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Category: Direct Taxes

Advance tax: Interest u/ss.234B and 234C: A.Y. 2007-08: Search and seizure: Cash seized of Rs.18 lakh and Rs.1.98 crore deposited by assessee on 31-1-2007 could be adjusted against advance tax liability for computing interest u/ss.234B and 234C.

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[CIT v. Shri Jyotindra B. Mody (Bom.), ITA No. 3741 of 2010, dated 21-9-2011] In the course of the search proceedings on 10th, 11th and 12th January, 2007 cash amounting to Rs.18 lakh was found and seized. The assessee offered an income of Rs.6,32,79,857 and paid an additional amount of Rs.1.98 crore on 31-1-2007. Thereafter, by a letter dated 14-3-2007, the assessee requested to adjust the said amounts of Rs.18 lakh and 1.98 crore towards the advance tax liability. The Assessing Officer accepted the offered income. However, while computing interest u/ss.234B and 234C, he did not take into account the said amounts of Rs.18 lakh and 1.98 crore paid by the assessee towards the advance tax liability. The CIT(A) allowed the assessee’s claim. The Tribunal dismissed the appeal filed by the Revenue.

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

“(i) The basic argument of the Revenue is that u/s.132B(1)(i), the amount seized during the course of search can be dealt with for discharging the existing liability under the Acts set out therein. In the present case, the tax liability in relation to the assessment year in question would get crystallised only after the assessment is completed and therefore, the request of the assessee for adjustment of the amounts in question towards the advance tax liability could not be entertained.

(ii) We see no merit in the above contention, because once the assessee offers to tax the undisclosed income including the amount seized during the search, then the liability to pay advance tax in respect of that amount arises even before the completion of the assessment. Section 132B(1)(i) of the Act does not prohibit utilisation of the amount seized during the course of search towards the advance tax payable on the amount of undisclosed income declared during the course of search.

(iii) In the present case, the assessee, prior to the last date for payment of last instalment of advance tax, had in fact by a letter dated 14-3-2007 requested the Assessing Officer to adjust the amount towards the existing advance tax liability. Since advance tax liability is to be computed and paid in accordance with the provisions of the Act even before the completion of the assessment, no fault can be found with the decision of the ITAT in holding that in the facts of the present case, the amounts in question were liable to be adjusted towards the existing advance tax liability.”

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Strictures by a Judicial Forum — Need for Restraint

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“The knowledge that another view is possible on the evidence adduced in a case acts as a sobering factor and leads to the use of temperate language in recording judicial conclusions. Judicial approach in such cases should always be based on the consciousness that one may make a mistake; that is why the use of unduly strong words in expressing conclusions or the adoption of unduly strong, intemperate or extravagant criticism, against the contrary view, which are often founded on a sense of infallibility should always be avoided.”

These are the observations of the Supreme Court in the case of Pandit Ishwari Prasad Misra v. Mohammad Isa, (1963) BLJR 226; AIR 1963 SC 1728, 1737(1).

The Patna High Court in CIT v. Shri Krishna Gyanoday Sugar Ltd., (1967) 65 ITR 449 referring to the ruling of the Apex Court, held that the use of strong language and the passing of strictures against the officers concerned of the Incometax Department were, to say the least, unwarranted and uncalled for and that it was not safe and advisable to make the remarks as made by the Tribunal in that case.

In my opinion, the conclusion of the Patna High Court is applicable while commenting on the conduct of the assessee as well. In the matter relating to penalty, the Delhi Bench of the ITAT in ACIT v. Khanna & Annadhanam, (2011) 13 Taxmann.com 94 (Delhi-Trib.) while conforming penalty u/s.271(1)(c) held:

“The assessee can harbour any number of doubts, however, the law postulates that the assessee should file a return which is correct, complete and truthful. The law of Income-tax prescribes allowability of various kinds of incomes and expenses and in respect of professional income mandate is clear. The need of proper verification clearly indicates that law wants the assessee to be very vigilant while making a claim and not to make a claim which is not in accordance with law. If the receipt is prima facie revenue in nature, there is no gainsaying that the assessee harboured doubt in respect of earning fruits of the tree though not from the same branch of the tree.”

Doubts can always result into a mistake and that therefore this needs to be tolerated with humility and calmness, rather than by severe criticism of the person who held any such doubt or commits mistake.

 In this case the assessee, a firm of chartered accountants, was a partner of Deloitte Haskins & Sells (DHS) and had nominated partners in DHS and was a member of Deloitte Touche Tohmatu International (DTTI), a non-resident professional firm. The assessee rendered services to clients of DHS in India in the name of DHS. DTTI was keen that all the firms constituting DHS should merge into one firm. The merger would have resulted in losing national identity of the constituent firms. As this was not acceptable to the assessee, it was decided that DTII would ask the assessee to withdraw from the membership of DHS/DTII. The assessee received a compensation of Rs.1.15 crores on its withdrawal, which was treated as capital receipt by the assessee and was credited to partners’ accounts. This was disclosed in the computation and the balance sheet by way of a note.

The Tribunal held that if the assessee had continued as the member of DTII, the earning would have been professional receipt and the alternate receipt also takes the same analogy and has no trapping of having any doubt about its being a purely professional receipt or revenue receipt. The Bench went further on to pass the following strictures in this case against the assessee:

“The assessee is a firm of chartered accountants and it is not understandable that for such an issue about a clearly professional receipt, which is very basic in character, the assessee had any doubt about its nature. If it is so, we are unable to understand how the assessee can discharge its role as a professional consultant, auditing number of clients, giving them valuable advices on the accounting and taxation aspects. It is unimaginable that a professional firm like the assessee, will tend to have any doubt on such a simple proposition of professional receipt. There is no whisper in the agreement between DTTI and the assessee which creates any doubt at all. In our view, the issue never called for any doubt or ambiguity, the same has been created by the assessee and not by the law. The assessee has ventured into an adventure which was fraught with obvious risks which it has preferred to take. The assessee has pleaded that payment of advance tax does not amount to admission and the assessee is free to change its stand. In our view, advance tax payment may not be conclusive, but it is an indication to the mindset of the assessee. While construing strict civil liability, it becomes imperative to correlate the assessee’s various activities and explanations.”

In this case the assessee also held with it three legal opinions to defend its case, but their content did not yield any help, nor find discussion in the order for the reason that these were not presented to the assessing authorities either during the assessment or penalty proceedings.

The criticism against the assessee firm in this case is: “How the assessee can discharge its role as a professional consultant, auditing number of clients, giving them valuable advices on the accounting and taxation aspects can view a professional receipt as a capital receipt. It is unimaginable that a professional firm like the assessee will tend to have any doubt on such a simple proposition of professional receipts.”

Even though the assessee may be well versed on the subject, it gathered opinion of three independent experts out of which two headed the CBDT forum. The Bench countered the professional firm doubting its competencies even in areas that have nothing to do with the subject of taxation. With due respect, the thing that is of utmost concern here is whether it is appropriate for the Tribunal to demean a firm of professional chartered accountants of repute. It must be appreciated that the profession of law and accountancy are noble professions and it is only in keeping with this notion that the Benches are formed of judicial and accountant members who hold expertise in their respective discipline. In keeping with the observations of the Supreme Court, it is submitted with respect that perhaps it is desirable that the Honourable members of the Tribunal exercise restraint and avoid excessive criticism. This will only postulate and protect the rule of law as well as the dignity of the great forum of the Income Tax Appellate Tribunal.

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Rectification of mistake — Tribunal should have regard to all the facts — Capital or revenue expenditure — Business loss — Loss incurred due to fluctuation of foreign exchange rate — To be decided in the light of CIT v. Woodward Governor India P. Ltd.

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[Perfetti Van Melle India (P) Ltd. v. CIT, (2011) 334 ITR 259 (SC)]

The assessment order for A.Y. 1998-99 was passed on 10th January, 2001, in which foreign exchange fluctuation loss amounting to Rs.38,30,000 was disallowed by the Assessing Officer.

The assessee filed an appeal before the Commissioner of Income-tax (Appeals) who upheld the disallowance on the ground that the exchange fluctuation related to long-term loan, and it could not be allowed as revenue expenditure.

Against the order of the Commissioner of Incometax (Appeals), the assessee filed an appeal before the Tribunal. The Tribunal vide order dated 22nd April, 2004, upheld the disallowance of loss of Rs.38,30,000.

Thereafter, the assessee filed an appeal before the High Court. While disposing of the appeal, it was observed by the High Court on 6th December, 2004, that:

“In view of paragraphs 13 and 14 of the Tribunal’s order, it is not possible for us to accept the contention that the assessee had produced books of account. It is for the Tribunal, which is a fact-finding authority, to examine the same and to record a finding. If the appellant had produced all the necessary documents in this behalf, then the Tribunal should have examined the same. In fact, in such a situation, instead of approaching this Court, the assessee ought to have moved the Tribunal u/s.254(2) of the Income-tax Act, 1961. It would be open to the appellant to move the Tribunal within 15 days from today. The appeal is disposed of accordingly.”

Thereafter, the assessee filed an application u/s. 254(2) of the Act, before the Tribunal and that application was dismissed by the Tribunal vide its order dated 15th June, 2005.

On an appeal, the High Court was of the view that ex facie, the appeal challenging two different orders passed by the Tribunal dated 22nd April, 2004, and 15th June, 2005, in one single appeal was not maintainable.

The High Court held that as far as the order dated 22nd April, 2004 was concerned, the same was challenged by the assessee by the way of appeal and vide order dated 6th December, 2004, that appeal had been disposed of by the High Court. The assessee could not reagitate the same issue again.

Coming to the order dated 15th June, 2005, passed by the Tribunal, the High Court noted that the Tribunal while dismissing the application for rectification, vide impugned order had held that:

“Our attention was invited to para 13 of the order in which the Tribunal has observed that it was for the assessee, which possesses exclusive knowledge as to the utilisation of the loan, to prove the same by leading evidence to that effect by producing the books of account and showing the entries made therein and that the assessee has not discharged this burden either before the Commissioner of Income-tax (Appeals) or before the Tribunal. It is stated that the Tribunal has noted in para 14 of the order that in A.Y. 1997-98 the assessee had filed some details and documents on the basis of which the Commissioner of Income-tax (Appeals) accepted the claim, but has gone further to record that for the year under appeal no such details were filed. The submission of the assessee before us is that the loss was allowed by the income-tax authorities in the A.Ys. 1996-97 and 1997-98 and a different treatment for the same is not warranted since the facts were the same for the year under appeal also. It is submitted that inasmuch as the Tribunal has overlooked this aspect of the matter, there is an error apparent from the record. It was alternatively submitted that the Tribunal should give a finding about the nature of the loss, whether it is capital or revenue. However, it was fairly admitted before us that this claim was not made before the income-tax authorities or before the Tribunal.”

The High Court observed that according to this order, it had been admitted before the Tribunal that the claim was not made before the incometax authorities or before the Tribunal. The Tribunal further held that:

“We have considered the matter. Given the findings of the Tribunal in paras 13 and 14 of its order, the present application cannot be accepted. It may perhaps be that the evidence produced in the earlier years was relevant for the purpose of deciding the merits of the assessee’s claim, but when the Departmental Authorities have held that for the year under appeal there was no evidence brought on record to show the utilisation of the loan, and where such a finding has been upheld by the Tribunal, the provisions of section 254(2) of the Act cannot be invoked. We do appreciate the assessee’s anxiety and it may even be open to the assessee to argue that the evidence adduced by the assessee for the earlier years would be sufficient to discharge the assessee’s burden for the year under appeal, but even if there is grievance on this score, it could not perhaps be redressed by resorting to section 254(2) of the Act. At best it may amount to an error of judgment or may even amount to the Tribunal insisting on the same evidence being formally placed on record for the year under appeal, which may appear to be ritualistic, but since the Tribunal has gone on the basis of the question of burden, it is not possible for us to accept the present application. We are also unable to give a finding as to the nature of loss, keeping in view the very fair admission that the question was not raised before the Tribunal or the income-tax authorities.”

According to the High Court, the appeal was wholly misconceived and without any basis and there was no reason to disagree with the findings given by the Tribunal and there was no infirmity in the impugned order passed by the Tribunal. The Supreme Court held that having examined the facts and circumstances of the case, which pertained to the A.Y. 1998-99, and particularly in the light of the order passed for the earlier A.Ys. 1996-97 and 1997-98, as also having regards to the assessment orders passed in the following year (1999-2000) and in view of its judgment in the case of CIT v. Woodward Governor India P. Ltd. reported in (2009) 315 ITR 254 (SC), the Tribunal was wrong in refusing to rectify its own order u/s. 254(2) of the Income-tax Act, 1961, particularly when it had failed to appreciate that in any event the expenditure could have fallen on the capital account, which was specifically pleaded by the assessee as an alternate submission.

For the aforestated reasons, the Supreme Court set aside the judgment of the High Court and the matter was remitted to the Tribunal. The Tribunal was directed to decide the matter de novo in accordance with the law laid down by the Supreme Court in the case of Woodward Governor India P. Ltd. (2009) 312 ITR 254 (SC) as well as on the merits of this case.

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Section 51 — Treatment of advance money received — Pursuant to a transaction of sale of property the assessee received advance money — Whether AO justified in reducing the advance money received from cost of acquisition of the property — Held, No.

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Upendrakumar Shah v. ITO
ITAT ‘F’ Bench, Mumbai
Before D. Manmohan (VP) and T. R. Sood (AM)
11 ITA No. 1730/Mum./2009
A.Y.: 2004-05. Decided on: 30-8-2011 Counsel for assessee/revenue: Jayesh Dadia/ A. K. Nayar

Section 51 — Treatment of advance money received — Pursuant to a transaction of sale of property the assessee received advance money — Whether AO justified in reducing the advance money received from cost of acquisition of the property — Held, No.


Facts:

The assessee was the co-owner of an immovable property acquired prior to 31-3-1981. Both the coowners had agreed to sell the property by entering into agreement in November, 1994 for a total consideration of Rs.1.3 crore. The assessee and the co-owner received sales consideration in several instalments during the financial years 1998-99 to 2003-04 and the transfer of the property took place only in the year under consideration. The issue before the Tribunal was whether advance received in connection with the transfer of the property could be reduced from the cost of acquisition of the property. According to the AO as well as the CIT(A), as per the provisions of section 51, the advances received by the assessee should be deducted the from the value of the property as on 1-4-1981 while computing cost of acquisition.

Held:

The Tribunal noted that clause (iii) below the Explanation to section 48 does not provide for reduction of the advance amount from the cost of acquisition as against which, the clause (iv) below the said Explanation, which explains ‘indexed cost of improvement’, states that “the cost inflation index for the year in which the improvement to the asset took place” should be taken as the basis. Further, referring to the Apex Court decision in the case of Travancore Rubber & Tea Co. Ltd. (243 ITR 158), where it was held that advances received and forfeited by the assessee would be reduced from the 11 cost of acquisition u/s.51, the Tribunal held that the provisions of section 51 are applicable to an aborted transaction only. In the case of the assessee, the advances were received from a transaction which was not aborted. According to the Tribunal, the decision of the Bombay High Court in the case of Sterling Investment Corpn. Ltd. (123 ITR 441) also supports the case of the assessee. Accordingly, the appeal filed by the assessee was allowed on the point.

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Shree Cement Ltd. vs. Addl. CIT In the Income Tax Appellate Tribunal Jaipur Bench, Jaipur Before Hari Om Maratha (J.M.) and N.K. Saini (A.M.) ITA No. 503/JP/2012 Assessment year: 2007-08. Decided on 27th January, 2014 Counsel for Assessee/Revenue: D.B. Desai/A.K. Khandelwal

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Section 80IA(8) – Where more than one market value/Arm’s Length Value is available and the assesse is entitled to adopt the market value of its choice. Section 2(24) – Receipt on account of Carbon credit is capital receipt not liable to tax.
(1) Re: Claim u/s. 80IA:

Facts:
The assessee claimed deduction u/s. 80IA in respect of its Power generation undertaking. Power generated by the power undertaking is predominantly used by the assessee captively at its cement unit. For computing the profitability of the power captively consumed, in terms of provisions of section 80IA(8), the assessee considered the market value or Arm’s Length Value being the value at which independent power supplier had sold power to Power Distribution Companies (DISCOMs) in the State of Rajasthan. While the AO applied the rate at which power is supplied by the State Electricity Grid to assessee’s cement unit and accordingly, re-computed the deduction eligible u/s. 80IA. The CIT(Appeals) upheld the action of the AO.

Before the tribunal, the revenue justified the orders of the lower authorities on the grounds amongst others, that:

• the assessee has adopted market price of its choice in computing the transfer price and such discretion cannot be allowed to the assessee;
• On the point of selection of price from the basket of market values, it submitted that there is no such provision in the act which gives assessee such prerogative.
• Since, the assessee itself is drawing power from the State grid on regular basis, Grid rate is the best market price available which should be adopted for computing deduction u/s. 80IA.

Held:
According to the tribunal, the issue before it is where there are two or more market values available and if the assessee has adopted a ‘value’ which is ‘market value’, whether it is permissible for the Revenue to still replace the same by another ‘market value’. The tribunal, on perusal of section 80IA(8) noted that the statute provides that the assessee must adopt ‘Market Value’ as the transfer price. In the open market, where a basket of ‘Market Values’ are available, the Act does not put any restriction on the assessee as to which ‘Market Value’ it has to adopt. It is purely assessee’s discretion. As long as the assessee has adopted a ‘Market Value’ as the transfer price, that is sufficient compliance of law. Even if assessee’s cement unit has purchased power, also from the Grid or that assessee’s Power Unit has also partly sold its power to grid or third parties that by itself, does not compel the assessee or permit the Revenue, to adopt only the ‘grid price’ or the price at which the Eligible Unit has partly sold its power to grid or third parties, as the ‘market value’ for captive consumption of power to compute the profits of the eligible unit. Any such attempt is clearly beyond the explicit provisions of section 80IA(8) of the Act. The above principles are also supported by the decision of Special Bench of Bangalore Tribunal in Aztec Software & Technology Services Ltd. vs. ACIT 107 ITD 141 as well as Mumbai Tribunal decision in the case of ACIT vs. Maersk Global Service Centre (I) Pvt. Ltd. 133 ITD 543. Since the assesse had adopted a rate at which actual transactions had been undertaken by the unrelated entities and the volumes of transaction as relied upon were also substantial, the appeal filed by the assesse on this ground was allowed.

Re: Receipt from Carbon Credit is capital receipt or revenue receipt:

Facts:
The assessee’s project ‘Optimum Utilisation of Clinker’ had generated CER or Carbon Credit by reducing emissions from clinkerisation and from power generation. The said project generated CERs against which the assessee received Rs. 16,02 crore which has been claimed as ‘capital receipt’. In the assessment order, the Assessing Officer held that cost of acquisition of Carbon Credit is NIL & the entire receipt is taxable as capital gain. However, in the computation, it has been added as Business income. The CIT (Appeals) on appeal held that the receipt was in the nature of benefit arising from the business of the assessee and is taxable as ‘Business Income’ u/s. 28(iv) of the Act.

Before the tribunal the revenue submitted that the receipt on account of carbon credit was related to the business of the assessee and the assessee had undertaken activities which had resulted in the receipt on account of carbon credits. Hence, the amount so received had to be considered as related to the business of the assessee and should either be considered as revenue receipts chargeable to tax as business income, or the net amount after deduction of expenditure if any, incurred for the same should be considered as chargeable to tax under the head capital gains.

Held:
The tribunal relied on the decisions of the Hyderabad Tribunal in the case of  My Home Power Ltd.  vs.  DCIT 151 TTJ 616 (Hyd), the Chennai Tribunal in the cases of Sri Velayudhaswamy Spinning Mills (P.) Ltd. vs. DCIT 40 taxmann.com 141  and  Ambika Cotton Mills Ltd. vs. DCIT I.T.A. No. 1836/Mds/2012 and held that receipt on account of Carbon Credit is capital in nature and neither chargeable to tax under the head Business Income nor liable to tax under the head Capital Gains.  In its above view, the tribunal also drew support from the decision of the Supreme Court in the case of Vodafone International Holdings vs. UOI 341 ITR 1 wherein the Supreme Court held that     treatment     of     any     particular     item     in     different    manner in the 1961 Act and DTC serves as an important guide in determining the taxability of said item. Since DTC by virtue of the deeming provisions specifically    provides    for    taxability    of    carbon    credit    as    business receipt and Income Tax Act does not do so, the tribunal held in favour of the assessee and the addition made by the AO was deleted.

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(2014) 98 DTR 281 (Hyd) Fibars Infratech (P) Ltd. vs. ITO A.Y.: 2007-08 Dated: 03-01-2014

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Section 2(47)(v): Under the development agreement, since no construction activity had taken place on the land in the relevant previous year, it cannot be said that the transferee has performed or was willing to perform its obligation under the agreement in the relevant year and, therefore, provisions of section 2(47)(v) did not apply.

Facts:
During the F.Y. 2006-07, the assessee company transferred certain property for development to M/s MAK Projects (P) Ltd. The development agreement was executed on 15th December, 2006. As per the development agreement, the assessee was entitled to receive 16 villas comprising 9,602 sq. yards of plotted area along with 58,606 sq. ft. of built up area.

However, there was no development activity until the end of the previous year ending 31st March, 2007. Commencement of building process had not been initiated as the building approval was provided only on 6th March, 2007. The Assessing Officer alleged that the transaction under development agreement was a transfer u/s. 2(47)(v) as on the date of entering into the agreement.

Though possession of the property was handed over to the developer, the assessee contended that since there is no amount of investment by the developer in the construction activity during the F.Y. 2006-07, it would amount to non-incurring of required cost of acquisition by the developer. Hence, no consideration can be attributed to the F.Y. 2006-07. As there is no quantification of consideration to be received by the assessee, section 2(47)(v) would not apply.

Held:
The handing over of the possession of the property is only one of the conditions u/s. 53A of the Transfer of Property Act, but it is not the sole and isolated condition. It is necessary to go into whether or not the transferee was ‘willing to perform’ its obligation under these consent terms. When transferee, by its conduct and by its deeds, demonstrates that it is unwilling to perform its obligations under the agreement in this assessment year, the date of agreement ceases to be relevant. In such a situation, it is only the actual performance of transferee’s obligations which can give rise to the situation envisaged in section 53A of the Transfer of Property Act.

In the given case, nothing is brought on record by the authorities to show that there was development activity in the project during the assessment year under consideration and cost of instruction was incurred by the developer. Hence, it is to be inferred that there was no amount of investment by the developer in the construction activity during the assessment year in this project and it would amount to non-incurring of required cost of acquisition by the developer. The developer in this assessment year had not shown its readiness in making preparations for the compliance of the agreement. On these facts, it is not possible to hold that the transferee was willing to perform its obligations in the financial year in which the capital gains are sought to be taxed by the Revenue. This condition laid down u/s. 53A of the Transfer of Property Act was not satisfied in this assessment year. Consequently, section 2(47) (v) did not apply.

Further, it cannot be said that there is any sale in terms of section 2(47)(i). To say that there is an exchange u/s. 2(47)(i) both the properties which are subject matter of the exchange in the transaction are to be in existence at the time of entering into the transaction. It is to be noted that at the time of entering into development agreement, only the property i.e., land pertaining to the assessee is in existence. There is no quantification of consideration or other property in exchange of which the assessee has to get for handing over the assessee’s property for development.

It cannot be said that the assessee carried on the adventure in the nature of trade so as to bring the income under the head ‘Income from business’. This is so, because the assessee has not sold any undivided share in the property to the developer in the year under consideration. The assessee remains to be the owner of the said property and the land was put for development for the mutual benefit. Even if the transaction is considered as business transaction, it would be taxed only when the undivided share in the land is transferred.

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(2013) 96 DTR 220 (Del) ACIT vs. Meenakshi Khanna A.Y.: 2008-09 Dated: 14-06-2013

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Section 56(2)(vi): Lump sum alimony received by a divorcee as a consideration for relinquishing all her past and future claims is not chargeable u/s 56(2) (vi).

Facts:
During A.Y. 2008-09, the assessee received lump sum alimony from her ex-husband. The divorce agreement between the assessee and her exhusband was made in the F.Y. 1989-90. Pursuant to this agreement, the ex-husband of the assessee was required to make monthly payments to his wife over a period of time. However the ex-husband did not pay the same and hence the assessee threatened to take legal action against him. The exhusband, therefore, paid a lump sum amount as full and final settlement in lieu of assessee’s past and future claims. The Assessing Officer held that exhusband was not covered under the definition of relative as provided in exceptions to section 56(2) (vi). He, therefore, treated the amount received by the assessee as income from other sources taxable under the provisions of section 56(2)(vi) and added the same to the income of the assessee. The assessee however contended that she had received the amount against consideration of extinguishing her right of living with her husband. It was further argued that the amount was a capital receipt.

Held:
Though the assessee was to receive monthly alimony which was to be taxable in each year from conclusion of divorce agreement, but the monthly payments were not received and, therefore, were not offered to tax. The receipt by the assessee represents accumulated monthly installments of alimony, which has been received by the assessee as a consideration for relinquishing all her past and future claims. Therefore, there was sufficient consideration in getting this amount. Therefore, section 56(2)(vi) is not applicable. Secondly, amount was paid by way of alimony only because they were husband and wife and the assessee was spouse of the person who has paid the amount and, therefore, payment received from spouse did fall within the definition of relative. Moreover even if it is accepted that the monthly payments of alimony are liable to tax then also in the present case the amount received represents past monthly payments and hence cannot be taxed in the year under consideration. Therefore, it was held that amount received was a capital receipt and not liable to tax.

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Legislation by incorporation — Schedule VI vis-à-vis MAT

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Schedule VI to the Companies Act, 1956 (‘the Companies Act’) prescribed under section 211 of the Companies Act, sets out the form and contents for disclosure of the profit and loss account and balance sheet of a company. Schedule VI to the Companies Act originally notified by the Central Government vide Notification No. 414, dated 21st March 1961 was divided into 4 parts (referred to as ‘the Old Schedule VI’). Recently, the Central Government has by Notification No. 447(E), dated 28th February 2011, and Notification No. 653(E), dated 30th March 2011, revised Schedule VI to the Companies Act, which shall come into effect for the financial years ending on or after 1st April 2011 (referred to as ‘the Revised Schedule VI’).

Section 115JB of the Income-tax Act, 1961 (‘the Act’) requires every assessee-company to prepare its profit and loss account in accordance with Part II and Part III of the Schedule VI for the purpose of determining net profit, for the computation of ‘book profit’. In other words, Part II and Part III of the Schedule VI are legislatively incorporated under the provisions of section 115JB of the Act.

Legislation by incorporation is a legislative device by which certain provisions of a particular Act are incorporated by reference into another Act, such that the provisions so incorporated become part and parcel of the later Act, as if they had been ‘bodily transposed into it’. In other words, the legal effect of such incorporated provisions are often held to be actually written in the later Act with the pen, or printed in it. The said observations were made by Lord Esher, M. R. while explaining the aforesaid principle in one of the earliest decisions on the subject1.

However, the aforesaid incorporated provisions in MAT, only prescribe the contents of the profit and loss account of the company and the principles for recognition, measurement, presentation, etc. of financial items are prescribed under the Accounting Standards as applied by the company in adopting the accounts at its annual general meeting.

A question which requires attention is whether the Revised Schedule VI as amended by the Central Government can be said to be legislatively incorporated under the provisions of section 115JB of the Act and accordingly net profit for the purpose of computation of book profit will be determined based on the format of profit and loss account as prescribed under the Revised Schedule VI.

The answer to this question depends upon the manner of construction and interpretation of whether Part II and Part III of the Old Schedule VI are introduced in MAT provision of the Act merely as reference/citation or have been incorporated under section 115JB. Legislation by incorporation may be undertaken by either merely citing a provision of one statute in another statute or by incorporating the said provision in another statute.

Therefore, before embarking upon answering the question under consideration, it is necessary to understand the principles of identifying the differences between the two and implications on the construction of a provision of a particular statute, which is merely referred to in another statute vis-à-vis being incorporated. In the former case, a modification, repeal or re-enactment of the statute that is referred will also have the effect in the statute in which it is referred, but in the latter case any change in the incorporated statute by way of amendment or repeal shall have no repercussion on the incorporating statute. The legal decisions have time and again tried to differentiate between the two, but the distinction is one of difference in degree and is often blurred2. There are no clear-cut guidelines which have been spelt out.

However, there are four exceptions which have been observed by the Courts3 to the implications on the construction of a provision as discussed above, wherein a repeal or amendment of an Act which incorporated in a later Act shall have effect on the later Act, irrespective of whether the said provision was merely referred or incorporated in the other statute. These exceptions are as under:

  •  where the later Act and the earlier Act are supplemental to each other;

  •  where the two Acts are in pari materia;

  •  where the amendment of the earlier Act if not imported in the later Act would render the later Act wholly unworkable; and

  •  where the amendment of the earlier Act either expressly or by necessary intendment also applies to the later Act.

On the touchstone of the aforesaid exceptions applied to the case under consideration, one may observe as under:

  •  the Income-tax Act, 1961 and the Companies Act, 1956 are not supplemental to each other i.e., existence of either of the said Acts is not dependant of each other;

? the two Acts are not in pari materia i.e., both the Acts legislate in two different fields of law;

? the non-incorporation of the Revised Schedule VI under MAT provisions would not make the said provisions unworkable, since one would be able to compute net profit based on the Old Schedule VI; and

  •  there is no mention by the Central Government of simultaneous amendment of MAT provisions, when Schedule VI was replaced under the Companies Act.

Considering this, one may observe that none of the four exceptions are applicable to the impugned issue.

Though it makes a case stronger to tilt the balance of construction that Part II and Part III of the Old Schedule VI are incorporated and not referred under MAT provisions, yet one may not conclude such construction without further discussion. It is necessary to understand the factors which may help in answering the aforesaid question. A matter of probe into the semantics of the provision along with the legislative intention and/ or taking an insight into the working of the enactment may help in determining which of the view is to be adopted. Part II and Part III of the Old Schedule VI are incorporated in all its phases from section 115J to section 115JB of the Act.

Reference is invited to the relevant provisions of section 115JB of the Act, which are reproduced below for ready reference:

“ ……………….. (2) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956):

Provided that while preparing the annual accounts including profit and loss account, —

(i) the accounting policies;

(ii) the accounting standards followed for preparing such accounts including profit and loss account;

(iii) the method and rates adopted for calculating the depreciation,

shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956):” (Emphasis supplied)

From the perusal of the aforesaid provisions of section 115JB(2), one would notice that the Legislature by applying the principle of legislation by incorporation introduced two provisions of the Companies Act, 1956. The differences in the language used for incorporating the said provisions highlight the mechanism of merely citing a provision vis-à-vis incorporating the provision.

The accounting policies, accounting standards and the method and rate of depreciation as considered while preparing the annual accounts of the company u/s.210 of the Companies Act are legislatively incorporated by reference for the purpose of calculation of book profit u/s.115JB of the Act and whereas Part II and Part III of the Old Schedule VI to the Companies Act are legislatively incorporated under the mechanism of incorporation.

The distinction lies in the usage of words ‘shall be the same’, which makes a case of a provision merely referred and not being incorporated. The usage of those words highlight the intention of the Legislature of applying the same policies, standards and depreciation rate and method under the Companies Act as used for preparation of annual accounts, also for the purpose of computation of book profit. Therefore, in case there are amendments to, repeals of provisions of Accounting Standards and method and rate of depreciation under the provisions of the Companies Act, the same effects will have to be considered for the computation of book profit.

One finds that similar usage of words, being ‘shall be the same’ is missing under the incorporation of Part II and Part III of Schedule VI to the Companies Act. Therefore, such similar construction and mechanism may not hold good for the purpose of interpretation of Part II and Part III of the Schedule VI to the Companies Act, which have been incorporated and not merely referred under the provisions of section 115JB(2) of the Act.

In a recent decision of the Supreme Court in the case of M/s. Dynamic Orthopedics Pvt. Ltd. v. CIT, (321 ITR 300), the Apex Court while referring the matter relating to the computation of book profit under MAT provisions to the Larger Bench, made following observations with respect to the semantics of MAT provisions under the Act. These observations on legislation by incorporation which may hold good for all the three avatars of MAT provisions viz. section 115J, section 115JA, and section 115JB are reproduced below:

“….Section 115J of the Act legislatively only incorporates provisions of Parts II and III of Schedule VI to 1956 Act. Such incorporation is by a deeming fiction. Hence, we need to read section 115J(1A) of the Act in the strict sense. If we so read, it is clear that by legislative incorporation, only Parts II and III of Schedule VI to 1956 Act have been incorporated legislatively into section 115J of the Act. Therefore, the question of applicability of Parts II and III of Schedule VI to 1956 Act does not arise….

…. It needs to be reiterated that once a company falls within the ambit of it being a MAT company, section 115J of the Act applies and, under that section, such an assessee-company was required to prepare its profit and loss account only in terms of Parts II and III of Schedule VI to 1956 Act ….. Hence, what is incorporated in section 115J is only Schedule VI and not section 205 or section 350 or section 355 ….. ” [Emphasis supplied]

The aforesaid decision reiterates the understanding that Part II and Part III of Schedule VI only are legislatively incorporated under the provisions of MAT. Therefore, any repeal, amendment or revision of Part II and Part III of Schedule VI to the Companies Act may not have effect on the operation of computation of book profit, until the Revised Schedule is incorporated under the MAT provisions of the Act.

Based on the aforesaid discussions, one may conclude that the Revised Schedule VI to the Companies Act cannot be taken into consideration, until necessary amendments are made requiring the assessee companies to determine the net profit for the purpose of computation of book profit under MAT provisions as per the Revised Schedule VI to the Companies Act.

This conclusion and article may be incomplete if the significant in-principle differences between the Old Schedule VI and the Revised Schedule VI are not highlighted. These differences are touched upon only in brief:

  •     The Revised Schedule only contains Part I and Part II. It does not have Part III of the Old Schedule VI which provided for interpretation of the various expressions such as ‘provision’, ‘reserve’, ‘liability’, etc. and Part IV of the Old Schedule VI which dealt with balance sheet abstract and company’s general business profile.

  •     The Revised Schedule VI prescribes the format of profit and loss account for the company, as against the Old Schedule VI, which did not provide for such format; and

  •     The Old Schedule VI prescribed the principles on which the profit and loss account of the company was required to be prepared for the purpose of disclosure, which one fails to find under the Revised Schedule VI;

This issue is of importance from the perspective of the Direct Tax Code Bill, 2010 (draft) (‘DTC’) which in Clause 104 has provision analogous to section 115JB of the Act. Clause 104 of DTC provides reference to Clause 105 of DTC for the purpose of determination of net profit as shown in the profit and loss account prepared in accordance with Part II and Part III of Schedule VI to the Companies Act. Assuming Clause 104 and Clause 105 of draft DTC come into effect in their present form, one may interpret that Part II and Part III of the Revised Schedule VI are incorporated in the said clauses, considering the fact that the Revised Schedule VI to the Companies Act will be existing on the statute when draft DTC becomes an Act. However, it may be intriguing to notice that the Revised Schedule VI does not have Part III and therefore, the Legislature may have to make necessary amendments; otherwise the formula may become unworkable. Similar consequences may also be envisaged for companies subjected to MAT provisions for financial years ending on or after 1st April 2011, if we propose that Part II and Part III of the Old Schedule VI are merely referred to in section 115JB of the Act.  This subject may require further attention with the intention of the Government to introduce different set of Accounting Standards (i.e., Ind-AS and otherwise) applicable to different categories of companies and thereby leading to different tax bases of net profit as shown in the profit and loss account prepared in accordance with Part II and Part III of the Schedule VI to the Companies Act.

If the above discussion and conclusions are drawn to their logical end, then one envisages that companies subjected to MAT provisions of the Act may have to prepare two sets of their profit and loss account, wherein net profit as shown in the profit and loss account will have to be prepared in accordance with:

  •     Part II and Part III of the Revised Schedule VI for the compliance of provision of Companies Act, 1956; and

  •     Part II and Part III of the Old Schedule VI for the computation of book profit under the Act.

Taxation of Capital Gains under Direct Taxes Code

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1.  Background
1.1 Direct Taxes Code Bill, 2010, (DTC) introduced in the Parliament on 27-8-2010 is now under consideration of the Standing Committee for Finance. After its report is submitted, the Parliament will consider the Bill and the proposals of the Standing Committee before enacting the Code. Therefore, if DTC is enacted by the Parliament in 2011, the income for the F.Y. 1-4-2012 to 31-3-2013 and onwards will be assessed as provided in the Code. There are 319 sections divided into 20 Chapters and 22 Schedules in DTC. Chapter III-D containing sections 46 to 55 deals with provisions for computation of income under the head ‘Capital Gains’. Further, Schedule 17 provides for determination of cost of acquisition in certain cases.

1.2 Prior to introduction of the DTC Bill, 2010, the Government had issued the DTC Bill, 2009 with a Discussion Paper for public debate on 12-8-2009. The DTC Bill, 2009, proposed to introduce several changes in the provisions relating to capital gains. There was a proposal to do away the present distinction between short-term and long-term capital gains. It was also proposed to abolish the present exemption/concession available to capital gains on sale of listed securities on which STT is paid. The concessional rate for long-term/short-term capital gains was also proposed to be abolished and there was a proposal to levy tax on capital gains at the normal rate applicable to other income.

1.3 Several representations were made to the Government objecting to these proposals. Based on the above representations, a Revised Discussion Paper was issued by the Government on 15-6-2010 and the revised DTC Bill, 2010, was introduced in the Parliament in August, 2010.

1.4 In the revised Discussion Paper of June, 2010, it was clarified that the original proposals of DTC – 2009 for taxation of capital gains have been modified as under:

(a) Income from capital gains will not be considered as income from ordinary sources.

(b) Asset held for more than one year from the end of the financial year will be considered as long-term capital asset.
(c) Securities Transaction Tax (STT) will continue.
(d) For long-term capital gains indexation benefit will continue. The existing date of 1-4-1981 will now be fixed as 1-4-2000.
(e) Capital Gains Savings Scheme will be introduced.
(f) A new scheme for taxation of capital gains on investment assets has been proposed to reduce the burden of tax.
(g) Income of FIIs from share trading will be considered as capital gains and not business income.

2. Concept of capital gains


The existing concept of capital gains is significantly changed in the Code. The word ‘asset’ is defined in section 314(24) to mean (a) a business asset or (b) an investment asset. ‘Business asset’ is defined in section 314(38) to mean ‘business trading asset’ or ‘business capital asset’. ‘Business trading asset’ is defined in section 314(42) to mean stock-in-trade, consumable stores or raw materials held for the purpose of the business. ‘Business capital asset’ is defined in section 314(39) to mean a tangible, intangible or any other capital asset, other than land, which is used for the purpose of business. ‘Investment asset’ is defined in section 314(141) to mean (a) any capital asset which is not a business capital asset, (b) any security held by a FII or (c) any undertaking or division of a business. Any surplus on transfer of a business capital asset is to be treated as business income. Hence, the provisions for computation of capital gains apply in respect of surplus (loss) on transfer of ‘investment asset’ only.

3. Computation of capital gains


3.1 Section 49 of the Code provides that the computation of capital gains on transfer of an investment asset shall be made by deducting from the full value of the consideration on transfer of such asset, the cost of acquisition of such asset. The gains (losses) arising from the transfer of investment assets will be treated as capital gains (losses). The net gain will be included in the total income of the financial year in which the investment asset is transferred, irrespective of the year in which the consideration is actually received. However, in the case of compulsory acquisition of an asset, capital gains will be taxed in the year in which the compensation is actually received.

3.2 It may be noted that the word ‘Transfer’ is defined in section 314(267). This definition is very elaborate as compared to section 2(47) of the Income-tax Act (ITA). The above definition provides that ‘Transfer’ in relation to a ‘Capital Asset’ includes the following:

(i) Sale, exchange or extinguishment of any asset or any rights in it;

(ii) Compulsory acquisition under any law;
(iii) Conversion of capital asset into stock-intrade;
(iv) Buyback of shares u/s.77A of the Companies Act;
(v) Contribution of any asset towards capital in a company or unincorporated body;
(vi) Distribution of assets on liquidation of a company or dissolution of unincorporated body;
(vii) Any transaction allowing possession or enjoyment of an immovable property. This provision is more or less similar to section 2(47) (v) and (vi) of ITA with the only difference that if enjoyment of any immovable property is given to participant of unincorporated body it will be considered as a transfer under DTC;
(viii) Amount received/receivable on maturity of Zero Coupon Bond, on slump sale or on damage/ destruction of any insured asset;
(ix) Transfer of securities by a person having beneficial interest in the securities held by a depository as registered owner;
(x) Distribution of money or asset to a participant in an unincorporated body on his retirement;
(xi) Any disposition, settlement, trust, covenant, agreement or arrangement.

3.3 The capital gains arising from the transfer of personal effects and agricultural land is exempt from income tax. The term ‘personal effects’ is defined in section 314(190) and the term ‘agricultural land’ is defined in section 314(12). This definition states that the land, wherever situated, if used for agricultural purposes will be treated as agricultural land.

3.4 In general, the capital gains will be equal to the full consideration from the transfer of the investment asset minus the cost of acquisition, cost of improvement thereof and transfer-related incidental expenses. However, in the case of an investment asset which is transferred anytime after one year from the end of the financial year in which it is acquired, the cost of acquisition and cost of improvement will be adjusted on the basis of cost inflation index.

3.5 Capital gains from all investment assets will be aggregated to arrive at the total amount of current income from capital gains. This will, then, be aggregated with unabsorbed capital loss at the end of the preceding financial year to arrive at the total amount of income under the head ‘Capital gains’. If the result of the aggregation is a loss, the total amount of capital gains will be treated as ‘nil’ and the loss will be treated as unabsorbed current capital loss at the end of the financial year. This unabsorbed loss will be carried forward for adjustment against capital gains in subsequent years. There is no time limit for such carry forward and set-off of losses.

4.    Exemption from capital gains tax
4.1 Section 47 of the Code provides that certain transfers of investment assets will not be consid-ered as a transfer and no capital gains tax will be payable. This section is on the same lines as existing section 47 of ITA. However, it is significant to note that clause (xiii) of existing section 47 of ITA which provides for exemption from tax when a partnership firm is converted into a company, subject to certain conditions, is absent in section 47 of the Code. This will mean that if the Code is enacted without this clause in section 47, a partnership firm which is converted into company after 1-4-2012 will not be entitled to claim this exemption. It may also be noted that section 47 (1)(J) of the Code provides for exemption from tax when a non-listed company converts itself into an LLP, on the same lines as provided in section 47 (xiii b) of ITA. Again, 47(1)(n) of the Code provides for exemption from tax when a sole proprietary concern is converted into a limited company. This provision is similar to section 47(xiv) of ITA.

4.2 Section 46 of the Code provides that the exemption granted u/s.47 of the Code in respect of certain transfers of investment assets and u/s.55 of the Code in respect of certain rollover of investment assets will become taxable in the F.Y. in which the conditions specified in section 47 or 55 are violated. This provision is on the same lines as in the existing sections 47A, 54, 54B, 54F, 54EC, etc. of ITA.

4.3 Section 48 of the Code explains about the F.Y. in which the income arising on non-compliance with the conditions laid down in section 47 will become taxable. This section also explains about the F.Y. in which enhanced additional compensation received on compulsory acquisition of property will be taxable. Further, the section also explains as to when an immovable property will be considered to have been transferred. These provisions are similar to sections 45(1), 45(4), 45(5) and 46 of ITA with some modifications.

4.4 It is significant to note that the existing sec-tion 45(4) of ITA provides that if any capital asset is transferred by way of distribution of capital as-sets to any partner or partners on dissolution of a firm or AoP or otherwise, the difference between the market value of the asset and its cost will be taxable as capital gains in the hands of the Firm or AoP. This position will continue under the Code in view of item 6(ii) of the table below section 48(1) r.w.s 50(2)(d) of the Code. However, in the case of retirement of a partner, the Courts have held that the word ‘otherwise’ in the existing section 45(4) applies when a partner retires from the Firm or AoP and takes away any asset of the Firm or AoP as part of the amount due on retirement. Now, section 48(2)(b) of the Code, read with item 7 of the table below section 48(1) and section 50(2) (f), provides that “Any money or asset received by a participant (Partner/Member) on account of his retirement from an unincorporated body (Firm, LLP, AoP, BoI) shall be deemed to be the income of the recipient of the F.Y. in which the money or asset is received”. This will mean that if the amount due to the retiring partner as per the books of the Firm, AoP or BoI is Rs.1.5 crore but the amount received and market value of the asset received on his retirement is Rs.2.5 crore, the retiring partner will have to pay tax on capital gains under the Code.

4.5 Under section 51(2) of the Code, in the case of equity shares of a company and units of equity-oriented fund of a M.F., held for more than one year, the capital gain will be exempt from tax if STT is paid. It may be noted that there is difference in the wording of section 51(2) and 51(3). U/s.51(2) the requirement is holding of shares, etc. for more than one year, whereas u/s.51(3) the period for holding other assets is at least one year after the end of the F.Y. in which the asset is acquired.

4.6 In the above case if the STT is paid and the shares/units are held for less than one year, 50% of the capital gain will be exempt and tax at normal rate will be payable on the balance of 50%.

4.7 It may be noted that under item No. 32 of Schedule 6 it is provided that the capital gain arising from transfer of the following assets will not be liable to tax under DTC:

(i)    Agricultural land in a rural area as defined in section 314(221)r.w.s 314 (284). This definition is similar to the definition in section 2(14)(iii) of ITA.

(ii)    Personal effects as defined in section 314 (190) which is similar to section 2(14)(ii) of ITA.

(iii)    Gold Deposit Bonds.

5.    Full value of consideration
5.1 The provisions relating to computation of capital gains on transfer of an investment asset and determination of the full value of the consideration are contained in sections 49 and 50 of the Code. These provisions are similar to the provisions of sections 45(2), 45(3), 45(5), 48 and 50C of ITA with certain modifications. In the case of sale of land or building, section 50(2)(h) of the Code provides that stamp duty value of the asset will be considered as full value of the consideration. The term ‘Stamp duty value’ is defined in section 314(246) on the same lines as in section 50C of ITA with the exception that there is no provision for refer-ence to valuation officer in the event such value is disputed by the assessee. Further, section 50(2) r.w.s 314(267) and 314(93) of the Code provides that in respect of conversion of investment asset into stock-in-trade, distribution of assets to partici-pants on dissolution of the unincorporated body or retirement of a participant, etc. the fair market value of the asset on the date of transfer will be determined according to the method prescribed by the CBDT.

5.2 It may be noted that u/s.45(3) of the ITA it is provided that when the partner/member of a firm, LLP, AoP or BoI in which he becomes a partner/ member and contributes a capital asset as his capital contribution in the entity, the amount credited to this account in the entity will be considered as full value of the consideration and capital gain tax will be payable by him on this basis. This benefit is not available at present when a person becomes a shareholder in a company and he is allotted shares in the company against any transfer of any asset to the company. Now, section 50(2)(c) of the Code provides that the amount recorded in the books of the company or an unincorporated body as value of the investment asset contributed by the shareholder or participant will be the full value of the consideration and the capital gain will be computed in the hands of the transferor on that basis.

6.    Cost of acquisition and indexation
6.1 As stated earlier, section 49 of the Code provides that capital gain on transfer of an investment asset is to be computed by deducting from the full value of the consideration, the cost of acquisition and the cost of improvement. The term ‘Cost of acquisition’ is defined in section 53 read with the 17th Schedule. The term ‘Cost of improvement’ is defined in section 54. These provisions are more or less on the same lines as sections 48, 49 and 55 of ITA. It may, however, be noted that when the investment asset is received by way of gift, will, inheritance, etc., it is provided that the cost will be the cost of acquisition in the hands of previous owner. However, the period during which the previous owner held the asset cannot be added in computing the total period for which the assessee has held the asset, as there is no provision for this purpose corresponding to the provision in section 2(42A) of ITA. Existing section 55(3) of ITA provides that if the cost of the asset in the hands of the previous owner cannot be ascertained, the market value on the date on which the previous owner acquired the asset will be considered as his cost. Now, section 53(7)(c) of the Code provides that if the cost of investment asset in the hands of the previous owner cannot be determined or ascer-tained, the said cost will be taken as ‘nil’. Similarly, in the case of the assessee if a self-generated asset or any other investment asset is acquired and the cost of such asset cannot be determined or ascertained for any reason, it shall be considered as ‘nil’.

6.2 Section 52 of the Code gives mode of computation of indexation of certain investment assets in specified cases. The method prescribed in this section is similar to the provision in the existing section 48 of ITA. However, some modification in the scheme under the Code is made as under:

(i)    Under section 2(29A)r.w.s 2(42 A) of ITA, a capital asset which is held for more than three years is considered as a ‘long-term asset’. U/s.51(3) of the Code, it is provided that if the investment asset is held for more than one year from the end of the financial year in which the asset is acquired, the benefit of indexation of cost will be available.

In other words, if the investment asset is acquired on 1-5-2010, it will be considered as long-term capital asset if it is sold on or after 1-4-2012 under the Code. In the following discussions such investment asset is referred to as a ‘long-term asset’.

(ii)    In the case of any investment asset, if it is a long-term asset as explained in (i) above, the assessee will be entitled to deduct indexed cost of the asset as provided in section 52 of the Code from the full value of the consideration for computation of capital gain. The method for working out indexed cost is the same as in section 48 of ITA. However, the base date for determining the indexed cost will be 1-4-2000 under DTC instead of 1-4-1981 provided in ITA.

(iii)    At present, section 55(2)(b) of ITA provides that if a capital asset is acquired before 1-4-1981, the assessee has an option to substitute the fair market value of the asset as on 1-4-1981 for its cost.

Now, section 53(1)(b) of the Code provides that if the investment asset is acquired before 1-4-2000, the assessee will have the option to substitute fair market value on 1-4-2000 for its cost.

7.    Relief on reinvestment of consideration
Section 55 of the Code provides for relief for roll-over of long-term investment asset in the case of an Individual or HUF. This provision is similar to the existing provisions for relief on reinvestment of capital gains in sections 54, 54B and 54F of ITA with the following modifications:

(i)    At present, the exemption is available if ‘capital gain’ on sale of a capital asset is reinvested in the specified assets u/s.54, 54B or 54EC of ITA. In case of section 54F of ITA, the ‘Net consideration’ on sale is required to be reinvested. Now, u/s.55 of the Code, the benefit of exemption is available on reinvestment of ‘Net consideration’ in all the cases.

(ii)    The rollover relief is available for only two categories of long-term assets viz. (a) agricultural land, and (b) any other investment asset.

(iii)    In the case of agricultural land there is no distinction between rural and urban land. The only condition is that it is assessed to land revenue or local cess and used for agricultural purposes. Further, this land should be an agricultural land during two years prior to the F.Y. in which it is transferred and was acquired by the assessee at least one year before the beginning of the F.Y. in which it is transferred. If these conditions are satisfied and the assessee invests the net consideration on sale of such agricultural land for the purchase of one or more pieces of agricultural land within a period of three years from the end of the F.Y. in which the original agricultural land was sold, he will get exemption in proportion to the amount so invested.

(iv)    In the case of any other long-term investment asset, the above rollover benefit will be available, if the net consideration is invested in the purchase or construction of a residential house within a period of three years from the end of the F.Y. in which the original asset was sold. For getting this benefit there are two conditions as under:

(a)    The assessee should not be the owner of more than one residential house (other than the residential house in which such investment is made) on the date of sale of original asset.

(b)    The residential house in which the above investment is made to get rollover benefit should not be transferred within one year from the end of the F.Y. in which such investment is made.

It is also provided in section 55 of the Code, that the above rollover benefit will be available if the investment in the new asset is made within a period of one year before the sale of the original asset.

(vi)    It is also provided in the above section that the net consideration on sale of the original asset should be reinvested for acquiring the new asset, as stated above, before the end of the F.Y. in which the original asset is sold or within six months from the date of such sale, whichever is later. If this is not done, the net consideration or balance thereof should be deposited with Capital Gains Deposit Scheme to be framed by the Government. The amount so deposited should be used within three years from the end of the F.Y. in which the original asset is sold. If it is not so used, the same will be taxable in F.Y. in which the period of three years expires.

(vii)    From the above, it will be evident that the present concession of investing the capital gain on sale of residential house for purchase of another residential house even if the assessee is owner of more than one residential house u/s.54 of the ITA will not be available. Further, the benefit of investment in approved bonds up to Rs.50 lakh u/s.54EC of ITA will also not be available.

8.    Income of FII
As stated earlier, definition of investment asset u/s.314(141) of the Code includes any shares or securities held by a Foreign Institutional Investor (FII). In view of this, FII engaged in trading of shares or securities in India will not be entitled to claim exemption under the applicable DTAA on the ground that it is carrying on business in India and has no permanent establishment in India. Under the Code, the surplus from these transactions will be considered as income from capital gains.

9.    Slump sale
The definition of investment asset also includes any undertaking or division of a business. Section 53(5) provides that if there is any slump sale of any undertaking or division of a business, the cost of acquisition of such asset will be the ‘net worth’ of such undertaking or division. If such undertaking or division is sold after the end of one year from the end of the financial year in which it was acquired or established, the benefit of indexation u/s.51 and 52 of the Code will be available. Net worth of such undertaking or division will be worked out as may be prescribed by the CBDT u/s.314(166). The term ‘Slump sale’ is defined in section 314(234) on the same lines as section 2(42C) of ITA.

10.    Aggregation of capital gains and losses
10.1 Income from capital gains (short-term or long-term) from various investment assets, whether positive or negative, shall be first aggregated and any carried forward loss under this head from earlier years shall be deducted therefrom. If the net result is loss, it shall be carried forward to next year. There is no time limit for such carry forward of losses. If the net result is positive, it shall be aggregated with income under other heads. It may be noted that there is a departure from the provisions of ITA where income from long-term capital gains is taxed at a separate lower specified rate. Under DTC long- term or short-term capital gains is taxable at the normal rate applicable to other income.

10.2 It may be noted that there is no provision for adjustment of short-term or long-term capital losses carried forward from F.Y. 2011-12 (A.Y. 2012-13)    and earlier years against capital gains for F.Y. 2012-13 and subsequent years under DTC.

11.    Treatment of losses in certain specified cases

11.1    Section 64 and 65 of DTC provide for treatment of losses in specified cases as under:

(i)    On conversion of unlisted company into LLP — It may be noted that as stated earlier, u/s.47(1) (J) exemption from capital gain is given in the case of conversion of an unlisted company into a LLP. There are certain conditions for this purpose which are similar to section 47(xiii b) of ITA. Section 64(1) provides that unabsorbed current loss from ordinary sources in the case of an unlisted company shall be available for set-off in the case of LLP against its current aggregate income from ordinary sources of subsequent years. Similarly, unabsorbed current capital loss of the company shall be set off against current capital gains in the case of LLP in the subsequent years. This section is similar to section 72A(6A) of ITA. If the conditions laid down in section in section 47(1)(J) of DTC are not complied with, the set-0ff of loss so allowed in any F.Y. can be withdrawn by rectification of the assessment order.

(ii)    On Business Reorganisation — It may be noted that as stated earlier, u/s.47(1)(n) exemption from capital gain is given in the case of conversion of sole proprietary concern into a limited company. There are certain conditions for this purpose which are similar to section 47(xiv) of ITA. U/s.64(2) it is provided that unabsorbed current loss from ordinary sources in the case of sole proprietor shall be set off against current income from ordinary sources of the company. Similarly, unabsorbed current capital loss in the case of sole proprietor will be set off against current capital gain in the subsequent year in the case of the company. If the conditions laid down in section 47 (1)(n) of DTC are not complied with, the set-off of loss so allowed in any F.Y. can be withdrawn by rectification of assessment order.

11.2    Treatment of unabsorbed losses on change in Constitution

(i)    Changes in constitution of unincorporated body — Section 65 provides that in the case of change in the constitution of an unincorporated body (i.e., Firm, LLP, AoP or BoI) on account of death/retirement of a participant, the unabsorbed loss of that entity (including capital loss) shall be reduced in proportion of the loss attributable to the deceased/retiring participant and allowed to be carried forward and set off in the subsequent years as under:

(a)    Proportionate unabsorbed loss from ordinary sources shall be carried forward and set off against current income from ordinary sources in the subsequent years.

(b)    Proportionate unabsorbed capital loss shall be carried forward and set off against current capital gain in the subsequent year.

This section is similar to section 78 of ITA with the difference that section 78 of ITA applies to a Firm or LLP, whereas section 65 of DTC applies to a Firm, LLP, AoP or BoI.

(ii)    Changes in shareholding of closely-held companies — Section 66 of DTC is similar to section 79 of ITA. It provides that in the case of a closely-held company, if the persons holding not less than 51% of voting power on the last day of the F.Y. when the loss under the ordinary sources or capital gains was incurred, are not holding this voting power on the last day of the F.Y. when the income from such sources is earned, such unabsorbed loss cannot be the set-off against the income from such sources in that F.Y. The only difference between section 79 of ITA and section 66 of DTC is that section 79 does not apply to set off of unabsorbed depreciation, whereas u/s.66 of DTC loss includes depreciation.


12.    Filing return of loss
Section 67 provides that if the return of tax bases showing loss is not filed before the due date for filing the return, the loss under the head ordinary sources, special sources, capital gains, speculation, horse races activities, etc. shall not be allowed to be carried forward or set off in the subsequent years. This section is similar to section 80 of ITA. Here also it may be noted that section 80 does not refer to unabsorbed depreciation, but u/s.67 loss will include depreciation also.

13.    Some issues
From the above discussion about provisions relating to taxation of capital gains proposed to be introduced in DTC w.e.f. 1-4-2012, it is evident that the existing provisions will stand substantially modified. Some of the following issues require consideration.

(i)    The word ‘Asset’ is defined to mean (a) a business asset or (b) an investment asset. Again, a business asset is further classified as business trading asset and business capital asset. So far as business trading asset is concerned, it will be allowed as revenue expenditure in computing business income. As regards business capital asset, only depreciation will be allowed. Thus, only investment asset will form part of the computation of capital gains.

(ii)    The existing distinction between long-term and short-term capital asset is now proposed to be modified. It an investment asset is held for more than one year after the end of the F.Y. in which it is acquired, it will be considered as a long-term capital asset.

(iii)    The existing concept of determination of indexed cost for computing long-term capital gain has been retained. The base date for this purpose will be 1-4-2000, instead of 1-4-1981.

(iv)    The existing provision for granting exemption in respect of long-term capital gain on sale of securities, where STT is paid, will continue. As regards short-term capital gain in such transactions, only 50% of such capital gain will be taxable at normal rate. Therefore, the effective tax rate shall not exceed 15%.

(v)    If net result under the head capital gain (long-term or short-term) is positive, it will be added to income under other heads and tax will be payable at normal rate of tax applicable to the total income. If the net result is capital loss, the same will be carried forward without any time limit. There is no concessional rate for taxation of long-term capital gain as provided in section 112 of ITA.

(vi)    There is, however, no provision in DTC for adjustment of short-term or long-term capital losses carried forward under ITA from F.Y. 2011-12 (A.Y. 2012-13) and earlier years against capital gains for F.Y. 2012-13 and subsequent years.

(vii)    Existing section 47(xiii) of ITA provides that conversion of a partnership firm into limited company does not attract any capital gains tax if certain conditions are complied with. There is no corresponding provision in DTC. Similarly, there is no provision in DTC for such exemption when a partnership firm is converted into an LLP.

(viii)    As discussed in para 5.1 above, there is no provision in DTC for reference to valuation officer if the assessee objects to the stamp duty valuation in respect of sale of immovable property. Therefore, stamp duty valuation will now become mandatory.

(ix)    As discussed in para 7(vii) above, there is no provision in DTC similar to section 54EC of ITA to enable an assessee to deposit up to Rs.50 lakh, out of long-term capital gains in notified Bonds. Thus, assessees selling small value investment assets will not be able to claim exemption from long-term capital gains tax to this extent.

Let us hope that some of the above anoma-lies are removed before DTC is enacted by the Parliament.

Business expenditure: Section 37(1) While on business tour, the whole-time director of assessee-company was kidnapped by a dacoit: Ransom money paid to dacoit for releasing the director is allowable business expenditure.

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[CIT v. Khemchand Motilal Jain, Tobacco Products (P) Ltd., 13 Taxman.com 27 (MP)]

The assessee-company was engaged in manufacturing and sale of bidis. ‘S’ was a whole-time director of the assessee-company and was looking after the purchase, sales and manufacturing of bidis. During his business tour to Sagar for purchase of tendu leaves, ‘S’ was kidnapped by a dacoit for ransom. The assessee lodged complaint with the police and awaited the action of the police, but the police was unsuccessful to recover ‘S’ from the clutches of dacoit. Ultimately after 20 days, the assessee paid certain amount by way of ransom for release of ‘S’ and got him released. The assessee claimed deduction of that amount as business expenditure. The Assessing Officer disallowed the claim of the assessee on the ground that the ransom money paid to the kidnappers was not an expenditure incidental to business. The CIT(A) and the Tribunal allowed the assessee’s claim for deduction.

On appeal by the Revenue, the Revenue contended that the amount of ransom could not have been claimed by way of expenditure as the Explanation to s.s(1) of section 37 prohibits such expenditure.

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

“(i) Section 364A of the Indian Penal Code, 1860, provides that kidnapping a person for ransom is an offence and any person doing so or compelling to pay is liable for the punishment as provided in the section, but nowhere it is provided that to save a life of the person if a ransom is paid, it will amount to an offence. There is no provision that payment of ransom is prohibited by any law. In the absence of it, the Explanation to s.s(1) of section 37 will not be applicable in the instant case.

(ii) In the instant case, ‘S’ was on business tour and was staying at a Government rest-house, from where he was kidnapped. As he was on business tour, to get him released, if the aforesaid amount was paid to the dacoits as ransom money and because of this, he was released, the assessee claimed it a business expenditure.

(iii) The entire tour of ‘S’ 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.

(iv) In these circumstances, the reasoning of the Commissioner (Appeals) and the Tribunal allowing the aforesaid expenditure as business expenditure is to be confirmed.”

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Appeals by Revenue: Small tax effect: CBDT circular dated 15-5-2008 providing that notional tax effect could be taken in loss cases is prospective: Applicable to appeals filed on or after 15-5-2008.

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[CIT v. Continental Construction Ltd., 336 ITR 394 (Del.)]

The CBDT Circular dated 15-5-2008, provided that the Circular is applicable to the appeals filed on or after 15-5-2008. The Circular also clarified the terms ‘tax effect’ to include the notional tax effect in loss cases. It is the case of the Department that the Circular is clarificatory and therefore, in loss cases the notional tax effect has to be considered even in respect of appeals filed prior to 15-5-2008.

The Delhi High Court held that the notional tax effect in loss cases does not apply to appeals filed prior to 15-5-2008.

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Representative assessee: Section 163: Liability of representative assessee is limited to connected income: No liability for assessment of unconnected income.

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[General Electric Co. v. DDIT (Del.), WP No. 9100 of 2007, dated 12-8-2011]

Genpact India is an Indian company. The whole of the share capital of Genpact India was held by a Mauritius company. The whole of the share capital of the Mauritius company was in turn held by General Electric Co., USA. The Assessing Officer found that the shares of Genpact India were transferred outside India. He held that the transaction of transfer of shares of Genpact India has resulted in capital gains to General Electric, USA. Therefore, he issued a notice u/s.163 of the Income-tax Act, 1961 proposing to treat Genpact India as an agent of General Electric and to assess the capital gain in its hands as a representative assessee. General Electric Co. filed writ petition challenging the notice.

The Delhi High Court allowed the writ petition and held as under:

“(i) The mere fact that a person is an agent or is to be treated as an agent u/s.163 and is assessable as ‘representative assessee’ does not automatically mean that he is liable to pay taxes on behalf of the non-resident.

(ii) U/s.161, a representative assessee is liable only ‘as regards the income in respect of which he is a representative assessee’. This means that there must be some connection or concern between the representative assessee and the income.

(iii) On facts, even assuming that Genpact India was the ‘agent’ and so ‘representative assessee’ of General Electric, there was no connection between Genpact India and the capital gains alleged to have arisen to General Electric. Genpact India is sought to be taxed as representative assessee when it had no role in the transfer of shares. Merely because these shares relate to Genpact India that would not make Genpact India as agent qua deemed capital gain purportedly earned by General Electric Co.

(iv) Consequently, the section 163 proceedings seeking to assess Genpact India for the capital gains of General Electric were without jurisdiction.”

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Shipping business of non-residents: Section 172 of Income-tax Act, 1961: A.Y. 1987-88: Tug towing ship which could not sail by itself: No carriage of goods: Section 172 not applicable.

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[CIT v. Oceanic Shipping Service of M. T. Suhail, 334 ITR 132 (Guj.)] A merchant vessel came to an Indian port for discharging cargo. While at the Indian port it developed engine trouble and hence it had to be towed away. It entered into an agreement with the assessee, a non-resident for towing away the ship. The agreement was made outside India and payment was also made outside India. The assessee received US $ 1,00,000 as towing charges. The Assessing Officer held that the towing charges was assessable u/s.172 of the Income-tax Act, 1961. The Tribunal held that section 172 was not applicable. On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under: “(i) Section 172 requires in the first instance that a ship should belong to or be chartered by a non-resident; secondly, the ship should carry passengers, livestock, mail or goods; and thirdly, such cargo of passengers, etc., should be shipped at a port in India. (ii) The provision stipulates a ship which carries passengers, livestock, mail or goods. Therefore, the term ‘goods’ has to take colour from the preceding words/terms and one cannot visualise either passengers or livestock or mail being towed away and they have to be carried by a ship aboard a ship. Thus, goods also have to be carried by ship aboard a ship. (iii) The term ‘goods’ as used in the provision has to be understood in ordinary commercial parlance and usage, i.e., as articles or things which can be bought and sold. A vessel which due to mechanical fault that it has developed, cannot propel itself on its own, does not become ‘goods’ for the purpose of being carried by a ship for the purpose of trade. Therefore, it cannot be stated that a tug, though a vessel/ship for a limited purpose, carries goods when it pulls a ship by way of tow. (iv) The Tribunal was right in law in holding that the provisions of section 172 were not applicable and hence tax was not leviable u/s. 172(2) in respect of US $ 1,00,000 received by the assessee for towing away the merchant vessel.”

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TDS: Disallowance of business expenditure: Sections 40(a)(ia) and 194C of Income-tax Act, 1961: A.Y. 2006-07: Assessee-firm engaged in transportation business, secured contracts with oil companies for carriage of LPG, executed the contracts through its partners retaining 3% commission as charges: Sections 194C and 40(a)(ia) not applicable.

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[CIT v. Grewal Bros., 240 CTR 325 (P&H)]

The assessee, a partnership firm, was engaged in the business of transport. It entered into contracts with oil companies for carriage of LPG. From the payment made to it, the companies deducted tax. The assessee firm passed on the transportation work to its partners and made the payment received from the said companies to its partners after deducting 3% commission as charges for the firm having secured the contract. The Assessing Officer held that in giving the contract of transportation by the firm to the partners there was a sub-contract and the firm was liable to deduct TDS [u/s.194C(2)] out of the payment made to the partners. Since the tax was not deducted at source on payments made to the partners, the Assessing Officer disallowed the amounts paid by the firm to the partners resulting in addition to the income. The CIT(A) and the Tribunal accepted the assessee’s plea and deleted the addition.

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

“(i) No doubt the firm and the partners may be separate entities for income-tax and it may be permissible for a firm to give a contract to its partners and deduct tax from the payment made as per section 194C, it has to be determined in the facts and circumstances of each case whether there was any separate sub-contract or the firm merely acted as agent as pleaded in the present case.

(ii) The case of the assessee is that it was the partners who were executing transportation contract by using their trucks and payment from the companies was routed through the firm as agent. The CIT(A) and the Tribunal accepted this plea on facts.

(iii) Once this plea was upheld, it cannot be held that there was a separate contract between the firm and the partners in which case the firm was required to deduct tax from the payment made to its partners u/s.194C.

(iv) The view taken by the Tribunal is consistent with the view taken by the Himachal Pradesh High Court in CIT v. Ambuja Darla Kashlog Mangu Transport Co-operative Society, 227 CTR 299 (HP) and the judgment of this Court in CIT v. United Rice Land Ltd., 217 CTR 332 (P&H).

(v) The matter being covered by earlier judgment of this Court, no substantial question of law arises.”

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Search and seizure: Interest u/s.132B(4) of Income-tax Act, 1961: Period for which interest is payable on seized amount: Search assessment resulting in no additional tax liability: Interest payable up to the date of refund and not up to the date of the assessment order.

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[Mohit Singh v. ACIT, 241 CTR 244 (Delhi)]

In the course of search u/s.132 of the Income-tax Act, 1961 on 11-9-2003, an amount of Rs.17 lakhs was seized. Block assessment order for the block period 1998-99 to 2003-04 was passed on 23-3-2006 which resulted in no additional tax liability. The seized amount of Rs.17 lakhs was paid on 15-4-2008. Thereafter on 16-5-2008, interest amount of Rs.1,91,704 was paid covering the period from 7-5-2004 to 23- 3-2006. No interest was paid for the period from 23-3-2006 to 15-4-2008 i.e. date of refund.

On a writ petition filed by the assessee the Delhi High Court directed the Revenue to pay the interest at the rate of 7.5% for the period from 23-4-2006 to 15-4-2008 i.e., the date of the refund.

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Loss return: Carry forward of unabsorbed depreciation: Section 32(2), section 80 and section 139(3) of Income-tax Act, 1961: A.Ys. 2000-01 and 2001-02: Section 80 and section 139(3) apply to business loss and not to unabsorbed depreciation covered by section 32(2): Period of limitation for filing loss return not applicable.

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[CIT v. Govind Nagar Sugar Ltd., 334 ITR 13 (Del.)]

For the A.Y. 2001-02, the assessee filed loss return belatedly on 31-3-2003. The AO computed the loss at Rs.6,03,14,560, but did not allow the assessee to carry forward the loss including the depreciation by relying on the provisions of sections 80 and 139(3) of the Income-tax Act, 1961. The Tribunal allowed the carry forward of the depreciation of the relevant year and also of the A.Y. 2000-01.

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

“(i) Sections 80 and 139(3) of the Act apply to business losses and not to unabsorbed depreciation which was exclusively governed by section 32(2) of the Act. That being so, the period of limitation for filing loss return as provided u/s.139(1) would not be applicable for carrying forward of unabsorbed depreciation and investment allowance.

(ii) U/s.32(2), unabsorbed depreciation of a year becomes part of depreciation of subsequent year by legal fiction and when it becomes part of the current years depreciation it was liable to be set off against any other income, irrespective of whether the earlier years return was filed in time or not.”

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Capital gain: Exemption u/s.54E of Incometax Act, 1961: A.Y. 2007-08: Long-term capital gain on transfer of depreciable asset: Investment of net consideration in Capital Gains Deposit Account Scheme: Assessee entitled to exemption u/s.54F.

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[CIT v. Rajiv Shukla, 334 ITR 138 (Del.)]

In the A.Y. 2007-08, the assessee had long-term capital gain on transter of depreciable assets. The assessee invested the net capital gain in the Capital Gains Deposit Account Scheme and calimed exemption u/s.54F of the Income-tax Act, 1961. The AO disallowed the claim on the ground that the capital gain arising from transfer of a depreciable asset shall be deemed to be capital gain arising from transfer of a short-term capital asset. 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: “The income earned by the assessee on sale of depreciable asset was to be treated as long-term capital gain, entitling him to the benefit of section 54F.”

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Business expenditure: Deduction only on actual payment: Section 43B of Income-tax Act, 1961: A.Y. 1989-90: Excise duty paid in advance: Assessee entitled to deduction: AO not right in holding that deduction allowable only on removal of goods from factory.

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[CIT v. Modipon Ltd., 334 ITR 106 (Del.)]

For A.Y. 1989-90, the assessee had claimed a deduction of Rs.14,71,387 as business expenditure on account of excise duty paid in advance. Reliance was placed on section 43B of the Income-tax Act, 1961. The Assessing Officer disallowed the claim holding that the deduction can be claimed only on removal of goods from the factory. 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) With regard to the deduction of Rs.14,71,387 on account of excise duty paid in advance as business expenditure, the procedure envisaged for payment of excise duty envisages such duty to be deposited in advance with the treasury before the goods were removed from the factory premises. The duty, thus, already stood deposited in the accounts of the assessee maintained with the treasury and the amount, thus stood paid to the State.

(ii) The submission of the Department that it was only on removal of goods that the amount credited to the personal ledger account could be claimed as deductible u/s.43B of the Act, could not be accepted.”

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Appeal to Commissioner: Tax recovery by auction sale of property: Income-tax Act, 1961 Sch. II, RR. 63, 65 and 86: TRO confirming sale in recovery proceedings: Order confirming sale is not conclusive: Appeal is maintainable: Period of limitation runs from the date of knowledge of the order.

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[Vijay Kumar Ruia v. CIT, 334 ITR 38 (All.)]

A property belonging to one I was sold by auction on 22-3-1988 by the TRO for recovery of tax dues. The auction was confirmed by the TRO by order dated 25- 4-1988 and certificate of sale was issued in favour of the auction purchaser on the same day. The executor of the will of I preferred an appeal before the Commissioner purporting to be u/r. 86 of Schedule II to the Income-tax Act, 1961. The appeal was dismissed as not maintainable and being barred by time.

The Allahabad High Court allowed the writ petition challenging the order of the Commissioner and held as under:

“(i) An appeal u/r. 86 lies against the original order of the TRO, provided such an order was not conclusive in nature. The relief claimed in the appeal was to cancel and set aside the sale of property. Rule 63 did not contemplate the order of confirmation of sale to be conclusive order. The appeal was maintainable.

(ii) The intention was to challenge the order of sale confirmation and the order issuing the sale certificate. What was intended to be challenged was the sale of the immovable property also and not only the sale certificate. Mere mentioning of a wrong provision in appeal would not take away the statutory right of the petitioner, if the appeal was otherwise provided under the statute and was maintainable.

(iii) The limitation for filing appeal u/r. 86(2) was 30 days from the date of the order. The petitioner acquired the knowledge of the auction sale, the order of sale confirmation and issuance of sale certificate for the first time on 18-8-1988. The appeal was filed on 19-9-1988, within limitation from the date of knowledge.

(iv) If the party aggrieved was not made aware of the order it could not be expected to take recourse to the remedy available against it. Therefore, the fundamental principle was that the party whose rights were affected by an order must have the knowledge of the order. Thus, the appeal was within limitation both from the date of knowledge of the order and its service.”

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Press Release — Central Board of Direct Taxes — No. 402/92/2006 (MC) (17 of 2011) dated 26-7-2011

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Press Release — Central Board of Direct Taxes — No. 402/92/2006 (MC) (17 of 2011)
dated 26-7-2011.

The Double Tax Avoidance Agreement is signed between India and Lithuania on 26th July, 2011.

CBDT Instructions No. 8, dated 11-8-2011 regarding streamlining of the process of filing appeals to ITAT.

Copy of the Instructions available on www.bcasonline.org

Annual detailed Circular on Deduction of tax from salaries during the Financial Year 2011-12 — Circular No. 5 of 2011

[F.No.275/192/2011-IT(B)], dated 16-8-2011. Copy available for download on www.bcasonline.org

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Sudhir Thackersey Charitable Trust v. DIT ITAT ‘H’ Bench, Mumbai Before Pramod Kumar (AM) and R. S. Padvekar (JM) ITA No. 5031/Mum./2010 Decided on: 26-8-2011 Counsel for assessee/revenue: A. H. Dalal/ V. V. Shastri

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Section 12AA — Registration of Trust — Delay in application for registration — Refusal to grant registration on the ground that the trust was claiming exemption u/s.11 even though it was not registered — Whether the refusal was on the valid ground — Held, No.

Facts:
The assessee trust came into existence vide trust deed dated 24th August, 2006. It had not applied for registration till 30-10-2009. However, all along the trust was carrying on its activities and duly filing its return of income with claims for exemption u/s.11. The DIT refused to grant registration for the reason that the assessee was claiming exemption u/s.11 even though it had not complied with the mandatory provisions of registration. According to him the assessee had concealed its income by claiming exemption which otherwise it was not entitled to.

Held:
According to the Tribunal the reason for refusal to grant registration as given by the DIT was not relevant to the consideration on which an application for registration of a trust or charitable institution is to be examined. Further, it also noted that the assessee had admitted an inadvertent lapse in nonfiling of registration application and also the fact that the trust had not accepted any donation, other than corpus donation at the time of formation of the trust. According to it, the lapse by the assessee cannot be visited with the consequence of its being declined registration later also, which approach was not supported either by any specific legal provisions or plain logic or rationale. The DIT was only required to examine if the objects of the trust were charitable and the activities were bona fide. Further noting that the assessee had placed enough relevant details and supportive evidences in support of the trust objects being charitable and the activities being bona fide, the Tribunal directed the DIT to grant registration.

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Krishna Land Developres Pvt. Ltd. v. DCIT ITAT ‘G’ Bench, Mumbai Before J. Sudhakar Reddy (AM) and Asha Vijay Raghavan (JM) ITA No. 1057/Mum./2010 A.Y.: 2005-06. Decided on : 12-8-2011 Counsel for assessee/revenue: Rakesh Joshi/ A. K. Nayak

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Sections 22, 28 — Rental income for letting out premises, which are duly notified as IT Park and can be used only for a specific purpose along with provision of complex service facilities and infrastructure for operation such business is chargeable to tax under the head ‘Income from Business’.

Facts:
The assessee had let out on leave and licence basis for a period of 33 months property purchased by it along with the infrastructure, equipment and facilities, which were prescribed both by the Ministry of Commerce as well as the CBDT. The I.T. Park was duly notified by the Ministry of Commerce and also by the CBDT. The assessee offered licence fees in respect of this activity, for taxation, under the head ‘Income from Business’. The Assessing Officer (AO) relying on the decision of the Apex Court in the case of Shambhu Investments P. Ltd. v. CIT, 263 ITR 143 (SC) held that the income is assessable under the head ‘Income from House Property’. Aggrieved the assessee preferred an appeal to the CIT(A).

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

Held:
The Tribunal noted that the property in question was not a simple building but an I.T. Park with all infrastructure facilities and services. It observed that the Ministry of Commerce and Industries, notifies certain buildings as I.T. Park only if various facilities and infrastructure, as specified by the Department, are provided. It noted that all the technical requirements, infrastructures, facilities and services were being provided for in the building and it was for this reason that not only the Ministry of Commerce & Industries but also the CBDT notified the same as an I.T. Park which entitles the assessee to earn certain incentives. It also observed that the intention of the assessee while purchasing the property is to participate in the I.T. Park and it cannot be said that the intention is only to invest in property. The Tribunal observed that:

“The assessee is offering complex services by way of providing operation place in a notified I.T. Park, with all services and amenities such as infrastructure facilities, waiting room, conference room, valet parking, reception, canteen, 24 hours’ securities, internal facilities, high-speed lift, power back-up, etc. Just because a sister concern incurred this expenditure and claims reimbursement from the assessee, it cannot be said that the facilities are not provided for by the assessee. Whoever maintains them, the fact remains that it is the assessee who ultimately bears such expenditure for the services and undertakes to provide such services. The facilities are made available by the assessee to the person occupying the premises.”

The Tribunal noted that the Gujarat High Court has in the case of Saptarshi Services Ltd. 265 ITR 379 (Guj.) held that the income earned from business centre is to be assessed under the head ‘Income from Business and Profession’ and SLP filed by the Revenue against this judgment was rejected by the Supreme Court [264 ITR 36 (St)]. It also noted that the Mumbai Bench of ITAT has in the case of ITO v. Shanaya Enterprises, (ITA No. 3648/Mum./2010, A.Y. 2006-07, order dated 30th June, 2011) held that when the property is used for specific purposes and in the nature of providing complex services, the income is taxable under the head ‘Income from Business’.

Applying the propositions laid down in the abovementioned decisions, the Tribunal held that since the property can be used only for a specific purpose i.e., I.T. operation and the assessee has provided complex service facilities and infrastructure for operating such business, the income in question be assessed under the head ‘Income from Business & Profession’. It set aside the order passed by the CIT(A) and allowed this ground of the assessee’s appeal.

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Mahalaxmi Sheela Premises CHS Ltd. v. ITO ITAT ‘B’ Bench, Mumbai Before J. Sudhakar Reddy (AM) and Vijay Pal Rao (JM) ITA Nos. 784, 785 & 786/Mum./2010 A.Ys.: 2000-01 to 2002-03 Decided on: 30-8-2011 Counsel for assessee/revenue: Hiro Rai/ P. C. Maurya

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Sections 22, 28 and 58 — Income received on lease of a portion of terrace of the building and a wall of the building for the purpose of fixing of hoarding, neon sign, etc., is assessable under the head ‘Income from House Property’.

Facts:
The assessee leased out portion of terrace of the building and a wall of the building to one Mrs. Sudha Vora, for the purpose of fixing of hoarding, neon sign, etc. The Assessing Officer, while assessing the total income for A.Y. 2000-01, assessed the income under the head ‘Income from Other Sources’ on the ground that the amount received by the assessee was not for letting of a building or terrace or any land appurtenant thereto but on account of allowing Mrs. Sudha Vora to display the advertisement of neon sign, illuminated hoarding, of a size 60 ft x 20 ft on the terrace and also illuminated hoarding of size 20 ft x 50 ft on a vertical wall of a building facing Pedder Road. Aggrieved, the assessee preferred an appeal to the CIT(A).

The CIT(A) held that the terrace has not been let out but merely permission has been granted to use the terrace only to set up the hoarding and to display the hoarding. He also observed that the lessee could use only a portion of the terrace and the purpose of utilisation was not for stay, etc. He upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
Before the Tribunal, the assessee relied on the following case laws:

(1) ITO v. Cuffe Parade Sainara Premises Co-op. Society Ltd., (ITA No. 7225/Mum./2005, order dated 28-4-2008)

(2) Dalamal House Commercial Complex Premises Co-op. Society Ltd. v. ITO, (ITA No. 2286/ Mum./2008, order dated 29-5-2009)

(3) Sharda Chambers Premises Co-op. Society Ltd. v. ITO, (ITA No. 1234/Mum./2008, order dated 1-9-2009)

(4) Matru Ashish CHS Ltd. v ITO, (ITA No. 316/ Mum./2010, order dated 27-8-2010)

(5) S. Sohan Singh v. ITO, (16 ITD 272) (Del.); and

(6) CIT v. Bajaj Bhavan Owners Premises Co-op. Society Ltd., (ITA No. 3183 of 2010/Mum.).

The Tribunal noted that in the case of Bajaj Bhavan Owners Premises Co-op. Society Ltd. v. ITO, Mumbai ‘B’ Bench of the Tribunal in ITA No. 5048/Mum./2004, A.Y. 2001-02 and ITA No. 1433/Mum./2007, for A.Y. 2002-03 and ITA No. 1434/Mum./2007, for A.Y. 2003- 04, order dated 4-11-2009, the facts were that the assessee had allowed a telecom company to erect the tower on their terrace in consideration of an amount of Rs.5,93,700 and claimed it as being chargeable under the head ‘Income from House Property’. The Tribunal following the decision in the case of Sharda Chamber Premises v. ITO, (supra) and ITO v. Cuffe Parade Sainara Premises Co-op. Society Ltd. held such income to be chargeable under the head ‘Income from House Property’.

The Tribunal further noted that the jurisdictional High Court in ITA No. 3183 of 2010 in para 3 of judgment dated 16th August, 2011 confirmed the findings of the Tribunal in the case of Bajaj Bhavan Owners Premises Co-op. Society Ltd.

In view of the aforesaid binding judgment of the jurisdictional High Court, the Tribunal set aside the impugned order of the CIT(A), allowed the ground raised by the assessee and directed the AO to assess the income in question under the head ‘Income from House Property’.

The Tribunal allowed the appeal filed by the assessee.

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Press Release — Central Board of Direct Taxes — No. 402/92/2006-MC (15 of 2011) dated 24-6-2011.

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The Governement of India has signed a protocol amending the DTAA with the Government of Singapore for effective exchange of information in the tax matters.
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Salaried employees exempted from filing tax returns — Notification No. 36/2011, dated 23-6-2011.

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Salaried employees having total taxable income of less than Rs.5 lac have been exempted from filing the tax returns for A.Y. 2011-12, subject to the fulfilment of the following conditions:

  •  The only source of income is salary and income from savings bank interest does not exceed Rs. 10,000.

  •  The PAN of the employee is available with the employer and is mentioned in the Form 16 issued by the employer.

  •  The bank interest income is disclosed to the employer, and is included in employee’s total income, and tax is duly deducted thereon and paid to the Government.

  •  Total tax liability of such person is discharged by way of TDS deducted by the employer which has been duly paid to the Government.

  •  The employee does not derive salary from more than one employer.

  •  The employee has no claim of refund.

  •  No specific notice is issued under the Act to the employee for filing a return of income.
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Requirement to file digitally signed tax returns in certain cases — Notification No. 37/2011, dated 1-7-2011.

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The CBDT has notified that partnership firms filing return in ITR-5 or individuals and HUFs filing returns in ITR-4 and subjected tax audit u/s.44AB would require to digitally sign and submit their income tax returns for A.Y. 2011-12 and onwards.
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IS IT FAIR TO EXPECT AN INDIVIDUAL TO DO TDS (EVEN WITH PRESENT EXEMPTIONS)?

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Introduction It is an accepted fact that the provisions relating to tax deduction at source (TDS) under the Income-tax Act, 1961 (the Act) are very cumbersome, ambiguous and irrational. No amount of input can give you an assurance that the compliances are flawless. There would hardly be any organisation that can claim perfection in compliance with these provisions. As regards the Government organisations — including statutory corporations, nationalised banks, etc., the less said the better.

The law-makers in their wisdom have by and large exempted individuals and HUFs from complying with these provisions. However, there is still much to desire in this respect.

The unfairness In sections 194A (Interest), 194C (Contracts), 194H (Commission), 194I (Rent) and 194J (Professional fees), there are clear provisions that ordinarily, an individual and HUF are not required to deduct tax at source. However, either a sub-section or a proviso in these sections makes an exception that if the individual or the HUF is required to get his/its accounts audited u/s.44AB for the preceding financial year, on the basis of turnover-criterion, then the said individual/HUF would be required to comply with the provisions of TDS.

Again section 194C and 194J provide that if the individual/ HUF is making a payment for personal purpose, then TDS provisions are not applicable. Thus, when a businessman is making a payment to a doctor/ lawyer, etc. for personal matters (non-business), no tax needs to be deducted.

The unfairness lies in not providing similar exemption in section 194A, 194H, 194I. Therefore, if a businessman with tax audit makes personal borrowings for buying a house, he may be required to deduct tax on interest. So also, on brokerage for sale/purchase of house. The same difficulty may arise for rent.

Difficulties in respect of section 195 are too well known. A typical case of an individual buying a house from a non-resident — entails so much of a nightmarish exercise! Either to comply with all formalities for just one single transaction or to obtain exemption u/s.195(2)/ 195(3), involves tremendous hardship.

It can be well understood that the main intention of the statute, to exclude individual and HUF from complying with the requirements for TDS u/s.194C and 194J, was to cover only business transactions and to exclude personal transactions from the ambit of TDS. However, the same logic is not made applied in case of sections 194A, 194H and 194I.

Nevertheless, there is some solace to the individuals and HUF viz. non-applicability of the provisions of section 40(a)(ia). The provisions of section 40(a)(ia) are applicable to any business expense, thus saving the personal expense. But there is an exception to this solace — section 25 which disallows the deduction of interest on housing loan made to a non-resident if TDS requirements are not fulfilled.

The test for deciding, whether individuals and HUFs have to comply with the provisions of TDS, is based on the turnover of the business or professional receipts (same limit as for tax audit u/s.44AB) (i.e., 60 lakh for business and 15 lakh for profession)? However, is it fair that this turnover must be a conclusive criterion for deciding TDS requirement?

Further even compliance procedure of TDS viz. taking TAN, deducting and making TDS payment, filing quarterly returns, issuing TDS certificates, can prove to be extremely cumbersome for individuals and HUFs.

Solution:
One solution that can be thought of may be to lay down a separate criterion which is not based on limits laid down in section 44AB for deciding the TDS compliance by individual or HUF. For instance, the monetary limit for applicability of TDS can be gross payments of Rs.1 crore for individuals and HUFs.

Also, similar exclusion (as in section 194J and 194C) should be provided in case of section 194A, 194H, 194I. Hence, in case of personal expenses none of the provisions dealing with TDS should not apply to individuals and HUFs.

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Raman Gupta Prop. M/s. Raman & Co. v. ACIT ITAT Amritsar Bench, Amritsar Before C. L. Sethi (JM) and Mehar Singh (AM) ITA No. 05/ASR/2010 A.Y.: 2003-04. Decided on: 31-1-2011 Counsel for assessee/revenue: P. N. Arora/ Tarsem Lal

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Section 271D r.w.s 269SS — Penalty for acceptance of loan/deposit otherwise than by account payee cheque/draft — Assessee’s bona fide belief and conduct established a sufficient and reasonable cause — Penalty deleted.

Facts: The assessee had taken cash deposit from three persons amounting to Rs.2.5 lakh from each, aggregating to Rs.7.5 lakh. In response to showcause notice, the assessee explained that on account of urgency, as otherwise the cheque issued by him to the third party would have bounced, he took the cash deposit. Further it was pleaded that he was under the genuine impression that the provisions of section 269SS applied only to the business transactions and not to the personal transactions. However, according to the ACIT, the cheque issued to the third party by the assessee was not for payments to a creditor or discharge of any liability, but the same was issued for payment of a loan to the third party. The ACIT further did not agree with the assessee that the personal transactions were not covered and pointed out that the provisions of section 269SS do not make such distinction. Thus, he imposed a penalty u/s.271D of Rs.7.5 lakh.

According to the CIT(A) none of the exceptions provided u/s.269SS apply to the case of the assessee and the assessee had no compelling reasons to violate the provisions of section 269SS. Accordingly, he confirmed the order imposing penalty.

Held:
The Tribunal noted that the assessee was under bona fide belief that the provisions of section 269SS do not apply to the personal transactions and this belief had not been found to be false or untrue. Secondly, it was noted that the loan so taken was immediately deposited in the bank account and the transactions were duly recorded by the assessee in his books of accounts. According to the Tribunal, the assessee had not consciously disregarded the provisions of section 269SS of the Act. Therefore, relying on the decisions of the Punjab & Haryana High Court in the case of CIT v. Speedways Rubber Pvt. Ltd., (326 ITR 31), it held that the assessee had been able to establish a sufficient and reasonable cause for not accepting the loan by account payee cheque/ draft, and accordingly the penalty imposed was deleted.

Note:
In Hemendra Chandulal Shah v. ACIT, (ITA No. 1129/Ahd./2010), where on a direction of the bank a father had taken cash loan from his son to clear the debit balance in his bank account, according to the Ahmedabad Tribunal, there was reasonable cause and penalty u/s.271D could be imposed. The full text of the decision is available in the office of the Society.

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Vineetkumar Raghavjibhai Bhalodia v. ITO ITAT Rajkot Bench, Rajkot Before A. L. Gehlot (AM) and N.R.S. Ganesan (JM) ITA No. 583/RJT/2007 A.Y.: 2005-06. Decided on: 17-5-2011 Counsel for assessee/revenue: Manish Shah/ N. R. Soni

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Explanation to proviso to clause (v)/(vi) of subsection (2) of section 56 — Gifts from relatives exempt from tax — Whether the gift received from HUF is exempt from tax — Held, Yes — Also held that the amount is exempt u/s.10(2) of the Act.

Issue: The issues before the Tribunal were as under:

1. Whether gift received from HUF by a member of HUF falls under the definition of ‘relative’ as provided in the Explanation to clause (vi) of sub-section (2) of section 56 of the Act?

2. Whether amount received by the assessee from his HUF is covered by section 10(2) of the Act?

The Assessing Officer was of the view that HUF is not covered in the definition of ‘relative’. Therefore, the gift received from the HUF was taxable. On appeal, the CIT(A) confirmed the view of the AO and further observed that if the Legislature wanted, it would have specifically mentioned so in the definition of ‘relatives’. According to him, the exemption u/s.10(2) was available only if the amount was received on partial/total partition and secondly to the extent of share in the assessed income of the current year. Before the Tribunal, the Revenue supported the orders of the lower authorities.

Held:
The Tribunal noted that a Hindu Undivided Family is a person within the meaning of section 2(31) of the Income-tax Act and is a distinctively assessable unit under the Act. Further, it observed that the Act does not define the expression ‘Hindu Undivided Family’, hence, it must be construed in the sense in which it is understood under the Hindu Law. According to it, HUF constitutes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. All these persons fall in the definition of ‘relative’ as provided in Explanation to clause (vi) of section 56(2) of the Act. It did not agree with the views of the CIT(A) that HUF is as good as ‘a body of individuals’ and cannot be termed as ‘relative’. According to it, an HUF is ‘a group of relatives’. Further, from a plain reading of section 56(2)(vi) along with the Explanation to that section and on understanding the intention of the Legislature from the section, the Tribunal found that a gift received from ‘relative’, irrespective of whether it is from an individual relative or from a group of relatives is exempt from tax as a group of relatives also falls within the Explanation to section 56(2) (vi) of the Act. It pointed out that the Act does not provide that the word ‘relative’ represents a single person. Accordingly, the Tribunal held that the ‘relative’ explained in Explanation to section 56(2)(vi) of the Act includes ‘relatives’ and as the assessee received gift from his ‘HUF’, which is ‘a group of relatives’, the gift received by the assessee from the HUF should be interpreted to mean that the gift was received from the ‘relatives’ and therefore, the same was not taxable u/s. 56(2) (vi) of the Act.

As regards the alternative claim for exemption u/s.10(2) — the Tribunal did not agree with the CIT(A) and held that the assessee was entitled to exemption u/s.10(2). According to it, the assessee was a member of HUF and had received the amount out of the income of the family. There was no material on record to hold that the gift amount was part of any assets of HUF. It was out of income of family to a member of HUF, therefore, the same is exempt u/s.10(2) of the Act.

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(2011) 128 ITD 345 (Mum.) Smt. Bharati Jayesh Sangani v. ITO A.Y.: 2005-06. Dated: 4-11-2010

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Section 50C — AO is bound to apply the valuation given by DVO in the valuation report.

Facts:
The assessee purchased a flat for Rs.30,00,000 on 22-10-2003. This property was then sold on 29- 9-2004 for a total consideration of Rs.35,00,000. The stamp duty valuation of the said flat was Rs.1,18,07,180. The assessee was asked to show cause as to why the provisions of section 50C should not be applied. The assessee explained that the value of the property sold within a period of less than one year could not be expected to be as high as 1.18 crore. Further, the building was an old one and in dilapidated condition. The members of the society had resolved to construct a new building by demolishing the old one. Accordingly, the construction contract was entered with builders. As per the contract, the members were to pay certain amounts towards the construction cost and purchase of TDR. Since the assessee did not have money, she sold the flat to a third party with an agreement that the purchaser shall pay the construction cost and purchase cost of TDR to the builder. Further, the assessee explained that when the flat was sold, the building was already demolished and only the plinth was laid for the purpose of construction of new building.

Without prejudice to this main argument, the assessee also requested the Assessing Officer to refer the matter to the Valuation Officer. The DVO valued the said flat at Rs.46.48 lakh. The AO did not concur with the view of DVO as according to him the valuation done by the DVO was very low and further no deduction was required towards TDR. Further, according to the AO, section 50C(2) and section 16A of the Wealth-tax Act, 1957 do not bind the AO to follow the valuation done by the DVO.

Held:
Sub-section (2) of section 50C states that “……..where any such reference is made, the provisions of sub-sections (2), (3), (4), (5) and (6) of section 16A of wealth tax shall apply, with necessary modifications.

Sub-section (6) of section 16A of the Wealth-tax Act states that on receipt of order from the Valuation Officer, the Assessing Officer shall “proceed to complete the assessment in conformity with the estimate of the Valuation Officer”. Hence the AO has no option but to go by the estimate of the Valuation Officer.

The DVOs are experts in the matter of valuation by virtue of special qualification held by them in this field. The AO cannot ignore the report of the DVO.

The words used in sub-section (2) of section 50C that where reference is made to the DVO the provisions of sub-section (6) of section 16A of the Wealth-tax Act shall apply with necessary modifications. The ambit of expression ‘with necessary modifications’ implies striking out the inapplicable fractions of the provision which align strictly with the specifics of the Wealth-tax Act. This will not enable the AO to completely disregard the valuation report by the DVO.

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(2011) 56 DTR (Ahd.) (Trib.) 89 Valibhai Khanbhai Mankad v. DCIT A.Y.: 2006-07. Dated: 29-4-2011

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Section 40(a)(ia) — Payment of hire charges to sub-contractors after obtaining Form 15-I cannot be disallowed u/s.40(a)(ia) on the ground that Form 15J was not filed in time as per Rule 29D.

Facts:
The assessee had made payment of Rs.7,93,34,193 to sub-contractors to whom it awarded subcontract for hiring and from whom he obtained Form 15-I and hence TDS was not deducted. The AO, however, noted that even though the Forms 15-I were obtained from the transporters, the same were not furnished to the CIT in Form 15J as per Rule 29D of the IT Rules, 1962. He therefore, quoting from section 194C(3) as applicable to the relevant assessment year, held that once the assessee failed to furnish Form 15J enclosing therewith Form 15-I to the CIT before 30th June, 2006, he failed to fulfil the conditions laid down u/s. 194C(3)(ii). He accordingly added back the sum paid without TDS u/s.40(a)(ia).

The learned CIT(A) confirmed the addition by holding that responsibility after non-deduction does not stop just at collecting Forms 15-I from the sub-contractors, but also extends to requiring the contractor to furnish Form 15J to the CIT on or before 30th June of the following financial year. It was contended before the learned CIT(A) that Form 15J was submitted to the CIT on 26th February 2009 i.e., after the completion of assessment. The learned CIT(A) rejected this contention holding that such delay defeats the very purpose of the section.

Held:
Once the assessee has obtained Forms 15-I from the sub-contractors, and contents thereof are not disputed or whose genuineness is not doubted, then the assessee is not liable to deduct tax from the payments made to sub-contractors. Once the assessee is not liable to deduct tax u/s.194C, then addition u/s.40(a)(ia) cannot be made.

Non-furnishing of Form 15J to the CIT is an act posterior in time to payments made to subcontractors. This cannot by itself, undo the eligibility of exemption created by second proviso. Third proviso to section 194C(3)(i) which requires the assessee to submit Form 15J is only a procedural formality and cannot undo what has been done by second proviso.

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(2011) 55 DTR (Mumbai) (Trib.) 241 Porwal Creative Vision (P) Ltd. v. Addl. CIT A.Ys.: 2006-07 & 2007-08. Dated: 18-3-2011

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Section 272A(2)(k) — Penalty for failure to file TDS return is leviable only for the delay from the date of payment of taxes by the assessee.

Facts:
There was delay in submitting quarterly statement in Form No. 26Q and for such delay the AO imposed penalty u/s.272A(2)(c) and (k) @ Rs.100 per day of delay. Before the CIT(A), the assessee contended that it was incurring losses and there was financial crisis and therefore due to non-availability of funds there were delays in making the payments and filing the returns. However, the CIT(A) confirmed the penalty levied.

Held:
The clause (c) of section 272A(2) is not applicable as the same related to return/statement u/s.133, 206 and 206C. The case of the assessee is that it had deducted the TDS at the time of crediting amounts in the books of account and the payment could not be made due to financial difficulties and since the payments had not been made, the TDS returns could not be filed, as the same required data relating to payment of TDS.

As regards the default in not paying the tax to the Central Government in time or for non-deducting the tax at source, there are other provisions for ensuring compliance. In case the assessee fails to deduct tax at source or after deducting fails to pay the same to the Central Government, the assessee is deemed to be in default u/s.201(1) and is liable for penalty. The assessee is also liable to pay interest for the period of default till the payment of tax u/s.201(1A). Therefore, the period for levying the penalty has to be counted from the date of payment of tax, because the delay in filing the return till the date of payment of tax is already explained on the ground that the assessee could not pay the taxes for which separate penal provisions exist.

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Bhumiraj Homes Ltd. v. DCIT ITAT ‘B’ Bench, Mumbai Before R. S. Syal (AM) and Asha Vijayaraghavan (JM) ITA No. 2170/Mum./2009 A.Y.: 2004-05. Decided on : 25-3-2011 Counsel for assessee/revenue: Pradip Kapasi/ Naresh Kumar Balodia

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Section 80IB(10) — Deduction in case of housing project — (1) For computation of built-up area for commercial purpose whether proportionate area covered by staircase, passage, lift area and liftroom, etc. is also to be considered — Held, No. (2) While considering the size of the plot whether the unbuilt-up area should be bifurcated in proportion to commercial as well as residential area — Held, No.

Facts:
The assessee, a builder developer had claimed a deduction of Rs.2.55 crore u/s.80IB(10) representing the profits of the housing project. In the original assessment deduction u/s.80IB(10) was disallowed to the extent it was relatable to profits of the commercial area. In the re-assessment proceeding u/s.147, the AO disallowed the remaining part of the deduction which was earlier allowed as in his opinion only the projects approved as ‘housing projects’ were eligible and not those approved as ‘residential as well as commercial projects’ by the local authority.

Before the Tribunal the Revenue contended that the commercial area exceeded 10% of the total built-up area computed on the following basis, hence, the order of the AO was to be upheld. It was submitted that:

  • Built-up area for commercial purpose should include proportionate area covered by staircase, passage, lift area and lift-room;
  • While considering the size of the plot, unbuiltup area should be bifurcated in proportion to commercial as well as residential area. Plot size so calculated was less than 1 acre. It also relied on the decision of the Kolkata Tribunal decision in the case of Bengal Abuja Housing Development Ltd. v. DCIT, (ITA No. 1595/Kol./2005, dated 24-3-2006).

Held:
The Tribunal did not agree with the Revenue’s contention that unbuilt-up area should be bifurcated in proportion to commercial as well as residential area. According to it, in any project there would always be some portion of the area which remains unbuilt and is required to be kept open as per the plans approved. According to the Tribunal the decision of the Kolkata Tribunal was not on the point advocated by the Revenue. As regards the contention to include proportionate area covered by staircase, passage, lift area and lift-room, the Tribunal noted that since all shops and commercial establishments were in the ground floor, such areas cannot be considered to compute built-up area for commercial purpose. Further, relying on the decision of the Bombay High Court in the case of Brahma Associates (ITA No. 1194 of 2010), it allowed the appeal of the assessee.

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(2011) 128 ITD 459/ 9 taxmann.com 121 (Mum.) ACIT v. Safe Enterprises A.Y.: 2005-06.

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Section 143 r.w.s. 133A — Assessee can retract the admission made during survey in respect of concealed income with sufficient evidence and hence no addition of the said amount can be made.

Facts:
The assessee-firm was engaged in the business of civil contracts. During the course of survey, it was noticed that three invoices amounting to Rs. 76,33,179 were not entered into the books of accounts. The AO hence concluded that the labour receipts were suppressed. The partner of the firm agreed to the above findings and offered Rs.76 lakhs as additional income on that account.

However, in the immediate post-survey proceedings, the assessee was able to produce all the related documents before the assessing authority, thus retracting his earlier admission. The Assessing Officer made addition of the impugned amount despite retraction by the assessee. On appeal to the CIT(A) by the assessee the learned CIT(A) considered the matter in great detail and ultimately deleted the said additions. Aggrieved the Revenue preferred an appeal before the Appellate Tribunal.

Held:
1. Survey is essentially an evidence gathering exercise. It is an established position of law that if a disclosure is made by the assessee either under mistaken belief of facts and law due to mental pressure from the survey party or under coercion, he can retract the statement and the admission so made.

2. Reliance was placed on the Supreme Court decision in Pullan Gode Rubber Produce Co. Ltd. v. State of Kerala that admission was an extremely important piece of evidence, but it cannot be said to be conclusive. It is open to the person who made the admission to show that it is incorrect.

3. Also it was held in CIT v. Ramdas Motor Transport and Jaikishin R. Agarwal v. ACIT that if the admission in the statement is not supported by any asset or document, the retraction may be genuine.

4. The assessee, in the post-survey proceedings as well as assessment proceedings had amply demonstrated through credible evidence the source of labour receipts.

Consequently, the ITAT upheld the order of the CIT(A).

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(2011) TIOL 530 ITAT-Kol. ITO v. Rajesh Kr. Garg A.Y.: 2006-2007.

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Sections 40(a)(ia), 194C — When tax was not deducted at source on the basis of Form 15I received by the assessee from the payee and the assessee failed to file Form 15J with the jurisdictional CIT, disallowance cannot be made merely on the basis that the Form 15J was not filed in time with the jurisdictional CIT.

Facts:
The assessee, engaged in business of transportation of goods through hired trucks, made payments aggregating to Rs.28.01 lakhs in respect of 42 vehicles and actual payment was exceeding Rs.50,000 per vehicle, without deduction of tax at source since it had received declarations from the payees in Form 15I. However, the assessee did not file Form 15J within the prescribed time to the jurisdictional CIT. The Assessing Officer disallowed the sum of Rs.28.01 lakhs u/s.40(a)(ia), though the declarations were produced before him in the course of assessment proceedings, on the ground that the authenticity of receiving Form 15I is not discharged due to non-filing of Form 15J with the jurisdictional CIT. Aggrieved the assessee preferred an appeal to the CIT(A).

The CIT(A) stated that the Act does not say that Form 15I is to be treated as non-est due to non-filing of Form 15J by the assessee with the jurisdictional CIT. He held that Form 15I comes into effect before the actual payment or crediting to the account takes place, whereas the due date for furnishing the particulars in Form 15J is 30th June following the financial year. The appellant was to stop deduction of tax on payments as and when he received Form 15I from the sub-contractor. He also observed that the AO had not doubted the existence of Form 15I at the time of making the payment by the assessee. He deleted the addition made by the AO.

Aggrieved the Revenue preferred an appeal to the Tribunal.

Held:
Before the Tribunal, it was contended on behalf of the assessee that this issue is squarely covered in favour of the assessee by the decision of ITAT, Mumbai ‘F’ Bench in the case of Shri Vipin P. Mehta v. ITO, (ITA No. 3317/Mum./2010, A.Y. 2006-07, order dated 20th May, 2011) and also by the decision of Ahmedabad ‘A’ Bench in the case of Valibhai Khanbhai Mankad v. Dy. CIT, (OSD) (ITA No. 2228/Ahd./2009, A.Y. 2006-07, order dated 29-4-2011).

The Tribunal found that the assessee had obtained Form 15I and filed during the course of assessment proceedings but failed to file Form 15J with the jurisdictional CIT. The Tribunal found the issue to be covered in favour of the assessee by the decision of the Mumbai Bench of ITAT in the case of Vipin P. Mehta (supra). Following the ratio laid down by the said decision, the Tribunal confirmed the order of the CIT(A) and deleted the addition made by the AO.

The Tribunal decided this ground of appeal in favour of the assessee.

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(2011) TIOL 511 ITAT-Mum. Manali Investments v. ACIT A.Y.: 2005-06.

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Sections 2(29A), 2(29B), 2(42A), 2(42B), 48, 49, 50 and 74 — Brought forward long-term capital loss can be set-off against capital gain computed u/s.50 in respect of a long-term capital asset.

Facts:
The assessee, engaged in the business of finance and investments, sold meters and transformers, which were its depreciable assets, for a consideration of Rs.1,45,99,988. The gain arising on such sale was shown as long-term capital gain. The AO noticed that these meters and transformers were purchased in earlier years for a consideration of Rs.8,75,99,928 and on these 100% depreciation was claimed and allowed in the respective first year itself. The AO invoked the provisions of section 50 and regarded the gain to be short-term capital gain. The assessee, placing reliance on the decision of the Bombay High Court in the case of CIT v. Ace Builders Pvt. Ltd., (281 ITR 210) (Bom.) contended that such profit on sale of meters and transformers, which were otherwise long-term capital assets, was required to be considered as long-term capital gain for the purposes of set-off against brought forward loss arising on transfer of long-term capital assets. The AO rejected this contention of the assessee and treated the amount of Rs.145.99 lakhs as short-term capital gain on sale of assets which resulted into not allowing set-off against brought forward loss from the long-term capital assets.

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

Aggrieved, the assessee filed an appeal to the Tribunal.

Held:
The effect of section 50 is that once depreciation has been allowed under this Act on a capital asset which forms part of a block of assets, then capital gain on the transfer of such assets shall not be computed in accordance with the provisions of sections 48 and 49, but the income so resulting shall be deemed to be the capital gains arising from the transfer of short-term capital assets in the manner provided in the latter section. Section 50 is a deeming provision and only by legal fiction income from the transfer of otherwise long-term capital assets (held for a period of more than 36 months) is treated as capital gains arising from the transfer of short-term capital assets. Such deeming provision has to be restricted only up to the point which has been covered within the provisions of section 50. The prescription of section 50 is to be extended only up to computation of capital gains. Once the amount of capital gain is determined in case of depreciable assets as per this section, ignoring the mandate of sections 48 and 49 which otherwise deal with the mode of computation of capital gains, the function of this provision shall come to an end and the capital gain so determined shall be dealt with as per the other provisions of the Act. If the assessee is otherwise eligible for any benefit under the Act which is attached to a longterm capital asset, the same shall remain intact. It cannot be denied simply for the reason that on the transfer of such a long-term capital asset, the short-term capital gain has been computed as per section 50.

There can be two stages, viz. firstly, the computation of capital gain on the transfer of otherwise longterm capital assets u/s.50 and secondly, when such capital gain has been so computed, the applicability of other provisions dealing with the short-term or long-term capital assets.

As has been held in the case of Ace Builders (supra), the view that by virtue of the operation of section 50, the capital gain so computed becomes that arising from the transfer of a short-term capital asset for all purposes is incorrect.

The effect of provision of section 74 is that the brought forward loss from long-term capital assets can be set off only against long-term capital gain within the period prescribed in s.s(2) of section 74.

In the instant case, capital gain has arisen from the transfer of an asset which was held for a period of more than three years and no long-term capital gain has entered into the computation of total income of the assessee on this transaction. This amount would also retain the character of long-term capital gain for all other provisions and consequently qualify for set-off against the brought forward loss from the long-term capital assets.

The appeal filed by the assessee on this ground was allowed.

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Insurance business: Section 44: A.Y. 2002-03: The amount set apart by insurance company towards solvency margin as per directions given by IRDA is to be excluded while computing actuarial valuation surplus: Pension fund like Jeevan Suraksha Fund would continue to be governed by provisions of section 44, irrespective of fact that income from such fund is exempted.

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[CIT v. Life Insurance Corporation of India Ltd., 201 Taxman 115 (Bom.); 12 Taxman.com 388 (Bom.)]

The assessee was engaged in the life insurance business. In its return of income for the A.Y. 2002-03, it computed actuarial valuation surplus by excluding the provision for reserve on account of solvency margin amounting to Rs.3,500 crores and loss in Jeevan Suraksha Fund. The Assessing Officer disallowed the claim of the assessee and passed the assessment order by adding the amount on account of the provision for solvency margin and loss from Jeevan Suraksha Fund, inter alia, on the ground that the provision for solvency margin was not an ascertained liability; and that income from Jeevan Suraksha Fund being exempt u/s.10(23AAB), the loss incurred from the said fund could not be adjusted against the taxable income. The Tribunal deleted the additions.

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

“(i) A plain reading of Rule 2 of the First Schedule to the Act, makes it clear that the annual average of the surplus from the insurance business has to be arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938.

(ii) In the instant case, the Chairman of IRDA had directed that the solvency calculations of the assessee did not conform to the requirements of the Regulations that have been stipulated by the Regulatory Authority. It was further directed that the deficiency in the solvency margin was to the extent of Rs.10,000 crores and the assessee was directed to set right the said deficiency over a period of three years by making a provision which would be kept apart in the policy-holders’ fund and no part of the said provision would be available for distribution either to the policy-holders or to the Government of India. Accordingly, the assessee had set apart Rs.3,500 crores towards solvency margin in the assessment year in question.

(iii) The Tribunal, after considering various decisions of the Apex Court as also, the High Court and section 64(VA) of the Insurance Act, 1938, held that the amounts set apart towards the solvency margin as per the directions given by the IRDA was ascertained liability which was required to be set apart as per the Regulations framed by IRDA and, hence, liable to be excluded while computing the actuarial valuation surplus.

(iv) In those circumstances, the decision of the Tribunal in holding that the funds set apart as solvency margin had to be excluded while determining the distributable profits of the assessee could not be faulted.

(v) So far as loss incurred by the assessee from Jeevan Suraksha Fund was concerned, the Jeevan Suraksha Fund is a pension fund approved by the Controller of Insurance appointed by the Central Government to perform the duties of the Controller of Insurance under the Insurance Act. The loss incurred in the Jeevan Suraksha Fund has been considered by the actuary as a business loss, as per the valuation report as on the last day of the financial year, allowable u/s.44 read with the First Schedule to the Act. The fact that the income from such fund has been exempted u/s.10(23AAB) w.e.f. 1-4-1997, does not mean that the pension fund ceases to be insurance business, so as to fall outside the purview of the insurance business covered u/s.44.

(vi) In other words, the pension fund like Jeevan Suraksha Fund would continue to be governed by the provisions of section 44, irrespective of the fact that the income from such fund is exempted, or not. Therefore, while determining the surplus from the insurance business, the actuary was justified in taking into consideration the loss incurred under Jeevan Suraksha Fund.

(vii) The object of inserting section 10(23AAB) as per the Board Circular No. 762, dated 18-2-1998 was to enable the assessee to offer attractive terms to the contributors. Thus, the object of inserting section 10(23AAB) was not with a view to treat the pension fund like Jeevan Suraksha Fund outside the purview of insurance business, but to promote insurance business by exempting the income from such fund.

(viii) Therefore, in the facts of the instant case, the decision of the Tribunal in holding that even after insertion of section 10(23AAB), the loss incurred from the pension fund like Jeevan Suraksha Fund had to be excluded while determining the actuarial valuation surplus from the insurance business u/s.44 could not be faulted.”

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Section 115F — Bonus shares received on account of original investments made in foreign currency are ‘foreign exchange asset’ covered by provisions of section 115F.

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Sanjay Gala v. ITO ITAT ‘L’ Bench, Mumbai Before P. M. Jagtap (AM) and V. Durga Rao (JM) ITA No. 2989/Mum./2008  A.Y.: 2005-06. Decided on : 15-7-2011 Counsel for assessee/revenue: Vijay Mehta & Umesh K. Gala/R. S. Srivastava

Facts:

For the A.Y. 2006-07, the assessee, a non-resident Indian, filed his return of income declaring the income of Rs.60,000. The Assessing Officer (AO) while assessing the total income u/s.143(3) of the Act did not treat the bonus shares as foreign exchange assets and denied the benefits available u/s.115C of the Act. He assessed the total income to be Rs.11,23,265. There was no dispute that the original shares in respect of which bonus shares were received were acquired with convertible foreign exchange. Aggrieved, the assessee preferred an appeal to the CIT(A). The CIT(A) held that the provisions of section 115(C)(b) define the term ‘foreign exchange asset’ to mean an asset which the assessee has acquired or purchased or subscribed to in, convertible foreign exchange. He held that the bonus shares were neither acquired nor purchased nor subscribed by the assessee and consequently the same were held to be not ‘foreign exchange asset’. He upheld the order passed by the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

(1) The assessee acquired the original shares by investing in convertible foreign exchange and, therefore, it cannot be said that the bonus shares are acquired in isolation without taking into consideration the original shares acquired by the assessee.

(2) The Tribunal observed that the Supreme Court and various High Courts have considered the issue with regard to value of the bonus shares and held that “the method of spreading over on both the bonus and original shares the cost of acquisition of the original shares would appear to be the proper method of determining the value of the asset. For, there is no doubt that on the issuance of the bonus shares, the value of the original shares is proportionately diminished. In simple language it is ‘split up’. As such, the cost of acquisition of the original shares and their value is closely interlinked and interdependent on the issue of bonus shares. Therefore, once the bonus shares are issued, the averaging out formula has to be followed with regard to all the shares.”

(3) In view of the above proposition, the bonus shares were held to be covered by section 115C(b) of the Act, and the same are eligible for benefit u/s.115F of the Act. The Tribunal allowed the appeal filed by the assessee.

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Project Completion Method, AS-7 — In the case of an assessee following project completion method of accounting, receipts arising from sale of TDR received, directly linked to the execution of the project, will go to reduce the cost of the project.

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(2011) TIOL 400 ITAT-Mum. ACIT v. Skylark Build ITA Nos. 4307 & 4308/Mum./2010 A.Ys.: 2006-07 and 2007-08. Dated: 17-6-2011

Facts:

The assessee, a builder, had
taken up a slum rehabilitation project at Worli, Mumbai. The project
started with the construction of a transit building on land provided by
Municipal Corporation of Greater Mumbai (MCGM) at Worli. In financial
year 2005-06, the MCGM came up with a proposal that if the assessee was
ready to handover possession of transit buildings it would grant TDRs.
In terms of the said scheme, the assessee received TDR measuring 15308
sq.mts. vide certificate No. SRA 526, dated 2-10-2005 and another TDR
measuring 46909 sq.mts. vide certificate No. SR 594, dated 3-6-2006.
These TDR were sold by the assessee for Rs.9,92,04,469 and
Rs.5,55,86,123, respectively. Both the TDRs were sold in the same
financial year in which they were received. Since the project was not
complete and the assessee was following project completion method, the
assessee had reduced these receipts against work-in-progress.

The
Assessing Officer (AO) did not accept the explanation given. He held
that TDR was nothing but FSI granted by SRA which could be used by
recipient for construction of flats/premises in Mumbai. Therefore, the
income had accrued to the assessee on account of TDR which was required
to be shown as income in the year of receipt. The AO rejected the method
followed by the assessee and assessed the amounts received on sale of
TDR as income of the respective years under consideration.

Aggrieved,
the assessee preferred an appeal to the CIT(A) who observed that TDRs
were directly related to the project undertaken by the assessee,
therefore, sale proceeds could be taxed only in the year of completion,
which was A.Y. 2007-08. The CIT(A) also referred to the decision of the
Tribunal in the case of ITO v. Chembur Trading Corporation, (2009) in
ITA No. 2593/Mum./2006, dated 21-1-2009 in which it was held that TDRs
have to be recognised as revenue receipts in the year in which project
was completed. He, accordingly, deleted the addition made by the AO.
Aggrieved, the Revenue filed an appeal to the Tribunal.

Held:

The
approach adopted by the AO for assessing the income from TDR
independently without deducting the expenses incurred is not justified.
The assessee has been following project completion method which is an
accepted method of accounting in construction business and also
recommended as per AS-7 of ICAI. Therefore, in such cases the income
from the project has to be computed in the year of completion. The TDRs
received are directly linked to the execution of the project and
therefore, before the completion of the project the income from TDR or
any other receipt inextricably linked to the project will only go to
reduce the costs of the project. Therefore, the assessee had rightly set
off TDR received against work-in-progress. Even if TDR receipt is
assessed as an independent item, deduction has to be allowed on account
of the expenses incurred. The TDRs have been received in lieu of handing
over of constructed transit buildings and therefore, cost of those
buildings has to be deducted against income from sale of TDR. The cost
of the buildings is claimed to be more than income from TDR, full
details of which were given to the CIT(A) and therefore, even on this
ground no income can be assessed in case of the assessee. For A.Y.
2006-07, there was no dispute that the project was not complete.

The
Tribunal held that for A.Y. 2006-07, the receipts from sale of TDR have
to be reduced from WIP. The Tribunal noted that the AO had not given
any finding about the year of completion of the project. The CIT(A) had
held that the project was completed in A.Y. 2007-08, but had not given
any basis of such finding. The Tribunal restored the matter to the file
of the AO to verify the year of completion of the project and directed
the AO to compute income from project after taking into account entire
expenditure and the receipts from the beginning of the year including
TDRs as directed by the AO, if he comes to the conclusion that the
project was complete. In case he comes to a conclusion that the project
was not complete, then the AO shall set off TDR receipts against WIP and
no income will be assessed on account of TDR receipts separately.

The Tribunal dismissed the appeals filed by the Revenue.

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Sections 40(a)(ia), 194C — Service contracts have not been specifically included in Explanation III below section 194C. Provisions of section 194C are not applicable to the payments to C & F agents. Payments made by the assessee to C & F agents towards reimbursement of statutory liability paid by C & F agent on behalf of the assessee cannot be considered to be covered by section 194C as they are not for any work of the nature mentioned in Explanation III.

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(2011) TIOL 440 ITAT-Mum. ACIT v. P. P. Overseas ITA No. 733/Mum./2010 A.Y.: 2006-07. Dated: 18-2-2011

Facts:

The assessee had paid C & F agency charges to Vidhi Enterprises and Jayashree Shipping being their charges as agent of the assessee. These payments were made without deducting tax at source. Also, no tax was deducted from payments debited under the head ‘C & F Expenses; being reimbursement of expenses such as customs duty, food stuffing charges, DEPB licence/miscellaneous expenses, conveyance and other charges. The Assessing Officer rejected the contention of the assessee that considering the nature of payment, no tax was required to be deducted. He, accordingly, added a sum of Rs.4,02,252 to the total income by invoking the provisions of section 40(a)(ia) of the Act.

Aggrieved the assessee preferred an appeal to CIT(A) where relying on the decision of the Bombay High Court in the case of East India Hotels Ltd. v. CBDT, 179 Taxman 17 (Bom.) it was contended that section was not applicable to a service contract which is not specifically included in the section under Explanation III. Reliance was also placed on the decision of Visakhapatnam Bench of the Tribunal in the case of Mythri Transport Corporation v. ACIT, 124

TTJ 970, where it was held that when the risk of the main contract is not passed on to the intermediary, then the provisions of section 194C do not apply. The CIT(A) accepted these contentions and directed the AO to delete the disallowance of Rs.4,02,252. Aggrieved, the Revenue filed an appeal to the Tribunal.

Held:

 The contract between the assessee and the C & F agent is a service contract which has not been specifically included in Explanation III below section 194C. In this view of the matter, the provisions of section 194C are not applicable to the payments to C & F agents. If that is so, there was no obligation on the part of the assessee to deduct tax from the payment made to C & F agents.

In respect of payments to agents towards reimbursement of statutory liabilities such as customs duty, DEPB licence, etc., the Tribunal observed that these are actually the liabilities of the assessee and noted that the receipt for the payment is issued by the concerned authority only in the name of assessee. The C & F agents merely collected the payments from the assessee for payment to concerned authorities. The Tribunal held that such payments cannot be considered to be covered by section 194C as they are not for any work of the nature mentioned in Explanation III. These amounts are not subject to TDS, even if it is assumed that section 194C is applicable to the payments in question.

The Tribunal upheld the order of CIT(A) by observing that the basic question as to whether the payments of the nature made by the assessee are covered by Explanation III below section 194C has been answered in favour of the assessee by the judgment of the Bombay High Court cited above and on this ground alone the decision of the CIT(A) has to be upheld. The appeal filed by the Revenue was dismissed.

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Section 194C — As per explanation III(c) to section 194C(2) payment made by assessee for using facility for movement of goods should be categorised as payment for carriage of goods and not as technical fees u/s.194J.

(2011) 129 ITD 109 (Mum.) ACIT v. Merchant Shipping (P) Ltd. A.Y.: 2004-05. Dated: 24-11-2010

Section 194C — As per explanation III(c) to section 194C(2) payment made by assessee for using facility for movement of goods should be categorised as payment for carriage of goods and not as technical fees u/s.194J.

Section 201(1) & 201(1A) — Person responsible to deduct tax at source cannot be treated as assessee in default in respect of tax u/s.201(1), if payee has paid tax directly — However, payee is liable to pay interest u/s.201(1A), from date of deduction to actual payment of tax.

Facts

  •  Payment was made by the assessee to the NSICT for movement of containers to the vessel and from the vessel. On payment to NSICT the assessee deducted tax u/s.194C.

  •   However the AO rejected the same on the ground that services received by the assessee are in the nature of technical services. Therefore, tax should be deducted u/s.194J. Subsequently the AO raised the demand for short deduction u/s.194J of Rs.36,08,701 and interest u/s.201(1A) of Rs.24,90,004.

  • Aggrieved by the order of the AO the assessee filed the appeal before CIT(A).

  • The CIT(A) up held the contention of the assessee of deducting tax under 194C. However the CIT(A) upheld the order of AO u/s. 201(1) and 201(1A).

Held

  •  In order to be covered by sec 194J, there should be consideration for acquiring/using technical know-how provided/made available by human intervention. Section 194J is to be read with explanation 2 to section 9(1)(vii) which defines fees for technical services. Involvement of human element is essential to bring any service with in the meaning of technical service.

  •  In the present case payment was made by the assessee for using a facility and not for availing any technical service which may have gone into making of the facility.

  • In order to be covered by section 194J, there should be direct link between the payment and receipt of technical service/information. Technical service does not include service provided by machines/robots. (CIT v. Bharti Cellular Ltd.) Held that the assessee had rightly deducted tax u/s.194C and the AO had erred in applying provisions of section 194J.

Facts

  • The AO considering the deduction to be a short deduction of the raised demand for the interest u/s.201(1A) of Rs.29,00,004.

  • On appeal by the assessee to the CIT(A), the learned CIT(A) held that the assessees’s liability for deducting tax at source was not washed away by payment of tax by recipient. The CIT(A) upheld order of the AO passed u/s. 201(1) and 201(1A).

  • The assessee filed appeal before the ITAT for payment of interest u/s.201(1A) and for treating order of the AO u/s.201(1) and 201(1A) as time-barred.

 

Held

1.    Payment of interest u/s.201(1A) of Rs.2490004:

(a)    As there was no liability on the assessee to deduct tax u/s.194J, demand of interest u/s.201(1A) is incorrect.
(b)    However from a legal and academic point of view, the liability of payer to pay interest u/s.201(1A) exists for the period between the date on which tax was deductible till date of actual payment.
(c)    Any demand u/s.201(1) of the Act should not be enforced after the tax deductor has satisfied AO that taxes due have been paid by the payee.

2.    Treating order as time-barred:

(a)    Held that, time limit for initiating and completing the proceeding u/s.201(1) has to be at par with the time limit available for initiating and completing the reassessment. Thus the order passed by the AO is within the time limit.
(b)    Thus appeal of the Revenue was dismissed and cross-objection of the assessee was partly allowed.

Educational institution: Exemption u/s. 10(23C)(vi): Assessee-society was running a school: Its application for exemption u/s. 10(23C)(vi) was rejected on ground that its objects, viz., to manage/maintain a library, reading-room, and conduct classes of stitching, embroidery, weaving, centre for adult education and to make necessary arrangements for overall development and growth of children when required, were non-educational in nature: Rejection not proper.

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[Little Angels Shiksha Samiti v. UOI, 199 Taxman 237 (MP)(Mag), 11 Taxman.com 37(MP)]

The assessee-society was running a school. Its objects were:

(a) establishment of a school for the intellectual development of children;
(b) to conduct the classes and activities for all the levels of study and education;
(c) to manage/maintain a library, reading-room, and conduct classes of stitching, embroidery, weaving centre for adult education and education in the field of entertainment, arts, etc.; and
(d) To make necessary arrangements for the overall development and growth of children when required.

For the A.Ys. 2005-06 and 2006-07, the assesseesociety had been granted exemption u/s. 10(23C) (vi). It filed application for grant of approval for exemption u/s.10(23C)(vi) for A.Y. 2007-08. The Commissioner rejected the assessee’s application on the ground that the objects of the society mentioned in clauses (c) and (d) of the object clause were non-educational and, thus, the society did not exist solely for educational purpose.

The Madhya Pradesh High Court allowed the writ petition filed by the assessee-society and held as under:

“(i) In view of the judgment of the Supreme Court in the case of Sole Trustee, Loka Shikshana Trust v. CIT, (1975) 101 ITR 234 the word ‘education’ used in clause (15) of section 2 means the process of training and developing the knowledge, skill, mind and character of the students by normal schooling.

(ii) In the instant case, clause (c) of the objects was to manage and maintain a library, reading-room and conduct classes of stitching, embroidery, weaving and schooling, adult education and education in the field of entertainment, arts, etc. The assessee-society had followed the instructions issued by the Board of Secondary Education in regard to practical examinations for home science and in the aforesaid instructions, stitching, embroidery, weaving subjects had been mentioned. The adult education is also a part of education. If the assessee-society introduced the aforesaid object, it could not be said that the object of the assessee-society was not of educational purpose.

(iii) Clause (d) of the objects was to make necessary arrangement for the complete development of the children. That object was also in consonance with the modern concept of education, because the education is not only to impart education through book reading, but it also includes sports activities and other recreational activities, dance, theatre and even having educational tour within the country and abroad, so that the children can develop their overall talent. It could not be said that the said object was not for educational purpose.

(iv) Apart from that, from the audited accounts of the society, it was clear that it had not used the amount and income for any other business activities. In such circumstances, rejecting the application of the assessee-society at threshold was arbitrary and illegal.

(v) It was also a fact that for prior two years, the assessee-society was granted exemption and after the year 2006-07, the assesseesociety had deleted the clauses (c) and (d) in its memorandum of association. In such circumstances, the order passed by the authority was illegal and against the provisions of section 10(23C)(vi).

(vi) Consequently, the petition was to be allowed. The impugned order was to be quashed. The application filed by the assessee for grant of approval u/s. 10(23C)(vi) was to be accepted.”

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Depreciation: Rate: Section 32: Gas cylinder including valves and regulators: Entry in schedule: Rate 100%: Liquefied petroleum gas cylinder mounted on chasis of truck: Gas cylinder entitled to depreciation at 100%: Cannot be treated as motor vehicle.

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[CIT v. Ananth Gas Supplies, 335 ITR 334 (AP)]

The assessee was dealing in liquefied petroleum gas which it transported in gas cylinders fitted to the chassis of transport vehicles. The assessee claimed depreciation on the cylinders at 100% as applicable to gas cylinders. The Assessing Officer held that the assessee was entitled to depreciation at 40% as applicable to transport vehicles on the ground that the vehicle on which the cylinder was mounted was registered as transport vehicle. The Tribunal allowed the assessee’s claim.

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

“(i) The container mounted on the chassis of the truck was nothing but a gas cylinder and it fits the description of gas cylinder in Appendix I, Part I, item III(ii)F(4) read with Rule 5 of the Rules as including valves and regulators.

(ii) The mere fact that the container was mounted on the chassis of the truck did not deprive it of the character of gas cylinder. It had all the attributes of the cylinder and was not divested of its basic character as cylinder on account of the fact that the item was registered as a transport vehicle.

(iii) The assessee was therefore entitled to claim depreciation at 100% on the liquefied petroleum gas cylinder mounted on the chassis of the truck.”

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Business expenditure: TDS: Disallowance u/s.40(a)(i) r.w.s 194A: Assessee exporting goods: Bills of exchange discounted abroad: Discounting charges not interest: Tax not deductible at source: Discounting charges allowable as deduction.

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[CIT v. Cargill Global Trading P. Ltd., 335 ITR 94 (Del.); 241 CTR 443 (Del.)]

The assessee was in the export business. On the exports to its buyers outside India, the assessee drew bills of exchange on those buyers. These bills of exchange were discounted by the assessee from CSFA which on discounting the bills immediately remitted the discounted amount to the assessee. CSFA was a company incorporated in Singapore and a tax-resident of Singapore. The discount charges were claimed by the assessee as expenses u/s.37. The Assessing Officer disallowed the claim for deduction of the discount charges treating the same as interest on the ground that tax was not deducted at source from the amount. 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) It is clear from the definition in section 2(28A) of the Income-tax Act, 1961, that before any amount paid is construed as interest, it has to be established that the same is payable in respect of any money borrowed or debt incurred.

(ii) The discount charges paid were not in respect of any debt incurred or money borrowed. Instead the assessee had merely discounted the sale consideration. Tax was not deductible at source on the amount. The amount was deductible.”

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Business expenditure: TDS: Disallowance u/s.40(a)(i) r.w.s 195: Payment of interest by branch (PE) to head office abroad: By virtue of convention head office not liable to pay any tax in India: No obligation on branch to deduct tax at source: Interest to be allowed as deduction in the hands of branch.

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[ABN Amro Bank v. CIT, 241 CTR 552 (Cal.)]

The assessee-foreign company incorporated in the Netherlands had its principal branch office in India. Indian branch remits funds to head office as payment of interest. The Indian branch had not deducted tax at source on such interest payment to the head office. The following two issues were for consideration by the Calcutta High Court:

“(i) Whether interest payment made by the Indian branch of the appellant to its head office abroad was to be allowed as a deduction in computing the profits of the appellant’s branch in India?

(ii) Whether in making such payment to the head office, the appellant’s said branch was required to deduct tax at source u/s.195 of the Income-tax Act, 1961?”

The Calcutta High Court held as under:

“(i) An unnecessary complication has been created by the interpretation made of section 40(a) (i) r.w.s 195 by both the appellant and the respondents. A proper meaning has to be ascribed to the expression ‘chargeable’ under the provisions of this Act. Section 195(1) says that if any interest is paid by a person to a foreign company, which interest is chargeable under the provisions of this Act, tax should be deducted at source. The word ‘chargeable’ is not to be taken as qualifying only the phrase ‘any other sum’, but it qualifies the word ‘interest’ also. Where the interest is not so chargeable, no tax is deducted.

(ii) In this case, by virtue of the convention, the head office of the appellant is not liable to pay any tax under the Act. Therefore, there was and still is no obligation on the part of the appellant’s said branch to deduct tax while making interest remittance to its head office or any other foreign branch.

(iii) Therefore, if no tax is deductible u/s.195(1), section 40(a)(i) will not come in the way of the appellant claiming such deduction from its income. Therefore, in the circumstances, the appellant would be entitled to deduct such interest paid, as permitted by the convention or agreement, in the computation of its income.”

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Deduction u/s.10A: A.Y. 2004-05: Export proceeds received beyond 6 months: RBI approval under FEMA: Sufficient compliance u/s.10A: Amount received late entitled to deduction.

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[CIT v. Morgan Stanley Advantage Services Pvt. Ltd. (Bom.), ITA No. 4027 of 2010, dated 30-8-2011]

The assessee was entitled to deduction u/s.10A of the Income-tax Act, 1961. For the A.Y. 2004-05, for availing benefit u/s.10A, the assessee was required to realise the export proceeds by 30-9-2004. The assessee received export proceeds of Rs.2.20 crores in December 2004. On 7-10-2004, the assessee had made an application to the RBI seeking extension of time for realisation of the export proceeds. Reminders were sent on 24-1-2007 and 30-3-2007. By its letter dated 25-4-2007, the RBI confirmed the realisation of the amount under the provisions of FEMA. There was no separate approval under the provisions of the Income-tax Act, 1961. The Assessing Officer disallowed the claim for deduction of the said amount of Rs.2.20 crores u/s.10A of the Act. The Tribunal held that once the assessee has applied for extension and has completed all the formalities and in response the RBI has taken the remittance on record, then non-issuance of a formal letter of approval by the RBI cannot be held against the assessee for none of its fault. The Tribunal further held that in the facts of the present case, it must be held that the extension has been granted in substance and, therefore, the benefit of section 10A has to be allowed to the assessee on the ground that the extension is deemed to have been granted.

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

“(i) In our opinion, no fault can be found with the decision of the Tribunal. In the present case, the note appended to the RBI’s letter dated 25-4-2007 no doubt records that the approval granted by the RBI is under FEMA and the said approval should not be construed as approval by any Authority or Government under any other laws/regulations. The question is, whether the extension of time for realisation of the export proceeds by the Competent Authority under FEMA can be said to be the approval granted by the Competent Authority u/s.10A(3) of the Income-tax Act, 1961.

(ii) ‘Competent Authority’ in section 10A means the RBI or such other Authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange. Admittedly, RBI is the Competent Authority under FEMA which regulates the payments and dealings in foreign exchange. Thus, what section 10A(3) of the Act provides is that the benefits u/s.10A(1) would be available if the export proceeds are realised within the time prescribed by the Competent Authority under FEMA. In the present case, the competent authority under FEMA, namely, the RBI, has granted approval in respect of the export proceeds realised by the assessee till December, 2004. Therefore, the approval granted by RBI under FEMA would meet the requirements of section 10A of the Income-tax Act, 1961. In other words, once the competent authority under FEMA which regulates the payments and dealings in foreign exchange has approved realisation of the export proceeds by the assessee till December 2004, then it meets the requirements of section 10A(3) and consequently the assessee would be entitled to the benefits u/s.10A(1) of the Act.

(iii) Moreover, in the present case, the RBI which is the Competent Authority under FEMA as also u/s.10A of the Income-tax Act, 1961 has neither declined nor rejected the application made by the assessee seeking extension of time u/s.10A of the Act. Therefore, the decision of the Income Tax Appellate Tribunal in holding that the approval granted under FEMA constitutes a deemed approval granted by the RBI u/s.10A(3) of the Act cannot be faulted.”

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Business income/House property income: Rent from leave and licence of office premises: Assessable as business income.

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[The Scientific Instrument Co. Ltd. v. CIT (All.), ITA No. 1 of 2003, dated 12-8-2011]

The assessee company was carrying on business of import and sale of scientific instruments. It purchased premises at Nariman Point, Mumbai in 1982 and had its regional office there. In November 1987, the assessee gave the property on leave-and-licence basis to Citibank. The rental income so received was offered to tax by the assessee as ‘business profits’. The Assessing Officer assessed the income as ‘income from house property’. The Tribunal upheld the assessment.

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

“(i) In Universal Plast Ltd. v. CIT, 237 ITR 454 (SC), tests were laid down as to when income from property is assessable as ‘business profit’ and as ‘income from house property’.

(ii) Applying these tests, the rental income has to be assessed as ‘business profits’ because

(a) All assets of the business were not rented out by the assessee and it continued the main business of dealing in scientific apparatus, etc.

(b) The property was being used for the regional office and was let out by way of exploitation of business assets for making profit.
(c) The assessee had not sold away the properties or abandoned its business activities. The transaction is a ‘commercial venture’ taken in order to exploit business assets and for receiving higher income from commercial assets.”

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Offences and prosecution — False verification in return — Since the signature on return was not disputed at the time of assessment and penalty proceedings, it amounted to admission and the accused could not have been acquitted for the reason that prosecution was not able to prove the signature of the accused.

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[ITO v. Mangat Ram Norata Ram Narwana & Anr., (2011) 336 ITR 624 (SC)]

M/s.
Mangat Ram Norata Ram is a partnership firm carrying on the business of
sale and purchase of machinery, iron pipes and spare parts. One Mr. Hem
Raj happened to be one of its partners. M/s. Mangat Ram Norata Ram
(hereinafter referred to as ‘the firm’) filed its income-tax return for
the A.Y. 1988-89 on July 14, 1988 through its counsel, which was signed
and verified by Hem Raj, its partner. The income-tax return showed the
income of the firm Rs.1,02,800. Return was accompanied by statement of
income, trading accounts, profit and loss account, partnership account
and balance sheet for the A.Y. 1988-89. The assessment was completed by
the then Income-tax Officer u/s.143(3) of the Income-tax Act for
Rs.1,47,370.

The books of account of the firm were taken into
possession by the Sales Tax Department, which were obtained by the
Income-tax Department and on its perusal, discrepancies relating to
entries of income, sale and purchase, bank account, etc., were noticed
and accordingly a notice u/s.148 of the Income-tax Act, 1961
(hereinafter referred to as ‘the Act’) was issued requiring the
respondents to furnish a revised return within 30 days. The respondents
did not comply with the notice and thereafter notice u/s.142(1) of the
Act was issued and the assessee-firm ultimately filed its incometax
return declaring its income of Rs.1,47,870. This return was said to be
duly signed and furnished by the accused Hem Raj, which was accompanied
by a revised statement of income, trading account and profit and loss
account. All these documents were also signed by the accused Hem Raj. On
consideration of the same, the Assistant Commissioner of Income-tax
made addition of Rs.1,28,000 with the trading account, Rs.1,10,000 in
the bank account and Rs.19,710 as additional income and assessed the
total income to Rs.3,68,200 and directed for initiating penalty
proceedings.

Ultimately, the minimum penalty of Rs.1,24,950 was
imposed u/s.271(1)(c) of the Act and further a sum of Rs.7,890 and
Rs.12,680 u/s.271(1)(a) of the Act. The respondent firm filed appeal
against the imposition of penalty which was dismissed by the
Commissioner of Income-tax (Appeals). The respondents had paid the
penalty inflicted on the firm.

A complaint was also lodged for
prosecution of the respondents u/s.276C(1), 277 and 278 of the Act. The
Trial Court on appraisal of the evidence held both the respondents
guilty and awarded a fine of Rs.1,000 each u/s.276C(1), 277 and 278 of
the Act to the firm, whereas, Hem Raj was sentenced to undergo rigorous
imprisonment for one year and to pay a fine Rs.1,000 on each count and
in default to suffer simple imprisonment for three months.

The
firm and Hem Raj aggrieved by their conviction and sentence preferred
appeal and the Appellate Court set aside the conviction and sentence on
the ground that sanction for prosecution was not valid. The Appellate
Court further held that the prosecution has not been able to prove the
signature of Hem Raj in the return filed, and hence, the conviction is
bad on that ground also. The Income-tax Officer aggrieved by the
acquittal of the accused preferred an appeal and the High Court by its
impugned judgment upheld the order of the acquittal and while doing so
observed that the sanction is valid but maintained the order of
acquittal on the ground that the prosecution has not been able to prove
that the return was signed/verified by Hem Raj.

On further
appeal, the Supreme Court observed that the prosecution had led evidence
to prove that the revised return was filed by the firm under the name
of the accused Hem Raj and on that basis assessment was made by the
assessing authority. There is further evidence to show that aggrieved by
the order of assessing authority, an appeal was preferred before the
Appellate Authority under the signature of the accused Hem Raj, which
was dismissed and the penalty was paid. At no point of time the accused
Hem Raj made any objection that the return did not bear his signature
and was not filed by him. It is trite that admission is the best
evidence against the maker and it can be inferred from the conduct of
the party. Admission implied by conduct is strong evidence against the
maker, but he is at liberty to prove that such admission was mistaken or
untrue. By proving conduct of the accused Hem Raj in not raising any
dispute at any point of time and paying the penalty, the prosecution has
proved his admission of filing and signing the return. Once the
prosecution has proved that, it was for the accused Hem Raj to
demonstrate that he did not sign the return. There is no statutory
requirement that signature on the return has to be made in the presence
of the income-tax authority. Nothing has been brought in evidence by the
accused Hem Raj that the signature did not belong to him on the return
and the penalty was paid mistakenly. The Supreme Court was of the view
that the Appellate Court had misdirected itself in not considering the
evidence in a right perspective and acquitting the accused, so also the
High Court which failed to correct the apparent error.

Accordingly,
the Supreme Court allowed the appeal and the impugned orders were set
aside and the judgment of conviction passed by the Chief Judicial
Magistrate was restored. However, the Supreme Court reduced the
substantive sentence from one year to six months on each count and they
were directed to run concurrently.

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BUSINESS RESTRUCTURING — IMPLICATIONS U/S.56(2)(viia)

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The Finance Bill, 2010 witnessed the introduction of a new provision in the Income-tax Act, 1961 (IT Act), being the insertion of clause (viia) to sub-section (2) of section 56 of the IT Act, with effect from 1st day of June 2010.

Until such time, only individuals and Hindu Undivided Families (HUF) were covered within the provisions of section 56(2). As explained in the Memorandum to the Finance Bill 2010, clause (viia) was inserted in section 56(2) to prevent the practice of transferring shares of an unlisted company without consideration or at a price lower than the Fair Market Value (FMV) and to bring it under the tax net.

The legislative intent behind introduction of this provision was to prevent laundering of unaccounted income under the pretext of gifts, especially after abolition of the Gift Tax Act. Hence, these provisions are in the nature of anti-abuse provisions.

These provisions apply only if the recipient of shares is a company and in which public are not substantially interested or a firm. The term ‘firm’ has now been inclusively defined u/s.2(23)(i) to include a Limited Liability Partnership as defined (LLP), under the LLP Act, 2008.

We reproduce below the relevant extract of section 56(2)(viia) of the IT Act:

“(viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested, —

(i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;

(ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:

Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47.

Explanation — For the purposes of this clause, ‘fair market value’ of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);”

The provisions of section 56(2)(viia) of the IT Act are therefore, attracted upon fulfilling of the following conditions:

(a) Recipient is a firm or a company not being a company in which the public are substantially interested, as defined u/s.2(18) of the IT Act closely held company;
(b) Transferor can be any person;
(c) Recipient must ‘receive’ shares of a closely-held company; and
(d) Shares should be received without consideration or for inadequate consideration.

Therefore any receipt of shares of a closely-held company, without consideration or for inadequate consideration, is taxable in the hands of the recipient.

For the purposes of this section, consideration would be deemed to be inadequate, if the difference between the actual consideration and the FMV (to be determined as per prescribed Valuation Rules) of the property exceeds Rs.50,000.

As per Rule 11UA of the Income-tax Rules, 1962, the FMV of unquoted shares is to be determined as under:

(a) Equity shares: Book value of the shares to be computed as follows:

(A – L) x (PV)
—————-
(PE)

Where,
A = Book value of the assets in balance sheet as reduced by any amount paid as advance tax under the Income-tax Act and any amount shown in the balance sheet including the debit balance of the profit and loss account or the profit and loss appropriation account which does not represent the value of any asset.

L = Book value of liabilities shown in the balance sheet but not including the following amounts —

(i) the paid-up capital in respect of equity shares;

(ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;

(iii) reserves, by whatever name called, other than those set apart towards depreciation;

(iv) credit balance of the profit and loss account;

(v) any amount representing provision for taxation, other than amount paid as advance tax under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;

(vi) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;

(vii) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.

PE = Total amount of paid-up equity share capital as shown in balance sheet.

PV = the paid-up value of such equity shares.

Please note, here FMV does not imply the actual market value of the shares at which shares may be transacted between parties. It is the value of shares as determined based on book value of the assets and liabilities of the company.

(b) Other than equity shares: Price which the shares will fetch in the open market, to be determined by a valuation report of a Merchant Banker or a Chartered Accountant.

If, in case the company has issued Compulsory Convertible Preference Shares (CCPS), then unless it has been actually converted to equity shares, it would be regarded as ‘other shares’. Thus, on any transfer of CCPS before its conversion, one will have to consider its market value, as stated above, to ascertain the implications u/s.56(2)(viia).

The tax officer is given the power to refer the questions of FMV of equity shares and other shares, to a valuation officer. For this purpose, necessary changes have been made u/s.142A(1) of the IT Act, with effect from 1st July 2010.

In order to avoid hardships in genuine cases, certain exceptions have been provided in the said provision as listed below:
(a) Receipt of shares in an Indian company by amalgamating foreign company from the amalgamated foreign company, in a scheme of amalgamation;

(b) Receipt of shares in an Indian company by resulting foreign company from the demerged foreign company, in a scheme of demerger;

(c) Receipt of shares in case of business reorganisations of a co-operative bank;

(d) Receipt of shares in the resulting company by the shareholders of the demerged company, under a scheme of demerger; and

(e) Receipt of shares in the amalgamated company by the shareholders of the amalgamating company, under a scheme of amalgamation.

Thus, the receipt of shares of a closely-held company, for reasons, other than as mentioned above, would attract the provisions of section 56(2)(viia) of the IT Act.

It is pertinent to note that corresponding amendments to section 49 by insertion of sub-section (4) have been incorporated, so as to provide that if provisions of section 56(2)(viia) are invoked, then the FMV of the shares so determined would be regarded as the ‘cost of acquisition’ in the hands of the recipient. This is to ensure that once the recipient is taxed on the differential value of the consideration, i.e., difference between FMV and the actual consideration, then such recipient is entitled to add such value towards its cost of acquisition of the shares.

The applicability of these provisions to certain transactions which are not specifically included in the list of exceptions will have to be judged by interpretation of the provisions as they read vis-à-vis the actual legislative intent. A strict interpretation may lead to absurd results while digging the legislative intent may lead to a liberal interpretation.

In this article, we have dealt with certain peculiar situations which may arise in corporate restructuring.

1.    Receipt of shares pursuant to fresh issue of shares at a price less than FMV or issue of bonus shares by the company

In case, where a closely-held company restructures its capital base, it may consider the option of further issue/rights issue to new/existing shareholders. Unlike listed companies which are subject to pricing guidelines on preferential allotment, closely-held companies are free to issue shares at a price as decided by its board of directors.

Thus, legally a closely-held company is entitled to issue shares at less than the book value of its existing shares, being the FMV for the purposes of section 56(2). Now, whether such an issue of shares at less than FMV can be covered within the ambit of section 56(2)(viia)? Also, would there be any taxability u/s.56(2)(viia) in case of bonus issue by a company which due to its very nature would always be received by the shareholders without any consideration?

The application of section 56(2)(viia) to allotment of bonus does not seem to be the legislative intent. This is supported by the Memorandum to the Finance Bill, 2010 which indicates that section 56(2)(viia) ought to apply only in case of ‘transfer’ of shares. In case of allotment of shares, there is no ‘transfer’ of shares. Further, even the meaning of the words ‘receives any property’ contemplates that the property should be in existence before it can be received. Whereas, in case of issue of shares by a company, shares come into existence only at the time of allotment.

Additionally, in case of bonus issue, it is a case of capitalisation of reserves which in any case belong to the shareholders. Therefore, the shareholders do not receive shares without consideration, rather what they receive is in lieu of an existing right in the profits of the company. Hence, 56(2)(viia) ought not to apply to a bonus issue.

2.    Conversion of debentures into equity shares at a pre-agreed value

Similar to issue of equity shares, it is common for companies to issue debentures which are convertible into equity shares of the company at a later date. At the time of issue of such instrument, the subscriber would have paid the entire value of the debenture and would have agreed to the terms and conditions regarding the conversion ratio of debentures into equity shares.

A question that arises is at the time of actual conversion of debentures, if the FMV of the equity shares is higher than the price paid by the debenture holders to acquire the debentures, would section 56(2)(viia) apply?

Similar to the issue of equity shares for cash, on conversion of debentures, the company would issue equity shares to debenture-holder in consideration of the value of the debentures being surrendered to the company. On allotment of shares by the company at the time of conversion of debenture, new shares are brought into existence at such point of time and hence section 56(2)(viia) ought not to apply on conversion of debentures into equity shares.

3.    Implications for non-resident recipients

Section    56(2)(viia) does    not make any distinction between resident and non-resident companies/ firms. Therefore, receipt of any shares of a closely held company by a non-resident without consideration or for an inadequate consideration would be taxable as ‘Income from other sources’ under the IT Act.

However, if the non-resident is a resident of a foreign country with which India has entered into a Double Tax Avoidance Agreement (DTAA), his taxability in India would depend on the relevant DTAA. Under the DTAA, the said income may be governed by the Article dealing with ‘Other Income’. It may be noted that the DTAAs entered by India with countries like Czech Republic, Germany, Hungary, Mauritius, etc., provide that ‘Other Income’ earned by a resident of a Contracting State shall be taxable only in the Contracting State where the taxpayer is resident, except if the tax-payer carries on business in the other Contracting State through a permanent establishment (PE) or the person provides independent personal services from a fixed base situated therein. In other words, section 56(2)(viia) may not apply to a non-resident, if he does not have a PE or fixed base in India.

If the non-resident is a resident of a foreign country with which India has not entered into a DTAA, then the provision of section 56(2)(viia) of the IT Act would apply and income earned by such non-resident would be subject to tax in India.

4.    Sale of an undertaking comprising of shares on a slump-sale basis

When a closely-held company acquires an ‘undertaking’ by way of a ‘slump sale’ and the undertaking, inter alia, comprises of shares of a company in which public are not substantially interested, whether it can be said that provisions of section 56(2)(viia) get attracted.

In such a case, can it be said that the transfer is of certain assets and liabilities as a whole for a lump sum consideration and that it would not be possible to artificially allocate consideration towards the shares, which form part of the undertaking?

Even if one were to ignore the practical difficulty, section 56(2)(viia) should not apply to sale of an undertaking, because the words used in section 56(2)(viia) are ‘receives any property, being shares of a company …….’ which means that the property being transferred/received should be shares of a company. In case of sale of an undertaking, the property being transferred would be an ‘undertaking’ and not ‘shares’ per se. To attract section 56(2)(viia), the subject matter of receipt should be ‘property being shares’ and not property being an undertaking which may include shares of a company in which public are not substantially interested. Several Court decisions have recognised ‘undertaking’ as a distinct capital asset or a distinct property. If sale of an undertaking on a slump sale is viewed as a sale of individual assets like plant and machinery, shares, etc. and subjected to section 56(2)(viia), it would go to diluting the meaning of slump sale.

However, the above argument may be looked at differently by the Revenue authorities, in case of transfer of an undertaking where the undertaking comprises only of shares of a company, i.e., an Investment Division.

5.    Capital reduction/Buyback of shares

Amongst others, companies resort to capital reduction u/s.100-103 of the Companies Act as part of their corporate restructuring. One of the ways of doing capital reduction is by way of cancellation of shares either partially or fully (in case a class of shares is being cancelled). Depending on the purpose of capital reduction and the liquidity in the company, the board of directors may decide to pay the shareholders certain amount of consideration per share. In case of closely-held companies, the FMV as defined for the purpose of section 56(2)(viia) of the shares may or may not be relevant in deciding the consideration on cancellation of shares. Post introduction of section 56(2)(viia), the issue is whether this section will get attracted in the hands of a company if the consideration paid is less than the FMV of the shares cancelled.

On the same lines, can it be said that a buyback of shares by a closely-held company u/s.77A of the Companies Act, 1956 will attract the provisions of 56(2)(viia) of the IT Act?

The key issue here is whether the meaning of the words ‘receives’ as used in the provision can extend to buyback or capital reduction for mere cancellation purposes? As the word ‘receives’ is not defined under the IT Act, it gives room to varied interpretations.

While the ‘transfer’ of shares pursuant to capital reduction/buyback are taxable transfers in the hands of the transferor, the tax authorities may contend that these would constitute ‘receipt’ in the hands of the company cancelling or buying back the shares and therefore should be subjected to section 56(2)(viia) if the consideration paid to the shareholders is less than the FMV.

A relevant point, that the company does not receive its shares, but only cancels its share capital pursuant to the powers conferred on it under the Companies Act. In fact, the Companies Act does not permit a company to hold its own shares. Even if one were to say that a company receives its own shares on buyback or cancellation of shares, it is for the limited purpose of cancellation of those shares and therefore the company does not actually ‘receive’ any property, in the nature of shares.

However, litigation on applicability of section 56(2)(viia) to buyback or reduction cannot be ruled out.

6.    Transfer of shares by a partner of a firm/LLP

When a partner of a firm/LLP transfers shares of a closely-held company by way of capital contribution to a firm/LLP, section 45(3) of the IT Act would apply. As per section 45(3), the amount recorded in the books of accounts is deemed to be the full value of the consideration for computing the capital gain in the hands the partner.

If, the value so recorded in the books of the firm/ LLP is less than the FMV as determined under the valuation rules, then it may be possible that the difference between the FMV and the price at which transfer is made by the partner, may be considered as income of the firm/LLP u/s. 56(2)(viia) of the IT Act.

While undertaking any business reorganisation, a closely-held company will have to evaluate the applicability and the possible implications u/s.56(2) (viia) of the IT Act. Since this is a recently introduced provision, various interpretations can emerge.  

Annual detailed Circular on Deduction of tax from salaries during the Financial Year 2011-12 — Circular No. 5 of 2011 [F.No. 275/192/2011-IT(B)], dated 16-8-2011.

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Copy available for download on www.bcasonline.org

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Cross-border Secondments — Tax implications

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Just as the ambiguity over tax implications on secondment of expats to India appeared to be settling down, the Authority for Advance Rulings (‘AAR’) has vide its ruling in the case of Verizon Data Services1, reopened the Pandora’s box by holding that salary reimbursement of seconded employees is taxable in India as Fees for Included Services (‘FIS’)/ Fees for Technical Services (‘FTS’).

This article discusses key tax implications arising on Secondment of employees of Foreign Company to Indian Company, in light of the existing regulations and various judicial precedents.

Introduction
Increasing number of MNCs establishing business in India has led to a huge surge in the number of ‘Expatriates’ working in India. The term ‘expatriate’ has not been defined in the Act. However, as per various legal dictionaries2, expatriate means someone who is removed from/voluntarily leaves one’s own country to reside in or become a citizen of another country.

Typically, Foreign Companies (‘FCo’) depute their employees to India either in connection with some project or for rendering services to the Indian company (‘ICo’) or to safeguard their interest in India (stewardship functions). For this purpose FCo may enter into a contract to depute their employees to ICo for a predetermined time period. FCos also depute their employees to India as a part of a Foreign Collaboration Agreement (‘FCA’) under which they are obliged to provide complete support to ICo in carrying out business ventures.

‘Deputation’, in common parlance means appointment, assignment to an office, function. The dictionary meaning of the term ‘Second’ is to transfer temporarily to another unit or employment for a special task3. However, as a common practice, both these terms are used interchangeably.

Dual employment

To retain employment with FCo and safeguard the social security/retirement benefits in their home country, expats desire to continue to be on the payroll of FCo and receive salary in their home country. Accordingly, the foreign entity will be regarded as the ‘Legal Employer’. On the other hand, the expats function under the control and supervision of the ICo which eventually bears their salary costs by reimbursing the same to FCo. Thus, ICo can be regarded as the ‘Real’ or ‘Economic employer’.

The concept of ‘Dual Employment’ is also recognised in section 192(2) of the Income-tax Act, 1961 (‘Act’). The Section provides for withholding tax compliances in case of ‘Simultaneous employment’ or ‘Successive employment’ with an option to the employee to choose one of the employers who can consolidate the withholding tax obligations in respect of his salary.

With this background, let us understand the tax implications arising out of the said arrangements. Key tax implications on secondments

  • Expats — Salary received by expatriate employees could be subject to tax in India as such
  • Foreign Companies — FCo deputing expats could be subject to tax in India.

For the purposes of this article, we have only discussed the taxability of FCos in India.

Tax implications in the hands of FCo
Taxation of payments made to FCos in India, pursuant to secondment contracts has been a subject-matter of litigation since quite some time now. The Indian Revenue authorities have been contending that by sending their employees to India, the foreign entities are actually rendering services to the ICo or carrying out business in India. Accordingly, they hold that;

  • the payments made by Indian entities are in the nature of Fees for Technical Services (‘FTS’); or
  • the foreign entities have a Permanent Establishment (‘PE’) in India by virtue of the employees’ presence in India.

Consequently, ICo is held liable to withhold taxes u/s.195 of the Act, before making payments to FCo.

On the other hand, FCos believe that merely by seconding their employees to work under the supervision and control of ICo, they are not rendering any services in India. The amount recharged to ICo is mere recovery of salary costs of secondee paid by FCo in the home country and no taxable income arises in India.

Explanation 2 to section 9(1)(vii) and Article 12/13 dealing with FTS in many DTAAs specifically excludes ‘salaries’ from the scope of FTS. Thus, if it can be established that the secondee is the employee of ICo, then the salary cost recharged by FCo cannot be regarded as FTS.

As regards PE, by virtue of its employees’ presence in India, FCos are exposed to two types of PEs; (i) Service PE and (ii) Fixed Place PE. One of the most important factors to mitigate the PE risk in case of secondment arrangements is establishing the fact that the ICo is the real employer of the expats and FCo does not have any presence in India through them.

Thus, the moot question is whether the secondee, who renders services to ICo can be regarded as its employee, even though he continues to remain on the payroll of FCo.

Contract of service and contract for service

A contract, by virtue of which an employer-employee relationship is established, is regarded as a Contract of Service, whereas contracts which entail services to be rendered by one entity to another could be regarded as Contracts for Services. The importance of this distinction is also recognised by the OECD4 in their ‘Model Tax Convention on Income and on Capital’ published in July 2010 (‘hereinafter referred to as the OECD commentary’).

In order to draw distinction between ‘contract of service’ and ‘contract for service’, one needs to understand what constitutes an employment relationship in case of such contracts. Thus, interpretation of the term ‘employer’ assumes paramount significance.

Employer
The term ‘employer’ is not defined in the OECD model convention or in the Indian domestic law. However, the Hon’ble Supreme Court of India, in various decisions5 has laid down the following key tests to determine the existence of employment relationship.

  • Control and supervision over the method of doing work;
  • Payment of wages or other remunerations;
  • Power of selection of the employee;
  • Right of suspension or dismissal of the employee

Further, the OECD Commentary6 has also laid down the following key factors for determining an employer-employee relationship:

  • Authority to instruct the individual regarding the manner in which the work is to be performed
  • Control and responsibility for the place of work
  • Remuneration of the individual is directly charged by the formal employer to the enterprise to which the services are provided
  • Provision of tools and materials to employee
  • Determination of the number and qualifications of the individual seconded
  • Right to select the individual to perform work and to terminate contractual agreements with the employee for that purpose
  • Right to impose disciplinary sanctions related to the work of that individual
  • Determination of holidays and work schedule.

The OECD commentary7 also provides that the financial arrangement between the two enterprises would also be one of the relevant factors in determining the nature of the relationship.

Renowned author, Professor Klaus Vogel in his treatise on Double Taxation Conventions has provided his views on the term ‘employer’ as follows

“An employer is someone to whom an employee is committed to supply his capacity to work and under whose directions the latter engages in his activities and whose instructions he is bound to obey.”8

As per Prof. Vogel’s hypothesis9, the determination of employer rests with the degree of personal and economic dependence of the employee towards the enterprises involved. Thus, if the employee works exclusively for the ICo and was released for the period in question by the FCo, he may be regarded as an employee of the ICo.

Thus, the aforesaid criteria can be applied in determining the existence of an employer-employee relationship between the ICo and the Secondee.

Judicial precedents

Having discussed what constitutes an employer-employee relationship, let us now look at the stand adopted by Indian judicial authorities in case of such secondment contracts. The common issue before the judiciary is whether the reimbursement of salary cost by ICo to FCo could be regarded as income of the FCo (FTS or otherwise) and be subject to withholding tax u/s.195 of the Act?

Having regard to the terms of the secondment contracts and after applying the tests discussed above, the Indian judicial authorities, in various cases10  have held that reimbursement of salary costs of seconded employees cannot be regarded as income of the FCo. Consequently, there is no withholding tax requirement u/s.195 of the Act. Some of the key common observations in most of these decisions are discussed below:

  •   Expats are deputed to work under the control and supervision of the ICo. FCo is not responsible for the actions of the expats. Thus, FCo does not render any technical service to the ICo.

  •   Since payment by ICo is towards reimbursement of salary cost borne by FCo, no income can be said to accrue to FCo in India.
  •     Referring to Klaus Vogel’s commentary and the relevant facts, ICo could be regarded as an ‘economic employer’ of the secondees. Agreement constituted an independent contract of service.

  •     Since the deputed employees were not subject to the control and supervision of the FCo, there would be no Service PE.

However, in case of AT&S India Pvt. Ltd.11, it was held that compensation paid by ICo to FCo constituted FTS liable to withholding tax u/s.195 of the Act. While arriving at the said ruling, the AAR made the following key observations:

  •     FCo was the real employer of the secondees as it retains right over the employees and has power to remove/replace them

  •     Pursuant to foreign collaboration agreement, FCo had undertaken to render the services to ICo and hence, lent the services of its seconded employees on payment of compensation by ICo

  •     The recipient of the compensation was FCo and not the seconded employees. Further, the payment was not merely reimbursement of salary, it also included other costs

  •     Thus, compensation referred to in the secondment agreement was for rendering ‘services of technical or other personnel’ — hence taxable as FTS and liable to withholding of tax u/s.195.

Here the key fact noted by the AAR was that the secondment agreement was in connection with the foreign collaboration agreement, whereby FCO had undertaken to render services to ICo. Accordingly, payments made pursuant to the secondment agreement were held taxable in the nature of fees for services rendered by FCo.

Verizon ruling

This recent AAR ruling has reignited the somewhat settled position as regards secondment contracts.

Facts

The applicant, Verizon India (‘VI’) is engaged in providing software and allied services to its parent, Verizon US (‘VUS’). GTE Overseas Corporation (‘GTE’), another US-based affiliate is engaged in business activity similar to VI. VI entered into an agreement with GTE for secondment of its three employees to India. The structure of the arrangement is depicted below:

One of the secondees assumed the position of managing director of VI while the other two employees liaised between VI and VUS, and supervised its day-to-day operations.

The salient features of the agreement were:

  •     Employees would function exclusively under the control and supervision of VI;

  •     Employees would continue to remain on the payroll of GTE;

  •     GTE would be absolved from the responsibility/ liability of the work, actions performed and the quality of results produced by its employees;

  •     GTE had the authority to replace and terminate the employees;

  •     GTE would disburse the salary of the secondees and get the same reimbursed from VI without any mark-up;

  •     VI would be liable for the Indian withholding tax compliances and the payments to GTE would be made ‘Net of taxes’.

Key questions before the Authority

  •    Whether the amounts reimbursed to GTE would constitute income accruing to GTE and therefore the same is liable to deduction of tax in accordance with the provisions of section 195 of the Act?

  •     If yes, then whether the payment is taxable as Fees for Included Services (‘FIS’) under the Act read with the India-USA DTAA?

AAR Ruling12

The AAR held that the seconded employees are employees of GTE and not VI. The payments made for performing managerial services would be regarded as FIS under the India-USA DTAA. Also, managerial services are directly covered under FTS as defined under Explanation 2 to section 9(1)(vii) of the Act. Hence, the payment is taxable and VI would be liable to withhold tax u/s.195 of the Act. While arriving at the said conclusion, the AAR made the following key observations:

  •    Since the control and supervision of the company vests with the managing director, GTE has rendered managerial services to the applicant.

  •     The ‘net of tax’ payment clause in the agreement suggests that the services provided by GTE were liable to tax in India.

  •     Since the employees continue to be on the payroll of GTE, get their salaries from it and can be terminated only by GTE, GTE is the employer of the seconded employees.

  •     The nature of the two receipts, one in the hands of GTE and the other in the hands of employees by way of salaries spring from different sources and are of different character and represent different species of income.

  •     As per MOU of the DTAA it is clear that ‘make available’ clause would be applicable only to technical services. ‘Make available’ clause does not apply to managerial services, the payments for which are otherwise covered within the ambit of FIS under Article 12(4) of the DTAA.

  •     Since the amount reimbursed by the applicant is taxable as FIS, the question of PE is merely of an academic interest. Accordingly, the same was not delved into.

Analysis

  •     AAR has not appreciated that managing director is subject to the superintendence and control of Board of Directors and MOA/AOA of the company. The fact that a managing director can be regarded as an employee of the company has been discussed in several judicial precedents14. The AAR also failed to consider the Tribunal rulings in the cases of IDS Software and Karlstorz Endoscopy India, which dealt with similar facts.

  •     AAR failed to consider Circular No. 720 of the CBDT, dated 30th August 1995, which clarifies that each section relating to tax withholding under Chapter XVII of the Act deals with a particular kind of payment and excludes all other sections in that Chapter and that the payment of any sum shall be liable to deduction of tax only under one section. This Circular was duly relied upon in the case of HCL15. Withholding tax on reimbursements u/s.195 which have already suffered tax u/s.192 amounts to double taxation.

  •     While analysing whether the ICo is the real employer, the AAR ignored the key tests laid down by the Supreme Court, OECD guidelines and Klaus Vogel’s commentary on International Hiring Agreements.

  •    AAR has misinterpreted the FIS clause in the India-US treaty by holding that for services that are technical or consultancy in nature, the make-available clause would not apply. Various judicial precedents16 have held that services which are not technical in nature are not covered within the scope of FIS clause.

  •    The AAR ruling is also not in line with other decisions pronounced on similar issue by various authorities in the cases of HCL Infosystems, Cholamandalam MS General Insurance, IDS Software Solutions, etc.

Key takeaways

  •     Since the law is not yet settled and various judicial authorities have adopted different interpretations, drafting of the secondment agreement by clearly defining the nature of relationships between various parties assumes paramount significance.

  •    While drafting the agreement, the principles promulgated by the OECD and the tests laid down by the Apex Court which determine the existence of an employer-employee relationship should be kept in mind.

  •     The documentation and conduct of the seconded employees may also influence taxation of such transactions.

  •    A periodic review of the documentation and compliance process in line with the latest judicial precedents could help in mitigating risk.

Conclusion

The conflicting rulings by various authorities and the uncertainty on taxability of payments made pursuant to secondment contracts continue to create a dilemma in minds of Indian as well as multinational corporations deputing their employees in India. However, to put at rest the stir created by such rulings, concrete clarification from the Legislature17 or the final word from the Apex Court in the near future is the need of the hour. Till then it’s a wait-and-watch situation for all18.

1       Verizon Data Services India Private Limited v. CIT (AAR No. 865 of 2010)

2       a. Law Lexicon (2nd Edition, reprint 1999 on page 681) — ‘Renunciation of allegiance, one voluntary renunciation of citizenship in order to become a citizen of another country’

b.     Black’s law dictionary (Sixth Edition, page 576) — The voluntary act of abandoning renouncing one’s country and becoming the citizen or subject of another

c.     Webster — Residing in a foreign country

d.    Oxford — Remove onself from homeland

3       As noted by the AAR Cholamandalam MS General Insurance Co. (2009 TIOL 02 ARA-IT)

4       Para 8.4 of the Commentary on Article 15

5       Lakshminarayan Ram Gopal (25 ITR 449); Piyare Lal Adishwar Lal (40 ITR 17); Ram Prashad (86 ITR 122)
 
6. Para 8.14 of the Commentary on Article 15

7       Para 8.15 of the Commentary on Article 15

8       Page 899

9       Page 885

10     IDS Software Solutions v. ITO, 2009 TII 22 ITAT-Bang-Intl; Cholamandalam MS General Insurance Co. Ltd. (‘CM’)(2009 TIOL 02 ARA-IT) (Advance Rulings); Tekmark Global Solutions LLC (‘TLLC’) (131 TTJ 173) (Mumbai-ITAT); ACIT v. Karlstorz Endoscopy India Pvt. Ltd. (‘KI’) (ITA No. 2929/ Del/2009)

11     AT&S India Pvt. Ltd. — 287 ITR 421 (‘AAR’) — Distinguished in case of Cholamandalam MS General Insurance Co. Ltd.

12     AAR ruling is binding only on the applicant and the Income-tax officer in respect of transaction in relation to which the ruling is sought. However, persuasive value may be drawn in other similar cases.

13     DIT v. Morgan Stanley and Co. Inc. 292 ITR 416 (SC)

14     K. R. Kothandaraman v. CIT (1966) 62 ITR 345 (Mad), Scottish Court of Sessions in Anderson v. James Sutherland(1941) S.C. 203, Ram Prashad v. CIT (1972) 86 ITR 122 (SC)

15     In HCL Infosystems Ltd. v. DCIT, (76 TTJ 505, later affirmed by Delhi High Court in 272 ITR 261), Delhi ITAT held that reimbursement of salary cost of personnel seconded by Indian company to foreign company was not subject to tax withholding u/s.195

16     Raymonds Ltd. 80 TTJ 120 (Mum.), Boston Consulting Group – 93 TTJ 293, McKinsey & Co. Inc (Philippines) & others 99 TTJ 857 (Mum.)

17     The Legislature has recognised the ambiguity and has endeavoured to provide some clarity on the subject by defining the term employer in the proposed Direct TaxesCode, 2010.

18     Verizon has filed an appeal before the High Court against the said ruling. The outcome is eagerly awaited.

(2011) 57 DTR (Visakha) (Trib.) 299 Swaraj Enterprises v. ITO A.Y.: 1999-2000.

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Section 40(b) — Partners may choose not to provide depreciation in books and in such case AO is not entitled to deduct the cumulative depreciation from capital balances for working out interest u/s.40(b).

Facts:
The assessee paid interest to its partners and claimed the same as deduction. There was no dispute that the partnership firm had complied with the conditions prescribed u/s.40(b) of the Act. The dispute was related to the determination of the capital account balances of the partners on which the interest is payable. The assessee claimed interest on the capital account balances of the partners as disclosed in its books of account. However, during the course of assessment proceedings, the AO noticed that the firm did not provide for depreciation on the fixed assets in its books. However for the purpose of computing the total income, it has claimed depreciation in accordance with section 32 of the Act. Thus it was noticed that the net profits for book purposes have been shown at a higher figure by not charging depreciation, which would consequently increase the capital balances of the partners. In that case, the assessee would claim deduction of more amount of interest on the capital balances so inflated by not providing depreciation on the fixed assets. The AO felt that it is compulsory for the assessee to provide for depreciation in the books also.

Hence the AO reworked the capital balances of the partners by reducing the cumulative amount of depreciation therefrom and accordingly allowed the interest computed on such reduced capital balances. The learned CIT(A), confirmed the order of the A.O. The learned CIT(A) relied upon the decision of the SMC Bench of Visakhapatnam in the case of Arthi Nursing Home v. ITO, (2008) 119 TTJ (Visaka) 415 in order to reject the appeals filed by the assessee before him.

Held:
In the case of Arthi Nursing Home (supra), the SMC Bench, inter alia, placed reliance on the decision of the Supreme Court in the case of British Paints Ltd. (1991) 188 ITR 44, wherein it was held that the AO has a right and also duty to consider whether the books disclose the true state of accounts and the correct income can be deduced therefrom. The computation of total income is not affected by the amount of depreciation provided for in the books of account and the position remains the same even if no depreciation is provided for in the books. Hence, in our view, the ratio laid down in the case of British Paints Ltd. (supra) shall not apply in respect of depreciation, as it will not affect the computation of total income under the Income-tax Act.

Under the Partnership Act, there is no statutory compulsion to provide for depreciation in the books of account or to follow the accounting standards prescribed by the ICAI, though it may be in the interest of the partnership firms to follow the said accounting standards.

In Explanation 5 to section 32, the words ‘whether or not the assessee has claimed the deduction in respect of depreciation’ would show that the assessee has an option not to claim depreciation while computing his total income, but the said option shall be ignored by the AO and he will deduct depreciation from the total income of the assessee. Thus, there is no statutory compulsion for the partnership concerns to provide for depreciation in the books of account under Explanation 5 to section 32.

The AO is authorised only to verify whether the payment of interest to any partner is authorised by and is in accordance with the terms of partnership deed and also it relates to the period falling after the date of partnership deed. Besides the above, the AO should restrict the rate of interest, if the rate authorised in the partnership deed is more than the rate specified in section 40(b)(v) of the Act. Thus, it could be seen that nowhere it is provided that the AO is entitled to disallow the payment of interest to partners by reworking the capital account balances of the partners.

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Income: Interest: Accrual of: Mercantile system: Section 5 of Income-tax Act, 1961: NBFC; Interest on loans given: Loans became non-performing assets: Interest not received and possibility of recovery nil: Interest not accrued.

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[DIT v. Brahamputra Capital Financial Services Ltd., 335 ITR 182 (Del.)]

The assessee, a non-banking financial company, had given interest-bearing loans to group concerns. In the relevant year, the loans had become non-performing assets in terms of the guidelines issued by the Reserve Bank of India. In the relevant year, the assessee did not show the interest in the P&L A/c on the ground that it was unlikely to receive the interest thereupon and thus the interest had not accrued to the assessee in the relevant assessment year. The Assessing Officer held that since the assessee is following mercantile system of accounting the interest had accrued to the assessee and was to be treated as income of the assessee u/s.5. 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 Tribunal had accepted the contention of the assessee that since the recovery of the principle amount of loan itself was doubtful, a decision was taken as a prudent businessman and interest was not accounted for in the books of account. According to the assessee, under these circumstances, there was no real accrual of interest and interest was not taxable in the hands of the assessee having regard to the principles of real income by holding that there was no accrual of real income and, therefore, it did not become income in the hands of the assessee u/s.5 of the Act.

(ii) The Tribunal had also held that merely because the assessee and the borrowers were known to each other, that would not be sufficient to render the financial position of borrower company better, so as to increase the likelihood of interest payment to the assessee.

(iii) On non-performing assets where the interest was not received and possibility of recovery was almost nil, it could not be treated to have been accrued in favour of the assessee.”

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CBDT Instructions No. 8, dated 11-8-2011 regarding streamlining of the process of filing appeals to ITAT.

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Copy of the Instructions available on www.bcasonline.org

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Reassessment: Section 147 and section 148 of Income-tax Act, 1961: Reopening of assessment on reason to believe that certain items of income have escaped assessment: Finding in reassessment proceedings that such items of income have not escaped assessment: Reassessment proceedings not valid: AO cannot assess any other income.

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[Ranbaxy Laboratories Ltd. v. CIT (Del.), ITA No. 148 of 2008 dated 3-6-2011]

The assessee-company was engaged in the business of manufacturing and trading of pharmaceutical products. For the relevant year, the assessee filed the return of income on 31-10-1994, which was processed u/s.143(1)(a) of the Income-tax Act, 1961. Subsequently, a notice u/s.148 was issued on 23-1- 1998 for the reason that the items viz., club fees, gifts and presents and provision for leave encashment have escaped assessment. In reassessment proceedings the assessee explained that there is no escapement of income on account of these items and the explanation was accepted by the Assessing Officer. Accordingly, no addition was made on that count. However, the Assessing Officer reduced the claim for deduction u/s.80HHC and u/s.80I of the Act. The assessee challenged the validity of the assessment order and the additions. The Tribunal upheld the reassessment and the additions.

On appeal by the assessee, the Delhi High Court followed the decision of the Bombay High Court in the case of Jet Airways; 331 ITR 236 (Bom.), allowed the appeal and held as under:

“(i) Though Explanation 3 to section 147 inserted by the Finance Act, 2009 w.e.f. 1-4-1989 permits the Assessing Officer to assess or reassess income which has escaped assessment even if the recorded reasons have not been recorded with regard to such items, it is essential that the items in respect of which the reasons had been recorded are assessed.

(ii) If the Assessing Officer accepts that the items for which reasons are recorded have not escaped assessment, it means he had no “reason to believe that income has escaped assessment” and the issue of the notice becomes invalid. If so, he has no jurisdiction to assess any other income.”

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Appeals to the Appellate Tribunal, High Court and Supreme Court — Circular laying down monetary limit not to apply ipso facto.

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[CIT v. Surya Herbal Ltd., SLP (CC) No. 13694 of 2011 dated 29-8-2011]

By an Instruction No. 3/2011 [F. No. 279/Misc. 142/2007-IT] dated 9-2-2011, the Central Board of Direct Taxes specified the monetary limits and other conditions for filing departmental appeals (in income-tax matters) before the Appellate Tribunal, High Courts and Supreme Court were specified as under:

As per the instructions, the appeals should not be filed in cases where the tax effect does not exceed the monetary limits given hereunder:

Sr. No. Appeals in income-tax matters Monetary limit (in Rs.)
1. Appeal before Appellate Tribunal 3,00,000
2. Appeal u/s.260A before High Court 10,00,000
3. Appeal before Supreme Court 25,00,000

It was clarified that an appeal should not be filed merely because the tax effect in a case exceeds the monetary limits prescribed above. Filing of appeal in such cases should to be decided on merits of the case.

Paragraph 5 of the said Circular read as under:

5. “The Assessing Officer shall calculate the tax effect separately for every assessment year in respect of the disputed issues in the case of every assessee. If, in the case of an assessee, the disputed issues arise in more than one assessment year, appeal can be filed in respect of such assessment year or years in which the tax effect in respect of the disputed issues exceeds the monetary limit specified in para 3. No appeal shall be filed in respect of an assessment year or years in which the tax effect is less than the monetary limit specified in para 3. In other words, henceforth, appeals can be filed only with reference to the tax effect in the relevant assessment year. However, in case of a composite order of any High Court or Appellate Authority, which involves more than one assessment year and common issues in more than one assessment year, appeal shall be filed in respect of all such assessment years even if the ‘tax effect’ is less than the prescribed monetary limits in any of the year(s), if it is decided to file appeal in respect of the year(s) in which ‘tax effect’ exceeds the monetary limit prescribed. In case where a composite order/judgment involves more than one assessee, each assessee shall be dealt with separately.”

The Delhi High Court by its order dated 21st February, 2011 passed in ITXA No. 379 of 2011, dismissed the Revenue’s appeal for the reason that the tax effect was less than Rs.10 lakh.

On an appeal against the order of the Delhi High Court, the Supreme Court gave liberty to the Department to move the High Court pointing out that the Circular dated 9th February, 2011, should not be applied ipso facto, particularly, when the matter has a cascading effect. The Supreme Court held that there are cases under the Income-tax Act, 1961, in which a common principle may be involved in subsequent group of matters or large number of matters. The Supreme Court was of the view, that in such cases if attention of the High Court was drawn, the High Court would not apply the Circular ipso facto. For that purpose, liberty was granted to the Department to move the High Court in two weeks. The special leave petition was, accordingly, disposed of.

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Business expenditure: Revenue or capital: A.Y. 2002-03: Assessee in business of manufacture of steel wire rods, etc.: Paid Rs. 45,21,000 to Mahanagar Gas Ltd. towards CNG connection: Is revenue expenditure.

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[CIT v. TATA SSL Ltd. (Bom.), ITA No. 1321 of 2010 dated 8-6-2011] The assessee, a public limited company, was engaged in the business of manufacturing steel wire rods, wires, CR sheets and profiles. In the relevant year i.e., A.Y. 2002-03, the assessee had paid Rs. 45,21,000 to Mahanagar Gas Ltd. towards CNG connection. The assessee claimed the expenditure as revenue expenditure. The Assessing Officer disallowed the claim. The Assessing Officer held that expenditure is capital in nature on the ground that the payment was made as capital contribution towards the cost of acquiring service meter, twin steam regulator, meter regulating station and cost of pipelines up to meter regulating station and that the payment was made before commencement of the gas supply. The Tribunal allowed the assessee’s claim. The Tribunal held that by paying the impugned amount to Mahanagar Gas Ltd., the assessee did not acquire any right or control over the gas facility. The Tribunal held that the facilities served the sole purpose of supplying the gas to the assessee’s work and, therefore, it was an integral part of profitearning process and facilitated in carrying on the assessee’s business more efficiently without giving any enduring benefit to the assessee.

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

“(i) In the present case, the finding recorded by the Tribunal is that the assets remained the property of Mahanagar Gas Ltd. and that the sole object of payment was to get gas to facilitate the manufacturing activity carried on by the assessee.

(ii) In these circumstances, in our opinion, no fault can be found with the decision of the Tribunal.”

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Interest-tax — Supreme Court — Matter remanded for determining the questions that arose in accordance with the law.

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[Motor and General Finance Ltd. v. CIT, (2011) 334 ITR 33 (SC)] The assessee, a non-banking financial company registered with R.B.I., was engaged in the business of hirepurchase and leasing. In the return of income, 1961 it showed the following components of income:

Rs.
(A) Lease charges 40,86,85,186
(B) Hire-purchase charges 32,64,89,358
(C) Bill discounting charges 1,91,48,614

The assessee did not, however, file any return of interest under the Interest-tax Act, 1974 (for short ‘1974 Act’). The Assessing Officer served a letter on the assessee asking the assessee to explain the reasons for not filing the Interest-tax return for the A.Y. 1995-96. A reply was filed by the assessee requesting the Assessing Officer to withdraw his letter, as the assessee claimed that it was not liable to file returns under the 1974 Act. On 31st March, 2005, a notice u/s. 10 of the 1974 Act was served on the assessee calling upon it to file its return of interest. According to the Assessing Officer, the interest chargeable to tax had escaped assessment. According to the Assessing Officer, on a perusal of the income-tax return of the assessee for the A.Y. 1995-96, it was found that the assessee was engaged in financial activities; that it had income from net hire-purchase charges, lease charges and bill discounting charges as indicated hereinabove. Since the assessee did not file the required return of chargeable interest the Assessing Officer assessed the chargeable interest by way of best judgment assessment u/s. 8(3) of the 1974 Act. The total interest chargeable, according to the Assessing Officer, was Rs.75,43,23,158. One of the issues which arose for determination was whether the transactions undertaken by the assessee were in the nature of hire-purchase and not in the nature of financing transactions. According to the assessee, there is a dichotomy between financing transactions and hire-purchase transactions. According to the assessee, its principal business was of leasing. For the aforestated reasons, the assessee contended that it was not covered by the definition of ‘financial company’ u/s. 2(5B) of the 1974 Act. On examination of the facts of the case and looking into all the parameters, including the parameter of the principal business, such as turnover, capital employed, etc., it was held by the Commissioner of Income-tax (Appeals) that the assessee carried on hire-purchase business activity and bill discounting activity as the principal business and, therefore, the assessee constituted a ‘credit institution’ as defined u/s. 2(5A) of the 1974 Act and was, therefore, taxable under the 1974 Act. However, after coming to the conclusion that the reopening of the proceedings was valid and that the assessee constituted a credit institution, the Commissioner of Income-tax (Appeals) went into the merits of the case and came to the conclusion that the transactions entered into by the assessee were not financing transactions, as the ownership of the vehicle in each case remained with the assessee; that the hirer did not approach the assessee after purchasing the vehicles; that the vehicle stood purchased by the assessee and let out to the hirer for use on payment of charges. Consequently, the Commissioner of Income-tax (Appeals) held that the hire-purchase transactions of the assessee were not financing transactions or loan transactions and, therefore, the Assessing Officer, was not justified in bringing to tax hire-purchase charges of Rs.32,64,89,358. The Commissioner of Income-tax (Appeals), however, held that the Assessing Officer was justified in treating receipts from bill discounting charges of Rs.1,91,48,614 as ‘chargeable interest’ under the 1974 Act. Lastly the Commissioner of Income-tax (Appeals) held that the lease transaction undertaken by the assessee and the lease charges received by it did not fall within the ambit of section 2(7) of the 1974 Act because the Department had accepted the case of the assessee that it remained the owner of the leased assets for all times to come and, therefore, it was not open for the Department to say that charges received for leasing the vehicles are financial charges exigible to the Interest-tax Act, 1974. Consequently, the Commissioner of Income-tax (Appeals) came to the conclusion that the Assessing Officer had erred in bringing to tax lease rental charges of Rs.40,86,85,186 as chargeable interest under the 1974 Act.

Aggrieved by the decision of the Commissioner of Income-tax (Appeals) the assessee as well as the Department went in appeal(s) to the Tribunal which held that the Department was justified in confirming the validity of action u/s. 10 of the 1974 Act. On the question as to whether the assessee was a ‘financial company’ as defined u/s. 2(5B), it was held that the assessee was not a finance company and therefore it did not fall within the definition of ‘credit institution’ as envisaged in section 2(5A) of the 1974 Act and, therefore, it fell outside the purview of the 1974 Act. That, bill discounting charges was taxable under the 1974 Act. That the plea of the assessee that such charges were not covered by the definition of the word ‘interest’ was not acceptable. Consequently, the appeals filed by the assessee were partly allowed. In the Department’s counter-appeal the Tribunal held on examination of the transaction in question that the Commissioner of Income-tax (Appeals) was right in holding that the hire-purchase agreement in the present case was not a financing transaction. Similarly, on examining the lease transaction undertaken by the assessee, the Tribunal held that the asset owned by the lessor was given to the lessee for use only and therefore the Commissioner of Income-tax (Appeals) was fully justified in holding that the receipt on account of lease charges was not taxable as finance charges or interest under the 1974 Act.

Aggrieved by the decision of the Tribunal, the Department carried the matter in appeal to the Delhi High Court u/s. 260A of the Income-tax Act, 1961. The appeal was allowed by the High Court, it was held by the High Court that the Tribunal had erred in holding that for deciding the principal business of a taxable entity under the 1974 Act only the receipt from business is the criteria and the other parameters such as turnover, capital employed, the head count of persons employed, etc. were not relevant. Accordingly, the Tribunal’s decision stood set aside. The High Court also remitted the case to the Assessing Officer saying that it was not clear from the material produced before the Court as to whether the lease agreements entered into by the assessee were financial lease or operational leases or both.

Aggrieved by the decision of the High Court, the assessee went to the Supreme Court by way of civil appeals. The Supreme Court was of the view that the High Court had not examined whether the transaction entered into by the assessee constituted financial transactions so as to attract the provisions of the 1974 Act. The Supreme Court noted that the Commissioner of Income Tax had examined the nature of the transactions entered into by the assessee and the three components of the receipt of the assessee under 1974 Act. According to the Supreme Court the main question which arose for determination in this case was whether the receipt from lease charges, from net hire-purchase charges and bill discounting charges could be taxed under the 1974 Act. This was apart from the question as to whether the assessee which was a non-banking financial company was a credit institution u/s. 2(5A) of the 1974 Act. The Supreme Court was of the view that the matter needed reconsideration and hence set aside the judgment of the High Court with a direction to decide the matter in accordance with law.

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The power of parliament to make law with respect to extra-teritorial aspects or causes — Part iI

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G. V. K. Industries Ltd. & Anr. v. ITO & Anr. — 228 ITR 564 (A.P.):

3.1 Brief facts in the above case were: main object of the company was to generate and sell electricity for which purpose it was constructing a power generation station designed to operate using natural gas as fuel near Rajahmundry in the State of Andhra Pradesh. For the purpose of raising funds for the said project, GVK Inds. Ltd. (Company) needed expert services of qualified and experienced professionals who could prepare a scheme for raising finance and tie-up the required loan. For this purpose, the Company had entered into an agreement with a non-resident company (NRC), namely, ABB-Project and Trade Finance (International) Ltd. Zurich, Switzerland. Under the agreement, the NRC was to act as financial advisor and render requisite services for a success fee. Accordingly, the NRC rendered professional services from Zurich by correspondence as to how to execute documents for sanction of loan by the financial institutions within and outside India on the basis of which the Company approached such institutions and obtained the requisite loan. For a successful rendering of services, the NRC sent an invoice to the Company for payment of success fee amounting to US$.17.15 lakh (Rs.5.4 crores). For the purpose of remittance of this amount, the Company approached the ITO for issuing NOC for remitting the amount without TDS u/s. 195 without any success. The Company also approached the CIT, u/s. 264, who ultimately took the view that the NOC can be issued only after making TDS and payment thereof to the Government. This was challenged by the Company before the Andhra Pradesh High Court.

3.2 After considering various contentions raised on behalf of the Company and various judgments of the Apex Court as well as High Courts and after considering the scope of the services/work undertaken by the NRC, the Court took the view that a ‘business connection’ between the Company and NRC has not been established. Hence what remains to be considered is whether the amount of success fee can be treated as FTS u/s. 9(1)(vii)(b). In this context, it was contended on behalf of the Company that the NRC merely rendered advice in connection with procurement of loan which does not amount to rendering technical or consultancy services and hence, amount in question is not FTS. The Revenue had taken a view that the success fee is FTS as the services rendered by the NRC fall within the ambit of both managerial and consultancy services as contemplated in the definition of FTS given in Explanation to section 9(1)(vii) (b) considering the scope of the services/work of the NRC, the Court took the view that the advice given to procure loan to strengthen finance would be as much a technical or consultancy service as it would be with regard to management, generation of power or plant and machinery. Accordingly, the Court held that the success fees in question fall within the ambit of section 9(1)(vii). In fact, it appears that this was not seriously disputed by the counsel appearing for the Company, but the main argument seems to be that if that is so, then, provisions would be unconstitutional for want of legislative competence. For this, reliance was placed on the commentary given in the book (i.e., Law of Income Tax and Practice) written by the learned authors Kanga and Palkhivala.

3.3 Dealing with the above-referred issue raised on behalf of the Company, the Court stated that having regard to the present liberalisation policy, it is for the Government to take steps to have clause (vii)(b) of section 9(1) either replaced or amended so as to make income by way of FTS chargeable only when territorial nexus exists. After making this observation, the Court upheld the validity of the provisions mainly relying the judgment of the same Court as well as of the Apex Court in the case of ECIL (referred to in para 2 in Part-1).

G. V. K. Industries Ltd. & Anr. v. ITO & Anr. — 332 ITR 130 (SC):

4.1 The judgment of the Andhra Pradesh High Court in the above case came up for consideration before the Apex Court at the instance of the Company (i.e., assessee). Considering the importance of the issue involving validity of section 9(1)(vii)(b), the matter was finally referred to the Constitutional Bench. For the purpose of deciding the issue, the Court noted that the High Court having held that section 9(1)(i) did not apply in the facts of the case of the Company, nevertheless upheld the applicability of section 9(1) (vii)(b) and also upheld the validity of the said provisions mainly relying on the judgment of three-Judge Bench of the Apex Court in the case of ECIL.

4.2 For the purpose of dealing with the issue, the Court noted that the Apex Court in the case of ECIL conclusively determined that clauses (1) and (2) of Article 245, read together, imposed requirement that laws made by the Parliament should bear a nexus with India and ask that the Constitution Bench be constituted to consider whether the ingredients of section 9(1)(vii)(b) indicate such a nexus. In the course of proceedings before the Constitution Bench, the Company (i.e., GVK Inds. Ltd.) withdrew its challenge to the constitutional validity of section 9(1)(vii)(b) and elected to proceed only on the factual matrix as to the applicability of the said section. However, the learned Attorney General (A.G.), appearing on behalf of the respondent, pressed upon the Bench to reconsider the decision of the three-Judge Bench in the case of ECIL. Considering the constitutional importance of the issue, the Court agreed to consider the validity of the requirement of relationship to or nexus with the territory of India as a limitation on the powers of the Parliament to enact laws pursuant to Article 245(1).

4.3 For the purpose of deciding the above issue, the Court noted that the central constitutional theme before the Court relate to whether the Parliament’s powers to legislate, pursuant to Article 245, include legislative competence with respect to aspects or causes that occurred, arise, or exist or may be expected to do so, outside the territory of India. For this purpose, the Court noted that there are two divergent and dichotomous views on this. First one arises from a rigid reading of the ratio in the case of ECIL which suggests that the Parliament’s powers to legislate, incorporate only competence to enact laws with respect to aspects or causes that occur, or exist, solely within India. In this context, the Court further observed as follows (page 133):

“….A slightly weaker form of the foregoing strict territorial nexus restriction would be that the Parliament’s competence to legislate with respect to extra-territorial aspects or causes would be constitutionally permissible if and only if they have or are expected to have significant or sufficient impact on or effect in or consequence for India. An even weaker form of the territorial nexus restriction would be that as long as some impact or nexus with India is established or expected, then the Parliament would be empowered to enact legislation with respect to such extra-territorial aspects or causes. The polar opposite of the territorial nexus theory, which emerges also as logical consequence of the propositions of the learned Attorney General, specifies that the Parliament has inherent powers to legislate ‘for’ any territory, including territories beyond India, and that no Court in India may question or invalidate such laws on the ground that they are extra-territorial laws. Such a position incorporates the views that the Parliament may enact legislation even with respect to extra-territorial aspects or causes that have impact on, effect in or consequence for India, any part of it, its inhabitants or Indians, their interest, welfare, or security, and further that the purpose of such legislation need not in any manner or form be intended to benefit India.”

4.4 After noting the above-referred divergent views, the Court framed the following two questions for the decision of the Constitutional Bench (pages 133/134):

“(1)    Is the Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on, or effect(s) in, or con-sequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians?

(2)    Does the Parliament have the powers to legislate ‘for’ any territory, other than the territory of India or any part of it?

4.5    Before proceeding to decide the questions framed, the Court noted the provisions of Article 245 of Constitution, which fall in part XI of Chapter 1 under the head ‘Extent of laws made by the Parliament and by the Legislatures of the States’. The Court also stated that many expressions and phrases that are used contextually in the flow of language, involving words such as ‘interest’, ‘benefit’, ‘welfare’, ‘security’ and the like in order to satisfy the purpose of laws and their consequences, can have range to meanings. The Court then, for the purpose of the judgment, decided to set forth the following range of meanings for such expressions and phrases (pages 134/135):

‘aspects or causes’, ‘aspects and causes’:

“events, things, phenomena (howsoever common place they may be), resources, actions or transactions, and the like, in the social, political, economic, cultural, biological, environmental or physical spheres, that occur, arise, exist or may be expected to do so, naturally or on account of some human agency.”

‘extra-territorial aspects or causes’:

“aspects or causes that occur, arise, or exist, or may be expected to do so, outside the territory of India.”

‘nexus with India’, ‘impact on India’, ‘effect in India’, ‘effect on India’, ‘consequence for India’ or ‘impact on or nexus with India’:

“any impact(s) on, or effect(s) in, or consequences for, or expected impact(s) on, or effect(s) in, or consequence(s) for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well being of, or security of inhabitants of India, and Indians in general, that arise on account of aspects or causes.”

‘benefit to India’ or ‘for the benefit of India’, ‘to the benefit of India’, ‘in the benefit of India’ or ‘to benefit India’ or ‘the interests of India’, ‘welfare of India’, ‘well-being of India’, etc.:

“protection of and/or enhancement of the interest or, welfare of, well-being of, or the security of India (i.e., the whole territory of India), or any part of it, its inhabitants and Indians.”

4.6 Dealing with the ratio of the judgment in the case of ECIL, the Court stated as under (pages 136/137):

“The requirement of nexus with the territory of India was first explicitly articulated in the decision by a three-Judge Bench of this Court in ECIL. The implication of the nexus requirement is that a law that is enacted by the Parliament, whose ‘objects’ or ‘provocations’ do not arise within the territory of India, would be unconstitutional. The words ‘object’ and ‘provocation’, and their plural forms, may be conceived as having been used in ECIL as synonyms for the words ‘aspects’ and ‘cause’, and their plural forms, as used in this judgment.”

4.6.1 The Court further noted that in the case of ECIL, while dealing with the validity of section 9(1) (vii)(b) of the Act and interpreting the provisions of Article 245(1) and (2), the Court, in that case, drew the distinction between the phrases ‘make laws’ and ‘extraterritorial operation’ — i.e., the acts and functions of making laws versus the acts and functions of effectuating a law already made. The Court also noted the conclusion of the Court in that case that the operation of the law can extend to persons, things and acts outside the territory of India. However, the principle enunciated in that case does not address the question as to whether a Parliament may enact a law ‘for’ a territory outside boundaries of India. The Court then observed as follows (page 138):

“….To enact laws ‘for’ a foreign territory could be conceived of in two forms. The first form would be, where the laws so enacted, would deal with or be in respect of extra-territorial aspects or causes, and the laws would seek to control, modulate or transform or in some manner direct the executive of the legislating State to act upon such extra-territorial aspects or causes because: (a) such extra-territorial aspects or causes have some impact on or nexus with or to India; and (b) such laws are intended to benefit India. The second form would be when the extra-territorial aspects do not have, and neither are expected to have, any nexus whatsoever with India, and the purpose of such legislation would serve no purpose or goal that would be beneficial to India.”

4.6.2 The Court then further noted that in the case of ECIL, it was concluded that the Parliament does not have the powers to mark laws that bear no relationship to or nexus with India. The obvious questions that arises from this is: “what kind of nexus?” According to the Court, in this context, the words used in that case (referred to in para 2.5.2 in Part-1) are instructive both as to principle and also the reasoning. The Court then opined that the distinction drawn in that case between ‘make laws ‘ and ‘operation of laws’ is a valid one and leads to a correct assessment of relationship between clauses (1) & (2) of Article 245.

4.6.3 Concluding on the possible effect of the rigid reading of the judgment of in the case ECIL, the Court stated as under (page 139):

“We are, in this matter, concerned with what the implications might be, due to use of the words ‘provocation’, ‘object’, ‘in’ and ‘within’ in connection with the Parliament’s legislative powers regarding ‘the whole or any part of the territory of India’, on the understanding as to what aspect and/or causes the Parliament may legitimately take into consideration in exercise of its legislative powers. A particularly narrow reading or understanding of the words used could lead to a strict territorial nexus requirement wherein the Parliament may only make laws with respect to objects or provocations — or alternately, in terms of the words we have used ‘aspect and causes’ — that occur, arise or exist or may be expected to occur, arise or exist, solely within the territory of India, notwithstanding the fact that many extra-territorial objects or provocations may have an impact or nexus with India. Two other forms of the foregoing territorial nexus theory, with weaker nexus requirements, but differing as to the applicable tests for a finding of nexus, have been noted earlier.

4.7 Having noted the implications of the judgment in case of ECIL and the issue arising therefrom, and the impact thereof on the powers of the Parliament to enact a law with respect to ‘extra-territorial aspects or causes’, the Court also noted that learned A.G. appeared to be concerned by the fact that the narrow reach of Article 245 in the context of the ratio in the case of ECIL would significantly incapacitate the Parliament, which is charged with the responsibility of legislating for the entire nation, in dealing with extra-territorial aspects or causes that have an impact on or nexus with India. The Court also noted the following propositions made by the learned A.G. with respect to the meaning, purport and ambit of Article 245 (pages 139/140), which, it seems, the Court found as moving to another extreme:

“(1)    There is a clear distinction between a Sovereign Legislature and a Subordinate Legislature.
(2)    It cannot be disputed that a Sovereign Legislature has full power to make extra-territorial laws.

(3)    The fact that it may not do so or that it will exercise restraint in this behalf arises not from a Constitutional limitation on its powers but from a consideration of applicability.

(4)    It does not detract from its inherent rights to make extra-territorial laws.

(5)    In any case, the domestic courts of the country cannot set aside the legislation passed by a Sovereign Legislature on the ground that it has extra-territorial effect or that it would offend some principle of international law.

(6)    The theory of nexus was evolved essentially from Australia to rebut a challenge to income-tax laws on the ground of extra-territoriality.

(7)    The principle of nexus was urged as a matter of construction to show that the law in fact was not extra-territorial because it has a nexus with the territory of the legislating State.

(8)    The theory of nexus and the necessity to show the nexus arose with regard to State Legislature under the Constitution since the power to make extra-territorial laws is reserved only for the Parliament.”

4.7.1 According to the Court, the main propositions are that the Parliament is a ‘Sovereign Legislature’ and that such a ‘Sovereign Legislature’ has full power to make extra-territorial laws. The Court, then, stated that this can be analysed in two ways. The first aspect of this is: the phrase ‘full power to make extra-territorial laws’ would implicate the competence to legislate with respect to extra-territorial aspects or causes that have an impact on or nexus with India, wherein the State machinery is directed to achieve the goals of such legislation by exerting the force on such extra-territorial aspects or causes to modulate, change, transform or eliminate their effects. The second aspect of this is: such powers would also extend to legislate with respect to the extra-territorial aspects or causes that do not have any impact on or nexus with India. The Court then noted that according to the learned A.G., both these forms of powers are within the legislative competence of the Parliament. The Court then assumed that the learned A.G. did not mean that the Parliament would have powers to enact extra-territorial laws with respect to foreign territories that are devoid of justice i.e., they serve no benefits to the denizens of such foreign territories. Considering historical background of establishment of India as a nation, the Court, in this context, observed as under (page 141):

“To the extent that extra-territorial laws enacted have to be beneficial to the denizens of another territory, three implications arise. The first one is when such laws do benefit the foreign territory, and benefit India too. The second one is that they benefit the denizens of that foreign territory, but do not adversely affect India’s interest. The third one would be when such extra-territorial laws benefit the denizens of the foreign territory, but are damaging to the interest of India. We take it that the learned Attorney General has proposed that all three possibilities are within constitutionally permissible limits of legislative powers and competence of the Parliament.”

4.7.2 The Court then also noted the propositions of the learned A.G. that the Courts do not have power to declare the extra-territorial laws enacted by the Parliament invalid on the grounds that they have an ‘extra-territorial effect’ whether such laws are with respect to extra-territorial aspects or causes that have any impact on or nexus with India, or that do not in any manner or form work to, or intended to be or hew to the benefit of India or that might even be detrimental to India. The Court then noted the far-reaching implications of this proposition including the one that the judiciary also has been stripped of its essential role even where such extra-territorial laws may be damaging to the interests of India.

4.8 For the purpose of considering the propositions made by the learned A.G., the Court referred to relevant principles of constitutional interpretation. In this context, the Court noted that under the scheme of Constitution the sphere of actions and extent of powers exercisable by various organs are specified. Such institutional arrangements made under the constitution are legal, inter alia, in the sense that they are susceptible to judicial review with regard to determination of vires of any of the actions of the organs of the State. The actions of such organisation are also judiciable, in appropriate cases, where the values or the scheme of the constitution may have been transgressed. The Court then dealt with the guiding principles for interpretation in the process of such review, the powers of the Parliament to amend the Constitution and also noted that such amending powers do not extend to the basic structure of the Constitution. The Court also referred to relevant principles of interpretation in this context and the methods to be adopted for the same.

4.9 The Court then proceeded to analyse the provisions of Article 245 and stated that under the clause

(1), the Parliament is empowered to enact a law ‘for’ the whole or any part of the territory of India. The word that links subject, ‘the whole or any part of the territory in India’, with the phrase that grants the legislative powers to the Parliament is ‘for’. After noting the range of meanings of the word ‘for’, the Court observed as under (page 146):

“Consequently, the range of senses in which the word ‘for’ is ordinarily used would suggest that, pursuant to clause (1) of Article 245, the Parliament is empowered to enact those laws that are in the interest of, to the benefit of, in defence of, in support or favour of, suitable or appropriate to, in respect of or with reference to ‘the whole or any part of the territory of India.”

4.9.1 The Court then noted that the problem with the manner in which Article 245 has been explained in the case of ECIL relates to the use of the word ‘provocation’, and ‘object’ as the principal qualifiers of laws and then specifying that they need to arise ‘in’ or ‘within’ India. Considering the effect of this, the Court took the view as under (page 147):

“Consequently, the ratio of ECIL could wrongly be read to mean that both the ‘provocations’ and ‘objects’ — in terms of independent aspects or causes in the world of the law enacted by the Parliament, pursuant to Article 245, must arise solely ‘in’ or ‘within’ the territory of India. Such a narrowing the ambit of clause (1) of Article 245 would arise by substituting ‘in’ or ‘within’, as prepositions, in the place of ‘for’ in the text of Article 245. The word ‘in’, used as a preposition, has a much narrower meaning, expressing inclusion or position within the limits of space, time or circumstances, than the word ‘for’. The consequence of such a substitution would be that the Parliament could be deemed to not have the powers to enact laws with respect to extra-territorial aspects or causes, even though such aspects or causes may be expected to have an impact on or nexus with India, and laws with respect to such aspects or causes would be beneficial to India.”

4.9.2 The Court then noted that the view that a nation/state must be concerned only with respect to persons, property events, etc. within it’s own territory emerged in the era when external aspects and causes were thought to be only of marginal significance, if at all. The Court also noted the earlier versions of sovereignty emerged in the context of global position and lesser interdependence of the nations at the relevant time. Having noted the earlier scenario, the Court stated that on account of scientific and technological developments, the magnitude of cross border travel and transactions has tremendously increased. Moreover, existence of economic, business, social and political organisations that operate across borders, implies that their activities, even though conducted in one territory, may have an impact on or in another territory. Global criminal and terror network are also example of how things and activities in a territory outside one’s own borders would affect interests, welfare, well being and security within. The Court then stated that within the international law, the principles of strict territorial jurisdiction have been relaxed, in the light of greater inter dependencies and other relevant reasons. At the same time, no State attempts to exercise any jurisdiction over matters, persons, or things with which it has absolutely no concern. After noting this position with regard to international law concerning power of making law with regard to extra-territory aspects and causes, the Court held as under (page 149):

“Because of interdependencies and the fact that many extra-territorial aspects or causes have an impact on or nexus with the territory of the nation/ state, it would be impossible to conceive legislative powers and competence of national parliaments as being limited only to aspects or causes that arise, occur or exist or may be expected to do so, within the territory of its own nation-state. Our Constitution has to be necessarily understood as imposing affirmative obligations on all the organs of the State to protect the interest, welfare and security of India. Consequently, we have to understand that the Parliament has been constituted, and empowered to, and that its core role would be to, enact laws that serve such purposes. Hence even those extra-territorial aspects or causes, provided they have a nexus with India, should be deemed to be within the domain of legislative competence of the Parliament, except to the extent the Constitution itself specifies otherwise.”

4.10 The Court then dealt with the extreme view canvassed by the learned A.G. that the Parliament is empowered to enact a law in respect of extra-territorial aspects or causes that have no nexus with India, and further more could such laws be bereft of any benefit to India? While rejecting such a proposition, the Court stated as under (pages 149/150):

“The word ‘for’ again provides the clue. To legislate for a territory implies being responsible for the welfare of the people inhabiting that territory, deriving the powers to legislate from the same people, and acting in a capacity of trust. In that sense the Parliament belongs only to India and its chief and sole responsibility is to act as the Parliament of India and of no other territory, nation or people. There are two related limitations that flow from this. The first one is with regard to the necessity, and the absolute base line condition, that all powers vested in any organ of the State, including the Parliament, may only be exercised for the benefit of India. All of its energies and focus ought to only be directed to that end. It may be the case that an external aspect or cause, or welfare of the people elsewhere may also benefit the people of India. The laws enacted by the Parliament may enhance the welfare of people in other territories too; nevertheless, the fundamental condition remains: that the benefit to or of India remain the central and primary purpose, That being the case, the logical corollary, and hence the second limitation that flows therefrom, would be that an exercise of legislative powers by the Parliament with regard to extra-territorial aspects or causes that do not have any, or may be expected not to have nexus with India, transgresses the first condition. Consequently, we must hold that the Parliament’s powers to enact legislation, pursuant to clause (1) of Article 245 may not extend to those extra-territorial aspects or causes that have no impact on or nexus with India.”

4.10.1 The Court further explained reasons for taking the above view and drew support from sources such as Directive Principle of State Policy, etc. The Court then stated that it is important to draw a clear distinction between the acts and functions of making laws and acts and functions of operating laws. Making laws implies the acts to changing or enacting laws.

The phrase ‘operation of law’, in its ordinary sense, means effectuation or implementation of the laws. The acts and functions of implementing laws already made fall within the domain of the executives. The essential nature of the act of invalidating a law is different from both the act of making a law, and act of operating a law. Invalidation of laws falls exclusively within the functions of the judiciary, and occurs after examination of vires of a particular of law.

4.11 Dealing with the powers of judiciary to invalidate a law, the Court stated that the only organ of State which may invalidate the law is judiciary and the provisions of Article 245(2) should be read to mean that it reduces the general and inherent. powers of the judiciary to declare a law ultra vires only to the extent of that one ground of invalidation. Explaining the effect of this provision, the Court stated as under (page 154):

“Clause (2) of Article 245 acts as an exception, of a particular and a limited kind, to the inherent poser of the judiciary to invalidate, if ultra vires, any of the laws made by any organ of the State. Generally, an exception can logically be read as only operating within the ambit of the clause to which it is an exception. It acts upon the main limb of the article — the more general clause — but the more general clause in turn acts upon it The relationship is mutually synergistic in engendering the meaning. In this case, clause (2) of Article 245 carves out a specific exception that law made by the Parliament, pursuant to clause (1) of Article 245, for the whole or any part of the territory of India may not be invalidated on the ground that such law may need to be operated extra-territorially. Nothing more. The power of judiciary to invalidate laws that are ultra vires flows from its essential functions, Constitutional structure, values and scheme, and indeed to ensure that the powers vested in the organs of the State are not being transgressed, and they are being used to realise a public purpose that subserves the general welfare of the people. It is one of the essential defences of the people in a constitutional democracy.”

4.12 Referring to various decisions, cited and relied on by the learned A.G. in support of his propositions, the Court stated that in none of these cases, the issue under consideration has been dealt with. The Court also noted that having gone through those decisions, none stand for the proposition that the powers of the Parliament are unfettered and the Parliament possesses a capacity to make laws that have no connection whatsoever with India. Having noted this factual position, the Court also dealt with some of the decisions.

4.13 Before answering the questions framed, the Court also decided to share its thoughts on some important concerns such as claims of supremacy or sovereignty for various organs to act in a manner that is essentially unchecked and uncontrolled. In this context, the Court also explained the misconception of the sovereignty and of power, and predilections to oust judicial scrutiny even at the minimum level, such as examination of the vires of the legislation or other type of state actions.

4.14 Finally, while answering the first question framed, the Court held as under (page 166):

“(1)    Is the Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on or effect(s) in or con-sequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians?

Answer to the above would be yes …..”

4.14.1 Explaining the effect of the above answer, the Court further held as under (page 166):

“However, the Parliament may exercise its legislative powers with respect to extra-territorial aspects or causes, -events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like, that occur, arise, or exist or may be expected to do so, naturally or on account of some human agency, in the social, political, economic, cultural, biological, environmental, or physical spheres outside the territory of India, and seek to control, modulate, mitigate or transform the effects of such extra-territorial aspects or causes, or in appropriate cases, eliminate or engender such extra-territorial aspects or causes only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians.”

4.14.2 While answering the second question framed (referred to in para 4.4 above), the Court also held that the Parliament does not have power to legislate ‘for’ any territory, other than the territory of India or any part of it.

4.15 After taking the above view, the Court has sent back the matter of GVK Inds. Ltd. (referred to in para 3 above) to the Division Bench for its decision in the light of judgment of the Constitution Bench.

Conclusion:

5.1 In the above case, the Constitution Bench has laid down the criteria to test the validity of the laws enacted by the Parliament or any provisions of such laws. Therefore, any law enacted by the Parliament (including tax laws) would be governed by the same.

5.2 The Court has held that the Parliament is constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on or effect(s) in or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians. The Court has also held that any law enacted by the Parliament with respect to extra-territorial aspects or causes that have no impact on or nexus with India would be ultra vires as that would be law made “for” a foreign territory.

5.3 The Court also held that in all other respects (other than referred to in para 5.2 above), the Parliament has a power to enact a law with respect of extra-territorial aspects or causes and such power is not subject to test of ‘sufficiency’ or ‘significance’ or in any other manner requiring a pre-determined degree of strength. For this purpose, all that is required is that the connection to India be real or expected to be real, and not illusory or fanciful.

5.4 On the basis of the tests and principles laid down by the Apex Court in the above case, any issue arising under the IT Act relating to validity of any provision, will have to be decided. Accordingly, challenge if any, to the validity of the provisions of section 9(1)(vii)(b) will have to be tested on that basis.

5.5 Considering the meanings ascribed to various expressions, such as ‘aspects or causes’ ‘extra territorial aspects’, etc. (referred to in para 4.5 above), the scope of inclusion within the legislative competence is substantially wider and of such exclusion is much narrower. In this context, by and large, the Parliament has the power to enact any law in national interest with regard to extra territorial aspects or causes, once there in real connection thereof with India.

5.6 It seems that validity of the retrospective introduction/substitution (w.e.f. 1-4-1976) of Explanation to section 9(1) by the Finance Act, 2010 (referred to in para 1.5 in Part-1) may need to be separately considered.

Cost of acquisition in case of Property of Ex-Rulers

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Issue for consideration : Prior to independence,
India had a large number of native states, each having a separate Ruler.
Many of these ex-rulers owned substantial number of properties even
today, which were part of their princely possessions inherited by them
from their forefathers who had acquired such properties by way of
conquest or by way of jagir (grant).

The Supreme Court in the
case of CIT v. B. C. Srinivasa Setty, 128 ITR 294, held that no capital
gains tax is payable by an assessee where it was not possible to compute
the capital gains u/s.48 of the Act. It held that capital gains could
not be computed in cases where the cost of acquisition could not be
conceived at all. Of course, this position of law has been slightly
altered by the insertion of section 55(2)(a), which provides that the
cost of certain assets shall be deemed to be nil in cases of the assets
specified therein. Sale of such specified assets, though not having any
cost of acquisition, is now subjected to capital gains tax by virtue of
this amendment. Section 55(2)(a) however does not include such property
of ex-rulers.

The question has arisen before the courts as to
whether such property of ex-rulers acquired by their forefathers by way
of conquest or by way of jagir has no cost of acquisition, and the gains
arising on sale of such property is not subject to capital gains tax,
or whether such property has a cost of acquisition and the gains thereon
is subject to capital gains tax on sale. While the Madhya Pradesh,
Madras, and Gujarat High Courts have taken the view that the sale of
such property would not be subject to capital gains tax, the Full Bench
of the Punjab and Haryana High Court has recently taken a contrary view
that the provisions relating to capital gains tax do apply to such
properties. The decision, though rendered in the context of an ex-ruler,
has far-reaching implications inasmuch as it seeks to chart a new
course of thinking by relying on the provisions of section 55(3) for
bringing to tax gains arising even in cases not covered by section
55(2).

Lokendra Singhji’s case : The issue first came up before
the Madhya Pradesh High Court in the case of CIT v. H.H. Maharaja Sahib
Shri Lokendra Singhji, 162 ITR 93.

In this case, the assessee
was the ex-ruler of the erstwhile State of Ratlam, which was founded by
Maharaja Ratansinghji. A jagir of the entire state of Ratlam was
conferred on Ratansinghji in the 17th century by Emperor Shahjahan for
his daring feat of killing a mad elephant with a dagger. The assessee
sold certain land and building within the compound of Shri Ranjit Vilas
Palace, Ratlam during the relevant year, which property was a part of
the estate received as jagir, and which had been inherited by the
assessee in his capacity as the ruler.

The assessee initially
included the capital gains (loss) on sale of the property in his tax
return, by claiming the fair market value of the land and building on
1st January 1954 as the substituted cost of acquisition. The Assessing
Officer computed the assessment by taking such fair market value as on
1st January 1954 at a lower figure, which figure was slightly enhanced
by the Commissioner (Appeals).

Before the Tribunal, for the 1st
time the assessee raised an additional ground claiming that there was no
cost of acquisition of the asset and as such there could be no capital
gains as a result of the transfer of the property. The Tribunal admitted
the additional ground and came to the conclusion that no capital gains
arose as a result of the sale of the land and building.

Before
the Madhya Pradesh High Court, on behalf of the Revenue, it was argued
that the Tribunal was not justified in holding that no capital gains
arose, and that the main controversy was whether the sale proceeds of
the property were in the nature of capital receipts and whether such
receipts attracted the provisions of section 45. It was argued that as
the assessee had received the property by way of inheritance and himself
opted for substitution of the cost of the capital asset as on 1st
January 1954, the Tribunal was not right in concluding that there being
no cost of acquisition of the property to the initial owner, there was
no question of capital gains.

On behalf of the assessee, it was
submitted that though the property was a capital asset, there was no
gains because the forefathers of the assessee were not required to pay
any cost in terms of money for acquiring the property, given the history
of Ratlam State. It was argued that in the absence of any cost of
acquisition, no liability to capital gains could be fastened on the
assessee, though he might have accepted the valuation as on 1st January
1954 and had disclosed the capital loss in his return of income.
Reliance was placed on the decisions of the Bombay High Court in the
case of CIT v. Home Industries and Co., 107 ITR 609, of the Madhya
Pradesh High Court in CIT v. Jaswantlal Dayabhai, 114 ITR 798, and of
the Supreme Court in CIT v. B. C. Srinivasa Setty, 128 ITR 294, all of
which decisions were rendered in the context of goodwill, for the
proposition that the charging section and the computation provisions
together constituted an integrated code, and where the computation
provisions could not apply at all, such a case was not intended to fall
within the charging section. Reliance was also placed on the decisions
of the Delhi High Court in the case of Bawa Shiv Charan Singh v. CIT,
149 ITR 29, and the Bombay High Court in the case of CIT v. Mrs.
Shirinbai P. Pundole, 129 ITR 448 in the context of tenancy rights.

The
Madhya Pradesh High Court noted that though none of the cases cited by
the assessee related to the sale of an immovable property as was the
case before it, but the gist of all these decisions was that if there
was no cost of acquisition, then the gains on sale would not attract the
provisions of capital gains. According to the Madhya Pradesh High
Court, the liability to capital gains tax would arise in respect of only
those capital assets in the acquisition of which the element of cost
was either actually present or was capable of being reckoned and not in
respect of those assets in acquisition of which the element of cost was
altogether inconceivable, as in the case before it.

The Madhya
Pradesh High Court observed that a case where a person acquired some
property by way of gift or reward (for instance, jagirs from a ruler)
and the property passed on by inheritance to succeeding generations, and
was sold for a valuable consideration, because the initial owner had
not acquired it at some cost in terms of money, it would not attract
capital gains tax in such a transaction of sale, there being no gains
that could be computed as such. The Madhya Pradesh High Court therefore
held that the gains on sale of the property would not attract capital
gains tax.

This view taken by the Court in this case was
followed subsequently by the Court in the case of CIT v. Pushparaj
Singh, 232 ITR 754 (shares/securities transferred to the assessee by the
government as a moral gesture), by the Gujarat High Court in the case
of CIT v. Manoharsinhji P. Jadeja, 281 ITR 19 (property acquired by
forefathers by conquest), and by the Madras High Court in the case of
CIT v. H.H. Sri Raja Rajagopala Thondaiman, 282 ITR 126. The Punjab and
Haryana High Court also took a similar view in the case of CIT v. Amrik
Singh, 299 ITR 14, in the context of ownership acquired by the assessee
by Court’s sanction in terms of section 3 of the Punjab Occupancy
Tenants (Vesting of Proprietary Rights) Act, 1952.

Raja
Malwinder Singh’s case :

The issue again recently came up before the Full Bench of the Punjab and Haryana High Court in the case of CIT v. Raja Malwinder Singh, 334 ITR 48.    In this case the assessee was an ex-ruler of the Pepsu State, which state was acquired under an instrument of annexation. Certain plots of land which were part of that state were sold. The assessee claimed that since the cost of acquisition could not be ascertained, capital gains tax was not attracted.

The Assessing Officer assessed the capital gains by taking the cost of acquisition equal to the market value as on 1st January 1954/1964. The Commissioner (Appeals) rejected the assessee’s appeal and the contention that cost of acquisition was incapable of ascertainment, but the Tribunal reversed the decision, following the judgment of the Supreme Court in the case of B. C. Srinivasa Setty (supra). The Division Bench of the Punjab and Haryana High Court prima facie differed with the view taken by the same court in the case of Amrik Singh (supra), and therefore referred the matter to a large Bench.

On behalf of the Revenue, before the Full Bench, a distinction was sought to be drawn between the judgment of the Supreme Court in the case of B. C. Srinivasa Setty (supra) and the case before the Court, on the ground that in a newly started business the value of goodwill was not ascertainable, whereas in the case of acquisition of land, the same was either acquired at some cost or without cost, and under the scheme of the Act, there could be no situation where the cost was incapable of ascertainment.

The Punjab and Haryana High Court noted that in the case before it, the assessee acquired the property by succession from the previous owner. It also noted that according to the assessee, the cost of acquisition by the previous owner could not be ascertained and had failed to exercise the option of adopting the market value on the date of acquisition or the cost of the previous owner. Therefore, according to the Court, the only option available to the Assessing Officer was to compute capital gains by taking the cost of asset to be the fair market value on the specified date (1st January 1954/1964, as the case may be).

According to the Full Bench of the Punjab and Haryana High Court, even in a case where the cost of acquisition could not be ascertained, section 55(3) statutorily prescribed the cost to be equal to the market value on the date of acquisition. Therefore, capital gains was not excluded even on the plea that value of the asset in respect of which capital gains was to be charged was incapable of ascertainment.

The Full Bench of the Punjab and Haryana High Court therefore held that the view taken by it earlier in Amrik Singh’s case was not correct, being against the statutory scheme. The Court also held that the view taken by the Madhya Pradesh High Court in Lokendra Singhji’s case (supra) could not be accepted, as it did not give effect to the mandate of section 55(3), which provided for a situation where the value of the asset acquired could not be ascertained. According to the court, if the market value of an asset on the date of its acquisition could be ascertained, the cost of acquisition had to be taken to be equal to that, and if the value could not be so ascertained, the cost had to be equal to the market value on a specified date (for example, 1-4-1964 or 1-4-1981) at the option of the assessee. The Court observed that it was not the case of the assessee that the land had no market value on the date of its acquisition.

The Full Bench of the Punjab and Haryana High Court therefore held that once an asset had a market value, on the date of its acquisition, capital gains tax would be attracted by taking the cost of acquisition to be fair market value as on the specified date or at the option of the assessee, the market value on the date of acquisition where no cost was incurred. The Court accordingly held that the gains made on sale of the property of the ex-ruler was subject to capital gains tax.

Observations:

Computation of capital gains is possible where all of the following information is available :

  •     Date of acquisition,

  •     Cost of acquisition,

  •     Mode and manner of acquisition,

  •     Date of transfer,

  •     Consideration for transfer, and

  •     Mode and manner of transfer.

These requirements are sought to be taken care of by provisions of section 45(2) to (6), section 46 to 49, 50 and section 55(1) to (3) and section 2(42A). Further, the decision of the Supreme Court provides for the course of action, to be adopted, where the cost of acquisition and the date of acquisition are not known or cannot be determined. One dimension however, i.e., the mode and the manner of acquisition remains unexplored where no information is available about the mode of acquisition of the previous owner who had acquired the asset by any of the modes not specified by section 49(1). On a harmonious reading of the provisions of Chapter IVE, it appears that the capital gains cannot be brought to tax where the information in relation to any of the above referred dimensions is not available.

The Supreme Court in the case of B. C. Srinivasa Setty, 128 ITR 294 was concerned with the taxability of the receipts on transfer of goodwill. The Court in the context of the said case observed and held as under :

  •     It was impossible to predicate the moment of the birth of goodwill and there can be no account in value of the factors producing goodwill. No business possessed goodwill from the start which generated on carrying on of business and augmented with the passage of time.

  •     The charging section 45 and the computation provisions of section 48 together constituted an integrated code.

  •     All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction that cannot satisfy the test of computation must be regarded as never intended to be covered by section 45.

  •     Section 48 contemplated an asset in the acquisition of which it was possible to envisage a cost, an asset which possessed the inherent quality of being available on the expenditure of money to a person seeking to acquire it.

  •     The date of acquisition of an asset was a material factor in applying the computation provisions and for goodwill, it was not pos-sible to ascertain such date.

  •     Taxing the goodwill amounted to taxing the capital value of the asset and not the profits or gains.

The Supreme Court in the above-referred case observed that what was contemplated for taxation was the gains of an asset in the acquisition of which it was possible to envisage a cost; the asset in question should be one which possessed the inherent quality of being available on the expenditure of money to a person seeking to acquire it. Importantly, it observed that it was immaterial that although the asset belonged to such a class it might have been acquired without the payment of money, in which case section 49 would determine the cost of acquisition for the
purposes of section 48. This finding is heavily relied by the taxpayers to canvass that the Court implied that an asset for which no payment is made and which is not covered by section 49 is outside the scope of section 48.

The Court on a reference to section 50 and section 55(2) as also section 49 gathered that section 48 dealt with an asset that was capable of being acquired at cost; these provisions indicated that section 48 excluded such assets for which no cost element could be identified or envisaged and the goodwill was one such asset.

Significantly the Court observed that it was impossible to determine the cost of acquisition of goodwill even in the hands of the previous owner who had transferred the same in one of the modes specified in section 49(1). It also held that section 55(3) could not be invoked in such a case, because the date of acquisition of the previous owner re-mained unknown. In cases where the cost of an asset cannot be conceived at all, it appears that the fair market value as prescribed by section 55(3) cannot be adopted even where the date of acquisition of the previous owner is known. Whether the cost of acquisition is ascertainable or not should be examined from the standpoint of the assessee or the previous owner, as the case may be and in doing so, due importance should be given to the mode of acquisition by the assessee. An asset may be the one which is capable of being acquired at cost and may have a fair market value, but in the context of the assessee, it may not be possible to conceive any cost for him on account of his mode of acquisition.

The observation, findings and the ratio of the decision in the said Srinivasa Setty’s case when applied to the issue under consideration, the following things emerge:

  •     It is essential to determine the cost of acqui-sition in the hands of previous owner where the asset was acquired in any of the modes specified in section 49(1). If such cost to the previous owner cannot be determined, there will be no liability to Capital Gains tax. It is impossible to determine the cost of acquisition of goodwill having regard to the nature of asset.

  •     S/s. 55(3) cannot be invoked in cases where the date of acquisition by the previous owner remains unknown.

The asset i.e., the immovable property, in the facts of the cases under consideration, is an asset that was originally acquired by the forefathers of the transferor on conquest and/or ascension. The assessee transferor acquired the asset by inheritance. In computing the capital gains of the transferor, it was essential to adopt the cost of the previous owner and also determine the date of acquisition of the previous owner. It is an admitted fact that the immediate previous owner of the asset did not incur any cost of acquisition. In such cases, by virtue of the Explanation to section 49(1), one was required to travel back in time to reach such an owner who had last acquired it by a mode of acquisition other than that, that is referred in clause (i) to (iv) of section 49(1). Following the mandate provided by the said Explanation, it was essential to find out the cost of acquisition of the persons from whom the asset was acquired by the forefathers of the assessee, on conquest. Admittedly this was not possible for scores of reasons and therefore the cost to the assessee could not have been ascertained by resorting to the provisions of section 49(1) for computing the capital gains. Accordingly, while it was possible to ascertain the date of acquisition and the period of holding of the asset, the cost of acquisition of such asset remains to be determined as it is unknown and therefore the capital gains could not be computed and be brought to tax in the facts of the case. Further, no cost could have been envisaged in the cases ‘of conquest and/ or ascension. Similarly, where the property was acquired by conquest in a war, it cannot be said that the cost incurred on the war is the cost of acquisition of the property. Therefore, in all such cases of property of ex-rulers, one cannot envisage a cost of acquisition at all, and it is not merely a case of difficulty of determination or ascertainment of cost of acquisition.

One has to at the same time examine whether the conclusion reached in the above paragraph meets the test provided by section 55(3) of the Act. The Full Bench of the Punjab & Haryana High Court has heavily relied on the provisions of section 55(3) for the purposes of overruling the decision of Madhya Pradesh High Court. The said section 55(3) reads as : “where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner”. Ordinarily, an assessee is required to ascertain his cost only and not of the previous owner unless where section 49(1) apply. From a reading of section 55(3), it is clear that the provision applies only in cases where an assessee is required to ascertain the cost of the previous owner which requirement arises only in cases where the asset is acquired by any of the modes specified in section 49(1) and not otherwise. Section 55(3) appears to take care of situations where the cost of previous owner can-not be ascertained.

On insertion of the said Explanation to section 49(1) w.e.f. 1-4-1965 by the Finance Act, 1965, an assessee is required to adopt that cost of acquisition which was the cost of the previous owner in time who had last acquired the asset under a mode other than the one specified in section 49(1). It appears that the said Explanation is specifically inserted to take care of the situations where it is difficult to ascertain the cost of the previous owner. It requires an assessee to travel back in time and adopt the cost of that owner, previous in time, who last acquired it by any of the mode not specified in section 49(1). It appears that the provisions of section 55(3) are rendered redundant on introduction of the said Explanation. The attention of the Full Bench of the Court was perhaps not invited to the presence of the said Explanation. Had that been done, the Court might not have relied solely on the provisions of section 55(3) for reaching the conclusion derived by it.

The said Explanation has the effect of defining the term ‘previous owner of the property’ to mean the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in section 49(1). The notes to clauses and the memorandum explaining the provi-sion of the Finance Bill, 1965 reported in 55 ITR 131 explain the objective behind the introduction of the said Explanation to section 49(1). Please also see Circular No. 31, dated 21-9-1962 and Circular No. 3-P, dated 11-10-1965.

The Supreme Court on page 301 specifically held that having regard to the nature of the asset, it was impossible to determine the cost of acquisition even of the previous owner for the purposes of section 49(1). It also held that section 55(3) could not be invoked because the date of acquisition by the previous owner remained unknown. It is relevant to note that the Court in that case was concerned with A.Y. 1966-67 and the said Explanation was inserted w.e.f. 1-4-1965. Even assuming that the provision of section 55(3) continues to be relevant, it may be difficult to substitute the fair market value prevailing on the date of conquest or ascension on account of the fact that the asset is acquired on conquest and due to the manner of acquisition of the asset no cost can be envisaged for acquisition of such an asset.

It is relevant to note that presently section 55(2) provides for adopting the cost of acquisition of certain specified assets, including the goodwill at Nil. It provides for cases of the goodwill, tenancy rights, loom hours, stage carriage permits, trade mark or a brand name associated with the business, no-compete rights, right to manufacture, etc. On a closer reading, it is seen that the assets specified for are the ones which are not acquired on a given day for a cost and whose value has been generated over a period of time on regular efforts made over a period. The cost of such an asset including the cost of the regular efforts cannot be identified and quantified. The said section does not provide for such a fiction in cases of the assets acquired on conquest and/or ascension. In the circumstances, it is fair for the assessee to contend that the capital gains in his case cannot be computed as the cost of an asset so acquired could not be taken to be Nil. Wherever the government has intended no cost assets to be subjected to capital gains tax, such assets have been specifically included in the provisions of section 55(2)(a). The very fact that such property of ex-rulers has not been included in this section over the years in spite of so many courts taking the view that the sale of such property is not subject to capital gains tax, clearly indicates that the intention is not to tax such sale proceeds. It is intriguing to note that the Revenue in the past has not relied on section 55(3) while defending the cases of tenancy rights and goodwill. The better view therefore is that such property of an ex-ruler acquired by way of conquest or grant by his ancestors does not have any cost of acquisition, and the capital gains on sale of such property is not subject to tax.

The Direct Tax Code, proposed to be introduced from Financial Year 2012-13, provides that the cost of acquisition will be taken as Nil in all cases where the asset is acquired for no cost in any of the modes for which the cost of the previous owner is not permitted to be adopted.

Neither section 49 nor section 55(3) shall apply in cases where no cost is paid for an asset by the assessee, and the asset is acquired by him by any of the modes not specified by section 49, inas- much as there is no previous owner. Even if there is one, his cost would be ascertainable and therefore section 55(3) does not apply in his case and that section 49(1) cannot apply as the asset is not acquired by any of the modes specified therein.

(2011) 137 TTJ 508 (Coch.) F.C.I. Technology Services Ltd. v. ACIT ITA No. 616 (Coch.) of 2008 A.Y.: 2003-04. Dated: 4-6-2010

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Section 10A — While computing deduction u/s.10A of an eligible unit, loss of non-eligible and other eligible unit cannot be set off against profit of such eligible unit.

The assessee was rendering services from its three units located at Chennai, Bangalore and Kochi. It claimed exemption of Rs.58.68 lakh u/s.10A in respect of income from the Bangalore unit. The Assessing Officer held that the loss from the other two units had to be set off first against the income of the Bangalore unit and since this set-off left the assessee with no positive income, the assessee was not entitled to any exemption u/s.10A. The CIT(A) upheld the order of the Assessing Officer.

The Tribunal, following the Special Bench decision of ITAT Chennai in the case of Scientific Atlanta India Technology (P.) Ltd. v. ACIT, (2010) 129 TTJ 223 (Chennai) (SB)/(2010) 37 DTR 46 (Chennai) (SB)/(2010) 2 ITR 66 (Trib.) (Chennai) (SB), held as under:

(1) The business loss of non-eligible unit(s) cannot be set off against the profits of undertaking(s) eligible for deduction u/s.10A.

(2) Any other income, including the losses arising to the assessee from other concerns, shall be computed as per the regular provisions of the Act, and, consequently, carried forward under and in terms of the regular provisions of the Act.

(3) That the unabsorbed claim u/s.10A, i.e., the income after deduction, having arisen from an eligible unit, cannot be carried forward in the like manner as a business loss or unabsorbed depreciation and would, therefore, be subject to tax.

(4) Deductions u/s.10A and u/s.10B, and also those u/s.80HH, u/s.80HHA, u/s.80-I, u/s.80-IA, etc. are unit-specific in contradiction to being assessee-specific.

(5) There is nothing in the section that suggests aggregation of profits from two or more undertakings so that the profit derived from each is to be considered separately i.e., as if it were the only income of the assessee, for the purpose of computation of deduction thereunder.

(6) In other words, the qualifying amount and, consequently, the deduction in its respect are to be worked out on a stand-alone basis, independently for each eligible unit.

(7) Loss of any other unit is not to be set off while computing deduction u/s.10A.

(8) Income that remains after the deduction u/s. 10A or the unabsorbed claim u/s.10A would stand to be taxed as such i.e., shall not be set off against any other loss or be carried forward.

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(2011) 137 TTJ 249 (Jab.) (TM) ACIT v. Smt. Mukta Goenka IT (SS)A No. 23 (Jab.) of 2007 A.Ys.: 1-4-1996 to 12-12-2002 Dated: 28-5-2010

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Section 158BD — Satisfaction recorded u/s.158BD before initiation of block assessment proceedings of the person searched does not satisfy the requirement of law — Further, so-called satisfaction recorded by the Assessing Officer in the order sheet without even stating that undisclosed income pertaining to the assessees has been detected from the seized record of the persons searched was not in accordance with the provisions of section 158BD —Therefore, the block assessments of the assessees u/s.158BD are not valid.

During the search and seizure operations at the premises of SGL Ltd. and its director A, certain incriminating documents were found. Investigations revealed that SGL Ltd. had received large amount in the form of share capital from sister concerns through bogus shareholders and from agricultural income. Since assessee-trusts also made investment in SGL Ltd., the Assessing Officer framed block assessment u/s.158BD r.w.s 158BC. So-called satisfaction in the order sheet dated 4th September 2003 was recorded before the commencement of block assessment proceedings of the persons searched on 5th September 2003.

The assessees challenged the block assessment orders u/s.158BD before the learned CIT(A). The learned CIT(A) accepted the contention of the assessee and quashed the proceedings u/s.158BD because such notices were issued without any basis. The CIT(A) held that there is no satisfaction recorded objectively and that the same is without application of mind and, accordingly, annulled the block assessment orders u/s.158BD.

There was a difference of opinion between the members of the Tribunal. The Third Member, relying on the decisions in the following cases, upheld the CIT(A)’s order in favour of the assessee:

(a) Manish Maheshwari v. ACIT & Anr., (2007) 208 CTR 97 (SC)/(2007) 289 ITR 341 (SC)

(b) Manoj Aggarwal v. Dy. CIT, (2008) 117 TTJ 145 (Del.) (SB)/(2008) 11 DTR 1 (Del.) (SB) (Trib.)/ (2008) 113 ITD 377 (Del.) (SB).

The Tribunal noted as under:

(1) The so-called satisfaction in the order sheet dated 4th September 2003 has been recorded before the commencement of the block assessment proceedings of the persons searched on 5th September 2003. This satisfaction is not in accordance with the provisions of section 158BD. The satisfaction recorded u/s.158BD on 4th September 2003 i.e., before the initiation of block assessment proceedings of the person searched does not satisfy the requirement of law. The observation that the Assessing Officer has taken simultaneous action in the case of persons searched and in the cases of these assessee-trusts is factually incorrect, because in the cases of assessee-trusts the satisfaction was recorded on 4th September 2003, whereas the block assessment proceedings of the person searched were started subsequently on 5th September 2003.

(2) Similarly, the observation of the AM that it is immaterial whether the satisfaction was recorded in the file of the persons searched or in the case of assessee-trusts is legally incorrect and is not according to the provision of law. Similarly, the reason given by the AM that the Assessing Officer in the case of assessee-trusts and the persons searched is the same and, hence, it is immaterial whether the reasons recorded were in the file of the persons searched or in the case of assesseetrusts is incorrect and is contrary to law.

(3) Satisfaction should be recorded by the Assessing Officer of person searched as per the provisions of section 158BD. It is well-settled law that satisfaction recorded has to be objective/ judicious satisfaction and the order sheet dated 4th September 2003, in the cases of the present assessees, does not fulfil this condition, because the block assessment proceedings of the persons searched were started by issuing notice u/s.158BC on 5th September 2003 and hearing of the case of the persons searched was started on 13th October 2003.

(4) Hence, in no case, the Assessing Officer of the persons searched can examine the seized record on 4th September 2003 and ask the assessees’ explanation in respect of seized record of the persons searched.

(5) The so-called satisfaction recorded on 4th September 2003 by the Assessing Officer is based on assumption and presumption and is not based on seized record and is not a judicious satisfaction and, hence, the order sheet dated 4th September 2003 does not fulfil the requirement of section 158BD.

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Tax deduction at source.

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Tax deduction at source on the deposits in banks in the name of the Registrar/Prothonotary and Senior Master attached to the Supreme Court/ High Court, etc. during the pendency of litigation or claim/compensation — Circular No. 8 of 2011 [F.No. 275/30/2011-IT(B)], dated 14th October, 2011 — Copy available for download on www. bcasonline.org
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Tax Accounting Standards.

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The CBDT has released a discussion paper on Tax Accounting Standards for inviting comments/suggestions from all the stake-holders.

Copy of the discussion paper is available for download on www.bcasonline.org

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Notification No. 56 (F.No. 133/48/2011), dated 17-10-2011 — Income-tax (7th Amendment) Rules, 2011 to amend Rule 114 w.e.f. 1st November, 2011.

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As per the amendment, PAN application shall be made by following persons in Form 49AA:

(a) Individual not being a citizen of India
(b) LLP registered outside India
(c) Company registered outside India
(d) Firm formed or registered outside India
(e) Association of persons (trust) formed outside India
(f) Association of persons (other than trust) or body of individuals or local authority or artificial juridical person formed or any other entity by whatever name called registered outside India.

The amended Rule also prescribes various documents that are to be furnished along with the form as proof of identity and address.

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B. V. Kodre (HUF) v. ITO ITAT ‘B’ Bench, Pune Before I. C. Sudhir (JM) and D. Karunakara Rao (AM) ITA Nos. 834/PN/2008 A.Y.: 2004-05. Decided on: 4-10-2011. Counsel for assessee/revenue: D. Y. Pandit/ Ann Kapthuama

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Section 2(47)(v) — Since the assessee had not received full consideration nor handed over possession of the property, capital gains cannot be assessed in the year of execution of the development agreement.

Facts:
The assessee, B. V. Kodre (HUF), entered into a development agreement on 26-6-2003 with M/s. Deepganga Associates, whereby the HUF gave rights of development of an agricultural land to M/s. Deepganga Associates. The development agreement was stamped under Article 5(ga) of Schedule I of the Bombay Stamp Act, 1958. Under the said article stamp duty was leviable @ 1%. The said article applied if possession of the property was not handed over. In cases where possession of property is handed over, the instrument would be covered by Article 25 and the stamp duty leviable would be 5%. Clause 10 of the agreement provided that possession would be given to the developer on receipt of full payment of consideration. Of the total consideration of Rs.60 lakhs the amount of Rs.38,48,150 was given by the developers to the assessee.

The assessee submitted that since it has not handed over possession of the property and also entire consideration has not been received, there was no transfer. Mere registration of development agreement does not give rise to a transfer. It was contended that since there was no transfer, capital gain is not chargeable to tax in the year under consideration. The AO did not agree with the contentions of the assessee. He noted that transfer u/s.2(47)(v) is wider than that as per the Transfer of Property Act, 1882. He noted that clause 5 of the development agreement allowed the developer to amalgamate, divide, plan and construct. According to him, this indicated that it was a transaction u/s.2(47)(v) of the Act. He charged capital gain to tax.

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

Aggrieved, the assessee preferred an appeal to ITAT where it relied on the ratio of the following decisions:

(a) General Glass Company (P.) Ltd., 14 SOT 32 (Bom.)

(b) ITO v. Smt. Satyawati Devi Verma, (2010) 124 ITD 467 (Del.)

(c) Smt. Raja Rani Devi Ramna v. CIT, (1993) 201 ITR 1032 (Pat.) Held: The Tribunal noted that it has not been rebutted by the Revenue that the development agreement has been stamped under Article 5(ga) of Schedule I of the Bombay Stamp Act and not under Article 25. It also noted that clause 10 of the development agreement provides that property as stated in clause 1 of the agreement will be transferred and the purchase deed will be executed only after the receipt of the payment of entire consideration of Rs.60 lakhs and payment of stamp duty. The Tribunal held that registration is prima facie proof of an intention to transfer but it is no proof of an operative transfer, if there is a condition precedent as to payment of consideration. The transfer u/s.2(47) of the Act must mean any effective conveyance of capital asset to the transferee. Accordingly, where the parties had clearly intended that despite the execution and registration of the sale deed, transfer by way of sale would become effective only on payment of the entire sale consideration, it had to be held that there was no transfer made. Upon considering the ratio of the 3 decisions relied upon by the assessee, the Tribunal observed that the agreement in question does not establish that a transaction of sale of property was completed in terms of provisions of section 2(47)(v) of the Act r.w.s. 53A of the Transfer of Property Act, as neither the sale consideration was paid, nor the possession of the property was handed over to the vendor, and so, the capital gain worked out by the AO and added to the income of the assessee was not justified. The amount received out of the agreed consideration, during the year, at best can be treated as advance towards the agreed consideration of the transaction.

The Tribunal further held that it is an established proposition of the law that the AO is required to make just and proper assessment as per the law based on the merits of the facts of the case before it. Just assessment does not depend as to what is claimed by the assessee, but on proper computation of income deduced based upon the provisions of law. An AO cannot allow the claims of the assessee if the related facts and provisions of law do not approve it and similarly it is also the duty of the AO to allow even those benefits about which the assessee is ignorant but otherwise legally entitled to it.

The facts of the present case are distinguishable from the facts before the Apex Court in the case of Goetze (India) Ltd. v. CIT. In the case before the Apex Court the assessee subsequent to filing of return of income, claimed a deduction by filing a letter. The AO disallowed it on the ground that there was no provision in the Act to allow an amendment in the return without revising it. The action of the AO was upheld. In the present case the question is whether there was a transfer u/s.2(47) of the Act to make an assessee liable to pay capital gains tax. There is no estoppels against proper application of the law.

The Tribunal allowed the appeal filed by the assessee.

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Bennett Coleman & Co. Ltd. v. ACIT ITAT ‘B’ Bench, Mumbai Special Before D. Manmohan, (VP), R. S. Syal (AM) and T. R. Sood (AM) ITA No. 3013/Mum./2007 A.Y. : 2002-03. Decided on : 30-9-2011 Counsel for assessee Revenue : Arvind Sonde and S. Venkatraman/Pavan Ved

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Section 45 r.w.s. 48 — Reduction in share capital of an investee company — Whether the investor can claim proportionate sum of capital reduced as capital loss — Held, No.

Facts:
The assessee had made an investment of Rs.24.84 crore in equity shares of a group company viz., TGL. Pursuant to a scheme of reduction u/s.100 of the Companies Act, the face value of the said company’s shares was first reduced to Rs.5 from Rs.10 and thereafter two equity shares of Rs.5 each were consolidated into one equity share of Rs.10. The assessee claimed its value of investment in TGL got reduced by half to Rs.12.42 crore and hence, after applying the indexation, a sum of Rs.22.22 crore was claimed as long-term capital loss. For the purpose it relied on the decision of the Supreme Court in the case of Kartikeya V. Sarabhai (228 ITR 163) wherein it was held that reduction in face value of shares would amount to transfer, hence, such loss was allowable. According to the AO, the said decision was distinguishable as in that case, the shares involved were non-cumulative preference shares and further in terms of section 87(2)(i) of the Companies Act, 1956, the voting rights of the preference shareholders were also reduced proportionately. He further observed that in the present case the assessee had not received any consideration for reduction in the value of shares, nor any part of the shares had been passed to anyone else. Thus, according to him, there was no change in the rights of the assessee vis-à-vis other shareholders and, therefore, no transfer had taken place and, thus, the assessee was not entitled to the claim of long-term capital loss. On appeal the CIT(A) upheld the action of the Assessing Officer on similar reasoning.

Before the Tribunal the assessee contended that the transaction did amount to a transfer and in support made the following submissions:

ISIN Number, a unique identification number allotted to each security, had changed, meaning thereby that the new shares were different from the old;

old shares had been replaced with the reduced number of new shares, hence, it should be treated as ‘exchange’ of shares which is covered by the definition of ‘transfer’;

as per the decision of the Supreme Court, in the case of Kartikeya V. Sarabhai (228 ITR 163) the definition of transfer given in section 2(47) is an inclusive definition and, inter alia, provides that relinquishment of an asset or extinguishment of any right therein would also amount to transfer of a capital asset;

the principle laid down in the case of CIT v. G. Narsimhan (Decd) and Others, (236 ITR 327) squarely applies since the issue therein was regarding reduction of equity share capital;

as per the Supreme Court in the case of CIT v. Grace Collis & Ors., (248 ITR 323), the expression ‘extinguishment of any right therein’ can be extended to mean extinguishment of right independent of or otherwise than on account of transfer. Thus, even extinguishment of right in a capital asset would amount to transfer and since the assessee’s right got extinguished proportionately, to the reduction of capital, it would amount to transfer.

As regards the absence of consideration, the other ground on which the claim for long-term capital loss was denied by the lower authorities, the assessee contended as under:

In the case of B. C. Srinivasa Setty (128 ITR 294) the proposition was not that if no consideration was received, then no gain can be computed but the proposition was that if any of the element in computation provision could not be ascertained, then computation provision would fail and such gain could not be assessed to capital gains tax. However, in the case of the assessee consideration was ascertainable, in the sense that same should be taken as zero. In this regard he relied on the decision of the Bombay High Court in the case of Cadell Wvg. Mill Pvt. Ltd. v. CIT, (249 ITR 265).

If the idea was not to subject zero consideration transaction to capital gain tax u/s.45, then there was no need for clause (iii) for gifts in section 47.

The assessee concluded by submitting that during the process of reduction of share capital, transfer had taken place and consideration received by the assessee should be considered as zero and, therefore, capital loss should be allowed.

Held:
According to the Tribunal, in the case of Cadell Wvg. Mill Pvt. Ltd. relied on by the assessee, the Bombay High Court specifically declined to entertain the argument that the cost of tenancy right should be taken at zero because according to it, that would amount to charging of capital value of the asset to tax and not capital gain.

In the case of reduction of capital, the Tribunal noted that nothing moves from the coffers of the company and, therefore, it was a simple case of no consideration which cannot be substituted to zero. It further noted that after the decision of the Supreme Court in the case of B. C. Srinivasa Setty, the Legislature had introduced specific provision wherein cost of acquisition of goodwill was to be taken at nil. Similar amendments were made to specify the cost with reference to trademark, cost of right to manufacture or produce or process any article or thing, etc. Therefore, wherever the Legislature intended to substitute the cost of acquisition at zero, specific amendment has been made. In the absence of such amendment it has to be inferred that in the case of reduction of shares, without any apparent consideration, that too in a situation where the reduction has no effect on the right of shareholder with reference to the intrinsic rights on the company, the cost of acquisition cannot be ascertained and, therefore, the provisions of section 45 would not be applicable. For the purpose it also relied on the decisions in the cases of Mohanbhai Pamabhai and also in the case of Sunil Siddharthbhai.

Further with the help of example, the Tribunal explained that even after reduction of capital, the net worth of the company remained the same and the share of every shareholder also remained the same. There was no change in the intrinsic value of the shares and even the shareholder’s rights vis-àvis other shareholders as well as vis-à-vis company remained the same. There was thus no loss that can be said to have actually accrued to the shareholder as a result of reduction in the share capital. The Tribunal further observed that there would also no change even in the cost of acquisition of shares which the shareholder would be entitled to claim as deduction in computing the gain or loss as and when the said shares are transferred or sold in future as per section 55(v).

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(2011) 60 DTR (Chennai) (TM) (Trib.) 306 Sanghvi & Doshi Enterprise v. ITO A.Ys.: 2005-06 & 2006-07. Dated: 17-6-2011

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Section 80-IB(10) — Deduction is available to the builder even though he is not the owner of the land. Deduction is allowable on pro-rata basis if some flats were having built-up area exceeding 1,500 sq.ft.

Facts:
The assessee firm was engaged in the business of construction. In both assessment years, it derived profits from a housing project which was constructed on a land owned by Hotel Mullai (P) Ltd. (HMPL). The AO considered the agreement entered into between HMPL and the assessee. He observed that HMPL as the owner of the land decided to develop the project for which the assessee was nominated as its builder for construction. Further, the AO observed the fact that possession with the assessee of the land does not amount to possession as a part performance of the contract u/s.53A of the Transfer of Property Act. All permissions were obtained by HMPL, there was no outright purchase of land by the assessee and the assessee had sub-contracted the civil work to someone else. The AO was of the view that development includes many aspects and construction is only one of it. Based on the above facts, he concluded that the assessee is not eligible for deduction u/s.80-IB of the Act.

Besides the above, the AO noticed that certain other conditions were also violated like:

(a) The built-up area of certain flats exceeded the statutory limit of 1,500 sq.ft.

(b) In some cases, two flats were combined to make one unit which was exceeding 1,500 sq.ft.

(c) In one case, the purchaser had an exclusive right over the terrace and if built-up area of terrace included, then it would exceed 1,500 sq.ft.

(d) The project had to be completed on or before 31st March, 2008 and no completion certificate was on records.

The CIT(A) confirmed the order of the AO in toto in both the years.

Held:
1. The distinction between a ‘builder’, ‘developer’ and ‘contractor’ is quite blurred. As a matter of fact, different persons often use the expressions interchangeably and according to their own perceptions. The question is not who decided to develop the land, but the question is who actually developed the land. Obviously, since the land is owned by HMPL, permissions have to be in its name only. As per the agreement, the builder has the exclusive right to sell the flats to the persons of his choice. He has the exclusive right to determine the sale price of the flats. He has the exclusive right to collect the entire sales consideration of the flats. Out of the total sales consideration received by him, he has to make over only the cost of undivided share of land to the owner which is fixed at Rs.600 per sq.ft. of the super built-up area. Undoubtedly, HMPL as the owner of the land has ventured to realise the potentialities of the land. It has indeed realised the potentialities, not by developing the land, but by handing over the land for development to the builder. All these facts go to show that it is the builder who is responsible to develop the property, maintain it and satisfy the purchasers.

A distinction needs to be drawn between the expressions ‘developer and builder’ and ‘builder and contractor’. If a person is a contractor, then, his job would be merely to construct the building as per the designs provided by the owner and hand over the constructed building to the owner. Thus, the assessee is not a contractor simpliciter, he is not a builder simpliciter, he is not a developer simpliciter. He is all rolled into one i.e., he is a developer, a builder and also a contractor. Even though the assessee and HMPL are joint developers, the role of the assessee as a developer is greater than the role of HMPL as developer. In the final analysis, the assessee is a builder and a developer entitled to deduction u/s.80-IB(10) subject to fulfilment of other conditions mentioned in the section.

2. Once the flats are sold separately under two separate agreements, the builder has no control unless the joining of the flats entails structural changes. Therefore, it is quite clear that the two flat owners have themselves combined the flats whereby the area has exceeded 1,500 sq.ft. The project as a whole and the assessee cannot be faulted for the same. Moreover, clause (e) and (f) of section 80-IB(10) are effective from 1st April, 2010 and they are not retrospective in operation.

3. The assessee has placed on record the completion certificate issued by the Corporation of Chennai by way of additional evidence. The certificate clearly mentions that the building was inspected on 23rd November, 2007 and that it was found to have satisfied the building permit conditions. However, Chennai Metropolitan Development Authority (CMDA) issued completion certificate on 13th June, 2008 in response to an application by the assessee on 13th March, 2006. When sanction is given normally the sanction would contain a date. In the present case the certificate issued is a completion certificate that is a certificate accepting the claim of the assessee that the project has been completed, i.e., the certificate is issued on an application given by the assessee. The assessee can give an application for completion certificate only when the completion of the project is done. Thus the grant of a completion certificate after verification by the competent authority even on a subsequent date would relate back to the date on which the application is made.

4. The terrace talked about here is not the rooftop terrace. It is the terrace, the access to which is through the flat of the purchaser and which is at the floor level and is the terrace of the immediately lower flat. The regular terrace is considered as part of the common area. The terrace that is sold and that is attached to the flat and which is having exclusive access is separate from the regular terrace. Consequently private terrace is to be considered as part of the builtup area of the flat for computing the built-up area of 1,500 sq.ft.

5. The Accountant Member followed the decision of the judgment of the Calcutta High Court rendered in the case of CIT v. Bengal Ambuja Housing Dev. Ltd. in IT Appeal No. 458 of 2006, dated 5th January, 2007 which was a judgment directly on the issue upholding the view of the Calcutta ‘C’ Bench of the Tribunal that a pro-rata deduction is permissible u/s.80-IB(10) when some flats were having built-up area exceeding 1,500 sq.ft. It was held that proportionate deduction should be allowed u/s.80-IB(10) with a caveat that the built-up area of flats measuring more than 1,500 sq.ft. should not exceed 10% of the total built-up area. The Judicial Member disagreed with the above view and held that no such proportional deduction is allowable following the decision of the Co-ordinate Bench in the case of Viswas Promotors (P) Ltd. Upon difference of opinion among the members regarding the last issue the matter was referred to the Third Member.

The third member was of the view that the Madras High Court had not considered the decision in Viswas Promotors (P) Ltd on merits. The Madras High Court in its writ order has dealt with only the writ application filed by the assessee against the order of the Tribunal dismissing the miscellaneous petition filed by the assessee. The Court has specifically mentioned that the writ petition was misconceived and therefore liable to be dismissed. The Madras High Court has not considered anything concerning the merit of the issue. The judgment of CIT v. Bengal Ambuja Housing Dev. Ltd. was a judgment directly on the issue. As there is no direct decision of the jurisdictional High Court available on the subject, the judgment of the Calcutta High Court was to be followed. The assessee was entitled for deduction u/s.80-IB(10) in respect of flats having built-up area not exceeding 1,500 sq.ft. on proportionate basis.

(2011) TIOL 662 ITAT-Mum. Sureshchandra Agarwal v. ITO & Sushila S. Agarwal v. ITO A.Y.: 2005-2006. Dated: 14-9-2011

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Sections 2(47)(v), 45, 54, — Receipt of full consideration coupled with handing over of possession without execution of a registered sale deed is good enough to treat a transaction as transfer. The amendment made in section 53A by which the requirement of registration has been indirectly brought on the statute need not apply while construing the meaning of the term ‘transfer’ with reference to the Income-tax Act.

Facts:
Each of the two assessees were 50% owners of a flat in a building known as Usha Kunj situated at Juhu, Mumbai which was stated to have been sold on 30-4-2004 for a total consideration of Rs.62,50,000 and share of each assessee was Rs.31,25,000. On this sale, capital gain of Rs.24,93,910 arose to each of the two assessees which capital gain was claimed to be exempt u/s.54 against the purchase of a new flat vide agreement dated 25-6-2003 which agreement was registered on 9-7-2003. The claim for exemption was made on the ground that the new flat was purchased within a period of one year before the date of transfer of the old flat which has been sold. In the course of assessment proceedings the assessee filed copy of agreement dated 23-4- 2004 which agreement was not registered. The AO made inquiry with the purchasers of this flat who filed agreement dated 26-8-2004 which agreement was registered on the same date. Upon inquiry with the society, it was found that the share certificate showed the date of transfer as 27-8-2004.

The assessee contended that simultaneous with the execution of the agreement dated 30-4-2004 the assessee received full consideration and handed over the possession of the flat to the purchasers along with all original documents including the share certificate and the application to the society for transfer of shares in favour of the transferee, application for transfer of electric meter to the name of the transferee and also NOC received from the society. The assessee submitted that there was delay on the part of the purchaser in getting the agreement stamped and subsequently when the agreement was presented for stamping the transferee was informed that some penalty was leviable for delay in presenting the same. The transferees, at this stage, requested the assessees to execute a fresh agreement and in these circumstances an agreement dated 26-8-2004 was executed which agreement was registered.

The AO denied exemption u/s.54 on the ground that after the amendment to section 53A of the Transfer of Property Act, the provisions of section 53A apply only to agreements which are registered. Since agreement dated 23-4-2004 was not registered, the date of transfer is not 23-4-2004 but 26-8-2004 and since the date of purchase of new flat is more than one year before 26-8-2004, the assessee was denied exemption u/s.54.

Aggrieved the assessee preferred an appeal to the CIT(A) who agreed with the AO and emphasised that since section 53A of the Transfer of Property Act has been amended, therefore, unless and until the agreement was registered, the same would not amount to transfer. He confirmed the action of the AO.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal considered the amendment to section 53A of the Transfer of Property Act and held that even after the amendment, it has not been specifically provided that such instrument of transfer is necessarily to be registered. To ascertain the true meaning in the context of clause (v) of section 2(47) the Tribunal considered the Circular No. 495, dated 22-9-1987 explaining the purpose of introduction of clauses (v) and (vi) to section 2(47). Thereafter, it observed that clause (v) in section 2(47) does not lift the definition of part performance from section 53A of the Transfer of Property Act. Rather, it defines any transaction involving allowing of possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of TOPA. This means such transfer is not required to be exactly similar to the one defined u/s.53A of the TOPA, otherwise, the Legislature would have simply stated that transfer would include transactions defined in section 53A of TOPA. But the legislature in its wisdom has used the words ‘of a contract, of the nature referred to in section 53A’. Therefore, it is only the nature which has to be seen. The purpose of insertion of clause (v) was to tax those transactions where properties were being transferred by way of giving possession and receiving full consideration. Therefore, in a case where possession has been given and full consideration received, then such transaction needs to be construed as ‘transfer’. The amendment made in section 53A by which the requirement of registration has been indirectly brought on the statute will not alter the situation for holding the transaction to be a transfer u/s.2(47)(v) if all other ingredients have been satisfied.

Referring to the decisions of the Apex Court in the case of CIT v. Podar Cement P. Ltd., (226 ITR 625) (SC) and Mysore Minerals Ltd. v. CIT, (239 ITR 775) (SC) it held that for the purpose of the Act the ground reality has to be recognised and if all the ingredients of transfer have been completed, then such transfer has to be recognised. Merely because the particular instrument has not been registered will not alter the situation.

The Tribunal held that the transfer deed dated 30- 4-2004 transferred all the rights of the assessee to the transferees and, therefore, this deed should be considered as the deed of transfer. It held the date of transfer for old property has to be reckoned as 30-4-2004 which is well within one year from the date of acquisition of the new property on 25-6- 2003. It held that the assessees are entitled to claim exemption u/s.54 of the Act.

The Tribunal set aside the orders of the CIT(A) and directed the AO to allow exemption u/s.54. Appeals of both the assessees were allowed.

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(2011) TIOL 648 ITAT-Mum. De Beers India Pvt. Ltd. v. DCIT A.Y.: 2005-06. Dated: 5-9-2011

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Sections 35E, 37(1), Matching concept — Only expenses incurred wholly and exclusively for exploring, locating or proving deposits of any minerals and including expenses on operations which prove to be infructuous or abortive are eligible for amortisation u/s.35E — Matching principle cannot restrict the quantum of deduction of expenses by relating the same to quantum of earnings as a result of incurring these expenses.

Facts:
The assessee, engaged in the business of prospecting, exploration and mining activities for diamonds and other minerals as also in the business of providing consultancy in the field of diamond prospecting and other related matters. The assessee filed a return of income declaring a loss of Rs.4,39,48,222. The AO noticed that the assessee has incurred expenditure of Rs.23,64,44,196 mainly on prospecting for minerals in India, commercial production of minerals has not commenced, the assessee has only capitalised Rs.17,04,80,638. He asked the assessee to show cause why the entire expenses should not be treated as capital expenses u/s.35E and be disallowed. The assessee submitted that apart from the expenses capitalised by the assessee, the assessee has suo moto disallowed Rs.1,20,06,438 and to this extent capitalisation of entire expenses will result in double disallowance. It was also submitted that expenses not capitalised are eligible for deduction u/s.37 and include expenses like property expenses, communication expenses, printing and stationery, travelling and conveyance, membership and subscriptions, etc., which expenses are not incurred wholly and exclusively for the purposes of prospecting. Further, the assessee has also carried consultancy business from which there were receipts of Rs.98,42,810 which receipts have been offered for taxation.

The AO was of the view that any expenditure incurred for the purpose of prospecting eligible minerals is to be capitalised u/s.35E and deduction is to be claimed only when commercial production starts. As regards earning of professional receipts he observed that “even applying the matching concept, it is not possible to accept that there can be expenditure of Rs.5,39,57,120 to earn consultancy income of Rs.98,42,810”. He allowed an ad hoc deduction of 30% for earning the income of Rs.98,42,810. The balance expenditure of Rs.5,10,04,277 was disallowed and treated as capital expenditure eligible for amortisation u/s.35E.

Aggrieved the assessee preferred an appeal to the CIT(A) who, on the basis of what he perceived as applicability of matching concept, restricted the deductibility of expenses and upheld the order passed by the AO.

Aggrieved, the assessee filed an appeal to the Tribunal.

Held:
The Tribunal upon going through the provisions of section 35E and also the CBDT Circular No. 56, dated 19th March, 1971 held that in order to be eligible for amortisation of expenses u/s.35E, the expenses must have been incurred wholly and exclusively for “exploring, locating or proving deposits of any minerals, and includes such operations which prove to be infructuous or abortive”. The Tribunal observed that the AO has proceeded on the basis that since the assessee is, inter alia, engaged in the business of prospecting minerals, all the expenses incurred by the assessee are to be treated as eligible for amortisation u/s.35E, unless he can demonstrate that the expenses are incurred for earning an income which is taxable in the hands of the assessee. The Tribunal held that this is an incorrect approach. The assessee even when he is engaged in the business of prospecting minerals is eligible for amortisation of such expenses as are eligible u/s.35E(2) r.w.s. 35E(5)(a). All other expenses are eligible for deduction as in the normal course of computation of business income.

As regards the restriction of allowability of expenses based on matching concept, the Tribunal held that the application of ‘matching principle’, based on the quantum of earnings, is wholly devoid of any merits. One cannot invoke the matching principle to restrict the deductibility of a part of expenses as a result of the expenses being too high in proportion to quantum of expenditure; it can at best be invoked to spread over the costs over the entire period in which revenues as a result of those costs are generated, such as in deferred revenue expenditure — but even in such cases the restriction on deductibility of expenses have not been upheld by the Co-ordinate Benches as indeed by the Courts. All that the matching principle states is that in measuring net income for an accounting period, the costs incurred in that period should be matched against the revenue generated in the same period, and that where costs result in a benefit over a period beyond one accounting period, the costs should be reasonably spread over the entire period over which the benefits accrue. As far as the position under the Income-tax Act is concerned, as long as expenses are incurred for the purposes of business, even if it turns out to be wholly unprofitable, the same is to be allowed as deduction in computation of business income. By no stretch of logic, matching principle can restrict the quantum of deduction of expenses by relating the same to the quantum of earnings as a result of incurring these expenses. Once the business has commenced, deduction of expenses in respect of that business cannot be declined on the ground that the earnings from consultancy income do not justify such high expenses. This kind of revenue mismatch, which cannot be a ground of disallowing the expenditure in anyway, is a normal commercial practice in the businesses which have long-term perspectives and larger business interests in their consideration.

The Tribunal held that the AO was in error in capitalising the expenses which were not directly attributable to the prospecting of diamonds, as also restricting the deductibility of expenses to 30% of consultancy revenues received by the assessee.

The appeal filed by the assessee was allowed.

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(2011) TIOL 583 ITAT-Kol. Sushil Kumar Das v. ITO A.Y.: 2005-06. Dated: 13-5-2011

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Sections 139(1), 148, Circular No. 14(XL-35), dated 11-4-1955 — Income assessed can be lower than the income returned by the assessee — A receipt returned by the assessee can be reduced at the Appellate stage if the same is, in law, not taxable.

Facts:
The assessee retired as a school teacher on 31- 7-1998. He received an amount of Rs.10,92,796 inclusive of interest of Rs.3,29,508. Interest was received by virtue of writ petition filed by the assessee. Since the amount received by the assessee included interest on which tax was deducted at source, the AO issued a notice u/s.148 of the Act upon noticing that income has escaped assessment (since assessee had not filed return of income). The assessee filed return of income returning income of Rs.6,19,392 and claimed relief u/s.89(1) of the Act. The AO restricted the relief u/s.89(1) to Rs.65,817 and assessed the total income at Rs.8,86,500.

The returned income as well as assessed income included interest received as per the order of the High Court. Upon completion of the assessment the assessee came to know that interest received pursuant to the order of the High Court, being non-statutory interest in the form of damages/ compensation, the same is not chargeable to tax. He filed an appeal to the CIT(A) and contended that interest wrongly returned by him be held to be not taxable in view of the decision of the Punjab & Haryana High Court in the case of CIT v. Charanjit Jawa, (142 Taxman 101). The CIT(A) rejected the same by stating that the assesse had offered the income in his return and the same cannot be reduced at the Appellate stage.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the moot question was whether the income determined by the AO on the basis of the return filed by the assessee can be a figure lower than the income returned by the assessee. It held that the principle for determining the taxable income of the assessee under the Act should be within the purview of the law in force. If the taxable income determined by the AO is not in accordance with such principle it is open to the assessee raise the contention to before the higher authorities for following the law to determine the actual taxable income of the assessee. The Tribunal held that the lower authorities cannot say that merely because the assessee has returned income which is higher than the income determined in accordance with the legal principles, such returned income can be lawfully assessed. An assessee is liable to pay tax only on his taxable income. The AO cannot assess an amount which is not taxable merely on the ground that the assessee has returned the same as its income. It is always open to the assessee to show before the higher authorities that income though returned as income is not taxable under law.

On merits, the Tribunal held that the case of CIT v. Charanjit Jawa, (supra) supports the view that interest received as a result of the order of the High Court was not a statutory interest and was in the form of damage/compensation and the same was not liable to tax. The Tribunal held that the interest of Rs.2,53,730 received by the assessee as per the order of the High Court was not taxable and the same is a capital receipt. The Tribunal also found support from the Circular issued by the CBDT being Circular No. 14 (XL-35) dated 11-4-1955 which has directed the officers not to take advantage of the ignorance of the assessees. The Tribunal directed the AO to treat the sum of Rs.2,53,730 as capital receipt.

The appeal filed by the assessee was allowed.

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Depreciation: Computation: Block of assets: WDV: S. 43(6)(c)(i)(B): Sale of flat forming part of block of assets: Apparent consideration and not its fair market value to be deducted.

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[CIT v. Cable Corporation of India Ltd., 336 ITR 56 (Bom.)]

The assessee had sold a flat forming part of block of assets for a consideration of Rs.9 lakh. The assessee deducted the said amount of Rs.9 lakh from the block of assets and computed the depreciation allowable on the balance amount. The Assessing Officer determined the fair market value of the flat at Rs.66,44,902 and reduced the said amount from the written down value of the block of assets while calculating the depreciation. The Tribunal accepted the assessee’s claim.

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

 “The Tribunal was right in holding that for the purpose of calculating depreciation allowable to a block of fixed assets, only the apparent consideration for which the flat was sold should be reduced from the block of the fixed assets being Rs.9 lakhs even though the fair market value of the flat was Rs.66,44,902 as determined by the Departmental Valuation Officer.”

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Business income: Section 28(iiia): A.Y. 1997- 98: U/s.28(iiia) only profit on sale of licence is chargeable and not profit which may come in future on sale of licence.

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[GKW Ltd. v. CIT, 200 Taxman 396 (Cal.); 12 Taxman. com 234 (Cal.)]

The assessee-company was making export under the Advance Licence Scheme of the Government. In the accounts for the A.Y. 1997-98, the assessee passed a book entry debiting export benefit receivable account and crediting miscellaneous income by a sum of Rs.228.34 lakh. The said amount represented the customs duty benefit which would have accrued to the assessee on the import of raw materials in future. The assessee claimed that the sum of Rs.228.34 lakh credited to the profit and loss account was a notional figure not liable to income-tax and, accordingly, the said amount was claimed as a deduction from the profits as per profit and loss account. The Assessing Officer treated the sum of Rs.228.34 lakh as the assessee’s income on the ground that the assessee had itself shown the same as such in its books of account. On appeal, the Commissioner (Appeals) and the Tribunal upheld the order of the Assessing Officer.

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

“(i) If the language employed in clause (iiia) of section 28 is compared with the next two clauses, i.e., clauses (iiib) and (iiic), it will appear that while in case of clause (iiia), it is the profit on actual sale of licence that will be chargeable to tax, but in the cases covered by clause (iiib) or (iiic), cash assistance (by whatever name called) received or receivable by any person against exports or any duty of customs or excise repaid or repayable as drawback to any person against exports are chargeable to tax.

(ii) Thus, the Legislature was conscious that in cases covered under clause (iiia), only profit on sale of licence should be chargeable, but not the profit which may come in future on sale of the licence, because the benefit of making import without payment of customs duty accrues to an assessee only at the time of actual import and if the domestic price of the raw materials is lower than the landed cost of the imported materials, it would not be sensible to import the raw materials under the advance licence. Moreover, at times, the advance licences may not be utilised within the period of validity thereof and in such cases, no actual benefit is available to an assessee, whereas in the cases covered by clause (iiib) or (iiic), there is no scope of non-utilisation of the cash assistance or drawback mentioned therein and, as such, those are automatically chargeable to tax.

(iii) So long as the profit had not actually accrued to the assessee on sale of the licence, the notional figure indicated in the profit and loss accounts of the assessee could not be chargeable to tax.

(iv) It is now a settled law that if a particular income shown in the account of profit and loss is not taxable under the Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is outside the purview of tax laws; a particular income is either liable to tax under the taxing statute or it is not. If it is not, the ITO has no power to impose tax on the said income.

(v) Therefore, the Tribunal committed substantial error of law in treating the amount of Rs.228.34 lakhs as chargeable to incometax notwithstanding the fact that the same did not come within the purview of section 28(iiia) when the licence had not been sold and no profit had come in the hands of the assessee.”

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Business expenditure: Section 37: A.Y. 2000- 01: Foreign business tour by managing director with wife: Company resolution authorising expenses: Travel expense is deductible.

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[J. K. Industries Ltd. v. CIT, 335 ITR 170 (Cal.)]

In May 1986, the assessee-company had passed a resolution stating that for the business of the company, the managing director was required to go on tours to countries abroad, that if on such tours he were accompanied by his wife, it would go a long way to benefit the company since warm human relations and social mixing promoted better business understanding, that the wife of the managing director was also sometimes required to accompany him on tours abroad as a matter of reciprocity in international business and that the company has decided to bear the expenses of such travel. In the A.Y. 2000-01, the assessee had sent its managing director and the deputy managing director abroad along with their wives for the purpose of the assessee’s business and claimed deduction of the expenses. The Assessing Officer disallowed the expenses on the two wives. The Commissioner (Appeals) and the Tribunal confirmed the disallowance.

On appeal by the assessee, the Calcutta High Court held as under : “

(i) The Income-tax authorities have to decide whether the expenditure was incurred voluntarily and on the grounds of commercial expediency. In applying the test of expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, the reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue.

(ii) When the board of directors of the assessee had thought it fit to spend on the foreign tour of the accompanying wife of the managing director for commercial expediency for reasons reflected in its resolution, it was not within the province of the Income-tax authority to disallow such expenditure.

(iii) However, there was no resolution authorising expenditure on the travel of the wife of the deputy managing director. The expenses on such travel were rightly disallowed.”

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Advance tax: Interest for short payment of advance tax: Sections 234B, 234C, 207, 208, 211: A.Y. 2001-02: Where assessee had no liability to pay any advance tax u/s.208 on any of due dates for payment of advance tax instalments and it became liable to pay tax by virtue of a retrospective amendment made close of financial year, no interest could be imposed upon it u/s. 234B and u/s.234C.

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[Emami Ltd. v. CIT, 200 Taxman 326 (Cal.); 12 Taxman. com 64 (Cal.)]

The assessee did not have any taxable income according to the normal computation provisions of the Income-tax Act, 1961 for the A.Y. 2001-02. It had also no liability u/s.115JB. Thus, the assessee had no liability to pay any advance tax u/s.208 for the A.Y. 2001-02.

By the Finance Act, 2002, section 115JB was amended with retrospective effect from 1-4-2001. In view of the aforesaid retrospective amendment, the assessee was not in a position to deduct the sum of Rs.26.51 crore withdrawn from the revaluation reserve. It recomputed the book profit u/s.115JB for the A.Y. 2001-02, worked out the amount of tax payable, paid the same on 31-8-2002 and it filed revised return on the basis of amended section. The Assessing Officer passed an order u/s.143(3)/115JB for the A.Y. 2001-02. The Assessing Officer computed the tax liability u/s.115JB at the same figure as shown in the assessee’s revised return. However, he charged interest u/s.234B and section 234C since the assessee did not pay any advance tax with reference to the liability for tax under the retrospective amended section 115JB.

The Commissioner (Appeals) allowed the assessee’s appeal holding that since the amended provision did not exist in the statute during the relevant previous year, the assessee’s contention that it had no liability u/s.208 to pay advance tax was well-founded. The Tribunal held that the assessee was liable to pay interest u/s.234B and u/s.234C.
 On appeal by the assessee, the Calcutta High Court reversed the decision of the Tribunal and held as under:

 “(i) A plain reading of sections 234B and 234C makes it abundantly clear that these provisions are mandatory in nature and there is no scope of waiving of the said provisions. However, in order to attract the provisions contained in sections 234B and 234C, it must be established that the assessee had the liability to pay advance tax as provided in sections 207 and 208 within the time prescribed u/s.211.

(ii) A mere reading of sections 207, 208 and 211 leaves no doubt that the advance tax is an amount payable in advance during any financial year in accordance with the provisions of the Act in respect of the total income of the assessee which would be chargeable to tax for the assessment year immediately following that financial year. Thus, in order to hold an assessee liable for payment of advance tax, the liability to pay such tax must exist on the last date of payment of advance tax as provided under the Act or at least on the last date of the financial year preceding the assessment year in question. If such liability arises subsequently when the last date of payment of advance tax or even the last date of the financial year preceding the assessment year is over, it is inappropriate to suggest that still the assessee had the liability to pay ‘advance tax’ within the meaning of the Act.

(iii) The amended provision of section 115JB having come into force with effect from 1-4-2001, the assessee could not be held defaulter of payment of advance tax. On the last date of the financial year preceding the relevant assessment year, as the book profit of the assessee in accordance with the then provision of law was nil, one could not conceive of any ‘advance tax’ which in essence was payable within the last day of the financial year preceding the relevant assessment year as provided in sections 207 and 208 or within the dates indicated in section 211, which inevitably fell within the last date of financial year preceding the relevant assessment year. Consequently, the assessee could not be branded as a defaulter in payment of advance tax as mentioned above and no interest could be imposed upon it u/s.234B and u/s.234C.”

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Dispute Resolution Panel (DRP): Powers: Deduction u/s.10A: AO allowed deduction u/s. 10A; DRP has no power to withdraw it..

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[GE India Technology Centre Pvt. Ltd. v. DRP (Kar.), WP No. 1010 of 2011 dated 5-7-2011.]

For the A.Y. 2006-07, the assessee had claimed deduction of Rs.32.58 crore u/s.10A. In the draft assessment order passed u/s.144C of the Act, the Assessing Officer allowed deduction u/s.10A, but he reduced the quantum by Rs.44.49 lakh. The assessee filed an objection before the Dispute Resolution Penal (DRP). The DRP held that the assessee was not entitled to deduction u/s.10A of the Act as it was engaged in ‘research and development’. On the alternative plea of the assessee that the assessee was engaged in providing ‘engineering design services’ the DRP directed the Assessing Officer to examining the claim on merits.

The assessee filed a writ petition before the Karnataka High Court claiming that the direction given by the DRP withdrawing the deduction u/s.10A was beyond jurisdiction. The Single Judge dismissed the petition. On appeal by the assessee, the Division Bench held as under :

“As the Assessing Officer had accepted that the assessee was eligible for section 10A deduction and had only proposed a variation on the quantum, the DRP had no jurisdiction to hold that the assessee was not eligible for section 10A deduction.”

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Transfer pricing — Foundational facts were not established — Assessee relegated to adopt proceedings that were pending before various authorities and each of the authorities to decide the matter uninfluenced by the observation of the High Court.

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[Coca Cola India Inc. v. ACIT & Ors., (2011) 336 ITR 1 (SC)]

The petitioner, a company incorporated under the laws of the United States of America and thus a foreign company u/s. 2(23A) of the Act, had a branch office in India. It was a part of the International Coca Cola corporate group. The said group had other companies operating in India incorporated under the Companies Act, 1956. The petitioner obtained permission u/s. 29(1)(a) of the Foreign Exchange Regulation Act, 1973, (FERA) to operate a branch office in India to render a services to the Coca Cola group companies, as per conditions mentioned in the application for the said permission. There is a service agreement between the petitioner on the one hand and Britco Foods Company Private Limited (Britco) on the other.

As per the said agreement, the petitioner provides advisory services to Britco to advise, monitor and co-ordinate the activities of bottlers, in consideration of which the petitioner receives fee calculated on the basis of actual cost plus 5%. The petitioner was assessed under the Act for the A.Y. 1998-99 on 31st March, 2004. The Assessing Officer, however, formed an opinion that income of the petitioner, chargeable to tax for the said year, had escaped assessment within the meaning of section 147 of the Act. A notice dated 30th March, 2005, was issued u/s. 148 of the Act, requiring the petitioner to file a return and thereafter, some further information was sought from the petitioner for the purpose of assessment. The petitioner filed reply to the said notice, seeking reasons for the proposed reassessment.

The reasons indicated that the Assessing Officer referred to section 92 of the Act, which enables the Assessing Officer to determine profits which may reasonably deemed to have been derived, when less than ordinary profits are shown to have been derived by a resident. It was further stated in the said reasons that as per the order dated 7th February, 2005, u/s. 92CA(3) for the A.Y. 2002- 03, passed by the Transfer Pricing Officer-1, the profit declared by the petitioner was abnormally low, on account of which arm’s-length price had been fixed. On that account, the income of the assessee had escaped assessment. Similar notices were issued for the A.Ys. 1999-2000, 2000-01 and 2001-02. On 14th July, 2005, notice u/s. 92CA(3) of the Act was issued by the Additional Commissioner of Income-tax acting as Transfer Pricing Officer, on a reference made by the Assessing Officer u/s. 92CA(1) of the Act for the A.Y. 2003-04, to determine arm’s-length price. Identical notices were issued for the A.Ys. 2004-05, 2005-06 and 2006-07.

The Assesssing Officer made assessment in respect of income of the petitioner for the A.Y. 2002-03, vide order dated 24th March, 2005, after getting determined arm’s-length price of services rendered by the petitioner to its associated company, thereby enhancing the income of the assessee. Against the said order, the petitioner preferred an appeal which is pending before the appropriate authority. The petitioner filed a writ petition before the Punjab & Haryana High Court on 19th October, 2005. On 21st October, 2005, notice was issued to the respondents and, vide order dated 18th November, 2005, stay of passing of final order for the A.Ys. 2003-04, 2004-05, 1998-99 to 2001-02 was granted. Similarly, on 15th December, 2006, stay of passing final order for the A.Y. 2005-06 was granted and permission to amend the petition was also granted to challenge the notice in respect of the said year.

Similarly, on 26th May, 2008, stay of passing of final order for the A.Y. 2006-07 was granted. The petitioner further amended the petition to challenge the notice in respect of the A.Y. 2006-07, which amendment had been allowed by a separate order. The main contention raised in the writ petition was that the provisions of Chapter X, i.e., section 92 to 92F of the Act have been enacted with a view to prevent diversion of profits in intra-group transactions leading to erosion of tax revenue. The said provisions have been incorporated, vide Finance Act, 2001, and further amended, vide Finance Act, 2002. Having regard to the object for which the provisions have been enacted, applicability of the said provisions has to be limited to situations where there is diversion of profits out of India or where there may be erosion of tax revenue in intra-group transaction. In the present case, there was neither any material to show diversion of profits outside India, nor of erosion of tax revenue. If the price charged was less and profit of the petitioner was less, there was corresponding lesser claim for deduction by Britco.

Question of diversion of profits out of India would arise only if price charged is higher and that too if the higher profit was not subject to tax in India, which was not the situation in the present case. Further contention was that there was no occasion for determining arm’s-length price as the price determined by the petitioner itself was as per section 92(1) and (2) of the Act, i.e., cost plus 5%. In such a situation, there was no occasion to make reference to the Transfer Pricing Officer. Even if the reference was sought to be made, the petitioner was entitled to be heard before such a decision is taken, so that it could show that reference to the Transfer Pricing Officer was not called for. In objecting to the notices for reassessment, contention raised was that the provisions of Chapter X having been introduced only from 1st April, 2002, there could be no reassessment for the period from April 1, 1997, to 31st March, 2001. It was pointed out that prior to the amendment with effect from April 1, 2002, u/s. 92 of the Act, there was a provision for determination of reasonable profits deemed to have been derived by a resident and not a ‘non-resident’.

The amended provision could not be applied to the petitioner for the period prior to 31st March, 2001. In the reply filed on behalf of the respondents, the impugned notices and orders were defended. As regards the period prior to the A.Y. 2002-03, when the amended provisions of Chapter X were not operative, the stand of the respondents was that the petitioner suppressed its profit in its transactions with its associated companies, which was clear from the proportion of amount of working capital employed to the declared profit and this resulted in escapement of income within the meaning of section 147 of the Act. As regards the period for and after the A.Y. 2002- 03, it was submitted that the said Chapter was applicable to the petitioner as the petitioner had entered into ‘international transaction’ within the meaning of the said provisions with its ‘associated enterprises’. There was no condition that the said Chapter could apply only if the parties were not subject to the tax jurisdiction in India. The only requirement is that at least one of the parties should be non-resident, apart from other requirements in the said Chapter.

According to the High Court the following questions arose for its consideration: “

(i) Whether inapplicability of the unamended provisions of section 92 of the Act (as it stood prior to 1st April 1, 2002) to the petitioner created a bar to reassessment of escaped income of the petitioner?

(ii) Whether the order passed by the Transfer Pricing Officer under Chapter X after 1st April, 2002, could be one of the reasons for reassessment for period prior to introduction of the amended Chapter X in the Act?

(iii) Whether the provisions of Chapter X are attracted when both the parties to a transaction are subject to tax in India, in the absence of allegation of transfer of profits out of India or evasion of tax?

(iv) Whether opportunity of being heard is required before referring the matter of determination of arm’s-length price to the Transfer Pricing Officer?”
The above questions framed by the High Court were dealt by it as under:

Re: Question No. (i)

The High Court noted that the objection of the petitioner was twofold: (a) Reference to inapplicable provisions of section 92 of the Act, as it stood prior to the amended with effect from 1st April, 2002, and (b) irrelevance of the order of the Transfer Pricing Officer under Chapter X passed in respect of a subsequent assessment year.

The High Court held that section 147 of the Act requires formation of opinion that income has escaped assessment. The said provision is not in any manner controlled by section 92 of the Act, nor is there any limit to consideration of any material having nexus with the opinion on the issue of escapement of assessment of income. Interference with the notice for reassessment is called for only where extraneous or absurd reasons are made the basis for opinion proposing to reassess. Apart from the fact that the Assessing Officer had given other reasons, it cannot be held that the material relied upon by the Assessing Officer for proposing reassessment was irrelevant. Whether or not the said material should be finally taken into account for reassessment was a matter which had to be left open to be decided by the Assessing Officer after considering the explanation of the assessee. The High Court was of the view that having regard to the relationship of the petitioner to its associate company, it could not be claimed that the price mentioned by it must be accepted as final and may not be looked at by the Assessing Officer.

Reg: Question No. (ii)

As regards the question whether order of the Transfer Pricing Officer could be taken into account, the High Court was of the view that there could not be any objection to the same being done. Requirement of section 147 of the Act is fulfilled if the Assessing Officer can legitimately form an opinion that income chargeable to tax has escaped assessment. For forming such opinion, any relevant material can be considered. The order of Transfer Pricing Officer can certainly have nexus for reaching the conclusion that income has been incorrectly assessed or has escaped assessment. The High Court observed that in the present case, the said material came to the notice of the Assessing Officer subsequent to the assessment. There was no grievance that the provisions of section 148 to 153 of the Act had not been followed. In such a situation, it could not be held that the notice proposing reassessment was vitiated merely because one of the reasons referred to the order of the Transfer Pricing Officer.

Reg: Question No. (iii)

The High Court did not find any ambiguity or absurd consequence of application of Chapter X to persons who were subject to jurisdiction of taxing authorities in India, nor could find any statutory requirement of establishing that there was transfer of profits outside India or there was evasion of tax. The only condition precedent for invoking provisions of Chapter X was that there should be income arising from international transaction and such income had to be computed having regard to arm’s-length price. ‘International transaction’ as defined u/s. 92B of the Act, stood on different footing than any other transaction. Arm’s -length price was nothing but a fair price which would have been normal price. There was always a possibility of transaction between a non-resident and its associates being undervalued and having regard to such tendency, a provision that income arising out of the said transaction could be computed having regard to arm’s-length price, would not be open to question and was within the legislative competence to effectuate the charge of taxing real income in India.

The High Court did not find any merit whatsoever in the contention that provisions of Chapter X could not be made applicable to parties which were subject to jurisdiction of taxing authorities in India, without there being any material to show transfer of profits outside India or evasion of tax between the two parties. The contention that according to the permission granted by the Reserve Bank of India under the Foreign Exchange Regulation Act, the assessee could not charge more than particular price, could also not control the provisions of the Act, which provides for taxing the income as per the said provision or computation of income, having regard to arm’s-length price in any international transaction, as defined.

Reg: Question No. (iv)

The High Court held that when it is a matter of assessment by one or other officer and the assessee is to be provided opportunity, in the course of the assessment, there was no merit for inferring further opportunity at the stage of decision of the question, whether the Assessing Officer himself is to compute the arm’s-length price or to make a reference to the Transfer Pricing Officer for the said purpose.

On an appeal, the Supreme Court observed that the issue in the Special Leave Petition concerned the
 

application of the principle of transfer pricing. In this case a notice was issued u/s. 148 of the Act for some of the assessment years. On the question of jurisdiction, a writ petition was filed by the assessee, which was disposed of by the High Court in the writ jurisdiction. The Supreme Court, however, on going through the papers, found that foundational facts were required to be established, which could not have been done by way of writ petition. For the aforestated reasons, the Supreme Court was of the view that the assessee should be relegated to adopt proceedings, which were pending, as of date, before various authorities under the Act.

The Supreme Court accordingly, directed the authorities to expeditiously hear and dispose of pending proceedings as early as possible. If the petitioner- assessee was aggrieved by the orders passed by any of these authorities, it would have to exhaust the statutory remedy provided under the Act. It was made clear that each of the authorities would decide the matter uninfluenced by any of the observations made by the High Court.

The special leave petition was disposed of accordingly.

International transactions — Transfer price — Arm’s-length price — Order of remand of the High Court modified so that the TPO would be uninfluenced by the observations given by the High Court.

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[Maruti Suzuki India Ltd. v. ACIT, (2011) 335 ITR 121 (SC)]

The petitioner before the Delhi High Court, formerly known as Maruti Udyog Limited (hereinafter referred to as ‘Maruti’), was engaged in the business of manufacture and sale of automobiles, besides trading in spares and components of automotive vehicles. The petitioner launched ‘Maruti 800’ car in the year 1983 and thereafter launched a number of other models, including Omni in the year 1984 and Esteem in the year 1994. The trade mark/logo ‘M’ was the registered trade mark of the petitioner-company.

Since Maturi wanted a licence from Suzuki for its SH model and Suzuki had granted licence to it, for the manufacture and sale of certain other models of Suzuki four-wheel motor vehicles, Maruti, on 4th December, 1992, entered into a licence agreement, with Suzuki Motor Corporation (thereinafter referred to as ‘Suzuki’) with the approval of the Government of India.

Prior to 1993, the petitioner was using the logo ‘M’ on the front of the cars manufactured and sold by it. From 1993 onwards, the petitioner started using the logo ‘S’, which is the logo of Suzuki, in the front of new models of the cars manufactured and sold by it, though it continued to use the mark ‘Maruti’ along with the word ‘Suzuki’ on the rear side of the vehicles manufactured and sold by it.

A reference u/s. 92CA(1) was made by the Assessing Officer of the petitioner, to the Transfer Pricing Officer (hereinafter referred to as ‘TPO’) for determination of the arm’s-length price for the international transactions undertaken by Maruti with Suzuki in the financial year 2004-05. A notice dated 27th August, 2008, was then issued by the TPO, to the petitioner with respect to replacement of the front logo ‘M’, by the logo ‘S’, in respect of three models, namely, ‘Maruti’ 800, Esteem and Omni in the year 2004-05, which, according to the TPO, symbolised that the brand logo of Maruti had changed to the brand logo of Suzuki. It was stated in the notice that Maruti having undertaken substantial work towards making the Indian public aware of the brand ‘Maruti’, that brand had become a premier car brand of the country. According to the TPO, the change of brand logo from ‘Maruti’ to ‘Suzuki’, during the year 2004-05, amounted to sale of the brand ‘Maruti’ to ‘Suzuki’. He noticed that Suzuki had taken a substantial amount of royalty from Maruti, without contributing anything towards brand development and penetration in Indian Market. It was further noted that Maruti had incurred expenditure amounting to Rs.4,092 crore on advertisement, marketing and distribution activity, which had helped in creation of ‘Maruti’ brand logo and due to which Maruti had become the number one car company in India. Computing the value of the brand at cost plus 8% method, he assessed the value of the brand at Rs.4,420 crore. Maruti was asked to show cause as to why the value of Maruti brand be not taken at Rs.4,420 crore and why the international transaction be not adjusted on the basis of its deemed sale to Suzuki.

Maruti, in its reply dated 8th September, 2008, stated that at no point of time had there been any transfer of the ‘Maruti’ brand or logo by it to Suzuki, which did not have any right at all to use that logo or trade mark. It was submitted by Maruti that a registered trade mark could be transferred only by a written instrument of assignment, to be registered with the Registrar of Trade Marks, and no such instrument had been executed by it, at any point of time. It was also brought to the notice of the TPO that Maruti continued to use its brand and logo ‘Maruti’ on its products and even on the rear side of the models Esteem, ‘Maruti 800’ and ‘Omni’ , the ‘Maruti’ trade mark was being used along with the word ‘Suzuki.’ It was further submitted that Maruti continued to use the trade mark/logo ‘Maruti’ in all its advertisements, wrappers, letterheads, etc. It was also submitted by Maruti that Suzuki, on account of its large shareholding in the company and because of strong competition from the cars introduced by multinationals in India, had permitted them to use the ‘Suzuki’ name and logo, so that it could face the competition and sustain its market share, which was under severe attack. It was also submitted that Suzuki had not charged any additional consideration for use of their logo on the vehicles manufactured by Maruti and there was no question of any amount of revenue being transferred from the tax net of the Indian exchequer to any foreign tax jurisdiction. It was submitted that Maruti had, in fact, earned significantly larger revenue on account of the co-operation extended by Suzuki and that larger revenue was being offered to tax in India.
The jurisdiction of the TPO was thus disputed by ‘Maruti’ in the reply submitted to him. He was requested to withdraw the notice and drop the proceedings initiated by him.
Since Maruti did not get any response to the jurisdictional challenge and the TPO continued to hear the matter on the basis of the notice issued by him, without first giving a ruling on the jurisdiction issue raised by it, a writ petition was filed before the High Court seeking stay of the proceedings before the TPO. Vide interim order dated 19th September, 2008, the High Court directed that the proceedings pursuant to the show-cause notice may go on, but, in case any order is passed, that shall not be given effect to.

Since the TPO passed a final order on 30th October, 2008, during the pendency of the writ petition and also forwarded it to the Assessing Officer of the petitioner, the writ petition was amended so as to challenge the final order passed by the TPO.

In the final order passed by him, the TPO came to the conclusion that the trade mark ‘Suzuki’, which was owned by Suzuki Motor Corporation, had piggy-backed on the Maruti trade mark, without payment of any compensation by Suzuki to ‘Maruti’. He also came to the conclusion that the trade mark ‘Maruti’ had acquired the value of super brand, whereas the trade mark ‘Suzuki’ was a relatively weak brand in the Indian market and promotion of the co-branded trade mark ‘Maruti Suzuki’ had resulted in: “
(a) Use of ‘Suzuki’ — trade mark of the AE.
(b) Use of ‘Maruti’ — trade mark of the assessee.
(c) Reinforcement of ‘Suzuki’ trade mark which was a weak brand as compared to ‘Maruti’ in India.
(d) Impairment of the value of ‘Maruti’ trade mark due to branding process.”

The TPO noted that Maruti had paid royalty of Rs.198.6 crore to Suzuki in the year 2004-05, whereas no compensation had been paid to it by Suzuki, on account of its trade mark having piggy-backed on the trade mark of Maruti. Since Maruti did not give any bifurcation of the royalty paid to Suzuki towards licence for manufacture and use of trade mark, the TPO apportioned 50% of the royalty paid in the year 2004-05, to the use of the trade mark, on the basis of findings of piggy-backing of ‘Maruti’ trade mark, use of ‘Maruti’ trade mark on co-branded trade mark ‘Maruti Suzuki’, impairment of ‘Maruti’ trade mark and reinforcement of ‘Suzuki’ trade mark, through co-branding process. The arm’s-length price of royalty paid by Maruti to Suzuki was held as nil, using the CUP method. He also held, on the basis of the terms and conditions of the agreement between Maruti and Suzuki, that Maruti had developed marketing intangibles for Suzuki in India, at its costs, and it had not been compensated for developing those marketing intangibles for Suzuki. He also concluded that non-routine advertisement expenditure, amounting to Rs.107.22 crore, was also to be adjusted. He, thus, made a total adjustment of Rs.2,06,52,26,920 and also directed that the Assessing Officer of Maruti shall enhance its total income by that amount, for the A.Y. 2005-06.

The High Court set aside the order dated 30th October, 2008 of TPO and the TPO was directed to determine the appropriate arm’s-length price in respect of the international transactions entered into by the petitioner Maruti Suzuki India Limited with Suzuki Motor Corporation, Japan, in terms of the provisions contained in section 92C of the Income-tax Act and in the light of the observations made in the judgment and the view taken by it therein. The TPO was to determine the arm’s-length price within three months of the passing of this order [(2010) 328 ITR 210 (Del.)].

On an appeal by Maruti Suzuki India Ltd., the Supreme Court noted that the High Court had remitted the matter to the TPO with liberty to issue fresh show-cause notice. The High Court had further directed the TPO to decide the matter in accordance with the law. The Supreme Court observed that the High Court had not merely set aside the original show-cause notice but it had made certain observations on the merits of the case and had given directions to the Transfer Pricing Officer, which virtually concluded the matter. In the circumstances, on that limited issue, the Supreme Court directed the TPO, who, in the meantime, had already issued a show-cause notice on 16th September, 2010, to proceed with the matter in accordance with law uninfluenced by the observations/directions given by the High Court in its judgment dated 1st July, 2010.

The Supreme Court further directed that the Transfer Pricing Officer would decide this matter on or before 31st December, 2010.
    

Use of Borrowed Funds for Reinvestment

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1. Issue for consideration

A benefit of exemption from tax on capital gains tax, is conferred on certain specified persons, subject to reinvestment of the capital gains or the net sales consideration, as the case may be, in specified assets, particularly vide sections 54, 54B, 54EC, 54ED and 54F of the Income-tax Act.

The reinvestment in the specified assets is required to be made within the time prescribed under the respective sections. The prescribed amount is required to be deposited in a designated bank account maintained under the Capital Gains Scheme. In a case where the reinvestment is not made by the due date of filing return of income for the year of capital gains, to be utilised for ultimate reinvestment in specified asset within the stipulated time.

It is common to come across cases, where an assessee has, for the purposes of reinvestment, utilised the funds other than the funds realised on sale of capital assets, borrowed or otherwise, leading to a question about his eligibility for exemption from tax for not having used the sale proceeds directly for reinvestment in specified asset. Conflicting decisions, delivered on the subject, require consideration by the taxpayers and their advisors to enable them avoid any unintended hardship in matters of daily recurrence.

 2. V. R. Desai’s case

The issues recently came up for consideration before the Kerala High Court in the case of CIT v. V. R. Desai, 197 Taxman 52. An appeal in this case was filed by the Revenue u/s.260A of the Act for challenging the order of the Tribunal under which an exemption u/s.54F was granted from paying tax on long-term capital gains. In the peculiar and interesting facts of the case, the assessee was the managing partner of a firm, namely, M/s. Desai Nirman, which was engaged, among other things, in real estate business, including construction and sale of flats. During the previous year relevant to the A.Y. 1995-96, the assessee transferred 12.876 cents of land to the said partnership firm treating it as his contribution to the capital of the firm. The firm in turn credited the capital account of the assessee with an amount of Rs.38,62,800, being the full value of the land brought into the firm by him as his share of capital contribution. The assessee availed a loan from HDFC Bank for the construction of a house and within three years from the date of transfer of land to the firm, he got a new house constructed by another firm of M/s. Desai Home, in which also he was a partner.

There was no dispute that the transfer of the land by the assessee to the partnership firm towards his capital contribution to the firm was a transfer within the meaning of section 2(47) resulting into long-term capital gains as per section 45(3) of the Act. In the return filed for the A.Y. 1995-96, the assessee had in fact offered tax on capital gains on the very same transaction of contribution of the above land towards his capital contribution as managing partner, subject however, to his claim for exemption from capital gains tax u/s.54F of the Act, for investment made in the construction of the new building, out of the loan from HDFC Bank, within three years from the date of transfer of the land to the firm.

The AO noticed that the assessee had not invested the sale consideration in full or part in any of the designated bank accounts maintained under the Capital Gains Scheme prior to the date of filing return in terms of section 54F(4) of the Act. He therefore, completed the assessment and issued intimation u/s.143(1)(a) of the Act, holding that the assessee was not entitled to exemption u/s.54F of the Act. The intimation u/s.143(1)(a) was challenged by the assessee before the first Appellate Authority, who dismissed the appeal. In the second appeal filed by the assessee, the assessee took the contention that disallowance of exemption u/s.54F could not be made while issuing an intimation u/s.143(1)(a) of the Act. In the alternative, the assessee contended that the facts established the construction of a new house within three years from the date of sale of land, and so much so, the assessee was entitled to exemption in terms of section 54F of the Act. The Tribunal upheld the claims of the assessee on both the grounds raised.

The Revenue filed an appeal before the Kerala High Court, challenging the order of the Tribunal. The Revenue contended that in order to qualify for exemption u/s.54F, the assessee should have purchased a residential house within one year before or two years after the date of transfer or should have constructed a residential house within a period of three years from the date of transfer, in either case, by utilising the sale proceeds of land; that, for qualifying for exemption, the assessee should have, before the date of filing return, deposited the net sale consideration received in a nationalised bank in terms of section 54F(4) and the receipt should have been produced along with the return filed.

The assessee on the other hand, contended that in order to qualify for exemption, there was no need to directly utilise the sale consideration in constructing the house and it was enough if during the period of three years, an equivalent amount was invested in the construction of the house, from whatever sources; that the assessee admittedly had constructed a new house within three years from the date of transfer of the property and therefore was eligible for exemption.

The Court observed that the assessee allowed the firm to which the property was transferred to retain and use it as a business asset and towards consideration he got only credit of land value in his capital account and as a result the sale consideration was not received by the assessee in cash, nor could it be deposited in terms of clause 4 of section 54F with any nationalised bank or institution; that the assessee did not have the sale proceeds available for investment in the account under the scheme u/s.54F(3) of the Act. The Kerala High Court, on going through the provisions of section 54F, particularly sub-section (4), held that in order to qualify for exemption from tax on capital gains, the net sale consideration should have been deposited in any bank account specified by the Government for this purpose, before the last date for filing of the return and the assessee should have produced along with the return, a proof of deposit of the amount under the specified scheme, in a nationalised bank.

The Court further observed and held that in order to qualify for exemption u/s.54F(3), the assessee should have first deposited the sale proceeds of the property in any specified bank account, and the construction of the house, to qualify for exemption u/s.54F, should have been completed by utilising the sale proceeds that also were available with the assessee; that in the case before them, though the assessee constructed a new building within the period of three years from the date of sale, it was with the funds borrowed from HDFC. By allowing credit of value of transferred property in the capital account of the assessee in the firm, the assessee conceded that the sale proceeds was neither received, nor was going to be utilised for construction or purchase of a house.

The Court finally held that the assessee was not entitled to exemption u/s.54F, because the assessee neither deposited the sale proceeds for construction of the building in the bank in terms of s/s. (4) before the date of filing return, nor was the sale proceeds utilised for construction in terms of section 54F(3) of the Act and that the assessee was not entitled to claim exemption from tax on capital gains u/s.54F of the Act, which the AO had rightly declined.

3.    P. S. Pasricha’s case

The Bombay High Court vide an order dated 7th October, 2009 passed in ITA 1825 of 2009 in the case of CIT v. Dr. P. S. Pasricha, dismissed the Revenue’s appeal against the order of the Tribunal reported in 20 SOT 468 (Mum.). The facts in the Revenue’s appeal before the Tribunal were that;

  •     the assessee had acquired a residential flat in the building known as ‘Dilwara’ at Cooperage, Mumbai at cost of Rs.3,22,464. The said flat was sold during the year relevant to A.Y. 2001-02 for a total consideration of Rs.1,40,00,000. After claiming deductions for the expenses incurred for sale and the cost of acquisition of the said flat, the long-term capital gains was worked out by the assessee at Rs.1,24,02,738,
  •    subsequent to the sale of the said flat, the assessee purchased a commercial property at Kolhapur out of the sale proceeds of the said flat for a total consideration of Rs.1,25,28,000 and gave the said property on rent to Hughes Telecom Ltd.,

  •     thereafter, within the period specified u/s.54(1) of the Act, the assessee purchased two adjoining residential flats at Mumbai for a total consideration of Rs.1,04,78,750, on the strength of which the assessee claimed exemption u/s.54(1) of the Act from tax on capital gains on the sale of the said flat,

  •    the assessee claimed an exemption u/s.54(1) of the Act to the extent of Rs.1,04,78,750 and returned the taxable capital gains at Rs.19,23,988,

  •     the AO disallowed the claim of deduction u/s.54 on two grounds; that the sale proceeds from original asset were not deployed fully in the new asset and that the assessee had not purchased one single property, but, two units,

  •     the assessee preferred an appeal before the CIT(A) and submitted that he had purchased the residential property within the specified period, as such, he was entitled to the exemption u/s.54(1) of the Act. With regard to two residential flats, it was contended that these flats were adjoining flats and they could be used as a single unit, and

  •     the CIT(A) held that the assessee was entitled to exemption u/s.54(1) of the Act, even where the capital gains was invested in more than one flat and with regard to investment of sale proceeds, he further held that since the entire sale proceeds was utilised for purchase of both the flats in question, as such, exemption was to be allowed at Rs.1,04,78,750 as claimed by the assessee.

The Revenue, in the context of the discussion here, contended that the sale proceeds received on account of sale of flat in the building known as ‘Dilwara’ was utilised in purchase of commercial properties at Kolhapur; that the assessee had later on, purchased two residential flats in Lady Ratan Tower, Worli, Mumbai for a sum of Rs.1,04,78,750 out of the funds received from different sources; that to avail the benefit of section 54(1), the assessee was required to invest the sale proceeds received on transfer of long-term capital asset in purchase of another residential house, but, in the instant case, the said sale proceeds from earlier capital asset, were utilised to purchase the commercial property; that a residential house was purchased out of the funds obtained from different sources; that alternatively, the identity of the funds should not be changed and in the instant case, the identity was lost once the sale proceeds were exhausted in purchase of a commercial property; as such, the assessee was not entitled for deduction u/s.54(1) of the Act.

On behalf of the assessee, in the context, it was contended that no doubt the sale proceeds received on sale of residential flat in the building known as ‘Dilwara’ were utilised to purchase a commercial property at Kolhapur, but the assessee had purchased another residential house within the period specified u/s.54(2) of the Act; that the provisions of section 54 nowhere provided that the same sale proceeds, received on transfer of long-term capital asset, must be utilised for the purchase of another residential house; that the assessee was simply required to acquire the residential house within a period of one year before or two years after the date on which the transfer took place and in the instant case, the assessee had purchased the residential flat before the due date of filing of the return and as such, his claim was not hit by ss.(2) of section 54 of the Act and that the proposition propounded by the Revenue about the identity of the funds was without any basis as it could not be applied where the assessee acquired/purchased the residential house before the transfer took place.

The Tribunal observed that the Revenue’s main dispute was about the utilisation of the sale proceeds for purchase of a commercial property and the purchase of residential house out of the funds obtained from different sources, as such, losing the identity of funds. On an analysis of section 54, the Tribunal did not find much force in the Revenue’s contention as, in the opinion of the Tribunal, the requirement of section 54 was that the assessee should acquire a residential house within a period of one year before or two years after the date on which transfer took place and that nowhere, it had been mentioned that the same funds must be utilised for the purchase of another residential house, only that the assessee should purchase a residential house within the specified period, and source of funds was quite irrelevant. Since the assessee had purchased the residential house before the due date of filing of the return of income, his claim was found to be not hit by sub-section (2) of section 54 of the Act and the Tribunal therefore was of the view that assessee was entitled for deduction u/s.54(1) of the Act.

4.    Observations

The wording of the section makes it clear that the law does not insist that the sale consideration obtained by the assessee itself should be utilised for the purchase of house property. The main part of section 54 provides that the assessee has to purchase a house property for the purpose of his own residence within a period of one year before or two years after the date on which the transfer of his property took place or he should have constructed a house property within a period of three years after the date of transfer. A reading of clauses (i) and (ii) of section 54 would also make it clear that no provision is made by the statute that the assessee should utilise the amount which he obtained by way of sale consideration for the purpose of meeting the cost of the new asset.

The assessee has to construct or purchase a house property for his own residence in order to get the benefit of section 54. The statutory provision is clear and does not call for a different interpretation.

There is no ambiguity in understanding the provisions of section 54 and section 54F. The purpose of these provisions is to confer exemption from tax on investment in residential premises. The Legislature itself has appreciated the fact that it would not always be possible to invest the sale proceeds immediately after the sale transaction and therefore, two years’ or three years’ time is given for reinvestment. Neither it is expected, nor is it prudent to keep the sale proceeds intact and keep the said proceeds unutilised till such time.

The fact that these provisions permit the invest-ment in residential premises even before the date of sale, within one year before the sale, and such an investment qualifies for exemption puts it beyond doubt that the Legislature does not intend to have any nexus between the sale proceeds and the investment that is made for exemption. For the purposes of section 54E, even the earnest money or advance is qualified for exemption as clarified by the CBDT’s Circular No. 359, dated 10th May, 1983.

The provisions of sub-sections (2) of section 54 and (4) of section 54F do not, anywhere mandate that there should be a direct nexus between the amount reinvested and the amount of sale consideration or a part thereof, in any manner. A bare reading of these provisions confirm that they use the same language as is used by the sub-section (1) and therefore to infer a different meaning form reading of these provisions, as is done by the Revenue, to obstruct the claim for exemption in cases where the reinvestment was made out of the borrowed funds or funds other than the sales proceeds, is unwarranted and not desirable.

The issue had first arisen before the very same Kerala High Court in the case of CIT v. K. C. Gopalan, 162 CTR 566 wherein, in the context of somewhat similar facts, the Court in principle held that in order to get benefit of section 54, there was no condition that the assessee should utilise the sale consideration itself for the purpose of acquisition of new property. The ratio of this decision was not brought to the attention of the Kerala High Court in V. R. Desai’s case, neither was this case cited. We are of the view that the decision of the Court would have been quite different had this decision and its ratio been brought to the attention of the Court.

In Prema P. Shah v. ITO, 100 ITD 60 (Mum.), the assessee’s claim for benefit of exemption u/s.54 was allowed by the Tribunal, following the said decision of the Kerala High Court in the case of K. C. Gopalan (supra) by rejecting the argument of the Revenue that the same amount should have been utilised for the acquisition of new asset and holding that, even if an assessee borrowed the required funds and satisfied the conditions relating to investment in specified assets, she was entitled to the exemption.

The decision in the case of K. C. Gopalan (supra), though cited, was erroneously distinguished and not followed by the Tribunal in the case of Milan Sharad Ruparel v. ACIT, 121 TTJ 770 (Mum.) wherein it was held that for exemption u/s.54F, utilisation of borrowed funds for purchase of house was detrimental and that the exemption u/s.54F was not available where the assessee purchased a residential house out of funds borrowed from bank. It was held that for the purposes of section 54F, residential property should either be acquired or constructed by the assessee out of his personal funds or the sale proceeds of the capital asset on which the benefit was claimed. Even here, the Tribunal has agreed that the assessee would be entitled to the exemption, which could not be denied to him on the ground of use of borrowed funds, if he is otherwise in possession of his own funds. Once this is conceded, the reference to sub-sections (3) and (4) and reliance thereon for denial of the exemption appears to be incongruous. Either they prohibit the use of other funds or they do not — there cannot be a third meaning assigned to the existence of these provisions.

Similarly, the claim for exemption was denied by the Tribunal in the case of Smt. Pramila A. Parikh in ITA No. 2755/Mum./1997, in which case the assessee had constructed a residential house out of the loans and thereafter the sale proceeds of shares of M/s. Hindustan Shipping & Weaving Mills were utilised for repayment of loans raised for the construction of a residential house. The assessee claimed exemption u/s.54F of the Act. The Tribunal had held that the assessee was not entitled to exemption u/s.54F as she had constructed the house by taking loans from other persons for the purpose of construction of the house and there-after sold the capital asset and repaid the loan out of the sale proceeds of the same.

The Ahmedabad Tribunal, when asked to exam-ine a similar issue in the context of section 54E, in the case of Jayantilal Chimanlal HUF, 32 TTJ 110, held that for claiming exemption u/s.54E, it was sufficient if sale proceeds were invested in Rural Bonds and that the source of funds was immaterial. Similar was the view in the case of Bombay Housing Corporation v. ACIT, 81 ITD 545, wherein it was held that the condition relating to investment in specified assets u/s.54E was satisfied even where the investment was made by the assessee by borrowing funds instead of a direct investment out of consideration received by it for transfer of capital asset. In that case, it was held that the exemption u/s.54E was available for investment in specified assets out of borrowed funds and that the requirement of section 54E was only that the assessee must invest an amount which was arithmetically equal to the net consideration in the specified assets and that no distinction could be made between an assessee who was forced to borrow for the purpose of making the investment and another assessee who effected the borrowing, not because of forced circumstances, but because he consciously or deliberately used the sale consideration for a different purpose. The fact that instead of making a direct investment in the bonds, the borrowed amount was invested in the bonds should not make any difference. These decisions are sought to be distinguished by the Revenue as was done by the Tribunal in the case of Milan Ruparel (supra) on the ground that the said section 54E did not contain a provision similar to section 54F(4) which required an assessee to deposit the sale proceeds in a designated bank account failing the reinvestment before the due date of return of income.

The provisions in any case are meant to be interpreted liberally in favour of the assessee, being incentive provisions, even where it is assumed that there is some doubt in their interpretation. The Courts have always adopted such liberal interpretation of sections 54 and 54F when there is substantial compliance with the provisions of the section.

Even if one looks at the object of sections 54 and 54F, the intention clearly is to encourage investment in residential housing. So long as that purpose is achieved, the benefit of the exemption should not be denied on technical grounds that the same funds should have been utilised.

Income: Deemed profit: Section 41(1): A. Y. 2007-08: Unclaimed liabilities of earlier years which are shown as payable in the accounts are not taxable as income u/s. 41(1) even if the creditors are untraceable and liabilities are non-genuine:

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CIT vs. Bhogilal Ramjibhai Atara (guj); tax appeal no. 588 Of 2013 dated 04-02-2014:

For the A. Y. 2007-08, in the return of income, the assessee had shown an amount of Rs. 37,52,752/- as outstanding debt and the same was shown in the accounts as payable. The Assessing Officer summoned all the creditors and questioned them about the alleged credit to the assesee. In the assessment order he gave a finding that a number of parties were not found at the given address, many of them stated that they had no concern with the assessee and some of them conveyed that they did not even know the assessee. On the basis of such findings and considering that the debts were outstanding since several years, the Assessing Officer applied section 41(1) of the Income-tax Act, 1961 and added the entire sum as income of the assessee. The Assessing Officer held that liabilities have ceased to exist within the meaning of section 41(1) and therefore, the same should be deemed to be the income of the assessee. The Tribunal allowed the assessee’s appeal and deleted the addition.

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

“i) We are in agreement with the view of the Tribunal. Section 41(1) of the Act would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year.

ii) In the present case, both elements are missing. There was nothing on record to suggest that there was remission or cessation of liability that too during the previous year relevant to the A. Y. 2007-08 which was the year under consideration.

iii) It is undoubtedly a curious case. Even the liability, itself, seems under doubt. The Assessing Officer undertook the exercise to verify the records of the so-called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealings with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income u/s. 41(1) of the Act.

vi) This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of section 41(1) of the Act there is no cure for it. Be that as it may, insofar as the orders of the Revenue authorities are concerned, the Tribunal not having made any error, this Tax Appeal is dismissed.”

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Income: Accrual in India: Non-resident: Fees for technical services: Section 9(1)(vii): A. Y. 1991-92: Sale of design and engineering drawings outside India: Sale of plant: Income does not accrue in India: Not taxable in India:

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DIT vs. M/s. Nisso Lwai Corporation, Japan (AP); ITA No. 612 of 2013 dated 04-02-2014:

The assessee is a non-resident company and it is represented by RINL Visakhapatnam. The assessee company had provided design and engineering services, manufacture, delivery, technical assistance through supervision of erection and commissioning etc., to establish compressor house-I for RINL. The payments were made by RINL separately for each of the services/ equipments provided/supplied by the assessee. It, inter alia, included payment made towards supply of design and engineering drawings. The assessee company claimed that the said payment is not taxable in India as the transaction was of a sale of goods outside India. The Assessing Officer rejected the claim and assessed it as income. The Tribunal allowed the assessee’s claim, deleted the addition and held as under:

“We are of the view that the amount received by the assessee for supply of design and engineering drawings is in the nature of plant and since the preparation and delivery has taken place outside Indian territories, the same cannot be taxed in India.”

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

“i) It appears, the learned Tribunal, on fact, found that there has been no accrual of income in India and this accrual of income has taken place in Japan. As such, the Income-tax Act, cannot be made applicable.

ii) We feel that the decision is legally correct and we do not find any element of law to be decided in this appeal. The appeal is accordingly dismissed.”

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Power to call for information – Powers u/s. 133(6) are in nature of survey and general enquiry to identify persons who are likely to have taxable income and whether they are in compliance with provisions of Act – The notice seeking information from a cooperative Bank in respect of its customers which had cash transactions on deposits of Rs. 1,00,000 and above for a period of three years without reference to any proceeding or enquiry pending before any authority under the Act was valid.

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Kathiroor Service Co-operative Bank Ltd. vs. CIT (CIB) & Ors. [2014] 360 ITR 243 (SC)

The appellant-assessee before the Supreme Court was a service co-operative rural bank. The Incometax Officer (CIB), Calicut, issued a notice on 2nd February, 2009 to the assessee u/s. 133(6) of the Act calling for general information regarding details of all persons (whether resident or non-resident) who have made (a) cash transactions (remittance, transfer, etc.) of Rs. 1,00,000 and above in any accounts and/or (b) time deposits (FDs, RDs, TDs, etc.) of Rs. 1,00,000 or above for the period of three years between 1st April, 2005 and 31st March, 2008. It was expressly stated therein that failure to furnish the aforesaid information would attract penal consequences. The assessee objected to the said notice on grounds, inter alia, that such notice seeking for information which is unrelated to any existing pending proceedings against the assessee could not be issued under the provisions of the Act and requested for withdrawal of the said notice.

The assessing authority addressed to the objections raised by the assessee and accordingly rejected them by letter dated 5th March, 2009. The assessing authority relied on the decision of the jurisdictional High Court in M.V. Rajendran vs. ITO [(2003) 260 ITR 442 (Ker) ] wherein it was held that the Department is free to ask for information about any particular person or to call for general information in regard to any matter they consider necessary. Section 133(6) does not refer to any enquiry about any particular person or assessee, but pertains to the information in relation to ‘such points or matters’ which the authority issuing notices needs. This clearly shows that information of a general nature can be called for and names and address of the depositors who hold deposits above a particular sum is certainly permissible. In fact, as the section presently stands, section 133(6) is a power of general survey and is not related to any person and no banking company including a nationalised bank is entitled to claim any immunity from furnishing such information.

The assessee, aggrieved by the aforesaid, filed Writ Petition before the High Court challenging the notice dated 2nd February, 2009. The learned single judge held that the impugned notice was validly issued under the provisions of the Act and, therefore, dismissed the said petition.

Thereafter, the assessee approached the Division Bench of the High Court by way of Writ Appeal questioning the said notice on grounds, inter alia, that the issuance of such notice u/s. 133(6) was bad in law as section 133(6) only provides for power to seek information in case of pending proceedings under the Act and does not contemplate the powers to seek fishing information which is unrelated to any existing proceedings or which may enable the assessing authority to decide upon institution of proceedings under the Act. The Division Bench has observed that the questions raised therein was no longer res integra in view of the decision of the Supreme Court in Karnataka Bank Ltd. vs. Secretary Government of India [2002] 9 SCC 106, and, accordingly dismissed the said appeal.

Aggrieved by the aforesaid, the assessee went before the Supreme Court in appeal.

The Supreme Court observed that before the introduction of amendment in section 133(6) in 1995, the Act only provided for issuance of notice in case of pending proceedings. As a Consequence of the said amendment, the scope of section 133(6) was expanded to include issuance of notice for the purposes of enquiry. The object of the amendment of section 133(6) by the Finance Act, 1995 (Act 22 of 1995), as explained by the Central Board of Direct Taxes in its circular showed that the legislative intention was to give wide powers to the officers, of course with the permission of the Commissioner of Income-tax or the Director of Investigation to gather particulars in the nature of survey and store those details in the computer so that the data so collected can be used for checking evasion of tax effectively.

The assessing authorities are now empowered to issue such notice calling for general information for the purposes of any enquiry in both cases: (a) where a proceeding is pending, and (b) where proceeding is not pending against the assessee. However, in the latter case, the assessing authority must obtain the prior approval of the Director or the Commissioner, as the case may be, before issuance of such notice. The word ‘enquiry’ would, thus, connote a request for information or questions to gather information either before the initiation of proceedings or during the pendency of proceedings; such information being useful for or relevant to the proceeding under the Act.

The Supreme Court referred to its decision in Karnataka Bank Ltd. vs. Secretary, Government of India [2002] 9 SCC 106, wherein it had examined the proposition whether a notice us/. 133(6) could be issued to seek information in cases where the proceedings are not pending and construed section 133(6) of the Act.

In that case, it was held that it was not necessary that any inquiry should have commenced with the issuance of notice or otherwise before section 133(6) could have been invoked. It is with the view to collect information that power is given u/s. 133(6) to issue notice, inter alia, requiring a banking company to furnish information in respect of such points or matters as may be useful or relevant. The second proviso makes it clear that such information can be sought for when no proceeding under the Act is pending.

In view of the aforesaid, the Supreme Court held that the powers u/s. 133(6) were in the nature of survey and a general enquiry to identify persons who are likely to have taxable income and whether they are in compliance with the provisions of the Act. It would not fall under the restricted domains of being ‘area specific’ or ‘case specific’. Section 133(6) does not refer to any enquiry about any particular person or assessee, but pertains to information in relation to “such points or matters” which the assessing authority issuing notices requires. This clearly illustrated that the information of general nature could be called for and requirement of furnishing names and addresses of depositors who hold deposits above a particular sum is certainly permissible.

In the instant case, by the impugned notice the assessing authority sought for information in respect of its customers which had cash transactions or deposits of Rs. 1,00,000 or above for a period of three years, without reference to any proceeding or enquiry pending before any authority under the Act. The notice was issued only after obtaining approval of the Commissioner of Income-tax, Cochin. The Supreme Court therefore held that the assessing authority has not erred in issuing the notice to the assessee-financial institution requiring it to furnish information regarding the account holders with cash transactions or deposits of more than Rs. 1,00,000.

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Search and Seizure – Section 132B(4)(b) as it stood dealt with pre-assessment period and there is no conflict between this provisions and section 240 or 244A which deals with post-assessment period after the appeal – Assessee is entitled to interest for the period from expiry of period of six months from the date of the order u/s. 132(5) to the date of the regular assessment order in respect of amounts seized and appropriated towards tax but which became refundable as a result of appellate orde<

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Chironjilal Sharma HUF vs. Union of India & Ors. [2014] 360 ITR 237 (SC)

In the search conducted in the house of the appellant on 31st January, 1990, a cash amount of Rs. 2,35,000 was recovered. On 31st May, 1990, an order u/s. 132(5) came to be passed. The Assessing Officer calculated the tax liability and cash seized from appellant’s house was appropriated. However, the order of the Assessing officer was finally set aside by the Tribunal on 20th February, 2004. The Revenue accepted the order of the Tribunal. Consequently, the appellant was refunded the amount of Rs. 2,35,000 along with interest from 4th March, 1994 (date of last of the regular assessments by the Assessing Officer) until the date of refund.

The Appellant (assessee) claimed that he was entitled to interest u/s. 132B(4)(b) of the Act which was holding the field at the relevant time for the period from expiry of period of six months from the date of order u/s. 132(5) to the date of regular assessment order. In other words, the order u/s. 132(5) of the Act having been passed on 31st May, 1990, six months expired on 30th November, 1990, and the last of the regular assessment was done on 4th March, 1994, the assessee claimed interest u/s. 132B(4)(b) of the Act from 1st December, 1990 to 4th March, 1994.

The Supreme Court observed that close look at the provisions of section 132(5) and 132B, and, particularly, clause (b) of u/s. 132B(4) of the Act showed that where the aggregate of the amounts retained u/s. 132 of the Act exceeded the amounts required to meet the liability u/s. 132B(1)(i), the Department is liable to pay simple interest at the rate of 15% on expiry of six months from the date of the order u/s. 132(5) of the Act to the date of the regular assessment or reassessment or the last of such assessments or reassessments, as the case may be. The Supreme Court noted that though in the regular assessment done by the Assessing Officer, the tax liability for the relevant period was found to be higher and, accordingly, the seized cash u/s. 132 of the Act was appropriated against the assessee’s tax liability but the order of the Assessing Officer was overturned by Tribunal finally on 20th February, 2004 and in fact, the interest for the post-assessment period, i.e., from 4th March, 1994, until refund on the excess amount was paid by the Department to the assessee. The Department denied the payment of interest to the assessee u/s. 132B(4)(b) on the ground that the refund of excess amount was governed by section 240 of the Act and section 132B(4)(b) had no application. According to the Supreme Court, however, section 132B(4)(b) dealt with pre-assessment period and there was no conflict between this provision and section 240 or for the matter section 244A. The former dealt with pre-assessment period in the matters of search and seizure and the latter deals with post-assessment period as per the order in appeal.

The Supreme Court held that the view of the Department was not right on the plain reading of section 132B(4)(b) of the Act as indicated above.

The Supreme Court, accordingly, allowed the appeal and set-aside the impugned order holding that the appellant was entitled to the simple interest at the rate of 15% p.a. u/s. 132B(4)(b) of the Act from 1st December, 1990 to 4th March, 1994.

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‘Income’ includes ‘loss’ – a revisit

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‘Income includes loss’ is a phrase found in various judicial precedents in the context of Indian Incometax laws, although commercially ‘income’ and ‘loss’ have always been understood to be antonyms. The gap between the commercial and tax-understanding is intentional. In this context, it is important to know the meaning of the terms ‘income’ and ‘loss’ (along with difference between them).

Income is a term though commonly used; is seldom understood. It has always triggered more questions rather than answers. It cannot be understood with recourse to some accepted tenets, beliefs and established class of propositions. To limit income exclusively to one or any specific sphere would be an unjustified arrest of its reach. Possibly, this is the reason that Income-tax statute also has left the definition of income open-ended.

There are various principles concerning ambit of ‘income’. One among them is ‘income includes loss’. A number of decisions including the Apex Court ruling in the case of CIT vs. J.H. Gotla (1985) 156 ITR 323 (SC) and CIT vs. Harprasad & Co. Pvt. Limited (1975) 99 ITR 118 (SC) has flagged this canon. The attempt in this write-up is to revisit and discern the meaning of the phrase ‘income includes losses’. In this journey, the write-up touches upon various instances in the Act when this principle ‘appears’ to be inapplicable or unworkable. The write-up attempts to initiate a thought whether this principle is to be applied in every situation or this has a restricted application?

Definition of income in the Income-tax Act, 1961 (‘the Act’)

Section 2(24) of the Act provides an inclusive definition of the term ‘income’. It does not define ‘income’ per se. Section 2(24), if paraphrased, would read as under:

(24) “income” includes

• profits and gains
• dividend
• voluntary contributions received by a trust
• the value of any perquisite or profit in lieu of salary taxable
• any special allowance or benefit, other than perquisite included under sub-Clause (iii), specifically granted to the assessee
• any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed or to compensate him for the increased cost of living
• the value of any benefit or perquisite, whether convertible into money or not, obtained from a company or by a representative assessee
• any sum chargeable to Income-tax under Clauses (ii) and (iii) of section 28 or 41 or 59
• any sum chargeable to Income-tax under Clause (iiia) of section 28(iiia)/ (iiib)/ (iiic)
• the value of any benefit or perquisite taxable under clause (iv) of section 28
• any sum chargeable to Income-tax under clause (v) of section 28
• any capital gains chargeable u/s. 45
• the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society
• the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members
• any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever
• any sum received from employees towards ESIC contribution
• any sum received from Keyman Insurance policy
• Gifts or receipts for inadequate consideration.

Section 2(24) enlists various instances of income. First among them is ‘profits and gains’. The terms ‘profits’ and ‘gains’ have not been defined in the Act. It is trite to state that in the absence of statutory definition one could place reliance on the dictionary meaning or normal connotation of term(s). If dictionary meanings are referred, ‘profits’ means excess of revenue over expenditure and ‘gains’ as an increase in amount, degree or value. These twin concepts are indicative of a positive figure. There are judicial precedents to indicate that gains include ‘negative gains’ and we would keep these judicial precedents aside for the time being [and restrict ourselves to terminologies used in the Act].

Other terms used in the definition are ‘received’, ‘granted’, ‘winnings’, ‘obtained’. All these terms also have an element of ‘positivity’ inbuilt in them. Can these terms be used along with ‘losses’? A loss is something different. It is not something which is received or won or granted or obtained. It comes ‘ab-extra’ from outside. The term ‘loss’ generally accompanies verbs such as ‘incurred’, ‘sustained’, ‘computed’, ‘suffered’ etc. The use of these terms in section 2(24) appears to indicate that the law does not visualise any losses to be listed therein. This becomes more evident on a reading of the remaining instances in the definition which confine themselves to incomes which are chargeable to tax. These are obviously not concerned with losses. To conclude, although section 2(24) is an inclusive definition, the instances listed therein do not seem to accommodate ‘losses’ within its stride.

Although section 2(24) is an inclusive definition and its normal meaning should not be curtailed by various items listed therein in its inclusive sweep, it is interesting to observe that the legislature has consciously not included a ‘single’ instance to suggest that income may possibly include a negative face also.

Scope and charge of total income

Section 4 is the charging provision under the Act. The charge is in respect of the total income of a person for any year. The scope of total income is outlined by section 5 which has two sub-sections – one, dealing with residents and other with nonresidents. It enlists incomes which are includible in total income. It recognises those incomes which are to be included in total income on ‘receipt’ or ‘accrual’ or ‘deemed accrual’ basis. Cumulatively, these sections seek to include income within the scope of total income to levy a charge of tax. The question is whether losses can be charged to tax? Can losses be accrued or received or deemed so? The answer is negative in my view.

This is because, the term(s) ‘accrue or arise’ connotes ‘legal right to receive’. It is generally a stage prior to actual receipt (except for advances). The gap between accrual and actual receipt is only a matter of timing difference. It needs no explanation to state that losses cannot be ‘received’. When they cannot be received; how can there be a right to receive them? – Readers may deliberate.

Provisions of clubbing of income

Explanation 2 to section 64 reads – ‘For the purposes of this section, ‘income includes loss.’ This explanation was inserted by Finance Act 1979 whose objective is explained by Circular No. 258, dated 14-06-1979; relevant portion of which is as under:

“17.2 Under the provisions of section 64, the income of the specified persons is liable to be included in the total income of the individual in certain circumstances. The Finance Act, 1979 has inserted a new Explanation 2 below section 64(2) to provide that the term “income” for the purposes of section 64 would include a loss. Hence, for example, where the individual and his spouse are both partners in a firm carrying on a business and the firm makes a loss, the share of loss attributable to the spouse will be included in determining the total income of the individual.”(emphasis supplied)

The intention of the aforesaid amendment/insertion was to include losses in determining total income of the person in whose hands the income gets clubbed.  The inclusion was, therefore, sought to be made in ‘total income’ determination.  Losses of one person (whose income/loss get clubbed) were sought to be set-off against the income of another person (in whose hands the income is getting clubbed).  The explanation seeks to enable set-off of losses of one person in another’s hand. To effectuate this principle the legislature inserted explanation 2 WHEReby income for the purposes of this section includes loss. The important aspect here is the limited scope of this explanation.  The content of this explanation is limited to the context of section 64 only.  It does not travel beyond this. The explicit mention of such an aspect goes on to substantiate that under general principles income does not include losses.  This is a unique provision with a special purpose.

Some of the circulars on the aspect of considering losses for the purpose of set-off against income provide some insight into the purpose of such leg- islation.  In addition to Circular 258 dated 14-06-1979 (referred above) one may refer the C. B. R. Circular No. 20 of 1944 – C. No. 4(13)-I.T/ 44 dated the 15TH July, 1944 which reads as under:
Subject : Section 16(3)(a) – Loss incurred by wife or minor child – Right of set off under section 24(1) and (2).

Attention is invited to the Boards Circular No. 35 of 1941, on the above subject. It was laid down therein that where the wife or minor child of an individual incurs a loss which if it were income would be includ- ible in the income of that individual u/s. 16(3), such loss should be set-off only against the income, if any, of the wife or minor child and if not wholly set-off should be carried forward, subject to the provisions of section 24(2). The Board has reconsidered the question and has decided that, although this view may be tenable in law, the other and more equitable view is at least equally tenable that such loss should be treated as if it were a loss sustained by that individual. Thus, if the wife or minor child has a personal income of Rs. 5,000 which is not includible in the individuals income and sustains a loss of Rs. 10,000 from a source the income of which would be includible in the income of the individual, the loss should be set-off against the income of the individual under section 24(1), and if not wholly set-off should be carried forward u/s. 24(2). The wife or the minor child, would, therefore, be assessable on the personal income of Rs. 5,000. If, in any case, the wife or minor child claims a set-off of the loss against the personal income, it should be brought to the notice of the Board. Boards Circular No. 35 of 1941 is hereby cancelled.” (emphasis supplied)

Thus, losses are included to enable set-off against income. The inclusion is in the total income computation and not in income as such. The inclusion is for the limited purpose of computation. The Direct Tax Law Committee 1978, in its final report, also made some observations on this provision:

“The provisions for aggregating income of the spouse under clause (i) of section 64(1) has led to a dispute in regard to the treatment of losses which may fall to the share of the spouse from the partnership. The Gujarat High Court in Dayalbhai Madhavji Vadera vs. CIT [1966] 60 ITR 551 has ruled that the section contemplates inclusion of income and, accordingly, the share of loss arising to the spouse cannot be set-off against the total income of the other spouse. The Karnataka High Court in Kapadia vs. CIT [1973] 87 ITR 511 has dissented from this view and has held that income in this section includes a loss. On general principles, income from membership in a firm would include a loss and the context of clause (i) of sub-section (1) does not warrant the contrary construction. The liability to assessment cannot alternate from year to year between the individual and the spouse depending on whether there is a profit or a loss…” (emphasis supplied)

The Committee has categorically said that income ‘in this section’ includes loss. To state negatively, otherwise (or under normal circumstances) income does not include loss. The reason for such inclusion is to ensure consistency in the process of aggre- gating the profit or loss with the spouse’s income. It does not indicate income to include loss in all circumstances.

The scope of clubbing section is limited. It provides for clubbing of one’s income in the total income of another. By defining income to include loss, it is suggesting that loss of one person (along with income) may also be included in the total income of another person. The inclusion of loss is expanding the scope of ‘clubbing’ and not ‘income’.

Set-off and carry forward of losses

Chapter VI of the Act deals with aggregation of income and set-off of loss. Section 70 provides for set off of ‘loss’ from one source of income against ‘income’ from another source under the same head. If the losses cannot be fully set-off against income under the same head, they may be set-off against incomes under other heads (section 71). The balance losses remaining after set off against the incomes computed under other heads is carried forward to the succeeding years as per the relevant provisions of the Act. Thus, the Act recognises loss to be different from income. Loss has an effect of reducing income in the process of set-off against income. An increase in loss would reduce the income. They are inversely proportional. The opening portion of section 70 and 71 is broadly similar language which is reproduced below:

Section 70

(1) Save
as otherwise provided in this Act,
where the net
result for any assessment year
in respect of any source
falling under any
head of income, other
than “Capital gains”, is a loss,
the assessee shall
be entitled to have
the amount of such loss
set-off against his
income from any other
source under the
same head.

Section 71

(1) Where
in respect of
any assessment year
the net result of the computation under any
head of income, other than “Capital gains”, is a loss and the assessee has no income
under the head “Capital gains”, he shall, subject to the provisions of this Chapter, be entitled to have
the amount of such loss
set-off against his
income, if any, assessable for that assessment year under any other head.


to absorb the costs/expenditures/ other outlays; an assessee ends up with a situation of unabsorbed costs/ expenditures. This event of income falling short of outflows is called ‘loss’. Can such a situation be termed as ‘in- come’? Loss and Income are names of opposite fiscal situation(s) and cannot be equated with one another. Both the sections deal with set off of loss against income. The legislature itself recognises income and loss to be different and distinct. They are different outcomes having opposite characters. They cannot co-exist. This being the case, can one say that income includes loss?

The term ‘include’ means – ‘to comprise or contain as part of a whole’. Say for instance, if A includes B, then, A either consists of B wholly or partially. On the contrary, if the presence of B negates or diminishes the existence of A, then can we say that A includes B? In the context of clubbing, the legislature required losses (of one person) to be clubbed along with income (of another). This clubbing is to facilitate total income computation. Thus, the inclusion is only ‘quantitative’ and not ‘qualitative’. This being the case, such limited quantitative inclusion of the legislature cannot be understood to be ‘qualitative’ to paint all the incomes with such understanding.

In the context of section 70 and 71, ‘loss’ is a mere outcome in the process of computing income. This is apparent from the language used in these twin sections which read – ‘where the net result….’. Loss is a net result or consequence. The other alternative outcome is ‘income’. To elucidate further, one may look at the structure of the Income-tax Act.

Section 4 creates a charge on total income.  Section 5 (read with section 7 and 9) outline the scope for such total income.  While computing total income certain incomes are excluded by section 10 (along with 11).  Section 14 classifies income into 5 heads for the purpose of total income computation (and charge of Income-tax).  Sections 15 to 59 compute incomes under various heads.   Section 60 to 64 include (or club) certain incomes to assessee’s total income.  The focus is thus on total income computa- tion since the charge u/s. 4 is on it.  While making such computation, when the income is insufficient ‘Loss’ is conceptually different from income.  It is not defined in the Act.  Black’s law dictionary de- fines ‘loss’ as – ‘An undesirable outcome of a risk; disappearance or diminution in value; usually in an unexpected or relatively unpredictable way’.  The definition appears to reflect attributes of involuntary happening.  Although Companies Act of 1956 does not define ‘loss’ there is an indirect inference one could draw from section 210(2) therein which reads :

(2)IN the case of a company not carrying on business for profit, an income and expenditure account shall be laid before the company at its annual general meeting instead of a profit and loss account, and all references to “profit and loss account”, “profit” and “loss” in this section and elsewhere in this Act, shall be construed, in relation to such a company, as references respectively to the “income and expenditure account”, “the excess of income over expen- diture”, and “the excess of expenditure over income”. (emphasis supplied)

The meaning of loss has been explained to be ‘excess of expenditure over income’. It is a differential between expenditure and income. It is an outcome when income is unable to absorb all the expenditure/ costs. In other words, unabsorbed cost is loss. The interplay between income and expenditure results in loss. While computing income, loss could arise if the income falls short of expenditure. Loss is thus a status or situation wherein expenditure exceeds income. It is not a part of income. Something to be included in income, it should be a part of it. Income (net) or losses are two alternatives. They are outcomes. One denotes surplus and other is an epitome of deficit. From an Income-tax standpoint, marriage of these two extremes is impossible sans specific situations such as clubbing or set-off provi- sions (referred above).

Accounting standards also differentiate the two. Accounting Standard 22 [Disclosure and computation of deferred tax] defines taxable income (tax loss) as the amount of the income (loss) for a period, determined in accordance with the tax laws, based upon which Income-tax payable (recoverable) is determined.  Income and loss have been recognised as alternatives.  Loss is an antonym of income.  The question is whether such parallel and unlike concepts overlap under the Income-tax regime?

As stated in the beginning of this write-up, various courts held that income includes ‘losses’. It appears to be a fairly settled proposition. Whether this proposition is applicable in every situation?  Does ‘income’, which is inherently positive, include losses?

In my opinion, the term ‘income’ is not a polymor- phous term having an open texture. Income which indicates ‘coming in’ is an embodiment of positivity. It signifies pecuniary enrichment or accumulation. Loss is indicative of opposite emotions (to income). Loss may take various forms but would always result in deterioration. Indian tax provisions (keeping the judicial precedents aside) actually do not seek to hold these contradictory terms synonymous in every situation. At best, loss can be defined to be ‘loss of income’ and not ‘loss includes income’.

Having gone through the various instances and indications in the Act, the question still persists. The mystery around relationship between income and loss still lingers. Can these instances in the statute shake the law of land (Apex Court rulings)? Readers may deliberate whether INCOME REALLY INCLUDES LOSS?

If this proposition is accepted, can a daring attempt be made to claim that ‘losses emanating from sources of income which are exempt can be set-off against other income?’  Although this proposition is well settled by the Apex Court in the case of CIT vs. Harprasad & Co. Pvt. Limited (1975) 99 ITR 118 (SC), the attempt is to just explore an alternate school of thought:

Loss is not a part of total income

Section 2(45) defines total income to mean total amount of income referred to in section 5 and computed in the manner laid down in the Act. The definition thus contains two limbs which are
as follows:

(a)    The income includible in total income must be ascertained as per section 5; and

(b)    The income must be computed as per provisions of the Act.

‘Total income’ defined in section 2(45) presupposes an existence of ‘income’ referred to in section 5. For the reasons mentioned above, section 5 does not appear to cover losses.   Therefore, section 2(45) can never include loss (since they cannot be ascertained as per section 5).  Section 10 seeks to exclude certain incomes from total income.  When a loss is never included in total income, how can section 10 exclude something which never existed?

Section 10 can never exempt a loss

Section 10 contains provisions for exemption of certain incomes.  It never exempts a loss.  Infact, courts have held that exemptions provided by the legislature itself may furnish an infallible clue to the income character of a particular receipt [Refer All India Defence Accounts Association, In re: Shailendra Kumar vs. UOI (1989) 175 ITR 494 (All)]; although not conclusive.

The apex court in the case of UOI vs. Azadi Bachao Andolan and Another 263 ITR 706 (SC) held that the ‘liability to tax’ is a legal situation; whereas ‘payment of tax’ is a fiscal fact.   A taxing statute does not always proceed to charge and levy tax.  Exemption provisions provide exemption from payment of tax.  One among them is section 10.  The incomes enumerated therein exclude income from the total income.  However, it does not annul the charge of tax.  An exemption cannot dispense with the very levy created under the Act [Refer B.K. Industries vs. UOI (1993) 91 STC 548].  Support for this proposi- tion can be drawn from the Apex Court decision in the case of Peekay Re-Rolling Mills vs. Assistant Commissioner – 2007 (219) ELT 3 (SC) – In this case, the court observed:

“In our opinion, exemption can only operate when there has been a valid levy, for if there is no levy at all, there would be nothing to exempt. Exemption does not negate a levy of tax altogether.” “Despite an exemption, the liability to tax remains unaffected, only the subsequent requirement of payment of tax to fulfill the liability is done away with.” (emphasis supplied)

Taking cue from the aforesaid decision (although rendered in the context of central excise), one could argue that exemption section could operate on only those income which can come within the ambit of Income-tax levy. Loss can never be subject to Income-tax levy; so there is no occasion to take relief of exemption provisions. Moreover, it is a settled principle that exemption provisions have to be construed liberally.  The tax relief granted by a statute should not be whittled down by importing limitations not inserted by the legislature [Refer CIT vs. K E Sundara Mudaliar (1950) 18 ITR 259 (Mad) and others].

With utmost respect for the Apex Court decision in the case of Harprasad & Co. Pvt. Limited case and many other cases which have concurred or followed this proposition, the aforesaid write-up is an attempt to take a deeper insight into these landmark judgments and may be challenge the obvious.

(2011) 137 TTJ 188 (Mumbai) Inter Gold (India) P. Ltd. v. JCIT ITA No. 441 (Mum.) of 2004. A.Y.: 1998-99. Dated: 5-1-2010

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Sections 4 and 28(i) of the Income-tax Act, 1961 — Compensation received for loss of goodwill/ reputation is a capital receipt.

The assessee received a sum of Rs.41.58 lakh from Union Bank of Switzerland (UBS) towards loss of reputation and goodwill and claimed the same as capital receipt not chargeable to tax. The Assessing Officer and the CIT(A) held the said amount as revenue receipt chargeable to tax.

The Tribunal, relying on the decision of the ITAT Pune in the case of Serum Institute of India Ltd. v. Dy. CIT, (2007) 12 TTJ (Pune) 174/111 ITD 259 (Pune), upheld the assessee’s claim.

The Tribunal noted as under:

(1) It is evident that the compensation was awarded to the assessee ‘against loss of reputation and goodwill’. It was not on account of the failure on the part of UBS to supply the quantity ordered or some loss caused to the assessee in a particular trading transaction.

(2) It was on account of injury caused to the reputation of the assessee, albeit such injury was caused due to some business transaction.

(3) Had the amount been awarded to make good the loss caused due to excess or short supply of the material or some other trading deficiency, it would certainly have been regarded as a revenue receipt.

(4) Since the nexus of the compensation is with reputation and goodwill and not with the trading operations, it cannot be held to be a revenue receipt.

(5) The main criterion to judge as to whether the compensation is capital or revenue is to ascertain the purpose for which such compensation is awarded. If the compensation is to recoup the loss suffered by the assessee in its business activity, then it will be a revenue receipt. If, however, the purpose is unrelated to the trading activity of the assessee, it will be in the nature of a capital receipt.

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(2011) 128 ITD 108/ (2010) 8 taxmann.com 209 (Delhi) Escorts Heart Institute & Research Centre Ltd. v. ACIT A.Y.: 2005-06. Dated: 9-10-2009

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Section 37(1) — Key personnel, on whose life keyman insurance policy is taken must include, not only the person responsible for the turnover of the business (Chief Cardiac Surgeon), but also the person responsible for managing the business and to make the same profitable (Chairman and Managing Director). Accordingly the premium paid on their policy is allowable.

Facts:
The assessee was a super-specialty hospital dealing with cardiac and cardio vascular diseases. It had taken insurance policies on life of its key personnel — Chief Surgeon, Chairman and Managing Director, the premium on which was claimed as deduction.

The Assessing Officer disallowed the deduction on grounds that the benefit of policy was assigned to key personnel and therefore was not incurred wholly for business purpose.

On appeal, the learned CIT(A) held that since the surgeon had the requisite skill and knowledge of the field, therefore he was responsible for the turnover of the company and accordingly only the premium paid on his policy is deductible and that on the policy of the Chairman and the Managing Director is not.

Held:
(1) The assessee’s activity cannot be said to be solely depending on the surgeon. Though, he may be responsible for the turnover of the company, he may not be responsible for the profits of the company, due to lack of competence necessary for a businessman.

(2) Further, since the business is carried on with the ultimate motive of earning profits, it cannot be said that profits could not be taken as guiding factor to analyse the business.

(3) It was also not argued that the salaries paid to these persons were not allowable.

(4) Further, on their resignation in the subsequent year, the profits of the assessee reduced substantially.

(5) All the above factors led to the conclusion that the Chairman and the Managing Director were key personnel and accordingly the premium paid on their policy is allowed.

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Press Release — Central Board of Direct Taxes — No. 402/92/2006 (MC) (17 of 2011) dated 26-7-2011.

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The Double Tax Avoidance Agreement is signed between India and Lithuania on 26th July, 2011.

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Anil G. Puranik v. ITO ITAT ‘A’ Bench, Mumbai Before R. S. Syal (AM) and R. S. Padvekar (JM) ITA No. 3051/Mum./2010 A.Y.: 2006-07. Decided on: 13-5-2011 Counsel for assessee/revenue: Soli Dastur/ Rajeev Agarwal

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Section 49(1), section 50C — Once a particular amount is considered as full value of consideration at the time of its purchase, the same shall automatically become the cost of acquisition at the time when such capital asset is subsequently transferred — Section 50C applies to a capital asset being ‘land or building or both’ and not to ‘any right in land or building or both’ — Leasehold rights in plot of land is not ‘land or building or both’ — Section 50C does not apply to leasehold rights.

Facts:
On 16-8-2004, the assessee was allotted leasehold rights in a plot of land for a period of 60 years under ‘12.50% Gaothan Expansion Scheme’. The allotment was in lieu of agricultural land owned by the assessee’s father which land was acquired by the Government of Maharashtra. The lease agreement, in favour of the assessee, was executed on 8-8-2005. On 25-8-2005, the assessee transferred its rights in the said plot for a consideration of Rs.2.50 crore. In the return of income, the assessee took the stand that since the plot which was transferred by the assessee was received in consideration for agricultural land which was not a capital asset, this plot is also not a capital asset and hence gain on its transfer is not chargeable u/s.45 of the Act. Alternatively, it was contended that the market value of the plot on the date of its allotment to the assessee be taken to be its cost of acquisition. The Assessing Officer (AO) held that though the original land was agricultural, the allotted land was not agricultural and therefore the land transferred was capital asset. He held that by virtue of section 49, the cost of acquisition of original land in the hands of the assessee’s father has to be regarded as the cost of acquisition of the land transferred by the assessee. Also, he invoked the provisions of section 50C and considered the market value of land as per stamp valuation authorities to be full value of consideration.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
(1) There were two distinct transactions — the first was the acquisition by the Government of land belonging to the assessee’s father, against which the assessee, as legal heir, was given lease of plot on 16-8-2004. This transaction got completed when the assessee got the leasehold rights viz. on 16-8-2004. The second transaction was transferring, on 25-8-2005, leasehold rights in the plot for a consideration of Rs.2.50 crores. The second asset i.e., leasehold rights in the plot cannot be categorised as agricultural land within the meaning of section 2(14)(iii) of the Act.

(2) The sole criteria for considering whether the asset transferred is capital asset u/s.2(14) or not is to consider the nature of asset so transferred in the previous year and not the origin or the source from which such asset came to be acquired. The second asset i.e., the leasehold rights in the plot cannot be categorised as agricultural land within the meaning of section 2(14)(iii) of the Act. Hence, gains arising on transfer of leasehold rights were chargeable to tax u/s.45 of the Act.

(3) Section 49(1) provides that where a capital asset becomes the property of the assessee by any of the modes specified in clauses (i) to (iv), such as gift or will, succession, inheritance or devolution, etc., the cost of acquisition of such capital asset in the hands of the assessee receiving such capital asset shall be deemed to be the cost for which it was acquired by the person transferring such capital asset in the prescribed modes. In order to apply the mandate of section 49(1), it is a sine qua non that the capital asset acquired by the assessee in any of the modes prescribed in clauses (i) to (iv) should become the subject matter of transfer and only in such a situation where such capital asset is subsequently transferred, the cost to the previous owner is deemed as the cost of acquisition of the asset. Once such capital asset is transferred and another capital asset is acquired, there is no applicability of section 49(1) to such converted asset. The lower authorities erred in applying the provisions of section 49(1) to transfer of leasehold rights.

(4) Since the market value of the leasehold rights, on the date of allotment, constituted full value of consideration for transfer of lands belonging to the assessee’s father, the cost of acquisition of leasehold rights will be its market value on the date of allotment. Once a particular amount is considered as full value of consideration at the time of its purchase, the same shall automatically become the cost of acquisition at the time when such capital asset is subsequently transferred.

(5) Section 50C is a deeming provision which extends only to land or building or both. Deeming provision can be applied only in respect of the situation specifically given and hence cannot go beyond the explicit mandate of the section. The distinction between a capital asset being ‘land or building or both’ and any right in land or building or both is well recognised under the Income-tax Act. The deeming fiction in section 50C applies only to a capital asset being land or building or both, it cannot be made applicable to lease rights in land. As the assessee had transferred lease rights for sixty years in the plot and not land itself, the provisions of section 50C cannot be invoked.

The appeal filed by the assessee was allowed.

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ITO v. Radha Birju Patel ITAT ‘D’ Bench, Mumbai Before N. V. Vasudevan (JM) and Pramod Kumar (AM) ITA No. 5382/Mum./2009 A.Y.: 2006-07. Decided: 30-11-2010 Counsel for revenue/assessee: Jitendra Yadav/Shalin S. Divatia

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Section 14 — Heads of income — Income out of investments in shares of listed companies through Portfolio Management Scheme —Whether the AO was justified in taxing income under the head business income — Held that the income was taxable as capital gains.

Facts:
The assessee had made investment in shares through the Portfolio Management Scheme. She had disclosed a short-term capital gain of Rs.11.61 lakh and short-term capital loss of Rs.0.5 lakh in respect of purchase and sales of shares of various companies. According to the AO based on CBDT Circular No. 4 of 2007, dated 15-6-2007, the case of the assessee falls in the case of trading in shares. A reference was also made to the Supreme Court decision in the case of G. Venkataswami Naidu & Co v. CIT, (35 ITR 594), wherein the had laid down a principle that where purchases had been made solely and exclusively with intention to resell at a profit and the purchaser had no intention of holding property for himself or otherwise enjoying or using it, presence of such an intention was a relevant factor and unless it was offset by presence of other factors, it would raise a strong presumption that the transaction was in the nature of trade. He also noted that dividend earned during the year amounted to Rs.0.94 lakh, which according to him indicated that the intention of the assessee was to hold shares only for such period as may enable her encashing the appreciation in its value. On appeal by the assessee, the CIT(A) held in favour of the assessee. Being aggrieved, the Revenue appealed before the Tribunal and relied on the order of the AO.

Held:
The Tribunal noted that the assessee was doing investment activities through the Portfolio Manager. Such activities were for maximisation of wealth rather than encashment of profits on appreciation in value of shares. It further noted that the very nature of the Portfolio Management Scheme was such that the investments made by the assessee were protected and enhanced. Therefore, according to it, in such a circumstance, it cannot be said that Portfolio Management was a scheme of trading in shares and stock. Accordingly, it upheld the order of the CIT(A).

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(2011) 52 DTR (Jab.) (TM) (Trib.) 346 DCIT v. Vishwanath Prasad Gupta A.Y.: 2004-05. Dated: 15-6-2010

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Merely on the basis of non-maintenance of stock register it cannot be inferred that the account books are false — Also mere low Gross Profit (GP) rate by itself cannot justify an addition. Gifts received by cheques which have been confirmed by the donors in affidavits and disclosed in their respective returns could not be treated as non-genuine gifts.

Facts:
The assessee derives income from sale of motor parts, tractor parts, tyres, etc. The assessee had shown GP at 10.84% which was less than previous year GP of 14.17%. To support the reduction in GP, the assessee submitted regular books of accounts which were audited. As no quantitative details of  purchases, sales, closing stock, etc. were maintained, the book results were rejected by the AO applying provisions of section 145. The AO thereafter added an estimated amount of Rs.50,000 to total income.

Held:
The assessee had maintained inventory of opening and closing stock and vouchers for purchases and sales which were also audited. Mere non-maintenance of stock register cannot mean that the books of accounts maintained are false. Also, low GP may justify an enquiry but cannot justify an addition to the profit shown. In the present case, the AO had not shown any mistake in books of accounts. Furthermore, rate of GP in a particular year depends on many factors and the same need not be constant from year to year. Therefore addition to income is not justified.

Facts:
The assessee received gift from two parties vide cheques. To prove the gifts are genuine, the assessee submitted affidavits of donors. However, the assessee’s claim was rejected as the AO was also not satisfied with the relationship between donor and donee. Further the AO observed that the assessee did not produce donors for verification and also did not prove financial capacity. The CIT(A), however, upheld the contention of the assessee.

On Revenue’s appeal, there was a difference of opinion between the members, and the matter was referred to the Third Member.

Held II:
The gifts received by the assessee were to be considered genuine as the gift was made through cheque and also disclosed in the books of accounts of the donees. Also the donees have admitted the gift given in their respective affidavits and hence there was no reason in disbelieving the genuineness of the gift.

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(2011) TIOL 266 ITAT Mum.-SB ITO v. United Marine Academy ITA No. 968/Mum./2007 A.Y.: 2003-2004. Dated: 25-4-2011

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Sections 48, 50, 50C, Circular 8 of 2002 — Provisions of section 50C can be invoked in case of depreciable assets where the provisions of section 50 are applicable.

Facts:
The assessee, a partnership firm, engaged in business of running a marine training institute, filed its return of income declaring the total income of Rs.1,86,466. During the previous year relevant to the assessment year under consideration the assessee sold a building, on which depreciation was claimed in earlier years, for a consideration of Rs.49,43,525. Since the amount of consideration was the same as its WDV, the assessee did not offer short-term capital gains on sale of the building. The value of this building as per stamp valuation authorities was Rs.76,49,000. The Assessing Officer (AO) was of the view that one of the office building i.e., office No. 101 having a WDV of Rs.13,14,425 was not sold by the assessee during the year under consideration. The Assessing Officer (AO) held that in view of the provisions of section 50 r.w.s 50C, the value of the building adopted by the stamp valuation authorities needs to be taken as full value of consideration. He, accordingly, made an addition of Rs.20,44,900, being the difference between value of the office sold (excluding office No. 101) as per stamp valuation authorities (Rs.56,74,000) and the WDV of the said office (Rs.36,29,100), to the total income of the assessee.

Aggrieved the assessee preferred an appeal to the CIT(A), where it contended that the provisions of section 50C cannot be invoked in the case of an assessee wherein section 50 is applicable. It contended that it is not permissible to impose a supposition on a supposition of law. The CIT(A) held that the deeming provisions of section 50C could not apply to depreciable assets. He also held that the block of assets had ceased to exist. He deleted the addition made by the AO.

Aggrieved the Revenue preferred an appeal to the Tribunal.

The President, ITAT constituted a Special Bench to consider the following question:

“On a proper interpretation of sections 48, 50 and 50C of the Income-tax Act, 1961, was the Assessing Officer right in law in applying section 50C to capital assets covered by section 50 (depreciable assets) and in computing the capital gains on the sale of depreciable assets by adopting the stamp duty valuation?”

Held:
(1) There are two deeming fictions created in section 50 and section 50C. The first deeming fiction modifies the term ‘cost of acquisition’ used in section 48 for the purpose of computing the capital gains arising from transfer of depreciable assets, whereas the deeming fiction created in section 50C modifies the term ‘full value of the consideration received or accruing as a result of transfer of the capital asset’ used in section 48 for the purpose of computing the capital gains arising from the transfer of capital asset being land or building or both.

(2) The deeming fiction created in section 50C operates in a specific field which is different from the field in which section 50 is applicable. It is not a case where a supposition has been sought to be imposed on other supposition of law. Going by the legislative intentions to create the said fictions, the same operate in different fields.

(3) The harmonious interpretation of the relevant provisions makes it clear that there is no exclusion of applicability of one fiction in a case where other fiction is applicable.

(4) The assessee’s alternate argument that as the AO had held that the block of asset had not ceased to exist in the year and was in existence, section 50C could not apply as held in Roger Pereira Communications 34 SOT 64 was not acceptable, since the assessee itself had considered the entire block of buildings as having been sold/transferred during the year and the same was upheld by the CIT(A). The assessee is not entitled to take a stand with regard to facts, inconsistent with the stand that he had taken before the Revenue Authorities to obtain a decision in his favour. He cannot be heard to say that the stand on facts so taken by him is not correct just to raise a new legal plea.

The question referred to the Special Bench was answered in the affirmative i.e., in favour of the Revenue and against the assessee. The appeal filed by the Revenue was allowed.

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(2011) TIOL 262 ITAT-Mum. Purvez A. Poonawalla v. ITO ITA No. 6476/Mum./2009 A.Y.: 2006-07. Dated: 9-3-2011

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Section 56(2)(v) — ‘Consideration’ referred to in the provisions of section 56(2)(v) has to be understood as per the definition of consideration as given in section 2(d) of The Indian Contract Act, 1872 — Amount received in consideration of the assessee abstaining from contesting the will is not covered by section 56(2)(v).

Facts:
One Mrs. Mani Cawas Bamji (the deceased) was a childless widow who died in Mumbai on 6-1-2001. She possessed considerable movable properties in the form of shares, debentures and fixed deposits and immovable property known as Avasia House in her sole name at Nepean Sea Road, Mumbai. During her lifetime, she had allegedly executed a will dated 2-5- 1997. The only legal heirs entitled to her property in the event of her intestacy were the assessee, being the son of a pre-deceased sister of the deceased, and Mr. Dinshaw Jamshedji Mistry, being brother of the deceased. Under her will dated 2-5-1997, the deceased had bequeathed all her properties to her brother Mr. Dinshaw Jamshedji Mistry (DJM), who was also appointed as one of the executors in the will. There were three executors to the will but the other two (other than Mr. Dinshaw Mistry) renounced their executorship. DJM filed a petition before the Bombay High Court for grant of probate of the last will of the deceased. The assessee, as a legal heir of the deceased, received a citation from the Bombay High Court in the petition for grant of probate in respect of the last will of the deceased. The assessee filed a caveat against the grant of probate in respect of the last will of the deceased. In the affidavit filed in support of the caveat the assessee set out reasons as to why the alleged will was not valid. On such objection, the petition for grant of probate was converted into a testamentary suit. The Bombay High Court restrained DJM from dealing with the properties of the deceased. On 28-9-2002, DJM died leaving behind his will dated 29-10-2001 appointing Mr. Rajesh K. Bhavsar (RKB) as the sole executor and legatee. RKB got himself impeded as plaintiff in place of DJM in the testamentary suit for grant of probate of the last will of the deceased.

RKB and the assessee entered into a compromise agreement dated 22-11-2002, whereby the assessee agreed to receive a sum of Rs.5,08,80,000 in consideration for agreeing to the Court granting probate in respect of the last will of the deceased. This sum of Rs.5,08,80,000 was later reduced by Rs.30,00,000 and the sum of Rs.4,78,80,000 was received by the assessee in the following manner:

F.Y. 2003-04 : Rs.1,04,77,032 by various cheques
F.Y. 2005-06 : Rs.3,73,95,335 by various cheques
F.Y. 2006-07 : Rs.7,633 by cash

RKB and the assessee had on 12-12-2002 signed consent terms which consent terms were identical to the agreement dated 22-11-2002. The Court recorded the consent terms and modified the earlier order restraining DJM from alienating any part of the estate of deceased and permitted RKB to alienate some of the properties to enable him to raise funds to discharge the obligation to pay the assessee. The assessee on receipt of the agreed sum was to withdraw his caveat to enable issue of letters of administration with the Will annexed in respect of the estate of the deceased.

The assessee did not offer these amounts for taxation in the A.Y. 2006-07. The AO taxed on substantive basis the sum of Rs.3,73,95,335 (in the year of receipt) and the sum of Rs.1,04,77,032 (received in previous year relevant to A.Y. 2004-05 on a protective basis).

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

Aggrieved the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted section 56(2)(v) has been introduced w.e.f. 1-9-2004. Thus, prior to 1-9-2004, receipts of any sum of money would not be income u/s.56(2)(v). A sum of Rs.1,04,77,032 was received between 3-4-2003 to 14-10-2003. Therefore, these receipts could not be taxed as income u/s.56(2)(v). As regards the sum of Rs.3,73,95,334, the Tribunal held that the sum in question was received by the assessee in consideration of giving up his rights to contest the will of late Mrs. Mani Cawas Bamji. The consideration referred to in the provisions of section 56(2)(v) of the Act have to be understood as per the definition of consideration as given in the Indian Contract Act, 1872 in section 2(d). The assessee has abstained from contesting the will and this constitutes the consideration for payment by RKB to the assessee. Thus, the amount received by the assessee is not without any consideration. Therefore the provisions of section 56(2)(v) were not applicable. The additions made by the AO were directed to be deleted.

The appeal filed by the assessee was allowed.

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(2011) TIOL 251 ITAT-Mum. Capgemini Business Services (India) Ltd. v. DCIT ITA No. 1164/Mum./2010 A.Y.: 2006-07. Dated: 26-11-2010

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Section 246A — The expression ‘amount of tax
determined’ in section 246A(1)(a) refers also to the determination of
the sum finally payable by the assessee and not merely to calculation of
incometax on the amount of total income by applying the rates of tax.

Facts:
The
assessee company, engaged in the business of providing IT-enabled
services and BPO services, e-filed its return of income declaring total
income of Rs.98,90,146 and claiming therein a refund of Rs.22,76,152.
The Assessing Officer in an order passed u/s.143(3) assessed the total
income to be Rs.98,90,146. While calculating the amount of tax payable
by the assessee/refund due to it, the AO in form ITNS 150A granted
credit for TDS and advance tax as claimed by the assessee, but did not
grant credit of Rs.8,38,764 claimed by the assessee u/s.90 and u/s.91 of
the Act.

Aggrieved, the assessee preferred an appeal to the
CIT(A) who held that the appeal was not maintainable since he was of the
view that section 246A did not permit such issues within its ambit.
Referring to the provisions of section 246A(1) (a), he held that the
reference to ‘tax’ is only for calculation of tax on total income and
not beyond that. He also made a reference to the definition of ‘tax’
u/s.2(43) and held that since the assessee was not challenging the
calculation of tax on total income, the grounds raised were several
steps beyond this calculation. He held that the issue of granting of
credit for advance tax or TDS could not be agitated in an appeal.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The
Tribunal noted that the AO had in form ITNS 150A not granted credit of
withholding tax of Rs.8,38,764 u/s.90/91 and also that he had left the
column 18 of ITNS-150A, which specifically provides for DIT relief
u/s.90/91, blank. Upon going through the provisions of section
246A(1)(a) of the Act, the Tribunal observed that the assessee’s case
can be considered only under the second part of section 246A(1)(a) viz.
‘to the amount of tax determined’ and not under the remaining parts as
non-granting of benefit in respect of withholding tax u/s.90 /91 can
neither be considered as ‘the income assessed’, nor ‘the loss computed’,
nor ‘the status under which he is assessed’. Having so observed the
Tribunal proceeded to examine whether non-granting of refund in respect
of withholding tax u/s.90/91 can be considered under the expression
‘amount of tax determined’ and held:

(1) From the ratio
decidendi of the decisions of SC, in the case of Auto and Metal
Engineers and Others v. Union of India and Others, 229 ITR 399 (SC) and
Kalyankumar Ray v. CIT, 191 ITR 634 (SC), it is discernible that the
‘determination of tax’ refers to finding out the amount finally payable
by the assessee for which notice of demand is issued.

(2) The
expression ‘amount of tax determined’ in section 246A(1)(a) also refers
to the determination fo the sum finally payable by the assessee. Not
only the calculation of tax on the total income but also the adjustment
of taxes paid by or on behalf of the assessee is also covered within the
determination of sum payable by the assessee u/s.156 of the Act.

(3)
The expression ‘amount of tax determined’ as employed in section
246A(1)(a) encompasses not only the determination of the amount of tax
on the total income but also any other thing which has the effect of
reducing or enhancing the total amount payable by the assessee. As the
question of not allowing relief in respect of withholding tax u/s.90/91,
has the direct effect of reducing the refund or enhancing the amount of
tax payable, such an issue is squarely covered within the ambit of
section 246A(1)(a).

(4) Accepting the view-point of the CIT(A)
that the appeal is not maintainable in respect of non-allowing of relief
for tax withheld u/s.90/ 91 would amount to violating the language of
section 246A, which has otherwise given the right to the assessee to
appeal broadly against on any aspect of the ‘amount of tax determined’.

(5)
The CIT(A) was not justified in dismissing the appeal of the assessee
as not maintainable on the aspect of not allowing of credit by the AO of
tax withheld on behalf of the assessee u/s.90 and 91. The AO was
directed to modify ITNS 150A and grant the consequential refund due,
which has not been allowed.

The appeal filed by the assessee was allowed.

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(2011) 137 TTJ 741 (Del.) ACIT v. Bulls & Bears Portfolios Ltd. ITA No. 2727 (Del.) of 2008 A.Y.: 2005-06. Dated: 28-1-2011

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Sections 28(i) and 45 of the Income-tax Act, 1961 — If the assessee has maintained the investment portfolio separately and income from which was offered as capital gains and was also assessed as capital gains in successive assessments, then the income will be assessed as capital gains and not as business income.

For the assessment years 2005-06 and 2006-07, the Assessing Officer treated income from sale of shares as business income as against income from capital gains. The CIT(A) held in favour of the assessee.

The Tribunal also held in favour of the assessee. The Tribunal noted as under:

(1) The assessee is a broker as well as an investor. It has maintained the investment portfolio separately, income from which was liable to be taxed as capital gains, since the intention in respect of this was to hold the investment as investment only and was shown as such in the books of account and income therefrom was shown and treated as capital gains in the successive assessments.

(2) The schedule of investments was duly appended in the balance sheet.

(3) The assessee has also maintained separate D-mat accounts for investment and for trading. Therefore, the assessee has distinctly maintained investment account and trading account.

(4) The assessee was holding certain stock for the purpose of doing business of buying and selling and at the same time it was holding other shares as its capital for the purpose of dividend income.

Therefore, the CIT(A) has rightly held that the income is to be treated as capital gains and not as business income.

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(2011) 137 TTJ 573 (Mumbai) ACIT v. Safe Enterprises Misc. Application No. 413 (Mum.) of 2010 in ITA No. 2278 (Mum.) of 2009 A.Y.: 2005-06. Dated: 4-11-2010

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Section 254(2) of the Income-tax Act, 1961 — Where the Tribunal specifically observed that it was in agreement with the reasons given by CIT(A), mere non-production of the reasons and the conclusions of the CIT(A) in the body of the order of the Tribunal does not give rise either to a mistake of law or fact, nor can it be considered as an irregular order for being rectified u/s.254(2).

For the relevant assessment year, certain additions were made by the Assessing Officer against which the assessee filed an appeal. The CIT(A) considered the issue in great detail and passed an elaborate order in favour of the assessee. Aggrieved by this, the Department preferred an appeal before the Tribunal. The Tribunal passed a short order since it was in agreement with the CIT(A)’s order.

The Department filed a miscellaneous application on the ground that the Tribunal was not justified in passing a short order without elaborating on the issues and, thus, it gives rise to a ‘mistake apparent from record’ since it has to be presumed that the Tribunal has not applied its mind on the contentions and issues raised by the Department. In this regard, the applicant has taken a support from para 11 of the guidelines issued by the then President of the Tribunal.

Rejecting the miscellaneous application, the Tribunal observed as under:

(1) Internal guidelines issued by the then President were only to prod the Members to give detailed reasons, as far as practicable, implying thereby that whenever an order of the lower forum is based on two reasons out of which an Appellate Authority agrees only with one reason which would ultimately have an effect of upholding the order of the lower authority, it is the duty of the Tribunal to give detailed reasons to satisfy as to the basis for coming to such conclusion. In a given case, where the appellant raises some additional issues and relies upon some additional case laws which were not considered by the lower authority, even though they are not applicable to the facts of the instant case, the Tribunal may have to give its reasons rejecting such arguments while upholding the order of the CIT (A).

(2) However, when the facts and circumstances are not disputed before the Tribunal and no additional arguments were advanced by the learned Departmental Representative and, in addition to that, when the Tribunal is fully agreeing with the reasons given by the learned CIT(A), as rightly observed by the Apex Court in the case of K. Y. Pilliah & Sons (1967) 63 ITR 411 (SC), it may not be necessary to repeat the reasons given by the first Appellate Authority and an order passed by the Tribunal under such circumstances cannot be said to be illegal.

(3) In para 3 of the order of the Tribunal this Bench has specifically observed that it was in agreement with the reasons given by the CIT (A). Thus, mere non-production of the reasons and the conclusions of the CIT(A) in the body of the order of the Tribunal do not give rise either to a mistake of law or fact, nor can it be considered as an irregular order.

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[2013] 154 ITD 455 (Pune – Trib.) Bharat Forge Ltd. vs. Addl. CIT A.Y. 2007-08 & 2008-09 Date of Order : 31st January, 2013

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Section 194J – A.Y.2007-08 & 2008-09 – Provisions of section 194J do not apply to sitting fees paid to directors. However, provisions of section 194J(1) (ba) w.e.f. 1st July, 2012 will apply to sitting fees paid to Directors.

Facts
The assesse had paid sitting fees to its resident directors on which no tax was deducted. The assessee had deducted tax from salary and commission paid to non-executive directors and contended that provisions of section 194J are not applicable to sitting fees paid to directors. The AO held that 194J would be applicable on such payments since director is also manager under the provisions of the Companies Act, 1956 and therefore, a technical personnel and thus sitting fees paid to him shall be liable to TDS.

Held
As per Explanation to section 194J, professional services mean services rendered by a person in the course of carrying legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession notified by the Board. Therefore, sitting fees paid to directors do not amount to fees paid for any professional services mentioned in explanation to section 194J. Further, section 194J(1)(ba), effective from 1st July, 2012 states that TDS should be deducted on any remuneration or fees or commission by whatever name called, other than those on which tax is deductible u/s. 192, paid to a director of a company. However, these provisions shall not apply to A.Y. 2007-08 & 2008-09. Thus, no tax is required to be deducted u/s. 194J out of such directors sitting fees for AY 2007-08 & 2008-09.

Tax on payments made by assessee towards testing and inspection charges will be covered u/s. 194C and will not be considered as professional services as per section 194J.

Facts
The assessee had incurred testing and inspection charges on which TDS was done u/s. 194C. The charges were paid for getting the jobs done like testing, inspection of materials, etc., and were in the nature of material and labour contract. However, according to AO, the assessee should have deducted TDS u/s. 194J since the services rendered by the said parties are in the nature of technical/professional service. The CIT(A) upheld the action of AO.

Held
It was held that the nature of expenditure made by the assessee cannot be considered as payment for technical consultancy. The Pune Bench of the Tribunal in the case of Glaxosmithkline Pharmaceuticals Ltd. vs. ITO [2011] 48 SOT 643/15 taxmann.com 163 has held that any payment for technical services in order to be covered u/s. 194J should be a consideration for acquiring or using technical know-how simpliciter provided or made available by human element. There should be direct and live link between the payment and receipt/use of technical services/information. If the conditions of 194J r.w.s. 9(1), Explanation 2 Clause (vii) are not fulfilled, the liability under this section is ruled out. Therefore, it was held that payment by the assessee towards testing and inspection charges cannot be considered as payments towards professional services as per provisions of section 194J and the assessee has rightly deducted tax u/s. 194C.

Payments made for the use of cranes (cranes provided along with driver/operator) is covered under 194C and not under 194-I.

Facts
The assessee had made payments for hire of cranes for loading and unloading of material at its factory. The cranes were provided by the parties along with driver/operator and all expenses were borne by the owners only. The assessee had deducted the tax under 194C. The assessee contended that the hire charges are paid in terms of a service contract and do not amount to rent contract. The AO argued that definition of rent u/s. 194I means ‘any payment, by whatever name called, under any lease, sublease, tenancy or any other agreement or arrangement for the use of (either separately or together) any machinery, plant, equipment, fittings whether or not any or all of the above are owned by the payee’. Thus, AO held that the assessee should have deducted tax u/s. 194I and not 194C. The same was upheld by the CIT(A).

Held
Section 194C of the Act makes provision for deduction of tax at source in respect of payments made to contractors whereas section 194I makes provision for deduction of tax at source in respect of income by way of rent.

The Tribunal, relying on the decisions of the Hon’ble Gujarat High Court in cases of CIT (TDS) vs. Swayam Shipping Services (P.) Ltd. [2011] 339 ITR 647/199 Taxman 249 and CIT vs. Shree Mahalaxmi Transport Co. [2011] 339 ITR 484/211 Taxman 232/ (Guj.), held that provisions of section 194C should be applicable and not section 194I.

Payment towards windmill operation and maintenance, being comprehensive contract, will attract TDS u/s. 194C of the Act and not u/s. 194J.

Facts
The assessee company had made payments towards maintenance of windmill, replacement of parts, implementing safety norms, conduct of training programmes, prevention of damage, etc. at windmill site. The contract was a comprehensive contract for material and labour services required. The AO held that the operation and maintenance of windmill requires technical skills and knowledge and is covered u/s. 194J. The CIT(A) held that the assessee had correctly deducted tax u/s.194C.

Held
The Tribunal upheld the order of CIT(A). Mere fact that technical skill and knowledge was required for rendering services, did not render the amount paid by the assessee company for a comprehensive contract as ‘fees for technical services’. The said payment was of the nature of payment for a comprehensive contract on which the appellant company had rightly deducted tax u/s. 194C and not section 194J. This view is also supported by the decision of Tribunal, Ahmedabad in Gujarat State Electricity Corpn. Ltd. vs. ITO [2004] 3 SOT 468 (Ahd.) wherein it was held that a composite contract for operation and maintenance would come within the ambit of 194C and not 194J.

Payments towards annual maintenance contract (AMC) for software maintenance attracts TDS u/s. 194C and not 194J.

Facts
The assessee had made TDS u/s. 194C on payments for annual maintenance contracts. The AO held that these payments were towards technical, managerial and professional services and hence TDS u/s. 194J will be applicable. The CIT(A) decided the issue in favour of the assessee.

Held
As per the CBDT Circular No. 715, dated 8th August, 1995 routine/normal maintenance contract including supply of spares covered u/s. 194C. Following the decision of Ahemdabad Tribunal in case of Nuclear Corpn. of India Ltd. vs. ITO [IT Appeal No. 3081 (Ahd.) of 2009, dated 30-09-2011] and CBDT circular, the Tribunal held that payments made for AMC cannot be considered as fees for technical services within the meaning of section 194J.

Also refer decision of the Hon’ble Madras High Court in case of Skycell Communications Ltd. vs. Dy. CIT [2001] 251 ITR 53/119 Taxman 496 (Mad.)

Training and seminar expenses do not fall under definition of professional services and hence tax to be deducted u/s. 194C and not 194J.

Facts
The assessee had made payments towards training programmes and seminars organised by various entities including CII towards attending training and seminars by its employees. The assessee had deducted tax at source u/s. 194J. The AO held that the payments made on this account are covered u/s. 194J as the employees were getting training from experts in various fields having professional knowledge to give training and lectures to the employees for the benefit of the company. The CIT(A) held that training and seminar expenses do not    fall    under    the    definition    of    professional    services and accordingly decided the issue in favour of of the assessee.

Held
It was held that the payments made to various organisations towards attending seminars by the
employees of the assessee company cannot be considered as towards rendering of professional services by those training institutes as per the provisions of section 194J. Thus the order of CIT(A) was upheld.

Transfer pricing: International transaction: Arm’s length price: A. Ys. 2004-05 and 2005-06: Marketing services to associated enterprise: Different from services in nature of engineering services rendered by four companies taken as comparables by TPO: Functionally different and not comparable: Addition made by AO on basis of adjustment made by TPO not justified:

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CIT vs. Verizon India Pvt. Ltd.; 360 ITR 342 (Delhi):

The assessee company had entered into a service agreement with its associated enterprise in Singapore for rendering marketing services. The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) for determining the arm’s length price. TPO compared the services provided by the assessee to its associated enterprise with four companies rendering engineering services for determining the arm’s length price and made adjustments which resulted in the Assessing Officer making additions in respect of both the years. CIT(A) and the Tribunal held that the two services, that is, marketing services and engineering services, were functionally different and were, hence, not comparable and deleted the addition.

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

“(i) The services rendered by the assessee to its associated enterprise were in the nature of marketing services which were entirely different from the set of services in the nature of engineering services rendered by the four comparables.

ii) Consequently, the adjustment arrived at by the TPO and the additions made by the Assessing Officer could not be sustained on the basis of the transfer pricing study with regard to the four companies which were clearly functionally not comparable.

iii) So, no question of law arises for our consideration. The appeals are dismissed.”

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Speculative transaction: Loss: Set off: Section 73: A. Y. 1991-92: Loss on account of purchase and sale of shares from solitary transaction: Transaction not constituting business carried on by assessee: Loss can be set off against profits from other sources:

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CIT vs. Orient Instrument P. Ltd.; 360 ITR 182 (Del):

The assessee company was engaged in the business of trading in crafts paper, installation, job work, consultancy and commission. In the relevant year it incurred loss of Rs. 5,53,500/- on account of a transaction whereby it purchased and sold shares. The assessee claimed set off of the said loss against other income. The Assessing Officer disallowed the claim for set off of the loss holding that the loss is speculation loss. 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 transaction whereby the assessee purchased the shares and incurred loss on account of fall in the value of the shares was a solitary one.

ii) The finding of the Tribunal that the transaction did not constitute the business carried on by the assessee, could not be termed perverse and unreasonable. The appeal is accordingly dismissed.”

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Speculative transaction: Speculative loss: Section 43(5)(c): Share trading business on own behalf is “jobbing”; Jobbing is not speculative in view of proviso(c) to section 43(5): Loss from jobbing business is not speculative loss:

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CIT vs. Ram Kishan Gupta; [2014] 41 taxmann.com 363 (All):

The assessee is a Member of the U.P. Stock Exchange Association Ltd., and is registered as Stock Broker and carries on the purchase and sale of shares and securities. On scrutiny of the trading profit and loss account filed along with the return of income of Rs. 81,050/-, the Assessing Officer found that a sum of Rs. 8,53,030/- is debited for which the claim of the assessee was that it incurred loss in respect of transactions done by him on the floor of stock exchange with other brokers. The Assessing Officer rated the same as speculation loss as the loss of Rs. 8,53,030/- was on account of transactions for which there was no physical delivery. The assessee submitted before the Assessing Officer that the delivery had been effected on net basis as per the Stock exchange guidelines and no forward trading was allowed therefore there was no question of any speculation loss. The assessee’s plea was also that otherwise the assessee’s transaction was covered u/s. 43(5)(c) of the Income-tax Act , therefore, the transaction carried out by the assessee were specifically exempted to be treated as speculative transactions. However, the Assessing Officer disallowed the loss of Rs. 8,53,030/- treating the same to be speculative loss. The Tribunal allowed the assessee’s appeal and held that the allegation that transactions were settled without actual delivery was not fully established by the Revenue. It was held that if the system provides settlement at net basis in respect of jobbing and the appellant-assessee had been found paying turnover fee on such transactions ever since 1991-92 the assessee’s entire business was of non-speculative nature. The Tribunal also relied on the judgment of the Allahabad High Court in CIT vs. Shri Sharwan Kumar Agrawal; 249 ITR 233 (All) wherein it was held that the assessee who was a share broker was entitled for the exception covered by proviso (c) to section 43(5).

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

“i) We have already observed that purchase or sale of shares periodical or ultimately settled otherwise than by the actual delivery is a speculative transaction as provided u/s. 43(5). The assessee’s categorical case is that losses were suffered on account of non-delivery transactions. Whether the assessee is still entitled to protection under proviso (c) to subsection (5) of section 43, which transactions are non delivery transactions and what is the scope of the proviso in context of speculative transaction have to be examined.

ii) The Tribunal having returned finding that the details of each and every transaction were disclosed by the assessee which were part of the paper book. No discrepancy in any of the transactions can be pointed out by the Assessing Officer nor the bonafide of the transactions were doubted, the transaction thus carried out were part of the ‘jobbing’ within the meaning of proviso (c) to section 43(5).

iii) We are thus of the view that the order of the Tribunal allowing the appeal of the assessee is to be upheld although confined to the ground that the losses suffered by the assessee cannot be termed to be speculative loss by virtue of proviso (c) to section 43(5).”

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Refund: Section 237: A. Y. 2004-05: Belated revised return filed on 08-09-2011 claiming refund on basis of CBDT Circular dated 08- 05-2009: Condonation of delay: Delay to be condoned:

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Assessee entitled to refund: Devdas Rama Mangalore vs. CIT; [2014] 41 taxmann.com 508 (Bom)

The
petitioner, who was an employee of RBI had opted for the Optional Early
Retirement Scheme and had received an amount as per the Scheme in the
year 2004. The RBI had deducted TDS of Rs. 1,64,117/- treating the said
payment as taxable. In the return of income for the A. Y. 2004-05 filed
on 15th October 2004 the petitioner did not claim any refund of tax as
TDS paid by RBI on his behalf nor was the credit on tax utilised to
discharge tax payable on any other income.

On 08-05-2009, CBDT
issued a Circular clarifying that the employees of RBI who had opted for
early retirement scheme during the year 2004-05 would be entitled for
benefit of exemption u/s. 10(10C) of the Income-tax Act, 1961. The
Supreme Court also in Chandra Ranganathan and Ors. vs. CIT; (2010) 326
ITR 49 (SC) held that the amounts received by retiring employees of RBI
opting for the scheme are eligible for exemption u/s. 10(10C) of the
Act. In view of the above, the petitioner filed a revised return of
income on 08-11-2011 claiming benefit of exemption available to the
Scheme u/s. 10(10C) of the Act which consequently would result in refund
of Rs.1.64 lakh paid by RBI as TDS. However, there was no response to
the above revised return of income from the respondent-revenue. The
petitioner in the meantime, also, filed an application with the CIT u/s.
119(2) (b) of the Act seeking condonation of delay in filing his
application for refund in the form of revised return of income for A. Y.
2004-05. The CIT by an order dated 04-02-2013 dismissed the application
u/s. 119(2)(b) of the Act on the ground that in view of Instruction No.
13 of 2006 dated 22nd December, 2006 by the CBDT an application
claiming refund cannot be entertained if the same is filed beyond the
period of 6 years from the end of the assessment year for which the
application is made. In the affidavit in reply dated 19th November 2013
the Commissioner of Income Tax states that he is bound by the above
instructions issued by the CBDT and consequently the claim for refund
cannot be considered.

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

“i)
It is not disputed by the respondent revenue that on merits the
petitioner is entitled to the benefit of refund of TDS as the payment
received under the scheme is exempted u/s. 10(10C) of the Act. The
decision of the Apex Court in the matter of Chandra Ranganathan and Ors.
(supra) concludes the issue. This is also the view of the revenue as
clarified in CBDT Circular dated 8th May, 2009. The application u/s.
119(2)(b) of the Act is being denied by adopting a very hypertechnical
view that the application for condonation of delay was made beyond 6
years from the date of the end of the A. Y. 2004-05. In this case, the
revised return of income filed on 8th September, 2011 should itself be
considered as application for condonation of delay u/s. 119(2)(b) of the
Act and refund granted.

ii) It is to be noted that the
respondent revenue does not dispute the claim of the petitioner for
refund on merits but the same is being denied only on hypertechnical
view of limitation. It will be noted that on 8th May, 2009 the CBDT
issued a circular clarifying and reviewing its earlier decision to
declare that the employees of RBI who opted for early retirement scheme
under the Scheme will be entitled to the benefit of section 10(10C) of
the Act. Soon after the issue of circular dated 8th May, 2009 by the
CBDT and the decision of the Apex Court in Chandra Ranganathan (supra)
the petitioner filed a revised return of income on 8th September, 2011
seeking refund of TDS paid on his behalf by RBI.

iii) In the above view, we allow the petition and direct respondent-revenue to grant refund due to the petitioner.”

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