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Category: Direct Taxes

Section 14A, Rule 8D — Exercising jurisdiction in the larger interest of justice, ITAT directed the AO to compute disallowance u/s.14A @ 2% of the exempt income instead of 4.06% as computed by the AO.

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18. JNJ Holdings P. Ltd. v. ACIT
ITAT ‘J’ Bench, Mumbai
Before B. Ramakotaiah (AM) and S. S. Godara (JM)
ITA No. 3411/M/2009
A.Y.: 2005-06. Decided on: 8-6-2012
Counsel  for  assessee/revenue:  Hiro  Rai/Rupinder Brar
       
Section 14A, Rule 8D — Exercising jurisdiction in the larger interest of justice, ITAT directed the AO to compute disallowance u/s.14A @ 2% of the exempt income instead of 4.06% as computed by the AO.

Facts:

The assessee involved in business of investments and dealing in shares, securities, filed its return declaring total income of Rs.14,60,52,720. In the said return it had shown dividend income of Rs. 76,49,289 as exempt income. In response to the show-cause notice issued by the AO as to why expenses in relation to earning of dividend income should not be disallowed, the assessee explained that it had not incurred any direct expenditure. The AO rejected this contention and computed the disallownce to be Rs.4,36,027 i.e., 4.06% of dividend income.

Aggrieved the assessee preferred an appeal to the CIT(A) who directed the AO to recompute the disallowance by following Rule 8D of the Incometax Rules, 1963.

 Aggrieved, the assessee preferred an appeal to the Tribunal where on behalf of the assessee it was contended that for the assessment year under consideration, Rule 8D is not applicable and that the Tribunal by exercising jursidiction u/s.254(1) of the Act, should determine the reasonable expenditure in peculiar circumstances of the case.

Held:

The Tribunal held that the CIT(A) was not correct in directing the AO to recalculate the disallowance by following Rule 8D. Keeping in view the fair statement of the AR as well as exercising jurisdiction in the larger interest of justice, the Tribunal directed the AO to compute the disallowance @ 2% of the exempt income instead of 4.06% which the Tribunal felt should meet the ends of justice.

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Section 54G — Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking to non-urban area — Investment by assessee in land and building for its business in non-urban area — Whether is it necessary that the investment in land and building in non-urban area is for the purposes of the business of the industrial undertaking transferred — Held, No.

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17. Dy. CIT v. Enpro Finance Ltd.
ITAT ‘J’ Bench, Mumbai
Before B. Ramakotaiah (AM) and S. S. Godara (JM)
ITA No. 4428/Mum./2008
A.Y.: 2004-05. Decided on: 27-6-2012 Counsel for revenue/assessee: Rupinder Brar/Mayur Kisnadwala

Section 54G — Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking to non-urban area — Investment by assessee in land and building for its business in non-urban area — Whether is it necessary that the investment in land and building in non-urban area is for the purposes of the business of the industrial undertaking transferred — Held, No.


Facts:

The assessee-company was carrying on its business of manufacturing activity at its leased premises in Mumbai for more than 45 years. Due to severe competition and high operational overheads in Mumbai, the assessee incurred losses and the activity was commercially not feasible. During the financial year 1999-2000, it decided to shift its undertaking to a non-urban area. As the plant and machinery was very old, the assessee sold them immediately, but for surrendering the tenancy rights it took some time and after protracted negotiations with the lessor, the leased premises on which the industrial undertaking operated was finally surrendered on 1-10-2003 and compensation of Rs.4.12 crore was received. It earned capital gain of an equivalent amount as the cost of acquisition of the leased premise was nil. Out of this amount the assessee invested Rs.1.4 crore in Capital Gain Account Scheme and Rs.1.14 crore in purchase of land and building in non-urban area. The assessee claimed deduction u/s.54G of the amount of Rs.2.54 crore and offered the balance amount as taxable income.

According to AO, the assessee sold its entire plant and machinery in the financial year 1999-2000 and since there was no existence of an undertaking, having sold the entire plant & machinery, the claim u/s.54G, which provides for exemption for shifting of industrial undertaking from urban area to non-urban area is not eligible to the assessee. However, the CIT(A) on appeal allowed the claim of the assessee.

Held:

On closer reading of the provisions of section 54G the Tribunal noted that whereas u/s.54G(1)(a), the requirement is that the new machinery or plant has to be purchased for the purposes of the business of the industrial undertaking, section 54G(1)(b) merely requires that the acquisition of building or land or construction of a building should be for the purposes of its business in such non-urban area. In other words, the phrase ‘of the industrial undertaking’, which is there in clause 1(a) is conspicuously missing in clause 1(b). It further compared the provisions of section 54G with section 54D and noted that while section 54D mandates that, for the capital gains to exempt, the new land or building, have to be used only for either shifting or re-establishing or establishing an industrial undertaking (and no other purpose), the provisions of section 54G of the Act permits the use of capital gains for acquiring land or building or constructing building for the purposes of (any) business in the non-urban area. Thus, according to the Tribunal, the provisions of section 54G can be interpreted that assessee should carry on any business in non-urban area. If the amounts are utilised for acquisition of assets for the purpose of its business, this should qualify for the purpose of exemption u/s.54G as there is no requirement that the land and building should be used for the purpose of the business of industrial undertaking.

The Tribunal also did not agree with argument of the AO that the assessee’s industrial undertaking ceased to exist in 1999-2000. According to it, the assessee was in the process of shifting and even the section itself provides that shifting was ‘in course of or in consequence of’ of such industrial undertaking.

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Section 80IB(10) — If conditions prescribed u/s.80IB(10) are satisfied, claim cannot be denied merely because the assessee had not carried on construction activity itself.

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39. (2012) 23 taxmann.com 176 (Bangalore-Trib.)
Abdul Khader v. ACIT
A.Y.: 2006-07. Dated: 30-4-2012

Section 80IB(10) — If conditions prescribed u/s.80IB(10) are satisfied, claim cannot be denied merely because the assessee had not carried on construction activity itself.


Facts:

The assessee, a builder and developer, was owner of an agricultural land which was converted into stock-in-trade and put the same for development by entering into a joint development agreement. Under the joint development agreement, the assessee contributed land and incurred expenses for statutory approvals. The assessee did not carry on construction activity. The assessee was entitled to 24% share in the said project. The assessee sold 49 flats which it got as its share and claimed as deduction u/s.80IB(10).

The Assessing Officer denied the claim on the ground that the assessee had not carried on the construction activity. This was confirmed by CIT (A). The assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that the assessee contributed land as its contribution of capital and incurred initial expenses for development and building of housing project like sanction of plan, getting the electricity and water connection by making the payments to BWSSB and KEB, etc. It also noted that it is not the case of the Department that the project was not approved or developed and built by the assessee. The only reason for denying the deduction u/s.80IB(10) was that the assessee had not carried out construction activity himself.

The Tribunal also noted that on a joint reading of s.s (10) of section 80IB and Explanation thereto it is clear that deduction is allowable to an undertaking developing and building housing project approved, it is nowhere mentioned that, construction has to be carried out by the undertaking. Moreover, the Explanation clarified that any undertaking which has executed housing project as a works contract awarded by any person is not eligible for claiming this deduction, which clearly shows that even if any undertaking is constructing the housing project under a works contract entered by a person is not eligible for deduction. The only condition for claiming deduction u/s.80IB(10) is that the undertaking is developing and building housing projects approved by a local authority.

It observed that in such type of cases, getting the approval and plan sanction is the first and initial stage which was to be taken by the assessee and for that purose the assessee was required to make investments. So, it cannot be said that assessee did not make any investment for the project under consideration.

The Tribunal held that the deduction u/s.80IB(10) cannot be denied merely on the basis that the assssee did not construct himself. Considering the totality of the facts and the ratio of the decision of Jurisdictional High Court in the case of CIT v. Shravanee Constructions, (2012) 22 taxmann. com 250 (Kar.), the Tribunal set aside the order passed by the CIT(A) and directed the AO to allow deduction u/s.80IB(10) of the Act.

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The assessee was engaged in the business of construction of buildings

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The assessee had sold the agricultural land on which agricultural activities were carried out till the date of transfer. Thereafter order permitting non-agricultural use was obtained. The assessee claimed that it is a case of transfer of an agricultural land and therefore there was no capital gain chargeable to tax. The Assessing Officer held that the land was a capital asset and assessed the capital gain as taxable. The CIT(A) accepted the assessee’s claim and allowed the assessee’s appeal. The Tribunal held that the land sold by the assessee retained its agricultural character till the date of the order permitting non-agricultural use and that it could be treated as a capital asset only thereafter. The Tribunal held that there was no need to interfere with the finding of the CIT(A) that the sale transaction was not a transaction involving transfer of a capital asset and, therefore, no need to bring to tax the income referable to the capital gains.

On an appeal filed by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held that there was no illegality in the order of the Tribunal.

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Business expenditure: Capital or revenue expenditure: Section 37 of Income-tax Act, 1961: A.Y. 1993-94: Construction business: Amount spent for acquiring unfinished works and inventories of another company: Revenue expenditure.

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The assessee was engaged in the business of construction of buildings. The assessee entered into an agreement with AFPL to takeover by assignment and complete all the pending projects/contracts/work-inprogress remaining to be completed by the transferor company. For the A.Y. 1993-94, the assessee claimed deduction of the payment of Rs.3,20,00,000 made to AFPL as revenue expenditure. The Assessing Officer disallowed the claim holding that the expenditure is capital in nature. The Tribunal upheld the disallowance.

On appeal by the assessee, the Madras High Court reversed the decision of the Tribunal and held:

“(i) What was transferred was in the nature of stockin- trade and not the entire building division of the transferor company. There were no clauses to lead to the inference that with the transfer of the ongoing projects awaiting agreements to be signed, the transferor company had transferred its entire business.

(ii) The expenditure was deductible as revenue expenditure”

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Assessment giving effect to Tribunal order: Scope: A.Y. 1994-95: Capital gains: Sale of property and factory building: Sale consideration accepted by AO: Tribunal referring back the question of bifurcation and apportionment of sale consideration between land and building: AO enhancing sale consideration: Not justified.

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In the A.Y. 1994-95, the assessee sold a property consisting of land and factory building for a consideration of Rs.17.5 lakh. Permission for sale was granted by the Appropriate Authority u/s.269UL(3) of the Income-tax Act, 1961. The assessee challenged the apportionment of the sale consideration between the land and building by the Assessing Officer. The Tribunal referred back the question of bifurcation and apportionment of sale consideration between land and building to the Assessing Officer. While re-examining, the Assessing Officer also enhanced the sale consideration. The Tribunal accepted the enhancement.

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

“(i) The Tribunal had referred back the question of bifurcation and apportionment of the sale consideration of Rs.17.5 lakh as between the land and the factory building. To this extent, the report of the Valuation Officer was required.

(ii) The Departmental Valuation Officer and the Assessing Officer were not required or permitted by that order to go into to question and examine the total sale consideration as the assessee had applied under Chapter XX-C and the Appropriate Authority had accepted the sale consideration mentioned by the assessee. The sale consideration and the quantum thereof was never in question or doubt. This was not the aspect to be reexamined.

(iii) Thus the enhancement by the Assessing Officer of the sale consideration from 17.5 lakh to Rs.21,42,502 was not justified and as per law.

(iv) According to the report of the Depatmental Valuation Officer, the bifurcation and apportionment of the sale consideration towards the land and the factory building by the assessee had been accepted.

(v) In view of the above, the question of law is answered in favour of the assessee appellant.”

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Assessment: Validity: Sections 143(2), 143(3) and 292B of Income-tax Act, 1961: A.Y. 2002-03: Assessment in the name of non-existing amalgamating company is not valid

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For the A.Y. 2002-03, Spice Corp. Ltd. filed the return of income on 30-10-2002 declaring Nil income. Subsequently, vide order dated 11-2-2004 the said company stood amalgamated with M/s. MCorp (P) Ltd. w.e.f. 1-7-2003. The Assessing Officer selected the case for scrutiny and issued notice u/s.143(2) of the Income-tax Act, 1961 dated 18-10-2003 in the name of Spice Corp. Ltd. The fact that Spice Corp. Ltd., having been dissolved, as a result of its amalgamation with MCorp (P) Ltd. was duly brought to the notice of the Assessing Officer by letter dated 02-04-2004. However, the Assessing Officer passed the assessment order u/s.143(3) dated 28-3-2005 in the name of Spice Corp. Ltd. The assessee’s contention that the assessment having been framed in the name of a non-existing entity is bad in law and void ab initio was rejected by the CIT(A) and the Tribunal. The Tribunal held that the mere failure of the Assessing Officer to mention the name of the amalgamated company in the assessment order did not vitiate the assessment as a whole since the assessment was, in substance and effect, made on the amalgamated company viz., MCorp Global (P) Ltd. and not on the non-existing entity, viz. Spice Corp. Ltd. The Tribunal further held that the omission to mention the name of the amalgamated company in the assessment order was a mere procedural defect and in terms of the provisions of section 292B of the Act, such assessment was not invalid.

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

“(i) Assessment in the name of a company which has been amalgamated with another company and stands dissolved is null and void.

(ii) Assessment framed in the name of a non-existing entity is a jurisdictional defect and not merely a procedural irregularity of the nature which can be cured by invoking the provisions of section 292B of the Act.”

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OffShore Transaction of Transfer of Shares Between Two NRs Resulting in Change in Control of Indian Company — Withholding Tax Obligation and Other Implications

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Part-II
(Continued from last month)
Vodafone
International Holdings B.V. v. Union of India & Anr.- 341 ITR 1 (SC)


3.1 As stated in Part I of this write-up (March, 2012), the Bombay High
Court took the view that the essence of the transaction between the
parties was a change in the controlling interest in HEL, which
constituted a source of income in India. According to the High Court,
the transaction between the parties covered within its sweep, diverse
rights and entitlements for which the consideration is paid. Based on
this dissecting approach, the High Court left the issue of apportionment
of consideration open to be decided by the Revenue. The High Court also
held that VIH by the diverse agreements that it entered into has nexus
with Indian jurisdiction. Accordingly, the High Court held that the
proceedings initiated by the Revenue Authorities did not lack
jurisdiction and VIH was under an obligation to deduct TAS while making
the payment in this case.

3.2 The said view of the Bombay High
Court came up for consideration before the Apex Court at the instance of
VIH. Effectively, the Apex Court was required to consider the true
nature of the transaction between the parties, the taxability thereof
and the withholding tax obligations of VIH including the jurisdiction of
the Revenue in that respect, as well as the liability of VIH to be
treated as representative assessee u/s.163.

3.2.1 In this case,
views and the observations of the Court are given in two separate
judgments i.e., one by two Judges, namely, Shri S. H. Kapadia, CJ and
Shri Swatanter Kumar, J (Majority Judgment), and another by Shri K. S.
Radhakrishnan, J (Concurring Judgment). In both the judgments,
conclusions are the same. However, there are some differences in the
reasons given for the same conclusions, particularly in the context of
applicability of section 195. In the Concurring Judgment, certain
additional observations have also been made. On all major issues,
learned judge of the Concurring Judgment has expressly stated that he
fully concurs with the views expressed in the Majority Judgment.
However, the Majority Judgment is salient on the views expressed and
various observations made in the Concurring Judgment. This write-up is
primarily based on the Majority Judgment.

Facts relating to nature of transaction

3.3
For the purpose of deciding the issues, the Court noted the brief facts
of the case and various events which took place (referred to in paras
2.1 to 2.3.2 of Part I of this write-up).

3.3.1 After referring
to all relevant events which had taken place and various agreements and
arrangements made by the parties for the purpose of giving effect to the
transaction and the procedures followed for compliance of Indian law,
the Court observed that vide settlement agreement HTIL agreed to dispose
of its direct and indirect equity, loan and other interests and rights
in and related to HEL, to VIH. The Court then noted that these rights
and interests are enumerated in the order of Revenue dated 31-5-2010,
the details of which are given in para 35 of the Majority Judgment.

3.3.2
The Court also referred to the arrangements made between VIH and Essar
Group which, inter alia, include various terms agreed for regulating the
affairs of HEL and the relationship of shareholders of HEL including
the arrangement of put option wherein, the Essar Group can require VIH
to buy from Essar Group shareholders at their option, the shares held by
them, etc.

3.3.3 The Court then noted that on receipt of the
approval from FIBP on 7-5-2007, the board resolutions were passed by CGP
on 8-5-2007 and its downstream companies, consequent to which, various
steps were taken to give an effect to the transaction the detail of
which are appearing at para 46 of the Majority Judgment.

Tax avoidance/evasion — Settled position

3.4
After referring to the facts relating to the nature of transaction
between the parties, the Court considered the correctness of the
judgment of the Apex Court in the Azadi Bachao Andolan (263 ITR 706) as
the same was questioned by the Revenue on the ground that in that case,
the Division Bench of the Apex Court has not considered certain aspects
of the judgment in the case of McDowell & Co. Ltd. (154 ITR 148).
For this purpose, the Court noted that in that case two aspects were
dealt with viz. (i) validity of Circular issued by the CBDT concerning
Mauritius Tax Treaty and (ii) the concept of tax avoidance/evasion and
stated that in the context of this case, the Revenue has only raised
objection with regard to the second aspect i.e., tax avoidance/ evasion.

3.4.1 The Court then noted the principle laid down in the case
of Duke of Westminster in UK, popularly known as Westminster Principle,
and noted that the said principle states that “given that a document or
transaction is genuine, the Court cannot go behind it to some supposed
underlined substance”. The Court then took note of the fact that the
said principle has been reiterated in subsequent English Court judgments
as ‘the cardinal principle’. Explaining the effect of such subsequent
judgments, the Court stated that it is the task of the Court to
ascertain the legal nature of the transaction and while doing so it has
to ‘Look at’ the entire transaction as a whole and not to adopt
dissecting approach, (‘Look at’ test). The Court then observed that in
the present case, the Revenue has adopted a dissecting approach.

3.4.2
The Court then stated that the majority judgment in McDowell’s case
held that “Tax planning may be legitimate provided it is within the
framework of law ‘. . . . . however’ colourable device cannot be a part
of tax planning and it is wrong to encourage or entertain the belief
that it is honourable to avoid the payment of tax by resorting to
dubious methods.”

3.4.3 The Court then concluded that the
judgment in the case of Azadi Bachao Andolan has been correctly decided
and held as under on this aspect (page 34, para 64):

“. . . . .
In our view, although Chinnappa Reddy, J. makes a number of observations
regarding the need to depart from the ‘Westminster’ and tax avoidance —
these are clearly only in the context of artificial and colourable
devices. Reading McDowell, in the manner indicated hereinabove, in cases
of treaty shopping and/or tax avoidance, there is no conflict between
McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal.”

Tax
aspects of holding structure

3.5 In the context of holding structures,
the Court first noted that corporate bodies are treated as separate
entities. This is also recognised under the Act in the matter of
corporate taxation. The companies are viewed as economic entities with
legal independent vis-à-vis their shareholders. It is also fairly well
settled that for tax treaty purpose, a subsidiary and its parent are
also totally separate and distinct taxpayers.

3.5.1 The Court then noted that it is generally accepted that the group parent company is involved in giving principal guidance to group. The fact that a parent company exercises shareholder’s influence on its sub-sidiaries does not generally imply that subsidiaries are to be deemed residents of the State in which the parent company resides. However, if subsidiary’s executive directors are no more than puppets, then the turning point in respect of subsidiary’s residence come about. If the transaction is arranged through abuse of organisation form/legal form and without reasonable business purpose to avoid tax implications, then the Revenue may disregard the form of the arrangement or structure, recharacterise the arrangement according to its economic substance and determine tax implications accordingly on actual controlling enterprise. This should be decided on overall facts of each case.
In this context, the Court further stated as under (pages 35/36, para 67):

“…..Thus, whether a transaction is used principally as a colourable device for the distribution of earnings, profits and gains, is determined by a review of all the facts and circumstances surrounding the transaction. It is in the above cases that the principle of lifting the corporate veil or the doctrine of substance over form or the concept of beneficial ownership or the concept of alter ego arises. There are many circumstances, apart from the one given above, where separate existence of different companies, that are part of the same group, will be totally or partly ignored as a device or a conduit (in the pejorative sense).”

3.5.2 The Court then noted that it is common practice in international law, which is the basis of international taxation, for foreign investors to invest in Indian companies through an interposed foreign holding or operating company, such as CI or Mauritius-based company, for both tax and business purpose. In doing so, foreign investors are able to avoid lengthy approval and registration processes required for a direct transfer of equity interest in a foreign-invested Indian company.

3.5.3 The Court then further noted that the taxation of such holding structures gives rise to issue such as double taxation, tax deferrals, tax avoidance and application of anti-avoidance rules (GAAR). The Court then stated that in the present case, it is concerned with concept of GAAR (and not with the treaty shopping) which is not new to India since India already has a judicial GAAR, like some other jurisdictions. The Court then noted that lack of clarity and absence of appropriate provisions in the statute and/or in the treaty regarding the circumstances in which the judicial GAAR would apply has generated litigation in India. The Court then took the view that when it comes to taxation of a holding structure, at the threshold, the burden is on the Revenue to establish the abuse, in the sense of tax avoidance in the creation and/or use of such structures. In this context, the Court then observed as under (pages 36/37, para 68):

“…….In the application of a judicial anti-avoidance rule, the Revenue may invoke the ‘substance over form’ principle or ‘piercing the corporate veil’ test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant. To give an example, if a structure is used for circular trading or round, tripping or to pay bribes, then such transactions, though having a legal form, should be discarded by applying the test of fiscal nullity. Similarly, in a case where the Revenue finds that in a holding structure an entity which has no commercial/business substance has been interposed only to avoid tax, then in such cases applying the test of fiscal nullity it would be open to the Revenue to discard such inter-positioning of that entity. However, this has to be done at the threshold….’’

3.5.4 The Court then reiterated that for the above purposes, the Revenue must apply ‘Look at’ test and the Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/savings device, but that it should apply the ‘Look at’ test to ascertain its true legal nature. While concluding on the issue of tax avoidance, the Court stated as under (Page 37, para 68):

“……. Applying the above tests, we are of the view that every strategic foreign direct investment coming to India as an investment destination, should be seen in a holistic manner. While doing so, the Revenue/ Courts should keep in mind the following factors: the concept of participation in investment, the duration of time during which the holding structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit. In short, the onus will be on the Revenue to identify the scheme and its dominant purpose. The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate busi    ness purpose must exist to overcome the evidence of a device.”

Whether section 9 is a ‘Look through’ provision and covers ‘indirect transfer’ of Indian Capital Asset

3.6 The Court then dealt with the contention of Rev-enue that u/s.9(1)(i) can ‘Look through’ the transfer of shares of a foreign company holding shares in an Indian company and treat such transfer as equivalent to transfer of shares of the Indian company on the premise that section 9(1)(i) covers direct and indirect transfer of capital asset.

3.6.1 Dealing with the above issue, the Court noted that section 9(1)(i) gathers in one place various types of income and broadly there are four items of income. The income dealt with in each sub-clause is distinct and independent of the other and the requirements of bringing income within each sub-clause are separately stated. In the case under consideration, the Court is concerned with the last sub-clause of section 9(1)(i), which refers to income arising from ‘transfer of a capital assets situated in India’. This provides a fiction which comes into play only when the income is not charged to tax on the basis of receipt in India, as receipt of income in India by itself attracts tax whether the recipient is a resident or non-resident. This fiction is introduced to avoid any possible arrangement on the part of the non-resident vendor that profit accrued or arose outside India on the basis that the contract to sell is executed outside India. A legal fiction has a limited scope and when the language is unambiguous and admits no doubt, it cannot be expanded by giving purposive interpretation.

3.6.2 According to the Court, section 9(1)(i) cannot by a process of interpretation be extended to cover indirect transfers of capital assets situated in India as the Legislature has not used the words ‘indirect transfer’ in section 9(1)(i). The words directly or indirectly used in section 9(1) (i) go with the income and not with the transfer of capital assets. For this purpose, the Court also drew support from the language of the provisions of section 163(1)(c) and the proposal contained In the Direct Tax Code Bill, 2010 as well as its earlier draft version of 2009. Based on this, while taking a view that indirect transfer is not covered within the said sub-clause of section 9(1)(i), the Court finally concluded on this contention of the Revenue as under (Page 40, para 71):

“…….The question of providing ‘look through’ in the statute or in the treaty is a matter of policy. It is to be expressly provided for in the statute or in the treaty. Similarly, limitation of benefits has to be expressly provided for in the treaty. Such clauses cannot be read into the section by interpretation. For the foregoing reasons, we hold that section 9(1)(i) is not a ‘look through’ provision.”

Whether there was extinguishment of the property rights of HTIL?

3.7 The Court then dealt with the primary argument advanced on behalf of the Revenue that SPA, commercially construed, evidences a transfer of property rights of HTIL by their extinguishment. According to the Revenue, HTIL’s property rights (i.e., right of control and management over HEL and its subsidiaries) got directly extinguished under SPA and accordingly, there was a transfer of capital assets situated in India. For this purpose, the Revenue relied on various features of SPA and on various arrangements entered into between the parties. It was the contention of the Revenue that HTIL possesses de facto control over HEL and its subsidiaries and such control was the subject-matter of transfer under SPA.

3.7.1 For the purpose of dealing with the above contentions of the Revenue, the Court reiterated the position that it is concerned with the transaction of sale of share and not with the sale of assets, item wise. In this context, the Court observed as under (Page 41, para 73):

“…….. The facts of this case show sale of the entire investment made by HTIL, through a top company, viz. CGP, in the Hutchison structure. In this case we need to apply the ‘look at’ test. In the impugned judgment, the High Court has rightly observed that the arguments advanced on behalf of the Department vacillated. The reason for such vacillation was adoption of ‘dissecting approach’ by the Department in the course of its arguments……….”

3.7.2 The Court then considered the legal position that whether HTIL possesses a legal right to appoint directors on the board of HEL and as such had some ‘property right’ in HEL. In this context, the Court stated that a legal right is an enforceable right by a legal process. In a proper case of lifting of ‘corporate veil’, it would be proper to say that the parent company and the subsidiary form one entity. But barring such cases, the legal position of any company incorporated abroad is that its powers, functions, and responsibilities are governed by the law of its incorporation. A company is a separate legal person even with one shareholder. Thus even though a subsidiary may normally comply with the request of a parent company, it is not just a puppet of a parent company. There is a difference between having a power or having a persuasive position. The power of persuasion cannot be constructed as a right in legal sense. The concept of ‘de facto’ control, which existed in Hutchison structure, conveys a state of being in control without any legal right to such a state. Based on this, the Court concluded that HTIL as group holding company has no legal right to direct its downstream companies in the manner of voting, nomination of directors and management rights.

3.7.3 Dealing with the power of a parent company on account of its shareholding in subsidiary, the Court concluded as under (Page 43, para 74):

“…..The fact that the parent company exercises shareholder’s influence on its subsidiaries cannot obliterate the decision-making power or authority of its (subsidiary’s) directors. They cannot be reduced to be puppets. The decisive criteria is whether the parent company’s management has such steering interference with the subsidiary’s core activities that subsidiary can no longer be regarded to perform those activities on the authority of its own executive directors.”

3.7.4 The Court then dealt with the need for executing an SPA and stated that exit is an important right of an investor in every strategic investment. Thus, a need for an SPA arose to re-adjust the outstanding loans between companies; to provide for standstill arrangements in the interregnum between date of SPA and completion of the transaction, to provide for seamless transfer and to provide for fundamental terms of price, indemnities, warranties, etc. SPA was entered into, inter alia, for smooth transaction of business of divestment by HTIL.

3.7.5 Dealing with the issue with regard to arrangements entered into with Essar Group, partner in HEL, as well as with other Indian companies holding 15% interest in HEL (minority investors), the Court stated that the minority investor has what is called a ‘participative’ right, which is subset of ‘protective rights’. These participative rights in certain instances restrict the powers of the shareholders with majority voting interest to control the operations or assets of the investee. Even minority investors are entitled to exit. This ‘exit right’ comes under ‘protective rights’. Considering the Hutchi-son structure in its entirety, the Court found that the participative and protective rights existed in Hutchison structure under various arrangements. Even without execution of SPA, such rights existed in the above arrangements and therefore, it would not be correct to say that such rights flowed from SPA. The Court also stated that it is important to note that ‘transition’ is a vide concept. It is impossible for the acquirer to visualise all events that may take place between the date of SPA and completion of acquisition. For all such things, an SPA may become necessary, but that does not mean that all the rights and entitlements flow from SPA.

3.7.6 After considering various agreements, arrangements and features of SPA, on the issue of extinguishment of property rights of HTIL, the Court concluded as under (Page 48, para 77):

“For the above reasons, we hold that under the HTIL structure, as it existed in 1994, HTIL occupied only a persuasive position/influence over the downstream companies qua manner of voting, nomination of directors and management rights. That, the minority shareholders/investors had participative and protective rights (including RoFR/TARs, call and put options which provided for exit) which flowed from the CGP share. That, the entire investment was sold to VIH through the investment vehicle (CGP). Consequently, there was no extinguishment of rights as alleged by the Revenue.”

Whether Hutchison structure is sham or tax-avoidant?

3.8 The Court also considered the issue as to whether the structure of Hutchison Group is a sham/device/tax-avoidant and whether it was pre-ordained to avoid the tax in question.

3.8.1 Dealing with the above issue, the Court stated that there is a conceptual difference between ‘pre-ordained transaction’ which is created for tax avoidance purposes and a transaction which evidences ‘investment to par-ticipate’ in India. Having mentioned this conceptual difference, the Court explained the concept of ‘investment to participate’ and stated that in order to find out whether a given transaction evidences a pre-ordained transaction in the sense indicated above or investment to participate, one has to take into account various factors enumerated earlier and again re-iterated them, such as duration of time during for which the holding structure existed, the period of business operations in India, generation of taxable revenue in India during the period of business operations in India, etc. referred to the para 3.5.4 above. Explaining the effect of these tests on the case on hand, the Court held as under (Pages 42, para 73):

“……Applying these tests to the facts of the present case, we find that the Hutchison structure has been in place since 1994. It operated during the period 1994 to 11-2-2007. It has paid income-tax ranging from Rs.3 crore to Rs.250 crore per annum during the period 2002-03 to 2006-07. Even after 11-2-2007, taxes are being paid by VIH ranging from Rs.394 crore to Rs.962 crore per annum during the period 2007-08 to 2010-11 (these figures are apart from indirect taxes which also run in crores). Moreover, SPA indicates ‘continuity’ of the telecom business on the exit of its predecessor, namely, HTIL. Thus, it cannot be said that the structure was created or used as a sham or tax-avoidant…..”

3.8.2 While taking the above view, the Court further observed as under (Page 42, para 73):

“……. In a case like the present one, where the structure has existed for a considerable length of time generating taxable revenues right from 1994 and where the Court is satisfied that the transaction satisfies all the parameters of ‘participation in investment’ then in such a case the Court need not go into the questions such as de facto control v. legal control, legal rights v. practical rights, etc.’’

The effect of introduction of CGP before entering into transaction

3.9 The main contention of the Revenue was that CGP was inserted at a late stage in the transaction in order to bring in a tax-free entity (or to create a transaction to avoid tax) and thereby, avoid tax on capital gains. Originally in this transaction, the transfer of shares of Array was contemplated. According to the Revenue, the Mauritius route was not available to HTIL in this transaction to get the benefit to avoid liability of tax.

3.9.1 Dealing with the above contention of the Revenue, the Court first noted that when a business gets big enough, it does two things. First, it reconfigures itself into corporate group by dividing itself multitude of commonly owned subsidiaries. Second, it causes various entities in the said group to guarantee each other’s debts. A typical large business corporation consists of sub-incorporates. Such division is legal and recognised by various laws including laws of taxation. If large firms are not divided into subsidiaries, creditors would have to monitor the enterprise in its entirety. Subsidiaries also promote the benefits of specialisation, permit creditors to lend against only specified division of the firm, reduce the amount of information that creditor needs together, etc. These are efficiencies inbuilt in a holding structure. As a group member, subsidiaries work together in many ways and they are financially inter-linked. The Court then further observed as under (Page 49, para 79):

“….. Such grouping is based on the principle of internal correlation. Courts have evolved doctrines like piercing the corporate veil, substance over form, etc. enabling taxation of underlying assets in cases of fraud, sham, tax avoidant, etc. However, genuine strategic tax planning is not ruled out.”

3.9.2 CGP was incorporated in 1998 in CI and it was in Hutchison structure since then. CGP was an investment vehicle. The transfer of Array had the advantage of transferring control over the entire shareholding held by downstream Mauritius companies, other than 3GSPL (GSPL). On the other hand, the advantage of acquisition of CGP share was to enable VIH to also indirectly acquire the rights and obligations of GSPL (the option to acquire further 15% interest in HEL). This was the reason for VIH to go by CGP route. Dealing with the argument with regard to non-availability of Mauritius route for getting the tax benefit, the Court stated that HTIL could have influenced its Mauritius subsidiaries (indirect) to sell the shares of Indian companies in which case no liability to pay tax on capital gain would have arisen. Thereafter, nothing prevented Mauritius companies from declaring dividend to ultimately remit money to HTIL and there is no tax on dividend in Mauritius in such cases. Thus, the Mauritius route was also available, but it was not opted because that route would not have given the control over GSPL. The Court then took the view that it was open to the parties to opt for any one of the two routes available to them. Accordingly, taking a holistic view, the Court held that it cannot be said that the intervened entity (CGP) had no business or commercial purpose.

Situs of CGP share

3.10 It was contended by the Revenue that under the Companies Law of CI, an exempted company was not entitled to conduct business in CI and therefore, CGP, being exempted company, cannot conduct business in CI and hence, the situs of CGP share existed where the ‘underlying assets are situated’, that is to say, India. While dealing with this contention, the Court stated that the Court does not wish to pronounce authoritatively on the Companies Law of CI. However, under the Indian Companies Act, 1956, the situs of the shares would be where the company is incorporated and where its shares can be transferred. In the present case, it has been asserted by VIH that the transfer of CGP share was recorded in CI and this has neither been rebutted in the order of the Department, nor traversed in the pleadings filed by the Revenue, nor controverted before the Court. Accordingly, the Court took the view that the situs of CGP share cannot be taken at the place where underlying assets stood situated and hence, the same is not in India.

Did VIH acquire 67% controlling interest in HEL?

3.11 It was the contention of the Revenue that VIH acquired 67% controlling interest (including option to acquire 15% interest in HEL held by AS/AG/IDFC through various companies). For this, the Revenue relied on various agreements, arrangements and features of SPA.

3.11.1 Dealing with the above contention of the Revenue, the Court noted that primary argument of the Revenue is based on the equation of ‘equity interest’ with the word ‘control’. On the basis of the shareholding test, HTIL can be said to have 52% control over HEL. By the same test, it can be equally said that the balance 15% stake in HEL remained with AS/AG/IDFC, who had through their respective group companies invested in HEL. This 15% stake comes under the options held by GSPL. Pending exercise, options are not management rights. At the highest, options can be treated as potential shares and they cannot provide right to vote or management or control. HTIL/VIH cannot be said to have a control over 15% stakes in HEL. It is for this reason that even FIBP gave its approval to the transaction by saying that VIH was acquiring or has acquired shareholding of 51.96% in HEL.

3.11.2 Dealing with the case of the arrangement with Indian JV partner Essar Group, the Court stated that it was entered into in order to regulate the affairs of HEL and to regulate the relationship of shareholders of HEL and continue the practice of appointment of directors on agreed basis. The articles of association of HEL did not grant any specific person or entity a right to appoint directors. Under the Company Law, the management control vests in the Board of Directors and not with the shareholders. Therefore, neither from SPA, nor from the terms sheets one can say that VIH had acquired 67% controlling interest in HEL.

3.11.3 Dealing with the contention of the Revenue that why VIH should pay consideration to HTIL based on 67% of the enterprise value of HEL, the Court stated that it is important to know that valuation cannot be the basis of taxation. The basis of taxation is profits or income or receipt. In this case, the Court is not concerned with the tax on income/profit arising from business operations but with the tax on transfer of rights (capital asset) and gains arisen therefrom. In the present case, VIH paid US $ 11.08 bn for 67% of the enterprise value of HEL and its downstream companies having operational licences. When the entire business or investment is sold, for valuation purposes, one may take into account the economic interest or realities. In this case, enterprise value is made-up of two parts, namely, the value of HEL, the value of CGP and companies between CGP and HEL. The Revenue cannot invoke section 9 of the Act on the value of underlying assets or consequence of acquiring a share of CGP. The price paid as a percentage of enterprise value ought to be 67% not because that was available in praesenti to VIH, but on account of the fact that competing Indian bidders would have had de facto access to the entire 67%, as they were not subject to limitation of FDI cap and therefore, they would have immediately encashed the call options.

Approach of the High Court and true nature of transaction

3.12 Dealing with the dissecting approach adopted by the High Court, the Court stated as under (Page 56, para 88):

“We have to view the subject-matter of the transaction, in this case, from a commercial and realistic perspective. The present case concerns an offshore transaction involving a structured investment. This case concerns ‘a share sale’ and not an asset sale. It concerns sale of an entire investment. A ‘sale’ may take various forms. Accordingly, tax consequences will vary. The tax consequences of a share sale would be different from the tax consequences of an asset sale. A slump sale would involve tax consequences which could be different from the tax consequences of sale of assets on itemised basis.”

3.12.1 Further, dealing with the question of transfer of controlling interest dealt with by the High Court, the Court state as under (Page 56, para 88):

“…….Ownership of shares may, in certain situations, result in the assumption of an interest which has the character of a controlling interest in the management of the company. A controlling interest is an incident of ownership of shares in a company, something which flows out of the holding of shares. A controlling interest is, therefore, not an identifiable or distinct capital asset independent of the holding of shares. The control of a company resides in the voting power of its shareholders and shares represent an interest of a shareholder which is made up of various rights contained in the contract embedded in the articles of association. The right of a shareholder may assume the character of a controlling interest where the extent of the shareholding enables the shareholder to control the management. Shares, and the rights which emanate from them, flow together and cannot be dissected…..”

3.12.2 The Court further stated that if owners’ structure is looked at by acquiring one share of CGP, VIH acquired control over various companies which gave it 52% shareholding control over HEL and indirect control over GSPL which gave VIH control over the options to acquire further 15% interest in HEL. These options continued to be held by GSPL and there is no transfer of them. The options have remained un-encashed with GSPL and therefore, even if options are treated as capital asset as held by the High Court, section 9 (1)(i) was not applicable as there was no transfer of such options. The Court also stated that the High Court wrongly viewed the transaction as acquisition of 67% of the equity capital of HEL. 67% of economic value is not equivalent to 67% of equity capital. If the High Court was right, then entire investment would have breached the FDI norms (which had imposed a sectorial cap of 74%) as in this case, Essar group held 22% of its stake through Mauritius Companies.

3.12.3 The Court also stated that as a general rule, in case of transaction involving transfer of shares lock, stock and barrel, such a transaction cannot be broken up in to separate individual components, assets or rights such as right to vote, right to participate in company meetings, management’s rights, controlling rights, control premium, brand licences and so on as shares constitute a bundle of rights. According to the Court, the High Court failed to examine the nature of various items such as non-compete agreement, control premium, call and put options, etc. The Court then took the view that the High Court ought to have examined entire transaction holistically. The transaction should be looked at as an entire package. Where the parties have agreed for a lump sum consideration without placing separate value for each of the items which go to make up the entire ‘investment in participation’, merely because certain values are included in the correspondence with FIPB which had raised the query, would not mean that the parties had agreed for the price payable for such individual items. The transaction remained a contract of outright sale of the entire investment for a lump sum consideration.

3.12.4 Finally, the Court did not agree with the dissecting approach adopted by the High Court and treated the transaction as sale of one share of CGP outside India and accordingly, it does not involve any gain arising on transfer of capital asset situated in India. Hence, capital gain in question is not chargeable to tax u/s.9(1)(i) of the Act and as such, question of deduction of TAS does not arise. Accordingly, the ultimate view of the High Court that the proceedings initiated by the Revenue Authorities did not lack jurisdiction and VIH was under an obligation to deduct TAS while making the payment in this case did not find favour with the Apex Court.
(to be concluded in the third part)

Note: Subsequent Developments
In the Finance Bill, 2012, certain amendments are proposed with retrospective effect from 1-4-1962 to effectively overturn the final position emerging from the above judgment. With these proposals, the stand of the Revenue Authorities with regard to the taxability of such gain, withholding tax obligation of the NR Payer and the jurisdiction of the Revenue Authorities in that respect is sought to be retrospectively confirmed by the legislative amendments.

We understand that on 20th March, 2012, the Apex Court has dismissed the review petition filed by the Government in Vodafone’s case.

(2011) 131 ITD 263 DCIT v. Jindal Equipment Leasing & Consultancy Services Ltd. A.Y.: 2003-04. Dated: 25-2-2011

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Section 48 — The full value of consideration as contemplated in section 48 of the Act does not have any reference to the market value, but only to the consideration referred to in the sale deeds or other supporting evidences as the sale price of the assets which have been transferred.

Facts:
The assessee-company sold shares held in Nalwa Sponge Iron Ltd. (NSIL) to three persons at Rs.12 per share. The book value of shares was estimated to be Rs.254.40 at the time of sale. The AO took the view that the sale of shares was a device to pass on undue monetary benefit to the persons, who according to the AO were related persons. Based on that the AO recomputed capital gain by adopting the fair market value of the shares which was Rs.254.50. He thus made additions of Rs.6,06,27,500 as undisclosed sale consideration. On appeal to the CIT(A) by the assessee, it was held that the AO can’t alter the computation of capital gain without any evidence.

The Department filed appeal against the order of the CIT(A).

Held:
Section 48 contemplates ascertainment of ‘full value of consideration received or accruing as a result of the transfer of capital asset’. The word received means actually received and word accruing means the debt created in favour of the assessee as a result of transfer. In any case, both the terms are used as actual and not estimated amounts. The erstwhile provision does not contain words ‘fair market value’, thus addition made to sale consideration by the AO is not in accordance with the section 48 of the Act.

As regards the objection raised by the AO regarding related party, there was no evidence to prove that transferees were related to the directors of the company. However in any case transferees could not be said to be related to the company as company does not have any corporeal existence.

Hence it was held that the transactions were conducted with independent parties.

Also it is commonly accepted law that the onus to prove otherwise than the fact lies on the person who alleges. In the instant case even though the transaction had taken place at values far less than the arm’s-length price, in absence of any evidence purporting receipt of more consideration than stated, computation of capital gain made by the assessee cannot be altered by the AO.

In order to show that the transaction was colourable device intended to evade tax, the Revenue must prove understatement of consideration. They should have basic material and evidence in its hand. In the instant case, the AO relied upon hypothetical sale price without any evidence, which does not prove that there is more consideration passed than what is disclosed.

Held that as there was no evidence on record that transferees were related to directors of the assessee-company and that the assessee had received amount more than stated consideration, computation of capital gain can be made only on the basis of consideration actually received.

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(2012) TIOL 44 ITAT-Mum. Mithalal N. Sisodia HUF v. ITO A.Y.: 2005-06. Dated: 5-8-2011

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Section 271(1)(c) — Penalty cannot be levied in respect of amount surrendered by the assessee unless the AO proves that bogus LTCG was being declared to claim benefit of either exemption or lower rate of tax.

Facts:
The assessee HUF in its return of income declared long-term capital gains on sale of shares. The assessee claimed that it had purchased a flat and therefore LTCG was exempt u/s.54F of the Act. The LTCG arose on sale of 6000 shares of a company known as Poonam Pharmaceuticals Ltd. (P). The shares had been purchased by the assessee on 8-4-2003 for a sum of Rs.14,320 through V. K. Singhania, a stock-broker in Calcutta. The purchase price was claimed to have been paid in cash. The shares were sold in 3 tranches in August, Sept and Nov 2004 for a total consideration of Rs.17,87,450. The shares were claimed to have been sold through Shyamlala Sultania, stock-broker in Calcutta. The delivery of shares was received and given via Demat account of the assessee. In the course of assessment proceedings, the AO with a view to verify the transactions of purchase and sale of shares wrote a letter to P which was returned unserved with a remark ‘Not Known’. The broker through whom the shares were claimed to have been sold stated that the assessee was not his client and during the previous year he had not done any transactions in shares of P. The Calcutta Stock Exchange confirmed that M/s. V. K. Singhania had not done any transaction in scrip P in the physical form in the online trading system of Calcutta Stock Exchange.

The AO, in the course of assessment proceedings, examined the assessee u/s.131 and recorded statement of the Karta of the assessee. In the statement it was stated that the shares were purchased and sold on the advice of one Mr. R who was resident of Mumbai. Upon being confronted with the materials collected by the AO, he stated that he had purchased and sold shares and had nothing more to say. He then sought adjournment and before the next date of hearing filed a letter surrendering the amount of exemption claimed on the ground that due to his age he cannot go to Calcutta to verify the details, he has not concealed any income nor filed wrong particulars, but with a view to buy peace and avoid litigation the surrender was being made by revising return of income (though time for filing revised return u/s.139(5) had expired) and taxes were paid. The AO made a reference to investigation conducted by Investigation Wing of the Department and pointed modus operandi followed by various persons claiming LTCG. The AO held that the assessee had brought into his accounts unaccounted money and paid less tax by claiming the sum brought in the books as LTCG.

Subsequently, the AO levied penalty on the ground that the assessee had concealed particulars of income and only when investigation was carried out the assessee surrendered the amount and offered the sale proceeds of shares as Income from Other Sources.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted the sequence of events and observed that the assessee had shown the shares in its balance sheet as on 31-3-2004 and the same was accepted by the Revenue. It also noted that the shares were transferred to the Demat account of the assessee. Sale consideration was received by banking channels. The Tribunal observed that the enquiry by the AO from the Calcutta Stock Exchange that the transaction was not done through the Exchange cannot be taken as basis to conclude that the transactions of sale of shares was not genuine. It observed that denial of Shyamlal Sultania, through whom shares were sold is a circumstance going against the assessee. The Tribunal held that from the sequence of events it cannot be said with certainity that the claim made by the assessee was bogus. It noted that the surrender was made to buy peace and avoid litigation. It was because of his inability to go to Calcutta, due to old age, to collect necessary evidence that the surrender was made. The AO had not brought on record any independent material to show that the assessee was part of any investigation referred to in the assessment order. The Tribunal held that imposition of penalty would depend on facts and circumstances of the case. On the present facts, the Tribunal held that the explanation offered by the assessee was bona fide. The Tribunal directed that the penalty imposed be deleted.

The appeal filed by the assessee was allowed.

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(2012) TIOL 25 ITAT-Bang.-SB Nandi Steels Ltd. v. ACIT A.Y.: 2003-04. Dated: 9-12-2011

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Section 72 — Capital gains arising on sale of land and building used for business purposes cannot be set off against brought forward business loss.

Facts:
The assessee-company was engaged in the business of manufacture/production of iron and steel. In the proceedings u/s.143(3) r.w.s. 148 the Assessing Officer (AO), relying on the decision of the Supreme Court in the case of Killick Nixon & Co. v. CIT, (66 ITR 714) (SC), held that the brought forward business loss and unabsorbed depreciation cannot be set off against income from capital gains arising on sale of land and building used for the purposes of the business. He noted that the SC has in the said case held that only income which is earned by carrying on business is entitled to be set off. Accordingly, he denied the set-off of gains arising on sale of land and building which were computed under the head ‘Capital Gains’ against brought forward business loss.

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

Before the Division Bench, the assessee relied upon the decision of the Bangalore Bench of the Tribunal in the case of Steelcon Industries (P) Ltd. v. ITO, ITA No. 571 (Bang.) 1989, A.Y. 1985-86, order dated 27-12- 2004) wherein the issue was decided in favour of the assessee by following the decisions of the SC in the cases of CIT v. Cocanada Radhaswami Bank, (55 ITR 17) (SC) and CIT v. Chugandas & Co., (55 ITR 17) (SC). The Division Bench noticed that there is another judgment of the SC in the case of CIT v. Express Newspapers Ltd., (53 ITR 250) wherein the SC held that capital gains are connected with the capital assets of the business and therefore, it cannot make them the profit of the business and cannot be set off against the brought forward business loss. This decision of the SC was not considered by the Tribunal in the case of Steelcon Industries (P) Ltd (supra) and therefore, the Division Bench felt that the decision in the case of Steelcon Industries (P) Ltd. (supra) requires reconsideration by a Special Bench. The President constituted a Special Bench for disposal of the following two grounds of the appeal filed by the assessee —

“(1) That the learned CIT(A) erred in law and on facts that the appellant is not entitled to set off carry forward business loss of Rs.39,99,652 against the long-term capital gain arising on sale of land used for the purpose of business.

(2) That the authorities below ought to have appreciated that there is no cessation of business and the appellant is entitled to set off the carry forward business loss.”

Held:
Section 72 permits carry forward of business loss to subsequent assessment years and allows it to be set off against profits & gains, if any, of any business or profession carried on by the assessee and assessable for the relevant assessment year. The term ‘profits and gains of business or profession’ means income earned out of business carried on by the assessee and not any income which is in some way connected to the business carried on by the assessee.

SB did not agree with the contention of the assessee that the assets sold by the assessee were business assets. It held that these were un-disputedly capital assets and capital receipts are not taxable, nor are the capital payments deductible from the income of the assessee. The capital is to be used for the purpose of carrying on the business of the assessee and it shall remain in the business of the assessee till it is either converted into stock-in-trade or is disposed of. The income earned by the assessee by carrying on the business by use of stock-in-trade only is the business income of the assessee.

SB held that the decision of the SC in Express Newspapers Ltd. (supra) is squarely applicable to the facts of the present case and that the Coordinate Bench of the Tribunal in the case of Steelcon Industries Pvt. Ltd. (supra) has wrongly placed reliance upon the decision of the Apex Court in the cases of United Commercial Bank Ltd. and M/s. Cocanada Radhaswami Bank Ltd. It held that the gains arising on sale of land and building were not eligible for set-off against the brought forward business loss u/s.72.

These grounds of appeal filed by the assessee were decided against the assessee.

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(2011) 142 TTJ 358 (Hyd.) Four Soft Ltd. v. Dy. CIT A.Y.: 2006-07. Dated: 9-9-2011

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Section 92B and 92C of the Income-tax Act, 1961 — Corporate guarantee provided by the assessee company does not fall within the definition of international transaction and, therefore, no TP adjustment is required in respect of corporate guarantee transaction undertaken by the assesseecompany.

Facts:
The assessee-company had provided corporate guarantee to ICICI Bank UK on behalf of its subsidiary. The TPO held that guarantee is an obligation and if the principal debtor falls to honour the obligation, the guarantor is liable for the same and, hence, the TPO determined a commission @ 3.75% as the ALP under the CUP method on the basis of the commission charged by the ICICI Bank as benchmark.

Held:
The Tribunal held that no TP adjustment is required in respect of corporate guarantee transaction done by the assessee-company. The Tribunal noted as under:

(1) The TP legislation provides for computation of income from international transaction as per section 92B.

(2) The corporate guarantee provided by the assessee-company does not fall within the definition of international transaction.

(3) The TP legislation does not stipulate any guidelines in respect of guarantee transactions.

(4) In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. The corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the bank or financial institution.

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(2011) 142 TTJ 252 (Visakha) Dredging Corporation of India Ltd. v. ACIT A.Ys.: 2006-07 to 2008-09. Dated: 25-7-2011

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Section 234D r.w.s. 2(40) of the Income-tax Act, 1961 — Reassessment made u/s.147 after completion of assessment u/s.143(3) cannot be termed as regular assessment and, consequently, interest u/s.234D is not chargeable in such reassessment.

Facts:
The assessee was given refund while processing the return u/s.143(1) and further refund was given after assessment u/s.143(3). In reassessment proceedings u/s.147, the refund amount got reduced and, therefore, the excess refund given earlier became collectible from the assessee. The Assessing Officer levied interest u/s.234D on such excess refund amount. The learned CIT(A) held that the interest u/s.234D is not chargeable in the hands of the company in reassessment proceedings.

Held:
The Tribunal upheld the CIT(A)’s order. The Tribunal noted as under:

(1) On a plain reading of section 234D, it is noticed that the interest u/s.234D is leviable only if the refund granted to the assessee u/s.143(1) of the Act becomes collectible in the order passed under regular assessment.

(2) As per section 2(40) read with Explanation to section 234D, ‘regular assessment’ is defined to mean assessment order passed u/s.143(3) or u/s.144 or where the assessment has been made for the first time u/s.147 or u/s.153A. Thus, reassessment proceedings u/s.147 after completion of the assessment u/s.143(3) is excluded from the purview of ‘regular assessment’.

(3) Such exhaustive definition of ‘regular assessment’ when considered in the light of the fact that in the appellant-company’s case the assessment u/s.147 has been made not for the first time, but after the completion of an assessment u/s.143(3), the same cannot be termed as regular assessment and, consequently, the provisions of section 234D cannot apply in the appellantcompany’s case.

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(2011) 142 TTJ 86 (Pune) Drilbits International (P.) Ltd. v. Dy. CIT A.Y.: 2006-07. Dated: 23-8-2011

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(a) Section 32(1)(iii) of the Income-tax Act, 1961 — Unit acquired at slump price — Amount allocated towards trademark, brand name, logo, etc. and technical know-how by approved valuer is capital expenditure eligible for depreciation claim.

(b) Section 92C of the Income-tax Act, 1961 read with Rules 10B(1)(a), 10B(1)(c) and 10B(1)(e) of the Income-tax Rules, 1962 — Transfer pricing — Most appropriate method for computing arm’s-length price — Rates charged to the third parties in the domestic market cannot be compared with the rates charged to AE in the export market — There are various factors which affect the pricing of the product in the domestic market vis-à-vis the export market — Hence the CPM method is not appropriate method for determining the ALP — CUP or TNMM was the most appropriate method for determining ALP.

Facts:
(a) Depreciation u/s.32(1)(iii)

The assessee acquired the unit of G on slump-sales basis consisting of all its assets which included intellectual property rights such as designs, drawings, manufacturing processes and technical know-how for a consideration of Rs.17.01 crore. The registered valuer valued the knowhow acquired at Rs.2.41 crore and royalty payable for use of brand name, trademark, logo, etc. at Rs.2.67 crore. The Assessing Officer disallowed depreciation on the same on the basis that as per agreement, the assessee has not purchased any know-how from G and the assessee is entitled to use trademark, logo and brand name of G free of cost for a period of three years.

Held:
The Tribunal, relying on the decisions in the following cases, allowed the assessee’s claim:

(a) Amway India Enterprises v. Dy. CIT, (2008) 114 TTJ 476 (Del.) (SB)/(2008) 4 DTR (Del.) (SB) (Trib.) 1/(2008) 111 ITD 112 (Del.) (SB)

(b) Hindustan Coca Cola Beverages (P.) Ltd. v. Dy. CIT, (2010) 43 DTR (Del.) 416

The Tribunal noted as under:

(1) It is an undisputed fact that the assessee has paid the agreed consideration of Rs. 17.01 crore as a lump-sum amount to purchase the unit in its entirety i.e., the unit consisting of items like trademark, logo and brand name, designs, drawings, manufacturing processes and technical know-how.

(2) Simply because, in the agreement to purchase, it is mentioned that the use of all items like trademark, logo and brand name is allowed to the assessee for three years by G free of cost, it does not mean that there is no value for these items. The agreement between the seller and the purchaser does not put restriction on the right of the purchaser to record the asset at its fair value in its books.

(3) The apportionment of the lump-sum amount amongst the various assets and rights has to be made and which has been done in the present case as per the valuer’s report. The approved valuer has valued the know-how acquired at Rs.2.41 crore and royalty payable for use of brand name, trademark and logo at Rs.2.67 crore.

(4) The Special Bench of the Tribunal in the case of Amway India (supra) has held that if the software is useable/used for more than two years, it is a capital expenditure and if it is for less than two years, it is revenue expenditure. Thus, following the ratio laid down therein, since the assessee had purchased the use of brand name, trademark, logo for three years and similarly, the intellectual property right such as design, drawings, manufacturing processes and technical know-how in respect of the products manufactured by the unit was acquired, the expenditure incurred in this regard as valued by the approved valuer is capital expenditure on which the claim of depreciation was allowable.

Facts:
(b) Computation of ALP

During the year, the assessee-company sold goods to its associate enterprises (AEs). Initially, while filing the return of income, the assessee had adopted the comparable uncontrolled price method (CUP) for determining the arm’s-length price (ALP) in respect of exports transactions undertaken with the AE. Thereafter, in the proceedings before the learned TPO, the assessee contended that even as per transactional net margin method (TNMM), the transactions of export of goods are at ALP. The revised Form No. 3CEB was filed and details of the company selected as comparable were furnished. The learned TPO did not agree with the submissions of the assessee and held that the CUP method and TNMM are not applicable for determining the ALP. The learned TPO has considered the gross margin earned by the assessee in the export segment visà- vis gross margin earned in the domestic segment. Accordingly, he has held that the gross margin in the domestic segment is much higher than the margin earned in the export segment and, hence, he made an addition of Rs.58.54 lakh.

Held:
The Tribunal held that the TPO was not justified in adopting CPM and in comparing the gross margin in export segment vis-à-vis gross margin in domestic segment of the assessee without appreciating that the CUP or TNMM was the most proper method for determining the ALP. The TPO was directed to accept the claim of the assessee regarding the ALP based on TNMM which method has been accepted in the succeeding year.

The Tribunal noted as under:

(1) Rates charged to the third parties in the domestic market cannot be compared with the rates charged to AE in the export market. There are various factors which affect the pricing of the product in the domestic market vis-à-vis the export market and, therefore, the price cannot be compared. The assessee has to bear substantial marketing cost in the domestic segment, there is no bad debt risk in respect of the sales made to the AE and no product liability risk. Besides, it is also a material aspect that the assessee has to bear product liability risks like retention money, bank guarantee, warranty, etc. in the domestic segment, but such risks are not to be borne in the export segment. Due to these factors, the assessee has to charge higher rates in the domestic segment and, therefore, comparison of the rates of the products in the domestic segment and the export segment is not justified.

(2) For the A.Y. 2007-08, the assessee has adopted TNMM for determining the ALP and the TPO has accepted the same. There is substance in the alternative submissions of the authorised representative that TNMM can also be accepted during the year for determining the ALP.

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(A) ITAT: Jurisdiction: Power and scope: Decision on a matter not arising in appeal: AO not disputing genuineness of transaction: Not questioned genuineness before CIT(A) or Tribunal: Tribunal treating transaction sham is erroneous. (B) Non-competition fee received by assessee prior to 1-4-2003 is capital receipt and not taxable.

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The relevant assessment year is A.Y. 1997-98. The assessee was one of the promoters and a director of Gaghra Sugar Ltd. which had a factory for manufacture of sugar. The assessee was also the director of Ganges Sugar Mills (P) Ltd. which had applied for and received licence to set up new sugar factory in the same region. In such circumstances Gaghra Sugar Ltd. negotiated with the assessee and entered into an agreement with the assessee preventing the assessee from competing with the sugar business of the company directly or indirectly for a period of five years for a consideration or Rs.25 lakh. In the assessment proceedings the assessee claimed the said amount received for ‘non-competition’ as capital receipt not liable for tax. The Assessing Officer however taxed the said amount under the head ‘Other Sources’. The CIT(A) accepted the assesses contention and allowed the appeal. In the appeal filed by the Revenue, the Tribunal held that the claim of the assessee of ‘non-competition’ fee was not genuine and allowed the appeal of the Assessing Officer.

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

“(i) The Assessing Officer having assessed the noncompetition fee as revenue receipt without disputing the genuineness of the transaction and not questioned the genuineness even in the appeal either before the CIT(A) or before the Tribunal, order passed by the Tribunal treating the receipt of non-competition fees as a sham transaction is erroneous.

(ii) Non-competition fees received by the assessee prior to 1-4-2003 has to be treated as capital receipt and it is not taxable.”

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(2012) 65 DTR (Mum.) (Trib.) 104 Ramesh R. Shah v. ACIT A.Y.: 2005-06. Dated: 29-07-2011

Revised return u/s.139(5) — When original return made u/s.139(1) declaring positive income, claim for carry forward of long-term capital loss made in revised return u/s.139(5) is allowable.

Facts:

The assessee had filed original return of income u/s.139(1) declaring total income of Rs.94.09 lakhs. Subsequently, the assessee filed a revised return claiming long-term capital loss of Rs.1.82 crore and the said loss was claimed to be carried forward u/s.74. The AO denied carry forward of such loss on the ground that as per section 80, loss not determined in return u/s.139(3) cannot be allowed to be carried forward and set off u/s.74. The learned CIT also confirmed the order of the AO observing that carry forward of loss returned for the first time in revised return of income is not eligible for carry forward to the next assessment year as per provisions of section 80.

Held:

In the present case, the assessee filed the original return u/s.139(1) in which the positive income is determined and subsequently even revised return filed declared positive income as the assessee could not set off the long-term capital loss on the sale of shares. He claimed the same to be carried forward.

As per the provisions of section 139(5) in both the situations where the assessee has filed the return of positive income as well as return of loss at the first instance as per the time-limit prescribed and subsequently, files the revised return then the revised return is treated as valid return. Hence once the assessee declares positive income in original return filed u/s.139(1), but subsequently finds some mistake or wrong statement and files revised return declaring loss, then he cannot be deprived of the benefit of carry forward of such loss.

TDS: Payment to sub-contractors: Section 194C: Union of truck operators procuring contracts for its members: No sub-contracts: Tax not deductible at source.

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[CIT v. Truck Operators Union, 339 ITR 532 (P&H)]
The assessee was a truck operators’ union. It procured contracts for its members. The Assessing Officer made an addition of Rs.6,30,32,453 by way of disallowance u/s.40(a)(ia) holding that such payment to the members required deduction of tax u/s.194C of the Act which was not done. The Tribunal deleted the addition and held as under:

“The assessee-union had been formed by truck operators in order to obtain bigger contracts through it. It was of course entitled to booking charges received, which constituted its main income and the main function of the assessee was to arrange contracts from different agencies for its member operators which were factually and collectively formed by such members. The freight received from the parties concerned belonged to the member truck operators by whose trucks the contracts were performed and as such, the same was disbursed to none else but them. The assessee-union did not give any sub-contract to its members as alleged by the Assessing Officer.”

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

“When the union was acting only in the representative capacity and there was no separate contract between the union and its members for performance of the work as required for applicability of section 194C(2) of the Act, section 40(a)(ia) of the Act was not applicable.”

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TDS: Sections 194C and 194I of Income-tax Act, 1961: A.Y. 2007-08: Assessee engaged in transportation of building materials: Payment to contractors for hiring dumpers: Not rent for machinery or equipment but payment for works contract: Section 194C applicable and not Section 194I.

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[CIT v. Shree Mahalaxmi Transport Co., 339 ITR 484 (Guj.)]

The assessee was engaged in the transportation of building materials, etc. In the A.Y. 2007-08, the assessee paid Rs.1,18,29,647 as rent for hiring dumpers and deducted tax at source at the rate of 1.12%. as applicable u/s.194C of the Income-tax Act, 1961. The Assessing Officer held that the payment was governed by section 194-I and accordingly passed order u/s.201(1) holding the assessee to be in default and levied interest u/s.201(1A) of the Act. The Commissioner (Appeals) and the Tribunal held that the assessee was not in default and that the levy of interest was not justified.

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

“(i) The assessee had given contracts to the parties for the transportation of goods and had not taken machinery and equipment on rent. The Commissioner (Appeal) was justified in holding that the transactions being in the nature of contracts for shifting of goods from one place to another wood be covered as works contracts, thereby attracting the provisions of section 194C of the Act. Since the assessee had given sub-contracts for transportation of goods and not for the renting out of machinery or equipment, such payments could not be termed as rent paid for the use of machinery and the provisions of section 194-I of the Act would not be applicable.

(ii) The Tribunal was, therefore, justified in upholding the order passed by the Commissioner (Appeals).”

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Chanchal Kumar Sircar v. ITO ITAT ‘A’ Bench, Kolkata Before Mahavir Singh (JM) and C. D. Rao (AM) ITA No. 1147/Kol./2011 A.Y.: 2005-06. Decided on: 21-2-2012 Counsel for assessee/revenue : S. Bandyopadhyay/S. K. Roy

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Section 54EC — Exemption from capital gains tax —
Whether assessee entitled to claim exemption under the provision when
the investment in the eligible bonds is made within six months of the
date of receipt of consideration as against the prescribed condition of
the date of transfer — Held, Yes.

Facts:
During the year under appeal
the assessee sold three flats and the entire floor of a building
constructed by him by sales agreements dated 2-7-2004 and 1-7-2004,
respectively. The entire consideration aggregating to Rs.131.77 lacs was
received in instalments between 1-7-2004 and 27-6-2005. Each of the
instalment received by the assessee was deposited by him in full with
NABARD almost immediately and in any case within six months’ period from
the dates of the respective receipts. The assessee claimed exemption
u/s.54EC of the Act on Capital Gains. The AO completed the assessment
u/s.143(3) of the Act accepting the returned income. The CIT, in
exercise of his powers u/s.263 of the Act, held that the investments of
sale consideration amounts should be within six months’ from the date of
the sale and not from the date of receipt of consideration as claimed
by the assessee. In that view, he not only set aside the assessment, but
also gave directions for not considering the deposits made beyond the
period of six months from 2-7-2004 for the purpose of section 54EC.

In
consequence to revision order passed u/s.263 of the Act by the CIT,
assessment was framed u/s. 254/263/143(3) of the Act by the AO on
24-12-2010, and disallowed exemption u/s.54EC of the Act. Aggrieved, the
assessee preferred appeal before the CIT(A) and the CIT(A) also
confirmed the action of the AO.

Held:
According to the Tribunal, if the
period is reckoned from the date of agreement and receipt of part
payment at the first instance, then it would lead to an impossible
situation by asking the assessee to invest money in specified asset
before actual receipt of the same. In taking this view the Tribunal was
supported by the decision of the Andhra Pradesh High Court in the case
of S. Gopal Reddy v. CIT, (181 ITR 378), where in a similar situation of
delayed receipt of compensation amount on acquisition of property, the
Court observed that if the investment in specified asset was made within
a period of six months from the date of receipt of compensation, as
against the date of acquisition of the property denoting transfer
thereof, the same should be considered to be sufficient compliance for
the purpose of claiming exemption u/s.54E of the Act. The Tribunal noted
that similar view was also taken by the Allahabad High Court in the
case of CIT v. Janardhan Dass, (late through legal heir Shyam Sunder)
(299 ITR 210) and by the Andhra Pradesh High Court in the case of
Darapaneni Chenna Krishnayya (HUF) v. CIT, (291 ITR 98). In view of the
above consistent principle adopted by the High Courts in respect to
interpretation of a beneficial provision and the fact that the assessee
invested in specified bonds i.e., NABARD bonds, within one month of the
receipt of sale consideration, the Tribunal held that the assessee is
eligible for exemption u/s.54EC of the Act.

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Shri 1008 Parshwanath Digamber Jain Mandir Trust v. DIT ITAT ‘I’ Bench, Mumbai Before P. M. Jagtap (AM) and N. V. Vasudevan (JM) ITA No. 5544/M/2009 Decided on: 8-2-2012 Counsel for assessee/revenue: Ajay Ghosalia/ Sanjiv Dutt

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Section 12AA — Registration of charitable trust — Trust constituted with the object clause consisting of charitable as well as religious — Whether entitled for registration — Held, Yes.

Facts:
The assessee trust had applied for registration u/s.12AA of the Act. Its objects, as per its trust deed, were charitable as well as religious. According to the DIT, since the objects were admixture of religious as well as non-religious, relying on the decision of the Jammu & Kashmir High Court in the case of Ghulam Mohidin Trust v. CIT, (248 ITR 587) and the decision of the Supreme Court in the case of State of Kerala v. M. P. Shanti Verma Jain, (231 ITR 787), the registration u/s.12AA was denied. Before the Tribunal, the Revenue justified the order of the DIT on the ground that at the time of grant of registration u/s.12AA, it was necessary that he was satisfied that the objects are charitable and as per section 2(15), which defines the term ‘charitable purpose’, religious purpose is not part of charitable purpose.

Held:
According to the Tribunal, the trust, whose objects are religious as well as charitable, would be entitled for grant of registration and also to claim exemption u/s.11. For the purpose, reliance was placed on the decision of the Gujarat High Court in the case of ACIT v. Bibijiwala, (AA) Trust (100 ITR 516). It further observed that when the assessee seek exemption u/s.11, the same would be allowed subject to provision of section 13(1)(a) and (b) of the Act. According to it, the decisions relied on by the Revenue were on different facts, hence, not applicable to the case of the assessee.

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Interest on refund: Section 244A of Incometax Act, 1961: A.Y. 1998-99: Period for interest: Period of delay caused by assessee: Assessee’s belated claim for deduction allowed by CIT(A): No delay caused by assessee: Interest payable from beginning of relevant A.Y.

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[CIT v. South Indian Bank Ltd., 340 ITR 574 (Ker.)]

For the A.Y. 1998-99, the assessee’s belated claim for bad debts was rejected by the Assessing Officer for failure to establish the claim. The claim was allowed by the CIT(A). The Assessing Officer denied interest on refund u/s.244A of the Income-tax Act, 1961 on the ground that the delay was attributable to an additional claim of deduction which was allowed by the CIT(A). The Tribunal held that the assessee was entitled to interest from 1-4-1999.

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

“The Assessing Officer had not established that the assessee had caused any delay in issuing the refund order. There was no decision by the Commissioner or Chief Commissioner on this issue. The assessee was eligible to get interest from 1-4-1999, till the date of refund.”

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Penalty – Concealment of Income – There is no time limit prescribed for payment of tax with interest for the grant of immunity under clause (2) of Explanation 5 to section 271(1)(c).

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[Asst. CIT v. Gebilal Kanhaialal HUF (2012) 348 ITR 561 (SC)]

Search and seizure operation were carried out during the period 29-7-1987 to 1-8-1987 at the residential/business premises of the assessee HUF, represented by the Karta, Shri Kalyanmal Karva. Assets worth Rs.48,32,000 besides incriminating documents were seized. On 1-8-1987, the Karta while surrendering the amount made a statement u/s. 132(4). The return of income for the assessment year 1987-88 which was required to be filed u/s.139(1) on or before 31-7-1987 was not filed. Pursuant to notices issued u/s.142(1)(ii) in December 1988, the assessee on 16-2-1990 furnished required information including statement of all assets and liabilities whether included in the accounts or not. In the said statement, the said Karta reiterated his earlier statement of concealment. The Department denied the immunity under clause (2) of Explanation 5 to section 271(1) (c) mainly for the reason that the assessee had failed to file his return of income on or before 31-7-1987 and had failed to pay the tax thereon.

The Supreme Court observed that Explanation 5 is a deeming provision. It provides that where, in the course of search u/s. 132, that assessee is found to be the owner of unaccounted assets and the assessee claims that such assets have been acquired by him by utilising, wholly or partly, his income for any previous year which has ended before the date of search or which is to end on or after the date of search, then, in such a situation, notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall be deemed to have concealed the particulars of his income for the purposes of imposition of penalty u/s. 271(1)(c). The only exception to such a deeming provision or to such a presumption of concealment is given in sub-clause (1) and (2) of Explanation 5. Three conditions have got to be satisfied by the assessee for claiming immunity from payment of penalty under clause (2) of Explanation 5 of section 271(1)(c). The first condition was that the assessee must make a statement u/s. 132(4) in the course of search, stating that the unaccounted assets and incriminating documents found from his possession during the search have been acquired out of his income, which has not been disclosed in the return of income to be furnished before expiry of time specified in section 139(1). Such statement was made by the karta during the search which concluded on 1st August, 1987. It was not in dispute that condition No.1 was fulfilled. The second conditions for availing of the immunity from penalty u/s. 271(1)(c) was that the assessee should specify, in his statement u/s. 132(4), the manner in which such income stood derived. Admittedly, the second condition, in the present case also stood satisfied. According to the Department, the assessee was not entitled to immunity under clause (2) as he did not satisfy the third condition for availing of the benefit of waiver of penalty u/s. 271(1)(c) as the assessee failed to file his return of income on 31st July, 1987, and pay tax thereon particularly when the assessee conceded on 1st August, 1987 that there was concealment of income.

The Supreme Court held that the third condition under clause (2) was that the assessee had to pay the tax together with interest, if any, in respect of such undisclosed income. However, no time limit for payment of such tax stood prescribed under clause (2). The only requirement stipulated in the third condition was for the assessee to “pay tax together with interest”. In the present case, according to the Supreme Court, the third condition also stood fulfilled. The assessee had paid tax with interest up to the date of payment.

The Supreme Court held that the assessee was entitled to immunity under clause (2) of Explanation 5 to section 271(1)(c).

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Time limit for issuing of notice : Sections 148 and 149 of Income-tax Act, 1961: A.Y. 1998-99: Assessment order u/s.143(3) passed on 28-2- 2001: Notice u/s.148 issued on 30-3-2009: Not valid: Section 149 amended by Finance Act, 2001, w.e.f. 1-6-2001 reducing the time limit from 10 years to 6 years is applicable.

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[C. B. Richards Ellis Mauritius Ltd. v. ADIT, 21 Taxman. com 535 (Del.)]

For the A.Y. 1998-99 the assessment was completed u/s.143(3) on 28-2-2001. Subsequently, on 30-3-2009, a notice u/s.148 was issued for reopening the assessment. The assessee’s objections were rejected by the Assessing Officer. The Delhi High Court allowed the writ petition filed by the assessee and held as under: “

(i) The issue in dispute gained importance because the time limit for issuance of notice u/s.148 as stipulated and stated in section 149 underwent substitution by the Finance Act, 2001 with effect from 1-6-2001. By the Finance Act, 2001, the period was restricted to six years from the end of the relevant assessment year. Before the said substitution, till 31-5-2001 reassessment proceedings could be initiated for up to 10 years from the end of the relevant assessment year.

(ii) It is an accepted and admitted position that the re-assessment notice dated 30-3-2009 would be barred and beyond time, in case, the period stipulated in substituted section 149 with effect from 1-6-2001 is applied.

However, the contention of the Revenue is that the substituted section is not applicable and section 149 before its substitution by the Finance Act, 2001 would apply. It is stated that the return in question was filed on 20-11-1998 and the law/limitation period prescribed/applicable on the first day of the assessment year determines and decides the time period for issue of notice u/s.147/148. The question raised is whether the amendment substitution of the period with effect from 1-6-2001 in section 149, is procedural or substantive.

(iii) Law of limitation is a procedural law and the provision or the limitation period stipulated on the date when the suit is filed applies. Law of limitation, therefore, being procedural law has to be applied to the proceedings on the date of institution/ filing. No person can have a vested right in the procedure. Therefore, the procedural law on the date when it was enforced is applied.

(iv) Law of limitation does not create any right in favour of a person or define or create any cause of action, but simply prescribes that the remedy can be exercised or availed of by or within the period stated and not thereafter. Subsequently, the right continues to exist but cannot be enforced. The liability to tax under the Act is created by the charging section read with the computation provisions. The assessment proceedings crystallise the said liability so that it can be enforced and the tax if short-paid or unpaid can be collected. If this difference between liability to tax and the procedure prescribed under the Act for computation of the liability (i.e., the procedure of assessment), is kept in mind, there would be no difficulty in understanding and appreciating the fallacy and the error in the primary argument raised by the Revenue.

(v) It is a settled position that liability to tax as a levy is normally determined as per statute as it exists on the first day of the assessment year, but this is not the issue or question in the present case. The issue or question in the present case relates to assessment, i.e., initiation of re-assessment proceedings and whether the time/limitation for initiation of the re-assessment proceedings specified by the Finance Act, 2001 is applicable. The Court is not determining/deciding the liability to tax but has to adjudicate and decide whether the re-assessment notice is beyond the time period stipulated. This is a matter/issue of procedure, i.e., the time period in which the assessment or re-assessment proceedings can be initiated. Thus, the time period/limitation period prescribed on the date of issue of notice will apply.

(vi) In view of the aforesaid reasoning, writ petition is allowed and the re-assessment notice dated 30-3-2009 and the order passed by the Assessing Officer and Assistant Commissioner dismissing the objections of the assessee are quashed.”

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Speculation business: Speculation loss: Section 73, r/w section 28(i)-: A.Ys. 1996-97 and 1998-99: Assessee-company in business of dealing in shares and also earning interest income by granting loans and advances: Incurred loss in purchase and sale of shares: Claimed set-off of above loss against interest income: AO denied set-off relying on Explanation to section 73: Tribunal held that principal business of assessee was granting of loans and advances: Allowed set-off: Tribunal is right.

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[CIT v. Narayan Properties Ltd., 21 Taxman.com 547 (All.)]

The assessee-company was in the business of purchase and sale of shares and was also earning interest income by granting loans and advances. During the previous years relevant to the A.Ys. 1996-97 and 1998-99, the assessee incurred loss in the purchase and sale of shares and earned interest income from loans and advances. It claimed set-off of the above loss against the interest income. The Assessing Officer assessed the interest income as business income. He further treated the business of purchase and sale of shares as speculation business as per Explanation to section 73 of the Income-tax Act, 1961. He, therefore, considered the aforesaid loss as speculation loss and held that it would only be set off against the speculation profit in the subsequent years. The Tribunal allowed the assessee’s claim.

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

(i) Section 73(1) provides that any loss, computed in respect of speculation business carried on by the assessee, shall not be set off except against profits and gains, if any of another speculation business. Section 73(1) uses the words ‘business carried on’. The Explanation to section 73 also uses the phrase ‘where any part of the business of the company . . . . . consists in the purchase and sale of shares of other companies’. Section 28(1) provides for charging of income-tax on profits and gains of any business or profession which was carried on by the assessee at any time during the previous year. Section 28(1) r/w section 73(1) which also uses the words ‘business carried on’ clearly indicate that what is chargeable to the income-tax is the business actually carried on and profits and gains of the said business.

The Explanation to section 73 contains an exclusionary clause, according to which the following companies are excluded from the operation of the deeming clause

(i) a company whose gross total income consists mainly of income which is chargeable under the heads ‘Interest on securities’, ‘Income from house property’, ‘Capital gains’ and ‘Income from other sources’, or (ii) a company the principal business of which is the business of banking or granting of loans and advances’.

(ii) The question to be considered is as to whether a company, which fulfils the conditions as mentioned in the exclusionary categories, can be denied the benefit, if the income consists mainly of income as used in first category and the principal business of which as used in the second category from the activities and business which are not the part of the memorandum of association of the company. Section 28(1), section 73(1) and the Explanation to section 73 indicate that the income which is chargeable is the income in the relevant year arising from business or profession carried on by the company. The words ‘carried on’ mean actual carrying of the activity. The words ‘carried on has to be read in context of what actually was done by the company in the relevant year, rather than what was main object in the memorandum of association of the company. Thus, the submission of the Revenue that since in the memorandum of association the activity or business, which is shown to have been carried on by the assessee, is not included, it is not entitled to be considered in exclusionary clause, has to be rejected.

(iii) For qualifying the exclusionary categories as mentioned in the Explanation to section 73, the condition to be fulfilled is that gross total income consists mainly of income which is chargeable under the heads

 (a) ‘Interest on securities’,

(b) ‘Income from house property’,

(c) ‘Capital gains’ and

(d) ‘Income from other sources’.

The said provision uses the words ‘mainly of income’. The words ‘mainly of income’ and similarly in the second category the words ‘principal business of which’ mean substantially or primarily.

(iv) In the instant case, the total gross income of the assessee, which has been shown in the assessment order, is interest income. The assessment order does not refer to any other income. Hence, the condition that income consists ‘mainly of income’ is completely fulfilled. One of the heads of the income for exclusionary category is income from other sources.

 (v) The second category consists of the phrase ‘a company the principal business of which is granting of loans and advances’. The income, which has been treated to be gross income, is income from interest of the assessee from granting loans and advances. Thus, the assessee was covered by exclusionary clause of Explanation to section 73.

(vi) Therefore, the assessee was clearly covered by the exclusionary clause of Explanation to section 73 and the Tribunal rightly set off of the aforesaid loss against the income of the assessee from loans and advances.”

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Settlement of case: Abatement: Sections 245C, 245D and 245HA : A.Ys. 1989-90 to 1993-94: Effect and scope of section 245HA: Where there was no fault of the applicant and he himself is not responsible for delay in getting decision on the settlement application, the application shall not abate.

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[Md. Sanaul Haque & Ors. v. UOI, 250 CTR 218 (Jharkhand)]

Dealing with the effect and scope of section 245HA of the Income-tax Act, 1961, the Jharkhand High Court followed the judgment of the Bombay High Court in Star Television News Ltd. v. UOI, 317 ITR 66 (Bom.) and held as under: “In a case where there was no fault of the applicant and he himself is not responsible for delay in getting decision on the settlement application, in that situation, the application shall not abate. The Settlement Commission has to decide the application following the principles laid down in Star Television News Ltd.”

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Penalty: Delay in filing declaration in Form No. 15H: Section 272A(2)(f): A.Ys. 1991-93, 1992-93 and 1994-95: No obligation to file declaration prior to 1-6-1992: Penalty not imposable for that period: Further the penalty to be restricted to the tax amount as per subsequent clarificatory amendment to proviso.

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[CIT v. Krishna Cold Storage, 250 CTR 134 (Guj.)]

For the A.Ys. 1991-92, 1992-93 and 1994-95 penalty u/s.272A(2)(f) of the Income-tax Act, 1961 was imposed for delay in filing declaration in Form 15H. The Tribunal held that no penalty was imposable for the period prior to 1-6-1992 because there was no statutory obligation to file the prescribed form u/s.197A. The Tribunal also held that the penalty should be restricted to the amount of tax deductible by giving retrospective effect to the proviso which is clarificatory.

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

(i) Failure to file the declaration in Form No. 15H prior to 1-6-1992 not being a default u/s. 272A(2) (f), no penalty could be levied for delay up to 1-6-1992.

(ii) In view of proviso, which is remedial in nature and consequently retrospective in operation, penalty could not exceed the tax deductible.”

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PAN: TDS: Section 206AA, r.w.s. 139A: Constitutional validity; Article 14 of the Constitution of India, 1950: Requirement to furnish PAN: Section 206AA is unconstitutional and has to be read down from statute and made inapplicable to persons whose income is less than taxable limit: Therefore, banking and financial institution shall not invariably insist upon PAN from small investors as well as persons who intend to open an account in bank or financial institution.

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[Smt. A. Kowsalya Bai v. UOI, 22 Taxman.com 157 (Kar.)]

Considering the constitutional validity of section 206AA of the Income-tax Act, 1961, the Karnataka High Court held as under: “

(i) The very intent of section 206AA is to make it conditional for every person who wish to have a transaction in the bank or financial institution including small investors/depositors, invariably to have a PAN. This runs contrary to what has been contemplated u/s.139A which was introduced by the Legislature in its wisdom. What is not in dispute is, persons whose income is below the taxable limit need not have a PAN and also they need not furnish income tax declaration/ returns. Of course, under the Finance Act, it is made clear that a person whose income is less than the taxable limit is not taxable.

(ii) Such of the small investors who come forward to invest their savings from earnings as security for their future, by virtue of the present section 206AA necessarily have to give their PAN. The poor and illiterate/uneducated persons are finding it difficult rather to approach the various Government departments, particularly the Income-tax Department to get their PAN.

(iii) It is, therefore, held that it may not be necessary for such persons whose income is below the taxable limit to obtain PAN. Such investments/ savings from their earnings or by way of agriculture or any other source, in banking and financial institutions would also further the financial position from the point of the country’s economy.

(iv) But imposing condition to invariably go for a PAN on such small depositors would cause hindrance and discourage such small investors to come forward to invest their money for secured returns and as security for their future.

(v) The difficulty expressed by the petitioners and similarly placed persons is, imposing condition to invariably go for PAN as per section 206AA would run contrary to section 139A. It is also their grievance that filing of Form 15G to seek exemption from deduction of income tax at source, also is not accepted by the 3rd and 4th respondents and acted upon unless the PAN is produced.

(vi) Section 139A which is introduced way back in April 1991 is in vogue and this provision stands the scrutiny of Article 14 of the Constitution for reasonableness. But, section 206AA which is contrary to section 139A appears to be discriminatory as if it is overriding section 139A introduced earlier.

Though the intention of the Legislature is to bring the maximum persons under the net of income tax, when necessarily it provides for exemption up to taxable limit, it may not insist such persons whose income is below the taxable limit to compulsorily go for PAN. If any mischief of avoiding of tax or any other act of concealing the income is detected, that could be taken care of by penal provisions.

vii) In that view of the matter, in view of the specific provision of section 139A, section 206AA is made inapplicable to persons and read down from the statute for those whose income is less than the taxable limit as per the Finance Act, 1991. However, it is made clear that section 206AA would of course be made applicable to persons whose income is above the taxable limit.

(viii) The banking and financial institutions shall not invariably insist upon PAN from such small investors like the petitioners as well as from persons who intend to open an account in the bank or financial institution.”

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Income: Deemed to accrue or arise in India: Sections 5, 6 and 9 : A.Y. 2001-02: Assessee was an employee of an American company and non-resident from year 1991 to 1999: On termination of employment in 1999, he received certain amount from previous employer as retirement benefit/severance/ vacation engagement: Assessee not ordinary resident in relevant assessment year: Amount received by assessee had not accrued/ deemed to be accrued/paid in India in terms of section 6 and section 9(1)(ii): Amou<

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[CIT v. Anant Jain, 207 Taxman 117 (Del.), 21 Taxman. com 19 (Del.)]

The assessee was an employee of an American company from 1991 till November, 1999 and during this period he was a non-resident Indian. The employment was terminated in the year 1999. In the relevant year, i.e., A.Y. 2001-02 the assessee was ‘not ordinarily resident’. In the relevant year the assessee received certain amount as leave encashment according to the number of years of service, which was subsequently described as severance and vacation encashment paid by the erstwhile employer of the assessee in the USA for services rendered outside India.

The assessee claimed that this amount was not taxable in India under provisions of section 5(1)(c) read with section 9(1)(ii). The Assessing Officer held that the said amount was received by the assessee as his profit in lieu of salary which was payable by the employer under the employer-employee relationship and, therefore, was taxable u/s.17(3)(ii). The CIT(A) held that the receipt of the impugned amount was on account of the past services rendered by the assessee to his previous foreign employer outside India at a time when he was a non-resident and this could not be deemed to have accrued or arisen in India and would not come under the purview of section 9(1)(ii).

The Tribunal upheld the order of the CIT(A). On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under: “

(i) It is clear from the factual findings recorded by both the Commissioner (Appeals) and the Tribunal, that the payment in question was received towards retirement benefit/severance/vacation encashment from the erstwhile employer on termination of employment in November, 1999. The erstwhile employer was based in the USA and services were rendered to the erstwhile employer in the USA.

(ii) In view of the aforesaid factual position, elucidated and accepted by both, the Commissioner (Appeals) and the Tribunal, the said amount cannot be taxed in India, as the status of the assessee during the year in question was that of ‘not ordinary resident’. The said income did not accrue or arise in India.

(iii) The Tribunal has rightly held that in terms of section 6 and section 9(1)(ii), the amount/income had not accrued/deemed to be accrued/ paid in India.”

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Depreciation: Intangible assets: Section 32(1) (ii): A.Ys. 2002-03 and 2005-06: Know-how, business contracts, business information, etc., described as goodwill are intangible assets eligible for depreciation u/s.32(1)(ii) as ‘business or commercial rights of similar nature’ specified in section 32(1)(ii).

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[Areva T&D India Ltd. v. Dy. CIT, 250 CTR 151 (Del.)]

The assessee had acquired know-how, business contracts, business information, etc., as part of the slump sale described as goodwill. The assessee’s claim for depreciation u/s.32(1)(ii) of the Income-tax Act, 1961 on such intangible assets was disallowed for the A.Ys. 2002-03 and 2005-06, for the reason that the same were described as goodwill. The Tribunal upheld the disallowance.

On appeal by the assessee, the Delhi High Court reversed the decision of the Tribunal and held as under: “Intangible assets viz., business claims, business information, business records, contracts, employees and know-how acquired by the assessee under slump sale of running business are in the nature of ‘business or commercial rights of similar nature’ specified in section 32(1)(ii) and therefore, the same are eligible for depreciation.”

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Capital gains: Sections 2(47) and 48: A.Y. 2002-03: Redemption of preference shares amounts to transfer u/s.2(47): Computation: Redeemable preference shares are not bonds or debentures: At time of redemption of preference shares, assessee would be entitled to benefit of indexation u/s.48.

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[CIT v. Enam Securities (P.) Ltd., 345 ITR 64 (Bom.); 208 Taxman 54 (Bom.); 21 Taxman.com 267 (Bom.)]

In the A.Y. 2001-02, the assessee redeemed three lakh preference shares (held for 10 years) at par and claimed long-term capital loss after availing benefit of indexation and claimed the set-off of the same against the long-term capital gain on sale of other shares. The Assessing Officer disallowed the claim on the grounds that —

(i) both the assessee and the company in which the assessee held the preference shares, were managed by the same group of persons;

(ii) that there was no transfer; and that the assessee was not entitled to indexation on the redemption of non-cumulative redeemable preference shares. The CIT(A) allowed the claim of the assessee. The Tribunal affirmed the view of the CIT(A).

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

(i) There is a finding of fact that the transaction was not questioned by the Revenue for over ten years: that both the assessee and the company of which the assessee held redeemable preference shares were juridical entities and the mere fact that both were under common management would not necessarily indicate that the transaction was not genuine. There is no reason for this Court to differ with the finding of the Tribunal.

(ii) The judgment of the Supreme Court in Anarkali Sarabhai v. CIT, (1997) 224 ITR 422/90 Taxman 502 concludes the issue that a redemption of preference shares by a company squarely comes within the ambit of section 2(47), since it amounts to a transfer.

(iii) The second proviso to section 48 provides for indexation where long-term capital gain arises from the transfer of a long-term capital asset. The third proviso, however, stipulates that nothing contained in the second proviso shall apply to long-term capital gain arising from the transfer of a long-term capital asset being bonds or debentures other than capital indexed bonds issued by the Government.

The Assessing Officer was of the view that the principal characteristic of a bond is a fixed holding period and a fixed rate of return. According to him, the four per cent non-cumulative redeemable preference shares which the assessee redeemed also had a fixed holding period and a fixed rate of return and on this basis denied the benefit of cost indexation to the assessee. The entire basis on which the Assessing Officer denied the benefit of cost indexation was flawed and was justifiably set right in the order of the Tribunal.

(iv) There is a clear distinction between bonds and share capital, because a bond does not represent ownership of equity capital. Bonds are in essence interest-bearing instruments which represent a loan. This distinction has been accepted by the Supreme Court in R. D. Goyal v. Reliance Industries Ltd., (2002) 40 SCL 503.

(v) Section 48 denies the benefit of indexation to bonds and debentures other than capital indexed bonds issued by the Government. The four percent non-cumulative redeemable preference shares were not bonds or debentures within the meaning of that expression in section 48. In these circumstances, the Tribunal was correct in its decision to that effect.”

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Capital gain: Sections 48 and 55(2): A.Y. 1999- 00: Transfer of self acquired trademark and design: No cost of acquisition: Capital gain not chargeable to tax.

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[CIT v. M/s. Fernhill Laboratories and Industrial Establishment (Bom.); ITA No. 5615 of 2010, dated 12-6-2012]

In the previous year relevant to the A.Y. 1999-00, the assessee transferred self acquired trademark and designs for the considerations of Rs.15 crore and Rs.20 lakh, respectively. The assessee claimed that the capital gain on such transfer is not chargeable to tax in view of the judgment of the Supreme Court in the case of CIT v. B. C. Srinivasa Setty, 128 ITR 249 (SC). The Assessing Officer rejected the assessee’s claim and held that the capital gain is chargeable to tax. The CIT(A) and the Tribunal accepted the assessee’s claim.

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

(i) Prior to the amendment made to section 55(2) by the Finance Act, 2001 effective from 1-4-2002 by adding the words ‘trademark or brand name associated with the business’ self-generated assets such as trademark did not have any cost of acquisition. Therefore, for the period under consideration the computation u/s.48 fails resulting in such transfer of trademarks not being chargeable to capital gains tax.

 (ii) Consequent to amendment made to section 55(2) w.e.f. 1-4-2002 by which the words trademark or brand name associated with the business was introduced into it, the computation provision becomes workable and the consideration for the sale of trademark would be subject to capital gains tax.

(iii) In fact, when the amendment was made to section 55 by the Finance Act, 2001 the CBDT had issued Circular bearing No. 14-2001 explaining the provisions of the Finance Act, 2001. From the said Circular it would be clear that the amendment bringing self-generated intangible assets such as trademarks to capital gains tax only w.e.f. A.Y. 2002-03 onwards. In this case we are concerned with the A.Y. 1999-00 and therefore, the amendment would not have any effect. Consequently, the sale of self-generated trademarks during the A.Y. 1999-00 are not chargeable to capital gains tax.

(iv) So far as the sale of self-generated designs (i.e., not acquired) the same is also not chargeable to capital gains tax not only for the reasons applicable to trademarks, but for the fact that even till this date, no amendment has been made to section 55(2) of the said Act, defining cost of acquisition of design as in the case of trademark, goodwill, etc.”

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Capital gain: Indexed cost: Sections 2(42A), 48 and 49 : A.Y. 2005-06: Acquisition of asset by inheritance: Indexation to be made w.r.t. the holding of asset by previous owner.

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[CIT v. Ms. Janhavi S. Desai (Bom.); ITA No. 126 of 2011 with CO(L) No. 2 of 2012, dated 5-7-2012]

In or about the year 1942, the assessee’s father acquired the immovable property from his father. The assessee’s father expired on 21-8-1988, leaving behind a will bequeathing the property to his wife (assessee’s mother) and the assessee in equal shares. The assessee’s mother expired on 21-2-2000 and her 50% share was inherited by the assessee. In the previous year corresponding to the A.Y. 2005-06, the assessee sold the property for a consideration of Rs.9.5 crore and declared a long-term capital gain of Rs.38,44,247. While computing the capital gain the assessee considered the date of acquisition of the property to be prior to 1-4-1981 and took the cost of acquisition and indexed the same w.r.t. 1-4-1981. The AO held that for the purpose of indexation, the actual date of acquisition by the assessee must be taken. Accordingly, he indexed the cost in respect of 50% w.r.t. 21-8-1988 (date of death of father) and the balance 50% w.r.t. 21-2-2000 (date of death of mother). The CIT(A) allowed the assessee’s appeal and held that the indexation should be w.r.t. 1-4- 1981. The Tribunal upheld the order of the CIT(A) w.r.t. 50% of the property acquired from the father. In respect of the balance 50% acquired from mother, the Tribunal held that the indexation should be w.r.t. 21-8-1988 when the mother acquired the property from the father. The Tribunal held that for the purpose of indexation, the period of holding of the asset by the previous owner should be taken into account.

The Revenue filed appeal in respect of the 50% decided in favour of the assessee and the assessee filed cross-objection in respect of the balance 50%. The Bombay High Court dismissed the appeal and allowed the cross-objection and held as: “

(i) The Explanation to section 49(1) defines the expression ‘previous owner of the property’ to be the last previous owner thereof, who acquired it by a mode of acquisition ‘other than that referred to in clauses (i) to (iv) of s.s (1)’. The last previous owner of the property, who acquired the property by a mode of acquisition other than those referred to in clauses (i) to (iv), was the assessee’s grand-father. The assessee’s father admittedly acquired the property in 1942 from his father.

 (ii) As far as the 50% portion of the property acquired by the assessee from his father is concerned, the cost of acquisition must be determined to be the cost at which the assessee’s grandfather, in any event the assessee’s father acquired the property and not the date on which the assessee acquired it. The Tribunal does not hold otherwise either.

(iii) The Tribunal however held that in respect of 50% of the property inherited by the assessee from her mother, the period of holding would start from 21-8-1988, as she became owner of her 50% share in the property only from that date. This requires consideration. The last previous owner of the assessee’s mother’s 50% share was her husband’s father and at the highest her husband. Thus the assessee must be deemed to have held this 50% share in the property also from 1-4-1981.

(iv) In the circumstances, the questions are answered in favour of the assessee. The period of holding shall be from 1-4-1981 in respect of the entire property.”

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Dy. Commissioner v. MTZ Polyfilms Ltd. ITAT ‘B’ Bench, Mumbai Before N. V. Vasudevan (JM) and Pramod Kumar (AM) ITA No. 5015/Mum./2009 A.Y.: 2004-05. Decided on: 30-12-2011 Counsel for revenue/assessee: P. C. Mourya/ Jitendra Jain

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Section 36(1)(iii), section 37(1) and section 43B — Interest paid on unpaid purchase consideration — It was held that such interest is governed by the provisions of section 37(1) and not by section 36(1) (iii) — Further held that the provisions of section 43B are not applicable to such interest.

Facts:
The assessee was engaged in the business of manufacturing of polyester films. It had its manufacturing facilities at GIDC, Gujarat. It was allotted plot of land by GIDC. As per the terms of allotment the assessee was required to pay the purchase consideration of the land in instalments with interest. For the year under consideration the assessee had paid the sum of Rs.99.97 lakh as interest to GIDC and the same was claimed as business expenditure. According to the AO the expenditure was of capital in nature. On appeal the CIT(A) allowed the appeal and held that the expenditure was of revenue in nature.

Before the Tribunal the Revenue supported the order of the AO and further contended that since the interest to GIDC was unpaid, it is not allowable u/s.43B.

Held:
The Tribunal, as per the order of the CIT(A), noted that the fact that the production by the assessee had commenced in October, 1988 was not controverted. Accordingly, it held that the interest paid during the year cannot be considered as capital expenditure. Further, it referred to the decision of the Supreme Court in the case of Bombay Steam Navigation Co. Pvt. Ltd. v. CIT, (1953) (56 ITR 52), where the interest paid on purchase consideration of the assets by the amalgamated company was held as allowable as business expenditure u/s. 10(2)(xv) of the 1922 Act (equivalent to section 37(1) of the 1961 Act) According to the Apex Court, the expression ‘capital’ used in section 10(2)(iii) of the 1922 Act (equivalent to section 36(1)(iii) of the 1961 Act), in the context in which it occurred, meant money and not any other asset. The Apex Court further observed that an agreement to pay the balance consideration due by the purchaser did not in truth give rise to a loan. On that basis the Apex Court held that the interest paid was not allowable as deduction u/s.10(2)(iii) of the 1922 Act, but as business expenditure u/s.10(2) (xv) of the 1922 Act. Applying the above ratio, the Tribunal held that the interest paid to GIDC by the assessee was allowable u/s.37(1). It further agreed with the assessee that the provisions of section 43B would also not apply to the facts of the present case, since unpaid sale consideration cannot be said to be monies borrowed.

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Sections 28, 145 — Project completion method — In the case of an assessee following project completion method, receipts by way of sale of TDR, which TDR has direct nexus with the project undertaken, can be brought to tax only in the year in which the project is completed.

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16. Pushpa Construction Co. v. ITO ITAT ‘C’ Bench, Mumbai
Before J. Sudhakar Reddy (AM) and R. S. Padvekar (JM)
ITA No. 193/Mum./2010

A.Y.: 2006-07. Decided on: 25-4-2012 Counsel for assessee/revenue: Vipul B. Joshi/ A. C. Tejpal

Sections 28, 145 — Project completion method — In the case of an assessee following project completion method, receipts by way of sale of TDR, which TDR has direct nexus with the project undertaken, can be brought to tax only in the year in which the project is completed.


Facts:

The assessee, a partnership firm, engaged in construction activity especially the Slum Rehabilitation Programme (SRA Scheme) launched by the Government of Maharashtra, had undertaken two projects of slum rehabilitation, during the financial year 2005-06, which were not completed as on 31-3-2006. The assessee was following project completion method of accounting.

During the financial year 2005-06, the assessee sold TDR allotted to it by BMC, which TDR was directly linked to the projects undertaken by the assessee, for a consideration of Rs.2,67,29,626. Since the projects were not complete as on 31-3-2006, this amount was reflected in the balance sheet as on 31- 3-2006 as advance. The Assessing Officer (AO) rejected the contentions of the assessee and brought to tax the entire amount as income of the assessee for A.Y. 2006-07. Aggrieved, the assessee preferred an appeal where it was also submitted that the entire sale proceeds of TDR totalling to Rs.6,90,26,192 were reflected in the P & L Account for A.Y. 2008-09 and surplus income of Rs.2,78,59,939 was offered. The CIT(A) confirmed the order of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that admittedly the two slum rehabilitation projects were not completed in A.Y. 2006-07 and also that the TDR in quesetion had direct nexus with the two projects undertaken by the assessee. It found that the contention of the assessee is supported by the decision of the jurisdictional High Court in the case of CIT Central I, Mumbai v. Chembur Trade Corporation, (ITA No. 3179 of 2009) order dated 14-9-2011 and also the decision of Mumbai Bench of ITAT in the case of ACIT v. Skylark Building, 48 SOT 306 (Mum.) and also that the assessee has offered the amounts in A.Y. 2008- 09 when the projects were completed.

The Tribunal accepted the contention of the assessee and restored the matter back to the file of the AO with a direction to verify whether the assessee has offered sale consideration of TDR in question in A.Y. 2008-09. If it has so offered, then the same should not be taxed in A.Y. 2006- 07.

The Tribunal allowed the appeal filed by the assessee.

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(2012) 49 SOT 387 (Delhi) Harnam Singh Harbans Kaur Charitable Trust v. DIT (Exemption) Dated: 16-12-2011

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Section 80G of the Income-tax Act, 1961 — After omission of proviso to clause (vi) of section 80G(5), existing approval expiring on or after 1-10- 2009 would be deemed to have been extended in perpetuity unless specifically withdrawn.

The assessee-charitable trust’s recognition for exemption u/s.80G expired on 31-3-2011. The assessee made an application in Form No. 10G seeking exemption for the period after 31-3-2011. The Director of Income-tax (Exemption) rejected this application for renewal of exemption and also held that assessee was earning huge money/fees in the name of medical treatment which was nothing but income from commercial activity carried out under the name of medical relief and, accordingly, invoked section 2(15) for withdrawing exemption.

The Tribunal held in favour of the assessee. The Tribunal noted as under:

(1) Proviso to clause (vi) of section 80G(5) has been omitted by the Finance Act, 2009 with effect from 1-10-2009. This proviso imposing the limitation of five years was omitted by the Finance Act, 2009 with effect from 1-10-2009 to provide that the approval once granted shall continue to be valid in perpetuity.

(2) The impact and scope of the omission of proviso to clause (vi) of s.s (5) of section 80G has been explained by the Board in its Circular No. 5, dated 3-6-2010 clarifying that the existing approval expiring on or after 1-10-2009 will be deemed to have been extended in perpetuity unless specifically withdrawn.

(3) Therefore, in the instant case, the filing of an application for renewal of exemption after the expiry of the same on 31-3-2011 by the assessee was not required. Once the exemption granted stands extended in perpetuity by operation of law, merely moving an application by the assessee would not divest it of the assessee’s right to treat the exemption to have been extended in perpetuity, which right had accrued to the assessee in view of the aforesaid Circular and the amendment made in the Act.

(4) Proviso to section 2(15) inserted w.e.f. 1-4-2009, provides that the advancement of any other object of general public utility shall not be a charitable purpose if it involves carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application or retention of the income from such activity.

(5) It is clear that this proviso is applicable in respect of charitable institutions engaged in the activity of advancement of any other object of general public utility i.e., the 4th limb of section 2(15). The first three limbs i.e., relief of the poor, education and medical relief are outside the purview of the aforesaid proviso inserted to section 2(15). It has been admitted by the Director of Income-tax (Exemption) himself that the assessee-society has been registered u/s.12A as charitable trust and is running dispensary and health centre, which makes it clear that the charitable purpose for which the assessee-society is established includes medical relief and it is not a case of advancement of any other object of general public utility. Therefore, applying the provisions of proviso to section 2(15) to the instant case by the Director of Income-tax (Exemption) is also totally misplaced and for that reason, the assessee cannot be said to be not eligible for exemption u/s.80G.

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Section 54 — Exemption from capital gains tax provided the amount is invested in purchase or construction of a flat within the prescribed time period — Held that (1) booking of the flat with the builder is to be treated as construction of flat; (2) the extended period u/s.139(4) has to be considered for the purposes of utilisation of the capital gain amount.

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15. Kishore H. Galaiya v. ITO ITAT ‘A’ Bench, Mumbai Before B. R. Mittal (JM) and Rajendra Singh (AM) ITA No. 7326/Mum./2010 A.Y.: 2006-07 Decided on: 13-6-2012 Counsel for assessee/revenue: Bhavesh Doshi/K. R. Vasudevan

Section 54 — Exemption from capital gains tax provided the amount is invested in purchase or construction of a flat within the prescribed time period — Held that (1) booking of the flat with the builder is to be treated as construction of flat;     the extended period u/s.139(4) has to be considered for the purposes of utilisation of the capital gain amount.


Facts:

  • The assessee along with his wife was joint and equal owner of the property being a residential flat at Mumbai which had been purchased by them in April 2002 for a consideration of Rs.21 lac. The flat was sold by them on 7-3-2006 for a consideration of Rs.45 lac in which the share of the assessee was Rs.22 lac. The assessee computed the long term capital gain from sale of the flat after deducting the indexed cost of acquisition at Rs.9.98 lac. The assessee purchased another flat jointly along with his wife for a total consideration of Rs.35 lac. The assessee had made total payment of Rs.14.62 lac till 16-2-2009. The assessee, therefore, claimed that he was entitled to claim exemption u/s.54 of the Act as the capital gain had been invested in the new residential flat. The claim for exemption was denied by the AO because the assessee: Failed to deposit the balance amount in the account in any of the specified bank as required u/s.54 and utilise the same in accordance with the scheme framed by the Government; and
  • Could not produce evidence regarding taking possession of the new flat. On appeal, the CIT(A) confirmed the disallowance made by the AO. Before the Tribunal, the Revenue strongly supported the orders of the authorities below.

Held:

The Tribunal noted that the assessee had booked the new flat with the builder and as per agreement, the assessee was to make payment in instalments and the builder was to hand over the possession of the flat after construction. Based on the clarification of the CBDT vide its Circular No. 472, dated 16-12-1993 read with Circular No. 471 dated, 15-10-1986 and the decision of the Mumbai Bench of the Tribunal in the case of ACIT v. Smt. Sunder Kaur Sujan Singh Gadh, (3 SOT 206), the Tribunal noted that the case of the assessee was to be considered as construction of new residential house and not purchase of a flat. Thus, the Tribunal held that in case the assessee had invested the capital gains in construction of a new residential house within a period of three years, this should be treated as sufficient compliance of the provisions of section 54. According to it, it was not necessary that the possession of the flat should also be taken within the period of three years. For the purpose, it relied on the decision of the Bombay High Court in the case of CIT v. Mrs. Hilla J. B. Wadia, (216 ITR 376). As regards the default pointed out by the authorities below regarding non-deposit of unutilised amount of capital gain in the Capital Gain Account Scheme, the Tribunal noted the submission of the assessee that it was only due to ignorance of law and intention of the assessee was always to utilise the amount for construction of flat and the assessee had kept the amount in the savings bank account which was utilised towards the construction of flat. According to the Tribunal, this was only a technical default and on this ground alone the claim of exemption cannot be denied, particularly when the amount had been actually utilised for the construction of residential house and not for any other purpose. The view was supported by the decision of the Jodhpur Bench of the Tribunal in the case of Jagan Nath Singh Lodha v. ITO, (85 TTJ 173). The Tribunal also agreed with the assessee’s contention that the due date of filing of return of income u/s.139(1) has to be construed with respect to the due date of section 139(4) as the s.s (4) provides for the extended period for filing return as an exception to the section 139(1) and considering this, there was no default as the entire amount of capital gain had been invested within the due date u/s.139(4). For the purpose, reliance was placed on the judgment of the Punjab and Haryana High Court in the case of Ms. Jagrity Aggarwal (339 ITR 610).

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(1) Section 54F — Exemption of long-term capital gains where sales consideration is invested in purchase of a house — Whether purchase of house jointly with spouse is eligible — Held, Yes. (2) Section 94(7) — Purchase of units and sale thereof at loss after earning dividend — If date of tender of cheque for purchase of shares was considered as the date of purchase, then the sale was not within three months of purchase — Whether the provisions of section 94(7) attracted — Held, No.

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14. Vasudeo Pandurang Ginde v. ITO ITAT ‘F’ Bench, Mumbai
Before Vijay Pal Rao (JM) and N. K. Billaiya (AM)
ITA No. 4285/Mum./2009
A.Y.: 2004-05. Decided on: 6-6-2012
Counsel for assessee/revenue: C. N. Vaze/ Rajan

Section 54F — Exemption of long-term capital gains where sales consideration is invested in purchase of a house — Whether purchase of house jointly with spouse is eligible — Held, Yes.

Section 94(7) — Purchase of units and sale thereof at loss after earning dividend — If date of tender of cheque for purchase of shares was considered as the date of purchase, then the sale was not within three months of purchase
— Whether the provisions of section 94(7) attracted — Held, No.


Facts:

(1) The assessee had made long-term capital gain on sale of shares. The sales proceeds were invested in purchase of row house and exemption u/s.54F was claimed. One of the grounds on which the exemption was denied by the AO was that the house purchased by the assessee was in the joint name of his wife.

(2) The assessee had purchased units of mutual funds of Rs.3 crore on 26-12-2003. On the very same date, the assessee received a dividend of Rs.1.16 crore. On 29-3-2004, the assessee redeemed the units for Rs.1.7 crore and thereby booked a shortterm capital loss of Rs.1.3 crore. The AO found that the cheque of Rs.3 crore for the purchase of units was actually realised on 30-12-2003 and therefore, according to him, the period of holding before the redemption of the said units on 29-3-2004 was only 88 days i.e., less than 3 months. Therefore, according to him, the transaction was hit by the provisions of section 94(7) of the Act. The AO was also of the view that the entire transaction of sale and purchase of mutual fund units was nothing but a colourable device for setting off of the capital gains arising on sale of shares. Accordingly, the set off of short term capital loss claimed by the assessee was denied. On appeal the CIT(A) confirmed the denial of exemption u/s.54F. While on the issue regarding applicability of section 94(7) he noted that the provisions of section 94(7) lays down three cumulative conditions, the non-fulfilment of any one of the conditions would result into non applicability of section 94(7). Thus, if the date of the purchase as claimed by the AO was 30-12-2003, then it cannot be said that the units were purchased within three months prior to the record date because the record date was 26-12-2003 when the dividend was declared. Thus, one of the conditions essential for application of section 94(7) is not fulfilled. Secondly, the CIT(A) noted that the mutual fund had accepted 26-12-2003 as the date on which the units were allotted to the assessee. Based on the said date, the second conditions viz. that the units are sold within a period of three months was also not fulfilled. Accordingly, it was held that the provisions of section 94(7) were not applicable. As regards the point raised by the AO that the entire transaction was a colourable device, the CIT(A) relying on the decision of the Bombay High Court in the case of CIT v. Walfort Share & Stock Brokers Pvt. Ltd., Appeal No. 18 of 2006 held that as the conditions of section 94(7) have not been fulfilled, no disallowance was permissible.

Held:

(1) The Tribunal noted that the total consideration for the house had been met by the assessee. According to it the assessee had added the name of his wife only for the sake of convenience. It also drew support from the provisions of section 45 of the Transfer of Property Act which provides that the share in the property will depend on the amount contributed towards the purchase consideration. Further, relying on the decisions listed below, the Tribunal held that since the total consideration for the house had been paid by the assessee, the exemption cannot be denied on this ground.

  • The decisions relied on are as under:  ITO v. Arvind T. Thakkar in ITA No. 7338/Mum./2005 vide order dated 29-4-2011;
  •  Ravinder Kumar Arora v. ACIT in ITA No. 4998/ Del./2010 vide order dated 11-3-2011; and
  •  DIT v. Mrs. Jennifer Bhide, (2011) 15 Taxmann 82 (Kar.). (2) As regards section 94(7) The Tribunal noted that the whole issue revolved around the date of purchase of units. The Tribunal agreed with the findings of the CIT(A) and the appeal filed by the Revenue was dismissed.
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(2012) 49 SOT 312 (Delhi) Dhoomketu Builders & Developers (P.) Ltd. v. Addl. CIT A.Y.: 2006-07. Dated: 30-11-2011

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Section 28(i) r.w.s. 56 of the Income-tax Act, 1961 — Participation in tender for sale of land demonstrates that business of real estate development is set up during the year.

For the relevant assessment year, the assessee, which was a 100% subsidiary of DLF Ltd., filed its return of income declaring a loss. The assessee company borrowed Rs.186 crore from DLF Ltd. and the paid the same amount as earnest money deposit for a tender for sale of land. This deposit was received back along with interest of Rs.0.62 crore and the assessee, in turn, returned the amount to DLF Ltd. and paid interest of Rs.1.79 crore, resulting in a net loss of Rs.1.17 crore. The Assessing Officer disallowed the loss on the ground that the assessee had not commenced any business activity and, therefore, it was not entitled for interest expenses as claimed by it. Similarly, the interest income received by the assessee deserved to be assessed as an ‘income from other sources’ and not as a business income.

The CIT(A) allowed the adjustment of interest received against the interest paid and determined the net loss of Rs.1.17 crore under ‘Income from Other Sources’, but did not allow carry forward of this loss.

The Tribunal allowed the assessee’s claim. The Tribunal noted as under:

(1) Participation in the tender was starting of one activity which enabled the assessee to acquire the land for development. The actual development of the land is immaterial for construing that business of the assessee has been set up.

(2) The investment of Rs.186 crore was not as a deposit out of surplus funds; rather it was earnest money paid by the assessee for the purchase of land. Thus, the assessee had demonstrated that its business was set up during the accounting period relevant for this assessment year.

(3) Therefore, income of the assessee had to be assessed under the head ‘business income’ and consequently loss computed by the first appellate authority at Rs.1.17 crore deserved to be permitted for carry forward.

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(2012) TIOL 64 ITAT-Bang. Shakuntala Devi v. DCIT A.Y.: 2007-08. Dated: 20-12-2011

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Section 22, section 23(1)(a), section 23(1)(c) — Annual value of property which could not be let out throughout the previous year needs to be taken as ‘nil’ in accordance with the provisions of section 23(1)(c).

Facts:
The assessee, a non-resident Indian, owned eight properties in India. During the relevant previous year, four properties were let out, whose annual value was offered for taxation under the head ‘Income from House Property’. Annual value of one property was claimed to be ‘nil’ on the ground that it be regarded as self-occupied property. For the other 3 properties in Mumbai annual value was regarded as ‘nil’ under the provisions of section 23(1)(c) of the Act. Before the AO it was submitted that of these 3 properties — one was old and was not in a habitable condition. The second property was let out in the earlier year and also in the subsequent year. It was contended that despite the best efforts, the assessee could not find a tenant for this property. As for third property it was purchased during the year and was let out in subsequent year. The AO held that since the assessee had not shown any proof regarding the efforts made to let out these three properties, it was quite inconvincible that there can be any hardship faced in letting out since these properties were located in prime localities like Bandra and Andheri (East) in Mumbai. He considered 70% of the rent received in subsequent year for each of the two properties to be their annual value. Accordingly, he added Rs.6,95,555 to the total income of the assessee.

Aggrieved the assessee preferred an appeal to the CIT(A) who held that the annual value of these properties needs to be computed u/s.23(1)(a) of the Act.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the Lucknow ‘B’ Bench has, in the case of Smt. Indu Chandra v. DCIT, (ITA No. 96 (Lkw)/2011, dated 29-4-2011, for A.Y. 2004- 05), following the decision of the Mumbai Bench in the case of Premsudha Exports (P) Ltd. v. ACIT, [110 ITD 158 (Mum.)] decided the issue in favour of the assessee. The Tribunal also noted that the facts involved in the present case are similar to the facts before the Lucknow Bench in the case of Smt. Indu Chandra. Accordingly, following the decision of the Lucknow Bench, the Tribunal deleted the addition made by the AO and sustained by the CIT(A).

The appeal filed by the assessee was allowed.

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Sections 40(a)(ia), 194H — Commission retained by credit card companies out of amounts paid to merchant establishment is not liable for deduction of tax at source u/s.194H.

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13. DCIT v. Vah Magna Retail (P) Ltd.
ITAT ‘B’ Bench, Hyderabad
Before D. Karunakararao (AM) and Saktijit Dey (JM)
ITA No. 905/Hyd./2011
A.Y.: 2007-08. Decided on: 10-4-2012
Counsel for revenue/assessee: Dr. B. V. Prasad Reddy/None

Sections 40(a)(ia), 194H — Commission retained by credit card companies out of amounts paid to merchant establishment is not liable for deduction of tax at source u/s.194H.


Facts:

The assessee-company, engaged in business of direct retail trading in consumer goods, had claimed a deduction of Rs.16,34,000 on account of commission paid to credit card companies, which amount was disallowed by the AO u/s.40(a)(ia) on the ground that assessee failed to deduct tax at source u/s.194H of the Act. Aggrieved the assessee preferred an appeal to the CIT(A) where it contended that the assesee only receives payment from bank/credit card companeis after deduction of commission thereon, and thus, this is only in the nature of a post facto accounting and does not involve any payment or credit to the account of the banks or any other account before making such payment by the assessee. The CIT(A) accepted the claim of the assessee for deduction of Rs.16,34,000 and observed as follows: “9.8 On going through the nature of transactions, I find considerable merit in the contention of the appellant that commission paid to the credit card companies cannot be considered as falling within the purview of section 194H. Even though the definition of the term ‘commission or brokerage’ used in the said section is an inclusive definition, it is clear that the liability to make TDS under the said section arises only when a person acts on behalf of another person. In the case of commission retained by the credit card companies however, it cannot be said that the bank acts on behalf of the merchant establishment or that even the merchant establishment conducts the transaction for the bank. The sale made on the basis of a credit card is clearly a transaction of the merchants establishment only and the credit card company only facilitates the electronic payment, for a certain charge. The commission retained by the credit card company is therefore in the nature of normal bank charges and not in the nature of commission/brokerage for acting on behalf of the merchant establishment. Accordingly, concluding that there was no requirement for making TDS on the ‘Commission retained by the credit card companies, the disallowance of Rs.16,34,000 is deleted . . . . .” Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:

 The Tribunal found no infirmity in the reasoning given by the CIT(A). It upheld the order passed by the CIT(A). The Tribunal dismissed the appeal filed by the Revenue.

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(2012) TIOL 63 ITAT-Mum. Savita N. Mandhana v. ACIT A.Y.: 2006-07. Dated: 7-10-2011

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Section 28(va), section 55(2)(a) — Consideration received by a shareholder of a company, for transfer of shares of the company, under a share transfer agreement which includes non-compete covenant and the assessee is not actively engaged in business, is chargeable to tax as capital gains.

Facts:
The assessee along with other shareholders of Mandhana Boremann Industries Pvt. Ltd., who were all family members of the assessee, transferred their shares to Paxar BV, a Dutch Company. The shares were acquired by Paxar BV for a consideration of Rs.570 per shares which worked out to Rs.45.60 crore for the shares held by Mandhana family. All the shareholders in Mandhana family entered into an agreement with Paxar BV for the purpose of this transfer of shares, and one of the clauses in the agreement also provided that the transferor shall not carry on, or be interested in, any business which competes with the business of Mandhana Boremann. The AO held that a part of the sale consideration of Rs.570 is attributable to the non-compete covenant and is liable to be taxed in the hands of the assessee u/s.28(va). The AO computed the value of shares, by break-up method, at Rs.365. Accordingly, the balance amount of Rs.205 per share was treated as towards non-compete fee and brought to tax u/s.28(va) in the hands of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO in principle, but held that only Rs.41 per share can be attributed to non-compete fees. He also held that the decision of a Co-ordinate Bench in the case of Homi Aspi Balsara v. ACIT, (2009 TIOL 789 ITAT-Mum.) does not help the assessee as there is specific mention of non-compete obligations in the share sale agreement, and therefore, part of the sale consideration of shares is attributable to the non-compete obligations.

Aggrieved, the assessee preferred an appeal to the Tribunal and contended that no part of consideration can be attributed to non-compete fees.

Held:
The Tribunal noted that the even in the case of Homi Aspi Balsara there was a specific non-compete obligation and yet the Co-ordinate Bench had taken a view that no part of sale consideration of shares could be attributed to be taxed in the hands of the assessee as business income u/s.28(va).

Following the ratio of the decision of the Mumbai Tribunal in Homi Balsara the amounts held to be attributable to non-compete obligations are taxable as capital gains and not as business income. To this extent it reversed the order of the CIT(A). It observed that since the entire consideration was already offered for taxation as capital gains, the bifurcation between consideration attributable to sale of shares and for non-compete obligations is rendered academic and infructuous. It also noted that since it was uncontroverted position that the assessee was not actively engaged in the business it was not necessary to examine the matter any further. The Tribunal upheld the stand of the assessee in treating the entire consideration received on sale of shares as taxable under the head ‘capital gains’.

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Section 14A — Disallowance u/s.14A applies to partner’s share of profits in a firm — ‘Depreciation’ is not an expenditure but an allowance, hence the same cannot be disallowed u/s.14A.

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12. Vishnu Anant Mahajan v. ACIT
ITAT Special Bench, Ahmedabad
Before G. E. Veerabhadrappa (President),
G. C. Gupta (VP) and K. G. Bhansal (AM)
ITA No. 3002/Ahd./2009
A.Y.: 2006-07. Decided on: 25-5-2012
Counsel for assessee/revenue: Sunil H. Talati/S. K. Gupta with Kartarsingh

Section 14A — Disallowance u/s.14A applies to partner’s share of profits in a firm — ‘Depreciation’ is not an expenditure but an allowance, hence the same cannot be disallowed u/s.14A.


Facts:

The assessee, a partner in the firm, derived income by way of remuneration and interest from the firm in addition to the share of profits in the firm which was exempt u/s.10(2A). Apart from the income from the firm, the assessee also had income under the head house property, capital gains, interest income and dividend income. The assessee had suo motu disallowed 1/10th of depreciation allowance of motor car. The Assessing Officer (AO) disallowed expenditure u/s.14A. Aggrieved, the assessee preferred an appeal to the CIT(A) who held that since the share of profits from the firm is exempt u/s.10(2A), expenditure was required to be disallowed u/s.14A. Since the assessee derived 76% of professional income as share from firm and balance 24% by way of remuneration and interest income, the CIT(A) allocated the expenses to income not includible in total income u/s.10(2A). Thus, business income by way of remuneration and interest from firm was taxed in the hands of the assessee u/s.28(v) after allowing 24% of the expenditure. 76% of the expenditure was disallowed. Aggrieved, the assessee preferred an appeal to the Tribunal.

 Held:

A firm is not a separate entity under the general law, whereas under the Income-tax Act, it is a separate entity distinct from its partners. Remuneration and interest on capital of partners is allowed as a deduction to the firm and the same are taxable in the hands of the partners u/s.28(v), whereas the profits of the firm, after deducting remuneration to partners and interest on capital of partners, are taxed in the hands of the firm. The partners do not pay tax on the share of profits from the firm since the same are exempt u/s.10(2A). Section 10(2A) provides that the share of partner shall not be included in his total income, hence it is not possible to hold that share of profit is not excluded from the total income of the partner because the firm has already been taxed thereon. Since share of profits are excluded from the total income of the partner, section 14A would apply and any expenditure incurred to earn the share of profits needs to be disallowed. In the case of Hoshang D. Nanavati v. ACIT, (ITA No. 3567/Mum./2007 for A.Y. 2003-04, order dated 18-3- 2011), while considering the question as to whether depreciation is an expenditure or not, it has been held that section 14A deals only with the expenditure and not any statutory allowance admissible to the assessee. A statutory allowance u/s.32 is not an expenditure. Being in agreement with the decision of the DB in the case of Hoshang Nanavati (supra), the SB held that depreciation cannot be disallowed u/s.14A.

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(2012) TIOL 65 ITAT-Mum. Tanna Agro Impex Pvt. Ltd. v. Addl. CIT A.Y.: 2007-08. Dated: 29-7-2011

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Section 40(a)(ia), section 194H — Hedging transactions of commodities, if in the nature of derivatives transactions, do not attract the provisions of section 194H.

Facts:
The assessee was engaged in export, import and wholesale trade of agro products. Since the assessee had not deducted tax at source from payments of Rs. 4,61,769 made towards brokerage on commodities hedging transactions, the AO disallowed the same u/s.40(a)(ia).

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the payment towards commission or brokerage in respect of transactions in ‘securities’ is not covered by the scope of tax deduction at source requirements and as per Explanation (iii) to section 194H the meaning assigned to the expression ‘securities’ is the same as assigned to it in clause (h) of section 2 of Securities Contracts (Regulations) Act, 1956 which covers transactions of derivatives. It held that hedging transactions of commodities, if in the nature of derivatives transactions, will be outside the ambit of transactions on which TDS requirements come into play. Since this aspect of the matter was not clear from the material on record, the Tribunal remitted the matter to the file of the AO for fresh adjudication in the light of the abovementioned observations. The Tribunal also clarified that except in the abovementioned situation, commission paid on transactions of sales and purchases of commodities through commodities exchange are clearly covered by the scope of section 194H.

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(2011) 130 ITD 137/9, Chennai Bench D ACIT v. Harshad Doshi A.Y.: 2006-07. Dated: 23-4-2011

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Section 2(22)(e) — Advance which carries with an obligation of repayment is covered u/s.2(22) (e). Trade advance/advance given for effecting commercial transaction did not fall under the ambit of section 2(22)(e). Amount advanced by company to its directors under board resolution, for specific business purpose would not fall under the mischief of section 2(22)(e) of the Act.

Facts:
The assessee was managing director in DHL Ltd. The company was engaged in the business of development of property. The company advanced funds to purchase plot of lands in the name of the assessee on understanding that land is to be given to DHL for development. The AO on scrutiny of books of DHL Ltd., discovered that there is advance of Rs.3.59 crore and rental advance of Rs.19.89 lakh issued to the assessee. The AO applied provisions of deemed dividend u/s.2(22)(e) on these advances. In order to support its contention the AO also relied on the capital gain shown by the assessee in his books.

Appeal was filed by the assessee to the CIT(A). The assessee contended that advance of Rs.3.59 crore was taken to acquire land which was to be developed by DHL. The main intention behind bifurcating ownership of land and development rights was to reduce the cost of stamp duty so that they remain competitive in this fierce market. The CIT(A) deleted the above addition except sum of Rs.39.62 lakh accepting the fact that transaction was motivated by business consideration and commercial expediency.

The CIT(A) also deleted the addition of lease advance of Rs.19.89 lakh accepting holding it to be advance given for lease of building to be used as office by DHL Ltd.

Aggrieved by the order of the CIT(A), the AO filed appeal before the ITAT.

Held:
Trade advance and monies given for business expediency could not be taxed as dividend. In order to bring any advance within the four corners of section 2(22)(e), advance should carry an obligation of repayment.

Advance given by the company to managing director to purchase the land in its name and then transfer the development rights to the company was a business arrangement made with a view to avoid payment of stamp duty twice, first on land and then on proposed construction of flats.

The assessee was well within the law to adopt such practice which would reduce the cost incidence to the ultimate customer. The AO’s contention that bifurcation was done with an intention to circumvent provisions of the Tamil Nadu Stamp Act could not be accepted being for an unlawful purpose.

Also, the project executed by DHL Ltd. does not appear in the capital gain computation of lands as disclosed by the assessee. So there was no direct nexus as alleged by the AO.

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Business expenditure: TDS: Disallowance: Non-resident: Sections 9 and 40(a)(i): A.Y. 2007-08: Income deemed to accrue or arise in India: Business connection not established: Mere entry in books of account of Indian payer does not mean that non-resident received payment in India: No income accrued in India: Tax need not be deducted at source: Expenditure not disallowable.

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32. Business expenditure: TDS: Disallowance: Non-resident: Sections 9 and 40(a)(i): A.Y. 2007-08: Income deemed to accrue or arise in India: Business connection not established: Mere entry in books of account of Indian payer does not mean that non-resident received payment in India: No income accrued in India: Tax need not be deducted at source: Expenditure not disallowable.

[CIT v. EON Technology P. Ltd., 343 ITR 366 (Del.)]

The assessee-company was engaged in the business of development and export of software. In the A.Y. 2007-08, the assessee paid commission to its parent company in the U.K. on the sales and amounts realised on export contracts procured by it for the assessee and the same was claimed as deduction. The Assessing Officer held that the U.K. company had a business connection in India and that commission income had accrued and arisen in India when credit entries were made in the books of the assessee in favour of the U.K. company and the income towards commission was received in India. He held that the assessee was liable to deduct tax at source and as there was failure to do so, disallowed the expenditure u/s.40(a)(i) of the Income-tax Act, 1961. The Commissioner (A) held that the ‘business connection’ was not established and allowed the assessee’s claim. The Tribunal upheld the decision of the Commissioner (A).

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

“(i) The Assessing Officer did not elaborate or had not discussed on what basis he had come to the conclusion that ‘business connection’ as envisaged u/s.9(1)(i) existed. The assessee had submitted that the U.K. company was a non-resident company and did not have any permanent establishment in India. The U.K. company was not rendering any service or performing any activity in India itself. These facts were not and could not be disputed.

(ii) The stand of the Revenue was contrary to the two Circulars issued by the CBDT in which it was clearly held that when a non-resident agent operates outside the country, no part of his income arises in India, and since payment was remitted directly abroad, merely because an entry in the books of account was made, it did not mean that the non-resident had received any payment in India.

(iii) The Assessing Officer did not make out a case of business connection as stipulated in section 9(1)(i) of the Act. He had not made any foundation or basis for holding that there was business connection and, therefore, section 9(1)(i) of the Act was applicable.

 (iv) The Appellate Authorities, on the basis of material on record, had rightly held that ‘business connection’ was not established.”

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Interest on refund: Section 244A of Incometax Act, 1961: A.Y. 2002-03: Interest u/s.244A is to be calculated from the date of payment of tax till the date of refund and not from the 1st of April of the assessment year or from date of regular assessment.

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[CIT v. Vijaya Bank, 246 CTR 548 (Kar.)]

For the A.Y. 2002-03, the Assessing Officer granted interest u/s.244A of the Act from the date of regular assessment. The CIT(A) and the Tribunal held that interest should be calculated from the date on which the self-assessment tax was paid by the assessee.

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

“Where the assessee is entitled to refund of self-assessment tax, interest u/s.244A is to be calculated from the date of payment of tax till the date of refund and not from the 1st of April of the assessment year or from the date of regular assessment.”

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Business expenditure: Capital or revenue: A.Y. 2003-04: Assessee tenant in premises contributed to reconstruction cost of premises with understanding that it will continue as tenant at the same rent: Expenditure is revenue expenditure.

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31. Business expenditure: Capital or revenue: A.Y. 2003-04: Assessee tenant in premises contributed to reconstruction cost of premises with understanding that it will continue as tenant at the same rent: Expenditure is revenue expenditure.
[CIT v. Talathi and Panthaky Associated P. Ltd., 343 ITR 309 (Bom.)]

The assessee was a tenant of 5000 sq.ft. in a building which was declared as unsafe. The assessee contributed Rs.1.5 crore for reconstruction of the building with the understanding that it will continue as a tenant at Rs.11,300 per month. In the A.Y. 2003-04, the assessee claimed the deduction of the said expenditure of Rs.1.5 crore. The Assessing Officer disallowed the claim holding that it is capital expenditure. The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“(i) The assessee had not incurred any expenditure of capital nature. The expenditure did not result in the acquisition of a capital asset by the assessee. The assessee continued as before to be a tenant in respect of the premises.

(ii) By contributing an amount of Rs.1.5 crore towards the construction or, as the case may be, renovation of the existing structure, the assessee obtained a commercial advantage of securing tenancy of an equivalent area of premises at the same rent as before. Since there was no acquisition of a capital asset and the occupation of the assessee continued in the character of a tenancy, the expenditure could not be regarded as being of a capital nature.

(iii) The cost of repair/reconstruction of the tenanted premises was of a revenue nature and was allowable as and by way of deduction.”

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Export profit: Deduction u/s.10BA of Incometax Act, 1961: A.Y. 2005-06: DEPB is a profit derived from export business for the purpose of deduction u/s.10BA.

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[CIT v. Arts & Crafts Exports, 246 CTR 463 (Bom.)]

The Tribunal held that DEPB is a profit derived from export business for the purposes of deduction u/s.10BA of the Income-tax Act, 1961. In appeal by the Revenue, the following question was raised:

“Whether on the facts and circumstances of the case, the Tribunal erred in law in holding DEPB as a profit derived from export business for the purpose of deduction u/s.10BA ignoring the ratio of decision in the case of Liberty India v. CIT, (2009) 225 CTR (SC) 233; (2009) 28 DTR (SC) 73; (2009) 317 ITR 218 (SC) having binding force on facts and circumstances of the case?”

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

“The Counsel for the Revenue fairly states that though the question has been raised by relying upon the decision of the Apex Court in the case of Liberty India v. CIT, the said decision has no relevance to the facts of the present case. In this view of the matter, the question raised by the Revenue cannot be entertained.”

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Appellate Tribunal: Adjournment: Section 255, Rule 32 of Income-tax (Appellate Tribunal) Rules, 1963: Where a case is adjourned by Tribunal by giving a last opportunity to counsel for assessee, same can be adjourned again on the next date, if sufficient or reasonable cause exists on that day.

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30. Appellate Tribunal: Adjournment: Section 255, Rule 32 of Income-tax (Appellate Tribunal) Rules, 1963: Where a case is adjourned by Tribunal by giving a last opportunity to counsel for assessee, same can be adjourned again on the next date, if sufficient or reasonable cause exists on that day.

[Mehru Electrical and Engg. (P) Ltd. v. CIT, (2012) 22 Taxman.com 45 (Raj.)]

The assessee’s appeal before the Tribunal was fixed for hearing on 11-1-2010 and at the request of the counsel for the assessee, hearing of the case was adjourned to 9-2-2010 giving him a last opportunity. However, the counsel for the assessee moved an application before the Tribunal for adjournment of the case in advance on 8-2-2010 on the ground that he was going to Mumbai for some urgent work. On 9-2-2010 the Tribunal rejected the application for adjournment. It further heard the counsel for the Revenue ex parte and allowed the appeal of the Revenue. On appeal to High Court, the assessee contended, inter alia, that

(i) from the order of the Tribunal it was clear that adjournment application was rejected only on the ground that a last opportunity was granted to counsel for the assessee to argue the appeal, and

(ii) even if a last opportunity was granted on last date, it did not mean that on sufficient ground the case could not be adjourned again. The Rajasthan High Court allowed the assessee’s appeal and held as under: “(i) From the proceedings of the Tribunal dated 11-1-2010, it is clear that last opportunity was given and the case was adjourned for 9-2- 2010. Application for adjournment was filed on 8-2-2010, which was put up for consideration before the Tribunal on 9-2-2010. From the application, it appears that counsel for the assessee had to go to Mumbai due to some urgent work. No one was present on behalf of the assessee. The Tribunal, in absence of counsel for the assessee, rejected the adjournment application. (ii) Ordinarily it is not incumbent on the part of the Tribunal to adjourn the case again when a last opportunity had already been granted to the counsel for the assessee. However, there may be number of circumstances where adjournment becomes necessary in the interest of justice. If counsel for the assessee had to go for some urgent work to Mumbai and an application for adjournment was moved in advance, then in the interest of justice a short adjournment should have been granted. If number of opportunities had already been afforded to the counsel for the assessee, then adjournment could have been granted on payment of cost.

(iii) The Tribunal has not assigned any reason as to whether reason mentioned in the application for adjournment constituted sufficient cause for adjournment or not. Even if a last opportunity is granted and case is fixed for hearing and sufficient cause is shown on the date fixed for hearing, then the case can be adjourned and it should be adjourned in the interest of justice. In these circumstances, the Tribunal committed an illegality in rejecting the application for adjournment and in deciding the appeal ex parte.

(iv) Therefore, the ex parte order passed by the Tribunal deserved to be set aside. The case was to be remitted back to the Tribunal for decision afresh on merits.”

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Appeal to High Court: Power and scope: Section 260A: Jurisdiction to reassess: Question can be raised for the first time before the High Court.

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29. Appeal to High Court: Power and scope: Section 260A: Jurisdiction to reassess: Question can be raised for the first time before the High Court.
[Mukti Properties P. Ltd. v. CIT, 344 ITR 177 (Cal.)]

The assessee had not raised the issue as regards the jurisdiction to reassess before the Assessing Officer, Commissioner (A) or the Tribunal. For the first time the assessee raised the issue before the High Court in appeal u/s.260A of the Income-tax Act, 1961.

The Calcutta High Court admitted the question and held as under:

“A pure question of law which goes to the very root of the jurisdiction and further initiation of the proceedings can be raised at any stage, even at the stage of appeal to the Supreme Court.”

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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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