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Category: Direct Taxes

Principle of mutuality: Club: A.Y. 2003-04: Principle of mutuality applies to interest on fixed deposits, dividend, income from Government securities and profit on sale of investments.

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[CIT v. Delhi Gymkhana Club Ltd., 339 ITR 525 (Del.)]

The assessee-club was granted exemption from paying income-tax on the income from its members on the basis of the principle of mutuality. On the same basis the assessee also claimed exemption in respect of income from fixed deposits, dividend, income from Government securities and profit on sale of investment. The Assessing Officer did not allow the claim. The Tribunal allowed the assessee’s claim and held that the principle of mutuality would apply even on these incomes.

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

“We are of the opinion that the aforesaid finding of the Tribunal is correct on facts and in law, which does not call for any interference.”

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Educational institution: Section 10(23C)(vi): A.Y. 2010-11: Petitioner-society was engaged in teaching all forms of music and dance with no profit motive: Run like a school or educational institution in a systematic manner: Not recognised by any university or Board: Is eligible for exemption u/s.10 (23C)(vi).

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[Delhi Music Society v. DGIT, 17 Taxman.com 49 (Delhi)]
The petitioner-society was established in 1953 with the aim and object of teaching music and dancing in all its forms. It was allotted government land and was claiming tax exemption u/s.10(22) of the Income-tax Act, 1961. During the financial year 2008- 09, gross receipts of the petitioner exceeded Rs.1 crore and thus, it had to comply with the condition prescribed in section 10(23C)(vi), as to procurement of approval from the prescribed authority, to continue enjoying the tax exemption. Accordingly, the petitioners moved an application before the prescribed authority, i.e., DG (Exemption) for approval. The prescribed authority rejected the claim for exemption on ground that it did not satisfy criteria of being an ‘educational institution’. As per prescribed authority the petitioner was not awarding any degree or certificate and was merely imparting coaching/training in India as per norms of foreign colleges; that it was not an institution recognised by the UGC or by any board constituted by government for imparting formal education in the field of western music. The prescribed authority observed that the petitioner could not be distinguished from any coaching or training institute preparing the students for appearing in any examination for obtaining a formal degree by a formally recognised institution. The prescribed authority, therefore, held that the petitioner was not entitled to be characterised as an ‘educational institution’ within the meaning of section 10(23C)(vi).

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

“(i) The Supreme Court in the case of Sole Trustee, Loka Sikshana Trust v. CIT, (1975) 101 ITR 234 interpreted the word ‘education’ in section 2(15) and held that the word has been used to denote systematic instruction, schooling or training given to the young in preparation for the work of life and it also connotes the whole course of scholastic instruction which a person has received. It has further been observed that the word also connotes the process of training and development of knowledge, skill, mind and character of students by normal schooling.

(ii) It is seen that the petitioner is being run like any school or educational institution in a systematic manner with regular classes, vacations, attendance requirements, enforcement of discipline and so on. These provisions in the rules and regulations satisfy the condition laid down in the judgment of the Supreme Court in Sole Trustee, Loka Sikshana Trust (supra). It cannot be doubted that having regard to the manner in which the petitioner runs the music school, that there is imparting of systematic instruction, schooling or training given to the students so that they attain proficiency in the field of their choice — vocal or instrumental in western classical music.

(iii) The Calcutta High Court in CIT v. Doon Foundation, (1985) 154 ITR 208/22 Taxman 9 has observed that section 10(22) does not impose a condition that an educational institution to be eligible for exemption thereunder should be affiliated to any university or any board. As per the High Court, so long as the income is derived from an education institution existing solely for educational purposes and not for purposes of profit, such income is entitled to exemption u/s.10(22). This judgment takes care of the objection of the prescribed authority that the petitioner is not affiliated to, or recognised by any university or board in India and that it merely awards certificates or grades which are issued by the Trinity College and Royal School of Music, London. Since section 10(23C)(vi) also uses the same language as section 10(22), the same principle should govern the interpretation of that provision also.

(iv) The Supreme Court in S. Azeez Basha v. Union of India, AIR 1968 SC 662 has considered the nature of an educational institution. It was held by the Supreme Court that there is a good deal in common between educational institutions which are not universities and those which are universities in the sense that both teach students and both have teachers for the purpose. It was further observed by the Supreme Court that what distinguishes a university from any other educational institution is that a university grants degrees of its own, whereas other educational institutions cannot. These observations of the Supreme Court support the stand of the petitioner that the fact that it does not conduct its own examination or awards degrees of its own is not decisive of the question whether it is an educational institution or not. It also lends support to the petitioner’s stand before the prescribed authority that it is not a mere coaching centre preparing students for competitive examinations.

(v) For the above reasons, it is held that the petitioner meets the requirements of an educational institution within the meaning of section 10(23)(c)(vi).

(vi) Accordingly, the impugned order passed by the prescribed authority is quashed. The prescribed authority will now deal with the asses-see’s application for approval afresh in accordance with law. The writ petition is accordingly allowed.”

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Deduction u/s.10A/10B: FTZ: A.Y. 2007-08: Assessee received pure gold from a nonresident, converted same into jewellery and exported it to said non-resident: Activity amounted to ‘manufacture or production’ which qualified for deduction u/s.10A/10B.

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[CIT v. Lovlesh Jain, 204 Taxman 134 (Del.); 16 Taxman. com 366 (Del.)]

The assessee had received pure gold supplied by ‘R’ Jewellery, Dubai, and the same after conversion into jewellery was ‘exported’ by the assessee to ‘R’ Jewellery, Dubai. In the meantime ‘R’, Jewellery Dubai continued to remain the legal owner of the gold and had not sold the gold to the assessee. The assessee was paid conversion charges or production/ manufacturing charges for converting the gold into jewellery. The Assessing Officer held that the assessee was not manufacturing ornaments/ jewellery and was not an exporter as he was paid making charges for the job work/services for making ornaments as per specification of third parties. Accordingly, the AO held that the assessee was not entitled to deduction u/s.10A. The Commissioner (Appeals) and the Tribunal allowed the assessee’s claim for deduction.

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

“(i) Section 10A/10B is applicable when an undertaking manufactures, or is engaged in production of articles or things. The term ‘production’ has a larger magnitude and is more expansive and liberal than the term ‘manufacture’.

(ii) In the present case, manufacture as well as production of goods, articles or things is covered u/s.10A/10B. The activity for converting gold bricks, biscuit or bars, into jewellery amounts to ‘production or manufacture’ of a new article and, therefore, qualifies for deduction u/s.10A/10B.

(iii) Case of the Revenue is that the assessee had not exported jewellery as the assessee was not owner of the imported gold or the exported jewellery and was paid making charges. Thus, the income earned does not qualify for deduction u/s.10A/10B.

(iv) The expressions/terms, ‘importer’ and ‘exporter’ are wide and not restricted to the owner of the goods at a particular point of time. Owner is treated as the importer/ exporter but a person who holds himself out as an importer or exporter is also an importer or exporter. The activity undertaken i.e., export/import is important and the person involved and associated with the said activity is important/relevant, mere ownership is not the sole criteria to determine whether a person is an importer or exporter. Further the expression ‘exported’ or ‘imported’ goods has reference to the nature of the goods as in the case of expressions ‘import’ or ‘export’ and not a person/owner.

(v) In the present case, the standard gold was imported into India and then converted into jewellery or ornaments and was sent out of India i.e., jewellery and ornaments were exported. When the import was made, the assessee was shown as a consignee and an importer and when the export was made the assessee was shown as a consignor i.e., the exporter. The assessee complied with the various formalities, when the standard gold was imported and then again when the jewellery/ornaments were exported. The assessee was in actual physical possession of the gold when it remained in India and would have been liable in case of loss, etc. The concept of and the term ‘ownership’, has various jurisprudential connotations. For all practical purposes, the assessee was in possession of gold and had a right, dominance and dominion over it. They were liable to pay Customs duty, etc. in case export was not made. Keeping in view the nature of transactions in question, it is not possible to hold that the assessee did not ‘export’ the jewellery/ornaments and that the transactions in question cannot be regarded as export for the purpose of section 10A/10B. Thus, when the assessee had exported the ornaments, it was exporting articles or things. The assessee were exporters or had exported articles/things as understood in common parlance.

(vi) Section 10A does not apply to export income earned by an assessee from merely trading the goods and postulates that the assessee must be an undertaking, which manufactures or produces articles or things, which are exported.

(vii) This condition in the present case is satisfied. Accordingly, the contention raised by the Revenue fails and has to be rejected. Appeals are accordingly dismissed.”

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CIT(A): Power to issue directions against third party: Sections 153C and 251(1)(c) of Income-tax Act, 1961: In the matter of lis between the assessee and the Revenue before it, it is not open to the CIT(A) to proceed to determine the rights or liabilities of a third party, who is not before it.

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[CIT v. Krishi Utpadan Mandi Samiti, 245 CTR 591 (All.)]

The assessee, a charitable institution transferred development cess to Mandi Parishad and claimed deduction of the said amount. The Assessing Officer disallowed the claim for deduction. The CIT(A) allowed the assessee’s claim and held that the payment treated as expenditure or application by the assessee shall be treated as business receipt by Mandi Parishad and directed the Assessing Officer to make a reference to the Assessing Officer of Mandi Parishad to take remedial measures, if necessary, in the relevant assessment years to tax the relevant receipts in the hands of the Mandi Parishad. The Tribunal held as under:

“The learned CIT(A) while referring to the cases of Mandi Parishads had not afforded any opportunity to the said assessees and it is also noticed that the learned CIT(A) made these observations in spite of the fact that no such material relating to Mandi Parishads was available to him. In our opinion, these observations of the learned CIT(A) are unnecessary, because the facts of the case which is pending for adjudication are only to be considered. However, in the instant case, neither the material relating to other issues was available to the learned CIT(A) nor opportunity of being heard was given to the said assessee whose cases have been referred by the learned CIT(A). We, therefore, modify the order of the learned CIT(A) to this extent that the impugned observations made by him are unwarranted in the case of present assessees.”

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

“(i) It is not open to another quasi-judicial authority of limited jurisdiction, in the matter of lis between the assessee and Revenue before it to proceed to determine the rights or liabilities of the third party, who is not before it, in the assessment of the assessee.

(ii) The CIT(A) had no jurisdiction to direct the Assessing Officer to make a reference to the Assessing Officer of Mandi Parishad, to whom the assessee used to pay cess and claim it as deduction, to take a remedial action and, if necessary, to tax the receipts in the hands of Mandi Parishad.”

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Capital gain: Exemption: Sections 54 and 139(1), (4): A.Y. 2006-07: Condition precedent: Profit to be used for purchase of residential property or deposited in specified account before due date for furnishing return: Due date can be u/s.139(4).

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[CIT v. Ms. Jagriti Aggarwal, 339 ITR 610 (P&H); 245 CTR 629 (P&H)]

The assessee had sold a house property on 13-1-2006 and had purchased another house property on 2-1- 2007. The Assessing Officer disallowed the assessee’s claim for deduction u/s.54 of the Income-tax Act, 1961 holding that the assessee failed to deposit the amount in the capital gains account scheme and also failed to purchase house property before the due date for filing the return of income. The Commissioner (Appeals) allowed the assessee’s claim and held that the assessee had complied with the provisions of section 54 as she had purchased the new residential property on 2-1-2007 i.e., before the due date u/s.139(4) of the Act. The Tribunal affirmed the order of the Commissioner (Appeals).

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

“(i) The sale of the asset had taken place on 13- 1-2006, falling in the previous year 2006-07, the return could be filed before the end of the relevant A.Y. 2007-08 i.e., 31-3-2007. Thus, s.s(4) of section 139 provides the extended period of limitation as an exception to s.s(1) of section 139 of the Act.

(ii) S.s (4) was in relation to the time allowed to an assessee u/ss.(1) to file the return. Therefore, such provision is not an independent provision, but relates to the time contemplated u/ss.(1) of section 139. Therefore, s.s(4) had to be read along with s.s(1).

(iii) Therefore, due date for furnishing return of income according to section 139(1) of the Act was subject to the extended period provided u/ss.(4) of section 139 of the Act.”

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Business expenditure: Capital or revenue: A.Y. 2003-04: Assessee stopped manufacturing and continued trading: Severance cost paid to employees is revenue expenditure.

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[CIT v. KJS India P. Ltd., 340 ITR 380 (Del.)]

The assessee-company was manufacturing soft drinks. In the A.Y. 2003-04, the assessee-company stopped manufacturing soft drinks as it was found to be non-profitable. Many employees who were directly in the manufacturing activity were laid off and severance cost of these employees of Rs. 93,91,706 was paid. The assessee’s claim for deduction of this amount was disallowed by the Assessing Officer holding that it is capital in nature. The Tribunal found that apart from manufacturing soft drinks, the assessee was also trading in soft drinks. The Tribunal held that suspension of one of the activities did not amount to closure of business and allowed the assessee’s claim.

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

“Since the assessee had been doing other business activity also, namely, ‘trading’, it could not be said that the assessee had closed its business with the suspension of manufacturing soft drinks. The expenditure was deductible.”

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Reassessment — Assessee allowed to raise all contentions on merits in the reassessment proceedings

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The assessment for the A.Y. 2000-01 was re-opened after the expiry of four years from the end of the relevant assessment year for the reason that though in the tax audit report an amount of Rs.107.70 lakh had been shown u/s.41 of the Act, only Rs.9.23 lakh on account of provision for warranties no longer required was written back under the head ‘Other sources of Income’ leaving a balance of Rs.98.46 lakh resulting in escapement of income. The other reason for reopening was that though dividend income of Rs.188.73 lakh was earned which was exempt u/s.10(33), no disallowance was made of the expenses related to purchase/sale of the investment.

In fact the balance amount of Rs.98.46 lakh was added back under different heads, but was not separately indicated and in its objection the assessee did not take this specific plea. It only stated that Rs.1,07,69,936 was added back/credited to the profit and loss account and one item of Rs.9,23,471 was reflected on the credit side of the profit and loss account. As regards, disallowance of expenses incurred for earning tax-free income it was contended that section 14A was introduced in the statute by the Finance Act, 2001, with retrospective effect from April 1, 1962 and the return was filed on 30-11-2000 and therefore it was not obligatory to make a disallowance and there was no failure on the part of the assessee in disclosing fully and truly the material facts in respect of the expenditure incurred for earning the tax-free income. The assessee also relied upon the proviso to section 14A which prohibited reopening of assessment for any assessment year beginning on or before 1-4-2001.

On a writ challenging the notice issued u/s.148 for want of jurisdiction, the Delhi High Court noted that in reply to the notice issued u/s.154 of the Act the assessee had given the full break-up and specific details with regard to credit/adjustment of Rs.98.46 lakh into profit and loss account and hence it found some merit in the contention of the assessee. However, it did not dwell further on this aspect since the notice was sustainable on the ground of section 14A. According to the High Court the proviso to section 14A only barred the reassessment/rectification and not the original assessment on the basis of retrospective amendment. Since the Assessing Officer had failed to apply section 14A when he passed the original assessment order, it had prima facie resulted in escapement of income. According to the High Court there was an omission and failure on the part of the assessee to point out the expenses incurred relatable to tax-free/exempt income which prima facie have been claimed as a deduction in the income and expenditure account and hence there was omission and failure on the part of the petition to disclose fully and truly the material facts.

On an appeal, the Supreme Court held that in its view the reopening of the assessment was fully justified on the facts and circumstances of the case. However, on merits of the case, it would be open to the assessee to raise all contention with regard to the amount of Rs.98.46 lakh being offered for tax as well as its contention on section 14A of the Act.

[Honda Siel Power Products Ltd. v. Dy. CIT and Others, (2012) 340 ITR 53 (SC)]

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Eligibility of Contractual workers for inclusion in Number of Workers

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Issue for consideration

Section 80I(2)(iv) (effective up to 31-3-1991) of the One finds that similar language and expression has been used under the Act of 1922 and has been continued to be used by the Legislature even under the provisions of the 1961 Act while stipulating one of the conditions for the ‘tax holiday’. For ready reference, the language and expressions as used in different provisions over the period are tabulated below:

Comparison of incentive provisions where employment of workers is mandated.


Section

Language
and Expression used

 

 

15C(2)(iii) of the

Employs ten or more workers in manufacturing process carried on with
the aid

1922 Act

of power, or employs twenty or more workers in a manufacturing
process carried on

 

without the aid of power.

 

 

84(2)(iv)
of the

It
employs ten or more workers in a manufacturing process carried on with the

1961 Act

aid of power, or employs twenty or more workers in a manufacturing
process carried

 

on without the aid of power.

 

 

80J(4)(iv)
of the

In
a case where the industrial undertaking manufactures or produces articles,
the

1961 Act

undertaking employs ten or more workers in a manufacturing process
carried on with

 

the of power, or employs twenty or more workers in manufacturing
process carried

 

on without the aid of power.

 

 

80HH(2)(iv)
of the

It
employs ten or more workers in a manufacturing process carried on with the

1961 Act

aid of power, or employs twenty or more workers in a manufacturing
process carried

 

on without the aid of power.

 

 

80I(2)(iv)/

In
a case where the industrial undertaking manufactures or produces articles,
the

80IB(2)(iv) of the

undertaking employs ten or more workers in a manufacturing process
carried on

1961 Act

with the of power, or employs twenty or more workers in manufacturing
process

 

carried on without the aid of power.

 

 

10BA(2)(e) of the

It employs twenty or more workers during the previous year in the
process of

1961 Act

manufacture or production.

 

 

Income-tax Act, 1961, analogous to present section 80IB(2)(iv) of the Act, requires employment of certain number of workers by the new industrial undertaking as one of the conditions for the undertaking to qualify for the ‘tax holiday’. The industrial undertaking should employ ten or more workers in a manufacturing process where the manufacture or production of articles or things takes place with the aid of power or employ twenty or more workers in a manufacturing process if manufacture or production is undertaken without the aid of power.

It appears that one of the aims and objects of the Legislature under the scheme of ‘tax holidays’ over the period is to generate employment in the country.

The language and expression as used in the aforesaid sections have been subject of the judicial interpretation by Courts on different counts viz., the determination of period for which the aforesaid condition needs to be satisfied in a financial year, interpretation of the expression ‘employs’, meaning of the word ‘workers’, etc.

The controversy, sought to be discussed here, revolves around the issue whether the contractual workers or the workers supplied by a contractor for manufacture or production of articles or things could be treated as ‘workers’ employed by the assessee undertaking for the purpose of deduction u/s.80IB/u/s.80I of the Act.

The Bombay High Court recently had an occasion to deal with the aforesaid issue under consideration, wherein the High Court held that it was immaterial as to whether the workers were directly employed or employed by hiring them from a contractor. What was relevant was the employment of ten or more workers and not the mode and the manner in which the said workers were employed. In deciding the issue, the Bombay High Court dissented with the findings that were given on the subject by the Allahabad High Court.

Jyoti Plastic’s case The issue came up recently before the Bombay High Court in the case of CIT v. M/s. Jyoti Plastic Works Private Limited, [339ITR 491 (Bom)]

Jyoti Plastic Works Private Limited (‘Jyoti Plastic’) was engaged in the manufacture of plastic parts which were excisable and had claimed deduction u/s.80IB of the Act. In the reassessment proceedings, the AO disallowed the deduction u/s.80IB of the Act for the following two reasons:

(1) Jyoti Plastic was not a manufacturer, as the goods were manufactured at the factory premises of the job worker; and

(2) The total number of permanent employees employed in the factory were less than ten and thereby the condition as required u/s.80IB (2)(iv) was not satisfied.

The first Appellate Authority and the Mumbai Tribunal allowed the claim of Jyoti Plastic and the Revenue, being aggrieved, carried the issue to the Bombay High Court. As regard the first issue, the Court held in favour of Jyoti Plastic. With respect to the second issue, the Court, in the absence of the meaning of the word ‘worker’ under the Act, referred to the following external aids of construction to determine the meaning of the word ‘worker’:

(1) Black Law Dictionary — ‘worker’ means a person employed to do work for another;

(2)    Section 2(L) of the Factories Act, 1948 — ‘worker’ is a person employed directly or by or through any agency (including a contractor) with or without the knowledge of the principal employer, whether for remuneration or not, in any manufacturing process, or in any other kind or work incidental to or connected with the manufacturing process.

The Court further relied on its earlier judgment in the case of CIT v. Sawyer’s Asia Limited (122 ITR 259) (Bom.), wherein the Court while considering the provisions of section 84(2)(iv) of the Act had observed that the word ‘workers’ should also include ‘casual workers’.

The Revenue relied on the following decisions of the Allahabad High Court to submit otherwise :

(1)    R and P Exports v. CIT, (279 ITR 536); and

(2)    Venus Auto Private Limited v. CIT, 321 ITR 504.

The Bombay High Court distinguished the decision of the Allahabad High Court in the R and P Exports’ case on the ground that the Tribunal in the case before the Bombay High Court had recorded a specific finding of fact that the agreement between Jyoti Plastic and the contractor was a ‘contract of service’ and not ‘contract for service’, whereby the contractual workers were under direct control and supervision of Jyoti Plastic as against the facts which were to the contrary in the case of R and P Exports (supra).

With regard to the decision of Venus Auto Private Limited (supra), the Court acknowledged that the facts in the said case were similar to the facts of the case before the Court; it dissented with the ratio of the decision in the said case and chose to rely on its own decision in the case of Sawyer’s Asia Limited (supra).

The Court finally concluded that since the agreement with the contractor was a ‘contract of service’ i.e., of employer-employee relationship and just because it differed with terms of contract of service with regular employees, that could not be a ground to deny the deduction u/s.80IB of the Act. In other words, so long as the agreement between the parties was a ‘contract of service’ and not ‘contract for service’, it would satisfy the condition prescribed u/s.80IB(2)(iv) of the Act.

Venus Auto’s case

The issue had come up earlier before the Allahabad High Court in the case of Venus Auto Private Limited v. CIT, (321 ITR 504).

Venus Auto Private Limited (‘Venus Auto’) was engaged in the manu-facturing activity of the scooter seat and claimed deduction u/s.80HH and u/s.80I of the Act. In the assessment and appellate proceedings up to the Tribunal stage, Venus Auto’s claim for deduction was rejected on the ground that the condition u/s.80I(2) (iv) of workers employed was not satisfied as the workers employed through the contractor were not to be treated as the workers employed in the industrial undertaking.

On appeal by Venus Auto before the High Court, the Allahabad High Court observed that the word ‘employment’ meant employment of workers by Venus Auto. There should be a relationship of employer and employee between the workers and Venus Auto. The Court observed that with regard to the contractual employees, there was no such employer-employee relationship between Venus Auto and the contractual employees; such relationship existed between the contractor and the contractual employees. The Court on facts and in law distinguished the reliance of Venus Auto on the following decisions:

(1)    Aditya V. Birla v. CBDT, (170 ITR 137) (SC);
(2)    CIT v. K. G. Yediyurappa, (152 ITR 152) (Kar.);
and
(3)    CIT v. V. B. Narania & Co., (252 ITR 884) (Guj.)

Further, the Court observed that vide word ‘it employs’, the Legislature sought to limit the relationship between employer and employee only i.e., between Venus Auto and the workers and therefore, it would not include the workers employed by the contractor.

Observations

‘Tax holidays’ have been provided from time to time vide various sections, viz., section 15C of the Act of 1922 section 84, section 80J, section 80HH, section 80I, section 80IA and section 80IB of the Act of 1961. The intention of the Legislature has been all along to encourage the setting up of new industrial undertakings with a view to expanding industries, employment opportunities and production of goods. The Courts have acknowledged the intention of the Legislature in introducing the said deduction/exemption/relief provisions of the Act and have held that such provisions should be interpreted liberally and reasonably and they should be so construed as to effectuate the object of the Legislature and not to defeat it.

The purpose of ‘tax holiday’ provisions has been apparently to provide tax incentives to stimulate the industry and manufacture of articles, resulting in more employment and economic gain for the country. The element of ‘number of workers to be employed’ being consistently present in all the ‘tax holiday’ provisions justifies the intention of the Legislature to promote and create employment opportunities in the country, thereby reducing unemployment.

In the case of CIT v. P. R. Alagappan, (173 ITR 522) (Mad.), the Court for the purpose of section 80J (4) of the Act explained that a ‘worker’ was a person who worked relying on the definition of ‘worker’ in the Factories Act.

The Court approved of the reference to the definition of ‘worker’ under the Factories Act and also observed that the expression ‘employs’ contemplated ‘contract of service’.

The Karnataka High Court in the case of CIT v. K. G. Yediruppa & Co., (152 ITR 152) in context of section 80HH(2)(iv) of the Act has held that in absence of definition of the word ‘worker’, the ordinary meaning of the word ‘worker’ meant casual, permanent or temporary workers.

Similarly, in the case of CIT v. Sawyer’s Asia Ltd. (supra), the Bombay High Court for the purpose of deduction u/s.84(2)(iv), observed as under:

“………The undertaking is not required to have ten or more regular workers and it may be said to have satisfied that requirement if the aggregate actual number of workers engaged in the manufacturing process, both regular and normal, is ten in number……….If it chooses to have less than 10 regular workers on its muster roll, it runs the risk of not satisfying the requirement on such days on which the necessary number of casual workers is not available.”

The Court also considered even persons employed on casual basis as eligible to be ‘workers’ for the purpose of satisfaction of condition u/s.84(2)(iv) of the Act.

Similarly, in the case of CIT v. V. B. Narania & Co., (252 ITR 884), the Gujarat High Court, in context of provisions of section 80HH(2)(iv) and section 80J(2) (iv), held by relying on the decision of Apex Court in the case of Harish Chandra Bajpai v. Triloki Singh, (AIR 1957 SC 444), that a contract of employment may be in respect of either piece work or time work. It held that the real test of deciding whether the contract was one of employment or not was to find whether the agreement was for the personal labour of the person engaged, and if that was so, the contract was one of employment and the rest of the facts were immaterial like, whether the work was time work or piece work, or whether the employee did the whole of the work himself, or whether he obtained the assistance of other persons also for the work.

In interpretation of the analogous provisions to sec-tion 80IB(2)(iv)/section 80I(2)(iv) the Courts have interpreted the word ‘worker’ to also include ‘casual and temporary workers’ and the expression ‘employ’ has been interpreted to mean a contract of service, where the requirement of personal labour of the person employed is of importance as against whether the employee is in normal employment of the undertaking or otherwise. The stress is upon the substance of the arrangement rather than its legal form.

Looking from the perspective of intention of the Legislature in creating employment and supported by the above-referred decisions, the better view appears to be that the casual and contractual workers employed directly or through the contractor are to be treated as the ‘workers’ for the purposes of the ‘tax holiday’. The decision in the case of Venus Auto (supra) may require reconsideration.

Legitimacy of Reference to OECD Commentary for Interpretation of Income Tax Act and DTAs

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Recently, in the case of Gracemac Corporation and Others v. ADIT, (47 DTR 65) (Del.) (Tri.), the appellant had relied on the Commentary of OECD Model Tax Convention (‘the OECD Commentary’) in order to differentiate between ‘copyright’ and ‘copyrighted article’ for interpretation of the term ‘royalty’ in respect of computer software. The Tribunal rejected the reliance on the OECD Commentary after referring to the decision of the Apex Court in the case of CIT v. P.V.A.L. Kulandagan Chettiar, (137 Taxman 460) for the following reasons:

  • The phrase ‘copyrighted article’ is not used under the Income-tax Act, 1961 (‘the Act’) or in the Double Taxation Avoidance Agreements (‘DTAA’) or even under the Copyright Act, 1957; and

  • As held by the Apex Court in the aforesaid decision, OECD Commentary is not a safe or acceptable guide or aid for interpretation of provisions of the Act or DTAAs between India and other countries.

The Tribunal concluded that royalty in respect of computer software has to be decided on the basis of provisions of the Act or relevant DTAA under consideration.

On the other hand, the Delhi High Court recently in the case of Asia Satellite Telecommunications Co. Ltd. v. DIT and vice versa, (332 ITR 340) upheld the reliance on OECD Commentary while interpreting the definition of ‘royalty’ in respect of leasing out transponder capacity on a satellite. The Court held that the technical terms used in DTAA are the same which appear in section 9(1)(vi) and for better understanding of the terms, OECD Commentary can always be relied upon. The Court relied on the decision of the Apex Court in the case of UOI and Anr v. Azadi Bachao Andolan & Anr., (263 ITR 706) and other catena of decisions1 to emphasise that the international accepted meaning and interpretation placed on identical or similar terms employed in various DTAAs should be followed by the Courts in India when it comes to construing similar terms occurring in the Act.

On a combined reading of the findings of the aforesaid decisions, one may reconcile that for better understanding of the terms used in the Act or DTAAs, one may refer to the OECD Commentary provided and subject to:

  • The technical terms as sought for interpretation are ambiguous; and

  • Technical terms as used in the Act or DTAAs are identical or similar to terms employed in OECD Commentary.

The true significance however, lies in the practical implementation of the aforesaid principle while interpreting the provisions of the Act and DTAAs, which may be subject to criticisms or limitations similar to reliance on English decisions and other international decisions and/or statutes. In addition, India not as a ‘Member’ of OECD but as ‘Observer’ has expressed its position/views on the Articles of OECD Model Convention and its commentary thereon, which has been published in the OECD Model Tax Convention on Income and on Capital 2010 (version dated 22 July 2010). The position is presented qua the Articles under the Tax Convention as regard to its disagreement with the Text of the Article or disagreement with an interpretation given in the commentary in relation to the Article. It would be further necessary to highlight that while nations like Indonesia and China, (non-OECD economies like India) have expressly clarified that in the course of negotiations with other countries, they will not be bound by their stated positions in the OECD Commentary; India has not expressly clarified as such. Therefore, one may suggest that India may be bound by its stated positions in respect of the OECD Commentary in its course of negotiation and interpretations of DTAAs with other countries.

In the backdrop of the aforesaid discussion, it may then be necessary to consider the legitimacy in relying on OECD Commentary for interpretation of provisions of the Act and DTAAs entered into by India with other countries.

Reliance on OECD Commentary in interpreting provisions of the Act

Reference to English and other International decisions for interpretation and construction of the provisions of the Act have been subject of concern and criticism, time and again by the Courts2 since the provisions of the Act are not in pari materia with the provisions of the other statues, as well as the fundamental concepts and the principles on which the provisions are incorporated under the Act are different vis-à-vis the other statues. The provisions of the Act though may at times appear to be similar to the provisions of OECD Tax Convention, on deeper scrutiny may reveal differences not only in the wording but also in the meaning of a particular expression which has been acquired in the context of the development of law in those countries. Reliance on OECD Commentary in interpreting the provisions of the Act may therefore be subject to similar criticisms and concerns.

OECD is a 31 Member country organisation where the respective governments work together to address the economic, social and environmental challenges of globalisation. The OECD Model Tax Convention on Income and on Capital was designed and developed by the member countries as a means to settle on a uniform basis the most common problems that arise in the field of International juridical double taxation. India while negotiating its tax treaties maintains a balance and follows either OECD Model or UN Model on Tax Convention or a mix of the two. So, the provisions and terms as used in the Act may not confirm to the same language, interpretation and meanings as used in the DTAAs by India with other countries. Observations have been made by various Courts in catena of decisions3 with respect to various provisions of the Act as being wider/narrower in scope to the analogous provisions of DTAAs.

One may therefore say that the provisions of the Act should be construed on their own terms without drawing any analogy of the OECD Commentary, subject to principles as drawn above.

Reliance on OECD Commentary in interpreting provisions of DTAAs

Though, India is not a signatory to Vienna Convention on the Law of Treaties (‘VCLT’), but the judicial forums4 in India have acknowledged its importance in interpreting the provisions of DTAAs and have observed as under:

“The DTAAs are international agreements entered into between States. The conclusion and interpretation of such convention is governed by public international law, and particularly, by the Vienna Convention on the Law of Treaties of 23 May 1969. The rules of interpretation contained in the Vienna Convention, being customary international law also apply to the interpretation of tax treaties. . . . .”

The principles governing the interpretation of tax treaties can be broadly summed up as follows:

(i) A tax treaty is an agreement and not a taxing statute, even though it is an agreement about how taxes are to be imposed.

(ii) The principles adopted in the interpretation of statutory legislation are not applicable in interpretation of treaties.

(iii) A tax treaty is to be interpreted in good faith in accordance with the ordinary meaning given to the treaty in the context and in the light of its objects and purpose.

(iv) A tax treaty is required to be interpreted as a whole, which essentially implies that the provisions of the treaty are required to be construed in harmony with each other.

(v) The words employed in the tax treaties not being those of a regular Parliamentary draughtsman, the words need not examined in precise grammatical sense or in literal sense. Even departure from plain meaning of the language is permissible whenever context so requires, to avoid the absurdities and to interpret the treaty ut res magis valeat quam pereat i.e., in such a manner as to make it workable rather than redundant.

(vi)    A literal or legalistic meaning must be avoided when the basic object of the treaty might be defeated or frustrated insofar as particular items under consideration are concerned.

(vii)    Words are to be understood with reference to the subject-matter, i.e., verba accopoenda sunt secundum subjectum materiam.

(viii)    When a tax treaty does not define a term employed in it, and if the context of the treaty so requires, the terms can be given a meaning different from its meaning in the domestic law. The meaning of the undefined terms in a tax treaty should be determined by reference to all of the relevant information and the context.

The rules of interpretation in VCLT can be found in Article 31 to 33 of the Convention. Article 32 of the Convention provides recourse to supplementary means of interpretation, which in turn should confirm to the broad principles of Article 31 as summarised above. According to Article 32 of VCLT, the ‘supplementary means of interpretation’ include the preparatory work of the treaty and the circumstances of its conclusion. The word ‘include’ indicates that the rule is not exhaustive and there may be other supplementary means of interpretation. One such means is provided by the commentaries appended to the OECD Model Tax Convention. To the extent, the provisions of DTAAs are similar to OECD Model Convention, the OECD commentaries may become relevant to interpretation of DTAAs.

The Kolkata Tribunal in the case of Graphite India Ltd. v. DCIT, (86 ITD 384) while deciding whether the services rendered by an American Consultant to an Indian Company are covered under the Article 15, being in the nature of professional services or under Article 12, being in the nature of Fees for Technical services, observed as under as regard to interpretation of OECD and UN Model Commentaries:

“17. The aforesaid interpretation is clearly in harmony with the OECD and UN Model Conventions’ official commentaries, ………….. Andhra Pradesh High Court has, in the case CIT v. Visakhapatnam Port Trust, (1984) 38 CTR (AP) 1: (1983) 144 ITR 146 (AP), referred to OECD commentaries on the technical expressions and the clauses in the model conventions, and referred to, with approval, Lord Radcliffe’s observations in Ostime v. Australian Mutual Provident Society, (1960) AC 459, 480: (1960) 39 ITR 210, 219 (HL), which have described the language employed in these documents as the ‘international tax language’. In view of the observations of Andhra Pradesh High Court, in Visakhapatnam Port Trust’s case (supra), these model conventions and commentaries thereon constitute international tax language and the meanings assigned by such literature to various technical terms should be given due weightage. In our considered view, the views expressed by these bodies, which have made immense contribution towards development of standardisation of tax treaties between various countries, constitute ‘contemporanea expositio’ inasmuch as the meanings indicated by various expressions in tax treaties can be inferred as the meanings normally understood in, to use the words employed by Lord Radcliffe, ‘international tax language’ developed by bodies like OECD and UN.”

As discussed earlier, India by giving its stance on the text of the Article of OECD Model Tax Convention and commentaries thereon has helped in confirming an interpretation, in resolving ambiguities and obscurities and in displacing interpretation which appears absurd or unreasonable from India’s point of view. India’s position qua the text of the Articles and commentaries thereon as stated in the OECD Model Tax Convention — July 2010 version under the chapter ‘Non -OECD Economies’ positions on the OECD Model Tax Convention’ is tabulated below:

Relevant
Article

 

OECD
— India’s position

 

 

Text
of the Article

 

Commentary
of the Article

 

 

 

 

 

Article 1 – Persons
covered

No disagreement5

 

Disagreement6

Article 2 – Taxes
Covered

No disagreement

 

No disagreement

Article 3 – General
Definitions

Reservations7

 

No disagreement

Article 4 – Resident

Reservations

 

Disagreement

Article 5 – Permanent
Establishment

Reservations

 

Disagreement

Article 6 – Income
from Immovable Property

Reservations

 

No disagreement

Article 7 – Business
Profits (position after 22-7-2010)

Reservation and

 

Disagreement

 

 

disagreement

 

 

 

 

 

 

 

Article 7 – Business
Profits (position before 22-7-2010)

Reservations

 

Disagreement

Article 8 – Shipping,
Inland Waterways Transport and

 

 

 

Air Transport

Reservations

 

Reservations

Article 9 –
Associated Enterprises

No disagreement

 

No disagreement

Article 10 –
Dividends

Reservations

 

Disagreement

Article 11 – Interest

Reservations

 

Disagreement and
Reservations

Article 12 – Royalties

Reservations

 

Disagreement and Reservations

Article 13 – Capital
Gains

Reservations

 

No disagreement

Article 14 –
Independent Personal Services

Article and
commentary thereon has been deleted by OECD

Article 15 – Income
from Employment

Reservations

 

Disagreement

Article 16 – Director’s
Fees

No disagreement

 

No disagreement

Article 17 – Artists
and Sportsmen

Reservations

 

No disagreement

Article 18 – Pensions

No disagreement

 

No disagreement

Article 19 –
Government Service

No disagreement

 

Disagreement

Article 20 – Students

Reservations

 

No disagreement

Article 21 – Other
Income

Reservations

 

No disagreement

Article 22 – Taxation
of Capital

Reservations

 

No disagreement

Article 23A –
Exemption Method

Reservations

 

No disagreement

Article 23B – Credit
Method

 

 

 

 

Article 24 – Non
Discrimination

Reservations

 

Reservations

Article 25 – Mutual
Agreement Procedure

No disagreement

 

Disagreement

Article 26 – Exchange
of Information

Reservations

 

No disagreement

Article 27 –
Assistance in the Collection of Taxes

 

 

 

Article 28 – Members
of Diplomatic Missions and

There are no disagreements which India has
raised as regard to Text

Consular Posts

Article 29 – Territorial Extension

of the Article and
Commentary thereon.

Article 30 – Entry
into Force

 

 

 

Article 31 –
Termination

 

 

 

However, a question that arises is whether the position by India with respect to provisions of OECD Model Tax Convention is binding on taxpayers, tax authorities and more so, on the judicial forums of India.

To begin with, it is necessary to find the statutory force or lack of it, under which India has provided its position to the OECD Model Tax Convention, since its nature will determine the legitimacy of reference to OECD Commentary for interpreting the provisions of DTAAs.

After considering the OECD Commentary — ‘Non-OECD Economies’ Positions on the OECD Model Tax Convention’ Chapter, one understands that these are official statements made by Government of India as regard its interpretation of the Tax Convention. The clarifications or comments provided to OECD are not issued as a rule u/s.295, Circular or order u/s.119 of the provisions of the Income-tax Act, 1961. A pos-sible conclusion which can then be drawn is that even though such clarification may not be binding on taxpayers, they shall have high persuasive value considering contemporary official statements made by the Government of India on the subject of interpretation.

One also needs to consider whether these official statements can be considered as an aid for construction of the DTAAs entered into by India and which are based on OECD Model Tax Convention.

The aforesaid explanations received from the Indian Government could be considered as an aid for construction, which is in accordance with the Latin Maxim Contemporanea expositio. The Indian Courts8 have time and again held that Contemporaneous Exposition by the administrators entrusted with the task of executing the statute is extremely significant in interpretation of the statutory instruments. The rule of contemporanea expositio provides that “administrative construction (i.e., contemporaneous construction placed by administrative or executive officers) generally should be clearly wrong before it is over-turned; such a construction commonly referred to as practical construction, although non-controlling, is nevertheless entitled to considerable weight, it is highly persuasive.” [Crawford on Statutory Construction, 1940 Ed, as in K. P. Varghese (supra)]. However, generally, such expositions from the administrators are subject to the following limitations:

  •     The plain and unambiguous language of the statutory instruments shall hold

good against such expositions; and

  •     Such expositions even though binding on the Income-tax Department, are not binding on the Tribunal and Courts.

Therefore, based on the aforesaid discussion and doctrine of Contemporanea exposition, one may hold that provisions of DTAAs could be construed based on the explanation as received from the Indian Government on the OECD Model Tax Convention, provided the said exposition adheres to the broad principles of Article 31 of the VCLT, even though the applicability of VCLT to India may be a question in itself.

So, besides, decisions delivered by the various Indian judicial forums interpreting the provisions of DTAAs, one can now rely on India’s position on the Articles of the OECD Model Tax Convention and commentary thereon.

Lastly, the relevant extracts of the decision of the Apex Court in the case of UOI v. Azadi Bachao Andolan and Anr. (supra) as regard to interpretation of DTAAs are reproduced below:

“………… Interpretation of Treaties

96.    The principles adopted in interpretation of treaties are not the same as those in interpretation of statutory legislation. While commenting on the interpretation of a treaty imported into a municipal law, Francis Bennion observes:

“With indirect enactment, instead of the substantive legislation taking the well-known form of an Act of Parliament, it has the form of a treaty. In other words the form and language found suitable for embodying an international Agreement become, at the stroke of a pen, also the form and language of a municipal legislative instrument. It is rather like saying that by Act of Parliament, a woman shall be a man. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with disorganised composition instead of precision drafting. The drafting of treaties is notoriously sloppy, usually for very good reason. To get Agreement, politic uncertainty is called for.

…… This echoes the optimistic dictum of Lord Widgery CJ that the words “are to be given their general meaning, general to lawyer and layman alike… the meaning of the diplomat rather than the lawyer.” [Francis Bennion, Statutory Interpretation, p. 461 (Butterworths) 1992 (2nd Ed.)]

An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief, p. 4 (London Sweet & Maxwell, 1985), points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions”

On a more practical front, one finds that since the publication of India’s position on OECD Model Tax Convention, the Courts have not acknowledged much, the said publication as an aid for construction in interpreting the provisions of DTAAs. The taxpayers could however look forward to taking re-course to the India’s position on OECD Commentary as an aid for construction, for the favourable interpretations with respect to provisions of DTAA.

Appeal to Supreme Court – Special Leave Petition – Delay by the Government bodies – Unless there is a reasonable and acceptable explanation for the delay and there is bona fide effort, the usual explanation regarding procedural delay should not be accepted.

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[Office of the Chief Post Master General and Others v. Living Media India Ltd. and Anr. (2012) 348 ITR 7 (SC)]

Living Media India Ltd., a company incorporated under the Companies Act, 1956, publishes the magazines Reader’s Digest and India Today. These magazines are registered newspapers, vide Registration Nos. DL 11077/03-05 and DL 11021/01-05 respectively issued by the Department of Posts, Office of the Chief Post-Master General, Delhi Circle, New Delhi (in short “the Postal Department”) under the provisions of the Indian Post Office Act, 1898 (in short “the Act”), read with the Indian Post Office Rules, 1933 (in short “the Rules”), and the Post Office Guide and are entitled for transmission by post under concessional rate of postage.

On 14th October, 2005, the manager (circulation), Living Media India Ltd., submitted an application to the Postal Department seeking permission to post December, 2005, issue of Reader’s Digest magazine containing the advertisement of Toyota Motor Corporation in the form of booklet with calendar for the year 2006 at concessional rates in New Delhi. By letter dated 8th November, 2005, the Postal Department denied the grant of permission for mailing the said issue at concessional rates on the ground that the booklet containing advertisement with calendar is neither a supplement nor a part and parcel of the publication. On 17th November, 2005, the Director (Publishing), Living Media India once again submitted an application seeking the same permission which was also denied by the Postal Department by letter dated 21st November, 2005.

In the same way, the Postal Department also refused to grant concessional rate of postage to post the issue dated 26th December, 2005, of India Today magazine containing a booklet of Amway India Enterprises titled “Amway”, vide their letter dated 18th February, 2006, and 17th March, 2006, stating that the said magazine was also not entitled to avail of the benefit of concessional rate available to registered newspapers.

Living Media India Ltd., being aggrieved by the decision of the Postal Department filed a Writ Petitions before the High Court. The learned single judge of the High Court, by order dated 28th March, 2007, allowed both the petitions filed by Living Media India Ltd.

Being aggrieved, the Postal Department filed LPA’s before the High Court. The Division Bench of the High Court, vide common final judgment and order dated 11th September, 2009, while upholding the judgment of the learned single judge, dismissed both the appeals.

Challenging the said order, the Postal Department preferred appeals by way of special leave before the Supreme Court. There was a delay of 427 days in filing the above appeals.

The learned senior counsel for Living Media India Ltd., seriously objected to the conduct of the appellants in approaching the Supreme Court after the enormous and inordinate delay of 427 days in filing the above appeals.

The Supreme Court, after noting the various judgments cited by both the parties and the affidavits filed by the Postal Department dismissed the applications, holding that the Postal Department had itself mentioned and was aware of the date of the judgment of the Division Bench of the High Court as 11th September, 2009. Even according to the department, their counsel had applied for the certified copy of the said judgment only on 8th January, 2010, and the same was received by the department on the very same day. There was no explanation for not applying for certified copy of the impugned judgment on 11th September, 2009, or at least within a reasonable time. The fact remained that the certified copy was applied only on 8th January, 2010, i.e., after a period of nearly four months. In spite of affording another opportunity to file better affidavit by placing adequate material, neither the Department nor the person in-charge had filed any explanation for not applying the certified copy within the prescribed period. The other dates mentioned in the affidavit clearly showed that there was delay at every stage and there was no explanation to why such delay had occurred. The Supreme Court observed that, though it was stated by the Department that the delay was due to unavoidable circumstances and genuine difficulties, the fact remained that from day one, the Department or the person/persons concerned had not evinced diligence in prosecuting the matter to the court by taking appropriate steps. The person(s) concerned were well aware or conversant with the issues involved including the prescribed period of limitation for taking up the matter by way of filing a special leave petition in the court. The Postal Department cannot claim that they have separate period of limitation when the Department was possessed with competent persons familiar with court proceedings. According to the Supreme Court in the absence of plausible and acceptable explanation, the delay could not to be condoned mechanically merely because the Government or a wing of the Government was a party before it. The Supreme Court held that though it was conscious of the fact that in a matter of condonation of delay when there was no negligence or deliberate inaction or lack of bona fide, a liberal concession had to be adopted to advance substantial justice, but in the facts and circumstances, the Department could not be allowed to take advantage of various earlier decisions. The claim on account of impersonal machinery and inherited bureaucratic methodology of making several notes could not be accepted in view of the modern technologies being used and available. According to the Supreme Court, the law of limitation undoubtedly binds everybody including the Government.

In the opinion of the Supreme Court, unless all the Government bodies, their agent and instrumentalities have reasonable and acceptable explanation for the delay and there was bona fide effort, there is no need to accept the usual explanation that the file was kept pending for several months/ years due to considerable degree of procedural red-tape in the process. The Government departments are under a special obligation to ensure that they perform their duties with diligence and commitment. Condonation of delay is an exception and should not be used as an anticipated benefit for Government departments. The law shelters everyone under the same light and should not be swirled for the benefit of a few.

According to the Supreme Court, there was no proper explanation offered by the Department for the delay except mentioning of various dates; the Department had miserably failed to give any acceptable and cogent reasons sufficient to condone such a huge delay. The Supreme Court dismissed the appeals on the ground of delay.

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Business Expenditure – Where payment is for acquisition of know-how to be used in the business of the assessee, deduction is to be allowed u/s. 35AB and section 37 has no application.

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[Drilcos (India) Pvt. Ltd. v. CIT (2012) 348 ITR 382 (SC)]

The assessee, a manufacturer of mining equipments, entered into an agreement with an American company on 7th June, 1990. The agreement with the American company was called “licence and technical assistance agreement” under which the American company was required to transfer technical know-how to the assessee for consideration of $ 25,000 to be paid in three instalments. The first instalment in convertible Indian currency amounting to Rs.17,49,889 was paid on 29th November, 1990. Subsequently, disputes arose between the contracting parties and the know-how was not transferred by the American company.

The short question which arose for determination before the Supreme Court was, whether the amount of Rs.17,49,889 could be claimed by the assessee as a deduction u/s. 37 of the Income-tax Act, 1961.

The claim of the assessee u/s. 37 of the Income Tax Act, 1961 was rejected by the Department. However, the Department allowed the expenditure to be amortised u/s. 35AB of the Act.

The contention of the assessee was that section 35AB of the Act was not applicable to this case. The Supreme Court found no merit in the said contention.

The Supreme Court observed that s/s. (1) of section 35AB of the Act clearly states that, where the assessee has paid in any previous year any lump sum consideration for acquiring any knowhow for use for the purpose of his business, then one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years. The Explanation to the said section says that the word “know-how” means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine. According to the Supreme Court if one carefully analyses section 35AB of the Act, it would be clear that prior to 1st April, 1986, there was some doubt as to whether such expenditure could fall u/s. 37 of the Act. To remove that doubt, section 35AB of the Act stood inserted. In s/s. (1) of section 35AB of the Act, there is a concept of amortisation of expenditure. The Supreme Court observed that in the present case, it was true that on account of certain disputes which arose between the parties, the balance amount was not paid by the assessee to the American company. However, the word “for” in section 35AB of the Act, which is a preposition in English grammar, has to be emphasised while interpreting section 35AB of the Act. Section 35AB of the Act says that the expenditure should have been incurred for the purposes of the business of the assessee. In the present case, the technical assistance agreement was entered into between the assessee and the American company for acquiring know-how which was, in turn, to be used in the business of the assessee. Once section 35AB of the Act comes into play, then section 37 of the Act has no application.

According to the Supreme Cour,t there was no error in the impugned judgment of the High Court. The Supreme Court dismissed the civil appeal filed by the assessee.

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Valuation of stock – In valuing the closing stock the element of excise duty is not to be included.

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[CIT v. Dynavision Ltd. (2012) 348 ITR 380 (SC)]

The assessee, a private limited company, carried on the business of manufacture and sale of television sets. For the assessment year 1987-88, the Assessing Officer while completing the assessment u/s. 143(3) found that the assessee had not included in the closing stock the element of excise duty. Accordingly, he added a sum of Rs.16,39,000 to the income of the assessee on the ground of undervaluation of closing stock.

The question before the Supreme Court was whether the Department was right in alleging that the closing stock was undervalued to the extent of Rs.16,39,000/-.

The Supreme Court noted that, it was not in dispute that the assessee had been following consistently the method of valuation of closing stock which was “cost or market price, whichever is lower.” Moreover, the Assessing Officer had conceded before the Commissioner of Income Tax (Appeals) that he revalued the closing stock without making any adjustment to the opening stock. According to the Supreme Court though u/s. 3 of the Central Excise Act, 1944, the levy of excise duty in on the manufacture of the finished product, the same is quantified and collected on the value (i.e. selling price). The Supreme Court referred to the judgment in the case of Chainrup Sampatram v. CIT reported in [1953] 24 ITR 481 (SC) in which it has been held that, “valuation of unsold stock at the close of the accounting period was a necessary part of the process of determining the trading results of that period. It cannot be regarded as source of profits. That the true purpose of crediting the value of unsold stock is to balance the cost of the goods entered on the other side of the account at the time of the purchase, so that on canceling out the entries relating to the same stock from both sides of the account, would leave only the transactions in which actual sales in the course of the year has taken place and thereby showing the profit or loss actually realised on the year’s trading. The entry for stock which appears in the trading account is intended to cancel the charge for the goods bought which have remained unsold which should represent the cost of the good”.

The Supreme Court for the above reasons, held that, the addition of Rs.16,39,000 to the income of the assessee on the ground of undervaluation of the closing stock was wrong.

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Commencement of Activity – whether pre-requisite for registration u/s.12AA

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Issue for Consideration

Section 12A r.w.s. 12AA of the Income-tax Act, 1961 provides the procedure for grant of registration of a trust or institution (“trust”). According to this procedure, the trust has to make an application for registration in Form No. 10A prescribed under Rule 17A of the Income-tax Rules, 1962 within one year from the date of creation of the trust or the establishment of the institution. Upon receipt of the application, the Commissioner (SIT) shall call for documents and information and conduct inquiries to satisfy himself about the genuineness of the trust or institution.

After he is satisfied about the charitable or religious nature of the objects and genuineness of the activities of the trust, he will pass an order granting registration. If he is not satisfied, he will pass an order refusing registration. The order granting or refusing registration has to be passed within six months from the end of the month in which the application for registration is received by the Commissioner.

Section 12AA, inserted by the Finance (No. 2) Act, 1996 with effect from assessment year 1997-98, reads as under:

“12AA Procedure for registration.

(1) The Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) or clause (aa) of ss. (1) of section 12A, shall—

(a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about institution and may also make such inquiries as he may deem necessary in this behalf; and

(b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he—

(i) shall pass an order in writing registering the trust or institution;

(ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, and a copy of such order shall be sent to the applicant :

Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard……

(2) Every order granting or refusing registration under clause (b) of subsection (1) shall be passed before the expiry of six months from the end of the month in which the application was received under clause (a) or clause (aa) of sub-section (1) of section 12A.

(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996) and subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution:

Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard.”

Section 12AA therefore, details the provisions for registration of a trust for which an application has been filed u/s 12A. A reading of sub-clauses (a) and (b) of Section 12AA(1) makes it clear that the CIT has to satisfy himself about the genuineness of the activities of the trust and also about the objects of the trust.

As regards the objects of the trust, these can be determined from a perusal of the Memorandum or the deed of the trust, which is filed along with the registration application. If the objects of the trust are not for any charitable or religious purpose, registration may be refused by the CIT.

On the other hand, in order to determine the genuineness of the activities of the trust or the institution, the CIT has powers to make inquiries, call for documents or information. In cases where application is made after the activity is commenced, the CIT would exercise such powers of inquiry.

Given the time limit prescribed for making application for registration of a trust, in many cases, the application is made before the commencement of any activity by the applicant-trust. A controversy has arisen as to whether the CIT can reject the registration application of a trust, which has not commenced any activity, on the ground of non-determination of genuineness of activities of the trust. While the Delhi, Karnataka and Allahabad High Courts have taken a view that registration u/s. 12AA of the Act cannot be rejected by the CIT on the ground that it had not yet commenced any activity, the Kerala High Court has held that until the activity is commenced by the applicant trust/institution, registration should not be granted by the CIT.

Grant of Registration to a trust u/s. 12AA of the Act is important, since it is one of the conditions for grant of exemption u/s. 11 and 12 for the income of a trust.

Self Employers Service Society’s Case

The issue first came up before the Kerala High Court in the case of Self Employers Service Society v CIT 247 ITR 18.

The society was registered as a charitable society under the Travancore Cochin Literary Scientific and Charitable Societies Registration Act, 1955. The members of the society were mainly merchants. Though it had a large number of charitable objects, it had not commenced any of them during the first year of its functioning. It was accepting recurring deposits from its members and fixed deposits from the public. Loans were being given to its members at 21 % interest. The Commissioner found that in spite of the reference to a large number of charitable objects in its bye-laws, the activity carried on by the society was confined to its members, numbering about 150. Since such activities could not be regarded as charitable in nature, the Commissioner refused registration u/s.12AA.

The High Court noted that though several charitable activities were included in the objects of the society, it had not been able to do any of such charitable activities during the first year of its functioning. The proposal to start a technical educational institution itself was taken after the order of the CIT, rejecting the registration. The Court observed, that in the present case, the charitable society had not done any charitable work during the relevant period, but the activity which was undertaken during the said period was only for the generation of income for its members. It also noted that there were no materials before the Commissioner to be satisfied of the genuineness of the activities of the trust or institution. The Court therefore held that the rejection of the application could not be termed as illegal or arbitrary.

Foundation of Opthalmic and Optometry Research Education Centre’s Case

The issue under consideration again recently arose before the Delhi High Court in the case of DIT vs. Foundation of Ophthalmic and Optometry Research Education Centre 210 Taxman 36.

In this case, the assessee, a society registered under the Society Registration Act on 30th May 2008 with charitable objects of Optometry and Ophthalmic Education applied for registration before the Director of Income-tax (Exemption) [‘DIT(E)’] and filed other documents as sought by DIT(E)’s office from time to time. The DIT(E) refused to grant registration to the assessee by relying on the decision of Kerala High Court in the case of Self Employers Service Society vs CIT (supra), on the ground that no charitable activity was undertaken by the newly established assessee society.

On appeal by the assessee, the Tribunal, following the decision of the Allahabad High Court in the case of Fifth Generation Education Society (185 ITR 634), held that non-commencement of charitable activity cannot be a ground for rejection of application of registration filed by the assessee u/s. 12AA of the Act and thereby upheld the contention of the assessee.

Aggrieved with the judgement of the Tribunal, the Revenue filed an appeal before the High Court reiterating its arguments as placed before the Tribunal. The assessee-applicant on the other hand, relied on the decision of the Karnataka High Court in the case of DIT(E) v. Meenakshi Amma Endowment Trust (2011) (50 DTR 243) , wherein the High Court while considering similar facts of the assessee applicant held that when no activities are undertaken by the newly established trust/institution, then in such a scenario, the objects of the trust have to been taken into consideration by the CIT for determination of question of registration.

The High Court, after hearing the arguments of both the parties, upheld the contention of the assessee. The Court distinguished the judgements of Self Employers Service Society (supra) and Aman Shiv Mandir Trust (Regd.) v. CIT (296 ITR 415)(P&H) relied on by the Revenue on the ground that reasons for refusal of registration in the aforesaid decisions were not that the Trusts were newly registered, but that the activities of the Trusts under consideration were not charitable.

The High Court, after referring to the provisions of section 12AA, further held that the provision did not prohibit or enjoin the CIT from registering a trust solely based on its objects, without any activity, in the case of a newly registered trust. It also observed that the statute did not prescribe a waiting period for a trust to qualify itself for registration. Based on the said observations and following the decision of the Karnataka High Court of Meenakshi Amma Endowment Trust (supra), the appeal of the Revenue was rejected.

The Karnataka High Court in the case of Meenakshi Amma Endowment Trust (supra ) had earlier interpreted the provisions of section 12A r.w.s. 12AA of the Act and opined in context of registration of a newly established trust without undertaking any activity, as under:

“….When the trust itself was formed in January 2008 with the money available with the trust, one cannot expect them to do activity of charity immediately…. In such a situation, the objects of the trust could be read from the trust deed itself. In the subsequent returns by the trust, if the Revenue comes across that factually trust has not conducted any charitable activities, it is always open to the authorities concerned to withdraw the registration already granted or cancel the said registration u/s. 12AA of the Act.

A trust can be formed today and within a week registration u/s. 12A could be sought as there is no prohibition under the Act seeking such registration…..… the objects of the trust for which it was formed will have to be examined to be satisfied about its genuineness and activities of the trust cannot be the criterion, since it is yet to commence its activities.”

In other words, the High Court held that where a trust has not commenced its activities, then the CIT is required to examine the objects of the trust in order to ascertain the genuineness of its activities.

The Allahabad High Court in the case of Fifth Generation Education Society (supra) also had opined on the issue. The Court, while considering the provisions of registration of trust/institution u/s. 12A of the Act relating to assessment years prior to Finance (No. 2)    Act, 1996, held that at the time of considering the application for grant of registration u/s. 12A, the CIT was not required to examine the application of income or carrying on of any activity by the trust. The Court further held that the CIT may at this stage examine whether the application was made in accordance with the requirements of section 12A r.w. Rule 17A, Form 10A was properly filled, along with determination of whether the objects of the trust were charitable or not.

Observations

On perusal of the decisions as discussed above, one may find that the Delhi, Karnataka and Allahabad High Courts have rightly interpreted the procedural provisions of section 12AA of the Act and rejected the contention of the Revenue to read in the condition of actual conduct of charitable activities for grant of registration of trusts, who have not commenced their charitable activities. Instead, in such situations, where trusts are yet to commence their activities, the Courts have sought to ascertain the genuineness of the activities of the trust by relying on their objects.

The Courts have also acknowledged that, injecting such subjectivity of satisfaction of conduct of charitable activities may be susceptible to varied interpretations by the relevant authorities, wherein some may be satisfied with activities of a month or few months, while others may wish to examine the activities of the applicant for a longer time.

The plain and simple procedures laid down in section 12AA do not empower the CIT to reject the grant of registration to trust, until the actual charitable activities are undertaken by the trust. On the contrary, in case of any abuse of procedures of section 12AA by any non-genuine trust, the Act provides for a safeguard by empowering the CIT u/s. 12AA(3) of the Act to cancel the registration of such trusts.

Further, the decision of the Kerala High Court was rightly distinguished by the Delhi High Court, wherein the refusal of registration of trust was not on account of non-commencement of activities of the newly constituted trust, but was for undertaking non-charitable activities. So, the view taken by the Kerala High Court that there had to be some material before the CIT showing the genuineness of activities actually carried on by the trust does not seem to be justified, and the view taken by the other high courts, that carrying on of activity is not a prerequisite for grant of registration u/s.12AA, seems to be the better view of the matter.

Doctrine of merger — If for any reason an appeal is dismissed on the grounds of limitation and not on merits, that order would not merge with the orders passed by the Appellate Authority.

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[Raja Mechanical Co. (P) Ltd. v. CCE, (2012) 345 ITR 356 (SC)]

The Supreme Court noted that the facts were not in dispute and could not be disputed that there was a delay in filing the prescribed forms before the assessing authority. Therefore, the assessing authority had rejected the claim of the assessee and accordingly, had directed him for payment of the excise duty credit availed of by the assessee. Aggrieved by that order, the assessee had belatedly filed an appeal before the proper Appellate Authority. Since there was delay in filing the appeal and since the same was not within the time that the Appellate Authority dismissed the same. It is that order which was questioned before the Tribunal. Before the Tribunal, the assessee had requested the Tribunal to first condone the delay and next to decide the appeal on the merits, i.e., to decide whether the adjudicating authority was justified in disallowing the benefit of the MODVAT credit that was availed of by the assessee. The Tribunal had not conceded to the second request Kishor Karia Chartered Accountant Atul Jasani Advocate Glimpses of supreme court rulings made by the assessee and only accepted the findings and conclusions reached by the Commissioner of Appeals, who had rejected the appeal.

The question that fell for the consideration and decision of the Supreme Court was whether the Tribunal was justified in not considering the case of the assessee on merits. The assessee’s stand before the Tribunal and before the Supreme Court was that the orders passed by the adjudicating authority would merge with the orders passed by the first Appellate Authority and the Tribunal ought to have considered the appeal filed by the assessee on merits also. According to the Supreme Court such a stand of the assessee could not be accepted in view of the plethora of decisions of the Supreme Court, wherein it has been categorically observed that if for any reason an appeal is dismissed on the ground of limitation and not on merits, that order would not merge with the orders passed by the first Appellate Authority. In that view of the matter, the Supreme Court was of the opinion that the High Court was justified in rejecting the request made by the assessee for directing the Revenue to state the case and also the question of law for its consideration and decision. According to the Supreme Court there was no merit in the appeal.

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Section 37(1) — Whether payments towards noncompete fees can be claimed as deferred revenue expenditure — Held, Yes.

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31. (2011) 131 ITD 385 (Chennai) Orchid Chemicals & Pharmaceuticals Ltd. v. ACIT A.Y.: 2003-04. Dated: 18-6-2010

Section 37(1) — Whether payments towards non-compete fees can be claimed as deferred revenue expenditure — Held, Yes.


Facts:

The assessee was engaged in the business of manufacture and export of bulk drugs and other pharmaceuticals. The assessee in the previous year paid a sum of Rs.24 crore to three of the parties for acquiring the Intellectual property rights, brands and drug licences. The above payment also included a sum of Rs.2 crore paid towards non-compete clause. The assessee claimed the above expense as revenue expenditure. The Assessing Officer refused the claim on the basis that the expenditure incurred for non-compete agreement was for a fairly long period of four years and as it was of enduring nature, it cannot be treated as revenue. On appeal the Commissioner (Appeals) upheld the order. The assessee thus appealed to the Tribunal. The assessee raised additional grounds which were alternative to other grounds. The assessee contended that the sum paid may be allowed as deferred revenue expenditure or alternatively depreciation on the same should be allowed.

Held:

(1) The payment made for non-compete fee cannot certainly be treated as revenue expenditure in view of decisions in the case of Hatsum Agro Products Ltd. (ITA No. 1200/Mad./1999, dated 27th July, 2005), Asianet Communications (P) Ltd. (ITA No. 4437/Mad./2004, dated 3th January, 2005) (ITA No. 615/Mad./1999, dated 10th February, 2005) and Act India Ltd. No doubt section 28(va) of the Act considers a receipt of non-compete fee as income but it would not by itself lead to a conclusion that any payment of like nature would be on revenue account only. (2) Further, relying on the decision of the Apex Court in the case of Madras Industrial Investment Corporation Ltd. (225 ITR 802) (SC), the expenses should be held in the nature of deferred revenue expenses since the noncompete agreement precluded the sellers from engaging in a competing activity for a period of four years. (3) Hence, the payment made for non-compete fee should be allowed as deferred revenue expenses over a period of four years.

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Section 40(b) and Interest to partners

The present section 40(b) of the Income-tax Act has
been introduced by the Finance Act, 1992 w.e.f. 1-4-1993 to coincide
with the introduction of the new scheme of taxation of the firm and the
partners. The section provides for the conditions, on compliance of
which the remuneration and the interest to partners, by the firm, shall
not be disallowed in the hands of the firm. In other words the claim of
the firm, for deduction of remuneration and interest to partners, shall
be allowed where it satisfies the conditions stipulated in section
40(b).

For allowance of an interest to the partner, it is
essential that the payment is authorised by and is in accordance with
the terms of the partnership deed and relates to a period falling after
the date of partnership deed and the amount does not exceed the amount
calculated at the rate of 12% simple interest per annum.

It is
usual that the interest is paid to a partner on the capital introduced
by him as increased by the deposits made by him and the share of profits
credited to his account and as reduced by the amounts withdrawn by him
and the share of losses debited to his account. At times, the account is
credited with the share of notional profits arising on revaluation or
is debited with the transfer to reserves created to meet certain
contingencies.

Section 40(b) is silent about the ‘base amount’,
with reference to which the interest of 12% is to be calculated. It also
does not specify the manner in which such base amount is to be
calculated. In the circumstances, issues regularly arise about the
determination of the base amount, with reference to which the interest
payable to a partner is to be ascertained so as to face no disallowance.
Unlike section 115JB, it does not provide for the manner of preparation
of the profit & loss account, nor does it lay down any guidelines
for ascertaining the book profit of the firm, the share of which is to
be credited to the partner’s account.

A controversy has arisen
about the need and necessity to provide depreciation by the firm in its
books of account, while ascertaining the amount of the profit or loss of
the year, to be shared amongst the partners and credited to their
respective accounts. Providing no depreciation or a lower depreciation
results in higher profits being credited to partners’ accounts which in
turn helps in payment of higher interest to them. Is this practice of
not providing depreciation in the books in accordance with the
provisions of the Act, for allowance of interest in the hands of the
firm, is a question that has been addressed by the different benches of
the Tribunal to arrive at the different and conflicting views.

The relevant part of section 40(b), pertaining to interest to partners, reads as under:

“Amounts not deductible.

40.
Notwithstanding anything to the contrary in sections 30 to 38, the
following amounts shall not be deducted in computing the income
chargeable under the head ‘Profits and gains of business or profession’,
—

(b) in the case of any firm assessable as such:

(i) ……………..

(ii)
any payment ………….., or of interest to any partner, which, in
either case, is not authorised by, or is not in accordance with, the
terms of the partnership deed; or

(iii) any payment
……………. , or of interest to any partner, which, in either case,
is authorised by, and is in accordance with, the terms of the
partnership deed, but which relates to any period (falling prior to the
date of such partnership deed) for which such payment was not authorised
by, or is not in accordance with, any earlier partnership deed, so,
however, that the period of authorisation for such payment by any
earlier partnership deed does not cover any period prior to the date of
such earlier partnership deed; or

(iv) any payment of interest
to any partner which is authorised by, and is in accordance with, the
terms of the partnership deed and relates to any period falling after
the date of such partnership deed insofar as such amount exceeds the
amount calculated at the rate of twelve per cent simple interest per
annum; or………………”

The Visakhapatnam Bench of the
Tribunal had an occasion to deal with the issue, wherein the Tribunal
held that the Assessing Officer (‘AO’) was not entitled to recompute the
balance of capital account of the partners, so determined by the
assessee firm. In deciding the said issue, the Bench did not follow the
findings to the contrary of another Bench of the Visakhapatnam Tribunal
on the subject.

Arthi Nursing Home’s case

The
issue under consideration was examined by the Visakhapatnam Tribunal in
the case of Arthi Nursing Home v. ITO, 119 TTJ 415 (Visakha).

 In
that case, Arthi Nursing Home, a partnership firm, had claimed
deduction of interest paid to partners on their respective capital
accounts. Consequent to the findings in the course of the survey
operations conducted on the firm and during the course of assessment
proceedings, it was noticed by the AO that the firm was not providing
for depreciation in the books of account, but was claiming depreciation
in computation of taxable income. The AO was of the view that the firm
by following the practice of not providing the depreciation was
inflating the capital accounts of the partners on which higher interest
was paid. He observed that the said practice was for the purposes of
claiming higher deduction, towards payment of interest, in the hands of
the firm. He was of the view that the firm was required to draw its
profit & loss account by debiting the depreciation. The AO
recomputed the balances in capital accounts of the partners after
charging depreciation. Consequently, the claim for deduction of interest
to partners was disallowed u/s.40(b) as the balance in the capital
accounts of the partners had turned negative after apportioning the
recomputed profits and losses.

 On appeal before the CIT(A), the
action of the AO in disallowing the deduction of interest to partners
u/s.40(b) was confirmed for the following reasons:

  • The
    assessee claimed benefit of depreciation in computing the total income,
    but did not provide the same in computing the profit of the firm to be
    shared amongst the partners. The said practice led to showing higher
    amount of profits in the books of account which inflated the capital
    balances of the partners and the consequent interest to partners;
  • Depreciation,
    like any other head of expenditure, was required to be debited to the
    profit and loss account to arrive at the real profits of the business;
  •  Debiting of depreciation was a cardinal principle of mercantile system of accounting; and
  •  The
    figures of accretion to the capital balances, were exaggerated and
    fictitious, not in accordance with any principles of accountancy.

The
assessee firm’s contention that the AO could not have rewritten books
of account of the firm based on the decisions in the cases of Ambica
Chemical Products v. Dy. CIT, (ITA No. 612/Vizag./1999, dated 31st May,
2005 and 9/Vizag./1999) dated 9th January, 2009, respectively; and ACIT
v. Sant Shoe Store, 88 ITD 524, (Chd.) (SMC) was negatived by the CIT(A)
by holding that the AO had only undertaken an exercise of discovery of
correctness of accounts which was not an exercise of rewriting the books
of account.

Aggrieved with the order of the CIT(A), on appeal
before the Tribunal, the following additional arguments were made by the
firm:

  • Section 40(b) did not provide for the manner of
    computing the profit of the firm for the year and did not have any
    relevance to the claims made in computing the total income; and
  •   
    The firm had been consistently over the years not charging depreciation
    in the books of account, but had claimed depreciation in computing the
    taxable income, which had been accepted by the Revenue authorities.

Likewise, the following additional contentions were raised by the Revenue:

  •    
    Explanation 5 to section 32 of the Act and the Accounting Standards
    prescribed by ICAI required charging of depreciation in the books of
    account; and

  •     The Apex Court in the case of CIT
    v. British Paints India Ltd., (188 ITR 44) held that the books disclosed
    the true state of accounts and the correct income.

The Tribunal after considering the rival submissions upheld the contention of the Revenue authorities for the following reasons:

  •    
    In light of the Apex Court decision in the case of British Paints Ltd.
    (supra), the AO was duty bound to recompute the profit/accretion to the
    capital account of the partners after charging depreciation to the
    profit and loss account;

  •     Explanation 5 to
    section 32 and the Accounting Standards prescribed by the ICAI required
    mandatory charging of depreciation to determine profit and loss of the
    firm for the year; and

  •     The profit and loss
    account prepared without charging depreciation did not reflect the true
    and correct state of affairs of the partnership firm.

The
Tribunal concluded that the AO was justified in correcting the aforesaid
error, thereby disallowing the interest claimed by the assessee firm
u/s.40(b).

Swaraj Enterprises case

The issue under consideration subsequently came up before the Division Bench of the Visakhapatnam

Tribunal in the case of Swaraj Enterprises v. ITO, 132 ITD 488.

In
this case, the assessee firm, like in the case of Arthi Nursing Home
(supra), did not charge depre-ciation in the books of account, but
claimed depre-ciation in computing the total income. As a result the
partners’ accounts were credited with higher share of profits on which
interest was paid to the partners. The AO, by relying on the several
decisions of the High Courts, held that the depreciation was a charge on
profits of the firm and the same should be provided for in computing
the profit that was distributed amongst the partners. He recomputed the
capital account balances of the partners and interest thereof.

On
appeal the CIT(A) relying on the decision in the case of Arthi Nursing
Home (supra) upheld the action of the AO of recomputing the interest to
partners for the purposes of section 40(b).

Aggrieved with the order of the CIT(A), the assessee firm filed an appeal before the Tribunal and contended that:

  •    
    There was no provision under the Act that allowed an AO to rework the
    capital balances of the partners and to recompute the interest to
    partners u/s.40(b);

  •     There was no statutory compulsion for partnership firms to provide for depreciation under the Indian Partnership Act, 1932;

  •    
    The determination of profit for the purposes of the books of account
    and the computation of total income for income tax were two different
    exercises and hence the allowance or disallowance made in computing the
    total income under the Act did not in any way affected the balances in
    the capital accounts of the partners disclosed in the books of account;
    and

  •     Without prejudice, the firm in any case had
    the discretion to select the method of charging depreciation and also
    the rates at which such depreciation was charged, which discretion was
    not vested in the AO.

The Revenue contended that the
depreciation was a charge on the profits of the year and it was a must
for the firm to provide for depreciation to arrive at the true profits
of the firm; that the AO following the British Paints’ case was duty
bound to rework the profit; that action of the firm was not in
accordance with the Accounting Standards and principles and that the
Explanation 5 to section 32 required that the depreciation was charged
to the accounts.

After considering the rival submissions and the decision in the case of Arthi Nursing Home (supra), the Tribunal held as under:

  •    
    The findings of the Apex Court in the case of British Paints Ltd.
    (supra) for reworking the profits were in context of determination of
    taxable income and could not be employed for recomputing the capital
    account of the partners;

  •     The total taxable
    income of the firm remained the same, since the depreciation was already
    claimed in computing the taxable income;

  •    
    Under, the Partnership Act, 1932, there was no statutory compulsion to
    provide for depreciation in the books of account or to follow the
    Accounting Standards prescribed by ICAI;

  •     The
    Companies Act that required an enterprise to follow the mercantile
    method of accounting and employ the Accounting Standards did not apply
    to a partnership firm;

  •     Explanation 5 to section
    32 provided for compulsory depreciation for the purpose of computation
    of taxable income under the Act and nowhere it was provided that it was
    to be applied even in preparing the books of account;

  •    
    U/s.40(b), the AO was allowed only to verify whether the payment of
    interest to any partner was authorised by and was in accordance with the
    terms of partnership deed and whether the period of interest so paid
    fell after the date of partnership deed. The AO could not have reworked
    or redetermined the balance in the capital accounts of the partners; and

  •    
    Even if the depreciation was required to be charged in the books of
    account, the choice to determine the method and the rate of depreciation
    would be at the discretion of the assessee firm and not of the AO.

Based
on the aforesaid findings, the Tribunal ignored its own findings in the
case of Arthi Nursing Home (supra) and upheld the claim of deduction of
inter-est to partners.

Observations

Section 40(b)
is silent as to the amount on which the interest to partners is to be
calculated. As noted, the ‘base amount’ remains to be defined by the
provision. In the context of interest, it has no reference to the books
of account, nor to the book profit unlike the provisions of section
115JB or even those within the section that provide for calculating the
quantum of remuneration payable to the partners. It may not be incorrect
to state that the claim of interest, in the context, is independent of
the books of account.

Unlike section 115JB, this section does not
provide for the method of accounting to be followed, the method of
depreciation to be employed and the rates at which the assets are
required to be de-preciated.

Section 40(b) provides that no
disallowance shall take place where the interest to partners is;
authorised by the partnership deed; in accordance therewith; for the
period falling after the date of partnership deed and the rate of
interest does not exceed 12%. In the circumstances, what is of paramount
importance is that the interest to partners should be authorised by the
deed and if it is so what remains to be seen is that such interest is
paid in the manner provided by the said deed which of course should be
in conformity with the other stipulations stated above. Nothing, beyond
these simple rules, is required to be read in to the provision.

The
computation of total income, under the Act, is largely independent of
the books of account. A debit or credit does not decide the taxability
or allowance of an income or an expenditure. Unless otherwise expressly
stated, the books of account do not determine the taxability or
otherwise under the Act. The allowance or a deduction and the taxability
of an income is governed by the provisions of the Income-tax Act and
not the books of account.

Explanation 5 to section 32 has a very
limited relevance and its application is mainly restricted to the
provisions of section 32(1) and section 43(6) which provide for
determination of the written down value of an asset or a block of
assets. The said provision, at the most, has the effect of altering the
total income that is computed under the Act and does not travel beyond,
to the computation of the book profit, not even for the purposes of
section 115JB.

The Partnership Act, 1932 does not prescribe the
manner in which the books of account are to be maintained, nor do they
provide for the method of accounting to be followed by the firm for
determining its profit or loss. They also do not prescribe for
compulsory depreciation and the rate thereof.

The Companies Act
has no application to the partnership firms and the provisions therein
for mercantile system of accounting, true and fair profit and the
mandatory application of the Accounting Standards do not apply to the
partnership firms.

The Chandigarh Bench of the Tribunal in Sant
Shoe Store’s case was concerned with the allowance of interest on the
capital account of the partners which included credits on revaluation of
the assets, not involving any inflow of funds. The Tribunal even in
such a case approved of the claim of interest made by the firm. Again,
the Tribunal in Ambica Chemical Products approved of the claim of
interest in circumstances where the firm had not provided for
depreciation in the books of account; the claim was allowed to the firm
in two different appeals vide orders passed after a gap of four years
and one of it was passed after the decision in the case of Aarthi
Nursing Home was rendered. A useful reference may be made to the
decision of the Pune Bench in the case of Deval Utensils Factory, 98 TTJ
501 wherein the action of the AO in reworking the capital account
balance, on the basis of which interest was paid to partner was
disapproved.

The rewriting of the books by either side should
be discouraged. If permitted, it may invite the tax-payers to indulge
in creative accounting, for example; by adding back the provision for
taxation where debited to the profit & loss account so as to enhance
the amount of share of profit that is credited to the capital accounts
by holding out that the tax is not an allowable deduction in computing
the total income. The example amplifies the need to stick to the books
of account and the need to avoid importing the computation provisions in
calculation of interest.

The interest to the partners, where
allowed in the hands of the firm, is taxable in the hands of the
partners as business income by virtue of section 28(v). The one that is
disallowed in the hands of the firm, is not taxable in the hands of the
partners by virtue of the proviso to the said section 28(v) of the Act.
The disallowance largely does not result in any loss or gain of revenue
for either side.

This essentially leaves us with the conclusion
that no disallowance shall take place under the provisions of section
40(b) in cases where the interest to partners is authorised by the
partnership deed and the same is calculated as per the terms of the
partnership deed. The case of the firm gets forti-fied where the deed
does not make it mandatory for the firm to charge depreciation in
computing the profit for the year.

Why income from sale of computer soft ware not taxable as royalty?

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While best efforts were made from world over to persuade the then Finance Minister of India to have second thoughts on the retrospective proposals introduced in the Finance Bill, 2012, nothing seems to have appealed. The retrospective amendments as were proposed in the Finance Bill, 2012 have received the President’s assent. In this backdrop, an effort is made to consider whether the Income-tax Department under the so retrospectively amended section 9(1)(vi) of the Act would be able to tax, income from sale of computer software as royalty under the Income-tax Act, 1961 (‘the Act’) and/or Double Taxation Avoidance Agreements (‘DTAAs’) entered in by India with other countries?

From the following three Circulars issued by the Central Board of Direct Taxes at different points in time, one understands that the intention of the Legislature was very clear to tax any income from ‘right for use’ or ‘right to use’ any copyright (viz., computer program) as royalty under the Act:

  • Circular No. 152, dated 27th November 1974;
  • Circular No. 588, dated 2nd January 1991; and
  • Circular No. 621, dated 19th December 1991.

However, the controversy whether income from sale of computer software is taxable as royalty under the Act or not, developed only from the year 2005, with the judgment of the Special Bench of Delhi Tribunal in the case of Motorola Inc. v. DCIT, (95 ITD 269). The decision pertained to A.Ys. 1997-98 and 1998-99, though the first Circular justifying the taxability of income as royalty under the Act was issued in 1974.

Such an unusual scenario could be the result of imperfect drafting of section 9(1)(vi) to support the taxability of sale of computer software as royalty. This article examines whether the retrospective introduction of Explanation 4 to section 9(1)(vi), achieves the object of the Legislature to tax the income from sale of computer software as royalty under the Act. The said retrospective amendment in section 9(1)(vi) reads as under:

“Explanation 4 — For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of licence) irrespective of the medium through which such right is transferred.”

  • Section 9(1)(vi) provides that any income payable by way of royalty in respect of any right, property or information is deemed to accrue or arise in India. So, to determine the taxability of income u/s.9(1)(vi), an income needs to satisfy the following twin conditions, apart from the principle of ‘source rule of taxation’ in section 9(1)(vi): The income should be covered under the definition of ‘royalty’ i.e., under Explanation 2 to section 9(1) (vi); and
  •  l It has to be in respect of any right, property or information.

The expression ‘any right, property or information’ is explained in the definition of ‘royalty’ viz., intellectual properties, equipments, know-how, experience or skills, etc. In other words, the definition of ‘royalty’ gives colour to or limits the scope of, the expression, which is otherwise very wide in scope.

Explanation 4 retrospectively includes, ‘right for use or right to use computer software’ under the expression ‘any right, property or information’. The text of Explanation 4, however, does not include the said rights of a computer software under the definition of ‘royalty’, which is specifically required as discussed, for applicability of section 9(1)(vi). Even though, the Memorandum explaining the amendments relating to Direct Taxes in the Finance Bill, 2012 mentions that ‘transfer of all or any right in respect of any right, property or information’ used in Explanation 4 defines the rights, property or information referred to in Explanation 2 to section 9(1)(vi), the text of Explanation 4 does not refer to Explanation 2. Therefore, one may argue that until the language of Explanation 4 is amended to include the aforesaid rights of computer software under Explanation 2, section 9(1)(vi) may not apply to the said rights of computer software.

 The said argument also draws support from the Karnataka High Court judgment in the case of Jindal Thermal Power Company Ltd. v. DCIT, (321 ITR 31). The High Court while considering the retrospective amendment in context of Explanation to section 9(2) r.w.s. 9(1)(vii) held that since the purport of Explanation 2 is plain in its meaning, it is unnecessary and impermissible to refer to the Memorandum Explaining the provisions. Apart from the above or assuming that the Legislature amends Explanation 4 on the lines as suggested above or the Courts hold otherwise, the question that arises is, what is the meaning of the expression ‘right for use’ or ‘right to use’ a computer software? The provisions of the Act do not define ‘right for use’ or ‘right to use’.

Broadly, there are two schools of thought emerging for interpretation of the aforesaid rights of computer software. One school of thought suggests that the said expression should be construed in its general sense. Whereas, the other school of thought suggests the said expression should be construed in the light of the meaning as given in 2010 OECD Commentary on Model Tax Convention on Income and on Capital.

First school of thought

The Memorandum justifies the retrospective insertion, so as to restate the intention of the Legislature to tax the income from use or right to use computer software as royalty under the Act, which was interpreted otherwise by some judicial authorities. The judicial authorities1 in India have given conflicting findings on different questions relating to taxability of income from sale of computer software as royalty. Out of these questions, the Legislature has by Finance Act, 2012 sought to address only the question whether the expression ‘transfer of all or any rights’ includes ‘right for use’ or ‘right to use’?

The Memorandum does not refer to the conflicting judgements. The findings of these conflicting judgements were summarised in a Table in the feature Direct Tax Controversy in the BCAS Journal for the month of December 2011, (page no. 54).

In such a scenario, it would be relevant to understand the meaning of the expression ‘right for use’ or ‘right to use’ a computer software in the light of the findings of Heydon’s case (1584) (3 Co Rep 7a, 7b), better known as Mischief Rule. The Heydon’s case requires that to construe a provision of a statute, it would be just and proper to see what was the position before an amendment and find out what was ‘the mischief’ sought to be remedied and then discover the true rationale for such remedy. The aforesaid rule which is more than four hundred years old requires the following four questions to be answered in order to construe the provisions of section 9(1)(vi):

1. What was the common law before making the amendment in section 9(1)(vi)?

Judicial authorities were divided as regard the taxability of the subject. Some of the findings of the said decisions are:

— Passing on the right to use and facilitating the use of a product for which the owner has a copyright is not the same thing as transferring or assigning rights in relation to copyright and therefore, consideration to authorise the end-user to have an access to and make use of the licensed computer software, does not amount to royalty under the Act.

— On the other hand, some judicial authorities, held that payments made by end-users or distributors for granting of licence to use copyright i.e., computer program in respect of sale of computer software is royalty under the Act. Right of user of computer software involves right to use the computer program. When the right for user is given, right to use copyright is also given and therefore, consideration amounts to royalty under the Act.

2.    What was the mischief and defect for which the Act did not provide?

The mischief and the defect for which the Act did not provide and which seems to be the intent of the Legislature was to tax ‘right for use’ or ‘right to use’ computer program [involved in a sale of/ licence to use computer software] as royalty under the Act.

3.    What remedy the Legislature/Parliament has resolved and appointed to cure the defect?

The remedy effected by the Legislature to cure the aforesaid defect is retrospective insertion of Explanation 4.

4.    What is the true reason for the remedy?

The true reason for the remedy seems that the Legislature wanted to subject ‘right for use’ or ‘right to use’ computer program involved in sale of computer software as royalty under the Act. The Legislature instead of using the expression to achieve its remedy to tax “right for use or right to use computer program embedded in a computer software” has chosen to use the expression “right for use or right to use computer software”, in a way suggesting that words ‘computer software’ and ‘computer program’ are used interchangeably.

In other words, the true expression ‘right for use or right to use a computer software’ is referred to as having a general meaning of act of using the property i.e., computer program embedded in a computer software and right to transfer such usage, respectively. Therefore, if one agrees with the conclusion of first school of thought, then purchase of any computer software viz., either shrinkwrap, bundled, canned or customised software, would be taxable as ‘royalty’ under the Act.

Second school of thought

The second school of thought suggests that the impugned expression should be construed in the light of the meaning as given in 2010 OECD Commentary on Model Tax Convention on Income and on Capital. The Para 2 of Article 12 of 2010 OECD Model defines ‘royalty’ as under:

The term ‘royalties’ as used in this Article means payments of any kind received as a consideration for the use of, or the right to use any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.

The expressions ‘right for use’ or ‘right to use’ as referred in Explanation 4 to section 9(1)(vi) is also found in Article 12(2). Paras 12 to 17 of the OECD Model Commentary on Article 12 cover the various facets of taxability of computer software as royalty. Para 13.1 of the Commentary explains the meaning of the expression ‘right for use’ or ‘right to use’ any copyright in the context of a computer software. This is similar to rights referred to in section 14 of the Copyright Act, 1957 (‘the Copyright Act’) and India has not raised any reservations or disagreements to such construction. The rights referred in section 14 of the Copyright Act for computer program are reproduced below:

  •     to reproduce the work in any material form including the storing of it in any medium by electronic means;

  •    to issue copies of the work to the public not being copies already in circulation;

  •     to perform the work in public, or communicate it to the public;

  •     to make any cinematograph film or sound recording in respect of the work;

  •     to make any translation of the work;

  •     to make any adaptation of the work;

  •     to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in any of the points mentioned above; and

  •     to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer program.

So, it is the transfer or granting of licence of rights in section 14 of the Copyright Act which refers to use or right to use the copyright in context of computer software.

Further, there is a case to presume that the expression ‘right for use’ and ‘right to use’ in the context of taxability of computer software as royalty, has acquired a particular meaning, when India has accepted the meaning of that expression as explained in the 2010 OECD Model Commentary. Therefore, it is worth arguing that when India has accepted the meaning of the expression in a particular sense, then the use of the said expression subsequently should also be given similar meaning. The Courts also have in a catena of decisions2 held that internationally accepted meaning and interpretation placed on identical or similar terms employed in various DTAAs should be followed when construing similar terms occurring in the Act. However, the said reference/is subject to certain limitations, and for better understanding of the subject, one may refer to the Article ‘Legitimacy of References to OECD Commentary for interpretation of provisions under the Act and DTAAs’ published in BCAJ, February 2012, (page no. 9).

Therefore, if one agrees with the conclusion of the second school of thought, then it is only the income from the transfer or granting of licence of rights in section 14 of the Copyright Act which means use or right to use copyright in the context of computer soft-ware and accordingly will be taxable as royalty under the Act. In other words, purchase of any computer software viz., either shrinkwrap, bundled, canned or customised software would still continue to remain non-taxable as ‘royalty’ under the Act.

Analysis

Based on the above discussion, if the text of the Explanation 4 to section 9(1)(vi) is brought to test then one feels that the Legislature may still fail to pass the muster to tax the income from sale of computer software as royalty under the Act for want of the following broad reasons:

In Explanation 4, the Legislature has used the words ‘all or any’ which are prefixed to expression ‘right for use’ or ‘rights to use’ computer software. The expression ‘transfer of all or any right for use or right to use a computer software (including granting of licence)’ gives an impression of there being many ‘rights for use’ or ‘rights to use’ a computer software, which can either be transferred or licensed. However, as concluded under the first school of thought, ‘right for use’ or ‘right to use’ computer software in its general sense refers to only a simple case of ‘usage’ of property. One fails to determine the various rights ‘for use’ or rights ‘to use’ involved in context of a computer software and is forced to doubt whether the Explanation 4 supports the construction of the expression as sought under the first school of thought. On the contrary, considering the multiple rights referred in section 14 of the Copyright Act, one may agree that the expression ‘all or any’ could be construed as referring to those multiple rights u/s.14 of the Copyright Act, thereby supporting the meaning as drawn under the second school of thought.

Further, Explanation 3 to section 9(1)(vi) of the Act defines ‘computer software’ to mean computer program recorded on any medium. In a sense, suggesting that even though the Copyright Act distinguishes between ‘original copyrighted computer program’ and ‘copy of said computer program embedded in computer software’, the Income-tax Act, 1961 does not recognise such a distinction for the purpose of taxation and the words ‘computer software’ and ‘computer program’ may be used interchangeably. The same conclusion is also drawn under question no. 4 – What is the true reason for remedy, while discussing the findings of Heydon’s case in the context of computer software, under the first school of thought? So, the expression ‘right for use or right to use a computer software’ may be read as ‘right for use or right to use a computer program’ in respect of computer software.

Conclusion

Considering the above, one may conclude that Explanation 4 to section 9(1)(vi) of the Act, in its present form, may fail to achieve its object for want of the following broad reasons:

  •     Expressions viz., ‘transfer of all or any rights in respect of any right, property or information’, ‘all or any’, ‘rights for use’ or ‘right to use’ are neither defined nor properly referenced in section 9(1)(vi) of the Act;

  •     Expression ‘right for use’ or ‘right to use’ referred to in Explanation 4 to section 9(1)(vi) may suggest a meaning different than meaning in general sense of usage of property and transfer thereof; and

  •     Explanation 4 to section 9(1)(vi) supports the construction of the expressions ‘right for use’ or ‘right to use’ to cover the rights referred to in section 14 of the Copyright Act.

Apart from the above, it would be possible for non-resident taxpayers to take recourse to the beneficial provisions of DTAAs entered in by India with other countries. The Article on taxability of ‘royalty income’ generally defines “royalty as payment of any kind from ‘use or right to use’ any copyright”. It thus restricts the scope of royalty income and one may rely on the 2010 OECD Model Commentary and India’s position thereof for non-taxability of computer software as royalty.

Further, the Central Government has recently issued a Notification giving relief from multiple level of tax deduction at source (‘TDS’) u/s.194J in the context of computer software. The said Notification No. 21 of 2012, dated 13rd June 2012 is issued u/s.197A(1F) effective from 1st July 2012 and provides as under:

  •     The transferee has been defined to be a person who acquires the software. He may be a resident or a non-resident of India and the transferor is defined to be a person from whom the software is acquired, but he has to be a resident of India (as a precursor for applicability of section 194J of the Act).

  •     Acquisition of the software has to be in the course of transfer of software (referred to as ‘subsequent transfers’) and tax should have been deducted at source either u/s.194J or section 195 of the Act, as the case may be, in any of the previous transfers;

  •     The software so acquired under subsequent transfer should not have been modified; and

  •     The transferee should obtain a declaration from the transferor that the tax has been deducted in any of the previous transfers along with PAN of the transferor.

This Notification has a narrow scope and has several limitations, which are as under:

  •     The exemption from multiple level of deduction of tax has only been provided to payments subject to tax deduction as royalty u/s.194J of the Act and not u/s.195 of the Act; and

  •     The acquisition of software under subsequent transfers should be without modification. One generally finds that in a direct arrangement between a copyright owner and end-user, the standard End-User Licence Agreement (‘EULA’) specifically prevents the end-user for resale of acquired software and therefore, the question of multiple level of deduction of tax will not arise in such a scenario. However, in case of copyright owner-distributor- end -user chain, it may be possible to undertake the benefit of the said Notification.

A fact pattern which is generally involved in the case of copyright owner-distributor-end user chain of transfer of software and its TDS implications thereof are explained in the Diagram for ease of understanding and ready reference:

Generally, the copyright owner of a computer program assigns/licenses rights to commercially exploit the copyright to the distributor. The rights to commercially exploit copyright provide for making multiple copies of software along with rights to sell and/or rent computer software qua a geographical location i.e., in the given example could be India. Pursuant to aforesaid rights, the end-user in India acquires the software copy from the distributor, subject to terms and conditions as provided in a EULA.

(Note: It is assumed that under the Scenario 1 and 2, the income from sale of computer software is taxable as ‘royalty’ under the Act and respective DTAAs between India and other countries. The analysis has been limited with respect to TDS implications, which arise in the light of aforesaid notification.)

The important question which is relevant to determine the TDS implications in context of non-residents transferors that is discussed here is ‘Can a non-resident transferor take recourse to Article on ‘Non-discrimination’ under the DTAAs as regard the discriminatory treatment sought by the Notification by limiting the benefit to only resident transferors u/s.194J of the Act?’

Section 40a(ia) r.w.s. 194J and Notification No. 21 of 2012 provides for deduction of royalty expenses for payment to resident transferor for acquisition of software without any deduction of tax. On the other hand, for similar payment to non-resident transferor, if the transferee has not deducted tax u/s.195, then the said expense will not be allowed as deduction u/s.40a(i). Such discrimination is addressed in an indirect manner by Article 24(3) of the respective DTAAs entered in between India and other countries. Article 24(3), generally reads as under:

“Except where the provisions of para 1 of Article 19, para 7 of Article 11, or para 8 of Article 12 apply, interest, royalties, and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State, shall for the purposes of determining the taxable profits of the first mentioned person, be deductible under the same conditions as if they had been paid to a resident of the first mentioned State.”

Article 24(3) deals with the treatment of the enterprises of Contracting State under the tax laws of that State. The said Article provides that interest, royalties and other disbursements paid to a resident of the other contracting State should be deductible to the same extent as would be deductible if paid to a resident of the same State. The said para of the Article is designed to end a particular form of discrimination resulting from a fact that in certain countries the deduction of interest, royalties and other disbursements is allowed without restriction when the recipient is a resident, but is restricted or prohibited when the recipient is non-resident4.

A similar discriminatory treatment is sought by Notification No. 21 of 2012. Therefore, by taking recourse to Article 24(3) of DTAAs read with Notification No. 21 of 2012, similar exemption from multiple level of TDS may be claimed on payment to non-resident transferors.

Given the aforesaid situation, one is reminded of the proverb, ‘Once burnt is twice shy.’ But the hard lesson of consequences from imperfect drafting do not seem to have learnt and therefore, the Income-tax Department may still fail to tax income from sale of computer software as ‘royalty’ under the Act and may also fail to simultaneously impose onerous and discriminatory treatment of multiple level of TDS u/s.195 of the Act.

Undisclosed investment: Section 69B: Search revealed that assessee had purchased a flat for Rs. 17.55 lakh: Said flat was fetching an income of Rs. 7.02 lakh per annum: AO estimated the value and made an addition of Rs. 65.32 lakh u/s. 69B: No incriminating material found: Addition not justified.

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[CIT Vs. Dinesh Jain HUF ;25 taxmann.com 550 (Delhi)]

During a search at the residential and business premises of the assessee, certain material was seized which, inter alia, revealed investment in various properties by the assessee. One such property was a flat, which was purchased for Rs. 17.55 lakh. The Assessing Officer noticed that it was a commercial property which was fetching rent of Rs. 7.02 lakh per annum. He was of the view that a property which was fetching such a substantial rental income could not have been acquired for Rs. 17.55 lakh. He concluded that the fair market value of the property should be estimated in accordance with Rule 3 of Schedule III to the Wealthtax Act, 1957. The difference between value of the property calculated in accordance with the said rule and the amount shown in the sale document came to Rs. 65.32 lakh which was assessed as unexplained investment u/s. 69B of the Income-tax Act, 1961. The Tribunal deleted the addition.

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

“i) Section 69B in terms requires that the Assessing Officer has to first ‘find’ that the assessee has ‘expended’ an amount which he has not fully recorded in his books of account. It is only then that the burden shifts to the assessee to furnish a satisfactory explanation. Till the initial burden is discharged by the Assessing Officer, the section remains dormant.

ii) A ‘finding’ obviously should rest on evidence. In the instant case, it is common ground that no incriminating material was seized during the search which revealed any understatement of the purchase price. That is precisely the reason why the Assessing Officer had to resort to Rule 3 of Schedule III to the Wealth Tax Act.

iii) Section 69B does not permit an inference to be drawn from the circumstances surrounding the transaction that the purchaser of the property must have paid more than what was actually recorded in his books of account for the simple reason that, such an inference could be very subjective and could involve the dangerous consequence of a notional or fictional income being brought to tax contrary to the strict provisions of article 265 of the Constitution of India and Entry 82 in List I of the Seventh Schedule thereto which deals with ‘Taxes on income other than agricultural income’.

iv) Applying the logic and reasoning in K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 (SC) , for the purposes of section 69B, it is the burden of the Assessing Officer to first prove that there was understatement of the consideration (investment) in the books of account. Once that undervaluation is established as a matter of fact, the Assessing Officer, in the absence of any satisfactory explanation from the assessee as to the source of the undisclosed portion of the investment, can proceed to adopt some dependable or reliable yardstick with which to measure the extent of understatement of the investment. One such yardstick can be the fair market value of the property determined in accordance with the Wealth Tax Act.

v) Since the entire case has proceeded on the assumption that there was understatement of the investment, without a finding that the assessee invested more than what was recorded in the books of account, the decision of the Income-tax Authorities cannot be approved.

vi) Section 69B was wrongly invoked. The order of the Tribunal is upheld.”

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Unexplained expenditure: Section 69C: A. Ys. 2000-01 to 2003-04: Hospital: Search disclosed unaccounted collection of fees in the name of doctors and distribution thereof to doctors: Explanation that amount was collected and distributed to doctors: Doctors not examined: Amount not assessable in hands of hospital.

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[CIT Vs. Lakshmi Hospital; 347 ITR 367 (Ker):]

The assessee is a hospital. In the course of search, the Department discovered unaccounted collection of fees in the name of doctors and distribution thereof to doctors in the relevant period. The assessee hospital contended that it had distributed the entire amount to the doctors in whose names the collections were made and no part of the collections was retained as its income. The Assessing Officer assessed the entire amount as unexplained expenditure falling u/s. 69C. The Tribunal deleted the addition.

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

“i) Cases falling u/s. 69C are of essentially expenditure accounted as such by the assessee. The entire amount was collected without bringing it into the regular accounts and the payments were also made by the assessee without accounting for them.

ii) This was not a case of failure of the assessee to explain the expenditure. In fact the assessee, on being confronted with the accounts seized from it, conceded that the entire amounts were collected by it for payment to doctors serving the hospital. The assessee, prima facie, discharged its burden or at least shifted the burden to the Revenue when it gave particulars of payments made to the doctors.

iii) The Department should have issued notice to the doctors for confirmation of the payments and if they confirmed receipts, made assessments on doctors and if they denied the receipts, proceeded against the assessee and direct it to prove assessment of the amount u/s. 69C. Since this exercise had not been done, the addition u/s. 69C was not justified. ”

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Refund: Delay in claiming refund: Power to condone delay: Section 119: A. Ys. 1995-96 to 1998-99: Refund due to charitable trust: Trust not under obligation to file return: Delay in filing return claiming refund due to bifurcation of trust: Delay had to be condoned.

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[North Eastern Electric Power Corporation Employees Provident Fund Trust Vs. UOI; 348 ITR 584 (Gauhati):]

The petitioner was a trust recognised under the Income-tax Act. For the relevant period, the petitioner was not required to file return of income u/s. 139. However, in order to claim refund of TDS, the petitioner filed returns claiming refunds. Since the returns were filed beyond the time limit, they were treated as invalid returns and the Assessing Officer rejected the application for the refunds. The petitioner filed applications before the Chief Commissioner u/s. 119(2) of the Act requesting to condone the delay in filing the returns claiming refunds. The petitioner explained that the delay was caused due to bifurcation of the trust. The application was rejected by the Chief Commissioner.

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

“i) The Revenue authorities did not dispute the entitlement of the petitioner for refund of the deducted amount. The Trust in this case was being deprived of a sum of Rs. 8,93,773/- for which it could not be blamed at all. It had no liability whatsoever to pay this amount to the Revenue. Yet, the Revenue had refused to refund the sum taking a hypertechnical view of the matter.

ii) The petitioner was entitled to condonation of delay in filing the claim for refund.”

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Recovery of tax: S/s. 156 and 220: A. Y. 1985-86: Service of demand notice u/s. 156 is condition precedent for recovery proceedings: Demand notice not received by assessee: Recovery proceedings not valid.

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[Saraswati Moulding Works Vs. CIT; 347 ITR 161 (Guj):]

For the A. Y. 1985-86, the petitioner did not receive the assessment order and the demand notice u/s. 156. However, the Department served recovery notice. In response to the recovery notice, the petitioner had objected to the initiation of the recovery proceedings pointing out that it had not received the assessment order and the demand notice u/s. 156 of the Act. Thereafter, over the years, from time to time, recovery notices were issued to the petitioner and on each occasion, the petitioner had responded to the notice by requesting the Assessing Officer to serve the assessment order and the demand notice u/s. 156 of the Act on the petitioner. However, the assessment order and the demand notice u/s. 156 was not served on the petitioner.

In the circumstances, the petitioner filed a writ petition before the Gujarat High Court requesting to quash the recovery notices and the recovery proceedings. Gujarat High Court allowed the petition and held as under:

“I) In the absence of service of demand notice u/s. 156 of the Act on the petitioner, which was a basic requirement for invoking the provisions of section 220 of the Act, the petitioner could not have been treated to be an assessee in default. The subsequent proceedings u/ss. 220 to 226 of the Act were without jurisdiction.

ii) The impugned notice and the recovery proceedings are hereby quashed and set aside.”

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Recovery of tax: Adjustment of refund against demand: S/s. 220(6) and 245: A. Y. 2006-07: Appeal pending before Tribunal: Tribunal has power to stay recovery and not permit adjustment of refund.

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[Maruti Suzuki India Ltd. Vs. Dy. CIT; 347 ITR 43 (Del):]

For the A. Ys. 2003-04 and 2004-05, the assessee was entitled to refund of Rs. 122.57 crore and Rs. 107.42 crore respectively. In the normal course, refund should have been paid by the authorities to the petitioner. However, the refund amount was not paid to the petitioner. The refund was adjusted against the demand for A. Y. 2006-07 in respect of which the assessee was in appeal before the Tribunal. The petitioner had made an application before the Assessing Officer u/s. 220(6) for stay of recovery till the disposal of the appeal by the Tribunal. The petitioner had also made a stay application before the Tribunal. The Tribunal held that the Assessing Officer should first dispose of the application u/s. 220(6) of the Act.

The petitioner therefore filed a writ petition before the Delhi High Court, requesting for the stay of the recovery and refund of the amounts. Delhi High Court allowed the petition and held as under:

“i) Section 220(6) which permits the Assessing Officer to treat the assessee as not in default is not applicable when an appeal is referred before the Tribunal, as it applies only when an assessee has filed an appeal u/s. 246 or 246A.

ii) As per Circular No. 1914 dated 2nd December, 1993, the Assessing Officer may reserve a right to adjust, if the circumstances so warrant. In a given case, the Assessing Officer may not reserve the right to refund. Further, reserving a right is different from exercise of right or justification for exercise of a discretionary right/power. Moreover, the circular is not binding on the Tribunal.

iii) The Tribunal has power to grant stay as an inherent power vested in the appellate authority as well as u/s. 254 and the rules. The Tribunal is competent to stay recovery of the demand and if an order for “stay of recovery” is passed, the Assessing Officer should not pass an order of adjustment u/s. 245 to recover the demand. In such cases, it is open to the Assessing Officer to ask for modification or clarification of the stay order to enable him to pass an order of adjustment u/s. 245 of the Act.

iv) Different parameters can be applied when a stay order is passed, against use of coercive methods for recovery of demand and when adjustment is stayed. Therefore, the Tribunal can stay adoption of coercive steps for recovery of demand but may permit adjustment u/s. 245. When and in what cases, adjustment u/s. 245 of the Act should be stayed would depend upon the facts and circumstances of the case.

v) The discretion should be exercised judiciously. The nature of addition resulting in the demand is a relevant consideration. Normally, if the same addition/ disallowance/issue has already been decided in four of the assessee by the appellate authority, the Revenue should not be permitted to adjust and recover the demand on the same ground. In exceptional cases, which include the parameters stated in section 241 of the Act, adjustment can be permitted/allowed by the Tribunal.

vi) The action of the Revenue in recovering the tax in respect of additions to the extent of Rs. 96 crore on issues which were already covered against them by the earlier orders of the Tribunal or the Commissioner (Appeals) was unjustified and contrary to law.

vii) Accordingly, directions are issued to the respondents to refund Rs. 30 crore, which will be approximately the tax due on Rs. 96 crore.”

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Reassessment: S/s. 54EC, 147 and 148: A. Y. 2006-07: Benefit of section 54EC granted taking into account investment before date of transfer: Reopening of assessment to deny benefit: change of opinion: Reopening not valid.

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[Mrs. Pravin P. Bharucha Vs. Dy.CIT; 348 ITR 325 (Bom):]

For the A. Y. 2006-07, the assessee had claimed deduction u/s. 54EC of the Income-tax Act, 1961. On the request of the Assessing Officer, the assessee had filed the details of the investment u/s. 54EC. The Assessing Officer considered and allowed the deduction to the extent of Rs. 7.40 crore. Subsequently, the Assessing Officer issued notice u/s. 148 for withdrawing the deduction. Assessee’s objections were rejected.

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

“i) While granting the benefit, the Assessing Officer took a view that investment made out of earnest money/advance received as a part of the sale consideration before the date of the transfer of the assets would also be entitled to the benefit of section 54EC. This view was possible, in view of Circular No. 359 dated 10-05-1983, and the decision of the Tribunal.

ii) The reasons recorded did not state that the deduction u/s. 54EC was not considered in the assessment proceedings. In fact, from the reasons, it appeared that all facts were available on record and, according to the Revenue, the deduction was only erroneously granted. This was a clear case of review of an order.

iii) The application of law or interpretation of a statute leading to a particular conclusion, cannot lead to a conclusion that tax has escaped assessment, for this would then certainly amount to review of an order which is not permitted unless so specified in the statute.

iv) The order disposing of the petitioner’s objections also proceeded on the view that there had been non-application of mind during the original proceedings for assessment. This was unsustainable and a fresh application of mind by the Assessing Officer on the same set of facts amounted to a change of opinion and did not warrant reopening.

v) In view of the above, the notice u/s. 148 is without jurisdiction and we set aside the same.”

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Reassessment: Section 17 of W. T. Act, 1957: Notice in the name of person who did not exist i.e. a company which is wound up and amalgamated with another company: Notice and subsequent proceedings not valid.

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[I. K. Agencies Pvt Ltd. Vs. CWT; 347 ITR 664 (Cal):]

A company AP was wound up by virtue of the order of the company court and was amalgamated with the assessee company w.e.f. 01-04-1995. On 20-01-1997, the Assessing Officer issued notice u/s. 17 of the Wealth-tax Act, 1957 on AP directing it to file its wealth tax return in respect of a period prior to 01-04-1995 i.e. prior to amalgamation. Pursuant to the notice, reassessment order was passed. The notice and the reassessment was upheld by the Commissioner (Appeals) and the Tribunal.

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

“i) Section 17 of the Wealth-tax Act, 1957, is similar to the provisions contained in section 148 of the Income-tax Act, 1961, and section 34 of the Indian Income-tax Act, 1922. The jurisdiction to reopen a proceeding depends upon issue of a valid notice under the provisions, which gives power to the Assessing Officer to reopen a proceeding. A notice to a person who is not in existence at the time of issuing such notice is not valid. The fact that the real assessee subsequently filed its return with the objection that such notice is invalid and cannot cure the defects which go to the root of the jurisdiction to reopen the proceedings.

ii) The authorities below totally overlooked the fact that initiation of the proceedings for reassessment was vitiated for not giving notice u/s. 17 of the Act to the assessee and the notice issued upon AP which was not in existence at that time, was insufficient to initiate proceedings against the assessee which had taken over the liability of AP prior to the issue of such notice.

iii) Reassessment proceedings were not valid and were liable to be quashed.”

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Export: Deduction u/s. 10A: Gain from export on account of fluctuation in rate of foreign exchange is eligible for exemption.

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[CIT Vs. Pentasoft Technologies Ltd.; 347 ITR 578 (Mad):]

The assessee was an exporter and was eligible for deduction u/s. 10A. Due to diminution in rupee value, the assessee gained a higher sum in rupee value while earning the export income. The assessee claimed the deduction of the whole of the export profit u/s. 10A including the gains on account of fluctuation in rate of foreign exchange. The Assessing Officer disallowed the claim in respect of the gains on account of rate of foreign exchange. The Tribunal allowed the assessee’s claim.

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

“In order to allow a claim u/s. 10A, what is to be seen is whether such benefit earned by the assessee was derived by virtue of export made by the assessee. When fluctuation in foreign exchange rate was solely relatable to the export business of the assessee and the higher rupee value was earned by virtue of such exports carried out by the assessee, the benefit of section 10A should be allowed to the assessee.”

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Reassessment: S/s. 147 and 148: A. Y. 2005-06: Notice u/s. 148 issued by AO not having jurisdiction to assess: Notice and reassessment proceedings invalid: Disgraceful and deplorable conduct of ACIT and CIT in seaking to circumvent law condemned.

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[Fiat India Automobiles Ltd. V/s. ACIT (Bom); W. P. No. 8657 of 2012 dated 16-10-2012:]

On shifting the registered office of the petitioner from Mumbai to Pune, the petitioner in June-July 2009 had applied for transfer of assessment records from Mumbai to Pune. After exchange of several letters, by his order dated 22-11-2011, the CIT-10 Mumbai transferred the powers to assess the petitioner from ACIT-10(1) Mumbai to DCIT, Circle-1(2) Pune. However, on 30-03-2012, ACIT-10(1) Mumbai issued notice u/s. 148 with a view to reopen the assessment for the A. Y. 2005-06.

The Bombay High Court allowed the writ petition filed by the petitioner and quashed the impugned notice u/s. 148 dated 30-03-2012 and held as under:

“i) In the affidavit-in-reply filed by the DCIT-10(1) Mumbai, it is stated that by a corrigendum order dated 27-03-2012, the CIT-10 Mumbai has temporarily withdrawn/cancelled the earlier transfer order dated 22-11-2011 for the sake of administrative convenience and therefore, the notice dated 30-03-2012 would be valid. It is the case of the petitioner that neither any notice to pass a corrigendum order was issued to the petitioner nor the alleged corrigendum order dated 27-03-2012 has been served upon the petitioner.

ii) The question therefore to be considered is, when the CIT-10 Mumbai has transferred the jurisdiction to assess/reassess the petitioner from ACIT-10(1) Mumbai to DCIT Circle-1(2) Pune u/s. 127 of the Act after hearing the petitioner on 22-11-2011, whether the CIT-10 Mumbai at the instance of ACIT-10(1) Mumbai is justified in issuing a corrigendum order on 27/03/2012 behind the back of the petitioner and whether the ACIT-10(1) Mumbai is justified in issuing the impugned notice u/s. 148 of the Act dated 30-03-2012 on the basis of the said corrigendum order dated 27-03-2012 which was passed without issuing a notice to the petitioner, without hearing the petitioner and which is uncommunicated to the petitioner.

iii) The conduct of the ACIT and CIT is highly deplorable. Once the jurisdiction to assess the assessee was transferred from Mumbai to Pune, it was totally improper on the part of ACIT Mumbai to request the CIT to pass a corrigendum order with a view to circumvent the jurisdictional issue. Making this request was in gross abuse of the process of law. If there was any time barring issue, the ACIT Mumbai ought to have asked his counterpart at Pune to whom the jurisdiction was transferred to take appropriate steps in the matter instead of taking steps to circumvent the jurisdictional issue.

iv) It does not befit the ACIT Mumbai to indulge in circumventing the provisions of law and his conduct has to be strongly condemned. Instead of bringing to book persons who circumvent the provisions of law, the CIT has himself indulged in circumventing the provisions of law which is totally disgraceful. The CIT ought not to have succumbed to the unjust demands of the ACIT and ought to have admonished the ACIT for making such an unjust request.

v) The CIT ought to have known that there is no provision under the Act which empowers the CIT to temporarily withdraw the order passed by him u/s. 127(2) for the sake of administrative convenience or otherwise. If the CIT was honestly of the opinion that the order passed u/s. 127(2) was required to be recalled for any valid reason, he ought to have issued notice to that effect to the assessee and passed an order after hearing it.

vi) Writ petition is allowed by quashing the impugned notice dated 30-03-2012. Though the CCIT agrees that the actions of CIT and ACIT are patently unjustified and not as per law, he has expressed his helplessness in the matter. It is expected that the CCIT shall take immediate remedial steps to ensure that no such incidents occur in the future. Department shall pay a cost of Rs. 10,000/- which may be recovered from CIT and ACIT.”

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Charitable Purpose – Application of income – Amounts transferred by the Mandi Samiti to the Mandi Parishad in accordance with the Adhiniyam constitutes application of income for charitable purposes.

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[CIT v. Krishi Utpadan Mandi Samiti (2012) 348 ITR 566 (SC)]

Krishi Utpadan Mandi Samiti, a market committee incorporated and registered u/s. 12 of the Uttar Pradesh Krishi Utpadan Mandi Adhiniyam, 1964 (“the 1964 Adhiniyam” for short), carried out its activities in accordance with section 16 of the 1964 Adhiniyam, under which it is required to provided facilities for sale and purchase of specified agricultural produce in the market area. The members of the said market committee consisted of producers, brokers, agriculturists, traders, commission agents and arhatiyas. The source of income of the assessee was in the form of receipt collected as market fee from buyers and their agents, development cess on sale and purchase of agricultural products and licence fees from traders. U/s. 17(iv), the Mandi Samiti has to utilise the market committee fund the purpose of the 1964 Adhiniyam.

Under the 1964 Adhiniyam, broadly there are two distinct entities or bodies. One is Mandi Samiti (assessee) and the other is Mandi Parishad.

Section 26A of the 1964 Adhiniyam deals with establishment of the Mandi Parishad (Board). Under the 1964 Adhiniyam, the Board shall be a body corporate. Section 26A, inter alia, states that the Mandi Parishad (Board) shall have its own fund which shall be deemed to be a local fund and in which shall be credited all monies received by or on behalf of the Board, except monies required to be credited in the State Marketing Development Fund u/s. 26PP. U/s. 26PP, the State Marketing Development Fund has been established for the Mandi Parishad (Board) in which amounts received from the market committee u/s. 19(5) shall be credited. Section 19(5), inter alia, states that every market committee shall, out of its total receipts realised as development cess, shall pay to the Mandi Parishad (Board) contribution at a specified rate. The said payment from the Market Committee (Mandi Samiti) shall be credited to the State Marketing Development Fund u/s. 26PP. The State Marketing Development Fund shall be utilised by the Mandi Parishad (Board) for purposes indicated u/s. 26PP(2). Section 26PPP deals with establishment of Central Mandi Fund to which amounts specified in s/s. (1) shall be credited. Section 26PPP(2), inter alia, states that the Central Mandi Fund shall be utilised by the Mandi Parishad (Board) for rendering assistance to financially weak and underdeveloped market committees; that the funds would be used for construction, maintenance and repairs of link roads, market yards and other development works in the market area and such other purposes as may be directed by the State Government or the board.

The short question that arose before the Supreme Court was, whether transfer of amounts collected by Mandi Samiti to Mandi Parishad would constitute application of income for charitable purposes.

The Supreme Court noted that, both the Mandi Samiti and the Mandi Parishad were duly registered u/s. 12AA of the Income-tax Act, 1961 (“the 1961 Act”, for short). That, after the amendment of section 10(20) and section 10(29) by the Finance (No.2) 2 of 2002 with effect from 1st April, 2003, the words “local authority” had lost its restricted meaning and, therefore, the assessee (market committee) had to satisfy the conditions of section 12AA read with section 11(1)(a) of the 1961 Act, like any other body or person.

According to the learned senior counsel for the Department, in view of the said amendment, vide the Finance (No.2) Act of 2002, the assessee had to show that, during the relevant assessment year, income had been derived from property held under trust and that the said income stood applied to charitable purposes. According to the learned counsel, if one analysed the scheme of the 1964 Adhiniyam, it would become clear that the amounts transferred by the assessee to the Mandi Parishad could not constitute application of income for charitable purposes within the meaning of section 11(1)(a) of the 1961 Act in view of the fact that the assessee (Mandi Samiti) was only a conduit which collected Mandi shulk (fees) whereas utilisation of the said Mandi shulk was not by the assessee but is made by another entity, i.e., Mandi Parishad whose accounts were not verifiable and, therefore, according to the Department, such income would not get the benefit of exemption u/s. 11(1)(a) of the 1961 Act.

The Supreme Court held that u/s. 19(2) of the 1964 Adhiniyam, all expenditure incurred by the assessee in carrying out the purposes of the 1964 Adhiniyam (which includes advancing credit facilities to farmers and agriculturists as also construction of development works in the market area) had to be defrayed out of the market committee fund and the surplus, if any, had to be invested in such manner as may be prescribed. This was one circumstance in the 1964 Act to indicate application of income. Similarly, u/s. 19B(2) of the 1964 Adhiniyam, the assessee was statutorily obliged to apply the market development fund for the purposes of development of the market area. U/s. 19B(3), the assessee was statutorily obliged to utilise the amounts lying to the credit in the market development fund for extending facilities to the agriculturists, producers and payers of market fees. The market development fund was also to be statutorily utilised for development of market yards. Similarly, all contributions received by the market committee (Mandi Samiti) from the members u/s. 19(5) were to be statutorily paid by the market committee (assessee) to the Uttar Pradesh State Marketing Development Fund. These provisions indicated application of income of the assesee to the statutory funds set up under the 1964 Adhiniyam. According to the Supreme Court, keeping in mind the statutory scheme of the 1964 Adhiniyam, whose object falls u/s. 2(15) of the 1961 Act, there was no doubt that the assessee satisfied the conditions of section 11(1)(a) of the 1961 Act. The income derived by the assessee (which was an institution registered u/s. 12AA of the 1961 Act) from its property had been applied for charitable purposes, which includes advancement of an object of general public utility.

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Deduction of tax at sources – The Transaction of purchase of stamp papers at discount by the Stamp Vendors from the State Government is a transaction of sale and there is no obligation on the State Government to deduct tax at source u/s. 194 H on the amount of discount.

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[CIT v Ahmedabad Stamp Vendors Association (2012) 348 ITR 378 (SC)]

The registered association of the stamp vendors of Ahmedabad approached the Gujarat High Court to quash the communication received from the Income Tax Department calling upon the State Government to deduct tax at source u/s. 194 H on commission or brokerage to the person carrying the business as “Stamp Vendors” and for a declaration that section 194H was not applicable to an assessee carrying on business as a stamp vendor.

The principal controversy before the High Court was whether the stamp vendors were agents of the State Government who were being paid commission or brokerage or whether the sale of stamp papers by the Government to the licensed vendors was on principal to principal basis involving the contract of sale.

The High Court after considering the Gujarat Stamps and Sales Rules, 1987, Gujarat Sales Tax Act, 1969 and the authorities cited held that the stamp vendors were required to purchase the stamp papers on payment of price less the discount on the principal to principal basis and there was no contract of agency at any point of time and that the discount made available to the licensed stamp vendors under the provisions of the Gujarat Stamps and Supply and Sales Rules, 1987, does not fall within the expression ‘commission’ or ‘brokerage’ u/s. 194H of the Act.

On appeal by the Department, the Supreme Court held that 0.50 % to 4 % discount given to the stamp vendors was for purchasing the stamps in bulk quantity and the said discount was in the nature of the cash discount. The Supreme Court concurred with the judgement of the High Court that the impugned transaction was a sale and consequently, section 194H had no application.

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(2012) 26 taxmann.com 265 (Mumbai Trib) Shrikant Real Estates (P.) Ltd. v ITO Assessment Year: 2008-09. Dated: 19-10-2012

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Section 143(1), 154 – Keeping in mind the present system of e-filing, application u/s. 154 is maintainable in a case where assessee has not shown Short Term Capital Gain u/s. 111A in Schedule CG of e-return.

Facts:
For assessment year 2008-09, the assessee e-filed return which was revised by filing another e-return on 05.01.2009.

During the said year the assessee had short term capital gain of Rs. 2,65,853 which was chargeable at special rates u/s. 111A. In the returns, the assessee had at Item No. 3(a)(i) inadvertently/due to clerical error mentioned the amount as Nil but at the same time in item no. 3(a)(ii) and 3(a)(iii) short term capital gain of Rs. 2,65,853 was shown. Also in Schedule CG–Capital Gains on page 19 of e-return shown short term capital gain at item no. 6 but due to inadvertence/clerical error at item No. 7 – Short Term Capital Gain u/s. 111A included in 6 above the amount was stated to be Nil.

In the intimation received by the assessee, short term capital gain was charged to tax at normal rates instead of rate mentioned u/s. 111A. The assessee’s application u/s. 154 to rectify this was rejected on the ground that the assessee ought to have rectified the mistake in the returns by filing a revised return and this mistake is not rectifiable u/s. 154 of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that in the present system of e–filing of return which is totally dependent upon usage of software, it is possible that some clerical errors may occur at the time of entering the data in the electronic form. The return is prepared electronically which is converted into an XML file either through the free downloaded software provided by CBDT or by the software available in the market. In either of the case, there is every possibility of entering incorrect data without the expert knowledge of preparing an XML file. The Tribunal also noted that the assessee had under Schedule SI – income chargeable to income-tax at special rate IB which is at internal page 24 of the return shown short term capital gains at Rs 2,65,853 and tax thereon @ 10% to be Rs 26,585. The Tribunal directed the AO to rectify intimation u/s. 143(1) and to charge tax on short term capital gains @ 10%.

The appeal filed by the assessee was allowed.

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(2012) 27 taxmann.com 104 (Chennai Trib) ACIT v C. Ramabrahmam Assessment Year: 2007-08. Dated: 31-10-2012

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Section 24, 48 – Interest on loan taken for acquisition of property can be regarded as cost of acquisition even though the same has been claimed as deduction u/s. 24 in earlier years.

Facts:
During the previous year relevant to the assessment year under consideration, the assessee returned capital gain arising on transfer of house property. While computing such capital gain, the assessee had regarded interest on loan taken in 2003 for purchasing the property as forming part of cost of acquisition of the property. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the amount of interest which has been regarded as cost of acquisition had already been claimed as deduction u/s. 24(b). He was of the view that since the amount of interest was already claimed u/s. 24(b) the same could not again be allowed u/s. 48. He added the amount of interest to the income of the assessee from short term capital gains.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the assessee’s appeal and held that the assessee was entitled to include interest amount for computation u/s. 48 despite the fact that the same had been claimed u/s. 24(b) while computing income from house property.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that admittedly the loan was taken to acquire house property and the deduction allowed u/s. 24(b) was in accordance with the statutory provisions. Upon going through the provisions of section 48 the Tribunal held that the deduction u/s. 24(b) and computation of capital gains u/s. 48 are altogether covered by different heads of income i.e. `income from house property’ and `capital gains’. A perusal of both the provisions makes it unambiguous that none of them excludes operation of the other. The Tribunal held that it did not have the slightest doubt that interest in question was indeed an expenditure in acquiring the asset. Since both the provisions are different, the assessee was held to be entitled to include interest amount at the time of computing capital gains u/s. 48 of the Act. CIT(A) was right in accepting the contention of the assessee and deleting the addition made by the AO.

The appeal filed by the revenue was dismissed.

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Controversy on taxability of cross-border software payments

Introduction:

Section 4 and section 5 r.w.s. 9(1)(vi) of the Incometax Act, 1961 (the Act) provide for taxability of income from royalty in India. Section 9(1)(vi) of the Act by a deeming fiction provides for the taxation of income from royalty in India. Explanation 2 to section 9(1)(vi) of the Act defines the word ‘royalty’, which is wide enough to cover both industrial royalties as well as copyright royalties, both being forms of intellectual property. Computer software is regarded as an ‘industrial royalty’ and/or a ‘copyright royalty’. Industrial properties include patents, inventions, process, trademarks, industrial designs, geographic indicators of source, etc. and are generally granted for an article or for the process of making such article, on the other hand, copyright property includes literary and artistic works, plays, films, musical works, knowledge, experience, skill, etc. and are generally granted for ideas, principles, skills, etc.

Just as tangible goods are sold, leased or rented in order to earn monetary gain, on similar lines, the Intellectual Property laws enable authors of the intellectual properties to exploit their work for monetary gain. The modes of exploitation of intellectual property for monetary gains are different for each type of intellectual property covered in various sub-clauses of the definition of ‘royalty’ under Explanation 2 to section 9(1)(vi) and subjected to tax as per the scheme of the Act.

The controversy on taxability of cross-border software payments basically relates to characterisation of the income in the hands of the non-resident payee. The controversy, sought to be discussed here, revolves around the issue “whether the payment received by non-resident for giving licence of the computer software, popularly known as ‘sale of software’, is chargeable to tax as ‘royalty’, or it is a ‘sale’. The Revenue holds such sales to be royalty on the ground that during the course of sale of computer software, computer program embedded in it is also licensed and/or parted with the end-user of the software, and as against the claim of the taxpayers who treat the transaction as one of transfer of ‘copyrighted article’ and not transfer of the right in the copyright or licence of the software. Typically the tax authorities seek to tax these payments in the hands of non-residents as royalty and subject the same to withholding taxes. The non-resident payees seek to label such receipts as business income not chargeable to tax, in the absence of a Permanent Establishment in India. Taxability of software-related transaction depends upon the nature and extent of rights granted or transferred under the particular arrangement regarding use and exploitation of the program.


Determining the taxability of any cross-border software transaction involves an understanding and analysis of the following aspects:

 

I. Definition and classification of Computer Software;
II. Definitions of Royalty under the Act and Double Tax Avoidance Agreement (DTAA);
III. Relevant provisions of the Copyright Act, 1957;
IV. OECD Commentary on Software Payments; and
V. Key judicial and advance rulings.


I. Definition and classification of Computer Software

Definition: Income-tax Act: Explanation 3 to Section 9(i)(vi) of the Act defines ‘Computer Software’ to mean any computer program recorded on any disc, tape, perforated media or other information storage device and includes any such program or any customised electronic data.

Copyright Act: Under the Indian Copyright law (Copyright Act, 1957), computer program and computer databases are considered literary works.

Section 2(ffc) defines ‘Computer Programme’ as a set of instructions expressed in words, codes, schemes or any other form, including a machine-readable medium, capable of causing a computer to perform a particular task or achieve a particular result.

Commentary on Article 12 of the OECD Model Convention describes software as a program, or series of programs, containing instructions for a computer required either for the operational processes of the computer itself (operational software) or for the accomplishment of other tasks (application software).

The New Oxford Dictionary for the Business World defines ‘software’ as programs used with a computer (together with their documentation), including program listings, program libraries, and user and programming manuals.

Typical Business Model relating to computer software:

  • Single End-user model — Foreign Company supplies a single copy of the software to the end-user.
  • Distributor Model — Foreign Company either supplies soft copies to an independent distributor in India for onward distribution to Indian customers either directly or through distribution channels or supplies a single copy of the software to a distributor in India who is given the licence to make copies and distribute soft copies to the customers.
  • Multiple-user licence model — Foreign Company supplies a single disk containing the software program to an Indian Company with a right to make copies of the software and distribute to in-house end users.
  • Customised model — Foreign Company customises the software as per Indian buyer’s requirements/ specifications — Enterprise Resource Planning software.
  • Software embedded in hardware — Foreign Company supplies integrated equipment (software bundled with hardware).
  • Cost contribution model — Foreign Company incurs expenditure for installation and maintenance of software system for the benefit of the group companies. It provides access to such Indian group company to use the system and recharges the cost on the basis of use of the system.
  • Electronic model — Payment to Foreign Company for purchase of software through electronic media.
  • Payment to Foreign Company for provision of services for development or modification of the computer program (incl. for upgradation, training, installation, maintenance, etc.).
  • Payment to Foreign Company for know-how related to computer programming techniques.
  1. Definition of Royalty

Under the Act:Explanation 2 to Section 9(i)(vi) of the Act defines the term ‘Royalty’ to mean consideration for:(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trademark or similar property;

(ii) …………….
(iii) …………….
(iv) …………….
(v) …………….
(vi) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or

(vii) the rendering of any services in connection with the activities referred to above in subclauses (i) to (iv), (iva) and (v).

Under the DTAA:
Most DTAAs define the term ‘royalty’ to mean:

(i) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and

(ii)    payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.

III.    Relevant provisions of the Copyright Act, 1957

Section 2(o): Literary Work

includes computer programs, tables and compilations including computer databases.

Section 14: Meaning of Copyright:

Copyright means the exclusive right, subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely;

(i)    in the case of a literary, dramatic or musical work, not being a computer program —

(a)    to reproduce the work in any material form including the storing of it in any medium by electronic means;
(b)    to issue copies of the work to the public and not being copies already in circulation;
(c)    to perform the work in public, or communicate it to the public
(d)    to make any cinematograph film or sound recoding in respect of the work
(e)    to make any translation of the work
(f)    to make any adaptation of the work
(g)    to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses

(i) to (vi).

(ii)    in the case of computer program —

(a)    to do any of the acts specified in clause (a) above;
(b)    to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer program
(c)    No copyright except as provided in this Act, i.e., Copyright does not extend to any right beyond the scope of section 14.

Section 52: Certain acts not to be infringement of copyright.

(1)    The following act shall not constitute an infringement of copyright, namely:

(a)    …………

(aa)    The making of copies or adaptation of a computer program by a lawful possessor of a copy of such computer program, from such copy —

a)    In order to utilise the computer program for the purpose for which it was supplied; or
b)    To make back-up copies purely as a tem-porary protection against loss, destruction or damage in order only to utilise the computer program for the purpose for which it was supplied.


IV. OECD on Software Payments

The 1992 OECD Model Convention (MC):

(1)    Following a survey in the OECD member states, the question of classification of computer software was first considered in 1992 and accordingly revision made in the Commentary to the OECD Model Convention on Article 12.
(2)    Software was generally defined as a program, or a series of program, containing instructions for a computer either for the computer itself or accomplishing other tasks. Modes of media transfer were also discussed.
(3)    Acknowledged that OECD member countries typically protect software rights under copyright laws.
(4)    Different ways of transfer of software rights e.g., Alienation of entire rights, alienation of partial rights (sale of a product subject to restrictions on the use).

The taxability was analysed under 3 situations:

First situation: Payments made where less than full rights in the software are transferred:

  •     In a partial transfer of rights the consideration is likely to represent a royalty only in very limited circumstances.
  •     One such case is where the transferor is the author of the software and alienates part of his right in favour of a third party to enable the latter to develop or exploit the software itself commercially — for example by development and distribution of it.
  •     In other cases, acquisition of the software will generally be for personal or business use of the purchaser and will be business income or independent personal services. The fact that software is protected by copyright or there are end use restrictions is of no relevance.


Second situation: Payments made for alienation of Complete Rights attached to the software:

  •     Payments made for transfer of a full ownership cannot result in royalty.

Difficulties can arise where there are extensive transfer of rights, but partial alienation of rights involving:

exclusive right of use during a specific period
or in a limited geographical area.
additional consideration related to usage.
consideration in the form of substantial lump-sum payment.

  •     Subject to facts, generally such payments are likely to be commercial income or capital gains rather than royalties.


Third situation: Software payments under mixed contracts:

  •     Examples include sale of computer hardware with built-in software with concessions of the right to use software with provision for services.
  •     In such a scenario, it was felt that the consideration be split on the basis of information contained in the contract or by a reasonable apportionment with the appropriate tax treatment being applicable to each part.

Thus for the first time these three situations were envisaged by the OECD in its 1992 MC.

2000 OECD MC brought in further refinements to the earlier positions.

It acknowledged that software can be transferred as an integral part of computer hardware or in independent form available for use with various hardware. For the first time, the 2000 MC suggested a distinction between a copyright in the program and software which incorporates a copy of the copyrighted program. The transferee’s rights will in most cases consist of partial rights or complete rights in the underlying copyright or they may be rights partial or complete in a copy of the program. — It does not matter, if such copy is provided in a material medium, or electronically. Payments made for acquisition of partial rights in the copyright will represent ‘royalty’ only if consideration is for granting of rights to use the program that would, without such licence, constitute an infringement of copyright.

The 2000 MC also throws light on  rights to make multiple copies for operation within its own business and these are commonly referred to as ‘site licences’, ‘enterprise licences’, or  ‘network licences’. If these are for the purposes of enabling the operation of the program on the licensee’s computers/network and reproduction for any other purpose is not permitted, payments for such arrangements would not be reckoned as royalty, but may be business profits.

2008 MC to the OECD Model expanded the scope of software payments by including transactions concerning digital products such as images, sounds or text. The downloading of images, sounds or text for the customers own use or enjoyment is not royalty as the payment is essentially for acquisition of data transmitted digitally. However, if the essential consideration for the payment for a digital product is the right to use that digital product, such as to acquire other types of contractual rights, data or services, then the same would be characterised as royalty.

Example a book publisher, who would download a picture and also acquire the right to reproduce that picture on the cover of a book that it is producing.

India’s position on OECD: India  reserves its position on the interpretations provided in the OECD MC and is of the view that some of the payments referred therein may constitute royalties.

Issues in the controversy:
(1)  Whether payment for purchase of computer software is payment for  ‘goods’ or payment for ‘royalty’?

(2) Whether payment for computer software can be said to be payment for ‘use of process’ as referred to in clauses (i), (ii) and (iii) of the royalty definition in the Act?

(3) Whether payment for computer software is for ‘right to use the copyright in a program’ or ‘right to use the program only’? [Copyright v. Copyrighted Article]

(4) Whether mere grant of non-exclusive licence would fall within the ambit of ‘royalty’ definition under the Act? [Ref. clause (v) of the royalty definition in the Act which also includes the phrase ‘granting of a licences’]

(5)    Whether payment for computer software can be said to ‘impart information concerning technical, industrial, commercial or scientific knowledge’ and hence falling under clause (iv) of the royalty definition under the Act?

(6)    Section 115A prescribes the rate of tax applicable to a foreign company on income by way of ‘royalty’ or ‘fees to technical services’. Whether as per section 115A(1A) of the Act, it is not necessary that copyright therein should be specifically transferred as consideration in respect of any computer software is stated to be taxable u/s.115A?

V.    Key judicial and advance rulings

CIT v. Samsung Electronics Co. Ltd., 64 DTR (Kar.) 178

Facts:

The assessee was engaged in the development and export of computer program. The assessee imported ‘shrinkwrapped’/‘off-the-shelf’ software from suppliers in foreign countries for use in its business and made payment for the same without deducting tax at source u/s.195.

Ruling of the High Court:

U/s.9(1)(vi) of the Act and Article 12 of the DTAA, “payments of any kind in consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work” is deemed to be ‘royalty’.

It is well settled that in the absence of any definition of ‘copyright’ in the Act or DTAA with the respective countries, reference is to be made to the respective law regarding definition of Copyright, namely, the Copyright Act, 1957, in India, wherein it is clearly stated that ‘literary work’ includes computer programs, tables and compilations including computer (databases).

On reading the contents of the respective agreement entered with the non-resident, it is clear that under the agreement, what is transferred is a right to use the copyright for internal business by making copies and back-up copies of the program.

The amount paid to the supplier for supply of the ‘shrinkwrapped’ software is not the price of the CD alone nor software alone nor the price of licence granted. It is a combination of all. In substance unless a licence was granted permitting the end-user to copy and download the software, the CD would not be helpful to the end-user.

There is a difference between a purchase of a book or a music CD, because while these can be used once they are purchased, software stored in a dumb CD requires a licence to enable the user to download it upon his hard disk, in the absence of which there would be an infringement of the owner’s copyright. Therefore, there is no similarity between the transaction of a computer program and books.

The decision of the Supreme Court in case of TCS v. State of AP, (271 ITR 404) distinguished as being in the context of sales tax.

Thus, held that the payments made in respect of computer program would constitute ‘royalty’ under the applicable DTAA and would also fall within the ambit of ‘royalty’ under the broader definition in the Act. Thus, the assessee would be required to deduct tax on the payment made in respect of computer programs.

Further, the Karnataka High Court in case of CIT v. M/s. Wipro Ltd., (ITA No. 2804 of 2005) has also held that payment for subscription/access to database is payment for licence to use the copyright hence taxable as ‘royalty’.

Director of Income-tax v. Ericsson Radio System AB, (ITA No. 504 of 2007) (Delhi High Court)

Facts:

The assessee, a Swedish company, entered into con-tracts with ten cellular operators for the supply of hardware equipment and software. The installation and testing were done in India by the assessee’s group entities.

The contracts were signed in India. The supply of the equipment was on CIF basis and the assessee took responsibility thereof till the goods reached India. The assessee claimed that the income arising from the said activity was not chargeable to tax in India.

The Assessing Officer and the Commissioner of Income-tax (Appeals) held that the assessee had a ‘business connection’ in India u/s.9(1)(i) and a ‘permanent establishment’ under Article 5 of the DTAA. It was also held that the income from supply of software was assessable as ‘royalty’ u/s.9(1)(vi) and Article 13. On appeal, the matter was referred to Special Bench of the Tribunal. The Tribunal held that as the equipment had been transferred by the assessee offshore, the profits therefrom were not chargeable to tax. It also held that the profits from the supply of software were not assessable to tax as ‘royalty’ either under the Act or DTAA with Sweden.

Aggrieved by the common order of the Special Bench in case of Motorola Inc. 95 ITD 269 (Del.) (SB), which also covered the case of Ericsson, the Tax Authority filed an appeal before the High Court.

Ruling of the High Court:

The profits from the supply of equipment were not chargeable to tax in India because the property and risk in goods passed to the buyer outside India. The assessee had not performed installation service in India.

The argument that the software component of the supply should be assessed as ‘royalty’ is not acceptable because the software was an integral part of the GSM mobile telephone system and was used by the cellular operator for providing cellular services to its customers.

Software was embedded in the equipment and could not be independently used. It merely facilitated the functioning of the equipment and was an integral part thereof. The Tax Authority accepts that it could not be used independently. The fact that in the supply contract, the lump -sum price was bifurcated is not material. The same was only because differential customs duty was payable.

To qualify as royalty, it is necessary to establish that there is transfer of all or any right (including the granting of any licence) in respect of copy right of a literary, artistic or scientific work. Section 2(o) of the Copyright Act makes it clear that a computer program is to be regarded as a ‘literary work’. Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. In the present case, this has not been established. It is not even the case of the Revenue that any right contem-plated u/s.14 of the Copyright Act, 1957 stood vested in this cellular operator as a consequence of Article 20 of the supply contract.

A distinction has to be made between the acquisition of a ‘copyright right’ and a ‘copyrighted article’. The submissions made by the assessee on the basis of the OECD commentary are correct.

Even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 2 below section 9(1)(vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in Article 13, para 3 of the DTAA. This is so because the definition in the DTAA is narrower than the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payment made for the use of or the right to use a copyright of a literary work. Therefore, what are contemplated are a payment that is dependent upon user of the copyright and not a lump-sum payment as is the position in the present case.

The payment received by the assessee was towards the title of the equipment of which software was an inseparable part incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment could be classified as payment towards royalty.

Solid Works Corporation, ITA No. 3219/Mum./2010 (Mum. Tribunal), dated 8-2-2012

Recently the Mumbai ITAT on the issue of characterisation of shrinkwrapped computer software in the case of Solid Works Corporation (Taxpayer) has held that the consideration received by the taxpayer for the shrinkwrapped software is not ‘royalty’ under the provisions of the India-USA DTAA, but business receipts.

While arriving at its decision, the ITAT relied on the favourable view taken by the Delhi High Court in the case of Ericsson, after considering the decision of the Karnataka High Court in the case of Samsung (supra).

It may be noted that the ITAT has also accepted the argument of the taxpayer that when two views are available, the one favourable to the taxpayer should be followed. This principle should apply even to a non-resident in view of the non-discrimination article in the DTAA.

This ruling should be helpful, especially to taxpayers coming within the jurisdiction of the Mumbai ITAT, and is likely to have persuasive value in case of other neutral jurisdictions (i.e., other than the jurisdiction of the Karnataka High Court), in defending the tax position that is taken based on whether a transaction is a ‘copyright right’ or a ‘copyrighted article’.

Further, the Mumbai Tribunal in the following cases had ruled the issue in favour of the taxpayer by following the Special Bench decision in case of Motorola Inc.:

  •     Kansai Nerolac Paints Ltd. v. Addl. DIT, 134 TTJ 342 (Mum.)
  •     DDIT v. M/s. Reliance Industries Ltd., 43 SOT 506 (Mum.)
  •    Addl. DIT v. Tata Communications Limited, 2010 TII 157 ITAT-Mum.


Controversy before the AAR:

The Authority for Advance Rulings (‘AAR’) recently in its ruling in the case of Citrix Systems Asia Pacific Pty. Limited (AAR No. 882 of 2009) and Millennium IT Software Ltd., 338 ITR 391 had an occasion to deal with the aforesaid issue under consideration, wherein the AAR while deciding against the taxpayer’s contention, held that the income from the transaction be regarded as a royalty, liable to tax in India. In deciding the issue in this case the AAR gave findings that were contrary to its own findings on the subject given in the earlier decisions in the cases of Dassault Systems K. K., 322 ITR 125 and FactSet Research Systems Inc., 317 ITR 169.

Citrix Systems Asia Pacific Pty. Limited (AAR):

In this case, the AAR held that the payment received from Indian distributor under software distribution agreement is taxable as royalty u/s.9(1)(vi) of the Act as well as Article 12 of the India-Australia DTAA. It also observed that sale/licence to use software entails transfer of rights in copyrights embedded in software. The AAR took a contrary view to its earlier ruling in the case of Dassault Systems and refused to rely on the Delhi HC ruling in the case of Ericsson (supra), thereby following the ruling in the case of Millennium IT Software and the Karnataka HC in the case of Samsung (supra).

It is interesting to note that the Chairman of the AAR has mentioned in the ruling of Citrix that the differing views on the issue can get resolved and the matter can be set at rest only by a decision of the Supreme Court, laying down the law finally, to be followed by all the Courts and Tribunals including the AAR. Only an authoritative pronouncement by the Apex Court can settle this controversy.


Millennium IT Software’s case:

In this ruling, the AAR held that the licence fees paid for use of ‘Licenced Program’ is taxable as ‘royalty’ under clause (v) of Explanation 2 to section 9(1)(vi) of the Act and Article 12 of the India-Sri Lanka DTAA. Thus the provisions of withholding tax u/s.195 are applicable to the applicant. The AAR’s ruling was based on the ruling of the Delhi ITAT in the case of Gracemac Corporation v. DIT, (42 SOT 550).

The said Delhi ITAT ruling has been distinguished by the Mumbai ITAT in the case of TII Team Telecom Inter-national Pvt. Ltd., 60 DTR 177. Also, the Mumbai ITAT has distinguished the AAR ruling of Millennium in the case of Novel Inc. (ITA No. 4368/Mum./2010) where income of non-resident from re-selling of software via Indian distributor was held as not taxable.

Conclusion:

The issue under consideration is otherwise a multi-faceted issue and has several dimensions which are sought to be addressed through a few questions and answers thereon. An analysis of the above-discussed important decisions rendered in the context of software/ use of technology-related payments give rise to the following open-ended questions before the taxpayers:

  •    What is meant by the expression ‘transfer of all or any rights (including granting of licence) and which rights are sought to be covered?
  •     Whether the rights referred in section 14 of the Copyrights Act, 1957 are transferred in sale of computer software to end-users?
  •     Whether ‘computer program’ is copyright and/or industrial intellectual property?
  •    Whether the payment made in relation to shrink-wrapped/off-the-shelf software would constitute payment for a copyright, would need to be determined as per section 14 of the Copyright Act, 1957?
  •     Where there is any distinction between a copyright v. copyrighted article in light of the decision of the Karnataka High Court in the case of Samsung Electronics?
  •     Whether in case of bundled contract i.e., software supplied along with hardware, any bifurcation can be made between the payments made for software and hardware?
  •     Whether every payment made by the taxpayer for use of computer program would constitute ‘royalty’ under the Act and relevant DTAA?
  •     Is the position under the DTAA stronger than un-der the Act as the definition of royalty under the DTAA is restrictive than under the Act?
  •     What would be the position, where the DTAA between two Contracting States specifically cover the payments for computer software program within the ambit of taxation as royalty, vis-à-vis the DTAA where such inclusion is not there.

Key takeaways:

The ruling of the Karnataka High Court in the case of Samsung would have significant tax implications on the industries operating under jurisdiction of the Karnataka High Court dealing in computer software/ other technology. The Delhi High Court in the case of Ericsson Radio System A.B., New Delhi having upheld the decision of the Special Bench on this issue, could help the taxpayers to reinforce its position on this contentious issue before various Tribunals (except Bangalore Tribunal). Although, the AAR rulings in the case of Dassault, Geo quest, Citrix’s and Millennium are applicable only to the applicant and Tax Department, they have persuasive value.

Analysis of Finance Bill, 2012 — Proposals:

Controversy revolving around the tax-ability of software payments, is sought to be resolved by amendment to section 9(1)(vi) of the Act. The Finance Bill, 2012 has proposed to insert Explanation 4 and Explanation 5 to the section 9(1)(vi) with retrospective effect from 1st June 1976. The definition of the royalty in Explanation 2 is sought to be expanded by these two explanations.

Explanation 4 clarifies that the transfer of all or any rights in respect of any right, property or information includes transfer of all or any right for use or right to use a computer software (including granting of a licence), irrespective of the medium through which such right is transferred.

Implications of Explanation 4:

By insertion of proposed Explanation 4 to section 9(1) (vi) the controversy surrounding taxability of software payment by characterising it as royalty is sought to be put at rest. The main issue would be whether by inserting Explaination and expanding the scope of the definition ‘royality’ by way of clarificatory retro-spective amendment, can a payment for software be brought to tax?

The dispute was whether by making a payment for software, the licensee gets rights in the ‘copyright’ of the software. It appears that it is felt by the law-makers that by specifically inserting payment for software itself in the definition of royalty, this purpose will be achieved. The moot question however is, whether it can be done retrospectively from 1 June 1976?

Further, Explanation 5 clarifies that royalty includes consideration in respect of any right, property or information whether or not the payer has the possession or control of it, the payer is using it directly or such right, etc. are located outside India.

Implications of Explanation 5:

Explanation 5 seeks to clarify that once a right, property or information is deemed to be covered under Explanation 2 read with Explanation 4 to the section 9(1)(vi), the interpretation would continue to remain so, irrespective of possession or control of the right, property or information, direct or indirect use of the right, property or information or location of the right, property or information.

While it remains to be seen how Explanation 5 will be interpreted by the Courts. It would not be correct to say that on fulfilment of the situations laid down in Explanation 5, the taxability of sale of software is, per se, attracted.

Existence of beneficial treaty provisions:

As mentioned above, the payment for the sale or licence of software, would now get covered u/s. 9(1) (vi), if provisions of the Act are to be applied. However, if the provisions of the treaty are beneficial than the provisions of section 9(1)(vi), still it will be possible to contend that payment for software as per the provisions of the treaty is not liable to tax in India. Further, out of several treaties signed by India, only in 4 to 5 treaties, namely, Morocco, Rus-sia, Turkmenistan, Malaysia and Tobago specifically payment for software is covered as part of royalty. Therefore, it will still be a good case to argue that in case of, off-the-shelf or standardised software are not chargeable to tax in India except where as per treaty it is specifically covered.

It is, therefore, important to note here that the taxpayers who are entitled to claim benefit of tax treaty will still be able to take shelter under the beneficial treaty provisions as the scope of provisions (generally Article 12) under the treaty is restricted than under the Act.

Way forward:

  •     It is learnt that the taxpayer has filed an SLP against the Karnataka High Court ruling in the case of Samsung Electronics Company Ltd. in December 2011 which is yet to be admitted. The SC has reacted that adjudication on this issue is going to be the next big thing after Vodafone judgment.
  •    The proposed amendment, as mentioned above, may resolve the controversy in respect of future transactions, however, whether the amendment will apply retrospectively or not will be a matter of debate and litigation. So in cases where applicable the treaty does not specifically cover the software, the non-taxability could be claimed.
  •     Hence, till the time, the issue gets settled at the highest level, litigation over taxability of software payments is likely to continue. So let’s WAIT & WATCH.
Year of Decision in the case of Authority Jurisdiction Favourable Against
judgment
2004 Tata Consultancy Services Supreme — 3
Court
2004 Wipro Ltd. ITAT Bangalore 3
2005 Motorola Inc. Special Delhi 3
Bench ITAT
2005 Lucent Technologies Hindustan Ltd. ITAT Bangalore 3
2005 Samsung Electronics Company Ltd. ITAT Bangalore 3
2005 Sonata Software Ltd. ITAT Bangalore 3
2006 Hewlett-Packard (India) (P) Ltd. ITAT Bangalore 3
2006 Sonata Information Technology Ltd. ITAT Bangalore 3
2006 IMT Labs (India) Pvt. Ltd. AAR — 3
2006 Metapath Software International Ltd. ITAT Delhi 3
2008 Airports Authority of India AAR — 3
2009 FactSet Research Systems Inc. AAR — 3
2009 Samsung Electronics High Court Karnataka 3
2010 Lotus Development (Asia Pacific) Ltd. Corp. ITAT Delhi 3
2010 Microsoft Corporation and
Gracemac Corporation ITAT Delhi 3
2010 Reliance Industries Ltd. ITAT Mumbai 3
2010 M/s. Tata Communications Ltd. ITAT Mumbai 3
2010 M/s. Daimler Chrysler AG ITAT Mumbai 3
2010 Dassault Systems K.K. AAR — 3
Year of Decision in the case of Authority Jurisdiction Favourable Against
judgment
2010 GeoQuest Systems BV AAR — 3
2010 Velankani Mauritius Ltd. ITAT Bangalore 3
2010 Kansai Nerolac Paints Ltd. ITAT Mumbai 3
2010 Bharati AXA General Insurance Co. Ltd. AAR 3
2011 Asia Satellite Co. Ltd. High Court Delhi 3
2011 Dynamic Vertical Software India Pvt. Ltd. High Court Delhi 3
2011 Standard Chartered Bank Ltd. ITAT Mumbai 3
2011 ING Vysya Bank Ltd. ITAT Bangalore 3
2011 TII Telecom International Pvt. Ltd. ITAT Mumbai 3
2011 M/s. Abaqus Engineering Pvt. Ltd. ITAT Chennai 3
2011 Millennium IT Software AAR — 3
2011 Samsung Engineering Company Limited High Court Karnataka 3
2011 Novel Inc. (Mum.) ITAT Mumbai 3
2011 Lucent Technologies High Court Karnataka 3
2011 Ericsson Radio System AB High Court Delhi 3
2012 Solid Works Corporation ITAT Mumbai 3
2012 Citrix Systems Asia Pacific Pty. Limited AAR 3
2012 Acclerys K. K. AAR — 3
2012 People Interactive (I) P. Ltd. ITAT Mumbai 3

Sections 200(3), 272(2)(k), Rule 31A — When assessee derives no benefit from failure to file e-TDS return, no penalty is called for. In a case where assessee has deposited TDS on time but failed to file e-TDS return because of delay in collecting PANs from landowners, such breach is only technical in nature and no penalty is warranted.

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38. (2012) TIOL 399 ITAT-Mum.
The Collector, Land Acquisition Department of Industries and Commerce v. Addl. CIT (TDS)
A.Ys.: 2007-08 to 2010-11. Dated: 9-3-2012

Sections 200(3), 272(2)(k), Rule 31A — When assessee derives no benefit from failure to file e-TDS return, no penalty is called for. In a case where assessee has deposited TDS on time but failed to file e-TDS return because of delay in collecting PANs from landowners, such breach is only technical in nature and no penalty is warranted.


Facts:

The Person Responsible (PR) in respect of Collector, Land Acquisition, Department of Industries & Commerce, Punjab Chandigarh (PR) had not filed e-TDS quarterly returns on respective due dates and so had defaulted u/s.200(3) of the Act. In response to the show-cause notice issued by the Assessing Officer, the PR submitted that the delay was due to landowners not having submitted their PAN numbers and therefore the delay was for a reasonable cause and no penalty could be levied. The AO rejected this explanation and held PR to be an assessee in default and levied penalty u/s.272A(2) (k) of Rs.6,11,600.

Aggrieved, the PR filed an appeal to the CIT(A) and contended that the interest on compensation was disbursed to landowners not directly but was deposited in the District/High Courts and as per guidelines issued for submission of e-TDS quarterly returns Form No. 26Q with less than 70% PAN data was not accepted for quarter ended 30-9-2007. Since PAN data was not available with PR, the quarterly returns could not be filed. The CIT(A) upheld the order passed by the AO. Aggrieved, the assessee preferred an appeal to the Tribunal

Held:

The Tribunal noted that the Collector, Land Acquisition, Department of Industries is a government organisation acquiring land on behalf of Punjab Government. The land compensation is paid by the organisation to the landowners through the District/High Courts. The tax is deducted at source on the interest payment to the landowners, but the compensation and interest is deposited in the Court and not paid directly to the landowners. The landowners/agriculturists do not have PAN numbers. The Department was not able to find PAN numbers of these landowners.

Letters written to the landowners to furnish their PAN Numbers, at the available address, but no response was received due to improper addresses. The amount of tax was deducted at source and paid to the credit of the Government on time. The Tribunal held that the assessee was prevented by sufficient cause from filing the returns within the statutory period. Nonfiling of quarterly returns was only a technical and venial breach to the provisions contained in Rule 31A(2). Even otherwise also, the assessee did not derive any benefit whatsoever by not filing the e-TDS returns in time, as the amount of TDS was duly deposited in the Government Treasury within prescribed time. Such delay has not caused any loss to the Revenue/ Income-tax Department. The Tribunal cancelled the penalty levied by the AO. The appeals filed by the assessee were allowed.

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Sections 143(3), 147, 254 — In an assessment completed u/s.143(3) r.w.s. 254, the AO should confine himself to the directions issued by the Tribunal. He does not have jurisdiction to go beyond the directions given by the Tribunal.

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37. (2012) TIOL 383 ITAT-Mum.
Ambattur Flats Ltd. v. ITO
A.Y.: 2001-02. Dated: 22-5-2012

Sections 143(3), 147, 254 — In an assessment completed u/s.143(3) r.w.s. 254, the AO should confine himself to the directions issued by the Tribunal. He does not have jurisdiction to go beyond the directions given by the Tribunal.


Facts:

For A.Y. 2001-02, the original assessment of the assessee-firm, engaged in the business as builder and developer, was completed by estimating the income at 8% of the total contract receipts of Rs.94,57,500.

The assessment was subsequently reopened and in an order passed u/s.143(3) r.w.s. 147 of the Act, the total income was determined at Rs.28,11,700. This income was determined by the AO by adopting a profit rate of 20% of the gross profit. Aggrieved by the order passed u/s.147, the assessee preferred an appeal to the CIT(A) who gave a deduction of Rs.20,00,000 towards cost of land. The total income was modified at Rs.16,12,679. The assessee accepted the order of the CIT(A) but the Revenue preferred an appeal to the Tribunal.

The Tribunal found that the issue about cost of land was never raised before the AO and there was no discussion in the order of the AO on this issue. The Tribunal remitted the issue of deducting the cost of land to the AO and directed him to make necessary adjustments in accordance with law. In proceedings initiated u/s.254 and completed u/s.143(3), the AO collected evidences from sellers and accepted the contention of the assessee that it has incurred Rs.20 lakh towards purchase of land. However, he went further and reworked the profit and ultimately determined the income of the assessee at Rs.32,69,228.

Aggrieved by the order passed u/s.143(3) r.w.s. 254, the assessee preferred an appeal to the CIT(A) who held that the AO was justified in estimating the profit at 12%, which was also the rate adopted by the CIT(A) earlier.

Aggrieved the assessee preferred an appeal to the Tribunal.

 Held:

The Tribunal noted that the single issue was remitted back by the Tribunal to the file of the AO. Having examined the issue remitted and having concluded that the assessee’s contention on the issue remitted was to be accepted the AO should have stopped there. The Tribunal observed that the action of the AO in going further and reworking the profit was against law. It held that in an order passed u/s.143(3) r.w.s. 254, the AO should confine himself to the directions issued by the ITAT. He does not have jurisidction to go beyond the direction given by the Tribunal.

Since the AO had gone beyond the direction of the Tribunal and had redetermined the income, the Tribunal held the order passed by the AO to be contrary to law and set aside the same. The order of the CIT(A) was vacated. The Tribunal remitted the matter to the AO to determine the income at Rs.16,12,679 as detemined by the CIT(A) and to close the file. The Tribunal allowed the appeal filed by the assessee.

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Section 194C — Where the arrangement was more of a sharing of fees under contract, provisions of section 194C cannot be applied. Section 36(1)(ii) — Bonus paid to directors could not have been otherwise paid as dividend. Hence provisions of section 36(1)(ii) cannot be applied. Income v. receipt — Only that part of the receipt as has accrued during the year should be taxed as income.

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36. (2011) 131 ITD 414 (Delhi)
Career Launcher (India) Ltd. v. ACIT,
Circle 3(1), New Delhi
A.Ys.: 2005-06 & 2006-07. Dated: 27-12-2010

Section 194C — Where the arrangement was more of a sharing of fees under contract, provisions of section 194C cannot be applied.

Section 36(1)(ii) — Bonus paid to directors could not have been otherwise paid as dividend. Hence provisions of section 36(1)(ii) cannot be applied.


Facts:

The assessee was into the business of running coaching classes. The assessee had entered into standardised agreements with various persons willing to run similar coaching classes in form of franchisees. The franchisees were allowed to use the trademark, tradename and course material belonging to the assessee, in lieu of which assessee received an amount equal to 25% of the net value earned from the operations. The assessee showed ‘Franchisee payments’ under the head ‘administrative and other expenses’. The Revenue held that payment made by the assessee to the franchisees was in nature of payment to contractor/sub-contractor and hence provisions of section 194C were applicable. Resultantly, the expenses were disallowed u/s.40(a) (ia). The CIT(A) upheld the order.

Held:

As per the agreement, the franchisees make payment to the assessee and not the other way round. However, the accounts of the assessee have been drawn in a manner which shows that the assessee pays to franchisees. This anomaly between the agreement and the accounts has not been explained by either party. This matter has also not been dealt with by the lower authorities. At this juncture, the matter has to be decided as per law and not merely as per entries in the books of account, which may only be indicative in nature, but not conclusive of the matter.

The franchisees set up the premises, equipment and infrastructure at their own cost as per specifications of the assessee. The assessee was to provide entire study material, upgradation thereof, technical knowhow and product details. The franchisee collected fees from students and taxes/duties leviable were borne by them. They retained 75% of the profit from operations and handed over 25% to assessee. Hence, from the facts of the terms, it clearly emerges that the franchisee is not doing work for the assessee and it is a case of running a study centre and apportionment of profits thereof between the assessee and the franchisee. The agreement is not regarding work done on behalf of the assessee rather it is a case of sharing fees under the contract.

Though the term ‘work’ in explanation of section 194C is wide enough, it does not cover the case of the assessee. Thus, the ground was allowed in favour of the assessee. Facts: The assessee paid bonus to directors who were also the shareholders of the assessee-company. The AO held that bonus was paid instead of dividends so as to avoid payment of dividend distribution tax. Hence, by invoking provisions of section 36(1)(ii) bonus was disallowed. The CIT(A) also upheld action of the AO. Held: Section 36(1)(ii) provides that any sum paid to an employee as bonus or commission for services rendered is to be deducted in computing the total income, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission.

Taking the example of director A, it is clear that if the amount of Rs.7,02,231 had not been paid to him as bonus, the same amount would not have been paid to him as dividend, because he would have got 40.93% as dividend from the total dividend declared. In other words, he would have received higher dividend than the bonus. The position in case of S would be opposite. He was paid bonus of Rs.4,13,077 although his sharehold-ing is only 1.09%. Relevant facts are similar in case of other directors. Thus, it can be said that none of the directors would have received the bonus as dividend in case bonus was not paid. Also the bonus was paid as per resolution of Board of Directors. Therefore, the provision of 36(1)(ii) was not applicable. Facts: Being a coaching class, the assessee received nonrefundable fees in a year. However, the coaching was to be rendered in current year and subsequent year. Hence, the obligation was to be discharged in two accounting years. The assessee booked part fees in this year and part in the subsequent year. However, the AO added the entire amount to income.

The CIT(A) also upheld AO’s observation. Held: The decision as held in case of K. K Khullar v. Dy. CIT, (2008) 304 ITR (AT) 295 was considered. It was held that a distinction has to be made between the terms ‘receipt’ and ‘income’. Income is liable to be taxed and not receipt. Hence, only that part of receipt was taxable to assessee which accrued as income. Thus, the accounting policy followed by the assessee was correct. The CIT(A) erred in treating the nonrefundable deposit as income.

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Section 80-IB(10) — There is no precondition that the assessee should be the owner of the land for claiming deduction — Terrace in front of penthouse should not be considered while measuring built-up area.

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35. (2011) 131 ITD 142
Amaltas Associates v. ITO
A.Y.: 2006-07. Dated: 21-1-2011

Section 80-IB(10) — There is no precondition that the assessee should be the owner of the land for claiming deduction — Terrace in front of pent-house should not be considered while measuring built-up area.


Facts:

The assessee was a builder and developer of housing projects and claimed deduction u/s.80-IB. During the relevant year under consideration, it constructed a housing project and claimed deduction u/s.80-IB. The AO disallowed the deduction u/s.80-IB on the ground that the builder was not the owner of the land and various permissions and approvals were granted in the name of the co-operative society. Further, based on the DVO report, the AO observed that, out of 110 flats, the penthouses on the top floor of each building had a built-up area of more than 1500 sq.ft.

Held:

The contention of the Revenue authorities that the assessee must be the owner of the land to claim deduction u/s.80-IB has no force. There is no such condition for claiming deduction u/s.80- IB. Further, the agreement to sell showed that assessee purchased the property in question for a consideration of Rs.3 lakh. All the responsibilities for carrying out the construction, permission and development of the project lie with the assessee. The dominant control over the land was with assessee. The real owner was only to co-operate with the assessee. Also the assessee was only entitled to enrol members for selling the units within its own rights. Further, the deduction u/s.80-IB is not exclusively to an assessee but to an undertaking developing and building housing project, be it by a contractor or by an owner. Hence, the assessee cannot be denied deduction u/s.80-IB on this ground.

The next issue was of ‘built-up area’ exceeding the prescribed limits of 1500 sq.ft. in case of some of the flats. The AO, based on DVO’s report, had included the area of open terrace in front of the penthouses on the top floor of each building in the total builtup area, thereby increasing the maximum limits. The contention of assessee was that the definition of built-up area means inner measurement of residential unit at floor level including projections and balconies. But open terrace in front of penthouse, not being a covered area and open to sky, should not be considered as a part of built-up area. This contention was accepted by the Tribunal and hence the assessee’s appeal was allowed.

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Section 254(2) and Rules 23 and 25 of Income Tax (Appellate Tribunal) Rules, 1963 — Assessee’s chartered accountant having filed an affidavit stating that he did not appear at the time of hearing as he had wrongly recorded the date of hearing in his diary and also furnished a photocopy of the diary showing the wrong noting, it has to be accepted that there was sufficient cause for his non-appearance on the date of hearing.

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34. (2012) 145 TTJ 537 (Delhi) (TM)
Five Star Health Care (P.) Ltd. v. ITO A.Y.: 2006-07. Dated: 2-3-2012

Section 254(2) and Rules 23 and 25 of Income Tax (Appellate Tribunal) Rules, 1963 — Assessee’s chartered accountant having filed an affidavit stating that he did not appear at the time of hearing as he had wrongly recorded the date of hearing in his diary and also furnished a photocopy of the diary showing the wrong noting, it has to be accepted that there was sufficient cause for his non-appearance on the date of hearing.

The assessee filed a miscellaneous application for recalling the said order against the exparte order passed by the Tribunal. The only ground taken by the assessee in its miscellaneous application was that there was a bona fide reason for non-appearance on the part of the assessee on the fixed date of hearing. There was a difference of opinion between the members of the Tribunal and, therefore, the matter was referred to the Third Member u/s.255 (4). The agreed point of difference was

“Whether on facts and in the circumstances of the case, it will be appropriate in law to recall order dated 8th Oct., 2010 passed in ITA No. 1063/Del./2010”. The Third Member held that it would be appropriate to recall the ex-parte order of the Tribunal. It noted as under:

(1) Though in the miscellaneous application there is neither the mention of Rule 25, nor section 254(2), but, from the contents of the application, it is evident that it was under Rule 25 only because u/s.254(2) the assessee can request the rectification of an apparent mistake while under Rule 25, the assessee can request for the recalling of the order of the Tribunal which has been passed ex-parte due to non-appearance of the assessee.

(2) A perusal of Rule 25 shows that, as per proviso, where an appeal has been disposed of as provided in the rule and the respondent appears afterwards and satisfies the Tribunal that there was sufficient cause for his non-appearance on the date of hearing, the Tribunal is at liberty to recall the ex-parte order passed by it and restore the appeal.

(3) In the present case, the chartered accountant has given an affidavit. In support of the affidavit, he has also furnished the photocopy of his diary in which the hearing of the assessee’s appeal was wrongly noted as 9th September, 2010, instead of 7th September, 2010.

(4) Therefore, there was sufficient cause for nonappearance by the assessee on the date of hearing i.e., 7th September, 2010. Proviso to Rule 25 was squarely applicable and the Tribunal was justified in recalling the order of the Tribunal.

(5) Rule 23 provides the procedure to be adopted at the time of hearing the appeal. Tribunal having effectively decided the matter against the respondent-assessee by setting aside the order of the CIT(A) and restoring the matter back to the Assessing Officer without hearing the assessee, the ex-parte order of the Tribunal must be recalled as required by Rule 23 of ITAT Rules.

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Section 40(a)(ia) — Disallowance can be made only in respect of an amount which is sought to be deducted u/ss.30 to 38 and not in respect of reimbursement simplicitor which is profit neutral and not routed through the P & L a/c.

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33. (2012) 145 TTJ 1 (Kol)
Sharma Kajaria & Co. v. Dy. CIT
A.Y.: 2006-07. Dated: 17-2-2012

Section 40(a)(ia) — Disallowance can be made only in respect of an amount which is sought to be deducted u/ss.30 to 38 and not in respect of reimbursement simplicitor which is profit neutral and not routed through the P & L a/c.

In the re-assessment proceedings, the Assessing Officer noted that the assessee had made payments to various lawyers for their professional services but had not deducted tax at source u/s. 194J from the same. The Assessing Officer was of the view that the assessee was under statutory obligation to deduct tax at source u/s.194J and, since the assessee had failed to perform this obligation, such payments were disallowed u/s. 40(a)(ia).

The CIT(A) rejected the assessee’s contention that expenditure which is not claimed in and did not appear in the Return and the P & L a/c should not be disallowed by application of section 40(a)(ia). The CIT(A) upheld the Assessing Officer’s order. The Tribunal, setting aside the orders of the lower authorities, noted as under:

(1) Unless a deduction is claimed in respect of the said amounts u/ss.30 to 38, the disallowance u/s.40(a)(ia) cannot come into play at all. The question of disallowance u/s.40(a)(ia) can arise only when something is claimed as a deduction in computation of business income; reimbursements simplicitor, being profit neutral, are not routed through the P & L a/c.

(2) Whether the assessee had claimed the fees paid to outside lawyers as a reimbursement from its clients or not was simply a matter of fact which will be evident from the bills raised on the clients and there was no need for making any inferences in respect of the same.

(3) If in the bills raised on its clients, the assessee had separately itemised the payments made to the outside counsel and claimed reimbursements in respect of the same, then these expenses cannot be of such a nature as to seek deduction in respect of the same. When the expenses are being reimbursed by the clients, these expenses cease to be expenses of the assessee and, therefore, there is no question of deduction in respect of the same.

(4) However, if the assessee has raised composite bills for professional services, on gross basis and without giving details of payouts to outside lawyers on behalf of his clients, the payments to outside lawyers will be in the nature of deduction to be claimed by the assessee.

(5) Without there being any categorical finding to the effect that the payments to outside lawyers were claimed as deductions in computation of profits, the disallowance u/s.40(a)(ia) in respect of such payments is not legally sustainable.

The matter was remanded back to the Assessing Officer for adjudication de novo in light of the above observations.

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Sections 2(47) and 45 — Purchase and sale of land and flat necessary parts of business of construction. Loss arising on sale of these properties is business loss.

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32. (2012) 144 TTJ 1 (Chennai) (TM)
Vijaya Productions (P) Ltd. v. Addl. CIT
A.Y.: 2007-08. Dated: 25-11-2011

Sections 2(47) and 45 — Purchase and sale of land and flat being necessary parts of the regular business of construction carried on by the assessee, the losses arising on sale of these properties have to be considered as loss incurred in the course of carrying on its regular business.

For the relevant assessment year, the Assessing Officer disallowed the assessee’s claim for loss on sale of one flat and land as business loss.

The Assessing Officer was of the opinion that such loss was not proved to have been incurred in the course of the assessee’s business of civil construction but, on the other hand, incurred due to purchase and sale of land. Further, according to him, the purchase and sale were effected in close proximity of time and land value could not have depreciated to such a large extent in a prime location of the city. The CIT(A) allowed the assessee’s claim. The Tribunal held in favour of the assessee. The Tribunal noted as under:

(1) Both the assertions of the Assessing Officer were misplaced.

(2) The assessee was engaged in the business of promoting commercial and residential flats and was authorised by the partnership deed to carry on any line or lines of business.

(3) Even if one considers the authorisation given in the partnership deed ‘to carry on any other line or lines of business’, to be ejusdem generis with the earlier terms of ‘promoting commercial and residential flats’, sale and purchase of land would still come within the ambit of the ‘business’ of the assessee.

(4) In a business of promoting commercial and residential flats and other lines of business, it cannot be said that purchase and sale of land would be alien and not a part of the business.

(5) Further, the land was treated as stock-in-trade and this has not been disputed by the learned Department representative. When stock-intrade is sold result can only be business profit or business loss. The assessee might have been forced to sell it at a loss for a myriad of reasons. It is not for the Revenue to sit on the armchair of a businessman and to decide appropriate point of time in which a sale or purchase has to be effected in the course of his business.

(6) Neither the sale deed, nor the purchase deed had been doubted. Neither books of account have been rejected, nor the seller or purchaser were called up by the Revenue for any verification. Without doubting the purchase and sale deed, the loss could not have been disallowed.

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(2012) 27 taxmann.com 111 (Coch Trib) E.K.K. & Co. v ACIT Assessment Year: 2009-10. Dated: 16-11-2012

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Section 139, 143(2) – In a case where acknowledgment in Form ITR-V has been forwarded in a prescribed form and prescribed manner and within a prescribed time to CPC, date of filing Return of income filed electronically shall relate back to the date on which the return was electronically uploaded. Accordingly, the period mentioned in proviso to section 143(2) shall be with reference to date on which return was electronically uploaded and not with reference to date on which ITR-V was received by CPC.

Facts:
For the assessment year 2009-10, the assessee uploaded its return of income electronically without digital signature on 25-09-2009. The acknowledgment in form ITR-V was dispatched by the assessee by ordinary post on 5-10-2009 but was received by CPC on 29-11-2010. Though there was some controversy about date of dispatch of ITR-V, admittedly the same was received by CPC within the time prescribed, as was extended by CBDT from time to time.

The Assessing Officer (AO) served notice u/s. 143(2) on 26-08-2011 i.e. beyond a period of six months from the end of financial year in which return was furnished, if the date of uploading the return is to be regarded as date of furnishing the return of income. However, if the date of receipt of ITR-V by CPC is regarded as date of furnishing the return of income then the notice was served within time prescribed by section 143(2).

Held:
The Tribunal upon going through the scheme framed by CBDT noted that as per the scheme, in respect of returns filed electronically without digital signature the date of transmitting the return electronically shall be the date of furnishing of return if the form ITR-V is furnished in the prescribed manner and within the period specified. In this case the period specified was 31-12-2010 or 120 days whichever is later. Admittedly, Form ITR-V was received by CPC on 29-11-2010 which was within the prescribed time, in the prescribed manner and in the prescribed form. Hence, the date of filing of the return shall relate back to the date on which the return was electronically uploaded i.e. 25-09-2009. The assessment order passed by the AO was quashed on the ground that the notice served on the assessee u/s. 143(2) on 26-08-2011 was beyond the period of six months from the end of the financial year in which the return was furnished.

The appeal filed by the assessee was allowed.

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Clarifications for Notification on tax-free bonds from Rural Electrification Board — Notification No. 13/2012, dated 6-3-2012.

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In corrigendum to Notification No. 7/2012, dated 14-2-2012 it is clarified that QIBs shall have meaning as assigned to it in the SEBI (Issue and listing of Debt Securities) Regulations, 2008 and any individual investor investing above 5 lakh would be considered as a HNI.

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Exemption to certain categories of persons from filing tax returns for A.Y. 2012-13 — Notification No. 9/2012, dated 17-2-2012.

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Any salaried employee whose total income does not exceed Rs.5,00,000 and which consist of salary income and interest from savings bank account up to Rs.10,000, is exempted from filing his return of income for A.Y. 2012-13 provided:

He has given his PAN to his employer

He informs employer of his Bank interest income and tax has been appropriately deducted from such interest by the employer and paid. Has received his Form 16 wherein total income, total TDS deducted and paid are mentioned

He has no refund claim for the said year and all his tax liability is duly discharged by way of TDS

He receives his salary income from only one employer

He is not required to furnish his return of income under any other provisions of the Act.

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Deduction u/s.80-IB(10): Income from developing and building housing project: Land not owned by assessee: All other conditions satisfied: Assessee entitled to deduction u/s.80-IB(10).

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35. Deduction u/s.80-IB(10): Income from developing and building housing project: Land not owned by assessee: All other conditions satisfied: Assessee entitled to deduction u/s.80-IB(10).
[CIT v. Radhe Developers, 249 CTR 393 (Guj.)]

The assessee entered into a development agreement with the owners of the land for a housing project. The assessee claimed deduction u/s.80- IB(10) of the Income-tax Act, 1961. The Assessing Officer rejected the claim on the ground that the assessee was not the owner of the land. The Tribunal allowed the assessee’s claim. The Tribunal held that for deduction u/s.80-IB(10) of the Act it is not necessary that the assessee must be the owner of the land. The Tribunal also held that even otherwise looking to the provisions of section 2(47) of the Act, r/w section 53A of the Transfer of the Property Act, by virtue of the development agreement and the agreement to sell, the assessee had, for the purpose of incometax, become the owner of the land.

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

 “Terms and conditions of development agreement showed that assessee had taken full responsibility for execution of the projects and the resultant profits or loss belonged to the assessee in entirety and all other conditions of section 80-IB(10) being satisfied, deduction u/s.80-IB(10) could not be disallowed to assessee on the ground that the land under development projects was not owned by the assessee and in some cases development permission was granted in the name of original land owners.”

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Charitable purpose: Sections 2(15) and 80G(5): Recognition u/s.80G(5): Objects of assessee-trust include conduct of periodical meetings on professional subjects and publishing and selling books/booklets on professional subjects: Activities are charitable in nature and cannot be construed to be in the nature of trade or commerce or business: Assessee is entitled to approval u/s.80G(5).

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34. Charitable purpose: Sections 2(15) and 80G(5): Recognition u/s.80G(5): Objects of assessee-trust include conduct of periodical meetings on professional subjects and publishing and selling books/booklets on professional subjects: Activities are charitable in nature and cannot be construed to be in the nature of trade or commerce or business: Assessee is entitled to approval u/s.80G(5).
[DI v. The Chartered Accountants Study Circle, 250 CTR 70 (Mad.)

The objects of the assessee-trust included conduct of periodical meetings on professional subjects, publishing books, booklets, etc., on professional subjects i.e., bank audit, tax audit, etc., and selling the same. The assessee filed an application in Form 10G to the Director of IT (Exemption), Chennai for grant of renewal u/s.80G of the Income-tax Act, 1961. The application was rejected on the ground that the assessee was publishing and selling books of professional interest to be used as a reference material by the general public as well as the professionals in respect of bank audit, tax audit, etc., and its activities are commercial in nature and will fall within the amended provision of section 2(15) of the Act. The Tribunal allowed the assessee’s appeal.

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

“Activities of the assessee-trust in publishing and selling books of professional interest which are meant to be used as reference material by the general public as well as the professionals in respect of bank audit, tax audit, etc., cannot be construed as commercial activities and, therefore, the assessee-trust was entitled to approval u/s.80G(5) of the Act.”

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Capital gain: Computation: Sections 48 and 49, and section 7 of the Wealth-tax Act, 1957: A.Y. 1992-93: Cost with reference to certain modes of acquisition: Sale of jewellery inherited from son: Fair market value of jewellery as on 1-4-1974 should be arrived at by reverse indexation, from fair market value as on 31-3-1989 on basis of which Revenue had imposed Wealth Tax upon assessee: Reverse indexation is not to be done from date of sale held in December 1991 based on sale price.

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33. Capital gain: Computation: Sections 48 and 49, and section 7 of the Wealth-tax Act, 1957: A.Y. 1992-93: Cost with reference to certain modes of acquisition: Sale of jewellery inherited from son: Fair market value of jewellery as on 1-4-1974 should be arrived at by reverse indexation, from fair market value as on 31-3-1989 on basis of which Revenue had imposed Wealth Tax upon assessee: Reverse indexation is not to be done from date of sale held in December 1991 based on sale price.
[Deceased Shantadevi Gaekwad v. Dy. CIT, (2012) 22 Taxman.com 30 (Guj.)]

 In the month of December, 1991, the assessee had sold certain jewellery which she inherited from her son. The assessee herself gave a declaration of fair market value of the selfsame jewellery as on 31-3-1989 based on the report of a registered valuer for the purpose of the Wealth-tax Act and the Assessing Officer had accepted the said valuation. Further the assessee for calculation of the capital gains arising from sale of the aforesaid jewellery worked out the fair market value of the jewellery as on 1-4-1974 by following the method of reverse indexation. She adopted the base as the fair market value of the jewellery worked out as on 31-3-1989 on the basis of valuation done by the registered valuer. The Tribunal held that fair market value of the jewellery as on 1-4-1974 should be arrived at by reverse indexation from the date of sale held in December, 1991 based on the sale price and not from the fair market value as on 31-3-1989.

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

“(i) According to provisions contained in sections 48 and 49, 1-4-1974 should be treated to be the date in the instant case on which the jewellery was deemed to have been acquired by the assessee. There is no dispute that although the jewellery was transferred in the month of December, 1991, the assessee herself gave a declaration of fair market value of the selfsame jewellery as on 31-3-1989 based on the report of a registered valuer for the purpose of the Wealth-tax Act as required under the said Act. It is admitted position that the Assessing Officer has accepted the said valuation and has not disputed the same for the purpose of the Wealth-tax Act.

(ii) There is also no dispute that both the assessee and the Revenue agreed before the Tribunal that the method of reverse indexation should be the appropriate one for the purpose of ascertaining the fair market valuation of the jewellery as on 1-4-1974.

(iii) There is substance in the contention of the assessee that the Revenue having accepted the valuation of the same jewellery given by her as on 31-3-1989 as correct valuation for the purpose of the Wealth-tax Act, there is no reason why the same valuation should not be treated to be a reliable base for the purpose of computing the capital gain under the Income-tax Act by the process of reverse indexation. There is no reason to disbelieve the valuation given by the assessee under the Wealth-tax Act as on 31-3-1989 based on the valuation assessed by a registered valuer in terms of the said statute. The Revenue having accepted the said valuation for the purpose of the Wealth-tax Act is precluded from disputing the correctness of the selfsame valuation for the purpose of assessment of capital gain, as the factor of ‘fair market value’ is decisive for the purpose of both the Wealth-tax Act and in ascertaining the cost of acquisition under the Income-tax Act.

 (iv) Therefore, there was no justification for disbelieving the valuation of the selfsame jewellery given by the assessee as on 31-3-1989 for the purpose of Wealth-tax Act.

(v) Therefore, the order passed by the Tribunal was liable to be set aside. The Assessing Officer was to be directed to recalculate the capital gain by adopting reverse indexation based on valuation of jewellery given by the assessee as on 31-3-1989 for the purpose of Wealth-tax Act.”

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Reassessment: Sections 143(2), 143(3), 147 and 148 of Income-tax Act, 1961: A.Y. 2003- 04: Assessment u/s.147 cannot be made within the time available for issuing notice u/s.143(2) and for completion of assessment u/s.143(3).

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[CIT v. ABAD Fisheries, 246 CTR 513 (Ker.)]

For the A.Y. 2003-04, the Assessing Officer accepted the returned income u/s.143(1) of the Income-tax Act, 1961. Subsequently, even before the expiry of the period for issuing the notice u/s.143(2) for completing the assessment u/s.143(3) the Assessing Officer issued notice u/s.148 holding that income chargeable to tax has escaped assessment and passed an assessment order u/s.147. The Tribunal allowed the assessee’s claim and cancelled the assessment and held that within the time provided for regular assessment u/s.143(3) after issuing notice u/s.143(2), no reassessment u/s.147 is permissible under the Act.

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

“(i) Reassessment u/s.147 cannot be completed within the time available for issuing notice u/s.143(2) and for completion of assessment u/s.143(3).

(ii) Similar view taken by the Madras and the Delhi High Courts remains unchallenged by the Department. The Departmental appeal is dismissed.”

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Order No. [F. No. 225/124/2012/ITA.II], dated 20-6-2012 — Order extending due date for filing Form 49C for F.Y. 2011-12.

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Rule 114DA of the Income-tax Rules read with Circular No. 5, dated 6-2-2012, provided that Liaison Office in India should electronically file Form 49C, within 60 days from the end of financial year. The CBDT has extended the due date of filing Form 49C for the financial year 2011-12, up to 30th September, 2012. For the financial year 2011-12, Form 49C can be filed in ‘paper mode’ instead of filing it electronically with digital signatures.

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AMENDMENTS IN DIRECT TAX PROVISIONS BY THE FINANCE ACT, 2012

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1. Background:

The Finance Minister presented the Budget
for the year 2012-13 on 16th March, 2012, and introduced the Finance
Bill, 2012, containing 154 clauses. Out of these, 113 clauses relate to
‘Direct Taxes’ and other 41 clauses relate to ‘Indirect Taxes’. There
was heated discussion on the various provisions of the Bill which
included over 30 amendments in various sections of the Income-tax Act
with retrospective effect. There was lot of protest in India and abroad
as most of these amendments would affect non-residents and will have
adverse effect on global trade. Inspite of this protest, the Government
could manage to get through the legislation with some changes. The
Finance Act, 2012, containing 119 sections relating to Direct Taxes is
now passed by both Houses of the Parliament and received the assent of
the President on 28-5-2012. Originally, the existing Income-tax Act was
to be replaced by the Direct Taxes Code (DTC) w.e.f. 1-4-2012. Since the
implementation of DTC is delayed, we will have to live with the
existing Income-tax Act for one more year. Some of the amendments made
by the Finance Act, 2012, will give some relief in the computation of
Income and Tax. However, some of the amendments, which have
retrospective and retroactive effect, will make the life of taxpayers
miserable.

 In particular, the retrospective amendments of some
of the sections of the Income-tax Act will increase the tax burden of
non-resident assessees and also increase their compliance cost. In this
respect, the tax litigation will also increase in the coming year. In
this article, the amendments made in the Incometax Act, Wealth-tax Act
and Securities Transaction Tax are discussed.

2. Rates of income tax, surcharge and education cess:

2.1
Relief in income tax: The tax slabs for individuals, HUF, AOP, BOI,
etc. have been made more beneficial. The exemption limit for these
assessees have been raised from Rs.1.80 lac to Rs.2 lac. As a result of
the revision of the exemption limit and realignment of some of the
slabs, tax liability of this category of assessees for A.Y. 2013-14 will
be less by Rs.2,000 in respect of income up to Rs.8 lac. In respect of
income above Rs.8 lac the reduction of the tax will be of Rs.22,000. For
senior citizens and very senior citizens there is no change in tax
payable on income up to Rs.8 lac. If the income is more than Rs.8 lac
the reduction in the tax liability in their cases will be of Rs.20,000.

2.2 Rates of income tax:

(i)
For individuals, HUF, AOP, BOI and Artificial Juridical person, as
stated above, the threshold limit of basic exemption has been increased
for A.Y. 2013-14. Individuals above the age of 60 years are treated as
‘Senior Citizens’ and those above the age of 80 years are treated as
‘Very Senior Citizens’. The rates of tax for A.Y. 2012-13 and A.Y.
2013-14 are as under:

(a) Rates in A.Y. 2012-13 (Accounting Year ending 31-3-2012)

(b) Rates in A.Y. 2013-14 (Accounting Year ending 31-3-2013)

No
surcharge is payable for A.Y. 2012-13 and 2013-14. However, education
cess of 3% (2+1) of the tax is payable for both the years.

 (ii)
The following table gives comparative figures of tax payable by
individuals, HUF, AOP, BOI, etc. in A.Y. 2012-13 and A.Y. 2013-14.

The above tax is to be increased by 3% of tax for education cess.

(a) Tax payable in A.Y. 2012-13 (Accounting Year ending 31-3-2012)

(b) Tax payable in A.Y. 2013-14 (Accounting Year ending 31-3-2013)

The
concessional rate of 15% plus applicable surcharge and education cess
which was provided for A.Y. 2012-13 has been continued for A.Y. 2013-14
also.

(vii) Rate of Alternate Minimum Tax (AMT)

The
rate of tax 18.5% plus education cess of 3% of tax which was payable as
AMT on income of LLP for A.Y. 2012-13 is now payable by all assessee,
other than a company, i.e., LLP, firm, individual, HUF, AOB, BOI, etc.
in A.Y. 2013-14. No surcharge is payable on AMT.

2.3 Surcharge on income tax:

(i)
As in A.Y. 2012-13, no surcharge is payable by non-corporate assessees
i.e., individuals, HUF, AOP, BOI, Firm LLP, co-operative societies, etc.
in A.Y. 2013-14. In the case of a company the rate of surcharge, if
income exceeds Rs.1 Cr, is 5% of income tax. As regards MAT u/s.115JB,
if the book profit exceeds Rs.1 Cr., rate of surcharge is 5%.

(ii) As regards TDS and TCS, no surcharge is required to be added to the rates of TDS or TCS.

(iii) In the case of dividend distribution tax u/s.115O and 115R the rate of surcharge on tax (i.e., 15%) is 5% of the tax.

(iv)
In the case of foreign companies, the rate of surcharge on income tax
is 2% of tax if the taxable income of the company exceeds Rs.1 Cr.
Similarly, the rate of surcharge on tax to be deducted u/s.195 in case
of foreign company is 2% of the tax if the income from which tax is
deductible at source exceeds Rs.1 Cr. 2.4 Education cess: As in earlier
years, education cess of 3% (including 1% higher education cess) of
income tax and surcharge (if applicable) is payable by all assesses
(Residents or non-residents). No education cess is applicable on TDS or
TCS from payments to all residents (including companies). However, if
tax is deducted from payments made to

(a) foreign companies,

(b) non-residents or

(c)
on salary payments to residents or non-residents, education cess at 3%
of the tax and surcharge (if applicable) is to be deducted.

3. Tax Deduction and Collection at Source (TDS and TCS):

3.1 Section 193: At
present, no tax is required to be deducted at source if interest
payable to a resident individual on debentures issued by a listed
company does not exceed Rs.2,500 in a year. This limit is increased to
Rs.5,000 w.e.f. 1-7-2012. This concession will now apply to debentures
issued by unlisted public companies as well as to interest payable to
resident HUF. The existing exemption in respect of interest paid on
debentures issued by listed companies which are held in Demat Account
will continue without any limit. The amendment in this section comes
into force on 1-7-2012.

 3.2 Section 194J — TDS from fees
from professional or technical services: This section is now amended
w.e.f. 1-7-2012. It will now be necessary for a company to deduct tax at
source from any remuneration, fees or commission paid or payable to a
director, if no tax is deductible u/s.192 under the head salary. The
rate for TDS is 10%. It may be noted that the manner in which the
section is amended indicates that this deduction is to be made
irrespective of the quantum of such payment in the year. As regards
professional fees, technical service fees, royalty, etc. to which this
section applies it is provided that tax is to be deducted only if
payment under each head exceeds Rs.30,000 in the financial year.
Therefore, in case of payment of fees to non-executive directors and
independent directors as ‘Director’s Fees’, the tax at 10% will be
deductible even if the total payment in the F.Y. is less than Rs.30,000
to each of them.

3.3 Section 194LA:

At present TDS from compensation on compulsory acquisition of immovable property at 10% is required to be made if compensation amount exceeds Rs.1 lac. This will now be required to be made if the compensation amount exceeds Rs.2 lac w.e.f. 1-7-2012.

3.4    Section 194LC:

This is a new section inserted in the Income-tax Act w.e.f. 1-7-2012. It provides for deduction of tax at the concessional rate of 5% plus applicable surcharge and education cess, in respect of interest paid to a non-resident, other than a foreign company. This interest should relate to monies borrowed by an Indian company from the non-resident at any time on or after 1-7-2012 and before 1-7-2015 in foreign currency from a source outside India. This borrowing should be (i) under a loan agreement or (ii) by way of issue of long- term infrastructure bonds approved by the Central Government. Further, the rate of such interest should not exceed the rate approved by the Government for this purpose.

3.5    Section 201 — Failure to deduct tax at source:

U/s.201, a person can be deemed to be an assessee in default in respect of non/short deduction of tax at source. The AO can pass order for this purpose within a period of four years from the end of the financial year in a case where no returns for tax deducted at source have been filed. Section 201 is amended with retrospective effect from 1st April, 2010, to extend the time limit for passing the order u/s.201(1) for non/short deduction of tax from 4 years to 6 years from the end of the F.Y. in which payment is made or credit is given.

3.6    Section 206C — Tax Collection at Source (TCS):

This section provides for collection of tax at source from sale of alcoholic liquor, tendu leaves, timber, forest products, scrap, etc. at the rates ranging from 1% to 5% of the sale price. The scope of this provision for TCS is extended w.e.f. 1-7-2012 as under.

    i) In respect of sale of minerals, being coal or lignite or iron ore, tax is to be collected by the seller at the rate of 1% of the sale price.

    ii) However, such tax is not to be collected if the purchase of such goods listed in section 206C(i) is made by the buyer for the purpose of manufacturing, processing or producing articles or things or for the purposes of generation of power. For this purpose the buyer of such goods has to give a declaration in Form No. 37C.

    iii) In order to reduce the quantum of cash trans-actions in bullion or jewellery sector and for curbing the flow of unaccounted money in the trading system, it is now provided that the seller of bullion or jewellery shall collect from the buyer tax at the rate of 1% of the sale consideration. For this purpose it is provided that the collection of the above tax of 1% shall be made if the sale price in cash exceeds the following amounts:

    a. For bullion, if the sale price exceeds Rs.2 lac. It may be noted that for this purpose definition of ‘Bullion’ does not include coin or any other article weighing ten grams or less.

    b. For jewellery, if the sale price exceeds Rs.5 lac.

iii) It may be noted that this tax will be collected from the buyer even if the buyer has purchased bullion or jewellery for personal use or for manufacture or processing the same for his business. Further, it appears that persons who purchase bullion or jewellery for personal use will not be able to get credit for the tax collected at source because there will be no corresponding income from sale of bul-lion or jewellery in respect of which such credit for tax can be claimed. Further, the person making such payment for purchase of bullion or jewellery in cash will have to prove the source from which such cash is paid.

    iv) There are certain consequential amendments made in section 206C on the same lines as in section 201 . According to these amendments, if the seller, who is required to collect tax under this section fails to do so, he will not be deemed to be in default if he can establish that the buyer has filed his return u/s.139 and paid tax on his income after considering the goods purchased by him. Consequential provision for reduction in the period for which interest is payable u/s.206C is also made.

3.7    No Advance tax payable by senior citizens u/s.207:

This section provides for payment of Advance Tax in instalments. It is now provided, w.e.f. 1-4- 2012, that a senior citizen who has no income from business or profession will not be required to pay any Advance Tax.

    4. Exemptions and deductions:

4.1    Charitable trust:

Section 2(15) provides that if the object of advancement of general public utility involves carrying on of any activity in the nature of trade, commerce or business, etc. and the aggregate value of the receipts from such activity exceeds Rs.25 lac, the trust will not be considered as charitable trust. New s.s (8) has been inserted in section 13 and a proviso has been added in section 10(23C), with retrospective effect from A.Y. 2009- 10, to provide that the trust or institution will not be granted exemption only for the year in which such receipts exceed Rs.25 lac. Such loss of exemption in that year will not affect the registration of the trust or institution u/s.12AA. The exemption can be claimed in subsequent years when such receipts do not exceed Rs.25 lac.

4.2    Section 10(10D) — Deduction of life insurance premium:

At present, any sum received under a life insurance policy, including bonus, but excluding amount re-ceived under Keyman Insurance policy, is exempt, provided the premium amount does not exceed 20% of the actual capital sum assured in any year during the policy period. Now, this limit is reduced to 10% in the case of an insurance policy issued on or after 1st April, 2012. Similar amendment is made u/s.80C, whereby it is provided that deduction in respect of life insurance premium, etc. in the case of insurance policies issued on or after 1st April, 2012 shall be avail-able only in respect of premium not exceeding 10% of the actual capital sum assured. It may be noted that in respect of life insurance premium paid on policies issued before 31-3-2012, the old limit of 20% of actual capital sum assured will apply.

‘Actual capital sum assured’ is also defined to mean the minimum amount assured under the policy on happening of the specified event at any time during the term of the policy, and excluding the value of any premiums agreed to be returned and benefit of bonus or otherwise over and above the sum actually assured. This is done to ensure that life insurance products are not designed to circumvent the prescribed limit by varying the capital sum as-sured from year to year. This amendment comes into force from A.Y. 2013-14 (Accounting Year end-ing on 31-3-2013).

4.3    Section 10(23FB) — Venture Capital Company (VCC) and Venture Capital Funds (VCF):

    i) This section has been amended w.e.f. A.Y. 2013-14. Simultaneously, section 115U has also been amended. Section 10(23FB) provides that a VCC or VCF registered with SEBI and deriving income from investment in a Venture Capital Undertaking (VCU) is exempt from tax. VCU is presently defined to mean such domestic company whose shares are not listed in a recognised stock exchange in India and which is engaged in any one of the nine specified businesses. VCC and VCF registered with SEBI are granted a pass-through status and the income in the hands of the investor is taxed in the like manner and to the same extent as if the investment was directly made by the investor in the VCU.

    ii) The sectoral restriction that the VCU should be engaged in only the nine specified businesses is now removed. The definition of VCU is now amended to cover any undertaking referred to in SEBI (Venture Capital Funds) Regulations, 1996. As such VCC and VCF will be exempt from tax, irrespective of the nature of business carried out by the VCU, as long as it satisfies the conditions imposed by SEBI.

    iii) At present, the income received by any VCC/ VCF from VCU, is taxed on receipt basis in the hands of the investor and hence could result in deferral of taxation till the income is distributed to the investor. It is now provided that the income accruing to VCC/ VCF will be taxable in the hands of the investor on accrual basis.

4.4    Section 10(23BBH):

This new section is inserted w.e.f. 1-4-2013 to pro-vide for exemption from tax in the case of income of the Prasar Bharati (Broadcasting Corporation of India) from A.Y. 2013-14.

4.5    Section 10(48):

This is a new provision made w.e.f. A.Y. 2012-13 (1-4-2011 to 31-3-2012). This section provides for exemption in respect of any income of a foreign company received in India, in Indian currency, on account of sale of crude oil to any person in India. This is subject to the conditions that (i) the receipt of money is under an agreement which is entered into by the Central Government or approved by it the foreign company, and the arrangement or agreement has been notified by the Central Govern-ment and (iii) the receipt of the money is the only activity carried out by the foreign company in India. This provision is introduced in view of the mecha-nism devised by the Government to make payment to certain foreign companies in Indian currency for import of crude oil (e.g., from Iran).

4.6    Section 40(a)(ia):

This section provides for disallowance of payment to a resident if tax required to be deducted there from has not been deducted by the assessee. By amendment of this section it is provided that if the assessee establishes that the resident payee (de-ductee) has paid tax on this income before furnish-ing his return of income, the expenditure shall not be disallowed under this section. This amendment is made from A.Y. 2013-14 (Accounting Year 2012-13). Consequential amendment is made in section 201 to provide, w.e.f. 1-7-2012, that the payer shall not be deemed to be in default if he can prove that the payee has furnished his return u/s.139 and paid tax on such amount. However, the payer will have to pay interest from the due date till the date of filing return by the payee. This being a beneficial provision, it should be made applicable to earlier years also. This will reduce litigation on this issue. It will be pos-sible to argue that the above beneficial amendment will have retrospective effect in view of decision of CIT v. Virgin Creations, ITA No. 302 of 2011 (Calcutta High Court) in respect of similar amendment in the section by the Finance Act, 2010.

4.7 Section 80C:

As discussed in Para 4.2 above, section 80C is amended to provide that the deduction of LIP in respect of life policy taken out on or after 1-4-2012 shall be restricted to 10% of the capital value assured.

4.8 Section 80CCG:

This is a new section inserted w.e.f. A.Y. 2013-14 (Accounting Year 1-4-2012 to 31-3-2013) and provides as under:

    i) The deduction under this section can be claimed by an Individual who is a resident, if he acquires listed equity shares in accordance with the scheme to be notified by the Government. The assessee will be allowed deduction of 50% of the amount invested subject to the limit of deduction of Rs.25,000 in the computation of income for the year of investment. It may be noted that this deduction is not allowable to an HUF.

    ii) The above deduction is subject to the following conditions:

    a) The gross total income of the assessee for the relevant assessment year should not exceed Rs.10 lac.
    b) The assessee should make the above investment in retail category specified in the scheme.

    c) The above investment should be in listed equity shares as specified under the scheme.

    d) There will be locking period of 3 years for such investment.

    iii) If the assessee fails to comply with any of the above conditions in any year, the amount of deduction allowed in earlier years will be taxable in that year.


4.9    Section 80D:

Under this section deduction up to Rs.15,000 is allowed to an assessee (individual or HUF) for premium paid on mediclaim insurance policy. For senior citizens the limit for deduction is Rs.20,000. Now it is provided that, effective from Accounting Year 2012-13, if the assessee makes payment up to Rs.5,000 in a year for preventive health check-up, deduction will be allowed within the above ceiling limit. Further, age limit for senior citizens is reduced from 65 years to 60 years. It is suggested that this deduction upto Rs.5,000 should have been allowed over and above the existing ceiling limit of Rs.15,000 or Rs.20,000. The limits of Rs.15,000/20,000 were fixed in the year 2000 and deserve to be enhanced due to increase in medical cost and consequential increase in insurance premium.

4.10    Sections 80G and 80GGA:

Deduction for donation of Rs.10000 or more under these sections will not be allowed if the same is paid in cash. This provision will apply to donations made in the Accounting Year 2012-13 onwards.

4.11    Section 80IA(4)(iv):

Under this section an industrial undertaking engaged in the business of generation and distribution of power and allied activities is entitled to tax holiday for 10 years if such undertaking begins its activities on or before 31-3-2012. This date is now extended to 31-3-2013.

4.12    Interest from bank exempt u/s.80TTA:

This is a new section which has been introduced effective from A.Y. 2013-14 (accounting year ending 31-3-2013). Under this section, in the case an individual or HUF, interest from savings bank account with a bank, co- operative bank or post office bank up to Rs.10000 will not be taxable. This provision will not apply to interest on fixed deposit with banks.

4.13    Section 115-O:

At present, dividend distributed by a company out of the dividend received from its subsidiary company, which has paid Dividend Distribution Tax, is not liable to Dividend Distribution Tax once again. For this purpose, the dividend receiving company should not be a subsidiary of any other company. By amendment of this section, effective from 1-7-2012, the condition that “the company is not a subsidiary of any other company” has now been removed. Therefore, any domestic company (whether it is a holding company or a subsidiary company) receiving dividend from its subsidiary or step down subsidiary company and declaring dividend in the same year out of such dividend amount will be allowed to reduce the amount of such dividend for determining the liability to Dividend Distribution Tax if the subsidiary or step down subsidiary company has paid Dividend Distribution Tax that is payable.

    5. Income from business or profession:

5.1    Section 32(1)(iia):

At present, an assessee engaged in the business of manufacture or production of any article or thing is entitled to additional depreciation of 20% of the cost of the new plant and machinery in the year of acquisition. From A.Y. 2013-14, this benefit is now extended to an assessee engaged in the business of generation or generation and distribution of power.

5.2    Section 35(2AB):

According to the existing provisions of section 35 (2AB) weighted deduction at 200% of expenditure on approved in-house research and development by a company engaged in the business of biotechnology or in the manufacture of specified articles is allow-able up to 31-3-2012. This benefit is now extended up to 31-3-2017.

5.3    Section 35AD:

    i) Investment-linked deduction of 100% of capital expenditure (excluding expenditure incurred for land, goodwill or financial instrument) is allowed for certain specified businesses. In the list of specified businesses, there are at present 8 types of businesses. With effect from 1-4-2012, 3 new businesses have been added to this list. These 3 businesses re-late to setting up and operating (a) inland container depot, or container freight station, (b) warehousing facility for storage of sugar and (c) bee-keeping and production of honey beeswax which commence operations on or after 1-4-2012.

    ii) Further, the above investment-linked deduction is now enhanced to 150% of the capital expenditure incurred on or after 1st April, 2012 in respect of certain specified businesses which commence operations on or after 1-4-2012. These specified businesses are setting up and operating (a) cold-chain facility warehousing facility for agricultural produce, (c) building and operating a hospital with at least 100 beds, (d) developing and building affordable housing project and (e) production of fertiliser in India.

    iii) Further, it is provided that an assessee who builds a hotel of two-star or above category as classified by the Central Government and subsequently, continuing to own the hotel, transfers the operation thereof, the assessee shall be deemed to be engaged in specified business and will be eligible to claim deduction u/s.35AD. This amendment has been made with effect from A.Y. 2011-12.

5.4    New sections 35CCC and 35CCD:

These two new sections are inserted effective from A.Y. 2013-14. They provide as under:

    i. Section 35CCC provides that when an assessee incurs any capital or revenue expenditure for agricultural extension project notified by the CBDT, he will be allowed deduction of 150% of such expenditure.

    ii. Section 35CCD provides that where a company incurs expenditure (other than expenditure on any land or building) on any skill development project notified by the CBDT, it will be allowed deduction of 150% of such expenditure.

5.5    Presumptive taxation:

Section 44AD provides for presumptive taxation in respect of non-corporate assessees carrying on specified businesses and having a total turnover of less than Rs.60 lac. Under this section 8% of the total turnover is deemed to be the income from business subject to certain conditions. It is now provided that this section will not apply to a person having income from (i) a profession, (ii) commission or brokerage or (iii) any agency business. This amendment is made effective A.Y. 2011-12. Further, the limit of Rs.60 lac for total turnover is increased to Rs.1 crore w.e.f. A.Y. 2013-14 (Accounting Year 2012-13).

5.6    Section 44AB:

The limit of turnover/gross receipts for tax audit u/s.44AB has also been increased for business to Rs.1 Cr. And for profession to Rs.25 lac w.e.f. A.Y. 2013-14 as discussed in Para 17.2 below:

    6. Capital gains:

6.1 Section 47(vii):

This section is amended w.e.f. A.Y. 2013-14. It is now provided that when a subsidiary company amalgamates with a holding company, the requirement of the issue of shares of the amalgamated company on amalgamation will not apply.

6.2 Section 49:

At present, there is no provision to treat the cost of assets of a proprietary concern, converted into a company, or a firm converted into a company as the cost of the assets in the case of the company. It is now provided, w.e.f. A.Y. 1999 -2000, that the cost of assets on conversion of a proprietary concern or a firm into a company u/s.47(xiii), or 47 (xiv), in the hands of the company shall be the same as in the hands of the converting enterprise. Similarly, when an unlisted company is converted into LLP u/s.47(xiiib), the cost assets in the case of the company shall be treated as cost in the case of the LLP.

6.3 Section 50D:

This is a new section inserted w.e.f. A.Y. 2013-14. It provides that where the consideration received or accrued for transfer of a capital asset is not ascertainable or cannot be determined, then the fair market value of the said asset shall be deemed to be the full value of the consideration on the date of transfer for computing the capital gain. This situation may arise in a case where the capital asset is transferred in exchange of another capital asset.

6.4 Section 54B:

At present, the benefit of exemption from capital gain on sale of agricultural land is available to the assessee on reinvestment of such capital gain for purchase of another new agricultural land within two years. One of the conditions is that the land should have been used by the assessee or his parent for agricultural purposes. This provision is amended, w.e.f. A.Y. 2013-14, to provide that even if such land was used by the HUF, in which the as-sessee or his parent was a member, this exemption can be claimed.

6.5 Section 54GB:

This is a new section which is inserted w.e.f. A.Y. 2013-14 to provide that if an Individual or HUF makes capital gains on sale of a residential house or plot, he can claim exemption from Capital Gains Tax if he invests the net consideration in equity shares of a new SME company. Such SME company is required to invest this amount in purchase of new plant and machinery. This exemption can be claimed subject to the following conditions.

    i) The investee company should qualify as a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006. (SME).

    ii) The company should be engaged in the business of manufacture of an article or a thing.

    iii) SME company should be incorporated within the period from 1st of April of the year in which capital gain arises to the assessee and before the due date for filing the return by the assessee u/s.139(1).

    iv) The assessee should hold more than 50% of the share capital or the voting right after the subscription in the shares of a SME company.

    v) The assessee will not be able to transfer the above shares for a period of 5 years.

    vi) The company will have to utilise the amount invested by the assessee in the purchase of new plant and machinery. If the entire amount is not so invested before the due date of filing the return of income by the assessee u/s.139, then the company will have to deposit the amount in the scheme to be notified by the Central Government.

    vii) The above new plant and machinery acquired by the company cannot be sold for a period of 5 years.

    viii) The above scheme of exemption granted in respect of capital gains on sale of residential property will remain in force up to 31-3-2017.

The above conditions prescribed in the new section are very harsh. This section should have allowed the investment in existing SME company for the purpose of exemption. Further, investment in LLP, which satisfies the condition of SME enterprises, should also be permitted. The restricted time limit for acquiring new plant and machinery will create difficulties and, therefore, it should have been provided that the SME company should be allowed to make such investment in new plant and machinery within a period of 18 months from the date on which the assessee makes the investment in its equity shares. The period of 5 years for retaining the equity shares is too long and should have been reduced to 3 years. Similarly, lock-in-period for plant and machinery acquired by the SME company should be reduced from 5 years to 3 years.

6.6    Section  55A  —  Reference  to  Valuation Officer:

This section is amended w.e.f. 1-7-2012. Under this section, the AO can make a reference to the Valuation Officer with a view to ascertain the fair market value of the capital asset. At present, such reference can be made when the AO is of the view that the value disclosed by the assessee is less than the fair market value. In some cases it is held that when the assessee exercises his option to substitute fair market value of the capital asset as on 1-4-1981, for the cost of the asset, and if the AO is of the view that such market value as declared by the assessee was more, he cannot make a reference to the Valuation Officer. To overcome this position, this amendment provides that w.e.f. 1-7-2012 the AO can make such reference to the Valuation Officer. This amended provision will apply w.e.f. 1 -7-2012 but will have retroactive effect, inasmuch as, the AO can make such a reference to the Valuation Officer in respect of all pending assessments of earlier years.

6.7    Securities Transaction Tax (STT):

    i) Section 98 of the Finance (No. 2) Act, 2004, providing for rates of STT has been amended w.e.f. 1-7-2012. The revised rates of STT in Cash Delivery Segment are reduced from 0.125% to 0.1%. Therefore, in the case of delivery-based transaction relating to equity shares of a company or units of equity ori-ented fund of a mutual fund entered into through a recognised Stock Exchange, the STT payable by a purchaser is reduced from 0.125% to 0.1% and a seller is reduced from 0.125% to 0.1% w.e.f. 1-7-2012.

    ii) In order to encourage unlisted companies to get them listed in recognised Stock Exchange, it is now provided that sale of unlisted equity shares by any holder of such shares, under an offer for sale to the public included in an Initial Public Offer (IPO), if subsequently such shares are listed on the recognised Stock Exchange, will be liable for pay-ment of STT at 0.2%. If such STT is paid, long-term capital gain on such sales will be exempt from tax and tax on short-term capital gain will be payable at concessional rate of 15% u/s.111A.

    7. Income from other sources:

7.1    Section 56(2)(vii):

Under this section any gift exceeding Rs.50,000 in any year received by an Individual or HUF on or after 1-10-2009 is taxable as income from other sources, subject to certain exceptions. One of the exceptions is about gift received from relatives of the individual as defined. Similar exemption is not given in respect of gifts from members of HUF. It is now provided, w.e.f. 1-10-2009, that gifts received by HUF from its members will be exempt. However, if such a gift is given by a member to such HUF, income from the property gifted will be clubbed with the income of the member u/s.64(2). In order to mitigate hardship experienced in practical life it is suggested that the following relationship should have been covered in the definition of relatives.

    i. Gifts by HUF to its members

    ii. Gifts to an Individual by any lineal descendant of a brother or sister of the Individual or his/ her spouse (i.e., gift by a nephew or niece to an uncle or aunt). Similar provision is made in section 314(214)(h) of DTC Bill, 2010.

7.2    Section 56(2)(viib):

This is a new provision inserted from the A.Y. 2013-14. It is now provided that where a closely held company issues shares to a resident, for amount received in excess of the fair market value of the shares, it will be deemed to be the income of the company under the head ‘Income from other Sources’. The fair market value for this purpose is the higher of the value arrived at on the basis of the method to be prescribed or the value as substantiated by the company to the satisfaction of the Assessing Officer. The company can substantiate the value based on the value of the tangible and intangible assets and various types of commercial rights as stated in the section.

This provision will not apply to amounts received by a venture capital undertaking from a venture capital fund or a venture capital company. Further, this provision will not apply to amount received from  non-resident, a foreign company or from a class of persons as may be notified by the Government. The provision appears to have been made with a view to ensure that excessive amount, representing revenue payment, is not received in the form of share premium and does not escape taxation.

7.3    Section 68:

This section deals with taxation of cash credits. The section is amended w.e.f. A.Y. 2013-14. This section now provides that in the case of a closely held company, if the amount credited in the name of a resident is by way of share application money, share capital, share premium or any such amount, by whatever name called, and the explanation offered for the credit is not considered to be satis-factory, such amount will be considered as income of the company. However, if the person (being a resident) in whose name the amount is credited offers explanation about the source and nature of the amount credited and such explanation is found to be satisfactory by the Assessing Officer this Section shall not apply. In the event of failure to do so, the entire amount credited will be taxed at the rate of 30% plus applicable surcharge and Education cess in the hands of the company.

This provision does not apply to amount received from a venture capital fund or a venture capital company. It will also not apply to the amount received from a non-resident or a foreign company.

7.4    Section 115BBD:

At present, this section provides that rate of tax, for dividend received by an Indian company from a foreign company in which it has share holding of 26% or more, is 15% for A.Y. 2012-13. This concession has been extended for one more year i.e., A.Y. 2013-14.

7.5 Section 115BBE:

This is a new section inserted from A.Y. 2013-14. The section provides that unexplained amounts treated as income (i) u/s.68 cash credits, (ii) u/s.69 unexplained investment, (iii) u/s.69A unexplained money, bullion, jewellery or other valuable articles, u/s.69B amount of investments, expenditure on jewellery, bullion or other valuable articles not fully disclosed in books, (v) u/s.69C — Unexplained expenditure, and (vi) u/s.69D — Amount borrowed or repaid on a Hundi in cash, will now be taxed at a flat rate of 30% plus applicable surcharge and education cess. No deduction for any expenditure or allowance will be allowed against such income.

    8. Minimum Alternate Tax (MAT) (section 115JB):

8.1 Section 115JB is amended w.e.f. 1-4-2001 (A.Y. 2001-02) to provide that in the case of the income arising from life insurance business the tax under this section will not be payable. In other words, MAT provisions will not apply from A.Y. 2001-02 onwards in respect of income from life insurance business.

8.2 (i) The section is amended w.e.f. A.Y. 2013 -14 to provide that in the case of a company, such as insurance, banking, electricity company, etc., for which the Form of Profit & Loss A/c. and Balance Sheet is prescribed in the Act governing such com-panies, the book profit shall be determined on the basis of the Form of Profit & Loss A/c. prescribed under that Act. Further, it is provided that in respect of companies to which the Companies Act applies, the book profit will be computed on the basis of the revised format of Schedule VI.

    ii) By another amendment of this section effective from A.Y. 2013-14, it is now provided that the book profit will be increased by the amount standing to the credit of revaluation reserve relating to reval-ued asset which has been discarded or disposed of, if the same is not credited to the Profit & Los A/c. This amendment is in order to cover cases in which revaluation reserve is directly transferred to general reserve on disposal of asset resulting in the gain that is not being included in the computation of book profits up to now.

    9. Alternate Minimum Tax (AMT)

9.1 Sections 115JC to 115JE for levy of AMT on ad-justed total income of LLP have now been extended to other non-corporate assessees such as individual, HUF, AOP, BOI, Firm, etc. w.e.f. A.Y. 2013-14. New section 115JEE has also been added from A.Y. 2013-14.

9.2 Provision for AMT was made last year for income of LLP w.e.f. A.Y. 2012- 13 in sections 115JC to 115JE. Now section 115JC is replaced by a new section and other sections 115JD to 115JE have been amended w.e.f. A.Y. 2013-14. A new section 115JEE is also inserted. The effect of these amendments is as under.

    i) The provisions of section 115JC will now apply to LLP and all other non-corporate assessees i.e., individual, HUF, AOP, BOI, Firm, etc. As provided in section 115JC the assessees will have to obtain audit report in the prescribed form before the due date.

    ii) In the case of an individual, HUF, AOP, BOI or Artificial Juridical person, AMT will not be payable if the adjusted total income does not exceed Rs.20 lac. (section 115JEE)

    iii) AMT is payable at 18.5% plus applicable surcharge and education cess of the adjusted total income if the amount of such tax is more than the tax payable on the total income computed under other provisions of the Income-tax Act.

    iv) Adjusted total income is defined to mean the total income computed under the Income-tax Act increased by (a) deductions claimed under Chapter VIA (section C) i.e., 80HH to 80 RRB (other than section 80P) and (b) deduction claimed u/s.10AA (SEZ income).

    v) Other provisions of sections (a) section 115JD for tax credit for AMT paid for 10 years, (b) Section 115JE applicability of other sections of the Income-tax Act and (c) Section 115JF— Definitions will continue to apply to LLP and also to other non-corporate assessees to whom sections 115JC and 115JEE for payment of AMT apply.

    10. Specified domestic transactions:

Section 40A(2) of the Income-tax Act empowers the AO to disallow payment to a related person for expenditure, if he considers that such expenditure is excessive or unreasonable, having regard to the fair market value of the goods, services or facilities for which such payment is made and claimed as a deduction in the computation of income. Similarly, sections 10AA, 80A, 80IA, 80IB, etc. provide that if there are any transactions of purchases, sales, etc. between two related persons, the AO can ap-ply the test of fair market value and make adjust-ments in the computation of income. In all these sections, the concept of ‘fair market value’ has not been specifically explained. Therefore, the Supreme Court in the case of CIT v. Glaxo Smithkline Asia (P) Ltd., 195 Taxman 35 (SC) observed that in order to reduce litigation, sections 40A(2) and 80IA(10) need to be amended to empower the AO to make adjustments to the income declared by the assessee, having regard to the market value of the transac-tions between related parties, by applying any of the generally accepted methods for determination of Arm’s- Length Price (ALP), including methods provided under Transfer Pricing Regulations. In view of the above, amendments are made in sec-tions 40A(2), 10AA, 80A and 80IA to provide that the ‘Specified domestic transactions’ will now be subject to Transfer Pricing Regulations contained in sections 92, 92BA to 92F — from A.Y. 2013-14 (Accounting Year 1-4-2012 to 31-3-2013). In brief, the effect of these provisions, from A.Y. 2013-14 (1-4-2012 to 31-3-2013) onwards will be as under.

10.1 The term ‘specified domestic transaction’ is defined in new section 92BA to mean the following transactions, other than the international transactions:

    a) Any expenditure in respect of which payment has been made or to be made to a person referred to in section 40A(2)(b). This will include remuneration, commission, rent, interest, etc. paid to a related person as well as purchases made from such person.

    b) Any transaction referred to in section 80A.

    c) Any transfer of goods or services referred to in section 80IA(8).

    d) Any business transacted between the assessee and other person as referred to in section 80IA(10).

    e) Any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sections 80IA(8) or 80IA (10) are applicable.

    f) Any other transaction as may be prescribed by Rules by the CBDT.

10.2 It is also provided that the Transfer Pricing provisions will not apply if the aggregate amount relating to the above transactions entered into by the assessee, in the relevant accounting year, does not exceed Rs.5 crore. It is not clear from the word-ing of the above section whether such aggregate amount is to be worked out by considering the amount of expenditure, purchases, sales, etc. under all the above sections taken together or whether the aggregate amount under each section i.e., 40A(2), 80A, 80IA, 10AA, etc. is to be separately worked out in order to determine the limit of Rs.5 crore provided in the section.

10.3    Section 40A(2):

This section provides for disallowance of revenue expenditure incurred by the assessee. The section does not apply to any revenue or capital receipt or to capital expenditure. Further, the section does not apply to any revenue expenditure which is capita-lised. Under this section, if any payment is made or to be made for any revenue expenditure to any ‘Related Person’, the AO can disallow that part of the expenditure which he considers to be excessive or unreasonable, having regard to the fair market value of the goods, services or facilities for which such payment is made and claimed as a deduction in computing the income. This section applies to the computation of ‘Income from Business or Profession’ and ‘Income from other Sources’. This section is now amended to provide that the fair market value for any payment to which the concept of specified domestic transaction applies shall be determined on the basis of arm’s-length price concept as provided in sections 92C and 92F(ii).

10.4    Section 80A:

Section 80A(6) refers to transfer of any goods or services held for the purposes of the undertaking, unit, enterprise, or eligible business to any other business carried on by the assessee. It also refers to transfer of goods or services held for the pur-poses of any other business of the assessee to the undertaking, unit, enterprise or eligible business. If the consideration for such transfer is not at the market value, then the AO can substitute the market value of the goods or services for such transfer. The expression ‘Market Value’ is defined in the Explanation to mean the price that such goods or services would fetch, if they were sold in the open market, subject to statutory or regulatory restrictions. This Explanation is now amended w.e.f. A.Y. 2013-14 to provide that the expression ‘Market Value’ in relation to specified domestic transactions shall now mean, in relation to any goods or services sold, supplied or acquired, the ‘Arm’s-length price’ as defined in section 92F(ii). It may be noted that this section applies to transfer of goods or services from one undertaking, unit or business owned by the assessee to another undertaking, unit or business owned by the same assessee.

10.5    Section 80IA:

S.s (8) and s.s (10) of this section are amended w.e.f. A.Y. 2013-14 as under.

    i) Section 80IA(8):

This provision refers to transfer of goods or services held for the purposes of the eligible business to any other business of the assessee. The section also refers to transfer of goods or services from any other business of the assessee to any eligible business. For this purpose, the expression ‘eligible business’ means business carried on by any indus-trial undertaking owned by the assessee carrying on business of infrastructure development, generation of power, telecommunication services, etc. as listed in section 80IA(4), for which 100% deduction is given u/s.80IA. Section 80IA(8) provides that transfer of goods or services between eligible business under-taking and other undertakings of the assessee shall be at market value. Now, it is provided that such transfers should be made at arm’s-length price as defined by the provisions of section 92F(ii).

    ii) Section 80IA(10):

This section provides that where it appears to the AO that, owing to the close connection between the assessee carrying on the eligible business and any other person, the course of business between them is so arranged that the profits of the eligible business for which 100% deduction is allowed u/s.80IA is shown at a figure higher than the ordinary profits in such business, the AO can recompute the profits of the eligible business for deduction u/s.80IA. The section is now amended to provide that, if the above arrangement between closely related parties involves specified domestic transactions, the AO shall compute the profit of the eligible business having regard to the arm’s-length price concept as defined in section 92F(ii).

    iii) Other sections:

It may be noted that the provisions of section 80IA(8) and 80IA(10) apply to certain other sections of the Income-tax Act also. These sections provide for deduction of income derived from various specified activities. In respect of transactions with related parties for claiming deduction from income, the above concept of arm’s-length price as applicable to specified domestic transactions will apply.

10.6 Since the concept of arm’s-length price is now extended to section 80IA(8) and 80IA(10), this concept will apply to transactions between related parties in computing income under the following sections:

    Section 10AA: Income from newly established units in SEZ.

    Section 80IAB: Income of an undertaking or enterprise engaged in the development of SEZ.

    Section 80IB: Income from certain industrial undertakings and housing projects, etc. (other than infrastructure development undertakings).

    Section 80IC: Income from certain undertakings set up in certain States such as Sikkim, Himachal Pradesh, Uttarakhand, North-Eastern States, etc.

    Section 80ID: Income from hotels and convention centres set up in National Capital Territory of Delhi, and Districts of Faridabad, Gurgaon, Gautam Buddhha Nagar and Ghaziabad and other specified districts having ‘World Heritage
Site’.

    Section 80IE: Income from eligible business undertakings in North-Eastern States.

10.7    Other transactions:

The CBDT has been given power to prescribe, by Rules, other domestic transactions to which the above provisions will apply.

10.8    Effect of application of arm’s-length price concept:

As stated above, the concept of arm’s-length price (ALP) is now to be applied to certain domestic trans-actions. In view of this, the assessee who enters into specified domestic transactions will have to comply with the following sections w.e.f. A.Y. 2013-14.

    i) Section 92: This section deals with computation of income from international transactions. It is now extended, w.e.f. A.Y. 2013-14, to specified domestic transactions. Therefore, the concept of ALP which was applicable to international transactions up to now will now apply to specified domestic transactions also. S.s (2A) inserted in this section now provides that any allowance for an expenditure or interest or allocation of any cost, expense or income in relation to specified domestic transactions shall be computed having regard to the ALP.

    ii) Section 92C: This section deals with computa-tion of ALP in relation to international transactions. As stated above, this concept is now extended to specified domestic transactions. The section pro-vides for six alternate methods for determination of ALP.

    iii) Section 92CA: This section provides for reference by AO to the Transfer Pricing Officer (TPO). Such reference is to be made if the aggregate value of international transactions exceed Rs.5 cr. The TPO is given wide powers. The order passed by the TPO is binding on the AO and the AO has to complete the assessment in conformity with the order of the TPO. This section has now been amended and it is now provided that such reference is to be made by the AO to the TPO even in cases where the assessee has entered into specified domestic transactions. Since section 92BA states that transactions with related parties aggregating Rs.5 Cr. or more will be considered as specified domestic transactions, all cases in which these transactions are involved will have to be referred to the TPO.

    iv) Section 92D: This section provides for maintenance and keeping of information and documents by persons entering into international transactions.  This section is made applicable to specified domestic transactions. Therefore, all assessees who enter into specified domestic transactions, as stated above, will have to maintain the information and documents specified in this section. It may be noted that these records and documents will have to be maintained w.e.f. 1-4-2012, in the manner prescribed in Rule 10D.

    v) Section 92E: This section requires that an as-sessee entering into international transactions has to obtain report from a Chartered Accountant in the prescribed form No. 3CEB before the due date for filing the return of income. This requirement is now extended to specified domestic transactions from the A.Y. 2013-14 (Accounting Year 1-4-2012 to 31-3-2013).

    vi) Section 92F: This section gives definition of certain terms. The following definitions are relevant in the context of specified domestic transactions.

    a. ‘Arm’s-length price’: This term means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.

    b. ‘Transaction’: This term includes an arrangement, understanding or action in concert, whether or not it is formal or in writing or whether or not it is intended to be enforceable by legal proceedings.

    vii) Penalty u/s.271 and 271AA: By amendment of Explanation 7 of section 271, it is now provided that penalty under that section will be leviable in respect of amount disallowed out of the above specified domestic transactions u/s.92C(4). Similarly, penalt 2% of the amount can also be levied u/s.271AA for not maintaining records u/s.92D or not reporting such transactions u/s.92E or furnishing incorrect information.

    11. Taxation of non-residents:

Some of the sections dealing with taxation of non-residents have been amended with retrospective effect. These amendments will have far reaching effect. While presenting the Budget the Finance Minister has not made any mention about these far -reaching changes affecting non-residents in his Budget Speech. However, in the Explanatory Memorandum attached to the Finance Bill, 2012, the reasons for these retrospective amendments have been explained.

The effect of these amendments with retrospective effect will be that cases of many assesses may be reopened and they may be required to pay tax, interest or penalty for last 16 years. It appears that these amendments provide for taxing gain on sale of shares in foreign countries and therefore, the time limit of 16 years for reopening the assessments will apply to such transactions. It is, therefore, necessary that a specific provision should have been made that no interest or penalty will be payable if tax levied as a result this retrospective amendment is paid by the assessee. It may be noted that when sections 28 and 80HHC were amended by the Taxation Laws (amendment) Act, 2005, with retrospective effect, CBDT issued a Circular No. 2/2005 on 17-1-2006. In this Circular the tax authorities were directed not to levy any interest or penalty if tax levied due to these retrospective amendments was paid. The Circular also provided that the tax due as a result of the retrospective amendment can be paid in five equal yearly instalments. No interest was payable on such instalments. Let us hope that the CBDT issues similar Circular in respect of the tax payable as a result of these retrospective amendments made by the Finance Act, 2012.

11.3    Section 2(14):

This section defines that term ‘Capital asset’ to mean ‘Property’ of any kind held by an assessee, whether or not connected with his business or profession. However, assets in the nature of stock-in-trade, personal effects, agricultural land, etc. are excluded from this definition. Now, Explanation has been added w.e.f. 1-4-1962 to clarify that ‘property’ shall include and shall be deemed to have always included any rights in or in relation to an Indian company, including right of management or control or any other rights. This will mean that the term, ‘Capital asset’ shall now include a tangible as well as intangible property.

11.4    Section 2(47):

This section defines the word ‘Transfer’ in relation to a capital asset. This is an inclusive definition and includes transfer of a capital asset by way of sale, exchange, relinquishment, or extinguishment of rights in the asset, compulsory acquisition of the asset, etc. Now a new Explanation is added w.e.f. 1-4-1962 to clarify that the word ‘Transfer’ shall include, and shall be deemed to have always included, disposing of, parting with an asset or any interest therein, or creating any interest in any asset, directly, indirectly, absolutely, conditionally, voluntarily or involuntarily. Such transfer may be by agreement made in India or outside India. This is irrespective of the fact that such transfer has been characterised as being effected, dependent upon or following from the transfer of shares of an Indian or foreign company. This will show that if any interest is created in the shares of an Indian or foreign company by agreement or even an action, it will be considered as a ‘transfer’ of capital asset u/s.2(47).

11.5    Section 9:

This section explains when income is deemed to ac-crue or arise in India in the case of a non-resident. The scope of this section is widened by addition of Explanation 4 and 5 below section 9(1)(i) w.e.f. 1-4-1962 as under:

    i) In section 9(1)(i) it is stated that any income shall be deemed to accrue or arise if it accrues or arises, directly or indirectly ‘Through’ or ‘From’ (a) any business connection in India, (b) any property in India (c) any asset or source of Income in India or (d) the transfer of a capital asset situated in India. Now, it is clarified in Explanation 4 that the word ‘Through’ in the above section shall mean and include (w.e.f. 1-4 -1962) — ‘by means of’, ‘in consequence of’ or ‘by reason of’. This explanation appears to have been introduced with retrospective effect to counter the decision of the Supreme Court in ‘Vodafone’ case which was against the Income-tax Department.

    ii) Similarly, Explanation 5 clarifies with retrospective effect from 1-4-1962 that an asset or capital asset being any share or interest in a foreign company shall be deemed to be situated in India if such share or interest derives, directly or indirectly, its value substantially from the assets located in India. It may be noted that the concept of holding interest in substantial value of assets located in India has not been explained or defined in this Explanation. This concept is explained in various other sections in the Income tax in different manner. This will be evident from reference to substantial interest in the following sections.

    a. Section 2(32): While defining ‘person having substantial interest in the company’ it is stated that if a person holds 20% or more of voting power it is considered as substantial interest.

    b. Section 40A(2): Under this section the provisions of transfer pricing are now made applicable in respect of domestic transactions. In the definition of related party, the concept of substantial interest in a company is to be determined by applying the test of 20% or more voting power.

    c. Section 79: For carry forward and set-off of losses of a closely held company, the concept of holding at least 50% holding of shares by shareholders who were shareholders on the last day of the year in which loss was incurred has been provided.

In view of the above, for determination of the tax liability on transfer of shares in a foreign company the concept of holding substantial interest in the value of assets located in India should have been clearly defined. Further, the section refers to share on interest in a foreign company which derives (directly or indirectly) its value substantially from the assets located in India. The word ‘value’ is also required to be defined otherwise there will be confusion as to whether the word ‘value’ refers to ‘book value’ or ‘market value’.

11.6    Section 9(1)(vi) — Royalty:

This Section provides that income by way of royalty earned by a non-resident is deemed to be income accruing or arising in India under the circumstances explained in this section. The concept of royalty for this purpose is now expanded, with retrospective effect from 1-6-1976 as under:

    i) New Explanation 4 is now added to provide that the transfer of any rights in respect of any right, property or information includes all or any right for use or right to use computer software (including granting of a licence) irrespective of the medium through which such right is transferred.

    ii) New Explanation 5 now provides that ‘Royalty’ includes consideration in respect of any right, prop-erty or information, whether or not (a) the posses-sion or control of such right, etc. is with the payer such right, etc. is used directly by the payer, or the location of such right, etc. is in India.

    iii) New Explanation 6 now provides that the expression ‘Process’ used in section 9(1)(vi), in-cludes transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic-fiber or by any other similar technology. This is irrespective of the fact whether such process is a secret process or otherwise. It ap-pears that this provision has been made to over rule the decision of the Delhi High Court in the case of Aasia Satellite Telecommunication Co. Ltd. v. DIT, 332 ITR 340 (Del.).

The above amendments with retrospective effect from 1-6-1976 will create lot of practical difficulties. It is possible that the Tax Department may consider part of purchase consideration for software paid to a non-resident as royalty payment. This amendment, read with amendment of section 195, with retrospective effect from 1-4-1962, will create greater hardship to tax payers, as it will be impossible to comply with TDS provisions in respect of such payments made to non-residents in earlier years. It is also possible that the AO may invoke provisions of section 40(a)(i) and disallow such payment made to non-residential and claimed as revenue expenditure by the assessee in the earlier years.

It may, however, be noted that if any such payment is made to a non- resident in a country with which there is DTAA, the provisions in DTAA, if favourable, will apply in preference to the above provision.

11.7    Sections 90 and 90A:

Section 90 empowers the Central Government to enter into agreements with any foreign country or a specified territory for Double Taxation Relief (DTAA). Section 90A empowers the Government to enter into similar agreements with certain specified/ notified association in specified territories. Both these sections are amended as under:

    i) New s.s (2A) is inserted w.e.f. 1-4-2013 (A.Y. 2013-14) in section 90 to provide that the provisions of new sections 95 to 102 dealing with General Anti-Avoidance Rule (GAAR) will be applicable even if the provisions of DTAA are more favourable to the assessee. In other words, where GAAR is invoked, the assessee cannot seek protection of beneficial provisions of DTAA. Similar amendment is made in section 90A also.

    ii) New s.s (4) is inserted in section 90 w.e.f. 1-4-2013 (A.Y. 2013-2014) to provide that a non-resident cannot claim benefit of DTAA unless a certificate in the Form prescribed by the CBDT is obtained from the foreign country with which the Indian Govern-ment has entered into the DTAA. In this certificate such foreign country will have to certify the place of residence of the non-resident and such other particulars which the Indian Tax Department may require to decide whether the benefit claimed under a particular DTAA is available to the non-resident assessee. Similar amendment is made in section 90A.

    iii)  New Explanation 3 is inserted in section 90 w.e.f. 1-10-2009 to provide that any meaning as-signed through Notification u/s.90(3) to a term used in DTAA shall be effective from the date of coming into force of the applicable DTAA. Similar amend-ment is made in section 90A w.e.f. 1-6-2006.

11.8    Section 195:

    This section provides for deduction of tax at source (TDS) in the case of payments made to non-residents. This section is now amended with retro-spective effect from 1-4-1962. By this amendment it is provided in the new Explanation-2 that the obligation to comply with TDS provisions will apply, with retrospective effect, to all persons whether resident or non-resident. So far section 195 was understood to put the obligation for TDS on residents and non-residents who have a permanent establishment in India and who make payments to non-residents of Income taxable under the Income-tax Act. Now, w.e.f. 1-4-1962, the obligation is extended to a non-resident person who has (a) residence or place of business or business connection in India, or (b) any other presence in any manner whatsoever in India. It may be noted that the obligation for deducting tax at source (TDS) is never made under Chapter XVII of the Income-tax Act (sections 192 to 194, 194A to 194CC and 195) with retrospective effect. All these provisions for TDS, whenever introduced or amended, are from prospective dates to enable the payer to comply with the same. Even in the Finance Act, 2012, such provisions for TDS or amendments are made in sections 193, 194E, 194J, 194LA, 194LC and 195(7) only w.e.f. 1-7-2012. However, only Explanation 2 has been inserted in section 195(1) with retrospective effect from 1-4-1962. By putting such obligation to deduct tax on certain non-residents who were not covered by the section earlier will create practical difficulties for them. It may not be possible to deduct tax from payments covered by section 195 for earlier years and they may be saddled with huge Interest liabilities and other penal conse-quences under the Income-tax Act. TDS provisions in Chapter XVII puts an obligation on the payer of any amount to collect tax due by the payee and pay to the Government. This obligation is in the nature of vicarious liability. It is a well-settled principle of law that such vicarious liability cannot be saddled on a person with retrospective effect.

    ii) New s.s (7) has been inserted in section 195 w.e.f. 1-7-2012. By this amendment it is provided that the CBDT may, by Notification specify a class of persons or cases where the person responsible for paying to a non-resident, any sum, whether, chargeable to tax or not, can make an application to the AO to determine the appropriate proportion of sum chargeable to tax. On such determination tax will be deductible u/s.195(1) on that portion of the amount. Such determination by the AO may be by a general order applicable to all similar payments or may be specific order applicable to one specific transaction.

11.9    Section 163:

This section provides for liability of an ‘Agent’ of a non-resident to pay the tax or meet with obligations of a non-resident for whom he is recognised as an agent under this section. For this purpose    an employee of the non-resident, (b) a person who has any business connection with the non-resident, (c) a person from or through whom the non-resident receives any income, (d) a person who is the trustee of the non-resident or (e) a person (resident or non-resident) who has acquired by way of transfer a capital asset in India. The section provides for certain limitations on the vicarious li-ability of the agent. Section 149 provides that AO has to give notice to the person whom he wants to treat as agent of a non-resident. The time limit for giving such notice was 2 years from the end of the assessment year for which he wants to treat that person as agent u/s.163. This time limit is now extended to 4 years w.e.f. 1-7-2012. It is also pro-vided, by this amendment, that such notice can be given for any assessment year prior to A.Y. 2012-13. In other words, the AO can give such notice to any person to treat him as agent of a non-resident in respect of income assessable in the case of a non-resident for A.Y. 2008-09, after 1-7-2012 but before 31-3-2013. This amendment appears to have been made to recover tax from Vodafone by treating it as agent of the non-resident company in respect of capital gain alleged to have been made on transfer of shares of a non-resident company to another non-resident company. This tax is now proposed to be levied in respect of such transactions as a result of retrospective amendments of sections 2(14), 2(47), 9 and 195 as discussed above.

11.10  Section 119 of the Finance Act, 2012:

This section provides for validation of demands raised under the Income-tax Act in certain cases in respect of income accruing or arising, through or from a transfer of capital asset situated in India, in consequence of the transfer of shares of a foreign company or in consequence of an agreement or otherwise in a foreign country. This section also states that any notice sent or taxes levied, demanded, assessed, imposed, collected or recovered during any period prior to 1-4 -2012 shall be deemed to have been validly made. Such notice or levy of tax, etc. shall not be called in question on the ground that the tax was not chargeable. This cannot be challenged even on the ground that it is a tax on capital gains arising out of transactions which have taken place in a foreign country. This section will operate notwithstanding anything contained in any judgment, decree or order of any Court, Tribunal or any Authority. It appears that this section is inserted in the Finance Act to ensure that taxes collected in the Vodafone case or other similar cases are not required to be refunded. A question may arise about validity of such a provision for retention of taxes collected from certain assesses by the Govern-ment when any Court judgment or decree directs that such tax should be refunded to the assessee. Another question will arise whether the Government will be liable to pay interest on such amount retained under the validation provision if ultimately the Government has to refund the amount after some years of litigation.

11.11    Section 115A:

This section is amended with effect from 1-7-2012. It is provided that the rate at which Income tax shall be payable in the case of a non-resident, other than a foreign company, in respect of interest received from an Indian company engaged in specified in-frastructure activities, in respect of loan given in foreign currency under an agreement approved by the Government between 1-7-2012 to 30-6-2015, shall be taxable @ 5%. This tax shall be subject to deduction at source u/s.194LC w.e.f. 1-7-2012.

11.12    Section 115BBA:

This section is amended effective from A.Y. 2013-14 to provide that a non-resident, entertainer, such as a theatre, radio, television artist and musician, from performance in India will be taxable at 20% of gross receipts. It is also provided that in the case of a non-resident sports association, tax will be payable at 20% of gross receipts instead of 10% which is the existing rate. Consequential amendments have also been made for the purpose of TDS on these payments u/s.194E w.e.f. 1-7-2012.

11.13    Tax on long-term capital gain:

Section 112 has been amended from A.Y. 2013 -14 to provide that, in the case of a non -resident or a foreign company, capital gains tax payable on transfer of a long-term capital asset, being shares or securities which are not listed on the Stock Ex-change shall be 10%. For this purpose the long-term capital gain is to be computed without indexation or without taking advantage of foreign currency rate differences provided in section 48.

    12. Transfer pricing provisions:

In order to widen the scope of transfer pricing pro-visions and to clarify certain issues, the following sections are amended. Some of these amendments have retrospective effect.

12.1 Section 92B:

This section gives the meaning of ‘International Transaction’. This section is now amended with retrospective effect from 1-4-2002. By this amendment, it is provided that the expression ‘International Transaction’ shall include —

    i) the purchase, sale, transfer, lease or use of tangible property, including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity and any other article or thing.

    ii) the purchase, sale, transfer, lease or use of intangible property, including transfer of owner-ship or the provision for use of rights regarding land, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any business or commercial rights of similar nature.

    iii) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment receivable or any other debt arising during the course of business.

    iv) provision of services, including provision of mar-ket research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service.

    v) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has a bearing on the profit, income, losses, or assets of such enterprise at the time of the transaction or at future date.

Further, the expression ‘Intangible Property’ has also been defined w.e.f. 1-4-2002 to include 12 items listed in the amended section. This refers to various types of intangible properties related to marketing, technology, artistic, data processing, engineering, customer, control, human capital, location, goodwill and similar items which derive their value from intellectual content rather than physical attributes.

12.2    Section 92C:

    i) This section deals with computation of arm’s-length price. In section 92C(1) six methods are provided for determination of ALP. Section 92C(2) states that the most appropriate method for this purpose shall be determined as provided in the Rules 10B and 10C framed by the CBDT. The second proviso to this section is now amended w.e.f. A.Y. 2013-14 to provide that if the variation between the ALP determined under the section and the price at which the international transaction has actually been undertaken does not exceed such percentage not exceeding 3% of the latter, as may be notified by the Government. Earlier this margin was ±5% which has now been restricted to ±3%.

    ii) Further, section 92C is amended by insertion of s.s (2A) with retrospective effect from 1-4-2002. The amendment is stated to be of a clarificatory nature. The effect of this amendment is that, in respect of first proviso to section 92C(2), as it stood before its substitution by the Finance (No. 2) Act, 2009, the tolerance band of 5% is not to be taken as a standard deduction while computing ALP. However, it is also clarified that already concluded assessment proceedings should not be a reopened or rectified on the ground of retrospective amendment.

    iii) Section 92C(2) is also amended with retrospective effect from 1-10-2009. This amendment clarifies that the second proviso to section 92C(2) shall also be applicable to all proceedings which were pending as on 1-10-2009 i.e., the date on which the second proviso, as inserted by the Finance (No. 2) Act, 2009, came into force.

    iv) It may be noted that, as stated above, section 92C now applies to specified domestic transactions also from A.Y. 2013-14.

12.3    Section 92CA:

    i) This section deals with reference by the AO to the Transfer Pricing Officer (TPO) in specified cases involving Transfer Pricing issues. S.s (2B) has now been inserted with retrospective effect from 1-6- 2002. It is provided by this amendment that if the assessee has not furnished the audit report u/s.92E in respect of an international transaction and such transaction comes to the notice of the TPO, during the course of proceedings before him, it will be possible for the TPO to consider this transaction as if it has been referred to him by the AO It is also provided in new sub-section (2C) that the AO shall not have power to reopen or rectify any assessment proceedings which have been completed before 1-7-2012.

    ii) As stated above, this section is now applicable to specified domestic transactions from A.Y. 2013-14. This will mean that assesses who have entered into specified domestic transaction exceeding Rs.5 Cr. in the accounting year 2012-13 onwards will have to appear before the AO as well as the TPO.

    13. Advance Pricing Agreement:

Advance Pricing Agreement (APA) mechanism is introduced by new sections 92CC and 92CD inserted in the Income-tax Act, w.e.f. 1-7-2012. This provision is similar to Clause 118 of the DTC Bill, 2010. This provision is introduced to provide certainty to the international transactions and will reduce litigation relating to transfer pricing issues. Section 92CC gives power to the CBDT to enter into an APA, with any person, determining arm’s-length price.

13.1    In brief, the provisions of section 92CC are as under:

    i) The CBDT, with the approval of the Central Government, can enter into an APA with any person (assessee) determining the arm’s-length price or specifying the manner in which such ALP is to be determined. This APA will relate to an international transaction to be entered into by that person.

    ii) The manner in which ALP is to be determined in the above APA may include any of the methods referred to in section 92C(1) or any other method, with such adjustments or variations, as the assessee and the CBDT agree upon.

    iii) Once APA is entered into by the CBDT with the assessee, the ALP for the international transaction, stated in APA, will be determined on that basis and the AO cannot invoke the provisions of sections 92C and 92CA.

    iv) APA referred to above shall be valid for such period not exceeding 5 years as specified in the APA.

    v) The above APA shall be binding on (a) the person in whose case and in respect of the transaction stated in the APA and (b) the Income tax Authorities in respect of the party to the APA for the transaction specified therein.

    vi) The above APA shall not be binding if there is change in the law or facts relating to the APA.

    vii) The CBDT, with the approval of the Govern-ment, can declare the APA as void abinitio, if it finds that the APA has been obtained by the assessee by fraud or misrepresentation of facts.

    viii) If the APA is declared as void by the CBDT, all the provisions of the Act shall apply as if such agreement was not entered into. For the purpose of taking any action against the assessee, in view of the cancellation of APA, the period from the date of the APA to the date of its cancellation will not be counted for determining the limitation period.

    ix) The CBDT will prescribe a scheme for the pro-cedure to be followed for entering into the APA.

13.2 The effect of the APA entered into by an as-sessee is explained in the new section 92CD as under:

    i) Where APA has been entered into by an assessee, the Income-tax return which pertains to a previous year covered under the above agreement and is already filed, the assessee has to file a modified return of income u/s.139 in accordance with and limited to the APA. This modified return has to be filed within 3 months from the end of the month in which APA is entered into.

    ii) Once the modified return of income is filed, the AO will have to assess, reassess or recompute the income, irrespective of the fact whether the assessment/reassessment proceedings are over or not, in accordance with the APA.

    iii) Where the assessment proceedings are completed, the reassessment proceedings are to be completed within one year from the end of the financial year in which modified return of income is filed. If the assessment proceedings are pending, the period of limitation for completion of these proceedings will be extended by 12 months.

13.3 Considering the wording of sections 92CC and 92CD and the intention of the legislation, it will be possible for any assessee, who has already entered into international transactions in the earlier years, to approach the CBDT after 1-7-2012 to enter into APA in respect of such transactions already entered into in the past. This will enable the assessee to apply to the AO that the pending assessments may be completed on the basis of APA. It appears that even if any appeals are pending for any of the earlier years, the assessee will be entitled to withdraw the appeals and approach the AO to make reassessment or recomputation of income for those years in ac-cordance with APA. For this purpose, the assessee should ensure that the APA covers all the earlier years for which disputes are pending.

13.4 Since the transfer pricing provisions have now been extended to ‘Specified Domestic Transactions’ also, it will be in the interest of the assessee and the Tax Department that the above provisions for Advance Pricing Agreement are extended to ‘Specified Domestic Transactions’ also. This will reduce litigation on the question of determination of arm’s-length pricing issues which will arise in relation to such domestic transactions.

    14. General Anti-Avoidance Rule (GAAR):

14.1 This is a new concept introduced in the Income-tax Act by the Finance Act, 2012. Very wide powers are given to the Tax Authorities by these provisions. In new Chapter X-A, sections 95 to 102 have been inserted. In para 154 of the Budget Speech, while introducing the Finance Bill, 2012, the Finance Minister has stated that “I propose to introduce a General Anti-Avoidance Rule (GAAR) in order to counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, enabling review by a GAAR panel.

14.2 The reasons for introducing GAAR provisions in the Income-tax Act are explained in the Explanatory Notes attached to the Finance Bill, 2012.

14.3 There was large-scale opposition to the introduction of this provision in the form suggested in the Finance Bill, 2012, and the DTC Bill, 2010, pending consideration of the Parliament. This opposition was voiced by various trade and industry bodies in India and abroad. The Finance Minister responded to the various suggestions made by members of the Parliament and various trade and industry bodies while replying to the debate in the Parliament on 7th May 2012.

14.4 GAAR provisions:

For the reasons stated by the Finance Minister, special provisions relating to GAAR have been made in sections 95 to 102 in the Income-tax Act from A.Y. 2014-15 (Accounting Year ending 31-3-2014) and onwards. These provisions apply to all assesses (residents or non-resident) in respect of their transactions in India as well as abroad. Very wide powers are given to the tax authorities to disregard any agreement, arrangement or any claim for expenditure, deduction or relief. These provisions, broadly stated are discussed below.

14.5 Section 95:

This section provides that an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement. The tax arising from such declaration by the tax authorities, will be determined subject to provisions of sections 96 to 102. It is also stated in this section that the provisions of sections 96 to 102 may be applied to any step, or a part of the arrangement as they are applicable to the entire arrangement.

14.6    Impermissible Avoidance Arrangement (section 96):

    i) Section 96 explains the meaning of Impermissible Avoidance Arrangement to mean an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit and it —

    a. Creates rights or obligations which would not ordinarily be created between persons dealing at arm’s length.

    b. Results, directly or indirectly, in misuse or abuse of the provisions of the Income-tax Act.

    c. Lacks commercial substance, or is deemed to lack commercial substance u/s.97, or

    d. is entered into or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.

    ii) The Finance Bill, 2012, provided in the section that an arrangement whereby there is any tax benefit to the assessee shall be presumed to have been entered into or carried out for the main purpose of obtaining tax benefits, unless the assessee proved otherwise. It will be noticed that this was a very heavy burden cast on the assessee. However, this requirement has now been deleted and, as declared by the Finance Minister, the onus of proof is now on the Department who has to establish that the arrangement is to avoid tax before initiating the proceedings under these provisions.

14.7    Lack of commercial substance (section 97):

    i) Section 97 explains the concept of lack of com-mercial substance in an arrangement entered into by the assessee. It states that an arrangement shall be deemed to lack commercial substance if —

    a) The substance or effect of the arrangement, as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part of such steps.

    b) It involves or includes

—  Round-trip financing
—  An accommodation party,
— Elements that have the effect of offsetting or canceling each other, or
— A transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction, or

    c) It involves the location of an asset or a transaction or the place of residence of any party which is without any substantial commercial purpose. In other words, the particular location is disclosed only to obtain tax benefit for a party.

    ii) For the above purpose, it is provided that round-trip financing includes any arrangement in which through a series of transactions —

    a) Funds are transferred among the parties to the arrangement, and
    b) Such transactions do not have any substantial commercial purpose other than obtaining tax benefit.

    iii) It is further stated that the above view will be taken by the Tax Authorities without having regard to the following.

    a) Whether or not the funds involved in the round-trip financing can be traced to any funds transferred to, or received by, any party in connection with the arrangement,

    b) The time or sequence in which the funds involved in the round trip financing are transferred or received, or

    c) The means by, manner in, or mode through which funds involved in the round-trip financing are transferred or received.

    iv) The party to such an arrangement shall be treated as ‘Accommodating Party’ whether or not such party is connected with the other parties to the arrangement, if the main purpose of, direct or indirect, participation of such party with the arrangement is to obtain, direct or indirect, tax benefit under the Income-tax Act.

v) It is clarified in the section that the following factor shall not be taken into consideration for determining whether there is commercial substance in the arrangement:

    a. The period or time for which the arrangement exists.
    b. The fact of payment of taxes, directly or indirectly, under the arrangement.
    c. The fact that an exist route, including transfer of any activity, business or operations, is provided by the arrangement.

14.8    Consequence of impermissible avoidance arrangement (section 98):

Under the newly inserted section 144BA, the Commissioner has been empowered to declare any arrangement as an impermissible avoidance arrangement. Section 98 states that if any arrangement is declared as impermissible, then the consequences, in relation to tax or the arrangement shall be determined in such manner as is deemed appropriate in the circumstances of the case. This will include denial of tax benefit or any benefit under applicable DTAA. The following is the illustrative list of conse-quences and it is provided that the same will not be limited to the list:

    i) Disregarding, combining or re-characterising any step in, or part or whole of the impermissible avoidance arrangement;

    ii) Treating, the impermissible avoidance arrangement as if it had not been entered into or carried out;

    iii) Disregarding any accommodating party or treating any accommodating party and any other party as one and the same person;

    iv) Deeming persons who are connected persons in relation to each other to be one and the same person;

    v) Re-allocating between the parties to the ar-rangement, (a) any accrual or receipt of a capital or revenue nature or (b) any expenditure, deduction, relief or rebate;

    vi) Treating (a) the place of residence of any party to the arrangement or (b) situs of an asset or of a transaction at a place other than the place or location of the transaction stated under the arrangement.

    vii) Considering or looking thorough any arrangement by disregarding any corporate structure.

    viii ) It is also clarified that for the above purpose that Tax Authorities may re-characterise (a) any equity into debt or any debt into equity, (b) any accrual or receipt of capital nature may be treated as of revenue nature or vice versa or (c) any expenditure, deduction, relief or rebate may be re-characterised.

14.9    Section 99:

This section provides for treatment of connected person and accommodating party. The section provides that for the purposes of sections 95 to 102, for determining whether a tax benefit exists —

    i)The parties who are connected person, in relation to each other, may be treated as one and the same person.

    ii) Any accommodating party may be disregarded.

    iii) Such accommodating party and any other party may be treated as one and the same person.

    iv) The arrangement may be considered or looked through by disregarding any corporate structure.

14.10 It is further provided in section 100 that the provisions of sections 95 to 102 shall apply in addition to, or in lieu of, any other basis for determination of tax liability. Section 101 gives power to the CBDT to prescribe the guidelines and lay down conditions for application of sections 95 to 102 relating to the General Anti-Avoidance Rules (GAAR). Let us hope that these guidelines will specify the type of arrangements and transactions in relation to which alone the Tax Authorities have to invoke the provision of GAAR. Further, it is necessary to specify that if the tax benefit sought to be obtained by any arrangement is say Rs.5 crore or more in a year, then only the Tax Authorities will invoke these powers.

14.11  Section 102:

This section defines words or expressions used in sections 95 to 102 as stated above.

14.12 Section 144BA:

Procedure for declaring an arrangement as impress-ible u/s.95 to u/s.102 is given in this section. This section will come into force from A.Y. 2014-15.

    i) The Assessing Officer can make a reference to the Commissioner for invoking GAAR and on re-ceipt of reference the Commissioner shall hear the taxpayer. If he is not satisfied by the submissions of taxpayer and is of the opinion that GAAR provi-sions are to be invoked, he has to refer the matter to an ‘Approving Panel’. In case the assessee does not object or reply, the Commissioner shall make determination as to whether the arrangement is an impermissible avoidance arrangement or not.

    ii) The Approving Panel has to dispose of the ref-erence within a period of six months from the end of the month in which the reference was received from the Commissioner.

    iii) The Approving Panel shall either declare an arrangement to be impermissible or declare it not to be so after examining material and getting further inquiry to be made. It can issue such directions as it thinks fit. It can also decide the year or years for which such an arrangement will be considered as impermissible. It has to give hearing to the assessee before taking any decision in the matter.

    iv) The Assessing Officer will determine conse-quences of such a positive declaration of arrangement as impermissible avoidance arrangement.

    v) The final order, in case any consequences of GAAR is determined, shall be passed by the AO only after approval by the Commissioner and, thereafter, first appeal against such order shall lie to the Ap-pellate Tribunal.

    vi) The period taken by the proceedings before the Commissioner and the Approving Panel shall be excluded from time limitation for completion of assessment.

    vii) The CBDT has to constitute an ‘Approving Panel’ consisting of not less than three members. Out of these three members, two members shall be of the rank of Commissioners of Income-tax and one member shall be an officer of the Indian Legal Service of the rank of Joint Secretary or above to the Central Government. It is not clear from these provisions whether the CBDT will appoint only one Approving Panel for the whole of the country or there will be separate Panels in each State. Considering the work load and considering the convenience of the assessees it is necessary to have one such Panel in each State.

    viii) In addition to the above, it is provided that the CBDT has to prescribe a scheme for efficient functioning of the Approving Panel and expeditious disposal of the references made to it.

    ix) Appeal against order of assessment passed under the GAAR provisions after approval by the appropriate authority is to be filed directly with the ITA Tribunal and not before the CIT(A). Section 144C relating to reference before DRT does not apply to this assessment order and, therefore, no reference can be made to DRT when GAAR provisions are invoked.

14.13 The above GAAR provisions will have far-reaching consequences for assessees engaged in the business with Indian or foreign parties. GAAR is not restricted to only business transactions. Therefore, all other assessees who are engaged in business or profession or who have no income from business or profession will be affected by these provisions. It appears that any assessee having any arrangement, agreement, or transaction with an associated person will have to take care that the same is at arm’s-length consideration. In particular, an assessee will have to consider the implications of GAAR while (a) executing a will or trust, (b) entering into partner-ship or forming LLP, (c) taking controlling interest in a company, (d) carrying out amalgamation of two or more companies, (e) effecting demerger of a company, (f) entering into a consortium or joint venture, (g) entering into foreign collaboration, or acquiring an Indian or foreign company. It may be noted that this is only an illustrative list and there may be other transactions which may attract GAAR provisions.

14.14 From the wording of the above provisions of sections 95 to 102 and 144BA it appears that the provisions of GAAR can be invoked in respect of an arrangement made prior to 1-4-2013. The CIT or the Approving Panel can hold any such arrangement entered into prior to 1-4-2013 as impermissible and direct the AO to make adjustments in the computation of income or tax in the A.Y. 2014-15 or any year thereafter. As stated in para 15.15 of the report of the Standing Committee on Finance on the DTC Bill, 2010, it would be fair to apply GAAR provisions prospectively, so that it is not made applicable to existing arrangements/transactions. It may be noted that no such provision is made in sections 95 to 102 and 144BA and, therefore, it can be presumed that the above GAAR provisions will have retroactive effect.

14.15 In section 101 it is stated that the CBDT will issue guidelines to provide for the circumstances under which GAAR should be invoked. Let us hope that these guidelines will specify that GAAR provisions will apply to all arrangements or transactions entered into after 1-4-2013 and also the type of arrangements or transactions to which GAAR will apply. It is also necessary to specify that GAAR provisions will be invoked if the tax sought to be avoided is more than Rs.5 crore, in any one year. This is also suggested by the Standing Committee on Finance in their report on the DTC Bill, 2010. As regards the procedure for invoking GAAR, section 144BA(4) provides that if the CIT agrees with the view of the AO to invoke GAAR, he should refer the matter to an Approving Panel. U/s.144BA(14) it is provided that the CBDT will appoint an Approving Panel consisting of two members of the level of Commissioners and one Law Officer. As suggested by the above Standing Committee in their report on the DTC Bill, 2010, such Panel should consist of a Chief Commissioner and two independent technical persons.

    15. Assessment, reassessment and appeals:

15.1    Section 139 — Return of income:

    i) This section is amended from A.Y. 2012-13 (Ac-counting Year ending 31-3-2012). The amendment now requires that a resident and ordinarily resident, who is otherwise not required to furnish a return of income, will be required to furnish his return of income before the due date for filing the return in the following cases:

    a) If the person has any asset located outside India. This will mean that if the person owns any immovable property outside India, any shares in a foreign company, any bank account or other assets outside India, he will have to file return even if the total income is below the taxable limit.

    b) If the person has any financial interest in any entity in a foreign country. This will mean that if the person is a beneficiary in any specific or any discretionary foreign trust, he will have to file his return of income whether he has received any benefit from the trust or not.

    c)If the person has signing authority in any account located outside India.

    ii) The above provision applies to a company, firm, individual, HUF or any non-corporate entity who is a resident and ordinarily resident. Such person will have to file return of income for the accounting year 1-4-2011 to 31-3-2012 (A.Y. 2012-13) and onwards. It may be noted that in a case where the person (whether resident or non-resident) has taxable income in India, he will have to give information about the above items in the form of return of income prescribed for A.Y. 2012-13.
    iii) At present, the due date for furnishing the return of income in the case of an assessee, being a company is required to file Transfer Pricing Re-port u/s.92E, is 30th November. It is now provided that the extended time limit up to 30th November will apply to all assessees who are required to fileTransfer Pricing Report u/s.92E. This amendment will come into force from A.Y. 2012-13.


15.2    Section 143 — Procedure for assessment:

At present, the return is required to be processed u/s.143(1) even if the case is selected for scrutiny. The section is now amended, effective from 1-7-2012, to provide that if the case is selected for scrutiny, the AO is not required to process the return of income u/s.143(1). This will mean that if the person has claimed refund in the return of income and his case is taken up for scrutiny, the refund if due, will be issued only after completion of assessment u/s.143(3).

15.3    Section 144C — Reference to DRP:

    i) This section is amended with retrospective effect from 1-10-2009. Under this section when the AO wants to make a variation in the income or loss, as a result of order passed by a Transfer Pricing Officer u/s.92CA(3), he has to pass a draft assessment order. If the assessee objects to the variation, he has to refer the matter to the Dispute Resolution Panel (DRP) u/s.144C. The DRP has power to confirm, reduce or enhance the assessment. There was a controversy as to whether this power of enhancement includes power to consider any other matter arising out of the assessment proceedings relating to the draft assessment order. To clarify this doubt, this section is now amended w.e.f. 1-10-2009 to provide that the DRP can consider any other mater relating to the draft assessment order while enhancing the variation. It may be noted that this amendment does not clarify whether the DRP can consider any other matter brought to its notice by the assessee which has the effect of reducing the income or increasing the loss.

    ii) Further, it is also clarified that the enhance-ment in time limit for computation of assessment, provided in this section 144C(13), will apply to time limit provided u/s.153 as well as u/s.153B w.e.f. 1-10-2009.

    iii) It may be noted that from A.Y. 2013-14, cases in which specified domestic transactions are there will now be referred to TPO. Therefore, the above procedure of making draft order and reference to
DRP will apply in such cases also.

15.4    Sections 147 and 149 — Reassessment of income:

These two sections dealing with income-escaping assessment and time limit for reopening assessment have been amended w.e.f. 1-7-2012. These amendments will apply to any assessment year beginning on or before 1-4-2012. The effect of these amendments is as shown in Table on the next page.


    i) At present, the time limit for reopening assessments is 6 years. In a case where assessment is made u/s.143(3) and the income-escaping assessment is not due to failure of the assessee to disclose fully and truly all material facts necessary for assessment for that year, the time limit for reopening is 4 years. This time limit is now enhanced in specified cases.

    ii) It is now provided that if the income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any year, the time limit for reopening the assessment shall be 16 years. For this purpose, where a person is found to have any asset or any financial interest in any entity located outside India, shall be deemed to be a case where income chargeable to tax has escaped assessment. This provision will apply to a resident or a non-resident. In the coming years, this provision will have far-reaching implications.

    iii) It is now provided that if a person has failed to furnish the Transfer Pricing Report u/s.92E in respect of any international transaction, income shall be deemed to have escaped assessment. In such a case the AO can send notice for reopening assessment within the prescribed period.

    iv) Similar amendments are made in the Wealth Tax Act also.

    v) Reading the above provisions, it appears that in a transaction similar to the case of the famous VODAFONE the assessments of a foreign company which has made taxable capital gains or other income can be reopened for 16 years instead of 6 years as in such cases some assets will be located outside India.

15.5    Sections 153 and 153B — Time limit for completion of assessments:

These sections are amended w.e.f. 1-7-2012. At present, the time limit for completion of assessment or reassessment proceedings is 21 months. In a case where reference is made to the Transfer Pricing Officer, the time limit for completion of assessment is 33 months. This time limit is extended as under:

15.6    Sections 153A and 153C — Assessment in case of search or requisition:

These sections are amended w.e.f. 1-7-2012. Sections 153A and 153C of the Act lay down the procedure for assessment/reassessment in case of search or requisition. Presently, the notice for filing of returns of income and assessment thereof has to be given for six assessment years preceding the previous year in which the search was conducted or requisi-tion made.

It is now provided that the Central Government can notify cases or class of cases where the Assessing Officer shall not be required to issue notice for initia-tion of assessment/reassessment proceedings for six preceding assessment years and proceedings may only be taken up for the assessment year relevant to the year of search or requisition.

15.7 Sections 154 and 156:

    i) These sections have been amended w.e.f. 1-7-2012. A statement of tax deduction at source is processed u/s.200A and an intimation is sent to the deductor as provided u/s.200A(1). At present, there is no provision for rectification or appeal against the said intimation.

    ii) It is now provided that any mistake apparent from the record in the intimation issued u/s.200A shall be rectifiable u/s.154. It is also provided that the intimation issued u/s.200A shall also be deemed to be a notice of demand u/s.156 and an appeal can be filed with the Commissioner of Income-tax (Appeals) u/s.246A.

    iii) In actual practice there is considerable delay in passing order u/s.154 for rectification of mistake in any order passed by the AO It is, therefore, sug-gested that section 246A should be amended to provide that if rectification order is not passed by the AO within 6 months of filing such application the assessee will have a right to file appeal to the CIT(A). It may be noted that similar provision is made in clause 178 of the DTC Bill, 2010.

15.8    Section 245C — Settlement Commission:

Sections 245C dealing with application for settlement of cases has been amended w.e.f. 1-7-2012. At present, an application can be filed before the Settlement Commission u/s.245C by a related person who has substantial interest of more than 20% of the profits of the business at any time during the previous year. Now, it is provided that the substan-tial interest should exist on the date of search and not at any time during the previous year.

15.9    Section 245N: Authority for Advance Ruling (AAR)

This Section is amended w.e.f. 1-4-2013 (A.Y. 2013-14). By this amendment it is provided that an assessee can approach the AAR for determination or decision whether an arrangement which is proposed to be undertaken by any person (resident or non-resident) is an impermissible arrangement as provided in sections 95 to 102. This will enable the person enter-ing into an arrangement to get an Advance Ruling from AAR if he apprehends that the AO may invoke GAAR provisions during assessment proceedings. As suggested earlier, this provision should be made available to persons entering into specified domestic transactions u/s.92BA.

15.10 Section 245Q — Fees for filing application for Advance Ruling:

Fees for filing an application before the Authority for Advance Ruling is increased from Rs.2500 to Rs.10000 w.e.f. 1-7-2012. The CBDT is now given power to increase or reduce the amount of fees from time to time by prescribing the necessary rule for this purpose.

15.11    Section 246A — Appealable orders before CIT(A):

The list of orders against which appeals can be filed before the CIT(A) has now been expanded. Now appeals can be filed before the CIT(A) against the following orders:

    i) The tax deductor can file appeal on after 1-7-2012 against the intimation issued u/s.200A relat-ing to short deduction of tax at source.

    ii) The assessee can file appeal against the order passed by the AO u/s.153A in search cases if such order is not passed in pursuance of the directions of the DRP. This will be effective from 1-10-2009.

    iii) The assessee can file appeal against the order of assessment or reassessment passed under new section 92CD(2) after furnishing the modified return based on the Advance Pricing Agreement as provided in the new section 92CC. This is effective from 1-7-2012.

    iv) Penalty order passed under new section 271 AAB where search has been initiated. This is effec-tive from 1-7-2012.

15.12 Section 253 — Appeals before ITA Tribunal:

    i) The following amendment is made w.e.f. 1-4-2013:

Any order passed by the AO u/s.143(3), 147, 153A or 153C in pursuance of the order passed by the CIT u/s.144BA(12) in accordance with the directions by the Approving Panel or the CIT, declaring any ar-rangement as impermissible avoidance arrangement, is appealable directly to the ITA Tribunal.

    ii) The following amendments are made with reference to DRP cases:

    a) The directions given by the DRP in the case of a foreign company or any person in whose case variation in the income arises due to order of the Transfer Pricing Officer are binding on the Assessing Officer. It is now provided that the Assessing Officer can also file an appeal before the ITA Tribunal against an order passed in pursuance of directions of the DRP in respect of objections filed on or after 1st July, 2012.

    b) The Assessing Officer or the assessee is entitled to file memorandum of cross objections on receipt of notice that an appeal has been filed by the other party.

    c) Any order passed u/s.153A or 153C in pursuance of directions of the DRP shall be directly appeal-able to the ITA Tribunal w.e.f. 1st October, 2009. Presently, such appeals are being filed with the Commissioner (Appeals).

15.13 Section 292CC — Authorisation and assessment in case of search or requisition:

This is a new section inserted w.e.f. 1-4-1976 to clarify the procedure for authorisation and assessment in certain cases of search or requisition. In the case of CIT v. Smt. Vandana Verma, 330 ITR 533 (All.) it was held that if search warrant is in the name of more than one person, then assessment cannot be made individually in the absence of any search warrant in the individual name. To overcome this judgment, it is now provided in this new section, with retrospective effect from 1-4-1976, that where a search warrant has been issued mentioning names of more than one persons, the assessment/reassessment can be made separately in the name of each of the persons mentioned in such search warrant.

    16. Penalties and prosecution:

16.1    Section 234E — Fees for delay in furnishing TDS/TCS statement:

This is a new section which has been inserted w.e.f. 1-7-2012. At present, section 272A provides for penalty of Rs.100 per day for delay in furnishing TDS/TCS statement within the time prescribed in section 200(3) or 206C(3). Newly inserted section 234E now provides for levy of fees of Rs.200 for every day of the delay in furnishing TDS/TCS state-ments. However, the total fee shall not be more than the amount of tax deductible/collectable for the quarter for which the TDS/TCS statement is delayed. The fee is to be paid before the delivery of the TDS/TCS statements. Consequently levy or penalty provided in section 272A(2)(k) is deleted. However, new section 271H has been added to levy of penalty under certain circumstances as discussed in Para 16.5 below. It may be noted that no appeal against levy of fees payable u/s.234E is provided in section 246A.

16.2 Section 271 — Penalty for concealment — Amendment w.e.f. 1-4-2013:

The transfer pricing regulations are extended to specified domestic transactions entered into by domestic related parties. If any amount is added or disallowed, based on the arm’s- length price determined by the Assessing Officer, it is now provided that such addition/disallowance shall be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished as provided in Explanation 7 to section 271(1) and it is liable to penalty accordingly.

16.3    Section 271AA — Penalty for failure to report, etc. of International and specified domestic transactions:

    i) Amendment w.e.f. 1-7-2012

At present, there is no penalty for non-reporting of an international transaction in the report filed u/s.92E or maintaining or furnishing or incorrect information of documents.

Therefore, a levy of penalty at the rate of 2% of the value of the international transaction is provided, if the taxpayer

    a) fails to keep and maintain prescribed information and documents u/s.92D(1) or (2)
    b) fails to report any international transaction u/s.92E, or
    c) maintains or furnishes any incorrect information or documents.
    ii) Amendment w.e.f. 1-4-2013

The above provision for levy of penalty u/s.271AA will apply if there is failure to comply with the above requirements in the case of domestic transactions also from A.Y. 2013-14.

16.4    Section 271G — Penalty for failure to furnish information or documents u/s.92D — w.e.f. 1-4-2013:

At present, section 271G provides for levy of penalty at 2% of the value of transaction for failure to furnish information or documents u/s.92D which requires maintenance of certain information and documents in the prescribed proforma by the persons entering into an international transaction. This penal provision will now apply to persons entering into specified domestic transactions for such failure effective from A.Y. 2013-14.

16.5    Section 271H: Penalty for failure to furnish TDS/TCS statements:

This is a new section which has been inserted w.e.f. 1-7-2012. In addition to fees payable under the newly inserted section 234E, section 271H also provides for penalty for not furnishing quarterly TDS statements within the prescribed time limit or penalty for furnishing incorrect information such as PAN of the deductee or amount of TDS deducted, etc. in the statements to be filed u/s.200 (3) or 206C(3). A penalty ranging from Rs.10,000 to Rs.1,00,000 is leviable for these failures. No appeal against the levy of this penalty is provided u/s.246A.

It is also provided that no such penalty will be levied if the deductor delivers the statement within a year from the due date and the person has paid the tax along with fees and interest before delivering the statement.

16.6    Sections 271AAA and 271AAB — Penalty on undisclosed income found in the course of search:

    i) At present, penalty in the case of search initiated on or after 1st June, 2007 is not liviable u/s.271AAA subject to certain conditions, such as:

    a) the assessee admits the undisclosed income in a statement u/s.132(4) recorded during the search,
    b) he specifies the manner in which such income has been derived, and
    c) he pays the tax together with interest, if any, in respect of such income.

Now, section 271AAA will not apply to search initi-ated on or after 1st July, 2012.

    ii) Newly inserted section 271 AAB now provides for levy of penalty on undisclosed income of specified previous years where search has been initiated on or after 1st July, 2012 as under:

    a) If the assessee admits undisclosed income during the course of search in a statement u/s.132(4), specifies the manner in which such income has been derived, pays the tax with interest on such income and furnishes return of income declaring such income, penalty shall be 10% of undisclosed income.
    b) If undisclosed income is not so admitted during the course of search, but disclosed in the return of income filed after the search and he pays the tax with interest, penalty shall be 20% of undisclosed income.
    c) In other cases, the minimum penalty shall be 30% subject to maximum of 90% of the undisclosed income.

16.7    Prosecution provisions — Sections 276C, 276CC, 277, 277A, 278 and 280A to 280D:

The effect of these amendments w.e.f. 1-7-2012 shall be as under:

    i) Section 276C — Wilful attempt to evade tax:

At present, if the amount of tax sought to be evaded exceeds Rs.1 lac, the punishment is rigorous imprisonment for minimum of 6 months and maximum of 7 years. The limit of Rs.1 lac is now raised to Rs.25 lac.

In other cases, the rigorous imprisonment period is 3 months minimum and 3 years maximum. The period of 3 years is now reduced to 2 years.

    ii) Section 276CC — Failure to furnish Returns of Income:

In this section also amendments similar to amendments in section 276C as stated in para (i) above are made.

    iii) Section 277 — False Statement in Verification:

In this section also amendments similar to amendments in section 276C as stated in para (i) above are made.

    iv) Section 277A — Falsification of Books of Accounts or Documents:

In this section the maximum term of imprisonment has been reduced from 3 years to 2 years.

    v) Section 278 — Abetment of False Return of Income and Statements:

In this section also amendments similar to amendments in section 276C as stated in (i) above are made.

(vi)    Sections 280A to 280D:

These new sections have been inserted w.e.f. 1-7-2012 with a view to appoint Special Courts to try specified offences under the Income-tax Act. It appears that these new provisions are made to strengthen the prosecution mechanism and expe-dite the disposal of prosecution cases under the Income-tax Act. In brief these provisions deal with the following matters:

    a. Providing for constitution of Special Courts for trial of offences under the Act.

    b. Application of summons trial for offences under the Act to expedite prosecution proceedings as the procedures in summons trial are simpler and less time consuming. The provision for summons trials will apply to offences where the maximum term of Imprisonment does not exceed 2 years.

    c. Providing for appointment of public prosecutors.

17.  Other amendments:
 17.1  Senior citizens:
In various sections of the Income-tax Act the age limit for senior citizens was fixed at 65 years. This has now been reduced to 60 years w.e.f.  A.Y. 2013-14 (Accounting Year 2012-13).

  17.2  Tax audit:
Section 40AB provides that an assessee carrying on business or profession has to get the accounts audited by a Chartered Accountant if the turnover or gross receipts exceed Rs.60 lac in the case of business or exceeds Rs.15 lac in the case of profession. The limit of turnover or gross receipts for this purpose has now been increased to Rs.1 crore in the case of business or Rs.25 lac in the case of profession. Further, date for obtaining tax audit report which is 30th September has been changed to the due date of filing return of income u/s.139(1) as applicable to the assessee. The amendment increasing the limit for turnover/gross receipts will come into force from A.Y. 2013-14 (Accounting Year 2012-13).

17.3    Section 115VG — Computation of daily tonnage income for shipping companies:

This section is amended w.e.f. A.Y. 2013-14. The Tonnage Tax Scheme for shipping companies was introduced by the Finance Act, 2005. This section provides for taxation of income of a shipping company on presumptive basis. Under this scheme, the operating profit of a shipping company is determined on the basis of tonnage capacity of its ships. The rates of daily tonnage income specified in the section have not been changed since 2005. By this amendment these rates are enhanced as under:

17.4    Section 209 — Advance tax calculation:

At present, for the purpose of calculation of advance tax liability, tax deductible or collectable at source was required to be reduced even though the tax was actually not deducted. Therefore, in such cases, there was no interest liability. Now it is provided that unless such tax is actually deducted, the advance tax liability. This amendment is made w.e.f. 1-4-2012.


17.5 Section 234D — Interest on excess refund:

This section is amended w.e.f. 1-6-2003. This section was inserted by the Finance Act, 2003, w.e.f. 1-6-2003 to enable the Government to recover amount of excessive refund granted u/s.143(1). The section provides for levy of simple interest at the rate of ½% for every month or part thereof on the excess amount of refund granted u/s.143(1) if, on regular assessment, it is found to be excessive. Interest is payable for the period starting from the date of refund to the date of regular assessment.

The Delhi High Court in DIT v. Jacabs Civil Incorporated, (2011) 330 ITR 578 held that this provision will apply from the A.Y. 2004-05 and no interest is payable for the earlier assessment years. To overcome this decision, it is now provided that interest shall be payable u/s.234D on excess refund for any earlier assessment years if the proceedings in respect of such assessment are completed after 1-6-2003.

    Wealth Tax Act :

    Section 2(ea) — Definition of ‘Assets’:

At present, any residential unit allotted to officers, employees or whole-time directors is exempt from wealth tax if the gross annual salary of such person is less than Rs.5 lac. This limit of gross annul salary is increased to Rs.10 lac. This amendment is effec-tive from A.Y. 2013-14.

    Section 17 — Wealth-escaping assessment:

This section is amended w.e.f. 1-7-2012 — It is now provided in this section that if any person is found to have any asset or financial interest in any entity located outside India, it will be deemed to be a case where net wealth chargeable to tax has escaped as-sessment. In such cases the wealth tax assessment can be reopened by the AO within 16 years.

    Section 17A — Time limit for completion of assessment and reassessment:

This section is amended w.e.f. 1-7-2012. As discussed earlier, while considering the amendments in sections 153 and 153B of the Income tax, this amendment has the effect of increasing the time limit by 3 months for completion of assessment/reassessment proceedings.

    Section 45:

This section provides for exemption from wealth tax to section 25 companies, co-operative societies, social clubs, recognised political parties, mutual funds, etc. This list is now expanded to provide that the ‘Reserve Bank of India’ will not be liable to pay wealth tax w.e.f. 1-4-1957.

    To sum up:

19.1 From the above discussion, it will be evident that the amendments made in the Income-tax Act by this Budget are the most controversial. In par-ticular, the amendments affecting non -residents which have retrospective and retroactive effect will affect our relationship with many foreign countries and will affect our global trade. The Finance Minister has quoted in his Budget Speech Shakespear’s immortal words “I must be cruel only to be kind”. Reading the provisions relating to amendments in the Income-tax Act, one can say that this year he has been ‘Cruel’ with the non-resident taxpayers. Hopefully he may become ‘kind’ next year.

19.2 In his Budget speech, the Finance Minister has stated that his proposals relating the Direct Taxes will result in a net revenue loss of Rs.4,500 Cr. in the year and the proposals relating to Indirect Taxes will yield net revenue gain of Rs.45940 Cr. However, from his post-budget speeches before various trade bodies indicate that retrospective amendments in the Income-tax Act itself will yield revenue of about Rs.40000 Cr. Considering the stakes involved, it is evident that in the coming years we will witness a long-drawn tax litigation relating to interpretation of the retrospective amendments in the Income-tax Act.

19.3 Another provision which is likely to create lot of hardship to resident as well as non-resident tax-payer is about GAAR. It is true that the implementation of GAAR has been postponed to next year, there is apprehension that the Tax Department may hold arrangements made prior to 1-4-2013 as impermissible and make adjustments in the income for the year 1-4-2013 to 31-3-2014 and subsequent years. In other words, GAAR provisions may have retroactive effect. From the wording of GAAR provisions it is evident that it will now be difficult for resident as well as non-resident tax-payers to take any major decisions about the structure of any business transaction. Even the tax consultants will find it difficult to advise their clients about structuring or restructuring any business transaction. If the Government does not come out with a taxpayer-friendly Guidance Note, taking into consideration the business realities, the fear above invocation of GAAR will continue in the minds of all taxpayers and their tax consultants.

19.4 Another controversial provision which has been made this year relates to specified domestic transactions. By extending the scope of Transfer pricing provisions to these transactions, the compliance cost of the assessee will increase. At present no adequate data about domestic comparable prices is available in our country, and therefore, it will be difficult for assesses to maintain transfer pricing records and documents for this purpose. Since the provisions have been made effective from 1 -4-2012, many assesses may not be well equipped to maintain these records in this year. Since every case in which specified domestic transactions are entered into will be referred to the TPO, the entire assessment proceedings will become lengthy and time consuming. This will also increase compliance cost.

19.5 It is true that the tax burden of individuals, HUF, etc. has been reduced and some beneficial provisions have been introduced to remove some practical difficulties. But, it can be stated that these efforts are only half-hearted and there are many areas in which the taxpayers will have to face many practical difficulties.

19.6 The DTC Bill, 2010, is pending before the Par-liament. The report of the Standing Committee on Finance is also laid before the Parliament. This Bill was to be implemented from 1-4-2012. However, due to the delay in the legislative process it is stated that DTC will now be passed in the next session of the Parliament and will be made effective from 1-4-2013. In view of this, it is not clear why such controversial amendments are made this year in the last year of the life of the present Income-tax Act. By the time the taxpayers grasp the implications of these amend-ments, the new provisions of DTC will come into force from next year. When it became evident in the beginning of this year that DTC may be postponed by one year, it was felt that in this Budget some minimal amendments will be made in the Income-tax Act as and by way of parting gift to the taxpayer. But, after reading the controversial amendments in the Income-tax Act in this Budget, the taxpayers have felt that this Act has given a parting kick to the taxpayers in the last year of its existence.

Acknowledgement:

S. M. Jhaveri, Chartered Accountant has assisted the author in the preparation of this article.

Notification No. 25/2012, S.O. 1453(E) dated 2-7-2012 — Income-tax (Seventh Amendment) Rules, 2012 — Amendment in Rule 12 and substitution of forms ITR 5 and ITR 6.

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Rule 12 provided that the prescribed ITR Form SAHAJ — ITR 1 and SUGAM — ITR 4S could not be used by a resident individual or a HUF to file his return of income, if he had:

(a) assets (including financial interest in any entity) located outside India; or

(b) signing authority in any account located outside India. The Rule is amended to provide that not ordinary residents can use SAHAJ — ITR 1 and SUGAM — ITR 4S though they have assests located outside India and have signi

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Instructions to AOs to rectify/reconcile disputed arrears in demand irrespective of limitation of four years u/s.154(7) — Circular No. 4, dated 20-6-2012.

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Instructions to AOs to rectify/reconcile disputed arrears in demand irrespective of limitation of four years u/s.154(7) — Circular No. 4, dated 20-6-2012.

In certain cases, assessees have disputed the figures of arrear demands shown as outstanding against them in the records of the Assessing Officers. The Assessing Officers have expressed their inability to correct/reconcile such disputed arrear demand on the ground that the period of limitation of four years as provided u/ss.(7) of section 154 of the Act has expired. Further, in some cases, the Assessing Officers have uploaded such disputed arrear demand on the Financial Accounting System (FAS) portal of Centralised Processing Center (CPC), which has resulted in adjustment of refund arising out of processing of returns against such arrear demand which has been disputed by such assessees on the grounds that either such demand has already been paid or has been reduced/eliminated in the appeals, etc. The arrear demands, in these cases also were not corrected/reconciled for the reason that the period of limitation of four years has elapsed. The CBDT has now authorised the Assessing Officers to make appropriate corrections in the figures of such disputed arrear demands after due verification/reconciliation and after examining the same on merits, whether by way of rectification or otherwise, irrespective of the fact that the period of limitation of four years as provided u/s.154(7) of the Act has elapsed.

Notification No. 25/2012, S.O. 1453(E) dated 2-7-2012 — Income-tax (Seventh Amendment) Rules, 2012 — Amendment in Rule 12 and substitution of forms ITR 5 and ITR 6.

Rule 12 provided that the prescribed ITR Form SAHAJ — ITR 1 and SUGAM — ITR 4S could not be used by a resident individual or a HUF to file his return of income, if he had:

(a) assets (including financial interest in any entity) located outside India; or

(b) signing authority in any account located outside India.

The Rule is amended to provide that not ordinary residents can use SAHAJ — ITR 1 and SUGAM — ITR 4S though they have assests located outside India and have signing authority in any account located outside India.

Agreement for exchange of information for collection of taxes between India and Jersey — Notification No. 26/2012, dated 10-7-2012. DTAA between India and Norway notified — Notification No. 24/2012, dated 19-7-2012.

Direct Tax Press Release No. 402/92/2006-MC (15 of 2012), dated 20-7-2012.

The CBDT vide its Notification No. 9/2012, dated 17th February, 2012 has exempted salaried employees from the requirement of filing the returns for A.Y. 2012-13.

The exemption is applicable only if all the following conditions are fulfilled:

  • Employee has earned only salary income and income from savings bank account and the annual interest earned from savings bank account is less than Rs.10 thousand.
  •  The total income of the employee does not exceed Rs.5 lakh (Total income means gross total income less deductions under Chapter VIA).
  • The employee has reported his PAN to the employer.

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Section 32 — Claim for depreciation on amount paid for acquisition of the non-compete right — Whether allowable — Held, Yes.

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Issue:

Whether the CIT(A) was right in allowing depreciation on non-compete fee of Rs.4.55 crore by treating the same as intangible asset u/s.32(1)(ii). According to the AO, the fees paid for obtaining non-compete right from the vendor was not an intangible asset u/s.32(1)(ii) for the following two reasons:

(a) It is not covered under the phrase ‘any other business or rights of similar nature’ used in the provisions; and

 (b) It is not capable of and transfer like other intangible assets of know-how. Before the Tribunal, the Revenue relied on the order of the AO and placed reliance on the following decisions:

  • R. Keshvani v. ACIT, (2009) 116 ITD 133 (Mumbai);
  • Srivatsan Surveyors (P) Ltd. v. ITO, (2009) 125 TTJ 286 (Chennai);
  • CIT v. Hoogly Mills Co. Ltd., (2006) 157 Taxman 347 (SC); and
  • Bharatbhai J. Vyas v. ITO, (2006) 97 ITD 248 (Ahd.).


Held:

The Tribunal agreed with the views of the CIT(A) that the acquisition of the non-compete right by the assessee from the vendor for a period of 10 years is a right in the nature of an intangible capital asset which is capable of being transferred. According to it, it was further proved by the fact that this right had been further transferred by the assessee at the time of its amalgamation with another company. As regards the reliance placed by the Revenue on various judicial decisions, the Tribunal noted that, except one judgment of the Tribunal rendered in the case of Srivatsan Surveyors (P) Ltd., the other judgments cited by the Revenue are not regarding the allowability of depreciation on non-compete fees. As regards the Tribunal decision rendered in the case Srivatsan Surveyors (P) Ltd., the Tribunal noted that the issue was decided against the assessee on the basis that the depreciation on restrictive covenant is ‘a right in persona’ and not a ‘right in rem’ and hence, the depreciation was not allowed.

However, the Tribunal noted that in a subsequent decision of the Chennai Tribunal in the case of ITO v. Medicorp Technologies India Ltd., (2009) 30 SOT 506 on the similar issue, the case was decided in favour of the assessee. As held by the Apex Court in the case of CIT v. Vegetable Products Ltd., (1073) 88 ITR 192 (SC), the Tribunal observed that in cases where there are two views possible, the view favourable to the assessee should be followed. Accordingly, the issue was decided in favour of the assessee by following the Tribunal decision rendered in the case of ITO v. Medicorp Technologies India Ltd.

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Section 14A, Rule 8D — Exercising jurisdiction in the larger interest of justice, ITAT directed the AO to compute disallowance u/s.14A @ 2% of the exempt income instead of 4.06% as computed by the AO.

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18. JNJ Holdings P. Ltd. v. ACIT
ITAT ‘J’ Bench, Mumbai
Before B. Ramakotaiah (AM) and S. S. Godara (JM)
ITA No. 3411/M/2009
A.Y.: 2005-06. Decided on: 8-6-2012
Counsel  for  assessee/revenue:  Hiro  Rai/Rupinder Brar
       
Section 14A, Rule 8D — Exercising jurisdiction in the larger interest of justice, ITAT directed the AO to compute disallowance u/s.14A @ 2% of the exempt income instead of 4.06% as computed by the AO.

Facts:

The assessee involved in business of investments and dealing in shares, securities, filed its return declaring total income of Rs.14,60,52,720. In the said return it had shown dividend income of Rs. 76,49,289 as exempt income. In response to the show-cause notice issued by the AO as to why expenses in relation to earning of dividend income should not be disallowed, the assessee explained that it had not incurred any direct expenditure. The AO rejected this contention and computed the disallownce to be Rs.4,36,027 i.e., 4.06% of dividend income.

Aggrieved the assessee preferred an appeal to the CIT(A) who directed the AO to recompute the disallowance by following Rule 8D of the Incometax Rules, 1963.

 Aggrieved, the assessee preferred an appeal to the Tribunal where on behalf of the assessee it was contended that for the assessment year under consideration, Rule 8D is not applicable and that the Tribunal by exercising jursidiction u/s.254(1) of the Act, should determine the reasonable expenditure in peculiar circumstances of the case.

Held:

The Tribunal held that the CIT(A) was not correct in directing the AO to recalculate the disallowance by following Rule 8D. Keeping in view the fair statement of the AR as well as exercising jurisdiction in the larger interest of justice, the Tribunal directed the AO to compute the disallowance @ 2% of the exempt income instead of 4.06% which the Tribunal felt should meet the ends of justice.

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Section 54G — Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking to non-urban area — Investment by assessee in land and building for its business in non-urban area — Whether is it necessary that the investment in land and building in non-urban area is for the purposes of the business of the industrial undertaking transferred — Held, No.

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17. Dy. CIT v. Enpro Finance Ltd.
ITAT ‘J’ Bench, Mumbai
Before B. Ramakotaiah (AM) and S. S. Godara (JM)
ITA No. 4428/Mum./2008
A.Y.: 2004-05. Decided on: 27-6-2012 Counsel for revenue/assessee: Rupinder Brar/Mayur Kisnadwala

Section 54G — Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking to non-urban area — Investment by assessee in land and building for its business in non-urban area — Whether is it necessary that the investment in land and building in non-urban area is for the purposes of the business of the industrial undertaking transferred — Held, No.


Facts:

The assessee-company was carrying on its business of manufacturing activity at its leased premises in Mumbai for more than 45 years. Due to severe competition and high operational overheads in Mumbai, the assessee incurred losses and the activity was commercially not feasible. During the financial year 1999-2000, it decided to shift its undertaking to a non-urban area. As the plant and machinery was very old, the assessee sold them immediately, but for surrendering the tenancy rights it took some time and after protracted negotiations with the lessor, the leased premises on which the industrial undertaking operated was finally surrendered on 1-10-2003 and compensation of Rs.4.12 crore was received. It earned capital gain of an equivalent amount as the cost of acquisition of the leased premise was nil. Out of this amount the assessee invested Rs.1.4 crore in Capital Gain Account Scheme and Rs.1.14 crore in purchase of land and building in non-urban area. The assessee claimed deduction u/s.54G of the amount of Rs.2.54 crore and offered the balance amount as taxable income.

According to AO, the assessee sold its entire plant and machinery in the financial year 1999-2000 and since there was no existence of an undertaking, having sold the entire plant & machinery, the claim u/s.54G, which provides for exemption for shifting of industrial undertaking from urban area to non-urban area is not eligible to the assessee. However, the CIT(A) on appeal allowed the claim of the assessee.

Held:

On closer reading of the provisions of section 54G the Tribunal noted that whereas u/s.54G(1)(a), the requirement is that the new machinery or plant has to be purchased for the purposes of the business of the industrial undertaking, section 54G(1)(b) merely requires that the acquisition of building or land or construction of a building should be for the purposes of its business in such non-urban area. In other words, the phrase ‘of the industrial undertaking’, which is there in clause 1(a) is conspicuously missing in clause 1(b). It further compared the provisions of section 54G with section 54D and noted that while section 54D mandates that, for the capital gains to exempt, the new land or building, have to be used only for either shifting or re-establishing or establishing an industrial undertaking (and no other purpose), the provisions of section 54G of the Act permits the use of capital gains for acquiring land or building or constructing building for the purposes of (any) business in the non-urban area. Thus, according to the Tribunal, the provisions of section 54G can be interpreted that assessee should carry on any business in non-urban area. If the amounts are utilised for acquisition of assets for the purpose of its business, this should qualify for the purpose of exemption u/s.54G as there is no requirement that the land and building should be used for the purpose of the business of industrial undertaking.

The Tribunal also did not agree with argument of the AO that the assessee’s industrial undertaking ceased to exist in 1999-2000. According to it, the assessee was in the process of shifting and even the section itself provides that shifting was ‘in course of or in consequence of’ of such industrial undertaking.

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Section 80IB(10) — If conditions prescribed u/s.80IB(10) are satisfied, claim cannot be denied merely because the assessee had not carried on construction activity itself.

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39. (2012) 23 taxmann.com 176 (Bangalore-Trib.)
Abdul Khader v. ACIT
A.Y.: 2006-07. Dated: 30-4-2012

Section 80IB(10) — If conditions prescribed u/s.80IB(10) are satisfied, claim cannot be denied merely because the assessee had not carried on construction activity itself.


Facts:

The assessee, a builder and developer, was owner of an agricultural land which was converted into stock-in-trade and put the same for development by entering into a joint development agreement. Under the joint development agreement, the assessee contributed land and incurred expenses for statutory approvals. The assessee did not carry on construction activity. The assessee was entitled to 24% share in the said project. The assessee sold 49 flats which it got as its share and claimed as deduction u/s.80IB(10).

The Assessing Officer denied the claim on the ground that the assessee had not carried on the construction activity. This was confirmed by CIT (A). The assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that the assessee contributed land as its contribution of capital and incurred initial expenses for development and building of housing project like sanction of plan, getting the electricity and water connection by making the payments to BWSSB and KEB, etc. It also noted that it is not the case of the Department that the project was not approved or developed and built by the assessee. The only reason for denying the deduction u/s.80IB(10) was that the assessee had not carried out construction activity himself.

The Tribunal also noted that on a joint reading of s.s (10) of section 80IB and Explanation thereto it is clear that deduction is allowable to an undertaking developing and building housing project approved, it is nowhere mentioned that, construction has to be carried out by the undertaking. Moreover, the Explanation clarified that any undertaking which has executed housing project as a works contract awarded by any person is not eligible for claiming this deduction, which clearly shows that even if any undertaking is constructing the housing project under a works contract entered by a person is not eligible for deduction. The only condition for claiming deduction u/s.80IB(10) is that the undertaking is developing and building housing projects approved by a local authority.

It observed that in such type of cases, getting the approval and plan sanction is the first and initial stage which was to be taken by the assessee and for that purose the assessee was required to make investments. So, it cannot be said that assessee did not make any investment for the project under consideration.

The Tribunal held that the deduction u/s.80IB(10) cannot be denied merely on the basis that the assssee did not construct himself. Considering the totality of the facts and the ratio of the decision of Jurisdictional High Court in the case of CIT v. Shravanee Constructions, (2012) 22 taxmann. com 250 (Kar.), the Tribunal set aside the order passed by the CIT(A) and directed the AO to allow deduction u/s.80IB(10) of the Act.

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The assessee was engaged in the business of construction of buildings

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The assessee had sold the agricultural land on which agricultural activities were carried out till the date of transfer. Thereafter order permitting non-agricultural use was obtained. The assessee claimed that it is a case of transfer of an agricultural land and therefore there was no capital gain chargeable to tax. The Assessing Officer held that the land was a capital asset and assessed the capital gain as taxable. The CIT(A) accepted the assessee’s claim and allowed the assessee’s appeal. The Tribunal held that the land sold by the assessee retained its agricultural character till the date of the order permitting non-agricultural use and that it could be treated as a capital asset only thereafter. The Tribunal held that there was no need to interfere with the finding of the CIT(A) that the sale transaction was not a transaction involving transfer of a capital asset and, therefore, no need to bring to tax the income referable to the capital gains.

On an appeal filed by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held that there was no illegality in the order of the Tribunal.

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Business expenditure: Capital or revenue expenditure: Section 37 of Income-tax Act, 1961: A.Y. 1993-94: Construction business: Amount spent for acquiring unfinished works and inventories of another company: Revenue expenditure.

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The assessee was engaged in the business of construction of buildings. The assessee entered into an agreement with AFPL to takeover by assignment and complete all the pending projects/contracts/work-inprogress remaining to be completed by the transferor company. For the A.Y. 1993-94, the assessee claimed deduction of the payment of Rs.3,20,00,000 made to AFPL as revenue expenditure. The Assessing Officer disallowed the claim holding that the expenditure is capital in nature. The Tribunal upheld the disallowance.

On appeal by the assessee, the Madras High Court reversed the decision of the Tribunal and held:

“(i) What was transferred was in the nature of stockin- trade and not the entire building division of the transferor company. There were no clauses to lead to the inference that with the transfer of the ongoing projects awaiting agreements to be signed, the transferor company had transferred its entire business.

(ii) The expenditure was deductible as revenue expenditure”

levitra

Assessment giving effect to Tribunal order: Scope: A.Y. 1994-95: Capital gains: Sale of property and factory building: Sale consideration accepted by AO: Tribunal referring back the question of bifurcation and apportionment of sale consideration between land and building: AO enhancing sale consideration: Not justified.

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In the A.Y. 1994-95, the assessee sold a property consisting of land and factory building for a consideration of Rs.17.5 lakh. Permission for sale was granted by the Appropriate Authority u/s.269UL(3) of the Income-tax Act, 1961. The assessee challenged the apportionment of the sale consideration between the land and building by the Assessing Officer. The Tribunal referred back the question of bifurcation and apportionment of sale consideration between land and building to the Assessing Officer. While re-examining, the Assessing Officer also enhanced the sale consideration. The Tribunal accepted the enhancement.

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

“(i) The Tribunal had referred back the question of bifurcation and apportionment of the sale consideration of Rs.17.5 lakh as between the land and the factory building. To this extent, the report of the Valuation Officer was required.

(ii) The Departmental Valuation Officer and the Assessing Officer were not required or permitted by that order to go into to question and examine the total sale consideration as the assessee had applied under Chapter XX-C and the Appropriate Authority had accepted the sale consideration mentioned by the assessee. The sale consideration and the quantum thereof was never in question or doubt. This was not the aspect to be reexamined.

(iii) Thus the enhancement by the Assessing Officer of the sale consideration from 17.5 lakh to Rs.21,42,502 was not justified and as per law.

(iv) According to the report of the Depatmental Valuation Officer, the bifurcation and apportionment of the sale consideration towards the land and the factory building by the assessee had been accepted.

(v) In view of the above, the question of law is answered in favour of the assessee appellant.”

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Assessment: Validity: Sections 143(2), 143(3) and 292B of Income-tax Act, 1961: A.Y. 2002-03: Assessment in the name of non-existing amalgamating company is not valid

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For the A.Y. 2002-03, Spice Corp. Ltd. filed the return of income on 30-10-2002 declaring Nil income. Subsequently, vide order dated 11-2-2004 the said company stood amalgamated with M/s. MCorp (P) Ltd. w.e.f. 1-7-2003. The Assessing Officer selected the case for scrutiny and issued notice u/s.143(2) of the Income-tax Act, 1961 dated 18-10-2003 in the name of Spice Corp. Ltd. The fact that Spice Corp. Ltd., having been dissolved, as a result of its amalgamation with MCorp (P) Ltd. was duly brought to the notice of the Assessing Officer by letter dated 02-04-2004. However, the Assessing Officer passed the assessment order u/s.143(3) dated 28-3-2005 in the name of Spice Corp. Ltd. The assessee’s contention that the assessment having been framed in the name of a non-existing entity is bad in law and void ab initio was rejected by the CIT(A) and the Tribunal. The Tribunal held that the mere failure of the Assessing Officer to mention the name of the amalgamated company in the assessment order did not vitiate the assessment as a whole since the assessment was, in substance and effect, made on the amalgamated company viz., MCorp Global (P) Ltd. and not on the non-existing entity, viz. Spice Corp. Ltd. The Tribunal further held that the omission to mention the name of the amalgamated company in the assessment order was a mere procedural defect and in terms of the provisions of section 292B of the Act, such assessment was not invalid.

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

“(i) Assessment in the name of a company which has been amalgamated with another company and stands dissolved is null and void.

(ii) Assessment framed in the name of a non-existing entity is a jurisdictional defect and not merely a procedural irregularity of the nature which can be cured by invoking the provisions of section 292B of the Act.”

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OffShore Transaction of Transfer of Shares Between Two NRs Resulting in Change in Control of Indian Company — Withholding Tax Obligation and Other Implications

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Part-II
(Continued from last month)
Vodafone
International Holdings B.V. v. Union of India & Anr.- 341 ITR 1 (SC)


3.1 As stated in Part I of this write-up (March, 2012), the Bombay High
Court took the view that the essence of the transaction between the
parties was a change in the controlling interest in HEL, which
constituted a source of income in India. According to the High Court,
the transaction between the parties covered within its sweep, diverse
rights and entitlements for which the consideration is paid. Based on
this dissecting approach, the High Court left the issue of apportionment
of consideration open to be decided by the Revenue. The High Court also
held that VIH by the diverse agreements that it entered into has nexus
with Indian jurisdiction. Accordingly, the High Court held that the
proceedings initiated by the Revenue Authorities did not lack
jurisdiction and VIH was under an obligation to deduct TAS while making
the payment in this case.

3.2 The said view of the Bombay High
Court came up for consideration before the Apex Court at the instance of
VIH. Effectively, the Apex Court was required to consider the true
nature of the transaction between the parties, the taxability thereof
and the withholding tax obligations of VIH including the jurisdiction of
the Revenue in that respect, as well as the liability of VIH to be
treated as representative assessee u/s.163.

3.2.1 In this case,
views and the observations of the Court are given in two separate
judgments i.e., one by two Judges, namely, Shri S. H. Kapadia, CJ and
Shri Swatanter Kumar, J (Majority Judgment), and another by Shri K. S.
Radhakrishnan, J (Concurring Judgment). In both the judgments,
conclusions are the same. However, there are some differences in the
reasons given for the same conclusions, particularly in the context of
applicability of section 195. In the Concurring Judgment, certain
additional observations have also been made. On all major issues,
learned judge of the Concurring Judgment has expressly stated that he
fully concurs with the views expressed in the Majority Judgment.
However, the Majority Judgment is salient on the views expressed and
various observations made in the Concurring Judgment. This write-up is
primarily based on the Majority Judgment.

Facts relating to nature of transaction

3.3
For the purpose of deciding the issues, the Court noted the brief facts
of the case and various events which took place (referred to in paras
2.1 to 2.3.2 of Part I of this write-up).

3.3.1 After referring
to all relevant events which had taken place and various agreements and
arrangements made by the parties for the purpose of giving effect to the
transaction and the procedures followed for compliance of Indian law,
the Court observed that vide settlement agreement HTIL agreed to dispose
of its direct and indirect equity, loan and other interests and rights
in and related to HEL, to VIH. The Court then noted that these rights
and interests are enumerated in the order of Revenue dated 31-5-2010,
the details of which are given in para 35 of the Majority Judgment.

3.3.2
The Court also referred to the arrangements made between VIH and Essar
Group which, inter alia, include various terms agreed for regulating the
affairs of HEL and the relationship of shareholders of HEL including
the arrangement of put option wherein, the Essar Group can require VIH
to buy from Essar Group shareholders at their option, the shares held by
them, etc.

3.3.3 The Court then noted that on receipt of the
approval from FIBP on 7-5-2007, the board resolutions were passed by CGP
on 8-5-2007 and its downstream companies, consequent to which, various
steps were taken to give an effect to the transaction the detail of
which are appearing at para 46 of the Majority Judgment.

Tax avoidance/evasion — Settled position

3.4
After referring to the facts relating to the nature of transaction
between the parties, the Court considered the correctness of the
judgment of the Apex Court in the Azadi Bachao Andolan (263 ITR 706) as
the same was questioned by the Revenue on the ground that in that case,
the Division Bench of the Apex Court has not considered certain aspects
of the judgment in the case of McDowell & Co. Ltd. (154 ITR 148).
For this purpose, the Court noted that in that case two aspects were
dealt with viz. (i) validity of Circular issued by the CBDT concerning
Mauritius Tax Treaty and (ii) the concept of tax avoidance/evasion and
stated that in the context of this case, the Revenue has only raised
objection with regard to the second aspect i.e., tax avoidance/ evasion.

3.4.1 The Court then noted the principle laid down in the case
of Duke of Westminster in UK, popularly known as Westminster Principle,
and noted that the said principle states that “given that a document or
transaction is genuine, the Court cannot go behind it to some supposed
underlined substance”. The Court then took note of the fact that the
said principle has been reiterated in subsequent English Court judgments
as ‘the cardinal principle’. Explaining the effect of such subsequent
judgments, the Court stated that it is the task of the Court to
ascertain the legal nature of the transaction and while doing so it has
to ‘Look at’ the entire transaction as a whole and not to adopt
dissecting approach, (‘Look at’ test). The Court then observed that in
the present case, the Revenue has adopted a dissecting approach.

3.4.2
The Court then stated that the majority judgment in McDowell’s case
held that “Tax planning may be legitimate provided it is within the
framework of law ‘. . . . . however’ colourable device cannot be a part
of tax planning and it is wrong to encourage or entertain the belief
that it is honourable to avoid the payment of tax by resorting to
dubious methods.”

3.4.3 The Court then concluded that the
judgment in the case of Azadi Bachao Andolan has been correctly decided
and held as under on this aspect (page 34, para 64):

“. . . . .
In our view, although Chinnappa Reddy, J. makes a number of observations
regarding the need to depart from the ‘Westminster’ and tax avoidance —
these are clearly only in the context of artificial and colourable
devices. Reading McDowell, in the manner indicated hereinabove, in cases
of treaty shopping and/or tax avoidance, there is no conflict between
McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal.”

Tax
aspects of holding structure

3.5 In the context of holding structures,
the Court first noted that corporate bodies are treated as separate
entities. This is also recognised under the Act in the matter of
corporate taxation. The companies are viewed as economic entities with
legal independent vis-à-vis their shareholders. It is also fairly well
settled that for tax treaty purpose, a subsidiary and its parent are
also totally separate and distinct taxpayers.

3.5.1 The Court then noted that it is generally accepted that the group parent company is involved in giving principal guidance to group. The fact that a parent company exercises shareholder’s influence on its sub-sidiaries does not generally imply that subsidiaries are to be deemed residents of the State in which the parent company resides. However, if subsidiary’s executive directors are no more than puppets, then the turning point in respect of subsidiary’s residence come about. If the transaction is arranged through abuse of organisation form/legal form and without reasonable business purpose to avoid tax implications, then the Revenue may disregard the form of the arrangement or structure, recharacterise the arrangement according to its economic substance and determine tax implications accordingly on actual controlling enterprise. This should be decided on overall facts of each case.
In this context, the Court further stated as under (pages 35/36, para 67):

“…..Thus, whether a transaction is used principally as a colourable device for the distribution of earnings, profits and gains, is determined by a review of all the facts and circumstances surrounding the transaction. It is in the above cases that the principle of lifting the corporate veil or the doctrine of substance over form or the concept of beneficial ownership or the concept of alter ego arises. There are many circumstances, apart from the one given above, where separate existence of different companies, that are part of the same group, will be totally or partly ignored as a device or a conduit (in the pejorative sense).”

3.5.2 The Court then noted that it is common practice in international law, which is the basis of international taxation, for foreign investors to invest in Indian companies through an interposed foreign holding or operating company, such as CI or Mauritius-based company, for both tax and business purpose. In doing so, foreign investors are able to avoid lengthy approval and registration processes required for a direct transfer of equity interest in a foreign-invested Indian company.

3.5.3 The Court then further noted that the taxation of such holding structures gives rise to issue such as double taxation, tax deferrals, tax avoidance and application of anti-avoidance rules (GAAR). The Court then stated that in the present case, it is concerned with concept of GAAR (and not with the treaty shopping) which is not new to India since India already has a judicial GAAR, like some other jurisdictions. The Court then noted that lack of clarity and absence of appropriate provisions in the statute and/or in the treaty regarding the circumstances in which the judicial GAAR would apply has generated litigation in India. The Court then took the view that when it comes to taxation of a holding structure, at the threshold, the burden is on the Revenue to establish the abuse, in the sense of tax avoidance in the creation and/or use of such structures. In this context, the Court then observed as under (pages 36/37, para 68):

“…….In the application of a judicial anti-avoidance rule, the Revenue may invoke the ‘substance over form’ principle or ‘piercing the corporate veil’ test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant. To give an example, if a structure is used for circular trading or round, tripping or to pay bribes, then such transactions, though having a legal form, should be discarded by applying the test of fiscal nullity. Similarly, in a case where the Revenue finds that in a holding structure an entity which has no commercial/business substance has been interposed only to avoid tax, then in such cases applying the test of fiscal nullity it would be open to the Revenue to discard such inter-positioning of that entity. However, this has to be done at the threshold….’’

3.5.4 The Court then reiterated that for the above purposes, the Revenue must apply ‘Look at’ test and the Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/savings device, but that it should apply the ‘Look at’ test to ascertain its true legal nature. While concluding on the issue of tax avoidance, the Court stated as under (Page 37, para 68):

“……. Applying the above tests, we are of the view that every strategic foreign direct investment coming to India as an investment destination, should be seen in a holistic manner. While doing so, the Revenue/ Courts should keep in mind the following factors: the concept of participation in investment, the duration of time during which the holding structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit. In short, the onus will be on the Revenue to identify the scheme and its dominant purpose. The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate busi    ness purpose must exist to overcome the evidence of a device.”

Whether section 9 is a ‘Look through’ provision and covers ‘indirect transfer’ of Indian Capital Asset

3.6 The Court then dealt with the contention of Rev-enue that u/s.9(1)(i) can ‘Look through’ the transfer of shares of a foreign company holding shares in an Indian company and treat such transfer as equivalent to transfer of shares of the Indian company on the premise that section 9(1)(i) covers direct and indirect transfer of capital asset.

3.6.1 Dealing with the above issue, the Court noted that section 9(1)(i) gathers in one place various types of income and broadly there are four items of income. The income dealt with in each sub-clause is distinct and independent of the other and the requirements of bringing income within each sub-clause are separately stated. In the case under consideration, the Court is concerned with the last sub-clause of section 9(1)(i), which refers to income arising from ‘transfer of a capital assets situated in India’. This provides a fiction which comes into play only when the income is not charged to tax on the basis of receipt in India, as receipt of income in India by itself attracts tax whether the recipient is a resident or non-resident. This fiction is introduced to avoid any possible arrangement on the part of the non-resident vendor that profit accrued or arose outside India on the basis that the contract to sell is executed outside India. A legal fiction has a limited scope and when the language is unambiguous and admits no doubt, it cannot be expanded by giving purposive interpretation.

3.6.2 According to the Court, section 9(1)(i) cannot by a process of interpretation be extended to cover indirect transfers of capital assets situated in India as the Legislature has not used the words ‘indirect transfer’ in section 9(1)(i). The words directly or indirectly used in section 9(1) (i) go with the income and not with the transfer of capital assets. For this purpose, the Court also drew support from the language of the provisions of section 163(1)(c) and the proposal contained In the Direct Tax Code Bill, 2010 as well as its earlier draft version of 2009. Based on this, while taking a view that indirect transfer is not covered within the said sub-clause of section 9(1)(i), the Court finally concluded on this contention of the Revenue as under (Page 40, para 71):

“…….The question of providing ‘look through’ in the statute or in the treaty is a matter of policy. It is to be expressly provided for in the statute or in the treaty. Similarly, limitation of benefits has to be expressly provided for in the treaty. Such clauses cannot be read into the section by interpretation. For the foregoing reasons, we hold that section 9(1)(i) is not a ‘look through’ provision.”

Whether there was extinguishment of the property rights of HTIL?

3.7 The Court then dealt with the primary argument advanced on behalf of the Revenue that SPA, commercially construed, evidences a transfer of property rights of HTIL by their extinguishment. According to the Revenue, HTIL’s property rights (i.e., right of control and management over HEL and its subsidiaries) got directly extinguished under SPA and accordingly, there was a transfer of capital assets situated in India. For this purpose, the Revenue relied on various features of SPA and on various arrangements entered into between the parties. It was the contention of the Revenue that HTIL possesses de facto control over HEL and its subsidiaries and such control was the subject-matter of transfer under SPA.

3.7.1 For the purpose of dealing with the above contentions of the Revenue, the Court reiterated the position that it is concerned with the transaction of sale of share and not with the sale of assets, item wise. In this context, the Court observed as under (Page 41, para 73):

“…….. The facts of this case show sale of the entire investment made by HTIL, through a top company, viz. CGP, in the Hutchison structure. In this case we need to apply the ‘look at’ test. In the impugned judgment, the High Court has rightly observed that the arguments advanced on behalf of the Department vacillated. The reason for such vacillation was adoption of ‘dissecting approach’ by the Department in the course of its arguments……….”

3.7.2 The Court then considered the legal position that whether HTIL possesses a legal right to appoint directors on the board of HEL and as such had some ‘property right’ in HEL. In this context, the Court stated that a legal right is an enforceable right by a legal process. In a proper case of lifting of ‘corporate veil’, it would be proper to say that the parent company and the subsidiary form one entity. But barring such cases, the legal position of any company incorporated abroad is that its powers, functions, and responsibilities are governed by the law of its incorporation. A company is a separate legal person even with one shareholder. Thus even though a subsidiary may normally comply with the request of a parent company, it is not just a puppet of a parent company. There is a difference between having a power or having a persuasive position. The power of persuasion cannot be constructed as a right in legal sense. The concept of ‘de facto’ control, which existed in Hutchison structure, conveys a state of being in control without any legal right to such a state. Based on this, the Court concluded that HTIL as group holding company has no legal right to direct its downstream companies in the manner of voting, nomination of directors and management rights.

3.7.3 Dealing with the power of a parent company on account of its shareholding in subsidiary, the Court concluded as under (Page 43, para 74):

“…..The fact that the parent company exercises shareholder’s influence on its subsidiaries cannot obliterate the decision-making power or authority of its (subsidiary’s) directors. They cannot be reduced to be puppets. The decisive criteria is whether the parent company’s management has such steering interference with the subsidiary’s core activities that subsidiary can no longer be regarded to perform those activities on the authority of its own executive directors.”

3.7.4 The Court then dealt with the need for executing an SPA and stated that exit is an important right of an investor in every strategic investment. Thus, a need for an SPA arose to re-adjust the outstanding loans between companies; to provide for standstill arrangements in the interregnum between date of SPA and completion of the transaction, to provide for seamless transfer and to provide for fundamental terms of price, indemnities, warranties, etc. SPA was entered into, inter alia, for smooth transaction of business of divestment by HTIL.

3.7.5 Dealing with the issue with regard to arrangements entered into with Essar Group, partner in HEL, as well as with other Indian companies holding 15% interest in HEL (minority investors), the Court stated that the minority investor has what is called a ‘participative’ right, which is subset of ‘protective rights’. These participative rights in certain instances restrict the powers of the shareholders with majority voting interest to control the operations or assets of the investee. Even minority investors are entitled to exit. This ‘exit right’ comes under ‘protective rights’. Considering the Hutchi-son structure in its entirety, the Court found that the participative and protective rights existed in Hutchison structure under various arrangements. Even without execution of SPA, such rights existed in the above arrangements and therefore, it would not be correct to say that such rights flowed from SPA. The Court also stated that it is important to note that ‘transition’ is a vide concept. It is impossible for the acquirer to visualise all events that may take place between the date of SPA and completion of acquisition. For all such things, an SPA may become necessary, but that does not mean that all the rights and entitlements flow from SPA.

3.7.6 After considering various agreements, arrangements and features of SPA, on the issue of extinguishment of property rights of HTIL, the Court concluded as under (Page 48, para 77):

“For the above reasons, we hold that under the HTIL structure, as it existed in 1994, HTIL occupied only a persuasive position/influence over the downstream companies qua manner of voting, nomination of directors and management rights. That, the minority shareholders/investors had participative and protective rights (including RoFR/TARs, call and put options which provided for exit) which flowed from the CGP share. That, the entire investment was sold to VIH through the investment vehicle (CGP). Consequently, there was no extinguishment of rights as alleged by the Revenue.”

Whether Hutchison structure is sham or tax-avoidant?

3.8 The Court also considered the issue as to whether the structure of Hutchison Group is a sham/device/tax-avoidant and whether it was pre-ordained to avoid the tax in question.

3.8.1 Dealing with the above issue, the Court stated that there is a conceptual difference between ‘pre-ordained transaction’ which is created for tax avoidance purposes and a transaction which evidences ‘investment to par-ticipate’ in India. Having mentioned this conceptual difference, the Court explained the concept of ‘investment to participate’ and stated that in order to find out whether a given transaction evidences a pre-ordained transaction in the sense indicated above or investment to participate, one has to take into account various factors enumerated earlier and again re-iterated them, such as duration of time during for which the holding structure existed, the period of business operations in India, generation of taxable revenue in India during the period of business operations in India, etc. referred to the para 3.5.4 above. Explaining the effect of these tests on the case on hand, the Court held as under (Pages 42, para 73):

“……Applying these tests to the facts of the present case, we find that the Hutchison structure has been in place since 1994. It operated during the period 1994 to 11-2-2007. It has paid income-tax ranging from Rs.3 crore to Rs.250 crore per annum during the period 2002-03 to 2006-07. Even after 11-2-2007, taxes are being paid by VIH ranging from Rs.394 crore to Rs.962 crore per annum during the period 2007-08 to 2010-11 (these figures are apart from indirect taxes which also run in crores). Moreover, SPA indicates ‘continuity’ of the telecom business on the exit of its predecessor, namely, HTIL. Thus, it cannot be said that the structure was created or used as a sham or tax-avoidant…..”

3.8.2 While taking the above view, the Court further observed as under (Page 42, para 73):

“……. In a case like the present one, where the structure has existed for a considerable length of time generating taxable revenues right from 1994 and where the Court is satisfied that the transaction satisfies all the parameters of ‘participation in investment’ then in such a case the Court need not go into the questions such as de facto control v. legal control, legal rights v. practical rights, etc.’’

The effect of introduction of CGP before entering into transaction

3.9 The main contention of the Revenue was that CGP was inserted at a late stage in the transaction in order to bring in a tax-free entity (or to create a transaction to avoid tax) and thereby, avoid tax on capital gains. Originally in this transaction, the transfer of shares of Array was contemplated. According to the Revenue, the Mauritius route was not available to HTIL in this transaction to get the benefit to avoid liability of tax.

3.9.1 Dealing with the above contention of the Revenue, the Court first noted that when a business gets big enough, it does two things. First, it reconfigures itself into corporate group by dividing itself multitude of commonly owned subsidiaries. Second, it causes various entities in the said group to guarantee each other’s debts. A typical large business corporation consists of sub-incorporates. Such division is legal and recognised by various laws including laws of taxation. If large firms are not divided into subsidiaries, creditors would have to monitor the enterprise in its entirety. Subsidiaries also promote the benefits of specialisation, permit creditors to lend against only specified division of the firm, reduce the amount of information that creditor needs together, etc. These are efficiencies inbuilt in a holding structure. As a group member, subsidiaries work together in many ways and they are financially inter-linked. The Court then further observed as under (Page 49, para 79):

“….. Such grouping is based on the principle of internal correlation. Courts have evolved doctrines like piercing the corporate veil, substance over form, etc. enabling taxation of underlying assets in cases of fraud, sham, tax avoidant, etc. However, genuine strategic tax planning is not ruled out.”

3.9.2 CGP was incorporated in 1998 in CI and it was in Hutchison structure since then. CGP was an investment vehicle. The transfer of Array had the advantage of transferring control over the entire shareholding held by downstream Mauritius companies, other than 3GSPL (GSPL). On the other hand, the advantage of acquisition of CGP share was to enable VIH to also indirectly acquire the rights and obligations of GSPL (the option to acquire further 15% interest in HEL). This was the reason for VIH to go by CGP route. Dealing with the argument with regard to non-availability of Mauritius route for getting the tax benefit, the Court stated that HTIL could have influenced its Mauritius subsidiaries (indirect) to sell the shares of Indian companies in which case no liability to pay tax on capital gain would have arisen. Thereafter, nothing prevented Mauritius companies from declaring dividend to ultimately remit money to HTIL and there is no tax on dividend in Mauritius in such cases. Thus, the Mauritius route was also available, but it was not opted because that route would not have given the control over GSPL. The Court then took the view that it was open to the parties to opt for any one of the two routes available to them. Accordingly, taking a holistic view, the Court held that it cannot be said that the intervened entity (CGP) had no business or commercial purpose.

Situs of CGP share

3.10 It was contended by the Revenue that under the Companies Law of CI, an exempted company was not entitled to conduct business in CI and therefore, CGP, being exempted company, cannot conduct business in CI and hence, the situs of CGP share existed where the ‘underlying assets are situated’, that is to say, India. While dealing with this contention, the Court stated that the Court does not wish to pronounce authoritatively on the Companies Law of CI. However, under the Indian Companies Act, 1956, the situs of the shares would be where the company is incorporated and where its shares can be transferred. In the present case, it has been asserted by VIH that the transfer of CGP share was recorded in CI and this has neither been rebutted in the order of the Department, nor traversed in the pleadings filed by the Revenue, nor controverted before the Court. Accordingly, the Court took the view that the situs of CGP share cannot be taken at the place where underlying assets stood situated and hence, the same is not in India.

Did VIH acquire 67% controlling interest in HEL?

3.11 It was the contention of the Revenue that VIH acquired 67% controlling interest (including option to acquire 15% interest in HEL held by AS/AG/IDFC through various companies). For this, the Revenue relied on various agreements, arrangements and features of SPA.

3.11.1 Dealing with the above contention of the Revenue, the Court noted that primary argument of the Revenue is based on the equation of ‘equity interest’ with the word ‘control’. On the basis of the shareholding test, HTIL can be said to have 52% control over HEL. By the same test, it can be equally said that the balance 15% stake in HEL remained with AS/AG/IDFC, who had through their respective group companies invested in HEL. This 15% stake comes under the options held by GSPL. Pending exercise, options are not management rights. At the highest, options can be treated as potential shares and they cannot provide right to vote or management or control. HTIL/VIH cannot be said to have a control over 15% stakes in HEL. It is for this reason that even FIBP gave its approval to the transaction by saying that VIH was acquiring or has acquired shareholding of 51.96% in HEL.

3.11.2 Dealing with the case of the arrangement with Indian JV partner Essar Group, the Court stated that it was entered into in order to regulate the affairs of HEL and to regulate the relationship of shareholders of HEL and continue the practice of appointment of directors on agreed basis. The articles of association of HEL did not grant any specific person or entity a right to appoint directors. Under the Company Law, the management control vests in the Board of Directors and not with the shareholders. Therefore, neither from SPA, nor from the terms sheets one can say that VIH had acquired 67% controlling interest in HEL.

3.11.3 Dealing with the contention of the Revenue that why VIH should pay consideration to HTIL based on 67% of the enterprise value of HEL, the Court stated that it is important to know that valuation cannot be the basis of taxation. The basis of taxation is profits or income or receipt. In this case, the Court is not concerned with the tax on income/profit arising from business operations but with the tax on transfer of rights (capital asset) and gains arisen therefrom. In the present case, VIH paid US $ 11.08 bn for 67% of the enterprise value of HEL and its downstream companies having operational licences. When the entire business or investment is sold, for valuation purposes, one may take into account the economic interest or realities. In this case, enterprise value is made-up of two parts, namely, the value of HEL, the value of CGP and companies between CGP and HEL. The Revenue cannot invoke section 9 of the Act on the value of underlying assets or consequence of acquiring a share of CGP. The price paid as a percentage of enterprise value ought to be 67% not because that was available in praesenti to VIH, but on account of the fact that competing Indian bidders would have had de facto access to the entire 67%, as they were not subject to limitation of FDI cap and therefore, they would have immediately encashed the call options.

Approach of the High Court and true nature of transaction

3.12 Dealing with the dissecting approach adopted by the High Court, the Court stated as under (Page 56, para 88):

“We have to view the subject-matter of the transaction, in this case, from a commercial and realistic perspective. The present case concerns an offshore transaction involving a structured investment. This case concerns ‘a share sale’ and not an asset sale. It concerns sale of an entire investment. A ‘sale’ may take various forms. Accordingly, tax consequences will vary. The tax consequences of a share sale would be different from the tax consequences of an asset sale. A slump sale would involve tax consequences which could be different from the tax consequences of sale of assets on itemised basis.”

3.12.1 Further, dealing with the question of transfer of controlling interest dealt with by the High Court, the Court state as under (Page 56, para 88):

“…….Ownership of shares may, in certain situations, result in the assumption of an interest which has the character of a controlling interest in the management of the company. A controlling interest is an incident of ownership of shares in a company, something which flows out of the holding of shares. A controlling interest is, therefore, not an identifiable or distinct capital asset independent of the holding of shares. The control of a company resides in the voting power of its shareholders and shares represent an interest of a shareholder which is made up of various rights contained in the contract embedded in the articles of association. The right of a shareholder may assume the character of a controlling interest where the extent of the shareholding enables the shareholder to control the management. Shares, and the rights which emanate from them, flow together and cannot be dissected…..”

3.12.2 The Court further stated that if owners’ structure is looked at by acquiring one share of CGP, VIH acquired control over various companies which gave it 52% shareholding control over HEL and indirect control over GSPL which gave VIH control over the options to acquire further 15% interest in HEL. These options continued to be held by GSPL and there is no transfer of them. The options have remained un-encashed with GSPL and therefore, even if options are treated as capital asset as held by the High Court, section 9 (1)(i) was not applicable as there was no transfer of such options. The Court also stated that the High Court wrongly viewed the transaction as acquisition of 67% of the equity capital of HEL. 67% of economic value is not equivalent to 67% of equity capital. If the High Court was right, then entire investment would have breached the FDI norms (which had imposed a sectorial cap of 74%) as in this case, Essar group held 22% of its stake through Mauritius Companies.

3.12.3 The Court also stated that as a general rule, in case of transaction involving transfer of shares lock, stock and barrel, such a transaction cannot be broken up in to separate individual components, assets or rights such as right to vote, right to participate in company meetings, management’s rights, controlling rights, control premium, brand licences and so on as shares constitute a bundle of rights. According to the Court, the High Court failed to examine the nature of various items such as non-compete agreement, control premium, call and put options, etc. The Court then took the view that the High Court ought to have examined entire transaction holistically. The transaction should be looked at as an entire package. Where the parties have agreed for a lump sum consideration without placing separate value for each of the items which go to make up the entire ‘investment in participation’, merely because certain values are included in the correspondence with FIPB which had raised the query, would not mean that the parties had agreed for the price payable for such individual items. The transaction remained a contract of outright sale of the entire investment for a lump sum consideration.

3.12.4 Finally, the Court did not agree with the dissecting approach adopted by the High Court and treated the transaction as sale of one share of CGP outside India and accordingly, it does not involve any gain arising on transfer of capital asset situated in India. Hence, capital gain in question is not chargeable to tax u/s.9(1)(i) of the Act and as such, question of deduction of TAS does not arise. Accordingly, the ultimate view of the High Court that the proceedings initiated by the Revenue Authorities did not lack jurisdiction and VIH was under an obligation to deduct TAS while making the payment in this case did not find favour with the Apex Court.
(to be concluded in the third part)

Note: Subsequent Developments
In the Finance Bill, 2012, certain amendments are proposed with retrospective effect from 1-4-1962 to effectively overturn the final position emerging from the above judgment. With these proposals, the stand of the Revenue Authorities with regard to the taxability of such gain, withholding tax obligation of the NR Payer and the jurisdiction of the Revenue Authorities in that respect is sought to be retrospectively confirmed by the legislative amendments.

We understand that on 20th March, 2012, the Apex Court has dismissed the review petition filed by the Government in Vodafone’s case.

(2011) 131 ITD 263 DCIT v. Jindal Equipment Leasing & Consultancy Services Ltd. A.Y.: 2003-04. Dated: 25-2-2011

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Section 48 — The full value of consideration as contemplated in section 48 of the Act does not have any reference to the market value, but only to the consideration referred to in the sale deeds or other supporting evidences as the sale price of the assets which have been transferred.

Facts:
The assessee-company sold shares held in Nalwa Sponge Iron Ltd. (NSIL) to three persons at Rs.12 per share. The book value of shares was estimated to be Rs.254.40 at the time of sale. The AO took the view that the sale of shares was a device to pass on undue monetary benefit to the persons, who according to the AO were related persons. Based on that the AO recomputed capital gain by adopting the fair market value of the shares which was Rs.254.50. He thus made additions of Rs.6,06,27,500 as undisclosed sale consideration. On appeal to the CIT(A) by the assessee, it was held that the AO can’t alter the computation of capital gain without any evidence.

The Department filed appeal against the order of the CIT(A).

Held:
Section 48 contemplates ascertainment of ‘full value of consideration received or accruing as a result of the transfer of capital asset’. The word received means actually received and word accruing means the debt created in favour of the assessee as a result of transfer. In any case, both the terms are used as actual and not estimated amounts. The erstwhile provision does not contain words ‘fair market value’, thus addition made to sale consideration by the AO is not in accordance with the section 48 of the Act.

As regards the objection raised by the AO regarding related party, there was no evidence to prove that transferees were related to the directors of the company. However in any case transferees could not be said to be related to the company as company does not have any corporeal existence.

Hence it was held that the transactions were conducted with independent parties.

Also it is commonly accepted law that the onus to prove otherwise than the fact lies on the person who alleges. In the instant case even though the transaction had taken place at values far less than the arm’s-length price, in absence of any evidence purporting receipt of more consideration than stated, computation of capital gain made by the assessee cannot be altered by the AO.

In order to show that the transaction was colourable device intended to evade tax, the Revenue must prove understatement of consideration. They should have basic material and evidence in its hand. In the instant case, the AO relied upon hypothetical sale price without any evidence, which does not prove that there is more consideration passed than what is disclosed.

Held that as there was no evidence on record that transferees were related to directors of the assessee-company and that the assessee had received amount more than stated consideration, computation of capital gain can be made only on the basis of consideration actually received.

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(2012) TIOL 44 ITAT-Mum. Mithalal N. Sisodia HUF v. ITO A.Y.: 2005-06. Dated: 5-8-2011

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Section 271(1)(c) — Penalty cannot be levied in respect of amount surrendered by the assessee unless the AO proves that bogus LTCG was being declared to claim benefit of either exemption or lower rate of tax.

Facts:
The assessee HUF in its return of income declared long-term capital gains on sale of shares. The assessee claimed that it had purchased a flat and therefore LTCG was exempt u/s.54F of the Act. The LTCG arose on sale of 6000 shares of a company known as Poonam Pharmaceuticals Ltd. (P). The shares had been purchased by the assessee on 8-4-2003 for a sum of Rs.14,320 through V. K. Singhania, a stock-broker in Calcutta. The purchase price was claimed to have been paid in cash. The shares were sold in 3 tranches in August, Sept and Nov 2004 for a total consideration of Rs.17,87,450. The shares were claimed to have been sold through Shyamlala Sultania, stock-broker in Calcutta. The delivery of shares was received and given via Demat account of the assessee. In the course of assessment proceedings, the AO with a view to verify the transactions of purchase and sale of shares wrote a letter to P which was returned unserved with a remark ‘Not Known’. The broker through whom the shares were claimed to have been sold stated that the assessee was not his client and during the previous year he had not done any transactions in shares of P. The Calcutta Stock Exchange confirmed that M/s. V. K. Singhania had not done any transaction in scrip P in the physical form in the online trading system of Calcutta Stock Exchange.

The AO, in the course of assessment proceedings, examined the assessee u/s.131 and recorded statement of the Karta of the assessee. In the statement it was stated that the shares were purchased and sold on the advice of one Mr. R who was resident of Mumbai. Upon being confronted with the materials collected by the AO, he stated that he had purchased and sold shares and had nothing more to say. He then sought adjournment and before the next date of hearing filed a letter surrendering the amount of exemption claimed on the ground that due to his age he cannot go to Calcutta to verify the details, he has not concealed any income nor filed wrong particulars, but with a view to buy peace and avoid litigation the surrender was being made by revising return of income (though time for filing revised return u/s.139(5) had expired) and taxes were paid. The AO made a reference to investigation conducted by Investigation Wing of the Department and pointed modus operandi followed by various persons claiming LTCG. The AO held that the assessee had brought into his accounts unaccounted money and paid less tax by claiming the sum brought in the books as LTCG.

Subsequently, the AO levied penalty on the ground that the assessee had concealed particulars of income and only when investigation was carried out the assessee surrendered the amount and offered the sale proceeds of shares as Income from Other Sources.

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 the sequence of events and observed that the assessee had shown the shares in its balance sheet as on 31-3-2004 and the same was accepted by the Revenue. It also noted that the shares were transferred to the Demat account of the assessee. Sale consideration was received by banking channels. The Tribunal observed that the enquiry by the AO from the Calcutta Stock Exchange that the transaction was not done through the Exchange cannot be taken as basis to conclude that the transactions of sale of shares was not genuine. It observed that denial of Shyamlal Sultania, through whom shares were sold is a circumstance going against the assessee. The Tribunal held that from the sequence of events it cannot be said with certainity that the claim made by the assessee was bogus. It noted that the surrender was made to buy peace and avoid litigation. It was because of his inability to go to Calcutta, due to old age, to collect necessary evidence that the surrender was made. The AO had not brought on record any independent material to show that the assessee was part of any investigation referred to in the assessment order. The Tribunal held that imposition of penalty would depend on facts and circumstances of the case. On the present facts, the Tribunal held that the explanation offered by the assessee was bona fide. The Tribunal directed that the penalty imposed be deleted.

The appeal filed by the assessee was allowed.

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(2012) TIOL 25 ITAT-Bang.-SB Nandi Steels Ltd. v. ACIT A.Y.: 2003-04. Dated: 9-12-2011

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Section 72 — Capital gains arising on sale of land and building used for business purposes cannot be set off against brought forward business loss.

Facts:
The assessee-company was engaged in the business of manufacture/production of iron and steel. In the proceedings u/s.143(3) r.w.s. 148 the Assessing Officer (AO), relying on the decision of the Supreme Court in the case of Killick Nixon & Co. v. CIT, (66 ITR 714) (SC), held that the brought forward business loss and unabsorbed depreciation cannot be set off against income from capital gains arising on sale of land and building used for the purposes of the business. He noted that the SC has in the said case held that only income which is earned by carrying on business is entitled to be set off. Accordingly, he denied the set-off of gains arising on sale of land and building which were computed under the head ‘Capital Gains’ against brought forward business loss.

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.

Before the Division Bench, the assessee relied upon the decision of the Bangalore Bench of the Tribunal in the case of Steelcon Industries (P) Ltd. v. ITO, ITA No. 571 (Bang.) 1989, A.Y. 1985-86, order dated 27-12- 2004) wherein the issue was decided in favour of the assessee by following the decisions of the SC in the cases of CIT v. Cocanada Radhaswami Bank, (55 ITR 17) (SC) and CIT v. Chugandas & Co., (55 ITR 17) (SC). The Division Bench noticed that there is another judgment of the SC in the case of CIT v. Express Newspapers Ltd., (53 ITR 250) wherein the SC held that capital gains are connected with the capital assets of the business and therefore, it cannot make them the profit of the business and cannot be set off against the brought forward business loss. This decision of the SC was not considered by the Tribunal in the case of Steelcon Industries (P) Ltd (supra) and therefore, the Division Bench felt that the decision in the case of Steelcon Industries (P) Ltd. (supra) requires reconsideration by a Special Bench. The President constituted a Special Bench for disposal of the following two grounds of the appeal filed by the assessee —

“(1) That the learned CIT(A) erred in law and on facts that the appellant is not entitled to set off carry forward business loss of Rs.39,99,652 against the long-term capital gain arising on sale of land used for the purpose of business.

(2) That the authorities below ought to have appreciated that there is no cessation of business and the appellant is entitled to set off the carry forward business loss.”

Held:
Section 72 permits carry forward of business loss to subsequent assessment years and allows it to be set off against profits & gains, if any, of any business or profession carried on by the assessee and assessable for the relevant assessment year. The term ‘profits and gains of business or profession’ means income earned out of business carried on by the assessee and not any income which is in some way connected to the business carried on by the assessee.

SB did not agree with the contention of the assessee that the assets sold by the assessee were business assets. It held that these were un-disputedly capital assets and capital receipts are not taxable, nor are the capital payments deductible from the income of the assessee. The capital is to be used for the purpose of carrying on the business of the assessee and it shall remain in the business of the assessee till it is either converted into stock-in-trade or is disposed of. The income earned by the assessee by carrying on the business by use of stock-in-trade only is the business income of the assessee.

SB held that the decision of the SC in Express Newspapers Ltd. (supra) is squarely applicable to the facts of the present case and that the Coordinate Bench of the Tribunal in the case of Steelcon Industries Pvt. Ltd. (supra) has wrongly placed reliance upon the decision of the Apex Court in the cases of United Commercial Bank Ltd. and M/s. Cocanada Radhaswami Bank Ltd. It held that the gains arising on sale of land and building were not eligible for set-off against the brought forward business loss u/s.72.

These grounds of appeal filed by the assessee were decided against the assessee.

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(2011) 142 TTJ 358 (Hyd.) Four Soft Ltd. v. Dy. CIT A.Y.: 2006-07. Dated: 9-9-2011

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Section 92B and 92C of the Income-tax Act, 1961 — Corporate guarantee provided by the assessee company does not fall within the definition of international transaction and, therefore, no TP adjustment is required in respect of corporate guarantee transaction undertaken by the assesseecompany.

Facts:
The assessee-company had provided corporate guarantee to ICICI Bank UK on behalf of its subsidiary. The TPO held that guarantee is an obligation and if the principal debtor falls to honour the obligation, the guarantor is liable for the same and, hence, the TPO determined a commission @ 3.75% as the ALP under the CUP method on the basis of the commission charged by the ICICI Bank as benchmark.

Held:
The Tribunal held that no TP adjustment is required in respect of corporate guarantee transaction done by the assessee-company. The Tribunal noted as under:

(1) The TP legislation provides for computation of income from international transaction as per section 92B.

(2) The corporate guarantee provided by the assessee-company does not fall within the definition of international transaction.

(3) The TP legislation does not stipulate any guidelines in respect of guarantee transactions.

(4) In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. The corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the bank or financial institution.

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(2011) 142 TTJ 252 (Visakha) Dredging Corporation of India Ltd. v. ACIT A.Ys.: 2006-07 to 2008-09. Dated: 25-7-2011

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Section 234D r.w.s. 2(40) of the Income-tax Act, 1961 — Reassessment made u/s.147 after completion of assessment u/s.143(3) cannot be termed as regular assessment and, consequently, interest u/s.234D is not chargeable in such reassessment.

Facts:
The assessee was given refund while processing the return u/s.143(1) and further refund was given after assessment u/s.143(3). In reassessment proceedings u/s.147, the refund amount got reduced and, therefore, the excess refund given earlier became collectible from the assessee. The Assessing Officer levied interest u/s.234D on such excess refund amount. The learned CIT(A) held that the interest u/s.234D is not chargeable in the hands of the company in reassessment proceedings.

Held:
The Tribunal upheld the CIT(A)’s order. The Tribunal noted as under:

(1) On a plain reading of section 234D, it is noticed that the interest u/s.234D is leviable only if the refund granted to the assessee u/s.143(1) of the Act becomes collectible in the order passed under regular assessment.

(2) As per section 2(40) read with Explanation to section 234D, ‘regular assessment’ is defined to mean assessment order passed u/s.143(3) or u/s.144 or where the assessment has been made for the first time u/s.147 or u/s.153A. Thus, reassessment proceedings u/s.147 after completion of the assessment u/s.143(3) is excluded from the purview of ‘regular assessment’.

(3) Such exhaustive definition of ‘regular assessment’ when considered in the light of the fact that in the appellant-company’s case the assessment u/s.147 has been made not for the first time, but after the completion of an assessment u/s.143(3), the same cannot be termed as regular assessment and, consequently, the provisions of section 234D cannot apply in the appellantcompany’s case.

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(2011) 142 TTJ 86 (Pune) Drilbits International (P.) Ltd. v. Dy. CIT A.Y.: 2006-07. Dated: 23-8-2011

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(a) Section 32(1)(iii) of the Income-tax Act, 1961 — Unit acquired at slump price — Amount allocated towards trademark, brand name, logo, etc. and technical know-how by approved valuer is capital expenditure eligible for depreciation claim.

(b) Section 92C of the Income-tax Act, 1961 read with Rules 10B(1)(a), 10B(1)(c) and 10B(1)(e) of the Income-tax Rules, 1962 — Transfer pricing — Most appropriate method for computing arm’s-length price — Rates charged to the third parties in the domestic market cannot be compared with the rates charged to AE in the export market — There are various factors which affect the pricing of the product in the domestic market vis-à-vis the export market — Hence the CPM method is not appropriate method for determining the ALP — CUP or TNMM was the most appropriate method for determining ALP.

Facts:
(a) Depreciation u/s.32(1)(iii)

The assessee acquired the unit of G on slump-sales basis consisting of all its assets which included intellectual property rights such as designs, drawings, manufacturing processes and technical know-how for a consideration of Rs.17.01 crore. The registered valuer valued the knowhow acquired at Rs.2.41 crore and royalty payable for use of brand name, trademark, logo, etc. at Rs.2.67 crore. The Assessing Officer disallowed depreciation on the same on the basis that as per agreement, the assessee has not purchased any know-how from G and the assessee is entitled to use trademark, logo and brand name of G free of cost for a period of three years.

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

(a) Amway India Enterprises v. Dy. CIT, (2008) 114 TTJ 476 (Del.) (SB)/(2008) 4 DTR (Del.) (SB) (Trib.) 1/(2008) 111 ITD 112 (Del.) (SB)

(b) Hindustan Coca Cola Beverages (P.) Ltd. v. Dy. CIT, (2010) 43 DTR (Del.) 416

The Tribunal noted as under:

(1) It is an undisputed fact that the assessee has paid the agreed consideration of Rs. 17.01 crore as a lump-sum amount to purchase the unit in its entirety i.e., the unit consisting of items like trademark, logo and brand name, designs, drawings, manufacturing processes and technical know-how.

(2) Simply because, in the agreement to purchase, it is mentioned that the use of all items like trademark, logo and brand name is allowed to the assessee for three years by G free of cost, it does not mean that there is no value for these items. The agreement between the seller and the purchaser does not put restriction on the right of the purchaser to record the asset at its fair value in its books.

(3) The apportionment of the lump-sum amount amongst the various assets and rights has to be made and which has been done in the present case as per the valuer’s report. The approved valuer has valued the know-how acquired at Rs.2.41 crore and royalty payable for use of brand name, trademark and logo at Rs.2.67 crore.

(4) The Special Bench of the Tribunal in the case of Amway India (supra) has held that if the software is useable/used for more than two years, it is a capital expenditure and if it is for less than two years, it is revenue expenditure. Thus, following the ratio laid down therein, since the assessee had purchased the use of brand name, trademark, logo for three years and similarly, the intellectual property right such as design, drawings, manufacturing processes and technical know-how in respect of the products manufactured by the unit was acquired, the expenditure incurred in this regard as valued by the approved valuer is capital expenditure on which the claim of depreciation was allowable.

Facts:
(b) Computation of ALP

During the year, the assessee-company sold goods to its associate enterprises (AEs). Initially, while filing the return of income, the assessee had adopted the comparable uncontrolled price method (CUP) for determining the arm’s-length price (ALP) in respect of exports transactions undertaken with the AE. Thereafter, in the proceedings before the learned TPO, the assessee contended that even as per transactional net margin method (TNMM), the transactions of export of goods are at ALP. The revised Form No. 3CEB was filed and details of the company selected as comparable were furnished. The learned TPO did not agree with the submissions of the assessee and held that the CUP method and TNMM are not applicable for determining the ALP. The learned TPO has considered the gross margin earned by the assessee in the export segment visà- vis gross margin earned in the domestic segment. Accordingly, he has held that the gross margin in the domestic segment is much higher than the margin earned in the export segment and, hence, he made an addition of Rs.58.54 lakh.

Held:
The Tribunal held that the TPO was not justified in adopting CPM and in comparing the gross margin in export segment vis-à-vis gross margin in domestic segment of the assessee without appreciating that the CUP or TNMM was the most proper method for determining the ALP. The TPO was directed to accept the claim of the assessee regarding the ALP based on TNMM which method has been accepted in the succeeding year.

The Tribunal noted as under:

(1) Rates charged to the third parties in the domestic market cannot be compared with the rates charged to AE in the export market. There are various factors which affect the pricing of the product in the domestic market vis-à-vis the export market and, therefore, the price cannot be compared. The assessee has to bear substantial marketing cost in the domestic segment, there is no bad debt risk in respect of the sales made to the AE and no product liability risk. Besides, it is also a material aspect that the assessee has to bear product liability risks like retention money, bank guarantee, warranty, etc. in the domestic segment, but such risks are not to be borne in the export segment. Due to these factors, the assessee has to charge higher rates in the domestic segment and, therefore, comparison of the rates of the products in the domestic segment and the export segment is not justified.

(2) For the A.Y. 2007-08, the assessee has adopted TNMM for determining the ALP and the TPO has accepted the same. There is substance in the alternative submissions of the authorised representative that TNMM can also be accepted during the year for determining the ALP.

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(A) ITAT: Jurisdiction: Power and scope: Decision on a matter not arising in appeal: AO not disputing genuineness of transaction: Not questioned genuineness before CIT(A) or Tribunal: Tribunal treating transaction sham is erroneous. (B) Non-competition fee received by assessee prior to 1-4-2003 is capital receipt and not taxable.

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The relevant assessment year is A.Y. 1997-98. The assessee was one of the promoters and a director of Gaghra Sugar Ltd. which had a factory for manufacture of sugar. The assessee was also the director of Ganges Sugar Mills (P) Ltd. which had applied for and received licence to set up new sugar factory in the same region. In such circumstances Gaghra Sugar Ltd. negotiated with the assessee and entered into an agreement with the assessee preventing the assessee from competing with the sugar business of the company directly or indirectly for a period of five years for a consideration or Rs.25 lakh. In the assessment proceedings the assessee claimed the said amount received for ‘non-competition’ as capital receipt not liable for tax. The Assessing Officer however taxed the said amount under the head ‘Other Sources’. The CIT(A) accepted the assesses contention and allowed the appeal. In the appeal filed by the Revenue, the Tribunal held that the claim of the assessee of ‘non-competition’ fee was not genuine and allowed the appeal of the Assessing Officer.

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

“(i) The Assessing Officer having assessed the noncompetition fee as revenue receipt without disputing the genuineness of the transaction and not questioned the genuineness even in the appeal either before the CIT(A) or before the Tribunal, order passed by the Tribunal treating the receipt of non-competition fees as a sham transaction is erroneous.

(ii) Non-competition fees received by the assessee prior to 1-4-2003 has to be treated as capital receipt and it is not taxable.”

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(2012) 65 DTR (Mum.) (Trib.) 104 Ramesh R. Shah v. ACIT A.Y.: 2005-06. Dated: 29-07-2011

Revised return u/s.139(5) — When original return made u/s.139(1) declaring positive income, claim for carry forward of long-term capital loss made in revised return u/s.139(5) is allowable.

Facts:

The assessee had filed original return of income u/s.139(1) declaring total income of Rs.94.09 lakhs. Subsequently, the assessee filed a revised return claiming long-term capital loss of Rs.1.82 crore and the said loss was claimed to be carried forward u/s.74. The AO denied carry forward of such loss on the ground that as per section 80, loss not determined in return u/s.139(3) cannot be allowed to be carried forward and set off u/s.74. The learned CIT also confirmed the order of the AO observing that carry forward of loss returned for the first time in revised return of income is not eligible for carry forward to the next assessment year as per provisions of section 80.

Held:

In the present case, the assessee filed the original return u/s.139(1) in which the positive income is determined and subsequently even revised return filed declared positive income as the assessee could not set off the long-term capital loss on the sale of shares. He claimed the same to be carried forward.

As per the provisions of section 139(5) in both the situations where the assessee has filed the return of positive income as well as return of loss at the first instance as per the time-limit prescribed and subsequently, files the revised return then the revised return is treated as valid return. Hence once the assessee declares positive income in original return filed u/s.139(1), but subsequently finds some mistake or wrong statement and files revised return declaring loss, then he cannot be deprived of the benefit of carry forward of such loss.

TDS: Payment to sub-contractors: Section 194C: Union of truck operators procuring contracts for its members: No sub-contracts: Tax not deductible at source.

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[CIT v. Truck Operators Union, 339 ITR 532 (P&H)]
The assessee was a truck operators’ union. It procured contracts for its members. The Assessing Officer made an addition of Rs.6,30,32,453 by way of disallowance u/s.40(a)(ia) holding that such payment to the members required deduction of tax u/s.194C of the Act which was not done. The Tribunal deleted the addition and held as under:

“The assessee-union had been formed by truck operators in order to obtain bigger contracts through it. It was of course entitled to booking charges received, which constituted its main income and the main function of the assessee was to arrange contracts from different agencies for its member operators which were factually and collectively formed by such members. The freight received from the parties concerned belonged to the member truck operators by whose trucks the contracts were performed and as such, the same was disbursed to none else but them. The assessee-union did not give any sub-contract to its members as alleged by the Assessing Officer.”

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

“When the union was acting only in the representative capacity and there was no separate contract between the union and its members for performance of the work as required for applicability of section 194C(2) of the Act, section 40(a)(ia) of the Act was not applicable.”

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TDS: Sections 194C and 194I of Income-tax Act, 1961: A.Y. 2007-08: Assessee engaged in transportation of building materials: Payment to contractors for hiring dumpers: Not rent for machinery or equipment but payment for works contract: Section 194C applicable and not Section 194I.

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[CIT v. Shree Mahalaxmi Transport Co., 339 ITR 484 (Guj.)]

The assessee was engaged in the transportation of building materials, etc. In the A.Y. 2007-08, the assessee paid Rs.1,18,29,647 as rent for hiring dumpers and deducted tax at source at the rate of 1.12%. as applicable u/s.194C of the Income-tax Act, 1961. The Assessing Officer held that the payment was governed by section 194-I and accordingly passed order u/s.201(1) holding the assessee to be in default and levied interest u/s.201(1A) of the Act. The Commissioner (Appeals) and the Tribunal held that the assessee was not in default and that the levy of interest was not justified.

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

“(i) The assessee had given contracts to the parties for the transportation of goods and had not taken machinery and equipment on rent. The Commissioner (Appeal) was justified in holding that the transactions being in the nature of contracts for shifting of goods from one place to another wood be covered as works contracts, thereby attracting the provisions of section 194C of the Act. Since the assessee had given sub-contracts for transportation of goods and not for the renting out of machinery or equipment, such payments could not be termed as rent paid for the use of machinery and the provisions of section 194-I of the Act would not be applicable.

(ii) The Tribunal was, therefore, justified in upholding the order passed by the Commissioner (Appeals).”

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Chanchal Kumar Sircar v. ITO ITAT ‘A’ Bench, Kolkata Before Mahavir Singh (JM) and C. D. Rao (AM) ITA No. 1147/Kol./2011 A.Y.: 2005-06. Decided on: 21-2-2012 Counsel for assessee/revenue : S. Bandyopadhyay/S. K. Roy

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Section 54EC — Exemption from capital gains tax —
Whether assessee entitled to claim exemption under the provision when
the investment in the eligible bonds is made within six months of the
date of receipt of consideration as against the prescribed condition of
the date of transfer — Held, Yes.

Facts:
During the year under appeal
the assessee sold three flats and the entire floor of a building
constructed by him by sales agreements dated 2-7-2004 and 1-7-2004,
respectively. The entire consideration aggregating to Rs.131.77 lacs was
received in instalments between 1-7-2004 and 27-6-2005. Each of the
instalment received by the assessee was deposited by him in full with
NABARD almost immediately and in any case within six months’ period from
the dates of the respective receipts. The assessee claimed exemption
u/s.54EC of the Act on Capital Gains. The AO completed the assessment
u/s.143(3) of the Act accepting the returned income. The CIT, in
exercise of his powers u/s.263 of the Act, held that the investments of
sale consideration amounts should be within six months’ from the date of
the sale and not from the date of receipt of consideration as claimed
by the assessee. In that view, he not only set aside the assessment, but
also gave directions for not considering the deposits made beyond the
period of six months from 2-7-2004 for the purpose of section 54EC.

In
consequence to revision order passed u/s.263 of the Act by the CIT,
assessment was framed u/s. 254/263/143(3) of the Act by the AO on
24-12-2010, and disallowed exemption u/s.54EC of the Act. Aggrieved, the
assessee preferred appeal before the CIT(A) and the CIT(A) also
confirmed the action of the AO.

Held:
According to the Tribunal, if the
period is reckoned from the date of agreement and receipt of part
payment at the first instance, then it would lead to an impossible
situation by asking the assessee to invest money in specified asset
before actual receipt of the same. In taking this view the Tribunal was
supported by the decision of the Andhra Pradesh High Court in the case
of S. Gopal Reddy v. CIT, (181 ITR 378), where in a similar situation of
delayed receipt of compensation amount on acquisition of property, the
Court observed that if the investment in specified asset was made within
a period of six months from the date of receipt of compensation, as
against the date of acquisition of the property denoting transfer
thereof, the same should be considered to be sufficient compliance for
the purpose of claiming exemption u/s.54E of the Act. The Tribunal noted
that similar view was also taken by the Allahabad High Court in the
case of CIT v. Janardhan Dass, (late through legal heir Shyam Sunder)
(299 ITR 210) and by the Andhra Pradesh High Court in the case of
Darapaneni Chenna Krishnayya (HUF) v. CIT, (291 ITR 98). In view of the
above consistent principle adopted by the High Courts in respect to
interpretation of a beneficial provision and the fact that the assessee
invested in specified bonds i.e., NABARD bonds, within one month of the
receipt of sale consideration, the Tribunal held that the assessee is
eligible for exemption u/s.54EC of the Act.

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Shri 1008 Parshwanath Digamber Jain Mandir Trust v. DIT ITAT ‘I’ Bench, Mumbai Before P. M. Jagtap (AM) and N. V. Vasudevan (JM) ITA No. 5544/M/2009 Decided on: 8-2-2012 Counsel for assessee/revenue: Ajay Ghosalia/ Sanjiv Dutt

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Section 12AA — Registration of charitable trust — Trust constituted with the object clause consisting of charitable as well as religious — Whether entitled for registration — Held, Yes.

Facts:
The assessee trust had applied for registration u/s.12AA of the Act. Its objects, as per its trust deed, were charitable as well as religious. According to the DIT, since the objects were admixture of religious as well as non-religious, relying on the decision of the Jammu & Kashmir High Court in the case of Ghulam Mohidin Trust v. CIT, (248 ITR 587) and the decision of the Supreme Court in the case of State of Kerala v. M. P. Shanti Verma Jain, (231 ITR 787), the registration u/s.12AA was denied. Before the Tribunal, the Revenue justified the order of the DIT on the ground that at the time of grant of registration u/s.12AA, it was necessary that he was satisfied that the objects are charitable and as per section 2(15), which defines the term ‘charitable purpose’, religious purpose is not part of charitable purpose.

Held:
According to the Tribunal, the trust, whose objects are religious as well as charitable, would be entitled for grant of registration and also to claim exemption u/s.11. For the purpose, reliance was placed on the decision of the Gujarat High Court in the case of ACIT v. Bibijiwala, (AA) Trust (100 ITR 516). It further observed that when the assessee seek exemption u/s.11, the same would be allowed subject to provision of section 13(1)(a) and (b) of the Act. According to it, the decisions relied on by the Revenue were on different facts, hence, not applicable to the case of the assessee.

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Interest on refund: Section 244A of Incometax Act, 1961: A.Y. 1998-99: Period for interest: Period of delay caused by assessee: Assessee’s belated claim for deduction allowed by CIT(A): No delay caused by assessee: Interest payable from beginning of relevant A.Y.

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[CIT v. South Indian Bank Ltd., 340 ITR 574 (Ker.)]

For the A.Y. 1998-99, the assessee’s belated claim for bad debts was rejected by the Assessing Officer for failure to establish the claim. The claim was allowed by the CIT(A). The Assessing Officer denied interest on refund u/s.244A of the Income-tax Act, 1961 on the ground that the delay was attributable to an additional claim of deduction which was allowed by the CIT(A). The Tribunal held that the assessee was entitled to interest from 1-4-1999.

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

“The Assessing Officer had not established that the assessee had caused any delay in issuing the refund order. There was no decision by the Commissioner or Chief Commissioner on this issue. The assessee was eligible to get interest from 1-4-1999, till the date of refund.”

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Penalty – Concealment of Income – There is no time limit prescribed for payment of tax with interest for the grant of immunity under clause (2) of Explanation 5 to section 271(1)(c).

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[Asst. CIT v. Gebilal Kanhaialal HUF (2012) 348 ITR 561 (SC)]

Search and seizure operation were carried out during the period 29-7-1987 to 1-8-1987 at the residential/business premises of the assessee HUF, represented by the Karta, Shri Kalyanmal Karva. Assets worth Rs.48,32,000 besides incriminating documents were seized. On 1-8-1987, the Karta while surrendering the amount made a statement u/s. 132(4). The return of income for the assessment year 1987-88 which was required to be filed u/s.139(1) on or before 31-7-1987 was not filed. Pursuant to notices issued u/s.142(1)(ii) in December 1988, the assessee on 16-2-1990 furnished required information including statement of all assets and liabilities whether included in the accounts or not. In the said statement, the said Karta reiterated his earlier statement of concealment. The Department denied the immunity under clause (2) of Explanation 5 to section 271(1) (c) mainly for the reason that the assessee had failed to file his return of income on or before 31-7-1987 and had failed to pay the tax thereon.

The Supreme Court observed that Explanation 5 is a deeming provision. It provides that where, in the course of search u/s. 132, that assessee is found to be the owner of unaccounted assets and the assessee claims that such assets have been acquired by him by utilising, wholly or partly, his income for any previous year which has ended before the date of search or which is to end on or after the date of search, then, in such a situation, notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall be deemed to have concealed the particulars of his income for the purposes of imposition of penalty u/s. 271(1)(c). The only exception to such a deeming provision or to such a presumption of concealment is given in sub-clause (1) and (2) of Explanation 5. Three conditions have got to be satisfied by the assessee for claiming immunity from payment of penalty under clause (2) of Explanation 5 of section 271(1)(c). The first condition was that the assessee must make a statement u/s. 132(4) in the course of search, stating that the unaccounted assets and incriminating documents found from his possession during the search have been acquired out of his income, which has not been disclosed in the return of income to be furnished before expiry of time specified in section 139(1). Such statement was made by the karta during the search which concluded on 1st August, 1987. It was not in dispute that condition No.1 was fulfilled. The second conditions for availing of the immunity from penalty u/s. 271(1)(c) was that the assessee should specify, in his statement u/s. 132(4), the manner in which such income stood derived. Admittedly, the second condition, in the present case also stood satisfied. According to the Department, the assessee was not entitled to immunity under clause (2) as he did not satisfy the third condition for availing of the benefit of waiver of penalty u/s. 271(1)(c) as the assessee failed to file his return of income on 31st July, 1987, and pay tax thereon particularly when the assessee conceded on 1st August, 1987 that there was concealment of income.

The Supreme Court held that the third condition under clause (2) was that the assessee had to pay the tax together with interest, if any, in respect of such undisclosed income. However, no time limit for payment of such tax stood prescribed under clause (2). The only requirement stipulated in the third condition was for the assessee to “pay tax together with interest”. In the present case, according to the Supreme Court, the third condition also stood fulfilled. The assessee had paid tax with interest up to the date of payment.

The Supreme Court held that the assessee was entitled to immunity under clause (2) of Explanation 5 to section 271(1)(c).

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Time limit for issuing of notice : Sections 148 and 149 of Income-tax Act, 1961: A.Y. 1998-99: Assessment order u/s.143(3) passed on 28-2- 2001: Notice u/s.148 issued on 30-3-2009: Not valid: Section 149 amended by Finance Act, 2001, w.e.f. 1-6-2001 reducing the time limit from 10 years to 6 years is applicable.

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[C. B. Richards Ellis Mauritius Ltd. v. ADIT, 21 Taxman. com 535 (Del.)]

For the A.Y. 1998-99 the assessment was completed u/s.143(3) on 28-2-2001. Subsequently, on 30-3-2009, a notice u/s.148 was issued for reopening the assessment. The assessee’s objections were rejected by the Assessing Officer. The Delhi High Court allowed the writ petition filed by the assessee and held as under: “

(i) The issue in dispute gained importance because the time limit for issuance of notice u/s.148 as stipulated and stated in section 149 underwent substitution by the Finance Act, 2001 with effect from 1-6-2001. By the Finance Act, 2001, the period was restricted to six years from the end of the relevant assessment year. Before the said substitution, till 31-5-2001 reassessment proceedings could be initiated for up to 10 years from the end of the relevant assessment year.

(ii) It is an accepted and admitted position that the re-assessment notice dated 30-3-2009 would be barred and beyond time, in case, the period stipulated in substituted section 149 with effect from 1-6-2001 is applied.

However, the contention of the Revenue is that the substituted section is not applicable and section 149 before its substitution by the Finance Act, 2001 would apply. It is stated that the return in question was filed on 20-11-1998 and the law/limitation period prescribed/applicable on the first day of the assessment year determines and decides the time period for issue of notice u/s.147/148. The question raised is whether the amendment substitution of the period with effect from 1-6-2001 in section 149, is procedural or substantive.

(iii) Law of limitation is a procedural law and the provision or the limitation period stipulated on the date when the suit is filed applies. Law of limitation, therefore, being procedural law has to be applied to the proceedings on the date of institution/ filing. No person can have a vested right in the procedure. Therefore, the procedural law on the date when it was enforced is applied.

(iv) Law of limitation does not create any right in favour of a person or define or create any cause of action, but simply prescribes that the remedy can be exercised or availed of by or within the period stated and not thereafter. Subsequently, the right continues to exist but cannot be enforced. The liability to tax under the Act is created by the charging section read with the computation provisions. The assessment proceedings crystallise the said liability so that it can be enforced and the tax if short-paid or unpaid can be collected. If this difference between liability to tax and the procedure prescribed under the Act for computation of the liability (i.e., the procedure of assessment), is kept in mind, there would be no difficulty in understanding and appreciating the fallacy and the error in the primary argument raised by the Revenue.

(v) It is a settled position that liability to tax as a levy is normally determined as per statute as it exists on the first day of the assessment year, but this is not the issue or question in the present case. The issue or question in the present case relates to assessment, i.e., initiation of re-assessment proceedings and whether the time/limitation for initiation of the re-assessment proceedings specified by the Finance Act, 2001 is applicable. The Court is not determining/deciding the liability to tax but has to adjudicate and decide whether the re-assessment notice is beyond the time period stipulated. This is a matter/issue of procedure, i.e., the time period in which the assessment or re-assessment proceedings can be initiated. Thus, the time period/limitation period prescribed on the date of issue of notice will apply.

(vi) In view of the aforesaid reasoning, writ petition is allowed and the re-assessment notice dated 30-3-2009 and the order passed by the Assessing Officer and Assistant Commissioner dismissing the objections of the assessee are quashed.”

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Speculation business: Speculation loss: Section 73, r/w section 28(i)-: A.Ys. 1996-97 and 1998-99: Assessee-company in business of dealing in shares and also earning interest income by granting loans and advances: Incurred loss in purchase and sale of shares: Claimed set-off of above loss against interest income: AO denied set-off relying on Explanation to section 73: Tribunal held that principal business of assessee was granting of loans and advances: Allowed set-off: Tribunal is right.

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[CIT v. Narayan Properties Ltd., 21 Taxman.com 547 (All.)]

The assessee-company was in the business of purchase and sale of shares and was also earning interest income by granting loans and advances. During the previous years relevant to the A.Ys. 1996-97 and 1998-99, the assessee incurred loss in the purchase and sale of shares and earned interest income from loans and advances. It claimed set-off of the above loss against the interest income. The Assessing Officer assessed the interest income as business income. He further treated the business of purchase and sale of shares as speculation business as per Explanation to section 73 of the Income-tax Act, 1961. He, therefore, considered the aforesaid loss as speculation loss and held that it would only be set off against the speculation profit in the subsequent years. The Tribunal allowed the assessee’s claim.

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

(i) Section 73(1) provides that any loss, computed in respect of speculation business carried on by the assessee, shall not be set off except against profits and gains, if any of another speculation business. Section 73(1) uses the words ‘business carried on’. The Explanation to section 73 also uses the phrase ‘where any part of the business of the company . . . . . consists in the purchase and sale of shares of other companies’. Section 28(1) provides for charging of income-tax on profits and gains of any business or profession which was carried on by the assessee at any time during the previous year. Section 28(1) r/w section 73(1) which also uses the words ‘business carried on’ clearly indicate that what is chargeable to the income-tax is the business actually carried on and profits and gains of the said business.

The Explanation to section 73 contains an exclusionary clause, according to which the following companies are excluded from the operation of the deeming clause

(i) a company whose gross total income consists mainly of income which is chargeable under the heads ‘Interest on securities’, ‘Income from house property’, ‘Capital gains’ and ‘Income from other sources’, or (ii) a company the principal business of which is the business of banking or granting of loans and advances’.

(ii) The question to be considered is as to whether a company, which fulfils the conditions as mentioned in the exclusionary categories, can be denied the benefit, if the income consists mainly of income as used in first category and the principal business of which as used in the second category from the activities and business which are not the part of the memorandum of association of the company. Section 28(1), section 73(1) and the Explanation to section 73 indicate that the income which is chargeable is the income in the relevant year arising from business or profession carried on by the company. The words ‘carried on’ mean actual carrying of the activity. The words ‘carried on has to be read in context of what actually was done by the company in the relevant year, rather than what was main object in the memorandum of association of the company. Thus, the submission of the Revenue that since in the memorandum of association the activity or business, which is shown to have been carried on by the assessee, is not included, it is not entitled to be considered in exclusionary clause, has to be rejected.

(iii) For qualifying the exclusionary categories as mentioned in the Explanation to section 73, the condition to be fulfilled is that gross total income consists mainly of income which is chargeable under the heads

 (a) ‘Interest on securities’,

(b) ‘Income from house property’,

(c) ‘Capital gains’ and

(d) ‘Income from other sources’.

The said provision uses the words ‘mainly of income’. The words ‘mainly of income’ and similarly in the second category the words ‘principal business of which’ mean substantially or primarily.

(iv) In the instant case, the total gross income of the assessee, which has been shown in the assessment order, is interest income. The assessment order does not refer to any other income. Hence, the condition that income consists ‘mainly of income’ is completely fulfilled. One of the heads of the income for exclusionary category is income from other sources.

 (v) The second category consists of the phrase ‘a company the principal business of which is granting of loans and advances’. The income, which has been treated to be gross income, is income from interest of the assessee from granting loans and advances. Thus, the assessee was covered by exclusionary clause of Explanation to section 73.

(vi) Therefore, the assessee was clearly covered by the exclusionary clause of Explanation to section 73 and the Tribunal rightly set off of the aforesaid loss against the income of the assessee from loans and advances.”

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Settlement of case: Abatement: Sections 245C, 245D and 245HA : A.Ys. 1989-90 to 1993-94: Effect and scope of section 245HA: Where there was no fault of the applicant and he himself is not responsible for delay in getting decision on the settlement application, the application shall not abate.

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[Md. Sanaul Haque & Ors. v. UOI, 250 CTR 218 (Jharkhand)]

Dealing with the effect and scope of section 245HA of the Income-tax Act, 1961, the Jharkhand High Court followed the judgment of the Bombay High Court in Star Television News Ltd. v. UOI, 317 ITR 66 (Bom.) and held as under: “In a case where there was no fault of the applicant and he himself is not responsible for delay in getting decision on the settlement application, in that situation, the application shall not abate. The Settlement Commission has to decide the application following the principles laid down in Star Television News Ltd.”

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Penalty: Delay in filing declaration in Form No. 15H: Section 272A(2)(f): A.Ys. 1991-93, 1992-93 and 1994-95: No obligation to file declaration prior to 1-6-1992: Penalty not imposable for that period: Further the penalty to be restricted to the tax amount as per subsequent clarificatory amendment to proviso.

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[CIT v. Krishna Cold Storage, 250 CTR 134 (Guj.)]

For the A.Ys. 1991-92, 1992-93 and 1994-95 penalty u/s.272A(2)(f) of the Income-tax Act, 1961 was imposed for delay in filing declaration in Form 15H. The Tribunal held that no penalty was imposable for the period prior to 1-6-1992 because there was no statutory obligation to file the prescribed form u/s.197A. The Tribunal also held that the penalty should be restricted to the amount of tax deductible by giving retrospective effect to the proviso which is clarificatory.

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

(i) Failure to file the declaration in Form No. 15H prior to 1-6-1992 not being a default u/s. 272A(2) (f), no penalty could be levied for delay up to 1-6-1992.

(ii) In view of proviso, which is remedial in nature and consequently retrospective in operation, penalty could not exceed the tax deductible.”

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PAN: TDS: Section 206AA, r.w.s. 139A: Constitutional validity; Article 14 of the Constitution of India, 1950: Requirement to furnish PAN: Section 206AA is unconstitutional and has to be read down from statute and made inapplicable to persons whose income is less than taxable limit: Therefore, banking and financial institution shall not invariably insist upon PAN from small investors as well as persons who intend to open an account in bank or financial institution.

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[Smt. A. Kowsalya Bai v. UOI, 22 Taxman.com 157 (Kar.)]

Considering the constitutional validity of section 206AA of the Income-tax Act, 1961, the Karnataka High Court held as under: “

(i) The very intent of section 206AA is to make it conditional for every person who wish to have a transaction in the bank or financial institution including small investors/depositors, invariably to have a PAN. This runs contrary to what has been contemplated u/s.139A which was introduced by the Legislature in its wisdom. What is not in dispute is, persons whose income is below the taxable limit need not have a PAN and also they need not furnish income tax declaration/ returns. Of course, under the Finance Act, it is made clear that a person whose income is less than the taxable limit is not taxable.

(ii) Such of the small investors who come forward to invest their savings from earnings as security for their future, by virtue of the present section 206AA necessarily have to give their PAN. The poor and illiterate/uneducated persons are finding it difficult rather to approach the various Government departments, particularly the Income-tax Department to get their PAN.

(iii) It is, therefore, held that it may not be necessary for such persons whose income is below the taxable limit to obtain PAN. Such investments/ savings from their earnings or by way of agriculture or any other source, in banking and financial institutions would also further the financial position from the point of the country’s economy.

(iv) But imposing condition to invariably go for a PAN on such small depositors would cause hindrance and discourage such small investors to come forward to invest their money for secured returns and as security for their future.

(v) The difficulty expressed by the petitioners and similarly placed persons is, imposing condition to invariably go for PAN as per section 206AA would run contrary to section 139A. It is also their grievance that filing of Form 15G to seek exemption from deduction of income tax at source, also is not accepted by the 3rd and 4th respondents and acted upon unless the PAN is produced.

(vi) Section 139A which is introduced way back in April 1991 is in vogue and this provision stands the scrutiny of Article 14 of the Constitution for reasonableness. But, section 206AA which is contrary to section 139A appears to be discriminatory as if it is overriding section 139A introduced earlier.

Though the intention of the Legislature is to bring the maximum persons under the net of income tax, when necessarily it provides for exemption up to taxable limit, it may not insist such persons whose income is below the taxable limit to compulsorily go for PAN. If any mischief of avoiding of tax or any other act of concealing the income is detected, that could be taken care of by penal provisions.

vii) In that view of the matter, in view of the specific provision of section 139A, section 206AA is made inapplicable to persons and read down from the statute for those whose income is less than the taxable limit as per the Finance Act, 1991. However, it is made clear that section 206AA would of course be made applicable to persons whose income is above the taxable limit.

(viii) The banking and financial institutions shall not invariably insist upon PAN from such small investors like the petitioners as well as from persons who intend to open an account in the bank or financial institution.”

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Income: Deemed to accrue or arise in India: Sections 5, 6 and 9 : A.Y. 2001-02: Assessee was an employee of an American company and non-resident from year 1991 to 1999: On termination of employment in 1999, he received certain amount from previous employer as retirement benefit/severance/ vacation engagement: Assessee not ordinary resident in relevant assessment year: Amount received by assessee had not accrued/ deemed to be accrued/paid in India in terms of section 6 and section 9(1)(ii): Amou<

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[CIT v. Anant Jain, 207 Taxman 117 (Del.), 21 Taxman. com 19 (Del.)]

The assessee was an employee of an American company from 1991 till November, 1999 and during this period he was a non-resident Indian. The employment was terminated in the year 1999. In the relevant year, i.e., A.Y. 2001-02 the assessee was ‘not ordinarily resident’. In the relevant year the assessee received certain amount as leave encashment according to the number of years of service, which was subsequently described as severance and vacation encashment paid by the erstwhile employer of the assessee in the USA for services rendered outside India.

The assessee claimed that this amount was not taxable in India under provisions of section 5(1)(c) read with section 9(1)(ii). The Assessing Officer held that the said amount was received by the assessee as his profit in lieu of salary which was payable by the employer under the employer-employee relationship and, therefore, was taxable u/s.17(3)(ii). The CIT(A) held that the receipt of the impugned amount was on account of the past services rendered by the assessee to his previous foreign employer outside India at a time when he was a non-resident and this could not be deemed to have accrued or arisen in India and would not come under the purview of section 9(1)(ii).

The Tribunal upheld the order of the CIT(A). 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 factual findings recorded by both the Commissioner (Appeals) and the Tribunal, that the payment in question was received towards retirement benefit/severance/vacation encashment from the erstwhile employer on termination of employment in November, 1999. The erstwhile employer was based in the USA and services were rendered to the erstwhile employer in the USA.

(ii) In view of the aforesaid factual position, elucidated and accepted by both, the Commissioner (Appeals) and the Tribunal, the said amount cannot be taxed in India, as the status of the assessee during the year in question was that of ‘not ordinary resident’. The said income did not accrue or arise in India.

(iii) The Tribunal has rightly held that in terms of section 6 and section 9(1)(ii), the amount/income had not accrued/deemed to be accrued/ paid in India.”

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Depreciation: Intangible assets: Section 32(1) (ii): A.Ys. 2002-03 and 2005-06: Know-how, business contracts, business information, etc., described as goodwill are intangible assets eligible for depreciation u/s.32(1)(ii) as ‘business or commercial rights of similar nature’ specified in section 32(1)(ii).

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[Areva T&D India Ltd. v. Dy. CIT, 250 CTR 151 (Del.)]

The assessee had acquired know-how, business contracts, business information, etc., as part of the slump sale described as goodwill. The assessee’s claim for depreciation u/s.32(1)(ii) of the Income-tax Act, 1961 on such intangible assets was disallowed for the A.Ys. 2002-03 and 2005-06, for the reason that the same were described as goodwill. The Tribunal upheld the disallowance.

On appeal by the assessee, the Delhi High Court reversed the decision of the Tribunal and held as under: “Intangible assets viz., business claims, business information, business records, contracts, employees and know-how acquired by the assessee under slump sale of running business are in the nature of ‘business or commercial rights of similar nature’ specified in section 32(1)(ii) and therefore, the same are eligible for depreciation.”

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Capital gains: Sections 2(47) and 48: A.Y. 2002-03: Redemption of preference shares amounts to transfer u/s.2(47): Computation: Redeemable preference shares are not bonds or debentures: At time of redemption of preference shares, assessee would be entitled to benefit of indexation u/s.48.

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[CIT v. Enam Securities (P.) Ltd., 345 ITR 64 (Bom.); 208 Taxman 54 (Bom.); 21 Taxman.com 267 (Bom.)]

In the A.Y. 2001-02, the assessee redeemed three lakh preference shares (held for 10 years) at par and claimed long-term capital loss after availing benefit of indexation and claimed the set-off of the same against the long-term capital gain on sale of other shares. The Assessing Officer disallowed the claim on the grounds that —

(i) both the assessee and the company in which the assessee held the preference shares, were managed by the same group of persons;

(ii) that there was no transfer; and that the assessee was not entitled to indexation on the redemption of non-cumulative redeemable preference shares. The CIT(A) allowed the claim of the assessee. The Tribunal affirmed the view of the CIT(A).

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

(i) There is a finding of fact that the transaction was not questioned by the Revenue for over ten years: that both the assessee and the company of which the assessee held redeemable preference shares were juridical entities and the mere fact that both were under common management would not necessarily indicate that the transaction was not genuine. There is no reason for this Court to differ with the finding of the Tribunal.

(ii) The judgment of the Supreme Court in Anarkali Sarabhai v. CIT, (1997) 224 ITR 422/90 Taxman 502 concludes the issue that a redemption of preference shares by a company squarely comes within the ambit of section 2(47), since it amounts to a transfer.

(iii) The second proviso to section 48 provides for indexation where long-term capital gain arises from the transfer of a long-term capital asset. The third proviso, however, stipulates that nothing contained in the second proviso shall apply to long-term capital gain arising from the transfer of a long-term capital asset being bonds or debentures other than capital indexed bonds issued by the Government.

The Assessing Officer was of the view that the principal characteristic of a bond is a fixed holding period and a fixed rate of return. According to him, the four per cent non-cumulative redeemable preference shares which the assessee redeemed also had a fixed holding period and a fixed rate of return and on this basis denied the benefit of cost indexation to the assessee. The entire basis on which the Assessing Officer denied the benefit of cost indexation was flawed and was justifiably set right in the order of the Tribunal.

(iv) There is a clear distinction between bonds and share capital, because a bond does not represent ownership of equity capital. Bonds are in essence interest-bearing instruments which represent a loan. This distinction has been accepted by the Supreme Court in R. D. Goyal v. Reliance Industries Ltd., (2002) 40 SCL 503.

(v) Section 48 denies the benefit of indexation to bonds and debentures other than capital indexed bonds issued by the Government. The four percent non-cumulative redeemable preference shares were not bonds or debentures within the meaning of that expression in section 48. In these circumstances, the Tribunal was correct in its decision to that effect.”

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Capital gain: Sections 48 and 55(2): A.Y. 1999- 00: Transfer of self acquired trademark and design: No cost of acquisition: Capital gain not chargeable to tax.

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[CIT v. M/s. Fernhill Laboratories and Industrial Establishment (Bom.); ITA No. 5615 of 2010, dated 12-6-2012]

In the previous year relevant to the A.Y. 1999-00, the assessee transferred self acquired trademark and designs for the considerations of Rs.15 crore and Rs.20 lakh, respectively. The assessee claimed that the capital gain on such transfer is not chargeable to tax in view of the judgment of the Supreme Court in the case of CIT v. B. C. Srinivasa Setty, 128 ITR 249 (SC). The Assessing Officer rejected the assessee’s claim and held that the capital gain is chargeable to tax. The CIT(A) and 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: “

(i) Prior to the amendment made to section 55(2) by the Finance Act, 2001 effective from 1-4-2002 by adding the words ‘trademark or brand name associated with the business’ self-generated assets such as trademark did not have any cost of acquisition. Therefore, for the period under consideration the computation u/s.48 fails resulting in such transfer of trademarks not being chargeable to capital gains tax.

 (ii) Consequent to amendment made to section 55(2) w.e.f. 1-4-2002 by which the words trademark or brand name associated with the business was introduced into it, the computation provision becomes workable and the consideration for the sale of trademark would be subject to capital gains tax.

(iii) In fact, when the amendment was made to section 55 by the Finance Act, 2001 the CBDT had issued Circular bearing No. 14-2001 explaining the provisions of the Finance Act, 2001. From the said Circular it would be clear that the amendment bringing self-generated intangible assets such as trademarks to capital gains tax only w.e.f. A.Y. 2002-03 onwards. In this case we are concerned with the A.Y. 1999-00 and therefore, the amendment would not have any effect. Consequently, the sale of self-generated trademarks during the A.Y. 1999-00 are not chargeable to capital gains tax.

(iv) So far as the sale of self-generated designs (i.e., not acquired) the same is also not chargeable to capital gains tax not only for the reasons applicable to trademarks, but for the fact that even till this date, no amendment has been made to section 55(2) of the said Act, defining cost of acquisition of design as in the case of trademark, goodwill, etc.”

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Capital gain: Indexed cost: Sections 2(42A), 48 and 49 : A.Y. 2005-06: Acquisition of asset by inheritance: Indexation to be made w.r.t. the holding of asset by previous owner.

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[CIT v. Ms. Janhavi S. Desai (Bom.); ITA No. 126 of 2011 with CO(L) No. 2 of 2012, dated 5-7-2012]

In or about the year 1942, the assessee’s father acquired the immovable property from his father. The assessee’s father expired on 21-8-1988, leaving behind a will bequeathing the property to his wife (assessee’s mother) and the assessee in equal shares. The assessee’s mother expired on 21-2-2000 and her 50% share was inherited by the assessee. In the previous year corresponding to the A.Y. 2005-06, the assessee sold the property for a consideration of Rs.9.5 crore and declared a long-term capital gain of Rs.38,44,247. While computing the capital gain the assessee considered the date of acquisition of the property to be prior to 1-4-1981 and took the cost of acquisition and indexed the same w.r.t. 1-4-1981. The AO held that for the purpose of indexation, the actual date of acquisition by the assessee must be taken. Accordingly, he indexed the cost in respect of 50% w.r.t. 21-8-1988 (date of death of father) and the balance 50% w.r.t. 21-2-2000 (date of death of mother). The CIT(A) allowed the assessee’s appeal and held that the indexation should be w.r.t. 1-4- 1981. The Tribunal upheld the order of the CIT(A) w.r.t. 50% of the property acquired from the father. In respect of the balance 50% acquired from mother, the Tribunal held that the indexation should be w.r.t. 21-8-1988 when the mother acquired the property from the father. The Tribunal held that for the purpose of indexation, the period of holding of the asset by the previous owner should be taken into account.

The Revenue filed appeal in respect of the 50% decided in favour of the assessee and the assessee filed cross-objection in respect of the balance 50%. The Bombay High Court dismissed the appeal and allowed the cross-objection and held as: “

(i) The Explanation to section 49(1) defines the expression ‘previous owner of the property’ to be the last previous owner thereof, who acquired it by a mode of acquisition ‘other than that referred to in clauses (i) to (iv) of s.s (1)’. The last previous owner of the property, who acquired the property by a mode of acquisition other than those referred to in clauses (i) to (iv), was the assessee’s grand-father. The assessee’s father admittedly acquired the property in 1942 from his father.

 (ii) As far as the 50% portion of the property acquired by the assessee from his father is concerned, the cost of acquisition must be determined to be the cost at which the assessee’s grandfather, in any event the assessee’s father acquired the property and not the date on which the assessee acquired it. The Tribunal does not hold otherwise either.

(iii) The Tribunal however held that in respect of 50% of the property inherited by the assessee from her mother, the period of holding would start from 21-8-1988, as she became owner of her 50% share in the property only from that date. This requires consideration. The last previous owner of the assessee’s mother’s 50% share was her husband’s father and at the highest her husband. Thus the assessee must be deemed to have held this 50% share in the property also from 1-4-1981.

(iv) In the circumstances, the questions are answered in favour of the assessee. The period of holding shall be from 1-4-1981 in respect of the entire property.”

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Dy. Commissioner v. MTZ Polyfilms Ltd. ITAT ‘B’ Bench, Mumbai Before N. V. Vasudevan (JM) and Pramod Kumar (AM) ITA No. 5015/Mum./2009 A.Y.: 2004-05. Decided on: 30-12-2011 Counsel for revenue/assessee: P. C. Mourya/ Jitendra Jain

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Section 36(1)(iii), section 37(1) and section 43B — Interest paid on unpaid purchase consideration — It was held that such interest is governed by the provisions of section 37(1) and not by section 36(1) (iii) — Further held that the provisions of section 43B are not applicable to such interest.

Facts:
The assessee was engaged in the business of manufacturing of polyester films. It had its manufacturing facilities at GIDC, Gujarat. It was allotted plot of land by GIDC. As per the terms of allotment the assessee was required to pay the purchase consideration of the land in instalments with interest. For the year under consideration the assessee had paid the sum of Rs.99.97 lakh as interest to GIDC and the same was claimed as business expenditure. According to the AO the expenditure was of capital in nature. On appeal the CIT(A) allowed the appeal and held that the expenditure was of revenue in nature.

Before the Tribunal the Revenue supported the order of the AO and further contended that since the interest to GIDC was unpaid, it is not allowable u/s.43B.

Held:
The Tribunal, as per the order of the CIT(A), noted that the fact that the production by the assessee had commenced in October, 1988 was not controverted. Accordingly, it held that the interest paid during the year cannot be considered as capital expenditure. Further, it referred to the decision of the Supreme Court in the case of Bombay Steam Navigation Co. Pvt. Ltd. v. CIT, (1953) (56 ITR 52), where the interest paid on purchase consideration of the assets by the amalgamated company was held as allowable as business expenditure u/s. 10(2)(xv) of the 1922 Act (equivalent to section 37(1) of the 1961 Act) According to the Apex Court, the expression ‘capital’ used in section 10(2)(iii) of the 1922 Act (equivalent to section 36(1)(iii) of the 1961 Act), in the context in which it occurred, meant money and not any other asset. The Apex Court further observed that an agreement to pay the balance consideration due by the purchaser did not in truth give rise to a loan. On that basis the Apex Court held that the interest paid was not allowable as deduction u/s.10(2)(iii) of the 1922 Act, but as business expenditure u/s.10(2) (xv) of the 1922 Act. Applying the above ratio, the Tribunal held that the interest paid to GIDC by the assessee was allowable u/s.37(1). It further agreed with the assessee that the provisions of section 43B would also not apply to the facts of the present case, since unpaid sale consideration cannot be said to be monies borrowed.

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Sections 28, 145 — Project completion method — In the case of an assessee following project completion method, receipts by way of sale of TDR, which TDR has direct nexus with the project undertaken, can be brought to tax only in the year in which the project is completed.

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16. Pushpa Construction Co. v. ITO ITAT ‘C’ Bench, Mumbai
Before J. Sudhakar Reddy (AM) and R. S. Padvekar (JM)
ITA No. 193/Mum./2010

A.Y.: 2006-07. Decided on: 25-4-2012 Counsel for assessee/revenue: Vipul B. Joshi/ A. C. Tejpal

Sections 28, 145 — Project completion method — In the case of an assessee following project completion method, receipts by way of sale of TDR, which TDR has direct nexus with the project undertaken, can be brought to tax only in the year in which the project is completed.


Facts:

The assessee, a partnership firm, engaged in construction activity especially the Slum Rehabilitation Programme (SRA Scheme) launched by the Government of Maharashtra, had undertaken two projects of slum rehabilitation, during the financial year 2005-06, which were not completed as on 31-3-2006. The assessee was following project completion method of accounting.

During the financial year 2005-06, the assessee sold TDR allotted to it by BMC, which TDR was directly linked to the projects undertaken by the assessee, for a consideration of Rs.2,67,29,626. Since the projects were not complete as on 31-3-2006, this amount was reflected in the balance sheet as on 31- 3-2006 as advance. The Assessing Officer (AO) rejected the contentions of the assessee and brought to tax the entire amount as income of the assessee for A.Y. 2006-07. Aggrieved, the assessee preferred an appeal where it was also submitted that the entire sale proceeds of TDR totalling to Rs.6,90,26,192 were reflected in the P & L Account for A.Y. 2008-09 and surplus income of Rs.2,78,59,939 was offered. The CIT(A) confirmed the order of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that admittedly the two slum rehabilitation projects were not completed in A.Y. 2006-07 and also that the TDR in quesetion had direct nexus with the two projects undertaken by the assessee. It found that the contention of the assessee is supported by the decision of the jurisdictional High Court in the case of CIT Central I, Mumbai v. Chembur Trade Corporation, (ITA No. 3179 of 2009) order dated 14-9-2011 and also the decision of Mumbai Bench of ITAT in the case of ACIT v. Skylark Building, 48 SOT 306 (Mum.) and also that the assessee has offered the amounts in A.Y. 2008- 09 when the projects were completed.

The Tribunal accepted the contention of the assessee and restored the matter back to the file of the AO with a direction to verify whether the assessee has offered sale consideration of TDR in question in A.Y. 2008-09. If it has so offered, then the same should not be taxed in A.Y. 2006- 07.

The Tribunal allowed the appeal filed by the assessee.

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(2012) 49 SOT 387 (Delhi) Harnam Singh Harbans Kaur Charitable Trust v. DIT (Exemption) Dated: 16-12-2011

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Section 80G of the Income-tax Act, 1961 — After omission of proviso to clause (vi) of section 80G(5), existing approval expiring on or after 1-10- 2009 would be deemed to have been extended in perpetuity unless specifically withdrawn.

The assessee-charitable trust’s recognition for exemption u/s.80G expired on 31-3-2011. The assessee made an application in Form No. 10G seeking exemption for the period after 31-3-2011. The Director of Income-tax (Exemption) rejected this application for renewal of exemption and also held that assessee was earning huge money/fees in the name of medical treatment which was nothing but income from commercial activity carried out under the name of medical relief and, accordingly, invoked section 2(15) for withdrawing exemption.

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

(1) Proviso to clause (vi) of section 80G(5) has been omitted by the Finance Act, 2009 with effect from 1-10-2009. This proviso imposing the limitation of five years was omitted by the Finance Act, 2009 with effect from 1-10-2009 to provide that the approval once granted shall continue to be valid in perpetuity.

(2) The impact and scope of the omission of proviso to clause (vi) of s.s (5) of section 80G has been explained by the Board in its Circular No. 5, dated 3-6-2010 clarifying that the existing approval expiring on or after 1-10-2009 will be deemed to have been extended in perpetuity unless specifically withdrawn.

(3) Therefore, in the instant case, the filing of an application for renewal of exemption after the expiry of the same on 31-3-2011 by the assessee was not required. Once the exemption granted stands extended in perpetuity by operation of law, merely moving an application by the assessee would not divest it of the assessee’s right to treat the exemption to have been extended in perpetuity, which right had accrued to the assessee in view of the aforesaid Circular and the amendment made in the Act.

(4) Proviso to section 2(15) inserted w.e.f. 1-4-2009, provides that the advancement of any other object of general public utility shall not be a charitable purpose if it involves carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application or retention of the income from such activity.

(5) It is clear that this proviso is applicable in respect of charitable institutions engaged in the activity of advancement of any other object of general public utility i.e., the 4th limb of section 2(15). The first three limbs i.e., relief of the poor, education and medical relief are outside the purview of the aforesaid proviso inserted to section 2(15). It has been admitted by the Director of Income-tax (Exemption) himself that the assessee-society has been registered u/s.12A as charitable trust and is running dispensary and health centre, which makes it clear that the charitable purpose for which the assessee-society is established includes medical relief and it is not a case of advancement of any other object of general public utility. Therefore, applying the provisions of proviso to section 2(15) to the instant case by the Director of Income-tax (Exemption) is also totally misplaced and for that reason, the assessee cannot be said to be not eligible for exemption u/s.80G.

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Section 54 — Exemption from capital gains tax provided the amount is invested in purchase or construction of a flat within the prescribed time period — Held that (1) booking of the flat with the builder is to be treated as construction of flat; (2) the extended period u/s.139(4) has to be considered for the purposes of utilisation of the capital gain amount.

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15. Kishore H. Galaiya v. ITO ITAT ‘A’ Bench, Mumbai Before B. R. Mittal (JM) and Rajendra Singh (AM) ITA No. 7326/Mum./2010 A.Y.: 2006-07 Decided on: 13-6-2012 Counsel for assessee/revenue: Bhavesh Doshi/K. R. Vasudevan

Section 54 — Exemption from capital gains tax provided the amount is invested in purchase or construction of a flat within the prescribed time period — Held that (1) booking of the flat with the builder is to be treated as construction of flat;     the extended period u/s.139(4) has to be considered for the purposes of utilisation of the capital gain amount.


Facts:

  • The assessee along with his wife was joint and equal owner of the property being a residential flat at Mumbai which had been purchased by them in April 2002 for a consideration of Rs.21 lac. The flat was sold by them on 7-3-2006 for a consideration of Rs.45 lac in which the share of the assessee was Rs.22 lac. The assessee computed the long term capital gain from sale of the flat after deducting the indexed cost of acquisition at Rs.9.98 lac. The assessee purchased another flat jointly along with his wife for a total consideration of Rs.35 lac. The assessee had made total payment of Rs.14.62 lac till 16-2-2009. The assessee, therefore, claimed that he was entitled to claim exemption u/s.54 of the Act as the capital gain had been invested in the new residential flat. The claim for exemption was denied by the AO because the assessee: Failed to deposit the balance amount in the account in any of the specified bank as required u/s.54 and utilise the same in accordance with the scheme framed by the Government; and
  • Could not produce evidence regarding taking possession of the new flat. On appeal, the CIT(A) confirmed the disallowance made by the AO. Before the Tribunal, the Revenue strongly supported the orders of the authorities below.

Held:

The Tribunal noted that the assessee had booked the new flat with the builder and as per agreement, the assessee was to make payment in instalments and the builder was to hand over the possession of the flat after construction. Based on the clarification of the CBDT vide its Circular No. 472, dated 16-12-1993 read with Circular No. 471 dated, 15-10-1986 and the decision of the Mumbai Bench of the Tribunal in the case of ACIT v. Smt. Sunder Kaur Sujan Singh Gadh, (3 SOT 206), the Tribunal noted that the case of the assessee was to be considered as construction of new residential house and not purchase of a flat. Thus, the Tribunal held that in case the assessee had invested the capital gains in construction of a new residential house within a period of three years, this should be treated as sufficient compliance of the provisions of section 54. According to it, it was not necessary that the possession of the flat should also be taken within the period of three years. For the purpose, it relied on the decision of the Bombay High Court in the case of CIT v. Mrs. Hilla J. B. Wadia, (216 ITR 376). As regards the default pointed out by the authorities below regarding non-deposit of unutilised amount of capital gain in the Capital Gain Account Scheme, the Tribunal noted the submission of the assessee that it was only due to ignorance of law and intention of the assessee was always to utilise the amount for construction of flat and the assessee had kept the amount in the savings bank account which was utilised towards the construction of flat. According to the Tribunal, this was only a technical default and on this ground alone the claim of exemption cannot be denied, particularly when the amount had been actually utilised for the construction of residential house and not for any other purpose. The view was supported by the decision of the Jodhpur Bench of the Tribunal in the case of Jagan Nath Singh Lodha v. ITO, (85 TTJ 173). The Tribunal also agreed with the assessee’s contention that the due date of filing of return of income u/s.139(1) has to be construed with respect to the due date of section 139(4) as the s.s (4) provides for the extended period for filing return as an exception to the section 139(1) and considering this, there was no default as the entire amount of capital gain had been invested within the due date u/s.139(4). For the purpose, reliance was placed on the judgment of the Punjab and Haryana High Court in the case of Ms. Jagrity Aggarwal (339 ITR 610).

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(1) Section 54F — Exemption of long-term capital gains where sales consideration is invested in purchase of a house — Whether purchase of house jointly with spouse is eligible — Held, Yes. (2) Section 94(7) — Purchase of units and sale thereof at loss after earning dividend — If date of tender of cheque for purchase of shares was considered as the date of purchase, then the sale was not within three months of purchase — Whether the provisions of section 94(7) attracted — Held, No.

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14. Vasudeo Pandurang Ginde v. ITO ITAT ‘F’ Bench, Mumbai
Before Vijay Pal Rao (JM) and N. K. Billaiya (AM)
ITA No. 4285/Mum./2009
A.Y.: 2004-05. Decided on: 6-6-2012
Counsel for assessee/revenue: C. N. Vaze/ Rajan

Section 54F — Exemption of long-term capital gains where sales consideration is invested in purchase of a house — Whether purchase of house jointly with spouse is eligible — Held, Yes.

Section 94(7) — Purchase of units and sale thereof at loss after earning dividend — If date of tender of cheque for purchase of shares was considered as the date of purchase, then the sale was not within three months of purchase
— Whether the provisions of section 94(7) attracted — Held, No.


Facts:

(1) The assessee had made long-term capital gain on sale of shares. The sales proceeds were invested in purchase of row house and exemption u/s.54F was claimed. One of the grounds on which the exemption was denied by the AO was that the house purchased by the assessee was in the joint name of his wife.

(2) The assessee had purchased units of mutual funds of Rs.3 crore on 26-12-2003. On the very same date, the assessee received a dividend of Rs.1.16 crore. On 29-3-2004, the assessee redeemed the units for Rs.1.7 crore and thereby booked a shortterm capital loss of Rs.1.3 crore. The AO found that the cheque of Rs.3 crore for the purchase of units was actually realised on 30-12-2003 and therefore, according to him, the period of holding before the redemption of the said units on 29-3-2004 was only 88 days i.e., less than 3 months. Therefore, according to him, the transaction was hit by the provisions of section 94(7) of the Act. The AO was also of the view that the entire transaction of sale and purchase of mutual fund units was nothing but a colourable device for setting off of the capital gains arising on sale of shares. Accordingly, the set off of short term capital loss claimed by the assessee was denied. On appeal the CIT(A) confirmed the denial of exemption u/s.54F. While on the issue regarding applicability of section 94(7) he noted that the provisions of section 94(7) lays down three cumulative conditions, the non-fulfilment of any one of the conditions would result into non applicability of section 94(7). Thus, if the date of the purchase as claimed by the AO was 30-12-2003, then it cannot be said that the units were purchased within three months prior to the record date because the record date was 26-12-2003 when the dividend was declared. Thus, one of the conditions essential for application of section 94(7) is not fulfilled. Secondly, the CIT(A) noted that the mutual fund had accepted 26-12-2003 as the date on which the units were allotted to the assessee. Based on the said date, the second conditions viz. that the units are sold within a period of three months was also not fulfilled. Accordingly, it was held that the provisions of section 94(7) were not applicable. As regards the point raised by the AO that the entire transaction was a colourable device, the CIT(A) relying on the decision of the Bombay High Court in the case of CIT v. Walfort Share & Stock Brokers Pvt. Ltd., Appeal No. 18 of 2006 held that as the conditions of section 94(7) have not been fulfilled, no disallowance was permissible.

Held:

(1) The Tribunal noted that the total consideration for the house had been met by the assessee. According to it the assessee had added the name of his wife only for the sake of convenience. It also drew support from the provisions of section 45 of the Transfer of Property Act which provides that the share in the property will depend on the amount contributed towards the purchase consideration. Further, relying on the decisions listed below, the Tribunal held that since the total consideration for the house had been paid by the assessee, the exemption cannot be denied on this ground.

  • The decisions relied on are as under:  ITO v. Arvind T. Thakkar in ITA No. 7338/Mum./2005 vide order dated 29-4-2011;
  •  Ravinder Kumar Arora v. ACIT in ITA No. 4998/ Del./2010 vide order dated 11-3-2011; and
  •  DIT v. Mrs. Jennifer Bhide, (2011) 15 Taxmann 82 (Kar.). (2) As regards section 94(7) The Tribunal noted that the whole issue revolved around the date of purchase of units. The Tribunal agreed with the findings of the CIT(A) and the appeal filed by the Revenue was dismissed.
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(2012) 49 SOT 312 (Delhi) Dhoomketu Builders & Developers (P.) Ltd. v. Addl. CIT A.Y.: 2006-07. Dated: 30-11-2011

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Section 28(i) r.w.s. 56 of the Income-tax Act, 1961 — Participation in tender for sale of land demonstrates that business of real estate development is set up during the year.

For the relevant assessment year, the assessee, which was a 100% subsidiary of DLF Ltd., filed its return of income declaring a loss. The assessee company borrowed Rs.186 crore from DLF Ltd. and the paid the same amount as earnest money deposit for a tender for sale of land. This deposit was received back along with interest of Rs.0.62 crore and the assessee, in turn, returned the amount to DLF Ltd. and paid interest of Rs.1.79 crore, resulting in a net loss of Rs.1.17 crore. The Assessing Officer disallowed the loss on the ground that the assessee had not commenced any business activity and, therefore, it was not entitled for interest expenses as claimed by it. Similarly, the interest income received by the assessee deserved to be assessed as an ‘income from other sources’ and not as a business income.

The CIT(A) allowed the adjustment of interest received against the interest paid and determined the net loss of Rs.1.17 crore under ‘Income from Other Sources’, but did not allow carry forward of this loss.

The Tribunal allowed the assessee’s claim. The Tribunal noted as under:

(1) Participation in the tender was starting of one activity which enabled the assessee to acquire the land for development. The actual development of the land is immaterial for construing that business of the assessee has been set up.

(2) The investment of Rs.186 crore was not as a deposit out of surplus funds; rather it was earnest money paid by the assessee for the purchase of land. Thus, the assessee had demonstrated that its business was set up during the accounting period relevant for this assessment year.

(3) Therefore, income of the assessee had to be assessed under the head ‘business income’ and consequently loss computed by the first appellate authority at Rs.1.17 crore deserved to be permitted for carry forward.

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(2012) TIOL 64 ITAT-Bang. Shakuntala Devi v. DCIT A.Y.: 2007-08. Dated: 20-12-2011

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Section 22, section 23(1)(a), section 23(1)(c) — Annual value of property which could not be let out throughout the previous year needs to be taken as ‘nil’ in accordance with the provisions of section 23(1)(c).

Facts:
The assessee, a non-resident Indian, owned eight properties in India. During the relevant previous year, four properties were let out, whose annual value was offered for taxation under the head ‘Income from House Property’. Annual value of one property was claimed to be ‘nil’ on the ground that it be regarded as self-occupied property. For the other 3 properties in Mumbai annual value was regarded as ‘nil’ under the provisions of section 23(1)(c) of the Act. Before the AO it was submitted that of these 3 properties — one was old and was not in a habitable condition. The second property was let out in the earlier year and also in the subsequent year. It was contended that despite the best efforts, the assessee could not find a tenant for this property. As for third property it was purchased during the year and was let out in subsequent year. The AO held that since the assessee had not shown any proof regarding the efforts made to let out these three properties, it was quite inconvincible that there can be any hardship faced in letting out since these properties were located in prime localities like Bandra and Andheri (East) in Mumbai. He considered 70% of the rent received in subsequent year for each of the two properties to be their annual value. Accordingly, he added Rs.6,95,555 to the total income of the assessee.

Aggrieved the assessee preferred an appeal to the CIT(A) who held that the annual value of these properties needs to be computed u/s.23(1)(a) of the Act.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the Lucknow ‘B’ Bench has, in the case of Smt. Indu Chandra v. DCIT, (ITA No. 96 (Lkw)/2011, dated 29-4-2011, for A.Y. 2004- 05), following the decision of the Mumbai Bench in the case of Premsudha Exports (P) Ltd. v. ACIT, [110 ITD 158 (Mum.)] decided the issue in favour of the assessee. The Tribunal also noted that the facts involved in the present case are similar to the facts before the Lucknow Bench in the case of Smt. Indu Chandra. Accordingly, following the decision of the Lucknow Bench, the Tribunal deleted the addition made by the AO and sustained by the CIT(A).

The appeal filed by the assessee was allowed.

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Sections 40(a)(ia), 194H — Commission retained by credit card companies out of amounts paid to merchant establishment is not liable for deduction of tax at source u/s.194H.

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13. DCIT v. Vah Magna Retail (P) Ltd.
ITAT ‘B’ Bench, Hyderabad
Before D. Karunakararao (AM) and Saktijit Dey (JM)
ITA No. 905/Hyd./2011
A.Y.: 2007-08. Decided on: 10-4-2012
Counsel for revenue/assessee: Dr. B. V. Prasad Reddy/None

Sections 40(a)(ia), 194H — Commission retained by credit card companies out of amounts paid to merchant establishment is not liable for deduction of tax at source u/s.194H.


Facts:

The assessee-company, engaged in business of direct retail trading in consumer goods, had claimed a deduction of Rs.16,34,000 on account of commission paid to credit card companies, which amount was disallowed by the AO u/s.40(a)(ia) on the ground that assessee failed to deduct tax at source u/s.194H of the Act. Aggrieved the assessee preferred an appeal to the CIT(A) where it contended that the assesee only receives payment from bank/credit card companeis after deduction of commission thereon, and thus, this is only in the nature of a post facto accounting and does not involve any payment or credit to the account of the banks or any other account before making such payment by the assessee. The CIT(A) accepted the claim of the assessee for deduction of Rs.16,34,000 and observed as follows: “9.8 On going through the nature of transactions, I find considerable merit in the contention of the appellant that commission paid to the credit card companies cannot be considered as falling within the purview of section 194H. Even though the definition of the term ‘commission or brokerage’ used in the said section is an inclusive definition, it is clear that the liability to make TDS under the said section arises only when a person acts on behalf of another person. In the case of commission retained by the credit card companies however, it cannot be said that the bank acts on behalf of the merchant establishment or that even the merchant establishment conducts the transaction for the bank. The sale made on the basis of a credit card is clearly a transaction of the merchants establishment only and the credit card company only facilitates the electronic payment, for a certain charge. The commission retained by the credit card company is therefore in the nature of normal bank charges and not in the nature of commission/brokerage for acting on behalf of the merchant establishment. Accordingly, concluding that there was no requirement for making TDS on the ‘Commission retained by the credit card companies, the disallowance of Rs.16,34,000 is deleted . . . . .” Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:

 The Tribunal found no infirmity in the reasoning given by the CIT(A). It upheld the order passed by the CIT(A). The Tribunal dismissed the appeal filed by the Revenue.

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(2012) TIOL 63 ITAT-Mum. Savita N. Mandhana v. ACIT A.Y.: 2006-07. Dated: 7-10-2011

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Section 28(va), section 55(2)(a) — Consideration received by a shareholder of a company, for transfer of shares of the company, under a share transfer agreement which includes non-compete covenant and the assessee is not actively engaged in business, is chargeable to tax as capital gains.

Facts:
The assessee along with other shareholders of Mandhana Boremann Industries Pvt. Ltd., who were all family members of the assessee, transferred their shares to Paxar BV, a Dutch Company. The shares were acquired by Paxar BV for a consideration of Rs.570 per shares which worked out to Rs.45.60 crore for the shares held by Mandhana family. All the shareholders in Mandhana family entered into an agreement with Paxar BV for the purpose of this transfer of shares, and one of the clauses in the agreement also provided that the transferor shall not carry on, or be interested in, any business which competes with the business of Mandhana Boremann. The AO held that a part of the sale consideration of Rs.570 is attributable to the non-compete covenant and is liable to be taxed in the hands of the assessee u/s.28(va). The AO computed the value of shares, by break-up method, at Rs.365. Accordingly, the balance amount of Rs.205 per share was treated as towards non-compete fee and brought to tax u/s.28(va) in the hands of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO in principle, but held that only Rs.41 per share can be attributed to non-compete fees. He also held that the decision of a Co-ordinate Bench in the case of Homi Aspi Balsara v. ACIT, (2009 TIOL 789 ITAT-Mum.) does not help the assessee as there is specific mention of non-compete obligations in the share sale agreement, and therefore, part of the sale consideration of shares is attributable to the non-compete obligations.

Aggrieved, the assessee preferred an appeal to the Tribunal and contended that no part of consideration can be attributed to non-compete fees.

Held:
The Tribunal noted that the even in the case of Homi Aspi Balsara there was a specific non-compete obligation and yet the Co-ordinate Bench had taken a view that no part of sale consideration of shares could be attributed to be taxed in the hands of the assessee as business income u/s.28(va).

Following the ratio of the decision of the Mumbai Tribunal in Homi Balsara the amounts held to be attributable to non-compete obligations are taxable as capital gains and not as business income. To this extent it reversed the order of the CIT(A). It observed that since the entire consideration was already offered for taxation as capital gains, the bifurcation between consideration attributable to sale of shares and for non-compete obligations is rendered academic and infructuous. It also noted that since it was uncontroverted position that the assessee was not actively engaged in the business it was not necessary to examine the matter any further. The Tribunal upheld the stand of the assessee in treating the entire consideration received on sale of shares as taxable under the head ‘capital gains’.

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Section 14A — Disallowance u/s.14A applies to partner’s share of profits in a firm — ‘Depreciation’ is not an expenditure but an allowance, hence the same cannot be disallowed u/s.14A.

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12. Vishnu Anant Mahajan v. ACIT
ITAT Special Bench, Ahmedabad
Before G. E. Veerabhadrappa (President),
G. C. Gupta (VP) and K. G. Bhansal (AM)
ITA No. 3002/Ahd./2009
A.Y.: 2006-07. Decided on: 25-5-2012
Counsel for assessee/revenue: Sunil H. Talati/S. K. Gupta with Kartarsingh

Section 14A — Disallowance u/s.14A applies to partner’s share of profits in a firm — ‘Depreciation’ is not an expenditure but an allowance, hence the same cannot be disallowed u/s.14A.


Facts:

The assessee, a partner in the firm, derived income by way of remuneration and interest from the firm in addition to the share of profits in the firm which was exempt u/s.10(2A). Apart from the income from the firm, the assessee also had income under the head house property, capital gains, interest income and dividend income. The assessee had suo motu disallowed 1/10th of depreciation allowance of motor car. The Assessing Officer (AO) disallowed expenditure u/s.14A. Aggrieved, the assessee preferred an appeal to the CIT(A) who held that since the share of profits from the firm is exempt u/s.10(2A), expenditure was required to be disallowed u/s.14A. Since the assessee derived 76% of professional income as share from firm and balance 24% by way of remuneration and interest income, the CIT(A) allocated the expenses to income not includible in total income u/s.10(2A). Thus, business income by way of remuneration and interest from firm was taxed in the hands of the assessee u/s.28(v) after allowing 24% of the expenditure. 76% of the expenditure was disallowed. Aggrieved, the assessee preferred an appeal to the Tribunal.

 Held:

A firm is not a separate entity under the general law, whereas under the Income-tax Act, it is a separate entity distinct from its partners. Remuneration and interest on capital of partners is allowed as a deduction to the firm and the same are taxable in the hands of the partners u/s.28(v), whereas the profits of the firm, after deducting remuneration to partners and interest on capital of partners, are taxed in the hands of the firm. The partners do not pay tax on the share of profits from the firm since the same are exempt u/s.10(2A). Section 10(2A) provides that the share of partner shall not be included in his total income, hence it is not possible to hold that share of profit is not excluded from the total income of the partner because the firm has already been taxed thereon. Since share of profits are excluded from the total income of the partner, section 14A would apply and any expenditure incurred to earn the share of profits needs to be disallowed. In the case of Hoshang D. Nanavati v. ACIT, (ITA No. 3567/Mum./2007 for A.Y. 2003-04, order dated 18-3- 2011), while considering the question as to whether depreciation is an expenditure or not, it has been held that section 14A deals only with the expenditure and not any statutory allowance admissible to the assessee. A statutory allowance u/s.32 is not an expenditure. Being in agreement with the decision of the DB in the case of Hoshang Nanavati (supra), the SB held that depreciation cannot be disallowed u/s.14A.

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(2012) TIOL 65 ITAT-Mum. Tanna Agro Impex Pvt. Ltd. v. Addl. CIT A.Y.: 2007-08. Dated: 29-7-2011

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Section 40(a)(ia), section 194H — Hedging transactions of commodities, if in the nature of derivatives transactions, do not attract the provisions of section 194H.

Facts:
The assessee was engaged in export, import and wholesale trade of agro products. Since the assessee had not deducted tax at source from payments of Rs. 4,61,769 made towards brokerage on commodities hedging transactions, the AO disallowed the same u/s.40(a)(ia).

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 that the payment towards commission or brokerage in respect of transactions in ‘securities’ is not covered by the scope of tax deduction at source requirements and as per Explanation (iii) to section 194H the meaning assigned to the expression ‘securities’ is the same as assigned to it in clause (h) of section 2 of Securities Contracts (Regulations) Act, 1956 which covers transactions of derivatives. It held that hedging transactions of commodities, if in the nature of derivatives transactions, will be outside the ambit of transactions on which TDS requirements come into play. Since this aspect of the matter was not clear from the material on record, the Tribunal remitted the matter to the file of the AO for fresh adjudication in the light of the abovementioned observations. The Tribunal also clarified that except in the abovementioned situation, commission paid on transactions of sales and purchases of commodities through commodities exchange are clearly covered by the scope of section 194H.

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(2011) 130 ITD 137/9, Chennai Bench D ACIT v. Harshad Doshi A.Y.: 2006-07. Dated: 23-4-2011

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Section 2(22)(e) — Advance which carries with an obligation of repayment is covered u/s.2(22) (e). Trade advance/advance given for effecting commercial transaction did not fall under the ambit of section 2(22)(e). Amount advanced by company to its directors under board resolution, for specific business purpose would not fall under the mischief of section 2(22)(e) of the Act.

Facts:
The assessee was managing director in DHL Ltd. The company was engaged in the business of development of property. The company advanced funds to purchase plot of lands in the name of the assessee on understanding that land is to be given to DHL for development. The AO on scrutiny of books of DHL Ltd., discovered that there is advance of Rs.3.59 crore and rental advance of Rs.19.89 lakh issued to the assessee. The AO applied provisions of deemed dividend u/s.2(22)(e) on these advances. In order to support its contention the AO also relied on the capital gain shown by the assessee in his books.

Appeal was filed by the assessee to the CIT(A). The assessee contended that advance of Rs.3.59 crore was taken to acquire land which was to be developed by DHL. The main intention behind bifurcating ownership of land and development rights was to reduce the cost of stamp duty so that they remain competitive in this fierce market. The CIT(A) deleted the above addition except sum of Rs.39.62 lakh accepting the fact that transaction was motivated by business consideration and commercial expediency.

The CIT(A) also deleted the addition of lease advance of Rs.19.89 lakh accepting holding it to be advance given for lease of building to be used as office by DHL Ltd.

Aggrieved by the order of the CIT(A), the AO filed appeal before the ITAT.

Held:
Trade advance and monies given for business expediency could not be taxed as dividend. In order to bring any advance within the four corners of section 2(22)(e), advance should carry an obligation of repayment.

Advance given by the company to managing director to purchase the land in its name and then transfer the development rights to the company was a business arrangement made with a view to avoid payment of stamp duty twice, first on land and then on proposed construction of flats.

The assessee was well within the law to adopt such practice which would reduce the cost incidence to the ultimate customer. The AO’s contention that bifurcation was done with an intention to circumvent provisions of the Tamil Nadu Stamp Act could not be accepted being for an unlawful purpose.

Also, the project executed by DHL Ltd. does not appear in the capital gain computation of lands as disclosed by the assessee. So there was no direct nexus as alleged by the AO.

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Business expenditure: TDS: Disallowance: Non-resident: Sections 9 and 40(a)(i): A.Y. 2007-08: Income deemed to accrue or arise in India: Business connection not established: Mere entry in books of account of Indian payer does not mean that non-resident received payment in India: No income accrued in India: Tax need not be deducted at source: Expenditure not disallowable.

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32. Business expenditure: TDS: Disallowance: Non-resident: Sections 9 and 40(a)(i): A.Y. 2007-08: Income deemed to accrue or arise in India: Business connection not established: Mere entry in books of account of Indian payer does not mean that non-resident received payment in India: No income accrued in India: Tax need not be deducted at source: Expenditure not disallowable.

[CIT v. EON Technology P. Ltd., 343 ITR 366 (Del.)]

The assessee-company was engaged in the business of development and export of software. In the A.Y. 2007-08, the assessee paid commission to its parent company in the U.K. on the sales and amounts realised on export contracts procured by it for the assessee and the same was claimed as deduction. The Assessing Officer held that the U.K. company had a business connection in India and that commission income had accrued and arisen in India when credit entries were made in the books of the assessee in favour of the U.K. company and the income towards commission was received in India. He held that the assessee was liable to deduct tax at source and as there was failure to do so, disallowed the expenditure u/s.40(a)(i) of the Income-tax Act, 1961. The Commissioner (A) held that the ‘business connection’ was not established and allowed the assessee’s claim. The Tribunal upheld the decision of the Commissioner (A).

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

“(i) The Assessing Officer did not elaborate or had not discussed on what basis he had come to the conclusion that ‘business connection’ as envisaged u/s.9(1)(i) existed. The assessee had submitted that the U.K. company was a non-resident company and did not have any permanent establishment in India. The U.K. company was not rendering any service or performing any activity in India itself. These facts were not and could not be disputed.

(ii) The stand of the Revenue was contrary to the two Circulars issued by the CBDT in which it was clearly held that when a non-resident agent operates outside the country, no part of his income arises in India, and since payment was remitted directly abroad, merely because an entry in the books of account was made, it did not mean that the non-resident had received any payment in India.

(iii) The Assessing Officer did not make out a case of business connection as stipulated in section 9(1)(i) of the Act. He had not made any foundation or basis for holding that there was business connection and, therefore, section 9(1)(i) of the Act was applicable.

 (iv) The Appellate Authorities, on the basis of material on record, had rightly held that ‘business connection’ was not established.”

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Interest on refund: Section 244A of Incometax Act, 1961: A.Y. 2002-03: Interest u/s.244A is to be calculated from the date of payment of tax till the date of refund and not from the 1st of April of the assessment year or from date of regular assessment.

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[CIT v. Vijaya Bank, 246 CTR 548 (Kar.)]

For the A.Y. 2002-03, the Assessing Officer granted interest u/s.244A of the Act from the date of regular assessment. The CIT(A) and the Tribunal held that interest should be calculated from the date on which the self-assessment tax was paid by the assessee.

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

“Where the assessee is entitled to refund of self-assessment tax, interest u/s.244A is to be calculated from the date of payment of tax till the date of refund and not from the 1st of April of the assessment year or from the date of regular assessment.”

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Business expenditure: Capital or revenue: A.Y. 2003-04: Assessee tenant in premises contributed to reconstruction cost of premises with understanding that it will continue as tenant at the same rent: Expenditure is revenue expenditure.

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31. Business expenditure: Capital or revenue: A.Y. 2003-04: Assessee tenant in premises contributed to reconstruction cost of premises with understanding that it will continue as tenant at the same rent: Expenditure is revenue expenditure.
[CIT v. Talathi and Panthaky Associated P. Ltd., 343 ITR 309 (Bom.)]

The assessee was a tenant of 5000 sq.ft. in a building which was declared as unsafe. The assessee contributed Rs.1.5 crore for reconstruction of the building with the understanding that it will continue as a tenant at Rs.11,300 per month. In the A.Y. 2003-04, the assessee claimed the deduction of the said expenditure of Rs.1.5 crore. The Assessing Officer disallowed the claim holding that it is capital expenditure. The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“(i) The assessee had not incurred any expenditure of capital nature. The expenditure did not result in the acquisition of a capital asset by the assessee. The assessee continued as before to be a tenant in respect of the premises.

(ii) By contributing an amount of Rs.1.5 crore towards the construction or, as the case may be, renovation of the existing structure, the assessee obtained a commercial advantage of securing tenancy of an equivalent area of premises at the same rent as before. Since there was no acquisition of a capital asset and the occupation of the assessee continued in the character of a tenancy, the expenditure could not be regarded as being of a capital nature.

(iii) The cost of repair/reconstruction of the tenanted premises was of a revenue nature and was allowable as and by way of deduction.”

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Export profit: Deduction u/s.10BA of Incometax Act, 1961: A.Y. 2005-06: DEPB is a profit derived from export business for the purpose of deduction u/s.10BA.

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[CIT v. Arts & Crafts Exports, 246 CTR 463 (Bom.)]

The Tribunal held that DEPB is a profit derived from export business for the purposes of deduction u/s.10BA of the Income-tax Act, 1961. In appeal by the Revenue, the following question was raised:

“Whether on the facts and circumstances of the case, the Tribunal erred in law in holding DEPB as a profit derived from export business for the purpose of deduction u/s.10BA ignoring the ratio of decision in the case of Liberty India v. CIT, (2009) 225 CTR (SC) 233; (2009) 28 DTR (SC) 73; (2009) 317 ITR 218 (SC) having binding force on facts and circumstances of the case?”

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

“The Counsel for the Revenue fairly states that though the question has been raised by relying upon the decision of the Apex Court in the case of Liberty India v. CIT, the said decision has no relevance to the facts of the present case. In this view of the matter, the question raised by the Revenue cannot be entertained.”

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Appellate Tribunal: Adjournment: Section 255, Rule 32 of Income-tax (Appellate Tribunal) Rules, 1963: Where a case is adjourned by Tribunal by giving a last opportunity to counsel for assessee, same can be adjourned again on the next date, if sufficient or reasonable cause exists on that day.

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30. Appellate Tribunal: Adjournment: Section 255, Rule 32 of Income-tax (Appellate Tribunal) Rules, 1963: Where a case is adjourned by Tribunal by giving a last opportunity to counsel for assessee, same can be adjourned again on the next date, if sufficient or reasonable cause exists on that day.

[Mehru Electrical and Engg. (P) Ltd. v. CIT, (2012) 22 Taxman.com 45 (Raj.)]

The assessee’s appeal before the Tribunal was fixed for hearing on 11-1-2010 and at the request of the counsel for the assessee, hearing of the case was adjourned to 9-2-2010 giving him a last opportunity. However, the counsel for the assessee moved an application before the Tribunal for adjournment of the case in advance on 8-2-2010 on the ground that he was going to Mumbai for some urgent work. On 9-2-2010 the Tribunal rejected the application for adjournment. It further heard the counsel for the Revenue ex parte and allowed the appeal of the Revenue. On appeal to High Court, the assessee contended, inter alia, that

(i) from the order of the Tribunal it was clear that adjournment application was rejected only on the ground that a last opportunity was granted to counsel for the assessee to argue the appeal, and

(ii) even if a last opportunity was granted on last date, it did not mean that on sufficient ground the case could not be adjourned again. The Rajasthan High Court allowed the assessee’s appeal and held as under: “(i) From the proceedings of the Tribunal dated 11-1-2010, it is clear that last opportunity was given and the case was adjourned for 9-2- 2010. Application for adjournment was filed on 8-2-2010, which was put up for consideration before the Tribunal on 9-2-2010. From the application, it appears that counsel for the assessee had to go to Mumbai due to some urgent work. No one was present on behalf of the assessee. The Tribunal, in absence of counsel for the assessee, rejected the adjournment application. (ii) Ordinarily it is not incumbent on the part of the Tribunal to adjourn the case again when a last opportunity had already been granted to the counsel for the assessee. However, there may be number of circumstances where adjournment becomes necessary in the interest of justice. If counsel for the assessee had to go for some urgent work to Mumbai and an application for adjournment was moved in advance, then in the interest of justice a short adjournment should have been granted. If number of opportunities had already been afforded to the counsel for the assessee, then adjournment could have been granted on payment of cost.

(iii) The Tribunal has not assigned any reason as to whether reason mentioned in the application for adjournment constituted sufficient cause for adjournment or not. Even if a last opportunity is granted and case is fixed for hearing and sufficient cause is shown on the date fixed for hearing, then the case can be adjourned and it should be adjourned in the interest of justice. In these circumstances, the Tribunal committed an illegality in rejecting the application for adjournment and in deciding the appeal ex parte.

(iv) Therefore, the ex parte order passed by the Tribunal deserved to be set aside. The case was to be remitted back to the Tribunal for decision afresh on merits.”

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Appeal to High Court: Power and scope: Section 260A: Jurisdiction to reassess: Question can be raised for the first time before the High Court.

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29. Appeal to High Court: Power and scope: Section 260A: Jurisdiction to reassess: Question can be raised for the first time before the High Court.
[Mukti Properties P. Ltd. v. CIT, 344 ITR 177 (Cal.)]

The assessee had not raised the issue as regards the jurisdiction to reassess before the Assessing Officer, Commissioner (A) or the Tribunal. For the first time the assessee raised the issue before the High Court in appeal u/s.260A of the Income-tax Act, 1961.

The Calcutta High Court admitted the question and held as under:

“A pure question of law which goes to the very root of the jurisdiction and further initiation of the proceedings can be raised at any stage, even at the stage of appeal to the Supreme Court.”

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