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Assessment – Intimation – Prima Facie Adjustments – Additional tax – Retrospective amendment made in 1993 was only clarificatory of the position that existed in 1989 and was valid but 143(1A) could be invoked only where it was found in facts that the lesser amount stated in the return filed by the assessee was a result of an attempt to avoid tax lawfully payable by the assessee.

CIT & Ors. vs. Sati Oil Udyog Ltd. & Anr. (2015) 372 ITR 746 (SC)

The assessee, in its annual return for the assessment years 1989-90 and 1991-92, showed a loss of Rs.1,94,13,40 and Rs. 1,80,22,480 respectively. By an assessment order dated 14th December, 1992, the Assessing Officer levied an additional tax u/s. 143(1A) of Rs. 5,62,490 and Rs. 8,09,290, respectively, for the two assessment years in question calculated in the manner provided in the section.

Being aggrieved by the order dated 14th December, 1992, the respondent filed two separate writ petitions to declare the provisions of section 143(1A) as ultra vires and, consequently, prayed for the quashing of the order dated 14th December, 1992. The learned single judge who heard the two petitions upheld section 143(1A) as amended in 1993 prospectively but held that in so far as it operated with effect from 1989 on losses made by companies, the section is arbitrary and unreasonable and would, therefore, have to be struck down. The Division Bench agreed with single judge and dismissed the two writ appeals before it.

The Supreme Court held that on a cursory reading of the provision, it was clear that the object of section 143(1A) was the prevention of evasion of tax. By the introduction of this provision, persons who has filed returns in which they have sought to evade the tax properly payable by them is meant to have a deterrent effect and a hefty amount of 20% as additional income-tax is payable on the difference between what is declared in the return and what is assessed to tax.

The Supreme Court observed that a plain reading of the provision as it originally stood referred to the total income. Further, it was settled law that the word “income” would include within it both profits as well as losses. The Supreme Court further held that even on a reading of section 143(1)(a) which is referred to in section 143(1A), a loss is envisaged as being declared in a return made u/s. 139. It was clear, therefore, that the retrospective amendment made in 1993 would only be clarificatory of the position that existed in 1989 itself.

According to the Supreme Court, all assessees were put on notice in 1989 itself that the expression “income” contained in section 143(1A) would be wide enough to include losses also. That being the case, on facts there was in fact no retrospective imposition of additional tax–such tax was imposable on losses as well from 1989 itself.

In the present case, the question that therefore arose before the Supreme Court also as to whether bona fide assesses are caught within the net of section 143(1A).

The Supreme Court after referring to its decisions in CIT vs. Hindustan Electric Graphites Ltd. (2000) 243 ITR 48(SC), Asst. CIT vs. J.K. Synthetics Ltd (2001) 251 ITR 200 (SC) and K. P. Varghese vs. ITO 131 ITR 579 (SC); held that section 143(1A) could only be invoked where it was found on facts that the lesser amount stated in the return filed by the assessee was a result of an attempt to evade tax lawfully payable by the assessee. The burden of proving that the assessee had so attempted to evade tax was on the Revenue which could be discharged by the Revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee had, in fact, attempted to evade tax lawfully payable by it. Subject to the aforesaid construction of section 143(1A), the Supreme Court upheld the retrospective clarificatory amendment of the said section and allowed the appeals.

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Upfront payment of interest on debentures in one year – the year of deductibility– Part I

Introduction

1.1 Sizeable debt funds are being raised by the corporates through the issue of debentures. To make the issue of debentures attractive, such debentures are issued with different terms. Sometimes debentures are issued at a discount with nominal or lower rate of interest. At times, the debentures are issued at par for a fixed period with specified interest rate, but the option is also given to the debenture holders for upfront payment of present value of interest on debentures in the very first year for the entire period of debentures. In such cases, the accounting treatment of such interest is guided by the accounting principles, and generally the expenditure on interest is spread over the life of the debentures on an appropriate basis.

1.2 The expenditure of revenue nature incurred on issue of such debentures generally qualifies for deduction u/s. 37(1) of the Income-tax Act, 1961 (the Act). Section 36(1)(iii) of the Act grants deduction of interest on capital borrowed for business purpose. Accordingly, interest on such debentures should generally qualify for deduction u/s. 36(1)(iii) of the Act, subject to certain exceptions with which we are not concerned in this write-up.

1.3 In the past,for the assessees following mercantile system of accounting, the issue was under debate with regard to the year of deductibility of interest under the Act, in cases where the upfront payment of present value of interest on debenture is made in the very first year for the entire period of debentures and for accounting purpose, such interest is amortised over the redemption period of debentures in the books of account.

1.4 Earlier, the issue with regard to deductibility of discount on issue of debentures under the Act came up for consideration before the courts. Finally, the Apex Court in the case of Madras Industrial Investment Corporation Ltd [225 ITR 802 – Madras Industrial Investment’s case] settled the controversy with regard to deductibility of such discount and the year of its deductibility. In this case, the Apex Court, on the facts of that case, held that the discount on issue of debentures constitutes revenue expenditure. The Court further held that, although a liability of such expenditure has been incurred in the year of issue of debenture, this is a continuing liability which stretches over the period for which the debentures were issued and therefore, the liability spreads over such period. Accordingly, the deduction of such expenditure will also be spread over on a proportionate basis during the tenure of the debentures. The Court also noted that this view is in conformity with the accounting practice in which such discount is amortised over the redemption period of debentures. It may be noted that in this case, initially, the assessee itself had claimed deduction on proportionate basis and subsequently, changed it’s position in this respect. We had analysed this judgment in this column in the July, 1998 issue of the journal.

1.5 Recently, the issue with regard to the year of deductibility of upfront payment of interest in the first year of the tenure of debentures referred to in para 1.3 above came up for consideration before the Apex Court in the case of Taparia Tools Ltd. and the Court has decided this issue. Considering the importance and usefulness of this judgment, it is thought fit to consider the same in this column.

Taparia Tools Ltd. vs. JCIT – 260 ITR 102 [Bom.]

2.1 The issue referred to in para 1.3 above came up before the Bombay High Court in the above case. In this case, the brief facts were: the assessee was following mercantile system of accounting and it had issued non-convertible debentures of the face value of Rs. 100 each aggregating Rs. 600 lakh on a private placement basis. Under the terms of issue,effectively, as noted by the Court,the debenture holders were entitled to receive interest periodically on half yearly basis @ 18% p.a. for five years. Alternatively, the debenture holders had the option to receive one year upfront payment of Rs. 55 per debenture immediately on allotment. The debentures were redeemable at a premium of Rs. 10 per debenture in one installment any time after the end of fifth year from the date of allotment but, not later than the seventh year from that date.

2.1.1 The company made allotment of debentures to six parties on two different dates. On 29th March, 1996, the allotment was made to one party for which the company had received Rs. 495 lakh and on 19th June, 1996, the company had made an allotment to five parties for which the company had received Rs. 100 lakh from one party and Rs. 1.25 lakh each from the other four parties. Out of six parties, two lenders exercised the option to receive upfront payment. Accordingly, upfront payment of Rs. 2,72,25,000 became payable to one party (who was allotted debentures of the face value of Rs. 495 lakh) on 29th March, 1996 and Rs. 55 lakh became payable to another party (who was allotted debentures of the face value of Rs. 100 lakh)on 19th June, 1996. The other four debenture holders holding debentures of the aggregate face value of Rs. 5 lakh opted for payment of interest periodically as per the terms of issue of debentures. In the books of account, the assessee had shown the upfront payment of interest of both the years as ‘deferred revenue expenditure’ to be written off over a period of five years. Similarly, the premium of Rs. 60 lakh payable on redemption of debentures was also proportionately debited to each year’s profit and loss account and credited as reserve on the liability side of the balance sheet. Even for tax purpose, the claim by deduction of this premium payable on redemption was spread over the life of the debentures.

2.1.2 For the purpose of furnishing return of income for the assessment year 1996-97, the assessee claimed entire upfront payment of interest of Rs. 2,72,25,000 as deduction and similarly, in the Return of income from the assessment year 1997- 98, the full deduction of Rs. 55 lakh paid upfront was claimed as deduction. For both the years, the deduction was disallowed by the Assessing Officer (AO) on the ground that liability for the full amount regarding discounted interest paid upfront has not been incurred in the respective accounting years and the approximate income which the assessee would have earned by utilisation of Rs. 595 lakh (Rs. 495 lakh and Rs. 100 lakh) borrowed was not offered for taxation. Relying on the judgment of the Apex Court in Madras Industrial Investment’s case, the AO spread over the deduction of interest expenditure over a period of five years and worked out the amount of deduction of interest by applying appropriate discount rate for the assessment year 1996-97 [Rs. 74,250 – for three days (annual amount being Rs. 89,10,000) as against the claim of Rs. 2,72,25,000]. For the assessment year 1997-98 also, similar approach was adopted. It seems that in subsequent years, deduction was allowed on this basis. On first appeal, for the Assessment Year 1996-97, the Commissioner of Income-tax (Appeals) [CIT (A)] took the view that the entire scheme was made to avoid tax and the upfront payment was repayment of capital out of the total borrowing and accordingly, the actual borrowing for the assessment year 1996-97 was only Rs. 2,22,75,000 (and not Rs. 495 lakh). For this, the CIT(A) also relied on the judgment of the Apex Court in the case of McDowell & Company Ltd. [154 ITR 148 – McDowell’s case]. Based on this, the CIT(A) allowed deduction on this reduced amount of borrowing for three days. The Tribunal set aside the order of CIT(A) and restored the order of the AO.

2.2 It seems that similar views were taken for the assessment years 1997-98 and subsequent years. It also seems that appeals for three assessment years (1996-97 to 1998-99) were filed by the assessee as well as the revenue before the Bombay high Court. details of the other years are not available. Appeals of the Revenue were filed on the ground that the upfront payment represented repayment of borrowed capital and therefore, the assessee was entitled to deduction u/s. 36(1)(iii) only on the net amount of rs. 2,22,75,000.

2.3 On the above facts, the matters came-up before the Bombay high Court, and the high Court, it seems, dealt with the appeals by first taking the appeal for the assessment year 1996-97 as the base. It seems that in the assessee’s appeals, large number of questions were raised before the Court. however, the high Court framed the following substantial question of law for its decision [Page 107]:

“Whether, on the facts and circumstances of the case and in law, the tribunal was right in holding that, even though the liability of payment of interest stood liquidated in the first year itself, such liability had to be allowed on a spread over basis over the life of the debentures?”

2.4 On behalf of the assessee, it was, inter alia, contended that the upfront payment of Rs. 55 per debenture on 29th march, 1996 was on account of interest and the CIT(a) wrongly treated the payment of Rs. 55 per debenture on capital account. the terms of issue of debentures in this respect are very clear. for accounting purpose, the assessee has debited 1/5th of Rs. 55 for five years in profit and loss account but, for the purpose of determining deductibility of the amount under the act one has to go by the year in which the liability arises under the terms of issue of debentures, and for that purpose, the treatment in the books of account is irrelevant. The assessee is following mercantile system of accounting and under the terms of issue, the liability arose in the first year itself and therefore, deductibility thereof cannot be spread over the five years as erroneously done by the ao. It was further contended that it was not open to the revenue to tamper with the terms of issue and therefore, the ao was wrong in spreading the deduction over the five years. Such spreadover in five years amounts to altering the terms and conditions of the issue of debentures which was not permissible. It was also pointed out that, had the assessee not claimed the deduction in the very first year, the Revenue could have denied deduction in the second and subsequent years on the ground that no liability accrued in those years and no amount was also paid during those years. The method of determining the quantum for allowing the deduction on a spreadover basis adopted by the revenue was also questioned.

2.4.1 It was further contended that the judgment of the apex Court in the case of madras industrial investment’s case did not apply to the facts of the case of the assessee. this was distinguished on various grounds which, inter alia, include: in that case, the Court was concerned with the concept of premium payable at the time of redemption and in this case, although the assesse is liable to pay 10% premium at the time of redemption, that has been claimed on the basis of tests laid down in that case and,therefore, in this case, we are not concerned with the deductibility of such premium. Present case is concerned with the deductibility of upfront payment of interest which became payable in the very first year ending on 31st march, 1996. it was further pointed out that in madras industrial investment’s case, the premium amount was payable after five years and therefore, the apex Court has allowed amortisation whereas in this case, the liability to pay interest arose in the very first year and that is also discharged in the first year itself. Furthermore, in that case the liability was a continuing liability which is not the case in this case. From the judgment of the apex Court in that case, it would appear that the option was with the assessee to claim deduction in the very first year when it discharged the accrued liability or to spread it over for five years. As such, according to the learned counsel appearing on behalf of the assessee, the judgment of the Apex Court in the madras industrial investment’s case had no application to the facts of the present case. A reliance was also placed on the judgment of the Bombay high Court in the case of Buckau Wolf new india engineering Works Ltd. [157 ITR 751] in which case, the amount was payable in installments and yet, the high Court took the view that the deduction for the entire amount should be given in the first year because the liability was accrued in the first year.

2.4.2 It was also pointed out that @ 55 per debenture, the assessee was required to pay Rs. 4,45,50,000 interest in five years but by paying upfront amount of Rs. 2,72,25,000 it has been able to save a payment of interest to the extent of Rs. 1,73,25,000. While spreading over the deduction,even the revenue is ultimately allowing deduction of Rs. 4,45,50,000 as against the claim of deduction of Rs.2,72,25,000 made by the assessee. It was also contended that the Revenue has wrongly invoked the judgment of the apex Court in mcdowell’s case.

2.4.3 The learned counsel for the assessee further contended that under the terms of issue, the lenders were free to opt for interest on half yearly basis @ 18% per annum for five years (i.e. in aggregate Rs. 90 per debenture) or to receive upfront payment of Rs. 55 per debenture in the year of allotment itself. Therefore, the lenders had a right to receive discounted amount of interest in the first year under the second option. In other words, by making upfront payment of Rs. 55 per debenture, the assessee has brought the present value of rs. 90 to Rs. 55 which is nothing but discounted value of the interest otherwise payable in five years. Under the first option, the assessee would have paid Rs. 89,10,000 every year for a period of five years on this amount of borrowing. however, by making upfront payment of discounted value of interest amounting to Rs. 2,72,25,000,the assessee got rid of the annual liability of Rs. 89,10,000 for five years. It was also contended that the revenue has accepted that upfront payment of Rs. 55 per debenture was revenue expenditure and by spreading over the amount of deduction, the revenue allows deduction of rs. 89,10,000 per year for a period of five years aggregating the amount to Rs. 4,45,50,000 as against the assessee’s claim of deduction of Rs. 2,72,25,000 in the first year. Therefore, there is no loss to the revenue. As such, the only question which the ao was required to decide was whether the liability to pay interest was incurred in the first year itself or not, and if so, the assessee was entitled to obtain full deduction in the first year.

2.4.4 It was also pointed out that the tribunal has proceeded on the footing that the entire measure was adopted because the assessee had surplus income whereas the concerned lender had brought forward losses. In this respect, it was contended that the court should not take into account extraneous factors while deciding the claim of the assessee.

2.4.5 Referring to the judgment of the Apex Court in the case of tuticorin alkali Chemicals and fertilizers Ltd. [227 itr 172 – tuticorin’s case], it was further contended that the deduction of expenditure under the act does not depend on what the assessee debits in its accounts but, it depends on the provisions of the law. Therefore, in this case, the fact that the assessee has not debited the full amount to profit and loss account in the first year itself cannot be the ground for its disallowance in that year. The tax cannot be levied on the basis of entries made by an assessee in its books of account.

2.4.6 It was also contended that the tribunal has erred in introducing matching concept to the effect that the expenditure must relate to the income in the assessment year and the benefit was spread over for a period of five years and therefore, the expenditure must also be spread over. According to the learned counsel, since the liability in this case is incurred in the first year itself, the assesseee was entitled to full deduction in that year and, therefore, the question of co-relating the expenditure to income/ benefit for five years does not arise. For this, the reliance was placed on the judgment of the Apex Court in the case of Mysore Spinning and mfg. Co. Ltd. [61 itr 572].

2.5 On behalf of the revenue, it was, inter alia, contended that the option given to the lenders refers to upfront one-time payment and it does not speak of interest. the upfront payment of Rs. 55 per debenture, as against the amount of Rs. 90, was made to get the benefit of differential amount of Rs. 45 for a period of five years and therefore, the ao was right in spreading the expenses over that period. If the argument of the assessee for deduction of the full amount in the first year is accepted, then the computation of income will stand distorted, because the assesse got the benefit of Rs. 45 for five years. Upfront payment of Rs. 55 was on account of advance payment of interest in the first year for five years. As such, the principle laid down by the apex Court in the madras industrial investment’s case was squarely applicable to the facts of the case of the assessee. It was also contended that under both the options, the interest was payable every six months and therefore, the amortisation principle was applicable to both the options. Therefore, even Rs. 55 per debenture was payable by way of interest for five years which was paid by the assessee in the first year and therefore, the ao was right in applying the principle of amortisation in this case.

2.5.1 Supporting the appeals filed by the Revenue, the learned counsel appearing on behalf of the revenue, further contended that, as against the amount of Rs. 4,95,00,000 borrowed on 29th march, 1996, on the same day, an amount of Rs. 2,72,25,000 was repaid in the name of upfront payment of interest and therefore, the actual borrowed capital left with the assesse was only Rs. 2,22,75,000 which was used for the purpose of business. Since part of the borrowed capital was refunded to the subscribers on the same date, the actual borrowed capital remaining was the net amount and the tribunal has failed to appreciate this factual positon. as such, the assessee was entitled to claim deduction u/s. 36(1)(iii) for interest only on Rs. 2,22,75,000.

2.5.2.1 It was also contended that the entire scheme of issue of non-convertible debenture was devised to defeat the collection of tax revenue. In the present case, the assessee has not paid the discounted value of interest, but has repaid part of the face value of the debenture itself under the garb of upfront payment of interest at present value. therefore, the tribunal has erred in giving spread over and granting deduction of Rs. 4,45,50,000 @ 18% per annum for five years on the gross amount (i.e. Rs.4,95,00,000) of debentures.

2.6 After considering the contentions raised on behalf of both the sides, the Court proceeded to decide the question referred to in para 2.3. For this purpose, at the outset, the Court noted the following relevant terms of the issue of debentures [Page115]:

“3(a) Each debenture shall carry interest at the rate of 2%. Per annum above the prime lending rate and the interest shall be payable half-yearly.
(b) Each debenture shall carry interest at the rate of Rs. 55 per debenture, payable up-front within thirty days of the exercise of option or from the date of allotment, whichever is earlier”.

These terms were not accepted by the lenders.
The final terms of the issue were as follows:

“2. Terms of the issue:
(a) Up-front fee – the debenture shall carry up- front fee at the rate of Rs. 55 per debenture payable up-front immediately on allotment.
(b) Redemption period – the debenture shall be redeemed at a premium of 10 per cent, i.e., Rs.10 per debenture, in one instalment any time after the end of the fifth year from the date of allotment, but not later than the seventh year from the date of allotment.”

2.6.1 The Court then briefly referred to the facts of the present case and stated that the question which arises for determination in this case is whether Rs. 55 per debenture (total – Rs. 2,72,25,000) deductible in the first year of allotment or that expenditure was to be apportioned over the period of five years, which is the life of the debenture. The Court also noted that the assesse is following the mercantile system of accounting on the basis of which the assessee has made a claim for the full amount in the first year itself whereas the Revenue has treated this as deferred revenue expenditure (DRE) and apportioned the expenditure for five years. The Court then stated that for the purpose of deciding this issue, two concepts are required to be borne in mind, viz., matching and discount rate.

2.6.2 The Court then proceeded to consider the ‘matching concept’ referred to in above para. for this purpose, the Court noted that the mercantile system of accounting is based on accrual. under this system, book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. the system postulates the taxation of monies that are due and payable by the parties to whom they are debited. explaining the effect of the ‘matching concept’ in the mercantile system of accounting, the Court observed as under [Page no. 116]:
“…….therefore, under the mercantile system of accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed (expenses). under the mercantile system of accounting, this matching is required to be done on accrual basis. under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in- flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In this case, the assesse is following the mercantile system of accounting. this matching concept is very relevant to compute taxable income particularly in cases involving dre. it has been recognised by numerous judgments… ”

2.6.2.1 The Court then referred to the judgment of the apex Court in the case of Calcutta Co. Ltd. [37 ITR 1] and stated that, in that case, the Court had held that the expression ‘profits or gains’ used in section 10(1) of the income-tax act, 1922 [similar to section 28(i) of the act] should be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure, which is necessary for the purpose of earning receipts is deducted therefrom. the Court then noted that in that case the apex Court had applied the ‘matching concept’ and allowed the deduction of an expenditure required to be incurred in subsequent period on an estimated basis which related to the income that was already accounted on the ground that otherwise it was not possible to compute profits and gains. The Court then stated that this concept is also applied by the apex Court in the case of madras industrial investment’s case and for that purpose the Court noted the following observations from the head notes of that case [Page 117]:

“Ordinarily, revenue expenditure which is incurred wholly and exclusively for thepurpose of business must be allowed in its entirety in the year in which, it is incurred. it cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. in fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assesse has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. the liability should, therefore, be spread over the period of the debentures”.

2.6.2.2 The Court then stated that the ‘matching concept’ is also covered by section 36(1)(iii) read with section 43(2), which defines the word ‘paid’ to include incurred according to the method of accounting. Both these sections are part of the provisions relating to computation of business income. Interest on monies borrowed for business purposes is an expenditure in the business, which is deductible under section 36(1)(iii). the Court then pointed out that for claiming deduction u/s. 36(1)(iii), the necessary conditions are: the capital must have been borrowed; it must have been borrowed for business purpose and the interest must have been paid i.e., actually paid or incurred in accordance with the method of accounting followed by the assessee.

2.6.2.3 Referring to the facts of the case of the assessee, the Court noted that the assessee got the benefit of the borrowed money for a period of five years and if the ‘matching concept’ is not applied, the profits get distorted. In this context the Court then observed as under [Page 118]:

“……for the year ending march 31, 1996, the assessee has submitted that it has incurred an expenditure amounting to rs. 2,72,25,000 as and by way of interest deductible under section 36(1)(iii) of the income-tax act. however, in the annual accounts, the said amount is not debited to the profit and loss account. It is interesting to note from the profit and loss account for the year ending March 31, 1996, that profit after tax was rs.1,86,34,016. now if the expenditure incurred was Rs. 2,72,25,000 as submitted by the assessee then the assessee could never have earned the said profit of Rs. 1,86,34,016. This is how the profit got distorted. In the annual report, the assessee has conceded that Rs. 2,72,25,000 was deferred revenue expenditure to be written off over five years. In his order, the Assessing Officer has recorded a finding of fact which categorically brings out the ‘matching concept’. he has stated that for the accounting year March 31, 1996, profit after tax increased to Rs. 1,86,34,016 from rs. 50 lakhs in the last year ending march 31, 1995. Therefore, the Assessing Officer was right in apportioning the expenditure at 18 per cent. per annum on Rs. 495 lakhs amounting to Rs.74,259 for three days because only then the estimated expenditure could match with income of Rs. 1,86,34,016… ”

2.6.2.4 Considering the above referred accounting treatment and the accounting profit for the year ending 31st march, 1996, the Court stated that the assessee has shown Rs. 2,72,25,000 as deferred revenue expenditure and according to the Court, this expenditure, though paid, was not incurred in the year ending 31st march, 1996 and the expenditure incurred in that year was Rs. 74,250. in this context, the Court further observed as under [Page 118]:
“… What we would like to emphasise is that, therefore, ordinarily revenue expenditure incurred only and exclusively for business purposes must be allowed in its entirety in the year in which it is incurred. However, in a given case, like the present one, the facts may justify the Assessing Officer to spread the expenditure over the life of the debentures because allowing the entire expenditure in one year might give a distorted picture of the profit of a particular year… ”

2.6.2.5 Considering the overall facts of the assessee, the Court took the view that the assessee has received the borrowed funds for a period of five years and it is a continuing benefit to the business of the assessee over the entire period of debentures and therefore, the liability was required to be spread over the period of debentures. the Court also noted that the assessee itself has applied a ‘matching concept’ qua the claim of premium payable on redemption of debentures. As such, in this very case, the assessee has invoked the ‘matching concept’ qua premium but not for interest.

2.7 The Court then proceeded to consider the second concept, viz., discount rate. in this context, the Court noted that the ao had taken a view that the upfront payment made by the assessee had to be discounted as these payments represent present value of the interest liability and were deferred revenue expenditure. For this purpose, the ao applied 18% as the discount rate which was effectively based on one of the options available for payment of interest over a period of five years. On this basis, the ao determined the annual liability of interest at Rs. 89,10,000 in respect of borrowing of Rs. 495 lakh and Rs. 18 lakh in respect of borrowing of Rs. 100 lakh. on this basis, the ao allowed deduction of Rs. 74,250 for three days for the assessment year 1996-97 and Rs. 1,03,20,410 for the assessment year 1997-98 (i.e. Rs. 89,10,000 for the first set of debenture and Rs. 14,10,410 for the second set of debenture on a proportionate basis for part of the financial year 1996-97). in the subsequent years,it seems, the ao had allowed deduction on this basis for the full year. The assessee had questioned the discount rate applied by the ao for determining the amount of deduction. After considering the factual position, the Court did not find any defect in the method of determining the amount of deduction adopted by the ao.

2.8 After considering both the above concepts, viz., ‘matching concept’ and discount rate, the Court stated that if they are kept in mind, the matter stands resolved in law. For this purpose, the Court then analysed the annual accounts of three years under appeal and noted that in each of the years, the assessee has treated the upfront payments made in the first year as deferred expenditure and written off the same on that basis during the life of the debentures. After analysing these annual accounts for three years, the Court also noticed that even this method continued in the subsequent accounting years upto 31st march, 2001 and finally, the debentures were repaid during the accounting year 2001-02.

2.8.1 Based on the analysis of the above referred annual accounts, the Court noted that this analysis indicates two things. Firstly, in the accounts, the upfront payment has been written off over the period of debentures by creating an asset in respect thereof on the basis that interest for five years is paid in advance in the first year. Secondly, the accounts show that the premium payable by the assessee on redemption was Rs. 60 lakh and in each year, 20% thereof has been charged to the profit and loss account. On this basis, the Court felt that the acceptance of claim of deduction of the full amount in the first year would result into distortion.

2.9 The Court then noted the contention of the assessee that good accounting is not necessarily correct law. For this, on behalf of the assessee, apart from the other authorities, heavy reliance was placed on the judgment of the Apex Court in tuticorin’s case to contend that the deduction of expenses in computation of income under the act does not depend on its accounting treatment but depends on the provisions of the law. For this, the Court considered the relevant provisions contained in section 36(1)(iii) read with section 43(2) and stated that, from this, it would be clear that question of allowance permitted to be deducted under the head profits and gains would differ according to the system of accounting adopted by the assessee. For this purpose, one has to estimate the expenditure by applying the ‘matching concept’ and a proper discount rate. Referring to the judgment of the Apex Court in the case of A. Krishnaswamy Mudaliar [53 ITR 122], the Court stated that profits of the business should be determined according to the ordinary principles of commercial accounting so far as they are applicable. The Court then stated that there is no merit in the argument advanced on behalf of the assessee that good accounting is not necessarily good law.

2.10 Finally, explaining the effect of judgment in tuticorin’s case,the Court held as under [Page 125]:
“………one of the points which arose for determination was whether interest received by the assessee on short-term deposits during pre-commencement of business could be capitalised as accretion to capital and, therefore, nontaxable. Therefore, in the case, the issue was on the nature of the receipt. Hence, that case has no application. On the contrary, it has been held that the accounting principles are relevant for ascertainment of profits made by a company or for ascertainment of value of assets of the company but, not for determining the nature of receipt. Therefore, the said judgment supports the view which we have taken as in this case, we are concerned with computation of income.

It is important to note that the deferred revenue expenditure is of revenue nature but, because of its special features, it is spread over a number of years during which the benefit of expenditure is expected to arise to the business. on the facts, we hold that the liability was a continuing liability to pay interest spread over for a period of five years… ”

2.11 In view of the above, the Court took the view that the ao was right in spreading the deduction over the period of five years which was the life of the debentures. Accordingly, the Court decided the question referred to in para 2.2. above in favour of the revenue and against the assessee.

2.12 On the above basis, appeals of the assessee for all the three years were dismissed. the Court also noted that the three appeals preferred by the revenue, relate to the ground that upfront payments represented repayment of borrowed capital and therefore, the assessee was not entitled to deduction u/s. 36(1)(iii) in respect thereof. In this respect, the Court clarified that the AO has recorded the finding of fact that the upfront payments were on revenue account and that has been confirmed by the Tribunal and therefore, the Court has decided these matters on the basis of that finding of fact. Accordingly, on this basis, the Court preferred not to answer the questions raised in the three appeals filed by the Revenue.

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Payment of Ransom or Protection money and section 37

Issue for Consideration
An expenditure laid out or expended wholly and exclusively for the purposes of business or profession is allowed as a deduction, u/s. 37, in computing the income chargeable under the head ‘Profits and Gains of Business or Profession’, provided such an expenditure is not in the nature of a capital expenditure or a personal expenditure of the assessee and is not of the nature covered by section 30 to 36 of the Act.

The expenditure, though incurred for the purposes of business, shall be deemed to have not been incurred for the purposes of business, where the expenditure is incurred for a purpose which is an offence or which is prohibited by law. No deduction or allowance, therefore can be made in respect of such an expenditure by virtue of Explanation 1 to section 37(1) of the Act.

It is not uncommon for a businessman to make certain payments in the course of his business, the payment of which might be an offence or prohibited by law. Several cases of payments of fines and penalties for violation of law are the examples that immediately come to mind. Such payments largely would be the cases of expenditure that would be hit by the Explanation 1 to section 37(1) and would stand to be disallowed in computing the Total Income.

Cases often arise wherein a businessman, for the purposes of his safety or for safeguarding his business, is required to make certain payments to either the police or security guards or to the gangsters or even to the kidnappers. Such payments, when made to the police or security guards are known as “Security Charges”, when made to gangsters are known as “Protection Money” and as “Ransom” when paid to kidnappers.

Issue arises in the context of Allowance or Deduction when such payment, i.e., security charges or protection money or ransom is made. Whether such payments, though made for business purposes, would be liable for disallowance on the ground of it being construed as an expenditure incurred for a purpose which is an offence or is prohibited by law. Conflicting views of the High Courts highlight the controversial nature of the issue under consideration.

M. S. Swam inathan’s case
Before the Karnataka High Court in the case of CIT vs. M. S. Swaminathan, 236 CTR 559, the Revenue had raised the following question for consideration of the high court in an appeal filed by it – “ whether the payment made to local police and local rowdies can be an allowable expenditure as a business expenditure ?

“In the said case, a sum of Rs. 86,000 was claimed as expenditure for money paid to local police and local goons towards the maintenance of the two theatres run by the assessee, viz., Vinayaka Touring Talkies and Sri Krishna Theatre. The expenditure of Rs. 86,000 claimed was disallowed by the AO. The CIT(A), in an appeal filed by the assessee, concurred with the view expressed by the AO and dismissed his appeal. Aggrieved by the same, the assessee filed the second appeal before the tribunal, which allowed the appeal in part, by allowing deduction of Rs. 50,000 as against Rs. 86,000 claimed. Being aggrieved by the same, the appeal was filed by the Revenue before the High Court.

On hearing the rival contentions, the Karnataka High Court allowed the appeal of the Revenue for disallowing the claim of the expenditure by holding as under;

“If any payment is made towards the security, towards the business of the assessee, such amount is an allowable deduction, as the amount spent for the maintenance of peace and law and order in the business premises of the assessee as he was running two cinema theatres. But the amount spent in the instant case claimed by the assessee is towards payment made to the police and rowdies. If any payment is made to the police illegally, it amounts to bribe and such illegal gratification cannot be considered as an allowable deduction and similarly, if any amount is paid to a rowdy as a precautionary measure to see that he shall not cause any disturbance in the theatre run by the assessee, the same is also an amount paid illegally for which no deduction can be allowed by the Department. If the assessee had spent the money for the purpose of security, we would have to concur with the view of the Tribunal. However, in the instant case, the payment has been made to the police and rowdies to keep them away from the business premises which payment be held as illegal and such illegal payment cannot be an allowable deduction.”

Khemchand Motilal Jain, Tobacco Products (P.) Ltd.’s case
The issue arose in the case of CIT vs. Khemchand Motilal Jain, Tobacco Products (P.) Ltd. 340 ITR 99 (MP) before the Madhya Pradesh High Court. In that case, the assessee company was engaged in manufacturing and sale of bidis. One Mr. Sukhnandan Jain was a whole-time director of the assessee-company and was looking after the purchase, sales and manufacturing of bidis. During his business tour in August 1987 to Sagar for purchase of tendu leaves, he was kidnapped for ransom by a dacoit gang headed by Raju Bhatnagar. Immediately, a complaint and FIR were lodged with Sagar Police. The assessee company awaited the action of the police but the police was unsuccessful in getting Mr. Sukhnandan Jain released from the clutches of the dacoit. Ultimately after 20 days, a sum of Rs. 5,50,000 was paid by way of ransom for the release of Mr. Sukhnandan Jain. On the same day of payment of the ransom, Mr. Sukhnandan Jain was released by the dacoits.

The company claimed a deduction of the ransom amount as business expenditure. The AO disallowed the claim of the assessee company on the ground that the ransom money paid to the kidnappers was not an expenditure incidental to business. On appeal, the CIT (Appeals) allowed the claim of the assessee. The Tribunal confirmed the finding of the CIT (Appeals). On appeal, the Revenue contended that the amount of ransom could not have been claimed by way of expenditure as the Explanation to sub-section (1) of section 37 prohibits such expenditure. The Tribunal referred the following question to the Court :“Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amount of Rs. 5,50,000 paid as ransom money to the kidnappers of one of the Directors was an allowable deduction under section 37(1) of the Income-tax Act,1961?”

Before the High Court, the Revenue submitted that the amount of ransom could not have been claimed by way of expenditure as the Explanation of sub-section (1) of section 37 of the Income-tax Act, 1961 prohibited allowance of such an expenditure. It was submitted that the payment of any amount which was prohibited by law was not a business expenditure and it could not be allowed as an expenditure.

The amicus curiae, and the assessee company supported the orders passed by the appellate authorities and submitted that the payment of ransom was an allowable expenditure. It was pleaded that the amount was paid to the dacoits to get Mr. Sukhnandan Jain, who was on business tour and who was working as the director of the company, released from the dacoit. It was contended that the aforesaid amount was rightly claimed as an expenditure of business. It was insisted that at the relevant time, Mr. Sukhnandan Jain was on a business tour and was staying at a Government Rest House at Sagar, from where he was kidnapped.

The assessee company, in support of its claim, relied upon the judgments in cases of Sassoon J. David & Co. (P.) Ltd. vs. CIT, Bombay 118 ITR 261 and CIT West Bengal, Calcutta vs. Karam Chand Thapar and Brothers (P.) Ltd, 157 ITR 212(Cal.) and Addl. CIT vs. Kuber Singh Bhagwandas, 118 ITR 379(MP).

The madhya Pradesh high Court extensively quoted with approval the findings of the appellate authorities in respect of the contribution of Mr. Sukhnandan Jain to the business of the company, his need to travel for the purposes of business, the business exigency for payment of ransom money and the compulsion thereof. The court noted that from the perusal of the facts, it was apparent that Sukhnandan jain was conducting business tour for the company and was staying at a government rest house and the visit was to meet one Bihari Lal for the procurement of quality tendu leaves and it was during the business tour, that he was kidnapped. The court further noted that for a period of near about 20 days after lodging a report to the police, when all the efforts of the police were unsuccessful, the company made payment of ransom amount of Rs. 5,50,000 to the kidnappers and ultimately on the same day, Sukhnandan jain was released from the clutches of the dacoits and that both the appellate authorities had found that it was a business expenditure while allowing the claim.

The court referred to the provisions of explanation of sub-section (1) of section 37, for determining whether the expenditure could have been disallowed under that provision of the act. It also examined the provisions of section 364a of the indian Penal Code which provided that kidnapping a person for a ransom was a criminal offence. It noted that the aforesaid section 364A provided that kidnapping a person for ransom was an offence and any person doing so or compelling to pay, was liable for punishment as provided in the section, but nowhere it was provided that to save a life of the person if a ransom was paid, it would amount to an offence. No provision was brought to the notice of the court that the payment of ransom was prohibited by any law and in absence of it, the Explanation of sub-section (1) of section 37 was not applicable in the case of the assessee company.

The madhya Pradesh high Court, after analysing the decisions cited by the assessee company, observed that in the case before the court, Mr. Sukhnandan Jain was on business tour and was staying at a government rest house from where he was kidnapped and to get him released, the amount was paid to the dacoits as ransom money. It thereafter held as under; “If the respondents to save his life paid the aforesaid amount, then the aforesaid amount cannot be treated as an action which was prohibited under the law. No provision could be brought to our notice that payment of ransom is an offence. In absence of which, the contention of the petitioner that it is prohibited under Explanation of section 37(1) of the Income-tax Act has no substance. The entire tour of Sukhnandan Jain was for purchase of tendu leaves of quality and for this purpose he was on business tour and during his business tour, he was kidnapped and for his release the aforesaid amount was paid.”

The high Court accordingly held that the ransom amount was an allowable business expenditure.

Observations
The bitter reality of the day is that people do have to regularly cough up money, against their will, for securing the safety of their business or lives or both. in some cases. the payments are made to ensure continuity of the business. In many cases, the payments are not only involuntary but may not be authorised by the law, as well. Such payments are forced by the goons or the guardians of the law and at times by the framers of the law. Barring a very limited section of the society, no one cherishes such payments but are seen, nonetheless to be acquiescing to such extortions in the interest of survival. Cases are available wherein a citizen has to resort to imaginary ways to meet such demands by generating cash from one’s accounted funds. In most of the cases, even approaching the authorities, entrusted with the task of protecting and ensuring the safety of the citizens, involves an extra and additional cost. Therefore, it brings additional pains where such expenditure incurred against one’s will is not allowed as a deduction in computing the total income. On disallowance of the claim, it becomes a case of a double whammy for the businessman.

The Government, instead of ensuring that its citizens are not extorted to pay money against their will by securing their safety, by booking the extortionists, has, to add insult to the injury, legislated the said Explanation to section 37(1) for providing that such an expenditure is disallowable.

Section 37 of the income-tax act provides for allowance of an expenditure that has been wholly and exclusively incurred for the purposes of the business of the assessee. It is a settled position in law that the expression “wholly and exclusively” does not mean “necessarily”. An expenditure maybe incurred by than assessee without there being a dire necessity for incurring such an expenditure and such an expenditure will not be disallowed once it is shown that the same has been incurred for the purposes of business of the assessee. It is for the assessee to decide whether any expenditure should be incurred in the course of his business or not. Such an expenditure may be incurred voluntarily and without any necessity. Once an expenditure is incurred for promoting the business and to earn profits, the assessee can claim deduction even though there is no compelling necessity to incur such expenditure.

In order to decide whether a payment of money or incurring of expenditure is for the purpose of the business and is an allowable expenditure or not, the test to be applied is that of ‘commercial expediency’. If the payment or expenditure is incurred to facilitate the carrying on of the business of the assessee and is supported by commercial expediency, it does not matter that the payment is voluntary or that it also enures to the benefit of a third party.

An expenditure otherwise allowable u/s. 37, in terms of the tests discussed above, would still be disallowed if the same is incurred for a purpose which is an offence or is prohibited by law, in which event the expenditure so incurred shall be deemed to be not for the purposes of business or profession. The purpose behind an expenditure assumes a great importance; where the purpose is an offence, the disallowance would take place.

An offence, as per the dictionary, in the context, is an illegal act; a transgression or misdemeanour. accordingly, an expenditure incurred for the purpose which is illegal cannot be allowed under the act. Similarly, an expenditure incurred for achieving a purpose that is prohibited by law would not be allowed a deduction. It appears that there is very little difference between a purpose which is an offence and a purpose which is prohibited by law. In the context of explanation to section37 (1), one is therefore required to examine whether the payment is being made for a purpose which is prohibited by law.

Ensuring security of the business or of the business personnel, is an essential function of any business and therefore, payment of security charges would neither be an offence nor prohibited by law. We are afraid that the objective of the payee or his purpose behind demanding, collecting or receiving the payment is an irrelevant factor while applying the test of explanation 1 to section 37(1), the application of which is qua the payer and is limited to his purpose, as long as the purpose behind his expenditure is not an offence or prohibited by law.

Taking this understanding to the second level of payment of protection money, to a gangster, such a payment should not be disallowed as long as paying such an amount is not an offence under the indian Penal Code or any other law. It is true that for a gangster, demanding protection money or extorting money for not causing any damage, is an offence that is punishable under the indian Penal Code. His offence, however, need not necessarily be the offence of the payer assessee. The objectives and the purposes are different and cannot be equated.

Likewise, payment of ransom for securing the release to a kidnapper is not an offence or is not prohibited under any law. So, however, demanding a ransom is a serious crime that is punishable in law. Accordingly, the payment of ransom shall not be liable for any disallowance, simply on application of explanation 1 to section 37(1).

At the same time, it is significant to note that a payment to a police officer is an offence and is also prohibited by law if the same amounts to bribing him. however, an official payment to the Police Department, for security, is not an offence and is not liable for disallowance. In Swaminathan’s case (supra), it is not clear that what was the nature of payment to the police. Was it a bribe? if yes, it was liable for disallowance.

Many years back, the mumbai tribunal in the case of Pranav Construction Company, 61 T1TJ 45, held that payments made by a builder of “protection money” to tapories and hawkers was allowable as deduction on being satisfied about the genuineness of the expenditure. The tribunal held that the builders engaged in construction activities were vulnerable to danger such as extortion, haftas, etc. and unless, they obliged, it would be impossible for them to conduct business.

The view of the madhya Pradesh high Court, in the case of Khemchand Motilal Jain’s case (supra), that payment of ransom for securing the release of the director was not an expenditure for a purpose that was an offence or was prohibited by law and was therefore not hit by the explanation 1 to section 37(1) is the correct view in law.

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THE FINANCE ACT – 2015 DIRECT TAX PROVISIONS

1. Background

1.1 The Finance Minister, Shri Arun Jaitley, presented his second budget in the Lok Sabha on 28th February, 2015. After some discussions, both the houses of Parliament have passed the Finance bill with some amendments in the Finance Bill, 2015, and the same has received presidential assent on 14th May, 2015. There are 80 sections in the Finance Act dealing with amendments in direct tax provisions.

1.2 In Paras 96 to 98 of his budget speech he has referred to certain steps which the Government proposes to take in the field of Indirect Taxes and Corporate Taxation, in the coming years. These are

(a) Expediting the process to legislate Goods and Services Tax (GST)
(b) Reduce the corporate tax to 25% over the next four years and phase out exemptions and incentives.

1.3 I n Para 99 of his budget speech he has enumerated the themes adopted by him for his tax proposals as under;

“99. While finalizing my tax proposals, I have adopted certain broad themes, which include;

A Measures to curb black money;
B Job creation through revival of growth and investment and promotion of domestic manufacturing and ‘Make in India’.
C Minimum government and maximum governance to improve the ease of doing business;
D Benefits to middle class taxpayers;
E Improving the quality of life and public health through Swachch Bharat initiatives; and
F Stand alone proposals to maximize benefits to the economy”

1.4 It may be noted that another major step in this year’s budget is about abolition of wealth tax from A.Y. 2016-17. The justification for this is given in Para 113 of the budget speech as under;

“113. My next proposal is regarding minimum government and maximum governance with focus on ease of doing business and simplification of Tax Procedures without compromising on tax revenues. The total wealth tax collection in the country was Rs. 1,008 Crore in 2013-14. Should a tax which leads to high cost of collection and a low yield be continued or should it be replaced with a low cost and higher yield tax? The rich and wealthy must pay more tax than the less affluent ones. I have therefore decided to abolish the wealth tax and replace it with an additional surcharge of 2% on the super-rich with a taxable income of over Rs. 1 Crore. This will lead to tax simplification and enable the Department to focus more on ensuring tax compliance and widening the tax base. As against a tax sacrifice of Rs. 1,008 Crore, through these measures the Department would be collecting about Rs. 9,000 Crore from the 2% additional surcharge. Further, to track the wealth held by individuals and entities, the information regarding the assets which are currently required to be furnished in wealth-tax return will be captured in the income tax returns. This will ensure that the abolition of wealth tax does not lead to escape of any income from the tax net”.

1.5 While concluding his budget speech, he has stated that the Direct Tax proposals will result in revenue loss of Rs. 8,315 Crore. As compared to this, his Indirect Tax proposals will yield estimated revenue of Rs. 23,383 Crore. Thus the net revenue gain will be about Rs. 15,068 Crore.

1.6 I n this article some of the important amendments made to the Income-tax Act by the Finance Act, 2015, have been discussed. It may be noted that the amendments, as in last year’s Finance Act, have only prospective effect i.e., will operate for assessment year 2016-17, unless specifically provided

2. Rates of Taxes

2.1 I n view of the changes in threshold limits made by the Finance (No.2) Act, 2014, the exemption limit for Individuals, HUF, AOP as well as the rates of tax remain unchanged.The rates of income tax in the case of corporate and non-corporate assessees in A.Y. 2015-16 and A.Y.: 2016-17 will be the same.

2.2 T herefore, in the case of an Individual, HUF, AOP, BOI etc., the rates of Income-tax for A.Y. 2015-16 and A.Y. 2016-17 will be as under:

Note: Rebate of Tax – A Resident Individual having total income not exceeding Rs. 5 lakh, will get Rebate upto Rs. 2,000/- or tax payable, whichever is less u/s. 87A.

2.3 A s stated earlier, due to abolition of wealth tax from A.Y. 2016-17, the rate of Surcharge on tax has been increased from 10% to 12% for Super Rich assessees. This increased surcharge will be charged as under from A.Y. 2016-17.

(i) I n the case of an Individual, HUF, AOP etc. the rate of surcharge on tax will be 12% if the total income of the assessee exceeds Rs.1 crore.
(ii) In the case of a firm, LLP, Co-operative Society and a Local Authority the rate of Surcharge on tax will be 12% if the total income exceeds Rs.1 crore.
(iii)In the case of a domestic company the rate of surcharge on tax will be as under:
(a) I f the total income exceeds Rs.1 crore but does not exceed Rs.10 crore the rate of surcharge will be 7%.
(b) I f the total income exceeds Rs.10 crore, the rate of surcharge will be 12%.
(iv) I n the case of a foreign company there is no increase in the rate of surcharge on tax. Hence, the existing rate which is 2% in respect of total income between Rs.1 crore and 10 crore and 5% in respect of total income exceeding Rs.10 crore will continue.
(v) T he rate of surcharge on Dividend Distribution Tax u/s. 115-0, Tax on Buy Back of shares u/s. 115 QA, Income Distribution Tax payable by Mutual Funds u/s. 115R, and Income Distribution Tax payable by Securitisation Trusts u/s. 115 TA will be 12%.

2.4 T he existing rate of 3% for Education Cess (including Secondary and Higher Secondary Education Cess) on Income tax and surcharge will continue in A.Y. 2016-17.

2.5 T he effective maximum marginal rate of tax (including Surcharge and Education Cess ) will be as under for A.Y. 2016 – 17.

3. Tax Deduction at Source:

3.1 Section 192: At present, the person responsible for paying salary has to depend upon the evidence and particulars furnished by the employee in respect of deduction, exemptions and set-off of loss claimed by the employee while deducting tax at source. There is no guidance available about the evidence or particulars to be collected. Therefore, s/s. (2D) is inserted from 1.6.2015 to provide that the person responsible for deduction of tax will have to get particulars, evidence etc. about the deduction claimed from the salary in the Form which will be prescribed in the Rules.

3.2 Section 192A: This is a new section inserted from 1.6.2015. In the case of an employee participating in a Recognised Provident Fund (RPF), the accumulated balance to his credit in his PF account is excluded from his total income if Rule 8 of Part A of Schedule IV is applicable. If this Rule does not apply, the trustees of RPF are required to deduct tax at source. The Trustees of P.F. sometimes find it difficult to determine the rate of tax for TDS. To resolve this issue, section 192A provides that, at the time of payment of the accumulated balance due to the employee, trustees shall deduct income-tax at the rate of ten per cent. If the employee fails to furnish his PAN to the trustees, tax shall be deducted at the maximum marginal rate. Tax is not deductible under this section where the aggregate amount of withdrawal is less than Rs. 30,000/- or where the employee furnishes a selfdeclaration in the prescribed Form 15G/15H that tax on his estimated total income would be nil.

3.3 Section 194A: This section has been amended from 1.6.2015. The effect of this amendment is as under:

(i) A co-operative Bank will have to deduct tax at source from interest paid or payable on time deposit made by its member. This deduction is to be made if the amount of the interest exceeds Rs.10,000/-. however, no such deduction will be required to be made on interest paid or payable on time deposit by a co-operative society. Similarly, a primary agricultural society, a primary credit society, a Co-operative land mortgage bank, or a Co-operative land development bank will not be required to deduct tax at source from interest payment. the amendment to section 194a(3)(v) sets at rest the controversy created by a recent decision of the Bombay high Court.

(ii) Hitherto, there was no tdS from interest paid by a Bank on recurring deposits. now, tax will be required to be deducted by the bank in respect of interest on recurring deposit also.( amendment to explantion 1 of section 194 a).

(iii) At present, the threshold limit of exemption from tdS provisions apply to interest credited or paid by a branch on an individual basis in the case of a bank, Co- operative bank or a public company engaged in long- term housing finance. It is now provided that the TDS provisions u/s. 194a with reference to interest credited or paid by such entities as a whole will apply if the entity has adopted core banking solutions. in other words, in such cases, total interest paid or payable by all branches will have to be considered for determining the threshold limit of exemption.

(iv) Interest paid on compensation amount awarded by the motor accident Claim tribunal (MACT) shall now be liable to TDS u/s. 194a only at the time of payment of interest, if the aggregate amount of such payment during the financial year exceeds Rs. 50,000/-. Hence, as per the amended provision, there will be no withholding of tax at the time when such interest is credited.

3.4 Section 194C: This section is amended from 1.6.2015. at present, payment to a transporter carrying on the business of plying, hiring, or leasing of goods carriages is not subject to TDS u/s. 194C if the transporter furnishes his Pan to the payer. Now, this exemption will be available only to such transporterwho owns ten or less goods carriages at any time during the previous year and also furnishes a declaration to that effect to the payer along with his Pan.

3.5 Section 194-I: This section is amended from 1.6.2015. It is now provided that tax will not be deducted u/s. 194-I from rent paid or payable to a Business trust (real estate investment trust) in respect of any real estate asset as referred to in section 10(23fCa) owned directly by such business trust.

3.6 Section 194 LBA: This section is amended from 1.6.2015. Section 194LBA was inserted by the finance (no.2) act, 2014, w.e.f. 1.10.2014 to provide for deduction of tax @10% from income referred to in section 115ua (i.e. interest income received by a Business trust from SPV) distributed to a resident unit holder. in the case of non-resident unit holder the rate of TDS was 5% plus applicable Surcharge and education Cess. By an amendment of this section, the scope of this TDS provision is extended to income of Business trust from renting, leasing or letting out any real estate asset owned by it distributed to its unit holder. it is now provided that, in the case of a resident unit holder the rate of TDS will be 10% and in the case of a non-resident unit holder, tax will be deductible at the applicable rate if the distribution of income is from income referred to in section 10 (23FCA) i.e., rental from the real estate asset.

3.7 Section 194 LBB: This is a new section inserted from1.6.2015. this section provides for deduction of tax @10% from income distributed to persons holding units issued by “investment fund” (refer section 115 uB) out of income other than that referred to in section 10(23fBB) (i.e. income of investment fund other than income from business or profession).

3.8 Section 194 LD: This section was inserted by the finance act, 2013, w.e.f. 1.6.2013. under this section, tax is required to be deducted at concessional rate of 5% from interest payable to foreign institutional investors or Qualified Foreign Investors on Government Securities or rupees denominated Bonds of any indian Company. This concessional rate was applicable on interest payable during the period 1.6.2013 to 1.6.2015. this will now continue in respect of interest payable till 1.7.2017.

3.9 Section 195: This section is amended from 1.6.2015. Section 195(1) requires any person responsible for paying to a non-resident any interest or other sum chargeable under the provisions of this act to deduct tax from such payment. At present, such person has to furnish the information relating to payment of any sum in form 15Ca. now, section 195(6) is amended to provide for furnishing of information, whether or not such remittances are chargeable to tax, in such form as may be prescribed. this will cast an onerous obligation on payers. Section 271-I has been introduced to provide for a penalty of Rs.1,00,000/-, if the person required to furnish information under this section fails to furnish such information or furnishes inaccurate particulars. this is a new provision for levy of penalty.

3.10 Section 197A: This section is amended from1.6.2015 to provide as under:

(i) Section 194da provides for deduction of tax at source at the rate of 2% from payments made under life insurance policy, which is chargeable to tax if the amount is rs. 1,00,000/- or more. it is now provided that tax shall not be deducted, if the recipient of the payment on which tax is deductible furnishes to the payer a self-declaration in the prescribed form no.15G/15h declaring that the tax on his estimated total income for the relevant previous year would be nil.

(ii) Similarly, as stated in Para 3.2 above, it is now provided that tax shall not be deducted u/s. 192a if a salaried employee withdrawing the accumulated balance from P.f. a/c gives a self-declaration in form no.15G/15h.

3.11 Section 203A: This section is amended from1.6.2015 to provide that the requirement of obtaining and quoting of TAN shall not apply to the persons as notified by the Central Government. This is in order to reduce the compliance burden for those individuals or huf who are not liable for audit u/s. 44aB or for one time transaction such as single transaction of acquisition of immovable property by an individual or huf, on which tax is deductible.

4. Exemptions and Deductions:

In order to give certain benefits to middle class taxpayers and with a view to encourage savings and to promote health care among individual taxpayers, the following amendments are made in various sections of the income -tax act.

4.1 Section 80C: at present, section 80C (2) (vill) of the income-tax act provides that any subscription to a scheme notified by the Central Government will be eligible for deduction in the case of an individual or huf. By Notification No.9/2015 dated 21-1-2015, a scheme for the welfare of the girl child under the SukanyaSarmiddhi Account Rules, 2014, has been notified. In view of this, amendment is made in section 80Cfrom1-4-2015. under this amendment any deposit by any individual, in the name of girl child of that individual or by legal guardian of the girl child as specified in the scheme will be eligible for deduction u/s. 80C within the overall limit of Rs.1.50 lakh as provided in that section. an amendment is also made to provide u/s. 10(11A) to grant exemption to the individual in respect of interest on the deposit under the above scheme or for the amount withdrawn from such deposit. Since this amendment comes into effect from
a.y. 2015 – 16 any such deposit made on or before 31-3- 2015 will be eligible for this deduction.

4.2 Section 80CCC: This section provides for deduction in the case of an individual in respect of contribution to any annuity Plan of LiC or any other insurer for receiving pension from the fund set up under a pension scheme upto Rs.1 lakh. this limit is now raised to Rs. 1.50 lakh froma.y. 2016-17. it may be noted that u/s. 80CCe an overall cap of Rs. 1.50 lakh for such deduction is provided for contribution u/s. 80C, 80CCC and 80CCd(1). There is no amendment to raise this limit.

4.3 Section 80CCD: this section provides that an individual contributing to national Pension Scheme (NPS) can claim deduction upto 10% of salary, in the case of an employee or 10% of the gross total income in other cases subject to a cap of Rs.1 lakh u/s. 80CCD(1A). However, this deduction is subject to overall ceiling limit of Rs.1.50 lakh u/s. 80CCe. it is now provided from A.Y. 2016-17 that the cap of Rs.1 lakh u/s. 80CCD(1A) be removed.

With a view to encourage individuals to contribute towards NPS, it is now provided, by insertion of section 80CCD(1B), that an additional deduction upto Rs.50,000/- will be allowed if the individual contributes to NPS. this deduction will be allowed even if it exceeds 10% limit in respect of salary income (for employees) or gross total income (for others). Further, this deduction will be over and above the ceiling limit of Rs.1.50 lakh provided u/s. 80CCe relating to deduction u/s. 80C, 80CCC and 80CCD(1). therefore, with proper planning of investments in PF, PPF, LIP, savings certificates etc. (section 80C), annuity Plan of LIC or other insurers (section 80CCC) and contribution to NPS (section 80CCD) an assessee can claim deduction upto Rs.2 lakh under these sections.

4.4 Section 80D: this section provides for deduction for premium paid for mediclaim policies for self, family members and Parents of the individual. Similarly, similar deduction for premium paid by huf for mediclaim polices of members of huf is allowed. the present limits for such deduction is Rs.15,000/- and for Senior Citizens it is Rs. 20,000/-. these limits are now raised from A.Y. 2016- 17and a further provision is made for deduction of actual medical expenses under certain circumstances. the new provisions are as under.

(i) In view of continuous rise in the cost of medical expenditure, the limit of deduction is raised from Rs.15,000/- to Rs. 25,000/- in case of premium for mediclaim policy for individual and his family members. Similarly, in the case of huf such deduction for premium on mediclaim policies for members of huf is also raised from Rs.15,000/- to Rs. 25,000/-. In the case of a Senior Citizen the deduction for premium on mediclaim policies is raised from Rs.20,000/- to Rs. 30,000/-.

(ii) In the case of very Senior Citizens (i.e 80 years and above), it may not be possible to get a mediclaim policy and they cannot get benefit of the above deduction. therefore, as a welfare measure, it is now provided that deduction upto Rs.30,000/- will be allowed for medical expenditure in respect of very senior citizens if no mediclaim policy is taken out. The aggregate expenditure available for deduction in the case of an individual/huf for premium on mediclaim policy and expenditure on medical expenditure for parent or family member who is a very senior citizen shall not exceed Rs. 30,000/-.

4.5 Section 80 DDB:This section provides for deduction for expenditure incurred by a resident individual or huf for medical treatment of certain chronic and protracted diseases. It is provided that the expenditure in the case of individual should be in respect of medical treatment of himself or his dependant relative and in the case of huf it should for any member of HUF. The medical treatment should be for a disease specified in Rule 11DD and should be supported by a certificate from an authorised Doctor in a Govt. Hospital. at present, the deduction allowable is upto Rs. 60,000 if the medical treatment is of a Senior Citizen and in other cases deduction is allowed upto Rs. 40,000/-. In view of the difficulties experienced in obtaining certificate from a specialised doctor in a Govt. Hospital, the section is now amended to provide that the assessee should obtain prescription from a specialized doctor as may be prescribed. further, in the case of medical treatment of a very senior citizen the ceiling for deduction of expenditure is now raised from Rs. 60,000/- to Rs. 80,000/- from A.Y. 2016-17.

4.6 Section 80DD: This section provides that a resident individual or huf can claim deduction for (i) expenditure for medical treatment (including nursing), training and rehabilitation of a dependant relative suffering from specified disability or (ii) any amount paid to LIC or other insurer in respect of a scheme for the maintenance of a disabled dependant relative. At present, this deduction can be claimed upto Rs.50,000/- in the case of medical treatment for specified disability and upto rs.1 lakh in the case of medical treatment for severe disability as defined in the section. In view of rising costs of medical treatment, these limits have been raised, by amendment of this section, from A.Y. 2016-17 from Rs.50,000/- to Rs.75,000/- (for disability) and from Rs.1 lakh to Rs.1,25,000/- (for Severe disability).

4.7 Section 80U: this section provides for deduction of Rs.50,000/- in the case of a resident individual suffering from a specified Disability. If such individual is suffering from specified Severe Disability deduction of Rs.1 lakh is allowed. in view of rising costs of special needs of disabled persons, these limits are now raised from A.Y. 2016-17 from Rs. 50,000/- to Rs.75,000/- (for disability) and from Rs.1 lakh to Rs.1,25,000/- (for Severe disability).

4.8 Section 80G: this section provides for deduction of amounts contributed by way of donations to various institutions set up for charitable purposes. this section has been amended as under:-
(i) Two funds, namely, “Swachh Bharat Kosh” and “Clean Ganga fund” have been established by the Central Government. With a view to encourage people to participate in this national effort, section 80G is amended from A.Y. 2015-16 to provide that deduction of 100% of the donation to any of these funds will be allowed. Since this amendment has been made from A.Y. 2015-16, such donation made upto 31-3-2015 will be eligible for deduction under the amended section. it may be noted that such donation made by a company in pursuance of Corporate Social responsibility (CSR) expenditure u/s. 135(5) of the Companies act, 2013, will not qualify for this deduction. it may be noted that section 10(23C) has been amended from A.Y. 2015-16 to provide that income of “Swachh Bharat Kosh” and “Clean Ganga fund” will be exempt from income tax.

(ii) By another amendment to section 80G from a.y. 2016- 17 donation made to “the national fund for control of drug abuse” will now be eligible to 100% deduction.

4.9 Section 80 JJAA: This section is amended from A.Y. 2016-17. this section allows deduction to an indian Company deriving profit from manufacturing of goods in a factory. This benefit is now extended to non-corporate assessees also. The quantum of deduction allowed is equal to 30% of additional wages paid to new regular workmen employed by the assessee in such factory in the previous year. this deduction can be claimed for 3 assessment years. At present, additional wages for this purpose has been defined to mean wages paid to new regular workmen in excess of 100 workmen. This limit is now reduced to 50. It is also clarified that the above benefit will not be granted where factory is acquired by way of transfer from any other person or as a result of any business reorganisation.

5. Investment Fund:
a new Chapter XII – FB has been added in the income tax act from A.Y. 2016-17. Special provisions relating to tax on income of “investment funds” and income received from such funds are made in sections 115 UB, 10 (23 FBA) and 10 (23FFB) of the act. In brief, these provisions are as under:

5.1 “Investment fund” means any fund established or incorporated in india in the form of a trust, Company, LLP or a body corporate which has been granted certificate of registration as a Category I or a Category II alternate investment fund (AIF) and is regulated under SEBI (AIF) regulations, 2012.

5.2 In order to rationalise the taxation of Category –i and Category-ii AIFS (i.e. investment funds) section 115uB provides for a special tax regime. The taxation of income of such investment funds and their investors shall be in accordance with the provisions applicable to such funds irrespective of whether they are set up as a trust, company, or LLP etc. the salient features of these provisions are as under:

(i) Income of a person, being a unit holder of an investment fund, out of investments made by the investment fund shall be chargeable to income-tax in the same manner as if it was the income accruing or arising to, or received by, such unit holder.

(ii) Income in the hands of investment fund, other than income from profits and gains of business, shall be exempt from tax. The income in the nature of profits and gains of business or profession shall be taxable in the case of investment fund.

(iii) Income in the hands of investor which is of the same nature as income by way of profits and gain of business at investment fund level shall be exempt.

(iv) Where any income, other than income which is taxable at investment fund level, is payable to a unit holder by an investment fund, the fund shall deduct income-tax at the rate of 10%.

(v) The income paid or credited by the investment fund shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as if it had been received by, or had accrued or arisen to, the investment fund.

(vi) If in any year there is a loss at the fund level either current loss or the loss which remained to be set off, the loss shall not be allowed to be passed through to the investors but would be carried over at fund level to be set off against income of the next year in accordance with the provisions of Chapter Vi of the income-tax act.

(vii) The provisions of Chapter Xii-d (dividend distribution tax) or Chapter Xii-e (tax on distributed income) shall not apply to the income paid by an investment fund to its unit holders.

(viii) The income received by the investment fund would be exempt from TDS requirement. this would be provided by issue of appropriate notification u/s. 197A(1F) of the act subsequently.

(ix) It shall be mandatory for the investment fund to file its return of income. The investment fund shall also provide to the prescribed income-tax authority and the investors, the details of various components of income, etc. for the purposes of the scheme.

6. Business Trusts:

6.1 This was a new concept introduced by the finance (no.2) act, 2014 w.e.f. A.Y. 2015-16. new chapter XII FA (Section 115 UA) was inserted in the income-tax Act, w.e.f. 1.10.2014. The definition of the term “Business trust” is now amended in section 2(13a) from a.y. 2016-17 to mean a trust registered as an “infrastructure investment trust” (inVitS) or a real estate investment trust” (reit), under the relevant SeBi regulations, the units of which are required to be listed on a recognised Stock exchange, in accordance with the SeBi regulations. in brief, at present the following is the taxation position of the trust.

Out any real estate asset owned directly by the reit, by granting exemption to the reit u/s. 10(23fCa) and taxing such income in the hands of the unit holder, by amending section 115ua(3) to provide that the distributed income, of the nature referred to in section 10(23fCa), received by a unit holder during the previous year shall be deemed to be the income of the unit holder and shall be charged to tax as his income of the previous year. Consequential amendments have been made in relation to tdS provisions in sections 1941 and 194LBa, which are effective from 1st june, 2015.

6.5 In view of the above amendments from A.Y. 2016- 17, the taxation structure of reit and its unit holders shall be as under:

(i) Any income of reit by way of renting or leasing or letting out any real estate asset owned directly by such business trust shall be exempt;

(ii)    The distributed income or any part thereof, received by a unit holder from the reit, which is in the nature of income by way of renting or leasing or letting out any real estate asset owned directly by such reit, shall be deemed to be income of such unit holder and shall be charged to tax.

6.2    Section 47(xvii) Currently provides that the

(iii)    The reit shall effect tdS on rental income allowed to be passed through. in case of resident unit holder, tax shall be deducted @ 10%, and in case of distribution

Transfer of shares of a Special Purpose Vehicle (SPV) to a Business trust by a share holder (Sponsor) in exchange of units allotted by the trust to the share holder is not considered as a transfer for the purpose of capital gains in the hands of the share holder. Section 10(38) has now been amended to provide that the long term capital gain from transfer or such units will be exempt. Section 111a has also been amended to provide that short term capital gains arising on transfer of such units of a Business trust shall be charged to tax at the rate of fifteen per cent.

6.3 Therefore, units received by a ‘Sponsor’ in exchange of shares of a SPV, are now at par with other units of a Business trust. further, Stt is now chargeable on sale of unlisted units of a Business trust under an offer for Sale. therefore, Sale of such unit in an offer for sale will qualify for exemption u/s. 10(38) and the concessional rate of tax in respect of short term capital gains u/s. 111A.

6.4 reit has been granted pass through status also in respect of income by way of renting or leasing or letting
to non-resident unit holder, the tax shall be deducted at applicable rate.

(iv) No deduction of tax at source shall be made u/s. 194- 1 of the act, where the income by way of rent is credited or paid to such business trust, in respect of any real estate asset held directly by such reit (Business trust)

7. Charitable Trusts:

7.1 Section 2(15): The Definition of “charitable purpose” in the section has been amended from A/Y:2016- 17 as under:-

(i) “yoga” is now recognised as a charitable purpose. hence any charitable trust for promotion of “yoga” can now claim exemption u/s. 11 to 13 of the income tax act.

(ii) Under the existing provisions of section 2(15) if a charitable trust having “any other object of general public utility”, carries on any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to the above for a consideration, will lose the exemption u/s. 11 if the total receipts from such activities is more than Rs. 25 lakh. By amendment of this section, it is now provided that such a trust will not lose its exemption if:

(a) Such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(b) The aggregate receipts from such activities, during the previous year, do not exceed 20% of the total receipts of the trust.

(c) This amendment will create a fresh round of litigation for charitable trusts. the limit of 20% will affect small charitable instituitions adversely.

7.2 Section 11 provides that a charitable trust should apply at least 85% of its income for charitable or religious purposes. if it is not possible to do so, it can apply the balance of unspent amount in the next year. for this purpose, the trust can write a simple letter to a.o. before the due date for filing the return u/s. 139(1). It is now provided from a/y: 2016-17 that the trust can exercise such option only by filing the prescribed from before the due date for filing the return of income.

7.3 Section 11 also provides that if a trust is not able to apply 85% of the income or any part of the same it can apply for accumulation of such unspent amount for 5 years. For this purpose the trustees have to file an accumulation application in Form No.10. No specific time limit is fixed in the Act. The Supreme Court in CIT vs. Nagpur Hotel Owners Association (247ITR201) held that Form 10 can be filed at any time before completion of the assessment. now, by amendment of section 11 from A.Y. :2016-17, it is provided that form no.10 should be filed before due date for filing Return u/s. 139(1). By amendment of section 13 it is also provided that if the return of income as well application in form 10 is not filed before the due date provided in section 139(1), the benefit of accumulation will not be available.

7.4 A university or educational institution, hospital or other Institution which is wholly or substantially financed by the Government and which is exempt u/s. 10(23C) (iiiab) or (iiiac) is not required to mandatorily file its return of income. By amendment of section 139(4C), it is now provided that these entities will have to mandatorily file return of income from A.Y. 2016-17.

7.5 Section 10(23C)(vi) and (via) provides that educational institutions or hospital specified in section 10(23C)(iiiab) to (iiiae) have to obtain approval from the prescribed authority. If this approval is denied there is at present no specific remedy. Section 253(1) is now amended from 1.6.2015 to provided that appeal to ITA Tribunal can be filed against any order for denying such approval.

8. Income from business or profession:

8.1 Income: The definition of “Income” in section 2(24) has now been widened by insertion of clause (xviii) in section 2(24) from A.Y 2016-17. Under this definition, any receipt from the central or state Government or any authority, body or agency in the form of any assistance in the form of subsidy, grant, cash incentive, duty drawback, waiver, concession or reimbursement in cash or kind will be considered as income. however, if any subsidy, grant etc is required to be deducted from the cost of any asset under explanation (10) to section 43(1), the same will not be considered as income.

From the wording of the above definition it will be seen that no distinction has been made between Government Grants which are of a capital nature and which are in the nature of revenue grant. The Supreme Court and the various high Courts have held that subsidy received from Government as an incentive to set up an industry is a capital subsidy not liable to tax. In the case of Sahney Steel & Press Works Ltd vs. CIT (2281TR 253), the Supreme Court has held that subsidy given to set up the business or to complete a project will be considered as a Capital receipt not liable to tax. In view of the above amendment assessees will have to enter into fresh litigation about taxability of subsidy received from the Government.

8.2 Additional Depreciation : at present, additional depreciation of 20% is allowed in respect of new plant and machinery (other than ships and aircraft) installed by an assessee engaged in the business of manufacture or production or in the business of generation as well as generation and distribution of power u/s. 32(1) (iia). There was no clarity about deduction in the event of Plant & machinery installed and put to use for less than 180 days. By amendment of section 32(1) from A.Y. 2016-17 it is now provided that in such a case 10% of additional depreciation will be allowed in the year if the new plant & machinery is used for less than 180 days and the balance of 10% will be allowed in the subsequent year.

8.3 Backward Area Incentive: a special incentive is given by way of additional depreciation at the rate of 35% (instead of 20%) in respect of new plant & machinery (other than ships and aircraft) acquired and installed during the period 1.4.2015 to 31.3.2020. this incentive will be available to new plant & machinery installed in the notified backward area of Andhra Pradesh, Bihar, telangana and West Bengal. in this case also, if the new plant and machinery is used for less than 180 days, 17.5% additional depreciation will be allowed in the first year and balance 17.5% additional depreciation will be allowed in the next year.

8.4 Investment Allowance: A new section 32 ad has been inserted from a.y. 2016 – 17 providing for deduction of one time investment allowance in respect of newly established undertaking for manufacture or production in the notified backward areas of Andhra Pradesh, Bihar, telangana and West Bengal. This deduction will be at 15% of the actual cost of the new asset (other than office equipments, vehicles etc.) acquired and installed in the new undertaking during the period 1.4.2015 to 31.3.2020. this deduction is allowable in the year of installation of new plant and machinery and isin addition to depreciation (including additional depreciation) allowable u/s. 32 and investment allowance allowable u/s. 32AC. It is also provided that if the above plant and machinery is sold or transferred within 5 years from the date of installation, otherwise than in connection with amalgamation, demerger or business re-organisation (section 47 (xiii), (xiii b), or (xiv), the amount of deduction allowed u/s. 32ad shall be taxable as income of the year of sale or transfer.

8.5 Section 35(2AB): under this section a company can claim deduction of 200% of the expenditure on scientific research by way of in house research and development facility. For this purpose, the company has to comply with certain formalities. One of the requirements is to get the accounts maintained for this research facility audited. This requirement is now modified from A.Y. 2016-17 and its is provided that the company should fulfill such conditions with regard to maintenance of accounts and audit and furnishing the reports as may be prescribed by the rule.

8.6 Section 36: this section is amended from A.Y. 2016-17 as under

(i) Section 36(1) (iii) provides for deduction of interest paid on funds borrowed for the purposes of business.
It is provided in this section that interest paid in respect of amount borrowed for acquisition of asset for extension of existing business shall not be allowed. By amendment of this section the words “for extension of existing business or profession” have now been deleted. the effect of this amendment is that interest paid for acquisition of any asset for the business or profession from the date of purchase to the date it is put to use, will not be allowed. it appears that this amendment is made to bring this provision in line with income Computation and disclosure Standard (ICDS IX) relating to “Borrowing Costs”.

(ii) Section 36(1) (vii) dealing with allowance of Bad debits is also amended to provide that an amount of any debt or part thereof is considered as income under any ICDS issued u/s. 145(2) without recording in the books of accounts, it will be possible to claim deduction for such amount in the year in which such debt becomes irrecoverable. thus, if the a.o. makes any addition in the computation of income from business under ICDS IV dealing with “revenue recognition” and no entry is made in the books of accounts, deduction u/s. 36(1) (vii) can be claimed in any subsequent year when the debt representing such amount becomes irrecoverable.

(iii) Section 36(1)(xvii): this provision added in section 36(1) provides for deduction of expenditure incurred by a co-operative society engaged in the business of manufacturing of sugar for purchase of sugarcane at a price which is equal to or less than the price approved by the Government.

9. Income computation and disclosure standards (ICDS):

9.1 Section 145 of the income-tax act (act) dealing with “method of accounting” was amended by the finance act, 1995, effective from a.y. 1997- 98. the concept of Tax Accounting Standards was introduced for the first time by this amendment. this section has been amended by the finance (no.2) act, 2014, effective from 1.4.2015. By this amendment, the concept of computation of income from “Business or Profession” and “income from other Sources” are required to be computed in accordance with “income Computation and disclosure Standards” (ICDS) notified by the Central Government. In brief, section 145 is divided into three parts as under.

(i) Income under the heads “income from Business or Profession” and “income from other sources” shall be
computed in accordance with either (a) cash or (b) mercantile system of accounting regularly adopted by the assessee.

(ii) The Central Government shall notify ICDS to be followed by the assessee for computation of income from the above two sources.

(iii) The assessing officer (A.O) can make a best judgment assessment u/s. 144 of the act by estimating the income if the provisions of section 145 are not complied with by the assessee.

9.2 On 25.1.1996, the Central Government notified two accounting Standards viz. (i) disclosure of accounting Polices and (ii) disclosure of Prior period and extra ordinary items and Changes in accounting Policies”. these standards were required to be followed by the assessee while maintaining its books of account. These two standards were more or less on the same lines as AS-1 and AS-5 issued by the institute of Chartered accountants of india (ICAI). Thereafter, for about two decades, no information and make the adjustments while computing the taxable income from these two sources. If the required information is not furnished by the assessee, the A.O. can make the best judgment assessment u/s. 144 of the Act.

Accounting Standards were notified u/s. 145(2) of the Act.

9.3 CBDT has now notified 10 Accounting Standards u/s. 145(2) on 31/3/2015. this Standards are called “income Computation and disclosure Standards” (iCdS). The notification u/s. 145(2) states that ICDS will have to be followed by the assessee following mercantile system of accounting for the purpose of computing income chargeable to tax under the head “Profits and Gains of Business or Profession” and “income from other sources”. This Notification comes into force with effect from 1/4/2015 i.e. a/y:2016-17 (f.y:2015-16).

9.4 The Ten ICDS notified u/s. 145(2) of the Act and the corresponding aS issued by iCai and ind – aS as notified under the companies Act, 2013, are as under:

9.5 It may be noted that ICDS issued u/s 145(2) of the act only provide that income from Business/Profession or income from other sources should be computed in accordance with the standards ICDS. Therefore, the assessee will have to maintain its accounts in accordance with applicable AS issued by ICAI or IND – AS notified under the Companies act. if there is any difference between the accounting results and the requirements of applicable ICDS, the assessee will have to make adjustments while computing its taxable income from the above two sources while filing its Return of Income. If this is not done, the a.o. can call upon the assessee to furnish the required information and make the adjustments while computing the taxable income from these two sources. if the required information is not furnished by the assessee, the a.o. can make the best judgment assessment u/s. 144 of the Act.

9.6 It may be noted that the amended section 145 (3) of the Act provides that if the A.O. is not satisfied about the correctness or completeness of the accounts of the assessee or where the method of accounting as provided in section 145(1), i.e. either cash or mercantile has not been regularly followed by the assessee or income has not been computed in accordance with the requirements of ICDS, he can make a best judgment assessment. In fact, the standards notified are “computation “ standards and not accounting standards.there is no mandate that the assessee should maintain accounts which comply with iCdS. in view of this, in the case of a company, no adjustment can be made in the computation of Book Profits u/s. 115JB of the Act if the accounts are prepared in accordance with the applicable accounting Standards and the Provisions of of the Companies act. in other words, ICDS do not apply for computation of Book Profits u/s 115jB of the act.

9.7 In the preamble of all the ten ICDS it is stated that in case of conflict between the provisions of the income tax act and ICDS, the provisions of the act shall prevail to that extent. To take an example, if a provision for any tax, duty, cess or fee etc. is made and the same is in accordance with any ICDS, deduction will not be allowable unless actual payment is made as provided in section 43B of the act. Similar will be the position where provisions of section 40(a)(i) or 40 (a)(ia) are applicable.

10. Minimum Alternate Tax (MAT)

During the last over a year there has been an extensive debate aboutcertain provisions of section 115JB which levies tax on Book Profits. By amendment of this Section from A.Y. 2016-17, the Government has tried to deal with some of the issues in brief, these amendments are as under.

(i) Income accruing or arising to a foreign Company from (i) Capital Gains arising on transactions in securities or (ii) interest. royalty or fees for technical Services chargeable at the concessional rates specified in Chapter Xii, after deduction of expenses relatable to such income (i.e. net income), shall not form part of Book Profits u/s. 115 jB. this provision will apply if the tax payable on such net income is less than the tax payable at the rate specified u/s. 115JB

(ii) Share of a company in the income of aoP or Boi on which tax is payable u/s. 86, after deduction of expenditure relatable to such income, shall not be included in the computation of Book Profit u/s. 115JB. This will benefit companies which have entered into joint venture and income of the j.V. is taxed as AOP.

(iii) Notional Gain or notional loss on transfer of capital asset, being shares in SPV to a Business trust, in exchange of units allotted by such trust, as referred to in section 47 (xvii), shall not be considered in the computation of Book Profits u/s. 115JB. Similarly, notional gain or loss resulting from any change in carrying amount of the said units or gain or loss on transfer of units referred to in section 47(xvii) will be excluded from the computation of Book Profits u/s. 115JB. It may be noted that certain adjustments, as provided in the amended section for computation of cost of shares or units, have to be made in computing the notional gain or loss on such transfer of shares or units.

11. Capital Gains:

11.1 Sections 2(42a), 47 and 49 have been amended from a.y. 2016–17. The amendments in the sections provide that consolidation of two or more similar schemes of mutual funds under the process of consolidation of schemes of mutual funds in accordance with SEBI (mutual funds) regulations, 1996 will not be treated as a transfer. the consolidation should be of similar schemes i.e. two or more schemes of an equity oriented fund or two or more schemes of a non-equity oriented fund. Consequently, section 2 (42A) and section 49 relating to the period of holding and cost of acquisition, respectively, have been amended to provide that the cost of acquisition of the units of the consolidated scheme shall be the cost of the units in the consolidating scheme and the period of holding of the units of the consolidated scheme shall include the period for which the units in the consolidating scheme were held by the assessee.

11.2 The provisions of section 49 have been amended from A.Y. 2016-17 to provide that the cost of acquisition of a capital asset acquired by a resulting company in a scheme of demerger shall be the cost for which the demerged company acquired the asset as increased by the cost of improvement incurred by the demerged company. Consequently, the period of holding of the capital asset by the demerged company will be considered in the hands of the resulting company u/s. 2 (42a).

11.3 Section 49 has been amended from A.Y. 2016-
17 to provide that cost of acquisition of shares of a company acquired by a non-resident on redemption of Global depository receipts (GDR) referred to in section 115AC (1)(b) shall be the price of the shares quoted on the recognised Stock exchange on the date on which request for such redemption is made. A consequential amendment is made in section 2(42A) to provide that the period of holding of such shares shall be reckoned from the date on which such request for redemption of Gdr is made.

12. Domestic Transfer Pricing:

At present, section 92BA can be invoked only if the aggregate of transactions, to which the provision applies exceeds Rs.5 Crore. this limit is now increased to Rs. 20 Crore from a.y. 2016-17.

13. Deferment of applicability of general anti-avoidance rule (GAAR):

Sections 95 to 102 (chapter X-a) dealing with provisions of Gaar were to come into force from a.y. 2016-17 (i.e. accounting year 1-4-2015 to 31-3-2016 and onwards). in order to accelerate the momentum in investment (Para 109 of the speech of the finance minister) the applicability of Gaar has been postponed to a.y. 2018 – 19 (i.e from accounting year 1.4.2017 to 31.3.2018 and onwards).

14. Measures to curb black money:

14.1 One of the broad themes adopted by the finance minister in the finance Bill was to curb black money. Provisions of the income-tax act 1961, were felt to be inadequate as regards to achieve this objective. In the opinion of the finance minister it required stringent measures, which he summarised in in Paras 103 to 105 of his budget speech.

14.2 To achieve the above objective, the Parliament has passed the Black money“ undisclosed foreign income and assets (imposition of tax) act, 2015”. this act has come into force from 1.4.2015 (A.Y. 2016-17). Suitable amendments are also made in Prevention of money- laundering act, 2002, foreign exchange management act, 1999 and other relevant acts. Since the said act is an independent legislation, the same is being mentioned in this article and not analysed.

15. Furnishing of returns, assessment and reassessment:

15.1 Section 139 has been amended from a.y. 2016- 17 to provide that a resident (other than notordinarily resident in india) who is not required to furnish his return as his income is below taxable limit or for any other reasons will now be required to file his return of income mandatorily before the due date. this amended provision will apply if the assessee –

(i) Holds, as beneficial owner or otherwise, any asset (including any financial interest in any entity) located outside india or has signing authority in any account loaded outside india, or,

(ii) Is a beneficiary of any asset (including any financial interest in any entity) located outside india.

It is also provided that if the assessee is a beneficiary of any asset located out of India, will not be required to file return under the above provision if income from such asset is includible in the income of the person referred to in (i) above under the provisions of the act.

15.2 In section 139, it is now provided that every “Investment Fund” shall file its return of income from A.Y. 2016-17.

15.3 In the form of return of income, from a.y. 2016- 17, the assessee will be required to give details of assets
of prescribed nature and value held by him as a beneficial owner or otherwise or as a beneficiary. This will mean that details of assets of a trust in which the assessee is a beneficiary will have to be disclosed.

15.4 Section 151 is amended to provide that notice u/s. 148 can be issued by an Assessing Officer, after the expiry of a period of four years from the end of the relevant assessment year, only after the sanction of Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. In any other case, where Assessing Officer is below the rank of the Joint Commissioner, sanction of joint Commissioner is required.

16. Appeals and Revision:

16.1 A new procedure for non-filling an appeal by the Commissioner before the income tax appellate tribunal (itat)tribunal against the order of the CIT (a) for avoiding multiple litigation has been introduced from 1.6.2015 in section 158 aa.

This Procedure is as under:

(i) If a question of law decided by the CIT (a) is in favour of the assessee and the identical question of law is pending before the Supreme Court either by way of an appeal or by way of a Special Leave Petition in case of the same assessee for any other year and the Commissioner receives an acceptance from the assessee that the question of law is identical to the one which is pending before the Apex Court, he need not file before ITAT.

(ii) On receipt of the acceptance from the assessee, the Assessing Officer will apply to the ITAT stating that an appeal against the order of CIT (a) on a question of law may be filed within 60 days of receipt of the order of the Supreme Court.

(iii) If no acceptance is received from the assessee, the Commissioner will proceed to file an appeal before the ITAT.

(iv) If the order of the CIT(a) is not in conformity with Supreme Court order, the Commissioner will file an appeal against the CIT(a)’s order, within 60 days of receipt of Supreme Court order.

It may be noted that similar facility is already given to the assessee in section 158A.

16.2 As stated earlier any order rejecting the application for approval of an educational institution or hospital u/s. 10(23C) can be challenged in appeal before ita tribunal from 1/6/2015.

16.3 A single member bench of the itat can now dispose of any case where the income assessed by the Assessing Officer does not exceed Rs.15 lakh. Earlier this limit was Rs. 5 lakh. this amendment in section 255 from 1/6/2015.

16.4 At present, the CIT is empowered to revise u/s. 263 the order passed by the Assessing Officer, if it is erroneous and prejudicial to the interest of the revenue. The section does not provide for the meaning of the words ‘erroneous and prejudicial to the interest of the revenue’. Explanation 2 is added in section 263(1) from 1.6.2015 to provide that an order passed by the Assessing Officer shall be deemed to be erroneous and prejudicial to the interest of revenue, if in the opinion of the CIT:-

(i) The order is passed without making inquiries or verification which should have been made;

(ii) The order is passed allowing any relief without inquiring into the claim;

(iii) The order has not been made in accordance with any order, direction or instruction issued by the Board u/s. 119; or

(iv) The order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.

From the above explanation, it will be noticed that very wide powers are given to CIT to revise the order passed by A.O. the extent of enquiry or verification is a very subjective matter. thus, any assessment order passed by the A.O. will not become final for 2 years during which it can be revised by CIT on any of the above grounds. CIT may try to revise the order of A.O if A.O is not able to reopen the assessment u/s. 147 on some technical or other ground.

17. Settlement Commission:

Chapter XIX-A deals with settlement of cases. Several amendments have been made in some of the sections in this Chapter from 1.6.2015. Consequential changes have also been made in a few other sections. The important amendments are as under:
(i) For an assessee to approach the Settlement Commission u/s. 245a, it was necessary that a notice u/s. 148 was received for every assessment year for which the application was to be made. this provision is amended to provide that where a notice u/s. 148 is issued for any assessment year, the assessee can approach the Settlement Commission for other assessment years even if notice u/s. 148 for such other assessment years has not been issued if return of income for such other assessment years has been furnished u/s. 139 of the act or in response to notice u/s. 142 of the act.

(ii) In Section 245A(b), the explanation is amended to provide that a proceeding for assessment or reassessment referred to in clause (i) or clause (iii) or clause (iiia) for any assessment year shall be deemed to have commenced from the date on which a return of income is furnished u/s. 139 or in response to notice u/s. 142 and concluded on the date on which the assessment is made or on the expiry of two years from the end of relevant assessment year, in a case where no assessment is made.

(iii) The provision for time limit for rectification of an order assed by the Settlement Commission has been revised.

(iv) Section 245h is amended to provide that while granting immunity to the applicant from prosecution, the Settlement Commission must record its reasons in writing.

(v) 245K is amended to ensure that in respect of an individual who has made an application to the Settlement Commission u/s. 245C, any entity controlled by such person is also barred from making an application to the Settlement Commission. Hitherto, only the concerned person was prevented from making another application to the Settlement Commission. Now, entities controlled by such a person will also be prevented. The situations when an entity will be considered to be controlled by the applicant are provided in the explanation inserted after section 245K(2).

(vi) Section 132B is amended to allow the assets seized from an assessee u/s. 132 or requisitioned u/s. 132a to be adjusted against the liability arising on an application made to the Settlement Commission u/s. 245C.

Sub-section (2A) is inserted in section 234B to levy interest on the shortfall, if any, that may arise in the advance tax on account of an application made u/s. 245C. The interest would be calculated from the 1st april of the assessment year and ending on the date of making the application. Similarly, interest would also be payable on the additional shortfall, if any, arising on the basis of an order passed u/s. 245d for the period from 1st day of april of the assessment year and ending on the date of the order.

18. Taxation of non-residents:

18.1 Section 6 of the income-tax act has been amended from A.Y. 2015–16 to provide that in the case of an individual who is a citizen of india and a member of a crew of a foreign bound ship leaving india, the period of stay in india shall be determined as prescribed in the rules. The earlier explanation (now renumbered as explanation 1 applied only to indian Ship.

18.2 Section 6 has been further amended from a.y. 2016-17. Under the existing provisions, a company is said to be resident in india in any previous year, if:

a) It is an indian company; or

b) During that year, the control and management of its affairs is situated wholly in india.

Therefore, currently, a foreign company which is partially or wholly controlled abroad is to be regarded as non- resident in india. now section 6, has introduced the concept of ‘Place of effective management’ (Poem), in substitution of the existing provisions of requiring the control and management of affairs to be situated wholly india. In view of the above, provisions of this section has been amended to provide that a company shall be said to be resident in india in any previous year, if;

a) It is an indian company; or

b) Its place of effective management, in that year, is in india. (it may be noted that in the finance Bill, 2015, the proposal was to provide that the company will be resident in india if Poem is “at any time” in that year is in india. the words “at any time” in india have been dropped while passing the finance act.)

Further, POEM has been defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made. this is a far reaching amendment as a number of indian Companies have foreign subsidiaries and what would be considered as POEM in such cases will be a subject matter of litigation. if any foreign company becomes resident in india, it will have to comply with the various provisions of the income-tax Act such as filing return of income, getting accounts audited u/s. 44aB, complying with tdS provisions etc.

18.3 Explanation 5 to section 9(1) provides that an asset being any share or interest in a foreign company or entity shall be deemed to have been situated in india if it derives, directly or indirectly, its value substantially from assets located in india. The word “substantially” in the explanation was not defined. In order to clarify the position, new explanation (6) is added from A.Y. 2016-17 to provide as under

(i) If the value of assets (tangible on intangible) situated in india exceeds Rs.10 crore and represents at least 50% of the value of total assets of the foreign company as on valuation date (without deduction of any liabilities) it will be deemed that the interest in the foreign company is substantially from assets in india.

(ii) the valuation date shall be the last day of the accounting period preceding the date of transfer or the date of transfer in case the book value of assets on the date of transfer exceeds book value as on the last day of the accounting period by 15%.

(iii) The taxation of gains arising on transfer of share or interest deriving directly or indirectly its value substantially from assets located in india will be on proportional basis and the method for determination of such proportion shall be provided in the rules. To avoid hardship in genuine cases, exemption is available in certain transfers subject to fulfillment of prescribed conditions.

Moreover, to keep a track of such offshore transactions, an obligation has been cast on the indian concern to furnish information in respect of off-shore transactions resulting into modification of its control or ownership structure. any non-compliance in this regards by the india concern would attract penalty of Rs.5 lakhs or 2% of transaction value, as the case may be.

18.4 At present, income arising to foreign Portfolio investors (‘FPIS’) from transactions in securities is treated as capital gains. however, the provisions of the act did notadequately address the apprehension of fund managers, resulting in a large number of offshore funds choosing to locate their investment managers outside india. therefore, new section 9a is inserted in the income tax act from A.Y.2016-17 for providing clarity on issues relating to business connection/permanent establishment and residential status of offshore funds. in order to facilitate location of fund managers of off-shore funds in India, this section now provides that, subject to fulfillment of certain conditions by the fund and the fund manager:

(i) The tax liability in respect of income arising to the fund from investment in india would be neutral to the fact as to whether the investment is made directly by the fund or through engagement of fund manager located in india;

(ii) Income of the fund from the investments outside india would not be taxable in india solely on the basis that the fund management activity in respect of such investments have been undertaken through a fund manager located in india;

(iii) In the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in india of the said fund;

(iv) An eligible investment fund shall not be said to be resident in india merely because the eligible fund manager undertaking fund management activities on its behalf is located in India, subject to certain conditions.

(v) The term “Eligible Investment Fund” is defined in section 9a(3) and the term “eligible fund manager” is defined in section 9A(4).

Further, every eligible investment fund shall, in respect of its activities in financial year, furnish within ninety days from the end of the financial year, a statement in the prescribed form to the prescribed income-tax authority containing information relating to the fulfillment of the conditions or any information or document which may be prescribed. In case of non-furnishing of the prescribed information or document or statement, penalty of Rs.5 lakh shall be leviable on the fund.

18.5 Under the provisions of Securities Contracts (regulation) (Stock exchanges and Clearing Corporations) Regulations, 2012 (SECC) notified by SEBI, the Clearing Corporations are mandated to establish a fund, called Core Settlement Guarantee fund (Core SGF) for each segment of each recognised stock exchange to guarantee the settlement of trades executed in respective segments of the exchange. under the existing provisions, income by way of contributions to the investor Protection fund set up by recognised stock exchanges in india, or by commodity exchanges in india or by a depository is exempt from taxation. on similar lines, the income of the Core SGF arising from contribution received and investment made by the fund and from the penalties imposed by the Clearing Corporation subject to similar conditions as provided in case of investor Protection fund set up by a recognised stock exchange or a commodity exchange or a depository will now be exempt u/s. 10(23ee) from A.Y. 2016-17.

However, where any amount standing to the credit of the fund and not charged to income-tax during any previous year is shared, either wholly or in part with the specified persons, the whole of the amount so shared shall be deemed to be the income of the previous year in which such amount is shared.

The specified person for this purpose is defined to mean any recognised clearing corporation which establishes and maintains the Core Settlement Guarantee fund and the recognised stock exchange being the shareholder of such clearing corporation.

18.6 The CBDT, in its Circular no.740 dated 17/4/1996 had clarified that branch of a foreign company in India is a separate entity for the purpose of taxation under the act and accordingly tdS provisions would apply along with separate taxation of interest paid to head office or other branches of the non-resident, which would be chargeable to tax in india.

Considering that there are several disputes on the issue which are pending and likely to arise in future, section 9 is amended form a.y. 2016-17 to provide that, in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in india of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside india shall be deemed to accrue or arise in india and shall be chargeable to tax in addition to any income attributable to the permanent establishment in india and the permanent establishment in india shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the act relating to computation of total income, determination of tax and collection and recovery would apply. Accordingly, the PE in india shall be obligated to deduct tax at source on any interest payable to either the head office or any other branch or PE, etc. of the non-resident outside india. Further, non-deduction would result in disallowance of interest claimed as expenditure by the PE and may also attract levy of interest and penalty in accordance with relevant provisions of the act.

18.7 Section 115a (1)(b) has been amended from a.y. 2016-17 to provide that the rate of tax on royalty or fees for technical Services received by a non-resident or a foreign Company shall now be 10% instead of 25%.

18.8 Section 91(1) of the income-tax act provides for relief in respect of income-tax on the income which is taxed in india as well as in the country with which there is no double taxation avoidance agreement (DTAA). it provides that an indian resident is entitled to a deduction from the india income-tax of a sum calculated on such doubly taxed income, at the indian rate of tax or the rate of said country, whichever is lower. in case of countries with which india has entered into an agreement for the purposes of avoidance of double taxation u/s. 90 or section 90A, a relief in respect of income-tax on doubly taxed income is available as per the respective dtaas. the income-tax act does not provide the manner for granting credit of taxes paid in any country outside india. accordingly, Section 295(2) is amended from 1.6.2015 to provide that CBDT may make rules to provide the procedure for granting relief or deduction, of any income-tax paid in any country or specified territory outside india, u/ss. 90,90A or 91, against the income-tax payable under the act.

19. Restrictions about Appointment Tax Auditors:

19.1 Assessees are, under various provisions of the act, required to obtain and/or furnish the reports and certificates from an ‘accountant’. At present, the term “accountant” is defined in theExplanation below section 288(2) to mean a chartered accountant within the meaning of the Chartered accountants act, 1949. From 1.6.2015 this definition has been amended. The amended definition defines the term ‘accountant’ to mean a chartered accountant as defined in section 2(1)(b) of the Chartered accountants act, 1949 who holds a valid certificate of practice u/s. 6(1) of that Act. The definition specifically excludes the following chartered Accountants for purposes of Tax Audit and certification.

(1) Where the assessee is a company – any person who is not eligible for appointment as an auditor of the said company in accordance with the provisions of section 141(3) of the Companies act, 2013;
(2) Where the assessee is a person other than a company –

(i) Where the assessee is an individual, firm or association of persons or hindu undivided family – the assessee himself or any partner of the firm, or member of the association or the family;
(ii) Where the assessee is a trust or institution, any person referred to in clauses (a), (b), (c) and (cc) of section 13(3) of the act;

(iii) Where the assessee is any person other than those referred to in (i) and (ii) above any person who is competent to verify the return u/s. 139 in accordance with the provisions of section 140;

(iv) Any relative of any of the persons referred to in (i), (ii) and (iii) above;

(v) An officer or employee of the assessee;

(vi) An individual who is a partner, or who is in employment of an officer or employee of the assessee;

(vii) An individual who himself or his relative or his partner

(a) Is holding any security of or interest in, the assessee;

however, the relative may hold security or interest in the assessee of the face value up to Rs. 1,00,000/-.
(b) Is indebted to the assessee;

however, the relative may be indebted to the assessee for an amount upto Rs.1,00,000/-.

(c) Has given a guarantee or provided any security in connection with the indebtedness of any third party to the assessee;

However, the relative may give guarantee or provide any security in connection with the indebtedness of any third person to the assessee for an amount up to Rs.1,00,000/.

(viii) Any person who, whether directly or indirectly, has business relationship with the assessee of such nature as may be prescribed;

(ix) A person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.

19.2 For this purpose, the term ‘relative’ in relation to an individual is defined to mean (a) spouse of the individual;
(b) Brother or sister of the individual; (c) brother or sister of the spouse of the individual; (d) any lineal ascendant or descendant of the individual; (e) any lineal ascendant or descendant of the spouse of the individual; (f) spouse of the person referred to in clause (b), (c), (d) or (e) above; or
(g) Any lineal ascendant or descendant of a brother or sister of either the individual or of the spouse of the individual.

19.3 The above disqualification will apply only to professional assignment as tax auditor or assignment for Certification of financial statements for tax purposes. It may be noted that disqualification noted in Para 19.1 (2) above is on similar lines as provided in Section 141(3) of the Companies act, 2013. As the amended provisions come into force from 1.6.2015, many non-corporate assessees will have to change their tax auditors for auditing the accounts for the accounting year 2014-15 if the existing tax auditor is to be considered as disqualified under amended explanation as stated in Para 19.1 (2) above. It may be noted that the above disqualification does not apply to representation by a Chartered accountant before tax authorities.

19.4 Sub-section (4) of section 288 has been amended to provide that a person who has become insolvent or has been convicted by a court for an offence involving fraud, shall be disqualified to represent an assessee for a period of ten years from the date of conviction.

20. Penalties :

20.1 Section 271: (i) under the existing provisions of this section penalty for concealment of income or furnishing inaccurate particulars of income is levied on the “amount of tax sought to be evaded”, which has been defined, inter alia, as the difference between the tax due on the income assessed and the tax which would have been chargeable had such total income been reduced by the amount of concealed income.

(ii) There was no clarity on the computation of amount of tax sought to be evaded, where the concealment of income or furnishing inaccurate particulars of income occurred in the computation of income under the other provisions whereas the book profits u/s. 115JB remained unchanged. further, in the case of CIT vs. Nalwa Sons Investments Ltd. [327 ITR 543 (Del)], it was held that penalty u/s. 271(1)(c) cannot be levied in cases where the concealment of income occurred under the income computed under general provisions but the tax was paid under the provisions of sections 115JB, where there was no addition to the Book Profit. The SLP against the judgment of the Delhi High Court was dismissed by the Supreme Court.

(iii) In order to deal with such cases, it is now provided from A.Y. 2016-17 that the amount of tax sought to be evaded shall be the summation of tax sought to be evaded under the general provisions and the tax sought to be evaded under the provisions of section 115JB. However, if an addition on any issue is considered both under the general provisions and also u/s. 115JB, then such amount shall not be considered in computing tax sought to be evaded under provisions of section 115JB or 115JC. Further, in a case where the provisions of section 115 JB are not applicable, the computation of tax sought to be evaded under the provisions of section 115JB shall be ignored.

20.2 Sections 269SS/269T and 271D / 271E:
(i) Sections 269SS and 269t, at present, prohibit acceptance of loan or deposit in excess of Rs.20,000/- by any person or repayment of loan or deposit in excess of Rs.20,000/- by any person in cash. The scope of both these sections has been enlarged by amendments in these sections from 1.6.2015. This amendment in section 269SS extends its scope to specified items. In brief, this section will also apply to any sum of money received or receivable as advance or otherwise in relation to an immovable property, whether or not the transfer takes place. Similar amendment in section 269T prohibits repayment of advance in relation to transfer of an immovable property, whether or not the transfer takes place. With these amendments, any advance given or repaid in cash, where such advance exceeds Rs. 20,000/- in immovable property transactions will contravene the provisions of Section 269SS or 269T.

(ii) Section 271D and 271E levying penalty of a sum equivalent to the amount received or paid in cash in contravention of 269SS and 269T has now been extended to the above transactions relating to immovable properties from 1.6.2015.

20.3 Section 271 FAB: under new section 9A(5), an eligible investment fund is required to furnish a statement, information or document within the prescribed time. if this is not furnished, this new section inserted from A.Y. 2016- 17 provides for levy ofpenalty of Rs.5,00,000/-

20.4 Section 271 GA: new Section 285A provides for furnishing information/document by an indian Concern. if this is not done in accordance with the prescribed rules, penalty @ 2% of the value of the transaction as specified in the section can be levied under this new section from A.Y. 2016-17. in any other case of default u/s. 285 A, penalty of Rs.5,00,000/- can be levied.

20.5 Section 271 – I : This is a new section inserted from 1.6.2015. It provides for levy of penalty of Rs.1,00,000/- if the information required u/s. 195 (6) is not furnished or inaccurate information is furnished.

20.6 Section 272A: this section is amended from 1.6.2015. under the existing provisions, Government deductors/collectors are allowed to pay TDS / TCS through book entry. rules 30 and rule 37CA of the income- tax Rules required the Paying Officer to furnish Form 24G detailing the deduction / collection and adjustment. There are no penal consequences for non-furnishing of the said information.

With a view to enforce compliance for reporting of payment through book entry of TDS/TCS, sections 200 (2a) and section 206(3a) are inserted requiring furnishing of the prescribed information for TDS / TCS by the Government dedicators / collectors concerned. Section 272a has been suitably amended to extend levy of penalty of Rs. 100/- for every day of delay in filing the requisite statement under section 200(2a) and 206(3a) in respect of tdS / tCS which shall not exceed the amount of tax.

21. Other Provisions

21.1 Interest payable u/s. 234B: in case of increase in the assessed income on reassessment u/s. 147 or 153A, currently interest u/s. 234B is chargeable from the date of the regular assessment up to the date of reassessment. Section 234B has now been amended from 1/6/2015to provide that such interest would be chargeable from 1st april of the relevant assessment year up to the date of reassessment on the additional tax liability.

21.2 Section 285A: this is a new section inserted from a.y. 2016-17. It is provided in this section that where any share of or interest in a foreign company or entity, derives directly or indirectly, its value substantially from assets located in india (refer section 9(1)(i) explanation 5, the indian concern owning such assets shall furnish such information as may be prescribed within the prescribed time limit.

21.3 Wealth Tax Act: Section 3 of the wealth – tax has been amended. it is provided there in that net Wealth shall not be changed to wealth-tax with effect from a.y. 2016-17. Thus, assessees will have to file return of wealth tax in respect of net Wealth as at 31.3.2015 and no such return will be required to be filed from next year.

22. To sum up:

22.1 From the above discussion it is evident that the finance minister has lived upto his promise made last year that all major amendments in the Income tax Act will be only prospective. This year one major step taken for tax reforms relates to Goods and Service tax (GST). The necessary legislation, as a first step, is passed in the Lok Sabha. It is expected to be cleared in the Rajya Sabha during the year. Let us hope that GSt is implemented from 1/4/2016 as promised by the Government.

22.2 In the last year’s Budget Speech an assurance was given that direct tax Code Bill, 2010, which lapsed, will be revived after consultation with the stakeholders. It is surprising that in this year’s budget speech the finance minister has stated in Para 129 of his Speech that now there is no need for revival of dtC.

In view of this, we will have to live with the present income-tax act with so many sections, sub-sections, clauses, provisos, explanations etc. and many different interpretations leading to unending litigation.

22.3 Another important step taken by the finance minister is to address the burning issue about Black money. he has listed steps taken and proposed to be taken in Para 103 of his Budget Speech. in order to tackle the issue relating to Black money stacked in foreign Countries Black money “undisclosed foreign income and assets (imposition of tax) act, 2015”, has been passed. Harsh penalty and prosecution provisions are made in this legislation. if this act was made applicable to persons holding foreign assets exceeding rs.1 crore small assesses would not have been put to any hardship.

22.4 The finance minister has tried to show some sympathy so far as personal taxation is concerned. he has also given some benefit to the salaried employees by increasing the exemption limit for the transport allowance from Rs.800/- per month to Rs.1,600/- per month. However, if we consider the other procedural provisions of the income-tax act, very wide powers are given to assessing officers and commissioners. This will be evident from the amendments relating to taxation of charitable trusts where compliance cost to trusts will increase and the responsibility of trustees, who generally render honorary service, will increase. further, amendments in section 263 will give wide powers to Commissioners to revise the orders of the assessing officers. Thus, cases in which the assessments cannot be reopened by the assessing officers will be reopened through this route. again, the finance minister, while abolishing the Wealth tax act, has stated that to track the wealth held by individuals and entities, information regarding the assets which are currently required to be furnished in wealth tax return will be captured in the income tax return. This will show that compliance cost of getting valuation of assets, which were subject to wealth tax, will not reduce. Further, this information will have to be given by firms, AOP, etc. who were outside the wealth tax provision. Let us hope that this requirement of disclosing assets in the income tax return is introduced only in cases where the value of such assets exceed the specified limit and is restricted to only those who were otherwise liable to the wealth tax. If this is not done, all taxpayers, whether small or big, will have to get valuation of assets done for disclosing in the income tax return.

22.5 The concept of minimum alternative tax (mat) was introduced for the first time by the Finance Act, 1987 effective from A/Y:1988-89. The finance minister at that time explained that many Companies were not paying any tax or paying nominal tax but were showing large profits in the published accounts and paying dividend to shareholders. This was because they were availing of tax incentives and reducing taxable profits as compared to book profits. For this reason, tax on Book Profits (MAT) was introduced. It was always understood that these provisions (sections 115J, 115JA or 115JB) applied to domestic Companies. In last couple of years, the tax department has started applying mat provisions to foreign Companies (in particular FIIS) although they are not required to prepare accounts under the Companies act, 1956. in view of the loud protest by foreign Companies, the finance act has made only halfhearted attempt to amend section 115JB from A/Y :2016-17. Earlier year’s issues, involving huge tax demands which are under litigation, are now being considered by an expert Committee. The ideal way of handling the issue was to declare that section 115JB does not apply to foreign Companies which have no P.E. in india.

22.6 One disturbing feature relates to notification issued u/s. 145(2) requiring assesses carrying on business or profession or having income from other sources to comply with “income Computation and disclosure Standards” (iCdS) from A/Y:2016-17. Since accounts are required to be prepared according to Accounting Standards notified by the Government under the Companies and ICDS notified u/s. 145(2) are different in some important areas there will be lot of confusion while computing taxable income. This will lead to unending litigation.

22.7 Another area of concern is about the provisions relating to disclosure of foreign income and foreign assets in the return of income. These provisions also apply to residents who have no taxable income. This new provision read with the new legislation Black money “undisclosed foreign income and assets (imposition of tax) act, 2015” which has come into force from A/Y:2016-17 will create lot of confusion and hardships. Some asessees who are not aware of these provisions will suffer harsh penalty and prosecution proceedings.

22.8 The finance minister has assured that the amendments made in the act will not put small assesses to any hardship. While concluding his speech he has stated as under:-

“To conclude, it is no secret that expectations of this Budget have been high. . In this speech, I think I have clearly outlined not only what we are going to do immediately, but also a roadmap for the future.

I think I can genuinely stake, for our Government, a claim of intellectual honesty. We have been consistent in what we have said, and what we are doing. We are committed, to achieving what we have been voted to power for: Change, growth, jobs and genuine, effective upliftment of the poor and the under-privileged. This will be in the spirit of the Upanishad-inspired mantra:

Om Sarve Bhavantu Sukhinah, Sarve Santu Nir-Aamayaah, Sarve Bhandraanni Pashyantu,
Maa Kashcid-Dukkha-Bhaag-Bhavet,
Om Shaantih Shaantih Shaantih!

(OM! May All Be Happy, May All Be Free From Illness, May All See What is Beneficial, May No One Suffer)”

Let us hope, the present Government is able to achieve its goal and make our life happier.

shailesh.kwebmaker

Business expenditure- Disallowance u/s. 43B – Contribution to Provident Fund and Employees’ State Insurance – Provision that contribution should be paid before due date for filing of return is applicable to contribution by employees also –

CIT vs. Magus Customers Dialog Pvt. Ltd.; 371 ITR 242 (Karn):

Considering the scope of section 43B the Karnataka High cOurt held as under:

“The employees’ contribution made to the provident fund and employees’ State insurance by the assessee on or before the due date for filing the return u/s. 139(1) of the Income-tax Act, 1961, would be eligible for the benefit conferred u/s. 43B(b).”

levitra

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Fees for technical services – The services of qualified and experienced professional who could prepare a scheme for raising requisite finances and tie-up loans for the power projects could be said with certainty would come within the ambit and sweep of the term ‘consultancy service’ in section 9(1)(vii)(b) and, therefore, the tax at source should have been deducted as the amount paid as fee could be taxable as ‘fees for technical service’

GVK Industries Ltd. & Anr. vs. The Income Tax Officer & Anr. Civil Appeal No. 7796 of 1997 dated February 18, 2015

The appellant, a company, was incorporated under the Companies Act, 1956 for the purpose of setting up a 235 MW Gas based power project at Jegurupadu, Rajahmundry, Andhra Pradesh at an estimated cost of Rs. 839 crore. The main object of the appellant company is to generate and sell electricity.

With the intention to utilie the expert services of qualified and experienced professionals who could prepare a scheme for raising the required finance and tie up the required loan, it sought the services of a consultant and eventually entered into an agreement with ABB – Projects & Trade Finance International Ltd., Zurich, Switzerland, (hereinafter referred to as “Non-Resident Company/NRC”).

The NRC, having regard to the requirements of the appellant-company offered its services as financial advisor to its project from 8th July, 1993. Those services included, inter alia, financial structure and security package to be offered to the lender, making an assessment of export credit agencies world-wide and obtaining commercial bank support on the most competitive terms, assisting the appellant in loan negotiations and documentation with lenders and structuring, negotiating and closing the financing for the project in a coordinated and expeditious manner. For its services the NRC was to be paid, what is termed as, “success fee” at the rate of 0.75% of the total debt financing. The said proposal was placed before the Board meeting of the company on 21st August, 1993 and the Board of Directors approved the appointment of the NRC and advised that it be involved in the proposed public issue of share by the company. The NRC rendered professional services from Zurich by correspondence as to how to execute the documents for sanction of loan by the financial institutions within and outside the country. With advice of NRC the appellant-company approached the Indian Financial Institutions with the Industrial Development Bank of India (IDBI) acting as the Lead Financier for its Rupee loan requirement and for a part of its foreign currency loan requirement it approached International Finance Corporation (IFC), Washington DC, USA. After successful rendering of services the NRC sent invoice to the appellant-company for payment of success fee amount i.e., $.17,15,476.16 (Rs. 5.4 Crore).

After the receipt of the said invoice the appellant-company approached the concerned income tax officer, the first respondent herein, for issuing a ‘No Objection Certificate’ to remit the said sum duly pointing out that the NRC had no place of business in India; that all the services rendered by it were from outside India; and that no part of success fee could be said to arise or accrue or deemed to arise or accrue in India attracting the liability under the Income-tax Act, 1961 (for brevity, ‘the Act’) by the NRC. It was also stated as the NRC had no business connection section 9(1)(i) is not attracted and further as NRC had rendered no technical services section 9(1)(vii) is also no attracted. The first respondent scanning the application filed by the company refused to issue ‘No Objection Certificate’ by his order dated 27th September, 1994.

Being dissatisfied with the said order passed by the first respondent the appellant-company preferred a revision petition before the Commissioner of Income-tax, Hyderabad, u/s. 264 of the Act. On 21st March, 1995 the Commissioner permitted the appellant-company to remit the said sum to the NRC by furnishing a bank guarantee for the amount of tax. The company took steps to comply with the said order but afterwards on 25th October,1995 the revisional authority revoked the earlier order and directed the company to deduct tax and pay the same to the credit of the Central Government as a condition precedent for issuance of the ‘No Objection Certificate’. Thus, the order passed by the first respondent was affirmed and resultantly the revision petition was dismissed.

The non-success in revision compelled the company to approach the High Court for issue of writ of certiorari for quashing of the orders passed by the Income-tax officer and that of by the revisional authority.

The High Court framed the following two issues for consideration:

“(1) Whether ‘success fee’ payable by the petitionercompany to the NRC or any portion thereof is chargeable under the provisions the Act; and

(2) Whether the petitioner-company is entitled to ‘No Objection Certificate’.”

The High Court referring to the contents of the correspondence, the nature and extent of services which the NRC had undertaken under the agreement, the resolution passed by the Board of Directors which had perused the letter dated 8th July, 1993 addressed by the NRC stipulating the scope of services to be undertaken by NRC; the decisions of the Board to pay a fee to NRC and came to hold thus:

“On a careful reading of the letter of proposal of the NRC and the extract of resolution of the Board of Directors of the petitioner-company, it is clear to us that it was no part of the services to be provided by the NRC to manage public issue in India to correspond with various agencies to secure loan for the petitionercompany, to negotiate the terms on which loan should be obtained or to draft document for it. The NRC has only to develop a comprehensive financial model, tie up the rupee/foreign currency loan requirements of the project, assess export credit agencies worldwide and obtain commercial bank support, assist the petitionercompany in loan negotiations and documentation with the lender. It appears to us that the service to be rendered by the NRC is analogous to draw up a plan for the petitioner-company to reach the required destination indicating roads and highways, the curves and the turns; it does not contemplate taking the petitioner-company to the destination by the NRC. Once the NRC has prepared the scheme and given necessary advice and assistance to the petitionercompany for obtaining loan, the responsibility of the NRC is over. It is for the petitioner-company to proceed on the suggested lines and obtain loan from Indian or foreign agencies. On the petitionercompany obtaining loan, the NRC becomes entitled to ‘success fees’.”

The High Court scanned the letters with due consideration and opined that the business connection between the petitioner company and the NRC had not been established. Thereafter, the writ court adverted to the proposition whether success fee could fall within clause (vii) (b) of section 9(1) of the Act. Interpreting the said provision, the High Court opined that:

“Thus from a combined reading of clause (vii) (b) Explanation (2) it becomes clear that any consideration, whether lump sum or otherwise, paid by a person who is a resident in India to a non-resident for running any managerial or technical or consultancy service, would be the income by way of fees for technical service and would, therefore, be within the ambit of “income deemed to accrue or arise in India”. If this be the net of taxation under Section 9 (1) (vii) (b), then ‘success fee’, which is payable by the petitioner company to the NRC as fee for technical service would be chargeable to income tax thereunder. The Income-tax officer, in the impugned order, held that the services offered by the NRC fell within the ambit of both managerial and consultancy services. That order of Income-tax officer found favour by the Commissioner in revision. In the view we have expressed above, we are inclined to confirm the impugned order.”
A contention was advanced before the high Court by the assessee that the nrC did not render any technical or consultancy service to the company but only rendered advise in connection with payment of loan by it and hence, it would not amount to technical or consultancy service within the meaning of section 9(1)(vii)(b) of the act. While not accepting the said submission, the high Court observed that for the purposes of attracting the said provision, the business of the company cannot be divided into water-tight compartments like fire, generation of power, plant and machinery, management, etc. and to hold that managerial and technical and consultancy service relate to management, generation of power and plant and machinery, but not to finance. Elaborating further, the high Court observed that advice given to procure loan to strengthen finances may come within the compartment of technical or consultancy service and “success fee” would thereby come within the scope of technical service within the ambit of section 9(1)(vii)(b) of the act. Being of this view, the high Court opined the assessee was not entitled to the “No Objection Certificate”.

Being aggrieved, the appellant approached the Supreme Court. according to the Supreme Court, the crux of the matter was whether, in the obtaining factual matrix, the High Court was justified in concurring with the view expressed by the revisional authority that the assessee- company was not entitled to “No Objection Certificate” under the act as it was under the obligation to deduct the tax at source pertaining to payment to the nrC as the character of success fee was substantiated by the revenue to put in the ambit and sweep of section 9(1)(vii)
(b)of the act.

The Supreme Court observed that NRC was a non- resident Company and it did not have a place of business in india. The revenue has not advanced a case that the income had actually arisen or received by the NRC in india. The high Court has recorded the payment or receipt paid by the appellant to the NRC as success fee would not be taxable u/s. 9(1)(i) of the act as the transaction/ activity did not have any business connection. that being the position, the singular question that remained to be answered was whether the payment or receipt paid by the appellant to NRC as success fee would be deemed to be taxable in india u/s. 9(1)(vii) of the act. As the factual matrix would show, the appellant had not invoked double taxation avoidance agreement between india and Switzerland. that being not there, the Supreme Court was only concerned with as to whether the “success fee” as termed by the appellant was “fee for technical service” as enjoined u/s. 9(1)(vii) of the act.

According to the Supreme Court, the principal provision is Clause (b) of section 9(1)(vii) of the act. the said provision carves out an exception. the exception carved out in the latter part of clause (b) applies to a situation when fee is payable in respect of services utilised for business or profession carried out by an indian payer outside india or for the purpose of making or earning of income by the indian assessee i.e. the payer, for the purpose of making or earning any income from a source outside india.

The Supreme Court held that on a studied scrutiny of the said Clause, it becomes clear that it lays down the principle what is basically known as the “source rule”, that is, income of the recipient to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. the Clause further mandates and requires that the services should be utilised in india.

The two principles, namely, “Situs of residence” and “Situs of source of income” have witnessed divergence and difference in the field of international taxation. The principle “residence State taxation” gives primacy to the country of the residency of the assessee. This principle postulates taxation of world-wide income and world-wide capital in the country of residence of the natural or juridical person. The “Source State taxation” rule confers primacy to right to tax to a particular income or transaction to the State/nation where the source of the said income is located. The second rule, as is understood, is transaction specific. To elaborate, the source State seeks to tax the transaction or capital within its territory even when the income benefits belongs to a non residence person, that is, a person resident in another country. The aforesaid principle sometimes is given a different name, that is, the territorial principle. It is apt to state here that the residence based taxation is perceived as benefiting the developed or capital exporting countries whereas the source based taxation protects and is regarded as more beneficial to capital importing countries, that is, developing nations. Here comes the principle of nexus, for the nexus of the right to tax is in the source rule. It is founded on the right of a country to tax the income earned from a source located in the said State, irrespective of the country of the residence of the recipient. It is well settled that the source based taxation is accepted and applied in international taxation law.

The two principles that have been mentioned hereinabove, are also applied in domestic law in various countries. the source rule is in consonance with the nexus theory and does not fall foul of the said doctrine on the ground of extra-territorial operation. The doctrine of source rule has been explained as a country where the income or wealth is physically or economically produced.

Appreciating the aforesaid principle, it would apply where business activity is wholly or partly performed in a source State, as a logical corollary, the State concept would also justifiably include the country where the commercial need for the product originated, that is, for example, where the consultancy is utilised. From the aforesaid, it is quite vivid that the concept of income source is multifaceted and has the potentiality to take different forms. The said rule has been justified on the ground that profits of business enterprise are mainly the yield of an activity, for capital is profitable to the extent that it is actively utilised in a profitable manner. To this extent, neither the activity of business enterprise nor the capital made, depends on residence.

The purpose of adverting to these aspects is only to highlight that the source rule has been accepted in the un Commentaries and the organisation of economic Corporation and development (OECD) Commentaries. It is well known that what is prohibited by international taxation law is imposition of sovereign act of a State on a sovereign territory. This principle of formal territoriality applies in particular, to acts intended to enforce internal legal provisions abroad. Therefore, deduction of tax at source when made applicable, it has to be ensured that this principle is not violated.

The Supreme Court adverting to the instant case, held that, it was evident that fee which had been named as “success fee” by the appellant had been paid to the NRC. It had to be seen whether the payment made to the non- resident would be covered under the expression “fee for technical service” as contained in explanation (2) to section 9(1)(vii) of the act. The said expression means any consideration, whether lumpsum or periodical in rendering managerial, technical or consultancy services. It excludes consideration paid for any construction, assembling, mining or like projects undertaken by the non-resident that is the recipient or consideration which would be taxable in the hands of the non- recipient or non-resident under the head “salaries”. In the case at hand, the said exceptions were not attracted. What was required to be scrutinised was that the appellant had intended and desired to utilise expert services of qualified and experience professional who could prepare a scheme for raising requisite finances and tie-up loans for the power projects. As the company did not find any professional in India, it had approached the consultant NRC located in Switzerland, who offered their services. Their services rendered included, inter alia, financial structure and security package to be offered to the lender, study of various lending alternatives for the local and foreign borrowings, making assessment of expert credit agencies world-wide and obtaining commercial bank support on the most competitive terms, assisting the appellant company in loan negotiations and documentations with the lenders, structuring, negotiating and closing financing for the project in a coordinated and expeditious manner.

The Supreme Court held that from the letter dated 8.7.1993 addressed by the NRC and resolution passed by the Board on 21st august, 1993, it was clear as crystal that the obligation of the NRC was to:

“(i) Develop comprehensive financial model to tie-up the rupee and foreign currency loan requirements of the project.

(ii) assist expert credit agencies world-wide and obtain commercial bank support on the most competitive terms.
(iii) assist the appellant company in loan negotiations and documentation with the lenders.”

Pursuant to the aforesaid exercises carried out by the NRC, the company was successful in availing loan/financial assistance in India from the Industrial development Bank of india (IDBI) which acted as a lead financier for the rupee loan requirement. For foreign currency loan requirement, the appellant approached international finance Corporation, Washington D.C., USA and was successful. in this backdrop, “success fee” of Rs. 5.4 crore was paid to the NRC.

According to the Supreme Court, it was in this factual score, that the expression, managerial, technical or consultancy service, were to be appreciated. The said expressions have not been defined in the Act, and, therefore, it was obligatory on the part of the Supreme Court to examine how the said expressions are used and understood by the persons engaged in business. The general and common usage of the said words has to be understood at common parlance.

The Supreme Court held that in the case at hand, it was concerned with the expression “consultancy services” and in this regard, a reference to the decision by the authority for advance ruling In Re.P.No. 28 of 1999 (1999) 242 itr 280, would be applicable. The observations therein read as follows:

“By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. The category of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it.”

In this context, according to the Supreme Court, a reference to the decision in C.I.T. vs. Bharti Cellular Limited and others (2009) 319 ITR 139, was also apposite. In the said case, while dealing with the concept of “consultancy services”, the high Court of delhi has observed thus:

“Similarly, the word “consultancy” has been defined in the said Dictionary as “the work or position of a consultant; a department of consultants.” “Consultant” itself has been defined, inter alia, as “a person who gives professional advice or services in a specialized field.” It is obvious that the word “consultant” is a derivative of the word “consult” which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as “ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action”. It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant.”

The Supreme Court, in this context, referred to the dictionary meaning of ‘consultation’ in Black’s law dictionary, eighth edition. The word ‘consultation’ has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It means a meeting in which a party consults or confers and eventually it results in human interaction that leads to rendering of advice.

The Supreme Court held that as the factual matrix in the case at hand, would exposit the nrC had acted as a consultant. It had the skill, acumen and knowledge in the specialised field i.e. preparation of a scheme for required finances and to tie-up required loans. The nature of service referred by the nrC, can be said with certainty would come within the ambit and sweep of the term ‘consultancy service’ and, therefore, it had been rightly held that the tax at source should have been deducted as the amount paid as fee could be taxable as ‘fees for technical service’. once the tax is payable the grant of ‘no Objection Certificate’ was not legally permissible. Ergo, the judgment and order passed by the high Court was absolutely impregnable.

The Supreme Court dismissed the appeal, being devoid of merit.

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Income from Flats held as Stock in Trade

Issue for Consideration
A businessman may hold flats as stock-in-trade at the year end. For example, on completion of construction of a building, a builder may be left with unsold houses or offices. Such houses or offices may not be let pending sale, and left vacant. Section 22 of the Income Tax Act requires the annual value of a property, consisting of buildings or land appurtenant thereto, of which the assessee is an owner, to be charged to tax under the head “Income from House Property”. The income under this head is chargeable to tax irrespective of the fact that such flats held in stock-in-trade are not let out and that no rent is received there from. Section 22 however excludes such portions of such property as is occupiedfor the purposes of business or profession carried on by him, the profits of which are chargeable to income tax.

A question that often arises in such circumstances is about the taxability of notional income under the head ‘Income from House Property’ in respect of the flats held as stock-intrade of business from which no rental income is received during the year. Whether the notional income in such cases is taxable at all and if yes, under the head “Income from business or profession” or “Income from house property”. Could it be said that even otherwise the notional income was not taxable on the ground that the unsold flats are occupied for the purposes of business. Further issue is whether rental income from such flats is taxable under the head ‘Income from House Property’ or ‘Profits and Gains of Business or Profession’. While the Delhi High Court has taken the view that notional income is to be taxed under the head “Income from House Property”, the Gujarat high court has held that the rental income in respect of the flats held as stock-in-trade should be taxed under the head ‘Profits and Gains of Business and Profession’ .

Ansal Housing Finance and Leasing Co’s case
The issue came up before the Delhi High Court in the case of CIT vs. Ansal Housing Finance and Leasing Co Ltd., 354 ITR 180. In this case, the assessee was engaged in the business of development of mini townships, construction of house property, commercial and shopping complexes, etc. It had certain unsold flats, out of the flats that it had constructed.

During the course of assessment proceedings, the assessing officer proposed to assess the annual letting value of flats which the assessee had constructed, but which were lying unsold, on notional basis u/s. 22, under the head “Income from House Property”. The assessee contended that the flats were its stock in trade, were lying vacant, and therefore the annual letting value of the flats could not be brought to tax under the head “Income from House Property”. The assessing officer did not accept the assessee’s stand, and added the notional letting value of the unsold flats to the total income of the assessee.

The Commissioner(Appeals) set aside the addition made by the assessing officer. The appeal to the Tribunal by the revenue was also dismissed.

Before the High Court, it was argued on behalf of the revenue that regardless of whether income was on from the vacant flats, the assessee in its capacity as owner, had to pay tax on the annual letting value. It was argued that tax incidence did not depend on whether the assessee actually rented out the premises or not, but on the mere fact of ownership. Reliance was placed on behalf of the revenue on the Calcutta High Court decision in the case of Azimganj Estate (P) Ltd 206 Taxman 308, where , the builder had flats which were let out, the Court held that the rental income was assessable not under the head of profits or income from business, but under the head income from house property. It was argued before the Delhi high court that so long as the assessee continued to be the owner of the vacant flats, it had to be assessed under the head of income from house property. Since there was no letting out, the basis of assessment had to be annual letting value, which was rational and scientific.

On behalf of the assessee, it was argued that unlike in the case before the Calcutta High Court, in the present case, the assessee did not actually let out the vacant flats. It was not even in the business of renting out its flats. Letting out vacant or other properties was not part of the business objectives of the assessee, and since it did not derive any income as a result of letting out, that judgment did not apply. It was argued that income tax was a levy on income received, and not only on an amount derived on notional calculations. In the alternative, it was argued that the flats could not be taxed on the basis of their notional annual letting value, because the owner was an occupant, and such occupation was in the course of and for the purpose of business as a builder. It was explained to the court that section 22 saved the case of flat occupied, for the purposes of business, from taxation.

The Delhi High Court held that the levy of income tax in the case of a person holding house property was premised not on whether the assessee carried on business as landlord, but on the ownership. The incidence of charge was because of the fact of ownership.

The High Court further observed that in every case, the Court had to discern the intention of the assessee, and that in the case before it, the intention of the assessee was to hold the properties till they were sold. According to the Court, the capacity of being an owner was not diminished one whit because the assessee carried on the business of developing, building and selling flats in housing estates. It negated the assessee’s argument that since income tax was levied not on the actual receipt but on a notional basis, i.e. Annual Letting Value, it was therefore not sanctioned by law. According to the Court, Annual Letting Value was a method to arrive at a figure on the basis of which the impost was to be effectuated. The existence of an artificial method itself would not mean that levy was impermissible. Parliament had resorted to several other presumptive methods, for the purpose of calculation of income and collection of tax. Application of Annual Letting Value to determine the tax was regardless of whether actual income was received; it was premised on what constituted a reasonable letting value, if the property were to be leased out in the marketplace.

Addressing the alternative argument that the assessee itself was the occupier, because it held the property till it was sold, the Court held that there was no merit in that submission. According to the Court, while there could be no quarrel with the proposition that ‘occupation’ could be synonymous with physical possession, in law, when Parliament intended a property occupied by one who was carrying on business, to be exempted from the levy of income tax was that such property should be used for the purpose of business. The intention of the lawmakers, in other words, was that occupation of one’s own property, in the course of business, and for the purpose of business, i.e., an active use of the property, (instead of mere passive possession) qualified as ‘own’ occupation for business purpose.

The Delhi High Court therefore held that the annual letting value of the unsold flats was taxable, as the income was taxable under the head “Income from House Property”.

Neha Builders’ case
The issue about the head of income came up for consideration before the Gujarat High Court in the case of CIT vs. Neha Builders (P) Ltd. 207 CTR 231.

The assessing officer was of the view that since the expenses on maintenance of the property were debited to the profit and loss account, and the building was also shown as stock in trade, the property would partake the character of stock. According to the assessing officer, any income derived from stock could not be taken to be income from property. the Commissioner(appeals) upheld the view of the assessing officer. The Tribunal allowed the assessee’s appeal, observing that any dividend received on shares held as stock-in-trade was taxable under the head ‘income from other sources’ by virtue of statutory provision, and therefore, any income derived as rent would be taxable under the head ‘income from house property’.

Before the Gujarat high Court, on behalf of the revenue, it was argued that if the property was used as a property, then any income therefrom would be an income from house property, but if the property was used as stock, than any income from such stock would not be an income from house property.

The Gujarat high Court noted that the case of the assessee was that the company was incorporated with the main objects of purchasing, taking on lease, acquiring by sale or letting out the buildings constructed by the company. development of land or property was also one of the businesses for which the company was incorporated.

The high Court noted that income derived from property would always be termed as income from the property, but if the property was used as stock in trade, then the property would partake the character of the stock, and any income derived from the stock would be income from the business, and not income from the property. The court observed that if the business of the assessee was to construct the property and sell it or to construct and let out the same, then that would be business, and the business stocks, which would include movable and immovable properties, would be taken to be stock in trade, and any income derived from such stocks could not be termed as income from property.

The high Court further held that , there was a distinction between “income from business” and “income from property” on one side, and “income from other sources” on the other. in the opinion of the Court, the tribunal was not justified in comparing rental income with dividend income on shares or interest income on deposits. The court observed that this comparison was not raised before the subordinate authorities, and the tribunal on its own supplied the said analogy.

The high Court noted that from the statement of the assessee, it was clear that it was treating the property as stock in trade. From the records, it was also clear that except for the ground floor, which had been let out by the assessee, all other portions of the property constructed had been sold out. That being the case, right from the beginning, the property was held as stock-in-trade.

The Gujarat high Court therefore held that the income from property held as stock-in-trade was to be assessed as business income.

Observations
There are three issues involved here; the taxation of notional income of unsold flats held as stock-in-trade, claim that such flats so held are occupied for the purposes of business and the head of income especially in cases where real income is received on letting of such flats. The related questions could be the allowability of the claims for vacancy allowance and that of the taxes and interest in full. A reasonable certainty that prevailed in relation to taxation of income under the head ‘income from house property,’ where the rental income is received on letting of such flats, is disturbed by the above referred decision of the Gujarat high court in the case of neha Builders. The court in this case held that the rental income of such flats, in the hands of a builder, can be taxed under the head ‘Profits and Gains of Business’, dismissing the claim of the assessee that the same should be taxed as ‘income from house property’. In that case, it was the income tax department that claimed that the income in question should be taxed as the business income. The reasoning of the court that income from flats held as stock-in-trade of a business, should be taxed as the business income, is appealing and is not to be dismissed summarily for the added reason that the court distinguished the decisions delivered in the context of dividend and interest income relating to the business under the head ‘Profits and Gains of Business’, to consciously hold that there was a difference between the two heads of income. With this, there at least arises the need for refreshing the debate on the issue.

The case of the unsold flats not let out and remaining vacant is otherwise also on a better pedestal. it is a case where no income whatsoever is received. there is no real income is received here, actual or otherwise. in the circumstances, no question should arise about deciding the head of income. The Gujarat high court decision can be applied here with the greater force to contend that the question of deciding the head, as is in the case of the business related dividend income, does not arise at all where there is no income. Independently, the rule that the income from ownership of the property shall always be taxed under the head ‘income from house property’ is not something that is written in stone; an exception is made by section 56(2)(iii) that provides for taxation of such income which is inseparable from letting of other assets. The case for not taxing the flats held as stock-in-trade is also supported by the fact that such flats are exempted from levy of the wealth tax under the Wealth tax act which in turn indicates the intention of the legislature to keep away such flats from the impost of taxation.

There is also a good case to hold that even the notional income is saved from taxation by the express provision of section 22 which excludes the income from the property occupied for the purposes of business. It is true that the delhi high court in the ansal housing finance’s case explained where a person could be said to be occupying the property for business purposes.With respect, it seems that a contrary view is not ruled out. A businessman holding an unsold flat for the purposes of sale can surely be said to have occupied such a flat for the purposes of his business which business is to keep such flat ready for sale and exhibit it to persons desirous of purchasing it . All this is a part of the business and is possible only where it is occupied by him.

There is also a good case for him in such a case to claim vacancy allowance u/s 23(1)(c) of the act. the deeming fiction of section 22 is to be applied by determination of annual Value as per section 23 of the act which provision requires due consideration of the fact that the property in question had remained vacant during the year.

It appears that the CBDT also has two conflicting views on the subject which has been evident by the fact that in the case before the Gujarat high court, it sought to contend that the income in question should be taxed under the head “Profits and Gains of Business”.

The history of the income tax act is replete with stories of cases revolving simply around the heads of taxation. the enormous litigation arises simply on account of the schedular system of taxation which requires the income to be pegged under a specific pigeon hole. This is most evident in the cases involving transactions in securities that has flooded the courts. It is high time that the parliament takes note of unwarranted litigation and does away with the system of head wise taxation, once for all.

shailesh.kwebmaker

AGREEMEN T TO SELL – TAX IMPLICATIONS

Introduction:
While purchasing an immovable property in the
form of land or building, generally an agreement to purchase/ sell is
entered into between the parties stipulating the conditions or terms of
the transaction and thereafter actual conveyance deed or sale deed is
executed. An Agreement to Sell is a formal legal document and has legal
implications under the General Law. Under the Income-tax Act, the income
under the head capital gains pertaining to such transaction is
considered under clause (v) of section 2(47) which refers to Part
Performance u/s. 53A of the Transfer of Property Act. The capital gains
implications are therefore seen with reference to possession as against
an agreement to sell. Recently, the Supreme Court in the case of Sanjeev
Lal vs. CIT reported in 365 ITR 389, had an occasion to deliberate on
the question as to transfer u/s. 2(47) as also exemption u/s. 54 and in
the process, the Apex Court has made certain observations in connection
with the “Agreement to sell”. The observations of the Supreme Court are
vital and give rise to further questions as to the implications of
‘Agreement to sell’ for tax purposes. It is therefore felt necessary to
analyse the concept of “Agreement to sell” under the Income-tax Act in
the light of the decision of Supreme Court.

Position under Transfer of Property Act, 1882:
Before
discussing the position under the Income-tax Act, it would be
imperative to understand the implications under the General Law i.e.
Transfer of Property Act. Section 54 of Transfer of Property Act
provides that ‘A contract for the salel of immovable property is a
contract that a sale of such property shall take place on terms settled
between the parties. It does not, of itself, create any interest in or
charge on such property.’ As the section expressly provides, an
agreement to sell is merely a contract for sale on agreed terms and the
agreement itself does not create any right or interest in the property.
It is therefore considered as a contract between the parties with
ensuing respective contractual obligations. In so far as the property is
concerned, no right in the property is affected. The parties to the
contract however get a right of specific performance of contract under
Specific Relief Act. This right of specific performance is a right
independent of the right in the property. This right is also construed
as right to obtain conveyance.

Further, section 40 of Transfer
of Property Act provides that where a third person is entitled to the
benefit of an obligation arising out of contract, and annexed to the
ownership of immovable property, but not amounting to an interest
therein or easement thereon, such right or obligation may be enforced
against a transferee with notice thereof or a gratuitous transferee of
the property affected thereby, but not against a transferee for
consideration and without notice of the right or obligation, nor against
such property. E.g., A sells Sultanpur to C. C has notice of the fact
that there is a contract of sale between A and B. B may enforce the
contract against C who is a third person and stranger to contract just
as he could enforce it against A. This provision is based on equity.
Accordingly, although a contract for sale does not create any interest
in land or charge upon it yet, it does create an obligation annexed to
ownership of property. However, it is to be seen that this obligation is
not enforceable against a transferee for consideration who had no
notice of the earlier contract.

Part Performance:
It
would also be necessary to appreciate the provisions of Part Performance
u/s. 53A of the Transfer of Property Act. As the provisions of section
53A where any person contracts to transfer for consideration any
immovable property by writing signed by him or on his behalf from which
the terms necessary to constitute the transfer can be ascertained with
reasonable certainty, and the transferee has, in part performance of the
contract taken possession of the property or part thereof, or the
transferee, being already in possession, continues in possession in part
performance of the contract and has done some act in furtherance of the
contract and the transferee has performed or willing to perform his
part of the contract, then notwithstanding that the contract, though
required to be registered, has not been registered, or, where there is
an instrument of transfer, that the transfer has not been completed in
the manner prescribed therefore by the law for the time being in force,
the transferor or any person claiming under him shall be debarred from
enforcing against the transferee and persons claiming under him any
right in respect of the property of which the transferee has taken or
continued in possession, other than a right expressly provided by the
terms of the contract:

Provided that nothing in this section
shall affect the rights of a transferee for consideration who has no
notice of the contract or the part performance thereof.

This
doctrine is a step subsequent to the execution of agreement to sell. It
applies where the transferee is in possession of the property in
pursuance of agreement for transfer of the property and he is willing to
perform his obligation under the agreement, then transferor is debarred
from claiming any right against the transferee. This doctrine gives a
right to the transferee to protect his possession and does not create a
title in the property. This right can be used as a shield but not as a
sword. This is based on the principle of equity However, the proviso to
section 53A further makes it clear that the right under this section
does not affect the right of a transferee who is different than the one
with whom the agreement to sell is made.

Thus it can be seen
that under both the situations above, there is no transfer of any right
in the property to the transferee but they give some other rights in
different forms. In case of Agreement to sell, the purchaser gets right
of specific performance of the agreement and in case of part
performance, the purchaser is entitled to protect his possession. The
transferor can transfer the property to third person and the new
transferee for a consideration who has no notice of such earlier
agreement gets proper title.

Position under Income-tax Act:

The right arising fromthe agreement to sell has been explained in various decisions. Since, the agreement to sell does not create rights in the assets, there have been instances where the assessee claimed specific performance of the contract and in that process, the amount received by assigning the right of specific performance was claimed to be capital receipt. While dealing with such question, the hon. Bombay high Court in case of CIT vs. Tata Services 122 ITR 594 held a contract of salel of land is capable of specific performance. It is also assignable. therefore, such right to obtain conveyance was ‘property’.

As contemplated by section 2(14). in that case, the assessee entered into an agreement with Seth Anandji Haridas for purchase of 5,000 sq. yards of land situated at Bombay, @ Rs. 175 per sq. yard and paid earnest money of Rs. 90,000. the vendor was to obtain requisite permission from municipal and other authorities at his cost. the agreement of purchase was to be completed within 6 months of its execution. if the permission was not obtained on any account whatsoever, the vendor was entitled to cancel the agreement and the earnest money was to be refunded. the vendor could not obtain requisite permission and wanted to cancel the agreement. this was not accepted by the assessee. finally, a tripartite agreement was entered into among Seth anandji haridas, the assessee and m/s advani & Batra. in consideration, the assessee received a sum of Rs. 5,90,000 from m/s. advani & Batra, consisting of rs. 5 lakh as consideration for transfer and assigning its rights, etc., and Rs. 90,000, being the earnest money paid to Seth anandji haridas. the tribunal held that it was a case of transfer of a capital asset. the case of the assessee was that the agreement for sell did not create any interest or right in land in favour of the assessee as per section 54 of the transfer of property act. the amount of Rs. 5,90,000 was merely compensation and not consideration of transfer of any right, etc. in the land as the assessee did not own any asset as contemplated by section 2(14) of the act. the hon’ble Court pointed out that as per section 54 of the transfer of property act, a contract for sell of immovable property does not by itself create any interest in such property. However, it was difficult to see how the aforesaid provisions were applicable to the facts of the case. It was nobody’s case that the aforesaid agreement gave rise to a right in the land which was agreed to be sold by Seth anandji haridas and purchased by the assessee. the case of the revenue was that under the agreement to sell, the assessee had a right to obtain a conveyance of the immovable property. This right of conveyance either get extinguished or was assigned in favour of m/s. advani & Batra for a consideration, of rs. 5,90,000. the hon’ble Court referred to the definition of ‘capital asset’ given in section 2(14) of the act and pointed out that it has a wide ambit. The hon’ble Court also referred to the provisions of section 2(47) of the Act, which defines the term ‘transfer’ to include the sell, exchange, relinquishment of asset or extinguishments of any right therein, etc. It was also pointed out that a contract of sell of land is capable of specific performance. It is also assignable. Therefore, such right to obtain conveyance was ‘property’ as contemplated by section 2(14). This right was assigned in favour of m/s. advani & Batra and, therefore, it amounted to transfer of right by way of extinguishment of any right therein. a similar view has been taken in the following cases–

CIT vs. Vijay Flexible containers 186 ITR 693 Bom,
K. R. Shrinath vs. ACIT 268 ITR 436 Mad CIT vs. H. Anil Kumar 237 CTR 537 Kar

The above decisions imply that the right acquired under agreement to Sell is a right which is a capital asset since the definition of Capital asset u/s. 2(14) provides property of any kind. it further implies that this right is different than the property itself. The agreement to Sell gives rise to a right which is separate and independent right than the right in the property itself. Applying this principle of law, in cases where the assessee enters into agreement to sell with the intention to purchase a flat to be constructed in a scheme by a builder, and if the rights are sold before possession and conveyance, the capital gains are chargeable on account of transfer of rights arising out of the agreement to sell.

Right to sue:
The right to obtain specific performance or right to obtain conveyance is further distinguished from right to sue. in a given case, if after agreement to sell, one of the party refuses to perform his part of the contract but also disposes of the subject-matter, the injured party has nothing left in the contract except the right to sue for damages. there is no other right flowing from the contract except the right to complain about breach and sue for damages or specific performance of the contract with or without injunction as well as restitution of the benefit which the defaulting party has received from the injured party. Once there is a breach of contract by one party and the other party does not keep it alive but acquiesces in the breach and decides to receive compensation therefor, the injured party cannot have any right in the capital asset which could be transferred by extinguishment to the defaulter for valuable consideration. That is because a right to sue for damages not being an actionable claim, a capital asset, there could be no question of transfer by extinguishment of the assessee’s rights therein since such a transfer would be hit by section 6(e) of the transfer of property act. Section 6(e) provides for exceptions to property that can be transferred. it provides in clause (e) that a mere right to sue cannot be transferred. in such situation, the amount received an account of damages would not be chargeable under the head capital gains. Gujrat high Court in case of Baroda Cement & Chemical Ltd vs. CIT 158 ITR 636 has adopted this line of proposition. In order to find out the exact nature of amount received by the assessee as to whether it is from assignment of right attracting capital gains or purely damages for breach of contract to be treated as capital receipt, it would be essential to refer to the agreement minutely and determine the exact transaction.

Period of holding:
The next question is as to the period of holding. for the purpose of determining the nature of capital gains as to long term or short term, the period of holding is relevant. the question arises as to which date, the capital asset was acquired, the date of agreement to sell or the date of possession or actual conveyance. Section 2(42a) defines short term capital asset as a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. as per this section, the period for which the asset was held by the assessee is to be seen. the interpretation of the word ‘held’ requires attention. the term can be understood to mean held as a legal owner in which case the date of acquiring the legal title would be relevant or the term ‘held’ can be interpreted to include beneficial ownership as well without the legal title. the Bombay high Court in case of CIT vs. R. R. Sood 161 ITR 92 held that it is well-settled in law that a mere agreement to purchase a land does not convey any title to the said land or create any interest in the said land. all that the intended purchaser acquires under such an agreement is an equity to obtain specific performance. the fact that she was put in possession of the said plot does not in any way confer on the assessee a title to the land in question. at best, such possession might give the assessee a right to claim the benefit of part performance, but it is clear that the fact of being put in possession in part performance of the agreement cannot confer any title on the assessee to the land in question. It was only on the execution of the conveyance that the assessee acquired title to the said plot and it was only from the date of conveyance that it can be said that the assessee held the said plot as the owner thereof. However, the punjab & haryana high Court in case of CIT vs. Ved Parkash & Sons (HUF) 207 ITR 148 has taken a different view on the question. in the case before the punjab & haryana high Court, the assessee entered into an agreement for sell and was put into possession on the same day. the consideration was to be paid in installments. When the last installment was paid, the same day the property was sold. the capital gains was assessed as short term by ao. the high Court held that from the bare reading of section 2(42A) of the act, word `owner’ has designedly not been used by the legislature. The word `held’ as per dictionary meaning means to possess, be the owner, holder or tenant of (property, stock, land. ). Thus, person can be said to be holding the property as an owner, as a lessee, as a mortgagee or on account of part performance of agreement, etc. Conversely, all such other persons who may be termed as lessees, mortgagees with possession or persons in possession as part performance of the contract would not, in strict parlance, come within the purview of an `owner’. As per Shorter oxford dictionary, edition 1985, `owner’ means one who owns or holds something; one who has the right to claim or title to a thing. the assessee in terms of agreement to sell having been put in possession, remained in its occupation as of right and thus for all intents and purposes was its beneficial owner from the start. the capital gain was a long-term capital gain. the meaning of beneficial ownership was also adopted in case of decision of itat in A. Suresh Rao vs. ITO 144 ITD 677 (Bang). The decision of the Bombay high Court in case of r. r. Sood was before the amendment to Section 2(47) by which the concept of part performance u/s. 53a of transfer of property act was recognised for the purpose of transfer. The meaning of beneficial ownership may be possible and if the assessee is in possession of the property as a beneficial owner and is beneficially enjoying it, such date can be suitably adopted for computing the period of holding. Other relevant and supporting factors for claiming beneficial ownership could be the municipal bill, the electricity connection or income from the property if assessed in his hands. On the other hand, if the rights to obtain conveyance are transferred, the date of agreement would be the date relevant for computing period of holding as held in Gulshan Malik vs. CIT 102 DTR 354 (Del) in which case the booking rights were transferred.

Nature of Transaction of sale: The transaction of sale of property may involve two stages. first, the stage of agreement to sell. if the agreement is entered into and thereafter it becomes matured for conveyance by fulfillment of the respective obligations from both sides, it would be a transaction of sell of property i.e land or building. the agreement to sell gives rise to right of specific performance but if the conditions are fulfilled, the right thereafter gets merged or converted into ownership after the purchase of the property. if however, the terms are not fulfilled; either party has option to use their right of specific performance under Specific Relief Act. The suit for specific performance may have various outcomes. The Court may direct for specific performance in a given case or the parties may arrive at the settlement involving assignment of this right to someone else or the party may accept pure damages. in such cases where the right is assigned, it would be a transfer of right to obtain specific performance liable for capital gains u/s.
45. It is essential to carefully identify in a given situation as to whether is it transaction of sale of property itself or transfer of right of obtaining conveyance in pursuance of agreement to sell.

Transfer u/s. 2(47):
In both the situations, the point at which the transfer u/s. 2(47) needs to be determined. In the case where the right is surrendered, the transfer u/s. 2(47) would arise at a time when the agreement for surrender of such right is entered into. in other case where the agreement to sell is to be acted upon by fulfilling the obligations, section 53A would be applicable. Section 2(47) was amended in 1987 which enlarged the scope of transfer to transaction contemplated u/s. 53A of transfer of property act. the CBDT’s Circular no. 495, dt. 22nd Sept., 1987 [(1988) 67 CTR (St) 1] provides an insight into the background and objective of the said clauses :

“11.1 The existing definition of the word ‘transfer’ in section 2(47) does not include transfer of certain rights accruing to a purchaser, by way of becoming a member of or acquiring shares in a co-operative society, company, or aop or by way of any agreement or any arrangement whereby such person acquires any right in any building which is either being constructed or which is to be constructed. transactions, of the nature referred to above are not required to be registered under the registration act, 1908. Such arrangements confer the privileges of ownership without transfer of title in the building and are a common mode of acquiring flats particularly in multi- storeyed constructions in big cities. The definition also does not cover cases where possession is allowed to be taken or retained in part performance of a contract, of the nature referred to in sectiosssssn 53A of the transfer of property act, 1882. now sub-cls. (v) and (vi) have been inserted in section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above.”

The above amendment makes it clear that earlier, there was no transfer unless conveyance deed was executed. To prevent avoidance of capital gains liability to indefinite period, the scope of transfer was widened and the event of transfer was preponed to the stage of contemplated under part performance u/s. 53a of transfer of property act. This goes to show that the mere execution of agreement to sell did not trigger transfer u/s. 2(47) of the property. Specifically in the context of purchase of property, the transfer has to be seen with reference to clause (v) of section 2(47) dealing with part performance. The necessary event would therefore be the obtaining of possession by the transferee in pursuance of agreement to sell.

Decision of The supreme court in The case of Sanjeev Lal:
in the case before the Supreme Court, the agreement to sell was made in 2002. the assessee received Rs. 15 lakh out of total consideration of rs 1.32 crore. the assessee purchased new house on 30-4-2003. thereafter, there were suits filed challenging the will document by which the assessee had acquired the property. Because of the interim order of the court of civil suit restraining the parties to deal with the property, the sell deed could not be executed. the dispute was resolved and then the sell deed was executed on 24-9-2004. The assessee claimed the capital gains to be exempt since the gain was invested in new house. the claim was rejected on the ground that the transfer took place in 2004. Since the new house was purchased before one year prior to the date of transfer, the exemption was held to be not allowable by the learned ao. the matter reached upto the Supreme Court. in dealing with the question of transfer the Supreme Court held that-

1.    An agreement to sell gives rise to a right in personam in favour of transferee. It gives right of specific performance if vendor is not executing sell deed.
2.    Some right in respect of capital asset had been transferred in favour of vendee which got extinguished because after agreement to sell as it was not open to the appellants to sell the property to some one else in accordance with law. There was a transfer u/s. 2(47) on agreement to sell.
3.    Purposive interpretation should be given while considering a claim of exemption. Since the amount was invested in new house, the assessee was entitled to exemption u/s. 54.

The immediate question that is raised in one’s mind is that does it lay down the law that transfer of property u/s. 2(47) gets triggered on agreement to sell. As discussed earlier considering the provisions of section 2(47), the amendment in 1987 so as to insert clause (v) thereby encompassing the situation of part performance within the meaning of transfer, the reading of the decision to that effect may not be appear to be in consonance with the existing or prevailing provisions of the act. The provisions of transfer of property also do not provide for any express bar for the transferor to sell the property to third person. the agreement to sell gives rise to independent right of Specific Performance without affecting the title of the owner or transferor. Even the obligation attached to the property in view of section 40 of the transfer of property act does not bind the third person is he has no knowledge of the contract.

In view of this inconsistency between the above interpretation of the decision and the prevailing law, the decision could not be understood to be laying down the law on transfer u/s. 2(47) for agreement to sell in general. the Supreme Court’s verdict was on the whole question as to the transfer of property u/s. 2(47) as also the exemption u/s. 54. Since the assessee had invested the capital gain in new asset, the Supreme Court proceeds to adopt purposive interpretation and did not hesitate to hold that the transfer was effected u/s. 2(47) on agreement to sell appreciating that ultimately the legislature did not want to burden the tax payer if he invested in prescribed asset. If one looks at the decision as a whole question, it can be said that the decision is in the specific context of facts and law before them. The obvious reason for such view is that the Supreme Court decides not to go into the law on transfer in general but restricts itself to question of exemption rws transfer u/s. 2(47). In the context of general law, the Supreme Court makes a categoric observation in para 20 of the decision that the question as to whether the entire property can be said to have been sold at the time when agreement to sell is entered into, in normal circumstances has to be answered in the negative. The entire discussion of the Supreme Court in connection with transfer u/s. 2(47) is in the background of exemption u/s. 54 which appears expressly in the judgement.

In the context of general law, section 52 of transfer of property act is based on a doctrine called “Lis Pendens” meaning during the pendency of any suit regarding title of a property, any new interest in respect of that property should not be created. in essence, the provision prohibits transfer of property pending litigation. This aspect though crucial in general law could not prevail the mind of the Supreme Court as it did not find relevant for deciding the question before them.

Similar situation arose before Supreme Court in case of CIT vs. Sun Engineering Works P. Ltd. 198 ITR 297 in which the Supreme Court had to interpret the judgement of Supreme Court in case of V. Jaganmohan Rao vs. CIT reported in 75 ITR 373. it was urged before the Supreme Court that in case of jaganmohan rao, the Supreme Court has taken a view that in reassessment proceedings, the entire assessment is reopened and the original assessment is wiped off. The Supreme Court in case of Sun engineering held that to read the judgment in V. jaganmohan rao’s case (supra), as laying down that reassessment wipes out the original assessment and the reassessment is not only confined to “escaped assessment” or “underassessment” but to the entire assessment for the year and starts the assessment proceedings de novo giving the right to an assessee to re-agitate matters which he had lost during the original assessment proceedings, which had acquired finality, is not only erroneous but also against the phraseology of section 147 of the act and the object of reassessment proceedings. Such an interpretation would be reading that judgment totally out of context in which the questions arose for decision in that case. it is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete “law” declared by this Court. the judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning. in Madhav Rao Jivaji Rao Scindia Bahadur vs. Union of India (1971) 3 SCR 9 : AIR 1971 SC 530, this Court cautioned :”it is not proper to regard a word, clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment.” The above observations thus help us in interpretation of the decision in Sanjeev lal’s case.

Conclusion:
Agreement to sell in the literal as also in legal sense means, a contract or agreement to transfer property on agreed terms. It needs to be perceived as a contractual arrangement to be fulfilled in future. The taxability on transfer of property may not be guided by the agreement to sell. The verdict of Supreme Court needs to be interpreted being restricted to the question before it in light of the discussion above. However, the agreement to sell is an essential document to find out and determine the exact nature of property that is transferred and its chargeablity to capital gains.

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IVF Advisors Pvt. Ltd. vs. ACIT ITAT Mumbai `A’ Bench Before N. K. Billaiya (AM) and Amit Shukla (JM) ITA No. 4798 /Mum/2012 Assessment Year: 2009-10. Decided on: 13th February, 2015. Counsel for assessee/revenue: Kanchan Kaushal, Dhanesh Bafna and Ms. Chandni Shah/Azghar Zain

Section 43(5) – Derivatives include foreign
currency and call/put option are transactions of derivative markets and
cannot be termed as speculative in nature.

Facts:
The
assessee, an investment management consultant, filed its return of
income for assessment year 2009-10 returning a total income of Rs. Nil.
In the course of assessment proceedings, the Assessing Officer (AO)
noticed that the assessee has claimed a loss of Rs. 93,63,235 on account
of foreign currency futures. The AO disallowed the loss of Rs.
93,63,235 by considering it to be a speculative transaction in view of
the provisions of section 43(5) r.w.s. 2(ac) of the Securities Contracts
(Regulation) Act, 1956.

Aggrieved, the assessee preferred an
appeal to the CIT(A) who observed that the assessee is not in the
manufacturing and merchanting business, and is also not a dealer or
investor in stocks and shares and therefore the loss on foreign currency
futures is not in the nature of hedging loss and that such loss was not
incurred in the course of guarding against loss through future price
fluctuation in respect of contract for actual delivery of goods
manufactured or in respect of stock of shares entered into by a dealer.
He held that the provisions of clause (d) of the proviso to section
43(5) were not applicable. He, accordingly, confirmed the order passed
by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The
Tribunal considered the provisions of section 43(5) of the Act and
observed that clause (d) of the proviso to section 43(5) excludes the
transaction of trading in derivatives referred to in section 2(ac) of
the Securities Contracts (Regulation) Act, 1956 carried out on a
recognised stock exchange from the purview of the definition of the term
`speculative transaction’. Considering the definition of the term
`derivative’ in section 2(ac) of the Securities Contracts (Regulation)
Act, 1956, it observed that derivatives also includes securities. It
noted that the Madras High Court has in the case of Rajashree Sugar
& Chemicals Ltd. vs. Axis Bank Ltd. AIR (2011), Mad 144 has defined
the term derivative to include foreign currency as underlying security
of the derivative. It also noted the meaning of the term `derivative’ as
explained in the section `Frequently Asked Questions’ on the website of
SEBI. On going through the copies of the contract notes, it found that
the assessee had entered into either a call option or a put option and
on the settlement day, the transaction has been settled by delivery.
Either the assessee has paid US Dollar on the settlement day or has
taken delivery of the US Dollar.

The Tribunal held that there
remains no doubt that the transaction of the assessee cannot be treated
as a speculative transaction. Derivatives include foreign currency and
call/put option are transactions of derivative markets and cannot be
termed as speculative in nature. The Tribunal held that the transactions
entered into by the assessee were not speculative transaction and
therefore, the loss incurred had to be allowed.

The Tribunal allowed the appeal filed by the assessee.

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[2014] 151 ITD 490 (Delhi – Trib.) Soham For Kids Education Society Centre vs. DIT (Exemptions)

Section 12A, read with section 12AA – Mere non-carrying on of the vigorous activities of trust at the time of registration per se cannot be detrimental for registration of the trust u/s. 12A when the objects are charitable and there is no adverse comm ent about them.

FACTS
The assessee, a registered society, applied for registration u/s. 12AA.

The DIT (Exemption) mentioned that the provisions of section 12AA stipulates the following conditions for registration u/s. 12A of the Income-tax Act, 1961 :

(i) The objects of the society should be of charitable in nature;

(ii) The activities of the society should be genuine. The DIT (Exemption) noticed that life members and general members had not paid admission fee to assessee till date, the assessee had not been able to raise funds from public nor from amongst themselves and that no activities had been started yet by assessee.

The DIT (Exemption) thus observed that applicant had not done any charitable activity, and the genuineness of the activities could not be established. Therefore, one of the conditions for granting registration u/s. 12AA is also not satisfied.

Accordingly, the application filed by the applicant for grant of registration u/s. 12AA was rejected.

On appeal:

HELD
From the DIT (Exemptions)’s order, it emerges that no dispute has been raised about the charitable nature of the objectives of the trust as per the memorandum. The adverse inference has been drawn on possible intention, activities, i.e., the issues, which are not germane at the time of grant of registration of trust u/s. 12A , more so when the assessee’s objects are not held to be non-charitable.

Apropos the income and expenditure, it has been accepted by the assessee that it had created a website for the trust which also is one of the activities to promote the objects of the trust, the fact which is not denied by the DIT (Exemptions) or the Departmental representative. Therefore, the adverse inference has nothing to reflect on this aspect. Apropos time to raise the funds and donations it is the discretion of the society that can be undertaken in due course, may be the issue of section 80G registration which is consequent to section 12A registration may be important.

Thus mere non-carrying on of the vigorous activities of trust at the time of registration per se cannot be detrimental for registration of the trust u/s. 12A when the objects are charitable and there is no adverse comment about them.

Thus, the order of the DIT (Exemptions) is reversed and the assessee is held to be eligible for registration u/s. 12A.

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Capital gain or perquisite- Sections. 45 and 17(2) – A. Ys. 1998-99 and 2002-03 – Amount received by assessee on redemption of Stock Appreciation Rights received under ESOP was to be taxed as capital gain and not as perquisite u/s. 17(2)(iii) –

CIT vs. Bharat V. Patel; [2015] 54 taxmann.com 170 (Guj):

In the course of assessment, the Assessing Officer made addition to assessee’s income in respect of amount received on redemption of Stock Appreciation Rights received under ESOP as a perquisite u/s. 17(2)(iii). The Tribunal held that stock options were capital assets and gain therefrom was liable to capital gain tax.

On appeal by the Revenue the Gujarat High Court held as under:

“i) In the case of CIT vs. Infosys Technologies Ltd. [2008] 297 ITR 167/166 Taxman 204, it is held by the Supreme Court that the revenue had erred in treating amount being difference in market value of shares on the date of exercise of option and total amount ‘paid’ by employees consequent upon exercise of the said options as perquisite value as during the lock-in period there was no cash inflow to employees to foresee future market value of shares and the benefit if any which arose on date when option stood exercised was only a notional benefit whose value was unascertainable.

ii) In view of the above, the Tribunal was correct in treating the amount received on redemption of Stock Appreciation Rights as capital gain as against treated as perquisite u/s. 17(2)(iii) and in treating the amount received on exercising the option of Employee’s Stock Option Plan (EOSP) as long term capital gains instead of treating the same as short term capital gains.

iii) However, the Tribunal was not justified in holding that capital gain arose to the assessee on redemption of Stock Appreciation Rights which were having no cost of acquisition. Tax Appeals stand disposed of accordingly”

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Business expenditure – Section 37 – A. Y. 2009-10 – Business of selling mobile hand sets and other electronic items and accessories – Advertisement expenditure – Expenditure is revenue in nature – AO not justified in treating it as differed revenue expenditure

CIT vs. Spice Distribution Ltd.: 374 ITR 30 (Del):

The assessee
was trading in mobile hand sets, other electronic items and accessories.
For the purpose of business it had incurred expenditure of Rs.11,51,40,004 on advertisement. The Assessing Officer treated the
expenditure as deffered revenue expenditure and allowed 25% thereof
observing that the balance amount would be allowed in the next three
years. The Tribunal allowed the full claim.

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

“i)
In the previous assessment year 2008-09 the Tribunal in the case of the
assessee allowed the advertisement expenditure as the expenditure of
revenue in nature. No information was available whether the Revenue has
preferred an appeal against the findings recorded by the Tribunal in the
assessee’s case for the A.Y. 2008-09. The reasoning given by the
Tribunal deserved affirmation.

ii) The Tribunal had rightly held
that the Assessing Officer could not treat the revenue expenditure as
deferred revenue expenditure because the Act itself does not have any
concept of differed revenue expenditure. Even otherwise, advertisement
expenditure normally is and should be treated as revenue in nature
because advertisements do not have long lasting effect and once the
advertisements stop, the effect thereof on the general public and
customer would diminish and vanish soon thereafter. Advertisement
expense is a day-to-day expense incurred for running the business and
improving sales.

iii) Keeping in view the nature and character
of the assessee’s business, every year expenditure has to be incurred to
make and keep the public informed and remain in the limelight. It is an
expenditure of trading nature. Therefore, the order of the Tribunal did
not call for interference.”

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Agricultural Income-tax – Legislative Powers – Retrospective Legislation – The Legislature has powers to render the judicial decision in a case ineffective by enacting a valid law on a topic within the legislative field which fundamentally alters or change the character of legislation retrospectively. The changed or altered conditions are such that the previous decision would not have been rendered by the court if those conditions had existed at the time of declaring the law as invalid.

Asst. Commissioner of Agricultural Income-tax & Ors. vs. Netley “B” Estate and Ors. [2015] 372 ITR 590 (SC)

Before the Supreme Court the issue in a batch of appeals was whether the assessment of agricultural income received by a firm after it was dissolved in so far as the income of the firm pertained to actual cash receipts after the firm was dissolved but relating to income earned prior to dissolution.

The Supreme Court noted that in L.P. Cardoza vs. Agricultural ITO [1997] 227 ITR 421 (Karn.), the question involved was as to whether a dissolved firm could be assessed to agricultural income-tax after the date of its dissolution in respect of income received for supply of goods made by the firm prior to its dissolution. This question arose in the light of section 26(4) and section 27 as they then stood, that is, as they stood in 1987.

The Karnataka High Court had held that there was nothing in section 26(4), as it then stood or section 27, to indicate that where the firm is dissolved and income is received after dissolution in respect of agricultural produce supplied by the firm before dissolution, the firm itself could be assessed in the year of receipt of income notwithstanding its dissolution.

Faced with this decision of the Karnataka High Court, the Legislature amended section 26(4) retrospectively, that is, with effect from, 1st April, 1975. The amended provision as follows:

“26. (4) Where any business through which agricultural income is received by a company, firm or association of persons is discontinued or any such firm or association is dissolved in any year, any sum received after the discontinuance or dissolution shall be deemed to be income of the recipient and charged to tax accordingly in the year of receipt, if such would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance or dissolution.

Explanation – For the removal of doubts, it is hereby declared that where before the discontinuance of such business or dissolution of a firm or association hitherto assessed as a firm or association, or as the case may be, on the company, the crop is harvested and disposed of, but full payment has not been received for such crop, or the crop is harvested and not disposed of, the income from such crop shall, notwithstanding the discontinuance or dissolution be deemed to be the income of the company, firm or association for the year or years in which it is received or receivable and the firm or association shall be deemed to be in existence, for such year or years and such income shall be assessed as the income of the company, firm or association according to the method of accounting regulatory employed by it immediately before such discontinuance or dissolution.”

The said amendment was the subject matter of challenge before a learned single judge of the Karnataka High Court. The single judge repelled the challenge basically on the ground that the Explanation only clarified the main provision and, therefore, did not go beyond the main provision. Equally, since the Legislature has the right to amend both prospectively and retrospectively, all that was done in the present case was an exercise of the legislative power retrospectively and, therefore, no question arose of any discrimination on this count. The single judge, therefore, dismissed the writ petitions before him.

In appeal before the Division Bench, the Division Bench set out all the aforesaid provisions and ultimately found, following the judgment in D. Cawasji & Co. vs. State of Mysore [1984] (Suppl.) SCC 490/ 150 ITR 648, that the Amending Act of 1997 suffered from the vice that was found in Cawasji’s case, namely, that it interfered directly with the judgment of the High Court and would, therefore, have to be struck down as unconstitutional on this score alone. This the Division Bench found because, according to the Division Bench, in the Statement of Objects and Reasons for the 1997 amendment, it was held that the object of the amendment was to undo the judgment of the High Court of Karnataka in Cardoza’s case.

The Supreme Court was thus concerned with the validity of Explanation added retrospectively to section 26(4) of the Karnataka Agricultural Income-tax Act (hereinafter referred to as “the Act”).

The Supreme Court noticed that in the amended section 26(4), two changes were made. Whereas in the original provision, no express reference was made to companies or association of persons, and no reference whatsoever was made to a dissolved firm, both were added. By the Explanation, which is for the removal of doubts, he Legislature declared that where before dissolution of a firm, full payment was not received in respect of income that has been earned pre-dissolution, then notwithstanding such dissolution, the said income would be deemed to be the income of the firm in the year in which it was received or receivable and the firm would be deemed to be in existence for such year for the purposes of assessment. By this amendment, the basis of the law as it stood when Cardoza’s case was decided had been changed.

The Supreme Court held that all that had been done in the present case was to remove the basis of the law as it stood in 1987 which was interpreted in Cardoza’s case as leading to a particular result. All that the Legislature has done in the present case is to say that with effect from 1st April, 1975, dissolved firms will by legal fiction, continue to be assessed, for the purposes of levy and collection of agricultural income-tax, in so far as they receive income post-dissolution but relating to transactions pre-dissolution. In no manner has the Legislature in the present case sought to directly nullify the judgment in Cardoza’s case. All that had happened was that the legal foundation on which the Cardoza’s case was built was retrospectively removed, something which was well within the legislative competence of the Legislature.

The Supreme Court further held that the judicial decision in Cardoza’s case had been rendered ineffective by enacting a valid law on a topic within the legislative field which fundamentally alters or change the character of legislation retrospectively. The changed or altered conditions are such that the previous decision would not have been rendered by the court if those conditions had existed at the time of declaring the law as invalid. The Legislature had not directly overruled the decision of any court but has only rendered, as has been stated above, such decision ineffective by removing the basis on which the decision was arrived at.

The Supreme Court set aside the impugned judgment of the Division Bench of the High Court, and allowed the appeals.

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Charitable purpose- Section 2(15)- scope of proviso-

India Trade Promotion Organization vs.DGIT; [2015] 53 taxmann.com 404 (Delhi)

Considering the scope of proviso to section 2(15) of the Income-tax Act, 1961, the Delhi High Court has held as under:

“i) The correct interpretation of the proviso to section 2(15) of the Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen.

ii) If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a ‘charitable purpose’.

iii) On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes.”

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Capital or revenue expenditure- A. Y. 2000-01- One time lump sum payment for use of technology for a period of six years- Is licence fee for permitting assessee to use technology- Licence neither transferrable nor payment recoverable- No accretion to capital asset- No enduring benefit- Revenue expenditure:

Timken India Ltd. vs. CIT; 369 ITR 645 (Cal):

For the A. Y. 2000-01 the assessee had claimed that the lump sum payment made for acquiring technical knowhow for a period of six years as revenue expenditure. The Assessing Officer and the Tribunal held the expenditure is capital expenditure and therefore disallowed the claim..

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

“i) The fact was that the payment made by the assessee was on account of licence fee. By making such payment, the assessee had got permission to use the technology. The money paid was irrecoverable. If the business of the assessee stopped for some reason or the other, no benefit from such payment was likely to accrue to assessee.

ii) The licence was not transferrable. Therefore, it could not be said with any amount of certainty that there had been an accretion to the capital asset of the assessee. If the assessee continued to do business and continued to exploit the technology for the agreed period of time, the assessee would be entitled to take the benefit thereof. But if it did not do so, the payment made was irrecoverable.

iii) Therefore, the one-time lump sum payment made by the assessee for acquiring technical know-how for a period of six years was revenue expenditure.”

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Capital gain- Long term- Investment in capital gains bonds- Section 54EC- A. Ys. 2008-09 and 2009-10- Assessee is entitled to exemption in respect of investment of Rs. 50 lakh each in two different financial years within the time limit

CIT vs. C. Jaichander; 370 ITR 579 (Mad):

Assessee
sold a property for a consideration of Rs. 3,46,50,000/- and invested
Rs. 1 crore out of the sale proceeds in capital gains bonds in two
financial years 2007-08 and 2008-09 Rs. 50 lakh each within the
prescribed time limit of six months. For the A. Y. 2008- 09 the
Assessing Officer held that the assessee could take the benefit of
investment in specified bonds upto a maximum of Rs. 50 lakh only u/s.
54EC(1) of the Incometax Act, 1961. The Tribunal held that the exemption
granted under the proviso to section 54EC(1) should be construed not
transaction-wise but financial year-wise. If an assessee was able to
invest a sum of Rs. 50 lakh each in two different financial years,
within the period of six months from the dated of transfer of the
capital asset, it could not be said to be inadmissible. Accordingly, the
Tribunal allowed the assessee’s claim.

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

“The
assessee was entitled to exemption of Rs. 1 crore u/s. 54EC, in respect
of investment of Rs. 50 lakh each made in two different financial
years”

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Business expenditure- Section 37(1)- A. Ys. 2006-07 to 2008-09- Hire charges paid on plastic moulds could not be disallowed even if they were given to contract manufactures free of cost-

CIT vs. Tupperware India (P) Ltd. ; [2015] 53 taxmann. com 232 (Delhi)

Assessee had entered into agreements with Dart Manufacturing India Private Ltd (‘DMI’) and Innosoft Technology Ltd (‘ITL’) to manufacture products to be sold under its brand name. It had imported moulds on hire basis from overseas group companies. These moulds were given on ‘free of cost basis’ to DMI and ITL. The Assessing Officer relied upon the order of SetCom passed under the Central Excise Act, 1944, holding that manufacturing cost would include rent paid for the moulds. Accordingly, he disallowed expenditure on plastic moulds on the ground that it should have been claimed by DMI and ITL, who were contract manufacturers of the assessee. 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) How and in what context the finding recorded by the SetCom relating to valuation of good for levy of excise duty would be relevant for deciding whether rent paid for the moulds could be allowed as deduction u/s. 37(1)?

ii) The valuation or cost of manufacture would include cost of raw material as an expenditure but it would not mean that the assessee could not treat the price of raw material as an expenditure.

iii) In case the aforesaid two contract manufacturers had paid hire charges for the moulds, it would have resulted in increase in the purchase price in hands of assessee.

iv) Thus, assessee was entitled to deduction of hire charges paid for moulds. Disallowance made by Assessing Officer could not be sustained.”

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Business expenditure- Disallowance u/s. 40(a) (ia) r/w. s. 194H- A. Y. 2009-10- Bank providing swiping machine to assessee- Amount punched in swiping machine credited to account of retailer by bank- Bank providing banking services in form of payment and subsequently collection of payment- Bank does not act as agent- No obligation to deduct tax at source- Disallowance u/s. 40(a)(ia) is not warranted-

CIT vs. JDS Apparels P. Ltd; 370 ITR 454 (Del):

Assessee was engaged in the business of trading in garments. HDFC provided swiping machine to assessee. Amount punched in swiping machine credited to the account of retailer by bank. Bank providing banking services in form of payment and subsequently collecting payment. For the A. Y. 2009-10 the Assessing Officer held that the amount earned by the HDFC was in the nature of commission and should have been subjected to deduction of tax at source u/s. 194H of the Income-tax Act, 1961. Since tax was not deducted at source, he disallowed an amount of Rs. 44,65,654/- u/s. 40(a)(ia) of the Act. The Tribunal held that the assessee had not violated section 194H and accordingly the Tribunal deleted the addition.

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

“i) HDFC was not acting as an agent of the assessee. Once the payment was made by HDFC, it was received and credited to the account of the assessee. In the process a small fee was deducted by HDFC. HDFC realized and recovered the payment from the bank which had issued the credit card. HDFC had not undertaken any act on “behalf” of the assessee. The relationship between HDFC and the assessee was not of an agency but that of two independent parties on principal to principal basis. Therefore, section 194H would not be attracted.

ii) Another reason why section 40(a)(ia) should not have been invoked was the principle of doubtful penalisation which required strict construction of penal provisions. The principle requires that a person should not be subjected to any sort of detriment unless the obligation is clearly imposed. HDFC would necessarily have acted as per law and it was not the case of the Revenue that HDFC had not paid taxes on its income. It was not a case of a loss of revenue as such or a case where the recipient did not pay its taxes.

iii) We do not find any merit in the present appeal and the same is dismissed.”

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Block assessment- Assessment of third person: Section 158BD- Limitation- Notice to third person to be issued immediately after completion of assessment of persons in respect of whom search was conducted- Notice issued to third person more than a year after completion of assessments of persons in respect of whom search was conducted- Notice not valid-

CIT vs. Bharat Bhushan Jain; 370 ITR 695 (Del):

The respondent assessee is a third party who was issued notice u/s. 158BD, pursuant to search proceedings in case of M group. The satisfaction note was record almost a year after the assessment proceedings in the case of M group ware completed. The Tribunal held that notice u/s. 158BD was not valid.

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

“i) Revenue has to be vigilant in issuing notice to the third party u/s. 158BD, immediately after completion of assessment of the person in respect of whom search was conducted.

ii) Notice was not issued in conformity with the requirements of section 158BD and were unduly delayed. Tax appeal is dismissed.”

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Assessment- Amalgamation of companies- Sections 170, 176 and 292B- A. Ys. 2003-04 to 2008-09- Amalgamating company ceases to exist- After amalgamation assessment to be done on the amalgamated company- Order of assessment on amalgamating company is not valid-

CIT vs. Dimention Apparels P. Ltd; 370 ITR 288 (Del):

For the A. Ys. 2003-04 to 2008-09 the assessment was made in the name of the amalgamating company instead of the amalgamated company. The assessee contended that it had ceased to exist from 07-12-2009 by virtue of amalgamation with another company u/s. 391(2) and 394 of the Companies Act, 1956.However, the assessment orders were made. The Tribunal held that the assessment orders were not valid.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal dismissed the appeal and held that the orders of assessment were invalid.

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Reassessment – Full and true disclosure of materials facts – Supreme Court directed the Commissioner of Income Tax (Appeals) to decide the appeal without being influenced by the observation of the High Court that though the Assessing Officer enquired into the matter and the assessee having furnished the material still there was no full and true disclosure as the Assessing Officer had not applied his mind to a particular aspect of the issue.

Indian Hume Pipe Co. Ltd. vs. ACIT and Others. [SLP (Civil) No.5195 of 2012 dated 20-7-2012]

On July 13, 2001, the petitioner entered into memorandum of understanding with a third party, Dosti Associates, for the transfer of development rights in certain land for a consideration of Rs. 39 crore. Following this a development agreement was entered into on 31st October, 2001. Finally, a supplemental agreement was entered into on 15th December, 2003, by which in consideration of the total agreed of Rs. 39 crore paid by the developer to the petitioner, the petitioner recognised the acquisition by the developer of the absolute right to develop the property. Clause 5 of the agreement stipulated that with effect from 15th December, 2003, the developer had been placed in absolute and complete possession of the property. The petitioner filed a return of income for the assessment year 2004-05. In the computation of assessable income, profits on the sale of land amounting to Rs. 38.75 crore were considered separately.

The petitioner annexed a working of the taxable long-term capital gains. The total long-term capital gains were computed at Rs. 23.19 crore. The petitioner claimed an exemption u/s. 54EC of the Income-tax Act, 1961, stating that a total amount of Rs. 23.24 crore had been invested in specified bonds of the National Highway Authority of India (Rs. 2 crore), the Rural Electrification Corporation of India (Rs.14.44 crore) and the National Housing Bank (Rs. 6.80 crore). The computation of capital gains in the amount of Rs. 23.19 crore, as stated earlier, was based on the total consideration of Rs. 39 crore received for the sale of development rights under the conveyance executed on 31st December, 2003; from which an amount of Rs.15.80 crore was deducted representing the value of the land as on 1st April, 1981.

During the assessment proceedings, the Assessing Officer asked for a copy of the agreements with the purchaser and other details which the assessee furnished. A copy of each of the section 54EC bonds (which gave the dates of investments) was also furnished. The Assessing Officer passed an order of assessment u/s. 143(3) on 27th November, 2006 allowing the deduction as claimed.

A notice was issued to the Petitioner by the Assessing Officer after an audit query was raised on 4th June, 2007. As per the audit query the Petitioner was entitled to deduction u/s. 54EC only in respect of the amount of Rs. 6.80 crore which was invested within six months from the date of sale deed. The remaining amounts had been invested between 1st February, 2002 and 30th June, 2002, prior to date of transfer, that is, 15th December, 2003.

A notice for reopening assessment was issued on 29th March, 2011, u/s. 148. As per the reasons recorded deduction u/s. 54EC was not admissible on the investments made prior to the date of transfer.

The petitioner filed a Writ Petition to challenge the reopening on the ground that there was no failure on its part to make a full and true disclosure of material facts.

The High Court (348 ITR 439) held that the Petitioner, in the return of income that was originally filed, submitted a computation of taxable long-term capital gains. After computing the long-term capital gains at Rs. 23.19 crore, the Petitioner sought to deduct therefrom an amount of Rs. 23.24 crore investment u/s. 54EC. The statement, however, was silent on the date on which the amounts were invested. The Asessing Officer did during the course of the assessment proceedings raise a query on 14th July, 2006, seeking an explanation of an amount of Rs. 38.75 crore credited from the sale of certain property. The Assessing Officer called upon the Petitioner to furnish a copy of the sale deed together with the details of the property sold; valuation reports for determination of the fair market value as on 1st April, 1981, and a detailed working of capital gains arising out of the sale of the property. The Petitioner disclosed the sale agreements and furnished a working of capital gains which was in terms of what was submitted with the return of income. The High Court noted that, neither in the return of income nor in the disclosures that were made in response to the query of the Assessing Officer did the Petitioner make any reference to the dates on which amounts were invested in bonds of the National Highway Authority of India, Rural Electrification Corporation of India and National Housing Bank. The petitioner did enclose copies of the certificates which did bear the date of allotment. According to the High Court it was evident that the Assessing Officer had clearly not applied his mind to the question as to whether the petitioner had fulfilled the conditions specified in section 54EC for availing of an exemption. Also, the petitioner was required to make a full and true disclosure of materials facts which did not appear either from the computation of taxable long-term capital gains in the original return of income or in the computation that was submitted in response to the query of the Assessing Officer. In both the sets of computation there was a complete silence in regard to the dates on which the amounts were invested. The assessment order did not deal with this aspect. In the circumstances, the High Court held that there was no full and proper disclosure by the petitioner of all the material facts necessary for the assessment.

The Petitioner challenged the order of the High Court before the Supreme Court but later the learned counsel for the petitioner sought permission to withdraw the Special Leave Petition in view of the fact that petitioner’s appeal, bearing No. IT No.63/2012-2013 was pending before Commissioner of Income Tax (Appeals) against the Order of re-assessment dated 29th May, 2012. The Supreme Court while permitting the Petitioner to do so, however, clarified that on the issue of validity of Notice u/s. 148 of the Income-tax Act, 1961, it would be open to the petitioner as well as Department to put forth their respective contentions before the Appellate Authority and the Appellate Authority would decide this issue also along with other issues without being influenced by the observation made by the High Court in the its order.

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Jewellery & Ornaments – Acceptable holdings

Issue for Consideration
Instruction No. 1916 (F.No. 286/63/93-IT(INV.II), dated 11-5-1994, issued by the Central Board of Direct Taxes (‘CBDT’) directs the income tax authorities, conducting a search, to not seize jewellery and ornaments found during the course of search of varying quantities specified in the instructions, depending upon the marital status and the gender of a person searched. The guidelines are issued to address the instances of seizure of jewellery of small quantity in the course of search operations u/s. 132 that have been noticed by the CBDT. A common approach is suggested in situations where search parties come across items of jewellery for strict compliance by the authorities. The CBDT directed 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.

The High Courts, under the circumstances, relying on the above referred instructions of the CBDT, has consistently held that the possession of the jewellery and ornaments to the extent of the quantities specified in the instruction is to be treated as reasonable and therefore explained and should not be the subject matter of additions in assessment of the total income of a person. Recently the Madras High Court has sounded a slightly discordant note to this otherwise rational view accepted by various high courts.

Satya Narain Patni’s case
The issue, in the recent past had come up for the consideration of the Rajasthan High Court in the case of CIT vs. Satya Naraain Patni, 46 taxmann.com 440 .

A search u/s. 132 was carried out at the business and residential premises of the assessee on 30-06-2004. During the course of search, gold jewellery weighing 2,202.464 gms. valued at Rs.10,53,520/- and silver items valued at Rs.93,678/- were found. Looking to the status of the assessee and the statement given during the course of the 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 by the authorised officer.

In assessment of the income, however, the jewellery to the extent of 1,600 gms was treated as reasonable by the AO. The balance jewellery weighing 602.464 gms was treated as unexplained in the absence of any satisfactory explanation from the assessee and the value of the same which was determined at Rs. 2,88,176/-, was added back to the income of the assessee, treating the same as purchased out of Income from undisclosed sources of the assessee. In an appeal by the assessee, the Commissioner(Appeals), deleted the additions made by the AO of the value of the jewellery to the tune of Rs. 2,88,176/-. The Tribunal, on appreciation of facts and evidence available on record, also confirmed the order of CIT (A).

The Revenue, in the appeal before the Rajasthan High Court, contended that the AO had given due credit for the jewellery belonging to the various family members; that almost 75% of the jewellery found was treated as explained by the AO himself; only where the assessee or family members were not in a position to explain the balance jewellery, the addition was made; that the assessee or/and other family members were not in a position to adequately explain the source of receipt of aforesaid jewellery and it was the duty of the assessee to lead proper evidence, but since no evidence was led, the AO after giving due credit for 1,600 gms. of jewellery, and being not satisfied with the balance, made the addition which was correct and justified; that the circular of the Board referred to by the tribunal dated 11-05-1994, simply laid down that in case a person was not assessed to wealth tax, then in that case, 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, but that did not mean that the AO was debarred from questioning the possession of the items found; that the circular emphasised only that jewellery would not be seized. However, the AO was duty bound to seek explanation of owning and possessing of such jewellery. The Rajasthan High Court, on due consideration of the facts of the case. and importantly, relying on the Instruction No. 1916 of the CBDT, dismissed the appeal of the Income tax Department by holding as under;

“12. It is true that the circular of the CBDT, referred to supra dt. 11/05/1994 only refers to the jewellery 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 and it does not speak about the questioning of the said jewellery from the person who has been found with possession of the said jewellery. However, the Board, looking to the Indian customs and traditions, has fairly expressed that jewellery to the said extent will not be seized and once the Board is also of the express opinion that the said jewellery cannot be seized, it should normally mean that any jewellery, found in possesion of a married lady to the extent of 500 gms, 250 gms per unmarried lady and 100 gms per male member of the family will also not be questioned about its source and acquisition. We can take notice of the fact that at the time of wedding, the daughter/ daughter-in-law receives gold ornaments jewellery and other goods not only from parental side but in-laws side as well at the time of ‘Vidai’ (farewell) or/and at the time when the daughter-in-law enters the house of her husband. We can also take notice of the fact that thereafter also, she continues to receive some small items by various other close friends and relatives of both the sides as well as on the auspicious occasion of birth of a child whether male or female and the CBDT, looking to such customs prevailing throughout India, in one way or the another, came out with this Circular and we accordingly are of the firm opinion that it should also mean that to the extent of the aforesaid jewellery, found in possession of the various persons, even source cannot be questioned. It is certainly ‘Stridhan’ of the woman and normally no question at least to the said extent can be made. However, if the authorized officers or/and the Assessing Officers, find jewellery beyond the said weight, then certainly they can question the source of acquisition of the jewellery and also in appropriate cases, if no proper explanation has been offered, can treat the jewellery beyond the said limit as unexplained investment of the person with whom the said jewellery has been found.”

The High Court noted that, looking to the status of the family and the jewellery found in possession of four ladies, the quantum of jewellery was held to be reasonable and therefore, the authorised officers, in the first instance, did not seize the said jewellery as the same was within the tolerable limit or the limits prescribed by the Board. Thus, in the view of the court, subsequent addition was held to be not justified and was thus rightly deleted by both the two appellate authorities, namely, Commissioner(Appeals) as well as the tribunal.

V. G. P. Ravidas’ case
The Madras High Court very recently in the case of V.G.P. Ravidas vs. ACIT, 51 taxmann.com 16, offered certain observations that are found to be inconsistent with the near unanimous view of the High Court that the possession of the jewellery and ornaments, to the extent of the quantities specified by the CBDT, should be held to be explained.

In this case, the assessees filed the original return of income for the assessment year 2009-2010 on 30-09- 2009. The Assessing Officer, pursuant to a search u/s. 132, reopened the assessment and a reassessment was completed by him on 29-12-2010. The ao in so assessing the income, treated excess gold jewellery found and seized, of 242.200 gms. and 331.700 gms. respectively, as the unexplained income.

The assessees appeals before the Commissioner (Appeals), were dismissed. The Tribunal confirmed the order passed by the Commissioner (appeals). In the appeal before the High Court, the short question that arose for consideration was whether the assessees in both the cases were entitled to plead that the quantum of excess gold jewellery seized did not warrant inclusion in the income of the assessees as unexplained investment in the light of the Board instruction no.1916 [F.no.286/63/93-it (INV.II)], dated 11-05-1994.

the madras high Court while dismissing the appeals, on the facts of the case before it, inter alia observed in paragraph 10 of its order as under;

“10. The Board Instruction dated 11.5.1994 stipulates the circumstances under which excess gold jewellery or ornaments could be seized and where it need not be seized. It does not state that it should not be treated as unexplained investment in jewellery. In this case, “

The high Court also approved the observations of the Commissioner(appeals) in paragraph 8 of its order as follows;

“8. The Commissioner of Income Tax (Appeals) as well as the Tribunal came to hold that since there was no explanation offered by the assessees before the Assessing Officer or Commissioner of Income Tax (Appeals) or Tribunal, their mere placing reliance on the Board Instruction No. 1916 [F.No.286/63/93-IT (INV.II)], dated 11.5.1994 will be no avail. In fact, the Commissioner of Income Tax (Appeals) has correctly held that the Board Instruction does not make allowance in calculation of unexplained jewellery and it only states 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. Whereas, “

Observations
The observations of the madras high Court, in paragraphs 8 and 10 of the its order in the case of V. G. P. Ravidas, suggest that the instruction no. 1916 has a limited application and should be applied by the search authorities in deciding whether the jewellery & ornaments found during the search to the extent of the specified quantities be seized or not. the court appears to be suggesting that the scope of the instructions is not extended to the assessment of income and an assessee therefore cannot simply rely on the said instructions to plead that the possession of the jewellery to the extent of the specified quantity be treated as explained. An outcome of the observations of the High Court, is that an assessee is required to explain the possession of the jewellery in assessment of the income to the satisfaction of the ao independent of the fact that the jewellery was not seized and has to lead evidences in support of its possession though for the purposes of seizure, its possession was found to be reasonable by the search authorities.

Nothing can highlight the conflict better than the interpretation sought to be placed by the two different authorities of the income tax department. one of them, the search authority, does not seize the jewellery on the understanding that the possession thereof within the specified quantities is reasonable in the context of customs and practises prevailing in india while the another of them, the assessing authority, does not accept the possession as reasonable and puts the assessee to the onus of explaining the possession of the jewellery found to his satisfaction and failing which he proceeds to add the value thereof to his total income.

The conflicting stand of the authorities belonging to the different departments of the same set up also highlights the pursuit of petty aims ignoring the larger interest of administration of justice by adopting a highly technical approach, best avoided in implementing the revenue laws.

The Gujarat High Court in CIT vs. Ratanlal Vyaparilal Jain, the allahabad high Court in Ghanshyam Das Johri’s case, 41 taxmann.com 295 and the Rajasthan High Court in yet another case, Kailash Chand Sharma 198 CTR 271 have consistently held that the possession of the jewellery of the quantities specified in the instruction issued by the CBDT is reasonable and therefore should be held to be explained in the hands of asesseee and should not be the subject matter of addition by the ao on the ground that the asseseee was unable to explain the possession thereof to his satisfaction.

The Rajasthan High Court in Patni’s case and the other high Courts before it, rightly noted that considering the practices and the customs prevailing in india of gifting and acquisition of jewellery and ornaments since birth and even before birth, it is not only common but is reasonable for an Indian to possess the jewellery of the specified quantity. The question of applying another yardstick for determining the reasonability in assessment does not arise at all.

The CBDT in fact a goes a step further in its human approach to the issue under consideration, in paragraph
(iii) of the said instructions, when it permits the search party to not seize even such jewellery that has been found to be excess of the specified quantities in paragraph(ii) where the search authorities are satisfied that depending upon the status of the family and community customs and practices, the possession of such jewellery was reasonable. The said paragraph reproduced here clearly settles the issue in favour of accepting what has not been seized as duly explained for the purposes of assessment as well.

“(iii) The authorized officer may, having regard to the status of the family, and the custom and practices of the community to which the family belongs and other circumstances of the case, decide to exclude a larger quantity of jewellery and ornaments from seizure. This should be reported to the director of income tax/Commissioner authorising the search at the time of furnishing the search report.”

This grace of the CBDT clearly confirms that the search authorities do make a spot assessment of the reasonability of possession. It is therefore highly improper, on a later day, for the assessing authority, to take a dim view of the reasonability. It is befitting that the AO allows the grace to percolate downstream to the case of assessment, as well.

shailesh.kwebmaker

Domestic Transfer Pricing

1. Introduction
The Domestic Transfer Pricing Regulations were introduced in India by the Finance Act, 2012 with effect from the Assessment Year 2013-14. The amendment has been brought in basically by amending Chapter X of the Income-tax Act, 1961 (“the Act”) whereby the applicability of the international transfer pricing provisions has been extended to certain domestic transactions between specified related parties referred to as the ‘Specified Domestic Transactions’ (“SDTs”). Corresponding amendments have also been brought in the specific provisions of the Act – i.e. sections 40A(2), 80A(6), 80IA(8) and 80IA(10). Thus, with effect from the Financial Year 2012-13, the SDTs are subject to the transfer pricing provisions, which hitherto, were applicable only to international transactions and accordingly, a new concept of ‘Domestic Transfer Pricing’ (“DTP”) has been introduced in India. The DTP regulations essentially provide for a mechanism to determine the arm’s length price (ALP) in cases of SDTs, require the assessees to maintain information and documents supporting the ALP of such transactions as also obtain and file an accountant’s report in respect of such transactions along with the return of income. The DTP regulation does not apply to small assessees, since a monetary limit of Rs. 5 crores has been set in respect of the SDTs for the DTP provisions to apply.

1.2. Hence, an assessee who undertakes SDTs during a financial year, aggregating in value by more than Rs. 5 crore, would require to comply with the following:

ensure that the value of such transactions is at arm’s length price having regard to the methods prescribed under the Act;

maintain and keep information and documents in relation to such transactions as statutorily required;

obtain and file an accountant’s report in respect of such transactions along with his return of income.

1.3. Genesis of the DTP provisions is the decision of the Supreme Court in the case of CIT vs. GlaxoSmithkline Asia P. Ltd. (2010) 195 Taxman 35 (SC). The Apex Court gave suggestions, in order to “reduce litigation” to consider amendments in the law with a view to:

Make it compulsory for the tax payer to maintain books and documentation on the lines of Rule 10D;

Obtain audit report from a CA;

Reflect the transactions between related entities at arms’ length price;

Apply the generally accepted methods specified in TP regulations.

1.6. T he above suggestions have been duly carried out by the legislature. The Explanatory Memorandum (“EM”) clearly recognises the suggestions of the Supreme Court. It talks about extending the TP provisions “for the purposes of section 40A, Chapter VI-A and section 10AA”. The EM states the objective to amend the Act is to provide applicability of the transfer pricing regulations to domestic transaction “for the purposes of” computation of income, disallowance of expenses, etc. “as required under provisions of sections 40A, 80- IA, 10AA, 80A, sections where reference is made to section 80-IA, or to transactions as may be prescribed by the Board…”. The relevant extract of the EM reads as under:

“the application and extension of scope of transfer pricing regulations to domestic transactions would provide objectivity in determination of income from domestic related party transactions and determination of reasonableness of expenditure between related domestic parties. It will create legally enforceable obligation on assessees to maintain proper documentation”….Therefore, the transfer pricing regulations need to be extended to the transactions entered into by domestic related parties or by an undertaking with other undertakings of the same entity for the purposes of section 40A, Chapter VI-A and section 10AA.” (emphasis supplied)

1.7. T he fundamental propositions that emerge out of this analysis are:

a. DTP provisions are computation provisions and are neither charging provisions nor disallowance provisions;
b. DTP provisions have limited applicability to specified provisions of the Act;
c. DTP provisions, in addition to governing computation, impose administrative obligation of maintaining documentations and getting accounts audited.

2. Meaning of SDT

1.1. Section 92BA of the Act defines the term ‘Specified Domestic Transactions’ in an exhaustive manner. It basically refers to the following transactions:

a. Any expenditure in respect of which payment has been made or is to be made to a person referred to in section 40A(2)(b);

b. Any transaction referred to in section 80A; c. A ny transfer of goods or services referred to in section 80-IA(8); d. A ny business transacted between the assessee and other person as referred to in section 80- IA(10);

e. Any transaction referred to in any other section under Chapter VIA to which provisions of section 80 IA(8)/(10) are applicable;

f. Any transaction referred to in section 10AA to which provisions of section 80-IA(8)/(10) are applicable; where the aggregate value of such transactions in a previous year exceeds Rs. 5 crore.

1.2. T he definition starts with the phrase “for the purposes of this section and sections 92, 92C, 92D and 92E”. Thus, ordinarily, this meaning of SDT will not be extended to any other provision of the Act. However, the term SDT is referred to in the proviso to sections 40A(2), clause (iii) of the Explanation to section 80A(6), Explanation to section 80IA(8) and the proviso to section 80IA(10). It is nothing but incorporation by reference and since these sections refer to this phrase as understood within the meaning of section 92BA, its meaning for the purposes of those sections will have to be understood as given in section 92BA.

1.3. Further, the definition excludes “an international transaction” from the scope of the term SDT. Hence, “international transaction” and “specified domestic transactions” are two mutually exclusive concepts. As a corollary, a single transaction would not be subject to both International Transfer Pricing regulations and DTP regulations. It can be subject to only one of the two regulations.

1.4. Further, the word “domestic” in the expression “specified domestic transactions” is a bit misleading, since a specified domestic transactions may be a transaction within the domestic territory of India or it may also be a cross border transaction between parties who are not “associated enterprises” as defined u/s. 92A but are covered within the scope of the specific sections included in various clauses of section 92BA. For example, take a transaction of payment of an expenditure by an Indian company to its foreign shareholder holding, say, 25% shares in the said Indian company. Since the shareholding is less than 26%, the parties will not be related as associated enterprises within the meaning of section 92A. However, since the shareholding of more than 20% amounts to “substantial interest” within the meaning of section 40A(2)1 , the transaction will qualify as a SDT.

1.5. T o constitute SDT, the value of all the transactions referred to in the definition entered into by an assessee in a previous year should exceed Rs. 5 crore. As per the EM of the Finance Bill, 2012, such monetary limit has been prescribed with a view to provide relaxation to small assessees from the requirements of the DTP regulations, such as maintenance of documents, filing of accountant’s report, etc. The monetary limit of Rs. 5 crore is applicable with respect to the aggregate value of all the transactions and not individual transactions. Hence, where several transactions of less than Rs. 5 crore sum up to the total of more than Rs. 5 crore, all such transactions would be regarded as SDTs, even though their individual value is less than Rs. 5 crore.
1.6. It is not specified in the definition as to what value has to be considered while computing the aggregate value of the transactions i.e. is it the arm’s length price or the actual price of the transactions that needs to be considered. however, since the monetary limit has been prescribed to determine whether the ALP of the transactions have to be computed or not, logically, the monetary limit would have to computed having regard to the actual recorded value of the transactions.

1.7. Further, where the transactions referred to in the definition cover both income as well as expense items, both the receipt as well as outflow from the transactions would be required to be aggregated for testing the monetary limit. in other words, both income side and expense side of the transactions referred to in the definition would need to be aggregated to test whether the monetary limit of Rs. 5 crore has been exceeded or not. However, while deciding as to whether the income or the expense item has to be added up or not, it should be first ascertained as to whether such item is covered within the definition or not. For example, transaction referred to in clause
(i) Of section 92BA is ‘any expenditure…..’. hence, in such cases, only expense items would need to be considered.

1.8. Cases may arise where the same transaction falls in more than one clauses of section 92Ba. For example, transfer of goods and services between two units would fall both within clauses (ii) and (iii) of section 92Ba. Similarly, purchase of goods from a person specified u/s. 40a(2)(b) for the purpose of an eligible unit may fall within clauses (i) as well as clause (iv) of section 92Ba, which refers to transactions referred to in section 80ia(10). In such cases, it has not been clarified as to whether such transactions should be considered twice for determining the aggregate value. However, since the section requires to aggregate the value of the transactions ‘entered into’ by the assessee, a single transaction cannot be considered twice, for the purpose of determining the sum total.

1.9. Further, consider a case of a company getting converted into a LLP with effect from, say, october 1, 2014. it borrowed monies from a party covered u/s. 40a(2). interest cost for the period april 1, 2014 to September 30, 2014 is rs. 1.5 crores and for the period october 1,2014 to march 31, 2015 is rs. 4.5 crore. there are no other transactions falling under any of the clauses of section 92BA. A question that arises is as to whether for determining the applicability of the provisions of Chapter X, should the aggregate interest expense of the two periods be considered or whether the interest expense of the two periods on a stand-alone basis should be considered.

1.10. One view is that upon conversion of a company into LLP, new assessee comes into existence. the company is succeeded by the LLP. For the period from april to September 2014, the company would file its return of income and for the period october 2014 to march 2015, the LLP would file a separate return of income. Section 170(1) of the act provides that where a person carrying on any business or profession (such person hereinafter in this section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as the successor) who continues to carry on that business or profession,—
(a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession;(b) the successor shall be assessed in respect of the income of the previous year after the date of succession. hence, the threshold should be considered separately for both the assessees.

1.11. The other view is also possible. it proceeds on the following lines :

Section 92Ba refers to the aggregate of such transactions entered into by the “assessee” ;

the word “assessee” would include even its predecessor, in the view of the decision of the Supreme Court in the case of CIT vs. T. Veerbhadra Rao (155 ITR 152) (SC).

the case was concerning section 36(2) which requires that for allowing deduction in respect of a bad debt, such debt should have been taken into account in computing the income of the “assessee” and the Supreme Court held that debt if the predecessor had taken that debt into account in computing its income, the successor would be eligible for claiming bad debts if it writes off such debt in its Profit and Loss account.

thus a combined total ought to be taken of the predecessor and successor with a view to apply threshold of rs. 5 crore.

1.12.   Personally, the auditors prefer the first mentioned view. however, having regard to the general adversarial approach of the tax department, it may be safer to go by the second view and ensure compliance   of   the   transfer   Pricing   Provisions anyway.

3.   DTP in relation to section 40A(2)
3.1.   Clause (i) of section 92B, which defines Sdt, refers to any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of section 40a(2). Section 40a(2) is    a computation provision, providing for disallowance of an expenditure incurred in a transaction entered into with specified persons, subject to satisfaction of other conditions mentioned in that section. Under this section, such expenditure is disallowed if it is considered as excessive or unreasonable having regard to the following:

–   the fair market value of the goods, services or facilities for which the payment is made; or
–   the legitimate needs of the business or profession of the assessee; or
–   the benefits derived by or accruing to him therefrom.

3.2. The said three conditions are separated by the conjunction ‘or’, which indicates that all the three circumstances need not exist simultaneously and that these requirements are independent and alternative to each other. Further, in respect of the first condition that the expenditure incurred should be at fair market value, the Finance act, 2012 has inserted a new proviso to section 40a(2)(a) with effect from assessment year 2013-14, which reads as under:

“Provided that no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm’s length price as defined in clause (ii) of section 92F.”

3.3. This amendment is consequential to the introduction of the dtP regulations in the act. hence, post amendment, the reasonableness of an expenditure in respect of a SDT needs to be ascertained based on the transfer pricing methods prescribed in Chapter X of the act. Further, the assessee also needs to maintain proper documents to demonstrate that the transactions are entered into on arm’s length basis.

3.4. The said clause refers only to “expenditure”. hence, items of income are not covered for the purpose of this clause. Therefore, the section applies only to an assessee who has incurred the expenditure and not the assessee who has earned the income in the very same transaction.

3.5. Further, though it refers to ‘any’ expenditure in respect of which payment has been made or is to be made to a person referred to in section 40a(2) (b), it does not cover such expenditure, which is not claimed as deduction by the assessee while computing its income under the head ‘Profits or Gains from Business or Profession’. in other words, it does not cover expenditure of, say, capital nature or say, claimed as deduction while computing “income from house property”, since the scope of section 40a(2)(b) is restricted only to compute “Profits and Gains from Business or Profession”. this is also clear from the em of the Finance Bill, 2012, which clearly states that the dtP provisions have been introduced ‘for the purpose of’ section 40a(2), etc. hence, clause (i) of section 92Ba cannot be applied for purpose other than for section 40a(2). the only exception to the above would be computation of income under the head “income for other Sources”, since section 58(2) of the act, imports the provisions of section 40a(2) for the purpose of computation of income under that head.

3.6. Clause (b) of section 40a(2) provides for an exhaustive list of persons for various kinds of assessees. hence, where any transaction involving an expenditure is entered into with such specified persons, and such expenditure is deductible while computing the income under the “Profits or Gains from Business or Profession” or “income from other Sources”, it would automatically fall within clause (i) of section 92Ba.

4. DTP in relation to section 80A/80IA(8):
4.1. Clauses (ii) and (iii) of section 92Ba refers to transactions referred to in sections 80a(6) and 80ia(8), respectively. Both these sections contain provisions for computation of the eligible profits claimed as deduction under the sections specified therein having regard to the market value, in a case where there has been transfer of goods or services to or from the eligible undertaking/unit/enterprise/ business of an assessee from or to other business of the assessee. Further, the Explanation to these sections has been amended by the Finance act, 2012, providing that where such transfer of goods or services is regarded as an Sdt, the market value of the goods or services would mean the ALP as defined under section 92F(ii).

4.2. The transaction referred to in section 80a(6)/80ia(8) is inter-unit transfer of goods or services. hence, the transaction referred to in these sections is internal transfer of goods and services as against transaction between two persons. Hence, transfers within separate businesses of an assessee covered under these sections would also need to be considered and aggregated for the purpose of determining the monetary limit of Rs. 5 crore u/s. 92Ba. Further, unlike clause (i) of section 92BA, it would cover both items of income as well as expenses. however, where a transaction is covered under both section 80a(6) and section 80ia(8), it would be considered only once for the purpose of finding the aggregate total.

4.3. However, mere allocation of common costs between several units/businesses of the assessee would not be covered under these sections. the said sections provides that the profits of an eligible business shall be determined based on the market value of the goods and services, where such goods or services have been ‘transferred’ by such unit to ‘any other business’ or vice versa and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer. hence, u/s. 92Ba r.w.s. 80a(6)/80ia(8), the transfer pricing provisions have been applied to a particular unit of the assessee, whose profit is to be determined based on arm’s length principles only in certain specified scenarios, the same being:

a.   there should be inter-unit ‘transfer’ of goods or services;
b.   Such transfer should be to/from any other ‘business’ of the assessee; and
c.   Such transfer should be at a consideration that does not correspond to the market value.

4.4. In case of common expenses, such as managerial remuneration, general administrative expenses or research, marketing and finance expenses, etc., it may be noticed that they are not ‘transferred’ by any one unit of the assessee to another unit. Further, such activities may qualify as “services”, the same cannot be regarded as another “business” of the assessee. Hence, it may not be strictly covered u/s. 80ia(8), implying that such common cost need not be allocated to the eligible unit on an arm’s length basis.

4.5.   However, attention may be brought to sub-section (5) of section 80IA, which requires that the profits of the undertaking claiming deduction under section 80ia should be computed as if the undertaking is the only source of income of the assessee. in view of this provision, Courts have held that the essence of the phrase ‘as if such eligible business was the only source of income’ used in the said sub-section (5) is that the expenses of the business, whether direct or indirect; project-specific or common expenses, had to be considered and allocated for computation of the profits and gains of an eligible business. See:
    Nitco Tiles Ltd. vs. Deputy Commissioner of Income-tax [2009] 30 SOT 474 (MUM.);
    Kewal Kiran Clothing Ltd., Mumbai vs. Assessee ITA No. 44/Mum/2009;
    Control & Switchgear Co. Ltd. vs. Deputy Commissioner Of Income Tax;
    Nahar Spinning Mills Ltd. vs. Joint Commissioner of Income-tax, Range VII, Ludhiana [2012] 54 SOT 134 (CHD)(URO):[2012] 25 taxmann.com 342 (Chd.);
    Synco Industries Ltd. vs. Assessing Officer of Income-tax [2002] 254 ITR 608 (Bom)

4.6. Hence, the common costs do need to be allocated to the eligible unit u/s. 80ia(5). however, such allocation is not required u/s. 80IA(8) or section 80a(6), since these provisions apply only when there is a ‘transfer’ of goods and services from an eligible ‘business’ to another or vice versa. Hence, the pre-requisite for invoking these provisions is that goods or services should be ‘transferred’ from one unit to another. in absence of any transfer, this provision would not be triggered. Indeed, when there is no transfer, no price would be regarded for any transfer of goods in the books of the eligible unit and hence, there would be no occasion to examine as to whether such price adopted by the eligible unit is as per the market value of such goods or not.

4.7. In this context, attention may be invited to the decision in Cadila Healthcare Ltd. vs. Additional Commissioner of Income-tax, Range – I, [2013] 56 SOT 89 (Ahmedabad – Trib.). In that case, the assessee was carrying out only one manufacturing business that was eligible for deduction under section 80iC. Hence, it carried out both manufacturing and selling and distribution activity as a part of one single business. The issue arose before the tribunal as to whether such manufacturing and distribution businesses need to be segregated and a notional transfer of goods from the manufacturing business to the selling business needs to be assumed for determine the profits of the manufacturing business.

4.8. It was held that for applying this provision, one cannot assume an artificial or notional transfer of good or services between the units. Section 80iC(7) read with section 80IA(8) does not require that eligible profit should be computed first by transferring the product at an imaginary sale price to the head office and then the head office should sell the product in the open market. in that case, the ao had suggested two things; first that there must be inter-corporate transfer, and second that the transfer should be as per the market price determined by the ao. it was held that both these suggestions are not practicable. If these two suggestions are to be implemented, then a Pandora box shall be opened in respect of the determination of arm’s length price vis-a-vis a fair market and then to arrive at reasonable profit. rather a very complex situation shall emerge. Specially when the Statute does not subscribe such deemed inter-corporate transfer but subscribe actual earning of profit, then the impugned suggestion of the ao does not have legal sanctity in the eyes of law. When the method of accounting as applicable under the Statute, does not suggest such segregation or bifurcation, then it is not fair to draw an imaginary line to compute a separate profit of the eligible unit. it was held that there is no such concept of segregation of profit. rather, the profit of an undertaking for section 80ia deduction purposes should be computed as a whole by taking into account the sale price of the product in the market. If the Statute wanted to draw such line of segregation between the manufacturing activity and the sale activity, then the Statute should have made a specific provision of such demarcation. But at present the legal status is that the Statute does not do so.

4.9. Thus, this provision cannot be invoked by the revenue authorities for allocating the common expenses of the assessee to the eligible business of the assessee. For example, allocation of the expenditure incurred on managerial remuneration to an eligible unit, which was debited to another non-eligible unit by the assessee, was held in Nahar Spinning Mills Ltd. vs. Joint Commissioner of Income-tax, Range VII, Ludhiana [2012] 54 SOT 134 (CHD)(URO) to be not covered u/s. 80ia(8), in absence of any transfer of goods or services between the two units. Indeed, managerial services would qualify as “services”. Also, managerial services is not the “business” of an assessee. These provisions apply when the goods and services held for an eligible business are transferred to other business or vice-versa. Therefore, these provisions do not apply to such allocation of expenses

4.10. Further under 80ia(5), the common cost needs to be only allocated i.e. apportioned between various eligible units on actual basis without adding any notional mark-up. had section 80ia(8) applied, then a mark-up would have been added, since in that case, it would have been regarded as transfer of goods and services by one unit to another, and as per the arm’s length principle, such transfer would have been made not at cost but at a price, which obviously includes mark – up.

4.11. Besides, reference may also be made to sections 92(2a) and 92(2) of the act. Section 92(2a) provides that allocation of any cost or expense in relation to the Sdt shall be computed having regard to the ALP. Similarly, section 92(2) provides that where in a Sdt, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the ALP of such benefit, service or facility, as the case may be.

4.12. As would be observed, though these sections deal with computation of allocation of cost/expense having regard to ALP, such allocation should be in respect of a transaction, which is a SdT. In other words, the allocation should be in respect of a transactions referred to in sections 40a(2), 80a(6), 80ia(8), 80ia(10) for the purposes of those sections. as stated earlier, the allocation of common cost between units of an assessee is not a transaction covered u/s. 80a(6)/80(8). Further, sections 80ia(10) and 40a(2) are totally inapplicable for the purpose of such allocation. Accordingly, since there is no Sdt at the first place, the question of applying section 92(2) or section 92(2a) would not apply.

4.13. Also, as far as section 92(2) is concerned, it applies only in respect of Sdt between two ‘associated enterprises’. Clearly, two units of same assessee cannot be regarded as ‘associated enterprises’ as defined u/s. 92a of the act. though sub-clause (ii) of clause (a) of rule 10a, defines the term ‘associated enterprise’, in relation to Sdt entered into by an assessee to include “other units or undertakings or businesses of such assessee in respect of a transaction referred to in section 80a or, as the case may be, sub-section (8) of section 80ia”, the said definition is applicable only for the purposes of the rules and cannot be imported for the purpose of section 92(2). Hence, even u/s. 92(2)/(2a), the transfer pricing methods need not be applied in allocating the common expenses to the eligible unit.

4.14. Difficulties could arise also where different entities of a group that are related to each other u/s. 40a(2) have arranged their affairs in such a manner that some employees and some resources are jointly used and each entity raises debit note on the other towards sharing of costs every month based on certain fixed criteria – like number of staff, turnover, etc. Since the charges are essentially towards sharing of costs, companies would like to contend that the inter-company charge is reasonable having regard to ALP as determined under CUP method. however, the point that is being missed is that the basis of sharing should really meet the arm’s length principle because if such basis is not scientific, then, the condition in section 40a(2) that the expenditure should be reasonable having regard to not only the ALP but also to the legitimate needs of the business and benefits derived therefrom may come under a challenge.

4.15. Section 80ia(8) has been referred to in various other provisions of Chapter VIA and in section 10aa, so that while computing the profits eligible for deduction under those provisions, effect needs to be given to this sub-section of section 80ia.

Clause (v) of section 92Ba provides that even such transactions of assessee claiming deduction under these other provisions to which section 80ia(8) applies would also be covered for the purpose of SDT. For example, sections 80iB(13), 10aa(9), 80iaB(3), 80iC(7), 80id(5) and 80ie(6) provides that while computing the provisions contained in section 80ia(8) shall, so far as may be, apply to the eligible business under this section. Hence, inter unit transfer of goods and services where one of the unit is eligible to claim deduction u/s. 80iB would also be regarded as transactions covered under clause (v) of section 92Ba.

5. DTP in relation to section 80IA(10):
5.1. Clause (iv) of section 92BA refers to any business transacted between the assessee and another person as referred to in section 80IA(10). unlike sections 80A(6) and 80IA(8), which deal with inter-unit transfer of goods and services, section 80IA(10) deals with a case where the assessee having an eligible business enters into a transaction with another person, which owing to the “close connection” between them or otherwise, is arranged in a manner which results in the eligible business showing more than ordinary profits.

5.2. Hence, for a transaction to be covered u/s. 80IA(10) and therefore under clause (iv) of section 92Ba, it should be a transaction which is ‘arranged’ to show more than ordinary profits from the eligible business.

5.3. Further, invoking section 80IA(10) is a prerogative of the ao. the ao can recompute the profits eligible for tax holiday if the tax payer having business with another party of “close connection” earns more than ordinary profits because of such “close connection” or “for any other reason”. The section does not provide for any objective criteria to decide whether there is any “close connection” between two parties doing business with each other. Generally, the expression ‘close connection’ has been interpreted to cover all companies which belong to the same group 2.

5.4. Also, “any other reason” is a term that is subjective and which reflects the legislative intent of providing freedom to the ao to examine all facts and circumstances of the case and decide. For example, an unrelated person who has lived with the assessee as a paying guest for several years and for whom he develops affection may be covered under “close connection”. At the same time two brothers separated from each other may run independent companies which may do business with each other, but the “close connection”, in substance, is absent.

5.5. The new law casts the onus on the assessee and the auditors to identify and report such transactions! it is impossible to comply with such a requirement unless, like section 40A(2) or section 92A there are objective criteria to determine the persons having “close connection”. Also, cases of “any other reason” can never be imagined by the assessee or the auditors for reporting.

5.6. Further, like sub-section (8) of section 80IA, even sub-section (10) of section 80ia has been referred to in various other sections. hence, even such transactions of assessee claiming deduction under these other provisions to which section 80IA(10) applies would also be considered as Sdt.

6. Issues in relation to DTP regulations
6.1. Whether DTP regulations can be made applicable even in a case where there is no tax arbitrage:

The Supreme Court in CIT vs. GlaxoSmithkline Asia P. Ltd. (supra), on the facts of that case, refused to interfere “as the entire exercise is revenue neutral” and accordingly dismissed the SLP filed by the revenue. The Court has also observed that in the case of domestic transactions, the under-invoicing of sales and over-invoicing of expenses ordinarily would be revenue neutral in nature, except in those cases, which involve tax arbitrage. The Court has then listed the circumstances where there could be tax arbitrage as under:

(i) if one of the related companies is a loss making company and the other is a profit making company and profit is shifted to the loss making concern; and

(ii) if there are different rates for two related units [on account of different status, area-based incentives, nature of activity, etc.] and if profit is diverted towards the unit on the lower side of the tax arbitrage. For example, sale of goods or services from non-SEZ area, [taxable division] to SEZ unit [non-taxable unit] at a price below the market price so that taxable division will have less taxable profit and non-taxable division will have a higher profit exemption.

Hence, applying the ratio of this decision, the DTP regulations should be applicable only to such cases that involve tax arbitrage.

Further, in the context of section 40a(2), the CBDT vide Circular no. 6P dated 06-07-1968 has clearly specified that the same cannot be applied in cases where there is no tax evasion. The relevant extract of which reads as under:

“No disallowance is to be made u/s. 40A(2) in respect of payment made to relatives and sister concerns where there is no attempt to evade tax. ITO is expected to exercise his judgment in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associated concerns and should not be applied in a manner which will cause hardship in bona fide cases.” (emphasis supplied)

In CIT vs. V.S. Dempo & Co (P) Ltd [2011] 196 Taxman 193 (Bom), it has been observed that the object of section 40A(2) is to prevent diversion of income. an assessee, who has large income and is liable to pay tax at the highest rate prescribed under the act, often seeks to transfer a part of his income to a related person who is not liable to pay tax at all or liable to pay tax at a rate lower than the rate at which the assessee pays the tax. In order to curb such tendency of diversion of income and thereby reducing the tax liability by illegitimate means, Section 40a was added to the act by an amendment made by the Finance act, 1968. hence, in cases where there has been no attempt to evade tax, section 40A(2) cannot be attracted. Also see:
    CIT vs. Jyoti Industries (2011) 330 ITR 573 (P&H);
    CIT vs. Udaipur Distillery Co Ltd. (2009) 316 ITR 426 (Raj);
    Deputy Commissioner of   Income-tax   vs.   Ravi Ceramics [2013] 29 taxmann.com 22 (Ahmedabad – Trib.);
    CIT vs. Indo Saudi Services (Travel) (P.) Ltd. [2008] 219 CTR 562 (Bom);
    Orchard Advertising (P.) Ltd. vs. Addl. CIT [2010] 8 taxmann.com 162 (MUM);
    DCIT vs. Lab India Instruments (P.) Ltd. [2005] 93 ITD 120 (PUNE);
    ACIT vs. Religare Finvest Ltd. [2012] 23 taxmann. com 276 (Delhi);
    Aradhana Beverages & Foods Co. (P.) Ltd. vs. DCIT [2012] 21 taxmann.com 135 (Delhi);
    CIT vs. J. S. Electronics P. Ltd. (2009) 311 ITR 322 (Del).

Hence, it can be said that the dtP regulations should not be applied where there is no tax advantage to the parties, especially in cases where section 40A(2) is being applied. However, the act, as it stands today, does not so provide. transactions between related resident parties may be subject to the rigours of DTP regulations even if there is no tax arbitrage or an advantage obtained by any of the parties from such a transaction. For example, transaction of sale and purchase of goods between two indian companies, which are subject to the same maximum marginal rate of tax, would not lead to any tax advantage to either of them. However, if the said two companies are related to each other under section 40A(2)(b) of the act and the volume of the transactions between the two companies exceeds rs. 5 crore in a given financial year, the transactions between the two companies would still be subject to the domestic transfer pricing regulations and accordingly, the companies would be required to maintain proper documents in support of the arm’s length price of such transactions and would also be required to obtain an accountant’s report in respect of such transactions. Similarly, in case of an assessee having two eligible units u/s. 80IA of the act, transfer of goods between the two units would not lead to any tax advantage to either of them, but nevertheless, they would be subject to the domestic transfer pricing regulations.

The irony, thus, is that while the transactions that are revenue neutral shall not suffer any disallowance in terms of the Supreme Court ruling, the related parties entering into such transactions will, nevertheless, be required to maintain documentation and records under the new transfer pricing provisions.

6.2. Whether ‘corresponding adjustments’ are allowed under the DTP regulations in the hands of the other assessee:

On a plain reading of section 92(2a), it may appear that since ALP adjustment is required both in the case of income as also expense, the total income of both the parties to the transaction would be adjusted for the difference, if any, between the recorded/actual price and the aLP of the transaction.

However, this is not the case, when this provision is read along with section 92(3), which provides that the provisions of section 92 would not apply where such ALP adjustment has the effect of reducing the income chargeable to tax or increasing the losses.

Hence, though ALP adjustment may be required in case of the assessee whose income stands increased, corresponding adjustment in the case of the counter- party would not be permissible, since that would result in reduction of his taxable income. this would lead to double taxation of same income twice. This is apparently contrary to an important canon of taxation, namely, the rule against double taxation of the same income.3

Unlike this, in case of international transactions, in most of the DTAAs, Article 9 provides that if an adjustment on account of ALP is made for determining the income of enterprise of the first contracting state, then corresponding adjustment shall be made to the income of enterprise of the second contracting state. hence, where there has been adjustment to the total income of the indian assessee u/s. 92(1) or section 92(2), the DTAA generally provides for a corresponding adjustment to the counter non-resident party, upon satisfaction of certain conditions.

Article 9(2) of the OECD Model provides as under:

“2. Where a Contracting State includes in the profits of an enterprise of that State — and taxes accordingly —profits on which an enterprise of the other Contracting State has been charged to tax in that other State and the profits so included are profits which would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those which would have been made between independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult each other.”

Article 9 of the united nations model Convention too provides for such corresponding adjustments, though subject to certain further conditions. The relevant paras of Article 9 read as under:

“2. Where a Contracting State includes in the profits of an enterprise of that State—and taxes accordingly—profits on which an enterprise of the other Contracting State has been charged to tax in that other State and the profits so included are profits which would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those which would have been made between independent enterprises, then that other States hall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of the Convention and the competent authorities of the Contracting States shall, if necessary, consult each other.

3. The provisions of paragraph 2 shall not apply where judicial, administrative or other legal proceedings have resulted in a final ruling that by actions giving rise to an adjustment of profits under paragraph1, one of the enterprises concerned is liable to penalty with respect to fraud, gross negligence or wilful default.”

Hence, though section 92(3) of the act prohibits corresponding adjustments even in the cases of international transactions, a relief of corresponding adjustments, subject to certain conditions, is available to the non-resident assessees in the relevant dtaas. in such cases, there is no double taxation of the said amount.

Such unequal treatment of the Indian assessees and foreign assessees would lead to hostile discrimination between them, which is not permitted under article 14 of the Constitution of india. hence, such discrimination between the two assesses may be constitutionally challenged.

6.3. DTP and section 35AD:

Section 35ad provides for deduction/weighted deduction in respect of certain capital expenditure incurred by an assessee wholly and exclusively, for the purposes of any business specified in that section, carried on by him during the previous year.

Sub-section (7) of this section provides that “the provisions contained in sub-section (6) of section 80a and the provisions of sub-sections (7) and (10) of section 80-IA shall, so far as may be, apply to this section in respect of goods or services or assets held for the purposes of the specified business”. Hence, the provisions of section 80a(6) and section 80IA(10) are applicable even to section 35AD.

Prima facie, it may appear that in view of the reference to sections 80A(6) and 80IA(10), the DTP regulations would also be applicable to this section. however, for applying the dtP provisions, existence of a SDT is a pre-requisite. Now, on close reading of the definition of Sdt4, it would be clear that it covers transactions referred to in section 80a(6), any business transaction referred to in section 80IA(10) as also any transaction, referred to in any other section ‘under Chapter VI-A or section 10AA’, to which provisions of section 80IA(10) are applicable. however, it does not cover transactions referred to in any other provision of the act other than Chapter VIA and section 10AA, to which the provisions of section 80IA(10) apply. Now, SDT has been defined “to mean……”, so that it is an exhaustive definition and cannot be construed widely to cover transactions other than those mentioned therein. hence, since the transactions referred to in section 35AD are not covered within the ambit of SDT, the DTP provisions contained in sections 80A(6) and 80IA(10) would not apply to it. Further, the other dtP provisions contained in Chapter X, which are applicable to SDT, would also not apply to transactions covered under section 35ad.

6.4. Directors’ Remuneration -: Whether Companies Act provisions/approval is valid benchmark?

A director of a company is covered in the list of persons specified under clause (b) of section 40a(2). Hence, the remuneration paid to it by the company would be subject to the provisions of section 40A(2) and consequently, to the DTP regulations.

Now, u/s. 92C, the aLP of a transaction needs to be determined by applying the most appropriate method. Rule 10C deals with the criteria for the selection of the most appropriate method. the most appropriate method is one which best suits to the facts and circumstances of each particular transaction and which provides the most reliable measure of an arm’s length price in relation to the transaction. Now, under CUP method, the prices charged/paid for a comparable uncontrolled transaction are considered. However, having read the provision of section 92Ba read with section 40a(2)(b) of the act, payment of remuneration to a director, being a party specified in section 40a(2)(b) of the act, would always be a controlled transaction. Hence, since CUP method works only in case where comparable uncontrolled transaction exists, this method may not apply from that angle. Nevertheless, under this method, tribunals have taken a view5 that payments, if approved by appropriate authorities would be considered as being at arm’s length royalty under CUP method. See:

– DCIT vs. Sona Okegawa Precision Forgings Ltd. [2012] 17 taxmann.com 98 (Delhi);
– Sona Okegawa Precision Forgings Ltd. vs. ACIT[2012] 17 taxmann.com 141 (Delhi);
– Thyssenkrupp Industries India (P.) Ltd. v. ACIT [2013] 33 taxmann.com 107 (Mumbai – Trib.);
– SGS India (P.) Ltd. vs. ACIT [2013] 35 taxmann. com 143 (Mumbai – Trib.)

However, there also exist views contrary to the same. See:

– Perot Systems TSI (India) Ltd. vs. DCIT [2010] 37 SOT 358 (Delhi);
– SKOL Breweries Ltd. vs. ACIT [2013] 29 taxmann. com 111 (Mumbai – Trib.)

Hence, it is arguable that so long as the directors’ remuneration is within the limits prescribed under the Companies act, 1956/2013, such remuneration should be regarded as at ALP under CUP method, though contrary view cannot be ruled out.

now, RPM is generally preferred where the entity performs basic sales, marketing, and distribution functions (i.e. where there is little or no value addition) and therefore, it cannot be applied in the instant case. Similarly, CPm which is generally adopted in cases of provision of services, joint facility arrangements, transfer of semi-finished goods, long term buying and selling arrangements, etc, the same fails in the present case. PSm method is applicable in cases where there are multiple interrelated transactions between aes and when such transactions cannot be evaluated independently. Since payment of remuneration by Company to its directors is a single transaction capable of being evaluated separately, applicability of PSm method fails in the present case. TNMM requires a comparison between the income derived by unrelated entities from uncontrolled transactions and the income derived by the assessee from its transactions with related parties. In this method, it is the profit and not the price that forms the basis for comparison. In case of a transaction of payment of director’s remuneration, the profits of unrelated parties shall always be from “controlled transactions” because the directors are covered within the meaning of related parties u/s. 40a(2). Therefore, it is not possible to find any comparable company that qualifies for selection for comparison of profits. Accordingly, this method is also not capable of being implemented.

As would be observed, all the methods prescribed, (except, arguably, the CUP method) are rendered unsuitable for determining the aLP in the present case. Hence, recourse may be made to the residuary method prescribed under rule 10AB of the rules, which permits application of any rational basis for determining the ALP, where none of the other methods are applicable.

Now, the CBDT has, in its Circular No. 6P (LXXVI-66), dated july 6, 19686 , while clarifying the introduction to section 40a to act vide Finance act, 1968, at para 75 remarked that when the remuneration of a director of the Company is approved by a Company Law administration, the reasonableness of the same cannot be doubted. the relevant extract of the said circular reads as under:

“In regard to the latter provisions, the Deputy Prime Minister and Minister of Finance observed in Lok Sabha (during the debates on the Finance Bill, 1968) that where the scale of remuneration of a director of a company had been approved by the Company Law Administration, there was no question of the disallowance of any part thereof in the income-tax assessment of the company on the ground that the remuneration was unreasonable or excessive.”

Thus, as per the CBDT’s own views, if the remuneration paid by a Company is within the ceiling limits provided under the provisions of the Companies act, 1956 or approved by the Company Law administration, then disallowance u/s. 40a(2) of the act cannot be sustained.

Hence, having regard to this Circular, one may proceed to benchmark the remuneration paid by a Company to its directors under the residuary method. Indeed, the aforesaid CBDT circular has not been withdrawn even after the introduction of DTP regulations under Chapter X of the act. also, one may keep in mind the decision of the Supreme Court7 that circulars issued by the Board are binding on all officers and persons employed in the execution of the act.

Thus, it may safely be concluded that where the remuneration paid to the directors (including commission and sitting fees) is within the permissible limits expressly provided under the Companies act, it is at ALP.

6.5. Whether persons indirectly related would get covered under clause (b) of section 40A(2):

Clause (b) of section 40a(2) provides for the list of persons the transactions between whom would be covered under that section. the said clause does not use the words ‘directly or indirectly’. hence, it appears that the transactions between persons who are indirectly related would not be covered within its ambit. Indeed, whatever indirect relationships were intended to be covered, the same have been specifically provided in the said clause. For example, a company, the director of which has substantial interest in the business of the assessee has been covered as a specified person. Clearly, such company has no direct relation with the assessee. Indeed, wherever the Legislature has intended to cover even indirect relationships, it has been specifically provided in the act. For example, section 92a of the act defines the term ‘associated enterprise’ to, inter alia, mean an enterprise, which participates, directly or indirectly…..in the management or control of the other enterprise.’ Hence, apart from the persons specifically mentioned in clause (b), no other person indirectly related to the assessee would be regarded as a related party.

For example, where A holds 20% equity share capital in B and B holds 20% equity share capital in C, transactions between a and B as well as between B and C could be hit by section 40a(2). However, transactions between a and C would not covered by these provisions.

In Para 73 of Circular no. 6P dated 06-07-1968, explaining the provisions of the Finance act, 1968 (through which section 40a was inserted), it is mentioned that ‘the categories of persons payments to whom fall within the purview of this provision comprise, inter alia………… persons in whose business or profession the taxpayer has a substantial interest directly or indirectly’.

However, the said phrase so used in the Circular cannot be construed to mean that in all cases of assessee holding indirect substantial interest in another person’s business, they would be regarded as related persons. The said phrase basically refers to sub-clause (vi) of Section 40a(2)(b), which provides for specific instances where the assessee and another person in whose business he has substantial interest (directly or indirectly to the extent specified in the section), would be regarded as related persons. the indirect substantial interests so covered in the said sub-clause (vi) are in case of an individual, substantial interest through his relative and in case of other specified assessees, substantial interest through its director or partner or member, as the case may be or any relative of such director, partner or member.

Hence, the interpretation of the word ‘indirectly’ used in the Circular should be restricted to mean only the foregoing indirect interests envisaged in the section and should not be widely construed to cover cases beyond the scope of the section. For example, substantial interest of a company in another person indirectly through a company is not covered within this clause. indeed, the word “indirectly” appears to be used in the Circular merely to avoid reproducing the entire clause from the section once again and therefore, should not be interpreted to widen the scope of that section. Besides, it is an established principle that a delegated legislation (such as circulars, rules, etc.) cannot travel beyond the scope of main legislation. A circular cannot even impose on the taxpayer a burden higher than what the act itself on a true interpretation envisages.

Recently, the institute of Chartered accountants of india has also clarified in its Guidance note on report u/s. 92e of the income-tax act, 19618, at Para 4a.16 that, for the purpose of section 40a(2), it would be appropriate to consider only direct shareholding and not derived or indirect shareholding.

6.6. Whether section 40A(2) applies only to expenditure for which deduction has been claimed, can it made applicable to adjust the expenditure capitalised on which depreciation is subsequently claimed?

Section 40A(2) applies when there is a claim for deduction of an expense. u/s. 37(1), expenditure in the nature of capital expenditure is not allowed as deduction in computing the income chargeable under the head ”Profits and gains of business or profession“. Hence, strictly speaking, such expenses would not be covered by section 40A(2), since this section is applicable only for computing the deductions which are otherwise allowable while computing the “Profits and gains of business of profession”.

A question arises as to whether the section can be applied to the depreciation claimed on such capital expenditure. now, it is a settled legal position that depreciation is not an ‘expenditure’. In Nectar Beverages P. Ltd. vs. DCIT (314 ITR 314), the apex Court has held that “depreciation is neither a loss nor an expenditure nor a trading liability”. in Vishnu Anant Mahajan vs. ACIT (137 ITD 189)(Ahd) (SB) and Hoshang D Nanavati vs. ACIT (ITA No. 3567/Mum/07)(TMum), it has been held to be an ‘allowance’ and not an ‘expenditure’. Hence, since depreciation cannot be regarded as an ‘expenditure’, its disallowance/allowance cannot be governed by section 40A(2) of the act. it is has been held that section 40A(2) does not operate when a transaction concerns only the assets of the assessee.

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[2014] 151 ITD 481(Mumbai – Trib.) ITO vs. Shiv Kumar Daga A.Y. 2003-04, A.Y. 2006-07 and A.Y. 2007-08.

Section 28(i), read with section 45-Where assessee converts ancestral land into smaller plots and after providing road, parking space etc., sells the same over a period of years, then the assessee’s claim that he converted the said land (capital asset) into stock-in-trade is to be accepted and consequently the income arising from the sale of such land is to be taxed as business income.

FACTS
The assessee had inherited ancestral land from his parents in and around year 1992 which he held as investment till 1999 and in the year 1999 the same was converted by him into stock-in-trade with the intention to develop and sub-divide the said land into smaller plots in order to sell them to the various buyers.

The assessee’s case was that the activity of plotting and selling the plots of land was real, substantial, systematic and organised activity and the income arising out of such activity was business income.

The AO did not accept the claim of the assessee of conversion of land into stock-in-trade and treating the same as capital asset of the assessee, he held that the profit arising from sale of land during the year under consideration was chargeable to tax in the hands of the assessee as capital gain.

Accordingly, the stamp duty value of the land was taken by the AO as the sale consideration as per section 50C and after reducing the indexed cost of acquisition of the land, long-term capital gain was brought to tax in the hands of the assessee.

The CIT (A), however, accepted assessee’s claim that the income arising from the sale activity was chargeable to tax as business income.

On revenue’s appeal

HELD
It was noted from records that the two bigger plots of land inherited by the assessee in the year 1992 were claimed to be converted by him into stock-in-trade in the year 1999 with the intention to sub-divide the same into small plots of land of different sizes and sell the same to various buyers.

The claim of the AO that the assessee had not filed returns in the assessment year in which such conversion took place and consequently had not informed the Department regarding conversion was not to be accepted as income of those earlier years were not taxable, and therefore, returns were not filed.

The claim of the assessee was also duly supported by expenditure incurred over a period on levelling of the land, plotting etc. and even the plan showing the layout of different sizes of small plots including the provision made for road, parking space etc. which was filed by the assessee before the authorities below.

Also all the plots of land were sold by the assessee to different parties in assessment years 2003-04, 2005-06 and 2007-08 respectively..

Going by this intention, CIT(A) had rightly held that the land held as capital asset was converted by the assessee into stock-in-trade in the year 1999 of the business of plotting and selling the land and the profit arising from sale of land therefore was chargeable to tax as his business income.

Accordingly, the impugned order of the CIT (A) deleting the addition made by the AO on account of long-term capital gains is upheld and the appeal filed by the revenue is dismissed.

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Exemption – Educational Institution – When a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit.

Queen’s Educational Society vs. CIT [2015] 372 ITR 699 (SC)

The
Appellant filed its return for the assessment years 2000-01 and 2001-02
showing a net surplus of Rs.6,58,862 and Rs.7,82,632, respectively.
Since the appellant was established with the sole object of imparting
education, it claimed exemption u/s. 10(23C)(iiiad) of the Income-tax
Act, 1961. The Assessing Officer, vide his order dated 20th February, 2003, rejected the exemption claimed by the appellant. The Commissioner
of Income-tax (Appeals) by his order dated 28th March, 2003, allowed the
appellant’s appeal, and the Income-tax Appellate Tribunal, Delhi, by
its judgment dated 7th July, 2006, passed an order dismissing the appeal
preferred by the Revenue.

The Income-tax Appellate Tribunal while granting exemption u/s. 10(23C)(iiiad) recorded the following reasons:

“During
the years relevant for the assessment year 200-01 and 2001-02, the
excess of income over expenditure stood at Rs.6,58,862 and Rs.7,82,632,
respectively. It was also noticed that the appellant society had made
investments in fixed assets including building at Rs.9,52,010 in the
financial year 1999-2000 and Rs.8,47,742 in the financial year 2000-01
relevant for the assessment years 2000- 01 and 2001-02, respectively.
Thus, if the amount of investment into fixed assets such as building,
furniture and fixture, etc., were also kept in view, there was hardly
any surplus left. The assessee-society is undoubtedly engaged in
imparting education and has to maintain a teaching and non-teaching
staff and has to pay for their salaries and other incidental expenses.
It, therefore, becomes necessary to charge certain fees from the
students for meeting all these expenses. The charging of fee is
incidental to the prominent objective of the trust, i.e., imparting
education. The trust was initially running the school in a rented
building and the surplus, i.e., the excess of the receipts over
expenditure in the year under appear (and in the earlier years) has
enabled the appellant to acquire its own property, acquire computers,
library books sports equipment, etc., for the benefit of the students.
And more importantly the members of the society have not utilised any
part of the surplus for their own benefit. The Assessing Officer wrongly
interpreted the resultant surplus as the main objective of the assessee
trust. As held above, profit is only incidental to the main object of
spreading education. If there is no surplus out of the difference
between receipts and outgoings, the trust will not be able to achieve
the objectives. Any education institution cannot be run in rented
premises for all the times and without necessary equipment and without
paying to the staff engaged in imparting education. The assessee is not
getting any financial aid/assistance from the Government or other
philanthropic agency and, therefore, to achieve the objective, it has to
raise its own funds. But such surplus would not come within the ambit
of denying exemption u/s. 10(23C)(iiiad) of the Act.”

In a
reference to the High Court u/s. 260A of the Income-tax Act, the High
Court, vide the impugned judgment set aside the judgment of the
Incometax Appellate Tribunal and affirmed the order of the Assessing
Officer.

The Uttarakhand High Court held: “Thus, in view of the
established fact relating to earn profit, we do not agree with the
reasoning given by the Income-tax Appellate Tribunal for granting
exemption.”

On appeal, the Supreme Court held that the High
Court did not apply its mind independently. The High Court copied one
paragraph from the Supreme Court judgment in Aditanar Educational
Institution vs. Addl CIT (1997) 224 ITR 310 (SC), followed by a
paragraph of faulty reasoning by the Assessing Officer and the said
faulty reasoning of the Assessing Officer had been wrongly said to be
the law laid down by the apex court. The High Court had erred by quoting
a non-existent passage from the said judgment

Further, the High Court had erred quoting a portion of a property tax judgment in Municipal Corporation of Delhi vs. Children Book Trust and Safdarjung Enclave Educational Society vs. Municipal Corporation of Delhi (1992) 3 SCC390, which expressly stated that ruling arising out of the Income-tax Act would not be applicable. It also went on to further quote from a portion of the said property tax judgment which was rendered in the context of whether an educational society is supported wholly or in part by voluntary contributions, something which was completely foreign to section 10(23C)(iiiad).

According to the Supreme Court, the final conclusion that if a surplus is made by an educational society and ploughed back to construct its own premises would fall foul of section 10(23C) is to ignore the language of the section and to ignore tests laid down in the Surat Art Silk Cloth’s case (121 ITR1), Aditanar’s case (supra) and the American Hotel and Lodging’s case (301 ITR 86).

The Supreme Court held that when a surplus is ploughed back for educational purposes, the educational institution exist solely for educational purposes and not for purposes of profit.

The Supreme Court set aside the judgment of the Uttarakhand High Court holding that the reasoning of the Income-tax Appellate Tribunal (set aside by the High Court) was more in consonance with the law laid down by it.

The Supreme Court approved the judgment of the Punjab and Haryana High Court in Pinegrove International Charitable Trust (327 ITR 73), Delhi High Court in St. Lawrence Educational Society vs. CIT (353 ITR 320) and Bombay High Court in Tolani education Society (351 ITR 184).

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Upfront payment of interest on debentures in one year – the year of deductibility – Part II

3 As mentioned in Part I of this write-up (BCAI-June, 2015), the Bombay
High Court rejected the claim of the assessee for deduction of upfront
payment of interest on debenture in the first year itself and instead,
accepted the action of the AO in spreading over the deduction over the
five years, being the life of the debentures. For this purpose, the High
Court relied on the judgment of the Apex Court in Madras Industrial
Investments case (referred to in para 1.4 of the Part I of the write-up)
wherein the Court had upheld the spread over of deduction of borrowing
cost of debentures on the ground that there is a continuing benefit to
the business of the company during the tenure of the debentures. While
deciding the issue against the assessee, the Bombay High Court took the
view that although ordinarily revenue expenditure incurred for the
purpose of business must be allowed in its entirety in the year in which
it is incurred but, in the present case, the fact justifies the AO to
spread over the deduction during the life of the debentures as allowing
the expenditure in the first year itself gives a distorted picture of
the profit of that year when the funds collected through the issue of
debentures give a continuing benefit to the business of the assessee
over the entire period of the debentures. For this, the High Court
applied the ‘Matching Concept’ referred to in para 2.8 of Part I of the
write-up. While doing so, the High Court did not accept the contention
of the assessee that this amounts to re-writing of the terms of issue of
debenture. For this, the High Court largely relied on the accounting
treatment of the expenditure given by the assessee in its accounts and
also rejected the contention of the assessee that good accounting is not
necessarily correct law.

Taparia Tools Ltd. vs. Jcit – 276 ctr 1 (sc)

4.1
The judgment of the Bombay High Court in the above case came-up for
consideration before the Apex Court for its decision at the instance of
the assessee and accordingly, the issue referred to in para 1.3 of Part I
of the write-up came-up before the Apex Court for its consideration.
Before the Apex Court, three assessment years [1996-97 to 1998-99]
involving identical issue had come-up for decision.

4.2
Referring to the details of the appeals involving identical issue for
the assessment year 1996-97, the Court stated that the question of law
which has arisen for consideration is whether the liability of the
assessee to pay the interest upfront to the debenture holders is
allowable as deduction in the first year itself or it has to be spread
over a period of five years, during the life of the debentures?

4.3
For the purpose of deciding the issue, the Court noted the relevant
facts [as mentioned in paras 2.1 to 2.3 of Part I of the write-up] and
also noted that the assessee was unsuccessful in appeal before the
Bombay High court. The Court noted that the view taken by the Tribunal
as well the High Court was that for theentire amount paid by the
assessee in the particular assessment year, full deduction is not
available and this deduction is spread over a period of five years.
Thus, the question is as to whether deduction of the entire amount of
interest paid should be allowed in the first year itself or the stence
of the Revenue need to be affirmed.

4.4 For the purpose of deciding the issue at hand, the Court referred to the following relevant factual position [page 7]:

“As
pointed out above, the assessee maintains its accounts on mercantile
basis. Further, the entire amount for which deduction was claimed was,
in fact, actually paid to the debenture-holder as upfront interest
payment. It is also a matter of record that this amount became payable
to the debenture-holder in accordance with the terms and conditions of
the non-convertible debenture issue floated by the assessee, on the
exercise of option by the aforesaid debenture-holders, which occurred in
the respective assessment years in which deduction of this expenditure
was claimed.”

4.5 The Court then noted the provisions of section 36(1)(iii) of the Act and explainedthe effect thereof as under [page 8]:

“…………It
is clear that as per the aforesaid provision any amount on account of
interest paid becomes an admissible deduction u/s.36 if the interest was
paid on the capital borrowed by the assessee and this borrowing was for
the purpose of business or profession. There is no quarrel, in the
present case, that the money raised on account of issuance of the
debentures would be capital borrowed and the debentures were issued for
the purpose of the business of the assessee. In such a scenario when the
interest was actually incurred by the assessee, which follows the
mercantile system of accounting, on the application of this statutory
provision, on incurring of such interest, the assessee would be entitled
to deduction of full amount in the assessment year in which it is paid.
While examining the allowability of deduction of this nature, the AO is
to consider the genuineness of business borrowing and that the
borrowing was for the purpose of business and not an illusionary and
colourabale transaction. Once the genuineness is proved and the interest
is paid on the borrowing, it is not within the powers of the AO to
disallow the deduction either on the ground that rate of interest is
unreasonably high or that the assessee had himself charged a lower rate
of interest on the monies which he lent………………….”

4.6 While
dealing with the principle of deduction of such expenditure, the Court
noted that the AO did not dispute that the expenditure on account of
interest was genuinely incurred. It is also not in dispute that the
amount of interest was actually paid in the relevant year. Since the
assessee was following mercantile system of accounting, the amount of
interest could be claimed as deduction even if it was not actually paid
but simply incurred. While staggering and spreading the interest over a
period of five years, the AO was mainly persuaded by two reasons viz.,
(i) the term of debenture was five years; and (ii) the assessee had
itself given this very treatment in the books of account (i.e.,
spreading it over a period of five years in its final accounts by not
debiting the entire amount in the first year to the P&L account).
The Court also noted that the High Court has based its reasoning on the
second aspect and applied the principle of ‘Matching Concept’ to support
its conclusion.

4.7 Dealing with the first reason adopted by
the AO i.e., the debentures were issued for the period of five years,
the Court took the view that this is clearly not tenable. For this, the
Court stated as under [page 9]:
“………….While taking this view, the AO clearly erred as he ignored by ignoring the terms on which debentures were issued. As noted above, there were two methods of payment of interest stipulated in the debenture issued. Debenture- holder was entitled to receive periodical interest after every half year @ 18% per annum for five years, or else, the debenture-holder could opt for upfront payment of Rs. 55 per debenture towards interest as one-time payment. By allowing only 1/5th of the upfront payment actually incurred, though the entire amount of interest is actually incurred in the very first year, the AO, in fact, treated both the methods of payment at par, which was clearly unsustainable. By doing so, the AO, in fact, tampered with the terms of issue, which was beyond his domain. It is obvious that on exercise of the option of upfront payment of interest by the subscriber in the very first year, the asessee paid that amount in terms of the debenture issue and by doing so he was simply discharging the interest liability in that year thereby saving the recurring liability of interest for the remaining life of the debentures because for the remaining period the assessee was not required to pay interest on the borrowed amount.”

4.8 Having dealt with the first reason on which the AO based his order, the Court proceeded to consider the second reason of the AO and stated that whether the assessee was estopped from claiming deduction for the entire interest paid in the same year merely because it had spread over this interest in its books of account over a period of five years. The Court then noted, in brief, the contentions raised on behalf of the assessee in this context (which are broadly on the line raised before the High Court). In substance, on behalf of the assessee, it was contended that the accounting treatment in the books of account is not relevant for the purpose of determining the deductibility of an expenditure and thathas to be decided in accordance with the provisions of the Act when the claim is made by the assessee on that basis and for that purpose, terms of issue of debentures are relevant. For this, the assessee had relied on the provisions of section 36(1)(iii) of the Act. The Court noted that the High Court has dealt with this provision and explained implications thereof in following words [page 10]:

“……The term ‘interest’ has been defined u/s. 2(28A) of the Act. Briefly, interest payment is an expense u/s. 36(1)(iii). Interest on monies borrowed for business purposes is an expenditure in a business [see M.L.M. Muthiah Chettiar & Ors. vs. CIT (1959) 35 ITR 339 (Mad)]. For claiming deduction under s. 36(1)(iii), the following conditions are required to be satisfied viz. the capital must have been borrowed; it must have been borrowed for business purpose and the interest must be paid. The word ‘paid’ is defined in section 43(2). It means payment in accordance with the method followed by the assessee. In the present case, therefore, the word ‘paid’ in section 36(1)(iii) should be construed to mean paid in accordance with the method of accounting followed by the assessee i.e. Mercantile System of accounting… ”

4.8.1 The Court then stated that notwithstanding the aforesaid implications of the provisions of section 36(1)(iii) noted by the High Court, the High Court chose to decline the whole deduction in the year of payment and thereby, affirmed the orders of lower authorities by invoking the ‘Matching Concept’. In the opinion of the High Court, this ‘Matching Concept’ is required to be done on accrual basis and in High Court’s view, in this case, payment of Rs. 55 per debenture towards interest made by the assessee pertained to five years, and thus, this interest of five years was paid in the first year. The Court then opined that it is here that the High Court has gone wrong and this approach resulted in wrong application of ‘Matching Concept’. In this context the Court further opined as under [pages 10 & 11]:

“… However, in the second mode of payment of interest, which was at the option of the debenture- holder, interest was payable upfront, which means insofar as interest liability is concerned, that was discharged in the first year of the issue itself. By this, the assessee had benefited by making payment of lesser amount of interest in comparison with the interest which was payable under the first mode over a period of five years. We are, therefore, of the opinion that in order to be entitled to have deduction of this amount, the only aspect which needed examination was as to whether provisions of section 36(1)(iii) r/w section 43(2) of the Act were satisfied or not. Once these are satisfied, there is no question of denying the benefit of entire deduction in the year in which such an amount was actually paid or incurred.”

4.8.2 The Court then dealt with the issue of deferred revenue expenditure and stated as under [page 11]:

“The High Court has also observed that it was a case of deferred interest option. Here again, we do not agree with the High Court. It has been explained in various judgments that there is no concept of deferred revenue expenditure in the Act except under specified sections, i.e. where amortisation is specifically provided, such as section 35D of the Act.”

4.8.3 Dealing with the facts of the assessee’s case, the Court then stated that the moment second option was exercised by the debenture-holder to receive the upfront payment, liability of the assessee to make the payment in that very year has arisen and this liability was to pay interest @ Rs. 55 per debenture. To support this position, the Court noted the following passage from the judgment of the Apex Court in the case of Bharat Earth Movers [245ITR 428]:

“The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesentithough it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.”

4.1.1.1 Having referred to the above passage, the Court stated that the present case is even on a stronger footage in as much as not only the liability had arisen in the relevant year, it was even quantified and discharged as well in that very year.

4.1.2 The Court then dealt with the effect of Madras Industrial Investments case (supra) and stated that, in that case, the Court categorically held that the general principle is to allow the revenue expenditure incurred for business purposes in the same year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claim it over a period of ensuing years. In that case, the assessee wanted spreading the expenditure over a period of time and had justified the same. By raising money through the said debentures, the assessee could utilise the said amount and secure the benefit over number of years. On this basis, the Court found that the assessee could be allowed to spread over the expenditure over a period of five years, at the end of which the debentures were to be redeemed.

4.1.2.1 After referring to the relevant passage from the judgment in the case of Madras Industrial Investments case (supra), the Court observed as under [pages12 &13]:

“Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread over. The Court was conscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period.”

4.8.4.2 Explaining the effect of the above judgment, the Court further stated as under [page 13]:

“What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of ‘Matching Concept’ is satisfied, which upto now has been restricted to the cases of debentures.”

4.8.5 Having explained the effect of the judgment in the case of Madras Industrial Investments case (supra), the Court dealt with the case of the assessee and stated that, in this case, the assessee did not want spread over of this expenditure and it had claimed the entire interest paid upfront as deductible expenditure in the same year in its return of income. When this course of action was permissible in law to the assessee, merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. This Court has repeatedly held that entries in the books of account are not determinative or conclusive and the matter is to be examined in the context of the provisions contained in the Act. Having referred to this settled position, the Court, finally, held as under [page 13]: “At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of accounts, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the IT return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/ paid by invoking the provisions of section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed.”

4.9 Based on the above,the Court concluded that the High Court and the authorities below did not law down correct position in law. The assessee would be entitled to a deduction of the entire interest expenditure in the year in which the amount was actually paid. As such, the appeals of the assessee were allowed.

Conclusion
5.1 (i) From the above judgment of the Apex Court, it is clear that the upfront payment of interest on debenture in one year is eligible for deduction u/s. 36(1)(iii) in that year itself whenliability to pay the same is incurred in that year.

(ii) In such cases, if the assessee has spread over the interest expenditure in accounts and if the claim of deduction is made on that basis on the ground that there is a continuing benefit to the business, he can choose to do so.

(iii) As such, in mercantile system of accounting, in such cases, the assessee has an option either to claim deduction in the year in which the liability to pay interest is incurred or to spread over the same during the life of the debentures.

5.2 In the above case, in the context of the mercantile system of accounting, the Apex Court has reiterated following settled positions under the Act:-

(i) Ordinarily the revenue expenditure incurred for the purpose of the business of the assessee is eligible for deduction in its entirety in the same year in which it is incurred.

(ii) In the absence of any specific provision in the Act, deductible revenue expenditure cannot be treated as deferred revenue expenditure and on that basis, the deduction of such expenditure cannot be spread over.

(iii) The claim of deduction of any expenditure should be examined on the basis of the relevant provisions contained in the Act and in that context, the accounting treatment given by the assessee in the books of account is irrelevant.

(iv) The conditions to be satisfied for claiming deduction of interest on capital borrowed u/s. 36(1)
(iii) [refer para 4.5]. This should be subject to other specific provisions contained in the proviso and Explanation to section 36(1)(iii).

5.3 (i) Section 145(2) has been amended by the Finance (No. 2) Act, 2014 from assessment year 2015-16. Under these amended provisions, the Central Government is authorised to notify Income Computation and Disclosure Standards (ICDS) to be followed by the any class of assessees or in respect of any class of income.

(ii) Under these provisions, the Government has notified 10 ICDS by notification dated 31st March, 2015 [applicable from assessment year 2016-17]. ICDS-IX deals with the borrowing costs. The impact of this should now also be borne in mind.It is also worth noting that every ICDS specifically provides that in case of conflict between the provisions of the Act and the ICDS, the provisions of the Act shall prevail to that extent.

(iii) Arguably, even in post ICDS era, this judgment should continue to hold good. At the same time, in all probability, the Revenue is likely to contest this position. As such, on this position,which is settled by the Apex Court after nearly two decades, fresh round of litigation is likely to start. Instead, if the Government does not wish to accept this position, although it would be unfair as well as improper as the Court, in this case, has only re-iterated the settled position, it can consider to make appropriate amendment.

(iv) Similar could be the impact of most of the ICDS as, almost all the major assessees, for the purpose of maintenance of books of account, will have to follow either the accounting standards [including Ind AS] prescribed under the Companies Act, 2013 or the accounting standards issued by the ICAI [Statutory AS]. At macro level, the Government is showing it’s preparedness to address all genuine concerns of the business community on tax issues. But, unfortunately, at micro level, things are not encouraging. Need of the hour is to provide clarity at the micro level and encourage change of mind- set in the tax administration. The ICDS will certainly not make it easy for doing business in India. This will lead to further uncertainty in determination of annual tax liability.

(v) In our view, there is absolutely no need to keep suchelaborate ICDS for the purpose of computation of income. In a good tax system, there should be minimum possible gap between the accounting profit and the taxable profit. The ICDS have gone completely against this basic canon of taxation. The ICDS will only widen this gap. A common thread noticed in the ICDS is an attempt to accelerate the taxation either by advancing the taxation of income before it is recorded in accounts or by postponing the deduction of expenses/ losses recognised in the books of account based on well settled accounting principles. As such, for tax purpose also, the Revenue Department should have accepted the commercial profit determined in accordance with the Statutory AS and in cases of disagreement, if any, on treatment of some items, the Government could have amended few provisions in the Act itself. In fact, effectively, this was the recommendation of the earlier Committee formed in the year 2002 in it’s report submitted in November, 2003. This could have achieved the object of ICDS,provided certainty and also relieved the business community from the unwarranted huge compliance burden. Statutory ASsare mandatory for maintenanceof books of account for most of the assessees. Effectively, under ICDS regime, the assessees will have to maintain either one more set of books of account or detailed records for the purpose of reconciling the commercial profit with the taxable income. In this process, we are almost assured of new era of litigation in this respect for atleast two more decades, if not more. It is difficult to believe that the Revenue Department is unaware of this ground reality. BCAS had made elaborate representation explaining why ICDS should not be introduced, but no impact.
(vi) In view of the notification of the ICDS, the damage has already been done. Best way is to withdraw the same. But this is doubtful as the Government will not have courage to do so. Therefore, now, only the extent of this damage can be restricted. For this, the only one action is required and that is to restrict the applicability of ICDS only to corporate entities which are mandatorily required to followInd-AS. This will be also in line with the object of ICDS as the idea of prescription of ICDS had originatedonly on account of requirement of introduction of Ind AS. This will restrict the impact of ICDS to largecorporate assesseesand will also help to mitigate the hardships of the smaller and medium size assessees, who lack requisite competence and infrastructure needed for such compliance. This will substantially save the nation from the potential long term protected litigation on the issues which are not worth litigating. There are many other constructive and better things to do to build the nation. We may also mention that if the ICDS continue to apply to all assessees, the profession may benefit but the nation will not. The Government has to make a choice.

shailesh.kwebmaker

Interest u/s. 244A on Refund of Self Assessment Tax

Issue for Consideration
Section 244A(1) of the Income-tax Act, 1961 provides for payment of interest on refunds due to the assessee. It provides that, in addition to the amount of refund, the assessee is entitled to simple interest at the rate of ½% for every month or part of a month,in cases where refund is out of any tax paid u/s. 115WJ or tax collected at source u/s. 206C or paid by way of advance tax or treated as paid u/s. 199, for the period commencing from the first day of April of the assessment year to the date on which the refund is granted. In any other case, including the case of a refund of self assessment tax (not being the case where refund is less than 10% of the tax determined), the interest is payable, vide clause(b) of section 244A(1), at the same rate, for every month or part of a month, for the period commencing from the date of payment of the tax or penalty to the date on which the refund is granted.

An Explanation to clause (b) defines the term “date of payment of tax or penalty” to mean the date on and from which the amount of tax or penalty specified in the notice of demand issued u/s. 156 is paid in excess of such demand.

The sub-section reads as under:

244A. Interest on Refunds – (1) Where refund of any amount becomes due to the assessee under this Act, he shall, subject to the provisions of this section, be entitled to receive, in addition to the said amount, simple interest thereon calculated in the following manner, namely :—

(a) where the refund is out of any tax paid under section 115WJ or collected at source under section 206C or paid by way of advance tax or treated as paid under section 199, during the financial year immediately preceding the assessment year, such interest shall be calculated at the rate of one-half per cent for every month or part of a month comprised in the period from the 1st day of April of the assessment year to the date on which the refund is granted:

Provided that no interest shall be payable if the amount of refund is less than ten per cent of the tax as determined under sub-section (1) of section 115WE or sub-section (1) of section 143 or on regular assessment;

(b) in any other case, such interest shall be calculated at the rate of one-half per cent for every month or part of a month comprised in the period or periods from the date or, as the case may be, dates of payment of the tax or penalty to the date on which the refund is granted.

Explanation.—For the purposes of this clause, “date of payment of tax or penalty” means the date on and from which the amount of tax or penalty specified in the notice of demand issued under section 156 is paid in excess of such demand.

The issue has arisen before the courts as to whether any interest is payable u/s. 244A on self-assessment tax paid by the assessee, where such self-assessment tax or a part thereof becomes refundable to the assessee. The questions that arose in addressing the issue on hand were; Can the payment of a self-assessment tax be treated as the payment made in pursuance of a notice and that too in excess of the amount that is specified in the notice of demand u/s. 156? Can such a payment be considered as a payment referred to under clause(a)of section 244A? Does the Explanation to clause(b) have the effect of reducing the scope of clause(b) to payments made in pursuance of demand or not? Whether the generality of clause(b) is otherwise not restricted by explanation to clause(b)?

While the Bombay, Delhi, Madras, Karnataka and Punjab & Haryana High Courts have taken a view that the assessee is entitled to interest u/s. 244A on such refund of self-assessment tax, the Delhi High Court has recently taken a contrary view, holding that no interest is payable u/s. 244A on self-assessment tax refunded to the assessee.

Stock Holding Corporation’s Case
The issue recently came up
before the Bombay High Court in the case of Stock Holding Corporation of
India Ltd vs. N. C. Tewari, CIT & Others, 373 ITR 282.

In
this case, the assessee paid a self-assessment tax of Rs. 2.60 crore in
August 1994 for assessment year 1994-95. In December 1996, the
assessment was completed u/s. 143(3), raising a demand of Rs. 1.76
crore. This demand was partly adjusted against the refund due of Rs.
1.53 crore for another assessment year. The Commissioner(Appeals), on
appeal, granted substantial relief to the assessee in appeal against the
assessment order. While giving effect to the order of the
Commissioner(Appeals) in October 1998, the assessee was granted a refund
of Rs. 2 crore, consisting of tax of Rs. 1.53 crore and Rs. 18.24 lakh
aggregating to Rs. 1.7124 crore and interest of Rs. 29 lakh being
interest on refund of Rs. 1.53 crore. However, no interest was granted
on Rs. 18.24 lakh for the period from the date of payment of tax on
self-assessment till the date of refund.

The assessee filed a
revision application to the Commissioner of Income-tax u/s. 264, seeking
a total interest of Rs. 42.87 lakh, u/s. 244A, consisting of Rs. 33.75
lakh payable on a refund of Rs. 1.53 crore (being the demand adjusted
against refund of another year) and Rs. 9.12 lakh on refund of tax of
Rs. 18.24 lakh (being the tax paid on self-assessment). The Commissioner
partly allowed the revision petition, directing the payment of interest
on Rs. 1.53 crore, but rejecting the claim for interest on refund of
tax paid on self-assessment of Rs. 18.24 lakh. A writ petition was filed
before the Bombay High Court challenging this order.

Before the
Bombay High Court, on behalf of the assessee, it was argued that the
issue of grant of interest was no longer in dispute in view of the
Supreme Court decision in the case of Union of India vs. Tata Chemicals
Ltd. 363 ITR 658. It was claimed that refund of any amount due under the
Act to the assesse would entitle the assessee to receive the refund
along with interest. While clause (a) of section 244A(1) governed
refunds of advance tax and tax deducted at source, clause (b) would
govern all other refunds, including tax paid on self-assessment.
Reliance was placed on the CBDT circular number 549 dated 30th October
1989, 182 ITR (St) 1. It was argued that the explanation to section
244A(1)(b) would have no application to the case, as no amount had been
paid in excess of the demand specified u/s. 156.

On behalf of
the revenue, it was argued that the amount paid on self-assessment was
not tax payable in pursuance of a notice of demand. It was contended
that as per the computation of income filed by the assessee, a refund of
Rs. 47.15 lakh only was claimed and consequently, the assessee was
entitled to only refund of the tax, and not to interest thereon. It was
claimed that the decision in Tata Chemicals (supra) was not applicable
to the case before the court, as in that case, the assessee had claimed
interest on refund of amount of TDS that was deducted in excess of tax
that it was liable to deduct in view of an order passed by the
authorities under the Act. Alternatively, it was argued that if at all
any interest was to be allowed to the assessee, it would only be from
the date on which the notice u/s. 156 was issued to the assessee, which
was the date of the assessment order.

The Bombay High Court noted that it was clear that the amount paid by the assessee as self-assessment tax was not covered by clause (a) of section 244A(1), since it was neither a payment of advance tax, nor a tax deducted at source. Thus, it would fall under clause (b), a residuary clause governing refunds of amounts not falling under clause (a). It rejected the revenue’s contention that such tax would not fall under clause (b), because of non- applicability of the said clause. According to the High Court, such a contention was opposed to the meaning of the provision even on a bare reading of the said clause(b). According to the court, if a tax paid was not covered by clause (a), it fell within clause (b), which was a residuary clause.

The Bombay High Court also observed that the contention of the revenue was otherwise negatived by the CBDT circular number 549 (supra), which clarified, in relation to the provisions of section 244A, that if the refund was out of any tax, other than advance tax or tax deducted at source or penalty, interest was payable for the period starting from the date of payment of such tax or penalty and ending on the date of the grant of the refund. The court observed that nowhere did the CBDT even remotely suggest that interest was not payable by the Income- tax Department on refund of the self-assessment tax. According to the court, the amount paid u/s. 140A on self- assessment was an amount payable as and by way of tax, to meet the likely shortfall in the taxes.

Addressing the arguments of the revenue that no interest at all was payable unless the amount had been paid as tax in pursuance of a notice of demand, and that section 244A did not cover the cases where the payment was gratuitous, as was in the case of the assessee, who sought an interest of Rs. 47 lakh after paying tax on self- assessment of Rs. 2.60 crore, the court observed that
(a) section 244A(1) commenced with the words “when refund of any amount became due to the assessee under this Act…”, and that (b) clause (b) commenced with the words “in any other case…….” and those words clearly provided that refund of any amount that became due to any assessee under the Act would entitle the assessee to interest u/s. 244A.

In any case, the Court noted , the amount on which the refund was being claimed was originally paid as self- assessment tax u/s. 140A and even the assessing officer in passing the assessment order, had accepted the entire amount paid as self-assessment tax as a payment of tax. In addition, the court observed that when any refund became due to an assessee out of tax paid, it became so only after holding that it was not the tax payable in the first instance. The Bombay High Court therefore rejected the revenue’s contention that the amount of tax paid on self-assessment was not a ‘tax’, and that interest could not be granted on refund of such amounts which were not ‘taxes’.

Addressing the revenue’s argument that the decision of the Supreme Court in Tata Chemicals (supra) was not applicable to the facts of the case before it, the Bombay High Court, analysing the observations of the Supreme Court, observed that it was clear that the requirement to pay interest arose whenever an amount was refunded to an assessee as it was a kind of compensation for use and retention of the money collected by the revenue. The only distinction being made in the facts of the case before it, and those before the Supreme Court was that the amount paid as tax on self-assessment was paid voluntarily, while in the case before the Supreme Court, the tax was deducted at a higher rate in view of the order passed by an authority under the Act. The court observed that there was no distinction between the two, as, when an assessee paid tax either as advance tax or on self- assessment, it was paid to discharge an obligation under the Act and a non-compliance visited an assessee with a penalty just as non-compliance of orders passed by authorities under the Act would. Thus, according to the court, there was no voluntary payment of tax on self- assessment as was contended by the revenue.

The Bombay High Court then addressed the argument of the revenue that in view of the explanation to section 244A(1)(b), eligibility thereunder arose only when the amounts were paid consequent to a notice issued u/s. 156. The court noted that the same submission advanced by the revenue before the Supreme Court in the case of Tata Chemicals (supra) had been rejected in that case by the Tribunal, the High Court as well as the Supreme Court.

Rejecting the argument of the revenue that the payment of interest, in any case, should be for the period that commenced from the date of notice u/s. 156, the Bombay High Court observed that; the Supreme Court in Tata Chemicals (supra), held that theExplanation applied only where payment of tax was made pursuant to notice u/s. 156; the payment in the instant case had not been made pursuant to any notice of demand, but was made prior to the filing of the return of income and was in accordance with section 140A; the provisions of section 244A(1)
(b) required the revenue to pay interest on the amount refunded for the period commencing from the date the payment of tax was made to the revenue, up to the date when refund was granted by the revenue.

The Bombay High Court drew support from the decisions of the Karnataka High Court in the case of CIT vs. Vijaya Bank 338 ITR 489 and of the Delhi High Court in CIT vs. Sutlej Industries Ltd 325 ITR 331, where, in identical circumstances, it was held that interest u/s 244A was payable from the date of payment of the tax on self- assessment to the date of refund of the amounts. The Court therefore held that interest u/s. 244A was payable on refund of excess self-assessment tax paid by the assessee.

A similar view, that interest was payable under section 244A on refund of self-assessment tax, has also been taken by the Madras High Court in the case of CIT vs. Cholamandalam Investment & Finance Co Ltd 294 ITR 438, and the Punjab and Haryana High Court in the case of CIT vs. Punjab Chemical & Crop Protection Ltd. 231 Taxman 312.

Engineers India’s case

The issue again recently came up before the Delhi High Court in the case of CIT vs. Engineers India Ltd 373 ITR 377.

In this case, the assessee filed its return of income for assessment year 2006-07 in November 2006. It filed a revised return disclosing a higher income in November 2008. During the course of assessment proceedings, a disallowance of Rs. 69 lakh was made u/s. 14A read with rule 8D. An appeal was filed against such disallowance to the Commissioner(Appeals), and during the course of hearing before the Commissioner (Appeals), the issue of the assessing officer not having allowed interest u/s. 244A was raised by the assessee. The Commissioner(Appeals) allowed the assessee’s claim for interest u/s. 244A, following the decision of the Madras High Court in the case of Cholamandalam Investment and Finance Company Ltd (supra).

In appeal before the Tribunal by the revenue, the tribunal upheld the order of the Commissioner(Appeals), as regards admissibility of interest on the excess self- assessment tax paid.

In the further appeal before the Delhi High Court by the revenue, the revenue argued that interest was payable to the assessee only if it was so provided under the statute. Reliance was placed on the decisions of the Supreme Court in the cases of Sandvik Asia Ltd vs. CIT 280 ITR 643, CIT vs. Gujarat Fluoro Chemicals 358 ITR 291 and Tata Chemicals (supra). On behalf of the assessee, reliance was placed on the decisions of the Delhi High Court in the case of Sutlej Industries (supra), and of the Bombay High Court in the case of Stock Holding Corporation of India (supra).

The Delhi High Court noted that in Sandvik Asia’s case, the issue for consideration by the Supreme Court was as to whether the assessee was entitled to be compensated by the revenue for delay in payment of the amount due to the assessee. Since there was an inordinate delay in that case on the part of the revenue in refunding the amount, the Supreme Court held that the assessee was entitled to be adequately compensated by way of interest for the delay in payment of the amount “lawfully due to the assessee which are withheld wrongly and contrary to the law”.

The Delhi High Court noted the decision of the Madras High Court in the case of Cholamandalam Investment (supra), and observed that the argument in that case revolved around the question as to whether interest would be admissible under clause (a) or clause (b) of section 244A(1), in the context of the distinction on account of the additional requirement in clause (a) that the amount refundable must be more than 10% of the tax determined. The Madras High Court held that the refund was governed by clause (b) and was therefore not subject to that restriction.

The Delhi High Court, then noted the decision of its own court in the case of Sutlej Industries (supra), where the question of law related to whether clause (b) of section 244A(1) excluded the payment of interest on refund of self-assessment tax. It noted that in Sutlej Industries’ case, the assessee had paid self-assessment tax u/s. 140A, in addition to TDS and advance tax.

The Delhi High Court, then noted the decision of the Supreme Court in the case of CIT vs. Gujarat Fluoro Chemicals (supra) where a bench of two judges doubted the correctness of the decision in the case of Sandvik asia(supra), and referred the matter for consideration and authoritative pronouncement to a larger bench. It noted the observations of the larger bench of the Supreme Court, which clarified that only interest provided for under the statute may be claimed by an assessee from the revenue, and no other interest on such statutory interest.

The Delhi High Court, then noted the observations of the Supreme Court in the case of Tata Chemicals (supra), which was a case of whether the deductor of TDS is also entitled to interest on refund of excess deduction or erroneous deduction of tax at source under section 195.

The Delhi High Court, then analysed the decision of the Bombay High Court in the case of Stock Holding Corporation of India (supra), which was in the context of an issue similar to that before the Delhi High Court. According to the Delhi High Court, the Bombay High Court did not take note of the clarification given by the Supreme Court in the case of Gujarat Fluoro Chemicals(supra).

The Delhi High Court analysed the provisions relating to payment of advance tax, filing of returns and payment of self-assessment tax. It observed, on analysis, that it was clear from the bare reading of these provisions that whether for purposes of computing the advance tax liability or for calculation of self-assessment tax, the assessee was given the liberty to make the estimation of his own accord. The revenue expected proper declaration on the basis of which the liability would be eventually determined, since after all, the necessary information or data was available first to the assessee. It observed that the liability of the revenue to pay interest u/s. 244A on refund of excess amount paid towards the income tax by the assessee required to be examined in the above light.

The court observed that the provisions relating to advance tax in respect of fringe benefits u/s. 115WJ, credit for tax deducted u/s. 199, credit for tax collected at source under section 206C and liability for advance tax u//s 207 had no connection with the liability to pay self-assessment tax and therefore clause (a) of section 244A(1) would not apply to refund out of the amount paid as self-assessment tax. On the other hand, clause (b) was a residuary clause which opened with the expression “in any other case”, and naturally therefore, the liability of the revenue towards interest on refund from out of amount paid as self-assessment tax would fall under this clause.

It noted that under clause (b), the beginning point for purposes of calculating the liability of the revenue towards interest on the amount being refunded was prescribed as the date of payment of tax (penalty). This expression, as defined in the explanation appended to the clause, was indicative of the date of payment of the amount specified in the demand notice u/s. 156. According to the Delhi High Court therefore, the legislation made it clear that for the rest of the clause, the amount paid by the assessee (from which refund was to be made) must have been deposited pursuant to a demand notice issued by the assessing authority. The clause (b) would therefore not apply, by virtue of the Explanation, in case the excess amount being refunded had been paid by the assessee otherwise than in compliance with demand notice or voluntarily. According to the Delhi High Court, this was the import and effect of the Explanation if the language employed thereof was read, understood and construed in its natural and ordinary sense. Since the words used were clear, plain and unambiguous, according to the Delhi High Court, there was no scope for beneficial construction, since it would lead to re-legislation, which was impermissible.

According to the Delhi High Court, the observations of the Supreme Court in Sandvik Asia’s case (supra) must be understood in the light of clarification given in the case of Gujarat Fluoro Chemicals (supra), and there was no liability on the revenue to pay tax on refund beyond the liability created by the statutory provisions. In the case of Tata Chemicals (supra), the Delhi High Court noted that the collection of the tax through the deductor was found to be illegal, thus giving rise to the liability to pay interest on the refunded amount.

The Delhi High Court therefore,concluded that there could not be a general rule that whenever a refund of income tax paid in excess was to be made, the revenue must necessarily pay interest on the refunded amount. The letter and spirit of the law on the subject, according to the Delhi High Court was that the party which committed the error in proper calculation (or delay in proper assessment) must bear the burden. If the excess amount was paid due to erroneous assessment by the revenue, having exacted such burden wrongfully and inequitably on the assessee and having retained the excess amount thus received, the reimbursement must be accompanied by payment of interest at the statutorily prescribed rate. Conversely, if the assessee was to be blamed for the miscalculation (or for delay, or for want of claim of refund), the revenue did not owe any interest, even if the excess payment of tax was liable to be refunded.

The Delhi High Court therefore expressed its inability to subscribe to follow the view taken by its own Division Bench in the case of Sutlej Industries (supra). In doing so, it observed that in that case, even otherwise, the question had been examined in the facts and circumstances indicative of high-pitched assessment made by the revenue and the refund of the self-assessment tax resulting from a claim to such effect being made by the assessee in the return. It noted that in the case before it, the revenue had not made the excessive assessment so as to impel the deposit of self-assessment tax in excess, and that the assessee did not make a claim for refund in the return, but that such claim appeared to have been made later.

It also declined to follow the decision of the Madras High Court in the case of Cholamandalam Investment (supra), for the same reasons and since, in the view of the Delhi High Court, the proposition of law on the subject was expounded in too broad terms in that case. The Delhi High Court observed that as clarified by the Supreme Court in Gujarat Fluoro Chemicals, there was no general principle of liking the revenue to pay interest on all sum so wrongfully retained. It observed that it was trite that a fiscal statute is to be construed strictly, and the claim of interest on refund of income tax had to be pegged only on the statutory clauses.

In the absence of explanation as to how the assessee erred in calculation of self-assessment tax, and there being no allegation that such excess deposit was pursuant to demand by the revenue, the Delhi High Court therefore held that the claim for interest on excess payment voluntary paid could not be sustained.

Observations
Use of the citizen’s money, whether paid voluntarily or otherwise, by the Government, not representing any liability, should be compensated is an acceptable principle of law and when not provided for specifically, should be read in to the law as has been held by the apex court. Therefore, the case for the interest on refund of an tax , including that of the tax paid on self assessment, is on a sound footing in cases where it has been held back for no fault of the tax payer. This understanding is independent of the provisions of section 244A, which provisions, in our opinion, further strengthens the case for interest.

It is true that the case of interest under consideration is not covered by clause(a) of section 244A(1). Whether the case is however, covered by clause(b) or not is a question that requires to be examined and answered for arriving at the correct view. The additional question that is required to be addressed is whether the Explanation to the clause has the effect of limiting the scope of the clause or not. Obviously, on a bare reading of the clause, it is clear that refund of any tax, other than advance tax or tax deducted at source or penalty, entitles an assessee to interest u/s. 244A. The clause later on provides that the interest shall be payable for the period starting from the date of payment of such tax or penalty and ending on the date of the grant of the refund. Explanation to the clause defines the term from ‘the date of payment of tax or penalty’ and while doing so it links tax payments to those paid in pursuance of a notice of demand. It is this restriction that has emboldened the revenue to take a stand that no interest is payable on refund of tax paid on self assessment.

Usually an Explanation does not limit the scope of the provision and when it seeks to do so, a question arises over its ability to do so. In the context, it is clear that the intention of the legislature is to grant interest on ‘any refund’ and therefore the Explanation should be interpreted to provide also for the cases where the tax is paid in pursuance of the notice of demand and in addition to provide for the period for which the interest in such cases is to be paid. In our opinion, this is the only way the Explanation can be interpreted considering the clear and unambiguous language of the main provision contained in clause(b). Alternatively, the Explanation could be said to have been inserted only to provide for the period for which interest is to be paid and in that case there would be a tacit acceptance of the fact that the case under consideration for interest on refund of self assessment tax surely falls under clause(b). Any limitation restricting the period through an Explanation, would be construed as an unauthorised limitation and would therefore have to be read down, especially in a case where the interest is otherwise payable for the moneys withheld by the Government.

The Delhi High Court, in the past, in Sutlej Industries case, had ruled in favour of the assessee when it held that an assessee was entitled to interest u/s. 244A on refund of taxes paid on account of self assessment tax. Instead of following the said decision that was delivered on similar facts, the Delhi High Court distinguished it in Engineers India’s case, which we with respect believe was under an error of facts. An error was committed when It assumed that the payment of self-assessment tax was on account of demand by the revenue, in the case of Sutlej Industries. This erroneous assumption led the court to believe that such payment was on regular assessment, and not on self-assessment and .therefore, the payment was pursuant to a notice of demand u/s. 156, on refund of which there was no doubt that interest was payable u/s. 244A. It is evident from the facts of the case of Sutlej Industries, that the payment of the self-assessment tax was prior to filing of the return of income. The Court, in Engineers India’s case, was therefore not justified in trying to differentiate the ratio of the decision of its own division bench in the earlier case of Sutlej Industries and in not following that decision.

Judicial propriety and discipline required that in case the division bench in Engineers India’s case disagreed with the earlier decision in Sutlej Industries case, it should have referred the earlier decision to a larger bench of the court, and not taken a different view from that taken by a division bench of the same court in the earlier decision.

The decision of the Supreme Court in the case of Tata Chemicals was rendered after its decision in the case of Gujarat Fluoro Chemicals. Both these decisions contained important observations of the apex court which are very relevant in the context. We are sure that had these observations of the apex court been pressed in service before the court, the decision in Engineers India ‘s case would have been different. The following observations of the Supreme Court in the case of Tata Chemicals (supra) are relevant in this regard (underlined for emphasis):

The refund becomes due when tax deducted at source, advance tax paid, self assessment tax paid and tax paid on regular assessment exceeds tax chargeable for the year as a result of an order passed in appeal or other proceedings under the Act. When refund is of any advance tax (including tax deducted/collected at source), interest is payable for the period starting from the first day of the assessment year to the date of grant of refund. No interest is, however, payable if the excess payment is less than 10 percent of tax determined u/s. 143(1) or on regular assessment. No interest is payable for the period for which the proceedings resulting in the refund are delayed for the reasons attributable to the assessee (wholly or partly). The rate of interest and entitlement to interest on excess tax are determined by the statutory provisions of the Act. Interest payment is a statutory obligation and non- discretionary in nature to the assessee. In tune with the aforesaid general principle, section 244A is drafted and enacted.

‘A “tax refund” is a refund of taxes when the tax liability is less than the tax paid. As per the old section an assessee was entitled for payment of interest on the amount of taxes refunded pursuant to an order passed under the Act, including the order passed in an appeal. In the present fact scenario, the deductor/assessee had paid taxes pursuant to a special order passed by the assessing officer/ Income Tax Officer. In the appeal filed against the said order the assessee has succeeded and a direction is issued by the appellate authority to refund the tax paid. The amount paid by the resident/ deductor was retained by the Government till a direction was issued by the appellate authority to refund the same. When the said amount is refunded it should carry interest in the matter of course. As held by the Courts while awarding interest, it is a kind of compensation of use and retention of the money collected unauthorizedly by the Department. When the collection is illegal, there is corresponding obligation on the revenue to refund such amount with interest in as much as they have retained and enjoyed the money deposited. Even the Department has understood the object behind insertion of section 244A, as that, an assessee is entitled to payment of interest for money remaining with the Government which would be refunded. There is no reason to restrict the same to an assessee only without extending the similar benefit to a resident/ deductor who has deducted tax at source and deposited the same before remitting the amount payable to a non-resident/ foreign company.

Providing for payment of interest in case of refund of amounts paid as tax or deemed tax or advance tax is a method now statutorily adopted by fiscal legislation to ensure that the aforesaid amount of tax which has been duly paid in prescribed time and provisions in that behalf form part of the recovery machinery provided in a taxing Statute. Refund due and payable to the assessee is debt-owed and payable by the Revenue. The Government, there being no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, cannot shrug off its apparent obligation to reimburse the deductors lawful monies with the accrued interest for the period of undue retention of such monies. The State having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances. The obligation to refund money received and retained without right implies and carries with it the right to interest. Whenever money has been received by a party which ex aequo et bono ought to be refunded, the right to interest follows, as a matter of course.

The view that interest is payable under clause (b) of section 244A(1) only where tax is paid pursuant to a notice of demand u/s. 156, based on interpretation of the Explanation to clause (b) is clearly contradictory to the decision of the Supreme Court in the case of Tata Chemicals (supra), where the Supreme Court held as under:

In the present case, it is not in doubt that the payment of tax made by resident/ depositor is in excess and the department chooses to refund the excess payment of tax to the depositor. We have held the interest requires to be paid on such refunds. The catechise is from what date interest is payable, since the present case does not fall either under clause (a) or (b) of section 244A of the Act. In the absence of an express provision as contained in clause (a), it cannot be said that the interest is payable from the 1st of April of the assessment year. Simultaneously, since the said payment is not made pursuant to a notice issued u/s. 156 of the Act, Explanation to clause (b) has no application. In such cases, as the opening words of clause (b) specifically referred to “as in any other case”, the interest is payable from the date of payment of tax. The sequel of our discussion is the resident/deductor is entitled not only the refund of tax deposited under Section 195(2) of the Act, but has to be refunded with interest from the date of payment of such tax.

The view, that the language of section 244A is clear and unambiguous, and that the CBDT circular therefore need not be referred to for its interpretation, also does not seem to be justified, given the contrary view on the issue taken by several High Courts (including by the Division Bench of the Dellhi court in Sutlej Industries case ) in the matter. It is a well-established principle that circulars issued by the CBDT are binding on the assessing officer, and therefore an assessing officer cannot take a view contrary to that expressed by the CBDT to deny the benefit to an assessee. CBDT circular number 549 of 1989 clarifies as under:

“11.4 The provisions of the new section 244A are as under:—

(i) Sub-section (1) provides that where in pursuance of any order passed under this Act, refund of any amount becomes due to the assessee then—

(a) if the refund is out of any advance tax paid or tax deducted at source during the financial year immediately preceding the assessment year, interest shall be payable for the period starting from the 1st April of the assessment year and on the date of grant of the refund. No interest shall, however, be payable, if the amount of refund is less than 10 per cent of the tax determined on regular assessment;
(b) if the refund is out of any tax, other than advance tax or tax deducted at source or penalty, interest shall be payable for the period starting from the date of payment of such tax or penalty and ending on the date of the grant of the refund. (Refer to example III in para 11.8).”

Very often, taxpayers apprehend that there could be litigation on certain claims for deduction made in the return of income, and prefer to pay a slightly higher amount of tax so that they do not end up paying interest in case the claim is denied. This cannot be said to be a voluntary payment, since it is on account of the excessive tendency towards litigation of the tax department in recent times.

The facts in Engineer India’s case seem to indicate that it was only the claim for interest u/s. 244A which was made in appeal proceedings and not the claim of refund for the first time as seems to be believed by the court. In any case, a payment of tax whenever made, cannot be considered to be a voluntary payment, as a rule. No taxpayer would voluntarily want to pay higher taxes than he is likely to be liable to ultimately pay, given the difficulties in obtaining refunds from the tax department and the low rate of interest paid on refunds.

Therefore, the view taken by the Bombay, Madras, Karnataka, and Punjab and Haryana High Courts, and the Delhi High Court in the case of Sutlej Industries, to the effect that interest is payable u/s. 244A on refund of self-assessment tax paid by an assessee, seems to be the better view of the matter.

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TDS: DTAA between India and UAE- Capital gains arising to resident of UAE from sale of Government securities in India is not taxable in India- No obligation to deduct tax at source-

DIT vs. ICICI Bank Ltd.; 370 ITR 17 (Bom):

The respondent-bank had allowed certain residents of UAE to open account in India with it, depositing in their accounts monies which were the income derived from sale of Government securities by them. The C. A.s certified that the capital gains had arisen to the concerned person on account of sale proceeds of Government securities and such gains being exempt under article 13 of the DTAA between India and UAE, no tax was liable to be deducted at source. The Assessing Officer held that the account holder or the constituent having earned the income from the sale of securities in India, that income had not been remitted from India to UAE and the bank was liable to deduct tax at source. The Tribunal accepted the assessee’s claim and held that there was no tax liability on the income by way of gains from sale proceeds of Government securities in India by the residents of UAE and accordingly, there is no liability to deduct tax at source.

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

“In view of the concurrent findings that there was no liability to tax on the capital gains arising to the individual constituent/investor on the transaction in the Government treasury bills undertaken through the bank, the bank was not obliged to deduct tax at source.”

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Speculative transaction- Section 43(5)- Stock and share broker- Hedging transactions- Loss due to price of shares continuing to rise- Not speculative loss- Transaction within the ambit of exception- Not disallowable-

Maud Tea and Seed Co. Ltd. vs. CIT; 370 ITR 603 (Cal):

The assessee, a stock and share broker, entered in to three transactions of sale and purchase of shares for the purpose of hedging. It suffered loss of Rs. 14.82 lakh by reason of price of shares continuing to rise. The assessee claimed that the transaction is not a speculative transaction as it came within the exception provided for. The Revenue held that the loss of Rs. 14.82 lakh incurred by the assessee fell outside the purview of proviso (b) to section 43(5), because the market price of ACC shares continued to rise and there was no adverse price fluctuation. This was upheld by the Tribunal.

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

“The undisputed facts in the case contained the ingredients of hedging. The result of those transactions, however, was a gain in the holding of shares by the assessee. By incurring a loss in the sum of Rs. 14.82 lakh, the value of the holding of the assessee in the shares in that period increased. Therefore, when ultimately the assessee sold those shares at an even greater value, it was denied the wind fall profit it would have made if it had not hedged at all. The loss was allowable.”

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ITAT- Miscellaneous application- S/s. 254(2) and 260A- A. Y. 2007-08- Pendency of an appeal filed in the High Court u/s. 260A is no bar to the maintainability of a MA filed u/s. 254(2)- R. W. Promotions P. Ltd vs. ITAT (Bom)

W. P. No. 2238 of 2014 dated 08/04/2015: www.itatonline. org

For the A. Y. 2007-08, the assessee had filed an appeal u/s .260A to the High Court against the order of the Tribunal. During the pendency of the appeal, the assessee filed a miscellaneous application (MA) before the Tribunal u/s. 254(2) to request it to rectify certain mistakes apparent from the record. The Tribunal dismissed the miscellaneous application on the ground that “judicial propriety does not allow the assessee to seek efficacious remedy simultaneously before two authorities and in particular where the issue is seized by a higher judicial forum, even if pending admission”.

On a Writ Petition filed by the assessee to challenge the order of the Tribunal dismissing the MA, the Bombay High Court allowed the petition and held as under:

“i) The least that can be said about the understanding of the legal provision by the Tribunal is that it is ex facie incorrect and erroneous. Merely because the assessee has challenged the order of the Tribunal in an Appeal u/s. 260A of the Incometax Act, 1961 before the High Court does not mean that the power under s/s. (2) of section 254 cannot be invoked either by the assessee or by the revenue/ Assessing Officer. Such a power enables the Tribunal to rectify any mistake apparent from the record and make amendments.

ii) That in a given case would not only save precious judicial time of the Tribunal but even of the higher Court. Only when the assessee or the Assessing Officer calls upon the Tribunal to undertake an exercise which is not permissible within the meaning of s/s. (2) of section 254 that the Tribunal can rely on the principle of judicial propriety or its reluctance or refusal to take upon itself the powers of the higher Court of Appeal. We can understand if the Tribunal had passed an order after considering the application made by the petitioner-assessee on its merits and in accordance with law.

iii) However, the refusal of the Tribunal to go ahead and reject the application only on the ground that the petitioner-assessee has invoked the appellate powers of higher Court cannot be sustained. That is contrary to the plain language of the two statutory provisions and which have been brought to our notice. Nothing contrary having been pointed out and such a view of the Tribunal may affect and prejudicially the interest of the revenue that all the more we cannot sustain the impugned order. The Writ Petition is allowed. The petitioner’s misc. application seeking to invoke the powers under s/s. (2) of section 254 of the Income-tax Act, 1961 shall now be heard by the Tribunal and it shall be decided in accordance with law.”

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Income computation and Disclosure Standards notified: Notification No. 33/2015 F.No. 134/48/2010 – TPl, dated 31 March 2015

Income computation and Disclosure Standards notified: Notification No. 33/2015 F.No. 134/48/2010 – TPl, dated 31 March 2015

CBDT has notified income computation and disclosure standards applicable to all assessees following the mercantile system of accounting, for computing income chargeable to income-tax under the following heads:

(i) “Profit and gains of business or profession”
(ii) “Income from other sources”.

The Notification is effective from April 1, 2015 and will apply to Assessment Year 2016-17 and subsequent Assessment Years.

17. Roll back of Advance Pricing Agreements (APA): Notification no. 23/2015 dated 14.3.15 and Notification no. 33/2015 dated 1.4.2015

The Board vide Income tax (Third Amendment) Rules, 2015 had issued rules for roll back of application of APA as well as APA vide Rule 10 MA. These Rules allow retrospective application for roll back up to four years.

The dates prescribed in the said rules has been amended vide Income tax (Fourth Amendment) Rules, 2015. Currently, an application filed before 31 March 2015 can be rolled back by filing prescribed Form 3CEDA along with additional fee before 30 June 2015 or the date of entering the APA whichever is earlier. Similar provisions apply for APAs’ entered before 31 March 2015.

18. No capital gain arises on roll over of Mutual Funds under Fixed Maturity Plans as per SEBI norms – Circular No. 6 dated 9 April 2015

19. Amendment in Rule 114 to provide procedure for application of PAN/Tax deduction Account No./Tax collection Account No. for company not registered under the Companies Act, 2013, Certain additional documents (like Aadhar card, election card etc.) permitted as proof of date of birth in case of individuals – Income tax (Fifth Amendment) Rules 2015 – Notification no. 38/2015 dated 10 April 2015

20. Rule 2BB amended to increase amount of Transport allowance for blind or handicap employee from Rs. 1600/- to Rs. 3200/- and for other employees from Rs. 800/- to Rs. 1600/- per month – Income tax (Sixth Amendment) Rules 2015 – Notification no. 39/2015 dated 13 April 2015

21. New tax returns forms notified – Notification no- 41/2015 [S.O. 1014(E) dated 15 April , 2015 – Income tax (Seventh amendment) Rules, 2015

New forms SAHAJ (ITR-1), ITR-2, SUGAM (ITR-4S) and ITR-V” have been notified. Further Rule 12 has been amended with effect from 1 April, 2015

22. Chargeability of Interest on Self-Assessment tax under the Wealth tax Act, 1957 – Circular no. 5 dated 9 April 2015

As notified for income tax purposes, the Board now clarifies that no interest u/s. 17B will be charged on self assessment tax paid before the due date of filing the return, while computing the tax liability under the Wealth tax Act for delay in filing the return of net wealth.

23. CBDT Instructions on claim of treaty benefits by FIIs – File :F.No.500/36/2015-FTD-1 dated 24 April 2015 (reproduced hereunder)

It has come to the notice of the Board that several Foreign Institutional Investors receiving income from transactions in secrutities claim such income as exempt from tax under the Income-tax Act, 1961 (‘the Act)’, by availing benefit provided in the Double Taxation Avoidance Agreements (‘DTAAs’) signed between India and their respective countries of residence.

Since the issue involved in such cases is limited, such claims should be decided expeditiously. Accordingly it has been decided that in all cases of Foreigh Institutional Investors seeking treaty benefits under the provisions of respective DTAAs, the decision may be taken within one month from the date such claim is filed.

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

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Jupiter Construction Services Ltd. vs. DCIT ITAT Ahmedabad `A’ Bench Before Pramod Kumar (AM) and S. S. Godara (JM) ITA No. 2850 and 2144/Ahd/11 Assessment Year: 1995-96 and 1996-97. Decided on: 24th April, 2015. Counsel for assessee / revenue: Tushar P. Hemani / Subhash Bains

Section 255(4) – At the time of giving effect to the majority view, it normally is not open to the Tribunal to go beyond the exercise of giving effect to the majority views, howsoever mechanical it may seem. Even if the Third Member’s verdict is shown to be “unsustainable in law and in complete disregard to binding judicial precedents”, Division Bench has no choice but to give effect to it.

Facts:
There was a different of opinion between the members of Division Bench while deciding the appeal of the assessee relating to levy of penalty. The difference was referred to the Third Member who agreed with the Accountant Member and confirmed the levy of penalty.

At the stage of Division Bench giving effect to the order of the Third Member, the assessee claimed that the order of the Third Member could not be given effect to as it was unsustainable and in complete disregard to binding judicial precedents. The assessee claimed that the matter of whether effect could be given to such an order was required to be referred to a Special Bench.

Held:
Post the decision of the jurisdictional High Court in the case of CIT vs. Vallabhdas Vithaldas 56 taxmann.com 300 (Guj) the legal position is that the decisions of the division benches bind the single member bench, even when such a single member bench is a third member bench.

A larger bench decision binds the bench of a lesser strength because of the plurality in the decision making process and because of the collective application of mind. What three minds do together, even when the result is not unanimous, is treated as intellectually superior to what two minds do together, and, by the same logic, what two minds do together is considered to be intellectually superior to what a single mind does alone. Let us not forget that the dissenting judicial views on the division benches as also the views of the third member are from the same level in the judicial hierarchy and, therefore, the views of the third member cannot have any edge over views of the other members. Of course, when division benches itself also have conflicting views on the issues on which members of the division benches differ or when majority view is not possible as a result of a single member bench, such as in a situation in which one of the dissenting members has not stated his views on an aspect which is crucial and on which the other member has expressed his views, it is possible to constitute third member benches of more than one members. That precisely could be the reason as to why even while nominating the Third Member u/s. 255(4), the Hon’ble President of this Tribunal has the power of referring the case “for hearing on such point or points (of difference) by one or more of the other members of the Appellate Tribunal”. Viewed from this perspective, and as held by Hon’ble Jurisdictional high Court, the Third Member is bound by the decisions rendered by the benches of greater strength. That is the legal position so far as at least the jurisdiction of the Gujarat High Court is concerned post Vallabhdas Vithaldas (supra) decision, but, even as we hold so, we are alive to the fact that the Hon’ble Delhi High Court had, in the case of P. C. Puri vs. CIT 151 ITR 584 (Del), expressed a contrary view on this issue which held the field till we had the benefit of guidance from the Hon’ble jurisidictional High Court. The approach adopted by the learned Third member was quite in consonance with the legal position so prevailing at that point of time.

At the time of giving effect to the majority view, it cannot normally be open ot the Tribunal to go beyond the exercise of giving effect to the majority views, howsoever mechanical it may seem. In the case of dissenting situations on the division bench, the process of judicial adjudication is complete when the third member, nominated by the Hon’ble President, resolves the impasse by expressing his views and thus enabling a majority view on the point or points of difference. What then remains for the division bench is simply identifying the majority view and dispose of the appeal on the basis of the majority views. In the course of this exercise, it is, in our humble understanding, not open to the division bench to revisit the adjudication process and start examining the legal issues.

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ACIT vs. Ramila Pravin Shah ITAT Mumbai `D’ Bench Before B. R. Baskaran (AM) and Sanjay Garg (JM) ITA No. 5246 /Mum/2013 Assessment Year: 2010-11. Decided on: 5th March, 2015. Counsel for revenue / assessee: Love Kumar / Bhupendra Shah

Section 69C – The fact that suppliers name appears in the list of havala dealers of sales tax departments and assessee is unable to produce them does not mean that purchases are bogus if the payment is through banking channels and the GP ratio becomes abnormally high. Statement by third parties cannot be concluded adversely in isolation without corroborating evidences against appellant specially when AO had not offered cross examination to the appellant.

Facts:
In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee has made purchases from certain parties whose names appeared in the list of parties provided by the sales-tax department who allegedly provide accommodation entries. The AO considered statements taken by the sales-tax department from some of the parties. The Inspector deputed to serve notices to these parties reported that these parties were not available at the given address.

The AO asked the assessee to submit delivery challans and stock register to prove the movement of stock and also to produce these parties. The assessee failed to furnish the details called for. Placing reliance on the statements given by these parties before the sales-tax authorities the AO took the view that purchases to the tune of Rs. 28.08 lakh have to be treated as unexplained expenditure. He added this amount to the total income of the assessee u/s. 69C of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A). The CIT(A) in his order noted that the jurisdictional High Court in the case of Nikunj Exim Enterprise Pvt. Ltd (ITA No. 5604 of 2010) has held that once sales are accepted, the purchases cannot be treated as ingenuine in those cases where the appellant had submitted all details of purchases and payments were made by cheques, merely because the sellers/suppliers could not be produced before the AO by the assessee.

He mentioned that he has also gone through the judgment in the case of Balaji Textile Industries (P) Ltd. vs. ITO 49 ITD 177 (Bom) which was made as long back as 1994 and which still holds good.

He took into consideration the G.P. Ratio/G.P. Margin of the assessee in the previous assessment year as well as subsequent assessment year and observed that if the addition made by the AO is accepted, then the GP ratio of the assessee during the previous year will become abnormally high and therefore, that is not acceptable because the onus is on the AO by bringing adequate material on record to prove that such a high GP ratio exists in the nature of business carried on by the assessee.

He further observed that it has to be appreciated that (i) payments were made through banking channel and by cheque; (ii) notices coming back does not mean those parties are bogus, they are just denying their business to avoid sales tax/VAT , etc, (iii) statement by third parties cannot be concluded adversely in isolation and without corroborating evidences against appellant; (iv) no cross examination has been offered by AO to the appellant to cross examine the relevant parties (who are deemed to be witness or approver being used by AO against the appellant) whose name appear in the website ww.mahavat. gov.in and (v) failure to produce parties cannot be treated adversely against the appellant.

He held that considering the facts and the binding judicial pronouncements of the jurisdictional ITAT Mumbai Bench as well as Mumbai High Court and other legal precedents the addition made by the AO cannot be sustained.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the CIT(A) had properly analysed the facts prevailing in the instant case. It extracted the relevant portion of the order of the CIT(A) and held that it did not find any infirmity in the same.

The appeal filed by the revenue was dismissed.

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Heranba Industries Ltd. vs. DCIT ITAT Mumbai `H’ Bench Before R. C. Sharma (AM) and Sanjay Garg (JM) ITA No. 2292 /Mum/2013 Assessment Year: 2009-10. Decided on: 8th April, 2015. Counsel for assessee / revenue: Rashmikant C. Modi / Jeetendra Kumar

Section 271(1)(c) – If surrender is on the condition of no penalty and assessment is based only on surrender and not on evidence, penalty cannot be levied. The fact that surrender of income was made after issuance of a questionnaire does not mean that it was not voluntary.

Facts:
The assessee company was engaged in manufacture of pesticides, herbicides and formulations. It filed its return of income for assessment year 2009-10 returning therein a total income of Rs.1.49 crore. In the course of assessment proceedings, the Assessing Officer (AO) noticed that during the previous year under consideration, the assessee had received share application money of Rs. 89.50 lakh. He asked the assessee to furnish details with supporting evidences. In response, the assessee expressed its inability to provide the necessary details and stated that in order to buy peace, it agreed to offer the share application money of Rs. 89.50 lakh as its income.

The AO added Rs. 89.50 lakh to the assessee’s income u/s. 69A and also levied penalty u/s. 271(1)(c).

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

Aggrieved, the assessee preferred an appeal to Tribunal.

Held:
The Tribunal noted that the assessee, at the very first instance, surrendered share application money with a request not to initiate any penalty proceedings. Except for the surrender, there was neither any detection nor any information in the possession of the department. There was no malafide intention on the part of the assessee and the AO had not brought any evidence on record to prove that there was concealment. No additional material was discovered to prove that there was concealment. The AO did not point out or refer to any evidence to show that the amount of share capital received by the assessee was bogus. It was not even the case of the revenue that material was found at the assessee’s premises to indicate that share application money received was an arranged affair to accommodate assessee’s unaccounted money.

The Tribunal noted that the Supreme Court in the case of CIT vs. Suresh Chandra Mittal 251 ITR 9 (SC) has observed that where assessee has surrendered the income after persistence queries by the AO and where revised return has been regularised by the Revenue, explanation of the assessee that he has declared additional income to buy peace of mind and to come out of vexed litigation could be treated as bonafide, accordingly levy of penalty u/s. 271(1)(c) was held to be not justified.

The Tribunal held that in the absence of any material on record to suggest that share application money was bogus or untrue, the fact that the surrender was after issue of notice u/s. 143(2) could not lead to the inference that it was not voluntary.

The amount was included in the total income only on the basis of the surrender by the assessee. It held that in these circumstances it cannot be held that there was any concealment. When no concealment was ever detected by the AO, no penalty was imposable. Furnishing of inaccurate particulars was simply a mistake and not a deliberate attempt to evade tax. The Tribunal did not find any merit in the levy of penalty u/s. 271(1)(c).

The appeal filed by the assessee was dismissed.

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DCIT vs. Aanjaneya Life Care Ltd. Income Tax Appellate Tribunal “A” Bench, Mumbai Before D. Manmohan (V. P.) and Sanjay Arora (A. M.) ITA Nos. 6440&6441/Mum/2013 Assessment Years: 2010-11 & 2011-12. Decided on 25.03.2015 Counsel for Revenue / Assessee: Asghar Zain / Harshavardhana Datar

Section 221(1) – Penalty for delay in payment of self-assessment tax deleted on account of financial crunch faced by the assessee.

Facts:
Due to financial crunch the assessee was not able to pay the self-assessment tax within the stipulated period. However, according to the AO, the assessee could not prove its contention with cogent and relevant material. Further, he observed that substantial funds were diverted to related concerns. He therefore levied penalty u/s. 221(1) of the Act. On appeal, the CIT(A) allowed the appeal of the assessee and deleted the penalty imposed.

Held:
According to the Tribunal, the Revenue was unable to show that the assessee had sufficient cash/bank balance so as to meet the tax demand. Secondly, it also could not show if any funds were diverted for non-business purposes at the relevant point of time so as to say that an artificial financial scarcity was created by the assessee. In view of the same the tribunal accepted the contention of the assessee and upheld the order of the CIT(A).

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Dy. Director of Income Tax vs. Serum Institute of India Limited Income Tax Appellate Tribunal Pune Bench “B”, Pune Before G.S. Pannu (A. M.) and Sushma Chowla (J. M.) ITA Nos. 1601 to 1604/PN/2014 Assessment Year: 2011-12. Decided on 30-03-2015 Counsel for Revenue / Revenue: B. C. Malakar / Rajan Vora

Section 206AA read with section 90(2) – Rate of deduction of tax at source where nonresidents do not have PAN – Held that the beneficial provisions of DTAAs override the provisions of section 206AA and tax to be deducted at the lower rate as prescribed in DTAA.

Facts:
The assessee company was engaged in the business of manufacture and sale of vaccines. In the course of its business activities, assessee made payments to non-residents on account of interest, royalty and fee for technical services. The assessee deducted tax at source on such payment in accordance with the tax rates provided in the Double Taxation Avoidance Agreements (DTA – As) with the respective countries. It was noted by the AO that in case of some of the non-residents, the recipients did not have Permanent Account Numbers (PANs). As a consequence, Revenue treated such payments, as cases of ‘short deduction’ of tax in terms of the provisions of section 206AA which require that the tax shall be deductible at the rate specified in the relevant provisions of the Act or at the rates in force or at the rate of 20%. On appeal, the CIT(A) held that where the DTAA s provide for a tax rate lower than that prescribed in 206AA , the provisions of the DTAA s shall prevail and the provisions of section 206AA would not be applicable. Therefore, he deleted the tax demand raised by the Revenue relatable to the difference between 20% and the actual tax rate provided by the DTAA s.

Before the Tribunal, the Revenue contended that section 206AA would override section 90(2) and therefore, the tax deduction was liable to be made @ 20% in absence of furnishing of PANs by the recipient non-residents.

Held:
The Tribunal, relying on the decisions of the Supreme Court in the cases of Azadi Bachao Andolan and Others vs. UOI, (2003) 263 ITR 706, CIT vs. Eli Lily & Co. (2009) 312 ITR 225 and the case of GE India Technology Centre Pvt. Ltd. vs. CIT (2010) 327 ITR 456 upheld the order of the CIT(A) and held that where the tax had been deducted on the strength of the beneficial provisions of DTAAs, the provisions of section 206AA cannot be invoked by the AO having regard to the overriding nature of the provisions of section 90(2).

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2015-TIOL-408-ITAT-DEL ITO vs. JKD Capital & Finlease Ltd. ITA No. 5443/Del/2013 Assessment Year : 2005-06. Date of Order: 27.3.2015

Section 269SS, 271E, 275(1)(c) – Cases of levy of penalty u/s. 271E are covered by section 271(1)(c) and accordingly orders passed u/s. 271E will be barred by limitation on expiry of the financial year in which the proceedings in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which penalty proceedings are initiated, whichever period expires later.

Facts:
In the case of the assessee, proceedings for levy of penalty u/s. 271E were initiated in assessment order dated 28th December, 2007. Aggrieved by the assessment order the assessee preferred an appeal to the CIT(A) on various grounds. The appeal filed by the assessee was dismissed by the CIT(A). Upon dismissal of the appeal filed by the assessee, the Assessing Officer (AO) referred the matter regarding levy of penalty u/s. 271E to the Ad ditional Commissioner. The Additional Commissioner passed an order levying penalty u/s. 271E on 20th March, 2012.

Aggrieved by the levy of penalty, the assessee preferred an appeal to CIT(A) who quashed the order levying the penalty on the ground that it is barred by limitation.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the Delhi High Court has in the case of CIT vs. Worldwide Township Projects Ltd. 269 CTR 444 (Del) held that section 275(1)(c) will apply to cases of penalty for violation of section 269SS. The Tribunal held that the date on which CIT(A) had passed order in quantum proceedings had no relevance as it did not have any bearing on the issue of penalty. The Tribunal held that the CIT(A) had rightly held that the penalty order passed by the AO was barred by limitation as the penalty order was passed beyond six months from the end of the month in which penalty proceedings were initiated in the month of December 2007 and penalty order was thus required to be passed in before 30th June, 2008 whereas the penalty order was passed on 20th March, 2012.

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2015-TIOL-419-ITAT-AHM Dashrathbhai V.Patel vs. DCIT MA No. 174/Ahd/2014 arising out of CO No. 177/Ahd/2009 Block Period : 1.4.1989 to 16.11.1999. Date of Order: 23.1.2015

Section 254 – Decision of the Tribunal which is contrary to the subsequent decision of the Supreme Court gives rise to a mistake apparent which is required to be rectified.

Facts :
In the case of the assessee, the assessment of undisclosed income was completed and the amount of tax payable was computed @ 67.2% i.e. applying the rate of 60% plus surcharge thereon @ 12% as per proviso to section 113.

In the course of appellate proceedings before CIT(A), the assessee took an additional ground and contended that the proviso to section 113 was introduced by the Finance Act, 2002. Till 31st May, 2002 section 113 did not have a proviso levying surcharge on income-tax. The assessee contended that the proviso is prospective and does not apply to his case where search was carried on 16.11.1999. Accordingly, the assessee is not liable to pay surcharge levied by proviso to section 113. Reliance was placed on the Special Bench decision in the case of Merit Enterprises vs. DCIT 101 ITD 1 (Hyd)(SB). The CIT(A) decided the case against the assessee by following the decision of Supreme Court in the case of CIT vs. Suresh N. Gupta 297 ITR 322 (SC) wherein it held that the proviso was clarificatory and curative in nature. The assessee did mention that in the case of CIT vs. Vatika Township (P) Ltd. 314 ITR 338 (SC) the issue had been referred by the Division Bench to the Larger Bench of the Supreme Court.

Before the Tribunal, while arguing the Cross Objection filed by the assessee, it was pointed out that the issue has been referred to the Larger Bench of the Supreme Court. However, the Tribunal following the decision of the Supreme Court in the case of CIT vs. Suresh N. Gupta (supra) decided the issue against the assessee.

Subsequently, the Larger Bench of the Supreme Court in the case of CIT vs. Vatika Township (P.) Ltd. 49 taxman. com 249(SC) reversed the decision of the Division Bench of the Supreme Court in the case of CIT vs. Suresh N. Gupta and held that the proviso was prospective and not clarificatory. The assessee filed Miscellaneous Application requesting the Tribunal to correct the view taken while deciding the Cross Objection by relying on a Supreme Court decision decided after the Cross Objection was decided.

Held:
The Tribunal noted that the order of the Supreme Court in the case of Vatika Township (P.) Ltd. (supra) was pronounced after the decision of the Tribunal. However, it observed that the order of the Supreme Court laid down the law of the land as it existed since the inception of the enactment. It noted that the Supreme Court has in the case of Saurashtra Kutch Stock Exchange 305 ITR 227 (SC) held that even a subsequent decision of the Supreme Court is binding on the Tribunal and if the decision of the Tribunal is contrary to the subsequent decision of the Supreme Court such decision of the Tribunal gives rise to a mistake apparent which needs to be rectified.

The Tribunal allowed the application filed by the assessee.

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2015-TIOL-416-ITAT-DEL ITO vs. Bhupendra Singh Monga ITA No. 3031/Del/2013 Assessment Years: 2007-08. Date of Order: 30.3.2015

Section 268A, CBDT Instruction No. 5 of 2014 – Instruction No. 5 of 2014 dated 10.7.2014 fixing monetary limit for not filing the appeal to the Tribunal at Rs. 4,00,000 is applicable even to pending cases i.e. cases where appeal was filed before issuance of this instruction.

Facts :
While assessing the total income of the assessee, an individual, the Assessing Officer (AO) held that the assessee had not properly explained the source of cash deposits. He, accordingly, made certain additions on account of cash deposits.

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

Aggrieved, the Revenue preferred an appeal to the Tribunal. The tax effect of the appeal filed was less than Rs. 4,00,000. The appeal was filed on 15.5.2013. Vide CBDT Instruction No. 5 of 2014 the threshold limit for filing appeal to Tribunal was fixed at Rs. 4,00,000. The Bench noticed that the Revenue ought not to have filed the appeal since the tax effect was less than Rs. 4,00,000. The DR argued that the appeal was filed before issuance of Instruction No. 5 of 2014, and therefore, the said instruction is not applicable to the present case.

Held:
The Tribunal noted that section 268A has been inserted by the Finance Act, 2008 with retrospective effect from 1.4.1999. It also noticed that CBDT has vide Instruction No. 5 of 2014 fixed the threshold of tax effect for filing appeal by the Revenue to the Tribunal to be Rs. 4,00,000. Accordingly, it held that the circular is applicable for pending cases also and therefore, the Revenue should not have filed the appeal before the Tribunal. It fortified its decision by the following decisions of the Hon’ble Punjab & Haryana High Court:

1 CIT vs. Oscar Laboratories P. Ltd. (2010) 324 ITR 115 (P & H)
2 CIT vs. Abinash Gupta (2010) 327 ITR 619 (P & H)
3 CIT vs. Varindera Construction Co. (2011) 331 ITR 449 (P & H)(FB)

It also noted that the Delhi High Court in the case of CIT vs. Delhi Race Club Ltd. in ITA No. 128/2008, order dated 3.3.2011 has following its earlier order dated 2.8.2010 in ITA No. 179/1991 in the case of CIT Delhi-III vs. M/s P.S.Jain & Co. held that such circular would also be applicable to pending cases.

The appeal filed by the Revenue was dismissed.

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[2015] 152 ITD 533 (Jaipur) Asst. DIT (International taxation) vs. Sumit Gupta. A.Y. 2006-07 Order dated- 28th August 2014.

Section 9, read with section 195 and Article 7 of DTAA between India and USA

Income cannot be said to have deemed to accrue or arise in India when the assessee pays commission to non-resident for the services rendered outside India and the non-resident does not have a permanent establishment in India. Consequently, section 195 is not attracted and so the assessee is not liable to deduct TDS from the said payment.

FACTS
The assessee exported granite to USA and paid commission on export sales made to a US company but it did not deduct tax u/s. 195.

The Assessing Officer held that the sales commission was the income of the payee which accrued or arose in India on the ground that such remittances were covered under the expression fee for technical services’ as defined u/s. 9(1)(vii)(b). He thus held that the assessee was liable deduct tax u/s. 195 and he was in default u/s. 201(1) for tax and interest.

On Appeal, CIT (Appeals) held that commission does not fall under managerial, technical or consultation services and therefore, no income could be deemed to have accrued or arisen to the non-resident so as to attract provisions of withholding tax u/s. 195.

On Appeal-

HELD THAT
The order of CIT(A) was to be upheld as the non-resident recipients of commission rendered services outside India and claimed it as business income and had no permanent establishment in India. Thus, provisions of section 9 and section 195 were not attracted.

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Reference- High Court- Question of Law- The legal inferences that should be drawn on the primary facts is eminently a question of law.

Premier Breweries Ltd vs. CIT (2015) 372 ITR 180 (SC)

Business Expenditure – The High Court rightly reversed the order of the Tribunal allowing the claim of deduction of commission paid to agents to co-ordinate with the retailers and State Corporation which were exclusive wholesalers of alcoholic beverages based on primary facts.

The appellants were engaged in the manufacture and sale of beer and other alcoholic beverages. Certain States like Kerala and Tamil Nadu had established marketing corporations which were the exclusive wholesalers of alcoholic beverages for the concerned State whereby all manufactures had to compulsorily sell their products to the State Corporations which, in turn, would sell the liquor so purchased, to the retailers. It was pleaded by the appellants that manufacturers of beverages containing alcohol had to engage services of agents who would co-ordinate with the retailers and State Corporations to ensure continuous flow/supply of goods to the ultimate consumers. And on that ground they sought deduction u/s. 37 of the Act.

The claim made by the assessee in the facts noted above was disallowed by the Assessing Officer. The said order of the Assessing Officer was confirmed by the Commissioner of Income-tax (Appeals). The assessee had moved the learned Income-tax Appellate Tribunal, Cochin Bench against the aforesaid orders. The learned Tribunal took the view that the assessee was entitled to claim for deduction. The said view of the learned Tribunal was reversed by the High Court in the Reference made to it u/s. 256(2) of the Act.

Before the Supreme Court, three propositions were advanced on behalf of the appellants. The first was whether the High Court could have reframed the questions after the conclusion of the arguments and that too without giving an opportunity to the assessee. The answer to the above question, according to the appellant, was to be found in M. Janardhana Rao vs. Joint CIT (237 ITR 50) wherein the Supreme Court had held that questions of law arising in an appeal u/s. 260A of the Act must be framed at the time of admission and should not be formulated after conclusion of the arguments.

The second issue raised was the jurisdiction of the High Court to set aside the order of the Tribunal in the exercise of its reference jurisdiction. According to the appellants, the point was no longer res integra having been settled in C.P. Sarathy Mudaliar vs. CIT (62 ITR 576) wherein the Supreme Court had taken the view that setting aside the order of the Tribunal in exercise of the reference jurisdiction of the High Court was inappropriate. It had been observed that while hearing a reference under the Income-tax Act, the High Court exercises advisory jurisdiction and does not sit in appeal over the judgment of the Tribunal. It had been further held that the High Court had no power to set aside the order of the Tribunal even if it is of the view that the conclusion recorded by the Tribunal is not correct.

The third question that had been posed for an answer before the Supreme Court was with regard to the correctness of the manner of exercise of jurisdiction by the High Court in the present case, namely, that the evidence on record had been re-appreciated by the High Court with a view to ascertain if the conclusions recorded by the Tribunal were correct. Reliance had been placed on paragraph 16 of the judgment of the Supreme Court in the case of Sudarshan Silks and Sarees vs. CIT (300 ITR 205, 213).

The Supreme Court noted that in the present case, the High Court while hearing the reference made u/s. 256(2) of the Act had set aside the order of the Tribunal. The Supreme Court held that undoubtedly, in the exercise of its reference jurisdiction the High Court was not right in setting aside the order of the Tribunal. The Supreme Court, however, on reading the ultimate paragraph of the order of the High Court found that the error was one of form and not of substance inasmuch as the question arising in the reference had been specifically answered in the following manner: “We, therefore, set aside the order of the Tribunal and uphold that of the Commissioner (Appeals) and answer the questions in favour of the Revenue by holding that the assessee had not discharged the burden that it is entitled to deductions under section 37 of the Income-tax Act. Reference is answered accordingly.”

The Supreme Court observed that a reading of the questions initially framed and subsequently reframed showed that what was done by the High Court was to retain three out of twelve questions, as initially framed, while discarding the rest. Some of the questions discarded by the High Court were actually more proximate to the questions of perversity of the findings of fact recorded by the learned Tribunal, than the questions retained. The Supreme Court held that from a reading of the order of the High Court it was clear that the High Court examined the entitlement of the appellant assessee to deduction/ disallowance by accepting the agreements executed by the assessee with the commission agents; the affidavits filed by C. Janakiraman and Shri A. N. Ramachandra Nayar, husbands of the two lady partners of R.J. Associates and also the payments made by the assessee to R.J. Associates as well as to Golden Enterprises. The question that was posed by the High Court was whether acceptance of the agreements, affidavits and proof of payment would debar the assessing authority to go into the question whether the expenses claimed would still be allowable u/s. 37 of the Act. This was a question which the High Court held was required to be answered in the facts of each case in the light of the decision of the Supreme Court in Swadeshi Cotton Mills Co. Ltd. vs. CIT (No.1) (63 ITR 57) and Lachminarayan Madan Lal vs. CIT (86 ITR 439, 446). The High Court had noted the following observations in Lachminarayan (supra):

“The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee’s business. Although there might be such an agreement in existence and the payments might have been made. It is still open to the Incometax Officer to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under section 37 of the Act.”

The Supreme Court held that there were certain Government circulars which regulated, if not prohibited, liaisoning with the government corporations by the manufacturers for the purpose of obtaining supply orders. The true effect of the Government circulars along with the agreements between the assessee and the commission agents and the details of payments made by the assessee to the commission agents as well as the affidavits filed by the husbands of the partners of M/s. R.J. Associates were considered by the High Court. The statement of the managing director of tamil nadu State marketing Corporation Ltd. (taSmaC Ltd.), to whom summons were issued u/s. 131 of the Act, to the effect that M/s. Golden Enterprises had not done any liaisoning work with taSmaC Ltd. was also taken into account. the basis of the doubts regarding the very existence of R. J. Associates, as entertained by the Assessing Officer, was also weighed by the high Court to determine the entitlement of the assessee for deduction u/s. 37 of the act. In performing the said exercise the high Court did not disturb or reverse the primary facts as found by the learned tribunal. Rather, the exercise performed was one of the correct legal inferences that should be drawn on the facts already recorded by learned tribunal. The questions reframed were to the said effect. the legal inference that should be drawn from the primary facts, as consistently held by the Supreme Court, was eminently a question of law. No question of perversity was required to be framed or gone into to answer the issues arising. the questions relatable to perversity were consciously discarded by the High Court. The Supreme Court, therefore, could not find any fault with the questions reframed by the high Court or the answers provided.

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Recovery of tax – Stay application – A. Y. 2011-12 – Authority to prima facie consider merits and balance of convenience and irreparable injury – Authority to record reasons and then conclude whether stay should be granted and if so on what condition – No examination and no consideration – Order rejecting stay is not valid –

Hitech Outsourcing Services vs. ITO; 372 ITR 582 (Guj):

For the A. Y. 2011-12, the assessee challenged the assessment order filing appeal before Commissioner (Appeals) The assessee also filed stay application which was initially granted on the condition that the assessee furnished a bank guarantee but subsequently, as the bank guarantee was not furnished, the application was dismissed.

The assessee filed a writ petition challenging the dismissal order. The Gujarat High Court allowed the writ petition and held as under:

“The Revenue had not been able to show any reasons which had weighed the authority for passing the order. When the question of grant of stay against any demand of tax is to be considered, the authority may be required to prima facie consider the merits and balance of convenience and also irreparable injury. These had neither been examined nor considered. The authority was required to record the reasons and then reach an ultimate conclusion as to whether the stay should be granted and if so on what condition. In the absence of any reasons, the order rejecting the stay application could not be sustained.”

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Penalty – Sections 271D, 271E and 273B – A. Ys. 1996-97 to 1998-99 – Loan or deposit in cash exceeding prescribed limit – Payments from partners in cash – Firm and partner are not different entities – Penalty cannot be imposed u/s. 271D –

CIT vs. Muthoot Financiers; 371 ITR 408 (Del): (2015) 55 taxmann.com 202 (Del):

The
assessee firm was involved in the business of banking. The Assessing
Officer found that the firm had accepted payments firm the partners,
during the relevant years corresponding to the A. Ys. 1996-97 to 1998-99
in cash. The Assessing Officer imposed penalty u/s. 271D of the
Income-tax Act, 1961. The Tribunal held that the advances made to the
firm by its partners could not be regarded as loans advanced to the
firms and deleted the penalty.

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

“i)
The transaction effected could not partake the colour of loan or
deposit and neither section 269SS nor section 271D of the Act would come
into play.

ii) It was an undisputed fact that the money was
brought in by the partners of the assessee firm. The source of money had
also not been doubted by the Revenue. The transactions are bonafide and
not aimed at avoiding any tax liability.

iii) The
creditworthiness of the partners and the genuineness of the transactions
coupled with the relationship between the “two persons” and two
different legal interpretations put forward could constitute a
reasonable cause in a given case for not invoking section 271D and
section 271E of the Act. Section 273B of the Act would come to the aid
and help the assessee. Penalty could not be levied.”

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Non-resident -Taxability in India – Royalty – Section 9(1)(vi) – Income from supply of software embedded in hardware equipment or otherwise to customers in India – Does not amount to royalty –

CIT vs. Alcatel Lucent Canada; 372 ITR 476 (Del):

The assessee, a non-resident, manufactured, traded in and supplied equipment and services for global system for mobile cellular radio. The assessee supplied hardware and software to various entities in India. The software licensed by the assessee embodied the process required to control and manage the specific set of activities involved in the business use of the customers. The software also made available the process to its customers, who used it to carryout their business activities. The Assessing Officer held that the consideration for supply of the software amounted to royalty u/s. 9(1)(vi) of the Incometax Act, 1961. The Tribunal held that the payment did not constitute royalty and, therefore, section 9(1)(vi) was not attracted and for the same reasons, article 13(3) of the DTAA s between India and France, Canada, Germany, China were not attracted.

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

“The income of the assessee from supply of software embedded in the hardware equipment or otherwise to customers in India did not amount to royalty u/s. 9(1)(vi).”

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Income – Accrual of – A. Y. 1996-97 – Mercantile system – Civil construction – Sums retained for payment after expiry of defect free period – Right to receive amount contingent upon there being no defects – Accrual only on receipt of amount after defect free period –

CIT vs. Shankar Constructions; 271 ITR 320(T&AP):

The assessee is a civil contractor. The contract provided for deduction of 7.5% of each bill. Out of this, 5% was payable on successful completion of the work and the balance 2.5% after the expiry of the defect-free period. For the A. Y. 1996-97 the assessee did not include the amount representing 2.5% of the bills. The Assessing Officer held that since the assessee was following the mercantile system of accounting, the amount of 2.5% of the bills could be said to have accrued to it, along with the amount paid under the bills and was liable to be treated as income for that year. The Tribunal held in favour of the assessee.

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

“The right to receive the amount was contingent upon there not being any defects in the work, during the stipulated period. It was then, and only then, that the amount could be said to have accrued to the assessee.”

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Constitutional validity – Amendment made in section 80-IB(9) by adding an Explanation was not clarificatory, declaratory, curative or made “small repair” in the Act – On the contrary, it takes away the accrued and vested right of the Petitioner which had matured after the judgments of ITAT. Therefore, the Explanation added by the Finance (No.2) Act 2009 was a substantive law – Explanation added to section 80-IB(9) by the Finance (No.2) Act, of 2009 is clearly unconstitutional, violative of Arti<

Niko Resources Ltd. vs. UOI: [2015] 55 taxmann.com 455 (Guj):

The
Petitioner is a foreign company based in Canada and has set up a
project office in India with the permission of Reserve Bank of India.
The Petitioner has been claiming benefit of deduction of 100% of the
profits and gains from the production of mineral oil and natural gas
u/s. 80-IB(9) of the Income Tax Act, 1961, as it stood prior to the
amendment by the Finance (No.2) Act 2009. In these proceedings, the
constitutional validity of the amendment to sub-section (9) of section
80-IB and Explanation added to it under the Act by the Finance (No.2)
Act, 2009, has been challenged.

The disputed question was as to
whether the benefits of tax holiday of seven years was available on each
undertaking which has now been taken away by the amendment made in
section 80-IB(9) by adding on Explanation that provides that all blocks
licensed under a single contract shall be treated as a single
undertaking.

The Gujarat High Court held as under:

“i)
Arbitrarily, the 100% tax deduction benefit could not be withdrawn by
the Finance Minister or the legislature by amending section 80-IB(9) of
the Act retrospectively from an anterior date.

ii) The amendment
in such cases where already tax benefit had accrued and vested in the
assessee could not be taken away by giving retrospective amendment to
section 80-IB(9) which is nothing but a substantive provision inserted
by amendment and it can only operate prospectively and not
retrospectively.

iii) Explanation added to section 80-IB(9) by
Finance (No.2) Act, of 2009 is clearly unconstitutional, violative of
Article 14 of the Constitution of India and is liable to be struck
down.”

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National Horticulture Board vs. Assistant Commissioner of Income Tax ITAT Delhi ‘E’ Bench Before Pramod Kumar(A.M.) and A. T. Varkey(J.M.) I.T.A. No.: 4521/Del/12 Assessment year: 2009-10. Decided on 16.01.2015 Counsel for Assessee/Revenue: Ved Jain and Rano Jain/J P Chandrakar

Section 2(15) –First proviso to Section 2(15) will not apply where the services are rendered for fees but it is only subservient to the charitable objects of the institute and is not in the nature of business itself.

Facts:
The assessee is a society under the Societies Registration Act, 1860 and registered u/s. 12A(a). Its objectives include promoting, encouraging and developing horticultural activities in the country. As a part of pursuing its objective, one of the activities that the assessee was involved in was disbursement of subsidy received from the Ministry of Agriculture in respect of qualified horticulture projects. In the course of the assessment proceedings, the AO noticed that the assessee had received a sum of Rs. 2.21 crore on account of cost of application form and the brochure from the subsidy seekers. The AO was of the view that the amounts so received were for services rendered to the customers, which is in the nature of business, commerce and trade, and, therefore, the activities of the assessee cannot be treated as charitable activities of the nature as contemplated by section 2(15). On appeal, the CIT(A) confirmed the order of the AO, as according to him,the assessee’s claim was hit by second limb of first proviso to section 2(15).

Before the Tribunal, the revenue relied on the decision of the Andhra Pradesh High Court in the case of Andhra Pradesh State Seed Certification Agency vs.Chief Commissioner of Income Tax [(2013) 356 ITR360] and contended that as long as the services are rendered to a business, trade or commerce, irrespective of the motives of the person rendering such services, the services so rendered vitiate the charitable character of the assessee rendering such services.

Held:
The Tribunal noted that there is no dispute as regards the objects of the assessee viz., objects of general public utility, which is also a charitable purpose as per the law; and as confirmed by the lower authorities, the first limb of first proviso to section 2(15) is not attracted on the facts of the case of the assessee. As regards the revenue’s case, that the case is covered under the second limb of first proviso to section 2(15), on the basis that the assessee has rendered services “in relation to trade, commerce or business” for a consideration, the Tribunal relying on the decision of the Delhi High Court in the case of GS1 vs. Director General of Income Tax (Exemptions)[(2013) 360 ITR 138], observed that the scope of second limb extends only to such cases in which a business is carried out to feed the charitable activities. For invoking second limb of first proviso to section 2(15), it is sine qua non that the assessee extends services to business, trade or commerce and such services have been extended in the course of business carried on by the assessee. According to it, even in a situation in which an assessee receives a fees or consideration for rendition of a service to the business, trade or commerce, as long as such a service is subservient to the charitable cause and is not in the nature of business itself, the disability under second limb of first proviso to section 2(15) will not come into play. Further, it also noted that in another decision of the Delhi High Court in the case of The Institute of Chartered Accountants of India vs. DGIT (Exemptions) [(2013) 358 ITR 91], the rendition of services by the assessee was viewed in conjunction with the overall objectives of the assesse and once it was seen that those services were not in the nature of trade, commerce or business per se, the mere charging of fees for services so rendered, were held to be sub-servient to the charitable objectives and it was held to have no effect on the overall charitable objects of the assessee.

As regards the case law relied on by the revenue the tribunal preferred to follow the decision of the jurisdictional High Court.

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ANS Law Associates vs. Assistant Commissioner ofIncome Tax ITAT Mumbai ‘A’ Bench Before D. Karunakara Rao (A. M.) and Sanjay Garg (J. M.) ITA No.5181/M/2012 Assessment Year: 2008-09. Decided on 05.12.2014 Counsel for Assessee/Revenue: Kirit N. Mehta / Vivek Batra

Section 285BA – Additions made solely on the basis of AIR information are not sustainable.

Facts:
The assessee is a registered partnership firm of advocates and solicitors. The AIR information showed that the assessee had received professional/technical fees from various persons aggregating to Rs.1.39 crore, which the AO required the assessee to reconcile. The assessee reconciled major portion of the amount, but could not reconcile the amount of Rs. 4.49 lakh allegedly received from one party viz., Allied Digital Services Ltd. The assessee stated before the AO that it had never received above amount. But the AO did not agree and made the addition of Rs. 4.49 lakh to the income of the assessee. In the appeal before the CIT(A), the assessee submitted bank statements of all its accounts. It was further submitted that only Rs.1 lakh was received during the year under consideration from Allied Digital Services Ltd.and a confirmation from the said party in this respect was also filed. The CIT(A),however, held that since the assessee had failed to reconcile the receipts from Allied Digital Services Ltd., the AO was justified in making the addition. According to him, the confirmation of Rs.1 lakh did not tally with the dates of receipts mentioned in the AIR information.

Held:
The Tribunal noted that the assessee had received only Rs.1 lakh from Allied Digital Services Ltd., for which there was no reference in the AIR information. Relying on the decision of the Tribunal in the case of DCIT vs. Shree G. Selva Kumar (ITA No.868/Bang/2009 decided on 22.10.10) and in the case of Aarti Raman vs. DCIT (ITA No.245/Bang/2012 decided on 05.10.12), it observed that time and again, it has been held that the additions madesolely on the basis of AIR information are not sustainable in the eyes of the law. If the assessee denies that he is in receipt of income from a particular source, it is for the AO to prove that the assessee has received income as theassessee cannot prove the negative. Accordingly, the matter was restored to the file of the AO.

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Arvind Kanji Chheda vs. ACIT ITAT Mumbai `A’ Bench Before R. C. Sharma (AM) and Sanjay Garg (JM) ITA No. 2295 /Mum/2012 Assessment Year: 2008-09. Decided on: 2nd December, 2014. Counsel for assessee / revenue: Madan Dedia / Rodolph N. D’souza

Section 73 – Classification of business for the limited purpose of set off of past losses, into speculative and non-speculative is to be done on uniform basis and losses incurred in the same business in earlier assessment years are to be treated as eligible for set off against profit of the same business in the subsequent assessment years. Accordingly, brought forward loses from business of dealing in derivatives, incurred in assessment years prior to AY 2006-07 can be set off against profit of the same business from AY 2006-07 onwards.

Facts: During the previous year relevant to assessment year 2008-09, the assessee earned profit of Rs. 57,45,716 from transactions carried out in derivatives being futures and options. He had brought forward losses, amounting to Rs. 50,64,262, from this activity since AY 2004-05 to AY 2007-08. In the return of income filed, the assessee claimed set off of loss of earlier years incurred on derivative transactions out of profit of transactions of similar nature in the current year. The Assessing Officer (AO) while assessing the total income declined the claim on the plea that brought forward speculation loss cannot be set off against profit of a nonspeculative business in the current year.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :
The Tribunal found that it was undisputed fact that during the year under consideration the assessee had entered into similar transactions as were entered into in the earlier years when the losses were suffered. The loss brought forward from the earlier years and the gain made in the current year is of the same nature. There is no change in the nature of income earned during the current year.

The classification of business for the limited purpose of set off of past losses into speculative and non-speculative is to be done on uniform basis and losses incurred in the same business in earlier assessment years are to be treated as eligible for set off against profit of the same business in the subsequent assessment years. The Tribunal held that for this reason also the assessee deserves to be allowed set off of brought forward losses from business of dealing in derivatives, incurred in assessment years prior to AY 2006-07 against profit of the same business in current assessment year. Thus, speculative losses made on future and option transactions in earlier years are eligible to be allowed to be set off against the business income of future option transactions of current year. The Tribunal also noted that the Mumbai Bench of ITAT in Gajendra Kumar T. Agarwal vs. ITO (2011) 40 (II) ITCL 324 (Mum-Trib) vide order dated 31.5.2011 has held that loss incurred in derivative transactions upto AY 2005-06 can be set off against income from derivative transactions for AY 2006-07. The Tribunal decided the appeal in favor of the assessee.

The appeal filed by assessee was allowed.

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ITA No. 6062 /Mum/2012 Assessment Year: 2008-09. Decided on: 2nd December, 2014. Counsel for assessee/revenue: V. C. Shah/ Vivekanand Prempurna

Section 271(1)(c) – Reduction of interest income
from expenses / WIP being a debatable issue, penalty u/s. 271(1)(c) is
not leviable notwithstanding that the assessee had not filed an appeal
on quantum addition.

Facts:
During the previous
year relevant to the assessment year 2008-08, the assessee company
received interest income of Rs. 5,99,644. In the return of income filed
by the assessee, this income was reduced from expenses and the net
expenses were carried forward as work-in-progress.

The Assessing
Officer (AO) while assessing the total income treated this sum of Rs.
5,99,644 to be income of the assessee. The assessee accepted the
addition. On the said addition, the AO levied penalty, u/s 271(1)(c),
amounting to Rs. 1,82,289.

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 found that the assessee has disclosed the relevant facts in
the return of income. The fact of not filing further appeal on quantum
addition should not come in the way of deciding the penalty proceedings.
The Tribunal was of the opinion that the issue whether interest income
was rightly set off against the development expenses or was to be
offered as income was a debatable issue. Accordingly, penalty u/s.
271(1)(c) is not sustainable. The Tribunal decided the appeal in favor
of the assessee. The appeal filed by assessee was allowed.

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Neelkanth Township & Construction Pvt. Ltd. vs. ITO ITAT Mumbai `B’ Bench Before D. Karunakara Rao (AM) and Amit Shukla (JM) ITA No. 6062 /Mum/2012 Assessment Year: 2008-09. Decided on: 2nd December, 2014. Counsel for assessee/revenue: V. C. Shah/ Vivekanand Prempurna

Section 271(1)(c) – Reduction of interest income from expenses / WIP being a debatable issue, penalty u/s. 271(1)(c) is not leviable notwithstanding that the assessee had not filed an appeal on quantum addition.

Facts:
During the previous year relevant to the assessment year 2008-08, the assessee company received interest income of Rs. 5,99,644. In the return of income filed by the assessee, this income was reduced from expenses and the net expenses were carried forward as work-in-progress.

The Assessing Officer (AO) while assessing the total income treated this sum of Rs. 5,99,644 to be income of the assessee. The assessee accepted the addition. On the said addition, the AO levied penalty, u/s 271(1)(c), amounting to Rs. 1,82,289.

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 found that the assessee has disclosed the relevant facts in the return of income. The fact of not filing further appeal on quantum addition should not come in the way of deciding the penalty proceedings. The Tribunal was of the opinion that the issue whether interest income was rightly set off against the development expenses or was to be offered as income was a debatable issue. Accordingly, penalty u/s. 271(1)(c) is not sustainable. The Tribunal decided the appeal in favor of the assessee. The appeal filed by assessee was allowed.

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ACIT vs. Ajit Ramakant Phatarpekar and Neelam Ajit Phatarpekar ITAT Panaji Bench, Panaji Before P. K. Bansal (A. M.0 and D.T. Garasia (J. M) ITA NO. 145 & 146/PNJ/2014 Assessment Year 2010-11. Decided on 16/03/2015 Counsel for Revenue /Assessee: Jitendra Jain / B. Balakrishna

Section 40(a)(i) r.w. Explanation to section 9 – Payments made without TDS prior to the amendment came into force is allowable

Facts:
The Assessee had paid a sum of Rs. 28.88 lakh towards sampling charges i.e. consultant/technical charges, to the parties in Hong Kong and Singapore but had not deducted any TDS on the belief that the services were rendered outside India and India is having DTAA with China and Singapore, therefore, these charges are taxable in those countries. According to him, the fee for technical services/ professional services is taxable in the hands of the party who received it outside India. According to the AO, the Finance Act, 2010 amended section 9(1)(vii) retrospectively w.e.f. 1.6.1976 and as per the amended provisions, income of non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of s/s. (1) and shall be included in the total income of the nonresident whether or not the non-resident has a residence or place of business or business connection in India or the non-resident has rendered the services in India. Therefore, according to him the Assessee was liable to deduct TDS as per the provisions of section 195.

Before the CIT(A) the assessee submitted that no income accrued in India. Explanation to section 9 inserted by the Finance Act, 2010 is not applicable as all the payments were made before the Finance Act received assent of the President on 8.5.2010. The CIT(A) allowed the appeal of the assessee.

Held:
The Tribunal noted that the Finance Act, 2010 received the assent of the President on 8.5.2010 and all the payments have been made by the Assessee to the non-resident party prior to receiving of assent of the President making the retrospective amendment by adding Explanation to section 9. At the time when the Assessee made the payment there was no provision u/s. 9 making the technical fees deemed to accrue or arise in India whether or not (a) the non-resident has residence or place of business or business connection in India or (b) the non-resident has rendered services in India. The source of the income in the hands of the non-resident was outside India. Even the place of business which earned the income was also outside India. Since the technical fees was not deemed to accrue or arise in India at the time when the Assessee made the payment as per the law then prevailing, the tribunal held that the payment made was not taxable in India.

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IDBI Capital Market Services Ltd. vs. DCIT ITAT “I” Bench, Mumbai Before N.K. Billaiya, (A. M.) & Amit Shukla (J. M.) I.T.A. No. 618/Mum/2012 Assessment Year: 2008-09. Decided on 18.02.2015 Counsel for Assessee/Revenue: N.C. Jain/Kishan Vyas

Section 37(1) – Loss arising from valuation of interest rate swap contracts as at the end of the year is allowable as deduction.

Facts:
The assessee is engaged in the business of investment, share broking and dealing in Government securities and it is a member of Bombay Stock Exchange as well as National Stock Exchange. While scrutinising the return of income the AO noticed that as on 31st March 2008 the assessee had valued the outstanding interest swap contracts and the loss of Rs.18.3 crore determined was debited to P&L Account. According to the AO, the assessee had recognised only the loss and not the profit. Further, he observed that the assessee was not consistent and definite in making entries in the account books in respect of losses and gains and accordingly denied the claim of deduction. On appeal, the CIT(A) relied upon the decision of the Bombay High Court in the case of Bharat Ruia in ITA No.1539 of 2010 and treated the loss as speculation loss and confirmed the disallowance.

Held:
The Tribunal noted that it was an undisputed fact that the assessee had made the valuation of interest rate swap contracts as at the end of the year and had incurred losses on such valuation. Further, it also noted that the assessee had made the entries following Accounting Standard AS- 11 of the ICAI. The Tribunal further found the observations of the AO that the assessee had never accounted for the gains on such transactions as totally misplaced and against the facts of the case. Relying on the decision of the Tribunal Special Bench Mumbai in the case of Bank of Bahrain & Kuwait, ITA No.4404 & 1883/Mum/2004 and of the Supreme Court in the case of Woodward Governor India Pvt. Ltd. [2009] 179 Taxman 326 (SC), the Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition of Rs.18.3 crore.

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2015-TIOL-250-ITAT-MUM Schrader Duncan Ltd. vs. Addl CIT ITA No. 8223/Mum/2010 Assessment Year : 2004-05. Date of Order: 1.1.2015

Section 271(1)(c) – Penalty u/s. 271(1)(c) is not leviable when the High Court has admitted the substantial question of law on the question of addition.

Facts
The Assessing Officer (AO) passed an order levying penalty of Rs. 66,36,077 u/s. 271(1)(c) of the Act in respect of disallowance of Long Term Capital Loss on repurchase of units of US 64 scheme of Unit Trust of India. The AO held that the assessee had furnished inaccurate details of income with respect to long term capital loss claimed.

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 where relying on the decision of the Bombay High Court in the case of CIT vs. M/s. Nayan Builders & Developers (ITA No.415/2012) order dated 8th July, 2014. it was contended that since the High Court has admitted substantial question of law, penalty u/s. 271(1)(c) is not leviable.

Held
The Tribunal noted that the substantial question of law “whether on the facts in the circumstances of the case and in law, the Tribunal was justified in holding that the appellant was not entitled to claim the loss of Rs.6. 34 crore arising on conversion of UTI US 64 units in to 6.75% Tax Free Bonds of UTI?” has been admitted by the Hon’ble jurisdictional High Court, vide order dated 19th September, 2014.

It also noted that the Hon’ble jurisdictional High court vide order dated 08-07-2014 in the case of CIT vs. M/s. Nayan Builders & Developers (ITA No.415/2012) held that no penalty is imposable u/s. 271(1)(c) of the Act in a case where substantial question of law has been admitted by the High Court. Likewise, the Tribunal, in the case of M/s. Nayan Builders & Developers Pvt. Ltd. (ITA No.2379/ Mum/2009) order dated 18th March 2011, deleted the penalty. In another case Advaita Estate Development (P.) Ltd. vs. ITO (2013) 40 Taxman.com 142 (Mumbai-Trib.) vide order dated 27/08/2013 deleted the penalty.

The Tribunal following the decision of the jurisdictional High Court allowed the appeal filed by the assessee. The Tribunal, however, observed that if at any stage, the order of the Tribunal on quantum addition is upheld by the Hon’ble High Court, the Department is free to proceed in accordance with law on penalty proceedings.

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2015-TIOL-286-ITAT-MUM Tata Realty and Infrastructure Ltd. vs. DCIT ITA No. 6380/Mum/2011 Assessment Years: 2007-08. Date of Order: 9.1.2015

Section 28 – For a company providing consultancy
services, the date of opening office can be considered as date of
setting up of business.

Facts :
The assessee
company was incorporated on 2-3-2007 to carry on business of providing
advisory services in the field of real estate and infrastructure
project. During the first previous year the assessee in its return of
income declared a loss of Rs. 61,01,298. The assessee company had not
received any operative income but had incurred various kinds of
expenditure from 2-3-2007 to 31-3-2007 and had earned dividend income of
Rs. 19,121. The assessee could not furnish any evidence to show that it
had rendered services during the previous year. The first MOU was
entered into on 10-8-2007.

Since the first MOU was entered into
by the assessee on 10- 8-2007, the Assessing Officer (AO) was of the
view that the assessee had not set up its business and the entire
expenditure incurred by the assessee was to earn exempt income. He
disallowed the entire expenditure of Rs. 61,01,298.

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

Held:
The business of the assessee was
providing advisory services in real estate and infrastructure projects.
For a company providing consultancy services, the date of opening of
office can be considered as date of setting up of business.

The
Tribunal noted that the assessee company recruited its employees well
before the date of incorporation, which included, inter alia, a Managing
Director, a Chief Financial Officer, Human Resource personnel,
Secretarial Staff and persons well versed in Strategic Research and
Advisory and Marketing and also persons having expertise in Construction
projects, Architects etc. It also purchased computers, office
equipments, vehicles and also hired its office. The assessee had
undertaken specific projects in the month of March, 2007 for companies
like TCS, Rallis, VSNL. Tata tea (Bangalore), Tata Tea (Munnar), Delhi
Development Authority, Indira Gandhi National Centre for Arts, certain
projects in Tamil Nadu, Mass Rapid Transport System (Phase 2), Special
Economic Zones, Airports etc, which meant that the assessee had started
contacting its prospective customers in the month of March 2007 itself.

As
regards the specific observation of the tax authorities that the
assessee has failed to furnish any evidence in the form of
correspondence etc. to show that it has commenced its business
activities, the Tribunal held that the said fact may not be relevant for
a consultancy company. It held that the assessee should be considered
to have been set up its business on the date of its incorporation and
hence the expenses incurred after that date should be allowed as revenue
expenditure. The view taken by the tax authorities that the first MOU
was entered in the succeeding year should be considered as date of
setting up of business was held to be not in accordance with the settled
principles.

However, since the AO did not have occasion to
examine the expenditure claim put forth by the assessee, the Tribunal
restored the matter of examining claim of expenditure to the file of the
AO.

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[2014] 151 ITD 726 (Del) Himalya International Ltd. vs. DCIT A.Y. 2005-06 Order dated- 14th March, 2014

Section 37(1) – Where in terms of sales
agreement, assessee pays expenses relating to export sales carried out
on its behalf by consignment agent located abroad, assessee’s claim for
deduction of said expenses cannot be rejected taking a view that same
were in nature of post sales expenses.

FACTS
The
assessee was engaged in the business of manufacturing, food processing
and infotech. The assessee had a consignment agent namely ‘G’ located in
USA. During relevant year, the assessee filed its return claiming ‘USA
office expenses’. The assessee’s case was that said expenses were
incurred by the consignment agent in the course of export sales of goods
on behalf of the assessee.

The AO opined that expenses incurred
by assessee were in the nature of post sales expenses and the same
could not be said to be expenses pertaining to the export business of
the assessee. Accordingly, the AO rejected the assessee’s claim.

The Commissioner (Appeals), however, allowed a major portion of assessee’s claim.

Revenue
filed an appeal on the ground that the said expenses were post sales
and therefore should be disallowed and also on the ground that no TDS
had been deducted by the assessee while making payment of these expenses
and therefore the said expenses should be disallowed.

HELD
As
per terms of the agreement between the assessee and its consignment
agent ‘G’, the expenses in the nature of selling and administrative
expenses were clearly the responsibility of the assessee and the
assessee had to reimburse the same to its consignment agent. It is a
well accepted proposition that in case of a standard consignment, sale
is effected by the consignment agent on behalf of the consignor and the
agent is not responsible for any expenses incurred for such sale and
expenses actually incurred or paid on behalf of the consigner is
reimbursed to the consignment agent.

It was apparent from the
agreement between the assessee and its consignment agent ‘G’ that the
assessee was responsible for all costs, taxes and other tax expenses
relating to the import from India to USA and sale of products made by
‘G’ including custom duty, ocean freight and land freight of USA,
warehousing expenses in USA etc. and other general and administrative
expenses including USA salaries payments, telephone expenses, travelling
expenses, staff education and medical expenses, courier expenses, web
hosting expenses, USA local expenses, membership fees paid to different
associations, legal & professional fees, car expenses etc. The
assessee also fixed the selling and administrative expenses remuneration
and other incidental at the rate of 9.05 % of the sales effected in
USA.

The amount of remittance or reimbursement made to ‘G’ also
contained an element of commission of consignment agent but since the
consignment agent has not rendered any service in India and, therefore,
consignment commission is not taxable in India.

The assessee
raises bills/invoices by estimating net realisable value (i.e. gross
sales value in US less US expenses) and under the relevant custom rules
an ARE-1 was filed by the assessee in respect of all goods leaving
Indian custom boundaries and same detail was duly declared in ARE-I by
the assessee amounting to Rs. 9.65 crore. The authorities below have
also not disputed rather accepted the accounting method of the assessee
that out of the gross sales realised in USA was declared as turnover by
the assessee in the final account and US expenses were also claimed
separately therein.

In view of above, it is opined that the
Assessing Officer concluded the assessment by recording a contradictory
finding because on the one hand, the Assessing Officer has considered
gross sales realised value in USA as sales of the assessee for the
financial year under consideration and on the other hand the Assessing
Officer held that the export sale was completed when the consigned goods
left the Indian Customs Border and all expenses incurred thereafter
were post sale expenses.

As per the above set of facts, all US
expenses incurred by the consignment agent on behalf of the assessee
were the responsibility of the assessee and subsequent agreement, which
was also certified by CPA audit report, when actual export sale was
effected at USA through consignment agent on behalf of the assessee,
then expenses claimed by the assessee for the purpose of business could
not be treated as post sales expenses and observations and findings of
the Assessing Officer are not correct and justified in this regard.

In
the result, the Commissioner (Appeals) has granted relief for the
assessee on reasonable, justified and cogent grounds which were again
followed by Commissioner (Appeals) in assessee’s own case for assessment
year 2003-04. There is no ambiguity, perversity or any other valid
reason to interfere with the same. Accordingly, all grounds of the
revenue being devoid of merits are dismissed.

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[2014] 151 ITD 642 (Mum) ITO vs. Gope M. Rochlani AY 2008-09 Order dated – 24th May, 2013

Explanation 5A to section 271(1)(c), read with
section 139. In absence of any limitation or restriction relating to
words ‘due date’ as given in clause (b) of Explanation 5A to section
271(1)(c), it cannot be read as ‘due date’ as provided in section 139(1)
alone, rather it can also mean date of filing of return of income u/s.
139(4). Therefore, where pursuant to search proceedings, assessee files
his return before expiry of due date u/s. 139(4) surrendering certain
additional income, he is entitled to claim benefit of clause (b) of
Explanation 5A to section 271(1)(c).

FACTS
The
assessee firm was carrying out business of housing development. A search
and seizure action u/s. 132(1) was carried out in case of assessee on
16th October 2008. In course of said proceedings, one of partners of
firm made statement u/s.132(4) declaring certain undisclosed income and
subsequently, the return was filed by the assessee declaring the amount
surrendered as income.

In the assessment order passed u/s.143(3)
read with section 153A, the assessment was completed on the same income
on which return of income was filed. The Assessing Officer also
initiated a penalty proceedings u/s. 271(1)(c).

The assessee,
before the Assessing Officer, submitted that this additional income was
offered voluntarily which was on estimate basis and the same has been
accepted in the assessment order as such, therefore, provisions of
section 271(1)(c) is not applicable. The Assessing Officer rejecting
assessee’s explanation levied penalty u/s. 271(1)(c).

In
appellate proceedings before Commissioner (Appeals), the assessee also
submitted that in view of clause (b) of Explanation 5A to section
271(1)(c) penalty could not be levied as the assessee filed return of
income on the due date which could also be inferred as return of income
filed u/s.139(4).

The Commissioner (Appeals) did not accept the
assessee’s explanation on Explanation 5A to section 271(1)(c), but
deleted the penalty on the ground that the income which was offered was
only on estimate basis, therefore, additional income offered by the
assessee could neither be held to be concealed income or furnishing of
inaccurate particulars of income.

On appeal by Revenue

HELD
There
is a saving clause in the Explanation 5A to section 271(1)(c) wherein
penalty cannot be held to be leviable u/s. 271(1)(c); according to which
if the assessee is found to be the owner of any asset/income and the
assessee claims that such assets/income represents his income for any
previous year which has ended before the date of search and the due date
for filing the return of income for such previous year has not expired
then the penalty u/s. 271(1)(c) shall not be levied.

The due
date for filing of the return of income u/s. 139(1) for assessment year
2008-09 was 30-9-2008, whereas the assessee has filed the return of
income on 31-10- 2008 i.e., after one month from the date of filing of
the return of income as provided in section 139(1). However the due date
for filing of the return of income u/s. 139(4) for the assessment year
2008-09 was 31-3-2010 and thus, the return of income filed by the
assessee in this case was u/s. 139(4).

The issue however is
whether the return of income filed u/s. 139(4) can be held to be the
‘due date’ for filing the return of income for such previous year as
mentioned in clause (b) of Explanation 5A to section 271(1)(c).

For
the purpose of the instant case, one has to see whether or not the
assessee has shown the income in the return of income filed on the ‘due
date’. Provisions of section 139(1) provides for various types of
assessees to file return of income before the due date and such due date
has been provided in the Explanation 2, which varies from year-to-year.
Whereas, provisions of section 139(4) provide for extension of period
of ‘due date’ in the circumstances mentioned therein and it enlarges the
time-limit provided in section 139(1). The operating line of
sub-section (4) of section 139 provides that ‘any person who has not
furnished the return within the time allowed’, here the time allowed
means u/s. 139(1), then in such a case, the time-limit has been
extended. Wherever the legislature has specified the ‘due date’ or has
specified the date for any compliance, the same has been categorically
specified in the Act.

In the aforesaid Explanation 5A, the
legislature has not specified the due date as provided in section 139(1)
but has merely envisaged the words ‘due date’. This ‘due date’ can be
very well-inferred as due date of the filing of return of income filed
u/s. 139, which includes section 139(4). Where the legislature has
provided the consequences of filing of the return of income u/s. 139(4),
then the same has also been specifically provided.

Once the
legislature has not specified the ‘due date’ as provided in section
139(1) in Explanation 5A, then by implication, it has to be taken as the
date extended u/s. 139(4). In view of the above, it is held that the
assessee gets the benefit /immunity under clause (b) of Explanation to
section 271(1)(c) because the assessee has filed its return of income
within the ‘due date’ and, therefore, the penalty levied by the
Assessing Officer cannot be sustained on this ground.

Thus, even
though the conclusion of the Commissioner (Appeals), is not affirmed,
yet penalty is deleted in view of the interpretation of Explanation 5A
to section 271(1)(c).

In the result, revenue’s appeal is treated as dismissed.

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Search and seizure – Block assessment – B. P. 1/04/1996 to 12/09/2002 – No incriminating material found during search – Survey – Incriminating material found in survey but no evidence that it related to assessee – Amounts based on survey not includible in block assessment –

CIT vs. Smt. Yashoda Shetty; 371 ITR 75 (Karn):

In September
2002, search proceedings were initiated in the case of YS and were
concluded in November 2002. A statement of KB was recorded. No
incriminating materials were found. On 12th September, 2002, a survey
was conducted in the business premises of the Assessee and incriminating
materials were identified and were impounded. Such material contained
the extract of a savings bank account in the name of B. His statement
was recorded on 12th September, 2002. The bank account contained heavy
deposits and withdrawals. After going through the statement, the
Assessing Officer came to the conclusion that this bank account
contained transactions related to assessee and it contained deposits in
respect of unaccounted sales and withdrawals. Therefore, he estimated
the undisclosed income on the basis of the deposits made in the bank
account and applied a certain rate of profit and computed the
undisclosed income. Therefore, a block assessment order was passed. The
Tribunal held that the income computed in the hands of the assessee as
undisclosed income could not have been taxed under the block assessment
and the income had to be considered for regular assessment.

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

“On
the basis of the incriminating material found in the course of survey
mainly because the material was put to the assessee and his statement
was recorded subsequent to the search, the material could not be held to
be relatable to the assessee. Therefore, the Appellate Authorities were
justified in holding that the material found in the course of survey
can become the subject matter of regular assessment and it could not
become the subject matter of block assessment.”

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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 –

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 –

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 –

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.

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 –

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 –

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-

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-

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

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 –

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-

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

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:

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:

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:

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:

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.”

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.

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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.

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.

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Taxability of Carbon Credits

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.

shailesh.kwebmaker

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

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.

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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

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.

levitra

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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

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

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

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.

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.

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Acceptance and Repayment of Loans & Deposits – Applicability Journal Entries

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.

shailesh.kwebmaker

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

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.

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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.

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

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:

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):

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

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

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.

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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

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

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

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

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

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

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.

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

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

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.

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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:

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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