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Category: Direct Taxes

Deemed income: Remission or cessation of trading liability: Section 41(1) of Incometax Act, 1961: A.Y. 1995-96: Explanation 1 to section 41(1) is prospective and not retrospective: Applies w.e.f. A.Y. 1997-98: Not applicable to A.Y. 1995-96: For A.Y. 1995-96 mere writing back of amounts in relation to unclaimed salaries, wages and bonus and unclaimed suppliers’ and customers’ balances could not amount to cessation of liability: Amounts (uncashed cheques, dividend paid to shareholders, provision<

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[CIT v. Mohan Meakin Ltd., 18 Taxman.com 47 (Del.)]

In the A.Y. 1995-96, the assessee had written back certain amount representing (a) unclaimed salaries, wages and bonus; (b) credit balances unclaimed by the suppliers; (c) credit balances unclaimed by the customers; (d) uncashed cheques; (e) excess dividend; and (f) excess provision made for doubtful debts in its books of account. The Assessing Officer added these amounts as deemed income relying on the provisions of section 41(1) of the Income-tax Act, 1961. The Tribunal deleted the additions.

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

“(i) Salaries, wages and bonus

The contention of the assessee was that there was no cessation or remission of the liability and, therefore, by merely writing back the credit balances in the books of account, which is an unilateral action of the assessee, the liability cannot be said to have ceased.

The concerned assessment year was 1995-96. Explanation 1 to section 41(1) was added by the Finance (No. 2) Act, 1996 with effect from 1-4-1997. The Explanation provides that the unilateral act of the assessee by way of writing off such liability in its accounts would be considered as remission or cessation of the liability. In Circular No. 762, dated 18-2-1998, which is reported in (1998) 230 ITR (St.) 12, the CBDT has explained the reason behind insertion of the above Explanation. In paragraph 28.3 of the Circular it has further been stated that the amendment will take effect from 1-4-1997 and will, accordingly, apply in relation to A.Y. 1997-98 and subsequent years. The Explanation, therefore, does not have any retrospective effect. It does not, therefore, apply to the A.Y. 1995-96. For this reason, the mere writing back of the loan in relation to unclaimed salaries, wages and bonus cannot amount to cessation of the liability.

(ii) Suppliers’ credit balances and customers’ credit balances

So far as the suppliers’ credit balances and the customers’ credit balances are concerned, the same reasoning is applicable for the year under consideration. Accordingly, those two additions made by the Assessing Officer are also not in accordance with law.

(iii) Uncashed cheques

In the case of the uncashed cheques, the finding of the Tribunal is that there was no claim for deduction in any of the earlier years and, therefore, the amount cannot be added u/s.41(1). It is not in dispute, as it cannot be, that the amount of uncashed cheques was not allowed as deduction in any of the earlier assessment years. As per the assessee this represents the cheques received and remaining on hand on the last day of the accounting period. The Tribunal has accepted this stand. The Assessing Officer and the Commissioner (Appeals) have not stated why the stand of the assessee was not acceptable. The Revenue has also not stated and averred that in the assessment order now passed, this aspect was not considered and examined. In these circumstances, section 41(1) can hardly have any application. Accordingly, the decision of the Tribunal deleting the addition is to be upheld.

(iv) Excess dividend

Dividend paid by a company to its shareholders is not an allowable deduction under the Income-tax Act as it represents an appropriation of the profits after they have been earned. If the dividend is not allowable as a deduction, the excess written back cannot also be assessed as income u/s.41(1).

(v) Excess provision for doubtful debts

The finding of the Commissioner (Appeals) is that the provision was never allowed as a deduction in the earlier years. Since the finding that the provision was not allowed in the earlier year as a deduction is not under challenge, the amount cannot be added u/s.41(1) when it is written back in the accounts. The decision of the Tribunal is to be upheld.”

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Business expenditure — Banks — The provisions of clause (viia) of section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) are distinct and independent of the provisions of section 36(1) (vii) relating to allowance of the bad debts — The scheduled commercial banks would continue to get the full benefit of the writeoff of the irrecoverable debt(s) u/s.36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) u/s<

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[Catholic Syrian Bank Ltd. v. CIT, (2012) 343 ITR 270 (SC)]

The
assessee, a scheduled bank, filed its return of income for the A.Y.
2002-03 on October 24, 2002, declaring total income of Rs.61,15,610. The
return was processed u/s.143(1), and eligible refund was issued in
favour of the assessee. However, the Assessing Officer issued notice
u/s.143(2) to the assessee, after which the assessment was completed.
Inter alia, the Assessing Officer, while dealing, u/s.143(3), with the
claim of the assessee for bad debts of Rs.12,65,95,770, noticed that the
argument put forward on behalf of the assessee, that the deduction
allowable u/s.36(1) (vii) is independent of deduction u/s.36(1)(viia),
could not be accepted. Consequently, he observed that the assessee
having a provision of Rs.15,01,29,990 for bad and doubtful debts
u/s.36(1)(viia), could not claim the amount of Rs.12,65,95,770 as
deduction on account of bad debts because the bad debts did not exceed
the credit balance in the provision for bad and doubtful debts account
and also the requirements of clause (v) of s.s (2) of section 36 were
not satisfied. Therefore, the assessee’s claim for deduction of bad
debts written off from the account books was disallowed. This amount was
added back to the taxable income of the assessee, for which a demand
notice and challan was accordingly issued. This order of the Assessing
Officer dated January 24, 2005, was challenged in appeal by the assessee
on various grounds.

The Commissioner of Income-tax (Appeals)
vide his order dated April 7, 2006, partly allowed the appeal,
particularly in relation to the claim of the appellantbank for bad
debts. Relying upon the judgment of a Division Bench of the Kerala High
Court in the case of South Indian Bank Ltd. v. CIT, (2003) 262 ITR 579
(Ker.), the Commissioner of Income-tax (Appeals) held that the claim of
the appellant was fully supported by the said decision and since the
entire bad debts written off by the bank u/s.36(1)(vii) were pertaining
to urban branches only and not to the provision made for rural brances
u/s.36(1)(viia), it was entitled to the deduction of the full claimed
amount of Rs.12,65,95,770. Consequently, he directed deletion of the
said amount.

Being aggrieved from the order of the Commissioner
of Income-tax (Appeals), the Revenue as well as the assessee filed
appeal before the Income Tax Appellate Tribunal, Cochin. Vide its order
dated April 16, 2007, while relying upon the judgment of the
jurisdictional High Court in the case of South Indian Bank Ltd. (supra),
the Income Tax Appellate Tribunal dismissed the appeal of the Revenue
on this issue and also granted certain other benefits to the assessee in
relation to other items.

However, the Department of Income-tax,
being dissatisfied with the order of the Income Tax Appellate Tribunal
in the A.Y. 2002-03, filed an appeal before the High Court u/s.260A of
the Act.

The Division Bench of the High Court of Kerala at
Ernakulam hearing the batch of appeals against the order of the Income
Tax Appellate Tribunal expressed the view that the judgment of that
Court in the case of South Indian Bank (supra) was not a correct
exposition of law. While dissenting therefrom, the Bench directed the
matter to be placed before a Full Bench of the High Court.

Vide
its judgment dated December 16, 2009, the Full Bench not only answered
the question of law but even decided the case on the merits. While
setting aside the view taken by the Division Bench in South Indian Bank
(supra) and also the concurrent view taken by the Commissioner of
Income-tax (Appeals) and the Income Tax Appellate Tribunal, the Full
Bench of the High Court held as under (page 181 of 326 ITR):

“What
is clear from the above is that provision for bad and doubtful debts
normally is not an allowable deduction and what is allowable under the
main clause is bad debt actually written off. However, so far as banks
to which clause (viia) applies are concerned, they are entitled to claim
deduction of provision u/ss.(viia), but at the same time when bad debts
written off is also claimed deduction under clause (vii), the same will
be allowed as a deduction only to the extent it is in excess of the
provision created and allowed as a deduction under clause (viia). It is
worthwhile to note that deduction u/s.36(1)(vii) is subject to s.s (2)
of section 36 which in clause (v) specifically states that any bad debt
written off should be claimed as a deduction only after debiting it to
the provision created for bad and doubtful debts. What is clear from the
above provisions is that though the respondent-banks are entitled to
claim deduction of provision for bad and doubtful debts in terms of
clause (viia), such banks are entitled to deduction of bad debt actually
written off only to the extent it is in excess of the provision created
and allowed as deduction under clause (viia). Further, in order to
qualify for deduction of bad debt written off the requirement of section
36(2)(v) is that such amount should be debited to the provision created
under clause (viia) of section 36(1). Therefore, we are of the view
that the distinction drawn by the Division Bench in the South Indian
Bank’s case between the bad debts written off in respect of advances
made by rural branches and bad debts pertaining to advances made by
other branches does not exist and is not visualised under the proviso to
section 36(1)(vii). We, therefore, hold that the said decision of this
Court does not lay down the correct interpretation of the provisions of
the Act. Admittedly, all the respondent-assessees have claimed and have
been allowed deduction of provision in terms of clause (viia) of the
Act. Therefore, when they claim deduction of bad debt written off in the
previous year by virtue of the proviso to section 36(1)(vii), they are
entitled to claim deduction of such bad debt only to the extent it
exceeds the provision created and allowed as deduction under clause
(viia) of the Act.

In the normal course we should answer the
question referred to us by the Division Bench and send back the appeals
to the Division Bench to decide the appeals consistent with the Full
Bench Decision. However, since this is the only issue that arises in the
appeals, we feel it would be only an empty formality to send back the
matter to the Division Bench for disposal of appeals consistent with our
judgment. In order to avoid unnecessary posting of appeals before the
Division Bench, we allow the appeals by setting aside the orders of the
Tribunal and by restoring the assessments confirmed in first appeals.”

Dissatisfied
from the judgment of the Full Bench of the Kerala High Court, the
assessee filed the appeals before the Supreme Court purely on question
of law.

The Supreme Court held that the income of an assessee
carrying on a business or profession has to be assessed in accordance
with the scheme contained in Part D of Chapter IV dealing with heads of
income. Section 28 of the Act deals with the chargeability of income to
tax under the head ‘Profits and gains of business or profession’. All
‘other deductions’ available to an assessee under this head of income
are dealt with u/s.36 of the Act which opens with the words ‘the
deduction provided for in the following clauses shall be allowed in
respect of matters dealt with therein, in computing the income referred
to in section 28’. In other words, for the purposes of computing the
income chargeable to tax, beside specific deductions, ‘other deductions’
postulated in different clauses of section 36 are to be allowed by the
Assessing Officer, in accordance with law.

Section 36(1)(vii) and 36(1)(viia) provide for such deductions, which are to be permitted, in accordance with the language of these provisions. A bare reading of these provisions shows that sections 36(1) and 36(1)(viia) are separate items of deduction. These are independent provisions and, therefore, cannot be intermingled or read into each other. It is a settled canon of interpretation of fiscal statutes that they need to be construed strictly and on their plain reading.

The provision of section 36(1)(vii) would come into play in the grant of deductions, subject to the limitation contained in section 36(2) of the Act. Any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year is the deduction which the assessee would be entitled to get, provided he satisfies the requirements of section 36(2) of the Act. Allowing of deduction of bad debts is controlled by the provisions of section 36(2). The argument advanced on behalf of the Revenue is that it would amount to allowing a double deduction if the provisions of section 36(1)(vii) and 36(1)(viia) are permitted to operate independently. There is no doubt that a statute is normally not construed to provide for a double benefit unless it is specifically so stipulated or is clear from the scheme of the Act. As far as the question of double benefit is concerned, the Legislature in its wisdom introduced section 36(2)(v) by the Finance Act, 1985, with effect from April 1, 1985. Section 36(2)(v) concerns itself as a check for claim of any double deduction and has to be read in conjunction with section 36(1)(viia) of the Act. It requires the assessee to debit the amount of such debt or part thereof in the previous year to the provision made for that purpose.

The Supreme Court, referring to the Circular Nos. 258, dated 14-6-1979, 421, dated 12-6-1988, 464, dated 18-7-1986 and the objects and reasons for the Finance Act, 1986, held that clear legislative intent of the relevant provisions and unambiguous language of the Circulars with reference to the amendments to section 36 of the Act demonstrate that the deduction on account of provision for bad and doubtful debts u/s.36(1)(viia) is distinct and independent of the provisions of section 36(1)(vii) relating to allowance of the bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. Another material aspect of the functioning of such banks is that their rural branches were practically treated as a distinct business, though ultimately these advances would form part of the books of accounts of the principal or head office branch. According to the Supreme Court the Circulars in question show a trend of encouraging rural business and for providing greater deductions. The purpose of granting such deductions would stand frustrated if these deductions are implicitly neutralised against other independent deductions specifically provided under the provisions of the Act.

The Supreme Court further held that the language of section 36(1)(vii) of the Act is unambiguous and does not admit of two interpretations. It applies to all banks, commercial or rural, scheduled or unscheduled. It gives a benefit to the assessee to claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the amounts of the assessee for the previous year. This benefit is subject only to section 36(2) of the Act. It is obligatory upon the assessee to prove to the Assessing Officer that the case satisfies the ingredients of section 36(1)(vii) on the one hand and that it satisfies the requirements stated in section 36(2) of the Act on the other. The proviso to section 36(1)(vii) does not, in absolute terms, control the application of this provision as it comes into operation only when the case of the assessee is one which falls squarely u/s.36(1)(viia) of the Act. The Supreme Court noticed that the Explanation to section 36(1)(vii), introduced by the Finance Act, 2001, had to be examined in conjunction with the principal section. The Explanation specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of ‘any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee’. Thus, the concept of making a provision for bad and doubtful debts would fall outside the scope of section 36(1)(vii) simpliciter. The proviso, would have to be read with the provisions of section 36(1)(viia) of the Act. Once the bad debt is actually written off as irrecoverable and the requirements of section 36(2) satisfied, then, it would not be permissible to deny such deduction on the apprehension of double deduction under the provisions of section 36(1)(viia) and the proviso to section 36(1)(vii). According to the Supreme Court this did not appear to be the intention of the framers of law. The scheduled and non-scheduled commercial banks would continue to get the full benefit of write-off of the irrecoverable debts u/s.36(1)(vii) in addition to the benefit of deduction of bad and doubtful debts u/s.36(1)(viia). Mere provision for bad and doubtful debts may not be allowable, but in the case of a rural advance, the same, in terms of section 36(1)(viia)(a), may be allowable without insisting on an actual write-off.

The Supreme Court observed that as per the proviso to clause (vii), the deduction on account of the actual write-off of bad debts would be limited to the excess of the amount written off over the amount of the provision which had already been allowed under clause (viia). According to the Supreme Court the proviso by and large protects the interests of the Revenue. In case of rural advances which are covered by clause (viia), there would be no double deduction. The proviso, in its terms, limits its application to the case of a bank to which clause (viia)applies. Indisputably, clause (viia)(a) applies only to rural advances.

The Supreme Court further observed that as far as foreign banks are concerned, u/s.36(1)(viia)(b) and as far as public finance institutions or State financial corporations or State industrial investment corporations are concerned, u/s.36(1)(viia)(c), they do not have rural branches. The Supreme Court therefore inferred that the proviso is self-indicative that its application is to bad debts arising out of rural advances.

In a concurring judgment, the Chief Justice held that u/s.36(1)(vii) of the Income-tax Act, 1961, the taxpayer carrying on business is entitled to a deduction, in the computation of taxable profits, of the amount of any debt which is established to have become a bad debt during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. In order to promote rural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act inserted clause (viia) in relation to their rural advances, the Finance Act inserted clause (viia) in s.s (1) of section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debt(s) relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches computed in the manner prescribed by the Income-tax Rules, 1962. Thus, the provisions of clause (viia) of section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of section 36(1)(vii) relating to allowance of the bad debts. In other wards, the scheduled commercial banks would continue to get the full benefit of the write-off of the irrecoverable debt(s) u/s.36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) u/s.36(1)(viia). A reading of the Circulars issued by Central Board of Direct Taxes indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write-off. However, this may result in double allowance in the sense that in respect of the same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of accrual write-off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write-off to the excess, if any, of the write-off over the amount standing to the credit of the account created under clause (viia).

Note: The Court incidentally considered whether, when findings recorded in the other assessment year are accepted by the Revenue, it should be permitted to question the correctness of the same in the subsequent years. The relevant portion of the judgment is extracted below:

The applicant has contended that as the similar claims had been decided in favour of the banks for the A.Ys. 1991-92 to 1993-94 by the Special Bench of the Income Tax Appellate Tribunal, which had not been challenged by the Department, as such, the issue had attained finality and could not be disturbed in the subsequent years.

The above contention of the appellant-banks does not impress us at all. Merely because the orders of the Special Bench of the Income Tax Appellate Tribunal were not assailed in appeal by the Department itself, this would not take away the right of the Revenue to question the correctness of the orders of assessment, particularly when a question of law is involved. There is no doubt that the earlier orders of the Commissioner of Income-tax (Appeals) had merged into the judgment of the Special Bench of the Income Tax Appellate Tribunal and attained finality for that relevant year. Equally, it is true that though the Full Bench judgment of that very Court in the case of South Indian Bank (supra), it did not notice any of the contentions before and principles stated by the Special Bench of the Income Tax Appellate Tribunal in its impugned judgment. As already noticed, the questions raised in the present appeal go to the very root of the matter and are questions of law in relation to interpretation of sections 36(1)(vii) and 36(1)(viia) read with section 36(2) of the Act. Thus, without any hesitation, we reject the contention of the appellant-banks that the findings recorded in the earlier A.Ys. 1991-92 to 1993-94 would be binding on the Department for subsequent years as well.

Capital or revenue expenditure: Section 37 of Income-tax Act, 1961: A.Y. 1998-99: Airport authority: Expenditure towards removal of encroachments in and around technical area of airport for safety and security: Is revenue expenditure.

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[Airport Authority of India v. CIT, 340 ITR 407 (Del.) (FB)]

The assessee is the Airport Authority managing the airports in India. The assessee incurred expenditure towards removal of encroachments in and around technical area of the airport for safety and security. The assessee’s claim for deduction of the expenditure was disallowed by the Assessing Officer and the disallowance was confirmed by the Tribunal.

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

“The land belonged to the assessee. In the scheme formulated by the Government for removal of encroachers and their rehabilitation amount was not for acquisition of new assets. The payment was made to facilitate its smooth functioning of the business in a profitable manner and, therefore, such an expenditure was revenue in nature.”

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Deduction u/s.80IB Manufacture: Production of perfumed hair oil by using coconut oil and mineral oil is manufacture: Assessee entitled to deduction u/s.80IB.

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The assessee was engaged in the business of production of perfumed hair oil using coconut oil and mineral oil as per the requirement of M/s. Hindustan Lever Ltd. The assessee’s claim for deduction u/s.80IB was rejected by the Assessing Officer holding that the activity did not amount to manufacture for the purposes of section 80IB. 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 finding of fact recorded by the ITAT is that the production of the perfumed hair oil as per the requirement of Hindustan Lever Ltd. constituted manufacture of a product distinct from the inputs used and on the said manufactured product the Central Excise Duty has been paid. The Apex Court in the case of CCE v. Zandu Pharmaceutical Works Ltd., reported in (2006) 12 SCC 453 has held that addition of perfume to coconut oil to produce perfumed oil constitutes a manufacturing process.

(ii) Moreover, in the present case it is not in dispute that the deduction u/s.80IB of the Act has been allowed to the assessee in the first year of manufacture and that order has attained finality.

(iii) In these circumstances, the decision of the ITAT in holding that the assessee is engaged in manufacturing activity and hence entitled to avail deduction u/s.80IB cannot be faulted.”

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Capital gain: Computation: Section 2(42A) and section 48 Indexed cost: A.Y. 2001-02: Acquisition of capital asset by gift, will, etc.: Indexed cost to be determined w.r.t. the holding of the asset by the previous owner.

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The settler of the assessee-trust had acquired the property before 1-4-1981 and he settled it on trust on 5-1-1996. The assessee-trust sold the property and computed the indexed cost of acquisition on the basis that it ‘held’ the property from the time the settler had held it. The Assessing Officer accepted that the settler’s cost of acquisition had to be treated as the assessee’s cost of acquisition but held that the settler’s period of holding could not be treated as the assessee’s period of holding. The Tribunal upheld the decision of the Assessing Officer.

On appeal by the assessee, the Delhi High Court reversed the decision of the Tribunal, followed the judgment of the Bombay High Court in the case of CIT v. Manjula J. Shah, 16 Taxman.com 42 (Bom.) and held as under:

“(i) The Department’s contention that in a case where section 49 applies the holding of the predecessor has to be accounted for the purpose of computing the cost of acquisition, cost of improvement and indexed cost of improvement but not for the indexed cost of acquisition will result in absurdities. It leads to a disconnect and contradiction between ‘indexed cost of acquisition’ and ‘indexed cost of improvement’.

(ii) This cannot be the intention behind the enactment of section 49 and Explanation to section 48. There is no reason why the Legislature would want to deny or deprive an assessee the benefit of the previous holding for computing ‘indexed cost of acquisition’ while allowing the said benefit for computing ‘indexed cost of improvement’.

(iii) The benefit of indexed cost of inflation is given to ensure that the taxpayer pays capital gains tax on the ‘real’ or actual ‘gain’ and not on the increase in the capital value of the property due to inflation.

(iv) The expression ‘held by the assessee’ used in Explanation (iii) to section 48 has to be understood in the context and harmoniously with other sections and as the cost of acquisition stipulated in section 49 means the cost for which the previous owner had acquired the property, the term ‘held by the assessee’ should be interpreted to include the period during which the property was held by the previous owner.”

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Double Taxation Avoidance Agreement — While India is not a party to the Vienna Convention, it contains many principles of customary international law, and the principle of interpretation of Article 31 of the Vienna Convention, provides a broad guide-line as to what could be an appropriate manner of interpreting a treaty in Indian context also.

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In a petition filed before the Supreme Court by an organisation called Citizen India based upon media and scholarly reports alleged that various individuals, mostly citizens, but may also include non-citizens, and other entities with presence in India, have generated and secreted away large sums of monies, through their activities in India or relating to India, in various foreign banks, especially in tax havens and jurisdiction that have strong secrecy laws with respect to the contents of bank accounts and the identities of individuals holding such accounts and that the Government of India and its agencies have been very lax in terms of keeping an eye on the various unlawful activities generating unaccounted monies; the consequent tax evasion and such laxity extends to efforts to curtail the flow of such funds out and into, India and seeking the Court’s intervention to order proper investigations and monitor continuously, the action of the Union of India, and any and all governmental departments and agencies in these matters.

In deciding the matter, the Supreme Court had an occasion to consider the Double Taxation Avoidance Agreement with Germany and the Vienna Connection and it made certain observations with respect to the same.

The Supreme Court noted the relevant portions of Article 26 of the Double Taxation Avoidance Agreement with Germany, which reads as follows:

“1. The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Agreement. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of or the determination of appeals in relation to, the taxes covered by this Agreement. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

2. In no case shall the provisions of paragraph 1 be construed so as to impose on Contracting State the obligation:

(a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

(b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;

(c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process or information, the disclosure of which would be contrary to public policy (order public).”

The Supreme Court observed that the above clause in the relevant agreement with Germany would indicate that there is no absolute bar or secrecy. Instead the agreement specifically provides that the information may be disclosed in public court proceedings which the instant proceedings are. The proceedings before it, relate both to the issue of tax collection with respect to unaccounted monies deposited into foreign bank accounts, as well as with issues relating to the manner in which such monies were generated, which may include activities that are criminal in nature also. Comity of nations cannot be predicated upon clauses of secrecy that could hinder constitutional proceedings such as these, or criminal proceedings.

The Supreme Court noted that the claim of the Union of India is that the phrase ‘public court proceedings’, in the last sentence in Article 26(1) of the Double Taxation Avoidance Agreement only relates to proceedings relating to tax matters. The Union of India claims that such an understanding comports with how it is understood internationally. In this regard, the Union of India cited a few treatises. According to the Supreme Court, however, the Union of India did not provide any evidence that Germany specifically requested it to not reveal the details with respect to accounts in the Liechtenstein even in the context of proceedings before it.

The Supreme Court held that in Article 31, ‘General Rule of Interpretation’, of the Vienna Convention of the Law of Treaties, 1969, provides that a “treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” While India is not a party to the Vienna Convention, it contains many principles of customary international law, and the principle of interpretation of Article 31 of the Vienna Convention, provides a broad guideline as to what could be an appropriate manner of interpreting a treaty in Indian context also.

The Supreme Court said that in Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706; (2004) 10 SCC 1, it approvingly had noted Frank Bennion’s observations that a treaty is really an indirect enactment instead of a substantive legislation, and that drafting of treaties is notoriously sloppy, whereby inconveniences obtain. In this regard this Court further noted that the dictum of Lord Widgery C.J. 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.” The broad principle of interpretation, with respect to treaties, and the provisions therein, would be that the ordinary meanings of words be given effect to, unless the context requires or otherwise. However, the fact that such treaties are drafted by diplomats, and not lawyers, leading to sloppiness in drafting also implies that care has to be taken to not render any word, phrase, or sentence redundant, especially where rendering of such word, phrase or sentence redundant would lead to a manifestly absurd situation, particularly from a constitutional perspective. The Government cannot bind India in a manner that derogates from constitutional provisions, values and imperatives.

The last sentence of the Article 26(1) of the Double Taxation Avoidance Agreement with Germany, “They may disclose this information in public court proceedings or in judicial decisions,” is revelatory in this regard. It stands out as an additional aspect or provision, and an exception, to the proceeding portion of the said Article. It is located after the specification that information shared between the Contracting Parties may be revealed only to “persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to taxes covered by this Agreement.” Consequently, it has to be understood that the phrase ‘public court proceedings’ specified in the last sentence in Article 26(1) of the Double Taxation Avoidance Agreement with Germany refers to court proceedings other than those in connection with tax assessment, enforcement, prosecution, etc., with respect to tax matters. If it were otherwise, as argued by the Union of India, then there would have been no need to have that last sentence in Article 26(1) of the Double Taxation Avoidance Agreement at all. The last sentence would become redundant if the interpretation pressed by the Union of India is accepted. Thus, notwithstanding the alleged convention of interpreting the last sentence only as referring to proceedings in tax matters, the rubric of common law jurisprudence, and fealty to its principles, leads us inexorably to the conclusion that the language in this specific treaty, and under these circumstances cannot be interpreted in the manner sought by the Union of India.

The Supreme Court while agreeing that the language could have been tighter, and may be deemed to be sloppy, to use Frank Bennion’s characterisation, negotiation of such treaties are conducted and secured at very high levels of Government, with awareness of general principles of interpretation used in various jurisdictions. It is fairly well known, at least in common law jurisdictions, that legal instruments and statutes are interpreted in a manner whereby redundancy of expressions and phrases is sought to be avoided.

The Supreme Court inter alia constituted Special Investigation Team to take over the matter of investigation of the individuals whose names had been disclosed by Germany as having accounts in Liechtenstein; and expeditiously conduct the same.

Nath Holding & Investment Pvt. Ltd. v. DCIT ITAT ‘B’ Bench, Mumbai Before D. Manmohan (VP) and Pramod Kumar (AM) ITA No. 5328/Mum./2006 A.Y.: 1996-97. Decided on: 25-10-2011 Counsel for assessee/revenue: N. R. Agarwal/P. K. B. Menon

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Section 271(1)(c) — Penalty for concealment of income — During quantum proceedings assessee failed to explain certain discrepancies in respect of its claim for loss in share trading business — AO disallowed the loss and imposed penalty — Held that in the absence of the finding that the claim for loss was bogus or false, penalty cannot be imposed.

Facts:
The impugned penalty was levied in respect of disallowance of loss in share trading business. The loss was disallowed on the ground of discrepancy in the distinctive number of shares purchased and sold and which could not be explained at the relevant point of time. It was only for the lack of explanation for discrepancy that quantum addition was finally confirmed.

Before the Tribunal the assessee furnished reconciliation in order to explain the discrepancy and it also filed an affidavit setting out the reasons as to why the same could not be explained earlier.

Held:
According to the Tribunal, once the assessee had given a reasonable explanation which was not found to be false, imposition of penalty in respect of the same cannot be justified. Further, it observed that the mere fact that the assessee could not explain its claim in the quantum proceedings and in the absence of any independent finding in the penalty order to the effect that claim for loss made by the assessee was bogus or false, it held that the penalty cannot be imposed.

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OffShore 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-I

Introduction
1.1 With the liberalisation and the history of strong economic growth in the last few years and with the prospects of reasonably sound economic growth, India has become one of the major attractive destinations for Foreign Direct Investment (FDI) for carrying on business by Multinational Companies (MNC). 1.2 Large amount of FDI has flown to India through Mauritius for various commercial purposes including the tax advantage under Double Taxation Avoidance Agreement entered into by India with Mauritius (Mauritius Tax Treaty).

1.2.1 Under the Mauritius Tax Treaty, one major advantage is with regard to non-taxability of capital gain arising on alienation of shares of the Indian companies. Under the Mauritius Tax Treaty, the right to tax such a gain is only with Mauritius (with some exception with which we are not concerned in this writeup) and as such, the same cannot be taxed in India. For this purpose, Mauritian Company is required to establish that it is tax resident of Mauritius and which can generally be established by producing Tax Residency Certificate (TRC) issued by the Tax Department of Mauritius. Such TRC issued by the Mauritius tax officer is generally regarded as sufficient evidence for that purpose by virtue of the CBDT Circular No. 789, dated 13-4-2000. This legal position is also confirmed by the judgment of the Apex Court in Azadi Bachao Andolan (263 ITR 507). There is a historical background to this position, with which also we are not concerned in this write-up.

1.3 For the purpose of withholding tax from the taxable income received by a Non-Resident (NR), section 195(1) of the Income-tax Act, 1961 (the Act) provides that any person responsible for paying (Payer) to NR (Payee) any sum chargeable under the Act is liable to deduct tax (TDS) as provided therein. There are some exceptions to this, with which we are not concerned in this write-up. Effectively, under these provisions, the Payer is liable to deduct tax at source (TAS) in such cases and pay the amount so deducted to the Government. Procedural provisions are also made for compliance of these provisions and consequences are also provided for default in compliance of these provisions, with which also we are, effectively, not concerned in this write-up.

1.4 Multinational Groups (MNG) generally operate through various companies in different jurisdictions where such operating companies are directly or indirectly controlled through downstream subsidiaries set up by the main holding company of the MNG. Such holding and subsidiary structures are common in commercial world for various business needs. One of the objectives of putting-up overseas holding and downstream subsidiary structure for FDI is also to provide for easy exit at a later stage when it is decided to withdraw from a business carried on in India through Special Purpose Vehicle (SPV) created in India. At the time of exit, in such cases, generally shares of overseas company are transferred to the buyer who, in the process, acquires control and management of Indian SPV. Such overseas transaction, many times, takes place between two NR entities.

1.5 In case of a transaction of the nature referred to in 1.4 above, of late, the Revenue Department has taken a stand that on account of transfer of shares of such overseas holding company, there is indirect transfer of underlying assets of the Indian company as the control and management of the Indian company gets indirectly transferred in such cases. Therefore, the capital gain arising in such offshore transaction between two NRs is liable to tax in India by virtue of provisions of section 9(1)(i) which, inter alia, provides that all income accruing or arising, whether directly or indirectly through the transfer of capital asset situate in India shall be deemed to accrue or arise in India. According to the Revenue, indirect transfer of capital asset situated in India is covered within the scope of this provision.

1.5.1 In view of the above stand of the Revenue, further stand is taken by the Revenue that the Payer NR entity is also required to deduct TAS u/s.195(1) while making payment to the transferor of the share, which is also another NR entity. If such obligation of TDS is not discharged, then the Payer is regarded as ‘assessee in default’ u/s.201 and he would be liable to pay the amount of such tax with interest and will also be subject to other consequences such as penalty, etc. The Payer could also be considered as representative assessee of the Payee u/s.163.

1.6 The issues referred to in paras 1.5 and 1.5.1 are under debate currently in many cases and different views were being taken. The issue became more vital in view of the judgment of the Bombay High Court in the case of Vodafone International Holdings B. V. (VIH) reported in 329 ITR Page 126.

1.6.1 Recently, the issues referred to in para 1.6 above, came up for consideration before the Apex Court in the case of VIH and this hotly debated issue got finally decided. Relevant principles of law have been decided/re-iterated in this case and therefore, the judgment becomes more relevant.

1.7 Now, since the Revenue has filed a review petition before the Apex Court for recalling the judgment in Vodafone‘s case, it would also be useful to consider the judgment of the High Court in little greater detail. Various contentions were raised by both the parties before the High Court, as well as Supreme Court. Both the judgments are very long. For the sake of brevity and space constraints, only some of the main contentions are referred to in this write-up. For the same reasons, even the facts of the case are very broadly given in brief. For the sake of convenience, the percentages of shareholding referred to herein at different places are rounded off.

Vodafone International Holdings B.V. v. UOI — 329 ITR 126 (Bom.)

Facts in brief
2.1 In 1992, Hutchison group of Hong Kong (HK) acquired interest in Mobile Telecommunication Industry in India, through a joint venture Company in India (JV Co.), Hutchison Makes Telecom Ltd., [subsequently renamed Hutchison Essar Ltd. (HEL)] through its overseas group of companies. In 1998, CGP Investment Holdings Ltd., (CGP) was incorporated in Cayman Islands (CI) of which the sole shareholder was Hutchison Telecommunication Ltd., HK (HTL). The CGP had set up two Wholly-Owned Subsidiaries (WOS) in Mauritius viz. Array Holdings Ltd. (Array) and Hutchison Telecommunication Services India Holdings Ltd., (HTI-MS).

Array, through its various downstream subsidiaries in Mauritius held 42% shareholdings interest in HEL. Further, 10% shareholding interest in HEL was held by CGP through certain overseas JV companies. HTL-MS had set up WOS in India, namely, 3 Global Services Pvt. Ltd. (3GSPL). The shareholding of HTL in CGP got transferred to another group com-pany [HTI (BVI Holding Ltd.) HTIHL (BVI)], a company incorporated in British Virgin Island (BVI). The HTIHL (BVI) was indirectly WOS of Hutchi-son Telecommunication International Ltd. (HTIL), a company incorporated in CI. HTIL was listed on stock exchange of New York and Hong Kong. As part of group restructuring and consolidation, the structure was further evolved with certain arrangements/ agreements and finally in 2006, the Hutchison group held 52% shareholding in HEL through structural arrangement of holding and subsidiary companies and it had also options to acquire through 3GSPL, a further 15% shareholding interest in HEL from certain Indian companies, subject to relaxation of FDI norms as the Essar group, JV partner, was already hold-ing 22% shareholding through Mauritius companies. Effectively, CGP through its downstream overseas subsidiaries held 42.43% (42%) interest in HEL and it had indirect interest of 9.62% (10%) in the equity of HEL through its pro rata shareholding (indirect) in some Indian companies which had direct/indirect equity interest in HEL. These Indian companies [viz., Telecom Investment India Pvt. Ltd. (TII) and Omega Telecom Holding P. Ltd. (Omega)] belong to (with majority shareholding) its Indian Partners (viz. Mr. Asim Ghosh, Mr. & Mrs. Analgit Singh and IDFC). The structure created was very complex and various commercial arrangements were made between group companies and others for that purpose. The detailed chart of the structure is appearing in the judgment of the High Court at pages 134/135.

2.2 Vodafone International Holdings B. V., Netherlands (VIH) is a company controlled by Vodafone group, UK (Vodafone) . The said VIH acquired the entire shareholding of CGP from HTIHL (BVI) vide transaction dated 11 -2-2007, as a result of which the Vodafone group indirectly acquired the interest of Hutchison group in HEL which that group held through structural arrangement of holding and subsidiary companies (referred to in para 2.1) either through Mauritius-based companies having Tax Residency Certificates (TRCs), or through other entities in which the interest of Hutchison group was held by Mauritius companies. On these facts, the Revenue took a stand that it was a case of acquisition of 67% controlling interest in HEL by VIH from HTIL and since HEL is a company resident in India, such controlling interest is an asset situated in India. Therefore, the capital gain arising from this transaction is taxable in India on the basis that though CGP is not a tax resident in India, it indirectly also holds underlying Indian assets of HEL. The transaction results into indirect transfer of capital assets situated in India. As such, VIH was also under obligation to deduct TAS u/s. 195 from the payment made for acquiring 67% interest of Hutchison group. This was disputed by VIH saying that it agreed to acquire share of CGP and as a consequence, it has direct/indirect control of 52% shareholding of HEL with call options to further acquire 15% shareholding.

2.3 Prior to the above arrangement of transfer of direct and indirect interest of Hutchison group to Vodafone group, certain events took place such as: in December 2006, HTIL had issued a statement stating that is has been approached by various potential-interested parties regarding possible sale of its equity interest in HEL; in December 2006, Vodafone group had made non-binding offer to HTIL for its direct and indirect shareholding in HEL; in February 2007, the offer was revised with binding offer on behalf of VIH for ‘HTIL’s shareholdings in HEL together with inter-related company loans; in February 2007, Bharti Infotel Pvt. Ltd. had also given a letter stating it has no objection to the proposed transaction (as Vodafone had some shareholding in the said company). Ultimately, final binding offer was made by Vodafone group on February 10, 2007 of US $ 11.076 billion.

2.3.1 On 11th February, 2007, Share Purchase Agreement (SPA) was entered into with HTIL [and not with HIHL (BVI) which was holding share of CGP] under which HTIL agreed to procure and transfer to VIH the entire issued share capital of CGP by HTIHL (BVI), free from all encumbrances together with all rights attaching or accruing, and together with as-signment of its loan interests. This was followed by announcement of Vodafone group on February 12, 2007 stating that it had agreed to acquire a controlling interest in HEL via its subsidiary VIH. On February 28, 2007 Vodafone group, on behalf of VIH, addressed a letter to Essar group for purchase of Essar’s entire shareholding in HEL under ‘Tag along rights’ of Essar group under its joint venture with Hutchison group in HEL and so on.

2.3.2 On 28th February, 2007, VIH filed an application with the Foreign Investment Promotion Board (FIPB) of the Union Ministry of Finance in which, effectively, it was requested to take note and grant approval under Press Note 1 to the indirect acquisition of 51.96% stake in HEL through an overseas acquisition of the entire shareholding of CGP from HTIHL (BVI). HTIL in its filing before US SEC had, inter alia, stated that a combined holding of the HTIL group was 61.88%, which is sought to be transferred. Therefore, on a query being raised by FIPB in regard to the difference in percentage of shareholding mentioned in the application and in the filing with US SEC, it was clarified that the variation is because of the difference in the US GAAP and Indian GAAP declarations that the com-bined holding for US GAAP purpose was 61.88% and for the Indian GAAP purpose it is 51.96% and the Indian GAAP number reflects accurately a true equity ownership and control position. Based on this clarification, FIPB granted a requisite approval. On 15th March, 2007, a settlement was also arrived at between HTIL and set of companies belonging to the Essar group on certain payments on the basis of which the Essar group indicated its support to the proposed transaction between Hutchison group and Vodafone group. For the purposes of running the business of JV with Essar Group, a term sheet agreement between VIH and Essar Group of companies was entered into for regulating various affairs of the HEL and the relationship of shareholders of the HEL. In this term sheet, it was, inter alia, stated that VIH had agreed to acquire the entire indirect shareholding of HTIL in HEL, including all rights, contractual or otherwise, to acquire directly or indirectly shares in HEL owned by others, which shares shall, for the purposes of the term sheet, be considered to be part of holding acquired by VIH.

2.3.3 In respect of the above transac-tion, a show- cause notice u/s.163 of the Income-tax Act, 1961 (the Act) was issued by the Revenue to HEL in August 2007 asking it to explain why it should not be treated as a representative assessee of VIH. A notice was issued u/s.201(1) and 201(1A) of the Act to VIH in September 2007 asking it to show cause as to why it should not be treated as an ‘assessee in default’ for failure to withhold tax. This action of the Revenue was challenged by VIH before the Bombay High Court in a writ petition in which the jurisdiction of the Revenue over the petitioner for issuing such a notice was challenged. The petition was dismissed by the Bombay High Court (311 ITR 46) declining to exercise its jurisdiction under Article 226 in a challenge to the show-cause notice. Against this, a Special Leave Petition (SLP) was filed by the petitioner before the Supreme Court which was also dismissed with a direction to Revenue to determine the jurisdictional challenge raised by the petitioner and the right of the petitioner to challenge the decision of the Revenue (if, determined against the petitioner) on this issue was reserved keeping all the questions of law open (179 Taxman 129).

2.3.4 Subsequent to the above events, another show-cause notice u/s.201 was issued by the Revenue in October 2009 on the basis of which, after considering the assessee’s reply, the order was passed u/s.201 upholding jurisdiction of the Revenue on 31st May, 2010. On the same date, a show-cause notice was also issued u/s.163 to VIH as to why it should not be treated as an agent/representative assessee of HTIL. These were challenged by the assessee before the Bombay High Court by a writ petition.

Basic contentions from both the sides

2.4 Before the High Court, on behalf of the petitioner, it was pointed out that the CGP through its downstream subsidiaries, directly or indirectly controlled equity interest in HEL. The transfer of share of CGP has resulted in the petitioner acquiring control over the CGP and its downstream subsidiaries including ultimately HEL and its downstream operating companies. On the passing of downstream companies, commercial arrangements common to such transaction were put in place. The transaction represents a transfer of a capital asset (i.e., share of CGP) situated outside India and hence, any gain arising on such transfer is not taxable in India. Accordingly, there was no obligation on the part of the petitioner to deduct tax u/s.195. It was also pointed out that if the shares held by the Mauritian companies were sold in India, the capital gain, if any arising on such transaction would not be taxable in India in view of the Mauritius Tax Treaty. Section 195 is inapplicable to foreign entity which has no presence in India, not even a branch office, as such entity cannot be subjected to obligation to deduct tax in respect of offshore transaction. It is the recipient who is the potential assessee as he has received the sum chargeable, if any. This by itself, does not create nexus with the Payer who has neither taxable income nor any presence in India. In support of this stand, various submissions were made.

2.5 On behalf of the Revenue, primarily it was pointed out that SPA and other documents establish that the subject-matter of the transaction between HTIL and VIH was a transfer of 67% interest (direct as well as indirect) in HEL. The CGP share is only one of the means to achieve this object. The transaction constitutes a transfer of composite rights of HTIL in HEL as result of the divestment of HTIL’s rights which paved way for VIH to step in the shoes of HTIL. The transaction in question has a sufficient territorial nexus to India and is chargeable to tax under the Act. This is evident from various arrangements made to give an effect to the understanding between the parties including the fact that SPA was entered in to with HTIL and not HTIHL (BVI). The consideration paid was a package for composite rights and not for a mere transfer of a CGP share. It was also pointed out that there is a distinction between proceedings for deduction of tax and regular assessment proceedings. The jurisdiction issue should be legitimately confined to obligation of VIH u/s.195 to withhold tax. Nonetheless, the Revenue made various submissions before the Court with regard to chargeability to tax arising out of the transaction.

2.5.1 The view of the Revenue that the real nature of transaction is with regard to transfer of 67% interest of HTIL in HEL to VIH and not only transfer of one CGP share was based on the premise that on interpretation of SPA and other agreements/documents, it is clear that the form of the transaction is reflected therein. Several valuable rights which are property rights and capital assets of HTIL stand relinquished in favour of VIH under these agreements. These rights are property and constitute capital assets which are situated in India. But for these agreements, the HTIL would not have been able to effectively transfer to VIH, its controlling inter-est in JV Co., HEL, to the extent of 67%. The HTIL’s interest in HEL arose by way of indirect equity shareholding upon agreements; finance agreements, shareholdings agreements, call options agreements, etc. aggregate of which confers a controlling interest of 67% in HEL. All these varied interests did not emerge only from one share of CGP and could not have been conveyed by the transfer of only one equity share of CGP. The parties themselves have treated the transaction as acquisition of one share of CGP, as well as other assets in the form of various rights, and entitlements, which are situated in India.

Settled principles acknowledged

2.6 For the purpose of considering the submissions made by both the parties and the principles on which they have relied, the Court referred to various judicial precedents and the principles emerging therefrom and acknowledged various settled principles in that regard such as: in interpretation of fiscal legislation, the Court is guided by the language and the words used; a legal relationship which arises out of the business transaction cannot be ignored in search of substance over form or in pursuit of the underlying economic interest; the tax planning is legitimate so long as the assessee does not resort to colourable device or a sham transaction with a view to evade taxes; incorporated corporation has a distinct juristic personality and its business is not the business of its shareholders; during the subsistence of corporation, its shareholders have no interest in its assets; a share represents an interest of a shareholder which is made up of various rights; shares, and rights which emanate from them, flow together and cannot be dissected; a controlling interest is an incident of the ownership of the shares in a company and the same is not an identifiable or distinct capital asset independent of the holding of shares; control and management is one facet of the holding of shares; the jurisdiction of a State to tax NRs is based on the existence of nexus connecting the person sought to be taxed with the State which seeks to tax; in certain instances, a need for apportioning income arises where the source rule applies and the income can be taxed in more than one jurisdiction, etc.

2.6.1 Evaluating the contentions of the petitioner with regard to obligation to withhold tax, the Court dealt with the provisions of section 195(1) as well as the relevant precedents and then, the Court formulated the principles governing the interpretation of section 195 which, inter alia, include the position that the Parliament has not restricted the obligations to deduct TAS on a resident and the Court will not imply a restriction not imposed by the legislation.

Analyses of facts and tax implications

2.7 The Court, then, proceeded to analyse the fact of the case on hand to determine the issues raised on the basis of settled principles referred to hereinbefore. For this purpose, the Court noted that essentially the case of VIH is that the transaction was only in respect of the purchase of one share of CGP and that being a capital asset situated outside India, no taxable income arises in India. On the other hand, the case of the Revenue is that the subject-matter of the transaction on a true construction of SPA and other transaction documents is a composite transaction involving transfer of various rights in HEL by HTIL to VIH, which resulted into deemed accrual of Income for HTIL from a source of income in India or through transfer of capital assets situated in India.

2.7.1 To decide the issue, the Court first considered as to how both the parties have construed the transaction. The Court noted that it is revealed from both the interim and final reports of HTIL that the transaction represented discontinuation of its operations in India upon which, it had generated a profit of HK $ 70,502 million. From the proceeds of the transaction, the HTIL also declared special dividend to its shareholders. Accordingly, from HTIL’s perspective, it had carried on in India Mobile Telecommunications Operations, which were to be discontinued as a result of the transaction.

On the other hand, VIH also perceived the transaction as acquisition of 67% interest in Indian JV Co., for an agreed consideration. This is evident from various announcements made by VIH, as well as the arrangements entered into between the parties. The equity value of HTIHL (BVI)’s 100% stake in CGP was computed on the basis of the enterprise value of HEL at US $ 18,250 million and by computing 67% of equity value on that basis. The entire value that was ascribed to its stake in CGP was computed only on the basis of enterprise value of HEL.

The Court then noted that it is in the above background, various documents should be considered and analysed and the effect thereof should be determined.

2.7.2 After considering various clauses of the SPA and the relationship of shareholders of the Company, the Court observed as under (Page 207):

“The diverse clauses of the SPA are indicative of the fact that parties were conscious of the composite nature of the transaction and created reciprocal rights and obligations that included, but were not confined to the transfer of the CGP share. The commercial understating of the parties was that the transaction related to the transfer of a controlling interest in HEL from HTIL to VIH BV. The transfer of control was not relatable merely to the transfer of the CGP share.

Inextricably woven with the transfer of control were other rights and entitlements which HTIL and/or its subsidiaries had assumed in pursuance of contractual arrangements with its Indian partners and the benefit of which would now stand transferred to VIH BV. By and as a result of the SPA, HTIL was relinquishing its interest in the telecommunications business in India and VIH BV was acquiring the interest which was held earlier by HTIL.”

2.7.3 The Court also further noted various other agreements/arrangements made between the parties such as: the term sheet agreement with Essar group to regulate the affairs of HEL and relationship of the shareholders of both the groups, put option agreement with Essar group of companies, a tax deed of covenant for indemnifying various companies in respect of taxation and transfer pricing liabilities, the brand licence agreement, the loan assignment agreements, the arrangement with the existing Indian partners of HTIL (viz. Asim Ghosh, Analjeet Singh and IDFC), etc.

2.7.4 The Court then observed that the facts which have been disclosed before the Court support the contention of the Revenue that the transaction between HTIL and VIH took into consideration various rights, interests and entitlements which, inter alia, include: direct and indirect interest of 52% equity shares of HEL; indirect interest of 15% in HEL through call options held by Indian partners of Hutchison group; right to carry on business through telecom license in India; non-compete in India; management rights of HEL under SPAs; right to use Hutchison brand for a specified period, etc. (the complete details of rights, etc. are appearing on pages 211/212 of the judgment).

2.7.5 The Court then also referred to the FIPB process in the transaction, wherein various queries were raised and clarifications were given by VIH. Referring to one of the clarifications of VIH dated 19th March, 2007, the Court noted that VIH had stated that it had agreed to acquire from HTIL for US $ 11.08 billion interest in HEL, which included 52% equity shareholding (direct/indirect). This price included a control premium, use and rights to use the Hutch brand in India, a non-compete agreement, loan obligations and entitlement to acquire further 15% indirect interest in HEL, subject to the FDI rules, etc. These elements together equated to about 67% of the equity capital.

2.7.6 The above facts clearly establish that it will be simplistic to assume that the entire transaction between HTIL and VIH was only related to transfer of one share of CGP. The commercial and business understanding between the parties postulated what was being transferred was controlling interest in HEL from HTIL to VIH. In its due diligence report, Earnst & Young have also stated that the target structure now also includes CGP which was originally not within the target group. The due diligence report emphasises that the object and intent of the parties was to achieve the transfer of control over HEL and transfer of solitary share of CGP was put in place at the behest of HTIL, subsequently as a mode of effectuating the goal.

2.7.7 The Court further observed that the true nature of the transaction as it emerges from the transactional documents is that the transfer of solitary share of CGP reflected only a part of the arrangement put into place by the parties in achieving to object of transferring control of HEL to VIH. T h e Court, then, held as under (pages 213/214):

“The price paid by VIH BV to HTIL of US $ 11.01 billion factored in, as part of the consideration, diverse rights and entitlements that were being transferred to VIH BV. Many of these entitlements were not relatable to the transfer of the CGP share. Indeed, if the transfer of the solitary share of CGP could have effectuated the purpose it was not necessary for the parties to enter into a complex structure of business documentation. The transactional documents are not merely incidental or consequential to the transfer of the CGP share, but recognised independently the rights and entitlements of HTIL in relation to the Indian business which were being transferred to VIH BV.”

2.7.8 According to the Court, intrinsic to the transaction was a transfer of other rights and entitlements. These rights and entitlements constitute in themselves capital assets within the meaning of section 2(14) of the Act.

2.7.9 After concluding that the transaction should be dissected in to various rights and entitlements for which the consideration is paid, the Court, dealing with the issue of apportionment of consideration to such rights and entitlements to determine the taxability thereof, further held as under (page 215):

“The manner in which the consideration should be apportioned is not something which can be determined at this stage. Apportionment lies within the jurisdiction of the Assessing Officer during the course of the assessment proceedings. Undoubtedly, it would be for the Assessing Officer to apportion the income which has resulted to HTIL between that which has accrued or arisen or what is deemed to have accrued or arisen as a result of a nexus within the Indian taxing jurisdiction and that which lies outside. Such an enquiry would lie outside the realm of the present proceedings ……..”

2.8 The Court then considered the issue with regard to jurisdiction of the Revenue to initiate pro-ceedings u/s.195 in the case of VIH. In this context, after referring to the provisions of section 195(1) and the relevant judicial precedents, the Court concluded as under (page 221):

“Chargeability and enforceability are distinct legal conceptions. A mere difficulty in compliance or in enforcement is not a ground to avoid observance. In the present case, the transaction in question has significant nexus with India. The essence of the transaction was a change in the controlling interest in HEL which constituted a source of income in India. The transaction between the parties covered within its sweep, diverse rights and entitlements. The petitioner by the diverse agreements that it entered into has nexus with India jurisdiction. In these circumstances, the proceedings which have been initiated by the income-tax authorities cannot be held to lack jurisdiction.”

2.8.1 The Court finally stated that the issue of juris-diction has been correctly decided by the Revenue for the reasons already noted above and the VIH was under an obligation to deduct TAS while making payment to HTIL.

2.8.2 This judgment of the High Court is now reversed by the Apex Court (of course, subject to outcome of the review petition filed by the Revenue) which we will consider in the next part of this write-up.
(To be continued)

Ghanshyam Mudgal v. ITO ITAT ‘A’ Bench, Jaipur Before R. K. Gupta (JM) and N. L. Kalra (AM) ITA No. 896/JP/2010 A.Y.: 2007-08. Decided on: 9-9-2011 Counsel for assessee/revenue: Mahendra Gargieya/D. K. Meena

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Section 14 — Heads of income — Compensation received on acquisition of land under the Land Acquisition Act — Additional amount received was linked to the period when the Notification was issued till the date of actual possession — Whether AO justified in treating the sum so received as interest income — Held it was part of the compensation amount receivable and taxable as capital gains.

Section 2(1A) — Agricultural income — Compensation received on account of demolition of borewell and godown on agricultural land — Held that the amount received is agricultural income.

Facts:
During the year under appeal, the assessee’s land was acquired by the government agency under the Land Acquisition Act. Amongst other amounts, he received a sum of Rs.4.64 lakh with reference to the land acquired. As per the provisions of section 23(1A) of the Land Acquisition Act, the said amount was calculated @ 12% p.a. on market value of the land acquired for the period commencing on from the date notified for acquisition of land to the date of taking its possession. In addition, the assessee had also received Rs.8.54 lakh as compensation on account of demolition of borewell and godown used by him in his agricultural activities. According to the assessee, the sum of Rs.4.64 lakh received was part of the land compensation though it was computed on the basis of the period between the date of notification to the date of possession. As regards the sum of Rs.8.54 lakh received, it was contended that the same should be treated as receipt on account of transfer of agricultural land, income wherefrom is exempt from tax. However, the AO treated the sum of Rs.4.64 lakh as interest income. As regards the sum of Rs.8.54 lakh received, the AO assessed it as capital gains and after indexation the gain was determined at Rs.2.86 lakh. On appeal the CIT(A) agreed with the AO and upheld his order.

Held:
As regards the receipt of Rs.4.64 lakh, the Tribunal, relying on the decision of the Apex Court in the case of CIT v. Ghanshyam, (HUF) (224 CTR 522) agreed with the assessee that the amount received should be treated as enhanced compensation receivable on acquisition of the land by the government agency. Accordingly, it was held that the said receipt of Rs.4.64 lakh would be considered as part of capital gains and taxed accordingly.

As regards the sum of Rs.8.54 lakh received, the Tribunal observed that borewell is a form of irrigation and related to agricultural income. Hence, the compensation received on borewell is to be considered as compensation for agricultural land. Similarly, it was held that the compensation received against godown which was used for storage of agricultural produce, would also be considered as compensation for agricultural land.

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Baba Promoters & Developers v. ITO ITAT ‘B’ Bench, Pune Before I. C. Sudhir (JM) and G. S. Pannu (AM) ITA Nos. 629/PN/2009; 625/PN/2009 and 159/PN/2010 A.Ys.: 2004-05, 2006-07 and 2005-06 Decided on: 29-2-2012 Counsel for assessee/revenue: Sunil Ganoo/ Satindersingh Navrath and Ann Kapthuama

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Section 80IB(10) — While computing the area of plot, the area of a plot acquired subsequently for providing approach road also needs to be included in the measurement of total plot area. Areas of open land/garden/store/gym room meant for common use are not to be included for calculating built-up area of the residential unit. Merger of flats, after purchase, by the owners thereof to make it into a larger flat for their own convenience cannot be a cause for denial of deduction u/s.80IB(10).

Facts:
The assessee-firm started construction of a residential project at Aundh, Pune. As per the original lay-out plan approved by Pune Municipal Corporation (PMC), the total area of the plot was shown to be 3995.34 sq.mts. i.e., marginally less than the prescribed area of 1 acre. The assessee submitted that in addition to the above-stated area of land, an additional land measuring 5 ‘Are’ was also acquired by the assessee for the approach road to the said project vide a separate agreement made with the same landlords from whom the above-stated area of 3995.34 sq.mts. of land was purchased. On including this area, the size of the plot exceeded 1 acre. The assessee submitted that if this area would not have been acquired, the PMC would not have sanctioned the plan and issued commencement certificate. The AO visited the site and being satisfied allowed the deduction.

The CIT found this order to be erroneous and prejudicial to the interest of the revenue on the ground that: (1) the area of the plot is less than 1 acre; (2) as per sale agreement of row house, the saleable area mentioned is more than 1500 sq. feet; (3) in A.Y. 2005-06 the AO has in order passed u/s.143(3) denied deduction u/s.80IB(10); and (4) flats have been merged together and the modification is not as per approved plans.

Aggrieved, the assessee filed an appeal questioning the validity of revisional order passed u/s.263 of the Act.

Held:
The Tribunal noted that in the case of Haware Engineers and Builders (P) Ltd. v. ACIT, (11 Taxmann.com 286) (Mum.) deduction claimed u/s.80IB(10) was denied by the A.O. on the ground that the additional plot acquired subsequently, by allotment, was a distinct plot which cannot be included in computation of the area of the plot. The Mumbai Bench of Tribunal held that in case an assessee finds that he is not eligible for deduction u/s.80IB(10), because size of the plot on which project is built is less than minimum necessary size, and he makes good that deficiency, and ensures that all the necessary pre-conditions are satisfied and approvals obtained, the assessee is eligible for deduction u/s.80IB(10). It was further held that the fact that he satisfied the conditions later, does not adversely affect its claim for deduction. What is material is that at the point of time when matter comes up for examination of the claim, the necessary pre-conditions for being eligible to claim are satisfied. The Tribunal held that the facts in the present case are similar as the assessee has acquired the additional land of 5 ‘Are’ subsequently after the acquisition of the main plot of land from the same seller. It held that it is a well-established proposition of law that for transfer of a plot within the meaning of the Act, the requirement is handing over of the possession and payment of consideration. Thus, registration of document of the transaction is not the foremost requirement to establish the transfer for the purpose of the Act. The Tribunal also noted that the Pune Bench of the Tribunal has in the case of Bunty Builders v. ITO held that housing project constitutes development plan, roads and grant of other facilities, therefore, those areas should exist within the prescribed limits and area to be considered as part and parcel of the project. In the present case, after addition of 5 Are of land purchased by the assessee vide agreement dated 20th March, 2004, for the purpose of approach road, to the area given in the lay-out plan, it fulfils the prescribed area for eligibility of claiming deduction u/s.80IB(10) of the Act.

As regards the second ground about row house having area exceeding 1500 sq.ft., the Tribunal noted that sale area included area of open land/garden and if that is excluded, then area of the row house is less than 1500 sq.ft.

As regards the merger of flats and thereby exceeding the prescribed limit of 1500 sq.ft. being taken as a basis for denial of deduction in A.Y. 2005- 06, the Tribunal held that there is no substance since it is undisputed fact that each flat was within the prescribed limit of 1500 sq.ft. area and if after purchasing of 2 flats the owner(s) of flats merges it into a larger flat, the claimed deduction cannot be denied to the assessee.

The Tribunal held that the grounds on which the assessment order has been treated as erroneous and prejudicial to the interest of the Revenue are debatable and hence revisional powers cannot be invoked.

The Tribunal allowed the appeal filed by the assessee.

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DCIT v. Tejinder Singh ITAT ‘B’ Bench, Kolkata Before Pramod Kumar (AM) and Mahavir Singh (JM) ITA No. 1459/Kol./2011 A.Y.: 2008-09. Decided on : 29-2-2012 Counsel for revenue/assessee: A. P. Roy/ L. K. Kanoongo

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Section 50C — Transfer of leasehold rights in a building does not attract provisions of section 50C.

Facts:
The assessee along with one Amardeep Singh had vide registered lease deeds dated 19th November, 1992 acquired from Shree Khubchand Sethia Charitable Trust (Owner), leasehold rights for 99 years, in a house property at Kolkata.

By a tripartite registered deed dated 20th July, 2007 entered into between the owner, the assessee and Amardeep Singh (lessees) and three entities viz. Sugam Builders Pvt. Ltd., Neelanchal Sales and Suppliers Pvt. Ltd. and Pleasant Niryat Pvt. Ltd. (purchasers), the purchasers purchased this property. Under this deed dated 20th July, 2007 the owner transferred its ownership and reversionary rights in the said property for a consideration of Rs.1,00,00,000; the lessees for a consideration of Rs.3,19,00,000 gave up all their rights and interests in the said premises. Thus, purchasers paid total consideration of Rs.4,19,00,000 — Rs.1,00,00,000 to the owner and Rs.1,59,50,000 to the assessee and Rs.1,59,50,000 to Amardeep Singh — co-lessee. As against the consideration of Rs.4,19,00,000 the stamp duty valuation of the property was Rs.5,59,57,375.

The Assessing Officer (AO) computed the capital gains by adopting the stamp duty valuation to be the full value of consideration and notionally divided the said amount amongst the owner and the lessees in the ratio of actual consideration received by them. Accordingly, as against actual consideration of Rs.1,59,50,000 the AO computed capital gain by adopting Rs.2,12,47,375 to be the full value of consideration. He considered the lease rents paid over a period of time, duly indexed, to be the indexed cost of acquisition and on this basis arrived at LTCG of Rs.1,84,17,692. Since the assessee had invested Rs.1,96,03,685 and not the entire consideration adopted by the AO for computing capital gains, the AO granted proportionate exemption u/s.54F and charged balance Rs.14,46,692 to tax as LTCG.

Aggrieved the assessee preferred an appeal to the CIT(A) who relying upon various Tribunal decisions held that provisions of section 50C do not apply to transfer of leasehold rights.

Aggrieved the revenue preferred an appeal to the Tribunal and the assessee filed cross-objection on the ground that the CIT(A) has not adjudicated the alternative ground of the assessee viz. for the purposes of section 54F, full value of consideration does not mean value determined u/s.50C.

Held:
The Tribunal noted that the assessee was a lessee of the property which was sold by the owner of the property, yet the AO had treated the assessee as a seller apparently because the assessee was a party to the sale deed. The Tribunal held that in case of purchase of tenanted property the buyer pays the owner for ownership rights and if he wants to have possession of the property and remove the fetters of tenancy rights he would pay the tenants for surrendering their tenancy rights. Merely because the amount is paid at the time of purchase of the property, the character of receipt will not change.

The provisions of section 50C are not applicable where only tenancy rights are transferred or surrendered. On facts, the assessee had the rights of the lessee and not ownership rights. The assessee had granted, conveyed, transferred and assigned leasehold right, title and interest.

The Tribunal dismissed the appeal filed by the Revenue.

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(2011) 130 ITD 287/9 taxmann.com 69 (Mum.) Ashok Kumar Damani v. Addl. CIT A.Y.: 2005-06. Dated: 3-12-2010

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Allowability of penalty paid to stock exchange for violation of bye-laws of the stock exchange — The payment made to the stock exchange on account of short payment of margin money is only a compensatory payment under the rules of the stock exchange and not for infraction of law. Hence the same is allowable as revenue expenditure.

Facts:
The assessee had made short payment of margin money to the stock exchange. The penalty is levied by the stock exchange for the same which was paid by the assessee during the period under consideration. The AO disallowed the same on belief that the said expenditure is not an allowable expenditure being in the nature of penalty.

Before the Tribunal, the assessee relied on the decision of the Tribunal in ACIT v. Ramesh M. Damani, [ITA No. 5143 (Mum.) of 2006].

Held:
Following the judgment of the Mumbai Bench of the Tribunal in the case of ACIT v. Ramesh M. Damani, (supra), it is held that the payment had been made to stock exchange on account of short payment of margin money. This is only a compensatory payment under the rules of the stock exchange which is allowable as revenue expenditure as the same is not for infraction of law.

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(2011) 130 ITD 255 (Jp.) Dy. CIT v. Abdul Latif A.Y.: 2005-06. Dated: 30-4-2010

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Section 145 — Method of accounting — Rejection of accounts — Addition cannot be made simply on the basis of closing stock without considering the opening stock.

Facts:
The assessee was engaged in the business of manufacture of papers. He had shown purchases of packing material and colour and chemicals as on 31- 3-2005. Also, he had shown closing stock of colour and chemicals as on 31-3-2005, but no amount of packing material was shown in the closing stock. On being asked by the AO as to why the purchases of packing material purchased on the last day of the accounting period were not shown in the closing stock, it was submitted:

(1) that the packing material shown as purchased on last day was actually purchased in earlier months, which due to some computer error were posted on 31-3-2005; (2) that such packing material was consumed during the process; and

(3) that entire packing material remains after the end of year becomes obsolete and, therefore, it was not shown in the closing stock.

The Assessing Officer having noticed that there could be a possibility that some purchases made in the previous year could have been booked during the year, held that the book results were not acceptable. He, therefore, rejected the books of account of the assessee and made a certain addition to his income.

The assessee on the appeal before the CIT(A) had submitted that the packing material is used by him within a period of 7 to 15 days and the same is recognised as expenditure. Further, it was submitted that such practice is followed consistently.

Before the CIT(A), the assessee relied upon the decision of the ITAT, Chandigarh Bench in the case of ACIT v. Ram Sahai Wool Combers (P.) Ltd., (2002) 120 Taxman 84 (Mag.) in which it was held that the addition on account of closing stock cannot be made in case the assessee is consistently showing the purchases as expense.

Relying on the decision of the ITAT in the above case, the learned CIT(A) held that in respect of packing material, there was consistent practice of showing the entire purchase of packing material as consumed. Once this consistent practice was accepted, merely not including the stock of packing material in the closing stock could not be a reason for invoking section 145(3) or making the addition.

On second appeal by the Revenue —

Held:
In case the Assessing Officer felt that such purchases were entered on the last day of the accounting period, then he could have made an investigation to enquire about the genuineness of the purchases. However, he had not taken any step to verify as to whether such purchases were genuine or not. It was not the case of the Revenue that the purchases were not genuine. Moreover, in case the AO wanted to change the method of valuation of closing stock, then he was also required to consider opening stock on the same basis as he had taken for the closing stock. The assessee was following a consistent method of valuing the closing stock by including the packing material as consumed at the time of purchase.

Hence, the Assessing Officer had rejected the books of account on an improper ground. Further, the addition cannot be made simply on the basis of closing stock without considering the opening stock.

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DTAA between India and Georgia notified — Notification 4/2012, dated 6-1-2012.

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DTTA between India and Georgia shall be given effect from 1st April, 2012
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Central Processing of Returns Scheme, 2011 and related amendments/clarifications in relevant sections of the Act — Notification No. 2/2012 and Notification No. 3/2012, dated 4-1-2012.

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The CBDT has notified the aforementioned scheme which lays down the procedure for E-filing of the returns of income either digitally signed or not, filing of ITR V in the latter case, receipt and acknowledgement of such returns, procedure for filing revised return of income, cases wherein the returns would be considered invalid or defective and the remedy thereof, processing of the returns filed and rectification procedure for the same, adjustment of refund against the arrears of demand outstanding as per the records of the CPC, service of notice or communication, appellate proceedings, etc.
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Guidelines for Notification of affordable housing project u/s.35AD — Notification No. 1/2012, dated 2-1-2012.

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The Board vide the Income-tax (First Amendment) Rules, 2012 has Rule 11-0A prescribing guidelines for approval of affordable housing projects u/s.35AD. This includes Form No. 3CN in which the application needs to be made to Member (IT), Central Board of Direct Taxes, the manner in which the form would be approved and the objections/defects if any would be treated, the circumstances under which the application would be rejected, etc. It also lays down the conditions for eligibility of such projects. Conditions are as under:

  • The project shall have prior sanction of the competent authority empowered under the Scheme of Affordable Housing in Partnership framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India.

  • Date of commencement of the project should be on or after 1st April 2011 and date of completion should be within five years from the end of financial year in which the above authorities have sanctioned it.

  • The plot of land should not be less than one acre.

  • Of the total allocable rentable area of the project, affordable housing units for Economically Weaker Section (EWS), Lower Income Group (LIG) and Middle Income Group (MIG) should be as prescribed in the Rule.

Separate books need to be maintained for the project. Also the various terms like date of commencement, housing unit, etc. have been defined in the said rules.

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SRL Ranbaxy Ltd. v. Addl. CIT ITAT ‘G’ Bench, Delhi Before A. D. Jain (JM) and Shamim Yahya (AM) ITA Nos. 434/Del./2011 A.Y.: 2006-07. Decided on: 16-12-2011 Counsel for assessee/revenue: Ajay Vohra & Rohit Garg/Gajanand Meena

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Section 194H — Existence of principal-agency relationship is a sine qua non for invoking section 194H. Amount of discount retained by the collection centres is not ‘commission’ paid by the assessee to the collection centres and consequently section 194H does not apply to such amounts. Since assessee has not paid any amounts to the collection centres, provisions of section 194H could, not have been met.

Facts:
The assessee entered into non-exclusive agreements with domestic and international collection centres comprising of hospitals, nursing homes, clinics and other laboratories/entrepreneurs also. In accordance with the said agreements, the collection centres collected samples from patients/ customers seeking various laboratory testing services. The collection centres had their own premises, infrastructure, staff and necessary licences/ approvals. The collection centres acted as authorised collector for collecting samples and availed of the professional services of the assessee with respect to testing of samples and issue of necessary reports. The assessee charged a discounted price to the collection centres. The price to be charged by the collection centres to its patients/customers was fixed by them and not by the assessee. The assessee raised an invoice on the collection centre which was paid by the collection centre after deduction of TDS u/s.194J. The payment made by the collection centres to the assessee was not dependent on the collection centres receiving the payment from its patients/customers. The amount of discount given to collection centres was not claimed by the assessee as expenditure, but the amount charged to collection centres was shown as its income. The collection centres had flexibility and freedom to choose the laboratory to which samples should be sent for testing, unless the patient/ customer mandated that it be sent to the assessee.

While assessing the total income of the assessee u/s.143(3), the Assessing Officer (AO) held that a sum of Rs.16,80,66,667 being discount offered by the assessee to collection centres was liable for deduction of TDS u/s.194H/194C and since tax was not deducted at source, he disallowed this sum u/s.40(a)(ia).

Aggrieved the assessee preferred an appeal to the CIT(A) who restricted the disallowance from Rs.16,80,66,627 to Rs.11,78,24,030 but affirmed the disallowance, in principle, holding that the relationship between the assessee and the collection centres was that of principal and agent attracting the provisions of section 194H of the Act.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The element of agency is necessarily to be there in cases of all the services or transactions contemplated by section 194H. Where the dealing between the parties is not on a principal to agent basis, section 194H does not get attracted. The Tribunal held that the relationship between the assessee and the collection centres was not on a ‘principal & agent’ basis because (a) the centres issued their own bill to the customer/patient, collected the fees and issued the receipt; (b) the rates charged by the centres from its customers were not decided by the assessee; (c) there was no privity of contract between the assessee and the patients; (d) the amounts were not collected by the centres on behalf of the assessee; (e) the set-ups of the collection centres was entirely different from that of the assessee; (f) the collection centres were not under an obligation to forward the samples for testing only to the assessee, but could forward them to other laboratories as well unless mandated by the patients/customers; (g) the expenditure of the collection centres did not show any interlacing with that of the assessee and also the staff of the two was distinct and separate; (h) the collection centres had no authority to bind the assessee in any form.

Further, the disallowance u/s.40(a)(ia) r.w.s. 194H can be made only in respect of expenditure in the nature of commission paid/credited to the account of the recipient, or to any other account. In the present case, the assessee received the amount of the invoice raised, net of discount, from the collection centres. The Tribunal held that this discount, indisputably, cannot, in any manner, be said to be expenditure incurred by the assessee and so, section 40(a)(ia) of the Act is not attracted.

The appeal filed by the assessee was allowed by the Tribunal.

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DCIT v. Tide Water Oil Co. (India) Ltd. ITAT ‘A’ Bench, Kolkata Before Mahavir Singh (JM) and C. D. Rao (AM) ITA No. 2051/Kol./2010 A.Y.: 2003-04. Decided on: 20-1-2012 Counsel for revenue/assessee: D. R. Sindhal/A. K. Tulsiyan

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Section 80IB, Form No. 10CCB — By filing Form No. 10CCB in the course of reassessment proceedings (which form was not filed with the return of income, nor was it filed in the course of assessment proceedings) the assessee is not making any fresh claim for deduction u/s.80IB but merely furnishing the documents to substantiate its claim made during the course of assessment and even reassessment proceedings.

Facts:
For A.Y. 2003-04, the assessee filed its return of income by due date mentioned in section 139(3) of the Act. In the return of income filed the assessee claimed deduction u/s.80IB. The Assessing Officer (AO) assessed the total income u/s.143(3) to be Rs.7,31,51,920 as against returned income of Rs.5,16,02,964 by restricting deduction u/s.80IB on allocation of corporate expenses proportionately over all units. Subsequently, the AO noticed that the assessee had not filed audit report in Form No. 10CCB, hence is not eligible for deduction u/s.80IB and due to that the income has escaped assessment. The AO initiated proceedings u/s.147 r.w.s. 148 of the Act.

In the course of reassessment proceedings the assessee filed Form No. 10CCB and claimed that nonfiling of Form No. 10CCB is only a technical default and since original Form No. 10CCB was filed along with return of income u/s.148, technical default is removed and deduction u/s.80IB should be allowed. The AO noticed that the due date of filing return of income u/s.139(3) was 30-11-2003 and the assessment u/s.143(3) was completed on 31-3-2006, but the audit report filed along with return u/s.148 was dated 23-2-2007 and also balance sheet of Silvasa Unit, in respect of which deduction u/s.80IB was claimed, was audited on 23-2-2007, whereas the P & L Account of Silvasa unit was audited on 16-10- 2003. He held that there was severe non-compliance on the part of the assessee. He, accordingly, denied claim for deduction u/s.80IB. Aggrieved, the assessee preferred an appeal to the CIT(A).

The CIT(A) confirmed the jurisdiction, but he allowed the claim of the assessee u/s.80IB by holidng that submission of audit report in Form No. 10CCB is directory in nature and it is not mandatory and that submission of audit report even during reassessment proceedings is sufficient compliance u/s.80IB of the Act. The assessee did not challenge the decision of the CIT(A) confirming jurisdiction. Therefore, the assumption of jurisdiction became final.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the AO while framing assessment u/s.143(3) of the Act, originally, accepted the claim of deduction u/s.80IB of the Act despite the fact that there was no audit report in Form No. 10CCB i.e., that means that the AO was also under bona fide belief that the assessee is entitled to deduction u/s.80IB of the Act and he allowed the same. It was subsequently that he noticed that the assessee had not filed the audit report along with return of income, nor had it filed the same during the course of assessment proceedings. He, accordingly, recorded reasons and re-opened the assessment.

The Tribunal held that the assessee is not making any fresh claim for deduction u/s.80IB of the Act, but merely furnishing the documents to substantiate its claim made during the course of assessment and even reassessment proceedings. The Tribunal held that there is no infirmity in allowing the claim of deduction even though the assessee has filed audit report in Form No. 10CCB during the course of reassessment proceedings. It upheld the order of the CIT(A).

The Tribunal dismissed the appeal filed by the Revenue.

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Rachna S. Talreja v. DCIT ITAT ‘D’ Bench, Mumbai Before J. Sudhakar Reddy (AM) and V. Durga Rao (JM) ITA No. 2139/Mum./2010 A.Y.: 2006-07. Decided on: 28-12-2011 Counsel for assessee/revenue : G. P. Mehta/ C. G. K. Nair

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Section 143 — Assessment — Assessee during the course of assessment proceedings filed revised computation of income and claimed additional deduction — Whether AO justified in refusing to consider the revised income and insisting that only by filing revised return u/s.139(5) the additional deduction can be claimed — Held, No.

Facts:
The assessee had filed her return of income on 31-10-2006 declaring income of Rs.11.05 lakh. Subsequently, during the course of assessment proceedings, the assessee filed revised computation of income by claiming deduction on account of interest of Rs.2.1 lakh paid to a bank. The AO did not consider the revised computation of income filed by the assessee on the ground that there was no provision in the Act to file a revised computation of income. According to him, the assessee should file revised return of income as per section 139(5). On appeal, the CIT(A), relying on the Supreme Court decision in the case of Goetz India Ltd. (284 ITR 323) upheld the AO’s order.

Held:
The Tribunal noted that a similar issue had arisen before the Mumbai Tribunal in the case of Pradeep Kumar Harlalkar v. ACIT, (47 SOT 204) wherein the Tribunal following the decision in the case of Goetz India Ltd. observed that ‘power of the Appellate Authority to entertain claim in question was still there . . . . .’. In view thereof the Tribunal admitted the claim made by the assessee and restored the matter to the file of the AO with a direction to consider the revised computation of income filed by the assessee and decide the issue afresh.

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Baba Amarnath Educational Society v. CIT ACE Educational & Charitable Society v. CIT ITAT ‘B’ Bench, Chandigarh Before Sushma Chowla (JM) and Mehar Singh (AM) ITA Nos. 825 & 826/Chd./2011 Decided on: 29-12-2011 Counsel for assessees/revenue : P. N. Arora/ Jaishree Sharma

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Section 12A read with section 2(15) — Registration of charitable institution — Assessees engaged in educational activities — One of the objects permitted assessee to export computer and other similar activities — The said object was never acted upon by the assessee — Whether the CIT justified in rejecting registration application of the trust — Held, No.

Facts:
In the present two appeals, since the facts of the cases as well as the grounds of appeal were identical, the Tribunal decided to dispose of the same by a consolidated order.

The assessee-trusts were established primarily to promote education. The assessees’ application for registration u/s.12A was rejected by the CIT on the ground that their one of the object clauses provided for promotion of export of computers hardware/ software, telecommunication, internet, e-commerce and allied services. For the purpose the CIT relied on the decisions of the Supreme Court in the cases of Yogi Raj Charities Trust v. CIT, (103 ITR 777) and of East India Industries (Madras) Pvt. Ltd. (65 ITR 611).

Held:
From the detailed list of activities carried out by the two assessees, the Tribunal noted that they have carried out activities pertaining to achieving their charitable objects viz., imparting education. The object clause, which was objected to by the CIT and the ground on which the registration was rejected was never acted upon and it remained on paper. According to it, single inoperative object cannot eclipse the whole range of other charitable objects and actual conduct of charitable activities. According to it, it was not the letter or language of one single object clause which is conclusive, but it was the activity of the appellants, which was more relevant. Further, it observed that the first proviso to section 2(15) was not applicable to the first three objects enumerated in the definition. The said proviso only restricts the scope of the expression ‘ advancement of any other object of general public utility’. The proposition was also supported by the Board Circular No. 11/2008, dated 19-12-2008 which inter alia states “where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute charitable purpose, even if it incidentally involves the carrying on of commercial activities”.

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Hansraj Mathuradas v. ITO ITAT ‘H’ Bench, Mumbai Before R. V. Easwar (President) and P. M. Jagtap (AM) ITA No. 2397/Mum./2010 A.Y.: 2006-07. Decided on: 16-9-2011 Counsel for assessee/revenue : Mehul Shah/ A. G. Nayak

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Section 37(1) — Business expenditure — Whether the expenditure, which are subjected to FBT, can part thereof be disallowed on the ground that the same are not for the purpose of the business — Held, No.

Facts:
The assessee is a partnership firm engaged in the business of providing services as insurance surveyor and loss assessor. In one of the grounds before the Tribunal, the assesse had challenged disallowance made by the AO and confirmed by the CIT (Appeals), conveyance and telephone expenses of Rs.4,818 and Rs.17,224 out of Rs. 24,088 and Rs.86,120, respectively. In the absence of any record maintained by the assessee in the form of log book or call register to establish that the said expenses were wholly and exclusively for the purpose of its business, the same were disallowed by the AO to the extent of 20%.

Held:
The Tribunal referred to the CBDT Circular No. 8/2005, dated 29-8-2005 and opined that once fringe benefit tax is levied on expenses incurred, it follows that the same are treated as fringe benefits provided by the assessee as employer to its employees and the same have to be appropriately allowed as expenses incurred wholly and exclusively incurred by the assessee for the purpose of its business.

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Dy. Director of Income tax vs. G. K. R. Charities Income tax Appellate Tribunal “G” Bench, Mumbai. Before G. E. Veerabhadrappa (President) and Amit Shukla (J. M.) ITA No. 8210/Mum /2010 Asst. Year 2007-08. Decided on 10.08.2012. Counsels for Revenue/Assessee: Pavan Ved/A. H. Dalal

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Section 11 – Charitable institution – (1) Claim for depreciation on fixed assets is treated as application of income; (2) Receipt of loan in violation of the Bombay Public Trust Act does not invite denial of exemption u/s. 11; (3) Repayment of loan originally taken for the objects of the trust will amount to an application of income.

Facts:
The assessee is a charitable trust registered with the Charity Commissioner as well as u/s 12A of the Act. In the assessment order passed for the year under appeal, the AO held as under:

1. In respect of depreciation of Rs. 19.48 lakh claimed: Since cost of fixed assets had already been allowed as application of income in the earlier years, relying on the decision of the Supreme Court in the case of Escorts Ltd. & Anr. Vs. Union of India (199 ITR 43), the claim for depreciation was denied;

2. Re: Treatment of repayment of loan of Rs. 2.92 crore as the application of income: Since the loan when it was raised was not declared/treated as income in the year of receipt, relying on the decision of the Supreme Court in the case of Escorts Ltd. & Anr. (supra), the assessee’s claim would result into double deduction, hence not permissible;

3. The above loan was taken without the Charity Commissioner’s permission, thus in violation of the provisions of section 36A(3) of the Bombay Public Trust Act. Therefore, relying on the Bombay high court decision in the case of CIT vs. Prithvi Trust (124 ITR 488), he forfeited the exemption granted u/s. 11.

Being aggrieved by the order of the CIT(A), who held in favour of the assessee, the revenue filed appeal before the tribunal. Before the tribunal, the revenue justified the order passed by the AO and further relied on the decision of the Cochin bench of tribunal in the case of DDIT Vs. Adi Shankara Trust (ITA no. 96/Coch/2009 dated 16-06-2011) and on the Cochin tribunal decision in the case of Lissie Medical Institution (2010 TIOL 644). According to it, the later decision was also affirmed by the Kerala high court. Further, it was contended that the decision of the Bombay high court in CIT vs. Institute of Banking Personnel Selection (264 ITR 110) relates prior to insertion of section 14A of the Act without considering the judgment of Escorts Ltd.

Held:
As regards the denial of exemption u/s. 11 on the ground that loan taken by the assessee in earlier years from managing trustee was in violation of the Bombay Public Trust Act, the tribunal held that under the Act, once the CIT grants registration u/s. 12AA, looking to the objects of the trust, the same cannot be withdrawn until and unless there was a violation of provisions of section 13 or the registration is cancelled u/s. 12AA(3). The tribunal further observed that once the loan taken was duly shown in the Accounts, there was no requirement under the Act that the provisions of other Acts have to be complied with. According to it, the Bombay high court decision in the case of Prithvi Trust was on a different ground, hence, not applicable to the case of the assessee. According to it, the decision of the Supreme court in the case of ACIT vs. Surat City Gymkhana (300 ITR 214) and Mumbai tribunal decision in the case of ITO (Exemption) vs. Bombay Stock Exchange (ITA No. 5551/Mum/2009 dt. 22. 08. 2006) also support the case of the assessee.

As regards the allowability of depreciation – the tribunal preferred to follow the decision of the Bombay high court in the case of Institute of Banking Personnel Selection. It further noted that on the similar issue, the Punjab & Haryana high court in the case CIT vs. Market Committee, Pipli (330 ITR 16) after considering the decision of the Supreme Court in the case of Escorts Ltd., held in favour of the assessee. Also, taking note of the Mumbai tribunal decision in the case of ITO vs. Parmeshwaridevi Gordhandas Garodia (ITA No. 4108/ Mum/2010 dated 10-08-2011), the tribunal held that allowing of depreciation is application of income and it does not amount to double deduction. Hence, the order of the CIT (A) was upheld on this ground also.

As regards the claim for treating repayment of loan as the application of income, the tribunal agreed with the order of the CIT (A) and relying on the CBDT Circular No. 100 dated 24-01-1973 and the decision of the Gujarat high court in the case CIT vs. Shri Plot Swetamber Murti Pujak Jain Mandal (211 ITR 293)and of the Rajasthan high court in the case of Maharana of Mewar Charitable Foundation (164 ITR 439), held that such repayment of loan originally taken to fulfill one of the objects of the trust will amount to an application of income for charitable and religious purposes.

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(2012) 75 DTR (Chennai)(Trib) 113 Smt. V.A. Tharabai vs. DCIT A.Y.: 2007-08 Dated: 12-1-2012

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54F – Inability to construct the residential house within three years due to restraint order by competent Court will not disentitle the assessee from the exemption.

Facts:
The assessee sold her capital asset resulting in long-term capital gains which was claimed as exempt as the the assessee was proposing to construct a residential house property out of the sale consideration. The exemption was claimed u/s. 54F. The assessee sold the property on 8th June, 2006 and immediately thereafter, on 5th July, 2006, purchased a landed property to construct a house. The purchase price paid for the land was more than the long-term capital gains arisen in the hands of the assessee on sale of her capital asset. But the assessee could not construct the residential house in the land purchased by her as proposed, due to injunction granted to the owners by the Civil Court. The expiry of the threeyear period from the date of sale of the property was on 8th June, 2009. The matter went upto the Hon’ble Supreme Court, which was dismissed by the Hon’ble Supreme Court and all proceedings were dismissed on 13th September 2011.

Held:
The facts demonstrate that the assessee had arranged the transaction in such a bona fide manner so as to claim the exemption available u/s. 54F. It is after the purchase of the property that hell broke loose against the assessee in the form of civil litigation. The litigation started on 25th February, 2008 and ended only on 19th September, 2011. By that time, the available period of three years to construct the house was already over, on 8th June, 2009. It is an accepted principle of jurisprudence that law never dictates a person to perform a duty that is impossible to perform. In the present case, it was impossible for the assessee to construct the residential house within the stipulated period of three years.

A dominant factor to be seen in the present case is that the entire consideration received by the assessee on sale of her old property has been utilised for the purchase of the new property. The conduct of the assessee unequivocally demonstrates that the assessee was in fact proceeding to construct a residential house, based on which the assessee had claimed exemption u/s. 54F. It is true that the assessee could not construct the house. In the special facts and circumstances of the present case, therefore, it is necessary to hold that the amount utilised by the assessee to purchase the land was in fact utilised for acquiring/constructing a residential house.

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Aplicability of Explanation to Section 73

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Section 73 of the Income-tax Act prohibits set-off of losses of speculation business except against profits and gains of another speculation business. The Explanation to section 73 extends the meaning of speculation business for the purposes of such set-off, by deeming any part of the business of a company which consists in the purchase and sale of shares of other companies to be a speculation business.

There are however two exceptions to this deeming fiction — one is for 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’ and the second is for a company the principal business of which is the business of banking or the granting of loans and advances.

The Explanation to section 73 reads as under:

“Where any part of the business of a company (other than 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 a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carried on a speculation business to the extent to which the business consists of the purchase and sale of such shares.”

Two issues have arisen before the Courts, in the context of the first fiction, above, as to how the composition of the gross total income is to be looked at for the purpose of considering the applicability of this Explanation. One issue has been as to how negative income (loss) has to be considered — whether in absolute terms ignoring the negative sign, or to be taken as lower than a positive figure, for determining the majority composition of the gross total income. The second issue has arisen as to whether, for considering the applicability of this Explanation, the deemed speculation business loss is to be set off first against the other business profits, and only the net business income after such set-off is to be considered as ‘included’ in the gross total income and that it is such net business income, so included, that is to be compared with the income from the other heads of income to determine the composition of the gross total income. Naturally, the income under the other heads of income shall gain a higher share in composition of the gross total income where the business income is first set off against the losses of the deemed speculation business.

Considering the second issue, the Calcutta High Court has taken the view that for considering the applicability of the Explanation, the share trading loss is not to be set off against other business profits by adopting the ratio of its earlier decisions in the context of the first issue, the Bombay High Court has held that only the net business income after setting off the share trading loss against other business profits is to be considered as included in the gross total income.

Park View Properties’ case
The issue first came up before the Calcutta High Court in the case of CIT v. Park View Properties P. Ltd., 261 ITR 473.

In this case, the assessee-company had incurred a loss of Rs.8,98,799 in share trading, and had other business profits of Rs.12,32,469, the net business profits being Rs.3,33,670. The assessee had income from other sources and dividend income (which was taxable at that point of time) of Rs.5,73,701. The gross total income, determined after set-off of the share trading loss, was therefore Rs.9,07,371.

The Assessing Officer denied the benefit of the exception to the Explanation to section 73, denying set-off of share dealing loss on the ground that such losses were to be deemed as the loss of a speculation business, on application of the said Explanation. The Commissioner (Appeals) allowed the appeal of the assessee, holding that the main source of income of the assessee consisted of income from interest on securities and income from house property. The Tribunal upheld the order of the Commissioner (Appeals), allowing set-off of the share trading business loss without treating the same as a speculation loss.

The Calcutta High Court noted that the Tribunal had allowed the benefit of the exception to the Explanation to section 73 by setting off the share trading loss against the profits of other business for the purposes of determining whether the said Explanation was applicable or not. The Court did not approve the approach of the Tribunal. According to the Calcutta High Court, in order to ascertain whether an assessee would be covered by the Explanation to section 73, it had to be first examined whether the assessee came within the exception provided to the Explanation. This, according to the Court, was to be done by taking into consideration only the business profits, excluding the share trading loss, as could be gathered from the expression ‘gross total income consists mainly of income chargeable under the heads . . . . .’ used in the Explanation that was clear and unambiguous, and reflected the intention of the Legislature.

The Calcutta High Court noted that while computing the gross total income, loss was also to be taken into account, since loss was treated as a negative profit. The Calcutta High Court noted that in the case of Eastern Aviation and Industries Ltd. v. CIT, 208 ITR 1023, the Calcutta High Court had held that the explanation to section 73 could be applied before the principle of deduction was applied, namely, after computing the gross total income.

Applying this principle, the Court observed that if the loss in the share dealing account of Rs.8,98,799 was treated as a negative profit, then definitely the income from other sources and dividend income of Rs.5,73,701 was lower. Therefore, according to the Calcutta High Court, the main income consisted of the business of share trading, which was the main object of the assessee. The Calcutta High Court expressed the view that the business income computed after setting of the loss in share trading of Rs.3,33,670 did not represent the business income, since it was arrived at after applying the benefit of the explanation to section 73, namely, setting off the speculative income.

The Calcutta High Court therefore held that the case did not fall within the exception in the explanation to section 73, and the loss incurred on share trading was to be treated as speculation loss and could not be set off against other income.

Darshan Securities’ case
The issue again recently came up before the Bombay High Court in the case of CIT v. Darshan Securities Pvt. Ltd., (ITA No. 2886 of 2009, dated 2-2-2012 — available on www. itatonline.org).

In this case, the assessee had an income from service charges of Rs.2,25,04,588, and share trading loss of Rs.2,23,32,127, besides a taxable dividend income of Rs.4,79,325. The assessee claimed that in computing the gross total income for the purposes of the Explanation to section 73, the share trading loss had to be first adjusted against the income from service charges.

The Assessing Officer disallowed the set-off of the share trading loss, holding it to be a speculation loss. The Commissioner (Appeals) accepted the assessee’s claim that the case of the company was covered by the first exception to the said Explanation to section 73, as did the Tribunal.

On behalf of the Revenue, it was argued before the Bombay High Court that in computing the gross total income for the purposes of the Explanation to section 73, income under the heads of profits and gains of business or profession must be ignored. Alternatively, it was urged that where the income from business included a loss in trading of shares, such loss should not be allowed to be set off against income from any other source under the head of profits and gains of business or profession.

The Bombay High Court analysed the provisions of section 73 and the Explanation thereto. It noted that the Explanation to section 73 was a deeming fiction applying only to a company and extending only for the purposes of that section. It noted that the bracketed portion of the Explanation carved out an exception.

The Bombay High Court noted that ordinarily income which arose from one source, which fell under the head of profits and gains of business or profession could be set off against the loss, which arose from another source under the same head. Section 73(1) however set up a bar to setting off a loss which arose in respect of a speculation business against the profits and gains of any other business. Consequently, such speculation loss could be set off only against the profits and gains of another speculation business.

According to the Bombay High Court, the explanation provided a deeming fiction of when a company is deemed to be carrying on a speculation business. If the Department’s submissions were accepted, it would lead to an incongruous situation, where in determining as to whether a company was carrying on a speculation business within the meaning of the explanation, section 73(1) would be applied in the first instance. According to the Bombay High Court, this would not be permissible as a matter of statutory interpretation, as the explanation was designed to define a situation where the company was deemed to carry on speculation business. It is only thereafter that section 73(1) can apply. Applying the provisions of section 73(1) to determine whether a company was carrying on speculation business would reverse the order of application, which was impermissible and not contemplated by Parliament.

The Bombay High Court observed that in order to determine whether the exception carved out by the Explanation applied, the Legislature had first mandated a computation of the gross total income. Further, the words ‘consists mainly’ were indicative of the fact that the Legislature had in its contemplation that the gross total income consisted predominantly of income from the 4 heads referred to therein. Obviously, according to the Bombay High Court, in computing the gross total income, the normal provisions of the Act must be applied, and it was only thereafter that it had to be determined as to whether the gross total income so computed consisted mainly of income which was chargeable under the heads referred to in the Explanation.

The Bombay High Court followed the ratio of its earlier decisions in the cases of CIT v. Hero Textiles and Trading Ltd. , (ITA No. 296 of 2001 dated 29-1-2008) and CIT v. Maansi Trading Pvt. Ltd., (ITA No. 47 for 2001 dated 29-1-2008). It also noted that it had dismissed Notice of Motion No. 1921 of 2007 in ITA (Lodging) No. 852 of 2007 for condonation of delay against the Tribunal Special Bench decision in the case of Concord Commercial Pvt. Ltd., which decision had been followed by the Tribunal in this case.

The Bombay High Court therefore held that since the net business income of Rs.1,72,461 was less than the dividend income of Rs.4,79,325, the assessee was covered by the exception carved out in the Explanation to section 73, and would not be deemed to be carrying on a speculation business for the purposes of section 73(1).


Observations

The Calcutta High Court seems to have placed reliance on its decision in the case of Eastern Aviation and Industries Ltd. (supra) in arriving at its conclusion. In particular, it followed the view taken in that case that negative profits are also income and are to be considered in the absolute sense (ignoring the positive or negative signs) for the purpose of the exception carved out in explanation to section 73(1). The Calcutta High Court, however, failed to appreciate that Eastern Aviation’s case dealt with a situation where there was a negative speculation income and negative share trading income, but no other profits from any other business. The question of set-off of share trading loss against any other business profit, therefore, did not arise for consideration in that case. In that case, the gross total income itself also was a negative figure. The reliance placed on the ratio of that decision, therefore, seems to have been misplaced.

Even assuming that the ratio of Eastern Aviation’s case that even negative incomes should be considered in the absolute sense were correct, what needs to be considered is the net position of the income under each head of income, and not the net position of each source of income. In Darshan Securities’ case, the net position of the income under the head business or profession was a positive figure, which was lower than the income under the head ‘Income from Other Sources’. Therefore, even applying Eastern Aviation’s case, the ratio of Darshan Securities’ case seems justified.

As rightly observed by the Bombay High Court, one cannot start with a presumption that the explanation applies and that the loss is a loss from speculation business for determining whether the explanation applies. One would therefore have to compute the gross total income without applying the explanation for finding out the applicability of the explanation. In doing so, one would have to apply the normal provisions for computation of gross total income ignoring the explanation to section 73, i.e., by setting off the share trading loss against other business profits, which would normally have been the position in the absence of the explanation. It is only then if it is determined that the explanation applies, as the case falls outside the exception to the explanation, that the prohibition on set-off of the loss would apply.

The view taken by the Bombay High Court that the share trading loss is to be set off against other business income for determining whether explanation to section 73 applies, is therefore the better view of the matter.

War Against Offshore Tax Evasion — Will Tax Information Exchange Agreements Work?

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In the recent crackdown against errant taxpayers, the Income-tax Department has initiated action against many Indians who had stashed their wealth in the HSBC bank in Geneva. This is similar to the action it had taken earlier against the Indian account holders in LGT Bank in Lichtenstein. Similarly, proceedings are also expected to be initiated against many tax evaders on the basis of more than 10,000 pieces of information reportedly received from the different countries. This news may be comforting to the majority of taxpayers who honestly pay their taxes and believe that the Government ought to severely punish tax evaders.

This development gives hope that such trickle would turn into a flow of information to bring back Indian black money stashed abroad after the Indian Government has entered into Tax Information Exchange Agreements (TIEAs) with the tax havens. India has so far signed TIEAs with Bermuda, Bahamas, Isle of Man, British Virgin Island, Cayman Island, Liberia, and Jersey and more TIEAs are under negotiation. India is also seeking to amend its 75 existing Double Taxation Agreements with the countries to provide for effective exchange of tax information.

However, sceptics feel that Tax Information Exchange Agreements are unlikely to make any meaningful contribution in fight against tax evasion, more particularly against offshore tax evasion. Their scepticism is because of several reasons. However, before discussing their views it may be necessary to go through a bit of background to understand the issues involved in TIEAs.

Background
The global financial crisis triggered TIEA drive. One of the fallout of the global financial crisis was that of growing realisation among the governments on the menace of tax evasion, particularly offshore tax evasion, which has resulted in massive revenue loss hitting developing countries harder, which need more funds for their development and poverty eradication. Various agencies and organisations have estimated the magnitude of the problem. For example, a non-profit organisation, ‘Global Financial Integrity’ in its report published in January 2009, has estimated that the developing countries lost between $ 858 billion to $ 1.06 trillion in illicit financial outflows in 2006. ‘Oxfam’, another non-profit organisation in a study carried out in March 2009 found that at least $ 6.2 trillion wealth of the developing countries is held offshore, depriving them annual tax receipts between $ 64-124 billion. Therefore, considering the sheer size of the revenue loss, the governments are looking to collect tax from the funds deposited in the offshore accounts, on which tax was not paid.

Role of a tax haven

Critical role played by tax havens in offshore tax evasion is well known, which often ignore and many a time aid tax evasion taking place in their jurisdiction. Tax evaders find tax havens attractive because many tax havens have developed ‘liberal’ systems, such as simple registration of a company with bearer shares, minimum capitalisation, nominal reporting requirements, provide ease of funds transfer and offer possibility of keeping ownership anonymous. Such rules make tax evasion easier. More importantly, tax havens are attractive to tax evaders because of lack of transparency and little exchange of information apart from the fact that it levies nominal tax or no tax on them. On the other hand, for a tax haven, on-going financial activity in its jurisdiction is beneficial for its survival and prosperity. It is win-win situation for both: the tax haven and the tax evaders.

OECD response
Tax administrations cannot function beyond their country’s jurisdiction, although globalisation of economy and growing international business require tax administrations to operate internationally. Tax administrations find it difficult to detect tax evasion involving tax haven because of the lack of adequate information on such transactions. Therefore, ‘Organisation of Economic Cooperation and Development’ (OECD) decided to tackle two critical elements — which make a jurisdiction a tax haven — lack of transparency and lack of or little exchange of information. The OECD, strongly supported by the G20 Nations, has aggressively promoted international co-operation in tax matters through exchange of information by promoting TIEAs with tax havens.

The OECD started its campaign in 1998 with the publication of the report ‘Harmful Tax Competition: Emerging Global Issue’ emphasising the need for effective exchange of information. Subsequently, the OECD developed a model ‘Tax Information Exchange Agreement’ which is largely followed by all nations. The OECD also devised a compliance standard for the tax havens to ensure that each of them sign and effectively implement TIEAs. This compliance standard required each tax haven to sign TIEAs with minimum 12 nations other than tax havens. As standards for monitoring their compliance, the OECD also calls for willingness on part of the tax haven to continue to sign agreements even after reaching threshold and insists on effective implementation of the TIEAs.

The ‘Global Forum’ created by the OECD member countries has devised a system to monitor jurisdiction’s standards on transparency and exchange of tax information by carrying out phase-wise peer reviews by other jurisdictions. Peer review assesses jurisdiction’s legal and regulatory framework on criteria of 10 key elements in 1st Phase of review and in Phase 2 review, examines effective implementation of exchange of tax information after a jurisdiction removes deficiencies identified in its legal and regulatory framework. The peer reviews assess the availability of ownership, accounting and bank information and authorities’ power to access as well as capacity to deliver information along with rights and safeguards and provisions of confidentiality.

So far various countries world over have signed more than 700 TIEAs. The tax havens have signed these agreements to come out of the OECD’s ‘grey list’ to avoid possible sanctions imposed on them if they fail to comply with the stipulated standard of signing minimum 12 TIEAs with the countries other than tax havens.

TIEA
TIEAs provide for exchange of requested information even in the cases in which the conduct of the taxpayer does not constitute crime in the jurisdiction of the requested country (Tax haven). The country is also required to provide requested information which is not in its possession by gathering it. Most importantly, the TIEAs provide for obtaining information from the banks and the financial institutions regarding ownership of companies, partnerships, trusts including ownership information of the persons in the ownership chain and also information on the settlers, trustees, and beneficiaries. This is one of the most important provisions of the agreement, which make it possible, at least theoretically, to unravel ultimate beneficiaries of the tax haven bank accounts. It is too well known that beneficiaries of the tax haven bank accounts are often shielded by a deliberately created complex ownership structure consisting of a maze of entities. It is also important to note that TIEA does not place any restrictions on information exchange caused by the bank secrecy or domestic tax interest requirements.

Why TIEAs cannot be effective

Despite having the well-designed provisions in the TIEA and seriousness of the OECD and governments in dealing with tax evasion, many professionals believe that the TIEAs will not work. There are various reasons for this negative sentiment.

Firstly, there is a conflict of interests among tax haven and non-tax haven countries. Secrecy jurisdictions are hardly interested in sharing information about their customers.

In many jurisdictions, ownership and beneficial ownership information is protected by domestic law.

From the OECD’s Progress Report Tax Transparency of 2011, it becomes clear that making legal and structural changes in secrecy jurisdictions is going to be a time-consuming affair. So far, out of total 81 peer reviews launched, Global Forum has adopted 59 reports. Out of the 59 reviews completed, 42 are Phase 1 reviews and 17 are combined reviews (reviews of both the Phases conducted simultaneously). Nine Jurisdictions will move to Phase 2 after they fix the deficiencies pointed out in the peer reviews. Thus, jurisdictions have to do considerable work to enable them to exchange tax information effectively. Moreover, one of the conclusions of the Report is that the information exchange is too slow.

Secondly, there is no automatic exchange of information. The TIEA requires that for getting information on a taxpayer, the applicant country has to provide specific information of the taxpayer such as (a) the identity of the taxpayer under examination or investigation; (b) the period for which information is requested; (c) the nature of the information requested and the tax purpose for which the information is sought; (d) grounds for believing that the requested information is present in the requested country or is in the possession of a person within the jurisdiction of the requested country; (e) to the extent known, the name and address of any person believed to be in possession of the requested information; (f) a statement that the request is in conformity with the law and administrative practices of the applicant country, that if the requested information was within the jurisdiction of the applicant country, then the applicant country would be able to obtain the information under the laws of the applicant country or in the normal course of administrative practice and that it is in conformity with this agreement; (g) a statement that the applicant country has pursued all means available in its own territory to obtain the information, except which would give rise to dispro-portionate difficulties. Thus, very high amount of information is required to be furnished for making a request meaning that the tax administration should already have substantial evidence against the taxpayer rather than gathering evidence against a taxpayer to make a case of tax evasion. Very often, furnishing such information before the completion of investigation is like putting a cart before the horse.

Thirdly, a taxpayer can move his deposits from the bank account of one tax haven to another before developing of an enquiry making tax administration’s efforts futile. Lastly, experiences of some of the countries indicate little usefulness of TIEAs as they have sparingly used it for the information exchange.

It may be recalled here that the information on the basis of which the Income-tax Department has recently initiated action was not received under the TIEA. The information on Indian account holders in LGT bank Lichtenstein was provided by Germany, which in turn had bought it from the disgruntled employee of the Bank, whereas France reportedly passed on the information on the account holders of the HSBC Bank, Geneva.

Responses by other countries

Probably considering the limitations of the TIEA, some of the countries have adopted multi-pronged strategy to counter offshore tax evasion. On the one hand, US, Germany and Australia had offered Voluntary Income Disclosure Scheme and on the other, some of them have enacted specific legislations to deal with it.

The US has strengthened domestic legislation by enacting specific laws to counter offshore tax evasion by creating additional sources of information gathering.

The US introduced ‘Hiring Incentives to Restore Employment Act’ (HIRE) providing tax incentives for hiring and retaining unemployed workers also imposes 30% withholding on payment made to foreign financial institution, unless such institution agrees to adhere to certain reporting requirements with respect to US account holders. It has also enacted legislation — FATCA (the Foreign Account Tax Compliance Act) which is to be implemented from 2013 requiring non-US banks to report the accounts of US clients to the US Internal Revenue Service. There is also a proposal in the US for enacting additional law, ‘Stop Tax Haven Abuse Act’ strengthening FATCA and plugging specific offshore tax evasion schemes. Similarly, UK’s new law introduced in 2010 provides for higher penalty at 200% on offshore tax evasion.

In addition, many countries have stepped up their counter offensive by allocating more work force to investigate the cases of offshore tax evasion. It is reported that the IRS of the US had placed more than 1400 agents on a project to investigate the merchants who were directly depositing credit card sales in their offshore accounts.

Conclusion

The real challenge to willingness to exchange of information comes from the difference in the tax laws and law on confidentiality along with conflicting interests among countries. Therefore, there is a need to take additional measures along with the TIEAs. However, the measures for information gathering which may work for the countries such as the US, Germany or the UK because of their political and economic clout may not work for India. India will have to supplement its measures — legislative as well as administrative — for information gathering in its battle against tax evasion leveraging at the international level its position of a giant emerging market.

On a positive note, the biggest contribution of the TIEAs is providing legal instrument in an environment against tax evasion. With the result, tax evaders are now increasingly realising that there will be no safer havens in near future for their tax evaded funds, which is the fundamental requirement in a fight against tax evasion.

Guidelines for setting up an Infrastructure Debt Fund u/s.10(47) — Notification No. 16/2012, dated 30-4-2012.

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A new Rule 2F has been inserted vide Income-tax (Fifth Amendment) Rules, 2012 prescribing guidelines and conditions for setting up an infrastructure debt fund for the purpose of claiming exemption u/s.10(47) of the Act. These conditions inter alia provide as under:

A new Rule 2F has been inserted vide Income-tax (Fifth Amendment) Rules, 2012 prescribing guidelines and conditions for setting up an infrastructure debt fund for the purpose of claiming exemption u/s.10(47) of the Act. These conditions inter alia provide as under:
(a) The fund shall be set up as a NBFC as per the Guidelines issued by RBI.
(b) The fund shall invest in Public Private infrastructure projects as prescribed.
(c) The fund shall issue Rupee denominated Bonds as well as Foreign Currency Bonds in accordance with guidelines issued by RBI and regulations under FEMA.
(d) Restrictions are imposed on investment by the fund as well as lock-in period for the investor.

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Section 54EC — Exemption from payment of capital gains tax provided the amount is invested within six months from the date of transfer — Whether the investment made within six months from the date of the receipt of consideration is eligible — On the facts held yes.

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Mahesh Nemichandra v. ITO
ITAT ‘A’ Bench, Pune
Before Shailendra Kumar Yadav (JM) and
G. S. Pannu (AM)
iTa Nos. 594 to 597/PN/10
A.Y.: 2006-07. Decided on: 29-3-2012
Counsel for assessee/revenue : S. U. Pathak/Ann Kapthuama

Section 54EC — exemption from payment of capital gains tax provided the amount is invested within six months from the date of transfer — Whether the investment made within six months from the date of the receipt of consideration is eligible — on the facts held yes.


Facts:

The assessee jointly owned with three others land at Pune. The
assessee entered into a joint venture development agreement with a
builder on 12-7- 2005, in which the consideration was fixed at Rs.2.50
crore. This document was registered later by way of confirmation deed
dated 23-1-2007. Thereafter, a correction deed was entered into on
2-7-2007 in which the sale consideration was increased to Rs.4.90 crore.
Out of the total sale consideration at Rs.4.90 crore, the assessee’s
share was 1/4th i.e., Rs.1.22 crore. On these facts, the Assessing
Officer inferred that the date of joint venture agreement, i.e.,
12-7-2005 was the date of transfer for the capital asset. Further the
claim for relief u/s.54EC on account of investments of Rs.12.5 lac and
Rs.37.5 lac made on 3-8-2007 and 27-10-2007 was denied. The assessee
objected to taxation of the capital gain in A.Y. 2006-07, and contended
that it should be considered in the A.Y. 2007-08 since the joint venture
agreement was registered on 23-1-2007 and only after which it was acted
upon and implemented. On appeal the CIT(A) confirmed the order of the
AO. Before the Tribunal the Revenue supported the orders of the
authorities below by pointing out that the Bombay High Court in the case
of Chaturbhuj Dwarkadas Kapadia v. CIT, (260 ITR 491) (Bom.) has noted
that after insertion of clauses (v) and (vi) in section 2(47) of the
Act, the expression ‘transfer’ includes any transaction which allowed
possession to be taken/retained in part performance of a contract of the
nature referred to in section 53A of the Transfer of Property Act,
1882. Therefore, it contended that in the case of the assessee, as he
had granted possession with an irrevocable permission for development of
the land in favour of the builder, the date of development agreement
was the date of transfer for the purpose of ascertaining the year of
taxability of capital gains.

Held:

The Tribunal noted that under the
agreement dated 12-7-2005 the builder was given the possession of the
property for development. This according to it, fulfils the requirements
of section 2(47)(v) as understood and explained by the Mumbai High
Court in the case of Chaturbhuj Dwarkadas Kapadia. Accordingly, it held
that the ‘transfer’ in terms of section 2(47)(v), had taken place during
A.Y. 2006-07. As regards the issue relating to granting of exemption
u/s.54EC of the Act in respect of the investment Rs.12.5 lakh and
Rs.37.5 lakh made on 3-8-2007 and 27-10-2007, respectively, in eligible
bonds, the Tribunal noted that the assessee had received the aforestated
consideration on subsequent dates, namely, 12-2-2007, 14-5-2007,
19-6-2007 and 3-7-2007. The Tribunal referred to the CBDT Circular No.
791 issued in the context of the provisions of sections 54EA, 54EB and
54EC. Under the said provisions the assessee is similarly granted
exemption from capital gains tax arising from the conversion of capital
assets into stock-in-trade provided the assessee makes investment in the
specified bonds within six months of the date of conversion.

The CBDT
in consultation with the Ministry of Law decided that the period of six
months for making investment in specified assets for the purpose of
sections 54EA, 54EB and 54EC of the Act should be taken from the date
such stockin- trade is sold or otherwise transferred in terms of section
45(2) of the Act, though the taxability of capital gain was on the
basis of ‘transfer’ as understood in section 45(2) of the Act. According
to the Tribunal, the interpretation placed by the CBDT in the
above-referred Circular to the condition of making investment within six
months from the date of transfer in section 54EC would support the
claim of the assessee for exemption from capital gain with respect to
the impugned sum of Rs.50 lakh invested in specified assets on 3-8- 2007
and 27-10-2007.

Accordingly, the contention of the assessee on this
ground was accepted and exemption u/s.54EC as claimed by the assessee
was granted.

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Sections 37, 40(a)(ii) — Taxes levied in foreign countries whether on profit or gain or otherwise are deductible u/s.37 — Payment of such taxes does not amount to application of income.

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Mastek Ltd. v. DCIT
ITAT ‘A’ Bench, Ahmedabad
Before D. K. Tyagi (JM) and
a. Mohan alankamony (aM)
iTa Nos. 1821/ahd./2005, 2274/ahd./2006 and
2042/ahd./2007
A.Ys.: 2003-04 to 2004-05
Decided on: 11-5-2012
Counsel for assessee/revenue:
S. N. Soparkar/Kartar Singh

Sections 37, 40(a)(ii) — Taxes levied in foreign countries whether on profit or gain or otherwise are deductible u/s.37 — Payment of such taxes does not amount to application of income.


Facts:

The assessee had, in its accounts, debited Rs.42,57,297 on account of taxes paid in Belgium and claimed this amount as a deduction u/s.37 on the ground that all taxes and rates were allowable irrespective of the place where they are levied i.e., whether in India or elsewhere. The exception to this being Indian income-tax which is not allowable by virtue of provisions of section 40(a)(ii). The Assessing Officer (AO) held that the term ‘tax’ u/s.40(a)(ii) is not limited to tax levied under the Indian Incometax Act, but is wide enough to include all taxes which are levied on profits of a business. He disallowed the entire amount of Rs.42,57,297 charged to P & L Account. Aggrieved the assessee preferred an appeal to the CIT(A) who held that the amount is allowable u/s.37 of the Act. He allowed this ground of the appeal. Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:

Taxes levied in foreign countries whether on profits or gains or otherwise are deductible u/s.37(1). Such taxes are not hit by section 40(a)(ii). It is also not application of income. The Tribunal noted that in the case of South East Asia Shipping Co. (ITA No. 123 of 1976) the Mumbai Bench of ITAT has held that tax levied by different countries is not a tax on profits but a necessary condition precedent to the earning of profits. In this case reference application of the Revenue was rejected by the Tribunal which has been upheld by the Bombay High Court in ITA No. 123 of 1976. The Tribunal also noted that in the case of Tata Sons Ltd. (ITA No. 89 of 1989) the Department’s reference applications u/s.256(1) and 256(2) were rejected and the issue has reached finality. The Tribunal upheld the order passed by the CIT(A) on this ground. The Tribunal decided this ground in favour of the assessee.

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Section 54F — Exemption u/s.54F can be claimed in respect of deemed long-term capital gain u/s.54F(3) arising on transfer of new house if net consideration thereof is again invested in purchase of a residential house within a period of two years.

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(2012) 21 taxmann.com 385 (Chennai)
aCiT v. Sultana Nazir
A.Y.: 2007-08. Dated: 23-3-2012

Section 54F — exemption u/s.54F can be claimed in respect of deemed long-term capital gain u/s.54F(3) arising on transfer of new house if net consideration thereof is again invested in purchase of a residential house within a period of two years.


Facts:

On 5-5-2005 the assessee sold land held by him as long-term capital asset, for a consideration of Rs.81 lakh. On 1-10-2005, the assessee invested Rs.75 lakh in purchase of new house property at Alwarpet. In A.Y. 2006-07, the assessee claimed Rs.73,94,157 to be exempt u/s.54F of the Act, which was allowed. On 13-11-2006, the assessee sold the house purchased at Alwarpet for a consideration of Rs.50 lakh and purchased another residential house at Spur Tank Road on 15-11-2006 for Rs.70,80,620. The Assessing Officer (AO) while assessing the total income for A.Y. 2007-08 held that the long-term capital gain of Rs.73,94,157 claimed to be exempt u/s.54F in A.Y. 2006-07 was to be withdrawn in A.Y. 2007-08. According to the AO, the assessee suffered a capital loss of Rs.25 lakh on sale of house property situated at Alwarpet and therefore, allowing set-off of such loss, he brought to tax the balance amount of Rs.48,94,157. Aggrieved the assessee preferred an appeal to the CIT(A) who allowed the appeal. Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:

The Tribunal after considering the provisions of section 54F(3) of the Act held that the AO was justified in treating Rs.73,94,157 as long-term capital

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Section 54 — Exemption u/s.54 can be claimed when under a development agreement an assessee exchanges his old flat for a new flat. Such acquisition amounts to construction of new flat and therefore time period of 3 years is available for such acquisition.

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(2012) 21 taxmann.com 316 (Mumbai)
Jatinder Kumar Madan v. ITO
A.Y.: 2006-07. Dated: 25-4-2012

Section 54 —  exemption u/s.54 can be claimed when under a development agreement an assessee exchanges his old flat for a new flat. Such acquisition amounts to construction of new flat and therefore time period of 3 years is available for such acquisition.


Facts:

Vide development agreement dated 8-7-2005 the assessee surrendered his flat of carpet area 866 sq.ft. to the builder and in lieu thereof was allotted new flat of carpet area 1040 sq.ft. and also given cash compensation of Rs.11,25,800. The cash compensation was invested by the assessee in REC bonds and was claimed to be exempt u/s.54EC. Since the assessee had acquired new flat in lieu of the old flat, capital gain arising on account of the transfer of the old flat was claimed to be exempt u/s.54 of the Act. The assessee submitted that the capital gain computed at Rs.55,91,866 was less than the value of the new flat and, therefore, the same was exempt u/s.54 of the Act.

The AO held that the assessee had neither purchased, nor constructed the new flat and therefore was not eligible to claim exemption u/s.54. He denied the claim u/s.54. He computed sale consideration of old flat to be Rs.86,96,760 comprising Rs.75,64,960 being market value of the new flat and Rs.11,25,800 being cash compensation. After deducting indexed cost of acquisition from the sale consideration, he computed the long-term capital gains to be Rs.55,91,866.

Aggrieved the assessee preferred an appeal to the CIT(A) who confirmed the disallowance u/s.54. Aggrieved the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal held that acquisition of a new flat under a development agreement in exchange of the old flat amounts to construction of new flat. This view was also taken in the case of ITO v. Abbas Ali Shiras, (5 SOT 422). The Tribunal held that the provisions of section 54 are applicable and the assessee is entitled to exemption if the new flat had been constructed within a period of 3 years from the date of transfer. Since cash compensation was part of consideration for the transfer of old flat and the assessee had invested money in REC bonds, the exemption u/s.54EC will be available. Since the longterm capital gain computed by the AO including cash compensation as part of sale consideration was much below the cost of new flat and therefore, the cash component was also held to be exempt u/s.54. The Tribunal noted that to substantiate the completion of new flat within 3 years the assessee had filed a copy of letter dated 30-5-2007 of the builder in which it was mentioned that the builder had applied for occupation certificate and possession was given on 14-6-2007. This letter was not available with lower authorities. The exact date of taking possession of the flat was also not clear. The Tribunal directed the AO to verify these facts.

The Tribunal held that the assessee is entitled to exemption u/s.54, subject to verification of the date of taking possession by the assessee. The Tribunal decided this ground of appeal in favour of the assessee.

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Section 26 — Income of co-owners of house property — Cannot be assessed as income of an association of persons (AOP) in spite of the fact that a return was filed in the legal status of AOP.

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30. (2011) 131 ITD 377 (Mum.) Sujeer Properties (AOP) v. ITO A.Y.: 2002-03. Dated: 28-1-2011

Section 26 — Income of co-owners of house property — Cannot be assessed as income of an association of persons (AOP) in spite of the fact that a return was filed in the legal status of AOP.


Facts:

A particular house property was co-owned by five persons. A return of income was filed by the association of persons (AOP) of these five persons declaring NIL income and claiming that income is to be assessed in the hands of the respective coowners of the building as share of each co-owners is predetermined. The assessment of AOP was subsequently reopened since the AO observed that the assessee had not paid any municipal taxes but had claimed the same in computation of house property. Before the ITAT, the assessee argued that in view of clear provisions of section 26, there was no question of first ascertaining the property income in the hands of the AOP and then ascertaining the share in the hands of each co-owner. He further argued that the entire exercise of filing of return of AOP was an entirely infructuous exercise and had no income tax implications at all. The DR argued that since the assessee had not taken up this plea of nontaxability while filing the original return, the same cannot be taken up before the Tribunal.

Held:

(1) Since the plea of non-taxability of income is a purely legal ground which does not require any further investigation of facts, there is no bar on dealing with the said plea.

(2) Further, there is a merit in the argument that the very act of filing return of income by the AOP as far as co-ownership of house property is concerned has no income tax implications. This is because the income from house property is to be taxed as per sections 22 to 26. There is no support for the proposition that annual value of the property is to be determined in the course of the AOP itself. So far as the income from house property is concerned, the Act does not envisage that annual value of the co-owned property, upon being determined in the assessment of the AOP, is to be divided amongst the co-owners in predetermined ratio.

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(2011) 130 ITD 219 (Cochin) (TM) Dy. CIT, Circle 2(1), Range-2, Ernakulam v. Akay Flavours & Aromatics (P.) Ltd. A.Y.: 2004-05. Dated: 20-9-2010

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Section 10B, r.w.s. 32 and section 72 — For hundred percent export-oriented unit eligible for deduction u/s.10B, set-off of unabsorbed depreciation and business loss brought forward from relevant assessment year in which deduction was so claimed for the first time up to A.Y. 2000-01, will be allowed against business income or under any other head of income including ‘income from other sources’, for all assessment years up to assessment year in which deduction was last claimed (i.e., during the tax holiday period).

Facts:
The assessee is a hundred percent export-oriented unit and is eligible for deduction u/s.10B of the Income-tax Act. The first relevant assessment year for which deduction u/s.10B claimed was A.Y. 1996- 97 and therefore the last assessment year for which the deduction will be available to assessee will be A.Y. 2005-06. During the assessment of return of income for A.Y. 2004-05, the AO noticed that the assessee had claimed set-off brought forward unabsorbed depreciation up to A.Y. 2000-01 against income computed under the head ‘Income from other sources’. The AO disallowed the claim of deduction under grounds of provision of section 10B(6) and while computing the income of the assessee during the assessment, the AO, first set off the brought forward business loss and unabsorbed depreciation against the income from the export unit and balance income was considered for deduction u/s.10B. Thus the AO neutralised the claim of deduction u/s.10B by setting off the brought forward loss and unabsorbed depreciation first and disallowed the assessee’s claim of set-off against income under the head ‘Income from other sources’.

The assessee, against said order of the AO, preferred an appeal to the CIT(A). The CIT(A) reversed the order of the assessing officer and upheld the claim of the assessee. The CIT(A) opined that reading of provision u/s.10B(6)(ii) clearly states that set-off of unabsorbed depreciation and business loss brought forward up to A.Y. 2000-01 will not be allowed to be carried forward beyond the tax holiday period. In the instant case, the last year of claim of deduction u/s.10B was A.Y. 2005-06, whereas the assessment year for which appeal was referred is A.Y. 2004-05, therefore the view of AO could not be upheld and the assessee’s claim was allowed.

Aggrieved the Revenue appealed before the ITAT.

Held:
(1) On simple reading of section 32 with section 72, it is apparent that unabsorbed depreciation can be set off against business income or under any head of income including ‘Income from other sources’. There is no provision in law which prohibits set-off of unabsorbed depreciation from income computed under head ‘Income from other sources’.

(2) The benefit given u/s.10B is deduction and not an exemption and is evident from the wordings of the said provision which states that only 90% of the business profits are allowed as deduction. Thus the balance 10% has to be treated only as business income. The perusal of section 10B(1) clearly reveals that deduction under the section from profits and gains derived by undertaking from the export has to be made first while computing income under the head ‘Income from business’ and not at a later stage of computation of the gross total income of the assessee.

(3) Provision of section 10B(6)(ii) states that no loss insofar as it relates to the business of the undertaking including unabsorbed depreciation, so far it relates to any relevant assessment year up to A.Y. 2000-01 shall be carried forward for set-off while computing income for any assessment year subsequent to the last relevant assessment year in which deduction under this section is claimed i.e., after the tax holiday period. Therefore, setoff of such brought forward business loss or unabsorbed depreciation can be made in accordance with provisions of section 32, section 71 and section 72 while computing the total income of the assessee for assessment year within the tax holiday period.

(4) Thus, set-off of brought forward business loss and unabsorbed depreciation up to A.Y. 2000-01 cannot be disallowed for A.Y. 2004- 05, where the last year of claim for deduction u/s.10B was A.Y. 2005-06 as the assessment year in consideration falls within the tax holiday period. Thus Revenue’s appeal stood dismissed and the view taken by the CIT(A) was upheld.

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Section 12A of the Income-tax Act, 1961 — Registration under charitable institutions — Trust formed for propagating the knowledge of Vedas cannot be said to be benefiting only a particular community — Registration cannot be denied on this ground.

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29. 2011) 131 ITD 370 (Cochin) Kasyapa Veda Research Foundation v. CIT A.Y.: 2008-09. Dated: 28-4-2011

Section 12A of the Income-tax Act, 1961 — Registration under charitable institutions — Trust formed for propagating the knowledge of Vedas cannot be said to be benefiting only a particular community — Registration cannot be denied on this ground.


Facts:

The assessee-trust filed an application u/s.12A of the Income-tax Act, 1961 seeking registration as a charitable trust. It was formed for preaching and propagating the knowledge of Vedas. The Commissioner of Income-tax was of the opinion that the trust was not benefiting the public at large and was confined to only the Hindu community. He thus cancelled registration u/s.12A of the Income-tax Act. He further passed an order declaring the trust as religious trust.

Held:

There is a very thin line of difference so as to identify whether the nature of activity is a charitable one or a religious one. The assessee-trust was formed to propagate and spread the knowledge of Vedas and Vedanta amongst the public so that they can change their living habits and take the necessary steps for the betterment of humanity. This would not only help the common public to improve their current status but also would enhance their ability to think about the humanity as a whole. The overall appeal of Vedas and its contents are universal and a representation of religious scriptures. The whole purpose of imparting education in Vedas is to promote the behavioural patterns of the people. Also as mentioned in the Trust deed, the other activities are pure charitable in nature. Thus, the assessee-trust was thus allowed a status of charitable trust.

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Section 11 of the Income-tax Act — Accumulation @ 15% should be calculated on the gross income and before deducting other expenses.

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28. (2011) 131 ITD 335 (Luck.) Krishi Utpadan Mandi Samiti v. DCIT A.Y.: 2006-07. Dated: 7-6-2010

Section 11 of the Income-tax Act — Accumulation 15% should be calculated on the gross income and before deducting other expenses.


Facts:

The assessee-trust has earned total receipts of Rs. 1.32 crore as per their books of accounts. As per the provisions of section 11 of the Act, it accumulated 15% of the receipts and claimed as an exemption. However, the AO computed exemption @ 15% after deducting administrative expenses.

Held:

According to section 11(a) of the Act, income derived from the property held by the trust and applied for religious or charitable purposes will be exempt. Where any income is accumulated, exemption to the extent of fifteen percentage of the said income will be available. The assessee-trust calculated the exemption on the basis of gross income received from the property. As per the AO and the CIT(A) the exemption should be calculated after deducting the expenses incurred for charitable purposes. Relying on the decision of CIT v. Programme for Community Organisation, (248 ITR 1) (SC) it was held that the exemption of 15% must be taken on the gross income and not on net income as determined for income tax purposes.

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Section 22 r.w.s 28(1) — Principle of res judicata though not applicable to income tax proceedings, principle of consistency applicable and in absence of any change of circumstances or non-consideration of material facts or statutory provisions, Department cannot change the stand taken in earlier years.

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27. (2011) 131 ITD 171 (Luck.)ACIT v. Harbilas Cold Storage and Food ProductsA.Y.: 2006-07. Dated: 12-11-2010

Section 22 r.w.s 28(1) — Principle of  res judicata though not applicable to income tax proceedings, principle of consistency is applicable and in absence of any change of circumstances or non-consideration of material facts or statutory provisions, Department cannot change the stand taken in earlier years.


Facts:

(1) The assessee was engaged in carrying on business of running cold storage till 1989. Thereafter, the assessee made some alterations and additions in cold storage building and rented out certain portions for use as warehouse and office.

(2) The rent income was offered by the assessee as income under the head income from house property and the same was accepted by the Department in all earlier assessment years. Further, there was no change in facts in the year under consideration as compared to earlier years.

(3) However for the assessment year under consideration, the AO treated the income as profits and gains from business and profession on the ground that the assessee was not just letting property, but also providing various facilities.

(4) On appeal filed by the assessee, the CIT(A) held that the income is chargeable under the head income from house property only, thus allowing the appeal filed by the assessee.

 (5) Against the order of the CIT(A), the Department filed appeal before the Tribunal.

Held:

 (1) Though principle of res judicata is not applicable in tax proceedings, the principle of consistency is applicable as held by the Supreme Court in the case of Radhasoami Satsang (100 CTR 267) and the Jurisdictional High Court in case of Goel Builders (supra).

(2) Where an issue is decided either in one manner or other and the same has not been challenged by either of the parties, it would not be appropriate to change the position in subsequent years.

(3) The Department has got the right to depart from its earlier practice only on change of circumstances or non-consideration of material facts or statutory provisions.

(4) In the present case, no new facts have been brought on record by the AO so as to justify departure from the earlier stand taken by the Department.

(5) Thus, appeal of the Revenue was dismissed.

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Reassessment: Sections 143(3), 147 and 148: A.Y. 2004-05: Original assessment u/s.143(3): Notice u/s.148 beyond 4 years: No allegation in the reasons of failure on the part of the assessee to state fully and truly all material facts necessary for assessment: Reopening not valid.

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38. Reassessment: Sections 143(3), 147 and 148: A.Y. 2004-05: Original assessment u/s.143(3): Notice u/s.148 beyond 4 years: No allegation in the reasons of failure on the part of the assessee to state fully and truly all material facts necessary for assessment: Reopening not valid.
[Shriram Foundry Ltd. v. Dy. CIT, 250 CTR 116 (Bom.)]

For the A.Y. 2004-05, the original assessment was made u/s.143(3) of the Income-tax Act, 1961. Subsequently, on 10-2-2011 i.e., beyond the period of 4 years, the Assessing Officer issued notice u/s.148 for reopening the assessment. The reasons recorded for reopening are as under: “You have claimed a melting loss in excess of 7.24%, which is higher than what is found in the similar line of business. So the melting loss earlier allowed is excess.” Objections filed by the assessee were rejected. Thereafter the assessee filed a writ petition challenging the reopening.

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

 “(i) The original assessment was completed u/s.143(3). The assessment is sought to be reopened beyond a period of 4 years from the end of the relevant assessment year. The jurisdictional condition is that in such case, before an assessment can be validly reopened, there must be a failure on the part of the assessee to state fully and truly all the material facts necessary for the assessment.

 (ii) There is no such allegation in the reasons which have been disclosed to the assessee. The Assessing Officer has purported to reopen the assessment only recording that according to him the melting loss of 7.24% which was claimed by the assessee is higher than what is found in a similar line of business. This ex facie would amount merely to a change of opinion.

 (iii) The reopening of the assessment u/s.148 is not valid. The consequential assessment order dated 30-12-2011 would have to be quashed and set aside.”

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Presumptive income: Section 44AE: A.Y. 2001- 02: Transporters: Section 44AE stipulates tax on presumptive income, which may be more or less than actual income: Assessee is not required to maintain any account books: No addition could be made as income from other sources on ground that assessee was not able to explain discrepancies in account books.

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37. Presumptive income: Section 44AE: A.Y. 2001- 02: Transporters: Section 44AE stipulates tax on presumptive income, which may be more or less than actual income: Assessee is not required to maintain any account books: No addition could be made as income from other sources on ground that assessee was not able to explain discrepancies in account books.
[CIT v. Nitin Soni, (2012) 21 Taxman.com 447 (All.)]

The assessee, a proprietor of transport business possessed eight trucks. In the income-tax return for the A.Y. 2001-02, he disclosed income u/s.44AE. The Assessing Officer made additions to the income of the assessee on ground that the assessee did not have sufficient withdrawals to explain as to how he had been meeting daily expenses. He held that the assessee must have got income from other sources. The Tribunal deleted the addition holding that it could not be treated as income from other sources.

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

(i) Section 44AE inserted by the Finance Act, 1994 provides special provision for computing profits and gains of business of plying, hiring or leasing goods carriages. It opens with an non obstante clause by giving an overriding effect over sections 28 to 43C, in the case of an assessee who owns not more than ten goods carriages. Income of such assessee chargeable to the tax under the head ‘Profits and gains of business or profession’ shall be deemed to be the aggregate of the profits and gains, from all the goods carriages owned by him in the previous year, computed in accordance with the provisions of s.s (2).

(ii) The very purpose and idea of enactment of provision like section 44AE is to provide hassle-free proceedings. Such provisions are made just to complete the assessment without further probing provided the conditions laid down in such enactments are fulfilled. The presumptive income, which may be less or more, is taxable. Such an assessee is not required to maintain any account books. This being so, even if, its actual income in a given case, is more than income calculated as per s.s (2) of section 44AE, cannot be taxed. (iii) Thus, it follows the query of the Assessing Officer as to how the assessee met his daily expenses, there being no withdrawal and conclusion of additional income was uncalled for. (iv) The addition made by the Assessing Officer due to increase in the capital cannot be taxed u/s.56 as income from other sources as the accretion, if any, in the capital is relatable to profit from transport business of the assessee. A reading of the assessment order would show that the addition was made on account of excess generation of income of the assessee from the goods carriages business, u/s.56.”

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Method of accounting: Hybrid system: Section 145: A.Y. 1991-92: Amendment of Incometax Act w.e.f. 1-4-1997 not permitting hybrid system: Assessee can follow hybrid system in A.Y. 1991-92: Amendment of Companies Act in 1988 not permitting hybrid system: Not applicable.

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36. Method of accounting: Hybrid system: Section 145: A.Y. 1991-92: Amendment of Income tax Act w.e.f. 1-4-1997 not permitting hybrid system: Assessee can follow hybrid system in A.Y. 1991-92: Amendment of Companies Act in 1988 not permitting hybrid system: Not applicable.
[Pradip Chemical P. Ltd. v. CIT, 344 ITR 171 (Cal.)]

 For the A.Y. 1991-92, the assessee-company had followed hybrid system of accounting for the purpose of computation of income. The Assessing Officer discarded the hybrid system and adopted the mercantile system and made addition. The Tribunal upheld the order of the Assessing Officer.

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

(i) The method of accounting referred to section 145 of the Income-tax Act, 1961, prior to its substitution by the Finance Act, 1995. w.e.f. 1-4-1997, included hybrid or mixed systems of accounting and it was open to a company-assessee to follow the cash system of accounting in respect of a particular source of income and the mercantile system in respect of the others.

(ii) The provisions of the Companies Act, 1956, are meant for the requirement of the 1956 Act and in case of infraction thereof necessary consequences as provided in the 1956 Act itself follows. Section 209 of the 1956 Act does not have overriding effect over any other law, nor has the 1956 Act elsewhere provided that the provisions of the 1956 Act have overriding effect over income-tax and fiscal statutes.

(iii) The Tribunal was not right in holding that for the A.Y. 1991-92, the assessee could not follow the cash system for accounting for its interest income and in upholding the assessment of interest income on accrual basis.”

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TDS: Interest: Section 2(28A) and section 194A of Income-tax Act, 1961: Interest on amount deposited by allottees on account of delayed allotment of flats: Interest on account of damages: Tax need not be deducted at source.

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[CIT v. H. P. Housing Board, 340 ITR 388 (HP)]

The assessee, the Himachal Pradesh Housing Board, floated a self-financing scheme for sale of house/ flats wherein the allottees were required to deposit some amount with the assessee and construction was to be carried out out of these amounts. One of the conditions of the terms of allotment was that in case the possession of the house/flat was not given to the allottee within a particular time frame, the assessee was liable to pay interest to the allottees on the money received by it. There was a delay in construction of the houses and thereafter the assessee paid interest at the agreed rate to the allottees in terms of the letter of allotment. The Assessing Officer held that the assessee was liable to deduct tax at source on payment of such interest u/s.194A of the Income-tax Act, 1961. The CIT(A) and the Tribunal held that section 194A was not applicable.

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

“(i) The amount which was paid by the assessee was not payment of interest, but was payment of damages to compensate the allottee for the delay in the construction of his house/ flat and the harassment caused to him.

(ii) Though compensation had been calculated in terms of interest, this was because the parties by mutual agreement agreed to find out a suitable and convenient system of calculating the damages, which would be uniform for all the allottees. The allottees had not given the money to the assessee by way of deposit, nor had the assessee borrowed the amount from the allottees.

(iii) The amount was paid under a self-financing scheme for construction of the flats and the interest was paid on account of damages suffered by the claimant for delay in completion of the flats.”

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Sections 194I, 199 — Tax is not deductible at source on payment received as an obligation and not as an income — If the amount is paid by the payer to the payee, not directly but indirectly, through the medium of some other person, then such other person receives the amount as an obligation and not as income — Payment received as an obligation is not taxable as income and credit for TDS was allowable u/s.199 in the year in which the amount was received by such other person after deduction of ta<

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(2012) 21 taxmann.com 131 (Mumbai-Trib)
arvind Murjani Brands (P.) Ltd. v. ITO
A.Y.: 2007-08. Dated: 2-5-2012

Sections 194i, 199 — Tax is not deductible at source on payment received as an obligation and not as an income — if the amount is paid by the payer to the payee, not directly but indirectly, through the medium of some other person, then such other person receives the amount as an obligation and not as income — Payment received as an obligation is not taxable as income and credit for TDS was allowable u/s.199 in the year in which the amount was received by such other person after deduction of tax at source.

Facts:

 M/s. Guys & Gals, franchisees of the assessee, desired to take premises on rent. Since the landlords were not willing to let out their premises to M/s. Guys & Gals, the sister concern of the assessee took the premises on rent from the landlords, Sibals.

M/s. Guys & Gals paid to the assessee the amount of rent after deduction of tax at source u/s.194I. The assessee paid the gross amount of rent to its sister concern. The sister concern of the assessee paid the amount of rent to the landlords after deduction of tax at source. Thus, there was TDS on two occasions — first at the time of payment by Guys & Gals to the assessee and second at the time of payment by the sister concern of the assessee to the landlord.

Since the amount received by the assessee from Guys & Gals was for onward payment to its sister concern, it did not reflect any rental income in its accounts. However, the assessee claimed credit for TDS by Guys & Gals.

While assessing the total income of the assessee the Assessing Officer (AO) denied credit of TDS amounting to Rs.8,77,881 on the ground that the corresponding income has not been offered for tax. The AO, however, after considering the explanation of the assessee did not include the amount of rent as income of the assessee.

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

Held:

The Tribunal considered the provisions of TDS contained in Chapter VII of the Act and held that the common thread running through these provisions is the chargeability of the amount as income. If the amount received by the payee is not in the nature of any income or does not contain some element of income, there cannot be any question of deduction of tax at source. In order to attract the provisions for withholding of tax, the amount must be received by the recipient in the nature of income and not as an obligation. When the amount of income is directly paid by the payer to the payee, such amount is liable for deduction of tax at source if it is of the nature as specified in the relevant provisions concerning with deduction of tax at source. If however the amount is paid by the payer to the payee not directly but indirectly, that is, through the medium of some other person, then such other person receives the amount as an obligation and not as income in his hands. Neither the amount received by such middleman can be considered as income in his hands, nor can there be any requirement under law fastening some sort of tax liability on him towards such transaction. The said middleman does not earn any income from the payer, nor incurs any expenditure by mediating in the transaction between the payer and receiver of income.

Section 199 only deals with allowing of the credit for tax deducted at source and not with the disallowing of such credit. It does not encompass within its purview the question for determination as to whether the credit for tax deducted at source should at all be allowed or disallowed. This enabling 298 (2012) 44-A BCAJ provision cannot be employed to disable the allowing of credit for tax deducted at source from the payment made to the assessee in the nature of income. The amount of tax deducted at source has to be necessarily allowed credit somewhere. It cannot be a case that the amount of such tax deducted and paid to the exchequer is not to be refunded, if the tax due on the amount of income received is either lower than the amount of tax deducted or there does not exist any liability to tax in respect of amount received.

The amount of tax deducted at source needs to be adjusted against some tax liability of the payee and in case there is no such liability, it has to be refunded to the payee because of the very mandate of section 199 as per which such amount is ‘treated as payment of tax on behalf of the person from whose income the deduction was made’ that is the payee.

As the amount on which tax was deducted at source is not at all chargeable to tax, then the command of section 199 will have to be harmoniously and pragmatically read as providing for allowing credit for the tax deducted at source in the year of receipt of the amount, on which such tax was deducted at source.

Since the assessee received the amount after deduction of tax at source from Guys & Gals and such amount was admittedly not chargeable to tax in its hands, the Tribunal held that the credit for tax deducted at source should be allowed in the instant year.

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Section 40(a)(i) r.w.s 195 — Whether no tax is deductible u/s.195 on the commission payable to a non-resident for services rendered outside India — Held, Yes.

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(2011) 131 ITD 271 (Hyd.)
CIT v. Divi’s Laboratories Ltd.
A.Ys.: 2001-02 to 2004-05. Dated: 25-3-2011

Section 40(a)(i) r.w.s 195 — Whether no tax is deductible u/s.195 on the commission payable to a non-resident for services rendered outside india — Held, Yes.

Therefore such payments made to overseas agents without deducting of TDS are not liable to be disallowed u/s.40(a)(i) — Held, Yes.


Facts:

The assessee had paid commission to foreign agents for services rendered outside India. The Assessing Officer disallowed the same u/s.40(a)(i) on the ground that the tax was not deducted at source. The assessee contended that the payment was made through appropriate banking channels as per the RBI guidelines and regulations and hence was not liable to TDS. On assessee’s appeal with the CIT(A), the Commissioner allowed certain relief to the assessee. On the Department’s appeal, it was held:

Held:

Section 195 clearly states that the obligation to deduct tax is only on the income taxable in India. On the basis of section 9, the income is liable to be taxed only when it arises, accrues by virtue of its control or management being situated in India. In this case the overseas agents of Indian exporters operate in their own countries and therefore the income received by them is not liable to be taxed in India and hence do not attract TDS provisions. Also the Assessing Officer had not been able to prove the specific instruction of payee to receive the same payment in India. Hence he had erred in disallowing such agency fees u/s.40(a)(i) and thus the CIT(A)’s order ought to be upheld.

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Section 263 — Without examining detailed records submitted by assessee and in absence of finding of any factual mistake or any legal error or any instance which could have shown as to how the order of AO was erroneous and prejudicial to interest of Revenue, the proceedings initiated by Commissioner u/s.263 were not justified.

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(2011) 131 ITD 58 (Jp.)
Rajiv Arora v. CIT-iii
A.Y.: 2007-08. Dated: 9-7-2010

Section 263 — Without examining detailed records submitted by assessee and in absence of finding of any factual mistake or any legal error or any instance which could have shown as to how the order of  ao was erroneous and prejudicial to interest of revenue, the proceedings initiated by Commissioner u/s.263 were not justified.


Facts:

The assessee was an individual deriving income from manufacturing and export of gems and jewellery. Order of assessment was passed by the Assessing Officer (‘AO’) u/s.143(3). Taking into consideration the past history of the assessee, the deduction u/s.10B was allowed. Thereafter, the successor AO sent a proposal u/s.263 to the Additional Commissioner. Notice u/s.263(1) was thus issued to the assessee. The assessee filed detailed replies to notice. The Commissioner, in exercise of his power u/s.263, set aside the assessment order passed by the AO mainly on ground that while completing assessment, the AO had not raised any queries and details, which were suo moto filed by assessee, were not examined by the AO and no investigation was made. Accordingly, order of the AO was held erroneous and prejudicial to interest of the Revenue and hence was set aside. The assessee appealed before the Tribunal.

Held:

While completing the assessment, the AO though he had not discussed the issue in detail but had clearly mentioned that the case was discussed and various details filed by the assessee were test-checked and were found correct. Taking into consideration the past history, deduction u/s.10B was also allowed. It is not necessary that the AO should write a lengthy order discussing all the details but the necessity is that he should have applied his mind. In reply to the notice issued by the Commissioner, the assessee explained each and every query through detailed reply. However, the Commissioner didn’t comment as to how these explanations and details were not acceptable. The Commissioner set aside the order of the AO to make de novo assessment. The approach of the Commissioner was not legally well-founded. The order of the Commissioner could not be sustained as it could not point out as to how the order of the AO was erroneous and prejudicial to interest of the Revenue or it could not point out any specific defect in the details filed before the AO and again before the Commissioner or how any addition can be sustained. Without pointing out any defect, mere setting aside the order of the AO, just to make fresh investigation in a manner suggested by the Commissioner is not permissible under law. Resultantly, the appeal of the assessee was allowed. The error envisaged by section 263 is not one which depends on possibility or guesswork, but it should be actually an error either of fact or law. The phrase ‘prejudicial to interests of Revenue’ has to be read in conjunction with an erroneous order passed by the AO.

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Section 11 r.w.s 12A — Whether the accumulated funds along with all the assets and liabilities transferred to a new institution or section 25 company formed shall be taxable as deemed income u/s.11(3)(d). Held, No.

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(2011) 130 ITD 157 (Luck.)
aCiT v. U.P. Cricket association
Dated: 24-9-2010

Section 11 r.w.s 12A — Whether the accumulated funds along with all the assets and liabilities transferred to a new institution or section 25 company formed shall be taxable as deemed income u/s.11(3)(d). Held, No.


Facts:

The assessee a sports association working for the promotion of sports was granted a registration u/s.12A. In the year 2005, the assessee passed a resolution to create a new company u/s.25 of the Companies Act, 1956 and to thus dissolve the existing society by transferring all the assets and liabilities. As on the date of transfer the society had accumulated funds of Rs.5.48 crore which were also transferred. These funds were deemed to be the income u/s.11(3)(d). The CIT(A) held that the funds transferred by the assessee were not covered by section 11(3A) because the new company had invested the accumulated balance in accordance with the provisions. The Department preferred a second appeal.

Held:

The scope of transfer has been extended to by section 11(3A) to not only societies but also to institutions. The new company being a charitable institution registered u/s.12A had taken over the functions of the society as also the assets and liabilities as per its Memorandum of Association. The Revenue had also not placed any material to prove it otherwise, hence the order of the CIT(A) was restored.

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Loss on account of valuation of interest rate swap as on the balance sheet date is deductible.

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(2012) 69 DTR (Mum.) (Trib.) 161
aBN amro Securities india (P) Ltd. v. ITO
A.Y.: 2003-04. Dated: 26-8-2011

Loss on account of valuation of interest rate swap as on the balance sheet date is deductible.


Facts:

Interest rate swap is a financial contract between two parties exchanging a stream of interest payments for a notional principal amount, on multiple occasions, during the contract period. These contracts generally involve exchange of fixed rate of interest, with floating rate of interest, and vice versa. On each payment date, the interest is notionally paid on the agreed fixed or floating rate by one party to the other, by settling for the difference payments. The assessee had three ongoing interest rate swap contracts, for a notional principal amount of Rs.185 crore, under which the assessee was to pay a fixed rate of interest and receive the floating rate of interest. The assessee claimed a deduction of Rs.10,10,92,000 on account of unrealised loss on the basis of valuation of interest rate swap. This valuation, was arrived at by working out future extrapolation of the yield curve, considering past history of available rates and current market rate. This provision was made in accordance with the guidelines issued by the RBI, and the method of valuation consistently followed all along. The AO disallowed this loss considering it as unascertained liability and it was confirmed by the CIT(A).

Held:

It is important to bear in mind the fact that whatever is claimed as a loss at this stage, is eventually reduced from the overall loss or added to overall profit taken into account, for tax purposes, in the subsequent year in which the settlement date falls. It is not really, therefore, the question as to whether the deduction is to be allowed or not, but only the assessment year in which deduction is to be allowed. Viewed in the long-term perspective, thus, it is wholly tax neutral, but for the timing of deduction. One of the mandatory Accounting Standards, notified vide Notification No. 9949, dated 25th Jan., 1996, provides that “provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information”. There is no enabling provision which permits the AO to tinker with the profits computed in accordance with the method of accounting so employed u/s.145 and as long as the mandatory accounting standards are duly followed. It is not even the AO’s case that the mandatory accounting standards have not been followed.

Loss having been incurred is a reality, its recoupment or aggravation is contingent. It is contingent upon future happenings i.e., whether or not loss the assessee will be able to recoup the losses till settlement date, and such recoupment or aggravation of loss will fall in period beyond the end of the relevant previous year. Viewed thus, and bearing in mind the fact that the real issue in this appeal is not the deductibility but only the timing of the deduction, the loss computed vis-à-vis the variation as on the end of the relevant previous year, the loss is deductible in the relevant previous year.

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Exemption u/s.54EC — Granted even in respect of bonds purchased in wife’s name where repayment was to be received by the assessee.

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(2012) 69 DTR (Mum.) (Trib.) 19
aCiT v. Vijay S. Shirodkar
A.Y.: 2007-08. Dated: 30-8-2011

exemption u/s.54eC — Granted even in respect of bonds purchased in wife’s name where repayment was to be received by the assessee.


Facts:

Against the long-term capital gain on surrender of tenancy rights the assessee claimed exemption u/s.54EC on the ground that he invested a total sum of Rs.46 lakh in REC bonds. There were two certificates of REC bonds of Rs.23 lakh each. In the first certificate the assessee was mentioned as the main holder of the bonds, whereas wife and daughter of the assessee were shown as the joint holders. In respect of other certificate, Smt. Sabita Shirodkar, wife of the assessee, was the main holder of the certificate and the assessee along with his son were only the nominees of the first beneficial owner.

The AO allowed exemption in respect of first certificate of Rs.23 lakh in the light of the decision of the Tribunal, Mumbai Bench in the case of Dr. (Mrs.) Sudha S. Trivedi v. ITO, 27 DTR (Mum.) (Trib.) 271 though wife and daughter were co-holders. But he disallowed the exemption in respect of another certificate of Rs.23 lakh since the assessee was not the main-holder.

Held:

In respect of the assessee’s investment in REC Bonds the CIT(A) observed that the primary requirement for claiming deduction u/s.54EC of the Act was fulfilled in the instant case by virtue of the fact that the funds invested emanated from the sum received from the transfer of long-term capital asset and that it was invested within a specified time. In his opinion payment of the maturity proceeds to any one of the bond holders is not a material factor for deciding the ownership of the bonds. In the statement of facts before the CIT(A) the assessee stated that though rules were framed for ease of operation and not for determining ownership and/or succession rights, the fact remains that the assessee’s wife had instructed REC to remit the maturity proceeds directly to the account of the assessee and REC had agreed to the change readily without asking for any documentation for the reason that they are not concerned with the question as to who among the joint applicants are the true owners of the bonds. It was stated that the REC had confirmed the change vide their letter dated 27th July, 2009.

Having regard to the factual matrix, the CIT(A) observed that the payment of the maturity deposit to any one of the bond-holders is not a material factor so long as investment was made out of the sale proceeds and the assessee’s name also figures as one of the investors, more particularly when REC changed the name of recipient in its records. Thus, the CIT(A) held that the assessee had invested in REC Bonds.

ITAT primarily relied upon the decision of Dr. (Mrs.) Sudha S. Trivedi v. ITO, 27 DTR (Mum.) (Trib.) 271 and confirmed the above findings of CIT(A).

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(2012) 65 DTR (Ahd.) (Trib.) 342 ITO v. Parag Mahasukhlal Shah A.Y.: 2005-06. Dated: 30-6-2011

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Interest for delayed payment of purchase price to principal — Since such interest is compensatory in nature and not related to any deposit or loan or borrowings, no TDS required to be deducted u/s.194A and hence no disallowance u/s.40(a)(ia).

Facts:
The assessee had claimed interest expenses of Rs.12.47 lakh. Out of the total interest claimed, an amount of Rs.7.83 lakh was towards interest of FAG Bearing (India) Ltd. On the said amount of interest no tax was deducted at source. The assessee, having dealership of FAG Bearing (India) Ltd. as per terms of payment was allowed interest-free credit period for 60 days. In case of overdue payment the cost of purchase includes with a liability to pay a compensatory sum which was termed as interest. As per the assessee since it was not in the nature of interest in strict terms, hence there was no liability to deduct the tax at source. The AO denied such claim and stated that as per section 2(28A) interest means interest payable in any manner in respect of any money borrowed or debited. Hence as per the AO, for such payment section 194A was applicable and hence he disallowed such interest u/s.40(a)(ia). The learned CIT(A) upheld the claim of the assessee. The Department went into further appeal.

Held:
Section 2(28A) has defined the term ‘interest’, but the definition appears to be wide to cover interest payable in any manner in respect of loans, debts, deposits, claims and other similar rights or obligations. But it is also worth noting that the said definition is not wide enough to include other payments. There ought to be a distinction between the payments not connected with any debt, and a payment having connection with the borrowings. A payment having no nexus with a deposit, loan or borrowing is out of the ambit of the definition of interest as per section 2(28A). A decision of Respected National Consumer Disputes Redressal Commission was relied upon, where in the case of Ghaziabad Development Authority v. Dr. N. K. Gupta, (2002) 258 ITR 337 (NCDRC), it was held that if the nature of payment is to compensate an allottee, then the provisions of section 194A not to be applied as far as the question of deduction of TDS on interest is concerned.

Reliance was also placed on the decision of the Gujarat High Court in the case of Nirma Industries Ltd. (2006) 283 ITR 402, wherein the interest received from trade debtors was allowed as deduction u/s.80HH and 80-I, the source being trade activity. The Courts in their judgments have considered the immediate source of interest received. If the immediate source is a loan, deposit, etc., then the payment is in the nature of ‘interest’, but if the immediate source of payment is trade activity, then the nature of receipt is not ‘interest payment’, but in the nature of payment of compensation. Hence, interest for delayed payment of purchase price to principal was held as beyond the ambit of section 194A and hence not liable to TDS.

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Search and seizure: Section 132 and section 153A of Income-tax Act, 1961: A.Ys. 2004-05 to 2009-10: Warrant of authorisation: Satisfaction must be based on information coming into possession of Department: Absence of new material with authorities: Search and consequent notice unsustainable.

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[Spacewood Furnishers Pvt. Ltd. v. DGIT, 340 ITR 393 (Bom.)]

Search operations u/s.132 of the Income-tax Act, 1961 were carried out in the case of the petitionercompany and its two directors. The petitioner filed writ petition and challenged the validity of the search action and the consequent notice u/s.153A of the Act. The Bombay High Court allowed the petition and held as under:

“(i) When the satisfaction recorded is justiciable, the documents pertaining to such satisfaction may not be immune and if appropriate prayer is made, inspection of such documents may be required to be allowed.

(ii) The mode and the manner in which all the satisfaction notes were prepared showed the absence of any relevant material with the authorities which would have enabled them to have ‘reason to believe’ that action u/s.132 was essential. No new material as such had been disclosed anywhere. No document or report of alleged discreet inquiry formed part of these notes. The entire exercise had been undertaken only because of the high growth noted by the authorities.

(iii) The material like high growth, high profit margins, the contention in respect of or doubt about international brand and details thereof was available with the authorities. It was not their case that they had obtained any other information which was suppressed by the petitioners.

(iv) The effort, therefore, was to find out some material to support the doubt entertained by the Department. The exercise had not been undertaken as required by section 132(1) in transparent mode. The satisfaction note contemplated therein must be based upon contemporaneous material, information becoming available to the competent authorities prescribed in that section. Its availability and the nature and also the time factor must also be ascertainable from relevant records containing such satisfaction note.

(v) Loose satisfaction notes placed by the authorities before each other could not meet the requirements and the provision. The necessary live link and availability of relevant material for considering it had not been brought before the Court. Therefore, the authorisation issued u/s.132(1) was bad and unsustainable. Consequently, the exercise of search undertaken in consequence thereof was illegal. Notice action u/s.153A was also bad in law. The same were accordingly stand quashed and set aside.”

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Settlement of cases: Sections 245C, 245D, 245F & 245-I of Income-tax Act, 1961: A.Ys. 2000-01 to 2006-07. Order of Settlement Commission is final: AO has no power to make any addition other than the addition sustained by the Settlement Commission.

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Search and seizure operations u/s.132 of the Incometax Act, 1961 were carried out at the premises of the assessee. The assessee moved application before the Settlement Commission. The Settlement Commission passed order u/s.245D(4) whereby the undisclosed income of the assessee was settled for the relevant assessment years. The order of the Settlement Commission observed that the CIT/AO may take such appropriate action in respect of the matter not before the Commission as per provision of section 245F(4) of the Act. Thereafter, the Assessing Officer issued notice and made additions over and above the additions sustained by the Settlement Commission. The additions were deleted by the CIT(A) and the Tribunal upheld the order of the CIT(A).

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

“(i) After passing the order by the Settlement Commission, no power vests in the Assessing Officer or any other authority to issue the notice in respect of the period and income covered by the order of the Settlement Commission. Except in the case of fraud or misrepresentation of facts, the order passed by the Settlement Commission is final and conclusive and binding on all parties. The Assessing Officer, therefore, has no jurisdiction to issue the impugned notice for making further enquiry in the matter in view of sections 245D(6) and 245I.

(ii) There cannot possibly be piecemeal determination of the income of an assessee for relevant period, one by the Settlement Commission and another by the Assessing Officer. Otherwise the very purpose of filing application before the Settlement Commission would be frustrated.

(iii)  In the absence of any right conferred by the Act, mere observation of the Settlement Commission will not empower the assessing or Appellate Authority to reassess on any ground, whatsoever, for the same financial year with regard to which the Settlement Commission had exercised jurisdiction and given a finding.”
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Revision: Limitation: Two years: Section 263 of Income-tax Act, 1961: A.Y. 1994-95: Limitation period to be counted from the original assessment order to be revised and not from the order giving effect to the order of the CIT(A).

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For the A.Y. 1994-95, the original assessment order was passed on 27-2-1997 and the order giving effect to the order of the CIT(A) was passed on 31-3-1999. The CIT passed an order of revision u/s.263 of the Income-tax Act, 1961 on 20-2-2001. It was the claim of the Revenue that the order of revision was within the period of limitation taking into account the assessment order dated 31-3-1999 giving effect to the order of the CIT(A). The Tribunal held that the period of limitation is to be counted from the date of the original assessment order dated 27-2-1997 and accordingly that the order of revision dated 20-2-2001 is beyond the period of limitation and hence is invalid.

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

“The order passed by the CIT in exercise of the revisional jurisdiction beyond two years of the assessment order was clearly barred by limitation and hence rightly set aside.”

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(2011) 130 ITD 11/19 taxmann.com 138 (Cochin) Prasad Mathew v. DCIT A.Y.: 2005-06. Dated: 30-7-2010

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Section 2(14) — Definition of Capital Asset.

Facts:
The assessee received certain amount from the sale of rubber and coconut trees standing on his land. The assessee explained that the trees had been sold along with the roots and hence there was no scope to re-grow the trees and as such they were a capital asset and, thus, sale proceeds thereof would represent a capital receipt. The Assessing Officer rejected the assessee’s claim and brought the above amount to tax under the head income from other sources. The Commissioner (Appeals) upheld the order of the Assessing Officer. On second appeal it was held that

Held:
The trees which stood cut and sold were from a spontaneous growth and were neither nurtured, nor cultivated by the assessee. Also they were in no manner used by the assessee for any activity. The controversy between the assessee and the Revenue was with respect to whether the trees were sold along with the roots or not and whether the receipts from sale of these trees was of capital nature. It was held that the trees whether sold with roots or without the roots was an immaterial question given the fact that the trees stood uprooted. The material question would be the purpose for which the trees were cut and sold. If the trees were cut and sold by the assessee for planting fresh ones the sale proceeds would stand to be assessed under income from other sources. Further trees rooted to the land, by definition, are a part of the land. Thus, what stood sold and transferred by the assessee was a part of land itself and thus would be categorised as capital asset and the receipt from their sale would be assessed as capital receipt and eligible to capital gains tax under the act.

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(2012) 65 DTR (Mum.) (Trib.) 39 DCIT v. Eversmile Construction Co. (P) Ltd. A.Y.: 2001-02. Dated: 30-8-2011

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Assessment u/s.153A — Total income for each assessment year has to be done afresh without any reference to what was done in the original assessment and hence assessee is entitled to seek any relief on any addition made in the original assessment.

Facts:
In the original assessment u/s.143(3), the AO disallowed interest of Rs.58.86 lakh. The assessee-company did not agitate the disallowance of interest before the Appellate Authority. While filing return in response to notice u/s.153A, the assessee voluntarily disallowed the interest disallowance made in the original assessment, subject to reservation of right for contesting the allowability of entire interest during the course of assessment proceedings. When the matter came before the CIT(A), the assessee put forth details to support the deduction of interest. The learned CIT(A) forwarded the same to the AO and as per the remand report, the learned CIT(A) directed the AO to disallow interest of Rs.10.81 lakhs and ordered deletion of the remaining disallowance.

The viewpoint of the Department was that the assessee was not entitled to seek relief on any matters which had attained finality in the original assessment, as section 153A does not permit assessment at income lower than the one finally assessed in the original assessment.

Held:
U/s.153A the AO is required to make assessment afresh and compute ‘total income’ in respect of each of relevant six assessment years. As there is no specific restriction on jurisdiction of the AO in not including any new income to such fresh total income pursuant to search which was not added during the original assessment, in the like manner, there is no restriction on the assessee to claim any deduction which was not allowed in the original assessment. As it is a fresh exercise of framing assessment or reassessment, the assessee can argue about merits of the case qua addition made in the original assessment.

The judgment of the Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd., (198 ITR 297) was distinguished since in that case the Apex Court was considering provisions of section 147. Conditions for taking action u/s.147 vis-à-vis u/s.153A are different.

Also provisions of search assessment u/s.153A, etc. have been inserted by the Finance Act 2003 w.e.f. 1st June 2003. These provisions are successor of special procedure for assessment of search cases under Chapter XIV-B starting with section 158B. Whereas Chapter XIV-B required assessment of ‘undisclosed income’ as a result of search, which has been defined in section 158(b), section 153A dealing with assessment in case of search w.e.f. 1st June 2003 requires the AO to determine ‘total income’ and not ‘undisclosed income’.

Regarding the view that the income in assessment u/s.153A should not be reduced than original assessment, it needs to be noted that total income is not reduced simply on basis of making claim. The AO is fully empowered to consider the question of deductibility. Hence, assessment u/s.153A needs to be done afresh without any reference to the original assessment.

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(2012) 75 DTR (Mum)(SB)193 Kotak Mahindra Capital Co. Ltd. vs. ACIT A.Y.: 2003-04 Dated: 10-8-2012

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Section 74(1) – Amendment with effect from A.Y. 2003-04 restricting set off of long-term capital loss only against long-term capital gain applies only in respect of losses for the A.Y. 2003-04 & onwards and not to losses of prior assessment years.

Facts:
The assessee filed its return of income wherein the brought forward long-term capital loss of A.Y. 2001- 02 was set off against the short-term capital gain arising during the present assessment year (i.e. A.Y. 2003-04). According to the Assessing Officer, the assessee was entitled to set off the brought forward long-term capital loss only against long-term capital gain and not against short-term capital gain by virtue of the provisions of section 74(1) as amended w.e.f. 1st April, 2003. He held that since the said provisions were amended w.e.f. 1st April, 2003, they were applicable to the year under consideration i.e. A.Y. 2003-04. The action of the Assessing Officer in disallowing the assessee’s claim for such set off was upheld by the learned CIT(A).

Held:
In the case of Komaf Financial Services Ltd. vs. ITO [132 TTJ (Mumbai) 359], the Mumbai Bench had taken a view that amended provisions of section 74(1) will apply to the losses under the head capital gains for any assessment year and not only to the losses relating to the A.Y. 2003-04 onwards. A contrary view, however, was taken by another Division Bench at Mumbai in the case of Geetanjali Trading Ltd. vs. ITO [ITA No. 5428/Mum/2007], wherein it was held that the amended provisions of section 74(1) will apply only in respect of losses for A.Y. 2003-04 and onwards. Therefore, the Special Bench was constituted to decide this question of law.

In the provisions of section 74(1) as substituted w.e.f. 1st April, 2003 present tense has been used, which refers to the long-term capital loss of the current year. The said provisions thus are applicable to the long-term capital loss of A.Y. 2003-04 onwards and not to the long-term capital loss relating to the period prior to A.Y. 2003-04. Therefore, the provisions of section 74(1) as substituted w.e.f. 1st April, 2003 are not applicable to the long-term capital loss relating to the period prior to A.Y. 2003- 04 and set off of such loss is therefore governed by the provisions of section 74(1) as stood prior to the amendment made by the Finance Act, 2002 w.e.f. 1st April, 2003.

The right accrued to the assessee by virtue of section 74(1) as it stood prior to the amendment made w.e.f 1st April, 2003 thus has not been taken away either expressly by the provisions of section 74(1) as amended w.e.f. 1st April, 2003 or even by implication. The golden rule of construction is that, in the absence of anything in the enactment to show that it is to have retrospective operation, it cannot be so construed as to have the effect of altering the law applicable to a claim in litigation at the time when the Act was passed. The right accrued to the assessee by virtue of section 74(1) as it stood prior to the amendment made w.e.f. 1st April, 2003 to set off brought forward long-term capital loss relating to the period prior to A.Y. 2003-04 against short-term capital gain of subsequent year/s has not been taken away by the provisions of section 74(1) substituted w.e.f. 1st April, 2003. The provisions of section 74 which deal with carry forward and set off of losses under the head “Capital gains” as amended by Finance Act, 2002, will apply only to the unabsorbed capital loss for the A.Y. 2003-04 and onwards and will not apply to the unabsorbed capital losses relating to the assessment years prior to the A.Y. 2003-04.

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Industrial undertaking – Deduction under section 80IA – In the absence of separate books of accounts in respect of manufacturing activity and trading activity, the Assessing Officer was justified in working out the manufacturing account.

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[Arisudana Spinning Mills Ltd. v. CIT (2012) 348 ITR 385 (SC)]

The assessee, engaged in manufacturing yarn, filed its return of income for the assessment year 1998-99 on 30-11-1998 showing total income of Rs.36,27,866 inter alia after claiming deduction u/s. 80IA of Rs.15,54,800 being 30% of the gross total income of Rs.51,82,666. The Assessing Officer found that the assessee had sold raw wool, wool waste and textile and knitting clothes and that the assessee had not maintained a separate trading and Profit and Loss account for the goods manufactured. The assessee contended that for certain business exigencies in the assessment year in question, it had sold the above items but such sale would not disentitle him from claiming the benefit u/s. 80IA on the told sum of Rs.51,82,666. The Assessing Officer, in the absence of separate accounts for manufacture of yarn actually produced as a part of the industrial undertaking, worked out on his own, the manufacturing account giving bifurcation in terms of quantity of wool produced. The assessee challenged the preparation of separate trading account by the Assessing Officer in respect of manufacturing and trading activity before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) allowed the appeal. The Tribunal reversed the order of the Commissioner of Income Tax (Appeals). The High Court upheld the order of the Tribunal.

On further appeal, the Supreme Court was of the view that the finding given by the Tribunal and the High Court were findings of fact. The Supreme Court dismissed the appeal, observing that the assessee ought to have maintained a separate account in respect of raw material which it had sold during the assessment year, so that a clear picture would have emerged indicating the income occurring from manufacturing activity and the income occurring on sale of raw materials.

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(2011) 130 ITD 296 (Pune) Maharashtra Rajya Sahakari Sangh Maryadit v. ITO, Ward 1(2), Pune A.Y.: 2003-04. Dated: 30-4-2011

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Section 10(23C)(iiiab) — Where the Government legislates law to provide for compulsory contribution by the member societies to an ‘education fund’ which was set apart to be the source of finance for educational institution engaged in the co-operative movement in India, which constitutes indirect financing by the Government, are entitled for exemption u/s.10(23C)(iiiab) of the Act.

Facts:
The assessee was a co-operative society registered under the Maharashtra State Co-operative Societies Act, 1960. By virtue of section 68 of the Maharashtra Co-operative Societies Act, every other membersociety was to mandatorily contribute annually towards the education fund of the assessee as per the sums prescribed in the Notification issued by the State Government. The assessee filed his return of income for A.Y. 2003-04 claiming exemption u/s.10(23C)(iiiab) of the Act. The Assessing Officer, while assessing the total income rejected the assessee’s claim holding that it failed to fulfil conditions prescribed u/s.10(23C) (iiiab) with regard to expression ‘financed by the Government’.

On appeal, it was submitted that such supply of finance indirectly by way of mandatory contributions by member co-operative societies met requirement of expression ‘financed by the Government’ used in section 10(23C)(iiiab). The CIT(A) however rejected the claim of the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

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

(1) Small Business Corpn., In re (2008) 173 Taxman 452 (AAR — New Delhi)

(2) Dy. DIT (Exemptions) v. Indian Institute of Management, (2009) 120 ITD 351 (Bang.)

The Tribunal noted that in the provisions of section 10(23C)(iiiab), the Legislature has not used the words such as ‘directly or indirectly’ anywhere, meaning thereby the indirect financing by the Government is also a possibility not ruled out by the Legislature.

Further, the decision of the Department to reject the benefits of tax exemption u/s.10(23C)(iiiab) to the institution merely in view of the absence of inflow of the finance directly from the funds of the Government and ignoring the alternate financing mechanisms provided by the Government by legislative enactment, tantamount to narrow interpretation of the expression in the said clause.

In such circumstances and considering the peculiarity of the co-operative movement, governmental role in financing such educational institution rightly should stop with the role as a facilitator by providing requisite legislation for enabling the member societies to contribute to the assessee and contribute mandatorily. Therefore, it is the case of indirect financing of the educational institution of the co-operative movement by the Government and it is evolved in order to promote participation of the members and respect the financial independence of the movement in general and institution in particular.

In the light of the above discussion, the Tribunal set aside the impugned order of the CIT(A) and allowed the claim by the assessee of being entitled to exemption u/s.10(23C)(iiiab) of the Act.

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Ramakrishna Vedanta Math v. Income Tax Officer In the Income Tax Appellate Tribunal, Kolkata ‘C’ Bench, Kolkata Before Pramod Kumar (A.M.) and Mahavir Singh ( J. M. ) I.T.A. No.: 477,478 and 479/Kol/2012 Assessment year: 2005-06, 2006-07, 2008-09. Decided on July 31 , 2012 C ounsel for Assessee/Revenue : Miraj D Shah/ Amitava Ray

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Section 201(1) and 201(1A) r.w.s. 194C – Default
in recovery and payment of TDS – Appellant treated as Assessee in
default for failure to deduct tax at source u/s 194C – Whether the
appellant is justified in its contention that if the recipient has paid
taxes then no action against it under the provisions be taken – Held,
yes.

Facts:
The issue before the tribunal was whether a
demand under section 201(1) and section 201(1A) r.w.s. 194C can be
enforced even in a situation in which, the recipient of income embedded
in the payments has paid due taxes thereon, and, if not, who has the
onus to demonstrate that status about payment of such taxes.

During
the relevant period, the assessee had made several payments, in respect
of book binding charges, printing charges, advertisement and publicity
and bus hire charges etc, but had not deducted tax at source from the
payments made. According to the assessee the recipients have paid tax on
income embedded in those payments, and in the light of Supreme Court’s
decision in the case of Hindustan Coca Cola Beverages Pvt. Ltd. v CIT
(293 ITR 226), the taxes cannot once again be recovered from the
assessee. This contention was rejected by the Assessing Officer on the
ground that the assessee was not able to prove that taxes on income
embedded in those payments have been duly been paid by the recipients.
Aggrieved, assessee carried the matter in appeal but without any
success.

Held:
The tribunal referred to the
observations of the Allahabad High Court in the case of Jagran Prakashan
Ltd. v DCIT [ (2012) 21 taxmann.com 489 All], viz. that “tax deductor
cannot be treated an assessee in default till it is found that assessee
has also failed to pay such tax directly”. According to it, once this
finding about the non payment of taxes by the recipient was held to be a
condition precedent to invoking section 201(1), the onus was on the
Assessing Officer to demonstrate that the condition was satisfied. It
further noted that the Act provides for three different consequences for
lapse on account of non-deduction of tax at source viz., penal
provisions (section 271C), and interest provisions (section 201 (1A) and
recovery provisions section 201(1). As far as the matter under the
later two provisions were concerned, the former provides for levy of
interest in case of any delay in recovery of such taxes and the later
provisions seek to make good any loss to revenue on account of lapse by
the assessee tax deductor. The Tribunal further added that the question
of making good the loss of revenue arises only when there is indeed a
loss of revenue and the loss of revenue can be there only when recipient
of income has not paid tax. Therefore, it held that recovery provisions
under section 201(1) can be invoked only when loss to revenue is
established, and that can only be established when it is demonstrated
that the recipient of income has not paid due taxes thereon.

Accordingly,
the Assessing Officer was directed to verify the related facts about
payment of taxes on income of the recipient directly from the recipients
of income before invoking provisions of section 201(1).

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(2012) 146 TTJ 543 (Mumbai) Pranit Shipping & Services Ltd. v. Asst.CIT ITA No.5962 (Mum.) of 2009 A.Y.2005-06. Dated 25.01.2012.

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Sections 36(1)(iii), 40(a)(ia) and 194A of the Income Tax Act 1961 – Assessee having neither credited the interest in the books of account under any account nor paid such interest in the year, but claimed deduction on the basis of mercantile system of accounting straightaway in the computation of income without routing it through books of account, mandate of section 194A is not attracted and, consequently, the provisions of section 40(a)(ia) are not attracted.

Facts
For the relevant assessment year, the Assessing Officer disallowed u/s 40(a)(ia) Rs. 336.49 lacs towards accrued interest payable by the assessee-company to Sahara India Financial Corporation Ltd. (SIFC) for which no entry was passed in the books of account.Deduction was claimed directly in the Computation of Total Income. The CIT (A) confirmed the disallowance.

For earlier A.Y.2003-04, the assessee claimed deduction for similar interest payable on term loan to SIFC to the tune of Rs. 2.51 crore which was allowed by the Assessing Officer in the assessment framed u/s 143(3). Subsequently, the learned CIT, taking recourse of the provisions of section 263, held that the amount of interest was not deductible. ”

Held:
The Tribunal held that the provisions of section 40(a) (ia) are not attracted in the assessee’s case. The Tribunal noted as under:

In the mercantile system of accounting, deduction is allowed on accrual of liability. It is not material whether the amount is paid or not, or whether or not it is recorded in the books of account. Therefore, the deduction of interest payable to SIFC cannot be denied.

On a conjoint reading of sub section (1) with Explanation to section 194A, it is amply borne out that the event for deduction of tax at source arises when the amount of interest is credited to the account of the payee or when it is paid, whichever is earlier.

Even if the amount is not credited to the account of payee but shown under the head `Interest payable 20 account’ or `suspense account’, etc. it shall still be deemed as credit to the account of payee.

Thus, the essential requirement is that the amount must be credited in the books of account either in the account of payee or interest payable account or any other account by whatever name called such as suspense account. Once an amount is credited in the books of account, the liability to deduct tax at source arises if the payment of such interest is made after the date of crediting.

Since the assessee has not credited the amount of such interest in its books of account and, further, such interest has not been paid in this year, the mandate of section 194A cannot be attracted. This provision comes into play only when either the amount is credited in the books of account or interest is paid, whichever is earlier.

Once there is no liability to deduct tax at source u/s 194A, the provisions of section 40(a)(ia) cannot be attracted.

Probably, this lacuna was not noticed by the legislature while enacting the relevant provisions, which has been exploited by the assessee as a measure of tax planning. In this year the deduction has to be allowed. It will be open to the Assessing Officer to consider the later development of actual payment or non-payment of interest to SIFC and deal with it as per law in such later years.

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(2011) 132 ITD 34 (Allahabad) Asst. CIT v. A.H.Wheelers & Co. (P) Ltd. A.Y. 2004-05 Dated. 18-05-2011

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Section 271(1)(c) – Penalty cannot be levied in respect of wrong figures claimed by the assessee by mistake.

FACTS:
The assessee, who was engaged in the business of trading of books and periodicals, declared certain loss in its return of income for the relevant assessment year which was filed by a tax consultant on the basis of audit report u/s 44AB. The said loss included brought forward losses of earlier years. The Assessing officer, on going through past records, noticed that the assessee had wrongly claimed the brought forward loss in excess of the actual amount.

The assessee rectified the discrepancy before the completion of assessment. However, the Assessing Officer held that the assessee had furnished inaccurate particulars of income and imposed a penalty u/s 271(1) (c).

The CIT(A) deleted the penalty. On revenue’s appeal to the Tribunal, it was held:

HELD:
The details of brought forward losses are within the knowledge of the Assessing Officer in the form of return of income of earlier years filed by the assessee.

The mistake by the assessee was bonafide as it was based on the advice of the Tax Consultant.

It is the duty of the Assessing Officer to apply the relevant provisions of the Act for the purpose of determining the taxable income of the assessee and the consequential tax liability, even if the assessee failed to provide accurate figures relating to set-off of loss of earlier years already determined by the department.

Further, the mistake was inadvertent and was rectified before finalisation of assessment.

Merely because the assessee claimed the wrong amount of set-off, the Assessing Officer cannot reject the claim and consequentially levy the penalty considering wrong claim as concealment of income.

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(2011) 131 ITD 471 (Mum.) Chika Overseas (P) Ltd. v. ITO A.Y. 2000-01 Dated: 25-02-2010

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Section 147 – During the original assessment, facts placed before AO and detailed explanation given – AO discussed issue and then allowed deduction u/s 80HHC – hence there was application of mind by AO – matter carried to Tribunal – during pendency of appeal, AO initiated proceedings u/s 147 – while issue was subject matter of appeal, initiation of reassessment proceedings was bad in law – As AO applied his mind earlier, subsequent belief can only be considered as change of opinion on same set of facts-reopening not sustained.

Facts:
The assessee company was engaged in business of export of leather goods and textile dyes. It had filed return of income declaring total income at NIL after availing at a deduction u/s 80HHC. Assessment u/s 143(3) was completed and the Ld. AO had adjusted the trading losses against the profits of business and had then arrived at deduction u/s 80HHC. On certain other issues relating to section 80HHC, the matter was carried to the Tribunal.

While the appeal was still pending before the Tribunal, the AO had initiated reassessment proceedings u/s 147. The reason for reopening given by the AO was that his predecessor had allowed the losses in trading of goods to be set off against profit on incentives and hence erred in allowing excess deduction u/s 80HHC.

Held:
As the issue was subject matter of appeal during the pendency of appeal, issuance of notice of reassessment is bad in law.

During the original assessment, all the facts were placed before the AO and detailed explanation was given to the AO. The ld. AO had also considered certain judicial decisions while allowing set off of losses. This indicates that the AO had applied his mind at the time of original assessment. Hence, subsequent belief of AO can only be considered as change of opinion on same set of facts. Thus, reopening cannot be sustained.

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(2011) 131 ITD 396 (Mum.) Capgemini Business Services (India) Ltd. v. DCIT (ITAT, Mumbai) A.Y. 2006-07 Dated: 26-11-2010

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Section 246A – where the credit of foreign taxes
paid is not given by the assessing officer, appeal against the same to
the CIT(A) is maintainable.

Facts:
The assessee
filed IT return of income electronically, claiming tax credit u/s 90 and
91 to the extent of Rs. 8,38,764. While passing the assessment order
and determining the tax liability, the AO ignored this tax credit and
determined the amount to be refunded to the assessee. Aggrieved by this,
the assessee filed an appeal to the CIT(A). The CIT(A) did not accept
the appeal on the ground that section 246A did not permit such issues
within its ambit. He observed that the provisions of cl. (B) of s/s (1)
of section 246A refer to “tax” only for calculation of tax on total
income and not beyond that. According to him, the definition of “tax” in
section 2(43) refers to only income chargeable under the provisions of
this Act and hence, the question of tax is to be restricted only to tax
on total income. As the assessee was not challenging the calculation of
tax on total income, the CIT(A) held the appeal was not maintainable.

Held:
On
going through the mandate of clause (a) of section 246(1), it is clear
that an assessee has the right to appeal to the CIT(A) against inter
alia, “any order of assessment under s/s (3) of section1 43”, income
assessed, or to the amount of tax determined etc.

When we see
the expression “amount of tax determined” in juxtaposition to any “order
u/s 143(3)”, it becomes approved that the reference in the provision is
to the determination of the final amount of tax, which is distinct from
income assessed or the amount of loss computed or the status under
which the assessee is assessed.

Considering the judgment of
Hon’ble Supreme Court in M.Chockalingam & M. Meyyappan v. CIT (48
ITR 34) (SC) it appears that the same expression, viz., “amount of tax
determined” as employed in section 246(1) (a), encompasses not only the
determination of the amount of tax on the total income but also any
other act of omission which has the effect of reducing or enhancing the
total amount payable by the assessee. As the question of not allowing
relief in respect of withholding tax under section 90/91 has the effect
of reducing the refund or enhancing the amount of tax payable, such an
issue is squarely covered within the ambit of section246(1)(a).

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127 ITD 211 (Mum.) DDIT (IT) v. Stork Engineers & Contractors B. V. A.Y.: 1999-2000. Dated: 16-6-2009

Section 37(1) — Expenditure incurred from the date
of receiving contract till the grant of approval by RBI cannot be termed
as prior period expense — Such expense incurred is allowable as expense
incurred after the commencement of business.

Section 37(1) —
Percentage completion method – the figure of opening work-in-progress
cannot be termed as ‘prior period expense’ — Opening work in progress
needs to be taken into consideration to ascertain correct profits.

Facts:
The
assessee-company was incorporated in the Netherlands. It was awarded a
contract by the Indian Oil Corporation for Engineering Procurement and
Construction (EPC) on 24-2-1998. The approval for the setting up of the
project office in India was granted by the RBI in on 16-6-1998, but the
actual work of basic engineering had already commenced during the year
ending March 1998. During the intervening period i.e., 1-4-1998 to
16-6-1998, the assessee had incurred expenditure for the purpose of
execution of its project.

The return of income was filed
claiming a loss of Rs.3.24 crore. The assessee had further mentioned in
the notes to accounts of the Audit Report that expenses of
Rs.1,76,20,000 debited to profit and loss account were the ones incurred
by the head office before setting up project office in India. The
Assessing Officer noted that the expenditure was incurred before setting
up project in India and should be thus disallowed as prior-period
expenses.

Held:
1. The expenditure was incurred after
1-4-1998 i.e., during the year itself. Hence, it is wrong to call it as
prior-period expenditure.

2. Relying on the decision of CIT v.
Franco Tosi Ingenerate, (241 ITR 268) (Mad.), the ITAT noted that the
assessee was awarded contract on 24-2-1998. Any expense incurred after
this date relates to period after commencement of business. Hence, the
expenses would be allowable.

Facts:
The assessee was
following percentage completion method. It had an opening work in
progress of Rs.78,88,526. The assessee submitted that various expenses
were incurred during financial year 1997-98 for the purpose of bidding
for the aforesaid contract. The above-mentioned amount also included
various expenses incurred for basic engineering during the period ending
31-3-1998. The AO observed that the assessee had not filed any return
of income for the A.Y. 1998-99. It was therefore disallowed on the
ground that they were prior-period expenses.

Held:
1.
It is wrong to disallow the first year’s brought forward expenditure in
the second year by branding it as ‘prior-period expenditure’. The
profit cannot be finally determined unless the entire expense is
considered.

2. If the figure of the opening work-in-progress is
not taken into consideration, then the resultant figure of the profit
will be fully distorted. If the income and expenditure of the current
year is only considered, then there will arise difficulty in computing
the ultimate profit on completion of the project.

3. As regards
the requirement of filing return of income, it gets activated only when
there is any income chargeable to tax. As per AS-7, no profit is to be
recognised unless the work has reached a reasonable extent. As the
assessee had completed a very small percentage of the total work in the
preceding year, which is far below the prescribed percentage, there was
no requirement for it to offer any income for taxation in that year.

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(2010) 127 ITD 160 (Chennai) (TM) Hemal Knitting Industries v. ACIT A.Y.: 2001-02. Dated: 30-8-2010

Section 253 r.w.s. 147 — When the disposal of a particular ground is not on merit, the matter cannot be said to have achieved finality — Issue of jurisdiction goes to the very root of proceedings and can be agitated any time.

Facts:
The original assessment was completed on 30-3- 2004, determining the total income at Rs.9,16,870 after allowing deduction u/s.80HHC. Gross bank interest was treated as income from other sources. The assessee filed an appeal against the same to the CIT(A) who dismissed the assessee’s appeal vide order dated 3-12-2004.

The assessee then appealed to the Tribunal. The matter was remanded back to the file of AO. Pursuant to this, the Assessing Officer passed the second assessment order.

In the course of second round, it was contended before the AO that the time limit for issue of notice u/s.143(2) was available to the AO during the first round and thus the AO could not resort to reopening u/s.147. The AO held that the issue of reassessment was raised in the first appeal and the same was rejected by the CIT(A) by observing that no material was brought on record. Further the AO observed that the present assessment was only to give effect to the Tribunal’s order and so the question as to the validity was out of the purview.

There was a difference of opinion between the members. The Accountant Member was of the opinion that the question of jurisdiction goes to the root of the matter and can be raised at any point of time. The Judicial Member was of the view that the assessee did not challenge the validity of reassessment before the CIT(A) or Tribunal. The issue of jurisdiction had thus obtained finality.

On reference to the third Member, the following was held:

Held:
1. The CIT(A) order rejecting the assessee’s ground on reassessment has not discussed any argument on merits of the matter. The assessee can, at best be said to be not to have pressed the ground. But the disposal was never on merit.

2. This issue was never raised before the Tribunal in the first round of litigation. Hence, the Tribunal did not have any opportunity to decide on this matter. Finality cannot be conferred to such an order in a manner that in the second round doors of justice are closed. In the opinion of the third Member, the matter had not reached any finality. The jurisdiction to the authorities cannot be conferred by acceptance or negligence of the parties to the dispute. To shut doors at the threshold on the grounds of technicalities is not within the spirit of the Apex Court’s decision in the case of Improvement Trust.

3. The action of the Assessing Officer in reassessing u/s.147 when time limit for issue of notice u/s.143(2) was available is impermissible in the light of the decision of CIT v. Qatalys Software Technologies Ltd., (308 ITR 249) (Mad).

4. The matter had not reached finality and therefore it was open to the assessee to take up the issue in the second round of litigation.

(2010) 127 ITD 133 (Chennai) (TM) V. Narayanan v. Dy./ACIT A.Ys.: 1987-88 & 1990-91. Dated: 27-8-2009

Section 263 r.w.s. 143 and 153 of the Income-tax
Act — AO cannot be directed by CIT to re-do the assessment when no valid
notice was issued within the given time limit.

Facts:
The
assessee was a managing director of Ponds (India) Limited (‘PIL’). M/s.
Chesebrough Ponds Inc, USA (CPI) had a controlling interest in PIL.
Later on, after coming into force of regulations under FERA the CPI’s
holding was reduced to 40%. Thereafter PIL was sold to Unilever Ltd. The
assessee continued to be the MD of PIL and when the shares were diluted
CPI started representative office in India in 1988. The assessee was to
look after the interest of CPI’s representative office for which
necessary facilities were to be provided to him.

CPI provided a
Mercedes car and an amount of USD 1 lakh to the assessee. Since the
customs authorities did not allow import of car in the name of the
assessee, the car was imported in the name of CPI.

The return
was processed u/s.143(1) of the Act on 27- 1-1989 accepting the
assessee’s claim for exemption of USD 1 lakh and the value of Mercedes
Benz car amounting to Rs.8,10,104. The CIT later on initiated
proceedings u/s.263 and passed an order on 22-3- 1991 directing the AO
to re-do the assessment. The CIT further found that the assessee held
power of attorney for the CPI authorising him to do several acts on its
behalf and that he had the status of head of its representative office.
So, CIT held that the value of car and USD 1 lakh should be taxed
u/s.17(iii). The assessee contended that there was no employeremployee
relationship, nor had he offered any services to CPI, USA and he was
full-time employee of M/s. Ponds India Ltd. He had received it as a gift
from CPI for which gift tax was paid by CPI.

Held:
The
Tribunal held that section 143(1) permits only certain arithmetical
adjustments while making the assessment and that the taxability of the
amount received from the US company (i.e., CPI) and the value of Benz
car cannot fall in the category of those adjustments. The CIT can invoke
the provisions of section 263 only when there is a failure on the part
of AO to make an enquiry u/s.143(2). Section 263 cannot be invoked when
only an intimation u/s.143(1) was sent to the assessee.

At the
most a fresh assessment should be made u/s.143(3) and if this is so, the
AO can make the assessment under this provision only if valid notice
u/s.143(2) had been issued to the assessee on or before 31-3-1990.
However, since that date had elapsed when the CIT passed the order (on
22-3- 1991) it is not possible to either issue such a notice or make an
assessment u/s.143(3). The position would have been different if the AO
in the first place completed the assessment u/s.143(3) after issuing
notice u/s.143(2). In that case the AO can be directed by the CIT to
make fresh assessment. The order of the CIT can be primarily challenged
on the ground that his direction to the AO to re-do the assessment would
result in an assessment being made after the period of limitation and
thus would be contrary to law. Section 153(2A) (as the sub-section stood
at that time) of the Act states that fresh assessment order may be
passed at any time before the expiry of two years from the end of the
financial year in which order u/s.263 is passed. Since the order u/s.263
was passed on 22-3-1991 the AO could pass the fresh assessment order on
or before 31-3-1993. But this sub-section cannot be applied to this
case as section 153(2A) does not confer jurisdiction upon the AO, which
does not exist in him prior to passing of the order of section 263.

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(2011) 50 DTR (Mumbai) (Trib.) 158 Yatish Trading Co. (P) Ltd. v. ACIT A.Y.: 2004-05. Dated: 10-11-2010

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Facts:
The assessee-company was engaged in the business of trading in shares and securities as well as in investment in shares and securities. During the relevant previous year the total income credited by the assessee to the P & L A/c was Rs.39.03 crores which included dividend income of Rs.2.99 crores. The assessee also debited an amount of Rs.10.68 crores which includes administrative expenses, interest and financial charges, etc.

The Assessing Officer disallowed the proportionate interest and financial charges u/s.14A. Upon further appeal, the CIT(A) directed to recompute the disallowance u/s.14A keeping in view the principles laid down in Rule 8D.

Held:
Since the assessment year under consideration is A.Y. 2004-05, the provisions of Rule 8D cannot be applied.

When the real purpose and intent to use the borrowed funds were for trading activity and if incidentally it resulted some dividend income on the shares purchased for trading, then the same would not change the purpose, nature or character of the expenditure. Thus, when the said expenditure incurred for trading activity, then the same cannot be said to have been incurred for earning the dividend income. As per the basic principle of taxation only the net income i.e., gross income minus expenditure incurred is taxed. Accordingly, the expenditure which was incurred for earning the taxable business income has to be allowed against the taxable income and the question of apportionment of the said expenditure does not arise. The expression ‘in relation to’ used in section 14A means dominant and immediate connection or nexus. Thus, in order to disallow the expenditure u/s.14A there must be a live nexus between the expenditure incurred and the income not forming part of the total income. Disallowance cannot be made on the basis of presumption and estimation of the AO. No notional expenditure can be apportioned for the purpose of earning income unless there is an actual expenditure ‘in relation to’ earning the income not forming the part of the total income. If the expenditure is incurred with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then as such no disallowance can be made u/s.14A merely because some tax-exempt income is received incidentally. In case of dealer in shares and securities the primary object and intention for acquisition of the shares is to earn profit on trading of shares. The income on sale and purchase of shares of a dealer is chargeable to tax. Therefore, if the said activity of purchase and sale also incidentally yields some dividend income on the shares held by him as stock-in-trade, such dividend income is not intended at the time of purchase of such shares and accordingly there is no live connection between the expenditure incurred and dividend income.

As held by the jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT, section 14A is implicit within it a notion of apportionment in the cases where the expenditure is incurred for the composite/indivisible business which receives taxable and non-taxable income. However, the principle of apportionment is applicable only in the cases where it is not possible to determine the actual expenditure incurred ‘in relation to’ the income not forming part of the total income. But when it is possible to determine the actual expenditure ‘in relation to’ the exempt income or no expenditure has been incurred ‘in relation to’ the exempt income, then the principle of apportionment embedded in section 14A has no application.

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[2012] 23 taxmann.com 226 (Mum) DCIT v Ranjit Vithaldas ITA No. 7443/Mum/2002 Assessment Year: 1998-99. Date of Order: 22.06.2012

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Section 54 – Exemption u/s 54 would be available in respect of long term capital gain arising on sale of two flats, in two different years, invested in one residential house. Capital gain arising on sale of more than one residential house can be invested in one residential house. One of the requirements for claiming exemption u/s 54 is that the income of the residential house which has been sold, should be chargeable to tax under the head `Income from House Property’ and not that income should have actually been so charged.

Facts:
The assessee alongwith his three brothers had purchased two residential houses situated in two separate buildings viz. R and V. The assessee had 25% share in each of these two flats. Flat in R was sold on 4.10.1996 for Rs. 1,77,00,000 and flat in V was sold on 8.10.1997 for Rs. 3,30,00,000. The assessee had invested the capital gain arising on sale of two flats in construction of a residential house by purchasing a plot on 25.4.1996 at Bangalore from M/s Adarsh Builders and vide another agreement, had engaged the same builder for construction of a house on the said land. The assessee computed his share of capital gain and therefrom claimed exemption u/s 54 in respect of amount spent on construction of a new residential house and the balance was offered for tax. In response to the AO’s contention that exemption u/s 54 can be claimed only with reference to capital gain arising on transfer of one residential house, the assessee submitted that both R and V need to be regarded as one residential house on the ground that they were proximately located and in the earlier years in wealth-tax returns they were regarded as one residential house and this contention was accepted.

The AO noted that in AY 1997-98 the assessee had claimed exemption in respect of capital gain arising on sale of flat R meaning thereby that it was treated as its SOP and therefore the annual value of flat V was chargeable to tax but the assessee had not included its annual value in returned income and the AO concluded that the only reason it could be excluded was that the flat was used for the purposes of the business by the assessee. The AO concluded that the flat V was used for the purposes of the business and also that in AY 1997-98 capital gain arising on sale of flat R was claimed to be exempt with reference to new house constructed. He therefore, denied claim for exemption u/s 54.

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

Aggrieved the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the two flats sold were located in two different buildings on two different roads and were acquired in two different years. There was no common approach road to the buildings. Hence, it held that the two flats sold could not be regarded as one residential house as was held by CIT(A).

The Tribunal held that there is no restriction placed in section 54 that exemption is allowable only in respect of sale of one residential house. Even if assessee sells more than one residential houses in the same year and capital gain is invested in a new residential house, the claim for exemption cannot be denied if other conditions of section 54 are fulfilled. It noted that the Mumbai Bench of ITAT in the case of Rajesh Keshav Pillai has held that exemption u/s 54 will be available in respect of transfer of any number of long term capital assets being residential houses if other conditions are fulfilled. The only restriction is that the capital gain arising from sale of one residential house must be invested in one residential house and not in two residential houses.

There is an inbuilt restriction that capital gain arising from sale of one residential house cannot be invested in more than one residential house. However, there is no restriction that capital gain arising from sale of more than one residential houses cannot be invested in one residential house. Therefore, even if two flats are sold in two different years, and capital gain of both the flats is invested in one residential house, exemption u/s 54 will be available in case of sale of each flat provided the time limit of construction or purchase of the new residential house is fulfilled in case of each flat sold.

As regards the finding of the AO that flat V was used for the purposes of the business, the Tribunal noted that this conclusion was based only on the finding that the asssessee had not returned any income in respect of this flat under the head `Income from House Property’. The Tribunal held that only on the ground that the assessee had not shown any income from the property, it cannot be concluded that the flat had been used for the purposes of business when there is no material to support the said conclusion. It held that the only requirement of section 54 is that the income should be chargeable to tax under the head `Income from House Property’ and it is not necessary that income should have been actually charged.

The appeal filed by the revenue was partly allowed.

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(2011) 135 TTJ 663 (Mumbai) ACIT v. Delite Enterprises (P.) Ltd. ITA No. 4813 (Mumbai) of 2006 A.Y.: 2003-2004. Dated: 20-10-2010

Section 14A r.w.s 36(1)(iii), section 10(2A) and section 28(v) — Since there was direct/one-toone nexus between the funds borrowed on which interest was paid and the funds invested in the firm on which interest was received, such interest had to be deducted u/s.36(1)(iii) against the interest income assessable as business income u/s.28(v) and no disallowance of interest expenditure is called for u/s.14A.
Facts: For the relevant assessment year, the assessee earned interest of Rs.2.34 crores on capital invested in a partnership firm (SE) and also share of profit from the firm [exempt u/s.10 (2A)]. The assessee paid interest of Rs.1.82 crores on funds borrowed from R. Ltd. for investing in the partnership firm. The AO assessed the interest income under the head ‘Income from Other Sources’ as against ‘Business Income’ shown by the assessee. Further, he did not allow any deduction for the interest paid by the assessee.
The CIT(A) held in favour of the assessee on both counts. In further appeal, the Revenue also invoked the provisions of section 14A for proportionate disallowance of interest on borrowed funds invested in the partnership firm. The Departmental representative stated that the assessee company not only earned interest income of Rs.2.34 crores from the partnership firm in the shape of interest, but also received the share in the profits of the firm to the tune of Rs.8.54 crores, which is exempt u/s.10(2A) and, therefore, the proportionate interest on the amount borrowed and invested in the firm to the extent it related to the share in the profits of the firm, should have been disallowed u/s.14A. In other words, the contention was that the interest paid amounting to Rs.1.82 crores should be bifurcated into two parts, that is, as relatable to the earning of the share in the profits of the firm and earning of interest income in the capacity of partner in the partnership firm and, thereafter, the part as is relatable to share in the profits of the firm should be disallowed by invoking the provisions of section 14A.
Held: The Tribunal upheld the assessee’s claim on both issues. The Tribunal noted as under:
1. From the facts it is clearly noticed that the assessee borrowed funds from R. Ltd. and the same funds were invested in SE. One-toone nexus between the borrowed funds as invested in partnership firm was proved by the assessee.
2. Interest income from the firm always has a direct and immediate relation with the capital contribution. Interest is allowed on the capital contributed by a partner in firm irrespective of the profit-sharing ratio. If some funds are borrowed and invested in the firm as capital, it is only the relation between the interest paid on such borrowed funds and interest earned from the firm that exists.
3. The interest paid by the assessee at Rs.1.82 crore has direct and sole relation with the interest income of Rs.2.34 crores. When the interest income of Rs.2.34 crores is taxable u/s.28(v) as business income, it cannot be bifurcated into two parts viz., towards interest received and share of profit from firm.
4. Even though an amount is deductible under the regular provisions of the Act, including section 36(1)(iii), disallowance can be made u/s.14A if the expenditure is in relation to exempt income. Thus, it becomes obvious that the provisions of section 14A have an overriding effect. In such a situation the applicability of section14A on the otherwise deductible interest expenditure of Rs.1.82 crores u/s.36(1) (iii) has to be examined. The question is whether any part of interest expenditure of Rs.1.82 crores can be correlated to the share of the assessee in the profits of the firm, which is otherwise exempt u/s.10(2A). [Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT & Anr., (2010) 234 CTR (Bom.) 1, (2010) 43 DTR (Bom.) 177].
5. No part of interest expenditure, which is sought to be disallowed u/s.14A, relates to share in profits of partnership firm which is otherwise exempt u/s.10(2A).
6. As there is direct nexus between the funds borrowed on which interest is paid and the funds invested in the firm on which interest is received, such interest has to be deducted u/s.36(1)(iii) against the interest income in entirely. Therefore, no disallowance of interest expenditure is called for u/s.14A, as it does not relate to any exempt income.

(2011) 135 TTJ 419 (Mumbai) Digital Electronics Ltd. v. Addl. CIT ITA No. 1658 (Mum.) of 2009 A.Y.: 2005-2006. Dated: 20-10-2010

Section 72 — Income earned by the assessee in the
relevant year on sale of factory building, plant and machinery, although
not taxable as profits and gains of business or profession, is an
income in the nature of income of business though assessed as capital
gains u/s.50 and, therefore, assessee is entitled to set-off of brought
forward business losses against the said capital gains.

Facts:
For
the relevant assessment year, the assessee set off brought forward
business loss against shortterm capital gains arising on sale of factory
building and plant and  machinery assessable u/s.50. The AO declined to
accept the assessee’s claim. The CIT(A) upheld the stand of the AO.

Held:
The
Tribunal, relying on the decision of the Supreme Court in the case of
CIT v. Cocanada Radhaswami Bank Ltd., (1965) 57 ITR 306 (SC), upheld the
assessee’s claim. The Tribunal noted as under:

1. Section 72
provides that where, for any assessment year, the net result of the
computation under the head ‘Profits and gains of business or profession’
is a loss to the assessee, not being a loss sustained in a speculation
business, and such loss cannot be or is not wholly set off against
income under any head of income in accordance with the provisions of
section 71, so much of the loss as has not been so set off is to be
carried forward to the following assessment year and is allowable for
being set off ‘against the profits, if any, of that business or
profession carried on by him and assessable for that assessment year’.

2.
Therefore, for setting off the income, while the loss to be carried
forward has to be under the head ‘Profits and gains of business or
profession,’ the gains against which such loss can be set off, has to be
profits of ‘any business or profession carried on by him and assessable
in that assessment year’.

3. In other words, there is no
requirement of the gains being taxable under the head ‘Profits and gains
of business or profession’ and thus, as long as gains are ‘of any
business or profession carried on by the assessee and assessable to tax
for that assessment year’ the same can be set off against loss under the
head profits and gains of business or profession carried forward from
earlier years. The income earned in the relevant year, although not
taxable as ‘profits and gains from business or profession’, was an
income in the nature of income of business nevertheless.

4. The
assessee was, therefore, justified in claiming the set-off of business
losses against the income of capital gains assessable u/s.50.

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EXEMPTION U/S.54F IN CASES WHERE SECTION 50C APPLICABLE

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Issue for consideration:
Section 50C provides for substituting the full value of consideration with the value adopted or assessed by the stamp valuation authorities, in computing the capital gains arising on transfer of land or building or both. Where the value of the property assessed or adopted for stamp duty purposes is higher than the sale consideration as specified in the transfer documents, then such higher value is deemed to be the full value of consideration for the purposes of computation of capital gains u/s.48, by virtue of the provisions of section 50C.

Capital gains on sale of an asset other than a residential house, in the hands of an individual or a Hindu Undivided Family, is eligible for an exemption u/s.54F on purchase or construction of a residential house within the specified period, subject to fulfilment of other conditions. The assessee enjoys a complete exemption from tax where the cost of the new asset is equal or more than the net consideration of the asset transferred and he will get a pro-rated exemption where the cost of the new asset is less than the net consideration.

A question has arisen, in the above facts, as to how such exemption u/s.54F is to be computed in a case where the provisions of section 50C apply. Should one take the sale consideration recorded in the documents of transfer, or should one take the stamp duty value as per section 50C, is an issue which is calling our attention.

To illustrate, if a plot of land is sold for Rs.50 lakhs with its stamp duty valuation being Rs.75 lakhs, and if the cost of the new residential house is Rs.50 lakhs, would the entire capital gains be exempt from tax u/s.54F or would only two-thirds of the capital gains be exempt from tax under this section?

While the Lucknow and the Bangalore Benches of the Tribunal have taken a view that for the purposes of computation of exemption u/s.54F, the stamp duty value being the deemed full value of consideration as per section 50C is to be considered, the Jaipur Bench of the Tribunal has held that it is the actual sale consideration recorded in the document of transfer which is to be considered and not the stamp duty value.

Mohd. Shoib’s case:
The issue first came up before the Lucknow Bench of the Tribunal in the case of Mohd. Shoib v. Dy. CIT, 1 ITR (Trib.) 452.

In this case, the assessee sold 7 plots of land, which had been subdivided from a larger plot of land, for a total consideration of Rs.1.47 crore. In respect of 4 plots of land sold for Rs.83 lakh, the consideration was lower than the valuation adopted by the stamp duty valuation authorities, such valuation being Rs.1,00,61,773. The assessee had purchased a residential house out of a part of the total sale consideration, and claimed exemption u/s.54F which was calculated with reference to the consideration recorded in the documents of transfer by ignoring the difference of Rs.17,61,773 between the stamp duty value and the recorded consideration.

The Assessing Officer enhanced the returned capital gains by Rs.17,61,773, by invoking the provisions of section 50C. In appeal before the Commissioner (Appeals), the assessee challenged the applicability of the provisions of section 50C, which was rejected by the Commissioner (Appeals).

In further appeal to the Tribunal, besides challenging the applicability of section 50C, the assessee claimed that once the assessee had reinvested the net consideration in purchasing the new residential house as per section 54F, then no capital gains would remain to be computed for taxation and therefore provisions of section 50C could not be invoked. It was argued that once the exemption was claimed u/s.54F, there was no occasion to charge capital gains and therefore provisions of section 45 could not be invoked as no capital gains could be computed. Reliance was placed on the use of the words ‘save as otherwise provided in section 54, 54B, . .’ in section 45 for the argument that once the charging section failed, substitution of the sale consideration by the stamp duty valuation would not arise. It was further argued that investment in new asset could be made only of real sale consideration, and not of the notional sale consideration. Once there was no real sale consideration, there could not be any capital gains on notional sale consideration.

On behalf of the Department, it was argued that neither section 45 nor section 50C would fail if the assessee had made investment in exempted assets as per section 54, 54F, etc. According to the Department, section 54F only provided the method of computation of capital gains and did not provide exemption from the charging section 45. It was submitted that if an assessee did not invest the full consideration into a new asset, then he would be required to compute the capital gains in the manner laid down in sections 48 by applying the provisions of section 50C, and the exemption from capital gains was available only to the extent of investment made by the assessee in the new asset. Where a part investment was made in the new asset, then capital gains would be charged with respect to the sale consideration not invested. It was argued that the provisions of section 54, 54F, etc. followed the charging section 45, and that the charging section 45 did not follow the exemption provisions. It was submitted that merely because the assessee did not get an opportunity to invest the difference between the notional sale consideration as per section 50C and sale consideration shown by the assessee, the charging of capital gains on the basis of notional sale consideration as per section 50C could not be waived. According to the Department, there were many provisions where a notional income is taxed without giving any occasion to the assessee to make investment out of such notional income and claim deductions under Chapter VIA, etc. It was thus claimed that the charging section could not be made otiose merely because the assessee did not get an opportunity to claim deduction or make investments for claiming deduction in respect of additional income assessed.

While upholding the applicability of section 50C to the facts of the case, the Tribunal observed that section 45 provided a general rule that profits or gains arising from the transfer of a capital asset would be chargeable to income-tax under the head capital gains, except as provided in section 54, 54F, etc. According to the Tribunal while charging capital gains on profits and gains arising from the transfer of a capital asset, one had to see and take into account section 54F, and to the extent provided in section 54F and other similar sections, capital gains would not be chargeable. The moment there was a profit or gain on transfer of a capital asset, capital gains would be chargeable within the meaning of section 45, except and to the extent it was saved by section 54F and like sections.

Analysing the provisions of section 54F, the Tribunal noted that it was not the case that merely because provisions of section 54F were applicable to an assessee, that the entire capital gains would be saved and that no capital gains be chargeable. Saving u/s.54F depended upon investment in new asset of net consideration received by the assessee on sale of old asset. The quantum of net consideration was the result of transfer of the old asset, charge of the capital gain was only on the old asset, and investment in new asset did not and could not nullify or take away the case from the charging section 45. According to the Tribunal, first it was section 45 which came into operation, then it was section 48 which provided computation of capital gains, and thereafter it was section 54F which saved the capital gains to the extent of investment in the new asset.

The Tribunal observed that once section 45 came into operation as a result of transfer of capita

Capital or revenue receipt — Non-competition fee is a capital receipt — Not exigible to tax prior to amendment of Finance Act, 2002.

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[Gufic Chem P. Ltd. v. CIT, (2011) 332 ITR 602 (SC)]

During the A.Y. 1997-98 the assessee received Rs.50,00,000 from Ranbaxy as non-competition fee. The said amount was paid by Ranbaxy under an agreement dated 31st March, 1997. The assessee was a part of the Guffic group. The assessee had agreed to transfer its trade marks to Ranbaxy and in consideration of such transfer the assessee agreed that it shall not carry on directly or indirectly the business hitherto carried on by it on the terms and conditions appearing in the agreement. The assessee was carrying on the business of manufacturing, selling and distribution of pharmaceutical and medical preparations including products mentioned in the list in schedule A to the agreement. The agreement defined the period, i.e., a period of 20 years commencing from the date of the agreement. The agreement defined the territory as territory of India and rest of the world. In short, the agreement contained prohibitory/ restrictive covenant in consideration of which a non-competition fee of Rs.50 lakh was received by the assessee from Ranbaxy. The agreement further showed that the payment made to the assessee was in consideration of the restrictive covenant undertaken by the assessee for a loss of source of income.

On perusal of the said agreement, the Commissioner of Income-tax (Appeals) while overruling the decision of the Assessing Officer observed that the Assessing Officer had not disputed the fact that Rs.50 lakh received by the assessee from Ranbaxy was towards non-competition fee; that under the said agreement the assessee agreed not to manufacture, itself or through its associate, any of the products enlisted in the schedule to the agreement for 20 years within India and the rest of the world; that the assessee and Ranbaxy were both engaged in the business of pharmaceuticals and to ward off competition in manufacture of certain drugs, Ranbaxy had entered into an agreement with the assessee restricting the assessee from manufacturing the drugs mentioned in the schedule and consequently the Commissioner of Income-tax (Appeals) held that the said sum of Rs.50 lakh received by the assessee from Ranbaxy was a capital receipt not taxable under the Income-tax Act, 1961 during the relevant assessment year. This decision was affirmed by the Tribunal. However, the High Court reversed the decision of the Tribunal by placing reliance on the judgment of the Supreme Court in the case of Gillanders Arbuthnot and Co. Ltd. v. CIT, (1964) 53 ITR 283. Against the said decision of the High Court the assessee went to the Supreme Court by way of petition for special leave to appeal.

The Supreme Court held that the position in law was clear and well settled. There is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. The compensation received for the loss of agency is a revenue receipt, whereas the compensation attributable to a negative covenant is a capital receipt. The above dichotomy is clearly spelt out in the judgment of this Court in Gillanders’ case (supra).

The Supreme Court observed that this dichotomy had not been appreciated by the High Court in its impugned judgment. The High Court misinterpreted the judgment of this Court in Gillanders’ case (supra). In the present case, the Department had not impugned the genuineness of the transaction. In the present case, the High Court had erred in interfering with the concurrent finding of the fact recorded by the Commissioner of Incometax (Appeals) and the Tribunal. According to the Supreme Court one more aspect needed to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt prior to the A.Y. 2003-04. It is only vide the Finance Act, 2002 with effect from 1st April, 2003 that the said capital receipt was made taxable [see section 28(va)]. The Finance Act, 2002 itself indicated that during the relevant assessment year compensation received by the assessee under non-compensation agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1st April, 2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under the non-compensation agreement was in the nature of a capital receipt and not a revenue receipt. The said section 28(va) was amendatory and not clarificatory.

For the above reasons, the Supreme Court set aside the impugned judgment of the Karnataka High Court dated 29th October, 2009, and restored the order of the Tribunal. Consequently, the civil appeal filed by the assessee was allowed with no order as to the costs.

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DEDUCTIBILITY OF FEES PAID FOR CAPITAL EXPANSION TO BE USED FOR WORKING CAPITAL PURPOSES — AN ANALYSIS, Part I

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Background :
The Supreme Court in Punjab Industrial Development Corporation Ltd v. CIT, (1997) 225 ITR 792 held that the amount paid to the Registrar of Companies as filing fee for enhancement of capital constitutes capital expenditure. Relying on this decision, the Supreme Court in Brooke Bond India Ltd. v. CIT, (1997) 225 ITR 798 held that expenditure incurred in connection with issuing shares for increasing capital by a company is capital expenditure. Since then one is a witness to these two decisions being mechanically applied by tax authorities as a ground for disallowing any and every expenditure associated with share capital. These include expenses not only directly related but also incidentally connected to capital expansion. The question for consideration is whether any and every expenditure relatable to capital expansion is capital expenditure? Whether the above-mentioned decisions of the Supreme Court are all-pervasive? To put it differently, could there be occasions when these Supreme Court decisions become distinguishable? This write-up discusses one such occasion — in two parts. The first part outlines the law applicable for allowing any expenditure as business expenditure under the head income from business or profession. The second part would cover why the ratio of above-mentioned decisions of the Supreme Court cannot be regarded as all-pervasive as also other connected matters.

Assumed facts:
ABC Limited is a public company (hereinafter referred to as ‘ABCL’ for brevity) engaged in the business of manufacture and sale of pharmaceuticals products. ABCL has presence in various countries across the globe. The success of the business of ABCL is dependent upon marketing of its products. During financial year 2010-11, ABCL undertook certain strategic initiatives (including organisational restructuring) to re-align its business activities for entering into European, African and Asia-pacific countries. The objective was to capture trading opportunities available in such countries. ABCL was thus in need of funds for various business purposes viz., working capital for carrying out business, funds for securing distribution rights, licences, brands.

In view of the above, ABCL engaged the services of a commercial bank (say, XY bank) which assisted it in raising funds through foreign investors. With assistance from XY bank, ABCL managed to raise funds by issuing preference shares to three foreign investors. The funds raised by ABCL were utilised for the above purposes. In consideration of all the services provided, ABCL paid a consolidated fee to XY bank. The question for consideration is whether fees or any portion thereof paid to XY bank would be deductible as business expenditure under the provisions of the Income-tax Act, 1961 (‘Act’ for short hereinafter).

Applicable law — Introduction:
Chapter IV-D contains provisions relating to computation of ‘Profits and gains from business or profession’. Section 28 is the charging section. Section 29 enjoins that profits and gains referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D. Sections 30 to 36 and 38 outline the law relating to specific deductions. Section 37 deals with expenditure which is general in nature and not covered within sections 30 to 36.

The payment by XY bank would not qualify for deduction under sections 30 to 36. Even section 35D would not have relevance. This is for the reason that the section would apply when expenses are incurred under specified heads prior to incorporation or after incorporation in connection with the extension of the industrial undertaking. The expenses under consideration are not pre-incorporation expenses. No extension of any existing undertaking is involved. Section 35D therefore would not be relevant. The deductibility of the said expenditure under section 37(1) of the Act remains for consideration.

Deductibility under section 37(1):
Section 37(1) of the Act enables a general or residual deduction while computing profits and gains of business or profession. Section 37(1) reads as under: “(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’.

(Explanation — For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.)

In order to be eligible for an allowance under section 37, the following conditions should be cumulatively satisfied:
(i) The impugned payment must constitute an expenditure;
(ii) The expenditure must not be governed by the provisions of sections 30 to 36;
(iii) The expenditure must not be personal in nature;
(iv) The expenditure must have been laid out or expended wholly and exclusively for the purposes of the business of the assessee; and
(v) The expenditure must not be capital in nature.

(i) The payment must constitute an expenditure:
The first and foremost requirement of section 37 is that there should be an expenditure. The term expenditure is not defined in the Act. The Supreme Court in Indian Molasses Company (P) Ltd. v. CIT, (1959) 37 ITR 66 (SC) defined it in the following manner:
“ ‘Expenditure’ is equal to ‘expense’ and ‘expense’ is money laid out by calculation and intention though in many uses of the word this element may not be present, as when we speak of a joke at another’s expense. But the idea of ‘spending’ in the sense of ‘paying out or away’ money is the primary meaning and it is with that meaning that we are concerned. ‘Expenditure’ is thus what is ‘paid out or away’ and is something which is gone irretrievably.”

A definition to a similar effect is found in section 2(h) of the Expenditure Act, 1957. This definition reads as : “Expenditure : Any sum of money or money’s worth spent or disbursed or for the spending or disbursing of which a liability has been incurred by an assessee. The term includes any amount which, under the provision of the Expenditure Act is required to be included in the taxable expenditure.”

In CIT v. Nainital Bank Ltd., (1966) 62 ITR 638, the Supreme Court held : “In its normal meaning, the expression ‘expenditure’ denotes ‘spending’ or ‘paying out or away’, i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not ‘expenditure’ : it is only when he satisfies the obligation by delivery of cash or property or by settlement of accounts, there is expenditure.”

Expenditure for the purposes of section 37 includes amounts which the assessee has actually expended or which the assessee has provided for or laid out in respect of an accrued liability. In the case under discussion, ABCL has paid fees to XY bank as consideration for services. The amount paid to XY bank constitutes ‘expenditure’ for the purpose of section 37(1) of the Act.

(ii) The expenditure must not be governed by the provisions of sections 30 to 36:
As already stated, the payment under discussion viz., fees paid to XY bank is not covered by any of the provisions of sections 30 to 36 of the Act. The payment would also not qualify for deduction under section 35D as the same has not been incurred prior to incorporation of business of ABCL or in connection with extension of the undertaking or setting up a new u

FINANCE ACT, 2011

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1. Background:

1.1 The Finance Minister, Shri Pranab Mukherjee, presented the third Budget of UPA-II Government in the Parliament on 28-2-2011. The Finance Act, 2011, has now been passed by both Houses of the Parliament on 24-3-2011, without any discussion. It has received the assent of the President on 8-4- 2011. There are only 35 sections in the Finance Act amending some of the provisions of the Income tax and Wealth tax Act. This year’s amendments in our Direct Tax Laws are very few, probably because the Direct Taxes Code Bill, 2010 (DTC), introduced in the Parliament is under discussion and will replace the existing Income tax Act and Wealth tax Act hopefully from 1-4-2012.

1.2 Part ‘B’ of the Budget Speech deals with proposals relating the Direct Taxes, Excise Duty, Customs Duty and Service tax. In para 139 and 140 of his Budget Speech the Finance Minister has stated as under:

“139. In the formulation of these (tax) proposals, my priorities are directed towards making taxes moderate, payments simple for taxpayers and collection of taxes easy for the tax collector.”

“140. As Government’s policy on direct taxes has been outlined in the DTC which is before the Parliament, I have limited my proposals to initiatives that require urgent attention.”

After presenting his budget proposals, he has concluded his speech as under:

“197. As an emerging economy, with a voice on the global stage, India stands at the threshold of a decade which presents immense possibilities. We must not let the recent strains and tensions hold us back from converting these possibilities into realities. With oneness of heart, let us all build an India, which in not too distant a future, will enter the comity of developed nations.”

1.3 The various important amendments made in the Income tax Act and Wealth tax Act can be briefly stated as under:

(i) Slabs for tax payable by Individuals/HUF/ AoP/ BoI have been revised and the tax burden on these assessees have been reduced to some extent.

(ii) MAT on Corporate Bodies has been marginally raised and surcharge on income of companies is reduced.

(iii) Alternate Minimum Tax (AMT) will be levied on Limited Liability Partnership (LLP).

(iv) Certain exemption and deduction provisions have been relaxed.

(v) Provisions relating to taxation of international transactions have been made more strict.

(vi) Scope of cases which can be referred to the Settlement Commission has been widened.

(vii) Some procedural changes have been made.

1.4 In this article some of the important amendments made in rates of taxes and in some of the provisions of the Income tax and Wealth tax Acts have been discussed.

2. Rates of taxes, surcharge and education cess:

2.1 Rates of Income tax:

(i) For Individuals, HUF, AoP, BoI and Artificial Juridical Persons the threshold limit of basic exemption has been revised upwards for A.Y. 2012-13. Age limit for resident senior citizens has been lowered to 60 years from the present limit of 65 years. Further, a new category of ‘VERY SENIOR CITIZEN’ who is a resident and 80 years and above has been created. The revised tax rates for A.Y. 2012-13 as compared to A.Y. 2011-12 are as under:

(a) Rates in A.Y. 2011-12
(Accounting Year ending 31-3-2011):

Note: There is no surcharge but Education cess at 3% (2 + 1) of tax is payable.
(b) Rates in A.Y. 2012-13 (Accounting Year ending 31-3-2012):

Note: No surcharge is payable but Education cess @ 3% (2 +1) of tax is payable.
(ii) The impact of these changes can be noticed from the following charts.

(a) Tax payable in A.Y. 2011-12 (Accounting Year ending 31-3-2011):

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

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

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

(iii) Other assessees: There are no changes in the rates of taxes so far as other assessees are concerned. Therefore, they will have to pay taxes in A.Y. 2012-13 at the same rates as applicable in A.Y. 2011-12.

(iv) Rate of tax u/s.115JB (MAT): The rate of tax on book profits u/s.115JB i.e., MAT has been increased from 18% in A.Y. 2011-12 to 18.5% in A.Y. 2012-13. This is to be increased by surcharge of 5% of tax if the Book Profit is more than Rs.1 cr. Education cess at 3% of tax is also payable.

(v) Rate of tax on dividends from foreign companies:
A new section 115BBD is inserted for A.Y. 2012- 13. This section provides for concessional rate of tax payable by an Indian company on dividend received by it from any Foreign company in which the Indian company holds 26% or more of the equity capital. The rate of tax on such dividend income will be 15% plus applicable surcharge and education cess. This concessional rate of tax on foreign dividend income is applicable only for one year i.e., dividend received during the year ending 31-3-2012 (A.Y. 2012-13). It is also provided in this section that no expenditure shall be allowed against this dividend income. Therefore, an Indian company which controls a Foreign company by holding 26% or more of equity capital in such a company can consider repatriation of profits accumulated in the foreign company to avail of this concessional rate of tax during the current year before 31-3-2012.

(vi) Rate of Alternate Minimum Tax on LLP (AMT):
Limited Liability Partnership (LLP) will now have to pay Alternative Minimum Tax (AMT) at the rate of 18.5% on its gross total income as computed under new section 115JC. No surcharge is payable, but education cess is payable @ 3% of tax. This is discussed in para 8 below.

2.2 Surcharge on Income tax:
(i) No surcharge is payable by non-corporate assessees i.e., Individuals, HUF, Juridical person, AoP, BoI, Firm, LLP, Co-operative Society and Local Authority. In the case of a company, if the total income is more than Rs.1 cr. the surcharge on tax payable in A.Y. 2011-12 is 7.5%. This is now reduced to 5% for A.Y. 2012-13. Similarly, rate of surcharge on tax payable by a company u/s.115JB (MAT) is also reduced to 5% for A.Y. 2012-13 if the Book Profits amount is more than Rs.1 cr. So far as Dividend Distribution and Income Distribution Tax payable u/s.115O and u/s.115R by companies and Mutual Funds is concerned the rate of surcharge on tax is reduced from 7.5% to 5% w.e.f. 1-4-2011.

(ii) In the case of a Foreign company the rate of surcharge on tax is also reduced from 2.5% to 2% w.e.f. A.Y. 2012-13 if the taxable income of such a company is more than Rs.1 cr. Similarly, for deduction of tax at source u/s.195 from the income of a foreign company the Income tax has to be increased by surcharge at the rate of 2% (instead of 2.5%) w.e.f. 1-4-2011 if the income from which tax is deducted at source is more than Rs.1 cr.

(iii) It may be noted that no surcharge on tax is required to be charged on tax deducted at source from payments to resident assessees.

2.3 Education cess:
As in earlier years, Education cess of 3% (including 1% for higher education cess) of Income tax and Surcharge (if applicable) is payable by all assessees (Residents and Non-residents). No Education cess is to be deducted or collected from TDS or TCS from payments to all resident assessees, including companies. However, if the tax is deducted from payments made to (a) Foreign companies, (b) Non- Residents or (c) on Salary payments, Education cess at 3% of tax and surcharge (if applicable) is to be applied.

2.4 TDS on interest:
New s

[2012] 23 taxmann.com 93 (Del) ACIT v Result Services (P) Ltd. ITA No. 2846/Del/2011 Assessment Year: 2008-09. Date of Order: 28.06.2012

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Section 194I – Reimbursement by the assessee to its holding company of amount of rent for a portion of premises being used by the assessee company, which premises were taken on lease by the holding company from the landlord and the lease deed provided for use of part of the premises by the subsidiary company, do not qualify for TDS u/s 194I since there was no lessor and lessee relationship between the holding company and the assessee.

Facts:
M, a holding company of the assessee, had taken certain premises on lease/leave and license basis. The lease/leave and license agreements was for the premises to be used by M, its subsidiaries, affiliates, group entities and associates. However, the obligation to pay rent was of the lessee i.e. M. The amount of rent paid by M under these agreements was paid after deduction of TDS u/s 194I.

Part of the premises taken on lease/leave and license were used by the assessee. The assessee reimbursed to M certain amounts towards such user. However, these amounts were paid without deduction of TDS u/s 194I. The Assessing Officer (AO) while assessing the total income of the assessee, disallowed a sum of Rs. 56,23,456 paid by the assessee to M u/s 40(a) (ia) on the ground that tax was not deducted at source u/s 194I.

Aggrieved, the assessee filed an appeal to the CIT(A) who deleted the addition made by the AO.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the assessee was paying rent to the holding company as reimbursement since many years. This position was accepted by the department all through and it was never disputed even when the provisions of section 194I were introduced on the statute w.e.f. 1.6.1994. It also noted that even after amendment to section 40(a) (ia) w.e.f. 1.4.2006, this position was not disputed. It noted that there is no material change in the facts and law during the year under consideration. It also noted that the lease deed provided for use of the premises by the subsidiary companies. Tax was deducted at source from the actual payments made by the holding company to the lessor and holding company had not debited the whole of rent to its P& L account but had only debited rent pertaining to the part of the premises occupied by it. Considering these facts, the Tribunal held that there was no lessor and lessee relationship between the holding company and the assessee which could attract the provisions of section 194I. The Tribunal upheld the order of CIT(A).

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(2011) 135 TTJ 357 (Mumbai) Bhumiraj Constructions v. Addl. CIT ITA No. 3751 (Mum.) of 2009 A.Y.: 2006-2007. Dated: 12-4-2010

Section 249(4) — If appeal is filed without payment of tax on returned income, but subsequently the required amount of tax is paid, the appeal shall be admitted on payment of tax and taken up for hearing.

Facts:
Against the appeal filed by the assessee, the CIT(A) noted that self-assessment tax on the income returned by the assessee was not paid. Ten days’ time was given by the CIT(A) to the assessee to make the payment. The assessee expressed its inability to pay the tax. The CIT(A) passed the order u/s.249(4) dismissing the appeal as not maintainable. Against this, the assessee filed further appeal.

Held:
The Tribunal noted as under: 1. It is sine qua non that the assessee must have made the payment of tax on the income returned. If no payment of tax on the income returned is made at all and the appeal is filed, it cannot be admitted.

2. If, however, the appeal is filed without the payment of such tax, but subsequently the required amount of tax is paid, the appeal shall be admitted on payment of tax and taken up for hearing.

3. The objective behind section 249(4) is to ensure the payment of tax on income returned before the admission of appeal. If such payment is made after filing of the appeal but before it is taken up for disposal validates the defective appeal, then there is no reason as to why the doors of justice be closed on a poor assessee who could manage to make the payment of tax at a later date.

4. The stipulation as to the payment of such tax before the filing of first appeal is only directory and not mandatory. Although the payment of such tax is mandatory, the requirement of paying such tax before filing appeal is only directory.

5. The distinction between a mandatory provision and a directory provision is that if the non-compliance with the requirement of law exposes the assessee to the penal provisions, then it is mandatory, but if no penal consequences follow on non-fulfilment of the requirement, then usually it is a directory provision.

6. It is a trite law that omission to comply with a mandatory requirement renders the action void, whereas omission to do the directory requirement makes it only defective or irregular. On the removal of such defect, the irregularity stands removed and the status of validity is attached.

7. When the defect in the appeal, being the nonpayment of such tax, is removed, the earlier defective appeal becomes valid. Once we call an appeal as valid, it is implicit that it is not time-barred. It implies that on the removal of defect the validity is attached to the appeal from the date when it was originally filed and not when the defect is removed.

8. In the instant case, it is found that the assessee paid the tax due on income returned, although after the disposal of the appeal by the CIT(A). On such payment, the defect in the appeal due to non-compliance of a directory requirement of paying such tax before filing of the appeal stood removed. Therefore, this appeal should have been revived by the first Appellate Authority. Under such circumstances the impugned order is set aside and the matter restored to the file of the CIT(A) for disposal of the appeal on merits.

Kumarpal Amrutlal Doshi v. DCIT ITAT ‘G’ Bench, Mumbai Before P. M. Jagtap (AM) and N. V. Vasudevan (JM) ITA No. 1523/Mum./2010 A.Y.: 2006-07. Decided on: 9-2-2011 Counsel for assessee/revenue: B. V. Jhaveri/ S. K. Singh

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Section 54EC — Exemption from capital gains tax if investment is made within six months from the date of transfer of a capital assets in the specified assets — Date of investment — Is it the date when cheque was delivered or encashed or the date of allotment of the bonds — Held the relevant date is the date when the cheque was delivered — Whether NABARD bonds were the specified assets — Held, Yes.

Facts:
The assessee sold a property on 9-8-2005 and earned long-term capital gain of Rs.19.16 lac. He invested Rs.20 lac in NABARD bonds and claimed exemption u/s.54EC. The lower authorities rejected the assessee’s claim on the following two grounds:

The investment was not made within the prescribed period of 6 months from the date of sale; and

NABARD bonds were not the long-term specified assets prescribed under the provisions. The assessee claimed that the application for the bonds and cheque were sent to NABARD by courier on 7-2-2006 which was received by NABARD on 9-2-2006. The bonds were allotted to him by NABARD on 15-2-2006. According to him the date of investment should be considered as the date when the cheque was sent to NABARD. According to the Revenue, the assessee was not able to prove that NABARD had received the application and encashed the cheque before 9-2-2006. As per the bank statement produced by the assessee, the cheque was encashed on 13-2-2006.

As regards whether or not NABARD bonds were long-term specified assets prescribed under the provisions, it was contended by the Revenue that by the Finance Act, 2006, the provisions of section 54EC were amended and NABARD bonds were no longer eligible for exemption.

Held:
The Supreme Court in the case of CIT v. Ogale Glass Works Ltd., (25 ITR 529) had held that payment by cheque realised subsequently relates back to the date of the receipt of the cheque and as per the law, the date of payment is the date of delivery of the cheque. Applying the said principle, the Tribunal held that since the assessee had delivered the cheque to NABARD by 9-2-2006, the date of payment would be the date of delivery of the cheque. The date when the cheque was encashed by NABARD cannot be said to be the date of investment.

As regards whether or not NABARD bonds were long-term specified assets prescribed under the provisions — the Tribunal noted that by the Finance Act, 2006, the clause (b) below Explanation to section 54EC(3) was substituted w.e.f. 1-4-2006, whereby the NABARD bonds were made in-eligible for exemption u/s.54EC. However, the Tribunal pointed out that till 31-3-2006, the said bonds were one of the eligible specified assets. Accordingly, it held that since the assessee had made investment on 9-2-2006, the contention of the Revenue that the law as on the 1st day of the assessment year should be applied cannot be accepted. For the purpose, it also relied on the decision of the Gujarat High Court in the case of CIT v. Nirmal Textiles, (224 ITR 378). It further observed that if the Revenue’s contention was accepted, then the assessee could never claim deduction u/s.54EC, because the period of 6 months would expire well before the 1st day of assessment year.

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Part A : DIRECT TAXES

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1) Where the variation between the arm’s length price determined u/s. 92C and the price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm’s length price for assessment year 2012-13.Notification No. 31/2012 dated 17th August,2012

2) Income-tax (Dispute R esolution Panel)(first amendment) R ules, 2012 – Notification No. 33/2012 dated 24th August,2012

CBDT will assign one CIT as a Reserve Member to each panel who would replace any Member of the Panel as and when the DGIT(Intl Tax) deems it necessary. He would function as a Member of the Panel in addition to his regular duties. Further, the notification states that the DGIT (Intl Tax) maytransfer the case of an eligible assessee from one Panel to the other after giving him due opportunity of being heard.

3) Report u/s. 115JC of the Income-tax Act, 1961 for computing adjusted total income and alternate minimum tax for LLP –Rule 40BA and Form 29C introduced– Notification no. 34/2012 dated 28th August 2012

4) Multilateral convention on mutual administrative assistance on tax matters with OECD member countries signed on 26th January, 2012 notified – Notification 35/2012 dated 29th August,2012

5) Advance Pricing Agreement Scheme notified- Notification 36/2012 dated 30th August, 2012

Income-tax (10th Amendment) Rules, 2012 notifies following rules detailing the Advance Pricing Agreement Scheme:

  •  Rule 10F explains the meaning of the terms application, bilateral agreement, covered transactions, most appropriate transfer pricing method, etc
  •  Rule 10G any person who has entered into an international transaction or any person contemplating to do so, can take benefit of this scheme.
  •  Rule 10H contains provisions for the Pre-filing Consultation.Before filing an application – in Form 3CEC to DGIT(Intl tax), meeting will be held between the team involving IT authorities and experts nominated by DGIT(Intl tax) and the person filing the application.
  •  Rule 10I specifies the procedure for making an application for Advance Pricing Agreement in Form 3CED along with the requisite fee. Such an application should be made to the DGIT(Intl tax) in case of a unilateral agreement and to the Competent Authority in case of a bilateral or multilateral agreements. Time limits are also prescribed for filing such application.
  •  Rule 10J contains procedure for withdrawal of the application by the assessee before finalisation of the terms of agreement in Form 10 CEE. Fees paid alonwith the application would not be refunded on withdrawal.
  •  Rule 10K details procedure for preliminary processing of application wherein any deficiencies or defects would be identified and applicant would be given the opportunity to rectify the same within prescribed time limit. In case thesame is not done, The DGIT(Intl tax) or the Competent Authority, as the case may pass an order after giving due opportunity, not allowing the application to be processed further. Rule 10L lays down the procedure for framing the agreement.
  •  Rule 10M provides that the Agreement would not be binding on the Board or the applicant if any of the critical assumptions change. In such an event, a notice needs to be given and the Agreement can be modified by following the prescribed procedure. The revision or the cancellation of the agreement shall be in accordance with rules 10Q and 10R respectively.
  •  Rule 10N provides for revision of the application.
  •  Rule 10O provides for the Annual Compliance Report to be furnished by the applicant in Form 3CEF.
  •  Rule 10P details the Annual Compliance Audit of the Agreement by the jurisdictional TPO.  

Rules 10S prescribes the renewal of the said agreement and Rule 10T deals with Miscellaneous matters. Rule 44GA has been introduced, which prescribes the procedure to be followed to deal with requests for bilateral or multilateral agreements

6) Income-tax (11th Amendment) Rules, 2012. -Notification No. 37 dated 12th September 2012 Rule 31ACB and Form 26A introduced being the format of the certificate to be issued by an Accountant under the first proviso to sub-section (1) of section 201. Rule 37J and Form 27BA introduced being the format of the certificate to be issued by an Accountant under first proviso to sub-section (6A) of section 206C

7) Cost Inflation Index for the financial year 2012-13 is 852 – Notification No. 38/2012 dated 17 September 2012

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Section 263 r.w.s. 40(b) – Allowability of interest to partners – Interest amount calculated as per daily product method by the assessee – Whether CIT is justified in holding the view that the interest should be calculated on the average amount of opening and closing balances – Held, no.

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2. Muthoot Bankers vs. DCIT
In the Income Tax Appellate Tribunal
Cochin Bench: Cochin
Before N. R. S. Ganesan (J. M.) and B. R.
Baskaran (A. M.)
ITA No. 223/Coch/2010
Decided on 27.07.2012
Counsel for Assessee / Revenue: R.
Sreenivasan / A. S. Bindhu

Section 263 r.w.s. 40(b) – Allowability of interest to partners – Interest amount calculated as per daily product method by the assessee – Whether CIT is justified in holding the view that the interest should be calculated on the average amount of opening and closing balances – Held, no.


Facts:

The CIT noticed that the assessee had paid interest of Rs. 2.05 crores to a partner on his current account, which was computed under daily product method. According to him, it should have been calculated on the average amount of opening and closing balances, based on which, the interest payable to partner worked out to Rs. 1.59 crore. Accordingly, he set aside the order of the AO by holding that the assessment was erroneous and prejudicial to the interest of the revenue. The assessee appealed before the tribunal challenging the order of the CIT.

Held:

Referring to the Supreme court decision in the case of Malabar Industrial Co. Ltd. vs. CIT (243 ITR 83), the tribunal observed that the revision of order u/s. 263 is permissible only after showing that the order passed by the AO is erroneous and prejudicial to the interest of the revenue. It further noted that the assessee has followed the product method for the purpose of calculating interest payable to the partner, since the partner was having frequent transaction of both receipts and payments. According to it, the said product method is scientific and also followed by the banks and financial institutions. The method takes into account all transactions of payments and receipts carried out throughout the year. On the other hand, the method suggested by the CIT was unscientific which does not taken into account the transactions that have taken place during the year. Accordingly, it held that the CIT has failed to establish that the assessment order was erroneous. Therefore, it set aside the order of the CIT.

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Section 12A – Registration as charitable institution – Assessee formed for improving the quality and profitability of the members’ enterprises by providing suitable platform to its CEOs who only could become assessee’s members – Whether entitled to registration – Held, yes.

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1. XYZ vs. DIT (Exem)
In the Income Tax appellate Tribunal “C”  
Bench: Mumbai
Before N. V. Vasudevan (J. M.) and
rajendra (A. M.)
ITa No. 3503/Mum/2011
Decided on 13.06.2012
Counsel for Assessee / Revenue: A. H. Dalal / V. V. Shastri

Section 12A – registration as charitable institution – assessee formed for improving the quality and profitability of the members’ enterprises by providing suitable platform to its CEOs who only could become assessee’s members – Whether entitled to registration – Held, yes.


Facts:

The assessee incorporated as a private limited company was granted license u/s. 25 of the Companies Act, 1956. Its main object as per its Memorandum of Association was as under: “To promote and provide networking facilities to the Chief Executive Officers (CEOs) of both private and public companies for improving the quality and profitability of their enterprises by providing a platform for CEOs for exchange of ideas and promotion of entrepreneurship through shared experience in India and to apply its income or profits if any, solely for the promotion of its objects and for the promotion of commerce in India and abroad.” The assessee applied for registration u/s. 12A.

According to the DIT, the object for which the assessee was incorporated were clearly not for the benefit of general public as a whole, but was confined to specific members only, viz., CEOs of companies and was commercial in nature. Hence, the assessee cannot be termed as a charitable association falling within the definition of section 2(15). Further, from the details filed, he noted that most of the activities of the assessee were held outside India. Therefore, relying on the decision of the Bombay high court in the case of State Bank of India (169 ITR 298), he held that the trust would not be entitled to exemption.

Held:

From the decision of the Supreme Court in the case of Surat Art Silks Cloth Manufacturers Association (121 ITR 1), the tribunal noted that the object which seeks to promote or protect the interest of a particular trade or industry is object of public utility. It further noted that the main object of the assessee, was to promote networking facilities to the CEOs for improving the quality and profitability of their enterprises, by providing a platform for CEOs for exchange of ideas and promotion of entrepreneurship through shared experience in India. According to it, advancement or promotion of trade, commerce and industry leading to economic prosperity ensures a benefit of the entire community. It further observed that, that prosperity would also be shared by those who engage in the trade, commerce and industry, but on that account, the purpose is not rendered any less an object of general public utility. As regards holding of conference abroad, it held that the said act would not make the activities of the assessee being carried out outside India. The benefit of such conference will ultimately go to assessee and its members. Thus, it held that the reasons assigned by the DIT for rejecting the assessee’s application for registration cannot be sustained.

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Sections 50C of the Income Tax Act, 1961 – Section 50C cannot be invoked on receipt of refund of booking advance paid earlier to a builder.

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3. (2012) 147 TTJ 94 (Ahd)
ITO V. Yasin Moosa Godil
ITA No.2519 (Ahd.) of 2009
A.Y.2006-07. Dated 13.04.2012

Sections 50C of the Income Tax Act, 1961 – Section 50C cannot be invoked on receipt of refund of booking advance paid earlier to a builder.

The assessee had booked a flat with a builder and paid advance of Rs.16.12 lakh for the same from time to time. Since the entire amount was not paid by the assessee, the builder had neither handed over the possession of the flat to the assessee nor had he executed any registered sale deed in favour of the assessee. During the relevant assessment year, the assessee requested the builder to cancel the booking and return the advance paid of Rs. 16.12 lakh. The builder, the new buyer and the assessee entered into a tripartite registered sale agreement for transfer of the said flat, wherein the appellant (addressed as the vendor in the sale agreement) was to transfer all his rights, title and interest in the said flat to the buyer, the builder (addressed as the confirming party in the sale agreement) was to give possession of the said flat to the buyer and was also to allot the said flat to the buyer, which was originally agreed to be allotted to the assessee and the new buyer (addressed as the purchaser in the sale agreement) was to acquire only the rights in the said flat from the appellant and the possession and the allotment thereof from the builder. Accordingly, during the year under consideration, the assessee received back from the buyer the booking amount paid by him to the builder.

The Assessing Officer held that the flat was registered for value of Rs.57.57 lakh as against Rs.16.12 lakh refund received by the assessee. He, therefore, treated the difference of Rs.41.45 lakh as unexplained income u/s.50C. The CIT(A) deleted the addition made by the Assessing Officer.

The Tribunal, relying on the decision in the case of Dy.CIT V. Tejinder Singh (2012) 147 TTJ 87 (Kol)/ (2012) 72 DTR (Kol) (Trib) 160 held in favour of the assessee. The Tribunal noted as under:

Prior to the execution of the tripartite agreement, the assessee had neither paid full consideration of the flat nor had he acquired the possession of the flat from the builder.

 From the agreement, it was evident that it is the builder who is transferring the capital asset i.e. the flat to the new buyer by handing over the possession of the flat as also the legal ownership thereof to the new buyer and the appellant only received back the advance paid by him to the builder by relinquishing his booking right in respect of the said flat.

From the reading of section 50C, it is evident that it is a deeming provision and it covers only to land or building or both. Section 50C can come into play only in a situation where the consideration received or accruing as a result of the transfer by an appellant of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of State Government for the purpose of payment of stamp duty in respect of such transfer. It is a settled legal proposition that deeming provision can be applied only in respect of the situation specifically given and hence cannot go beyond the explicit mandate of the section.

Therefore, it is essential that for application of section 50C the transfer must be of a capital asset, being land or building or both. If the capital asset under transfer cannot be described as “land or building or both”, then section 50C will not apply.

From the facts of the case, it is seen that the assessee has transferred booking rights and received back the booking advance. Booking advance cannot be equated with the capital asset and therefore section 50C cannot be invoked.

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S/s 56(2)(v) – Gift of India Millennium Deposit Certificate (IMD) received by an assessee is not taxable u/s. 56(2)(v) since the same is not money.

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2. 2012-TIOL-528-ITAT-MUM
ACIT v Anuj Jitendra Mehta
ITA No. 6399/Mum/2010
Assessment Year: 2006-07.  
Date of Order: 05.09.2012

S/s 56(2)(v) – Gift of India Millennium Deposit Certificate (IMD) received by an assessee is not taxable u/s. 56(2)(v) since the same is not money.


Facts:

On 25.9.2005, the assessee received, from a nonresident Indian, a gift in the form of IMD of face value of INR94,000. On 5.10.2005, the assessee prematurely encashed these IMDs and received maturity amount of INR139,452 equivalent to Rs. 98,56,827. While assessing the total income of the assessee, the AO stated that the assessee utilised the unaccounted income of the group company to obtain a non-genuine gift. He also held that the IMDs were equivalent to sum of money and attracted provisions of section 56(2) (v). He added the amount received by the assessee u/s.. 56(2)(v) on the ground that the status of IMDs with the facility of premature encashment available was on par with the legal status of a bank fixed deposit. Aggrieved, the assessee filed an appeal to the CIT(A) who held that the gift was a genuine gift and following the ratio of the decision of ITAT in the case of Shri Anuj Agarwal (130 TTJ 49)(Mum) held that the gift of IMDs is gift in kind and outside the purview of section 56(2)(v) of the Act. He deleted the addition made by the AO. Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:

 The Tribunal noted that the facts of the present case before it were identical to the facts before the Tribunal in the case of Haresh N. Mehta (ITA No. 6804/M/2010, AY 2006-07, order dated 31.1.2012). In the case of Haresh N. Mehta, the Tribunal relying on the decision of co-ordinate Bench in the case of ACIT v Anuj Agarwal, 130 TTJ 49(Mum) and also the decision of ITAT Vizag Bench in Sri Sarad Kumar Babulal Jain v ITO (ITA No. 29/Viz/2011) order dated 11.8.2011 dismissed the appeal of the department by confirming the order of CIT(A). Following the decision of the

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ITO v DKP Engineers & Construction P. Ltd. ITAT Mumbai `D’ Bench Before D. Manmohan (VP) and Rajendra Singh (AM) ITA No. 7796/M/2010 A.Y.: 2006-07. Decided on: 31st August, 2012. Counsel for revenue/assessee: Amardeep /Dr. K. Shivram & Rahul Hakani

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S/s. 28, 45 – In case of assessee following project completion method, sale proceeds of TDR allotted consequent to development of road need to be reduced from WIP.

Facts:
The assessee company engaged in construction activity had undertaken to develop the D.P. Road leading to Vikroli property on which it was to construct flats. Upon development of the road, the assessee became entitled to TDR which was sold on 5.8.2005. Cost incurred on development of road was considered as part of WIP and the sale consideration of TDR was reduced from WIP which had the effect of reducing the total expenditure incurred till the end of the year, on the project under development. The AO assessed the receipts arising on sale of TDR under the head `Income from Capital Gains’.

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the receipt of TDR had direct nexus with the work done by the appellant and was incidental to the entire project undertaken. It held that the assessee was correct in reducing the sale proceeds of TDR from work-in-progress. The Tribunal confirmed the order passed by the CIT(A) and dismissed the appeal filed by the revenue.

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A.D.I.T. v Shri Vile Parle Kelvani Mandal ITAT Mumbai ‘E’ Branch Before Dinesh Kumar Agarwal (J.M.) and N.K. Billaiya (A.M.) ITA No. 7106/Mum/2011 Assessment Year: 2008-09. Decided on 05-10-2012 Counsel for Revenue/Assessee : A.B. Koli/A.H. Dalal

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Section 11 – (i) Income from management development program earned by educational institute considered as eligible for exemption; (ii) Income from hiring premises and advertisement rights since applied for educational activities eligible for exemption; (iii) Claim for depreciation on fixed assets, the cost of which was allowed as application of income, allowed.

Facts:
The assessee is a trust engaged in running more than 30 schools and colleges and is registered u/s 12A and also under the Bombay Public Trust Act. The assessee has got approval u/s 10(23C)(vi) as approved educational institution valid from A.Y. 2008-09 and onwards.

The return was filed declaring total income at Rs. ‘nil’. However, the assessment was completed at an income of Rs. 4.19 crores vide assessment order dtd. 31-12-2010 passed u/s. 143(3) of the Act. This was based on the finding that:

i) the assessee had shown receipt of Rs. 3.25 crore under the head ‘Management Development Program & Consultancy Charges’ in the case of one of its institutions viz., NMIMS University. According to the AO, the same was not education in itself, as defined by the Supreme Court in the case of Lok Shikshana Trust vs. CIT (1975) 101 ITR 234 even though it may be incidental to its main activity of providing education. He further observed that since it was an organised systematic activity, it can be called business incidental to the main objects of the trust. He further observed that since the assessee had maintained only the ledger account for this activity separately, as against the requirement to maintain separate books of accounts, the assessee would not be entitled to exemption u/s. 11(4A) of the Act. Accordingly, the difference of Rs. 2.29 crore between the receipt and expenditure was treated as the business income.

ii) The income from hiring premises and advertisement rights of Rs. 1.91 crore was treated as business income.

On appeal, the CIT(A) observed that the element of business was missing in conducting management courses i.e. profit motive, repetitive nature, frequency of transactions etc.. Further, according to him, the assessee was maintaining separate ledger account for Management Development Programme, which should be regarded as sufficient compliance of provisions of section 11(4A) of the Act as held by the Delhi Tribunal in the case of ITO v Jesuit Conference of India (2010) 40 DTR (Del) (Tribunal) 493. As regards the income from hiring of premises and advertisement rights, he noted that income from these rentals were applied towards the educational purpose of the Institute and, hence, eligible to claim exemption u/s 11(1). Further, relying on the decision of the Supreme Court in CIT vs. Andhra Chamber of Commerce (1965) 55 ITR 722 (SC), wherein it has been held that the rental income from letting out of property cannot be held to be income from business and the income will be exempt as income from property held for charitable purpose, he directed the A.O. to delete the addition made by him.

The other issue before the tribunal was regarding allowability of depreciation claimed by the assessee. According to the AO, since the cost of fixed assets was fully allowed as application of funds, the depreciation on the same cannot be allowed. In support, reliance was placed on the decision of the Supreme Court in the case of Escorts Ltd. vs. Union of India (1993) 199 ITR 43. On appeal the CIT(A) distinguished the said decision and relied on the decision of the Bombay High Court in CIT vs. Institute of Banking, (2003) 264 ITR 110 and directed the AO to allow depreciation.

Before the tribunal, the assessee pointed out that it was maintaining separate books of accounts. In support, the separate accounts i.e. balance sheets etc. of all the Institutes were placed on record. The revenue, as regards allowability or otherwise of depreciation claimed by the assessee, also relied on the decision of the Kerala High Court in Lissi Medical Institutions, Kochi v CIT, (2012)-TIOL-303-HC-Kerala, ITA No. 42 of 2011 dtd. 17-2-2012.

Held:
In the absence of any contrary material placed on record by the Revenue against the aforesaid finding of the CIT(A) and keeping in view that the assessee was maintaining separate books of accounts for each Institute and also keeping in view that the rental income was applied towards the educational purpose of the Institute, the tribunal upheld the order of the CIT(A).

As regards the allowability of depreciation – the tribunal observed that the assessee was not claiming double deduction on account of depreciation as has been held by the AO. According to it, the income of the assessee being exempt, the assessee was only claiming that depreciation should be reduced from the income for determining the percentage of funds which have to be applied for the purpose of Trust. Thus, there was no double deduction claimed by the assessee. The tribunal also referred to the decision of the Punjab & Haryana High Court in CIT v Market Committee, Pipli (2011) 330 ITR 16 where the decision of the Supreme Court in Escorts Ltd.’s case was distinguished, while relying on various decisions including the decision of the jurisdictional High Court in Institute of Banking’s case. Accordingly, the order of the CIT(A) was upheld and deleted the disallowance made by the AO.

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(2012) 73 DTR (Mum)(Trib) 265 Kotak Securities Ltd. v DCIT A.Y.: 2004-05 Dated: 3-2-2012

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TDS u/s. 194H – Commission paid to bank for issuing bank guarantee is not liable for TDS u/s. 194H

Facts:
The assessee was a company engaged in stock broking business and was a member of the BSE and NSE. During the course of business carried on by the assessee, it furnished bank guarantees, mainly in lieu of margin deposits, to various agencies, such as BSE and NSE. In consideration for issuance of such bank guarantees, banks charged the fees which was termed as bank guarantee commission. He further noted that the assessee has taken bank guarantees from various banks and these bank guarantees protect the stock exchanges from any default by the assessee and acts as security for due performance and fulfilment of obligations by the assessee. The bank guarantee commission paid by the assessee for these bank guarantees, according to the AO, was liable for deduction at source u/s. 194H. The assessee’s failure to deduct the tax source was, accordingly. visited with demands raised u/s. 201(1) r.w.s. 194H, to make good the shortfall in TDS and u/s. 201 (1A) r/w s. 194H, to compensate interest for delay in realizing the TDS revenues. Aggrieved by the stand so taken by the AO, assessee carried the matter in appeal before the CIT(A) but without any success.

Held:
Even when an expression is statutorily defined u/s. 2, it still has to meet the test of contextual relevance as section 2 itself starts with the words “In this Act, unless context otherwise requires…”, and, therefore, contextual meaning assumes significance. Every definition in the IT Act must depend on the context in which the expression is set out, and the context in which expression ‘commission’ appears in section 194H, i.e. along with the expression ‘brokerage’, significantly restricts its connotations. The common parlance meaning of the expression ‘commission’ thus does not extend to a payment which is in the nature of fees for a product or service; it must remain restricted to a payment in the nature of reward for effecting sales or business transactions etc.

The inclusive definition of the expression ‘commission or brokerage’ in Explanation to section 194H is quite in harmony with this approach. Therefore, what the inclusive definition really contains is nothing but normal meaning of the expression ‘commission or brokerage’. An inclusive definition does not necessarily always extend the meaning of an expression. When inclusive definition contains ordinary normal connotations of an expression, even an inclusive definition has to be treated as exhaustive. That is the situation in this case as well. Even as definition of expression ‘commission or brokerage’, in Explanation to section 194H, is stated to be exclusive, it does not really mean anything other than what has been specifically stated in the said definition.

Principal agent relationship is a sine qua non for invoking the provisions of section 194H. In the present case there is no principal agent relationship between the bank issuing the bank guarantee and the assessee. When bank issues the bank guarantee, on behalf of the assessee, all it does is to accept the commitment of making payment of a specified amount to, on demand, the beneficiary, and it is in consideration of this commitment, the bank charges a fees which is customarily termed as ‘bank guarantee commission’. While it is termed as ‘guarantee commission’, it is not in the nature of ‘commission’ as it is understood in common business parlance and in the context of the section 194H. This transaction is not a transaction between principal and agent so as to attract the tax deduction requirements u/s. 194H.

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2012-TIOL-559-ITAT-DEL ITO v Indian Printing Packaging & Allied Machinery Manufacturers Association ITA No. 2934/Del/2012 Assessment Year: 2003-04. Date of Order: 31-08-2012

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S/s. 194I, 197, 201, 201(1A)–When certificate u/s. 197 has been issued and is valid till 31st March of the financial year, demand u/s. 201/201(1A) cannot be sustained for deduction of tax at a lower rate during the period before the issue of certificate.

Facts:
The assessee had on 01-04-2002 made a payment of advance rent to NESCO Ltd. after deduction of TDS @ 2% instead of 20% as provided u/s. 194I. NESCO Ltd. had on 1.4.2002 applied for issuance of certificate u/s 197 authorising the assessee to deduct TDS @ 2%. The certificate u/s. 197 authorising the payee to deduct TDS @ 2% u/s. 194I was granted on 23-04- 2002. This certificate was valid upto 31-03-2003. The tax so deducted by the assessee was deposited by the assessee to the Government Account on 06-05-2002.

The Assessing Officer levied tax u/s. 201(1) on the assessee for deducting tax u/s. 194I @ 2% instead of 20% on the ground that at the time of deduction of tax (i.e. at the time of payment of advance rent) the assessee did not have certificate u/s. 197. He also levied interest u/s. 201(1A).

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the assessee’s appeal and quashed the demand raised by the AO.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the application for certificate u/s. 197 was made before the payment was made by the assessee. It also noted that the certificate was to remain in force till 31-03-2003 unless cancelled earlier. The Tribunal agreed with the finding of CIT(A) that such a breach, if at all, was only a venial breach or default. It held that such default could have been ascribed to the assessee only if no tax had been deducted in accordance with the provisions of section 201(1). Assessee can be deemed to be an assessee in default only in the case of non-payment of tax within the prescribed time. In the present case, tax having been deducted @ 2% and having been deposited before the prescribed date, by no stretch of imagination can the assessee be deemed to be an assessee in default. The Tribunal decided the issue in favour of the assessee.

The appeal filed by the revenue was dismissed.

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2012-TIOL-530-ITAT-MUM DCIT v BOB Cards Ltd. Assessment Year: 2007-08. Date of Order: 18-09-2012

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Section 37 – Amount of TDS borne by the assessee, as part of its liability under an agreement entered into by the assessee, is allowable as a deduction.

Facts:
The assessee company, engaged in the business of credit card operations and financing payments, had in its return of income claimed under the head Operating Expenses a sum of Rs. 21,61,004 towards non-reimbursible TDS for Master Card and Visa Card. This amount represented TDS which was to be borne by the assessee under the agreements entered into by the assessee with Visa and Master International. The Assessing Officer (AO) disallowed these payments on the ground that they are not incurred wholly and exclusively for business purposes.

Aggrieved, the assessee filed an appeal to the CIT(A) who allowed the appeal by relying on the decision of the Madras High Court in the case of Standard Polygraph Machines P. Ltd. (243 ITR 788) wherein it has been held that amount paid by the assessee for discharging a liability undertaken in terms of an agreement entered into between the assessee and its collaborator, forms part of consideration for agreement relating to knowhow and hence is allowable.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:
The Tribunal held that the payment made as a result of a contractual liability is an allowable expenditure. It held that the CIT(A) was correct in placing reliance on the decision in the case of Standard Polygraph Machines P. Ltd. It also noted that the issue has been decided in favor of the assessee by `I’ Bench of ITAT vide order dated 20-06-2012 (AY 2003-04, 2004-05 and 2005-06); ITA Nos. 4882, 2475, 6527/Mum/2010). Following the decision of the co-ordinate bench, the Tribunal decided the grounds in favour of the assessee.

The appeal filed by the revenue was dismissed.

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[2012] 23 taxmann.com 347 (Mum) Ashok C. Pratap v Addl CIT ITA No. 4615/Mum/2011 Assessment Year: 2007-08. Date of Order: 18.07.2012

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Section 56(2)(vi) – Amount received by a Trusteecum- Beneficiary of a discretionary trust, on dissolution of a trust, is not chargeable to tax u/s 56(2)(vi).

Facts:
The mother of the assessee was settlor of a private discretionary trust, created vide trust deed dated 19th January, 1978, wherein the assessee and his wife were the trustees and the two daughters of the assessee (viz. grand daughters of the settlor) were the beneficiaries. By letter dated 15th January, 2001, the assessee and his wife were added as beneficiaries to the said trust. On 30th March, 2001, two daughters of the assessee, both being major, signed the document of release whereby they relinquished their right, title, interest, share and benefits in and from the property and assets of the said trust including accumulated income. On 27th February, 2007, the said trust was dissolved and the assets were equally distributed amongst the two beneficiaries viz. the assessee and his wife. The assessee received Rs. 1,36,00,595. This sum of Rs. 1,36,00,595 was not included by the assessee in his returned income.

While assessing the total income of the assessee for AY 2007-08, the AO noticed that the trust was never registered u/s 12AA of the Act. He held that if the assessee claims to be a trustee, then his status will always be of a trustee and if he claims to be one of the beneficiaries, then he has no right to dissolve the trust. Accordingly, he held that, applying the provisions of section 77(b) of the Indian Trust Act, he included the said sum of Rs. 1,36,00,595 in the total income u/s 56(2)(vi).

Aggrieved the assessee preferred an appeal to CIT(A) who upheld the addition on the ground that the trust is not a relative of the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that it is an un controverted fact that the trust had borne tax at maximum marginal rate on its income and also that the assessee had received the amount in the capacity of beneficiary. It held that amount received being in pursuance of dissolution of the trust cannot be termed to be an amount received by the beneficiaries “without consideration”. The addition made by the AO and upheld by CIT(A) was deleted.

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(2012) 72 DTR (Mum)(Trib) 175 Sandvik Asia Ltd. v. JCIT A.Y.: 1994-95 Dated: 29-11-2011

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Section 40(a)(i) – No disallowance of incremental amount due to foreign exchange rate fluctuation on account of non-deduction of TDS u/s 195 if the TDS is already deducted earlier at the time of credit.

Facts:
The assessee had entered into a research and know-how agreement with A.B. Sandvik Coromant, Sweden during AY 1991-92 in terms of which the assessee was liable to pay Swiss Kroner 38,58,000. In the assessment order for AY 1991-92, the AO held that since the duration of the agreement was five years, the appellant was entitled to deduction of 1/5th of the amount payable under the agreement (Swiss Kroner 7,71,600) in each assessment year for five years. However, the assessee had deducted TDS also and remitted the same to the exchequer, on the entire amount of fees payable as the assessee had credited the entire amount in the account books. Accordingly, in the year under consideration, assessee claimed deduction of Rs. 42,89,872 as fourth instalment of fee in its return of income. While remitting the instalment during the year, it suffered foreign exchange fluctuation loss of Rs. 8,82,234 which was comprised in its claim of Rs. 42,85,872. The CIT (A) noticed that deduction of earlier instalments have been allowed on actual payment basis and, hence, directed that even in this year deduction for exchange loss should be allowed. However, he directed the AO to check whether remittances are actually made subject to appropriate deduction of tax at source as per section 40(a)(i) of the Act.

Thereafter, AO passed an order denying the claim of deduction of foreign exchange fluctuation loss amounting to Rs. 8,82,234 on the ground that TDS was deducted in the initial year only with respect to the amount (Rs. 34,07,638) corresponding to Sw. Kr 7,71,600 (i.e. 1/5 of the amount payable) and not on the additional sum of Rs. 8,82,234 (foreign exchange loss) and was to be disallowed u/s 40(a)(i) of the Act. The CIT(A) upheld the disallowance.

Held:
Section 195(1) of the Act requires TDS either “at the time of credit” or “at the time of payment” of an income, whichever is earlier. When the assessee credited the income payable to the foreign concern as research and technical know-how in the earlier year, the provision so made on the basis of the exchange rate then existing was subjected to TDS u/s 195(1). Notably, section 195(1) of the Act prescribes TDS on a sum payable to non-resident either at time of credit or at the time of payment, whichever is earlier. Quite clearly, section 195(1) does not envisage TDS at both instances, i.e. at the time of credit as well as at the time of payment thereof.

Also, as per agreement, the assessee is to make a total payment of Swiss Kroner 38,58,000 and out of which, it was required to remit Swiss Kroner 7,71,600 during the year under consideration. In this year, the cost of remitting the amount to foreign concern has increased due to foreign exchange fluctuation and there is no additional amount payable to foreign concern. The transaction remained of Swiss Kroner 38,58,000 and the same having been subjected to TDS earlier at the time of credit, it would not again call for deduction of tax at source per section 195(1) of the Act.

Alternatively, out of the total claim of Rs. 42,89,872 as fourth instalment of research and know-how fee in this year, tax has been deducted in relation to a sum of Rs. 34,07,638 and, therefore, it is merely a case involving short deduction of tax at source and not a case for failure to deduct tax at source. In decisions of Chandabhoy & Jassobhoy [ITA No. 20/Mum/2010] and S.K. Tekriwal [ITA No. 1135/ Kol/2010], which have been rendered in the context of section 40(a)(ia) of the Act, it has been held that the disallowance envisaged in section40(a)(ia) can be invoked only in the event of non-deduction of tax, but not in cases involving short deduction of tax at source. The ratio of the decisions is squarely applicable in the present case also, inasmuch as the provisions of section 40(a)(ia) of the Act are akin to those of section 40(a)(i). On this count also, the sum of Rs. 8,82,234 cannot be disallowed u/s 40(a)(i).

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(2012) 72 DTR (Mum)(Trib) 167 ITO v. Yasin Moosa Godil A.Y.: 2006-07 Dated: 13-04-2012

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Section 50C does not apply to transfer of booking right in a flat.

Facts:
During the course of assessment proceedings the AO noticed that in the preceding assessment year, the assessee had booked a flat with a builder which was under construction. Out of the agreed aggregate consideration of Rs. 16,12,000, an amount of Rs.1,00,000 was kept outstanding, since the builder had failed to give the possession of the flat in time and also failed to allot the promised parking place. As the entire amount was not paid by the assessee, the builder had neither handed over the possession of the flat to the assessee nor had executed any registered sale deed in favour of the assessee. In the current assessment year, the assessee requested the builder to cancel the booking of the flat and return the booking amount as paid by him towards the said flat. Upon such request, a tri-party registered sale agreement for transfer of said flat was executed between the assessee, the builder and the new buyer wherein the assessee was to transfer all his rights, title and interest in the said flat to the buyer and the builder was to give the possession of the said flat to the buyer and was also to allot the said flat to the buyer which was originally to be allotted to the assessee. Accordingly, during the year under consideration, the appellant received back the booking amount paid by him to the builder from the buyer.

During the course of assessment proceedings, the AO observed that the Jt. Sub-Registrar’s Office had considered the value of the said flat at Rs.57,57,255 for registration of flat as against the total value of Rs.16,12,000. Accordingly, on the basis of information received from the Jt. Registrar’s Office, the AO treated the difference amount of Rs.41,45,255 (i.e. Rs. 57,57,255 – Rs. 16,12,000) as the unexplained income of the appellant and made addition thereof to the total income of the assessee.

The CIT(A) deleted the addition on the ground that such addition can only be made u/s 50C and in the present case provisions of section 50C do not apply since what is transferred is only booking rights in the flat.

Held:
It is an undisputed fact that prior to the execution of the tripartite agreement the assessee had neither paid full consideration of the flat nor had the assessee acquired the possession of the flat from builder. From the agreement it is evident that it is the builder who is transferring the capital asset i.e. the flat to the new buyer, by handing over the possession of the flat as also the legal ownership thereof to the new buyer and the assessee only received back the booking advance paid by him to the builder, by relinquishing his booking right on the said flat.

It is settled legal proposition that deeming provision can be applied only in respect of the situation specifically given and one cannot go beyond the explicit mandate of the section. It is essential that for application of section 50C, the transfer must be of a capital asset, being land or building or both. If the capital asset under transfer cannot be described as “land or building or both” then section 50C will not apply. From the facts of the case narrated above, it is seen that the assessee has transferred booking rights and received back the booking advance. Booking advance cannot be equated with land or building and therefore section 50C cannot be invoked.

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Wealth Tax: Valuation of land in excess of ULC limit: Section 7 of W. T. Act, 1957: A. Y. 1991-92: Land in excess of limit permitted by ULC Act to be valued taking restriction into account and not at market value.

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[Aims Oxygen Pvt. Ltd. v. CIT; 345 ITR 456 (Guj.) (FB):]

The assessee owned certain open land which was the subject of the Urban Land (Ceiling and Regulation) Act, 1976. For the A. Ys. 1988-89 to 1990-91, the Tribunal had held that for the purposes of wealth tax, the valuation of the land in excess of the limit laid down under the 1976 Act had to be made on the basis of the compensation which the assessee would be entitled to receive under the 1976 Act. For the A. Y. 1991-92, the Tribunal directed the Assessing Officer to value the light in the light of the above decisions for the earlier years. The Assessing Officer valued the land at market value on the basis of the report of the Departmental Valuation Officer. The Tribunal confirmed the order of the Assessing Officer.

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

“i) The land of the assessee was acquired as early as in 1960. The land in question was declared surplus land under the 1976 Act, which had a depressing effect on the value of the asset. The valuation has to be made on the basis of the assumption that the purchaser would be able to enjoy the property as the holder, but with restrictions and prohibitions contained in the 1976 Act and in such case value of the property or land would be reduced.

ii) The Department, having already accepted the depressed valuation for the A. Ys. 1988-89 to 1990-91 and then for the A. Y. 1991-92, it was not open to the department to assess the property on the basis of the market value, without any restriction or prohibition.

iii) The Tribunal is incorrect in holding that the land should be valued in accordance with the open market rate, without any restriction and prohibition.

iv) Whenever there is any restriction on transfer of any land, the value of the property or land, as the case may be, would be normally reduced and the valuation is to be ascertained, taking note of the restrictions and prohibitions contained in the Ceiling Act as if the land is notified as excess land.

v) Once the competent authority issues any notification u/s. 10(1) or (3) of the Land Ceiling Act, the land has to be deemed to have been acquired by the Government and what the assessee owned was the right to compensation and in such case, the compensation amount would only be the maximum compensation as provided under the Ceiling Act which is to be taken into consideration.”

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TDS: S/s 194H, Expl (i), 201(1A): A. Ys. 2009- 10 and 2010-11: (i) Trade discount is not a discount, commission or brokerage: Tax not deductible at source: (ii) Failure to deduct tax at source: When payer deemed in default: Only if payee fails to pay tax directly: Tax not to be recovered from payer if payee pays directly : Liability of payer only for interest and penalty:

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[Jagran Prakashan Ltd. v. Dy. CIT; 345 ITR 288 (All): 251 CTR 65 (All.)]

The petitioner is a publisher of a hindi daily newspaper. The petitioner had granted trade discount of 10% to 15% to the advertising agencies in accordance with the rules and regulations of the Indian Newspaper Society of which the petitioner was a member. For the A. Ys. 2009-10 and 2010-11, the Assessing Officer treated the petitioner as an assessee in default on the ground that the petitioner has failed to deduct tax at source u/s 194H of the Income-tax Act, 1961 on the trade discount and also passed orders u/s 201(1A) levying interest. The case of the Department was that allowing trade discount to the advertising agencies by the petitioner is nothing but payment of commission within the meaning of section 194H Explanation (i) and the petitioner was liable to deduct tax at source.

The petitioner preferred a writ petition challenging the order. The Allahabad High Court allowed the writ petition and held as under:

“i) The proceedings u/s 201/201(1A) of the Act were clearly not permissible because the two fundamental facts did not exist: (a) the relationship between the petitioner and the advertising agency was not that of principal and agent; and (b) advertising agencies rendered service to advertisers and were accredited by the society not as an agent of the newspaper agency. The observation of the Assessing Officer that advertising agencies rendered service to the petitioner was without any basis and foundation. No fundamental facts existed on the basis of which any inference could be drawn that advertising agencies were agents of the petitioner and further that advertising agencies rendered any services to the newspaper.

ii) The authorities had not adverted to the Explanation to section 194H nor had applied their mind to whether the assessee had also failed to pay such tax directly. Directing recovery of interest from the petitioner and recovery of tax alleged to be short deducted, was beyond the scope of section 201 and without jurisdiction.”

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Penalty: S/s 269T, 271E and 273B A. Y. 2003-04: Repayment of loan or deposit otherwise than by account payee cheque or draft: Provision mandatory: Repayment by debit of accounts through journal entries is in contravention of the provision: Assessee becoming liable to repay loan and receive similar sum towards sale price of shares sold to creditor: Account settled by journal entries: No finding that repayment not bonafide or attempt at evasion of tax: Reasonable cause shown: Penalty not leviable<

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[CIT v. Triumph International Finance (I) Ltd.; 345 ITR 270 (Bom.)]

The assessee was engaged in the business of share trading. The assessee had accepted a sum of Rs. 4,29,04,722/- as loan from I which was repayable during the A. Y. 2003-04. In that year the assessee sold 1,99,300 shares to I for an aggregate consideration of 4,28,99,325/-. The parties set off that amount in the respective books of account by making journal entries and the balance amount of Rs. 5,397/- was paid by the assessee by a crossed cheque. The Assessing Officer imposed penalty u/s 271E on the ground that the assessee had repaid the loan to the extent of Rs,4,28,99,325/- in contravention of the provisions of section 269T of the Income-tax Act, 1961. The Tribunal held that the payment through journal entries did not fall within the ambit of sections 269SS or 269T and consequently no penalty could be levied u/ss. 271D or 271E.

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

“i) The Tribunal was not justified in holding that repayment of loan or deposit through journal entries did not violate the provisions of section 269T of the Act.

ii) It would have been an empty formality to repay the loan or deposit amount by account-payee cheque or draft and receive back almost the same amount towards the sale price of the shares. Neither the genuineness of the receipt of loan or deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business had been doubted in the regular assessment.

iii) There was nothing on record to suggest that the amounts advanced by I to the assessee represented money of I or the assessee. The fact that the assessee company belonged to a group involved in the security scam could not be a ground for sustaining penalty.

iv) Settling claims by making journal entries in the respective books is also one of the recognised methods for repaying loan or deposit. Therefore, on the facts, in the absence of any finding recorded in the assessment order or in the penalty order to the effect that the repayment of loan or deposit was not a bona fide transaction and was made with a view to evade tax, the cause shown by the assessee was a reasonable cause and in view of s. 273B of the Act, no penalty u/s 271E could be imposed for contravening the provisions of s. 269T of the Act.”

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Capital gains: Exemption u/s 54F: A. Y. 2006- 07: Sale of shares and part of net consideration paid to developer for construction of a residential house: Construction almost complete in three years: Assessee entitled to exemption u/s 54F.

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[CIT v. Sambandam Udaykumar; 345 ITR 389 (Kar.)]

In the previous year relevant to the A. Y. 2006-07, the assessee sold certain shares and invested a part of the net consideration in purchase of house property and paid the said amount to the developer. The assessee claimed exemption u/s 54F in respect of the said investment. The Assessing Officer found that the flooring work, electrical work, fitting of door shutters and window shutters were still pending. Therefore, the Assessing Officer came to the conclusion that the construction was not complete even after the lapse of three years of time from the date of transfer of the shares and hence the exemption u/s 54F of the Act, is not allowable. The Tribunal allowed the assessee’s claim.

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

“i) The assessee had invested Rs. 2,16,61,670/- as on October 31, 2006, within 12 months from the date of realisation of sale proceeds of the shares. Assessee had produced before the authorities the registered sale deed dated 07/11/2009, showing the transfer of the property in his favour. The assessee had been put in possession of the property and he was in occupation. The assessee had invested the sale consideration in acquiring residential premises and had taken possession of the residential building and was living in the premises.

ii) Section 54F of the Act is a beneficial provision of promoting the construction of residential house. Therefore, the provision has to be construed liberally for achieving the purpose for which it was incorporated in the statute. The intention of the legislature was to encourage investments in the acquisition of a residential house and completion of construction or occupation is not the requirement of law. The words used in the section are ”purchased’ or “constructed”. For such purpose, the capital gain realised should have been invested in a residential house. The condition precedent for claiming the benefit under the provision is that capital gains realised from sale of capital asset should have been invested either in purchasing a residential house or in constructing a residential house. If after making the entire payment, merely because a registered sale deed had not been executed and registered in favour of the assessee before the period stipulated, he cannot be denied the benefit of section 54F of the Act.

iii) Similarly, if he has invested the money in construction of a residential house, merely because the construction was not complete in all respects and it was not in a fit condition to be occupied within the period stipulated, that would not disentitle the assessee from claiming the benefit u/s 54F of the Act. Once it is demonstrated that the consideration received on transfer has been invested either in purchasing a residential house or in construction of a residential house, even though the transactions are not complete in all respects as required under the law, would not disentitle the assessee from the benefit.

iv) The Tribunal was justified in extending the benefit of section 54F of the Act to the assessee.”

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Capital gains: Long term/short term: S/s 2(42A), 10(38) and 54EC: A. Y. 2006-07: Period of holding : If an assessee acquires an asset on 2nd January in the preceding year, the period of 12 months would be complete on 1st January, next year and not on 2nd January: If it is sold on 2nd January and if the proviso to section 2(42A) applies, it would be treated as a long term capital gain.

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[Bharti Gupta Ramola v. CIT; 252 CTR 139 (Del.)]
The assessee had sold two mutual fund instruments on 29/09/2005 and 14/10/2005 which were purchased on 29/09/2004 and 14/10/2004 respectively. In the return of income for the A. Y. 2006-07, the assessee claimed that the capital gain on such sales were long term capital gains and had claimed exemption u/s 10(38) and section 54EC as the case may be. The Assessing Officer treated the two capital gains as short term capital gains on the ground that the instruments had not been held for a period of more than 12 months immediately preceding the date of transfer and accordingly disallowed the claim for exemption. The Tribunal allowed the assessee’s claim.

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

“If an assessee acquires an asset on 2nd January in a preceding year, the period of 12 months would be complete on 1st January, next year and not on 2nd January. If it is sold on 2nd January and if the proviso to section 2(42A) applies, it would be treated as long term capital gain.”

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Business loss: Section 28: A. Y. 2004-05: Real estate business: Amount advanced for purchase of property: Property not transferred and amount not repaid: Loss is business loss, deductible.

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[CIT v. New Delhi Hotels Ltd; 345 ITR 1 (Del.)]

Assessee
was carrying on business in construction and real estate. The assessee
had paid an amount of Rs. 44,28,000/- to M/s Gulmohar Estate for
purchase of property/plot. The property/plot was neither
transferred/sold nor the amount was refunded. The assessee claimed the
said amount as bad debt/business loss in the A. Y. 2004-05. The
Assessing Officer disallowed the claim on the ground that the provisions
of section 36(1)(vii) r.w.s. 36(2) of the Income-tax Act, 1961 are not
satisfied. The Tribunal found that the assessee treated immovable
properties as stock in trade 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:

“i)
The assessee also had rental income but this factum alone did not show
and establish that the properties which were being purchased from
Gulmohar Estate were to be treated as investment and not for the purpose
of stockin- trade.

ii) In view of the factual findings recorded by the Tribunal, the loss was deductible.”

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Assessment: Notice: Section 143(2) A. Y. 2006- 07: Notice not served on correct address mentioned in return.

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[CIT Vs. Mascomptel India Ltd.; 345 ITR 58 (Del.)]
For the A. Y. 2006-07, the Assessing Officer issued notice u/s 143(2) of the Income-tax Act, 1961. The notice could not be served and was received back with the remark that no such person existed at the address mentioned. An inspector was deputed to serve the notice personally, but he also reported that the company was not available at the address. The Assessing Officer, thereafter, served the notice by affixture. The assessment was made ex parte and a best judgment assessment order was passed. The Tribunal found that the assessee had mentioned a different address in the return of income filed for the A. Y. 2006-07 and held that the service by affixture was not valid and accordingly the assessment order was invalid.

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

“i) No attempt was made to serve the assessee at the correct address which was available with the Department and in fact stated in the return of income for the A. Y. 2006-07.

ii) Subsequent attempt to serve another notice long after the expiry of the limitation period prescribed by the proviso, could not help the Revenue.”

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Capital gain: Exemption u/s 54EC: A. Y. 2006- 07: Section 54EC bonds not available in the last period of limitation: Investment in bonds as soon as available: Assessee entitled to exemption.

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[CIT Vs. Cello Plast (Bom); ITA No. 3731 of 2010 dated 27/07/2012:]

The assessee sold factory building on 22/03/2006 and earned long term capital gain of Rs. 49.36 lakhs. The last date for investment in section 54EC bonds was 21/09/2006. The assessee invested the capital gain in section 54EC bonds of Rural Electrification Corporation (REC) bonds on 31/01/2007. The assessee claimed that from 04/08/2006 to 22/01/2007, the bonds were not available and the investment was made immediately on the bonds being available. The Assessing Officer disallowed the claim for exemption on the ground that the investment was beyond the period of limitation. The Tribunal allowed the assessee’s claim.

In appeal before the High Court, the Revenue argued that (i) even if the bonds were not available for part of the period, they were available for some time in the period after the transfer (01/07/2006 to 03/08/2006) and the assessee ought to have invested then & (ii) the section 54EC bonds issued by National Highway Authority (NHAI) were available and the assessee could have invested in them.

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

“i) The Department’s contention that the assessee ought to have invested in the period that the section 54EC bonds were available (01/07/2006 to 03/08/2006) after the transfer is not well founded. The assessee was entitled to wait till the last date (21/09/2006) to invest in the bonds. As of that date the bonds were not available. The fact that they were available in an earlier period after the transfer makes no difference, because the assessee’s right to buy the bonds up to the last date cannot be prejudiced.

ii) Lex not cogit impossibila (law does not compel a man to do that which he cannot possibly perform) and i (law does not expect the party to do the impossible) are well known maxims in law and would squarely apply to the present case.

iii) The Department’s contention that the assessee ought to have purchased the alternative section 54EC NHAI bonds is also not well founded, because if section 54EC confers a choice of investing either in the REC bonds or the NHAI bonds, the Revenue cannot insist that the assessee ought to have invested in the NHAI bonds.”

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Authority of Advance Ruling – Advance Ruling of the Authority could be challenged before the appropriate High Court under Article 226 and/or 227 of the Constitution of India and is to be heard by the Division Bench hearing income tax matters expeditiously.

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[Columbia Sportswear Co. v. DIT, Bangalore (2012) 346 ITR 161 (SC)]

The Petitioner, a company incorporated in the United States of America (for short ‘the USA’) was engaged in the business of designing, developing, marketing and distributing outdoor apparel. For making purchases for its business, the petitioner established a liaison office in Chennai with the permission of the Reserve Bank of India (for short “the RBI”) in 1995. The RBI granted the permission in its letter dated 01.03.1995 subject to the conditions stipulated therein. The permission letter dated 01.03.1995 of the RBI stated that the liaison office of the petitioner was for the purpose of undertaking purely liaison activities viz. to inspect the quality, to ensure shipments and to act as a communication channel between head office and parties in India and except such liaison work, the liaison office will not undertake any other activity of a trading, commercial or industrial nature nor shall it enter into any business contracts in its own name without the prior permission of the RBI. The petitioner also obtained permission on 19.06.2000 from the RBI for opening an additional liaison office in Bangalore on the same terms and conditions as mentioned in the letter dated 01.03.1995 of the RBI.

On 10.12.2009, the petitioner filed an application before the Authority for Advance Rulings (for short ‘the Authority’) on the questions relating to its transactions in its liaison office in India.

The Authority heard the petitioner and the respondent and passed the order dated 08.08.2011. In para 34 of the said order, the Authority gave its ruling on the six questions raised before it as follows:

(1) A portion of the income of the business of designing, manufacturing and sale of the products imported by the applicant from India accrued to the applicant in India.

(2) The applicant had a business connection in India being its liaison office located in India.

(3) The activities of the Liaison Office in India were not confined to the purchase of goods in India for the purpose of export.

(4) The income taxable in India would be only that part of the income that could be attributed to the operations carried out in India. This was a matter of computation.

(5) The Indian Liaison Office involved a ‘Permanent Establishment’ for the applicant under Article 5.1 of the DTAA.

(6) In terms of Article 7 of the DTAA only the income attributable to the Liaison Office of the applicant was taxable in India.

Aggrieved, the petitioner challenged the said order of the Authority on various grounds mentioned in special leave petition, before the Supreme Court.

The Supreme Court held that the Authority is a body exercising judicial power conferred on it by Chapter XIX-B of the Act and is a tribunal within the meaning of the expression in Articles 136 and 227 of the Constitution. The fact that subsection (1) of Section 245S makes the advance ruling pronounced by the Authority binding on the applicant, in respect of the transaction and on the Commissioner and the income tax authorities subordinate to him in respect of the applicant, would not affect the jurisdiction of either the Supreme Court under Article 136 of the Constitution or of the High Courts under Articles 226 and 227 of the Constitution to entertain a challenge to the advance ruling pronounced by the Authority. The reason for this view is that Articles 136, 226 and 227 of the Constitution are constitutional provisions vesting jurisdiction on the Supreme Court and the High Courts and a provision of an Act of legislature making the decision of the Authority final or binding could not come in the way of this Court or the High Courts to exercise jurisdiction vested under the Constitution.

The Supreme Court noted that in a recent advance ruling in Groupe Industrial Marcel Dassault, In re [2012] 340 ITR 353 (AAR), the Authority had, observed as under:

“But permitting a challenge in the High Court would become counter productive since writ petitions are likely to be pending in High Courts for years and in the case of some High Courts, even in Letters Patent Appeals and then again in the Supreme Court. It appears to be appropriate to point out that considering the object of giving an advance ruling expeditiously, it would be consistent with the object sought to be achieved, if the Supreme Court were to entertain an application for Special Leave to appeal directly from a ruling of this Authority, preliminary or final, and tender a decision thereon rather than leaving the parties to approach the High Courts for such a challenge.”

The Supreme Court after considering the aforesaid observation of the Authority, felt that it could not hold that an advance ruling of the Authority can only be challenged under Article 136 of the Constitution before this Court and not under Articles 226 and 227 of the Constitution before the High Court. The Supreme Court observed that in L. Chandra Kumar v. Union of India and Others [(1997) 3 SCC 261], a Constitution Bench of the Supreme Court has held that the power vested in the High Courts to exercise judicial superintendence over the decisions of all courts and tribunals within their respective jurisdictions was part of the basic structure of the Constitution. Therefore, to hold that an advance ruling of the authority should not be permitted to be challenged before the High Court under Articles 226 and/or 227 of the Constitution would be to negate a part of the basic structure of the Constitution. Nonetheless, the Supreme Court appreciated the apprehension of the Authority that a writ petition may remain pending in the High Court for years, first before a learned Single Judge and thereafter in Letters Patent Appeal before the Division Bench and as a result the object of Chapter XIX-B of the Act which is to enable an applicant to get an advance ruling in respect of a transaction expeditiously would be defeated. The Supreme Court, therefore, opined that when an advance ruling of the Authority is challenged before the High Court under Articles 226 and/or 227 of the Constitution, the same should be heard directly by a Division Bench of the High Court and decided as expeditiously as possible.

The Supreme Court accordingly disposed of the Special Leave Petition granting liberty to the petitioner to move the appropriate High Court under Article 226 and/or 227 of the Constitution. The Supreme Court requested the concerned High Court to ensure that the Writ Petition, if filed, is heard by the Division Bench hearing income-tax matters and further requested the Division Bench to hear and dispose of the matter as expeditiously as possible.

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S. 43(5)(d), Rules 6DDA and 6DDB, Notification dated 22.5.2009 recognizing MCX as a recognized stock exchange – Transactions in commodity derivatives carried out on MCX are not speculative transactions w.e.f. 1.4.2006 though MCX has been notified, vide notification dated 22.5.2009, as a recognised stock exchange prospectively.

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1. [2012] 25 taxmann.com 252 (Mum)
ACIT v Arnav Akshay Mehta
ITA No. 2742/Mum/2011
Assessment Year: 2007-08.  
Date of Order: 12.09.2012

Section 43(5)(d), Rules 6DDA and 6DDB, Notification dated 22.5.2009 recognising MCX as a recognised stock exchange – Transactions in commodity derivatives carried out on MCX are not speculative transactions w.e.f. 1.4.2006 though MCX has been notified, vide notification dated 22.5.2009, as a recognised stock exchange prospectively.


Facts:

During the previous year relevant to the assessment year 2007-08, the assessee suffered a loss of Rs. 77,63,237 in trading in commodity derivatives on MCX. The assessee regarded this loss as a non-speculative business loss which was set off against short term capital gains and income from other sources.

While assessing the total income of the assessee for AY 2007-08, the AO noticed that w.e.f. AY 2006- 07, section 43(5)(d) provides that transactions in derivatives will not be regarded as speculative transactions if they have been carried out on a notified stock exchange. He also noted that MCX has been notified as a recognised stock exchange vide notification dated 22.5.2009 prospectively. He, accordingly, held the loss in trading in commodity derivatives to be speculative and denied the set off of the same against short term capital gains and income from other sources as was claimed by the assessee.

Aggrieved, the assessee preferred an appeal to CIT(A) who allowed the assessee’s appeal. Aggrieved, the Revenue preferred an appeal to the Tribunal. C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi Chartered Accountants Tribunal news

Held:

The Tribunal noted that the AO has treated the loss under consideration to be speculation loss mainly on the ground that the Notification No. 46 of 2009 issued by CBDT on 22.5.2009, recognising MCX as a recognised stock exchange for the purpose of section 43(5) only from the said date has a prospective effect and therefore, derivative trading in commodity through MCX prior to the said date will amount to speculation business. The Tribunal also noted that The Finance Act, 2005 has w.e.f. 1.4.2006 inserted clause (d) in the proviso to section 43(5) as a result of which w.e.f. 1.4.2006 trading in derivative carried out through the recognised Stock Exchange is treated as non-speculative transaction. For this purpose, Rules 6DDA and 6DDB provide that notification of recognised stock exchange will be done by the Central Government (CBDT).

The Tribunal held that a combined reading of 43(5) (d) and rules 6DDA and 6DDB and Explanation (ii) to section 43(5) indicates that the rules prescribed are only procedural in nature and they prescribe the method as to how to apply for necessary recognition and consequent notification. When a rule or provision does not affect or empower any right or create an obligation but merely relates to procedural mechanism, then it is deemed to be retrospective and will apply to all the proceedings, pending or to be initiated, unless such an inference is likely to lead to an absurdity. It also held that just because the procedural mechanism has taken a long time to notify a stock exchange as recognised stock exchange, it will not lead to an inference that the same would be applicable from the date the stock exchange is notified to be a recognised stock exchange. It observed that the notification does not empower any right or create an obligation, but only recognises what is already provided in the statute. It held that the transactions carried out through MCX Stock Exchange after 1.4.2006 would be eligible for being treated as non-speculative within clause (d) of proviso to section 43(5).

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Loss return: Condonation of delay in filing: Power of CBDT: Section 119 of Income-tax Act, 1961: A.Ys. 2000-01 and 2002-03: Genuine hardship to an assessee: Meaning of: Loss of about Rs.1,500 crores, if not allowed to be carried forward, it would cause genuine hardship to it in successive assessments: Order of CBDT for fresh adjudication.

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[Madhya Pradesh State Electricity Board v. UOI, 197 Taxman 238 (MP)]

The assessee, an organisation fully-owned and aided by the Government of Madhya Pradesh, was engaged in business of power. For the relevant assessment years, it filed its returns of income declaring certain loss after a delay of 16 months and filed an application before the CBDT for condonation of the delay, contending that as per the provisions contained in the M.P. Re-organisation Act, 2000, the erstwhile State of Madhya Pradesh and the assessee-Board, both were bifurcated and because of that reason, returns could not be filed in time. The CBDT rejected the assessee’s contention and declined to condone the delay.

On a writ petition filed by the assessee challenging the order of the CBDT, the Madhya Pradesh High Court set aside the order of the CBDT for fresh determination and held as under:

“(i) In the instant case, as per the return filed by the assessee, there was a loss of Rs.1,500 crores in the accounting year 1999-2000. If the return filed by the assessee was not accepted by the Department, then the loss suffered by it could not be carried forward and it would cause hardship to it in successive assessments.

(ii) From the perusal of the impugned order, it was apparent that the CBDT had not considered that aspect of the matter which was having a material bearing in the matter and ought to have been considered by the CBDT while considering the question of condonation of the delay in filing the return. Though there was a delay of nearly 16 months in filing returns by the assessee before the Department, but in the peculiar facts of the case, the delay ought to have been dealt with by the CBDT in proper perspective, but it appeared that the said aspect had escaped from the notice of the CBDT.”

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Wealth Tax: Exemption: Section 40(3)(vi) of Finance Act, 1983: A. Ys. 1988-89 to 1992-93: Assessee in leasing business: Property given on lease is asset used in business: Property falls within specified assets u/s. 40(3)(vi): Exemption available.

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[CIT Vs. Donatus Victoria Estates and Hotel P. Ltd.; 346 ITR 114 (Mad.)]

Assessee was carrying on the business of leasing. The assessee had let a hotel building and the lessee used it as a hotel. In the A. Ys. 1988-89 to 1992-93, the assessee claimed exemption from wealth tax in respect of the property u/s. 40(3)(vi) of the Finance Act, 1983 as an asset used in the assessee’s business. The Assessing Officer rejected the claim. The Tribunal allowed the assessee’s claim.

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

“i) One of the conditions to be satisfied by the assessee u/s. 40(3) was that, the asset must be used in the assessee’s business. The assets let out were used in the leasing business. Not all the assets used in the business were exempt from the purview of the wealth tax. Once the asset let out came within the specified clause as contemplated u/s. 40(3)(vi) of the Finance Act, 1983, the assessee was entitled to exemption.

 ii) One of the objects of the assessee was leasing and another object was running a hotel in the property. Accordingly, the assessee had leased out the property as a hotel and the lessee also used the property as a hotel. Therefore, the assets came within the specified assets as contemplated u/s. 40(3)(vi) of the Finance Act, 1983. The assessee was entitled to exemption.”

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Transfer pricing: Arm’s length price: A. Y. 2002-03: Merely because the assessee had paid the royalty even in respect of the products sold by it to the clients, who had not paid for the same, it would make no difference to the determination of the ALP of the transaction: Once it is accepted that the ALP of the royalty is justified, there can be no reduction in the value thereof on account of the assessee’s customers failing to pay the assessee for the product purchased by them from the assessee<

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[CIT Vs. CA Computer Associates India (P) Ltd.; 252 CTR 164 (Bom.)]

For the A. Y. 2002-03, the assessee had filed the return of income, declaring a loss of about Rs. 14.5 crore. Assessee had claimed the ALP of royalty at the contractual value of Rs. 7.43 crore. The Assessing Officer computed the ALP of royalty at Rs. 5.85 crore on the ground that the assessee had paid royalty even in respect of the products sold by it to the clients who had not paid for the products purchased by them. This resulted in the reduction of the loss of about Rs. 1.50 crore. The Tribunal allowed the assessee’s appeal and held that merely because the assessee had paid the royalty even in respect of the products sold by it to the clients, who had not paid for the same, it would make no difference to the determination of the ALP of the transaction.

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

“i) The Tribunal rightly came to the conclusion that merely because the assessee had paid the royalty even in respect of the products sold by it to the clients, who had not paid for the same, it would make no difference to the determination of the ALP of the transaction. Section 92C provides the basis for determining the ALP in relation to international transactions. It does not either expressly or impliedly consider failure of the assesee’s customers to pay for the products sold to them by the assessee to be relevant factor in determining the ALP.

 ii) Indeed, in the absence of any statutory provision or the transactions being colourable bad debts on account of purchasers refusing to pay for the goods purchased by them from the assessee can never be a relevant factor, while determining the ALP of the transaction between the assessee and its principal.

iii) Once it is accepted that the ALP of the royalty is justified, there can be no reduction in the value thereof on account of the assessee’s customers failing to pay the assessee for the products purchased by them from the assessee.

iv) The question is therefore, answered in the affirmative in favour of the assessee. The appeal is accordingly dismissed.”

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Search and seizure: Abatement of assessment proceedings: Section 153A: A. Y. 2002- 03: Assessment or reassessment proceedings pending at the time of search abate: Appeal from assessment pending before Tribunal would not abate.

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[CIT Vs. Smt. Shaila Agarwal; 346 ITR 130 (All.)]

When the assessee’s appeal for the A. Y. 2002-03 was pending before the Tribunal, search proceedings were initiated against the assessee. The Tribunal passed the order as under:

 “i) The present appeal arises out of the assessment made prior to the date of search. The intention of the Legislature is to make a combined assessment of all the income disclosed or assessed in regular assessment and discovered in search. We accordingly restore the assessment to the file of the Assessing Officer to consider these additions in the assessment u/s. 153A as well. However, in an event where search is declared illegal by any court or the assessment u/s. 153A is held invalid, then this appeal in relation to regular assessment will revive at the instance of the Department, if an application is moved to the Tribunal in this behalf.

 ii) Accordingly, the appeal of the assessee was allowed, but for statistical purposes and subject to the observations made above.”

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

“i) We are of the opinion that the Income Tax Appellate Tribunal erred in abating the regular assessment proceedings, which had become final, and restoring them as a consequence of search u/s. 132, and notice u/s. 153A of the Act to the file of the Assessing Officer.

ii) The appeal is allowed. The order of the Tribunal is set aside. The Tribunal will decide the appeal on the merits in accordance with law.”

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