 134 of 2007 dated 22-11-2007, in the case of Dhiraj Shyamji Chauhan has confirmed that the period of holding in such cases should commence from the date of acquiring leasehold rights.

Observations
The Supreme Court, in the case of A.R. Krishnamurthy vs. CIT 176 ITR 417, held that a land is a bundle of rights. the issue is whether these rights are separable, whether they can be separately transferred, and if transferred together, whether it is possible to bifurcate the rights between those held for more than 36 months and those held for a shorter period. in the case of A R Krishnamurthy, the Supreme Court considered a situation of grant of mining rights, which was one of the bundle of rights acquired on acquisition of the land. in that case, the Supreme Court directed bifurcation of the cost of acquisition to compute the capital gains. In that case, of course, it was the assessee himself who separated the rights, and transferred one of the rights. The court found that each of the rights comprised in the bundle was capable of being separately transferred for a valuable consideration. Conversely, the different rights in an asset can be acquired at different point of time, acquisition     of each of which has the effect of improving the title of the acquirer over the property.   The doctrine of merger, embodied in the transfer of Property act, provides that on acquisition, by the lessee, of the freehold rights in a property, the lesser estate of the lessee i.e., his leasehold rights merge into a larger estate of the lessee i.e., his freehold rights. . .

Section 111 (d) of the transfer of Property act provides as under:

111. A lease of immovable property determines – (a)…..
(b)…..
(c)    ….
(d)    in case the interests of the lessee and the lessor in the whole of the property become vested at the same time in one person in the same right.

From the statutory provision, it is clear that a lease comes to an end when the same person is both the owner as well as the lessee of the property, and therefore the subject matter of transfer is the ownership rights in the property, which remain on merger, to the buyer of the property. To that extent, the views of the Karnataka high Court and the Bombay High Court at first seem to be justified when the courts dealt with the nature of rights or the title that the buyer acquired. What perhaps, was overlooked, with respect, and had remained unaddressed, was the issue whether the asset in question was held for a longer period that began with the date of acquiring the leasehold rights in the property. This issue was specifically dealt with by the allahabad high court in the later decision which after considering the ratio of the decision of the Karnataka high court chose to take a contrary view.

The issue in question, as identified by the Allahabad High Court, is about the period of holding of a capital asset which is determined with reference to the period for which an asset is ‘held by an assessee’. the property all along remained the same i.e., an immovable property. What was changed was the rights over the property – from leasehold  to  ownership.  the  assessee  remained  the same. Holding a property under a leasehold right as a lessee, is also a recognised mode of holding the property. It is only when the property in question is changed, that the period of holding is shortened, for e.g., warrants to shares. When the property remains the same, the change in the title to the property is not a relevant factor for the purposes of the income-tax act.

It is a settled position that lease is one of the modes of acquisition of an immovable property and that leasehold rights are a capital asset capable of being transferred. Applying the law of section 2(47) to the case of a purchase or acquisition, it is possible to hold that an asset is acquired on execution of a lease deed. It is also clear that an immovable property comprises of a bundle of rights and grant of lease is one such right.

In the case of R. K. Palshikar HUF vs. CIT 172 ITR 311, the Supreme Court held that grant of a lease of a property for 99 years amounts to transfer of the property, giving rise to capital gains. if that is the position, and under tax laws, the owner is regarded as having transferred the property, the logical consequence should be that the lessee is then regarded as the deemed owner, a position that is acknowledged by section 27 of the act. Even A.
R. Krishnamurthy’s case (supra) was a case of grant of a mining lease for 10 years, where the Supreme Court followed r. K. Palshikar huf’s decision (supra), taking a view that transfer of capital asset in section 45 includes grant of mining lease for any period.

In fact, section 27 of the income-tax act provides that a person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction referred to in section 269UA(F), is deemed to be the owner of that building or part thereof. Section 269UA(F), which dealt with acquisition proceedings, refers to, inter alia, a lease for a period exceeding 12 years. Therefore, for all practical purposes, the income-tax act regards the property as having been transferred to the lessee if the lease is for a period exceeding 12 years.

Under such circumstances, is it appropriate to say that the lessee was really not the owner, for the period that he was a lessee, when it comes to payment of capital gains taxes, even if he was a lessee for more than 12 years?

The cost of acquisition is a significant factor in computation of the capital gains. The cost in certain specified cases remains the historical cost, and, in those cases, the courts have taken a consistent view that the period of holding should also be so taken, by relating it back, in the interest of the harmonious construction of the provisions of the act, [h.f.Craig harvey  244 itr 578 (mad.), and manjula j. Shah, 355 itr 474(Bom)].

Alternatively, the cost would have to be taken as the market value as on the date of conversion where a view is taken that the period of holding should be determined with reference to the date of acquisition of the new asset. The law on this aspect is very clear that the cost should be the market value.

In case of an asset held under a deed of conveyance executed in pursuance of an agreement for sale, the period of holding should commence from the date of agreement and not of the deed, though on execution of the deed, the rights under the agreement are extinguished and absolute rights are acquired in the asset.

It may not be possible to separate the gains in two parts nor may it be possible to divide the consideration, but the period of holding can surely be said to have begun from the date of the lease, particularly in a case where the lessee has acquired a dominion over the property with   a right to transfer the same in lieu of consideration paid by him. In fact, in dr. V. V. mody’s case, the lease was coupled with the right to acquire ownership after a period of ten years, which right itself was a capital asset. The definition of the term ‘capital asset’ u/s. 2(14) includes a ‘property of any kind’ and is wide enough to cover the case of a leasehold right. Having acquired a capital asset, it does not vanish in thin air, unless it is lawfully transferred or is improved upon.

The issue therefore is not whether there were two estates or one but is all about the period of holding of the property. It may be that the latest rights that are transferred may not be old, but the property that is transferred is certainly old. Even the pedigree of the new rights is ancestral.

Various explanations contained in ssection  2(42a)  of the Act, precisely confirm the theory of harmonious construction by extending the period of holding in cases of various financial assets referred to therein. This principle also is approved by section 55 of the act. in all cases, where the historical cost is frozen in time, the period of holding of the new asset is extended to cover the period of holding of the old asset as well. this is, otherwise, also true on first principles of taxation.

One strong view is that the issue cannot be determined with reference to the provisions of section 111 of the transfer  of  Property  act.  These  provisions  have  the limited impact of explaining the title of a person over a property.  they  simply  explain  that  the  inferior  rights  of a  person  are  transformed  into  the  superior  rights.  this does not affect the period of holding of the property at all. It only improves the legal title to the property. Tax laws clearly recognise the concept of holding of an asset other than by way of legal title – leasehold rights in a property is one such form of ownership.

In fact, the delhi high Court, in a recent decision in the case of CIT vs. Frick India Ltd. 369 ITR 328, has analysed the meaning of the term “held by the assessee” u/s. 2(42A) as under:

“We would like to elucidate and explain the expression, “held by the assessee” in some detail. General words should normally receive plain and ordinary construction but this principle is subject to the context in which the words are used as the words  reflect  the  intention  of the Legislature. The words have to be construed and interpreted to effectuate the object and purpose of the provision, when they are capable of multiple meanings or are ambiguous. Isolated reading of words can on occasions negate the very purpose. Lord Diplock had referred to the term, “business” as an ‘etymological chameleon’, which suits its meaning to the context in which it is found. The background, therefore, has to be given due regard and not to be ignored, to avoid absurdities. This principle is applicable when we interpret the word, “held” in section 2(42A) of the Act, for the said word is capable of divergent and different connotations and understanding.

The word, ‘held’ as used in section 2(42A) of the Act is with reference to a capital asset and the term, ‘capital asset’ is not confined and restricted to ownership of a property or an asset. Capital assets can consist of rights other than ownership right in an asset, like leasehold rights, allotment rights, etc. The sequitur, therefore, is that the word ‘held’ or ‘hold’ is not synonymous with right over the asset as an owner and has to be given a broader and wider meaning. In Black’s Law Dictionary, Sixth Edition, the word ‘hold’ has been given a variety of meanings under nine different headings. Four of them, i.e, 1, 4, 8 and 9 read as under:

‘1. To possess in virtue of a lawful title; as in the expression, common in grants, “to have and to hold,” or in that applied to notes, “the owner and holder.”
** ** **
4. To maintain or sustain; to be under the necessity or duty of sustaining or proving; as when it is said that a party “holds the affirmative” or negative of an issue in a cause.
** ** **
8.    To possess; to occupy; to be in possession and administration of; as to hold office.

The word ‘held’ was interpreted to mean “lawfully held, to possess by legal title”. The term ‘legal title’ here not only includes ownership, but also title or right of a tenant, which will mean actual possession of the land and a  right to hold the same and claim possession thereof as a tenant (we are not examining rights of a rank trespasser in the  present  decision  and  we  express  no  opinion  in that regard).”

From  this,  it  is  clear  that  the  term  “held”  need  not necessarily refer to only the period of holding as an owner.

Under the law contained in the income-tax act, 1961, in the context, there are only two possibilities:

a.    a transfer arises on conversion of leasehold rights into ownership rights in which case;
i.    liability to capital gains is attracted on such conversion, and
ii.    the fair market value becomes the cost of acquisition of the new asset,
 
9.    To keep; to retain; to maintain possession of or authority over.’

or

b.    there is no transfer on such conversion and the period of holding is extended to include the period during which the asset was held on lease.

The latter view seems to be the more equitable view of the matter, but given the views of the Karnataka and Bombay high Courts, the debate will ultimately be settled only by a decision of the Supreme Court.

Business expenditure: Disallowance u/s. 43B r.w.s. 2(24)(x) and 36(1)(va): A. Y. 2008-09: Employer’s and Employees’ contributions to Provident fund deposited before due date for filing return u/s. 139(1):

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Amount allowable as deduction: Essae Teraoka P. Ltd. vs. CIT; 366 ITR 408 (Kar):

For the A. Y. 2008-09, the assessee company had deposited the Employer’s and Employees’ contribution to the provident fund after the due date under the Provident Fund Scheme but before the due date for filing the return of income u/s. 139(1) of the Income-tax Act, 1961. The Assessing Officer added the amounts to the income of the assessee u/s. 36(1)(va) r.w.s. 2(24)(x) of the Act and did not allow the deduction. The Tribunal upheld the disallowance.

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

“i) F rom a bare perusal of clause (va) of section 36(1) of the Act, it is clear that if any sum received by the assessee employer from any of his employees towards the employees’ contribution to provident fund is deposited in the relevant fund within the time stipulated in the scheme then the assessee is straightway entitled to deduction as contemplated u/s. 36(1)(va) of the Act.

ii) Section 43B states that notwithstanding anything contained in any other provision of the Income-tax Act, a deduction otherwise allowable in this Act in respect of any sum payable by the assessee as an employer by way of contribution to any fund such as provident fund shall be allowed if it is paid on or before the due date as contemplated u/s. 139(1) of the Act. This provision has nothing to do with the consequences, provided for under the Employees’ Provident Funds Act for not depositing the “contribution” on or before the due date therein.

iii) T he word “contribution” used in clause (b) of section 43B of the Act means the contribution of the employer and the employee. That being so, if the contribution is deposited on or before the due date for furnishing the return of income u/s. 139(1) of the Act, the employer is entitled to deduction.

iv) I n the result, the appeal is allowed and the substantial question of law is answered in favour of the appellantassessee and against the Revenue.”

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ITAT: Duty of Tribunal to decide appeals: Section 254(1): A. Y. 1997-98 and 1998-99: Unnecessary remand by ITAT causes prejudice and amounts to a failure to exercise jurisdiction:

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Coca-Cola India P. Ltd. vs. ITAT (Bom): W. P. No. 3650 of 2014 dated 14-08-2014:

For the A. Y. 1997-98 as regards the assessee’s claim for deduction of service charges the Tribunal had remanded the matter back to the Assessing Officer for fresh consideration. Allowing the writ petition filed by the assessee against the said order, the Bombay High Court (see 290 ITR 464) had held that as the CIT(A) had given specific grounds for the disallowance , the Tribunal ought to have decided the specific issues on merit and not simply remanded it. Thereafter, the Tribunal decided the issue on merits and allowed the assessee’s claim. For A. Y. 1998-99, though the CIT(A)’s order was passed on the same date as the order passed for A. Y. 1997-98 and the Tribunal was aware of the High Court order for A. Y. 1997-98, it still remanded the issue to the Assessing Officer for fresh consideration. Miscellaneous application filed by the assessee was dismissed on the ground that the remand order was a conscious “decision” and not an apparent mistake.

The assessee filed a writ petition challenging the order. The Bombay High Court allowed the writ petition and held as under:

“i) T he Tribunal should not have refused to consider and decide the issue relating to service charges, more so, when an identical view taken by it earlier has not found favour of this Court. This Court repeatedly reminded the Tribunal of its duty as a last fact finding authority of dealing with all factual and legal issues. The Tribunal failed to take any note of the caution which has been administered by this Court and particularly of not remanding cases unnecessarily and without any proper direction.

ii) A blanket remand causes serious prejudice to parties. None benefits by non-adjudication or non-consideration of an issue of fact and law by an Appellate Authority and by wholesale remand of the case back to the original authority. This is a clear failure of duty which has to be preformed by the Appellate Authority in law. Once the Appellate Authority fails to perform such duty and is corrected on one occasion by this Court, and in relation to the same assessee, then, the least that was expected from the Tribunal was to follow the order and direction of this Court and abide by it even for this later assessment year.

iii) I f the same claim and which was dealt with by the Court earlier and for which the note of caution was issued, then, the Tribunal was bound in law to take due note of the same and follow the course for the later assessment years. We are of the view that the refusal of the Tribunal to follow the order of this Court and equally to correct its obvious and apparent mistake is vitiated as above. It is vitiated by a serious error of law apparent on the face of the record. The Tribunal has misdirected itself completely and in law in refusing to decide and consider the claim in relation to service charges.

iv) O rder of the Tribunal is set aside for reconsideration of the issue on service charges in accordance with law.”

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Housing projects: Deduction u/s. 80IB(10): A. Y. 2006-07: Limit on extent of commercial area of housing project inserted w.e.f. 01/04/2005 does not apply to projects approved before that date:

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CIT vs. M/s. Happy Home Enterprises (Bom); ITA No. 201 of 2012 dated 19-09-2014:

The following questions were raised in this appeal by the Revenue before the Bombay High Court.

“i) Whether on the facts and in the circumstances of the case and in law the Hon’ble Tribunal was right in allowing to the assessee company a deduction u/s. 80IB(10) of the Income-tax Act, for A. Y. 2006- 07 amounting to Rs. 2,11,74,864/- wherein the commercial area built by the assessee exceeded the limit specified in clause (d) to section 80IB(10) of the I. T. Act, 1961?

ii) Whether on the facts and in the circumstances of the case and in law, the Hon’ble Tribunal was right in holding that the limits on commercial area provided in clause (d) to section 80IB(10) of the Act, would not be applicable even after 01-04-2005 as the projects were approved before that date even though no such exception is provided under the Income Tax Act?”

The High Court decided the questions in favour of the assessee and held as under:

“i) Clause (d) of section 80IB(10) is a condition that relates to and/or is linked with the approval and construction of the housing project and the Legislature did not intend to give any retrospectivity to it.

ii) A t the time when the housing project is approved by the local authority, it decides, subject to its own rules and regulations, what quantum of commercial area is to be included in the said project. It is on this basis that building plans are approved by the local authority and construction is commenced and completed. It is very difficult, if not impossible to change the building plans and/or alter construction midway, in order to comply with clause (d) of section 80IB(10).

iii) It would be highly unfair to require an assessee to comply with section 80IB(10)(d) who has got his housing project approved by the local authority, before 31-03-2005 and has either completed the same before the said date or even shortly thereafter, merely because the assessee has offered its profits to tax in A. Y. 2005-06 or thereafter.

iv) It would require the assessee to virtually do a humanly impossible task. This could never have been the intention of the Legislature and it would run counter to the very object for which these provisions were introduced, namely to tackle the shortage of housing in the country and encourage investment therein by private players.

v) I t is therefore clear that clause (d) of section 80IB(10) cannot have any application to housing projects that are approved before 31-03-2005.”

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Assessment – Best judgment assessment – Assessee not very educated person, not properly represented – Supreme Court refused to interfere with assessment but directed that no interest be recovered and no penalty proceedings be initiated.

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Tripal Singh and Anr. vs. CIT & Anr. [2014] 365 ITR 511 (sc)

The dispute before the Supreme Court related to the assessment year 1998-99. The petitioner-assessee failed to appear before the assessing authority which compelled the assessing authority to complete the assessment u/s. 144 of the Income-tax Act, 1961. The said order is dated 29th December, 2005. The petitioner did not file any appeal, instead challenged the assessment order by filing a revision as provided for u/s. 264 of the Act before the Commissioner of Income-tax (Admn.), Muzaffarnagar. The memo of revision was dated 23rd May, 2006. The said revision was dismissed by the Commissioner of Income-tax on 25th March, 2008, as no one attended the office on the fixed date. Thereafter, an application to recall the said order was filed which was dated 9th June, 2008. The said application was dismissed by the order dated 26th October, 2010, on the short ground that there was no provision under the Income-tax Act for recalling the order passed u/s. 264 thereof. Feeling aggrieved, a writ petition was filed.

Before the High Court, Learned counsel for the petitioner submitted that power to pass ex-parte order included the power to recall the same notwithstanding absence of any express provision in respect thereof. He further submitted that the Commissioner of Income-tax should have decided the revision on the merits even if the petitioner could not appear on the fixed date.

The High Court held that it was not necessary to examine the proposition as to whether the Commissioner of Incometax was right in rejecting the restoration application on the ground and on the facts of the present case that he does not possess power to recall the ex-parte order. According to the High Court, even assuming that the Commissioner had power to recall the ex-parte order on the merits, it did not find that the petitioner had been able to establish sufficient cause for his non-appearance on the date fixed. The assessment order was also passed ex parte. It appeared that the petitioner was never serious to pursue his remedies under the Act and filed the revision application as a chance petition and did not prosecute it. The High Court did not find any merit in the petition.

On further appeal, the Supreme Court observed that the facts were very peculiar in this case because the appellants, who were not very educated persons, unfortunately could not be properly represented before the Assessing Officer and, therefore, the assessment was made ex-parte for the assessment year 1998-99. The Supreme Court noted that so far as the subsequent assessment years were concerned, some relief was given to the appellants-assessees by the High Court, but so far as the assessment year 1998-99 is concerned, the assessment was over and the assessment order has become final. In these circumstances, the Supreme Court was of the view that it was not proper to interfere with the assessment order. However, it directed that no penalty proceedings would be initiated and no interest would be recovered from the appellants-assessees and that the amount of tax would be paid within 60 days and if the amount was not paid within 60 days, it would be open to the authorities to charge interest on the assessed tax.

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DCIT vs. Rajeev G. Kalathil ITAT Mumbai `D’ Bench Before Rajendra (AM) and Dr. S. T. M. Pavalan (JM) ITA No. 6727/Mum/2012 A.Y.: 2009-10. Decided on: 20th August, 2014. Counsel for revenue/assessee: J. K. Garg/Devendra Jain

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Section 28, 37 – Purchases cannot be disallowed, merely because the supplier is treated as a havala dealer by VAT authorities, if receipt of material is substantiated by delivery challan and other evidences and payment is by account payee cheque.

Facts:
In the course of assessment proceedings, the AO sent notices u/s. 133(6) to various parties at random. Of these, notices sent to two parties were returned unserved with the remarks not known. The AO asked the assessee to furnish correct address or explain why purchases of Rs. 13,69,417 (Rs. 5,05,259 from NBE and Rs. 8,64,158 from DKE) should not be treated as bogus purchases.

The assessee furnished its reply expressing inability to establish contact with the parties but furnished letter from its banker stating that the payment has been made to the two parties in subsequent year. Sample bills were also filed which had TIN Numbers.

The AO verified the TIN numbers from the official website and found that NBE was specifically mentioned as `Hawala Dealer’ and the search for DKE did not show any result. He, accordingly, added Rs. 13.69 lakh to total income of the assessee on account of bogus purchases.

Aggrieved, the assessee preferred an appeal to CIT(A) and contended that suppliers were registered dealers and were carrying proper VAT registration; bills were accounted and payments were made by cheque; certificate from banker giving details of payments made to said parties were furnished; copies of consignment note received from government approved transport contractor showing material was delivered at site were furnished to the AO; some of the items purchased from these parties were reflected in closing stock. The CIT(A) allowed the appeal.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The AO made addition because one of the supplier was declared a havala dealer by VAT Department. According to the Tribunal, this could be a good starting point for making further investigation and to take it to logical end. Suspicion of highest degree cannot take place of evidence. According to the Tribunal, the AO could have called for details of bank accounts of suppliers to find out whether there was any immediate cash withdrawl from their account. It observed that transportation of goods to the site is one of the deciding factors to be considered for resolving the issue. It noted the finding of fact given by CIT(A) that some of the goods received were forming part of closing stock.

The Tribunal held that the decision of the Mumbai Tribunal in the case of Western Extrusion Industries (ITA /6579/ Mum/2010 dated 13-11-2013) was distinguishable since in that case there was no evidence of movement of goods and also cash was withdrawn by the supplier immediately from the bank.

This ground of appeal filed by the revenue was dismissed.

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Raj Kumari Agarwal vs. DCIT ITAT, Agra Pramod Kumar (A.M.) and Joginder Singh (J.M.) I.T.A. No.: 176/Agra/2013 Assessment Year: 2008-09. Decided on July 18th, 2014 Counsel for Assessee/Revenue: Arvind Kumar Bansal/S D Sharma

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Section 57(iii) – Interest paid on loan taken against fixed deposit is deductible against interest earned on the fixed deposit.

Facts:
During the course of the assessment proceedings, the AO noticed that the assessee had made a fixed deposit of Rs. 1 crore with abank and earned interest of Rs 11.78 lakh thereon. However, whilecomputing the income from other sources, the assessee claimed a deduction of Rs. 4.37 lakh on account of interest paid on loan of Rs 75 lakh taken on the securityof deposits. When asked to justify this deduction, the assessee submitted that she needed her funds, as she had to give money to her son and with a view toavoid premature encashment of the fixed deposits, which wouldhave resulted in net loss to her, she took a loan against fixed deposit so as to keepthe fixed deposit intact and earn the interest income thereon. It was contended thatthe interest of Rs. 4.37 lakh paid on the borrowings from the Bank against security of fixed deposit, was thus made for the purpose of earning FDR interest. The AO rejected the claim of deduction observing that interest onloan has not been laid out or expended wholly and exclusively for the purpose ofmaking or earning income from FDR. On appeal the CIT(A) upheld the order of the AO.

Before the Tribunal, the assessee also justified her claim with the working showing that she has returned higher interest income of Rs. 7.41 lakh (Rs. 11.78 lakh minus Rs. 4.37 lakh paid) while if she had encashed the FDR then the interest income from FDR would had beenat lower sum of Rs. 5.38 lakh.

Held:
According to the Tribunal, the question that needs to be adjudicated was whether interest paid can be said to have been incurred “wholly and exclusively” for the purpose of earning interest income from fixed deposits.For this purpose, it referred to a decision by the coordinate bench of its own Tribunal in the case of AjaySingh Deol vs. JCIT [(91 ITD 196). Relying thereon, it observed that even in a situation in which proximate or immediate cause of an expenditure was an event unconnected to earning of the income, in the sense that the expenditure was not triggered by the objective to earn that income, but the expenditure was, nonetheless, wholly and exclusively to earn or protect that income,it will not cease to be deductible in nature (emphasis supplied). According to it, in order to protect the interest earnings from fixed deposits and to meet her financial needs, when an assessee raises a loan against the fixed deposit, so as to keep the source of earning intact, the expenditure so incurred is wholly and exclusively to earn the fixed deposit interest income. It further observed that the assessee could have gone for premature encashment of bank deposits, and thus ended the source of income itself as well, but instead of doing so, she resorted to borrowings against the fixed deposit and thus preserved the source of earning. The expenditure so incurred, according to the tribunal was an expenditure incurred wholly and exclusively for earning from interest on fixed deposits.

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ACIT vs. Iqbal M Chagala ITAT Mumbai “I” Bench Before Vijay Pal Rao (J.M.) and Rajendra (A. M.) ITA No. 877/Mum/2013 Assessment Year 2009-10. Decided on 30/07/2014 Counsel for Revenue/Assessee: Garima Singh/P J Pardiwala

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Section 14A and Rule 8D – Application of the Rule is not automatic. Disallowance cannot exceed the expenditure claimed and if no expenditure is claimed by the assessee then disallowance cannot be made

Facts:
During the assessment proceedings, the AO noted that the assessee had earned exempt income and the audit report did not show disallowance of any expenses relating to exempt income. According to the assessee, the investment transaction undertaken by him were managed by the investment advisors whose fees amounting to Rs. 5.64 lakh had been debited to the capital account of the assessee. Plus, demat expenses and security transaction tax amounting to Rs. 2.2 lakh was also debited to the capital account of the assessee. However, the AO held that looking into the fact that partof the expenses on account of salary, telephone and other administrative expenses must have been related to the activities for earning exempt income, he disallowed the sum of Rs. 16.36 lakh, being 0.5% of average investment of Rs. 32.72 crore.

On perusal of Profit and Loss Account of the assessee the CIT(A) noted that the assessee had not made any claim of expenditure incurred in relation to exempt income, therefore according to him, the provisions of section 14A (1) r.w.s.14A(2) were not attracted. Therefore, relying on the cases of Walfort Shares & Stock Brokers Pvt. Ltd.(326 ITR 1) and Godrej & Boyce Manufacturing Co. Ltd (328 ITR 81) he deleted the disallowance of Rs.16.36 lakh made by the AO.

Held:
The tribunal noted that as per the audit report filed by the assessee, expenses in respect of exempt income was Rs. Nil and the assessee had debited all expenses relating to exempt income in the capital account. The AO had merely presumed that the assessee must have incurred someexpenditure under the heads salary, telephone and other administrative charges for earning theexempt income. Further, it was noted that that the total expenditure claimed by the assessee for the year was about Rs. 13 lakh and the AO had made a disallowance of about Rs.16 lakh. According to it, the AO had just adopted the formula of estimating expenditure on the basis of investments. But, the justification for calculating the disallowance was missing. The onus was on the AO to prove that out of the expenditure incurred under various heads part related to earning of exempt income. Not only thatthe AO was required to give the basis of calculation. In any manner disallowance of Rs.16.36 lakh, as against the total expenditure of Rs.13 lakh claimed by the assessee was not justified. Provisions of Rule 8D cannot and should not be applied in a mechanical way. Facts of the case have to be analysed before invoking them. Accordingly, the appeal filed by the AO was dismissed and the order of the CIT(A) was confirmed.

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[2014] 149 ITD 363 (Agra) Rajeev Kumar Agarwal vs. Addl CIT A.Y. 2006-07 Order dated – 29th May, 2014

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Section 40(a)(ia) – Second proviso to section 40(a) (ia), which states that if assessee fails to deduct tax at source while making payments but the recipient has included the income embedded in the said payments in his tax return furnished u/s. 139 and had also paid the tax due thereon on such payments, then disallowance of such payments u/s. 40(a)(ia) cannot be invoked for assessee; has retrospective effect from 01-04-2005.

Facts:
The assessee had made interest payments without discharging his tax withholding obligations u/s. 194A. Therefore, the Assessing Officer disallowed payment u/s. 40(a)(ia).

The assessee contended that, in view of the insertion of second proviso to section 40(a)(ia) by the Finance Act, 2012, and in view of the fact that the recipients of the interest had already included the income embedded in the said interest payments in their tax returns filed u/s. 139, disallowance u/s. 40(a)(ia) could not be invoked in this case.

He also contended that since the said second proviso to section 40(a)(ia) is ‘declaratory and curative in nature’, it should be given retrospective effect from 01-04-2005, being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.

Held:
The scheme of section 40(a)(ia) is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee.

Section 40(a)(ia) is not a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction to compensate for the loss of revenue for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in section 271C, and section 40(a)(ia) does not add to the same Thus, disallowance u/s. 40(a)(ia) cannot be invoked in a case, where assessee fails to deduct tax at source but recipients have taken, in their computation of income, the income embedded in the payments made by the assessee, paid taxes due thereon and filed income tax returns in accordance with the law.

The provisions of section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee’s tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassionate enough to cure these shortcomings of provision and, thus, obviate the unintended hardships, such an amendment in law, in view of the well-settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso to section 40(a)(ia) must be given retrospective effect from the point of time when the related legal provision was introduced.

Accordingly, the insertion of second proviso to section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 01-04-2005, being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.

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[2014] 149 ITD 169 (Hyderabad) Binjusaria Properties (P) Ltd vs. ACIT A.Y. 2006-07 Order dated- 4th April, 2014

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Section 2(47) of The Income-tax Act, 1961 Where assessee enters into a development agreement of land with a developer in terms of which developer has to develop property and deliver a part of constructed area to assessee, capital gains cannot be brought to tax in year of signing of development agreement if developer does not do anything to discharge obligations cast on it and it is only upon receipt of consideration in the form of developed area by the assessee in terms of the development agreement, the capital gains becomes assessable in the hands of the assessee.

Facts:
• The assesee gave its plot of Land for development and had received a refundable deposit in the relevant year. According to Development Agreement-cum-General Power of Attorney, the developer had to develop the property, according to the approved plan from the competent authority, and deliver to the assessee 38% of the constructed area in the residential part.

• No development activity was carried out by the developer in the year of the agreement and accordingly, assessee did not offer the sum for tax.

• The Assessing Officer was of the view that, in terms of the development agreement, the transfer has taken place during the year under appeal and the assessee was liable to pay capital gain taxes on the date of transfer.

• The CIT (A) confirmed the view of assessing officer and, therefore aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
• Tribunal observed the following:-

The assessee has executed a ‘Development Agreement- cum-General Power of Attorney’ which indicates that the assessee has given a permissive possession to developer.

The refundable deposit received by the assessee is to be refunded on the complete handing over of the area falling to the share of the assessee and in the event of the failure on the part of the assesee, the same shall be adjusted at the time of final delivery.

It is undisputed that there is no development activity carried out in the said relevant year. Even the approval of plan was not obtained and the process of construction has not been initiated.

• Considering specific clauses in the agreement, all abovementioned facts and circumstances and the reading of section 2(47)(v) of the Income-tax Act, 1961 alongwith section 53A of The Transfer of property Act, 1882, Tribunal held that the assessee had fulfilled its part of obligation under the development agreement but the developer had not done anything to discharge the obligations cast on it under the development agreement, the capital gains could not be brought to tax in the year under appeal, merely on the basis of signing of the development agreement .

It is only upon receipt of consideration in the form of developed area by the assessee in terms of the development agreement, the capital gains becomes assessable in the hands of the assessee.

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TDS: Salary: S/s. 192 and 201 of I. T. Act, 1961: A. Y. 2008-09: Consultant doctors employed by hospital: No administrative control: Doctors free to come at any time and treat patients: No provision for payment of provident fund and gratuity: No employer and employee relationship: Payment to doctors is not salary: Section 192 for TDS is not applicable:

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CIT vs. Yashoda Super Speciality Hospital; 365 ITR 356 (AP):

For the A. Y. 2008-09, orders u/ss. 201 and 201(1A) were passed treating the assessee hospital as an assessee in default for non deduction of tax at source u/s. 192 of the Income-tax Act, 1961 holding that the payments made by the assessee to the consultant doctors was salary. The Tribunal held that there was no employer employee relationship between the assessee and the consultant doctors and accordingly such payments did not constitute salary paid by the assessee. The Tribunal therefore set aside the said orders.

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

“i) O n the facts and on examining the agreement between the consultant doctors and the assessee hospital under which the services of the doctors were engaged, the appellate authorities found that there was no relationship of employer and employee between the doctors and the hospital. The doctors were not administratively controlled and managed by the assessee and they were free to come at any point of time as far as their attendance was concerned and treat the patients. There was no provision for payment of provident fund and gratuity to them.

ii) T he only clause in the agreement was that the doctors could not take up any other assignment. The existence of one prohibitory clause did not change the basic character of the relationship between the assessee and the doctors concerned. There was no employer and employee relationship. And their payments could not be treated to be salaries and, as such, deduction of tax at source did not need to be made u/s. 192.

iii) O n a careful reading of the impugned judgment and order of the Tribunal, we are of the view that the law has been correctly applied. Therefore, we do not find any question of law involved in the matter. The appeal is accordingly dismissed.”

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Industrial undertaking: Manufacture: Deduction u/s. 80-IB: A. Ys. 2004-05 to 2007-08: Assessee buying monitor, key board, mouse etc. and assembling them and selling computers so assembled: Activity is manufacturing activity: Assessee is entitled to deduction u/s. 80-IB:

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CIT vs. Sai Infosystem India P. Ltd.; 365 ITR 433 (Guj):

The assessee bought basic computer items such as monitor, key board, mouse, etc., and was into the activity of assembling them. The assessee claimed deduction u/s. 80-IB of the Income-tax Act, 1961. For the A. Ys. 2004-05 to 2007-08, the Assessing Officer disallowed the claim holding that the activity of the assessee could not be said to be manufacturing activity so as to enable the assessee to claim the deduction. The Tribunal allowed the assessee’s claim.

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

“i) T he Tribunal had rightly deleted the disallowance of deduction u/s. 80-IB made by the Assessing Officer. There was a specific finding of the Commissioner(Appeals) that the assessee had employed at least ten persons. This was a finding of fact and it could not be said that the assessee was not entitled to deduction u/s. 80-IB of the Act.

ii) T he questions raised in the present tax appeals are held against the Revenue and in favour of the assessee. Consequently, the tax appeals are dismissed.”

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Charitable purpose: Education: Exemption u/s. 11 r/w. s. 2(15): A. Y. 2009-10: Assessee-association conducting various continuing education diploma and Certificate Programmes, Management Development Programmes, Public Talks, Seminars, Workshops and Conferences: Assessee’s activities would fall within realm of education which is ‘charitable’ as per section 2(15): Proviso is not applicable: Assessee is entitled to exemption u/s. 11:

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DIT(E) vs. Ahmedabad Management Association: 366 ITR 85 (Guj): 47 taxmann.com 162 (Guj):

The assessee, a public charitable trust, was dedicated to pursue the objects of continuing education, training and research on various facets of management and related areas. It claimed exemption u/s. 11 of the Income-tax Act, 1961 on ground that it undertook multifaceted activities comprising of conducting various continuing education diploma and certificate programmes, management development programmes, public talks, seminars, workshops and conferences which falls in the realm of “education” as the charitable purpose. For the A. Y. 2009- 10, the Assessing Officer observed that considering the nature of courses, its durations and resultant surplus from each activity, the activity of the assessee is not educational in nature. The Assessing Officer held that activities of assessee fell within scope of amendment of ‘advancement of any other object of general public utility and any other activity’ of section 2(15) and, since the aggregate value of receipts were more than Rs. 10 lakh, proviso to section 2(15) was applicable and the assessee was not entitled for exemption u/s. 11. The Tribunal had held that the activities of the assessee were in the field of education and, therefore, the assessee was eligible for exemption u/s. 11.

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

“i) I t is required to be noted that all throughout for the previous years, right from the A. Y. 1995-96 till A. Y. 2008-09 the revenue has considered the activities of the assessee as educational activity and has granted the benefit u/s. 11.

ii) H owever, subsequently and w.e.f. A. Y. 2009-10, proviso to section 2(15) has been added and section 2(15) has been amended by the Finance Act, 2008 by adding the proviso which states that the ‘advancement of any other object of general public utility’ shall not be a charitable purpose if it involves the carrying on of (a) any activity in the nature of trade, commerce or business; or (b) any activity of rendering any service in relation to any trade, commerce or business for cess or fee or any other consideration, irrespective of the nature of use or application, or retention of the income from such activity. The revenue has denied the exemption claimed by the assessee u/s. 11 mainly relying upon the amended section 2(15) by submitting that the case of the assessee would fall under the fourth limb of the definition of ‘charitable purpose’ i.e., ‘advancement of any other object of general public utility’ and, therefore, the assessee shall not be entitled to exemption from tax u/s. 11.

iii) T he activities of the assessee such as continuing education diploma and certificate programme; management development programme; public talks and seminars and workshops and conferences etc., is educational activities and/or is in the field of education.

iv) O n fair reading of section 2(15) the newly inserted proviso to section 2(15) will not apply in respect of relief to the poor; education or medical relief. Thus, where the purpose of a trust or institution is relief of the poor; education or medical relief, it will constitute ‘charitable purpose’ even if it incidentally involves the carrying on of the commercial activities.

v) I n the present case, the activities of the assessee would fall within the definition of ‘charitable purpose’ as per section 2(15) and, therefore, would be entitled to exemption u/s. 11.”

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Capital gain: Slump sale or exchange: S/s. 2(42C) and 50B: A. Y. 2005-06: Transfer of division of undertaking in exchange for issue of preference shares and bonds: No monetary consideration: Exchange and not a sale: Not a slump sale:

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CIT vs. Bharat Bijlee Ltd.; 365 ITR 258 (Bom):

In the relevant year, the asessee transferred its lift field operations undertaking to one T under the scheme of arrangement as approved by the Court in exchange for issue of preference shares and bonds. The assessee claimed that it is a case of exchange and not a case of slump sale attracting the provisions of section 50B of the Income-tax Act, 1961. The Assessing Officer rejected the claim of the assessee and held that the transaction squarely fell within the definition of “slump sale” in section 2(42C) and was taxable in terms of section 50B of the Act. The Tribunal held that a reading of the clauses in the scheme of arrangement showed that the transfer of the undertaking had taken place in exchange for issue of preference shares and bonds. The scheme did not refer to any monetary consideration for the transfer. It was a case of exchange and not a sale. Therefore, section 2(42C) was inapplicable and section 50B was also inapplicable.

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

“i) I n the given facts and circumstances and going by the clauses of the scheme of arrangement and reading them harmoniously and together, the Tribunal had held that the transfer of the lift division came within the purview of section 2(47) but could not be termed as a slump sale.

ii) This finding of fact could not be said to be perverse or based on no material. It also could not be said to be vitiated by an error of law apparent on the face of the record.

iii) We do not find any merit in the appeal. It is accordingly dismissed.”

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Business expenditure: TDS: Disallowance: S/s. 9, 40(a)(i) and 195: A. Y. 2009-10: Commission paid by the assessee to the non-resident agent for procuring orders for leather business from overseas buyers – wholesalers or retailers: Services rendered by non-resident agent can at best be called as a service for completion of export commitment: Services provided by non-resident agent are not technical services: Assessee is not liable to deduct tax at source when the nonresident agent provides servi<

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CIT vs. Faizan Shoes P. Ltd.; [2014] 48 taxmann.com 48 (Mad):

The assessee is a company engaged in the business of manufacture and export of articles of leather. In the course of business, the assessee entered into an Agency Agreement with a non-resident agent to secure orders from various customers, including retailers and traders, for the export of leather shoe uppers and full shoes by the assessee. As per the terms of the Agency Agreement, the business will be transacted by opening letters of credit or by cash against document basis. The non-resident agent will be responsible for prompt payment in respect of all shipments effected on cash against document basis. The assessee undertook to pay commission of 2.5% on FOB value on all orders procured by the non-resident agent. For the A. Y. 2009-10, the Assessing Officer disallowed the claim for deduction of the said commission relying on the provisions of section 40(a)(i) of the Income-tax Act, 1961 for non-deduction of tax at source u/s. 195 of the Act. The Commissioner(Appeals) and the Tribunal allowed the assessee’s claim. The Tribunal observed that the non-resident agent was only procuring orders for the assessee and following up payments and no other services are rendered, and accordingly held that the nonresident agent was not providing any technical services to the assessee. The Tribunal also held that the commission payment made to non-resident agent does not fall under the category of royalty or fee of technical services and, therefore, the Explanation to section 9(2) of the Act has no application to the facts of the assessee’s case. The Tribunal, therefore held that the commission payments to non-resident agents are not chargeable to tax in India and, therefore, the provisions of section 195 of the Act are not applicable.

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

“i) T he services rendered by the non-resident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of “fees for technical services”, we are of the firm view that Section 9 of the Act is not applicable to the case on hand and consequently, section 195 of the Act does not come into play.

ii) We find no infirmity in the order of the Tribunal in confirming the order of the Commissioner of Income Tax (Appeals).

iii) I n the result appeal is dismissed.”

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Business expenditure: Section 36(1)(ii): A. Y. 2006-07: Commission paid to directors for providing personal guarantee to bank as precondition for grant of credit facilities cannot be disallowed stating that otherwise it would have been payable to the directors as dividend;

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Control and Switchgear Contractors Ltd. vs. Dy. CIT; 365 ITR 312 (Del):

In the A. Y. 2006-07, the assessee company had claimed deduction of Rs. 24,37,500/- being commission paid to the directors for providing personal guarantees to the bank for grant of credit facilities to the company. The Assessing Officer disallowed the claim for deduction holding that the same would have been otherwise payable to the directors as dividend. The Tribunal upheld the disallowance. Assessee’s rectification application was rejected by the Tribunal.

The Delhi High Court allowed the writ petition filed by the assessee, reversed the decision of the Tribunal and held as under:

“i) The directors having provided personal guarantees had acted beyond the call of duty as employees of the assessee. It was not within the jurisdiction of the Assessing Officer to impose his views with regard to the necessity or the quantum of the expenditure undertaken by the assessee. The Assessing Officer had only to determine whether the transactions were genuine or real.

ii) The directors would not be entitled to receive the amount paid to them as commission, as dividends because even if it was assumed that non-payment of commission would add to the kitty of distributable profits these would have to be distributed pro rata to all the shareholders and not selectively to the directors. Dividend is paid by a company as distribution of profits to its shareholders in the ratio of their shareholding in the company. The directors were not the only shareholders of the company and, therefore, in the event the commission had not been paid by the assessee it could not have been distributed to them as dividend.

iii) The writ petition is allowed. The said disallowance and the additions made on this count are set aside.”

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Agent of non-resident: Section 163: A. Y. 2003- 04: Where a person in respect of whom agent is sought to be made a representative assessee, does not attain status of non-resident during relevant accounting period, provisions of section 163 cannot be invoked in such a case:

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Comverse Networks Systems India (P.) Ltd. vs. CIT; [2014] 48 taxmann.com 1 (Delhi)

One F was an employee with the petitioner. In respect of the A. Y. 2003-04, which is relevant in this case, the said F had filed the return of income and was assessed in the status of “Resident & Ordinarily Resident”. On 16/03/2010, the ACIT issued a notice u/s. 163(1)(c) of the Income-tax Act, 1961 proposing to treat the petitioner as the representative agent of F for the A. Y. 2003-04. In reply, the petitioner stated that F was not a non-resident in the A. Y. 2003-04 and accordingly that the petitioner could not be treated as a representative agent of F u/s. 163(1)(c) of the Act and, therefore, the petitioner requested the ACIT to drop the proceedings. The ACIT did not agree with the submissions of the petitioner and passed an order dated 31.01.2011 treating the petitioner as the agent of F u/s. 163 of the Act for the A. Y. 2003-04. The Commissioner rejected the revision application made by the petitioner u/s. 264 of the Act.

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

“i) S ection 160(1)(i) of the said Act makes it clear that the expression “representative assessee” has to seen “in respect of the income of a non-resident”. It is obvious that when we construe the expression “income of a non-resident” it has reference to income in a particular previous year/accounting year. The income of that year must be of a non-resident. If that be so, the agent of the non-resident or the deemed agent u/s. 163 of the said Act would be the representative assessee. The petitioner is not an agent of F.

ii) S ection 163(1)(c) talks about the person from or through whom the non-resident “is in receipt of any income, whether directly or indirectly”. The income bears reference to the accounting year for which the statutory agent is to be appointed. In the present case, the year in question is the year ended on 31-03-2003. During that year F was not a nonresident. Therefore, the petitioner cannot even be regarded as a deemed agent u/s. 163(1)(c) of the Act. Consequently, the petitioner cannot be considered to be the representative assessee of F in respect of the A. Y. 2003-04.

iii) T he writ petition is allowed and the impugned order is set aside.”

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Income: Deemed dividend: Section 2(22)(e): Advance or loan to a shareholder: Section 2(22) (e) cannot be invoked where the assessee is not a shareholder in the lending company:

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CIT vs. Impact Containers Pvt. Ltd.(Bom); ITA No. 114 of 2012 dated 04/07/2014:

The Assessing Officer found that the assessee company had received loans from a company and also found that the assessee had shareholding in a company which had controlling interest in the lending company. The Assessing Officer applied the provisions of section 2(22)(e) of the Income-tax Act, 1961 and held that the loan received by the assessee is deemed dividend u/s. 2(22)(e) of the Income-tax Act, 1961 and made the addition accordingly. The Tribunal found that the assessee company was not a shareholder of the lending company and therefore, by following the decision of the Special Bench in the case of ACIT vs. Bhaumik Colour Pvt. Ltd.; 313 ITR(AT ) 146 (Mum)(SB) deleted the addition.

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

“i) T he consistent view taken is that if the words as noted by us herein-above have been inserted in the definition so as to make reference to the beneficial owner of the shares, still the definition essentially covers the payment to the shareholder and the position of the shareholder as noted in the Supreme Court’s decision, cannot undergo any change. That legal position and the status of the shareholder being same, we do not see how the view prevailing from CIT vs. C. P. Sarthy; 83 ITR 170 (SC) is in any way said to be changed. That is how all the judgments subsequent thereto have been rendered.

ii) We have noted that the Delhi High Court, even after exhaustive amendment to section 2(22)(e) held that the payment made to any concern would not come within the purview of this sub-clause so long as it contemplated shareholders. The Division Bench of Delhi High Court has made detailed reference to all the decisions in the field. It has also referred to the order passed by the Special Bench of the Tribunal in arriving at the same conclusion.

iii) In CIT vs. Ankitech Pvt. Ltd.; 340 ITR 14(Del), The Hon’ble Delhi High Court referred to both Sarathi Mudaliar and Rameshwarlal Sanwarmal, extensively. It also referred to the arguments of the Revenue which are somewhat similar to those raised before us. It is in dealing with these arguments that the Division Bench concluded that all the three limbs of the section analysed in CIT vs. Universal Medicare; 324 ITR 263 (Bom) denote the intention that closely held companies in which public are not substantially interested which are controlled by a group of members, even though having accumulated profits would not distribute such profits as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concerns in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholders. In such an event, by the deeming provision, such payment by the company is treated as dividend. The purpose is to tax dividend in the hands of the shareholder.

iv) We do not see how such a view taken by the Delhi High Court and which reaffirms that of this Court in Universal Medicare can be said to be contrary to the legal fiction or the intent or purpose of the legislature in enacting it.

v) We are of the view that so long as the Tribunal holds that the assessee company is not a shareholder in any of the entities which have advanced and lent sums, then, the addition is required to be deleted.”

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Business expenditure: Disallowance of expenditure in relation to exempt income: Section 14A: A. Ys. 2001-02 to 2005-06: Where available interest free funds are more than the investment in tax free securities, disallowance of interest u/s. 14A will not be justified:

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CIT vs. HDFC Bank Ltd.(Bom): ITA No. 330 of 2012 dated 23-07-2014:

In the relevant years, the assessee claimed that no disallowance of interest be made u/s. 14A of the Incometax Act, 1961 in view of the fact that the asessee had interest free funds available more than the investment in tax free securities. The Assessing Officer rejected the claim and made disallowance of interest u/s. 14A on proportionate basis. The Tribunal deleted the addition.

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

“i) We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities and Power Ltd.; 313 ITR 340 (Bom). The findings of fact given by the ITAT in the present case is that the assessee’s own funds and other non-interest bearing funds were more than the investment in the tax-free securities.

ii) I n the present case, undisputedly the assessee’s capital, profit reserve, surplus and current account deposits were higher than the investment in the taxfree securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities and Power Ltd.; 313 ITR 340 (Bom), it would have to be presumed that the investment made by the assessee would be out of the interest-free funds available with the assessee.

iii) We therefore, are unable to agree with the submission of Suresh Kumar that the Tribunal had erred in dismissing the appeal of the Revenue on this ground.

iv) We do not find that the question gives rise to any substantial question of law. Appeal is therefore rejected.

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ACIT vs. Connaught Plaza Restaurants Pvt. Ltd. ITAT Delhi `B’ Bench Before G. D. Agrawal (VP) and H. S. Sidhu (JM) ITA No. 5466/Del/2013 A.Y.: 2003-04. Decided on: 1st September, 2014. Counsel for revenue / assessee: Parwinder Kaur / Rohit Gar and Tejasvi Jain

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S. 32 – Point of Sales (POS) systems qualify for depreciation @ 60% being the rate applicable to computers.

Facts:
In the course of assessment proceedings, the Assessing Officer (AO) noticed from the tax audit report that additions to Computers included a sum of Rs. 65,89,449 towards POS on which depreciation was claimed @ 60%. The AO held that POS could be regarded as computer accessories but not as computer. It is only computers and computer software which qualify for depreciation @ 60%. The rate of 60% cannot be extended to computer accessories and peripherals. He rejected the contention of the assessee that the POS systems are capable of performing the basic functions performed by a computer such as data processing, storage, etc and therefore are similar to computers. The AO allowed depreciation on POS @ 25% i.e. the rate applicable to normal plant and machinery.

Aggrieved, the assessee preferred an appeal to CIT(A) who following the decision of the Delhi High Court in the case of CIT vs. Rajdhani Powers Ltd. (ITA No. 1266/2010) decided the issue in favor of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the CIT(A) had on perusing the technical specifications of POS from the brochure filed held that the POS terminal is akin to computer in terms of basic features and can be categorized as `Computers’. It also noted that he had followed the order of the jurisdictional High Court in the case of CIT vs. Rajdhani Powers Ltd. (supra) and therefore no interference was called for.

The appeal filed by the revenue was dismissed.

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Exemption – Educational Institute – Application for grant of certificate u/s. 10(23C)(vi) was rejected for the reason that the applicant was not using the entire income for the educational purposes – In view of the amendment to the objects, the Supreme Court set aside the orders of the High Court and authorities concerned with liberty to apply for registration afresh.

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Om Prakash Shiksha Prasar Samiti & Anr. vs. CCIT & Ors. [2014] 364 ITR 329 (SC)

The appellants had applied for grant of a certificate u/s. 10(23C)(vi) of the Income-tax Act, 1961, inter alia, requesting the authorities to grant certificate to claim exemption under the provisions of the Act. The said certificate was not granted by the authorities primarily on the ground that the appellants were not using the entire income for the educational purposes for which purpose the trust was established.

Being aggrieved by the order passed by the Chief Commissioner of Income-tax, the appellants approached the High Court. The writ petitions were dismissed by the High Court.

During the course of hearing before the Supreme Court the learned counsel for the appellants stated that the appellants had amended the objects of the society, with effect from 31st March, 2008. The Supreme Court was of the view that if that was so, the appellants should make an appropriate application before the authorities for grant of certificate u/s. 10(23C)(vi) of the Act for the assessment years 2002-03 to 2007-08 along with the amended objects of the society.

In view of this subsequent development and keeping in view of the peculiar facts and circumstances of the case, the Supreme Court set aside the order passed by the High Court and the authorities concerned and permitted the appellants to file a fresh application within a month’s time from the date of the order. The Supreme Court directed that if such application is filed within the time granted the authority would consider the same in accordance with law, keeping in view the amended objects of the society, with effect from 31st March, 2008. All the contentions of both the parties were left open by the Supreme Court.

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Nitco Logistics Pvt. Ltd. vs. JCIT ITAT (Asr) Before A.D. Jain (J. M.) and B.P. Jain (A. M.) I.T.A. No. 437(Asr)/2012 Assessment Year:2009-10.Decided on 05-09-2014 Counsel for Assessee/Revenue: P.N. Arora/Saad Kidwai

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Section 2(24) – Collection of Dharmarth along with the assessee company’s freight income and used for charity is not part of the income of the assessee.

Facts:
The AO made an addition of Rs. 15.99 lakh on account of Dharmarth collected by the assessee along with freight receipt which was not reflected by it in its profit and loss account. According to the AO, the receipts were directly related to the business of the assessee; that the receipts were received not by a trust created for the purposes of charity, but by a company doing business and trading and that no evidence had been filed by the assessee that the receipts had been actually spent on charity. The CIT(A) upheld the addition inter alia on the ground that the assessee was unable to establish that the object of the assessee company, as per its memorandum and articles of association, was also to carry out charity.

Held:
The Tribunal noted that the stand of the assessee was entirely in line with its stand taken earlier in A.Y. 2001-02 to A.Y. 2008-09 which was never disputed by the revenue. According to the Tribunal, once the receipts are routed as such to a charitable trust by the assessee company and the nature of that trust has not been questioned, the receipts are Dharmarth receipts and nothing else. Further, it was noted that the memorandum and articles of association of the assessee company clearly showed that one of the objectives of the assessee company is charity. Further, relying on the decision of the Supreme Court in the case of CIT vs. Bijli Cotton Mills (P.) Ltd. (1979) 116 ITR 60 the tribunal allowed the appeal of the assessee.

Facts:
The assessee being a company is an association of various industrialists formed in the year 1925 for development of trade, industries and commerce.

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Asst. CIT (TDS) vs. Oil and Natural Gas Corporation Ltd. ITAT ‘C’ Bench, Mumbai Before Sanjay Arora (AM) and Amit Shukla (JM) I.T.A. No. 5808/Mum/2012 Assessment Year: 2008-09. Decided on 03-12-2014 Counsel for Revenue/Assessee: Premanand J./ Naresh Jain & Mahesh Saboo

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Section 194-I – Payments towards lease premium and additional Floor Space Index (FSI) charges not subjected to TDS.

Facts:
The issue before the Tribunal was about the exigibility to Tax Deduction at Source (TDS) u/s.194-I of the sum, described as lease premium and additional Floor Space Index (FSI) charges paid by the assessee to Mumbai Metropolitan Regional Development Authority (MMRDA) during the relevant year.

The Revenue’s case was that u/s.194-I the ‘rent’ is very comprehensively defined to include any payment made under the lease, sub-lease, tenancy or any such agreement or arrangement for use (either separately or together) of any land, building, plant, machinery, etc. By legal fiction, therefore, the scope of the term ‘rent’ stands thus extended beyond its common meaning. The same would include not only the payments on revenue account, but on capital account as well, as long as the sum paid is toward the use of any of the assets specified under the provision. For the purpose, the reliance was placed on the decisions in the case of CIT vs. Reebok India Co. [2007] 291 ITR 455 (Del); United Airlines vs. CIT [2006] 287 ITR 281 (Del); Krishna Oberoi vs. Union of India [2002] 257 ITR 105 (AP); and CIT vs. H.M.T. Ltd. [1993] 203 ITR 820 (Kar).

The CIT(A) on appeal, had held that the lease premium in the instant case was only toward acquisition of lease hold rights and additional FSI in the leased plots and thus, the payment made was not in the nature of rent hence, not covered u/s. 194(I).

Held:
The Tribunal noted that the amount charged by MMRDA as lease premium was equal to the rate prevailing as per the stamp duty ready reckoner for the acquisition of commercial premises. Further, it was also noted that there was no provision in the lease agreement for termination of the lease at the instance of the lessee and hence, for the refund of lease premium under normal circumstances. It noted that even the charges levied for additional FSI was as per the ready reckoner rate. Thus, according to the Tribunal, the whole transaction was for grant of leasehold rights or transfer of property; the lease premium paid by the assessee was the consideration for acquiring leasehold rights, which comprise a bundle of rights, including the right of possession, exploitation and its long term enjoyment. It further observed that the charges for FSI also partake the character of capital assets in the form of Transferable Development Rights (TDRs), such that the owner (of land) transfers the rights of development and exploitation of land, which rights are again capital in nature.

On the basis as discussed above and relying on the decisions in the cases of ITO vs. Naman BKC CHS Ltd. (in ITA Nos. 708 & 709/Mum/2012 dated 12-09-2013) and TRO vs. Shelton Infrastructure Pvt. Ltd. (in ITA No. 5678/ Mum/2012 dated 19-05-2014), the Tribunal upheld the decision of the CIT(A) and dismissed the appeal filed by the revenue. Referring to the decisions of the Tribunal in ITO vs. Dhirendra Ramji Vora (in ITA No.3179/Mum/2012 dated 09-04-2014) and Naman BKC CHS Ltd. (supra), it further observed that the decisions relied on by the A.O. were distinguishable and cannot be applied to the case of the assessee.

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[2014] 150 ITD 502 (Mum) Urban Infrastructure Venture Capital Ltd. vs. DCIT A.Y. 2008-09. Date of Order – 21st May, 2014.

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Section 37(1) – When the assessee incurs expenditure, on the premises taken on rent by it, which does not create any new capital asset and the said expenditure merely helps the assessee for efficiently carrying on its business and the items on which expenditure so incurred cannot be reused on vacation of said premises, then such expenditure has to be treated as revenue in nature.

Explanation-1 after the fifth proviso to section 32(1)(ii) – It can be invoked only if the expenditure itself is capital in nature

FACTS
During the year under consideration, the assessee, an investment manager/advisor, had taken new premises on rent and had carried civil work, tiling work, marble work, fittings, fixtures, interior work in respect of said premises. The assessee had treated the said expenses as revenue expenditure.

However the Assessing Officer was of the opinion that these were major renovation expenses in the nature of capital and since the property was taken on lease, the assessee was entitled to depreciation only.

The Commissioner (Appeals) sustained the disallowance on the basis of Explanation (1) after the fifth proviso to section 32(1)(ii) which reads as – where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.

Aggrieved, the assessee preferred an appeal before the Tribunal.

HELD
The nature of business of the assessee needed a posh office as the visitors/clients were normally corporate executives and high net-worth individuals. It was submitted that during the course of its business, the assessee had to cater high-profile clients both Indian as well as foreign and hence the office premises were required to be kept to a good standard. The expenditure incurred by the assessee was in order to meet these business requirements.

The civil work, tiling work, marble work, fittings, fixtures, interior work carried out in respect of said rented premises brought changes only in the internal part of the structure. No new asset had been created and the said expenditure merely helped the assessee for efficiently carrying on its business and the items on which expenditure had been incurred could not be reused on vacation of said premises. Hence, the expenses incurred were revenue in nature.

Also the pre-condition to invoke the provision of Explanation- 1 after the fifth proviso to section 32(1)(ii) is that expenditure itself should be capital in nature. If the expenditure by its nature itself is not capital in nature and its nature is revenue then provisions of Explanation-1 after fifth proviso to section 32(1)(ii) will not be applicable at all.

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2014] 150 ITD 440 (Jd) Jeewanram Choudhary vs. CIT A.Y. 2006-07 Date of Order – 22nd February, 2013

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Section 145, read with section 263 – Where Assessing Officer rejects books of account of the assessee due to its defects and applies a particular gross profit rate to derive assessee’s income, after applying his mind and after examining records and details, his order cannot be said to be erroneous or prejudicial to the interest of revenue and consequently it is not permissible for Commissioner to invoke revisionary powers to complete assessment in manner he likes by simply applying different gross profit rate.

FACTS
During the course of assessment proceedings, the Assessing Officer noted that the assessee firm had not maintained stock register and details of material consumed on a dayto- day basis. In the absence thereof, the consumption of material was not fully verifiable. Thus, on noticing various defects in the books of account of the assessee, Assessing Officer rejected the same as per section 145(3).

The Assessing Officer rather than making item-wise additions deemed it appropriate to estimate the gross profit rate considering the past history of the assessee. He accordingly worked out the addition, by applying gross profit rate of 9.5%, which was derived by comparing current year’s turnover with past year’s turnover.

Subsequently, the Commissioner pointing out defects, similar to the defects pointed out by the Assessing Officer, rejected the books of accounts of the assessee and exercising his revisionary power u/s. 263, calculated income of assessee taking gross profit rate of 10% by treating the order passed by the Assessing Officer as erroneous and prejudicial to the interest of revenue. On assessee’s appeal.

HELD
In the year under consideration, the pross profit rate declared by the assessee was 8.5% while in the preceding assessment year gross profit rate of 10% was applied by the Assessing Officer after rejecting the books of account. However, the turnover of the assessee increased in the assessment year under consideration in comparison to the immediately assessment preceding year. The Assessing Officer, therefore, keeping the past history in mind considered it fair and reasonable to apply gross profit rate of 9.5%. Therefore, it cannot be said that the Assessing Officer did not apply his mind while framing the assessment.

The Commissioner did not doubt the turnover shown by the assessee but was of the view that Assessing Officer ought to have applied gross profit rate of 10% instead of 9.5%. However the various defects in the books of account of the assessee on which jurisdiction was assumed by Commissioner u/s. 263, were already considered by the Assessing Officer while rejecting the books of account and determining the income by applying the gross profit rate.

It is well-settled that once the books of account are rejected, the only alternative to determine the income is application of net profit rate. Also, the Assessing Officer framed the assessment after examining the records and the details which were called for by him and also after applying his mind came to the conclusion of applying Gross Profit rate of 9.5%. Therefore, the assessment order passed by him cannot be said to be erroneous or prejudicial to the interest of the Revenue.

Also, when the Assessing Officer as well as Commissioner were of the same view that in the assessee’s case, gross profit rate was to be applied for determining the taxable income, it cannot be said that the order passed by the Assessing Officer by applying a particular gross profit rate, was erroneous or prejudicial to the interest of revenue. Therefore, the order passed by the Commissioner by simply applying a different gross profit is held to be not sustainable.

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Valuation of property – Reference to DVO – Section 142A – A. Y. 1991-92 – AO not rejecting books of account – Reference to DVO and addition on account of differential amount as unexplained investment is not sustainable –

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CIT vs. Lakshmi Constructions; 369 ITR 271 (T&AP):

For the A. Y. 1991-92, the assessee firm had disclosed a sum of Rs. 23,75,000/- towards the cost of construction of a building. The Assessing Officer, without rejecting the assessee’s books of account, referred the matter to the DVO and as per the report of the DVO treated the difference as unexplained investment. The CIT(A) and the Tribunal deleted the addition holding that reference to the DVO could not have been made, unless the Assessing Officer rejected or doubted the veracity of the books of account of the assessee. On appeal by the Revenue, the Telangana and Andhra Pradesh High Court held as under:

“i) It is only when the Assessing Officer did not take the contents of the books of account, on their face value, that he could have resorted to an independent valuation. The Tribunal maintained the distinction and held that even before ordering the valuation of any property by independent valuer in respect of an assessee, who has maintained the books of account, the Assessing Officer must, as a first step, express his lack of confidence in the books of account. That not having been done, the very reference to the Valuation Officer could not be sustained in law.

ii) Though section 142A of the Income-tax Act, 1961 was amended in the year 2004 with retrospective effect from 1972, the exercise undertaken by the Assessing Officer could not be sustained on the touchstone of that provision.”

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TDS – Sections 194A, 201(1) and (1A) – Fixed deposit in name of Registrar General of High Court under directions of Court – S. 194A not to apply to credit by Bank in name of Registrar General – Bank has no obligation to deduct tax at source thereon-

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UCO Bank vs. UOI and Dy. CIT; 369 ITR 335 (Del):

The Petitioner bank had accepted fixed deposits in the name of the Registrar General of the Delhi High Court in compliance with a direction by the Court in relation to certain proceedings before the Court. On the question of applicability of section 194A, 201(1) and (1A) of the Income-tax Act, 1961, the High Court held as under:

“i) In the absence of an assessee, the machinery of provisions for deduction of tax to his credit are ineffective. The expression “payee” u/s. 194A would mean the recipient of the income whose account is maintained by the person paying interest. The Registrar General of the Court was clearly not the recipient of the income represented by interest that accrued on the deposits made in his/her name. Therefore, the Registrar General could not be considered as a “payee” for the purposes of section 194A. The Registrar General was also not an assessee in respect of the deposits made with the bank pursuant to the orders of the Court. The credit by the bank in the name of the Registrar General would, thus, not attract the provisions of section 194A. Although section 190(1) clarifies that deduction of tax can be made prior to the assessment year of regular assessment, none the less the section would not imply that deduction of tax is mandatory even where it is known that the payee is not the assessee and there is no other assessee. The deposits kept with the bank under the orders of this Court were, essentially, funds which were in custodia legis, that is, funds in the custody of the Court. The interest on that account – although credited in the name of the Registrar General – was also part of funds under the custody of the Court. The credit of interest to such account was, thus, not a credit to an account of a person who was liable to be assessed to tax. Thus, the bank would have no obligation to deduct tax because at the time of credit there was no person assessable in respect of that income which may be represented by the interest accrued/paid in respect of the deposits. The words “credit of such income to the account of the payee” occurring in section 194A have to be ascribed a meaning in conformity with the scheme of the Act and that would necessarily imply that deduction of tax bears nexus with the income of an assessee.

ii) Circular No. 8 of 2011, dated 04-10-2011, proceeds on an assumption that the litigant depositing the money is the account holder with the bank or is the recipient of the income represented by the interest accruing thereon. This assumption is fundamentally erroneous as the litigant who is asked to deposit the money in Court ceases to have any control or proprietary right over those funds. The amount deposited vests with the Court and the depositor ceases to exercise any dominion over those funds. It is also not necessary that the litigant who deposits the money would be the ultimate recipient of the funds. The person who is ultimately granted the funds would be determined by orders that may be passed subsequently. And at that stage, undisputedly, tax would be required to be deducted at source to the credit of the recipient. However, the litigant who deposits the funds cannot be stated to be the recipient of income.

iii) Deducting tax in the name of the litigant who deposits the funds with the Court would also create another anomaly because the amount deducted would necessarily lie to his credit with the Income Tax Authorities. In other words, the tax deducted at source would reflect as a tax paid by that litigant/depositor. He, thus, would be entitled to claim the credit in his return of income. The implications of this are that whereas the Court had removed the funds from the custody of a litigant/depositor by judicial orders, a part of the accretion thereon is received by him by way of tax deducted at source. This is clearly impermissible because it would run contrary to the intent of judicial orders.

iv) Therefore, the notices issued by the Assistant Commissioner directing the bank to submit the details of deposits made with the bank by all litigants in the name of the Registrar General of the Court during the financial years 2005-06 to 2010-11, Circular No. 8 of 2011 and the order holding the bank to be an assesee in default within the meaning of section 201(1) for a sum of Rs. 7,78,34,950 determined u/s. 201(1)/201(1A) were liable to be set aside.”

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TDS: Income – Charge – Sections 4, 6 and 194A – Compensation awarded under Motor Vehicles Act is in lieu of death of a person or bodily injury suffered in a vehicular accident and it cannot be said to be taxable income; Tax is not deductible on interest on term deposits made by the Registry in terms of the orders passed by the Court in Motor Accident Claims cases – Circular No. 8/2011, dated 14-10-2011 quashed-

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Court on its own motion vs. H. P. State Cooperative Bank Ltd.; [2014] 52 taxmann.com 151 (HP):

The Registrar of the Himachal Pradesh High Court had put up a note that Bank Authorities were making tax deductions on interest accrued on the term deposits, i.e., fixed deposits made by the Registry in terms of the orders passed by the Court in Motor Accident Claims cases. The matter was referred to the Finance/Purchase Committee for examination. The Committee was of the view that since the dispute involved was intricate and public interest was involved, it was recommended that the matter required consideration on judicial side. The recommendation of the Committee was treated as Public interest Litigation and suo motu proceedings were drawn. The department filed the reply and pleaded that in terms of Circular No. 8/2011, dated 14-10-2011, issued by the Income-tax authorities, income-tax was to be deducted on the interest periodically accruing on the deposits made on the court orders to protect the interest of the litigants.

The High Court Held as under:

“i) The circular, dated 14-10-2011, issued by the incometax authorities, is not in tune with the mandate of sections 2(42) and 2(31), read with section 6. The said circular also is not in accordance with the mandate of section 194A.

ii) Section 194A clearly provides that any person, not being an individual or a Hindu undivided family, responsible for paying to a “resident” any income by way of interest, other than income by way of interest on securities shall deduct income tax on such income at the time of payment thereof in cash or by issue of a cheque or by any other mode.

iii) While going through the said provisions of law, one comes to the inescapable conclusion that the mandate of the said provisions does not apply to the accident claim cases and the compensation awarded under the Motor Vehicles Act is awarded in lieu of death of a person or bodily injury suffered in a vehicular accident, which is damage and not income.

iv) Chapter X and XI of the Motor Vehicles Act, 1988 provides for grant of compensation to the victims of a vehicular accident. The Motor Vehicles Act has undergone a sea change and the purpose of granting compensation under the Motor Vehicles Act is to ameliorate the sufferings of the victims so that they may be saved from social evils and starvation, and that the victims get some sort of help as early as possible. It is just to save them from sufferings, agony and to rehabilitate them. One wonder how and under what provisions of law the income tax authorities have treated the amount awarded or interest accrued on term deposits made in Motor Accident Claims cases as income. Therefore, the said Circular is against the concept and provisions referred to hereinabove and runs contrary to the mandate of granting compensation.

v) The Apex Court has gone to the extent of saying that the Claims Tribunals, in Motor Accident Claims cases, should award compensation without succumbing to the niceties of law and procedural wrangles and tangles.

vi) The Circular dated 14-10-2011, issued by the Income- Tax Authorities, whereby deduction of income-tax has been ordered on the award amount and interest accrued on the deposits made under the orders of the Court in Motor Accident Claims cases, was quashed, and in case any such deduction has been made by department, they are directed to refund the same, with interest at the rate of 12% from the date of deduction till payment.”

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Recovery of tax – Provisional attachment – Section 281B – A. Ys. 2010-11 to 2013-14 – For valid provisional attachment notice to pay arrears is mandatory-

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T. Senthil Kumar vs. CIT: 369 ITR 101 (Mad):

Allowing
the assessee’s writ petition challenging the orders of provisional
attachment u/s. 281B of the Incometax Act, 1961, the Madras High Court
held as under:

“i) A combined reading of the provisions of law
would show that even to make a provisional attachment of the property of
the assessee, there should be a notice to pay the arrears as per rule
51 of the Second Schedule, Part III of the Income-tax Act. Without any
notice to the assessee, the provisional attachment cannot be made u/s.
281B of the Act. In the instant case this court finds that without
notice of demand to pay arrears, the respondent has passed an order for
provisional attachment in arbitrary manner.

iii) This court is
of the considered view that in the absence of any notice of demand or
notice u/s. 156 of the Act, the petitioner cannot be termed as “assessee
in default” or “assessee deemed to be in default”. Similarly, in the
absence of any notice to pay the arrears of tax as per rule 51 of Second
Schedule, Part III, of the Act, there cannot be any provisional
attachment u/s. 281B of the Act. Hence the impugned orders are liable to
the quashed.”

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Penalty – Concealment of income – Section 271(1)(c) – A. Y. 1997-98 – High Court admitting quantum appeal by assessee – Debatable issue – Penalty not leviable-

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CIT vs. Nayan Builders: 368 ITR 722 (Bom):

For the A. Y. 1997-98, in respect of addition made by the Assessing Officer, the High Court had admitted the appeal filed by the assessee and substantial questions of law were framed. Penalty u/s. 271(1)(c) of the Income-tax Act, 1961 imposed by the Assessing Officer was cancelled by the Tribunal on the ground that the quantum appeal has been admitted by the High Court.

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

“i) The imposition of penalty was found not to be justified and the appeal was allowed. As a proof that the penalty was debatable and arguable issue, the Tribunal referred to the order on the assessee’s appeal in quantum proceedings and the substantial questions of law which had been framed therein.

ii) Thus, there was no case made out for imposition of penalty and the penalty was rightly set aside.”

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Loss: Carry forward and set-off – Sections 80, 143(3) and 154 – A. Y. 1997-98 – Return with positive income filed in time – AO computed loss in order u/s. 143(3) – Loss can be carried forward and set off – Rectification u/s. 154 to withdraw carry forward of loss not justified-

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CIT Srinivasa Builders; 369 ITR 69 (Karn):

For the A. Y. 1997-98, the assessee filed return of income on 06/01/1998 declaring income of Rs. 5,29,270/-. The Assessing Officer concluded the assessment u/s. 143(3) of the Income-tax Act, 1961 and assessed the business loss of Rs. 74,84,234/- and also allowed the same to be carried forward. Subsequently, the Assessing Officer issued notice u/s. 154, to rectify the order, withdrawing the benefit of carry forward of business loss stating that the return filed by the assessee was belated. Accordingly, he rectified the assessment order. The Tribunal set aside the order of rectification.

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

“i) The assessee had not violated any of the conditions u/s. 80 of the Act. The assessee had shown positive income in the return but in the assessment, the business loss was determined by the Assessing Officer. This being the factual position the assessee was entitled to the benefit of carry forward of business loss.

ii) Whether the loss ultimately determined by the Assessing Officer was liable to be carried forward or not was a debatable issue. The order of rectification was not valid.”

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